Internal Control and Risk Management System
The Company`s Internal Control and Risk Management System (hereinafter — IC&RMS) is an element of Corporate Management system which includes the entire range of control procedures, methods and mechanisms established and utilised by the Board of Directors, Revision Commission, Audit Committee, management and all employees of the Company having the aim of ensuring reasonable guarantees of goals achievement per the following focus areas:
- efficiency and performance of business organization;
- compliance with state regulations applicable to the Company`s activity and with requirements of local regulations of the Company;
- preventing illegal actions of Company`s employees and third parties in relation to Company`s assets;
- reliability, completeness and timeliness of any kind of reports.
The following internal documents for IC&RMS development were approved by the Company`s Board of Directors:
- Internal control policy of JSC Tyumenenergo;
- Risk management policy of JSC Tyumenenergo;
- Internal audit policy of JSC Tyumenenergo.
(Board of Directors protocol No.
Internal Control and Risk Management System
IC&RM System improvement is carried out on all management levels of the Company by following control functions:
Parties of Internal Control and Risk Management System
IC&RMS key parties` powers and responsibilities
- Board of Directors
- ensures establishing, functioning control and definition of overall Internal Control and Risk Management System development strategy in the Company;
- reviews reports and makes decisions on systematic, significant and problematic issues of internal control.
- Auditors
- control over financial and operational activities of the Company;
- independent evaluation of data consistency in the Company`s annual report and annual accounting statements.
- Board of Directors Audit committee
- ensures independent auditor selection and audit results review;
- ensures evaluation of Company`s accounting (financial) reports consistency (including the independent auditor conclusion);
- evaluates efficiency of internal control and risk management system, makes suggestion on its improvement.
- General Manager
- ensures Company`s effective and reliable internal control system organization and routing functioning.
- Managers of sections and structural units
- organise effective control environment for the processes (functions) they are in charge of, bear responsibility for effective achievement of such processes (functions) operational objectives and for such processes (functions) risk management, and for controlling execution of procedures.
- Employees of Company`s structural units performing control procedures within their duties
- perform control procedures in the context of internal control system functioning in accordance with their duties and effective regulations;
- ensure timely reporting to the line managers about events when control procedures or risk management measures became impossible due to any reasons and/or control procedures / risk management measures design change is required due to a change of internal and/or external functioning conditions of the Company, and develop and submit for management review the suggestions on control procedures and risk management measures implementation in the relevant business areas.
- Internal audit and control department
- ensures methodology and coordination support for risk management and control environment regulating in the Company, performs independent follow-up control and evaluation for control environment effectiveness, informs the Company`s Board of Directors and executive bodies about significant trends and problems in Company`s activity.
Company evaluates the internal control system effectiveness in terms of its target condition and maturity to ensure that internal control system works efficiently and meets the reasonably changing requirements and conditions.
Risk Value assessment
- Industry risks
- Risks related to tariffs
Incomplete accounting of costs related to losses purchasing, credits interests payments, shortfall in income, unrecoverable expenditures from previous periods and other business risks. Regional regulator“s decision in the context of limited increase of end-user and networks tariffs, which does not fully consider IDGC‘s economically, justified expenditures.
Risk Value evaluation and trends
as compared with2013 and during2014 :Significant, risk weight decrease
Mitigation measures
- In accordance with the Regional Energy Commission of Tyumen region decision, Khanty-Mansiysk Autonomous District and Yamal-Nenets Autonomous District No.
109 dated30 May2012 (revisions No.366 dated15 October2012 , No. 3 dated26 February2013 , No.73 dated25 June2013 ) the long-term regulation parameters were fixed for JSC Tyumenenergo on2012 –2017 period via long-term indexation of relevant gross profit which allows for annual tariff adjustment within tariff regulation period. - Continuous collaboration with regional authorities of Russian Federation in charge of state tariff regulation to ensure maximum permitted growth of unit (boiler) tariffs within the national development scenario, and Company`s relevant gross profit in the tariff with regard to shortfall in income from the regulated activities.
- Company`s well-balanced policy to improve efficiency of its investment and operating activities, in particular, to reduce expenses and properly arrange the funding sources.
Reduction in yield due to tariff decrease within the tariff regulation period.
Risk Value evaluation and trends
as compared with2013 and during2014 :Significant, risk weight decrease
Mitigation measures
- In accordance with the Regional Energy Commission of Tyumen region decision, Khanty-Mansiysk Autonomous District and Yamal-Nenets Autonomous District No.
109 dated30 May2012 (revisions No.366 dated15 October2012 , No. 3 dated26 February2013 , No.73 dated25 June2013 ) the long-term regulation parameters were fixed for JSC Tyumenenergo on2012 –2017 period via long-term indexation of relevant gross profit which allows for annual tariff adjustment within tariff regulation period. - Continuous collaboration with regional authorities of Russian Federation in charge of state tariff regulation to ensure maximum permitted growth of unit (boiler) tariffs within the national development scenario, and Company`s relevant gross profit in the tariff with regard to shortfall in income from the regulated activities.
- Company`s well-balanced policy to improve efficiency of its investment and operating activities, in particular, to reduce expenses and properly arrange the funding sources.
- In accordance with the Regional Energy Commission of Tyumen region decision, Khanty-Mansiysk Autonomous District and Yamal-Nenets Autonomous District No.
- Technology connection risks
Technology connection services demand slow-down.
Risk Value evaluation and trends
as compared with2013 and during2014 :Moderate, risk weight increase
Mitigation measures
- Inclusion of the power grid construction required to maintain future loads into its investment program with regard to the plans of long-term development of industrial consumers so that the latter refuse from construction of their own generating capacities.
- Applications monitoring (with surplus geography) based on which the productive supply and demand for network connection services are forecast for the next year.
- Business process improvement related to processing of applications for network connections.
- Consumer education on the network connection services (posting information on JSC Tyumenenergo official website, developing applicant awareness methods), and round-table conferences with business and authorities representatives attendance in order to attract clients and explain the network connection procedure.
- Risk of shortfall in income due to cross-subsidization
Drop of services scope due to termination (non-extension) of “last mile” rent agreements with JSC FGC UES and consequent power transfer tariff growth.
Risk Value evaluation and trends
as compared with2013 and during2014 :Significant, risk weight decrease
Mitigation measures
- Electric power balance monitoring.
- Analysis of actual electric power losses and productive supply with and without regard to “last mile” consumers of JSC FGC UES.
- “Last mile” consumers release to network monitoring and analysis of electric power loss mean value changes.
- Control of contractual provisions with JSC FGC UES (terms).
- Monitoring capital structure and determining optimal loan parameters.
- Measures to reduce cross-subsidization and operating capital structure optimization.
- Risk of electric power losses purchasing cost growth
Proceeds determination for electric power transfer services by grid company without cost of losses purchasing at unregulated price.
Risk Value evaluation and trends
as compared with2013 and during2014 :Critical, dynamics without changes
Mitigation measures
Negotiations with regional regulators on metering such expenditures in gross revenue requirement of a grid company in the next regulation period upon acceptance on a federal level of the shortfall in income amounts from the unregulated price.
Growth of losses accounted in settlements with JSC FGC UES as compared with those accounted in TBR (tariff & balance resolution) approval.
Risk Value evaluation and trends
as compared with2013 and during2014 :Significant, risk weight increase
Mitigation measures
- Assets monitoring in terms of balance — that is electric power down-flow from FGC to the grids of Company`s subsidiaries, forecasting upon actual performance to predict the volume of grid company applications for the regulated period.
- Preparation of amendments to contracts between JSC Tyumenenergo and JSC FGC UES on contracted capacity target values and normative losses corresponding to the approved TBR.
- Providing the state authorities in charge of tariff regulation with the supporting documents to confirm the lawfulness of losses value being fully included in TBR.
- Risks of overdue and non-collectable receivables growth
Risk, related to consumer disagreements on the scope of provided services (with energy sales companies, consumers — legal entities, etc.). In consequence, the contested and overdue receivables appear for the Company`s power transfer services which results in Company`s liquidity and financial stability decrease.
Risk Value evaluation and trends
as compared with2013 and during2014 :Significant, risk weight increase
Mitigation measures
- Measures on consumer conflict cause elimination, contested and overdue receivables for provided services reduction, communication with federal authorities on changes to the retail market functioning rules.
- Court practice positive legal precedents establishing.
- Realization of the Board of Directors approved Long-term development program for electric power metering in retail market distribution grids.
- Risks related to tariffs
- Country and Regional Risks
- Macroeconomic risk
Crisis phenomena in the global economy reduce industrial and electric power consumption thus decreasing the Company`s proceeds.
Risk Value evaluation and trends
as compared with2013 and during2014 :Significant, risk weight increase
Mitigation measures
- The Company implements a complex of measures, aimed at optimization of loans in the overall capital structure.
- Long-term loan raised at fixed interest rates.
- Company`s OPEX and CAPEX efficiency improvement.
- Inclusion into Company`s contracts of a Force Majeure clause to reduce Company`s financial losses in some circumstances.
- Risks related to political and economic situation in the country and region
Changes of political and economic situation in the country and region.
Risk Value evaluation and trends
as compared with2013 and during2014 :Significant, risk weight increase
Mitigation measures
- The Company implements a complex of measures, aimed at optimization of loans in the overall capital structure.
- Long-term loan raised at fixed interest rates.
- Company`s OPEX and CAPEX efficiency improvement.
- Inclusion into Company`s contracts of a Force Majeure clause to reduce Company`s financial losses in some circumstances.
Risks related to potential military conflicts, imposition of the state of emergency and strikes in the country and region.
Risk Value evaluation and trends
as compared with2013 and during2014 :Significant, risk weight increase
Mitigation measures
- The Company implements a complex of measures, aimed at optimization of loans in the overall capital structure.
- Long-term loan raised at fixed interest rates.
- Company`s OPEX and CAPEX efficiency improvement.
- Inclusion into Company`s contracts of a Force Majeure clause to reduce Company`s financial losses in some circumstances.
- Risks related to geographical features of the country and region including higher risk of hazards, potential loss of transport communication
Geographic and climatic features of the region located in the northern part of West Siberia can expose the power facilities to a risk of emergency due to unfavourable natural events (hurricanes, heavy snowfalls, ice glazes, extremely low ambient temperatures etc.).
Risk Value evaluation and trends
as compared with2013 and during2014 :Significant, dynamics without changes
Mitigation measures
- Power facilities design considering the climate and geography.
- Power distribution complex facilities insurance against natural hazards.
- Feed, materials and fuel stock management required for Company`s main activity.
- Inclusion into Company`s contracts of a Force Majeure clause to reduce Company`s financial losses in some circumstances.
- Macroeconomic risk
- Financial risks
- Risks related to change in currency exchange rate
JSC Tyumenenergo operates on the territory of Russian Federation. The company is not an exporter, its contractors are Russian Federation residents, Company prices for electric energy transfer and network connection services, and assets and liabilities, are presented in Russian RUB. Russian Rouble is the only currency used for the Company settlements, payments and loans. However, since the goods and equipment purchased by Company contain import components, a considerable growth of the exchange rate can result in increase in procurement costs.
Risk Value evaluation and trends
as compared with2013 and during2014 :Significant, risk weight increase
Mitigation measures
- Import substitution policy.
- Long-term contracts without products price escalation.
- Risks of interest rate changes
Interest rate increase against planned values.
Risk Value evaluation and trends
as compared with2013 and during2014 :Significant, risk weight increase
Mitigation measures
- Long-term loan raised at fixed interest rates.
- Financial and operational activities planning concerning risks of interest rate changes.
- Debt capital market monitoring and usage of economically feasible credit sources from interest rate and terms point of view.
- Early loan repayment without commissions and penalties as set out in effective credit contracts.
- Inflation-related risks
Inflation growth against planned values may result in:
- the risk of loss in receivables real value in case of considerable grace or delay in payment;
- the risk of increasing interest payable on borrowed funds;
- the risk of raised prime cost of the goods, products, works, services due to indexation of tariffs for purchased energy, wages and other consequences.
Risk Value evaluation and trends
as compared with2013 and during2014 :Significant, risk weight increase
Mitigation measures
- Company`s financial and operational activities planning concerning inflation.
- Inflation risk assessment in submission of economically feasible costs for the tariff balance resolution approval by the regulation authority.
- Cost optimization through development and implementation of the cost management program.
- In case of unfavourable changes in the inflation rate, the Company plans to optimise its receivables and cost management and to focus on the assets turnover.
- Risks related to change in currency exchange rate
- Legal Risks
- Legal risks
Company failure to comply with the legislation and other legal acts, requirements of the regulation and supervision authorities, and Company by-laws that determine its internal policy, rules and procedures (compliance risk).
Risk Value evaluation and trends
as compared with2013 and during2014 :Moderate, risk weight decrease
Mitigation measures
- Normative documents monitoring.
- Internal Control system improvement.
- Preventive, operational and follow-up control of Company`s activity compliance with law and internal regulations and by-laws.
Acknowledge the Company`s antitrust infringement.
Risk Value evaluation and trends
as compared with2013 and during2014 :Moderate, risk weight decrease
Mitigation measures
- Effective law and court practice monitoring.
- Network connection processes are in strict compliance with applicable legislation.
- Investment program continuous monitoring and adjustment in order to expedite the obligations.
- Applications monitoring, network connection forecasting (including increment geography) to forecast the applications number and grid company`s obligation for the upcoming year.
- Compliance with regulations, which defines activities of structural units in the context of technical connection organization.
- Management of network connection technical specifications and expedited contracts preparation..
- Software implementation to successfully control the technical connection applications execution.
- Court practice establishing in terms of abuse of dominance to mitigate the network connection procedure infringement by the grid company.
- Legal risks
- Risks related to operation activities
- Operating and network risks
Failure of the power supply to consumers due to network fault in electric grid facilities operation.
Risk Value evaluation and trends
as compared with2013 and during2014 :Significant, risk weight increase
Mitigation measures
- Failure analysis based on SAP R/3 data, and determining bottleneck areas.
- Grid renovation, reliability improvement target program to enhance grid technical condition.
- Facilities repair as required, taking into account risks and failure data.
- HR activities: training, professional development.
- Public work, PR programs development.
- Emergency response drills including special trainings on implementation of Temporary Shutdown Plan.
- Preparation and updating of the Network collaboration guideline with power allied companies.
- Measures on power grid reliability improvement.
- HSE management system improvement.
- Investment risk
Total performance decrease against planned values (as accepted during Investment Program planning phase).
Risk Value evaluation and trends
as compared with2013 and during2014 :Significant, risk weight decrease
Mitigation measures
- Investment Program planning based on key performance criteria as follows:
- grid infrastructure availability improvement;
- wear and tear decrease and power facilities revamp;
- high loading of commissioned facilities.
- Monitoring of Investment program execution, its funding, cause analysis of actual vs. planned investment parameters.
- Implementation of project management in Company`s investment activities with investment project risk management as one of its knowledge.
- Measures, aimed at projects execution quality improvement; enhancing the efficiency of investments in existing grid; construction cost factor reduction; ensuring high loads of commissioned facilities; comparative analysis system development and implementation in the context of construction/materials/automation cost factor within investment management system.
Failure to meet the planned dates of CAPEX assimilation and investment projects commissioning delays, including due to contractors and suppliers” failure to perform their obligations.
Risk Value evaluation and trends
as compared with2013 and during2014 :Significant, risk weight decrease
Mitigation measures
- Investment Program planning based on key performance criteria as follows:
- grid infrastructure availability improvement;
- wear and tear decrease and power facilities revamp;
- high loading of commissioned facilities.
- Monitoring of Investment program execution, its funding, cause analysis of actual vs. planned investment parameters.
- Implementation of project management in Company`s investment activities with investment project risk management as one of its knowledge.
- Measures, aimed at projects execution quality improvement; enhancing the efficiency of investments in existing grid; construction cost factor reduction; ensuring high loads of commissioned facilities; comparative analysis system development and implementation in the context of construction/materials/automation cost factor within investment management system.
- Investment Program planning based on key performance criteria as follows:
- Operating and network risks
Risk Value assessment
To improve operation management efficiency, the Company currently implements a risk management system integration into business planning and establishes a multi-factor analysis of risks impact on business plan target indices achievement. Information on risk identification, assessment, and risk management measures is submitted quarterly to the Company`s Board of Directors within business plan performance report.
Key objectives for
- risk map development;
- mitigation plans execution monitoring;
- risk information updating;
- quarterly accounting (financial) reports review;
- internal audit in accordance with approved schedule;
- execution checks of directions from Revision commission, public authorities and internal auditor and correction of previously identified violations.
Additionally, Company`s plans for
- implementation of Company`s Internal Control system improvement project for accounting and fiscal reporting processes and for processes (disciplines) which sufficiently impact JSC Tyumenenergo accounts reporting indices;
- random check of comments implementation identified during external controlling bodies checks; adaptation and implementation of the unified methodology developed in JSC Rosseti; regulations for internal control risk-oriented system establishment and improvement.