Earnings

In spite of the historically low water supply, the earnings trend was quite excellent. The group result improved significantly and, parallel to this, the operating result deteriorated slightly by 2.9 % to € 321.6 million.

The much-reduced water supply from domestic rivers, above all, due to the heat waves in summer 2003, had a negative impact. In 2003, the water supply was down 24 percentage points on the level reported the previous year and down 13 percentage points on the long-term average. The shortfall had to be compensated through the enhanced utilization of the expensive storage and, above all, thermal power plants as well as through electricity purchases at high wholesale prices. As a result, the low water supply compared to the average volume recorded in the previous year depressed the result by approx. € 47 million. Lower grid revenue, attributable to a deterioration in income from transport contracts and declining transit revenue, also exerted pressure on the operating result.

The operating result was, however, positively influenced by the increase in European wholesale prices triggered by the extreme drought and blackouts in a number of European countries. This price increase was integrated into a number of supply contracts that were concluded in 2003. This positive effect was further enhanced through the continued implementation of strict cost management. Payroll expenses, depreciation and amortization and other operating expenses were once again reduced significantly. Owing to these compensating effects, the operating result of Verbund, which produces approx. 80 % of its electricity from hydropower, only deteriorated slightly in spite of the poor water supply.

Profit before tax was up significantly by 51.8 % to € 315.7 million. The positive development of the Swiss Franc and the Japanese Yen resulted in exchange gains which were, in part, realized. The group's successful debt clearing policy also had a very positive effect on the financial result. In fiscal 2003, debts in the amount of € 555.3 million were paid off without the need for refinancing.

Profit after tax, which climbed 33.5 % to € 217.6 million, also displayed a clearly positive trend. The effective tax rate came to 31.1 %. After factoring minority shares, the financial result also rose significantly by 29.2 % to € 200.1 million. Earnings per share rose to € 6.51.

In total, sales revenue increased by 19.6 % to € 2,478.1 million. Electricity sales, not including revenue from eco-electricity, were up 12.4 % at € 1,986.6 million. The increase in wholesale prices paved the way for substantial sales gains in Austria as well as in the core foreign markets Germany, Slovenia, Italy and France. The group contribution margin from electricity business as a whole did, however, deteriorate to € 709.3 million on account of the lower volume of own generation following the extreme drought.

Sales to domestic resellers increased significantly by 11.5 % to 24,051 GWh. A significantly larger volume of hydropower electricity was sold particulary to the partner companies of EnergieAllianz. The volumes supplied to other provincial companies were considerably lower. In addition to the increase in volumes, Verbund was able to pass the rise in European wholesale prices on the customers. This led to an increase of 8.7 % in the average contract prices. The price indicators for elecrticity sales prices in Austria rose significantly. The one-year forward prices for base-load supplies rose, for example, by 18 %, while the corresponding prices for peak-load electricity, which is more valuable to the electricity market, rose by 26 %.

Sales to domestic business customers who purchase in excess of 0.1 GWh/year also displayed a clear increase of 29.3 % to 4,960 GWh. In fiscal 2003, the focus moved from expanding the market share to enhancing profitability. New customers were only acquired subject to the secured contract prices being covered on the market.

Clear sales gains were once again reported with foreign customers. In Germany, where Verbund focuses, above all, on public utilities, sales were up 34.0 %. The business trend on the Slovenian market was also positive with sales improving significantly parallel to an increase in prices. The Slovenian electricity market is deregulated to a greater extent than the markets in the other acceding countries and therefore offers favorable market conditions for the Verbund group. In this market, business activities focus, above all, on large industrial areas. Higher sales revenue was also generated in France. Here, new customers were won through the advances that were made on the liberalization front.

Verbund’s electricity trading activities with foreign customers deteriorated by 10.0 % to 31,359 GWh. This can be attributed, among other things, to the increase in bookout agreements where the balancing of non-realized, equivalent buying and selling volumes was effected with the same business partner.

SALES REVENUE	Million €

Sales revenue from regulated grid operations fell by 10.9 % to € 231.4 million. The decline is mainly attributable to the partial inapplicability of the European tariff regulation for cross-border energy supplies and the high grid revenues in prior periods. The expiration of transport contracts also had an adverse effect on sales.

For the first time, sales revenue from the processing and administration of subsidies for eco-electricity came to € 208.4 million. The Verbund grid company is obliged under law to process and administer the subsidies for eco-electricity in Austria. On this basis, Verbund charges electricity traders and distribution grid operators regulated eco-electricity premiums which are subsequently passed on to the eco-electricity producers.

Expenses for electricity and grid purchases and fuels increased by 39.6 % to € 1,657.5 million.

The electricity procurement costs rose significantly by 43.2 % to € 1,476.9 million. The decrease in own generation from run-of-river plants as a result of the extreme drought necessitated the purchase of high volumes of electricity at increased European wholesale prices. In addition, expenses for ecoelectricity purchases were included in this item for the first time.

Fuel expenses also rose significantly by 16.2 % to € 115.7 million. This was mainly due to a marked increase in thermal production to compensate for the below-average generation from run-of-river plants. The increase in wholesale prices for electricity did, however, lead to higher contribution margins from thermal generation compared to the previous year.

Personnel expenditure was lowered slightly by 1.5 % to € 263.7 million.

In spite of a collective agreement increase of 2.1 %, expenditure for wages and salaries was reduced by 7.5 % to € 196.0 million. The number of employees was reduced by 147. The staff cuts were implemented in a socially compatible manner, primarily through early-retirement measures. Since the commencement of liberalization, the number of employees has been reduced by 35.6 %.

Expenses for severance payments and pensions did, however, rise by 21.7 % to € 67.7 million. A provision in the amount of € 34.4 million had to be set up for Early-retirement measures. This measure will, however lead to a reduction in expenses for pensions and severance payments in the coming years.

Other operating expenses, which had already been reduced to a low level, were trimmed by a further 12.4 % to € 144.9 million. In 2002, this item was burdened by one-off expenses for flood damage in the amount of € 14.0 million. In addition, savings – primarily in the administration area – were reported in the amount of € 6.5 million.

The financial result, which consists of the financing result, the result from participating interests and the result from long-term investments rose significantly by 95.2 % to € 5.9 million. This increase can essentially be attributed to the group’s successful debt-clearing policy.

The financing result improved by 71.3 % to € 35.6 million. Here, the strong free cash flow paved the way for a debt clearance in the amount of € 555.3 million largely without refinancing. The poor development of the Swiss Franc and the Japanese Yen compared to the Euro also had a positive effect. Realized and valuation-based exchange gains boosted the financial result in the amount of € 62.4 million. The positive exchange rate development was used to hedge bonds in Swiss Francs. In this way, Verbund was able to reduce the future volatility of the financial result.

Finally, the low interest rates led to a reduction of the interest burden from variable-interest loans. Within Verbund, 17.1 % of all borrowed funds are subject to variable interest rates.

The result from participating interests rose by € 16.5 million to € 22.2 million. This is primarily due to the divestment of the EVN AG shares for an amount in excess of the acquisition value.

The result from long-term investments, which essentially reflects the performance of the securities held to cover pension entitlements, was also quite positive. The depreciation of securities in 2002 on account of the weak capital markets was followed by an appreciation in the period under review. Consequently, the result from long-term investments improved from -€ 4.7 million to € 7.5 million.