Since PJSC ROSSETI does not perform any operating activities and is only in charge of corporate management, country and regional risks are primarily incurred by the Company’s SDCs.
Risks associated with the political and economic situation in the country and regions.
Country and regional risks incurred by the Company and SDCs are determined primarily by macroeconomic factors existing globally, nationwide, and at regional level. These factors may cause the risks that will affect the Company’s and SDCs’ possibilities for borrowing and reduce their liquidity, investment and operating efficiency, and, eventually, shareholder value. Additionally, the global economic crisis has a harmful effect on industrial production and electricity consumption, which reduces revenues of the Company and SDCs.
The volatile external conditions, lower credit ratings, higher inflationary pressures contribute to the ROSSETI Group’s economic decline in the regions and an increase in borrowing costs and lead to the risk of a potential growth in SDCs’ receivables.
With the aim of mitigating the macroeconomic risk, the Company and SDCs take comprehensive measures to optimize the share of borrowings in their total capital, take out fixed interest rate loans, and enhance the efficiency of operating and investment expenses of the Company and SDCs.
The impact of macroeconomic risks on the volume of electricity distribution services provided by the Company’s SDCs and measures to minimize the consequences of materialized risks are described in more detail in the section “Industry-Specific Risks.”
Risks associated with possible military conflicts and their implications, imposition of the state of emergency, and strikes in the regions.
A significant contributor to the uninterrupted operation of the Russian electric grid sector will be efforts to ensure the safety and security of its facilities. Damage to SDCs’ activities can be caused by illegal interference in SDCs’ operations, including acts of terrorism, as well as international terrorism, and by nationalists from certain countries. These acts, along with potential governmental counterterrorism measures and the imposition of the state of emergency in certain regions where the Company’s SDCs operate, can have an adverse effect not only on fulfilling SDCs’ functions specified in the Strategy for Development of the Electric Grid Sector of the Russian Federation in general but also on the amount of investment and on the value of the Company’s securities.
However, it is expertly estimated that these risks are unlikely to occur.
Risks associated with the geographical characteristics of the country(ies) and regions, including the potential effects of natural disasters, interruptions to transportation due to remoteness and/or inaccessibility, etc.
The Company’s SDCs operate in a considerable area of Russia with diverse climatic, natural, and temperature conditions. Therefore, there are risks associated with natural and climatic emergencies (hurricanes, heavy rains, high water and floods, snow drifts, icing, power outages due to fires, domestic gas explosions, etc.). This can result in interruptions to the region’s electricity supply and transportation.
Detailed information concerning measures to reduce technological risks is contained in Section 2.4.7.
Risks associated with high likelihood of natural disasters and with possible interruptions to transportation due to remoteness and/or inaccessibility are assessed by the Company as negligible.
2.4.3. Financial Risks
Risks associated with exchange rate changes.
Currently, all revenues and an overwhelming majority of operating and investing expenses of the Company and its SDCs are denominated in rubles. PJSC ROSSETI and its SDCs do not have any foreign currency-denominated loan debts or any investments in foreign companies whose value is exposed to risks associated with exchange rate changes.
Exchange rate changes have a certain adverse impact on the Company’s financial and economic performance. Information about the impact of currency fluctuations on the implementation of capital investment programs is contained below.
Risks associated with interest rate changes.
The Company and SDCs mainly borrow to refinance debts and finance SDCs’ capital investment programs.
The loan portfolio of the Company and SDCs consists mostly of fixed interest rate instruments. To reduce the risk of higher interest costs, the Company and SDCs take measures to minimize the loan portfolio, including by means of optimizing their operating expenses and capital investment programs and by means of using their own funds to partially repay debts.
Risks associated with the effects of inflation.
Changes in the consumer price index have certain effects on SDCs’ interest costs, profitability, and, consequently, the financial condition of the Company and SDCs and their ability to perform obligations.
The government’s monetary policy and the electric grid sector’s tariff regulation policy give consideration to the consumer price level, changes in the actual purchasing power of the ruble, and the situation in the electricity markets, which impacts companies’ profitability.
Risks associated with possible failure to receive money from bank accounts.
The Company and its SDCs are mainly provided with payment and cash services by five key banks ranking among Russia’s 20 largest banks in terms of net asset value. Therefore, this risk is minimized by concentrating a large amount of the Company’s and SDCs’ cash turnover at Russian major banks.
The risk associated with the possible nonrepayment of fixed-term deposits is minimized by setting ceiling limits on deposits with counterparty banks (as a percentage of banks’ asset value as of the latest balance sheet date) and monitoring compliance with such limits.
Risks associated with impaired financial stability and financial solvency.
These risks are determined by the simultaneous and unidirectional effects of several factors, and it is reasonable to single out the following factors:
- set tariffs;
- lower financial solvency of electricity consumers;
- lower volume of electricity distribution services provided;
- inflation factors (higher loan interest rates, inflation, changes in US dollar and euro exchange rates, etc.);
- volatility in the financial markets;
- increased number of network connection requests.
The Company and SDCs manage the risk of impaired financial stability and financial solvency by optimizing their capital structure, monitoring compliance with debt limits under the Regulations for Credit Policy approved by the Boards of Directors of the Company and SDCs, pursuing a policy on receivables and payables management, and implementing other measures that help minimize the potential adverse impact of this risk on the Company and SDCs.
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