Annual Report

Transcription

1 Annual Report

2 2 CONTENT ANNUAL REPORT 2014 Table of Contents OVERVIEW Introduction by Chairman and CEO 3 About Us 4 Highlights Group Key Figures 8 Outlook BUSINESS Lauritzen Bulkers 11 Lauritzen Kosan 16 Other Businesses 21 People, Relations and Systems 22 Finance 24 GOVERNANCE Corporate Governance 26 Risk Management 27 Corporate Responsibility 29 Board of Directors 30 Management 32 FINANCIALS Financial review 34 Consolidated financial statements 36 Parent company financial statements 67 Management statement 89 Independent Auditors Report 90 List of Group Companies 91 DISCLAIMER This Annual Report contains forward-looking statements about J. Lauritzen s future financial position. Such statements are subject to risks and uncertainties as various factors, many of which are beyond the control of J. Lauritzen, may cause actual developments and actual results to differ materially from expectations contained in the Annual Report. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results.

3 OVERVIEW ANNUAL REPORT Introduction by Chairman and CEO Early 2014, an undercurrent of optimism existed in the shipping markets in general and amongst members of the dry-cargo community in particular. The reality of the past year has proved this optimism misplaced, and 2014 turned out to be considerably more difficult and challenging for us than expected. The net results for 2014 were USD (166)m compared to USD (285)m in The results were in line with our most recent expectations but considerably below our expectations at the beginning of the year. The results were heavily impacted by impairment and provisions totalling USD (161)m. While the results were unsatisfactory in financial terms, we regard them as an outcome consistent with a very difficult year. It is part of our strategy to diversify the revenue base and value creation opportunities by spreading business activities and investment interests across different market segments. The exit from the product tanker segment in , the sales of our shuttle tankers and two of our capesize bulk carriers in 2014 have changed the risk profile of our revenue base. We maintain some diversification by operating two distinctly different business activities while our investment in Axis Offshore provides a further diversification to our value creation opportunities. In our view, our value creation will to an increasing extent have to be driven by our ability to combine acumen, operational excellence and talent to transform relations, insight and knowledge into shared value to our owner and to our clients. The global shipping industry faces cost-intensive challenges imposed on our industry by regulators and authorities. We support well considered environmental regulation and call for their effective enforcement when economic incentives for noncompliance are obvious. We have little doubt that we are facing a 2015 where it is very difficult indeed to find any creditable reasons for our markets to improve considerably. The gas carrier earnings will continue to be impacted by slow global economic growth, dry bulk suffers from severe oversupply and offshore activities are hampered by low oil prices. Low energy prices may provide the beginning of an upturn as households all over the world feel the increased spending power and start consuming. It is, however, unlikely for this to have an impact short-term, and we believe that our three business areas will be faced with a year of hard work and little financial reward. Bent Østergaard Chairman of the Board Jan Kastrup-Nielsen President and CEO

4 4 OVERVIEW ANNUAL REPORT 2014 About Us J. Lauritzen has served the maritime trade worldwide for more than 130 years and has been engaged in a range of different segments of the shipping industry. Today, we are a global provider of marine transportation of dry bulk cargoes, petrochemicals and liquefied petroleum gases. In addition we have investments in the offshore service sector. Our business Lauritzen Bulkers controls a modern fleet of more than 100 primarily handysize and supramax dry bulk carriers. The handysize operation is our main business activity and is based on a large homogeneous fleet of owned, part-owned and long-term time-chartered vessels, vessels committed by partners as well as a substantial number of shortterm time-chartered vessels. Lauritzen Kosan specialises in carriage of petrochemicals and liquefied petroleum gases - a segment of the shipping industry characterised by technically complex requirements from regulators and clients. Lauritzen Kosan controls a fleet of 39 semi-refrigerated, fully-pressurized and ethylene gas carriers. In addition to our two main business areas, we have business interests in the offshore service sector through our part-ownership of Axis Offshore Ltd., provider of high specification accommodation units servicing the offshore oil and gas industry. Invested capital per business unit, year-end 2014 J. Lauritzen at a glance Lauritzen Kosan Founded in 1884, Denmark Owned by the Lauritzen Foundation. The Lauritzen Foundation is a self-governing institution regulated by the Danish Act on Commercial Foundations. Through its charter, the Foundation is committed to promote and develop the Danish shipping industry in general and support humanitarian work. Operating world-wide with headquarters in Copenhagen, Denmark Overseas offices in Singapore, China, the Philippines, the United States, Switzerland and Spain 5,759 port calls in 104 countries during employees ashore 20 nationalities with a gender distribution of 37% female and 63% male 798 seafarers on board owned vessels Revenue per business unit, 2014 Lauritzen Kosan Lauritzen Bulkers Lauritzen Bulkers

5 OVERVIEW ANNUAL REPORT Business strategy During we made wide-ranging adjustments to our business portfolio, and this has allowed us to devote our full attention to the development of Lauritzen Bulkers and Lauritzen Kosan. The strategies of Lauritzen Bulkers and Lauritzen Kosan share the objective of creating value to our owner and clients by being reliable and trustworthy providers of marine transportation services on a global scale. Our two business units operate in two distinctly different segments of the shipping industry, and their respective business models differ, yet, they share the following strategic attributes: Build and manage long-term relations with clients and stakeholders Create insight via building critical mass in selected segments Embrace complexity, leverage skills and competencies Select and invest in talent Who we are We consider ourselves a value-driven organisation with Accountability, Respect, Competence, Enthusiasm, Entrepreneurship and Team Spirit representing the essence of who and what we are. Our attitudes, decisions and actions always reflect our values. Our value creation is anchored in the ability of our people to build and manage relations with our clients and hereby understand and fulfil efficiently many different types of transportation requirements. Our aim is to be considered always approachable, always accountable and always looking towards shared value creation. We can only achieve this by attracting and developing high-calibre talented people, who anchor themselves in our tradition for open communication, in combination with our organisational structure and tools, and who are empowered to develop our business. We believe that part of a quality service is to conduct business in a responsible manner creating benefits broadly while being open, fair and honest in all our activities. Geographic distribution of imports, % 20% 40% 60% 80% 100% Lauritzen Bulkers Lauritzen Kosan Africa Asia Oceania Europe North America South America

6 6 OVERVIEW ANNUAL REPORT 2014 Highlights turned out to be considerably more difficult and challenging than we anticipated. After a somewhat disappointing first half of 2014 in terms of global economic growth and world trade, some improvement was expected in the second half of the year. However, as the year progressed, our market forecasts were repeatedly revised downwards, and the cautious optimism we expressed mid-year for the markets beyond Q3 had to be adjusted. J. Lauritzen s net results for 2014 were USD (165.7)m compared to USD (284.6)m in The results were in line with our most recent expectations but considerably below our expectations, not only at the beginning of the year but also at the presentation of the results for the first half year of The results were unsatisfactory in financial terms but an outcome consistent with a very difficult year. The results for 2014 were heavily impacted by special items net totalling USD (118.9)m, in particular due to impairment losses and provisions. In 2013, special items net totalled USD (136.1)m also mainly related to impairment losses. Furthermore, net results for 2014 included USD 18.7m profit from discontinued operations compared to USD (47.8)m in On a comparable basis, excluding special items and profit from discontinued operations, the net results for 2014 were USD (65.6)m compared to USD (100.7)m for At year-end 2014, the solvency ratio amounted to 47% (2013: 39%) and cash and undrawn committed credit facilities stood at USD 284m (USD 154m). Net debt amounted to USD 268m equal to 37% of broker values (in 2013 USD 631m and 62%, respectively). The business environment The global economy experienced an uneven development during 2014, with recovery to accelerated growth in the US, slowdown in China, deterioration of the growth outlook for the emerging economies and increased risk of recession in Europe turned out to be another year of headwind in terms of transforming global economic growth into global trade. Declining commodity prices during the year reduced the incentive to have much in storage to the detriment of seaborne trade. Thus, the anticipated market improvement for dry bulk carriers and smaller gas carriers in the second half of 2014 did not materialise.

7 OVERVIEW ANNUAL REPORT Falling crude oil prices in the second half of the year led to reduced bunker prices and reduced the incentive to slowsteam, effectively increasing the supply of carrying capacity. Main events in 2014 During 2014, we succeeded in executing significant adjustments to our business portfolio, including the exit from the product tanker and shuttle tanker segments. The completion of these adjustments allowed us to devote our full attention to the development of Lauritzen Bulkers and Lauritzen Kosan. A range of initiatives and adjustments were initiated in Lauritzen Bulkers with a view to increasing the value creation from transforming a significant number of shipping transactions into knowledge and market insight that enable Lauritzen Bulkers to take additional but time-limited shipping risk and hereby generate additional earnings from spot trading activities. At Lauritzen Kosan, efforts were made to strengthen the business model, which is rooted in the ability to, repeatedly, deliver reliable performance in a niche market surrounded by complex requirements. During 2014, Lauritzen Bulkers and Lauritzen Kosan controlled a combined average fleet of 147 vessels compared to 155 vessels in At yearend 2014, we owned 19 bulk carriers (average age of 4.6 years) and 22 gas carriers (average age of 9.8 years). Our newbuilding programme consists of four supramax and two handysize dry bulk carriers. Two additional handysize dry bulk carriers have been ordered in a joint venture. The newbuildings are expected to be delivered through Axis Offshore, our joint venture in the Accommodation and Support Vessel (ASV) segment, has two high-specification semi-submersible ASVs under construction with expected delivery in 2015 and Assets and solvency Total invested capital was USD 836m at year-end 2014, down from USD 1,225m at year-end The total book value of vessels amounted to USD 773.0m, down USD 248.1m on 2013 due to the sale of assets, impairment losses and depreciation. Brokers valuations of vessels were on average down 9% on In order to simplify the legal structure of the J. Lauritzen Group, the decision was taken to merge subsidiary group companies with the parent company in Denmark and Singapore, respectively. Lauritzen Bulkers and Lauritzen Kosan remain the trading names of our business activities.

8 8 OVERVIEW ANNUAL REPORT 2014 Group Key Figures USDm Income statement Revenue Time-charter equivalent income (TCE) Operating income before depreciation (EBITDA) and special items EBITDA accounted for as discontinued operations N/A N/A Profit/(loss) on sale of vessels and other assets 14 (8) 2 8 (12) Depreciation (56) (63) (75) (91) (75) Share of profit in joint ventures (1) (6) (8) 5 11 Operating income (EBIT) before special items (28) (70) (64) Special items, net (119) (136) (200) (25) 82 Financial items, net (40) (31) (41) (69) (56) Profit/(loss) from continuing operations before tax (187) (237) (305) (46) 141 Profit/(loss) from discontinued operations 19 (48) (43) N/A N/A The J. Lauritzen Group's share of profit/(loss) (166) (285) (350) (46) 131 Balance sheet Non current assets 952 1,185 1,931 2,361 2,062 Total assets 1,208 1,877 2,315 2,682 2,411 J. Lauritzen's share of equity ,199 1,239 Non-current liabilities ,297 1, Invested capital * 836 1,225 1,469 2,344 2,049 Net interest bearing debt (NIBD) * , Cash flows and financial ressources Cash flow from operating activities 60 (20) Cash flow from investment activities (108) (330) (325) - hereof investments in vessels, machinery and equipm. (43) (118) (190) (438) (538) Cash flow from financing activities (572) (126) Changes for the year in cash and cash equivalents 41 (118) (19) Financial ressources at the end of the year Key figures and financial ratios Average number of employees * 1,064 1,125 1,167 1,300 1,148 Total number of ship days * 53,515 56,736 59,156 55,115 54,385 DKK exchange rate year-end Average DKK exchange rate Profit margin (6.1)% (12.7)% (10.0)% 7.4% 15.6% NIBD/EBITDA * Solvency ratio 47% 39% 37% 45% 52% Return on equity (ROE) (25.3)% (35.8)% (34.1)% (3.8)% 11.1% Return on invested capital (ROIC) * (14.3)% (15.3)% (17.1)% 1.1% 10.2% * Continuing operations only in In 2013, J. Lauritzen decided to discontinue its operations in Lauritzen Offshore - Shuttle tankers and Lauritzen Tankers and thus these activities have been accounted for as discontinued operations for the periods Comparison figures for have not been represented. The key figures have been calculated as follows: Profit margin: Solvency ratio: Return on equity: Invested capital: Return on invested capital: Net interest bearing debt (NIBD): NIBD/EBITDA: Operating income before special items excl. Share of profit in joint ventures x 100 / Revenue Total equity, year-end x 100 / Total equity and liabilities, year-end J. Lauritzen s share of profit/(loss) x 100 / J. Lauritzen s average share of equity Total assets less cash, securities, non operational assets and non interest-bearing current liabilities Operating income after special items x 100 / Average invested capital Interest-bearing liabilities, less subordinated loan, interest-bearing assets and cash NIBD / Operating income before depreciation and special items

9 OVERVIEW ANNUAL REPORT Selected key figures USDm EBITDA Result for the year EBIT Special items, net Revenue USDm Lauritzen Bulkers Other Lauritzen Kosan Discontinued oper. Capital structure USDm 3,000 2,500 2,000 1,500 1, Total equity Non-current liab. Current liab. Cash flow from operations and financial resources USDm Cash flow from operating activities Financial resources

10 10 OVERVIEW ANNUAL REPORT 2014 Outlook 2015 Global economic activity is expected to increase slightly in 2015 primarily due to solid growth in the US, whereas the European area is struggling to avoid recession. The contribution to global growth from China and from emerging economies is expected to decrease. China s economy is gradually changing from investment driven growth towards consumption driven growth. We see this as a risk for further decrease of Chinese import growth of raw materials to the detriment of demand for dry bulk shipping. The current low oil prices are, however, expected to turn out to be a stimulus to global growth, and the availability of low priced LPG in combination with the US recovery is e.g. expected to support demand for gas carriers. Increases in protectionist measures and sanctions that reflect ongoing geopolitical conflicts represent a threat to global trade and marine transportation. The existing Indonesian mineral export ban and the Chinese coal import restrictions are expected to continue to have a negative impact on demand for dry bulk shipping. Tonnage supply is expected to grow slightly stronger than demand growth in 2015, and net fleet growth is expected to further increase in the coming years due to significant ordering in 2013 and The incentive to slowsteam has been reduced with the current low bunker oil prices effectively causing an additional increase in carrying capacity. Based on the above, we expect market conditions and the overall business environment in 2015 to remain as challenging as in EBITDA before special items for 2015 is expected to be within the range USD (20)m-30m, compared to USD 15m in Net results are expected to be USD (70)m-(20)m, up compared to USD (166)m in 2014 where special items net had an impact of USD (119)m on the net results. Currency and interest rate fluctuations as well as effects from the sale of assets, if any, may impact the result.

11 BUSINESS ANNUAL REPORT Lauritzen Bulkers Operating income from our dry bulk activities before depreciation (EBITDA) and special items amounted to USD 6.4m in 2014 which was up compared to USD (12.1)m in The activity level, measured by performed ship-days, declined by 4% compared to The results for 2014 were negatively impacted by special items net totalling USD (118.9)m which comprised impairment losses and provisions totalling USD (161.0)m, revenue from the sale of a counterparty claim relating to STX Pan Ocean and other settlements totalling USD 31.7m as well as a profit of USD 10.4m from sale of vessels also as a consequence of the STX Pan Ocean default. For comparison, the results for 2013 were impacted by special items net totalling USD (136.1)m mainly related to impairment losses. Market conditions turned out to be considerably more difficult in 2014 than expected, and we expect the business environment to remain challenging throughout ACTIVITY IN 2014 In 2014, the total number of ship-days performed reached 39,118 corresponding to 107 vessels on average, compared to 40,895 ship-days with 112 vessels on average in Spot ship-days amounted to 10,311 compared to 8,897 in 2013 due to increased focus on the spot trading activity. Measured by the number of fixtures, which amounted to 1,098 in 2014, the activity in 2014 was on par with Our client base totalled more than 250 clients. Operating income after special items amounted to USD (132.5)m compared to USD (207.7)m in Measured by time-charter equivalent income, the total income in 2014 amounted to USD 248.8m, with USD 9,012/day in the handysize segment, USD 9,958/day in the supramax segment and USD 29,518/day in the capesize segment. The spot trading activity contributed with USD 8.4m, net. During 2014, we worked on a range of initiatives and organisational adjustments to focus our business activities and to improve our ability to generate value in fluctuating markets, in particular from spot trading activities. Activity (average no. of ships) Handysize Supramax Capesize Total (RHS) Key figures USDm Cargo mix, Revenue Time-charter equivalent income EBITDA before special items 6.4 (12.1) Depreciation (29.5) (36.9) Profit/(loss) on sale of vessels etc (10.7) Share of profits in joint ventures (3.9) (11.9) Operating income before special items (13.6) (71.6) Special items, net (118.9) (136.1) Operating income after special items (132.5) (207.7) Ship-days 39,118 40,895 Energy Metals Construction materials Minerals Agricultural products

12 12 BUSINESS ANNUAL REPORT 2014 GLOBAL MARKET DEVELOPMENTS The dry bulk markets started 2014 with expectation of a recovery in the second part of Following the trough related to the Chinese New Year, the expected seasonal uptick in Q2 did, however, not materialise due to a combination of negative events, including the effects of the mineral export ban imposed by Indonesia. This and the slowdown in Chinese coal imports dented the expected rate improvements in the latter part of Q3 and into Q4. Despite overall robust demand growth (approximately 6%) that actually exceeded nominal supply growth (approximately 5%) freight rates were disappointing. The decreasing bunker prices in H2 reduced the incentive to slowsteam, and this effectively increased the supply of carrying capacity in addition to the nominal supply growth. The annual spot market average (on time-charter equivalent basis, as reported by Clarkson Research Services) was down 6% in the handysize segment, down 4% in the supramax segment and down 2% in the capesize segment compared to STRATEGY AND BUSINESS MODEL A strong presence in the handysize bulk carrier segment is the hallmark of Lauritzen Bulkers strategy. The objective is to deliver competitive and reliable transportation services to our clients while generating earnings to our owner exceeding market levels. The dry bulk market is generally characterised by solid demand, fragmentation among carriers, strong price competition and fluctuating capacity utilisation. This allows us ample possibilities to provide dry bulk shipping services on the basis of a large homogeneous fleet consisting of a core of owned, part-owned and long-term time-chartered vessels, vessels committed by partners and a substantial volume of shorter term time-chartered vessels. Our business model in handysize is rooted in our ability to transform a significant number of shipping transactions into knowledge and market insight. We have a strategic goal to employ a similar approach in the neighbouring supramax segment as this will allow us more opportunity to leverage our business model. To achieve this we pay special attention to: Positioning: Remain a preferred carrier by having strong client focus and providing first-class dry bulk shipping services Performance: Optimise fleet utilisation in order to minimise ballasting days Processes: Always look to improve and trim processes to reduce costs and ensure scalability Spot trading: Leverage our knowledge and take additional time-limited shipping risk, i.e. additional positions in cargo, periods or ship-days, and thereby generating additional earnings In addition to our presence in the handysize and supramax bulk carrier segments, we have a limited presence in the capesize segment with two owned vessels long-term employed to a reliable counterparty. We do not wish to take new active shipping risk in this segment and our focus is strictly to act as shipowners under existing longterm charters. Spot market rates since 2010 in time-charter equivalent USD/day 70,000 60,000 50,000 40,000 30,000 20,000 10, Average of the 4 T/C Routes for Baltic Capesize Index - LHS Average of the 6 T/C Routes for Baltic Supramax Index - RHS Average of the 6 T/C Routes for the Baltic Handysize Index - RHS 40,000 30,000 20,000 10,000 Source: Own analysis based on data from clarkson research services

13 BUSINESS ANNUAL REPORT Business risk management Fluctuations in freight rates is the primary risk factor associated with our business model. With a business strategy focusing on the handysize and supramax segments, the majority of our business is concluded in the spot and shorter term period market and market volatility is thus reflected in our earnings. The existence of market volatility is, however, also supportive for our strategy to earn margins from our spot trading activities. Based on our outlook for handysize and supramax dry bulk carriers, the contract coverage for 2015 in relation to our committed fleet in handysize is approximately at the same level as early 2014, whereas coverage for our committed supramax fleet has increased, to some extent due to a decrease in the fleet size. In the capesize segment, the relatively high coverage reflects our aim only to have vessels employed on longer term contracts. Coverage at the beginning of the year 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Capesize Supramax Handysize Other important risk factors associated with our business model are access to tonnage, credit risk related to counterparties and fleet portfolio management. We manage risk in relation to these factors in the following way: Tonnage: Securing and rejuvenating the controlled fleet with focus on size and fuel efficiency. Obtaining flexibility in charter parties in terms of trading, period and purchase options Counterparties: Careful scrutiny of counterparties, including i.a. their trading history, prior to concluding longer term contracts within predefined limits Fleet portfolio management: Balancing the needs for control, flexibility and commitment by having a core fleet of owned, part-owned and longer-term time-chartered vessels, vessels committed by partners as well as short-term chartered vessels enabling our spot trading activity

14 14 BUSINESS ANNUAL REPORT 2014 FLEET In 2014, our core fleet averaged 57 vessels (unchanged from 2013). Vessels committed by pool partners averaged 22 (down from 30 in 2013). At year-end 2014, our core fleet and vessels committed by pool partners comprised 63 handysize, ten supramax and four capesize bulk carriers. Two supramax vessels, sold in 2013, were delivered to new owners, and a further two were sold and delivered during Two capesize vessels were also sold and delivered to their new owners in 2014, reflecting our strategy to exit this segment as an active player. A total of 16 long-term time-chartered vessels were delivered to the core fleet while ten vessels were redelivered to owners during Four scheduled dry dockings were completed in Unscheduled off-hire for our owned fleet came to 0.47% of available ship-days in 2014 (0.57% in 2013). At year-end 2014, the average age of the owned fleet was 4.6 years (3.3 years at year-end 2013). The newbuilding programme includes six owned vessels and a further two vessels ordered by a joint-venture formed together with Sincere Industrial Corporation with scheduled delivery in Various tonnage providers are expected to deliver a further 14 newbuildings on long-term time-charter to us. Deliveries of newbuildings Owned Handysize 2 Supramax Part-owned Handysize 2 Supramax Chartered Handysize Supramax 1 1 Total PERFORMANCE We work with our processes and organisation to ensure our competitiveness in a cost-focused market, where we see reliability, quality and global presence as a way to deliver value. Increasing vessel performance Our technical department implemented Vessel Energy Renovation Plans (VERP) on four vessels during 2014 (three vessels in 2013). VERP is a fleet performance catalogue that covers the optimisation of auxiliary machine consumption, including pumps, fans and air conditioning, plus additional initiatives for technical and operational optimisation. Vessel Energy Renovation Plans have been implemented on seven vessels over the last two years realising fuel-savings of approximately 7% A performance desk was established during 2014 to strengthen our efforts within energy-efficiency and increasing fleet performance. This new function is establishing a Key Performance Indicator system for all performance-related data as a tool to streamline efficiency and at the same time stimulate a performance-oriented culture. Operational excellence During 2014, our operations department began utilising the Optimum Ship Routing (OSR) platform provided by WNI Weathernews International, enabling us to work in an even more structured way with day-to-day performance analysis, projected fuel consumption and routing recommendations. Core fleet and vessels committed by pool partners at year-end 2014 Total Handysize Supramax Capesize Newbuildings Owned Part-owned T/C in Pool, etc Total Note: Not including vessels with a charter duration of less than 12 months

15 BUSINESS ANNUAL REPORT Our RightShip risk profile To benchmark our efforts to ensure low-risk operations, we utilise RightShip s database, the Ship Vetting Information System (SVIS) to rate our owned vessels. The SVIS data provide evaluation of vessels based on factors such as flag and class performance, technical manager performance, yard profile, casualty history, terminal reports and age. The average risk rating of the owned fleet was unchanged and satisfactory at 4.9 on the Right- Ship vetting scale (with 5.0 as the best rating) at year-end The rating supports our ambition to remain a preferred carrier. PEOPLE To ensure quality operations at all organisational levels ashore and at sea, we rely on employees with the right sets of skills and ethical mindset. Transforming the organisation During the year we continued our shift towards a more client-oriented business model. The transition has allowed us to attract new talent to open positions and at the same time protect the knowledge and know-how already present. To support the organisational transformation we have initiated projects facilitating interaction across the organisation as we wish to foster and stimulate a feedback culture. In 2014, a project dedicated to further streamlining our processes and increasing our operational performance also allowed us to work in a more cross-functional manner. Building on our relations In 2014, we continued to focus on building and managing relations with clients, trading houses, shipyards, technical managers and crews. Newbuildings for our own account are all being built at Japanese shipyards or at Japanese coowned shipyards. Likewise, newbuildings for delivery in on structured charter deals are solely being built at Japanese shipyards. Many of these shipyards and the trading houses involved have been our partners for decades, and in 2014 we strengthened our relationship activities as Japanese tonnage suppliers are essential for our tonnage strategy. Technical management, including crewing for our owned fleet, is performed by New Century Overseas Management Inc., Manila, and Synergy Maritime Pte., Singapore providing safe, cost-effective and reliable vessel operations controlled and supervised by our in-house technical department. As part of our ambition to get closer to the crews onboard our owned vessels, we are conducting regular officer seminars with support from our technical managers. OUTLOOK FOR 2015 We expect demand growth for transportation of dry bulk commodities to be on par with or slightly lower than in Fleet growth of bulk carriers is expected to increase compared to 2014, albeit only marginally. The decrease in bunker oil prices is, however, effectively causing an additional increase in the carrying capacity as the incentive to slowsteam has decreased. The dry bulk markets are already struggling with oversupply, and further capacity increases are negative for the market balance. With demand and supply growth expected to almost equal out each other in 2015, only marginally improved markets are expected for 2015 compared to In 2015, we expect to employ 90 handysize and 25 supramax vessels on average. As part of our strategy to move closer to our clients, we opened a new office in Geneva, Switzerland

16 16 BUSINESS ANNUAL REPORT 2014 Lauritzen Kosan EBITDA before special items from our gas carrier activities amounted to USD 17.9m in 2014 compared to USD 28.1m in Challenging market conditions for smaller semi-refrigerated gas carriers and a decrease in activity level, measured by ship-days down 9% compared to 2013, were the main contributing factors. Operating income amounted to USD (7.3)m compared to USD 3.6m in Measured as time-charter equivalent income, the total income in 2014 amounted to USD 102.3m, with notable differences between vessel types and sizes, ranging from USD 6,971/day for the fully-pressurised carriers, USD 9,883/day for the semi-refrigerated carriers to USD /day for the ethylene carriers. Activity (average no. of ships) During 2014, we made efforts to strengthen our business with focus on improving performance while building closer relations to existing clients and potential new business partners. One outcome from the activities was the agreement with Odfjell Gas to have two of their ethylene gas carriers join our ethylene gas carrier pool. Market conditions turned out to be considerably more difficult in 2014 than anticipated, and we expect the business environment to remain challenging in ACTIVITY IN 2014 In 2014, the total number of ship-days performed reached 14,397 corresponding to 39 vessels on average, compared to 15,841 ship-days with 43 vessels on average in We maintained a strong presence in the Atlantic basin with transatlantic cargo contracts as well as an increasing number of LPG exports from the US Our client base, representing some of the world s largest oil majors and energy traders, totals some 90 clients, and the top 10 clients accounted for half of the 2014 revenues. The vast majority are repeating clients Semi-refrigerated Ethylene Fully-pressurised (F/P) Total (RHS) 0 Cargo mix, 2014 Key figures USDm Butadiene Ethylene Other LPG Revenue Time-charter equivalent income EBITDA before special items Depreciation (26.5) (26.5) Profit/(loss) on sale of vessels etc Share of profits in joint ventures Operating income before special items (7.3) 3.6 Special items, net - - Propylene Operating income after special items (7.3) 3.6 Ship-days 14,397 15,841

17 BUSINESS ANNUAL REPORT GLOBAL MARKET DEVELOPMENTS After some improvement in the market balance during the first part of 2014, a set-back was seen during the second half. Economic and geopolitical factors contributed to disappointing overall demand growth for smaller gas carriers in Another factor that put a strain on the market was a number of unscheduled turnarounds in the petrochemical industry which reduced availability of products for exports. STRATEGY AND BUSINESS MODEL Lauritzen Kosan specialises in safe and efficient carriage of petrochemicals and liquefied petroleum gases on a global basis - a segment of the shipping industry characterised by technically complex requirements from regulators and clients. The strategy is based on our brand and rooted in years of solid operational performance. We strive to remain a leading, reliable, high quality provider of safe and flexible transportation to our clients and in this way generate value to our owner. We control and operate smaller semi-refrigerated, ethylene and fully-pressurised gas carriers in the 3-10,000 cbm segment serving the petrochemical companies, oil majors and traders. The underlying long-term drivers of demand for smaller gas carriers are the global consumption of plastics and liquefied petroleum gases (for fuel and heating purposes as well as petrochemical feedstock). In the shorter term, the demand for transportation is fluctuating with production cycles in the refinery and petrochemical industry. The reliability of our performance has earned us the trust of our many repeating clients Our business model is based on our ability to maintain reliability and embrace complexity: Maintain reliability: Continuous focus on improvements through education and training, innovation and careful implementation of procedures to ensure our reliability as service provider to our clients Embrace complexity: Strong collaboration between the commercial departments and our in-house technical department to ensure that we meet the strictest health, safety and environmental standards and stringent requirements from clients and authorities Spot market rates since 2010 in time-charter equivalent 1,000 USD/month F/P (3,500 cbm., trading east of Suez) Semi-refrigerated (6,500 cbm) F/P (3,500 cbm., trading west of Suez) Ethylene (10,000 cbm) Source: Own analysis based on data from Fearnley s

18 18 BUSINESS ANNUAL REPORT 2014 Business risk management Vessel employment and fluctuating freight rates are key risk factors associated with our business model. Cargo contracts that are renewed annually form the majority of our business. The contract coverage at the beginning of 2015 is slightly lower for our fully-pressurised gas carriers but slightly higher for our semi-refrigerated gas carriers and ethylene carriers compared to last year. The changes reflect market conditions as well as a change in committed days. Coverage at the beginning of the year 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Fully-pressurised Semi-refrigerated Ethylene Compliance, utilisation and fleet portfolio management are other important risk factors associated with our business model. We manage risk in relation to these risk factors in the following way: Compliance: In a business with complex requirements from regulators and clients, lack of compliance can have detrimental impact on our daily business and on our long-term business relations. In all aspects of our business we thus have strict focus on complying with requirements to be able to trade for any client anywhere Utilisation: A significant part of our business is concluded as cargo contracts (COAs) and we strive to balance the need to provide tonnage to meet contract requirements with additional employment from time-charter and spot contracts in order to maximise fleet utilisation Fleet portfolio management: Tonnage chartering, part-ownership (joint ventures), poolpartnership and sale and purchase of vessels are core elements of our fleet portfolio management. The limited size of the market for smaller gas carriers, however, restricts the availability of tonnage for chartering and likewise limits sales & purchase turnover

19 BUSINESS ANNUAL REPORT FLEET The total operated fleet consists of owned, partowned and chartered tonnage as well as vessels in commercial management (pool). In total, the combined average carrying capacity was 220,004 cbm in 2014 (224,737 cbm in 2013). At the end of 2014, the average age of the owned fleet was 9.8 years (9.3 years at year-end 2013). On average, we operated a total fleet of 39 vessels in The average operated fleet of semi-refrigerated gas carriers totalled 17 vessels (down one from 2013). We extended the bareboat charter on four vessels and now operate a modern fleet of smaller semi-refrigerated vessels following our sale of older tonnage and redelivery of older bareboat-chartered vessels. The operated fleet of fullypressurised gas carriers decreased to 12 vessels in The fleet of ethylene gas carriers decreased in 2014 to 11 vessels. In 2014, we conducted eight scheduled drydockings (14 in 2013). Unscheduled off-hire came to 1.6% of available vessel days in 2014 (1.9% in 2013). PERFORMANCE The ever-changing regulatory agenda is setting an increasingly demanding scene for ship management in terms of both complexity and costs. However, we see increased complexity as an opportunity. Working proactively with regulators and increased demands are embedded in our business model. We continuously monitor new demands and we prepare and invest to meet future demands from regulators and clients always focusing on competitive ship management and pushing the boundaries of best practice. Improving energy-efficiency Our performance management department monitors, develops and implements energy-efficiency initiatives as part of our REJUICE programme, a systematic approach to assessing and achieving fuel-savings. Since 2012, our energy-efficiency related to transport work has improved by more than 15% across our owned fleet. Our initial focus has been to develop a solid data platform for ongoing monitoring and evaluation of performance. Enhanced data collection through auto-logging and KPI tracking has been added to the traditional daily reports to form the basis for an automated reporting system that provides us with a reliable and current overview of the performance of our fleet. In 2014, focus on optimising trim and ballasting, as well as limiting hull and propeller fouling, contributed with approximately 6% fuel savings. Looking into 2015, further improvements are expected as we introduce enhanced weather routing and initiatives to increase crew awareness on energy-efficiency. The implementation of an enhanced KPI structure will support and motivate energy-efficiency efforts onboard our owned vessels. Vetting Performance The 27 gas carriers that are technically managed in-house were inspected 124 times by oil majors during During the year, we focussed particularly on improving performance under the Oil Companies International Marine Forum s (OCIMF) Ship Inspection Report Programme (SIRE). Our target for SIRE inspections in 2014 (4.5 observations per vetting inspection) was met with an average of 4.1 observations per vetting inspection. Crew-related observations accounted for an average of 1.5 of the total observations. The last 2.6 observations related to office and vessel construction and design observations. Vetting performance is a reflection of the safety performance of our company. Our focus continues to be on strengthening the safety culture of our people onboard the vessels and in the offices. A reduction in the number of vetting observations will not only reduce the commercial implications originating from the vetting regime, but it will also contribute to creating safer operations of our vessels. Core fleet and vessels committed by pool partners at year-end 2014 Semi-refrigerated Ethylene Fully-pressurised Total New-buildings Owned Part-owned B/B in T/C in Pool, etc Total

20 20 BUSINESS ANNUAL REPORT 2014 PEOPLE To ensure quality operations at all organisational levels ashore and at sea, we rely on employees with the right sets of skills and ethical mindset. Strengthening the organisation We continued the organisational changes initiated in 2013 resulting in closer collaboration between our commercial, operational and technical departments. These changes provided us with the ability to better understand and meet clients expectations. Supporting the organisational transformation, additional focus was on facilitating knowledge sharing and empowerment of our employees with the objective of ensuring competitive ship management. During the year, our technical organisation was expanded in Manila, the Phillipines. Focus on our safety culture Safeguarding our people, the environment and our clients cargoes is the crux of our health and safety efforts and improving the safety culture for all employees is always on top of our agenda. All crew members are introduced to Lauritzen Kosan at a Safety Culture Awareness course and on the basis of this our senior officers are enrolled in the Lauritzen Kosan Leadership and Management course, empowering leaders on board our vessels with our management culture and tools. Lost Time Injury Frequency was 0.5 in 2014 While the human element is one of many factors we work with, we also include IT and business intelligence as part of our efforts. In 2014, we continued to work with identifying trends and patterns to improve our performance. Combining our experienced seafarers, our company culture and IT tools form the basis of our strategic work to create value and increase safety performance. Long-term relations An open dialogue and face-to-face meetings are an important part of the way we build trust and develop our business relationships. Identification and insight of our clients priorities enable us to improve our services as well as create a solid basis for future investments and new tonnage. Our competitiveness and service are demonstrated by the fact that many clients have had their contracts with us for more than 15 years. OUTLOOK FOR 2015 In 2015, we will continue to pursue our strategy of leveraging both our brand and technical management platform to build long-term relations with our existing as well as potential new clients. In addition, we will continue to work to optimise the composition of our fleet, both through pool arrangements as well as through the evaluation of existing time charters. In 2015, we anticipate a slight improvement of the market balance. Supply is projected to grow by approximately 6% with especially fully-pressurised as well as larger semi-refrigerated tonnage continuing to flow into the market. Demand growth is expected to grow slightly faster, assuming a stabilisation of energy and petrochemical prices, and a reduction of maintenance and outage of refining and petrochemical plants. Rate improvements are only expected to a limited extent in 2015 and any case, it will be a recovery from low levels, particularly for the smallest size gas carriers. We expect to employ 36 vessels on average in The decrease of the operated fleet is a result of redelivery of the bareboat-chartered vessels and fewer pool vessels.

21 BUSINESS ANNUAL REPORT Other Businesses In addition to our main business activities in the dry bulk and gas segments, we have investments in the offshore service sector and a minor shareholding in the product tanker segment. These investments have originated as part of our own business activities. Axis Offshore We hold 34% of the shares (50% of the voting rights) in Axis Offshore Pte. Ltd. Axis Offshore was formed in 2012 as a joint venture together with the Norwegian equity fund HitecVision, based on our existing business in the Accommodation and Support Vessel (ASV) segment and our monohull ASV, the Dan Swift. In addition to the Dan Swift, Axis Offshore has two highspecification semi-submersible ASVs under construction at the Cosco Qidong Offshore shipyard in China. The newbuildings are expected to be delivered in Our outstanding capital commitment to Axis Offshore amounts to up to USD 67m to be injected in connection with the delivery of the two newbuildings. The actual amount to be injected depends on the financing structure of Axis Offshore. Hafnia Tankers We hold 5.6% of the shares in Hafnia Tankers Ltd. The shares were acquired in connection with the sale of our fleet of product tankers to Hafnia Tankers during Hafnia Tankers is a shipping company focused on ownership and chartering of tonnage in the product tanker segment. Discontinued activities In August 2013, the strategic decision was taken to exit the product tanker segment, cf. above and in October 2013 we sold our fleet of ten owned MR product tankers to Hafnia Tankers. The last of our owned product tankers was delivered to the new owner in Q1 of Lauritzen Tankers contributed USD 2.8m to the 2014 results included as profit from discontinued operations. In early January 2014, we announced that we had accepted an offer to sell Lauritzen Offshore s fleet of three shuttletankers to Knutsen NYK Offshore Tankers (KNOT). The vessels were delivered during Q2 and Q3 of The operational activities in Lauritzen Offshore Services were terminated simultaneously with the delivery of the vessels. Lauritzen Offshore contributed USD 15.9m to the 2014 results included as profit from discontinued operations.

22 22 BUSINESS ANNUAL REPORT 2014 People, Relations and Systems Our people, tools and systems enable us to build and manage our relations with stakeholders efficiently. Attracting and developing talented employees is essential to us, as competent and motivated employees are an important foundation towards fulfilling our goals. Ensuring employee development In 2014, we amended our appraisal system by launching the Employee Development Dialogue (EDD). EDD is a tool assisting us in the implementation of our business strategies by setting ambitious goals for each employee and linking individual goals with individual development activities and business strategy. The new system supports our focus on stimulating a performance-oriented feedback culture. The system is aimed at our entire land-based organisation. As part of the implementation of EDD, we have conducted mandatory workshop sessions both at the Copenhagen office and the Singapore office covering 95% of management being trained in the new approach. Almost all our land-based employees have attended sessions introducing the EDD. A new IT-platform for all human resource (HR) matters was introduced in 2014 to streamline and ensure more accurate and accessible HR data across the organisation. Internal talent pipeline It is important that we develop relationships with talents early in their careers and that we recognise our responsibility to develop these new talents. In line with our recruitment strategy, we have taken steps to develop our internal talent pipeline by increasing the number of trainees. In 2014, new trainees joined us in Copenhagen, Singapore and Stamford, USA. At year-end, 6% of our landbased workforce was trainees. In addition to trainees, we also welcome young talents conducting shorter internships in our offices. In Singapore, two interns were taken onboard as part of our commitment to the Global Internship Award, an initiative taken by the Maritime and Port Authority of Singapore as part of their ongoing efforts to promote maritime careers amongst the young talent pool in Singapore. Diversity We define diversity in terms of cultural width, extensive experience, new inspiration and gender. Diversity is an important and natural prerequisite for innovation and development of our business. We employ 20 different nationalities across our offices was a year with influx of new graduates from universities as well as experienced shipping employees bringing experience from other parts of the industry. In 2013, a policy for diversity management, including equal gender composition of all management levels, was approved by the Board of Directors. Our target is that the overall gender distribution of employees shall be matched at management levels. The distribution of females and males in managerial positions of our shorebased organisation was 26% and 74% in We aim to reach the goal of 31% and 69% by December The corresponding distribution between females and males within the organisation as a whole remained stable at 37% and 63%. Our aim to increase the number of females in managerial positions has led us to put further emphasis on initiatives focusing on recruitment, staff development, measurement and benchmarking that may strengthen a more equal gender distribution amongst managers in Executive Management has an equal gender distribution. At year-end 2014, the Board of Directors consisted of nine members, six elected by the general meeting and three by the employees. With six board members elected by the annual general meeting, the diversity profile of the Board of Directors was 17% female with 34% coming from outside Denmark compared to 20% female and 40% coming from outside Denmark at yearend Our objective is to have two female board members by 2017 elected at the annual general meeting. Employee development The retention rate for shore-based personnel was 83% and remained at the same level as last year. Retirements, organisational changes, including the termination of our product and shuttle tanker operations affected the turnover of staff in At year-end our total headcount was 1,011 compared to 1,108 in 2013.

23 BUSINESS ANNUAL REPORT Total workforce , Seafarers Head office Overseas offices The average age of shore-based personnel increased to 42.3 years (40.6 in 2013). The average length of service with J. Lauritzen increased slightly to 8.8 years (8.4 in 2013). Seafarers At Lauritzen Bulkers, ship management and crewing is outsourced to external service providers. Our in-house technical department controls and supervises the external managers to ensure safe, efficient operations and alignment of expectations. An essential part of Lauritzen Kosan s services depends on crew performance, and all officers are selected carefully together with external crew managers. Technical management of the owned fleet is conducted in-house or by associated companies. Irrespective of the technical management set-up, both business units conduct officer seminars to communicate specific topics and provide dialogue and discussions between the shore and sea sides of our operations. Strengthened global presence Through our offices in Singapore, China, USA, Spain, the Philippines, Switzerland and our headquarters in Copenhagen, we are in close contact with our clients, brokers, tonnage providers and other stakeholders. In 2014, our Singapore and Manila offices grew in terms of number of staff. The increased number of employees serving our clients in the Eastern Hemisphere implied that both offices moved to new and larger facilities during the year. A new office opened in Geneva in January 2015 providing proximity to our growing number of Swiss-based clients. Networks for solutions and new insights We see network participation as a way of engaging and building leverage related to issues and challenges relevant to us and our industry. We participate in the following networks and committees: The Danish Shipowners Association The Danish Committee on Corporate Governance International Chamber of Shipping BIMCO The Baltic Exchange Danish Society for Education and Business The Trident Alliance The Maritime Anti-Corruption Network IMPA ACT UN Global Compact Our systems Information Technology (IT) systems are critical for the conduct of our business. Our IT infrastructure and application management is outsourced to a third party provider, while our internal IT organisation has the authority, capabilities and capacity to manage the relationship in order to ensure the desired quality and availability of the IT services. Following a review of the existing set-up, a tender for renewal of the operation and maintenance of our systems was conducted during 2014, and towards the end of 2014 the transition to a new service provider was completed. During the year, we launched a new IT strategy plan with the objective of securing compliance with our business strategy based on a stable platform. Building business intelligence We regard superior knowledge as key to increasing performance and decided to establish a central Business Intelligence (BI) unit in The BI function will help us transform internal and external data into meaningful and useful information for business analysis and thereby support improved decision making and provide basis for the development of new service offerings to our clients.

24 24 BUSINESS ANNUAL REPORT 2014 Finance and Investor Relations It is a key objective for us to have access to diversified financial resources to finance our fleet of owned and part-owned vessels. The owned fleet is financed with a mix of debt instruments (bank facilities and issued bonds) and own funds. At year-end 2014, bank facilities accounted for 75% of the long-term debt with the remainder sourced from corporate bonds (net of own holdings). Bank facilities The bank facilities are provided by Scandinavian and international banks, financial institutions and in some cases supported by export credit agencies (ECAs). The bank facilities are composed of amortising loan facilities (term loans) and revolving credit facilities (long-term rights to draw liquidity on-demand). ECA-backed term loans are fully amortising whereas other term loans typically are repaid as bullet loans at maturity which usually requires refinancing. Revolving credit facilities reduce the need to hold excess liquidity and are used to optimise our funding position and lower the net financing costs. Facilities are obtained by J. Lauritzen A/S (the parent company) or our subsidiary J. Lauritzen Singapore Pte. Ltd., depending on vessel ownership, and are provided on the basis of collateral security including a mortgage on the vessels. Corporate bonds We currently have two corporate bonds outstanding. The first bond was issued in 2010 and the second in Both were issued with a five-year tenor and are listed on the Oslo Stock Exchange. To reduce the amount of relatively expensive debt, a nominal NOK 29m in the 2017-maturing bond and a nominal NOK 37.5m in the 2015-maturing bond were repurchased in In 2013, a nominal NOK 259m was repurchased in the 2015-maturing bond. Refinancing of maturing debt During 2014 we refinanced USD 226m (corresponding to 73%) of bank facilities originally scheduled to mature in This refinancing was provided by banks from the existing group of lenders after a tender process. The refinancing increased the share of revolving credit facilities. The remaining refinancing of bank facilities amounts to a total USD 83m during A total of USD 71m, net (NOK 441m, net) of the bond debt will mature in May Financing of newbuilding programme Our newbuilding programme, comprising six owned dry bulk carriers, is scheduled to be delivered between 2016 and A committed postdelivery bank facility for up to USD 109m (65% loan to market value at delivery) covering all six vessels has been secured. Financing of newbuildings to be part-owned via joint ventures will be raised directly in the joint venture entities. Outstanding debt and commitment at year-end in USDm Repayment profile of outstanding debt in USDm Term loans Term loans ECA backed Revolving credits (drawn) Bonds unsecured Undrawn revolving credits Note: Existing facilities and commitments. Bond debt at hedged value less holdings of own bonds. Numbers may change subsequently > 2019 Repayment Bullet bank loans Bullet bonds Undrawn revolving credits Note: Existing facilities and commitments. Bond debt at hedged value less holdings of own bonds. Numbers may change subsequently

25 BUSINESS ANNUAL REPORT Covenants Our bank facilities include customary covenants: Security maintenance: A requirement to maintain a minimum value of the collateral security (e.g. a ratio between the fair value of the security and the outstanding debt in the particular facility) of typically 125% Financial covenants: A value-adjusted consolidated solvency ratio of minimum 30%, consolidated liquidity of minimum USD 50m and consolidated working capital ratio (ratio between current assets and current liabilities) to be higher than 1 The corporate bonds have financial covenants requiring a consolidated solvency ratio of minimum 30% and a consolidated liquidity of minimum USD 50m. Prospectuses for the bonds are available on Throughout 2014, we complied with all covenants. INVESTOR RELATIONS Due to the listing of corporate bonds on the Oslo Stock Exchange, we have since 2010 kept an ongoing dialogue with current and potential investors, analysts and other market professionals, providing them with easy and equal access to information. Maintaining close relations with the investor community is important to us. We want to provide timely, precise and relevant information about our business, results and expectations and other matters that affect the perception and assessment of the securities we issue. It is our objective that the market price of the securities we issue fairly reflects our expected financial performance and our ability to repay our debt obligations as they fall due. Stock Exchange Announcements 2014 The following Stock Exchange announcements were released in calendar 2014 via Oslo Stock Exchange. Announcement No. 1: Sale of three shuttle tankers Announcement No. 2: Financial report for 2013 Announcement No. 3: New member of the Board of Directors Announcement No. 4: Sale of counterparty claim Announcement No. 5 : Interim financial report - first quarter 2014 Announcement No. 6: J. Lauritzen contemplates intra-group merger Announcement No. 7: J. Lauritzen contemplates intra-group merger - update Announcement No. 8: Interim financial report for the first half of 2014 Announcement No. 9: Interim financial report - third quarter 2014 Announcement No. 10: Write-downs and provisions

26 26 GOVERNANCE ANNUAL REPORT 2014 Corporate Governance Our corporate governance efforts are conducted in accordance with the Recommendations for Corporate Governance made by the Danish Committee on Corporate Governance and Section 107b of the Danish Financial Statements Act. MANAGEMENT STRUCTURE In accordance with the Danish Companies Act, we have a two-tier management structure consisting of two separate bodies: the Board of Directors and the Executive Management. The Board of Directors is the central, supreme governing body. Day-to-day management is conducted by the Executive Management in line with the rules and procedures laid down by the Board of Directors. Board of Directors The core task of the Board of Directors is to ensure that J. Lauritzen has a business strategy and appropriate capital structure, just as the Board must ensure the sound organisation of the activities of the company. In addition, focus is on risk management and internal control as well as ensuring that budgets and estimates are drawn up and approved and that monthly and quarterly reports are submitted. In 2014, the Board met six times, including a strategy seminar. Between meetings, recommendations were submitted to the Board for written resolution seven times. The Board of Directors is supported by two permanent committees: The Audit Committee and the Nomination and Remuneration Committee. The Audit Committee held five meetings and the Nomination and Remuneration Committee held two meetings in Executive Management The Executive Management is appointed by the Board of Directors and consists of Jan Kastrup- Nielsen, President & CEO and Birgit Aagaard- Svendsen, Executive Vice President & CFO. Dayto-day management is conducted by the Executive Management. An Executive Group functions as the coordinating forum for the dayto-day management and includes the Executive Management, Business Unit presidents and the heads of Corporate Control, Treasury and Corporate Human Resources. Additional information Please visit our corporate website for additional information on our Board Committees Terms of Reference, competence profiles of Board members and Principles of Remuneration at Our statutory report on Corporate Governance 2014 is available at answer_cguk_2014.pdf Lauritzen Foundation J. Lauritzen A/S was founded in 1884 and has been engaged in ocean transport for more than 130 years. The Lauritzen Foundation was established in 1945, and since then, it has been in full control of J. Lauritzen. The Lauritzen Foundation is a commercial foundation and is as such a selfgoverning institution under Danish law and is regulated by the Danish Act on Commercial Foundations. The Foundation is also subject to supervision by the Danish Ministry of Justice and the Danish Ministry of Business and Growth. At the general meeting in April 2014, five members were re-elected and Mr. Jesper Lok, (CEO, Falck Emergency as of January 2015) was elected as new member of the Board of Directors. At yearend 2014, the Board of Directors consisted of nine members, six elected by the general meeting and three by the employees. With six board members elected at the annual general meeting, the diversity profile of the Board of Directors was 17% female with 34% coming from outside Denmark compared to 20% female and 40% coming from outside Denmark at yearend Our objective is to have two female board members by The average length of board members service was eight years. Through its charter, the Foundation is committed to promoting and developing the Danish shipping industry in general and supporting humanitarian work. Its policy is also to ensure flexible capital structures of the companies it owns. In addition to its ownership of J. Lauritzen and its controlling interest in DFDS A/S (42.8% holding), the Lauritzen Foundation has holdings via whollyowned LF Investment ApS in oil analysis, measuring equipment, software, healthcare products, biotechnology and real estate sectors. The Lauritzen Foundation supports our goal of having a well-balanced financial structure, taking into consideration J. Lauritzen s continued existence and development.

27 GOVERNANCE ANNUAL REPORT Risk Management Risk Management is an integral part of our corporate governance and our policies on handling risk are approved by the Board of Directors. RISK APPETITE AND TOLERANCES J. Lauritzen enjoys strong brand recognition and it is vital to protect our reputation as an accountable quality shipowner and operator with high standards in all aspects of safety and corporate governance. We create value by taking calculated business risk. We want to minimise our exposure to financial risk and aim to keep a certain credit risk profile, defined by e.g. key financial indicators, supporting J. Lauritzen as being a solid and trustworthy business partner. Our risk tolerance related to operational issues such as fleet management and safety is in principle zero. BUSINESS RISK Business risk relates primarily to volatility in freight rates and asset values. Our earnings generation benefits from the diversification of our business portfolio which spans across distinctively different areas of maritime transportation as well as the presence in different vessel segments within the business units. Volatility in our earnings is further reduced via a deliberate combination of open and covered ship-days (including use of Forward Freight Agreements, FFAs). The business strategies for the individual business units, including policies for contract coverage by vessel segments and overall limits for off-balance sheet exposure (such as chartered tonnage), are approved by the Board of Directors and reporting on these are an integral part of our internal reporting routines. Please see the chapters about our business units for detailed information on their respective business models, contract coverage and management of their specific business risk. Fluctuations in asset values affect our balance sheet, financial covenants and the minimum value clauses in our loan agreements. Risk relating to fleet and asset values is managed by having a diversified fleet comprising owned, part-owned as well as pool and time-chartered vessels with different durations, optional periods and purchase options. Cash generation and profitability is monitored vessel-by-vessel saw vessel values decline, and USD 1.2m in cash has been provided as additional security after year-end 2014 in one loan facility to comply with security covenants due to the decrease in vessel values. Should vessel values decrease by 10% during 2015 compared to the December 2014 valuations, nil would be required by yearend 2015 as additional security for the existing bank facilities. FINANCIAL RISK Credit risk Contracts for longer term business entail a potential counterparty credit risk. To minimise the risk of entering into agreements with anyone who does not have the ability or willingness to honour their part of agreed terms, we perform a thorough credit assessment prior to concluding longer term contracts. This assessment includes i.a. the client s credit rating and financial statements as well as recent trading history, payment performance and reputation. Larger contracts are approved by the Board of Directors. Please see note 4.5 in the accounts for further details. Liquidity risk Managing liquidity risk is essential in a volatile industry like shipping. Liquidity is continuously monitored and assessed based on forecasts for the current year and projections for the subsequent years. Sensitivity analyses and stress tests are performed regularly. Please see note 4.5 in the accounts for further details. Currency and interest risk Currency and interest risk relate to currency exchange rates and interest rates as well as to risk connected with the use of derivative financial instruments. Our policy is to use derivative financial instruments to hedge currency and interest rate risk. When using derivative financial instruments, our exposure relates to movements in the market value of the derivatives which could cause margin calls affecting our liquidity. To reduce the risk of margin calls we have established credit lines with a number of financial counterparties based on second priority mortgages in our vessels. For an overview of derivative financial instruments, risk related to changes in market values of derivatives, currency exchange rates and interest rates, please refer to notes 4.1 and 4.5 in the accounts. Currency Risk Our operating and reporting currency is USD and thus all amounts are recorded and reported in

28 28 GOVERNANCE ANNUAL REPORT 2014 USD. Currency exposure relates to operational and financial cash flows in other currencies than USD. The most important non-usd operating cost currency is DKK arising mainly from head office costs. Currency risk related to debt in JPY is partially hedged and is fully hedged with regards to debt in NOK. Interest Risk Part of our loan portfolio is subject to floating interest rates. At year-end 2014, all debt was hedged into fixed interest rates. The hedge ratio was 176% when measured by total debt less our cash in hand and deposits at year-end. BUNKER OIL PRICE RISK Bunker oil is a significant cost element but in principle only a risk in relation to contracted cargo volumes not covered by BAF (Bunker Adjustment Factor). Most of the operated fleet is either employed in the spot market, re-let, on time-charter or employed under a Contract of Affreightment (COA) with BAF, and the bunker oil price risk is thus considered limited. OPERATIONAL RISK Operational risk refers to potential losses resulting from non-compliance, human error and inadequate systems, accidents, piracy, insufficient insurance and IT systems. Operational risk is generally managed via detailed operating procedures and ongoing training. The chapters about our business units have specific discussions on topics relating to their operations. Safety Casualties from ship operations can have serious consequences and the shipping industry has widely implemented international safety standards. Several clients have additional requirements relating to safety, environmental protection, etc. At J. Lauritzen, we have safety standards in place, complying not only with general safety standards, but also above and beyond client demands. Operation in high-risk areas Risk related to our crews and clients cargo due to piracy or violent crime-related activity in certain parts of the world has our strictest attention. We adhere to recommendations and best management practices (BMP4) from relevant national and international bodies. The necessity for engaging armed security teams on vessels operating in high-risk regions is assessed on the basis of voyage-specific risk assessments. This is supported by industry anti-piracy measures aboard, close monitoring by technical management and by military sources providing intelligence relevant to our vessels and military escorts. In 2014, Lauritzen Bulkers had 50 transits in high-risk areas whereas Lauritzen Kosan had 32. There were no incidents related to these transits. Ebola outbreak In March 2014, a serious outbreak of Ebola was seen in West Africa, which turned out to become the largest and most complex outbreak of Ebola in history. No seafarers are yet known to have been infected with Ebola during a call to one of the Ebola-affected countries. Conducting port calls in West Africa, we have ensured that all necessary information and precautionary instructions have been provided to vessels calling at ports in the affected areas. Recommendations from both the International Maritime Organization (IMO) and the World Health Organization (WHO) advocate that the movement of ships, including the handling of cargo and goods, to and from affected areas, should continue as normal in order to reduce the isolation and economic hardship of the affected countries. We fully support these recommendations. We recognise how vital it is for West Africa s economy that ship operations are maintained in the area. Lauritzen Bulkers primary activities in the region mainly relate to discharge of food products, including grain and wheat. Insurance An insurance policy is adopted with the aim of reducing the financial implications of incidents and casualties. The insurances cover our assets, our chartered and operated fleet, our liabilities and non-marine risk. As a general rule, insurances are always taken out with first class international insurance companies and are always taken out with a certain financial safety margin to avoid any serious consequential impact of an incident or casualty on our financial status. IT systems IT is critical, and it is imperative that our IT systems are available round-the-clock and are accessible worldwide. Redundant systems and duplicate infrastructure are in place, and systems are tested to ensure that they can be restored within pre-defined time limits.

29 GOVERNANCE ANNUAL REPORT Corporate Responsibility Our corporate responsibility efforts are based on our core values and aligned with internationally recognised principles, such as the voluntary UN Global Compact initiative and the UN Guiding Principles on Business and Human Rights. Policy commitment Our corporate responsibility policy includes commitments in relation to human rights, labour rights, protection of the environment, anti-corruption and responsible supply chain management. In 2014, we formalised an overarching policy that summarises our global commitments and existing policies. Focus areas In 2014, our main corporate responsibility activities were focused on human rights assessment in relation to our offices, the continued implementation of energy-efficiency projects, compliance sessions as part of the implementation of our anti-corruption programme and dialogue with selected suppliers as part of the implementation of our supplier code of conduct. Our main achievements and results in 2014 can be summarised as follows: Assessment of our potential and actual human rights impacts in relation to our offices Continuous implementation of our Energy Efficiency Project enabling a cut in our CO 2 emissions Founding member of Trident Alliance Anti-corruption training of approximately 75% of our shore-based personnel in Copenhagen, Singapore, Shanghai and Manila Launch of anti-corruption training sessions for our senior officers starting in Lauritzen Kosan with approximately 50% trained at year-end Engagement with selected suppliers with regard to the implementation of the IMPA ACT programme In 2015, we plan to take our corporate responsibility efforts to a new phase of integration with our business model and strategy and thus our overall value creation. Additional information Please visit our corporate website for additional information on our corporate responsibility and download our Corporate Responsibility report 2014, Global Commitments We are signatory to and support the UN Global Compact. The initiative is a voluntary commitment to include and integrate ten principles on human rights including labour rights, protection of the environment as well as anti-corruption into our business practices. This work has been structured and conducted since we signed the Global Compact in 2011 and has resulted in the implementation of e.g. our Anti-Corruption Programme, our responsible supply chain management programme (IMPA ACT) and our energy-efficiency programme. Game changing principles In 2011, the UN Human Rights Council unanimously endorsed the Guiding Principles on Business and Human Rights. The Guiding Principles and their spirit have been accepted and embedded in guidelines (e.g. the OECD guidelines for multinational enterprises) and legislation (e.g. the Danish Financial Statements Act, S.99a) making them the first universally accepted reference points for managing adverse impacts on human rights including labour rights. For us, the Guiding Principles provide tools and a description of a process assisting us in our commitment to respect human rights, and thus the translation into practice of the first six principles of our voluntary commitment to the UN Global Compact. Consequently, we have developed an overall corporate responsibility policy commitment that is aligned with the requirements set forth by the UN Guiding Principles.

30 30 GOVERNANCE ANNUAL REPORT 2014 Board of Directors Chairman Bent Østergaard Member since 2003 // Remuneration: DKK 850,000 Chairman of the Nomination and Remuneration Committee President LF Investment ApS & Lauritzen Fonden Chairman of the Board: Cantion A/S DFDS A/S Frederikshavn Maritime Erhvervspark A/S NanoNord A/S Board member: Comenxa A/S Desmi A/S Durisol UK Ltd Mama Mia Holding A/S Meabco Holding A/S Meabco A/S With Fonden Board Member Niels Heering Member since 2001 // Remuneration: DKK 450,000 Chairman of the Audit Committee Member of the Nomination and Remuneration Committee Chairman of the Board, partner Gorrissen Federspiel Chairman of the Board: NTR Holding A/S Civ. Ing. N.T. Rasmussens Fond Ellos A/S Helgstrand Dressage A/S Nesdu A/S Henning Stæhr A/S Deputy Chairman of the Board: 15. Juni Fonden Board member: Scandinavian Private Equity Partners A/S Ole Mathiesen A/S Lise og Valdemar Kählers Familiefond Vice Chairman Ingar Skaug Member since 1998 // Remuneration: DKK 500,000 Member of the Audit Committee Member of the Nomination and Remuneration Committee Chairman of the Board: Center for Creative Leadership Ragni Invest AS Vectura AS Environor AS Board member: Berg-Hansen Reisebureau AS DFDS A/S Miros AS Bery Maritime AS Petroleum Geo-Services ASA (Remuneration and CSR Committee) PURE AS ABV/AGL (Adjaristqali Netherlands BV/ Adjaristqali Georgia LLG) Board Member Peter Poul Lauritzen Bay Member since 2003 // Remuneration: DKK 250,000 Management Consultant, Head of Operations, Strategy Department Accenture Board member: J. Krebs & Co, A/S

31 GOVERNANCE ANNUAL REPORT Board Member Marianne Wiinholt Member since 2011 // Remuneration: DKK 300,000 Member of the Audit Committee Executive Vice President and CFO DONG Energy A/S Board Member Jesper Lok Member since March 2014 // Remuneration: DKK 190,278 CEO Falck Emergency - as of January 2015 Board member: Danish Crown Board Member Søren Berg* Member since 2005 // Remuneration: DKK 250,000 Project Manager Lauritzen Kosan Board member: De Forenede Sejlskibe I/S Board Member Ulrik Danstrøm* Member since 2009 // Remuneration: DKK 250,000 Senior Chartering Manager Lauritzen Bulkers AUDIT COMMITTEE Niels Heering (Chairman) Ingar Skaug (Member) Marianne Wiinholt (Member) Board Member Søren Roschmann** Member since August 2014 // Remuneration: DKK 94,429 NOMINATION & REMUNERATION COMMITTEE Bent Østergaard (Chairman) Ingar Skaug (Member) Niels Heering (Member) Senior Technical Manager, Head of Technical Department Lauritzen Bulkers * Re-elected in 2013 by the employees ** Elected in 2013 by the employees

32 32 GOVERNANCE ANNUAL REPORT 2014 Management Executive Management and Executive Committee President & CEO Jan Kastrup-Nielsen Joined J. Lauritzen in 2000 // CEO since February 2013 Board member: The Danish Shipowners Association Avance Gas Holding Limited Executive Vice President & CFO Birgit Aagaard-Svendsen Joined J. Lauritzen in 1998 // In current position since 1998 Chairman of the Board: Komitéen for god Selskabsledelse (Danish Committee on Corporate Governance) DSEB (Danish Society for Education and Business) Board member: The West of England Ship Owners Mutual Insurance Association (Luxembourg) Otto Mønsted A/S

33 GOVERNANCE ANNUAL REPORT Other Executive Committee members President - Lauritzen Bulkers Peter Borup Joined J. Lauritzen in February 2013 // In current position since February 2013 President - Lauritzen Kosan Thomas Wøidemann Joined J. Lauritzen in 2002 // In current position since 2011 Senior Vice President, J. Lauritzen A/S Group Treasury John Jørgensen Joined J. Lauritzen in 2001 // In current position since 2008 Senior Vice President, J. Lauritzen A/S Corporate Control Erik Bierre Joined J. Lauritzen in 2000 // In current position since 2000 Vice President, J. Lauritzen A/S Corporate Human Resources Jan Ulrik Nielsen* Joined J. Lauritzen in 2011 // In current position since 2015 *As from 1 January 2015