Financial instruments

The existing group's primary financial instruments primarily consist of long-term investments such as securities, loans and participating interests, trade receivables, cash in banks, public and non-public financial liabilities and trade payables.

The derivative financial instruments regarding financial activities can be broken down as follows and are recorded in the following balance-sheet items:

All of the derivative transactions listed are used exclusively for hedging against existing foreign-currency and interest-rate risks. Hedge accounting in accordance with IAS 39 was used for a number of the transactions listed. The value fluctuations of these hedging transactions are offset by the value fluctuations of hedged transactions. The value fluctuations of the transactions for which hedge accounting was not carried out are stated in the income statement.

The notional amount comprises the reference basis of those derivative instruments that are open at the balance sheet date. The actual cash flows are merely a fraction of these values.

In the year under review, an existing derivative transaction (cross-currency interest-rate swap) was reversed prematurely against a payment of € 17.0 million. In this transaction a valuation provision was used, income statement effective, in the amount of € 21.8 million.

The amounts stated on the asset side also represent the maximum credit risk and risk of default. As part of the group-wide risk management system, the counterparty credit risk in electricity and grid business as well as in financial activities is assessed and monitored in a uniform manner across the group. Transactions, apart from minor amounts, are only entered into with customers with a sufficient credit rating either following an internal credit check or on the basis of an external investment grade rating of an international rating agency (Moody’s, Standard & Poor’s). For this purpose, each counterparty is assigned an individual limit which will be monitored across the group. Money market investments are also only concluded with financial partners that have an appropriate credit rating. All counterparty risks and the customer structure portfolio are monitored on the basis of default likelihoods which are calculated by international rating agencies. If the credit assessment or rating does not meet the requirements, transactions will be entered into only under the precondition of sufficient security (e.g., prepayments, bank guarantees, letters of comfort). These counterparty requirements serve to reduce default risks. Netting agreements are concluded to further minimize the risk level. Counterparty risks are not insured.

Verbund considers fluctuations in interest rates a substantial cash flow risk. Under the rules of risk management, only a maximum of 25 % of the financial obligations may be subject to a floating rate. As of 31 December 2003, the share of financial obligations where Verbund has a corresponding interest-rate risk was approx. 17.1 %.

For a detailed description of the financial obligations including fair values, please refer to the table under (25). The average remaining maturity of the overall portfolio excluding money-market positions amounts to 4.1 years. With respect to variable loans, an interest-rate swap exists for hedging future variable payment flows (variable to fixed-rate). This derivative instrument was classified as a "cash flow hedge". The valuation in the balance sheet is based on the fair value. Value adjustments are included directly in shareholders' equity. At the balance sheet date, the fair value of this interest-rate swap amounted to € 1.6 million (previous year: minus € 4.0 million).

Additional interest-rate swaps exist in connection with the pre-financing of building-cost contributions on the account of the Republic of Austria as well as in connection with cross border leasing transactions. These interest-rate swaps are classified as "fair value hedges". The fair value of these derivative transactions forms, together with related securities, loans and receivables, a micro-valuation unit in each case, which corresponds exactly to the recorded fair value of the financial obligation.

There is no exchange risk on the asset side, because supplies are almost exclusively invoiced in Euro. The same is essentially true of the other primary financial instruments.

Since the assets (long-term investments, loans) and liabilities in connection with cross border leasing transactions are exclusively quoted in USD and since corresponding hedging transactions have been concluded, there is no exchange risk.

The situation on the liabilities side is different. Financing in a foreign currency is of considerable importance to Verbund due to the positive interest differential compared to financing in Euro. In this context, the option to hedge against exchange risk is not exercised, or only rarely. In the past few years and in the period under review, this strategy, despite taking into consideration unfavorable rate developments, resulted in considerable interest advantages and significantly improved actual costs compared to conventional financing.

Under the rules of risk management within Verbund, the foreign-currency share of financial obligations (excl. cross border leasing transactions) must not exceed the maximum values defined for each foreigncurrency portion. These values were not exceeded.

As of 31 December 2003, the exchange risk related to all financial obligations, excluding the financial obligations regarding the Republic of Austria in connection with the pre-financing of building cost contributions and excluding interest accruals, can be represented as follows:

LIABILITY			Million €
	31.12.2003		31.12.2002
	Foreign currency	€	Foreign currency	€
Swiss Francs	CHF 320.0	205.4	CHF 983.1	696.7
Japanese Yen	JPY 15,000.0	111,1	JPY 15,000.0	120.6
Total		316,5		817.3

By continuously observing the financial markets, reacting immediately to positive currency changes and through the conclusion of derivative transactions (currency forwards and cross currency swaps), the group was able to reduce exchange risks significantly in the year under review. In addition to the amounts listed above, further CHF liabilities exist in the amount of CHF 563.1 million. The € repayment amounts for these liabilities have been fixed by the implementation of hedging measures. Therefore, only an amount of CHF 320 million is exposed to exchange risk. In view of the long remaining maturity in the JPY area, hedging measures have not yet been implemented for this currency.

In fixing the terms and conditions for financial obligations, special attention is given, as mentioned above, to the minimum requirement of a 75 % portion of fixed-rate liabilities. The utilization of hedging instruments serves to reduce the effects short-term fluctuations in the market price have on earnings. Sustained negative changes in the market price, however, may have a negative effect on earnings.

An increase in the interest rate by one percentage point would, taking into account the existing interestrate swaps , result in a reduction of the result by € 2.8 million p.a. for the existing credit portfolio on the balance sheet date (previous year: € 2.9 million p.a.).

If CHF and JPY were to change by 1 % each vis-à-vis €, the result would, taking into account the existing currency forwards, decrease by approx. € 3.2 million (previous year: € 10.2 million).

The fair values of financial obligations can be seen in the table under (25). The fair value of derivative financial instruments can be seen in the table under "Financial Instruments". The fair value of other primary financial instruments is, given the daily or short-term maturities, essentially equivalent to the book value.