HEALTHY FISH LTD

Background

Healthy Fish Ltd is a company listed on the JSE Ltd under the Food Processing Sector. The company is vertically integrated with a number of wet fish trawlers, freezer trawlers and processing factories. The company catches and processes fish for the local and domestic market. The company regards each type of trawler and the processing plants as separate business units. All the fisheries have been certified as sustainable and well managed by the Marine Stewardship Council (MSC).

The catch is processed on board on the freezer trawlers, where skilled teams of fish workers chill, clean, fillet and package the catch as soon as it is brought aboard. These processes ensure the freshness and preservation of the delicate taste of the fish. The freezer trawlers remain at sea for up to 40 days. On-board processing facilities are fully compliant with South African food safety regulations for fish and fishery products and with the specifications of the Hazard Analysis Critical Control Points (HACCP), BRC Global Standards and IFS. The accreditation with international bodies is critical for the maintenance and development of the company's international markets. On wet fish trawlers, the catch is preserved on ice and then transported to two shore-based factories for further processing. The company's fishing fleet berths alongside a dedicated quay in Cape Town harbour where a full complement of personnel to service, equip and maintain the fishing fleet.

The primary processing factory is based in Cape Town, where the processing of natural cuts such as fillets, steaks and loins is carried out. These products are packaged for the retail or foodservice markets and are sold both locally and internationally. Retail products are packaged under the Healthy Fish brand and the under the brands of the company's international customers. The primary processing factory is equipped with technologically advanced fish processing equipment and the production personnel are highly skilled and well trained. The facility is capable of processing 24 000 000 metric tonnes of fish per annum.

Value-added products include products such as par-fried, char-grilled, coated and microwaveable seafood. Products are processed at the company's value-added processing factory in Cape Town. According to an industrial survey conducted by Department of Fisheries, the value-added factory is one of the most technologically advanced seafood processing plants in the Southern Hemisphere. The capacity of the value-added factory is 7 500 000 tonnes per annum.

Report on operations

The electricity supply to the Western Cape was severely disrupted in 20X5 due to problems experienced with the national electricity grid. The electricity usage for the factory is approximately 0.5kWh per tonne for the main processing plant and 0.25kWh for the value added plants. Healthy Fish pays R1 500 per kWh. Total electricity required by Healthy Fish for the factories is 157 500kWh per annum, which under normal conditions can be purchased from the national grid. The electricity purchased from the national grid was for some months below from what was required for full production. Healthy Fish supplemented the shortage from their own generators.

The running cost to produce 1kWh with the diesel generators was R3 600 for 20X5. The cost per diesel generator was R150 000, including installation. The generators are imported, with a purchase price of 10 000 at an exchange rate of R14.55. Currently, one generator is installed at the processing plant and one generator at the value add plant. The company has a diesel storage capacity of 2 000l at each of the plants. Fuel consumption is approximately 100l per kWh per generator. Each generator can be run for a maximum of 10 hours per day. The company also has an agreement with a fuel supplier to have fuel on standby when needed. The fuel can be provided as follows: 1 000l within 2 hours and up to two days for 20 000l.

The transport industry experienced a prolonged national strike for higher wages in 20X5, which was initially planned for two days, but increased to three weeks due to intimidation and posturing by the unions for position caused by strife within the federation of trade unions. The impact was more profound in the transport industry as the unions were of the opinion that the cut in the supply to petrol stations and fuel depots across the country will create more awareness of their struggle, score political points and take the business owners to task. The impact of the fuel supply had a significant impact on the company as the backup generators were not able to run at full capacity.

Financial results

The business was severely disrupted by unreliable electricity supply and the processing units were not able to operate at full capacity. A large portion of the catch of the wet trawler fleet was wasted due to the inability of the processing plants to process the fish.

Additional information

Sales

The company can sell the full production per annum. Products from the processes plan is sold at R30 per kg and from the value add plant is sold at R50 per kg.

Operating costs

The operating cost of the wet fish trawlers are R500 000 000 per annum. Salaries related to processing for the wet fish trawler catch is R30 000 000 per annum. Electricity cost is based on the prices charged by the national grid. The backup generators are used in the case of electrical shortages from the national grid.

Warehouse

Due to the electricity shortages, R13 000 000 of stock in the warehouse was damaged in 20X5. In terms of the insurance policy, this event type is insured and has an annual limit of R10million. The company submitted five successful claims for soiled stock.

Insurance cover

The company uses insurance to transfer the financial consequences of certain, specified risk to an insurance company. The current premium is R2.5million per month and the policy conditions and premium is reviewed on an annual basis. A straight deductible of R100 000 is applicable for all covered events related to fish production and storage. Business interruption insurance with recovery periods less than 18 months such as disruptions in electricity supply has an annual limit of R15 000 000 per annum without any deductibles applicable.

Deposit rates

Cash deposits earn 5% per annum.

Board fees

Risk related fees for non-executive directors are R20 000 per meeting and four meetings were held with all the non-executive directors attending the meetings. The risk committee is chaired by a non-executive director with another two non-executive directors as standing members. The chair receives R40 000 per meeting.

Risk appetite

The board has reported to shareholders that the company has a low risk appetite, has identified all the risk and have the appropriate risk management and risk financing strategies in place.

Risk management department

The actual cost of the risk management department is R8 500 000.

ASSIGNMENT QUESTIONS [25 MARKS]

For the 20X5 financial year:

1. Determine the financial consequence of the electricity shortfall for the processing plant. (3 Marks)

2. Determine the financial consequence of the electricity shortfall for the value add plant. (3 Marks)

3. Calculate the cost of risk. (9 marks)

4. Classify the cost in terms of the cost of risk framework. The Chief Risk Officer must include the cost of risk for the company in a board pack and the cost of risk will be presented in one page. The purpose to enable the committee to make informed decisions on the adequacy of the insurance policy and risk retention strategies. (5 marks)

5. Evaluate the risk retention strategy of the company based on the cost of risk framework. (5 marks