Economic performance

Management approach

Securing the future through economic value creation

Vattenfall strives to be a Benchmark for the Industry, with focus on operational efficiency and value creation. Expanding with good profitability is a prerequisite for contributing to sustainable development of society.

Measuring and managing performance

For a capital-intensive company like Vattenfall, it is important to generate a satisfactory capital return. Long-term value creation can be measured by operating profit less the required return on net assets to meet shareholder’s return requirement. The overall long-term financial requirement for Vattenfall from its owner is a 15% return on equity (ROE) after tax. This is translated to a Group-wide return target that is expressed as a return on net assets before tax and financial costs (operating profit as a percentage of average net assets). The return target is currently 11% and is based on a balanced consideration of the financial targets. This target, in turn, is broken down into individually defined targets for each business unit, according to which operations are managed. The main reason for this reformulation to individual targets for each business unit is that Vattenfall’s operations have widely varying conditions – mainly different asset bases in terms of size and age. Moreover, the company’s equity and net financial income and expense are not distributed over the business units. The basic principle for this target formulation is that asset-intensive operations are assessed according to their return on the asset base, while service operations are assessed according to their operating margin.

Financial targets

Vattenfall’s vision to be a leading European energy company is conditional upon economic value creation and profitable growth. These are the starting points for the Group’s financial targets, which in turn are the platform for the business planning process at the business unit level. The financial targets are long-term, which means that they are to be evaluated as averages over a business cycle (approximately 5–7 years).

Main goal is long-term sustainable economic value creation

Creating economic value by generating a competitive return over time is Vattenfall’s overriding financial objective, since the Group’s other strategies are based on a requisite level of financial strength. The owner’s required rate of return is used as the basis for setting targets for profitability, dividends and financial risk. The Board reviews the proposed targets and decides to propose them to the Annual General Meeting, where the owner then makes the final decision. Vattenfall’s four current financial targets are:

• Profitability. The owner’s long-term return target is that profit after tax will amount to 15% return on average equity. Translated to the Group’s long-term required level of profitability, expressed as the return on net assets, this corresponds to a return of approximately 11% before tax and financial costs.
• Dividend policy. The aim is that the dividend over the long-term shall amount to 40%–60% of profit after tax. However, the yearly decisions on the dividend shall take implementation of the company’s strategy, financial position and other economic targets into account.
• Ratings. It is Vattenfall’s intention to maintain a long-term credit rating in the single A category from both Moody’s and Standard & Poor’s.
• Cash flow interest coverage. The cash flow interest coverage ratio after maintenance investments should amount to 3.5–4.5 times over the long-term. For a complete definition, see the 2008 Annual Report .

Vattenfall’s investments

In 2008 Vattenfall invested a total of SEK 42.3 billion in energy generation, distribution and acquisitions.

Five-year investment programme

Investment planning is done long-term, and at the Vattenfall Group level, five-year investment plans are established. Investments are made in current operations and technologies that are viable and competitive for large-scale energy generation. In addition, Vattenfall conducts research and development activities within potential new energy sources and technology improvements (see EU7 ).

Vattenfall’s growth target together with the target of reducing CO₂ emissions with 50% by 2030 and the climate vision to become climate-neutral by 2050, creates significant investment needs.