Financial Review

Financial Review

Alpiq is looking back on a successful financial year 2022, despite the very challenging market environment characterised by soaring and yet highly volatile energy prices. On the one hand, the market price distortions brought with it new opportunities and improved trading margins, but on the other hand, they also introduced new challenges and heightened risks.

Electricity forward prices rose continuously from the second half of 2021, peaking at the end of August 2022. Prices declined in the subsequent months and by year-end returned to the levels last seen in the first half of 2022. The strong fluctuations were attributable to geopolitical uncertainties in European gas supply on account of the war in Ukraine, unplanned outages of French nuclear power plants and a period of extremely dry weather in Europe.

Alpiq successfully participated in the federal government’s tender process for the hydropower reserve and is now responsible for more than half of the 400 GWh allotment. For Alpiq this move is not about maximising profits, but one of social responsibility. As one of the largest electricity producers in Switzerland, Alpiq is committed to ensuring security of supply. The fact that earnings will shift into 2023 and possibly on lower levels is an accepted consequence.

The liquidity requirements for the hedging of our production and the participation in international energy trade, was significantly increased as a result of the high energy prices in 2022. In response to these market developments, Alpiq initiated and implemented sufficient precautionary measures at an early stage to increase liquidity and to avoid cash outflows in the short term. These measures considerably improved Alpiq’s room to manoeuver and ensures that Alpiq is more resilient to market developments.

Furthermore, the accounting treatment in accordance with IFRS of energy price hedges leads to earnings being shifted to future periods (accounting mismatch). While the accounting mismatch has reduced in the second half of 2022 there is still a significant positive effect expected on the results in subsequent financial years stemming both from 2021 and 2022.

In order to allow transparent presentation and demarcation of the exceptional items, the consolidated income statement is presented as a pro forma statement. The commentary on the financial performance relates to an operational EBITDA before exceptional items view. The categories of exceptional items are detailed in the “Alternative performance measures of Alpiq” section.

Alpiq Group: results of operations (before exceptional items)

In the 2022 financial year, the Alpiq Group generated net revenues before exceptional items of CHF 14.9 billion (up CHF 7.2 billion on the previous year) and an EBITDA before exceptional items of CHF 473 million (up CHF 161 million). The Swiss power production contributed a stable result despite lower inflows into the reservoirs. International power generation and energy trading surpassed the previous year's result, benefiting from high market volatility and the rise in energy prices.

Consolidated income statement (pro forma statement before and after exceptional items)

Switzerland business division

At CHF 3 million, EBITDA of Swiss power production was slightly down CHF 4 million on the previous year, with the previous-year including the subsequent price adjustment of CHF 10 million from Swissgrid for the sale of the Swiss high-voltage grid. The results from hydropower were impacted by lower inflows on account of less precipitation. The increased energy prices also resulted in a lower market premium. Thanks to increased power production and tight cost management, the area of Swiss nuclear power closed at a higher level than that of the previous year. In a year-on-year comparison, production volumes were largely higher, namely due to the maintenance work performed at the Leibstadt nuclear power plant in 2021. The EBITDA contribution from the new renewable energies in Switzerland was in line with previous year. With its climate-friendly power production in Switzerland, Alpiq is contributing to a better climate and strengthening the security of supply.

International business division

At CHF 134 million, EBITDA of international power production and sales & origination activities was up year-on-year by CHF 151 million. The gas-fired power plants in Italy, Hungary and Spain continued to contribute to security of supply. Thanks to their flexibility and high availability, these power plants generated strong results. The generation of renewables delivered strong profitability due to high availability and higher power prices.

The sales & origination activities contributed to value creation despite turbulent market conditions. The counterparty credit risk was actively managed by implementing a tighter credit risk strategy. Particularly on the French and German market Alpiq performed well and exceeded the previous year results. The energy market conditions resulted in a continued high credit risk environment. The negative impact of credit events substantially reduced in 2022, due to changes in the business strategy.

Trading business division

At CHF 387 million, EBITDA of energy trading was up by CHF 49 million compared to the already very good previous year. On one hand, the high availability and flexibility of the Swiss and International assets have contributed significantly to the exceptional trading result. On the other hand, Alpiq took excellent advantage of the opportunities such a volatile market environment provides and improved earnings both from trading of its own production as well as from other trading activities.

Alternative performance measures of Alpiq

To measure and present its operating performance, Alpiq also uses alternative performance measures through to the level of “Earnings before interest, tax, depreciation and amortisation (EBITDA)”. Alpiq makes adjustments to the IFRS results for exceptional items which Alpiq does not consider part of results of operations.

These performance measures do not have a standardised definition in IFRS. This can therefore limit comparability with such measures as defined by other companies. These performance measures are presented in a pro forma statement in order to give investors a deeper understanding of how Alpiq’s management measures the performance of the Group. However, they are no substitute for IFRS performance measures. Starting from 1 January 2022, Alpiq no longer presents any exceptional items from the categories “Effects from business disposals” or “Restructuring costs and litigation” in its internal or external reporting in order to simplify reporting. The previous year figures have been adjusted for comparative purposes, causing exceptional items to decrease by CHF 10 million. Accordingly, EBITDA before exceptional items for 2021 increased by CHF 10 million. Alpiq still does not use any alternative performance measures in the balance sheet and statement of cash flows.

Overview of exceptional items

Alpiq has defined the following categories of exceptional items:

Fair value changes (accounting mismatch)

Negative fair value changes of energy derivatives entered into to hedge future power production as well as energy procurement and energy delivery contracts do not reflect operating performance because they are economically linked with the changes in value of the hedged transactions. Rising forward prices cause the future production volumes and power purchase agreements to increase in value and the corresponding hedges to lose value. According to IFRS accounting policies, the fair value changes of financial hedges between the last and the current balance sheet date have to be recognised in the reporting year. As the future production volumes and the power purchase agreements are not measured at fair value and positive changes in value therefore cannot be recognised in the reporting year, this results in an accounting mismatch.

Accounting mismatch and expected reversals (based on energy prices as of 31 December 2022)

Development of decommissioning and waste disposal funds

The operating companies of Switzerland’s nuclear power plants are required to make payments into the decommissioning fund and the waste disposal fund to ensure that decommissioning and waste disposal activities are funded. The investments of these two funds are exposed to market fluctuations and changes in estimates, which cannot be influenced by Alpiq but which do influence electricity procurement costs. The difference between the return actually generated by the funds and the return budgeted by the nuclear power plants of 2.75 % is classified and recorded as an exceptional item.

Onerous contracts

Effects in connection with the future procurement of energy from the Nant de Drance pumped storage power plant (until June 2022) and an onerous contract abroad (until June 2021) relate to effects that are attributable to changes in expectations regarding future developments. Management therefore does not take these into account in the assessment of Alpiq’s operating performance. No onerous contracts are stated as exceptional items after July 2022.

Consolidated balance sheet and cash flow statement (after exceptional items)

Total assets amounted to CHF 14.7 billion at the 31 December 2022 reporting date, compared to CHF 13.6 billion at the end of 2021. Non-current assets of CHF 4.2 billion decreased by CHF 219 million, thereof CHF 118 million came from a decline in investments in partner power plants and other associates. Additionally, the sharp increase in the discount rate triggered an asset ceiling for pension assets, which meant that the net defined benefit assets of CHF 80 million reported in the previous year had to be derecognized. Thereof CHF 61 million was booked through other comprehensive income.

Current assets rose by CHF 1.4 billion to CHF 10.5 billion at 31 December 2022. As a consequence of the increased energy prices during 2022 trade and other receivables were CHF 1 billion higher than in the previous year. Cash and cash equivalents also increased by CHF 0.6 billion, partially due to a reduction of financial security deposits for trading, leaving Alpiq in a solid financial position.

Equity stood at CHF 3.5 billion at 31 December 2022, CHF 29 million below the previous year. Total comprehensive income, which consists of net income of CHF 111 million and other comprehensive income of CHF -108 million, amounted to CHF 3 million. The decrease in equity corresponds therefore almost entirely to the interest payment to the hybrid capital investors. The equity ratio decreased from 26.2 % to 24.0 %.

Financial liabilities increased by CHF 28 million to CHF 1.6 billion at 31 December 2022. Overall, the current financial liabilities decreased by CHF 420 million while the non-current financial liabilities increased by CHF 448 million. The main reason for this were new bonds issued in order to replace a bond and loans that fell due in the first half of 2022. The net debt could be significantly reduced from CHF 675 million to CHF 107 million. The gearing ratio (net debt / EBITDA before exceptional items) fell from 2.2 at 31 December 2021 to 0.2 at 31 December 2022. Compared to 31 December 2021, non-current liabilities increased by CHF 47 million to CHF 1.5 billion and current liabilities by CHF 1.1 billion to CHF 9.7 billion. The increase in non-current bonds were partially offset by the decrease in provisions for onerous contracts. The main reason for this increase were the high energy prices, which led to trade payables being 1.5 billion higher than in the previous year.

The positive earnings before taxes of CHF 116 million as well as the reduction of financial security deposits led to a positive net cash flow from operating activities of CHF 734 million (last year CHF -298 million). This improvement is driven by lower financial security deposits and better earnings before taxes. Net cash flows from investing activities decreased on the previous year, mainly driven by significant term deposits and securities, which were liquidated in 2021. Net cash flows from financing activities amounted to CHF -41 million and were down on the previous year by CHF 293 million. Proceeds from and repayments of financial liabilities resulted in a net cash inflow of CHF 365 million in the previous year, while this year the net cash inflow from change in financial liabilities amounted to CHF 32 million. In the previous year, a dividend of CHF 46 million was distributed to shareholders. Overall increase in cash and cash equivalents amounted to CHF 624 million and thus nearly doubled from CHF 863 million in 2021 to CHF 1’474 million.

Outlook

Volatility in the market in which Alpiq operates is expected to continue. The measures taken during the energy crisis have left Alpiq financially and operationally well equipped and more resilient against future market disruptions. For 2023, Alpiq expects further positive developments in the operative performance of the Group. The IFRS result continues to be subjected to market developments both with regards to the development of the decommissioning and waste disposal fund and the fair value changes (accounting mismatch).