Notes to the Consolidated Financial Statements

1.1 Basis of preparation of the consolidated financial statements

The consolidated financial statements of the Alpiq Group have been prepared in accordance with International Financial Reporting Standards (IFRS) and Interpretations (IFRIC and SIC) issued by the International Accounting Standards Board (IASB), and comply with Swiss law. The consolidated financial statements give a true and fair view of the financial position, financial performance and cash flows of the Alpiq Group. They have been prepared on a historical cost basis, except for certain items such as financial instruments, which have been measured at fair value in some instances. The consolidated financial statements were authorised for issue by the Board of Directors of Alpiq Holding Ltd. on 23 February 2022 and are subject to approval by shareholders at the Annual General Meeting on 28 April 2022.

1.2 Adoption of new and revised accounting standards

Amendments, standards and interpretations adopted for the first time in 2021

At 1 January 2021, the following amendments to the International Financial Reporting Standards (IFRS) entered into force and were applied by the Alpiq Group:

• Amendments to IFRS 9, IAS 39 and IFRS 7: Interest Rate Benchmark Reform – Phase 2
• Amendments to IAS 16: Property, Plant and Equipment – Proceeds before Intended Use (early adopted)

At 1 January 2021, the amendments to IFRS 9, IAS 39 and IFRS 7: Interest Rate Benchmark Reform – Phase 2 entered into force and were applied by the Alpiq Group. Alpiq has project financing facilities in Italy, which are based on EURIBOR interest rates and are hedged by interest rate swaps (cash flow hedges). No contract adjustments have been negotiated and no existing contracts have been replaced in connection with the Interest Rate Benchmark Reform. The reform has an immaterial financial impact on the Alpiq Group.

Alpiq decided to early adopt the amendments to IAS 16 at 1 January 2021, which prohibit a company from deducting from the cost of an item of property, plant and equipment amounts received from selling items produced while the company is preparing the asset for its intended use. Instead, such sales proceeds and related cost are recognised in profit or loss. In 2021, Nant de Drance capitalised net income from test runs and associated costs of CHF 10 million in its financial statements pursuant to Swiss GAAP FER. In the IFRS reconciliation for the calculation of the equity value at 31 December 2021, this amount was posted to the item “Share of results of partner power plants and other associates”, resulting in a CHF 3 million reduction in the equity value given the tax effect. For more information about the accounting policies for the recognition of partner power plants, see note 4.3. The associated income and expenses of Nant de Drance posted in the previous year were immaterial. Alpiq does not have any other property, plant or equipment under construction that generated significant revenue in the 2021 financial year or in the previous year.

IFRSs effective in future periods

The IASB has published the following standards and interpretations of relevance for Alpiq:

Based on previous analyses, Alpiq does not expect the aforementioned changes in standards to have any significant effect on the consolidated financial statements of the Alpiq Group.

1.3 Significant estimation uncertainties and judgements 

The preparation of the consolidated financial statements requires the management to exercise judgement and make estimates and assumptions. These can significantly affect recognised assets and liabilities, reported income and expenses and disclosures. Estimates and assumptions are based on historical experience and expectations of future events that are believed to be reasonable under the circumstances. Actual amounts may differ from these estimates. Any revisions to estimates and assumptions are recognised and disclosed in the period in which they are identified.

Impact of the COVID-19 pandemic on Alpiq

The coronavirus and the disease it causes (COVID-19) have been spreading on a global scale since the beginning of 2020, repeatedly forcing governments to take drastic protective measures. The spread of COVID-19 and the protective and stimulation measures taken by governments and central banks are having far-reaching effects on the macroeconomic environment.

The Alpiq Group has been left largely unscathed by the negative financial impact of the pandemic. Although wholesale prices initially declined in the first half of 2020, they recovered again during the second half of the year. Prices rose considerably in 2021 and are now significantly up on the level seen before the pandemic.

Alpiq regularly monitors the development of the pandemic as well as its potential effects, and takes the necessary measures. Certain effects are indirectly reflected in the 2021 consolidated financial statements via macroeconomic assumptions used to make estimates, such as interest rate, exchange rate and wage developments. Furthermore, Alpiq does not expect the pandemic to have any significant impact on the financial position, financial performance and cash flows of the Group.

1.4 Correction of errors

Due to the increase in electricity prices, own use contracts for the physical sale of electricity became loss making. Although Alpiq had hedged these contracts from an economic perspective, this in part involved financial contracts. As Alpiq does not use hedge accounting, own use contracts and associated financial hedges have to be evaluated and presented separately. At 31 December 2020, provisions for loss-making own use contracts in the Digital & Commerce business division, which had been hedged using financial instruments, were erroneously understated by CHF 11 million and the net income for 2020 was overstated by CHF 11 million.

The income statement for 2020, the statement of comprehensive income for 2020, the balance sheet at 31 December 2020, the statement of changes in equity for 2020, the statement of cash flows for 2020 as well as notes 2.1, 2.4, 2.8 and 4.7 have been adjusted. As a result, the equity ratio decreased from 51.2 % to 51.0 % at 31 December 2020. This correction did not impact the net debt / EBITDA before exceptional items. In this context, the figures at 30 June 2021 also had to be corrected. Alpiq issued the update of the Interim Report 2021 on 9 December 2021. The opening balance at 1 January 2020 was correct and thus not affected by the correction.

Changes to the consolidated income statement for 2020

Changes to the consolidated balance sheet at 31 December 2020

2.1 Segment information

The segment reporting of the Alpiq Group is based on the Group’s internal organisational and management structure and the internal financial information reported to the chief operating decision maker. The reportable segments under IFRS 8 consist of the three business divisions Switzerland (formerly Generation Switzerland), International (formerly Generation International) and Digital & Commerce. The Executive Board evaluates each of these separately for the purpose of assessing performance and allocating resources. Segment results (EBITDA) are the key performance indicators used for internal management and assessment purposes at Alpiq. Besides energy procurement and production costs, operating costs comprise all costs of operations, including personnel and service expenses. No operating business segments have been aggregated in the presentation of reportable segments.

• The Switzerland business division comprises the production of electricity from Swiss hydropower and nuclear power. The power plant portfolio includes run-of-river power plants, storage and pumped storage power plants, investments in the Gösgen and Leibstadt nuclear power plants as well as the Nant de Drance pumped storage power plant project. Moreover, the business division manages shares in HYDRO Exploitation SA and Kernkraftwerk-Beteiligungsgesellschaft AG (KBG).
• The International business division comprises power production of wind power plants, small-scale hydropower plants and industrial photovoltaic plants, the operation of power plants and the development of several wind farm projects. The business division also covers the production of electricity and heat in thermal power plants in Hungary, Italy and Spain. The power plant portfolio is made up of gas-fired combined-cycle power plants and gas-fired turbine power plants. Power is sold on the European electricity trading market via the Digital & Commerce business division or via third parties. The power plants are used by the respective grid operators to balance the grids.
• The Digital & Commerce business division comprises the optimisation of Alpiq’s own power plants as well as the optimisation of decentralised generation units and the production of electricity from third parties’ renewable energies. The business division also covers trading activities with standardised and structured products for electricity and gas as well as emission allowances and certificates. In addition, it includes direct marketing and energy management for industrial and business customers to help these meet their cost efficiency and sustainability goals. Digital & Commerce specifically utilises digitalisation and technologies such as artificial intelligence, connectivity, the Internet of Things and blockchain to further develop products and services for customer and business partners, always with a view to increasing customer benefits and creating value.

The business divisions’ results are carried over to the Alpiq Group’s consolidated figures by including the units with no market operations (Group Centre & other companies), Group consolidation effects as well as other reconciliation items presented in a separate column. This comprises shifts of CHF 14 million (previous year: CHF 15 million) between external net revenue and other income due to the difference in account structures between internal and external reporting. This column also contains foreign currency effects from using other average exchange rates in management reporting than pursuant to IFRS. Group Centre & other companies includes the financial and non-strategic investments which cannot be allocated directly to the business divisions as well as activities of the Group headquarters, including Alpiq Holding Ltd. and the functional units.

2021: Information by business division

2020: Information by business division (adjusted)

2021: Information by geographical area

2020: Information by geographical area

Net revenue from external customers by country is allocated based on the customer’s country of domicile. Those countries in which Alpiq generated the most net revenue in the reporting period are presented separately in this segment information. There were no transactions with any single external customers that amounted to 10 % or more of the consolidated net revenue of the Alpiq Group. Non-current assets consist of property, plant and equipment (including right-of-use assets), intangible assets and investments in the respective countries.

2.2 Net revenue

The Alpiq Group’s net revenue comprises revenue from contracts with customers (IFRS 15) and income from energy and financial derivatives (IFRS 9).

2021: Disaggregation of net revenue

2020: Disaggregation of net revenue

Accounting policies

Alpiq generally satisfies its performance obligations as principal. However, for performance obligations in connection with the transmission of energy, Alpiq acts as agent in all represented markets. Where Alpiq acts as agent, revenue is recognised net of the corresponding costs.

Revenue from energy and grid services

Revenue from energy supply from contracts with customers (“own use exception” pursuant to IFRS 9) is generally recognised over the period agreed for completion of performance. However, for energy supplies, Alpiq has a right to consideration that directly corresponds to the value to the customer of the energy already supplied. For such cases, Alpiq exercises the practical expedient and recognises revenue in the amount that can be billed. In single contracts, Alpiq sells the proportionate right in energy production of a power plant. Revenue from these contracts is recognised over the period that corresponds to the timing of the costs.

Revenue from standing ready to deliver ancillary services is recognised on a straight-line basis over the period in which Alpiq is available to render these services. Revenue for called ancillary services is recognised when it is delivered.

Revenue from digital energy services and e-mobility

Revenue from the e-mobility and energy management business is recognised upon successful installation of the respective device. Any costs incurred prior to revenue recognition are recognised under inventories and any prepayments received under contract liabilities (advances from customers). Any services in this area beyond installation are identified as separate performance obligations. The transaction price for these services is recognised in revenue when the customer receives the economic benefit. Revenue from projects is recognised over the period for completion of performance; progress is primarily measured using a cost-based input method. Revenue which cannot yet be billed is recognised in the balance sheet as contract assets, less any prepayments. In case of an excess of prepayments, revenue which cannot yet be billed is recognised as contract liabilities.

The method for determining project process is at the discretion of Alpiq. Under the cost-based input method, the revenue recognised best reflects the service already rendered to the customer. Applying this method requires certain estimates and forecasts. As a result, the expected additional costs in particular until the project is completed, which influence the degree of completion, are subject to significant uncertainty. Furthermore, estimated total costs may deviate from costs actually incurred upon the project being completed. Under project controlling, the cost estimates are reviewed regularly and adjusted if necessary. The adjustments relate to the expected total costs, the degree of completion and therefore also the amount of revenue already recognised. Alpiq discontinued operations in this field in the 2021 financial year.

Revenue from other services

Revenue from other services from contracts with customers is recognised, on the one hand, over the time period over which the performance obligation is satisfied on a straight-line basis. On the other hand, Alpiq applies the following practical expedient: if Alpiq has a right to consideration that directly corresponds to the value to the customer, then revenue is recognised in the amount that can be billed.

Practical expedients applied regarding revenue from contracts with customers

Alpiq exercises the practical expedient provided in IFRS 15 and, wherever possible, opts not to disclose the remaining performance obligations at the end of the reporting period. After applying this practical expedient, the remaining performance obligations disclosed by Alpiq at the end of the reporting period are not significant.

Alpiq applies the practical expedient and does not capitalise incremental costs of obtaining a customer contract, as far as these costs would be amortised within one year. Due to the application of this practical expedient, Alpiq did not disclose any significant costs of this type.

Income from energy and financial derivatives

Energy and financial derivatives are measured at fair value through profit or loss. Changes in value in energy derivatives are disclosed in net revenue in the period in which they occur. Revenue from trading in energy and financial derivatives comprises realised net gains and losses from settled contracts and unrealised changes in the fair value of unsettled contracts. For more information on measurement, please refer to note 3.2.

2.3 Other operating income

Other operating income includes income from government grants such as the market premium for large-scale hydropower plants in Switzerland. This item also includes income from operating leases as well as income that does not arise in the course of ordinary activities of the Alpiq Group. The latter is therefore generally not of a plannable or recurring nature. It includes gains from sales of non-current assets or business disposals, insurance claims received and payments received from litigation.

Market premium for large-scale hydropower plants in Switzerland

In accordance with the Energy Act (EnA), operators of large-scale hydropower plants in Switzerland with a mean mechanical gross output of more than 10 MW that sell their energy on the market at prices below production cost are eligible to receive a market premium. If the risk of uncovered production costs is not borne by the operators of the hydropower plants, but instead by the owners or electricity suppliers as a result of purchase agreements for the electricity, then the latter are eligible for the market premium. The Energy Act prescribed a time limit until 2022 for the market premium model. In November 2020, the Swiss Federal Council made the decision to combine the revisions of the Energy Act and the Electricity Supply Act in an omnibus bill entitled “Federal Act on a Secure Electricity Supply from Renewable Energy Sources”. The parliamentary consultation on this omnibus bill has not yet commenced. In the 2021 autumn session, both councils approved a parliamentary initiative, which presents a transitional solution for the promotion of renewable energies (wind turbines as well as biogas, geothermal and photovoltaic plants) from 2023. The initiative is limited until the end of 2030 and includes the following measures: continuation of subsidies for investments in renewable energies and the market premium until 2030, indefinite extension of the possibility to deliver renewable energies to the basic supply at cost price and an extension of the current maximum water usage levy until 2030.

In order to assert a claim for a market premium in a given year, the applicant must submit the entire application documentation by 31 May of that year at the latest. Should the claims of all those applicants entitled to do so exceed the funds available, all claims will be reduced on a straight-line basis. As a result, if demand exceeds the funds available, each claim for a market premium is dependent on all other claims. For this reason, the Swiss Federal Office of Energy (BFE) simultaneously announces the claims of all applicants by issuing an order.

As both the amount of the funds made available for the market premium and the effective entitlement to a market premium are still unknown upon issuing the first order, the BFE may decide to pay 100 % or 80 % of the provisional amount assigned by order to the applicants with the first order. For practical reasons, 20 % may be retained and only paid out when the second order is issued in order to avoid the time-consuming administrative process of reclaiming any overpayments where possible.

2021 claim

On 17 December 2021, Alpiq received the first order for the claim for market premiums for 2021 with legal effect from the start of February 2022. Alpiq’s claim for the 2021 financial year amounted to CHF 40 million, of which CHF 32 million was posted in the 2021 financial year, as the BFE decided in its first order to pay 80 % of the amount assigned. The remaining amount will be recognised in 2022, as soon as the second order takes legal effect.

2020 claim

The first order for the claim for market premiums for 2020 was made on 5 November 2020 and took legal effect in December 2020. Alpiq’s claim for the 2020 financial year amounted to CHF 33 million and was posted in full, as the BFE had decided to pay out 100 % of the amount once the first order became legally binding.

Accounting policies

The market premium for large-scale hydropower plants in Switzerland relates to government grants as defined by IAS 20. Government grants may not be posted until there is reasonable assurance as to the entitlement. Alpiq deems reasonable assurance of the claim for a market premium in the amount of the prospective payment to be given within the meaning of IAS 20 as soon as the order is legally binding or Alpiq has decided to accept the order. 100 % or 80 % of the provisional amount assigned will be recognised at this point in time, depending on the amount of the payment. Any residual amount will be recognised as soon as the second order is legally binding.

Income from operating leases

Alpiq has several operating leases that relate in particular to the rental of commercial premises that it owns. The leased assets are recognised in property, plant and equipment in the balance sheet and lease payments are recognised on a straight-line basis over the lease term. Undiscounted lease payments expected in the future amount to CHF 8 million (previous year: CHF 8 million).

2.4 Energy and inventory costs

The item “Other energy and inventory costs” mainly comprises water taxes, concession fees and plant maintenance costs.

2.5 Employee costs

Number of employees at the reporting date

2.6 Finance costs and finance income

2.7 Income tax

Income tax expense charged to the income statement

Reconciliation

Change in deferred tax assets and liabilities

Deferred tax assets and liabilities by origination of temporary differences

At 31 December 2021, individual subsidiaries held tax loss carryforwards totalling CHF 1,024 million (previous year: CHF 782 million), which are available for offsetting against future taxable profits. Of this, the Alpiq Group has not recognised tax benefits on tax loss carryforwards of CHF 376 million (CHF 577 million) in the balance sheet item “Deferred tax assets”, as they are recognised for tax loss carryforwards only to the extent that realisation of the related tax benefit is probable. The average tax rate on tax loss carryforwards not eligible for capitalisation is 17 % (15 %). These tax loss carryforwards expire in the following periods:

In addition, non-capitalised deductible temporary differences exist in an amount of CHF 227 million (CHF 91 million).

Accounting policies

Income tax expense represents the sum of current and deferred income tax. Current income tax is calculated on taxable earnings using the tax rates that have been enacted by the end of the reporting period. Deferred income tax is calculated using the tax rates enacted or substantively enacted at the reporting date.

Deferred taxes are recognised due to the differing recognition of certain income and expense items in the Group’s annual internal accounts and annual tax accounts. Deferred tax arising from temporary differences is calculated applying the balance sheet liability method. Deferred tax is not recognised for differences associated with investments in group companies, which will not reverse in the foreseeable future and where the timing of the reversal is controlled by the Group. Deferred tax assets are recognised when it is probable that they will be realised. Unrecognised tax loss carryforwards and unrecognised tax assets are disclosed.

2.8 Earnings per share

There are no circumstances that would lead to a dilution of earnings per share.

3.1 Financial risk management

General principles

The Alpiq Group’s operating activities are exposed to strategic and operational risks, in particular credit, liquidity and market risks (energy price risk, foreign currency risk and interest rate risk). The principles of the Group’s risk management policy are established by the Board of Directors. The Executive Board is responsible for their development and implementation. The Risk Management Committee monitors compliance with the principles and policies. It also defines the hedging strategy for the production of the Group’s own power plant portfolio, which is approved by the Executive Board.

The principles for managing risks in the Alpiq Group are set out in the Group Risk Policy. They comprise guidelines on the incurring, measurement, management and mitigation of business risks and specify the organisation and responsibilities for risk management. The units responsible manage their risks within the framework of the risk management policy and the limits defined for their areas of activity. The objective is to maintain a reasonable balance between the business risks incurred, earnings and risk-bearing equity.

The Group Risk Policy comprises a Group-wide Business Risk Policy, an Energy Risk Policy specifically for the energy business and a Financial Risk Policy. The Business Risk Policy governs the annual risk mapping process, the definition and monitoring of the measures to reduce exposure to operational and strategic risks as well as integral security management. The Energy Risk Policy defines the processes and methods to manage market and credit risks in the energy business. It also regulates the management of liquidity fluctuations caused by trading activities on stock exchanges and under bilateral arrangements to settle margin differences. Furthermore, it defines the principles of the hedging strategy for energy production trading books. The Financial Risk Policy defines the substance, organisation and system for financial risk management within the Alpiq Group. It defines the management of liquidity, foreign currency and interest rate risks.

The Risk Management functional unit is responsible for managing risks and reports to the CEO. The functional unit provides methods and tools for implementing risk management, and ensures timely reporting to the Board of Directors, Executive Board and the Risk Management Committee.

During the annual business risk assessment process, strategic and operational risks throughout the Group are recorded and assessed, and then assigned to the identified risk owners for management and monitoring. The Risk Management functional unit monitors the implementation of the measures. Exposure limits are set for market, credit and liquidity risks, which are adjusted in the context of the company’s overall risk-bearing capacity and with compliance monitored on an ongoing basis.

Capital management

Across the Alpiq Group, capital is managed in line with the Group’s overall financial strategy. During the budgeting and planning process, the Board of Directors takes notice annually of the planned performance of the figures critical for capital management. In addition, it receives regular reports on current developments. The strategy is focused on the Group’s reported consolidated equity and net debt to EBITDA ratio. At 31 December 2021, the Group reports an equity ratio of 26.2 % (previous year: 51.0 %).

Alpiq Holding Ltd. procures a significant portion of financing centrally for the Alpiq Group. The Swiss capital market forms the main source of financing. In the second half of 2021, Alpiq drew on the committed short-term credit lines to cover the sharp increase in financing requirements for trading activities. The shareholders also provided short-term liquidity. At 31 December 2021, Alpiq Holding Ltd. held 70 % of the Group’s total financial liabilities (61 %). The level of financial liabilities must be reasonable in proportion to profitability in order to ensure a solid credit rating in line with sector norms. The ratio of net debt to EBITDA before exceptional items plays a decisive role in capital management. This is calculated as follows:

The Alpiq Group has the following credit lines from banks:

The Alpiq Group has the following covenants from finance agreements:

The counterparty has a right to terminate the agreement if the covenants are breached. At 31 December 2020, all covenants were met. At the reporting date 31 December 2021, the syndicated loan banks agreed to suspend the financial covenants until final maturity on 31 December 2022. The bank rating requirement continued to be met.

Credit risk management

Credit risk management deals with potential losses arising from business partners’ inability to meet their contractual obligations to the Alpiq Group.

Credit risk management in the energy business encompasses all business units and subsidiaries that transact significant business volumes with external counterparties. It entails regular monitoring of outstanding receivables from counterparties and their expected future changes, as well as an analysis of the creditworthiness of new and existing counterparties. Besides energy derivatives recognised as financial instruments on the balance sheet, credit risk management also covers physical receipt or delivery contracts. Credit risk is primarily managed by applying rating-based credit limits. The Alpiq Group classifies counterparties or groups of counterparties (with similar risk characteristics) in risk categories (AAA – CCC) based on probability of default. Once established, these ratings are applied as the basis for setting credit limits. Such limits may be increased if collateral (such as guarantees, advances or insurance cover) is provided. The ratings of active counterparties are reviewed periodically and credit limits are adjusted where appropriate. The policy in the energy business is to enter into contracts only with counterparties that meet the criteria of the Group Risk Policy. Outstanding credit exposures are monitored and managed on an ongoing basis using a formalised process.

The maximum credit risk corresponds to the carrying amount of the financial assets and is calculated at CHF 8,785 million at 31 December 2021 (previous year: CHF 2,720 million). Credit risk is reduced by collateral. The Alpiq Group’s exposure to concentrations of risk is reduced by the number of customers, geographical diversification as well as the consolidation of positions. Due to the significant increase in energy prices in the 2021 reporting year, the replacement values of energy derivatives and thus the credit risk associated with several counterparties in various countries increased considerably and also led to liquidity problems at certain counterparties. Measures were agreed with the counterparties to reduce the impact on Alpiq. Taking into account the credit risk, the corresponding energy derivatives were reclassified to Level 3 energy derivatives, see note 3.2. By the end of the year, these items could be reduced to around CHF 1 million. Information about the effect on receivables is disclosed in note 4.5.

In addition, on the reporting date, there were the following concentrations of risk with two counterparties without concrete indications of a default risk:

In order to actively manage the credit risk associated with cash and cash equivalents and term deposits, the Treasury functional unit at the Alpiq Group centrally sets limits that restrict the amount of assets held at a counterparty. The limits are calculated and monitored monthly based on a number of factors. As in the previous year, no significant concentrations of risk existed at the reporting date, as cash and cash equivalents and term deposits are widely diversified, staggered over time and invested with counterparties with a low credit risk. To date, there have been no impairment losses on receivables due from financial counterparties.

Offsetting of financial assets and liabilities

A substantial portion of the energy contracts entered into by the Alpiq Group is based on agreements containing a netting arrangement. Netting arrangements are used widely in energy trading to reduce the volume of effective cash flows. Items relating to the same counterparties are only presented on a net basis in the balance sheet if a legally enforceable right to offsetting of the recognised amounts exists in the netting arrangement, and the intention exists to settle on a net basis.

Financial collateral

Furthermore, additional collateral, such as guarantees, variation margin payments or insurance cover, is collected where required. As a rule, the collateral held by the Alpiq Group covers both unrecognised energy transactions involving physical delivery and transactions recognised as financial instruments. Financial collateral received and issued in connection with the bilateral agreements to settle margin differences is presented in the following:

Liquidity risk

A substantial portion of the receivables in European energy trading is offset and settled on specified dates each month (netting). Margin agreements are commonly used on energy commodity exchanges and among energy traders to reduce counterparty risk. Consequently, Alpiq has to provide or can demand significant collateral in the form of liquidity or bank guarantees due to energy price movements. In addition, they can result in significant changes in liquidity, as both Alpiq and its counterparties are in most cases contractually entitled to replace cash collateral with bank guarantees in the short term and vice versa. The Alpiq Group manages such variable liquidity requirements by means of an early warning system, by maintaining sufficient liquid resources and by obtaining committed credit lines from banks. The role of liquidity management is to plan, monitor, provide and optimise liquidity of the Alpiq Group on a monthly rolling basis.

The anticipated cash flows of financial liabilities and derivative financial instruments are disclosed in the table below. Where the intention exists to refinance loans at the end of the contract term, but refinancing has not yet been contractually secured, a cash outflow on maturity is assumed. Accordingly, actual cash flows can differ significantly from the contractual maturities. The cash flows from derivatives are presented net when there are netting arrangements in place with counterparties and the amounts are expected to be settled net. Depending on the future changes in value of the derivatives until maturity, the effective cash flows may deviate significantly from the amounts reported. In order to demonstrate the effective liquidity risk from derivative financial instruments, the cash inflows and outflows from contracts with positive and negative replacement values are shown in the following table, even though IFRS only requires the presentation of the liquidity risk of financial liabilities. Derivative financial instruments for hedging future own use energy transactions are normally not included in the table, because these are unrecognised pending transactions.

2021: Maturity analysis of financial liabilities and derivative financial instruments

2020: Maturity analysis of financial liabilities and derivative financial instruments

Market risk

The Alpiq Group’s exposure to market risk primarily comprises energy price risk, foreign currency risk and interest rate risk. These risks are monitored on an ongoing basis and managed using derivative financial instruments. Market risk is measured within the framework of the Group Risk Policy that sets out rules on the taking of risks as well as their measurement, limitation and monitoring. Compliance with the risk limits is monitored on an ongoing basis by the Risk Management Committee based on regular reporting by the Risk Management functional unit.

Energy price risk

Energy price risk refers to potential price fluctuations that could have an adverse impact on the Alpiq Group. They can arise from factors such as variations in price volatility, market price movements or changing correlations between markets and products. Energy liquidity risks also belong to this category. They occur when an open energy position cannot be closed out or can only be closed out on very unfavourable terms due to a lack of market bids. Future own use energy transactions are normally not reported as financial instruments. Energy transactions are also conducted as part of the programme to optimise Alpiq’s power plant portfolio. A large proportion of the replacement values for energy derivatives shown at the reporting date are attributable to optimisation positions, with positive and negative replacement values generally cancelling each other out. Alpiq also engages in energy derivatives trading. The energy derivatives concluded by the Alpiq Group are usually forward contracts. The fair values are calculated on the basis of the difference between the contractually fixed forward prices and current forward prices applicable at the reporting date. Normally, the effect of credit risk on fair values is not material. Information about the situation in 2021 can be found in the “Credit risk management” section. The risks associated with trading and optimisation transactions are managed via clearly defined responsibilities and stipulated risk limits in accordance with the Group Risk Policy. Risk Management reports regularly on compliance with these limits to the Risk Management Committee and the Executive Board utilising a formalised risk reporting system. The risk positions are monitored in accordance with the Value at Risk (VaR) and Profit at Risk (PaR) industry standards.

Foreign currency risk

The Alpiq Group seeks wherever possible to mitigate foreign currency risks by natural hedging of operating income and expenses denominated in foreign currencies. The remaining foreign currency risk is hedged by means of forward transactions in accordance with the Group’s Financial Risk Policy. Foreign currency risk arising from energy generation or purchasing is contractually transferred to the counterparty wherever possible. Where this is not possible or is only partly possible, forward currency contracts with a medium-term hedging horizon are deployed to manage exposure centrally on the market in line with the Group’s Financial Risk Policy. Hedge accounting is used where possible to avoid fluctuations in results. The foreign currency derivatives are all OTC products. The fair values are calculated on the basis of the difference between the contractually fixed forward prices and forward prices applicable at the reporting date. Net investments in foreign subsidiaries are also exposed to changes in foreign exchange rates, although the difference in inflation rates should offset these changes in the long term. Investments in foreign subsidiaries (translation risks) are therefore not hedged.

Interest rate risk

The risks arising from volatility in interest rates relate to the interest-bearing financial assets and liabilities of the Alpiq Group. According to the Group’s Financial Risk Policy, liquidity is invested for a maximum of two years. The funding required for the business, however, is obtained on a long-term basis at fixed interest rates. Financing instruments with variable interest rates, particularly those that are long-term, are generally hedged by means of interest rate swaps. This means that a change in interest rates applied to interest-bearing assets has an impact on financial income. The interest rate derivatives are all OTC products. The fair value is determined by discounting the contractually agreed payment streams with current market interest rates.

Sensitivity analysis

To illustrate the sensitivity of market risks to the Alpiq Group’s financial results, the effects of reasonably possible changes in the market risks listed above are set out below. The sensitivities are based in each case on financial instruments recognised on the reporting date. The possible annual percentage changes in the fair values of energy derivatives are determined from the commodity market prices for electricity, gas, coal and oil over the past three years. The sensitivities are calculated by applying maximum deviations from the mean with a 99 % confidence level. Taking into consideration the historical fluctuations, the reasonably possible changes in foreign currency prices are estimated at 5 %. Interest rate swap sensitivity is shown as the effect on the change in fair value that would arise from a 1 % parallel shift in the yield curve. Alpiq quantifies each type of risk assuming that all other variables remain constant. The effects for continuing operations are shown before tax.

3.2 Financial instruments

Carrying amounts and fair values of financial assets and liabilities

Apart from lease liabilities, the carrying amounts of all other financial instruments measured at amortised cost differ only insignificantly from the fair values. This is why the corresponding fair values have not been disclosed.

Fair value hierarchy of financial instruments

At the reporting date, the Alpiq Group measured the following assets and liabilities at their fair value or disclosed a fair value. The fair value hierarchy shown below was used to classify the financial instruments:

Level 1:
Quoted prices in active markets for identical assets or liabilities

Level 2:
Valuation model based on prices quoted in active markets that have a significant effect on the fair value

Level 3:
Valuation models utilising inputs which are not based on quoted prices in active markets and which have a significant effect on fair value

Both in the reporting year and during the previous year, no reclassifications were applied between Levels 1 and 2. The reclassification from Level 2 to Level 3 mentioned below relates to energy derivatives with a significantly increased credit risk (for more information, refer to the “Credit risk management” section in note 3.1). The reclassification from Level 3 to Level 2 relates to longer-term energy derivatives, which are now measured on the basis of observable market prices as market liquidity increases. Alpiq always applies reclassifications between Level 2 and Level 3 at the end of the reporting period.

The energy, currency and interest rate derivatives comprise OTC products, the majority of which are to be classified as Level 2. Fair value of energy derivatives is determined using a price curve model. The observable input factors in the price curve model (market prices) are supplemented by hourly forward prices, which are arbitrage-free and compared with external price benchmarking on a monthly basis.

The fair value of the loans payable corresponds to the contractually agreed interest and amortisation payments discounted at market rates.

Level 3 energy derivatives

Energy derivatives disclosed under Level 3 are measured using methods that in some cases utilise input factors, such as long-term energy prices or discount rates, which cannot be derived directly from an active market. In complex cases, a discounted cash flow method is used for the measurement. Apart from the credit risk, a realistic change in unobservable input factors would not have a significant impact on Alpiq’s total comprehensive income or equity. More information about the credit risk associated with Level 3 energy derivatives can be found in note 3.1.

The following table shows the development of Level 3 energy derivatives:

Development of day one gains and losses

Measuring financial instruments with valuation inputs that are not entirely based on quoted prices in active markets may result in deviations between the fair value and the transaction price at the time of entering into the contract. These deviations are recognised as day one gains or losses and are amortised on a straight-line basis until the underlying markets of the valuation inputs become active.

The following table shows the reconciliation of the change in deferred day one gains and losses. These items relate entirely to Level 3 energy derivatives.

Expense / income related to financial assets and liabilities

Information about the impairment of trade receivables is disclosed in note 4.5.

Accounting policies

Financial investments, securities and derivatives are measured at fair value through profit or loss. All other financial assets and liabilities are measured at amortised cost. The Alpiq Group did not have any financial instruments that are measured at fair value through other comprehensive income.

Financial assets and liabilities at fair value through profit or loss

Financial assets and financial liabilities in this category are initially recognised at fair value. The corresponding transaction costs are recognised immediately in the income statement. Changes in value of the financial instruments measured at fair value are recognised through profit or loss in the financial result with the exception of energy derivatives and currency derivatives concluded in connection with the hedging of energy transactions. Changes in the fair value of derivatives in connection with the energy business are presented in net revenue.

In principle, future own use energy transactions are not reported in the balance sheet. This also includes contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments. By way of exception, Alpiq irrevocably designates such transactions as contracts measured at fair value through profit or loss if there is an accounting mismatch with the hedges.

Financial assets and liabilities at amortised cost

With the exception of trade receivables, financial assets and financial liabilities at amortised cost are initially recognised at fair value plus or less direct transaction costs. Trade receivables are measured at transaction price.

For the subsequent measurement of financial assets at amortised cost, the following method is used to calculate impairments: in accordance with the expected credit loss model, losses on unsecured financial assets expected in future are also recognised. The impairment losses expected in future are determined using the publicly available probability of default, which takes into account forward-looking information as well as historical probability of default. For financial assets, losses that are expected to occur in the next 12-month period are generally recognised. If the credit risk increases significantly for specific counterparties, impairment is recognised on the assets affected over the entire residual term of the asset. In accordance with IFRS 9, the simplified approach is applied for trade receivables for the measurement of the expected losses by recognising the lifetime expected credit losses (see note 4.5).

Hedge accounting

Alpiq uses energy, foreign currency and interest rate derivatives to hedge exposure to fluctuations in the cash flows of highly probable forecast transactions (cash flow hedges). In contrast to the recognition of energy derivatives, hedge accounting is used for certain foreign currency and interest rate derivatives.

The hedged items and the interest rate swaps are both based on EURIBOR rates. No contract adjustments have been negotiated and no existing contracts have been replaced in connection with the Interest Rate Benchmark Reform. The financial impact of the reform on the Alpiq Group is considered immaterial. In accordance with the practical expedients under IFRS 9, hedged future cash flows are still expected and hedge accounting will be continued following the implementation of the reform.

Before designating a new hedging instrument, the Group conducts a thorough analysis of the risk situation by analysing the risk management strategy and objective and defines the relationship between the hedging instrument and underlying transaction. It also ensures that the effectiveness requirements are met at the beginning of the hedging relationship. The formal designation occurs by documenting the hedging relationship. The designation of a new hedging instrument is authorised formally.

Change in cash flow hedge reserves

Foreign currency hedges

Foreign currency positions from the sale of Swiss production capacity in euros are hedged utilising forward transactions on the basis of the expected transaction volumes. Each spot component is designated as hedging instruments for hedge accounting. The unrealised gains / losses of the spot components are included in other comprehensive income taking deferred taxes into account. Changes in the forward components are recognised through profit or loss. There were no ineffective portions of the hedge from the foreign currency hedges at the reporting date. The underlying transactions will be recognised in the income statements for 2022 to 2025.

Interest rate swaps

At 31 December 2021, interest rate swaps were in place in order to fix interest rates on variable-interest project financing facilities in Italy. The project financing facilities have a remaining maturity of between three and nine years.

3.3 Other non-current assets

Alpiq has disposed of all of the loan claims received from Swissgrid Ltd in 2014 as part of the transfer of the Swiss high-voltage grid. As part of the disposal, the Swissgrid loan tranches were sold without the contractually related conversion rights. Swissgrid Ltd can, or must, convert the loans into equity if certain conditions arise. In this instance, the buyers of the loans would receive shares in the equity of Swissgrid Ltd. In the case of a conversion, however, Alpiq is obligated on the basis of the contract with the buyers of the loans to purchase from the buyers all equity shares of Swissgrid Ltd arising from the conversion up to a maximum amount of CHF 49 million (previous year: CHF 99 million). As a consequence, although Alpiq has sold the loans, it has at the same time entered into a directly related obligation in the amount of CHF 49 million (CHF 99 million). Due to the aforementioned contractual structure of the transaction, the loans could not be derecognised and remain on Alpiq’s books as “Receivables” in the amount of CHF 49 million (CHF 50 million) on account of the maturity of the underlying Swissgrid Ltd convertible bonds. In the previous year, this included “Other non-current assets” in the amount of CHF 49 million. The reclassification to receivables means that this amount of Swissgrid Ltd convertible bonds will be due for repayment in the next 12 months. Financial liabilities also exist in the amount of the obligations that were entered into as a result of the sales. These are included under “Other current liabilities” in the amount of CHF 49 million (CHF 50 million). In the previous year, this also included obligations disclosed under “Other non-current liabilities” in the amount of CHF 49 million.

3.4 Other non-current liabilities

In the previous year, this item included obligations in the amount of CHF 49 million arising from the sale of loans receivable due from Swissgrid Ltd. Note 3.3 provides further information about the transaction.

3.5 Financial liabilities