Safeway (SWY)

Liquidity and Financial Resources

Net cash flow used by operating activities was $151.0 million in the first quarter of 2009 compared to $41.2 million in the first quarter of 2008. This was primarily due to an increase in cash used by working capital which was the result of a shift in holiday shopping.

Net cash flow used by investing activities declined to $252.8 million in the first quarter of 2009 from $370.7 million in the first quarter of 2008 because of reduced capital expenditures.

Net cash flow provided by financing activities was $131.0 million in the first quarter of 2009 compared to $352.9 million in the first quarter of 2008. Borrowings were less in the first quarter of 2009 compared to the first quarter of 2008 due to reduced capital expenditures.

Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including potential borrowing under Safeway’s commercial paper program and its Credit Agreement, referred to below, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments, dividend payments and stock repurchases and scheduled principal payments for the foreseeable future. There can be no assurance, however, that Safeway’s business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under the commercial paper program and Credit Agreement.

CREDIT AGREEMENT The Company has a $1,600.0 million credit agreement (as amended, the “Credit Agreement”) with a syndicate of banks which has a termination date of June 1, 2012 and provides for two additional one-year extensions of the termination date. There are approximately 30 banks in the syndicate with individual commitments to lend ranging from approximately $20 million to approximately $115 million. The Credit Agreement provides (i) to Safeway a $1,350.0 million revolving credit facility (the “Domestic Facility”), (ii) to Safeway and Canada Safeway Limited a Canadian facility of up to $250.0 million for U.S. Dollar and Canadian Dollar advances and (iii) to Safeway a $400.0 million sub-facility of the Domestic Facility for issuance of standby and commercial letters of credit. The Credit Agreement also provides for an increase in the credit facility commitments up to an additional $500.0 million, at the option of the lenders and subject to the satisfaction of certain conditions. The restrictive covenants of the Credit Agreement limit Safeway with respect to, among other things, creating liens upon its assets and disposing of material amounts of assets other than in the ordinary course of business. Additionally, the Company is required to maintain a minimum Adjusted EBITDA, as defined in the Credit Agreement, to interest expense ratio of 2.0 to 1 and is required to not exceed an Adjusted Debt (total consolidated debt less cash and cash

15

Table of Contents

SAFEWAY INC. AND SUBSIDIARIES

Liquidity and Financial Resources

Net cash flow from operating activities was $1,284.8 million in the first 36 weeks of 2008 compared to $1,248.0 million in the first 36 weeks of 2007.

Net cash flow used by investing activities was $980.1 million in the first 36 weeks of 2008 compared to $1,183.2 million in the first 36 weeks of 2007.

Net cash flow used by financing activities was $209.4 million in the first 36 weeks of 2008 compared to $90.3 million in the first 36 weeks of 2007.

At September 6, 2008, the Company had cash and cash equivalents of $358.2 million which consisted of $34.1 million of cash in stores, $107.1 million in bank operating accounts and $217.0 million in cash equivalents (primarily short-term bankers’ acceptances in Canada). The bank operating accounts and bankers’ acceptances exceed the insured account limits or do not qualify for government insurance. The Company carefully monitors its cash and investments to minimize risks, and the Company has not experienced a loss or lack of access to its cash or cash equivalents. However, access to cash and cash equivalents could be impacted if the underlying financial institutions were to fail.

As of September 6, 2008, current maturities of notes and debentures were $1.2 billion. Approximately $0.8 billion is due in the fourth quarter of 2008. Safeway expects to repay these borrowings with cash on hand, commercial paper borrowings and/or the issuance of public debt.

The economic turmoil that has arisen in the credit markets may negatively impact the Company’s ability to issue commercial paper or public debt in the future. In the event that the Company is temporarily unable to issue sufficient commercial paper or public debt to repay current maturities, it will borrow under the Credit Agreement, described on the following page. Although there can be no assurance because of these challenging times for financial institutions, Safeway believes that the participating banks will be willing and able to loan to Safeway in accordance with their legal obligations under the Credit Agreement.

Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including potential borrowing under Safeway’s commercial paper program and Credit Agreement, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments, dividend payments and stock repurchases, if any, for the foreseeable future. There can be no assurance, however, that Safeway’s business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under the commercial paper program and Credit Agreement.

17

Table of Contents

SAFEWAY INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CREDIT AGREEMENT The Company has a $1,600.0 million credit agreement (as amended, the “Credit Agreement”) with a syndicate of banks which has a termination date of June 1, 2012 and provides for two additional one-year extensions of the termination date. The Credit Agreement provides (i) to Safeway a $1,350.0 million revolving credit facility (the “Domestic Facility”), (ii) to Safeway and Canada Safeway Limited a Canadian facility of up to $250.0 million for U.S. Dollar and Canadian Dollar advances and (iii) to Safeway a $400.0 million sub-facility of the Domestic Facility for issuance of standby and commercial letters of credit. The Credit Agreement also provides for an increase in the credit facility commitments up to an additional $500.0 million, subject to the satisfaction of certain conditions. The restrictive covenants of the Credit Agreement limit Safeway with respect to, among other things, creating liens upon its assets and disposing of material amounts of assets other than in the ordinary course of business. Additionally, the Company is required to maintain a minimum Adjusted EBITDA, as defined in the Credit Agreement, to interest expense ratio of 2.0 to 1 and not exceed an Adjusted Debt (total consolidated debt less cash and cash equivalents in excess of $75.0 million) to Adjusted EBITDA ratio of 3.5 to 1. As of September 6, 2008, the Company was in compliance with the covenant requirements. As of September 6, 2008, there were no borrowings, and letters of credit totaled $35.6 million under the Credit Agreement. Total unused borrowing capacity under the Credit Agreement was $1,564.4 million as of September 6, 2008.

SHELF REGISTRATION In 2004, the Company filed a shelf registration statement covering the issuance from time to time of up to $2.3 billion of debt securities and/or common stock. As of September 6, 2008, $825.0 million of securities were available for issuance under the shelf registration. The Company may issue debt or common stock in the future depending on market conditions, the need to refinance existing debt and capital expenditure plans.

DIVIDENDS ON COMMON STOCK Dividends paid on common stock totaled $36.0 million and $30.3 million for the third quarters of 2008 and 2007, respectively. Year-to-date dividends paid on common stock totaled $96.6 million and $81.0 million for 2008 and 2007, respectively. Note J to the Company’s condensed consolidated financial statements in this report provides additional information on dividends declared and dividends paid on Safeway common stock.

STOCK REPURCHASE PROGRAM From the initiation of the Company’s stock repurchase program in 1999 through the end of the third quarter of fiscal 2008, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $3.8 billion, leaving an authorized amount for repurchases of approximately $1.2 billion. This includes an increase in the total authorized level of the repurchase program by $1.0 billion to $5.0 billion approved by the Board of Directors in May 2008. During the third quarter of 2008, Safeway repurchased approximately 6.9 million shares of its common stock under the repurchase program at an aggregate price, including commissions, of $184.9 million. The average price per share, excluding commissions, was $26.77. The timing and volume of future repurchases will depend on several factors, including market conditions.

Liquidity and Financial Resources

Net cash flow from operating activities was $712.9 million in the first 24 weeks of 2008 compared to $652.1 million in the first 24 weeks of 2007.

Net cash flow used by investing activities was $657.0 million in the first 24 weeks of 2008 compared to $692.8 million in the first 24 weeks of 2007.

Net cash flow used by financing activities was $0.8 million in the first 24 weeks of 2008 compared to net cash flow provided by financing activities of $23.4 million in the first 24 weeks of 2007.

As of June 14, 2008, current maturities of notes and debentures were $1.2 billion. Safeway expects to repay these borrowings with cash on hand, borrowings of commercial paper and/or the issuance of public debt.

Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including potential borrowing under Safeway’s commercial paper program and Credit Agreement, referred to below, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments, dividend payments and stock repurchases, if any, for the foreseeable future. There can be no assurance, however, that Safeway’s business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under the commercial paper program and Credit Agreement.

CREDIT AGREEMENT The Company has a $1,600.0 million credit agreement (as amended, the “Credit Agreement”) with a syndicate of banks which has a termination date of June 1, 2012 and provides for two additional one-year extensions of the termination date. The Credit Agreement provides (i) to Safeway a $1,350.0 million revolving credit facility (the “Domestic Facility”), (ii) to Safeway and Canada Safeway Limited a Canadian facility of up to $250.0 million for U.S. Dollar and Canadian Dollar advances and (iii) to Safeway a $400.0 million sub-facility of the Domestic Facility for issuance of standby and commercial letters of credit. The Credit Agreement also provides for an increase in the credit facility commitments up to an additional $500.0 million, subject to the satisfaction of certain conditions. The restrictive covenants of the Credit Agreement limit Safeway with respect to, among other things, creating liens upon its assets and disposing of material amounts of assets other than in the ordinary course of

17

Table of Contents

SAFEWAY INC. AND SUBSIDIARIES

Liquidity and Financial Resources

Net cash flow used by operating activities was $41.2 million in the first quarter of 2008 compared to net cash flow from operating activities of $19.1 million in the first quarter of 2007. The increase in income before depreciation and amortization was more than offset by a significant reduction in payables and accruals in the quarter. Cash flow provided (used) by operating activities is typically not significant in the Company’s first quarter of the fiscal year.

14

Table of Contents

SAFEWAY INC. AND SUBSIDIARIES

Liquidity and Financial Resources

Net cash flow from operating activities was $1,248.0 million in the first 36 weeks of 2007 compared to $1,453.6 million in the first 36 weeks of 2006. Changes in working capital items used cash of $144.1 million in 2007 and provided cash of $82.9 million in 2006.

Net cash flow used by investing activities, which consists principally of cash paid for property additions, was $1,183.2 million for the first 36 weeks of 2007 compared to $1,097.6 million in 2006.

Financing activities used net cash flow of $90.3 million in the first 36 weeks of 2007. Financing activities used cash of $398.0 million in 2006 primarily due to the higher pay down of maturing long-term debt.

14

Table of Contents

SAFEWAY INC. AND SUBSIDIARIES

Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including potential borrowing under Safeway’s commercial paper program and its credit agreement, referred to below, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments, dividend payments, stock repurchases, if any, and scheduled principal payments for the foreseeable future. There can be no assurance, however, that Safeway’s business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under its commercial paper program and credit agreement.

CREDIT AGREEMENT On June 1, 2005, the Company entered into a $1,600.0 million credit agreement with a syndicate of banks. On June 15, 2006, the Company amended the credit agreement to extend the termination date for an additional year to June 1, 2011. On June 1, 2007, the Company amended the credit agreement again for purposes of (i) extending the termination date of the credit agreement for an additional year to June 1, 2012, (ii) providing for two additional one-year extensions of the termination date on the terms set forth in the amendment, and (iii) amending the pricing levels (which are based on Safeway’s debt ratings or interest coverage ratio), pricing margins and facility fee percentages for the loans and commitments under the revolving credit facility. The credit agreement, as amended (the “Credit Agreement”), provides (i) to Safeway a $1,350.0 million, five-year, revolving credit facility (the “Domestic Facility”), (ii) to Safeway and Canada Safeway Limited a Canadian facility of up to $250.0 million for U.S. Dollar and Canadian Dollar advances and (iii) to Safeway a $400.0 million sub-facility of the Domestic Facility for issuance of standby and commercial letters of credit. The Credit Agreement also provides for an increase in the credit facility commitments up to an additional $500.0 million, subject to the satisfaction of certain conditions. The restrictive covenants of the Credit Agreement limit Safeway with respect to, among other things, creating liens upon its assets and disposing of material amounts of assets other than in the ordinary course of business. Additionally, the Company is required to maintain a minimum Adjusted EBITDA, as defined in the Credit Agreement, to interest expense ratio of 2.0 to 1 and not exceed an Adjusted Debt (total consolidated debt less cash and cash equivalents in excess of $75.0 million) to Adjusted EBITDA ratio of 3.5 to 1. As of September 8, 2007, the Company was in compliance with the covenant requirements. As of September 8, 2007, there were no borrowings, and letters of credit totaled $38.5 million under the Credit Agreement. Total unused borrowing capacity under the Credit Agreement was $1,561.5 million as of September 8, 2007. The Credit Agreement is scheduled to expire on June 1, 2012.

SHELF REGISTRATION In 2004, the Company filed a shelf registration statement covering the issuance from time to time of up to $2.3 billion of debt securities and/or common stock. As of September 8, 2007, $825.0 million of securities were available for issuance under the shelf registration. The Company may issue debt or common stock in the future depending on market conditions, the need to refinance existing debt and capital expenditure plans.

Pursuant to the shelf registration, Safeway issued $500.0 million of 6.35% Notes (the “Notes”) on August 17, 2007. The Notes mature on August 15, 2017. The Company will pay interest on the Notes on February 15 and August 15 of each year, beginning on February 15, 2008. Safeway used the net proceeds from the Notes to repay borrowings under its U.S. commercial paper program which had been used to repay $480.0 million of Senior Notes which matured in July 2007. At Safeway’s option, the Notes can be redeemed, in whole or in part, at anytime at a redemption price equal to the greater of 100% of the principal amount of the Notes to be redeemed, or the sum of the present values of the remaining scheduled payments of principal and interest on the Notes to be redeemed. Additionally, Safeway will be required to offer payment in cash equal to 101% of the aggregate principal amount of the Notes, plus accrued and unpaid interest, upon change of control as described in the terms of the Notes.

DIVIDENDS ON COMMON STOCK Safeway paid a quarterly dividend of $0.0575 per common share on January 19, 2007 and April 20, 2007 to stockholders of record as of December 29, 2006 and March 30, 2007, respectively. In May 2007, the Company’s Board of Directors approved a 20% increase in the quarterly dividend from $0.0575 to $0.069 per common share. A cash dividend of $0.069 per common share was paid on July 19, 2007 to stockholders of record as of June 29, 2007. Dividend payments to date in 2007 have totaled $81.0 million.

15

Table of Contents

SAFEWAY INC. AND SUBSIDIARIES

STOCK REPURCHASE PROGRAM In December 2006, the Board of Directors increased the total authorized level of the Company’s stock repurchase program to $4.0 billion from the previously announced level of $3.5 billion. From the initiation of the repurchase program in 1999 through the end of the third quarter of 2007, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $3.4 billion, leaving an authorized amount for repurchases of $614.7 million. During the third quarter of 2007, the Company repurchased approximately 0.4 million shares of its common stock under its repurchase program at an aggregate price, including commissions, of $12.5 million. The average price per share, excluding commissions, was $31.54. Year-to-date through the third quarter of 2007, Safeway repurchased approximately 3.8 million shares of its common stock under the repurchase program at an aggregate price, including commissions, of $132.5 million. The average price per share, excluding commissions, was $35.10. The timing and volume of future repurchases will depend on several factors, including market conditions.

CREDIT RATINGS On July 23, 2007, Standard & Poor’s Rating Services affirmed the Company’s BBB- credit rating and revised its outlook to positive from stable. On August 1, 2007, Moody’s Investors Services affirmed Safeway’s Baa2 rating and revised its outlook to stable from negative. Investors should note that a credit rating is not a recommendation to buy, sell or hold securities and may be subject to withdrawal by the rating agency. Each credit rating should be evaluated independently. Please refer to the caption “Credit Ratings” on page 28 of our most recent Annual Report on Form 10-K for a further discussion of Safeway’s credit ratings.

CONTRACTUAL OBLIGATIONS The Company adopted FIN 48 on December 31, 2006, the first day of the 2007 fiscal year. The amount of unrecognized tax benefits at December 31, 2006 was $138.8 million. This amount has been excluded from the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be determined.

There have been no other material changes in the Company’s contractual obligations other than in the ordinary course of business since the end of fiscal 2006. Please refer to the Annual Report on Form 10-K for additional information regarding Safeway’s contractual obligations.

Liquidity and Financial Resources

Net cash flow from operating activities was $652.1 million in the first 24 weeks of 2007 compared to $742.5 million in the first 24 weeks of 2006. Cash flow in 2006 benefited from a $173 million decline in inventory. Inventory declined in 2007 as well, but only by $66 million.

14

Table of Contents

SAFEWAY INC. AND SUBSIDIARIES

Net cash flow used by investing activities, which consists principally of cash paid for property additions, was $692.8 million for the first 24 weeks of 2007 compared to $725.8 million in 2006.

Financing activities provided net cash flow of $23.4 million in the first 24 weeks of 2007. Financing activities used cash of $274.6 million in 2006 primarily due to the higher pay down of maturing long-term debt.

Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including potential borrowing under Safeway’s commercial paper program and its credit agreement, referred to below, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments, dividend payments, stock repurchases, if any, and scheduled principal payments for the foreseeable future. There can be no assurance, however, that Safeway’s business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under its commercial paper program and credit agreement.

CREDIT AGREEMENT On June 1, 2005, the Company entered into a $1,600.0 million credit agreement with a syndicate of banks. On June 15, 2006, the Company amended the credit agreement to extend the termination date for an additional year to June 1, 2011. On June 1, 2007, the Company amended the credit agreement again for purposes of (i) extending the termination date of the credit agreement for an additional year to June 1, 2012, (ii) providing for two additional one-year extensions of the termination date on the terms set forth in the amendment, and (iii) amending the pricing levels (which are based on Safeway’s debt ratings or interest coverage ratio), pricing margins and facility fee percentages for the loans and commitments under the revolving credit facility. The credit agreement, as amended (the “Credit Agreement”), provides (i) to Safeway a $1,350.0 million, five-year, revolving credit facility (the “Domestic Facility”), (ii) to Safeway and Canada Safeway Limited a Canadian facility of up to $250.0 million for U.S. Dollar and Canadian Dollar advances and (iii) to Safeway a $400.0 million sub-facility of the Domestic Facility for issuance of standby and commercial letters of credit. The Credit Agreement also provides for an increase in the credit facility commitments up to an additional $500.0 million, subject to the satisfaction of certain conditions. The restrictive covenants of the Credit Agreement limit Safeway with respect to, among other things, creating liens upon its assets and disposing of material amounts of assets other than in the ordinary course of business. Additionally, the Company is required to maintain a minimum Adjusted EBITDA, as defined in the Credit Agreement, to interest expense ratio of 2.0 to 1 and not exceed an Adjusted Debt (total consolidated debt less cash and cash equivalents in excess of $75.0 million) to Adjusted EBITDA ratio of 3.5 to 1. As of June 16, 2007, the Company was in compliance with the covenant requirements. As of June 16, 2007, borrowings totaled $16.8 million and letters of credit totaled $43.9 million under the Credit Agreement. Total unused borrowing capacity under the Credit Agreement was $1,539.3 million as of June 16, 2007. The Credit Agreement is scheduled to expire on June 1, 2012.

SHELF REGISTRATION In 2004, the Company filed a shelf registration statement covering the issuance from time to time of up to $2.3 billion of debt securities and/or common stock. As of June 16, 2007, $1.3 billion of securities were available for issuance under the shelf registration. The Company may issue debt or common stock in the future depending on market conditions, the need to refinance existing debt and capital expenditure plans.

DIVIDENDS ON COMMON STOCK Safeway paid a quarterly dividend of $0.0575 per common share on January 19, 2007 and April 20, 2007 to stockholders of record as of December 29, 2006 and March 30, 2007, respectively. The dividend payments totaled $50.7 million.

In May 2007, the Company’s Board of Directors approved a 20% increase in the quarterly dividend from $0.0575 to $0.069 per common share. A cash dividend of $0.069 per common share was paid on July 19, 2007 to stockholders of record as of June 29, 2007. The dividend payment totaled $30.3 million.

STOCK REPURCHASE PROGRAM In December 2006, the Board of Directors increased the total authorized level of the Company’s stock repurchase program to $4.0 billion from the previously announced

15

Table of Contents

SAFEWAY INC. AND SUBSIDIARIES

level of $3.5 billion. From the initiation of the repurchase program in 1999 through the end of the second quarter of 2007, the aggregate cost of shares of common stock repurchased by the Company, including commissions, was approximately $3.4 billion, leaving an authorized amount for repurchases of $627.2 million. The Company did not repurchase stock in the first quarter of 2007. During the second quarter of 2007, the Company repurchased approximately 3.4 million shares of its common stock under its repurchase program at an aggregate price, including commissions, of $120.0 million. The average price per share, excluding commissions, was approximately $35.52. The timing and volume of future repurchases will depend on several factors, including market conditions.

CONTRACTUAL OBLIGATIONS The Company adopted FIN 48 on December 31, 2006, the first day of the 2007 fiscal year. The amount of unrecognized tax benefits at December 31, 2006 was $138.8 million. The Company has not provided a detailed estimate of the timing due to the uncertainty of when the related tax settlements are due.

There have been no other material changes in the Company’s contractual obligations other than in the ordinary course of business since the end of fiscal 2006. Refer to the Annual Report on Form 10-K for additional information regarding Safeway’s contractual obligations.

Liquidity and Financial Resources

Net cash flow from operating activities declined to $19.1 million in the first quarter of 2007 from $128.6 million in the first quarter of 2006 primarily due to an increase in inventory and higher payments to partners for the sale of third-party gift cards, partly offset by higher net income and an increase in income tax payable.

Net cash flow used by investing activities, which consists principally of cash paid for property additions, was $391.7 million for the first quarter of 2007 compared to $414.7 million in 2006.

Financing activities provided net cash flow of $305.7 million in the first quarter of 2007 compared to $24.1 million in the first quarter of 2006 primarily due to an increase in commercial paper borrowings.

Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including potential borrowing under Safeway’s commercial paper program and Credit Agreement, referred to below, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments, dividend payments, stock repurchases, if any, and scheduled principal payments for the foreseeable future. There can be no assurance, however, that Safeway’s business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under the commercial paper program and Credit Agreement.

CREDIT AGREEMENT On June 1, 2005, the Company entered into a $1,600.0 million credit agreement (the “Credit Agreement”) with a syndicate of banks. The Credit Agreement provides (i) to Safeway a $1,350.0 million, five-year, revolving credit facility (the “Domestic Facility”), (ii) to Safeway and Canada Safeway Limited, a Canadian facility of up to $250.0 million for U.S. Dollar and Canadian Dollar advances and (iii) to Safeway a $400.0 million sub-facility of the Domestic Facility for issuance of standby and

13

Table of Contents

SAFEWAY INC. AND SUBSIDIARIES

Liquidity and Financial Resources

Net cash flow from operating activities was $1,453.6 million in the first 36 weeks of 2006 compared to $1,287.4 million in the first 36 weeks of 2005, primarily because of higher net income.

Net cash flow used by investing activities, which consists principally of cash paid for property additions, was $1,097.6 million for the first 36 weeks of 2006 compared to $835.7 million in 2005. The Company incurred higher costs for purchases of land and buildings in the first quarter of 2006. In addition, a portion of the costs associated with the large number of Lifestyle projects completed late in the fourth quarter of 2005 was paid in the first quarter of 2006.

Financing activities used cash flow of $398.0 million in the first 36 weeks of 2006 compared to $386.9 million in 2005. The income tax refund related to prior years’ debt refinancing was offset by pay down of long-term borrowings, stock repurchases and dividends paid.

Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including potential borrowing under Safeway’s commercial paper program and its credit agreement, referred to below, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments, dividend payments, stock repurchases, if any, and scheduled principal payments for the foreseeable future. There can be no assurance, however, that Safeway’s business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under its commercial paper program and credit agreement.

CREDIT AGREEMENT On June 1, 2005, the Company entered into a $1,600.0 million credit agreement with a syndicate of banks. On June 15, 2006, the Company amended the credit agreement to extend the termination date for an additional year to June 1, 2011. The credit agreement, as amended (the “Credit Agreement”), provides (i) to Safeway a $1,350.0 million, five-year, revolving credit facility (the “Domestic Facility”), (ii) to Safeway and Canada Safeway Limited a Canadian facility of up to $250.0 million for U.S. Dollar and Canadian Dollar advances and (iii) to Safeway a $400.0 million sub-facility of the Domestic Facility for issuance of standby and commercial letters of credit. The Credit Agreement also provides for an increase in the credit facility commitments up to an additional $500.0 million, subject to the satisfaction of certain conditions. The restrictive covenants of the Credit Agreement limit Safeway with respect to, among other things, creating liens upon its assets and disposing of material amounts of assets other than in the ordinary course of business. Additionally, the Company is required to maintain a minimum Adjusted EBITDA,

15

Table of Contents

SAFEWAY INC. AND SUBSIDIARIES

Liquidity and Financial Resources

Net cash flow from operating activities was $742.5 million in the first 24 weeks of 2006 compared to $671.8 million in the first 24 weeks of 2005. This change was primarily because of higher net income.

14

Table of Contents

SAFEWAY INC. AND SUBSIDIARIES

Liquidity and Financial Resources

Net cash flow from operating activities declined to $128.6 million in the first quarter of 2006 from $238.4 million in the first quarter of 2005 because of a decline in accounts payable and accrued liabilities. This decline was primarily due to the timing of vendor payments, the payment of higher bonuses and the payment of employee buyout costs, which were expensed in the fourth quarter of 2005. Additionally, as a result of growing gift card sales, the payment to the Company’s gift card partners was higher in the first quarter of 2006 compared with the first quarter of 2005.

Net cash flow used by investing activities, which consists principally of cash paid for property additions, was $414.7 million for the first quarter of 2006 compared to $204.9 million in 2005. The costs of the large number of Lifestyle projects completed late in the fourth quarter of 2005 were paid for in the first quarter of 2006. In addition, the Company had higher purchases of land and buildings in the first quarter of 2006.

Financing activities provided net cash flow of $24.1 million in the first quarter of 2006 and $26.1 million in the first quarter of 2005.

On June 1, 2005, the Company entered into a $1,600.0 million credit agreement (the “Credit Agreement”) with a syndicate of banks. The Credit Agreement provides (i) to Safeway a $1,350.0 million, five-year, revolving credit facility (the “Domestic Facility”), (ii) to Safeway and Canada Safeway Limited a Canadian facility of up to $250.0 million for U.S. Dollar and Canadian Dollar advances and (iii) to Safeway a $400.0 million sub-facility of the Domestic Facility for issuance of standby and commercial letters of credit. The Credit Agreement also provides for an increase in the credit facility commitments up to an additional $500.0 million, subject to the satisfaction of certain conditions. The restrictive covenants of the Credit Agreement limit Safeway with respect to, among other things, creating liens upon its assets and disposing of material amounts of assets other than in the ordinary course of business. Additionally, the Company is required to maintain a minimum Adjusted EBITDA, as defined in the Credit Agreement, to interest expense ratio of 2.0 to 1 and not exceed an Adjusted Debt (total consolidated debt less cash and cash equivalents in excess of $75.0 million) to Adjusted EBITDA ratio of 3.5 to 1. As of March 25, 2006, the Company was in compliance with the covenant requirements. The Credit Agreement is scheduled to expire on June 1, 2010. As of March 25, 2006, borrowings totaled $114.5 million and letters of credit totaled $45.5 million under the Credit Agreement.

13

Table of Contents

SAFEWAY INC. AND SUBSIDIARIES

Liquidity and Financial Resources

Net cash flow from operating activities declined to $238.4 million in the first quarter of 2005 from $388.1 million in the first quarter of 2004. Accounts payable typically is a large use of cash in the first quarter of each year. However, in the first quarter of 2004 Safeway significantly improved its management of trade payables creating a large source of cash. Trade payables continued to improve in the first quarter of 2005, though not as much as in 2004. Additionally, tax payments in the first quarter of 2005 were higher than in the first quarter of 2004 due to higher pre-tax income.

Net cash flow used by investing activities, which consists principally of cash paid for property additions, was $204.9 million for the first quarter of 2005 compared to $205.9 million in 2004.

Financing activities provided net cash flow of $26.1 million in the first quarter of 2005 and used net cash flow of $177.7 million in the first quarter of 2004.

Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including borrowing under Safeway’s commercial paper program and bank credit agreement, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for the foreseeable future. There can be no assurance, however, that Safeway’s business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under the commercial paper program and bank credit agreement.

If the Company’s credit rating were to decline below its current level of Baa2/BBB, the ability to borrow under the commercial paper program could be adversely affected. Safeway’s ability to borrow under the bank credit agreement is unaffected by Safeway’s credit rating. However, Safeway is required under material covenants in its bank credit agreement to maintain certain interest coverage and leverage ratios. On May 20, 2004, the bank credit agreement was amended, in conjunction with its annual renewal, to change the maximum leverage ratio to 4.0 to 1.0 from 3.5 to 1.0. The maximum leverage ratio returns to 3.5 to 1.0 for the Company’s third quarter of fiscal 2005. As of March 26, 2005, the Company was in compliance with the covenant requirements. If Safeway does not maintain these ratios, its ability to borrow under the bank credit agreement would be impaired.

In 2004, the Company filed a shelf registration statement covering the issuance from time to time of up to $2.3 billion of debt securities and/or common stock. The Company may issue debt or equity securities in the future depending on market conditions, the need to refinance existing debt and capital expenditure plans. At March 26, 2005, $1.6 billion of securities were available for issuance under the shelf registration.