0.010.01P5YP6YThe 2018 Bonds bear interest at a rate of 3-month NIBOR plus 6.0% per annum, calculated on a 360-day year basis and mature on November 2, 2023.estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied, or partially unsatisfied, including ongoing time charters, as of December 31, 2019. ASU 2014-09 requires disclosure based on time bands that would be the most appropriate for the duration of the remaining performance obligations. The company uses one year time bands for contracts with up to two years in remaining duration, then up to and more than five years thereafter. Interest is payable quarterly in arrears on February 2, May 2, August 2 and November 2. The Company may redeem the 2018 Bonds, in whole or in part, at any time beginning on or after November 2, 2021. Any 2018 Bonds redeemed from November 2, 2021 until November 1, 2022, are redeemable at 102.4% of par, from November 2, 2022 until May 1, 2023, are redeemable at 101.5% of par, and from May 2, 2023 to the maturity date are redeemable at 100% of par, in each case, in cash plus accrued interest. The Company may redeem the 2017 Bonds, in whole or in part, at any time beginning on or after February 11, 2019. Any 2017 Bonds redeemed from February 11, 2019 up until February 10, 2020, are redeemable at 103.875% of par, from February 11, 2020 to August 10, 2020, are redeemable at 101.9375% of par, and from August 11, 2020 to the maturity date are redeemable at 100% of par, in each case, plus accrued interest.The financial covenants each as defined within the bond agreement are: (a) The issuer shall ensure that the Group (meaning “the Company and its subsidiaries”) maintains a minimum liquidity of no less than $25.0 million and (b) maintain a Group equity ratio of at least 30% (as defined in the 2018 Bond Agreement). As of December 31, 2019, the Company was in compliance with all covenants for the 2018 Bonds. The financial covenants each as defined within the credit facility are: a) the maintenance at all times of cash and cash equivalents in an amount equal to or greater than (i) $25.0 million and (ii) 5 per cent of the total indebtedness; b) a ratio of EBITDA to interest expense of not less than 2:1 up to and including September 30, 2020, after which it will revert to 2.5:1; and c) maintain a ratio of total stockholders' equity to total assets of not less than 30%The financial covenants each as defined within the credit facility are: a) the maintenance at all times of cash and cash equivalents in an amount equal to or greater than (i) $25.0 million and (ii) 5 per cent of the total indebtedness; b) a ratio of EBITDA to interest expense of not less than 2:1 up to and including September 30, 2020, after which it will revert to 3:1; and c) maintain a ratio of total stockholders' equity to total assets of not less than 30%.P3YP3YP3YP10M2025-032022-122023-12the Company entered into a bareboat charter for the vessel for a period of up to 13 years, with purchase options at years 5, 7 and 10falseFYNYSEGBGB1TNavigator Holdings Ltd.0001581804--12-31P5YVoyage Charter revenues: Voyage charter revenues, which include revenues from contracts of affreightment, are shown net of address commissions.Includes amounts relating to the Navigator Aurora Facility held within a lessor entity (for which legal ownership resides with financial institutions) that we are required to consolidate under U.S. GAAP into our financial statements as a variable interest entity (Please read Note 9 (Variable Interest Entities) to our consolidated financial statements. 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nvgs:Vessels
Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM
 20-F
 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
For the transition period from 
            
 to
                
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
Date of event requiring this shell company report
                                 
Commission file number:
001-36202
 
NAVIGATOR HOLDINGS LTD.
(Exact Name of Registrant as Specified in Its Charter)
 
Republic of the Marshall Islands
(Jurisdiction of Incorporation or Organization)
c/o NGT Services (UK) Ltd
10 Bressenden Place
London, SW1E 5DH, United Kingdom
Telephone: +44 20 7340 4850
(Address of Principal Executive Offices)
Niall Nolan
Chief Financial Officer
10 Bressenden Place
London, SW1E 5DH, United Kingdom
Telephone: +44 20 7340 4850
Facsimile: +44 20 7340 4858
(Name, Telephone,
E-mail
and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
         
Title of Each Class
 
Trading Symbol(s)
 
Name of Each Exchange on which Registered
Common Stock
 
NVGS
 
New York Stock Exchange
 
 
 
 
 
 
 
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
55,826,644 Shares of Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  
    No  
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  
    No  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
 S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  
    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” and emerging growth company” in Rule
 12b-2
of the Exchange Act.
Large accelerated filer  
    Accelerated filer  
    
Non-accelerated
filer  
    Emerging growth company  
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.    
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
         
U.S. GAAP  
 
International Financial Reporting Standards as Issued
by the International Accounting Standards Board  
 
Other  
 
 
 
 
 
 
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17  
                 Item 18  
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule
 12b-2
of the Exchange Act).    Yes  
    No  
 
 

Table of Contents
NAVIGATOR HOLDINGS LTD.
INDEX TO REPORT ON FORM
20-F
             
 
 
1
 
Item 1.
 
 
 
1
 
Item 2.
 
 
 
1
 
Item 3.
 
 
 
1
 
A.
 
 
 
1
 
B.
 
 
 
4
 
C.
 
 
 
4
 
D.
 
 
 
4
 
Item 4.
 
 
 
31
 
A.
 
 
 
31
 
B.
 
 
 
32
 
C.
 
 
 
59
 
D.
 
 
 
59
 
Item 4A.
 
 
 
60
 
Item 5.
 
 
 
60
 
A.
 
 
 
60
 
B.
 
 
 
73
 
C.
 
 
 
84
 
D.
 
 
 
84
 
E.
 
 
 
85
 
F.
 
 
 
85
 
G.
 
 
 
86
 
 
 
 
86
 
Item 6.
 
 
 
92
 
A.
 
 
 
92
 
B.
 
 
 
95
 
C.
 
 
 
98
 
D.
 
 
 
99
 
E.
 
 
 
99
 
Item 7.
 
 
 
99
 
A.
 
 
 
99
 
B.
 
 
 
100
 
C.
 
 
 
101
 
Item 8.
 
 
 
101
 
A.
 
 
 
101
 
B.
 
 
 
101
 
Item 9.
 
 
 
102
 
A.
 
 
 
102
 
B.
 
 
 
102
 
C.
 
 
 
102
 
Item 10.
 
 
 
102
 
A.
 
 
 
102
 
B.
 
 
 
102
 
C.
 
 
 
102
 
D.
 
 
 
104
 
E.
 
 
 
104
 
F.
 
 
 
110
 
G.
 
 
 
110
 
i

Table of Contents
             
H.
 
 
 
110
 
I.
 
 
 
110
 
Item 11.
 
 
 
110
 
Item 12.
 
 
 
111
 
 
 
112
 
Item 13.
 
 
 
112
 
Item 14.
 
 
 
112
 
Item 15.
 
 
 
112
 
Item 16A.
 
 
 
113
 
B.
 
 
 
113
 
C.
 
 
 
113
 
D.
 
 
 
114
 
E.
 
 
 
114
 
F.
 
 
 
114
 
G.
 
 
 
114
 
H.
 
 
 
115
 
 
 
116
 
Item 17.
 
 
 
116
 
Item 18.
 
 
 
116
 
Item 19.
 
 
 
116
 
Presentation of Information in this Annual Report
This annual report on Form
20-F
for the year ended December 31, 2019, or this “annual report,” should be read in conjunction with our consolidated financial statements and notes thereto included in this annual report. Unless the context otherwise requires all references in this annual report to “Navigator Holdings,” “our,” “we,” “us” and the “Company” refer to Navigator Holdings Ltd., a Marshall Islands corporation. All references in this annual report to our wholly-owned subsidiary “Navigator Gas L.L.C.” refer to Navigator Gas L.L.C., a Marshall Islands limited liability company. As used in this annual report, unless the context indicates or otherwise requires, references to “our fleet” or “our vessels” include the 38 vessels we owned and operated as of December 31, 2019. As used in the annual report, “WLR Group” refers collectively to WL Ross & Co. LLC and certain of its affiliated investment funds owning shares of our common stock.
Cautionary Statement Regarding Forward Looking Statements
This annual report contains certain forward-looking statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto, including our financial forecast. In addition, we and our representatives may from time to time make other oral or written statements that are also forward-looking statements. Such statements include, in particular, statements about our plans, strategies, business prospects, changes and trends in our business and the markets in which we operate as described in this annual report. In some cases, you can identify the forward-looking statements by the use of words such as “may,” “could,” “should,” “would,” “expect,” “plan,” “anticipate,” “intend,” “forecast,” “believe,” “estimate,” “predict,” “propose,” “potential,” “continue,” “scheduled,” or the negative of these terms or other comparable terminology. Forward-looking statements appear in a number of places in this annual report. These risks and uncertainties include, but are not limited to:
 
future operating or financial results;
 
pending acquisitions, business strategy and expected capital spending;
 
operating expenses, availability of crew, number of
off-hire
days, drydocking requirements and insurance costs;
ii

Table of Contents
 
fluctuations in currencies and interest rates;
 
 
general market conditions and shipping market trends, including charter rates and factors affecting supply and demand;
 
 
our ability to continue to comply with all our debt covenants;
 
 
our financial condition and liquidity, including our ability to refinance our indebtedness as it matures or obtain additional financing in the future to fund capital expenditures, acquisitions and other corporate activities;
 
 
estimated future capital expenditures needed to preserve our capital base;
 
 
our expectations about the availability of vessels to purchase, the time that it may take to construct new vessels, or the useful lives of our vessels;
 
 
our continued ability to enter into long-term, fixed-rate time charters with our customers;
 
 
the availability and cost of low sulfur fuel oil compliant with the International Maritime Organization (“IMO”) sulfur emission limit reductions, generally referred to as “IMO 2020,” which took effect January 1, 2020;
 
 
our vessels engaging in ship to ship transfers of liquidified petroleum gas (“LPG”) or petrochemical cargoes which may ultimately be discharged in sanctioned areas or to sanctioned individuals without our knowledge. Three of our vessels were named in a March 2019 U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) Advisory to the Maritime Petroleum Shipping Community as ships that had engaged in such ship to ship transfers of cargoes that may have ultimately been destined for Syria;
 
 
global epidemics or other health crises such as the recent outbreak of coronavirus
COVID-19
(“Coronavirus”);
 
 
changes in governmental rules and regulations or actions taken by regulatory authorities;
 
 
potential liability from future litigation;
 
 
our expectations relating to the payment of dividends;
 
 
our expectation regarding providing
in-house
technical management for certain vessels in our fleet and our success in providing such
in-house
technical management;
 
 
our expectations regarding the completion of construction and financing of the ethylene export marine terminal at Morgan’s Point, Texas (the “Marine Export Terminal”) and the financial success of the Marine Export Terminal and our related 50/50 joint venture with Enterprise Products Partners L.P (the “Export Terminal Joint Venture”); and
 
 
other factors discussed in “Item 3—Key Information—Risk Factors” of this annual report.
 
All forward-looking statements included in this annual report are made only as of the date of this annual report. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement. We expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations, or otherwise. We make no prediction or statement about the performance of our common stock.
iii

Table of Contents
PART I
Item 1.
Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2.
Offer Statistics and Expected Timetable
Not applicable.
Item 3.
Key Information
 
A.
Selected Financial Data
The following table presents selected historical financial data for the years ended December 31, 2015, 2016, 2017, 2018 and 2019 which has been derived in part from our audited consolidated financial statements included elsewhere in this annual report, and should be read together with and qualified in its entirety by reference to such audited consolidated financial statements.
The following table should be read together with “Item 5—Operating and Financial Review and Prospects.”
                                         
 
Navigator Holdings
 
 
Year Ended December 31,
 
 
2015
 
 
2016
 
 
2017
 
 
2018
 
 
2019
 
 
(in thousands, except per share data, fleet data and
average daily results)
 
Income Statement Data:
 
 
 
 
 
 
 
   
 
 
Operating Revenue
  $
315,223
    $
294,112
    $
298,595
    $
310,046
    $
301,385
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brokerage commissions
   
6,995
     
5,812
     
5,368
     
5,142
     
4,938
 
Voyage expenses
   
33,687
     
42,201
     
55,542
     
61,634
     
55,310
 
Vessel operating expenses
   
78,842
     
90,854
     
100,968
     
106,719
     
111,475
 
Depreciation and amortization
   
53,453
     
62,280
     
73,588
     
76,140
     
76,173
 
General and administrative costs
   
13,564
     
14,504
     
15,947
     
18,931
     
20,878
 
Profit on sale of vessel
   
(550
)    
—  
     
—  
     
—  
     
—  
 
Vessel write down following collision
   
10,500
     
—  
     
—  
     
—  
     
—  
 
Insurance recoverable from vessel repairs
   
(9,892
)    
504
     
—  
     
—  
     
—  
 
                                         
Total operating expenses
   
186,599
     
216,155
     
251,413
     
268,566
     
268,774
 
                                         
Operating income
  $
128,624
    $
77,957
    $
47,182
    $
41,480
    $
32,611
 
                                         
Foreign currency exchange gain on senior secured bonds
   
—  
     
—  
     
—  
     
2,360
     
969
 
Unrealized loss on
non-designated
derivative instruments
   
—  
     
—  
     
—  
     
(5,154
)    
(615
)
Net interest expense
   
(29,730
)    
(32,142
)    
(41,475
)    
(44,054
)    
(48,094
)
                                         
Income/(loss) before income taxes
  $
98,894
    $
45,815
    $
5,707
    $
(5,368
)   $
(15,129
)
Income taxes
   
(800
)    
(1,177
)    
(397
)    
(333
)    
(352
)
Share of result of equity accounted joint venture
   
—  
     
—  
     
—  
     
(38
)    
(1,126
)
                                         
Net income/(loss)
  $
98,094
    $
44,638
    $
5,310
    $
(5,739
)   $
(16,607
)
Net income attributable to
non-controlling
interest
   
—  
     
—  
     
—  
     
—  
     
(99
)
                                         
Net income/(loss) attributable to stockholders of Navigator Holdings Ltd.
  $
98,094
    $
44,638
    $
5,310
    $
(5,739
)   $
(16,706
)
                                         
Earnings per share
attributable to stockholders of Navigator Holdings Ltd.:
   
     
   
     
 
Basic
  $
1.77
    $
0.81
    $
0.10
    $
(0.10
)   $
(0.30
)
Diluted
  $
1.76
    $
0.80
    $
0.10
    $
(0.10
)   $
(0.30
)
Weighted average number of shares outstanding:
   
     
   
     
 
Basic
   
55,360,004
     
55,418,626
     
55,508,974
     
55,629,023
     
55,792,711
 
Diluted
   
55,706,104
     
55,794,481
     
55,881,454
     
55,629,023
     
55,792,711
 
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Navigator Holdings
 
 
Year Ended December 31,
 
 
2015
 
 
2016
 
 
2017
 
 
2018
 
 
2019
 
 
(in thousands, except per share data, fleet data and
average daily results)
 
Balance Sheet Data (at end of period):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash
  $
87,779
    $
57,272
    $
62,109
    $
71,515
    $
66,130
 
Total assets
   
1,560,505
     
1,724,843
     
1,853,887
     
1,832,751
     
1,874,253
 
Total liabilities
   
650,414
     
768,363
     
890,674
     
877,641
     
934,351
 
Total stockholders’ equity
   
910,091
     
956,480
     
963,213
     
955,110
     
939,803
 
Cash Flows Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
  $
149,554
    $
86,748
    $
75,921
    $
77,517
    $
49,700
 
Net cash used in investing activities
   
(205,856
)    
(238,153
)    
(183,025
)    
(42,327
)    
(90,409
)
Net cash provided by / used in financing activities
   
81,555
     
120,898
     
111,941
     
(25,784
)    
35,324
 
Fleet Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of vessels
(2)
   
27.8
     
31.3
     
36.2
     
38.0
     
38.0
 
Ownership days
(3)
   
10,135
     
11,463
     
13,228
     
13,870
     
13,870
 
Available days
(4)
   
9,865
     
11,255
     
13,195
     
13,767
     
13,608
 
Operating days
(5)
   
9,298
     
9,888
     
11,564
     
12,247
     
11,813
 
Fleet utilization
(6)
   
94.3
%    
87.9
%    
87.6
%    
89.0
%    
86.8
%
Average Daily Results:
   
     
     
     
     
 
Time charter equivalent rate
(7)
  $
30,280
    $
25,476
    $
21,018
    $
20,284
    $
20,831
 
Daily vessel operating expenses
(8)
  $
7,779
    $
7,925
    $
7,635
    $
7,694
    $
8,037
 
Other Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA
(1)
  $
182,077
    $
140,237
    $
120,770
    $
114,788
    $
108,012
 
Adjusted EBITDA
(1)
  $
182,077
    $
140,237
    $
120,770
    $
117,582
    $
107,658
 
 
(1) EBITDA and Adjusted EBITDA are not measurements prepared in accordance with U.S. GAAP
(non-GAAP
financial measures). EBITDA represents net income before net interest expense, income taxes and depreciation and amortization. We define Adjusted EBITDA as EBITDA before foreign currency exchange gain or loss on senior secured bonds and unrealized gain or loss on
non-designated
derivative instruments. EBITDA and Adjusted EBITDA do not represent and should not be considered as alternatives to consolidated net income, cash generated from operations or any other measure prepared in accordance with U.S. GAAP, and our calculation of EBITDA and Adjusted EBITDA may not be comparable to that reported by other companies.
EBITDA and Adjusted EBITDA are included herein because they are bases upon which we assess our financial performance and because we believe that they are useful to investors in evaluating our operating performance and are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry.
EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
  EBITDA and Adjusted EBITDA do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
  EBITDA and Adjusted EBITDA do not recognize the interest expense or the cash requirements necessary to service interest or principal payments on our debt;
  EBITDA and Adjusted EBITDA ignore changes in, or cash requirements for, our working capital needs; and
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  other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered measures of discretionary cash available to us to invest in the growth of our business.
The following table sets forth a reconciliation of net income to EBITDA and Adjusted EBITDA for the periods presented:
                                         
 
Navigator Holdings
 
 
Year Ended December 31,
 
 
2015
 
 
2016
 
 
2017
 
 
2018
 
 
2019
 
 
(in thousands)
 
Net income/(loss)
  $
98,094
    $
44,638
    $
5,310
    $
(5,739
)   $
(16,607
)
Net interest expense
   
29,730
     
32,142
     
41,475
     
44,054
     
48,094
 
Income taxes
   
800
     
1,177
     
397
     
333
     
352
 
Depreciation and amortization
   
53,453
     
62,280
     
73,588
     
76,140
     
76,173
 
                                         
EBITDA
  $
182,077
    $
140,237
    $
120,770
    $
114,788
    $
108,012
 
Foreign currency exchange gain on senior secured bonds
   
—  
     
—  
     
—  
     
(2,360
)    
(969
)
Unrealized loss on
non-designated
derivative instruments
   
—  
     
—  
     
—  
     
5,154
     
615
 
                                         
Adjusted EBITDA
  $
182,077
    $
140,237
    $
120,770
    $
117,582
    $
107,658
 
                                         
(2) We calculate the weighted average number of vessels during a period by dividing the number of total ownership days during that period by the number of calendar days during that period.
(3) We define ownership days as the aggregate number of days in a period that each vessel in our fleet has been owned by us. Ownership days are an indicator of the size of our fleet over a period and the potential amount of revenue that we record during a period.
(4) We define available days as ownership days less aggregate
off-hire
days associated with scheduled maintenance, which includes drydockings, vessel upgrades or special or intermediate surveys. We use available days to measure the aggregate number of days in a period that our vessels should be capable of generating revenues.
(5) We define operating days as available days less the aggregate number of days that our vessels are
off-hire
for any reason other than scheduled maintenance. We use operating days to measure the aggregate number of days in a period that our vessels are providing services to our customers.
(6) We calculate fleet utilization by dividing the number of operating days during a period by the number of available days during that period. We use fleet utilization to measure our ability to efficiently find suitable employment for our vessels.
(7) Time charter equivalent, (“TCE”), is calculated by dividing total operating revenues, less any voyage expenses, by the number of operating days for the relevant period. TCE is not calculated in accordance with U.S. GAAP. TCE rate is a shipping industry performance measure used primarily to compare
period-to-period
changes in a company’s performance despite changes in the mix of charter types (i.e., spot charters, time charters and contracts of affreightment (“COAs”)) under which the vessels may be employed between the periods. We include average daily TCE rate, as we believe it provides additional meaningful information in conjunction with net operating revenues, because it assists our management in making decisions regarding the deployment and use of our vessels and in evaluating their financial performance. Our calculation of TCE rate may not be comparable to that reported by other companies.
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The following table represents a reconciliation of TCE rate to operating revenue, the most directly comparable financial measure calculated in accordance with U.S. GAAP for the periods presented:
                                         
 
Year Ended December 31,
 
 
2015
 
 
2016
 
 
2017
 
 
2018
 
 
2019
 
 
(in thousands, except operating days and
average daily time charter equivalent rate)
 
Fleet Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating revenue
  $
315,223
    $
294,112
    $
298,595
    $
310,046
    $
301,385
 
Voyage expenses
   
33,687
     
42,201
     
55,542
     
61,634
     
55,310
 
                                         
Operating revenue less Voyage expenses
   
281,536
     
251,911
     
243,053
     
248,412
     
246,075
 
Operating days
   
9,298
     
9,888
     
11,564
     
12,247
     
11,813
 
Average daily time charter equivalent rate
  $
30,280
    $
25,476
    $
21,018
    $
20,284
    $
20,831
 
(8) Daily vessel operating expenses are calculated by dividing vessel operating expenses by ownership days for the relevant time period.
 
B.
Capitalization and Indebtedness
Not applicable.
 
C.
Reasons for the Offer and Use of Proceeds
Not applicable.
 
D.
Risk Factors
You should carefully consider the following risk factors together with all of the other information included in this annual report in evaluating an investment in our common stock. If any of the following risks were actually to occur, our business, financial condition, operating results and cash flows could be materially adversely affected. In that case, the trading price of our common stock could decline, and you could lose all or part of your investment.
Risks Related to Our Business
Charter rates for liquefied gas carriers are cyclical in nature.
The international liquefied gas carrier market is cyclical with attendant volatility in terms of charter rates, profitability and vessel values. The degree of charter rate volatility among different types of liquefied gas carriers has varied widely. Because many factors influencing the supply of, and demand for, vessel capacity are unpredictable, the timing, direction and degree of changes in the international liquefied gas carrier market are also unpredictable.
Future growth in the demand for our services will depend on changes in supply and demand, economic growth in the world economy and demand for liquefied gas transportation relative to changes in worldwide fleet capacity. Adverse economic, political, or social developments or other global financial turmoil, could have a material adverse effect on world economic growth and thus on our business and operating results.
The charter rates we receive will be dependent upon, among other things:
  changes in the supply of vessel capacity for the seaborne transportation of liquefied gases, which is influenced by the following factors:
  the number of newbuilding deliveries and the ability of shipyards to deliver newbuildings by contracted delivery dates and capacity levels of shipyards;
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  the scrapping rate of older vessels;
  the number of vessels that are out of service, as a result of vessel casualties, repairs and drydockings; and
  changes in liquefied gas carrier prices.
  changes in the level of demand for seaborne transportation of liquefied gases, which is influenced by the following factors:
  the level of production of liquefied gases in net export regions;
  the level of demand for liquefied gases in net import regions such as Asia, Europe, Latin America and India;
  the level of internal demand for petrochemicals to supply integrated petrochemical facilities in net export regions;
  a reduction in global demand for petrochemicals due to ecological or environmental concerns about the use of plastics;
  a reduction in global or general industrial activity specifically in the plastics and chemical industry;
  changes in the cost of petroleum and natural gas from which liquefied gases are derived;
  prevailing global and regional economic conditions;
  political changes and armed conflicts in the regions traveled by our vessels and the regions where the cargoes we carry are produced or consumed that interrupt production, trade routes or consumption of liquefied gases and associated products;
  developments in international trade;
  the distances between exporting and importing regions over which liquefied gases are to be transported by sea;
  infrastructure to support seaborne liquefied gases, including pipelines, railways and terminals;
  the availability of alternative transportation means, including pipelines;
  changes in seaborne and other transportation patterns; and
  changes in environmental and other regulations that may limit the production or consumption of liquefied gases or the useful lives of vessels.
Adverse changes in any of the foregoing factors could have an adverse effect on our revenues, profitability, liquidity, cash flow and financial position.
We are partially dependent on voyage charters in the spot market, and any decrease in spot charter rates in the future may adversely affect our earnings.
We currently own and operate a fleet of 38 vessels. Of those, 14 vessels are employed in the spot market, exposing us to fluctuations in spot market charter rates.
Although spot chartering is common in our industry the spot market may fluctuate significantly over short periods of time. The successful operation of our vessels in the competitive spot market depends upon, among other things, obtaining profitable spot charters and minimizing, to the extent possible, time spent waiting for charters and time spent traveling in ballast and to pick up cargo. If future spot charter rates decline, we may be unable to operate our vessels trading in the spot market profitably or meet our obligations, including payments on
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indebtedness. Furthermore, as charter rates for spot charters are fixed for a single voyage or multiple voyages which may last up to several weeks or months, during periods in which spot charter rates are rising, we will generally experience delays in realizing the benefits from such increases.
We may be unable to charter our vessels at attractive rates, which would have an adverse impact on our business, financial condition and operating results.
Payments under our charters represent substantially all of our operating cash flow. Our time charters expire on a regular basis. If demand for liquefied gas carriers has declined at the time that our charters expire, we may not be able to charter our vessels at favorable rates or at all. If more vessels are added to the overall fleet through newbuilding programs, charter rates may reduce. In addition, while longer-term charters would become more attractive to us at a time when charter rates are declining, our customers may not want to enter into longer-term charters in such an environment. As a result, if our charters expire or newbuild vessels are delivered at a time when charter rates are declining, we may have to accept charters with lower rates or shorter terms than would be desirable. Furthermore, we may be unable to charter our vessels immediately after the expiration of their charters resulting in periods of
non-utilization
for our vessels. Our inability to charter our vessels at favorable rates or terms or at all would adversely impact our business, financial condition and operating results. Please read “Item 4—Information on the Company—Business Overview—Our Fleet.”
A significant portion of our revenues from a limited number of customers.
We have derived, and believe that we will continue to derive, a significant portion of our revenues from a limited number of customers. Our customers include major oil and gas companies, chemical companies, energy trading companies, state owned oil companies and various other entities that depend upon marine transportation. Four of our customers accounted for more than 10.0% each, and in aggregate, 5.41% of our consolidated revenues during the year ended December 31, 2019, equivalent to $163.5 million of our total revenue. Three of our customers accounted for more than 10.0% each, and in aggregate, 45.4% of our consolidated revenues during the year ended December 31, 2018 equivalent to $140.8 million of our total revenue. The loss of any significant customer or a substantial decline in the amount of services requested by a significant customer, or the inability of a significant customer to pay for our services, could have a material adverse effect on our business, financial condition and results of operations.
If the demand for liquefied gases and the seaborne transportation of liquefied gases does not grow, our business, financial condition and operating results could be adversely affected.
Our growth depends on continued growth in world and regional demand for liquefied gases and the seaborne transportation of liquefied gases, each of which could be adversely affected by a number of factors, such as:
  increases in the demand for industrial and residential natural gas in areas linked by pipelines to producing areas, or the conversion of existing
non-gas
pipelines to natural gas pipelines in those markets;
 
  increases in demand for chemical feedstocks in net exporting regions, leading to less liquefied gases for export;
 
  decreases in the consumption of petrochemical gases;
 
  decreases in the consumption of LPG due to increases in its price relative to other energy sources or other factors making consumption of liquefied gas less attractive;
 
  the availability of competing, alternative energy sources, transportation fuels or propulsion systems;
 
  decreases in demand for liquefied gases resulting from changes in feedstock capabilities of petrochemical plants in net importing regions;
 
  changes in the relative values of hydrocarbon and liquefied gases;
 
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  a reduction in global industrial activity, especially in the plastics and petrochemical industries, particularly in regions with high demand growth for liquefied gas, such as Asia;
 
  adverse global or regional economic or political conditions, particularly in liquefied gas exporting or importing regions, which could reduce liquefied gas shipping or energy consumption;
 
  changes in governmental regulations, such as the elimination of economic incentives or initiatives designed to encourage the use of liquefied gases over other fuel sources; or
 
  decreases in the capacity of petrochemical plants and crude oil refineries worldwide or the failure of anticipated new capacity to come online.
 
Reduced demand for liquefied gases and the seaborne transportation of liquefied gases would have a material adverse effect on our future growth and could adversely affect our business, financial condition and operating results.
The expected growth in the supply of petrochemical gases, including ethane and ethylene, available for seaborne transport may not materialize, which would deprive us of the opportunity to obtain premium charters for petrochemical cargoes.
Charter rates for petrochemical gas cargoes can be higher than those for LPG, with charter rates for ethylene historically commanding a premium. While we believe that growth in production at petrochemical production facilities and regional supply and pricing imbalances will create opportunities for us to transport petrochemical gas cargoes, including ethane and ethylene, factors that are beyond our control may cause the supply of petrochemical gases available for seaborne transport to remain constant or even decline. For example, a significant portion of any increased production of petrochemicals in export regions may be used to supply local facilities that use petrochemicals as a feedstock rather than exported via seaborne trade. If the supply of petrochemical gases available for seaborne transport does not increase, we will not have the opportunity to obtain the increased charter rates associated with petrochemical gas cargoes, including ethane and ethylene, and our expectations regarding the growth of our business may not be met.
The market values of our vessels may decline if market conditions deteriorate. This could cause us to incur impairment charges, which could cause us to breach covenants in our debt facilities.
The market value of liquefied gas carriers fluctuates. While the market values of our vessels have declined as a result of the most recent market downturn, they still remain subject to a potential significant further decline depending on a number of factors including, among other things: shipyard capacity and the cost of newbuildings, general economic and market conditions affecting the shipping industry, prevailing charter rates, competition from other shipping companies, other modes of transportation, other types, sizes and age of vessels and applicable governmental regulations.
In addition, when vessel prices are considered to be low, companies not usually involved in shipping may make speculative vessel orders, thereby increasing the supply of vessel capacity, satisfying demand sooner and potentially suppressing charter rates.
Also, if the book value of a vessel is impaired due to unfavorable market conditions or a vessel is sold at a price below its book value, we would incur a loss that could have a material adverse effect on our business, financial condition and operating results.
Furthermore, our loan agreements and our bond agreements have covenants relating to asset values, whereby if vessel values were to reduce to below those set out in the covenants, a breach would occur and cause the loan amounts to be immediately repayable. This could have a material adverse effect on our business, financial condition and operating results.
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Over the long-term, we will be required to make substantial capital expenditures to preserve the operating capacity of, and to grow, our fleet.
We must make substantial capital expenditures over the long-term to maintain the operating capacity and expansion of our fleet in order to preserve our capital base.
We estimate that drydocking expenditures can cost up to $2.0 million per vessel per drydocking, although these expenditures could vary significantly from quarter to quarter and year to year and could increase as a result of changes in:
  the location and required repositioning of the vessel;
 
  the cost of labor and materials;
 
  the types of vessels in our fleet;
 
  the age of our fleet;
 
  governmental regulations and maritime self-regulatory organization standards relating to safety, security or the environment;
 
  competitive standards; and
 
  high demand for drydock usage.
 
Our ability to obtain bank financing or to access the capital markets for future debt or equity offerings in order to finance the expansion of our fleet may be limited by our financial condition at the time of any such financing or offering as well as by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control. Our failure to obtain the funds for future capital expenditures could limit our ability to expand our fleet. Even if we are successful in obtaining necessary funds, the terms of such financings may significantly increase our interest expense and financial leverage and issuing additional equity securities may result in significant shareholder dilution. Please read “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Liquidity and Cash Needs.”
We may be unable to make, or realize the expected benefits from, acquisitions and the failure to successfully implement our growth strategy through acquisitions could adversely affect our business, financial condition and operating results.
Our growth strategy may include newbuildings or selectively acquiring existing liquefied gas carriers and investing in complementary assets. Factors such as competition from other companies, many of which have significantly greater financial resources than we do, could reduce our acquisition and investment opportunities or cause us to pay higher prices.
Any existing vessel or newbuilding we acquire may not be profitable at or after the time of acquisition or delivery and may not generate cash flow sufficient to cover the cost of acquisition. Market conditions at the time of delivery of any newbuildings may be such that charter rates are not favorable and the revenue generated by such vessels is not sufficient to cover their purchase prices.
In addition, our acquisition and investment growth strategy exposes us to risks that could adversely affect our business, financial condition and operating results, including risks that we may:
  fail to realize anticipated benefits of acquisitions, such as new customer relationships, cost savings or increased cash flow;
 
  not be able to obtain charters at favorable rates or at all;
 
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  be unable to hire, train or retain qualified shore and seafaring personnel to manage and operate our growing business and fleet;
 
  fail to integrate investments of complementary assets or vessels in capacity ranges outside our current operations in a profitable manner;
 
  not have adequate operating and financial systems in place as we implement our expansion plan;
 
  decrease our liquidity through the use of a significant portion of available cash or borrowing capacity to finance acquisitions;
 
  significantly increase our interest expense or financial leverage if we incur additional debt to finance acquisitions; or
 
  incur or assume unanticipated liabilities, losses or costs associated with the business or vessels acquired.
 
Unlike newbuildings, existing vessels typically do not carry warranties as to their condition. While we inspect existing vessels prior to purchase, such an inspection would normally not provide us with as much knowledge of a vessel’s condition as we would possess if it had been built for us and operated by us during its life. Repairs and maintenance costs for existing vessels are difficult to predict and may be substantially higher than for vessels we have operated since they were built. These costs could decrease our cash flow and reduce our liquidity.
From time to time, we may selectively pursue new strategic acquisitions or ventures we believe to be complementary to our seaborne transportation services and any strategic transactions that are a departure from our historical operations could present unforeseen challenges and result in a competitive disadvantage relative to our more-established competitors.
We may pursue strategic acquisitions or investment opportunities we believe to be complementary to our core business of owning and operating handysize liquefied gas carriers and the transportation of LPG, petrochemical gases and ammonia. Such ventures may include, but are not limited to, operating liquefied gas carriers in different size categories, expanding the types of cargo we carry and/or ventures or facilities involved in the export, distribution, mixing and/or storage of liquefied gas cargoes. While we have general knowledge and experience in the seaborne transportation services industry, we currently have limited operating history outside of the ownership and operation of liquified gas carriers and the transportation of petrochemicals, LPG and ammonia.
Any investments we pursue outside of our historical provision of seaborne transportation services could result in unforeseen operating difficulties and may require significant financial and managerial resources that would otherwise be available for the ongoing operation and growth of our fleet.
We may face several factors that could impair our ability to successfully execute these acquisitions or investments including, among others, the following:
  delays in obtaining regulatory approvals, licenses or permits from different governmental or regulatory authorities, including environmental permits;
 
  unexpected cost increases or shortages in the equipment, materials or labor required for the venture, which could cause the venture to become economically unfeasible; and
 
  unforeseen engineering, design or environmental problems.
 
Any of these factors could delay any such acquisitions or investment opportunities and could increase our projected capital costs. If we are unable to successfully integrate acquisitions or investments into our historical business, any costs incurred in connection with these projects may not be recoverable. If we experience delays, cost overruns, or changes in market circumstances, we may not be able to demonstrate the commercial viability of such acquisitions or investment opportunities or achieve the intended economic benefits, which would materially and adversely affect our business, financial condition and operating results.
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We may be unable to realize the expected benefits from our investment in the Marine Export Terminal in the U.S. Gulf.
There are a number of contingencies that could impact our ability to benefit from the Marine Export Terminal on a timely basis or at all, including, among others, the following:
  our ability to have the throughput to the Marine Export Terminal fully committed;
 
  any inability of the Marine Export Terminal to operate due to operational issues; and
 
  existing customers not renewing their contracts.
 
In addition, our 50/50 joint venture partner in the Export Terminal Joint Venture is the sole managing member of the Export Terminal Joint Venture and is also the operator of the related Marine Export Terminal. The success of the 50/50 owned Export Terminal Joint Venture and the Marine Export Terminal is dependent on the successful management and operation thereof by the managing member and operator. Further, the managing member’s and operator’s interests may not be entirely aligned with our interests.
If our expectations with respect to the completion of construction and financing of the Marine Export Terminal or the success of our 50/50 owned Marine Export Terminal and the Export Terminal Joint Venture are not realized, it could have a material adverse effect on our business, financial condition and operating results.
We operate in countries which can expose us to political, governmental and economic instability, which could adversely affect our business, financial condition and operating results.
Our operations are primarily conducted outside of the United States, and may be affected by economic, political and governmental conditions in the countries where we engage in business or where our vessels are registered. Any disruption caused by these conditions could adversely affect our business, financial condition and operating results. We derive some of our revenues from transporting gas cargoes from, to and within politically unstable regions. Conflicts in these regions have included attacks on ships and other efforts to disrupt shipping. In addition, vessels operating in some of these regions have been subject to piracy. Hostilities or other political instability in regions where we operate or may operate could have a material adverse effect on our business, financial condition and operating results. In addition, tariffs, trade embargoes and other economic sanctions by the United States or other countries against countries where we engage in business may limit, restrict or prohibit our trading activities with those countries, which could also harm our business. Finally, a government could requisition one or more of our vessels, which is most likely during a war or national emergency. Any such requisition would cause a loss of the vessel and would harm our business, financial condition and operating results.
If our vessels call on ports located in countries that are subject to restrictions imposed by the U.S. government, our reputation and the market for our securities could be adversely affected.
Although no vessels owned or operated by us have called on ports located in countries subject to comprehensive sanctions and embargoes imposed by the U.S. government and other authorities or countries identified by the U.S. government or other authorities as state sponsors of terrorism, such as Cuba, Iran, North Korea, Sudan, Syria and the Crimean region of Ukraine, in the future our vessels may call on ports in these countries from time to time on charterers’ instructions in violation of contractual provisions that prohibit them from doing so. Sanctions and embargo laws and regulations vary in their application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened over time.
Although we believe that we have been in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing
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interpretations. Any such violation could result in fines, penalties or other sanctions that could severely impact the market for our common shares, our ability to access U.S. capital markets and conduct our business and could result in some investors deciding, or being required, to divest their interest, or not to invest, in us.
Our charterers may violate applicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels and those violations could in turn negatively affect our reputation or the ability of our charters to meet their obligations to us or result in fines, penalties or sanctions.
Operating our vessels in sanctioned areas or chartering our vessels to sanctioned individuals or entities could adversely affect our business, financial condition and operating results.
We have obligations and believe we comply fully with the various sanctions regimes around the world, not just the sanctions authorities of the United States, but also the relevant departments within the United Nations, European Union and other individual countries, as well as governmental institutions and agencies of those countries. Our current 38 vessels transport LPG and other liquefied petrochemical gases throughout the globe and we are vigilant in ensuring our vessels do not call to countries or ports or trade with persons that may be on any lists which restrict or inhibit such trade or relationship. Any actual or alleged violations could materially damage our reputation and ability to do business.
Our vessels engage in hundreds of ship to ship transfers of LPG or petrochemical cargoes annually and these cargoes may ultimately be discharged in sanctioned areas or to sanctioned individuals without our knowledge. For example, three of our vessels were named in a 2019 U.S. Department of the Treasury’s OFAC Advisory to the Maritime Petroleum Shipping Community as ships that had engaged in such ship to ship transfers of cargoes in 2017 that may have ultimately been destined for Syria.
Furthermore, if any of our customers were to become a sanctioned entity, the charterparty would end immediately and become void which could lead to one or more vessels being redelivered to us, ending what may be a long-term charter commitment. For example, as a result of OFAC designating Petróleos de Venezuela S.A., or “PDVSA” as such, we had to prematurely terminate long term time charters on two of our vessels.
We provide
in-house
technical management for certain vessels in our fleet which may impose significant additional responsibilities on our management and staff.
We currently provide
in-house
technical management for 17 of the 38 vessels in our fleet. Providing
in-house
technical management for any vessel in our fleet may impose significant additional responsibilities on our management and staff. Further, because we had little experience of providing technical management
in-house
prior to 2016, our management may encounter challenges as we develop and refine our technical management systems.
Some charterers and port terminals may require the crew of our fleet to have a minimum of two years of experience with our vessel’s
on-board
safety management systems. We switch to
in-house
technical management for a vessel in our fleet only if the existing charterer so agrees, but charterers may change and a new charterer may refuse to charter a vessel in our fleet if it is managed by our
in-house
technical managers. Similarly, certain ports may not allow our vessels that recently changed to
in-house
technical management into their terminals to load or discharge cargoes. If we are not successful with respect to any vessel for which we may provide technical management
in-house,
our reputation and ability to charter vessels may be negatively impacted, which could materially and adversely affect our business, financial condition and operating results.
A fluctuation in fuel prices may adversely affect our charter rates for time charters and our cost structure for voyage charters and COAs and consequently adversely affect our business, financial condition and results of operation.
The price and supply of bunker fuel are unpredictable and fluctuate based on events outside our control, including geopolitical developments, supply and demand for oil, actions by members of the Organization of the
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Petroleum Exporting Countries (“OPEC”) and other oil and gas producers, war and unrest in oil producing countries and regions, regional production patterns and environmental concerns and regulations.
Bunker fuel prices have increased over the past few years and have further significantly increased with the introduction of the new low sulfur bunker fuel required effective as of January 1, 2020 under IMO 2020, absent the installation of scrubbers. We have not installed scrubbers on board our vessels, which removes sulfur oxides from exhaust gases, enabling the consumption of cheaper high sulfur bunker fuel. Consequently our customers may be less willing to enter into time charters under which they bear the full risk of bunker fuel price increases, or may shorten the periods for which they are willing to make such commitments. Under voyage charters and COAs, we bear the cost of bunker fuel used to power our vessels. From January 1, 2020, we will incur the increase in bunker fuel prices which will correspondingly increase our voyage expenses under each of our voyage charters and COAs, which could reduce our profitability and adversely affect our results of operations.
The required drydocking of our vessels could have a more significant adverse impact on our revenues than we anticipate, which would adversely affect our business, financial condition and operating results.
Our vessels require drydocking every five years until the age of 15 years and every two and a half years thereafter. The drydocking of our vessels requires significant capital expenditures and results in loss of revenue while our vessels are
off-hire.
Any significant increase in the number of days of
off-hire
due to such drydocking or in the costs of any repairs could have a material adverse effect on our financial condition. Although we attempt to ensure that no more than one vessel will be out of service at any given time, this may not always be possible because of the age of certain vessels in our fleet, we may underestimate the time required to drydock our vessels, or unanticipated problems may arise during drydocking. Currently, six of our vessels are over the age of 15 years and will require more regular drydocking.
Our operating costs are likely to increase in the future as our vessels age, which would adversely affect our business, financial condition and operating results.
In general, the cost of maintaining a vessel in good operating condition increases with the age of the vessel. As our vessels age, we will incur increased costs. Older vessels are typically less fuel-efficient and more costly to maintain than newer vessels due to improvements in engine technology. If equipment on board becomes obsolete and it is not cost effective to repair it, such equipment would have to be replaced. Cargo insurance rates increase with the age of a vessel, making older vessels less desirable to charterers. Governmental regulations, including environmental, safety or other equipment standards related to the age of vessels may also require expenditures for alterations, or the addition of new equipment, to our vessels to comply. These laws or regulations may also restrict the type of activities in which our vessels may engage or limit their operation in certain geographic regions. We cannot assure you that, as our vessels age, market conditions will justify those expenditures or enable us to operate our vessels as profitably as our younger vessels during the remainder of their expected useful lives.
The operation of ocean going vessels entails the possibility of marine disasters including damage or destruction of the vessel due to natural disasters, accident, the loss of a vessel due to piracy or terrorism, damage or destruction of cargo and similar events that may cause a loss of revenue from affected vessels and damage our business reputation, which may in turn lead to loss of business.
The operation of ocean going vessels entails certain inherent risks that may materially adversely affect our business and reputation, including:
  damage or destruction of vessel due to natural disasters;
 
  damage or destruction of vessel due to marine disasters such as a collision;
 
  the loss of a vessel due to piracy and terrorism;
 
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  cargo and property losses or damage as a result of the foregoing or less drastic causes such as human error, mechanical failure, grounding, fire, explosions and bad weather;
 
  environmental accidents as a result of the foregoing;
 
  risks to the onboard vessel management personnel as a result of the foregoing; and
 
  business interruptions and delivery delays caused by mechanical failure, human error, war, terrorism, political action in various countries, labor strikes or adverse weather conditions.
 
Any of these circumstances or events could substantially increase our costs. For example, the costs of replacing a vessel or cleaning up a spill could substantially lower our revenues by taking vessels out of operation permanently or for periods of time. The involvement of our vessels in a disaster or delays in delivery or loss of cargo may harm our reputation as a safe and reliable vessel operator and cause us to lose business.
The total loss or damage of any of our vessels or cargoes could harm our reputation as a safe and reliable vessel owner and operator. If we are unable to adequately maintain or safeguard our vessels, we may be unable to prevent any such damage, costs, or loss that could negatively impact our business, financial condition and operating results.
The loss of or inability to operate any of our vessels would result in a significant loss of revenues and cash flow which would adversely affect our business, financial condition and operating results.
We do not carry loss of hire insurance. If, at any time, we cannot operate any of our vessels due to mechanical problems, lack of seafarers to crew a vessel, prolonged drydocking periods, loss of certification, the loss of any charter or otherwise, our business, financial condition and operating results will be materially adversely affected. In the worst case, we may not receive any revenues because of the inability to operate any of our vessels, but we may be required to pay expenses necessary to maintain the vessel in proper operating condition.
Adverse global economic conditions could have a material adverse effect on our business, financial condition and operating results.
Adverse global economic conditions may negatively impact our business, financial condition, results of operations and cash flows in ways that we cannot predict. Adverse economic conditions may lead to a decline in our customers’ operations or ability to pay for our services, which could result in decreased demand for our vessels. There has historically been a strong link between the development of the world economy and demand for energy, including liquefied gases. Global financial markets and economic conditions have been volatile in recent years and remain subject to significant vulnerabilities, including trade wars between the U.S. and China or others, the effects of volatile energy prices and continuing turmoil and hostilities in the Middle East, the Korean Peninsula, North Africa and other geographic areas. An extended period of adverse development in global economic conditions or a tightening of the credit markets could reduce the overall demand for liquefied gases and have a negative impact on our customers. These potential developments, or market perceptions concerning these and related issues, could affect our business, financial condition and operating results.
Furthermore, a future economic slowdown could have an impact on our customers and/or suppliers including, among other things, causing them to fail to meet their obligations to us. Similarly, a future economic slowdown could affect lenders participating in our secured term loan and revolving credit facilities, making them unable to fulfill their commitments and obligations to us. Any reductions in activity owing to such conditions or failure by our customers, suppliers or lenders to meet their contractual obligations to us could adversely affect our business, financial condition and operating results.
Outbreaks of epidemic and pandemic of diseases could have a material adverse effect on our business, financial condition and operating results.
Our operations are subject to risks related to outbreaks of infectious diseases. The recent outbreak of the novel strain of coronavirus referred to as
COVID-19
(“Coronavirus”) that emanated from China, as well as other
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potential outbreaks of infectious diseases in the future, may negatively affect economic conditions or restrict the seaborne transportation of products, including LPG and petrochemical products. Governments throughout the world have imposed travel bans, quarantines and other emergency public health measures. Those measures, though temporary in nature, may continue for longer than anticipated.
As a result of these measures, there may be a reduction in the supply of and demand for LPG or petrochemicals regionally or globally, including as a result of a slowdown or complete shutdown in the infrastructure of countries if the outbreak persists for an extended period of time. Any restriction on the ability to transport LPG and petrochemicals to countries or continents could adversely affect our business, financial condition and operating results, principally through reduced revenues and resultant reduced cashflows. This may affect our ability to comply with our loan covenant obligations. In addition counter parties may not honor their obligations to us, financing and refinancing may be more difficult to achieve, and our operational activities may be disrupted. The ultimate severity of the Coronavirus outbreak is uncertain at this time. Therefore, we cannot predict the impact it may have on our future operations, which could be material and adverse.
To date, we have experienced the following disruption to our operations:
  crew changes have been cancelled and/or delayed until it is safe and feasible to do so. This is due to port authorities denying disembarkation, and a lack of international air transport or denial of
re-entry
by crew members’ home countries, which may have closed their borders;
  we have sought alternative shipyards which has resulted in delays to repairs, scheduled maintenance and dry docking of our vessels, as a result of a lack availability by shipyards from a shortage in labor or due to other business disruptions caused by
COVID-19;
  delays or cancellations in vessel inspections and related certifications by class societies, customers or government agencies;
  we have had to implement and adhere to additional strict onboard procedures to avoid potential
human-to-human
transmission of
COVID-19
to crew members as a result of vessel visits by port authority members, pilots, inspectors and suppliers.
Due to our lack of vessel diversification, adverse developments in the seaborne liquefied gas transportation business could adversely affect our business, financial condition and operating results.
We rely primarily on the cash flow generated from vessels that operate in the seaborne liquefied gas transportation business. Unlike many other shipping companies, which have vessels that carry drybulk, crude oil and oil products, we depend exclusively on the transport of LPG, petrochemicals and ammonia. Due to our lack of diversification, an adverse development in the international liquefied gas shipping industry would have a significantly greater impact on our business, financial condition and operating results than it would if we maintained a more diverse fleet of vessels.
If in the future our business activities involve countries, entities and individuals that are subject to restrictions imposed by the U.S. or other governments, we could be subject to enforcement action and our reputation and the market for our common stock could be adversely affected.
The tightening of U.S. sanctions in recent years has affected
non-U.S.
companies. In particular, sanctions against Iran have been significantly expanded. In 2012 the U.S. signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012 (“TRA”), which placed further restrictions on the ability of
non-U.S.
companies to do business or trade with Iran and Syria. A major provision in the TRA is that issuers of securities must disclose to the U.S. Securities and Exchange Commission, or the “SEC,” in their annual and quarterly reports filed after February 6, 2013 if the issuer or “any affiliate” has “knowingly” engaged in certain activities involving Iran during the timeframe covered by the report. This disclosure obligation is broad in scope in that it requires the reporting of activity that would not be considered a violation of U.S. sanctions as well as violative conduct, and is not subject to a materiality threshold. The SEC publishes these disclosures on its website and the President of the United States must initiate an investigation in response to all disclosures.
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In addition to the sanctions against Iran, the U.S. also has sanctions that target other countries, entities and individuals. These sanctions have certain extraterritorial effects that need to be considered by
non-U.S.
companies. It should also be noted that other governments have implemented versions of U.S. sanctions. We believe that we are in compliance with all applicable sanctions and embargo laws and regulations imposed by the U.S., the United Nations or European Union countries and intend to maintain such compliance. However, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in fines or other penalties and could result in some investors deciding, or being required, to divest their interest, or not to invest, in our common stock. Additionally, some investors may decide to divest their interest, or not to invest, in our common stock simply because we may do business with companies that do business in sanctioned countries. Investor perception of the value of our common stock may also be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries.
Failure to comply with the U.S. Foreign Corrupt Practices Act, the UK Bribery Act and other anti-bribery legislation in other jurisdictions could result in fines, criminal penalties, contract termination and an adverse effect on our business.
We may operate in a number of countries throughout the world, including countries known to have a reputation for corruption. We are committed to doing business in accordance with applicable anti-corruption laws and have adopted a code of business conduct and ethics. We are subject, however, to the risk that we, our affiliated entities or our or their respective officers, directors, employees and agents may take actions determined to be in violation of anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977 and the Bribery Act 2010 of the Parliament of the United Kingdom. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties, curtailment of operations in certain jurisdictions, and might adversely affect our business, operating results or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do business. Furthermore, detecting, investigating, and resolving actual or alleged violations is expensive and could consume significant time and attention of our senior management.
We rely on our information systems to conduct our business, and failure to protect these systems against security breaches could disrupt our business and adversely affect our results of operations.
We rely on information technology systems and networks in our operations, and those of our third-party technical managers, including processing, transmitting and storing electronic and financial information, communication with our vessels and the administration of our business. Information systems are vulnerable to security breaches by computer hackers and cyber terrorists and our operations could be targeted by individuals or groups seeking to sabotage or disrupt our information technology systems and networks, or to steal data. A successful cyber-attack could materially disrupt our operations, including the safety of our operations, or lead to unauthorized release of information or alteration of information on our systems. Any such attack or other breach of our information technology systems could have a material adverse effect on our business, operating results, financial condition, our reputation, or cash flows. In addition, the unavailability of the information systems or the failure of these systems to perform as anticipated including any failure in disaster recovery plans or data backups for us or our third-party technical managers for any reason could disrupt our business. We may be required to incur significant additional costs to remediate, modify or enhance our information technology systems or to try to prevent any such attacks.
Our business is subject to complex and evolving laws and regulations regarding privacy and data protection (“data protection laws”).
The regulatory environment surrounding data privacy and protection is constantly evolving and can be subject to significant change. New laws and regulations governing data privacy and the unauthorized disclosure of confidential information, including the European Union General Data Protection Regulation and recent California legislation, pose increasingly complex compliance challenges and potentially elevate our costs. Any
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failure, or perceived failure, by us to comply with applicable data protection laws could result in proceedings or actions against us by governmental entities or others, subject us to significant fines, penalties, judgments and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and adversely affect our business. As noted above, we are also subject to the possibility of cyber-attacks, which themselves may result in a violation of these laws.
Maritime claimants could arrest our vessels, which could interrupt our cash flow.
Crew members, suppliers of goods and services to a vessel, shippers of cargo, cargo receivers and other parties may be entitled to a maritime lien against that vessel for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lienholder may enforce its lien by arresting a vessel through foreclosure proceedings. The arrest or attachment of one or more of our vessels could interrupt our cash flow and require us to pay large sums to have the arrest lifted.
In addition, in some jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest both the vessel that is subject to the claimant’s maritime lien and any “associated” vessel, which is any vessel owned or controlled by the same owner. Claimants could try to assert “sister ship” liability against all of the vessels in our fleet for claims relating to only one of our ships. The arrest of any of our vessels would adversely affect our business, financial condition and operating results.
A shortage of qualified officers would make it more difficult to crew our vessels and increase our operating costs. If a shortage were to develop, it could impair our ability to operate and have an adverse effect on our business, financial condition and operating results.
Our liquefied gas carriers require technically skilled officer staff with specialized training. As the world liquefied gas carrier fleet and the liquefied natural gas, or “LNG,” carrier fleet grows, the demand for such technically skilled officers increases and could lead to a shortage of such personnel. If our crewing managers were to be unable to employ such technically skilled officers, they would not be able to adequately staff our vessels and effectively train crews. The development of a deficit in the supply of technically skilled officers or an inability of our crewing managers to attract and retain such qualified officers could impair our ability to operate and increase the cost of crewing our vessels and, thus, materially adversely affect our business, financial condition and operating results. Please read “Item 4—Information on the Company—Business Overview—Crewing and Staff.”
Compliance with safety and other vessel requirements imposed by classification societies may be very costly and could adversely affect our business, financial condition and operating results.
The hull and machinery of every commercial vessel must be classed by a classification society authorized by its country of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and the Safety of Life at Sea Convention. Our vessels are currently enrolled with, Lloyd’s Register, DNV GL Group AS or the American Bureau of Shipping. All of our vessels have been awarded International Safety Management certification.
As part of the certification process, a vessel must undergo annual surveys, intermediate surveys and special surveys. In lieu of a special survey, a vessel’s machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. All of the vessels in our existing fleet are on a planned maintenance system, or “PMS,” approval, and as such the classification society attends
on-board
once every year to verify that the maintenance of the
on-board
equipment is done correctly. Each of the vessels in our fleet have been qualified within its respective classification society for drydocking either once every two and a half or once every five years, depending on the age of the vessel, the latter being subject to an intermediate underwater survey done using an approved diving company in the presence of a surveyor from the classification society twice in each five-year cycle, with a maximum of 30 months between each underwater survey.
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If any vessel does not maintain its class and/or fails any annual survey, intermediate survey or special survey, the vessel will be unable to trade between ports and will be unemployable. This would adversely affect our business, financial condition and operating results.
Delays in deliveries of newbuildings or acquired vessels, or deliveries of vessels with significant defects, could harm our operating results and lead to the termination of any related charters that may be entered into prior to their delivery.
Although we currently have no vessels on order, under construction or subject to purchase agreements, we may purchase or order additional vessels from time to time. The delivery of these vessels could be delayed, not completed or cancelled, which would delay or eliminate our expected receipt of revenues from the employment of these vessels. In addition, under some of the charters we may enter into for newbuildings, if our delivery of a vessel to the customer is delayed, the customer may terminate the time charter, resulting in loss of revenues. The delivery of any newbuilding with substantial defects could have similar consequences.
Our receipt of newbuildings we may order or agree to purchase could be delayed because of many factors, including:
  quality or engineering problems;
  changes in governmental regulations or maritime self-regulatory organization standards;
  work stoppages or other labor disturbances at the shipyard;
  bankruptcy or other financial crisis of the shipbuilder;
  a backlog of orders at the shipyard;
  hostilities or political or economic disturbances in the locations where the vessels are being built;
  weather interference or catastrophic event, such as a major earthquake or fire;
  our requests for changes to the original vessel specifications;
  shortages of, or delays in the receipt of necessary construction materials, such as steel;
  our inability to obtain sufficient finance for the purchase of the vessels or to make timely payments; or
  our inability to obtain requisite permits or approvals.
We do not typically carry delay of delivery insurance to cover any losses that are not covered by delay penalties in our construction contracts. As a result, if delivery of a vessel is materially delayed, it could adversely affect our business, financial condition and operating results.
Our growth depends on our ability to expand relationships with existing customers and obtain new customers, for which we will face substantial competition.
The process of obtaining new charters is highly competitive, generally involves an intensive screening process and competitive bids, and often extends for several months or even years. Contracts are awarded based upon a variety of factors, including:
  the shipowner’s industry relationships, experience and reputation for customer service, quality operations and safety;
  the quality, experience and technical capability of the crew;
  the age, type, capability and versatility of our vessels;
  the shipowner’s construction management experience, including the ability to obtain
on-time
delivery of new vessels according to customer specifications;
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  the shipowner’s willingness to accept operational risks pursuant to the charter, such as allowing termination of the charter for force majeure events; and
  the competitiveness of the bid in terms of the vessel’s overall economics.
We expect substantial competition for providing seaborne transportation services from a number of experienced companies. As a result, we may be unable to expand our relationships with existing customers or to obtain new customers on a profitable basis, if at all, which would have a material adverse effect on our business, financial condition and operating results.
The marine transportation industry is subject to substantial environmental and other regulations, which may limit our operations and increase our expenses.
Our operations are affected by extensive and changing environmental protection laws and other regulations and international treaties and conventions, including those relating to equipping and operating vessels and vessel safety. These regulations include the U.S. Oil Pollution Act of 1990, or “OPA 90,” the U.S. Clean Water Act, the U.S. Maritime Transportation Security Act of 2002 and regulations of the IMO, including the International Convention on Civil Liability for Oil Pollution Damage of 1969, as from time to time amended and generally referred to as the CLC, the IMO International Convention for the Prevention of Pollution from Ships of 1975, as from time to time amended and generally referred to as MARPOL, the International Convention for the Prevention of Marine Pollution of 1973, the IMO International Convention for the Safety of Life at Sea of 1974, as from time to time amended and generally referred to as SOLAS, the IMO International Convention on Load Lines of 1966, as from time to time amended, the International Management Code for the Safe Operation of Ships and for Pollution Prevention, or the “ISM Code,” the International Convention on Civil Liability for Bunker Oil Pollution Damage, generally referred to as the Bunker Convention, and the European Union 2015 Regulation on the monitoring, reporting, and verification of carbon dioxide emissions from maritime transport. We have incurred, and expect to continue to incur, substantial expenses in complying with these laws and regulations, including expenses for vessel modifications and changes in operating procedures. For example, under IMO 2020, absent the installation of expensive sulfur scrubbers to achieve reduced emission requirements, the maximum sulfur content of bunker fuels used by the marine sector, including our vessels, was lowered from 3.5% to 0.5% sulfur content. The marine sector accounts for approximately half of all global fuel oil demand and the impact of the increased demand for compliant low sulfur fuel is expected to affect the availability and cost of such fuels and increase our costs of operation. Additional laws and regulations may be adopted that could limit our ability to do business or further increase costs, which could harm our business. In addition, failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of operations.
In addition, we believe that the heightened environmental, quality and security concerns of the public, regulators, insurance underwriters and charterers will generally lead to additional regulatory requirements, including enhanced risk assessment and security requirements, greater inspection and safety requirements on all vessels in the marine transportation markets and possibly restrictions on the emissions of greenhouse gases from the operation of vessels. These requirements are likely to add incremental costs to our operations and the failure to comply with these requirements may affect the ability of our vessels to obtain and, possibly, collect on insurance or to obtain the required certificates for entry into the different ports where we operate.
Please read “Item 4—Information on the Company—Business Overview—Environmental and Other Regulation” for a more detailed discussion on these topics.
Climate change and greenhouse gas restrictions may adversely impact our operations and markets.
Due to concern over the risk of climate change, a number of countries and the IMO have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emission from vessel emissions.
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These regulatory measures may include, among others, adoption of cap and trade regimes, carbon taxes, increased efficiency standards and incentives or mandates for renewable energy. Additionally, a treaty may be adopted in the future that includes restrictions on shipping emissions. Compliance with changes in laws and regulations relating to climate change could increase our costs of operating and maintaining our vessels and could require us to make significant financial expenditures that we cannot predict with certainty at this time.
Adverse effects upon the oil and gas industry relating to climate change, including growing public concern about the environmental impact of climate change, may also have an effect on demand for our services. For example, increased regulation of greenhouse gases or other concerns relating to climate change may reduce the demand for oil and gas in the future or create greater incentives for use of alternative energy sources. Any long-term material adverse effect on the oil and gas industry could have a significant financial and operational adverse impact on our business that we cannot predict with certainty at this time.
Changes in the law and regulations relating to the use of, or a decrease in the demand for, plastic could adversely impact our business.
There is growing public concern surrounding the accumulation of plastics in the environment and, as a result, concerning the use of plastics more generally. Plastics are derived or manufactured largely from the petrochemical gases that we transport. The growing public concern could reduce consumer demand for plastic products and result in laws and regulations restricting the use of plastics, which could limit or reduce the demand and need for petrochemical gases to be transported and could have a significant adverse impact on our business, financial condition and operating results.
Marine transportation is inherently risky. An incident involving significant loss of product or environmental contamination by any of our vessels could adversely affect our reputation, business, financial condition and operating results.
The operation of an ocean-going vessel carries inherent risks. Our vessels and their cargoes and the LPG and petrochemical production and terminal facilities that we service are at risk of being damaged or lost because of events such as:
  marine disasters;
  bad weather or climate change;
  business interruption caused by mechanical failures;
  grounding, capsizing, fire, explosions and collisions;
  war, terrorism, piracy, cyber-attack; and
  human error.
An accident involving any of our vessels could result in any of the following:
  death or injury to persons, loss of property or damage to the environment and natural resources;
  delays in the delivery of cargo;
  loss of revenues;
  higher than anticipated expenses, or liabilities or costs to recover any spilled cargo and to restore the ecosystem where the spill occurred;
  governmental fines, penalties or restrictions on conducting business;
  higher insurance rates; and
  damage to our reputation and customer relationships generally.
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Any of these results could have a material adverse effect on our business, financial condition and operating results.
Competition from more technologically advanced liquefied gas carriers could reduce our charter hire income and the value of our vessels.
The charter rates and the value and operational life of a vessel are determined by a number of factors including the vessel’s efficiency, operational flexibility and physical life. Efficiency includes fuel economy, speed and the ability to be loaded and discharged quickly. Flexibility includes the ability to enter ports, utilize related docking facilities and pass through canals and straits. The length of a vessel’s physical life is related to the original design and construction, maintenance and the impact of the stress of operations. If new liquefied gas carriers are built that are more efficient or more flexible or have longer physical lives than our vessels, competition from these more technologically advanced liquefied gas carriers could adversely affect the charter rates we receive for our vessels once their current charters are terminated and the resale value of our vessels. As a result, our business, financial condition and operating results could be adversely affected.
Acts of piracy on any of our vessels or on ocean going vessels could adversely affect our business, financial condition and operating results.
Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, the Gulf of Aden off the coast of Somalia, and West Africa. If such piracy attacks result in regions in which our vessels are deployed being named on the Joint War Committee Listed Areas,
war-risk
insurance premiums payable for such coverage could increase significantly and such insurance coverage might become more difficult to obtain. In addition, crew costs, including costs that may be incurred to the extent we employ
on-board
security guards, could increase in such circumstances. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, detention or hijacking as a result of an act of piracy against our crew or vessels could require a significant amount of management time negotiating the release of crew members or the vessel and could have a material adverse impact on our business, financial condition and operating results.
Terrorist attacks, increased hostilities, piracy or war could lead to further economic instability, increased costs and disruption of business.
Terrorist attacks may adversely affect our business, operating results, financial condition, ability to raise capital and future growth. Continuing hostilities in the Middle East may lead to additional armed conflicts or to further acts of terrorism and civil disturbance in the United States or elsewhere, which may contribute further to economic instability and disruption of production and distribution of LPG, petrochemical gases and ammonia, which could result in reduced demand for our services.
In addition, petrochemical production and terminal facilities and vessels that transport petrochemical products could be targets of future terrorist attacks. Any such attacks could lead to, among other things, bodily injury or loss of life, vessel or other property damage, increased vessel operational costs, including insurance costs, and the inability to transport gases to or from certain locations. Terrorist attacks, piracy, war or other events beyond our control that adversely affect the distribution, production or transportation of gases to be shipped by us could entitle customers to terminate our charters, which would harm our cash flow and business. In addition, the loss of a vessel as a result of terrorism or piracy would have a material adverse effect on our business, financial condition and operating results.
Exposure to currency exchange rate fluctuations results in fluctuations in cash flows and operating results.
Substantially all of our cash receipts are in U.S. Dollars. Certain disbursements, however, including some vessel operating expenses and general and administrative expenses are in the foreign currencies invoiced by the
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supplier, principally the Euro and British Pound Sterling. We remit funds in the various currencies invoiced. We convert the
non-U.S.
Dollar invoices received and their subsequent payments into U.S. Dollars when the transactions occur. This mismatch between receipts and payments may result in fluctuations if the value of the U.S. Dollar changes relative to such other currencies.
In addition, the Company has entered into a cross-currency interest rate swap agreement concurrently with the issuance of its NOK600 million
NOK-denominated
Senior secured bonds. If the Norwegian Kroner depreciates relative to the U.S. Dollar beyond a certain threshold, we are required to place cash collateral with our swap providers for the forecast future liability on the cross-currency interest rate swap. In the event the depreciation of the Norwegian Kroner relative to the U.S. Dollar is significant, the cash collateral requirements could adversely affect our liquidity and financial position.
Our insurance may be insufficient to cover losses that may occur to our vessels or result from our operations.
We carry insurance to protect us against most of the accident-related risks involved in the conduct of our business, including marine hull and machinery insurance, protection and indemnity insurance, which includes pollution risks, crew insurance and war risk insurance. We may not be able to adequately insure against all risks, and any particular claim may not be paid by insurance. None of our vessels are insured against loss of revenues resulting from vessel
off-hire
time. In addition, as a member of protection and indemnity associations we may be required to make additional payments over and above budgeted premiums if members claims exceed association reserves.
We may be unable to procure adequate insurance coverage at commercially reasonable rates in the future during adverse market conditions. Changes in the insurance markets attributable to war, terrorist attacks or piracy may also make certain types of insurance more expensive or more difficult to obtain. In addition, the insurance may be voidable by the insurers as a result of certain actions, such as vessels failing to maintain certification with applicable maritime self-regulatory organizations. Any uninsured or underinsured loss could have a material adverse effect on our business, financial condition and operating results.
Restrictive covenants in our secured term loan facilities and revolving credit facilities and in our secured and unsecured bonds and our Terminal Facility impose, and any future debt facilities will impose, financial and other restrictions on us
.
The secured term loan facilities and revolving credit facilities and the secured bonds and unsecured bonds impose, and any future debt facility will impose, operating and financial restrictions on us. The restrictions in the existing secured term loan facilities and revolving credit facilities and the secured bonds and unsecured bonds may limit our ability to, among other things:
  pay dividends out of operating revenues generated by the vessels securing indebtedness under the facility, redeem any shares or make any other payment to our equity holders, if there is a default under any secured term loan facility, revolving credit facility or secured term loan and revolving credit facility;
 
  incur additional indebtedness, including through the issuance of guarantees;
 
  create liens on our assets;
 
  sell our vessels;
 
  merge or consolidate with, or transfer all or substantially all our assets to, another person;
 
  change the flag, class or management of our vessels; and
 
  enter into a new line of business.
 
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The secured term loan facilities and revolving credit facility require us to maintain various financial ratios. These include requirements that we maintain specified maximum ratios of net debt to total capitalization, that we maintain specified minimum levels of cash and cash equivalents, that we maintain specified minimum ratios of consolidated earnings before interest, taxes, depreciation and amortization (consolidated EBITDA), to consolidated interest expense and that we maintain specified minimum levels of collateral coverage. Under our secured term loan facilities, if at any time the aggregate fair market value of (i) the vessels subject to a mortgage in favor of our lenders and (ii) the value of any additional collateral we grant to the lenders is less than 125% to 135%, as applicable, of the outstanding principal amount under the secured term loan facilities and any commitments to borrow additional funds, our lenders may require us to provide additional collateral. See “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Secured Term Loan Facilities and Revolving Credit Facility; 2017 Senior Unsecured Bonds; and 2018 Senior Secured Bonds—Financial Covenants.” The failure to comply with such covenants would cause an event of default that could materially adversely affect our business, financial condition and operating results.
In addition, following completion of the Marine Export Terminal, Navigator Ethylene Terminals LLC, our wholly-owned subsidiary and the borrower under our Terminal Facility (as defined in “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Terminal Facility”), can only pay dividends if it satisfies certain customary conditions to paying a dividend, including maintaining a debt service coverage ratio for the immediately preceding four consecutive fiscal quarters and the projected immediately succeeding four consecutive fiscal quarters of not less than 1.20 to 1.00 and no default or event of default has occurred or is continuing. The Terminal Facility also limits Navigator Ethylene Terminals LLC from, among other things, incurring indebtedness or entering into mergers and divestitures. The Terminal Facility also contains general covenants that will require Navigator Ethylene Terminals LLC to vote its interest in the Marine Terminal Joint Venture to cause the Marine Terminal Joint Venture to maintain adequate insurance coverage, complete the Marine Export Terminal and maintain its property (but only to the extent Navigator Ethylene Terminals LLC has the power under the organizational documents of the Marine Terminal Joint Venture to so cause such actions). Further, the loans under the Terminal Facility are secured by first priority liens on the rights to Navigator Ethylene Terminals LLC’s distributions from the Marine Terminal Joint Venture and our equity interests in the Marine Terminal Borrower.
Because of these covenants, we may need to seek permission from our lenders in order to engage in some corporate actions. Our lenders’ interests may be different from ours, and we may not be able to obtain our lenders’ permission when needed. This may limit our ability to finance our future operations and make acquisitions or pursue business opportunities. See “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Secured Term Loan Facilities and Revolving Credit Facility” and “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Terminal Facility.”
The secured term loan facilities and the Terminal Facility are reducing facilities. The required repayments under the secured term loan facilities and the Terminal Facility may adversely affect our business, financial condition and operating results.
Loans under the secured term loan facilities are subject to quarterly repayments. In addition, the loans under the Terminal Facility are subject to quarterly repayments of principal and interest beginning three months after the completion of the Marine Export Terminal. If at such time we have not made alternative financing arrangements or generate substantial cash flows, any such repayments and our declining borrowing availability could have a material adverse effect on our business, financial condition and operating results.
Our consolidated variable interest entity may enter into different financing arrangements, which could adversely affect our financial results.
In October 2019, we entered into a sale and leaseback transaction with respect to one of our vessels,
Navigator Aurora
¸ with a lessor, OCY Aurora Ltd, which is a newly formed special purpose vehicle (“SPV”) and wholly
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owned subsidiary of Ocean Yield Malta Limited, to refinance the vessel’s secured tranche of one of our secured term loan facilities. The SPV was determined to be a variable interest entity (“VIE”). We are deemed to be the primary beneficiary of the VIE, and, as a result, we are required by U.S. GAAP to consolidate the SPV into our results. Although consolidated into our results, we have no control over the funding arrangements negotiated by the SPV, such as interest rates, maturity and repayment profiles. In consolidating the SPV, we must make certain assumptions regarding the debt amortization profile and the interest rate to be applied against the SPV’s debt principal. Our estimates are therefore dependent upon the timeliness of receipt and accuracy of financial information provided by the SPV. For additional information, refer to note 9 “Variable Interest Entities” to our consolidated financial statements. For a description of our current financing arrangements including those of the VIE, please read “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources” and “Item 5—Operating and Financial Review and Prospects—Tabular Disclosure of Contractual Obligations.” The funding arrangements negotiated by the VIE could adversely affect our financial results.
If interest rates increase, it will affect the interest rates under our credit facilities, which could affect our operating results.
Amounts borrowed under our existing credit facilities bear interest at an annual rate ranging from 2.10% to 2.70% above LIBOR and loans under our Terminal Facility bear interest at an annual rate of 2.50% to 3.00% above LIBOR. Interest rates have recently been at relatively low levels and any increase in interest rates would lead to an increase in LIBOR, which would affect the amount of interest payable on amounts that we borrow under our credit facilities, which in turn could have an adverse effect on our operating results.
In addition, we are exposed to a market risk relating to increases in interest rates because the amounts borrowed under our existing credit facilities bear interest at rates based on LIBOR. On July 27, 2017, the United Kingdom Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021 (“FCA Announcement”). The FCA Announcement indicates that the continuation of LIBOR on the current basis is not guaranteed after 2021. The industry is currently working towards the development of replacement rates for each of the affected LIBOR currencies. Working groups have been formed in the United States, the United Kingdom, the European Union and others to recommend an alternative rate to LIBOR for its respective currency.
In the U.S., an Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for USD LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions.
The timing and method of transition to alternative successor rates by 31 December 2021 for each currency is likely to differ and a number of transition uncertainties remain at this time. An alternative reference rate with inherent increased volatility compared to LIBOR, significant increases in LIBOR or uncertainty surrounding its phase out after 2021 could adversely affect our business, financial condition, operating results and cash flows.
The derivative contracts we have or may enter into to hedge our exposure to fluctuations in interest rates could result in higher than market interest rates and reductions in our shareholders’ equity, as well as charges against our income.
We have entered into cross-currency interest rate swap and may enter into further swaps for purposes of managing our exposure to fluctuations in interest rates and foreign exchange rates applicable to indebtedness under our secured term loan facilities and revolving credit facility which were advanced at floating rates based on LIBOR. Our hedging strategies, however, may not be effective and we may incur substantial losses if interest rates move materially differently from our expectations.
To the extent our derivative contracts do not qualify for treatment as hedges for accounting purposes, we recognize fluctuations in the fair value of such contracts in our statement of operations. In addition, changes in
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the fair value of derivative contracts, even those that qualify for treatment as hedges, will be recognized as derivative assets or liabilities on our balance sheet, and can affect compliance with the net worth covenant requirements in our secured term loan facilities. In addition, we may have to cash collateralize unrealized losses on these derivatives, thus reducing our liquidity covenants headroom. The unrealized gains or losses relating to changes in fair value of our derivative instruments do not impact our cash flows, other than providing cash collateral security during the term of the derivative contracts. However, our financial condition could also be materially adversely affected to the extent we do not hedge our exposure to interest rate fluctuations under our financing arrangements under which loans have been advanced at a floating rate based on LIBOR.
Any hedging activities we engage in may not effectively manage our interest rate exposure or have the desired impact on our financial conditions or operating results.
Our business depends upon certain key employees.
Our future success depends to a significant extent upon certain members of our senior management team, who have substantial experience in the shipping industry and with the Company and are crucial to the development of our business strategy and to the growth and development of our business. In the event of the loss of any of these individuals, we may be unable to recruit replacement individuals with the equivalent talent and experience, which could adversely affect our business, financial condition and operating results.
Our major shareholder may exert considerable influence on the outcome of matters on which our shareholders will be entitled to vote, and its interests may be different from yours.
The WLR Group, our principal shareholder, owned approximately 39.2% of our common stock, as of December 31, 2019. The WLR Group may exert considerable influence on the outcome of matters on which our shareholders are entitled to vote, including the election of our directors to our board of directors and other significant corporate actions. The interests of the WLR Group may be different from your interests.
We are a holding company, and we depend on the ability of our subsidiaries to distribute funds to us in order to satisfy our financial obligations.
We are a holding company and our subsidiaries conduct all of our operations and own all of our operating assets. We have no significant assets other than the equity interests in our subsidiaries. As a result, our ability to satisfy our financial obligations depends on our subsidiaries and their ability to distribute funds to us. The ability of a subsidiary to make these distributions could be affected by a claim or other action by a third-party, including a creditor, or by the Republic of the Marshall Islands law, which regulates the payment of dividends by companies formed thereunder.
In addition, under the secured term loan facilities, Navigator Gas L.L.C., our wholly-owned subsidiary, and our vessel-owning subsidiaries that are parties to the secured term loan facilities and revolving credit facility may not make distributions to us out of operating revenues from vessels securing indebtedness thereunder, redeem any shares or make any other payment to our shareholders if an event of default has occurred and is continuing. Please read “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Secured Term Loan Facilities and Revolving Credit Facility.” Further, following completion of the Marine Export Terminal, Navigator Ethylene Terminals LLC, our wholly-owned subsidiary and the borrower under our Terminal Facility, can only pay dividends if it satisfies certain customary conditions to paying a dividend, including maintaining a debt service coverage ratio for the immediately preceding four consecutive fiscal quarters and the projected immediately succeeding four consecutive fiscal quarters of not less than 1.20 to 1.00 and no default or event of default has occurred or is continuing.
The inability of our subsidiaries to make distributions to us would have an adverse effect on our business, financial condition and operating results.
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The vote by the United Kingdom to leave the EU could adversely affect us.
The 2016 United Kingdom (the “U.K.”) referendum on its membership in the European Union (the “EU”) resulted in a majority of U.K. voters voting to exit the EU (“Brexit”). On January 31, 2020, the U.K. formally left the EU. The British government is currently in negotiations with the EU to determine the terms of the U.K.’s exit. The withdrawal could potentially disrupt the free movement of goods, services and people between the U.K. and the EU, undermine bilateral cooperation in key geographic areas and significantly disrupt trade between the U.K. and the EU or other nations as the U.K. pursues independent trade relations. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which EU laws to replace or replicate. The effects of Brexit will depend on any agreements the U.K. makes to retain access to EU or other markets either during a transitional period or more permanently. It is unclear what long-term economic, financial, trade and legal implications the withdrawal of the U.K. from the EU would have and how such withdrawal would affect our business. In addition, Brexit may lead other EU member countries to consider referendums regarding their EU membership.
These developments have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital, which could adversely affect our business, financial condition and operating results. As a result of the uncertainty and the potential consequences that may follow Brexit, we face risks with respect to volatility in exchange rates and interest rates, customs restrictions or delays in delivering our cargoes into the U.K. as well as our ability to employ or retain employees in our UK Representative Office. Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, operating results and financial condition.
Risks Relating to Our Common Stock
We may issue additional equity securities without your approval, which would dilute your ownership interests.
We may issue additional shares of common stock or other equity or equity-linked securities without the approval of our shareholders, subject to certain limited approval requirements of the NYSE. In particular, we may finance all or a portion of the acquisition price of future vessels, including newbuildings, that we agree to purchase through the issuance of additional shares of common stock. Our amended and restated articles of incorporation, which became effective on November 5, 2013, authorize us to issue up to 400,000,000 shares of common stock, of which 55,826,644 shares were outstanding as of December 31, 2019. The issuance by us of additional shares of common stock or other equity or equity-linked securities of equal or senior rank will have the following effects:
  our shareholders’ proportionate ownership interest in us will decrease;
 
  the relative voting strength of each previously outstanding share may be diminished; and
 
  the market price of the common stock may decline.
 
Future sales of our common stock could cause the market price of our common stock to decline.
Sales of a substantial number of our shares of common stock in the public market, or the perception that these sales could occur, may depress the market price for our common stock. These sales could also impair our ability to raise additional capital through the sale of our equity securities in the future. The WLR Group, our principal shareholder, owned 39.2% of our common stock, as of December 31, 2019. In the future, the WLR Group may elect to sell large numbers of shares from time to time.
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We have no current plans to pay dividends on our common stock. Consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.
We have no current plans to declare dividends on our common stock in the foreseeable future. Consequently, your only opportunity to achieve a return on your investment in us will be if you sell your shares of common stock at a price greater than you paid for it. There is no guarantee that the market price of our common stock will ever exceed the price that you pay.
The obligations associated with being a public company requires significant resources and management attention.
As a public company in the United States, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the “Exchange Act,” and the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act,” the listing requirements of the NYSE and other applicable securities rules and regulations. The Exchange Act requires that we file annual and current reports with respect to our business, financial condition and operating results. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we continue to take may not be sufficient to satisfy our obligations as a public company.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to continue to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative costs and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business, financial condition, operating results and cash flow could be adversely affected.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations. In addition, any testing we conduct in connection with Section 404 of the Sarbanes-Oxley Act of 2002, or any testing conducted by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Ineffective internal controls could subject us to regulatory scrutiny and sanctions and also cause investors to lose confidence in our reported financial information, limit our ability to access capital markets or require us to incur additional costs to improve our internal control and disclosure control systems and procedures, which could harm our business and have a negative effect on the trading price of our securities.
We have identified material weaknesses in our internal control over financial reporting. If we identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, it could result in material misstatements of our financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial
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statements will not be prevented or detected on a timely basis. We have identified three material weaknesses in our internal control over financial reporting due to: (i) a lack of sufficient effective controls around prospective financial information used in our going concern assessment, (ii) a lack of sufficient accounting and financial reporting personnel with requisite knowledge and experience in the application of U.S. GAAP and SEC financial reporting requirements, and (iii) control weaknesses related to manage access and manage change for IT systems at one of our third party technical managers.
Consequently, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2019 (See “Item 15. Controls and Procedures”). If we are unable to successfully remediate these material weaknesses in a timely manner, or if we identify additional material weaknesses in the future or we are unable to maintain effective internal controls and disclosure controls, investors may lose confidence in our reported financial information, which could lead to a decline in the price of our common stock, limit our ability to access the capital markets in the future, and require us to incur additional costs to improve our internal control and disclosure control systems and procedures. Further, if lenders lose confidence in the reliability of our financial statements, it could have a material adverse effect on our ability to fund our operations.
We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
We are a “foreign private issuer,” as such term is defined in Rule 405 under the Securities Act of 1933, as amended, and therefore, we are not required to comply with all the periodic disclosure and current reporting requirements of the Exchange Act and related rules and regulations. Under Rule 405, the determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter.
In the future, we would lose our foreign private issuer status if a majority of our shareholders, directors or management are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC which are more detailed and extensive than the forms available to a foreign private issuer. For example, the annual report on Form
10-K
requires domestic issuers to disclose executive compensation information on an individual basis with specific disclosure regarding the domestic compensation philosophy, objectives, annual total compensation (base salary, bonus, equity compensation) and potential payments in connection with change in control, retirement, death or disability, while the annual report on Form
20-F,
including this annual report, permits foreign private issuers to disclose compensation information on an aggregate basis. We would also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders would become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. We may also be required to modify certain of our policies or lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.
We are incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of corporate law.
Our corporate affairs are governed by our articles of incorporation and bylaws and by the Marshall Islands Business Corporations Act, or the “BCA.” The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. However, there have been few judicial cases in the Republic of the Marshall Islands interpreting the BCA. The rights and fiduciary responsibilities of directors under the Republic of the Marshall Islands law are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain U.S. jurisdictions. Shareholder rights may differ as well. While the BCA does specifically incorporate the
non-statutory
law, or judicial case law, of the
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State of Delaware and other states with substantially similar legislative provisions, our shareholders may have more difficulty in protecting their interests in the face of actions by the management, directors or controlling shareholders than would shareholders of a corporation incorporated in a U.S. jurisdiction.
Because we are a Marshall Islands corporation, it may be difficult to serve us with legal process or enforce judgments against us, our directors or our management.
We are a Marshall Islands corporation, and substantially all of our assets and several of our executive offices are located outside of the United States. A majority of our directors and officers are
non-residents
of the United States, and all or a substantial portion of the assets of these
non-residents
are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States if you believe that your rights have been infringed under securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Republic of the Marshall Islands and of other jurisdictions may prevent or restrict you from enforcing a judgment against our assets or the assets of our directors and officers.
There is substantial doubt that the courts of the Republic of the Marshall Islands would (1) enter judgments in original actions brought in those courts predicated on U.S. federal or state securities laws; or (2) recognize or enforce against us or any of our officers, directors or experts, judgments of courts of the United States predicated on U.S. federal or state securities laws. The Republic of the Marshall Islands does not have a bankruptcy statute or general statutory mechanism for insolvency proceedings.
Provisions of our articles of incorporation and bylaws may have anti-takeover effects.
Several provisions of our articles of incorporation, which are summarized below, may have anti-takeover effects. These provisions are intended to avoid costly takeover battles, lessen our vulnerability to a hostile change of control and enhance the ability of our board of directors to maximize shareholder value in connection with any unsolicited offer to acquire our company. However, these anti-takeover provisions could also discourage, delay or prevent the merger or acquisition of our company by means of a tender offer, a proxy contest or otherwise that a shareholder may consider in its best interest and the removal of incumbent officers and directors.
Blank Check Preferred Stock
. Under the terms of our articles of incorporation our board of directors has the authority, without any further vote or action by our shareholders, to issue up to 40,000,000 shares of “blank check” preferred stock. Our board could authorize the issuance of preferred stock with voting or conversion rights that could dilute the voting power or rights of the holders of our common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of us or the removal of our management and may harm the market price of our common stock.
Election of Directors
. Our articles of incorporation provide that directors will be elected at each annual meeting of shareholders to serve until the next annual meeting of shareholders and until his or her successor shall have been duly elected and qualified, except in the event of his or her death, resignation, removal or the earlier termination of his or her term of office. Our articles of incorporation do not provide for cumulative voting in the election of directors. Our bylaws require shareholders to provide advance written notice of nominations for the election of directors. These provisions may discourage, delay or prevent the removal of incumbent officers and directors.
Advance Notice Requirements for Shareholder Proposals and Director Nominations
. Our bylaws provide that, with a few exceptions, shareholders seeking to nominate candidates for election as directors or to bring business before an annual meeting of shareholders must provide timely notice of their proposal in writing to the corporate secretary. Generally, to be timely, a shareholder’s notice must be received at our principal executive office not less than 90 days or more than 120 days prior to the first anniversary date of the immediately preceding annual
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meeting of shareholders. Our bylaws also specify requirements as to the form and content of a shareholder’s notice. These provisions may impede a shareholder’s ability to bring matters before an annual meeting of shareholders or make nominations for directors at an annual meeting of shareholders.
Limited Actions by Shareholders.
Our bylaws provide that only the board of directors may call special meetings of our shareholders and the business transacted at the special meeting is limited to the purposes stated in the notice.
Tax Risks
In addition to the following risk factors, please read “Item 4—Information on the Company—Business Overview—Taxation of the Company” and “Item 10—Additional Information—Taxation” for a more complete discussion of the expected material U.S. federal and
non-U.S.
income tax considerations relating to us and the ownership and disposition of our common stock.
We may be subject to additional taxes, which could adversely impact our business and financial results.
We and our subsidiaries are subject to tax in the jurisdictions in which we or our subsidiaries are organized or operate. In computing our tax obligations in these jurisdictions, we are required to take into account various tax accounting and reporting positions on matters that are not entirely free from doubt and for which we have not received rulings from the governing authorities. Upon review of these positions the applicable authorities may disagree with our positions. A successful challenge by a tax authority could result in additional tax imposed on us or our subsidiaries. In addition, changes in our operations or ownership could result in additional tax being imposed on us or our subsidiaries in jurisdictions in which operations are conducted, or deemed to be conducted, which could adversely impact our business and financial results.
U.S. tax authorities could treat us as a “passive foreign investment company,” which could have adverse U.S. federal income tax consequences to U.S. shareholders.
A
non-U.S.
entity treated as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company,” or “PFIC,” for U.S. federal income tax purposes if at least 75.0% of its gross income for any taxable year consists of “passive income” or at least 50.0% of the average value of its assets produce, or are held for the production of, “passive income.” For purposes of these tests, “passive income” includes dividends, interest, gains from the sale or exchange of investment property, and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute “passive income.” U.S. shareholders of a PFIC are subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC, and the gain, if any, they derive from the sale or other disposition of their interests in the PFIC.
Based on our current and projected method of operation we believe that we were not a PFIC for any prior taxable year, and we expect that we will not be treated as a PFIC for the current or any future taxable year. We believe that more than 25.0% of our gross income for each taxable year was or will be
non-passive
income, and more than 50.0% of the average value of our assets for each such year was or will be held for the production of such
non-passive
income. This belief is based on certain valuations and projections regarding our assets and income, and its validity is conditioned on the accuracy of such valuations and projections. While we believe such valuations and projections to be accurate, the shipping market is volatile and no assurance can be given that our assumptions and conclusions will continue to be accurate at any time in the future.
Moreover, there are legal uncertainties involved in determining whether the income derived from our time-chartering activities constitutes rental income or income derived from the performance of services. In
Tidewater Inc. v. United States
, 565 F.3d 299 (5
th
Cir. 2009), the United States Court of Appeals for the Fifth Circuit, or the
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“Fifth Circuit,” held that income derived from certain time-chartering activities should be treated as rental income rather than services income for purposes of a provision of the Internal Revenue Code of 1986, as amended, or the “Code,” relating to foreign sales corporations. In that case, the Fifth Circuit did not address the definition of passive income or the PFIC rules; however, the reasoning of the case could have implications as to how the income from a time charter would be classified under such rules. If the reasoning of the case were extended to the PFIC context, the gross income we derive from our time-chartering activities may be treated as rental income, and we would likely be treated as a PFIC. In published guidance, the Internal Revenue Service, or “IRS,” stated that it disagreed with the holding in
Tidewater
and specified that time charters similar to those at issue in that case should be treated as service contracts. We have not sought, and we do not expect to seek, an IRS ruling on the treatment of income generated from our time-chartering activities. As a result, the IRS or a court could disagree with our position. No assurance can be given that this result will not occur. In addition, although we intend to conduct our affairs in a manner to avoid being classified as a PFIC with respect to each taxable year, we cannot assure shareholders that the nature of our operations will not change in the future and that we will not become a PFIC in the future. If the IRS were to determine that we are or have been a PFIC for any taxable year (and regardless of whether we remain a PFIC for subsequent taxable years), our U.S. shareholders would face adverse U.S. federal income tax consequences. Please read “Item 10—Additional Information—Taxation—Material U.S. Federal Income Tax Consequences—U.S. Federal Income Taxation of U.S. Holders—PFIC Status and Significant Tax Consequences” for a more detailed discussion of the U.S. federal income tax consequences to U.S. shareholders if we are treated as a PFIC.
We may have to pay tax on U.S. source income with respect to the operation of our vessels, and business conducted within the United States, which would reduce our cash flow.
Under the Code, “U.S. source gross transportation income” (as defined below) is subject to a 4.0% U.S. federal income tax without allowance for deductions, unless an exemption from tax applies under a tax treaty or Section 883 of the Code and the Treasury Regulations promulgated thereunder. U.S. source gross transportation income consists of 50.0% of the gross shipping income of a vessel owning or chartering corporation, such as ourselves that is attributable to transportation that either begins or ends, but that does not both begin and end, in the United States.
If a
non-U.S.
corporation satisfies the requirements of Section 883 of the Code and the Treasury Regulations thereunder, it will not be subject to the 4.0% U.S. federal income tax referenced above on its U.S. source gross transportation income. The Section 883 exemption does not apply to income attributable to transportation that both begins and ends in the United States.
We believe that with respect to the operation of our vessels, we satisfied the requirements to qualify for an exemption from U.S. tax on our U.S. source gross transportation income imposed by Section 883 of the Code for 2019, and we take the position that we will be able to satisfy those requirements for 2020 and future taxable years provided that our common stock satisfies certain listing and trading requirements and not more than 50.0% of our common stock is owned, or is deemed to be owned by operation of certain attribution rules, for more than half of the days of such year, by shareholders with a 5.0% or greater interest in our stock. The composition of owners of our common stock, including the quantity a shareholder may purchase in a given year, and the trading volumes of our common stock, are factual circumstances beyond our control. As a result, there can be no assurance that we can satisfy this stock ownership requirement for the current or any future year. If we did not satisfy the stock ownership requirement, we would likely not qualify for an exemption under Section 883 for such year. If we fail to qualify for this exemption in any taxable year, U.S. source gross transportation income earned by us and our subsidiaries will generally be subject to a 4.0% U.S. federal income tax and would adversely impact our business and financial results. For a more detailed discussion of Section 883 of the Code, the rules relating to exemptions under Section 883 and our ability to qualify for an exemption, please read “Item 4—Information on the Company—Business Overview—Taxation of the Company—U.S. Taxation.”
In addition to our U.S. source gross transportation income, we expect to generate U.S. taxable income that is effectively connected with the conduct of a U.S. trade or business as a result of our Marine Export Terminal in
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the U.S. Gulf Coast becoming operational in December 2019. Such U.S. taxable income generally will be subject to U.S. federal income tax on a net income basis (currently at a flat rate of 21%). We do not expect, however, that the generation of U.S. taxable income in respect of the Marine Export Terminal will affect our ability to qualify for the above-described exemption for U.S. source gross transportation income unrelated to the operations of the terminal.
Item 4.
Information on the Company
 
 
 
A.
History and Development of the Company
 
 
General
Navigator Holdings Ltd. was formed in 1997 as an Isle of Man public limited company for the purpose of building and operating a fleet of five semi-refrigerated, ethylene-capable liquefied gas carriers. In January 2003, the previous owners and managers filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. On August 9, 2006, the Company emerged from bankruptcy. As part of the plan of reorganization, the bondholders received all of the equity interests in the Company. Lehman Brothers Inc. became our principal shareholder, holding an approximate 44.1% ownership interest (subsequently reduced to 33.0% following the issue of additional shares). In October 2012, the ownership interests held by Lehman Brothers Holdings Inc. were acquired by our principal shareholder, the WLR Group, which currently owns 39.3% of our common stock. Please see “Item 7—Major Shareholders and Related Party Transactions.”
In November 2013, we completed our initial public offering of 13,800,000 shares of our common stock at $19.00 per share, including the full exercise by the underwriters of their option to purchase an additional 1,800,000 shares of common stock from the selling stockholders. We offered 9,030,000 shares of common stock and certain selling shareholders offered 4,770,000 shares of common stock. As of December 31, 2019 we had 55,826,644 shares of our common stock outstanding.
Our shares of common stock are traded on the New York Stock Exchange under the ticker symbol “NVGS.”
In March 2008, we redomiciled as a corporation in the Republic of the Marshall Islands and we maintain our principal executive offices at 10 Bressenden Place, London, SW1E 5DH. Our telephone number at that address is +44 20 7340 4850. Our agent for service of process in the United States is CT Corporation System and its address is 28 Liberty Street, New York, New York 10005.
We maintain a website on the Internet at www.navigatorgas.com. The SEC maintains a website on the Internet that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
Investments
Since January 2018, we have owned a 50% joint interest in the Export Terminal Joint Venture, which we account for using the equity method. The Export Terminal Joint Venture was formed to build and operate the Marine Export Terminal, which began commercial operations with the export of commissioning cargoes in December 2019. Refrigerated storage for 30,000 tons of ethylene will also be constructed
on-site
and, once completed, will have the capacity to export approximately one million tons of ethylene per year and provide the capability to load ethylene at rates of 1,000 tons per hour. Our share of the capital cost for the construction of the Marine Export Terminal is expected to be $150.0 million, of which we had contributed $125.5 million to the Export Terminal Joint Venture as of December 31, 2019. We expect to contribute the remaining $24.5 million of our expected share of the capital contributions towards the cost of the construction during 2020 and early 2021. The results from the Export Terminal Joint Venture are shown as ‘Share of results of equity accounted joint venture’ on the income statement.
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On October 21, 2019, we entered into a sale and leaseback transaction with respect to one of our vessels,
Navigator Aurora
, to refinance the vessel’s secured tranche of one of our secured term loan facilities. The sale price agreed was $77.5 million, with the buyer paying 90% of the vessel’s value, or $69.75 million and a seller’s credit representing prepaid hire for the remaining 10%. From the proceeds, $44.5 million was used to repay the vessel’s secured tranche of the December 2015 secured revolving credit facility. Simultaneous with this sale, we entered into a bareboat charter for the vessel for a period of up to 13 years, with purchase options at years 5, 7 and 10. The transaction was closed on October 28, 2019. See Note 9 (Variable Interest Entities) to our consolidated financial statements for additional information.
 
B.
Business Overview
 
 
We are the owner and operator of 38 semi- or fully-refrigerated liquefied gas carriers, the world’s largest fleet of handysize liquefied gas carriers. We also own a 50% share, through a joint venture with Enterprise Products Partners L.P. (the “Export Terminal Joint Venture”), in an ethylene export marine terminal at Morgan’s Point, Texas on the Houston Ship Channel (the “Marine Export Terminal”).
Our total fleet currently consists of 38 vessels, 33 of which are semi- or fully-refrigerated handysize liquefied gas carriers, and ten of these are ethylene/ethane capable. We define handysize liquefied gas carriers as those liquefied gas carriers with capabilities between 15,000 and 24,999 cubic meters, or “cbm”. In addition, we have five 37,300 – 38,000 cbm midsize liquefied gas carriers with four of which are ethylene/ethane-capable semi-refrigerated liquefied gas carriers.
Our handysize liquefied gas carriers typically transport LPG on short or medium routes that may be uneconomical for smaller vessels and can call at ports that are unable to support larger vessels due to limited onshore capacity, absence of fully-refrigerated loading infrastructure and/or vessel size restrictions. These handysize liquefied gas carriers are amongst the largest semi-refrigerated vessels in the world, which also makes them capable of transporting petrochemicals on long routes, typically intercontinental.
We play a vital role in the liquefied gas supply chain for energy companies, industrial consumers and commodity traders, with our sophisticated vessels providing an efficient and reliable ‘floating pipeline’ between the parties. We carry LPG for major international energy companies, state-owned utilities and reputable commodities traders. LPG, which consists of propane and butane, is a relatively clean alternative energy source with more than 1,000 applications, including as a heating, cooking and transportation fuel and as a petrochemical and refinery feedstock. LPG is a
by-product
of oil refining and natural gas extraction, and shale gas, principally from the U.S.
We also carry petrochemical gases for numerous industrial users. Petrochemical gases, including ethylene, propylene, butadiene and vinyl chloride monomer, are derived from the cracking of petroleum feedstocks such as ethane, LPG and naphtha and are primarily used as raw materials in various industrial processes, like the manufacture of plastics, vinyl and rubber, with a wide application of end uses.
Our vessels also carry ammonia for the producers of fertilizers, a main use of ammonia for the agricultural industry, and for ammonia traders.
The newly operational Marine Export Terminal will have the capacity to export approximately one million tons of ethylene per year from late 2020, when the
on-site
construction of refrigerated storage for 30,000 tons of ethylene will be completed and will provide the capability to load ethylene at rates of 1,000 tons per hour. The Marine Export Terminal loaded its first cargo of ethylene in December 2019 and is supported by four
off-take
contracts of between five and seven years for approximately 75% of the terminal’s ultimate one million ton annual capacity. During 2020, prior to the completion of the refrigerated storage, we expect the terminal’s annual capacity to be approximately 500,000 – 600,000 tons.
The recent outbreak of the novel strain of coronavirus referred to as
COVID-19
(“Coronavirus”) negatively affect economic conditions and restricts the seaborne transportation of products, including LPG and petrochemical
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products. The
COVID-19
pandemic is having numerous negative effects which include reduced demand for LPG, petrochemicals and ammonia that we transport. Any reduction in the supply of or demand for LPG, petrochemicals and ammonia that we transport for a period or periods longer than we anticipate could negatively affect the charter rates and vessel utilization that we are able to achieve and consequently reduce our cashflow and financial condition. These negative impacts of
COVID-19
may result in noncompliance of our covenants in our bank and bond loan facilities. We also provide cash collateral as security against unrealized losses on our cross-currency interest rate swap and in the event the Norwegian Kroner weakens further against the U.S. dollar, additional cash security will need to be placed into a collateral account, providing less headroom, or causing us to breach our liquidity maintenance covenant.
Given the recent fluidity of developments and the extensive response to the outbreak, we are continually reviewing the effects of
COVID-19
on our operations and we are constantly reassessing its impact. Measures that we are currently taking in response to
COVID-19
include:
  All crew changes have been cancelled until it is safe and feasible to do so and this will be continually reviewed as the situation develops;
 
  Arrangements to accept delivery of additional spare parts and critical supplies are made where possible in supply chains;
 
 
Non-critical
boardings are restricted, current visits are limited to vettings inspectors, pilots and port officials, where allowed, and procedures have been implemented on board to limit the risk of
human-to-human
transmission from visiting personnel;
 
  Global offices were closed in advance of government-mandated lockdown dates to minimize the opportunity for
human-to-human
transmission, IT systems and network capacity have proven to be robust, and no interruption to business support functions and no implications to financial reporting systems or internal controls over financial reporting have been identified.
 
On February 10, 2017, we issued senior unsecured bonds in an aggregate principal amount of $100.0 million for a period of four years. These bonds mature in full on February 10, 2021 and become repayable on that date. The bonds cannot be repaid from existing cash resources or from cash to be generated from operations prior to the expiry date of the bond. Refinancing this bond is capital markets dependent and although the Company had considered refinancing this bond with a
like-for-like
bond prior to the virus outbreak, and this remains the Company’s preferred plan, because of the current disruption in the capital markets, the Company is evaluating alternative plans in the event the effects of
COVID-19
last longer than anticipated. Such considerations include seeking an extension to the maturity of the bond, seeking to raise the capital by a sale and leaseback of a number of the Company’s vessels or raising alternative debt on a number of currently unsecured vessels. Please see “Item 5 B. Liquidity and Capital Resources”
We have referred to specific impacts to our operating activities due to
COVID-19,
however, the extent to which
COVID-19
will impact our operations and financial condition will depend on future developments, which are highly uncertain,
including the severity of
 
COVID-19
 
and the actions undertaken to contain its impact. An estimation of its impact cannot therefore be accurately taken at this time.
Our Business Strategies
Our objective is to enhance shareholder value by executing the following business strategies:
 
Delivering a safe and sustainable future.
In order to achieve our aspiration of delivering a safe and sustainable future, we need to think about our impact, not only our financial impact but also our environmental and social impact. To achieve this throughout the whole of Navigator Holdings we will be making sure that responsibility for environmental and social impact sits at the highest level of the organization and will be anchored through our values, vision and strategy as we move forward into 2020.