Within the framework of the planned financial and economic model the Company faces risk factors which may lead to a deficit of funds for financing investment and operational activities.
The most important factors of the financial risk are associated with the inadequacy of mechanisms of functioning of the electric energy retail market and explained in section "Regulatory (Industrial) Risks". However, there is a range of risk factors which can potentially affect results of financial and business activities.
Inflation risks
A negative influence of inflation on the Company's financial and business activities may be connected with losses in real value of accounts receivable, increase of interest payable on borrowed capital, increase of costs relating to construction of objects included in the investment program. The existing inflation level does not have a material effect on the Company's financial position. In accordance with the plans of the Central Bank of Russia for constraining inflation and its forecasted values for the nearest period, inflation should not have a substantial effect on the Company's financial results.
Currency risks
An unfavorable change in exchange rates of foreign currencies to ruble may affect indicators of the Company's operational and investment efficiency.
Currency risks do not affect the Company's activities substantially due to the fact that all settlements with counteragents are made solely in the currency of the Russian Federation. However, taking into account that the nomenclature of goods and equipment purchased by the Company contains imported components, a considerable increase in exchange rates may cause appreciation of purchased products. In view of the above the Company follows a policy aimed at import substitution and making long-term agreements which rule out the possibility of an increase in prices for products being purchased.
Interest rate risks
The dynamics of the refinancing rate of the Central Bank of Russia reflect the macroeconomic situation in the economy and affect the cost of credit resources. Increase of interest rates on loans taken may result in unplanned increase in expenses relating to the Company's debt service. In order to reduce the interest rate risk the Company conducts a well-balanced policy aimed at optimization of the credit portfolio structure and minimization of expenses relating to debt service.
Liquidity risks
The Company's activities are exposed to risk factors which may lead to decrease in liquidity and financial stability of the Company. The key factors are cross-subsidization of consumer groups and low payment discipline in the electric energy retail market.
Considerable cross-subsidization volumes in the Company's tariff structure results from the policy carried out by regional authorities aimed at constraining tariffs for certain consumer groups (population, agricultural consumers, state-funded entities, etc.). The most significant component of cross-subsidization is the mechanism of conclusion of "last mile" agreements (this factor is described in detail in section "Regulatory (Industrial) Risks").
A significant increase in accounts receivable, including overdue and disputed accounts, occurred in 2012. The main factors which led to a low payment discipline resulted in the significant increase in accounts receivable were the absence of effective mechanisms of influencing non-payers and disputes with regard to declared capacity in settlements with energy selling companies.
As a result of operation of the above risk factors the Company may become incapable of fulfilling financial and other limiting conditions (covenants) specified in loan agreements, in particular, EBITDA to total debt ratio, debt to equity ratio, current liquidity coefficient, cost of total assets. In order to minimize these risk factors the Company monitors the capital structure and determines optimal borrowing parameters and take measures to reduce cross-subsidization volumes and optimization of the working capital structure.