Interest rate and currency exposure/Risks related to inflation / Risk of obligation default by counteragents / Risk of obligation default in bringing investment vehicles into operation

Interest rate and currency exposure

Kubanenergo carries out its main production activities within the territory of the Russian Federation, and at the same time has no investments in foreign companies or income expressed in foreign currency. Therefore the risks relating to fluctuations in exchange rates do not have a direct effect on the financial and operating activities of the Company and are assessed as insigficant.

Kubanenergo is engaged in short term and long term borrowing on the Russian finance market. A significant increase in interest rates on loans could lead to more expensive debt servicing. in order to optimise the structure of the loan portfolio and reduce expenditure on its servicing the Company aims to use loans with fixed interest rates, as a result of which the risk is significantly reduced. in addition the Company aims to make a selection of organisations offering financial services by holding an auction in accordance with procedures set by the legislation of the Russian Federation, as well as carrying out constant monitoring of the capital loans market and the possibility of restructuring debt.

Risks related to inflation

For Kubanenergo the risk of inflation means faster devaluation of the ability of money received by the Company rather than nominal growth. This could be the result of devaluation of accounts receivable in conditions of inflation growing at a rate higher than expected and in connection with restrictions on altering tariff-balance decisions during the period for which they have been set.

in the event of significant growth in inflation the Company intends to pay particular attention to increasing turnover of working assets, mainly by reducing reserves, as well as re-examine existing contractual relations with consumers to reduce turnover of accounts receivable.

The level of inflation in existence at the current time and predicted in the short term demonstrates no significant effect on the financial condition of Kubanenergo.

Risk of obligation default by counteragents

As its activities mean the company enters into numerous contractual relationships with other businesses, Kubanenergo is exposed to the risk of obligation default by counteragents and violation of property and personal non-property rights. This could lead to a growth in volume of receivables and payables. To prevent these risks from occurring the Company selects suppliers and contractors on a competitive basis with obligatory inspection of their financial condition and the availability of sufficient resources to carry out works (services). Claims are made against counteragents for violation of contract conditions and fines (penalty fees) are imposed.

Risk of obligation default in bringing investment vehicles into operation

To provide the necessary level of renovation of fixed assets, uninterrupted network supply and renovation of electricity production holdings the Company carries out investments in the form of capital expenditure, which is accompanied by the risk of noncompliance with deadlines for bringing construction projects into operation. To reduce this risk Kubanenergo takes the following actions:

• organising timely corrections to the investment programme;
• redistributing resources derived from economies made from tendering procedures between various investment projects;
• monitoring the timeliness of holding tendering procedures for investment programme projects;
• monitoring of deadlines for concluding and executing investment contracts.