8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):

February 23, 2006

SAFEWAY INC.

(Exact name of registrant as specified in its charter)

Delaware	1-00041	94-3019135
(State or other jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification Number)

5918 Stoneridge Mall Road, Pleasanton, California	94588-3229
(Address of principal executive offices)	(Zip Code)

(925) 467-3000

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition.

The information in this Form 8-K, including the exhibit, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

On February 23, 2006, we issued our fourth quarter earnings press release. A copy of our press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

In the press release and our other public statements in connection with the press release, we use the following financial measures that are not measures of financial performance under U.S. generally accepted accounting principles (non-GAAP financial measures):

• “free cash flow” which is calculated as net cash flow from operating activities less net cash flow used by investing activities, excluding employee buyouts in 2006.

• “adjusted income and adjusted earnings per diluted share” for 2005 and 2004, which is defined as reported net income and earnings per diluted share, excluding the following:

• Texas store impairment charges (in 2005);

• Texas store exit activities (in 2005);

• Employee buyouts (in 2006 and 2005);

• Dominick’s store exit activities (in 2004);

• Health and welfare benefit contributions (in 2004);

• Accrual for rent holidays (in 2004); and

• Pro forma stock option expense (in 2004).

• “Adjusted operating and administrative expense as a percentage of sales” for 2005 and 2004, which is defined as reported operating and administrative expense as a percentage of sales excluding the following:

• Texas store impairment charges (in 2005);

• Texas store exit activities (in 2005);

• Employee buyouts (in 2005);

• Dominick’s store exit activities (in 2004);

• Health and welfare benefit contributions (in 2004);

• Accrual for rent holidays (in 2004); and

• Pro forma stock option expense (in 2004).

• “Adjusted EBITDA” which is defined by our bank credit agreement as EBITDA (earnings before interest, income taxes, depreciation and amortization), excluding the following:

• LIFO (income) expense;

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• Stock option expense;

• Property impairment charges; and

• Equity in earnings of unconsolidated affiliates, net.

• “Adjusted Debt” which is defined by our bank credit agreement as total debt less cash and equivalents in excess of $75.0 million.

• “Adjusted EBITDA as a multiple of interest expense” which is calculated by dividing Adjusted EBITDA by interest expense.

• “Adjusted Debt to Adjusted EBITDA” which is calculated by dividing Adjusted Debt by Adjusted EBITDA.

Reconciliations of “adjusted income and adjusted earnings per diluted share” to GAAP net income and “free cash flow” to GAAP cash flow for 2005 and 2004 are provided in the press release. Reconciliations of Adjusted EBITDA to the most directly comparable GAAP financial measures – net income and net cash flow from operating activities – also are provided in the press release. Each of these non-GAAP financial measures provides information regarding various aspects of the cash that our business generates, which management believes is useful to understanding our business.

The exclusions included in “adjusted income and adjusted earnings per diluted share” relate to impairment charges at our Texas stores, closing costs relating to store closures, the employee buyouts, health and welfare benefit contributions, accrual for rent holidays and pro forma stock option expense. Management believes that excluding these items provides a useful financial measure that will facilitate comparisons of our operating results before, during and after such expenses are incurred, as well as facilitating comparisons of our performance with that of other companies that might not have the non-cash charges, closing costs, employee buyouts, health and welfare benefit contributions and accrual for rent holidays that we have experienced. Management also believes that investors, analysts and other interested parties view our “adjusted income and adjusted earnings per diluted share” as an indicator of our ongoing operating performance. Management is unable to estimate the effect that any voluntary employee buyouts will have on guidance for 2006 of earnings per diluted share, and therefore is not able to provide any reconciliation of any amounts set forth herein with respect to any voluntary employee buyouts in 2006.

Management believes that adjusted operating and administrative expense as a percentage of sales provides a useful financial measure that will facilitate comparisons of our adjusted operating and administrative expense before, during and after the unusual or unpredictable expenses are incurred, as well as facilitate comparisons of our performance with that of other companies that might not have the non-cash charges, store closures, health and welfare benefit contributions and employee buyouts that we have experienced.

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Management believes that “Adjusted EBITDA,” “Adjusted Debt” and the related ratios are useful measures of operating performance that facilitate management’s evaluation of our ability to service debt and our capability to incur more debt to generate the cash needed to grow the business (including at times when interest rates fluctuate). Omitting interest, taxes and the enumerated non-cash items provides a financial measure that is useful to management in assessing operating performance because the cash our business operations generate enables us to incur debt and thus to grow.

Management believes that “Adjusted EBITDA” and the related ratios also facilitate comparisons of our results of operations with those of companies having different capital structures. Since the levels of indebtedness, tax structures, methodologies in calculating LIFO expense and unconsolidated affiliates that other companies have are different from ours, we omit these amounts to facilitate investors’ ability to make these comparisons. Similarly, we omit depreciation and amortization because other companies may employ a greater or lesser amount of owned property, and because, in management’s experience, whether a store is new or one that is fully or mostly depreciated does not necessarily correlate to the contribution that that store makes to operating performance.

Management also believes that investors, analysts and other interested parties view our ability to generate “Adjusted EBITDA” as an important measure of our operating performance and that of other companies in our industry.

“Free cash flow,” “Adjusted EBITDA,” “Adjusted Debt” and the related ratios are useful indicators of Safeway’s ability to service debt and fund share repurchases that management believes will enhance stockholder value. Adjusted EBITDA also is a useful indicator of cash available for investing activities. A portion of the free cash flow that the Company generates in 2006 is expected to be spent on mandatory debt service requirements or other non-discretionary expenditures. Management is unable to estimate the effect that any voluntary employee buyouts will have on guidance for 2006 of free cash flow, and therefore is not able to provide any reconciliation of any amounts set forth herein with respect to any voluntary employee buyouts in 2006.

These non-GAAP financial measures should not be considered as an alternative to net cash from operating activities or other increases and decreases in cash as shown on Safeway’s Consolidated Statement of Cash Flows for the periods indicated as a measure of liquidity. These measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Other companies in our industry may calculate “free cash flow,” “Adjusted EBITDA” and “Adjusted Debt” differently than we do, limiting their usefulness as comparative measures.

Additional limitations include:

• “Adjusted EBITDA” does not reflect our cash expenditures for capital expenditures;

• “Adjusted EBITDA” does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;

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• “Adjusted EBITDA” does not reflect cash requirements for income taxes paid; and

• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and “Adjusted EBITDA” does not reflect any cash requirements for such replacements.

Because of these limitations, our non-GAAP financial measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and use our non-GAAP financial measures supplementally.

Item 9.01. Financial Statements and Exhibits.

(c) Exhibits.

99.1 Press Release dated February 23, 2006 of Safeway Inc.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	SAFEWAY INC.
	(Registrant)
Date: February 23, 2006	By:	/s/ Robert A. Gordon
	Name:	Robert A. Gordon
	Title:	Senior Vice President,
		Secretary & General Counsel

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EXHIBIT INDEX

Exhibit No.
99.1	Press Release dated February 23, 2006 of Safeway Inc.

7

EX-99.1

Exhibit 99.1

FOR IMMEDIATE RELEASE

SAFEWAY INC. ANNOUNCES

FOURTH-QUARTER 2005 EARNINGS

Non-Fuel Identical Store Sales Increase 3.7%

Contacts: Melissa Plaisance (925) 467-3136

Julie Hong (925) 467-3832

Pleasanton, CA – February 23, 2006

Results From Operations

Safeway Inc. today reported net income of $173.5 million ($0.39 per diluted share) for the fourth quarter ended December 31, 2005. Net income for the quarter was reduced by a total of $0.12 per diluted share for previously announced store exit activities in Texas and employee buyouts primarily in Dominick’s and Northern California. These items are outlined on Table 1 of this release.

Net income for the fourth quarter of 2004 was $202.7 million ($0.45 per diluted share). Net income for the quarter was reduced by a total of $0.02 per diluted share for contributions to a Northern California UFCW multi-employer health and welfare plan and an accrual for rent holidays. In addition, pro forma stock option expense in the fourth quarter of 2004 was $0.02 per diluted share. These items are outlined on Table 1.

“We are very pleased with our 2005 results,” said Steve Burd, Chairman, President and CEO. “When adjusted for Easter, our same store sales grew stronger each quarter and we increased market share in the U.S. supermarket channel 51 of 52 weeks in 2005. We also completed the restructuring of our labor contracts and are beginning to experience solid operating and administrative expense leverage.”

Sales

Total sales increased 5.8% to $12.0 billion in the fourth quarter of 2005 compared to $11.4 billion in 2004. Safeway’s marketing strategy, Lifestyle store execution and increased fuel sales drove this sales increase. Comparable store sales increased 5.4% and identical store sales (which exclude replacement stores) increased 5.1% for the fourth quarter of 2005. Excluding the effect of fuel sales, comparable store sales increased 3.9% and identical store sales increased 3.7% for the fourth quarter of 2005.

Lifestyle Stores

Lifestyle stores have contributed significantly to sales growth throughout 2005. As expected, the cost of promoting Lifestyle openings reduced gross margin and increased operating and administrative expense as a percentage of sales. The company expects that

as the Lifestyle stores opened in 2005 mature in 2006, their margins will improve and they will contribute at a higher level to Safeway’s operating profit.

Gross Profit

Gross profit declined 36 basis points to 29.11% of sales in the fourth quarter of 2005 compared to 29.47% of sales in the fourth quarter of 2004. Higher fuel sales (which have a lower gross margin) reduced gross profit by 27 basis points. Higher energy costs reduced gross profit by 4 basis points in the fourth quarter of 2005. The remaining decline is the result of the grand opening of Lifestyle stores and targeted investments in price, offset by improved shrink.

Operating and Administrative Expense

Operating and administrative expense increased 8 basis points to 25.98% of sales in the fourth quarter of 2005 from 25.90% of sales in the fourth quarter of 2004. In the fourth quarter of 2005, Safeway incurred previously announced pretax charges of $55.5 million for store exit activities related to the closure of 26 Texas stores and $37.5 million for employee buyouts. Adjusting for these charges and other unusual and pro forma charges in 2004 as outlined in Table 7 of this release, operating and administrative expense improved 69 basis points.

This improvement in operating and administrative expense is primarily the result of increased sales (including fuel sales), restructured labor agreements and reduced workers’ compensation costs, partly offset by labor costs associated with the grand opening of Lifestyle stores and higher energy costs. Higher energy costs increased operating and administrative expense by 6 basis points in the fourth quarter of 2005.

Interest Expense

Interest expense was $124.3 million in the fourth quarter of 2005 compared to $123.0 million in the fourth quarter of 2004. Lower debt was offset by an increase in the average interest rate from 5.76% to 6.32%.

Income Tax Expense

Income tax expense was $94.6 million, or 35.3% of pretax income, in the fourth quarter of 2005 compared to $101.2 million, or 33.3% of pretax income in the fourth quarter of 2004. Income tax expense in the fourth quarter of 2005 included $7.3 million of tax benefits ($0.02 per diluted share) associated with the favorable resolution of certain tax issues. Income tax expense in the fourth quarter of 2004 included a tax benefit of $8.8 million ($0.02 per diluted share) due to tax law changes and the favorable resolution of certain tax issues.

Annual Results

Net income for the year ended 2005 was $561.1 million ($1.25 per diluted share) compared to $560.2 million ($1.25 per diluted share) in 2004. Sales increased 7.2% to $38.4 billion in 2005 from $35.8 billion in 2004, primarily because of Safeway’s marketing strategy, Lifestyle store execution and increased fuel sales.

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The gross profit margin decreased 65 basis points to 28.93% of sales in 2005 from 29.58% in 2004. Higher fuel sales reduced gross profit by 39 basis points. The remaining decline is due to grand openings of Lifestyle stores, investment in price, increased advertising expense and higher energy costs.

Operating and administrative expense decreased 53 basis points to 25.77% of sales from 26.30% in 2004. Excluding the unusual items outlined on Table 7, operating and administrative expense decreased 94 basis points. This improvement is the result of restructured labor agreements, increased fuel sales, and reduced workers’ compensation costs, partly offset by labor costs associated with the grand opening of Lifestyle stores and higher energy costs.

Capital Expenditures

During 2005, Safeway invested $1.4 billion in cash capital expenditures. The company opened 21 new Lifestyle stores, completed 293 Lifestyle remodels and closed 48 stores. In 2006, the company expects to spend approximately $1.6 billion in cash capital expenditures, open approximately 20 to 25 new Lifestyle stores and complete approximately 280 Lifestyle remodels.

Cash Flow

Net cash flow from operating activities was $1,881.0 million in 2005 compared to $2,226.4 million in 2004. Working capital contributed to cash flow in 2005, but at a lower level than in 2004.

Net cash flow used by investing activities, which consists principally of cash paid for property additions, increased to $1,313.5 million in 2005 from $1,070.3 million in 2004.

Net cash flow used by financing activities, which consists principally of cash used to pay down debt, was $466.9 million in 2005 and $1,077.6 million in 2004.

Free cash flow was $567.5 million in 2005. As a result, debt declined $404.8 million, cash and equivalents increased $106.5 million and the company paid $44.9 million in dividends to its stockholders.

Guidance

Safeway confirms guidance for 2006 of $1.55 to $1.65 earnings per diluted share and free cash flow of $400 million to $600 million, both excluding employee buyouts. Non-fuel identical store sales are expected to grow 3.0%. The timing of holidays is expected to affect the quarterly pattern of sales and earnings in the first half of 2006. Shopping for the Easter holiday occurred in the first quarter of the 2005, but will occur in the second quarter of 2006.

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Quarterly Dividend

On January 20, 2006, Safeway paid a dividend of $0.05 per common share to stockholders of record as of December 30, 2005. The payout was $22.5 million.

About Safeway

Safeway Inc. is a Fortune 50 company and one of the largest food and drug retailers in North America based on sales. The company operates 1,775 stores in the United States and Canada and had annual sales of $38.4 billion in 2005. The company’s common stock is traded on the New York Stock Exchange under the symbol SWY.

Safeway Conference Call

Safeway’s investor conference call discussing fourth-quarter results will be broadcast live over the Internet at www.safeway.com/investor_relations at 8:00 AM PST February 23, 2006. Click on Webcast Events to access the live call. An on-demand webcast of the conference call will also be available for approximately one week following the live call.

-o0o-

This press release contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements relate to, among other things, operating profit, estimates of earnings per diluted share, identical store sales, comparable store sales, dividend payments, capital expenditures, free cash flow, effects of restructuring labor contracts and Lifestyle stores and are indicated by words or phrases such as “guidance,” “expects,” “estimate,” “forecast” and similar words or phrases. These statements are based on our current plans and expectations and involve risks and uncertainties which are, in many instances, beyond our control, including general business and economic conditions, competitive factors, currency valuations, results of our programs to reduce costs, increase sales and improve capital management, achievement of operating improvements in companies that we acquire, labor costs, labor disputes that may arise from time to time, and work stoppages that could occur in areas where certain collective bargaining agreements have expired or are on indefinite extensions or are scheduled to expire in the near future, voluntary employee buyouts, unanticipated events or changes in future operating results, financial condition, real estate matters, including dispositions and impairments, or business over time, performance in new business ventures, or unfavorable legislative, regulatory, tax or judicial developments, that could cause actual events and results to vary significantly from those included in or contemplated by such statements. We undertake no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaim any obligation to do so. Please refer to our reports and filings with the Securities and Exchange Commission, including the Annual Report to Stockholders in our most recent Form 10-K and subsequent Quarterly Reports on Form 10-Q for a further discussion of these risks and uncertainties.

4

SAFEWAY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in millions, except per-share amounts)

(Unaudited)

	16 Weeks Ended December 31, 2005			16 Weeks Ended January 1, 2005			52 Weeks Ended December 31, 2005			52 Weeks Ended January 1, 2005
Sales and other revenue	$	12,046.1		$	11,390.4		$	38,416.0		$	35,822.9
Cost of goods sold		(8,539.2	)		(8,033.7	)		(27,303.1	)		(25,227.6	)
Gross profit		3,506.9			3,356.7			11,112.9			10,595.3
Operating and administrative expense		(3,129.7	)		(2,950.5	)		(9,898.2	)		(9,422.5	)
Operating profit		377.2			406.2			1,214.7			1,172.8
Interest expense		(124.3	)		(123.0	)		(402.6	)		(411.2	)
Other income, net		15.2			20.7			36.9			32.3
Income before income taxes		268.1			303.9			849.0			793.9
Income taxes		(94.6	)		(101.2	)		(287.9	)		(233.7	)
Net income	$	173.5		$	202.7		$	561.1		$	560.2
Basic earnings per share	$	0.39		$	0.45		$	1.25		$	1.26
Diluted earnings per share	$	0.39		$	0.45		$	1.25		$	1.25
Weighted average shares outstanding:
Basic		448.7			446.5			447.9			445.6
Diluted		450.5			449.4			449.8			449.1

5

SAFEWAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

	Year-end 2005		Year-end 2004
ASSETS
Current assets:
Cash and equivalents	$	373.3	$	266.8
Receivables		350.6		339.0
Merchandise inventories		2,766.0		2,740.7
Other current assets		212.5		251.2
Total current assets		3,702.4		3,597.7
Total property, net		9,097.1		8,689.4
Goodwill		2,402.4		2,406.6
Other long-term assets		555.0		683.7
Total assets	$	15,756.9	$	15,377.4
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of notes and debentures	$	714.2	$	596.9
Current obligations under capital leases		39.1		42.8
Accounts payable		2,151.5		1,759.4
Other current liabilities		1,359.1		1,393.0
Total current liabilities		4,263.9		3,792.1
Long-term debt:
Notes and debentures		4,961.2		5,469.7
Obligations under capital leases		644.1		654.0
Total long-term debt		5,605.3		6,123.7
Other long-term liabilities		982.1		1,154.7
Total liabilities		10,851.3		11,070.5
Total stockholders’ equity		4,905.6		4,306.9
Total liabilities and stockholders’ equity	$	15,756.9	$	15,377.4

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SAFEWAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	52 Weeks Ended December 31, 2005			52 Weeks Ended January 1, 2005
OPERATING ACTIVITIES
Net cash flow from operating activities	$	1,881.0		$	2,226.4
INVESTING ACTIVITIES
Cash paid for property additions		(1,383.5	)		(1,212.5	)
Proceeds from sale of property		105.1			194.7
Other		(35.1	)		(52.5	)
Net cash flow used by investing activities		(1,313.5	)		(1,070.3	)
FINANCING ACTIVITIES
Additions to short-term borrowings		13.0			11.2
Payments on short-term borrowings		(23.8	)		(1.5	)
Additions to long-term borrowings		754.5			1,173.5
Payments on long-term borrowings		(1,188.6	)		(2,278.6	)
Net proceeds from exercise of stock options		17.4			24.4
Dividends paid on common stock		(44.9	)		—
Other		5.5			(6.6	)
Net cash flow used by financing activities		(466.9	)		(1,077.6	)
Effect of changes in exchange rate on cash		5.9			13.5
Increase in cash and equivalents		106.5			92.0
CASH AND EQUIVALENTS
Beginning of period		266.8			174.8
End of period	$	373.3		$	266.8

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SAFEWAY INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION

(Dollars in millions, except per-share amounts)

(Unaudited)

TABLE 1: RECONCILIATION OF GAAP NET INCOME TO ADJUSTED INCOME AND ADJUSTED EARNINGS PER SHARE

	Fourth Quarter 2005						Fourth Quarter 2004
	Before Taxes		After Taxes		Per Diluted Share		Before Taxes			After Taxes			Per Diluted Share
Net income, as reported	$	268.1	$	173.5	$	0.39	$	303.9		$	202.7		$	0.45
Texas store exit activities		55.5		34.1		0.07		—			—			—
Employee buyout		37.5		23.0		0.05		—			—			—
Health and welfare contribution		—		—		—		6.0			3.7			0.01
Accrual for rent holidays		—		—		—		10.6			6.5			0.01
Pro forma stock option expense		—		—		—		(15.8	)		(9.7	)		(0.02	)
Adjusted income	$	361.1	$	230.6	$	0.51	$	304.7		$	203.2		$	0.45
	Year Ended 2005						Year Ended 2004
	Before Taxes		After Taxes		Per Diluted Share		Before Taxes			After Taxes			Per Diluted Share
Net income, as reported	$	849.0	$	561.1	$	1.25	$	793.9		$	560.2		$	1.25
Texas store impairment		54.7		33.9		0.08		—			—			—
Texas store exit activities		55.5		34.1		0.07		—			—			—
Employee buyout		59.4		36.6		0.08		—			—			—
Dominick's store exit activities		—		—		—		45.7			28.5			0.06
Health and welfare contribution		—		—		—		31.1			19.1			0.04
Accrual for rent holidays		—		—		—		10.6			6.5			0.01
Pro forma stock option expense		—		—		—		(73.0	)		(44.8	)		(0.10	)
Adjusted income	$	1,018.6	$	665.7	$	1.48	$	808.3		$	569.5		$	1.26

TABLE 2: RECONCILIATION OF GAAP CASH FLOW MEASURE TO FREE CASH FLOW

	Full Year 2005			Full Year 2004			Forecasted Range Fiscal 2006
Net cash flow from operating activities	$	1,881.0		$	2,226.4		$	2,010.0		$	2,090.0
Net cash flow used by investing activities		(1,313.5	)		(1,070.3	)		(1,610.0	)		(1,490.0	)
Free cash flow	$	567.5		$	1,156.1		$	400.0		$	600.0

TABLE 3: CAPITAL EXPENDITURES AND OTHER STATISTICAL DATA

	Full Year
	2005		2004
Cash capital expenditures	$	1,383.5	$	1,212.5
Stores opened		21		33
Stores closed		48		48
Lifestyle remodels completed		293		92
Stores at end of period		1,775		1,802
Square footage (in millions)		81.0		82.1
Number of fuel stations at end of period		314		311
Fuel sales	$	2,616.8	$	1,941.1

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SAFEWAY INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION

(Dollars in millions)

(Unaudited)

TABLE 4: RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA

	Year Ended 2005
Net income	$	561.1
Add (subtract):
Income taxes		287.9
Interest expense		402.6
Depreciation		932.7
Lifo income		(0.2	)
Stock option expense		59.7
Property impairment charges		78.9
Equity in earnings of unconsolidated affiliates, net		(15.8	)
Total Adjusted EBITDA	$	2,306.9
Total debt at December 31, 2005		6,358.6
Less cash and equivalents in excess of $75.0 at December 31, 2005		(298.3	)
Adjusted Debt	$	6,060.3
Adjusted EBITDA as a multiple of interest expense		5.73
Minimum Adjusted EBITDA as a multiple of interest expense under bank credit agreement		2.00
Adjusted Debt to Adjusted EBITDA		2.63
Maximum Adjusted Debt to Adjusted EBITDA under bank credit agreement		3.50

TABLE 5: RECONCILIATION OF NET CASH FLOW FROM OPERATING ACTIVITIES TO ADJUSTED EBITDA

	Year Ended 2005
Net cash flow from operating activities	$	1,881.0
Add (subtract):
Income taxes		287.9
Interest expense		402.6
Deferred income taxes		215.9
Net pension expense		(115.6	)
Accrued claims and other liabilities		(44.1	)
Loss on property retirements and lease exit costs		(13.6	)
Changes in working capital items		(310.9	)
Other		3.7
Adjusted EBITDA	$	2,306.9

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SAFEWAY INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION

(Dollars in millions)

(Unaudited)

TABLE 6: SAME STORE SALES INCREASES

	Fourth Quarter 2005		Year Ended 2005*
	Comparable Store Sales Increases	Identical Store Sales Increases	Comparable Store Sales Increases	Identical Store Sales Increases
As reported	5.4%	5.1%	4.6%	4.4%
Excluding fuel sales	3.9%	3.7%	3.0%	2.9%

* Excludes sales at strike affected stores in the first quarter of 2004.

TABLE 7: RECONCILIATION OF OPERATING AND ADMINISTRATIVE EXPENSE AS A PERCENTAGE OF SALES

	Fourth Quarter 2005					Fourth Quarter 2004					Basis Point Increase (Decrease)
	Dollars			Percentage of Sales		Dollars			Percentage of Sales
Reported operating and administrative expense	$	3,129.7		25.98	%	$	2,950.5		25.90	%	8
Add (subtract):
Texas store exit activities		(55.5	)				—
Employee buyout		(37.5	)				—
Health and welfare contribution		—					(6.0	)
Accrual for rent holidays		—					(10.6	)
Pro forma stock option expense		—					15.8
Adjusted operating and administrative expense	$	3,036.7		25.21	%	$	2,949.7		25.90	%	(69	)
	Year Ended 2005					Year Ended 2004					Basis Point (Decrease)
	Dollars			Percentage of Sales		Dollars			Percentage of Sales
Reported operating and administrative expense	$	9,898.2		25.77	%	$	9,422.5		26.30	%	(53	)
Add (subtract):
Texas store impairment		(54.7	)				—
Texas store exit activities		(55.5	)				—
Employee buyout		(59.4	)				—
Dominick’s store exit activities		—					(45.7	)
Health and welfare contribution		—					(31.1	)
Accrual for rent holidays		—					(10.6	)
Pro forma stock option expense		—					73.0
Adjusted operating and administrative expense	$	9,728.6		25.32	%	$	9,408.1		26.26	%	(94	)

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