Company's Key Risks, Means of Addressing them and Risk Management Measures
In the 4th quarter of 2011 a questionnaire was distributed between the risk "owners", department heads and the Company's management in order to identify the most significant risks and rank them. Based on the questionnaire a list of 15 key risks was compiled (Top 15 risks list). At the same time, operational risk "owners" carried out a FMEA-analysis of those risks. According to the results of the analysis, seven out of 84 risks exceeded the threshold (80 points in FMEA).
These seven risks are listed below:
- failure to receive a licence for export or import of nuclear materials on time;
- failures in the Company’s IT system;
- failures in the centralised (industrial) services of the State Atomic Energy Corporation ROSATOM ;
- information loss as a result of a fire;
- failure to order protective shipping packages (PSPs) on time;
- failure to fulfill obligations to pay insurance claim by insurance companies;
- failure to identify a serious violation due to not including certain areas of the operations into the audit plan of the Internal control and audit department.
Relative value of risks out of the Top-15 list, as well as those risks exceeding the threshold value based on the FMEA analysis of operational risks is shown below in the form a "risk radar".
- Risks of management decisions with regard to the Company
- Perception risks (reputation risk)
- Resource provision risks
- Risks of withdrawing from a planned transaction
- Risk of market capacity
- Risks of competitive environment
- Product risks (volume-related)
- Product risks (price related)
- Regulatory risks
- Political risks
- Failure to obtain a licence for export or import of nuclear materials on time
- Failure to order PSPs for uranium products in a timely manner
- Failures in the Company’s IT systems and information resources
- Failure to identify non-conformances on the part of Internal control and audit department in due time
- Danger of losing or corrupting the information as a result of a fire
- Credit risk of insurance companies
- Currency risk
- Risk of reduction in financial stability
- Risk of reduction in borrowing power
The results of a VaR evaluation, conducted in the 4th quarter of 2011, for a five-year period of mid-term planning with regard to the quantitatively assessed risks are provided below for the first (2012) and last (2016) years of risk modelling.
A: Revenue under risk in 2012
B: Revenue under risk in 2016
C: EBITDA under risk in 2012
D: EBITDA under risk in 2016
E: Histogram of EBITDA under risk in 2012
F: Histogram of EBITDA under risk in 2016
The results of a quantitative assessment of the Company's risk for 2012 and 2016: А, B, C, D – in the form of a "waterfall", which shows a relative effect of risks on the future revenue and EBITDA, аs well as E, F – in the form of a bar chart for the density distribution or a probability of EBITDA diverging from the target value.
The following risks will have the most significant impact on the profit and operating revenue (EBITDA) of the Company; currency risk, commodity price risk with regard to uncertainty of future market quotations for U3O8 and uranium enrichment services (SWU), as well as inflation risk (except for 2012).
The significance of commodity risk with regard to the SWU quotations in 2012 is low and rises towards 2016 due to the fact that in the majority of the Company's contracts SWU prices are estimated using SWU quotations for the periods preceding the year of delivery, and their value is known for 2012, and also because the volatility of SWU market prices is lower than that of U3O8 prices.
A significant impact of currency risk on revenue and operating profit of the Company in roubles can be explained by a significant volatility of projected US dollar and euro exchange rates (currencies of price and payment in the Company's contracts) to rouble and by the value of "the Company's foreign exchange exposure", i.e. income cash flow in the given currencies exceeding expenditure cash flow in these currencies (reimbursement of credit and interest rate payments on credits, payment for goods and services).
A significant share of inflation risk in EBITDA under the risk after 2012 can be explained by a dependence on the future values of Russian inflation indices, which have been historically volatile, in the pricing terms of the Company's contracts with suppliers of uranium products.
The risk of delayed shipments in St. Petersburg port has been included into the quantitative risk assessment model as an example of a "tail" operational risk. An estimate of probability of various events that could impede timely shipments of exported uranium products has shown that it exceeds the given confidence interval only slightly, which proves that the measures aimed at improving the transport and logistics in the Company are successful.
Below there is a description of the Company's most significant risks (out of the above-mentioned Top 15 list) and the risks exceeding the threshold as a result of FMEA - analysis of operational risks, as well as the inter-relation of risk management and insurance.
Ways of addressing key strategic risks
|Risk||Ways of addressing a risk|
|Commodity price risk||Developing pricing policy that does not exceed risk preparedness. Reaching agreements with suppliers about a "mirror" pricing mechanism with regard to the pricing mechanism of contracts with a high level of pricing risk.|
|Commodity volume risk||Working out volumes of future contracts with customers well in advance. Estimating future orders from the customers based on the previous contracts and market situation. Introducing volume flexibility and options that would help harmonise the volumes of purchases and sales into the contracts with suppliers of U3O8, conversion and SWU services.|
|Risk of reduction in the market capacity||Geographical diversification of the export business with a particular emphasis on developing markets. Proactive marketing in the fuel market for the newly built reactors, including the alliances with foreign companies to offer "packages" of services.|
|Competitive environment risks||Increasing non-price competitive advantages by providing comprehensive services and finding new formats and instruments of strategic marketing. Agreeing upon trade regimes that are acceptable and correspond with the Company's competitive abilities in the countries and regions with trade restrictions. Negotiating contracts for providing uranium enrichment services with foreign suppliers in the context of industrial cooperation. Establishing mutual transparency in information exchange regarding development of separation and conversion facilities.|
|Political risks||Obtaining general export licences (until 2016). Participating in developing the mechanisms of guaranteed deliveries of NFC products in case of a political force-majeure.|
|Perception risks (reputation risks)||Improving of the Company's business processes, QMS, SMSSC, information security management in order for the Company to fulfill its obligations impeccably and maintaining the image of a reliable supplier. Following the fundamental principle that 'the contract must be fulfilled'. Continuous explanatory work with customers and other stakeholders in order to justify the independence of the Company's performing its obligations from political and situational factors. Development of a multi-modal transport and logistics network (TLC "West" and TLC "East" projects, building its own container park, etc.).|
Ways of addressing key financial risks
|Risk||Ways of addressing a risk|
|Currency risk||Natural hedging of currency risk by ways of negotiating credit agreements and making purchases of goods and services (wherever possible) in the currency of profit in order to reduce the Company's foreign exchange exposure. There are plans to switch to hedging of currency risk based on the financial market instruments starting from 2012, such as currency forwards and/or options under the aegis of the State Atomic Energy Corporation ROSATOM.|
|Inflation risk||Maintaining optimum balance between market-oriented and escalation (inflationary price increase) pricing in the Company's contracts. Achieving distribution of market and inflation risks between the Company and Russian industrial suppliers of products and services, on the basis of the Company's objective to take market risks and the objective of the manufacturing companies of the industry to counteract the inflationary price increases by reducing the cost of production.|
|Credit risks (failure to meet payment obligations towards the Company)||Since 2009 the Company has been annually insuring the credit risks of its contractors – customers purchasing uranium products (entrepreneurial risk) based on the ratio of the probability estimate and effect of their default and the insurance premium. The Company chose the banks to place its deposits and insurance companies by tender out of those recommended by the State Atomic Energy Corporation ROSATOM and looked at their financial solvency as a significant non-price criteria.|
|Risks reduction in liquidity, financial stability and "borrowing power"||Monitoring of adherence to covenants (obligations towards the creditor banks to maintain a number of the Company's indicators within the limits set by the banks). Measuring the required volume of uranium reserves with the Company's borrowing power. Distributing the risks between the Company and other organisations within the State Atomic Energy Corporation ROSATOM – the Company's contractors.|
Ways of addressing key operational risks
|Risk||Ways of addressing a risk|
|Delay of the Company's shipments along the transport and logistics network||Implementing security management systems for the supply chain (SMSSC) and certification according to ISO 28000 standard. General improvement of QMS. Stress tests of the Company's business processes and measures for their improvement. Eliminating the underlying reasons of identified non-conformities. Implementing the projects aimed at improving transport and logistics system: TLC "West" and TLC "East" projects, establishing the Company's own container stock, etc.|
|Failure to obtain a licence for export or import of nuclear materials on time||Developing and approving the methodology for filling in the licence request forms.|
|Failure to order PSPs for uranium products in a timely manner or placing a wrong order||Determining and documenting personal responsibility of the employees for placing the PSP orders appropriately and on time.|
|Failures in the Company's IT systems and information resources resulting in deviations from the normal business process||Developing and approving the maintenance and repair schedule, as well as the maintenance instructions. Signing service contracts for the maintenance of the key equipment. Providing remote access to IT resources. Installing spare lines/data transmission nodes. Automation of filing error recovery requests and implementing the quality management programme for the completed work.|
|Risk of failure to identify significant non-conformities as a result of not including risk related aspects into the schedule plan, which can result in sanctions from the regulatory bodies||Identifying risk owners and charging them with regularly identifying and assessing risks and informing about the level and dynamics of risks (implemented in 2011).|