Dampskibsselskabet NORDEN A/S. We seek excellence through a dedicated team effort from competent and motivated people

Transcription

1 Dampskibsselskabet NORDEN A/S We seek excellence through a dedicated team effort from competent and motivated people Annual Report 2009

2 Contents Highlights 3 Key figures and ratios for the Group 4 Management s review Strategy update 5 Financial position 7 Fleet development 8 Fleet values 10 Fleet costs 12 Outlook for Dry Cargo 18 Tankers 24 Organisation and capabilities 30 Remuneration 32 Corporate governance 33 Board of Directors 35 Management Group 36 Shareholder issues 38 Corporate social responsibility 40 Financial review 43 Signatures 46 Income statement 48 Statement of comprehensive income 49 Statement of financial position 50 Statement of cash flows 52 Statement of changes in equity 53 Notes to the financial statements - contents 54 Notes to the financial statements 55 Significant accounting policies 55 Risk management 63 Parent company financial statements Income statement 86 Balance sheet 87 Statement of changes in equity 89 Notes to the financial statements 90 Accounting policies 90 Definitions of key figures and financial ratios 98 Technical terms and abbreviations 99

3 Company details and Group structure The Company Dampskibsselskabet NORDEN A/S 52, Strandvejen DK-2900 Hellerup Telephone: Fax: CVR no.: Financial year: 1 January 31 December Municipality of domicile: Gentofte Fax, Tanker Department: Fax, Dry Cargo Department: Fax, Technical Department: Website: direktion@ds-norden.com Board of Directors Mogens Hugo, Chairman Alison J. F. Riegels, Vice Chairman Erling Højsgaard Karsten Knudsen Arvid Grundekjøn Benn Pyrmont Johansen (employee representative) Bent Torry Kjæreby Sørensen (employee representative) Lars Enkegaard Biilmann (employee representative) Board of Management Carsten Mortensen, CEO Michael Tønnes Jørgensen, CFO Auditors PricewaterhouseCoopers, Statsaut. Revisionsaktieselskab 44, Strandvejen DK-2900 Hellerup Denmark Annual General Meeting The annual general meeting will be held on Thursday, 22 April 2010 at a.m. at Audience, Radisson SAS Falconer Center, 9, Falkoner Allé, DK-2000 Frederiksberg. Group structure Dampskibsselskabet NORDEN A/S Norient Cyprus Ltd. Norient Product Pool ApS NORDEN Shipping (Singapore) Pte. Ltd. Nortide Shipping III Ltd. (Dormant) NORDEN Tankers & Bulkers (USA) Inc. NORDEN Tankers & Bulkers (Brazil) Ltda. Cyprus 50% Denmark 50% Singapore 100% Bermuda 100% USA 100% Brazil 100% NORDEN Tankers & Bulkers (India) Private ltd. India 100% NORDEN Rep. Office China NORD EMPROS Pte. Ltd. I (Dormant) Singapore 50% NORD EMPROS Pte. Ltd. II (Dormant) Singapore 50% NORD EMPROS Pte. Ltd. III (Dormant) Singapore 50% NORD SUMMIT Pte. Ltd Singapore 50% ANL MARITIME Services Pte. Ltd. Singapore 50% Normit Shipping S.A. (Dormant) Panama 51% Management s review 1

4 NORDEN in brief Dampskibsselskabet NORDEN A/S (NORDEN) operates globally in dry cargo and tankers with one of the most modern and competitive fleets in the industry comprising some 175 vessels. The core fleet of owned vessels and vessels on long-term charters with purchase option is supplemented by vessels chartered on a short-term basis or for individual voyages, and this mix allows the Company to rapidly adjust the size of the fleet and the costs to changing market conditions. A large number of purchase options for active vessels as well as vessels for delivery increase flexibility and contribute to the long-term value creation. In dry cargo, NORDEN is active in all major vessel types. NORDEN is one of the world s largest operators in Handymax and Panamax, in addition to having growing activities in the Handysize, Capesize and Post-Panamax vessel types. NORDEN Handysize Pool and NORDEN Post-Panamax Pool operate the Company s owned vessels in addition to tonnage from Interorient Navigation Company Ltd. (INC), Cyprus. NORDEN s tanker activities comprise Handysize, MR and LR1 product tankers. These are operated commercially by the 50%-owned Norient Product Pool, which also operates vessels from INC and is one of the largest pools in the world. The Company has its head office in Hellerup (Denmark) and offices in Singapore, Shanghai (China), Annapolis (USA), Rio de Janeiro (Brazil) and Mumbai (India). Norient Product Pool has offices in Hellerup (Denmark), Singapore, Annapolis and Limassol (Cyprus). The Company has 216 employees ashore and 376 at sea. To this should be added 201 Philippine seamen on shore and 36 employees in Norient Product Pool. NORDEN was founded in 1871 and is one of the oldest listed shipping companies in the world. The management focus is long term and is based on the Company s vision, mission and values. The goal is for the Company to continuously develop for the benefit of its stakeholders and to achieve stable, reasonable earnings. The NORDEN share is listed on NASDAQ OMX Copenhagen A/S and is included in the OMXC20 index of the most traded shares. Mission Our business is global tramp shipping. We seek excellence through a dedicated team effort from competent and motivated people. With ambition, reliability, flexibility and empathy, we focus on customers who benefit from our constant commitment to being an independent long-term partner continue our long history of building valued relationships with shipowners and shipyards. Vision The preferred partner in global tramp shipping. Unique people. Open minded team spirit. Number one. Values Flexibility Adapt and find better solutions. Reliability Honest, good intentions and no cheating. Empathy Respect diversity in people and opinions. Ambition Think ambition into every activity. We will maintain a large modern fleet of owned and chartered tonnage, and in a volatile market we manage risks to constantly be able to develop our business and create shareholder value.

5 Management s review 3 Highlights Fourth quarter 2009 As expected, the fourth quarter was the best of the year, affirming the positive trend in operating earnings (EBITDA) seen throughout the year. The growth in earnings was generated by the Dry Cargo Department, whose EBITDA rose for the fourth consecutive quarter, based on a high degree of coverage at reasonable rates. To take advantage of the positive market conditions, NORDEN also increased its activities as an operator in Panamax, in particular, and rising spot rates lifted open ship day earnings in Handysize. Coverage in the Tanker Department was lower, and the open ship days were employed in a spot market that performed particularly poorly far into the quarter. In December, the cold winter weather started to drive up rates, however, and the Tanker Department capitalised on its ice-class vessels. Profits from the sale of vessels amounted to USD 18 million (USD 31 million). The Dry Cargo Department s EBITDA was USD 61 million (USD -4 million). The Tanker Department s EBITDA was USD -5 million (USD 15 million). NORDEN s EBITDA was USD 53 million (USD 6 million). NORDEN s EBIT was USD 61 million (USD 31 million). Highlights of 2009 After the collapse of the dry cargo market in 2008 and the highly turbulent start to the year, NORDEN chose a conservative market approach to ensure predictable earnings. The fleet s coverage was close to 100% for most of the year, and the Company focused on trimming the fleet and cutting costs and reducing exposure to the volatility characterising the larger vessel types. Towards the end of the year, NORDEN stepped up its operator activities, however. Earnings for the year were above the spot rates for the most significant vessel types. After having slimmed its counterparty portfolio in the spring, the Company experienced no major new disputes. The profit for the year was as expected. In tankers, the market fell heavily in March and until December remained at a level at which rates in many trades did not cover the daily vessel operating costs. Norient Product Pool managed to conclude a number of time charter agreements with solid counterparties before the market collapsed, and those agreements along with efficiency improvements contributed to producing earnings significantly above market rates. Tankers did not experience any problems with counterparties, and the loss for the year was as expected. Vessel sales generated a profit of USD 70 million (USD 290 million) and provided proceeds of USD 453 million. The Dry Cargo Department s EBITDA fell by 70% to USD 139 million. The Tanker Department s EBITDA fell by 105% to USD -4 million. NORDEN s total EBITDA fell by 75% to USD 126 million. NORDEN s total EBIT fell by 80% to USD 157 million. Net financials represented income of USD 7 million (USD 29 million). Positive fair value adjustment of USD 61 million of certain hedging instruments (USD -81 million). Net profit of USD 217 million, representing a return on equity of 12% (47%). Cash and cash equivalents amounted to USD 711 million (USD 807 million). Theoretical NAV decreased by 4% to DKK 268 per share. The Board of Directors proposes a dividend of DKK 7 per share (DKK 13). Outlook for 2010 Although the global economy is expected to recover gradually, both dry cargo and tankers are subject to greater uncertainty than normal. In dry cargo, the greatest unknown factor is the historically high but uncertain newbuilding order book. Demand is expected to be driven up by China. A large addition of new tonnage is also expected in tankers, which could lead to challenging market conditions. NOR- DEN expects increasing earnings based on high coverage (65% in Dry Cargo and 41% in Tankers) at attractive rates: Expected EBITDA in Dry Cargo: USD million. Expected EBITDA in Tankers: USD -25 to -5 million. Expected EBITDA for NORDEN: USD million. Expected EBIT for NORDEN: USD million. EBITDA Cash and securities Return on equity and payout ratio USD million USD million % Q Q Q Q Q Return on equity Payout ratio Management s review 3

6 4 Management s review Key figures and ratios for the Group Key figures are in USD million Income statement Revenue 1, , , , ,296.5 Costs -1, , , , ,080.5 Profit before depreciation, etc. (EBITDA) Profits from the sale of vessels, etc Profit from operations (EBIT) Fair value adjustment of certain hedging instruments Net financials Profit before tax Profit for the year Profit for the year for the NORDEN shareholders Statement of financial position Non-current assets 1, Total assets 2, , , Equity at year-end 1, , , Liabilities Invested capital 1, Net interest-bearing assets Cash and securities Cash flows From operating activities From investing activities of which gross investment in vessels From financing activities Change in cash and cash equivalents for the year Financial ratios and per share data Share related key figures and ratios: No. of shares of DKK 1 each (excluding treasury shares) 42,043,505 42,387,394 41,897,860 43,337,240 43,239,700 Profit per share (DKK) 5.2 (28) 16.7 (85) 16.8 (91) 4.1 (24) 7.8 (47) Earnings per share (EPS) (DKK) 5.2 (28) 16.7 (85) 16.5 (90) 4.0 (24) 7.6 (46) Diluted earnings per share (diluted EPS) (DKK) 5.2 (28) 16.7 (85) 16.2 (88) 4.0 (24) 7.6 (46) Dividend per share, DKK Intrinsic value per share (book value) (DKK) 42.9 (223) 40.1 (212) 31.3 (159) 16.4 (93) 14.1 (89) Share price at year-end, DKK Price/intrinsic value Net Asset Value (NAV) per share 1) (DKK) 40.5 (210) 43.0 (227) 57.3 (291) 26.6 (151) 19.8 (125) Theoretical Net Asset Value per share 2) (DKK) 51.6 (268) 54.3 (279) (614) 53.9 (305) 32.1 (203) Other key figures and ratios: ROE 12.4% 47.0% 69.5% 26.7% 71.0% ROIC 15.1% 89.5% 101.9% 34.5% 90.1% Payout ratio (excluding treasury shares) 3) 25.3% 14.1% 43.7% 23.1% 21.7% EBITDA ratio 7.5% 11.9% 18.3% 13.5% 16.7% Equity ratio 88.8% 83.3% 81.5% 74.0% 74.1% Total no. of ship days for the Group 55,951 77,448 67,393 47,425 44,738 USD rate at year-end Average USD rate The ratios were computed in accordance with the 2005 guidelines issued by the Danish Association of Financial Analysts, entitled Anbefalinger og nøgletal 2005 except of Theoretical Net Asset Value. Please see the definitions in the section Definitions of key figures and financial ratios. The figures are adjusted for the Company s holding of treasury shares. 1) Excluding purchase options on vessels. 2) Including value of 60 (68) charter parties with extension and purchase option on vessels, declared at the optimum time (before tax). The basis of calculation has been changed, and 2008 figures have been changed accordingly. Comparative figures for have not been changed. Please see page 45 for a comment on the uncertainty connected with the calculation. 3) The payout ratio was computed based on proposed dividends for the year, including extraordinary dividends paid during the year. Management s review 4

7 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review 5 Strategy update Balanced approach In 2009, NORDEN focused primarily on adjusting capacity and costs, limiting risk and improving liquidity as well as strength ening a number of systems, processes and controls. The purpose of these efforts was to strengthen the Company s competitiveness in the challenging market conditions in the short term and to improve NORDEN s ability to expand its position in the dry cargo and tanker markets in the long term. This balanced approach, which focuses both on short-term challenges and on long-term opportunities, was largely successful. At USD 157 million, the Company s EBIT was at the high end of the most recent forecast interval despite the very poor performance of the tanker market for most of the year and counterparty problems affecting Dry Cargo earnings in the first quarter. In addition, in order to ensure predictable earnings in an uncertain dry cargo market, NORDEN maintained a high level of coverage and was thus only to a limited extent able to capitalise from unexpectedly high market rates. Lower costs Throughout the year, the Company focused on cutting costs. On land, administrative expenses were reduced by 29%, or 31% when calculated on a comparable basis without non-recurring costs and bonuses. The cost cuts were achieved by means of strict cost control, consistent prioritising of activities, rationalisation, pay freeze and bonus reduction. NORDEN assesses that this was achieved without weakening the Company s core competences. At sea, operating costs on owned vessels were reduced by 7.5% through a number of measures, including outsourcing and systematic benchmarking, thereby revealing best practices across the fleet. NORDEN also used the flexibility of its business model to return expensive chartered vessels on expiry of the contracts and replace them with less expensive vessels at charter hires matching the current rate levels. The flexibility of the fleet is enhanced by the fact that a third of the short-term fleet consisted of vessels chartered for a single voyage only, so that after the end of the voyage, NORDEN bore no risk of having to employ the vessel. Adjustment of capacity Capacity and thus the business volume in Dry Cargo was reduced by 33%, measured in terms of ship days. The adjustment of the fleet began in the autumn of 2008, and between September 2008 and June 2009, the number of operated vessels declined by 42%. In view of the turbulent market and the uncertain outlook, NORDEN decided to take a conservative approach to the market at the beginning of the year, maintaining average coverage at close to 100% in order to reduce the sensitivity to declining spot rates. Towards the end of the year, NORDEN began taking in new vessels again, particularly in Panamax, to capitalise from the market s momentum. In Tankers, the level of activity and the fleet were almost unchanged, but towards the end of the year, Tankers returned 2 expensively chartered LR1 vessels. Expecting a declining market, Norient Product Pool which operates NORDEN s tanker vessels managed to charter out 9 vessels to solid counterparties for durations of 1-3 years before the market collapsed in March. These agreements reduced the exposure to the poor spot markets and meant that the Company s activities in MR and Handysize were profitable overall. Trimming of order book The future capacity was also adjusted. Since the crisis broke out at the end of Business model Flexible fleet Coverage & customer focus Total capacity Coverage Sale and purchase Technical competences in-house Owned vessels Contracts of Affreightment Customer relations Logistical efficiencies Option-based flexibility 5-7 years firm periods Long-term chartered vessels T/C out 2-5 years firm periods Flexibility Adds scale Arbitrage opportunities Short-term chartered vessels FFA market Spot market Quick and easy coverage People Brand Systems Flexibility is a keyword in NORDEN's business model. The number of short-term chartered vessels can quickly be increased or reduced depending on demand and market outlook, and NORDEN can also choose to employ its vessels in a way which seems most appropriate in the moment and provides the wanted portfolio and risk. Management s review 5

8 6 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review 2008, NORDEN has signed agreements to sell 17 bulk carriers. The vessels were sold in order to release tied-up cash and realise profits as well as to trim the portfolio of owned vessels based on an expectation that it will be possible to contract similar vessels at lower prices in the future. The order book was also reduced. An order for 2 Handysize newbuildings was cancelled, a long-term charter agreement for 4 Post-Panamax vessels was terminated, and NORDEN postponed a few newbuilding orders or obtained the right to exchange orders to other vessel types at market price. These changes were made in agreement with the counterparties. The Company neither contracted newbuildings nor entered into long-term charter parties based on the assumption that dry cargo and tanker asset prices will decline. These measures in combination with new COAs and cash flows from operations meant an almost 50% reduction of the Company s net commitments, including time charter and newbuilding liabilities, and a similar reduction of equity gearing. NORDEN thus has a strong financial basis for future growth. See table on page 7. In addition, the trimming of the order book and returning of expensive vessels meant low and declining fleet costs. The average costs of the known Dry Cargo fleet will be reduced by 27% from 2010 to 2012, and in the Tanker fleet, costs will be reduced by almost 20% over the same period. Counterparty overhaul For Dry Cargo, the first quarter was marked by great uncertainty regarding counterparties in the wake of the global crisis, and in a number of cases, NOR- DEN chose to settle, receiving full or partial compensation from customers unable to meet their contractual obligations. NORDEN chose settlement in cases where the counterparties ability to pay was uncertain or where special circumstances applied. But in a small number of cases, the counterparties proved either unwilling to meet their obligations or offered inadequate settlements, and NORDEN referred those cases to arbitration or legal proceedings. The process of overhauling the Company s counterparty portfolio was completed at the beginning of May, and since then the Dry Cargo Department has had no major new disputes. Tankers did not experience problems with counterparties inability to pay during the year. Overall, the Company assesses that the uncertainty relating to counterparties is significantly lower than at the beginning of 2009, but NORDEN continues its systematic credit assessment of counterparties before contract conclusion and its regular monitoring of counterparties creditworthiness. Such monitoring has been intensified and a number of processes tightened. Partner and customer focus NORDEN places great emphasis on build ing strong, permanent business relationships with customers, shipyards and T/C partners as this provides the best basis for the long-term development of the Company. In this context, it was particularly positive that NORDEN in 2009 entered into several large, long-term COAs with industrial, commodity and energy companies. 6 of the Company s 10 largest COAs were thus entered into in The contracts confirm an increasingly clear trend: customers are seeking stability, security and long-term solutions to their transport needs, and in this connection, NORDEN s position is particularly strong due to its financial strength, its brand and its tradition for cooperation. In 2010, the Dry Cargo Department will again seek to secure long-term COAs, which provide logistical advantages, improve coverage and ensure stable cash flows and earnings, thus reducing risks. Also, the Dry Cargo Department will strengthen its relationships with selected customers through ad-hoc cooperation in sharing cargoes and vessels. From the beginning of the year, the product tanker cooperation with Interorient Navigation Company Ltd. (INC) was extended to include 2 new pools in Dry Cargo, managed by NORDEN, which operate the Company s and INC s Handysize and Post-Panamax vessels. Both pools are off to a good start, and the new vessel type, Post-Panamax, is proving interesting to coal, grain and iron ore customers. NORDEN will continue building up its business in these 2 vessel types in order to obtain the same economies of scale as in Panamax and Handymax. Increasing coverage in Dry Cargo Dry Cargo is focusing on increasing coverage for 2010 and 2011 and lifting the level of activity relative to NORDEN is planning to take in more vessels and operate them in the short end of the market, but based on careful assessments of market outlook and risks. NORDEN s financial strength offers the Company significant opportunities to purchase vessels, order newbuildings and enter into new long-term charter parties, etc. In the short term, the Company is not planning on any major acquisitive action in Dry Cargo, however. Firstly, based on the existing order book, a large number of newbuildings and long-term charters are to be delivered in 2010, and, secondly, NORDEN assesses that the price trend makes it more attractive to put off any further purchases and contracting of vessels. New investments in Tankers In Tankers, NORDEN on the other hand believes that prices are at a level that makes it feasible for the Company to make investments that will yield attractive returns when rates normalise. The Company acquired 3 modern MR product tankers in January 2010 and is exploring further expansion opportunities. The Company already has reasonable business volume in Handysize, and the expansion is therefore mainly expected to be made in the MR vessel type. Coverage for 2010 and 2011 will also be increased as quickly as rates and demand allow. The Company will continue investing in management and staff development and improvement of internal processes and systems to ensure that the organisation is geared to handle the expected increase in business volume. Management s review 6

9 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review 7 Financial position Net commitments almost halved Cash and securities of USD 735 million Interest-bearing debt reduced Strong capital structure NORDEN has come through the macroeconomic turbulence of the past 18 months with a strong capital structure and considerable financial resources. The Company still has large cash holdings and limited bank debt, and at the end of 2009, net interest-bearing assets amounted to USD 672 million, equalling DKK 83 per share. At the end of 2008, net interest-bearing assets amounted to USD 760 million. Including NORDEN s operating lease liabilities, future payments for newbuildings and contractually secured inflows of earnings not included in the statement of financial position, the Company's total net commitments were almost halved during the year from USD 1,401 million to USD 773 million. The reduction is mainly explained by the large number of vessel sales, the conclusion of new long-term COAs, cash flows from operating activities and the cancellation of long-term charter parties for 4 Post-Panamax vessels. The combination of lower net commitments and increased equity during the year reduced NORDEN s gearing to 0.4, against 0.8 at the end of Gearing is the ratio of the Company s net commitments divided by shareholders equity. At the end of the year, NORDEN had cash and cash equivalents of USD 711 million (USD 807 million in 2008) and a portfolio of securities of USD 25 million (USD 22 million in 2008). The figures do not include NORDEN s share of cash and cash equivalents of joint ventures, which totals USD 16 million. The vast majority of cash and cash equivalents are readily available, whereas USD 8 million is tied up as guarantees and deposits received relating to vessels sold. Cash is mainly placed as short-term deposits with major Danish banks in which deposits are covered by a guarantee issued by the Danish government until September Interest-bearing debt was reduced by USD 5 million to USD 64 million. Debt falls due within the next 3 years and relates to 4 product tankers. All other vessels were paid in cash. The Company s solvency ratio at yearend was strengthened to 89% from 83% at year-end Initiatives in 2010 To strengthen its financial flexibility, NOR- DEN has entered into an agreement with BNP Paribas, as organiser, to establish a USD 200 million credit facility with a term of 10 years. The credit facility is guaranteed by the Chinese export guarantee fund, SINOSURE, and is secured on the Company s newbuildings from Chinese shipyards with delivery in The credit facility is expected to be finalised during the second quarter of By virtue of its strong balance sheet and large cash resources, NORDEN is able to meet its liabilities without this credit facility, but it is important to NORDEN to have sufficient financial resources to support the development of the business, and this credit facility provides added flexibility to pursue any of the attractive investment opportunities that may arise in volatile markets. At the beginning of 2010, NORDEN had known net investments of USD 456 million. The amount only includes payments in respect of the newbuildings and sales contracts that had been signed at yearend and thus do not include the purchase of 3 product tankers in January and the sale of 2 bulk carriers in February. Additional purchase, sales and contracting agreements may change the total investment amount. Gearing Net commitments in proportion to booked equity Net commitments at 31 December, USD million Adjusted net interest-bearing assets* Time charter liabilities** -2,199-3,085 Payments for newbuildings less proceeds from vessel sales** Contractually secured inflows of earnings (time charter, COAs)** 1,203 1,736 Net commitments ,401 * Adjusted for prepayments on sale of vessels and currency swaps ** Present value Management s review 7

10 8 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Fleet development Adjustment of the Dry Cargo fleet Core fleet of 50 vessels at year-end 2010 the most busy delivery year ever Adjustment of fleet composition In 2009, NORDEN continued adjusting the composition of the Dry Cargo fleet to the expected market conditions and the need for capacity under the Company's cargo programme. The adjustment process began in earnest in the autumn of 2008 during the period of massive rate drops, when NORDEN returned a large number of chartered vessels as the contracts expired, and only some of these vessels were replaced by cheaper vessels in the market. The process continued in the first half of 2009, albeit at a slower rate, and in the second half, the active fleet was increased as the Company chartered additional vessels to benefit from the surprisingly positive market conditions. The active fleet counted 137 dry cargo vessels at year-end, almost the same number as at the beginning of the year. By first reducing and subsequently increasing the size of the fleet, NORDEN took advantage of the flexibility of the fleet s composition: NORDEN has a core fleet of owned vessels and vessels on long-term charter with purchase option. In addition to these, the Company operates a number of long-term chartered vessels (chartered for approximately 3 years) and a flexible portfolio of short-term chartered vessels, which are continually chartered in or out. The number of these vessels fluctuated over the year between 65 and 90. The degree of flexibility is enhanced Gross fleet, end-period Order book, Dry Cargo Dry Cargo* Q Q Q Order book, Tankers Tankers Q * 25%-30% of active Dry Cargo fleet are single trip vessels Q by the fact that close to 30% of the shortterm chartered fleet consists of vessels chartered for a single voyage. When the voyage is completed, the vessel is returned, and NORDEN is not exposed to the risk of having to continue the journey in a possibly declining market. NORDEN's fleet at 31 December 2009 Vessels in operation Owned vessels 18 A 18 C Chartered vessels with purchase option D Total active core fleet Chartered vessels without purchase option Total active fleet Vessels to be delivered Owned vessels 29 B 38 E Chartered vessels with purchase option Total for delivery to core fleet Vessels chartered over 3 years without purchase option Total for delivery to active fleet Total gross fleet Total chartered with purchase option Sales during the year (delivered) Contracted newbuildings during the year (owned and chartered with purchase option) - 10 Note: NORDEN has changed its definition of core fleet. Going forward, this category only includes owned vessels and chartered vessels with purchase option A Of which 1 unit sold B Of which 3 units 50%-owned, 3 units sold, of this 1 unit 50-owned C Of which 1 unit sold D Of which 6 units sold E Of which 2 units in 50%-owned joint venture, 4 units sold, of this 1 unit in 50%-owned joint venture In Tankers, the active fleet was more stable at between 27 and 29 vessels through out the year. The Company s total active fleet counted 164 vessels at the end of the year 6 fewer than at the end of The gross fleet, which includes vessels for future delivery, was reduced from 258 to 231 vessels. Core fleet development NORDEN has changed the definition of its core fleet, so that it solely comprises the vessels that NORDEN either owns or has an option on. The core fleet is now defined as owned vessels and chartered vessels with purchase option, while long-term charters without purchase option have been eliminated. According to the new definition, the active core fleet counted 53 units at the beginning of the year: 18 owned vessels and 35 vessels with purchase option. During the year, the Company took delivery of 7 owned newbuildings and 8 vessels following declared purchase options. NORDEN also delivered 15 sold vessels to the new ow- Management s review 8

11 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review 9 ners, so the number of owned vessels at the end of the year was unchanged at 18. Overall, the core fleet was reduced by 3 units during the year. Adjustment of order book The order book to the core fleet was reduced from 71 to 57 vessels. This decline was mainly due to vessels being either delivered to NORDEN or sold. In addition, the Company in January cancelled orders for 2 Handysize newbuildings due to delivery problems at the shipyard, and in September, an agreement for the longterm charter of 4 Post-Panamax vessels was cancelled in agreement with the ship owner. During the year, NORDEN has neither contracted newbuildings nor entered into any long-term charter agreements. Initiatives in will be NORDEN s busiest year ever in terms of deliveries. In Dry Cargo, 16 newbuildings and 9 long-term chartered vessels with purchase option are scheduled for delivery, while Tankers will take delivery of 5 long-term chartered vessels with purchase option all newbuildings. NORDEN s order book totals 29 owned newbuildings and 28 vessels with purchase option (27.5 and 27.5 units, respectively, adjusted for share of ownership). 6 of these newbuildings have been sold on delivery from the shipyard, however. In Dry Cargo, most of the additions are in Handymax and Handysize. There are also planned deliveries in the new vessel type, Post-Panamax, where NORDEN expects to take delivery of 5 vessels in 2010 alone. In Tankers, NOR- DEN has 8 MR vessels on order (7.5 adjusted for share of ownership). Expected delivery of the Company's owned newbuilding programme at end-2009 Adjusted for Total ownership share Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Dry cargo vessels Capesize Post-Panamax Panamax Handymax 1 3 A 1 1 A 1 A Handysize Product tankers LR1 MR Handysize Total A Of which 1 unit 50%-owned Expected delivery of the Company's chartered vessels with purchase option at end-2009 Adjusted for Total ownership share Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Dry cargo vessels Capesize Post-Panamax Panamax Handymax Handysize Product tankers LR1 MR Handysize Total Management s review 9

12 10 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Fleet values Theoretical NAV of DKK 268 per share Estimated market value of owned fleet of USD 1.5 billion Value of charter parties with options of USD 468 million Theoretical NAV of DKK 268 per share Based on assessments from 3 independent brokers, the value of the Company s 18 owned vessels and 29 newbuildings on order (6 of which have been sold) at 31 December 2009 is estimated at USD 1,530 million. This estimated market value is USD 103 million, or DKK 13 per share, below the carrying amount and cost of newbuildings. Accordingly, the Net Asset Value (NAV) per share at 31 December 2009 is calculated at DKK 210 per share (excluding the value of charter parties with purchase option), against DKK 227 per share at the end of The Company s charter parties with purchase and extension option are still deemed to be of considerable value totalling USD 468 million, against USD 420 million the previous year. NORDEN s total theoretical NAV, including charter parties with purchase option, at the end of 2009 is thus estimated at DKK 268 per share, against DKK 279 per share the previous year. This corresponds to a fall in theoretical NAV of approximately 4%. However, it should be noted that this valuation is subject to uncertainty in terms of the value of both the Company s owned vessels and its charter parties with purchase option. The uncertainty Theoretical Net Asset Value Note: The chart illustrates total assets calculated at market values. See page 45 regarding the assumptions for valuation. USD million 2,500 2,000 1,500 1, ,219 Dry Cargo fleet 311 Tanker fleet 99 Purchase options Charter parties Other assets 2,170 Total theoretical NAV The total value of charter parties with purchase and extension option is estimated at USD 468 million. NORD IMAGINATION is one of the 60 vessels on which NORDEN has purchase option. Management s review 10

13 Management s review 11 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review mainly relates to the estimates of time charter rates (freight rates), which NOR- DEN uses to calculate the theoretical value of the Company s charter parties with purchase option. See the description under "Financial review Calculating the value of options in theoretical NAV" on page 45 and under "Risk management Vessel price risks (commercial)" on page 63. The method of calculating the value of purchase and extension options has been changed for 2009 compared to 2008, see description on page 45. Comparative figures for 2008 have been adjusted. No impairment of the fleet The estimated market values are USD 76 million and USD 49 million below the carrying amounts and costs of newbuildings in Tankers and Dry Cargo, respectively, excluding joint ventures and assets held for sale. Consequently, NORDEN has tested the vessels for impairment and assessed the carrying amounts and costs relative to the expected cash flows for the remaining useful lives of the vessels. On this basis, the values of vessels or newbuildings were not found to be impaired. See also the description under "Financial review Impairment test" on page 44 and under "Significant accounting policies Impairment test" on page 56. Fleet values (before tax) at 31 December 2009 USD million Owned (active and newbuildings) Calculated value of charter parties with option Purchase Value of Carrying and charter amount/ Market Added Charter extension party and Theoretical Dry Cargo Number cost value* value Number party option option NAV Capesize Post-Panamax Panamax Handymax Handysize Tankers MR Handysize Total 47 1,633 1, DKK per share Equity excl. minority interests per share, DKK 223 Total theoretical NAV per share, DKK 268 * Including joint ventures, assets held for sale and charter parties, if any Number of purchase options that can be declared during the period Segment Total Dry Cargo Capesize Post-Panamax Panamax Handymax Handysize Tankers MR Handysize Total Total strike value USD million ,574.4 Management s review 11

14 12 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Fleet costs Operating expenses reduced by 7.5% Redelivery of expensive dry cargo vessels Decreasing expenses Reducing costs NORDEN has intensified focus on strengthening its competitiveness by cutting fleet costs. The Company believes that effective cost management will become an increasingly important competitive factor, and, as a result, NORDEN is implementing best-in-class procedures on its vessels without compromising safety, environment or quality on board. At the turn of the year 2008/2009, NORDEN launched the Efficient Fleet Management programme, under which costs are systematically benchmarked and processes and procedures reviewed Provisioning is one of the areas where both savings and improvements have been shown as a result of cooperation with an external catering company. to identify areas of potential improvement. In the benchmarking process, NORDEN has for example chosen to hand over the technical management of 2 bulk carriers to V. Ships, a leading player in technical management. The initiatives have improved the transparency of NORDEN s costs and facilitated a direct, vessel-by-vessel comparability of operating figures. The results indicate that NORDEN is generally competitive, but that resources can be saved in certain areas. These include: Optimising procurement processes and focusing on minimising waste Improving planning to minimise overtime work and overtime pay Establish a stock of spare parts for components with long delivery time One example of the work done is the consumption of lubricating oil, which has been reduced by 19%, equalling 130 m 3, on the Company's owned vessels, a measure which has been both financially and environmentally beneficial. The initiatives under the Efficient Fleet Management programme have reduced vessel operating costs by a total of 7.5%. Returning expensive vessels In addition to cost savings on owned vessels, NORDEN has returned expensive chartered vessels and partially replaced them with less expensive vessels in the market. The Tanker Department returned 2 very expensive LR1 vessels, reducing costs in this vessel type by 20%. In the Dry Cargo Department, the cancellation of the agreement to charter 4 Post-Panamax vessels meant that average fleet costs for the entire Dry Cargo fleet were reduced by USD 1,000 per day for 3 years. At the forward prices in force in September, the present value for NORDEN of the cancellation was USD million. Initiatives in 2010 In Tankers, costs of the known fleet will decline steadily from approximately USD 14,500 per day in 2010 to approximately USD 11,500 per day in In normal market conditions, these are competitive levels, but in the present, challenging market, the costs are higher than the 1-year time charter rates in MR and Handysize (source: ACM), and it is thus essential to cut costs further by efficiency improvement measures. On the basis of this, NORDEN continues the work of trimming its fleet and processes. In Dry Cargo, average operating costs of the known fleet will decline from approximately USD 15,000 per day in 2010 to approximately USD 10,000 per day in Compared with the 1-year time charter rate at year-end 2009, average costs for 2010 are lower for all vessel types than the corresponding time charter rates (source: Clarksons), and with a young, competitive fleet, NORDEN is thus in a strong position for the future. Capacity and costs, Dry Cargo Ship days NORDEN's average costs Ship days USD per day 32,000 17,000 30,000 15,000 28,000 13,000 26,000 11,000 24,000 9,000 22,000 7,000 20,000 5, Capacity and costs, Tankers Ship days NORDEN's average costs Ship days 10,000 9,000 8,000 7,000 6,000 5, USD per day 15,000 13,000 11,000 9,000 7,000 5,000 Management s review 12

15 Management s review 13 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Outlook for 2010 Higher level of activity Strict cost control Higher EBITDA than in 2009 Fewer vessel sales Outlook for 2010 (USD million) Dry Cargo Tankers Group EBITDA Profits from the sale of vessels EBIT CAPEX Outlook for the Group For 2010, NORDEN expects a higher operating income (EBITDA) compared to EBIT is expected to be in line with 2009 due to lower profits from known vessel sales and increased depreciation on a growing fleet of owned vessels. The strict cost control will be continued at sea as well as ashore. Operating costs on owned vessels are expected to be in line with 2009, whereas administrative expenses are expected to rise principally due to a few recruitments in order to gear the organisation for a higher level of activity. Expected total EBITDA: USD million (USD 126 million in 2009). NORDEN has signed agreements to sell 6 bulk carriers for delivery and recognition in The sales will generate accounting profits of USD 31 million, USD 5 million of which will be included in "Results of joint ventures". The purchasing and sale of vessels remain an integral part of NORDEN s business. Further sale of vessels will depend, among other things, on price, timing, capacity requirements, ability to replace tonnage sold and an assessment of the development in asset prices. In light of the large number of deliveries of owned vessels in Dry Cargo and based on the current high prices of assets NORDEN is considering adjusting the existing fleet in the short term. Sales activity is expected to be lower than in In 2010, the Company will take delivery of 16 owned new bulk carriers and has also in January expanded the owned Tanker fleet by 3 vessels. Even if NOR- DEN decides to sell more vessels, the owned fleet is expected to grow, resulting in increased depreciation. Taking into account lower profits from the sale of vessels and increased depreciation resulting from a larger number of owned vessels, NORDEN expects an EBIT of USD million (USD 157 million in 2009). Financial items will consist of foreign exchange adjustments arising from the translation of DKK and other currencies to USD and of interest income from NORDEN s significant cash deposits less interest payable on bank debt. Assuming a USD/DKK exchange rate for the entire year of 5.00 and based on the budgeted cash flow, financial items are expected to be positive. The above estimates include no impairment of owned vessels and contracted newbuildings. Impairment may be necessary, however, if the carrying amounts are no longer supported by the expected earnings over the economic lives of the vessels. The cash flow effect of capital expenditure (CAPEX) is expected to be USD million, net. CAPEX consists of investments in newbuildings, etc. of USD million less USD 180 million in proceeds from the sale of vessels. Economic outlook After the sharp global economic downturn in 2009 with declining activity levels in the mature economies in Europe, North America and Japan and with a major reduction of global trade for the first time since the Second World War, the global economy is expected to regain some strength in The uncertainty factors remain stronger than normal, however, and considerable challenges still lie ahead. Massive public spending to soften the blow of the crisis will at some point have to be replaced by tighter fiscal policies. It is questionable to what extent the financial sector will be willing and able to provide the loan markets with additional liquidity. Another factor is the dependence on China, and, finally, it remains to be seen whether consumption and growth will continue once the major financial stimulus packages and subsidy schemes begin to run out. In its January forecast, the IMF expects the global economy to move from negative growth of 0.8% in 2009 to positive growth of 3.9% in This growth will once again be driven by the emerging markets in Asia and South America in general and specifically by China, where the IMF forecasts GDP growth of 10%. But the OECD countries are also expected to contribute to a somewhat stronger economic momentum. The IMF s GDP growth forecast for the OECD countries is just over 2%. Similarly, the IMF expects global trade to grow by 5.8%, measured in terms of volume, relative to a decline of 12.3% for It is particularly important for the tanker market that the recession loses its grip on the USA, Europe and Japan, because a major part of the consumption of oil and refined oil products is historically tied to these regions. The dry cargo market is expected to benefit particularly from China s growth and continued investment in infrastructure and new power plants in the emerging markets, but the gene- Management s review 13

16 14 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review ral growth in global trade and increasing steel production outside China are also expected to have a positive impact on demand. Actual and expected growth in GDP World Non-emerging markets Emerging markets incl. China China % Outlook for Dry Cargo At the beginning of 2010, NORDEN had 29,574 ship days at its disposal. 65% of these were covered, and average earnings for the 19,284 covered ship days were USD 24,523 per day, compared with average costs of USD 14,937 per day Coverage is highest in the large vessel types Capesize, Post-Panamax and Panamax and lowest in the smaller vessel types Handymax and Handysize where rates are traditionally more resilient to market volatility. Coverage is highest in the first quarter, after which it gradually declines. Capacity and coverage will be adjusted on an ongoing basis according to an evaluation of market conditions, and NOR- DEN expects to become more active as an operator of vessels on short-term charter in order to capitalise from market changes. The overall level of activity is expected to be higher than it was in Source: IMF NORDEN expects Dry Cargo s EBITDA to be approximately USD million (USD 139 million in 2009). This expectation includes income from agreement on cancellation of time charter contract (see company announcement no. 6 of 22 February 2010) as well as expected settlement with the Rusal Group (see page 17). Furthermore, the expectation is mainly based on these assumptions: that open ship days can be employed at average rates corresponding to the 1-year T/C rate in each vessel type, calculated at the end of February; that there will be no major new problems with counterparties inability to pay or non-performance of contracts. Based on the forward curve at the end of February, the potential time charter equivalent revenue from uncovered capacity amounted to USD 100 million, corresponding to a 10% drop in freight rates at that date causing a drop in expected earnings in 2010 of USD 10 million, all other things being equal. In January and February, the dry cargo market was relatively strong in the small vessel types, but was slightly weaker in the larger vessel types compared to the fourth quarter of In those 2 months, NORDEN increased both capacity and coverage. At 1 March, NORDEN had 28,500 ship days at its disposal for The first Post-Panamax vessel NORD DELPHINUS went on its maiden trip to South Africa after delivery from the yard in January On 7 February, she loaded around 110,000 tonnes of magnetite ore in Richards Bay and made for Rizhao in China with arrival on 2 March. The charterer was Rio Tinto. Management s review 14

17 Management s review 15 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Development in Dry Cargo's capacity Known capacity at the beginning of the year Development of capacity during the year Ship days 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, the rest of 2010, of which approximately 79% were covered. Market expectations are described on page 22 of this report. Outlook for Tankers At the beginning of the year, NORDEN had 9,653 ship days at its disposal. 41% of these were covered, and average earnings for the 3,989 covered ship days were USD 16,884 per day, compared with average costs of USD 14,290 per day. At 48% and 39%, respectively, coverage was highest in MR and Handysize, and at 9% lowest in LR1, in which segment the Company operates only 1 vessel. Capacity and coverage will be adjusted on an ongoing basis based on an evaluation of the market situation. Following the acquisition of 3 MR product tankers, the overall level of activity is expected to be slightly higher than it was in NORDEN expects Tankers EBITDA to be negative at approximately USD 5-25 million (USD -4 million in 2009). This ex- Capacity and coverage at 31 December 2009 Dry Cargo Ship days Costs and revenue (USD per day) Gross capacity Costs for gross capacity Capesize 1,825 1,825 1,737 11,822 11,388 11,388 11,147 8,979 Post-Panamax 1,006 2,192 2,914 37,720 6,987 10,376 12,409 10,301 Panamax 8,928 5,170 5,045 27,378 17,674 11,258 11,144 8,015 Handymax 11,169 10,554 10,791 59,819 15,512 13,685 12,088 8,456 Handysize 6,646 9,231 10, ,208 12,469 9,641 9,218 6,148 Total 29,574 28,972 31, ,947 14,937 11,569 10,927 7,619 Coverage Revenue from coverage Capesize 1,352 1, ,761 46,666 65,394 65,825 Post-Panamax ,657 22, Panamax 9,262 3,049 2,104 5,147 24,193 26,901 24,326 23,842 Handymax 7,298 4,129 2,842 4,113 21,064 21,047 23,391 14,632 Handysize ,815 12,341 10,797 10,345 11,862 Total 19,285 9,612 5,970 14,542 24,523 26,634 28,233 18,619 Net capacity Capesize ,005 11,355 Post-Panamax 281 1,467 2,914 37,720 Panamax ,121 2,941 22,231 Handymax 3,871 6,425 7,949 55,706 Handysize 5,998 8,982 10, ,393 Total 10,289 19,360 25, ,405 Coverage in % Capesize 74% 80% 42% 4% Post-Panamax 72% 33% 0% 0% Panamax 104% 59% 42% 19% Handymax 65% 39% 26% 7% Handysize 10% 3% 3% 4% Total 65% 33% 19% 6% NORDEN calculates costs per day for the known fleet as follows: costs of owned vessels are based on expected daily running costs. Thus, the total average costs show the expected cash costs per day of the known fleet. As of 1 January 2010, NORDEN operates its Post-Panamax and Handysize vessels in new pools. NORDEN's revenue and coverage in these vessel types are affected hereof because the figures show NORDEN's share of the pools' total revenue and coverage. Management s review 15

18 16 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review pectation is based, among other things, on these assumptions: that open ship days can be employed at average rates corresponding to the 1-year T/C rate in each vessel type at the end of February; Development in Tankers' capacity Known capacity at the beginning of the year Development of capacity during the year Ship days 12,000 10,000 8,000 6,000 4,000 2, that counterparty risk will not constitute a major problem due to the strong customer base of Norient Product Pool consisting of major oil companies and international oil traders. Based on the forward curve at the end of February, the potential time charter equivalent revenue from uncovered capacity amounted to approximately USD 50 million, corresponding to a 10% drop in freight rates at that date causing a drop in expected earnings in 2010 of USD 5 million, all other things being equal. In January and February, the product tanker market was characterised by strong demand as a result of the cold winter weather in Northern Europe and the USA, which experienced a real ice winter for the first time since 2003, resulting in premiums on the rates of iceclass vessels. NORDEN assesses this to be a seasonal phenomenon and expects the market to be challenging for the rest of the year. At 1 March, NORDEN had approximately 9,000 ship days at its disposal for the rest of 2010, of which 43% were covered. Market expectations are described on page 28 of this report. Events after the balance sheet date After the balance sheet date, NORDEN has acquired 3 modern MR product tankers for delivery in March-April. In addition, the Company has sold the 10-yearold Capesize, NORD-KRAFT, for delivery in the second half of 2010 as well as the new Handymax bulk carrier, NORD BRIGHT, upon delivery from the shipyard at end-april, at which time the Company will lease back the vessel on a 3-year time charter at market level. The selling prices slightly exceed the brokers assessments. Capacity and coverage at 31 December 2009 Tankers Ship days Costs and revenue (USD per day) Gross capacity Costs for gross capacity LR ,950 16,967 15,500 0 MR 3,475 4,931 4,244 32,361 15,219 14,603 13,812 11,382 Handysize 5,813 3,570 3,273 42,893 13,187 9,591 8,717 7,954 Total 9,653 8,866 7,529 75,254 14,477 12,682 11,599 9,428 Coverage Revenue from coverage LR , MR 1,673 1, ,206 17,536 17,852 0 Handysize 2, ,754 15,726 13,396 0 Total 3,989 1, ,884 16,801 14,305 0 Net capacity LR MR 1,802 3,900 4,193 32,361 Handysize 3,529 2,866 3,076 42,893 Total 5,664 7,131 7,281 75,254 Coverage in % LR1 9% 0% 0% 0% MR 48% 21% 1% 0% Handysize 39% 20% 6% 0% Total 41% 20% 3% 0% NORDEN calculates costs per day for the known fleet as follows: costs of owned vessels are based on expected daily running costs. Thus, the total average costs show the expected cash costs per day of the known fleet. Management s review 16

19 Management s review 17 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Proceeds from the 2 vessel sales constitute cash funds totalling USD 80 million. In addition, the Company has concluded 2 significant agreements, which affect expectations of income for These regard an agreement on cancellation of a Panamax charter party against cash payment (as stated in company announcement no. 6 of 22 February 2010) and a settlement with RTI Ltd., a subsidiary in the Rusal Group, after which the Company will receive a cash payment of USD 23 million and an attractive contract of 2 million tonnes of cargo against withdrawing further claims against RTI Ltd. The claims which NORDEN had legitimate expectations of pleading against RTI Ltd. amounted to USD million, calculated in February The Company has assessed that it would be most expedient to settle disagreements outside the court room. It is also positive that the Company can maintain commercial relations to a large player within bulk transportation. Furthermore, NORDEN has entered into an agreement to establish a USD 200 million credit facility in order to enhance the flexibility of its financial resources. No other significant events have occurred between the balance sheet date and the publication of this annual report that have not already been included and adequately disclosed in the annual report and that materially affect the Company s results of operations or financial position. Forward-looking statements This annual report contains certain forward-looking statements reflecting management s present judgment of future events and financial results. Statements relating to 2010 and the years ahead are inherently subject to uncertainty, and NORDEN s realised results may therefore differ from the projections. Factors that may cause NORDEN s realised results to differ from the projections include, but are not limited to: changes in macro-economic and political conditions (particularly in the Company's principal markets), changes to NORDEN s rate assumptions and operating costs, volatility in rates and tonnage prices, regulatory changes, counterparty risks, any disruptions to traffic and operations as a result of external events, etc. This annual report should not be interpreted as a recommendation to purchase or sell shares in Dampskibsselskabet NORDEN A/S. Management s review 17

20 18 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Dry Cargo Market: Volatile market, but rates above expectations Record demand from China Only about 60% of order book was delivered NORDEN: High coverage rate and strict cost control Challenges with counterparties early in the year EBITDA of USD 139 million as expected Management s review 18

21 Management s review 19 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Key figures and ratios (USD million) Revenue 1,516 4,002 EBITDA Profits from the sale of vessels EBIT Non-current assets EBITDA margin, % 9% 11% EBIT margin, % 12% 17% Average number of employees Number of ship days 45,945 68,172 NORDEN's Dry Cargo fleet at 31 December 2009 Vessel type Capesize Post-Panamax Panamax Handymax Handysize Size (dwt.) >150, , , , ,000 Length (meter) Main cargoes iron ore, iron ore, iron ore, iron ore, cement, coal coal coal, coal, steel, steel, salt, grain, bauxite, petcoke, bauxite alumina, cement Vessels in operation Owned vessels A Chartered vessels with purchase option Total active core fleet Chartered vessels without purchase option Total active fleet Vessels to be delivered Owned vessels B Chartered vessels with purchase option Total for delivery to core fleet Chartered vessels without purchase option Total for delivery to the active fleet Total gross fleet Total chartered with purchase option Global fleet (no.) 955 n.a. 1,631 1,865 2,861 7,312 7,007 On order, global fleet (no.) 733 n.a ,120 3,435 Source: Clarksons Note: NORDEN has changed its definition of core fleet. Going forward, this category only includes owned vessels and chartered vessels with purchase option A Of which 1 unit is sold B Of which 3 units 50%-owned, 3 units sold, of this 1 unit 50-owned Management s review 19

22 20 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Market developments in 2009 Since the collapse of the global freight markets in the autumn of 2008, the dry cargo market improved quarter by quarter in 2009, although it remained low compared with recent years. Thus, the Baltic Dry Index for the full year was 59% below the 2008 average. Freight rates remained very volatile, but not to the extent seen the previous year. The 1-year T/C rate for Panamax vessels thus began the year at approximately USD 10,000 per day and more than doubled in the first half of The T/C rate then fell again up to August, then rose again, ending the year at approximately USD 24,000 per day. By comparison, the 1-year Panamax rate was USD 80,000 per day in the summer of Vessel prices also reflected certain signs of optimism. For example, the price of a 5-year-old Panamax vessel rose from approximately USD 27 million at the beginning of the year to approximately USD 33 million towards the end of the year. China s demand for commodities for its steel industry, in particular, was the main reason for the overall market being better than expected. China s imports of iron ore rose by 170 million tonnes or some 40%, while coal imports rose by 80 million tonnes or some 160% (source: R.S. Platou). Overall, Chinese imports of bulk commodities rose by 39%, and China accounted for some 40% of the global dry cargo market. Grouping of dry cargo market (import) Western Europe 16% Other Asia 16% Kilde: R.S. Platou USA Other India 2% 3% 5% China 40% Japan 18% China s record imports was a key factor in the unchanged global demand for dry cargo transport relative to 2008, whereas the consensus at the beginning of the year was an expected 3-4% decline. Supply rose by approximately 10% (source: R.S. Platou), which was somewhat below expectations. The shipyards delivered just 42 million dwt. of new vessels, against a planned 72 million dwt., which meant that 42% of the known order book was not delivered. This was explained by financing problems among shipyards and shipping companies, technical problems among green-field shipyards and by orders being deferred. Another factor was over-reporting by shipyards, meaning that a portion of the official order book was not real. Scrapping also contributed to the global fleet s lower-than-expected net growth. In the first 2 months alone, 9.9 million dwt. or some 2.4% of the global fleet was scrapped, although the number of scrappings receded as the market regained strength. Throughout the year, bottleneck problems in ports were at an average level, with some 4% of the global fleet being in waiting position (source: R.S. Platou). NORDEN in 2009 In light of the turbulent markets and uncertain outlook, NORDEN chose a conservative market approach to ensure predictable earnings. The main focus at the beginning of the year was thus on trimming the fleet and costs and on reducing exposure to the volatility in the major vessel types. Fleet coverage was near 100% for most of the year, but with excess coverage in Handymax and Panamax and available capacity in Handysize. Consequently, the rising freight rates in Handymax and Panamax and unchanged rates in Handysize adversely impacted earnings to some extent at the beginning of the year. Towards the end of the year, the Company increased its operator activity, particular- Baltic Exchange Dry Index BDI Average Handymax and Panamax T/C rates 1-year T/C rate, 52,000 dwt. Handymax 1-year T/C rate, 74,000 dwt. Panamax Secondhand Handymax and Panamax prices 5-year Handymax, 52,000 dwt. 5-year Panamax, 74,000 dwt. 14,000 12,000 10,000 8,000 6,000 4,000 2, Source: Baltic Exchange USD per day 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, Source: Clarksons USD million Source: Baltic Exchange Management s review 20

23 Management s review 21 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Employment and rates, Dry Cargo Number of ship days (T/C equivalent (USD per day) incl. single Spot T/C NORDEN 2009 voyages, NORDEN NORDEN average T/C vs. spot Capesize 1,903 54,035 42,656 27% Panamax 18,272 26,067 19,295 35% Handymax 19,122 20,716 17,338 19% Handysize 6,648 11,041 11,342-3% Capesize T/C rates Panamax T/C rates NORDEN Baltic Exchange, spot NORDEN Baltic Exchange, spot above the spot market (source: Baltic Exchange). NORDEN carried 42.1 million tonnes of cargo approximately 10 million tonnes less than last year as a direct result of the decision to reduce the number of ship days, and thus the level of activity. Coal accounted for 47% of transports (37%), and salt and grain transports also rose proportionately, while bauxite and other cargoes were reduced. USD per day 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Handymax T/C rates NORDEN USD per day 25,000 20,000 15,000 10,000 5,000 0 Q Q Q Baltic Exchange, spot Q Q Q Q Q USD per day 30,000 25,000 20,000 15,000 10,000 5,000 0 Handysize T/C rates NORDEN USD per day 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Q Q Q Baltic Exchange, spot Q Q Q Q Q Approximately 17% of the volumes transported by the Company s vessels were destined for China for example coal from Indonesia, coal and iron ore from Australia and India and grain from the USA. After China, NORDEN s largest markets, measured in terms of discharged volumes, are the USA, India, Taiwan and Spain, and these 5 markets combined accounted for approximately 43%. Measured in terms of loaded volumes, NORDEN s 5 major markets are Indonesia, Australia, the USA, Chile and Columbia. Therefore, the Company retains a good, healthy geographical diversification of its activities. During the year, NORDEN entered into several major, long-term COAs. The most significant of these was a 15-year contract with a subsidiary of the German energy group, RWE Innogy, to transport up to 12 million tonnes of bio fuel across the Atlantic. Covering 30 annual cargoes and approximately 8,000 ship days, the contract represents a break-through in ly in Panamax, in order to capitalise on the favourable markets. Rising rates in Handysize also boosted NORDEN s open ship day earnings in this vessel type. of slimming the Company s counterparty portfolio was completed in May, and since then the Company has experienced no major new disputes. Transports - Dry Cargo Department, 2009 Other 21% Coal 47% The first quarter was marked by great uncertainty with respect to counterparties, and NORDEN therefore chose to make a number of settlements ensuring the Company full or partial compensation from customers defaulting on their contracts. A few cases were referred to arbitration or legal proceedings. The process EBITDA amounted to USD 139 million, against expected USD million. Earnings were generally significantly above market levels. The T/C equivalent in Handymax was thus USD 20,716 per day, which was 19% above spot rates, whereas Panamax with average daily earnings of USD 26,067 performed 35% Grain 7% Iron ore 7% Cement and clinker 8% Salt 10% Management s review 21

24 22 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Handysize, which is normally mostly employed in the spot market. NORDEN's most important trades and markets Largest loading countries Largest discharging countries Largest discharging and loading countries 6 of NORDEN s 10 largest COAs were entered into in 2009, and this is an indication that customers are increasingly seeking stability and security when covering their transport needs. NORDEN s financial strength, its name and its tradition for partnerships give the Company an advantage with customers seeking to close long-term contracts. And the contracts provide stable cash flows for the Company as well as an opportunity to optimise its logistics. Market developments in 2010 NORDEN expects the demand for dry cargo transports to rise in 2010, mainly driven by China, but also by moderate positive growth in the rest of the world. The market is expected to turn volatile again with average rates in line with 2009, but the uncertainty remains higher than normal due to the historically high but doubtful order book. Demand will remain dependent on China, which is expected to have a high level of economic growth. A large proportion of the stimulus packages and the recordhigh bank loans are earmarked for investments in infrastructure and construction. The government is also expected to give high priority to industrial production, which requires imports of commodities. China s own production of iron ore and Global seaborne trade Other Grain Steel Coal Iron ore Million tonnes +9% 3,500 3,000 2,500 2,000 1,500 1, E Source: R.S. Platou 10 largest COA contracts, end-2009 Million tonnes Duration Customer Contract year Commodity (up to) (years) Asian energy company 2008 Coal European energy company 2009 Wood Pellets Asian coal mining company 2009 Coal Asian energy company 2009 Coal American construction company 2009 Aggregates South American shipping company 2009 Salt Asian energy company 2007 Coal European power company 2008 Coal South American shipping company 2008 Salt Russian coal producer 2009 Coal coal is of an inferior quality to the imported commodities, and with the closure of many small coal mines and the continual consolidation of the steel industry in the coastal regions of south-eastern China, imports of iron ore and coal are expected to grow again, however, not at the rates seen in The rest of the world is also expected to contribute more to the demand after the steel industries outside China began to show indications of growth again towards the end of As only 58% of the planned deliveries from yards were realised in 2009, growth in the global fleet is subject to major uncertainty. It is estimated that only 40% of the total order book had been financed at the turn of the year, and continued difficulties in obtaining financing will be of added importance in 2010, when many of the most expensive newbuilding contracts are scheduled for delivery (source: Nordea). According to the known order book, approximately 125 million dwt. of new vessels are scheduled for delivery from shipyards, about half of them Capesize vessels and just some 10% are Handysize vessels (source: Clarksons). The Handysize vessels in particular were commonly contracted from newly established yards, and this type of vessel is therefore expected to be more prone to cancellations than the larger vessel types. NORDEN in 2010 NORDEN started the year with 29,574 ship days, 65% of which have been covered. Coverage is highest in the first quarter, after which it gradually declines. Management s review 22

25 Management s review 23 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Capacity and coverage will be adjusted on an ongoing basis according to an evaluation of market conditions, and NORDEN expects to be more active as an operator of vessels on short-term charters than was the case in A number of vessels will be added to the core fleet, including 16 newbuildings, 7 of these in Handysize, the vessel type in which NORDEN has most orders. In light of the large number of deliveries of owned vessels and based on the current high prices of assets NORDEN is considering reducing the existing fleet in the short term, before becoming more acquisitive in the long term. In January, NORDEN and INC entered into 2 new pool arrangements in Handy- Scheduled vs. actual deliveries Scheduled deliveries Actual deliveries Short fall Million dwt Q Q Source: R.S. Platou Q Q Q Q size and Post-Panamax. By virtue of the pool partners' order book, the new NOR- DEN Handysize Pool and NORDEN Post- Panamax Pool will obtain critical mass, Q Q Q Q Q Short fall % Q ensuring significant economies of scale, a wider geographical coverage and more flexible offering of services to customers. Perspectives of the trends which NORDEN expects to affect the future structure in the dry cargo market Historically low barriers to entry in the dry cargo market Financing, which was easily obtainable until 2008, is expected to be the main barrier against new investments Suppliers Competition Great uncertainty regarding size of order book and shipyards ability to deliver 40-50% of existing order book for is expected not to be delivered Entry barriers Due to the high rates in , dry cargo transports became a strategic asset, which large customers, in particular, have since sought to hedge in the long term Strong competition in a closely balanced market Market may be split into smaller segments with operators of varying degrees of quality Counterparty risks will be in focus NORDEN is one of a few blue chip companies most often shortlisted for major COAs NORDEN has sufficient financial strength to capitalise from potential market opportunities Customers Effect of substitution The world's 3 largest mining companies contracted many new vessels in However, these newbuildings account for just approximately 3% of the total order book It is estimated that there are no alternative means of transport, which can replace bulk carriers to a significant degree Source: NORDEN, inspired by Professor Michael Porter. The overview is not comprehensive and will not be representative in all situations. Management s review 23

26 24 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Tankers Market: Very low rates most of the year Weak demand due to global crisis Strong growth in global fleet NORDEN: Good coverage secured before rates dropped Cost control and efficiency improvements EBITDA negative at just under USD 4 million Management s review 24

27 Management s review 25 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Key figures and ratios (USD million) Revenue EBITDA Profits from the sale of vessels 0 36 EBIT Non-current assets EBITDA margin, % -2% 27% EBIT margin, % -11% 40% Average number of employees Number of ship days 10,006 9,276 NORDEN's Tanker fleet at 31 December 2009 Vessel type LR1 MR Handysize Size (dwt.) 60-75, , ,000 Length (meter) Main cargoes fuel and fuel and fuel and heating oil, heating oil, heating oil, gasoline, gasoline, veg. gasoline, diesel, oil, diesel veg. oil, jet fuel, naphtha diesel Vessels in operation Owned vessels Chartered vessels with purchase option Total active core fleet Chartered vessels without purchase option Total active fleet Vessels to be delivered Owned vessels Chartered vessels with purchase option Total for delivery to core fleet Chartered vessels without purchase option Total for delivery to active fleet Total gross fleet Total chartered with purchase option Global fleet (no.) ,225 1,824 On order, global fleet (no.) Source: SSY Note: NORDEN has changed its definition of core fleet. Going forward, this category only includes owned vessels and chartered vessels with purchase option Management s review 25

28 26 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review NORD BELL is one of the Company's 8 owned Handysize vessels here calling into Prøvestenen in Copenhagen. Market developments in 2009 At the beginning of the year, the market was relatively unaffected by the economic crisis, and seasonal demand provided a solid foundation supporting the rates. In January-February, MR spot rates stood at USD 20,000 per day (source: ACM), but in March, rates took a serious dive and for a long period remained below or equal to vessel operating costs. It was not until the end of the year that rates turned around again, driven by increased economic activity and higher demand as a result of the cold winter weather in large consumer areas such as the USA and Europe. The 1-year T/C rate for MR vessels began the year at USD 21,000 per day, bottomed out in November at approximately USD 11,500 per day and ended the year at USD 12,500 per day. Overall, the mar- ket as measured by the 1-year MR T/C rate was down by 39% relative to 2008 (source: ACM). Vessel prices fell throughout the year in limited trading activity. The price of a 5-year-old MR vessel fell from approximately USD 41 million at the beginning of the year to approximately USD 24 million towards the end of the year (source: Baltic Exchange), and the price more than halved since its peak in Baltic Clean Tanker Index BCTI Average Secondhand prices for modern MR tanker 5-year MR tanker, 47-48,000 dwt. MR and Handysize T/C rates 1-year T/C rate, 47-48,000 dwt. MR 1-year T/C rate, 37,000 dwt. Handysize USD million USD per day 2, ,000 2,000 1,500 1, ,000 25,000 20,000 15,000 10,000 5, Source: Baltic Exchange Source: Baltic Exchange Source: Clarksons Management s review 26

29 Management s review 27 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Temporary floating product storage Million barrels April December 2009 Source: IEA Global oil consumption fell in the first and second quarters and then began showing weak signs of growth again, driven by Asia and in particular China, but also by the massive financial stimulus packages. Demand rose from approximately 84.1 million barrels per day in the second quarter to 85.7 million barrels per day in the fourth quarter (source: IEA Jan). For the year as a whole, global oil consumption was approximately 1.5% lower than in 2008, however. The declining oil demand was to some extent offset by rising demand for vessels for use as floating oil storage facilities. This was directly linked to a contango price structure, which meant that the price of oil for future delivery was higher than the current spot market prices. In the first half-year, mainly crude oil was held in floating storage facilities, but over the summer months, gasoil was increasingly stored on board product tankers and new crude oil tankers. At the end of the year, it was reported that almost 100 million barrels of oil or more than 1 day s global consumption were held in floating storage facilities (source: IEA). The total tanker fleet grew by approximately 8%. In Handysize and MR combined, the fleet grew by approximately 7.8% (source: SSY), but this covers a negative development in Handysize and sharp growth in MR, in which a little over 2 new vessels a week were delivered throughout the year. Despite the poor rates, scrapping of older tonnage was relatively limited, but grew over the year. In the fourth quarter alone, approximately 3.4 million dwt. were scrapped, equalling approximately 1% of the tanker fleet (source: Clarksons). The increase in the effective tanker capacity was also limited by the fact that many vessels slowed down their speed slow steaming in order to save fuel and make voyages more economical. But neither lower speed nor the use of tonnage as floating storage facilities were enough to offset the declining demand and the sharply increasing supply of tonnage, and the market thus remained extremely challenging. NORDEN in 2009 Expecting weaker market conditions, Norient Product Pool which operates NORDEN s tankers managed to enter into a number of agreements with solid counterparties before the market collapsed in March. These agreements significantly increased the coverage for the year, but at the end of March, just over half of the pool s capacity was nonetheless exposed to the ailing spot market. The challenging markets affected Tanker earnings, and EBITDA was negative in the amount of almost USD 4 million, against expected USD -5 million. Unlike Dry Cargo, the Tanker Department did not have any disputes with counterparties unable to honour agreements. NORDEN s activities in MR and Handysize were profitable, and in both vessel types, NORDEN performed above market level with daily earnings of 23% and 30% above the 1-year T/C rates, respectively. But the good performance in MR and Handysize was overshadowed by losses in LR1, as all 3 chartered vessels in this vessel type were employed in the spot market. The 3 vessels were chartered in mid-2008 at charter hires significantly above the low spot rates in 2009, and 2 of the vessels were returned when the contracts expired towards the end of the year. NORDEN still believes that it is right for the Company to operate in these larger product tankers, and the activity will be stepped up again once the markets turn around. LR1 T/C rates MR T/C rates Handysize T/C rates NORDEN ACM, 1-year T/C rate NORDEN ACM, 1-year T/C rate NORDEN Baltic Exchange, spot USD per day USD per day USD per day 25,000 25,000 25,000 20,000 20,000 20,000 15,000 15,000 15,000 10,000 10,000 10,000 5,000 5,000 5,000 0 Q Q Q Q Q Q Q Q Q Q Q Q Management s review 27

30 28 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Capacity utilisation in Norient Product Pool Ship days, laden 3,028 4,513 7,328 9,982 9,648 Ship days, ballast 731 1,035 1,747 2,054 2,020 Total number of ship days 3,759 5,548 9,075 12,036 11,668 Capacity utilisation 81% 81% 81% 83% 83% The total number of ship days in the pool was reduced by 3%, and NORDEN s operative Tanker fleet was reduced by 1 unit to 27 vessels at year-end. The capacity utilisation in the pool remained high at 83%, and just 17% voyages without cargo is a highly satisfactory level in a market with declining demand and fewer cargoes. In the difficult markets, Norient Product Pool focused on trimming costs, improving processes and systems and tightening up its management of outstanding claims. For example, the pool rolled out a new IT platform, which is to improve communication between operators, vessels, customers and agents. This platform will also enable the pool to optimise fuel consumption, reduce the number of waiting days and minimise CO 2 emissions. The pool transported 19 million tonnes of liquid cargo, and at 46% (48%), fuel oil was once again the most important commodity, followed by gasoil and gasoline. Transports - Norient Product Pool, 2009 Jet fuel 4% Naphtha 7% Other 13% Fuel oil 46% Market developments in 2010 The tanker market is expected to remain difficult in Global demand for oil and refined products is also expected to rise as the global economies return to profitable growth. The IEA expects global oil demand to rise by approximately 1.8%, particularly aided by China and India (source: IEA Feb 2010). Another positive factor in the demand for tanker tonnage is still expected to be the longer transport distances that result from the fact that new, efficient refineries in Asia are outperforming older refineries in the OECD countries. The major unknown factor is the extent to which the planned order book is delivered. SSY estimates that approximately 74% of the order book in NORDEN s vessel types LR1, MR and Handysize were delivered according to plan in 2009, with a clear tendency towards increasing numbers of deferred and cancelled orders as the year progressed. This tendency is expected to be strengthened in 2010 due to the difficulties in obtaining financing from banks or in the financial markets. At year-end, the tanker order book totalled approximately 135 million dwt., equal to approximately 31% of the existing global tanker fleet. In NORDEN s vessel types, the order book was approx imately 21 million dwt., or 24% of the existing fleet. Another factor that could reduce tanker fleet growth is the phasing out of single-hulled vessels. IMO rules dictate that these vessels are to be phased out from 2010 unless their owners obtain dispensation from flag and port states. Single-hulled vessels still make up some 12% (source: Clarksons) of the total tanker fleet, and indications from the countries particularly using single-hulled tonnage are increasingly clear that not many dispensations will be given. Older single-hulled vessels are already difficult to employ, but an accelerated phase-out could help the market regain balance sooner between supply and demand. NORDEN in 2010 NORDEN started the year with 9,653 ship days, 41% of which have been covered at reasonable rates. Capacity and coverage will be adjusted to market conditions and outlook on an ongoing basis. With its strong financial position and solid market position through Norient Product Pool, the third largest pool in the world, NORDEN is in a strong position to cope with the challenging market. The pool s vessels are all modern, efficient and double-hulled, and many of them are ice-class vessels, which can operate in areas where standard vessels cannot get through in the winter season. The pressure on vessel prices provides NORDEN with good opportunities to increase activities. In January, the Company acquired 3 modern MR vessels, and this investment is expected to generate an attractive return as freight rates normalise. When the 3 vessels are delivered, NORDEN will operate 31 vessels, 12 of them owned, and the pool will operate 63 vessels. NORDEN will pursue Gasoline 13% Expected fleet growth 2010 Gasoil 18% Fleet size Share single- Order book Expected Vessel type (million dwt.) hull (%) (million dwt.) growth (%) LR % MR % HDY % Source: SSY Management s review 28

31 Management s review 29 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review other opportunities to increase its activities in a market in which the underlying factors for long-term demand are intact: The trend among OECD countries is towards stricter rules on sulphur contents, etc. in gasoline and other distilled products. These demands cannot be met by the refineries in the local regions, where plants are being closed down, and refineries are reluctant to invest because they are under pressure from newer, more efficient refineries east of the Suez Canal. Europe and the USA are therefore forced to import high-specification products from the Middle East and Asia. European refineries, on the other hand, are able to export their products to other regions. Employment and rates, Tankers NORDEN 1-year Number of ship days, T/C equivalent T/C rate NORDEN T/C 2009 NORDEN (USD per day) (USD per day) vs. 1-year T/C LR ,501 18,498-16% MR 2,465 17,355 14,077 23% Handysize 6,602 16,924 13,014 30% Perspectives of the trends which NORDEN expects to affect the future structure in the tanker market Strict requirements from oil companies to operators and owners regarding technical factors, quality, safety, maintenance and training This trend is expected to make it increasingly difficult for smaller operators to penetrate the market Financing, which was easily obtainable until 2008, is expected to be the main barrier against new investments Suppliers Competition Less uncertainty about order book than in dry cargo. Most orders are placed with established shipyards 10-15% of orders are expected to be cancelled In the long term, the market balance could improve as, in 2009, new orders in NORDEN s vessel types only amounted to 0.6 million dwt. (source: Clarksons) Entry barriers Competition expected to be severe, and many vessels expected to be added to the fleet Customers will focus strongly on monitoring quality and safety As a first-rate operator of modern vessels, NORDEN will be well positioned with advanced systems to optimise operations Effect of substitution Oil trading is expected to maintain a positive impact on the market, driven by price structures and different specification requirements With a no-risk approach, major oil companies will prefer using first-rate owners and operators Customers are expected to demand very high minimum standards of the shipping companies Customers The major oil companies control product tanker fleets themselves Climate considerations may affect demand for oil transports if oil is substituted by alternative energy sources Source: NORDEN, inspired by Professor Michael Porter. The overview is not comprehensive and will not be representative in all situations. Management s review 29

32 30 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Organisation and capabilities Adjustment of organisation Optimisation of systems and processes Hiring of new employees planned for 2010 Employee development ashore The organisation was adjusted during the year. In the wake of the crisis in the dry cargo market and the prospects of a lower level of activity, NORDEN in January laid off 37 employees and offered 8 employ ees other jobs in the Company. Those made redundant were released from service at once, maintaining their salary and employment terms throughout the period of notice, received redundancy pay equalling 3 months notice and were offered individual career counselling. When the level of activity started to rise again, and the dry cargo market recovered, new employees were hired, so that the organisation at year-end counted 216 employees, against 248 at the end of To this should be added 36 employees in Norient Product Pool. Apart from the layoffs in January, the retention rate was satisfactory, and the Company experienced no difficulties in recruiting suitable candidates. Average workforce Recruitment of trainees 4 trainees were hired under the international programme, which was launched in The marketing aimed at young candidates happens indirectly through the Danish Shipowners Association Blue Denmark campaign and directly Intake of trainees and apprentices Shipping trainees Number of people Apprentice officers As part of the effort to attract and retain seamen, welfare on board was enhanced through various measures. These included the installation of satellite TV and broadband/ip telephony on several vesthrough, for instance, the Company s own job adverts, meetings, visits to trade fairs and schools as well as through the website, In China, Singapore and the USA, trainees are recruited from maritime training institutions. 5 Danish and 3 international trainees completed their training in 2009, and 7 of these continued on with the Company. At year-end, the Company had 13 trainees in Denmark, the USA and Singapore. Employee development at sea At the end of the year, the Company had 376 officers and seamen, against 424 at the end of To this should be added 201 Philippine seamen on shore in the pool run by a dedicated NORDEN team from a recruitment office in Manila. The seamen in the pool sign on to NORDEN s vessels exclusively, but according to local collective agreements, they do not receive a service contract until they actually sign on. The Company s investment in training its own officers continued. The Company hired 7 new students from Svendborg International Marine Academy (SIMAC) and Marstal Navigationsskole (MARNAV) (Marstal Maritime Education Centre) and now has 30 apprentice officers at SIMAC and MARNAV. In the Philippines, NOR- DEN collaborates closely with the Holy Cross Davao College, where NORDEN focused on the many cadets with whom contact had already been established. 15 cadets are close to completing their training onboard. In addition, NORDEN is sponsoring 20 cadets, who are expected to sign on to vessels once they pass their exam from the Holy Cross Davao College. Sea-based staff Head office Overseas offices Number of people trainees are enrolled in education in the USA, Singapore and here at the head office in Denmark. Management s review 30

33 Management s review 31 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Retention rate, officers Danish Philippine Total % sels as well as sports facilities on board newbuildings. NORDEN also offers health care insurance and training opportunities to Philippine seamen, and these welfare measures proved effective in the fierce global demand for officers. Measured over a 2-year period, NORDEN s retention rate measured according to the OCIM s TMSA2 standard was 78% for officers and higher for senior officers, but this standard does not take into account that in companies such as NORDEN which regularly purchase and sell vessels, there is a greater number of crews signing on and discharging. Competences and systems Systems and processes were strengthened in order to achieve a more efficient, scalable business. In Dry Cargo, work processes relating to port settlements were outsourced to an external business partner, and a number of processes in Operations were optimised. In Tankers, Norient Product Pool developed a new digital log book, MOEPS, where operators and vessels report voyage and port call PSC - Deficiencies per inspection Q Q Q data to a shared on-line platform, where the information will also be accessible to charterers, agents and ports. The Glomaris/Navision ERP system was updated, and massive training was conducted in its use and in the utilisation of business intelligence data. Also, the roll-out of the communication system BusinessMail (Outlook) was completed, the database servers were upgraded and consolidated, and, finally, a video conference system is in the process of being rolled out at the offices. The Human Resource Department, among other things, focused on basic management training, all employees had their job descriptions updated and the appraisals system was strengthened. At sea, tanker vessels have focused especially on vettings, at which the Company traditionally receives very few remarks, but oil companies appear to be developing more rigid views. A new programme was therefore launched in order to further improve quality. The programme includes compulsory audits before the inspection, computer-based training, seminars, a direct relationship between performance and officers salaries and cash rewards to crews doing particularly well. The program seems to be paying off in the form of fewer remarks. Quality and safety are also high, judging by the number of remarks that the vessels receive at Port Stay Controls. The number for the full year was unchanged, but there is a clear downward trend, which is satisfactory. Initiatives in 2010 The organisation will be extended to accommodate the planned growth of the business. Ashore, new charterers and operators will be hired, and NORDEN expects to recruit some 10 new trainees, 6 of these at the overseas offices. At sea, the Company plans to hire new senior officers, and 22 junior officers will complete their training. The flag strategy will be continued with emphasis on Danish and Philippine officers. 15 Philippine cadets are completing their education on board the vessels. The upgrading of systems and processes continues. A CRM system will be introduced in Dry Cargo, and electronic document management (EDM) will be rolled out across the organisation following a trial period during the year. Moreover, the IT strategy will be reviewed to determine how best to support the business. In Human Resources, focus on the training and development of employees will be stepped up, and a survey will be conducted to gauge corporate culture, employee satisfaction, etc. At sea, focus on quality and security will be maintained, and a new software tool, MURE, will converge all reporting and thus give the Technical Department a more comprehensive view of the state and operation of each vessel. Vetting Average number of remarks per vessel No 4.5 inspections 4.0 Q Q Q Management s review 31

34 32 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Remuneration Pay freeze on land in 2009 Lower bonuses Broad option programme continued Remuneration policy Remuneration is determined according to the remuneration policy adopted at the annual general meeting in April The policy which is available at under Remuneration is implemented by a remuneration committee answering to the Board of Directors. The policy is to ensure that NORDEN s remuneration enables the Company to recruit and retain competent managers and employees, which is crucial in order for the Company to obtain the maximum return on its investments. Therefore, NORDEN offers a competitive base salary and pension scheme as well as bonuses, employee shares and share options. These share-based incentive programmes are designed to promote the long-term conduct of the employees and strengthen the community of interest between shareholders and employees. The remuneration committee continuously ensures that the individual elements of the policy match NORDEN s needs, performance and current challenges. In 2009 in particular, the remuneration committee and the Board of Management deemed that restraint was required in view of the financial crisis and the uncertainty in the markets. Pay freeze and adjustments NORDEN therefore implemented a general pay freeze on land, which was maintained until the end of the year. Staff at sea received pay rises of some 4%, in line with the collective agreements. The Company also adjusted the option programme, which meant that the grant in March comprised fewer options (0.85% of the share capital rather than the previous 1%) but more people (56 against 50 the previous year). Moreover, the exercise period and the period until exercise were extended from 2 to 3 years in order to encourage a more long-term line of thinking, and, finally, Senior Management was required to reinvest 25% of any net gain on their options in NORDEN shares and to keep these shares for 2 years. Bonuses were also adjusted. On the one hand, earnings were satisfactory, and performance was good, but on the other hand, bonuses should also be seen as reasonable relative to the shareholders return. Consequently, NORDEN did not allot a collective bonus (against 2 months pay for all employees in 2008), and the individual bonuses were reduced. Granted bonus USD million Option programmes % of net profit employees received bonuses averaging 3 months salary, whereas in 2008, 106 employees received bonuses averaging 5.5 months salary. The total bonus amount was reduced from USD 15.8 million in 2008 to USD 3.4 million in 2009, equalling 1.5% of the profit for the year (2.2% in 2008). The total bonus allotment included stay-on bonuses amounting to USD 0.4 million (USD 2.0 million in 2008) for selected managers, including the members of the Board of Management. These bonuses are payable on the condition that they remain with the Company for the period Managers bonuses are determined by the remuneration committee upon the recommendation of the Board of Management. Bonuses for other employees are rewarded by the Board of Management fixing a pool for each department. These pools are then distributed by the heads of department, who are deemed the best able to assess, who have delivered outstanding performances. The last component of the remuneration policy remained unchanged in 2009: NORDEN granted a total of 29,302 employee shares with a value of USD 1.3 million. Initiatives in 2010 The pay freeze for land-based employees was lifted at the end of the year, and average salaries were adjusted by an average of approximately 3%. At sea, the overall wage development is expected to be close to zero. In January 2010, NORDEN again granted employee shares. All employees with at least 1 year s seniority received 96 shares each, totalling 28,320 shares with a market value of USD 1.3 million. The shares were taken from the Company s portfolio of treasury shares. In March 2010, the Board of Directors granted 350,000 share options to 59 managers and employees on the same terms as in In determining the strike price, an 8% annual interest margin is added to ensure that the employees will only profit once the shareholders have received a return. The theoretical market value of the options has been calculated at USD 3.3 million according to the Black-Scholes model, provided that all options are granted and exercised at the earliest opportunity. The calculation presupposes a 6-year volatility of 50.4%, an annual dividend of DKK 5 per share, a riskfree interest rate of 1.67% and a USD/DKK exchange rate of 549. Bonus allotments for 2010 will be determined toward the end of the year. Board of Year of grant No. of people No. of options Exercise Management s portion , % , % , % , % , % Management s review 32

35 Management s review 33 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Corporate governance Strong focus on risk management Unchanged board remuneration High seniority in the Board of Directors Two-tier management structure NORDEN s vision, mission and values are the cornerstone of the Company s management. The management focus is long term, and the goal is for the Company to continuously develop for the benefit of its stakeholders and to achieve stable, reasonable performance within the risk framework set out by the Board of Directors. The Company has a two-tier management structure consisting of a Board of Directors and a Board of Management. There is no duality between the two bodies. The Board of Directors determines strategies, action plans, goals and budgets and sets out the risk management framework and supervises procedures, etc. According to the Articles of Association, the Board of Directors has the authority to distribute extraordinary dividends and also has a 1-year authority to authorise NORDEN s acquisition of treasury shares. The Board of Directors is not authorised to increase the Company s share capital, however. The Board of Directors appoints the Board of Management and sets out its terms and responsibilities. The Board of Management prepares and implements a strategy and is responsible for the dayto-day management, organisation and development of NORDEN, for managing assets and commitments, accounting and reporting. The Board of Directors evaluates the Board of Management s performance. The annual general meeting is the supreme authority of the Company. Resolutions are adopted by the shareholders by a simple majority of votes, unless otherwise is provided by legislation or the Articles of Association. Resolutions to amend the Articles of Association or to dissolve the Company require that 2/3 of the shareholders attend the meeting and that 2/3 of the attending shareholders vote in favour of the resolution. The work of the Board of Directors In 2009, the Board of Directors held 15 meetings 1 more than the previous year. There were 11 ordinary meetings, 4 of which were in the form of conference calls, and 4 extraordinary meetings, 1 of which was in the form of a conference call. The Board of Directors sets out a work schedule to ensure that all relevant issues are taken up and discussed during the year and that important policies, rules of procedure, internal rules, etc. are discussed at least once a year. Strategy and budgets are discussed and adopted in November and December. The task of the audit committee is to supervise control and risk management systems, audits, financial reporting, etc. Its terms of reference are available on the website. The responsibilities of the audit committee are undertaken by the Board of Directors in unison, and 4 meetings included this work, including discussions of counterparty risk, impairment test, management and reporting tools and IT systems, the latter based on a Risk Review prepared by the auditors. The remuneration committee under the Board of Directors held 3 meetings. The members of the committee are the Chairman, Karsten Knudsen (new) and Arvid Grundekjøn (new), and their responsibility is to oversee the implementation of the remuneration policy. Its terms of reference are available on the website. The Board of Directors evaluates its performance on the basis of a questionnaire in order to improve its own work and its interaction with the Board of Management. Composition of the Board of Directors The Board of Directors currently has 8 members 5 elected by the shareholders and 3 elected by the employees. All members elected by the shareholders are independent and have no interest in NORDEN other than their natural interests as shareholders. The seniority is high 12.8 years on average for the members elected by the shareholders and 8.8 years for all members. The Board of Directors has managed NORDEN in periods of high growth as well as during economic downturns, and this experience is considered a great asset. The Board of Directors is considered to possess the capabilities necessary to perform its managerial and strategic tasks and act as a good sparring partner to the Board of Management. Particularly relevant capabilities are: insight in the shipping industry in general and specifically within the areas of dry cargo and tankers, general management, strategy development, risk management, investment management, finance and accounting. At the 2009 annual general meeting, Arvid Grundekjøn was elected as a new member. His election was based in particular on his experience in international groups in the areas of shipping, cruise, offshore, finance, etc. The criteria were stated in the notice convening the annual general meeting and discussed at the meeting. Board remuneration It is recommended to the annual general meeting that the Board s basic remuneration is unchanged, and the supplement paid to the Chairman and the Vice Chairman is unchanged as well. The total remuneration is thus still USD 1 million. Corporate governance On NORDEN s website under Corporate Governance, the Company systematically sets out its views on the recommendations defined by the Danish Corporate Governance Committee ( NORDEN complies Management s review 33

36 34 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review with the vast majority of the recommendations, but has chosen a different and more suitable practice in the following areas: NORDEN does not have a ceiling on the number of directorships a board member may hold. NORDEN believes that what is important is each individual member s capacity, capabilities and contribution not some automatic limit. The Board of Directors regularly reviews its members workload and finds it appropriate to the members' positions with NORDEN. NORDEN does not have a stakeholder policy as recommended, but does have an IR policy, among other things. Consideration for the Company s stakeholders is deeply integral to NORDEN s corporate values, mission and day-to-day operations. According to the recommendations, all board members elected by the shareholders should stand for re-election every year, but at NORDEN, the 2 board members elected by the shareholders with the longest term retire every year. 5 of the 8 board members (including those elected by the employees) are new members elected within the past 2 years. The recommendations propose that the composition of the Board of Directors should factor in diversity in respect of gender and age. NORDEN considers many aspects, particularly knowledge and competences. NORDEN does not disclose the remuneration of each member of the Board of Management and the Board of Directors as recommended. NORDEN believes that what is important is that the shareholders are able to consider the total amount of remuneration. The board members other directorships in Danish and foreign companies and foundations are disclosed on page 35, but the Board of Directors has chosen not to include a few directorships that are considered insignificant. Initiatives in 2010 The Board of Directors has planned 8 ordinary meetings. The Board of Directors will discuss its remuneration in light of market conditions, workload, requirements, etc. and present the results of these discussions to the shareholders at the annual general meeting. The Danish Corporate Governance Committee has proposed a number of changes to its recommendations. Most of the changes match NORDEN s existing practice, others can easily be implemented, whereas a few proposals do not fit in with NORDEN s customs. NORDEN will systematically consider the new recommendations when they become effective. Controls and risk management in relation to the financial reporting process The purpose of the internal control and risk management systems is to ensure that NOR- DEN s financial statements are presented in accordance with applicable accounting legislation and Danish disclosure requirements for the annual reports of listed companies and to ensure fair, informative reporting without material misstatements or omissions. The internal control and risk management systems are designed to ensure that material errors or inconsistencies in the financial reporting are identified and corrected, but they do not provide absolute assurance that all errors are detected and corrected. The systems fall under the following headings: Control environment Risk assessment Control procedures Information and communication Monitoring Control environment The Board of Directors supervises the financial reporting and the effectiveness of internal control and risk management systems and furthermore discusses significant estimates and uncertainties in relation to the financial reporting (see note 1 to the financial statements). The Board of Management is responsible for the effectiveness of the risk management system and controls and has implemented controls to mitigate risks in relation to the financial reporting. The Board of Directors approves policies relating to, among other things, finance, treasury and risk management. The Board of Management approves all other policies and regularly briefs the Board of Directors about such policies. The composition of the Board of Directors and the Board of Management ensures the relevant capabilities with respect to internal controls and risk management in relation to the financial reporting process. Risk assessment The Board of Directors and the Board of Management regularly assess risks that NORDEN is exposed to, including risks related to financial reporting. The assessment includes the risk of fraud and misconduct. NORDEN s risk profile and management are described on the website under Risk Management. Systems, procedures and control activities to minimise the risk of material errors and omissions in relation to financial reporting have been described and documented in respect of all significant financial reporting areas. Control procedures The control procedures are integrated in the accounting and reporting systems and include procedures in respect of approval and certification, system controls, reconciliations and analytical controls. The processes and systems of particular significance to the financial reporting are described in Standard Operating Procedures (SOPs). The Board of Management follows up to ensure that any internal control weaknesses are addressed and that any errors or omissions identified and reported by the auditors are corrected, including that controls or procedures are implemented to prevent errors or omissions. Information and communication SOPs, reporting instructions and policies in relation to approvals and counterparty risks are updated on an ongoing basis and are available to the employees. A Group Finance forum with representatives of all finance functions meets regularly to ensure that all finance functions are updated on the latest developments in policies and procedures so as to ensure uniform, high quality in the regular reporting that forms the basis of the financial reporting. The information and transactions on which the financial reporting is based is compiled and registered in a single, integrated finance and information system according to uniform principles and definitions. Monitoring NORDEN uses a fully integrated finance and information system to monitor the accounting information. The system is able to identify material financial reporting errors and omissions, including material internal control and system weaknesses. The Board of Directors and the Board of Management receive monthly internal financial reporting, which they review against their own knowledge and expectations. The monthly reporting is developed on an ongoing basis. Management s review 34

37 Management s review 35 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Board of Directors Mogens Hugo, Managing Director, born in Board member and Chairman since Most recently re-elected in Term expires in 2010*. Other directorships: Amminex A/S (CB), Nordea - fonden (CB), Capidea Management ApS (CB), Aagaard Bræmer Holding A/S (CB) and Twins ApS (BM) 2 Alison J. F. Riegels, Managing Director, born in Board member and Vice Chairman since Most recently re-elected in Term expires in 2010*. Other directorships: A/S Motortramp (MD, BM), Stensbygaard Holding A/S (MD, BM), Stensbygaard, Aktieselskabet af 18. maj 1956 (BM) and Ejendomsselskabet Amaliegade 49 A/S (MD). 3 Erling Højsgaard, Managing Director, born in Board member since Most recently re-elected in Term expires in Other directorships: A/S Motortramp (VCB), Navision Shipping Holding A/S (CB) (including CB in subsidiary), Danbulk A/S (BM) and Dubai Commercial Investment A/S (BM). 4 Karsten Knudsen, Group Managing Director in Nykredit, born in Board member since 2008 (newly elected). Term expires in 2010*. Other directorships: BM in 4 other companies in the Nykredit Group. 5 Arvid Grundekjøn, Managing Director, born in Board member since 2009 (newly elected). Term expires in Other directorships: Statkraft AS (CB), Sparebanken Pluss (CB), Creati AS (CB), Sigma Fondene AS (CB) and Vetro Solar AS (BM). 6 Benn Pyrmont Johansen, Captain, born in Board member since 2008 (newly elected). Term expires in Bent Torry Kjæreby Sørensen, Chief Engineer, born in Board member since 2008 (newly elected). Term expires in Shareholdings of the Board of Directors 8 Lars Enkegaard Biilmann, Captain, born in Board member since 2008 (newly elected). Term expires in Directorships and shareholdings are stated at 1 January The stated directorships exclude directorships within the NORDEN Group and other directorships, for example in personally owned LLPs, which the Board of Directors considers insigificant. CB: Chairman of the Board. VCB: Vice Chairman of the Board. BM: Board Member. MD: Managing Director. In addition to shares held personally or through related parties (including companies controlled by them), Alison J.F. Riegels and Erling Højsgaard are associated with A/S Motortramp, which holds 11,851,240 shares. No. of shares At Change in 2009 Mogens Hugo 11,000 - Alison J. F. Riegels 3,100 - Erling Højsgaard 45, Karsten Knudsen Arvid Grundekjøn 5,000 +5,000 Benn Pyrmont Johansen Bent Torry Kjæreby Sørensen Lars Enkegaard Biilmann Total 66,582 6,373 *If the term expires for more than 2 board members, lots are drawn to determine who will first be up for re-election the following year Management s review 35

38 36 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Management Group Board of Management The Board of Management consists of Carsten Mortensen, President and CEO, and Michael Tønnes Jørgensen, Executive Vice President and CFO. Together with 7 Senior Vice Presidents, they constitute the Senior Management. The Senior Management is unchanged. Terms and remuneration The Board of Management s remuneration consists of a combination of fixed salary, variable bonuses and share-based payment. The Board of Management have the usual benefits such as company cars, but no pension plan paid by the Company. The total remuneration to the Board of Management for 2009, including share options and employee shares, amounted to USD 3.5 million, against USD 7.1 million the previous year. The 2 amounts are not directly comparable, as the figure for 2008 includes salary and redundancy pay to a former member of the Board of Management, while Michael Tønnes Jørgensen did not take up his position until 1 January Moreover, at the beginning of the year, Carsten Mortensen decided to waive his bonus in view of the difficult times, whereas in 2008, he was rewarded a bonus of USD 2.8 million, half of which was paid in March 2009 while the rest is payable in , subject to his continued employment with NOR- DEN and subject to NORDEN s earnings reaching a specific benchmark. Carsten Mortensen s fixed salary is unchanged from The remuneration committee under the Board of Directors and Carsten Mortensen have agreed that he is to have a new bonus agreement for 2010, under which a bonus is payable if NORDEN s earnings reach a specific benchmark after an appropriate minimum return to shareholders. The bonus will be capped. For 2009, Michael Tønnes Jørgensen, CFO, received a bonus payment of USD 0.1 million, rewarded at the discretion of the remuneration committee. Any bonus for 2010 is also rewarded at the committee s discretion. NORDEN believes that the total remuneration package of the members of the Board of Management, including bonuses, share options, etc. is competitive with those of the Company s peers. Notice of termination The Board of Management s terms of notice vis-à-vis the Company are 6 months, for which period they are subject to a non-competition clause. The Company s terms of notice vis-à-vis the members of the Board of Management are 12 months. If the members of the Board of Management step down in connection with a takeover of NORDEN or a merger with another business, they are entitled to compensation equal to 2 years salary in addition to receiving their normal salary for a 1-year notice period. 4 Senior Vice Presidents have similar terms, although their compensation is limited to an amount equal to 1 year s salary. The normal terms of notice with respect to the group of Senior Vice Presidents is 4-12 months. Management s review 36

39 Management s review 37 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Other than the above, no agreements exist between NORDEN and its management entitling them to special compensation on termination of employment or discontinuation of their positions as a result of a takeover bid. 1 Carsten Mortensen, President and CEO, born in Employed in NOR- DEN since Trained in shipping, holds a bachelor of commerce degree in international trade and has completed executive training programmes at INSEAD and Wharton Business School. Directorships: the Danish Shipowners Association (VCB) and International Chamber of Shipping, Executive Committee. 2 Michael Tønnes Jørgensen, Executive Vice President and CFO, born in Employed in NORDEN since Trained in shipping, holds a bachelor of commerce degree in accounting and financial management as well as an M.Sc. in accounting and has completed executive training programmes at INSEAD and IMD. 3 Peter Norborg, Senior Vice President and head of the Dry Cargo Department, born in Employed in NORDEN since Trained in shipping and holds an Executive MBA from IMD. ton Business School. Directorships: North of England P & I Club (BM), Intertanko Council (BM), Intertanko North European Panel, the Danish Shipowners Association s business committee. 5 Lars Lundegaard, Senior Vice President and head of the Technical Department, born in Employed in NORDEN since Holds a master s certificate and an MBA from Henley. Directorships: Intertanko s technical committee (VCB) and the negotiation committee of the Danish Shipowners Association. 6 Kristian Wærness, Senior Vice President and head of the Finance and Accounting Department, born in Employed in NORDEN since Holds an M.Sc. in accounting. 7 Vibeke Schneidermann, Senior Vice President in charge of Human Resources, born in Employed in NOR- DEN since Holds a bachelor of commerce degree in organisation. Directorships: the shipping committee of the Danish Shipowners Association. 8 Martin Badsted, Senior Vice President in charge of the Corporate Secretariat, born in Employed in NORDEN since Holds an M.Sc. in international business. 9 Peter Borup, Senior Vice President and in charge of activities outside Denmark, born in Employed in NORDEN since Trained in shipping, holds an MBA from IMD and has completed an executive training programme at Wharton Business School. Director- 4 Lars Bagge Christensen, Senior Vice President and head of the Tanker Department, born in Employed in NORDEN since Trained in shipping and has completed executive training programmes at INSEAD and Wharships: member of the Advisory Panel of the Singapore Maritime Foundation and adjunct professor at Shanghai Maritime University. Directorships, etc. are stated at 1 January CB: Chairman of the Board. VCB: Vice Chairman of the Board. BM: Board Member. Positions within the NORDEN Group are not stated as directorships. Other executives: Jens Christensen, Vice President and deputy manager of the Technical Department 344 shares (+91). Christian Danmark, Vice President, finance manager 490 shares (+237). Morten Ligaard, Vice President, head of the Legal Department 144 shares (+91). Executives of Norient Product Pool: Søren Huscher, CEO 18,110 shares (unchanged). Jens Christophersen, Vice President 1,590 shares (unchanged). Detailed executive profiles are available on the website under Corporate Governance. Options granted 2010 CEO Carsten Mortensen 57,213 CFO Michael Tønnes Jørgensen 31,831 Senior Management, other 136,427 Other executives and employees 124,529 Senior Management s shareholdings Shares Share options Change in Granted in Granted in Granted in At At Carsten Mortensen 26,144 +9, ,226 66,006 72,440 94,780 Michael Tønnes Jørgensen ,003 36, Peter Norborg ,242 26,402 21,300 26,540 Lars Bagge Christensen 2, ,982 23,042 27,820 34,120 Lars Lundegaard ,521 14,401 17,380 22,740 Kristian Wærness 1,501 +1,248 46,341 12,961 15,640 17,740 Vibeke Schneidermann ,821 10,561 5,660 6,600 Martin Badsted 1, ,021 12,721 13,900 16,400 Peter Borup ,062 18,722 18,600 22,740 Total 32, , , , , ,660 Management s review 37

40 38 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Shareholder issues Growing shareholder base Strengthened liquidity in the share Best Nordic Large Cap share Master data Share capital DKK 44,600,000 Number of shares 44,600,000 of DKK 1 Classes of shares 1 Voting and ownership restrictions None Stock exchange NASDAQ OMX Copenhagen A/S Ticker symbol DNORD ISIN code DK Bloomberg code DNORD.DC Reuters code DNORD.CO Shareholders and share capital The number of NORDEN shareholders registered by name rose by 14% during the year to a total at year-end of 16,446 shareholders, possessing a total of 82.2% of the share capital. The increase was explained by an increased turnover of the share and by the fact that the second-largest shareholder, POLY SHIPPING AS (formerly Kristiansands Tankrederi AS), a subsidiary in Rasmussengruppen, in March decided to reduce its portfolio by 4.7 million shares, which were sold to a wide group of investors. Indexed share price performance 5 years (1/1/2005 = 100) 3 shareholders have announced that they own 5% or more of the shares. They are A/S Motortramp, POLYSHIPPING AS and NORDEN with 2,556,495 (2,212,606) treasury shares used mainly to cover share option programmes. Holdings of treasury shares grew as NORDEN took part in the bookbuilding when POLY- SHIPPING AS reduced its holding. Other major shareholders are mainly institutional investors from Denmark, the USA and Great Britain. There are around 700 shareholders registered by name outside Denmark, owning a total of 37.7% of the shares. Composition of shareholders A/S Motortramp POLYSHIPPING AS NORDEN Registered, under 5% Non-registered 17.8% 38.9% 5.8% NORDEN OMXC20 Bloomberg DRYSHIP Index Bloomberg TANKER Index 26.6% 10.9% At 1 January 2009, A/S Motortramp and POLYSHIPPING AS changed the shareholder agreement, which they signed in According to the shareholder agreement, each party is committed not to transfer any NORDEN shares except intra-group transactions without first offering the shares to the other party, and if the other party does not accept such offer, ensuring that the other party has the opportunity to sell its shares on equal or better terms. As a result of the change, these terms will only apply to 4,869,640 shares of each party s holdings. All shares are listed, and neither share capital, rights nor transferability were changed. Price performance and trading volume The share price opened the year at DKK and closed at DKK This represented a 14.4% increase and, counting the dividends for the year, the shareholders return was 21.6% (-65.3%). By comparison, the OMXC20 index rose by 29.4%, the Bloomberg DRYSHIP Index (dry cargo companies) rose by 32.4%, whereas the Bloomberg TANKER Index (tanker companies) dropped by 8.7%. The share s liquidity improved. The market value of the average daily trading declined by 34% to DKK 69 million, but that was due to the lower share price, and the trading volume was up. The average daily turnover was 360,000 shares, relative to 280,000 shares the previous year, and even adjusting for the extraordinary trading in March when POLYSHIPPING AS reduced its holdings, daily turnover was up at 335,000 shares At 1 June and 1 December, the share again qualified for the OMXC20 index of the 20 most traded shares on NASDAQ OMX Copenhagen. NORDEN is also included in the Nordic Large Cap index of the largest shares on the Nordic stock exchanges Management s review 38

41 Management s review 39 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Dividends and capital structure NORDEN wishes to provide reasonable, long-term returns to shareholders through share price increases, dividends and occasional buy-backs of shares. It was therefore received with satisfaction when the Norwegian business daily, Dagens Næringsliv, in June named NOR- DEN the best Nordic Large Cap share from May 1999 to May In the analysis, NORDEN stood out with average annual returns of 48.6% among all the companies with a market cap of EUR 500 million or above. Even though NORDEN s business model as far as possible seeks to equalise the effect of market fluctuations, the shipping industry is cyclical, and the Company therefore finds it inappropriate to define a fixed dividend or capital structure policy. Instead, the Board of Directors assesses on an ongoing basis how the cash flows should be applied and distributed between the Company and its shareholders. This assessment is based on factors such as actual earnings and cash and cash equivalents, earnings forecasts, market outlook, risks, investments prospects, the Company s liabilities on and off the balance sheet, etc. It is the Board of Directors assessment that NORDEN s capital structure is adequate in relation to known and possible liabilities, and that additional capital strength is necessary in particular in the current market conditions as a buffer as well as a means to seize investment opportunities as they occur. Accordingly, the Board of Directors proposes a dividend of DKK 7 per share, or a total of Payout ratio excl. treasury shares % Shareholders on a guided tour at the head office in summer USD 60 million, corresponding to a payout ratio of 25% for the year, against 14% in Investor Relations It is the Company s goal that the share price reflects the Company s actual and expected ability to create value for its shareholders. For this reason, NORDEN seeks to consistently provide timely, precise and relevant information on the Company s strategy, operations, results, expectations and other matters affecting the assessment of the share. NORDEN strives to give all interested parties easy access to information through the website and to maintain an open dialogue with its stakeholders within the framework of the stock exchange rules of ethics. An information meeting and a teleconference are held when each interim report is presented, and both webcast and presentations from these are made available on the website. In addition, NORDEN attends trade fairs, conferences, meetings and other events with analysts, investors and the media. The share is monitored by analysts from 13 finance houses. In 2009, NORDEN published 36 company announcements, of which 11 concerned changes in shareholdings and insiders trading in the share. The Board of Management is responsible for the Company s investor relations. Senior Vice President Martin Badsted is responsible for day-to-day investor relations tasks. Information about NORDEN, access to electronic editions of the Company s quarterly magazine, NORDEN News, and presentations, subscription to mailing list, company announcements, IR policy, calendar, outlook and more are available at Initiatives in 2010 In January, NORDEN was presented with the Information Award by the Danish Society of Financial Analysts, receiving special praise for its whole of information, which is impressive in depth as well as in width with extensive and very detailed information. In 2010, the Company will strengthen its channels of information where appropriate and examine the possibilities of obtaining a wider analyst coverage of the share. Financial calendar for March Publication of the annual report 22 April Annual general meeting 29 April Payment of dividends 19 May Interim report for the first quarter of August Interim report for the first half of November Interim report for the third quarter of 2010 Management s review 39

42 40 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Corporate social responsibility The Company joined the UN Global Compact CO 2 emissions reduced by 3.3% Several new climate initiatives in 2010 A recognised framework In 2009, NORDEN joined the UN Global Compact a United Nations charter comprising 10 principles on human rights, labour rights, environmental protection and anti-corruption. Since 2007, NORDEN has taken inspiration from the UN Global Compact, and so it was the natural next step to join the charter and continue the Company s Corporate Social Responsibility (CSR) work within a globally recognised framework. Voluntary, focused efforts NORDEN has formulated the following general CSR policy: Based on our core values, we strive on a voluntary basis to improve our corporate social efforts by integrating social, environmental, health and safety concerns in our activities. We will establish appropriate reporting systems to help us meet our targets while at the same time focusing on continual improvements. We will communicate openly with our stakeholders on these issues. These efforts have dual purposes: they are to benefit the surrounding community and the Company s stakeholders and also strengthen the Company in the long term. Focus is on the areas most relevant to NORDEN environment and climate, safety, employee conditions, welfare and training. Conversely, the Company has no activities in those parts of the UN Global Compact that do not present significant challenges to NORDEN in relation to the Company s own activities. NORDEN primarily concentrates its efforts on its own parts of the value chain parent company, subsidiaries and joint ventures and also seeks to influence partners such as shipyards, key suppliers, agents, organisations and T/C partners. Human and labour rights Safety at sea NORDEN continuously strives to improve safety and work environment on owned vessels for the benefit of the crews and to avoid grounding, wrecks, spills or any other aspects that might impact the external environment. This, for example, happens through computer-based training, procedures, campaigns, briefings and safety meetings, inspections and Key Performance Indicators (KPIs) for officers. The aim of NORDEN s efforts is to avoid accidents. The Company s vessels were not involved in any accidents impacting the external environment in On its owned vessels, NORDEN measures the LTI frequency rate the number of lost time incidents, i.e. work-related incidents resulting in absence from work of more than 24 hours duration calculated per 1 million working hours. The LTI frequency rate is measured as a 12-month average and has constantly been below 2% the last 2 years. None of the incidents were life-threatening. LTI frequency rate / / / 2009 Near-misses are also reported, as these are important to the prevention of accidents and injuries. A campaign in 2008 resulted in the number of reports almost doubling, and this high reporting level was maintained in Seamen may report non-compliance with rules and policies regarding safety, environment, welfare, etc. through NOR- DEN's whistleblower system SAFELine. No such reports were filed in There were also no work-related injuries ashore in A workplace assessment will be made in Standard operation procedures for site offices were tightened in 2009, so that the Company s inspectors now have to report any occupational health or safety problems at the shipyards building vessels for NORDEN. The Company has maintained constructive dialogue with the shipyards on this subject, locally as well as at management level. NORDEN regularly screens prospective shipyards, and this process includes work conditions, safety, environmental issues, etc. Measures against piracy NORDEN has stepped up its measures to protect crews, cargoes and vessels against pirate attacks. According to the International Maritime Bureau, 406 pirate attacks were reported in 2009, and off Somalia s coast, the number was almost doubled. The coast of south east Africa and the Niger delta are other hotspots. Navigation in high-risk zones is subject to a case-by-case evaluation. In the Gulf of Aden, the Company s vessels must sail in group transit through safe corridors and, if possible, under naval protection. The vessels must sail at maximum speed and have a certain freeboard, the crew must be on extra alert, and the vessels must be equipped with electric fencing, NATO razor wire, fog nozzles, etc. In other areas, NORDEN changes the routes of vessels as one of its means to reduce the risk of attacks. The threat situation is assessed on an ongoing basis. Management s review 40

43 Management s review 41 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Near-miss reporting Near-misses Number of reports Q Q Near-misses per vessel per week Q Q Q Q Q Q Near-miss reports per vessel per week Q Q Q Q the measures in the 14-point plan were already implemented, and the new owners of the vessels as well as the climate will benefit from these. The regular addition and disposal of vessels makes it impossible for NORDEN to ever reach full implementation of all 14 points. In 2009, the measures were effective for approximately 60% of the year s ship months in the owned fleet. In addition to the 14 points, NORDEN is active as a partner and a sponsor in research and development projects and in testing of possible new target areas. Welfare initiatives The Company has introduced a number of initiatives to enhance the employees well-being, reduce the number of sick days and strengthen the employees connection to the Company. For example, Philippine seamen are offered a healthcare plan with free medical treatment for the seamen and their families. On board vessels, a number of welfare initiatives and regular health checks have been introduced. Ashore, NORDEN s offerings include a sports club, fitness training, ergo therapist, art and cultural events, healthy eating, etc. Both the average number of sick days ashore (4 days per employee, against 3.3 days in 2008) and the employee retention rate (approximately 89%, adjusted for the year s rationalisation measures, against 88% in 2008) are satisfactory. The retention rate among officers is also satisfactory. Sponsorship of education programmes NORDEN sponsors maritime education programmes in order to enhance the development of talent, increase the knowledge of NORDEN and obtain contact with researchers and students. In 2009, the Company renewed its sponsorship programme at Shanghai Maritime University and continued its collaboration with other universities as well. NORDEN recruits trainees and cadets from the educational establishments in Asia which the Company supports. Environmental and climate issues Need for global solutions NORDEN considers greenhouse gas emissions to be a global problem requiring global solutions. So it was disappointing that the UN Climate Summit in 2009 failed to reach a solution for the shipping industry. Through the Danish Shipowners' Association, the International Chamber of Shipping and INTER- TANKO, NORDEN supports giving the IMO a mandate to enforce global regulation with equal requirements to all shipping companies. Meanwhile, NORDEN carries on its efforts to reduce emissions from the owned fleet. Effects of 14-point plan Since 2007, NORDEN has adhered to a 14-point plan to reduce its vessels propulsion resistance and increase engine efficiency. This reduces bunker consumption and is the most effective way of limiting emissions of CO 2, SO x, NO x and hydrogen carbonate. It is estimated that the implementation of the plan reduced CO 2 emissions from owned vessels by 3.3% in 2009 (2.4% in 2008). The effect is calculated on the basis of assumptions as to size, type and strain of the engines, and the effects of the measures are calculated according to INTERTANKO s guidelines. Since autumn 2007, NORDEN has sold 17 dry cargo vessels on which some of Lower emissions The owned fleet s estimated CO 2 emissions for 2009 were 379,400 tonnes. In accordance with the IMO s voluntary use of the ship Energy Efficiency Operational Indicator (EEOI), the emissions are calculated as bunker consumption times the CO 2 emission factors of various types of fuel. For the part of the owned fleet which is operated by NORDEN, emissions totalled approximately 89,000 tonnes. Emissions from all vessels operated by NORDEN for 2009 were estimated at 1.6 million tonnes CO 2 (2.1 million tonnes in 2008). This figure was also calculated on the basis of the bunker consumption for the period in which the vessels were operated by NORDEN, but the durations of voyages were accrued on a prorata basis. Total emissions are affected by a number of factors: the number of ship days, voyage duration, speed (slow steaming), volumes transported, routes, voyages without cargo (ballast), weather conditions and, of course, climate and environmental initiatives. Average age of core fleet (years) Dry Cargo Tankers Owned vessels Chartered vessels with purchase option Total at 31 December Management s review 41

44 42 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review CO 2 emissions in metric tonnes (1,000 tonnes) Number of owned vessels Owned vessels operated by NORDEN Chartered vessels 1,721 1,970 1,547 Total of operated fleet 1,762 2,059 1,636 NORDEN considers it a competitive advantage to have a modern fleet, and at the end of 2009, the average age of the core fleet was just 3.4 years in Dry Cargo and 1.9 years in Tankers. All other things being equal, modern vessels are more fuel efficient than older tonnage, and in 2010, the average age of the core fleet will be reduced even further. Norient Re-imbursement System Norient Product Pool has developed the Norient Re-imbursement System (NORS) aiming to enable vessels to slow steam in order to avoid arriving at port ahead of time. The potential CO 2 and SOx reduction is estimated at 15-20%, through fuel reductions, which Norient Product Pool intends to share with the customers. So far, NORS has been implemented in charter parties with BP. Sulphur content % 5,0 4,5 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0 Lower sulphur content Targets have been set to reduce the sulphur content in the bunkers purchased for the vessels that NORDEN and Norient Product Pool operate. The target for 2009 was that the sulphur content was not to exceed 2.3%, and with an actual content of 2.27%, this target was achieved. IMO rules permit a maximum of 4.5% in international waters, but the IMO will reduce this limit to 3.5% in 2012 and to 0.5% from In special Emission Control Areas (ECAs) such as the North Sea, the Baltic Sea and the English Channel, the limit is 1.5%, which will be reduced, however. In addition, the IMO plans to designate North America and Canada as ECAs. Other environmental and climate initiatives There are also other areas in which NORDEN goes further than required by international law. One such area is waste, where NORDEN aims for constant reduction of waste volumes and also seeks to bring as much waste as possible to shore to be disposed of there. Also, through a Ballast Water Management Plan, NOR- DEN seeks to manage ballast water as responsibly as possible. Sulphur limit, globally Sulphur limit, ECAs Sulphur content, NORDEN, globally aim 2012 aim 2015 aim 2020 aim The environmental impact of NORDEN's activities on land is limited. Nonetheless, NORDEN has taken initiatives to minimise the environmental impact of its offices. For example, these include the installation of video conferencing equipment at offices to reduce the amount of air travel, using energy-saving light bulbs at the head office, virtualising servers, closed-circuit cooling of server rooms, reducing media circulation, eco-labelling and a CO 2 neutral website. Initiatives in 2010 In 2010, NORDEN will continue rolling out its 14-point plan on the many new vessels to be delivered to the Company and adding new initiatives to its climate efforts: The GreenSteam system will be installed on 4 new Post-Panamax vessels. On the basis of the tests made by the Company and a third party, NORDEN conservatively expects this trim optimising system to reduce fuel consumption, CO 2 and SOx emissions by 2.5%. After being tested on NORD MERMAID in 2009, electric boilers will be installed on all 8 owned Handysize product tankers. The effect is expected to be at least a 3% CO 2 reduction. The Company will begin the transition to a new type of bottom paint which will further reduce the vessels propulsion resistance. The transition will happen gradually as the vessels dock. The effect is expected to be a reduction of up to 2%. The target for 2010 is to cut the fleet's CO 2 emissions by 3.5%. As for the sulphur content in bunkers, the target is to reach an average of 2.2%, which will equal a 12% reduction since 2007, when this work was begun. On land, the focus will still be on environment and cost effective solutions to lighting and IT. All photocopiers will be replaced by more energy-efficient models with less energy waste and better life cycle management. In the area of human and labour rights, NORDEN will work on introducing a whistleblower system for employees on land. Management s review 42

45 Management s review 43 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Financial review The Group presents its financial statements in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU and additional Danish disclosure requirements for annual reports of listed companies. No changes have been made to the Group s accounting policies applied last year. The financial statements of the parent company, Dampskibsselskabet NOR- DEN A/S, are prepared in accordance with the Danish Financial Statements Act contrary to previous reporting in accordance with IFRS. For additional information, please see note 1 Significant accounting policies to the financial statements. Profit for the year and shareholders' equity The Group s EBIT for 2009 amounted to USD 157 million (USD 773 million), including a USD 70 million profit from the sale of vessels (USD 290 million). This performance was in line with the latest EBIT forecast, which was USD million. Profit after tax was USD 217 million (USD 708 million), including a positive fair value adjustment of USD 61 million (a negative adjustment of USD 81 million). This performance equalled earnings per share (EPS) of USD 5 (USD 17). Equity grew by 6% to USD 1,805 million (USD 1,700 million). The increase is specified as follows: Change in equity, USD million Equity at 1 January ,700 Profit for the year 217 Write-down at purchase/sale of treasury shares, net -9 Value adjustment of hedging instruments and securities -10 Dividend paid -98 Share-based payment 5 Equity at 31 December ,805 Dividend paid amounted to DKK 13 per share, equalling a total of DKK 549 million excluding treasury shares. Significant accounting decisions Vessels chartered by NORDEN in relation to which the risks and rewards of ownership based on an overall assessment of the individual lease has not been transferred to the Group, are accounted for as operating leases and recognised in the income statement on a straight-line basis over the term of the lease. As shown in note 22 to the financial statements, the Group at 31 December 2009 had operating lease liabilities in the amount of USD 2,416 million (USD 3,228 million) which are to be recognised in the income statement over the period The lease liability does not represent the Group s net exposure as it is hedged on an ongoing basis in accordance with the Group s risk management policy, see note 2 to the financial statements. The Group s vessels are recognised in the statement of financial position at cost less accumulated depreciation and impairment. Other accounting decisions are described in note 1 Significant accounting policies to the financial statements. Significant accounting estimates For a description of significant accounting estimates, see note 1 to the financial statements "Significant accounting policies". Revenue Revenue in the form of freight income declined by 61% to USD 1,676 million, which was the result of a combination of fewer ship days and significantly lower freight rates. Dry Cargo In Dry Cargo, the activity level in terms of ship days was 33% down in Freight income totalled USD 1,516 million (USD 4,002 million), equal to a 62% decline. Operating profit (EBIT) was USD 188 million (USD 687 million), including profits from the sale of 15 vessels of USD 70 million (USD 247 million). Tankers The Tanker activity in terms of ship days was up by 4% on the previous year. Freight income amounted to USD 160 million (USD 245 million), equalling a 35% decrease, as a result of considerably lower freight rates. Operating profit (EBIT) was USD -18 million (USD 97 million). Financials Financial income amounted to USD 15 million (USD 34 million) and related to interest income on demand deposits in bank accounts. The decrease was primarily due to major exchange rate gains in 2008 on translation to other currencies than USD, primarily DKK. Financial expenses amounted to USD 8 million (USD 5 million) and concern interest on fixed-rate loans of USD 3 million and foreign exchange adjustment of USD 4 million. The amount also includes a loss on termination of interest rate swaps. Fair value adjustment of certain hedging instruments Fair value adjustment of derivative financial instruments that did not qualify for hedge accounting under IFRS constituted income of USD 61 million (an expense of USD 81 million), of which a negative amount of USD 37 million related to Forward Freight Agreements (FFAs), USD 100 million related to bunker hedging contracts and a negative amount of USD 2 million related to Credit Default Swaps (CDSs). The item covered value adjustments recognised in previous financial years of contracts realised in 2009 in the amount of USD 43 million and value adjustments of unrealised contracts regarding in the amount of USD 18 million. For further specification, see note 6 to the financial statements. Management s review 43

46 44 Management s review Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Tax on profit for the year The Company s taxable income comprises income related to shipping activities as computed in accordance with the Danish Tonnage Tax Act and other income, including net financial income, computed in accordance with the general tax rules. Tax on the profit for the year amounted to USD 7 million (USD 13 million). Statement of financial position Assets The Company s total assets at 31 December 2009 amounted to USD 2,032 million (USD 2,042 million) and were thus largely unchanged. Non-current assets in the form of vessels and newbuildings rose by approximately 11%, while current assets in the form of receivables and cash and cash equivalents declined correspondingly. Tangible assets held for sale totalled USD 55 million (USD 47 million) and related to 1 vessel and 2 newbuildings, all to be delivered to the new owner in Vessels At the end of 2009, the Group had 18 owned vessels, which was the same number as the previous year. The number of newbuildings was reduced from 38 to 29, mainly as a result of sales. Impairment test The net selling price of the Group s fleet and newbuildings, excluding joint ventures and assets held for sale, at the end of 2009, expressed as the average of 3 broker valuations, totalled USD 1,348 million, which was USD 125 million below the carrying amounts and costs of newbuildings. Of this, USD 49 million related to the cash generating unit (CGU) Dry Cargo and USD 76 related to the CGU Tankers. Consequently, the Company performed an impairment test, comparing the recoverable amounts obtainable from continued operation of the 2 CGUs, calculated as the present value of total estimated cash flows over the remaining useful lives of the assets, including COAs entered into, time charters (coverage) and estimated rates for uncovered capacity. The Company estimated the value in use of the 2 CGUs applying 10-year and 20-year historical average rates as part of the basis of the evaluation of long-term values. The carrying amounts and costs of newbuildings excluding joint ventures and vessels held for sale for Dry Cargo and Tankers are USD 1,085 million and USD 387 million, respectively. Applying 10-year average rates to uncovered days and a discount factor of 8%, value in use exceeds the carrying amounts of the CGUs, Dry Cargo and Tankers, by USD 1,302 million and USD 95 million, respectively. In a similar calculation applying 20-year average rates, value in use is USD 356 million higher than the carrying amount for Dry Cargo and USD 12 million lower than the carrying amount for Tankers which is -3% compared to booked value. In the long term, the tanker market is expected to improve over the current, very low levels and to outperform the 20-year average rates. Among the reasons for this assessment are the fact that oil consumption is expected to grow at the same rate as previously, combined with the phaseout of single-hulled tonnage and a relatively minor order book. Moreover, transport distances are increasing because new refineries are typically established in areas further from the countries with the largest oil consumption. Against this background, management assesses that the long-term values (value in use) of both the Dry Cargo fleet and the Tanker fleet at least correspond to their carrying amounts, and, accordingly, there is no indication of a need for impairment. Freight receivables The Group s freight receivables were down to USD 77 million (USD 108 million), mainly due to lower levels of activity and lower rate levels. Freight receivables totalling USD 6 million were subject to uncertainty, and a write-down of USD 4.5 million was therefore made in this respect. Last year, the corresponding write-down was USD 4 million on a total amount of USD 6 million. Of these write-downs, USD 3 million was reversed, and USD 1.1 million realised as a loss in Other receivables and Other payables The reduction of Other payables and the increase of Other receivables mainly relate to the Group s fair value adjustments of future bunker purchases, which developed from a net negative market value of USD 37 million at the beginning of 2009 to a net positive market value of USD 15 million at year-end. Moreover, the fair value of the variable part of basic currency swaps developed from a negative market value of USD 31 million at the beginning of 2009 to a positive market value of USD 10 million. The fair value adjustment of the hedged cash flows was made through the company s cash and cash equivalents as the investment of the cash (DKK) and the related currency hedge involved different legal counterparties. Prepayments and trade payables The reduction of the Group s prepaid expenses and trade payables was mainly due to NORDEN s declining level of activity and the significantly lower rate levels. Cash flows The Group s cash and cash equivalents represent total liquidity at 31 December The statement of cash flows has been adjusted for cash and cash equivalents which are not at the Group s disposal within 3 months of the reporting period, USD 8 million. Management s review 44

47 Management s review 45 Strategy update Financial position Fleet Outlook for 2010 Dry Cargo Tankers Organisation Remuneration Corporate governance Shareholder issues CSR Financial review Changes in cash and cash equivalents for the year were USD 32 million to USD 703 million. Cash and cash equivalents consist mainly of USD and DKK bank deposits. Operating activities contributed a net cash inflow of USD 160 million (USD 541 million). In 2009, USD 530 million was invested in vessels and newbuildings, and profits from the sale of vessels amounted to USD 453 million. The free cash flows from investing activities were a net outflow of USD 80 million. Cash flows from financing activities amounted to a net outflow of USD 113 million. Of this, shareholder dividends represented an outflow of USD 98 million, purchases of treasury shares an outflow of USD 10 million and reduction of debt represented an outflow of USD 5 million. Calculating the value of options in theoretical NAV a long-term rate (20 years) determined as mentioned below, and an interpolated rate curve between year 5 and year 20. In addition, market prices are used for interest rates, exchange rates and operating costs. On the basis of the future scenarios for T/C rates and vessel prices, the optimum value of the purchase and extension option for each vessel is determined. Purchase options under which the price of the vessel is stated in JPY are translated at the forward USD/JPY rate before the pricing. New method of calculation As from the interim report for the third quarter of 2009, NORDEN changed its method of calculating the value of charter parties with purchase and extension option, and it is therefore not directly comparable to the annual report for 2008, but the comparative figures have been changed so that they reflect the new method of calculation. The change was made to ensure that the values are to an even greater extent based on independent sources and market information, although the calculations are still encumbered with uncertainty by its very nature. The most important changes to the method of calculation are: firstly, the daily vessel operating costs are based on estimates from external sources rather than on NORDEN s own estimates. Secondly, the risk premium, used in the calculation of vessel values, was updated. Finally, in the calculation of the T/C curve, the longterm level (the 20-year rate) is calculated as the implicit rate used to equate the discounted value of future cash flows with the market price of a secondhand 5-year-old vessel. Based on the new method of calculation, the Company s 60 charter parties with purchase and extension option have an estimated theoretical value of USD 468 million, corresponding to DKK 58 per share. The theoretical value of charter parties with purchase and extension option depends on the level of the model s market rate input for the first 5 years. If this level is assumed to be 10% higher or 10% lower, the theoretical value of the charter parties will be USD 656 million (up 40.2%) or USD 267 million (down 42.9%), respectively. NORDEN s valuation of purchase and extension options follows standard pricing of American options, which simulates future scenarios for T/C rates and vessel prices under assumptions of price volatility and correlation between the change in T/C rates and the change in vessel prices. In each segment, the volatility and the correlation are assumed to be constant over time and are estimated based on historical T/C rates and vessel prices. An important input to the model is the T/C rate curve for each segment. The curve consists of the following elements: expected market rates for the first 5 years, Assumptions for calculated value of charter parties with purchase option Ship prices and T/C rates Assumed volatility Secondhand price 5-year Freight rates Vessel values 5-year-old vessel T/C-rate (based on (based on 5-year Dry cargo (USD million) (USD/day) 1-year T/C) secondhand prices) Capesize 54 28,083 34% 25% Post-Panamax 45 23,579 34% 25% Panamax 34 17,750 34% 25% Handymax 28 15,250 26% 23% Handysize 21 11,750 20% 18% Product tankers MR 24 15,000 14% 13% The determination of the theoretical value of the charter parties including purchase option is subject to uncertainty, the value being dependent on the future development in freight rates and tonnage values as well as deviations in other assumptions. Management s review 45

48 46 Management s review Statement by the Board of Directors and Board of Management Independent Auditor s Report Signatures Statement by the Board of Directors and Board of Management The Board of Management and the Board of Directors have today considered and adopted the annual report of Dampskibsselskabet NORDEN A/S for the financial year 1 January - 31 December The consolidated financial statements are prepared in accordance with International Financial Reporting Standards as adopted by the EU, and the financial statements of the parent company are prepared in accordance with the Danish Financial Statements Act. Moreover, the consolidated financial statements and the financial statements of the parent company are prepared in accordance with additional Danish disclosure requirements for listed companies. The management s review is also prepared in accordance with Danish disclosure requirements for listed companies. In our opinion, the consolidated financial statements and the financial statements of the parent company give a true and fair view of the financial position at 31 December 2009 of the Group and the parent company and of the results of the Group's and the parent company's operations and the Group s consolidated cash flows for the financial year In our opinion, the management s review includes a true and fair account of the development in the operations and financial circumstances of the Group and the parent company, of the results for the year and of the financial position of the Group and the parent company as well as a description of the most significant risks and elements of uncertainty facing the Group and the parent company. We recommend that the annual report be adopted at the annual general meeting. Copenhagen, 9 March 2010 Board of Management Carsten Mortensen PRESIDENT Michael Tønnes Jørgensen EXECUTIVE VICE PRESIDENT Board of Directors Mogens Hugo Alison J. F. Riegels Erling Højsgaard CHAIRMAN VICE CHAIRMAN Karsten Knudsen Arvid Grundekjøn Benn Pyrmont Johansen Bent Torry Kjæreby Sørensen Lars Enkegaard Biilmann Management s review 46

49 Management s review Statement by the Board of Directors and Board of Management Independent Auditor s Report 47 Independent Auditor s Report To the shareholders of Dampskibsselskabet NORDEN A/S We have audited the consolidated financial statements, the financial statements of the parent company and the management s review of Dampskibsselskabet NORDEN A/S for the financial year 1 January - 31 December The consolidated financial statements comprise income statement, statement of comprehensive income, statement of financial position, statement of cash flows, statement of changes in equity and notes. The financial statements of the parent company comprise income statement, balance sheet, statement of changes in equity and notes. The consolidated financial statements are prepared in accordance with International Financial Reporting Standards as adopted by the EU, and the financial statements of the parent company are prepared in accordance with the Danish Fi-nancial Statements Act. Moreover, the consolidated financial statements and the financial statements of the parent company are prepared in accordance with additional Danish disclosure requirements for listed companies. The management s review is prepared in accordance with Danish disclosure requirements for listed companies. Management s responsibility Management is responsible for the preparation and fair presentation of the consolidated financial statements and the financial statements of the parent company in accordance with the above mentioned legislation and disclosure requirements. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the consolidated financial statements and the financial statements of the parent company that are free from material misstatement, whether due to fraud or error. The responsibility also includes selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. Furthermore, management is responsible for preparing a management s review that includes a true and fair account in accordance with Danish disclosure requirements for listed companies. Auditor s responsibility and basis of opinion Our responsibility is to express an opinion on the consolidated financial statements, the financial statements of the parent company and the management s review based on our audit. We conducted our audit in accordance with Danish auditing standards. These standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements, the financial statements of the parent company and the management s review are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements, the financial statements of the parent company and the management s review. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, the financial statements of the parent company and the management s review, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company s preparation and fair presenta tion of the consolidated financial statements and financial statements of the parent company and to the preparation of a management s review that includes a true and fair account in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements, the financial statements of the parent company and the management s review. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Our audit has not resulted in any qualification. Opinion In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group at 31 December 2009 and of the results of the Group operations and cash flows for the financial year 1 January - 31 December 2009 in accordance with International Financial Reporting Standards as adopted by the EU and additional Danish disclosure requirements for listed companies. In our opinion, the financial statements give a true and fair view of the financial position of the parent company at 31 December 2009 and of the results of the Company operations for the financial year 1 January - 31 December 2009 in accordance with the Danish Financial Statements Act and additional Danish disclosure requirements for listed companies. In our opinion, the management s review includes a true and fair account of the development in the operations and financial circumstances of the Group and the parent company, of the results for the year and of the financial position of the Group and the parent company as well as a description of the most significant risks and elements of uncertainty facing the Group and the parent company in accordance with Danish disclosure requirements for listed companies. Copenhagen, 9 March 2010 PricewaterhouseCoopers Statsautoriseret Revisionsaktieselskab Jens Otto Damgaard State Authorised Public Accountant Bo Schou-Jacobsen State Authorised Public Accountant Management s review 47

50 48 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Income statement 1 January 31 December Note Amounts in USD Revenue 1,675,863 4,246,815 3 Other operating income, net 1,018-8,341 Vessel operating costs -1,486,706-3,645,124 4 Other external costs -13,862-24,043 5 Staff costs -50,666-63,638 Profit before depreciation, etc. (EBITDA) 125, ,669 Profits from the sale of vessels, etc. 69, ,972 11/16 Depreciation and impairment -39,494-31, Share of results of joint ventures 965 8,580 Profit from operations (EBIT) 156, ,591 6 Fair value adjustment of certain hedging instruments 60,764-81,133 7 Financial income 15,302 34,192 8 Financial costs -8,227-5,125 Profit before tax 224, ,525 9 Tax for the year -7,327-12,695 PRofIT for ThE year 217, ,830 Attributable to: Shareholders of NORDEN 217, ,832 Minority interests , , Earnings per share (EPS), USD Basic earnings per share Diluted earnings per share

51 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 49 Statement of comprehensive income 1 January 31 December Note Amounts in USD Profit for the year, after tax 217, , Value adjustment of hedging instruments -13,243 13, Fair value adjustment of securities 2,538-4,696 Tax on fair value adjustment of securities Income and expenses recognised directly in equity -10,310 8,887 Comprehensive income for the year, after tax 206, ,717 Attributable to: Shareholders of NORDEN 206, ,719 Minority interests , ,717 49

52 50 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Statement of financial position at 31 December Assets Note Amounts in USD Property and equipment 55,841 56, Vessels 497, , Prepayments on vessels and newbuildings 442, ,836 Tangible assets 995, , Investments in joint ventures 31,770 30,855 financial assets 31,770 30,855 Non-current assets 1,027, ,519 Inventories 31,504 23, Freight receivables 76, , Receivables from joint ventures 0 8, Other receivables 58,041 15,604 Prepayments 47,764 87, Securities 24,563 22, Cash and cash equivalents 710, , ,401 1,072, Tangible assets held for sale 54,547 46,852 Current assets 1,003,948 1,119,145 ASSETS 2,031,698 2,041,664 50

53 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 51 Statement of financial position at 31 December Equity and liabilities Note Amounts in USD Share capital 7,087 7, Reserves 2,236 12,546 Retained earnings 1,795,620 1,680,673 Equity (NORDEN s shareholders) 1,804,943 1,700,306 Minority interests Equity 1,805,013 1,700, Bank debt 58,423 63, Prepayments received on vessels for resale 0 28,100 Non-current liabilities 58,423 91, Bank debt 5,187 5,187 Trade payables 66,452 91,237 Debt to joint ventures 6, Company tax 1,064 4,168 Other payables 17,106 85,250 Deferred income 33,448 29, , , Liabilities relating to tangible assets held for sale 38,425 34,066 Current liabilities 168, ,576 Liabilities 226, ,286 EQUITy AND LIABILITIES 2,031,698 2,041,664 51

54 52 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Statement of cash flows 1 January 31 December Note Amounts in USD Profit from operations 156, ,591 11/16 Reversed depreciation and impairment 39,494 31,630 Reversed profits on the sale of vessels, etc. -69, , Reversed share of results of joint ventures ,580 Other adjustments 5,180 9, Change in working capital 35,824 19,137 Financial payments received 15,352 16,852 Financial payments made -11,754-5,125 Company tax paid, net -10,036-5,226 Cash flows from operating activities 160, ,921 11/16 Investments in vessels and vessels held for sale -266, , Investments in other tangible assets -2,551-53, Investments in joint ventures 0-2, Additions in prepayments on newbuildings -263, ,383 Change in additions in prepayments received on sold vessels -23,741 22,273 Hereof change in held in restricted cash and cash equivalents 25,950-17,650 Proceeds from the sale of vessels and newbuildings 450, ,003 Proceeds from the sale of building and other tangible assets 63 10,877 Acquisition of securities -3-23,564 Sale of securities Cash flows from investing activities -79,957-56, Dividend paid to shareholders (excluding dividend on treasury shares) -97, , Payment to Vækstfonden concerning treasury shares 0-37, Acquisition of treasury shares -9, Sale of treasury shares ,337 Net distribution to shareholders -107, ,191 Instalments on/repayment of lease payment, assets acquired under finance leases 0-25,545 Instalments on/repayment of other non-current debt -5,187-5,186 Loan financing -5,187-30,731 Cash flows from financing activities -112, ,922 Change in cash and cash equivalents for the year -32, ,267 Cash and cash equivalents at 1 January, non-restricted 772, ,788 Exchange rate adjustments -37,511 50,412 Change in cash and cash equivalents for the year -32, , Cash and cash equivalents at 31 December, non-restricted 702, ,467 52

55 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 53 Statement of changes in equity Note Amounts in USD 000 Shareholders of NORDEN Retained Minority Share capital Reserves earnings Total interests Total Equity at 1 January ,087 12,546 1,680,673 1,700, ,700,378 Total comprehensive income for the year - -10, , , , Acquisition of treasury shares ,960-9, , Sale of treasury shares Distributed dividends , , ,117 Dividends, treasury shares - - 5,493 5,493-5, Share-based payment - - 5,180 5,180-5,180 Changes in equity 0-10, , , ,635 Equity at 31 December ,087 2,236 1,795,620 1,804, ,805,013 Shareholders of NORDEN Retained Minority Share capital Reserves earnings Total interests Total Equity at 1 January ,087 3,659 1,300,380 1,311, ,311,200 Total comprehensive income for the year - 8, , , , Payment to Vækstfonden concerning acquisition of treasury shares ,997-37, , Sale of treasury shares ,337 14,337-14, Distributed dividends , , ,647 Dividends, treasury shares ,116 15,116-15, Share-based payment - - 6,652 6,652-6,652 Changes in equity 0 8, , , ,178 Equity at 31 December ,087 12,546 1,680,673 1,700, ,700,378 See note 31 for a description of reserves available for distribution as dividends and note 17 for specification of distribution of reserves on securities and cash flow hedging. 53

56 54 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Notes to the financial statements Note Page 1 Significant accounting policies 55 2 Risk management 63 3 Segment information 67 4 Fees to auditor appointed at the annual general meeting 69 5 Staff costs 69 6 Fair value adjustment of certain hedging instruments 70 7 Financial income 70 8 Financial costs 70 9 Taxation Earnings per share (EPS) Tangible assets Joint ventures Receivables Securities Cash and cash equivalents Tangible assets held for sale Reserves Equity Bank debt Prepayments received on vessels for resale Liabilities relating to tangible assets held for sale Operating lease liabilities Unrecognised contingent assets and liabilities Mortgages and security COAs and operating lease income Financial instruments hedge accounting Related party disclosures and transactions with related parties Share-based payment Liquidity risk Change in working capital Dividend Subsidiaries Events after the reporting period 85 54

57 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Significant accounting policies Dampskibsselskabet NORDEN A/S with its subsidiaries is one of Denmark s oldest internationally operating shipping companies. NORDEN operates in dry cargo and tankers worldwide. Dampskibsselskabet NORDEN A/S is a public limited company incorporated in Denmark and is listed on NASDAQ OMX Copenhagen A/S. The consolidated financial statements of Dampskibsselskabet NORDEN A/S for 2009 have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and additional Danish disclosure requirements for annual reports of listed companies. The additional Danish disclosure requirements are set out in the Danish Statutory Order on Adoption of IFRS issued pursuant to the Danish Financial Statements Act and NASDAQ OMX Copenhagen A/S regulations. The consolidated financial statements and this additional information comprise the consolidated annual report. The consolidated financial statements have also been prepared in accordance with the IFRS issued by IASB. The annual report for the period 1 January 31 December 2009 with comparative figures comprises the consolidated financial statements of Dampskibsselskabet NORDEN A/S and its subsidiaries (the Group) and the financial statements of the parent company. The financial statements of the parent company, Dampskibsselskabet NOR- DEN A/S, for 2009 have been prepared in accordance with the Danish Financial Statements Act. The financial statements of the parent company, Dampskibsselskabet NORDEN A/S, for 2008 were prepared in accordance with IFRS. Accounting policies for the parent company are stated in note 1 to the financial statements of the parent company. In general The annual report is prepared on the basis of the historical cost principle, with the exception of the following assets and liabilities: Derivative financial instruments and financial instruments classified as available for sale, which are measured at fair value. Non-current assets and groups of assets held for sale are measured at the lower of carrying amount before the changed classification and fair value less costs to sell. USD is the functional currency of all enterprises in the Group as well as the parent company. In the annual report, the presentation currency is USD, and amounts are presented rounded off to the nearest USD 1,000. Changes in accounting policies, including presentation The accounting policies of the consolidated financial statements, including presentation, are unchanged compared to last year, except from the below. Effective as from 1 January 2009, NOR- DEN has implemented the effective financial reporting standards and amendments issued by IASB, including IFRS 1, 2, 4, 7, IAS 32 and 39 and the interpretations IFRIC for the consolidated financial statements. The new financial reporting standards and interpretations do not affect recognition or measurement and only result in changes to the notes to the financial statements. The accounting policies of the financial statements of the parent company have been changed as a result of presentation in accordance with the Danish Financial Statements Act instead of IFRS for the purpose of reducing the size of the annual report and increase clarity. See the financial statements of the parent company for a comment on the change in accounting policies. NORDEN has also made other changes in the notes to the financial statements for the purpose of increasing clarity, which has been done by reducing the number of notes and merging information. Comparative figures have been restated. New financial reporting standards (IAS/ IfRS) and interpretations (IfRIC) approved At 31 January 2010, IASB issued the following new financial reporting standards and interpretations, which are estimated to be of relevance to NORDEN: IFRS 9 Measurement and classification of financial assets. The number of categories of financial assets is reduced to two amortised cost or fair value. The classification is determined on the basis of the type of business model and the characteristics of the instrument, respectively. The annual improvements to current IFRS, which will result in minor changes to a number of standards. The annual improvements to IFRS and IFRS 9 have not yet been approved by the EU. The implementation of the standards is not expected to have any significant effect on NORDEN s recognition and measurement, but will be further assessed. The additional amendments to standards, which have been issued by IASB, but are irrelevant to NORDEN include: IFRS 1, 2, 3, IAS 1, 24, 27, 32, 39 and interpretations IFRIC The amendments have not been approved by the EU. Significant accounting choices in accounting policies and significant accounting estimate In preparing the annual report, NOR- DEN s management makes a number of accounting choices and estimates. These are the basis for recognition and measurement of the Group s and the parent company s assets, liabilities, income and expenses. The most significant accounting choices and estimates are described below. 55

58 56 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Notes Significant choices Tangible assets The Group s choice of historical cost rather than fair value as the basis for measuring tangible assets vessels has a material impact on the calculation of the Group s and the parent company s results and equity. See the below section on Tangible assets for a more detailed description of the Group s and the parent company s accounting policies. Leases Management s judgments of whether leases regarding vessels should be classified as finance leases or operating leases are based on an overall assessment of the individual leases. A finance lease is recognised as a non-current asset and as a liability. For leases classified as operating leases, lease payments are generally recognised in the income statement as they are paid. See the below section on Leases for a more detailed description of the Group s and the parent company s accounting policies. Recognition of revenue and voyage costs On recognition of freight income and voyage costs, including net income from pool arrangements, the management makes choices as to the start and end dates of voyages, etc. See the below section on Revenue for a more detailed description of the Group s and the parent company s accounting policies. Significant accounting estimates The determination of the carrying amounts of certain assets and liabilities requires judgments, estimates and assumptions about future events. The applied estimates are based on historical data and other factors that management considers appropriate under the given circumstances, but which are inherently uncertain or unpredictable. Such assumptions may be incomplete or inaccurate, and unexpected events or circumstances may occur. In addition, the Company is subject to risks and uncertainties that may cause actual outcomes to deviate from these estimates. Risk factors specific to the NORDEN Group are described in note 2. It may be necessary to change previous estimates as a result of changes to the assumptions on which the estimates were based or due to new information or subsequent events. Estimates and underlying assumptions are reassessed on a regular basis. Changes to accounting estimates are recognised in the period when the estimate is changed if the change affects this period only, or in the current and future periods if the change affects the current as well as future periods. Estimates material to the financial reporting are made, among other things, in the calculation of depreciation, amortisation and impairment, the value of receivables, provisions as well as contingent liabilities and assets. The most significant estimates are: Tangible assets including vessels and prepayments on vessels and newbuildings Significant accounting estimates include, among other things, estimates of useful lives, scrap values and impairment on tangible assets. Impairment test Management s assessment of the need for impairment on vessels and prepayments on newbuildings is based on the cash-generating units in which vessels, etc. are included. This is usually the total fleet within NORDEN s 2 segments, Dry Cargo and Tankers. If there are indications that the carrying amount of assets exceeds the value of future cash flows from the asset (recoverable amount), an impairment test must be carried out. The recoverable value is calculated as the highest value of the net selling price (fair value less cost to sell) and the value in use at continued use. If the net selling price (fair value less cost to sell) of the Company s vessels and newbuildings, expressed by the average of 3 broker estimates, is lower than the carrying amounts and costs of newbuildings, an impairment test must be carried out. The impairment test is carried out within NORDEN s 2 cash-generating units (CGUs), Dry Cargo and Tankers, as the vessels within these 2 segments can usually be handled on a portfolio basis. The impairment test is done by estimating the recoverable amount at value in use calculated as the present value of the total expected cash flows during the rest of the vessels economic lives including entered COAs, time charters and by using estimated rates on the basis of historical data for uncovered capacity. If the value in use is lower than the carrying amounts, the asset is written down for impairment. See the Financial review on page 45. Onerous contracts In assessing the need for provisions for onerous contracts, management has emphasised that contract performance can usually be achieved through substitution of vessels within the fleet in the segment concerned, and that this is reflected by the disposal of the fleet. For this reason, provisions for each of NORDEN s cashgenerating units, Dry Cargo and Tankers, are stated in aggregate, together with the statement of possible write-downs. At 31 December 2009, the carrying amount of these items (tangible assets) was USD 996 million (USD 892 million). See also note 11. Receivables Receivables are measured at amortised cost less provisions for impairment losses. Provisions for bad debts are determined on the basis of customers ability to pay, considering historical information about payment patterns, doubtful debts, customer concentrations, customer creditworthiness and collateral received as well as prevailing economic conditions. Estimates made are updated if the debtor s ability to pay changes. 56

59 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 57 The financial uncertainty attached to provisions for bad and doubtful debts is considered to have increased due to the economic trends. It is estimated that the provisions made are sufficient to cover any bad debts. At 31 December 2009, the carrying amount of Group receivables was USD 135 million (USD 132 million). In addition, see note 13. Contingent assets and liabilities Information on contingent assets and liabilities and when recognition should be made as asset and liability, respectively, is based on assessments of the expected outcome of each claim. The assessments are made on the basis of legal assessments of the signed agreements, which in considerable claims also include assessments obtained from external advisors including lawyers, among others. Assets are recognised when it is as good as certain that the claim will have a positive outcome for the Group. A liability is recognised if it is likely that the claim will have a negative outcome and when the amount is estimable. If this is not the case, the matter is stated in the notes to the financial statements. Rulings in connection with such matters may in coming accounting periods produce realised gains or losses which may differ considerably from the recognised amounts or information. The financial uncertainty tied to the information and the recognised amounts is considered to have significantly increased due to the current economic trends. In addition, see note 23. Consolidation principles The consolidated financial statements comprise the parent company, Dampskibsselskabet NORDEN A/S, and undertakings in which the parent company controls the operational and financial decisions, usually by directly or indirectly holding the majority of the voting rights (subsidiaries). In the determination of voting rights, share options exercisable by the Group at the balance sheet date are included. On consolidation, intra-group income and expenses, shareholdings, dividends and accounts as well as unrealised intragroup gains and losses on transactions between the consolidated undertakings are eliminated. The financial statements used in the consolidation are prepared in accordance with the Group s accounting policies. The consolidated annual report is prepared on the basis of the financial statements of the parent company and the subsidia ries by aggregating items of a uniform nature. Newly acquired or newly established undertakings are recognised in the consolidated financial statements from the date of acquisition using the purchase method. Undertakings divested or wound up are included in the consolidated income statement until the date of disposal. Comparative figures are not restated to reflect acquisitions, divestments or companies wound up. Leases The Group as lessee Agreements to charter vessels and to lease other tangible assets where substantially all risks and rewards of ownership have been transferred to the Group (finance leases) are recognised in the statement of financial position. Vessels and other tangible assets are recognised at the delivery date at a value corresponding to the present value of the finance charges set out in the agreements, including any purchase options expected to be exercised. For the purpose of calculating the present value, the zero-coupon rate with the addition of an interest margin is used as discount factor. Vessels and other tangible assets acquired under finance leases are depreciated and written down for impairment according to the same accounting policies as assets owned by the Group. The capitalised residual lease liability is recognised in the statement of financial position as a liability, and the interest element of the lease payment is charged to the income statement as incurred. Other agreements to charter vessels and other leases are considered operating leases. Payments in connection with operating leases are recognised on a straight-line basis in the income statement over the terms of the leases. The Group as lessor Agreements to charter out vessels on time charters where substantially all risks and rewards of ownership have been transferred to the lessee (finance leases) are recognised as a receivable in the statement of financial position. The receivable is measured in the same way as the lease liability in cases where the Group is the lessee, as described above. Other agreements to charter out vessels are considered operating leases. Payments in connection with operating leases are recognised on a straight-line basis in the income statement over the terms of the leases. foreign currency translation A functional currency is determined for each of the reporting entities in the Group. The functional currency is the currency in the primary economic environment in which the reporting entity operates. Transactions in currencies other than the functional currency are transactions in foreign currencies. Transactions in foreign currencies during the year are translated at the exchange rates at the transaction date. Gains and losses arising between the exchange rate at the transaction date and the exchange rate at the date of payment are recognised in the income statement as Financial income or Financial costs. 57

60 58 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Notes Receivables, payables and other monetary items denominated in foreign currencies that have not been settled at the balance sheet date are translated at the exchange rates at the balance sheet date. Differences between the exchange rates at the transaction date and the exchange rates at the balance sheet date are recognised in the income statement as Financial income or Financial costs. Exchange rate adjustments of shares denominated in foreign currencies held for sale are recognised in equity together with unrealised fair value adjustments of shares. Derivative financial instruments Derivative financial instruments are recognised in the statement of financial position at fair value at the date of transaction. Positive and negative fair values of derivative financial instruments are recognised as assets under Other receivables or as liabilities under Other payables, respectively. Changes in the fair value of derivative financial instruments that are designated as fair value hedges of a recognised asset or a recognised liability are recognised in the income statement in the same item as any changes in the carrying amount of the hedged asset or hedged liability. Changes in the fair value of derivative financial instruments designated as hedges of expected future transactions are recognised in the comprehensive income and are accumulated as a reserve in equity under Reserve for hedge transactions. Where the expected future transaction results in the acquisition of non-financial assets, any amounts deferred under equity are transferred from equity to the cost of the asset. Where the expected future transaction results in income or expense, amounts deferred under equity are transferred from equity to the income statement in the same item as the hedged transaction. The majority of the Group s derivative financial instruments provide effective financial hedging in accordance with the Group s risk management policy. Certain of the derivative financial instruments (FFAs and bunker hedging contracts) are not considered to qualify for hedge accounting according to accounting regulations. Changes in the fair value of derivative financial instruments not considered to qualify for hedge accounting are recognised in the income statement in a separate item under financials called Fair value adjustment of certain hedging instruments. As the hedging instruments are realised, the accumulated fair value adjustments are reclassified to the same item as the hedged transaction. Some of the Group s derivative financial instruments in the form of FFAs which were not entered into for hedging purposes are classified as held for trading and recognised at fair value. Fair value adjustments are recognised under Other operating income in the income statement. Determination of fair value Listed securities traded in an active market are measured at fair value at the balance sheet date using the selling price. Initial recognition is based on the fair value at the trade date. In determining the fair value of unlisted derivative financial instruments and o ther financial instruments for which there is no active market, fair value is determined using generally accepted valuation techniques. Market-based parameters such as market-based yield curves and forward exchange prices are used for the valuation. For bunker contracts the price is based on observable stock markets, e.g. Rotterdam and Singapore. The value of FFAs is assessed on the basis of daily recorded prices from the Baltic Exchange. For non-current liabilities and other interest rate-based financial instruments, the fair value is based on a discounted value of future cash flows. The zero-coupon rate with the addition of the undertaking s interest margin is used as discount factor. The fair value of financial assets and financial liabilities with a maturity of less than 1 year is assumed to approximate their face values less any estimated credit adjustments. The fair value of financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rates available to the Group for similar financial instruments. Segment information Information is provided on the Group s two business segments, Tankers and Dry Cargo. The information is based on the Group s organisation, business management and internal financial management, including financial reporting to NORDEN s operative management. NORDEN s operative management function comprises the Board of Management and the Board of Directors in unison. The Board of Management is responsible for the day-to-day management. The Board of Directors is in charge of strategy, action plans, targets and budgets and the financial and market risk limits and supervises the Board of Management. The Board of Management s and Board of Directors functions and responsibilities are described in more detail in the Corporate Governance section in the management s review. The services offered by NORDEN s Tanker segment comprise transport of crude oil or refined oil products, and the Dry Cargo segment offers transport of bulk commodities such as grain, coal, ore and sugar. NORDEN s segments generate revenue consisting of freight income from owned and chartered vessels and management income. Information is not provided by geographical segment because the global market is a unit, and the activities of the individual vessels are not limited to specific parts of the world. Nor does the internal financial reporting for the operative management provide such information. It is therefore not possible to provide geographical segment information on revenue from external customers or non-current assets. 58

61 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 59 The accounting policies governing the recognition and measurement of the segments are consistent with the policies described for NORDEN in this note. The accounting policies governing and presentation of segment information for the financial year under review are consistent with those for the previous financial year. The segment income statement items and their order are consistent with NOR- DEN s consolidated income statement, except for voyage costs, which are not included in the item Vessel operating costs but presented as a separate item, and the segment income statement therefore comprises the subtotal Contribution margin. The names and contents of segment assets are consistent with the consolidated statement of financial position. In the internal financial reporting to the operative management, liabilities are not allocated to segments. There are no inter-segment transactions. The methods of allocating related assets, liabilities and income statement items to segments are consistent. The allocation between Tankers and Dry Cargo is as follows: The items included in the segment profit, including the share of results of joint ventures, are allocated to the extent that the items are directly or indirectly attributable to the segments. Items that are allocated by both direct and indirect calculation comprise Staff costs and Other external costs. Parts of these items are not attributable, either directly or indirectly, to a segment and are therefore not allocated. Items allocated by indirect calculation are allocated on the basis of allocation keys defined on the basis of each segment s drawings on key resources. Financial income and costs are not allocated as they are considered to relate to NORDEN in general. Tax relating to financials is not allocated. Other non-allocated tax relates to non-allocated non-current assets. Non-current segment assets consist of the assets used directly in segment operations, including Vessels and Prepayments on newbuildings and Investments in joint ventures. Current assets are allocated to segments to the extent that they are directly attributable to these, e.g. Inventories and Freight receivables. Some of the freight receivables cannot be allocated directly, and allocation is therefore based on an estimate. Non-allocated items are primarily income and expenses and assets relating to the Group s administrative functions, investment activity and similar activities. NORDEN has no one customer with which the external revenue exceeds 10% of total revenue. Income statement Revenue Revenue comprises the present value of services rendered, net of discounts. Services rendered comprise freight income, time charter income and management income. Revenue is recognised in the income statement for the financial year as earned. The determination of whether revenue and other operating income is considered earned is based on the following criteria: a binding sales agreement has been made; the selling price has been determined; the service has been rendered before the end of the financial year; payment has been received or may reasonably be expected to be received; costs incurred or to be incurred in respect of the transaction can be measured reliably and, in respect of freight income other than time charter income, the percentage of completion can be reliably determined. All freight income and voyage costs are recognised as the freight services are rendered (percentage of completion). The percentage of completion is determined using the discharge to discharge method. According to this method, freight income and related costs are re cognised in the income statement according to the charter parties from the vessel s departure date to the delivery of the cargo (discharge). The departure date is defined as the date of the most recent discharge, and the voyage ends at the date of the next discharge (discharge to discharge). This applies to all spot transports and transports under Contracts of Affreightment (COAs). For voyages in progress at the end of an accounting period that will conclude in a subsequent accounting period, freight income and related costs are recognised according to the percentage of the estimated duration of the voyage concluded at the balance sheet date. Demurrage is recognised if the claim is considered probable. For vessels on time charters, that is operating leases, charter hire is recognised over the term of the lease. Management income is recognised upon receipt of the services in accordance with the management agreements concluded. For vessels operating in pools, the pool s profit is allocated to the pool participants on the basis of an agreed formula. The agreed formula may differ from pool to pool. Generally speaking, the pool profit is allocated to the participants according to the number of days the vessels have been at the pool s disposal, but weighted for the capacity and characteristics of the individual vessels. The above-mentioned principles for the recognition of freight income and related costs also apply to pool arrangements. For vessels ope rating in pools, income is presented on a time charter equivalent basis, that is after setoff of direct voyage costs, including bunker oil consumption, commissions and port charges. 59

62 60 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Notes other operating income Other operating income comprises items of a secondary nature relative to the Group s principal activity. The item mainly relates to the part of the Group s trading in derivative financial instruments (FFAs) that is not for hedging purposes. The item, furthermore, comprises rents received. Vessel operating costs Vessel operating costs comprise the expenses, excluding depreciation and staff costs, incurred to generate the revenue for the year. Vessel operating costs therefore include charter hire for chartered vessels (operating leases), bunker oil consumption, other voyage costs such as commissions and port charges, repair and maintenance costs, insurance costs, provisions for docking costs and other operating expenses. Like revenue, vessel operating costs are recognised upon receipt of services in accordance with the charter parties concluded. other external costs Other external costs comprise costs of properties, office expenses, external assistance, etc. Profits from the sale of vessels, etc. Profits from the sale of vessels are stated as the difference between the sales price for the vessel less selling costs and the carrying amount of the vessel in question at the time of delivery. Furthermore, any gains and losses upon repayment of related loans are included. Profit from the sale of other tangible assets is also included. Share of results of investments in joint ventures In the Group s income statement, the Group s shares of the joint ventures results after tax are included in the item Share of results of joint ventures. Net financials Financial income and costs comprise interest, financing costs of finance leases, realised and unrealised exchange rate adjustments, fair value adjustments of forward exchange contracts, market value adjustment of securities and dividends received on shares recognised in securities. fair value adjustment of certain hedging instruments Fair value adjustment of certain hedging instruments comprises changes in the fair values of derivative financial instruments that are used to hedge future bunker purchases and freight income but do not qualify for hedge accounting. As the hedging instruments are realised, the accumulated fair value adjustments are reclassified to the same income statement item as the hedged transaction. Tax on profit for the year The Company s current tax consists of tax paid according to the regulations of the Danish Tonnage Tax Act for shipping activities and according to general tax regulations for net financial income and other activities. Other activities comprise letting of the Company s domicile and management income. The Company is taxed jointly with the wholly owned Danish subsidiary. Statement of financial position Tangible assets Tangible assets are measured at cost less accumulated depreciation and impairment. Land is not depreciated. Cost comprises the acquisition price and costs directly related to the acquisition up until the time when the asset is ready for use. Borrowing costs directly attributable to financing of the construction of tangible assets are included in cost over the period of construction. All other borrowing costs are recognised in the income statement. The basis of depreciation is calculated as the excess of cost over the estimated scrap value. The scrap value of vessels is determined based on the market price per lightweight tonne for scrapping of the vessel. The basis of depreciation is allocated on a straight-line basis over the estimated useful lives of the assets as follows: Buildings 50 years Vessels, including vessels acquired under finance leases 20 years Fixtures, fittings and equipment 3 10 years The depreciation period for secondhand vessels is determined on the basis of the condition and age of the vessels at the time of acquisition, but the depreciation period does not exceed 20 years from delivery from the shipyard. Docking costs relating to vessels recognised in the statement of financial position are added to the carrying amounts of the vessels when incurred. Docking costs are allocated on a straightline basis over the estimated useful lives of the improvements. Useful lives and scrap values are reassessed annually. Prepayments on newbuildings are recognised in assets as vessels under construction as payments are made. At the delivery of the vessel, it is reclassified to the item Vessels. Impairment of tangible and financial assets The carrying amounts of tangible and financial assets are analysed annually to determine whether there are any indications of impairment in excess of the amount provided for by normal depreciation. An impairment test is conducted if there is an indication that the carrying amount of an asset may exceed the expected future cash flows from the asset. If there is such an indication, the asset is written down to the lower recoverable amount. The recoverable amount of the asset is determined as the higher of the 60

63 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 61 net selling price and the value in use. If a recoverable amount for the individual assets cannot be determined, the smallest group of assets for which it is pos sible to determine the recoverable amount (cash-generating unit) is analysed for impairment. For investments in joint ventures, the cash-generating unit is the individual joint venture, and the recoverable amount is usually determined based on value in use. For vessels, the cash-generating unit is usually the total fleet within the Group s individual segments, and for financial assets (other than investments in joint ventures), it is the individual paper or investment. For vessels, the recoverable amount is usually determined based on the estimated selling price assessed by external brokers. For financial assets (other than investments in joint ventures), the impairment is based on the selling price. Shares are written down when the decline in value is substantial or longterm. Bonds are written down when there are objective indications of loss (suspension of payments, bankruptcy, etc.). In both cases, the selling price is used as a basis because active markets exist. Investments in joint ventures Undertakings which are contractually operated jointly with one or more other undertakings (joint ventures) and which are thus jointly controlled are recognised in the consolidated financial statements according to the equity method. In the Group s statement of financial position, the Group s share of the net asset value of joint ventures is thus included in the item Investments in joint ventures, calculated on the basis of the Group s accounting policies and after deduction or addition of the Group s share of any unrealised intra-group gains or losses. Joint ventures with negative net asset values are valued at USD 0 million. If the Group has a legal or constructive obligation to cover the undertaking s negative balance, such obligation is recognised under liabilities. Inventories Inventories primarily comprise bunker oil kept on board vessels. Inventories are measured at the lower of cost according to the FIFO method and net realisable value. Receivables Receivables are measured in the statement of financial position at the lower of amortised cost and net realisable value, which corresponds to the nominal value less provisions for bad debts. Provisions for bad debts are determined on the basis of an individual assessment of each receivable. Securities Shares and bonds available for sale are recognised under current assets at fair value at the trade date and are subsequently measured at market price in respect of listed securities and at fair value applying a valuation method in respect of unlisted securities. If securities are impaired, they are written down. Value adjustments of shares are recognised in net financials when realised. Until realisation, value adjustments of listed securities are recognised in equity in the reserve for securities. Cash and cash equivalents Cash and cash equivalents are measured in the statement of financial position at nominal value. Tangible assets held for sale and related liabilities Tangible assets held for sale comprise vessels which will be sold within 12 months of the balance sheet date and prepayments on newbuildings under construction which will be sold on delivery within 12 months of the balance sheet date. Vessels and prepayments on vessels held for sale are measured at the lower of carrying amount and fair value less costs to sell and are recognised under current assets. Vessels classified as held for sale are not depreciated. Assets and directly related liabilities are recognised in separate items in the statement of financial position. The items are specified in the notes to the financial statements. Gains and losses are included in the income statement in the item Pro fits from the sale of vessels, etc. and are recognised on delivery. Statement of changes in equity Dividend Dividend is recognised as a liability at the time of adoption by the shareholders in general meeting. Dividend proposed by management in respect of the year is stated under equity. Dividend is not paid in respect of treasury shares. Treasury shares The acquisition and sale of treasury shares and dividends thereon are taken directly to retained earnings under e quity. Share-based incentive programme The value of services rendered by employees as consideration for share-based incentive payments is measured at the fair value of the granted options and employee shares. For options, this fair value is recognised in the income statement over the vesting period. The fair value of employee shares is recognised at the grant date. A corresponding increase is recognised in equity. The fair value of the options is determined using the Black-Scholes valuation model, taking into account the terms of the grant and the actual number of vested options. On recognition, the number of options expected to vest is estimated. The estimate is adjusted over the vesting period to the actual number of vested options. The fair value of the employee shares is 61

64 62 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Notes the quoted price (all trades at 5 p.m.) at the grant date. Provisions Provisions are recognised when, as a consequence of an event that has occurred before or on the balance sheet date, the Group has a legal or constructive obligation, and it is likely that economic benefits will flow from the Company to meet the obligation. Provisions for docking costs are recognised for bareboat chartered vessels where the agreement entails a commitment on the part of the Group to bring vessels into dock regularly. Provisions are made on a current basis at an amount equal to a pro rata share of the estimated cost of the next docking of each individual vessel, as the value of the liability increases continuously. The provisions are recognised in the income statement in the item Vessel operating costs. Provisions for onerous contracts are recognised when it is inevitable that a loss will be incurred on performance of the contract. In each of the two cashgenerating units, Dry Cargo and Tan kers, the vessels are operated collectively. The cash-generating units are identical to the reporting segments. Contact performance can usually be achieved by substitution of vessels in the fleet within the two cashgenerating units, Dry Cargo and Tankers. The inevitable loss is assessed in consideration of this possibility. The provision is measured at the lower of the net cost of contract performance and damages payable on termination of the contract. Provisions for onerous contracts are recognised in the income statement in the item Vessel operating costs. Deferred tax The parent company entered the Da nish tonnage tax regime for shipping enterprises with binding effect for a period of 10 years as from Based on the parent company s planned use of vessels and recovery of recaptured depreciation, respectively, the tonnage tax regime does not result in a liability, hence it does not result in any deferred tax in the statement of financial position. The liability is merely a contingent liability. The amount of contingent tax is stated in the note Company tax. Other activities of the Group and the parent company are not subject to deferred tax. financial liabilities Bank debt is recognised at the time the loans are obtained in the amount of the proceeds after deduction of transaction costs. In subsequent periods, such loans are recognised at amortised cost, equivalent to the capitalised value applying the effective rate of interest at the inception of the loan, to the effect that the difference between the proceeds and the nominal value is recognised in the income statement over the term of the loan. The capitalised residual lease liability under finance leases is also considered a financial liability. Other liabilities, comprising trade payables, prepayments received on vessels for resale, payables to joint ventures and other payables are measured at amortised cost, corresponding substantially to nominal value. Prepayments and deferred income Prepayments comprise costs incurred relating to subsequent financial years such as charter hire, rent, insurance premiums, subscription fees and interest. Deferred income comprises payments received relating to revenue in subsequent years, such as freight income, charter hire, interest and insurance premiums. Prepayments and deferred income are measured at nominal value. Consolidated statement of cash flows The statement of cash flows shows the Group s cash flows for the year distributed on operating, investing and financing activities, net changes for the year in cash and cash equivalents as well as the Group s cash and cash equivalents at the beginning and end of the year. Positive amounts indicate inflows, whereas negative amounts indicate outflows. Cash flows from operating activities Cash flows from operating activities are stated as the profit/loss adjusted for non-cash operating items such as depreciation and impairment, profits from the sale of vessels, provisions, fair value adjustments of certain hedging instruments and exchange rate adjustments of non-current liabilities, changes in working capital, interest received and paid and plus or minus corporation tax paid or received. Working capital includes current assets less current liabilities, excluding the items included in cash and cash equivalents. Cash flows from investing activities Cash flows from investing activities comprise cash flows from the acquisition and sale of non-current assets. Cash flows from financing activities Cash flows from financing activities comprise cash flows from the raising and repayment of non-current liabilities as well as payment of dividends to and from shareholders. Cash and cash equivalents Cash and cash equivalents comprise marketable securities with a term of less than 3 months and cash not subject to significant limits to its availability 62

65 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 63 Notes 2. Risk management Active risk management plays a central role in NORDEN s strategy to ensure stable earnings. The Company s risk management efforts are aimed at minimising potential negative effects on earnings from the commercial and financial activities and to limit risks to acceptable levels. The framework and objectives governing the commercial and financial risk management are set out and approved annually by the Board of Directors. The framework covers commercial risks, financial risks and capital management risks. The Board of Management is responsible for identifying material risks and developing the Company s risk management efforts. Exposures and the utilisation of the framework are reported to the Board of Directors on a monthly basis. NORDEN s commercial and financial activities lead to exposure to a number of risks, the most material of which are risks in connection with fluctuations in freight rates and vessel prices and credit risks. In the following, the individual risks are examined in terms of their impact on the Company s financial position and in terms of hedging the Company s expected future earnings. NORDEN s overall risk management policies are unchanged from last year. Market risks It is NORDEN s policy to assume material market risks only in relation to the freight market. Other risk factors, such as currency, interest rates and bunker prices, are limited by hedging the exposure when future liabilities can be estimated. The most material market price risks are thus freight rate risks relating to future earnings on owned vessels and chartered vessels. Other market price risks affecting the Company s financial position are currency risks, freight rate and bunker price risks on financial instruments and bunker price risks on owned vessels and chartered vessels, which are not employed on time charter contracts. Freight rate risks (commercial) Purchasing and chartering vessels implies a risk as the Company assumes a financial liability in expectation of an inflow of income which is subject to developments in the freight market. To limit the uncertainty relating to earnings, the future open ship days are hedged by entering into fixed long-term COAs and time charters. Coverage in 2009 in the form of COAs, time charter contracts, Forward Freight Agreements (FFAs) and single voyages constituted a total value of USD 540 million for Dry Cargo and Tankers, equalling 65% and 41% coverage of capacity in Dry Cargo and Tankers, respectively. Earnings on the remaining 35% and 59% of capacity are directly exposed to the future level of freight rates. A 10% drop in freight rates at the end of 2009 would, all other things being equal, result in a drop in expected future earnings for 2010 of USD -22 million (USD -14 million). For further information, see section on capacity and coverage in the management s review. Freight rate risks (financial) As a supplement to the actual employment of the vessels, the Company uses the FFA market to cover future physical positions (ship days) as mentioned above. At the end of 2009, the Company had sold FFAs at a net nominal value of USD 97 million (sold USD 63 million net). A 10% drop in freight rates at the end of 2009 would, all other things being equal, affect profit before tax by USD 11 million (USD 4 million). This positive effect is set off by a loss on earnings on future physical positions (ship days). Irrespective of obtaining effective financial hedging, the FFAs do not qualify for hedge accounting in accordance with the rules of accounting. Bunker price risks (financial) In order to cover risks in relation to fluctuations in future bunker prices, the Company hedges its expected future bunker consumption when entering into COAs. Hedging happens by means of bunker swaps, allowing the Company to purchase bunkers at a fixed future price. At the end of 2009, the Company had bunker swaps at a nominal value of USD 118 million (USD 170 million). A 10% decline in bunker prices at the end of 2009 would, all other things being equal, negatively affect the profit before tax by USD 14 million (USD -9 million). However, this negative effect is set off by a positive effect from lower prices on the expected future physical bunker consumption estimated in the COAs. Irrespective of obtaining effective financial hedging, the bunker swap contracts do not qualify for hedge accounting in accordance with the rules of accounting. Vessel price risks (commercial) One of NORDEN s most material risks is the risk of changes in the value of the Company s owned vessels and charter parties with purchase options as a result of changes in vessel prices and freight rates. At the end of 2009, the Company had 47 owned vessels and newbuildings and 60 charter parties with purchase option. The change in the value of owned vessels will directly affect the Company s estimated Net Asset Value (NAV), while a change in the value of charter parties with purchase option will only affect the Company s theoretical NAV. Based on the portfolio of owned vessels and charter parties with purchase option and market prices at the end of 2009, a simultaneous 10% decline in vessel prices and the freight rate curve would cause the Company s theoretical NAV to drop by USD 341 million (USD 366 million). The value of the purchase options and the assumptions applied in the calculations are set out in the sections Fleet development and Fleet values in the management s review. 63

66 64 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Currency risks (financial) The Company s functional currency is USD as the majority of the Company s transactions are in USD. Currency risks therefore arise in connection with transactions in currencies other than USD, including administrative expenses, dividends, consideration paid for vessels purchased in other currencies than USD and investment of excess liquidity in o ther currencies than USD. Currency risk on administrative expenses in DKK is hedged for a period of 6-24 months and is equivalent to approximately USD 55 million (approximately USD 50 million) in Dividend payments in DKK are hedged when the Board of Directors approves its recommendation to the annual general meeting. Receivables and payables in foreign currencies amount to net USD 0 million (USD 4 million), which has not been hedged as the currency risk is considered to be less significant. The currency risk relating to purchases of vessels in foreign currency is hedged fully on conclusion of the contract. At the end of 2009, the Company had hedged purchase liabilities corresponding to USD 30 million (USD 40 million). The excess liquidity, which was placed as fixed-term deposits in DKK at the end of 2009, amounts to DKK 1,644 million (DKK 1,981 million). This exposure was also hedged by means of offsetting positions in USD currency swaps. A 10% rise in exchange rates in foreign currencies against USD at the end of 2009 would, all other things being equal, have the following pre-tax effects on e quity and the income statement, stated in USD million (see table below): Income statement Interest rate risks (financial) The Company s interest rate risks relate to interest-bearing assets and non-current debt liabilities. At the end of 2009, the majority of the Company s excess liqui dity was placed in short-term fixed-interest deposits. Moreover, the Company s loans were entered into at fixed rates, and the Company s interest rate risks were therefore limited. A minor share of the Company s liquidity is placed in floating-rate bonds. Based on the Group s liquidity and debt at the end of 2009, a 1% interest rate reduction would, all other things being equal, have an effect of USD -7 million (USD -8 million) on the Group s financial performance before tax. Credit risks NORDEN mitigates its credit risks through systematic credit assessment of counterparties before concluding contracts and through regular monitoring of counterparties creditworthiness. The Company s Credit Risk Desk (CRD) collaborating closely with the commercial departments monitors counterparties based on a framework set out by the Board of Directors and the Board of Management. For all contracts over 65 days, internal credit rating of counterparties is required whereas credit assessment in connection with shorter contracts is based on concrete assessments. The CRD uses information from external credit rating agencies, publicly available information and its own analyses. All counterparties are given an internal rating, which is used in determining whether the Company wishes to do business with the counterparty and, if so, the allowed scope of the commitment. The ratings range from A to D, A being the Equity USD million DKK JPY EUR best category which typically includes industrial conglomerates, major shipowners or major operators with strong and transparent financial positions, available financial information and good reputations. For counterparties which are rated A, there are, as a rule, no limitations of NORDEN s trading, however, there is a 3-year limit for contracts with counterparties rated A-. With regard to counterparties with a rating of B, contracts can typically be entered into for a term of up to 1 year, whereas commitments with counterparties which are rated C are limited to single voyages. The Company s largest commercial credit exposure is with counterparties in COAs and time charter contracts of USD 1,367 million at 31 December 2009 and with shipyards and counterparties in connection with sale of vessels totalling USD 714 million. In 2010, coverage of known ship days in Dry Cargo involves 134 counterparties of which the 5 largest accounted for 30% of the covered revenue in the segment at the beginning of In Tankers, coverage was 41% and allocated on 34 counterparties, and the 5 largest counterparties comprise 64% of the covered revenue. The creditworthiness of counterparties is assessed on an ongoing basis, and ratings are updated accordingly. The Company s internal ratings are not identical to ratings issued by the international credit rating agencies and are naturally lower than those of the credit rating agencies. In connection with the sale of vessels for future delivery, the Company assumes credit risk in relation to the future consideration received for the vessels. The Company seeks to mitigate this risk by assessing the creditworthiness of counterparties and by arranging prepayment of around 10-20% of the selling price. The Company has outstanding payments regarding sold vessels for future delivery of USD 134 million in 2010 (USD 387 million in ). The Company currently anticipates that these counterparties will be able to meet their obligations. 64

67 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 65 Notes The credit risks affecting the Company s financial position relate to freight receivables, prepayments to shipyards on newbuildings, derivative financial instruments and fixed-term deposits with banks and financial institutions. At the end of 2009, these amounted to USD 1,340 million (USD 1,350 million). Freight receivables (financial) The credit risk on freight receivables in the Dry Cargo segment is limited as the freight is typically prepaid in the sense that the cargo is not loaded until payment has been made. On time charters, payment is made in advance, typically every 2 weeks. In tankers, freight is paid in arrears, but compared to dry cargo, the credit risks are lower as the freight contracts are typically concluded with large, well consolidated oil companies. Prepayments to shipyards (financial) Newbuilding contracts with shipyards are mainly entered into with repayment guarantees issued by banks with good ratings. If the credit risk is estimated to be low, guarantees will not be used. Total prepayments to yards amount to USD 462 million (USD 404 million) of which guarantees of USD 445 million (USD 383 million) have been obtained. Banks and financial institutions (financial) The Company s liquidity and derivative financial instruments (forward exchange contracts, FFAs and credit default swaps) are for the most part placed with financial institutions with a Moody s rating of at least Aa or equivalent. Minor deposits may Net commitments at 31 December 2009, USD million for short periods be placed with financial institutions with a Moody s rating of A. To limit credit risk, FFAs are only entered into through established clearing houses as these have daily margin settlement. Bunker swaps are entered into with financial institutions and with major, recognised business partners with good credit ratings. ISDA agreements are also entered into, ensuring continuous collateral, with all bunker swap counterparties in order to mitigate credit risk. A minor part of the Company s free capital is invested in securities, which as a minimum are rated BBB in accordance with S&P ( investment grade ). Liquidity risks (financial) In order to ensure sufficient cash reserves, it is the Company s policy that cash should at least equal the Company s payment obligations 1 year ahead. The size of these obligations is calculated on an ongoing basis and adjusted according to the profit forecast for the year and profit projections for subsequent years, market outlook, the availability of attractive investment opportunities and the Company s future liabilities on and off the statement of financial position. See also the section on capital management below. Capital management risks (financial) The Company s formal external capital adequacy requirement is limited to the subordinated loan capital of the parent company and the subsidiaries, which Net interest-bearing assets* Time charter liabilities** 2,199 3,085 Newbuilding payments less outstanding proceeds from sale of vessels** Contractually secured flows of income (time charter, COAs)** 1,203 1,736 Net commitments 773-1,401 * Adjusted for prepayments on purchase of vessels and currency swaps ** Present value are significantly lower than the Group s equity. The Group s equity ratio (excluding minority interests) was 89% (83%) at the end of This significant equity ratio should be considered relative to the Company s future payment obligations in the form of operating lease liabilities (time charters) and payments for newbuildings not recognised in the statement of financial position. As part of the management of NORDEN s capital structure, the Company s gearing, defined as net commitments relative to equity, is monitored on a monthly basis. The Board of Directors sets out a limit for this ratio, and in 2009, the ratio was not to exceed 1.5. At year-end 2009, the ratio of net commitments to equity was 0.4 (0.8). Net commitments are measured as the difference between the present value of total future time charter liabilities, payments to shipyards, instalments on loans less expected future freight and time charter payments received and cash and cash equivalents. other operational risks (commercial) Insurance The operation of vessels is exposed to a number of risks. In terms of value, the most material events covered by insurance are oil spills and total loss (lost value of owned vessels, value of purchase options and charter parties). The Company covers these risks by taking out insurances with recognised international insurance companies. The Company further minimises these risks by operating a modern fleet and by investing in the maintenance of the vessels and in the staff s awareness of both external and internal environments. IT The IT department has established a technical emergency capacity with an IT environment distributed on 2 locations with twinned critical systems. This emer- 65

68 66 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes gency capacity is consistent with the management s chosen alert level, which is to be able to ensure emergency operation within 4, 24 or 168 hours, de pending on the system. Also, the Company has established an IT Disaster Recovery Plan involving the entire organisation, which supports the IT department in setting up emergency operations as soon as possible after a disaster. Human Resources NORDEN has increased the Group s visibility and branding through a number of measures to attract the necessary human resources, among other reasons. An extensive development programme has been set up to continually enhance the competences of NORDEN s employees, and this is combined with a remuneration policy designed to retain key employees. 66

69 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 67 Notes Note Amounts in USD 000 Dry Cargo Tankers Not allocated Total 3 Segment information 2009 Revenue services rendered, external 1,516, , ,675,863 Voyage costs -450, ,576 Contribution margin I 1,066, , ,225,287 Other operating income, net* ,018 Charter hire for vessels -865, , ,002,357 Other vessel operating costs -21,951-11, ,773 Other external costs -10,208-1,258-2,396-13,862 Staff costs -30,242-13,362-7,062-50,666 Profit before depreciation, etc, (EBITDA) 138,767-3,662-9, ,647 Profits from the sale of vessels, etc. 69, ,576 Depreciation -17,463-15,402-3,229-36,094 Impairment tangible assets held for sale -3, ,400 Share of results of joint ventures Profit from operations (EBIT) 187,643-18,263-12, ,694 Fair value adjustment of certain hedging instruments 60, ,764 Financial income ,302 15,302 Financial costs 0 0-8,227-8,227 Tax for the year -5, ,995-7,327 Profit for the year 243,386-18,574-7, ,206 Vessels 203, , ,613 Prepayments on vessels and newbuildings 414,218 28, ,526 Property and equipment 1, ,726 55,841 Investments in joint ventures 27,229 4, ,770 Non-current assets 645, ,110 54,726 1,027,750 Current assets 238,254 20, ,145 1,003,948 - hereof tangible assets held for sale 54, ,547 Assets 884, , ,871 2,031,698 Investments in non-current assets for the year 261,307 41,700 2, ,209 Average number of employees, excluding employees on time charter vessels Profit margin 12% -11% - 9% Return on assets 21% -5% - 8% Material non-cash expenses included in the segment results other than depreciation solely consist in activity-specific fluctuations in trade payables, other payables and do not consist of such non-recurring material expenses as provisions, bonuses, bad debts, etc. * Result of derivatives trading in the Dry Cargo segment amounts to USD 0 thousand. In addition, see note 1 section on segment information. 67

70 68 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Note Amounts in USD 000 Dry Cargo Tankers Not allocated Total 3 Segment information 2008 Revenue services rendered, external 4,001, , ,246,815 Voyage costs -744,446-16, ,399 Contribution margin I 3,257, , ,485,416 Other operating income, net* -8, ,341 Charter hire for vessels -2,704, , ,841,164 Other vessel operating costs -34,169-8, ,561 Other external costs -16,230-2,677-5,136-24,043 Staff costs -39,132-13,256-11,250-63,638 Profit before depreciation, etc. (EBITDA) 454,999 66,927-16, ,669 Profits from the sale of vessels, etc. 246,867 36,479 6, ,972 Depreciation -17,056-8,650-2,045-27,751 Impairment tangible assets held for sale -3, ,879 Share of results of joint ventures 6,379 2, ,580 Profit from operations (EBIT) 687,310 96,957-11, ,591 Fair value adjustment of certain hedging instruments -81, ,133 Financial income ,192 34,192 Financial costs 0 0-5,125-5,125 Tax for the year -4, ,934-12,695 Profit for the year 601,737 96,636 9, ,830 Vessels 221, , ,865 Prepayments on vessels and newbuildings 316,951 80, ,836 Property and equipment ,986 56,963 Investments in joint ventures 27,044 3, ,855 Non-current assets 566, ,082 55, ,519 Current assets 273,757 15, ,218 1,119,145 - hereof tangible assets held for sale 46, ,852 Assets 840, , ,204 2,041,664 Investments in non-current assets for the year 272, ,436 53, ,847 Average number of employees, excluding employees on time charter vessels Profit margin 17% 40% - 18% Return on assets 82% 31% - 38% Material non-cash expenses included in the segment results other than depreciation solely consist of activity-specific fluctuations in trade payables, other payables and do not consist of such non-recurring material expenses as provisions, bonuses, bad debts, etc. * Result of derivatives trading in the Dry Cargo segment amounts to USD -8,674 thousand. In addition, see note 1 section on segment information. 68

71 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 69 Notes Note Amounts in USD fees to auditor appointed at the annual general meeting Other external costs includes the following fees to PricewaterhouseCoopers: Audit Other assurance services Tax consultancy Other services Total 622 1,065 5 Staff costs Wages and salaries 40,773 52,279 Pensions defined contribution plans 3,093 2,986 Other social security costs 1,620 1,721 Share-based payment 5,180 6,652 Total 50,666 63,638 Average number of employees, excluding employees on time charter vessels Parent Parent Parent Parent company company company company Board of Board of Other Board of Board of Other Directors Management executives Directors Management executives Wages and salaries 980 2,556 4,328 1,031 4,924 6,627 Pensions defined contribution plans Other social security costs Share-based payment , ,206 1,416 Total 980 3,480 6,311 1,031 7,131 8,365 Board of Management and a number of executives are covered by bonus and severance schemes. The bonus schemes are tied to predetermined performance targets after tax at group and department level. Parts of the bonuses awarded in 2008 and 2009 are conditional on employment continuing in and future earnings and will be recognised in those years. For a more detailed description of the bonus schemes, see the Remuneration policy section of the management s review. If members of the Board of Management or 4 executives resign in connection with a takeover of the Company, e.g. if the Company merges with or in any other way is combined with 1 or more companies outside NORDEN, a special severance payment will be paid for a 1-year notice period, corresponding to 1 year s salary (2 years salary for the Board of Management) in addition to the usual salary. See also note 28, which comprises a description of share-based payment. 69

72 70 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Note Amounts in USD fair value adjustment of certain hedging instruments Fair value adjustment of derivative financial instruments that do not qualify for hedge accounting amounts to: Bunker hedging: ,850-69, ,482-15, ,347-5, ,645-2, ,021-93,070 Realised fair value adjustment reclassified to Vessel operating costs 27,660-19,018 99, ,088 Forward Freight Agreements: , ,246 19, ,314 2, ,563-56,786 Realised fair value adjustment reclassified to Revenue ,741-37,467 30,955 Credit default swap: , ,450 0 Total 60,764-81,133 7 financial income Dividends Interest income 15,294 19,363 Net gain on forward exchange contracts 0 3,580 Gain on sale of shares Exchange rate adjustments, net 0 10,575 Total 15,302 34,192 8 financial costs Interest costs, non-current debt, etc. 2,671 5,125 Net loss on interest rate swaps 1,743 0 Exchange rate adjustments, net 3,813 0 Total 8,227 5,125 70

73 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 71 Notes Note Amounts in USD Taxation Tax on the profit for the year 7,432 12,395 Adjustment of tax regarding previous years Total 7,327 12,695 which is broken down as follows: Profit before tax 224, ,525 Of which under the tonnage tax scheme , , ,012 Calculated tax of this, 25% 55,923 86,503 Tax effect from: - Higher/lower tax rate in subsidiaries -51,375-77,422 - Profits from the sale of vessels ,279 9,081 Tonnage tax 2,153 3,314 Total 7,432 12,395 The Company joined the tonnage tax scheme on 1 January 2001 for a binding period of 10 years. If the Company s net investments in vessels decrease noticeably or if the Company is wound up, the contingent tax from before the Company joined the tonnage tax scheme will crystallise. Contingent tax under the tonnage tax scheme 18,544 18,544 Contingent tax is calculated at 25% equalling the current tax rate. 10 Earnings per share (EPS) Basic Profit for the year for NORDEN s shareholders 217, ,832 Weighted average number of shares (thousand) 42,086 42,411 Earnings per share (USD per share) Diluted Weighted average number of shares (thousand) 42,086 42,411 Adjusted for share options (thousand) 93 3 Weighted average number of shares for diluted earnings per share (thousand) 42,179 42,414 Diluted earnings per share (USD per share)

74 72 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Note Amounts in USD Tangible assets Prepayments Property on vessels and and new Vessels equipment buildings Total Cost at 1 January 488,697 64, , ,706 Additions for the year 39,161 2, , ,209 Disposals for the year Transferred during the year 187, ,746 0 Transferred during the year to tangible assets held for sale -146, , ,408 Transferred during the year to other items Cost at 31 December 569,023 66, ,526 1,078,155 Depreciation at 1 January -51,832-7, ,042 Depreciation for the year -32,484-3, ,094 Reversed depreciation on assets disposed of Transferred during the year to tangible assets held for sale 12, ,906 Depreciation at 31 December -71,410-10, ,175 Carrying amount at 31 December 497,613 55, , ,980 Capitalised borrowing costs on vessels USD 0. Amount insured on vessels USD million. Prepayments Property on vessels and and new Vessels equipment buildings Total Cost at 1 January 305,991 16, , ,660 Additions for the year 101,017 53, , ,886 Disposals for the year 0-1,135-3,531-4,666 Transferred during the year 132, ,301 0 Transferred during the year to tangible assets held for sale -50,612-4,529-18,033-73,174 Cost at 31 December 488,697 64, , ,706 Depreciation at 1 January -28,177-6, ,521 Depreciation for the year -25,472-2, ,751 Reversed depreciation on assets disposed of Transferred during the year to tangible assets held for sale 1, ,415 Depreciation at 31 December -51,832-7, ,042 Carrying amount at 31 December 436,865 56, , ,664 Capitalised borrowing costs on vessels USD 0. Amount insured on vessels USD million. See note 24 for security provided for vessels. 72

75 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 73 Notes Note Amounts in USD Joint ventures Cost at 1 January 22,771 20,310 Additions for the year 0 2,961 Disposals for the year Cost at 31 December 22,771 22,771 Value adjustments at 1 January 8, Share of results for the year 965 8,580 Reversed value adjustment on disposals for the year Dividends paid Value adjustments at 31 December 8,999 8,084 Carrying amount at 31 December 31,770 30,855 Share of results Investments comprise: ownership* of joint ventures Carrying amount Norient Product Pool ApS 50% 719 1,730 4,520 3,801 Norient Cyprus Ltd. 50% Nortide Shipping III Ltd.* ANL Maritime Services Pte. Ltd. 50% Nord Summit Pte. Ltd. 50% ,379 14,511 Nord Empros I Pte. Ltd. 50% ,481 2,337 Nord Empros II Pte. Ltd. 50% ,486 2,337 Nord Empros III Pte. Ltd. 50% -6 6,245 7,712 7,718 Total 965 8,580 31,770 30,855 Hereof profits from the sale of vessels 0 6,245 * As at 1 July 2008, Nortide Shipping III Ltd, became a 100% owned subsidiary. For other joint ventures, the ownership interests are the same in 2008 and Guarantees regarding joint ventures 18,688 40,525 Liabilities regarding joint ventures 40,209 51,171 Key figures (100%) for joint ventures: Revenue and other income 11,382 30,205 Costs 9,508 14,568 Non-current assets 35,379 41,492 Current assets 51,643 43,290 Non-current liabilities 8,300 8,300 Current liabilities 18,309 16,044 No significant restrictions apply to distributions from joint ventures, In addition, the Group and the parent company participate in normal profit sharing agreements (joint venture operations) on 5 vessels where profit sharing for the vessels is 50%. No contribution requirements or significant contingent liabilities are related to joint venture operations or profit sharing agreements. 73

76 74 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Note Amounts in USD Receivables Freight receivables 81, ,643 Provisions for bad debts -4,470-4,342 Freight receivables, net 76, ,301 Receivables from joint ventures 0 8,508 Other receivables 58,041 15,604 Total 134, ,413 The fair value of receivables amounts to: Freight receivables 76, ,301 Receivables from joint ventures 0 8,508 Other receivables 58,041 15,604 Total 134, ,413 Development in write-downs on freight receivables: Write-downs at 1 January -4,342 0 Applied during the year 1,104 0 Reversed 2,989 0 Additions during the year -4,221-4,342 Total -4,470-4,342 Freight receivables which have been written down in provision for bad debts amount to: 5,870 5,930 Freight receivables due which have not been written down in provision for bad debts amount to: - due in less than 3 months 7,741 21,956 - due in more than 3 months 0 1,842 Total 7,741 23,798 Loss on other receivables and receivables from joint ventures is not expected, and thus, no write-downs have been made. Regarding freight receivables, the Company usually has the opportunity to use the cargo as security. See also note 2. The carrying amount of receivables is distributed on the following currencies: USD 120, ,390 JPY 0 4,063 DKK 10, Other currencies 3,758 2,504 Total 134, , Securities Shares 2,583 2,411 Bonds 21,980 19,611 Total 24,563 22,022 74

77 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 75 Notes Note Amounts in USD Cash and cash equivalents Demand deposits and cash in hand 61,512 29,078 Money market investments 619, ,292 Other cash and cash equivalents 30,179 88,347 Cash and cash equivalents according to the statement of financial position 710, ,717 - Hereof tied-up cash and cash equivalents 8,300 34,250 Cash and cash equivalents according to the statement of cash flows 702, ,467 Money market investments at year-end have maturities of up to 181 days 91 days In connection with trading in derivative financial instruments, NORDEN has established margin accounts with Norwegian Future and Options Clearing House (NOS), UBS and Danske Bank in the form of cash. At 31 December, cash held in margin accounts placed as security amounted to 15,311 25, Tangible assets held for sale Carrying amount at 1 January 46,852 75,983 Additions for the year to tangible assets held for sale 227, ,046 Additions for the year from prepayments on vessels and newbuildings 30,827 18,033 Additions for the year from vessels 133,675 48,795 Additions for the year from property and equipment 0 3,931 Disposals for the year -380, ,057 Impairment for the year -3,400-3,879 Carrying amount at 31 December 54,547 46,852 Which can be specified as follows: Vessels 35,558 30,998 Newbuildings 18,989 6,254 Prepayments on vessels 0 9,600 Carrying amount at 31 December 54,547 46,852 75

78 76 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Note Amounts in USD Reserves Securities: Fair value adjustment at 1 January -3,638 1,058 Fair value adjustment for the year, net 2,933-4,499 Reversed fair value adjustment from the sale of shares Fair value adjustment at 31 December ,638 Cash flow hedges: Fair value adjustment at 1 January 16,184 2,601 Fair value adjustment for the year -7,830 23,341 Transferred to the income statement (vessel operating costs) Transferred to vessels -5,151-9,214 Fair value adjustment at 31 December 2,941 16,184 Total 2,236 12,546 Reserve for securities: Unrealised fair value adjustments of listed securities denominated in foreign currencies and bonds are recognised in equity until realised. Reserve for cash flow hedging: The value of unrealised bunker hedging contracts at 31 December 2004 of USD 0 thousand (USD 262 thousand), which do not qualify for hedge accounting in accordance with IFRS, is included in the above reserve. 18 Equity The share capital consists of 44,600,000 shares of a nominal value of DKK 1 each. No shares are subject to any special rights or restrictions. Treasury shares Number of shares Nominal value (DKK 000) % of share capital January 2,212,606 2,702,140 2,212 2, Acquired 380, Distributed/sold -36, , December 2,556,495 2,212,606 2,556 2, The Company is authorised by the general meeting to acquire a maximum of 4,460,000 treasury shares, equal to 10% of the share capital. Treasury shares are among other things acquired for the purpose of share-based payment. See note 28. In 2009, the Company acquired 380,000 treasury shares equalling a value of DKK 57,000 thousand (USD 9,960 thousand) and distributed 29,211 employee shares with a value of DKK 4,602 thousand (USD 792 thousand) from the Company s portfolio of treasury shares. Furthermore, the Company sold 6,900 shares with a selling price of DKK 801 thousand (USD 143 thousand). Of the Company s portfolio of outstanding shares, 188,460 shares (188,460 shares) have been lodged as security with Vækstfonden in connection with the employees exercise of share options comprised by the Company s share option programme. The shares can be released for cash at the applicable share price. Vækstfonden receives dividends as long as the shares are lodged. In 2008, the Company sold 489,534 treasury shares with a value of DKK 68,270 thousand (USD 14,337 thousand), including distribution of 15,994 employee shares. Furthermore, Vækstfonden released 350,000 shares against payment of DKK 179,636 thousand (USD 37,997 thousand). The Company had 42,387,394 outstanding shares of DKK 1 each at 1 January 2009 and 42,043,505 shares of DKK 1 each at 31 December

79 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 77 Notes Note Amounts in USD Bank debt Interest-bearing liabilities include bank debt, which is included in the following items: Current portion of non-current debt within 1 year 5,187 5,187 Current portion of non-current liabilities between 1-5 years 58,423 63,610 Total 63,610 68,797 Mortgages and security provided in relation to liabilities are disclosed in note 24. Interest-bearing liabilities amount to: Carrying amount: - Fixed-rate loans 63,610 68,797 Total 63,610 68,797 fair value: - Fixed-rate loans 66,353 72,277 Total 66,353 72, Prepayments received on vessels for resale Non-current prepayments received on vessels for resale: Carrying amount 0 28,100 Fair value 0 28,100 Maturities: Between 1-5 years 0 28,100 Total 0 28, Liabilities relating to tangible assets held for sale Prepayments received on sold vessels and newbuildings 38,425 34,066 Total 38,425 34, operating lease liabilities Operating lease payments in the form of charter hire including daily operating costs recognised in the income statement are disclosed in note 3. Leases have been entered into with a mutually interminable lease period of up to 12 years. Some leases include an option to renew for 1 additional year at a time for up to 3 years. Leases may also include purchase options, typically exercisable as from the end of the third year to the expiry of the period of renewal. Exercise of the purchase option on the individual vessel is based on an individual assessment. None of the leases comprise contingent lease payments Dry Cargo Tankers Total Dry Cargo Tankers Total Within 1 year 410, , , , , ,542 Between 1-5 years 1,004, ,373 1,239,453 1,286, ,370 1,557,700 More than 5 years 535, , , , , ,448 Total 1,949, ,185 2,416,177 2,669, ,692 3,227,690 For information on ship days distributed on years, please see capacity and coverage in the management s review. For information on number of charter parties with purchase option and their timing, see Fleet development in the management s review. 77

80 78 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Note Amounts in USD Unrecognised contingent assets and liabilities Contingent assets The Group has raised claims against third party regarding non-performance of cargo contracts totalling USD 68 million (USD 29 million). The Group and its legal advisors consider the claims to be justified and probable. There is uncertainty as to when the claims will be settled as well as the financial result hereof. No recognition hereof has been made as the existence of the assets is dependent on several uncertain future events, which are beyond the control of the Group, and therefore, it is not predominantly probable that it is an asset. 25,750 11,500 Contingent liabilities Guarantee commitments do not exceed The Company has entered into agreements for future delivery of newbuildings and purchase options, etc. The total contract amount is payable as follows: Within 1 year 378, ,059 Between 2 and 3 years 245, ,065 More than 3 years 0 16,065 Total 623,871 1,085,189 Claims have been made against the Group, primarily concerning discharge responsibility and broker fees. The Group and its legal advisors consider the claims unjustified and do not perceive that the Group will incur any losses as a result of the actions for damages. The maximum risk is assessed to be 15,077 24, Mortgages and security As security for bank debt 63,610 68,797 a total number of vessels of 4 4 with a carrying amount of 91,581 95,037 have been mortgaged at 85,580 85, CoAs and operating lease income At 31 December, the Group had entered into CoAs with customers amounting to: Dry Cargo Tankers Total Dry Cargo Tankers Total Within 1 year 196,880 11, , , ,020 Between 1-5 years 248,737 6, , , ,500 More than 5 years 140, ,629 78, ,959 Total 586,246 17, , , ,479 The Group has operating lease income amounting to: Dry Cargo Tankers Total Dry Cargo Tankers Total Within 1 year 189,288 53, , ,814 55, ,899 Between 1-5 years 256,640 26, , ,818 33, ,543 More than 5 years 12, ,648 6, ,846 Total 458,576 80, , ,478 88, ,288 78

81 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 79 Notes Note Amounts in USD financial instruments hedge accounting For more information on the Company s overall risk management, see the description in note 2. Recognised in equity Contractual value at 31 December Cash flow hedging, purchase of vessels in JPy Forward exchange contracts, gain/loss 29,552 29,552 2,736 4,063 Fixed-term deposits, gain/loss 0 92, ,859 Bunker hedging contracts, gain/loss 0 169, Total 29, ,652 2,941 16,184 Gains and losses on cash flow hedging transactions regarding forward exchange contracts taken to the fair value reserve are recognised in the statement of financial position at the same time as the hedged item as addition to/a deduction from cost. Recognition will take place up until For the use of future payments in JPY, the Group has exchanged USD and placed JPY in fixed-term deposits. The money is dedicated as coverage of single payments in relation to the purchase of vessels. 79

82 80 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Note Amounts in USD Related party disclosures and transactions with related parties The Company has no related parties exercising control. Related parties include the Board of Directors, Board of Management and executives as well as their close relatives. Related parties also include companies in which the above persons have significant interests as well as companies and foundations which have direct or indirect considerable influence through shareholdings. In addition, related parties include joint ventures, see note 12, in which NORDEN has significant influence. Trading and accounts with related parties comprise: Sale of goods and services - joint ventures 1,649 2,236 Purchase of goods and services - joint ventures 0 95 Sale of land and buildings - D/S Orients Fond 0 10,903 Dividends from - joint ventures Interest received - joint ventures 0 33 Amounts owed by related parties - joint ventures 0 8,508 Debt to related parties - joint ventures 6, Board of Directors, Board of Management and executives 4,258 5,353 Dividends paid to related parties - Board of Directors, Board of Management and executives A/S Motortramp 27,401 85,632 - POLYSHIPPING AS 11,259 70,042 - D/S Orients Fond 1,025 3,237 Guarantees are mentioned in notes 12 and 23. The emoluments, remuneration and share-based payment of the Board of Directors, Board of Management and other executives are disclosed in notes 5 and 28. No other transactions took place during the year with the Board of Directors, Board of Management, executives, major shareholders or other related parties. 80

83 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 81 Notes Note Amounts in USD Share-based payment Employee shares In connection with the employee share scheme for 2009, NORDEN granted 91 shares to all employees who either had, or during the course of 2009 would attain, 1 year s seniority. A total of 29,211 shares were granted. The price per share at the grant date was DKK The fair value of the granted employee shares, which were expensed, amounted to USD 1,283 thousand in 2009 (USD 1,272 thousand). Share option programme 2007 On 27 March 2007, the Board of Directors granted share options comprising a total of 458,300 shares to a number of executives. The options are exercisable from 27 March 2009 to 27 March 2011 and each entitles the holder to acquire 1 share at an exercise price which will be determined as the 5-day average of the market price following the grant, less all dividend payments after the grant date and plus an effective interest rate of 8% p.a. until any exercise. The share options may be exercised after at least 2 years and no more than 4 years from the grant date. The exercise of share options by the members of the Board of Management and other executives is subject to their continued employment with the Company at the exercise date. Special terms apply in case of illness and death. Upon joining the Company at 1 September 2007, the former CFO was awarded a total of 42,000 share options by the Board of Directors. The options are exercisable from 1 September 2009 to 1 September 2011, and give the holder the right to purchase one share per option at an exercise price determined as the 5-day average of the market price with the addition of an effective interest rate of 8% p.a. until the exercise date. In connection with resignation, it was agreed that final right of the options was acquired. Share option programme 2008 On 10 March 2008, the Board of Directors granted share options comprising a total of 446,100 shares to a number of executives. The options are exercisable from 10 March 2010 to 10 March 2012 and each entitles the holder to acquire 1 share at an exercise price which will be determined as the 5-day average of the market price following the grant, less all dividend payments after the grant date and plus an effective interest rate of 8% p.a. until any exercise. Upon exercise, the Board of Management and the executives must reinvest 25% of any net gain in NORDEN shares and keep these for 2 years. If the employee already owns shares, this can be included in the determination of the investment amount. The share options may be exercised after at least 2 years and no more than 4 years from the grant date. The exercise of share options by the members of the Board of Management and other executives is subject to their continued employment with the Company at the exercise date. Special terms apply in case of illness and death. Share option programme 2009 On 9 March 2009, the Board of Directors granted share options comprising a total of 379,175 shares to a number of executives. The options are exercisable from 9 March 2012 to 9 March 2015, and each entitles the holder to acquire 1 share at an exercise price which will be determined as the 5-day average of the market price following the grant, less all dividend payments after the grant date and plus an effective interest rate of 8% p.a. until any exercise. Upon exercise, the Board of Management and most of the executives must reinvest 25% of any net gain in NORDEN shares and keep these shares for a minimum of 2 years. If the employee already owns shares, this can be included in the determination of the investment amount. The share options may be exercised after at least 3 years and no more than 6 years from the respective grant dates. The exercise of share options by members of the Board of Management and other executives is subject to their continued employ - ment with the Company at the exercise date. Special terms apply in case of illness and death. 81

84 82 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Note Amounts in USD Share-based payment - continued The change in the number of outstanding shares is as follows: Number of options Number of options Outstanding at 1 January 831, ,740 Granted during the period 379, ,100 Lapsed during the period 0-121,920 Exercised during the period -6, ,540 Total 1,203, ,380 The weighted average exercise price for exercised share options in 2009 amounts to DKK Outstanding shares are composed as follows at 31 December 2009: Number of shares Board Other of Management executives Other Total Granted 27 March , , , ,140 Granted 1 September ,000 42,000 Granted 10 March , , , ,340 Granted 9 March , , , ,175 outstanding at 31 December , , ,579 1,203,655 Per option, DKK Exercise rate at Allocation Number at 31 december 2009 price of options Exercise period Granted 27 March ,140 27/ / Granted 1 September ,000 1/ / Granted 10 March ,340 10/ / Granted 9 March ,175 9/ / outstanding at 31 December ,203,655 The fair value of granted share options in 2007, 2008 and 2009 amounts to USD 2.9 million, USD 7.8 million and USD 2.9 million, respectively, and is recognised in the income statement over the vesting period and set off against equity. The expense for the year is USD 3,897 thousand (USD 5,382 thousand). The calculated fair value at the grant date is based on the Black-Scholes option valuation model. The calculation of the fair value of options granted in 2008 and 2009 was based on the following assumptions: - That all options are granted and that the options are exercised at the earliest opportunity. - A volatility of 42.3% (2008) and 59.4% (2009). - A dividend of 3500% (2008) and 500% (2009). - A risk-free interest rate of 3.7% (2008) and 2.21% (2009). - A revaluation of the strike price of 8% p.a. so that it is only the increase in value in addition to this, which will be rewarded. The expected volatility is based on the historical volatility (calculated at the weighted average remaining term of granted share options). The expected term is based on the historical term of previously granted share options. The assumed dividend per share is based on historical dividends. The risk-free interest rate is based on Danish government bonds. Total share-based payment The fair value adjustment for the year of employee shares and share options amounts to USD 5,180 thousand (USD 6,652 thousand). 82

85 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 83 Notes Note Amounts in USD Liquidity risk The terms to maturity of financial assets and liabilities are disclosed by category and class, distributed on maturity periods. All interest payments and repayments of financial assets and liabilities are based on contractual agreements. Interest payments on floating-rate instruments are determined based on a zero-coupon interest structure. All cash flows are undiscounted. Maturities 2009 Within Between More than Carrying 1 year 1-3 years 3 years Total amount* financial assets at fair value through profit or loss Forward exchange contracts - payments received 1) 323,668 24, ,945 12,435 Forward exchange contracts - payments made 1) -313,221-22, ,510 0 Bunker contracts 1) 11,128 6, ,291 18,291 Forward Freight Agreements 1) 1, ,824 1,824 Total 23,399 8, ,550 32,550 financial liabilities at fair value through profit or loss Forward exchange contracts - payments received 1) 11, ,026 0 Forward exchange contracts - payments made 1) -11, ,032-6 Bunker contracts 1) -1,700-1, ,832-2,832 Forward Freight Agreements 1) 0-3, ,518-3,518 Credit default swaps 1) , ,279-1,448 Total -2,274-6, ,635 7,804 Loans and receivables measured at amortised cost Cash and cash equivalents 710, , ,884 Freight receivables 76, ,645 76,645 Other receivables 25, ,491 25,491 Total 813, , ,020 financial liabilities measured at amortised cost Bank debt** 7,687 60, ,412 63,610 Trade and other payables 75, ,754 75,754 Total 83,441 60, , ,364 financial assets, which do not constitute a part of the cash resources Financial assets available for sale Shares 2) 2,583 2,583 Bonds 2) 21,980 21,980 Total 24,563 24,563 83

86 84 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes Note Amounts in USD Liquidity risk - continued Maturities 2008 Within Between More than Carrying 1 year 1-3 years 3 years Total amount* financial assets at fair value through profit or loss Forward exchange contracts - payments received 1) 58,676 25, ,948 5,542 Forward exchange contracts - payments made 1) -56,117-22, ,406 0 Bunker contracts 1) Total 3,068 2, ,051 6,051 financial liabilities at fair value through profit or loss Forward exchange contracts - payments received 1) 295, ,697 0 Forward exchange contracts - payments made 1) -328, ,521-32,824 Bunker contracts 1) -17,157-17,814-2,897-37,868-37,868 Total -49,981-17,814-2,897-70,692-70,692 Loans and receivables measured at amortised cost Cash and cash equivalents 778,617 28, , ,717 Freight receivables 108, , ,301 Other receivables 9, ,553 9,553 Total 896,471 28, , ,571 financial liabilities measured at amortised cost Bank debt** -7,895-68, ,308-68,797 Trade and other payables -105, , ,795 Total -113,690-68, , ,592 financial assets, which do not constitute a part of the cash resources Financial assets available for sale Shares 2) 2,411 2,411 Bonds 2) 19,611 19,611 Total 22,022 22,022 Financial instruments measured at fair value are divided in accordance with the following accounting hierarchy: - Level 1: observable market prices of identical instruments. - Level 2: valuation models primarily based on observable prices or trading prices of comparable instruments. - Level 3: valuation models primarily based on non-observable prices. 1) The fair value of NORDEN s forward exchange contracts and other derivative financial instruments (commodity instruments) is considered for fair value measurement at level 2 as the fair value can be determined directly on the basis of the published exchange rates and made forward rates on the balance sheet day. 2) Fair value measurement of shares and bonds is at level 1 as the fair value is determined on the basis of share prices. * The fair value of bank debt calculated as the present value of expected future repayments and interest payments amounts to USD 66,353 (USD 72,277). As discount rate at the calculation of present value, a zero-coupon interest with similar maturities has been used. The fair value of other items corresponds to the carrying amount. ** Bank debt relates to loans from Export-Import Bank of China/Nordea. The loans are repayable over 5 years from conclusion. The annual interest rate is 3.96%, including guarantee commission. 84

87 Income statement Comprehensive income Financial position Cash flows Equity Significant accounting policies Notes 85 Notes Note Amounts in USD Change in working capital Inventories on board vessels -8,098 21,816 Freight and other receivables, etc. 108,394-28,894 Trade and other payables, etc. -51,227 12,631 Fair value adjustments of hedging instruments taken to equity -13,245 13,584 Total 35,824 19, Dividends The amount available for distribution as dividends comprises: 919,716 1,015,984 Dividends paid in 2009 and 2008 amount to USD 103,117 thousand (DKK 13 per share) and USD 325,647 thousand (DKK 35 per share), respectively. The proposed dividend for 2009 is USD 60,153 thousand (DKK 7 per share). The proposed dividend for 2009 will be considered on the annual general meeting on 22 April The proposed dividend has not been recognised in the financial statements. 32 Subsidiaries Consolidated subsidiaries comprise: Ownership Ownership NORDEN Tankers & Bulkers Pte. Ltd., Singapore 1) - 100% NORDEN Tankers & Bulkers Inc., USA 100% 100% NORDEN Tankers & Bulkers Ltd., Brazil 100% 100% NORDEN Tankers & Bulkers Pvt. Ltd., India 100% 100% NORDEN Derivatives A/S, Denmark (liquidated) - 100% Norden Shipping Pte. Ltd. III, Singapore 1) 100% 100% Normit Shipping S.A., Panama 51% 51% Nortide Shipping III Ltd., Bermuda 100% 100% 1) The companies have been merged in Events after the balance sheet date See page 16 in the management s review. 85

88 86 Parent company financial statements Income statement Financial position Equity Significant accounting policies Notes Income statement 1 January 31 December Note Amounts in USD Revenue 1,545,257 4,029,474 Other operating income, net Vessel operating costs -1,552,649-3,748,466 Other external costs -16,383-26,943 2 Staff costs -41,403-52,034 Profit before depreciation, etc. (EBITDA) -64, ,364 Profits from the sale of vessels, etc. 32, ,486 7 Depreciation -25,398-21,974 Profit from operations (EBIT) -56, ,876 8 Earnings from investments in subsidiaries 210, ,438 9 Earnings from investments in joint ventures 731 2,201 3 Fair value adjustment of certain hedging instruments 60,764-81,133 4 Financial income 16,407 32,091 5 Financial costs -5,470-9,553 Profit before tax 225, ,920 6 Tax for the year -5,505-12,587 PROFIT FOR THE YEAR 220, ,333 Proposal for distribution of net profit Proposed dividend 60, ,000 Reserve for revaluation according to the equity method 213, ,639 Retained earnings -53, ,694 Total 220, ,333 Proposed dividend per share, DKK Parent company financial statements 86

89 Parent company financial statements Income statement Financial position Equity Significant accounting policies Notes 87 Balance sheet at 31 December Assets Note Amounts in USD Property and equipment 54,892 55,653 7 Vessels 318, ,990 7 Prepayments on vessels and newbuildings 31,724 81,486 Tangible assets 405, ,129 8 Investments in subsidiaries 897, ,431 9 Investments in joint ventures 4,542 3,811 Financial assets 901, ,242 Non-current assets 1,306,845 1,129,371 Inventories 27,604 17,249 Freight receivables 61,527 86,598 Receivables from subsidiaries 971 6,341 Receivables from joint ventures 5,453 6,122 Company tax Other receivables 54,209 8,644 Prepayments 49,001 85,048 Receivables 171, ,753 Securities 24,563 22, Cash and cash equivalents 438, , , , Tangible assets held for sale 360 1,502 Current assets 661, ,312 ASSETS 1,968,803 1,941,683 Parent company financial statements 87

90 88 Parent company financial statements Income statement Financial position Equity Significant accounting policies Notes Balance sheet at 31 December Equity and liabilities Note Amounts in USD Share capital 7,087 7,087 Reserve for revaluation according to the equity method 878, ,235 Retained earnings 859, ,984 Proposed dividend for the financial year 60, ,000 Equity 1,804,943 1,700, Bank debt 58,423 63,610 Non-current liabilities 58,423 63, Bank debt 5,187 5,187 Trade payables 50,879 60,281 Company tax 0 2,049 Other payables 15,930 80,605 Deferred income 33,441 29,645 Current liabilities 105, ,767 Liabilities 163, ,377 EQUITY AND LIABILITIES 1,968,803 1,941,683 Other notes: 1 Accounting policies 14 Operating lease liabilities 15 COAs and operating lease income 16 Unrecognised contingent assets and liabilities 17 Mortgages and security 18 Financial instruments 19 Share-based payment 20 Related party disclosures and transactions with related parties 21 Risk management Parent company financial statements 88

91 Parent company financial statements Income statement Financial position Equity Significant accounting policies Notes 89 Statement of changes in equity 1 January 31 December Note Amounts in USD 000 Reserve for revaluation according to Retained Proposed Share capital equity method earnings dividend Total Equity at 1 January , , , ,000 1,700,306 Profit for the year - 213,888-53,898 60, ,143 Fair value adjustments taken to equity, hedging instruments Fair value adjustments in subsidiaries - -12, , Acquisition of treasury shares , , Sale of treasury shares Distributed dividends , ,117 Dividends, treasury shares ,493 5,493 Market value adjustment, dividends paid - - 2,376-2,376 0 Share-based payment - - 5,180-5,180 Equity at 31 December , , ,563 60,153 1,804,943 Reserve for revaluation according to Retained Proposed Share capital equity method earnings dividend Total Equity at 1 January ,087 4, , ,916 Change in accounting policies - 351, , , ,210 Adjusted balance at 1 January , , , ,000 1,311,126 Profit for the year - 305, , , ,333 Fair value adjustments taken to equity, hedging instruments , ,000 8 Fair value adjustments in subsidiaries - 16, , Payment to Vækstfonden concerning treasury shares , , Sale of treasury shares ,337-14,337 Distributed dividends , ,647 Dividends, treasury shares ,116 15,116 Market value adjustment, dividends paid ,531 3,531 0 Share-based payment - - 6,652-6,652 Equity at 31 December , , , ,000 1,700,306 Parent company financial statements 89

92 90 Parent company financial statements Income statement Financial position Equity Significant accounting policies Notes 1. Accounting policies NORDEN prepares the parent company financial statements for Dampskibsselskabet NORDEN A/S pursuant to the provisions for class D companies of the Danish Financial Statements Act and in accordance with NASDAQ OMX Copenhagen A/S' requirements for annual reports of listed companies. Change in accounting policies, including presentation With effect from 2009, NORDEN has decided to present the parent company financial statements for Dampskibsselskabet NORDEN A/S in accordance with the Danish Financial Statements Act. The financial statements for the parent company, Dampskibsselskabet NORDEN A/S, were for 2008 prepared pursuant to IFRS. The change was made in order to improve the clarity of the annual report. The transition has solely entailed changed policies in the parent company for: 1) shares and bonds available for sale, and 2) investments in subsidiaries and joint ventures. Concerning 1): Shares and bonds are recognised in the balance sheet at fair value. The unrealised fair value adjustments are now recognised in the income statement where they were formerly recognised in the balance sheet (Statement of comprehensive income) and first upon realisation recognised in the income statement. The accounting policy change has increased the annual results by USD 2,539 million (USD -4,500 million), and the change has not affected equity. Concerning 2): Investments in subsidiaries and joint ventures are now measured at the proportional share of the companies net asset value, and the proportional share of results is recognised in the income statement. Formerly, investments in subsidiaries and group undertakings have been measured at cost and a lower recoverable amount. In the income statement, dividends received were recognised in net financials. The accounting policy change has increased the annual results by USD 210 million (USD 310 million) and affected equity by USD 879 million (USD 682 million). NORDEN has also reduced and combined the information in the notes to the financial statements. Comparative figures have been adjusted. Income statement and balance sheet Share of results of investments in subsidiaries and joint ventures In the parent company s income statement, the proportional share of results are recognised under Earnings from investments in subsidiaries and Earnings from investments in joint ventures. Investments in subsidiaries and joint ventures Investments in subsidiaries and joint ventures are recognised and measured according to the equity method. In the balance sheet under Investments in subsidiaries and Investments in joint ventures, the proportional ownership share of the companies net asset value is recognised. The total net revaluation of investments in subsidiaries and joint ventures is transferred through the distribution of profits to Reserve for revaluation according to equity method under equity. The reserve is reduced by dividend payments to the parent company and is adjusted with other changes in equity in subsidiaries and joint ventures. Subsidiaries and joint ventures with negative net asset value are recognised at USD 0. If the parent company has a legal or actual obligation to cover the company's negative balance, a provision to cover the negative balance is recognised. Securities Shares and bonds available for sale are recognised under current assets at fair value at the trade date and are subsequently measured at market price in respect of listed securities and at fair value applying a valuation method in respect of unlisted securities. Value adjustments are recognised in net financials in the income statement. Other accounting policies With reference to the provisions of the Danish Financial Statements Act, the Company has refrained from both preparing a cash flow statement and presenting segment information as well as disclosure on fee to auditor appointed at the annual general meeting in the parent company financial statements. For this information, see the consolidated financial statements for Dampskibsselskabet NORDEN A/S. Please see note 1 Significant accounting policies in the consolidated financial statements for other accounting policies. Parent company financial statements 90

93 Parent company financial statements Income statement Financial position Equity Significant accounting policies Notes 91 Notes Note Amounts in USD Staff costs Wages and salaries 32,796 41,858 Pensions - defined contribution plans 3,093 2,986 Other social security costs Share-based payment 4,793 6,289 Total 41,403 52,034 Average number of employees, excluding employees on time charter vessels For remuneration of the Board of Management and the Board of Directors, see note 5 to the consolidated financial statements. See also note 28 to the consolidated financial statements, which comprises a description of share-based payment. 3 Fair value adjustment of certain hedging instruments Fair value adjustment of derivative financial instruments that do not qualify for hedge accounting amounts to: Bunker hedging: ,850-69, ,482-15, ,347-5, ,645-2, ,021-93,070 Realised fair value adjustment reclassified to "Vessel operating costs" 27,660-19,018 99, ,088 Forward Freight Agreements: , ,246 19, ,314 2, ,563-56,786 Realised fair value adjustment reclassified to "Revenue" ,741-37,467 30,955 Credit default swaps: , ,450 0 Total 60,764-81,133 Parent company financial statements 91

94 92 Parent company financial statements Income statement Financial position Equity Significant accounting policies Notes Notes Note Amounts in USD Financial income Dividends Interest income 13,860 17,777 Net gain on forward exchange contracts 0 3,580 Gain on sale of shares Gain on foreign currency translation, securities 2,539 0 Exchange rate adjustments, net 0 10,060 Total 16,407 32,091 5 Financial costs Interest costs, non-current debt, etc. 2,661 5,054 Loss on foreign currency translation, securities 0 4,499 Exchange rate adjustments, net 2,809 0 Total 5,470 9,553 6 Taxation Tax on the profit for the year 6,598 12,287 Adjustment of tax regarding previous years -1, Total 5,505 12,587 which is broken down as follows: Profit before tax, excluding results in subsidiaries and joint ventures 14, ,281 Of which under the tonnage tax scheme ,390 14,857 35,891 Calculated tax of this, 25% 3,714 8,973 Tax effect from: - Profits from the sale of vessels ,445 8,973 Tonnage tax 2,153 3,314 Total 6,598 12,287 The Company joined the tonnage tax scheme on 1 January 2001 for a binding period of 10 years. If the Company's net investments in vessels decrease noticeably or if the Company is wound up, the contingent tax from before the Company joined the tonnage tax scheme will crystallise. Contingent tax under the tonnage tax scheme 18,544 18,544 Contingent tax is calculated at 25% equalling the current tax rate. Parent company financial statements 92

95 Parent company financial statements Income statement Financial position Equity Significant accounting policies Notes 93 Notes Note Amounts in USD Tangible assets Prepayments Property and on vessels and 2009 Vessels equipment newbuildings Total Cost at 1 January 338,059 62,187 81, ,732 Additions for the year 6,465 2,384 47,688 56,537 Disposals for the year Transferred during the year 92, ,064 0 Transferred during the year to tangible assets held for sale -57, ,695-59,266 Transferred during the year to vessels, Group 0 0-3,691-3,691 Cost at 31 December 379,017 64,562 31, ,303 Depreciation at 1 January -47,069-6, ,603 Depreciation for the year -22,262-3, ,398 Reversed depreciation on assets disposed of Transferred during the year to tangible assets held for sale 8, ,748 Depreciation at 31 December -60,583-9, ,253 Carrying amount at 31 December 318,434 54,892 31, ,050 Capitalised borrowing costs on vessels USD 0. Amount insured on vessels USD million. Prepayments Property and on vessels and 2008 Vessels equipment newbuildings Total Cost at 1 January 286,169 15,180 76, ,793 Additions for the year 36,269 52,527 59, ,762 Disposals for the year ,531-4,522 Transferred during the year 45, ,806 0 Transferred during the year to tangible assets held for sale -30,185-4,529-2,361-37,075 Transferred during the year to vessels, Group 0 0-3,226-3,226 Cost at 31 December 338,059 62,187 81, ,732 Depreciation at 1 January -28,006-5, ,890 Depreciation for the year -20,035-1, ,974 Reversed depreciation on vessels disposed of Transferred during the year to tangible assets held for sale ,570 Depreciation at 31 December -47,069-6, ,603 Carrying amount at 31 December 290,990 55,653 81, ,129 Capitalised borrowing costs on vessels USD 0. Amount insured on vessels USD million. See note 17 for security provided for vessels. Parent company financial statements 93

96 94 Parent company financial statements Income statement Financial position Equity Significant accounting policies Notes Notes Note Amounts in USD Investments in subsidiaries Cost at 1 January 18,664 18,164 Transferred from joint ventures Disposals for the year Cost at 31 December 18,312 18,664 Value adjustments at 1 January 678, ,163 Share of results for the year 210, ,438 Transferred from joint ventures Fair value adjustments in subsidiaries under equity -12,983 16,386 Reversed value adjustment on disposals for the year 2,976 0 Dividends received 0-50,000 Value adjustments at 31 December 878, ,767 Carrying amount at 31 December 897, ,431 Subsidiaries comprise: Ownership Ownership NORDEN Tankers and Bulkers Ltd., Singapore 1) - 100% NORDEN Tankers & Bulkers Inc., USA 100% 100% NORDEN Tankers & Bulkers Ltd., Brazil 100% 100% NORDEN Tankers & Bulkers Pvt. Ltd., India 100% 100% NORDEN Derivatives A/S, Denmark (liquidated) - 100% Norden Shipping Pte. Ltd., Singapore 1) 100% 100% Normit Shipping S.A., Panama 51% 51% Nortide Shipping III Ltd., Bermuda 100% 100% For guarantees relating to subsidiaries, see note 16. No significant restrictions apply to distributions from subsidiaries. 1) Companies have been merged in Investments in joint ventures Cost at 1 January 5,343 2,882 Additions for the year 0 2,961 Transferred to subsidiaries Cost at 31 December 5,343 5,343 Value adjustments at 1 January -1,532-2,953 Share of results for the year 731 2,201 Transferred to subsidiaries Value adjustments at 31 December ,532 Carrying amount at 31 December 4,542 3,811 Guarantees regarding joint ventures 0 0 Liabilities regarding joint ventures 0 0 Parent company financial statements 94

97 Parent company financial statements Income statement Financial position Equity Significant accounting policies Notes 95 Note Amounts in USD Investments in joint ventures - continued Investments in joint ventures comprise: Ownership Ownership Norient Product Pool ApS, Denmark 50% 50% Norient Cyprus Ltd., Cyprus 50% 50% Key figures (100%) for joint ventures: Revenue and other income 10,346 16,854 Costs 8,940 13,914 Non-current assets 4,660 4,080 Current assets 18,733 13,460 Current liabilities 15,623 11,193 No significant restrictions apply to distributions from joint ventures. In addition, the Group and the parent company participate in normal profit sharing agreements (joint venture operations) for 5 vessels in which profit sharing for the vessels is 50%. No contribution requirements or significant contingent liabilities are related to joint venture operations or profit sharing agreements. 10 Cash and cash equivalents In connection with trading in derivative financial instruments, NORDEN has established margin accounts with Norwegian Future and Options Clearing House (NOS), UBS and Danske Bank in the form of cash. At 31 December, cash held in margin accounts placed as security amounted to 15,311 24, Tangible assets held for sale Carrying amount at 1 January 1,502 55,601 Additions for the year to tangible assets held for sale 102, ,891 Additions for the year from prepayments on vessels and newbuildings 1,695 2,361 Additions for the year from vessels 48,823 29,213 Additions for the year from land and buildings 0 3,931 Disposals for the year -154, ,495 Carrying amount at 31 December 360 1,502 Parent company financial statements 95

98 96 Parent company financial statements Income statement Financial position Equity Significant accounting policies Notes Notes Note Amounts in USD Share capital The share capital consists of 44,600,000 shares of a nominal value of DKK 1 each. No shares are subject to any special rights or restrictions. No changes have been made in the share capital in the recent 4 financial years. Treasury shares Number of shares Nominal value (DKK'000) % of share capital January 2,212,606 2,702,140 2,212 2, Purchased 380, Distributed/sold -36, , December 2,556,495 2,212,606 2,556 2, The Company is authorised by the general meeting to acquire a maximum of 4,460,000 treasury shares, equal to 10% of the share capital. Treasury shares are among other things acquired for the purpose of share-based payment. See note 28 to the consolidated financial statements. In 2009, the Company acquired 380,000 treasury shares, equalling a purchase price of DKK 57,000 thousand (USD 9,960 thousand), and distributed 29,211 employee shares with a value of DKK 4,602 thousand (USD 792 thousand) from the Company's portfolio of treasury shares. Furthermore, the Company sold 6,900 shares at a selling price of DKK 801 thousand (USD 143 thousand). Of the Company's portfolio of outstanding shares, 188,460 shares (188,460 shares) have been lodged as security with Vækstfonden in connection with the employees' exercise of share options comprised by the Company's share option programme. The shares can be released for cash at the share price existing from time to time. Vækstfonden receives dividends as long as the shares are lodged. In 2008, the Company sold 489,534 treasury shares, equalling a value of DKK 68,270 thousand (USD 14,337 thousand), including distribution of 15,994 employee shares. Furthermore, Vækstfonden released 350,000 shares against a payment of DKK 179,636 thousand (USD 37,997 thousand). The Company had 42,387,394 outstanding shares of DKK 1 each at 1 January 2009 and 42,043,505 shares of DKK 1 each at 31 December Bank debt Repayment within 1 year 5,187 5,187 Repayment between 1-5 years 58,423 63,610 Total 63,610 68, Operating lease liabilities Operating lease liabilities regarding vessels 1,986,789 2,209,856 Total 1,986,789 2,209, COAs and operating lease income COAs 604, ,479 Operating lease income 486, ,159 Total 1,090,469 1,519,638 Parent company financial statements 96

99 Parent company financial statements Income statement Financial position Equity Significant accounting policies Notes 97 Note Amounts in USD Unrecognised contingent assets and liabilities Contingent assets The Group has raised claims against third party of a total of USD 68 million (USD 29 million) regarding non-performance of cargo contracts. The Group and its legal advisors consider the claims to be justified and probable. There is uncertainty as to when the claims will be settled as well as the financial outcome hereof. No recognition hereof has been made as the existence of the assets is dependent on several uncertain future events, which are beyond the control of the Group, and therefore, it is not predominantly probable that it is an asset. 25,750 11,500 Contingent liabilities Guarantee commitments do not exceed Guarantees provided to subsidiaries 1,313,945 1,359,046 The Company has entered into agreements for future delivery of newbuildings and exercised purchase options, etc. The total contract amount is payable as follows: Within 1 year 28,069 50,013 Between 2 and 3 years 37,427 66,827 Total 65, ,840 Claims have been made against the Group, primarily concerning discharge responsibility and broker fees. The Group and its legal advisors consider the claims unjustified and do not perceive that the Group will incur any losses as a result of the actions for damages. The maximum risk is assessed to be 15,077 24, Mortgages and security As security for bank debt 63,610 68,797 a total number of vessels of 4 4 with a carrying amount of 91,581 95,037 have been mortgaged at 85,580 85, Financial instruments See note 26 to the consolidated financial statements where financial instruments are described. 19 Share-based payment See note 28 to the consolidated financial statements where share-based payment is described. 20 Related party disclosures and transactions with related parties See note 27 to the consolidated financial statements. 21 Risk management See note 2 to the consolidated financial statements. Parent company financial statements 97

100 98 Parent company financial statements Definitions of key figures and financial ratios The financial ratios were computed in accordance with "Recommendations and Ratios 2005" issued by the Danish Society of Financial Analysts. The ratios listed in the key figures and ratios section were calculated as follows: Return on invested capital (ROIC) = Profit or loss from operations x 100 Average invested capital Return on assets = Profit or loss from operations x 100 Total assets at year-end Share price at year-end per DKK 1 = The last-quoted average price on NASDAQ OMX share Copenhagen A/S for all trade in the Company share at the balance sheet date EBITDA ratio = EBITDA x 100 Net revenues Return on equity in % (ROE) = Profit or loss for the year x 100 Average equity, excluding minority interests Intrinsic value per DKK 1 share = Year-end equity, excluding minority interests Number of shares at year-end, excluding treasury shares Invested capital = Equity including minority interests + net interest-bearing debt at year-end Price/intrinsic value = Share price at year-end per DKK 1 share Intrinsic value per DKK 1 share Net Asset Value (NAV) per share = Equity, excluding minority interests + added value of vessels and vessels on order relative to year-end carrying amounts Number of shares at year-end, excluding treasury shares Net interest-bearing debt = Interest-bearing debt less cash, cash equivalents and securities, at year-end Profit margin = Profit or loss from operations x 100 Net revenues Payout ratio = Dividend (excluding treasury shares) x 100 Profit or loss for the year, excluding minority interests Net profit per DKK 1 share = Profit or loss for the year Number of shares at year-end, excluding treasury shares Equity ratio = Equity at year-end, excluding minority interests x 100 Total assets Dividend per DKK 1 share = Dividend yield x nominal share value 100 Dividend yield for the year = Parent company dividend yield USD exchange rate at year-end = The USD exchange rate quoted on NASDAQ OMX Copenhagen A/S at the balance sheet date Parent company financial statements 98

101 99 Technical terms and abbreviations A B C D ACM Shipbroking company. Baltic Exchange Clean Tanker Index (BCTI) Index of the product tanker rate development on selected routes for Handysize, MR and LR1. Baltic Exchange Dry Index (BDI) Index of the dry cargo rate development on selected routes for Handysize, Supramax, Panamax and Capesize. Bloomberg Provider of financial news and data. Bulk Bulk commodities - everything stowed in bulk without packaging. Bulk carrier (dry cargo vessel) Vessel with no twin-deck, used for bulk transport of grain, coal, ore, sugar and cement. Bunker Fuel used by the vessel. Bunker hedging Forward agreement to purchase or sell bunker oil at a predetermined price. Capesize Bulk carrier of more than 150,000 dwt. capacity. Carbon Disclosure Project Organisation registering company data, particularly on CO 2. Charter party Lease or freight agreement between shipowner and charterer. Clarksons Shipbroking company. CO 2 Carbon dioxide. COA (Contract Of Affreightment) or cargo contract Agreement to transport one or more cargoes at a predetermined price per tonne. Commercial management Agreement on operating a vessel for the account and risk of the shipowner. Core fleet Owned vessels and vessels on long-term charters with purchase option. CSR - Corporate Social Responsibility A company s social responsibility. Double-hulled vessel Vessel with both an outer and an inner hull. It provides extra protection in case of collision, for example. Dry cargo vessel See Bulk carrier. Dwt Deadweight ton. A measure of a vessel s carrying capacity. E F EBIT Earnings Before Interest and Tax. EBITDA Earnings Before Interest, Tax, Depreciation and Amortisation. FFA (Forward Freight Agreement) Forward agreement to purchase or sell the transport of cargo for a particular type of vessel and route at a predetermined price. H Handymax Bulk carrier of 40,000-60,000 dwt. capacity. I K L Handysize Bulk carrier of 25,000-40,000 dwt. capacity or product tanker of 27,000-42,000 dwt. capacity. IAS International Accounting Standards. IEA International Energy Agency. IFRS International Financial Reporting Standards. IMF International Monetary Fund. IMO International Maritime Organisation shipping organisation under the UN. KPI Key Performance Indicator. Long-term charter Agreement to charter a vessel for a period of more than 3 years. LR1 (long range tanker) Product tanker of 60,000-75,000 dwt. capacity. M MARPOL A set of international conventions on preventing pollution. Administrated by IMO. MR (medium range) tanker Product tanker of 42,000-60,000 dwt. capacity. N NO x Nitrogen oxides. O OECD Organisation for Economic Co-operation and Development. P Panamax Bulk carrier of 65,000-82,500 dwt. capacity. Pool Group of vessels with different owners, but commercially operated together. Post-Panamax Bulk carrier of 85, ,000 dwt. capacity. Product tank Transport of refined oil products, including gasoline, jet fuel, naphta, diesel and gas oils. R S T Propulsion resistance The effect required by the main engine to push the vessel through the water. The force increases with the vessel s speed and growths and irregularities on the vessel s hull. Purchase option A right, but not an obligation, to purchase a vessel at an agreed price. ROE Return on equity. ROIC Return on invested capital. R.S. Platou Shipbroking company. Ship days Total number of days with available vessel capacity. Short-term charter Agreement to charter a vessel for a period of less than 3 years. SO x Sulphur dioxide. Spot market Market in which vessels are contracted for a single voyage for immediate delivery. SSY Shipbroking company. Strike value Agreed option price. Tanker Vessel transporting liquid cargo such as crude oil and refined oil products. T/C (time charter) Lease of a vessel whereby the vessel is hired out for a short or long period. T/C (time charter) equivalent Freight revenues minus bunker consumption and port charges. Technical management Agreement to manage a vessel s technical operations and crew for the account and risk of the shipowner. Ton-mile A measure of demand for capacity. Calculated as the amount of freight times the transport distance in nautical miles. Tramp trading Voyages without fixed routes unlike line trading, where the routes are predetermined. U UN Global Compact The UN s social charter for enterprises, etc. V Vetting A review of the safety and performance status of a tanker vessel made by all major oil companies prior to entry into a charter party Design and graphic production: Meyer & Bukdahl as

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