Business Risks

Risks to our operations and financial affairs with the potential to significantly affect investor decision-making, as well as the measures taken to address such risks, are described below.

Recognizing the possibility that these risks could arise, in addition to making every effort to reduce their occurrence, the Group also endeavors to respond as quickly as possible to minimize the effects should they arise.

We have recognized the following risks as of March 31, 2024.

Global economic trends, social and political changes, trade protections, economic sanctions, diplomatic tensions, national energy policy shifts and oil, LNG and metal market price trends may adversely impact customer or partner financial circumstances, causing them to terminate, postpone or change their investment plans and affecting the Group’s business performance.

The Group closely monitors the external economic and social environment as it conducts business to determine project order certainty, and we endeavor to share the risk burden with customers through collaborative working relationships. We also prepare and regularly update order receiving plans for back-up projects and participate in broad studies centered on new business fields and non- EPC projects.

The occurrence of a natural disaster such as an earthquake, heavy rain, flooding or typhoon caused by global climate change, the spread of viral disease or a Force Majeure event such as an act of terrorism or armed conflict, may directly or indirectly result in damage to a worksite where there is an ongoing project, or to an office in Japan or overseas. Such risks can endanger workers' lives, delay the transport of equipment and materials to a worksite, or interrupt on-site work.

The geopolitical crisis in Ukraine and destabilization in the Middle East have increased global risks and undermined the global economy, which could adversely affect the Group’s business performance due to weakening customer and/or partner performance, supply chain disruption and rising global inflation.

Such global catastrophes endanger human life and we have established a Crisis Management Department, strengthened by externally hired security consultants, to compile and analyze data and evaluate the risk to employees in affected areas, such as on the NFE project in Qatar as we continue to closely monitor developments in the Middle East.

The Group works collaboratively with customers and partners to establish emergency response procedures, to be implemented in the event of an emergency, to minimize the risk to all affected parties. We also develop Business Continuity Plans (BCP) to improve our ability to continue operations through emergency safety drills.

In the Group’s business domains, we may receive an order jointly with partners by setting up a joint venture or a consortium based on project size and complexity and risk sharing. In the event of partners’ default, deteriorated financial circumstances or other critical issues affecting their project execution capabilities, the Group may bear contractual joint responsibility and this may affect the Group’s business performance.

The Group analyzes prospective partners’ financial circumstances before the collaboration decision. We also implement a system to immediately identify risks by monitoring joint venture partners’ financial circumstances.

Our risk management process includes analyzing potential partners’ financial circumstances and project execution capabilities prior to and after establishing partnerships to immediately identify and deal with risks.

For the fiscal year ended March 31, 2024, based on the fact that Zachry, a partner of one of the Group subsidiaries to execute the Golden Pass LNG project in Texas, U.S., filed for Chapter 11 relief under the United States Bankruptcy Code on May 21, 2024 in the U.S time, we estimated the total costs to be incurred to complete construction and the contract amount based on the signed documents as of the date of this report, considering the possibility of Zachry’s withdrawal from the Project.

There is time lag between when a contract estimate is issued and when an order is placed. As a result, when there is a dramatic shift in the socio-political situation, such as an outbreak of wars and conflicts between nations and regions, we are exposed to the risk of an unforeseen increase in equipment and materials costs. Specifically, the price of steel, which is a major component in plant construction, can be greatly affected by fluctuating prices for coking coal and iron ore. It is also difficult to predict fluctuations in market prices for materials such as copper, nickel, aluminum, and zinc. There are also concerns that shipping rates may be affected by the surge in oil prices and higher insurance premiums.

To mitigate such risks, in addition to tracking market trends, the Group takes steps such as diversifying our suppliers and encouraging competition by ordering from suppliers around the world, early order placement for equipment and materials, and building good relationships with top-tier suppliers. Through discussions and negotiations with our business partners and stakeholders, such as clients, suppliers, and subcontractors, we are working to appropriately address the soaring equipment, materials and labor prices caused by global inflation.

In plant construction, work may be delayed if we are unable to secure the necessary human resources such as construction workers, secure the necessary infrastructure, or procure the necessary equipment and materials as planned, or by supply chain disruption. There is a risk that additional expenditure may be required to recover lost time due to these factors.

In locations where the labor market is tight or where the climate is harsh, both in Japan and overseas, the Group mitigates the risk of an unexpected rise in construction costs through development of construction methods such as modular construction and by forming cooperative relationships with leading contractors and equipment and materials suppliers. If construction is unavoidably suspended due to the worldwide spread of some infectious disease or epidemic other than COVID-19, a strike, or some other unforeseen occurrence, we will work with our clients and relevant local agencies on appropriate measures to minimize the impacts.

Climate change is affecting society on a global scale, and it is one of the most important social challenges confronting the entire global community. The Group recognizes that the resulting changes to client investment environments and to their business portfolios by physical risks and transition risks could have a significant impact on our operations and business strategy.

The Group is addressing these challenges by formulating business plans that closely monitor the energy situation, review climate change policy, laws and regulations in each country, and by obtaining the latest information in a timely and appropriate manner via our government, agencies and customer networks in order to recognize the requirements of complicated and developed societies and client challenges and solve them accordingly.

Climate change can also be viewed as a new business opportunity. The business environment in which the Group operates is undergoing significant changes. These include advances in faster decarbonization and a carbon recycling society and an accelerated transition to a hydrogen-based society as well as the increasingly widespread adoption of low-carbon and renewable energy, including LNG. As a result of these changes, major clients are overhauling their business strategies and the Group sees prospects for growth thanks to new market opportunities. In view of the above, we continue to transform our business portfolio in response to society’s demand for reduced environmental load.

Since our foundation, we have demonstrated an ability to optimize solutions for complex constraints and challenges. In EPC execution, we rely on this ability to optimize engineering and ensure quality, and the application ability of new technologies fusing basic research and EPC expertise. By leveraging these strengths, we will accelerate the transition to a carbon-free society including hydrogen energy. By transforming our business portfolio on two fronts - growing carbon neutrality and life science contribution fields and creating and strengthening recurring business models - we aim to transform our earnings structure to generate consolidated-basis net profit in excess of JPY 30 billion.

We will contribute to achieving carbon neutrality by 2050 through a combination of reduction and circularity.

Should a major accident such as explosion or fire arise at a plant built or under construction and the Group is determined to be at fault, our liability for damage compensation could affect our business results.

With safety design and construction site accident prevention as top priorities, the Group takes all possible quality control, construction safety management, and other measures to prevent such unforeseen circumstances from arising. In addition, we seek to mitigate such risks by obtaining appropriate insurance coverage and securing contract terms that reasonably share the risk of such losses with the client. The Group is committed to fostering a culture of safety and we collectively refer to our various initiatives to ensure construction safety as ‘C-Safe’, which stands for Chiyoda’s Safety Culture.

Because amounts to be paid for equipment, materials, and subcontracted work for overseas projects can be in currencies that are different to our client payments, fluctuating exchange rates could affect our business results.

The Group endeavors to mitigate currency risk by receiving payments for work in the currencies in which we expect to make payments ourselves and also through forward currency exchange contracts.

In expanding our business domestically and overseas, the Group must comply with the laws and regulations of the various countries in which we have our corporate headquarters, subsidiary companies, representative offices, and construction sites. In the unlikely event that we violate, or are suspected of violating, such laws or regulations, there could be a significant impact on project execution or our business operations.

In order to prevent violations, and also to avoid coming under such suspicion, the Group continuously educates our employees through programs such as group training and e-learning. In doing so, we thoroughly disseminate information about the latest laws, regulations, and rules that are relevant to our business execution, including those pertaining to protecting human rights and preventing corruption. We also constantly work to assess trends among our stakeholders, including domestic and foreign agencies and clients. Furthermore, in order to ensure that compliance is incorporated into our business processes, we have established a Compliance Committee chaired by the Chief Compliance Officer (CCO) with the divisional Compliance Officers as its members, as well as a Group Company Compliance Liaison Committee, also chaired by the CCO, with the subsidiary presidents as its members.

The Group controls a large volume of client and counterparty information that is necessary to execute our business, and we also possess confidential information about technologies, sales, and other aspects of our business. Much of our core work and commercial activities are carried out making full use of state-of-the-art IT systems at various locations around the world. We mitigate risks by reinforcing protective measures to prepare for cyberattacks on important data system and network installations. However, an unforeseen event could cause a system failure, leak of confidential information, cyber fraud, or loss of important business information that could affect our business. Cyberattack risks on companies have recently increased, triggered by the geopolitical crisis in Ukraine.

Our headquarters and two overseas group companies have obtained ISMS*1 certification and Chiyoda X-ONE Engineering Corporation, established in April 2023, is working towards certification. Based on the ISMS certification and NIST CSF*2, the Group is establishing and strengthening a system that is conscious of information security in the supply chain. The Group works to mitigate these risks through rigorous information security management practices, such as regular education and audits.

The Group may make business investments such as establishing new companies and financing and acquiring existing companies. In making these investments, we may provide substantial amounts of equity capital or credit in the form of loans or guarantees. As a result, there are certain risks. An investee may fail to meet its earnings targets due to changes in the business environment, we may incur losses on the investment due to poor business results, or we may encounter a situation in which additional financing is required.

In addition to thoroughly examining a proposal in advance based on our own internal standards and rules, the Group only decides to invest and finance after carefully considering our financial capacity relative to the risk of losses. After making an investment, we monitor the investee’s business plan progress and provide support in the form of personnel or capital if necessary in order to prevent or minimize losses.

Zachry, a partner of one of the Group subsidiaries to execute the Golden Pass LNG project in Texas, U.S., filed for Chapter 11 relief under the United States Bankruptcy Code on May 21, 2024 in the U.S time. Considering the potential impacts related to the possibility of Zachry’s withdrawal from the Project as a subsequent event after reporting period based on the generally accepted accounting principles, on a consolidated basis, we have reported JPY 15,006 million as Operating Loss, JPY 5,461 million as Ordinary Loss, JPY 15,831 million as Loss Attributable to the Owners of the Parent for the fiscal year ended March 31, 2024. In addition, on a non-consolidated basis, total liabilities exceeded total assets by JPY 7,950 million. We recognize that these conditions indicate the existence of events or conditions, which may cast significant doubt on our ability to continue as a going concern.

In response to these situations, we will take the following measures:

Regarding the Golden Pass LNG project, the project customer was granted permission from the court to place orders for business operations such as safety-related tasks or infrastructure development tasks required for continuing local construction work. Following such permission, our customers officially placed orders with CIC and CB&I and such business operations have been resumed. Procedures for payment of required funds to CIC and CB&I in response to such progress has been commenced as well. On June 18, 2024 in the U.S. time, the project customer filed motions for requesting Zachry’s withdrawal from the project and for lifting the Automatic Stay to resume construction work of Train 1.

Soon after the court make an official judgement concerning Zachry’s withdrawal from the project, we aim to agree with the project customer, CB&I and CIC short-term and long-term plans to complete construction, and, upon agreement, we will re-calculate the estimated contract amount and total costs based on its contents.

Based on our previous five-year Revitalization Plan, we have implemented various measures including strengthening risk management system and have achieved certain results. However, considering the current situation, we will further strengthen partner risk management and strive to ensure a stable profit-making base.

In terms of finance, considering Zachry's withdrawal from the Golden Pass LNG project, we have conducted a reassessment and determined that it will not have a significant impact on our future cash flow, and there are no major concerns regarding the continuity of our business activities. Additionally, we have maintained close communication and a strong collaborative relationship with our financial institutions.

Based on the above, we have concluded that no material uncertainty exists regarding the going concern.

• *1 ISMS: Information Security Management System
• *2 NIST CSF: Cybersecurity Framework issued by National Institute of Standards and Technology to improve cyber security for critical infrastructure