Risk management

JSC Lenenergo has an effective system of internal control and risk management. The main bodies responsible for development and implementation of procedures, methods and control mechanisms are the Board of Directors, Audit Commission, and executive management bodies.

The system of internal control and risk management of JSC Lenenergo is aimed at providing reasonable guarantees of achievement of the purposes in the following directions:

  • efficiency and productivity of activities;
  • observance of requirements of the legislation, and requirements of local regulations of the Company;
  • prevention of illegal actions of employees of the Company and third parties in respect of the Company assets;
  • reliability, completeness and timeliness of preparation of all types of reporting.

The description of risks and activities on their minimization

Strategic risks

Country and regional risks

Factors (sources) of risks

  • The crisis phenomena in world economy: financial crisis, inflation, capital depreciation, decrease in volumes of the financial market.
  • Political and economic changes in Russia and worldwide.
  • Transition state of the Russian banking system.
  • Decrease in industrial outputs and electricity consumption.

Consequences of risk for the Company

  • Negative influence on possibilities on attraction of extra capital.
  • Decrease in indicators of liquidity.
  • Decrease in shareholder value of the Company.
  • Reduction of operational efficiency and revenue of the Company.

Risk management activities

  • Monitoring of current economic situation of the world, state and regional level.
  • Implementation of the complex of measures, directed on optimization of the share of loans in the general structure of capital.
  • Attraction of long-term loans on fixed interest rates.
  • Increase of efficiency of operating and investment expenses .
Currency risks

Factors (sources) of risks

  • dverse changes in the exchange rate of foreign currencies

Consequences of risk for the Company

  • Decrease in actual income as a result of currencies rate fluctuation .

Risk management activities

  • From the moment of its reforming the Company is not engaged in foreign economic activity. Export transactions are absent. Income and expenses, assets and liabilities are nominated in rubles.
  • In case of negative influence of the change of exchange rates in the future management of the Company plans to analyze the risk and make relevant decisions in each case.
Interest risk

Factors (sources) of risks

  • Unforeseen increase in interest rates in the financial market.

Consequences of risk for the Company

  • Unplanned increase in expenses on service of credits.
  • Need of modification of the credit policy.

Risk management activities

  • Continuous monitoring of the loan capital market and banks-contractors and, whenever possible, debt restructuring.
  • Continuous optimization of a loan portfolio taking into account the changed market indicators.
  • Monitoring of the credit resources market for the purpose of identification of more favorable credit conditions.
  • Increase in the share of tools with the fixed rate at the level acceptable for the Company. Search of alternative sources of borrowings.
Liquidity risk

Factors (sources) of risks

  • Cross subsidizing.
  • Low payment discipline in the retail market of electric power.
  • Policy of tariffs growth control.

Consequences of risk for the Company

  • Decrease in liquidity and financial stability.
  • Shortfall of revenue due to reduced tariffs for the population
  • Difficulties in attraction of borrowings from banks and investors.
  • Difficulties of observance of the terms of credit agreements

Risk management activities

  • Monitoring of the capital structure of the Company.
  • Determination of optimum loan parameters.
  • Optimization of the working capital structure.
  • Assessment of financial stability and solvency, including calculation of limits of a debt position.
  • Operational planning and performance of budgets (budgeting procedure, the system of cash flow accounting).
  • Control over receivables.
Branch risks (risks associated with tariff regulation)

Factors (sources) of risks

  • State regulation of tariffs for the Company’s services (services in electric power transmission and service in technological connection).
  • Control of tariffs growth.
  • Mechanism of cross subsidizing.
  • Transition to RAB regulation.
  • Competition with TGOs for a share in the consolidated tariff.
  • Discrepancy of tariffs and rates approved by regulators to requirements of the Company.
  • Disagreements between power grid and power sales companies concerning the volumes of electricity consumption and capacity, applied in tariffs calculations.
  • Contest by the regulator of assessment results of initial base of invested capital.
  • Redistribution of RGR by regulator within one long-term period.
  • Decrease in demand for technological connection services and services in electric power transmission in comparison with the planned volumes considered at acceptance of tariff and balance decisions.
  • Default of obligations to consumers on technological connection owing to large volume of demands.
  • Change of tariffs for electric power transmission.

Consequences of risk for the Company

  • Decrease in revenue caused by a drop in tariffs during the period of tariff regulation.
  • Decrease in revenue due to loss of potential consumers.
  • Failure to receive income differed as a result of implementation of the mechanism of smoothing.
  • Decrease in tariff sources for investments.
  • Decrease in liquidity and financial stability.
  • Losses associated with an incorrect forecast of the structure of electric power transmission on the level of voltage and overestimated volumes of declared capacity against actual ones, considered at acceptance of tariff and balance decisions.
  • By results of 2013 the Company received revenue below RGR accepted by the Committee at calculation of tariffs, due to application in calculations for electric power transmission for the actual capacity of tariffs (single- and double-rate), set by the tariff and balance decision which basis included single (joint-operations) tariffs calculated proceeding from the size of declared capacity which volumes are much higher than actual ones. The volume of lost income was RUB 3.7 bn.
  • Accounting of expenses at a tariff-setting not in full.
  • Overdue receivables growth.
  • Emergence of challenged receivables for services in electric power transmission.
  • Default of long-term parameters of RAB regulation.
  • Default of obligations towards subscribers on technological connection.
  • Violation of the antitrust law regarding rendering of services on electric power transmission and services on technological connection.

Risk management activities

  • Ensuring the balanced planning taking into account approved tariff and balance decisions.
  • Control of execution of the approved business plans.
  • Development of offers on legislation change.
  • Implementation of the program of cost management.
  • Justification of lost income at regulation for the subsequent periods.
  • Submission of documents to the regulator confirming validity of expenses and volumes of electric power transmission.
  • Appeal to regulators for establishment of an individual tariff for technological connection.
  • Participation in the solution of problems of cross-subsidies at the federal level.
  • Implementation of the program of perspective development of the systems of electric power metering.
  • Conclusion of agreements with the regulator on the volumes and sources of financing of investment activities within long-term programs of development of the regions.
  • Monitoring of applications, formation of look-ahead productive supply of electric power, demand for services in technological connection for the next year.
  • Inventory and updating of the databases used for calculations of the volumes of electricity transmitted.
  • Analysis and systematization of the reasons for the dispute on the volume of electricity transmitted.
  • Contesting in court the volume of electricity transmitted.
  • Explanatory work of the process of rendering of services on technological connection among consumers, including with public placement of information on rendering of services.
  • Placement of information on connection sources on the website .

Operational and technological risks

Risks associated with reliability of power supply, ensuring safe operation of production facilities and power efficiency

Factors (sources) of risks

  • Emergency situations owing to natural disasters (hurricanes, storm and sleets, high waters, snow blockages, etc.).
  • Emergencies of technogenic character.
  • Physical and obsolescence of power grid assets.
  • Default of the program of repairs in necessary volume.
  • Violation of service conditions and operational modes of power grid equipment.

Consequences of risk for the Company

  • Decrease in reputation in the region.
  • Increase in the volumes of electric power losses.
  • Increase in expenses for electric power purchase to compensate losses.
  • Losses which are not covered by insurance compensations.

Risk management activities

  • Implementation of the program of energy saving and increase of power efficiency.
  • Introduction of the automated control system of production assets.
  • Development and implementation of actions for preparation for passing of the autumn and winter period.
  • Expansion and clearing of glades of OTL routes.
  • Reconstruction (renovation) of power grid facilities.
  • Expansion of the park of reserve power supply, car- and special equipment for emergency recovery operations.
  • Modernization of the switching equipment and telemechanization systems.
  • Creation and improvement of formation of emergency stock.
  • Implementation of the insurance program.
  • Production control.
  • Interaction with third-party power grid subjects.
  • Improvement of systems of collecting and information transfer, analysis of technological violations, forecasting of their consequences.
  • Organization of work of the networks control center.
  • The growth of mobile emergency response teams and their quality of staffing.
  • Programs to reduce risks of accidents in the power grid facilities.
  • Training, control and assessment of personnel.
Risks associated with procurement activity and logistics

Factors (sources) of risks

  • Rise in prices for raw materials.

Consequences of risk for the Company

  • Financial losses associated with excess of the actual expenses over the planned ones.

Risk management activities

  • Monitoring of prices, planning of procurements.
  • Implementation of scheduled purchases in compliance with the existing order.
Risks associated with property management

Factors (sources) of risks

  • Lack of title documents for real estate objects.

Consequences of risk for the Company

  • Disputing of the rights on power grid facilities by third parties.

Risk management activities

  • Collection of documents confirming the right of ownership.
  • Work with state authorities.
  • Recognition of property rights in court.
  • Registration of property rights.

Investment risk

Decrease in efficiency and depreciation of capital investments at implementation of investment programs, programs of innovative development and research and development

Factors (sources) of risks

  • Non-compliance with parameters of RAB regulation.
  • Sale of socially significant objects for the region, economically inefficient for the Company.
  • Violations of planned terms of development of capital investments and delay of commissioning of objects of investment programs.
  • Growth of the volume of construction in progress due to exception of the objects under construction from the investment program.

Consequences of risk for the Company

  • Decrease in sources of financing of the investment program and required gross revenue of the Company in the subsequent periods.

Risk management activities

  • Formation and planning of the investment program directed on expansion and increase of availability of network infrastructure, modernization of power grid facilities, achievement of high load of commissioned capacities, coordination with the plans of territorial and regional development.
  • Monitoring of implementation of investment programs, its financing, analysis of reasons for deviation of the actual parameters of implementation of investment programs from the planned ones.
  • Timely coordination of changes of the investment program with executive authorities.
  • Introduction of project management by investment activity.
  • Automation of the investments control system.
  • Decrease in specific cost of construction, introduction of the system of comparative analysis of specific cost of construction and materials.
Risk of joint-stock cost (corporate risk)

Factors (sources) of risks

  • Control over tariffs growth for the electric power at the state level.
  • Decision-making at the state level associated with merge, acquisition, privatization of network companies of the power grid complex.

Consequences of risk for the Company

  • Decrease in capitalization of the Company.
  • Mistrust of investors.
  • Deterioration of image and reputation of the Company.
  • Claims of minority shareholders.

Risk management activities

  • Implementation of the program of strategic development of the Company till 2015 with prospect till 2020.
  • Performance of the normative legal acts issued by federal executive authorities within implementation of the plan of measures (road map) “Increase of availability of power infrastructure”.
  • Performance of the long-term RAB-parameters of regulation.
  • Implementation of the program of costs management.
  • Ensuring the balanced planning, formation of indicators of the business plan taking into account tariff and balance decisions.
  • Coordination of volumes and sources of financing of the investment program with authorities taking into account programs of development of territories.
  • Ensuring observance of the balance of interests of shareholders, requirements and standards of the Code of corporate governance of the Company.

Compliance-risk

Tax risks

Factors (sources) of risks

  • Increase in rates or change of the order of taxes calculation.

Consequences of risk for the Company

  • Tax sanctions.
  • Decrease in indicators of profitability and increase in tax load of the Company.

Risk management activities

  • Attraction of external audit and adviser.
  • Defense of interests in tax authorities and arbitration courts.
Risk of non-compliance by the Company of the legislation and other legal acts, requirements of regulating and supervising authorities

Factors (sources) of risks

  • Frequent changes of legislation, wide range of standard requirements and restrictions in the conditions of state regulation of the branch.
  • Control over the Company’s activity from FAS, FST, FFMS, FTS of Russia, Audit Chamber, the Federal Service for Ecological, Technological and Nuclear Supervision, prosecutor’s office
  • Violations of the antitrust law in the field of technological connection of power installations of consumers to electric networks of the Company.
  • Manipulation by securities market and misuse of insider information of the Company.
  • Conflict of interests.

Consequences of risk for the Company

  • Penalties for nondisclosure of essential information, for violations of the antitrust legislation, tax legislation, lack of re-registration of rights to perpetual rights of use of land plots, etc.

Risk management activities

  • Monitoring of changes in the legislation.
  • Control of observance of requirements of the law of the Russian Federation of July 27, 2010 # 224-FZ “About counteraction to a misuse of insider information and manipulation of the market” and Regulations on insider information of JSC Lenenergo.
  • Timely disclosure of essential information on the official corporate website.
  • Conducting declaration of the management team of the Company (including their close relatives), members of the Management Board with the purpose of preventing the conflict of interests.
  • Control over observance of the code of corporate conduct of JSC Lenenergo.
  • Creation and organization of work of the Conflict Commission.
  • Implementation of actions for execution of orders of the Government of the Russian Federation in the field of fight against corruption.
  • Monitoring of changes in the legislation.
  • Development of actions for observance of requirements of the current legislation.
  • Optimization of the business process of technological connection as a whole, including the process of reception and processing of applications of consumers.
  • Implementation of actions for renewal of the right of termless using.
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