The Group focuses on managing the following financial risks:
The nature of the Group’s activities, including cross-border supplies of electricity, management of foreign assets, implementation of international investment projects, etc., makes the Group exposed to currency risk which may lead to changes in cash flows and revaluation of the Group’s assets and liabilities denominated in foreign currencies.
Interest rate risk
The revision of credit rates for borrowed funds upon their refinancing, the exercise by the banks of their rights to change the interest rate on credits (loans) within a fixed agreement term, and the sensitivity of certain financial liabilities to changes in market interest rates expose the Group to interest rate risk.
To manage the currency and interest rate risks, the Group:
- assesses the currency and interest rate risks using simulation modeling, scenario modeling, and stress testing;
- manages the Group’s currency position, credit and deposit portfolios in accordance with the approved methodology;
- makes transactions on the financial derivative market with a view to hedge currency and interest rate risks.
Credit risk of counterparty banks
A delay or failure by the Group’s counterparty banks to fulfill their obligations, including as a result of their banking license revocation, a moratorium imposed on creditor claims, etc., entails the Group’s exposure to credit risk that may lead to changes in the amount of reserves and deviation of the Group’s net profit from the value set in the business plan.
Credit risk of counterparties (the risk of receivables from electricity and heat buyers, grid organizations, buyers’ receivables in the Wholesale Electricity and Capacity Market)
A delay or failure by the Group’s counterparties to fulfill their obligations, including as a result of reduced solvency or bankruptcy of power supply companies, deprivation of counterparty companies of their WECM subject and GS statuses, and a decline of payment discipline in the key groups of electricity and heat consumers expose the Group to credit risk.
To manage credit risk, the Group:
- assesses the banks’ creditworthiness, following which internal ratings are assigned to the banks, and limits on operations with counterparty banks are set and monitored. Maintains overall group limits on deposit operations with counterparty banks approved by the Company’s executive governing body, and monitors the financial status of the counterparty banks on a monthly basis (Russian perimeter). Makes the decision to revise the group limits as may be necessary. Controls compliance with the established group limits on deposit operations with counterparty banks;
- takes measures to reduce overdue receivables;
- analyzes the counterparties for their solvency and financial stability and the accounts receivable are monitored on an annual basis;
- prepares legislative initiatives and works as a member of inter-agency commissions for the settlement of payment arrears for heat and power resources.