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 in 2021 relates to energy derivatives with a significantly increased credit risk. The reclassification from Level 2 to Level 3 in 2022 relates to energy derivatives measured on the basis of inputs that are no longer observable in an active market due to decreased market activity. The reclassification from Level 3 to Level 2 in 2021 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 (market prices) in the price curve model are supplemented by hourly forward prices, which are arbitrage-free and compared with external price benchmarking on a monthly basis. Due to the persistently high and volatile energy prices, the replacement values of energy derivatives and thus the credit risk for several counterparties in various countries remain high. At 31 December 2022, the fair value of the derivatives that are classified as Level 3 due to a significantly increased credit risk is not material.

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. Transfers into Level 3 relate to energy derivatives which have been reclassified from level 2 to level 3 mainly due to reassessment of market liquidity. A change in the price of EUR 1 of the underlying commodity would lead to an increase / decrease in the fair value of Level 3 instruments of CHF 8 million. The sensitivity analysis does not include any interdependencies between different commodities. In order to hedge contracts assigned to Level 3, Alpiq enters into hedges that may be classified as Level 2 or Level 1. It is also possible that the Level 3 instrument is a hedge for an own use contract. Thus, the sensitivity analysis of Level 3 instruments does not include the offsetting effect from the hedging position or the own use contract. 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 some of these 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, any impairments are calculated using the expected credit loss model according to which losses on unsecured financial assets expected in future are also recognised. Impairment losses expected in the 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 twelve 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 forecasted transactions (cash flow hedges) and firm commitments (fair value hedges). Cash flow hedge accounting is applied to certain foreign currency and interest rate derivatives. In general, hedge accounting is not applied to energy derivatives. However, for selected energy purchase contracts, Alpiq introduced fair value hedge accounting in 2022.

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.

Cash flow hedge accounting

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 instrument 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 2023 to 2026.

Interest rate swaps

At 31 December 2022, 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 two and seven years.

Fair value hedge accounting

Since 1 July 2022, Alpiq applies fair value hedge accounting for selected fixed-priced, physical energy purchase contracts (firm commitments). Firm commitments are normally accounted for as own-use contracts and thus off-balance sheet unless they were to become onerous. Different accounting treatments of derivatives (hedges) and own-use contracts lead to an accounting mismatch reported as an exceptional item in the alternative performance measures. The introduction of fair value hedge accounting allows the fair value changes of the hedged item to be recognised in the IFRS financial statements and thus to eliminate this accounting mismatch for the effective part of the hedge.

Changes in fair value of firm commitments mainly result from commodity price fluctuations. To mitigate the exposure to these market price changes, Alpiq hedges the fair value of such transactions in accordance with its hedging strategy and risk management objectives either with physical contracts or financial derivatives (see note 3.1). To a limited extent, Alpiq designates these financial forwards and futures as hedging instruments in relationship to the hedged item. The hedged items are layers of firm commitments whereby the layers represent the part of the firm commitments that is hedged with derivatives accounted for at fair value through profit or loss. Beside prospective effectiveness testing, a half-yearly own use eligibility test is performed to ensure that the layering approach is still justified and that there is no over-hedging which would lead to significant ineffectiveness.

Hedged item

The fair value changes of the hedged items are recorded in net revenue and reflected in the balance sheet line items "Other non-current assets" and "Other current liabilities". The following table shows the carrying amount of the hedged items which represents the accumulated amount of fair value hedge adjustments on the hedged items since inception of the hedge relationship.

Hedging instruments

The maturity profile as well as the average price of the hedging instruments used for hedging a layer of a firm commitment are shown in the table below.

Forwards are recorded under the balance sheet line item derivative financial instruments (either as assets or liabilities). Futures are cash settled daily and therefore no open exposure is recognised in the balance sheet. The following table provides an overview of the hedging instruments:

Hedge effectiveness

At each reporting date or on significant changes in circumstances a quantitative hedge effectiveness assessment is performed. The fair values of both hedged items and hedging instruments are measured and the net difference of the changes is the hedge ineffectiveness amount. Specific factors that may cause ineffectiveness are timing differences (i.e. mismatch between the designated hedge period and the maturity period of the hedging instrument) and location differences. Hedge ineffectiveness is recorded under net revenue in the income statement.