Effective Risk Management

Federal Grid Company develops measures that would make any identified risk consistent with the “preferred risk,” i.e. the maximum permissible risk which the Company seeks or is ready to maintain. The response depends on risk relevance, impact on the likelihood and effect of a given risk, costs of risk materialisation, and risk benefits. After deciding on response measures, the Company’s executives assess the residual risk that must not go beyond the “preferred risk” level.

See details about the risk management system in Federal Grid Company in section GOVERNANCE AND DEVELOPMENT / Risk Management

Industry Risks

Tariff regulation risks

 

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Department of Economic Planning and Tariff Setting 2014 2015	The amount of investable funds in the tariff was reduced relative to the tariff sources of funds for the Company’s Investment Programme that has been taken into account when tariffs for electricity transmission were approved. The reduction was caused by an increased cost of debt Actual revenues from electricity transmission services were lower due to a changed order of payment for services; this change had not been taken into account when tariffs were set The costs of electricity transmission services via foreign energy systems increased due to changes of foreign currency rates tariff on electricity transmission deviated from the one that was included in the business plan	The amount of investable funds in the tariff was reduced relative to the tariff sources of funds for the Company’s Investment Programme that has been taken into account when tariffs for electricity transmission were approved. The reduction was caused by an increased cost of debt Actual revenues from electricity transmission services were lower due to a changed order of payment for services; this change had not been taken into account when tariffs were set The costs of electricity transmission services via foreign energy systems increased due to changes of foreign currency rate	Draft proposed changes to the corporate Investment Programme and the structure of sources of financing and changes in the structure of tariff decision in terms of tariff sources of financing for the corporate Investment Programme. Draft and submit proposed amendments to laws and regulations on tariff setting and on defining the declared capacity that is used in setting the tariffs, as well as the volumes of electricity transmission to customers, and other changes. Draft proposals to include lost revenues (caused by a reduced volume of services and increased costs of electricity transmission services via foreign energy systems) in the gross revenues. These proposals will be submitted to the Federal Tariff Service. Implement actions targeted at improving the efficiency of the Company’s operations and investments, consistent implementation of the approved parameters of RAB regulation and at drawing up well-balanced and economically justified proposals about how to adjust and set these parameters. Improve the quality of budget planning and develop a system of budget control through improving the corporate Budget Code and integrating the risk management processes in the system of medium-term and long-term business planning.	The cost of debt increased because interest payments increased by RUB 7,091 million (or 30.2%) due to an increase of the consumer price index Payments for services of other (foreign) distribution grid companies increased by RUB642 million (or 30.6%) According to an approved tariff & balance profile, payments should be made for the declared capacity. In practice, direct customers pay for actual capacity which means that the required gross revenues declined by RUB484 million (or 0.3%)

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Department of Economic Planning and Tariff Setting 2014 2015	The amount of investable funds in the tariff was reduced relative to the tariff sources of funds for the Company’s Investment Programme that has been taken into account when tariffs for electricity transmission were approved. The reduction was caused by an increased cost of debt Actual revenues from electricity transmission services were lower due to a changed order of payment for services; this change had not been taken into account when tariffs were set The costs of electricity transmission services via foreign energy systems increased due to changes of foreign currency rates tariff on electricity transmission deviated from the one that was included in the business plan	The amount of investable funds in the tariff was reduced relative to the tariff sources of funds for the Company’s Investment Programme that has been taken into account when tariffs for electricity transmission were approved. The reduction was caused by an increased cost of debt Actual revenues from electricity transmission services were lower due to a changed order of payment for services; this change had not been taken into account when tariffs were set The costs of electricity transmission services via foreign energy systems increased due to changes of foreign currency rate	Draft proposed changes to the corporate Investment Programme and the structure of sources of financing and changes in the structure of tariff decision in terms of tariff sources of financing for the corporate Investment Programme. Draft and submit proposed amendments to laws and regulations on tariff setting and on defining the declared capacity that is used in setting the tariffs, as well as the volumes of electricity transmission to customers, and other changes. Draft proposals to include lost revenues (caused by a reduced volume of services and increased costs of electricity transmission services via foreign energy systems) in the gross revenues. These proposals will be submitted to the Federal Tariff Service. Implement actions targeted at improving the efficiency of the Company’s operations and investments, consistent implementation of the approved parameters of RAB regulation and at drawing up well-balanced and economically justified proposals about how to adjust and set these parameters. Improve the quality of budget planning and develop a system of budget control through improving the corporate Budget Code and integrating the risk management processes in the system of medium-term and long-term business planning.	The cost of debt increased because interest payments increased by RUB 7,091 million (or 30.2%) due to an increase of the consumer price index Payments for services of other (foreign) distribution grid companies increased by RUB642 million (or 30.6%) According to an approved tariff & balance profile, payments should be made for the declared capacity. In practice, direct customers pay for actual capacity which means that the required gross revenues declined by RUB484 million (or 0.3%)

Risks related to technological connection

 

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Technological Development Department 2014 2015	Risks related to the untimely meeting of contractual obligations under contracts for technological connection, including deviation of the actual quality level of the technological connection services from the level established during tariff regulation. The quality level is measured as per Section 3 of Executive Order No. 718 dated 14 October 2013, issued by the Ministry of Energy, as the aggregate impact by the quality parameters of reviewing applications for technological connection; execution of contract for technological connection, compliance with the antimonopoly legislation and the quality of customer services.		The Company approved the Programme for Improving the Efficiency of Technological Connection to Electric Grids of Federal Grid Company and Increasing Transformer Capacity Utilisation. It includes actions targeted at initiation of amendments to the Russian laws (law-making) and organisational actions. Institutional actions of the Programme are targeted at improving the efficiency of Federal Grid Company’s operations when the Company provides technological connection services if tariff sources of financing are insufficient, including: Drafting and implementation of template documents in order to unify the document flow in the process of technological connection of customers Actions to increase capacity utilisation by identifying and decommissioning inefficient capacities Setting of schedules for completion of procedures by the Company’s structural units and implementation of actions to improve control over scheduled deadlines at all stages of business process, from registration of an application for technological connection to full performance of contractual obligations Law-making activities in the context of these risks include the drafting of proposed amendments to laws and regulations that govern relations of the parties in the process of technological connection (including those that regulate the fundamentals of pricing when individual tariffs for technological connection are set) and responsibility of grid organisations and counterparties for complying with the material terms and conditions of contracts for technological connection. These proposals were communicated to the regulators (the Federal Anti-Monopoly Service and Ministry of Energy). Federal Grid Company monitors and updates information about transformer capacity which is free for technological connection of customers and generation facilities. This monitoring is done across all feeding centres, and information is available at the corporate website.

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Technological Development Department 2014 2015	Risks related to the untimely meeting of contractual obligations under contracts for technological connection, including deviation of the actual quality level of the technological connection services from the level established during tariff regulation. The quality level is measured as per Section 3 of Executive Order No. 718 dated 14 October 2013, issued by the Ministry of Energy, as the aggregate impact by the quality parameters of reviewing applications for technological connection; execution of contract for technological connection, compliance with the antimonopoly legislation and the quality of customer services.		The Company approved the Programme for Improving the Efficiency of Technological Connection to Electric Grids of Federal Grid Company and Increasing Transformer Capacity Utilisation. It includes actions targeted at initiation of amendments to the Russian laws (law-making) and organisational actions. Institutional actions of the Programme are targeted at improving the efficiency of Federal Grid Company’s operations when the Company provides technological connection services if tariff sources of financing are insufficient, including: Drafting and implementation of template documents in order to unify the document flow in the process of technological connection of customers Actions to increase capacity utilisation by identifying and decommissioning inefficient capacities Setting of schedules for completion of procedures by the Company’s structural units and implementation of actions to improve control over scheduled deadlines at all stages of business process, from registration of an application for technological connection to full performance of contractual obligations Law-making activities in the context of these risks include the drafting of proposed amendments to laws and regulations that govern relations of the parties in the process of technological connection (including those that regulate the fundamentals of pricing when individual tariffs for technological connection are set) and responsibility of grid organisations and counterparties for complying with the material terms and conditions of contracts for technological connection. These proposals were communicated to the regulators (the Federal Anti-Monopoly Service and Ministry of Energy). Federal Grid Company monitors and updates information about transformer capacity which is free for technological connection of customers and generation facilities. This monitoring is done across all feeding centres, and information is available at the corporate website.

Risks related to an increase of overdue and bad accounts receivable

 

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Treasury and Corporate Finance Department 2014 2015	Deviation of overdue accounts receivable for electricity transmission services from the amount established in the business plan.		The Company approved the Receivables and Payables Management Procedure. It establishes the procedures of taking decisions about accounts receivable by contract managers. Besides, the Budget Committee has been established and is operating. Its goals are to make cash management in the Company more efficient, manage risks related to overdue accounts receivable and payable, and improve cash turnover. The Committee responsibilities include but are not limited to the following: Review of aggregate reports about the status of accounts payable and receivable and explanatory notes of contract managers Taking decisions about ways of recovering accounts receivable that have been overdue for more than three months and accounts receivable that were submitted for the Committee’s decision by contract managers Taking decisions to write off bad debt Selective assessment of the performance of employees who manage accounts payable and receivable Taking decisions on proposals about disciplinary measures against delinquents to be brought for approval by the Chairman of the Management Board in cases when the procedure of handling overdue accounts payable and receivable is breached

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Treasury and Corporate Finance Department 2014 2015	Deviation of overdue accounts receivable for electricity transmission services from the amount established in the business plan.		The Company approved the Receivables and Payables Management Procedure. It establishes the procedures of taking decisions about accounts receivable by contract managers. Besides, the Budget Committee has been established and is operating. Its goals are to make cash management in the Company more efficient, manage risks related to overdue accounts receivable and payable, and improve cash turnover. The Committee responsibilities include but are not limited to the following: Review of aggregate reports about the status of accounts payable and receivable and explanatory notes of contract managers Taking decisions about ways of recovering accounts receivable that have been overdue for more than three months and accounts receivable that were submitted for the Committee’s decision by contract managers Taking decisions to write off bad debt Selective assessment of the performance of employees who manage accounts payable and receivable Taking decisions on proposals about disciplinary measures against delinquents to be brought for approval by the Chairman of the Management Board in cases when the procedure of handling overdue accounts payable and receivable is breached

Environmental risks

 

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Environmental Policy Department 2014 2015	Risks related to noncompliance with the Russian laws on environmental protection.	In accordance with a decision taken by the Board of Directors (Minutes No. 166 dated 3 July 2012), since 2011 the Company gradually introduced and certified an environmental management system in its branches. In 2015, the environmental management system was put in place and certified in the branches of MES Siberia, Western Siberia, Ural and Volga. Besides, we obtained a unified company-wide certificate for Federal Grid Company.	As per Executive Order No. 362 dated 11 September 2015, the Company drew up a Procedure of Working with Trichlorodiphenyl-Containing Equipment. Trichlorodiphenyl-containing equipment (total weight: 262.04 tons) was handed over for salvage / placement from several PMES.
2014 2015	Risks related to the failure to implement assignment of the President of the Russian Federation, dated 6 June 2010 (subclause “l” of Clause 1 in the List of Assignments No. Pr-1640 and Directive No. 1710p-P13 of the Government of the Russian Federation, dated 30 April 2012 “On the need to ensure that joint-stock companies with government capital take a decision on implementation of voluntary mechanisms of environmental responsibility” (hereinafter “Assignments” and “Directives”) and decisions taken by the Company’s Board about the procedure of implementation and obtaining the certificates for compliance with the international standard ISO 14001:2004 for the Company’s environmental management system (Minutes No. 230 of the Board meeting, dated 3 October 2014).		The Company implements its environmental-saving initiatives in accordance with the Policy of Innovative Development, Energy Saving and Improvement of Energy Efficiency adopted by PJSC Rosseti (Minutes No. 222 of the Board meeting dated 30 June 2014) and Environmental Policy of Federal Grid Company (Minutes No. 230 of the Board meeting dated 03.10.2014). The Company implements the decision of its Board of Directors to put in place the system of environmental management as a voluntary mechanism of environmental responsibility, and obtain a certificate of compliance with the international standard ISO 14001:2004. The Company completed a set of actions that would help to embrace all its branches in one environmental protection framework in accordance with the international standards. An independent audit of the Company’s environmental management system was completed.
2014 2015	Reputation risks		The Company follows clearly formulated principles of corporate social responsibility, given its impact on the national economy, environment and the society. Particular attention is paid to implementation of charitable, social and environmental programmes most of which are long-term ones.

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Environmental Policy Department 2014 2015	Risks related to noncompliance with the Russian laws on environmental protection.	In accordance with a decision taken by the Board of Directors (Minutes No. 166 dated 3 July 2012), since 2011 the Company gradually introduced and certified an environmental management system in its branches. In 2015, the environmental management system was put in place and certified in the branches of MES Siberia, Western Siberia, Ural and Volga. Besides, we obtained a unified company-wide certificate for Federal Grid Company.	As per Executive Order No. 362 dated 11 September 2015, the Company drew up a Procedure of Working with Trichlorodiphenyl-Containing Equipment. Trichlorodiphenyl-containing equipment (total weight: 262.04 tons) was handed over for salvage / placement from several PMES.
2014 2015	Risks related to the failure to implement assignment of the President of the Russian Federation, dated 6 June 2010 (subclause “l” of Clause 1 in the List of Assignments No. Pr-1640 and Directive No. 1710p-P13 of the Government of the Russian Federation, dated 30 April 2012 “On the need to ensure that joint-stock companies with government capital take a decision on implementation of voluntary mechanisms of environmental responsibility” (hereinafter “Assignments” and “Directives”) and decisions taken by the Company’s Board about the procedure of implementation and obtaining the certificates for compliance with the international standard ISO 14001:2004 for the Company’s environmental management system (Minutes No. 230 of the Board meeting, dated 3 October 2014).		The Company implements its environmental-saving initiatives in accordance with the Policy of Innovative Development, Energy Saving and Improvement of Energy Efficiency adopted by PJSC Rosseti (Minutes No. 222 of the Board meeting dated 30 June 2014) and Environmental Policy of Federal Grid Company (Minutes No. 230 of the Board meeting dated 03.10.2014). The Company implements the decision of its Board of Directors to put in place the system of environmental management as a voluntary mechanism of environmental responsibility, and obtain a certificate of compliance with the international standard ISO 14001:2004. The Company completed a set of actions that would help to embrace all its branches in one environmental protection framework in accordance with the international standards. An independent audit of the Company’s environmental management system was completed.
2014 2015	Reputation risks		The Company follows clearly formulated principles of corporate social responsibility, given its impact on the national economy, environment and the society. Particular attention is paid to implementation of charitable, social and environmental programmes most of which are long-term ones.

Country and regional risks

Risks related to the political and economic situation in the country and region

 

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Strategic Development Department Political factors 2014 2015 Economic factors 2014 2015	Political risk factors in 2015 were minor for the Company because political stability was maintained. The most significant economic risk factors were related to the deterioration of macroeconomic fundamentals (GDP, inflation, unemployment and others).	Lower oil prices, depreciation of the Ruble exchange rates to the main foreign currencies and economic sanctions against the Russian Federation resulted in the higher relevance of the overall economic risk.	Risks related to the political and economic situation in the country fall in the group of risks that the Company cannot manage or influence.	Market situation deteriorated due to other factors; electricity consumption declined, followed by the lower demand for the Company’s services.

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Strategic Development Department Political factors 2014 2015 Economic factors 2014 2015	Political risk factors in 2015 were minor for the Company because political stability was maintained. The most significant economic risk factors were related to the deterioration of macroeconomic fundamentals (GDP, inflation, unemployment and others).	Lower oil prices, depreciation of the Ruble exchange rates to the main foreign currencies and economic sanctions against the Russian Federation resulted in the higher relevance of the overall economic risk.	Risks related to the political and economic situation in the country fall in the group of risks that the Company cannot manage or influence.	Market situation deteriorated due to other factors; electricity consumption declined, followed by the lower demand for the Company’s services.

Risks related to the geographical characteristics of the country or region, including an increased risk of natural disasters and possible discontinuation of transport services

 

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Strategic Development Department 2014 2015	Federal Grid Company manages a unified national electricity grid on the larger territory of the Russian Federation. It has a distributed network of structural units, and its assets are located on the whole territory of the Russian Federation. Therefore, risk factors for the Company are weather, climatic, seismic and other nature conditions.	The Company takes these factors into account when it plans and constructs grid facilities, takes decisions about protection tools, location of repair facilities, distance of facilities from the repairs units, and possible impact of natural phenomena on these facilities.	Federal Grid Company operates in compliance with the Unified Technical Policy of the Electric Grid Complex that was approved by the Board of Directors of JSC Rosseti (Minutes No. 138 dated 23 October 2013). The aim of the Unified Technical Policy is to identify the key technical areas that enhance the electric grid complex’s reliability and efficiency in the short and medium terms with an appropriate industrial and environmental safety based on innovative principles that provide non-discriminatory access to electric grids for all market participants. This includes: An increased number of off-road vehicles and use of air drones in the process of operating the overhead lines and arranging post-accident inspections Higher readiness for repair and recovery works	Equipment outages and technological disruptions caused by weather, climatic, seismic and other nature conditions did not exceed the estimated levels.

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Strategic Development Department 2014 2015	Federal Grid Company manages a unified national electricity grid on the larger territory of the Russian Federation. It has a distributed network of structural units, and its assets are located on the whole territory of the Russian Federation. Therefore, risk factors for the Company are weather, climatic, seismic and other nature conditions.	The Company takes these factors into account when it plans and constructs grid facilities, takes decisions about protection tools, location of repair facilities, distance of facilities from the repairs units, and possible impact of natural phenomena on these facilities.	Federal Grid Company operates in compliance with the Unified Technical Policy of the Electric Grid Complex that was approved by the Board of Directors of JSC Rosseti (Minutes No. 138 dated 23 October 2013). The aim of the Unified Technical Policy is to identify the key technical areas that enhance the electric grid complex’s reliability and efficiency in the short and medium terms with an appropriate industrial and environmental safety based on innovative principles that provide non-discriminatory access to electric grids for all market participants. This includes: An increased number of off-road vehicles and use of air drones in the process of operating the overhead lines and arranging post-accident inspections Higher readiness for repair and recovery works	Equipment outages and technological disruptions caused by weather, climatic, seismic and other nature conditions did not exceed the estimated levels.

Financial risk

Financial risk

 

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Treasury and Corporate Finance Department 2014 2015	This risk is related to possible losses and/or the Company’s inability to meet its obligations in full due to the following factors: CBR’s monetary policy Exchange rate fluctuations Changes of interest rates Inflationary pressures The Company’s restricted access to equity or debt financing		The Company is implementing an Action Programme (“road map”) to ensure financial sustainability and enhanced economic efficiency of Federal Grid Company in 2014–2015, including a package of anti-crisis actions approved by the Management Board (Minutes No. 1263 dated 10 October 2014). The goals of this Programme are to achieve the best balance between objectives of the Company’s investment growth, the level of its shareholder value and profitability; ensure financial sustainability; and conduct efficient and high-performance business operations. The Company developed and implemented actions that are included in the programmes and have an impact on the outcomes of the Company’s operations. These include: Investment Efficiency Programme which envisages a reduction of investment costs Programme for Substitution of Imported Equipment, Technologies, Materials and Systems for 2015–2019. Maintenance and Repair Costs Efficiency Programme Payroll Efficiency Programme Programme for Improving Efficiency of Technological Connection to Federal Grid’s Electric Grids and Increasing Utilisation Ratio of Transformer Capacities. The Company also implements other actions to minimise the financial effect of the abovementioned factors: It continuously monitors and manages risks related to changes of the regulatory framework (this is done by departments of finance and economy); It takes actions to improve management of the Company’s working capital and ensure profit from cash flow, including via stronger financial discipline of counterparties. The Company also implements its policy which envisions gradual reduction of advances paid to contractors; Federal Grid Company handles claims and bad debt recovery, and manages accounts receivable in order to reduce overdue accounts receivable or prevent their accumulation by counterparties; The Company drafts proposals for the federal executive authorities on how to change the process of calculation of fines for untimely fulfilment of contractual obligations; The Company conducts negotiations with entities that provide cross-border electricity transmission services (Kazakhstan, Belarus, the Baltic countries). The aim of these negotiations is to achieve an agreement not to increase the cost of transit due to exchange rate changes and synchronise the parameters of tariff indexation between the countries; The Board of Directors established a foreign currency limit on FX transactions in order to control operations in foreign currency; The Company takes actions to obtain various forms of government support (allocations from the National Wealth Fund, budget allocations via federal targeted programmes, loans and guarantees via investment projects support programmes implemented on the basis of project financing and others).	The risk materialised in terms of higher interest rates that affected the average cost of debt for the Company

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Treasury and Corporate Finance Department 2014 2015	This risk is related to possible losses and/or the Company’s inability to meet its obligations in full due to the following factors: CBR’s monetary policy Exchange rate fluctuations Changes of interest rates Inflationary pressures The Company’s restricted access to equity or debt financing		The Company is implementing an Action Programme (“road map”) to ensure financial sustainability and enhanced economic efficiency of Federal Grid Company in 2014–2015, including a package of anti-crisis actions approved by the Management Board (Minutes No. 1263 dated 10 October 2014). The goals of this Programme are to achieve the best balance between objectives of the Company’s investment growth, the level of its shareholder value and profitability; ensure financial sustainability; and conduct efficient and high-performance business operations. The Company developed and implemented actions that are included in the programmes and have an impact on the outcomes of the Company’s operations. These include: Investment Efficiency Programme which envisages a reduction of investment costs Programme for Substitution of Imported Equipment, Technologies, Materials and Systems for 2015–2019. Maintenance and Repair Costs Efficiency Programme Payroll Efficiency Programme Programme for Improving Efficiency of Technological Connection to Federal Grid’s Electric Grids and Increasing Utilisation Ratio of Transformer Capacities. The Company also implements other actions to minimise the financial effect of the abovementioned factors: It continuously monitors and manages risks related to changes of the regulatory framework (this is done by departments of finance and economy); It takes actions to improve management of the Company’s working capital and ensure profit from cash flow, including via stronger financial discipline of counterparties. The Company also implements its policy which envisions gradual reduction of advances paid to contractors; Federal Grid Company handles claims and bad debt recovery, and manages accounts receivable in order to reduce overdue accounts receivable or prevent their accumulation by counterparties; The Company drafts proposals for the federal executive authorities on how to change the process of calculation of fines for untimely fulfilment of contractual obligations; The Company conducts negotiations with entities that provide cross-border electricity transmission services (Kazakhstan, Belarus, the Baltic countries). The aim of these negotiations is to achieve an agreement not to increase the cost of transit due to exchange rate changes and synchronise the parameters of tariff indexation between the countries; The Board of Directors established a foreign currency limit on FX transactions in order to control operations in foreign currency; The Company takes actions to obtain various forms of government support (allocations from the National Wealth Fund, budget allocations via federal targeted programmes, loans and guarantees via investment projects support programmes implemented on the basis of project financing and others).	The risk materialised in terms of higher interest rates that affected the average cost of debt for the Company

Legal risks

 

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Rules and Regulations Directorate, Legal Department 2014 2015	These are risks related to changes in legislation and to regulation of Federal Grid’s operational areas, including but not limited to: Relations with other owners of UNEG facilities; Calculation of the justified value of maximum capacity for technological connection of applicants; The procedure for defining the declared capacity to be used for setting of the electricity transmission tariffs and calculation of service costs; Technological connection to the Company’s facilities having voltage below 110 kW; Coordination of electricity market participants’ programmes for development of the electric power industry in the longer term; Customers’ liability for the untimely payment for services; Relations with the third parties in technological connection.	The factor that affected the changed assessment of the risk related to the liability of customers for the untimely payment for services was the passage of Federal Law No. 307-FZ dated 3 November 2015 “On Amending Several Laws of the Russian Federation in the Context of Strengthening of Payment Discipline of Users of Energy Resources.”	The Company continuously contributes to the drafting of rules and regulations at the federal level, takes part in the work of inter-ministry panels on the regulation of the electric power industry, and co-operates with the relevant committees of the Federal Assembly of the Russian Federation. The following actions were taken in the reporting year as part of this work: Federal Grid Company drafted proposed amendments to the Federal Law “On Electric Power Industry” (about relations with other owners of UNEG) and submitted them to the Russian Ministry of Energy. Federal Grid Company drafted proposed amendments to the rules and regulations on the establishment of a procedure for the calculation of declared capacity including for regional grid organisations that purchase services from Federal Grid Company Federal Grid Company and the Ministry of Energy drafted and promoted proposed amendments to laws and regulations. These amendments will provide for exceptional cases of technological connection of the customers’ power receivers to electric grid facilities having voltage below 110 kV Federal Grid Company drafted proposed amendments to laws and regulations and submitted them to the Ministry of Energy. The proposals pertain to the procedure whereby a grid organisation settles relations with the third parties in technological connection. Federal Grid Company co-operated with the Ministry of Energy, Federal Anti- Monopoly Service and the State Duma Committee for Energy in order to include the Company’s proposals in the bill No. 348213-6 “On Amending Several Laws of the Russian Federation in the Context of Strengthening of Payment Discipline of Users of Energy Resources.”
2014 2015	Risks related to public law and pertaining to: Changes of court practices on issues related to the Company’s operations Balance of interests with other entities operating in the electric power industry		The Company monitors the key trends in court practices pertaining to its main operational areas. In the reporting period, there were no changes in the court practices on issues related to Federal Grid Company’s core business that could have a significant adverse effect on its performance and on the outcomes of court trials in which the Company is a party.

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Rules and Regulations Directorate, Legal Department 2014 2015	These are risks related to changes in legislation and to regulation of Federal Grid’s operational areas, including but not limited to: Relations with other owners of UNEG facilities; Calculation of the justified value of maximum capacity for technological connection of applicants; The procedure for defining the declared capacity to be used for setting of the electricity transmission tariffs and calculation of service costs; Technological connection to the Company’s facilities having voltage below 110 kW; Coordination of electricity market participants’ programmes for development of the electric power industry in the longer term; Customers’ liability for the untimely payment for services; Relations with the third parties in technological connection.	The factor that affected the changed assessment of the risk related to the liability of customers for the untimely payment for services was the passage of Federal Law No. 307-FZ dated 3 November 2015 “On Amending Several Laws of the Russian Federation in the Context of Strengthening of Payment Discipline of Users of Energy Resources.”	The Company continuously contributes to the drafting of rules and regulations at the federal level, takes part in the work of inter-ministry panels on the regulation of the electric power industry, and co-operates with the relevant committees of the Federal Assembly of the Russian Federation. The following actions were taken in the reporting year as part of this work: Federal Grid Company drafted proposed amendments to the Federal Law “On Electric Power Industry” (about relations with other owners of UNEG) and submitted them to the Russian Ministry of Energy. Federal Grid Company drafted proposed amendments to the rules and regulations on the establishment of a procedure for the calculation of declared capacity including for regional grid organisations that purchase services from Federal Grid Company Federal Grid Company and the Ministry of Energy drafted and promoted proposed amendments to laws and regulations. These amendments will provide for exceptional cases of technological connection of the customers’ power receivers to electric grid facilities having voltage below 110 kV Federal Grid Company drafted proposed amendments to laws and regulations and submitted them to the Ministry of Energy. The proposals pertain to the procedure whereby a grid organisation settles relations with the third parties in technological connection. Federal Grid Company co-operated with the Ministry of Energy, Federal Anti- Monopoly Service and the State Duma Committee for Energy in order to include the Company’s proposals in the bill No. 348213-6 “On Amending Several Laws of the Russian Federation in the Context of Strengthening of Payment Discipline of Users of Energy Resources.”
2014 2015	Risks related to public law and pertaining to: Changes of court practices on issues related to the Company’s operations Balance of interests with other entities operating in the electric power industry		The Company monitors the key trends in court practices pertaining to its main operational areas. In the reporting period, there were no changes in the court practices on issues related to Federal Grid Company’s core business that could have a significant adverse effect on its performance and on the outcomes of court trials in which the Company is a party.

Risk of loss of business reputation

 

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
External Communications and GR Department 2014 2015	Risk related to lower efficiency in communication with stakeholders and lower level of the Company’s transparency. Information effect if other risks materialise.		The Company’s information policy is targeted at the efficient disclosure of mandatory and additional information that helps to raise information openness and transparency of relations between the Company and its shareholders, creditors, prospective investors, professional participants of the securities market, government bodies, the media and other stakeholders. The Board of Directors (Minutes No, 280 dated 24 August 2015) approved a new version of the corporate Information Policy which takes into account the requirements of the Russian Corporate Governance Code. The Company’s internal rules and regulations on information exchange help to mitigate the cost of these risks if they materialise.

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
External Communications and GR Department 2014 2015	Risk related to lower efficiency in communication with stakeholders and lower level of the Company’s transparency. Information effect if other risks materialise.		The Company’s information policy is targeted at the efficient disclosure of mandatory and additional information that helps to raise information openness and transparency of relations between the Company and its shareholders, creditors, prospective investors, professional participants of the securities market, government bodies, the media and other stakeholders. The Board of Directors (Minutes No, 280 dated 24 August 2015) approved a new version of the corporate Information Policy which takes into account the requirements of the Russian Corporate Governance Code. The Company’s internal rules and regulations on information exchange help to mitigate the cost of these risks if they materialise.

Strategy risk

 

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Strategic Development Department 2014 2015	Strategy risk factors are related to losses that the Company might incur because of mistakes in taking decisions about the strategy of its operations and development.		The goals of the Company’s strategic development are outlined in its Long-Term Development Programme for 2015–2019, which was approved by the Board of Directors (Minutes No. 243 dated 22 December 2014). The Programme has been coordinated with the Ministry of Energy and Ministry of Economic Development, and approved by the Expert Council at the Government of the Russian Federation. Advantageous development area for the electric energy industry as an industry of production infrastructure and electricity transmission via backbone electric grids are identified with participation and control of the government bodies. Federal Grid Company and the System Operator draw up an annual Scheme and Development Programme for UES of Russia. The Scheme and Programme identifies, for seven years, the key development areas for the backbone grid in accordance with the projected volumes and location of generating sources and load units. The Scheme and Programme are approved by the Ministry of Energy.

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Strategic Development Department 2014 2015	Strategy risk factors are related to losses that the Company might incur because of mistakes in taking decisions about the strategy of its operations and development.		The goals of the Company’s strategic development are outlined in its Long-Term Development Programme for 2015–2019, which was approved by the Board of Directors (Minutes No. 243 dated 22 December 2014). The Programme has been coordinated with the Ministry of Energy and Ministry of Economic Development, and approved by the Expert Council at the Government of the Russian Federation. Advantageous development area for the electric energy industry as an industry of production infrastructure and electricity transmission via backbone electric grids are identified with participation and control of the government bodies. Federal Grid Company and the System Operator draw up an annual Scheme and Development Programme for UES of Russia. The Scheme and Programme identifies, for seven years, the key development areas for the backbone grid in accordance with the projected volumes and location of generating sources and load units. The Scheme and Programme are approved by the Ministry of Energy.

Execution risk related to the Import Substitution Programme

 

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Department for the Development of Technologies for the Manufacturing of Electrical Equipment 2014 2015	Limited or impossible procurement of electrical products (caused by legislative restrictions or ban on import to Russia either by foreign countries or by the Russian Federation); refusal of foreign producers to co-operate with the Russian companies; domestic producers do not have the required technology, equipment and competencies for manufacturing electrical products that would meet the present-day requirements) Increased prices on electrical products due to adverse external factors (Ruble depreciation against the main currencies; foreign producers’ discriminatory policy toward Russian customers; absence of Russian analogues of foreign equipment; or strong dependence of their manufacturing processes on imported equipment, inputs and spare parts)	Execution risks related to the Import Substitution Programme became more relevant in 2015 because external environment further deteriorated, additional sanctions were imposed on the Russian Federation by some countries, and Russia imposed countersanctions.	The Company drew up and approved (Directive No. 820r dated 29 December 2014) execution risk management actions related to the Programme for Import Substitution of Equipment, Technologies, Materials and Systems for 2015–2019. These actions include: Establishment of priorities for implementation of the Company’s investment projects Changes in the bids documentation and standard delivery contracts in order to use fixed prices for the calculation of prices for electrical products, and include clauses about mandatory hedging of currency risks in the delivery period Adjustments in the Company’s technical policy and main technical and project decisions in order to increase the number and range of domesticallymanufactured electrical products at the Company’s facilities; Transition to the centralised procurement of the main groups of importsubstituted electrical products Long- term delivery contracts with the Russian producers and those foreign companies that localise production in the Russian Federation Centralisation of procurement of the main electrical equipment and an increased share of Russian-made electrical equipment procured for the Company, in compliance with the applicable legislation Encouragement of innovative development of domestic producers of electrical equipment Communication with the federal, regional and municipal authorities in order to ensure support of domestic producers of electrical equipment	In Q4 2015, due to Russian sanctions against Turkey, Russia strengthened the customs control procedures for Turkish goods including spare parts for the manufacture of electrical equipment. This increases the risk of delayed delivery of electrical equipment with these spare parts to the Company’s facilities.

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Department for the Development of Technologies for the Manufacturing of Electrical Equipment 2014 2015	Limited or impossible procurement of electrical products (caused by legislative restrictions or ban on import to Russia either by foreign countries or by the Russian Federation); refusal of foreign producers to co-operate with the Russian companies; domestic producers do not have the required technology, equipment and competencies for manufacturing electrical products that would meet the present-day requirements) Increased prices on electrical products due to adverse external factors (Ruble depreciation against the main currencies; foreign producers’ discriminatory policy toward Russian customers; absence of Russian analogues of foreign equipment; or strong dependence of their manufacturing processes on imported equipment, inputs and spare parts)	Execution risks related to the Import Substitution Programme became more relevant in 2015 because external environment further deteriorated, additional sanctions were imposed on the Russian Federation by some countries, and Russia imposed countersanctions.	The Company drew up and approved (Directive No. 820r dated 29 December 2014) execution risk management actions related to the Programme for Import Substitution of Equipment, Technologies, Materials and Systems for 2015–2019. These actions include: Establishment of priorities for implementation of the Company’s investment projects Changes in the bids documentation and standard delivery contracts in order to use fixed prices for the calculation of prices for electrical products, and include clauses about mandatory hedging of currency risks in the delivery period Adjustments in the Company’s technical policy and main technical and project decisions in order to increase the number and range of domesticallymanufactured electrical products at the Company’s facilities; Transition to the centralised procurement of the main groups of importsubstituted electrical products Long- term delivery contracts with the Russian producers and those foreign companies that localise production in the Russian Federation Centralisation of procurement of the main electrical equipment and an increased share of Russian-made electrical equipment procured for the Company, in compliance with the applicable legislation Encouragement of innovative development of domestic producers of electrical equipment Communication with the federal, regional and municipal authorities in order to ensure support of domestic producers of electrical equipment	In Q4 2015, due to Russian sanctions against Turkey, Russia strengthened the customs control procedures for Turkish goods including spare parts for the manufacture of electrical equipment. This increases the risk of delayed delivery of electrical equipment with these spare parts to the Company’s facilities.

Operational and technological risk

 

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Operational and Technological Management Department 2014 2015	This risk is related to high physical wear and obsolescence of electricity grid assets, violations of service conditions and operational regimes of electric grid equipment, damages of equipment, wrong performance of relay protection of automatic controls and automatic emergency response system, the use of inefficient and obsolete technologies and failure to implement the repairs programme in full. System-wide interruptions in performance and failures to supply electricity to customers, either due do equipment failures or to natural disasters could eventually cause significant economic and reputational losses for the Company. Besides, they could affect the volume of losses in its electric grids.		Federal Grid Company operates in accordance with the regulation on the Unified Technical Policy in the Electric Grid Complex. The aim of its implementation is to enhance the electric grid complex’s reliability and efficiency in the short and medium term with an appropriate industrial and environmental safety based on innovative principles of development. Implementation of the corporate Investment Programme includes projects that aim to achieve the following goals: Reduce the degree of wear of fixed assets Renovate electric grid facilities Ensure delivery of capacity by power plants and reliability of cross-regional electric power exchanges Upgrade switchgear equipment; upgrade and develop automated process control systems Improve grid manageability and observability Clear the routes for overhead transmission lines (OH TLs) Improve energy efficiency Expand the pool of backup electric power sources, vehicles and special-purpose machinery for post-accident repairs Implement an action plan to prevent an increase of accident rate at high-voltage lines and substations. Moreover, the Company implements the following actions toward mitigation of operational and technological risks: Maintains the existing number of repair employees that provide maintenance and repair of substations and high-voltage lines Signs contracts for the servicing of substation equipment with the producers of electrical equipment Educates, oversees and certifies employees who operate process equipment Conducts emergency response drills and onsite inspections in the Company’s branches Implements the Property Insurance Coverage Programme Oversees operational and technological risks via technical oversight and maintaining the quality of construction control which is exercised by the Technical Supervision Centre as Federal Grid’s branch Maintains primary equipment at UNEG substations and high voltage lines, as well as auxiliary equipment at UNEG substations, in a working order in accordance with the regulatory requirements for maintenance and repair Operations of permanent duty teams in the Company’s branches. These teams are to conduct emergency and recovery work at the grid facilities. Besides, the Company establishes emergency reserve of equipment in order to ensure reliable operations of UNEG facilities in cases of disruptions in the electric grids due either to equipment failures or the aftermath of natural disasters or other emergency situations.

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Operational and Technological Management Department 2014 2015	This risk is related to high physical wear and obsolescence of electricity grid assets, violations of service conditions and operational regimes of electric grid equipment, damages of equipment, wrong performance of relay protection of automatic controls and automatic emergency response system, the use of inefficient and obsolete technologies and failure to implement the repairs programme in full. System-wide interruptions in performance and failures to supply electricity to customers, either due do equipment failures or to natural disasters could eventually cause significant economic and reputational losses for the Company. Besides, they could affect the volume of losses in its electric grids.		Federal Grid Company operates in accordance with the regulation on the Unified Technical Policy in the Electric Grid Complex. The aim of its implementation is to enhance the electric grid complex’s reliability and efficiency in the short and medium term with an appropriate industrial and environmental safety based on innovative principles of development. Implementation of the corporate Investment Programme includes projects that aim to achieve the following goals: Reduce the degree of wear of fixed assets Renovate electric grid facilities Ensure delivery of capacity by power plants and reliability of cross-regional electric power exchanges Upgrade switchgear equipment; upgrade and develop automated process control systems Improve grid manageability and observability Clear the routes for overhead transmission lines (OH TLs) Improve energy efficiency Expand the pool of backup electric power sources, vehicles and special-purpose machinery for post-accident repairs Implement an action plan to prevent an increase of accident rate at high-voltage lines and substations. Moreover, the Company implements the following actions toward mitigation of operational and technological risks: Maintains the existing number of repair employees that provide maintenance and repair of substations and high-voltage lines Signs contracts for the servicing of substation equipment with the producers of electrical equipment Educates, oversees and certifies employees who operate process equipment Conducts emergency response drills and onsite inspections in the Company’s branches Implements the Property Insurance Coverage Programme Oversees operational and technological risks via technical oversight and maintaining the quality of construction control which is exercised by the Technical Supervision Centre as Federal Grid’s branch Maintains primary equipment at UNEG substations and high voltage lines, as well as auxiliary equipment at UNEG substations, in a working order in accordance with the regulatory requirements for maintenance and repair Operations of permanent duty teams in the Company’s branches. These teams are to conduct emergency and recovery work at the grid facilities. Besides, the Company establishes emergency reserve of equipment in order to ensure reliable operations of UNEG facilities in cases of disruptions in the electric grids due either to equipment failures or the aftermath of natural disasters or other emergency situations.

Investment risk

 

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Investment Planning and Reports Department 2014 2015	Failure to meet the parameters of the Investment Programme which is approved by the Ministry of Energy and taken into account in tariff decisions results in a decline of gross revenues when tariffs are adjusted for the upcoming period of regulation (in accordance with the RAB-based regulation methodology). Rules of Approval of Investment Programmes of Electricity Sector Facilities with State Participation, and Grid Organisations” (included in Resolution No. 247 of the Government of the Russian Federation (dated 29 March 2014) became effective. These Rules may expose the Company to risks because facilities that are not included in the regional plans may be excluded from this Investment Programme.		The Company has developed and is implementing the following programmes in order to mitigate the abovementioned risk factors: Investment Efficiency Programme (reduction of investment costs) Programme for Substitution of Imported Equipment, Technologies, Materials and Systems for 2015–2019 Programme for Improving the Efficiency of Technological Connection to Federal Grid’s Electric Grids and Increasing Transformer Capacity Utilisation. Besides, the Company implements measures toward fulfilment of an Action Plan (“road map”) to establish and develop mechanisms of public control over natural monopolies (in which the power consumers will take part), as approved by Directive No. 1689-r of the Government of the Russian Federation (dated 19 September 2013). The Company implements an anti-corruption policy in order to avoid exposures to fraud in procurement during implementation of the Investment Programme; actions are taken to assess the good faith and reliability of counterparties.

Risk Disclosing Unit Risk assessment and changes in the risk relevance 2014/2015	Risk Description/Factors	Factors that affected risk assessment	Risk Management Actions	Risk Materialisation
Investment Planning and Reports Department 2014 2015	Failure to meet the parameters of the Investment Programme which is approved by the Ministry of Energy and taken into account in tariff decisions results in a decline of gross revenues when tariffs are adjusted for the upcoming period of regulation (in accordance with the RAB-based regulation methodology). Rules of Approval of Investment Programmes of Electricity Sector Facilities with State Participation, and Grid Organisations” (included in Resolution No. 247 of the Government of the Russian Federation (dated 29 March 2014) became effective. These Rules may expose the Company to risks because facilities that are not included in the regional plans may be excluded from this Investment Programme.		The Company has developed and is implementing the following programmes in order to mitigate the abovementioned risk factors: Investment Efficiency Programme (reduction of investment costs) Programme for Substitution of Imported Equipment, Technologies, Materials and Systems for 2015–2019 Programme for Improving the Efficiency of Technological Connection to Federal Grid’s Electric Grids and Increasing Transformer Capacity Utilisation. Besides, the Company implements measures toward fulfilment of an Action Plan (“road map”) to establish and develop mechanisms of public control over natural monopolies (in which the power consumers will take part), as approved by Directive No. 1689-r of the Government of the Russian Federation (dated 19 September 2013). The Company implements an anti-corruption policy in order to avoid exposures to fraud in procurement during implementation of the Investment Programme; actions are taken to assess the good faith and reliability of counterparties.