Risk Management and Internal Control

Management of sustainable development risks


PJSC RusHydro annually updates the Strategic risk management plan, which includes the list of key risks and response actions, and takes into account all material aspects as for sustainable development. In 2016, RusHydro elaborated and implemented the indicator system of strategic risks realisation, based on scenario approach.


The Governance of PJSC RusHydro annually adopts the Register of strategic risks where the risk owners are defined. The Register discloses information about RusHydro's risks for shareholders, rating agencies, auditors and other stakeholders, and helps to elaborate and control risk management activities in terms of realization of the Company’s strategy. The risks and opportunities are prioritized based on their level of impact on key financial, social and ecological aspects, taking into account the strategic goals, development priorities and mission of the Group.


Current procedures of risk/impact management in terms of sustainable development are classified based on three aspects in terms of sustainable development: economic, ecological, social risks. RusHydro Group also defines the stakeholders, that are subject to the potential impact in case of a particular risk occurrence.


Risk

Impact on KPIs of

RusHydro Group and PJSC RusHydro

[16]

Stakeholders

Risk management measures

Economic aspect

Capital construction project risks

Direct:


Compliance with the schedule of the capacities commissioning at the core facilities of new construction, %


Fulfilling capacity commissioning timetable and the finance and disbursement plan, %


Return on equity (ROE), %


Limitation on the debt burden (Net Debt/Ebitda)


Leverage ratio (coefficient)


Indirect:


Total shareholder return (TSR);

Shareholders and investors


Employees


Federal authorities


Regional authorities and local government authorities


Suppliers and contractors

Systematisation of data on the designed projects:


- Development of the corporate project management system for classification of data on the existing and designed projects


Development of the internal expert review for design and detailed documentation:


- Improvement of the efficiency of design institutes operation and procurement activities to strengthen the role of its own design institutes to conduct internal review of design and working documents;


- Regulation of the activity on conducting internal review of design documentation.


Quality, terms and cost of works control:


- Maintenance of the list of disreputable designers, participation in subdesigners selection process;


- Optimization of insurance and purchasing systems as for construction and mounting activities,


- Development of regulatory documents for performance of individual types of work, implementation of an authorisation system allowing the employees to perform such types of work, and adapted to suspend individual employees from the works performance in case of any substantial breaches;


- Development of the supplied equipment quality control system (including equipment manufacture and shipment/delivery);


- Creation of the schedule and cost monitoring and control system for new construction projects based on the SAP capital construction management information system.


The 2017-2021 Investment Program materials to be reviewed contain assessment of the cost-effectiveness of investment capital construction projects with the account of risks.

Reduction of electric power and capacity sales income compared to the business plan

Direct:


Return on equity (ROE), %


Limitation on the debt burden (NetDebt/Ebitda)


Current liquidity ratio (coefficient).


Indirect:


Leverage ratio (coefficient)


Total shareholder return (TSR);

Shareholders and investors


Employees


Suppliers and contractors

- Preparation of proposals for amendments to the normative legal acts in the field of electric power industry;


- Regular revision of the sales policy of PJSC RusHydro;


- Implementation of a commercial dispatch system.

Fund shortage including the shortage of external funds for planned investments

Direct:


Compliance with the schedule of the capacities commissioning at the core facilities of new construction, %


Fulfilling capacity commissioning timetable and the finance and disbursement plan, %


Indirect:


Return on equity (ROE), %


Limitation on the debt burden (NetDebt/Ebitda)


Leverage ratio (coefficient)


Total shareholder return (TSR);

Shareholders and investors


Federal authorities


Suppliers and contractors

- Maintenance of the sufficient amount of funds and availability of financial resources through credit lines;


- Implementation of a balanced model of working capital financing by using short-term and long-term sources;


- Monitoring of the compliance with credit agreements in order to avoid breaches of the Company’s financial covenants;


- Placement of temporarily available funds in short-term financial instruments (bank deposits);


- Execution of contracting agreements in accordance with standard financial provisions


- Introduction of interest rate and currency exposure management procedures with due regard to the credit policy of RusHydro


- Preparation of the flood zones of power plants under construction using the funds of the federal budget and the budgets of the subjects of the Russian Federation;


- In order to reduce the debt burden of RusHydro Holding, an additional issue of shares was made and an agreement was concluded on the purchase of 55 billion shares of the Company by PJSC VTB Bank.


As part of the Company’s approved interest rate and currency exposure management procedures, the Company calculated the risks of currency and interest rate fluctuations for 2017 for the open foreign currency position and the portfolio of liabilities of the Company, respectively, for the purpose of evaluation and formation of the reserve to cover foreign currency and interest rate risks in the Company’s budget for 2017.

Terrorism-risk

Direct:


Reliability criterion

Compliance with the schedule of the capacities commissioning at the core facilities of new construction, %


Fulfilling capacity commissioning timetable and the finance and disbursement plan, %


Return on equity (ROE), %


Limitation on the debt burden (NetDebt/Ebitda)


Indirect:


Leverage ratio (coefficient)


Reduction of the operating costs


Total shareholder return (TSR);

Shareholders and investors


Employees


Suppliers and contractors


Federal authorities


Regional authorities and local government authorities

- Provision of the facilities’ armed security by the private guard of Rosgvardia, FSUE Okhrana of Rosgvardia and FSUE Departmental security of the Ministry of Energy of the Russian Federation;


- Development and maintenance of up-to-date plans for interaction with law enforcement agencies to protect the Company’s facilities when committed or threatened to commit a terrorism act;


- Maintenance of security pass regime at the Company’s facilities;


- Application of measures to identify, prevent and suppress acts of unlawful interference in the activities of the Company’s facilities together with law enforcement agencies;


- Assessments of the most likely threats and development of plans for mitigation, together with the territorial bodies of EMERCOM of Russia in the constituent entities of the Russian Federation at the location of the Company’s facilities;


- Equipment of the Company’s facilities with engineering and technical means of protection;


- Organization and control over the access to information on the composition and condition of engineering and technical means of protection;


- The Company’s fixed assets insurance package includes insurance against Terrorism and Diversion;


- Increase in the number of equipment certified by FSTEC of Russia, and equipment of domestic production;


- Audits of information and technical security.


- Organization and control over the mode of access to software and hardware of control systems and information systems

Failure to achieve targets by the sales

companies

Direct:


Return on equity (ROE), %


Limitation on the debt burden (NetDebt/EBITDA)


Reduction of the operating costs


Indirect:


Leverage ratio (coefficient)


Total shareholder return (TSR);

Shareholders and investors


Employees


Suppliers and contractors

- Monitoring of the compliance of the sales companies controlled by PJSC RusHydro with the criteria for financial stability in accordance with the rules of retail markets;


- Work with consumers to form mutually beneficial relationships, including the work aimed at preserving the market share of the sales companies of PJSC RusHydro;


- Introduction of the PJSC RusHydro’s corporate risk management system into subsidiary sales companies

Delays and errors in management system improvement

Direct:


Compliance with the schedule of the capacities commissioning at the core facilities of new construction, %


Fulfilling capacity commissioning timetable and the finance and disbursement plan, %


Share of purchases from small and medium-sized business entities


Indirect:


Return on equity (ROE), %


Limitation on the debt burden (NetDebt/EBITDA)


Total shareholder return (TSR);

Shareholders and investors


Employees


Suppliers and contractors

- Improvement of the activities regulation and business process management system;


- Optimization of procurement timing and coordination;


- Improvement of the communication with the stakeholders


The internal control department of PJSC RusHydro analyses the key business processes in order to improve the Company’s control system and enhance its process efficiency. Civil responsibility of the Company’s officers to any third parties is insured.

PJSC RusHydro introduces corporate management standards in reacquired or established subsidiaries and branches, as well as the systems of corporate project management, staff grading (grading means the establishment of a job hierarchy based on the job evaluation, strategy, and corporate culture of the Company), manager certification and implementation of individual personnel development plans.

The risk of the low

efficiency of innovation activity

Direct:


Integral KPI of innovation activity, %


Return on equity (ROE), %


Limitation on the debt burden (NetDebt/EBITDA)


Indirect:


Leverage ratio (coefficient)


Total shareholder return (TSR);

Shareholders and investors


Employees


Suppliers and contractors

- Alteration/elaboration of work methods and infrastructure in order to ensure the implementation of the innovation programme;


- update of the innovative development programme;


- regular benchmarking of currently used technologies.

Environmental aspect

Adverse changes

/ breaches of

legislation

Direct:


Return on equity (ROE), %;


Limitation on the debt burden (NetDebt/EBITDA)


Current liquidity ratio (coefficient)


Reduction of the operating costs


Indirect:


Leverage ratio (coefficient)


Total shareholder return (TSR);

Shareholders and investors


Consumers


Employees


Trade unions


Federal authorities


Regional authorities and local government authorities


Local communities


Environmental organizations


Mass media


Suppliers and contractors

- Monitoring of initiated and pending changes in legislation, which could potentially have an impact on the Company’s activities;


- Monitoring and review of the existing standards and regulations in the field of technical regulation;


- Participation of the PJSC RusHydro’s representatives in the important law changing events held by legislative, executive and judicial bodies, public associations, professional legal organizations and associations;


- Regular environmental audits and implementation of the recommendations received;


- Participation in working groups of the Russian Ministry of Energy (on technical regulation) and the Technical Committee No.330 (on national standards).

Anthropogenic accidents

Direct:


Reliability criterion


Indirect:


Return on equity (ROE), %;


Limitation on the debt burden (NetDebt/EBITDA)


Leverage ratio (coefficient)


Current liquidity ratio (coefficient)


Reduction of the operating costs


Total shareholder return (TSR);

Shareholders and investors


Consumers


Employees


Trade unions


Federal authorities


Regional authorities and local government authorities


Local communities


Environmental organizations


Professional communities and higher education institutes


Mass media


Suppliers and contractors


Non-profit organizations

- Performance of the full scope of repairs and implementation of the Retrofitting and Upgrading Program;


- Development of the quality control system for supplied equipment including its manufacturing and shipment/delivery, construction, installation and commissioning, as well as increasing the scope of contractual liability of suppliers/contractors for the manufacture and supply of equipment and materials


- Filing claims against disreputable suppliers/contractors;


- Observance of the recommendations provided during inspections of the facilities owned by PJSC RusHydro;


- Strengthening of on-site control over contractors / sub-contractors in terms of reducing accident rates, fires, unethical behaviour, thefts;


- Development of regulatory technical documentation aimed at improving the quality of design and construction management processes;


- Introduction of up-to-date equipment troubleshooting procedures, advanced control technologies for business assets including appropriate information technologies;


- Refinement of the structure and amount of replacement parts;


- Development of equipment lifecycle management systems at operating hydroelectric power plants;


- Industrial environmental control and monitoring;


- Control over the officials’ compliance with the regulations, instructions, etc. in the course of operations, service, etc.

Damage in the result of natural disasters and anthropogenic accidents outside the Company’s facilities

Direct:


Reliability criterion


Compliance with the schedule of the capacities commissioning at the core facilities of new construction, %


Fulfilling capacity commissioning timetable and the finance and disbursement plan, %


Return on equity (ROE), %


Limitation on the debt burden (NetDebt/Ebitda)


Indirect:


Leverage ratio (coefficient)


Reduction of the operating costs


Total shareholder return (TSR);

Shareholders and investors


Consumers


Employees


Federal authorities


Regional authorities and local government authorities


Environmental organizations


Non-profit organizations

- Modernisation in accordance with modern requirements of the centralized emergency control system;


- Research and development of methods for remote monitoring of the condition of facilities and operating modes of HPPs;


- Compliance with the Russian legislation in the field of industrial safety and the use of a production control system functioning on its basis;


- Industrial environmental control and monitoring;


- Property insurance.

Incorrect water-content and output forecasting

Direct:


Return on equity (ROE), %


Limitation on the debt burden (NetDebt/EBITDA


Indirect:


Total shareholder return (TSR);

Shareholders and investors


Consumers

- Optimization of the use of water resources within the framework of the Energy Saving Program of PJSC RusHydro;


- Development of the industry system of hydro-meteorological observation and protection of the interests of HPPs in interagency working groups of the Federal Agency for Water Resources;


- Integration of the medium-term water-content forecasting model

Social aspects

Risks of interaction with stakeholders

Direct:


Total shareholder return (TSR);


Indirect:


Return on equity (ROE), %


Limitation on the debt burden (NetDebt/EBITDA

Shareholders and investors


Consumers


Employees


Trade unions


Federal authorities


Regional authorities and local government authorities


Local communities


Environmental organizations


Professional communities and higher education institutes


Mass media

- Compliance with the Rules of information activities, the Rules of participation in public events, the Rules of information disclosure;


- Preparation of explanatory press releases and media materials;


- Organization of interaction with stakeholders on the basic areas of the Company’s activity, including through organization of joint public events;


- Preparation of regular press releases with the Company’s official opinion on the activity issues;


- Holding of press tours and special events for the media

Unethical or illegal actions of the employees

Indirect:


Return on equity (ROE), %


Limitation on the debt burden (NetDebt/EBITDA


Total shareholder return (TSR);

Shareholders and investors


Consumers


Employees


Trade unions


Mass media


Suppliers and contractors


Non-profit organizations

- Introduction of the integrated automated control system over distribution of the commercial secret information;


- Monitoring of the compliance of the employees with the Regulation on Insider Information;


- Restriction of the right of access to the insider information for the Company’s employees;


- Organization of mandatory notifications from the insiders about transactions they enter into with the Company’s securities.



16 See the list of KPIs in PJSC RusHydro Annual Report 2016