"Inherited debts" and extraordinary factors a major burden on Group earnings

• Pre-tax earnings (EBT) show clear negative trend in line with forecast to -1.1 billion euros
• "Old debts" and one-off effects totalling 1.3 billion euros
• Improved efficiency of operations due to first phase of consolidation strategy, restructuring and reorientation of the Group
• TOP-FIT targets more than met for 2003
• Successful introduction of debt reduction programme

Karlsruhe. Extraordinary burdens totalling 1.33 billion euros and made up of, among other things, necessary depreciation and amortisation, value adjustments and risk provisions left a clear stamp on the pre-tax earnings (EBT) in the consolidated statement of EnBW Energie Baden-Württemberg AG in 2003. According to the annual statement presented in Karlsruhe on Friday (and drawn up for the first time in line with international accounting standards (IFRS/IAS)), earnings before tax (EBT) for 2003 stood at almost -1.1 billion euros. This result is directly connected to the "inherited debt" that had to be absorbed via the balance sheet in the financial year 2003; it also confirms the earnings risks identified back in the summer of 2003 by a comprehensive status report, and is in line with forecasts. Independently of numerous immediate measures that were successfully implemented in the second half of 2003, most of these inherited debts did not generate any lasting impact on operative earnings. On the contrary: after the overall situation had been rapidly made transparent in 2003, it was possible to take effective measures to reduce costs in both the short and long term, to secure the financing of business operations, to maintain the "A" rating, and to report the first important success stories in the TOP-FIT programme geared towards improving the cost structure at EnBW.

"The systematic refocusing of the Group on the basis of its core business areas, the urgently needed adjustments to the holding portfolio comprising 395 companies, and the fine-tuning of the Group-wide TOP-FIT programme geared towards improving the cost structure by the rapid implementation of initial measures have all made important contributions to the uptrend in the operating strength of EnBW in its core business segment in recent months. We have rapidly succeeded in achieving a tangible reduction in costs and optimisation on the investment front. Indeed, we have even exceeded the ambitious 2003 targets laid down by the TOP-FIT programme", said Prof. Dr. Utz Claassen, CEO of EnBW Energie Baden-Württemberg AG, who believes that the future outlook for EnBW is once again encouraging.

Sales up by 25 percent to 10.6 billion euros

EnBW increased its sales in its three core business segments: electricity, gas and near-energy services. Sales in the electricity segment were up from 6.1 billion euros in 2002 to 7.4 billion euros in 2003, gas sales improved from 534 million euros (2002) to 1.4 billion euros, and revenues from energy and environmental services rose from 434 million euros (2002) to 538 million euros. Overall therefore, EnBW succeeded in increased Group sales by 25 percent compared to the previous year to 10.6 billion euros. This puts EnBW in third place in the league table of German energy companies in terms of consolidated sales. "The encouraging sales growth reflects the market strength of EnBW, as, in addition to being boosted in particular by the consolidation effects of the Hidrocantábrico, ZEAG, Energiedienst-Gruppe and Gasversorgung Süddeutschland GmbH (GVS) companies, this success was also fuelled to a not inconsiderable degree by organic growth", says Prof. Dr. Utz Claassen.

High negative impact of "old debts" on earnings

In terms of earnings, the ENBW result for 2003 was, as expected, unsatisfactory. Group earnings before interest, taxes, depreciation and amortisation (EBITDA) were down by 11 percent on the previous year to 1.01 billion euros. Earnings before interest and taxes (EBIT) fell by 584 million euros to -190 million euros (previous year: 394 million euros), and earnings before tax (EBT) was down to -1.09 billion euros (previous year: -134 million euros). EBT was negatively impacted to a major degree by "old debts" and one-off effects totalling 1.33 billion euros. These included, in particular, burdens on earnings at Salamander amounting to 299 million euros, unscheduled depreciation, risk provision measures and additional earnings burdens arising from the Thermoselect projects totalling 286 million euros, and unscheduled writedowns on specific holdings due to impairment tests - above all relating to holdings in Stadtwerke Düsseldorf and totalling 210 million euros. These earnings burdens resulting from "old debts" are primarily of a one-off nature, will not have lasting impacts on operating earnings in the core business, and led to a liquidity burden of only 107 million euros in 2003.

Improved efficiency on the operational front due to the strategy of consolidation, restructuring and the refocusing of the Group

If the figures are adjusted for "old debts" and one-off effects, EBITDA is 30 percent and EBIT 75 percent up on the previous year. Adjusted EBT moved from a loss of -134 million euros in the previous year to a positive 238 million euros. "The post-adjustment improvement in the operating result for 2003 impressively reflects the initial success of the implemented consolidation and restructuring measures. The fact that the adjusted Group result has increased, in other words that we have achieved improvements in earnings from ongoing operations, should not be misconstrued as a sign that our calculations were poor or that we overstated the seriousness of the situation. On the contrary: it shows that the measures we have taken have been rapidly and successfully implemented to improve the situation on the operating front", Claassen emphasised.

Marked reduction in negative free cash flow

The success achieved to date should also be seen within the context of the 9 percent reduction in fixed asset investments and the 80 percent reduction in financial investments compared to the previous year. Against the backdrop of the far lower level of acquisitions in 2003, these measures helped to achieve a marked improvement in negative free cash flow compared to 2002, when it was in the order of -2.39 billion euros. This figure has been improved by an excellent 85 percent to the current level of -349 million euros. EnBW intends to continue on the road to consolidation and forecasts a return to a strong positive free cash flow in 2004.

Successful initiation of debt reduction programme - reduction of Group debts and an increase in the equity ratio remain key goals

The special one-off effects in financial 2003 not only burdened the Group result but also the balance sheet structure of the EnBW Group. During the course of the year, the equity ratio based on the international IFRS accounting standard fell from 9.9 to 6.1 percent. Claassen: "The improvement of the balance sheet structure and, in particular, the increase in the equity ratio are high-priority goals. We will reverse the serious downward trend in the equity ratio that has persisted since 2000 - and from 2004 we will begin to revitalise the equity ratio of EnBW on an ongoing basis. Furthermore, we intend to reduce Group debts - which stood at over 8 billion euros at year-end despite falling during the second half of 2003 - by a total 2 billion euros by the end of 2006."

TOP-FIT targets for 2003 exceeded by a long way

Within the framework of the TOP-FIT programme to improve the cost structure, the TOP-FIT team has already identified around 1,100 measures with a sustainable cost reduction potential of an estimated 940+ million euros throughout the Group. Further measures are currently being drawn up. During the course of 2003, the TOP-FIT target was initially increased to 100 million euros; the corresponding measures were drawn up, and the year ended well above target with a period-effective figure of 117 million euros. This will enable EnBW to improve its earnings strength on the operating front and provide a solid basis for the efficient and competitive development of value added chains all the way to the customer. Considering ambitious targets and the short time the programme has been in operation - the measures were only laid down in mid-2003 - the results that have already been achieved are worthy of note.

Disinvestment successful -deconsolidation of 113 holdings (including Apcoa)

The pruning of the investment portfolio, which at the time totalled 395 companies, initiated by EnBW in 2003 has proceeded extremely satisfactorily in recent months. Up to the present, 86 EnBW companies and holdings have been sold, merged, incorporated in partnerships, closed down or deconsolidated by other means. Including the agreement with Investcorp, one of the leading private equity companies based in London, to sell the holdings in the Apcoa Group, the number of deconsolidated holdings stands at 113.

In view of the disinvestments already made and still to come, EnBW intends to achieve its sales targets for 2004 with fewer than half the employees it had in 2001. This target also underlines the far higher expected efficiency levels in the consolidated value added chain.

In order to achieve these ambitious goals in the coming years, EnBW Holding will in future be the central point of strategic control and coordination for the group companies in the core business field of energy. Optimisation along the value added chain of the individual companies will be underpinned by closer consultation with the holding and stronger integration of the core companies.

Outlook

"Thanks to the measures implemented in financial 2003, we have succeeded in rapidly taking the first systematic and target-oriented step on the plotted road to success in line with the motto "restructuring, integration and future-oriented development", said Prof. Dr. Utz Claassen. EnBW intends, in Claassen's words, to one again achieve an "acceptable" result in 2004, followed by a "respectable" result in 2005, and, finally, a "fully satisfactory" result in 2006. This implies average annual earnings growth of EBITDA, EBIT and EBT in the two-digit percentage range (even without taking account of the "old debts" and one-off effects that have a major impact on the basic reference figures).

At the General Meeting on April 29, 2004, EnBW Energie Baden-Württemberg AG will not make any dividend proposal to its shareholders in view of the poor figures for the financial year 2003. EnBW expects to once again pay out an appropriate dividend for 2004.