Risk Log

The log of strategic risks for 2018—2019 was drawn up on the basis of the log for 2017—2018; the analysis of external information, including the experience of the world's largest companies in the electricity sector; reports of consulting and insurance companies on the risks of fuel and energy companies and business in general; and the report on global risks of the Davos World Economic Forum. Strategic risks are ranked by the probability of materialization and impact on the business of RusHydro Group and are presented below on the Risk Radar. The Risk Radar illustrates the Company's risk profile for 2018—2019. The risk assessment may be revised in the future due to changes in external factors.

The Company's management monitors all risks of RusHydro Group. Every year, a Strategic Risk Management Plan is drawn up, including both existing control procedures regulated by local regulatory documents that are in force in the Company and measures aimed at responding to risks.

To assess the effectiveness of risk management in the Company, a system of scenarios and risk indicators of business processes of the Company and RusHydro Group has been developed.

The set and nature of scenarios for each risk is determined based on the risk factors from the Company's strategic risk log, monitoring of which enables tracking of trends in risk factors.

RusHydro Risk Log for 2018—2019

Critical risks

  • delay in commissioning new facilities
  • increase in the cost of investment projects
  • decrease in revenue from sales of electricity (capacity) and heat relative to business plan
  • adverse changes/violations of law (legal risks)
  • man-made accidents and safety incidents at production facilities
  • shortage of funds, including those received from external sources (financial risks)

Significant Risks

  • risk of non-fulfillment/decrease in the effectiveness of production programs
  • terrorism and cyber terrorism
  • failure of engineering companies to achieve targets (projects, institutes, repair)
  • deficiencies and errors of the management system
  • reputation risks
  • resulting from natural disasters and industrial accidents not at RusHydro Group facilities
  • corruption risk
  • growth of receivables for the supply of electricity (capacity), heat, and transmission services

Lower Priority Risks

  • Inefficient integration of companies affiliated with RusHydro
RusHydro Risk Radar for 2018—2019

 Delay in Commissioning New Facilities

This risk is critical for the Company and is associated with the large scale of the investment program in coming years, as well as the complex structure of project management and financing. Risk factors:
  • high degree of uncertainty in the project rationale;
  • substandard quality of design documentation;
  • problems with preparation of flooding area;
  • significant dependence of economic parameters of projects on environmental factors (availability of network infrastructure, sales markets at the time of commissioning of a construction facility);
  • rising prices for equipment and materials during construction;
  • supply chain disruptions for various reasons;
  • issues of interaction with RusHydro shareholders.
In relation to this risk, the Company monitors the following scenarios:
  • failure to meet deadlines, causing new facilities to be unready to be put into operation.

Increase in Cost of Investment Projects

This risk is critical for the Company and is associated with the large scale of the investment program in coming years, as well as the complex structure of project management and financing. Risk factors:
  • design errors;
  • low financial stability and bankruptcy of contractors and suppliers, breach of contractual obligations by contractors and suppliers;
  • Overestimation of the volume and cost of works due to overestimation of physical quantities and conversion factors in current prices, the incorrect application of unit prices, cost estimates for inter-construction production, use of standards for overhead costs and planning costs that are recommended for construction when using intra-construction production;
  • adverse changes in legislation, including those related to stricter requirements for capital construction procedures (correlates with risk 4);
  • negative changes in exchange rates (correlates with risk 6);
  • low qualifications/poor equipment of contractors;
  • long terms required for contracting procedures for performance of construction/installation, as well as repair and retooling;
  • failure to meet the deadlines for the provision of submittals and estimates for newly developed documentation, frequent changes in estimates;
  • poor quality of equipment and materials (low technological culture of manufacturers) (correlates with risk 5) (exogenous factor);
  • acceptance of incomplete or partially performed works from contractors and failure to meet deadlines, which leads to the unreadiness of new facilities for operation;
  • inflation growth (exogenous factor).
In relation to this risk, the Company monitors the following scenarios:
  • the total increase in the cost of capital construction projects in 2018 included in the 2018 Investment Program of RusHydro Group;
  • the increase in the cost of priority construction projects.

Decrease in Revenue from Sales of Electricity (Capacity) and Heat Relative to Business Plan

The risk is critical due to over-regulation of the electricity and capacity market, high volatility of electricity prices at the ADEM, instability of fuel prices, a decrease in the solvency of counterparties as a result of the impact of the financial crisis, a decline in production, an increase in the energy efficiency of consumers, unfavorable conditions (low water years), and difficulty in forecasting equipment load.
To reduce the negative impact of the risk on the Company, the following measures are carried out:

  • drafting proposals for amendments to regulatory legal acts in the field of the electric power industry;
  • regular review of RusHydro's sales policy;
  • execution of hedging bilateral agreements on the day-ahead market (including for the purchase of electric power to secure liabilities);
  • introduction of a commercial dispatching system;
  • conducting work to reduce receivables for the supply of electricity and capacity.

In relation to this risk, the Company monitors the following scenarios:

  • a decrease in generation volume relative to the volume specified in the business plan;
  • deviation of the actual water content from the planned (forecast) value;
  • revision of the reservoir water use rules, reducing the energy performance of the Company's HPP;
  • untimely approval of the reservoir water use rules (if necessary) in respect of HPPs planned for commissioning;
  • reduction of day-ahead market prices relative to the forecast price;
  • increased losses in revenue from the sale of capacity related to under-delivery of capacity due to forced downtime of equipment.

Adverse Changes/Violations of Law (Legal Risks)

The critical risk of adverse changes/violations of legislation is noted as one of the most significant for the power industry not only in Russia, but also worldwide. Regulatory requirements are constantly being tightened with regard to safety, insurance, ecology, etc., energy efficiency of consumers is encouraged and the influence of this factor on the Company is likely to increase over time. The Company constantly monitors amendments to the legislation being initiated and considered which in the long term could influence its activity, as well as monitoring and revising existing standards and normative documents in the sphere of technical regulation. Representatives of RusHydro take part in significant events and round tables on amendments to legislation held by legislative, executive and judicial authorities, public associations, professional legal unions and associations to represent their interests. Regular environmental audits. RusHydro participates as an expert in the development of legal acts in the field of electric power at various public authorities and industry organizations, including the Ministry of Energy of the Russian Federation, the Federal Antimonopoly Service, the State Duma of the Federal Assembly of the Russian Federation, the NP Market Council Association, etc.

In relation to this risk, the Company monitors the following scenarios:

  • an increase in expenses for execution of the orders of state supervising bodies in comparison with the previous year;
  • an increase in the number of violations identified by supervisory authorities;
  • an increase in expenses for environmental protection and fees for negative impact on the environment;
  • growing losses of revenue from the sale of capacity as a result of changes in the ADEM rules: introduction of penalties for exceeding the time spent in the planned repair of equipment (technical repair and retooling);
  • refusal of the Russian Federal Tax Service to refund VAT to a developer implementing new construction projects or the emergence of an obligation to refund previously reimbursed VAT;
  • additional assessment of property tax by relevant authorities.

 Technogenic Accidents and Safety Incidents at Production Facilities

The risk is reduced within the red zone due to the implementation of the comprehensive modernization program and the corresponding increase in the reliability and safety of equipment, which leads to a decrease in the probability of risk materialization. At the same time, due to the possible severe consequences of the materialization of the risk of various man-made accidents which could pose threats to life and health and lead to interruptions in production and subsequent loss of income of RusHydro Group, the risk remains in the focus of the RusHydro Group management. A negative impact on the probability of the risk of breaks in management ties is also possible in the case of privatization and/or reorganization of the system for the management of generating assets and facilities under construction. Factors in this risk are design errors that manifest at the stage of operation, physical deterioration of equipment, violation of operating conditions and untimely repairs, technical retooling and reconstruction, poor-quality repair and execution of construction and installation works for technical repair and retooling, the influence of the human factor, and environmental impact. All of these can lead to failure of the main equipment and breakdown of hydraulic structures. According to the Company, the probability of failure of equipment and facilities is at an average level. All main production facilities of RusHydro are insured. In addition, a set of measures is being implemented by the Company to maintain the reliability of the equipment and facilities at an adequate level, namely:
  • conducting the full scope of repair works and implementation of the prospective Technical Re-Equipment and Reconstruction Program;
  • development of a quality control system for supplied equipment, including the process of its production and shipment/delivery/construction and installation, and commissioning, as well as increasing the level of contractual responsibility of suppliers/contractors when producing and supplying equipment and materials;
  • making claims against unscrupulous contractors/suppliers;
  • implementation of the recommendations identified while performing surveys of RusHydro facilities;
  • strengthening control of contractors/subcontractors on production sites in terms of reducing injuries, fires, unethical behavior and theft;
  • development of normative and technical documents aimed at improving the processes of design and construction management;
  • introduction of modern methods of equipment diagnostics without stopping and modern technologies of production asset management, including necessary information technologies;
  • optimization of spare parts structure and volume;
  • development of the life cycle management system at existing hydroelectric power plants.
In relation to this risk, the Company monitors the following scenarios:
  • the actual technical condition index is lower than the forecast index (all factors);
  • an increase in the number of technological incidents compared to the previous year (all factors);
  • an increase in the volume of under-supply of capacity associated with equipment downtime (all factors).

Shortage of funds, including those received from external sources (financial risks)

In the context of ongoing stagflation and international sanctions, the risk is slightly reduced inside the red zone due to the revision of investment priorities. At the same time, access to credit funds may be restricted if international sanctions are retained for a long time. Most of the risk factors are country factors and external factors for the Group.

The risk of shortage of funds received from external sources for planned investments is critical for the Company. It is closely interlinked with the risks of capital construction projects. The reduction of all or part of the sources planned for financing the investment program may lead to a delay in the implementation of projects by RusHydro or the implementation of a scenario in which the Company will be forced to suspend construction or even put a number of generating facilities under construction on hold. Given the high cost of mothballing construction work in progress, which in some cases is 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 availability of sufficient cash and the availability of financial resources through the provision of credit lines;
  • implementation of a balanced model of working capital financing where both long-term and short-term sources of finance are used.
  • monitoring compliance with loan agreements to prevent violation of the financial covenants of the Company;
  • placement of temporarily available funds in short-term financial instruments (bank deposits and bills);
  • conclusion of contracts with counterparties on "standard financial terms";
  • introduction of interest and currency risk management techniques taking into account the credit policy of RusHydro;
  • preparation of flood zones for reservoirs under construction at the expense of the federal budget and the budgets of the constituent entities of the Russian Federation;
In relation to this risk, the Company monitors the following scenarios:
  • inclusion of economically justified expenses in the tariffs in the regulated period at an insufficient level;
  • a decrease in the net profit of the Company;
  • a shortage of funds for payment of currency obligations;
  • a decrease in working capital;
  • an increase in attracted credit resources, an increase in shortfall in income, and an increase in losses if the amount of shortfall in income exceeds the amount to be reimbursed within the tariff, taking into account the forecast growth.

The risk of non-execution/decrease in the effectiveness of production programs

Factors in this risk are:
  • Delayed approval of key financial documents of the Company and its subsidiaries;
  • Long terms for concluding contracts for the performance of work (provision of services);
  • Low financial stability and bankruptcy of contractors and suppliers;
  • Low qualifications of contractors;
  • Low labor discipline of contractors;
  • Imperfection of the system for monitoring the progress of repair and retooling and modernization;
  • Negative change in exchange rates (correlates with risk 1, 6 in terms of foreign exchange risk management).
  • Adverse changes in the macroeconomic environment, including crisis phenomena in the global economy (correlates with risk 1).
  • Lack of criteria for economic evaluation of the effectiveness of innovative projects/solutions.
  • Uncertainty/impossibility of evaluating the effectiveness of individual innovative projects/solutions (exogenous factor).
  • Inadequate tracking of world-class advanced and innovative technologies.
  • Shortage of funds.
Measures to manage this risk are similar to those implemented in the risks "Failure to meet the deadlines for commissioning new capacities", "Shortage of funds, including received from external sources (Financial risks)"

Terrorism and cyber terrorism

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

The growth of cyberterrorism threats (currently Russia is in first place in terms of the rating of exposure to cyber threats of Kaspersky Lab and other studies). Lack of coordination with international anti-terrorism services in the case of tougher international sanctions. The large proportion of automated control systems of foreign manufacture. In order to reduce the impact of this risk on the Company, the following measures are carried out:
  • property insurance for the risk "Terrorism and Sabotage";
  • an increase in the share of equipment certified by the FSTEC and domestic equipment;
  • conducting an audit of information and technical security.
Armed security of facilities is also being implemented by private security units of the Ministry of Internal Affairs of Russia and the Federal State Unitary Enterprise "Departmental Protection" of the Ministry of Energy of Russia. In addition, plans have been developed for interaction with law enforcement agencies to protect the Company's facilities when someone commits or threatens to commit a terrorist act. On the territory of hydropower facilities, access control and intra-facility modes have been introduced. Together with law enforcement agencies, measures are being taken to prevent theft. An assessment of the most dangerous threats and development of mitigation plans are carried out together with the civil defense and emergency services of the constituent entities of the Russian Federation at the location of the Company's generating assets.

Failure of engineering companies to achieve targets

The risk can significantly affect the development of the business of the company as a whole. In times of crisis, a key development opportunity is to increase quality and reduce costs within all stages of the life cycle of the Group's assets by reducing the risks of engineering activities. At the same time, engineering companies may have limited access to credit funds in the event of long-term international sanctions and difficulties in obtaining funds in freely convertible currency. The company considers this risk significant for itself due to a possible reduction 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 on the Company, the following measures are carried out:
  • creation of a unified design complex of RusHydro through the reorganization of design subsidiaries;
  • implementation of a program for the development of engineering subsidiaries;
  • launch of programs for the international exchange of experience for repair and design subsidiaries;
  • organization of staff development and training of scientific personnel;
  • development of standard statements of the scope of work on the repair of equipment and hydraulic structures;
  • minimization of risks of inefficient management of non-core activities through its consolidation in specialized service subsidiaries.

Deficiencies and errors of the management system

In order to manage risk, the Company is developing a system for regulating activities and managing business processes, optimizing the timing and approval of purchases, and interacting with interested parties. The internal control division of RusHydro analyzes the main business processes in order to improve the control system and increase the efficiency of the processes. The civil liability of the Company's officials to third parties is insured. RusHydro implements corporate management standards in newly acquired or created subsidiaries and dependent companies, and also introduces organizational project management systems, employee grading (grading is the construction of a system of job levels, taking into account the assessment of positions and the strategy and corporate culture of the company), certification of management personnel and the implementation of individual employee development plans.

Reputation Risks

Factors in this risk are:

  • distribution of incorrect and knowingly false information about RusHydro Group in the public sphere;
  • distribution of negative (compromising) information about RusHydro Group in the public sphere;
  • unauthorized distribution of information by RusHydro Group employees;
  • unauthorized access of third parties to RusHydro Group facilities.

In order to reduce the impact of this risk on the Company, measures are taken to maintain the image of the Company when interacting with the investment community; special events are held for the media; publications are initiated in key national, regional and local media; information is regularly updated on the corporate website, in the corporate blog, in the community in Live Journal, and in the group on Facebook; and monitoring of media is conducted on a regular basis.

Damage resulting from natural disasters and industrial accidents not at RusHydro Group facilities

The risk's rating has not changed. The significance of the risk is due to the uncertainty of the consequences and the difficulty of predicting these risks. One of the most highlighted risks for energy companies according to insurance companies on the horizon under consideration. Improvement of protection procedures, but occurrences of the risk of force majeure weather events similar to the flood of 2013 are also possible. There is a likelihood of systemic accidents, as well as losses resulting from natural disasters. In order to ensure systemic reliability in the entire power system in the event of local accidents, the Company has introduced a centralized system of emergency automation and modernizes it in accordance with modern requirements. RusHydro complies with the legislation of the Russian Federation in the field of industrial safety and uses a production control system operating on its basis.

 Corruption risk

Risk events are possible due to conflicts of interest in the event of reorganization (including during privatization), but the quality of risk management is constantly improving. The increase in the probability of this risk worldwide. As part of improving the system of controls to reduce corruption risks, the Company is implementing measures to curb illegal actions: a system of integrated automated control system for the distribution of information containing trade secrets has been introduced, employee compliance with the Regulation on insider information is being monitored, and other measures are being taken to influence the factors and consequences of corruption risks.

The growth of receivables for the supply of electricity (capacity), heat and transmission services

The risk is significant for the Company. In the conditions of instability of fuel prices, a decrease in the solvency of counterparties as a result of the impact of the financial crisis, the absence of effective mechanisms for collecting debts, a decline in production, bankruptcy of counterparties, and an unfavorable macroeconomic environment, the risk has increased.

In order to reduce the negative impact of the risk on the Company, Measures for Managing Accounts Receivable in the Company are being taken, including initiating claim-related work, making settlements outside an authorized credit organization of ADEM in accordance with the ATP within the framework of current activities in accordance with the Regulation on the Department for Operation on the Wholesale Electricity and Capacity Market and Market Analysis and the Rules for interaction between structural divisions of RusHydro on matters of accounting for performance liabilities under contracts related to the sale of electric energy and capacity.

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