1.5. Risk Management 

This section includes description of Risk management system, risk assessment (interactive risk map) and key results of risk management.
GRI 102-15

1.5.1. Risk Management System

The effective risk management is one of the conditions to achieve the strategic goals of the Engineering Division.

Risk management in the Division is applied on the basis of international standards and proven methodological approaches. The qualitative and quantitative risk assessments are performed.

Risk Management Results in 2016

In 2016 the work on risk management of 14 NPP construction projects was carried out by following directions:

At each project the risks are detected (identified), risk owners are specified, corrective measures on risks mitigation are developed by design office specialists and business areas experts. Implementation of activities in the fiscal year allowed reducing the level of a number of risks.

The final annual report which includes reports on all projects has been issued. Data base on risks is supplemented taking into account the current year experience.

For automation of the risk management process, the Automated risk management system (ARMS) has been finalized and put into trial operation. ARMS key functions:

Six workshops have been conducted with design offices teams regarding ARMS training.

Risk Management Objectives for 2017 and in the Period

1.5.2. Key Risks

(GRI 102-15) Following the results of 2016 the Division’s key risks have been updated.

Click risk to see details
Very low Low Medium High Very high Very high High Medium Low Very low 4 14 12 6 5 1 9 2 11 10 3 13 7 8 Medium risks High risks Low risks Exposure (potential damage) Possibility 7 8 1 3 13 5 6 12 11 14 9 2 4 10 See details below

Legend of risk trends in comparison with 2015

Impact increase
At the level of 2015
Impact decrease
Click risk to see details
POLITICAL AND COUNTRY-BASED RISKS
1
COMMERCIAL AND FINANCIAL RISKS
2 3 4 5
PROJECT RELATED RISKS. SEGMENT OF HIGH POWER NPP
6 7 8
REPUTATION RISKS
9
TECHNOLOGICAL RISKS
10
ADDITIONAL MARKET SEGMENTS
POLITICAL AND COUNTRY-BASED RISK
1
Risk (factor)

Political risk (Political and economic instability of target markets)

Trend justification

Continued existence of sanctions on the part of the USA and the EU and retaliatory sanctions on the part of the RF.

Political nature of nuclear technologies supplier selection: high dependence of the general contractor selection on political impact of competing countries.

Key results on risk management and response to risks emerged in 2016

Project support at the government level.

Organization of international customer's representatives visits.

Search of new markets.

Implementation of import technologies and equipment replacement program.

Risk management performance in 2016

As of December 31, 2016, the portfolio of the Division’s overseas orders amounted to $92.3 bln which is by 31.8 % more than in 2015.

COMMERCIAL AND FINANCIAL RISK
2
Risk (factor) an arrow indicates a trend

Interest Rate Risk (unavailability of global financial resources)

Trend justification

Trend to decrease in the general ruble and dollar interest rates.

Key results on risk management and response to risks emerged in 2016

The decrease in the loan portfolio.

Risk management performance in 2016

The risk did not affect the Division in the fiscal year.

COMMERCIAL AND FINANCIAL RISK
3
Risk (factor)

Risk of state funding availability decrease (change of the Russian macroeconomic indicators)

Trend justification

Sequestering of long-term investment programs on the nuclear energy development.

Key results on risk management and response to risks emerged in 2016

An active search for orders for NPP construction abroad was undertaken as the volumes of available state financing in RF went down.

Risk management performance in 2016

No significant losses related to reduction of available state funding.

COMMERCIAL AND FINANCIAL RISK
4
Risk (factor) an arrow indicates a trend

Exposure to the credit risk of suppliers and customers

Trend justification

In 2016 there was a decrease in overdue receivables, as well as in the share thereof with regard to the general index of receivables, that may evidence on decrease of the level of NPP construction contracts default risks in the Division’s organizations. Decrease in overdue receivables by some organizations amounted from 15 to 54 %, on the average there was a decrease by 30.8 % in the Division’s organizations.

Key results on risk management and response to risks emerged in 2016

To minimize counterparty credit risks, the monitoring of the financial condition of counterparties is performed on quarterly basis. The bidding procedure comprises assessment of financial resources capacities. The Company uses financial guarantees provided by the partner banks of ROSATOM.

Monitoring of the level of the overdue receivables. Proactive efforts to decrease the level of the overdue receivables.

Risk management performance in 2016

No significant losses related to counterparty defaults.

COMMERCIAL AND FINANCIAL RISK
5
Risk (factor) an arrow indicates a trend

Growing influence of exchange rate

Trend justification

Strengthening of the Ruble’s exchange rate in 2016 had a negative impact on the Division’s financial position by means of:

  • negative revaluation of cash balances on the foreign exchange-denominated settlement accounts;
  • exceeding of currency receipts over currency expenditures.

Also, the Ruble weakening in 2015 had an adverse effect (extra profit was received) that led to the necessity of extra profit tax payment in 2016.

Positive effect: decreasing cost of equipment and services procured at foreign contractors.

Key results on risk management and response to risks emerged in 2016

In the context of heightened volatility of currency exchange rates, since 2015 all financial services of the Division have transfered to generation of a multicurrency cash flow budget, that allowed considering on an operational basis the effects of changing of the ruble exchange rate on the Division liquidity.

Risk management performance in 2016

Optimized ratio maintenance between the assets and liabilities expressed in one and the same currency has been ensured.

PROJECT RELATED RISK
6
Risk (factor)

Risks of default under EPC-contracts on NPP construction abroad, and of default under NPP construction contracts in the RF.

Trend justification

Absence of factors in 2016 influencing the fulfillment by JSC ASE EC of the obligations under EPC-contracts for NPP construction abroad.

Key results on risk management and response to risks emerged in 2016

Unconditional fulfillment of contracts conditions.

Risk management performance in 2016

The risk did not affect the Division in the fiscal year.

PROJECT RELATED RISK
7
Risk (factor) an arrow indicates a trend

Loss of contract, postponement of EPCcontract related to NPP construction project abroad

Including additional factor: postponement of Belarus NPP construction time limits.

Trend justification

High dependence of the general contractor selection on political impact of competing countries.

Including additional factor: replacement of the reactor pressure vessel at power unit No. 1.

Key results on risk management and response to risks emerged in 2016

Intensification of the work with the Customer.

Holding negotiations between the management of ROSATOM and the government of a foreign customer.

Development of action plans on cooperation with a foreign customer.

Implementation of the time and cost reduction program in NPP construction.

Proactive position of the Company in work with the existing foreign customers in relation to prospective projects.

Including additional factor: work within the frames of the road map on the reactor pressure vessel.

PROJECT RELATED RISK
8
Risk (factor)

Cutting of foreign customer budgets (1. Lack of funding in a number of countries where the Company has promising NPP construction projects. 2. Limited project investment resources in the RF) (at the level of 2015)

Trend justification

Changes in the macroeconomic performance of countries participating in projects.

Key results on risk management and response to risks emerged in 2016

Work performance using alternative financing sources, including commercial loans, hiring of partners and investors on alternative markets, including through involvement of Private Institution Rusatom International Network to implementation of measures in relation to alternative financing sources.

Risk management performance in 2016

Contractual obligations of foreign customers are performed in full.

REPUTATION RISK
9
Risk (factor)

Reputation Risk (1. Large-scale global events in the nuclear power industry. 2. Mass Media publications (in the Russian Federation and abroad) aimed at discrediting Russian nuclear technologies on conventional and prospective markets)

Trend justification

Public acceptance of nuclear power development and new NPP construction in Russia has a positive effect on the Company’s operations perception within the country.

In some cases, the Company’s overseas projects development are faced with opposition from local public organizations and political structures.

In general, the magnitude of the counteraction is relatively low, however, such events are periodically covered by the media.

Key results on risk management and response to risks emerged in 2016

Measures aimed at strengthening the positive public attitude towards development of the nuclear energy industry by improvement of information transparency and open communication with all stakeholders.

Regular interaction with the public and the mass media in the regions of construction projects. Informing the public on all important events related to the core business.

Publication of the Company’s Reports including in the English language.

Regular analysis of the stakeholders structure to determine their expectations, expand the stakeholders scope, involve foreign stakeholders.

Participation in Russian industrial events and international exhibitions and conferences.

Strengthening the brand presence on foreign markets through marketing promotion of the brand.

TECHNOLOGICAL RISKS
10
Risk (factor)

Risk of developed technologies non-competitiveness (competition strengthening)

Trend justification

Development of new technologies of conventional fuels production.

Improvement and cost-cutting of renewable technologies.

Key results on risk management and response to risks emerged in 2016

Assessment of innovations at preinvestment phase in accordance with the requirements of ROSATOM.

Design consideration using FRC-2 scientific and technical council.

Benchmark of foreign technologies and NPP projects.

Promotion of Multi-D technology on the market for PMC services in new sectors.

ADDITIONAL MARKET SEGMENT
11
Research Reactors
Risk (factor)

Loss of contract, postponement of research reactors contracts implementation (1. Political nature of general contractor selection. 2. Absence of expertise in the newcomer-countries)

Trend justification

Rise of interest for development of own nuclear power engineering in developing countries.

Key results on risk management and response to risks emerged in 2016

Continuation of current projects implementation.

Active participation in tender procedures to get new orders.

Negotiations on the research reactor construction in Bolivia.

ADDITIONAL MARKET SEGMENT
12
DC NRHF, construction and modernization of RW and SNF management facilities
Risk (factor)

Loss of contract, postponement of contracts implementation in a RAW and SNF segment. (High segment dependence on political decisions)

Trend justification

Refusal of some European countries to use nuclear power opens for the Company the opportunity (with consideration for European asset – Nukem) to strengthen its presence on the market of RW, SNF management facilities construction and DC NRHF.

Key results on risk management and response to risks emerged in 2016

During the year the work on the following RW and SNF projects have been carried out: Ignalina NPP, as well as within the modernization and construction projects of on-site RAW management facilities at existing NPP (Kursk NPP-1, Smolensk NPP), as at NPP under construction (Belarus NPP, Kursk NPP-2, Paks NPP etc.)

Risk management performance in 2016

The tender for Kozloduy NPP radioactive waste storage facility construction (Bulgaria) and for the development of Kozloduy NPP power units 1–4 equipment dismantlement projects is won by Nukem Technologies, the member of the German-Bulgarian and German-Russian Consortia.

ADDITIONAL MARKET SEGMENT
13
NPP service and modernization
Risk (factor)

Loss of contract, postponement of contracts implementation in the segment of NPP service and modernization (Tight competition on the part of local contractors)

Trend justification

Company’s reputation and expertise allow retaining its market position.

Risk management performance in 2016

In life extension service segment the Division in the fiscal period carried out the work on the Russian market on the existing plants – Balakovo, Kursk, Novovoronezh and Smolensk NPP. On the international market the Division was performing the works on the current service contract for Bushehr NPP 1 (Iran).

ADDITIONAL MARKET SEGMENT
14
Project Management Consulting services (PMC-services)
Risk (factor)

Loss of contract, postponement of contracts in the segment of project management consulting (PMC Services) (Tight competition on the part of the existing players)

Trend justification

The unique project management technology Multi-D provides the Division with the capacity to provide the market with consulting services on management of complex engineering facilities.

Key results on risk management and response to risks emerged in 2016

Application of best practices obtained by the Company in the main core business to NPP construction provides for buildup of competence in the PMC-services segment.

Risk management performance in 2016

Declarations of Intentions are signed on PMC-contracts conclusion on Kudankulam NPP power units 5 and 6 construction project.

A contract was signed with a strategic customer – JSC “Skorostnye Magistrali”, a subsidiary of JSC “Russian Railways”, on establishment of an information resource for controlling the implementation of BCM “Moscow–Kazan” project.

The 2016 first project implemented successfully a capital construction deadline management tool i.e a unified schedule used as part of the pilot projects, such as: Leningrad-2 NPP, FSUE Mining and Chemical Plant, FSUE Mayak Production Association, Skhk JSC.

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