Open joint-stock company territorial generating company no. 9 (стр. 3 )

·  Tender-based procurement of the principal volume of new equipment within the scope of investment program and limitation of price ceilings for the equipment to be purchased by the terms and conditions of contracts,

·  Implementing activities aimed at cost reduction in the course of repair campaign, subject to preserving the equipment reliability in the foreseeable future.

Therefore, the Company considers these risks insignificant and believes that the increase in prices of raw materials for power production on the domestic market as well as the increase in prices of equipment on the domestic and foreign market should not materially affect the Company’s activities.

The Company is not exposed to the risk of raw material price increase on foreign markets since the Company does not import energy resources.

The Company is exposed to the risk of setting a price for heat and electric energy that is lower then the forecasted or economically feasible levels.

The industry is peculiar for high volatility of electric energy price and setting fixed tariffs for heat energy. In connection with the high volatility of electric energy price there may be periods when the electric energy price set is lower then the forecasted or economically feasible level.

Realization of this risk, i. e. a reduction in the electric energy price, may result in a reduction in the Company’s net profit, which may in its turn, given the investments in the development, result in a reduction of the profit margin.

In order to limit the possible negative impact of this risk on its activities the Company has provided for such measures as:

·  Improvement of operating efficiency by implementing programs of production expenses reduction and fuel saving,

·  Entering into long term contracts for power and heat supply with consumers,

·  Continuous analysis of the electric and heat energy market conditions,

·  Implementation of a deliberate financial policy,

·  Development of a strategy for operating on the wholesale electric energy market,

·  Dealing on electric energy derivatives market.

In connection with the policy of fixed tariffs for heat energy, there is a possibility that the state will implement an inefficient tariff policy and set tariffs for heat energy that are lower then the forecasted or economically feasible levels.

Realization of this risk, i. e. a reduction in the heat energy price, may result in a downturn in financial performance, reduction in Company net profit, which may in its turn, given the investments in the development, result in a reduction of the profit margin.

As far as the heat supply is a social commitment of the Company irrespective of the tariffs set for heat energy, this risk is beyond the Company’s control. The Company understands the existence and impact of this risk on its performance results. In order to reduce the possible negative impact of this risk on its activities the Company has provided for such measures as:

·  Assumption of maximum negative effect of this risk when planning the Company’s activities.

Therefore, the Company considers insignificant the risk of setting prices for electric energy that are lower then the forecasted or economically feasible level, and considers significant the risk of setting prices for heat energy that are lower then the forecasted or economically feasible level. However, it believes that the issue of setting lower prices should not materially affect the Company’s activities.

Country and regional risks

The Company is registered as a taxpayer in the Perm Territory, and operates in the Russian Federation, namely in the Perm Territory, Sverdlovsk Region and Komi Republic. In this respect the political and economical situation in the country and in the said regions of presence of the Company have an impact on its activities.

The Company is exposed to country risks related to the dynamics of the Russian economy development and the stability of the political situation in the country.

According to the classification of Fitch, Moody’s and Standard & Poor’s, Russia has an investment rating defining the economical and political situation in the country as non-dangerous in the short term. The rating outlook is “stable”.

The credit ratings of the Russian Federation are set out in the following table:

Type of Rating	Russian Federation
Standard and Poors
Long-Term Foreign Currency Rating	BBB (Stable Outlook)
Long-Term National Currency Rating	BBB+ (Stable Outlook)
National Rating	ruAAA
Fitch
Long-Term Foreign Currency Rating	BBB (Stable Outlook)
Long-Term National Currency Rating	BBB (Stable Outlook)
Foreign Currency Short Term Issuer Default Rating	F3
National Rating	AAA(rus)

The rating agencies consider favourable the factors of the economy recovery after the crisis, moderate economic growth, improvement of most of the key economic indices, including the current account surplus, as well as the growth of the Russia’s gold and foreign exchange reserves.

On the other hand, as far as the country’s economy continues relying on raw materials, the Russia’s economy is sensitive to changes in the world prices for natural gas of oil, which dropping may inhibit the development of the Russian economy.

Realization of this risk, i. e. the slow down in the Russian economy growth rates, may result in deterioration in the growth dynamics of the industries consuming heat and electric energy, which will in its turn cause deterioration in the growth dynamics of the power industry on the whole and the Company in particular.

The Company understands the existence and impact of this risk on its performance results, but this risk is beyond the Company’s control.

Therefore, taking into account the opinions of the rating agencies, the Company considers the country risk insignificant and believes that the issue of slow down of the Russian economy growth rates should not materially affect the Company’s activities.

The Company is exposed to regional risks associated with the economic development dynamics of the Perm Territory, Sverdlovsk Region and Komi Republic as well as with the stability of the political situation in these regions.

According the classification of Expet Rating Agency these regions of Company’s presence, except for the Sverdlovsk Region, have a moderate risk and a medium or lower potential, and the Sverdlovsk Region has a high potential and a moderate risk.

The credit ratings of the Perm Territory, Sverdlovsk Region and Komi Republic are set out in the following table:

Region	Investment Attractiveness of Regions Expert RA
Perm Territory	2B Medium Potential – Moderate Risk
Sverdlovsk Region	1B High Potential – Moderate Risk
Komi Republic	3B1 Lower Potential – Moderate Risk

A favourable factor is the recovery of the regions’ economy after the crisis reflected in the recovery of production and the respective growth in many socio-economic development indices.

Realization of this risk, i. e. the slow down in the regional economy growth rates, may result in deterioration in the development dynamics of the Company caused by restriction of access to capital and reduction in the purchase power of the consumers of the Company’s products.

In order to limit the possible negative impact of this risk on its activities the Company has provided for such measures as:

·  Improvement of operating efficiency by implementing programs of production expenses reduction and fuel saving,

·  Reduced resort to loan funds to finance the operations.

Therefore, taking into account the stable outlook of the rating agencies, the Company considers the regional risk insignificant and believes that the issue of possible slow down in the regional growth rates should not materially affect the Company’s activities.

The Company is exposed to risks associated with military conflicts, announcement of the state of emergency and strikes in the country and in the regions of Company presence.

Occurrence of military conflicts or strikes, announcement of the state of emergency in the Russian Federation of in the Perm Territory, Sverdlovsk Region or Komi Republic, will certainly have a negative effect on the Company activities. Realization of this risk, i. e. the occurrence of social and political events preventing normal operations of the Company, may result in the loss of reliability of the heat and power supply system on the whole as well as the full stoppage of the Company business.

The Company understands the existence and impact of this risk on its performance results, but this risk is beyond the Company’s control.

However, as far as the economic and political situation in the Russian Federation on the whole and in the Perm Territory, Sverdlovsk Region or Komi Republic is assessed as stable, the probability of this risk in these regions is estimated as low.

Therefore, the Company considers insignificant the risk of occurrence of military conflicts or strikes, announcement of the state of emergency and believes that the issue of possible occurrence of social and political events preventing normal operations should not materially affect the Company’s activities.

The Company is exposed to risks associated with geographic features of the country and the region of Company presence, including hazard of natural disasters, possible break of the transport link with the territories.

According to the map of natural risks by Munich Re the Perm Territory, Sverdlovsk Region and Komi Republic do not have a high hazard of natural disasters. These regions are not exposed to such natural events as volcanic eruptions, tsunamis, tropic cyclones, storms and floods. Exposure of these territories to earthquakes, tornadoes, hails, snow storms, bolts of lightning is estimated as low.

Moreover, the Company carries out its activities in areas with well developed infrastructure. The regions of Company presence have convenient geographical situation and developed transport network featuring all modes of transportation: motor, water, air, railway vehicles.

Occurrence of natural disasters, discontinuation of the transport link with the territories will certainly have a negative effect on the Company activities. Realization of this risk, i. e. the occurrence of natural events preventing normal operations may result in the loss of reliability of the heat and power supply system on the whole as well as the full stoppage of the Company business.

The Company understands the existence and impact of this risk on its performance results, but this risk is beyond the Company’s control.

However, as far as the regions of Company presence are not exposed to a high hazard of natural disasters and have a developed transport network, the probability of this risk in these regions is estimated as low.

Therefore, the Company considers insignificant the risk of occurrence of natural disasters and discontinuation of the transport link and believes that the issue of possible occurrence of natural events preventing normal operations of the Company should not materially affect the Company’s activities.

Financial Risks

The Company’s activities are influenced by the changes in the monetary policy implemented in the country, changes in interest and inflation rates.

The Company is exposed to the risk of changes in the level of interest rates.

The electric and heat energy industry is a capital intensive industry and the Company’s activities require substantial capital investment. The current investment activities are carried by the Company using both Company’s own financing sources and raised credit facilities.

Realization of this risk, i. e. the growth in the interest rates on the market, may result in the need for the Company to raise more expensive resources to finance its investment program and operating activities, which may in its turn have a negative impact on the financial results of the Company. At the same time, an increase in the interest rates will reduce in real terms the cost of servicing the already existing loans with fixed rates.

In order to limit the possible negative impact of this risk on its activities the Company has provided for such measures as:

·  Increasing the share of fixed rate loans in the credit portfolio,

·  Development and implementation of a methodology for quantitative assessment of interest rate risks and mechanisms enabling hedging such risks with derivative financial instruments.

However, as far as the economic and political situation in the country is assessed as stable, the probability of this risk is estimated as low.

Therefore, taking into account the measures taken, the Company considers the risk of interest rate increase insignificant and believes that the issue of possible change in the level of interest rates in the Russian Federation should not materially affect the Company’s activities.

The Company is exposed to the risk of foreign exchange rate changes.

As far as the electric and heat power produced by the Company is sold on the Russian domestic market with prices therefor fixed in the national Russian currency, the Company liquidity, financing sources and performance results do not depend in any material way on changes in the foreign exchange rate.

Moreover, the Company plans to carry out its activities in a way so that its liabilities are expressed in the national currency. The Company is not planning to sell/purchase electric energy on the foreign market.

However, as far as the Company obtains income denominated the Russian rubles and a portion of expenditure to purchase equipment within the scope of the investment program is in foreign currency, the Company’s financial and economic situation depends on the changes in the foreign exchange rate when importing the equipment.

Implementation of this risk, i. e. the growth of the reverse exchange rate of ruble to dollar and euro may result in an increased price of the equipment to be purchased after entering into the supply contract for such equipment.

In order to limit the possible negative impact of this risk on its activities the Company has provided for such measures as:

·  Development and implementation of a methodology for quantitative assessment of exchange risks and mechanisms enabling hedging such risks with derivative financial instruments.

The probability of this risk is estimated as medium, the damage from realization of this risk, given the measures implemented, is estimated as low.

Therefore, the Company considers the risk of exchange rate increase insignificant and believes that the issue of possible change in the level of ruble to dollar and euro exchange rate should not materially affect the Company’s activities.

The Company is exposed to the risk of increased inflation rates.

The condition of the Russian economy is characterized by high inflation rates. The table below provides the data on annual inflation indices for the period of 2000 to 2011:

Period	Inflation in the Period
2011	6.1%
2010	8.8%
2009	8.8%
2008	13.3%
2007	11.9%
2006	9.0%
2005	10.9%
2004	11.7%
2003	12%
2002	15.1%
2001	18.6%
2000	20.1%

After the 2008 crisis the Russian Government managed to reduce the inflation level to 6.1% in 2011. However, the inflation level directly depends on the political and economical situation in the country.

Realization of this risk, i. e. the growth in inflation rates, may entail a negative change in the financial and economic activities of the Company, which may reflect in losses in the real value of receivables when payments are substantially deferred or delayed, in an increased cost of goods, products, services due to an increase in the expenses for energy production, in a reduced real value of funds provided within the scope of the investment program.

On the other hand, the Company shares are denominated in the national currency, in which connection the negative impact of increased inflation rates may reduce the real value of interest payments for liabilities, i. e. the real value of securities, thus getting reflected on the financial results of security holders.

In order to limit the possible negative impact of this risk on its activities the Company has provided for such measures as:

·  Assumption of most negative inflation rate variations when planning the Company’s activities.

The probability of this risk is estimated as medium, the damage for the Company from realization of this risk is estimated as low.

Therefore, the Company considers the risk of increased inflation significant but believes that the issue of possible changes in the inflation rates should not materially affect the Company’s activities.

Legal Risks

The Company does not export goods and services to foreign markets. In this respect the legal risks associated with the Company’s activities are described only for the domestic market. On the whole, the risks associated with the Company’s activities are specific of the most part of business entities operating in the territory of the Russian Federation.

The Company is exposed to the risk of changes in the currency regulation.

As far as the Company is not carrying out and does not plan to carry out its activities outside the Russian Federation, changes in the laws governing the currency regulation and control will not reflect on the Company’s activities.

Therefore, the Company considers the risk of changes in the currency regulation insignificant and believes that the issue of possible changes in the currency control rules should not materially affect the Company’s activities.

The Company is exposed to the risk of changes in the tax legislation.

The Company is involved in tax relations. The Russian tax legislation is subject to frequent changes, and the Company does not exclude the possible increase of the tax burden on Russian taxpayers.

The Company management believes that the Company fully complies with the tax laws related to its activities, which still does not eliminate possible disagreements with relevant regulatory authorities regarding the matters allowing ambiguous interpretation.

Realization of this risk, i. e. a change in taxation rules in the Russian Federation may result in an increased tax load on the Company and reduced net profit.

In order to limit the possible negative impact of this risk on its activities the Company has provided for such measures as:

·  Constant monitoring of changes in the tax legislation.

In the event of changes introduced in the existing tax procedures and conditions the Company will plan its business activities with account of such changes.

The probability of this risk is estimated as medium, the damage for the Company from realization of this risk is estimated as low.

Therefore, the Company considers the risk of changes in the tax legislation insignificant and believes that the issue of possible changes in the taxation rules should not materially affect the Company’s activities.

The Company is exposed to the risk of changes in customs regulations and dues.

The Company carries out activities for import of goods and services.

Realization of this risk, i. e. setting stricter customs rules and higher dues may result in an increase in the price of imported goods and the time for customs clearance of goods entering the territory of the Russian Federation.

In order to limit the possible negative impact of this risk on its activities the Company has provided for such measures as:

·  A tender-based selection of suppliers,

·  Constant monitoring of changes in the customs legislation.

In the event of changes introduced in the existing customs procedures and conditions the Company will plan its business activities with account of such changes.

The probability of this risk is estimated as medium, the damage for the Company from realization of this risk is estimated as low.

Therefore, the Company considers the risk of changes in the customs legislation insignificant and believes that the issue of possible changes in the customs rules and increased customs dues should not materially affect the Company’s activities.

The Company is exposed to the risk of changes in the licensing requirements for the core activity or for the rights to use some facilities.

The Company’s business involves the need to obtain licenses for some kinds of activities.

Realization of this risk, i. e. setting stricter rules for obtaining licenses may result in negative consequences in the form of penalties imposed on the Company or issuance of resolutions by government authorities requiring suspension of some activities in the event that the license has not been obtained in time.

In order to limit the possible negative impact of this risk on its activities the Company has provided for such measures as:

·  Constant monitoring of changes in licensing requirements.

In the event of changes introduced in the existing licensing procedures and conditions the Company will plan its business activities with account of such changes.

The probability of this risk is estimated as low, the damage for the Company from realization of this risk is estimated as low.

Therefore, the Company considers the risk of changes in the licensing requirements insignificant and believes that the issue of possible changes in the rules for obtaining and extending licenses should not materially affect the Company’s activities.

The Company is exposed to the risk of changes in the judicial practice regarding the matters related to the Company’s activities.

Realization of this risk, i. e. changes in the judicial practice may result in negative consequences in the form of penalties imposed on the Company.

In order to limit the possible negative impact of this risk on its activities the Company has provided for such measures as:

·  Constant monitoring of changes in the judicial practice regarding the matters related to the Company’s activities.

In the event of changes introduced in the existing judicial practice regarding the matters related to the Company’s activities the Company will plan its business activities with account of such changes.

The probability of this risk is estimated as low, the damage for the Company from realization of this risk is estimated as low.

Therefore, the Company considers the risk of changes in the judicial practice insignificant and believes that the issue of possible rendering of judgments that are negative for the Company should not materially affect the Company’s activities.

Risks associated with the Company’s activities

The Company is not exposed to the risk of negative impact of current judicial trials since the Company is not involved in judicial trials as of the time of preparing this Report.

The Company is exposed to the risk of inability to extend the validity of the Company’s license for certain kinds of activity or for use of certain facilities.

The current licenses of the Company expire in the period of December 2012 to July 2034. Upon expiry the licenses will be extended by application of the licensee in accordance with the requirements of the Russian laws applicable as of the time of filing extension.

Therefore, the Company considers the risk of inability to extend the validities of licenses insignificant and believes that the issue of possible non-conformity of the Company with the licensing requirements should not materially affect the Company’s activities.

The Company is exposed to the risk of possible liability for third party debts, including Company subsidiaries.

The liability for the debts of the subsidiaries specified in clause 2.1. hereof may arise in cases provided for by the legislation, specifically in the case when the Company have caused such company’s losses or bankruptcy by giving instructions binding on the subsidiary.

Therefore, the Company considers the risk of possible liability for third party debts insignificant and believes that the issue of possible liability for third party debts should not materially affect the Company’s activities.

The Company is exposed to the risk of loss of consumers accounting for no less then 10 percent of the total proceeds from the sales of the Company products.

In connection with the high volatility of the electric energy price, a significant increase in the price for heat or electric energy against the levels forecasted by the buyers or the economically feasible levels may result in the possibility that the consumers of the energy produced by the Company would shift to alternative or own sources.