Risk management

State policy in tariffs lies in inflation control and stipulates revisions of regulated tariffs for 2017-2019 below actual inflation on the back of advanced wholesale price hikes. This creates a risk of regulators’ setting tariffs below economically feasible levels.

1. Close cooperation with regional regulators regarding economic feasibility of Company’s expenses.
2. Filing with the Federal Antimonopoly Service of proposals regarding balance parameters for the next year to be approved in the consolidated regional forecast balance of electricity production and supply.
3. Preparation and filing with the Federal Antimonopoly Service of initiatives related to improvement of Russian laws on pricing in the energy sector.
4. Challenging of tariffs set in contravention of the law and infringing Company’s rights and legitimate interests in administrative and judicial proceedings.
5. Execution of the cost control program, providing well-balanced planning of operations in line with approved tariff decisions.
6. Cooperation with local authorities on preparation of long-term territorial development programs and approval of funding volumes and resources for Company’s investment programs.
7. Discharge of liabilities pursuant to investment and energy efficiency programs.
8. Cooperation with regional tariff regulators on preparation of supporting documents related to required ultimate electricity transmission tariffs.

The risk appears as a result of reduced consumption and optimization of external power supply by large consumers.

1. Monitoring of electricity consumption by large consumers that plan to construct and/or acquire generating and alternative facilities, generation of a 12M net supply forecast, adjusted for current electricity consumption.
2. Discussion and approval by consumers of target consumption volumes to be included into next year’s contracts and filed with the tariff regulators (with a view to prevent approval of volumes ignoring current consumption dynamics).

The risks derive from possible deficit of resources to fund activities related to execution of connection contracts; filers’ failure to discharge their liabilities related to connection contracts; reduction of maximum capacity in connection requests by filers. These factors may have an adverse impact on connection revenues.

1. Monitoring of requests to be used in generation of next year’s forecast demand for connection.
2. The Company polishes its business processes related to processing of connection requests and execution of connection contracts. Thus, we deployed the automated connection control system designed to optimize connection-related procedures for employees.
3. We prepared measures focusing on enhancement of connection efficiency, included into the corporate connection-related roadmap.
4. We prepared control matrices for “Connection” process, stipulating causes of trouble, factors, preventive actions, control procedures and designated persons liable for each connection process stage.
5. We also provide methodological support, incl. arrangement of videoconference calls with branches to discuss issues related to organizational management in units engaged in connection process due to statutory revisions and revealed connection-related faults, opinion of courts and other watchdogs.
6. The Company cooperates with regional tariff regulators providing grounds for inclusion of privileged connection expenses into transmission tariff, as stated by the law.
7. The Company also participates in legislative initiatives promoted by PAO Rosseti and NP TSO Association to cater to the needs of grid companies, to promptly introduce required amendments to eliminate or reduce risks from regulated operations.
8. The Company conducts a tariff campaign focusing on enforcing approval of economically justified connection fees for all kinds of works, subject to statutory regulation.

The risk derives from still evolving mechanisms for stimulation of consumers to pay on time for electricity transmission services and adverse effect of macroeconomic factors (lowered paying capacity of consumers).

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, including 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 implements Board-approved programs related to perspective development of metering systems on retail energy market in grids.
9. Filing of statements with federal executive bodies, supervisors and watchdogs.
10. Cooperation with Rosfinmonitoring units, court bailiffs service.
11. Filing of reports on persistent non-payers with law enforcements to decide on prosecution methods.

The risks derive from lowered economic activity of the regions of operation, increased cost of borrowings, impacted, in its turn, by unstable global environment, international sanctions, downgrade of credit ratings and inflation hikes. These factors may have an adverse impact on Company’s revenues and market value.

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.

The risks may arise from possible illegal interference into Company’s performance, incl. terrorist attacks (transnational and national terrorism). These attacks may have an adverse effect on the Company’s operations.

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). The Company actively collaborates with state agencies and other stakeholders to diminish the influence of these risks. Possibility of a military conflict and announcement of the state of emergency in the country or regions is low. In case of a military conflict the Company may encounter risks when its property, plant and equipment are destroyed. These risks are covered by insurance.

These risks derive from emergencies as a result of natural disasters (hurricanes, tropical downpours, floods, snow storms, icing, fires, explosions, etc.), disrupting electricity supply and transport connection in the region.

Regions of the Company’s service area have a developed transport infrastructure and are not exposed to the risks related to transport connection stoppage due to their remoteness and/or inaccessibility.

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.

An adverse impact on the Company’s performance due to changes of Fx rates.

Borrowings and payments with customers and suppliers are nominated in Russian currency.

But still, in light of possible imported components in goods or equipment purchased by OAO IDGC of Urals, 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.

Influence on possible increase of Company’s costs related to capital raising to fund its investment programs.

Improvement of debt structure depending on current credit conditions; 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, diversification of credit ceiling portfolio.

Influence of CPI growth on interest payable, costs, profitability and, as a consequences, financial profile and obligations fulfillment of the Company.

• Operating under inflation conditions the Company has developed the Enhanced Efficiency and Cost-Cutting Program.
• The Company concludes long-term contracts (3-5 years) with fixed prices.

Risks related to changes in legislation, court practices on Company’s operations and balance of interests of other energy sector players.

• 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.
• Our register is administered by a professional registrar (STATUS, АО).
• The Company enforces its strategy related to consolidation of grid facilities on its service area that may increase electricity transmission volumes in the long run.

Risks related to regulator’s sanctions as a result of possible non-compliance of Company’s operations with legislation, local regulatory documents and other enactments, subject to mandatory compliance.

• The Company monitors legislation and all introduced revisions.
• 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.
• Challenging of tariffs set in contravention of the law and infringing Company’s rights and legitimate interests in administrative and judicial proceedings.
• The Company regularly conducts compliance control and financial monitoring to manage its reputation.
• The Company has adopted a set of bylaws regulating anti-corruption norms, their evaluation and implementation, settlement of competing interests, whistleblowing statement processing, Corporate Ethics and On-Duty Conduct Code.
• The Company has established a unit liable for anti-corruption monitoring.
• An anticorruption clause is included in all contracts concluded by the Company.
• Expert (anti-corruption) evaluation of procurement participants.
• Corruption whistleblowing hotline.
• Oversight of timely disclosure of the Company’s insider information. Inclusion of a section on keeping insider information confidential in contracts under which insider information is to be processed.

The risk may arise from possible failures to discharge liabilities before customers and contractors. The risk may derive from possible loss of effective communications with various target audiences, incl. as a consequence of failures to execute key production plans and discharge liabilities before customers and contractors in full.

• Development of Company’s stakeholder-related priorities to define priorities related to reputation management and in-depth analysis of risk management priorities.
• Strict compliance with the Company’s Regulations on the Uniform Communications Policy stipulating PR rules.
• Timely response to situations related to technological disturbances in the Company’s service area and other production-related upsets.
• Consistent positive messaging about Company’s operations.
• 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).
• Timely disclosure of information as an issuer and natural monopoly.
• Participation in large Russian exhibitions, supported by regional authorities, to arrange efficient dialogue with business partners and form a positive image of the Company.
• Regular oversight of compliance and financial monitoring for reputation management.
• Timely congratulations of authorities, partners and other stakeholders to form a positive image of the Company.
• Arrangement of activities in social media and blogosphere, regular update of Company’s accounts on popular web-sites. Special attention is paid to communications with general public and mass media through social media and blogosphere during restoration of power supply after natural disasters. SNS accounts are also used to keep the target audience aware of prevention of injuries from electric equipment, non-contracted and unmetered electricity consumption, connection and power engineer job prestige.

Risk of failure to achieve strategic goals and objectives of the Company due to potential changes in internal and external environment of the Company.

Management of strategic risks is interpreted as a totality of actions aimed at implementation of activities and minimization of risks related to the implementation of the energy sector development strategy in light of regional development strategies. As strategic risks impacts the achievement of goals set by the energy sector development strategy and PAO Rosseti’s long-term development program, covering also Company’s development-related activities, management of the key operating risks and risks of Company’s business processes is one of the elements managing strategic risks under the adopted Risk Management Policy.

Deteriorated reliability of energy supply caused by accidents of natural or technogenic character resulting in equipment faults; high level of equipment with excessive service life; failure to comply with requirements in terms of excess of set values of technological exploitation parameters.

The Company takes the following steps:

• Clearing and widening of 0.4-220 kV power lines corridors.
• Reconstruction of grid facilities.
• Enhancement of reserve power supplies, machinery and special-purpose vehicles for emergency recovery works.
• Revised 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 the 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.

Reduction of sources to fund Company’s investment programs if its financial profile is deteriorated and, as a result, reduction of revenues from tariffs on the back of non-execution of investment programs. Violation of deadlines for commissioning of facilities from investment programs due to failures to discharge or discharge on time liabilities by contractors and suppliers.

• When the Company includes investment projects into its investment program, it aligns the projects with regional development plans. The Company files investment and funding volumes 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.

  The Company continues its efforts to align investment plans and territorial development plans. Maximum integration of strategic documents, territorial development schemes, information exchange help optimize terms and price of connection.