Risk Management System

The Company implemented the Risk Management System (further referred to as the RMS) to ensure sustainable and uninterruptible operation and development of the Company due to timely identification, assessment and efficient management of risks which threaten the efficient performance of the Company’s business activities and reputation, the employees’ health, environment, and property interests of the shareholders and investors.

In order to develop the RMS in the Company, the Board of Directors approved the Risk Management Policy (Minutes No. 242 dated October 9, 2014).

The main participants in the risk management process are:

  • Board of Directors;
  • Authorized committed reporting to the Board of Directors;
  • Executive bodies (Management Board, Director General);
  • Risk owners;
  • Rink Management Department;
  • Persons in charge of risk management action performance.

Dynamics of risk significance relative to 2014 and during 2015 (if any) is shown with arrows: (growth of risk significance), (reduction of risk significance).

 Critical
 Significant
 Moderate
 Insignificant

Main Risks in the Company Operation

Level of risk significance and its dynamics relative to 2014 and during 2015 Description Risk mitigation activities
Country risk Decrease in the Company possibilities to access capital and decrease in the demand for the Company services due to the negative impact of global financial market instability on the Russian economy.
  • Cost-cutting activities;
  • Optimization of investment program;
  • Reasonable credit policy.
Regional risks Risks associated with deterioration of economic situation in the region and destabilized political situation
  • Implementation of crisis management activities in case of risk realization
Regulatory risk Risks associated with the regional specifics of operation
  • Design of power lines with consideration of regional classification in terms of ice formation ;
  • Expansion and timely clearing of territory along the power line route from trees;
  • Implementation of modern equipment for diagnosis of overhead line condition and location of damage points;
  • Replacement of overhead line wires with selfsupporting insulated conductors;
  • Creation of weather monitoring system, preparation of weather forecasts and warning about hazardous weather;
  • Selective implementation of anti-icing and ice melting system;
  • Property insurance.
Regional risks Risk associated with the resolutions of authorities in the field of tariff regulation: introduction of electric power transmission tariffs below economically feasible level, revision of established tariffs over the regulation period
  • Interaction with the authorities in the field of tariff regulation to provide supporting materials which justify the level of costs;
  • Development of proposals on revision of draft regulatory documents prepared by authorities for revision of electric power transmission tariffs;
  • Planning of the Company’s business activities with consideration of tariff and balance resolutions;
  • Interaction with regulatory authorities and RF Ministry of Energy in connection with approval of the Company’s long-term investment program.
  • Implementation of cost management program
Risk of decrease in demand for services ↑ Risk associated with decrease in the volume of electric power transmission services due to general decrease in the volumes of power consumption and technological connections
  • Monitoring of electric power consumption and revision of sales plans with consideration of the current demand for electric power;
  • Interaction with regulatory authorities to account for lost revenues in the electric power transmission tariff in the following year;
  • Fulfillment of Program for Energy-Saving and Energy Efficiency Improvement;
  • Implementation of activities in the framework of the project “3 steps in 2 visits” to simplify the technological connection procedure and reduce the timeframe required for contract performance;
  • Inclusion of subjects in accordance with the Program for Lifting of Limitations into the investment program and fulfillment of Programs.
Operational risk Risk associated with technological violation (including grid breakdown)
  • Creation of weather monitoring system, preparation of weather forecasts and warning about hazardous weather;
  • Remote control functionality for 110-220 kV stations;
  • Implementation of target program on replacement of 0.4-10 kV overhead line wires with self-supporting insulated conductors;
  • Expansion and time cleating of power lines routes from trees;
  • Transformation of quick-action teams and repair & operation teams into mobile work teams;
  • Repair activities based on the results of assessment of the current technical conditions of main production assets;
  • Operation control over the condition of electric grid equipment, building and structures within Company branches
  • Insurance of electric grid facilities.
Price risk Risk associated with possible variation of prices for raw materials, services, equipment and other material and technical resources used by the Company in the course of operation.
  • Implementation of PJSC MOESK program for energy-saving and energy efficiency improvement;
  • Development and implementation of Program of Organizational and technical Activities for Reduction and Prevention of Losses;
  • Interaction with the regulatory authorities in connection with incorporation of justified costs of power loss compensation into the Company’s NGR, including submission of documents which confirm the actual costs in the previous reporting periods;
  • Interaction with regulatory authorities in connection with establishment of balance indicators (net supply and power rating) for PJSC MOESK and LGO of level 2 for adoption of tariff and balance resolutions;
  • Creation of competive environment in the firled of work and services procurement;
  • Centralized procurement to cust costs due to the procurement scale effect;
  • Elimination of cross procurement;
  • Optimization of costs of repair, operation and capital construction projects.
Interest rate risk ↓ Risk associated with increase in the rate of interest on borrowed funds due to financial market instability
  • Business planning with consideration of possible interest rate growth;
  • Raising of borrowed funds in the framework of long-term agreements on revolving credit lines with considerable limit of borrowing and established limitations on the maximum interest depending on the refinancing rate established by the RF Central Bank;
  • Selection of financial organizations for service delivery through open bidding procedures to ensure borrowing on the most beneficial terms for PJSC MOESK;
  • Inclusion of terms, which fix the floating interest rate in accordance with the key interest rate of the RF Central Bank into the new contracts.
Currency risk Increase in the Company costs due to currency exchange rate fluctuations
  • Minimization of transactions in foreign currencies
Inflation risk ↑ Increase in the Company costs due to higher inflation rate
  • Planning with consideration of annual price growth;
  • Implementation of cost management program.
Credit risk Risk associated with nonperformance by counterparties:
  • non-payment by consumers (guaranteed suppliers and retail power companies) for power transmission services,
  • electric power consumption without contract or fiscal metering,
  • Non-repayment of amounts transferred to the members of the “single window” system for technological connections in Moscow in the form of advance payments during the period from 2006 to 2010.
  • Performance of raids to identify power consumption without metering;
  • Installation of meters at the boundaries of power attribution with management companies in multi-apartment buildings. Transfer of installed metering devices to fiscal metering;
  • Implementation of PJSC MOESK Action Plan for collection of overdue receivables for power transmission services and settlement of disputes;
  • Initiation of claims against the participants of tariff regulation with consideration of the established judicial practice for recovery of payments PJSC MOESK by consumers due to termination of contract on technological connections which were executed earlier in the framework of the “Single Window” system;
  • Negotiations with participation of representatives of the Moscow Government, controlling shareholder and members of the “Single Window” system in order to develop reasonable solutions .
Strategic risk Risk of Company losses due to the errors (omissions) made when taking resolutions which determine the Company’s operation and development strategy (strategic management)
  • Implementation of the Company’s Program of Priority Objectives;
  • Implementation of the conceptual part of the Company’s strategic plan with planning horizon through 2020;
  • Adoption of management resolutions with consideration of the approved Business Plan, additional cost-cutting activities and with consideration of the documents which define the long-term plans for certain areas (e.g., Investment Program, Energy-saving and Energy Efficiency Improvement Program)
Reputation risk Risk of losses, which may be incurred by the Company due to decrease in the number of clients (counterparties) due to formation of negative image of the Company’s financial stability, financial position, quality of its products (work, services) or nature of its activities.
  • Information support in connection with the main Company operation areas (issue of press releases, publications in mass media, press tours, video spots, etc.);
  • Preparation and presentation of comments for mass media;
  • Organization of public events which contribute to promotion of the strategic Company activities with participation of authorities and public organizations (forums, round tables, etc.);
  • Participation in professional and themed events to inform the target audience about the Company activities (congresses and exhibitions)
  • Preparation and issue of polygraphic and advertising materials on the main Company activities (booklets, leaflets, client journal, etc.)
  • Creation of permanent positive information field and informing consumers about company services in the social networks;
  • Regular information provision and updated on the web site of PJSC MOESK.
Amendment of tax law Risk associated with amendment of tax system, tax rates, tax payment procedure
  • Performance of on-going work on improvement of tax base calculation in strict compliance with the effective law of the Russian Federation
  • Planning of business activities with consideration of the effective tax law
Amendment of legal practices Risk of amendment of legal practice in the aspects associated with the Company activities
  • Optimization of the process for legalization of documents and Company operation support;
  • Arrangement of mandatory due diligence for contracts and internal regulatory documents
Antimonopoly regulation risk Risk of fines imposed by antimonopoly authorities in connection with violation with the timeframe for preparation of offers on technological connection and contract performance timeframe as required by the law.
  • Reduction of internal time period required for connection of consumers;
  • Development of CRM system in compliance with the approved regulations on technological connections;
  • Submission of pleas for the court to invalidate the ordinances of antimonopoly authorities on application of administrative fines as related with cancellation of penalty enforcement and reduction of fine amount to 100 thous. rubles

Level of Risk Significance

Information on Possible Circumstances which Objectively Impact the Company’s Operation

Risk of earthquake

The region of PJSC MOESK property location is not classified as seismic hazardous.

The risk of losses due to earthquake is absent.

Risk of flood

A part of the Company’s electric transmission lines run across the beds of rivers in Moscow region — areas of possible land flooding during spring flood season. Sharp elevations of water level are possible after snowy winters; however, the flow rate of most rivers is regulated by dams of hydraulic structures, which reduces the water level variation amplitude during spring floods.

The risk of losses due to flooding or partial flooding is assessed as low.

Terrorism

The premises where the Company property is located are surrounded with fencing. Entry to and exit from the station premises is controlled due to utilization of access permit system. Shift duty personnel and security personnel are always present at the attended stations; video surveillance systems are installed; for unattended stations without continued presence of operating personnel, transfer points, cable structures are equipped with security alarm. In our opinion, the risk of unauthorized access to premises where the Company property is located is low, including unauthorized access with sabotage intentions. The risk of terrorist attack is minimal for these facilities.

The risk of losses due to a terrorist attack is insignificant.

Illegal actions of third parties (stealing, robbery, assault with intend to rob, property damage due to willful acts or negligence)

No significant stealing or misappropriation occurrences were detected over the last 5 years at PJSC MOESK facilities, which is attributable to the high perimeter security level and strict access control. All motor vehicles entering or exiting the premises of the Company’s facilities are subjected to thorough inspection at checkpoints.

The risk of losses due to this hazard group is assessed as low.

Improvement of Risk Management System

In the framework of activities conducted by the work group under the supervision of PJSC «Rosseti», the risk management system was integrated into the Company’s business planning process. Methods for risk assessment were developed and approved with consideration of their mutual impact and their impact on achievement of the Company’s strategic objectives (order No. 1021 dated August 14, 2015). Additionally, the Company developed and implemented the Guidelines on Planning and Implementation of Risk Management Activities, for form of Action Plan (Company order No. 1633 dated December 18, 2015).

In the framework of the RMS implemented by the Company, the Board of Directors approved the Register of Key Operation Risks (minutes No. 246 dated November 27, 2014). The key operation risks are the top-level risks which have direct effect on achievement of the Company’s strategic priorities.

Relationship between Strategic Priorities, Risks and KPI

The figure below shows the relationship between the key operation risks and strategic priorities of the Company.

The table below presents information on assessment and actual values of key operation risks in 2015:

 

Risk number Assessment parameter Unit of measurement Risk value Actual value Deviation, %
QRA-001 Volume of electric power transmission services mln kW·h 71,105.44 70,532.76 -0.81%
QRA-002 Average electric power transmission tariff RUB/K kW·h 1,720.8 1,713.46 -0.43%
QRA-003 Number of performed contracts on TC ea. 55,000 77,355 40.65%
Volume of connected capacity mln kW 1,750 3,106.7177.53%
Revenues from TC services RUB mln 10,000 10,302.13.02%
QRA-004 Purchased electric power for power loss compensation RUB mln 13,637.30 13,170.9 -3.42%
QRA-005 Non-influenceable costs minus costs of power loss compensation RUB mln 71,782.46 68,724.39 -4.26%
QRA-006 Operation costs RUB mln 32,477.90 31,752.88 -2.23%
QRA-007 Volume of overdue receivables for electric power transmissi on services RUB mln 2,392.04 1,564.02 -34.62%
QRA-008 Debt/EBITDA - 2 1.75 -12.51%
QRA-009 Net profit RUB mln 8,269.18 9,246.55 11.82%
QRA-010 Investment utilization (without VAT) RUB mln 32,916.13 36,715.42 11.54%
Commissioning of fixed assets (without VAT) RUB mln 31,014.75 34,45811.10%
Financing of investment development program (with VAT) RUB mln 37,297.86 36,295.23-2.69%
QRA-011 Rate of decrease of specific investment costs % 14.35 15 4.57%
QRA-012 Capacity load indicator % 24 30.13 25.54%
QRA-013 Reliability indicator of electric power transmission service (KPI) - 1 1 0.00%
QRA-014 Quality indicator for TC service - 1.2 1.03 -14.17%
QRA-015 Number of work-related injuries ea. - 6 -
QRA-016 Workforce efficiency RUB thous. / persons h 4.382 4.432 1.13%

Commentary-interview of the Audit Director E. A. Schegoleva

The Control and Risk Department took active part in the methodological activities of PJSC “Rosseti” in connection with development of new methods for risk identification and assessment. Due to that and also due to the interest into implementation of new methods demonstrated by the top level executives, this year we managed to make a breakthrough in the RMS formation and improvement, specifically:

  • All the risks associated with the Company business were identified, systemized, described and assessed; the risk chart was developed;
  • Action plans were developed for all risks, control over their performance and assessment of their impact on the risks are ongoing;
  • We implemented the system, which allows us to identify the risk impact on the Company’s operation results and engage manager at all Company levels into this process. In order to improve the Company’s risk management system further, the following activities are scheduled for 2016:
  • Adapt the Policies of Internal Control and Risk Management in accordance with the approach recommended by PJSC “Rosseti” and submit these documents to the Board of Directors for approval;
  • Develop and approve methods for assessment of the Company’s internal control and risk management system.

My Report

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