VATTENFALL IS ONE OF THE LARGEST ENERGY GROUPS IN NORTHERN EUROPE, WITH A GRADUALLY IMPROVING FINANCIAL PROFILE

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1 This Analysis provides a discussion of the factors underpinning the credit rating/s and should be read in conjunction with our Credit Opinion. The most recent ratings, opinion, and other research specific to this issuer are provided on Moodys.com. Click here to link. Analysis June 2004 Contact Phone London Helen Francis Stuart Lawton David Staples Vattenfall Corporate Profile VATTENFALL IS ONE OF THE LARGEST ENERGY GROUPS IN NORTHERN EUROPE, WITH A GRADUALLY IMPROVING FINANCIAL PROFILE The Vattenfall Group overall is Europe s fifth-largest power generator and the region s largest group in district heating. The parent, Vattenfall AB (rated A3/P-2), based in Sweden, has around 20% of total generating capacity in the Nordic sector and is a leading network operator with 1.3 million customers. In northern Europe, it provides energy to around 5.7 million customers and had electricity and heat output of about 158TWh 1 and 36TWh, respectively in Over the past three years, Vattenfall has consolidated its position in the Nordic sector, acquired further interests in Poland and created a significant position in Germany through a number of acquisitions. It is now the third-largest power company in Germany after E.ON (rated Aa3 with stable outlook) and RWE (rated A1 with negative outlook). The acquired companies in Germany were: HEW, the Hamburg-based vertically integrated utility; BEWAG, the Berlin-based vertically integrated utility; VEAG, the East German grid operator and generator, and LAUBAG, the lignite-mining operator. 2 Figure 1: Operating profit by segment SEK Million 2002 % 2003 % Nordic countries % % of which generation % % market 286 2% 369 2% heat 160 1% 348 2% networks % % services 98 1% 100 1% other and eliminations % % Germany % % Poland 5 0% 443 3% total In Poland, Vattenfall owns 70% of Elektrocieplownie Warsawskie (EW), which controls around 27% of the Polish heating market. Additionally, Vattenfall has recently increased its stake to 75% in Górnoslaski Zaklad Elektroenergetyczny (GZE), Poland s largest privately-owned network distribution company. Following these acquisitions Vattenfall has been gradually paying down debt. Approximately half of Vattenfall s cash flows are derived from lower risk monopoly-style networks and district heating businesses, with the balance from generation and supply activities. 1. TWh: terawatt-hours 2. Vereinigte Energiewerk AG (VEAG) generates energy predominantly from lignite which is supplied by Lausitzer Braunkohle AG (LAUBAG). Full names of other operators are Hamburg Electric Works AG (HEWAG) and Berlin Power Works AG (BEWAG).

2 LEGAL STRUCTURE Vattenfall AB is the parent holding company based in Sweden, and Vattenfall Europe AG, which was formally established in August 2002 out of the merger between HEW and VEAG, is the holding company for the Germany operations. Prior to this, LAUBAG had been taken over by HEW while the merger of BEWAG into Vattenfall Europe was legally closed at the end of August Vattenfall Europe AG is located in Berlin whilst several important functions are kept in Hamburg. Functionally, Vattenfall Europe is now organised along business lines. Additionally, all Nordic business units are now grouped into the Nordic Area business group. Vattenfall Treasury AB (under the guarantee of Vattenfall AB) issues all public debt instruments for the group. Vattenfall controls the cash flow of its subsidiaries, which are managed through cash pooling agreements. There are some external third-party bank loans (excluding associate loans noted below) at German subsidiary level within the Vattenfall Europe group (which represented around 20% of total group debt as at FYE 2003). Moody s expects this exposure to reduce over time as these loans mature and are replaced, as appropriate, by debt at the parent level. In addition, Vattenfall includes within group debt loans of approximately SEK15 billion (as at FYE 2003) from affiliate companies which hold some of Vattenfall s nuclear assets. Vattenfall AB has a diversified cash stream from its subsidiaries. OWNERSHIP State ownership is viewed positively, but limited support is factored into the rating Vattenfall AB is a public limited company which is 100% owned by the Swedish State. There is no direct state support factored into the rating, although it is viewed positively. Moody s believes that the state intends that Vattenfall should continue to be run as a fully commercial operation and we do not believe that the state would want to provide direct support (such as equity) in the unlikely case of distress, but it could use other means, such as a flexible dividend policy, if necessary. During the acquisition period, the state took a lower dividend (around 20%) than in the past, although this is expected to return to more normal levels of around 25-30%. Moody s understands that the representatives of the State Office, in line with the company s management, target the maintenance of a rating in the single-a category. Currently, there appears to be no political will to privatise Vattenfall, although the subject has been raised periodically. Given the trend towards privatisation within Europe, Moody s believes that this may be a possibility in the medium term, particularly if a sizeable cross-border alliance or consolidation were to be considered. However, no such plan has materialised in the past, nor appears likely at the moment. Management Strategy MANAGEMENT IS FOCUSED ON CONSOLIDATION, BUT WILL CONSIDER OTHER BUSINESS OPPORTUNITIES AS THEY ARISE Following the significant acquisition phase of recent years, Vattenfall s management is focused on integration and consolidation. Whilst the acquisition of the German companies was a real stepwise change for Vattenfall (the group has more than tripled in size since 2000), the integration process as well as business and financial developments have progressed well in the period from 2002 to early Management has said that it is aiming at maintaining a rating in the single-a category and delivering on the 15% return on equity targeted by the shareholder, which is equivalent to 11% return on net assets by 2004 (2003: 12.1%, 2002: 10.1% using the company s accounting measures). Pre-tax interest cover of x is a further requirement of the owner. The company s business plan ( ) is focused on consolidation and integration of recent acquisitions, and the company states that it expects to achieve its financial targets (as noted below) by the end of this period. Management believe that the company is well on target for rapid integration and profit improvement in the acquired German businesses. As the company s financial profile has improved and the integration process in Germany progresses, Moody s believes there is some reinvestment risk as the company seeks to create value through growth. The company will study new business opportunities as they arise, in line with its strategy of being a leading northern European player with focus on core markets and core products (defined by Vattenfall as those within electricity and heating), although Moodys expects the company to also consider opportunities in gas. One-off opportunities such as a stake in Statkraft should it be partially privatized (of Norway) could also be attractive. At the same time, we believe that the company has a strong commitment to maintaining a solid rating, and will consider the impact of further acquisitions on its business and financial profile. 2 Moody s Analysis

3 Key Rating Considerations Vattenfall s financial strength has been rapidly improving as it makes strong headway on integration of its German operations, although maintains its focus on further rationalisations and profitability improvements. There are a number of risks as well as opportunities in the markets in which it operates as outlined in more detail below, however the event risk associated with the prospect of additional debt funded acquisitions is likely to serve as a constraint on the current rating. Business Risk Factors The integration of the German companies is progressing well, although Vattenfall still needs to maintain focus on improving profitability Legal restructuring (as noted under the section entitled LEGAL STRUCTURE ), was achieved in line with plan. One of the key drivers of the German acquisitions was to extract cost reductions and synergies. The company s business structure in Germany, which focuses on separation of the various components of the value chain (six units), was completed in H and allows for greater transparency, and has also helped Vattenfall achieve cost reductions to date ( 338 million as per year-end 2003). Overall, Vattenfall has around 250 cost-cutting projects under way in Germany. One of the main objectives in the ongoing integration is that Vattenfall Europe should achieve its targeted earnings requirement in 2005 of about 850 million in terms of operating profit. This will represent an improvement of 420million compared to 2001 (and with operating profit at 680 million in 2003, Vattenfall is already moving closer towards its target). Vattenfall s focus is on continued integration with a particular target of increasing cost efficiency in core operations and strengthening of the new joint sales organisation. Nordic wholesale prices are subject to volatility, therefore greater diversification through the German operations helps Vattenfall Vattenfall s Nordic electricity generation is based on low-cost hydro and nuclear power, and it generates half of Sweden s power (around 20% of the whole Nordic market). Generation production mix and power prices in the Nordic sector are influenced by variations in water levels and will always be somewhat volatile. Prices have picked up from extreme lows during the wet years of the late 1990s, and an expected reduction in the reserve margin over the mediumto-long term should mitigate against repeating such large downward movement indeed, prices spiked significantly in late 2002 and during 2003 because of weather conditions. Vattenfall also has an active hedging programme through Nord Pool to mitigate the impact of price movements. But supply margins remain low in the fully liberalised Nordic and German sector Expansion into German generation (principally thermal), where prices are normally less volatile (and have also risen from lows), provides something of a hedge, although the company still remains long generation and hence is exposed overall to wholesale prices. Nonetheless, diversification along the value chain following its expansion into German businesses together with a greater fuel mix 3 has reduced Vattenfall s overall exposure to the Nordic weather system. Supply margins are still very thin in the Nordic and German markets. Vattenfall remains long in generation in Germany and, in common with the other larger German players, has a number of longer dated bilateral contracts with resellers that are currently out-of-the-money, compared to current wholesale market prices, although these contracts are gradually being run off. Environmental issues will remain an important consideration for Vattenfall, and nuclear power is expected to remain an important component in the Nordic fuel mix Sweden is currently debating future alternatives to nuclear power, but given the country's dependence on nuclear power, decommissioning has been limited (apart from at the oldest plant, Barsebäck 1) due to the lack of viable alternatives. Vattenfall owns shares in nuclear plants in both Sweden and Germany and in our opinion, full decommissioning in Sweden is unlikely in the foreseeable future. Indeed, Vattenfall, and other Swedish operators are currently engaged in negotiations with the government on these particular matters and Moodys believes that some compromise is likely to be reached. 3. In 2003, Vattenfall s group generation capacity fuel mix was: nuclear, 20% (2000: 49%); hydro, 36% (47%); other, principally fossil fuels, 44% (4%). Moody s Analysis 3

4 In Germany, Vattenfall and E.ON have recently closed down the Stade nuclear power plant in Hamburg on schedule. Vattenfall s shares in three other nuclear plants have planned closure dates between 2008 and 2019 (see Figure 4 Nuclear Liabilities). Vattenfall now has significant exposure to thermal plants in Germany and Poland. Nonetheless, the impact of the National Allocation Plans is expected to be limited at least in the immediate future for Vattenfall, but the medium- to long-term impact is less certain The acquisitions in Germany (particularly the lignite-based VEAG) and Poland have led to the inclusion of new operations with new environmental profiles and risks. National Allocation Plans (NAPs) designed by EU governments to address the issue of emissions of greenhouse gases are due to come into effect in 2005, initially covering carbon dioxide (CO2). All combustion plants over a certain size must have a number of emission allowances to cover their CO2 emissions. In each country, emission allowances will be allocated to plants participating in the system. Companies will look at ways of reducing emissions, whilst the price of emission allowances will be determined by their scarcity. Estimations of the prices of emission allowances vary significantly. The German government has indicated that on a country level, CO2 emission allowances per metric tonne (mt) for energy and industry will be reduced from the current 505mt CO2 allocation to 503mt by the end of the first period ( ) and 495mt by the end of the second period ( ). The rules are more likely to apply to new and replacement plant, and are probably unlikely to have any significant impact on Vattenfall in the near future. Vattenfall expects to receive on the whole sufficient allowances. Its lignite plants in Germany (the former VEAG) already took steps during the 1990s to make large reductions in emissions. Overall Vattenfall plants reduced carbon dioxide emissions by 40%. In the German NAP these early actions have been recognised, but not to 100%, so this will mean Vattenfall is likely to require a minor amount of additional trading certificates. Nonetheless they expect power prices overall to rise to account for the price of emissions trading. However, this leads to an additional political question if prices do rise, driven by increased costs of allowances/trading certificates then governments could impose additional taxes if companies were perceived to be enjoying windfall profits. In Sweden there is unlikely to be any significant impact as regards emission allowances given the high proportion of hydro and nuclear plant, although if Vattenfall constructs new thermal power plant in the future, it could be short on allocations. In Poland, there has been a substantial over-reduction vis á vis the Kyoto target, with the surplus allocated to the state. Vattenfall expects to receive at least the required amount. Future investments will also be focused on refurbishing power plants and networks; no new-build is currently expected Vattenfall is planning on substantial investments in Sweden over the next 10 years. This is focused on investments in the networks (SEK5 billion over five years) to increase reliability as well as to refurbish nuclear power plants (SEK16 billion over 12 years) and hydropower (SEK6 billion over 10 years) in order to increase capacity and extend their lifetimes. Site decontamination in Poland is included in its investment programme and provisions for similar issues have been made in Germany, and plans have been drawn up with the authorities concerned. Nonetheless, Moody s notes that the full extent of these potential risks may only become apparent over time. Vattenfall s operations in Poland are showing the benefits of rationalisation through improved profitability, but operating risks are still relatively high in this region Vattenfall has gained market share in Poland through its 70% stake in the district heating and electricity-generation company, Elektrocieplownie Warsawskie SA (through which it has a 68% heating market share in Warzaw). It has also recently increased its stake in an electricity distribution and sales company in the southwest of Poland, GZE, from 54% to 75%, which has 10% of the country s market share. There are no obvious synergies between these two, non-contiguous, investments, but Vattenfall believes it can extract value through its marketing, trading and rationalisation skills. Organisational streamlining accompanied by a strong reduction in costs helped deliver substantially improved costs in 2003, which proved to be a good year for Vattenfall s operations; 2004 will continue to require investments in order to continue the efficiency programme. The Polish market is attractive to foreign investors because of its growth potential and developmental needs. However, given that it is at an early stage of liberalisation and there is a need for greater transparency and regulatory developments, it does still present a number of risks. Also, further expansion or acquisitions in the Polish market, to create greater critical mass and synergies, may well be difficult given high expectation of prices by the State Treasury. 4 Moody s Analysis

5 There is some regulatory uncertainty in Vattenfall s markets, but distribution is a mature and relatively low-risk business compared with generation and supply Through its German acquisitions, the company has access to the well-established distribution and supply networks in the Berlin and Hamburg regions. However, there is a certain degree of regulatory risk and current uncertainty as a result of ongoing discussions pertaining to the introduction of a more proactive ex-post regulatory body into what has largely been a self-regulated environment. However, this is still likely to be a cost-plus model and Moody s does not expect any significant impact in the foreseeable future, given the range of companies potentially affected, particularly the indigenous German public utilities or Stadtwerke. Nonetheless, the monopoly businesses currently contribute the majority of cash flows in Germany, thus any threat to these could impact profits. Distribution is a relatively low-risk business in Scandinavia, and has traditionally been lightly regulated. However, some network disruptions in recent years resulted in Vattenfall having to make some additional refurbishment investments, and these disruptions also weakened Vattenfall s overall returns. Revised regulatory systems that are being introduced by the Swedish regulator in 2004 and those introduced by the Finnish regulator in 2003, are aiming to improve and reward efficiencies within the sector. These changes could introduce some pressures although, at the same time, the companies with larger networks, such as Vattenfall (in a very fragmented distribution industry), potentially have greater economies of scale and could do better in such reviews, assuming they address the issues relating to under-investment in the grid. The Polish regulatory environment is still in process of development. Tariff setting has traditionally been based on cost recovery, and further readjustments to tariffs are needed, but, over time, as tariff setting becomes more transparent and performance-based, this will lead to greater pressure on inefficient companies. DISTRICT HEATING Vattenfall is the fourth-largest supplier in this relatively low risk, quasi-monopoly type business in the Nordic region and the largest supplier in Germany. (Nordic ranking: Fortum, Sydkraft/E.ON, Helsinki Energia, Vattenfall.) Financial Risk Factors VATTENFALL S FINANCIAL PROFILE IS STEADILY IMPROVING FOLLOWING ITS ACQUISITION SPENDING Figure 2: Operating Earnings and Profitability, SEK million Net Sales 69, , ,935 EBITDA* 17,739 25,512 24,298 EBIT* 9,448 14,020 14,716 Profit Before Tax 7,454 9,987 12,360 Tax (2,167) (1,763) (2,831) Minority interest (1,097) (658) (406) Profit for the year 4,190 7,566 9,123 Declared Dividends (1,030) (1,485) (2,400) Retained Profit 3,160 6,081 6,723 *Moody's calculation is net of participation in the results of associated companies Source: Company Data, Moody's Research In 2003, sales improved due in part to higher electricity revenues in the key Nordic and German markets as well as the consolidation of GZE in 2003 and full consolidation of BEWAG. Operating profits improved due primarily to cost savings and higher electricity market prices in Germany as well as improved profits in Poland. There were also higher prices in the Nordic sector influenced by the hot dry weather but costs also rose as more expensive production (than hydro) was put into operation. Profits are, and will, in 2004 continue to be boosted by the release of negative goodwill that relates to anticipated future losses and restructuring costs identified as a result of Vattenfall s acquisitions in Germany. Moody s Analysis 5

6 RECENT TRENDS SHOW THE COMPANY SHOULD BE ABLE TO GENERATE STRONG FREE CASH FLOW Figure 3: Consolidated Cash Flow and Debt, SEK million Core operating cash flow in 2003 remained strong, but higher tax payments (including SEK90 million payment to the city of Hamburg) and negative working capital (as opposed to positive working capital in the previous year ) meant that retained cash flow (RCF) post-working capital was slightly down on With no large investments in 2003, the company was able to apply free cash flow to debt reduction. From 2004 onwards, Vattenfall is expected to focus on maintenance capex and a few, smaller, committed investments in Poland (capex and committed investments between 2004 and 2006 are expected to be slightly above SEK30 billion, with renewal of generation plants and upgrade of networks being the primary focus of cash). The company should be increasingly free cash-flow positive (assuming no further large investments) and core cash flows should benefit from increasingly efficient German and Polish operations. DEBT SHOULD FALL AS THE COMPANY APPLIES SURPLUS CASH, ASSUMING THERE ARE NO FURTHER LARGE ACQUISITIONS Moody s believes that debt levels had peaked at the end of 2002 after this heavy acquisition period although Vattenfall did benefit from the acquisition of the relatively unleveraged BEWAG and debt should continue to decline unless the company makes further acquisitions. As a result debt protection measures should also improve. Q SHOWS STRONG PROFITABILITY Q figures showed improved profitability, with operating profits rising to SEK31.8 billion, up 11.7% from Q1 2003, due principally to cost savings on the further integration of the German companies, despite net sales decreasing due to lower market prices for electricity compared with the exceptionally high Q prices. As a result Vattenfall, with reported FFO pre-working capital of SEK8.9 billion, was able to reduce gross debt through the application of free cash flow and some use of liquid assets; down from SEK85 billion at FYE 2003 to SEK80 billion at the end of Q Moody s Analysis FFO pre-wc 13,148 17,106 18,804 Working Capital (2,706) 2,997 (613) FFO post-wc 10,442 20,103 18,191 Dividends Paid (1,784) (1,364) 1,937 RCF post-wc 8,658 18,739 16,254 Net Capex (5,745) (10,170) (7,420) Free Cash Flow = RCF - Net Capex 2,913 8,569 8,834 Other Net Investments (37,535) (25,388) 975 Total Debt 88,533 94,740 85,547 Cash & Marketable securities* 6,744 11,877 11,052 Net Debt 81,789 82,863 74,495 Adjusted debt with nuclear** 104, , ,116 Net adjusted debt with nuclear ** 97, ,488 92,064 EBIT margin (company's definition)*** 14.4% 13.2% 13.7% EBIT Margin [1] 10.0% 10.3% 8.9% Adjusted RCF/Net Adjusted Debt [2] 9.2% 19.1% 18.2% Adjusted FFO Interest Coverage [3] Adjusted RCF/Capex+ Investments (net of disposals) [4] EBIT Gross Interest Coverage [5] Adjusted RCF/Net Adjusted Debt incl. Nuclear Liabilities [6] 9.2% 18.7% 17.9% [1] (Revenues - Op.Expenses adjusted for negative goodwill/turnover [2] (RCF postwc+2/3 OpLease Expense)/((Total Debt+ 8*OpLease Expense+G'tees+Hybrids+Off-balance sheet debt+pension liabilities) (Cash+Marketable Securities)) [3] (FFO postwc + Cash Interest Expense) / Interest Expense [4] RCF postwc /(Capex - Sale of TFA + Acquisitions - Divestments) [5] (EBIT + Interest Income) /(Interest Expense) [6] (RCF postwc+2/3 OpLease Expense)/((Total Debt+ 8*OpLease Expense+G'tees+Hybrids+Off-balance sheet debt+pension liabilities+nuclear liabilities)- (Cash+Marketable Securities)) * less cash held for nuclear insurance purposes in Germany **Moody's uses an approximate Vattenfall group debt capital ratio in some calculations to estimate a relevant amount of pension,nuclear and mining obligations to be included, in addition to the adjustments for operating leases. For Moody's approach, please refer to Moody's Rating Methodology entitles "Moody's approach to Analysing Pension Obligations of Corporations", November In these particular ratios, Moody's includes Vattenfall's guarantees on Swedish Swedish Nuclear Guarantee fund, but not German nuclear provisions, as explained in Note on Nuclear Liabilities. Source: Company Data, Moody's Research *** EBIT/net sales p103 Annual Report (English) 2003

7 SOME COMMENTS ON VATTENFALL S ACCOUNTS Figure 4. Nuclear Liabilities Plant Vattenfall s ownership % Management Responsibility Total Capacity (MW) Estimated closedown, year Brokdorf 20.0 E.ON 1, Brunsbüttel 66.7 Vattenfall Krümmel 50.0 Vattenfall 1, Stade 33.3 E.ON 0 (was 640) 2003 In Germany, Vattenfall Europe is co-owner of four nuclear plants, together with E.ON, and Vattenfall s total pro rata share of the capacity was 1,409 MW per annum after the closedown of Stade in Provisions for nuclear waste disposal and decommissioning are based on government guidelines and are built up over years, which compare to the estimated useful life of 30 years. These provisions are made at the level of the special-purpose, not for profit, GmbH companies which hold the nuclear assets. According to Vattenfall, on a pro rata basis, under International Accounting Standards, its share of the nuclear provisions at these companies amounts to billion (SEK13 billion), but under Vattenfall s accounting principles, the 66% owned Brunsbüttel is fully consolidated in the accounts, whilst Equity Accounting is used for the remaining associate companies. As a result, the consolidated accounts show a nuclear provision only in respect of Brunsbüttel, amounting to SEK6.6 billion. However, Moody s notes that production output is sold to the owners (E.ON and Vattenfall) at full cost (including depreciation and nuclear provisions), but in turn the surplus cash is then reinvested with the owners. Vattenfall s accounts therefore reflect loans from the three associate companies (this excludes Brunsbüttel, given its full consolidation in the accounts) totalling around SEK15 billion (2003), within total external debt (which is hence slightly in excess of its pro rata exposure to nuclear provisions in Germany). In Sweden, nuclear operators pay an annual fee into the separate Nuclear Waste Fund to cover nuclear liabilities. Also, on an annual basis, the Swedish Parliament determines an additional amount in respect of the possible liability represented by the difference between the present value of the Nuclear Waste Fund and estimated future costs (i.e. the unfunded part of the future costs). This guarantee is divided into two types (Guarantee 1, to cover for the event of an early reactor shutdown and Guarantee 2 to cover for the event that the funds in the Nuclear Waste fund are insufficient). Vattenfall s current share of these costs, for which it has had to post a guarantee, is for SEK3.029 billion (revised amount received from the government in 2004). Pension provisions. Moody s notes that Vattenfall has uncovered pension provisions of SEK14.9 billion in total (SEK16.4 billion in 2002) which will rise to SEK16.2 billion under IAS. These relate primarily to unfunded pension schemes from the former HEW and BEWAG. We also note the slight difference between Swedish accounting standards and IAS 19 for the Swedish pension funds which amounted to a net SEK352 million in Negative goodwill. Vattenfall built up considerable negative goodwill of around SEK18 billion during its acquisition phase, relating to anticipated future losses and expenses identified as a result of Vattenfall s acquisitions in Germany. During 2002, negative goodwill was dissolved by SEK3.6 billion and by a further SEK4.8 billion in 2003, to offset German restructuring costs and therefore had a positive effect on the profit and loss account but these increased costs passed through the cash flow. In 2004, Moody s expects Vattenfall to continue to dissolve negative goodwill as these costs arise, but in 2005 the adoption of IFRS will mean that it will no longer be able to dissolve these provisions, as negative goodwill will count as equity. However, Vattenfall has also established personnel-related provisions for non-pension purposes (such as severance payments), 60% of which are expected to be disbursed during Further provisions for tax and legal disputes (the latter principally in East Germany) are expected to be 65% utilised over the next five years. Deferred tax. The company has large deferred tax liabilities in relation to balance-sheet assets. These have been derived from the difference between the balance sheet value of the asset and the corresponding value according to tax legislation in the respective countries. Vattenfall does not believe that this will lead to any cash payments because it continues to invest in tangible assets. This should only have a tax cash impact if the company decided to sell its assets, which is not currently envisaged. Overall, provisions decreased from SEK97.5 billion to SEK91.8 billion in 2003, due primarily to the dissolution of negative goodwill. Moody s Analysis 7

8 IFRS IMPACT ON PROVISIONS Vattenfall s will adopt IFRS in 2005 and this is likely to have some impact on its accounts. Pension obligations will increase slightly (under IAS 19) as noted above; negative goodwill is likely to be credited to equity and provisions accordingly decreased. Cost for decommissioning for Swedish Nuclear Power plants, as well as any funds relating to them are likely to be recognised on balance sheet. Vattenfall s share of the Nuclear Fund will be SEK20 billion. In effect, gross accounting will apply, but this is unlikely to have a rating impact as long as the net provision is broadly unchanged. Financial management, debt maturity profile and liquidity The company has a healthy liquidity profile due to its strong cash flow, and strong cash and marketable securities positions. Moody's understands that Vattenfall currently has a balance of well over 1 billion in cash and liquid securities (including the proceeds from the recent 500 million bond issue) excluding a minimum 390 million which must be held at HEW to cover its nuclear operations. Vattenfall's general policy is to keep no less than 10% of Group turnover in cash or committed back-up lines (currently this would mean a minimum of around 1.1billion). Should the next 90 days debt maturities exceed this amount, then this sets the minimum level of cash and committed lines. Vattenfall has moderate debt maturities over the next 12 months of less than 1 billion. It has a five-year committed 600 million Revolving Credit Facility (RCF), syndicated with 12 banks (matures 2008). It also has a number of uncommitted facilities in Germany (US$650 million). There is a representation regarding no material adverse change in the 600 million RCF. Vattenfall Treasury also manages its exposure on a counterpart basis with over 90% of its credit exposure to issuers rated Aa, and above. RATING TRIGGERS Vattenfall has no rating triggers other than in some long-dated swap agreements (with the option to terminate at year 10, if the rating drops below Baa1). Vattenfall has certain cross-border leases, but certain collateral calls (Letters of Credit of SEK352 million) were triggered when Vattenfall was downgraded to A- by Standard & Poor s (S&P) in July There are no further triggers. 8 Moody s Analysis

9 Related Research Analysis: Fortum Oyj, February 2004, #81739 E.on AG, November 2003, #87187 RWE AG, November 2003, #80058 Industry Outlook: European Gas, February 2004, #81160 European Utilities, November 2003, #80100 To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. Moody s Analysis 9

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12 To order reprints of this report (100 copies minimum), please call Report Number: Author Editor Associate Analyst Production Associate Helen Francis Wendy Arthur Elena Griffin Alba Ruiz Copyright 2004, Moody s Investors Service, Inc. and/or its licensors including Moody s Assurance Company, Inc. (together, MOODY S ). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided as is without warranty of any kind and MOODY S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. Under no circumstances shall MOODY S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings and financial reporting analysis observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. MOODY S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODY S have, prior to assignment of any rating, agreed to pay to MOODY S for appraisal and rating services rendered by it fees ranging from $1,500 to $2,300,000. Moody s Corporation (MCO) and its wholly-owned credit rating agency subsidiary, Moody s Investors Service (MIS), also maintain policies and procedures to address the independence of MIS s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually on Moody s website at under the heading Shareholder Relations Corporate Governance Director and Shareholder Affiliation Policy. 12 Moody s Analysis