Nine-Month Interim Report 2001 January - September

11/13/2001 7:08 AM EST

Comments by the Chief Executive Officer

* "Neue Kraft" Project in full swing

* NordPool prices return to normal

* Sales increased more than twofold

* Improved profit and cash flow

Vattenfall's experience of Swedish and Nordic electricity generation,
distribution and sales has been lengthy and multifacetted. The company
focuses on providing and developing attractive and cost-efficient energy
solutions to customers. As a result of the early deregulation of the
Swedish and Nordic electricity market,
we have developed considerable expertise in conducting business in a
deregulated energy market. At an early stage, we made investments in
Finland, Poland and Germany. This long-term business strategy is now
beginning to yield benefits.

However, this does not mean that the gains from these major investments
can be immediately harvested. Nevertheless, it is satisfactory to now
see that business operations in Germany are better than we expected at
the time that the acquisition was made.
In the first nine months of the year, net sales increased by 112 per
cent to SEK 46.8 billion. The increase in sales can be explained by the
fact that HEW was consolidated from the beginning of 2001 and that HEW's
subsidiaries, Veag and Laubag were consolidated from May and July 2001,
respectively.

Operating profit for the first nine months
of the year, excluding items affecting comparability, increased by 47
per cent to SEK 5.5 billion. Profit before tax and minority interests,
excluding items affecting comparability, increased by 53 per cent to SEK
3.9 billion.

The cash flow before investing activities amounted to SEK 14.2 billion,
compared with 3.7 in the corresponding period of 2000.

Strong Position in Germany
Vattenfall increased its ownership stake in Hamburgische Electricitäts-
Werke AG (HEW) to 73.8 per cent. Together with the City
of Hamburg, we control 98.9 per cent.
The Board of Directors of HEW has now appointed Dr. Klaus Rauscher as
President of the company. Dr. Rauscher is also responsible for
developing "Neue Kraft" .

The basis of "Neue Kraft" is HEW and its new subsidiaries VEAG and
Laubag. VEAG is an electricity generator with modern thermal power
plants. The company also owns the high-voltage transmission lines in all
of the federal states of East Germany, apart from Berlin. Laubag
extracts the lignite used by Veag's thermal power plants.
Originally, the intention was to also integrate the Berlin-based
company, Bewag, into "Neue Kraft". However, the other shareholder,
Mirant, decided to discontinue the co-operation concerning Bewag's
involvement. This does not alter the basic concept. Vattenfall owns
about 45 per cent and, through a shareholder's agreement with Mirant, it
has full control over the company. "Neue Kraft" will have a close co-
operation with Bewag, even if the company is not consolidated into the
Group. We will keep the option open for the company to join at a later
stage.

Improved Group Structure
Vattenfall has sold its 51 per cent stake in Vattenfall Naturgas AB to
the other four shareholders - Ruhrgas, Statoil, Dong and Fortum. As the
energy markets in Europe are liberalized, natural gas will be available
on the open market to a greater extent. The strategy
of the Group is to divest activities that are not part of its core
business. In November, Vattenfall Naturgas changed its name to Nova
Naturgas.

Vattenfall has also sold its building in Råcksta to the German real
estate company, IVG.
SWECO and Vattenfall have agreed to terminate their co-operation in the
jointly owned company, SwedPower International AB. This means that
SwedPower International has become a wholly-owned subsidiary in the
Vattenfall Group, responsible for Vattenfall's international consulting
activities.

As a part of Vattenfall's strategy to focus on core business and to
concentrate on the northern European market, the Group has sold its
production assets in Bolivia, Peru and Brazil to the US company, NRG
Energy, Inc.

Vattenfall has also reached an agreement
to sell its stake in the hydro power company, Theun Hinboun, in Laos to
Statkraft. The transaction is expected to be completed in November.
Vattenfall has reached an agreement to sell its wholly-owned subsidiary,
Oslo Energi, to the Norwegian energy group, Hafslund ASA. The
transaction is expected to be completed in December, after the general
meeting of shareholders in Hafslund. At the same time, Vattenfall will
become a shareholder in the new Norwegian energy group. A provision has
been made in the accounts for the quarter for the capital loss that will
arise from the sale of the company.

Electricity Prices
The electricity prices on the Nordic power exchange, NordPool, have
returned to normal after a number of years of unusually high
precipitation. In the light of this development, Vattenfall has raised
its prices for customers in Sweden. On the Swedish electricity market,
the electricity price increased in spring to about the same level as
before deregulation in 1996. The increase was felt by household
customers because the tax since deregulation has doubled (from 9 to 18
öre *).

We look forward to the inquiry into pricing on the electricity market
that has just started.
The increase in price reflects the fact that the pricing mechanisms on
the producer market are efficient. This means that the price can
increase or decrease depending on supply and demand. However, to allow
for new investment in power generation, additional price increases of 20-
25 per cent are necessary.

Since the 1996 deregulation, Vattenfall has considerably reduced its
production costs.

The nuclear power tax that still exists distorts market competition and
has a negative long-term impact on electricity supply.

Increased Generation, Focus on Networks
Vattenfall accounts for about 20 per cent of the now integrated Nordic
electricity market. So far this year, we have generated more electricity
than last year.
As of July 1, Vattenfall's four wholly-owned network companies in Sweden
introduced a new form of service interruption guarantee for all
customers. The guarantee replaced Vattenfall's previous service
guarantee and is a part of the comprehensive package of measures that
was decided upon on February 1 and which entails an additional annual
investment of SEK 200 million in network improvements.

Financing
Vattenfall's loan strategy is characterized by flexibility and access to
various borrowing options. This means that we determine when to borrow
and concentrate borrowing to times when market conditions are
advantageous.

Vattenfall has a sound financing plan which also includes acquiring
additional shares in HEW from the City of Hamburg. Extensive
restructuring is in progress on the European energy market which is
resulting in an increase in debt in energy companies, leading to a
general deterioration in credit ratings. Following Vattenfall's
acquisitions in Germany, which were primarily debt-financed, Moody's and
Standard & Poor's downgraded Vattenfall during the summer. After Mirant
terminated the co-operation with Vattenfall, the rating agencies are
once again reviewing Vattenfall's rating. We are now consolidating and
integrating the German acquisitions into the Group. We anticipate a
positive financial development with an improved cash flow and financial
ratios.

Lars G Josefsson
President and Chief Executive Officer