China Power International Development Limited HKEx Stock Code: 2380繁體中文简体中文
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State Power Investment Corporation
Risk Management Report

Risk Management Committee

The Company established the Risk Management Committee on 23 March 2016. The Risk Management Committee is delegated by the Board with responsibilities to oversee the Group's overall risk management framework and to advise the Board on the Group's risk-related issues. The Risk Management Committee is also responsible for approving the Group's risk management policies and assessing the effectiveness of the Group's risk controls. The details of the terms of reference of the Risk Management Committee have been posted on the websites of the Company and the Hong Kong Stock Exchange.

The Risk Management Committee held two meetings during 2016. The committee's work performed during the year among which including: reviewed, discussed and approved the Financial Services Framework Agreement, and made recommendations to the Board; and reviewed the newly compiled "Internal Working Guidelines for the Risk Management Committee".

Risk Management Framework

The Group has established a risk management framework for three lines of defence:

  • 1st line of defence - Risk Management - is the relevant functional departments and business units, responsible for matters within their terms of reference for risk management;
  • 2nd line of defence - Risk Oversight - is the Risk Management Committee under the Board and the functional departments for risk management, responsible for overseeing, inspecting and evaluating those works relating to the implementation of risk management; and
  • 3rd line of defence - Independent Assurance - is the Audit Committee under the Board and the Group's Internal Audit Department, responsible for auditing the results of the risk management and internal control works done and issuing an audit report.

Risk Management Procedures

The risk management procedures of the Group are as follows:

Phase 1: Risk Assessment Criteria - the Group's Internal Audit Department establishes common risk assessment criteria and sets up risk score tables for the Group.

Phase 2: Risk Identification - each department/business unit identifies the risks that potentially impact the key processes of their operations.

Phase 3: Risk Assessment - each department/business unit assesses and scores the risks identified along with their impact on the business and the likelihood of their occurrence.

Phase 4: Risk Treatment - each department/business unit assesses effectiveness of existing controls and provides timely treatment plans.

Phase 5: Risk Reporting and Monitoring - each department/business unit monitors the risk mitigating activities. The functional departments for risk management reports regularly to the relevant management of the Group and provides assurance on the progress of treatment plans.

The risk management procedures include a periodic review of the control mechanisms for each risk and a rating of the effectiveness of each control. The Risk Management Committee examines the Group's significant corporate risks and action plans every six months and submits a risk management report to the Board every year.

The principal risks facing the Group based on the risk assessment for the year 2016 are as follows:

Group's Top Risks Treatment Plan(s) Target Risk Trend
Risks relating to market changes - The demand for electricity is expected to grow at a lower speed due to the slower economic growth in China. As the growth of new operating power generating units exceeds that of the electricity demand, the capacity of power generation is at risk of overcapacity and the annual average utilization hours of our power generating units and facilities will potentially decrease. Power generation companies thus are expected to confront with more intensified competition in the market. The Group will continue to focus its efforts on optimizing the power supply structure and strive to increase dispatching electricity. First, the Group will actively participate in direct transactions and bidding of regional major users to strive for the direct supply of electricity. Second, the Group will strive for basic electricity supply incentives through those supporting policies on basic electricity supply, like on energy-saving power supply and the development of the heat supply market. Third, the Group will strengthen the marketing mechanism, establish a market- and user-oriented marketing system and improve the marketing special incentive mechanism so as to enhance competitiveness, stabilize and increase market share.

Risks relating to policy changes - Our power plants are subject to the PRC governmental and power grid regulations. As China is intensifying the power industry reform, there is a risk of decreasing on-grid tariffs for coal-fired power generation. Meanwhile, the implementation of measures such as government intervention and production curtailment of the coal industry itself, the uncertainties existing in the coal market and the fluctuations in coal supply will bring risks to fuel cost control of the Group's coal-fired power generation. The Group will continue to closely follow the national policy and strengthen communication, understanding and support with regional governments, and strive for self-determining prices by negotiations. The Group will continue to promote energy saving and emission reduction, strive for ultra-low emission tariffs, and recover renewable energy subsidies.

The Group will continue to closely follow the national policy and strengthen communication, understanding and support with regional governments, and strive for self-determining prices by negotiations. The Group will continue to promote energy saving and emission reduction, strive for ultra-low emission tariffs, and recover renewable energy subsidies.

Risks relating to approvals of power plant development or investment - Our continued success depends on our ability to secure, in a timely and cost-effective manner, the required PRC government and other approvals for our power plant projects. Any delay or failure to secure any of the required approvals, licenses or permits may increase costs or delay or prevent the commercial operation or integration of the affected power plant. The Group has made strategic adjustments in accordance with the government policies, optimized the industrial structure, expanded the business scope, accelerated the development of integrated energy and transformed itself into an integrated energy supply and service enterprise. By capitalizing on the advantages of regional location and presence, the Group actively entered the local independent electricity sales and distribution business and vigorously developed integrated energy. The focus is put on investing in the economic development zones emphasized by the State with strong consumption capacity in order to guarantee the reliability of project revenue.

The Group has actively accelerated the development of clean energy, regulated the development of coal-fired power and is transforming itself into a low-carbon enterprise and has put efforts in investing in State-supported renewable energy projects such as the expansion of the existing hydropower stations, investment in offshore wind power projects and the photovoltaic "Top Runner" projects.

Risks relating to natural factors - The level of power generation and financial performance of our hydropower generation business are particularly affected by natural factors such as rainfall and temperature changes, which may increase costs or delay revenue and affect profitability. The Group has been strengthening the management of riverflows, leveraging the cascade watershed adjustment advantage and continuously stabilizing hydropower for the full year to reduce the negative impact brought by seasonal and rainfall changes.

Risks relating to environmental protection policy - The environmental protection laws and regulations are getting stricter in China. In particular, the PRC government focuses heavily on the control of smog weather and takes strict precautions against the pollution sources. Rigid management of processes and severe punishments are exerted in enforcement. For the power industry, investment in environmental protection will further increase as more stringent requirements will be imposed on the operation of environmental friendly facilities. The Group has always been placing a great emphasis on environment protection from a corporate sustainability and development perspective and is currently in full compliance with the requirements of the environmental protection laws and regulations. The Group will speed up the completion of the ultra-low emission and integrated energy-saving upgrades of all its coal-fired power generating units.

Risks relating to funding - As the Group increases its effort in various power generation project development, financial adequacy will have an increasingly impact on the Group's operations and development. The Group has always been capable of leveraging its access to the domestic and overseas markets to optimize its financing sources and lower its financing costs. Cost-saving and efficiency enhancement initiatives have been adopted in our business management to lower administrative and operating expenses.

Management reports annually to the Board on the working capital budget and estimates the required amount of borrowing for the year at the beginning of the year and the amount of the credit facilities required to ensure that the Group has obtained adequate financial resources to support the continued operation and development projects for the foreseeable future.

Risks relating to foreign exchange - The Group is principally operating in the Mainland China, with most transactions denominating in Renminbi. Apart from certain cash, bank balances and borrowings, most of the Group's assets and liabilities were denominated in Renminbi. The Group held commercial notes denominated in USD, and held borrowings denominated in JPY and USD. Increased fluctuation on the exchange rates between Renminbi against USD and JPY resulted in the increase in the Group's fluctuation in exchange gain/loss, thereby affecting its financial position and operating results. As at 31 December 2016, the single most significant foreign currency debt of the Group was the commercial notes of USD300,000,000 (approximately RMB2,081,100,000) for a period of three years from 8 July 2014. In order to manage exchange rate risks, the Group entered into two option contracts to sell RMB for USD with Bank of America at a fixed exchange rate with an aggregate amount of approximately USD296,778,000 in 2015, to hedge against the foreign exchange rate risks brought by the commercial notes. It is expected that there will be no material foreign exchange risk of RMB against USD upon settlement of the USD commercial notes.

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