Corporate governance
3.3.4

Risk management

With a view to secure sustainable faultless operations and evolution of the Company we have implemented the risk management system that identifies, evaluates and effectively manages risks threatening Company’s reputation and operations, health of employees, environment and ownership interests of stockholders and investors. To develop the RMS the Company’s Board of Directors has adopted the Risk Management Policy(91).

The following entities participate in the risk management:

  • Board of Directors;
  • Board of Directors’ Strategy and Development Committee;
  • Executive bodies (Executive Board, General Director);
  • Owners of risks (Deputy General Directors, Heads of units with straight reporting line to the General Director);
  • Internal control and risk management section;
  • Performers of risk management measures.

RM-related goals of the Company are:

  • Reduction of possibility and/or consequences of events with negative effect on Company’s goals;
  • Prioritization of Company’s activities in the light of existing risks, incl. financial risks;
  • Preservation of assets and efficient use of available resources;
  • Achievement of operational targets;
  • Ongoing improvement of overall efficiency by analyzing and evaluating existing risks;
  • Securing of reliable performance of the Russian grid sector;
  • Achievement of optimal efficiency for the RMS of the Company and its SACs;
  • Timely and in-depth informational and analytical support of decision-taking and planning processes of the Company and its SACs.

RM-related decisions of the C-level executives comply with laws of Russia and ensure reasonable proportion of positive effect and incurred expenses. Executing RM-related decisions, the Company regularly analyzes their practical efficiency. The Company singles out the following RM methods:

  1. Insurance of property, production units, vehicles and machinery, civil liability, health services and other types of insurance.
  2. Waiver of unreliable contractors.
  3. Diversification of purchases of raw materials, materials, equipment and services to reduce Company’s dependence on certain contractors.

Risk materiality is a combination of risk occurrence possibility and value of consequences in money and other terms. Changes of risk materiality, as compared to 2015 and during 2016, are indicated by arrows:

Risk materiality
  • Crucial
  • Important
  • Moderate
Changes of risk materiality, as compared to 2015 and during 2016.
  • increased materiality of risk
  • reduced materiality of risk
  • unchanged

Industry risks:

Tariff risks
Risk description

Energy transmission and connection to electric networks are regulated by the state. The state strives to cap transmission tariffs and connection fees (including privileged fees for separate categories of consumers); such policy may limit tariff resources for investment and operating activities of the Company. Tariff setting by regulators has a direct impact on Company’s revenues, ending up with:

  1. Risk related to setting of tariffs below economically feasible levels;
  2. Risk related to revenues reduction impacted by changes of actual transmission voltage breakdown, compared to revenues approved when tariffs were set;
  3. Risk related to revenues reduction impacted by slumped actual supply on the back of energy saving, if compared to revenues in tariff and balance decisions. Company’s total supply is mostly comprised of energy transmission for industrial enterprises. If their production declines or they acquire or launch own generating facilities, it is immediately followed by significant revenues implosion;
  4. Risk related to additional cross-subsidy expenses that impedes setting of economically feasible transmission tariffs;
  5. Risks arising from evolving legislation regarding pricing of the electric sector;
  6. Risks arising from impossibility to compensate shortfall in revenue of the previous periods in full, to record shortfall in revenue from privileged connection of separate categories of filers in full due to set transmission tariff ceiling.
Minimization of consequences
  1. Close cooperation with regional regulators regarding economic feasibility of Company’s expenses.
  2. Filing with the state tariff regulators of proposals regarding balance parameters for the next year to be approved in the consolidated regional forecast balance of electricity production and supply.
  3. Execution of the cost control program.
  4. Oversight of business plan execution.
  5. Provision of well-balanced planning of operations in line with approved tariff decisions.
Risks related to technological connection
Risk description Decrease of demand for connection and transmission services against target demand, covered by tariff and balance decisions approved by the regional regulators.
Minimization of consequences
  1. Filing with the regional tariff regulators of information regarding inclusion of privileged connection expenses in full into transmission tariffs.
  2. Arrangement of tariff campaign to secure approval of economically feasible connection fees for all operations set by the legislation.
Risk related to shortfalls in income driven by cross-subsidy
Risk description

Large industrial enterprises cross-subsidy other consumers, incl. residents. Several large industrial enterprises, connected directly to UNES networks, pay transmission fees for the transmission services in cases when last-mile facilities are leased by the Company under last-mile contracts, concluded between IDGC of Urals (OAO) and FSK UES (PAO).

Minimization of consequences

Collaboration with the regional tariff regulators regarding cross-subsidy (filing of substantiated documents and calculations).

Provider-of-last-resort risks
Risk description

Since several enactments were adopted at the end of 2012 to simplify withdrawal of PoLR status from energy sales companies, the Company encountered risks related to compulsory acceptance of authorities and liabilities from PoLR energy sales companies, namely:

  1. Risks of PoLR energy sales activities arising when insolvent and dishonest consumers or socially important and non-disconnectable consumers do not pay for the services and the Company cannot limit or cease energy supply to force them to pay;
Minimization of consequences

Interaction with infrastructure companies of whole-sale energy market, law enforcements regarding settlement of PoLR debts.

Risks related to increase of overdue and bad debts
Risk description
  1. Overdue transmission receivables contribute most to the total receivables structure of the Company and have a great impact on its financial results. As a result, the Company requires crediting, driven by demanding schedule of payments (suppliers, wages, taxes, etc.), since it does not collect enough money from contractors. Risk of income deficiency due to bad payment discipline of energy sales companies or reduced consumption if compared to targets.
  2. Imperfection of mechanisms of the retail energy market explodes into controversies between grid operators and sales firms over electricity consumption and tariffs. As a result, there appears contestable and overdue receivables for electricity transmission services rendered by the Company, triggering reduced liquidity of the Company and its solvency.
Minimization of consequences
  1. Interaction with contractors to secure timely discharge of contractual liabilities and cancellation of overdue debt.
  2. Legal collection focusing on debt collection (delay fees) and creation of favorable court practices.
  3. Generation of proposals to be introduced to legislation in effect to strengthen payment discipline.
  4. Implementation of direct-supplier-contract policy.
  5. Elimination of conflict-originating reasons, reduction of disputed and overdue debt for the rendered services.
  6. Collaboration with regional instrumentalities (commissions) that monitor payments for energy and its transmission to find a mutual debt-reducing solution.
  7. Search for alternative solutions focusing on debt reduction caused by payment failures by providers of last resort (ESC).

Federal and regional risks:

Risks related to political and economic situation
Risk description Federal and regional risks are influenced by macroeconomic factors of global, federal or regional scale. These are mainly EU sanctions against Russia, resulting in high Fx volatility, restrained supply of imported materials, equipment, etc. Regional risks for the Company are mainly limited to failures of regional regulators to include some of economically feasible expenses, incurred by the Company, into tariffs. Such disregard may have a strong effect on Company’s investment program execution.
Minimization of consequences
  • We take measures to replace imported materials and equipment with domestic ones, expand access for small and medium businesses to procurements in line with the Federal Procurement Law.
  • If political and economic situation in Russia or any region is unstable and may impact Company’s performance, the Company shall take antirecession measures to reduce this negative impact (cost-cutting and cost optimization, reduction of investment plans, reduction of loans and borrowings to fund operations, well-balanced financial policy).
  • Collaboration with state agencies and other stakeholders to diminish the influence of these risks.
Geographical risks, including additional exposure to natural disasters, possible suspension of transport connection
Risk description These risks include a danger of possible losses due bad weather conditions.
Minimization of consequences The Company prepares for autumn-winter operations, each branch being certified in a proper manner. All branches have a long-term experience of successful quick liquidation of consequences from natural disasters, badly influencing facilities and network infrastructure.

Financial risks:

Risks related to the policy of the Russian Central Bank
Risk description The Bank of Russia enforces its monetary policy in an inflation-targeting mode, focusing on protection and stabilization of ruble by price support to end up with low inflation and its support. To meet the inflation target the Bank of Russia enforces a range of monetary instruments, the key rate influencing setting of banking loan rates being the core parameter.
Minimization of consequences Appreciating the necessity to raise funding in 2016, the gradually reduced key rate helped us conduct tenders and raise required funding at optimal rate to refinance expensive loans and reduce the possibility of interest rate risks.
Fx risks
Risk description Fx changes have also no impact on operations and financial profile of the Company since loans and payments to suppliers or contractors are nominated in domestic currency. However, since equipment range of the Company still has a small share of imported components, any hikes of Fx rates may cause increased prices of the procured equipment.
Minimization of consequences The Company realizes its import-substitution policy focusing on project solutions to minimize usage of imported equipment and materials. Optionally, it considers conclusion of long-term contracts with stable equipment prices for projects depending on imported equipment and materials.
Interest rate risks
Risk description The Company has loans to fund its operational and investment activities and is exposed to risks related to rate hikes. Sharp increase of interest rates on loans and borrowings may lead to increased debt servicing costs.
Minimization of consequences IDGC of Urals (OAO) takes the following steps:
  • Improvement of debt structure;
  • Oversight of reciprocal discharge of liabilities on credit contracts in force;
  • Monitoring of the debt market during debt-attraction arrangements.
  • Auctions and contracts with largest Russian banks, able to credit large sums at moderate rates.
Inflation-based risks
Risk description Inflation has a negative influence on Company’s profile. The key risks are:
  • Risk related to the loss of real value of receivables if such receivables are delayed or overdue;
  • Risk related to grown costs of contractors’ services, resulting in increased Company’s expenses.
Minimization of consequences Operating under inflation conditions the Company has developed the Enhanced Efficiency and Cost-Cutting Program. Risk related to value loss of receivables is reduced by controlling due consumers’ payments and acceleration of overdue payments.

Legal risks:

Legal risks
Risk description
  • Legal risks are related to ambiguous interpretation of legislation to end up with wrong tax charges and payments.
  • Risks of losses due to evolving legislation and mistakes in documents and poor legal services.
  • Risks of changes in Fx legislation.
  • Risks of changes in tax legislation.
  • Risks of changes in customs regulations and tollages.
  • Risks related to changes in licensing of the Company or licensing of rights for usage of limited circulation facilities.
  • Risks of changes in legislation on the energy sector.
  • Risks related to changes in court practices with regard to Company’s operations (incl. licensing) that may have a negative impact on its performance and lawsuits.
  • Risks related to the churn of consumers contributing 10% to total revenues of the Company.
Minimization of consequences
  • Our register is administered by a professional registrar (STATUS, AO) with a good background. The Company promotes a range of measures focusing on strong cooperation with its stockholders and respect of their rights and interests: disclosure of information, compliant with relevant legislation, regular meetings with stockholders to discuss vital issues of the Company’s operations, compliance with corporate procedures and bylaws.
  • The Company plans its further operations with due regard to changes in legislation and judicial practices.
  • Ongoing improvement of tax calculation methodology and oversight of its compliance with legislation in force.
  • All operations undergo compulsory legal pre-examination.
  • Transactions undergo compulsory legal pre-examination to consider whether they fall under corporate procedures stated by laws and/or charter of the Company. If such approval is required, competent bodies of the Company examine such transactions.

Risks related to Company’s operations:

Operating and technological risks
Risk description Operating and technological risks affecting reliable supply are primarily related to a severe depreciation of grid assets, problems of exploitation and operations of grid assets as well as incomplete repair program. Factors of exploitation and technological risks are:
  • accidents of natural or technogenic character;
  • decrease of efficiency of Company’s asset management system (shift in priorities regarding reliable exploitation of networks, wrong ranging of facilities to be repaired);
  • shifts to forced accident-tolerant power exchanges;
  • factors related to equipment exploitation, including violations of technical norms, errors made by personnel, breaches of dispatcher schedules and discipline.
Risk may end up with significant economic and reputation losses. Besides, these factors influence network losses and increase Company’s loss compensation expenses.
Minimization of consequences The Company takes the following steps:
  • Clearing and widening of 0.4-220-kV power line corridors, refurbishment of grid facilities.
  • Enhancement of reserve power supplies, machinery and special-purpose vehicles for emergency recovery works.
  • Program of grid facility upgrade (revamp).
  • Upgrade of communications and telematics.
  • Improvement of systems, liable for collection and transmission of information, analysis of technological failures, forecast of consequences, incl. implementation of automated recovery resource management system (ARRMS).
  • Improvement of the system managing emergency inventories during emergency recovery works.
  • Increase of quality of mobile emergency recovery teams.
  • Training, supervision and examining of operating personnel.
Investment risks
Risk description The Company invests mainly in reconstruction and upgrade of existing facilities, in measures securing reliability of operations. Investing in upgrade the Company encounters the risk of reduced reconstruction investments, caused mainly by considerable portion of expenses, incurred by the Company, to connect consumers (including privileged ones). Reduced revenues from lowered electricity consumption in the regions also may influence investment cuts. The following factors may trigger the investment risks:
  • Reduced electricity consumption in the regions;
  • Tariff decisions;
  • High level of receivables (including overdue) and, as a result, risks of investment funding failures;
  • Persisting connection volumes (including privileged connection);
  • Risks when regulators do not include shortfall in revenues from privileged connection into the tariff;
  • Lack of federal legislative innovations regarding setting of privileged connection fair value and initiatives strengthening liability of consumers;
  • Reduction of efficiency and devaluation of capex in the course of investment and R&D programs.
Minimization of consequences
  • When the Company includes investment projects into its investment program, it aligns the projects with regional development plans. The Company files investment amounts and funding with the Ministry of Energy for approval.
  • The Company cuts per-unit investment expenditures by optimizing program structure, performing in-house works, generating typical technical solutions, annual monitoring of per-unit costs of investment projects as well as by reducing project value during planning (use of consolidated indices of construction costs, analysis of project solutions at incomplete facilities).
  • The Company enhances quality of projects and investment efficiency by reducing per-unit construction costs, high loading of commissioned facilities, generating and implementing systems for comparative analysis of per-unit CIW costs and for investment management.

2016 risk importance evaluation.

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ЦЕНТР ЗАГРУЗКИ
Здесь вы можете скачать полный отчет 2016, отдельные главы в формате PDF и наиболее важные таблицы в формате Excel.
1About company
1.1Mission and strategic goals
1.2Market share
1.3Key 2016 events
2Board of directors’ progress report
2.1Letter to stockholders
2.2Production capital formation
2.2.1Network exploitation
2.2.2Electricity transmission
2.2.3Technological connection
2.2.4Development of telecommunications and IT systems
2.2.5Investments
2.2.6Innovations
2.2.7Efficacy enhancement
2.3Financial capital formation
2.3.1Analysis of revenues and expenses
2.3.2Analysis of financial standing
2.3.3Analysis of receivables and payables
2.3.4Analysis of credit portfolio
2.3.5Description of tariff policy
3Corporate governance
3.1Corporate governance practices
3.2Corporate governance system
3.2.1General meeting of stockholders
3.2.2Board of Directors
3.2.3Board of directors’ committees
3.2.4General director and executive board
3.2.5Remuneration and compensation policy
3.3Oversight system
3.3.1Board of internal auditors
3.3.2Independent auditor
3.3.3Internal control
3.3.4Risk management
3.3.5Security and anti-corruption
3.4Investor and stockholder relations
3.4.1Shareholder capital structure
3.4.2 Shareholder rights
3.4.3The company and stock market
3.4.4Communications with market participants
3.4.5FAQ
3.4.6Allocation of profit
4Stakeholder
4.1Human resources management
4.2Customer support
4.3Supplier relationship management
4.4Public and goverment relations
4.5Environment protection
5Appendices
5.1Prepared under Russian accounting standards
5.2Prepared under international financial reporting standards
5.3Related-party transaction report
5.4Corporate governance code compliance report
5.5References
5.6Abbreviations and acronyms