Risk Management System

RMS Organization

The tasks of the Company's Risk Management System are to ensure reasonable confidence in achieving the goals set for the Company under the Strategy of the Russian Federation for Development of the Electric Grid Complex, development software documents and the Company's Articles of Associations, and the growth of the Company's value while maintaining the balance of interests of all stakeholders.

The Board of Directors, the executive bodies of Rosseti Kuban, managers, and  employees at all levels of the Company's management shall implement the Company's Risk Management, i.e. risk identification, evaluation, and ranking, as well as risk treatment to ensure a reasonable guarantee of the Company's goal achieving.

The Board of Directors has approved the Risk Management Policy (Minutes No.233/2016 dated March 18, 2016) to ensure the functioning of the RMS in the Company. The Policy is a Company’s internal document, which determines its attitude to risks, establishes the general principles, objectives, and tasks of the RMS, approaches to RMS organization, the allocation of responsibility between RMS participants, and the nature of their cooperation, risk management milestones.

Key Risks in the Company's Activities

The Company regularly identifies, evaluates, and monitors risks, implements measures to reduce the probability and potential consequences of the implementation of risks, and informs shareholders and other stakeholders.

According to the Company's Risk Management Regulation, the Management Board approved the Company's 2020 Risk Register of 19 operational risks, i.e. aggregated risks of business processes and risks that have a significant impact on the Company's activities, including key performance indicators of the Company's sole executive body, and respectively on achieving goals in the management of the  grid complex and meeting the strategic objectives of Rosseti Group.

A risk significance level helps to determine a level of risk impact on the Company's activities. Risks are ranked by three levels of significance: moderate, significant, critical.

The Company's Risk Management Plan for 2020 includes measures to minimise risks with a significant or critical level of significance.

Impact of Risks on Achieving Strategic Goals

In 2020, Rosseti Kuban introduced a new risk management methodology and expanded the conceptual framework.

Risks of the Company's business processes include risks of the Company's primary, secondary business processes, Company’s management and development business processes, These risks are taken into account in modelling business processes and arise in any Company's business processes, which influence the achievement of the goals of the relevant business process, and through the objectives of the business process - the achievement of company's operational objectives, the objectives of compliance with the company's applicable laws and regulations, timely and complete reporting on the all-kind activities of the Company (accounting (financial), tax, statistical, management, grid, etc.).

Each business process has the own specific set of risks. Therefore, the list of risks is determined and analysed separately for each business process, after which they are included in the Company's Risk Register.

The operational risks of the Company include aggregated risks of business processes and risks that have a significant impact on the Company's activities, including key performance indicators of the Company's sole executive body, and respectively on achieving goals in the management of the  grid complex and meeting the strategic objectives of Rosseti Group. In developing the scenario conditions for the Company's business plan, the Company's results from the beginning of this year and for previous periods are taken into account, as well as information about operational risks. The Company's business plan contains information about operational risks that have a final "significant" and "critical" rating.

One of the most critical consequences and the corresponding KPI of most impact are determined for each operational risk. Each operational risk is assessed separately from other risks affecting the same KPI.

KPIs:

• Achieving Consolidated Operating Income Indicators (EBITDA)
• Achieving the Consolidated Net Debt/ EBITDA
• Achieving the planned level of receivables for electricity transmission services
• Ensuring dividend flow
• Electricity losses, %
• Compliance with grid connection time-frames
• Compliance with the commissioning schedule, %
• Reliability of services provided
• Zero increase in casualties
• Innovation performance
• Reduction of per unit investment costs
• Compliance with legislation, including anti-corruption prevention and legislation and antitrust laws
• Ensuring the comprehensive security of the Company's activities

Evaluating the RMS Effectiveness and Improvement

In order to guarantee that the RMS is efficient and complies with changing requirements and conditions, the Company’s internal auditor assesses the RMS efficiency. The Internal Auditor’s RMS Performance Report for 2019 was discussed by the Board of Directors (Minutes No. 399/2020 dated August 28, 2020), and the RMS was concluded to be “moderately” or “optimally” mature. By the end of 2020, the level of RMS maturity is assessed analogously.

The RMS Development and Improvement Plan was approved by the decision of the Company's Board of Directors (Minutes No. 373/2019 dated December 31, 2019) with a preview of the Strategy Committee (Minutes No. 105/2019 dated December 10, 2019). In 2020, pursuant to the Company’s RMS Improvement Plan:

• the Register of Operational and Business Process Risks of the Company for 2020, the Risk Management Plan for 2020 was approved (Minutes of the Management Board meeting No.10/2020 dated April 30, 2020);
• the methodology documents on the Company’s risks identification, analysis and assessment, risk responding, and documenting information concerning the assessment of the risk management maturity level in the Company, were approved;
• Representatives of the Company participated in the activities of the Commission on Risk Management and Internal Control Methodology in Rosseti Group, as well as the working group on updating the Commission's Risk Management Methodology;
• some  employees of the Department of Internal Control and Risk Management joined the Association of Internal Auditors and participated in the Association's webinars.

Activities to Improve the RMS for 2021

• Updating the Risk Management Policy based on the principles of the COSO concept “Enterprise Risk Management. Integrating with Strategy and Performance”, and ISO 31000:2018 standard “Risk Management – Guidelines”.
• Developing a methodology for determining risk appetite under the standards of Rosseti Group. Introducing the risk appetite rate for discussion by the Board of Directors.
• Conducting training for managers and  employees regarding organization and functioning of the Internal Control System and the Risk Management System.