VINCI - 2005 annual report
VINCI - 2005 annual report VINCI - 2005 annual report
B. RISK FACTORS 1. OPERATING RISKS 1. 1 CONSTRUCTION, ROADS, ENERGY In general, VINCI Construction’s, Eurovia’s and VINCI Energies’ businesses are dependent on the economic climate and public-sector orders. If these decrease, pressure on business volumes and prices may result. In fulfi lling orders, Group companies are also exposed to the risk that the actual time and / or cost of construction will be different from the estimate made when the contract was awarded. Time and cost depend on a certain number of factors that are diffi cult or impossible to forecast such as changes in raw material prices, labour and sub-contracting costs, diffi culties connected with the technical complexity of the project to be built, and climatic and geological conditions. Group companies are also exposed to the risk of customer insolvency. The risks described above are lessened by the fact that Group companies’ revenue arises from a large number of contracts. These are estimated to number approximately 300,000 a year. They are generally of a modest size and last a few months, involving a very diverse range of skills, geographical locations and customers. 1. 2 PROPERTY The Group’s property development activities are exposed to a number of risks connected in particular to administrative, technical and commercial factors that could result in delays (or the abandoning of some projects), budget over-runs and uncertainties regarding the sales price of properties. VINCI’s exposure to property risks is limited. The Group’s property development activities are mainly carried out through its specialised subsidiary, VINCI Immobilier. This company’s activities are concentrated in the Paris Region and France’s main conurbations. In 2005, they accounted for less than 2% of the Group’s revenue. 182 VINCI 2005 ANNUAL REPORT The major projects carried out by VINCI Construction Grands Projets account for less than 7% of the Construction division’s revenue and less than 3% of the Group’s consolidated revenue. In this area, the Group’s policy is to favour projects with high technical value added, allowing its know-how to be leveraged in countries where the environment is known and manageable. These major projects are also usually carried out with outside companies in consortia in order to limit the Group’s risk exposure. Regarding order-taking, the Group has set up a policy for selecting new business. Procedures to monitor commitments at an early stage have been implemented for a long time. The budgetary procedures and reporting and internal control systems in each business line and at holding company level also enable regular (usually monthly) monitoring of key management indicators and a periodic review of each entity’s results. All these procedures are described in the “Report of the Chairman on the work of the Board of Directors and on internal control procedures”, page 169. Some VINCI subsidiaries may also participate in isolated property development operations in connection with the Group’s construction activities, mainly in France, Belgium and Luxemburg. Property development projects are submitted to the Risk Committee for prior examination and agreement. The Group’s policy is to undertake new projects only if all risks are under control and if the property is suffi ciently pre-sold.
1.3 CONCESSIONS The main risks in connection with Concession projects relate to design and construction (which are, however, usually borne by the undertakings in charge of the construction), to factors that can affect traffi c levels and to fi nancial variables (interest rates, infl ation, etc). 1.4 ACQUISITIONS To control the risks connected with the integration of newly acquired companies and to be able to apply the Group’s management principles in them, VINCI’s policy is to acquire a majority interest in acquirees. 2. MARKET AND LIQUIDITY RISKS 2.1 LIQUIDITY RISK The Group’s exposure to liquidity risk relates to its obligations to repay its existing debt, in addition to the supplementary debt arising from the acquisition in progress of ASF and, ASF’s own debt. In particular, the fi nancing of this transaction includes a 7-year acquisition loan of €4.2 billion that provides for a fi nancial ratio that must be met throughout the period of the loan, failing which, the loan will become repayable. 2.2 MARKET RISK (INTEREST RATE, CURRENCY AND EQUITY) VINCI is exposed to interest rate risk in connection with its fl oating-rate debt, and to currency risk in connection with its activities in foreign countries. However, as approximately 80% of the Group’s activities in foreign countries are in the eurozone, VINCI’s exposure to currency risk remains limited. Management of interest rate and currency risks is explained in Note 26 to the consolidated fi nancial statements. REPORT OF THE BOARD Concession projects are systematically submitted to the Risk Committee for examination and agreement. In order to limit the risk capital invested by the Group, these projects are generally developed in partnership with outside enterprises and are fi nanced so as to maximise the amount of debt, which is generally with no or limited recourse against VINCI. Any proposed acquisition or disposal is submitted to the Risk Committee for agreement. The largest are also submitted to the Board of Directors after examination by the Strategy and Investment Committee (see paragraph 3.2.2 of the Corporate Governance section). Details of these obligations and the Group’s resources enabling it to meet them (cash fl ow surpluses, unused confi rmed credit lines, fi nancial ratings) are given in Notes 25 and 26.2 to the consolidated fi nancial statements. VINCI has no exposure to equity risk. The Group no longer has any material unconsolidated holding in a listed company and the investment vehicles used to manage its cash surpluses are mainly monetary UCITS and negotiable debt securities. 183
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1.3 CONCESSIONS<br />
The main risks in connection with Concession projects relate to design<br />
and construction (which are, however, usually borne by the undertakings<br />
in charge of the construction), to factors that can affect traffi c levels and<br />
to fi nancial variables (interest rates, infl ation, etc).<br />
1.4 ACQUISITIONS<br />
To control the risks connected with the integration of newly acquired<br />
companies and to be able to apply the Group’s management principles in<br />
them, <strong>VINCI</strong>’s policy is to acquire a majority interest in acquirees.<br />
2. MARKET AND LIQUIDITY RISKS<br />
2.1 LIQUIDITY RISK<br />
The Group’s exposure to liquidity risk relates to its obligations to repay its<br />
existing debt, in addition to the supplementary debt arising from the<br />
acquisition in progress of ASF and, ASF’s own debt. In particular, the fi nancing<br />
of this transaction includes a 7-year acquisition loan of €4.2 billion that<br />
provides for a fi nancial ratio that must be met throughout the period of<br />
the loan, failing which, the loan will become repayable.<br />
2.2 MARKET RISK (INTEREST RATE, CURRENCY AND EQUITY)<br />
<strong>VINCI</strong> is exposed to interest rate risk in connection with its fl oating-rate<br />
debt, and to currency risk in connection with its activities in foreign<br />
countries. However, as approximately 80% of the Group’s activities in<br />
foreign countries are in the eurozone, <strong>VINCI</strong>’s exposure to currency risk<br />
remains limited.<br />
Management of interest rate and currency risks is explained in Note 26<br />
to the consolidated fi nancial statements.<br />
REPORT OF THE BOARD<br />
Concession projects are systematically submitted to the Risk Committee<br />
for examination and agreement. In order to limit the risk capital invested<br />
by the Group, these projects are generally developed in partnership with<br />
outside enterprises and are fi nanced so as to maximise the amount of debt,<br />
which is generally with no or limited recourse against <strong>VINCI</strong>.<br />
Any proposed acquisition or disposal is submitted to the Risk Committee<br />
for agreement. The largest are also submitted to the Board of Directors<br />
after examination by the Strategy and Investment Committee (see paragraph<br />
3.2.2 of the Corporate Governance section).<br />
Details of these obligations and the Group’s resources enabling it to meet<br />
them (cash fl ow surpluses, unused confi rmed credit lines, fi nancial ratings)<br />
are given in Notes 25 and 26.2 to the consolidated fi nancial statements.<br />
<strong>VINCI</strong> has no exposure to equity risk. The Group no longer has any material<br />
unconsolidated holding in a listed company and the investment<br />
vehicles used to manage its cash surpluses are mainly monetary UCITS<br />
and negotiable debt securities.<br />
183