Registration Document BOUYGUES

For several years, Colas has been committed to
extending the use of warm asphalts and bitumen
mixes, significantly reducing the temperatures at
which products containing bitumen are applied
and thus eliminating bitumen fume emissions
almost entirely. It is seeking a similar commitment
from the authorities and project owners to speed
up this generalised use.
There is no apparent obsolescence risk in terms
of patents or processes. Colas has developed a
research and development policy that allows for the
constant renewal and upgrading of the company's
technical know-how.
General contract execution risk is relatively limited
due to the large number of contracts and their low
average value. However, some subsidiaries do
work on large-scale projects. These major projects
are subject to specific monitoring procedures, paying
greater attention to specific issues: complexity,
design, unforeseen circumstances (geological or
archaeological constraints, making land available
for construction), execution, delivery lead-times,
etc. ISK, a Slovakian subsidiary, is currently
experiencing difficulties in performing the works
and honouring its obligations under a fixed-price
contract for the construction and renovation of
a power plant at Mochovce.
The activities of Colas may also be sensitive to
natural phenomena, particularly to the weather.
Adverse weather conditions (rain, snow, frost)
may generate additional costs to completion, and
fixed costs erode margins more significantly during
downtime.
Commodities risk
Colas is sensitive to the regularity of supplies of key
commodities and to fluctuations in their cost. The
main commodities involved are petroleum-based
products in the road building business (bitumen,
vehicle fuel, heating fuel, oil), together with other
commodities such as steel, copper and aluminium
in the security, signalling, waterproofing and rail
businesses.
The biggest risk relates to bitumen and other
petroleum-based products.
Supply chain risk
Delays or stockouts in the supply chain may lead
to direct and indirect cost overruns in the road
building and waterproofing businesses. This is not
a systematic risk, except in the case of a conflict
and a total breakdown in petroleum supplies.
This type of risk may affect a country, or more
likely a region, over a variable period of time. At
the beginning of 2011, the Kemaman refinery in
Malaysia (operated by the Thai subsidiary, Tipco)
had to stop production because it was unable to
procure supplies of the type of crude oil suitable
for the facility on acceptable purchase terms. This
incurred additional unforeseen costs. Some years
ago, Colas took steps to address this risk by setting
up a group-level Bitumen unit, supported by
similar units in some of the major regions where the
company operates (e.g. North America) to improve
supply chain capacity through bulk purchase
agreements and imports. Over the years, Colas has
also developed a bulk storage capacity, in France,
Europe, the French overseas departments, in the
Indian Ocean region and, on a larger scale, in
North America. Storage capacities are substantial
relative to bitumen consumption in each region.
The policy of building up storage capacity is ongoing,
with new capacity being added as opportunities
arise to buy existing facilities or create new
ones. The acquisition of Société de la Raffinerie
de Dunkerque, which produces around 300,000
tonnes of bitumen a year, is a significant factor in
securing supplies for road building in France and
Northern Europe. Possible, temporary closures
of new refining plants in France (Berre, Petit-
Couronne) increases the risk to bitumen supplies.
Price fluctuation risk
There have been significant fluctuations in bitumen
prices for several years. A number of factors
serve to limit the risk arising from these fluctuations,
including the number and value of average
contracts (which means that prices can often be
reflected in the tender bid) and the fact that many
contracts (in France and elsewhere) include revision
or indexation clauses. Employees involved
in contract negotiations are made aware of this
issue so that it can be factored into the process.
In some regions, it is possible to enter into supply
contracts that fix prices at a guaranteed level for a
specific period. For large-scale contracts, hedging
strategies may be implemented on a case by case
basis when orders are placed. In some of the Colas
group's activities, such as sales of manufactured
goods, rises in prices of bitumen and other petroleum-based
products are passed on to customers
to the extent that market conditions allow.
Given these factors, it is not possible to quantify
the sensitivity of operating profits to commodity
price fluctuations: Colas is involved in thousands
of contracts subject to varying degrees of legal
protection and the extent of price rises varies from
region to region.
There is also an indirect risk that rises in the prices
of these products might lead to a reduction in order
volumes as customers react to higher prices for
works and services.
Risks relating to the activities of
Société de la Raffinerie de Dunkerque
(SRD)
SRD, acquired in June 2010, is sensitive to fluctuations
in commodity prices. The profit of a specialty
product refinery is based on the difference between
the sale price of the refined products (oil, paraffin
wax, bitumen and fuel oil) and the price of the raw
material inputs to the refining process (atmospheric
residue, hydocrackate 1 , and feedstock). Refining
margin reflects this price differential. The margin
was satisfactory in the first half of 2011 but fell away
in the last quarter due to the price rise in materials
(linked to the price of heavy fuel oil) and price falls,
particularly in base oils, as a result of the worsening
economic crisis from September onwards and
inventory drawdowns by customers.
The supply/production/sale cycle is short and
supply and sale contracts are drafted so as to
reduce this risk. Input raw material purchases are
handled by a specialist committee. Raw materials
are used in production one month after purchase
and the resulting products are sold that month or
in the two months following. A hedging policy has
been introduced to reduce this risk.
As at 31 December 2011, these hedges represented
132,000 barrels of Brent crude and 1,200
tonnes of 1% fuel oil sold forward for a notional
amount (volume multiplied by the forward price)
of €11,368 million. In accounting terms, these
qualify as cash flow hedges and their fair value as
at 31 December 2011 had little impact (€0.104 million)
on group equity.
(1) Hydrocracking is an oil refining process wherein feedstock is cracked in the presence of hydrogen.
BOUYGUES • 2011 Registration Document • RISK FACTORS • Business-specific risks • 142