4.2

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 PolicyNo.75-ref, supported by a range of RegulationsNo.63-66-ref.

The following entities participate in risk management:

Board of Directors authorized Board of Directors Committee
Executive bodies (Executive Board, General Director) risk owners
unit, liable for risk management performers of risk management measures

Key risk factors

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. Market diversification to smoothen contributions of consumers to overall revenues structure.
  3. Waiver of unreliable contractors.
  4. Diversification of purchases of raw materials, materials, equipment and services to reduce Company’s dependence on certain contractors.
  5. Waiver of investment projects with potentially high risks.

We evaluated risk materiality and changes in the light of existing risk passports and expert evaluations in line with the following scales:

Risk materiality
Crucial 1
Important 1
Moderate 1
Changes of risk materiality, as compared to 2014 and during 2015
Increased materiality of risk 1
Reduced materiality of risk 1
Unchanged 1

Industry risks:

1 1 Tariff risks
Risk description

Energy transmission and connection to electric networks are regulated by the state. The state strives to cap transmission tariffs; 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 revenues reduction impacted by changes of actual transmission voltage breakdown, compared to revenues approved when tariffs were set;
  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, it is immediately followed by total supply implosion;
  4. Risk related to additional cross-subsidy expenses that impedes setting of economically feasible voltage-differentiated tariffs;
  5. Risks arising from evolving legislation regarding retail pricing of electric and thermal energy.
Minimization of consequences
  1. Close cooperation with regional regulators regarding economic feasibility of Company’s expenses;
  2. Cooperation with the Russian Antimonopoly Agency regarding approval of consolidated production and supply balance parameters at the levels expected by the Company;
  3. Cooperation with the Russian Antimonopoly Agency regarding revisions of laws of Russia on pricing in energy sector, etc.;
  4. Execution of the cost control program;
  5. Oversight of business plan execution;
  6. Cooperation with local authorities regarding long-term development programs and approval of Company’s investment programs and their funding.
1 1 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 regional regulators.

Minimization of consequences
  1. Interaction with regional regulators to include all privileged connection expenses into transmission tariffs;
  2. Joining Rosseti’s leg­islative initiatives to considerate interests of grid companies; immediate required revisions to eliminate or reduce regulation-related risks;
  3. Arrangement of tariff campaign to secure approval of economically feasible connection fees for all operations set by the legislation;
  4. Measures to enhance connection efficiency were generated and consolidated into the corporate connection roadmap of IDGC of Urals (OAO);
  5. Targets regarding enhanced productivity and reduced number of overdue contracts were set for all branches.
1 1 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
  1. The Federal Tariff Service reduces cross-subsidy by using a higher LUT for residents’ tariffs to end up with decreased chargeable load. With this in mind, the Company should cooperate with regulators to rise transmission tariffs for residents;
  2. Introduction of “social norm” scheme to services rendered to residents and similar consumers.
  3. Prolongation of “last-mile mechanism” till 2017 in the Chelyabinsk region.
1 1 Provider-of-last-resort risks
Risk description

Since several enactments were adopted at the end of 2012to 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;
  2. Risks arising when consumers do not conclude new supply contracts after PoLR replacement and non-contracted consumption increases;
  3. Risks arising when Company’s PoLR-related expenses exceed gross revenue requirement stipulated by sales premiums;
  4. Risks related to lack of end-user data bases, special software or skills to bill end-users as well as related to missent payments for consumed energy.
Minimization of consequences
  1. Cooperation with federal and regional authorities, mass media, wholesale market participants, law enforcement agencies and companies with withdrawn PoLR status with regard to functioning as PoLR and debt reconciliation.
  2. Joining Rosseti’s legislative initiatives on optimization of PoLR replacement procedure.
1 1 Risks related to increase of overdue and bad debts
Risk description

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.

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, incl. increase of delay fees;
  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);
  8. The Company realizes Board-approved programs for prospective development of retail market metering systems.

Federal and regional risks:

1 1 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
  1. 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.
  2. 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).
  3. Collaboration with state agencies and other stakeholders to diminish the influence of these risks.
1 1 Geographical risks
Risk description

Risks related to geographical features of the country or region in which the Company is registered as a taxpayer and/or operates, incl. major hazards of natural disasters, possible suspension of transport connection due to remoteness or isolation of lands, etc.

Minimization of consequences

The Company prepares for autumn-winter operations, each branch being certified in a proper manner.

Financial risks:

1 1 Risks related to the policy of the Russian Central Bank
Risk description

We expect the Bank of Russia to continue its moderate monetary policy. The economy stabilizing and inflation expectation abating, the Bank of Russia shall consider smoothing of the policy to reduce inflation. Supporting its flexible Fx rate program the Bank of Russia shall waive domestic Fx operations, except for cases to retain financial stability. Apart from strengthened rate controllability, transition to flexible Fx rates will also result in desensitization of domestic economy to outer challenges and shocks, smoothened by Fx changes.

Minimization of consequences
  1. Monitoring and oversight of expenses to achieve equilibrium in balance of payments.
  2. Preparation of proposals to be filed with Rosseti (PAO) with a view to generate grid sector stability measures for the MEDT of Russia.
  3. Generation of anti-recessionary measures to secure financial stability
1 1 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.

1 1 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

Auctions and contracts with largest Russian banks, able to credit large sums at moderate rates.

1 1 Inflation-based risks
Risk description

Inflation has a negative influence on Company’s profile. Key risks are:

  1. Risk related to the loss of real value of receivables if such receivables are delayed or overdue;
  2. Risk related to grown costs of contractors’ services, resulting in increased Company’s expenses.
Minimization of consequences

Inflation forces the Company to oversee that the growth of its expenses is within target limits. Risk related to value loss of receivables is reduced by controlling due consumers’ payments and acceleration of overdue payments. If inflation increases, real value of ruble-nominated liabilities decreases serving as a favorable factor for the Company.

Legal risks:

1 1 Legal risks
Risk description
  1. Legal risks are related to ambiguous interpretation of legislation to end up with wrong tax charges and payments.
  2. Risks of losses due to evolving legislation and mistakes in documents and poor legal services.
  3. IDGC of Urals (ОАО) is exposed to risks when stockholders may litigate major and related-party transactions of the Company (if such transactions have no proper preapproval of the Board or General Meeting or approved in improper manner).
  4. Risks related to shareholder relations are comprised of:
    • risks related to shareholding;
    • greenmailing risks;
    • risks of unfriendly stockholder actions to obstruct general meetings.
  5. Risks of changes in Fx legislation.
  6. Risks of changes in tax legislation.
  7. Risks of changes in customs regulations and tollages.
  8. Risks related to changes in licensing of the Company or licensing of rights for usage of limited circulation facilities.
  9. Risks of changes in legislation on the energy sector.
  10. 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.
  11. Risks related to the churn of consumers contributing 10% to total revenues of the Company.
Minimization of consequences
  1. Our register is administered by a professional registrar with a good background, operating on the stock market since early 1990-s and occupying tops of the registrar ratings.
  2. The Company maintains strong cooperation with its shareholders (disclosure of information complied with relevant legislation) as well as conducts regular meetings to discuss vital issues of the Company’s operations with shareholders.
  3. The Company plans its further operations with due regard to changes in legislation and judicial practices.
  4. The Company implements the strategy of grid asset consolidation that will potentially increase energy transmission in the service area due to registered ownership.
  5. Ongoing improvement of tax calculation methodology and oversight of its compliance with legislation in force.
  6. All operations undergo compulsory legal pre-examination.
  7. 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.
  8. The Company implements the strategy of grid asset consolidation that will potentially increase energy transmission in the service area due to registered ownership.

Risks related to Company’s operations:

1 1 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 investment program. Besides, 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
  1. learing and widening of 0.4-220-kV power line routes, refurbishment of grid facilities;
  2. Enhancement of reserve power supplies, machinery and special-purpose vehicles for emergency recovery works;
  3. Program of grid facility upgrade (revamp);
  4. Upgrade of communications and telematics;
  5. 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);
  6. Improvement of the system managing emergency inventories during emergency recovery works;
  7. Increase of quantity of mobile emergency recovery teams and their equipment quality;
  8. Implementation of the program decreasing traumatism risks on grid facilities;
  9. Training, supervision and examining of operating personnel;
  10. Implementation of the insurance program;
  11. Implementation of the energy-saving and enhanced energy efficiency program.
1 1 Investment risks
Risk description

The Company invests to upgrade its obsolete facilities, develop grid complex and commission new facilities. Investing in upgrade and extension, the Company encounters the risk of reduced investment program that does not cover Company’s needs. Current environment forced the Company to weaken its investment activities.

The following factors may give rise to such investment risks as:

  1. Changes of credit rates;
  2. High receivables ratio (incl. overdue);
  3. Reduction of efficiency and devaluation of capex in the course of investment and R&D programs;
  4. Insufficient funding (own or loaned) to comply with RAB requirements.
Minimization of consequences

To minimize the risks the Company takes the following investment-optimizing steps:

  1. When the Company includes investment projects into its investment program, it aligns the projects with regional development plans. The Company reduces its investment program and approves investment amounts and funding by the authorized executive body.
  2. The Company cuts per-unit investment expenditures by optimizing program structure, reducing investments, 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, evaluation whether completion of contracted facilities is required), in line with the strategyNo.1-ref.
  3. 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, for innovation and investment management.

Investment programs of the Company demand immense funding (own or loaned), complying with RAB requirements. This is a factor initiating investment risks. To reduce it the Company secures current payments and reduces receivables.

1 1 Reputation risks
Risk description

Reputation risk is a risk arising from poor relations with mass media, wrong positioning of the Company, public disclosure without relevant approval of the unit, liable for information policy. This may result in deterioration of Company’s reputation and profile, reduction of market value, C-level personnel removal solutions. Risk factors are:

  1. Inefficient information policy:
    • Disclosure of information is fragmentary, doubtful, hard-to-reach, irregular and ill-timed;
    • Failure to find a reasonable balance between transparency and protection of commercial secrets;
    • Wrong disclosure vectors;
    • Unstable interaction with mass media;
    • Mistakes in Company’s releases;
    • Waiver to comment on potentially negative topics;
    • Disclosure of information and comments from employees with no proper skills, knowledge and approval of PR department;
    • High proportion of negative releases;
    • Biased and incompetent treatment of sector problems by mass media.
  2. Overdue and fragmentary disclosure of information as an issuer and natural monopoly.
  3. No protection of commercial or state secrets or other information protected in line with laws of Russia.
  4. Failure to comply with the rules for disclosure and use of insider information, set by Company’s bylaws.
  5. Labor disputes (controversies among employees, falling into public domain, may lead to reduced productivity and strikes, credibility gaps between authorities and Company);
  6. Failure to discharge liabilities (credibility gap between business circles and Company, increased public negativity and attention of regulators);
  7. Poor corporate information system (inefficient protection against data leakages, fraud, breaches, viruses and sabotage).
Minimization of consequences
  1. Prioritization of reputation aspects, in-depth analysis of risk management priorities.
  2. Strict compliance with Company’s information policy setting forth PR rules.
  3. Proper reaction to Company’s process upsets or other technological disturbances.
  4. Consistent positive messaging about Company’s operations.
  5. Disclosure of at least 600 releases on Company’s operations, at least 8.0 thous. positive media mentions, achievement of KPI “Quality of messaging” at a minimum of 5% (negative mentions/total mentions).
  6. Single Regulations for PR Response to Accidents will be prepared by Rosseti (PAO), Company’s PR response plan will be updated to comply with it.
  7. Timely disclosure of information as an issuer and natural monopoly.
  8. Participation in large Russian exhibitions, supported by regional authorities, to arrange efficient dialogue with business partners and form a positive image of the Company.
  9. Regular control of compliance and financial monitoring for reputation management.
  10. Timely congratulations of authorities, partners and other stakeholders to form a positive image of the Company.
1 1 Strategical risks
Risk description

Strategic risk is a risk of losses due to mistakes or problems from wrong strategy-related decisions. Strategic management of the sector is consistent with the energy strategyNo.76-ref, focusing on max use of natural energy resources and sector potential to retain sustainable growth of the economy, to improve quality of life of residents and to facilitate the strengthening of global positions.

Key factors of strategic risks are:

  1. Poor compatibility of strategies, programs and plans for regional development with strategic documents of the energy sector (master plans, industrial strategies, federal target programs);
  2. Federal and regional network bottlenecks;
  3. Poor development of small-scale generation and low proportion of local small generators in total regional power balances;
  4. Many regions still do not have own regional power, energy-saving and thermal power urban development programs.
Minimization of consequences

Rosseti (PAO), as a major stockholder of the Company, shall prepare a long-term development strategy.