Vattenfall Capital Markets Day 2005Capital Markets Day, 27 Sept. 2005 © Vattenfall AB Cash Flow...

© Vattenfall AB

Vattenfall Capital Markets Day 2005

Presentation by

Matts EkmanCFO

27 September, 2005

Capital Markets Day, 27 Sept. 2005© Vattenfall AB

2Content

1. Update on Vattenfall’s financial targets, performance and steering model

2. Energy risk management

3. IFRS impact on Vattenfall

4. Investments

5. Funding

• Appendices


3Financial Targets

Key Ratio / Objective Target Q2 2005 FY 2004

Return on Equity (RoE) 15 % (on visible equity after tax over a business cycle)

15.8* 14.2

Return on Net Assets(RoNA, Excl. IAC)

11 % before tax (= 15 % RoE recalculated into the Groups RoNA requirement)

15.2* 13.8

Pre-tax interest coverage 3.5 – 5 times 5.3* 4.7

Credit Rating Single A category rating ChangedA2/A-

Positive outlook

UnchangedA3/A-

Stable outlookProfit improvement in German operations

Cost savings of EUR 400-500 million annually from 2005

Programme completed

MEUR 519

* rolling 12-months value


4Key Ratios (IFRS)

Key Ratios (in % unless otherwise stated) Q2 2005 Q2 2004 LTMRoNA (1)(2) 15.2 15.2

RoE (1)(2) 17.4 17.4

Operating margin (1) 15.8 14.9 17.8

Pre-tax profit margin (1) 13.8 12.7 16.6

Pre-tax interest coverage, times (1) 4.0 4.4 5.7

FFO/net debt (2) 35.7 35.7

FFO net interest coverage, times (2) 11.8 12.1 13.3

Equity/assets ratio 24.7 27.1 24.7

Net Gearing - Net debt/equity, times 0.85 0.77 0.85

Capitalisation - Net debt/net debt + equity 52.2 50.8 52.21) Excluding items affecting comparability

2) Q2 2005 value = LTM


5Return on Equity

G rou p - R e tu rn on E q uitySix m on ths in terim accou nts - 2005

0%

5%

10%

15%

20%

25%

30%

1992

1993199419

9519

96199

7199

8199

9200020

0120

0220

0320

04200

5

P eriod

R o ll ing - 4 quarte rIF R S

R o ll ing - 4 quarte rS w. G A A P

A verag e 4 -yea rs (16quarte r) S w. G A A P .IF R S fro m Q 4 2 004R equ ire m en t 15 %


6Continued Strong EBIT Development

Quarterly values, SEK million

Quarterly values SEK m, excluding items affecting comparabilityRolling 4 quarter values SEK m, excluding items affecting comparability

0

2 0004 000

6 000

8 00010 000

12 00014 000

16 000

18 00020 000

22 000

Q4 200

0Q1 2

001

Q2 200

1Q3 2

001

Q4 200

1Q1 2

002

Q2 200

2Q3 2

002

Q4 200

2Q1 2

003

Q2 200

3Q3 2

003

Q4 200

3Q1 2

004

Q2 200

4Q3 2

004

Q4 200

4Q1 2

005

Q2 200

5

HEW consolidated

Bewag consolidated

GZE consolidated


7H1 – EBIT by Primary Segment

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

NordicCountries

Germany Poland Other

2005 Jan-Jun2004 Jan-Jun

MSEK (excl. IAC)


8H1 – EBIT by Secondary Segment

MSEK

MSEK (excl. IAC)

-2,000

0

2,000

4,000

6,000

8,000

10,000

ElectricityGeneration

ElectricityMarkets

ElectricityNetworks

Heat Other

MSE

K 2005 Jan-Jun

2004 Jan-Jun


9Cash Flow Development

-4 0 0 0 0

-3 0 0 0 0

-2 0 0 0 0

-1 0 0 0 0

0

1 0 0 0 0

2 0 0 0 0

Q4 Q1 Q2 Q3 Q 4 Q1 Q2 Q3 Q4 Q 1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q 2 Q3 Q4 Q1 Q2

-99 2 00 0 2 00 1 2 0 02 20 03 20 04 2 00 5

F re e cash flo w fro mo p era tion s - R ol ling 4q u art er (1 )

C ash flow b efo ref in an c in g ac tiv i tie s -R ol lin g 4 q uarte r

M S EK

G ro u p - S ix m o n th s in te r im a cc o u n tsC a sh F lo w

(1 ) C a s h Flo w f ro m o p e ra ting a c tivit ie s m in u s r e in ve s tm en t s

1 ) Fig u r e s a c c o r d i n g to S w G AA P u nt il Q 4 2 0 0 4 .

2 ) Fig u r e s a c c o r d i n g to IFRS fr om Q 1 2 0 0 5 .

© Vattenfall AB

2. Vattenfall’s steering model


11Vattenfall’s steering model

15% return on equity required by the owner

Translated into required return on the Group’s capital employed

Translated into pre tax required return on net assets of 11%

Financial requirements cascaded to business units

Based on value creation which means that the return on net

assets must be no less than the cost of financing. The difference

between reached EBIT and EBIT required is called the ”GAP”

Value creation and GAP analysis


12Value creation targets established for each BU

• The Group’s net assets are defined as total balance sheet less cash and liquid assets and less non-interest bearing liabilities.

• Some units have ”real” assets, mainly in generation and in the network business. For these units we calculate real required cash flow returns, and transform them into required earnings to match the total Group’s requirement

• The various business units carry different risk. Therefore we differentiate the required returns between the BU’s.


13Financial requirements cascaded to business unitsTrading Services+ return on trading mandate

Heat Germany, Poland & Nordic

Networks Poland

Generation Germany & Nordic

EBIT return on indexed asset value

EBIT returnon net assets

EBIT return on replacem. value

Networks Germany & Nordic

Customer valueMargin/ kWh

Sales Germany & NordicMass market: Implied customer value

C&I, Resellers: EUR cent / kWh EBIT


14Value Creation

GAP-analysis ( annualised) vs. long term requirement : 11% RoNA

- 8 0 0 0- 7 0 0 0- 6 0 0 0- 5 0 0 0- 4 0 0 0- 3 0 0 0- 2 0 0 0- 1 0 0 0

01 0 0 02 0 0 03 0 0 04 0 0 0

5 0 0 06 0 0 07 0 0 08 0 0 0

D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J

MS

EK

2 0 0 1 2 0 0 2 2 0 0 3

G A P

2 0 0 4 2 0 0 5


15GAP-analysis Vattenfall Group

Vattenfall GroupOperating profit, excl. non-recurring item s

0

5,000

10,000

15,000

20,000

25,000

Sw GA A P Sw GA A P Sw GA A P Sw GA A P IFRS

2001 2002 2003 2004 2005

MSE

K

Actual 2001-2004, Forecas t 2005 (Q2)Requirem ent Top-down (AC 2001-2002, BP 2003-2005)


16BG Nordic – Gap Analysis

Source: Vattenfall

BG NordicO perating profit, e xcl. n o n -re cu rr in g ite ms

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Sw GA A P Sw GA A P Sw GA A P Sw GA A P IFRS

2001 2002 2003 2004 2005

MSE

K

Actua l 2001-2004 , Fo recas t 2005 (Q2) R equ irem en t


17BG Germany – Gap AnalysisB G Vatten fa ll Europe

O perating pro fit , e xcl n o n -re cu rr in g ite ms

0

200

400

600

800

1,000

1,200

Sw GAAP Sw GAAP Sw GAAP Sw GAAP IFR S

2001 2002 2003 2004 2005

MEU

R

A ctual 2001-2004, Forecast 2005 (Q2)

Requirement


18BG Poland – Gap AnalysisBG Poland

Operating profit, excl. non-recurring items

-100

0

100

200

300

400

500

600

Sw GAAP Sw GAAP Sw GAAP Sw GAAP IFRS

2001 2002 2003 2004 2005

MPL

N

Actual 2001-2004, Forecast 2005 (Q2)Requirement

© Vattenfall AB

2. Energy risk management


20Risk Control / Risk Management

Group control vs Business Units (BU:s)• Vattenfall has a centralised risk control function combined with local risk

controllers in the respective BU:s• The allocated mandates are monitored and checked on a daily basis by the

local risk controllers. • The Group Risk Control monitors the aggregated mandate.• There is a tree-structure of risk instructions (RI). One RI for each BU which

clarifies and describes the risk management process and the reportingscheme

• The RI is a tool for the BU:s as well as for the risk management organization.

Risk Models• “Value at Risk” and “Profit at Risk” are used together with stress tests and

other simulation methods

Counter-party risk management• Regulated by a separate Group Instruction


21Energy & Commodity Risk Management

Receives the risk mandate from Vattenfalls CEO

Defines and allocates risk mandates within thegroup

Chairs VRC (Vattenfall Group Risk Committee)

Approves counterparty exceptions

Vattenfall Group Risk Committee

(VRC)

Supports CFO in the risk management process

Vattenfall’s CFO


22Energy & Commodity Risk Management

Energy & Commodities Group Risk control

Independent control function on a group level

Responsible for risk control on an aggregatedlevel. CFO’s eye in the organisation.

Reports to CFO and to Executive GroupManagement.

Local Risk Controllers Monitors the BU:s risks on a daily basis.

Reports to Group Risk Control and to head ofBusiness Unit (BU).

Business Units

Responsible for active risk management.

Determines the current utilisation within the delegated risk mandates.

Assumes the financial consequences of therisks.

© Vattenfall AB

3. IFRS - Impact on Vattenfall


24IFRS vs Sw GAAP FY 2004

0

5,000

10,000

15,000

20,000

25,000

30,000

EBIT Net Profit FFO

IFRSSw GAAP

Excludes Germanrestructuring coststotalling 3 billion

0

50,000

100,000

150,000

200,000

250,000

300,000

Total Assets Total Liabilities

IFRSSw GAAP

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Equity Net Debt

IFRSSw GAAP

All amounts in SEK millions


25Hedging principles & the impact of IFRS/IAS 39

• Vattenfall hedges electricity generation in order to smooth earnings and cash flow

• Hedging horizon of three years

• Derivatives used to hedge future electricity production – cannot be fully netted according to IAS 39

• Given volatile electricity prices, long-term hedging has major impact on equity due to mark-to-market valuation of hedged position


26Transition to IFRS – IAS 39

MSEK Assets Equity

FY 2004 According to IFRS 285,014 83,599

Impact from adoption of IAS 39 per 1 January 2005 6,998 -440

Opening balance 2005 adjusted for effect from adoption of IAS 39

292,012 83,159


27Change in Equity H1 2005SEK million

Balance brought forward from 1 January 83,599

Transition effect (IAS 39) -440

Dividend to shareholders -5,771

Cash flow hedges -7,750

Translation differences, net 2,029

Changes in ownership -64

Profit for the period 8,486

Balance carried forward at 30 June 80,089


28Cash Flow HedgesSEK million

Change in equity Jan-June 2005

Energy trading Germany -2,770

Energy trading Nordic -4,596

Treasury -105

Other -279

-7,750

© Vattenfall AB

4. Investments


30Investment ambitions

Nuclear capacity increases.

Nuclear life-time extension.

Hydropower refurbishment.

New thermal power plant capacity on existing sites.

New mining areas.

Heat plant renewals.

Upgrade ofexisting assets

and

brownfieldinvestments

Quality improvements.

New capacity (Germany).Distribution and

Transmission

Greenfield investments (Sweden)Windpower

Selected pro active opportunities in prioritized areasAcquisitions


31Risk vs Return on Investment

Transmission

Windpower

Brownfield power projects

Upgrades of existing plants

High

Acquisitions

High

Low Return

Distribution

Risk


33Net debt increased in Q2 2005 due to Danishinvestment and dividend payment

SEK m

0

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000

Q4 200

0Q1 2

001

Q2 200

1Q3 2

001

Q4 200

1Q1 2

002

Q2 200

2Q3 2

002

Q4 200

2Q1 2

003

Q2 200

3Q3 2

003

Q4 200

3Q1 2

004

Q2 200

4Q3 2

004

Q4 200

4Q1 2

005

Q2 200

5

Capital Securities 9.2 billion


34Vattenfall Debt Maturity ProfileSEK million

Capital Securities

0

2000

4000

6000

8000

10000

12000

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025

2004 12 31

2005 06 30

Excluding loans from associated companies and minority owners

June 30, 2005 Dec. 31, 2004Net debt (SEK bn) 1) 68.3 55.4Duration (years) 1) 3.3 2.0*Average time to maturity (years) 1) 6.4 6.7

*Average fixed interest period (years)1) Including Capital Securities of 9,268 million. Excluding Capital Securities, net debt amounts to SEK 59.1 billion, with duration 2.4

years and average time to maturity 5.8 years.


36Net Sales

0

20 000

40 000

60 000

80 000

100 000

120 000

Q4 200

0Q1 2

001

Q2 200

1Q3 2

001

Q4 200

1Q1 2

002

Q2 200

2Q3 2

002

Q4 200

2Q1 2

003

Q2 200

3Q3 2

003

Q4 200

3Q1 2

004

Q2 200

4Q3 2

004

Q4 200

4Q1 2

005

Q2 200

5

Quarterly values, SEK million

Quarterly values SEK m * These quarterly values are pro forma, reflecting the situation if HEW had been consolidated from January 2001.

Rolling 4 quarter values SEK m


37Return on Net Assets

8

10

12

14

16

18

20

22

24

26

28

30

0,9 1,1 1,3 1,5 1,7 1,9 2,1 2,3 2,5 2,7

Net Assets / Sales

Ope

ratin

g m

argi

n, %

Requirement 11 %

- 00

-99

-98

-97-96

-01-02-03

-04

-05, Q2

Rolling 12 months backwards, excl. IAC


38Transition to IFRS – impact on 2004

MSEK Assets Equity Net Profit

FY 2004 According to Sw. GAAP 256,915 62,316 11,776

ADJUSTMENTS TO IFRS

A. Negative goodwill 0 6,928 -3,034

B. Amortisation of goodwill 134 134 122

C. Nuclear decommissioning 24,467 4,220 886

D. Mining operations 3, 034 2,763 42

E. Development costs 464 464 -77

F. Deferred taxes 0 -2,414 -192

G. Minority Interests 0 9,188 572

TOTAL CHANGE UNDER IFRS 28,099 21,283 -1,681

FY 2004 According to IFRS 285,014 83,599 10,095

Deviations compared with page 81 in Annual report due to the fact that deferred taxes are shown gross in this slide


39Group Liquidity

As of June 30, 2005 Treasury Germany Poland Others Total %Cash and bank 630 957 354 3,689 5,630 38

Interest-bearing investments 5,162 1,145 145 6,452 43

Special Funds 2,860 2,860 19

Shares 11 11 0

Total 5,792 4,973 354 3,834 14,953 100

Amounts in SEK million

Unused committed credit facilities amount to SEK 17 760 million and other unused credit- and overdraft facilities amount to SEK 10 109 million.


40Break Down of Group Debt

As of June 30, 2005 Treasury Germany Poland Others Total %

Subordinated perpetual Capital Securities 9,268 9,268 11

Commercial papers 4,980 4,980 6

MTN 2,327 2,327 3

EMTN 41,587 41,587 47

Liabilities to assoc. companies 14,882 4 14,886 17

Liabilities to oth. shareholders 146 4,234 4,380 5

Bank loans and others 472 9,153 39 286 9,950 11

Total 58,634 24,181 39 4,524 87,378 100

Amounts in SEK million


41Capital Securities – Key features

• Issue date: 29 June, 2005• Size: 1,000 MEUR• Coupon: 5.25%• Maturity: Perpetual, callable in 2015• Step-up 100 bps after 10 years• Ranking: Junior subordinated• Optional deferral: Yes, on a cumulative basis• Mandatory deferral: Yes, interest coverage trigger, non-

cumulative• Equity credit 75% Moody´s, 60% S&P


42Capital Securities - Rationale

• Provides Vattenfall with increased financial flexibility in combination with lower overall weighted average cost of capital

• In line with our growth strategy • Proceeds used to repay short term CP debt raised to fund

the purchase of Elsam shares

• Principal amount treated as 100 % debt in Vattenfall’s accounts

• Coupon treated as financial expense – not dividend


43Vattenfall yield curve

0

10

20

30

40

50

60

70

2004-09-29 2005-09-20

07-09-2109-04-03

10-03-31

18-06-18

24-04-29

Bps

Years

Midbond vs Midswaps in Euribor terms

2 4 5 13 19

Vattenfall Capital Markets Day 2005Capital Markets Day, 27 Sept. 2005 © Vattenfall AB Cash Flow...

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