Report of the managing board

2003 was a very successful year for Verbund and also for you, the co-owner, in spite of the turbulent developments within the sector over the last twelve months. The success enjoyed by our company proves that our strategy of concentrating on electricity – our core business area –, focusing on environmentally- friendly hydropower, enhancing the internationalization of our business activities and pushing ahead with our restructuring measures, is the correct answer to the liberalization of the electricity market. Moreover, we are convinced that the further development of the regulatory environment, the power failures in parts of Europe and the clear commitment to climate protection will lead to a complete realignment of the European electricity sector. In the past, Verbund has, however, often demonstrated that it is eager to take on new challenges and that it is very capable of fully exploiting new business opportunities.

The primary issue at a European level was undoubtedly that of security of supply. The spectacular power failures in several European countries have made one thing very clear: the demand for electricity is growing steadily and, consequently, greater investment in power plants and grids is critical to guarantee security of supply both now and in the future. The need to enhance investment activities would appear even more urgent in the wake of the massive drop in electricity prices since the commencement of liberalization. This price deterioration has actually induced many electricity suppliers to reduce their investment activities. In an effort to reverse this trend, the European Commission put together an extensive energy package. This package equips EU countries with a set of powers under which electricity suppliers can be obligated to generate electricity in line with demand and eliminate line bottlenecks. In addition, the member states are urged to motivate the electricity companies into making greater investments by offering financial incentives. This provided Verbund with the necessary tailwind to build new power plants and close the gaps in the domestic 380 kV line.

The EU’s clear commitment to promoting a liberated European electricity market can be seen as another significant development. This commitment is clearly reflected in the new provisions introduced by the European Commission which are designed to further accelerate the liberalization process. In line with the intention of these provisions, all non-household customers will be able to freely select their electricity supplier from 01 July 2004. In addition, the entire European electricity market will be fully liberated as of 01 July 2007. In other words: the option of freely selecting a supplier – an option that is currently enjoyed by electricity consumers in Great Britain, Scandinavia, Germany, Austria, Spain and Denmark – will then apply EU-wide. Full liberalization will eliminate existing market distortions and provide all electricity suppliers with a common starting base. This opens up new opportunities for Verbund. Today, foreign markets already account for over 50 % of our electricity sales.

The EU was also committed to climate protection. Accordingly, a decision was taken to implement the standards outlined in the Kyoto Protocol pertaining to the reduction of greenhouse gas worldwide before these came into force. An accurate appraisal of the extent to which Verbund will be affected by this development cannot be provided until such time as the Emission Certificate Act has been adopted and the national allocation plans become available. Experts do, in any case, believe that this will lead to significant cost increases for the electricity supply companies and ultimately to increased electricity prices. Verbund, however, produces most of its electricity from hydropower and, as a result, greenhouse gas emissions are minimal. Consequently, the company will profit greatly from the growing difference between falling generation costs and growing wholesale prices. It is, however, possible that greater burdens will have to be contended with in the area of thermal generation.

The above-average water volumes in the Austrian rivers over the previous years sank to a historically low level in 2003. In the first quarter, the water supply was quite excellent but, over the last nine months, volumes deteriorated continuously to a mere 87 % of the average annual volume. As a result, less low-priced hydropower electricity reached the market than in the previous years. The production shortfall was, in part, compensated by increased storage and, above all, thermal generation but the significant volumes still had to be purchased on international procurement markets at higher prices. This, unfortunately, had a very negative impact on the result.

Verbund did, however, profit greatly from the positive development of the wholesale prices. Here, the short-term spot market prices and the medium-term forward prices increased significantly. The higher spot market prices are attributable to the shortage of electricity as a result of the hot summer months. The forward prices were positively influenced, above all, by the dwindling reserve capacities in Europe, the raising of the prices for primary energy sources and the additional costs that are expected following the implementation of the climate protection measures. Verbund has already profited, to some extent, from the high price level and will greatly profit from this price trend in the coming years.

Last but not least, the consolidation of the domestic market was promoted by the Austrian Electricity Solution which was approved by the cartel office in June 2003. A number of conditions do, however, still have to be met. The Austrian Electricity Solution would put Verbund among the Top Ten electricity suppliers in Europe and would also create synergies in the amount of € 40 million per annum. Prior to the implementation of the Austrian Electricity Solution, the partner companies of EnergieAllianz are already purchasing larger volumes of clean hydropower electricity from Verbund.

In summary, it can be said that our efforts to achieve a good result were successful in spite of the significant drop in generation. Sales were up 19.6 % at € 2,478.1 million. This increase can be attributed, above all, to the successful expansion of sales activities in Austria and the more recent successes in the core European markets. Operating profit deteriorated slightly by 2.9 % to € 321.6 million. This was mainly due to the poorer water supply (burden in the amount of € 47 million on the basis of the average water supply) and additional expenditures for restructuring measures in 2004 (burden in the amount of € 34 million for early retirement). The increase in wholesale prices had a positive effect.

The ongoing debt-clearing program – in 2003, debts totaling € 555.3 million were paid off – paved the way for a 29.2 % improvement in the consolidated result to € 200.1 million. This translates to earnings per share of € 6.51 compared to € 5.03 in 2002. Net gearing was also improved significantly to 160.5 %. These figures confirm in an impressive manner that the group has adopted the correct strategy.

We believe that the shareholders of Verbundgesellschaft should also benefit from this success. We recommend therefore to the General Meeting, without ignoring the goal of further clearing the group’s debt, that the dividend be increased by 42.9 % from € 1.40 to € 2.00. This increase includes a bonus of € 0.20/share. As a result, the payout ratio amounts to 31.1 %; the dividend yield increased from 1.7 % to 2.2 %.

In addition to increasing the dividend, the shareholders’ equity was increased significantly. A contribution in the amount of € 174.6 million, essentially from retained earnings, increased the shareholders’ equity to € 1,437.6. Yet again, the capital structure was improved and the build-up of internal values emphasized.

Dear Shareholder! We are convinced that this year’s balance sheet paints a very clear picture and clearly documents that we have successfully steered our group through some turbulent times. Nevertheless, a company stands or falls with its employees. Their ability, their knowledge and their commitment made an essential contribution to this success. We would therefore like to take this opportunity to thank our staff whole-heartedly.

Dipl.-Ing. Hans Haider	Dr. Michael Pistauer	Dr. Johann Sereinig