Risk management

All major facilities of the Company are insured to reduce the negative effect of risk events and minimise operating risks. Furthermore, a whole range of measures is implemented to guarantee the trouble-free appropriate work of the equipment and facilities:

1. An automated asset management system to optimise the work, maintenance and repairs of grid assets and to regulate investment has been introduced.
2. Innovative equipment is being introduced as part of modernisation of grid assets to reduce the wear and tear of power facilities.
3. A long-term reliability programme has been developed and implemented to ensure trouble-free work and system reliability.
4. Tendering is held for service and procurement organisations in order to achieve higher quality of services and materials, increased responsibility of contractors and reduced costs per unit.

Industrial risk management of the company is conducted in accordance with federal laws on industrial safety, as well as under control of compliance with industrial safety requirements.

To minimise risks, the following measures are taken:

1. Work is being carried out with Russia’s tariff regulatory bodies to provide compensation for the shortfall in income of the grid operators caused by the implementation of Federal Law No. 308-FZ, through the additional tariff growth for other consumers beyond the forecast by the Ministry of Economic Development.
2. Regular work on economical justification of the expenses included in the tariffs is being carried out. This comprises the inclusion of the shortfall in income of the previous periods as well.
3. Systemic efforts to reduce costs and optimise the investment programme are made.
4. Measures are taken in cooperation with the Federal Service on Tariffs and tariff regulating regional bodies to amend the current legislation of the Russian Federation in the area of price setting for natural monopolies aimed at taking into account the interests of grid operators while setting tariffs for the retail market

The Environmental Policy of IDGC of Centre approved by the Board of Directors is a tool to reduce ecological risks and to improve environmental security by ensuring reliable and environmentally friendly transmission and distribution of energy and an integrated approach to the use of natural energy resources. In the course of realisation of the environmental policy, special attention is rendered to the importance of recycling various hazard classes of waste. Such an approach significantly reduces the risk of the adverse impact of toxic substances on the soil and, consequently, on human health.

A promising long-term programme of IDGC of Centre contributes to environmental risk reduction through replacing 6–10 kV oil circuit breakers with vacuum circuit ones and installing reclosers, which reduces the technological cycles of dielectric oils and exclude their contact with the environment and the necessity to bear the costs of recycling of the used oils.

As part of the activities envisaged by the long-range programme of technical renovation and reconstruction, the Company is carrying out the replacement of electrical components and assemblies with advanced equipment designed to ensure high environmental safety

• some regions and municipal entities of the Russian Federation have no relevant economic development plans, which are expected to indicate the dynamics of energy consumption growth for a certain period;
• power consumption of the Russian economy in general may be reduced by the adoption of Federal Law No. 261-FZ On Energy Saving and Increasing Energy Efficiency and Amendments to Certain Legislative Acts of the Russian Federation dd. November 23, 2009 and by the introduction of social norms of consumption;
• power consumption of the Russian economy may be reduced due to a future economic recession/crisis;
• power consumption may be reduced due to a downturn in the markets of major industrial consumers;
• a drop in consumer capacity caused by changing the day and night load schedule curve round-the-clock (load shift to the night hours without a decrease in consumption)

• cooperation with the Russian regional state governments and local authorities to develop mid- and long-term plans for the economic development of the regions;
• diversifying the services portfolio of the Company

• the Company supports regional secondary and higher institutions that train personnel for the industry, creates and renders financial assistance to the programmes aimed to train power engineering specialists with subsequent employment of the qualified specialists;
• The Company implements programmes to boost motivation and reduce staff turnover, and seeks ways to offer incentives other than financial ones

Financial problems or stronger fear of investment risks in emerging economies have reduced the foreign investment influx to Russia, caused an outflow of foreign capital, and had an adverse impact on the Russian economy. Moreover, the Russian economy is particularly vulnerable to changing global prices for natural gas and oil. Also the transit problem of Russian gas to the European countries through the territory of Ukraine still remains. The dynamics of growth of consumer prices in the country is still a problem. The sharp increase by the RF CB of the key rate has substantially increased the cost of borrowings. All these events can reduce the access of IDGC of Centre to capital and have a detrimental effect on customers’ purchasing power. Also today, the Russian Government is implementing the policy of containing the growth of tariff for products and services of natural monopolies, which can lead to the shortfall in funds for the Company’s investment programme. Moreover, in the mid-term some amendments will be made to the legislature in part that relates to the measures to tackle the problem of cross-subsidisation in the power industry.

Currently the sovereign rating of the Russian Federation has decreased due to the economic situation and is at the “BBB” level (in the sovereign currency, as rated by Standard & Poor’s), “BBB-” (by Fitch) with “negative” outlook, and “Baa3” (by Moody’s) with “negative” outlook

To minimise the risks mentioned above, IDGC of Centre has been working hard to reduce internal costs, streamline the investment programme and carry out a prudent borrowing policy.

Political risks are beyond the Company’s control because of their scale, but the Company seeks to minimise them by active cooperation with superior and regulatory organisations to jointly affect the development of the industry

• failure of the state agencies in charge of tariff-setting to accept expenditure proposed by the Company as economically justified and integrate it into the tariff;
• reduced energy consumption by large regional plants and manufacturing facilities;
• a possible change of regional authorities along with the change of the existing model of cooperation. The most obvious consequences for the Company in these cases are: low regional tariffs lacking economic justification, and absence of the regional authorities’ support for the integration of IDGC of Centre into the municipal power grid.

The geography of the region in which the Company operates entails the risk of natural disasters in autumn and winter seasons (AWS)

To minimise the influence of regional risks on the realisation of the investment programme, the Company cooperates with the state authorities and other stakeholders in order to monitor and control the choice of stakeholders in respect of their actions in connection with the Company’s investment projects. The company conducts activities to optimise financing of its investment programme by reducing internal costs.

The Company is also striving to cooperate with regional and local authorities in working out long-term development programmes in the regions where the branches operate, interacts with superior institutions in respect of its regional activities. The Company makes a set of steps to prepare the grid for the AWS, with certificates of preparedness to AWS issued for each branch.

Efforts are constantly made to speed up the relief operations after the disaster in autumn and winter.

Managers are to submit to the Board a report on the preparations for the autumn and winter, as well as a performance report after the AWS

The Company’s activity is exposed to risks leading to the dry-up of its liquidity and undermining financial stability. Cross-subsidisation among consumer groups and poor payment discipline in the retail energy market expose the Company to the most serious risks.

The state’s tariff policy to curb the tariff rise for the public brings about increased cross-subsidisation. The cross-subsidisation mostly affects large consumers that have signed last mile contracts.

The shift of big industrial consumers to conclude direct agreements with FGC UES generates shortfalls in the Company’s income.

Poor payment discipline of the contractors results in high accounts receivable, including overdue payments. The main factors affecting the payment discipline were the discrepancy in contracted capacity with retail companies, as well as the improper use of funds for electricity supply by the companies deprived of the SLR status.

The Company can be unable to meet financial and other conditions stipulated in loan agreements should these risk factors come into play

Tax regulations often have vague wording or include terms that are not clearly and legally defined. Moreover, the official clarifications exercised by Ministry of Finance and the Federal Tax Service of the Russian Federation occasionally fail to fully cover tax legislation.

Tax authorities establish the rules and mechanisms for compiling and issuing tax statements. They are entitled to impose additional taxes and fees, to introduce the late payment charge, to impose significant penalties, which seriously increases tax risk probability. The Company complies fully with the tax legislation relevant to its operations