Risk management is the process performed at all management levels of the Company which focuses on the identification, management and control of events that may negatively influence the Company’s achievement of its goals.
The risk management system is the complex of processes, methods and information systems which focuses on the achievement of the aims and objectives of risk management.
The key documents regulating the risk management system of IDGC of Centre, JSC are as follows:
- The Corporate Governance Code (Minutes of the Board of Directors of IDGC of Centre, JSC No. 009/06 of October 18, 2006). The document is available on the corporate website of the Company at the address: http://www.mrsk-1.ru/docs/koduprav.pdf;
- Regulations on the Audit Committee of the Board of Directors (Minutes of the Board of Directors No. 12/10 of June 02, 2010). The document is available on the corporate website of the Company at the address: http://www.mrsk-1.ru/docs/Appendixx9.doc;
- The Risk Management Policy (Minutes of the Board of Directors No. 13/10 of June 15, 2010). The document is available on the corporate website of the Company at the address: http://www.mrsk-1.ru/docs/Regulition6.doc.
The Risk Management Policy covers the following spheres:
- Risk management strategy
- Basic risk management processes:
- identification and assessment of risks;
- development and performance of measures on risk management;
- risk monitoring.
- Risk management system architecture:
- levels of risk management;
- the operational structure of risk management subdivisions;
- the roles and responsibilities of participants in the risk management system;
- information support for the risk management system.
- Risk accounting:
- regulatory documents and standards;
- communications, resolutions and reports;
- evaluation of risk management performance.
The functions and responsibilities are distributed between the participants of the risk management system at different management levels of the Company as follows:
- Audit Committee of the Board of Directors:
- control over the risk management performance.
- Chief Executive Officer (Management Board) of the Company:
- organisation of effective risk management
- approval of budgets for measures.
- approval of the risk register.
- Subdivisions of the Company:
- identification and assessment of risks.
- development and implementation of risk minimisation measures.
- prompt communication of information on risks and management measures within the subdivision responsible for the organisation of the risk management process.
- recording and transmission of information on risks that have occurred.
- The Company subdivision responsible for the organization of the risk management process:
- coordination of risk management processes.
- training and consulting on risk management methodology.
- support and development of a methodological and regulatory base for the risk management system.
- information support for collegial bodies resolving issues related to risk management.
- providing any interested parties with risk information.
The identification, classification and primary assessment of risks impacting on the Company’s activities has been conducted as part of the establishment of the risk management system at the Company.
Several risk groups were identified; they are classified by categories as indicated in the table below.
|Description of risks
|Measures for minimising risk consequences
|Risks connected with the political and economical situation in the country and in the region
| The forecast for the consumption of electric power and the development of energy production in the regions in which IDGC of Centre, JSC operates is determined by macroeconomic and economic situation in the country as a whole. The Company is subject to risks connected with the impact of the global financial crisis on the social and economic development of our country. The Russian economy remains vulnerable to changes in international market prices for natural gas and oil. The growth dynamics of prices for consumables in the country also remains a problem. All these circumstances may limit the Company’s access to capital resources and negatively affect the buying power of consumers of the Company’s products.
At the present time, the Russian Federation Government is also implementing a policy of restricting the growth of tariffs for the products and services of natural monopolies, including companies of the power grid complex, which may result in the underfunding of the investment programme of IDGC of Centre, JSC.The most likely outcome for economic development in
| A programme of measures aimed to increase operating efficiency in unstable economic conditions is being implemented:
|Risks connected with the geographical features of the country and the region
| The geographical features of the region in which the Company operates carry the risk of natural disasters in the autumn-winter period. These include the risk of interruption of power supply and the incurring of losses in connection with unfavourable weather conditions.
The Company considers these to be high risks, and for this reason the Company is bringing in a range of measures for preparing power grid facilities for the autumn-winter period, with the compulsory certification of each branch that it is prepared for the autumn-winter period.
| The Company is implementing a range of measures to prepare power grid facilities for the autumn-winter period, with each branch of the Company certifying that it is prepared for the autumn-winter period (AWPAutumn Winter Period).
Company branches have long-term experience of the successful prompt mitigation of the consequences of the impact of natural disasters on technical facilities and the infrastructure of electric power networks. Work is continually conducted on reducing the time period necessary for prompt mitigation of the consequences of acts of nature in the autumn-winter period. IDGC of Centre, JSC has also concluded property insurance agreements for compensation of damage so as to minimise the possible consequences of natural disasters.
|Risks connected with industrial regulation
| The most significant external factors in the electric power industry are:
| The development and approval of long-term regional development programmes, in areas where branches of the Company operate, in cooperation with regional and local authorities (signing of agreements).
Making changes to current legislation on pricing for the services of natural monopolies, working jointly with the Federal Tariff Service and the tariff regulation authorities of the constituent entities of the Russian Federation, with the aim of taking into account the interests of the distribution grid companies when establishing tariffs for electric power for the retail market.
| The major buyers of the Company’s services are sales companies supplying electric power to end-users. This leaves the Company exposed to the risk of an increase in the accounts receivable if end-users fail to make prompt payment, and with the need to attract additional credit resources.
A risk of income shortfalls may also arise in connection with individual major consumers’ actual consumption of electric energy falling below projected levels.
At the present time the probability of this risk is estimated as low, with effects on the performance of the Company from moderate to severe.
| The implementation of a carefully weighed credit policy, and receivables management focused on amount optimisation and the collection of debts.
Claim-related work on debt enforcement.
A policy of concluding direct agreements with consumers of electric power.
The diversification of the package of services provided to the consumers of electric power.
| Construction by major consumers of alternative electric power grid facilities may result in future in the reduction of the volume of electric power transmission services provided by the Company.
The probability of this risk occurring is estimated as insignificant, with insignificant effects on the performance of the Company
| The enhancement of operating efficiency by means of reducing production costs and making savings.
Working to increase the proportion of long-term contracts for providing electric power transmission services within in the total volume of concluded contracts.
A carefully weighed financial policy
|Risks of tariff regulation
| The restriction of acceptance of expenses in tariff regulation (the switch to RAB-regulation). From January 01, 2011 all the branches of IDGC of Centre, JSC switched to tariff regulation based on the RAB method. The beginning of implementation of RAB-regulation came at a time of national economic difficulty. The global financial crisis of 2008 impacted negatively on the industry as a whole.
Furthermore, to prevent a jump in electric power prices in 2012 and to ensure the gradual growth of tariffs on natural monopolies, from January 1 till June 30, 2012 it was decided to set tariffs for electric power transmission services at a level not exceeding that of 2011. For the second half-year of 2012, the growth of the average flat-rate “joint operation” tariff should not exceed 11% in comparison with the first half-year of 2011.
| Working with regional regulatory authorities on:
Working with the regulatory authorities on the inclusion of “lost income” in tariffs for the next period of regulation.
Providing economic justification for expenses included in the tariffs, including on the inclusion of “lost income” in tariffs of previous periods.
| Physical deterioration, infractions of operational conditions and critical changes in the working parameters of the electric power grid equipment may result in equipment failure (breakdowns) and the destruction of facilities. It may cause the occurrence of operational risks:
| Insurance of key production facilities.
Reliably maintaining equipment and facilities at the required level:
| These appear in the shape of hazardous emissions from stationary installations and from transport systems and mobile sources (the emission of carbon, nitrogen, hydrocarbon and carbon soot), leakages of transformer oil at substationsSubstation, electric installation designed to convert and distribute electric power, which may result in oil contamination of water reservoirs of commercial fishing importance.
There is an insignificant likelihood of these risks arising, with insignificant consequences for the Company’s activity
| Checks on the toxicity of motor vehicle exhaust gases.
An environmental policy has been approved and is being implemented. Its aim is to increase the level of environmental safety through the provision of reliable and environmentally safe transport and distribution of energy, and an integrated approach to the use of natural energy resources. Considerable attention is paid to work on handling of hazardous waste products — the observance of rules on storage, transportation, utilisation which significantly decreases the effect of toxic substances on soil and, as a consequence, on human health.
The replacement in
The replacement of elements and assembly units of electric power equipment with up-to-date alternatives whose configuration ensures high environmental production safety
|System interruptions of power supply of consumers
| The geographical features of the region in which the Company operates carry the risk natural disasters occurring in the autumn-winter period (AWP), which may result in breakdowns at substations and sections of the grid.
These risks are estimated as high
| The annual certification of each branch of the Company for winter preparedness.
Work on reducing the time period needed for prompt mitigation of consequences of acts of nature in the autumn-winter period (AWP).
The submission by the Company’s management for consideration of the Board of Directors of a report on preparation for operation in the AWP and a report on the results of the past AWP
| In the event that one or more of the risks specified below were to materialise, IDGC of Centre, JSC would undertake all possible measures to minimise the adverse effects of these risks; risks connected with:
| To partially eliminate risk, possible measures to be taken in the event of the occurrence of any given risk have been developed. However, in view of the uncertainty surrounding how such a situation might develop, the parameters of measures to be taken will to a large extent depend upon the specifics of the situation arising in each specific case.
Interaction with credit institutions working with budgetary funds (at state, regional and municipal levels) and with international financial institutions.
Selecting financial organisations for the provision of financial services through the holding of an open single-stage competitive tender or public auction in accordance with the procedures established by the legislation of the Russian Federation, in accordance with which the price of the government order or municipal contract is fixed and cannot be changed in the course of its execution.
A number of measures are being realised in order to reduce the consequences of inflation development:
| Ambiguities in the interpretation of tax legislation norms capable of leading to the incorrect calculation and payment of taxes, as a result of which penal sanctions on the part of tax authorities may follow.
Changes in the legislation, as well as incorrect legal processing of documents and legal support of activities of the Company. To limit such risks, practically all transactions of the Company undergo obligatory preliminary legal analysis.
Appeals by shareholders against major transactions and transactions in the execution of which there is financial self-interest (on the execution of such transactions without the proper prior approval of the Board of Directors or General Meeting of Shareholders, as well as those approved in violation of the established procedure).
Risks in the sphere of shareholder relations — the risk of “corporate blackmail” on the part of the shareholders; the risk of unfriendly shareholders carrying out of actions intended to disrupt future general meetings of the shareholders of the Company.
Legal proceedings concerning the obligations of third parties to the Company, as a result of non-fulfillment by them of their obligations in respect of the principal activities of the Company.
The risks specified, in the opinion of the management of the Company, are insignificant at the present time.
| Work on legitimate improvement of the methodology for calculating the taxation base for different taxes, and control of their compliance with current legislation.
Preliminary legal analysis of transactions concluded with respect to the existence of reasons for the carrying out of preliminary corporate procedures provided for by the current legislation of the Russian Federation and/or the Articles of Association. If necessary, the relevant transactions are submitted for consideration by the competent management bodies of the Company.
Maintenance of the register of the Company’s shareholders is performed by a professional registrar — OOO Reestr-RN. The Company performs a range of measures focused on sharing information with the shareholders and the complete observance of the legal rights and interests of the latter (disclosure of information in accordance with the procedures set forth in the regulatory legal acts, holding of regular meetings of the management of the companies with the shareholders in order to clarify relevant issues of the current activities, observance of corporate procedure and by-laws).
The Company performs mediation settlement of disputes, and conducts negotiations to minimise the risks of the initiation of legal proceedings and harm to the property of the Company