The RWE Group's value management

Return-oriented control of the company.

Increasing shareholder value lies at the heart of our strategy. Additional value is created when the return on capital employed (ROCE) exceeds the cost of capital. ROCE reflects the pure operating return. It is calculated by dividing the operating result by capital employed.

The table "RWE Group–cost of capital" shows the parameters used to calculate the cost of capital. We calculate them as a weighted average cost of equity and debt.

The cost of equity capital covers the capital market’s expectation of company-specific returns when investing in an RWE share over and above that of a risk-free investment. The cost of debt is linked to long-term financing conditions for the RWE Group and allows interest on debt to be classified as tax deductible (tax shield). We used the following figures as a basis for determining the cost of capital in 2008: We calculate the cost of debt by applying a pre-tax cost rate of 5.25 %. The cost of equity is derived on the basis of an interest rate of 4.75 %, which is customary for a risk-free investment, plus risk charges specific to the Group and the Group’s divisions. In the period under review, the beta factor for the Group was 0.67.

The ratio of equity to debt is 50:50. We do not derive this parameter from the amounts carried on the balance sheet, but, among other things, from the marked-to-market valuation of equity and assumptions concerning the long-term development of our net financial position and provisions. The RWE Group’s total cost of capital for 2008 was 8.5 % before tax. As explained in chapter value added, in the previous year, we had used 9.0 %.

When determining operating assets, depreciable non-current assets are not stated at carrying amounts. Instead, we recognize half of their historic costs. The advantage of the new procedure is that the determination of ROCE is no longer influenced by the depreciation period. This reduces the fluctuation in return caused by the investment c ycle. However, we fully account for the goodwill included in the purchase price of financial assets.

Relative value added is the difference between ROCE and the cost of capital. Multiplying this figure by the capital employed results in the absolute value added, which we employ as a central management benchmark. The higher the value added, the more attractive a particular activity is for our portfolio. It is another important criterion for evaluating capital expenditure and for determining bonus payments for RWE Group executives.

Higher capital costs from 2009.

The current financial crisis has made it more expensive to raise outside capital. This is reflected in higher interest rates. In consequence, we have increased the cost of capital in our value management concept from 2009 onwards. At the Group level, as it was until 2007, the basis is now 9 %. We will adjust the cost of capital by 0.5 to 1.0 percentage points for the divisions. The cost of capital after taxes for the RWE Group will be 6.5 % from 2009 onwards. The upper table compares the old figures with the new ones.