" alt="Alpiq Banner Interim Report" />Market conditions
During 2009, the European energy markets were subject to sharp fluctuations, with market conditions affected by the global financial and economic crisis. Demand for energy dropped in virtually all European countries. Electricity and commodity prices plummeted at the beginning of the year, then stabilised at a slightly higher level in the second quarter and subsequently moved mostly sideways. A perennial issue on the supply side was the reduced availability of nuclear power in France. Prices were underpinned by France's high electricity imports as well as the cold weather early and late in the year. In the second half of August, the high temperatures drove electricity prices up to over EUR 100 per MWh, especially around midday. Otherwise, there were few surprising and extreme price swings.
Many macroeconomic indicators currently show that the situation is bottoming out, with the first signs of economic stabilisation emerging. Nevertheless, a sustainable recovery will be sluggish for the time being, particularly in industrialised countries, since many government stimulus programmes are coming to an end and unemployment remains high. Added to that, subdued private consumption and fears of national bankruptcy are fuelling doubts about the sustainability of a fast economic rebound.
Alongside these economic developments, the reporting period was characterised by changes in the regulatory framework at European and Swiss level. In Switzerland, the Electricity Supply Act (StromVG) and Electricity Supply Ordinance (StromVV) now enacted and in force were implemented operationally with effect from 1 January 2009. Under the tightened regulatory requirements and the first rulings by the regulator, ElCom, Swiss power stations with a capacity of 50 MW or more have to bear a substantial portion of the increased costs of ancillary services. For 2009, this imposed a cost burden of way over CHF 50 million on Alpiq's generation facilities, only little of which could be recouped through additional business opportunities.
In Europe, the EU Council of Ministers adopted new energy directives and regulations primarily designed to provide the necessary legal framework to make full market liberalisation a reality. This is presenting new challenges for Switzerland and its bilateral negotiations.
Results of operations
The Energy segment generated consolidated revenue of CHF 12.8 billion for 2009, a decline of approximately CHF 1 billion or 8 % year on year. Although the intensified sales activities brought a 4 % increase in the consolidated sales volume to 135.2 TWh, revenue was impacted by the reduced liquidity in the energy markets, significantly lower European wholesale prices, regulatory stumbling blocks and adverse foreign currency movements. Operating profit (EBIT) reached CHF 1,003 million, virtually matching the year-earlier level of CHF 1,013 million. The excellent hydroelectric conditions in Switzerland, high availability of generation facilities in Central Europe and the successful activities of the Power Asset Trading and Optimisation units enhanced operating performance. The sales margins achieved by various market units also contributed to the stable results. Furthermore, unlike in the previous year, positive investment returns were generated on the nuclear decommissioning and waste disposal funds, which are recognised in the annual costs for the Gösgen and Leibstadt nuclear power stations. Conversely, the results were considerably weighed down by the mandatory charges to be paid to swissgrid for ancillary services in Switzerland from 1 January 2009, coupled with an exceptional loss arising from the insolvency of a sales partner in Central Europe and lower income from minority-owned companies in Italy.
Performance of the units
Operations in Switzerland were significantly strengthened by the merger. The business division made major progress and recorded positive earnings performance, driven in particular by combining the power generation units under one management and control. In its first year of joint operations, the Optimisation unit already benefited from the enlarged generation portfolio and made an encouraging contribution to results. Swiss supply and sales operations felt the negative economic climate. As expected, this led to lower sales levels both in wholesale business and in distribution across North-Western Switzerland. In contrast, the volume of sales to end customer supply partners in the French-speaking part of Switzerland were considerably up year on year.
Alpiq's power generation capacity in Switzerland has increased considerably since the generation portfolios of Atel and EOS were combined with the purchase rights associated with EDF's interest in Emosson and since the Cleuson-Dixence storage power station came back into operation in January 2010. The potential output now totals some 3,800 MW or an average of around 13,100 GWh per annum, representing about 20 % of Switzerland's generation capacity. The average costs of the combined generation portfolio are relatively low and stable, while the high proportion of storage facilities allows the generation facilities to be operated very flexibly. Having combined the portfolio management and optimisation, the Group was able to generate the first synergies and is all set to unleash substantial further synergies over the years ahead.
Alpiq Grid Ltd. Gösgen and Alpiq Grid Ltd Lausanne, the transmission network companies that are still managed separately, focused primarily on implementing the capital investment projects to assure trouble-free operation of the national transmission systems. As required by law, the responsibility for operating the high-voltage network was transferred to the national grid operator at the beginning of the year without any notable problems. Furthermore, measures were taken to ensure sustained, reliable and low-cost service operation after ownership of the transmission network is transferred to swissgrid.
The Trading & Services business division gained sustainable momentum from the merger between Atel and EOS, while filling the job vacancies in Olten again in spring 2009 and building up additional expertise. Operationally, the financial and economic crisis led to a decrease in the number of trading partners and to precautionary restrictions on trading and credit risk limits, which reduced the proprietary trading opportunities at times. The first quarter of 2009 saw prices in the electricity and commodity markets plummet. With shrewd positioning, both Power Asset Trading and Power Proprietary Trading profited from these movements. Despite low demand, electricity prices rallied during the next quarter, again having a positive impact on generation-related trading. As the markets then largely moved sideways, some of the gains were lost in the third quarter. Even though the spot, forward and futures prices fell in the final quarter, both Power Proprietary Trading and Power Asset Trading again generated more gains. The positive results were buoyed by the systematic drive to capitalise on short-term price spikes in neighbouring markets. Trading in CO2 certificates also performed well and increased steadily. New business units were successfully established for Multi Commodities & Fuel Management and for Origination & Environmental Markets. Alpiq Eurotrade S.à.r.l., Luxembourg, a new trading company (holding a so-called MiFID licence) set up in the European Union, started operating successfully in 2009, already acquiring numerous orders and conducting a substantial volume of trades on the European energy exchanges.
In the business division for Western Europe, Market Italy once again delivered an encouraging contribution to earnings although demand dropped in the wake of the economic meltdown and energy prices tumbled. However, revenue generated locally was noticeably down on the previous year due to the plunge in market prices for electricity, added to which the sales volumes declined because of the focus on markets with higher margins and the effect of risk-oriented customer selection. Operations in the balancing energy market repeated their successful performance, albeit with lower margins than a year earlier due to regulatory changes and reduced consumption. In this region, trading in green certificates also generated a steady contribution to earnings once again.
The power generation units in Italy had to contend with difficult general conditions. With the spark spreads driven down by the price slump, operations were reduced and energy generation cut back. This was compounded by the decrease in industrial customers' demand for electricity and steam.
Market Europe West, which includes the Spanish and French markets, posted solid results in the reporting period, growing revenue despite a marked drop in prices. This increase was fuelled in particular by the expansion of sales business in Spain. The newly acquired Madrid-based Hispaelec Energia S.A.U., a sales company already well established in the market, was integrated at the end of 2009 and will help to drive further expansion from 2010. Encouragingly, the successful positioning in the local sales market in France enabled the sales figures there to be maintained at the year-earlier level, with earnings even improving slightly, although industrial customers' demand for energy declined considerably.
The Market Nordic unit fell short of the targets. This unsatisfactory performance was due to low prices, weak trading performance and reduced portfolio services. With the strategic and human resources measures put in place during the reporting period, the unit expects to see a positive trend and a noticeable improvement in earnings in the short to medium term.
The business division for Central Europe saw the markets heavily hit by the economic crisis, especially in the first six months of 2009. The strained economic situation brought a marked decline in demand for electricity, particularly in industry, which in turn triggered a fall in prices. The adverse effect of the lower electricity prices was largely offset by the high proportion of medium- and long-term contracts in the overall portfolio. While electricity prices picked up somewhat in the second half of 2009, this did not have a significant impact on margins.
Despite the economic crisis, the division generated substantial growth in overall revenue, fuelled by a significant upturn in delivery volumes in wholesale and distribution business. Operations in the Market Central Europe North region benefited from high market liquidity and price volatility, coupled with high volumes in local wholesale business in Poland. However, performance was negatively impacted by unfavourable forward price movements. The Market Central Europe South region outpaced expectations despite the difficult market environment, with results driven by the expanded sales activities and the stable conditions in regional wholesale business. An additional boost came from the regional portfolio optimisation and the successful enlargement of the trading portfolio in Romania.
In Germany, both the sales volume and revenue were maintained at the previous year's level despite reduced demand for electricity and lower market prices. In particular, this was the result of continued expansion of sales, growth in portfolio services and the high proportion of yearly contracts on favourable terms.
The power generation facilities in Central Europe also delivered positive results. With its excellent capacity utilisation, the Kladno power station complex outperformed expectations. Despite reduced output, the Csepel power stations achieved stable results, underpinned by high availability, favourable delivery contracts and tight cost management. With their good operating performance, the Central European generation facilities managed to fully offset the negative fall-out from the economic crisis, compensating in particular for the lower industrial demand for heat and power. During the second half of 2009, the modernised Spreetal gas-fired combined cycle power station began generating electricity in Germany. However, its start-up was negatively impacted by the high gas prices and low sales prices.