6 Financial risk management

The Alpiq Group’s operating activities are exposed to strategic, operational and financial 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.

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 2022, the Group reports an equity ratio of 15.7 % (31 December 2021: 26.2 %).

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. Due to developments on the energy markets and the increased counterparty risk as a result, Alpiq, within the scope of its external financing, has agreed on additional lines of credit, taken out loans and issued bonds of CHF 450 million. The ratio of net debt to EBITDA before exceptional items plays a decisive role in capital management. This is calculated as follows:

CHF million

30 Jun 2022

31 Dec 2021

Non-current financial liabilities

996

627

Current financial liabilities

908

946

Financial liabilities

1,904

1,573

Current term deposits

11

35

Cash and cash equivalents

763

863

Financial assets (liquidity)

774

898

Net debt

1,130

675

EBITDA before exceptional items 1 / 2

343

312

Net debt / EBITDA before exceptional items

3.3

2.2

1 Rolling EBITDA before exceptional items of the last 12 months

2 The previous-year figure has been adjusted due to the reduction in number of categories of exceptional items (see note 2 for explanations). As a result, the Alpiq Group’s EBITDA before exceptional items for 2021 increased by CHF 10 million from CHF 302 million to CHF 312 million.

The Alpiq Group has the following credit lines from banks:

CHF million

30 Jun 2022

31 Dec 2021

Non-earmarked credit lines committed by banks and financial institutions

750

503

Of which, utilised

490

331

Of which, still available

260

172

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 issued or received if agreed in the contract and based on the net obligation. This is done to hedge the risk that one party does not fulfil its part of the deal and may default on the contractual obligations. The amounts to be provided change based on the net obligation that is calculated daily based on the price movements. 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:

 

 

 

 

 

 

30 Jun 2022

31 Dec 2021

CHF million

Collateral received

Collateral issued

Collateral received

Collateral issued

Cash collateral 1

133

941

318

101

Guarantees 2

142

220

323

72

Total

275

1,161

641

173

1 Contained under “Receivables” or “Other current liabilities” respectively

2 Guarantees to third parties in favour of third parties are presented in note 9.

Due to the volatile and significant increase in energy prices since the first half of 2021, the replacement values of energy derivatives as well as receivables and thus the credit risk associated with several counterparties in various countries increased considerably. Taking into account the credit risk, the corresponding energy derivatives were reclassified to Level 3 energy derivatives in the first half of 2021, see note 7. Moreover, impairment losses on receivables amounted to CHF 40 million in the first half of 2022 (first half of 2021: CHF 66 million).

On the reporting date, there were the following concentrations of risk with three counterparties without concrete indications of a default risk:

CHF million

30 Jun 2022

31 Dec 2021

Counterparty classified in risk category BBB+

 

 

Positive replacement values for energy derivatives

1,363

Counterparty classified in risk category BBB

 

 

Positive replacement values for energy derivatives

1,414

851

Trade receivables

48

96

Counterparty classified in risk category BB-

 

 

Positive replacement values for energy derivatives

1,486

657

Trade receivables

 

1

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 assure both parties’ performance. Consequently, Alpiq has to provide or can demand significant collateral in the form of liquidity or bank guarantees due to energy price movements and depending on the value of net obligation. In addition, they 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, by maintaining sufficient liquid resources and by obtaining committed credit lines from banks (see also note 11). The role of liquidity management 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. These fluctuations can 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 only be closed out on very unfavourable terms due to a lack of market bids. Future own use energy transactions are normally not reported as financial instruments. 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 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.

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