OREANDA-NEWS. December 21, 2010. Despite the very tense economic situation in shipping markets and the global economy, JSC “Latvijas kugnieciba” (Latvian Shipping Company - LSC) Group managed to maintain stable positions during the reporting period among the world’s leading operators of medium sized tanker ships. In terms of delivery volumes, it remains one of the leaders among analogous companies in Northern Europe.

In the same time according to the LSC audited financial statements 2009 due to reasons beyond the Group’s control it was forced to make substantial impairments for the non-shipping related real estate segment in relation to the several real estate object purchase deal that was concluded two years ago with the Latvian Shipping Company shareholder JSC “Ventspils nafta” (VN), who for over a year has not responded to the LSC requests and appeals to restructure the said deal pursuant to the current tendencies and actual prices in the real estate market. Thus the deliberate unwillingness of VN to consider the actual market situation affects not only the financial result of its subsidiary company Latvian Shipping Company, but will substantially concern the result of the VN itself.

The global recession inevitably affected financial performance of Latvian Shipping Company, but its negative impact on the LSC financial result is to be assessed as neutral. The actual reason of the LSC financial result of 2009 is the impairments related to the Group’s real estate segment, as the impairment of non-financial assets in the amount of USD  88.8 million was made in accordance with International Financial Reporting Standards (IFRS). The impairment made consists of the decrease of the shipping fleet value in amount of USD  6.2 million because of the unfavourable trends in the shipping markets and the absolutely largest part is made by evaluation of the real estate assets, decreasing their value by USD  82.6 million. Thus in 2009 LSC suffered net loss in the amount of USD  90.3 million. The difference between the Group’s audited and unaudited financial statements can be explained by making of the said accruals. Without the impairments made, the financial result of LSC was satisfactory in the dramatic market situation as it was this year. The financial stability of the company is acknowledged by the positive cash flow, as the amount of cash and cash equivalents at the end of the year reached USD  75.1 million in comparison with USD  36.7 million in prior year.

At the end of 2009, LSC had a fleet of 28 tankers (2 of them chartered from other ship owners). Older ships were sold off in order to increase the fleet’s competitiveness in the international market for shipping. Two gas tankers were among the ships to be sold during the reporting period.

The global recession during the reporting period inevitably led to a drop in voyage income – by 22% or USD  55.9 million during the reporting period in comparison to 2008. Low shipping rates and a slowdown in the global shipping business have had a fundamental influence on the gross profit – down by USD  41.6 million in the reporting period than in the prior year. The value of LSC equity at the end of the reporting period was USD  454.8 million, or 47% of all assets. The total value of the company’s assets at the end of 2009 was USD  964.4 million.

During the reporting period, the company optimised administrative costs and operating costs for ships, including reduction of the remuneration for the management board and supervisory board by 34%. The company’s overall liabilities have declined substantially by USD  98.4 million or 16% since the beginning of 2009, and the liabilities at this time are equal to 53% of the group’s assets.

Unfortunately we have to point out that the necessity to make accruals for investments in the real estate field is directly related with the LSC largest shareholder’s JSC “Ventspils nafta” unwillingness to find a solution to the situation caused by itself, when it at the end of 2008 initiated conclusion of a real estate object purchase deal with the LSC subsidiary company “LASCO Investment” (LI) at prices that protractedly did not comply with the actual situation in the real estate market. Upon receipt of the largest part of the payment from the LSC subsidiary company LI, JSC „Ventspils nafta” paid dividends to its shareholders in amount of LVL 50 million, the largest part of which was transferred to a Cyprus company “Euromin Holdings (Cyprus) Limited”, who publicly is called the company of the “Vitol” Group. In fact, by withdrawing money from the LSC subsidiary company, VN shareholders received dividends thus disregarding possibilities of other LSC shareholders to gain profit from their investment in LSC.

LSC has already repeatedly informed its investors and supervisors of the securities market about endeavours to reduce the potential losses, trying to commence constructive and business-like negotiations with VN about restructuring of the real estate deal, with the aim to ensure solvency and operation in the long-term of the LSC subsidiary company, as well as considering interests of all LSC and VN shareholders. The irresponsible avoidance of VN to find a suitable solution for the situation for both involved parties is the reason why drawing up of the audited financial statements for 2009 was delayed.

Due to deliberate inactivity of VN, ignoring the fact that only the money received from LI allowed payment of dividends to VN shareholders, LI was forced to apply to court for out-of-court legal protection process that was approved on 7 October 2010 on the term of 2 years.

Latvian Shipping Company has done everything possible to optimise the LSC Group’s operation and improve its financial performance, but its financial result of 2009 to the highest degree is to be regarded as the consequence of the JSC “Ventspils nafta” activities. VN has actually kept from its shareholders the fact that by payment of dividends on the LSC account and refusing to restructure the real estate deal it will later have to record substantial losses.

All the shares of Latvian Shipping Company are publicly traded on the Official list of the NASDAQ OMX Riga exchange. Negative macroeconomic trends in Baltic securities markets led to a drop in the price of Latvian Shipping Company shares from LVL 0.66 at the beginning of the year to LVL 0.40 at the end of the year, even though in mid-year, when the mood of the market improved a bit, the price rose to LVL 0.69. On December 31, 2009, the capitalisation of Latvian Shipping Company shares at the NASDAQ OMX Riga exchange was LVL 80 million in comparison with carrying amount of equity LVL 222 million. The Group’s Management opinion is that such a difference can be explained with low liquidity in the Latvian securities market. Although Latvian Shipping Company shares draw many investors' attention with 2,591 transactions at the exchange during the year involving 3.96 million shares worth LVL 1.91 million, these liquidity indicators do not show the real value of shares in Latvian Shipping Company as less than 100 transactions involved more than two-thirds of the total number and value of shares that were traded.

Unfavourable external factors remain in place also after the end of reporting period, including substantially lower shipping rates and the fragile situation in global financial markets. The Group will continue its programme of change to satisfy shareholder goals even under these complicated circumstances. The focus will be on commercial and financial risk management, increases in the effectiveness of company staff, and further reductions in costs.