Risk management report for 2018

Strategic risk management at RusHydro Group
Risk and its priority Impact on Long-term Development Program KPI Stakeholders Key risk mitigants
Economic aspect

1. Delayed commissioning of new capacities

Critical risk

RusHydro Group’s investment program implementation

Direct
  • Adherence to the capacity commissioning schedules, funding and spending plan
  • ROE
  • EBITDAIn this section, EBITDA refers to the indicator used for KPI calculations.
Indirect
  • Total shareholder return (TSR)

Shareholders and investors

Employees

Federal government authorities

Regional and municipal government authorities

Suppliers and contractors

Data systematization for designed facilities:

  • developing a corporate project management system to systematize data on the existing and designed facilities. Building internal capabilities for expert review of design and detailed design documents:
  • improving efficiency of design institutes and procurement processes to strengthen in-house capabilities for performing expert review of design and detailed design documents
  • formalizing activities involving in-house expert review of design documents. Control over the quality, timing and cost of works:
  • keeping a blacklist of unreliable designers, participating in selecting subdesigners
  • keeping a register of contractors’ failures to meet deadlines under contracts for new construction projects and rehabilitation & modernization (TR&M) projects
  • streamlining insurance and procurement processes as applicable to construction and installation (reducing the risk of project cost overruns due to the facility damage or loss caused by design or construction deficiencies or external impact)
  • drafting internal regulations for the performance of certain types of work and introducing a work permit system for such works enabling employee suspension from further projects in case of material violations
  • developing a quality control system for the supplied equipment (including its production and shipment/delivery)
  • monitoring the progress of building grid infrastructure;
  • using a system for supervising and monitoring the timing and cost of new construction projects based on the SAP permanent facilities construction management system; as part of the 2018–2023 investment program review, the Company measured the risk-adjusted rate of return on investment projects for permanent facilities construction
  • taking a more stringent stance on the contractors’ compliance with the terms of contracts
  • filing complaints and claims
  • automating the water level scenarios generation and refining the process methodology
  • taking part in shaping the Water Use Rules as part of the interagency working groups for setting HPP operation modes
  • implementing the Comprehensive Modernization Program;
  • drafting proposals on amending laws and regulations governing the power industry; liaising with the federal government authorities and the Market Council Non-Profit Partnership
  • improving transparency of the economic dispatching business process
  • preparing the areas to be flooded to form water reservoirs for the hydropower plants under construction with financing coming out of the state budgets and budgets of constituent entities of the Russian Federation
  • liaising with the federal and regional government authorities on the matters of tariff regulations with a view to eliminating the cost-tariff gap in the Russian Far East

2. Project cost overruns for permanent facilities construction

Critical risk

RusHydro Group’s investment program implementation

Direct
  • Free cash flow (FCF)
Indirect
  • Total shareholder return (TSR)

Shareholders and investors

Employees

Federal government authorities

Regional and municipal government authorities

Suppliers and contractors

3. Revenue shortfalls from the sale of electricity (capacity) and heat against the business plan

Critical risk

Production program implementation; development of a hydrometeorological observation network; tariff management, improvement of the regulatory framework governing the power industry in the Far Eastern Federal District of Russia

Direct
  • ROE
  • EBITDA
  • Labor productivity
Indirect
  • Free cash flow (FCF)
  • Total shareholder return (TSR)

Shareholders and investors

Employees

Suppliers and contractors

4. Lack of funds, including those sources externally

Critical risk

Refinancing the debt of RAO ES East

Direct
  • Adherence to the capacity commissioning schedules, funding and spending plan
Indirect
  • ROE
  • EBITDA
  • Total shareholder return (TSR)

Shareholders and investors

Federal government authorities

Suppliers and contractors

  • maintaining sufficient cash levels and securing access to liquidity through credit facilities
  • maintaining a well-balanced model of working capital financing from both short-term and long-term sources
  • overseeing compliance with the terms of loan agreements to exclude any breach of financial covenants by the Company
  • using short-term financial instruments (bank deposits) to invest idle cash balances
  • introducing an interest rate and currency risk management methodology subject to RusHydro’s credit policy
  • divesting non-core assets
  • RusHydro completed an an additional issue of shares to reduce the debt
  • hedging financial risks
  • diversifying the debt portfolio

5. Risk of non-delivery / efficiency losses associated with production programs

Significant risk

Production program implementation

Direct
  • Meeting the accident prevention target
  • ROE
  • EBITDA
  • Adherence to the capacity commissioning schedules, funding and spending plan
Indirect
  • Total shareholder return (TSR)
  • Labor productivity

Shareholders and investors

Employees

Suppliers and contractors

  • Prompt filing of complaints and claims with regard to the poor quality of repairs, delivery of substandard equipment and violation of delivery deadlines
  • Setting up production programs based on recommendations of the analytical center
  • Streamlining the contract approval process, amending the company’s internal regulations governing the contracting process
  • Cutting costs (in line with the value growth plan)
  • Maintaining control over the implementation of rehabilitation and modernization projects in compliance with the company’s standards

6. Terrorism and cyber terrorism

Significant risk

Improving the counter-terrorism and information security system

Direct
  • Meeting the accident prevention target
  • Adherence to the capacity commissioning schedules, funding and spending plan
  • ROE
  • EBITDA
Indirect
  • Decrease in operating expenses (costs)
  • Total shareholder return (TSR)

Shareholders and investors

Employees

Suppliers and contractors

Federal government authorities

Regional and municipal government authorities

  • Improving armed protection of the company’s facilities by engaging the private guarding units of the national guard of russia (rosgvardia), guard federal state unitary enterprise of rosgvardia, and departmental protection federal state unitary enterprise of the ministry of energy of russia
  • Amending and maintaining up-to-date plans for the interaction with law enforcement agencies to protect the company’s facilities in case of threatened or attempted terrorist attacks
  • Improving access and on-site security control systems at the company’s facilities
  • Planning and taking measures to identify, prevent and suppress acts of unlawful interference against the company’s facilities in cooperation with law enforcement agencies
  • Identifying the most probable threats and developing response plans to remedy acts of unlawful interference against the company’s facilities in cooperation with the local bodies of the ministry of the russian federation for civil defence, emergencies and elimination of consequences of natural disasters in the regions of the company’s operations
  • Equipping the company’s facilities with engineering and technical means of protection
  • Setting up and maintaining control of access to information about on-site engineering and technical means of protection and their condition
  • Maintaining property insurance against terrorism and sabotage risks
  • Increasing the share of equipment certified by the federal service for technical and export control of russia, and the share of domestically manufactured equipment
  • Conducting information and technical security audits
  • Setting up and maintaining control of access to software and hardware of control systems and information systems
  • Protecting remote access to the company’s information systems and taking measures to ensure information security of virtual, mobile and cloud services and solutions

7. Failure to achieve project targets by engineering companies (subsidiary engineering design institutes)

Significant risk

RusHydro Group’s investment program implementation

Rehabilitation and modernization program

Direct
  • Integrated innovative KPI
  • ROE
  • EBITDA
Indirect
  • Total shareholder return (TSR)
  • Labor productivity

Shareholders and investors

Suppliers and contractors

  • >Setting up a single engineering design complex of RusHydro through reorganization of subsidiary engineering design companies
  • Implementing a development program for subsidiary engineering design companies
  • Implementing international experience exchange programs at subsidiaries engaged in repairs and engineering design;
  • Organizing personnel development and training of scientific staff
  • Developing standard repair scope sheets for equipment and hydraulic structures
  • Creating and maintaining a database of advanced and innovative technologies
  • Mitigating the risks associated with inefficient management of non-core activities by their consolidation in specialized service subsidiaries

8. Management system deficiencies and errors

Significant risk

Improving the corporate governance system

Direct
  • Adherence to the capacity commissioning schedules, funding and spending plan
  • Share of procurement from SMEs
  • Labor productivity
Indirect
  • ROE
  • EBITDA
  • Total shareholder return (TSR)

Shareholders and investors

Employees

Suppliers and contractors

  • Exercising control over the implementation of directives of the federal government authorities
  • Monitoring, analysis, and control of document management procedures
  • Ensuring civil liability insurance of the members of the company’s management bodies and its officers, including liability to third parties and the company
  • Using an automated procurement management system
  • Exercising coordination and control of work on formalizing the activities of structural units and officers
  • Implementing the company’s it strategy
  • Ensuring support and maintenance of the company’s information systems
  • Improving the formalization of activities and business process management
  • RusHydro introduces corporate management standards in all its newly acquired or newly established subsidiaries and rolls out systems for managing organizational projects, employee gradingBuilding a system of employee grades based on the assessment of the Company’s staff list, its strategy and corporate culture., management personnel certification and individual employee development plans

9. Increase in receivables for electricity (capacity) and heat supplied and for transmission services rendered

Significant risk

Managing receivables

Direct
  • Free cash flow (FCF)
Indirect
  • Total shareholder return (TSR)

Shareholders and investors

Federal government authorities

Suppliers and contractors

  • Monitoring data on suppliers’ and contractors’ financial health to prevent the risk of counterparty bankruptcy
  • Filing complaints and claims
  • Claims and complaints management, settlements other than through the authorized credit institution on the wholesale electricity and capacity market in accordance with the agreement for accession to the wholesale market trading system
Environmental aspect

10. Adverse changes / breaches of the law

Critical risk

Improvement of the regulatory framework governing the power industry in the Far Eastern Federal District of Russia

Direct
  • ROE
  • EBITDA
  • Decrease in operating expenses (costs)
Indirect
  • Total shareholder return (TSR)
  • Labor productivity

Shareholders and investors

Consumers

Employees

Trade unions

Federal government authorities

Regional and municipal government authorities

Local communities

Environmental organizations

Media

Suppliers and contractors

  • Ongoing monitoring of initiated and reviewed changes to the legislation that may affect the company’s operations
  • Monitoring and revising the existing technical oversight standards and regulations
  • Participating in any relevant activities related to legislative changes and arranged by legislative, executive and judicial bodies, public associations, professional legal unions and associations
  • Conducting regular environmental audits and implementing received follow-up recommendations
  • Participating in working groups of the ministry of energy of russia on technical regulation matters; filing and managing complaints and claims
11. Industrial disasters and accidents Critical risk

Staffing system improvement

Production program implementation, roll-out of intelligent systems and digital technology

Direct
  • Meeting the accident prevention target and ensuring zero major accidents
Indirect
  • ROE
  • EBITDA
  • Labor productivity
  • Decrease in operating expenses (costs)
  • Total shareholder return (TSR)

Shareholders and investors

Consumers

Employees

Trade unions

Federal government authorities

Regional and municipal government authorities

Local communities

Environmental organizations

Professional communities and higher education institutions

Media

Suppliers and contractors

Non-profit organizations

  • Implementing the full scope of the repairs program and the rehabilitation and modernisation program
  • Developing a quality assurance system for equipment supplies (including the quality of production and shipment/delivery), construction, installation and start-up operations, and tightening contractual liability of suppliers/contractors for the quality of equipment and materials production and delivery
  • Filing and managing complaints and claims against unreliable contractors/suppliers
  • Implementing recommendations made in follow-up of surveyor inspections of RusHydro’s facilities
  • Tightening control over contractors’/subcontractors’ activities at production sites to reduce the opportunity for injuries, fires, unethical behavior and theft
  • Developing technical regulations to improve the quality of design and construction management processes
  • Introducing advanced diagnostics methods eliminating the need to take equipment offline, as well as modern technologies for managing production assets, including the required information technologies
  • Conducting technical equipment inspections at hazardous production facilities and expert examinations of industrial safety of technical equipment at hazardous production facilities, as well as buildings and structures accommodating hazardous production facilities
  • Developing a life cycle management system for existing hydroelectric power plants
  • Monitoring compliance with regulations, guidelines and other documents applicable to any operations, services and works by the company’s officers responsible for such monitoring
  • Reviewing design documents by the customer-side experts and training the general designer’s personnel to minimize the number of design errors

12. Damage caused by natural and industrial disasters outside RusHydro Group facilities

Significant risk
Direct
  • Meeting the accident prevention target and ensuring zero major accidents
  • Adherence to the capacity commissioning schedules, funding and spending plan
  • ROE
  • EBITDA
Indirect
  • Decrease in operating expenses (costs)
  • Total shareholder return (TSR)
  • Labor productivity

Shareholders and investors

Consumers

Employees

Federal government authorities

Regional and municipal government authorities

Environmental organizations

Non-profit organizations

  • Upgrading centralized automatic emergency response systems to the most advanced standards
  • Implementing civil defense and emergency prevention measures
  • Carrying out research and development in the field of remote monitoring of hpp facilities condition and operating modes
  • Ensuring compliance with and maintaining a production control system based on the russian industrial safety laws
  • Maintaining property insurance of RusHydro group
Social aspect

13. Reputational risks

Significant risk

Improving the corporate governance system

Direct
  • Total shareholder return (TSR)
Indirect
  • ROE
  • EBITDA
  • Labor productivity

Shareholders and investors

Consumers

Employees

Trade unions

Federal government authorities>

Regional and municipal government authorities

Local communities

Environmental organizations

Professional communities and higher education institutions

Media

  • Ensuring compliance with the company’s regulations governing information activities, participation in public events and information disclosure
  • Engaging with stakeholders across the company’s core operations, including through joint public events
  • Distributing regular press releases to share the company’s view of the matters pertaining to its operations
  • Holding press tours and special media events

14. Corruption risk

Significant risk

Improving the corporate governance system

Improving the corporate system of internal control and risk management

Improving the economic and information security system

Indirect
  • ROE
  • EBITDA
  • Total shareholder return (TSR)
  • Labor productivity

Shareholders and investors

Consumers

Employees

Trade unions

Media

Suppliers and contractors

Non-profit organizations

  • Developing, implementing and monitoring the company’s anti-corruption procedures
  • Coordinating activities aimed at preventing corruption;
  • Devising and supervising activities aimed at assessing and mitigating corruption risks
  • Supervising the compliance of RusHydro’s and its subsidiaries’ anti-corruption activities with the legislation;
  • Implementing procedures to prevent conflicts of interest in the workplace
  • Monitoring data on income, expenditures, property and property-related liabilities of the company’s officers holding positions exposed to corruption risks
  • Conducting expert review of procurement documents;
  • Checking counterparties for any conflicts of interest
  • Maintaining RusHydro’s anti-corruption trust line, checking reported allegations of wrongdoings
  • Conducting internal investigations of alleged wrongdoings involving the company’s employees; developing and implementing measures to eliminate identified violations/deficiencies