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Rating Action:

MOODY'S AFFIRMS A3 RATINGS OF EESTI ENERGIA (ESTONIA);OUTLOOK STABLE

11 Nov 2004
MOODY'S AFFIRMS A3 RATINGS OF EESTI ENERGIA (ESTONIA);OUTLOOK STABLE

London, 11 November 2004 -- Moody's Investors Service has today affirmed the A3/P-2 senior unsecured issuer ratings and A3 senior unsecured foreign currency debt rating of Eesti Energia (EE.). The outlook is stable.

The A3 ratings recognize EE's strength and strategic importance as the dominant vertically integrated electric utility in Estonia (foreign and domestic currency rating A1) with 100% State ownership, its protected market position and its solid business and financial progress to date. At the same time the ratings factor EE's small size in absolute terms, a fairly large ongoing investment programme, the evolving nature of regulation in Estonia, the prospect of limited earlier market opening than originally timetabled and exposure to developments in the Estonian economy.

Moody's also notes that the proposal by the former Estonian Ministry for Economic Affairs in Spring 2004 to consider splitting up Eesti Energia has been abandoned by his successor. This had caused some potential uncertainty for the rating-given the fact that this would have created much smaller entities with possibly higher business risk- that has now removed.

Eesti Energia's ratings reflect the company strategic importance to Estonia as its dominant vertically integrated electric utility and implicit support of its 100% state owner Estonia. Moody's believes that the State recognises the strategic importance of Eesti Energia, which is the largest indigenous company, and the importance of the oil shale industry, the country's prime source of energy. The State is not committed to provide capital to the company, however Moody's would expect it to use means at its disposal to support the company if necessary.

EE generates 96% of the country's electricity and 30% of its heating needs; it also owns and operates all transmission networks and most of the distribution networks. Additionally, EE owns 100% of the principal oil shale supplier - Estonia's long term primary fuel source for generation -after transference of the government's stake in 2003.

Competition from both Russia and Lithuania are expected to maintain pricing pressure for eligible clients in Estonia. However, Estonia's electricity market is protected - only 10% is open; its request for a derogation from the EU to defer market opening (35%) until 2009 and full opening until 2012 was approved in July 2002 although there may be further discussions in Parliament to discuss possible limited acceleration of market opening. However EE has made good progress on its sizeable modernisation programme of its generation plant which is well on the way to being completed. Whilst investment needs peaked in 02/03, EE will need to continue to invest in networks as well as generation to gradually increase efficiencies, with anticipated investments of around Eur150million p.a. - hence debt is likely to continue to rise and the company is expected to stay free cash flow negative over the next couple of years. It is possible that investments will increase later in the decade in order to install an ash handling plant and possibly for new generation capacity. EE has also agreed - together with the other Baltic energy companies, Latvenergo and Lithuanian Energy to invest in a subsea cable to Finland (350 MW capacity) at a total cost of EUR110million ( EE's share will be 40%). The project will operate as a commercial project until 2013 after which it will become part of the high voltage infrastructure.

The regulatory regime is relatively new, and political considerations have in the past slowed the timing and amounts of tariff increases; EE have requested a tariff increase in 2004 which they expect to get in Spring 2005. Nonetheless a new regulatory framework has been agreed which will mean that tariffs will be set for a certain period (3-5 years) and adjusted annually. Whilst tariffs were lower than expected during 2003/4 given that there were no tariff increases, EE's cash flow was still good as a result of strong domestic and export sales.

The rating outlook is stable. This assumes the company makes progress in line with its significant budget, maintains good debt protection measures (the company is expected to maintain Retained Cash Flow/Net Adjusted Debt of around 30% or over)and the economic situation in Estonia remains healthy. Factors which could be positive for the rating would include: continued improvement of financial profile; reduction in investment risk (unlikely in the near future given ongoing and potential investment needs) or improvement in Estonia sovereign credit rating. Factors which could be negative for the rating could be a significant increase in its investment programme resulting in higher than expected debt levels and weakening of current debt protection measures, a significant change in business conditions or negative developments in the country rating.

Eesti Energia, based in Tallinn, Estonia, is the 100% state owned vertically integrated utility. As of March 2004, it had sales of Eur 377 million.

London
Stuart Lawton
Managing Director
European Corporates
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Helen Francis
Vice President - Senior Analyst
European Corporates
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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