RusHydro Group has put in place an Internal Control and Risk Management System (the “System”).
The System focuses on providing reasonable assurance that the Group will be able to attain its goals and objectives in the following categories:
The roles of the Internal Control and Risk Management System stakeholders are differentiated based on their involvement in operating and implementing the System and monitoring its performance.
The Control and Risk Management Department is responsible for supervising and providing methodological support to the System. The Department has the following objectives:
As at December 31, 2019, the Department’s headcount was 35 employees.
RusHydro Group stands by the principles of highest transparency in communication with external stakeholders — shareholders, investors, governmental supervisory agencies, external auditors, banking and insurance organizations, complying with the applicable laws and internal regulations of the Company and its subsidiaries.
The key regulation defining the goals, objectives and principles of the corporate system of internal control and risk management is RusHydro’s Internal Control and Risk Management Policy (the "Policy")* .
The Policy promotes compliance with the principles of the Internal Control and Risk Management System and harmonization of internal control and risk management approaches across RusHydro Group, while also reflecting the latest recommendations of international professional organizations on internal control and risk management and relevant best practices of Russian companies.
In 2019, the Board of Directors approved the Guidelines on RusHydro Group’s Risk Appetite aiming to further improve the efficiency of internal controls and risk management in the Company.
In the reporting year, the Board of Directors also approved the Regulations on the Internal Control System of RusHydro Group (the “Regulations”), which set out applicable internal control guidelines. The document provides a detailed description of the internal control system and its elements, and sets forth requirements on key internal control procedures, types of monitoring to be used, coordination of efforts between the stakeholders of the RusHydro Group’s Internal Control and Risk Management System, and reports on the internal control system status and improvements.
In addition, the Control and Risk Management Department joined forces with risk owners to produce a comprehensive classifier of risks to facilitate identification of risks and the development of a typical risk database for RusHydro Group. The document was reviewed by the Audit Committee of RusHydro’s Board of Directors.
The Internal Control and Risk Management Policy of RusHydro specifies the following set of risk management methods and approaches:
The key document governing the planning of strategic risk management initiatives for 2019 was the Strategic Management Regulations of RusHydro Group.
Pursuant to these Regulations, the Group maintains a strategic risk register, which identifies risk owners and is reviewed annually by the Management Board. Strategic risks that are deemed critical or material are addressed in the risk mitigation plan, which identifies action owners, deadlines and deliverables and is approved by the Management Board. Performance against the risk mitigation plan is measured when determining employees' bonus awards. The implementation of the risk mitigation plan and progress under it are monitored and overseen by the Company’s risk managers.
Risk managers maintain an ongoing dialogue with the Audit Committee of the Board of Directors as the body overseeing RusHydro’s risk management system in line with the Guidelines on Audit Committees of the Boards of Directors of Joint-Stock Companies with a Stake Owned by the Russian Federation.
Reports on actual progress against the strategic risk mitigation plan are drafted by the Control and Risk Management Department at the end of each reporting period and submitted for approval by the Chairman of the Management Board.
In 2019, RusHydro’s Board of Directors approved the Group’s risk appetite framework. [102−33] [EC]
|Risk categories||Target||Risk appetite limit (risk level) indicator|
|Major accident risk||Reliable and safe operation of RusHydro Group’s facilities||Number of major accidents|
|Risks affecting operational efficiency||Operational efficiency||Return on equity (ROE),
labour productivity (revenue, RUB ‘000/man-hours)
|Risk of losing investment appeal I||Investment appeal||EBITDA|
|Investment risks||Investment activities||Adherence to the capacity commissioning schedule, progress against funding and spending targets|
|Corruption risk||Zero tolerance towards corruption||Number of actions lodged for illegal gratification offered on behalf of legal entities|
|Reputational risk||Good corporate reputation||Share of negative news in total media coverage|
The Audit Committee of the Board of Directors or the Chairman of the Management Board — General Director may seek an external independent assessment of the Company’s Internal Control and Risk Management System by independent third-party experts.
In 2019, no external independent assessment was performed.
The internal assessment of the corporate system of internal control and risk management is performed annually by the Company’s Internal Audit Service to provide the Company’s Board of Directors and the Group’s executive bodies with independent and objective information about the system’s current state and to identify areas for its improvement.
In 2019, the Internal Audit Service assessed the Company’s internal control and risk management. The assessment relied on the methodology agreed with the Audit Committee of the Board of Directors and designed to analyze the system’s current state against the target.
The report revealed that the Company’s corporate system of internal control and risk management had a moderate level of maturity, with its elements generally in line with the target state set by the assessment methodology. The results were reviewed by the Company’s Board of Directors at an in-person meeting and approved by its resolution of June 21, 2019.
Following the independent internal assessment, the Company drafted an Internal Control and Risk Management System Improvement Plan listing the development opportunities for 2019−2020.
The Internal Control and Risk Management System is continuously developed and improved to ensure prompt response to external and internal changes, improve operational efficiency and attain corporate goals. The Company updates and approves the Internal Control and Risk Management System Improvement (Development) Plan on an annual basis.
Key 2019 initiatives to improve the Internal Control and Risk Management System
|Coordination and methodological support||
|Development of internal regulations and training of employees||
|Development of the risk management and internal control process in the Company||
|Automation of the risk management and internal control process||
Risks and opportunities are prioritized according to their impact on key financial, environmental and social aspects of the Company’s operations, with the strategic targets, development priorities and the Company’s mission factored in.
In 2019, RusHydro Group’s strategic risk register consisted of 15 risks, with no changes taking place throughout the year.
The Management Board adopted a resolution to approve RusHydro’s Strategic Risk Mitigation Plan for 2018−2019 (the “Plan”)* . The document provides an overview of strategic risk materialization scenarios and key risk drivers, while also specifying the sources of data used in estimating risk indicators. The digitalization of risk indicators is currently underway to enable the identification of materialized risks, estimate deviations and compare the damage from risk materialization.
Strategic risk monitoring in 2019 [102−29] [EC]
|Category||Risk||2019 monitoring results (preliminary)|
In 2019, these risks remained most critical for key construction projects, including Nizhne-Bureyskaya HPP, Sakhalinskaya GRES2, Zaramagskaya HPP and a CHPP in Sovetskaya Gavan.
Delays in commissioning and project cost overruns were caused by the need to update and amend the design and cost estimate documents coupled with reduced financial stability, poor qualification of contractors, contractor employees' operating errors and gaps in synchronization of third-party efforts.In 2019, measures were taken to reduce these risks to an acceptable level, but due to the synergistic effect of construction delays accumulated over the previous project stages some of the construction projects were not completed on time.
||In 2019, financial risks were within the target range.|
In 2019, none of these risks materialized. The assessment of risk materialization was based on relevant risk indicators and applicable scenarios.ESG (Environmental, Social and Governance) risks have not been split into a separate risk group, but are reviewed (in terms of risk driver management) as part of the existing strategic risk register.
Strategic risk management report for 2019 [102−33]
Risk significance increase
Risk significance decrease
|Risk||Risk owner [ЭС]||Change in risk criticality during the year||Key risk drivers||Risk management practice|
Delayed commissioning of new capacitiesCost overruns for investment projects
|Unit of Capital Construction, Deputy General Director for Capital Construction||Design errors||
|Failure to meet quality requirements imposed on developers of design and construction documents|
|Late delivery of design specifications, estimates and construction documents, frequent changes to construction documents|
|Low financial stability and bankruptcies of contractors and suppliers; failure of contractors and suppliers to meet their contractual obligations|
|Lengthy contracting procedures to sign construction and installation, front-end engineering and design contracts|
|Poor qualification/reduced capacity of contractors|
|Acceptance of incomplete or partially completed works from contractors|
|Low quality of equipment and materials (reduced technical capacity of manufacturers)|
|Substandard grid infrastructure. Lack of connection capacity for completed and commissioned construction projects|
|Unfavorable weather conditions affecting construction and installation works|
|Revenue shortfalls from the sale of electricity (capacity) and heat against the business plan||
Unit of Sales, Economic Planning and Investments, First Deputy General DirectorUnit of Production Activity, First Deputy General Director- Chief Engineer (as regards equipment wear and tear, and failure to meet dispatch schedules)
|Decrease in electricity (capacity) and heat generation||
|Decline in electricity (capacity) sold
by the Group’s retail subsidiaries in retail markets, including as a result
|Regulated prices (tariffs) fixed below targets set by RusHydro Group companies|
|Adverse changes / breaches of the law||Unit of Financial and Corporate Law Management; First Deputy General Director||Adverse changes in laws and regulations governing the operation of the wholesale and retail electricity (capacity) markets||
|Failure to comply with legal
requirements imposed on:
|Sharper focus of environmental and nature conservation organizations on the Company’s operations|
Violation of the following requirements by retail companies of RusHydro Group:
|Industrial disasters and accidents||Unit of Production Activity, First Deputy General Director — Chief Engineer||Design and/or construction errors||
|Low quality of equipment, materials and repairs (reduced technical capacity of manufacturers)|
|Deterioration of the technical condition of equipment, buildings and facilities|
|Non-compliance with laws, internal regulations and guidelines|
|Failures of subsystems of the upper-level automated process control systems and computer software|
|Deficiencies in the system for physical protection of the Company’s facilities|
|Major industrial disasters/accidents/ injuries|
|Lack of funds, including those sourced externally||Unit of Sales, Economic Planning and Investments, First Deputy General Director||Increase in borrowing costs||
Loss of liquidity from delays in or lack of planned cash flows:
|Excess of actual cash flows (payments) vs planned, driven by growing prices of fuel for heat generation facilities and increased investment costs|
|Risk of non-delivery / efficiency losses associated with production programs||Unit of Production Activity, First Deputy General Director — Chief Engineer||Gaps in/violations of production program planning guidelines||
|Inadequate system of monitoring progress under the repair, rehabilitation and modernization projects, including the supervision of contractor works|
|Terrorism and cyber terrorism [EC]||Security Unit||Growing threat of international terrorism as a result of deteriorating international relations and growing political instability in some developing countries driven by the economic crisis and the activity of radical organizations||
|Growing share of industrial terrorism in proportion to overall terrorist activities|
|Low security level of third party facilities which are inherently connected to power plants or located close to them (bridges, roads)|
|The threat of hidden functionality and hardware/software implants in foreign network and server equipment being used to disable computer networks and disrupt production|
|Insufficient security of own facilities in terms of potential hacker attacks against information systems of the Company and external communication channels, including with the System Operator|
|Failure to achieve project targets by engineering companies (project companies, institutes, repair companies)||Unit of Capital Construction, Deputy General Director for Capital Construction||Shortage of qualified personnel in engineering companies||
|Inefficient management of engineering companies|
|Failure to use advanced design approaches|
|Management system deficiencies and errors||Unit of Financial and Corporate Law Management; First Deputy General Director||Slow process of managerial decision review and approval||
|Underregulated business processes and procedures|
|Low level of comprehensive IT implementation|
Unit of Corporate Communications (PR and GR)Strategy and Innovation Unit (IR)
|Dissemination of inaccurate and deliberately false information about RusHydro Group||
|Dissemination of negative (compromising) information about RusHydro Group|
|Damage caused by natural and industrial disasters outside RusHydro Group’s facilities||Unit of Production Activity, First Deputy General Director — Chief Engineer||Inadequate protection of RusHydro Group’s production assets against natural disasters||
|Corruption risk||Security Unit||
Appropriation of corporate opportunities for personal benefit:
|Unauthorized access to and disclosure of RusHydro Group’s confidential information|
|Increase in receivables for electricity (capacity) and heat supplied and for transmission services rendered||Unit of Sales, Economic Planning and Investments, First Deputy General Director||Low solvency of consumers (customers) and territorial grid operators||
|Cheating by consumers (customers) and territorial grid operators|
|Inefficient integration of companies merged into RusHydro Group||Unit of Financial and Corporate Law Management; First Deputy General Director||Impact of financial performance of merged companies on consolidated financial results of the Group||
In late 2019, China first reported a novel coronavirus disease (COVID-19). The World Health Organization received information on a cluster of cases of unknown aetiology. In the first months of 2020, the virus spread worldwide, with its devastating impact gaining momentum.
Although on the date of publishing this report the situation around the virus has not yet stabilized, we expect it to damage both the global economy and RusHydro Group operations, in particular. The virus repercussions included rouble depreciation, plunging oil prices and a stock market crash.
Up to now, the Group’s sales and supply chain have not taken a substantial hit, with future effects of the epidemic impossible to predict. The Company management is closely monitoring the related potential risks and is ready to unleash a comprehensive set of measures to mitigate the consequences.
While engaged in continuous electricity and heat generation, transfer and sales to all groups of customer, RusHydro is also taking steps to prevent the infection from spreading among its employees.
To that end, we are educating our people on how to avoid contagion and supplying personal protective equipment. We have also arranged for more than 80% of our whitecollar staff to work remotely.
Additionally, we reorganized the operation of our facilities. In regions where RusHydro Group companies render services to retail and corporate customers, all communications are handled distantly, by phone or online.