Notes to the Interim Consolidated Financial Statements

1 Significant accounting policies

Basis of preparation of the interim consolidated financial statements

The interim consolidated financial statements at 30 June 2021 have been prepared in accordance with International Accounting Standard IAS 34 Interim Financial Reporting. With the exception of the changes listed below, they are presented on a basis consistent with the Alpiq Group’s accounting policies set out in the Financial Report 2020 and should be read in conjunction with that report, as the interim consolidated financial statements are an update of information previously published. Unless stated otherwise, all figures in the interim consolidated financial statements are reported in millions of Swiss francs. Due to the necessary rounding, it is possible that subtotals or totals do not match the individual amounts. The Board of Directors of Alpiq Holding Ltd. approved the interim consolidated financial statements at 30 June 2021 on 25 August 2021.

Adoption of new and revised accounting standards

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 hedged by interest rate swaps (cash flow hedges) and are based on EURIBOR interest rates. Thus far, 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.

Foreign currency translation

The consolidated financial statements are presented in Swiss francs. The following exchange rates were used for currency translation:

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, forcing governments to take drastic protective measures. Thus far, the pandemic has not led to any substantial restrictions on the operating activities of the Alpiq Group. However, 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 of all industries across the globe and thus also on Alpiq. These effects were assessed at 30 June 2021 and taken into account in the 2021 interim financial statements.

At the time of approval of the interim consolidated financial statements by the Board of Directors of Alpiq Holding Ltd., the financial impact of the pandemic on the financial position, financial performance and cash flows of the Group cannot yet be fully assessed and estimated, as the effective impact will only become apparent as the situation develops over the coming months. The nature of the potential effects and estimation uncertainties were published in the notes to the 2020 consolidated financial statements of the Alpiq Group.

2 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 Generation Switzerland, 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 allocation keys for the internal settlement of Group Centre expenses were adjusted in the second half of 2020. Moreover, due to the sale of Flexitricity Ltd. in the second half of 2020 and Alpiq’s decision to no longer pursue the e-mobility business, the EBITDA effects from these two businesses are classified as exceptional items in internal reporting. Previous-year segment reporting for the first half of 2020 has been adjusted for comparability. As a result, the Alpiq Group’s EBITDA before exceptional items increased by CHF 3 million in the first half of 2020 from CHF 116 million to CHF 119 million.

• The Generation 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 Generation 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 way of including the units with no market operations (Group Centre & other companies), Group consolidation effects (including foreign currency effects from using other average exchange rates in management reporting) as well as another reconciliation item presented in a separate column. This reconciliation item comprises shifts between external net revenue and other income due to the difference in account structures between internal and external reporting. 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.

1 ^st half-year 2021: Information by business division

1 ^sthalf-year 2020: Information by business division (adjusted)

3 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).

1 ^st half-year 2021: Disaggregation of net revenue

1 ^st half-year 2020: Disaggregation of net revenue

4 Impairment losses and provisions

1 ^st half-year 2021: Allocation of impairment losses and provisions

Impairment losses of CHF 6 million had to be recognised on the Spanish gas-fired combined-cycle power plant Plana del Vent in the Generation International business division due to delivery delays at the manufacturer in connection with additional repairs, resulting in an extended downtime until December 2021, as well as earnings prospects. Other than that, no impairment losses had to be recognised on power plants thanks to the positive development of electricity prices.

The provision for the onerous contract relating to the future procurement of energy from the Nant de Drance pumped storage power plant was reduced by CHF 7 million, primarily on account of the development of electricity prices. Higher market prices also meant that the Group could reverse the existing provision for an onerous contract abroad of CHF 8 million in full. Information about discontinued operations can be found in note 10.

1 ^st half-year 2020: Allocation of impairment losses and provisions

Impairment losses totalling CHF 4 million had to be recognised on two Italian solar plants in the Generation International business division, the income of which partly depends on market prices. Other than that, no impairment losses had to be recognised on power plants, in particular due to the existing price hedges or because their income is not dependent on short-term market prices.

The provision for the onerous contract relating to the future procurement of energy from the Nant de Drance pumped storage power plant had to be increased by CHF 66 million because of less volatility in the hourly profile, lower short-term market prices, the lower CHF / EUR exchange rate and the fact that the full industrial commissioning of the power plant is now expected at the end of December 2021 and not as previously assumed at the end of September 2021. Lower market prices also meant that the Group had to increase a provision for an onerous contract outside Switzerland by CHF 11 million. Information about discontinued operations can be found in note 10.

5 Earnings per share

The next interest payment on the publicly placed hybrid bond is due on 15 November 2021. The interest after tax attributable to the first half of 2021 was CHF 15 million (previous year: CHF 15 million).

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

6 Financial risk management

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.

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 30 June 2021, the Group reports an equity ratio of 42.1 % (31 December 2020: 51.2 %).

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:

Credit risk

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. 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:

In the first half of 2021, Alpiq identified a significant increase in the credit risk associated with several counterparties. The associated impairment losses on receivables were increased by CHF 66 million in the first half of 2021. For more information, please refer to the “Market risk” section.

Liquidity risk

A substantial portion of the receivables in European energy trading are offset and settled on specified dates, reducing peak cash flow requirements. Margin agreements are commonly used on energy commodity exchanges and among large energy traders to reduce counterparty risk. Energy price movements can consequently lead to substantial receivables or payables in the short term. 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 facilities from banks. The Treasury & Insurance functional unit is responsible for Group-wide liquidity management. Its role is to plan, monitor, provide and optimise liquidity of the Alpiq Group on a monthly rolling basis.

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.

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 not reported in the balance sheet. 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. Due to the significant increase in energy prices in the first half of 2021, 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. The increased level of risk relates to replacement values for energy derivatives amounting to CHF 45 million. Measures were agreed with the counterparties to cushion the impact on Alpiq. The fair value of the items concerned was reduced by CHF 37 million due to management’s assessment of the credit risk. Taking into account the credit risk, the corresponding energy derivatives were reclassified to Level 3 energy derivatives, see note 7. 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.

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.

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.

7 Financial instruments and fair values

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 first half of 2021 and during the 2020 financial year, no significant 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. 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 6. Level 3 items were not disclosed separately in the previous year on the grounds of immateriality. The previous year has now been adjusted for comparative purposes.

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 if measured 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.

8 Cash and cash equivalents

The item “Cash and cash equivalents” includes foreign subsidiaries’ bank accounts with a total balance of EUR 53 million, translated CHF 58 million (31 December 2020: EUR 39 million, translated CHF 42 million), which are pledged in accordance with regulations in local finance agreements and which may only be used to cover their own needs for cash and cash equivalents. These funds are therefore not freely available in full for the Alpiq Group.

9 Contingent liabilities and guarantees

ANAF’s tax audit at Alpiq Energy SE

In the first half of 2021, a hearing was held concerning the ongoing proceedings in connection with the tax audit on the Bucharest branch of Alpiq Energy SE, Prague, by the Romanian tax authority ANAF (Agenţia Naţională de Administrare Fiscală). However, this hearing did not lead to any material developments. The next hearing will take place on 7 September 2021. For more information, please refer to note 4.8 of the notes to the 2020 consolidated financial statements of the Alpiq Group.

Compensation review proceedings against Alpiq Holding Ltd.

The compensation review proceedings filed against Alpiq Holding Ltd. by the two investors Knight Vinke (KVIP International V L.P.) and Merion Capital (Merion Capital LP, Merion Capital ERISA LP and Merion Capital II LP) pursuant to Sec. 105 of the Swiss Merger Act (FusG) aim to achieve a judicial review of the compensation of CHF 70 per share approved by both Annual General Meetings and paid by SKBAG in the squeeze-out merger. Arbitration proceedings for this took place in June 2021, which did not lead to an out-of-court settlement, as expected. The two plaintiffs have until mid-September 2021 to file a formal claim. For more information, please refer to note 4.8 of the notes to the 2020 consolidated financial statements of the Alpiq Group.

Other matters

There were no significant contingent liabilities from pledges, guarantees and other commitments to third parties in favour of third parties at the reporting date, as was also the case at 31 December 2020. Contingent liabilities in connection with the sale of the Engineering Services business can be found in note 10.

10 Companies sold

Compensation for the transfer of the Swiss high-voltage grid

On 3 January 2013, Alpiq transferred its share in the Swiss high-voltage grid to national grid operator Swissgrid Ltd based on provisional contribution values. It is was not possible to provide a final calculation of the value of individual assets at this point in time, as proceedings relevant for the measurement were still pending. Furthermore, in the 2016 financial year, Alpiq received higher compensation for transferring its share in the Swiss high-voltage grid on account of the new ruling by the Swiss Federal Electricity Commission (ElCom) on the measurement method.

On 9 February 2021, ElCom issued rulings on the margin differences of the former company Alpiq Grid Ltd. Gösgen and Alpiq Grid Ltd Lausanne in 2011 and 2012. It also issued a ruling on their regulatory values at 31 December 2012. These rulings became legally binding in March 2021. Based on these rulings, the second measurement adjustment will be made to offset the remaining difference between the amount already compensated at the transfer date and the amount ordered by the court ruling. In addition, the final value is calculated in accordance with the new ruling in 2016. The calculations for all parties providing in-kind contributions are carried out by the same independent company. Alpiq expects the audit of the calculation and the preparation of the fairness opinion to be completed by another independent company in the second half of 2021.

Discontinued operations

In 2018, Alpiq sold the Engineering Services business, which comprises the Alpiq InTec Group and the Kraftanlagen Group. These operations were classified as discontinued operations. Therefore, all income and expenses in connection with this sale continue to be posted to “Earnings after tax from discontinued operations”.

As part of the sale of the Engineering Services business, Alpiq must bear any fines and costs of Kraftanlagen München GmbH resulting from the proceedings started by the state prosecutor of Munich I and the German Federal Cartel Office in the first quarter of 2015. There were no material developments in this regard in the first half of 2021. For more information, please refer to note 5.2 of the notes to the 2020 consolidated financial statements of the Alpiq Group.

Income statement of discontinued operations

The cash outflow in connection with indemnification and warranties to Bouygues Construction came to CHF 1 million in the first half of 2021 (previous year: CHF 13 million). According to the sales agreement, these payments are treated as an adjustment to the sale price. They are therefore contained in the statement of cash flows under “Net cash flows from investing activities of discontinued operations”.

11 Events after the reporting period

There were no reportable events after the reporting date of 30 June 2021.