© Vattenfall AB Vattenfall Capital Markets Day 2005 Presentation by Matts Ekman CFO 27 September, 2005
© 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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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 %
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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)
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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.
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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)
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
31Risk vs Return on Investment
Transmission
Windpower
Brownfield power projects
Upgrades of existing plants
High
Acquisitions
High
Low Return
Distribution
Risk
© Vattenfall AB
5. Funding
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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.
© Vattenfall AB
Appendices
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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.
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
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