28. Financial Instruments and Risk Management
(a) Overview
The Group has exposure to the following risks from its use of financial instruments:
- credit risk;
- liquidity risk;
- market risk.
The Group does not have any significant exposure to currency risk on sales, purchases and borrowings, because no significant sales, purchases, or borrowings are denominated in a currency other than the functional currency of the Company, which is the Russian Rouble.
This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital.
(b) Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and investment securities.
(i) Trade and other receivables
The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer.
To manage credit risk the Group attempts, to the fullest extent possible, to demand prepayments from customers. As a rule, prepayment for connection services is set in a contract and depends on the amount of capacity to be connected.
The customer base for electricity transmission services is limited to several distribution companies and a small number of large manufacturing/extraction enterprises. Payments are tracked weekly and electricity transmission customers are advised of any failures to submit timely payments. For quick collection and complete control of accounts receivable collection a working team was formed to reduce the Company’s finance losses, caused by non-fulfilment or insufficient fulfilment by some contractors of their contractual obligations.
The Group does not require collateral in respect of trade and other receivables.
The Group establishes an allowance for impairment that represents its estimate of anticipated losses in respect of trade and other receivables that relate to individually significant exposures.
(ii) Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:
| 31 December 2011 | 31 December 2010 | |
|---|---|---|
| Trade and other receivables | 7,358,545 | 6,176,806 |
| Investments and financial assets | 533,976 | 614,380 |
| Cash and cash equivalents | 2,646,152 | 258,889 |
| 10,538,673 | 7,050,075 |
Financial guarantees are disclosed in Note 31.
The Group’s two most significant customers, regional distribution entities, account for RUB 2,227,664 thousand of the trade receivables carrying amount at 31 December 2011 (31 December 2010: RUB 3,031,388 thousand).
The maximum exposure to credit risk for trade receivables (excluding other receivables) at the reporting date by type of customer was:
| Carrying amount at 31 December 2011 |
Carrying amount at 31 December 2010 |
|
|---|---|---|
| Electricity transmission customers | 6,457,536 | 5,350,827 |
| Connection services customers | 119,838 | 187,268 |
| Other customers | 285,570 | 122,711 |
| 6,862,944 | 5,660,806 |
Impairment losses
The tables below analyze the Group’s trade and other receivables into relevant groups based on the past due periods:
| At 31 December 2011 | At 31 December 2010 | |||
|---|---|---|---|---|
| Gross | Allowance | Gross | Allowance | |
| Not past due | 3,179,262 | (3,620) | 2,207,375 | (11,801) |
| Past due |
2,049,914 | (19,214) | 533,928 | (797) |
| Past due |
1,322,700 | (215,397) | 3,211,085 | (273) |
| Past due |
1,522,458 | (632,632) | 216,037 | (87,989) |
| Past due more than 12 months | 1,069,102 | (914,028) | 1,740,816 | (1,631,575) |
| 9,143,436 | (1,784,891) | 7,909,241 | (1,732,435) | |
The movements in the allowance for impairment in respect of trade and other receivables during the year were as follows:
| Year ended 31 December 2011 |
Year ended 31 December 2010 |
|
|---|---|---|
| Balance at 1 January | 1,732,435 | 1,437,231 |
| Increase during the period | 704,001 | 605,084 |
| Amounts written-off against receivables | (432,948) | (25,187) |
| Decrease due to reversal | (218,597) | (284,693) |
| Balance at 31 December | 1,784,891 | 1,732,435 |
(c) Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group monitors the risk of cash shortfalls by means of current liquidity planning. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. This approach is used to analyze payment dates associated with financial assets, and also to forecast cash flows from operating activities.
To manage the liquidity risk, the Group has negotiated long-term and short-term credit lines with a pool of commercial banks, designated as highly rated banks.
As at 31 December 2011 the Group’s unused portion of long-term and short-term credit line facilities amounted to RUB 5,500,000 thousand (31 December 2010: RUB 8,800,000 thousand).
The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements:
| Carrying amount |
Contractual cash flows | 12 months or less | Between 1 and 5 years | More than 5 years | |
|---|---|---|---|---|---|
| Liabilities as at 31 December 2011 | |||||
| Long-term bank loans including current portion | 21,237,320 | 31,332,061 | 2,929,879 | 16,439,980 | 11,962,202 |
| Finance lease liabilities | 866,736 | 1,124,304 | 653,506 | 470,798 | — |
| Trade and other payables | 5,359,092 | 5,359,092 | 5,350,613 | — | 8,479 |
| 27,463,148 | 37,815,457 | 8,933,998 | 16,910,778 | 11,970,681 | |
| Financial guarantees | — | 755,334 | 755,334 | — | — |
| Carrying amount |
Contractual cash flows | 12 months or less | Between 1 and 5 years | More than 5 years | |
|---|---|---|---|---|---|
| Liabilities as at 31 December 2010 | |||||
| Long-term municipal loans | 345,738 | 352,221 | 352,221 | — | — |
| Long-term bank loans including current portion | 14,590,265 | 19,851,345 | 1,960,666 | 13,834,547 | 4,056,132 |
| Finance lease liabilities | 1,447,719 | 2,026,793 | 902,489 | 1,124,304 | — |
| Trade and other payables | 4,192,865 | 4,192,865 | 4,183,739 | 647 | 8,479 |
| 20,576,587 | 26,423,224 | 7,399,115 | 14,959,498 | 4,064,611 | |
| Financial guarantees | — | 1,203,717 | 1,203,717 | — | — |
(d) Market risk
Market risk is the risk that changes in market prices, such as interest rates will affect the Group’s income or the value of its holding of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return.
(i) Interest rate risk
The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group is exposed to interest rate risk only through market value fluctuations of loans and borrowings. The interest rates on most long- and short-term loans and borrowings are fixed. Changes in interest rates impact primarily loans and borrowings by changing either their fair value (fixed rate debt) or their future cash flows (variable rate debt).
Management does not have a formal policy of determining how much of the Group’s exposure should be to fixed or variable rates. However, at the time of raising new loans or borrowings management uses its judgment to decide whether it believes that a fixed or variable rate would be more favourable to the Group over the expected period until maturity.
Profile
At the reporting date the interest rate profile of the Group’s interest-bearing financial instruments was:
| Fixed rate instruments | Carrying amount 31 December 2011 |
Carrying amount 31 December 2010 |
|---|---|---|
| Financial liabilities | 22,104,056 | 16,383,722 |
Fair value sensitivity analysis for fixed rate instruments
The Group does not account for any fixed rate financial assets and liabilities at fair value through profit and loss, and the Group does not designate derivatives (interest rate swaps) as hedging instruments under a fair value hedge accounting model. Therefore a change in interest rates at the reporting date would not affect profit or loss.
(e) Fair values
Management believes that at the reporting date the fair value of the Group’s financial assets and liabilities approximates their carrying amounts.
(f) Capital management
Management’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Management monitors the return on capital, which the Group defines as result from operating activities divided by total shareholders’ equity.
Management seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position.
There were no changes in the Group’s approach to capital management during the year.
The Company and its subsidiaries are subject to external capital requirements that require that their net assets as determined in accordance with Russian Accounting Principles must exceed their charter capital at all times.
Return to Notes to the Consolidated Financial Statements for the year ended 31 December 2011