Defining the Probability and Impact of Risk Occurrence

We have defined categories for describing the probability that risks we identify will occur. They provide a framework for understanding our assessment of individual areas of risk. The categories define the range of probability as follows:

• Unlikely: under 25 percent
• Possible: 25 - 75 percent
• Likely: over 75 percent

We also use categories to describe how the occurrence of the risks listed might impact the Group’s earnings, net assets and financial position. We assess the possible effect on earnings using the net method, i.e. after taking appropriate countermeasures, such as establishing provisions or hedging. The following categories define the ranges:

• Low: up to € 25 million
• Medium: up to € 100 million
• High: over € 100 million

The following table shows our estimation of the probability of risks and of how risk occurrence might impact the Group’s earnings, net assets and financial position. The statements refer to the forecast period, thus to fiscal 2015.

Probability and Possible Impact of Our Risks in 2015

Overall Economic Risks

Scenario: Economic slowdown.

Impact on WACKER: Production-capacity utilization drops, specific manufacturing costs rise, and the Group’s sales and earnings decline.

Measures: We counter this risk by continuously monitoring economic trends in our key sales markets. If we detect economic weakness, we take early precautions to adjust production capacities, resources and inventories in line with customer demand. In such cases, we concentrate capacity utilization, for example, on production locations with the best cost position and temporarily shut down some production facilities. To counter an economic slowdown, we also use the instrument of short-time work and do not extend temporary employment contracts.

Evaluation: Analysts expect global economic growth to continue in 2015. They are forecasting economic expansion both in advanced economies and in the emerging markets of Asia, South America and Eastern Europe. At the same time, political and structural challenges remain high. The conflicts between Russia and the EU and USA, the unstable situation in several Middle East regions and the impact of the financial and sovereign-debt crisis in Europe continue to pose risks for the global economy.

Risk Assessment: We presently see no specific signs that economic trends will diverge substantially from the experts’ forecasts. Given the risks mentioned, however, we cannot completely rule out that the global economy in 2015 could perform below current projections.

Our chemical business supplies a large number of customers from a broad range of industrial sectors worldwide. This enables us, as experience has shown, to at least partially compensate for temporary weaknesses in some sectors and sales regions. If global economic growth should turn out to be weaker than currently forecast, the impact on our chemical-earnings trend will probably be low. However, if a recession should unexpectedly occur and significantly dampen demand for our products in a number of key sales markets and sectors, this would reduce our chemical earnings at least to a medium degree.

In Siltronic’s semiconductor-wafer business, volume and price trends depend essentially on two factors. First: on the trend in consumer and industrial demand for electronic equipment – for example, computers, smartphones and tablet PCs. Second: on the balance between global production capacities and semiconductor-manufacturer demand. Both factors are closely interlinked. If, contrary to expectations, the consumer climate should cool off noticeably, this would probably have a medium impact on Siltronic’s earnings trend.

The future development of our polysilicon business will primarily be determined by the regulatory framework for solar-power use and for international trade in photovoltaic systems and solar silicon. By comparison, economic influences play a subordinate role. Should the world economy prove weaker than currently forecast, this would have a medium impact on earnings in WACKER’s polysilicon business.

Sales-Market Risks

Scenario 1: Chemical-segment overcapacity.

Impact on WACKER: Price and volume pressures on our products.

Measures: WACKER minimizes this risk in various ways. For example, we align production with demand and perform quantity controls to ensure appropriate plant-utilization rates. Our approach also includes structured price management, process optimization and intense development of growth markets. Importantly, a key ongoing goal is to increase the share of cyclically resilient product groups in our portfolio and to rank among the global leaders in all our business fields. By cooperating closely with customers, we aim to quickly open the way to novel applications, thus fostering long-term customer loyalty.

Evaluation: We expect overcapacity-related risks for our products to remain the same in 2015. At WACKER POLYMERS, we see overcapacity for dispersions and dispersible polymer powders in Asia. Nevertheless, we expect plant utilization to be strong despite this overcapacity. WACKER SILICONES faces overcapacity for siloxane production in China and for certain segments (such as liquid silicone rubber) – which could reduce plant utilization. Price pressure on our chemical divisions’ products will persist in 2015.

Risk Assessment: It is unlikely that individual areas of our chemical business will experience overcapacity and, consequently, price pressure. We have already taken account of this possibility in our planning and forecasts.

Any potential impacts on Group earnings beyond that would be of medium scale.

Scenario 2: Cyclical fluctuations and intense competition on the semiconductor market.

Impact on WACKER: Volumes and prices decline.

Measures: Siltronic tries to reduce these risks through systematic cost management and through flexible structures and production operations. We are working on aligning our capacity for < 200 mm diameters with market trends. In the 300 mm wafer segment, Siltronic is continuously improving the efficiency of its production and business processes to strengthen its cost basis.

Evaluation: Semiconductor market growth is chiefly driven by increasing demand for 300 mm silicon wafers. For 2015, we currently foresee volume growth and also, in individual product families, opportunities to increase prices. Siltronic’s acquisition of a majority stake in Siltronic Silicon Wafer Pte. Ltd. in Singapore has strengthened the division’s market presence and competitive position. Market researchers expect global volumes of semiconductor-sector silicon wafers to increase by almost 3 percent in 2015. At the same time, global sales are projected to rise by around 5 percent amid somewhat better prices. We expect stronger demand, in particular for 300 mm silicon wafers. Volumes for wafer diameters below 300 mm might decline in 2015.

Risk Assessment: In our semiconductor business, we anticipate that volumes in 2015 will be higher than last year. This scenario forms the basis for our planning and forecasts. We consider it possible that volumes and prices will diverge substantially from our expectations. If volumes came in considerably below our current estimates, this would have a medium impact on Siltronic’s earnings.

Scenario 3: Polysilicon overcapacities and price risks, difficult market conditions due to a rollback of government incentive programs, and the tight financial situation of many customers.

Impact on WACKER: There will be volume risks if excessive and hurried cuts to government solar incentives negatively impact the photovoltaic market. Overcapacity could lead to intense price competition, exerting pressure on margins. Both factors could result in declining sales and earnings and impact the asset value of our polysilicon production facilities.

Measures: We counter these risks by continuously improving our cost positions and by optimizing our product and customer portfolio in line with market developments. If demand slows, we flexibly adjust our production capacities to the market trend. The production start-up at the new Charleston site in Tennessee (USA) remains scheduled for the second half of 2015.

Evaluation: The photovoltaic industry is still dominated by production overcapacity and by the unsatisfactory earnings situation of most solar companies. Prices, however, stabilized along the entire supply chain last year. The industry’s consolidation process is not yet over and will probably continue in the coming years. Given our good cost and quality position, we generally expect to emerge from this consolidation process with renewed strength. However, as long as global production capacity exceeds market demand, there is little chance of prices increasing noticeably at any stage of the supply chain. In certain European countries, we expect to see a tendency for further cuts in state incentives for photovoltaics. Conversely, incentive programs outside Europe – for example in China and the USA – will probably be expanded. At the same time, falling prices for photovoltaic components are making solar energy more competitive. In the renewable-energy sector, pholtovoltaics is becoming one of the most cost-effective technologies for generating electricity. This trend will help promote access to new markets and spur further growth in the global market for photovoltaic applications.

Risk Assessment: In all probability, the consolidation process in the solar industry will continue in 2015. As long as this process remains in place and global production capacities exceed market demand, polysilicon prices are unlikely to change substantially against current levels. Our planning and forecasts anticipate the continuation of this situation. Should solar-silicon demand clearly exceed supply, this would presumably benefit earnings at WACKER POLYSILICON. Conversely, a slump in demand for WACKER’s solar silicon would probably have a high impact on earnings in this business. We consider there to be a possible risk of falling prices.

Procurement-Market Risks

Scenario: Higher raw-material and energy prices, and bottlenecks in the supply of certain raw materials.

Impact on WACKER: Earnings dampened by higher raw-material and energy prices. Any supply bottlenecks could lead to longer customer delivery times and volume losses.

Measures: On an annual basis – and if necessary, ad hoc – we prepare systematic procurement plans for strategic raw materials and energy, along with an evaluation of the procurement risk. Whenever possible, we counter any procurement risks deemed significant with corresponding measures. Examples of such measures include long-term supply contracts with partners, structured procurement from multiple suppliers under contracts with various maturities, expansion of our supplier base, and higher safety stocks. With our silicon-metal production site in Holla (Norway), we have achieved partial backward integration for one of our key raw materials, considerably reducing our dependence on external suppliers. We are now in a position to produce – in-house and to a high quality standard – just under one-third of the quantities we need.

Evaluation: WACKER has positioned itself in energy and raw-material procurement in such a way that we can effectively manage the risks inherent in both economic upturns and downturns. If the world economy weakens markedly, our contracts for key raw materials allow us to adjust our purchase volumes flexibly and to benefit – wherever possible – from price decreases through escalator clauses. If the world economy grows, we have volume guarantees. As a result, we do not see any major risks affecting the supply of our raw materials. Prices could, of course, markedly increase in such a situation. There is, however, the possibility of at least partially compensating for these additional costs with higher selling prices for our own products. Overall, we see the risks facing WACKER in the area of raw-material procurement and raw-material prices as currently being low.

To date, energy-intensive companies or corporate entities have been able, for the most part, to obtain an exemption from the levy imposed by the German Renewable Energy Act (EEG). Some entities at WACKER also profit from this exemption.

Any restriction on the rules for exemption would considerably reduce the competitiveness of these individual corporate entities. During 2014, the EU adopted new state aid rules for renewable energy sources. At the same time, the German Federal Government passed a new version of the EEG limiting the levy (a renewables surcharge) on very energy-intensive companies or corporate entities. This has greatly enhanced WACKER’s legal certainty. The next revision of EEG legislation is expected in 2018, and could lead to renewed risks for WACKER. Although wholesale prices for electricity have dropped in Germany over the past few years, the price trend (wholesale prices, grid fees, capacity market) clearly depends on how German and European policy shapes the future development of the energy transition.

Risk Assessment: In the area of raw-material procurement and raw-material and energy prices, we currently consider the risks facing WACKER to be low. Accordingly, we estimate that they would have a low impact on Group earnings. Now that energy-intensive companies competing on international markets remain largely exempt from the EEG levy, we do not expect the energy-cost situation to result in any significant additional burden for our business compared with the prior year.

Market-Trend Risks

Scenario: An incorrect projection of market trends, and lack of customer acceptance for newly developed products.

Impact on WACKER: If we misjudge future market trends, this could impact our market strength and earnings position. New product developments that fail to meet market needs could negatively impact our sales and earnings.

Measures: WACKER works closely with its customers and, therefore, has reliable information for developing new products and applications. At the same time, we monitor the market and our competitors very closely (all the way down to a business-field level), hold customer and supplier interviews and regularly attend tradeshows that are important to WACKER. In individual cases, we commission market research. We minimize risks relating to product developments by collaborating with customers on specific projects. WACKER also cooperates with universities and scientific institutions on R&D projects to stay abreast of state-of-the-art technological and product-development trends.

Evaluation: WACKER has many years of market experience and can update its detailed planning as soon as market developments change.

Risk Assessment: We consider the risk of misjudging market trends, or not reacting to them appropriately, to be low. If this should, nevertheless, occur in individual application fields, the impact on our earnings trend would probably be low.

Investment Risks

Scenario: Bad investments, higher-than-expected investment costs, postponed plant start-ups, deterioration of original market projections, and assumption of risks from investments in joint ventures and associates.

Impact on WACKER: Bad investments lead to idle-capacity expenses and/or impairments of assets and investments, which can result in major effects on earnings. Higher investment costs mean higher cash outflows and, in the future, higher depreciation expenses in our operating result. Postponed start-ups expose us to the risk of being unable to fulfill supply agreements and, thus, of posting lower sales and earnings.

Measures: WACKER has numerous measures in place for countering investment risks. We check the completeness and plausibility of plans for new projects with an investment volume exceeding € 1.5 million. The Group’s corporate departments are involved in this check. Economic feasibility is assessed using comparative studies that look at other plant projects, including those of competitors. Investments are approved in stages only. Intensive project-budget management helps prevent or minimize delays.

By establishing a partnership with Dow Corning, we have reduced our own investment risk. In this regard, however, the partnership involves long-term purchasing and financing commitments with the respective associated company. The result from investments in joint ventures and associates influences our profitability.

Evaluation: Over the past few years, WACKER has demonstrated that it can complete complex technical investment projects on schedule, or even earlier than planned. At our new site in Charleston, Tennessee (USA), contracts for the remaining subcontracting work have been awarded to ensure that the new site can begin ramping up polysilicon production on schedule in the second half of 2015. On the basis of the contracts awarded, we consider it likely that the total investment volume will be some $ 2.4 billion. Due to the shale-gas boom, the chemical industry will be implementing a number of large-scale projects in the USA over the next few years. As a result of this competitive situation, the cost of materials and labor for the assembly of the Charleston site is higher than originally planned. We have identified opportunities, though, to achieve higher output than initially expected through production-process enhancements at Charleston.

Risk Assessment: We consider it possible that investment costs in Tennessee could come in higher than expected. The EURO/US dollar exchange rate could influence investment costs. These two factors could have a medium impact on capital expenditures and net cash flow.

Production Risks

Scenario: Risks relating to the production, storage, filling and transport of raw materials, products and waste.

Impact on WACKER: Potential personal injury, property damage and environmental impairment; production downtimes and operational interruptions; and the obligation to pay damages.

Measures: WACKER coordinates its operational processes through its integrated management system (IMS). The system regulates workflows and responsibilities, attaching equal importance to productivity, quality, the environment, and health and safety. Our IMS is based on legal regulations, and on national and international standards, such as Responsible Care^® and the Global Compact, which go far beyond legally prescribed standards. We monitor maintenance extensively and regularly perform inspections to ensure the highest possible level of operational safety at our production sites. We conduct thorough safety and risk analyses, from the design stage through to commissioning, to ensure our plants’ safety. We regularly hold seminars on plant and workplace safety and explosion protection. Every WACKER site has its emergency response plan to regulate cooperation between internal and external emergency response teams, and with the authorities. When we work with logistics providers, we ensure that hazardous-goods transport vehicles are always checked prior to loading and that faults are systematically recorded and tracked.

Evaluation: Risks stemming from the production, storage, filling and transport of raw materials, products and waste can never be completely ruled out.

Risk Assessment: Even though it is generally possible for risks to materialize regarding the production, storage, filling and transport of raw materials, products and waste, we currently consider a serious loss event to be unlikely. Nevertheless, if such an event should occur, it could have a medium impact on WACKER’s earnings.

Financial Risks

WACKER is exposed to financial risks from ongoing operations and financing. Such risks include credit, market-price, financing and liquidity risks. They are managed by the individual WACKER departments responsible for them. We employ primary and derivative financial instruments to cover and control the financial needs and risks necessitated by our operations. Such financial instruments are not permitted, however, if they are not based on actual or planned operational activities. The Notes to the consolidated financial statements provide extensive information about risk hedging using derivative financial instruments. For further details, see pages 256 to 260 of the Notes section.

Controlling Financial Risks

Credit Risks

Scenario: Customers or business partners fail to meet their payment obligations.

Impact on WACKER: Losses on trade receivables, and failure of banks to fulfill their obligations to WACKER (loan disbursements, repayment of deposits and compensatory payments arising from derivatives transactions).

Measures: We use a variety of instruments to reduce the risk of any loss on receivables. Depending on the nature of the product or service provided, we may demand collateral, including retention of title. Other preventive measures range from references and credit checks to the evaluation of historical data from our business relationship to date (particularly payment behavior). We limit default risks by means of credit insurance, advance payments and bank guarantees. We prevent counterparty risk vis-à-vis banks and contractual partners by carefully selecting these partners. We strictly limit cash investments and derivative dealings to banks with a minimum rating of A– from Standard & Poor’s or a comparable rating agency. Investment activities are additionally subject to maximum investment and term limits. In exceptional cases, investments or derivative dealings may be conducted with banks of lower creditworthiness within tight limits and terms.

Evaluation: The credit risks stemming from customer business are manageable. Credit risks arising from contractual obligations to financial institutions are related to financial assets and derivative financial instruments. Globally, our Corporate Finance and Insurance department conducts all transactions in currency and interest-rate derivatives and manages liquidity centrally.

Risk Assessment: We consider it unlikely that credit risks stemming from customer business will occur. We assume that our risk concentration with regard to bank failures is low, thanks to our approach to counterparty risk. If, however, credit risks stemming from customer business or from a bank failure unexpectedly occurred, their impact on WACKER’s earnings would probably be low.

Market-Price Risks and Risks of Fluctuating Payment Flows

Scenario: Fluctuations in currency-exchange and interest rates.

Impact on WACKER: Effect on earnings, liquidity and financial investments.

Measures: Currency risks primarily arise from exchange-rate fluctuations for receivables, liabilities, and cash and cash equivalents not held in euros. The currency risk is of particular importance with respect to the US dollar, Japanese yen, Singapore dollar and Chinese renminbi. WACKER hedges the net exposure exceeding a certain level using derivative financial instruments. The use of such instruments is governed by WACKER’s foreign exchange management directive. We work with forward-exchange contracts, foreign-exchange swaps and currency-option contracts. Foreign exchange hedging is carried out mainly for the US dollar, Japanese yen and Singapore dollar. We also counter exchange-rate risks through our non-eurozone production sites.

Interest-rate risks arise due to changes in market rates that impact future interest payments for variable-rate loans and investments. Thus, the changes have a direct influence on the Group’s liquidity and financial assets. When exposure is identified, interest-rate hedging is performed. The use of derivative financial instruments is governed by internal regulations that separate trading and settlement functions, and is subject to strict controls within the entire processing procedure. We continually monitor the effectiveness of any measures taken.

Evaluation: We hedge part of our US dollar, yen and Singapore dollar business. The possible impact or income from exchange-rate fluctuations is partially cushioned by hedging measures. Consequently, we do not expect any major effects from exchange-rate shifts in 2015.

Risk Assessment: From today’s perspective, we consider it unlikely that exchange-rate and interest-rate changes in 2015 will substantially differ from our planning assumptions. Nevertheless, if this were to occur unexpectedly, we believe that it would have a low impact on Group earnings.

Liquidity Risks

Scenario: Lack of funds for payments, and tougher access to credit markets.

Impact on WACKER: Higher financing costs, and modifications to further expansion plans.

Measures: Liquidity risk is managed centrally at WACKER. Our Corporate Finance and Insurance department employs efficient systems for both cash management and rolling liquidity planning. In order to counter financing risks, WACKER holds adequate long-term, contractually agreed lines of credit, and has set aside sufficient liquidity. By means of cash pooling, liquid funds are passed on internally within the Group as required.

Evaluation: As expected, WACKER’s liquidity decreased in 2014 compared with the previous year amid continued high investment spending and despite new loans. Liquidity totaled € 520.9 million at the reporting date. At that time, financial liabilities exceeded liquidity (consisting of current and noncurrent securities, and cash and cash equivalents) by € 1,080.6 million. The loans contain a net debt-to-EBITDA ratio as the only financial covenant. Concurrently, there were unused lines of credit with terms of over one year totaling some € 603.5 million. We invest liquid funds only in issuers or banks that have a credit rating within the sound investment-grade range. The investment of liquid funds is, moreover, subject to limits that we have defined.

Risk Assessment: We consider the occurrence of financing and liquidity risks to be unlikely. At the moment, we see no risks relating to financial-covenant infringements. Nevertheless, if financial or liquidity bottlenecks were to occur, their impact on Group earnings would be low.

Pensions

Scenario: The greater life expectancy of pension-fund beneficiaries, additional obligations due to pay and pension adjustments, and falling discount factors increase the volume of pension obligations. Significant changes in the composition of the invested fund assets and capital-market interest rates produce a rise or fall in fund assets. Altered criteria used in the measurement of pension plans influence the net pension cost for the period.

As of 2013, IAS 19 requires enterprises to report actuarial gains and losses, as well as other changes in value, immediately and in full in other comprehensive income. This leads to greater volatility in equity. Other future changes to the principles applied in accounting for pensions may adversely affect the Group’s earnings, net assets and financial position.

Impact on WACKER: A large portion of WACKER’s pension guarantees are covered by the Wacker Chemie VVaG pension fund, by pension-related funds and special-purpose assets, and by insurance plans. The largest contribution comes from the pension fund. A rise in pension obligations, a decline in plan assets, and a possible injection of financial resources into the pension fund or into the plan assets will affect the financial position and earnings of the Group. Over and above the basic pension plan, there are defined-benefit pension plans in the form of direct commitments. Additionally, employees have the option of converting part of their remuneration into direct benefit commitments. The greater life expectancy of pension-fund beneficiaries, adjustments to pay and pensions, and the discount factor (used in calculating the net present value of a final capital amount) also impact WACKER’s equity and earnings to a substantial extent.

Measures: A large portion of WACKER’s pension guarantees are covered by the Wacker Chemie VVaG pension fund, by pension-related funds and special-purpose assets, and by insurance plans. The pension fund manages the pension insurance of our German-based employees in accordance with its Articles of Association and General Terms and Conditions of Insurance. To ensure a sufficient rate of return and to limit investment risks, the fund diversifies its investment portfolio among various asset classes and regions. In managing its assets and liabilities, the pension fund controls and optimizes all asset items to attain the required return within specified risk limits. As one of the fund’s sponsoring entities, WACKER makes payments to it (when necessary), thereby ensuring sufficient coverage for pension obligations. We periodically adjust the calculation parameters of the other defined-benefit pension commitments (e.g. the minimum interest rate).

Evaluation: Pension-fund beneficiaries are living longer, and capital-market interest rates have steadily declined in recent years. The rate of return will probably be insufficient to fulfill pension obligations in the long term. The contribution for Wacker Chemie AG’s defined-benefit pension commitments thus rose from 350 percent of the employee contribution in 2013 to 400 percent in 2014 to protect the pension fund.

Risk Assessment: We consider it unlikely in 2015 that WACKER will have to make higher payments to the pension fund or increased pension payments to cover its other commitments. Furthermore, we estimate the impact on WACKER Group earnings as low. Nonetheless, the likelihood that we will have to make higher payments to the pension fund in the future is greater. See further details in the Notes section 20.

Legal Risks

Scenario: Diverse legal risks related to tax, trademarks, patents, competition, antitrust proceedings, the environment, labor and contracts could arise from our international business.

Impact on WACKER: Drawn-out legal disputes that could impact our company’s operations, image and reputation, and that could be costly.

Measures: We limit legal risks with centralized contract management and legal review by our legal department. If necessary, we also seek highly qualified and specialized external legal advice.

Our Intellectual Property department protects and monitors patents, trademarks and licenses. Before initiating R&D projects we conduct searches to determine whether existing third-party patents and intellectual property rights could prevent us from marketing any newly developed products, technologies or processes.

We limit risks arising from possible legal infringements by means of compliance programs. WACKER’s Code of Conduct defines and stipulates binding rules of behavior for all employees. Through training programs, WACKER enhances awareness of these issues and attempts to prevent reputation-related risks.

Evaluation: We currently do not foresee any legal disputes, patent infringements or other legal risks that could significantly influence our business.

Risk Assessment: Due to the varied nature of our business activities in all major regions of the globe, the occurrence of legal risks, for example in the form of legal disputes, is always conceivable in principle. We do not, however, see any specific indication of any such events that would have a significant impact on our business and currently categorize their occurrence as possible. Should they occur, there would be a low impact on Group earnings.

Regulatory Risks

Energy Transition in Germany

Scenario: The transition in Germany to 80 percent renewable energy in the electricity sector by 2050 (known as the “Energiewende” or energy transition) creates a regulatory environment that will probably be marked by constant legislative amendments in Berlin and Brussels (the German “EEG” or Renewable Energy Act reform, special compensation rules for energy-intensive companies, the grid charge, self-generated electricity, EU investigation into EEG state aid procedures, state aid rules, the 2030 EU Green Paper, and capacity mechanisms).

Impact on WACKER: Additional costs due to rising government levies on the cost of electricity procurement.

Measures: We continually monitor regulatory activity in Germany and in the EU. Whenever we anticipate changes in the current legal situation, we try to introduce our viewpoint into legislative procedures through discussions with policymakers and by participating in trade associations. In addition, we search for, and take advantage of, market opportunities arising, for example, from renewable energy (e.g. industrial demand-response management).

Evaluation: We expect the regulatory environment surrounding the energy transition to remain in flux for the next few years. WACKER is following the implementation of the energy transition at the regional, federal and EU level.

Risk Assessment: The regulatory risks from amendments to the EEG and from the special compensation rules for energy-intensive companies diminished during 2014. Now that the legislative procedure in Germany is complete and agreement has been reached with the European Commission, we do not expect these risks to cause any substantial strain on our business in 2015. Should it be decided, however, to completely abolish not only the rules relieving energy-intensive companies with regard to EEG feed-in tariffs, but also the privilege for self-generated electricity, and the grid charge, then there would be a high impact on WACKER’s earnings in the medium term. We consider this to be a possible risk.

Anti-Dumping Proceedings

Scenario: Completion of anti-dumping proceedings by the Chinese Ministry of Commerce against polysilicon imports from the USA. The anti-dumping proceedings of the EU against Chinese solar companies have been concluded and are of no relevance to WACKER’s business.

Impact on WACKER: Negative impact on the company’s earnings, net assets and financial position; influence on sales volumes, impact on long-term customer relations.

Measures: WACKER would be affected by the completion of anti-dumping proceedings if we were to sell US-manufactured polysilicon in China. By holding numerous discussions with policymakers in the USA and China, we are striving to avoid the imposition of punitive tariffs (US tariffs on Chinese solar modules and cells, as well as Chinese tariffs on polysilicon from the USA) and hence their impact on WACKER’s US-made polysilicon. According to Chinese anti-dumping laws, we can also apply to have the tariffs individually reviewed and have their level set, since WACKER has not, in fact, imported any polysilicon yet from the USA to China during the investigation period of the anti-dumping proceedings. We will apply for such a “New Shipper Review.” What is more, we will sell US-made polysilicon preferably to customers in other countries.

Evaluation: The tariffs on polysilicon imports from the USA to China are in effect until January 2019. In our view, it is not predictable as to whether the US Department of Commerce and the Chinese Ministry of Commerce will reach a new agreement on this issue.

Risk Assessment: It is possible that WACKER will be affected by punitive tariffs on US-made polysilicon intended for shipment to China. At the time these punitive tariffs were imposed, we had not yet made any polysilicon in the USA for shipment to China. Consequently, we see opportunities of reaching an individual solution with the Chinese Ministry of Commerce via its “New Shipper Review.” We also have the opportunity of extensively selling US-made polysilicon to customers in other countries. Should we be affected by punitive tariffs, this would have a low impact on Group earnings in 2015.

New Regulations for Upstream, Intermediate and Downstream Products That WACKER Produces Itself or Uses and Their Effects on Our Production Processes

Scenario: The production and use of chemical substances will be more strictly regulated due to new legal regulations. New legal provisions necessitate changes in WACKER’s production processes.

Impact on WACKER: Additional investments in production facilities and revenue losses in individual application fields.

Measures: WACKER continually monitors the regulatory environment surrounding its products and production processes so that it can react promptly to impending changes. This is why we have begun to technologically enhance individual silicone production plants in preparation for possible regulatory changes.

Evaluation: In principle, it is always possible that new legal regulations will make it necessary to modify our product portfolio or production processes.

Risk Assessment: We consider it likely that new legal provisions will require additional investment in our production facilities or changes to our product portfolio. Should such changes occur, the impact on WACKER’s earnings would be low, at most.

IT Risks

Scenario: Attacks, system errors and unauthorized access to IT systems and networks, threatening data security.

Impact on WACKER: Negative impact on the company’s earnings, net assets and financial position, on production processes and on workflows; loss of know-how.

Measures: We continually monitor our use of information technology and do everything we can to ensure that IT-supported business processes function reliably. Our IT-security and risk-management specialists are responsible for handling hazards in a cost-efficient way. Their work is based on ISO 27001. Using risk analyses, we define the requirements for WACKER’s central systems – in terms of availability, and data integrity and confi-dentiality. We anchor these requirements in SLAs (service level agreements) at our business divisions and corporate departments, and continually monitor compliance with those agreements. For our central ERP systems (Enterprise Resource Planning), we set – and exceeded – an availability goal of 99.5 percent for 2014. To achieve such a level, we design our systems for maximum availability, with an associated backup and recovery procedure. We have taken appropriate precautions to cover emergency situations (business continuity management).

We minimize project-related IT risks with the help of a uniform project and quality-management method. It ensures that changes are integrated into our system landscape in a controlled manner. Before new IT solutions are rolled out, we ensure that development and security requirements have been observed. Systematic enterprise-architecture management reduces complexity and risks.

As part of the risk management process, we log and evaluate any operations-related risks that arise and initiate countermeasures. We also optimize IT service management processes on an ongoing basis. We use state-of-the-art hardware and software solutions to counter network downtime, data loss or manipulation, and unauthorized access to our network. We use efficient software security programs to protect ourselves against malware. We have set up an international security team, which addresses problems involving data and system confidentiality, integrity and availability by means of organizational and technical measures and awareness programs. Information events and training on IT security ensure that our employees have the necessary skills to heighten information security at the company. In addition, we regularly conduct comprehensive penetration tests and audits at domestic and international sites to prevent the risk of hacker attacks.

Evaluation: We can never completely rule out system errors and attacks on our IT systems and networks. A long-term failure of IT systems or a major loss of data can considerably impair WACKER’s operations.

Risk Assessment: Thanks to our precautionary measures, we consider the occurrence of such events – and the risks associated with them – to be unlikely. However, if one of our IT systems experienced downtime, a service disruption or a hacker attack affecting a significant number of users or lasting a longer period of time, there would be a medium impact on Group earnings.

Personnel-Related Risks

Scenario: Demographic change, lack of qualified technical and managerial employees, and problems in filling executive positions.

Impact on WACKER: The lack of technical and managerial employees could dampen our continued growth and lead to the loss of our technological edge.

Measures: We counter these risks through personnel-policy measures. These particularly include our new Talent Management Process and the development plans derived from it. In addition, we offer a wide variety of training programs, good social benefits and performance-oriented compensation. We also offer our employees in Germany a wide range of working-time models and arrangements to better balance career demands with the different phases of life.

WACKER has a detailed, groupwide successor-planning process in place for all key positions in the company, including all positions held by executive personnel. For every upper management position, we observe up to three candidates to assess their potential and performance. In successor planning, WACKER distinguishes between short-term needs (up to two years) and medium-term needs (two to four years). In addition, WACKER has appointed deputies for executive personnel in the event of a lengthy absence or illness.

Evaluation: Demographic change will increase the risk of not being able to find sufficiently qualified personnel for technical and managerial positions in the medium to long term.

Risk Assessment: For 2015, we consider the risks to our personnel needs as being low. Should these risks occur, we believe that the impact on Group earnings would be low.

External Risks

Scenario: Pandemic, natural disaster, war or civil war.

Impact on WACKER: Impairment of our entrepreneurial capacity to act, production downtimes, loss of trade receivables, impact on sales and earnings.

Measures: WACKER is a global operation with production facilities and technical centers in Europe, the Americas and Asia, and about 50 sales offices worldwide. Possible pandemics, natural disasters and acts of war in individual countries or regions where we are active represent a potential risk to our business and production operations, product sales and fixed assets and, therefore, to our earnings, net assets and financial position. Our managerial entities and our sites have worked out and publicized plans and measures to minimize the effects of a pandemic on the health of our employees and on our business processes. A standardized and coordinated approach is ensured by a “pandemic preparedness plan.” The financial impact of damage to our production plants due to natural disasters is partly covered by insurance. Since WACKER has production sites on various continents, we can ensure manufacturing and delivery capability to some degree even if individual plants should fail.

Evaluation: Risks from pandemics, natural disasters, and acts of war or civil war can never be ruled out entirely.

Risk Assessment: In our view, it is unlikely that WACKER could be affected by risks from pandemics, natural disasters, and acts of war or civil war. Our preparedness plan and our internationally distributed production sites and sales offices help to limit the impact of local or regional damage on our business processes. As a result, we estimate that even if such events occurred, the impact on WACKER’s earnings would be low.