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Rating Action:

MOODY'S ASSIGNS Baa2 ISSUER RATING TO STATKRAFT AS; STABLE OUTLOOK

16 Dec 2004
MOODY'S ASSIGNS Baa2 ISSUER RATING TO STATKRAFT AS; STABLE OUTLOOK

London, 16 December 2004 -- Moody's Investors Service has today assigned a Baa2 senior unsecured issuer rating to the recently established Statkraft AS. The rating outlook is stable. The Aaa ratings on bonds issued by Statkraft SF prior to 1 January 2003 is affirmed. At the same time Moody's will withdraw the senior unsecured long term issuer and short-term debt ratings on Statkraft SF, the ultimate holding company.

Statkraft AS is a newly formed entity established on 1 October 2004 as an intermediate holding company for the Statkraft group operations. This company has been established following the approval from the Norwegian Parliament (the Reorganisation Act of September 2004) for the reorganisation of Statkraft SF, leading to a transfer of that company's operations to a wholly owned limited liability company (Statkraft AS), including subsidiaries. This new legal form may allow Statkraft AS to be partially privatised (which was not possible as an SF) if a suitable business combination is proposed. However, any reduction in the State ownership (from 100%) would require approval from Parliament. Moodys understands that there is no majority in Parliament for a part-privatisation at the moment.

Statkraft SF (the ultimate parent company) will remain the formal counterparty for the bonds issued prior to 1 January 2003, which continue to be backed by the Statutory guarantee (enshrined in the State-Owned Enterprise Act), which is the primary basis of the Aaa ratings assigned to such bonds. Statkraft SF will continue to exist as an entity until all state-backed loans are either amortised or refinanced. These loans are also at a pari passu level with debt at Statkraft AS as a result of internal company loans that have been put in place. All current and future financing, which does not benefit from the statutory guarantee, will be issued out of Statkraft AS.

Moody's also said that Statkraft SF's issuer rating of Baa2 and short term debt rating of P-2 have been lowered to Baa3 and P-3 respectively and will be withdrawn. The withdrawal reflects the fact that the ratings are no longer required since all financial liabilities have been moved or are moving to the level of Statkraft AS. The lower notching purely takes into account the structural subordination that would now exist were any new debt to be issued at this level (none planned) as a result of the new structure.

According to Moody's, the stand-alone rating of Baa2 of Statkraft AS reflects the ultimate 100% state ownership, which provides some uplift to the rating but incorporates lack of direct government support. Moody's will however continue to evaluate the strength of assumed support provided by the State. The rating also factors Statkraft's strong market position as Norway's leading electricity generator of low-cost environmentally-friendly hydro power, which is benefiting from higher prices in the Nordic sector, but will continue to remain somewhat volatile. Although profitability is currently depressed by long-term, out-of-the-money industrial contracts, Moody's notes that, as these contracts run off between now and 2013, core cash flows should gradually rise.

However, the rating also factors the company's current high debt levels and weak debt protection measures (particularly on a retained cash flow basis) following a number of acquisitions of stakes in smaller companies in the Norwegian power sector - although debt levels have declined since a peak in 2002. On the one hand, Moody's notes that proceeds from a number of expected asset disposals, which Statkraft has instigated as a result of antitrust requirements, are expected over the next few months. On the other, Moody's observes that the company has at the same time entered into a number of new investments and is expected to grow further, given the company's strategy to develop existing ownership in utilities in Norway, and expand into Europe if appropriate opportunities in environmentally friendly power were to arise.

Moreover, the rating agency notes that Statkraft has shares in Sydkraft, a valuable strategic asset, with an option to put these shares to E.ON, the majority owner. This could potentially offer Statkraft additional financial flexibility, although it is possible that Statkraft may decide to keep this as a longer-term investment. Moody believes that Statkraft will adopt a balanced financial strategy and gradually reduce debt, however the pace of this will be influenced by the timing and size of both acquisitions and divestments.

The company's retained cash flow has also been negatively impacted by large dividends over the past three years (90% in 2002/3) and, despite the recent restructuring, the government has recently proposed a 78% dividend payout for 2004 (estimated at NOK 3.4 billion) beyond the recommended 50% by the company's Board. Historically, the Norwegian government has made equity injections into Statkraft in measure to rebalance the large dividends -- however, Moody's cautions that such injections, whilst possible, cannot be relied upon in the future. Nonetheless Moody's also factors into the rating the fact that the company's financial flexibility looks much more significant on a Funds from Operations basis (FFO, i.e., cash flow after tax, pre-dividends) than after dividends and are currently which are at the ultimate discretion of the government.

The current Baa2 rating and stable outlook reflect the ongoing uncertainties surrounding both timing and the extent of improvements in credit protection measures given the factors noted above. Nonetheless, there are a number of trends which could be favourable for this company and the long-term rating could move in a positive direction should the company demonstrate that it can comfortably meet and sustain Retained Cash Flow/adjusted debt in a range from 10-14%, FFO/adjusted debt in the 14-18% range and FFO/interest coverage of 4x and over. According to Moody's, factors which could be the drivers of such a development include a commitment to a lower dividend policy than currently demonstrated, consistently lower debt levels or sustained cash flow improvement.

Factors which could have a negative impact include a significant investment drive leading to increased execution risk and increasing debt levels. Moody's cautions that a privatisation of the company, which did not go hand in hand with an improved financial profile for the company, or which entailed a deterioration in the company's business profile, could also exert downward pressure. However, such a development is considered unlikely given the political sensitivity to such a move and Moody's expects any proposed future business combination to enhance the company's operating and financial profile.

Statkraft AS is a newly established holding company within the Statkraft group. Statkraft SF continues to be the ultimate holding company for the Statkraft group which is a state-owned hydro generator based in Oslo, Norway. The group had total revenues of NOK12 billion as at 31.12.2003.

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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