CAPITAL CONSTRUCTION FUND MERCHANT MARINE CAPITAL CONSTRUCTION FUND FINANCING NEW CONSTRUCTION WITH MARAD’s CCF H. Clayton Cook Jr COUNTRY CLUB OF MOBILE August 13, 2015 COOK MARITIME FINANCE 2015 © COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF PROGRAM HISTORY & SUBSTANCE SHIPYARD USE: NASSCO & IRS/DOJ/OLC QUALIFICATION, APPLICATION & EFECTIVE DATE AGREEMENTS, DEPOSITS & WITHDRAWALS EIGHT POINTS TO REMEMBER COOK MARITIME FINANCE 2015 © COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF PROGRAM HISTORY & SUBSTANCE COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF PROGRAM HISTORY & SUBSTANCE The Merchant Marine Act of 1970 authorized a Capital Construction Fund (“CCF”) tax deferral program (“Program”). COOK MARITIME FINANCE 2015 “It is believed that these provisions will do more than anything else in the bill to help the ship operating, and therefore the shipbuilding industry to build ships in United States shipyards which are so urgently needed to modernize our United States merchant marine.” S. Rep. No. 91-1080, at 43 (1970)

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF PROGRAM HISTORY & SUBSTANCE The CCF Program had its origins in the Merchant Marine Act of 1936 and its special and capital reserve funds for our U.S. international liner trade operators. The 1970 Act expanded the tax deferrals for the U.S. international liner trades and added the international bulk trades, and the domestic Great Lakes and Alaska, Hawaii and Puerto Rico non-contiguous services. COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF PROGRAM HISTORY & SUBSTANCE The 1970 Act terminated what had been the Internal Revenue Service administration of the 1936 Act programs through IRS “Closing Agreements” and placed the administration of the new CCF Program in the Maritime Administration. COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF PROGRAM HISTORY & SUBSTANCE As first implemented in 1970, the CCF Program was available to ship owners and operators to shelter vessel operating and sales and portfolio income, to accumulate the capital to finance vessel purchases or to retire vessel debt, and to owner-lessors to shelter vessel leasing and sales income, and investment portfolio income in vessel leasing transactions. COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF PROGRAM HISTORY & SUBSTANCE Most of us think of the CCF Program as used by Gulf Coast owner-operators like Edison Chouest Offshore or Harvey Gulf International Marine or Hornbeck Offshore. But the General Dynamics, National Steel & Shipbuilding Company “NASSCO” shipyard has been a CCF Program participant since 1988 and has one of the largest CCF Program tax deferred working capital accounts that exists today. COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF 2. SHIPYARD USE: NASSCO & IRS/DOJ/OLC COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF SHIPYARD USE: NASSCO & IRS/DOJ/OLC Since 1988 MARAD has made the CCF Program available to shipyards to shelter vessel sales and leasing income and investment portfolio income, to accumulate working capital to finance vessel construction for customers or for the shipyard’s own account for vessel sales and leasing. COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF SHIPYARD USE: NASSCO & IRS/DOJ/OLC The CCF Program allows a shipyard to shelter profits from its vessel sales and conversions and vessel leasing transactions and from its CCF portfolio investments, in exchange for the shipyard’s commitment to construct a new vessel or vessels, or reconstruct an existing vessel, for a qualifying trade. One might think of the CCF Program as providing a shipyard 1031 vessel exchange transactions and to have a 401(k) investment account. COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF SHIPYARD USE: NASSCO & IRS/DOJ/OLC The Program provides the shipyard with the means for the deferral of tax on income from vessel construction and conversions projects, and from vessel financing and leasing – allowing the shipyard to accumulate a working capital account for financing vessel construction for customers, or for its own account, and for vessel leasing. COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF SHIPYARD USE: NASSCO & IRS/DOJ/OLC And the Program allows the deferral of tax on interest and other income from the shipyard or the shipyard group CCF investment portfolio or other high yield assets. At Sun Shipbuilding & Dry Dock, this Program sheltered interest income included the interest charged by Sun Oil Company to its SONOCO credit card customers on motor fuels purchases. COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF SHIPYARD USE: NASSCO & IRS/DOJ/OLC The deferrals are on a transaction by transaction basis, or for a 25 year base period. However, the shipyard may be able to operate on a tax “free” basis over more extended periods if the shipyard is engaged in vessel construction for qualifying trades. The NASSCO deferrals were commenced 1988. COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF 3. QUALIFICATION,APPLICATION, EFFECTIVE DATE & FEES COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF 3. QUALIFICATION, APPLICATION, EFFECTIVE DATE & FEES To qualify for the CCF Program a shipyard must: (i) be a U.S. citizen; (ii) own or lease or be a party to a contact for the construction of one or more “eligible” or “qualified” vessels; (iii) have a program that calls for the construction or reconstruction of one or more “qualified” vessels; and (iv) demonstrate that it has the financial capability to accomplish the program. COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF QUALIFICATION, EFFECTIVE DATE & FEES MARAD must have approved the applicant’s Program application and the Depositary must have received the initial deposit of funds no later than the last day for the Participant’s filing of its tax return for the tax year. COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF QUALIFICATION, EFFECTIVE DATE & FEES There are no MARAD filing fees or other charges. COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF 4. AGREEMENTS, DEPOSITS & WITHDRAWLS EIGHT POINTS TO REMEMBER COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF AGREEMENTS, DEPOSITS & WITHDRAWLS EIGHT POINTS TO REMEMBER 1. The CCF Program is a contractual program which allows a shipyard (that enters into an Agreement with MARAD) to shelter income from current taxation (generally federal and state) in exchange for the shipyard’s commitment to construct a U.S. vessel or vessels for a “qualifying” trade. COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF AGREEMENTS, DEPOSITS & WITHDRAWLS EIGHT POINTS TO REMEMBER 2. The income to be sheltered can be from the construction, conversion or leasing of any vessel built for U.S. flag operation in any U.S. domestic or foreign trade, that will then be named as an “eligible vessel” in the Agreement, and from shipyard portfolio investments and (in many instances) customer receivables. The income from the currently discussed OSV conversions from diesel to LNG would qualify for shelter FINANCING NEW CONSTRUCTION WITH MARAD’s CCF COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF AGREEMENTS, DEPOSITS & WITHDRAWALS EIGHT POINTS TO REMEMBER 3. The CCF Program shelter is temporary, because when the sheltered income is used to finance the future vessel, the shipyard’s cost basis in that vessel is correspondingly reduced for the purpose of computing the profit on the vessel sale. COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF AGREEMENTS, DEPOSITS & WITHDRAWALS EIGHT POINTS TO REMEMBER 4. An “eligible” vessel is any U.S. built U.S. flag vessel built for or operating in any U.S. domestic or foreign trade. A “qualified” vessel is any U.S. built U.S. flag vessel built for operations in or actually operating in a “qualifying” trade in a Great Lakes, Alaska, Hawaii or Puerto Rico service, or in a defined U.S. foreign trade or domestic container or ro/ro service. COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF AGREEMENTS, DEPOSITS & WITHDRAWALS EIGHT POINTS TO REMEMBER 5. The Program shelter can be extended by the deposit of a portion of proceeds sufficient to shelter the profit of that sale, and where the construction program involves a significant percentage of “qualifying” trade vessels, the deferral of tax can be ongoing. FINANCING NEW CONSTRUCTION WITH MARAD’s CCF COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF AGREEMENTS, DEPOSITS & WITHDRAWALS EIGHT POINTS TO REMEMBER COOK MARITIME FINANCE 2015 6. A shipyard Program participant may make deposits for a tax year in an amount equal to the measure of: (i) proceeds of sale or lease of “eligible” and “qualified” vessels; (ii) any vessel operating income; (iii) scheduled depreciation; and (iv) portfolio investment income.

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF AGREEMENTS, DEPOSITS & WITHDRAWALS EIGHT POINTS TO REMEMBER COOK MARITIME FINANCE 2015 7. “Qualified” withdrawals may be made for the construction or reconstruction of “qualified” vessels, or the payment of “qualified” vessel debt. All other withdrawals will be “non-qualified” and will be taxed at the shipyard’s highest marginal rate, and generally incur an interest charge.

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF AGREEMENTS, DEPOSITS & WITHDRAWALS EIGHT POINTS TO REMEMBER 8. Vessel leasing can be used by a shipyard (by the shipyard itself or in collaboration with a financial institution owner-lessor) as a way to increase shipyard profits from sales and to expand the number of customer opportunities. COOK MARITIME FINANCE 2015

FINANCING NEW CONSTRUCTION WITH MARAD’s CCF THANK YOU ______________________________________________________ ADDITIONAL INFORMATION: You may wish to refer to two Marine Money International articles on the MARAD CCF Program and non-citizen vessel leasing in the U.S. domestic trades: Cook & Ogle, “Financing Jones Act Vessel Assets”, Marine Money International, May 2010, and Cook, “Financing the US Market via MARAD’s ‘CCF’ Program,” Marine Money International, October 2007. H Clayton Cook Jr www.CookMaritimeFinance Phone: 703 288 3556 Email: Cook@CookMaritimeFinance.com COOK MARITIME FINANCE 015