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 2022 have been prepared in accordance with International Accounting Standard IAS 34 Interim Financial Reporting on a going concern basis (see note 11). 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 2021 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. authorised the interim consolidated financial statements at 30 June 2022 for issue on 24 August 2022.

Adoption of new and revised accounting standards

At 1 January 2022, the amendments to IAS 37 on the cost of fulfilling onerous contracts entered into force and were applied by the Alpiq Group. These amendments had no significant 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:

Correction of errors

As described in note 1.4 of the notes to the Financial Report 2021, Alpiq found errors in the Financial Report 2020 and in the Interim Report 2021. Due to the increase in electricity prices, own use contracts for the physical sale of electricity became loss making. Although Alpiq had hedged these contracts from an economic perspective, this in part involved financial contracts. As Alpiq does not apply hedge accounting, own use contracts and associated financial hedges have to be evaluated and presented separately. Provisions for onerous own use contracts in the International and Digital & Commerce business divisions, which had been hedged using financial instruments, were erroneously understated and the net income was overstated.

For the period ended 30 June 2021, the income statement and the statement of changes in equity were adjusted. As a result, the equity ratio decreased from 42.1 % to 41.6 % at 30 June 2021. The correction of this error did not impact the gearing ratio (net debt / EBITDA) before exceptional items.

The adjustments to the comparative information from 2021 are presented below:

Changes to the interim consolidated income statement 2021

Changes to the consolidated balance sheet

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 Switzerland, 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 financial steering process within Alpiq will be set up along the value chain sourcing, trading, and supply. This will be implemented for the annual report 2023.

The internal organisational and management structure was adjusted in the first half of 2022. As a result, the international sales & origination business units were moved from Digital & Commerce to International, the Swiss sales & origination business unit from Digital & Commerce to Switzerland and the Swiss RES business units from International to Switzerland. Furthermore, the number of categories of exceptional items for reconciling the IFRS results to the alternative performance measures has been reduced so as to simplify the internal reporting. For more information, please refer to the explanations in the “Alternative performance measures of Alpiq” section of the Financial Review. Previous-year segment reporting for the first half of 2021 has been adjusted for comparability. In addition, the segment information for the period ended 30 June 2021 was adjusted due to an error. For more information, please refer to note 1. As a result of all these effects, the Alpiq Group’s EBITDA before exceptional items for the first half of 2021 increased by CHF 3 million from CHF 80 million to CHF 83 million.

• The Switzerland business division comprises the production of electricity from Swiss hydropower, nuclear power, wind power and industrial photovoltaic plants, the operation of power plants and the development of several wind farm projects in Switzerland. The 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. Moreover, the business division manages shares in HYDRO Exploitation SA and Kernkraftwerk-Beteiligungsgesellschaft AG (KBG).

• The 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 located outside of Switzerland. 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. In addition, International includes direct marketing and energy management for industrial and business customers to help these meet their cost efficiency and sustainability goals always with a view to increasing customer benefits and creating value.

• 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. It also covers trading activities with standardised and structured products for electricity and gas as well as emission allowances and certificates. The business division will be renamed Trading in the second half of 2022 following the transfer of the support functions D&C Technology and Operations to the Group Centre.

The business divisions’ results are carried over to the Alpiq Group’s consolidated figures by including the units with no market operations (Group Centre & other companies), Group consolidation effects as well as other reconciliation items presented in a separate column. The latter comprises shifts of CHF 6 million (previous year: CHF 6 million) between external net revenue and other income due to the difference in account structures between internal and external reporting. This column also contains foreign currency effects from using other average exchange rates in management reporting than pursuant to IFRS. 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 ^sthalf-year 2022: Information by business division

1 ^sthalf-year 2021: 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).

The internal organisational and management structure was adjusted in the first half of 2022, see note 2. The disaggregation of net revenue for the first half of 2021 has been adjusted for comparability.

1 ^sthalf-year 2022: Disaggregation of net revenue

1 ^sthalf-year 2021: Disaggregation of net revenue (adjusted)

4 Impairment losses and provisions

1 ^st half-year 2022: Allocation of impairment losses and provisions

The provision for onerous contracts covers the present value of the existing onerous contracts and amounted to CHF 537 million at the beginning of the year. Of this, CHF 389 million related to the onerous contract for the future procurement of energy from the Nant de Drance pumped storage power plant. The rest related to own-use contracts, which became onerous as a result of the sharp rise in electricity and gas prices in the past year. Although Alpiq hedges these contracts from an economic perspective, this in part involves financial contracts. As Alpiq does not use hedge accounting, own use contracts and associated financial hedges have to be evaluated and presented separately. The net increase of provisions for such own-use contracts amounted to CHF 226 million in the first half of 2022. The provision for Nant de Drance was reversed in full at 30 June 2022, resulting in a positive effect on earnings of CHF 399 million. The section below explains the background to the reversal.

The production of electricity from Swiss hydropower and nuclear power is hedged, optimised and marketed within Alpiq together for all plants as a portfolio. The plants of the Switzerland business division therefore constitute a cash-generating unit (CGU). With the full commercial commissioning of Nant de Drance (NdD) at 1 July 2022, the energy produced by NdD is from now on being hedged, optimised and marketed together with the other production facilities in the portfolio of the Production Switzerland CGU. This means that NdD will be part of the Production Switzerland CGU from 1 July 2022 and will no longer be presented as a separate valuation unit as in the past, as its expected cash flows will no longer be independent of the cash flows of the Production Switzerland CGU. The combined expected economic benefits exceed the expected cost. Therefore, the provision for Nant de Drance was released in full.

The integration of Nant de Drance into the Production Switzerland CGU represents a triggering event. It was therefore necessary to perform an impairment test for the Production Switzerland CGU at the reporting date. This showed that the integration of NdD into the Production Switzerland CGU does not lead to an impairment.

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 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.

5 Earnings per share

The next interest payment on the publicly placed hybrid bond is due on 15 November 2022. The interest after tax attributable to the first half of 2022 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, 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:

The Alpiq Group has the following credit lines from banks:

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:

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:

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.

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 2022 and during the 2021 financial year, there were no reclassifications between Levels 1 and 2. The reclassification from Level 2 to Level 3 in 2021 mentioned below relates to energy derivatives with a significantly increased credit risk (for more information, refer to the “Credit risk” section in note 6). The reclassification from Level 2 to Level 3 in 2022 relates to energy derivatives measured on the basis of inputs that are no longer observable in an active market due to decreased market activity. The reclassification from Level 3 to Level 2 relates to longer-term energy derivatives which are now measured on the basis of observable market prices as market liquidity increases. 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 (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. Normally, the effect of credit risk on fair values is not material. Due to the persistently high and volatile energy prices, the replacement values of energy derivatives and thus the credit risk for several counterparties in various countries remain high. At 30 June 2022, the fair value of the derivatives that are classified as Level 3 due to a significantly increased credit risk is not material. More information can be found in the “Credit risk” section of note 6.

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. 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 8 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 6.

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 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 69 million, translated CHF 69 million (31 December 2021: EUR 57 million, translated CHF 59 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. The full funds are therefore not freely available to the Alpiq Group.

9 Contingent liabilities and guarantees

ANAF’s tax audit at Alpiq Energy SE

With regard to the ongoing legal proceedings in connection with the tax audit by the Romanian tax authority ANAF (Agenţia Naţională de Administrare Fiscală) at the Bucharest branch of Alpiq Energy SE, Prague, Alpiq received the written reasons for the decision dated 19 October 2021 from the Romanian administrative court of first instance on 20 May 2022. In the ruling the competent Romanian administrative court agreed with the reasoning of Alpiq Energy SE and revoked the decision of ANAF as unlawful. At the end of May 2022, ANAF contested the ruling by filing an appeal to the Romanian second instance administrative court. The first hearing in such appeal proceedings is expected to take place in 2023. For more information, please refer to note 4.8 of the notes to the 2021 consolidated financial statements of the Alpiq Group.

Appraisal claims against Alpiq Holding Ltd.

The appraisal claims filed in autumn 2021 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) seek a review of the compensation of CHF 70 per share approved by the Annual General Meetings of Alpha 2020 AG and Alpiq Holding AG and paid by Schweizer Kraftwerksbeteiligungs-AG (SKBAG) in the squeeze-out merger in 2020. There were no material developments in the first half of 2022. A first-instance decision is not expected until the second half of 2023.

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 2021. 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

The adjustment of the valuation of the transfer of the Swiss high-voltage grid was finalised for Alpiq in the second half of 2021 and the additional sales proceeds and interest components were recorded in the income statement. For more information, please refer to note 5.1 of the notes to the 2021 consolidated financial statements of the Alpiq Group.

In this context, additional sales proceeds of CHF 10 million were recorded under “Other operating income” and interest components of CHF 5 million were already recognised as interest income in the first half of 2021. Cash inflows from the additional sales proceeds amounted to CHF 31 million in the first half of 2022 (previous year: CHF 9 million) and are recorded under “Disposal of subsidiaries” in the statement of cash flows. Cash inflows from the interest components amounted to CHF 4 million in the first half of 2022 (previous year: CHF 4 million) and are recorded under “Interest received” in the statement of cash flows. The cash inflow of the last interest component part in the amount of CHF 1 million was received on 11 July 2022. Accordingly, all sales proceeds and interest components have been collected in full and for Alpiq the transaction to transfer the Swiss high-voltage grid is thus completed.

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 Energies & Services GmbH (“Kraftanlagen”) resulting from the proceedings started by the state prosecutor of Munich I and the German Federal Cartel Office in the first quarter of 2015. The main hearing at the Higher Regional Court of Düsseldorf started in the first half of 2022 and is expected to be finalized in the third quarter of 2022. Alpiq expects a ruling by the end of 2022. For more information, please refer to note 5.1 of the notes to the 2021 consolidated financial statements of the Alpiq Group.

Income statement of discontinued operations

The cash outflow from bearing the costs in connection with the aforementioned proceedings amounted to CHF 0 million in the first half of 2022 (previous year: CHF 1 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 Liquidity situation and ability to continue as a going concern

In the first half of 2022, Alpiq continued implementing extensive measures to increase its liquidity. On the one hand, these related to the energy business in order to increase short-term internal financing, on the other, Alpiq arranged additional credit and guarantee lines with banks. Furthermore, Alpiq was able to issue two new bonds in the total amount of CHF 450 million. These measures improved Alpiq's financial headroom at 30 June 2022 and its resilience to future market developments.

Alpiq's financial headroom comprises the available liquidity and the committed credit lines (see note 6). The necessary financial headroom is determined on an ongoing basis using scenario calculations by Alpiq's Risk Management. Furthermore, Alpiq closely monitors its compliance with financial covenants. Based on this, additional measures are decided when necessary. At the reporting date, there were current financial liabilities of CHF 908 million that have to be refinanced over the next 12 months.

The war in the Ukraine and sanctions imposed due to it are having far-reaching effects on the macroeconomic environment of many industries and thus also on Alpiq. The market and price situation continues to be difficult to predict. The volatile and high energy prices are causing fluctuations in the financial security deposits that have to be made at the energy exchanges. The counterparty risk of Alpiq has increased because the counterparties could run into financial difficulties. This could impact the financial position, financial performance and cash flows of Alpiq in 2022. Alpiq identifies the risks, carefully observes developments and takes appropriate measures in order to reduce the risks as far as possible.

There is still fundamental uncertainty regarding the further development of market prices. With all the measures already implemented and still ongoing in the area of internal and external financing, Alpiq considers its liquidity and ability to continue as a going concern to be secure.

12 Events after the reporting period

There were no reportable events after the reporting date of 30 June 2022.