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As filed with the Securities and Exchange Commission on August 31, 2020
Registration Statement No. 333-  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Hygo Energy Transition Ltd.
(Exact name of registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
Bermuda
4924
N/A
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)
2nd Floor, S.E. Pearman Building,
9 Par-la-Ville Road
Hamilton HM 11, Bermuda
+1 (441) 295-4705
(Address, including zip code, and telephone number, including area code of Registrant’s principal executive offices)
Puglisi & Associates
850 Library Avenue, Suite 204
Newark, Delaware 19711
(302) 738-6680
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
David Palmer Oelman
Brenda K. Lenahan
Vinson & Elkins L.L.P.
1001 Fannin Street, Suite 2500
Houston, Texas 77002
(713) 758-2222
J. Michael Chambers
John M. Greer
Latham & Watkins LLP
811 Main Street, Suite 3700
Houston, Texas 77002
(713) 546-5400
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.
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 7(a)(2)(B) of the Securities Act.
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered
Proposed Maximum
Aggregate Offering Price(1)(2)
Amount of
Registration Fee
Common shares, par value $1.00 per share
$100,000,000
$12,980
(1)
Includes   common shares issuable upon exercise of the underwriters’ option to purchase additional common shares.
(2)
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission becomes effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion, dated    , 2020
PRELIMINARY PROSPECTUS

Hygo Energy Transition Ltd.
Common Shares
This is the initial public offering of common shares of Hygo Energy Transition Ltd. We are offering     common shares. We expect the initial public offering price to be between $     and $     per common share.
Prior to this offering, there has been no public market for our common shares. We have applied to list our common shares on the Nasdaq Global Select Market under the symbol “HYGO.”
We are an “emerging growth company” and a “foreign private issuer” as defined under the U.S. federal securities laws and, as such, are eligible for reduced reporting requirements for this prospectus and future filings. Please read “Summary—Our Emerging Growth Company Status” and “Summary—Our Foreign Private Issuer and Controlled Company Status.”
Investing in our common shares involves risks. Please read “Risk Factors” beginning on page 20.
 
Per common
share
Total
Public Offering Price
$   
$   
Underwriting Discounts
$   
$   
Proceeds to us (before expenses)
$   
$   
(1)
See “Underwriting” for a description of compensation payable to the underwriters.
The underwriters may purchase up to an additional     common shares from us at the public offering price, less the underwriting discount, within 30 days from the date of the underwriting agreement to be entered into in connection with this offering.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the common shares to purchasers on or about    , 2020 through the book-entry facilities of The Depository Trust Company.
Joint Book-Running Managers
Morgan Stanley
Goldman Sachs & Co. LLC
Barclays
BTIG
Citigroup
UBS Investment Bank
Prospectus dated     , 2020


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You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized any other person to provide you with information different from that contained in this prospectus and any free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. You should not assume that the information contained in this registration statement is accurate as of any date other than the date on the front cover of this registration statement. Our business, financial condition, results of operations and prospects may have changed since such dates. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted.
This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. Please read “Risk Factors” and “Forward-Looking Statements.”
Common shares may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act of 2003 and the Exchange Control Act 1972, and related regulations of Bermuda which regulate the sale of securities in Bermuda. In addition, specific permission is required from the Bermuda Monetary Authority, or the BMA, pursuant to the provisions of the Exchange Control Act 1972 and related regulations, for all issuances and transfers of securities of Bermuda companies, other than in cases where the BMA has granted a general permission. The BMA, in its policy dated June 1, 2005, provides that where any equity securities, including our common shares, of a Bermuda company are listed on an appointed stock exchange, general permission is given for the issue and subsequent transfer of any securities of a company from and/or to a non-resident, for as long as any equities securities of such company remain so listed. The Nasdaq Global Select Market is an appointed stock exchange under Bermuda law. Approvals or permissions given by the Bermuda Monetary Authority do not constitute a guarantee by the Bermuda Monetary Authority as to our performance or our creditworthiness. Accordingly, in granting such permission, the BMA accepts no
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responsibility for our financial soundness or the correctness of any of the statements made or expressed in this prospectus or any prospectus supplement. Neither this prospectus nor any prospectus supplement needs to be filed with the Registrar of Companies in Bermuda in accordance with Part III of the Companies Act 1981 of Bermuda (the “Companies Act”) pursuant to provisions incorporated therein following the enactment of the Companies Amendment Act 2013. Such provisions state that a prospectus in respect of the offer of shares in a Bermuda company whose equities are listed on an appointed stock exchange under Bermuda law does not need to be filed in Bermuda, so long as the company in question complies with the requirements of such appointed stock exchange in relation thereto.
The BMA and the Registrar of Companies accept no responsibility for the financial soundness of any proposal or for the correctness of any of the statements made or opinions expressed in this prospectus.
Industry and Market Data
The data included in this prospectus regarding the industries in which we operate, including trends in the market and our position and the position of our competitors, is based on a variety of sources, including independent industry publications, government publications and other published independent sources, information obtained from customers, distributors, suppliers, trade and business organizations and publicly available information (including the reports and other information our competitors file with the Securities and Exchange Commission (the “SEC”), which we did not participate in preparing and as to which we make no representation), as well as our good-faith estimates, which have been derived from management’s knowledge and experience in the industries in which we operate. Estimates of market size and relative positions in a market are difficult to develop and inherently uncertain. Accordingly, investors should not place undue weight on the industry and market share data presented in this prospectus.
Certain Terms Used in this Prospectus
Unless the context otherwise requires, references in this prospectus to the following terms have the meanings set forth below:
“Barcarena Terminal” refers to the terminal located in Barcarena, State of Pará, Brazil, and consisting of (i) an FSRU, which will be operated by Hygo and deployed in service to CELBA pursuant to a long-term charter; and (ii) associated gas infrastructure, including mooring and offshore and onshore pipelines, wholly owned by Hygo.
“Brazilian reais” or “R$” refers to the Brazilian real in plural.
“CEBARRA” refers to Centrais Elétricas Barra dos Coqueiros S.A., a joint venture with Ebrasil Energia Ltda., which owns expansion rights with respect to the Sergipe Power Plant; Hygo indirectly owns a 37.5% interest in CEBARRA.
“CELBA” refers to Centrais Elétricas Barcarena S.A., our 50/50 joint venture with Evolution;
“CELSE” refers to Centrais Elétricas de Sergipe S.A., which is wholly owned by CELSEPAR;
“CELSEPAR” refers to Centrais Elétricas de Sergipe Participações S.A., our 50/50 joint venture with Ebrasil Energia Ltda.;
“Evolution” refers to Evolution Power Partners S.A.
“Golar LNG” refers to Golar LNG Limited (NASDAQ: GLNG);
“Golar Management” refers to Golar Management Limited, a subsidiary of Golar LNG;
“Hygo,” “Company,” “we,” “our,” “us” or like terms refer to Hygo Energy Transition Ltd., formerly known as Golar Power Limited, a Bermuda exempted company, and its subsidiaries, including its equity method investees, such as CELSEPAR and CELBA, as context requires; however, for an explanation of accounting treatment of our equity method investees, please see “Basis of Presentation” below;
“Santa Catarina Terminal” refers to the terminal located in Santa Catarina, Brazil that will consist of a newly converted FSRU and associated gas infrastructure;
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“Sergipe Terminal” refers to the terminal located in Sergipe, Brazil, consisting of (i) the Golar Nanook, a FSRU operated by Hygo in service to CELSE pursuant to a 25-year charter, and (ii) a dedicated gas pipeline connecting to the Porto de Sergipe I power plant, a specialized mooring system and associated gas pipelines, all of which are owned by CELSE, an entity which is wholly owned by CELSEPAR;
“Sponsors” means Golar LNG and Stonepeak;
“Stonepeak” refers to Stonepeak Associates II LLC and certain funds and other entities managed, advised or controlled by or affiliated with Stonepeak Associates II LLC;
“U.S. dollars,” “dollars” or “$” refers to U.S. dollars; and
In addition, we have provided definitions of some of the terms we use to describe our business and industry and other terms used in this prospectus in the “Glossary” on page A-1 of this prospectus.
Basis of Presentation
This is the initial public offering of Hygo. Historically, Hygo’s revenues have been derived primarily from its wholly owned liquefied natural gas (“LNG”) carriers. Hygo’s assets also include a Floating Storage and Regasification Unit (“FSRU”) as well as equity interests in non-controlled and non-consolidated joint ventures, including CELSEPAR and CELBA. Because we generally have between 20% and 50% of the voting rights and do not exercise control, or have the power to control, the financial and operational policies of these entities, our investment in these entities are accounted for by the equity method of accounting. Pursuant to Rule 3-09 of Regulation S-X, we are required to include separate audited financial statements for significant investments in entities that are accounted for under the equity method of accounting (“3-09 Financial Statements”). As of December 31, 2019, we owned interests in one significant investment, CELSEPAR. As our projects mature, we may present 3-09 Financial Statements for other significant equity investments.
In addition, we qualify as a “foreign private issuer” as defined under SEC rules. As such, we are exempt from certain SEC rules that are applicable to U.S. domestic public companies, including the rules requiring domestic filers to issue financial statements prepared under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). We have elected to present Hygo’s consolidated financial statements in accordance with U.S. GAAP. However, the 3-09 Financial Statements for our investment in CELSEPAR have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IASB”), and we are not required to, and do not, reconcile the 3-09 Financial Statements to U.S. GAAP.
Further, the financial information contained in this prospectus includes both Brazilian real amounts and U.S. dollar amounts. Certain other information presented in this prospectus have been presented in the currency rounded to the nearest whole number or the nearest decimal. Therefore, the sum of the numbers in a column may not conform exactly to the total figure given for that column in certain tables in this prospectus. In addition, certain percentages presented in this prospectus reflect calculations based upon the underlying information prior to rounding and, accordingly, may not conform exactly to the percentages that would be derived if the relevant calculations were based upon the rounded numbers or may not sum due to rounding.
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FORWARD-LOOKING STATEMENTS
This prospectus and other offering materials include forward-looking statements regarding, among other things, our plans, strategies, prospects and projections, both business and financial. All statements contained in this prospectus other than historical information are forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance or our projected business results. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “targets,” “potential” or “continue” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates based upon current information and involve a number of risks and uncertainties. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:
our limited operating history;
volatility and cyclical or other changes in the demand for and price of LNG and natural gas;
outbreaks, epidemics, pandemics, including the COVID-19 pandemic, or other public health events, and the resulting protocols put into place by federal, state or local governments;
the ability to successfully operate our power plant in Sergipe, Brazil;
our ability to successfully complete and begin operations at the Barcarena Terminal and the Santa Catarina Terminal, Brazil and associated gas infrastructure and power plants;
cost overruns and delays in the completion of the Barcarena Terminal and Santa Catarina Terminal, as well as difficulties in obtaining sufficient financing to pay for such costs and delays;
failure of our contract counterparties, including our joint venture co-owners, to comply with their agreements with us;
changes in our relationships with our counterparties;
loss of one or more of our customers;
changes in our relationship with Golar LNG;
changes in the performance of our joint ventures or equity method investees, including changes related to potential divestitures, spin-offs or new partnerships;
our ability to obtain additional financing on acceptable terms or at all;
failure to obtain and maintain approvals and permits from governmental and regulatory agencies;
changes to rules and regulations applicable to LNG-to-power infrastructure, FSRUs or other parts of the LNG supply chain;
failure of natural gas to be a competitive source of energy in the markets in which we operate and seek to operate;
competition from third parties in our business;
changes to environmental and similar laws and governmental regulations that are adverse to our operations;
inability to enter into favorable agreements and obtain necessary regulatory approvals;
the tax treatment of us or of an investment in our common shares;
a major health and safety incident relating to our business;
increased labor costs, and the unavailability of skilled workers or our failure to attract and retain qualified personnel;
changes in global political or economic conditions generally or in the markets we serve;
risks related to the jurisdictions in which we do, or seek to do business, particularly Brazil; and
volatility in foreign exchange rates, particularly Brazilian reais in relation to the U.S. dollar.
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When considering forward-looking statements, you should keep in mind the risks set forth under the heading “Risk Factors” and other cautionary statements included in this prospectus. The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, projections or achievements.
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SUMMARY
This summary highlights selected information appearing elsewhere in this prospectus. Because it is abbreviated, this summary does not contain all of the information that you should consider before investing in our common shares. While this summary highlights what we consider to be the most important information about us, you should read this entire prospectus carefully including, in particular, “Risk Factors,” “Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes included elsewhere in this prospectus. The information presented in this prospectus (i) assumes an initial public offering price of $    per share (the midpoint of the price range set forth on the cover of this prospectus) and (ii) assumes, unless otherwise indicated, that the underwriters’ option to purchase additional common shares is not exercised. This summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes thereto included elsewhere in this prospectus.
Hygo Energy Transition Ltd.
Overview
We provide integrated downstream LNG solutions to underserved markets by delivering low cost, environmentally sound energy alternatives to consumers around the world. Our business includes (i) our network of existing and development stage marine LNG import terminals, (ii) our ownership of interests in existing and development stage large-scale power plants backed by high quality offtakers, and (iii) the downstream distribution of LNG from our terminals via marine and onshore logistics to major demand centers in Brazil. In addition, we have historically derived the majority of our revenues from our LNG carriers, which we expect to convert into FSRUs to service our terminals. We believe our model of “hub and spoke” LNG infrastructure, anchored by our terminals in Brazil, is a model that is highly replicable to create a global platform. Accordingly, we are also pursuing multiple gas-to-power and distribution opportunities elsewhere around the world, including Latin America, Southeast Asia, the Indian Subcontinent, West Africa and Europe. We seek to unlock underserved markets by introducing LNG and natural gas as cheaper, cleaner and transformative alternatives to traditional fossil fuels, as well as an attractive, reliable complement to growing renewable energy sources.
Terminals and Floating Storage and Regasification Units
FSRUs represent a flexible, proven, expedient and cost effective means to import LNG. Planning, siting, permitting and constructing a traditional, land-based LNG terminal typically takes several years. In comparison, FSRU-based terminals typically take less than 24 months to complete and have been implemented in as little as six months. In addition, FSRUs are considerably less capital intensive than land-based LNG terminals.
Although our historical operating revenues have primarily consisted of time charter revenues from operating our vessels in the spot/short-term charter market, we expect our results will reflect an increasing proportion of revenues from the long-term charter of our FSRUs in support of our terminals and downstream distribution business as we complete their development.
As of August 2020, we have an operating FSRU terminal in Sergipe, Brazil (the “Sergipe Terminal”), two FSRU terminals in advanced stages of development in Pará, Brazil (the “Barcarena Terminal”) and Santa Catarina, Brazil (the “Santa Catarina Terminal”), and more than fifteen other terminals worldwide that are in various stages of evaluation or development. Our fleet consists of the Golar Nanook, a newbuild FSRU moored and in service at the Sergipe Terminal, and two operating LNG carriers, the Golar Celsius and the Golar Penguin, which are expected to be converted into FSRUs. As of June 30, 2020, we have invested $30 million for the anticipated conversion of one of these vessels into an FSRU for deployment at the Barcarena Terminal once an FID has been made and we anticipate a total investment of $75 million to $85 million for the conversion. We expect to continue the conversion and deployment of FSRUs for utilization as LNG storage, transshipment and regasification terminals as our business continues to grow.
Our terminals position us to become a critical supply source to customers in developing markets around the world where there is significant need for cheaper, cleaner and more efficient fuel sources. We anticipate significant demand from end-users in the power, utility, industrial, commercial and transportation industries. Upon completion of the Barcarena and Santa Catarina Terminals, we expect to be capable of receiving an aggregate of 2,370,000 MMBtu/d with storage capacity of 500,000 cubic meters, giving us a critical mass of scale in our base infrastructure investment and creating significant barriers to entry in our areas of operation.
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Power Generation
We have partnered with local companies to build cleaner and economically advantaged natural gas-fired power generation assets backed by long-term PPAs in our core operating areas. These assets will provide us with relatively stable base cash flows and serve as anchor customers for our LNG terminals. We are currently developing a total of 10.6 GW of fully licensed natural gas-fired power plants with local partners in Latin America, not including (i) the Porto de Sergipe I power plant, a 1.5 GW thermal power station supplied by the Sergipe Terminal (the “Sergipe Power Plant”), which began commercial operations (“COD”) in March 2020, and (ii) the Novo Tempo Barcarena power plant, a 605 MW thermal power station supplied by the Barcarena Terminal (the “Barcarena Power Plant”), which is expected to commence operations in 2025. Please see “—Our Current and Anticipated LNG-to-Power Infrastructure Network—Other Projects—Project Pipeline” for additional information.
Downstream Distribution
Our downstream distribution business is focused on the sale of LNG or natural gas to downstream customers under medium to long-term contracts. We procure LNG from our terminals and other sources and transport via ship, rail or truck using third-party providers. Our current and anticipated downstream customers are a mix of power, utility, industrial, commercial and transportation end-users of LNG and natural gas. We seek to provide our customers with integrated LNG logistics and procurement solutions to increase the accessibility of natural gas and unlock the economic and environmental benefits of LNG, as compared to other fossil fuels.
Our Current and Anticipated LNG-to-Power Infrastructure Network
Sergipe
Terminal. Our Sergipe Terminal located near Aracaju, the state capital of Sergipe, on the northeast coast of Brazil, commenced commercial operations in March 2020 and is a key component in Brazil’s first private-sector LNG-to-power project. The Sergipe Terminal is operated by CELSE, an entity wholly owned by CELSEPAR, a 50/50 joint venture between us and Ebrasil Energia Ltda. (“Ebrasil”), an affiliate of Eletricidade do Brasil S.A., one of the largest independent private thermoelectric energy generators in the north and northeast regions of Brazil. Because CELSEPAR is indirectly jointly owned and operated with Ebrasil, it is treated as an equity method investment in our consolidated financial statements. The terminal’s assets consist of (i) our FSRU, the Golar Nanook, which is under a 25-year bareboat charter with CELSE (the “Sergipe FSRU Charter”), (ii) specialized mooring infrastructure and (iii) a dedicated 8 kilometer pipeline which connects to the adjacent Sergipe Power Plant. The Golar Nanook is financed through a twelve year sale-leaseback transaction with the right and obligation to repurchase the vessel at the end of the lease period. The balance of the infrastructure as well as our interest in the Sergipe Power Plant is owned through our joint venture, CELSEPAR.
Pursuant to the Sergipe FSRU Charter, the Golar Nanook generates approximately $44 million per year in bareboat charter earnings, indexed to the Consumer Price Index (“CPI”), with operating expenditures passed through to CELSE. Pursuant to the terms of the Sergipe FSRU Charter, we expect total revenues less estimated operating costs, without adjusting for inflation, of $1.1 billion over the 25-year term. The charter terminates on December 31, 2044. In addition to the charter, we expect to generate incremental revenue in the Sergipe Terminal from downstream customers. The Sergipe Terminal is capable of processing up to 790,000 MMBtu/d and storing up to 170,000 cubic meters of LNG. We expect the terminal to utilize approximately 230,000 MMBtu/d (30% of the terminal’s maximum regasification capacity) to provide natural gas to the Sergipe Power Plant at full dispatch. Subject to obtaining required consents, we expect to utilize the terminal’s remaining 560,000 MMBtu/d of capacity to provide natural gas to additional customers, including industrial, commercial, transportation and other end-users via truck loading facilities. See “Business—Detailed Description of our Operating and Advanced Stage Terminals—Sergipe—Description of Contractual Arrangements Related to Sergipe—Sergipe FSRU Charter.” We also intend to construct 30 kilometers of additional pipeline connecting the Sergipe Terminal to the regional natural gas distribution network and other downstream customers. As of the commencement of operations in March 2020, capital expenditures related to the Sergipe Terminal totaled approximately $280 million. While we do not anticipate any additional capital expenditures to complete the Sergipe Terminal, we expect CELSE to invest $20 million to $30 million to complete interconnections to the regional natural gas distribution network. CELSE has also entered into a long-term, 25-year supply agreement for LNG for the Sergipe Terminal with Ocean LNG Limited (“Ocean LNG”), an affiliate of Qatar Petroleum (the “Sergipe Supply Agreement”). For the period from April 1, 2020 through June 30, 2020, net revenues generated from the Sergipe Terminal were $13.0 million.
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Power Generation. The Sergipe Power Plant, a 1.5 GW combined cycle power plant, receives natural gas from the Sergipe Terminal through a dedicated 8 kilometer pipeline. Owned by CELSE, the Sergipe Power Plant is the largest natural gas-fired thermal power station in South America and was built to provide electricity on demand throughout the region, particularly during dry seasons when hydropower is unable to meet the growing demand for electricity in the region. The Sergipe Power Plant’s gas-fired system is 90% less pollutant as compared to diesel powered plants of similar capacity. The power plant was constructed pursuant to a lump sum turn-key Engineering, Procurement and Construction (“EPC”) agreement with General Electric. CELSE also entered into an operation and maintenance agreement with General Electric pursuant to which General Electric will maintain and operate the Sergipe Power Plant. At full dispatch, the Sergipe Power Plant can supply up to 15% of total current power demand in northeast Brazil, a region with a population of more than 57 million people.
Following its bid award in a government power auction in April 2015, CELSE has executed multiple PPAs pursuant to which the Sergipe Power Plant will deliver power to 26 committed offtakers, including investment grade counterparties, for a period of 25 years. These PPAs provide for guaranteed annual capacity payments of R$1.6 billion at an expected EBITDA margin on gross revenue of 61% (calculated as total revenues less direct operating expenditures (including typical G&A and O&M charges relating to such arrangements) assuming zero dispatch and subject to standard adjustments for inflation and taxes to be incurred). The fixed capacity payments are adjusted annually for the Extended National Consumer Price Index (the “IPCA”), the Brazilian inflation-targeting system, which has historically offset changes in the exchange rate between the U.S. dollar and the Brazilian real. Annual revenues less operating costs are expected to be R$1.1 billion. Based on the terms of our PPAs, we expect total contracted revenues over the 25-year term, without adjusting for inflation, of R$41.0 billion. We also expect to generate incremental variable revenue during periods we elect to dispatch and sell power from the facility. For the first full quarter of operations from April 1, 2020 through June 30, 2020, the portion of CELSE’s revenues attributable to us included R$196.0 million in fixed capacity payments, R$39.0 million in variable revenue and R$139.0 million in EBITDA.
We anticipate generating incremental earnings through selling merchant power from the Sergipe Power Plant. The sales would be made through CELSE. We can choose to produce merchant power at the Sergipe Power Plant in any period in which power is not being produced pursuant to the PPAs, and sell the power into the electricity grid at spot prices, subject to local regulatory approval. For the six months ended June 30, 2020, the portion of CELSE’s revenue from the sale of merchant power produced at the Sergipe Power Plant attributable to us was R$43.0 million. We intend to take advantage of spot prices in this manner with power produced from not only the Sergipe Power Plant but also from our other assets and operations as opportunities arise.
Future Expansion. We also own 37.5% of Centrais Elétricas Barra dos Coqueiros S.A. (“CEBARRA”), our joint venture with Ebrasil, which owns expansion rights with respect to the Sergipe Power Plant. These rights include 179 acres of land and regulatory permits for up to 3.2 GW of power generation, including the capacity of the Sergipe Power Plant. CEBARRA has obtained all permits and other rights necessary to participate in future government power auctions. Our ownership in CEBARRA is also accounted for under the equity method.
Barcarena
Terminal. Upon the commencement of operations expected in the second half of 2021, the Barcarena Terminal will provide a strategic entry point for LNG to the north and northeast regions of Brazil, with a combined population of approximately 75 million that currently lacks the infrastructure necessary to support the region’s gas needs, and will be used as a hub for the distribution of LNG and natural gas for electricity generation, commercial and industrial customers, transportation and bunkering. We anticipate that the Barcarena Terminal will be anchored by several large-scale industrial and power customer contracts, including a contract with CELBA, a 50/50 joint venture between us and Evolution Power Partners S.A. (“Evolution”). The Barcarena Terminal will consist of an FSRU and associated infrastructure, including mooring and offshore and onshore pipelines. We will be the sole operator of the FSRU that will be deployed to the Barcarena Terminal and will wholly own the balance of the terminal infrastructure. We expect to incur approximately R$200 million to R$250 million in capital expenditures to construct and initiate operations at the Barcarena Terminal, exclusive of the approximately $75 million to $85 million of capital expenditures required to convert one of our vessels to an FSRU. Contracts will be structured for either regasification of LNG or for the storage of LNG with take-or-pay obligations. In July 2020, we entered into a memorandum of understanding with Norsk Hydro to supply LNG to its Alunorte refinery, which will be the first operational customer for the Barcarena Terminal. We are in what we believe to be the final stages of negotiations with Norsk Hydro for approximately 80,000 MMBtu per day of
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regasification capacity at an average net tariff to Hygo of approximately $1.30/MMBtu and approximately 45,000 MMBtu per day of storage capacity at an average net tariff of approximately $0.50/MMBtu. Assuming FID on the power plant, CELBA will pay an amount of approximately $10 million annually for their required capacity of the power plant. The fixed capacity payments will be adjusted annually to offset changes in the exchange rate between the U.S. dollar and the Brazilian real. We expect to incur capital expenditures of approximately $13 million per year in connection with the operation of the Barcarena Terminal.
The Barcarena Terminal will be capable of processing up to 790,000 MMBtu/d and storing up to 170,000 cubic meters of LNG. We expect the Barcarena Terminal to utilize approximately 92,000 MMBtu/d (12% of the terminal’s maximum regasification capacity) to service the Barcarena Power Plant upon commencement of operations in 2025. We have the ability to utilize the terminal’s excess capacity to service additional customers and are in advanced stages of negotiations with industrial offtakers for approximately 125,000 MMBtu/d of LNG from the terminal. We will utilize the remaining 572,000 MMBtu/d of the terminal’s capacity to service other potential customers, including industrial, commercial, transportation and residential end-users. We expect to commence LNG distribution operations from the Barcarena Terminal in the second half of 2021, significantly in advance of the anticipated target start-up date for the Barcarena Power Plant.
Power Generation. In October 2019, CELBA was awarded multiple 25-year PPAs to support the construction of the Barcarena Power Plant, a 605 MW combined cycle thermal power plant to be located in the Brazilian city of Barcarena, State of Pará. The power plant will utilize LNG sourced and processed at the Barcarena Terminal for the generation of electricity which will be distributed to the national electricity grid. The power project is scheduled to deliver power to nine committed offtakers for 25 years beginning in 2025 in accordance with the PPA contracts awarded by the Brazilian government in October 2019. We anticipate that the Barcarena Power Plant will commence operations in 2025, and we expect total capital expenditures by CELBA of approximately R$2.0 billion in order to complete construction. The PPAs provide for combined revenue from fixed capacity and dispatch charges of R$861 million per year. The fixed capacity charge is annually adjusted for the IPCA, which has historically offset changes in the exchange rate between the U.S. dollar and Brazilian real. The fixed dispatch charge is based on fuel-pass through with a margin. We expect our operations to generate approximately 27% EBITDA margin on gross revenue (calculated as total revenues less direct operating expenditures (including typical G&A and O&M charges relating to such arrangements) assuming zero dispatch and subject to standard adjustments for inflation and taxes to be incurred). Based on the terms of our PPAs, we expect total contracted revenues over the 25-year term, without adjusting for inflation, of R$21.5 billion.
Santa Catarina
Terminal. We have secured key regulatory and environmental licenses to develop the Santa Catarina Terminal on the southern coast of Brazil, with a regional population of approximately 30 million. We intend to install an FSRU with a processing capacity of 790,000 MMBtu/d and LNG storage capacity of up to 170,000 cubic meters. The Santa Catarina Terminal is being designed to connect to existing onshore pipeline systems via a 31 kilometer, 20” pipeline to an interconnection point in Garuva, which supplies regional power distribution companies. We will be the sole operator of the FSRU at the Santa Catarina Terminal and will wholly own the balance of the terminal infrastructure. We expect to take FID on the Santa Catarina Terminal in the first half of 2021. The terminal is also expected to supply LNG to the Norte Catarinense power plant, a 600 MW regional power plant (the “Santa Catarina Power Plant”), for which we have an option to purchase up to 100% of the equity interest. We intend to participate in the next planned power auction related to the potential Santa Catarina Power Plant (which has been delayed due to COVID-19). The construction of the Santa Catarina Power Plant is contingent upon winning this power auction and, should we win that auction, we would expect to commence operation of the Santa Catarina Terminal in 2022. We expect to incur approximately $50 million to $75 million in capital expenditures for terminal construction and pipeline interconnection in Garuva, exclusive of the approximately $75 million to $85 million of capital expenditures required to convert one of our vessels to an FSRU. While the Santa Catarina Terminal currently has no firm capacity contracts, we believe there is significant demand from multiple potential end-users, including power generation, industrial, commercial, transportation and residential customers, including the potential adjacent Santa Catarina Power Plant.
Suape
Terminal. In March 2020, we signed a Protocol of Intentions with the government of the State of Pernambuco, Brazil to develop an LNG import terminal in the Port of Suape, located in the northeast region of Brazil, which has a population of approximately 57 million (the “Suape Terminal”). We intend to install an LNG carrier with storage
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capacity of a minimum 125,000 cubic meters to act as a floating storage unit (“FSU”). The Suape Terminal will connect to onshore truck loading facilities to facilitate loading of LNG ISO containers for distribution to industrial, commercial and residential offtakers for regions that are underserved or not served by traditional pipeline networks. We have also secured contracts with Companhia Pernambucana de Gás Natural (“Copergás”) to facilitate the distribution of LNG or natural gas to such offtakers. The terminal will also act as a transshipment location to break bulk for downstream distribution. We expect to take FID on the Suape Terminal in the third quarter of 2020. We estimate initial volumes for onshore distribution to be equivalent to approximately 22,000 MMBtu/d with commencement of operations in the first half of 2021. Final development of the project remains subject to regulatory approvals and finalization of commercial agreements. We expect to incur approximately $10 million to $15 million in capital expenditures required to construct and initiate operations at the Suape Terminal. Subject to securing contracts from offtakers requiring regasification services, we may consider replacing the FSU with an FSRU. In addition, a local distribution company is considering constructing a natural gas pipeline to connect the Suape Terminal to the local distribution network. In its initial phase, we estimate regasification volumes related to the pipeline of up to 500,000 cubic meters/d with regasification operations expected to begin in the second half of 2022.
Other Projects
We are in the evaluation or development stage on more than fifteen other terminals worldwide, including in Brazil, Ivory Coast, Mexico and Vietnam, underserved markets where we believe our “hub and spoke” LNG infrastructure model will differentiate us relative to alternative solutions. Our terminals range from fully integrated LNG-to-power projects with associated onshore downstream distribution to the provision of an FSRU and additional infrastructure, such as moorings and pipelines, to enable access to LNG under charter or lease agreements. In connection with the development of our terminals and onshore LNG distribution infrastructure, including power generation, our strategy centers on securing local partners with expertise in crucial regulatory, environmental and other local and regional requirements. We focus on markets with growing electricity demand, an existing shortage of electricity generation and a lack of existing LNG infrastructure, as well as local support for less expensive and more environmentally friendly energy sources like natural gas. In addition, gas-fired power plants serve as the natural complement to the intermittent nature of growing sources of renewable power in many regions throughout the world. Contract duration for the projects under development ranges from 5 to 25 years. With respect to the FSRUs we deploy globally, we intend to target opportunities with run-rate economics in line with our FSRUs deployed or in advanced stages of development in Sergipe and Barcarena.
São Marcos, Brazil. We have partnered with Eneva S.A. to form Centrais Termelétricas São Marcos S.A. (“São Marcos”), a 50/50 joint venture developing an integrated LNG-to-power terminal in São Luis, State of Maranhão, Brazil (the “São Marcos Terminal”), and a power plant with 3.2 GW of installed capacity. We have applied for preliminary permits and environmental licenses and we anticipate that the São Marcos Terminal would supply natural gas to the power plant, which would be developed if awarded a PPA.
Ivory Coast, Africa. In 2017, we were awarded a 20-year charter of an FSRU off Abidjan, Ivory Coast. The charter will commence upon FID and is expected to generate average annual bareboat earnings of approximately $30.0 million. We also own a 6% equity interest in the CI-GNL (“Ivory Coast LNG”) terminal consortium and our joint venture partners include major integrated independent and state-owned energy companies.
Project Pipeline. The following table sets forth information regarding additional FSRU terminals and other LNG infrastructure projects in our development pipeline. Based on our experience with our existing and anticipated terminals, we anticipate a payback period from our anchor customers of seven to eight years on the capital expenditures required at each terminal.
Region
Annual Regas
Capacity
(TBtu)
Expected Anchor
Customer
Size of Power
Plant (MW)
Expected Anchor
Customer Regas
Capacity Utilization
Estimated
Startup
Estimated Total
Capex Required
($MM)
Awaiting FID
West Africa
149
Power Plant
150 - 500
10%
2021-2022
250
Feasibility / FEED Study
Latin America
 
TBD
TBD
 
2022-2023
TBD
Latin America
 
TBD
TBD
 
2022-2023
TBD
Latin America
186
Pipeline / Power Plant
TBD
 
2021-2022
310
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Region
Annual Regas
Capacity
(TBtu)
Expected Anchor
Customer
Size of Power
Plant (MW)
Expected Anchor
Customer Regas
Capacity Utilization
Estimated
Startup
Estimated Total
Capex Required
($MM)
West Africa
186
Power Plant
1,000 - 2,000
41%
2023+
325
West Africa
47
Power Plant
150 - 500
33%
2021-2022
165
Southeast Asia
186
Power Plant
3,000+
41%
2022
310
South Asia
47
Power Plant
150 - 500
33%
2022
185
Early Stage Development
Latin America
186
Pipeline / Power Plant
TBD
 
2022
310
Latin America
186
TBD
TBD
 
2023+
250
Southern Africa
186
Power Plant
1,000 - 2,000
55%
2022
310
Southeast Asia
186
Power Plant
150 - 500
14%
2023+
125
Southeast Asia
186
Power Plant
150 - 500
14%
2023+
125
Southeast Asia
186
Power Plant
150 - 500
14%
2023+
250
Southeast Asia
279
Power Plant
3,000+
92%
2023+
300
South Asia
186
Pipeline / Power Plant
TBD
 
2022
250
Europe
186
Industrial / Power Plant
TBD
 
2023
250
In addition, we are currently in discussions to acquire interests in long-term PPAs related to a brownfield opportunity in the State of Bahia, Brazil.
Downstream Distribution
We expect to capitalize on our strategic locations and LNG processing capacity by establishing a broader network of LNG distribution channels to penetrate additional downstream demand. To that end, we are in the process of establishing eight LNG and natural gas distribution hubs across Brazil from which we expect to pursue downstream customers. These eight hubs consist of our Sergipe, Barcarena, Santa Catarina and Suape Terminals as well as small scale receiving terminals in São Paulo, Rio de Janeiro, Itaqui and Pecem. In addition, we have entered into a strategic partnership with Petrobras Distribuidora S.A. (“BR Distribuidora”), Brazil’s leading fuel distribution company, as discussed in more detail below.
In order to facilitate our distribution of LNG through our eight hubs, we have entered into a bareboat charter agreement for one 7,500 cubic meter, small-scale LNG carrier from Avenir LNG Limited. The Avenir vessel is expected to be deployed in Brazil for three years. We anticipate that the vessel will be delivered to us from the shipyard in the first half of 2021.
As a result of designed capacity and delivery capabilities associated with our existing FSRUs and carriers earmarked for conversion, we expect to incur limited additional capital expenditures in establishing our regional distribution hubs. To enable natural gas access to downstream customers, we are utilizing existing technology from equipment suppliers as well as developing bespoke in-house technological solutions. By utilizing our network of terminals and related infrastructure and by leveraging third parties, we expect to be able to displace current high cost fuel sources with LNG at a materially lower distributed cost, allowing us to capture a significant portion of the price differential.
Partnership with BR Distribuidora
During the first quarter of 2020, we entered into a strategic partnership with BR Distribuidora, Brazil’s leading fuel distribution company, to serve as its exclusive provider of LNG for use in Brazil’s transportation and industrial sectors. Using BR Distribuidora’s 94 distribution centers and 7,600+ fuel stations across Brazil, we expect to leverage our existing infrastructure and LNG supply chain expertise to increase the accessibility of LNG to downstream end-users using a combination of marine and onshore solutions. According to the Brazilian National Agency of Petroleum, Natural Gas and Biofuels (“ANP”), diesel consumption in Brazil stood at 56 million cubic meters (equivalent to approximately 37 million tonnes of LNG) in 2018 with total consumption of diesel, gasoline, LPG, jet fuel, fuel oil and ethanol amounting to 136 million cubic meters (equivalent to approximately 80 million tonnes of LNG). BR Distribuidora reported a total sales volume of 42 million cubic meters in 2018 – making it the largest distributor of fuels in the Brazilian market. In connection with this
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partnership, we have executed letters of intent with three potential downstream customers with total demand of approximately 4,200 MMBtu/d. Once our downstream logistics systems commence operations we expect to enter into supply contracts in order to secure LNG volumes sufficient to meet our contractual delivery obligations. BR Distribuidora, as a major transportation end-user itself, also intends to replace its hired fleet of approximately 5,000 diesel trucks with LNG-powered vehicles at a stated goal of 20% annually, for which we will serve as the exclusive LNG supplier.
Other Downstream Customers in Brazil
In addition, we are in active discussions with more than 30 individual downstream customers with an aggregated demand of approximately 265,000 MMBtu/d, and we have identified upwards of 200 additional offtakers with an aggregated demand of approximately 585,000 MMBtu/d that would complement our existing distribution network.
The map below illustrates the location of our combined downstream distribution hubs in Brazil.

Other Downstream Opportunities Globally
Beyond Brazil, we have identified key markets and countries of focus where distribution of LNG can be facilitated from the use of terminal infrastructure we are currently developing through our project pipeline. A bespoke study of thirteen focus countries performed by Rystad Energy on the potential for diesel-to-LNG conversion of trucks indicates Mexico, South Africa, Thailand and Colombia, among others, as markets where our approach currently being implemented in Brazil could be replicated. These markets have large fleets of Heavy Commercial Vehicles (“HCV”) and high diesel prices that, when combined, form a strong value proposition for LNG as an alternative fuel. Based on total diesel demand from commercial vehicles and buses in the thirteen focus countries, Rystad Energy estimates diesel consumption in such countries of more than 2.6 million barrels per day with prices ranging from $15 per MMBtu to more than $30 per MMBtu as of February 2020.
Gas Marketing and Trading
We believe additional opportunities exist to generate incremental earnings from our downstream distribution network through natural gas origination and trading activities. Our strategically located LNG infrastructure creates opportunities to match customer demand with our gas supply capabilities and capture a margin on volumes delivered. We believe our business relationships with participants in various phases of the natural gas
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and LNG distribution chain, as well as our own industry expertise, provide us with extensive market insight and an understanding of the global physical natural gas and LNG markets that enables us to provide value chain solutions for our customers. Our activities are designed to limit downside exposure while generating upside potential associated with opportunities inherent in volatile market conditions, including opportunities benefitting from fluctuating differentials and market structure. The trades are structured to maintain a position that is substantially balanced with back-to-back offtake and supply commitments and all associated costs are passed through to the customer. The opportunities to earn additional margins vary over time with changing market conditions and accordingly, our results from these activities will fluctuate from period to period.
LNG Technology and Other Initiatives
A key feature of our downstream distribution business model is rapid deployment of assets to provide greater access to LNG. As part of this business model, we are presently developing proprietary technology that will offer faster and more flexible distribution of LNG. The technologies currently under development are innovations related to the transfer of LNG directly from small-scale LNG carriers to ISO containers, flexible storage and fueling solutions and micro-liquefaction units for smaller sources of natural gas.
As part of our efforts to reduce emissions, we have entered into an agreement with Galileo Technologies (“Galileo”), whereby Galileo will deliver two LNG production clusters for the production of biomethane liquefied natural gas (“Bio-LNG”). This technology captures methane produced from the decomposition of organic waste, including from landfills and the residual fibers from crushing sugar cane for sugar production. The clusters will be installed in the State of Bahia and the State of São Paulo, and can produce up to 45 tons of Bio-LNG per day, in aggregate. We expect to commence operations using Galileo’s technology by the end of 2020. Our goal is to have 20% of our natural gas portfolio come from biomethane production.
In addition, we are currently investigating the potential use of hydrogen as a fuel source – on a stand-alone basis for new projects and as a supplemental source of fuel to our existing and planned power plants. The gas turbines installed at the Sergipe Power Plant can use hydrogen as a fuel source after certain upgrades. We are also considering adding hydrogen production facilities to our existing sites to leverage locally available renewable energy sources to produce energy with a reduced carbon footprint.
Natural Gas Market and Market Access
Natural gas is in abundant supply globally and is the fastest growing fossil fuel in terms of demand, representing 24% of global energy demand and 23% of electricity generation in 2019. Innovation in natural gas extraction has resulted in a dramatic decrease in natural gas prices with Henry Hub prices declining from over $13.00 per MMBtu at the end of 2005 to $2.22 at the end of 2019 with an expectation that such prices will stabilize at these lower levels going forward.
Currently, however, much of the world’s natural gas reserves are not directly connected by pipeline to electricity producers and other end-users. An efficient alternative way to facilitate the transportation of natural gas to end-users is by converting natural gas to LNG, a process which involves treating natural gas to remove impurities and then chilling it to approximately negative 162 degrees Celsius, a process generally referred to as “liquefaction.” In LNG form, natural gas is typically transported in bulk by containers or tankers hauled by rail or truck or by marine vessels, such as LNG carriers. Once delivered to its end destination, LNG can be reconverted to natural gas through a process referred to as “regasification.”
Approximately 850 million people still do not have access to electricity, according to the International Energy Agency 2019 World Energy Outlook. Globally, many developing countries lack access to affordable fuel in order to generate electricity and large parts South America, Africa and Asia consume less than 3,000 MWh of electricity per capita because of high costs and lack of infrastructure. According to Bloomberg New Energy Finance (“Bloomberg NEF”), 63 out of 107 reported non-OECD countries have a cost of commercial electricity in excess of $100 per MWh. We believe we are well-positioned to bring low-cost and clean LNG to these countries to fuel further development.
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Economic development, increasing populations and rising standards of living will increase demand for homes, businesses and transportation, and the associated necessary energy use. According to Exxon Mobil’s 2019 Outlook on Energy, global electricity demand is expected to rise 60% by 2040. To satisfy these power needs with gas-fired power would require approximately 310 TBtu of LNG per day (based upon an estimated conversion of 2,500 gallons per day of LNG for every MW of power capacity). We believe that many countries around the world – keenly focused on both cost and environmental concerns – will increasingly look to natural gas to displace more environmentally damaging fuels such as heavy fuel oil (“HFO”), automotive diesel oil (“ADO”) and coal, particularly because natural gas can be significantly less expensive than these higher polluting fuels.
In Brazil, electricity generation has been historically dominated by hydroelectric power, which as of April 2020 accounted for 64% of 171.8 GW of total installed capacity compared to 25% for thermoelectric facilities, 11% for renewables and 1% for nuclear. In 2010, hydroelectricity accounted for approximately 80% of Brazil’s electricity generation; however, environmental regulatory hurdles in Brazil have restricted further expansion of hydroelectric capacity. In addition, hydroelectric facilities in Brazil are subject to substantial reductions in output during periods of drought, resulting in nation-wide energy rationing in 2001 and regional disruptions in 2014. As a result of the limitations of hydroelectric capacity, Brazil’s expanding power needs will be satisfied by alternative sources of energy including thermal, wind and solar power generation. The ten-year energy plan of the Brazilian Energy Research Company (Empresa de Pesquisa Energética, or “EPE”) calls for 60 GW of installed capacity to be added through 2029, of which 20 GW will be thermal, 5 GW hydro, 1 GW nuclear and 33 GW other renewables. Increased thermal power generation capacity, particularly cleaner natural gas generation, will be critical for Brazil to address the intermittent nature of hydroelectric, wind and solar power. There are also compelling reasons for existing non-gas Brazilian plants burning HFO or ADO as fuel to switch to natural gas, including the substantial benefits of using an environmentally cleaner fuel source compared to HFO or ADO, coupled with the cost benefits of LNG ($2.80 per MMBtu versus $11.20 for HFO as of March 2020). Moreover, Brazil has implemented PROCONVE P-8 emission standards to regulate gas and particulate emissions from on-road heavy-duty vehicles increasing the value proposition for LNG-fueled vehicles and driving greater demand for LNG.
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Brazil has only approximately 12,000 km of gas pipelines compared to 30,000 km of gas pipelines in Argentina despite having a landmass three times larger and population more than four times larger than that of Argentina. Most of Brazil’s existing gas infrastructure is located in the south and southeast regions while distribution across the rest of the country is limited. This lack of sufficient infrastructure restricts availability of gas in major demand centers. In addition, local distribution companies have monopolies over gas distribution in their districts which are regulated at the state level. As a result, small scale customers depend primarily on diesel, LPG and HFO for energy. Domestic production accounts for approximately 70% of Brazil’s natural gas supply, with the remainder coming from imported gas via pipelines and LNG. The only major gas import pipeline originates in Bolivia and sources supply from Bolivia’s state-owned oil company (“YPFB”). The long-term supply contract underpinning this pipeline is constrained by available supply from Bolivia. The pipeline has no contracted volumes beyond 2022 with shortfalls expected to be made up partly by LNG imports. Development of sufficient LNG infrastructure will offer an effective way to address supply and distribution constraints and expand natural gas use in the power, industrial, and transportation sectors in Brazil and elsewhere around the world.
We plan to capitalize on this growing supply-demand gap and create new markets for natural gas by developing downstream distribution networks, particularly in areas with significant demand. We design our downstream distribution networks to center around FSRU terminal “hubs”, and we target areas that have historically been underserved by regional pipelines, increasing access to natural gas and LNG via transportation by truck and barge.
LNG Supply
We intend to secure additional long-term supply agreements for LNG for future projects as they near commercial operations. In the absence of such agreements, we will purchase LNG on the spot market, where current pricing is highly favorable. Recent LNG prices have been historically low, which, coupled with ample global supply, affords us flexibility of supply and helps make LNG an even more compelling energy source.
Competitive Strengths
We believe we are well-positioned to execute our business strategies and deliver on our long-term growth objectives based on our competitive strengths:
A pioneer in providing integrated LNG solutions across the value chain. Our focus on the attractive downstream segments of the LNG value chain is complemented by our Sponsors’ proven expertise in the upstream and midstream LNG segments as well as their core maritime capabilities. As a result of our participation in each link in the energy value chain, we are able to provide highly customized energy solutions to a variety of downstream end-users and maximize value for our shareholders. We believe our fully integrated and broad service offering provides more attractive long-term returns than competitors focusing on a single component of the downstream LNG and power generation value chain.
First-mover advantage creates barriers to entry in key geographies. We believe our experience in navigating the Brazilian regulatory environment, negotiating contracts with key customers and working with local developers will allow us to complete projects faster, more efficiently and cost-effectively than new entrants or other competitors. Our foundational investment to develop critical LNG infrastructure and the largest thermal power station in South America, at Sergipe, has established Hygo as a key provider of energy and power in Brazil. Moreover, we have demonstrated that we can successfully replicate our business strategy in new geographies by securing new 25-year PPAs to support the construction of a 605 MW combined cycle thermal power plant in Barcarena in north Brazil. We have also secured the applicable licenses required for the current stage of the projects in Santa Catarina and Suape, in addition to Sergipe and Barcarena, providing access to key regions of the Brazilian market and creating a competitive advantage in our catchment areas given the long-lead time required to obtain these licenses.
Partnerships with key stakeholders across the LNG value chain will strengthen our local presence and enhance our customer value proposition. We have secured critical partnerships with key stakeholders across the LNG value chain. For example, we have entered into a 15-year exclusive strategic partnership with BR Distribuidora, which remains subject to Brazilian regulatory approval, to expand our distribution
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network, increase the accessibility of LNG to major demand centers in Brazil and expand our market share. While BR Distribuidora is not obligated to convert its fleet to LNG-powered vehicles, we expect it will replace its hired fleet of diesel trucks at its stated goal of 20% annually, for which we will serve as the exclusive LNG supplier. We have also established discrete, project-specific partnerships with experienced developers in our power generation projects, such as Ebrasil, one of the largest independent private thermoelectric energy generators in the north and northeast regions of Brazil. Together with our partners, we intend to develop natural gas-fired power plants and offer less expensive and cleaner energy to Brazil’s power grid, including the Sergipe Power Plant. The strength of these partnerships is further enhanced by our Sponsor, Golar LNG, a leading independent maritime LNG asset owner and operator by fleet count, with 27 vessels totaling an aggregate 2,108,687 Dwt and 4,005,000 cubic meters, providing us deep maritime expertise and enhancing our integrated service offering.
Providing an economically and environmentally attractive product creates a compelling value proposition to customers. Natural gas provides a compelling value proposition as it is a less expensive, more efficient and more environmentally friendly energy source than traditional fossil fuels and provides our customers the ability to promote environmental stewardship, energy security and affordability. In addition to being a more fuel-efficient source of energy, natural gas produces lower emissions than competing fuels. Gas-fired power is complementary to renewable energy, allowing power grids to diversify their sources of energy to renewables while maintaining their flexibility and baseload reliability. Stakeholders are increasingly focused on clean energy through the construction of new natural gas-fired power plants and the decommissioning or conversion of older plants. Our integrated downstream LNG infrastructure model positions us as the natural service provider to meet this need. As a “downstream enabler,” our complete LNG and associated infrastructure offering increases the availability of a cheaper, more environmentally sustainable energy alternative. Our goal is to convert a significant portion of the 40 million barrels per day of traditional distillate fuels consumed globally in 2019 to LNG and natural gas.
Well-positioned in Brazil, a market we believe is poised for substantial near- and long-term growth in natural gas consumption. We believe Hygo is well-positioned to capitalize on growth in Brazil’s energy demand which is driven by attractive, underserved and diverse end-markets. Demand for electricity in Brazil is forecasted to grow 30% over the next decade. BP’s 2019 Energy Outlook forecasts Brazil’s natural gas consumption to increase 114% (3.4% per annum) from 2017 to 2040 compared to an increase of only 0.4% per annum for coal and 1.4% per annum for oil. We believe our existing and planned LNG infrastructure positions us well to capitalize on a significant oil-to-gas switching opportunity as diesel, HFO and LPG are phased out in favor of cleaner natural gas. Additionally, we believe there is a large addressable market to convert over-the-road transportation assets, such as trucks and buses, to LNG, an opportunity for which we are uniquely positioned. We have established a strategic partnership with BR Distribuidora which we believe enhances our commercial reach, expands our gas distribution channels and will help accelerate the conversion from traditional fossil fuels to LNG.
Benefits from low LNG prices globally. The substantial global increase in LNG supply over the past ten years has structurally reduced prices and positioned LNG as a more commonly traded and readily available commodity. Global demand for LNG continues to grow both because the delivered cost is anticipated to remain competitive relative to other fuel sources and because greater emphasis is being placed on using cleaner sources of energy. As an integrated downstream gas infrastructure provider, we believe we can unlock a vast and underserved market by introducing LNG as a transformative fuel source.
Provide environmental and social stewardship through responsible energy generation. Natural gas, as a fuel source, produces lower carbon emissions than other fossil fuels and reduces the marginal impact on the climate. Furthermore, gas-fired power generation emits significantly lower toxins and particulate matter relative to other fossil fuels. Historically, natural gas has exhibited more stable pricing with higher energy efficiency making it more sustainable for energy production than other hydrocarbons. LNG is also safer to transport than most fossil fuels. By providing LNG infrastructure and distribution capabilities in remote and otherwise energy-isolated geographies, our platform benefits local communities and can provide a significant boost to economic development. Construction of large power plants and LNG distribution infrastructure results in additional job creation, further supporting regional development. We are proactive in educating communities and businesses in the regions in which we
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operate regarding the economic and environmental benefits, as compared to other fossil fuels, of the long-term adoption of LNG and natural gas as cleaner and more efficient fuels.
Experienced management team supported by strong board-level sponsorship. Hygo’s management team has more than 40 years of cumulative experience in the maritime LNG, power generation and infrastructure industries. We are highly focused on efficient management and operations of our assets, planning for future expansion projects and reducing costs to create value for our shareholders. Management is guided by strong and well-established corporate governance standards and has a clear strategy for providing customized and innovative solutions. Additionally, we have demonstrated an ability to leverage the industry expertise and global reach of Stonepeak and Golar LNG to advance our business. Our partnership with Stonepeak will give us access to their long-standing relationships in the energy, power generation, logistics and maritime industries. Golar LNG’s customer relationships and its technical, commercial and managerial expertise allow us to provide a more competitive, bespoke and compelling service offering to our customers.
Business Strategies
Our primary objective is to deliver long-term stakeholder value as an LNG-infrastructure owner and operator by providing downstream distribution and logistics for LNG and an attractive combination of competitive pricing and lower carbon emissions. We intend to achieve this objective by implementing the following strategies:
Provide our customers with integrated LNG logistics and procurement solutions to unlock the economic and environmental benefits, as compared to other fossil fuels, of natural gas. We will combine our marine LNG regasification terminal infrastructure and gas procurement capabilities to offer economically compelling energy generation and promote acceleration of the global transition to cleaner fuel. In addition to securing long-term gas offtake contracts, we will build or acquire natural gas-fired power generation assets, backed by long-term PPAs, to facilitate the sale and distribution of natural gas from our terminals.
Continue to develop and deploy marine LNG infrastructure across Brazil. We intend to deploy additional marine LNG import terminals across Brazil in the form of FSRUs as well as the necessary onshore infrastructure to facilitate gas offtake. We believe that our LNG terminal solutions are substantially more competitive than traditional onshore regasification terminals. We seek to lock in long-term gas offtake contracts, charters and terminal use agreements with large scale industrial, commercial, transportation and utility customers to anchor our initial LNG infrastructure investment decision. We plan to convert our remaining LNG carriers into FSRUs and develop additional newbuild FSRUs to expand our footprint and market presence across Brazil.
Create additional LNG and natural gas distribution channels to facilitate the consumption of natural gas by a broad spectrum of end-users. Through our downstream distribution business we have identified a broad spectrum of industrial, commercial and retail opportunities in major demand centers across Brazil. We will leverage our existing infrastructure and LNG supply chain expertise to increase the accessibility of LNG and natural gas to downstream end-users. We expect to create a multi-channel distribution network across Brazil by utilizing a combination of marine and onshore infrastructure and distribution solutions, including logistics services provided by third-parties.
Pursue new markets globally and offer compelling value to customers exposed to high energy costs. We intend to selectively pursue global expansion opportunities across Latin America, Eastern Europe, Asia, Africa and the Middle East. We will help create new import markets for LNG by providing infrastructure, distribution and power generation solutions for inland and off-grid energy consumption by large industrial, commercial and transportation customers as well as utilities. We intend to displace existing hydrocarbon-based fuels such as coal, LPG, diesel and HFO by marketing the benefits of LNG as a cheaper, more efficient and cleaner fuel source for global energy consumption. Furthermore, we will use our international footprint and leverage the expertise of our two Sponsors to facilitate our expansion efforts across the globe. We will maintain a flexible approach to business opportunities and continue to form partnerships with local industry participants including utilities, transportation companies and energy distributors to establish an integrated presence in new markets.
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Our History and Relationship with Our Sponsors
We were formed in May 2016 by Golar LNG. In June 2016, Stonepeak acquired a 50% common equity interest in us from Golar LNG and 20,000,000 preference shares from us. We will use the net proceeds from this offering to fund capital expenditures for the growth of our business as well as to redeem all of the preference shares held by Stonepeak. Following the completion of this offering, our Sponsors will retain a significant interest in us through their ownership of    common shares, representing    % of the voting power (or approximately    % if the underwriters' option to purchase additional common shares is exercised in full).
Golar LNG is a publicly traded, midstream LNG company engaged primarily in the transportation and regasification of LNG and the liquefaction of natural gas. It is engaged in the acquisition, ownership, operation and chartering of LNG carriers, FSRUs and FLNGs and the development of LNG projects through its subsidiaries, affiliates, joint ventures and equity method investees.
Stonepeak invests in long-lived, hard asset infrastructure businesses with leading market positions and high barriers to entry, which provide essential services to customers primarily in the following sectors: energy, power and renewables, transportation, utilities, water and communications. Founded in 2011 and headquartered in New York, Stonepeak manages $25.2 billion of capital for its investors (as of June 30, 2020). Stonepeak’s assets under management calculation as provided herein is determined by taking into account unfunded capital commitments of its funds, including any feeder funds and co-invest vehicles managed by Stonepeak as of June 30, 2020.
Prior to consummation of this offering, the entity that holds Stonepeak's investment in Hygo (Stonepeak Infrastructure Fund II Cayman (G) Ltd.) will merge with and into Hygo, with Hygo surviving the merger (the “Recapitalization”). Following consummation of this offering, Stonepeak’s investment in Hygo will be held through Stonepeak Golar Power Holdings (Cayman) LP. In connection with the Recapitalization, the preference shares of Hygo held by Stonepeak will be redeemed in exchange for the right to receive an amount of cash equal to the redemption price of such preference shares, with such cash to be paid with a portion of the proceeds of this offering. For additional information regarding the preference shares and the terms thereof, please see “Description of Share Capital—Stonepeak Preference Shares.”
Simplified Organizational and Ownership Structure After this Offering
The following diagram depicts our simplified organizational and ownership structure after giving effect to the offering, assuming no exercise of the underwriters’ option to purchase additional common shares. For more information regarding our subsidiaries and joint ventures, please see “Business—Our History and Development.”

(1)
BR Distribuidora has an option to acquire 50% of this entity, which expires six months after certain conditions precedent have been met. See “Business—BR Distribuidora Partnership.”
(2)
Prior to consummation of this offering, the entity that holds Stonepeak’s investment in Hygo (Stonepeak Infrastructure Fund II Cayman (G) Ltd.) will merge with and into Hygo, with Hygo surviving the merger. Following consummation of this offering, Stonepeak’s investment in Hygo will be held through Stonepeak Golar Power Holdings (Cayman) LP. See “Business—Our History and Relationship with Our Sponsors” and “Security Ownership of Certain Beneficial Owners and Management.”
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Our Emerging Growth Company Status
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”). For as long as we are an emerging growth company, unlike other public companies, we will not be required to:
provide an auditor’s attestation report on the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);
comply with any new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”) requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;
comply with any new audit rules adopted by the PCAOB, unless the SEC determines otherwise;
provide certain disclosure regarding executive compensation required of larger public companies; or
obtain shareholder approval of any golden parachute payments not previously approved.
We will cease to be an “emerging growth company” upon the earliest of:
when we have $1.07 billion or more in annual revenues;
the date on which we become a “large-accelerated filer” (i.e., the end of the fiscal year in which the total market value of our common equity securities held by non-affiliates is $700.0 million or more as of the preceding June 30);
when we issue more than $1.0 billion of non-convertible debt over a three-year period; or
the last day of the fiscal year following the fifth anniversary of our initial public offering.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”) for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our consolidated financial statements may not be comparable to companies that comply with public company effective dates.
Our Foreign Private Issuer and Controlled Company Status
We qualify as a “foreign private issuer” as defined under SEC rules. Even after we no longer qualify as an emerging growth company, as long as we continue to qualify as a foreign private issuer under SEC rules, we are exempt from certain SEC rules that are applicable to U.S. domestic public companies, including:
the rules requiring domestic filers to issue financial statements prepared under U.S. GAAP;
the sections of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;
the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders who profit from trades made in a short period of time;
the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial statements and other specified information, and current reports on Form 8-K upon the occurrence of specified significant events; and
the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
Notwithstanding these exemptions, we will file with the SEC, within four months after the end of each fiscal year, or such applicable time as required by the SEC, an annual report on Form 20-F containing financial statements audited by an independent registered public accounting firm.
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We may take advantage of these exemptions until such time as we are no longer a foreign private issuer. We would cease to be a foreign private issuer at such time as more than 50% of our outstanding voting securities are held by U.S. residents and any of the following three circumstances applies: (i) the majority of our executive officers or directors are U.S. citizens or residents, (ii) more than 50% of our assets are located in the United States or (iii) our business is administered principally in the United States.
Both foreign private issuers and emerging growth companies also are exempt from certain more stringent executive compensation disclosure rules. Thus, even if we no longer qualify as an emerging growth company, but remain a foreign private issuer, we continue to be exempt from the more stringent compensation disclosures required of companies that are neither an emerging growth company nor a foreign private issuer.
In addition, because we qualify as a foreign private issuer under SEC rules, we are permitted to follow the corporate governance practices of Bermuda (the jurisdiction in which we are organized) in lieu of certain Nasdaq Global Select Market (“NASDAQ”) corporate governance requirements that would otherwise be applicable to us. For example, under Bermuda law, we are not required to have a board of directors comprised of a majority of directors meeting the independence standards described in the NASDAQ rules.
In the event we no longer qualify as a foreign private issuer, we intend to rely on the “controlled company” exemption under NASDAQ rules. Because our Sponsors will initially hold approximately    % of the voting power of our shares following the completion of this offering (or approximately    % if the underwriters’ option to purchase additional common shares is exercised in full), we expect to be a controlled company as of the completion of the offering under the SEC and NASDAQ rules. A controlled company does not need its board of directors to have a majority of independent directors or to form independent compensation or nominating and corporate governance committees. As a controlled company, we will remain subject to rules of the SEC and NASDAQ that require us to have an audit committee composed entirely of independent directors.
If at any time we cease to be a foreign private issuer or a controlled company, we will take all action necessary to comply with the SEC and NASDAQ rules, including by appointing a majority of independent directors to our board of directors, subject to a permitted “phase-in” period.
Risk Factors
An investment in our common shares involves risks associated with our business, regulatory and legal matters, our Bermuda company structure and the tax characteristics of our common shares. Below is a summary of certain key risk factors that you should consider in evaluating an investment in our common shares. However, this list is not exhaustive. Please read the full discussion of these risks and the other risks described under “Risk Factors” and “Forward-Looking Statements.”
These risks include the following:
We have not yet completed contracting, construction and commissioning of some of our facilities in Brazil and other geographies we are active in. There can be no assurance that our facilities will operate as described in this prospectus, or at all.
We have a limited operating history, and an investment in our common shares is speculative.
Our ability to dispatch electricity from our power plants is dependent upon hydrological conditions in Brazil.
Our operational and consolidated financial results are partially dependent on the results of the joint ventures, affiliates and special purpose entities in which we invest.
We have a limited customer base and expect that a significant portion of our future revenues will be from a limited number of customers, and the loss of any significant customer could adversely affect our operating results.
Failure of LNG to be a competitive source of energy in the markets in which we operate, and seek to operate, could adversely affect our expansion strategy.
We are highly dependent upon economic, political, regulatory and other conditions and developments in Brazil and the other jurisdictions in which we operate.
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Our financial condition and operating results may be adversely affected by foreign exchange fluctuations.
Our Sponsors have the ability to direct the voting of a majority of our shares, and its interests may conflict with those of our other shareholders.
Because we are a Bermuda exempted company, our shareholders may have less recourse against us or our directors than shareholders of a U.S. company have against the directors of that U.S. company.
Because our offices and assets are outside the United States, our shareholders may not be able to bring a suit against us, or enforce a judgment obtained against us in the United States.
Shareholders will experience immediate and substantial dilution of $per common share.
There is no existing market for our common shares and a trading market that will provide you with adequate liquidity may not develop. The price of our common shares may fluctuate significantly, and shareholders could lose all or part of their investment.
We are a foreign private issuer within the meaning of the SEC rules, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.
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.
Brazilian tax legislation is currently under discussion and tax reform may affect our revenues.
Principal Executive Offices and Internet Address
Our principal executive offices are located at 2nd Floor, S.E. Pearman Building, 9 Par-la-Ville Road, Hamilton HM 11, Bermuda and our telephone number is +1 (441) 295-4705. Our website is located at www.          .com. We expect to make our periodic reports and other information filed with or furnished to the SEC available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.
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The Offering
Common shares offered to the public
    common shares, or     common shares if the underwriters exercise their option to purchase additional common shares in full.
Common shares outstanding after this offering
    common shares, or     common shares if the underwriters exercise their option to purchase additional common shares in full.
Use of proceeds
We expect to receive approximately $     million of net proceeds from this offering, based upon the assumed initial public offering price of $     per share (the midpoint of the price range set forth on the cover of this prospectus) and after deducting the underwriting discounts and estimated offering expenses.
We intend to use the net proceeds to fund (i) $     million of capital expenditures related to the Barcarena Terminal and increasing our equity interest in the Barcarena Power Plant, (ii) $     million of capital expenditures related to the Santa Catarina Terminal and (iii) $    million to redeem the preference shares in the Recapitalization, including accrued and unpaid dividends of $    . We intend to use any remaining net proceeds for working capital and general corporate purposes. Please read “Use of Proceeds” for additional information.
If the underwriters exercise their option to purchase additional common shares in full, the additional net proceeds will be approximately $     million. The net proceeds from any exercise of such option will be used for general corporate purposes, including the development of future projects.
Dividend policy
We do not currently anticipate paying any dividends on our common shares. See “Dividend Policy.”
Exchange listing
We have applied to list our common shares on NASDAQ, under the symbol “HYGO.”
Transfer agent
Computershare Trust Company, N.A.
Risk factors
You should carefully read and consider the information set forth under the heading “Risk Factors” and all other information set forth in this prospectus before deciding to invest in our common shares.
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Summary Historical Financial Data
The following table presents our summary historical financial data for the periods and as of the dates indicated. The summary historical financial data as of and for the years ended December 31, 2019 and 2018 was derived from the audited historical consolidated financial statements of Hygo Energy Transition Ltd., formerly known as Golar Power Limited, included elsewhere in this prospectus. The summary historical financial data as of June 30, 2020 and for the six months ended June 30, 2020 and 2019 was derived from the unaudited historical financial statements of Hygo Energy Transition Ltd., formerly known as Golar Power Limited, included elsewhere in this prospectus and which, in the opinion of management, contain all normal recurring adjustments necessary for a fair statement of the results for the unaudited interim periods and have been prepared on the same basis as the associated audited consolidated financial statements.
You should read the information set forth below together with “Use of Proceeds,” “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this prospectus. We expect our historical results of operations and cash flows, including our audited consolidated financial statements, to differ materially from our future operations and cash flows as our business and projects mature. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Historical and Anticipated Future Operating Results Will Differ Materially” for further information. Accordingly, our historical financial results are not necessarily indicative of results to be expected for any future periods.
 
Six Months Ended June 30,
Year Ended December 31,
 
2020
2019
2019
2018
 
(in thousands except share and per share data)
Statements of Operations Data:
 
 
 
 
Operating revenues
 
 
 
 
Time charter revenues
$22,787
$14,425
$35,601
$47,968
Time charter revenues – collaborative arrangement
9,622
9,622
30,681
Management fees
83
Total operating revenues
22,787
24,047
45,223
78,732
Operating expenses
 
 
 
 
Vessel operating expenses
(6,622)
(6,531)
12,638
11,499
Voyage, charter-hire and commission expenses
(770)
(2,882)
5,912
3,160
Voyage, charter-hire and commission expenses – collaborative arrangement
(9,825)
9,825
39,836
Administrative expenses
(11,849)
(7,285)
16,126
17,652
Depreciation and amortization
(5,640)
(5,579)
11,212
11,180
Total operating expenses
(24,881)
(32,102)
55,713
83,327
Other operating income (loss)
3,714
1,100
Operating income (loss)
(1,620)
(8,055)
(9,390)
(4,595)
Other non-operating income (loss)
 
 
 
 
Loss on disposal of asset under development
(25,981)
Unrealized gain on derivative instrument
5,127
9,990
Other non-operating income
5,000
Net gain on loss of control of subsidiary
72
Total non-operating income (loss)
(20,854)
9,990
5,072
Financial income (expense)
 
 
 
 
Interest income
10,839
489
795
1,336
Interest expense
(5,669)
(2)
(912)
Other financial items, net
2,011
(1,144)
(1,659)
(5,245)
Net financial income (expense)
7,181
(655)
(866)
(4,821)
Loss before equity in net losses of affiliates, income taxes and non-controlling interest
(12,053)
(8,710)
(266)
(4,344)
Income taxes
(2,522)
(33)
(4,152)
(110)
Equity in net loss of affiliates
(37,276)
(778)
(2,510)
(5,748)
Net loss
(51,851)
(9,521)
(6,928)
(10,202)
Net income attributable to non-controlling interest
(3,346)
(2,806)
(5,549)
(1,541)
Preferred dividends
(5,652)
(4,250)
(11,875)
(8,500)
Net loss attributable to common shareholders
$(60,849)
(16,577)
$(24,352)
$(20,243)
Net loss per share – basic and diluted
$(1.30)
$(0.35)
$(0.52)
$(0.43)
Weighted average number of shares outstanding – basic and diluted
46,950,154
46,950,154
46,950,154
46,950,154
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As of June 30
As of December 31,
 
2020
2019
2018
 
(in thousands)
Balance Sheet Data (at period end):
 
 
 
Vessels and equipment, net
$354,645
$360,143
$363,893
Total assets
1,042,620
1,154,792
1,034,129
Long-term debt
378,885
337,686
372,256
Total liabilities
555,575
570,551
434,561
 
Six Months Ended June 30
Year Ended December 31,
 
2020
2019
2019
2018
 
(in thousands)
Statements of Cash Flow Data:
 
 
 
 
Net cash provided by (used in):
 
 
 
 
Operating activities
$11,724
$15,854
$13,755
$(12,947)
Investing activities
(18,109)
(13,466)
(71,447)
(310,794)
Financing activities
43,614
(10,721)
80,030
324,436
 
Three Months Ended
June 30, 2020(2)
CELSE EBITDA(1):
(unaudited)
(BRL, in thousands)
 
Net income (loss)
R$(6,244)
Add:
 
Deferred taxes
(3,208)
Net financial expenses
164,537
Depreciation and amortisation
123,764
EBITDA
R$278,849
EBITDA attributable to Hygo
R$139,425
(1)
EBITDA is calculated as net income (loss), plus (i) deferred taxes, (ii) net financial expenses, and (iii) depreciation and amortization. EBITDA is not a financial measure under U.S. GAAP and should not be considered an alternative to net income (loss) or other consolidated income or cash flow statement data determined in accordance with U.S. GAAP or as a measure of profitability or liquidity. EBITDA is a measure commonly used by management and is presented because we believe that it is a useful adjunct to net income (loss) for analysts, investors and other interested parties in the evaluation of our business.
(2)
We have elected to present CELSE EBITDA for the three months ended June 30, 2020 as the Sergipe Terminal commenced commercial operations in March 2020.
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RISK FACTORS
Investing in our common shares involves risks. You should carefully consider the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common shares. Additional risks not presently known to us or that we currently deem immaterial could also materially affect our business. This prospectus includes forward-looking statements regarding, among other things, our plans, strategies, prospects and projections, both business and financial. As a result, you should not place undue reliance on any such statements included in this prospectus or any other offering materials.
If any of the following risks were to occur, our business, financial condition and results of operations could be materially adversely affected. In that case, the trading price of our common shares could decline and you could lose all or part of your investment.
Risks Related to Our Business
Only one of our terminals has commenced commercial operations. Our other planned terminals are in various stages of contracting customers, construction, permitting and commissioning. There can be no assurance that our planned terminals will commence operations timely, as described in this prospectus or at all.
Our Sergipe Terminal commenced commercial operations in March, 2020. However, we have not yet commenced commercial operations or entered into binding construction contracts or obtained all necessary environmental, regulatory, construction and zoning permissions for any of our other facilities. We expect to convert the Golar Celsius or the Golar Penguin into a FSRU to service our Barcarena Terminal, but have not yet reached FID for the deployment and conversion of such vessel. In addition, although we have been awarded environmental and regulatory licenses for our Santa Catarina Terminal, we have not secured any commercial projects nor obtained all remaining necessary approvals. We also have various agreements in place that remain subject to final investment decisions, such as our agreement to provide an FSRU to CI-GNL in the Ivory Coast. There can be no assurance that we will be able to enter into the contracts required for the development of our facilities on commercially favorable terms, if at all, or that we will be able to obtain all of the environmental, regulatory, construction and zoning permissions we need in Brazil and elsewhere.
In particular, we will require agreements with ports proximate to our facilities capable of handling the transload of LNG direct from our occupying vessel to our transportation assets. If we are unable to enter into favorable contracts or to obtain the necessary regulatory and land use approvals on favorable terms, we may not be able to construct and operate these assets as described in this prospectus, or at all. In addition, to develop future projects we will, in many cases, have to secure the use of suitable vessels and, as required, convert them. Finally, the construction of facilities is inherently subject to the risks of cost overruns and delays. For example, the construction of our Sergipe Power Plant experienced a two-month delay related to the installation of various offshore equipment.
If we are unable to construct, commission and operate all of our facilities as described in this prospectus, or, when and if constructed, they do not accomplish the goals described in this prospectus, or if we experience delays or cost overruns in construction, our business, operating results, cash flows and liquidity could be materially and adversely affected. Expenses related to our pursuit of contracts and regulatory approvals related to our facilities still under development may be significant and will be incurred by us regardless of whether these assets are ultimately constructed and operational.
There is no existing market in Brazil for the sale of LNG as a fuel source for trucking or vehicles generally. BR Distribuidora does not currently distribute, nor is obligated to commence distribution of, LNG through its distribution and fuel centers. Additionally, BR Distribuidora is not obligated to, and may not, convert any portion of its existing fleet of diesel trucks. Moreover, our agreement with BR Distribuidora is subject to regulatory approval and other uncertainties. We may be unable to realize the anticipated benefits of this partnership.
The transportation industry in Brazil currently relies on traditional fuels such as gasoline and diesel. And although there is wide acknowledgement in the industry that LNG represents a less expensive and more environmentally friendly alternative to these fuels, no significant portion of the transportation industry is currently utilizing LNG. We cannot predict when, or even if, any meaningful portion of the transportation industry within Brazil will convert to LNG powered vehicles. Our agreement with BR Distribuidora does not contractually obligate it to convert any portion of its fleet of diesel trucks to LNG-powered vehicles. Unless and until there is a significant conversion to LNG-powered vehicles within Brazil, we will not realize the anticipated benefits of our partnership, which could adversely impact our future revenues.
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In addition, our agreement with BR Distribuidora is subject to approval by Brazilian antitrust authorities and our activities with respect to the sale of LNG are subject to the approval of other regulatory authorities, including ANP. There can be no assurance as to whether regulatory approvals will be received or that they will be granted in a timely manner. Until we receive these approvals, we will be unable to make sales through BR Distribuidora’s distribution channels or other channels. Accordingly, we have not yet made any sales pursuant to this arrangement.
Our cash flow will be dependent upon the ability of our operating subsidiaries and joint ventures to make cash distributions to us, the amount of which will depend on various factors.
We currently anticipate that a major source of our earnings will be cash distributions from our operating subsidiaries and joint ventures. The amount of cash that our operating subsidiaries and joint ventures can distribute each quarter to their owners, including us, principally depends upon the amount of cash they generate from their operations, which will fluctuate from quarter to quarter based on, among other things:
the amount of LNG or natural gas sold to customers;
market price of LNG;
the level of dispatch of the Sergipe Power Plant and our future power plants;
any restrictions on the payment of distributions contained in covenants in their financing arrangements and joint venture agreements;
the levels of investments in each of our operating subsidiaries, which may be limited and disparate;
the levels of operating expenses, maintenance expenses and general and administrative expenses;
regulatory action affecting: (i) the supply of, or demand for electricity in Brazil, (ii) operating costs and operating flexibility; and
prevailing economic conditions.
In addition, we do not wholly own all of our operating subsidiaries and joint ventures. As a result, if such operating subsidiaries and joint ventures make distributions, including tax distributions, they will also have to make distributions to their noncontrolling interest owners.
We may not be able to fully utilize the capacity of our terminals, which could impact our future revenues and materially harm our business, financial condition and operating results.
Our FSRU terminals have significant excess capacity that is currently not dedicated to a particular anchor customer. Part of our business strategy is to utilize undedicated excess capacity of our FSRU terminals to serve additional downstream customers in the regions in which we operate. However, we have not secured, and we may be unable to secure, commitments for all of our excess capacity. Factors which could cause us to contract less than full capacity include difficulties in negotiations with potential counterparties and factors outside of our control such as the price of and demand for LNG. Failure to secure commitments for less than full capacity could impact our future revenues and materially harm our business, financial condition and operating results.
In addition, CELSE has the right to utilize 100% of the capacity at our Sergipe Terminal pursuant to the Sergipe FSRU Charter. In order to utilize the excess capacity of the Sergipe Terminal, we will need the consent of CELSE and the senior lenders under CELSE’s financing arrangements. If we are unable to obtain the necessary consents to utilize the excess capacity of the Sergipe Terminal, our business, financial condition and operating results may be adversely affected.
Failure of LNG to be a competitive source of energy in the markets in which we operate, and seek to operate, could adversely affect our expansion strategy.
Our operations are, and will be, dependent upon LNG being a competitive source of energy in the markets in which we operate. In particular, hydroelectric power generation is the predominant source of electricity in Brazil and LNG is one of several other energy sources used to supplement hydroelectric generation. Potential expansion in other parts of world where we may operate is primarily dependent upon LNG being a competitive source of energy in those geographical locations. Likewise, recent declines in the cost of crude oil, if sustained, will make crude oil and its derivatives a more competitive fuel source to LNG.
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As a result of these and other factors, natural gas may not be a competitive source of energy in the markets we intend to serve or elsewhere. The failure of natural gas to be a competitive supply alternative to oil and other alternative energy sources could adversely affect our ability to deliver LNG or natural gas to our customers or other locations on a commercial basis.
Our business plan requires the conversion of our LNG carriers to FSRUs. We have not yet made the final investment decision with respect to the conversion of either such carriers.
In the near term, we expect to convert the Golar Celsius or the Golar Penguin into a FSRU. To date, we have invested approximately $30 million in anticipation of a conversion of at least one of these carriers. However, our final investment decision to convert either of these carriers is subject to a variety of conditions, including, most importantly, obtaining an anchor customer with respect to certain of our planned projects. Additionally, the remaining expense of any such conversion will require project specific financing based on the value of the as-converted FSRU.
We cannot guarantee that any of our additional projects will be commenced on a timely basis, or at all, or that we will be able to obtain the necessary project financing for the conversion on favorable terms or at all. A delay in the conversion of the Golar Celsius or Golar Penguin may materially and adversely affect our ability to secure and commence future projects.
CELSE is subject to risk of loss or damage to LNG that is processed and/or stored at its FSRUs and transported via pipeline.
LNG processed and stored on FSRUs may be subject to loss or damage resulting from equipment malfunction, faulty handling, ageing or otherwise. For the period of time during which LNG is stored on an FSRU or is dispatched to a pipeline, CELSE, in the case of the Sergipe Terminal, bears the risk of loss or damage to all such LNG. Any such disruption to the supply of LNG and natural gas may lead to delays, disruptions or curtailments in the production of power at the Sergipe Power Plant. If CELSE cannot generate energy at the Sergipe Power Plant by burning natural gas, its revenues, financial condition and results of operations may be materially and adversely affected.
Our ability to implement our business strategy may be materially and adversely affected by many factors, including our ability to identify future projects, obtain sufficient financing for such projects and develop and operate energy-related infrastructure.
Our business is subject to a variety of risks, including, among others, any inability to identify and enter into appropriate projects, any inability to obtain sufficient financing for any project we identify, any failure of upstream and downstream LNG producing and consuming projects connected with our activities, and other industry, regulatory, economic and political risks.
Our business strategy relies upon our future ability to successfully market natural gas to end-users, develop and maintain cost-effective logistics in our supply chain and construct, develop and operate energy-related infrastructure in Brazil and other emerging and developing countries where we do not currently operate. Our strategy assumes that we will be able to expand our operations into other countries, enter into long-term agreements with end-users, develop infrastructure into efficient and profitable operations in a timely and cost-effective way, obtain approvals from all relevant federal, state and local authorities, as needed, for the construction and operation of these projects and other relevant approvals and obtain long-term capital appreciation and liquidity with respect to such investments. We cannot assure you if or when we will enter into contracts for the sale of LNG and/or natural gas in connection with our downstream distribution business, or, if we are able to enter into contracts, whether such contracts will materialize. In addition, there is no certainty as to the price at which we will be able to sell LNG and/or natural gas or our costs for such LNG and/or natural gas.
Thus, there can be no assurance that we will achieve our target pricing, costs or margins. Our strategy may also be affected by future governmental laws and regulations, which are subject to change in emerging countries, such as Brazil. Our strategy also assumes that we will be able to enter into strategic relationships with energy end-users, power utilities, LNG providers, shipping companies, infrastructure developers, financing counterparties and other partners. These assumptions are subject to significant economic, competitive, regulatory and operational uncertainties, contingencies and risks, many of which are beyond our control. Additionally, in
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furtherance of our business strategy, we may acquire operating businesses or other assets in the future. Any such acquisitions would be subject to significant risks and contingencies, including the risk of integration and we may not be able to realize the benefits of any such acquisitions.
Additionally, our strategy may evolve over time. Our future ability to execute our business strategy is uncertain, and it can be expected that one or more of our assumptions will prove to be incorrect and that we will face unanticipated events and circumstances that may adversely affect our business. Any one or more of the following factors may have a material adverse effect on our ability to implement our strategy and achieve our targets:
failure to develop cost-effective logistics solutions;
failure to manage expanding operations in the projected time frame;
inability to develop infrastructure, including our Barcarena and Santa Catarina Projects, as well as other future projects, in a timely and cost-effective manner;
inability to attract and retain personnel in a timely and cost-effective manner;
failure of investments in technology and machinery, such as LNG regasification technology, to perform as expected;
increases in competition which could increase our costs and undermine our profits;
inability to source LNG and/or natural gas in sufficient quantities and/or at economically attractive prices;
failure to anticipate and adapt to new trends in the energy sector in Brazil and elsewhere;
increases in operating costs, including the need for capital improvements, insurance premiums, general taxes, real estate taxes and utilities, affecting our profit margins;
inability to raise significant additional debt and equity capital in the future to implement our strategy as well as to operate and expand our business;
general economic, political and business conditions in Brazil and in the other geographic areas in which we operate or intend to operate;
public health crises, such as coronavirus which began in early 2020, which has significantly impacted global economic conditions;
inflation, depreciation of the currencies of the countries in which we operate and fluctuations in interest rates;
failure to obtain approvals from local authorities for the construction and operation of our facilities;
failure to win new bids or contracts;
failure to obtain approvals from governmental regulators and relevant local authorities for the construction and operation of potential future projects and other relevant approvals;
existing and future governmental laws and regulations; or
inability, or failure, of any customer or contract counterparty to perform their contractual obligations to us.
If we experience any of these failures, such failure may adversely affect our financial condition, results of operations and ability to execute our business strategy.
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The scale and scope of the recent COVID-19 outbreak, the resulting pandemic, and the impact on the financial markets is unknown and could adversely affect our business, financial condition and results of operation at least for the near term.
The scale and scope of the recent COVID-19 outbreak, the resulting pandemic, and the impact on the financial markets is unknown and could adversely affect our business, financial condition and results of operation at least for the near term. The rapid spread of COVID-19 globally has also resulted in increased travel restrictions and disruption and shutdown of certain businesses around the world, including our own. For example, there is an increased risk that FID of our Barcarena and Santa Catarina terminals may be delayed due to severe restrictions on travel within Brazil, which have prevented personnel from traveling between states to execute contracts and which have impacted the timing of inspections and permitting. In addition, the planned power auction related to the Santa Catarina Power Plant has been further postponed due to COVID-19. We continue to ask the majority of our non-essential workforce to work remotely, avoid public transportation and wear face coverings, and travel to other regions has been limited to essential personnel only. If COVID-19 were to affect a significant amount of our workforce, we may experience delays or the inability to fulfill our supply obligations to our customers on a timely basis. We will closely monitor this global health crisis and will reassess our strategy and operational activities on a regular, ongoing basis as the situation evolves.
The spread of COVID-19 has caused severe disruptions in the worldwide economy, including a significant decrease in the demand for LNG and natural gas, which could in turn disrupt our and our customers’ businesses, activities, and operations, including the marketability of our products. Moreover, since the beginning of January 2020, the COVID-19 outbreak has caused significant disruption in the financial markets both globally and in the U.S., which could limit our ability to access capital and sources of liquidity at attractive rates or at all, adversely affecting our business, financial condition, liquidity and results of operations. The global scale and scope of COVID-19 is unknown and the duration of the business disruption and related financial impact cannot be reasonably estimated at this time.
The extent to which COVID-19 impacts our results will ultimately depend on future developments, which are highly uncertain, and will include emerging information concerning the severity of COVID-19 and the actions taken by governments and private businesses to attempt to contain COVID-19. However, we believe COVID-19 could adversely affect our business, financial condition and results of operations at least for the near term. See “Management's Discussion and Analysis of Results of Operations and Financial Condition—Our Historical and Anticipated Future Operating Results Will Differ Materially—Impact of COVID-19.”
We have a limited operating history, anticipate significant capital expenditures and an investment in our common shares is speculative.
We have a limited operating history and track record. As a result, our prior operating history and historical consolidated financial statements may not be a reliable basis for evaluating our business prospects or the future value of our common shares. We commenced operations on May 19, 2016, and we had net losses attributable to common shareholders of approximately $7.3 million for the period from May 19, 2016 to December 31, 2017, $20.2 million in 2018, $24.3 million in 2019 and $60.8 million for the six months ended June 30, 2020. In addition, we have historically derived our revenues from the operation of our vessels in the Cool Pool, but we expect the majority of our future revenues to be derived from our LNG-to-power projects. Our strategy may not be successful, and if unsuccessful, we may be unable to modify it in a timely and successful manner. We cannot give you any assurance that we will be able to implement our strategy on a timely basis, if at all, or achieve our internal model or that our assumptions will be accurate. Accordingly, your investment in our common shares is speculative and subject to a high degree of risk. Prior to investing in our common shares, you should understand that there is a possibility of the loss of your entire investment. Our limited history also means that we continue to develop and implement various policies and procedures including those related to data privacy and other matters. We will need to continue to build our team to implement our strategies.
We will continue to incur significant capital and operating expenditures while we develop our network of downstream LNG infrastructure, including for the completion of the Sergipe Terminal, the Barcarena Terminal, the Santa Catarina Terminal and other projects in Brazil currently under construction, as well as other future projects in our project pipeline. We will need to invest significant amounts of additional capital to implement our strategy. We have not completed constructing all of our facilities and our strategy includes the construction of additional facilities. Any delays beyond the expected development period for these assets would prolong, and could increase the level of, operating losses and negative operating cash flows. Our future liquidity may also be
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affected by the timing of construction financing availability in relation to the incurrence of construction costs and other outflows and by the timing of receipt of cash flows under our customer contracts in relation to the incurrence of project and operating expenses. Our ability to generate any positive operating cash flow and achieve profitability in the future is dependent on, among other things, our ability to successfully and timely complete necessary infrastructure, including our Barcarena and Santa Catarina Terminals and other projects in Brazil currently under construction, and fulfill our delivery obligations under our customer contracts.
Cyclical or other changes in the demand for and price of LNG and natural gas may adversely affect our business and the performance of our customers and could have a material adverse effect on our business, contracts, financial condition, operating results, cash flows, liquidity and prospects.
Our business and the development of energy-related infrastructure and projects generally is based on assumptions about the future availability and price of natural gas and LNG and the prospects for international natural gas and LNG markets. Natural gas and LNG prices have at various times been and may become volatile due to one or more of the following factors:
insufficient supply or oversupply of natural gas;
insufficient LNG tanker capacity;
weather conditions and natural disasters;
reduced demand for natural gas;
increased natural gas production deliverable by pipelines, which could suppress demand for LNG;
decreased oil and natural gas exploration activities, which may decrease the production and increase the price of natural gas;
cost improvements that allow competitors to offer LNG regasification services at reduced prices;
changes in supplies of, and prices for, alternative energy sources such as coal, oil, nuclear, hydroelectric, wind and solar energy, which may reduce the demand for natural gas;
changes in regulatory, tax or other governmental policies regarding imported or exported LNG, natural gas or alternative energy sources, which may reduce the demand for imported or exported LNG and/or natural gas;
political conditions in natural gas producing regions;
adverse relative demand for LNG compared to other markets, which may decrease LNG imports into or exports from North America; and
cyclical trends in general business and economic conditions that cause changes in the demand for natural gas or LNG.
Adverse trends or developments affecting any of these factors could result in decreases in the prices at which we are able to sell LNG and natural gas or increases in the prices we have to pay for natural gas or LNG, which could materially and adversely affect the performance of our customers, and could have a material adverse effect on our business, contracts, financial condition, operating results, cash flows, liquidity and prospects. There can be no assurance we will achieve our target cost or pricing goals. In particular, because we have not currently procured fixed-price, long-term LNG supply for some of our terminals, increases in LNG prices and/or shortages of LNG supply could be material and adverse to our business. There is inherent risk in the estimation process, including significant changes in the demand for and price of LNG as a result of the factors listed above, many of which are outside of our control.
In addition, the spread of COVID-19 across the globe has negatively affected worldwide economic and commercial activity, disrupted global supply chains, reduced global demand for oil, natural gas and LNG, and created significant volatility and disruption of financial and commodity markets. Other factors expected to impact crude oil and natural gas demand include production cuts and freezes implemented by OPEC members, other large oil producers such as Russia, and certain state regulators in the U.S. For example, during the first quarter of 2020, OPEC and Russia failed to agree on a plan to cut production of oil and related commodities. Subsequently, Saudi Arabia announced plans to increase production and reduce the prices at which they sell oil. In response to the oversupply of crude oil caused by COVID-19 and the actions of OPEC, Saudi Arabia and Russia, certain
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state regulators in the U.S. are considering prorating production of hydrocarbons. These events, combined with the outbreak of the COVID-19 pandemic that has reduced economic activity and the related demand for oil, have contributed to a sharp drop in prices for crude oil, natural gas and LNG in the first half of 2020.
Any future liquidation proceeding of us or our subsidiaries may be conducted on a consolidated basis.
The Brazilian judiciary, our creditors and/or our subsidiaries may determine that any future liquidation proceeding of us or our subsidiaries be conducted as if we and our subsidiaries were a single company pursuant to the substantial consolidation theory. Should this happen, our shareholders may be adversely affected by the loss of value of the Company in the event our equity is allocated to pay the creditors of one or more of our subsidiaries.
Our power generation projects may depend on the construction and operation of transmission and interconnection facilities by third parties.
Our power generation projects must interconnect to Brazil’s transmission system and such projects may depend on the completion of new lines and/or increases in the capacity of existing facilities by the applicable power transmission concessionaires in order to interconnect and become fully operational. Delays from such concessionaires in the completion of the necessary interconnection and associated facilities may affect the ability of our power generation projects to start commercial operation and/or fulfill power delivery commitments under the PPAs.
Our ability to dispatch electricity from our power plants is dependent upon hydrological and other grid conditions in Brazil.
Historically, Brazil’s electricity generation has been dominated by hydroelectricity plants, which currently represent 64% of 171.8 GW of total installed capacity compared to 25% for thermoelectric facilities, 10% for renewables, and 1% for nuclear. There are substantial seasonal variations in monthly and annual flows to the plants, which depend fundamentally on the volume of rain that falls in each rainy season. When hydrological conditions are poor, the National Electricity System Operator (Operador Nacional do Sistema, or “ONS”) dispatches thermoelectric power plants, including those that we operate, to top up hydroelectric generation and maintain the electricity supply level.
The ONS Grid Code allows the ONS to dispatch thermoelectric power plants for the following reasons or under the following circumstances:
(i)
when marginal operation cost is the same as the variable unit cost of such power plant;
(ii)
due to inflexibility or necessity of the generator;
(iii)
when dispatch of such power plant is needed in order to maintain the stability of the system;
(iv)
as determined by the Energy Industry Monitoring Committee where extraordinary circumstances exist;
(v)
due to accelerated and/or replacement generation as proposed by the generator in order to make up for the unavailability of fuel; and
(vi)
for purposes of exportation of power to foreign markets.
As a result, the amount of electricity generated by thermoelectric power plants, including our power plants that are already contracted and our power plants under development, can vary significantly in response to the hydrological and other grid conditions in Brazil. If our power plants are not dispatched or are dispatched at levels lower than expected, our operations and financial results may be adversely affected.
Our growth depends on continued growth in demand for the services we provide.
Our growth strategy focuses on expansion in the floating storage and regasification sector and the transportation sector within the LNG transportation, storage and regasification industry. The rate of LNG growth has fluctuated due to several reasons, including the global economic crisis and the continued increase in natural gas production from unconventional sources in regions such as North America. Accordingly, our growth depends on continued growth in world and regional demand for LNG, FSRUs and other LNG infrastructure assets, which could be negatively affected by a number of factors, including:
increases in the cost of LNG;
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increases in the production levels of low-cost natural gas in domestic, natural gas-consuming markets, which could further depress prices for natural gas in those markets and make LNG uneconomical;
decreases in the cost, or increases in the demand for, conventional land-based regasification systems, which could occur if providers or users of regasification services seek greater economies of scale than FSRUs can provide or if the economic, regulatory or political challenges associated with land-based activities improve;
decreases in the cost of alternative technologies or development of alternative technologies for vessel-based LNG regasification;
increases in the production of natural gas in areas linked by pipelines to consuming areas, the extension of existing, or the development of new, pipeline systems in markets we may serve, or the conversion of existing non-natural gas pipelines to natural gas pipelines in those markets;
decreases in the consumption of natural gas due to increases in its price relative to other energy sources or other factors making consumption of natural gas less attractive;
availability of new, alternative energy sources, including compressed natural gas; and
negative global or regional economic or political conditions (including the ongoing global economic effects of COVID-19), particularly in LNG consuming regions, which could reduce energy consumption or its growth.
Reduced demand for LNG, FSRUs or other LNG infrastructure assets would have a material adverse effect on our future growth and could harm our business, financial condition and results of operations.
Our business is dependent upon obtaining substantial additional funding from various sources, which may not be available or may only be available on unfavorable terms.
A portion of the net proceeds from this offering will be used to redeem the preference shares held by Stonepeak, with the remaining portion used to fund future capital expenditures. After giving effect to this offering, assuming the accuracy of our assumptions relating to construction, we believe that our cash resources will be sufficient to meet projected capital expenditures, financing obligations and operating requirements related to the construction and development of our assets and LNG facilities. In the future, we expect to incur additional indebtedness to assist us in developing our operations, including to finance the conversion of our existing LNG carriers to FSRUs. If we are unable to secure additional funding, or if it is only available on terms that we determine are not acceptable to us, we may be unable to fully execute our business plan and our business, financial condition or results of operations may be adversely affected. Additionally, we may need to adjust the timing of our planned capital expenditures and facilities development depending on the availability of such additional funding. Our ability to raise additional capital will depend on financial, economic and market conditions and other factors, many of which are beyond our control. We cannot assure you that such additional funding will be available on acceptable terms, or at all. To the extent that we raise additional equity capital by issuing additional securities at any point in the future, our then-existing shareholders may experience dilution. Debt financing, if available, may subject us to restrictive covenants that could limit our flexibility in conducting future business activities and could result in us expending significant resources to service our obligations. If we are unable to comply with these covenants and service our debt, we may lose control of our business and be forced to reduce or delay planned investments or capital expenditures, sell assets, restructure our operations or submit to foreclosure proceedings, all of which could result in a material adverse effect upon our business and reduce the value of your investment.
A variety of factors beyond our control could impact the availability or cost of capital, including the valuations of our assets, domestic or international economic conditions, increases in key benchmark interest rates and/or credit spreads, the adoption of new or amended banking or capital market laws or regulations, the re-pricing of market risks and volatility in capital and financial markets, risks relating to the credit risk of our customers and the jurisdictions in which we operate, as well as general risks applicable to the energy sector. Our financing costs could increase or future borrowings or equity offerings may be unavailable to us or unsuccessful, which could cause us to be unable to pay or refinance our indebtedness or to fund our other liquidity needs.
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We may not be profitable for an indeterminate period of time.
We have a limited operating history and did not commence revenue-generating activities until 2016, and therefore did not achieve profitability as of June 30, 2020. We will need to make a significant capital investment to construct and begin operations of the Barcarena Terminal, the Santa Catarina Terminal, our downstream distribution hubs and our other LNG-to-power projects in Brazil, and we will need to make significant additional investments to develop, improve and operate them, as well as all related infrastructure. We also expect to make significant expenditures and investments in identifying, acquiring and/or developing other future projects. We also expect to incur significant expenses in connection with the launch and growth of our business, including costs for LNG purchases, rail and truck transportation, shipping and logistics and personnel. We will need to raise significant additional debt and/or equity capital to achieve our goals.
We may not be able to achieve profitability, and if we do, we cannot assure you that we would be able to sustain such profitability in the future. Our failure to achieve or sustain profitability would have a material adverse effect on our business and the value of our common shares.
Our operational and consolidated financial results are partially dependent on the results of the joint ventures, affiliates and special purpose entities in which we invest.
We conduct our business mainly through our operating subsidiaries. In addition, we and our subsidiaries conduct some of our business through joint venture and other special purpose entities, which are created specifically to participate in public auctions for enterprises in the generation and transmission segments. Our ability to meet our financial obligations is therefore related in part to the cash flow and earnings of our subsidiaries and joint ventures and the distribution or other transfers of earnings to us in the form of dividends, loans or other advances and payments that are governed by various joint venture financing and operating arrangements. For the purposes of Rule 3-09 of Regulation S-X, for the years ended December 31, 2019 and 2018, only CELSEPAR, whose sole material asset is its interest in CELSE, was considered a material investment.
We have a limited customer base and expect that a significant portion of our future revenues will be from a limited number of customers, and the loss of any significant customer could adversely affect our operating results.
A limited number of customers currently represent a substantial majority of our future income. Our operating results will be contingent on our ability to maintain sales to these customers. At least in the short term, we expect that a substantial majority of our sales will continue to arise from a concentrated number of customers, such as power utilities and industrial end-users. We expect the substantial majority of our revenue for the near future to be derived from our Sergipe Terminal and Sergipe Power Plant and as a result, are subject to any risks specific to those entities and the jurisdictions and markets in which they operate. We may be unable to accomplish our business plan to diversify and expand our customer base by attracting a broad array of customers, which could negatively affect our business, results of operations and financial condition.
Our contracts with our customers are subject to termination under certain circumstances.
Our contracts with our customers contain various termination rights. For example, each of our long-term customer contracts contains various termination rights allowing our customers to terminate the contract, including, without limitation:
the revocation of certain legal, governmental or regulatory authorizations or licenses;
our termination from Câmara de Comercialização de Energia Elétrica (the Electric Energy Trading Chamber or “CCEE”);
the occurrence of certain uncured payment defaults;
the occurrence of an insolvency event;
the occurrence of certain uncured, material breaches; and
if we fail to commence commercial operations or achieve other milestones within the agreed timeframes.
In addition, we may be subject to a penalty upon termination equal to one year of sales revenue as calculated in accordance with the terms of the PPAs and may be required to indemnify the losses of off-takers.
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We may not be able to replace these contracts on desirable terms, or at all, if they are terminated. Contracts that we enter into in the future may contain similar provisions. If any of our current or future contracts are terminated, such termination could have a material adverse effect on our business, contracts, financial condition, operating results, cash flows, liquidity and prospects.
We depend on a limited number of key suppliers and vendors to provide the necessary equipment to operate our businesses and construct our projects, and any failure by our key suppliers and vendors to supply the necessary equipment on a timely basis or at all could materially adversely affect our current and future projects.
We depend on a limited number of key suppliers and vendors to provide the equipment and other services necessary for the construction and operation of our projects in various jurisdictions. Although we contract with most of our suppliers and vendors at fixed prices and require them to pay delivery delay penalties, our suppliers may, among other things, extend delivery times, raise contract prices and limit supply due to their own shortages and business requirements. If our suppliers or vendors fail to provide the necessary equipment or services on a timely basis, we could experience disruptions in our operations, which could have a material adverse effect on our business and operations.
Our sale and leaseback agreements contain restrictive covenants that may limit our liquidity and corporate activities, and could have an adverse effect on our financial condition and results of operations.
Our sale and leaseback agreements for the Golar Nanook, Golar Penguin and Golar Celsius contain, and any future sale and leaseback agreements we may enter into are expected to contain, customary covenants and event of default clauses, including cross-default provisions and restrictive covenants and performance requirements that may affect our operational and financial flexibility. In addition, we also assign the shares in our subsidiaries which are the charterers of these vessels to the owners/lessors. Such restrictions could affect, and in many respects limit or prohibit, among other things, our ability to incur additional indebtedness, create liens, sell assets, or engage in mergers or acquisitions. These restrictions could also limit our ability to plan for or react to market conditions or meet extraordinary capital needs or otherwise restrict corporate activities. There can be no assurance that such restrictions will not adversely affect our ability to finance our future operations or capital needs.
Certain of our sale and leaseback agreements contain cross-default clauses and require us to maintain specified financial ratios, satisfy certain financial covenants and/or assign equity interests in our subsidiaries to third parties, including, among others, the following requirements:
that we maintain Free Liquid Assets (as defined in the Penguin Leaseback) of at least $50.0 million; and
that we assign the shares in each of Golar Hull M2026 Corp., Golar Hull M2023 Corp. and Golar FSRU 8 Corp., our subsidiaries that are the charterers under our sale and leaseback agreements, to the applicable vessel owners.
As of December 31, 2019, we are in compliance with the consolidated leverage ratio and the minimum free liquidity covenants in our sale and leaseback agreements.
As a result of the restrictions in our sale and leaseback agreements, or similar restrictions in our future sale and leaseback agreements, we may need to seek permission from the owners of our leased vessels in order to engage in certain corporate actions. Their interests may be different from ours and we may not be able to obtain their permission when needed. This may prevent us from taking actions that we believe are in our best interest, which may adversely impact our revenues, results of operations and financial condition.
A failure by us to meet our payment and other obligations, including our financial covenant requirements, could lead to defaults under our sale and leaseback agreements or any future sale and leaseback agreements. If we are not in compliance with our covenants and we are not able to obtain covenant waivers or modifications, the current or future owners of our leased vessels, as appropriate, could retake possession of our vessels or require us to pay down our indebtedness to a level where we are in compliance with our covenants or sell vessels in our fleet. We could lose our vessels if we default on our bareboat charters in connection with the sale and leaseback agreements, which would negatively affect our revenues, results of operations and financial condition.
There are risks and uncertainties relating to our sale and leaseback transactions.
On closing of our sale and leaseback transactions, we transferred our ownership interests in each of the Golar Nanook, the Golar Penguin and the Golar Celsius. Although the operation of these vessels is expected to continue in the ordinary course, the bareboat charters in connection with the sale and leaseback transactions may, in certain
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circumstances, be terminated. Any such termination could have a significant adverse effect on our business, financial condition and results of operations of our vessels. The sale and leaseback agreements will also require significant periodic cash payments in respect of the required rent thereunder, which we have not historically incurred for the Golar Celsius or, prior to December 2019, the Golar Penguin, and other allocated operating and maintenance costs. The increase in our lease expense may have an adverse impact on our future operations and profitability.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our existing or future debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to fund our day-to-day operations or to pay the principal, premium, if any, and interest on our indebtedness. As of December 31, 2019 and June 30, 2020, we had $469.2 million and $494.4 million of total indebtedness outstanding, respectively, excluding deferred financing costs.
If our cash flows and capital resources are insufficient to fund our debt service obligations and other cash requirements, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to sell assets or operations, seek additional capital or restructure or refinance our indebtedness or operations. We may not be able to affect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, such alternative actions may not allow us to meet our scheduled debt service obligations. The agreements that govern our indebtedness restrict our ability to dispose of assets and use the proceeds from any such dispositions and our ability to raise debt capital to be used to repay our indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our obligations. In addition, obligations under certain of our financing arrangements are secured by certain of our vessels and guaranteed by our subsidiaries holding the interests in our vessels, and if we are unable to repay debt under our financing arrangements, the lenders or lessors could seek to foreclose on those assets.
If we cannot make scheduled payments on our debt, we will be in default and, as a result, lenders under any of our existing and future indebtedness could declare all outstanding principal and interest to be due and payable, the lenders under our debt instruments could terminate their commitments to loan money, our secured lenders could foreclose against the assets securing such borrowings and we could be forced into bankruptcy or liquidation, in each case, which could result in your losing your investment.
Reforms, including the potential phasing out of LIBOR after 2021, may adversely affect us.
We have floating rate debt, the interest rate of which is determined based on the London Interbank Offered Rate (“LIBOR”). LIBOR and other “benchmark” rates are subject to ongoing national and international regulatory scrutiny and reform. For example, on July 27, 2017, the U.K. Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates for the calculation of the LIBOR rates after 2021 (the “FCA Announcement”). The Alternative Reference Rate Committee, a committee convened by the Federal Reserve that includes major market participants, has proposed an alternative rate to replace U.S. dollar LIBOR: the Secured Overnight Financing Rate, or “SOFR.”
We are unable to predict the effect of the FCA Announcement or other reforms, whether currently enacted or enacted in the future. They may result in the phasing out of LIBOR as a reference rate. The impact of such transition away from LIBOR could be significant for us because of the number of our financing arrangements that are linked to LIBOR and our indebtedness. The outcome of reforms may result in increased interest expense to us, may affect our ability to incur debt on terms acceptable to us and may result in increased costs related to amending our existing debt instruments, which could adversely affect our business, results of operations and financial condition.
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We have entered into joint ventures, and may in the future enter into additional or modify existing joint ventures, that might restrict our operational and corporate flexibility.
We have entered into joint ventures to acquire and develop LNG infrastructure projects and may in the future enter into additional joint venture arrangements with third parties. As we do not operate the assets owned by these joint ventures, our control over their operations is limited by provisions of the agreements we have entered into with our joint venture partners and by our percentage ownership in such joint ventures. Because we do not control all of the decisions of our joint ventures, it may be difficult or impossible for us to cause the joint venture to take actions that we believe would be in our or the joint venture’s best interests. For example, we cannot unilaterally cause the distribution of cash by our joint ventures. Additionally, as the joint ventures are separate legal entities, any right we may have to receive assets of any joint venture or other payments upon their liquidation or reorganization will be effectively subordinated to the claims of the creditors of that joint venture (including tax authorities and trade creditors). Moreover, joint venture arrangements involve various risks and uncertainties, such as committing us to fund operating and/or capital expenditures, the timing and amount of which we may not control, and our joint venture partners may not satisfy their financial obligations to the joint venture. Our results of operations depend on the performance of these joint ventures and their ability to distribute funds to us, and we may be unable to control the amount of cash we will receive from their operations or the timing of capital expenditures, which could adversely affect our financial condition.
We may guarantee the indebtedness of our joint ventures and/or affiliates.
We may provide guarantees to certain banks with respect to commercial bank indebtedness of our joint ventures and/or affiliates. Failure by any of our joint ventures, equity method investees and/or affiliate to service their debt requirements and comply with any provisions contained in their commercial loan agreements, including paying scheduled installments and complying with certain covenants, may lead to an event of default under the related loan agreement. As a result, if our joint ventures, equity method investees and/or affiliates are unable to obtain a waiver or do not have enough cash on hand to repay the outstanding borrowings, the relevant lenders may foreclose their liens on the vessels securing the loans or seek repayment of the loan from us, or both. Either of these possibilities could have a material adverse effect on our business. Further, by virtue of our guarantees with respect to our joint ventures and/or affiliates, this may reduce our ability to gain future credit from certain lenders.
Failure to maintain sufficient working capital could limit our growth and harm our business, financial condition and results of operations.
We have significant working capital requirements, primarily driven by the delay between the purchase of and payment for natural gas and the extended payment terms that we offer our customers. Differences between the date when we pay our suppliers and the date when we receive payments from our customers may adversely affect our liquidity and our cash flows. We expect our working capital needs to increase as our total business increases. If we do not have sufficient working capital, we may not be able to pursue our growth strategy, respond to competitive pressures or fund key strategic initiatives, such as the development of our facilities, which may harm our business, financial condition and results of operations.
We operate two of our vessels, through the Cool Pool, in the spot/short-term charter market, which is subject to volatility. Failure by the Cool Pool to find profitable employment for these vessels could adversely affect our operations.
As of June 30, 2020, we had two LNG carriers operating in the spot market within the Cool Pool. We anticipate that one or both of these vessels may be converted to FSRUs, but until such time they will remain in the pool. Please see “Business—Our Vessels” for further detail. The spot market refers to charters for periods of up to twelve months. Spot/short-term charters expose the Cool Pool to the volatility in spot charter rates, which can be significant. In contrast, medium to long-term time charters generally provide reliable revenues, but they also limit the portion of our fleet available to the spot/short-term market during an upswing in the LNG industry cycle, when spot/short-term market voyages might be more profitable. The charter rates payable in the spot market are uncertain and volatile and will depend upon, among other things, economic conditions in the LNG market.
If we do not reach FID on the conversion of our LNG carriers to FSRUs, they will operate within the Cool Pool. If the Cool Pool is unable to find profitable employment or re-deploy ours or any of the other Cool Pool participants’ vessels, we will not receive any revenues from the Cool Pool, but we may be required to pay
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expenses necessary to maintain that vessel in proper operating condition. A sustained decline in charter or spot rates or a failure by the Cool Pool to successfully charter its participating vessels could have a material adverse effect on our results of operations and our ability to meet our financing obligations.
We are dependent upon Golar LNG and its affiliates for the operation and maintenance of our vessels.
Each of our vessels is operated and maintained by Golar LNG or its affiliates pursuant to ship management agreements. These agreements are the result of arms-length negotiations and subject to change. If Golar LNG or any of its affiliates that provide services to us fails to perform these services satisfactorily or the terms of the ship management agreements change, it could have a material adverse effect on our business, results of operations and financial condition.
Operation of our LNG infrastructure and other facilities that we may construct involves significant risks.
As more fully discussed in this prospectus, our existing facilities and expected future facilities face operational risks, including the following: performing below expected levels of efficiency, breakdowns or failures of equipment, operational errors by tankers or tug operators, operational errors by us or any contracted facility operator, labor disputes and weather-related or natural disaster interruptions of operations, including ship-to-ship transfers. Any of these risks could disrupt our operations and increase our costs, which would adversely affect our business, operating results, cash flows and liquidity.
In particular, the operation of the Sergipe Power Plant will involve particular, significant risks, including, among others: failure to maintain the required license(s) and other permits required to operate the Sergipe Power Plant in Brazil; pollution or environmental contamination affecting operation of the Sergipe Power Plant; the inability, or failure, of any counterparty to any plant-related agreements to perform their contractual obligations to us including, but not limited to, planned and unplanned power outages due to maintenance, expansion and refurbishment. We cannot assure you that future occurrences of any of the events listed above or any other events of a similar or dissimilar nature would not significantly decrease or eliminate the revenues from, or significantly increase the costs of operating, the Sergipe Power Plant. If the Sergipe Power Plant is unable to generate or deliver power to its end-users, pursuant to its PPAs, such counterparties may not be required to make payments under their respective agreements so long as the event continues, and the Sergipe Power Plant may be required to pay penalties due to the unavailability of power. The counterparties to the PPAs and any other key plant-related agreements may have the right to terminate those agreements for certain failures to generate or deliver power. In addition under Brazilian law, we are strictly liable for direct and indirect damages resulted from the inadequate supply of electricity, such as abrupt interruptions or problems related to generation, transmission or distribution systems. As a consequence, there may be reduced or no revenues from the Sergipe Power Plant which could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.
The operation of FSRUs and LNG carriers is inherently risky, and our vessels face a number of industry risks and events which could cause damage or loss of a vessel, loss of life or environmental consequences that could harm our reputation and ongoing business operations.
Our vessels and their cargoes are at risk of being damaged or lost because of events such as marine disasters, acts of piracy, environmental accidents, bad weather, mechanical failures, grounding, fire, explosions and collisions, human error, national emergency and war and terrorism. Incidents such as these have historically affected companies in our industry, and such an event or accident involving any of our vessels could result in any of the following:
death or injury to persons, loss of property or environmental damage;
delays in the delivery of cargo;
loss of revenues from or termination of charter contracts;
governmental fines, penalties or restrictions on conducting business;
a government requisitioning for title or seizing our vessels (e.g. in a time of war or national emergency);
higher insurance rates; and
damage to our reputation and customer relationships generally.
Any of these circumstances or events could increase our costs or lower our revenues.
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Our construction of energy-related infrastructure is subject to operational, regulatory, environmental, political, legal and economic risks, which may result in delays, increased costs or decreased cash flows.
The construction of energy-related infrastructure, including our Barcarena Terminal, the Santa Catarina Terminal and other assets in Brazil, as well as other future projects, involves numerous operational, regulatory, environmental, political, legal and economic risks beyond our control and may require the expenditure of significant amounts of capital during construction and thereafter. These potential risks include, among other things, the following:
we may be unable to complete construction projects on schedule or at the budgeted cost due to the unavailability of required construction personnel or materials, accidents or weather conditions;
we may change orders under existing or future EPC contracts resulting from the occurrence of certain specified events that may give our customers the right to cause us to enter into change orders or resulting from changes with which we otherwise agree;
we will not receive any material increase in operating cash flows until a project is completed, even though we may have expended considerable funds during the construction phase, which may be prolonged;
we may construct facilities to capture anticipated future energy consumption growth in a region in which such growth does not materialize;
the completion or success of our construction project may depend on the completion of a third-party construction project (e.g., additional public utility infrastructure projects) that we do not control and that may be subject to numerous additional potential risks, delays and complexities;
we may not be able to obtain key permits or land use approvals including those required under environmental laws, at all or on terms that are satisfactory for our operations and on a timeline that meets our commercial obligations. There may be delays in obtaining such permits or approvals, perhaps substantial in length, such permits or approvals may be nullified or additional compensatory investments and/or obligations to perform remediation actions may be imposed, such as in the event of challenges by environmental authorities, public attorneys, citizens groups or non-governmental organizations, including those opposed to fossil fuel energy sources;
we may be (and have been in select circumstances) subject to local opposition in Brazil and elsewhere, including the efforts by environmental groups, which may attract negative publicity or have an adverse impact on our reputation; and
we may be unable to obtain rights-of-way to construct additional energy-related infrastructure or the cost to do so may be uneconomical.
A materialization of any of these risks could adversely affect our ability to achieve growth in the level of our cash flows or realize benefits from future projects, which could have a material adverse effect on our business, financial condition and results of operations.
Natural or manmade disasters could result in an interruption of our operations, a delay in the completion of our infrastructure projects, higher construction costs or the deferral of the dates on which payments are due under our customer contracts, all of which could adversely affect us.
Storms and related storm activity and collateral effects, or other disasters such as explosions, fires, seismic events, floods or accidents, could result in damage to, or interruption of operations in our supply chain, including at our facilities or related infrastructure, as well as delays or cost increases in the construction and the development of our proposed facilities or other infrastructure. Changes in the global climate may have significant physical effects, such as increased frequency and severity of storms, floods and rising sea levels; if any such effects were to occur, they could have an adverse effect on our marine and coastal operations.
If one or more tankers, terminals, pipelines, facilities, equipment or electronic systems that we own, lease or operate or that deliver products to us or that supply our facilities and customers’ facilities are damaged by severe weather or any other disaster, accident, catastrophe, terrorist or cyber-attack or event, our operations and construction projects could be delayed and significantly interrupted. These delays and interruptions could involve significant damage to people, property or the environment, and repairs could take a week or less for a minor
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incident to six months or more for a major interruption. Any such event that interrupts the revenues generated by our operations, or that causes us to make significant expenditures not covered by insurance, could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.
Our insurance may be insufficient to cover losses that may occur to our property or result from our operations.
Our current operations and future projects are subject to the inherent risks associated with LNG, natural gas and power operations, including explosions, pollution, release of toxic substances, fires, seismic events, hurricanes and other adverse weather conditions, and other hazards, each of which could result in significant delays in commencement or interruptions of operations and/or result in damage to or destruction of the our facilities and assets or damage to persons and property. In addition, such operations and the vessels of third parties on which our current operations and future projects may be dependent face possible risks associated with acts of aggression or terrorism. If our vessels suffer damage, they may need to be repaired. The costs of vessel repairs are unpredictable and can be substantial. We may have to pay repair costs that our insurance policies do not cover.
We do not, nor do we intend to, maintain insurance against all of these risks and losses. In particular, we do not carry business interruption insurance for hurricanes and other natural disasters. Therefore, the occurrence of one or more significant events not fully insured or indemnified against could create significant liabilities and losses which could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.
Although we carry insurance, all risks may not be adequately insured against, and any particular claim may not be paid. Any claims covered by insurance would be subject to deductibles, and since it is possible that a large number of claims may be brought, the aggregate amount of these deductibles could be material. In addition, we may be unable to procure adequate insurance coverage at commercially reasonable rates in the future. For example, environmental regulations have led in the past to increased costs for, and in the future may result in the lack of availability of, insurance against risks of environmental damage or pollution. A catastrophic release of natural gas, marine disaster or natural disasters could result in losses that exceed our insurance coverage, which could harm our business, financial condition and operating results. Our insurance may be voidable by the insurers as a result of certain of our actions and any uninsured or underinsured loss could harm our business and financial condition.
Changes in the insurance markets attributable to terrorist attacks or political change may also make certain types of insurance more difficult for us to obtain. In addition, the insurance that may be available may be significantly more expensive than our existing coverage.
From time to time, we may be involved in legal proceedings and may experience unfavorable outcomes.
In the future we and our subsidiaries may be subject to material legal proceedings in the course of our business, including, but not limited to, actions relating to contract disputes, business practices, intellectual property and other commercial and tax matters. Such legal proceedings may involve claims for substantial amounts of money or for other relief or might necessitate changes to our business or operations, and the defense of such actions may be both time consuming and expensive. Further, if any such proceedings were to result in an unfavorable outcome, it could have a material adverse effect on our business, financial position and results of operations.
We may be unable to attract and retain key management personnel in the LNG industry, which may negatively impact the effectiveness of our management and our results of operations.
Significant demands are placed on our management as a result of our growth. As we expand our operations, we must manage and monitor our operations, control costs and maintain quality and control. Our success depends, to a significant extent, upon the abilities and the efforts of our senior executives. While we believe that we have an experienced management team, the loss or unavailability of one or more of our senior executives for any extended period of time could have an adverse effect on our business and results of operations.
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We expect to be dependent on our primary building contractors and other contractors for the successful completion of our energy-related infrastructure.
Timely and cost-effective completion of our energy-related infrastructure, including our Sergipe Terminal, the Barcarena Terminal and the Santa Catarina Terminal, as well as future projects, in compliance with agreed specifications is central to our business strategy and is highly dependent on the performance of our primary building contractor and our other contractors under our agreements with them. For example, the construction of the Sergipe Power Plant was not completed on schedule, and we were forced to purchase energy in the spot market to avoid a breach of our obligations under the original PPAs. The ability of our primary building contractors and our other contractors to perform successfully under their agreements with us is dependent on a number of factors, including their ability to:
design and engineer each of our facilities to operate in accordance with specifications;
engage and retain third-party subcontractors and procure equipment and supplies;
respond to difficulties such as equipment failure, delivery delays, schedule changes and failures to perform by subcontractors, some of which are beyond their control;
attract, develop and retain skilled personnel, including engineers;
post required construction bonds and comply with the terms thereof;
manage the construction process generally, including coordinating with other contractors and regulatory agencies; and
maintain their own financial condition, including adequate working capital.
Until we have entered into an EPC contract for a particular project, in which the EPC contractor agrees to meet our planned schedule and projected total costs for a project, we are subject to potential fluctuations in construction costs and other related project costs. Although some agreements may provide for liquidated damages if the contractor fails to perform in the manner required with respect to certain of its obligations, the events that trigger a requirement to pay liquidated damages may delay or impair the operation of the applicable facility, and any liquidated damages that we receive may be delayed or insufficient to cover the damages that we suffer as a result of any such delay or impairment. The obligations of our primary building contractor and our other contractors to pay liquidated damages under their agreements with us are subject to caps on liability, as set forth therein. Furthermore, we may have disagreements with our contractors about different elements of the construction process, which could lead to the assertion of rights and remedies under their contracts and increase the cost of the applicable facility or result in a contractor’s unwillingness to perform further work. If any contractor is unable or unwilling to perform according to the negotiated terms and timetable of its respective agreement for any reason or terminates its agreement for any reason, we would be required to engage a substitute contractor, which could be particularly difficult in certain of the markets in which we plan to operate. This would likely result in significant project delays and increased costs, which could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.
We are relying on third party engineers to estimate the future rated capacity and performance capabilities of our existing and future facilities, and these estimates may prove to be inaccurate.
We are relying on third parties for the design and engineering services underlying our estimates of the future rated capacity and performance capabilities of our Sergipe Terminal, the Barcarena Terminal and the Santa Catarina Terminal, as well as other future projects. If any of these facilities, when actually constructed, fails to have the rated capacity and performance capabilities that we intend, our estimates may not be accurate. Failure of any of our existing or future facilities to achieve our intended future capacity and performance capabilities could prevent us from achieving the commercial start dates under our customer contracts and could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.
We may not be able to purchase or receive physical delivery of natural gas or LNG in sufficient quantities and/or at economically attractive prices to supply the Sergipe Power Plant and satisfy our delivery obligations under the PPAs, which could have a material adverse effect on us.
Under the PPAs related to the Sergipe Power Plant and our other LNG-to-power facilities, we are required to deliver power, which also requires us to obtain sufficient amounts of LNG. However, we may not be able to purchase or receive physical delivery of sufficient quantities of LNG to satisfy those delivery obligations, which may subject us
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to certain penalties and provide our counterparties with the right to terminate their PPAs. With respect to the Sergipe Power Plant, we have entered into a supply agreement with Ocean LNG, an affiliate of Qatar Petroleum. If Ocean LNG fails to deliver sufficient LNG to Sergipe, we would be forced to purchase LNG on the spot market, which may be on less favorable terms. In addition, price fluctuations in natural gas and LNG may make it expensive or uneconomical for us to acquire adequate supply of these items for our other customers.
We are dependent upon third party LNG suppliers and shippers and other tankers and facilities to provide delivery options to and from our tankers and energy-related infrastructure. If LNG were to become unavailable for current or future volumes of natural gas due to repairs or damage to supplier facilities or tankers, lack of capacity, impediments to international shipping or any other reason, our ability to continue delivering natural gas, power or steam to end-users could be restricted, thereby reducing our revenues. Additionally, under tanker charters, we will be obligated to make payments for our chartered tankers regardless of use. We may not be able to enter into contracts with purchasers of LNG in quantities equivalent to or greater than the amount of tanker capacity we have purchased. If any third parties were to default on their obligations under our contracts or seek bankruptcy protection, we may not be able to purchase or receive a sufficient quantity of natural gas in order to supply the Sergipe Power Plant and satisfy our delivery obligations under our PPAs. Any permanent interruption at any key LNG supply chains that caused a material reduction in volumes transported to our facilities could have a material adverse effect on our business, financial condition, operating results, cash flow, liquidity and prospects.
Recently, the LNG industry has experienced increased volatility. If market disruptions and bankruptcies of third party LNG suppliers and shippers negatively impacts our ability to purchase a sufficient amount of LNG or significantly increases our costs for purchasing LNG, our business, operating results, cash flows and liquidity could be materially and adversely affected.
Under certain circumstances, we may be required to make payments under our gas supply agreements.
If we fail to take delivery of contracted volumes under our gas supply agreements, we may be required to make payments to counterparties under such agreements. For example, CELSE entered into a 25-year LNG supply agreement with Ocean LNG for the supply of LNG to the Sergipe Terminal. Pursuant to the terms of the Sergipe Supply Agreement, CELSE is required to take delivery of a specified base quantity of LNG each year, subject to certain adjustments. If CELSE takes less than the full number of scheduled cargoes per year under the Sergipe Supply Agreement, CELSE will be required to pay Ocean LNG a cancellation fee per cargo according to a formula based on the number of the cargoes not taken, subject to a cap of $110 million for every five-year period, or an aggregate of $550 million over the 25-year term. For additional information regarding our relationship with Ocean LNG and the Sergipe Supply Agreement, please see “Business—Detailed Description of our Operating and Advanced Stage Terminals—Description of Contractual Arrangements Related to Sergipe—The Sergipe LNG Supply Agreement.”
We face competition based upon the international market price for LNG or natural gas.
Our business is subject to the risk of natural gas and LNG price competition at times when we need to replace any existing customer contract, whether due to natural expiration, default or otherwise, or enter into new customer contracts. Factors relating to competition may prevent us from entering into new or replacement customer contracts on economically comparable terms to existing customer contracts, or at all. Such an event could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects. Factors which may negatively affect potential demand for natural gas from our business are diverse and include, among others:
increases in the cost to supply LNG to our customers;
decreases in the cost of competing sources of natural gas, LNG or alternate fuels such as coal, HFO and diesel; and
displacement of LNG or fossil fuels more broadly by alternate fuels or energy sources or technologies (including but not limited to nuclear, wind, solar, biofuels and batteries) in locations where access to these energy sources is not currently available or prevalent.
Technological innovation may render our processes obsolete.
The success of our current operations and future projects will depend in part on our ability to create and maintain a competitive position in the natural gas industry. Our technologies may be rendered obsolete or
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uneconomical by legal or regulatory requirements, technological advances, more efficient and cost-effective processes or entirely different approaches developed by one or more of our competitors or others, which could materially and adversely affect our business, ability to realize benefits from future projects, results of operations, financial condition, liquidity and prospects.
Competition in the LNG industry is intense, and some of our competitors have greater financial, technological and other resources than we currently possess.
We plan to operate in the highly competitive area of LNG and face intense competition from independent, technology-driven companies as well as from both major and other independent oil and natural gas companies and utilities, many of which have been in operation longer than us.
We may face competition from major energy companies and others in pursuing our proposed business strategy. In addition, competitors have and are developing LNG import terminals in other markets, which may compete with our LNG facilities. Some of these competitors have longer operating histories, more development experience, greater name recognition, larger staffs and substantially greater financial, technical and marketing resources than we currently possess. We also face competition for the contractors needed to build our facilities. The superior resources that some of these competitors have available for deployment could allow them to compete successfully against us, which could have a material adverse effect on our business, ability to realize benefits from future projects, results of operations, financial condition, liquidity and prospects.
We may experience increased labor costs, and the unavailability of skilled workers or our failure to attract and retain qualified personnel could adversely affect us.
We are dependent upon the available labor pool of skilled employees, including technically skilled officers and crew. We compete with other energy companies and other employers to attract and retain qualified personnel with the technical skills and experience required to crew our vessels, construct and operate our energy-related infrastructure and to provide our customers with the highest quality service. In particular, our vessels require a technically skilled officer staff with specialized training. If we are unable to employ technically skilled staff and crew, we will not be able to adequately staff our vessels. We are subject to applicable labor regulations in the jurisdictions in which we operate, including Brazil. We may face challenges and costs in hiring, retaining and managing our Brazilian and other employee base. A shortage in the labor pool of skilled workers, particularly of skilled officers, or other general inflationary pressures or changes in applicable laws and regulations, could make it more difficult for us to attract and retain qualified personnel and could require an increase in the wage and benefits packages that we offer, thereby increasing our operating costs. Any increase in our operating costs could materially and adversely affect our business, financial condition, operating results, liquidity and prospects.
Labor strikes or general labor unrest could adversely affect our business.
A work stoppage or strike could occur in the future. Since initiation of construction of the Sergipe Power Plant, there have been numerous labor demonstrations and other forms of labor unrest by unemployed workers and union groups in the State of Sergipe, some of which were directed towards CELSE. Labor unrest, as well as any strikes, could cause interruptions or delays our projects or their operations.
Our current lack of asset and geographic diversification could have an adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.
The substantial majority of our anticipated revenue in 2020 will be dependent upon our assets and customers in Brazil. Brazil has historically experienced economic volatility and the general condition and performance of the Brazilian economy, over which we have no control, may affect our business, financial condition and results of operations. Due to our current lack of asset and geographic diversification, an adverse development at any of our facilities in Brazil, in the energy industry or in the economic conditions in Brazil, would have a significantly greater impact on our financial condition and operating results than if we maintained more diverse assets and operating areas.
We may incur impairments to long-lived assets.
We test our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Significant negative industry or economic trends, declines in our market capitalization, reduced estimates of future cash flows for our reportable segments or
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disruptions to our business could lead to an impairment charge of our long-lived assets, including our vessels. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. For example, as of December 31, 2019 and June 30, 2020, we determined that our vessels had a market value that was less than their carrying value but because estimated future undiscounted cash flows related to these vessels were significantly greater than the respective carrying values, we did not record an impairment. There can be no assurance that we will not record an impairment with respect to these vessels or any other assets in the future. Projections of future operating results and cash flows may vary significantly from results and we may recognize an impairment in the future. In addition, if our analysis results in an impairment to our long-lived assets, we may be required to record a charge to earnings in our consolidated financial statements during a period in which such impairment is determined to exist, which may negatively impact our operating results.
A major health and safety incident involving LNG or the energy industry more broadly or relating to our business may lead to more stringent regulation of LNG operations or the energy business generally, could result in greater difficulties in obtaining permits, including under environmental laws, on favorable terms, and may otherwise lead to significant liabilities and reputational damage.
Health and safety performance is critical to the success of all areas of our business. Any failure in health and safety performance from our operations may result in an event that causes personal harm or injury to our employees, other persons, and/or the environment, as well as the imposition of injunctive relief and/or penalties for non-compliance with relevant regulatory requirements or litigation. Any such failure that results in a significant health and safety incident may be costly in terms of potential liabilities, and may result in liabilities that exceed the limits of our insurance coverage. Such a failure, or a similar failure elsewhere in the energy industry (including, in particular, LNG storage, transportation or regasification operations), could generate public concern, which may lead to new laws and/or regulations that would impose more stringent requirements on our operations, have a corresponding impact on our ability to obtain permits and approvals, and otherwise jeopardize our reputation or the reputation of our industry as well as our relationships with relevant regulatory agencies and local communities. Individually or collectively, these developments could adversely impact our ability to expand our business, including into new markets. Similarly, such developments could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.
A cyber-attack could materially disrupt our business.
We rely on information technology systems and networks, the majority of which are provided by Golar Management, in our operations and the administration of our business. Our business 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 and the availability of our vessels and facilities or lead to unauthorized release of information or alteration of information in our systems. Any such attack or other breach of our information technology systems could have a material adverse effect on our business and results of operations.
We are subject to laws, directives and regulations relating to the collection, use, retention, disclosure, security and transfer of personal data. These laws, directives, and regulations, and their interpretation and enforcement continue to evolve and may be inconsistent from jurisdiction to jurisdiction. For example, the General Data Protection Regulation (“GDPR”), which regulates the use of personally identifiable information, went into effect in the European Union (“EU”) on May 25, 2018, applies globally to all of our activities conducted from an establishment in the EU, to related products and services that we offer to EU customers and to non-EU customers which offer services in the EU. Complying with the GDPR and similar emerging and changing privacy and data protection requirements may cause us to incur substantial costs or require us to change our business practices. Noncompliance with our legal obligations relating to privacy and data protection could result in penalties, fines, legal proceedings by governmental entities or others, loss of reputation, legal claims by individuals and customers and significant legal and financial exposure and could affect our ability to retain and attract customers.
Changes in the nature of cyber-threats and/or changes to industry standards and regulations might require us to adopt additional procedures for monitoring cybersecurity, which could require additional expenses and/or capital expenditures. However, the impact of such regulations is hard to predict at this time.
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Risks Relating to Applicable Laws and Regulations
Global climate change may in the future increase the frequency and severity of weather events and the losses resulting therefrom, which could have a material adverse effect on the economies in the markets in which we operate or plan to operate in the future and therefore on our business.
Over the past several years, changing weather patterns and climatic conditions, such as global warming, have added to the unpredictability and frequency of natural disasters in certain parts of the world, including the markets in which we operate and intend to operate, and have created additional uncertainty as to future trends. There is a growing consensus today that climate change increases the frequency and severity of extreme weather events and, in recent years, the frequency of major weather events appears to have increased. We cannot predict whether or to what extent damage that may be caused by natural events, such as severe tropical storms and hurricanes, will affect our operations or the economies in our current or future market areas, but the increased frequency and severity of such weather events could increase the negative impacts to economic conditions in these regions and result in a decline in the value or the destruction of our liquefiers and downstream facilities or affect our ability to transmit LNG. In particular, if one of the regions in which our terminals are operating or under development is impacted by such a natural catastrophe in the future, it could have a material adverse effect on our business. Further, the economies of such impacted areas may require significant time to recover and there is no assurance that a full recovery will occur. Even the threat of a severe weather event could impact our business, financial condition or the price of our common shares.
We are subject to comprehensive regulation of our business, which fundamentally affects our financial performance.
Our business is subject to extensive regulation by various Brazilian regulatory authorities, particularly ANEEL, ANP and ANTAQ. ANEEL regulates and oversees various aspects of our business and establishes our tariffs. If we are obligated by ANEEL to make additional and unexpected capital investments and are not allowed to adjust our tariffs accordingly, if ANEEL does not authorize the recovery of all costs or if ANEEL modifies the regulations related to tariff adjustments, we may be adversely affected. ANP regulates the import and export of LNG and the transportation and distribution of natural gas activities, including our downstream distribution business. ANTAQ regulates and oversees port activities in Brazil.
In addition, both the implementation of our strategy for growth and our ordinary business may be adversely affected by governmental actions such as changes to current legislation, the termination of federal and state concession programs, creation of more rigid criteria for qualification in public energy auctions, or a delay in the revision and implementation of new annual tariffs.
If regulatory changes require us to conduct our business in a manner substantially different from our current operations, our operations, financial results and our capacity to fulfill our contractual obligations may be adversely affected.
CELSE and CELBA could be penalized by ANEEL for failing to comply with the terms of their respective authorizations and applicable legislation and CELSE and CELBA may not recover the full value of their respective investments if such authorizations are terminated.
CELSE and CELBA will carry out their respective power generation activities in accordance with the authorizations granted by the Brazilian government through the MME (the “MME Authorizations”). CELSE’s authorization expires in November 2050, and CELBA’s authorization, which is in the process of being granted, is expected to expire in 2055. ANEEL may impose penalties on CELSE and CELBA if they fail to comply with any provision of the MME Authorizations or with the legislation and regulations applicable to the Brazilian power industry. Depending on the extent of the non-compliance, these penalties could include:
warnings;
substantial fines (in some cases up to 2% of gross revenues arising from the generation activity in the 12-month period immediately preceding the assessment);
prohibition on operations;
bans on the construction of new facilities or the acquisition of new projects;
restrictions on the operation of existing facilities and projects; or
restrictions on operations (including the exclusion from participating in upcoming auctions), temporary suspension of participation in auctions and bidding processes for new concessions and authorizations.
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ANEEL may also terminate the MME Authorizations prior to their expiration in the event that CELSE or CELBA fails to comply with the provisions of the MME Authorizations, is declared bankrupt or is dissolved. In the event of non-compliance by CELSE and/or CELBA, ANEEL may also impose certain of the penalties (in particular, bans and restrictions) on affiliates of CELSE and CELBA.
CELSE and CELBA are subject to extensive legislation and regulations imposed by the Brazilian government and ANEEL, and cannot predict the effect of any changes to the legislation or regulations currently in force regarding their respective businesses.
The implementation of our business strategy and our ability to carry out our activities may be adversely affected by certain governmental actions.
We may be subject to new regulations enacted by the Brazilian government that could retroactively affect the rules for renewal of our concessions and authorizations.
The non-renewal of any of our authorizations, as well as the non-renewal of our energy supply contracts, could have a material adverse effect on our financial condition, results of operations and our capacity to fulfill our contractual obligations.
The regulatory framework under which we operate is subject to legal challenge.
The Brazilian government implemented fundamental changes in the regulation of the power industry in legislation passed in 2004 known as the Lei do Novo Modelo do Setor Elétrico, or New Regulatory Framework. Challenges to the constitutionality of the New Regulatory Framework are still pending before the Brazilian Federal Supreme Court (Supremo Tribunal Federal), although preliminary injunctions have been dismissed. It is not possible to estimate when these proceedings will be finally decided. If all or part of the New Regulatory Framework were held to be unconstitutional, there would be uncertain consequences for the validity of existing regulation and the further development of the regulatory framework. The outcome of the legal proceedings is difficult to predict, but it could have an adverse impact on the entire energy sector, including our business and results of operations. Due to the duration of the lawsuit, it is possible that the Brazilian Federal Supreme Court will not give retroactive effect to its decision, but rather preserve the validity of past acts applying a judicial practice known as modulation of effects.
If the regulatory framework under which we operate is revised in a way that results in us being required to conduct our business in a manner substantially different from our current operations, our operations, financial results and our capacity to fulfill our contractual obligations may be adversely affected.
Commercialization activity is subject to potential losses due to short-term variations in energy prices on the spot market.
Sellers in the Free Market are subject to potential differences in the settlement between the energy delivered and the energy sold, and buyers in the Free Market are subject to potential differences in the settlement between the energy consumed and the energy acquired. The differences are settled by the CCEE at the spot price, or the PLD. The PLD is based on the energy traded in the spot energy market. It is calculated for each submarket and load level on a weekly basis and is based on the marginal cost of operation. The maximum and the minimum value of the PLD are set every year by ANEEL. Short-term variations in energy prices on the spot energy market may lead to potential losses in our commercialization activity.
We are uncertain as to the review of the Physical Guarantee of our generation power plants.
The “Physical Guarantee” is the amount of power that a plant is expected to contribute to the electricity grid over the life of a PPAs. We cannot be certain if future events could affect the Physical Guarantee of each of our individual power plants. When the Physical Guarantee of a power plant is decreased, our ability to supply electricity under that plant’s PPAs is adversely affected, which can lead to a decrease in our revenues and increase our costs if our generation subsidiaries are required to purchase power elsewhere.
We are subject to environmental, health and safety regulations that may become more stringent in the future and may result in increased liabilities and increased capital expenditures.
Our activities are subject to comprehensive and changing international, federal, state and municipal legislation, rules, regulations and agreements which impose the need to obtain and maintain licenses, as well as regulation and supervision by international organizations and Brazilian governmental agencies that are
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responsible for the implementation of environmental, health and safety laws and policies. Such laws and regulations, among other things, govern response to and liability for oil spills, discharges to air and water, and the handling and disposal of hazardous substances and wastes. In some cases, these laws and regulations require us to obtain governmental permits and authorizations before we may conduct activities.
Governmental agencies could take enforcement action against us for failure to comply with their regulations, or to obtain or maintain licenses. These actions could include, among other things, the imposition of administrative and criminal sanctions, including fines and revocation of licenses, or the suspension or termination of our operations, including, in certain instances, seizure or detention of our vessels. The sanctions depend on the seriousness of the infraction or on the extent of damage caused, and any mitigating or aggravating circumstances applicable to the violator. It is possible that enhanced environmental and health regulations will force us to allocate capital expenditures to compliance, and consequently, increase our level of investment or divert funds from existing planned investments, either of which could have a material adverse effect on our financial condition and results of operations.
There are various risks associated with greenhouse gases and climate change that could result in increased operating costs and reduced demand for the energy we produce.
Climate change continues to attract considerable attention in the United States, Brazil, and other foreign countries. Numerous proposals have been made and could continue to be made at the international, national, regional and state levels of government to monitor and limit existing emissions of greenhouse gases (“GHGs”) as well as to restrict or eliminate such future emissions. As a result, our operations are subject to a series of regulatory, litigation and financial risks associated with the transport of petroleum products and emission of GHGs.
In 2009, Brazil implemented the National Policy on Climate Change, which establishes a framework for reduction of GHGs. However, this does not include a mandatory emissions trading regime, carbon tax, or other such regulatory mechanism to enforce reductions of emissions across the country. Much of this reduction is expected to be achieved through reduced deforestation and increased supplies of renewable energy. It is not possible to know how quickly renewable energy technologies may advance, but the increased use of renewable energy for any reason could ultimately reduce future demand for hydrocarbons and energy produced from them. These developments could ultimately have a material adverse effect on our financial position, results of operations and cash flows. Additionally, various states and local governments have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, there is an agreement, the United Nations-sponsored “Paris Agreement,” for nations to limit their GHG emissions through non-binding individually determined reduction goals every five years after 2020. As a party to the agreement, Brazil intends to reduce GHG emissions by 37% below 2005 levels by 2025.
There are also increasing risks of litigation related to climate change effects. In the United States, governments and third-parties have brought suit against some fossil fuel companies alleging, among other things, that such companies are liable for damages due to their production and marketing fuels that contributed to climate change or alleging that the companies have been aware of the adverse effects of climate change for some time but defrauded their investors by failing to adequately disclose those impacts. Such cases could also adversely impact public perception and the demand for fossil fuels and petroleum products.
There are also increasing financial risks for fossil fuel producers as shareholders who are currently invested in fossil-fuel energy companies but are concerned about the potential effects of climate change may elect in the future to shift some or all of their investments into non-energy related sectors. Institutional lenders who provide financing to fossil-fuel energy companies also have become more attentive to sustainable lending practices and some of them may elect not to provide funding for fossil fuel energy companies. Additionally, the lending practices of institutional lenders have been the subject of intensive lobbying efforts in recent years, oftentimes public in nature, by environmental activists, proponents of the international Paris Agreement, and foreign citizenry concerned about climate change not to provide funding for fossil fuel energy companies. Limitation of investments in and financings for fossil fuel energy companies could result in the restriction, delay or cancellation of drilling programs or development or production activities. Our own operations could also face limitations on access to capital as a result of these trends, which could adversely affect our business and results of operations.
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The adoption and implementation of any Brazilian, international or foreign federal, state or local legislation or regulations imposing obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur significant costs to reduce emissions of GHGs associated with our operations. The potential increase in our operating costs could include new costs to operate and maintain our facilities, install new emission controls on our facilities, acquire allowances to authorize our GHG emissions, pay taxes related to our GHG emissions, and administer and manage a GHG emissions program. We may not be able to recover such increased costs through increases in customer prices or rates. In addition, changes in legislative or regulatory policies that make hydrocarbon products more expensive to consume may reduce demand for the energy we provide. These developments could have a material adverse effect on our financial position, results of operations and cash flows. Additionally, litigation and financial risks may result in curtailed gas supply, incurred liability, or other adverse effects on our business, financial condition and results of operations.
Our operations could be limited or restricted in order to comply with protections for indigenous populations located in the areas in which we operate, and could also be adversely impacted by any changes in Brazilian law to comply with certain requirements embodied in international treaties and other laws related to indigenous communities.
Indigenous communities—including, in Brazil, Afro-indigenous (“Quilombola”) communities—are subject to certain protections under international and national laws. There are several indigenous communities that surround our operations in Brazil. We have entered into agreements with some of these communities that mainly provide for the use of their land for our operations, and negotiations with other such communities are ongoing. In the event that we are unable to reach an agreement with indigenous communities, that our relationship with these communities deteriorates in future, or that such communities do not comply with any existing agreements related to our operations, it could have a material adverse effect on our business and results of operations.
Brazil has ratified the International Labor Organization’s Indigenous and Tribal Peoples Convention (“ILO Convention 169”), which is grounded on the principle of consultation and participation of indigenous and traditional communities under the basis of free, prior, and informed consent (“FPIC”). ILO Convention 169 sets forth that governments are to ensure that members of tribes directly affected by legislative or administrative measures, including the grant of government authorizations such as are required for our operations, are consulted through appropriate procedures and through their representative institutions. ILO Convention 169 further states that the consultation must be undertaken aiming at achieving an agreement or consent to the proposed legislative or administrative measures.
Brazilian law does not specifically regulate the FPIC process for indigenous and traditional people affected by undertakings, nor does it set forth that individual members of an affected community shall render their FPIC on an undertaking that may impact them. However, in order to obtain certain environmental licenses for our operations, we are required to comply with the requirements of, consult with, and obtain certain authorizations from a number of institutions regarding the protection of indigenous interests: the National Congress (in specific cases), the Federal Public Prosecutor's Office and the National Indian Foundation (Fundação Nacional do Índio or FUNAI) (for indigenous people) or Palmares Cultural Foundation (Fundação Cultural Palmares) (for Quilombola communities). If we are not able to timely obtain the necessary authorizations or obtain them on favorable terms for our operations in areas where indigenous communities reside, we could face construction delays, increased costs, or otherwise experience adverse impacts on our business and results of operations.
Additionally, the American Convention on Human Rights (“ACHR”), to which Brazil is a party, sets forth rights and freedoms prescribed for all persons, including property rights without discrimination due to race, language, and national or social origin. The ACHR also provides for consultation with indigenous communities regarding activities that may affect the integrity of their land and natural resources. If Brazil’s legal process for consultation and the protection of indigenous rights is challenged under the ACHR and found to be inadequate, it could result in orders or judgments that could ultimately adversely impact our operations. For example, in February 2020, the Interamerican Court of Human Rights (“IACtHR”) found that Argentina had not taken adequate steps, in law or action, to ensure the consulting of indigenous communities and obtaining those communities’ free prior and informed consent for a project impacting their territories. IACtHR further found that Argentina had thus violated the ACHR due to infringements on the indigenous communities’ rights to property, cultural identity, a healthy environment, and adequate food and water by failing to take effective measures to stop harmful, third-party activities on the indigenous communities’ traditional land. As a result, IACtHR ordered Argentina, among other things, to achieve the demarcation and grant of title to the indigenous communities over
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their territory and the removal of the third-parties from the indigenous territory. We cannot predict whether this decision will result in challenges regarding the adequacy of existing Brazilian legal requirements related to the protection of indigenous rights, changes to the existing Brazilian government body consultation process, or impact our existing development agreements or our negotiations for outstanding development agreements with indigenous communities in the areas in which we operate. However, if the consultations with indigenous communities potentially impacted by our operations are found to be insufficient, we could experience a material adverse impact to our business and results of operations.
Changes in legislation and regulations, which occur frequently in developing countries like Brazil, could have a material adverse impact on our business, results of operations, financial condition, liquidity and prospects.
Our business is subject to governmental laws, rules, regulations and requires permits that impose various restrictions and obligations that may have material effects on our results of operations. In addition, each of the applicable regulatory requirements and limitations is subject to change, either through new regulations enacted on the international, federal, state or local level, or by new or modified regulations that may be implemented under existing law. Emerging countries in particular are characterized by frequent legislative and regulatory change, creating uncertainty for businesses who operate in such jurisdictions. The nature and extent of any changes in these laws, rules, regulations and permits may be unpredictable and may have material effects on our business. Future legislation and regulations or changes in existing legislation and regulations, or interpretations thereof, such as those relating to the storage, or regasification of LNG, or its transportation could cause additional expenditures, restrictions and delays in connection with our operations as well as other future projects, the extent of which cannot be predicted and which may require us to limit substantially, delay or cease operations in some circumstances. Revised, reinterpreted or additional laws and regulations that result in increased compliance costs or additional operating costs and restrictions could have an adverse effect on our business, the ability to expand our business, including into new markets, results of operations, financial condition, liquidity and prospects.
Our vessels operating in international waters, now or in the future, will be subject to various international and local laws and regulations relating to protection of the environment.
Our chartered vessels’ operations in international waters and in the territorial waters of other countries are regulated by extensive and changing international, national and local environmental protection laws, regulations, treaties and conventions in force in international waters, the jurisdictional waters of the countries in which our vessels operate, as well as the countries of our vessels’ registration, including those governing oil spills, discharges to air and water, and the handling and disposal of hazardous substances and wastes. The International Maritime Organization (“IMO”) International Convention for the Prevention of Pollution from Ships of 1973, as amended from time to time, and generally referred to as “MARPOL,” can affect operations of our chartered vessels. In addition, our chartered LNG vessels may become subject to the International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea (the “HNS Convention”), adopted in 1996 and subsequently amended by a Protocol to the HNS Convention in April 2010. Other regulations include, but are not limited to, the designation of Emission Control Areas (“ECAs”) under MARPOL, the IMO International Convention on Civil Liability for Oil Pollution Damage of 1969, as amended from time to time, the International Convention on Civil Liability for Bunker Oil Pollution Damage, the IMO International Convention for the Safety of Life at Sea of 1974, as amended from time to time, the International Safety Management Code for the Safe Operation of Ships and for Pollution Prevention (the “ISM Code”), the IMO International Convention on Load Lines of 1966, as amended from time to time and the International Convention for the Control and Management of Ships’ Ballast Water and Sediments in February 2004.
Moreover, the overall trends are towards more regulations and more stringent requirements which are likely to add to our costs of doing business. For example, the IMO has promulgated regulations limiting the sulphur content of fuel oil for ships to 0.5 weight percent starting January 1, 2020. We contract with leading vessel providers in the LNG market and look for them to take the lead in maintaining compliance with all such requirements, although the terms of our charter agreements may call for us to bear some or all of the associated costs. While we believe we are similarly situated with respect to other companies that charter vessels, we cannot assure you that these requirements will not have a material effect on our business.
Our chartered vessels operating in Brazilian waters, now or in the future, will also be subject to various federal, state and local laws and regulations relating to protection of the environment, including waste handling
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and disposal, site remediation, and water and air quality, among others. Any operations in other jurisdictions may be subject to analogous laws. In some cases, these laws and regulations require governmental permits and authorizations before conducting certain activities. These environmental laws and regulations may impose substantial penalties for noncompliance and substantial liabilities for pollution. Failure to comply with these laws and regulations may result in substantial civil, administrative and criminal fines and penalties. As with the industry generally, our chartered vessels’ operations will entail risks in these areas, and compliance with these laws and regulations, which may be subject to frequent revisions and reinterpretation, may increase our overall cost of business.
Compliance with safety and other vessel requirements imposed by classification societies may be very costly and may adversely affect our business.
The hull and machinery of every large, oceangoing 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. All vessels in our current fleet are each certified by DNV GL.
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 is surveyed periodically over a five-year period. Each of the vessels in our existing fleet is on a planned maintenance system approval, and as such the classification society attends on board once every year to verify that the maintenance of the equipment on board is done correctly. Each of the vessels in our existing fleet is required to be qualified within its respective classification society for dry-docking once every five years subject to an intermediate underwater survey done using an approved diving company in the presence of a surveyor from the classification society.
If any vessel does not maintain its class or fails any annual survey, intermediate survey or special survey, the vessel will be unable to trade between ports and will be unemployable. We would lose revenue while the vessel was off-hire and incur costs of compliance, which would negatively impact our results of operations.
Failure to obtain and maintain permits, approvals and authorizations from governmental and regulatory agencies on favorable terms with respect to the design, construction and operation of our facilities could impede operations and construction and could have a material adverse effect on us.
The design, construction and operation of energy-related infrastructure, including our existing and proposed facilities, the import and export of LNG and the transportation of natural gas, are highly regulated activities at the federal, state and local levels. Approvals of the Brazilian Ministry of Mines and Energy (“MME”) under Article 7 of the Law No. 9,074/1995, as well as several other material governmental and regulatory permits, approvals and authorizations, including under federal environmental laws and their state analogues, may be required in order to construct and operate a gas-powered thermoelectric plant. Permits, approvals and authorizations obtained from the MME, ANEEL, ANP, ANTAQ and other federal and state regulatory agencies also contain ongoing conditions, and additional requirements may be imposed. Certain federal permitting processes may trigger a requirement to undergo detailed and time-consuming assessments and technical studies for any actions that have the potential to significantly impact the environment. Compliance with such processes may extend the time and/or increase the costs for obtaining necessary governmental approvals associated with our operations and create independent risk of legal challenges to the adequacy of any required analysis, which could result in delays that may adversely affect our business, contracts, financial condition, operating results, cash flow, liquidity and profitability. We may also be subject to analogous and additional requirements in other jurisdictions, including with respect to land use approvals needed to construct and operate our facilities.
We cannot control the outcome of any review and approval process, including whether or when any such permits, approvals and authorizations will be obtained, the terms of their issuance, or possible appeals or other potential interventions by third parties that could interfere with our ability to obtain and maintain such permits, approvals and authorizations or the terms thereof. If we are unable to obtain and maintain such permits, approvals and authorizations on favorable terms, we may not be able to recover our investment in our projects. Many of these permits, approvals and authorizations require public notice and comment before they can be issued, which can lead to delays to respond to such comments, and even potentially to revise the permit application. There is no assurance that we will obtain and maintain these governmental permits, approvals and
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authorizations on favorable terms, or that we will be able to obtain them on a timely basis, and failure to obtain and maintain any of these permits, approvals or authorizations could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects. Moreover, these permits, approvals and authorizations could be subject to administrative and judicial challenges, which could delay and protract the process for obtaining and implementing permits and can also add significant costs and uncertainty.
We are subject to numerous governmental laws and trade and economic sanctions laws and regulations. A failure by us to comply with such laws and regulations could subject us to liability and have a material adverse impact on our business, results of operations or financial condition.
We conduct business throughout the world and our business activities and services are subject to various applicable laws and regulations of the U.K. and other countries. Although we take precautions to comply with all such laws and regulations, violations of governmental control and economic sanctions laws and regulations could result in negative consequences to us, including government investigations, sanctions, criminal, administrative or civil fines or penalties, more onerous compliance requirements, loss of authorizations needed to conduct aspects of our international business, reputational harm and other adverse consequences.
We are also subject to anti-corruption laws and regulations, including the U.S. Foreign Corrupt Practices Act (“FCPA”) and the Bribery Act 2010 of the United Kingdom (“UK Bribery Act”), which generally prohibit companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits. We are also subject to Law No. 12.846/2013, a Brazilian statute (the “Clean Company Act”), which generally prohibits companies and their intermediaries from making improper payments to foreign or local officials whether or not such payments are for the purpose of obtaining or keeping business and/or other benefits. Although we have adopted policies and procedures that are designed to ensure that we, our employees and other intermediaries comply with the FCPA, the UK Bribery Act and the Clean Company Act, there is no assurance that these policies and procedures will work effectively all of the time or protect us against liability under anti-corruption laws and regulations, including the FCPA, the UK Bribery Act and the Clean Company Act, for actions taken by our employees and other intermediaries with respect to our business or any businesses that we may acquire. If we are not in compliance with anti-corruption laws and regulations, including the FCPA, the UK Bribery Act and the Clean Company Act, we may be subject to criminal, civil and administrative penalties and other remedial measures, including changes or enhancements to our procedures, policies and control, as well as potential personnel change and disciplinary actions, which could have an adverse impact on our business, results of operations and financial condition.
In addition, in certain countries we serve or expect to serve our customers through third-party agents and other intermediaries, such as customs agents. Violations of applicable trade and economic sanctions laws and regulations by these third-party agents or intermediaries may also result in adverse consequences and repercussions to us. There can be no assurance that we and our agents and other intermediaries will be in compliance with economic sanctions, laws and regulations in the future. In such event of non-compliance, our business and results of operations could be adversely impacted.
Changing corporate laws and reporting requirements could have an adverse impact on our business.
Changing laws, regulations and standards could create greater reporting obligations and compliance requirements on companies such as ours. Whilst the regulatory environment continues to evolve, we have invested in, and intend to continue to invest in, reasonably necessary resources to comply with evolving standards and maintain high standards of corporate governance and public disclosure. Recent examples of increased regulation include the UK Modern Slavery Act 2015 and the GDPR. The GDPR, for instance, broadens the scope of personal privacy laws to protect the rights of European Union citizens and requires organizations to report on data breaches within 72 hours and be bound by more stringent rules for obtaining the consent of individuals on how their data can be used.
Non-compliance with such regulation could result in governmental or other regulatory claims or significant fines that could have an adverse effect on our business, financial condition, results of operations and cash flows.
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Risks Relating to the Jurisdictions in Which We Operate
We are currently highly dependent upon economic, political, regulatory and other conditions and developments in Brazil and the other jurisdictions in which we operate.
We currently conduct a meaningful portion of our business in Brazil. As a result, our current business, results of operations, financial condition and prospects are materially dependent upon economic, political and other conditions and developments in Brazil. For example, on July 8, 2019, Petróleo Brasileiro S.A. – Petrobras (“Petrobras”) the state-owned oil company in Brazil, entered into an agreement (Termo de Compromisso de Cessão de Prática) with Brazilian antitrust authorities (Conselho Administrativo de Defesa Econômica - CADE) pursuant to which it has agreed to divest its equity participation in the gas pipelines and state gas distribution companies in Brazil by December 31, 2021. Such divestment plan, intended to end Petrobras’s monopoly on the distribution of gas in Brazil, will increase competition and may affect our business.
We currently have interests and operations in Brazil and currently intend to expand into additional markets in Latin America, Southeast Asia, the Indian Subcontinent, West Africa and Europe, and such interests are subject to governmental regulation in each market. The governments in these markets differ widely with respect to structure, constitution and stability and some countries lack mature legal and regulatory systems. Weaknesses in legal systems and legislation in many of these countries create uncertainty for investments and business due to changing requirements that may be costly, incoherent and contradictory, limited budgets for judicial systems, questionable judicial interpretations and/or inadequate regulatory regimes. To the extent that our operations depend on governmental approval and regulatory decisions, the operations may be adversely affected by changes in the political structure or government representatives in each of the markets in which we operate. Recent political, security and economic changes have resulted in political and regulatory uncertainty in certain countries in which we operate or may pursue operations. Changes in legislative and regulatory provisions in these countries, which we may not be able to anticipate, could have a material adverse effect on our business, financial condition, results of operations and prospects.
Furthermore, government authorities have a high degree of discretion in many of the markets in which we currently operate, and have sometimes exercised their discretion in ways that may be perceived as selective or arbitrary, or in a manner that could be seen as being influenced by political or commercial considerations. Moreover, many of the governments in the countries in which we currently operate have the power in certain circumstances, by regulation or other government action, to interfere with the performance of contracts or to terminate them or declare them null and void. Governmental actions may include withdrawal of licenses, withholding of permits, criminal prosecutions and civil actions. In some countries, when the economic environment has deteriorated and in order to compensate for the resulting revenue shortages, authorities have imposed new regulations, in particular relating to tax and customs duties, sometimes unexpectedly. There is no guarantee that legislative authorities in the countries in which we currently operate will not pass new laws or regulations or amend existing laws and regulations in a manner that would significantly negatively impact our business model or may even render our business model no longer viable.
Some of these countries have experienced political, security and economic instability in the recent past and may experience instability in the future. Any slowdown or contraction affecting the local economy in a jurisdiction in which we operate could negatively affect the ability of our customers to purchase LNG, natural gas, steam or power from us or to fulfill their obligations under their contracts with us. If the economy in Brazil or other jurisdictions in which we operate worsens because of, for example:
lower economic activity;
an increase in oil, natural gas or petrochemical prices;
liquidity of domestic capital and lending markets;
devaluation of the applicable currency;
higher inflation; or
an increase in domestic interest rates,
then our business, results of operations, financial condition and prospects may also be significantly affected by actions taken by the government in the jurisdictions in which we operate.
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In particular, the Brazilian economy has been characterized by frequent and occasionally extensive intervention by the Brazilian government and unstable economic cycles. The Brazilian government has often changed monetary, taxation, credit, tariff and other policies to influence the course of Brazil’s economy. The Brazilian government’s actions to control inflation and implement other policies have at times involved wage and price controls, blocking access to bank accounts, imposing capital controls and limiting imports into Brazil. In addition, Brazilian markets and politics have been characterized by considerable instability in recent years due to uncertainties derived from the ongoing corruption investigations, the conviction of Former President Luiz Inácio Lula da Silva, the impeachment of Former President Dilma Rousseff and the election of Congressman Jair Bolsonaro. The spread of COVID-19 in Brazil has resulted in heightened uncertainty and political instability as government officials debate appropriate response measures. These uncertainties and any measures adopted by the new administration may increase market volatility and political instability.
Due to the locations in which we operate or plan to operate, a number of our current and potential future projects are subject to a number of uncertainties, including higher political and security risks than operations in other areas of the world.
We operate in, or are pursuing projects which could lead to future operations in, areas of the world where there are significant uncertainties, including those we have not yet considered and heightened political and security risks. We identify higher risk countries in which we operate through our experiences, the experiences of our partners and publicly available third party information such as Transparency International, the World Bank and TRACE International, and monitor the specific risks associated with countries in which we operate. Our operations may be subject to higher political and security risks than operations in other areas of the world. Any extreme levels of political instability resulting in changes of governments, internal conflict, unrest and violence could lead to economic disruptions and shutdowns in industrial activities.
In addition, we may maintain insurance coverage for only a portion of the risks incidental to doing business in higher risk countries. There also may be certain risks covered by insurance where the policy does not reimburse us for all of the costs related to a loss. For example, any claims covered by insurance will be subject to deductibles, which may be significant. In the event that we incur business interruption losses with respect to one or more incidents, they could have a material adverse effect on our results of operations.
Our financial condition and operating results may be adversely affected by foreign exchange fluctuations.
Our consolidated financial statements are presented in U.S. dollars. Therefore, fluctuations in exchange rates used to translate other currencies into U.S. dollars will impact our reported consolidated financial condition, results of operations and cash flows from period to period. These fluctuations in exchange rates will also impact the value of our investments and the return on our investments. Additionally, some of the jurisdictions in which we operate may limit our ability to exchange local currency for U.S. dollars.
A portion of our cash flows and expenses may in the future be incurred in currencies other than the U.S. dollar. Our material counterparties’ cash flows and expenses may be incurred in currencies other than the U.S. dollar. We cannot be sure that non-U.S. currencies will not be subject to volatility and depreciation or that the current exchange rate policies affecting these currencies will remain the same. As a result, our expenses may, from time to time, increase relative to our revenues as a result of fluctuations in exchange rates, particularly between the U.S. dollar and the Brazilian real, which could affect the amount of net income that we report in future periods. Depreciation or volatility of any of these currencies against the U.S. dollar or other currencies could cause counterparties to be unable to pay their contractual obligations under our agreements or to lose confidence in us, which could also affect the amount of net income that we report in future periods.
Risks Inherent in an Investment in Us
Our Sponsors have the ability to direct the voting of a majority of our shares, and its interests may conflict with those of our other shareholders.
Upon completion of this offering, the Sponsors will initially own an aggregate of    approximately     common shares representing    % of our voting power (or approximately    % if the underwriters’ option to purchase additional common shares is exercised in full). The Sponsors’ beneficial ownership of greater than 50% of our voting shares means the Sponsors will be able to control matters requiring shareholder approval, including the election of directors, changes to our organizational documents and significant
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corporate transactions. This concentration of ownership makes it unlikely that any other holder or group of holders of our common shares will be able to affect the way we are managed or the direction of our business. The interests of the Sponsors with respect to matters potentially or actually involving or affecting us, such as future acquisitions, financings and other corporate opportunities and attempts to acquire us, may conflict with the interests of our other shareholders.
Furthermore, in connection with this offering, we will enter into a Shareholders’ Agreement with the Sponsors. The Shareholders’ Agreement will provide the Sponsors with the right to designate a certain number of nominees to our board of directors so long as the Sponsors and their respective affiliates collectively beneficially own at least 5% of the outstanding common shares. See “Certain Relationships and Related Transactions—Agreements with Affiliates in Connection with the Transactions—Shareholders’ Agreement.”
Given this concentrated ownership, the Sponsors would have to approve any potential acquisition of us. The existence of a significant shareholder may have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management, or limiting the ability of our other shareholders to approve transactions that they may deem to be in the best interests of our company. Moreover, the Sponsors’ concentration of share ownership may adversely affect the trading price of our common shares to the extent investors perceive a disadvantage in owning shares of a company with a significant shareholder.
In addition, the Sponsors may have different tax positions from us that could influence their decisions regarding whether and when to support the disposition of assets and the incurrence or refinancing of new or existing indebtedness. In addition, the determination of future tax reporting positions, the structuring of future transactions and the handling of any challenge by any taxing authority to our tax reporting positions may take into consideration the Sponsors’ tax or other considerations, which may differ from our considerations or those of our other shareholders.
The Sponsors may compete with us.
The Sponsors are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us. In addition, the Sponsors may compete with us for investment opportunities and may own an interest in entities that compete with us. Additionally, our governing documents will provide that if any of our officers or directors who are affiliates of the Sponsors or any of their respective affiliates acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us, our common shareholders or our affiliates. This may create actual and potential conflicts of interest between us and the Sponsors and result in less than favorable treatment of us and our common shareholders.
Our officers face conflicts in the allocation of their time to our business.
We do not currently employ any of the executive officers who manage our business. Mr. Antonello, our Chief Executive Officer, is employed by Magni Partners Bermuda Limited (“Magni Bermuda”) and provides services to us pursuant to a secondment agreement we have entered into with Magni Bermuda. Mr. Maranhão, our Chief Financial Officer, is employed by Golar Management and provides services to us pursuant to a management and administrative services agreement that we have entered into with Golar Management. Our officers, who are employed by Magni Bermuda and Golar Management, are not required to work full-time on our affairs and also perform services for affiliates of their respective employers, which conduct substantial businesses and activities of their own in which we have no economic interest. As a result, there could be material competition for the time and effort of our officers who also provide services to their employers and their respective affiliates. As we expand our operations, we will require more of our management and will need to expand our team beyond those supplied by Magni Bermuda and Golar Management. If we are unable to maintain access to the time and effort of our officers or are otherwise unable to develop our management team it could have a material adverse effect on our business, results of operations and financial condition. Please read “Management.”
Fees and cost reimbursements, which Golar Management will determine for services provided to us and certain of our subsidiaries, will be substantial and will be payable regardless of our profitability.
Pursuant to a management and administrative services agreement, Golar Management will provide us with significant management, administrative, financial and other support services. We will reimburse Golar Management for its reasonable costs and expenses incurred in connection with the provision of these services.
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In addition, we will pay Golar Management a management fee equal to 5% of its costs and expenses incurred in connection with providing services to us. We expect that we will pay Golar Management approximately $    million in total under the management and administrative services agreement for the twelve months ending    , 2021.
For a description of the management and administrative services agreement, please read “Certain Relationships and Related Transactions.” The fees and expenses payable pursuant to the management and administrative services agreement will be payable without regard to our financial condition or results of operations.
Because we are a Bermuda exempted company, our shareholders may have less recourse against us or our directors than shareholders of a U.S. company have against the directors of that U.S. company.
Because we are a Bermuda exempted company, the rights of holders of our common shares will be governed by Bermuda law and our memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders in other jurisdictions, including with respect to, among other things, rights related to interested directors, amalgamations, mergers and acquisitions, takeovers, the exculpation and indemnification of directors and shareholder lawsuits.
Among these differences is a Bermuda law provision that permits a company to exempt a director from liability for any negligence, default or breach of a fiduciary duty except for liability resulting directly from that director’s fraud or dishonesty. Our bye-laws will provide that no director or officer shall be liable to us or our shareholders unless the director’s or officer’s liability results from that person’s fraud or dishonesty. Our bye-laws will also require us to indemnify a director or officer against any losses incurred by that director or officer resulting from their negligence or breach of duty, except where such losses are the result of fraud or dishonesty. Accordingly, we carry directors’ and officers’ insurance to protect against such a risk.
In addition, under Bermuda law, the directors of a Bermuda company owe their duties to that company and not to the shareholders. Bermuda law does not, generally, permit shareholders of a Bermuda company to bring an action for a wrongdoing against the company or its directors, but rather the company itself is generally the proper plaintiff in an action against the directors for a breach of their fiduciary duties. Moreover, class actions and derivative actions are generally not available to shareholders under Bermuda law. These provisions of Bermuda law and our bye-laws, as well as other provisions not discussed here, may differ from the law of jurisdictions with which shareholders may be more familiar and may substantially limit or prohibit a shareholder’s ability to bring suit against our directors or in the name of the company. The Bermuda courts, however, would ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company’s memorandum of association or bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company’s shareholders than that which actually approved it.
It is also worth noting that under Bermuda law, our directors and officers are required to disclose to our board any material interests they have in any contract entered into by our company or any of its subsidiaries with third parties. Our directors and officers are also required to disclose their material interests in any corporation or other entity which is party to a material contract with our company or any of its subsidiaries. A director who has disclosed his or her interests in accordance with Bermuda law may participate in any meeting of our board, and may vote on the approval of a material contract, notwithstanding that he or she has a material interest.
Bermuda law differs from the laws in effect in the United States and may afford less protection to holders of our common shares.
We are incorporated under the laws of Bermuda. As a result, our corporate affairs are governed by the Companies Act, which differs in some material respects from laws typically applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, amalgamations, mergers and acquisitions, takeovers, shareholder lawsuits and indemnification of directors. Generally, the duties of directors and officers of a Bermuda company are owed to the company only. Shareholders of Bermuda companies may only take action against directors or officers of the company in limited circumstances. The circumstances in which derivative actions may be available under Bermuda law are substantially more proscribed and less clear than they would be to shareholders of U.S. corporations. The Bermuda courts, however, would ordinarily be expected to permit a shareholder to commence an
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action in the name of a company to remedy a wrong to the company where the act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company’s memorandum of association or bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against the minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company’s shareholders than that which actually approved it.
When the affairs of a company are being conducted in a manner that is oppressive or prejudicial to the interests of some shareholders, one or more shareholders may apply to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order regulating the conduct of the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the company. In addition, the rights of holders of our common shares and the fiduciary responsibilities of our directors under Bermuda law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States, particularly the State of Delaware. Therefore, holders of our common shares may have more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction within the United States.
We have anti-takeover provisions in our bye-laws that may discourage a change of control.
Our bye-laws will contain provisions that could make it more difficult for a third-party to acquire us without the consent of our board of directors, including the ability of our board of directors to determine the powers, preferences and rights of preference shares and to cause us to issue the preference shares without shareholder approval.
These provisions could make it more difficult for a third-party to acquire us, even if the third-party’s offer may be considered beneficial by many shareholders. As a result, shareholders may be limited in their ability to obtain a premium for their common shares. See “Description of Share Capital” for a discussion of these provisions.
Because our offices and assets are outside the United States, our shareholders may not be able to bring a suit against us or enforce a judgment obtained against us in the United States.
We, and most of our subsidiaries, are incorporated in jurisdictions outside the U.S. and substantially all of our assets and those of our subsidiaries are located outside the U.S. In addition, most of our directors and officers are non-residents of the U.S., and all or a substantial portion of the assets of these non-residents are located outside the U.S. As a result, it may be difficult or impossible for U.S. investors to serve process within the U.S. upon us, our subsidiaries, or our directors and officers or to enforce a judgment against us for civil liabilities in U.S. courts. In addition, you should not assume that courts in the countries in which we or our subsidiaries are incorporated or where our or our subsidiaries’ assets are located would enforce judgments of U.S. courts obtained in actions against us or our subsidiaries based upon the civil liability provisions of applicable U.S. federal and state securities laws, or would enforce, in original actions, liabilities against us or our subsidiaries based on those laws.
Shareholders will experience immediate and substantial dilution of $    per common share.
The initial public offering price of $    per common share exceeds our pro forma net tangible book value of $    per common share. Based on the initial public offering price of $    per common share, shareholders will incur immediate and substantial dilution of $    per common share in the pro forma net tangible book value per share. Please read “Dilution.”
We do not intend to pay cash dividends on our common shares. Consequently, your only opportunity to achieve a return on your investment is if the price of our common shares appreciates.
We do not plan to declare cash dividends on our common shares in the foreseeable future. Consequently, your only opportunity to achieve a return on your investment in us will be if you sell your common shares at a price greater than you paid for them. There is no guarantee that the price of our common shares that will prevail in the market will ever exceed the price that you pay in this offering.
We may issue preferred shares, the terms of which could adversely affect the voting power or value of our common shares.
Our bye-laws will authorize us to issue, without the approval of our shareholders, one or more classes or series of preferred shares having such designations, preferences, limitations and relative rights, including preferences over our common shares respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred shares could adversely impact the voting
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power or value of our common shares. For example, we might grant holders of preferred shares the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred shares could affect the residual value of the common shares.
The market price of our common shares could be adversely affected by sales of substantial amounts of our common shares in the public or private markets or the perception in the public markets that these sales may occur, including sales by the Sponsors or other large holders.
After this offering, we will have    common shares outstanding, assuming no exercise of the underwriters’ option to purchase additional common shares. The common shares sold in this offering will be freely tradable without restriction under the Securities Act except for any common shares that may be held or acquired by our directors, officers or affiliates, which will be restricted securities under the Securities Act. The common shares held by the Sponsors will be subject to resale restrictions under a 180-day lock-up agreement with the underwriters. Each of the lock-up agreements with the underwriters may be waived in the discretion of certain of the underwriters. Sales by the Sponsors or other large holders of a substantial number of our common shares in the public markets following this offering, or the perception that such sales might occur, could have a material adverse effect on the price of our common shares or could impair our ability to obtain capital through an offering of equity securities. In addition, we have agreed to provide registration rights to the Sponsors. Please read “Shares Eligible for Future Sale.”
There is no existing market for our common shares and a trading market that will provide you with adequate liquidity may not develop. The price of our common shares may fluctuate significantly, and shareholders could lose all or part of their investment.
Prior to this offering, there has been no public market for the common shares. After this offering, there will be only    publicly traded common shares. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. Common shareholders may not be able to resell their common shares at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common shares and limit the number of investors who are able to buy the common shares.
The initial public offering price for our common shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the price of the common shares that will prevail in the trading market. The market price of our common shares may decline below the initial public offering price. The market price of our common shares may also be influenced by many factors, some of which are beyond our control, including:
our quarterly or annual earnings or those of other companies in our industry;
announcements by us or our competitors of significant contracts or acquisitions;
changes in accounting standards, policies, guidance, interpretations or principles;
general economic conditions;
the failure of securities analysts to cover our common shares after this offering or changes in financial estimates by analysts;
future sales of our common shares; and
the other factors described in these “Risk Factors.”
We expect to be a “controlled company” within the meaning of NASDAQ rules and, as a result, will qualify for and intend to rely on exemptions from certain corporate governance requirements.
Upon completion of this offering, the Sponsors will hold a majority of the voting power of our shares. As a result, we expect to be a controlled company within the meaning of NASDAQ corporate governance standards. Under NASDAQ rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company is a controlled company and may elect not to comply with certain NASDAQ corporate governance requirements, including the requirements that:
a majority of the board of directors consist of independent directors as defined under the rules of NASDAQ;
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the nominating and governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.
These requirements will not apply to us as long as we remain a controlled company. A controlled company does not need its board of directors to have a majority of independent directors or to form independent compensation and nominating and governance committees. Following this offering, we intend to utilize some or all of these exemptions. Accordingly, you may not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of NASDAQ. See “Management.”
As an exempted company incorporated under Bermuda law, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NASDAQ listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the NASDAQ listing standards.
As a Bermuda exempted company listed on the Nasdaq Global Select Market, we are subject to the Nasdaq Stock Market corporate governance listing standards. However, the Nasdaq Stock Market Rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in Bermuda, which is our home country, may differ significantly from the Nasdaq Stock Market corporate governance listing standards. We may rely on home country practice with respect to our corporate governance after we complete this offering. If we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would enjoy under the Nasdaq Stock Market corporate governance listing standards applicable to U.S. domestic issuers.
As an exempted company incorporated under Bermuda law, our operations may be subject to economic substance requirements.
The Economic Substance Act 2018 and the Economic Substance Regulations 2018 of Bermuda (the “Economic Substance Act” and the “Economic Substance Regulations”, respectively) became operative on December 31, 2018. The Economic Substance Act applies to every registered entity in Bermuda that engages in a relevant activity and requires that every such entity shall maintain a substantial economic presence in Bermuda. A relevant activity for the purposes of the Economic Substance Act is banking business, insurance business, fund management business, financing business, leasing business, headquarters business, shipping business, distribution and service center business, intellectual property holding business and conducting business as a holding entity.
The Economic Substance Act provides that a registered entity that carries on a relevant activity complies with economic substance requirements if (a) it is directed and managed in Bermuda, (b) its core income-generating activities (as may be prescribed) are undertaken in Bermuda with respect to the relevant activity, (c) it maintains adequate physical presence in Bermuda, (d) it has adequate full time employees in Bermuda with suitable qualifications and (e) it incurs adequate operating expenditure in Bermuda in relation to the relevant activity.
A registered entity that carries on a relevant activity is obliged under the Economic Substance Act to file a declaration in the prescribed form (the “Declaration”) with the Registrar of Companies (the “Registrar”) on an annual basis.
If we fail to comply with our obligations under the Economic Substance Act or any similar law applicable to us in any other jurisdictions, we could be subject to financial penalties and spontaneous disclosure of information to foreign tax officials in related jurisdictions and may be struck from the register of companies in Bermuda or such other jurisdiction. Any of these actions could have a material adverse effect on our business, financial condition and results of operations.
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We are a foreign private issuer within the meaning of the SEC rules, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.
Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:
the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;
the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;
the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and
the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the Nasdaq Global Select Market. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.
For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements that apply to other public companies, including those relating to auditing standards and disclosure about our executive compensation.
The JOBS Act contains provisions that, among other things, relax certain reporting requirements for “emerging growth companies,” including certain requirements relating to auditing standards and compensation disclosure. We are classified as an emerging growth company. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things, (i) provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act, (ii) comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (iii) provide certain disclosures regarding executive compensation required of larger public companies, or (iv) hold nonbinding advisory votes on executive compensation. We currently intend to take advantage of the exemptions described above. We have also elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result, our consolidated financial statements may not be comparable to companies that comply with public company effective dates, and our shareholders and potential investors may have difficulty in analyzing our operating results if comparing us to such companies. We will remain an emerging growth company for up to five years, although we will lose that status sooner if we have more than $1.07 billion of revenues in a fiscal year, have more than $700.0 million in market value of our common shareholders held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period.
To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies. If some investors find our common shares to be less attractive as a result, there may be a less active trading market for our common shares and our common share price may be more volatile.
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If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our common shares.
Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a publicly traded company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We cannot be certain that our efforts to develop and maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes-Oxley Act. In connection with our efforts to maintain effective internal controls, we will need to hire additional accounting personnel as well as to make additional investments in software and systems. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our common shares.
We will incur increased costs as a result of being a public company.
We have no history operating as a publicly traded company. As a newly public company with shares listed on NASDAQ, we will need to comply with an extensive body of regulations that did not apply to us previously, including certain provisions of the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, regulations of the SEC and NASDAQ requirements. We expect these rules and regulations will increase our legal, accounting, compliance and other expenses that we did not incur prior to this offering and make some activities more time-consuming and costly. For example, as a result of becoming a public company, we intend to add independent directors and create additional board committees. We have entered into a management and administrative services agreement with Golar Management, an affiliate of Golar LNG, pursuant to which Golar Management provides us with certain back office and management services for the vessels in our fleet and charge us for the expenses incurred to provide these services. Golar Management will also continue to provide compliance services for the foreseeable future and any transition will take place over time. In addition, we may incur additional costs associated with our public company reporting requirements and maintaining directors’ and officers’ liability insurance. Because of the limitations in coverage for directors, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We estimate that we will incur approximately $    million of incremental costs per year associated with being a publicly traded company; however, it is possible that our actual incremental costs of being a publicly traded company will be higher than we currently estimate. We are currently evaluating and monitoring developments with respect to these rules, which may impose additional costs on us and have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows.
If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our common shares or if our operating results do not meet their expectations, our share price could decline.
The trading market for our common shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose viability in the financial markets, which in turn could cause our share price or trading volume to decline.
Tax Risks
A change in tax laws in any country in which we operate could adversely affect us.
Tax laws, regulations and treaties are highly complex and subject to interpretation. Consequently, we are subject to changing laws, treaties and regulations in and between the countries in which we operate. Our tax expense is based on our interpretation of the tax laws in effect at the time the expense was incurred. A change in tax laws, regulations, or treaties, or in the interpretation thereof, could result in a materially higher tax expense or a higher effective tax rate on our earnings.
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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 foreign corporation will be treated as a “passive foreign investment company” (a “PFIC”), for U.S. federal income tax purposes if, after applying certain look-through rules with respect to the income and assets of its subsidiaries, either (i) at least 75% of its gross income during the taxable year consists of “passive income” or (ii) the average percentage by value of the corporation’s assets during such taxable year that produce or are held for the production of “passive income” is at least 50%. 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 which 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 shares in the PFIC.
Based on our current and expected future method of operation, and on the opinion of Vinson & Elkins L.L.P., our U.S. counsel, we expect that we will not be treated as a PFIC for the current or any subsequent year. We have represented to our U.S. counsel that more than 25% of our gross income for each year was or will be income that our U.S. counsel has opined, based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations promulgated thereunder (“Treasury Regulations”) and current administrative rulings and court decisions, should be non-passive income and that the average percentage by value of our assets for each year that produce or are held for the production of such non-passive income is at least 50%. Our U.S. counsel’s opinion is based on certain representations, valuations and projections regarding our income and assets and is conditioned on the accuracy of such representations, valuations and projections. While we believe such representations, valuations and projections to be accurate, no assurance can be given that they will be accurate in the future. In addition, although there is substantial legal authority supporting our position consisting of case law and U.S. Internal Revenue Service (“IRS”) pronouncements concerning the characterization of income derived from time charters and voyage charters as services income for other tax purposes, there is also case law which characterizes certain time charter income as rental income rather than services income for other tax purposes. If the reasoning of this case law were extended to the PFIC context, the gross income we derive or are deemed to derive from our time chartering activities might be treated as rental income, and we might be deemed a PFIC.
As described above, we indirectly own a 50% interest in CELSE, which recently completed construction of a gas-powered power plant, and expect to invest in additional power plants in the future. We believe the gross income we are deemed to derive pursuant to the applicable look-through rules from the generation and sale of power is active business income and does not constitute “passive income” under the PFIC provisions of the Code. Existing Treasury Regulations, however, have not been revised to address changes to the statutory provisions governing when gains from the sale of commodities are treated as giving rise to active business income. Further, the current PFIC statutory and regulatory provisions do not address how that active business income exception applies when the relevant commodities income and related activities arise in subsidiaries of the foreign corporation being tested for PFIC status. In light of that lack of guidance, there can be no assurance that the IRS or a court will agree with our position that CELSE’s income from power generation and sales qualifies for the active business income exception.
Because PFIC status depends upon the composition of a company’s income and assets and the market value of its assets from time to time, and because there is no controlling authority for determining whether certain types of our income constitute passive income for PFIC purposes, there can be no assurance that we will not be considered a PFIC for the current or any future taxable year. Furthermore, the PFIC rules may change, which could result in us being treated as a PFIC in the future as a result of such change in law. For example, Treasury Regulations that were recently proposed under the PFIC statutory provisions may affect the characterization of our income generated by the operation of our vessels through the Cool Pool. If such proposed Treasury Regulations are finalized, there is a risk that our Cool Pool income and assets that we currently treat as active could instead be treated as passive and we could therefore be classified as a PFIC. However, it is not currently known if, when, or the extent to which such proposed Treasury Regulations will be finalized.
If we were a PFIC for any taxable year, our U.S. shareholders would face adverse U.S. tax consequences and certain information reporting requirements regardless of whether we remain a PFIC in subsequent years.
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Under the PFIC rules, unless those shareholders make a certain U.S. federal income tax election (which election could itself have adverse consequences for such shareholders), such shareholders would be liable to pay U.S. federal income tax at the then prevailing income tax rates on ordinary income plus interest upon excess distributions and upon any gain from the disposition of our common shares, as if the excess distribution or gain had been recognized ratably over the shareholder’s holding period of our common shares.
We may have to pay tax on United States source income, which would reduce our earnings.
Under the Code, 50% of the gross shipping income of a vessel owning or chartering corporation that is attributable to transportation that begins or ends, but that does not both begin and end, in the U.S., is treated as U.S. source shipping income and may be subject to a 4% U.S. federal income tax without allowance for deduction (to the extent not considered to be “effectively connected” with the conduct of a U.S. trade or business as described below), unless that corporation qualifies for exemption from tax under Section 883 of the Code and the applicable Treasury Regulations promulgated thereunder. We expect that we will qualify for this statutory tax exemption beginning in the 2021 tax year. However, there are factual circumstances beyond our control that could cause us to lose the benefit of this tax exemption and thereby become subject to U.S. federal income tax on our U.S. source income. Therefore, we can give no assurances that this tax exemption will apply to us or to any of our subsidiaries.
To the extent the benefits of the Section 883 exemption are unavailable and our U.S. source shipping income or regasification and storage income is considered to be “effectively connected” with the conduct of a U.S. trade or business (as described below), any such “effectively connected” income, net of applicable deductions, would be subject to the U.S. federal corporate income tax, currently imposed at a rate of 21%. In addition, we may be subject to the 30% “branch profits” taxes on earnings effectively connected with the conduct of such trade or business, as determined after allowance for certain adjustments, and on certain interest paid or deemed paid attributable to the conduct of our U.S. trade or business. Our U.S. source shipping income would be considered “effectively connected” with the conduct of a U.S. trade or business only if:
we had, or were considered to have, a fixed place of business in the United States involved in the earning of our U.S. source shipping income; and
substantially all of our U.S. source shipping income was attributable to regularly scheduled transportation, such as the operation of a ship that followed a published schedule with repeated sailings at regular intervals between the same points for voyages that begin or end in the United States.
We believe that our vessel operations will not give rise to these conditions because we will not have, nor permit circumstances that would result in having, a fixed place of business in the United States or any vessel sailing to or from the United States on a regularly scheduled basis.
We do not expect our income we are deemed to earn from power generation activities to be considered “effectively connected” with the conduct of a U.S. trade or business, as we expect, based on our current and anticipated activities, all power generation activities will be conducted outside of the United States. See “Business—Taxation of Hygo—United States Taxation—Taxation of Operating Income” for a more detailed discussion.
Brazilian tax legislation is currently under discussion and tax reform may affect our revenues.
Brazilian corporations are subject to two annual corporate income taxes, which are levied on total net income, as adjusted according to applicable tax law: (i) Corporate Income Tax, at approximately a 25% rate, and (ii) Social Contribution on Net Profit, at a 9% rate (and thus an aggregate tax rate of approximately 34%). Dividends distributed to a shareholder are fully exempted from tax, irrespective of the jurisdiction in which the shareholder is domiciled.
A bill to be voted on by the Brazilian congress would reinstate progressive taxation of dividends, while reducing progressively the taxation on corporate net income. If that bill is approved, it may affect our after-tax revenues.
Revenues derived from energy sales are subject to two monthly federal social contribution taxes that are levied on gross revenues: (i) the Contribuição para o Programa de Integração Social (the “PIS”), at a rate of 1.65%, and (ii) the Contribuição para o Financiamento da Seguridade Social (the “COFINS”), at a rate of 7.6%.
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These rates are applicable for entities subject to the non-cumulative regime, which allows the taxpayer to accrue PIS and COFINS credits with respect to eligible expenses and offset them against PIS and COFINS due on their revenue.
In addition, energy sales within a particular state are subject to the Imposto sobre Circulação de Mercadorias e Serviços (the “ICMS”), which is a state-specific value added tax. The applicable rate varies depending on the legislation of each state (usually ranging from 18% to 30%). In interstate sales, the outflow of energy is exempted from the ICMS (unless such energy is sold to non-taxpayers). Nonetheless, sellers of energy may be required to pay an amount equal to the amount of ICMS levied on the acquirer in the destination state under a substitute regime. Further discussion of rates under the PIS, COFINS, and ICMS can be found in “Taxation of Hygo—Brazilian Taxation.”
The Brazilian Federal Government recently proposed a bill that would replace the PIS and COFINS with a new tax, the Contribution on Goods and Services (“CBS”), levied at a rate of 12% on gross revenues with tax credit provisions like the PIS and COFINS.
However, there is also a constitutional amendment currently being discussed in the Brazilian congress that would abolish such taxes (including the CBS, if approved) and replace them with a single value-added tax on goods and services. This constitutional amendment or other tax legislation could affect our revenues.
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USE OF PROCEEDS
We expect to receive approximately $    million of net proceeds from this offering, based upon the assumed initial public offering price of $    per share (the midpoint of the price range set forth on the cover of this prospectus) and after deducting underwriting discounts and estimated offering expenses. If the underwriters exercise their option to purchase additional common shares in full, we expect the estimated net proceeds to be approximately $    million. See “Underwriting.”
We intend to use the net proceeds to fund (i) $    million of capital expenditures related to the Barcarena Terminal and increasing our equity interest in the Barcarena Power Plant, (ii) $    million of capital expenditures related to the Santa Catarina Terminal and (iii) $    million to redeem the preference shares in the Recapitalization, including accrued and unpaid dividends of $    . We intend to use any remaining net proceeds for working capital and general corporate purposes. If the underwriters exercise their option to purchase additional common shares in full, the additional net proceeds will be approximately $    million. The net proceeds from any exercise of such option will be used for general corporate purposes, including the development of future projects. For additional information on the Recapitalization and the terms of the preference shares, please see “Summary—Our History and Relationship with Our Sponsors” and “Description of Share Capital—Stonepeak Preference Shares.”
Pending any use, the net proceeds of this offering may be invested in short-term, interest-bearing investment-grade securities.
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and our capitalization as of June 30, 2020:
on an actual basis;
on a pro forma basis to give effect to (i) the reduction in the par value of our common shares from $5.00 to $1.00, effective September 11, 2020, (ii)  the reduction in the par value of preference shares from $5.00 to $1.00, followed by the redemption of the preference shares in the Recapitalization on mezzanine equity, each upon consummation of this offering and (iii) the conversion of the convertible common shares into common shares upon consummation of this offering; and
on a pro forma as adjusted basis to give effect to the pro forma adjustments set forth above and the sale by us of common shares at an assumed initial public offering price of $    per common share (the midpoint of the price range set forth on the cover of this prospectus), after deducting underwriting discounts and estimated offering expenses, and the application of the proceeds from this offering, each as described under “Use of Proceeds.”
You should read this table in conjunction with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes contained elsewhere in this prospectus.
 
As of June 30, 2020
 
Actual
Pro Forma
Shareholders’ equity
(unaudited)(2)
Pro Forma
As Adjusted(1)
 
(in thousands except share
and per share data)
Cash and cash equivalents
$74,633
$
$
Total liabilities
555,575
 
Mezzanine equity
 
 
 
Preferred capital — 20,000,000 preferred shares, par value $5.00 per share, issued and outstanding, actual
100,000
 
Convertible share capital — 23,475,077 common shares, par value $5.00 per share, issued and outstanding, actual(3)
117,375
 
Shareholders’ equity
 
 
 
Share capital — 23,475,077 common shares, par value $5.00 per share, issued and outstanding, actual; 46,950,154 common shares, par value $1.00 per share, issued and outstanding pro forma;     shares authorized, par value $1.00 per share,    outstanding, pro forma adjusted
117,375
46,950
 
Additional paid-in capital
339,524
447,324
 
Accumulated other comprehensive loss
(84,879)
(84,879)
 
Retained losses
(112,786)
(112,786)
 
Non-controlling interests
10,436
10,436
Total mezzanine and shareholders’ equity
487,045
307,045
Total liabilities, mezzanine and shareholders' equity
$1,042,620
$
$
(1)
The pro forma as adjusted information discussed above is illustrative only. Our additional paid-in capital, total mezzanine and shareholders’ equity and total liabilities, mezzanine and shareholders’ equity following the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing.
(2)
The unaudited pro forma shareholders' equity as at June 30, 2020 reflects (i) the reduction in the par value of the common shares from $5.00 to $1.00, passed by a resolution of the Board of Directors on August 21, 2020, (ii) the reduction in the par value of the preference shares from $5.00 to $1.00, followed by the redemption of the preference shares, each upon consummation of this offering and (iii) the conversion of the convertible common shares into common shares upon consummation of this offering.
(3)
Following the consummation of this offering, the common shares which comprise the convertible share capital will cease to be convertible into preference shares and will have the same rights and privileges as common shares offered hereby.
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DILUTION
Dilution is the amount by which the offering price per common share in this offering will exceed the pro forma net tangible book value per share after the offering. On a pro forma basis as of June 30, 2020, after giving effect to the offering of common shares, our net tangible book value was approximately $    million, or $    per common share. Purchasers of common shares in this offering will experience substantial and immediate dilution in pro forma net tangible book value per common share for financial accounting purposes, as illustrated in the following table.
Initial public offering price per common share
   
$   
Pro forma net tangible book value per common share before the offering(1)
$   
 
Increase in net tangible book value per share attributable to purchasers in the offering
 
 
Less: Pro forma net tangible book value per share after the offering(2)
 
 
Immediate dilution in net tangible book value per common share to purchasers in the offering(3)
 
$
(1)
Determined by dividing the number of common shares (    common shares) to be issued to our Sponsors into the pro forma net tangible book value of our assets and liabilities.
(2)
Determined by dividing the number of shares to be outstanding after this offering (    common shares) and the application of the related net proceeds into our pro forma net tangible book value, after giving effect to the application of the net proceeds of this offering.
(3)
Assumes the underwriters’ option to purchase additional common shares from us is not exercised. If the underwriters’ option to purchase additional common shares from us is exercised in full, the immediate dilution in net tangible book value per common share to purchasers in this offering would be $    .
The following table summarizes, on an adjusted pro forma basis as of June 30, 2020, the total number of common shares owned by existing shareholders and to be owned by the new investors in this offering, the total consideration paid, and the average price per share paid by our existing shareholders and to be paid by the new investors in this offering, calculated before deducting of estimated discounts and commissions and offering expenses:
 
Shares
Acquired
Total
Consideration
Average Price
Per Share
 
Number
%
Amount
%
Existing shareholders(1)(2)
   
%
$   
%
$   
Purchasers in this offering(2)
   
%
   
%
 
Total
   
100%
$   
100%
$
(1)
Following the completion of this offering and the Recapitalization, our Sponsors will own     common shares.
(2)
Assumes the underwriters’ option to purchase additional common shares from us is not exercised.
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DIVIDEND POLICY
We do not anticipate declaring or paying any cash dividends to holders of our common shares in the foreseeable future. We currently intend to retain future earnings, if any, to finance the expansion of our business. Our future dividend policy is within the discretion of our board of directors and will depend upon then-existing conditions, including our results of operations and financial condition, capital requirements, business prospects, statutory and contractual restrictions on our ability to pay dividends, including restrictions contained in our debt agreements, and other factors our board of directors may deem relevant.
Although we are incorporated in Bermuda, we are classified as a nonresident of Bermuda for exchange control purposes by the Bermuda Monetary Authority. Other than transferring Bermuda dollars out of Bermuda, there are no restrictions on our ability to transfer funds into or out of Bermuda to pay dividends to U.S. residents who are holders of our common shares or other non-resident holders of our common shares in currency other than Bermuda dollars.
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SELECTED HISTORICAL FINANCIAL DATA
The following table presents our selected historical financial data for the periods and as of the dates indicated. The selected historical financial data as of and for the years ended December 31, 2019 and 2018 was derived from the audited historical consolidated financial statements of Hygo Energy Transition Ltd., formerly known as Golar Power Limited, included elsewhere in this prospectus. The summary historical financial data as of June 30, 2020 and for the six months ended June 30, 2020 and 2019 was derived from the unaudited historical financial statements of Hygo Energy Transition Ltd., formerly known as Golar Power Limited, included elsewhere in this prospectus and which, in the opinion of management, contain all normal recurring adjustments necessary for a fair statement of the results for the unaudited interim periods and have been prepared on the same basis as the associated audited consolidated financial statements.
You should read the information set forth below together with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this prospectus. We expect our historical results of operations and cash flows, including our audited consolidated financial statements, to differ materially from our future operations and cash flows as our business and projects mature. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Historical and Anticipated Future Operating Results Will Differ Materially” for further information. Accordingly, our historical financial results are not necessarily indicative of results to be expected for any future periods.
 
Six Months Ended
June 30,
Year Ended
December 31,
 
2020
2019
2019
2018
 
(in thousands except share and per share data)
Statements of Operations Data:
 
 
 
 
Operating revenues
 
 
 
 
Time charter revenues
$22,787
$14,425
$35,601
$47,968
Time charter revenues – collaborative arrangement
9,622
9,622
30,681
Management fees
83
Total operating revenues
22,787
24,047
45,223
78,732
Operating expenses
 
 
 
 
Vessel operating expenses
(6,622)
(6,531)
12,638
11,499
Voyage, charter-hire and commission expenses
(770)
(2,882)
5,912
3,160
Voyage, charter-hire and commission expenses – collaborative arrangement
(9,825)
9,825
39,836
Administrative expenses
(11,849)
(7,285)
16,126
17,652
Depreciation and amortization
(5,640)
(5,579)
11,212
11,180
Total operating expenses
(24,881)
(32,102)
55,713
83,327
Other operating income (loss)
3,714
1,100
Operating income (loss)
(1,620)
(8,055)
(9,390)
(4,595)
Other non-operating income (loss)
 
 
 
 
Loss on disposal of asset under development
(25,981)
Unrealized gain on derivative instrument
5,127
9,990
Other non-operating income
5,000
Net gain on loss of control of subsidiary
72
Total non-operating income (loss)
(20,854)
9,990
5,072
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Six Months Ended
June 30,
Year Ended
December 31,
 
2020
2019
2019
2018
 
(in thousands except share and per share data)
Financial income (expense)
 
 
 
 
Interest income
10,839
489
795
1,336
Interest expense
(5,669)
(2)
(912)
Other financial items, net
2,011
(1,144)
(1,659)
(5,245)
Net financial income (expense)
7,181
(655)
(866)
(4,821)
Loss before equity in net losses of affiliates, income taxes and non-controlling interest
(12,053)
(8,710)
(266)
(4,344)
Income taxes
(2,522)
(33)
(4,152)
(110)
Equity in net loss of affiliates
(37,276)
(778)
(2,510)
(5,748)
Net loss
(51,851)
(9,521)
(6,928)
(10,202)
Net income attributable to non-controlling interest
(3,346)
(2,806)
(5,549)
(1,541)
Preferred dividends
(5,652)
(4,250)
(11,875)
(8,500)
Net loss attributable to common shareholders
$(60,849)
$(16,577)
$(24,352)
$(20,243)
Net loss per share – basic and diluted
$(1.30)
$(0.35)
$(0.52)
$(0.43)
Weighted average number of shares outstanding – basic and diluted
46,950,154
46,950,154
46,950,154
46,950,154
 
As of June 30,
As of December 31,
 
2020
2019
2018
 
(in thousands)
Balance Sheet Data (at period end):
 
 
 
Vessels and equipment, net
$354,645
$360,143
$363,893
Total assets
1,042,620
1,154,792
1,034,129
Long-term debt
378,885
337,686
372,256
Total liabilities
555,575
570,551
434,561