Case Study: Lake Michigan CarFerry

Robert Manglitz, president and chief executive officer, Lake Michigan Carferry

S.S. BADGER/LNG HISTORY A.) In 1973 there were Coast Guard regulations that indicated if a discharge from a vessel was incidental to the operation of that vessel, the vessel did not need to get a permit for that discharge. B.) In approximately 2007, an environmental group sued the EPA in California to regulate all marine discharges. The discharge they were really concerned with was ballast water despite the fact that there were 26 other discharges from marine vessels. The EPA sued to have the ruling appealed and lost. Only 17 discharges apply to the Great Lakes. C.) The EPA then had to develop a Vessel General Permit program to handle all of these discharges. Lake Michigan Carferry was able to work with the EPA to have our ash slurry discharge included in the Vessel General Permit. This was for a time period of four years. LAKE MICHIGAN CARFERRYS OPTIONS At the start of the Vessel General Permit, Lake Michigan Carferry had a number of options. A.) To investigate retaining ashes. B.) To look at converting the current power system to fuel oil (heavy oil). C.) To look at purchasing a vessel to replace the Badger. D.) To look at converting to diesel power. ASH A.) Ash retention was studied and it was believed it was possible but at that time had huge challenges and was not practical economically. We continue to do engineering studies on ash retention. CONVERTING TO A DIFFERENT FUEL A.) Lake Michigan Carferry considered installing oil burners in the fire box and utilizing heavy oil to be our source of energy. The EPA was very concerned about particulates in heavy oil and wanted to eliminate heavy oil as a fuel source. Through heavy

congressional support 10 steamers were exempted or permitted to burn heavy oil through 2020. We were not one of them. So that idea was abandoned. REPLACEMENT VESSEL A.)We looked at buying a vessel in Menomonee, Michigan called the Viking which was a diesel boat, had thrusters, stabilizers. We were told that if we bought the ship and used it exactly as it was, that would be permitted. However, if we increased the value through modifications and modernizing the boat by more than 50%, we would have to repower the boat and change out the engines which made that particular option uneconomically feasible. DIESEL REPOWER A.) Was determined that for us to repower or go to diesel the cost would have been approximately $18 million. We applied for a Tiger Grant to help us with that and we were not successful with that. RETAINING THE HISTORICAL ASPECT OF THE BADGER A.) The Badger is listed by the National Parks Department as a National Historical Site. In fact, our ticket stations on both sides of Lake Michigan are listed as historical places. It is extremely important for Lake Michigan Carferry to retain these historical designations for the S.S. Badger. B.) The Badger was recently nominated to be a National Historical Landmark. Most of this is because of the boilers, steam engines and the coal fired aspect of the Badger. C.) Because the Badger is a National Historic Place, we wanted to retain the items that really make it historical. Again, these are the boilers, steam engines and the coal firing. ELIMINATING A NUMBER OF THE OPTIONS A.) We worked very hard on the ash retention system and continue to do so. It appeared that the ash retention system would be very hard to be made practical. We still have ongoing engineering for ash retention. B.) The cost of dieselizing would be approximately $18 million. We believed it would be extremely difficult and expensive to attempt this on our own. The Badger has boilers and steam engines, it would not be like changing out a diesel engine for a diesel engine. It would not be unlike trying to make a steam engine out of your gasoline or diesel powered car. To repower would be extremely difficult when you consider all the instrumentation and internal apparatus that would have to be changed just to make the conversion from a steam engine to a combustion type engine. C.) We also looked at attempting to switch our fuel over to heavy oil. However, there is a new rule about particulate for the steamers that are currently operating on the Great Lakes. They have been able to stave that off until 2020 but we would not be included in that special piece of Legislation or permit. It is my understanding that if you do switch to

a higher tier engine, you can burn heavy oil until 2025. This would encourage the steamers to repower to a combustion engine. CNG/LNG DTE ENERGY A.) In the summer of 2011, DTE Energy approached us about natural gas. We were also working at that time with a company called US Oil in Wisconsin who was a very large consumer for British Petroleum. DTE ENERGY/CNG DTE Energy was working very hard with us with their focus on compressed natural gas. We worked with them and also jointly with US Oil on compressed natural gas. Both of these companies were much more interested in the CNG part of the supply side than LNG. A.) The Badger would use approximately 18,000 diesel gallons of fuel per day and the storage and loading of it would create several hardships. One would be the size of the compressor. The compressor would have taken a very large amount of energy to run and in addition we would have had to have a standby compressor in the event that the main compressor failed. B.) When we investigated the CNG storage on the vessel, it was determined that it would take well over 150 individual tanks with complex manifolding requirements, etc., this would be very difficult to do. We met with the ABS in Houston and also had preliminary conversations with the Coast Guard about the location of these tanks and also the fact that they would be operating with about 2600 2700 psi. LOCATION OF TANKS FOR THE S.S. BADGER A.) Because of the luxury of having large voids and storage areas below the car deck, we would like to locate the storage tanks below the car deck. B.) 24 from the main passenger floor. The car deck was built to handle 34 railroad cars at one time. The car deck is extremely durable, solid and well built. LNG For the Badger, LNG looked much more appealing and attractive. A.) On our visit to Houston in June of last year, we were given a tour by Clean Energy to one of their LNG truck stop stations and were extremely impressed with the LNG aspect. B.) The LNG has a very low PSI compared to CNG. The cost of the CNG station is obviously a very small percentage of what an LNG station would cost. It was determined that you would have to have multiple users for any justification of an LNG station. The LNG focus was really directed at the maritime, railroad and trucking industry. The cost of the LNG at that time was about $1.40 $1.70/diesel equivalent gallon.

C.) DTE Energy personnel traveled to Washington, D.C. with Lake Michigan Carferry personnel to visit with the National EPA. They had their teams of engineers and experts who did a presentation for us and the Environmental Protection Agency. D.) We indicated to the EPA that we needed an additional five years to attempt to pull all of this together and obtain the engineering, etc., for the Badger. We also believed that it would probably take a minimum of five years for the LNG industry to become established in a location that could be close enough to us to make operating on LNG practical. INDIVIDUAL PERMIT A.) The National EPA indicated that we should go to Region 5 in Chicago and apply for an Individual Permit. This was in June of 2011. No other ship has ever applied for an Individual Permit with the EPA. It took about nine months for the EPA to give us permission to apply for an Individual Permit. No other applicant has ever had to request permission to apply for an Individual Permit to the best of our knowledge. We were finally given permission in approximately February of this year to apply for an Individual Permit. In May of 2012, we did apply. The application and supporting data is approximately 1,000 pages long. We do not know what the outcome of that will be. Theres been a lot of opposition from environmentalists, a competitor and other sources. CONTENTS OF ASH A.) Much has been said about whats in our ash and its effect on Lake Michigan. Laboratory tests and analysis of our ash show that anything the Badger is doing to Lake Michigan would be very miniscule. Basically the content of the Badgers ash is not unlike sand. We are operating within limits applicable for discharge into Lake Michigan and discharge far less than many other approved permits. The only metal that was higher than the EPA threshold was Mercury. Meeting the Mercury threshold that the EPA has established is very difficult for most permitees. Our discharge is 1/50 of an ounce of Mercury per operating year. It would take us 50 years of operation to deposit one ounce of Mercury into Lake Michigan from our ash slurry. It is obvious that we would not be discharging for an additional 50 years. THE INDIVIDUAL PERMIT IS ONLY A SHORT TERM SOLUTION which would allow us the time to convert to LNG or some other option. GREAT LAKES MARITIME RESEARCH INSTITUTE/SS BADGER A.) In 2011 we were invited by GLMRI to attend a meeting that they sponsored in Cleveland, Ohio. B.) GLMRI approached us about applying for a grant from the Maritime Administration to do a study on the feasibility of using LNG by the maritime industry on the Great Lakes. C.) The Badger was picked as the pilot vessel for this study with the understanding that the information would be available and would be used by the public and the whole maritime industry.

D.) The grant was given to Great Lakes Maritime Research Institute, they contracted with Bay Engineering, Inc., in Sturgeon Bay, Wisconsin to analyze this from an engineering point of view. In particular, the feasibility of utilizing this fuel by the maritime industry on the Great Lakes.

E.) The preliminary draft and summary of this engineering study showed that the concept of a natural gas powered ship on the Great Lakes is a very promising prospect. In fact, the use of natural gas as fuel is more economical now and expected to even be more practical as we go forward. F.) One of their findings, and this was true from many sources indicated that while there is an abundance of natural gas, there is a shortage of LNG facilities.

G.) Obviously one solution to the shortage of the facilities would be truck transportation of LNG fuel. It is our understanding that the Washington Ferries are looking to possibly build two LNG powered vessels. There are also proposed offshore vessels to operate on the Gulf of Mexico that are proposed to be manufactured to use LNG in the United States.* H.) As you are probably all aware, the Europeans have been using LNG as a fuel for a very long time and fairly extensively with great success. I.) The Badger is extremely well positioned to convert to natural gas, probably better than most vessels. One issue that appears to be common in vessels is the tank positioning itself. In almost every case, there is not room available below deck and the recommendation is usually to place them above passenger areas. We would not want to position the fuel tanks above the passenger areas as our top deck is probably 70 above the water line. The Badger has tremendous voids and storage areas under deck and even the coal storage area we use now, which we store 640 tons of coal on board the ship, could open up a tremendous amount of space in itself. One Badger issue that we would need to deal with would be the fact that we need to refuel every day as we are on an extremely tight schedule. We never have longer than a 2-1/2 hour turnaround time when we are operating 24 hours a day. We would then have to re-fuel within this 2-1/2 hour period to maintain enough fuel to keep us running for 24 hours plus a 12 hour margin, if we were stranded in Wisconsin because of bad weather, etc. LNG FACILITIES A.) When you look at a distribution for natural gas, it shows you natural gas is everywhere but not a drop of LNG to use. WE FOUND LATER ON THAT THIS IS NOT TRUE. B.) Most LNG facilities shown on maps or graphs are actually peaking stations and are used for power plants when they need extra fuel or have their highest demand.

C.) One of the issues we see changing is the huge cost of the LNG facility itself. They would have to have a large amortization schedule for the sale of the fuel to recover the capital cost. Weve been told that the cost of these LNG facilities were somewhere between $50 and $100 million so they would need a very large demand to economically amortize their product. It is our understanding that Argon National Lab has developed an LNG station that would fit in two or three semi-trailers. We believe that this is being tried on an experimental basis in California and that the cost of that type of LNG facility would be greatly reduced from the $50 - $100 million. CHICKEN OR THE EGG A.) This is a comment that you will most likely hear every time you attend a conference like this or a conference on LNG. What comes first, the user or the supplier. Well, being in our position, we believe that it has to be the supplier first. B.) THE GOOD NEWS IS, we found a LNG facility called Integrys Transportation Fuels in Illinois. They did indicate that they did not have the infrastructure to do this right now, but they would pursue this with us. They estimated that their fuel would cost $1.00/gallon and about $.15/gallon to ship it to the Badger. They would have to utilize two trucks as we need to re-fuel every day. C.) ITF indicated they are interested in pursuing this, however, it would be easier if there was more potential users. The only issue they have is they do not currently have a facility to load trucks which the both of us believe would be something that could be overcome. D.) It is always important that you are always talking about a diesel equivalent gallon of fuel as a gallon of natural gas does not have the BTUs that a gallon of diesel fuel would have. I discovered this from Rich Cowans presentation (of Trans Canada) warned that when most natural gas was quoted, it was in the pipe and not through a LNG station or compressor station. Rich also indicated that it is typically not quoted with the diesel equivalent BTUs. When we utilized the math on the conversion, we discovered we would consume approximately 18,000 gallons of diesel equivalent fuel per day. There are very few disadvantages compared to a large number of advantages for the Badger to switch and use LNG. WHY SWITCH THE BADGER TO LNG /WHY WOULD WE BELIEVE THAT THIS IS POSSIBLE A.) We already know that LNG could possibly be available to us with the development of a truck loading facility. B.) It would eliminate the need for us to have three boilers on the line all of the time and possibly run on two. It would be much easier to automate and control the boiler response time with LNG. C.) USING LNG WOULD ALLOW THE BADGER TO IMMEDIATELY BECOME THE CLEANEST AND GREENETS SHIP ON THE GREAT LAKES.

D.) We know that through preliminary engineering studies it is possible to physically convert the Badger with its current engines and boilers to LNG. In fact, it would probably be easier for the Badger to convert to LNG than any other maritime vessel. We would be able to utilize the same engines and boilers by installing LNG burners and different instrumentation. We would probably be one of the simplest conversions of a maritime vessel. E.) Because of the Badgers large interior, empty space voids, LNG storage would not be an issue for the Badger. F.) As the market opened up and LNG became more readily available throughout the Great Lakes. The Badger would be able to operate much more during our off season. Hauling items such as steel coils, etc. The Badger is an ice-breaker and has an ice-breaker hull. G.) We know that the Europeans have been using this technology for some time so its not like we have to re-invent the wheel. A lot of that technology would be and is already available. A recent article in Research in Motion, described the international influence LNG is being used successful in Europe and entering the North American maritime arena.*** H.) The movement has already started out West and there probably will be a couple of passenger car ferries built in the next few years. We also know that the advance of LNG vessels is starting to happen for offshore vessels in the Gulf of Mexico.* I.) For other vessel operators on the Great Lakes it would make sense to have them very interested in a reasonably stable fuel cost that did not fluctuate with the politics or strife in other countries. We would be reliant on fuel from this country. J.) The fact that there is a great abundance of natural gas with more being discovered every day. K.) Companies today, in particular trucking companies are starting to use LNG not only in Michigan but in many states. We saw the facility last year in Houston and know that they are starting up in many other states including Michigan. There was a CNG station that was either just finished or is being built in Grand Rapids, Michigan basically for the trucking industry. When I was recently in Utah, (Heber City), it was sort of coincidental that Quest Star Gas Company was opening Heber cities first compressed natural gas station. There are now 34 public access CNG stations in the State of Utah in addition to the 50+ stations located at various businesses where fleet vehicles refuel with natural gas.** Clean cities appear to be the group to work with when you are trying to obtain helpful grants, etc. Apparently they work through the Department of Energy. L.) We believe that the maritime industry funded Great Lakes Maritime Research Institute feasibility study will prove that using CNG or LNG on the Great Lakes has a very high probability.

M.) We know that some of the major oil corporations are in discussions with building LNG facilities very close to Michigan such as in Sarnia. For Lake Michigan Carferry, its not a matter of if, its when. We understand with the capital costs we all have to work together to create the demand to justify the capital investment. N.) With the ability to truck transport LNG for reasonable distances, it would certainly open up the possibility for Lake Michigan Carferry and other Great Lakes operators to utilize LNG in the near future. O.) There are many automobiles, trucks, etc., already using CNG and LNG across the U.S. P.) The Europeans have already proven that LNG or natural gas as a fuel is not only a possibility it is a reality. LNG/CNG is already starting to happen in this country. With the abundance of natural gas, the stability of the future price and the tremendous environmental benefits, it is obvious this is a reality thats going to happen in the very near future. *Marine Log November 2011. **Wasatch Way, October 19, 2011. ***January or March Seaway Review.

Case Study: Lake Michigan CarFerry

Robert Manglitz, president and chief executive officer, Lake Michigan Carferry
S.S. BADGER The S.S. Badger is 410 long with a 59 beam and it drafts about 186. The Badger was commissioned in 1952 and has been operating on Lake Michigan almost continuously since that time. The Badger was originally designed and built to carry 34 railroad cars at one time. The Badger was part of a fleet that numbered 7 ships running back and forth from Ludington, Michigan to Green Bay, Kewaunee and Milwaukee, Wisconsin. In the early 1990s, the Badger was transformed into a passenger/automobile/truck carrier. The S.S. Badger can carry 600 passengers and 185 automobiles or a combination of automobiles and semi-trucks. The Badger is an ice-breaker and is double hulled and was designed to run and operate on Lake Michigan 365 days a year. The Badger has four boilers and two Skinner steam engines delivering 7,000hp. The average service speed is approximately 14-15 knots. The S.S. Badger currently operates between Ludington, Michigan and Manitowoc, Wisconsin. This is a 60 mile crossing and dock to dock takes approximately 4 hours. The service operates from mid-May to mid-October with one trip a day during the spring and fall season and two trips a day with 24-hour continuous operation in the summer months. The Badger is a continuation of a 100 year plus business.

Case Study: Lake Michigan CarFerry

Robert Manglitz, president and chief executive officer, Lake Michigan Carferry
The SS Badger/LMC 1996 the Badgers propulsion system was designated a mechanical engineering landmark by the American Society of Mechanical Engineers 1997 the Badger was officially named a Registered Michigan Historic Site by the Michigan Historical Commission 1997 the Badger was officially named a Registered Wisconsin Historic Site by the Wisconsin Historical Commission 1997 Lake Michigan Carferry was designated as a Michigan Centennial Business by the Historical Society of Michigan 2002 the Badger is named Ship of the Year by the Steamship Historical Society of America 2009 the Badger is placed on the Nation Register of Historic Places by the U.S. Department of the Interior