“SAMRUK-ENERGY” JSC | Integrated ANNUAL REPORT

Risk management system

The slowdown in the rates of the Republic of Kazakhstan’s economic growth, the weakening of the national currency. the change in the structure of the electricity market and the optimization of tariff have a key impact on the operating conditions of the Company. At the same time, availability of large reserves of thermal coal with low cost of production, effective power generating facilities and support from the state and the Sole Shareholder, provide an opportunity to develop export potential and improve competitiveness in the domestic market.

According to the results of work in 2018, 32 risks inherent in the activities of the group of companies of “Samruk-Energy” JSC were identified and assessed, the efficiency thresholds were updated, the risk factors and measures for reduce them. In connection with some of the events that took place in 2017, as well as on the basis of reports on the results of audits of the Company’s Internal Audit Service, risks were re-evaluated from the Risk Register. 14 risks fell into the key area of the Risk Map for 2018:

  1. Risks of ongoing/ future investment projects and investment programs of SA
  2. The risk of workplace accidents that caused damage to the health and life of employees in the performance of their duties
  3. Foreign exchange risk
  4. Credit risk
  5. The risk of non-fulfillment/untimely update of the Company's long-term development strategy
  6. The risk of violation of covenants of external creditors and listing requirements
  7. The risk of failure to fulfill the electricity sales plan
  8. Risks associated with implementation of Transformation Program
  9. The risk of impairment of assets
  10. The risk of liquidity shortage for operating, investment, financial activities
  11. The risk of accidents and disasters
  12. The risks associated with acquisition, reorganization and sale of assets
  13. The risk of tariff setting
  14. Risks of human resources of the Company’s group

The introduction and improvement of the corporate risk management system is the condition that needs to be met in order to achieve strategic and operational goals of the company’s group, and one of the most important tasks in the near future.

The Company adheres to the COSO standard using the “Three lines of defense” model:

Key changes in 2018 (key risks mitigation)

Risks of ongoing/ future investment projects and investment programs of “Samruk-Energy” JSC group of companies (without changes)

  • The main deviation in the underspending with regard to investment projects occurred at "Bogatyr Komir" LLP due to the suspension of access to debt financing by EDB for the implementation of the project on transition to cyclical-and-continuous method due to US sanctions against the Russian UC RUSAL (50% co-shareholder "Bogatyr Komir" LLP).
  • Actions: an alternative debt financing for the project implementation is sought.

The risk of workplace accidents that caused damage to the health and life of employees in the performance of their duties (no changes)

  • 10 work-related accidents have been recorded since the beginning of 2018, including 2 fatal accidents.
  • Actions: in accordance with the work plan "Occupational health and safety and environmental protection" department.

Foreign exchange risk (mitigation towards orange zone)

  • reduction of currency commitments.
  • Actions: monitoring changes in foreign exchange quotations, activities on refinancing of current loan.

Credit risk (without chnages)

  • Unstable situation in second tier banks.
  • Actions: monitoring of compliance with limits on counterparty banks, implementation of the RK Government Resolution dated September 19, 2018.

The risk of non-fulfillment/untimely update of the Company's long-term development strategy (mitigation towards orange zone)

  • Updating of the Company's long-term development strategy for 2018–2028.
  • Actions: monitoring the execution of the action plan for the implementation of the Company's Development Strategy and KPI set.

The risk of violation of covenants of external creditors and listing requirements

  • Actions: monitoring compliance with covenants, as well as financial sustainability ratios, actions aimed at reducing the level of debt burden and interest payments.

The risk of failure to fulfill the electricity sales plan (reduction by probability)

  • The electricity sales plan for 2018 – 28,7 bln. kWh. Actual sales of electricity in 2018 – 29,9 bln. kWh. Execution of the plan in quantitative terms – 104%.
  • Actions: daily participation in preparation of daily schedules of electricity supply to the wholesale market and participation in centralized auctions, attracting consumers of Kazakhstani wholesale market.

The risk associated with  transformation program implementation (without changes)

  • falling behind with the Roadmap of Business Transformation Program, due to occurrence of the risk of contractual obligations with contracting company.
  • Actions: the Roadmap with extended deadlines was approved, monitoring the execution of the Roadmap.

The risk of asssets impairment (mitigation toward yellow zone)

  • Becuase of improvement of the company's financial sustainability, factors of impairment of the Company's assets were reduced.
  • Actions: reduction of capital expenditures, analysis of relevance of scheduled capital repairs, conducting of an impairment test (in case of availability of impairment signs).

The risk of liquidity shortage for operating, investment, financial activities (mitigation towards yellow zone)

  • Actions: in line with the Company's entry into the green risk zone.

The risk of occupational accidents and disasters (reduction by probability)

  • absence of occupational accidents and disasters.
  • Actions: conducting major and current repairs, periodic inspections of equipment's technical condition,  provision of briefings and emergency training for operating staff of an enterprise

The risk of liquidity shortage for operating, investmThe risks associated with acquisition, reorganization and sale of assets  (without changes)

  • there are no delays in the implementation of activities on privatization.
  • Actions: monitoring of risks associated with acquisition, reorganization and sale of assets.

The risk of tariff setting (an increase by probability)

  • Actions: monitoring the tariff policy of subsidiaries and affiliates, monitoring (obtaining approval) tariff levels in the authorized bodies, participation in working groups on legislation amendments.

Risks of human resources of the Company's group (an increase by influence and the decrease by probability)

  • Actions: Personnel reserve relations, cooperation with educational organizations on training of specialists in priority areas for power and coal sectors, arrange workshops and and trainings for the Company's employees, introducing the principles of meritocracy, motivation system development.