The members of the EVN Executive Board, CEO Burkhard Hofer, Peter Layr and Herbert Pöttschacher, talk about the current challenges facing an international energy and environmental services company and how EVN demonstrates strategic foresightedness in exciting times.

How would you evaluate the 2008/09 financial year for EVN in the light of the current economic and financial crisis? How seriously was EVN affected?

Hofer: The last financial year was full of challenges and events which were not previously foreseeable. In the first quarter, it was already possible to predict that the crisis would at least have a negative effect on the financial results of EVN. At this point of time, it was not possible to forecast the extent to which the operating business would be influenced. In retrospect, we can conclude that we were not as negatively impacted as other sectors or competitors. We only provide energy to a relatively small number of large customers whose energy demand declined due to the economic situation. Accordingly, the overall performance of EVN in the 2008/09 falls within the framework of the stable development achieved in previous years.

Layr: In this case, we must emphasize the fact that the individual segments and business units developed in very divergent ways. The energy production business was very strongly affected by the crisis due to the decline in demand. In contrast, our Networks business unit proved to be relatively crisis-resistant thanks to our customer structure.

Pöttschacher: At this point I would like to add that our power generation activities suffered greatly due to price developments. We had to overcome a very volatile situation, which influenced the operating hours and total operating time of the power plants. This situation will first return to normal once the price level on the international electricity market rises again.

To what extent is the Environmental Services segment at the mercy of cyclical developments?

Hofer: We started the year in the Environmental Services segment very positively. The favourable economic mood deteriorated slightly in the course of the year because individual projects were delayed. In this business it is extremely difficult to predict the precise realisation deadline. Construction permits as well as decision-making processes are often very complex and thus time-consuming. The decisive point is that the projects are ultimately carried out, and this will be reflected in our business results in the next financial year.

Layr: The positive contribution of the projects in the Environmental Services segment is important to EVN. The risk potential is manageable due to the customers originating in the public sector, the project life cycle is shorter and individual investment volumes lower, and refinancing takes place more quickly than with large projects in the energy sector. Demand for drinking water supply and wastewater treatment facilities is enormous, also as a consequence of the very successful positioning of our subsidiary WTE.

In the year under review, EVN carried out upward price adjustments for electricity and gas. Isn’t this inconsistent with developments in energy procurement and sourcing?

Hofer: One of our most difficult challenges in a period of volatile purchase prices is to ensure a balanced, fair and also transparent pricing policy for our customers. This was particularly the case in the last year. Primary energy prices took a roller coaster ride featuring strong price rises up until the middle of 2008, subsequently followed by a speedy price decline. Such price fluctuations first affect us with a time delay. For this reason, price increases were necessary in late autumn 2008. However, I must point out that we were able to keep prices at a constant level for close to two years. In the winter of 2008/09, we also reduced gas prices twice, virtually corresponding to the development of the energy procurement market in real time. Thus we considerably relieved the burden on our customers, which is also reflected in the earnings development of the Supply business unit.

Layr: We have chosen to take a middle way in our procurement policy, aiming to achieve a balance between the reliability of supply and flexibility in the face of volatile price developments. Our customers also buy security in the form of storage capacities, which not every energy provider can offer in its portfolio. Naturally, such stockpiling also entails disadvantages in the light of declining primary energy prices. Thus a responsible question is where EVN sees the limits to its willingness to take risks.

EVN has several large projects in the pipeline. What is the situation in respect to financing in the light of the tense situation prevailing on capital markets?

Hofer: In the year under review, we did not have to cut back on implementing any of our growth projects because of financing aspects. EVN was able to very successfully issue five corporate bonds with a total volume of about EUR 470m. Naturally, the financing clout of EVN is limited, the more so as we have to act in an extremely risk-sensitive manner. Accordingly, we are committed to maintaining financial stability and flexibility at the level of an A-rating within the framework of our financing strategy. That is why we have to clearly define our priorities in the light of the abundance of potential projects. This also requires strategic foresightedness. We not only have to think of tomorrow, but far beyond that.

Layr: Investments in our network must be seen in a different light in comparison to large projects designed to increase our power generating capacities. In Austria, we operate within the confines of regulated markets, in which the investment climate is also influenced by the incentive regulatory system and the related tariff rate appraisals. Regulatory authorities have changed their way of thinking, at least in respect to large projects. As a result, the realisation of two large projects in the gas network - construction of the southern and western high pressure gas networks - now makes sense economically.

What is the underlying strategy being pursued by EVN to expand its power generating capacities?

Hofer: As a responsible power supply company, we must have sufficient own power generating capacities at our disposal in order to reduce our dependency on external factors. Our long-term goal is to achieve a coverage ratio of 40 - 60% of electricity sales volumes. The comparable level for the previous year is 17.8%, clearly demonstrating how far we still have to go.

Layr: Perhaps we still have a long way to go, but we have defined clearcut objectives. On the one hand, it is essential to ensure a balanced ratio of different forms of power generation, combining hydropower, wind power, biomass and thermal power stations. On the other hand, the value chain should embody a long-term balance in all of EVN’s sales markets. This is the reason why several projects have been initiated in the south-eastern Europe region to ensure a sufficient energy supply for our customers in Bulgaria and Macedonia.

Pöttschacher: This means that we have to strike new paths in the field of renewable energy. During the year under review, we realized a pilot project for photovoltaics in Zwentendorf. At the Dürnrohr power plant site, we will conclude our series of tests next year on the gasification of biogenic raw materials at our pyrolysis facility, which has delivered very good results. A geothermal energy project is also being planned, along with the expansion of wind power in Lower Austria as well as in Bulgaria.

Are there limits to how much can be generated from renewable energy sources?

Layr: Of course there are. The feasibility of projects not only depends on how meaningful and efficient they are for the energy industry, but is strongly linked to the general regulatory framework prescribed by lawmakers. An amendment to Austria’s Green Electricity Act was passed in September 2009. However, the extent to which it is attractive for a company to construct new wind parks in Lower Austria will first be shown by the accompanying regulations determining the relevant feed-in tariffs. And some resistant has arisen to new hydropower projects, a development which EVN naturally takes very seriously.

Hofer: On balance, it is important to note that Austria has defined very ambitious targets in respect to reducing CO₂ emissions and expanding the share of renewable energy. However, the legal and business framework underlying the implementation of such projects is not consistent with these ambitions. We are willing to do our share, inasmuch as the projects ultimately turn out to be feasible and profitable.

Pöttschacher: If we want to ensure the ongoing security and reliability of energy supplies, we should also clearly keep conventional processes in mind when planning our future production capacities. One example here is the hard coal fired power plant in Duisburg-Walsum, Germany, which we will complete together with our partners by 2010. This will raise our production capacity by 360 MW. At the same time, by integrating state-of-the-art technologies, the burden on the environment will be 35% less than the average of comparable facilities

What other projects is EVN pursuing abroad?

Layr: Last year, EVN was selected as the best bidder to construct three peak load storage power plants on the Devoll River in Albania. The related preliminary work was continued within the framework of a joint venture during the year under review. At the same time, EVN is pursuing a hydroelectric power plant project on the Drin River in cooperation with Verbundgesellschaft. In September 2009, political decision makers in Bulgaria gave us the go-ahead to construct three hydroelectric power stations on the Gorna Arda River. Each of these projects involves very ambitious goals, and will take the power generating capacities of EVN to a new dimension on a long-term basis.

Pöttschacher: Our investment strategy does not ignore the needs of our local market in Lower Austria. Several years ago we began implementing our energy concept for the Lower Austrian Central Region. About EUR 200m will be invested for projects at or near the Dürnrohr power plant. The special thing about this concept is the synergies that will be achieved by the various subprojects. This is impressively demonstrated by the construction of the district heating transmission pipeline to St. Pölten. It will cover most of St. Pölten’s district heating requirements, the heat being derived from three different sources at Dürnrohr. The other projects, such as the construction of the third waste incineration line, are proceeding on schedule and will be completed in the next year. From my point of view, this represents a major success for all involved.

To what extent has the integration process at EVN’s subsidiaries in Bulgaria and Macedonia been completed?

Layr: The restructuring and modernisation efforts have been completed in Bulgaria for all intents and purposes. The operating business is developing very well there. We are also in the midst of expanding the value chain in the fields of energy trading and generation. Developments in Macedonia must be viewed differently. The restructuring programme is proceeding according to the five year plan. In contrast, we are concerned about differences with the government in respect to unpaid electricity bills dating back to the period prior to privatisation. To solve the problem, we have initiated international arbitration proceedings on the basis of the bilateral investment treaty between Austria and Macedonia. These differences have resulted in a pricing policy which has denied our right to carry out price increases over the last three years, which naturally affects our earnings development. I am confident that we will be able to generate a positive earnings contribution in this market in the medium-term.

Where do you think EVN will be ten years from now?

Hofer: From today’s perspective, EVN will continue to remain competitive, also on an international level, thanks to its partnerships and cooperation agreements. We will witness a stronger convergence of our geographical markets as a consequence of the European integration process, enabling increasing economies of scale. EVN will continue to take advantage of the consolidation process in our industry to enhance the value of the company, but within the limits of our financing capabilities.

Layr: The development of greenhouse gases will play a more decisive role in energy production than ever before. EVN will exhaust the growth potential of the regions in which it operates on the basis of a value chain which is as complete as possible, offering all services related to the provision of electricity, heat and gas.

Pöttschacher: The nature of demand will also change. Alternative drive technologies will increasingly establish a foothold in everyday life, and issues such as e-mobility and natural gas driven vehicles will gain in importance. These aspects may not change our business model during the next ten years, but later on down the road.

Hofer: All these scenarios and future potential will determine the share price development of the EVN share in the future. EVN is a company which must plan its projects far ahead in advance. Nevertheless, we are concerned at the present time to ensure a suitable return on the capital our shareholders have invested, also in difficult times. We want to build a solid bridge to our shareholders on the basis of a sustainable and fundamentally growthoriented dividend policy.