ropax ferry business case returns & environmental benefits · ropax ferry business case returns...

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ROPAX FERRY BUSINESSCASE RETURNS & ENVIRONMENTALBENEFITS

13.6.2016 [Presentation name / Author]1

John Hatley PEGas Initiatives ( MBA, MSE )

Wartsila North AmericaCell 281 221 4209

[email protected]

Green Tech 2016Green MarineMapping Sustainable Future ShippingQuebec CityMay 30 – June 1

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Harvey Gulf International


Harvey Energy… on Charter March 2015

Harvey Power… on Charter October 2015

Harvey Liberty… on Charter May 2016

3 vessels, 23+ months operations… >15,000 hours…

charters running on gas fuel, no downtime.

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24+ LNG Fuel Vessels contracted Wartsila for North America


3 @ BC Ferries +2

2 @ Seaspan

2 @ TOTE

3 @ Society Quebec Ferries

6 @ Harvey Gulf

+ @ Owner 2 + X Merchant

Vessels

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Society for Gas as a Marine Fuel SGMF


Membership value…join the 100+ companies promoting safety and best practices

Source: http://www.sgmf.info/about/welcome

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Keys

Global Energy Policies, market gamesmanship ?

Future Ahead, structural shifts?

As a vessel owner, all I want to knowis the tipping point…

What fuel strategy do I choose to to boost my bottom line & improve sustainability?

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A “Commodity Play” on fuel energy costs

seeking competitive advantage for market

share.

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Agenda

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What ? Fuel Price vs. Cost

Energy

Why & How ? No. Am ECA & Emissions

Owner Choices

Abatement: SCR, Scrubber, LNG

Business Case Cargo, Investor, Banker Views

ROPAX Ferry

Investment Returns

Oil Price Shock ! Business Case: Robust or Fragile?

Stress Test

Conclusions Business Case Appendix

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Agenda

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Energy


Owner Choices



ROPAX Ferry

Investment Returns


Stress Test


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Quiz…. Fuel Price ?

a) HFO 412.87 $ CAD / ton ….

b) MDO 466.30 $ CAD / ton .…

c) LNG 514.85 $ CAD / ton ….

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Which is the lowest price ?

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The Price Paid for what it Cost

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: the amount of money that you pay for something

: the price of something : the amount of money that is needed to pay

for or buy something

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Quiz… Fuel Answer Key

a) HFO 412.47 $ CAD / ton ….

b) MDO 446.30 $ CAD / ton .…

c) LNG 514.85 $ CAD / ton ….

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Which is the lowest price ?

Key concept… purchase energy, not tons or gallons, which is the lowest

cost per unit of energy?

Reference Common Values that will vary…

HFO 37,430 BTU/kg MDO 40,500 BTU/kg LNG 46,720 BTU/kg

density 980 kg/ m3 850 kg/ m3 430 kg/ m3

11.02 $ CAD / mm BTU



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LNG Cost 08 February 2016

Fixed Liquefaction Charge 4.60 CAD $/ GJ

Variable Sumas Gas Basis + 3.00 CAD $/ GJ

Total FOB LNG Price 7.60 CAD $/ GJ

conversion to million BTU x 1.05435

LNG FOB price 8.02 CAD $/ mm BTU

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Allow 3.00 $/mmBTU transport = 11.02 CAD $ / mm BTU or LNG 515 CAD $ / ton

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Agenda

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Energy


Owner Choices



ROPAX Ferry

Investment Returns


Stress Test


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Emission Control Areas

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Sulphur ECA’s, more

coming soon.

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IMO MARPOL Annex VI NOX


2016 Tier III

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No. Am. ECA Fuel Sulfur Limit

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Source:http://www.dnvusa.com/industry/maritime/publicationsanddownloads/publi

cations/newsletters/technical_regulatory/2012/north_american_emission_control_

area.asp

Fuel Sulfur 0.10 % limit commences 1 January 2015

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2015 ECA 0.1% Sulfur Fuel

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Works with high Sulfur HFO

Low total lifecycle cost

Use everywhere

Scrubber targets Sox……….. Selective Catalytic Reducer targets N0x………..

LNG targets CO2, NOx, PM, & SOx.

Source: 2015 Exhaust Gas Cleaning Scrubbers Dec 2015 011415.pptx

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Emissions, Environment, & Health


CO2Carbon Dioxide

Greenhouse

Gas

NOxNitrogen Oxide

Ozone

SOxSulphur Oxide

Respiratory

PMParticulate

Matter

Carcinogen

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Watershed 12 December 2015

13.6.2016[Presentation name / Author]18

Paris COP21 nearly 200

nations adopt global pact to

fight climate change,

promise cuts to greenhouse

gas pollution with sanctions

for countries failing to

comply.

Source: http://www.cbc.ca/news/world/cop21-climate-change-talks-

saturday-announced-1.3362354

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22 April 2016 UN Secretary Signs Paris COP21


Source: http://ec.europa.eu/clima/news/articles/news_2016042101_en.htm

UN Secretary signs world’s first

universal climate change

agreement by 195 countries of

Paris accord December 12, 2015.

Ratification now underway,

requires 55 countries signatures

constituting 55% of global

emissions for entry into force.

Source:

http://ec.europa.eu/clima/policies/international/negotiations/paris/index_en.htm

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22 April 2016 IMO MEPC London

IMO response to Paris

COP21 Accord. CO2

reduction data

collection system and

reporting to flag states

for all vessels above

5,000 GT. First step

toward additional CO2

reduction measures.

Source:

http://www.marinelog.com/index.php?option=com

_k2&view=item&id=10892:imos-mepc-makes-

progress-on-co2-measures&Itemid=227

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Emission Control Areas

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DF Natural Gas Engine Diesel Engine0

20

40

60

80

100

Emission

values [%]

CO2

NOx

SOx

Particulates

-25%

-85%

-99%

-99%

LNG provides

significant emission

reductions

compared to

traditional diesel

engines

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Why clean ?


Methane

[CH4]

4:1

(400%)

Ethane

[C2H6]

6:2

(300%)

Propane

[C3H8]

8:3

(267%)

Butane

[C4H10]

10:4

(250%)

Natural gas… lowest carbon ratio = cleanest burning fuel

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North America ECA SOx & NOx

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Canada Fuel Sulfur

2012… 1% Limit

2015… 0.1% Limit*

*Fleet Averaging Program

IMO Newbuilds

2016… NOx Tier III

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Canada Fleet Sulphur Averaging Program


Transport Canada issues a

Canadian Air Pollution

Certificate for vessels

following the regime to

average sulphur content of

fuel across the firm’s fleet

until 31 December 2020.

Afterward all vessels are to

comply with 0.1% sulphur

content by fuel or

approved alternative

compliance option.

Source:https://www.tc.gc.ca/eng/marinesafety/bulletins-2013-

03-eng.htm

https://www.tc.gc.ca/eng/marinesafety/bulletins-2013-03-eng.htm

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Decision Tree… New Build IMO Vessel

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New

Build

Diesel

HFO

LNG

Scrubber … Fuel Sulfur

Compliance

LNG Compliance

North America ECA January 2016 multiple emission requirements; both fuel sulfur

limits (2015) and engine emissions requirements ( 2016 IMO Tier 3 ) in effect

New IMO Tier 3 engine

+ after-treatment… SCR, EGR 0.1% Sulfur… Fuel

Compliance


+ after-treatment… SCR, EGR

+ Scrubber


+ LNG cryogenics

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New Build Attributes

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Source: Wartsila Moss White Paper: Exhaust Gas Cleaning: How to Choose the Correct Scrubber,

Jennifer Ahlback, 2014.

Excess baggage as systems require host support; chemicals, tanks, waste stream

sludge, piping/pumps, controls/automation, soot blowers…

Diesel + SCR

LNG

HFO + SCR + Scrubber

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Wartsila NOx Selective Catalytic Reducer “SCR” System

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Soot Blower

Air

Pump

Mixing Duct

Dosing Unit

NOR Reactor

Controls

Urea Tank

Compressed

Air

Urea Mixing & Injection

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LNGPac System

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Source: http://www.wartsila.com/media/news/26-08-2014-wartsila-launches-new-technical-solution-for-fuel-gas-

handling

C Type

Cryogenic Tank

Cold Box

Bunker

Station

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De- Plume Unit

Bleed-Off

Treatment

Alkali Feed

Module

Holding Tank

Exhaust Gas Fan

Alkali Storage

Tank

Sludge

Tank

Water

Measurement

Exhaust Gas

Analyzer

Scrubbing Water

Pump

Heat

Exchanger

CW Pump

Water

Measurement

Process

Tank

Closed Loop Scrubber

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Venturi Inline


Scrubber Types

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Scrubber References


Merchant

Container vessels:

5 vessels, 8 scrubbers, 105 MW

Tankers:


Ro-Ro:


Bulker:


LPG:


Cruise and Ferry

Cruise:

23 vessels

45 scrubbers

1281 MW in total

Ro-Pax:

11 vessels

37 scrubbers

280 MW in total

Others

Trawler:

1 vessel 11 MW

81 installations… 160 scrubbers… > 2,300 Mw

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2015 ECA & 2016 N0x Owner Choices

Consume compliant Low Sulfur Distillate… champagne fuel + Selective Catalytic Reduction for N0x

Switch to LNG fuel: safe, clean, abundant, affordable, & available natural gas LNGReduction: CO2, N0x, SOx, PM

HFO Alternative Compliance… install scrubber for S0x + Selective Catalytic Reduction for N0x

Abort the Port

13 June 2016

ECA & IMO force timely owner choices

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Agenda

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Energy


Owner Choices



ROPAX Ferry

Investment Returns


Stress Test


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Cautionary Remarks

Each investment case requires careful analysis, inclusion, and weighing a broad variety of issues stemming from technical, financial, operational, regulatory, and other areas.

The purpose of this exercise is to illustrate a Business Case example and how a few of many key considerations may be transcribed into financial modeling as an aide to decision making.

Readers are advised that neither the Author nor Wartsila nor it’s subsidiaries are responsible for any errors, omissions, or updates to this information contained herein or assumptions or derivations whatsoever.

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This presentation is no substitute for your good and responsible decision

making. Please utilize prudence and caution when making investment decisions

along with securing the advice and guidance of professionals.

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4 Viewpoints

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Ultimate

Environment

Safety

At fair return

capturing risks

PUBLIC

FERRY OWNER

BANKER

Transport safely

at optimal cost

reliably

VEHICLE DRIVER

Are risks

understood &

I’m repaid !

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4 Key Metrics

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Ultimate

Environment

Safety

Return on

Investment:

ROIC, EBITDA,

cash flows

PUBLIC

FERRY OWNER

All in Charter

Freight Rate

$ / unit

transported

VEHICLE DRIVER

EBIT, Times

Burden Cover,

cash flows

BANKER

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Business Case Vessel

37 © Wärtsilä

Canadian Corporation

ROPAX Capacity 700 passengers & 240 vehicles

New Build

North America ECA IMO Tier 3

Cruise Speed 16 knots ( 3 engines online, 1 standby )

Design 18 knots ( 4 engines online w/margin )

Electric Drive Twin Screw

Installed power 18,800 kW ( 25,200 HP )

Major Class Society

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The Route

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100% “ECA” Bound route, 580 nm round trip, 6 hour turnaround each port,

high season 6 months @ 2 day/RT, transition 5 months @ 3 day/RT, slow season

1 month @ 4 day/ RT, 16 knot schedule ( 18 knot max speed )… 148 RT/year

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Recall ?

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Recall ?

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Wartsila W31


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W31 Diesel Electric


SCR

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W31 LNG Electric


LNG

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W31 HFO Electric


Scrubber

SCR

HFO

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Exchange Rates

Then August 2014

$1 US = $1.09 CAD

Source: http://www.xe.com/currencycharts/?from=USD&to=CAD&view=5Y

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Then… 5 August 2014

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LS380 1% 693 $ CAD/mt… LSMGO 0.1% 1,058 $ CAD/mt… LNG 700 $ CAD/mt

Source: http://www.bunkerworld.com/prices/port/us/hou/

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Vehicle Driver Transport safely at optimal cost reliably

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Passenger and vehicles find competitive transport costs, plus LNG advantage

captures significant emissions reductions supporting green goals.

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Vehicle Owner Transport safely at optimal cost reliably

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LNG advantage captures significant CO2 emissions reductions supporting green

goals… LNG is ≈ 34% below HFO & ≈ 25% below diesel.

CO2 gm/

unit mile

25% 34%

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Ferry Owner A fair return capturing risks

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Compelling fuel payback for LNG an initial screening tool … not a good investment metric.

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ROCE Investment Criteria

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ROCE: reflects the company fundamental earning power.

Source: Robert Higgens, Analysis for Financial Management, 10th Edition, pg 53-55.

Return on Capital Employed

(Return on Invested Capital, ROIC ) reflects the company fundamental earning power as it removes the distorting effects of leverage inherent with Return on Equity (ROE).

Shipping companies often target 12% ROCE

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Investor finds LNG Competitive Advantage for return on capital… LNG hurdle rate

is highest & yet preserves passenger substantial emission reductions.

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Xxx

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Warren Buffett… World Famous Investor

EBITDA as equivalent to earnings for a company is tantamount to the Egyptian Pyramids: forever state of the art…with never a need to be replaced, improved or refurbished…

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The Pyramids

Earnings Before Interest Taxes Depreciation Amortization

EBITDA may overstate available cash flow… when used carefully and fully understood it may indicate what is available to pay bank debt and shareholders.

Often viewed as one of many economic indicators of company performance by financiers/investors/bankers.

Is often utilized when company has significant fixed assets.

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LNG fuel has strongest EBITDA… + $2.8 Million over HFO+ Scrubber

and + $4.6 Million atop MDO.

Years

EBITDA

MDO Fuel

HFO +

Scrubber

LNG Fuel


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Banker Are risks understood & I’m repaid !

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Banker finds debt cover is weakest on MDO fuel, LNG is strongest.

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The Pyramids

Earnings Before Interest Taxes

EBIT = Revenue minus expenses, excluding tax & interest

EBIT may conservatively understate available cash flow… when used carefully and fully understood it may indicate what is available to pay bank debt and shareholders.

Often viewed as one of many economic indicators of company performance by financiers/investors/bankers.

EBIT nulls the effects of different capital structures and tax rates.

EBIT was the precursor to EBITDA.

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Years

EBIT

MDO Fuel

HFO +

Scrubber

LNG Fuel

Banker Are the risks understood and I’m repaid !

LNG has strongest EBIT… Depreciation Canada 25 years straight line, loan

retires year 10… Dry docking years 5,10,15,20

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Agenda

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Energy


Owner Choices



ROPAX Ferry

Investment Returns


Stress Test


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Global Recoverable Shale Gas Resource

13 June 2016

Top 5 hold over half of world’s

shale gas resource

tcfSource: http://www.eia.gov/conference/2013/pdf/presentations/kuuskraa.pdf

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Canada #5 Shale Gas Resource

573 tcf gas & 8.8 billion barrels oil

British Columbia…Gas favorable, commercial production, market challenges

Alberta/ Saskatchewan…Gas massive area & modest concentration, activity starting

Eastern Canada…Gas development moving slowly

13 June 2016

Source:http://www.eia.gov/conference/2013/pdf/presentations/kuuskraa.pdf

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28 November 2014

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Source: http://www.reuters.com/article/us-opec-meeting-

idUSKCN0JA0O320141128

Key OPEC Vienna

meeting sets stage for

market share battle.

Brent begins steep fall.

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5 January 2015

62 © Wärtsilä

Source: http://www.forbes.com/sites/nathanvardi/2015/01/05/saudi-

arabias-750-billion-bet-drives-brent-oil-below-54/

Exert Discipline in the

Marketplace amongst OPEC

and Non OPEC countries...

Key focus on market

share… oil prices plunging.

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Discipline Target US or Russia ?

63 © Wärtsilä

Russia suffering double whammy:

Oil rich Ukraine and Black Sea burdened by politics under imposed sanctions as oil takes severe price slide…

Ruble plunges down against USD

Source: http://online.wsj.com/articles/ruble-hits-new-low-as-oil-prices-drop-1417441184

Source: http://www.usnews.com/news/articles/2014/11/10/an-oil-price-cold-war-with-saudi-arabia-not-

so-fast-experts-say

Source: http://www.businessinsider.com/ruble-plunging-again-2014-

12p://online.wsj.com/articles/ruble-hits-new-low-as-oil-prices-drop-1417441184

1 December 2014

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Source: http://www.businessinsider.com/citi-saudi-arabia-wont-win-this-oil-standoff-2014-11

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Profits negative…

Severe Pain

Profits squeezed…

Manageable Pain

Key Oil Production Cost

40 $/BBL

Brent Breakeven Price

Total Production

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Saudi Arabia

11.6 m BBL/day

Canada jumps to #4

2014 Production

65 © Wärtsilä

US vaults to 1st in

production oil and

other liquids

OPEC

OPEC

OPEC

OPEC

OPEC

OPEC

OPEC

Source:

ttps://en.wikipedia.org/wiki/List_of_countri

es_by_oil_production

http://www.eia.gov/beta/international/ranki

ngs/#?prodact=53-1&cy=2014OPEC

https://en.wikipedia.org/wiki/List_of_countries_by_oil_production

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Government Breakeven Budgets

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Source:

https://alfinnextlevel.files.w

ordpress.com/2014/04/oil_

breakeven_deutsche_bank

_oct_14.png

40 $/BBL

Severe shortfalls @ prices under 100$/BBL, present oil glut & soft prices challenge

sustainability beyond short run

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Brent Crude Oil Prices

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Source: http://www.nasdaq.com/markets/crude-oil-brent.aspx?timeframe=1y

THEN

NOW

Oil severe 60% price drop

past 20 months as

abundant supplies face

weak demand from China

and stagnant EU.

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What’s the impact of the steep fall in oil prices !

Is competitive advantage of LNG robust or fragile ?

68 © Wärtsilä

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Exchange Rate 31 May 2016

Now

$1 US = $1.31 CAD

Then August 2014

$1 US = $1.09 CAD

Source: http://www.xe.com/currencycharts/?from=USD&to=CAD&view=5Y

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Recent Fuel Prices 30 May 2016

Montreal

IFO 380@ 332 $ CAD

MGO@ 763 $ CAD

LNG@ 515 $ CAD

Note: Exchange Rate$1 US = $1.31 CAD

Source: http://shipandbunker.com/prices/am

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Ferry Owner A fair return capturing risks of oil fall 30 May 2016

71 © Wärtsilä

LNG maintains strong investment returns, but HFO+SCR+Scrubber yields highest rates

amidst steep oil dive… Diesel + SCR remains 3rd place.

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Stress Test & Return On Capital Robustness or Fragility

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Deviation

ROCE

Ships are long term multi-decade

investments while fuel prices

fluctuate short term.

LNG provides superior returns

versus steeper slopes of higher

volatility traditional fuels.

LNG Win Win: emissions reduction & long term superior investment returns over many price

scenarios compared to traditional fuels. Strong HFO scrubber returns yield 2nd place

overall… most volatile is MGO.

Tier 3 IMO 100% ECA

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Fuel Stress Test: Tier 3 IMO 100% ECA

THEN 5 August 2014

13.64% @ LNG 700 $ CAD/mt

11.95% @ MDO 1,058 $ CAD/mt

12.50% @ HFO 693 $ CAD/mt

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Deviation

ROCE

NOW 30 May 2016

14.39% @ LNG 515 $/mt

13.39% @ MDO 763 $/mt

14.51% @ HFO 332 $/mt

Today HFO Scrubber is highest return on Capital Employed with steep bunkers drop.

LNG holds 2nd place as robust investment today’s market; MDO remains lowest returns.

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Why Volatile ?


Changes to LNG underlying commodity variable costs have far less impact than Diesel.

Source: Pivotal LNG, An AGL Resources Company

Source:

https://i.ytimg.com/vi/8BVDiBNJwLY/h

qdefault.jpg

Source:

https://c1.staticflickr.com/1/220/50384011

1_e3b8a10f17_z.jpg?zz=1

LNG Diesel

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Fuel Attributes

80 © Wärtsilä

Utilize fuels specific for regional case... As fuels widely vary, the historic

dollars per ton or gallon is challenging to use as fuels host widely varying

energy content and density values. Numbers shown are representative.

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Weight Average Cost Capital WACC

83 © Wärtsilä

Source: http://www.investopedia.com/walkthrough/corporate-

finance/5/cost-capital/wacc.aspx

WACC may be used as a hurdle rate for NPV or to

assess ROIC (ROCE) performance.

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Cost of Capital - Divisional & Project Costs ( WACC cont. )

84 © Wärtsilä



WACC must be adjusted up or

down to properly reflect project

risks that differ from those of the

overall firm.

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Net Present Value & Internal Rate of Return

85 © Wärtsilä



IRR = discount rate that makes

NPV equal zero.

© Wärtsilä






XXXXXXXXXXXXXX

Keys

Global Energy Policies, market gamesmanship ?

Future Ahead, structural shifts?

As a vessel owner, all I want to knowis the tipping point…

What fuel strategy do I choose to to boost my bottom line & improve sustainability?

86 © Wärtsilä

A “Commodity Play” on fuel energy costs

seeking competitive advantage for market

share.

ropax ferry business case returns & environmental benefits · ropax ferry business case returns...

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