Annual Report

Transcription

1 Annual Report

2 2 J. Lauritzen A/S Annual Report 2012 J. lauritzen at a glance J.Lauritzen (JL) was founded in 1884 and is owned by the Lauritzen Foundation. We have grown and developed our operations considerably during the last decade and thus remain one of Denmark s leading shipping companies. Part of our strategy is to spread risks across the different business areas. Today we have four business units with different growth drivers and cycles and each specifically positioned to their respective markets. We operate a modern, diversified fleet of bulk carriers, gas carriers, product tankers and dynamically positioned support vessels for the offshore industry that are all engaged in operations worldwide. We continuously strive to have a client-oriented approach to the way we do business and our operations are conducted by highly skilled staff at sea and ashore. JL is headquartered in Copenhagen with overseas offices in China, Japan, Philippines, Singapore, Spain and USA. Disclaimer This Annual Report contains forward-looking statements about JL s future financial position. Such statements are subject to risks and uncertainties as various factors, many of which are beyond the control of JL, 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. This report is available in Danish and English. In the event of any discrepancy between the two versions, the Danish version shall prevail. Printed by: KLS grafisk hus A/S, Denmarks most green graphic house

3 J. Lauritzen A/S Annual Report Table of contents BOARD & EXECUTIVE MANAGEMENT STAtement 4 company introduction 6 Group key figures 8 Highlights 2012 and outlook Lauritzen Bulkers 18 Lauritzen kosan 26 Lauritzen tankers 34 Lauritzen offshore 40 Finance and investor Relations 42 risk management 46 Corporate Governance 50 Corporate Responsibility 54 Organisation and People 56 Financial Review 58 Board of Directors 60 management 62 Accounts 64 management statement 100 Independent Auditors Report 101 Overall Group Structure 102 List of Group CompanieS 103

4 4 J. Lauritzen A/S Annual Report 2012 BOARD & EXECUTIVE MANAGEMENT STATEMENT The business environment for the shipping industry has changed substantially during the past few years. Characterised by oversupply in major shipping markets, surplus shipbuilding capacity, low economic growth and tight credit conditions, 2012 brought plummeting asset values, with the Baltic Freight Index at a 25 year low and further defaults among shipping companies. JL was obviously influenced by these circumstances and with a net loss of USD (350)m our 2012 result was very unsatisfactory. In this challenging environment, we continued to develop our different business activities and we made a number of important decisions during the year. Of special importance was the joint venture with HitecVision, Norway, in the promising offshore market, the formation of Axis Offshore Pte. Ltd. and the following order for a modern semisubmersible ASV (Accommodation and Support Vessel) for delivery in Lauritzen Bulkers increased its focus on long-term cargo contract business and related market activities. Capesize bulk carriers left without contract cover due to defaults were sold. All business units were engaged in an energy savings programme launched in collaboration with classification society DNV (Det Norske Veritas). Group finances were further strengthened with a new corporate bond issuance and the bonds were listed on Oslo Stock Exchange. In connection with the approval of JL s Annual Report for 2012, the Lauritzen Foundation decided to convert two subordinated loans equivalent to USD 160m into equity, thereby increasing JL s solvency ratio from 37% at year-end 2012 to 44%. Difficult trading conditions are expected to continue in 2013 as a multitude of risk factors continue to impact global shipping. Surplus capacity will influence most markets during the year. However, we expect global economic growth to gradually strengthen. At the same time, high scrappings and declining deliveries will reduce fleet growth and set the scene for the beginning of a modest recovery towards the end of the year. More than anything else, JL stands for accountability. Our well-qualified staff will continue to deliver the services which through our 128 years of history have enabled us to build strong relations with customers, partners and other stakeholders globally no matter which market conditions we have been operating in. After more than 14 years as President and CEO, Torben Janholt will retire with the release of JL s 2012 annual accounts. Jan Kastrup-Nielsen, who has been with JL since 2000 and a member of JL s Executive Management since 2009, will become the new President and CEO. Bent Østergaard Chairman of the Board Torben Janholt President & CEO Jan Kastrup-Nielsen President & CEO 2013-

5 From left: Torben Janholt, Bent Østergaard and Jan Kastrup-Nielsen J. Lauritzen A/S Annual Report

6 6 J. Lauritzen A/S Annual Report company introduction LAURITZEN BULKERS Dry bulk operations started in the late 1970s when the focus was on handysize bulk carriers/lakers (lakers are special ocean-going vessels capable of also serving the Great Lakes in North America). Today Lauritzen Bulkers is a major owner and operator of bulk carriers engaged in all dry bulk segments. Operations comprise a combined fleet of more than 100 handysize, handymax, panamax and capesize bulk carriers including short-term charters. LAURITZEN KOSAn With the acquisition of Kosan Tankers in 1989, JL entered the market for smaller gas carriers, and today Lauritzen Kosan is a leading carrier of liquefied gases, including petrochemical gasses such as ethylene and propylene. At year-end 2012, Lauritzen Kosan controlled a combined fleet of 45 semi-refrigerated/ethylene and fully pressurised gas carriers in the 3,000-10,000 m 3 segment.

7 J. Lauritzen A/S Annual Report LAURITZEN Tankers Established in 2004 with the acquisition of Quantum Tankers, Lauritzen Tankers is a provider of medium range (MR) product tankers for ocean transport of oil products ranging from vegetable oils to petroleum products, fuel oils and chemicals. Lauritzen Tankers controlled 18 modern, medium range product tankers at year-end LAURITZEN Offshore Operations started in 2008 with the conversion of a product tanker into a dynamically positioned shuttle tanker. The offshore operation today comprises three shuttle tankers and part-ownership in the offshore accommodation segment. In 2012, Axis Offshore was established as a 50:50 joint venture with HitecVision to focus on highend semi-submersible accommodation units also capable of serving clients in the North Sea. The joint venture builds on JL s expertise in the offshore accommodation sector and our first accommodation unit Dan Swift was transferred to the new operation.

8 8 J. Lauritzen A/S Annual Report 2012 Group key figures USDm Revenue Profit before depreciation (EBITDA) Profit/(loss) on sale of vessels (95) (36) (12) Operating income (EBIT) (264) Share of profit/(loss) in joint ventures (26) Financial items, net (59) (69) (56) (17) (38) Profit/(loss) before tax (349) (46) Profit/(loss) for the year (348) (44) Non-controlling interest's share of profit/(loss) (1) (2) (5) (5) (5) The J. Lauritzen Group's share of profit/(loss) (350) (46) Non current assets 1,931 2,361 2,062 1,671 1,399 - including vessels under construction Current assets hereof cash and securities Total assets 2,315 2,682 2,411 2,188 1,768 Share capital JL's share of equity 852 1,199 1,239 1,126 1,043 Non current liabilities 1,285 1, Current liabilities Cash flow from operating activities (24) 300 Cash flow from investment activities (108) (330) (325) (455) (237) - hereof investments in vessels, machinery and equipm. (190) (438) (538) (541) (714) Cash flow from financing activities Changes for the year in cash and cash equivalents (19) Cash and cash equivalents Average number of employees 1,379 1,300 1, DKK exchange rate year end Average DKK exchange rate Group key figures Profit margin (37.9)% 3.1% 25.9% 15.7% 25.6% Solvency ratio 37% 45% 52% 52% 59% Solvency ratio (JL's share of equity) 37% 45% 51% 51% 59% Return on equity (34.1)% (3.8)% 11.1% 6.9% 14.7% Return on invested capital (13.5)% 1.1% 10.2% 6.1% 17.1% The key figures have been calculated as follows: Profit margin Operating income x 100 Revenue Solvency ratio Total equity, year-end x 100 Total equity and liabilities, year-end Return on equity JL's share of profit/(loss) x 100 JL's average share of equity Invested capital Total assets less cash, securities, non operational assets and non interest-bearing current liabilities Return on invested capital (Operating income + share of profit/(loss) in joint ventures) x 100 Average invested capital

9 J. Lauritzen A/S Annual Report EBITDA usdm SELECTED KEY FIGURES usdm (20) Bulk Gas Tank Offshore Other EBITDA EBIT Result for the year One-off items Average no. of vessels REVENUES usdm Bulk Gas Tank Offshore Lauritzen Bulkers Lauritzen Kosan Lauritzen Offshore Lauritzen Tankers Reefer a.o. Invested capital at year-end USDm CAPITAL STRUCTURE usdm 1,400 3,000 1,200 1, ,500 2,000 1, , (200) Bulk Gas Tank Offshore Other Total equity Non-current liab. Current liab. CASH FLOW FROM OPERATIONS and cash usdm Cash flow from operating activities Cash and cash equivalents

10 10 J. Lauritzen A/S Annual Report 2012 Highlights 2012 and outlook 2013 In a year characterised by sustained world economic decline, generally depressed shipping markets and substantial deliveries of new tonnage to major shipping segments, JL s result was USD (349.7)m compared to USD (46.2)m in 2011, cf. Figure 1. The result for 2012 was significantly impacted by one-off items with a net effect of USD (254.4)m (2011: USD (25.2)m) comprising write-downs, sale of claims and sales of vessels due to counterparty defaults or strategic initiatives. Adjusted for one-off items, JL s result was USD (95.4)m, down from USD (21.0)m in 2011 mainly due to income lost as a consequence of counterparty defaults and to the weaker bulk markets. Return on invested capital was (13.5)% compared to 1.1% in The result was in line with expectations stated in our stock exchange announcement to Oslo Børs in December 2012 but considerably below our expectations at the beginning of the year. The result is regarded as very unsatisfactory. The business environment 2012 was a very difficult year for practically all shipping markets apart from offshore. The Clark- Sea Index, representing a weighted average of earnings in the bulk, gas, container and product tanker markets declined by 23% in 2012 compared to 2011, cf. Figure 2, and was - adjusted for rises in operational costs - at its lowest since Some markets such as gas carriers witnessed periods with acceptable earnings but the trend for most markets was downwards, and for shorter or longer periods heading towards operating costs. A number of unexpected economic and political factors contributed to reduce growth in world trade in 2012 to a meagre 2.8% with only the bulk market among JL s shipping businesses enjoying higher growth in demand, although with supply outpacing bulk demand growth. The year opened with fairly difficult credit conditions which had a detrimental effect, particularly on demand for bulk carriers. Tight monetary policies in China during the first half of 2012 and the increased turmoil in financial markets mainly in the Euro zone during the second quarter dampened economic growth and limited world trade. Tightening sanctions against Iran was another factor that hampered trade in petrochemical gases for example. The following characterized JL s main markets in 2012: The dry bulk market posted yet another year of unsatisfactory developments in rates and prices with the average Baltic Freight Index (BFI) declining by 40% compared to 2011 reaching at its lowest for 25 years. Spot rates were down by 30% on average for handysize and handymax and 50% for capesize compared to Period rates fell by 20% for capesize and 30% or more for all other segments. After a dismal opening of the year, an improvement set in for handysize and handymax in February which ended in August. The normal strengthening for handysize and handymax after the harvest season did not occur. Capesize spot earnings were at very low levels save for a couple of months towards the end of the year. Second-hand prices declined by 20-30% depending on vessel segment. Period rates for smaller gas carriers declined slightly to about USD 540,000 per month for ethylene carriers and USD 265,000 per month for 3,200 m 3 semi-refrigerated carriers. Figure 1: Result for the year usdm Bulk Gas Tank Offshore Result before tax Tax a.o. Result for the year

11 J. Lauritzen A/S Annual Report Spot rates for ethylene gas carriers were stable throughout the year with spot rates for fully pressurised gas carriers rising in the second half of Spot market rates for semi-refrigerated gas carriers in the 3,200-6,500 m 3 segment started falling at the beginning of Q2 and declined quite strongly for the balance of the year. Second-hand tonnage prices declined by 5% during the year. The product tanker market had a disappointing spot market which saw the three key routes down by 20% for MR product tankers. Period markets for MR product tankers levelled out at USD/day 13,500. Second-hand prices for tonnage were down by 5% for a five year-old MR product tanker. Offshore markets for specialized tonnage in general had another busy year. However, with only a limited number of long-term contracts signed, the shuttle tanker market was an exception to this. Orders for rigs and other specialized tonnage for the offshore industry continued at a high level. Other commodity shipping markets did not fare better. As a result, demolition increased by about 40% to approximately 60m dwt from 2011 to Demolition of dry bulk tonnage increased by almost 50% to approximately 35m dwt, whereas demolition of MR products tankers and smaller gas carriers fell to even lower levels than in Four shuttle tankers were scrapped in 2012 compared to one unit in 2010 and Contracting for new vessels was down by almost 50% in dwt terms compared to International shipping is in the midst of a large supply crisis. Heavy deliveries during the past years have lowered the average age of the world merchant fleet in most segments. Additionally, major ship building capacity has been established which current order levels are far from matching. Thus, shipyards saw their order books recede by a third in dwt terms from year-end 2011 to year-end Shipyards forward cover is now estimated to be slightly less than two years, implying continuing pressure on newbuilding prices. JL Group JL continued developing its business areas and a number of important decisions were taken during the year. Of special importance was the joint venture with HitecVision, Norway, in the promising offshore market, the formation of Axis Offshore Pte. Ltd. and the following order for a modern semi-submersible ASV (Accommodation and Support Vessel) for delivery in Lauritzen Bulkers increased its focus on long-term cargo contract business and related market activities. Capesize bulk carriers left without contract cover due to defaults were sold. figure 2: Clarksea index Usd/day Source: JL Business Analysis based on data extract from IMF website

12 12 J. Lauritzen A/S Annual Report 2012 All business units were engaged in an energy savings programme launched in collaboration with DNV (Det Norske Veritas). Group finances were further strengthened with a new corporate bond issuance and the bonds were listed on Oslo Stock Exchange. During the year, JL took delivery of seven newbuildings, including three bulk carriers, one fully pressurized gas carrier, two product tankers and one shuttle tanker. In addition, four bulk carriers, two gas carriers and one product tanker were taken on long-term charter. At year-end 2012, JL had four vessels on order. During the year, six long-term time-chartered vessels were redelivered according to plan. During 2012, JL controlled a combined average fleet of 178 vessels compared to 151 vessels in 2011, cf. Figure 3, of which 59 were owned vessels (48 in 2011) Total vessel days amounted to 65,073 in 2012 compared to 54,945 days reported in Due to our fleet renewal and expansion efforts in recent years, we own a modern, efficient fleet of bulk carriers with an average age of 2.3 years, gas figure 3: Average no. of vessels Own Part owned Chartered Shared charter Other

13 J. Lauritzen A/S Annual Report carriers 8.6 years, product tankers 3.6 years and shuttle tankers 5.3 years. Assets and solvency During 2012, investments in vessels amounted to USD 190m compared to USD 435m in Sale of vessels totalled USD 80m compared to USD 33m in Total invested capital was USD 1,960m at year-end 2012, down from USD 2,344m at year-end The total book value of vessels amounted to USD 1,702m, down USD 267m on 2011 primarily due to sale of assets and write-downs. Brokers valuations of vessels totalled USD 1,312m down 16% on The value in use of the vessels, taking contract coverage into account was higher than total book value. At the end of 2012, JL s newbuilding portfolio comprised four owned vessels, three product tankers and one bulk carrier for delivery in 2013 and represented outstanding capital expenditure of USD 103.9m. On the final trading day at Oslo Stock Exchange (29 December 2012), JL s unsecured bonds maturing in 2015 were trading at NOK 102 (NOK at year-end 2011), cf. Figure 4, and JL s unsecured bonds issued in October 2012 (2017 maturity) were listed on Oslo Stock Exchange on 16 January At year-end 2012, JL s solvency ratio was 37% compared to 45% at year-end After year-end events In connection with the approval of JL s Annual Report for 2012, the Lauritzen Foundation decided to convert two subordinated loans of originally DKK 850m into equity. At year-end 2012, the loans including accrued interest amounted to a total of DKK 903.1m, equivalent to USD 159.6m. The conversion increases JL s solvency ratio from 37% at year-end 2012 to 44%. figure 4: traded price (nok) for j. lauritzen nok 700m bond / / / / / / / /10 source: oslo stock exchange

14 14 J. Lauritzen A/S Annual Report 2012 Outlook for opened with very low spot earnings in all dry bulk markets, a slight improvement in the market for smaller semi-refrigerated gas carriers and firmness for fully pressurised gas carriers. The stronger spot market for MR product tankers recorded in late 2012 continued. We expect economic growth to be somewhat subdued during the first half of A number of indicators suggest that economic growth will strengthen as the year progresses. Once economic growth rises, we expect to see inventories rebuilding which will contribute to seaborne trade growth. Scheduled deliveries of merchant vessels amount to about 175m dwt in Due to cancellations and slippage which are expected to continue as a result among other things of the tight credit and lending situation in the shipping industry, actual deliveries are likely to be 25% below scheduled deliveries. Dry bulk deliveries are anticipated to fall by about a third to around 70m dwt in Deliveries of MR product tankers are expected to be of the same order as in 2012, whereas smaller gas carriers are in for a sizeable rise in deliveries. A total of 19 shuttle tankers are scheduled for delivery in 2013, however with possible delays for a number of these. Demolition is poised for another record surpassing the approximately 60m dwt reported in Bulk carriers will the biggest contributor for the third consecutive year. On average, the dry bulk market is expected to be below 2012, but with some relief towards the second half of 2013 when demand growth is expected to exceed supply growth. Smaller gas carriers are forecast to see the spot market weaken slightly in 2013 compared to 2012 due to the relatively strong supply growth. The outlook for MR product tankers is unpromising with only modest improvements in average spot market rates. The result for 2013 is anticipated to remain unsatisfactory with an expected loss of USD (75-100)m (2012: USD (350)m). EBITDA is expected to be in the range of USD 60 80m (2012: EBITDA of USD 88.7m). Taking the sale of the Accommodation and Support Vessel Dan Swift to the Axis Offshore Pte. Ltd. and oneoff items included in the 2012 EBITDA amounting to USD 33.7m into account, the expectations for 2013 are slightly up compared to The improvement primarily relates to Lauritzen Bulkers redelivery of time-charter vessels and increase of Lauritzen Tankers operational fleet.

15 J. Lauritzen A/S Annual Report Depreciations are expected to be approximately 10% down compared to 2012 primarily as a consequence of the 2012 write-down s and sale of assets. Income from joint ventures is anticipated to be unsatisfactory but up on The expected income from Axis Offshore Pte. Ltd. will not off-set the forecast loss from other joint ventures. Net finance is expected to be in line with the result in Currency and interest rate fluctuations may affect the result. Tax is expected to be limited and minorities share of the result is expected to decrease. During 2013, JL will take delivery of the last four vessels on the current newbuilding program, three MR product tankers and one handysize bulk carrier. A part-owned handysize bulk carrier newbuilding will also be added to the fleet and three MR product tanker newbuildings will enter the fleet on long-term time-charter. Capital expenditure including dockings amounts to USD 123m to be financed by at-delivery financing and own funds.

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18 18 J. Lauritzen A/S Annual Report 2012 Lauritzen Bulkers In 2012, Lauritzen Bulkers result amounted to USD (294.5)m compared to USD (24.7)m in 2011, cf. Table 1. The result was significantly impacted by one-off items with a net effect of USD (200.3)m (2011: USD (27.7)m) comprising write-downs, sale of claims and sales of vessels due to counterparty defaults. Adjusted for one-off items, the result was USD (94.2)m, down from USD 3.0m in 2011 due to the weaker bulk markets and income lost as a consequence of counterparty defaults. The result was very unsatisfactory. Business model and risk management Lauritzen Bulkers (LB) controls a fleet of more than 100 handysize, handymax, panamax and capesize bulk carriers with a low average age. The fleet comprises a portfolio of owned, part-owned, and time-chartered vessels as well as vessels committed by partners. Active fleet portfolio management via the sale, purchase and time-charter in/out of vessels is an important element of the business model. The handysize operation, which is LB s largest business activity, comprises a significant fleet of homogeneous vessels, ensuring economies of scale, operational optimisation and extensive customer service marked a strategic change as focus on long-term cargo contracts was added to the existing strategy based on spot and short to medium-term cargo contracts. The handymax fleet is managed similarly to the handysize vessels, whereas most of the fleet of capesize and panamax bulk carrier fleet is employed on long-term time-charter. The main business risks are market and counterparty risks. Counterparty risks are managed through continuous monitoring and evaluation of charterers substance and performance. Lower contract cover for the handysize and handymax operations means exposure to short-term market volatility which is to some extent evened out by the size of the controlled fleet. This risk is mitigated by booking cargoes for shorter periods (typically up to six months) or longer on affreightment contracts. Main events Fleet renewal continued with the aim of building a modern, fuel-efficient, versatile fleet and in 2012 the controlled fleet increased by 15 newbuildings, of which three were owned. During the year, three long-term time-chartered and four pool vessels were redelivered as planned.

19 J. Lauritzen A/S Annual Report table 1: key figures usdm Revenue EBITDA Depreciations and write-downs (150.7) (37.9) Profit/(loss) on sale of vessels etc. (96.6) (38.6) Operating income (243.2) (0.7) Share of profit in joint ventures (28.6) 2.3 Finance net (25.0) (18.4) Profit/(loss) before tax (296.8) (16.8) JL's share of profit/(loss) (294.5) (24.7) Invested capital (average) 1, ,121.5 Return on invested capital (24.5)% 0.1% Average no. of employees figure 5: Average no. of vessels The handysize fleet increased by 12 newbuildings, of which three were owned and four were taken on long-term time-charter. Pool partners contributed five additional handysize newbuildings and six second-hand handysize bulk carriers to the controlled fleet. The handymax fleet grew by three newbuildings on long-term time-charter. LB was severely affected by counterparty defaults with subsequent sales of two capesize bulk carriers due to strategic considerations. The risk management desk and risk management procedures were further enhanced during the year, and a cargo desk was established focusing on medium to long-term cargo contracts. Earnings from the handysize operations yet again outperformed the BHSI (Baltic Handysize Index). This was achieved through a combination of serving existing and new customers and exploitation of short-term trading opportunities. Towards the end of the year, Island View Shipping announced its withdrawal from the handysize pool, meaning that 14 handysize vessels will leave the pool in the first half of The withdrawal will not impact the critical mass of LB s handysize operations. LB was the runner-up as Ship Operator of the Year in Lloyd s List Awards Asia fleet In 2012, the total number of ship-days reached 43,539 with 119 vessels on average, 23% up on the figure reported in 2011, cf. Figure 5. The operational fleet of handysize bulk carriers averaged 80 vessels compared to 65 vessels in At year-end 2012, the controlled handysize fleet comprised 90 vessels. On average, the handymax fleet comprised 22 vessels in 2012 compared to 14 vessels in 2011, with a further 4 panamax vessels (four in 2011) and 8 capesize vessels (seven in 2011). At year-end 2012, LB had 43 vessels on long-term time-charter (including two newbuildings for delivery in 2014), with purchase options for 9 of these. The owned fleet comprised 25 vessels at the end of 2012 (24 in 2011) with part ownership of a further 18 vessels (21 in 2011). At the end of 2012, the average age of the owned fleet was 2.3 years Own Part owned Chartered Shared charter Other Fleet management Technical management, including crewing for owned bulk carriers, was undertaken by New Century Overseas Management Inc., Manila, Fleet Management Ltd., Hong Kong and Synergy Maritime Pte., Singapore.

20 20 J. Lauritzen A/S Annual Report 2012 Our technical department works closely with external providers on all aspects of achieving safe, cost-effective and reliable vessel operations. Three scheduled dry dockings were completed in Unscheduled off-hire for LB s owned fleet came to 0.29 % in 2012 (0.31 % in 2011). HSEEQ Our in-house technical department monitors overall fleet safety performance and energy efficiency in order to comply with applicable national and international rules and regulations as well as increasing client requirements. We constantly endeavour to minimize risks associated with our operations. In 2012, we enrolled with ship vetting specialists RightShip s rating programme and the average risk rating of the owned fleet was 4.9 on the RightShip vetting scale (with 5.0 as best rating) in mid-december During 2012, we developed a range of different initiatives to support our ongoing efforts to reduce fuel oil consumption and reduce emissions of SOx, NOx and CO 2. Our specific initiatives are listed in JL s Corporate Responsibility report 2012 p Global market developments The period market for bulk carriers had another difficult year with capesize 12 month period rates down by 20% and handysize/handymax down by 30% compared to Panamax bulk carriers suffered even more. The period market decline was due to deteriorating market imbalances which saw second-hand tonnage prices falling by 20% or more from year-end 2011 to year-end started with a very weak spot market for all segments, with handysize and handymax recovering from end February and peaking in late July. Capesize had stronger markets from September onwards, as did panamax, but the rise could not be sustained. Compared to 2011, the spot market fell by approximately 30% for handysize and handymax in 2012, cf. Figure 6. Demand for bulk carriers Demand for bulk carriers is estimated to have grown by around 6% in 2012 compared to 7.5% in 2011, cf. Figure 7. Many factors contributed to the fairly high, albeit lower than generally expected, demand growth.

21 J. Lauritzen A/S Annual Report Figure 6: Spot market rates usd/day / / / / / / Average of the 6 T/C Routes for the Baltic Handysize Index Average of the 6 T/C Routes for the Baltic Handysize Index Average of the 6 T/C Routes for Baltic Supramax Index Baltic Exchange Dry Index (1st November = 1334) - RHS Source: Clarkson Research Services Figure 7: Demand for dry bulk carriers dwtm Iron Coal Grain+Soya Minor Bulks Source: LB Business Analysis based on data derived from MSI Ltd. Figure 8: Supply of dry bulk carriers (beginning of year) dwtm Capesize Panamax Handymax Handysize Source: LB Business Analysis based on data derived from Clarkson Research Services

22 22 J. Lauritzen A/S Annual Report 2012 Uncertainty in credit markets as well as fairly tight monetary policies in for example China in early 2012 led commodity consumers and traders to keep inventories low in many parts of the world, or to actually reduce them. During the following months, economic uncertainties in Europe increased with negative repercussions for economic growth for the remainder of the year. A combination of reduced economic activity in mature economies and economic policies to curb inflationary pressures in China led to lower fixed investment growth which in turn reduced growth in imports of iron ore and other minerals. Coal, mainly steam coal, was the biggest contributor to demand growth for bulk carriers in Falling prices for coal due to ample supplies in combination with rising electricity production increased power plants demand for steam coal. This demand was further increased by droughts and high prices for natural gas in Europe. Grain shipments were at higher levels during the first half 2012 than in 2011 but due to crop failures in various parts of the world, prices increased to levels that made consumers postpone purchases which had a detrimental impact on demand in late Q3 and Q4, affecting particularly handysize and handymax. Supply of bulk carriers At the beginning of 2012, the world fleet of bulk carriers amounted to 616m dwt. Deliveries and demolitions both increased in 2012 compared to 2011, leading to net fleet growth of 10.5% (14.7% in 2011) with the world bulk fleet at 680m dwt at year-end 2012, cf. Figure 8. Fleet growth in the handymax, panamax and capesize segments was 10%, 13% and 12% respectively whereas the handysize fleet only increased by 2%. Orders for bulk carriers declined for the second consecutive year, and as a result of the heavy delivery schedule which was characterised by less slippage than expected, the order book was down to approximately 20% of the existing fleet at yearend Demolition of bulk carriers amounted to approximately 35m dwt compared to 23.2m dwt in 2011 due to the poor market, low probability of employment and high costs of maintenance. At year-end 2012, the orderbook for panamax stood at 30% of the existing fleet and 15-18% for the three other segments. Taking into consideration the age profile and the demand outlook by segment, it would appear that handysize is in a comparatively well-balanced situation. At year-end 2012, the average age of the world bulk fleet was slightly over 11 years compared to 12.5 years at year-end There are huge average age differences across segments, cf. Figure 9. After year-end events Peter Borup took up his position as President of Lauritzen Bulkers on 1 February Outlook for 2013 We expect the very low spot market rates characterising the end of 2012 to continue into the first part of 2013, partly due to the low level of economic activity as well as uncertainty in many parts of the world, partly due to continued high delivery schedules in the first part of However, 2013 is expected to witness a deceleration in supply growth as deliveries are forecast to fall from about 100m dwt in 2012 to about 65-70m dwt in Demolitions are expected to increase slightly from 35m dwt in Fleet growth is thus projected to fall from 10.5% in 2012 to about 6% in Figure 9: bulk carrier age profile and order book at year-end 2012 (% of existing fleet) 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Handysize Handymax Panamax Capesize 25 years or more years 0-14 years Order book Source: LB Business Analysis based on data derived from Clarkson Research Services

23 J. Lauritzen A/S Annual Report As in 2012, coal is expected to be a key driver of demand together with iron ore, as fiscal stimulus in China and strengthening economic activity in mature economies gather pace during the year. Grain shipments are expected to rise in the second half of 2013 as crops are expected to return to normal levels. Minor bulks are also poised for continued growth. Overall, an increase in demand growth is expected for 2013 compared to 2012, particularly in the second half of the year. We expect the above to stop the decline in the spot market during 2013 with some improvements in the second half. With large surplus shipbuilding capacity, tonnage prices may continue their decline into 2013.

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26 26 J. Lauritzen A/S Annual Report 2012 Lauritzen kosan The result was USD 8.9m, up from USD 6.5m in 2011 mainly due to improved trading conditions in the first half of 2012 and a larger average fleet of fully pressurised gas carriers, cf. Table 2. The result included USD 1.8m in gains from the sale of vessels, down from USD 2.3m in The result was in line with expectations and acceptable taking the market conditions into consideration. Business model and risk management Lauritzen Kosan (LK) controls a modern fleet of 43 gas carriers with an average age of 8.7 years. The fleet comprises owned, part-owned, chartered vessels and vessels committed by partners. Active fleet portfolio management via cargo and period cover and the sale and purchase of vessels constitute key elements in the business model. Strict health, safety and environmental standards and stringent client requirements are achieved through close in-house collaboration between the technical and commercial departments. Continuous improvements through education, innovation and careful implementation of procedures enhance operational flexibility and higher fleet utilization. As a leading tonnage supplier to the large petrochemical and oil companies, LK continuously enters into affreightment contracts, seeking to maximise effective fleet cover. While these contracts provide protection against short-term market fluctuations, due to their structure they do entail some scheduling risks. These risks are connected with the flexibility provided by the affreightment contracts in terms of charterers right to manage their flows in accordance with the business cycle and their specific operations. Main events LK took delivery of the last of a series of six 3,600 m 3 fully pressurised gas carriers from Yangzhou Kejin Shipyard in China designed for the growing Asian gas industry. Two 3,500 m 3 fully pressurised gas carrier newbuildings were taken on long-term time-charter from Japanese owners. A 3,500 m 3 fully pressurised gas carrier was sold to Korean interests. LK moved into its own premises in Manila in The offices will be used for crew-related matters such as training and briefing/debriefing senior officers saw the launch of Project REJUICE, a major initiative to reduce fuel consumption and emissions.

27 J. Lauritzen A/S Annual Report table 2: key figures usdm Revenue EBITDA Depreciations and write-downs (27.2) (26.4) Profit/(loss) on sale of vessels etc Operating income Share of profit in joint ventures Finance net (1.9) (3.7) Profit/(loss) before tax JL's share of profit/(loss) Invested capital (average) Return on invested capital 2.7% 2.7% Average no. of employees figure 10: Average no. of vessels fleet Total ship-days reached 15,617 for 42.8 vessels on average compared to 14,366 days for the average of 39.4 vessels reported in 2011, cf. Figure 10. LK s fleet comprised 35 owned, part-owned and chartered vessels at year-end The average age of the company s owned fleet was 8.6 years compared to 8.1 years at year-end At yearend 2012, the average age of the ethylene fleet was 4.6 years (3.6 years at year-end 2011), with the semi-refrigerated fleet at 16.7 years (15.7 years in 2011) and the fully pressurised fleet at 6.7 years (7.0 years in 2011). The operated fleet consisted of 29 semi-refrigerated/ethylene gas carriers on average (28 vessels in 2011) and 14 fully pressurized gas carriers (11 in 2011) with a combined capacity of about 221,950 m3 (212,650 m 3 in 2011) Fleet Management During the year, Lauritzen Kosan Fleet Management (LKFM) handled the technical management for the ethylene and semi-refrigerated gas carriers. Part-owned Star Management Associates, Tokyo, handled the technical management for the fully pressurised vessels, although one FP vessel was moved to LKFM towards the end of the year. Six scheduled dry-dockings were completed during 2012 (six in 2011). Unscheduled off-hire came to 3.0% in 2012 (2.3% in 2011). Technical fleet management is based on health, safety, security, environmental and technical policies to ensure efficient vessel operations in order to comply with international rules and regulations as well as stringent client expectations. A total of 156 client vetting inspections were performed in 2012 (143 in 2011) in order to maintain pertinent client approvals of the vessels. On average, 5.4 observations were received (6.2 in 2011). We focused especially on industry-standard SIRE inspections in which 4.8 observations were recorded on average per inspection (5.4 in 2011). So-called crew-related observations, which could have been prevented by the crew, continued to decline (2.4 in 2012; 2.8 in 2011). Crew-related observations in SIRE inspections fell from 2.6 in 2011 to 2.3 in Vessel crews are in the front line and their performance and attitude are essential in delivering the expected service. LKFM follows a strategy of training and education combined with performance incentives. Training operations in Manila were expanded and for the first time courses were given in Bilbao to Spanish and Cuban seafarers. To support our activities in Manila, LKFM personnel moved into the newly established Lauritzen Kosan offices in Makati. A new incentive scheme was successfully introduced in 2012 for captains and chief engineers in which performance is assessed and rewarded according to a set of key performance indicators for the vessel under their command. The scheme will be expanded in 2013 to include all officers on board. Own Part owned Chartered Shared charter Other

28 28 J. Lauritzen A/S Annual Report 2012 HSSEQ Health and safety is about protecting people and our focus on improving the safety culture for all employees is essential for us. During the past years, a broad range of safety initiatives were launched and we will continue to focus on strengthening our culture of embracing safety. The focus for the 2012 safety campaign was on work routines and factors relating to the prevention of fatigue. Fatigue is recognized in the industry as a significant contributory factor in breaches of safety. Our focus targeted implementation of new user-friendly software, interviews with crew members, changing procedures and responsibilities, analyses of work routines and discussions on work and watch schedules. Efficient planning and on board resource utilization for our shipboard management are regarded as offering the potential for increased performance. The yardstick for our efforts and ambitions is for zero harm inflicted by LK on any employee. Piracy and robbery unfortunately remain a threat to seafarers although there was a significant decrease in attacks and hijackings during Recognising our seafarers as our most important assets, LK continues to use private armed security teams on board our vessels operating in high risk areas. Efforts to protect the environment continued in LKFM maintains ISO certification with continuous improvement projects. Global market developments After opening on a fairly strong note, the spot market weakened for smaller semi-refrigerated gas carriers from Q2. Smaller fully pressurised gas carriers enjoyed a rising trend throughout the year, whereas ethylene gas carriers witnessed a fairly flat market, cf. Figure 11. Period markets for 2012 were down by about 5% for most types of smaller gas carriers. Second-hand prices declined marginally, whereas resale and newbuilding prices declined by 5-15% respectively during the year. Demand for gas carriers Demand for smaller gas carriers almost stagnated in 2012 on a cbm-mile basis after having posted strong growth during 2010 and Petrochemical gases made a negative contribution to demand growth with primarily LPG making a positive contribution. Transport of ammonia is not a significant part of demand for small gas carriers, and hence provided limited support in 2012, cf. Figure 12. The key drivers for rising demand for LPG in smaller gas carriers were Latin America and parts of Asia. Increased availability of LPG in North America and in Africa with stagnant supplies in the Middle East in combination with rising demand both from the household sector and the petrochemical industry were behind the rise in demand for smaller gas carriers transporting LPG. PROJECT REJUICE In 2012, Lauritzen Kosan launched the project REJUICE, a major initiative focusing on reducing fuel consumption and the environmental impact of our gas carrier operations. Specific initiatives for change have been brought in after a study of current operational practices, such as trim and ballast management, hull cleaning, improved regulation of power consumers and optimization of fleet utilization. Together, these initiatives are expected to give a significant reduction in our carbon footprint in the form of emissions.

29 J. Lauritzen A/S Annual Report Figure 11: Spot market rates usd 000/month / / / / / /07 East (F/P) coaster West (S/R) coaster 6500 S/R ETH Source: LK business analysis Based on data from Fearnley s Figure 12: Demand for smaller gas carriers by product (mill tons) Ethylene Propylene Butadiene VCM LPG Ammonia Source: LK Business Analysis based on data from ViaMar AS Figure 13: Supply of smaler gas carriers by type in cbmm S/R vessels F/P vessels Source: LK (23,000 CBM) Business Analysis based on data from ViaMar AS

30 30 J. Lauritzen A/S Annual Report 2012 Overall, there was a slight decline in transport of petrochemical gases in 2012 with VCM and ethylene declining, and propylene and butadiene growing. The worsening economic climate, particularly in Europe but also in parts of Asia, led to a reduction in demand growth for plastics and thus in petrochemical gases. The production of ethylene in China in 2012 is estimated to have been about 2% below 2011 with production of primary plastics up by 6% during the first 11 months of This has led to a strong increase in demand for ethylene imports into China. The severe tightening of sanctions on Iran for petrochemical exports with effect from May 2012 affected smaller gas carriers severely, as Iran is a key exporter of ethylene, and the disappearance of Iran as a supplier had a detrimental effect on ethylene transportation mileage. Transportation of butadiene benefitted strongly from demand in Asia, whereas movements with propylene increased due to deficits emerging in the US, partly due to feedstock becoming lighter with the increased use of ethane as feedstock and strongly growing demand in Asia. Supply of gas carriers The fleet of smaller gas carriers in the 3,200-22,999 m 3 segment increased by an estimated 4% in 2012 which marked a decline in the growth rate compared to the past five years. At year-end 2012, the fleet was estimated to be slightly above 4.5m m 3, cf. Figure 13. Total deliveries were estimated at 0.2m m 3 with deletions in the order of 0.05m m 3 in Fully pressurised gas carriers accounted for nearly two thirds of all deliveries continuing a period of high deliveries, whereas deliveries of semi-refrigerated and fully-refrigerated carriers declined. The current order book including options amounts to 0.6m m 3 equal to 13% of the existing fleet, of which 85% is semi-refrigerated tonnage. New orders increased in 2012 fivefold to almost 0.4m m 3 compared to About 50% of orders in 2012 were for ethylene carriers. All orders are for delivery in , including those ordered in The schedule for delivery is almost evenly spread over the coming two years.

31 J. Lauritzen A/S Annual Report Total deletions amount to approximately 0.05m m 3, equal to 1.5%, with the majority being semirefrigerated in the 5-15,000 m 3 segment. This is the second year with a comparatively low demolition figure which could be ascribed to the firm market with limited fleet growth. At year-end 2012, the average age of the world fleet of semi-refrigerated gas carriers (including both ethylene and fully-refrigerated units) was 13.8 years and the order book represented 15,6% of the existing fleet. The average age of fully pressurised gas carriers was 10,6 years and the order book was equal to 9,2% of the existing fleet, cf. Figure 14. Supply growth before demolitions is estimated at around 6%. Whereas the age profile suggests the potential for higher demolitions in 2013, we expect a net supply growth of 3%. This will be of the same order as forecast demand growth, although with demand growth lagging during the first half of Outlook for 2013 Various factors have the potential to keep demand growth for trade in petrochemical gases and ensuing demand for smaller gas carriers low in the first half of 2013 with improvements as the year progresses. These include the continuation of sanctions against Iran, the poor short-term economic outlook particularly in Europe and the possibility of major petrochemical capacity coming on stream in China. Figure 14: Smaller gas carriers age profile and order book at year-end 2012 (% of existing fleet) 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Semi-Refrigerated Fully-pressurised 25 years or more yeas 0-14 years Order book Source: LK Business Analysis based on data derived from Clarkson Research Services

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34 34 J. Lauritzen A/S Annual Report 2012 Lauritzen tankers In 2012, Lauritzen Tankers result amounted to USD (50.6)m compared to USD (4.0)m in 2011, cf. Table 3. The result was significantly impacted by write-downs and other one-off items with a net effect of USD (46.5)m (2011: USD 2.5m). Adjusted for one-off items, the result was USD (4.0)m, up from USD (6.6)m in The result was unsatisfactory. Business model and risk management Lauritzen Tankers (LT) controls a fleet of 18 modern MR product tankers with an average age of 3.6 years. The controlled fleet comprises owned, part-owned, and time-chartered vessels as well as vessels committed by partners. Vessels employed in the spot market or on COA are commercially and operationally managed by the MR pool of part-owned Hafnia Management, Copenhagen. Pooling the spot business reduces LT s market risk, inasmuch as the coverage obtained by the pool in terms of meeting customer requirements and being spread across many markets provides better protection against adverse market movements. In 2012, LT remained the largest tonnage provider to this pool. LT uses its market access to charter in/out tonnage from/to first class charterers, providing fixed income with limited risk. In addition, sale and purchase of vessels is an integrated part of the business model. Technical management responsibilities have been outsourced to external service providers. Main events Two 53,500 dwt MR product tanker newbuildings were delivered to the fleet in 2012 and they were both employed on long-term time-charter. One 50,000 dwt MR product tanker built in 2010 was taken on long-term time-charter with delivery mid-2012 and placed in the Hafnia Management s MR pool. fleet In 2012, total ship-days reached 4,646 with 12.7 vessels on average compared to the 4,405 days with 12.1 vessels on average reported in 2011, cf. Figure 15. At year-end 2012, LT controlled a fleet of 18 MR product tankers. Fleet management Technical management of owned ships is provided by Wallem Shipmanagement in Hong Kong and Bergen as well as MMS in Singapore and LT s technical department works closely with both suppliers on all aspects of achieving safe, cost-effective, responsible vessel operations.

35 J. Lauritzen A/S Annual Report Table 3: key figures usdm Revenue EBITDA Depreciations and write-downs (55.3) (6.3) Profit/(loss) on sale of vessels etc Operating income (40.9) 5.9 Share of profit in joint ventures (1.1) 0.2 Finance net (7.6) (5.8) Profit/(loss) before tax (49.5) 0.4 JL's share of profit/(loss) (50.6) (4.0) Invested capital (average) Return on invested capital (15.3)% 2.7% Average no. of employees figure 15: Average no. of vessels There were zero dry-dockings in 2012 (zero in 2011). The unscheduled off-hire for LT s owned fleet was 0.8% (1.3% in 2011). In 2012, seven owned vessels were inspected 23 times by oil majors. During the year, our special focus was on improving vessel performance against the Oil Companies International Marine Forum s (OCIMF) Ship Inspection Report Programme (SIRE). Accordingly we undertook additional onboard training and development for our vessels and offices. Our goals were met by achieving an average of 3.9 observations per vetting, which is better than industry average of 5.7. Crewrelated observations accounted for an average of 2.7 of total observations. The remaining 1.2 observations related to our offices and vessel construction Own Part owned Chartered Shared charter Other We continue to engage and encourage crewing by experienced, responsible multinational seafarers. Crews are selected for their skills in order to match our business profile and this is done in close collaboration between our external technical management service providers and our technical and operational departments, ensuring good dialogue and mutual understanding. HSSEQ We are committed to a strict focus on health, safety, security and environmental protection. This is being achieved by comprehensive safety procedures, a focus on security and by maintaining energy-efficient operations. We thus work closely with external technical managers and monitor their performance. Consistent dialogue with these providers enables us to meet client expectations for safe and efficient operations. Global market developments Average spot earnings on the three key MR product tanker routes were down by 20% compared to 2011, cf. Figure 16. Unsatisfactory refining margins towards the end of 2011 led refineries to reduce output which dampened demand for product tankers in early 2012, mainly in the Far East. Increased economic uncertainty in Europe during the summer contributed to depressing the Atlantic spot market during Q2 and Q3 before some seasonal strength was noted in Q4. Twelve month period rates for MR product tankers were on average at the same level of approximately USD/day 13,500 in 2012 as in 2011, whereas period rates for LR1 product tankers fell slightly. Tonnage prices have fallen since the end of 2011; for a five year-old MR product tanker by almost 5%. During the first months of 2012, oil prices reached their highest level since 2008 in part due to uncertainty relating to the sanctions against Iran, which eventually led Saudi Arabia and Qatar to increase production. With Libya resuming production and Iraq steadily increasing its production, oil prices declined slightly during Q3 and then stabilised at approximately USD 110 per barrel in Q4. Demand for product tankers Global oil consumption grew considerably less than expected due to higher oil prices, but mainly due to less vigorous economic growth than ex-

36 36 J. Lauritzen A/S Annual Report 2012 Figure 16: spot market rates key product tanker routes BCTI TC2_37 TCE: 37,000mt CPP Rotterdam- New York BCTI TC3_38 TCE: 38,000mt CPP Aruba (Caribs) - New York BCTI TC4-TCE: 30,000mt, CPP/UNL Singapore- Chiba (Japan) Source: Clarkson Research Services Figure 17: global refined products trade (mill tons) Gasoline Kerosene Residual fuel Gas and diesel oil Other products Source: LT Business Analysis based on data extract from the Joint Oil Data Initiative Figure 18: Supply of product tankers DWTm Dwt Dwt Dwt Dwt Source: LT Business Analysis based on data from MSI Ltd.

37 J. Lauritzen A/S Annual Report % pected. According to the International Energy Agency world oil consumption was up by only 1.1% on Consequently, seaborne trade in oil products is estimated to have grown by a modest 2.2% in 2012, similar to the growth in 2011, cf. Figure 17. Trading patterns continued to change in Most notably, US imports of refined products continued to decline, having fallen by one third in the course of only four years. During the same period, US exports of refined products almost doubled, leading to net exports of some 0.8m barrels per day in Europe experienced a slight decline in imports, whereas mature economies in the Pacific contributed to rising seaborne trade, partly reflecting the dismantling of old refineries. The same applies to emerging markets in both Asia and in Latin America. Supply of product tankers By year-end 2012 the fleet of product tankers (including chemical/oil tankers) amounted to 152m dwt, up by almost 4% on The MR segment (40-60,000 dwt) increased by 6% in both 2012 and 2011, whereas the supply of LR1 product tankers (60-80,000 dwt) increased by 4% in 2012 compared to 9% in 2011, cf. Figure 18. Figure 19: product TANKERS age profile and order book at year-end 2012 (% of existing fleet) Deliveries of MR product tankers amounted to 3.7m dwt in 2012, similar to deliveries noted in 2011 whereas scrapping fell to 0.2m dwt from 0.5m dwt in In general, contracting of product tankers increased by 35% in Contracts for MR product tankers increased by 15% to 2.6m dwt compared to At year-end 2012, the average age of MR product tankers was 7.8 years (LR1 6.5 years) and the order book for MR product tankers amounted to 10% of the existing fleet (LR1 9%), cf. Figure 19. Outlook for 2013 A combination of weak economic growth and high prices will continue to limit growth in oil consumption, whilst at the same time, natural gas is making inroads into markets normally supplied by oil. In 2013 world oil consumption is thus forecast to be another year of low growth of the order of 1%. This implies the risk of another year of low growth for product tankers in general, however with upside potential in terms of refinery closures in mature economies that could lift demand due to additional ton-miles. For 2013, we expect that the product tanker fleet will only increase by a couple of percent, however with fleet growth of the MR segment expected to be higher. This suggests that only a minor improvement in the market balance for MR products tankers is to be expected in % 60.0% 40.0% 20.0% 0.0% MR ( dwt) LR1 ( dwt) 25 years or more years 0-14 years Order book Source: LT Business Analysis based on data derived from Clarkson Research Services

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40 40 J. Lauritzen A/S Annual Report 2012 Lauritzen offshore In 2012, Lauritzen Offshore s result amounted to USD 8.8m, up from USD 3.7m in 2011, cf. Table 4. Earnings for 2012 were significantly impacted by the formation of Axis Offshore including a one-off transaction loss of USD 7.5m. Adjusted for the one-off transaction loss, the result in 2012 was USD 16.3m, up from USD 3.7m in The increase was mainly due to the two shuttle tanker newbuildings delivered late 2011 and early The result was in line with expectations and regarded as acceptable. Business model Our offshore activities comprise technologically advanced, dynamically positioned Accommodation and Support Vessels (ASV) and shuttle tankers for employment in the offshore exploration and production sector. ASV operations are developed as a joint venture whereas the shuttle tanker business is wholly-owned. As our shuttle tankers are employed on long-term contracts, business risks relate to counterparty risk and the renewal/alternative employment options. We continuously monitor risks and new business opportunities. Main events Dan Sabia, a 59,000 dwt shuttle tanker newbuilding, was delivered from Cosco Nantong Shipyard, China, in early January On delivery, the vessel commenced a 12-year bareboat contract for Transpetro, a wholly-owned subsidiary of Petrobras. Due to growing market potential, a 50/50 joint venture with HitecVision, Norway, was established in the ASV segment with effect from 30 June The new company, Axis Offshore Pte. Ltd. initially comprises JL s monohull ASV Dan Swift currently on long-term contract to the Brazilian oil major Petrobras. In September 2012, Axis Offshore announced an order for a Semi-Submersible accommodation vessel at Cosco Qidong Offshore, China, for delivery during the first quarter of 2015 to meet stringent North Sea operating requirements. Read more at Fleet management High quality fleet management is vital in the offshore industry and all issues relating to crewing, health, safety and the environment are managed by in-house experts, providing assurance for compliance with the requirements laid down in applicable national and international rules and regulations. There were zero dry-dockings 2012 (two in 2011). Unscheduled off-hire for the shuttle tanker fleet was zero in 2012 (also zero in 2011). Of the three owned shuttle tankers, only Dan Eagle had a vetting under the Ship Inspection Report Programme (SIRE) in Four minor observations were made. Three were immediately rectified but the last related to vessel design. The two shuttle-tankers Dan Cisne (2011) and Dan Sabia (2012) have both been lined up for future SIRE inspections during the year. Crew are regarded as a vital resource, so all officers for offshore vessels are selected carefully. Where ratings are concerned, close collaboration with skilled and proven crew managers continued in 2012 to ensure a high level of retention. Offshore is a highly competitive segment for crewing

41 J. Lauritzen A/S Annual Report table 4: key figures usdm and so a lot of resources are used to constantly keep officers and ratings updated with specialized courses and training in order to meet our clients expectations. HSSEQ Lauritzen Offshore (LO) is committed to providing safe working conditions in a markedly diverse multicultural and multilingual working environment. We have management systems certified to international standards in place to ensure the well-being of staff, third party contractors and others who may be affected by our activities, in an effort to minimize any impacts. In 2012, LO continued to implement our health, safety and environment strategy. Results included Revenue EBITDA Depreciations and write-downs (16.8) (20.7) Profit/(loss) on sale of vessels etc. (7.5) - Operating income Share of profit in joint ventures Finance net (10.8) (11.6) Profit/(loss) before tax JL's share of profit/(loss) Invested capital (average) Return on invested capital 5.1% 3.6% Average no. of employees a Lost Time Injury Frequency (LTIF) of zero and a Total Recordable Case Frequency (TRCF) of 5.2. Global market developments Unlike the two previous years, 2012 was a somewhat quiet year in terms of new projects being tendered by operators. A 15-year contract for two Suezmaxes in the North Sea was signed, and the market also saw two shuttle tankers obtaining contract extensions. The huge expansion in the market for shuttle tankers in the past couple of years has boosted the order book to 35% of the existing fleet. Part of the fleet is growing fairly old but we expect that a market for older vessels will develop in Africa and South East Asia, as new and modern DP2 or DP3 vessels come on stream. Including orders (two of which are options), the world fleet comprises almost 100 units. Average vessel age is decreasing, cf. Figure 20. Only nine shuttle tankers of the total fleet are less than 60,000 dwt, with seven between 60,000 dwt and 99,000 dwt, with the balance between 100,000 and 165,000 dwt. Outlook for 2013 Nineteen shuttle tankers are scheduled for delivery in 2013, of which 15 units are considered firm with the balance possibly subject to delay. With oil prices continuing at USD 100/ barrel or more in 2013, an increasing number of new deepwater offshore projects are forecast to be initiated with subsequent higher demand for shuttle tankers. Figure 20: global shuttle tanker fleet and age profile (beginning of year) No. of vessels <<< Fleet <<< Orderbook Average age >>> Average age Source: Lauritzen Offshore (own research)

42 42 J. Lauritzen A/S Annual Report 2012 Finance and investor Relations Maintaining strong and open relations with bond investors and lenders enables JL to benefit from having access to a range of resources to finance our business activities. Financing Reflecting the fact that our business operations are capital intensive, the financing for JL s assets comes from different financial resources and our financial policy has three main objectives: Secure the necessary liquidity. Secure the lowest possible cost of debt capital taking market terms and conditions into consideration. Maintain financial independency through prudent financial risk management and a diversified funding base. JL s Board of Directors has approved a financial strategy including a set of guidelines for group solvency ratio, liquidity target and policies for financing debt, including: Group solvency ratio of at least 35% and preferably not less than 40%. Group liquidity (cash and cash equivalents) of at least USD 50m plus a buffer to withstand a severe crisis. Debt financing for newbuildings to be drawn down at or after delivery of vessels. CAPEX to be paid out of the Group s cash holdings (during the construction phase of newbuildings). No single bank to contribute more than 25% of total debt. JL s owned fleet is financed with a mix of debt and own funds. Our remaining newbuilding program of owned vessels is fully financed. At year-end 2012, CAPEX remaining under the newbuilding program amounted to USD 104m and committed funding totalled USD 63m. The newbuilding program comprises four vessels. Debt financing Long-term debt is generally held by J. Lauritzen A/S but in some instances subsidiaries J. Lauritzen Singapore Pte. Ltd. or Lauritzen Shuttletankers Singapore Pte. Ltd. are borrowers of long-term debt. Bank facilities account for the majority of the debt financing. At year-end 2012, bank facilities (amortizing term loans and revolving facilities) accounted for 83% of total debt excluding subordinated loans. Bank facilities are secured by mortgages on the vessels being financed. Of the 83% bank facilities, 21% percentage points were ECA (Export Credit Agency) backed facilities at year-end 2012, cf. Figure 21.

43 J. Lauritzen A/S Annual Report Existing term loans (amortizing loans with a balloon payment at maturity) mature in 2016 and Existing ECA backed term loans (fully amortizing loans) mature in 2021 and Revolving facilities (partially amortizing credits with a balloon payment at maturity) mature between 2014 and JL s existing bank facilities include covenants on the mortgaged vessels relevant to the ordinary conduct of business. Bank facilities also include minimum value requirements (e.g. minimum requirements relating to a ratio between the fair market value of the security and outstanding debt in the particular facility) between 100% and 130%. Finally, facilities include financial covenants on JL s value-adjusted (taking e.g. vessels at broker valuation) consolidated solvency ratio (minimum 30%), JL s consolidated liquidity (minimum USD Figure 21: Forecast outstanding debt year-end usdm m) and JL s consolidated working capital ratio (to be 1:1 or better). JL was in compliance with all bank loan and bond debt covenants at year-end At year-end 2012, corporate bonds accounted for a further 17% of outstanding debt excluding subordinated loans. Issued bonds include financial covenants on JL s consolidated solvency ratio (minimum 30%) and consolidated liquidity (minimum USD 50m). Our strategy is to have approximately USD 300m or the equivalent in other currencies in outstanding debt on a rolling basis, based on corporate bond issuance. The first step was taken in May 2010 with the issuance of NOK 700m in corporate bonds (ISIN NO ) with maturity in May The next step was taken in October 2012 when JL issued NOK 500m in a new corporate bond (ISIN NO ) with maturity in October 2017, cf. Table 5. We expect to continue to issue additional corporate bonds in the future. No bank or bond debt requires refinancing until mid-2014, cf. figure 22. Term Loan Term Loan ECA backed Revolving Subordinated Loan Bond Unsecured table 5: JL s corporate bond issue Issuer J. Lauritzen A/S J. Lauritzen A/S ISIN NO NO Type Senior Unsecured Bond Senior Unsecured Bond Coupon p.a. Fixed 10.5% Floating rate 8.25% + NIBOR 3mths Issue date 05 May October 2012 Maturity date 05 May October 2017 Amount NOK 700m NOK 500m Interest payment Annual Quarterly Listing Oslo Stock Exchange Oslo Stock Exchange (As from 16 January 2013)

44 44 J. Lauritzen A/S Annual Report 2012 Equity JL is a private (non-listed) company owned by the Lauritzen Foundation. As a non-listed company JL has no direct market access to equity. However, JL benefits from having an owner with a long-term vested interest in shipping and we have received the following subordinated loans from our owner: DKK 600m on 1 April 2009 with an original maturity on 1 April However, in May 2012 the owner agreed to extend the maturity on this subordinated loan by an additional eight years to 1 April DKK 250m on 7 January 2010 with maturity on 31 January Early 2013, the Lauritzen Foundation decided to convert the two subordinated loans into equity. At year-end 2012, the loans including accrued interest amounted to a total of DKK 903.1m, equivalent to USD 159,6m. The conversion increases JL s solvency ratio from 37% to 44%. Joint ventures and part-ownership JL considers joint-ventures an attractive way to providing access to new markets or increasing our fleet with a view to gaining economies of scale in particular markets or market segments. Some of the Handysize bulk carrier vessels operated by Lauritzen Bulkers are part-owned vessels, Figure 22: repayment profile of outstanding debt Bullit Subordinated loan Bullit Bond Bullit Term Loan Repayment Note: Bullet payments on existing bank facilities are normally refinanced on or before maturity by way of pledging the particular financed vessels in a new facility and using proceeds to redeem the existing facility.

45 J. Lauritzen A/S Annual Report with Lauritzen Bulkers having co-ownership. Similarly a part of Lauritzen Kosan s fleet of Ethylene gas carriers is co-owned together with a joint venture partner and operated by Lauritzen Kosan. In 2012, Lauritzen Offshore formed the AXIS Offshore joint venture together with our Norwegian partner, HitecVision, with a view to growing its presence in the offshore accommodation and support vessel segment. Investor Relations As mentioned above, an integral part of our financial strategy is to be a recurring issuer of corporate bonds and since May 2010, JL has had corporate bonds listed on Oslo Stock Exchange. Relations with the investor community are thus important for us. JL s objective is for the market price of securities we issue to fairly reflect the JL Group s financial performance, our actual and forecast ability to create value and our ability to repay our obligations as they fall due. In doing so, we strive to provide timely, precise and relevant information on JL Group strategy, our business, results and expectations and other matters which affect the perception and assessment of the securities we issue. JL seeks to maintain an open dialogue with current and potential investors, analysts and other market professionals and to provide them with easy and equal access to information from us. JL held several investor meetings and conference calls in Presentations from these meetings are available on our website where all announcements and financial reports issued by JL are also available. Investor relations activities in 2012 focused on keeping the investor community updated on developments at JL but also on exploring our opportunities for issuing further corporate bonds. On the back of these efforts, we successfully launched and sold a second corporate bond in October STOCK EXCHANGE ANNOUNCEMENTS 2012 The following Stock Exchange announcements were made in calendar 2012 via Oslo Stock Exchange. Announcement No. 1: Financial report for 2011, 23 February 2012 Announcement No. 2: Further strengthening of funding and revised outlook for 2012, 10 May 2012 Announcement No. 3: J. Lauritzen establishes joint venture with HitecVision, 4 July 2012 Announcement No. 4: Interim financial report for the first half of 2012, 14 August 2012 Announcement No. 5 : J. Lauritzen contemplates bond issue, 10 October 2012 Announcement No. 6: J. Lauritzen successfully completes NOK 500m bond issue, 11 October 2012 Announcement No. 7: Kastrup-Nielsen will take over as CEO after Janholt in February 2013, 14 November 2012 Announcement No. 8 : Lower EBITDA and write-down as result of impairment, 21 December 2012 In order to align JL s financial reporting with the standards of other issuers, we will begin releasing quarterly interim financial reports from Q1/2013. Future investor relations activities are expected to remain at the same level as in 2012.

46 46 J. Lauritzen A/S Annual Report 2012 risk management As a cyclical, global industry, shipping is exposed to a large number of diverse risk factors with the potential to heavily impact on the way business is conducted. The purpose of risk management is to ensure that risks affecting JL s operations are identified, monitored and dealt with according to the risk tolerance set for each type of risk. JL as a Group has identified, monitors and manages four main types of risk: Business Risks (e.g. freight rates, fuel oil prices, asset values and operating costs), Financial Risks (e.g. interest rates, currencies and liquidity), Credit Risks (e.g. credit rating of counterparties) and Operational Risks (e.g. safety, insurance, IT and piracy). Risk management is an integral part of JL s corporate governance, see p As a shipping company we create value by taking calculated risks relating to our core businesses. For operational risks, our risk tolerance is in principle zero and risks relating to operations, safety, environment and IT systems are reduced as much as possible. We have a low risk tolerance related for financial risks and these are managed closely and minimised in order to support our strategy. Policies on risk management and risk limitation are approved by the Board of Directors. Key risk factors both at Group level and for individual business units are regularly assessed and prioritised based on how likely they are to occur and their potential impact. The Group and individual business units also have procedures in place to ensure consistent day-to-day risk management. Business risks Business risks relate primarily to volatility in freight rates and asset values. Global economic cycles and economic growth are key drivers for all shipping markets as world trade and seaborne trade both depend on economic growth. Further, the demand for seaborne transport depends on the geographical location of production compared to where the goods are being used. JL s four business units all have market-specific demand drivers and are responsible for identifying and monitoring risks relating to their individual markets. Volatility in JL s earnings is in part managed by operating a diversified business portfolio and different vessel segments within the individual business units and in part by securing a deliberate combination of open and covered vessel days (including FFAs). Instructions regarding charter obligations are defined by JL s Board of Directors. Some segments are characterised by long-term contracts whereas others are characterized by annual contracts and a high level of repeat clients. Long-term period charters and very long cargo

47 J. Lauritzen A/S Annual Report contracts are approved by the Board of Directors. We constantly monitor market trends and adjust our coverage to market expectations on an ongoing basis, cf. Figure 23. JL operates a young, cost-efficient, diversified fleet comprising owned and part-owned as well as time-chartered and pool vessels, giving us a high degree of flexibility in adjusting the fleet to market changes. Risks associated with fluctuations in asset values are assessed inter alia by using a model incorporating forecast economic/physical service lives, shipping cycles and average costs per fleet unit. Due to a significant drop in vessel values in the first half of 2012, cash totalling USD 22m was paid into pledged accounts to support fulfilment of minimum value clauses embedded in financing facilities. A further USD 8m cash is expected to be pledged during Q1/2013. Should vessel values drop further a 10% during 2013, JL will be expected to pay an additional USD 8m into pledged accounts. Business strategies, comprising policies for contract coverage by vessel segments and overall limits for off-balance sheet exposure (such as chartered tonnage) are approved by JL s Board of Directors and reporting on these is an integral part of our reporting routines. Bunker oil price risk Bunker oil is a significant cost element for JL, although oil price risk only relates to contracted cargo volumes not covered by BAF (Bunker Adjustment Factor). At present, most of the fleet is employed either in the spot market, re-let or on time-charter or employed under COA with BAF and hence bunker oil price risk is limited. Reputational risk JL enjoys strong brand recognition and loyalty and has for many years been a quality shipowner with high standards in all aspects of safety and corporate governance. However, any incident or accident could have an impact on the company to the detriment of our image and brand loyalty. Guarding against this type of risk is difficult and can only be achieved by extensive preventive work and complete transparency should an incident or accident nevertheless occur. Financial risks Financial risks relate to capital management risks, see the chapter Finance and Investor relations on p. 42ff and to the financial markets in general (currency exchange rates and interest rates). Currency risk JL s operating and reporting currency is USD and thus all amounts are recorded and reported in USD. Matching income and expenses and assets and liabilities minimises the net currency risk, leaving net positions to be focused on. Currency exposure relates to our operational, financial and investment cash flows. The most important non-usd operating cost currency is DKK arising mainly from head office costs and Danish crew expenses. Currency risk from non-usd investments in ships relates to JPY. Currency risk from non-usd interest bearing debt relates to JPY (USD 86.1m), NOK (USD 212.5m) and DKK (USD 161.8m). Figure 23: Coverage % 75% 50% 25% 0% Cap pesize Hand dymax Hand dysize F/ P LPG S/R LPG e LPG Ethylen Shuttle Ta ankers Product Ta ankers Our policy is to use derivative instruments to hedge currency risks relating to net non-usd cash flows from operating activities, investments and financing. General hedging policy is approved by the Board of Directors. Interest rate risks Part of JL s loan portfolio is subject to floating interest rates, meaning that we are exposed to fluctuations in these. Our policy is to hedge risks associated with changes in interest rates to limit the financial ef-

48 48 J. Lauritzen A/S Annual Report 2012 fects of adverse changes in interest rates by converting variable interest rates to fixed interest rates. Net interest rate risk may be hedged via forward rate agreements, interest rate swaps and related instruments if felt advantageous. General hedging policy is approved by the Board of Directors. At year-end 2012, 59% of JL s debt was in fixed rate loans (47% at year-end 2011). During 2012, we further increased lines relating to derivatives with financial counterparties, thus significantly reducing the risk of margin calls. Credit risk Credit risk is the risk of incurring financial loss if a client or a counterpart fails to fulfil its contractual obligations. JL rates clients for creditworthiness based on historical trading and payment records, input from rating agencies as well as industry knowledge and client reputation. Large counterparties are monitored and rated, with fixed exposure limits. Further, clients and counterparties are only accepted when fulfilling general requirements. In certain cases contracts are guaranteed by parent companies or the like. Large contracts and long-term commitments are reviewed and approved by the Executive Management and in certain cases by the Board of Directors. On a Group basis, our ten largest clients accounted for 20.5% of total revenues in 2012 (22.8% in 2011). Risks relating to financial counterparties, financial instruments, bonds and cash funds are minimised by trading only with financial institutions with a long-term investment grade credit rating from Moody s and by defined limits on deposits for each financial partner. Please see Note 16 of the financial statements for further details on financial and credit risks. Operational risks Operational risks refer to potential losses resulting from inadequate systems, accidents and piracy. Safety Casualties from ship operations can have serious consequences and so merchant shipping is one of the most heavily regulated industries in the world and was among the first to adopt and widely implement international safety standards. Further, many clients have implemented additional requirements relating to safety, environmental protection, etc. Any accident could have serious consequences for our crews or personnel, the environment and our financial position due to personel injury, loss of income, repair costs, claims and damages and consequential loss of client satisfaction. JL recognises the risks and potential hazards involved in owning, operating and managing a large, diversified fleet of ships worldwide. One major prerequisite for handling these risks is to ensure that all ships under our control comply with comprehensive internal management systems that are in line with or exceed the requirements of the International Safety Management (ISM) code. Management systems and reporting practices are regularly revised so as to communicate best practice across the fleet, thus avoiding or minimizing the risk of incidents, accidents and time loss. Ongoing training of crews is the key to reducing risks relating to ship and cargo handling operations. Piracy and violent crime The fight against piracy, violent crime and associated risks continue to be at the top of the global shipping agenda, hence also for JL. The risk 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 from relevant national and international bodies as set out in our corporate security guidelines. JL supports the use and dispatch of armed security teams aboard our vessels. 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 sup-

49 J. Lauritzen A/S Annual Report ported by industry anti-piracy measures aboard (best management practices, BMP4) and close monitoring by technical management and by military forces providing intelligence relevant to our vessels and military escorts. Our efforts are strengthened by working closely with external anti-piracy professionals for assessment of current risk trends. JL ensures that in the unfortunate case of a piracy-related incident, a team of professional crisis management psychologists will be assisting crew, family and relatives in order to provide the counselling required. Insurance An insurance policy has been adopted with the aim of reducing the financial implications of incidents and casualties. JL s insurances cover our assets, our hired and operated fleet and non-marine risks. As a general rule, insurances are always taken out with first class international insurance companies and they 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 for the conduct of our business and thus it is imperative that our IT systems are available round-the-clock and are accessible worldwide. IT infrastructure and application management is outsourced to a third party provider. Our internal IT organization has the authority, the capabilities and capacity to manage the relationship in order to ensure the quality and availability of the IT services delivered by the third party service provider. Redundant systems and duplicate infrastructure are in place and systems are tested annually to ensure that they can be restored within pre-defined time limits. The company s IT security policy defines the overall system, platform and infrastructure requirements and defines the framework for user behaviour and access to systems.

50 50 J. Lauritzen A/S Annual Report 2012 Corporate Governance JL s approach and day-to-day work with the Group s corporate governance is based on the three core pillars of commitment, governance and control. JL s corporate governance procedures are based on the Danish Companies Act, the fundamental principles and recommendations of the Danish Committee on Corporate Governance, the company s Articles of Association, the Board of Directors Rules of Procedure and its guidelines to the Executive Management. The procedures reflect the fact that JL is a private (non-listed) company with a sole owner but with several bond holders. Please visit the Group s corporate website to see the Group s statutory report on Corporate Governance for the financial year at _cguk_2012.pdf. COMMITMENT The Group s business foundation builds on JL s core values of competence, respect, entrepreneurship, accountability, team spirit and enthusiasm and being owned by a foundation that emphasises promoting and developing the Danish shipping industry in general and supporting charitable institutions, JL has always focused on long-term value creation. Our business foundation makes us agile and ensures our ability to adapt to increasing regulation. We thus continually increase our transparency whilst engaging with a growing number of stakeholders. GOVERNANCE Ownership JL is a private (non-listed) company incorporated in Denmark and is owned by the Lauritzen Foun- As the sole owner of J. Lauritzen, we have supported the development of the business platform that has taken place over the past couple of years, and when the global crisis is over we see JL as a strong contender to further develop its market presence Jens Ditlev Lauritzen, Chairman, Lauritzen Foundation. COMMITMENT GOVERNANCE CONTROL CORE VALUES GLOBAL COMPACT TRANSPARENCY EXTERNAL GUIDELINES & REGULATIONS OWNERS THE LAURITZEN FOUNDATION BOARD OF DIRECTORS and committees EXECUTIVE MANAGEMENT EXECUTIVE COMMITTEE ORGANISATION FINANCIAL MANAGEMENT RISK MANAGEMENT INTERNAL CONTROL AUDIT PROCESSES

51 J. Lauritzen A/S Annual Report dation. According to its charter, the Foundation is strongly committed to developing the shipping industry. Further, the Foundation s strong values and heritage provide daily inspiration and support for JL s market profile, with our focus on longterm value creation combined with the agility to meet outside demands and developments. The annual general meeting was in 2012 held on 27 March. Management structure JL has a two-tier management structure consisting of two separate bodies; a non-executive Board of Directors and an 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 JL s overall business strategy is consistent and the Group s capital structure is appropriate. Focus is on risk management and internal control and the Board of Directors ensures that an annual strategic plan and budget are drawn up and approved and that monthly and quarterly reports are submitted. In 2012 the Board met eight times, including an annual mid-year strategy meeting. Between meetings, recommendations were submitted to the Board for written resolution. The Board of Directors is supported by two permanent committees: An Audit Committee and a Nomination and Remuneration Committee. The Lauritzen Foundation LAURITZEN FOUNDATION J. Lauritzen A/S was founded in 1884 and has been a leading provider of ocean transport for more than 125 years. The Lauritzen Foundation was established in 1945 and since then has had full ownership of JL. The Lauritzen Foundation is a commercial foundation and as such is a selfgoverning institution in Danish law and is regulated by the Danish Act on Commercial Foundations. The Foundation is also overseen by the Danish Ministry of Justice and the Danish Ministry of Business and Growth. The Lauritzen Foundation supports JL s prudent dividend policy, taking account of the continued existence and development of JL. Further, its policy is to ensure the independence of the companies it owns. In addition to its ownership of JL and its controlling interest in DFDS A/S (36% holding), the Lauritzen Foundation has holdings via wholly-owned LF Investment ApS (100% holding) in the oil analysis, measuring equipment, software, biotechnology and real estate sectors. The Board of Directors consists of eight members, five elected by the general meeting and three elected by the employees. The members elected by the general meeting serve for one year and may stand for re-election. In 2012 all five members were re-elected at the general meeting. Pursuant to the Danish Companies Act, three board members are elected by the employees for a period of four years, last election was in LF Investment ApS 100 % Lauritzen Bulkers Lauritzen Kosan J. Lauritzen A/S 100% Lauritzen Tankers DFDS A/S 36% Lauritzen Offshore At the turn of 2012, the average length of service of the Board of Directors was eight years and their average age was 55. Three of the board members (Niels Heering, Peter Poul Lauritzen Bay and Marianne Wiinholt) elected by the general meeting are independent, as defined in the recommendations from the Danish Committee on Corporate Governance.

52 52 J. Lauritzen A/S Annual Report 2012 The Board is broadly composed of members with diverse, extensive experience, knowledge and know-how in relation to the global shipping industry, international leadership, finance and strategy development. Committee work in 2012 JL s Audit Committee held six meetings in 2012 and supported the Board of Directors in monitoring the financial controls and reporting process, risk management systems and the audit process. The Nomination and Remuneration Committee supports the Board of Directors in the ongoing process of establishing and maintaining appropriate succession plans for the Board of Directors and Executive Management as well as ensuring that the Group has a market conform remuneration policy. The committee held two meetings in Executive Management The Executive Management is appointed by the Board of Directors and consists of Torben Janholt, President & CEO, Birgit Aagaard-Svendsen, EVP & CFO and Jan Kastrup-Nielsen, EVP & COO (as per 26 February 2013, appointed President & CEO of JL). Extraordinary or major dispositions may only be implemented by the Executive Management on the basis of specific authorization granted by the Board. The Executive Committee functions as the coordinating forum for the day-to-day management of the JL Group. The Executive Committee consists of Executive Management together with Peter Borup (President, Lauritzen Bulkers as from 1 February 2013), Thomas Wøidemann (President, Lauritzen Kosan), Erik Donner (President, Lauritzen Tankers and Lauritzen Offshore), Erik Bierre (Senior Vice President, Business Control) and John M. Jørgensen (Senior Vice President, Treasury). Increased focus on diversity JL has signed Operation Chain Reaction, a Danish government initiative that strives to motivate companies to increase diversity with the focus on gender. A policy and action plan for diversity was adopted in 2012 and applies for all management levels. JL defines diversity in terms of gender, cultural width, extensive experience and new inspiration. The Board composition was unchanged in 2012 and thus the diversity profile of the Board members elected by the annual general meeting remained with 20% female and 40% being citizens from elsewhere than Denmark.

53 J. Lauritzen A/S Annual Report In 2012, JL succeeded in strengthening the diversity at management level both at head office and in Singapore in corporate positions, chartering and operation. For additional information on nationality, age profile and the composition of the executive management, please visit our website at www. j-lauritzen. com. Principles of remuneration During 2012, JL s policy and principles for remuneration were updated and disclosed on the Group s website. The principles of remuneration include the Board of Directors, Executive Management and employees in JL in general. Remuneration in JL reflects personal performance and achievements as well as market conditions in comparable companies. Members of the Board of Directors receive fixed compensation at a level which reflects the scope and character of duties as a Director and is on par with fees in comparable companies. Members of the Audit Committee and the Nomination and Remuneration Committee receive additional fees. No pension contributions are payable on Board member fees and neither are board members covered by incentive programmes. Fees are disclosed in JL s annual report, see p For additional information on JL s principles of remuneration, please visit our website at CONTROL An important part of JL s approach and day-today work with governance relates to risk management, financial control and management and audit processes. The Board of Directors and Executive Management routinely defines and reviews policies and control procedures to support the business, risk management, financial management and reporting and benchmarks these against generally accepted international practice. Operational efficiency is supported by centralized, shared corporate services such as business control, human resources, IT, legal and insurance, procurement, cash management and corporate communication. IT infrastructure and application management, technical management in some business areas and services relating to control functions have been outsourced to third party providers, which are selected on the basis of thorough due diligence. A whistleblower system was implemented in So far, no incidents have been reported. Financial Management, reporting and internal control JL s financial management comprises long-term financial projections and rolling two-year forecasts followed up by quarterly and monthly reporting. Long-term projections are revised at least twice a year or whenever required. During 2012, forecasts were revised several times. Effective, transparent reporting requires well-defined levels of authorisation, the segregation of duties and common adopted reporting structures. The Group s IT-systems promote requisite knowledge-sharing and transparency. Statutory reporting and internal management reporting are based on common policies, shared databases and a standardised reporting system. JL s Business Control is responsible for the Group s financial management, reporting and the internal financial control of business units and subsidiaries. Activities relating to day-to-day business are delegated insofar as possible to individual business units, subject to well-defined financial and risk limits.

54 54 J. Lauritzen A/S Annual Report 2012 Corporate Responsibility Our focus on Corporate Responsibility (CR) reflects the Group s long-term business fundamentals and gives us the opportunities to work closer with our stakeholders - our owner, suppliers, customers and other business partners. During 2012, we succeeded in further strengthening and formalising the Group s CR efforts both within the Group and in industry collaborations. Policy commitment The Group s CR policy was developed by JL s interdisciplinary CR committee in 2012, and is based on the Group s core values and internationally recognized principles for social, environmental and ethical business conduct. The policy has been approved by JL s Board of Directors and Executive Management. CR strategy process Our CR work continued in 2012 with the aim of aligning and prioritising existing and future CR initiatives such as responsible procurement and an anti-corruption compliance programme. This was supported by a materiality assessment process that started in 2011 and has served as a tool for guiding us in prioritising our focus areas. An essential part of our corporate responsibility strategy is to seek industry collaboration on some of the key industry challenges we meet Jan Kastrup-Nielsen, EVP & COO. Materiality assement Process 2011 Signatory to UN Global Compact UN Global Compact gap analysis conducted Internal workshop on risk and opportunities related to corporate responsibility UN s endorsement of the UN Guiding principles on Business and Human Rights 2012 Second assessments with internal stakeholders JL s corporate responsibility focus presented and approved at the Board s strategy seminar Executive Committee discussed specific projects Increased reporting requirements (Danish Financial Statements Act, 99a) Strategy and reporting focus Corporate level Human Rights Labour conditions Diversity Security Climate and environment Anti-Corruption Responsible procurement Community engagement projects Business unit level Health and safety Security Environment Business conduct

55 J. Lauritzen A/S Annual Report Key initiatives in 2012 The following main initiatives and actions were taken during the year: Completion of a responsible procurement programme together with another Danish shipowner. As part of our anti-corruption compliance programme, we conducted awareness sessions and published internal information material. Ongoing participation in the Maritime Anti- Corruption Network. Implementation of our Group Energy Efficiency Project, which aims to enhance fuel-efficiency and cut emissions whilst achieving savings on costs. Introduction of the Greenhouse Gas Protocol (GHGP), the most widely-used international environmental accounting tool for greenhouse gas emissions. Climate partnership with DONG Energy for our head office in Copenhagen. Additional information Read more on our CR efforts in the Group s statutory Corporate Responsibility report which has been prepared in accordance with the Danish Financial Statements Act ( 99a) and the UN Global Compact s requirements for communication on progress on jlcr_report_2012.pdf.

56 56 J. Lauritzen A/S Annual Report 2012 Organisation and People Ambitious and competent employees, who respect and adhere to the business ethics and cultural heritage on which JL is founded, are playing a more vital role than ever and are essential for our continuing growth and development. Competency development During the year, JL s first candidates embarked on a two-year commercial shipping programme developed in conjunction with other major Danish shipping companies and the Danish Shipowners Association. The programme is conducted in English which makes it possible to include employees from our overseas offices. The very first Nanyang Technological University student who is studying in the maritime programme of NTU in Singapore, received the scholarship established last year by the Lauritzen Foundation and J. Lauritzen Singapore. The scholarship provides financial support to young talented candidates who do not have the funds to complete their studies. Apart from experiencing financial difficulties, the applicants must also show sound academic results, be active in community service or other voluntary activities with a positive social impact. During 2012, JL employees had seats on national and international committees and advisory boards, where they were able to influence their fields of interest. JL employees were invited to speak at conferences in Denmark and abroad, for example on implementing corporate strategy, financial management, governance and CR in the maritime industry, LNG as alternative marine fuel and industry-specific topics. Recruitments The number of recruitments was at a modest level in 2012, and the majority concerned replacements of employees who had left either the Danish organisation or one of our overseas offices. JL experienced no problems in recruiting well-qualified candidates for all vacancies. Ambitious and competent employees, who respect and adhere to the business ethics and cultural heritage on which JL is founded, are playing a more vital role than ever and are essential for our continuing growth and development.

57 J. Lauritzen A/S Annual Report Employee development At year-end 2012, JL s total headcount was 1,341 compared to 1,384 in 2011, with a total of 166 working at head office in Copenhagen, 55 in the overseas offices, 4 in site teams, and 1,116 at sea, cf. Figures In 2012, staff turnover was 14.5% compared to 14.3% in The staff turnover has mainly been caused by employees transferring to Axis Offshore Pte. Ltd. and a considerably turnover among our student employees in part-time positions. Average years of service decreased to 9.2 in 2012 compared to 9.3 years in 2011, and average age remained 44.3 years in Figure 24: total workforce at year-end 1,400 1,200 1, Seagoing Head office Overseas offices Site teams Figure 25: Distribution of workforce year-end 2012 Seagoing Head office Overseas offices Site teams

58 58 J. Lauritzen A/S Annual Report 2012 Financial Review JL s result was USD (349.7)m compared to USD (46.2)m in The result was significantly impacted by one-off items with a net effect of USD (254.4)m (2011: USD (25.2)m) comprising writedowns, sale of claims and sale of vessels due to counterparty defaults or strategic initiatives. Adjusted for one-off items, JL s normalized result was USD (95.4)m, down from USD (21.0)m in 2011 cf. Table 6. The decrease of the normalized result was mainly caused by the weaker bulk markets and income lost as a consequence of counterparty defaults. The same factors also had a significant impact on revenues, but due to an 18% increase of the fleet and due to changed employment from time charters to cargo contracts and spot trading, revenues increased from USD 604.3m in 2011 to USD 695.6m in Hire of chartered vessels amounted to USD 266.1m, up from USD 229.6m in 2011 mainly caused by an increasing fleet of time-chartered bulk carriers. Operating costs for owned and bareboat chartered vessels totaled USD 62.1m, up from USD 54.4m in 2011 due to delivery of newbuildings during 2011 and Other operating costs including bunkers, port expenditures and other voyage-related costs amounted to USD 171.5m compared to USD 68.8m in 2011 reflecting the increasing fleet and the changed employment pattern. Office and fleet staff costs and other sales and administrative costs totaled USD 120.9m, down from USD 122.3m in 2011 mainly due to transfer of staff to the Axis Offshore joint venture. EBITDA amounted to USD 88.7m (normalized USD 72.0m), down from USD 146.0m in 2011 (normalized USD 126.5m). The decrease in normalized EBITDA related to Lauritzen Bulkers. The other business units reported EBITDA up on In 2012, net losses from the sale of vessels and other assets totaled USD (102.4)m, mainly related to the sale of two capesize bulk carriers due to counterparty default, and Dan Swift and other assets being transferred to Axis Offshore. One gas carrier was also sold with a profit of USD 1.8m. For comparison, 2011 saw the disposal of three gas carriers and two bulk carriers, including one capesize bulk carrier sold due to counterparty default, with a net loss of USD (36.2)m. Depreciation and write-downs totaled USD 250.0m compared to USD 91.2m in Writedowns on bulk carriers and product tankers amounted to USD 148.7m (2011: nil). Depreciation was up by USD 10.0m as a result of the expanding fleet of owned vessels. Share of profit in joint ventures totaled USD (26.2) m, down from USD 4.7m in The decrease was mainly related to bulk joint ventures and write-downs on part-owned vessels. Net financial costs of USD 59.5m fell from USD 69.2m in 2011 as increasing interest charges on at-delivery financing of newbuildings were off-set by increased currency exchange rate net gains and by costs for refinancing in 2011 not repeated in Result before tax was USD (349.2)m, down from USD (45.9)m in Income tax amounted to USD 0.8m down from USD 1.9m in The result of USD (348.4)m was considerably below our expectations at the beginning of the year but in line with expectations stated in our stock exchange announcement to Oslo Børs in December The result is regarded as very unsatisfactory. BALANCE SHEET At year-end 2012, total assets amounted to USD 2,315.4m down USD 366.5m on 2011 due to the sale of vessels, depreciations and write-downs and transfer of Dan Swift to Axis Offshore, partly off-set by investment in newbuildings. The total book value of vessels amounted to USD 1,701.9m, down USD 266.8m on 2011, whereas brokers valuations totaled USD 1,312.1m. The calculated value in use of the vessels, taking contract coverage into account, was higher than the total book value. Vessels under construction amounted to USD

59 J. Lauritzen A/S Annual Report m (2% of total assets), down USD 192.9m from USD 231.9m in 2011 (9% of total assets) due to delivery of newbuildings. Investments in joint ventures totaled USD 130.2m compared to USD 97.6m in Current receivables including cash pledged as security for debt and fair value adjustments on FFAs and other financial derivatives amounted to USD 100.1m, compared to USD 73.7m in Total shareholders equity was down by USD 348.6m at USD 852.4m. Solvency was 37%, down from 45% at the end of At year-end 2012, total liabilities amounted to USD 1,462.9m, down USD 17.8m on Total interest bearing debt decreased to USD 1,375.1m from USD 1,394.1m in Other current payables including fair value adjustments on FFAs and other financial derivatives amounted to USD 72.7m (2011: USD 68.2m). CASH FLOW STATEMENT Cash flow from operations totaled USD 34.1m, down from USD 85.8m in 2011 reflecting the decrease in EBITDA. In 2012 cash flows from investment activities including cash pledged as security for debt amounted to USD (107.9)m, down from USD (329.6)m in 2011 mainly due to decreasing net investment in vessels. Cash flows from financing activities (net proceeds from loans) amounted to USD 107.2m compared to USD 322.9m in The decrease mainly related to at-delivery financing of vessels, partly offset by proceeds of USD 87.0m from issuing bonds in Cash and cash equivalents at year-end amounted to USD 267.0m compared to USD 234.1m at yearend At year-end, financial resources, including committed facilities available upon delivery of vessels, amounted to USD 331.0m, down USD 145.2m compared to year-end The committed facilities available upon delivery of vessels decreased due to post-delivery draw downs in table 6: normalised result usdm INCOME STATEMENT - CONDENSED Actual One-off items Normalised Note Revenue 1) Other operating income Costs 2) (620.6) (475.1) (620.7) (477.6) Profit before depreciation (EBITDA) Profit/(loss) on sale of assets 3) (102.4) (36.2) (104.1) (44.7) Depreciations and write-downs 4) (250.0) (91.2) (148.7) - (101.2) (91.2) Operating income (263.6) 18.5 (236.1) (25.2) (27.5) 43.7 Share of profit in joint ventures 5) (26.2) 4.7 (18.2) - (8.0) 4.7 Net financial items (59.5) (69.2) - - (59.5) (69.2) Profit/(loss) before tax (349.2) (45.9) (254.4) (25.2) (94.9) (20.8) Income tax Profit/(loss) for the year (348.4) (44.0) (254.4) (25.2) (94.1) (18.8) Non-controlling interest's share of profit/(loss) (1.3) (2.2) - - (1.3) (2.2) The J. Lauritzen Group's share of profit/(loss) (349.7) (46.2) (254.4) (25.2) (95.4) (21.0) One-off items include: 1) Proceeds from sale of claims and settlements received 2) Use of provisions for onerous charter contracts 3) Sale of vessels as a consequence of counterparty defaults or strategic initiatives 4) Write-downs on vessels and vessels under construction due to impairment 5) Write-downs on vessels owned by joint ventures due to impairment

60 60 J. Lauritzen A/S Annual Report 2012 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 of Directors of: DFDS A/S Kayxo A/S Frederikshavn Maritime Erhvervspark A/S NanoNord A/S Cantion A/S Board member of: Comenxa A/S Desmi A/S Mama Mia Holding A/S Meabco A/S Royal Arctic Line A/S With Fonden Durisol UK 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 of Directors of: Jeudan A/S NTR Holding A/S (+subsidiary company) Ellos A/S Thrane & Thrane A/S Helgstrand Dressage A/S Nesdu A/S Stæhr Holding A/S (+ subsidiary company) Stæhr Invest II A/S Civ. Ing. N.T. Rasmussens Fond Board member of: Scandinavian Private Equity Partners A/S Ole Mathiesen A/S Henning Stæhr A/S 15. juni Fonden (Vice Chairman) Lise og Valdemar Kählers Familiefond Director of CCKN Holding ApS (+ two subsidiaries) 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 of Directors of: Bery Maritime A/S Ragni Invest A/S Center for Creative Leadership Board member of: Berg-Hansen Reisebureau AS DFDS A/S Miros Petroleum Geo-Services Performance Leadership AS BOARD MEMBER PETER POUL LAURITZEN BAY Member since 2003 // Remuneration: DKK 300,000 Member of the Audit Committee Management Consultant Accenture

61 J. Lauritzen A/S Annual Report BOARD MEMBER MARIANNE WIINHOLT Member since June 2011 // Remuneration: DKK 250,000 Senior Vice President/Head of Corporate Finance, DONG Energy A/S Board member of: KNI A/S, DK-3911 Sisimiut, Greenland BOARD MEMBER SØREN BERG* Member since 2005 // Remuneration: DKK 250,000 Project Manager, Lauritzen Kosan A/S Board member of: De Forenede Sejlskibe BOARD MEMBER ULRIK DANSTRØM* Member since 2009 // Remuneration: DKK 250,000 Vice President, Lauritzen Bulkers A/S BOARD MEMBER PER GOMMESEN* Member since 2009 // Remuneration: DKK 250,000 Captain, Lauritzen Offshore Services A/S Resigned as of 29 January 2013 AUDIT COMMITTEE Niels Heering (Chairman) Ingar Skaug (Member) Peter Poul Lauritzen Bay (Member) NOMINATION & REMUNERATION COMMITTEE Bent Østergaard (Chairman) Ingar Skaug (Member) Niels Heering (Member) *Elected by the employees

62 62 J. Lauritzen A/S Annual Report 2012 management EXECUTIVE MANAGEMENT & EXECUTIVE COMMITTEE Torben Janholt President & CEO Board member of: Danish Shipowners Association (DSA) (Chairman of DSA ) A/S United Shipping & Trading Ltd Post Norden AB European Community Shipowners Associations (ECSA) President of Lauritzen Bulkers from July 2012 through January 2013 Resigned as President and CEO as from 26 February 2013 Birgit Aagaard-Svendsen Executive Vice President & CFO Chairman of the Board of Directors of: Committee on Corporate Governance (Komitéen for god Selskabsledelse) Danish Society for Education and Business (DSEB) Board member of: Metroselskabet I/S The West of England Ship Owners Mutual Insurance Association (Luxembourg) Jan Kastrup-Nielsen Executive Vice President & COO President and CEO as from 26 February 2013 OTHER MEMBERS OF EXECUTIVE COMMITTEE PETER BORUP* President - Lauritzen Bulkers A/S Thomas Wøidemann President - Lauritzen Kosan A/S Erik Donner President - Lauritzen Tankers A/S & Lauritzen Offshore Services A/S** Erik Bierre Senior Vice President - J. Lauritzen A/S Group Business Control John Jørgensen Senior Vice President - J. Lauritzen A/S Group Treasury * From 1 February 2013 ** From July 2012

63 J. Lauritzen A/S Annual Report From left: Peter Borup,Torben Janholt, Erik Donner, Jan Kastrup-Nielsen, Thomas Wøidemann, Birgit Aagaard-Svendsen, John Jørgensen and Erik Bierre