3.1 Financial risk management

General principles

Risk management is integral to the successful strategic, operational and financial management of Alpiq Group and management of risk is crucial for its financial performance. Robust and comprehensive risk governance is therefore both a business and a strategic necessity.

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 and the Risk Management Committee monitors compliance with the principles and policies. The principles of risk management in the Alpiq Group are outlined in the Group Risk Policy, which comprises guidelines for entering into, measuring, managing and mitigating business risks, and specifies the organisation 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 generated and risk-bearing equity.

The Group Risk Policy governs a number of directives divided into three main categories: Energy Risk Management, Business Risk Management and Financial Risk Management. The Energy Risk Management directives define the processes and methods to manage market and credit risks in the energy business. They also regulate the management of liquidity fluctuations caused by trading activities on stock exchanges and under bilateral arrangements (over-the-counter; OTC) to settle margin differences. The Business Risk Management directives govern the annual risk assessments, the process for approval of new energy products and the definition and monitoring of measures to reduce exposure to operational and strategic risks. They also define the principles of the hedging strategy for energy production trading books. The Financial Risk Management directive defines the substance, organisation and system for financial risk management within the Alpiq Group, including management of financing, working capital, liquidity, foreign currency and interest rate risks.

The Risk Management functional unit is responsible for the overarching enterprise risk management and reports to the CFO. It provides methods and tools for implementation of risk management and actively steers energy-related risks. The unit 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 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.

Energy risk

The management of energy risk covers credit risks, liquidity risk and market risks. Although market, credit and liquidity risks are addressed in separate directives, the three are interdependent and need to be managed with an integrated approach. This does not imply that each risk factor is of equal weight or importance. Whereas market or credit risk potentially results in effective losses, liquidity risk impacts cashflow and operational capital temporarily (until the cash collateral is returned).

Credit risk

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. Contracts are entered into only with counterparties that meet the requirements outlined in the Credit Risk Directive.

Credit risk management deals with potential losses arising from business partners’ inability to meet their contractual obligations to the Alpiq Group. It 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 developments, as well as analysis and monitoring 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 and delivery contracts.

The maximum credit risk corresponds to the carrying amount of the financial assets and was calculated at CHF 3,981.6 million at 31 December 2024 (previous year: CHF 6,104.4 million). The replacement values of energy derivatives and receivables, and thus the credit risk associated with several counterparties in various countries, decreased compared to the previous year mainly due to lower energy prices. Overall credit risk is a consistent but not 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 collateral, Alpiq has various counterparties and customers in different countries, which prevents a concentration of risk. Thus, credit risk for derivatives and receivables is broadly diversified and there was no concentration of risk with any counterparty at year end. 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 are based on agreements with 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 the failure of one party to fulfil its part of the deal and defaulting on its contractual obligations. The amount to be provided changes 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 depending on energy price movements and related to 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.

2024: Maturity analysis of financial liabilities and derivative financial instruments

2023: 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 Market Risk Directive; handling of currency risk and interest rate risk is defined in the Financial Risk Directive. The Market Risk Directive sets out rules on taking, measuring, limiting and monitoring risks. The Risk Management Committee monitors compliance with risk limits through regular reports provided 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 Market Risk Directive. Risk Management reports regularly on compliance with these limits to the Risk Management Committee, the Executive Board and the Board of Directors, 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 Directive. 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 Directive. 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 Directive, liquidity is invested for a maximum of two years. This means that a change in interest rates applied to interest-bearing assets has an impact on financial income. 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. 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 the Alpiq Group’s financial results to market risks, 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 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 on the assumption that all other variables remain constant. The effects are shown before tax.