Risk Management System

Risk-management system
In the course of its business activities, Bilfinger Berger creates opportunities and takes risks; both must be thoroughly weighed and considered. Business success depends on the principle that the risks taken are managed and that they are outweighed by the opportunities. The task of the risk management system is to ensure that risks are controlled. For the timely identification, evaluation and responsible handling of risks, effective management, control and audit systems must be in place which together form Bilfinger Berger’s risk management system. The elements of our risk management system are strategic business planning combined with a detailed and up-to-date reporting system that serves as an internal early-warning and monitoring system. Our risk management system has been designed with the strong international focus of Bilfinger Berger’s business activities and the special features of the individual project business in mind. Last year, no risks were recognizable that could substantially jeopardize the Bilfinger Berger Group.

Risk management at Bilfinger Berger is a continuous and decentralized process,which is monitored and controlled from headquarters. Effectively avoiding risks requires more than just good instruments and procedures. A highly developed risk awareness among decision makers is also indispensable. For this reason, we have initiated a training program for all operational management levels to improve risk awareness.

Each year, the Group sets new targets for all of its subsidiaries in terms of the performance measures EBIT and return on capital employed, as well as liquidity targets and limits. These and other key figures are monitored with the use of monthly reporting. The actual situation and the targets set are analyzed at all levels. With the use of marginal values and deviation parameters, relevant risks are identified and monitored, and their effects are limited by taking suitable measures. This provides the Executive Board and other members of the management team with detailed information on the current financial situation. In consultation with the Executive Board, the corporate functions perform a specialist monitoring function throughout the Group. They have wideranging rights to request and receive information, to issue individually defined guidelines, and to be actively involved with their specialist colleagues at the subsidiaries.

Headquarters are also responsible for controlling tasks of overriding importance. The corporate departments of Group Controlling, Group Treasury, Project Controlling, Internal Auditing and Legal report regularly and comprehensively to the Executive Board on possible risks from their respective specialist perspectives. In addition, the Executive Board submits a quarterly risk report to the Audit Committee and the plenum of the Supervisory Board.
Orders with large volumes or special risks can only be accepted if they are expressly approved by the Executive Board. Risks related to major projects are counteracted by clearly structuring the distribution of tasks within the corporate functions:

• Group Project Controlling supports these projects from the bidding phase until completion. The technical, financial and timeline-related development of each project – irrespective of the responsible operating unit – is analyzed continually and critically.
• Decisions on financing, internal credit lines and guaranties are made at headquarters by the Executive Board with significant support from Group Treasury.
• Internal Auditing reviews the effectiveness of all working routines and processes. It also carries out audits at the level of the operating units.
• Group Controlling is responsible for the monthly recording of all performance measures as well as for the active controlling of the subsidiaries.
• The Legal department reviews contractual project risks and takes the lead with any legal disputes.

All of the processes and approval procedures that are stipulated by law, the Executive Board or the corporate functions are documented in manuals and working instructions. The Risk Map available on the Bilfinger Berger intranet provides employees throughout the Group with rapid access to the contents of the Risk Management Manual. Information on certain types of risks is arranged according to corporate processes and can be accessed via various search functions.

Our controlling and monitoring instruments are combined into a holistic system that is subject to continuous development. The effectiveness of the risk management system, the internal control system and the internal auditing system are reviewed by the Audit Committee of the Supervisory Board and the external auditor.

Internal control and risk management system as relates to the accounting process
The internal control system as relates to the accounting process consists of principles, procedures and measures to secure the effectiveness, efficiency and accuracy of the Company’s accounting as well as the observance of applicable legal requirements. This also includes the internal auditing system insofar as it relates to accounting.

Under consideration of standards that are usual for the industry as well as applicable legal requirements, Bilfinger Berger has established an internal control and risk management system for Group accounting processes in order to recognize potential risks and, through the application of appropriate measures, minimize them. This system is being continuously developed.

This internal control and risk management system ensures that entrepreneurial substance is accurately recorded, processed and recognized in the balance sheet and implemented in the accounting system. Appropriate staffing and equipment, the use of adequate software as well as clear legal and internal company requirements form the basis of an orderly, standardized and consistent accounting process. The clear division of areas of responsibility as well as various control and monitoring mechanisms (especially plausibility controls, the dual control principle and audit treatments from Internal Auditing), ensure proper accounting. This guarantees that accounting at Bilfinger Berger is carried out in a standardized manner that complies with legal requirements, the principles of orderly bookkeeping, international accounting standards and internal Group guidelines and that business transactions throughout the Group are recorded and evaluated both uniformly and correctly within the scope of accounting publications and that, as a result, accurate and reliable information is made available.

The key features of the internal control and risk management system established at Bilfinger Berger with regard to the Group accounting process can be described as follows:

• The accounting departments at Board at Bilfinger Berger AG and its subsidiaries are clearly structured in terms of their areas of responsibility and their management.
• The IT systems used in the accounting areas are protected from unauthorized access through appropriate security measures.
• Standardized accounting is guaranteed in particular through Group-wide guidelines. The functional competence in the accounting area lies with Corporate Finance and Accounting.
• Those departments and areas involved in the accounting process are appropriately equipped both in terms of expertise and personnel. The employees are carefully selected, educated and receive ongoing training.
• Accounting data is randomly reviewed on a regular basis for completeness and accuracy. Programmed plausibility audits are carried out by software that is designed for that purpose.
• Appropriate controls have been implemented for all accounting-relevant processes (including the dual control principle and analytical audits).
• Accounting-relevant processes are reviewed regularly by Internal Auditing. If deficits in control or potential for improvement are noticed, adequate measures to remove the deficits or to adjust the system will be taken.
  
  

Market and industry-specific risks
The Bilfinger Berger Group depends on the general economic situation and the development of those markets in which the Company is active. Due to the international nature of our business activities,we are also exposed to political,macroeconomic and other risks. There is a tremendous amount of competition in our markets, changes in legal requirements, particularly to tax laws, could burden our earnings.

To manage these risks, we regularly analyze how countries’ economies are developing and whether our business segments are competitive. We are actively involved in advisory committees and panels to ensure that the economic effects of new legislation, ordinances and regulations are considered in good time.

Country risks
Country risks include uncertainties arising from political developments in our markets. In order to minimize such risks, we operate only in certain specified markets. We see no country risks that are relevant to the Group’s earnings.

Financial risks
We monitor financial risks with proven control mechanisms that allow for a timely and transparent reporting. The Group’s reporting system guarantees the regular identification, analysis, assessment and management of financial risks by Group Treasury. All of our relevant subsidiaries and joint ventures are included in this monitoring.

Liquidity risks are monitored and managed centrally at Group headquarters on the basis of rolling 12-month cash-flow planning. Within the context of the central financing, Bilfinger Berger AG is available to its subsidiaries as a lender of last resort. In Europe, the Group’s internal equalization of liquidity is supported in numerous countries by cross-border cash pooling.

Investment financing is carried out under consideration of maturity of the financing. From the €250 million promissory note loan placed in 2008, there are maturities in 2011 and 2013. To finance working capital during the year, we have a €300 million pre-approved credit line at attractive conditions that is in place until 2012.

For the execution of our project business, we have sureties of more than €4 billion which are not fully utilized. More than €1.5 billion of that total is in syndicated sureties with maturities in 2010 and 2011. In case of a transfer of control of Bilfinger Berger AG, all credit commitments may become due prematurely.

The increasing long-term debt resulting from the expansion of our concessions business is solely on a non-recourse basis so that lenders have no access to Bilfinger Berger’s assets or cash flows beyond the respective project companies.

As part of our strategic corporate planning, we regularly review the impact of various scenarios involving the economic and financial development of the Group on our financial risk profile. Significant key figures in this respect are the dynamic debt-to-equity ratio, cash-flow protection and gearing. Our goal is that the ratios should reflect a financial standing comparable with an investment grade rating of BBB or better. In 2009, these considerations led to the decision to finance a substantial portion of the purchase price for MCE AG through a capital increase of €270 million. Following this measure, we have a sound capital structure and the financial flexibility necessary for further corporate development.

Market-price risks in the finance sector primarily involve exchange rates, interest rates, raw-material prices and the market values of financial investments. As a result of our central control, cash flows and financial positions are, to a large extent, netted out. We make use of derivative financial instruments to minimize residual risks and the resulting fluctuations in earnings, valuations and cash flows. We do not undertake any financial transactions beyond the underlying business risk. Fundamental issues in risk management such as the determination or reviewing of methodology, limits or risk strategies are discussed in a steering committee with a direct line to the Executive Board.

We use forward-exchange contracts or currency options to hedge risks relating to cash flows and balance-sheet items in foreign currencies. We generally hedge against transaction risks directly following the contract award and over the entire term of the project, in some individual cases this is done as early as the bid phase. Risk management takes place with the use of explicit risk limits for outstanding foreign-exchange items, their value at risk and marked-to-market results.
Whenever possible, hedging against price fluctuations for raw materials is undertaken on the basis of fixed-price agreements for deliveries or sliding-price clauses for consumption at a physical level. If this is not possible, hedging is carried out through the application of commodity swaps, for diesel fuel or bitumen, for example.

We counteract the risks of interest-rate changes by continually reviewing and, when required, adjusting the composition of recourse liabilities subject to fixed and variable interest rates. We evaluate risks under consideration of future new or refinancing needs on the basis of a cash-flowat- risk model. The borrowing costs budgeted within the scope of the cost-of-capital model serve as a point of reference. To manage this, we generally apply derivative financial instruments such as interest-rate swaps and swaptions. In the area of non-recourse project financing, on the other hand, a full congruent maturity hedging of the liabilities through interest-rate swaps is usually undertaken. Changes in market value occurring in this context must be reflected in the balance sheet, but they have no impact on the success of the relevant project or on the Group’s cash flow.

Substantial counterparty risks can occasionally arise in connection with the investment of liquid funds and the application of derivative financial instruments. To limit such risks, we enter into financial transactions exclusively with banks that have a rating of at least A-. In addition, on the basis of an internal limit system, a diversification of volumes and maturities takes place. In 2009 we expanded the scope of our risk considerations to include the loss of pre-approved though not yet utilized financing in the project business.

Due to the consistent application of financing principles, there were no negative effects on the Group’s earnings or financial situation as a result of the financial crisis.

Acquisition risks
We have a strict concept to counteract risks relating to acquisitions.We generally acquire either a controlling interest or 100 percent ownership of suitable companies. Companies that we regard as candidates for acquisition are valued by our experts with the help of comprehensive due diligence audits. The key criteria for this assessment are strategic relevance, profitability, management quality and future prospects. We only acquire companies that are active and successful in the market and which can make positive contributions to the Group’s earnings from the start. Our latest acquisitions have also fulfilled our expectations in terms of return on capital and profits. New companies are integrated as quickly as possible into the Group and its risk management system according to clear plans and instructions.

Subsidiaries’ risks
All the companies of the Group are subject to the regular financial controlling of subsidiaries and associated companies. This controlling function is carried out from headquarters as directed by the Executive Board and is outside the reporting hierarchy. By permanently monitoring business developments, especially by means of local reviews, it creates a complete picture and an independent opinion on the companies’ financial situations.

The subsidiary controllers report to the Executive Board once a month and inform it of any unusual developments without delay. In addition, there is a financial controlling department in each subgroup that reports to the respective management and is subordinate to the functional supervision of Subsidiary Controlling department at Group headquarters.

Partner risks
For the execution of our business activities we maintain diverse contractual relationships with a large number of partners. For the most part, these are clients, partners in jointly-owned companies, consortiums and joint ventures, subcontractors, suppliers, financial institutions as well as service providers. If these contract partners are not able to meet their performance and/or payment obligations, if they perform poorly, behind schedule or not at all, it can lead to difficulties for our own performance and to financial losses.

We counter this risk by carefully selecting our partners in terms of reliability and performance and – when necessary – a collateralization of their contractual obligations. In the execution of projects with consortial and joint venture partners and in the assignment of important subcontractors, all potential breakdowns on the partner side are routinely included in the bid considerations. We review and monitor the liquidity of finance partners with extreme care. The effectiveness of our management has proven itself over the course of the global financial and economic crisis and we have not been impacted by any noteworthy partner risks.

A particular problem is presented by advance performance obligations, especially in the construction business. Inherent to these obligations is the risk that payments from the client are not made on time or that additional work must be carried out that has not been secured with a price agreement. The negative experience in connection with a road project in Qatar has made us act even more carefully moving forward.We systematically monitor the business conduct and financial situation of our clients.

Project risks
We face calculation and execution risks in relation to the planning and implementation of complex major projects in particular. Losses in major projects can lead to a noticeable burden on earnings.

The management of these risks is one of the main tasks of the operating unit responsible for the individual project and is supported by an improved project controlling. This includes the selection of projects and the subsequent bid preparation, project execution and processing of any guarantee claims. In the selection of projects and the processing of bids, issues that go beyond those aspects immediately affecting the project work itself such as the client’s person, conditions in the region the project is to be carried out, the competence and capacity of the Group unit that will potentially do the work, execution risks, the draft contract as well as the payment plan and payment security are all analyzed, critically evaluated and divided into risk classes. Selection of the projects that are to be pursued is made on the basis of these risk classes.

Within the context of this project controlling, principal contracts are subjected to a thorough commercial and legal examination, with technical aspects analyzed separately by experts in that field. Projects above a certain volume or with a high degree of complexity are carefully monitored by a central unit with defined regulations in each phase of the business, so that any corrective measures can be taken in good time. 90 major projects were under special observation in the year 2009. With complex projects in the concessions business,we make use of the expertise available throughout the Group to assess costs and risks reliably.

Reputation risks
Accidents at our project sites, actual or alleged deficits and errors in our performance as well as compliance violations can all damage our reputation and impact our financial situation.We counteract damage to our reputation through open communication and unconditional cooperation with clients and government authorities. Our compliance system meets the highest demands and is being constantly developed. Suspicious events are actively confronted and investigated. We report any signs of legal violations to the responsible authorities and cooperate with them in full to reach a solution.

Litigation risks
We strive to avoid legal disputes wherever possible. This goal cannot always be achieved, however, with the result that German and international companies are sometimes involved in litigation or arbitration. It is naturally impossible to predict the outcome of such cases with certainty. Nonetheless, following careful analysis, we can assume that sufficient provisions have been recognized in the balance sheet for all such disputes.

Procurement risks
We intensively monitor our global procurement markets. The Group-wide monitoring of world market prices for steel, oil and petroleum products facilitates the flexible procurement of raw materials for our major projects at optimal conditions. We counteract regional procurement risks by cooperating with competitive suppliers and subcontractors. We secure quantities, qualities and prices by means of letters of intent and preliminary agreements. Whenever possible,we also protect ourselves against inflation by means of sliding-price clauses.

Human resources risks
We counteract any human-resources risks that might arise due to a shortage of junior managers, high staff turnover, lack of qualifications, low motivation or an ageing workforce through numerous human resources development programs. In this way, we ensure that highly qualified employees are recruited and retained by the Group over the long term.We therefore maintain close contacts with selected universities, organize internships for students and graduates, and organize specially designed familiarization programs at the beginning of new graduates’ careers at Bilfinger Berger. An extensive range of courses and further training is available to our workforce. Career prospects are discussed regularly and individually with our employees. Management positions are mainly occupied from within the workforce. By means of our human resources controlling, we analyze structural changes within the workforce and can thus counteract any negative developments at an early stage. As a result of our far-sighted human resources development, no specific risks are recognizable in the personnel sector.

IT risks
In order to prevent unauthorized access and data loss and to guarantee the permanent availability of our systems, we protect our information technology with numerous technical installations. Our IT structures are largely standardized. We use software products from leading producers such as SAP, IBM, AAB and Microsoft. Applicable security guidelines are regularly adapted to the latest technical developments.

Overall risk
In the year under review, we did not identify any individual risks whose occurrence, either alone or in combination, would have jeopardized the continuing existence of the Group. If unpredictable, exceptional risks should arise, the possibility that they would have an impact on our output volume or earnings cannot be excluded. However, no risks can be identified that could threaten the existence of the Group.