In spite of a difficult market environment overshadowed by further price erosion, the Axpo Group maintained its earnings strength and posted a good operating result for the 2012/13 financial year. This performance was supported by the very encouraging international energy trading business, the savings achieved by implementing a cost-cutting programme, and the tight management of investments. At CHF 312 million, the operating result (EBIT) was almost on a par with the previous year (CHF 329 million), while the net profit amounted to CHF 213 million (previous year: CHF 282 million). The result was once again strongly influenced by exceptional factors. At CHF 7,020 million, the Axpo Group's total revenues were down around 4% year-on-year (previous year: CHF 7,346 million).

Given the persistent economic and regulatory challenges, Axpo will reduce its costs further, continue to keep a tight rein on investments, and exploit new business areas and earnings potential. The Axpo Verbund will celebrate its centenary in 2014.

The economic and regulatory environment remains difficult for energy suppliers. The trend of eroding energy prices continued in the reporting year (1 October 2012 - 30 September 2013). Falling energy demand in the face of a sluggish economy in Europe, low prices for CO2 certificates and the increasing feed-in of subsidized energy resulted in persistently low wholesale prices. Wholesale prices dropped sharply by around one-quarter in the past year and are now sometimes lower than the cost of production for Axpo's power plant fleet.

In this challenging environment, the Business Area Trading & Sales, which was restructured in 2012, achieved an excellent result in the international energy trading business. At CHF 276 million, the trading result almost doubled year-on-year (previous year: CHF 140 million). Individual energy contracts were signed with existing and new customers across Europe and the origination business (tailor-made energy services for wholesale customers) was expanded further. This applies in particular to wind energy, where Axpo is already one of the largest providers of services to onshore wind farms in Europe. The good result underlines the strategic role played by energy trading as an important source of earnings for the Axpo Group.

In the supply area of North-eastern and Central Switzerland on the other hand, falling consumption, supplier changes and contracting prices led to revenue shortfalls. The low prices in particular encouraged more customers to switch from a universal service based on production costs to the free market.

The Axpo Group's profit for the 2012/13 financial year was once again strongly influenced by exceptional factors. Judgements in regulatory court cases translated into positive one-time effects of CHF 187 million. These concerned the reporting of grid costs by CKW as well as the costs for system services charged to the power plants in 2009 and 2010 and resulted in reimbursements and the reversal of provisions. The measures adopted by the PKE Pension Fund to secure its long-term equilibrium also led to a one-off decrease in pension costs of CHF 64 million. In contrast, the annual impairment review of the investments, power plant fleet and supply contracts had an adverse effect on the financial statements with a negative valuation adjustment of CHF 760 million (previous year: minus CHF 264 million). This clearly shows the impact of market distortions, in particular the subsidy-driven collapse of prices on the energy markets which is dampening the earnings prospects of the unsubsidized power plants in Switzerland.

In comparison with total revenues, the costs for procurement, grid utilization and goods dropped disproportionately by 6% to CHF 4,791 million. A change in the accounting policy for hedging transactions – gains on these transactions are now recognized net – contributed to this reduction. Production output for our own power plant fleet was down by 10%, primarily because of the strongly reduced operating times for the Italian gas-fired combined cycle plants which, in view of current price trends, are increasingly used for producing control energy rather than base load energy. The non-energy or grid-related operating costs fell by CHF 72 million, mainly as a result of the abovementioned reduction in pension costs.

The financial result declined by CHF 89 million year-on-year to minus CHF 113 million. Among other things, the gain on the sale of shares in the Trans Adriatic Pipeline (TAP) project company of CHF 35 million was offset by the reduced capital appreciation of the decommissioning and waste disposal fund for the Beznau nuclear power plant of CHF 87 million (previous year: CHF 184 million) and falling prices for financial and other investments. At CHF 750 million, the cash flow from operating activities was on a par with the previous year (CHF 749 million).

The average number of people employed by the Axpo Group dropped by 13 to 4,355 full-time equivalents. The reduction of the workforce in Switzerland by 62 positions was compensated by an increase in foreign jobs to support the expansion of the trading and origination activities.

The Board of Directors will propose to the General Meeting of 14 March 2014 to pay the same dividend as in the previous year of CHF 2.00 per share, which equals CHF 74 million.

In the reporting year, investment projects were reviewed even more critically with regard to their future profitability and revised in view of the uncertain environment. At CHF 182 million, the cash flow from investment activities was well below the previous year's level of CHF 226 million. Funding was approved, among others, for the autonomous emergency power supply for the Beznau nuclear power plant, the building of the new hydropower plant at Rüchlig in Aarau, and the acquisition of two existing wind farms in Northern France. Axpo also invested in connecting the Linth-Limmern power plant to the 380 kV grid and maintaining and expanding its grid infrastructure.

Axpo will continue to take a very cautious approach to investments in the future. Investment projects are reviewed carefully and downsized compared to the original plan whenever possible and strategically advisable. The available funds should primarily be invested in replacement projects and profitable transactions in renewable energies and services. Axpo has been investing in renewable energies on a large scale for a long time. The first wind turbines of the "Global Tech 1" offshore wind farm in the German North Sea came on line in autumn 2013. All turbines should be operational by autumn 2014, when the wind farm will generate around 1.4 billion kWh of electricity per year. Axpo owns 24.1% of this project. Construction work on the geothermal project in Taufkirchen in Bavaria, of which Axpo owns 35%, will start in January 2014 and the plant should be commissioned in summer 2014. Axpo's subsidiary CKW built the biggest wind farm in Central Switzerland. The plant in Entlebuch has been operational since autumn, and is expected to produce enough electricity every year to cover the consumption of 600 households. Axpo would like to expand its position as the largest Swiss producer of energy from renewable sources even further.

Axpo is pressing ahead with its current major projects. Work on Linthal 2015 is proceeding according to plan. All future waterways have been completely cut, the work on the interior of the generator gallery has progressed quite far, and around two-thirds of the kilometre-long dam wall has risen from the Muttenalp. According to plan, the first machine group of the new 1,000 megawatt Limmern pumped-storage plant will come on line at the end of 2015, with the next three to follow during the course of 2016.

At the end of June 2013, the Shah Deniz consortium selected the Trans Adriatic Pipeline TAP as the export route for natural gas from the Shah Deniz II gas field to Europe, and on 17 December 2013 the consortium took the final investment decision. Axpo is developing the natural gas pipeline together with international partners and currently owns 5% of the project. Axpo plans to route its long-term natural gas contracts through TAP. The first gas should start flowing in 2019. The pipeline will make an important contribution towards diversifying Axpo's portfolio and securing the supply of natural gas to Europe.

Total energy sales were up 18% year-on-year to 87.5 billion kWh. Gas sales firmed substantially, primarily because unfavourable market conditions led to a severe reduction in the operating times of the gas-fired combined cycle power plants in Italy. As a result, considerably more gas was sold on the market (17.0 billion kWh compared to 6.1 billion kWh in the previous year). In contrast, energy sales in the supply areas of North-eastern and Central Switzerland were down 1.9 billion kWh or 9% on the previous year to 19.2 billion kWh. This decline is mainly explained by the fact that many of the end customers supplied by the cantonal utilities made use of the opportunity to switch from a universal service to the free market.

The production of hydropower (8.5 billion kWh) was down 7% on the high levels of the previous year while nuclear energy production declined by 1% to 22.2 billion kWh. This was compensated by the new energies, where the commissioning of the WinBis wind farm in Italy and higher output by the La Penuca and Terravent plants co-owned by Axpo led to a substantial increase in production of 40% to 0.4 billion kWh.

Axpo expects wholesale prices in Europe to remain low while the political and regulatory uncertain-ties are likely to remain considerable. Massive subsidies for some few energy carriers and low CO2 prices have severely distorted the market and there are no signs of a trend reversal in the coming years. Axpo will therefore prepare itself for permanently low prices on the international markets by cutting its costs further, revising its investment projects even more consistently, and exploiting sectors that promise new earnings potential.

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