Financial Review

Financial Review

The first half of 2022 was shaped by sharply rising energy prices. This continuing trend was attributable to geopolitical uncertainties in European gas supply on account of the war in Ukraine, unplanned downtimes of French nuclear power plants, Germany’s exit from nuclear power and coal as well as the rise in demand for energy in Asia. In this environment, Alpiq has achieved a very good operational result, taking advantage of its best placed flexible asset portfolio which was characterised by high availability. While Alpiq successfully exploited market volatilities and high prices in trading, these developments also resulted in significantly higher than usual financial security deposits having to be made at the energy exchanges for commercial activities. These deposits are merely temporary in nature and thus, the financial security deposits we had to make will be returned to us in full.

The extreme prices have raised liquidity and credit risks for all market participants. The forward price for Q4/2022 Swiss Base power as well as the forward price for Q4/2022 gas more than doubled between 31 December 2021 and 30 June 2022 from almost 210 EUR / MWh to around 460 EUR / MWh and from 65 EUR / MWh to around 150 EUR / MWh respectively. The forward prices for 2023 Swiss Base power even increased by around 175 % from around 115 EUR / MWh to around 315 EUR / MWh between 31 December 2021 and 30 June 2022 while gas prices for 2023 increased from around 40 EUR / MWh to around 110 EUR / MWh (up around 150 %) in the same period. In some of the surrounding countries, the electricity prices increased even more. In response to market developments, Alpiq implemented precautionary measures at an early stage to increase liquidity in the short term. On the one hand, these related to the energy business in order to increase internal financing, on the other, Alpiq arranged additional credit and guarantee lines with banks and increased its loans and bonds. The above-mentioned measures improved Alpiq’s financial headroom and its resilience to current market developments.

Although the operational result is above the previous year, the accounting treatment in accordance with IFRS of hedges of wholesale prices leads to earnings being shifted (accounting mismatch), which will have a positive effect on the result in subsequent financial years. Therefore, the IFRS result, which reflects the decrease in the value of the hedges at the reporting date but not yet the value increase of the future energy production and physical energy purchase contracts, does not adequately reflect the operational performance of Alpiq. The higher valuation of hedging and trading items also results in a considerable extension of the balance sheet and thus a lower equity ratio.

In order to allow transparent presentation and demarcation of the exceptional items, the consolidated income statement is presented as a pro forma statement. The commentary on the financial performance relates to an operational EBITDA view, in other words, to earnings development before exceptional items. The categories of exceptional items that were adjusted for this financial year are described in the “Alternative performance measures of Alpiq” section.

Alpiq Group: results of operations (before exceptional items)

In the first half of 2022, the Alpiq Group generated net revenue before exceptional items of CHF 6.9 billion (up CHF 4.2 billion on the previous year) and EBITDA of CHF 114 million (up CHF 31 million or plus 37 %). Energy trading successfully made use of the market opportunities and closed at a significantly higher level than the previous year, while Swiss power production provided steady contributions to earnings. By contrast, the result of the International business division was slightly negative.

Results of operations (before exceptional items)

Switzerland business division

At CHF 32 million, EBITDA of Swiss power production was on a par with the previous year, although the previous-year result included the additional compensation of CHF 10 million from Swissgrid for the sale of the Swiss high-voltage grid. The area of hydropower confirmed the previous-year result, with positive price effects compensating for higher costs in connection with the commissioning of Nant de Drance. In the area of nuclear power, costs decreased compared to the previous year, due, among other things, to lower necessary maintenance work at the Leibstadt nuclear power plant compared to the previous year. Production volumes were raised in the area of new renewable energies in Switzerland. With its climate-friendly power production, Alpiq is contributing to a better climate and strengthening the security of supply.

International business division

At CHF ‑2 million, EBITDA of international power production and sales & origination activity was down slightly by CHF 2 million compared to the previous year. Current market developments, which are strongly impacted by the war in Ukraine and the impact of related sanctions on the market as well as the resulting negative impact on supply chains, have significantly increased the credit risk at some counterparties, which had a negative impact on results of operations of the International business division. In France, Alpiq performed well and exceeded the previous-year results in the area of industrial customers. The gas-fired combined-cycle power plants in Italy and Hungary again contributed to system stability thanks to their high availability. Furthermore, the Spanish gas-fired combined-cycle power plant Plana del Vent was put back into operation at the beginning of 2022 following repair work.

Digital & Commerce business division

At CHF 128 million, EBITDA of energy trading was up compared to the previous year by CHF 64 million. Optimisation and marketing of the power plant portfolio in both Switzerland and internationally generated higher earnings than in the previous year. Alpiq made good use of the opportunities offered by a highly volatile market environment. However, as expected, the exceptionally good previous-year result from system services in Italy could not be repeated due to changes in the regulatory environment and higher availability of other flexible power plants in the region compared to the previous year.

Consolidated balance sheet and cash flow statement (under IFRS)

Total assets amounted to CHF 18.1 billion at the 30 June 2022 reporting date, compared to CHF 13.6 billion at the end of 2021. Non-current assets decreased by CHF 101 million and came to CHF 4.3 billion. This decrease was mainly driven by the decline in investments in partner power plants and other associates as well as defined benefit assets due to the increase in discount rate related to pension plans and reaching the asset ceiling. On the other hand, deferred income tax assets increased mainly due to additional recognised tax benefits on tax loss carryforwards. Amortisation, depreciation and impairment was partly offset by net investments in property, plant and equipment and intangible assets.

Current assets rose by CHF 4.7 billion to CHF 13.8 billion at 30 June 2022. The rise is primarily due to the higher replacement values of energy derivatives, mainly driven by the significant increase in energy prices and high volatility. For the same reason, negative replacement values increased at a similar rate. In addition, Alpiq had to make higher financial security deposits.

Equity stood at CHF 2.9 billion at 30 June 2022 and was thus CHF 0.7 billion below the previous year. The decrease chiefly stems from the lower net income and the effects from the remeasurement of defined benefit pension plans. The equity ratio decreased from 26.2 % to 15.7 %.

Current and non-current financial liabilities increased by CHF 331 million to CHF 1.9 billion at 30 June 2022. The main reason for this were new bonds issued in order to replace a bond and loans that fell due in the first half of 2022. Furthermore, short-term loans were taken out in order to finance the net working capital. Net debt increased from CHF 675 million to CHF 1.1 billion. The gearing ratio (net debt / EBITDA before exceptional items) rose from 2.2 at 31 December 2021 to 3.3 at 30 June 2022. Compared to 31 December 2021, non-current liabilities increased by CHF 71 million to CHF 1.5 billion. In this context, the increase in non-current bonds were partially offset by the decrease in provisions for onerous contracts.

Net cash flows from operating activities declined from CHF 172 million in the first half of 2021 to CHF ‑416 million. This decrease is driven by higher financial security deposits and lower earnings before tax. Net cash flows from investing activities increased on the previous year, mainly driven by an increase in proceeds from disposals of subsidiaries from the additional compensation received for the transfer of the Swiss high-voltage grid. Net cash flows from financing activities were up on the previous year due to the additional financial liabilities raised to increase liquidity. Cash and cash equivalents decreased by CHF 100 million to CHF 763 million.

Outlook

The sword of Damocles of gas supply being cut continues to hang over Europe and is pushing prices upwards. For the coming winter, there is the threat of a gas shortage and, at the same time, an electricity shortage because a large number of nuclear power plants in France have been shut down. Given the dynamic market development, Alpiq expects further growth for the full year 2022 at the level of adjusted EBITDA. However, due to the exceptionally strong fluctuations in the fair value of Alpiq’s commercial portfolio in conjunction with potentially negative decommissioning and waste disposal funds (STENFO) performance, Alpiq cannot assume with certainty that it will achieve a positive net result (IFRS) by the end of the year.

Alternative performance measures of Alpiq

To measure and present its operating performance, Alpiq also uses alternative performance measures through to the level of “Earnings before interest, tax, depreciation and amortisation (EBITDA)”. Alpiq makes adjustments to the IFRS results for exceptional items which Alpiq does not consider part of results of operations.

These performance measures do not have a standardised definition in IFRS. This can therefore limit comparability with such measures as defined by other companies. These performance measures are presented in a pro forma statement in order to give investors a deeper understanding of how Alpiq’s management measures the performance of the Group. However, they are no substitute for IFRS performance measures. Starting from 1 January 2022, Alpiq no longer presents any exceptional items from the categories “Effects from business disposals” or “Restructuring costs and litigation” in its internal or external reporting in order to simplify reporting. The previous-year figures have been adjusted for comparative purposes, causing exceptional items to decrease by CHF 12 million. Accordingly, EBITDA before exceptional items for the first half of 2021 increased by CHF 12 million. Alpiq still does not use any alternative performance measures in the balance sheet and statement of cash flows.

Consolidated income statement (pro forma statement before and after exceptional items)

Overview of exceptional items

Alpiq has defined the following categories of exceptional items:

Fair value changes (accounting mismatch)

Negative fair value changes of energy derivatives entered into to hedge future power production as well as energy procurement and energy delivery contracts do not reflect operating performance because they are economically linked with the changes in value of the hedged transactions. Rising forward prices cause the future production volumes and power purchase agreements to increase in value and the corresponding hedges to lose value. According to IFRS guidelines, the fair value changes of financial hedges between the last and the current balance sheet date have to be recognised in the reporting year. As the future production volumes and the power purchase agreements are not measured at fair value and positive changes in value therefore cannot be recognised in the reporting year, this results in an accounting mismatch.

Accounting mismatch and expected reversals (based on energy prices as of 30 June 2022)

Development of decommissioning and waste disposal funds

The operating companies of Switzerland’s nuclear power plants are required to make payments into the decommissioning fund and the waste disposal fund to ensure that decommissioning and waste disposal activities are funded. The investments of these two funds are exposed to market fluctuations and changes in estimates, which cannot be influenced by Alpiq but which do influence electricity procurement costs. The difference between the return actually generated by the funds and the return budgeted by the nuclear power plants of 2.75 % is classified and recorded as an exceptional item.

Onerous contracts

Effects in connection with the future procurement of energy from the Nant de Drance pumped storage power plant and a contract abroad that was onerous before 30 June 2021 relate to effects that are attributable to changes in expectations regarding future developments. Management does not therefore take these into account for the assessment of Alpiq’s operating performance.