Risk Register

The risk register for 2016-2017 was formed on the basis of the register for 2015-2016, the analysis of external information, including the experience of the world's largest companies in the electric power industry, reports of consulting and insurance companies on the risks of companies in the fuel and energy complex and business in general, the report on the global risks of the World Economic Forum in Davos. When reviewing the risk register of PJSC RusHydro in 2016, the rating (level of criticality) of risks was compared with the monitoring of the priority of the tenth most important risks and opportunities of the electric power sector, as indicated in the international industry survey of Ernst & Young.


Risk Register of PJSC RusHydro for 2016-2017

Critical risks

  • Risks of capital construction projects implementation
  • Decrease in proceeds from sales of electricity and capacity as compared with the business plan
  • Adverse changes/violations of law
  • Technogenic accidents
  • Shortage of funds, including received from external sources, to make planned investments

Essential risks

  • Shortage of resources for fulfilment of production programs
  • Failure to achieve the targets by engineering companies (design institutes, repair companies) Terrorism
  • Failure to achieve the targets by distribution companies
  • Delays and mistakes in improving management systems
  • Risks of interaction with stakeholders
  • Damage caused by natural disasters and technogenic accidents not at the Company's facilities
  • Unethical or unlawful actions of employees
  • Insufficient efficiency of innovation activities
  • Incorrect forecast of water availability and generation plans
  • Growth of receivables for the supply of electricity and capacity

Less priority risks

  • Lack of key personnel in all areas of the Company's activities
  • Impossibility to enter international markets
  • Inefficiency of integration of companies affiliated with RusHydro

Among the most essential risks for the Company in 2016 we should note the growth of the following risks (compared to 2015): Risk of failure to achieve the targets by engineering companies, as well as the risk of growth of receivables for the supply of electricity and capacity (yellow zone). The relevance of risks related to personnel management has significantly decreased.


Based on the benchmarking conducted, it should be noted that the companies of the fuel and energy sector are experiencing a significant growth of opportunities in the field of expansion to prospective foreign markets, expansion of their business by expanding the service market for end-user services, strengthening attention to relationships with investors and other stakeholders, especially regarding disclosure of information on the Company's activities and public relations, innovation development, among other things, great attention is paid to the development of wind energy sector.


Risk Radar of PJSC RusHydro for 2016-2017




Risk of capital construction projects implementation

This risk is of critical importance for the Company and is related to the large scale of the investment program for the coming years, as well as the complex structure of management and financing of a number of projects. The factors of risk are the following:
  • A large share of uncertainty in the justification of projects;
  • Non-compliance of project documentation quality;
  • problems with preparation of reservoirs flooding zones;
  • Significant dependence of economic parameters of projects on environmental factors (availability of network infrastructure, sales markets by the time of delivery of the construction facility);
  • Rising prices for equipment and materials during construction;
  • Interruptions in supply chains for various reasons;
  • issues of cooperation with shareholders of PJSC RusHydro.

To reduce the negative impact of this risk on the Company the following activities are being carries out:
  • Development of corporate project management system to systematize data on existing and projected facilities;
  • Increasing the efficiency of work of design institutes, procurement activities aimed at strengthening the role of own design institutes in terms of conducting internal expertise of design and detailed documentation;
  • Regulation of activities for conducting internal expertise of project documentation;
  • Maintenance of the list of negligent designers, participation in selection of subdesigners;
  • Optimization of the insurance and procurement system in the area of construction and assembling operations;
  • Development of regulatory documents for performing certain types of works, introduction of the system of personnel admission to perform such work with the possibility of personal suspension from the implementation of subsequent projects in case of material violations;
  • Development of a quality control system for the delivered equipment (including the process of its manufacture and shipment/delivery);
  • Creation of the System for monitoring of and control over the timing and cost of new construction facilities on the basis of information system for capital construction management SAP.

     Risk of decrease in proceeds from sales of electricity and capacity as compared with the business plan

The risk is critical due to the extensive regulation of the electricity and capacity market rules, high volatility of electricity prices at the Wholesale market for electricity and power, instability in fuel prices, decreasing solvency of counterparties due to the impact of the financial crisis, a decline in production, increased energy efficiency of consumers, adverse conditions (low water years), difficulties in forecasting load of the equipment. This risk strongly correlates with the risk of inaccurate water availability forecast.


To reduce the negative impact of the risk on the Company the following activities are being carries out:

  • Preparation of proposals on amending the regulations in the electric power industry;
  • Review of the marketing policy of PJSC RusHydro on a regular basis;
  • Conclusion of bilateral hedging agreements for the day-ahead market (including purchase of electricity as collateral for obligations).
  • Introduction of a commercial dispatching system;
  • Conducting work to reduce receivables for the supply of electricity and capacity.

     Risk of adverse changes/violations of law

Critical risk of adverse changes/violations of law is noted as one of the most essential for the electric power industry not only in Russia, but worldwide. Regulatory requirements are constantly tightened on safety, insurance, environment, etc., energy efficiency of consumers is encouraged, and over time, the influence of this factor on the Company is likely to increase. The Company continuously monitors the initiated and changes in law and those under consideration, which in future may affect its activities, monitoring and revision of existing standards and regulations in the field of technical regulation. The representatives of PJSC RusHydro take part in major events and round tables on changing law conducted by legislative, executive and judicial bodies, public associations, professional legal associations and associations to represent their interests. Environmental audits are conducted on a regular basis and the resultant recommendations are implemented. PJSC RusHydro takes part in the activities of the working groups of the Ministry of Energy of the Russian Federation on technical regulation (as concerns Technical Regulations) and the Technical Committee No. 330 of the Federal Agency on Technical Regulation and Metrology (as concerns national standards).


      Risk of technogenic accidents

The risk is reduced within the red zone due to the implementation of PCM projects and the corresponding increase in equipment reliability and safety, which reduces the likelihood of risk realization. Therewith, the risk remains the focus of the Group’s management due to the possible serious consequences from the realization of the risk of various technogenic accidents that can endanger life and health of people, lead to interruptions in production and subsequent the Company’s profit risk. A negative impact is also possible on the probability of a risk of disruption of management relations in case of privatization and/or reorganization of the management system for generating assets and facilities under construction. This risk factors are design errors that appear at the stage of operation, physical deterioration of equipment, violation of operating conditions and untimely repairs and retrofitting and upgrading, poor repair, poor performance of construction and assembly work (CAW) for retrofitting and upgrading (RU), influence of the human factor, the impact of the environment. All of them can lead to the failure of the main equipment and the destruction of hydro-technical facilities. According to the Company, the probability of failure of equipment and facilities is at an average level. All main production facilities of PJSC RusHydro are insured. In addition, the Company carries out a set of measures to ensure the reliability of the equipment and facilities at the adequate level, i.e.:

  • maintenance of the full scope of repair work and the implementation of a prospective Program of retrofitting and upgrading;
  • development of a quality control system for the delivered equipment, including the process of its production and shipment/delivery/implementation of construction and assembly work and commissioning work, as well as increasing the level of contractual responsibility of suppliers/contractors in production and supply of equipment and materials;
  • conduct of claim work for unscrupulous contractors/suppliers;
  • implementation of recommendations discovered in the course of survey examination of the facilities of PJSC RusHydro;
  • strengthening the control of contractors/subcontractors at production sites in terms of reducing injuries, fires, unethical behaviour, stealing;
  • development of standard technical documents aimed at improving the design process and management of construction;
  • introduction of modern methods of diagnosing equipment without stopping, modern technologies for managing business assets, including the necessary information technologies;
  • optimization of the structure and volumes of spare parts.
  • development of a life cycle management system for existing hydroelectric power plants.

     Risk of scarcity of funds, received from external sources for planned investments

In terms of continuing stagflation and international sanctions, the risk is slightly reduced within the red zone due to the revision of investment priorities. At the same time, restriction of access to credit funds is possible in the event of long-term preservation of international sanctions. Most of the influencing risk factors are country and external factors for the Group.


For the Company, the risk of scarcity of funds, received from external sources for planned investments, is critical. It is closely related to the risk of capital construction projects. Reducing all or part of the sources for financing the investment program may lead to a disruption of the deadlines for the projects being implemented by PJSC RusHydro or the implementation of a scenario in which the Company will be forced to suspend construction or even to conserve a number of power generation facility under construction. Taking into account the high cost of work on the conservation of unfinished construction facilities, in some cases comparable to the cost of continuing construction, this fact will affect both the economic efficiency of the Company’s investment projects and the results of its financial and economic activities as a whole.


The Company manages this risk by the following means:

  • maintaining the sufficient funds and the availability of financial resources through the provision of credit lines;
  • implementation of the balanced model of working capital financing with the use of long-term and short-term sources of finance.
  • monitoring the compliance with credit agreements to prevent violations of the Company's financial covenants;
  • placement of temporarily available funds in short-term financial instruments (bank deposits and promissory notes);
  • conclusion of contracts with counterparties on “standard financial conditions”;
  • introduction of a methodology for managing interest and currency risks, taking into account the credit policy of PJSC RusHydro;
  • work on the preparation of flood zones of the reservoirs of hydraulic power station under construction at the expense of the federal budget and budgets of the subjects of the Russian Federation.

     Risk of failure to achieve performance targets by engineering companies

The growth of the risk rating is related to its significant influence on the possibility of developing the Company’s business as a whole. In the context of the crisis, the key development opportunity is the growth of quality and cost reduction at all life cycle stages of the Group’s assets by reducing the risks of engineering activities. At the same time, there may be a restriction of access of engineering companies to credit facilities in the event of long-term international sanctions and difficulties in obtaining funds in freely convertible currency. The Company considers this risk to be significant because of a possible decrease in the engineering part of the business due to its insufficient efficiency and high competition in the market. In order to reduce the impact of this risk, the Company carries out the following activities:

  • creation of a unified project complex of PJSC RusHydro through reorganization of design SAs;
  • implementation of the program for the development of engineering subsidiaries;
  • launch of SAs repair and project programs for international exchange of experience;
  • organization of personnel development and training of scientific personnel;
  • development of standard sheets of the scope of work for the repair of equipment and hydraulic structures;
  • minimization of risks of inefficient management of non-core activities through its consolidation in specialized service subsidiaries.

     Terrorism

This risk is related to the general tension in the political and social spheres of the country, the activity of bandit groups in the North Caucasus and their attempts to transfer their activities to other regions of the Russian Federation, with the high probability of local and regional armed conflicts, the growing threat from international terrorism and the level of political instability in a number of developing countries due to the economic crisis, as well as the activity of radical organizations, the development of industrial terrorism. In this regard, PJSC RusHydro assumes the emergence of risks associated with terrorist activities aimed at hydropower facilities, including in the regions adjacent to the border with Ukraine.


Increase in the risk rating. The growth of cyberterrorism threats (at the moment Russia is in the first place in the rating of exposure to cyber threats of the Kaspersky Lab and other studies). Lack of coordination with international antiterrorist services in the event of tougher international sanctions. Upcoming events (World Cup in 2018, etc.), a large proportion of foreign-made CIMs. In order to reduce the impact of this risk, the Company carries out the following activities:

  • insurance of property for the risk of “Terrorism and Sabotage”;
  • increase in the share of equipment certified by FSTEC, and equipment of domestic production;
  • audit of information and technical security.

Armed protection of objects is also being carried out by forces of the units of private security of the Ministry of Internal Affairs of Russia and FSUE “Departmental Security” of the Ministry of Energy of Russia. In addition, plans have been developed to work with law enforcement agencies to protect the Company’s facilities while committing or threatening to commit a terrorist attack. Access and intrafacility regimes were introduced on the territory of hydropower facilities. Measures to prevent stealing are organized jointly with law enforcement bodies. The most dangerous threats are being assessed and plans for mitigating the consequences are being developed jointly with the civil defense and emergency services of the subjects of the Russian Federation, at the location of the Company’s generating assets.


     Risk of failure to achieve performance targets by own retail companies

The risk rating is reduced compared with the other strategic risks, remaining still significant for the Company. At the same time, the implementation of risk may affect the failure to achieve the Group’s performance targets. The realization of the risk may be affected by a decrease in demand for electricity and capacity due to a decline in production and a decrease in the solvency of consumers in stagflation conditions, as well as in conditions of high competition with independent energy retail companies and the development of energy-saving technologies.


Risk factors are a high level of competition, the threat of the loss by the Company of the status of a guaranteeing supplier in the regions of retail sales and the possibility of building by large consumers of alternative power supply facilities. In order to reduce the impact of this risk, the following activities are being carried out:

  • monitoring the compliance of the Company as a guaranteeing supplier with the criteria of financial stability in accordance with the rules of retail markets;
  • active work with consumers for the formation of mutually beneficial relations, including through JSC “ESC RusHydro”;
  • introduction of corporate risk management system of PJSC RusHydro in retail subsidiaries;
  • development of plans for anti-crisis measures to increase profitability and reduce the liquidity deficit of SAs sales for 2016 - 2017.

     Risk of delays and errors in improving the management system

In order to manage risk, the Company develops a system for regulating the activities and management of business processes, optimizes the timing and coordination of purchases, interaction with the stakeholders. The Internal Control Division of PJSC RusHydro conducts an analysis of the main business processes in order to improve the control system and increase in the efficiency of processes. Public liability of Company officials to third parties is insured. PJSC RusHydro performs implementation of corporate governance standards in newly acquired or established subsidiaries and dependent companies, as well as the implementation of organizational project management systems, grading of employees (grading is the construction of a system of job levels, taking into account the assessment of the positions, strategy and corporate culture of the company), attestation of management personnel and implementation of individual employee development plans.


     Risk of interaction with the stakeholders

To develop interaction with the stakeholders, the Company organizes joint public events, conducts special events for the media, initiates publications in key all-Russian, regional and local media, regularly updates information on the corporate website, the corporate blog, the community in the Live Journal, Group on Facebook, regularly monitors the media.


             

The risk of damage as a result of natural disasters and technogenic accidents not at the Company’s facilities

The increase in the risk rating is related to the uncertainty of the consequences and the complexity of forecasting these risks. One of the most prominent risks for FEC companies according to the data of insurance companies on the horizon in question. Improvement of protection procedures, but also events of risk of force majeure weather events similar to the 2013 flood are possible. There is a possibility of occurrence of systemic accidents, as well as receiving losses as a result of natural disasters. To ensure system reliability in the entire power system in the event of local accidents, the Company has introduced and modernized a centralized system emergency control system in accordance with modern requirements. PJSC RusHydro complies with the RF laws on industrial safety and uses a production control system functioning on their basis.


     Risk of unethical or illegal actions of the employees

Increase in the risk rating. Risk events are possible due to conflicts of interest in case of reorganization (including during privatization), and the quality of risk management is constantly increasing. The increase in the probability of this risk in the world as a whole. As part of improving the system of controls to reduce the risks of unethical actions, the Company implements measures to clamp down on illegal activities: The system of the complex automated control system for the dissemination of information containing commercial secrets is being introduced; compliance by employees with the Regulations on Insider Information is being monitored, and other measures are taken to influence the factors and consequences of the risk of unethical or illegal actions of the employees.



     Risk of insufficient innovation performance

The growth of the risk rating in the conditions of stagflation and tightening of international sanctions is caused by the appearance of new requirements of the supervisory bodies for the formation and implementation of Innovative Development Programs, the widening gap between the applied technologies and international best practices, as well as the underfunding of design and survey work due to the implementation of the risk of scarcity of funds.


However, at the same time, opportunities are opening up for the development of innovations that can become more competitive in case of stagflation.


     Risk of incorrect forecast of water availability and target outputs

Reduction of the risk rating because such risk is more a factor of the risks described above and its implementation does not directly result in losses, but entails the implementation of the risks located in the register above. Such risk involves the impossibility of precise forecasting of the volumes of power generated in the mid-term and long-term. To reduce the negative impact of risk on the Company the following activities are carried out:

  • optimization of the use of water resources of the Energy Saving Program of PJSC RusHydro;
  • development of the sectoral system of hydrometeorological surveys and protection of interests of hydroelectric power plants in interdepartmental operational groups under the Federal Agency for Water Resources (RosVodResursy);
  • integration of the medium-term water forecasting model implemented in the IS “Dispatch Centre” with the IC Commercial dispatching.

     Risk of growth of bill receivables for the supply of electricity and power

Increase in the risk rating. The risk is significant for the Company. In the conditions of instability in fuel prices, a decrease in the solvency of counterparties as a result of the impact of the financial crisis, the lack of effective debt collection mechanisms, a decline in production, bankruptcy of counterparties, and in an unfavourable macroeconomic environment, the risk has grown.


To reduce the negative impact of risk on the Company, the Company carries out bill receivable management in the Company, including initiation of claims work, settlements outside the authorized credit organization of the Wholesale Market for Electricity and Power in accordance with the DPO within the framework of current activities in accordance with the Regulations “On the Department for Work at Wholesale Market for Electricity and Power and market analysis” (approved by Order No. 400 of 01.06.2016) and the Regulations on interaction between structural divisions of PJSC RusHydro “On accounting for the performance of obligations under contracts related to the sale of electricity and power” approved by the Company’s Order No. 30 of 21.01.2014 (as amended by Order No. 24 of 20.01.2015).