Critical

No change (or insignificant dynamics)

Significant

Increase

Moderate

Decrease

Industrial risks:

1

Tariff risks

The Company is a natural monopolist and its activities are subject to state regulation. Due to the limited increase in tariffs for power transmission to customers at the level of the Government of the Russian Federation, the possibility of establishing tariffs that fail to completely cover economically justified expenses on activities related to electric power transmission is estimated as high.
Besides, the Company is exposed to the risk of decline in revenue due to changes in the actual structure of power transmission as compared with that adopted when approving the tariffs as well as the risk of changes in tariff legislation.

• In order to prevent and mitigate consequences of occurrence of such risks, the Company shall submit to regulatory authorities materials that justify level of economically reasonable expenses of Issuer, maintain its position that accounting for economically reasonable expenses in full is required being a core company, a “boiler” owner in Krasnodar Krai and the Republic of Adygea as well as describe and submit discrepancies to the Federal Antimonopoly Service of the Russian Federation

2

Technological connection risks

The key risk of the Company in terms of technological connection (TC) is a risk of shortage of funding for the implementation of TC agreements as well as approval of TC rates by regulatory authorities.

• Cooperation with tariffs regulation authorities on of payments supporting the cost of individual projects (including submission of information, feedback in the form of decision of tariff regulation authorities on establishing the rate, its assessment and challenge, if necessary)
• development of design and estimate documents for TС projects;
• improvement of the TC process.

3

Risks of growth of overdue and uncollectible receivables

To a greater degree, the risk applies to the debt for electric power transmission, as the revenue from power transmission services constitutes a large portion of the revenue structure of the Company. Thus, the growth of overdue / uncollectible receivables for electric power transmission has the greatest impact on Company solvency and causes increase in need for borrowed funds.

• analysis of the causes of disagreement between amounts of power transmitted;
• execution of a schedule of activities to reduce receivables for electric power transmission services;
• claims-related work;
• accumulation of judicial practice and creation of positive precedents in cases where a customer unduly contests the use of supply points (e.g., refusal of utility service providers to record the amount of electricity consumed in for household needs or that determined using common metering device);
• installation of collective metering devices

Country and regional risks:

4

Risks associated with the political and economic situation in the country and region

Major risk factors in this group may include: decrease in the ratings of the country, changes in exchange rates and the key rate, inflation. These factors may lead to an increase in the cost of purchased power grid equipment, reduced purchasing power, complicated attraction and increase in the cost of borrowed capital.
The social and political situation in the regions where the Company is assessed as stable and the risk of occurrence in these regions, for internal reasons, of a military conflict or a state of emergency is minimal.
The risks of terrorism and subversive activities are assessed as minimal.

• implementation of state programs on import substitution to reduce the cost of purchased equipment;
• implementation of the program for decrease in operating expenses;
• improvement of energy efficiency and introduction of energy-saving technologies;
• implementation of measures to protect power facilities against sabotage and terrorist acts

5

Risks associated with the geographical features of the country or region, including increased risk of natural disasters, possible interruption of transport communications

Risks related to military conflicts, introduction of a state of emergency and natural disasters may have the following consequences:

• deterioration of the national economy and, as a consequence, deterioration of the financial situation of the Company;
• damage/loss of the Company’s property, which may adversely affect its ability to timely and fully meet its obligations to customers and partners.

Given the development of the transport infrastructure in the region, the risks of disruption of transportation due to inaccessibility and remoteness are minimal.
According to the Company, the situation in the region will have a positive impact on activities of the Company; there is no reason to expect that a change of situation in the region may result in a failure to fulfill its obligations

• property insurance;
• cost management.
•  

Financial risks:

6

Risks associated with changes in foreign exchange rates

The Company has no investments in foreign companies the net asset value which is exposed to changes in exchange rates, has no revenue and expenses denominated in foreign currencies (has no foreign currency settlement or deposit accounts). Risks associated with exchange rate fluctuations do not directly impact the financial and economic activity, but may lead to higher prices for power equipment. At the moment, the risk is assessed as moderate.

• increasing share of power equipment purchased from Russian manufacturers;
• implementation of the program for decrease in operating expenses;
• monitoring of the dynamics of exchange rates, analysis of the possible impact

7

Risks associated with changes in interest rates

The Company attracts short-term and long-term borrowings from the Russian financial market. The main factor in the growth of interest rates may be as well the increase of the key rate, but in 2016 the Central Bank of Russia reduced it.
Significant increase in interest rates in future may lead to higher debt servicing costs.

• Company’s Activity Performance Management Program is developed and implemented;
• effective management of a credit portfolio is exercised;
• effective placement of money for obtaining the additional income under conditions favorable to the Company is carried out;
• the work with creditor banks aimed at depreciation of the loan capital of Kubanenergo PJSC for decrease in operating expenses is carried out.

8

Risks associated with the effect of inflation

Rising inflation rates may increase the cost of procurement and operating expenses. The Company assesses the risks associated with the effect of inflation as moderate.

• a comprehensive analysis of financial risks is conducted;
• a business plan is prepared in accordance with the scenario;
• procurement procedures are carried out in order to reduce the cost of procurement

Legal risks:

9

Legal risks

Since the Company has no arrears on taxes and duties to the budgets of all levels, its tax risks are considered to be minimal. In addition, the Company does not expect the emergence of any significant consequences associated with changes in the tax law and civil law in the short term.
Changes in currency and customs legislation of the Russian Federation do not affect Company’s operations and, therefore, do not entail any legal risks.
Company’s exposure to the risk of suspension, modification or revocation of licenses is insignificant.
The risks of compliance with the legislation and internal regulatory documents are identified by the results of internal and external audits of the Company, with subsequent compilation and implementation of corrective action plans.

• extension of the necessary licenses for business activities;
• compliance with legal and internal regulations;
• monitoring of the legislation of the Russian Federation;
• planning of the Company’s financial and economic activities with account of all changes in the legislation.

Risks associated with Company activities:

10

Operational and technical risks

Risks of the industrial activity:

• systemic customer power supply failures due to accidents and damage of grid sections and substation equipment;
• reduction in quality of electricity;
• violations of power transmission conditions and reduced quality of services rendered;
• failure to perform timely maintenance (including diagnostics) and repairs;
• accidents in related networks, leading to failures of the equipment of the Company;
• abnormal power losses

• scheduled and unscheduled repairs and maintenance of electric grid equipment;
• upgrade, reconstruction and new construction;
• technical control;
• regular optimization of the structure and amount of components and spare parts in stock, etc.;
• ensuring industrial safety and production control;
• implementation of a program to reduce losses;
• planning emergency measures (based on the analysis of technological violations) in order to mitigate the risk and to prevent occurrence of similar cases in the future

11

Investment risks

The main risks for the Company’s investment activities are the risks of incomplete disbursement of capital investment, increased construction in progress, and reduced investment program (both in volume and funding).

• Formation (correction) of the investment program in accordance with the scenario conditions;
• reallocation of funds received from the savings as the result of tender procedures to other facilities of the investment program;
• implementation of measures to reduce the amount of construction in progress;
• control of compliance with the terms of the procurement procedures and agreement conclusion

12

Risks associated with current litigations of the Company

In 2016, the Company participated in judicial proceedings regarding its core activities that could significantly affect its financial situation. Judgments were passed both in favor of the Company and in favor of the plaintiffs against the Company

• supporting the interests of the Company in court;
• monitoring the judicial practice to ensure positive court decisions in favor of the Company

13

Risks associated with possible Company’ liability for of third parties, including subsidiaries

In 2016, the Company bore no liability for debts of the third parties since it provided no enforcement to their obligations.
The Company has affiliated joint-stock companies with 100% participations in their authorized capital and can become responsible for their debts. These obligations can have a certain negative impact on results of financial and economic activity of the Company.

• annual checks of subsidiaries by audit commissions of companies;
• consideration of the most significant issues and decision-making on them by corporate governance bodies of subsidiaries

14

Risks associated with possibility of customers loss, which share of a turn over amounts at least 10% of total sales revenue (products, works, services) of the Company

The Company cooperates with its main customers for a long time. Possibility of loss of the main customers is considered as minimum.

• conclusion of agreements with key customers according to the legislation and on mutually advantageous conditions