MODEC, INC.

The Group conducts business primarily through overseas projects, and there is a possibility that project profitability could deteriorate due to delays in mobilizing construction workers and procuring materials and equipment caused by sudden changes in economic conditions, local labor relations risks, restrictions on fund transfers, and special taxes or tariffs. In addition, against the backdrop of heightened geopolitical risk, economic security, energy security, tariff increases, and US-China friction may affect the supply chain. As a countermeasure, the Group is promoting the construction of a supply chain that avoids excessive concentration in a single region and the diversification of major subcontractors, and is working with customers to reduce risk.

If the sluggishness in crude oil prices persists over the long term, there is a possibility that the development of new projects by oil majors will be delayed, temporarily reducing the Group's FPSO orders. While the need for floating offshore oil and gas production facilities is trending upward against the backdrop of expanding exploration into ultra-deepwater areas, and oil and gas demand is expected to remain firm, there is a risk that business opportunities could shrink depending on price trends. The Company maintains its policy of continuing to pursue FPSO business development.

The aging deterioration of the initial FPSOs ordered in the 2000s has progressed rapidly, and as a result of prioritizing the assurance of safety, the Group has been forced to bear unexpected declines in operating rates and costs for maintaining and strengthening asset integrity. Through intensive improvement efforts in recent years, the condition of the initial FPSOs has been improving, and their charter periods are sequentially coming to an end; however, the Group continues to position this as a top-priority issue and is working to strengthen asset management and improve profitability.

Amid increasing uncertainty in the global situation due to Russia's invasion of Ukraine, conflicts in the Middle East, and trade policies of the new US administration, price fluctuation factors such as inflation and foreign exchange rates may have a negative impact on the FPSO business. These risks are hedged to a certain degree through contracts with customers, and foreign exchange risk is mitigated by denominating major settlements in US dollars. The Group is also working to diversify sources of material and equipment procurement and to standardize required specifications in order to shorten delivery times and reduce costs.

As efforts to reduce greenhouse gas emissions progress as measures against climate change and global warming, there is a possibility that, over the long term, demand for the Group's core business centered on FPSOs may gradually decline due to oil development companies restraining fossil fuel-related investments or changing their business models. The medium-term management plan sets a goal of promoting the development of floating structure and mooring technologies for offshore wind power generation and alternative energy businesses; however, if the Group is slow to respond to changes in the business environment, this could affect its business performance and financial condition.

As FPSOs become larger and more complex, whether through new hull construction or conversion, the difficulty of managing risks such as completion delays, cost increases, and failure to meet performance requirements has increased, and there is also a growing need to address concentration risk arising from the limited number of shipyards with the capability to build such facilities. In recent years, the competitive environment has also been changing, with major overseas shipyards participating in bids for FPSO design and construction projects. The Company positions its expertise, backed by experience in maximizing lifecycle value from design and construction through to operation, as a competitive advantage.

In the event of a large-scale disaster such as an earthquake, storm or flood damage, or a pandemic, business activities such as FPSO construction, leasing, chartering, and operations may be affected due to physical and human damage or the paralysis of logistics functions. The Group has established Group crisis management guidelines and has put in place response systems and guidelines for use in the event of a crisis, thereby working to minimize losses.

In conducting business both domestically and internationally, the Group complies with the laws, administrative permits and licenses, and regulations of each country; however, if these laws are amended or abolished, or if new legal regulations are established, this could affect the Group's business performance and financial condition. Given the multinational nature of the FPSO business in particular, continuous response to the risk of regulatory changes specific to each country is required.