Chapter 2
2.2. Risk management
Events of 2015
- The Internal Risk Control and Management Policy of the Company is updated.
- The Register of the strategic risks of PJSC RusHydro for 2015 – 2016 based on data from the automated Internal Risk Control and Management System is updated.
- The Internal Risk Control and Management Policy of PJSC RAO Energy Systems of the East is updated.
- 17 key subsidiaries (design institutes, сonstruction and equipment installation prime contractors, IT subsidiaries and affiliates, and distributing subsidiaries and affiliates) confirm Internal Risk Control and Management Policies based on the requirements of the parent Company, develop risk management plans for 2015 – 2016, and implement the procedures of annual individual risk management reporting.
2.2.1. Corporate risk management system
The activity of PJSC RusHydro is connected with some risks which, under certain circumstances, may have negative influence on the operational and financial results of the RusHydro, as well as the social and natural environment of the Company. The Company has developed a risk management system in order to minimize the negative influence of possible risks and optimize favorable opportunities. The system is developed in order to ensure the execution of the Company’s strategy.
The Risk Management and Control Department is established as a part of the Internal Risk Management and Control Unit for the purpose of risk management process organisation.
The risk management programme of RusHydro won the Best Risk Management 2015 competition in the Production Organisations category of the 13thRisk Management in Russia and the CIS International professional forum.
Structure of business and risk management activity of PJSC RusHydro
2.2.1.1.Stages and methods of risk management
Stages of risk management
The approval data is the principle document stipulating the process of the formation of the register/plan/report on risk management and respective KPI.
The Company compiles the Register of strategic risks on an annual basis. This document is subject to approval by the Board of Directors. The Board approves the plan of strategic risk management for the management of critical and significant risks. The plan stipulates the terms of actions, persons responsible for them, and their expected results. The efficiency of the execution of risk management actions and KPI is taken into consideration in the payment of bonuses to employees. The monitoring and control of the execution of the plan is carried out by the risk managers of the Company.
Risk managers interact with the members of the Audit Committee of the Board of Directors for the purpose of controlling the functioning of the risk management system of PJSC RusHydro, which corresponds to the guidelines on the audit of the Boards of Directors of companies in which the Russian Federation holds stakes (stipulated by decree no. 86 of the Russian Federation Federal Property Management Agency dd. 20.03.2014).
The Automated Internal Control and Risk Management System was implemented in 2014 in order to support the process of risk management technologically due to the necessity of processing big volumes of data and ensuring the current monitoring of key risk parameters.
2.2.1.2. Corporate documents
The Internal Control and Risk Management Policy of the Company is the main document stipulating the goals, purpose, and principles of the functioning of the corporate risk management control of PJSC RusHydro.
Documents stipulating strategic risk management
| Operational risks | Investment risks | Market (sales) risks | M&A risks |
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2.2.1.3. Development of internal risk management and control system in 2015 and plans for 2016
Company’s measures aimed to improve risk management system in 2015:
- the Register of the strategic risks of PJSC RusHydro have been updated, which allowed increasing the share of the quantitative assessment s of transactions and reduce the need for expert opinion;
- the risk management system continues at PJSC RAO Energy Systems of the East on the basis of approaches similar to the ones of PJSC RusHydro. The Internal Risk Management and Control Policy of PJSC RAO Energy Systems of the East has been approved. Strategic risk management registers and plans of PJSC RAO Energy Systems of the East, Far-Eastern Energy Company PJSC, and Far-Eastern Generating Company PJSC have been approved and are being regularly updated;
- Internal Risk Management and Control Policies have been approved by 17 subsidiaries and affiliates (design institutes, building and installation prime contractors, IT subsidiaries and affiliates, and distributing subsidiaries and affiliates) executing investment projects; the owners of risks and persons responsible for the collection and update of information have been appointed;
- the Internal Risk Management and Control Policy has been updated (minutes of the meeting of the Board no. 227 dd. 16/11/2015) ;
- an external audit of the Long-term Development Programme of the development implementation was carried out based on the results of the year 2015.
At the current stage of its development the Internal Risk Management and Control System (IRMCS) of the Company may be characterised as developing. The concept of the implementation and development of IRMCS against the decrease of staff is based on the risk-oriented approach to internal control; the formation of the vertically-integrated structure of the internal control subjects of the Company which ensures the maximum engagement of business process owners and the structural units of the Company into such activity through the appointment of business process administrators responsible for the execution of IRMCS within the respective units of the Company and the optimisation of the interaction of the internal control subjects of the Company with the Control and Risk Management Department of the Company responsible for methodological support, monitoring, and coordination of the activity of internal control subjects as a part of IRMCS activit
Integration of IRMCS system by PJSC RusHydro and PJSC RAO Energy Systems of the East
PJSC RAO Energy Systems of the East started implementing the IRMCS based on the principles and standards of PJSC RusHydro in 2012.
The following key steps have been taken:
- the Internal Control and Risk Management Policy has been approved
- consolidated strategic risk management plans have been formed etc.
The IRMCS system of PJSC RAO Energy Systems of the East is currently fully functional.
Registers and plans are updated, and position of the Group on the most pressing matters is formed under the control of the risk managers of PJSC RusHydro on a regular basis. Reports on the execution of strategic risk management plans are analysed for the introduction of important matters into the strategic risk management plans of PJSC RusHydro.
Special attention is paid to the management of the risks of investment projects carried out at four energy sites in the Far East: CHP in Sovetskaya Gavan (to be commissioned in 2017), Sakhalinskaya TPP-2 (1st stage) (to be commissioned in 2017), Yakutskaya TPP-2 (1st stage) (to be commissioned in 2016), Blagoveschenskaya CHP (2nd stage) (in 2015 the first phase of the second stage of Blagoveschenskaya CHP was finished. At this stage key equipment was tested and test-launched individually. Works on the site are to be finished in 2016).
Pursuant to decree no. 1564 of President of the Russian Federation as of 22.11.2014 On the Further development of PJSC RusHydro implementation of these projects is a high priority task for the Group.
Company conducts independent assessment of risks on a regular basis
In 2015, Willis CIS Insurance Broker surveyed 10 facilities. The Company is currently monitoring the execution of plans concerning the implementation of previous surveyors’ recommendations. The results of this monitoring are further submitted to the reinsurance broker for the assessment of risks by the insurers and reinsurers of the Company. Due diligence inspections concerning the risks connected with m&a transactions are carried out. The recommendations of the external auditor of the Company are taken into consideration.
Programme of development of Internal Risk Management and Control System of RusHydro Group until 2019
As parts of the execution of the Programme for 2016 – 2018, it is planned:
- to approve the Rules of the Compilation of Risk Management Reports and the interaction of branches, subsidiaries and affiliates and dependent companies with the risk managers of PJSC RusHydro concerning risk management and the implementation of respective adjustments to corporate procedures,
- to integrate risk management systems into the processes of planning and decision-making within the branches, subsidiaries and affiliates and dependent companies of the Group,
- to conduct the analysis of the risk management report collection system of the Group covering all of its companies and aggregate risk management information at the parent company level using automated internal risk management and control systems.
- to monitor the development of corporate risk management systems and their efficiency on a regular basis.
For more details on improvement of risk management system see corporate site.
2.2.2. Risk register of RusHydro Group
2.2.2.1. Risks caused by activity of the Company
The current register of risks caused by the activity of the Company has been formed on the basis of data as of the previous period and the analysis of external information.
The register of strategic risks taking into consideration the possibility of such risks and their influence on the business of the Company is represented in the Risk Radar. The Radar reflects the forecast on the change of the risk profile of the Company for 2015 – 2016 taking into consideration updated risk factors influencing the business of the Company against the growth of country risks. The range of risks presented in the Radar reflects the management priorities of the Company touching upon its readiness for the negative scenarios of the development of the overall risk situation.
Among the most serious risks of the Company in 2015 we should note the development of the following risks (compared to 2014): the risk of unfavourable legislative changes (the red zone), the risk of the deficit of resources required for the execution of production programmes, the risk of engineering companies to fail to meet their goals, and the risk of terror attacks (the yellow zone). The urgency of risks connected with staff management has decreased significantly.
Speaking about fuel-and-energy companies according to bench-marking report by leading international consultancies, the possibility of their expansion to foreign markets and the variety of their services rendered to end users have grown; their cooperation with investors and other stakeholders has developed, especially in terms of the disclosure of information touching upon the activity of the Company, innovative development, and the development of the alternative (wind) energy sector.
PJSC RusHydro risks radar for 2015-2016
The list of PJSC RusHydo risks in 2015
| CRITICAL RISKS | ||
| Risk name | Risk factors | Risk management activities |
Capital construction project risks  | The risk is related to a wide range of investment programmes for the next few years, and the complex management and financing structure of a range of products. Risk factors:
At the implementation stage:
Other:
| The systematisation of data on the designed projects:
The development of the internal expert review of design and detailed design documents:
Control over the quality of work, schedule and cost:
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| The risk of the reduction of electric power and capacity sales income compared to the business plan | The risk is critical due to overregulation of the electricity and capacity market, highly volatile electricity prices on WECM, variability of fuel prices for PJSC RAO Energy System of the East, decreasing payment capacity of contractors resulting from the effects of financial crisis, unfavourable conditions (dry years), difficulties in forecasting the payload of the equipment. The risk correlates closely to the risk of inaccurate forecast of water inflows. |
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The risk of negative legal changes/violations | The critical risk of unfavourable changes/ violations of law is one of the most significant for the power industry not only in Russia, but worldwide. The safety, insurance, environmental and other regulatory requirements are getting stringent; the consumers’ energy efficiency is encouraged, and this factor is increasingly affecting the Company with the course of time. |
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The risk of man-made accidents | The risk is mitigated within the red zone due to the implementation of the comprehensive modernisation programme and the respective equipment reliability and safety growth. However, taking into consideration the potential consequences of risk occurrence, which may threat human life and health and lead to the disruption of production and further reduction of the Company’s revenue, the risk remains in the focus of attention of the managers of the Group. The negative effect on the risk probability of severance of managerial ties is possible in case of Company privatisation and/or restructuring of the management system by cash-generating units and projects under construction. Here the risk factors result from design faults manifesting at the operation stage, equipment deterioration, the violation of operating conditions, untimely repairs, re-equipment and reconstruction, low-quality repair, the low-quality of construction and installation works connected with re-equipment and reconstruction, the human factor, and environmental factors. All of them may lead to the breakdown of major equipment and deterioration of hydrotechnic structures. As estimated by the Company, the probability of the breakdown of equipment and structures stays within the industry-average level. All main production facilities of PJSC RusHydro are insured. |
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| The risk of fund shortage including the shortage of external funds for planned investments | Against ongoing stagflation and international sanctions, the risk may be slightly mitigated due to the reconsideration of investment priorities. At that, given that international sanctions continue, the risk of the unavailability of borrowed funds on terms favourable for the Company is growing due to the existing covenants set forth in the Group’s loan agreements. Most of the affecting risk factors are represented by the country and external factors of the Group. The risk of external fund shortage is critical for the Company. It is closely bound with the implementation of capital construction projects. The full or partial reduction of financing sources within the framework of the investment programme may cause the late completion of ongoing projects or the Company’s being forced to suspend construction or even suspend the construction of a number of facilities. Taking into account high cost of preservation of facilities under construction, which in some cases is comparable with the cost of proceeding with the construction, this fact will affect the economic efficiency of the Company’s investment projects, as well as its financial and performance results. |
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| SIGNIFICANT RISKS | ||
| The risk of the shortage of resources for the implementation of working programmes | The significance of the risk is growing due to the growth of the risk of disruption of supplies caused by the counterpart’s faults as a consequence of the crisis and fiscal deficit influencing programme implementation due to the occurrence of correlated risks. The possible disruptions of tenders, equipment supplies, and the provision of maintenance services by foreign counterparties, the withdrawal of banking guarantees issued by foreign banks. The risk is highly correlated with the risk of the shortage of funds for investments. |
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| The risk of failure to achieve target values by engineering companies | The risk aggravation is connected with its significant impact on business development opportunities in general. Amid the crisis the key development opportunity includes the enhancement of quality and the reduction of costs at all lifecycle stages of the Group’s assets, to a large extent through the mitigation of engineering risks. At that, there is a possibility of the restriction of access to borrowed funds for engineering companies in case of the continuation of international sanctions and difficulties related to obtaining funds in a freely convertible currency. The company regards this risk as significant due to the high importance of engineering business as a part of the lifecycle of business assets. |
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| Terrorism risk | This risk is caused by general political and social tensions, the activity of armed groups in the North Caucasus and their attempts to expand their activities to other regions of the Russian Federation, the high probability of local and regional armed conflicts, the growing threat of international terrorism and political instability in a number of developing countries caused by the economic crisis, as well as the activity of extremist organisations, and growing commercial terrorism. In this context, PJSC RusHydro expects the growth of risks related to terrorist activities aimed at hydroelectric power facilities. Growing risk significance. Growing cyberterrorism threats (currently Russia is #1 in terms of exposure to cyber-attacks, as reported by Kaspersky Lab and organisations). We should note the lack of coordination with international counter-terrorism against the continuation of international sanctions. Upcoming events (the FIFA World Cup 2018, etc.); a large share of foreign management information systems. |
The armed security of facilities by non-departmental security organisations of the Ministry of Internal Affairs of the Russian Federation and federal state unitary enterprise Departmental Security Service of the Ministry of Energy of the Russian Federation. Moreover, plans for cooperation with law enforcement authorities are developed to ensure the protection of the Company’s facilities in case of a terror attack or a risk thereof. Access and internal security control measures have been introduced at hydroelectric power facilities. Measures to prevent thefts and ensure control over third-party access to the Company’s facilities are arranged in cooperation with law enforcement agencies. The most dangerous threats are evaluated and the consequence management plans are elaborated in cooperation with the Civil Defence and Emergency Service of the Russian Federation at the location of generating facilities of the Company. |
| The risk of failure to achieve target values by retail companies | The risk declines, remains significant for the Company. The risk may depend on slumping demand for electric power and capacity due to decline in production, intense competition with independent power supply companies and the development of energy-saving technologies, as well as consumers’ financial insolvency caused by stagflation and the development of energy-saving technologies. The risk factors include a high level of competition, a threat of losing the last resort supplier status in retail regions and the possibility for construction of alternative electric supply facilities by large consumers. |
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| The risk of delays and errors in management system improvemen |
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The internal control department of PJSC RusHydro analyses 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 affiliates, 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 cooperation with stakeholders |
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| The risk of damage caused by natural disasters and man-made accidents outside the Company’s facilities | Risk aggravation is connected with the uncertainty of consequences and difficulties in forecasting such risks. This is one of the most significant risks for fuel and energy companies, according to insurance companies. Protection procedures are being improved, but there may be the risk of force-majeure events including incidents similar to the flood of 2013. There is the probability of systemic accidents and damages caused by natural disasters. |
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| The risk of the misconduct or legislation violation of employees | The growing risk; such incidents are possible due to the conflict of interests in case of restructuring (including privatisation), though the efficiency of risk management is constantly improving. The growing probability of such risks all over the world, according to the findings of international consulting companies. |
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| The risk of the low efficiency of innovation activity | Risk growth against stagflation and the toughening of international sanctions is caused by the adoption of new requirements for the elaboration and implementation of innovation development programmes by regulatory authorities, the growing gap between the currently used technologies and the best international practices, as well as the lack of financing for design and survey work due to the risk of fund shortage. However, there arise new opportunities for innovation development, which may increase competitiveness in case of decline in the exchange rate of the Russian national currency. |
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| The risk of incorrect water-content and output forecasting | The risk is mitigated, since it is largely the factor of the risks described above. and its occurrence does not directly lead to damages, but may contribute to the possibility of the risks listed above. This risk includes the failure to accurately forecast power output in the medium- and long-term perspectives. |
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2.2.3. Other risks
2.2.3.1. Country risks
The Russian economy is not protected against market decline and global economic recessions. Currently investors’ fear of country risks reduces the volume of foreign investments into Russia, which has negative impact on the Russian economy. Besides, since Russia produces and exports large volumes of natural gas and oil, the Russian economy is highly sensitive to world energy prices, while slumping prices for natural gas and oil largely affect the economic development indicators of Russia.
Therefore, there may occur events capable of restricting the Company’s access to capital and having a negative impact on the purchasing power of product and service consumers. The Company tries to diminish the impact of such events on its activity by optimising the use of borrowed funds in crisis conditions.
Under the global financial market crisis and the decline in industrial production, there is a risk of reduced demand for electricity, which can result in a reduction in sales and a decrease in corporate revenues, as well as the risk of growth in accounts receivable due to non-payment by electricity consumers.
Exposure to country risk with certain assumptions can be indirectly assessed by a credit rating (excluding political risk for business). Due to external factors such as a decrease in oil prices and the fall of the RUBle at the end of 2014, Russia’s sovereign rating was lowered from BBB with a stable outlook to BBB- with a negative outlook (according to Fitch) and to BB + by the rating agency Standard & Poor’s, which is certainly a negative factor, but it has specifics related to the anti-Russian sanctions. Depending on the continuation of this policy or its cancellation, the level of country risk will be subject to change. In this regard, there might be an increase in risks associated with the failure of individual foreign suppliers to fulfil their commitments, the reduction of market outlets and the revision of contracts.
The results of the 4Q2015 and 1Q2016 did not show the worsening of the situation. As reported by Standard & Poor’s International Rating Agency in March 2016, the long-term foreign currency credit rating of Russia stays at the level of BB+ (below investment grade) with a negative outlook. The macroeconomic situation in Russia has not suffered negative changes since previous assessments of S&P and Fitch, as noted by economists, while the ratings presented by the leading rating agencies are based on political prejudice. The Russian outlook may be reviewed up to stable, if the financial situation and economic development perspectives of the country improve. Rating downgrade is likely to occur if geopolitical events lead to the strengthening of sanctions against Russia by foreign countries.
For the purpose of country risk diversification, active work is being conducted together with BRICS partners. A number of contracts has been concluded with Chinese power companies, which will further enable RusHydro Group to extend cooperation with China both in the area of the construction of new power facilities and electricity export.
According to the Memorandum of Understanding signed in January 2015 by RusHydro and K-Water (Korean Water Resources Corporation) at the Eastern Economic Forum, carried out on September 3-5 in Vladivostok, PJSC RusHydro and “K-water” (Korea Water Resources Corporation) entered into an agreement in the area of hydroelectric power and water resource management. Within the framework of that document, the parties agreed to search for mutually beneficial directions of joint activity in the area of hydroelectric power, renewable energy sources, and projects in the field of integrated water resource management within the territory of Russia, Southern Korea, and other countries. It is planned to carry out joint research, share technical data on the modernisation of hydrotechnical facilities, and develop new business directions. The parties do not exclude other forms of cooperation, for example, in the area of integrated water resource management including flood control measures, the use of tidal energy, and other types of alternative energy.
We should also note growing cooperation between Russia and its partners from the Shanghai Cooperation Organisation and BRICS, the establishment of new financial institutions, and the inflow of investments of those partners to the country, which could have positive influence on country risks.
2.2.3.2. Financial risks
Financial risks can be categorized as the risk of growth interest rates in bank loans, foreign currency risk, inflation risk and liquidity risk. The impact of these risks on the Company’s performance is not considered to be material to the Company.
Financial metrics, liquidity, financing sources and RusHydro’s performance are not very responsive to changes in the exchange rate and interest rates, because the Company sells energy on the domestic market, as well as settles accounts with resource suppliers, and accrues and receives payments from consumers mainly in the national currency – Russian rubles.
Some of the loans of PJSC RusHydro have been taken at variable interest rates. In order to minimise interest risks, the Company concluded a swap contract to fix the variable interest rate.
The rate of inflation directly depends on the political and economic situation in the country. The negative impact of inflation on the financial and economic activities of the Company manifests in the growth of the following risks:
- the risk of damages connected with the reduction of the actual value of receivables with a significant deferral of or delay in payment;
- the risk of increasing the value of the Company’s liabilities;
- the risk of increasing the unit cost of goods, products, works, services due to the increase of energy prices, transportation costs, and salaries;
- the risk of the decrease of the actual value of funds raised to finance the investment programme;
- the risk of increase in the cost of borrowed funds.
In the end of 2015, according to the data of the Federal State Statistic Service of the Russian Federation (Rosstat), the rate of inflation in Russia was 15.5% against 11.4% in 2014 (6.5% in 2013 and 6.6% in 2012). The Ministry of Economic Development of the Russian Federation expects that in 2016 the rate of inflation in Russia will decrease to 6.4 % as per the basic scenario with $50 p/b and to 8.3 % as per the conservative scenario with $40 p/b.
As of the end of 2015 the rate of inflation was much lower (below 20% per annum) than the critical inflation rate expected by PJSC RusHydro at which the Company might face difficulties.
The Company manages the liquidity risk by maintaining a sufficient amount of funds and marketable securities in order to remain able to perform its current liabilities. Temporarily available funds are invested into short-term financial instruments, in particular bank deposits and bills of exchange.
With a view to the aggravation of the international situation in 2015, and the worsening of the credit ratings of the Russian Federation expected by international rating agencies, as described above, as well as the existing economic sanctions and possible force majeure circumstances, there exist the risks of the restriction of the Company’s access to funds borrowed from foreign counterparties, the growth of the value of the Company’s debt liabilities, and losses related to exchange and interest rate growth.
The control of those risks can be carried out by the decrease of the lending limit for bank counterparties with decreased rating, the stress-testing of potential losses related to exchange an interest rate growth in accordance with the Company’s exchange and interest rate risk management procedure, as well as in the legal support of the contractual framework.
2.2.3.3. Industry risks
The Company is specifically exposed to industry risks due to possible changes in the electric power industry.
It is worth noting the decreasing uncertainty of the Company’s activity in the wholesale electric power market as a result of the adoption of the long-term competitive capacity auction model in 2015 as prescribed by the Wholesale Electric Power Market Regulations (approved by Decree of the Government of the Russian Federation no. 1172 as of 27.12.2010).
In the context of industry risk management, PJSC RusHydro takes necessary steps to create the favourable legal framework for the functioning of the electricity and power market. For this purpose, the Company participates as an expert in discussions of draft legal acts in the field of electric power at the sites of the Ministry of Energy of the Russian Federation and the NP Market Council Association.
Norms that regulate the activities of Russian energy companies and relate to the establishment of electricity tariffs, power market operations and the relationships between electricity producers and consumers are undergoing significant changes.
Under the existing market model, there is still a risk that electricity prices in the wholesale market will not fully cover the fixed costs of power. The Company is exposed to the risk of growing competitiveness when operating in the retail market as a result of the revitalisation of power supply companies struggling for the provision of services to large consumers. In order to manage this risk, the Company’s actions are aimed at maintaining and expanding its customer base.
The government tightens control over the spending of allocated budget funds by electricity sector companies. RusHydro undertakes necessary measures to prevent the negative impact of the abovementioned risks on its activities. In particular, key attention is paid to ensuring the transparency and reliability of control procedures for budget fund expenditures in investment programme execution and the implementation of risk management measures.
PJSC RusHydro considers risk management measures to be a part of performance indicators set forth by the Strategy Implementation Plan. At the end of 2015 the Company’s risk managers prepared the report on the Risk Management Plan implementation for 2015 as a part of the report on the KPI implementation in 2015 (the report has been approved by the Board) based on the information on the implementation of actions, envisaged by the Risk Management Plan in 2015, information received from risk owners, and the independent assessment of the implementation of actions.
Given that the Risk Management Plan was developed for 2015-2016, it will be updated in order to optimise the scope and result of risk management work in 2016.
2.2.3.4. Information about Circumstances that may fairly disrupt the Company’s business
Risks associated with the region’s geographical features include the risk of losses (for example, the risk related to the damage of facilities) due to seismic activity, avalanches and mudslides, possible landslides and rainfall related floods and other adverse weather conditions (hurricanes, heavy snowfalls and frosts).
In general, the regions in which the Company operates have a developed transportation infrastructure and are not exposed to the risks associated with the disruption of the transportation link. However, some generating assets are located in remote areas with harsh climates, including in the Krasnoyarsk Region and in the areas of the Far Eastern Federal District.
The Company is constantly working to upgrade the technologies of access and work in harsh climatic conditions in these areas. However, one cannot guarantee that no additional costs will be required to overcome technical difficulties associated with the climate and the accessibility of these locations, which may negatively impact earnings, financial conditions, and the Company’s performance and prospects. Within the foreseeable future, these risks are estimated as insignificant.
TERROR ATTACKS
With a view to the tense political and social situation, the revitalisation of armed groups in the North Caucasus, the high probability of local and regional armed conflicts, the increasing threat of international terrorism and political instability in a number of developing countries caused by the economic crisis, the activity of extremist organisations, and developing commercial terrorism, PJSC RusHydro is worried about possible risks associated with terrorist activity, in particular at North-Caucasian facilities. Security is maintained constantly to reduce such risks. The comprehensive programme aimed at ensuring safety and protection of the Company’s facilities from terrorism is being implemented. The regular inspections of the antiterrorist security of the Company’s facilities and personnel training, in particular by specialized anti-terrorist drills and trainings, are being carried out.
In the report on global risks presented at the annual World Economic Forum in Davos this risk was characterised as one of the three key risks of Russia (Global risks 2015), alongside the risk of interstate conflicts and the random fluctuations in energy prices.
The plan for strengthening the security of the Company’s facilities is being implemented. The plan amends the existing security programme applied at the power plants including sites under construction. The factors affecting the security of facilities are being monitored. Information security audit is being conducted.
The armed security of facilities is being provided by federal state unitary enterprise Departmental Security Service of the Ministry of Energy of the Russian Federation. Plans for cooperation with law enforcement authorities are being developed to ensure the protection of facilities in case of a terrorist attack or the threat thereof. Access and internal security control has been introduced within the Company’s facilities. Theft prevention work is being carried out in cooperation with law enforcement agencies. The most dangerous threats are being evaluated and consequence management plans are being elaborated in cooperation with the Civil Defence and Emergency Service of the Russian Federation (at generating facilities). The main equipment of the company is insured, in particular against terror attacks.
EARTHQUAKE-PRONE AREAS
Most of the Company’s facilities are located in seismically quiet regions. However, such facilities as the Pauzhetskaya GeoPP and the Verkhne-Mutnovskaya GeoPP are located in seismic zones, with possible earthquake intensity up to 9 points on the Richter scale. Currently, work to create the seismological network of the Dagestan Branch is underway. In 2014, VNIIG after B.E. Vedeneev performed seismic monitoring of the Bureyskaya HPP facilities.
The Company has worked out an emergency plan in case of earthquakes and is constantly monitoring the situation. There are seismic monitoring stations at the Company’s facilities. Issues relating to the transportation link are worked out in good time with a focus on the above-mentioned risk. Cargo and people delivery schemes are optimized. All corporate facilities comply with earthquake resistance standards.
SEASONAL FLOOD AREAS
The risk of seasonal floods plays an important role in corporate activities and is regularly included in the list of critical risks. To manage this, a water regime management, including: forecasting and monitoring hydrological regimes within the facilities, reservoir regulation, spillway construction and operation and other measures, has been implemented.
To prepare for the spring-summer flood discharge at the Company’s branches, flood commissions are created. They implement numerous measures aimed at ensuring a trouble-free flood season. In particular, they were making a survey of ice conditions in the area of the dam location of the Bureyskaya HPP, inspecting permanent supports to make sure they are ready for work during the flood period, readiness checks of back-up power supply units (diesel generator sets), releasing the gates of the service spillway from icing and ice fringe so that they could be maneuvered, and performing inspections of hydropower structures, the drainage system of the dam, power house and the installation site, visual inspection of the dam body abutment to the shores from the upper pool and lower pool.
Traditional agreements were signed between the Bureyskaya HPP and the Government of the Amur Region, the administration of the Bureya District and territorial bodies of the Ministry of Emergency Situations and the Russian Technical Supervisory Authority on the procedure to interact on prompt reporting on and rapid response by the Parties to emergency situations during flood discharge. Agreements were signed between PJSC RusHydro’s Branch – the Zeiskaya HPP and the Zeiskoye Reservoir Management Office, the administration of the city of Zeya and the Zeya District on the procedure to interact on prompt reporting on and rapid response by the Parties to emergency situations during the flood discharge through the hydropower structures of the Zeiskaya HPP. Similar work is done at other corporate facilities.
All Company’s facilities operate in accordance with the instructions of the interdepartmental working group of the Federal Water Resources Agency. The control of production assets was strengthened. In 2015, no accidents at the Company’s facilities were recorded.
2.2.4. Insurance Protection
RusHydro’s insurance protection is built based on the principles of standardisation insurance protection system, the optimisation of insurance coverage, the unity of approaches to insurance organisation, and insurance continuity.
2.2.4.1. Insurance company selection
Insurance company selection is carried out on a competitive basis to select those that offer the best quality-to-price ratio for insurance services. Requirements for the insurance cover terms and conditions are formed based on the Company’s current risk situation analysis, insurance market supply analysis, and social policy and legal requirements.
2.2.4.2. Types of insurance coverage
In 2015, the insurance coverage for PJSC RusHydro and its subsidiaries included the following types of insurance: property, automobile and water transport insurance, insurance against construction and installation risks, voluntary medical insurance, personal accident and sickness insurance, compulsory civil liability insurance for owners of motor vehicles and water crafts, third party insurance for owners of hazardous production facilities for causing harm in an accident at the hazardous production facility, civil liability insurance for damage caused as a result of an terrorist attack or sabotage, civil liability insurance for injury resulting from defects of construction work, project documentation preparation work and engineering survey work, and third party insurance for PJSC RusHydro’s management team and executives.
RusHydro imposes strict requirements with regard to insuring its assets (property insurance against all risks and insurance against construction and installation risks), and due to the limited resources of the Russian insurance market also puts forward additional demands and effects control over risk re-insurance. The Company is implementing a policy of openness to foreign insurance community representatives. Each year, the Company organizes insurance engineering surveys for its facilities, and holds road shows, negotiations and follows reinsurers’ recommendations.