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 IFRS Accounting Standards 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 27 February 2024 and are subject to approval by shareholders at the Annual General Meeting on 30 April 2024.

1.2 Adoption of new and revised accounting standards

Amendments, standards and interpretations adopted for the first time in 2023

At 1 January 2023, the following amendments to the International Financial Reporting Standards (IFRS) entered into force and were applied by the Alpiq Group:

• Amendments to IAS 1 and IFRS Practice Statement 2: Disclosure of Accounting Policies
• Amendments to IAS 8: Definition of Accounting Estimates
• Amendments to IAS 12: Deferred Tax related to Assets and Liabilities arising from a Single Transaction
• Amendments to IAS 12: International Tax Reform Pillar Two Model Rules
• Amendments to IFRS Practice Statement 2: Making Materiality Judgements

These amendments and improvements had no significant impact on the Alpiq Group.

IFRS effective in future periods

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

Based on our analysis, Alpiq does not expect the above-mentioned changes in standards to have any significant effect on the consolidated financial statements of the Alpiq Group.

1.3 Significant uncertainity in estimation and judgement

The preparation of the consolidated financial statements requires the management to exercise judgement and make estimates and assumptions. These may 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.

1.4 Change in the presentation of the financial statements

A substantial portion of the energy contracts entered into by the Alpiq Group include a netting arrangement. Such arrangements are common in energy trading to reduce the volume of cash flows between counterparties.

In 2022, derivative financial instruments were presented net in the balance sheet if the netting arrangement entered into by Alpiq and the counterparty contained a legally enforceable right to offset the recognised amounts and Alpiq had the intention of settling the derivatives on a net basis. However, the maturity of the cashflows were not taken into account when calculating the offsetting amount. In addition, in the balance sheet, all derivative financial instruments were presented as current.

The prior period error was corrected by consideration of the timing of the future cashflows for netting purposes and classification of the derivative financial instruments in current and non-current. Due to the two changes described above the balance sheet and the note 3.1 were adjusted (see impact below). As a result, the adjusted equity ratio amounts to 23.4% as of 31 December 2022 (previously 24%).

There is no material impact on the consolidated income statement or the consolidated statement of cash flows of the previous year.

2.1 Segment information

Alpiq Group segment reporting is based on the Group’s internal management structure and the internal financial information provided to the chief operating decision maker. Since 1 January 2023, the reportable segments at Alpiq consists of three elements along the company’s value chain: Assets, Trading, and Origination. The Executive Board evaluates each of these elements separately for the purposes of performance assessment and resource allocation. Segment results (EBITDA and adjusted EBITDA) are the key performance indicators used for internal management and assessment purposes at Alpiq. For more information about adjusted EBITDA, please refer to the unaudited explanations in the Financial Review. In addition to energy procurement and production costs, operating costs comprise all costs of operations, including personnel and service expenses. No value chain elements have been aggregated in the presentation of reportable segments. The prior-year segment results have been restated for comparability.

• The Assets segment covers the production of electricity by Alpiq’s Swiss and international power plants through different technologies such as hydro (including small-scale hydropower), nuclear, thermal, wind and solar, as well as the operation and optimisation of these power plants. It also comprises several wind farm projects in Switzerland and abroad. The Alpiq Swiss power plant portfolio includes run-of-river power plants, storage and pumped storage power plants (including Nant de Drance), as well as interests in the Gösgen and Leibstadt nuclear power plants. In addition, the Assets segment manages shares in HYDRO Exploitation SA and Kernkraftwerk-Beteiligungsgesellschaft AG (KBG). It also covers the production of electricity and heat at 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, and the power plants are used by the respective grid operators to balance the grids.
• The Trading segment covers proprietary trading activities with standardised and structured products for electricity and gas, as well as emission allowances and certificates. The Trading segment also includes foreign exchange and liquidity management.
• The Origination segment covers activities to optimise electricity production from third-party renewable energy and direct marketing and energy management for industrial and business customers. This includes the trading and sale of standardised and structured products in various countries, with the aim of helping partners to achieve their cost efficiency and sustainability goals, thereby creating value and increasing customer benefit. The Origination segment also covers the company’s Swiss sales and origination activities as well as retail activities in France.

The segment results are carried over to the Alpiq Group’s consolidated figures by including the units with limited market operations (Corporate), Group consolidation effects and other reconciliation items. The latter comprises reallocations totalling CHF 14 million (previous year: CHF 13 million) between external net revenue and other income due to differences in account structures used for internal and external reporting purposes. This column also includes the foreign currency effects of using alternative average exchange rates for management reporting purposes that differ from those pursuant to IFRS. Corporate includes the financial and non-strategic investments which cannot be allocated directly to the value chain, as well as the activities of the Group headquarters, including Alpiq Holding Ltd. and the functional units.

2023: Information by segment

2022: Information by segment (restated)

2023: Information by geographical area

2022: 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).

The internal management structure was adjusted in 2023, see note 2.1. The disaggregation of net revenue for 2022 has been adjusted for comparability.

2023: Disaggregation of net revenue

2022: Disaggregation of net revenue (adjusted)

Accounting policies

Alpiq generally satisfies its performance obligations as principal. However, for performance obligations related to 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 exemption” 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 some 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 stand-ready obligations to deliver ancillary services is recognised on a straight-line basis during the period in which Alpiq is available to render these services. Revenue for called ancillary services is recognised when the energy is delivered. 

Revenue from other services

Revenue from other services from contracts with customers is recognised generally over the time period over which the performance obligation is satisfied on a straight-line basis. However, 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 application of 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 net realised 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, gains from sales of non-current assets or business disposals, insurance claims received and payments received from litigations. This item also includes income that does not arise in the course of ordinary activities of the Alpiq Group and is therefore generally not of a predictable or recurring nature.

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. 

In 2022, Alpiq recognised market premiums in the amount of CHF 2 million for the 2022 financial year and CHF 9 million for the 2021 financial year. Since 2022, the amounts claimed for market premiums have been significantly lower due to higher prevailing market prices. In 2023, Alpiq decided to voluntarily waive its entitlement to the market premium. This waiver has no impact on the entitlement for the coming years.

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 recognised 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 when Alpiq decides to accept the order. At this point in time, 100% or 80% of the provisional amount assigned will be recognised, 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 9 million (previous year: CHF 8 million).

2.4 Energy and inventory costs

The item “Other energy and inventory costs” comprises mainly 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

Reconciliation

Income tax expense charged to the income statement

Change in deferred tax assets and liabilities

Deferred tax assets and liabilities by origination of temporary differences

At 31 December 2023, individual subsidiaries held tax loss carryforwards totalling CHF 207 million (previous year: CHF 638 million), which are available for offsetting against future taxable profits. Of these, the Alpiq Group has not recognised tax benefits on tax loss carryforwards of CHF 133 million (CHF 397 million) in the balance sheet item “Deferred tax assets”, as these are recognised 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 19% (17%). These tax loss carryforwards expire in the following periods:

In addition, there are unrecognised deductible temporary differences totalling CHF 11 million (CHF 167 million).

Global minimum corporate taxation

Under an OECD Inclusive Framework, more than 140 countries agreed to enact a two-pillar solution to address the challenges arising from the digitalisation of the economy. Pillar Two introduces a global minimum Effective Tax Rate (ETR), where multinational groups with consolidated revenue of more than EUR 750 million are subject to a minimum ETR of 15% on income arising in low-tax jurisdictions.

The Swiss constitutional amendment providing the legal basis for the implementation of Pillar Two was approved in a public vote on 18 June 2023. The Swiss Federal Council decided to implement a Qualifying Domestic Minimum Top-up Tax (QDMTT) as of 1 January 2024, ensuring that the Pillar Two ETR applies to all domestic entities within the scope of Pillar Two. By the end of 2024, the Swiss Federal Council may decide on the implementation of the other elements of Pillar Two, i.e. the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR).

Alpiq is within the scope of the OECD Pillar Two model rules. Since the Pillar Two legislation was not effective at the reporting date, Alpiq has no related current tax impact for the year ended 31 December 2023. Alpiq applies the temporary mandatory exception from deferred tax accounting for the impact of the top-up tax as provided in the amendments to IAS 12 issued in May 2023, and will account for it as a current tax when it is incurred.

The group is in the process of assessing its future exposure to the Pillar Two legislation. Due to the complexities in application of the legislation and calculation of the GloBE ETR, the quantitative impact of the enacted or substantively enacted legislation is not yet reasonably estimable.

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 be reversed 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.

Furthermore, definitive clarification of the taxation issue at the partner power plants in canton Graubünden is still pending.

2.8 Earnings per share

No circumstances exist 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, operational and financial risks, in particular liquidity, credit 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.

The principles for managing risks in the Alpiq Group are set out in the Group Risk Policy. They comprise guidelines for entering into, measuring, managing and mitigating business risks, and specify the organisation of and responsibilities related to risk management. The responsible units 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 measures to reduce exposure to operational and strategic risk, as well as integral security management. The Energy Risk Policy defines the processes and methods to manage market and credit risk in the energy business. It also regulates the management of liquidity fluctuations caused by trading activities on stock exchanges and under bilateral arrangements (over-the-counter; OTC) 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 risk assessment and reports to the CFO. It provides methods and tools for implementation of 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 note annually of the projected figures that are critical for capital management. In addition, it receives regular reports on current developments.

Alpiq Holding Ltd. procures a significant portion of financing centrally for the Alpiq Group. The Swiss capital market remains the main source of financing. The aim pursued in financing the Group is that the level of financial liabilities contributes to a solid credit rating in line with industry standards.

The capital management strategy is in principle focused on the Group’s reported consolidated equity and net debt-to-EBITDA ratio. In 2023, Alpiq sourced additional non-current financing during the year amounting to CHF 375 million by means of two bonds that will be used for corporate purposes, including refinancing.

At 31 December 2023, the Group reported an equity ratio of 45.9%, which is significantly above the 23.4% of the previous year. The two main factors for this increase were the good result, which lead to higher equity, and decreased total assets due to lower energy derivatives and receivables as a consequence of lower energy prices. 

The net debt-to-EBITDA ratio before non-operating effects ratio is calculated and compares with the previous year as follows:

The Alpiq Group has the following credit lines from banks:

In addition to the credit lines provided by the banks, Alpiq also has a committed credit facility from its shareholders amounting to CHF 300 million.

The Alpiq Group has the following covenants from finance agreements:

The counterparties have the right to terminate the agreement if covenants are breached. As in the previous year, all covenants were met at 31 December 2023. 

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. In addition to energy derivatives recognised as financial instruments on the balance sheet, credit risk management also covers physical receipt or delivery contracts. Credit risk is managed primarily by application of rating-based credit limits. The Alpiq Group classifies counterparties or groups of counterparties (with similar risk characteristics) in risk categories (AAA to 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 was calculated at CHF 6’104 million at 31 December 2023 (previous year: CHF 10’477 million). The replacement values of energy derivatives and receivables, and thus the credit risk associated with several counterparties in various countries, are much lower due to the decreased energy prices compared with the previous year, which results in credit risk becoming a less significant input factor in fair value measurement. 

In addition to the strict monitoring and management of credit risk by means of internal rating-based credit limits per counterparty and the retention of collaterals, Alpiq has a variety of counterparties and customers in different countries, which prevents a concentration of risk. Thus for derivatives and receivables credit risk is broadly diversified and there was no concentration of risk with any counterparty at year end (previous year: three counterparties). Information about the effect of credit risk on receivables is disclosed in note 4.5.

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 presented on a net basis in the balance sheet only if a legally enforceable right to offset the recognised amounts applies under the netting arrangement and there is an intention to settle on a net basis.

Financial collateral

Additional collateral such as guarantees, variation margin payments or insurance cover is obtained where necessary in order to hedge the risk of one party failing to fulfil its part of the deal and defaulting on its contractual obligations. The amounts to be provided change according to the net obligation calculated every day on the basis of price fluctuations. 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 bilateral agreements to settle margin differences is presented as follows:

Liquidity risk

Margin agreements are commonly used on energy commodity exchanges and among energy traders to reduce counterparty risk. A margin agreement is a collateralisation agreement to ensure both parties’ performance. Consequently, Alpiq has to provide or can demand significant collateral in the form of cash or bank guarantees due to energy price movements and depending on the value of the net obligation. In addition, these 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, continuous balancing of the underlying positions, maintenance of sufficient liquidity resources and 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 netting arrangements are 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. 

2023: Maturity analysis of financial liabilities and derivative financial instruments

2022: Maturity analysis of financial liabilities and derivative financial instruments

Market risk

The Alpiq Group’s exposure to market risk comprises primarily energy price risk, foreign currency risk and interest rate risk. These risks are monitored on an ongoing basis and managed using financial instruments. Market risk is measured in accordance with the Group Risk Policy, which sets out rules on taking, measuring, limiting and monitoring risks. 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 effect on the Alpiq Group. These fluctuations may arise from factors such as market price movements, variations in price volatility or changing correlations between markets and products. Market liquidity risks also belong to this category. They occur when an open energy position cannot be closed out or can be closed out only on very unfavourable terms due to a lack of market bids. Future own-use energy transactions are normally not reported as financial instruments unless the fair value option or hedge accounting for firm commitments are applied in accordance with IFRS 9. Energy transactions are also conducted 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 or futures. 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. 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, using a formalised risk reporting system. Risk positions are monitored in accordance with the Value at Risk (VaR) industry standards.

Foreign currency risk

The Alpiq Group seeks wherever possible to mitigate foreign currency risks through 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 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. However, the funding required for the business 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 value of energy derivatives are derived from the commodity market prices for electricity, gas, coal and oil over the past year. 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 are shown before tax.

3.2 Financial instruments

Carrying amounts and fair values of financial assets and liabilities

The fair values of financial assets and financial liabilities are summarised in the following table. Not included therein are cash and cash equivalents, trade receivables and trade payables, as well as miscellaneous receivables and liabilities whose carrying amounts differ only insignificantly from their fair values.

Fair value hierarchy of financial instruments

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 that are not based on quoted prices in active markets and which have a significant effect on the fair value

At the reporting date, the Alpiq Group measured the following assets and liabilities at their fair value or disclosed a fair value.

The energy, currency and interest rate derivatives comprise only 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. 

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

Level 3 energy derivatives

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

Transfers from Level 2 to Level 3 relate to energy derivatives measured on the basis of input factors that are no longer observable in an active market due to decreased market activity. Transfers out of Level 3 relate to energy derivatives measured on the basis of input factors that became observable in the financial year. Alpiq always applies reclassifications between Level 2 and Level 3 at the end of the reporting period. Both in the reporting year and during the previous year, no transfers between Level 1 and 2 took place.

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 5 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.

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 markets of the valuation inputs used 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

For information on the impairment of trade receivables, see 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 does not have financial instruments 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 otherwise an accounting mismatch would occur.

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 minus 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 publicly available probability of default, which takes into account forward-looking information and historical probabilites 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 foreign currency and interest rate derivatives to hedge the exposure to fluctuations in cash flows of highly probable forecasted transactions (cash flow 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.

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 with forward transactions on the basis of the expected transaction volumes. Each spot component is designated as a 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 2024 to 2028.

Interest rate swaps

At 31 December 2023, 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 six years.

Fair value hedge accounting

Since 1 July 2022, Alpiq applies fair value hedge accounting to selected fixed-priced, physical energy purchase contracts (firm commitments). Changes in fair value of firm commitments result mainly 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). The introduction of fair value hedge accounting allows the fair value changes of the hedged item to be recognised in the IFRS financial statements, thereby eliminating the accounting mismatch for the effective part of the hedge. Beside prospective effectiveness testing, a half-yearly own use eligibility test is conducted to ensure that no over-hedging exists that 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 that represents the accumulated amount of fair value hedge adjustments on the hedged items since inception of the hedge relationship.

Hedging instruments

The maturity profile and 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 “Derivative financial instruments” balance sheet line item (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 when circumstances change significantly, a quantitative hedge effectiveness assessment is performed. The fair value of the hedged items and hedging instruments are measured and the net difference of the changes represents the amount of hedge ineffectiveness. 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.

3.3 Other non-current assets

3.4 Financial liabilities