Corporate Strategy

With the energy turnaround adopted by the Federal Parliament and Federal Council, the way forward is now clearly marked out. In Germany, the future of the energy market lies in environmentally- friendly, more highly decentralised energy generation. To implement the nuclear energy exit, it will be necessary on the one hand to make greater use of renewable energy sources and enhance energy efficiency. On the other hand, flexible conventional generation capacities will also be needed.

We closely accompanied the energy policy decision-making process for the energy turnaround and the legislative amendments involved. Some of the demands we supported have been accounted for in the design of the future energy industry framework.

Detailed comments about the Energy Turnaround Package can be found in the Energy Policy Changes chapter.

The energy turnaround involves a fundamental system change for the energy industry in technological, economic and regulatory terms. Within the electricity supply, primary energy consumption is set to fall significantly. Conventional generation will increasingly be replaced by the use of renewable energies. This means that fewer fossil fuels will be used and conversion losses in the overall system will reduce. In the heating energy supply, the consumption of end energy in particular will fall sharply, as greater use will be made of low-grade heat. What‘s more, the renovation of existing buildings and new construction will significantly enhance building energy efficiency. The expansion of cogeneration will also continue to play a key role in terms of heating energy generation.

As a publicly listed group of companies with municipal roots, MVV Energie is well positioned to exploit the opportunities and possibilities arising from the energy turnaround called for by politicians and society alike.

Our claim: Energising the Future

We are an innovative, market-oriented company and aim to help shape Germany’s future energy supply. Consistent with our "Energising the Future" claim and our maxim of "always think and act for the long term", in our strategy we are building on regionalism, efficiency and sustainability. We aim to guarantee a reliable, economical and environmentally-friendly energy supply for our current total of around 1.1 million industrial, commercial and private customers in future as well. Furthermore, we aim to offer our shareholders good prospects and to be able to provide secure, attractive jobs to the Group‘s total of around 5 900 employees in future as well.

Energy turnaround affirms our course

Our corporate strategy was already aligned towards a climatefriendly, environmentally-compatible and nuclear-free future well before the nuclear catastrophe in Fukushima in March 2011. With the MVV 2020 project launched in 2009, we set out the right course with clear strategic focuses.We thus acted early to start expanding the use of renewable energy sources and enhancing energy efficiency.

Our strategic focuses are:

• Expanding the use of onshore wind power and of biomass and biogas
• Expanding district heating, cogeneration and the generation of energy from waste
• Boosting energy-related services and enhancing our customers’ energy efficiency
• Expanding our nationwide energy sales with industrial and commercial customers.

The energy turnaround has confirmed our strategic course.We have set the right focuses and believe the turnaround harbours great market opportunities for our Group. The coming years will see tough competition for attractive locations and available resources. We aim to exploit opportunities arising due to the restructuring of German generation capacities and will make investments that offer long-term growth potential and complement our portfolio.

In parallel, we will develop further innovative, energy-efficient products and offer our customers an attractive service in connection with our energy-related services.

In our expansion of onshore wind power, we are setting targeted regional focuses.We therefore welcome the announcement made by numerous state governments that they will be making more land available for this proven, economical technology.

Alongside onshore wind power, we have identified biomass as a particular focus in our use of renewable energies. Specifically, we will actively exploit the market potential offered by the local generation of electricity and heating energy from biogas and contribute our expertise in this field. Not only that, feeding biomethane into the natural gas grid is a further area offering substantial development potential.

Investments in the future implemented

We have ambitious investment targets. By 2020, we intend to invest around Euro 1.5 billion in modernising and securing our plants and grids, and a further Euro 1.5 billion in expanding renewable energies and environmentally-friendly cogeneration, i.e. in our company’s strategic high-growth business fields.

We are already well on course towards reaching our growth targets. This is especially true for the expansion in our wind power portfolio. With its wind farms in Plauerhagen in Mecklenburg- Vorpommern and Massenhausen in Nordhessen, our Group has successfully entered the wind power market. Via our Energieversorgung Offenbach subsidiary, we are currently investing in a large wind power project involving 23 wind turbines at the Kirchberg location in the state of Rheinland-Pfalz.With the help of these wind turbines, which are due to be connected to the grid in the 1st quarter of 2011/12, our Group’s installed wind power capacity will rise to 73 MW, while the annual volume generated from wind power will increase to around 160 GWh.

We have also made progress in the use of biomass. In May 2011, Energieversorgung Offenbach launched operations with its new wood pellet plant, one of the largest pellet production facilities in Germany. This plant currently manufactures 65 000 tonnes of pellets a year.

Not only that, in the 2010/11 financial year we also managed to enter the bio-natural gas production market. This is a new business field and one we will be expanding jointly with partners. We have acquired a stake in a biomethane plant already under construction. This plant in Klein Wanzleben (Sachsen-Anhalt) is expected to generate biomethane and feed it into the natural gas grid from summer 2012 already. Using around 60 000 tonnes of maize silage and sugar beet chips, the plant should produce around 6.3 million cubic metres of biomethane a year.

District heating and cogeneration are and will remain key components of our long-term growth strategy. We currently produce 28%of our electricity using cogeneration.We have thus already exceeded the nationwide expansion target of 25% by 2020! We even generate around 90% of our heating energy using cogeneration.

With the construction of Block 9 at the large power plant in Mannheim (GKM), we are creating a basis to safeguard supply reliability and the expansion and further concentration of district heating in the Rhine / Neckar metropolitan region in the long term. Block 9 is one of Germany’s most modern hard coal blocks. Thanks to efficient cogeneration, it will achieve a fuel efficiency rate of up to 70%.

We are further expanding our cogeneration-based district and local heating and the district heating grids at our locations in Mannheim, Kiel, Offenbach and Ingolstadt. Operations began in July 2011 with the new waste heat and district heating joint project in Ingolstadt. The first groundbreaking ceremony for the expansion of district heating to Brühl took place in June. At our Czech subgroup, we are also investing in technological extensions to existing heating energy generation plants and in the construction of gas-assisted cogeneration plants in Èeská Lípa. MVV Energie CZ a.s. managed to take over a heating energy plant with a waste incineration facility in the City of Liberec in July 2011, thus further boosting its position in the Czech heating energy market.

In our environmental energy business we have successfully entered the British market. We were awarded the contract for the construction and long-term operation of an energy from waste plant in Plymouth. Based on our extensive expertise in putting waste to ecological use, we will now be able to position ourselves in the British market. From 2014 onwards, the new plant should use around 245 000 tonnes of household, commercial and industrial waste a year to generate electricity and heating energy.

In our energy-related services business, we are focusing above all on projects and measures aimed at enhancing efficiency and optimising energy consumption for industrial, commercial, real estate and healthcare players, as well as on the operation of industrial parks. We have presented details of specific construction and investment projects in the Sustainability chapter.

Within the Rhine/Neckar metropolitan region we have acquired a 25.1% stake in Stadtwerke Walldorf GmbH, a municipal utility company with annual sales of around Euro 18 million. This new strategic partnership, due to take effect as of January 2012, represents an important step for us in boosting and expanding our commitment in this core region.

Another cornerstone of our growth strategy involves further expanding our nationwide electricity and gas sales with industrial and corporate customers. Our successful Electricity/ Gas Energy Fund product provides smaller and medium-sized industrial and commercial companies as well with easy and inexpensive access to structured procurement. Further details about this can be found in the Forward-looking Sales Strategy chapter below.

Solid financial foundation for investments

The MVV Energie Group has a strong equity base, with an adjusted equity ratio of 39.5%as of 30 September 2011. By building on this solid foundation, we can sustainably finance future investments by taking up additional debt capital. Further details about this can be found in the Outlook.

Consistently optimising existing business

By enhancing the efficiency of our structures and processes, we aim to become better and faster and generate sustainable cost savings. This way, we are laying a foundation enabling us to finance and implement all of the steps necessary to achieve our targeted strategic growth. To this end, we compiled numerous measures within our "Once Together" group programme. We consistently implemented these in the year under report. The measures to optimise internal processes in our existing business are focused on companies in Mannheim, Kiel and Offenbach, as well on the MVV Energiedienstleistungen and MVV Umwelt subgroups. Restructuring expenses of around Euro 31 million were recognised for this purpose in the 1st quarter of 2010/11.

WHAT STRUCTURAL CHANGES HAVE BEEN IMPLEMENTED?

We have amended organisational structures and reallocated tasks at several organisational units at the Mannheim location of MVV Energie AG. In our newly created Generation division, we have pooled the management of existing power plants and the development of additional generation capacities chiefly based on renewable energies. By introducing a new organisational structure, we have also optimised processes, improved efficiency and enhanced the competitiveness of the Infrastructure Service and Sales divisions.

We restructured our MVV Energiedienstleistungen subgroup in strategic, organisational and personnel terms with economic effect as of the beginning of the year under report.We reduced the number of legal entities and thus also cut jobs. Together with leaner structures and standardised processes, these measures will sustainably improve cost structures – a precondition for being able to exploit positive developments in the energyrelated services market in the coming years.

We will achieve further efficiency enhancements by enabling our shared service companies 24/7 United Billing GmbH, 24/7 Metering GmbH and 24/7 IT-Services GmbH to work together more closely under uniform mangement. These units were pooled at the newly founded company Shared Services Center GmbH (SSC) at the beginning of 2011. Ensuring that our shared service companies offer competitive costs and high-quality operating services will make an indispensible contribution towards the competitiveness of the MVV Energie Group. These companies also represent a core aspect of our target of retaining the entire energy industry value chain within our group of companies. This way, we can react more rapidly to new requirements.

In the final quarter of the 2010/11 financial year, we transferred executive board responsibility for the MVV Energiedienstleistungen subgroup to the executive board sales division. At the same time, the executive board technology division assumed responsibility for all strategic investments.

WHAT COST SAVINGS HAVE WE ALREADY ACHIEVED?

The annual cost savings from the "Once Together" group programme are set to rise in the coming reporting periods. Compared with the equivalent budget figures for the 2009/10 financial year, we aim to achieve savings with a volume of between Euro 20 million and Euro 30 million a year by the 2012/13 financial year. As we have agreed to implement personnel cuts in a socially responsible way, mainly by drawing on part-time early retirement agreements, the personnel cost savings will be realised, as planned, over a longer period of time.

By 2020, we will cut a net total of 450 jobs at our Group in a socially responsible manner, of which almost 300 jobs by 2012 already. We will cut jobs no longer required, eliminate vacant positions and implement further measures. Information about our current employee totals can be found in the Our Social Responsibility chapter.

WHAT ADDITIONAL MEASURES HAVE WE INITIATED?

Our "Energising the Future" claim also includes a claim to achieve permanent enhancements. Within the "Professional Optimisation (Pro!)" group programme that is being integrated at our Mannheim, Kiel and Offenbach locations, we aim to permanently improve documented internal processes in our existing business. Procurement makes a key contribution towards value creation within our group of companies. We have used our risk management to consistently enhance our network of suppliers in times of rising commodity prices. At the same time, we have optimised the procurement interfaces at our company and improved cross-location cooperation. We require our suppliers also to call for the sustainability criteria relevant for our business.

“Setting Course for the Future“ programme launched

Having successfully completed the “Once Together” group programme, our next step involves sustainably intensifying the degree of cooperation within the MVV Energie Group. To this end, we introduced the “Setting Course for the Future” change programme in the 2010/11 financial year.

We make the enhancement of our Group‘s efficiency the core focus of our entrepreneurial actions. We aim to exploit the expertise available at our companies to the mutual benefit of all and to learn from one another. To this end, we work in a targeted manner to identify common solutions and enhance our operational excellence. We set ourselves ambitious targets and work consistently to achieve these.

This provides a solid foundation for exploiting future opportunities by drawing on our shared strengths. We aim to find the best solution irrespective of location. This way, we boost the competitiveness and growth capability at each individual company – and at our Group as a whole.

Alongside regionalism and efficiency, our actions to "energise the future" also focus on sustainability.We aim to consistently increase the value of our companies and develop our business model in such a way as to facilitate long-term economic success. To achieve this, we are pursuing economic, ecological and social objectives in equal measure. Over and above this, we see sustainability as finding a good balance between proven and new approaches, short-term contingencies and longerterm perspectives, optimisation and growth, and security and innovation.

New planning and control approach implemented

In parallel with our strategic realignment, we also developed a new internal planning and control approach. Starting in the year under report, the MVV Energie Group has planned and controlled its business in line with all stages of the value chain – from generation and grids via trading through to sales and energy-related services. This way, we can clearly evaluate business-related opportunities and risks, exploit key success factors and levers to enhance efficiency in individual value chain stages and improve our overall management of the Group.

Since the beginning of the year under report, we have reported on the sales and earnings performance of the MVV Energie Group by reference to the new reporting segments, which have replaced the previous product-based segments of electricity, district heating, gas, water, energy-related services and environmental energy

• The GENERATION AND INFRASTRUCTURE reporting segment includes the conventional power plants, energy from waste plants and biomass power plants at the MVV Energie AG, Stadtwerke Kiel AG (SWK), Energieversorgung Offenbach AG (EVO) and MVV Umwelt GmbH subgroups, as well as the waterworks and the new wind power portfolio. Furthermore, it also includes grid facilities for electricity, heating energy, gas and water (assets) and the technical service units allocated to the grids business field.
• The TRADING AND PORTFOLIOMANAGEMENT reporting segment consists of energy procurement and portfolio management, as well as the energy trading business at MVV Trading GmbH.
• The SALES AND SERVICES reporting segment contains the retail business at the MVV Energie AG, SWK and EVO subgroups, as well as at SECURA Energie GmbH. It includes supplies of electricity, heating energy, gas and water to end customers, as well as the energy-related services business at the MVV Energiedienstleistungen GmbH and EVO subgroups.
• STRATEGIC INVESTMENTS includes the Stadtwerke Ingolstadt GmbH, Köthen Energie GmbH, MVV Energie CZ a.s. and Stadtwerke Solingen GmbH subgroups. The Ingolstadt and Solingen subgroups are proportionately recognised.
• OTHER ACTIVITIES relates to the new company Shared Services Center GmbH and cross-divisional activities.