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Rating Action:

MOODY'S SAYS PROPOSED UNBUNDLING OF DUTCH ELECTRICITY INDUSTRY RAISES CONCERNS, BUT RATINGS ARE MAINTAINED FOR NOW

02 Apr 2004
MOODY'S SAYS PROPOSED UNBUNDLING OF DUTCH ELECTRICITY INDUSTRY RAISES CONCERNS, BUT RATINGS ARE MAINTAINED FOR NOW

London, 02 April 2004 -- Moody's Investors Service has today said that the Dutch Government's decision to recommend a proposal about the unbundling of the Dutch electricity companies to the Lower House of the Dutch Parliament raises a number of uncertainties for the medium-term future of the electricity companies. However, Moody's is maintaining the current ratings and outlooks on Dutch electricity companies as these proposals are still at a relatively early stage and there is limited detail as to how such changes, if passed into law, would be implemented.

The Dutch Government's plan proposes to split each of the currently vertically integrated Dutch energy companies into two separate companies: one to own and operate the network businesses, and the other to carry out generation and sales activities. The networks are expected to remain under state ownership at least until 1 January 2007, whereas the generation and sales companies can be privatised after unbundling which is to be completed by 1 January 2007. The management of the 110kv network would be transferred to Tennet, the Dutch transmission systems operator. This proposal will be debated in Parliament with the intention of reaching an implementation plan by the end of 2004.

According to Moody's, the uncertainties and concerns raised by these proposals include the following:

(1) The possible future capital structure of the proposed new companies (and the impact on existing bonds at the holding company levels of Nuon and Essent). Moody's notes, however, that the Minister's letter requires the proposed companies to have adequate capital.

(2) More than half of the cash flows of the current vertically integrated companies are generated by the more stable regulated network businesses. Separate generation and supply businesses are likely to be inherently riskier from an operating risk perspective and with less critical mass. Conversely, stand-alone distribution companies are likely to carry lower operating risk than the current vertically integrated companies.

(3) Possible impact on the cross-border leases that are currently held at both companies.

(4) Possible diversion of management time from ongoing business issues to address the current debate, which is expected to be lengthy.

Moody's points out that there are a number of possible scenarios, some of which are potentially negative for the companies from a ratings perspective, that could result in rating downgrades.

These could include, firstly, a resulting financial risk profile that would not be commensurate with the business risk of the proposed company for the current rating categories. (Moody's would normally expect a networks company, given its lower business risk, to be able to sustain weaker debt protection measures for a rating category than a generation and supply company.) Another negative outcome, possibly remote, could be the triggering of cross-border leases should they result in significant cash outflows. A further outcome could be the spin-off of businesses without adequate compensation, which could negatively impact the business or financial profile of the remaining company.

However, Moody's also notes that options could be chosen that could be more benign for the current ratings -- with the possible result that the distribution companies' cash flows continue to significantly support the debt in some form.

In any event, Moody's expects the energy companies to vehemently protest against the proposed unbundling and a lengthy debate to ensue before any legislative change is agreed and implemented. Moody's would also expect that all the current stakeholders' interests, including bondholders, would be considered in the course of these discussions. Moody's will continue to monitor these discussions and will, as further clarity emerges over time, comment or take further action as appropriate.

The rated electricity companies and ratings that could potentially be affected as a result of these discussions are as follows:

- The senior unsecured A2/P-1 ratings assigned to the EUR2 billion EMTN programme of Nuon Finance BV, under the guarantee of n.v Nuon, and all debt issued thereunder.

- n.v. Nuon's senior unsecured A2 issuer rating.

- Nuon Power Generation BV's A3 issuer rating.

The outlook on Nuon's ratings is currently stable.

- The A2/P-1 ratings on the EUR2 billion EMTN programme and EUR1 billion ECP programme of Essent NV and Essent Nederland BV.

The outlook on Essent's ratings is currently negative.

Essent NV is a vertically integrated utility based in the Netherlands active in electricity, gas, waste water and cable activities. It is represented in Germany through its stakes in Stadtwerke Bremen and Stadtwerke Bielefeld. Preliminary results for FYE 2003 show a turnover of approximately EUR7 billion. Essent Nederland BV is an intermediate holding company.

Headquartered in Amsterdam, n.v. Nuon is an electricity, gas and water company serving over 2.7 million customers in the Netherlands. As at FYE 2002, it had consolidated sales of EUR4.4 billion.

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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