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OPERATIONAL RISKS
Responsibility for product quality/defects
Any defects in the design and manufacture of the Prysmian
Group's products could give rise to civil or criminal liability
in relation to customers or third parties. Therefore, the
Group, like other companies in the industry, is exposed to
the risk of legal action for product liability in the countries
where it operates. In line with the practice followed by many
industry operators, the Group has taken out insurance which
it considers provides adequate protection against the risks
arising from such liability. However, should such insurance
coverage be insufficient, the Group's results of operations
and financial condition could be adversely affected.
In addition, the Group's involvement in this kind of legal
action and any resulting liability could expose it to a damage
in reputation, with potential additional adverse consequenc-
es for its results of operations and financial condition.
Risks associated with non-compliance with the
contractual terms of turnkey projects
Projects relating to submarine or underground connections
with high/medium voltage cables feature contractual forms
that entail "turnkey" project management and so require
compliance with deadlines and quality standards, guaran-
teed by penalties calculated as an agreed percentage of the
contract value and even involving the possibility of contract
termination.
The application of such penalties, the obligation to compen-
sate any damages as well as indirect effects on the supply
chain in the event of late delivery or production problems,
could significantly affect project performance and hence
the Group's margins (for example, the Western HVDC Link
project). Possible damage to market reputation cannot be
ruled out.
Given the complexity of "turnkey" projects, Prysmian has
implemented a quality management process involving
extensive testing of cables and accessories before delivery
and installation, as well as specific ad hoc insurance coverage,
often through a pool of insurers, able to mitigate exposure to
risks arising from production through to delivery.
Moreover, the ERM findings for this particular risk have led
the Risk Management department, with the support of the
Commercial area, to implement a systematic process of
risk assessment for "turnkey" projects from as early as the
bidding stage, with the aim of identifying, assessing and
monitoring over time the Group's exposure to specific risks
and of taking the necessary mitigation actions. The decision
to present a bid proposal to the customer therefore also
depends on the results of risk assessment.
In particular, during the last few days of April, the manu-
facture of the cables for the Western HVDC Link project in
the United Kingdom encountered some technical problems,
which were duly placed under technical investigation. As a
result, for the purposes of the Quarterly Financial Report
at 31 March 2014, the Directors had felt unable to estimate
reliably the outcome of this contract, and so its revenues
were recognised to the extent of the costs incurred. Following
subsequent testing of the quality of the cable produced and
analysis of the materials and the manufacturing process,
the Directors felt able to make a reliable estimate of the
project's revenues and costs. This led to the full elimination
of the margins previously recognised on the contract and
the recognition of a provision to cover the expected contract
loss, with a total impact of Euro 53 million. In addition,
the technical problems described above have resulted in
the non-recognition of Euro 41 million in margins originally
expected in 2014. Consequently, including non-recognition
of the margin originally expected on this project in the year,
the overall negative impact of the Western HVDC Link (UK)
project on the results for 2014 was Euro 94 million.
It is not possible to exclude that in the future, in the face
of any further technical problems on the Western HVDC
Link contract, the Group may incur additional losses on top
of those estimated by the Directors in the current Annual
Financial Report.
Risk of business interruption through dependence
on key assets
The submarine cables business is heavily dependent on
certain key assets, such as the Arco Felice plant in Italy for the
production of a particular type of cable and the cable-laying
ships, the "Giulio Verne" and the "Cable Enterprise", some of
whose technical capabilities are hard to find on the market.