The Company performs the management of risks arising in the course of financial and business operations in accordance with the Risk Management Policy, the new version of which was approved by the Board of Directors on August 20, 2014, Minutes of August 20, 2014 No. 18/14.
Below, please find a map of risks of IDGC of Centre indicating the level of risk significance, which is the combination of risk probability and consequences to the Company in monetary and other terms, as well as the dynamics of risk significance compared to 2013 and for 2014.
|Level of risk significance||Dynamics of risk significance|
|Critical||Significant||Moderate||Growth of risk significance||Reduction of risk significance|
|No.||Name of the risk||Risk description||Measures to minimise the consequences of risk||Evaluation of risks and dynamics|
|1||Operating (technological) risks||Risks posed by the insufficient funding for repairs and maintenance and a shortage of investment funds, by the wear and tear of the grid, wrongful usage of the grid equipment, abnormal operating conditions and accidents, which may result in breakdowns (failures) of the grid equipment and irreparable damage to the installations and buildings||
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:
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.
|2||Regulatory risks stemming from state tariff regulation||Electricity transmission through distribution networks and connection to the power grid are regulated by the state. Thus, the formal approval of tariffs for the Company directly affects the amount of revenue||
To minimise risks, the following measures are taken:
|3||Environmental risks||Environmental risks are possible harmful emissions from fixed facilities and transport systems. Environmental risks can also consist in possible leakage of transformer oil at substations lacking oil receivers into rivers and lakes with surface water run-off. This can lead to oil contamination of fisheries||
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
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
|4||Profit risks caused by lack of payment discipline of power supply companies||The main risk involves the probability of increased receivables resulting from the breaches of the payment discipline of ultimate customers and the need for additional credit resources. There is a risk of cash shortage at the Company’s accounts caused by the time gap during the payment from the retailer and the need to finance current operations||To reduce the risk and minimise its consequences, managers are conducting a prudent credit policy and the policy of managing receivables to optimise their size and promote debt collection. The Company also does claims-related work to collect overdue receivables and implements a policy presupposing direct contracts with consumers of electricity|
|5||Risks associated with the floating maximum level in electric energy transmission services||The risk is expressed by the following circumstances:
||To minimise the risk, the following steps are being taken:
|6||Risks associated with a lack of qualified workforce in the industry||The industry is currently witnessing a reduced inflow of qualified personnel. If this current trend carries on, the Company may face a shortage of qualified personnel in its service areas||In order to minimise this risk, the Company is undertaking the following steps:
|Country and regional risks|
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
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
|8||Regional risks||Regional risks for IDGC of Centre generally include:
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
|9||Inflationary risks||Inflation could hurt the Company’s financial and economic performance through a drop in the real value of receivables, rising interest rates payable on loans, and higher construction costs under the investment programme||The current inflation will not have a significant impact on the Company’s financial state. According to plans of the Central Bank of Russia to curb inflation, and to its forecast scenario indicators for the closest future, we may believe that inflation will not have a considerable effect on the Company’s financial performance|
|10||Currency risks||Any unwelcome fluctuations in the foreign currencies — Russian rouble rate could affect the indicators of the Company’s operating efficiency and investment effectiveness||The Company is not highly susceptible to currency risks, because operations with its counteragents are carried out in Russian roubles only. Nonetheless, since the Company imports some goods and equipment, a considerable leap in the exchange rate could make imports more expensive. The Company is therefore seeking to replace imports with locally manufactured goods and to sign long-term contracts to preclude any rise in the cost of the acquired goods|
|11||Interest rate risks||Changes in the Central Bank of Russia refinancing rate reflect the macroeconomic situation and affect the cost of using credit facilities. Growing borrowing costs could trigger unexpected increases in the cost of servicing the Company’s debt||In order to minimise the interest rate risk, the Company conducts a prudent borrowing policy aimed at building a balanced loan portfolio and minimising the cost of servicing its debt|
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
|In order to reduce the probable risk of these developments, the Company regularly reviews its capital structure and determines the best terms of borrowing, working at the same time to improve the structure of its floating capita|
|13||Risks posed by changes in tax legislation||
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
|If taxation schemes or terms are changed, the Company will integrate these changes in its financial and economic activities|
|Risks linked to the Company’s activity|
|14||Risks posed by the Company’s claims currently in litigation||In 2013 a number of regional retail companies operating in the service area of IDGC of Centre and being service consumers of the Company, were deprived of the SLR status. Due to the insolvency of those organisations, both lenders and debtors themselves filed bankruptcy petitions||As a result, IDGC of Centre laid down the requirement to include retailers’ debts in the list of creditors’ claims. However, it is unlikely that the requirements of the Company in the insolvency process will be satisfied in full by the bankrupt’s assets|