Annual Report 2007 - Investis Digital

Annual Report 2007

DisclaimerThis document includes certain forward-looking statements. Thesestatements are based on current expectations and projections of the Groupabout future events. However, by their nature forward-looking statementsinvolve risks and uncertainties because they relate to events and depend oncircumstances that will or may occur in the future. Actual results may differfrom those expressed in such statements, depending on a variety of factorsincluding, but not limited to, the economic and business circumstancesoccurring from time to time in the countries in which the Group operates,changes in trends in the general, global or regional economies, changes intrends in the global energy sector, changes in regulation and naturaldisasters or other calamities.

CONTENTS

BUSINESS OVERVIEW2 Chairman’s statement4 Chief Executive Officer’s statement6 Our portfolio8 Business and financial review8 Strategy and Group overview 16 Our approach to risk and risk management24 Key performance indicators and financial highlights 32 Regional reviews 54 Financial position and resources 62 Board of Directors 64 Senior management team

GOVERNANCE67 Corporate governance72 Corporate responsibility80 Employees83 Directors’ remuneration report96 Our core values97 Directors’ report

FINANCIAL STATEMENTS99 Statement of Directors’ responsibilities100 Independent auditor’s report101 Consolidated income statement102 Consolidated balance sheet103 Consolidated statement of changes in equity104 Consolidated cash flow statement105 Notes to the consolidated financial statements165 Company balance sheet166 Notes to the Company financial statements

SUPPLEMENTARY INFORMATION175 Five-year financial summary177 Shareholder profile178 Shareholder services and information178 Financial calendar179 Glossary

CASE STUDIES23 Producing fresh water through desalination61 Reducing sulphur emissions66 Controlling dust emissions79 Wind generation

The Business and financial review is based on theguidelines for Operating and Financial Reviewspublished by the Accounting Standards Board. Toassist shareholders with their understanding of ourbusiness we look at issues affecting the Group as awhole on pages 8 to 31 followed by reviews of our five regions on pages 32 to 53. We cover ourfinancial position and resources on pages 54 to 60.

International Power Annual Report 2007 1

HIGHLIGHTS

PROFIT FROMOPERATIONSINCREASED TO£904 MILLION EARNINGS PERSHARE UP21%FREE CASH FLOWUP 43%

PROFIT FROM OPERATIONS

£904m2007

£773m 2006

Note: All references above to profit from operations and earnings per shareare before exceptional items and specific IAS 39 mark to market movements.

EARNINGS PER SHARE (BASIC)

27.1p2007

22.4p2006

FREE CASH FLOW

£653m2007

£456m2006

Chairman’s statement2

CHAIRMAN’S STATEMENT

Dear ShareholderYour Company has once again delivered a goodperformance. In 2007 profit from operations*was up 17% to £904 million, earnings pershare* (EPS) increased by 21% from 22.4p to 27.1p, and free cash flow also improvedstrongly by 43% to £653 million.

This overall increase in profit from operations was principally driven by improved results from ourEuropean and North American regions. Our Europeanbusiness delivered a particularly strong performancewith a £124 million increase in profit from operations to £574 million in 2007. The key driver in this region was the UK where profit fromoperations benefited from the forward contractingstrategy that we put in place during 2006. In NorthAmerica, a first full year contribution from ColetoCreek in Texas, together with enhanced capacitypayments in New England were key in driving profitfrom operations up by £35 million to £136 million in 2007. Although we had a challenging year inAustralia, mainly due to the very severe drought, we expect to achieve improved margins in 2008, as power prices recover. Our long-term contractedplants in Asia and the Middle East continue toperform well with growth in profit from operationsthrough good operational performance and acontribution from new assets.

GROWTH IS AKEY STRATEGICFOCUS FOR THEBUSINESS


We grew our generation portfolio during 2007 boththrough acquisitions and greenfield development. Themost significant expansion was in wind generationwhere we acquired 660 MW of operational capacityand 55 MW under construction, located in Italy,Germany and the Netherlands. Together with existingwind power assets our total wind portfolio nowcomprises 1,199 MW in operation.

Profitable growth remains a key strategic focus forInternational Power. Tightening power supply drivenby the need to replace old capacity and a growingdemand for power in many of our markets presentsus with multiple greenfield and acquisitionopportunities in both our existing and new markets. I am pleased to report that our experience, proventrack record and healthy balance sheet place us in agood position to deliver further growth in the future.

In October 2007, the Board introduced the payment of an interim dividend of 2.77 pence per OrdinaryShare. Interim dividends will be calculated as a fixedpercentage (35%) of the previous year’s full yeardividend. The Board is proposing a final dividend of7.39 pence per share for the year which, including theinterim dividend, will take the total for 2007 to 10.16pence per share. This represents an EPS pay-out ratioof 37.5%, up from 35% last year. Our dividend policyremains to progressively grow the dividend to an EPSpay-out ratio of 40%.

I would like to thank Adri Baan who, having servedon the Board for five years, retired on 31 December2007. During this time he chaired the RemunerationCommittee and made a valuable contribution to the growth of the business. John Roberts now takes over from Adri as Chairman of theRemuneration Committee.

In June 2007 Alan Murray joined the Company as a Non-Executive Director. Alan, who has a financebackground, was latterly CEO of Hanson plc and is now on the Managing Board of Heidelberg Cement AG. He has taken over as Chairman of theAudit Committee following the completion of the2007 accounts.

During 2007 we reviewed our US listing. The UScorporate governance regulatory requirements,following the Sarbanes-Oxley Act, involved theintroduction of an unreasonably burdensome andexpensive administrative environment across theGroup. As less than 1% of the traded volume of our shares occurred in New York, we decided in June 2007 to deregister and delist from the SEC and NYSE respectively. Prior to deregistering, wereceived an unqualified opinion from KPMG that we had achieved compliance with the requirements of section 404 of the Sarbanes-Oxley Act in relation to our US reporting for the 2006 financial year. The Board remains confident that a proper controlframework is in place across the Group.

Measures to control climate change and theprotection of the environment continue to affect our industry and we expect them to do so for theforeseeable future. Throughout this report you willread about our approach towards these issues. Theyrange from investing in renewables businesses toimproving the carbon efficiency of existing assets andinvesting human resources and capital into upcomingrenewable technologies, all with the aim of protectingand increasing shareholder value.

The Board has also established a new Health, Safetyand Environment (HS&E) Committee. The Committeeis chaired by Struan Robertson and comprises oneother Non-Executive Director and the CEO. TheCommittee, which started to operate from January2008, will review the Group’s HS&E policies,objectives and performance.

Last year, I visited a number of sites including ourColeto Creek coal fired plant in Texas, the Levantowind business in Germany and, with the whole Board,the Shuweihat CCGT and desalination plant in theUAE. Once again, as with our other plants around theworld, I was highly impressed by the commitment ofthe staff at our sites. It is only through the efforts of all our employees that we are able to develop theCompany and enhance its performance. Therefore, on behalf of both the Board and shareholders, I ampleased to acknowledge their contribution and tothank them here for all their hard work as wecontinue to find ways to grow your business.

Sir Neville SimmsChairman

* All references to profit from operations and earnings per share in theChairman’s statement are before exceptional items and specific IAS 39 mark to market movements.

Chief Executive Officer’s statement4

CHIEF EXECUTIVE OFFICER’S STATEMENT

Dear Shareholder2007 was a year of further growth, withsignificant improvement in earnings, free cashflow and, very importantly, our share price. The key drivers were increased earnings in our European and North American markets.Although this improvement was partially offsetby the impact of a very severe drought inAustralia, the strength of our global portfolioensured that we made good overall progress.

Our position in five key international regionscontinues to provide both a very solid earningsand cash flow profile for the Group, andexceptional access to growth opportunities.Let me give you a few of these regionalhighlights for 2007.

Portfolio performance In Europe, we benefited from much improved marginsat our UK plants, principally due to the well-timedcontracting of our 2007 output, and through highlevels of operational performance. We also standardisedour shareholdings with Mitsui in our major UK plants,(75% International Power, 25% Mitsui) and thisprovides an efficient structure for the future. Ourcontinental European portfolio also had a good yearwith consistently high availability at our long-termcontracted plants. Our Levanto wind farm, acquired in November 2006, was successfully integrated anddelivered a full year contribution in 2007.

In the US, our markets in Texas and New Englandmaintain their underlying recovery as the balancebetween installed capacity and peak demand continuesto tighten. However, because it was a relatively coolsummer in 2007 and air conditioning demand waslower, underlying margins showed only a modestimprovement over last year. New England benefitedfrom a full year of capacity income, and 2007 also sawa full year contribution from our coal fired ColetoCreek plant, where we successfully installed a majorupgrade to its dust extraction equipment. All our long-term contracted plants continued to perform well.

Both the Middle East and Asia are markets whereoutput is totally covered by long-term offtakecontracts, and where our financial return is primarilydependent on high levels of plant availability. Ourtrack record is consistently strong here, and we hadanother very good year. Earnings grew in the MiddleEast principally through a first full year contributionfrom the Tihama project in Saudi Arabia, and we werepleased to announce in August 2007 the award ofour latest project in the Middle East, Fujairah F2, anew-build 2,000 MW and 130 MIGD installation inthe UAE. We continue to be very active in targetinggrowth opportunities in this fast expanding region.

Performance at all our Asian plants was good, and we successfully divested our 18% stake in Malakoff in Malaysia in 2007, crystallising a significant £115 million profit. We also acquired a further 9%economic interest in Paiton (Indonesia) from Mitsui.

The Australian business faced a challenging year,principally due to the very severe drought. The lack of water had the effect of reducing hydro output, andrestricting some thermal power generation where freshwater was needed for cooling. This, in turn, madepricing exceptionally volatile and adversely impacted uswhen we needed to cover contractual positions if ourplants were not available for operational reasons orwhen the transmission networks could not cope withdemand. On the positive side, this volatility has resultedin a significant improvement in forward prices, so theoutlook for the Australian business is much improved.

Industry trendsThe key trends in our industry continue to be securityof supply, the drive for lower carbon dioxide (CO2)emissions and environmental upgrades, and theprovision of affordable power in the face of risingprices for both new power generation equipment andfor fuel. These are major issues in all the markets inwhich we operate, and span the energy, economic andpolitical agendas. Power generation is by its nature alarge-scale and long-term industry, so the decisions wemake today have an impact many years into the future.

We believe that security of supply is best protected by having a diversified and balanced powergeneration fleet – in terms of both technology andfuel type. This ensures no undue reliance on any onefuel or technology provider, and our global portfolioencompassing natural gas, coal, wind, pumpedstorage, hydro and oil addresses this point directly.We have excellent, in-depth skills across this widerange of technologies. Security of supply also meansthat the regulatory structure in each market needs to be transparent and consistent over the long-term– without this, it is extremely difficult to make long-term investment decisions, and we are therefore verystrong supporters of free and open markets with a minimum of government intervention.

IMPROVED EARNINGS, FREE CASH FLOW AND SHARE PRICE

SIGNIFICANT EXPANSION OF OUR RENEWABLES BUSINESS

EXCEPTIONAL ACCESS TO GROWTHOPPORTUNITIES IN TARGETED MARKETS


The environmental debate in the power sector is often centred on CO2 reductions, but in reality is muchwider and includes the reduction of sulphur and otheremissions. We are addressing all of these issues. OnCO2, some 57% of our portfolio is modern, efficient gas fired generation, and we are implementing efficiencyimprovements at our coal fired plants in the UK andAustralia to reduce their CO2 intensity. In Australia we are also working with both the state and federalgovernments to see how brown coal can be dried prior to burning, which could provide a very significantreduction in CO2 output, and we are working on a pilotplant for CO2 capture. These are early but importantsteps, and we want to ensure we are at the forefront ofthese initiatives. In the UK and Portugal, we are installingflue gas desulphurisation (FGD) equipment in 2008 toreduce sulphur emissions at our coal fired plants. In theUS we installed an improved dust extraction system thatalso allows improved mercury capture.

2007 was also a very significant year for the expansionof our renewables business. We acquired 660 MW ofoperating wind farms, including the Maestrale windfarm portfolio, based principally in Italy. The Maestraleportfolio is now run alongside the Levanto wind farmportfolio, which we acquired towards the end of 2006and is based principally in Germany. Our strategy is towork with wind farm developers to source furthergrowth opportunities where we can add value, and wenow have some 1,199 MW of operational wind farmswith a further 6 MW under construction.

Outlook for growthGrowth in demand for power in all our markets –both the developed and the developing world – isclearly good for the outlook of our business, but, of course, new power generation has to be affordablefor the local market. This is a major challenge as theglobal market is now experiencing very significant cost escalation in both power generation equipmentand in fuel costs, all driven by high worldwide demand. We are very experienced power developers with a good track record and strong relationships with the major equipment manufacturers, and therefore we can continue to deliver good value as demonstrated by our latest project award in the Middle East for a large power and desalination plant.

Our strategy remains to deliver growth in shareholdervalue through operating our existing portfolio to thehighest standards, and by growing in our targetedmarkets. We are well positioned financially, with strongfree cash flow and liquidity, and good access to thenon-recourse project finance market, which remainsrelatively resilient through the recent tightening of the global credit markets. We have an excellent highlyskilled team and I would like to thank all our employeesworldwide for their enthusiasm, commitment andprofessionalism. Our business is in good shape, wehave a strong platform for the future, and a range ofgrowth opportunities across the portfolio. We will keepour financial discipline to ensure we employ our capitalwisely, and we will remain agile to captureopportunities in our target markets.

Philip CoxChief Executive Officer

The tables below set out details in relation to our operating plants, assets under construction and other significant businessinterests as at 5 March 2008.

Our portfolio6

OUR PORTFOLIO

Location Fuel/type Gross IPR Net Gross Netcapacity ownership capacity capacity capacity

power % power heat (MWth) heat (MWth)MW MW desal (MIGD) desal (MIGD)

steam steam(million lbs/hr) (million lbs/hr)

Assets in operation

North America

Hartwell Georgia Gas (OCGT) 318 50 159

Coleto Creek Texas Coal 667 100 667

Hays Texas Gas (CCGT) 913 100 913

Midlothian Texas Gas (CCGT) 1,423 100 1,423

Oyster Creek Texas Gas (Cogen/CCGT) 440 50 220 100 MWth 50 MWth

Bellingham Massachusetts Gas (CCGT) 539 100 539

Blackstone Massachusetts Gas (CCGT) 488 100 488

Milford Massachusetts Gas (CCGT) 160 100 160

EcoEléctrica Puerto Rico LNG (CCGT) 548 35 192

North America total in operation 5,496 4,761

Europe

International Power Opatovice(1) Czech Republic Coal/gas (Cogen) 585 100 585 2,040 MWth 2,040 MWth

IPR European Wind Portfolio Germany, Italy, Wind 1,153 100 1,153

France, Netherlands

ISAB Italy Gas (IGCC) 562 34 193

Tejo Energia (Pego) Portugal Coal 628 50 314

Turbogás Portugal Gas (CCGT) 1,008 60 605

Spanish Hydro Spain Hydro 86 67 57

Uni-Mar (Marmara) Turkey Gas (CCGT) 488 33 162

Deeside UK Gas (CCGT) 500 75 375

Derwent UK Gas (CCGT) 214 23 49

First Hydro UK Pumped storage 2,088 75 1,566

Indian Queens UK Oil (OCGT) 140 75 105

Rugeley UK Coal (50 MW of OCGT) 1,050 75 788

Saltend UK Gas (CCGT/Cogen) 1,200 75 900 0.30m lbs/hr 0.23m lbs/hr

Europe total in operation 9,702 6,852

Middle East

Hidd Bahrain Gas (CCGT)/desalination 1,006 40 402 42 MIGD 17 MIGD

Al Kamil Oman Gas (OCGT) 276 65 180

Tihama Saudi Arabia Gas (Cogen) 1,076 60 646 4.5m lbs/hr 2.7m lbs/hr

Ras Laffan B Qatar Gas (CCGT)/desalination 920 40 368 30 MIGD 12 MIGD

Shuweihat S1 UAE Gas (CCGT)/desalination 1,572 20 314 100 MIGD 20 MIGD

Umm Al Nar UAE Gas (CCGT)/desalination 2,450 20 490 143 MIGD 29 MIGD

Middle East total in operation 7,300 2,400

Australia

Canunda South Australia Wind 46 100 46

Pelican Point South Australia Gas (CCGT) 487 100 487

Synergen South Australia Gas/distillate 371 100 371

Hazelwood Victoria Coal 1,675 92 1,541

Loy Yang B Victoria Coal 1,026 70 718

Kwinana Western Australia Gas (CCGT) 118 49 58

Australia total in operation 3,723 3,221


Location Fuel/type Gross IPR Net Gross Netcapacity ownership capacity capacity capacity

power % power heat (MWth) heat (MWth)MW MW desal (MIGD) desal (MIGD)

steam steam(million lbs/hr) (million lbs/hr)

Assets in operation

Asia

Paiton(2) Indonesia Coal 1,365 31 423

HUBCO Pakistan Oil 1,290 17 219

KAPCO Pakistan Gas/oil (CCGT) 1,600 36 576

Uch Pakistan Gas (CCGT) 572 40 229

TNP (Pluak Daeng) Thailand Gas (Cogen) 143 100 143 7.7 MWth(3) 7.7 MWth(3)

Asia total in operation 4,970 1,590

Total in operation around the world 31,191 18,824

Assets under construction

Elecgas Portugal Gas (CCGT) 830 50 415

IPR European Wind Portfolio Germany, Italy, Wind 6 100 6

France, Netherlands

Hidd Bahrain Desalination – 40 – 48 MIGD 19 MIGD

Ras Laffan B Qatar Gas (CCGT)/desalination 135 40 54 30 MIGD 12 MIGD

Fujairah F2 UAE Gas (CCGT)/desalination 2,000 20 400 130 MIGD 26 MIGD

Total under construction around the world 2,971 875

Other businesses

Asset Region Description IPRownership

%

Simply Energy Victoria and South Australia Electricity and gas retailer 100

Opus Energy UK Independent supplier of electricity to

small and medium-size businesses 30

SEA Gas pipeline Victoria and South Australia 687 km gas pipeline from

Victoria to South Australia 33

(1) Gross capacity amount shown for International Power Opatovice represents the actual net interest owned directly or indirectly by International Power Opatovice.

(2) In addition to the above holding, in June 2007, International Power also acquired the rights to additional returns from Paiton equivalent to a further 9.2% of earnings and cash distribution.

(3) District cooling system capacity.

Note: Gross MWs are defined as maximum electrical output that can be produced at reference site conditions.

International Power plc is a leadingindependent power generation company with interests in 31,191 MW (gross) of power generating capacity, located in 20 countries across five core regions – North America, Europe, Middle East,Australia and Asia.

Strategy and Group overview8

STRATEGY AND GROUP OVERVIEW

OUR STRATEGY IS TO DELIVER GROWTH IN SHAREHOLDER VALUE THROUGH POWERGENERATION, ENSURING A BALANCEDINTERNATIONAL PORTFOLIO IN TERMS OF MARKETS, FUEL, CONTRACT TYPE ANDTECHNOLOGY. WE CREATE VALUE BY THEEFFICIENT OPERATION, FINANCING, ANDTRADING OF OUTPUT FROM OUR POWERGENERATION FLEET, WHILST MAINTAININGTHE HIGHEST LEVELS OF SAFETY ANDENVIRONMENTAL PERFORMANCE. WEEXERCISE RIGOROUS FINANCIAL CONTROLIN ALL OUR INVESTMENT DECISIONS, AND INVEST IN THE DEVELOPMENTOF OUR PEOPLE FOR THE LONG-TERM.


Europe 36%

Middle East 13%

North America 25%

Australia 17%

Asia 9%

IPR PORTFOLIO BY GEOGRAPHY

Gas 57%

Wind 6.5%

Coal 25%

Pumped storage 8%

Oil 3%

Hydro 0.5%

IPR PORTFOLIO BY FUEL TYPE

A portfolio approachWe manage risk through a portfolio managementapproach, which involves maintaining a balance in the portfolio in terms of geographical spread, fueldiversity, technology and contract type. This approachgives us access to multiple opportunities to createvalue whilst mitigating the risks associated with overexposure to any particular market, fuel, technology or contract type.

Our geographic spread gives us access to growthopportunities whilst reducing the potential impact,on the overall business, of a downturn or adverseperformance in any particular market. For example,in 2007 a strong performance in Europe more thanoffset the impact of challenging market conditionsin Australia.

The portfolio approach also extends through to ouroperational capabilities. We are able to operate arange of power plant technologies, including thermal,hydro, pumped storage and wind. These technologiesproduce electricity using different fuel types thatinclude gas, oil, coal and renewable sources such as wind and water. This multi-technology expertiseallows us to capture opportunities that are best suited to the market in question.

As electricity is a critical service for any economy,governments carefully decide whether or not theywish to liberalise this key sector. Several governmentshave retained full control of the sector while othershave fully liberalised both the production and supplyof electricity. The skills required for operating inliberalised (merchant) or non-liberalised (contracted)markets are very different – and we have both.

The government-controlled markets typically offeropportunities to sell power to government bodies vialong-term contracts that offer stable returns. Assets inthe liberalised or merchant markets are subject to theforces of supply and demand, and these markets aregenerally more volatile. Both these markets offerattractive risk/reward environments for investments.

International Power maintains a balanced presencein both types of markets, providing the business with a stable platform of contracted earnings and cash flow, overlaid by merchant generationwhich offers greater potential when markets arefavourable. We also ensure that lessons learnt in any particular market – for example, experience of the environmental legislation in Europe relating to CO2 emissions trading – are shared across the business.

Short-term contracted 40%

Pumped storage 8%

Long-term contracted 35.5%

Uncontracted 10%

Wind 6.5%

* One year forward hedge position as at 5 March 2008

IPR PORTFOLIO BY CONTRACT TYPE*

Note:

All charts presented based on net MW excludingassets under construction, as at 5 March 2008.


DELIVERINGVALUE WITH A BALANCEDINTERNATIONALPORTFOLIO

Maximising the value of our existing portfolioOur specific strategies for value enhancement in eachcountry and for each individual plant are tailored tolocal requirements, but generally we seek to achievethe following:

■ Optimise the operations of our powerplants We optimise the operation of our powerplants through several means, including managingall of our assets to high standards of safety andoperating performance; managing our assets on a portfolio basis; closely co-ordinating plantoperation with trading activity to maximise thevalue of our output; standardising managementreporting for all investments; and investing inimproved plant efficiency.

■ Maximise the return from our existingassets We optimise operations as described aboveand we leverage our investments, particularly byusing non-recourse project finance at the assetlevel; we sell assets if that generates a higher rateof return.

Rugeley, UK

The Group has grown significantly in the last fiveyears, increasing its net operational capacity by 8,300 MW through both successful acquisitions and greenfield developments. International Powernow has an operational interest in 31,191 MW of gross capacity and owns net operating capacity of 18,824 MW.

Growth is an important part of International Power’sstrategic objectives, and we have clear investmentcriteria to ensure that our acquisitions and greenfieldprojects deliver value for our shareholders.

Our geographic footprint and in-depth marketknowledge present us with multiple growthopportunities, both new-build and acquisition.Wherever possible we seek to source opportunitiesthrough our regional knowledge, our extensiveindustry contacts and existing relationships.

Non-recourse project debt, as a fundamental buildingblock, together with a well balanced capital structureprovides us with the flexibility to carry out growthinitiatives without overstretching our financialresources. We have access to multiple sources offinance – including strong free cash flow generationfrom our portfolio, our borrowing facilities andcapacity, and through partnering – to execute selectedopportunities which meet our investment criteria.


PORTFOLIO GROWTH – NET GW YEAR-ON-YEAR KEY ASSET ADDITIONS

2000

2001

2002

2003

2004

2005

2006

2007* 18.8

18.5

15.9

15.3

10.6

10.5

8.9

8.3

0 5 10 15 20

2004

TihamaCanundaTurbogásEME Portfolio

2005

UchRas Laffan BSaltend

2006

HiddColeto CreekLevantoIndian Queens

2007

MaestraleFujairah F2

International Power’s net GW

North America Europe Middle East Australia Asia

* In 2007, International Power sold its interest in Malakoff and signed an agreement with Mitsui to align its percentage holdings in its UKsubsidiary power stations. This resulted in the net sale of 935 MW (net) during the year.

Our growth

EcoEléctrica, Puerto Rico


Of the numerous opportunities evaluated by regionaland corporate business development teams each year,the best projects are submitted to the InvestmentCommittee (ICOM) for initial review and to ensurethey are consistent with the Group’s strategic plan.The capital allocation process is centred on a detailedreview by the ICOM which comprises the ChiefExecutive Officer (CEO), Chief Financial Officer (CFO),all regional directors and all corporate function heads.

If projects pass this review they are allocated a budgetfor detailed due diligence. The project then undergoesfurther analysis during the due diligence process, atthe end of which a detailed review is carried out bythe ICOM. Only then is the decision taken as towhether to proceed with the opportunity, subject toBoard approval. This process ensures that we fullyevaluate the risks and returns of a project prior tomaking a commitment and that we proceed withonly the most value-enhancing deals.

The ICOM review process determines resourceallocation and evaluates the costs of due diligence atan early stage so as to avoid potential expenditure onprojects that are less likely to succeed. In addition, theprocess encourages healthy internal competition forcapital across regions and functions.

The cross-regional and cross-functional membershipof the ICOM ensures that only the most attractiveinvestments are presented to the Board.

The due diligence teams, which are made up ofemployees from our functional and regional teams,use their varied experiences and skill sets to assess thoroughly all potential projects before they arepresented to the ICOM. We ensure that the regionalteam(s) that will have responsibility for managing the asset after acquisition are fully involved in the due diligence process. We subject new investmentopportunities to rigorous evaluation criteria, with a focus on the elements shown opposite.

Local knowledge/ relationships

Investment committee

initial review Detailed due

diligence Investment committee

review/approval Board

review/approval

Completion/ integration

Continuous performance

appraisal/post investment review

IPR Corporate M&A team

Regional business development teams

Government/privateinvitations

Other e.g. investment advisers/banks

Cross-regional and cross-functional representation

Follow-on opportunities

Continuous knowledge sharing across portfolio OPPORTUNITY SOURCES

Investment process

We ensure that all acquisitions and greenfield projectsare quickly and efficiently integrated into our regionalbusiness structures. The forecast returns frominvestments are built into regional businessperformance targets and we measure delivery againstthese targets at a regional and Group level throughour financial KPIs, profit from operations (PFO), EPSand free cash flow.

The ICOM conducts post investment reviews, for bothsuccessful new projects and unsuccessful projects, toensure we maximise our learning from all experiences.

Our overarching criterion, irrespective of the marketstructure in which we operate, is that our investmentscreate value for our shareholders over the long-termwithin our strategic framework.


Area Considerations include

Financial ■ returns in excess of our investment thresholds

■ financial key performance indicators (KPIs) – profit from operations, EPS contribution, free cash flow generation

■ quality and sustainability of earnings

■ availability of project finance and an appropriate degree of leverage

■ payback period

■ efficient financial structuring

Operational ■ health and safety performance

■ age, plant type and operational history of the plant

■ environmental performance

■ maintenance record and likely capital expenditure requirements

■ ability to have a major/controlling stake in Operations & Maintenance

■ synergy potential

Market ■ market fundamentals – demand/supply balance

■ forward market prices and history

■ new entrant economics – and impact on long-term forecast prices

■ market track record of respecting foreign direct investment

■ opportunity for future investment and growth

■ analysis of incumbent players and market dynamics

Commercial ■ contractual position

■ offtake arrangements/security of offtake

■ security of fuel supply

■ correlation between power and fuel price

■ portfolio benefits of merchant assets

■ environmental obligations and pricing

People ■ historical staff/management relationships

■ staffing requirements for acquisition and integration

Ownership ■ degree of control – focus on investments where we are able to contributedirectly to the realisation of projected returns

■ plant operations structure and management – ability to have amajor/controlling stake in Operations & Maintenance

Legal/Regulatory ■ market and environmental regulation

■ potential regulatory changes

■ any outstanding/historical legal or contractual issues

Property ■ opportunities for future expansion or development

Investment evaluation criteria

Al Kamil, Oman


Core capabilitiesOur core capabilities for implementing our strategy canbe categorised into the following seven areas:

International Power’s high quality asset portfolio,together with the capabilities of our teams around theworld, forms a strong combination for performanceoptimisation, effective risk management and futuregrowth in earnings and cash flow.

International Power has in-depth experience in plantoperations and engineering. This not only helps toensure smooth plant operations, but also that weunderstand all operational and technical issues relatingto the potential acquisition and upgrade of existingassets or development of new power plants. The Grouphas skills to execute power projects from inception rightthrough to the delivery of power in the most advancedand complex traded markets of the world.

Greenfield development and constructionmanagement We have excellent experience ofdeveloping large capital intensive infrastructureprojects – from selecting the appropriate site, securingmultiple government/stakeholder approvals, projectmanaging the entire construction programme rightthrough to successful commercial operation. Oursignificant growth in the Middle East is the mostgraphic example of our greenfield developmentexpertise where we now have interests in sixoperational projects with 7,300 MW (gross). In 2007,1,436 MW of additional capacity was brought onlinein the region, and International Power was successfulin its bid for the 2,000 MW, 130 MIGD Fujairah F2plant, in the UAE – construction of which is now underway and it is expected to be operational by 2010.

Acquisitions We have demonstrated our ability to execute acquisitions at the right time and at theright value, together with the capability to integratenewly acquired assets quickly and seamlessly into the portfolio. Historically, International Power hasexecuted a number of successful acquisitions whichhave met or exceeded financial and operationalperformance targets. In 2006 we acquired ColetoCreek and the Levanto wind portfolio, and in 2007we significantly expanded our wind portfolio, with the acquisitions of Maestrale (Italy and Germany) and a number of other small wind projects.

Asset management All our investments have todeliver specific performance targets. Through regularand robust technical, commercial and financial reviews,the regional offices and corporate headquarterstogether monitor the performance of each asset in the portfolio. We work to ensure that we maximisefleet efficiencies where we operate plants with similartechnologies, for example through global spare partssupply agreements or by bringing certain engineeringservices in-house. In addition, we have a HS&ECommittee which co-ordinates the Group’s activitiesand enables best practices to be adopted at all plants.This co-ordinated approach helps us manageoperational risk and extract the full portfolio benefits.Our strategy to ensure we continue to attract, train and develop employees to manage our growingportfolio is set out in detail in the Employees section on pages 80 to 82.

Financing Given the very capital intensive nature of our business, the ability to fund projects is veryimportant. International Power has consistently proven its financing capabilities through the executionof numerous greenfield and acquisition financings,together with refinancings of existing assets. Weremain well placed to implement our growth strategythrough our ability to access financial markets andthrough our strong free cash flow generation. We have completed financings and refinancings in different parts of the world, under differentcircumstances and through the combined use of local and international capital. As examples, inDecember 2007 we successfully completed thefinancing of the Fujairah F2 project despite thetightening of the global credit markets and in June we also re-financed the debt facility at Tihama.

Greenfield development and construction

management Acquisitions

Financing

Plant operations

Long-term power contracts expertiseTrading

Assetmanagement

Non-recourse project finance is at the core ofInternational Power’s financing strategy and capitalstructure – this provides the most appropriate level of debt for each asset and excellent risk mitigation for the Group. This source of finance remainsavailable despite the tightening credit conditions.

Plant operations We have comprehensive powerstation operational experience and skills. Through-lifeengineering and maintenance plans, meticulouslyimplemented, ensure maximum availability andefficiency in the operation of our plant and are key fordelivering value in both our merchant and long-termcontracted markets. Effective plant operations areenhanced by ensuring information is shared acrossthe portfolio and key operational staff are rotated todifferent assets on a regular basis. Safe behaviour andenvironmental best practice are cornerstones ofInternational Power’s operations, and we share bestpractices across the portfolio to ensure all of ourassets operate to the highest possible safety andenvironmental standards.

Trading We operate in a number of merchantmarkets. We have the skills necessary to maximiseour returns in these markets, with a practical focus onclosely co-ordinating trading and plant operations tooptimise value. For us, trading predominately meansselling the physical output generated by our plants,which we call asset-backed trading. Our tradersoperate within strict guidelines and risk policies toensure our traded position is carefully monitored andmanaged. This includes matching fuel purchases withpower sales and carrying out only a very limitedamount of non-asset backed trading. Where possiblewe will forward sell output if we consider the return isfavourable, which secures earnings and cash flow. Forexample, a large proportion of Rugeley’s 2007 outputwas forward sold during the high prices of 2006,ensuring good financial returns during 2007, despitemarket dark spreads falling during the year.

Long-term power contracts expertise We havestrong commercial skills to structure and negotiatelong-term power and water contracts in regulatedmarkets such as Asia and the Middle East. Underthese contracts, key cost risks such as fuel andturbine maintenance are mitigated through long-term hedging and supply arrangements. Availabilitybonuses incentivise us to keep the plant wellmaintained in order to minimise the risk of forcedoutages. Overall, the contracts provide visibility andstability of earnings and cash generation over thelong-term.


Kwinana,Western Australia

International Power’s principal activities are the development, acquisition andoperation of power generation plantstogether with closely related activities, such as desalination and district heating.These principal activities are supported by a number of local, regional andcorporate offices which carry out activitiessuch as trading and treasury operations. All of these activities have inherent risks.

Our general approach to risk management andgovernance is set out below, followed by a descriptionof the principal risks faced by the business.

Risk management frameworkInternational Power owns, or has equity stakes in,over 40 plants and some closely linked businesseslocated in 20 countries. Our portfolio contains allmajor technologies and fuel types with the exceptionof nuclear power. In terms of age, our plants rangefrom those which entered service in the 1950sthrough to those still under construction. Overall, the majority of the portfolio entered service less than15 years ago. Geographically and economically theportfolio is similarly diverse, having a presence indeveloped and developing countries with a variety of cultural, political and legal systems. Our riskmanagement philosophy is designed to deal with the diverse set of risks faced by our business.

To reflect the profile of our business we havedeveloped a system that contains both bottom-upand top-down elements to identify and manage risks.

Corporate level Policy, delegations and exposure limits are set at thecorporate level, with the Board of Directors taking ultimate responsibility. Acceptable business practices and engineering and operational standards are set centrally.

Regional businesses Market and trading risk are managed regionally within the framework set at the corporate level. Political risks are also managed regionally withsupport from the corporate centre.

Business units Risk assessments and action plans are mainly businessunit based. Health, safety and environmental compliance activities are also managed locally, albeitwithin a central policy framework. Business managers are accountable for managing the risks within their areas of responsibility. This principle also applies tothe managers of our corporate functions.

There is a continuous process for identifying, evaluatingand managing the key risks faced by the Group.Activities are co-ordinated by the Risk Committee, which is chaired by the CFO and comprises ExecutiveDirectors, other regional directors and senior managers.

The Risk Committee has responsibility, on behalf of the Board, for ensuring:

■ the adequacy of systems for identifying andassessing significant risks;

■ that appropriate control systems and othermitigating processes are in place;

■ that residual exposures are consistent with theGroup’s strategy and objectives.

During the business planning process, each businessunit and functional group identifies and assesses thekey risks associated with the achievement of itsprincipal objectives and their potential impact. Theseassessments are conducted by all material entities.During the year, significant changes in the risk profileare highlighted through the business performancereporting process.

The centrepiece of our risk management activities is an annual, Group-wide, risk review. This is basedon the outcome of the business planning exercise,updated as necessary to take account of ‘postbusiness plan’ events. The assessments are synthesisedinto a Risk Report, that identifies all the principal risks,which is reviewed by the Risk Committee. Where risksare considered to exceed the Group’s risk appetite,the Risk Committee directs which actions are to betaken. The Risk Report is reviewed by the full Boardand the Audit Committee. Schematically the annualRisk Report system functions as follows:

In order to compare risks across the Group on asystematic basis, we segment our activities as shownbelow. In reality, certain exposures interact and otherexposures apply to more than one ‘risk area’ (forexample, regulatory risk applies to all of our activities).Such cross-segment risks are assessed in each of theareas in which they occur.

Our approach to risk and risk management16

OUR APPROACH TO RISK AND RISK MANAGEMENT

Review by full Board and Audit Committee

Review by Risk Committee

Act

ions

Synthesis by Risk Report working group

Risk assessments by business units and functions

Financial risks

Market and trading risks

Fuel supply risks

Country and political risks

Construction and operational risks

Health, safety and environmental risks

Staffing and HR risks

Financial risksOur business can be subject to financial volatility. This can originate from a number of sources, includingproject company, counterparty related events andgeneral market conditions. One example was theinsolvency of TXU Europe in 2002 which resulted in the termination of the Rugeley Tolling Agreement(a long-term agreement to purchase coal and sellpower), which caused a shortfall in revenues. Ourcapital structure is designed to address these risks.

At the corporate level we have a number of loanfacilities which provide us with a prudent level offinancial headroom (cash plus outstanding credit lines,less known obligations) which can be applied to anyaspect of our business should the need arise. Thesefacilities will meet the short to medium-term fundingrequirements envisaged by the business. Longer-termfunding requirements or funding for a particularly largetransaction may be sourced from a combination ofthese facilities and suitable long-term instruments, such as bonds, or by raising additional equity.


These risks are discussed in greater detail below, along with other factors that could potentially have a materialimpact on our business.

Risk Impact(s) Mitigating factor(s)

Adverse conditions in our electricitysales or fuel purchase markets and/orcounterparty default risk

– financial volatility

– reduction in profitability andbalance sheet assets

– application of Group policies andprocedures set limits on tradingcounterparty exposures

– maintenance of financialheadroom at corporate level

– structuring of project companiesas stand-alone businesses and useof non-recourse project financelimits Group impacts

Price volatility or changes in marketconditions result in exceptionaltrading credit support requirements

– reduction in financial resourcesavailable for growth

– reduced ability to hedge output

– maintenance of financialheadroom at corporate level

– trading via investment gradefinancial institutions

– for specific projects additionalsupport is provided, for exampleMitsui provides a credit supportfacility for International PowerMitsui (IPM) assets in the UK

Spreads outturn below expectation – reduced profitability

– potential impact on loan covenants

– rolling hedge programme thattypically aims to lock in margins

– 42% of our projects have long-term contractual arrangements orlong-term regulated renewabletariffs shielding our overallprofitability from market forces

– Group financial resources provideus with the ability to renegotiateloan agreements if so desired

Challenging engineering,procurement and construction (EPC)market conditions

– delays and increases in the price ofgreenfield development impactsgrowth rate

– long-standing relationships with allmajor EPC contractors

– new entrant pricing should reflectthe cost of building new plant

Changes in environmental regulatoryregime limit our ability to operateour fossil fuel plants

– reduced profitability – new environmental legislation inour developed markets introducedwith long-lead times

– we have established processes forsecuring the carbon requirementsof our European business, whichcan be applied to other markets(US and Australia) as required

– 6.5% of net operating capacity isnow made up of wind generation

Principal risks and exposures

The actual choice of funding instrument(s) willdepend on market conditions at that time.

In merchant markets we are sometimes required toprovide credit support for our trading operations. Fueland electricity markets periodically experience sharpprice movements and when these occur this has animmediate knock-on effect on our trading creditsupport requirements, which can be volatile as aconsequence. The maintenance of financial headroomoffers protection against escalating margin calls(which are payments we are required to make whenpower prices increase above the contract price).

Project development can, on occasions, also requirecredit support. This support can take the form ofparent company guarantees or credit supportinstruments issued by banks. In the unlikely event that credit support facilities are unavailable to supportthe growth developments that we are planning, thiscould require us to reduce our development activities.We consider it highly unlikely that we will have toforgo opportunities as a result of this constraint dueto the prudent level of financial headroom that wemaintain and the availability of additional bilateralfacilities with banks.

At the individual business level we finance our projectswith non-recourse debt. We use non-recourse financeas this insulates the Group from adverse eventsoccurring at the project level, limiting our balancesheet exposure on a given project to the loss of theequity in that project. Liquidity in the financial marketshas reduced due to the ‘fallout’ from the US sub-prime market and, although this may increase thecost of non-recourse finance and/or reduce itsavailability to some extent, we do not believe this willlimit our ability to refinance existing projects ordevelop new opportunities. Other financial exposuresand their mitigating factors are set out in this section.

Counterparty riskWe manage our credit exposure to trading andfinancial counterparties by establishing clearly definedlimits, policies and procedures. Energy tradingactivities are strictly monitored and controlled throughdelegated authorities and procedures, which includespecific criteria for the management of creditexposures in each of our key regions. With respect toour treasury activities, the financial counterparty creditexposure is limited to arrangements with relationshipbanks and to commercial paper that has aninvestment grade credit rating.

Counterparty exposures arising from sale and purchaseagreements with our customers are monitored andmanaged locally with assistance from Group treasury. In addition, Group treasury manages the consolidatedcounterparty credit positions, with the activeinvolvement of the global risk manager. Furtherinformation on credit risk is included in the financialstatements on page 155.

Currency and interest rate exposuresProject company borrowings are normally made inthe project company’s functional currency. Henceexchange rate fluctuations do not affect the financialstability of our assets. In countries with historicallyweak currencies we aim to have power purchaseagreement (PPA) tariffs denominated in, or indexedto, a major international currency such as the USdollar. This protects future returns against large andrapid devaluations.

Variability in interest payments can introduce furthervolatility into project returns. We mainly mitigate thisrisk by fixing borrowing rates, principally by usinginterest rate swaps. A limited number of our PPAsalso have interest rate pass-through mechanisms.Overall, 67% of our borrowings were protected from interest rate fluctuations in these ways at theend of 2007.

In order to hedge the net assets of non-UKoperations, borrowings are generally in the samecurrency as the underlying investment. The Groupaims to hedge a reasonable proportion of its non-sterling assets in this way. It is not our policy, however,to hedge currency translation exposures throughforeign exchange contracts or currency swaps. Thisexposes our sterling profits and our balance sheetassets and liabilities to fluctuations that are not relatedto underlying business performance.


Loy Yang B,Victoria

For 2007 and 2006, average and year end rates ofexchange to sterling, for major currencies which aresignificant to the Group, were:

Average At 31 December

2007 2006 2007 2006

US dollar 2.00 1.85 1.99 1.96

Australian dollar 2.39 2.44 2.27 2.48

Euro 1.46 1.47 1.36 1.48

Czech koruna 40.43 41.51 36.20 40.85

When one of our projects makes sales and purchasesin a currency other than its functional currency thisgives rise to a currency transaction exposure.Transaction exposures also arise when dividends or other funds are remitted from our overseascompanies. We match transaction exposures inadvance where possible, and hedge any unmatchedtransactions as soon as they are committed. We mayuse foreign currency contracts and similar instrumentsfor this purpose.

Further information on market risk, interest rate riskand foreign currency risk is included in note 32 to thefinancial statements on pages 153 to 154.

Investment structures and contingent liabilitiesGoing forward, the complexity of the Group and itsinvestment structures, together with the rapidlygrowing body of tax legislation, will make tax planningand forecasting an increasingly complex and uncertainprocess. We closely monitor actual and potentialchanges in tax legislation in order to assess thecontinued effectiveness of our corporate structuresand financial planning assumptions. We are supportedby external tax experts in making these assessments.

International Power has a number of actual andpotential liabilities, arising from certain tax planningassumptions that have not yet been confirmed by therelevant fiscal authorities and from ongoing legalactions, one of which dates back more than a decade.We have appropriately provided for those sums thatwe believe will ultimately be paid.

Funding of pensions obligationsThe Group operates a range of pension plansinternationally, with the most significant definedbenefit arrangements in the UK and Australia. Theseschemes guarantee their members that they willreceive retirement benefits related to their finalsalary at retirement, which gives rise to a risk thatour pension funds will not be sufficient to meetthese obligations.

This type of risk increases from time to time, for example, when share prices fall or in light of theincreasingly more onerous assumptions required by actuarial advisers to independent scheme trustees.

The UK defined benefit pension schemes, which haveapproximately 700 active members, carried out theirlatest triennial actuarial valuations in 2007, whichresulted in valuing the schemes at a combined deficitof £12 million as at 31 March 2007. Deficit repairarrangements have been agreed with the two sets of trustees and as part of this, up-front payments into the funds of approximately £3.8 million weremade at the end of 2007. Future service contributionrates have also been increased in line with actuarialadvice received.

In 2007, a strategic review of our UK pensionarrangements was initiated and we continue toconsult with employees and their representatives toensure the right solution is achieved for the Groupand our UK employees. No changes are beingconsidered which affect existing employees. Thereview has been initiated largely to seek to reduce theGroup’s exposure to risk over the longer-term.

Financial processesWe consider that we have an appropriate and robustinternal control system. During the past few years wehave reviewed our systems of financial control toensure they were able to meet the requirements ofsection 404 of the US Sarbanes-Oxley Act for theyear ended 31 December 2006. Although, sincederegistration from the SEC in 2007, we are nolonger subject to the Sarbanes-Oxley Act, we havecontinued to maintain the same quality of controls,which continue to provide a comprehensive coverageof our business.

In order to measure our performance, the delivery of our strategy and to provide an early warning of variances to our forecasts we monitor a number of performance indicators. The principal financial KPIs are PFO, EPS and free cash flow, details of which are set out on pages 24 to 26.

Insurance risk managementOur risk management processes assist us in theidentification of events that can be partly or entirelymitigated through use of insurance, or which we canself-insure. Risks that we insure include, inter alia,business interruption, Directors’ and officers’ liabilityand property damage. Where we are legally requiredto effect third party liability insurances these are alsoin place. Insurance providers recognise the robustnature of our processes and this is reflected in thecost of our policies.


Paiton,Indonesia

Market and trading risksA significant number of the projects in which we havean interest operate without PPAs and are, therefore,vulnerable to market forces, which determine the priceand amounts of power sold and fuel and CO2allowances purchased. In particular, the majority of ourplants in the UK, North America and Australia operateon a merchant basis. In order to limit our exposure tomarket movements, we hedge a proportion of ouranticipated output by forward selling power and buyingforward related commodities including fuel, transmissionrights, capacity and emission credits. The key risks facingour market and trading activities and their mitigatingfactors are set out below.

Hedging activitiesUnhedged output is subject to price and volumevolatility. To reduce this uncertainty, we operate a‘rolling hedge’ programme under which we increasethe proportion of output that is sold forward as theproduction date approaches. Whilst we generally aimto hedge a relatively high proportion of our output forthe following year, this strategy is dependent on marketconditions. Due to market liquidity considerations themajority of our hedging activity is for a maximumperiod of two years ahead.

It is not always possible to exactly match the expectedoutput of a plant with power sales and fuel and othercommodity purchases. Mismatched positions have thepotential to result in substantial losses. This potentialexposure is addressed in our trading policies, whichlimit the potential size of mismatched positions.

In addition to asset-backed trading we carry out someproprietary trading (trading not linked to the expectedoutput of our power plants). Our non-asset backedtrading activities are limited in scope and anyexposures are correspondingly small.

Framework for trading activitiesOur trading activities operate within a robustframework of policies and oversight functions. Tradingand forward contracting strategies are continuallyreviewed by regional and corporate trading and riskmanagement professionals, to ensure they are bestsuited to both local market conditions and corporaterisk guidelines. A Group-wide oversight of our tradingoperations is provided by a Global Commodities RiskCommittee (GCRC) which includes the CFO, thehead of finance, head of trading and the globaltrading and risk managers. The GCRC acts under the authority of the Board, and delegates limits andauthorities to local risk committees, which have beenestablished in each of our trading operations tooversee the management of market, operational andcredit risks arising from our marketing and tradingactivities. The local risk committees include thetrading manager, global and local risk managers,regional directors and senior managers.

Energy market risks and counterparty exposures onour asset and proprietary portfolios are measured and managed using various statistical techniques.

Fuel supply risksFuel supply security is fundamental to our business.Most of our markets have robust supply infrastructures,and other factors further enhance our position. Theseinclude: mines local to the power plant, fuel storage,dual-fuel capability and sourcing from a number ofreputable suppliers. Consequently, we have experiencedvery few supply interruptions that have had an impacton operations.

We procure fuel under a variety of contractualarrangements ranging from long-term fuel supplyagreements (FSAs) to on-the-day merchant gaspurchases. The principal determinant of our fuelsupply activity is the need to match purchases topower sales, both in terms of volume and price.Hence, we operate long-term FSAs at power plantswhere we have long-term PPAs and predominantlymerchant supply arrangements in our merchantpower markets. This strategy helps mitigate againstfuel price impacts, particularly in the current climate of high fuel prices, and the spread is locked in on the basis of operational profitability.

It is not always possible to achieve an exact balancebetween fuel purchases and power production. This is particularly an issue for our projects with PPAs,where the associated FSAs often have minimum fuelpurchase obligations. By structuring the purchasesflexibly and incorporating appropriate force majeureprotection, we are able to mitigate this risk byensuring, as far as possible, that the price and volumeobligations in the PPA and FSA mirror one anotherand, to date, we have never experienced a significantfinancial impact due to mismatches between our FSAs and PPAs.

Country and political risksMost of our projects with PPAs are in countries with a significant degree of country risk. In the past,some PPA tariffs have been reopened by our offtakers and renegotiated. We do not currently foresee theprospect of further renegotiations but this remains a general possibility.

We address country risk exposures in several ways.Country risk assessment is an important element ofour due diligence, prior to participating in a project,and we favour projects where international arbitrationis available for resolving disputes. Once projects areoperational, International Power always strives to be a ‘good neighbour’, supporting the local, regional andnational communities wherever possible. We alsoattempt to maintain good relationships with politicalinstitutions and our customers.


Saltend,UK

The size of our portfolio dilutes the effect of adispute, at any given project company, on the Groupas a whole. Furthermore, non-recourse debtarrangements limit our financial exposure to the lossof our equity investment and future cash flows fromthe project. Thus, whilst the loss or impairment ofassets in a project company might affect the financialperformance of the Group, other operatingcompanies would remain unaffected.

Construction and operational risks Our policy with regard to new-build is, whereverpossible, to award major projects on an EPC basis tosuitably qualified contractors. EPC contracts transferthe majority of the design and construction risks tothe contractor, and provide substantial protectionthrough liquidated damages, in the event of failureon the part of the contractor to meet contractualcompletion or plant performance targets. Wherethere is a project specific need to adopt a risk sharingapproach within the contract, this is done on thebasis of deliverable technical and performanceassumptions and with due regard to the ability tomanage these risks. We supplement this contractualprotection with insurances.

The rapid growth in demand for new power capacityglobally and rising raw materials prices havecontributed to significant price increases and longerlead times for the delivery of power plant equipment.If this trend continues, there is a risk that greenfieldproject development timescales will be extendedfurther and, in addition, the ability to secure extensivecommercial protection from the original equipmentmanufacturers will become more difficult. This risk isgenerally greater for coal fired plant because of longerconstruction lead times. We continue to work withthe main suppliers, such as Alstom, General Electric,Mitsubishi and Siemens, with whom we have long-term relationships, with emphasis on our growthplans and long-term opportunities.

Power plants are characterised by extremely hightemperatures, pressures, voltages and rotationalvelocities. Providing a safe environment for people on our sites and in surrounding areas is a majorpriority. We achieve a safe environment by using a combination of engineering and operationalprocedures and standards, provision of training,performance monitoring and by employingexperienced staff. In addition, we are currentlydeveloping a new engineering risk assessmentapproach to assist in the identification andmanagement of the key engineering risks across the plant portfolio. This will be rolled out in 2008 tofurther enhance our approach to risk management.

We are a minority participant in a number of projectsand do not set operational standards in such cases. In such circumstances we provide support, whereappropriate, and attempt to use our influence toachieve standards that are equivalent to our own.However, our ability to influence partners varies.

During the build period we closely monitor theprogress of four major factors: constructionprogramme, cost, quality and safety. Once a plant is in operation we monitor performance by referenceto a number of performance indicators including, for example, the technical availability, net maximumcapacity, thermal efficiency and forced outage rate.

Health, safety and environmental risksExcellent HS&E performance is critically important for our business. Risks range from enforced plantclosures and substantial fines to damage to the well-being of our staff and to our reputation in thewider community.

HS&E compliance activitiesAt plant level, HS&E requirements are set bycorporate, local and national standards andregulations, and individual plants operate within sitespecific environmental licensing limits. We have anongoing HS&E audit programme to provide assurancein this area and we closely monitor the accidentfrequency rate (AFR) and breaches of environmentalpermits. AFR and reportable environmental incidentsare amongst our KPIs.


Deeside, UK

Plant operating and monitoring procedures areeffective in ensuring that we comply with theconditions of our environmental licences andconsents. Whilst we have experienced occasionalbreaches of our environmental operating limits, therehave been no recent incidents that have posed asignificant threat to the environment or to our abilityto run our plants.

Sites are required to adhere to a set of corporatehealth and safety standards and to local regulations.Health and safety performance is the responsibility ofour plant managers, who are supported by localhealth and safety specialists. Our global health andsafety manager is responsible for ensuring that ourcorporate standards remain current and areunderstood by all of our sites.

Environmental regulationEnvironmental legislation is one of the key drivers ofthe long-term development of the electricity industry.Initiatives to reduce greenhouse gas emissions areexpected to impose increasing commercial constraintson our ability to emit CO2, and hence our ability touse fossil fuels to generate power without the use ofcarbon capture and storage. The impact of carbon reduction measures is currently mostapparent at our European plants, where we arerequired to ensure that we have sufficient carboncredits to support our expected levels of generation.Certain of our projects have change of law protection,which enables us to pass on any carbon costs to theofftaker. In such cases the economic impact of carbonrisk is removed.

In January 2008 the EU issued proposals for carbonallowances post 2012. If accepted, operators ofEuropean power plants will receive zero carbonallowances. The EU further mandated substantialrenewables targets. Both of these factors willinevitably impact on our portfolio in the medium to long-term.

At the end of 2007 there was a change ofgovernment in Australia and one of the first acts ofthe new administration was to sign up to the KyotoProtocol on climate change. Australia is nowcommitted to introducing a cap and trade-basedcarbon market similar to the European UnionGreenhouse Gas Emission Trading Scheme (EUETS)by 2010. Australia is not expected to have difficulty in meeting its Kyoto targets and the impact on ourbusiness is not expected to be great in the period up to 2012.

In the US discussions have continued at state levelthat could lead to CO2 limitations being introducedsome time in the future. The absence of single,centrally sponsored, proposals decreases thepredictability of final outcomes.

At the global level there is uncertainty over what, ifanything, will replace the Kyoto Protocol on climatechange when it expires at the end of 2012. Mostgovernments in developed countries have introducedlegislation to incentivise renewable generation to thepoint where growth in renewable generation mayhave a material impact on our fossil fuelled plants. In response, we made major investments in renewable energy during 2006 and 2007. We have also dedicated resources to reviewingtechnology trends in order to ensure that we are well positioned to participate in the drive towards a lower carbon environment.

Staffing and HR risksThe power industry has a history of long-termemployment at plant and corporate level and staffing is not generally a day-to-day risk issue.

Our industry is highly competitive and we have tobalance resources against the need to contain costs.We utilise our extensive experience to make thesejudgements and have the ability to mobilise people at short notice to mitigate the risk of loss of key staff. To date we have not experienced any disruption ofnote as a result of unexpected staff unavailability.

We anticipate that terrorism may be a threat to ourstaff and assets in the foreseeable future. In order toreduce this threat we liaise with local lawenforcement organisations on security issues and ourcorporate security specialist assists vulnerable sites toassess and reduce their exposures. We also utilise theservices of a global security consultancy to ensure thatour risk assessments and physical security measuresfully reflect local conditions. The consultancyadditionally has the capacity to provide personalsecurity services if required.

Certain of our sites have high union representation.We have not been affected by industrial action forseveral years but this remains a risk. We maintainactive dialogues with staff unions to ensure that weare aware of any potential issues in good time tomitigate our risks.


Hartwell, Georgia


CASE STUDY PRODUCING FRESH WATER THROUGH DESALINATION

Only 6% of the water on earth is freshwater and a large proportion of this freshwater is frozen in polar ice caps, mountainsnow and glaciers or remains underground.Any water with dissolved solid content ofup to 600mg/litre is considered to bedrinkable. Water becomes significantly lesspalatable when total dissolved solids exceed1,000mg/litre, so historically, this has led to the development of population centresaround sources of fresh water such as rivers and springs.

Over the last 50 years, advances in desalinationtechnology have made it possible to convertlarge quantities of saline water, from seas andoceans, into fresh water suitable for drinking andagriculture. Desalination of seawater has playeda significant part in the growth and developmentof arid regions such as the Middle East and hasoffered security of water supply to its residents.

Water desalination technologies can be broadlydivided into two processes, thermal andmembrane. Thermal processes such as multistage flash distillation (MSF) and multi effectdistillation (MED) involve adding heat toseawater until part of it evaporates into watervapour. This, in turn, is condensed into highquality fresh water called distillate. The process is carried out over several stages and, byadjusting the pressure to keep the waterboiling and vaporising in each cycle, theperformance and efficiency of the process isimproved. The distillate produced is so purethat to make it suitable for drinking it has to be re-mineralised by adding certain chemicalssuch as calcium carbonate.

Power stations usually have waste heat. Hence,combining power plants with desalination plantsis a logical and economically attractive solutionand this has been successfully applied, especiallyin the Middle East, thereby maximising theefficient use of fuel. The majority of ourdesalination plants use a thermal process to produce fresh water.

Reverse osmosis is the most commonmembrane process used for desalination. Thetechnique involves pumping seawater at pressurethrough a semi-permeable membrane. Themembrane allows the water to pass throughwhilst restricting any dissolved salts, which getleft behind in the remainder of the seawater.Energy is required in the form of electricity fordriving the pumps, but no heat is used as thereis no evaporation process. The efficiency of theprocess is improved by employing energyrecovery devices to draw energy from thepressurised return water stream.

International Power is actively engaged inseawater desalination across a number of plantsin the Middle East such as Shuweihat S1 andUmm Al Nar in Abu Dhabi, Hidd power stationin Bahrain and Ras Laffan B in Qatar. CurrentlyInternational Power has interests in a totalcapacity to produce over 500 MIGD of freshwater, enough to fill approximately 550Olympic-sized swimming pools per day.

We operate some of the largest desalinationfacilities around the world e.g. Umm Al Nar(143 MIGD) and Shuweihat S1 (100 MIGD). At Shuweihat the desalination units each have acapacity of 16.7 MIGD, making them the largestMSF units in commercial operation worldwide.

Umm Al Nar, UAE

Shuweihat S1, UAE

Hidd, Bahrain

Key performance indicators (KPIs)We use a range of performance indicators, bothfinancial and non-financial, to measure the delivery of the Company’s strategic objective – growth inshareholder value through the efficient operation,financing, and trading of output from our powergeneration fleet, whilst maintaining the highest levelsof safety and environmental performance – and tomanage the business.

The most important of these measures areconsidered KPIs and their targets are determinedannually during the business planning process. The KPIs are used by management to compareactual performance during the year, and the latestmonthly forecasts, against the annual budgetedtargets. Our KPIs, both financial and non-financial,are set out below.

Key performance indicators and financial highlights24

KEY PERFORMANCE INDICATORS AND FINANCIAL HIGHLIGHTS

Financial KPIs Non-financial KPIs

Our financial key performance indicators address two keyaspects of the business, its profitability and its cashgeneration:

Our non-financial key performance indicators addressother aspects of the business: safety, environmental andoperational performance:

Profit from operations (PFO)* Accident frequency rate (AFR)

Earnings per share (EPS)* Reportable environmental incidents

Free cash flow Technical availability

* Financial KPIs are presented excluding exceptional items and specific IAS 39 mark to market movements

Uni-Mar (Marmara),Turkey

We consider PFO and EPS excluding exceptionalitems and specific IAS 39 mark to market movementsto be an appropriate indicator of performance, asthese measures:

■ exclude significant items which, by virtue of theirsize or incidence, could potentially distort year-on-year comparisons;

■ allow a better understanding of the financialinformation presented, and specifically the Group’sunderlying business performance, by excluding fairvalue movements on economic hedges;

■ assist shareholders and analysts who have expresseda preference for the reporting of results without theinclusion of the effects of exceptional items andspecific IAS 39 mark to market movements.

Presenting the Group’s segment and total PFO andthe Group’s EPS excluding exceptional items andspecific IAS 39 mark to market movements isconsistent with the way management measures theGroup’s performance in its budgets, forecasts andmanagement accounts on a day-to-day basis.

The explanations of our KPIs follow.

Profit from operations PFO is a measure of the operating profitability of theGroup. It excludes the impact of all non-operatingcosts from subsidiaries, financing costs and incometax expense, and therefore provides a comprehensivemeasure of operational performance.

PFO excluding exceptional items and specific IAS 39mark to market movements has grown at an averagecompound growth rate of 60% over the last threeyears reflecting strong financial performance over theperiod. The results for the current and prior year arealso presented in the consolidated income statementon page 101.

This KPI is also used as one of the measures toevaluate Regional Directors’ performance whenquantifying their annual bonuses (more informationcan be found in the Directors’ remuneration reporton pages 83 to 95).

Earnings per share EPS is a measure of the overall profitability of theGroup and shareholder returns. It is defined as theprofit in pence attributable to each Ordinary Share in the Company, based on the consolidated profit forthe year, after deducting tax and minority interests.Growth in EPS over time is indicative of the ability of the Group to add value.

EPS excluding exceptional items and specific IAS 39mark to market movements has grown at an averagecompound growth rate of 47% over the last threeyears. The calculation of this year’s result is presentedin note 11 to the financial statements on page 125.

This KPI is also used as one of the measures toevaluate Directors’ performance when quantifyingtheir annual bonuses and as a performance conditionin their long-term incentive plans (more informationcan be found in the Directors’ remuneration reporton pages 83 to 95).

This KPI is also used as a performance condition inthe Company’s share-based payment schemes (moreinformation can be found in note 29 of the financialstatements on pages 139 to 143).

Financial KPIsYear ended 31 December

2004 2005 2006 2007

PFO £222m £536m £773m £904m

EPS 8.6p 14.6p 22.4p 27.1p

Free cash flow £104m £285m £456m £653m


PFO £222m 2004

£536m 2005

£773m 2006

£904m2007

EPS 8.6p 2004

14.6p 2005

22.4p 2006

27.1p2007


Free cash flow Power generation is a capital intensive business andhence it requires the assets within the Group togenerate sufficient cash to repay the initial investmentin the assets, to provide returns for shareholders and to provide funds for future investmentopportunities. We define free cash flow as net cashflow from operating activities after all operating costs,maintenance capital expenditure, interest and tax.

We consider this measure of cash flow to be a keyindicator of business performance as it measures thecash generated from the underlying businessperformance of continuing operating activities.

This is consistent with the way management measuresthe Group’s performance in its budgets, forecasts andmanagement accounts on a day-to-day basis. This KPI isalso used as one of the measures to evaluate Directors’performance when quantifying their annual bonuses(more information can be found in the Directors’remuneration report on pages 83 to 95).

Free cash flow has grown at an average compoundgrowth rate of 84% over the last three yearsreflecting both an increase in the size of the Groupand strong operational and financial performance overthe period. The results for the current and prior yearare also presented in the consolidated cash flowstatement on page 104.

Non-financial KPIs

Accident frequency rateHealth and safety is of vital importance in ourbusiness. It is important to provide employees with a safe place to work and any accident is disruptive to the running of the business. AFR is our reportingstandard and is defined as the number of lost timeaccidents (LTAs) divided by the number of hoursworked, multiplied by 100,000. A LTA is an accidentwhere an individual is away from work for more thanone day and is an auditable indicator across a numberof industries.

In 2007 the AFR for employees and contractorscombined was 0.12. This can be compared with 0.16 for 2006. International Power intends tomaintain this improvement by establishing a target of 0.10 for 2008. This does not mean we tolerateunsafe behaviour; we seek to have zero LTAs buttargets need to be realistic and challenging.

The data underlying these calculations is submitted by individual plants directly into the corporatereporting system.

FREE CASH FLOW £104m 2004

£285m 2005

£456m 2006

£653m2007

AFR 0.23 2005

0.16 2006

0.12 2007

Milford, Massachusetts

Reportable environmental incidentsThe environment and how we care for it is central to the business of International Power. We havealways had a policy of complying with all applicableenvironmental regulations. Our power plants areissued with environmental licences by the relevantstatutory authorities. Environmental licences requirethat any environmental incident is reported. Wemeasure our ability to comply with environmentalregulations by recording the number of reportableenvironmental incidents.

In 2006 there were 16 reportable environmentalincidents. In 2007 this declined to 13, a significantimprovement on the prior year. International Powerintends to consolidate this by establishing a target of12 for 2008. This does not mean we tolerateenvironmental incidents but targets need to berealistic and challenging.

The underlying data is submitted by individual plantsdirectly into the corporate reporting system.

Technical availabilityTechnical availability measures when a plant isavailable for dispatch. Each of our plants will generallybe unavailable during some periods in the year due toa combination of planned outages for maintenanceand unplanned outages due to operational problems.

Technical availability is calculated by first determiningthe potential maximum amounts of electricity thatcould be generated in the year, if all the plants wereoperated at full output for the entire year. We thendeduct from this maximum amount the electricitythat could not be produced due to planned andunplanned outages at the plants throughout the year. This number is then expressed as a percentageof the potential maximum electricity that could begenerated, where all these quantities are calculated interms of electrical energy (GWh). An important partof our business is ensuring that our merchant powertrading and power purchase agreements are closelyaligned to our operational activities and availabilityplanning is a key factor in this regard. The year-to-year variance in the profile of planned outagesinfluences both the achieved and targeted availability.

In 2007 we achieved technical availability of 90%, anincrease above the 89.6% achieved in 2006. Takingaccount of the outage plans for 2008 it is appropriateto set a target of 90% for the plant portfolio.

This calculation is carried out using data submitted by the individual plants directly into the corporatereporting system.


REPORTABLE ENVIRONMENTAL INCIDENTS 16 2005

16 2006

13 2007

TECHNICAL AVAILABILITY 90.1% 2005

89.6% 2006

90.0% 2007

Year ended 31 December Objectives

2005 2006 2007 2008

Accident frequency rate (AFR) 0.23 0.16* 0.12 0.10

Reportable environmental incidents 16 16 13 12

Technical availability 90.1% 89.6% 90.0% 90.0%

Note:

* The AFR for 2006 has been revised from 0.12 to 0.16 following the classification of an incident, which happened in December 2006, as a lost time accident (LTA) in September 2007.

Financial highlightsThe financial information included in the consolidated financial statements has been prepared on the basis of all applicable IFRSs as adopted by the EU. A discussion of the policies we believe to be most critical inconsidering the impact of estimates and judgements on the Group’s financial position and results of operationsare set out on pages 58 to 60.

In order to allow a full understanding of the financial information presented within the consolidated financialstatements, and specifically the Group’s underlying business performance, the Group presents its incomestatement such that it separately identifies:

■ the results excluding exceptional items and specific IAS 39 mark to market movements;

■ the effect of the exceptional items and specific IAS 39 mark to market movements;

■ the total result.

The basis of preparation is outlined more fully in note 1 to the consolidated financial statements on page 106.However, in summary, those items that the Group separately presents as exceptional are items which, in thejudgement of the Directors, need to be disclosed separately by virtue of their size or incidence in order toenable a proper understanding of the financial information. Those items that the Group separately present asspecific IAS 39 mark to market movements are those mark to market movements recorded in the incomestatement which relate to: derivative contracts into which the Group has entered in order to economicallyhedge certain of its physical and financial exposures; and fair value gains and losses on equity conversionfeatures embedded within convertible bonds, so as to separately identify a non-cash movement which, if theconversion option is exercised, will ultimately be extinguished by the issue of equity.


A summary of the Group’s financial performance during the year is as follows:

Income statementYear ended Year ended

31 December 31 December2007 2006

£m £m

Excluding exceptional items and specific IAS 39 mark to market movements:

Revenue (including joint ventures and associates) 3,872 3,645

Profit from operations

– from subsidiaries 718 565

– from joint ventures and associates 186 208

Profit from operations 904 773

Interest (308) (248)

Profit before tax 596 525

Tax (113) (122)

Profit for the year 483 403

Minority interests 77 71

Profit attributable to equity holders of the parent 406 332

Earnings per share (basic) 27.1p 22.4p

Including exceptional items and specific IAS 39 mark to market movements:



Profit attributable to equity holders of the parent 503 410

Earnings per share (basic) 33.6p 27.6p

Cash flowYear ended Year ended


£m £m


Depreciation, amortisation and other movements(1) 515 322

Dividends received from joint ventures and associates 145 113

Capital expenditure – maintenance (71) (128)

Purchase of intangible assets (48) –

Movements in working capital (4) (15)

Tax and net interest paid (413) (313)

Free cash flow 653 456

(1) Depreciation, amortisation and other movements include income statement charges for interest, tax, depreciation, specific IAS 39 mark to market movements and theshare of profit of joint ventures and associates. In addition in 2007 they include the exceptional profit on the disposal of 25% of UK subsidiaries and the exceptionalprofit on disposal of Malakoff. In the year ended 31 December 2006 they also included the exceptional profit on the TXU settlement and the exceptional profit oncompensation for breach of contract.

Balance sheetAs at As at


£m £m

Net assets 3,007 2,740

Net debt(2) (4,662) (3,575)

Gearing 155% 130%

Debt capitalisation 61% 57%

(2) For 2007 the net debt includes loans from minority interests. For 2006 the net debt has been re-presented on the same basis.

Profit from operations (PFO)

2007 PFO (excluding exceptional items and specific IAS 39 mark to market movements) at £904 million is17% ahead of 2006. This principally reflects strong performance in Europe, in particular at our UK assets andfrom first full year contributions from Levanto and Indian Queens, and in North America.

PFO (excluding exceptional items and specific IAS 39 mark to market movements) is discussed in more detail inthe Regional review sections which follow.

Reconciliation from PFO to PFO excluding exceptional items and specific IAS 39 mark to market movements

Year ended Year ended31 December 31 December

2007 2006£m £m

PFO 518 898

Losses/(gains) on exceptional items 56 (55)

Losses/(gains) on specific IAS 39 mark to market movements 330 (70)

PFO excluding exceptional items and specific IAS 39 mark to market movements 904 773


Segmental results – excluding exceptional items and specific IAS 39 mark to market movements

Year ended 31 December 2007 Year ended 31 December 2006

Subsidiaries Share of Total Subsidiaries Share of Totaljoint ventures joint venturesand associates and associates

£m £m £m £m £m £m

Profit from operations (excluding exceptional items and specific IAS 39 mark to market movements)

North America 108 28 136 73 28 101

Europe 521 53 574 381 69 450

Middle East 44 24 68 32 20 52

Australia 83 (1) 82 121 3 124

Asia 14 82 96 3 88 91

770 186 956 610 208 818

Corporate costs (52) – (52) (45) – (45)

718 186 904 565 208 773

Exceptional items and specific IAS 39 mark to market movements (398) 12 (386) 119 6 125

Profit from operations 320 198 518 684 214 898

The regional performance is discussed in more detail on pages 32 to 53. Corporate costs are discussed on page 54.

Earnings per share (EPS)

2007 EPS (excluding exceptional items and specific IAS 39 mark to market movements) at 27.1p is 21% ahead of 2006. This increase principallyreflects those items discussed under the heading ‘profit from operations’ and also reflects an increase in interest expense offset by a reduction in taxexpense (both of which are discussed on page 54).

Reconciliation from EPS to EPS excluding exceptional items and specific IAS 39 mark to market movements


2007 2006£m £m

EPS 33.6p 27.6p

Deduct after tax and minority interest gains on exceptional items (20.3)p (2.7)p

Add/(deduct) after tax and minority interest losses/(gains) on specific IAS 39 mark to market movements 13.8p (2.5)p

EPS excluding exceptional items and specific IAS 39 mark to market movements 27.1p 22.4p


Free cash flow

Free cash flow in 2007 at £653 million is 43% ahead of 2006. This increase was driven by full yearcontributions from Coleto Creek, Levanto, Tihama and Indian Queens, together with strong profitability of the UK assets. In addition, dividends from associates and joint ventures increased year-on-year by £32 million.Maintenance capital expenditure was also £57 million lower than in 2006. This was partially offset by anincrease in net interest and tax payments of £100 million, mainly as a result of acquisitions. Free cash flow was also enhanced by working capital reductions, including reduced margining and investment deposits withcounterparties.

Reconciliation from net cash inflow from operating activities to free cash flowYear ended Year ended


£m £m

Net cash inflow from operating activities 653 475

Less exceptional receipt from TXU Administrators – (14)

Less exceptional receipt of compensation for breach of contract – (5)


A review of liquidity is included on pages 56 to 57.

DividendDuring the year, the Board introduced the payment of an interim dividend. The interim dividend of 2.77 penceper Ordinary Share, was paid to shareholders on 30 October 2007. This interim dividend was calculated on afixed percentage (35%) of the previous year’s full year dividend.

The Board is proposing a final dividend of 7.39 pence per share, bringing the full year dividend to 10.16 penceper share (2006: 7.9p), an increase of 29% year-on-year and representing a pay-out ratio of 37.5% of EPS (pre-exceptional and specific IAS 39 mark to market movements). This increase is in line with the Group’s policyof progressively moving towards a dividend pay-out ratio of 40%.

Payment of this final dividend to shareholders registered on the Company share register on 23 May 2008 is dueto be made on 26 June 2008, following approval at the 2008 AGM, which will be held on 13 May 2008.

OutlookWe believe 2008 will be another year of growth after taking into account reduced output at Rugeley due to thefitting of FGD equipment, lower UK coal spreads, and in the US subdued summer spark spreads following thecool summer in 2007. We remain well positioned to finance and deliver on organic and acquisition growthopportunities across our international portfolio.


Indian Queens, UK

PROFIT FROMOPERATIONS INNORTH AMERICAINCREASED35%OVER 2006

Profit from operations in North America wasup at £136 million compared to £101 millionlast year, reflecting the introduction of theForward Capacity Market (FCM) in NewEngland and a full year of ownership ofColeto Creek, which was acquired in July2006. New dust emission control equipmentwas installed at Coleto Creek during the yearwhich, together with planned maintenancework, meant the plant contributed for tenmonths of the year. Our contracted assets,namely EcoEléctrica, Hartwell and OysterCreek all performed well delivering a goodfinancial performance.

A mild summer in Texas led to a decrease indemand compared to 2006, resulting in a flat spark spread at Midlothian of $14/MWh at areduced load factor of 55%. The spark spread atHays fell from $14/MWh in 2006 to $10/MWh and the load factor also decreased from 55% to45%, following outages to repair defective welds onhigh pressure steam pipes. All four units at Hays arenow fully operational, following the conclusion ofremedial work which was completed in the firstquarter of 2008.

In New England, spark spreads increased from$12/MWh in 2006 to $16/MWh, at a constant loadfactor of 60%, and our assets in the region benefitedfrom the introduction of the FCM. In February 2008,the New England Independent System Operatorconducted the first auction for additional capacity forthe period June 2010-May 2011. The auctionattracted a significant response from both generationand demand side management projects, resulting in acapacity income of $4.25 per kW-month for our NewEngland plants for this period.

For 2008 we have forward contracted 70% of ourexpected merchant CCGT output in Texas, 90% inNew England and 95% of our expected output atColeto Creek.

In January 2008, International Power in partnershipwith South Texas Electric Cooperative (STEC)(International Power 51%, STEC 49%) commencedthe process to permit a 650 MW second coal firedunit at Coleto Creek. The new unit, to be operated by International Power, will provide additional capacityand increased fuel diversity in the region when itenters service, which is expected in the 2013-2014timeframe. In line with the ownership structure STECwill take 49% of this new capacity.

Market environment and growth prospectsIn North America, the markets in Texas and NewEngland have been experiencing steady growth inpower demand and will be in need of new generationcapacity in the near future.

In Texas subject to new capacity coming online asplanned, the reserve margin is currently forecast to fall below minimum levels needed for reliability from2010/2011. Even including likely new capacity, thereserve margin is currently forecast to remain below the minimum desirable level and could fall to as low as 6% by 2013. This presents us with opportunities fororganic growth in Texas such as the potential expansionof our Coleto Creek coal fired power plant in Texas.


REGIONAL REVIEW – NORTH AMERICA

Bellingham,Massachusetts

Results – North AmericaYear ended Year ended

31 December 31 December 2007 2006

£m £m


Exceptional items and specificIAS 39 mark to market movements – losses/(profits) 21 (10)

PFO (excluding exceptional itemsand specific IAS 39 mark tomarket movements) 136 101

TEXAS (ERCOT) RESERVE MARGIN

16

14

12

10

8

6

4

2

0

Peak

res

erve

mar

gin

%

2008 2009 2010 2011 2012 2013

Q1 2008projection

Q4 2007projection

Target reservemargin

Regional review – North America34

Gas CCGT 36%

Nuclear 7%

Gas ST 28%

Coal 22%

Gas peaking 6%

Other 1%

TEXAS MARKET CAPACITY BY FUEL TYPE (MW)

Gas CCGT 36%

Coal 9%

Oil/gas ST 20%

Nuclear 15%

Other renewable 9%

Oil/gas peaking 6%

Pumped storage 5%

NEW ENGLAND MARKET CAPACITY BY FUEL TYPE (MW)

Snapshot – regional markets

North America

25% of International Power’s portfolio is located in North America

Key markets for International Power: Texas and New England

Texas (ERCOT)

■ Total installed capacity: 72 GW

■ Market type: liberalised – merchant market

■ Forecast demand growth: 2.1%

■ Peak reserve margin: 13.9% in 2007

■ Peak demand season: summer

■ International Power’s current installed capacity in the market 3,223 MW (net)

– 2,556 MW gas CCGT, 667 MW coal

New England (NEPOOL)


■ Market type: liberalised – merchant market

■ Forecast demand growth: 1.7%

■ Peak reserve margin: 13.8% in 2007



– 1,187 MW gas CCGT

In addition to assets in Texas and New England, International Power has interests in two long-term contracted plants,

Hartwell (Georgia) and EcoEléctrica (Puerto Rico)

Similarly, demand in New England (NEPOOL) hasbeen growing just under 2% per annum and isexpected to continue to grow at close to that pace.Given current demand levels, if no major new-buildoccurred, New England could fall below the targetreserve level in the short-term. However, the systemoperator in New England has introduced the FCM toensure that sufficient reserve margin is maintained inthe system.

The FCM incentivises existing generators to achievehigh levels of availability and encourages demand-sidemanagement and the construction of required newpower plants in supply deficient areas. Overall, theFCM provides a market environment that encouragesand rewards the right amount of new capacity thatwill be required to meet future demand, and providesearnings security for our existing, efficient planttogether with creating further expansionopportunities for us in New England.

In addition to organic growth, there are multipleopportunities for further growth via acquisitions in the region in both existing and selected new markets.

NEW ENGLAND (NEPOOL) RESERVE MARGIN

20

0

Peak

res

erve

mar

gin

%

2008 2009 2010 2011 2012 2013 2014 2015 2016

18161412108642

With new demand sideresources

Without newdemand sideresources

Target reservemargin


1

24

5

7

9

8

6

3

1

2

3

4

5

6

7

8

9

Midlothian TexasHays TexasColeto Creek TexasOyster Creek TexasHartwell GeorgiaMilford MassachusettsBellingham MassachusettsBlackstone MassachusettsEcoEléctrica Puerto Rico

Location Fuel/type Gross Net Gross Netcapacity capacity capacity capacity

power power heat (MWth) heat (MWth)MW MW

Assets in operation

Hartwell Georgia Gas (OCGT) 318 159

Coleto Creek Texas Coal 667 667

Hays Texas Gas (CCGT) 913 913

Midlothian Texas Gas (CCGT) 1,423 1,423

Oyster Creek Texas Gas (Cogen/CCGT) 440 220 100 MWth 50 MWth

Bellingham Massachusetts Gas (CCGT) 539 539

Blackstone Massachusetts Gas (CCGT) 488 488

Milford Massachusetts Gas (CCGT) 160 160

EcoEléctrica Puerto Rico LNG (CCGT) 548 192

North America total in operation 5,496 4,761

Note: Gross MWs are defined as maximum electrical output that can be produced at reference site conditions.As at 5 March 2008.

A SIGNIFICANTINCREASE INCONTRIBUTIONSFROM OUR UKPOWER PLANTS

Profit from operations in Europe increasedsignificantly to £574 million from £450 million last year. This was principallydue to strong contributions from our UKassets and first full year contributions fromLevanto and Indian Queens, together with a first-time contribution from Maestrale for the four months from September toDecember 2007. Our contracted assets in Iberia, Italy and Turkey continue to deliver consistent operational and financial performance.

In 2007 the UK power market saw dark spreadsfalling and spark spreads increasing. Rugeley benefitedfrom our decision to forward contract its output for2007, when power prices were higher in 2006, whilstDeeside was able to take advantage of its largelyuncontracted position as its achieved spark spreadincreased from £22/MWh to £23/MWh(1). Saltend’searnings were flat compared to 2006, due to thelower amortisation charge on the gas supply contractbeing offset by the impact of higher gas costs.

For 2008 we have forward contracted 85% of ourexpected merchant output at Rugeley, 95% atSaltend, and 60% at Deeside.

First Hydro’s earnings were up compared to 2006 as the asset captured higher prices during periods ofincreased power price volatility. The storage capacityof one of First Hydro’s upper reservoirs was expandedin October 2007, to give an extra 8% capacity.

Earnings at ISAB, in Italy, were down year-on-yearfollowing a planned outage and a revised fuelindexation methodology.

The Czech Republic experienced very mild weatherduring the first half of the year, and as a consequenceheat sales were lower compared to 2006, but thiswas partially offset by higher power sales at animproved margin. In August, International PowerOpatovice signed a new three-year contract with theexisting offtaker to sell 65% of its expected outputuntil the end of 2010.

During the year, International Power more thandoubled the size of its European wind portfolio,acquiring 100% ownership of 660 MW ofoperational wind generation. Details of theseacquisitions are shown below:


REGIONAL REVIEW – EUROPE

First Hydro, UK

Name of wind farm Location Acquisition/ MW (net) MW (net)completion date in operation* under construction*

Delfzijl-Zuid Netherlands July 2007 16 –

Maestrale Italy and Germany August 2007 581 55

Schkortleben Germany September 2007 28 –

Delfzijl-Zuid 2 Netherlands December 2007 15 –

Karstaedt 2 Germany December 2007 20 –

Total 660 55

* As at date of acquisition.

Results – EuropeYear ended Year ended


£m £m


Exceptional items and specificIAS 39 mark to market movements – losses/(profits) 191 (165)


At Levanto, which was acquired in November 2006, a further 69 MW of wind farms that were underconstruction at acquisition started commercialoperation in 2007, with the final 6 MW due tocommence operation in 2008. Construction of the 8 MW Horn wind farm, located in Germany, has been completed. In addition, 55 MW of capacitywhich was under construction at the time of theMaestrale acquisition has now reached commercialoperation. As at 5 March 2008, our European windportfolio comprises 1,153 MW in operation and 6 MW under construction.

In June, International Power created a commonownership platform for its UK(2) assets (75%International Power and 25% Mitsui). As part of theagreement, International Power sold a 25% equityinterest in Rugeley, Deeside and Indian Queens toMitsui and acquired an additional 5% equity interestin First Hydro and Saltend. In addition Mitsui provideda £200 million credit facility to support tradingactivities of the UK assets, and International Poweralso acquired the right to additional returns fromPaiton (Indonesia) equivalent to 9.2% of Paiton'searnings and cash distributions(3), equalising thereturns for International Power and Mitsui from thisimportant asset. The sale and purchase of theinterests in the UK assets and Paiton resulted in a netcash payment of £106 million to International Powerand an exceptional profit on disposal of £174 million.

The installation of FGD equipment, required tosignificantly reduce sulphur emissions at Rugeley, is underway with final commissioning scheduled inthe third quarter of 2008. A major planned outageand the FGD tie-in installation will together takeapproximately four months. Rugeley is currentlyburning ultra low sulphur coal in order to comply with the emissions requirements of the LargeCombustion Plant Directive (LCPD). The resulting load factor is expected to be 55% in 2008, downfrom 65% in 2007.

Construction of FGD and Selective CatalyticReduction (SCR) equipment at Tejo Energia (Pego)in Portugal is also progressing well, and is expectedto be completed in the second half of 2008. Oncompletion of this project Pego’s emissions of SO2and NOx will be significantly lower than the limitsimposed by the LCPD.

The new Elecgas 830 MW CCGT project, in Portugal,reached financial close in March 2008 together withfinalisation of the tolling agreement and EPCcontracts. The entire output of the new plant will besold to Endesa Generacion S.A., a subsidiary ofEndesa, under a 25-year tolling contract. The CCGTplant will be constructed by Siemens and will belocated adjacent to the existing 628 MW Pego coalfired plant. The total project cost is estimated at €580 million (£443 million), which will be funded by a mix of debt and equity in an 85:15 ratio. For its 50% share, International Power’s equity investmentwill be €44 million (£34 million).

Notes:

(1) Adjusted to reflect the fuel optimisation that was achieved by trading our coal and gas power station assets as a portfolio.

(2) Ownership in Derwent Cogeneration Limited, 33% held jointly byInternational Power and Mitsui, is unchanged as a result of this transaction.

(3) Via the acquisition of an economic interest from Mitsui, this transactionequalised the returns for International Power and Mitsui from Paiton (at 40% each) but did not entail any transfer of shares or change ofmanagement structure.

Regional review – Europe38

Tejo Energia (Pego), Portugal


Market environment and growth prospectsDemand growth for power, rising fuel costs, plannedplant retirements and tightening environmentallegislation (for both carbon and sulphur emissions) arekey factors affecting the power industry in Europe. Wesee these factors in each of the nine European marketsin which we operate, and we work continuously toensure our portfolio is optimally positioned.

For example, we have significantly increased ourrenewables portfolio in Europe by expanding inmarkets that offer a secure and attractiveenvironment for wind generation, and we areinvesting in economically viable major environmentalupgrades, such as the installation of FGD equipmentin both the UK and Portugal, to ensure these coalfired plants are best positioned for the long-term. We are working to deliver new projects to meetpower demand growth such as the Elecgas projectand an 840 MW greenfield CCGT plant in the port ofRotterdam, in partnership with Eneco.

A significant proportion of our European installedgeneration is located in the UK, where electricitydemand is growing at just over 1% per annum. A keyfactor affecting the supply/demand balance in the UKis the quantum of capacity that will be retired by2015. The LCPD requires plant to achieve stringentsulphur emission levels. If plant operators decide notto invest in sulphur emission abatement (termed as‘opting out’ of the LCPD), then the power plants in

question have to close by 2015 and can only operatefor a defined and restricted amount (20,000 hours intotal) until that date. In the UK, some 11,200 MW ofcoal and oil fired plant has ‘opted out’, and, as shownin the reserve margin chart, if operators begin to useup most of their allotted 20,000 hours over the next3-4 years then ‘opted-out’ plant could begin to retiremuch earlier, by 2011/2012. This would acceleratethe requirement for new-build.

We see expansion opportunities from both greenfielddevelopment projects and acquisitions – both forthermal assets and renewables. Our strong presencein regional markets and our flexible, efficientgeneration ensures we are well positioned.

DURING 2007 WE DOUBLED THE SIZE OF OUREUROPEAN WINDPORTFOLIO

IPR European wind portfolio,Germany, Italy, France and the Netherlands

UNITED KINGDOM RESERVE MARGIN

30

0

Peak

res

erve

mar

gin

%

2008 2009 2010 2011 2012 2013 2014 2015 2016

25

20

15

10

5

Reserve marginwithout earlyLCPD retirements

Reserve marginwith earlyLCPD retirements

Target reserve

Regional review – Europe40

Coal 38%

Oil 5%

Gas 33%

Nuclear 14%

Peak hydro 4%

Renewables 3%

Other 3%

UK MARKET CAPACITY BY FUEL TYPE (MW)

Lignite 49%

Pump storage 7%

Nuclear 22%

Hard coal 9%

Gas/mixed 5%

Run of river hydro 6%

Other 2%

CZECH MARKET CAPACITY BY FUEL TYPE (MW)

Snapshot – regional markets

Europe

36% of International Power’s portfolio is located in Europe

Key merchant markets for International Power: UK and Czech Republic

UK


■ Market type: fully liberalised – merchant market

■ Demand growth: 1.1%

■ Peak reserve margin: 19% in 2007

■ Peak demand season: winter

■ CO2 Emission Reduction Target:

– Signed up to the Kyoto Protocol

– 12.5% reduction by 2012 from 1990 levels


– 1,324 MW gas, 788 MW coal, 1,566 MW pumped storage, 105 MW oil

Czech Republic


■ Market type: fully liberalised – merchant market

■ Demand growth: 0.5%

■ Peak reserve margin: 21-46%(1)

■ Peak demand season: winter

■ CO2 emission reduction target:

– Signed up to the Kyoto Protocol

– 8% reduction by 2012 from 1990 levels

■ International Power’s current installed capacity in the market 585 MW (net)

– 585 MW coal/gas

International Power actively trades in the Czech bilateral market, but also has a three-year offtake contract with a local offtaker.

Rest of Europe

Total collective installed capacity in International Power’s existing markets is 410 GW

Existing markets: Germany, Italy, France, the Netherlands, Portugal, Spain and Turkey

■ Market type: fully regulated markets – with long-term offtake contracts

■ Fuel mix: various

■ Regulated tariffs for wind assets in Germany, Italy, France and the Netherlands

■ Peak demand season: winter for northern countries and summer for southern countries

■ CO2 emission reduction targets:

– Germany, Italy, France, the Netherlands, Portugal, Spain and Turkey signed up to the Kyoto Protocol

– Reduction targets under EU Burden Sharing agreement are Germany (-21%), Italy (-6.5%), France (0%),

the Netherlands (-6%), Portugal (+27%) and Spain (+15%), from 1990 levels by 2012


– 960 MW gas, 314 MW coal, 1,153 MW wind, 57 MW hydro

(1) Dependent on level of interconnector capacity assumed.


2 1

4 5

3 6

7

8

8

8

8

10

11

12

13

14

9

1

2

3

4

5

6

7

8

9

10

11

12

13

14

First Hydro UKDeeside UKRugeley UKSaltend UKDerwent UKOpus Energy UKIndian Queens UKIPR European Wind PortfolioGermany, Italy, France, the NetherlandsInternational Power Opatovice Czech RepublicTurbogás PortugalTejo Energia (Pego) PortugalSpanish Hydro SpainISAB ItalyUni-Mar (Marmara) Turkey


power power heat (MWth) heat (MWth)MW MW steam steam

(million lbs/hr) (million lbs/hr)

Assets in operation

International Power Opatovice(1) Czech Republic Coal/gas (Cogen) 585 585 2,040 MWth 2,040 MWth

IPR European Wind Portfolio Germany, Italy, France, Netherlands Wind 1,153 1,153

ISAB Italy Gas (IGCC) 562 193

Tejo Energia (Pego) Portugal Coal 628 314

Turbogás Portugal Gas (CCGT) 1,008 605

Spanish Hydro Spain Hydro 86 57

Uni-Mar (Marmara) Turkey Gas (CCGT) 488 162

Deeside UK Gas (CCGT) 500 375

Derwent UK Gas (CCGT) 214 49

First Hydro UK Pumped storage 2,088 1,566

Indian Queens UK Oil (OCGT) 140 105

Rugeley UK Coal (50 MW of OCGT) 1,050 788

Saltend UK Gas (CCGT/Cogen) 1,200 900 0.30m lbs/hr 0.23m lbs/hr

Europe total in operation 9,702 6,852

Assets under construction and other businesses

Elecgas Portugal Gas (CCGT) 830 415

IPR European Wind Portfolio Germany, Italy, France, Netherlands Wind 6 6

Europe total under construction 836 421

Asset Region Description

Opus Energy UK Independent supplier of electricity to small and medium-size businesses

(1) Gross capacity amount shown for International Power Opatovice represents the actual net interest owned directly or indirectly by International Power Opatovice.


MIDDLE EASTPROFIT FROMOPERATIONSBOOSTED BYAN INCREASE IN CAPACITY

In the Middle East, profit from operationsincreased to £68 million (2006: £52 million),principally reflecting a full year contributionfrom Tihama in Saudi Arabia and thecompletion of the Umm Al Nar extension inAbu Dhabi, and additional capacity coming on stream at Ras Laffan B in Qatar. Profit in 2007 included a development fee from the Fujairah F2 project, similar to thedevelopment fee received in 2006 relating to the Hidd acquisition in Bahrain.

At Umm Al Nar, the final stage of construction wascompleted in 2007. The plant, which now has anoverall capacity of 2,450 MW and 143 MIGD, isoperating under the first year of its 20-year Powerand Water Purchase Agreement (PWPA). 795 MWand 48 MIGD of the original plant will bedecommissioned in 2010. This decommissioning datewas extended, at the request of the Abu Dhabi Waterand Electricity Company (ADWEC), by an additionaltwo and a half years due to the good operationalperformance of the existing assets. After 2010, theplant will have a capacity of 1,655 MW and 95 MIGDuntil the end of the PWPA in 2027.

At Ras Laffan B, in Qatar, the second phase ofconstruction was completed in June, with an additionaltwo steam turbines entering commercial operationproviding 307 MW of capacity, and in January 2008 15 MIGD became operational. As at 5 March 2008,the plant has a capacity of 920 MW and 30 MIGD,and completion of the third and final phase of 135 MWand 30 MIGD is expected in the first half of 2008.

In Bahrain, the first phase (12 MIGD) of thedesalination extension at Hidd achieved commercialoperation in December 2007. The construction of the remaining 48 MIGD extension continues to makeprogress and we expect this additional capacity toreach commercial operation in the first half of 2008.

In June, the non-recourse debt facility at Tihama wassuccessfully refinanced for a total of US$550 million,achieving improved debt amortisation terms, lowermargins and providing an increased distribution ofUS$45 million to International Power plc.

International Power (in a 50:50 partnership withMarubeni of Japan) was successful in its bid for a 40% interest in the 2,000 MW and 130 MIGDgreenfield Fujairah F2 independent water and powerproject in the United Arab Emirates. The remaining60% will be held by the Abu Dhabi Water andElectricity Authority. A long-term PWPA was signedwith ADWEC for the sale of power and water, andthe project reached financial close in December. Thefinancing structure comprised two non-recourseloans, a US$1,284 million 23-year term loan fromJBIC and a US$856 million 23-year term commercialbank loan, together with a US$565 million equitybridge facility. This latter facility will be repaid throughan injection of equity of US$565 million (£280million) in July 2010. For its 20% share, InternationalPower’s equity investment will be US$113 million(£56 million). The project is now under constructionand is expected to be fully operational in 2010.

In Botswana, the development of the Mmamabulapower station (Phase One – up to 2,500 MW) withCIC Energy Corp. is proceeding. We continue toprogress the negotiation of the power purchaseagreements with Eskom Holdings Limited (for themajority of Mmamabula’s output) and BotswanaPower Corporation (BPC), alongside the negotiationof the EPC arrangements.


REGIONAL REVIEW – MIDDLE EAST

Umm Al Nar,UAE

Results – Middle EastYear ended Year ended


£m £m


Exceptional items and specificIAS 39 mark to market movements – (profits)/losses – –


Market environment and growth prospectsIn the Middle East the demand for power and watercontinues to grow strongly, driven by economicgrowth and expansion. The markets in which weoperate (essentially the Gulf States of the UAE, Qatar, Oman, Bahrain plus Saudi Arabia) require some 50,000 MW of additional power capacity – and very significant additional desalinated watermarket capacity – by the year 2015. Major newindustrial, commercial and residential projects arebeing planned, which will further increase demandgrowth in the region. This growth presents us with an excellent opportunity to expand our operationsand supply power and water for these developmentsin the region.

To illustrate this rate of growth, we expect to bid for the development and commissioning of severalnew power and water projects in some of our keymarkets in this region, as summarised in thefollowing table:

Capacity Project Country

1,600 MW, 100 MIGD Shuweihat S2 UAE

400 MW, 15 MIGD Salalah Oman

1,200 MW, 50 MIGD Ad Dur 1 Bahrain

400 MW Al Qatrana Jordan

1,200 MW Rabigh Saudi Arabia

Our strong reputation and track record of delivery inthe region places us in a good position to continue to deliver further growth.

We are also exploring/developing projects in selectedNorthern and Southern African countries. In particular,we are developing a major project (Mmamabula)principally for South Africa, which is experiencing powershortages and strong demand growth for electricity.This project involves the build of a major new powerstation in Botswana, using indigenous coal supplies,supplying to South Africa and Botswana under long-term power purchase agreements with Eskom (of South Africa) and BPC.

Regional review – Middle East44

Ras Laffan B,Qatar

Snapshot – regional market

Middle East

13% of International Power’s portfolio is located in the Middle East

Total collective installed capacity and desalination capacity in International Power’s existing markets in the Middle East:

56 GW and 3,000 MIGD

■ Majority of plants in the market are integrated to supply both power and desalinated water

■ Market type: regulated market – all long-term contracted assets

■ Fuel mix: mainly gas fired generation


■ Revenue is primarily linked to plant availability

■ Typically fuel and other major costs passed through to offtaker

■ International Power’s current installed operational capacity in the market 2,400 MW and 78 MIGD (net)

– 2,400 MW gas, 78 MIGD water


4 3 2

5 6 7

8

9

1

1

2

3

4

5

6

7

8

9

Ras Tanura Tihama Saudi ArabiaJu’aymah Tihama Saudi ArabiaHidd BahrainRas Laffan B QatarShedgum Tihama Saudi ArabiaUthmaniyah Tihama Saudi ArabiaShuweihat S1 UAEUmm Al Nar UAEAl Kamil Oman


power power desal (MIGD) desal (MIGD)MW MW steam steam

(million lbs/hr) (million lbs/hr)

Assets in operation

Hidd Bahrain Gas (CCGT)/desalination 1,006 402 42 MIGD 17 MIGD

Al Kamil Oman Gas (OCGT) 276 180

Tihama Saudi Arabia Gas (Cogen) 1,076 646 4.5m lbs/hr 2.7m lbs/hr

Ras Laffan B Qatar Gas (CCGT)/desalination 920 368 30 MIGD 12 MIGD

Shuweihat S1 UAE Gas (CCGT)/desalination 1,572 314 100 MIGD 20 MIGD

Umm Al Nar UAE Gas (CCGT)/desalination 2,450 490 143 MIGD 29 MIGD

Middle East total in operation 7,300 2,400

Assets under construction

Hidd Bahrain Desalination – – 48 MIGD 19 MIGD

Ras Laffan B Qatar Gas (CCGT)/desalination 135 54 30 MIGD 12 MIGD

Fujairah F2 UAE Gas (CCGT)/desalination 2,000 400 130 MIGD 26 MIGD

Total under construction 2,135 454


SEVEREDROUGHTIMPACTS ONPERFORMANCEIN AUSTRALIA

Profit from operations decreased from £124 million in 2006 to £82 million. Thesevere drought in 2007 had a significantimpact on the Australian results by increasinginter-regional pricing differentials and thecost of power purchased to cover bothunplanned outages and transmissionconstraints. Inter-regional pricing differentialswere the most significant factor and arosewhere we forward hedged our power outsideof the state in which we have our generation.

This resulted in contracts for the sale of power beingsettled by purchases in the spot market at times ofhigh prices and was compounded by a lack of liquidityin the market preventing us from closing out thesepositions. This policy had historically worked wellduring periods of low market liquidity in Victoria andSouth Australia. There are no such inter-regionalpositions in 2008.

Given current reserves of cooling water, we remainconfident that Hazelwood and Loy Yang B havesufficient water supply to generate at full loadthroughout 2008 and into 2009. In 2008 we haveforward contracted 80% of our expected merchantoutput and still expect to achieve an average price of A$45 per MWh at Hazelwood.

The acquisition of the remaining 50% stake in the Australian retail partnership was completed in August with a payment of A$142 million (£56 million) to EnergyAustralia. The company was renamed ‘Simply Energy’.

Hazelwood has signed the financing documents with the federal and Victorian governments for anA$80 million grant, and reached agreement with itssupplier (Alstom) for an innovative retro-fit solution toreduce greenhouse gas emissions by 20% on one ofits 200 MW brown coal fired units. The pilot projectcomprises a fluidised bed coal drying plant, boilerefficiency improvements, fitting a new highly efficientturbine, and a pilot carbon dioxide capture facility.Work on the project has begun and we expect thepilot carbon capture facility to be commissioned inlate 2008, with the coal drying plant commencingoperation in 2010.

At Pelican Point, the non-recourse debt facility was refinanced in February 2008 for a total of A$190 million. The funds will be used to repayexisting debt and fund the maintenance reserve for the plant. In addition an increased distribution has been paid to International Power plc.


REGIONAL REVIEW – AUSTRALIA

Pelican Point,South Australia

Results – AustraliaYear ended Year ended


£m £m

(Loss)/profit from operations (91) 74

Exceptional items and specificIAS 39 mark to market movements – losses 173 50


Regional review – Australia48

Brown coal 58%

Gas CCGT 5%

Conventional gas 14%

Gas OCGT 14%

Wind 5%

Hydro 3%

Oil/Diesel 1%

VICTORIA AND SOUTHAUSTRALIA MARKETCAPACITY BY FUEL TYPE (MW)

Market environment and growth prospectsIn Australia, the South Australian and Victorian powermarkets continue to grow at just under 2% perannum. At this growth rate, and with no new capacity,the reserve margin is currently forecast to fall below15% from 2010/2011. Even with the addition ofexpected new capacity, the reserve margin is currentlyforecast to remain below minimum desirable levelsand could fall below 15% by 2014.

Australia has large scale indigenous low cost fuelresources, principally brown and black coal, and gas.To date there has not been any significant link withinternational energy prices (fuel or electricity) but high

international coal prices, an Australian emissionstrading scheme from mid 2010, and the longer-termpotential to export gas from the eastern states, maychange this trend in the future.

The introduction of this emissions trading scheme in2010 is the subject of a very detailed review. Detailsof the proposed scheme should be announced bythe end of 2008, and we are very closely involved in the debate. This is clearly an important initiativein Australia, and we will continue to work hard toensure our portfolio is well positioned, includingprojects already underway to improve the efficiencyand CO2 output of our brown coal fired generation.

Our balanced asset portfolio in the region, withexperience and capabilities in producing electricityusing coal, gas and renewable technologies and thenselling the output in both the wholesale and retailmarkets, offers us a solid platform for further growthin the region. We are actively pursuing growthopportunities such as the 350 MW peaker in New South Wales and a number of renewablesopportunities.

In December 2007, the New South Wales stategovernment announced its intent to privatise its energysector, which includes 12,500 MW of generation assetsand three million retail customers. We will be reviewingopportunities arising from this privatisation.

VICTORIA AND SOUTH AUSTRALIA RESERVE MARGIN

25

0

Peak

res

erve

mar

gin

%

07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17

20

15

10

5

Reserve margin (with newbuild)

Target reserve


Australia

17% of International Power’s portfolio is located in Australia

Key markets for International Power: South Australia and Victoria

■ Total installed capacity: 13 GW in South Australia and Victoria

■ Market type: merchant market

■ Peak demand growth: 2.0%

■ Peak reserve margin: 22% in 2007/8


■ Australian CO2 Emission Reduction Target:

– Signed up to the Kyoto Protocol in December 2007

– 60% reduction from 2000 levels by 2050


– 858 MW gas, 2,259 MW coal, 46 MW wind

In addition to Victoria and South Australia, International Power has a presence in Western Australia with interests in the

118 MW (gross) Kwinana gas fired plant


1 2

3

4

6 7 8

5

1

2

3

4

5

6

7

8

Kwinana Western AustraliaSynergen South AustraliaPelican Point South AustraliaSEA Gas pipeline Victoria and South AustraliaCanunda South AustraliaSimply Energy Victoria and South AustraliaHazelwood VictoriaLoy Yang B Victoria

Location Fuel/type Gross Netcapacity capacity

power power MW MW

Assets in operation

Canunda South Australia Wind 46 46

Pelican Point South Australia Gas (CCGT) 487 487

Synergen South Australia Gas/distillate 371 371

Hazelwood Victoria Coal 1,675 1,541

Loy Yang B Victoria Coal 1,026 718

Kwinana Western Australia Gas (CCGT) 118 58

Australia total in operation 3,723 3,221

Other businesses

Asset Region Description

Simply Energy Victoria and South Australia Electricity and gas retailer

SEA Gas pipeline Victoria and South Australia 687 km gas pipeline from Victoria to South Australia


STRONGOPERATIONALPERFORMANCE CONTRIBUTES TORESULTS IN ASIA

Profit from operations in Asia was up to £96 million compared to £91 million in 2006.Performance in this region benefited fromhigher load factors as a result of continueddemand growth, and strong operationalperformances at all our assets in Asia,although the expiry of the tax holiday atKAPCO did result in lower post-tax earningsat this asset. Our investment in Malakoff wassold in May 2007 to MMC Corporation for£249 million, generating an exceptional profiton disposal of £115 million.

In December 2007, International Power agreed to acquire an additional 31% shareholding in Uch(572 MW plant located in Pakistan) for a total cashconsideration of US$85.5 million (£44 million). Theacquisition from affiliates of Tenaska Holdings (L)Corp, will take International Power’s total holding in Uch to 71%. The entire output of the plant is sold to WAPDA under a long-term PPA until 2023.The acquisition will be funded from current liquidresources, and is expected to complete in the first half of 2008.

We continue to actively pursue the 800 MW Paiton 3expansion, and the 1,320 MW West Java (renamedfrom Tanjung Jati A) coal fired greenfield opportunitiesin Indonesia. Tariff and PPA negotiations with theofftaker are continuing in parallel with discussions onthe EPC contracts for both projects.


REGIONAL REVIEW – ASIA

Uch, Pakistan

Results – AsiaYear ended Year ended


£m £m


Exceptional items and specificIAS 39 mark to market movements – losses 1 –


Regional review – Asia52


Asia

9% of International Power’s portfolio is located in Asia

Total collective installed capacity in International Power’s existing markets in Asia: 70 GW

■ Market type: regulated markets – all long-term contracted assets

■ Fuel mix: various


■ Revenue primarily linked to plant availability

■ Typically fuel and other major costs passed through to offtaker


– 948 MW gas, 423 MW coal and 219 MW oil

HUBCO, Pakistan

Market environment and growth prospectsDemand for power in Asia is forecast to growsignificantly, typically at rates between 5% and 10%per annum, in line with the strong economic (GDP)growth in the region. Through our successful

operation over the past several years, we havedeveloped a good reputation and strong long-termrelationships with key state owned customers and keystakeholders in the region. Given the strength of ourpresence, we are well placed to expand our portfolioin the region both organically and via acquisition.

We are actively pursuing growth projects inIndonesia, Pakistan, Thailand, and selected newmarkets. We have organic growth opportunities in Indonesia, namely, Paiton 3 (800 MW), and theWest Java project (1,320 MW), and in Thailandwhere we are working on a 100 MW expansion. All three of our Pakistan projects, namely HUBCO,KAPCO and Uch are working on expansion projectstotalling 1,075 MW. We are also consideringprojects in new markets, such as Vietnam where the power demand is estimated to grow strongly at average rates in excess of 17%. Overall, thegrowth opportunity for International Power in Asia is considerable, and we have an experienced andfocused business development team to reviewopportunities in both our existing and new selected markets.


3

2

1

4

5

1

2

3

4

5

KAPCO PakistanUch PakistanHUBCO PakistanTNP (Pluak Daeng) ThailandPaiton Indonesia


power power heat (MWth) heat (MWth)MW MW

Assets in operation

Paiton(1) Indonesia Coal 1,365 423

HUBCO Pakistan Oil 1,290 219

KAPCO Pakistan Gas/oil (CCGT) 1,600 576

Uch Pakistan Gas (CCGT) 572 229

TNP (Pluak Daeng) Thailand Gas (Cogen) 143 143 7.7 MWth(2) 7.7 MWth(2)

Asia total in operation 4,970 1,590

(1) In addition to the above holding, in June 2007, International Power also acquired the rights to additional returns from Paiton equivalent to a further 9.2% of earnings and cash distributions.

(2) District cooling system capacity.


Corporate costsCorporate costs at £52 million are £7 million higher than 2006. This is mainly due to a provision made for the expected period of vacancy in the Group head office sublease following notification from the existing subtenants that they are terminating their lease.

InterestNet interest expense at £308 million is £60 million higher than 2006. This is mainly due to the impact ofadditional debt relating to Maestrale and a full year impact of Levanto which was acquired in November 2006.

Foreign exchangeThe impact of the strengthening of sterling on the results of our overseas operations, compared to 2006, is areduction in EPS of 0.5 pence. The majority of this impact relates to the translation of the profits of US dollardenominated operations.

TaxThe Group tax charge has reduced by £9 million to £113 million (2006: £122 million). As announced in ourinterim results, this includes the impact of reduced UK deferred tax balances following the lowering of thestandard rate of UK corporation tax from 30% to 28% with effect from 1 April 2008. Minority interests in ourUK assets also benefited from this change in tax rate. The Group also benefited from reductions in tax rates inthe Czech Republic, Germany and Italy during 2007 and this has contributed to lowering the effective tax ratefor the Group to 26%. The effective tax rate excluding these impacts is 31% (2006: 30%).

The reduction in the tax rate in Italy also resulted in a tax credit of £49 million relating to Maestrale. We havetreated this tax credit as an exceptional item due to its magnitude and the proximity of the enactment of thechange of rate to the date of the acquisition.

Exceptional items and specific IAS 39 mark to market movementsExceptional items before tax amount to £233 million (2006: £55 million). This comprises the following items:

■ profit on the sale of Malakoff of £115 million;

■ profit on the partial disposal of certain UK subsidiaries to Mitsui of £174 million;

■ provision against the investment in BioX of £9 million;

■ Saltend Gas Supply Agreement (GSA) impairment of £47 million.

As a result of a fall in market gas prices during 2007, the remaining book value of the Saltend GSA was fullywritten off at the year end, resulting in a £47 million impairment charge. The Saltend GSA has already deliveredmore value than was assumed at acquisition due to the high market gas prices experienced in 2005 and 2006.

The specific IAS 39 mark to market movements reported in the period amount to a charge before tax of £346 million (2006: gain of £44 million), £173 million of which relates to significant increases in forward pricesin Australia and £135 million relates to increases in forward prices in the UK.

Tax on mark to market movements during the year was a credit of £96 million (2006: expense of £10 million).Tax on the Saltend GSA impairment was a credit of £14 million. No other tax arose on the exceptional items inthe period (2006: charge of £15 million).

Financial position and resources54

FINANCIAL POSITION AND RESOURCES

Cash flowA summary of the Group’s cash flow is set out below:


2007 2006£m £m


Depreciation, amortisation and other movements(1) 515 322

Dividends from joint ventures and associates 145 113

Capital expenditure – maintenance (71) (128)

Purchase of intangible assets (48) –

Movement in working capital (4) (15)

Tax and net interest paid (413) (313)


Receipt from TXU administrators – exceptional – 14

Receipt of compensation for breach of contract – exceptional – 5

Debt-financing costs capitalised on acquisition debt (2) (14)

Capital expenditure – growth (160) (142)

Government grant received 1 –

Investments in (net of returns from) joint ventures, associates and investments (1) 24

Acquisitions (841) (842)

Disposals 418 1

Dividends paid (160) (67)

Proceeds from share issue 13 15

Dividends paid to minority interests (35) (54)

Foreign exchange and other (262) 270

Increase in net debt (376) (334)

Opening net debt (3,575) (3,060)

Net debt on acquisition of subsidiaries (711) (181)

Closing net debt (4,662) (3,575)

(1) Depreciation, amortisation and other movements include income statement charges for interest, tax, depreciation, specific IAS 39 mark to market movements andthe share of profit of joint ventures and associates. In addition in 2007 they include the exceptional profit on the disposal of 25% of UK subsidiaries and theexceptional profit on disposal of Malakoff. In the year ended 31 December 2006 they also included the exceptional profit on the TXU settlement and the exceptionalprofit on compensation for breach of contract.


KAPCO,Pakistan

Liquidity

Free cash flow for the year ended 31 December 2007 was £653 million, an increase of 43% compared to the previous year (2006: £456 million). This increase was driven by full year contributions from Coleto Creek,Levanto, Tihama and Indian Queens, together with the strong profitability of the UK assets. In addition,dividends from associates and joint ventures increased year-on-year by £32 million. Maintenance capitalexpenditure was also £57 million lower than in 2006. This was partially offset by an increase in net interest and tax payments of £100 million, mainly as a result of acquisitions.

Acquisitions of £841 million in 2007 include the Maestrale wind farm portfolio and the purchase from Mitsui of 5% of First Hydro and Saltend and the economic interest of 9.2% of Paiton.

Disposals include the proceeds of £249 million from the sale of Malakoff and the £168 million from thedisposal of 25% of Deeside, Rugeley and Indian Queens to Mitsui.

Dividends paid in 2007 include a £42 million interim dividend in October 2007. An interim dividend was notpaid in 2006.

Foreign exchange movements include the effect of retranslating opening debt balances denominated in foreigncurrency into sterling at the year end exchange rate. The majority of this impact relates to retranslation of euroand Australian dollar denominated debt.

Summary balance sheet

A summarised, reclassified Group balance sheet is set out below:As at As at


£m £m

Goodwill and intangibles 901 425

Property, plant and equipment 5,721 4,435

Investments 1,292 1,290

Long-term receivables and others 1,530 1,270

9,444 7,420

Net current (liabilities)/assets (excluding net debt items) (355) 14

Non-current liabilities (excluding net debt items) (1,420) (1,119)

Net debt (4,662) (3,575)


Gearing 155% 130%

Debt capitalisation 61% 57%

Net debt – joint ventures/associates (1,297) (1,524)

Goodwill and intangibles have increased by £476 million mainly due to the acquisitions of the Maestrale windfarms and the remaining 50% of Simply Energy.

The acquisition of Maestrale also increased property, plant and equipment in August by £1,018 million, with the remaining increase due to growth capital expenditure on projects, including the FGD at Rugeley, and theimpact of currency retranslation.

Net debt has increased by £1,087 million in the year, and includes net debt in acquired subsidiaries of £711 million and a £206 million impact of currency retranslation. As a result, debt capitalisation has increasedto 61% at the end of the year (2006: 57%).


Net debt and capital structure

Group net debtAs at As at


£m £m

Cash and cash equivalents 1,161 980

Assets held for trading – 42

Convertible bonds (255) (237)

Other bonds (694) (687)

Bank loans and preferred equity (4,874) (3,673)

Net debt (4,662) (3,575)

The above net debt of £4,662 million excludes the Group’s share of joint ventures’ and associates’ net debt of£1,297 million (2006: £1,524 million). These obligations are generally secured by the assets of the respectivejoint venture or associate borrower and are not guaranteed by International Power plc or any other Groupcompany. In view of the significance of this amount, it has been disclosed separately.

The Group has sufficient credit facilities in place to fund and support adequately its existing operations and to finance the purchase of new assets. These facilities comprise a revolving credit facility and two convertiblebonds. During 2007 the revolving credit facility was increased by US$210 million to a total of US$850 million(£427 million) and the maturity extended to October 2010. The first convertible bond of US$252.5 million (£127 million) matures in August 2023 but with bond holders having the right to ‘put’ the bond back to theGroup in August 2010, 2013, 2018 and 2023. The second convertible bond of €230 million (£169 million)matures in July 2013. The bondholders having the right to convert both bonds into our shares at anytime. In addition, the Group has uncommitted bilateral credit lines from various banks at its disposal at the corporatelevel. Further information on liquidity is included in the financial statements on pages 156 to 158.

Secured non-recourse financeThe Group’s financial strategy is to finance its assets by means of limited or non-recourse project financings at the project company or intermediate holding company level, wherever that is practical. As part of thisstrategy, International Power Opatovice refinanced its existing term loan and replaced it with a new CZK 4 billion (£110 million) loan with a July 2012 maturity and Tihama was refinanced, increasing the level ofnon-recourse project finance to US$550 million (£276 million) and extending the tenor to 2025. In additionthe Group raised non-recourse facilities of €302 million (£222 million) to support the acquisition of Maestrale.

Corporate and Group debtOn 31 December 2007 we had aggregated debt financing of £5,823 million denominated principally in US dollars, Australian dollars, sterling, euro, Czech koruna and Thai baht. Of this amount only £255 million has recourse at corporate level and £5,302 million is secured by fixed or floating charges over the assets ofcertain subsidiaries.

Aggregated debt financing of £539 million is due for repayment in 2008, with the majority of the remainingdebt balance due after 2012.

During 2007 Standard & Poor’s, Fitch and Moody’s reviewed the credit rating at corporate level. Standard &Poor’s maintained the rating of BB but changed the outlook to stable (from positive). Fitch maintained its ratingof BB with stable outlook and Moody’s maintained its rating of B2 with stable outlook.

Short-term depositsSurplus funds are placed for short periods in investments that carry low credit risk and are readily realisable in major currencies.

Interest rate policyThe Group’s policy is to fix interest rates for a significant portion of the debt (62% as at 31 December 2007)using forward rate or interest rate swap agreements. Turbogás’ interest costs are a pass through in the PPA tariffand therefore not an exposure to the Group. Adjusting for this item would increase fixed rate debt to 67%. The level of fixed interest rate debt will increase in 2008 as the hedging strategy for the Maestrale acquisition is implemented. The Group is broadly neutral to changes in interest rates as variable rate debt is similar in sizeto variable rate cash and cash equivalents. Significant interest rate management programmes and instrumentsrequire specific approval of the Board. The weighted average interest rate of aggregated debt financing was 7% in 2007. Where project finance is utilised, our policy is to align the maturity of the debt with the contractualterms of the customer offtake agreement.


Shuweihat S1,UAE

Accounting policiesA discussion follows on the policies we believe to be the most critical in considering the impact ofestimates and judgements on the Group’s financialposition and results of operations.

Critical accounting policies and estimatesWe prepare our consolidated financial statements incompliance with International Financial ReportingStandards (IFRSs) as adopted by the EU. As such, weare required to make certain estimates, judgementsand assumptions that we believe are reasonable basedupon the information available. These estimates andassumptions affect the reported amounts of assetsand liabilities at the date of the financial statements,the reported amounts of revenue and expensesduring the periods presented and the relateddisclosure of contingent assets and liabilities.

On an on-going basis, we evaluate our estimatesusing historical experience, consultation with expertsand other methods considered reasonable in theparticular circumstances to ensure full compliancewith IFRSs and best practice. Actual results may differsignificantly from our estimates, the effect of which isrecognised in the period in which the facts that giverise to the revision become known.

Our Group accounting policies are detailed in note 1to the consolidated financial statements (on pages105 to 111). The table on page 60 identifies someof the areas where significant judgements arerequired, normally due to the uncertainties involved in the application of certain accounting policies.

Income recognitionMost of our income is derived from owning andoperating power plants worldwide. In merchantmarkets the Group enters into various types ofhedging or forward contracts for the buying andselling of commodities related to this activity:principally sales of electricity and the purchase of fuelfor our own power plants. These contracts typicallyfall within the definition of derivative financialinstruments and as such are required to be fair valued.Accounting for these contracts as cash flow hedgesallows, to the extent the hedge is effective, thechanges in value of the derivatives to be deferred in ahedging reserve within equity. In order to achieve cashflow hedge accounting it is necessary for the Groupto determine, on an on-going basis, whether aforecast transaction is both highly probable andwhether the hedge is effective. This requires bothsubjective and objective measures of determination(see also Fair values of energy derivatives).

When our power plants sell their output under long-term power purchase agreements it is usual for thepower plant owning company to receive payment(known as a ‘capacity payment’) for the provision ofelectrical capacity whether or not the offtakerrequests electrical output. In these situations, wherethere is a long-term contract to sell electricity output

and electrical capacity, it is necessary for the Group toevaluate the contractual arrangements and determinewhether they constitute a form of lease or a servicecontract. Where the arrangements are determined tobe or to contain a form of lease, an evaluation is thenrequired of where the substantial risks and rewards ofownership reside, in order to determine the form oflease it represents. For those arrangementsdetermined to be finance leases, it is necessary tocalculate the proportion of total capacity paymentswhich should be treated as finance income, capitalrepayment and as a fee for service provision. Foroperating leases it is necessary to calculate the splitbetween minimum lease payments and fees forservice provision.

The Group receives amounts from contractors inrespect of late commissioning and under performanceof new power plants. Receipts which relate tocompensation for lost revenue are treated as incomewhen the compensation is due and payable by thecontractor. Those receipts that relate to compensationfor plants not achieving long-term performance levelsspecified in the original contracts are recorded as areduction in the cost of the assets.

Fair values of energy derivativesThe Group has prepared its financial statements in accordance with the presentation requirements of IAS 32 (Financial Instruments: Presentation andDisclosure), the disclosure requirements of IFRS 7(Financial Instruments: Disclosures) and theaccounting requirements of IAS 39 (FinancialInstruments: Recognition and Measurement). Inaccordance with IAS 39, the Group records itsderivative contracts on balance sheet at fair value(unless they qualify for the ‘own use’ treatment).Changes in the value of derivative contracts in eachperiod are recorded in earnings unless strict hedgeaccounting criteria are met which allow themovement in fair value to be recorded within equity.

The Group estimates the fair value of its energyderivative contracts by reference to forward pricecurves. A forward price curve represents the Group’sview as to the prices at which customers wouldcurrently contract for delivery or settlement ofcommodities, such as power or gas, at future dates.Generally the forward price curve is derived frompublished price quotations in an active market, overthe short-term horizon period, and from valuationtechniques over the more distant horizon period.Assumptions which underpin the long-term pricecurve relate to the prices of commodities such as oil,the cost of constructing and financing the building of new power plants, and the prices at which it wouldbe economic for companies to enter the market andbuild additional capacity (‘new entrant pricing’). Theassumptions used during the application of valuationtechniques will directly impact the shape of theforward price curve. The forward price curves are onlyestimates of future prices and thus possess inherentuncertainty and subjectivity.


Recoverable amount of long-life assetsThe original cost of greenfield developed powerplants and other assets includes relevant borrowingsand development costs:

■ Interest on borrowings relating to major capitalprojects with long periods of development iscapitalised during construction and then amortisedover the useful life of the asset.

■ Project development costs (including appropriatedirect internal costs) are capitalised when it isvirtually certain that the project will proceed tocompletion and income will be realised.

Depreciation of plant is charged so as to write downthe value of the asset to its residual value over itsestimated useful life:

■ Gas plant is depreciated over 30 years to a 10%residual value, unless the circumstances of theproject or life of specific components indicate ashorter period or a lower residual value.

■ Wind farms, coal and hydro plants are consideredon an individual basis.

Management regularly considers whether there areany indications of impairment to carrying values ofthe Group’s long-life assets, including goodwill,intangible assets and property, plant and equipment(e.g. the impact of current adverse market conditions).Impairment reviews require a comparison of thecurrent carrying amount of the asset with the presentvalue of the expected future cash flows of therespective cash-generating unit and its fair value lesscosts to sell. The calculations are generally based onrisk adjusted discounted cash flow projections thatrequire estimates of discount rates and future marketprices over the remaining lives of the assets.

Fair values on acquisitionThe Group is required to bring assets and liabilitiesacquired in business combinations on to the Groupbalance sheet at their fair value. Power plant andequipment usually have long operating lives, and areoften bought with associated long-term contractssuch as PPAs. Hence determination of the fair valuesof these long-life assets and contracts can require asignificant amount of judgement.

Consolidation policy – amount of influenceThe determination of the level of influence the Grouphas over a business is often a mix of contractuallydefined and subjective factors that can be critical to theappropriate accounting treatment of entities in theconsolidated financial statements. At entities which arenot subsidiaries we achieve influence through Boardrepresentation and by obtaining rights of veto oversignificant actions. We generally treat investments wherethe Group holds less than 20% of the equity asinvestments available for sale. These investmentsavailable for sale are carried at market value wheremarket prices are available. Where quoted market pricesin an active market are not available, and where fairvalue cannot be reliably measured, unquoted equityinstruments are measured at cost.

Where the Group owns between 20% and 50% ofthe equity of an entity and is in a position to exercisesignificant influence over the entity’s operating andfinancial policies, we treat the entity as an associate.Equally, where the Group holds a substantial interest(but less than 20%) in an entity and has the power toexert significant influence over its operations, we alsotreat that entity as an associate.

A joint venture is a contractual arrangement wherebytwo or more parties undertake an economic activitythat is subject to joint control. Where we recognise ourinterest in a joint venture as a jointly controlled entitywe use the equity method of accounting. Sometimeswe may apply the equity method to a joint venturewhere we do not possess an equal shareholding to theother venturers, because the venturers are bound by acontractual arrangement and the contractualarrangement establishes joint control.

Exceptional items and specific IAS 39 mark tomarket movementsAs discussed on page 106, in order to allow a fullunderstanding of the financial information presentedwithin the consolidated financial statements, andspecifically the Group’s underlying businessperformance, the Group presents its incomestatement such that it separately identifies the effect of the exceptional items and specific IAS 39mark to market movements.

The Directors consider that items of income orexpense which are material by virtue of their natureand amount should be disclosed separately if thefinancial statements are to fairly present the financialposition and financial performance of the Group. The Directors label these items collectively as‘exceptional items’.

Determining which transactions are to be consideredexceptional in nature is often a subjective matter.However, circumstances that the Directors believewould give rise to exceptional items for separatedisclosure would include:

■ disposals of interests in businesses;

■ discontinued operations;

■ impairments and impairment reversals.

All exceptional items are included on the appropriateincome statement line to which they relate. Inaddition, for clarity, separate disclosure is made of all such items in one column on the face of theincome statement.

Those items that the Group separately present asspecific IAS 39 mark to market movements in theincome statement principally relate to derivativecontracts into which the Group has entered in orderto economically hedge certain of its physical andfinancial exposures.


TaxationThe income tax expense recorded in the incomestatement is dependent on the profit for the yearand the tax rates at the balance sheet date, either in place or which have been substantively enacted.The level of current and deferred tax recognised is also dependent on subjective judgements as to the outcome of decisions to be made by the taxauthorities in the various tax jurisdictions in whichInternational Power operates.

It is necessary to consider the extent to whichdeferred tax assets should be recognised based on anassessment of the extent to which they are regardedas recoverable.

ProvisionsWithin the Group there are a number of long-termprovisions. The carrying amount of these provisions isestimated based on assumptions about items such asthe risk adjustment to cash flows or discount ratesused, future changes in prices and estimates of costs.For example, the pensions liability is based onassumptions relating to discount rates used, futurechanges in salaries, expected mortality, and futureincreases in pension payments. We regularly review theassumptions underlying provision calculations, andpensions assumptions are reviewed on an annual basis.However, a change in estimates could have a materialimpact on the carrying amount of these provisions.


Accounting policy Critical accounting judgements and key sources of uncertaintyderive from the determination of:

Income recognition – correct revenue recognition policy based on the contractual arrangements inplace and the allocation of the risks and rewards of ownership of the plant

– appropriate accounting treatment of receipts from contractors

Fair values of energy derivatives – forward price curve for commodities where there is no observable market

Recoverable amount of long-lifeassets

– indications of impairment and the measurement of fair value usingprojected cash flows, together with risk adjusted discount rates, or othermore appropriate methods of valuation

Fair values on acquisition – useful economic life and residual value of certain assets

– fair values of assets and liabilities acquired and hence how much of thepurchase price is attributed to goodwill arising on acquisition of a business

Consolidation policy – amount of influence

– extent of influence the Group is in a position to exercise over theoperations, strategic direction and financial policies of entities in which itholds an equity stake

Items of income and expense whichrequire separate disclosure –‘exceptional items’

– items of income or expense which are material by virtue of their natureand amount which require separate disclosure. The Directors considerthese items most appropriately disclosed as ‘exceptional’

Taxation – appropriate provisions for taxation taking into account anticipated decisionsof the tax authorities

– assessment of the ability to utilise tax benefits through future earnings

Provisions – appropriateness of assumptions to calculate reliable estimates

Oyster Creek, Texas


CASE STUDY REDUCING SULPHUR EMISSIONS

Coal contains sulphur in varying amounts,depending on the type, and region fromwhich it is sourced. When burnt in theboilers of the power plant, the sulphurreacts with oxygen to form sulphur dioxide(SO2) and sulphur trioxide (SO3). Togetherthese are generally known by the term SOx which, when emitted by industry and transport, is a significant contributor to the production of acid rain.

Introduced across Europe on 1 January 2008,the LCPD aims at reducing SOx emissions bygiving coal fired plants two options. They caneither agree to a very limited running regimewith eventual closure by 2015, or install theequipment needed to remove SOx from plantemissions. This equipment, known as FGD, isalready installed at our Paiton plant in Indonesiaand at International Power Opatovice in theCzech Republic. FGD equipment is currentlybeing installed at our coal fired power plants at Pego in Portugal and Rugeley in the UK. Both FGD plants will become fully operationalduring 2008.

There are a number of competing FGDprocesses which can be used on power plants to remove the SOx. The most common processis to pass flue gases through a slurry oflimestone which reacts with SOx to producegypsum, a naturally occurring substance mostcommonly used in manufacturing plasterboard.

Raw limestone is crushed and mixed with waterto produce the limestone slurry. This is thenpumped into a large vessel, the absorber,installed between the boiler and the chimney.Within the absorber the slurry is sprayed overthe exhaust gases in such a manner as to ensureover 90% of the SOx reacts with the limestoneto produce calcium sulphite. At the bottom ofthe absorber air is blown through the slurry tooxidize the calcium sulphite to form gypsum.The gypsum slurry is separated out from thelimestone and stored ready for removal from the power plant. The remaining limestone slurryis recycled through the absorber to producemore gypsum.

International Power Opatovice,Czech Republic

Rugeley, UK

Paiton, Indonesia

CHAIRMAN

Sir Neville Simms FREng (63)Sir Neville became a Non-Executive Director ofNational Power in August 1998 and was appointedChairman of International Power in October 2000.He has been a member of the President’s Committeeof the CBI since 1998, is Deputy Chairman ofAshridge Management College and Chairman of theBRE Trust. Sir Neville was a Non-Executive Director of the Bank of England from 1995 to 2002 andChairman of the government’s SustainableProcurement Task Force from 2005 to 2007.

EXECUTIVE DIRECTORS

Philip Cox (56) Chief Executive OfficerPhilip joined the Company on 1 May 2000 fromInvensys plc as Chief Financial Officer. Philip wasappointed Chief Executive Officer of International Powerin December 2003. He is responsible for the overallmanagement of the Company, and leading theexecutive and operational teams in implementing thestrategies approved by the Board. He is a Non-ExecutiveDirector of Wincanton plc.

Mark Williamson (50) Chief Financial OfficerMark was appointed Chief Financial Officer ofInternational Power in December 2003. Hisresponsibilities include financial control and reporting,tax and risk management. Mark joined the Company in September 2000 from Simon Group plc as theGroup Financial Controller with responsibility for theGroup’s financial reporting. He is a Non-ExecutiveDirector of Imperial Tobacco plc and Chairman of itsAudit Committee.

Bruce Levy (52) Executive Director, North AmericaBruce manages International Power America. He joinedthe Company on 1 December 2004 having previouslyworked for US power company GPU, where he wassenior Vice President and Chief Financial Officer. Brucewas appointed to the Board in June 2005.

Steve Riley (46) Executive Director, EuropeSteve joined the business in 1985. In August 2003 he took up his current position as Executive Director,Europe. Steve was appointed to the Board in January2004. He is a Non-Executive Director of Shanks Group plc.

Tony Concannon (44) Executive Director,AustraliaTony joined the industry in 1982 and has worked in a number of business areas including; power stationoperations, trading and international businessdevelopment (based in Asia until 1999). He left his rolemanaging two power plants in the UK to manageInternational Power’s Australia business in August 2003and was appointed to the Board in January 2004.

NON-EXECUTIVE DIRECTORS

Anthony (Tony) Isaac (66) Tony became a Non-Executive Director of theCompany in October 2000. He is the SeniorIndependent Director and was Chairman of the AuditCommittee until 1 April 2008. He was previously theChief Executive of The BOC Group plc and is a Non-Executive Director of Schlumberger Limited and HoggRobinson Group plc.

Alan Murray (54) Alan became a Non-Executive Director of theCompany on 1 July 2007 and Chairman of the AuditCommittee on 1 April 2008. He is currently a memberof the Managing Board of Heidelberg Cement AG andwas previously the Chief Executive of Hanson PLC,from April 2002 to 1 October 2007. He joinedHanson in 1988 and held various positions prior to his appointment as Chief Executive, including FinanceDirector of Hanson PLC and Chief Executive of HansonBuilding Materials America.

Struan Robertson (58) Struan became a Non-Executive Director of theCompany on 1 October 2004. He is Chairman of theHealth, Safety and Environment Committee. He wasGroup Chief Executive of Wates Group Ltd until January2004. Before that he was Executive Chairman of BPAsia Pacific. He is currently a Non-Executive Director atForth Ports plc, Henderson TR Pacific Investment Trustplc and Tomkins plc and is the Senior IndependentDirector of Salamander Energy plc. Previously he wasthe Senior Independent Director at WS Atkins plc.

John Roberts (62) John became a Non-Executive Director of the Companyon 18 May 2006. He is Chairman of the RemunerationCommittee. He was previously Chief Executive of UnitedUtilities, a position he held for over six years. Beforethat, he was Chief Executive of Hyder Utilities and ofManweb. He is a Fellow of the Royal Academy ofEngineering, the Institution of Engineering andTechnology and the Association of Chartered CertifiedAccountants. He is a Non-Executive Director of RoyalBank of Canada (Europe) Limited, Merrill Lynch NewEnergy Technology Trust and Remote EnergyMonitoring Holdings Limited.

DIRECTORS WHO SERVED DURING 2007

Adri Baan (65) Non-Executive DirectorAdri became a Non-Executive Director of the Companyin June 2002 and retired on 31 December 2007. Hewas the Chairman of the Remuneration Committee. He was previously CEO of Philips Consumer Electronics,and Member of the Board of Management of RoyalPhilips Electronics. During the year, he served on theBoards of ICI plc and OCÉ. He is Chairman ofHagemeyer, Wolters Kluwer and Volkerwessels (KVWS).

Board of Directors62

BOARD OF DIRECTORS


2

5 6

1 Sir Neville Simms Chairman

2 Philip Cox Chief Executive Officer

3 Mark Williamson Chief Financial Officer

4 Bruce Levy Executive Director, North America

5 Steve Riley Executive Director, Europe

6 Tony Concannon Executive Director, Australia

7 Tony Isaac Non-Executive Director

8 Alan Murray Non-Executive Director

9 Struan Robertson Non-Executive Director

10 John Roberts Non-Executive Director

7

4

3

109

1

8

Senior management team64

SENIOR MANAGEMENT TEAM

Peter BarlowPeter is the head of corporate finance for InternationalPower and is responsible for funding and bankrelationships. Peter joined us in 1998 and has beeninvolved in corporate finance, project finance andtreasury activities since that time.

Penny ChalmersPenny is head of global resources. She is responsible for Group human resources, information technologyand corporate communications. Penny has 20 years’experience in the energy sector and has been with us since 1997.

Gareth GriffithsGareth manages global trading, with responsibility for our trading operations in the UK, US and Australia. He has 15 years’ experience in the industry and waspreviously Vice President, Marketing and Trading for our North American business.

Vince Harris OBEVince is the head of our Asia region and was previouslyhead of one of the UK’s first cogeneration businessesprior to becoming CEO of HUBCO in Pakistan. He hasnearly 40 years’ experience in the power generationindustry. Vince was awarded his OBE in 2007 forservices to British industry in Pakistan.

Edward MetcalfeEdward manages operations and engineering and has 34 years’ experience in the industry. Prior to hisappointment in July 2006, he was executive managingdirector of Arabian Power Company and was previouslyresponsible for our operations in South Australia,specifically Pelican Point, Synergen and SEA Gas.

Sean NeelySean heads up mergers and acquisitions. He is achartered accountant with 16 years’ experience in thepower sector. He joined us in October 1998, and has abackground in project finance and investment banking.

Stephen RamsayStephen is our Company Secretary and GeneralCounsel. He joined the Company in 1996, after 10 years as a solicitor in private practice, first working at National Wind Power and then in the internationallegal group before becoming Company Secretary inOctober 2000.

Ranald SpiersRanald is head of our Middle East and Africa region. He has been with us for 15 years, having previouslyworked for the BP Group for 12 years across a widespectrum of industries, including petrochemicals,detergents, oil refining, downstream gas, advancedmaterials and aerospace.


2

4

5

1 Peter Barlow

2 Penny Chalmers

3 Gareth Griffiths

4 Vince Harris OBE

5 Edward Metcalfe

6 Sean Neely

7 Stephen Ramsay

8 Ranald Spiers

3

1

6

7 8

Corporate governance66

CASE STUDY CONTROLLING DUST EMISSIONS

The combustion of coal produces smallparticulates which have to be captured prior to their emission from a power station to prevent environmental damage.Historically, the equipment used for thisconsisted of electrostatic precipitators which use electric charges to attract and hold the particles. These devices work very well when a plant is at full load, however are less effective duringstart-ups and shut-downs.

Fabric filters, commonly called ‘baghouses’,provide significant advantages over electrostaticprecipitators for the capture of dust and alsomercury particles. These work very much like a domestic vacuum cleaner. The expelled fluegas is drawn across bags which trap the particles before the flue gas escapes. Thecaptured matter is collected and sold as aningredient for concrete.

Coleto Creek’s environmental performance hasattracted recognition from the US EnvironmentalProtection Agency who presented the plant withan Environmental Excellence Award in 1993. In2006 Coleto Creek decided to further improveenvironmental performance by upgrading itstechnology to state-of-the-art particulate control,installing a baghouse, to further reduce dustemissions and prepare for future mercuryemissions-related regulations.

The challenge for Coleto Creek, in constructingthe new baghouse, was how to complete theinstallation without disrupting the operation ofthe plant. In addition, the existing precipitatorstreated flue gas upstream and the baghouse wasdesigned to take the flue gas downstream of theair preheater. This meant all of the ductworkfrom the boiler had to be modified.

The solution was to construct the baghouse tothe side, while the boiler was operating, thenconnect the new ductwork routing flue gas tothe baghouse during a planned outage. Theproject commenced in June 2006, and wassuccessfully completed during a scheduledoutage in 2007. The baghouse has now passedall necessary regulatory performance tests and is currently meeting all of our performanceexpectations.

Coleto Creek, Texas

Coleto Creek, Texas

We are committed to high standards ofcorporate governance and in this section setout how we comply with the principles in theCombined Code, and explain our reasons forany areas of non-compliance.

The BoardIn 2007 the effectiveness of the Board wasunderpinned by a balance between Executive andNon-Executive Directors. The Board believes that ithas the skills and experience necessary to provideeffective leadership and control of the Company.

Adri Baan retired from the Board on 31 December2007 and, on 1 July 2007, Alan Murray wasappointed a Non-Executive Director. There were noother changes during the year. At the end of the yearthe Board comprised of the Chairman (Sir NevilleSimms), Executive Directors (Philip Cox, MarkWilliamson, Tony Concannon, Steve Riley and BruceLevy) and four Non-Executive Directors (Tony Isaac,Alan Murray, John Roberts and Struan Robertson). Sir Neville Simms was considered independent on his appointment as Chairman and the four Non-Executive Directors are considered to be independent.Tony Isaac is the Senior Independent Director.

The structure of the Board, following Adri Baan’sretirement, is not in strict compliance with theCombined Code in that the number of Non-ExecutiveDirectors is less than the number of ExecutiveDirectors. However, the Directors consider that theBoard currently works effectively to carry out itsduties and that the Non-Executive Directors have asufficiently strong independent presence at Boardmeetings to provide an effective counter balance tothe Executive Directors. The size and structure of theBoard is kept under review.

The full Board met seven times during 2007.Attendance by Directors at these and the Boardcommittee meetings held during the year are detailedin the table below.

In addition to the Board and committee meetings, a meeting of the Chairman and the Non-ExecutiveDirectors was held without the Executive Directorsbeing present. The Non-Executive Directors also metwithout the Chairman being present. This meetingwas chaired by Tony Isaac, the Senior IndependentDirector, and included a review of the Chairman’sperformance.

Board membershipIn accordance with the Combined Code and theCompany’s Articles of Association, all Directorssubmit themselves for re-election every three yearsand newly appointed Directors are subject to re-election by shareholders at the first AGM after theirappointment. In addition, the Board seeks to maintaina balance between continuity and new blood amongstthe Non-Executive Directors.

In accordance with this policy, Adri Baan steppeddown as a Non-Executive Director at the end of 2007 and, following a search carried out by an external agency, Alan Murray was appointed to the Board as a Non-Executive Director on 1 July 2007 and will submit himself for re-election at the 2008 AGM.

In addition Philip Cox, Bruce Levy and StruanRobertson will submit themselves for re-election at the 2008 AGM in accordance with the three-yearre-election policy.


CORPORATE GOVERNANCE

Board Audit Remuneration Appointments(seven Committee Committee Committee

meetings) (six meetings(1)) (four meetings) (one meeting)

Sir Neville Simms 7 n/a 4 1Philip Cox 7 n/a n/a n/aAdri Baan 7 5 3 1Tony Concannon 7 n/a n/a n/aTony Isaac(2) 6 6 4 1Bruce Levy 7 n/a n/a n/aAlan Murray(3) 3 3 1 –Steve Riley 7 n/a n/a n/aJohn Roberts 7 5 4 1Struan Robertson 7 5 4 1Mark Williamson 7 n/a n/a n/a

(1) In 2007 the Audit Committee held three main meetings relating to the preliminary statement, the interim statement and audit planning. All members of theCommittee attended these meetings. The remainder of the meetings related to quarterly reports and US reporting issues.

(2) Tony Isaac missed one Board meeting during 2007 due to a pre-existing business commitment. He passed comments on each of the relevant papers to theChairman, prior to the meeting.

(3) Alan Murray joined the Board on 1 July 2007. He has attended all Board and committee meetings since that date except one Board meeting and one meetingof the Remuneration Committee which was due to a pre-existing commitment at the time of his appointment. For both the meetings he missed, he passed hiscomments on the relevant papers to each of the meeting’s chairmen, prior to the meetings.

Al Kamil,Oman

Board trainingArrangements are in place to ensure that newlyappointed Directors receive a comprehensive briefingon the Company, and training is provided for Directorson their roles and their legal obligations to ensure thatthey are fully conversant with their responsibilities asDirectors. In accordance with this policy Alan Murraymet all the members of the executive managementteam individually, over a period of two days. Inaddition he has received guided visits to powerstations in the UK and the US, so that he has a goodunderstanding of the business of the Company. Aprogramme of continuous training is also provided forthe Directors. Periodically, the Board meets at the siteof one of the Group’s power stations and briefings arealso given at Board meetings on particular parts of thebusiness, including regional and functional reviews. InJanuary 2007 the Board visited the Group’s businessin the Middle East where it met the regionalmanagement team and received a briefing about thelocal business operations. Directors are also keptinformed of changes to the regulatory regime such as the new Companies Act. All of the Directors haveaccess to the advice and services of the CompanySecretary and also to external independent adviceshould they so wish.

InsuranceThe Company has in place appropriate insurancecover in respect of legal action against its Directors.

Operation of the BoardThe Board has responsibility for defining strategy,ensuring the successful implementation of approvedprojects/proposals and for the financial policies of theGroup. It also reviews the risk policies and profile ofthe Group. It maintains a schedule of all mattersrequiring specific Board approval. Throughout 2007this included all strategy decisions and significantcapital investment proposals and acquisitions. TheBoard receives information on capital expenditureprojects and investment proposals in advance of Boardmeetings, as well as management reports on theoperational and financial performance of the business.Financial performance is monitored on a monthly basisand the overall performance of the Group is reviewedagainst approved budgets. At least once a year, theCEO presents a corporate strategy plan to the Boardfor review and approval. Each investment decision ismade in the context of this plan.

The Board has established business values andstandards for the Group, which provide a frameworkfor the Group to balance the interests of all itsstakeholders in the conduct of its business. Thebusiness values (FIRST) are set out on page 96 of this Annual Report. The Company’s Code of BusinessConduct has been formally adopted by the Board and is set out on the Company’s website. This codeincludes a whistle-blowing procedure.

In respect of Board performance for 2007, the Board, following an internal assessment of itsperformance in 2006, appointed an external facilitator

(Professor Rob Goffee of the London BusinessSchool) to carry out a performance assessment. The results of the review demonstrated that theBoard members were satisfied with the operation of the Board. The contribution by individual Directorsto Board and committee meetings was considered to be high.

Chairman and Chief Executive OfficerThere is a clear division of responsibilities at the headof the Company between the roles of the Chairmanand the CEO. The Chairman is responsible for theleadership and effective operation of the Board, interms of its agenda, decision making and theutilisation of the skills and experience of the Directors.He monitors, with the assistance of the CompanySecretary, the information provided to the Board toensure that it is sufficient, pertinent, timely and clear.The Chairman is also responsible for ensuring thatthere is effective engagement and communicationwith shareholders. The CEO is responsible for theoverall management of the Company, and leading theexecutive and operational teams in implementing thestrategies approved by the Board.

Non-Executive Directors and their functionThrough membership of the Board committees, theNon-Executive Directors have responsibilities for:overseeing that systems of internal control and riskmanagement are appropriate and effective; managingthe relationship with the external auditor; evaluatingthe performance of management in meeting targetsand objectives; setting the remuneration of ExecutiveDirectors; appointing Executive Directors; andplanning senior management succession.

Executive Directors holding non-executive directorshipsThe Company has a policy of encouraging itsExecutive Directors to hold a non-executivedirectorship in another company. This broadens theirexperience and helps improve their contributions tothe Group. Philip Cox is a Non-Executive Director of Wincanton plc. His remuneration from this role is retained by him and for the year ended 31 March2007 was £48,000. Similarly, Steve Riley and MarkWilliamson are respectively Non-Executive Directorsof Shanks Group plc and Imperial Tobacco Group plc.They are each entitled to retain their remuneration fortheir roles, which was in 2007 £28,750 for Steve Rileyand £30,000 for Mark Williamson.

Board committeesThe Company has established the followingcommittees: the Audit Committee; the RemunerationCommittee; and the Appointments Committee. Inaddition, the Company has established a Health,Safety and Environment Committee with effect from1 January 2008. No person other than a committeemember is entitled to attend the meetings of thesecommittees, except at the invitation of the Committee.The full terms of reference for each Committee areavailable on the Company’s website.


KAPCO, Pakistan

Audit CommitteeThe Committee manages the relationship with theexternal auditor, including fixing the level of the auditor’sremuneration and the scope and adequacy of the audit. The Committee also puts in place policies andprocedures to ensure that the external auditor remainsindependent. The Committee reviews all financialreports (which for the 2006 year end consisted of thepreliminary statement, Annual Report, Form 20-F, andfor 2007, the interim statement and quarterly reports)including consideration of the Group’s accountingpolicies and major judgemental areas. The Committeereviews the effectiveness of the Group’s systems ofinternal control, and reviews the scope (and the annualplan) of the internal audit function and satisfies itself ofits adequacy, particularly in terms of resources and itsperformance against its annual plan. In addition itreviews the report prepared by the Risk Committee toensure all relevant risks are addressed in these externaland internal audit processes.

The Committee reviewed the Group’s Sarbanes-Oxleycompliance programme for 2006 during 2007 toensure that the Group’s internal control system andsafeguards were such that they complied with therequirements of section 404 of the Sarbanes-Oxley Act.

Following the introduction of the TransparencyDirective, the Audit Committee approved the Companyreplacing its quarterly financial reports with InterimManagement Statements (IMS). The first period whichwill be reported through an IMS will be the threemonths ending 31 March 2008.

During 2007 the Audit Committee comprised all the independent Non-Executive Directors of theCompany. The Audit Committee Chairman was Tony Isaac, who is a Fellow of the Chartered Instituteof Management Accountants and, before becomingChief Executive of The BOC Group plc, was its GroupFinance Director. The Company Secretary acts assecretary to the Committee. Following the finalisationof the 2007 accounts, Tony Isaac has stepped down and Alan Murray has taken over as Chairman of theAudit Committee.

Time was set aside for the Committee to meet the external auditor and the head of internal auditwithout executive management present. In addition to the members of the Committee, regular attendees atthe Audit Committee meetings included representativesof the external auditor, the Chairman, the CEO, theCFO, other Executive Directors, the Group controllerand the head of internal audit.

Remuneration CommitteeThe Remuneration Committee is responsible forensuring that the remuneration package of ExecutiveDirectors is maintained on a sensible and comparablebasis and enables the Company to compete effectivelyfor good calibre executives. It monitors the performanceof Executive Directors against targets, it sets theperformance conditions for long-term incentive planawards and reviews the remuneration levels and otherconditions of service of senior managers, immediatelybelow Board level.

The Committee comprises the independent Non-Executive Directors of the Company and the Chairman.The Chairman of the Committee up to 30 September2007, was Adri Baan, and from 1 October 2007 it wasJohn Roberts. The Company Secretary acts as secretaryto the Committee and the director of global resourcesacts as adviser to the Committee. In 2007, following a formal review, Towers Perrin was re-appointed asexternal adviser to the Committee.

Appointments CommitteeThe Appointments Committee is responsible formatters of management succession and theidentification and appointment of Directors. It alsoreviews the Board structure, size and composition, andmakes recommendations to the Board with regard tochanges that are deemed desirable. The Committeecomprises the Chairman and all of the independentNon-Executive Directors of the Company. TheChairman of the Committee is Sir Neville Simms. TheCompany Secretary acts as secretary to the Committee.

Health, Safety and Environment CommitteeThe HS&E Committee has been established with effectfrom 1 January 2008. It is responsible for reviewing theGroup’s HS&E policies, objectives and performance. The Committee is chaired by Struan Robertson andalso comprises one other Non-Executive Director andthe CEO. In addition the director of operations andengineering will attend meetings of the Committee. TheCompany Secretary acts as secretary to the Committee.

Relations with shareholdersThe Board is accountable to shareholders for theperformance and activities of the Group. InternationalPower ensures that its AGM provides shareholderswith an opportunity to receive comprehensiveinformation on all aspects of the Group’s businessactivities and to question senior management aboutbusiness issues and prospects.

All proxy votes are counted and the level of proxy voteslodged for each resolution is reported at the AGM andon the Company’s website. In line with best practice,the Company aims to ensure that the notice of AGMand the Annual Report are sent to shareholders at least20 working days before the AGM.


Blackstone, Massachusetts

International Power also runs, within the terms of theregulatory framework, frequent contact programmeswith industry analysts and institutional investors todiscuss matters of strategy and financial performance.Contact is made principally by the CEO and the CFO.On issues of major importance the Chairmancommunicates with major shareholders. The SeniorIndependent Non-Executive Director (Tony Isaac) isalso available as an alternative point of contact ifshareholders have concerns over the Chairman’sperformance or where contact with the Chairman orthe use of other communication channels would beinappropriate. At each Board meeting, an update isgiven on movements in major shareholdings and oncontact programmes between the Executive Directorsand institutional shareholders. Reports issued byfinancial analysts on the Company are circulated toBoard members. These reports enable the Directors togain an understanding of the views and opinions ofthose with an interest in the Company. All resultspresentations and Stock Exchange announcements areavailable to shareholders on the Company’s website.

During 2007 the Company implemented theprovisions approved by shareholders at the 2007AGM that allow for all shareholder documents to beprovided electronically (unless otherwise requested bythe shareholder). To ensure all shareholders are keptinformed of the Company’s performance for 2007, allthe shareholders who did not elect to receive a hardcopy of the Annual Report will receive a highlightsreport. This balances the Company’s desire to reduceits costs and impact on the environment and, on theother hand, keeps shareholders informed of theGroup’s progress. In addition, during 2007, theCompany’s CEO and CFO met with representativesof the United Kingdom Shareholders’ Association.

Accountability and auditThe Board is mindful of its responsibility to present a balanced and understandable assessment ofInternational Power’s financial position and prospects,both to investors and regulatory authorities. The Annual Report, preliminary and interim resultsannouncements, and IMS are the principal means of achieving this objective.

An explanation of the respective responsibilities ofthe Directors and external auditor in connection withthe financial statements is set out in the Statement ofDirectors’ responsibilities. The Directors confirm inthe Directors’ report their view that the Group is agoing concern.

The Audit Committee has a process in place toapprove all non-audit services provided by theexternal auditor to ensure that the objectivity andindependence of the external auditor is notcompromised. Our procedures specify the servicesfrom which the external auditor is excluded and theapproval process for all other services.

Internal controlThe Board has responsibility for the Group’s systemof internal control and for monitoring and reviewingits effectiveness.

Systems are in place to meet the requirements of theCombined Code and Turnbull Guidance. Following theCompany deregistering from its registration with theSEC in the US it is no longer required to comply withthe terms of the Sarbanes-Oxley Act. However, it hasimplemented procedures and systems deriving fromthat compliance programme to ensure key controls are embedded into the internal control framework.

Any system of internal control is designed to manage,rather than eliminate, the risk of failure to achievebusiness objectives. The system can only providereasonable, and not absolute, assurance againstmaterial financial misstatement or loss. The Boardreviewed the effectiveness of internal controlprocedures during 2007. The principal features of the Group’s systems of internal control are:

Control environmentThe Board encourages a culture of integrity andopenness. The Group has an organisational structurewith clear lines of accountability and authority acrossits worldwide operations, supported by appropriatereporting procedures. Each of the regional businessesis accountable to the CEO and is managed within thestrategic guidelines and delegated authorities adoptedby the Board. An executive management team,chaired by the CEO and comprising the ExecutiveDirectors, regional directors and functional heads,meets regularly to discuss issues facing the Group.

Control proceduresControl procedures have been established in each of the Group’s operations to safeguard the Group’sassets from loss or misuse and to ensure appropriateauthorisation and recording of financial transactions.All acquisition and investment decisions are subject to disciplined investment appraisal processes. Riskmanagement procedures are in place for the Group’soperations, including its energy marketing and tradingactivities, which are overseen by the GlobalCommodities Risk Committee, which comprisesExecutive Directors and senior management, and is chaired by the global risk manager. The Grouptreasury function operates under defined policies and the oversight of the Treasury Committee, chairedby the CFO.

Performance reporting and informationCorporate plan Executive management submits anannual corporate plan to the Board for approval. Theplan for each business unit is the quantified assessmentof its planned operating and financial performance forthe next financial year, together with strategic reviewsfor the following four years. Group managementreviews the plans with each operational team. Theindividual plans are based on key economic and financialassumptions and incorporate an assessment of the riskand sensitivities underlying the projections.


Performance monitoring Monthly performance andfinancial reports are produced for each business unit,with comparisons to budget. Reports are consolidatedfor overall review by executive management, togetherwith forecasts for the income statement and cashflow. Detailed reports are presented to the Board on a regular basis.

Performance review Each business unit is subject toregular performance reviews with Group managementduring the year. Actual results and forecasts for the yearare compared to budget. Key operational and financialresults are reviewed together with the risk profile andbusiness environment of the reporting unit.

Investment projects These are subject to formalreview and authorisation procedures with designatedlevels of authority, including a review by an InvestmentCommittee chaired by the CEO and comprising theExecutive Directors and senior managers. Majorprojects are subject to Board review and approval. Further information on our investment process is available in our Group overview on pages 12 and 13.

Corporate reporting The Company has a DisclosureCommittee which is chaired by the CompanySecretary and is comprised of members from theinternal audit, corporate communications, globalresources, operations and engineering, companysecretariat and financial reporting departments. Itreviews the Annual Report and the Summary AnnualReport, and in 2007 reviewed the 2006 Form 20-F.

Risk identification and managementAs outlined in the section ‘Our approach to risk andrisk management’ there is a continuous process foridentifying, evaluating and managing the key risksfaced by the Group. Activities are co-ordinated by theRisk Committee, which is chaired by the CFO, andhas responsibility, on behalf of the Board, forensuring the adequacy of systems for identifying andassessing significant risks, that appropriate controlsystems and other mitigating actions are in place, and that residual exposures are consistent with theGroup strategy and objectives.

MonitoringThe Board reviews the effectiveness of establishedinternal controls through the Audit Committee whichreceives reports from management, the RiskCommittee, the Group’s internal audit function andthe external auditor on the systems of internal controland risk management arrangements.

The internal audit department reviews theeffectiveness of internal controls and riskmanagement through a work programme which isbased on the Group’s objectives and risk profile and isagreed with the Audit Committee. Findings arereported to operational and executive managementand the Audit Committee.

Business unit managers provide annual self-certificationstatements of compliance with procedures. Thesestatements give assurance that controls are in operation

and confirm that programmes are in place to addressany weaknesses in internal control. The certificationprocess embraces all areas of material risk. The internalaudit department reviews the statements on behalf ofthe Disclosure Committee and reports any significant issues to the Audit Committee.

Compliance with the Combined CodeThere were two areas where the Board was not fullycompliant with the requirements of the revisedCombined Code throughout 2007. Up to theappointment of Alan Murray as a Non-ExecutiveDirector on 1 July 2007, there were more ExecutiveDirectors than Non-Executive Directors on the Board.This is again the case following the retirement of AdriBaan as a Non-Executive Director on 31 December2007. The Board has reviewed the structure of theBoard and has concluded there is no need at this timeto appoint another Non-Executive Director.

The Senior Independent Director does not have acontact programme to communicate with institutionalinvestors, primarily to avoid potential confusion overchannels of communication. During 2007 no institutionalshareholder has requested such communication.

In all other respects, the Company has complied withthe provisions of the Combined Code throughout theperiod of the review.

US corporate governance complianceDuring 2006 the Group was required to comply withthe rules relating to its system of internal controls overfinancial reporting as required by the Sarbanes-OxleyAct 2002. These arrangements were audited by KPMGwho provided an audit opinion that the Group had metthe required standards in respect of the Form 20-F forthe year ended 31 December 2006. On 28 June 2007,the Board decided to delist from the New York StockExchange (NYSE) as the ADR facility listed on the NYSEonly accounted for around 1% of the annual sharetrading volume of shares in the Company. It decided toderegister from the SEC due to the extra costs requiredto comply with the Sarbanes-Oxley Act. The Board is satisfied that the Group’s financial reporting controlscontinue to operate effectively.

Guiding philosophyOur business culture is underpinned by our corevalues which form the guiding philosophy foreveryone within International Power. Our corporatevalues were set, reviewed and refreshed byrepresentatives from our businesses and regionaloffices around the world. They are:

■ Financial discipline

■ Integrity of communication

■ Respect for the individual

■ Safe behaviour

■ Team first culture.

More details are set out on page 96.


Tihama,Saudi Arabia

Business impactOur aim is to ensure that International Power isknown throughout the world as a responsible,efficient and successful company. Our stakeholders –our employees, shareholders, customers, suppliers,regulators and host communities – expect nothingless of us.

Electricity is a unique product that has the power toenhance the quality of life for people throughout theworld. Companies involved in the provision of thiscommodity must also demonstrate responsible andethical working practices. For a global wholesalegenerating company like International Power, thisequates to following fair and ethical principles togovern the way we manage and conduct ourbusiness. It means working in a smart and integratedway – by ensuring our key competencies, technicalexpertise and best practices are properlyimplemented over a widely dispersed and diverserange of assets to produce power, water and processheat safely and cleanly. It also means that corporateresponsibility (CR) forms an integral part of ourbusiness decision process and contributes to ourglobal competitiveness and reputation.

Our CR performance includes our management of the impact of emissions to air and water, otherenvironmental impacts, health and safety, employmentand human rights, and community development. A reputation for good CR performance is essential to our business since it influences our relations withgovernments and regulators, our ability to recruit thebest people, and our standing with other stakeholders,including customers and local communities.

The measures necessary to combat global climatechange represent one of the biggest potential risks to our business. Government action to meet the KyotoProtocol and subsequent CO2 reduction targets will,over time, increase the cost of emitting carbon. Thesemeasures will alter the economic balance betweendifferent fuels, favouring low carbon and renewabletechnologies. New business opportunities may becreated to exploit renewable energy technologies and potentially also carbon capture and storagetechnologies. Our aim is to generate energy in an efficient way, to develop low-carbon technologyand expand our renewables portfolio.

Corporate responsibility72

CORPORATE RESPONSIBILITY

A SUCCESSFULBUSINESS NEEDS TO BE A RESPONSIBLEBUSINESS

First Hydro, UK

To track our performance in implementing this strategywe measure the carbon intensity of each unit ofelectricity generated, across our portfolio. The averagecarbon intensity of International Power’s global portfoliohas fallen consistently over the last three years, in 2007the average carbon intensity was 0.694 kg/kWh downfrom 0.715 kg/kWh in 2006 and 0.736 kg/kWh in2005. We use net reporting for CO2, which reflects ourownership interest in a power plant. Whilst we measurethe carbon intensity of our output, and seek to reduceit, we do not have a specific target for reducing totalCO2 emissions. There are two principal reasons for this.Firstly, we are a growing company and any fossil fuelstations we add to our fleet will add to our aggregateCO2 emission level. Secondly, we are a demand-ledindustry. We are obligated to generate electricity tomeet the market demand and we are committed to‘keeping the lights on’. For our carbon footprint toreduce, we require less electricity consumption by ourcustomers. We are, however, committed to running ourassets in a responsible manner, complying with allrelevant legislation and taking into account ourobligations to our shareholders and other stakeholders.

EU member states are committed to meeting existingEU-wide legislation designed to tackle climate change.Under the Kyoto Protocol, the EU is planning an 8% reduction (from 1990 levels) in greenhouse gasemissions by 2012, and is seeking to achieve thisthrough a number of measures. Firstly, the EUETS is amarket trading mechanism designed to promote thereduction of CO2 emissions across European industry.In addition, the EU Renewables Directive sets individualnational targets for the amount of energy to beobtained through renewable sources. During 2007, EUmember states agreed to new, longer-term bindingtargets – a 20% reduction in greenhouse gas emissionsby 2020 and 20% of renewable energy by 2020.These targets will be apportioned between memberstates and implemented through new directives.

In December 2007, under a new federal government,Australia ratified the Kyoto Protocol, and is planning tointroduce an emissions trading scheme across a rangeof industrial sectors, including the power industry, bymid 2010. International Power Australia participated ina comprehensive study of such a scheme in the firsthalf of 2007 – drawing on its experience in Europe –and is currently engaged with the new federalgovernment on its design and implementation.

The power generation industry in the US is facingsome uncertainty as the government begins toaddress carbon emissions reduction. As a result thereare several state and federal programmes beingconsidered which would establish incentives for lowcarbon emissions. We expect the federal governmentto design and implement a more definitive CO2emissions policy and trading mechanism over themedium-term.

Significant CR issuesOur senior management team regularly reviews the significant CR issues relevant to our business.These are:

■ management of health and safety of ouremployees and contractors;

■ the consequences of climate change leading tonational and international regulation of CO2emissions;

■ measures to control our environmental impacts,especially emissions to air such as SOx, NOx andparticulates;

■ maintaining high standards of business ethics;

■ local community programmes.

Corporate responsibility governance

Management of CR issuesCorporate responsibility matters relating toInternational Power’s activities are governed by thesenior management team, and in particular the CEO,who has overall responsibility, assisted by the CompanySecretary, head of operations and engineering, and thehealth and safety manager. The CEO gives CR briefingsto the Board at every Board meeting, and the Boardalso receives a summary of Group-wide CR issues inthe annual Risk Report.

Day-to-day management of CR is performed by ourregional directors, plant managers and employees.Their work is overseen by the HS&E managementcommittee and the human resources group, the latterbeing responsible for employee matters andcompliance with human rights legislation. Allemployees are expected to play a role in maintainingInternational Power’s status as a responsible business.


IPR European wind portfolio, Germany, Italy, France

and the Netherlands

HS&E management committeeThe HS&E management committee includesrepresentation from each region and plant. Thecommittee meets quarterly to discuss HS&E issues,and shares best practice across the portfolio to ensureall plants operate to the highest possible safety andenvironmental standards.

In 2008, we strengthened our CR governance byestablishing a new Board-level HS&E Committee tooversee HS&E policy and the performance of theHS&E management committee. It will review HS&Ereports as well as any major incidents and issues ofpublic concern. It will meet at least once a year at a power station, where the committee will discussHS&E issues with the plant manager and relevant on-site staff.

Auditing CROur internal audit team reviews all InternationalPower plants and this includes an audit of keycorporate responsibility performance. We also workwith joint venture partners to try to ensure that jointventures receive an equally rigorous audit regime. TheAudit Committee and CEO receive all audit reports.

All power stations receive a full internal audit everythree years, with an interim audit mid-way through the cycle. The internal audit department includes anHS&E specialist, and technical support is externallysourced where necessary.

Third party auditors assess our plants againstISO14001 (environmental) and OHSAS18001 (safety)certification criteria. In 2007, DuPont Safety Resources(DuPont) completed an external review of our healthand safety procedures. Details are provided in‘Progress in 2007’ on page 75.

StandardsAll International Power plants, where we haveoperational control, have ISO14001 andOHSAS18001 certification, except Tihama whereconstruction was completed in 2007. We expectTihama to reach these standards in 2008. At plants in which International Power is not the majorityshareholder, we seek to agree with venture partnersthat we will jointly obtain these standards.

Our performance in the Business in the Community(BITC) CR Index improved between 2004 and 2005.In 2006, BITC changed its methodology from anumerical ranking to a bronze, silver, gold or platinumaward. For 2006 we were awarded a gold overall,with a platinum in the Environment Index and a silverin the Community Index.

In addition to our BITC ratings, we are a member ofthe FTSE4GOOD index, which identifies companiesthat meet globally recognised corporate responsibilitystandards. The selection criteria for this index includeenvironmental sustainability, stakeholder relationshipsand upholding and supporting universal human rights.

Human rights and Code of Business ConductWe endorse the United Nations Declaration onHuman Rights. This is supported by our own Code ofBusiness Conduct and human resources policies. Weapply human rights principles rigorously for our ownemployees, and we seek to influence our partners,contractors and suppliers to apply the same standards.

Our Code of Business Conduct, which applies to allInternational Power employees, includes clauses oncomplying with our ethical, environment and healthand safety policies. It also covers competitive practices,conduct in the community and charitable donations.We distribute copies of the Code to all employees,and make it publicly available on our website. All plant managers are responsible for overseeingimplementation of the Code.


Ras Laffan B,Qatar

CR communication and trainingEffective internal communication is essential to ensureinternal stakeholders receive accurate information onInternational Power’s strategic agenda, majorinitiatives, corporate developments and position onindustrial issues.

Being well informed ensures employees feelrespected, valued, and become engaged in any Groupinitiatives. For example our staff, through our regionalbusinesses, are encouraged to submit ideas for ourannual Flagship Awards, which are donations forprojects of special note in the communities in whichwe operate, in addition to participating in localcommunity work. More details on our FlagshipAwards can be found on page 77.

To communicate key issues effectively, a variety ofcommunication channels have been developed.Management briefings and functional forums aregood examples of these.

We produce an internal International Power magazinethat is distributed globally as hard copy to allInternational Power sites and offices. The publicationcontains details on major Group news, industrydevelopments that directly affect the Group, updateson regional progress and features on CR.

In 2008, International Power will also be relaunching itsintranet to provide employees with access to a range ofmaterial, including information on the Group’s CR aimsand achievements.

Information on International Power’s CR is also madeavailable via the Company website.

All Executive Directors of International Power and oursubsidiaries receive training in corporate governanceand CR. We give all new employees basic HS&Einductions and comprehensive safety training relevantto their work area.

Progress in 2007

Environment and climate changeAs a global power company, we recognise theimportance of developing and implementing a low carbon strategy over both the medium and long-term.

It is incumbent on us to operate our business in amanner which is sustainable. This means we need toretain our competitiveness today, but ensure we aretaking steps now, so that our business is fit forpurpose in the future. In this regard the control andlimitation of CO2 emissions is a critical issue and onewhich has a high priority within our business.

In January 2007, the Board endorsed several initiativesto reduce our environmental impact and enableInternational Power to take advantage of commercialopportunities for reducing CO2 emissions.

Generate electricity efficientlyWe use state-of-the-art, proven environmentaltechnology at our newly built plants and, wherepossible, are upgrading the older ones. For example,at Fujairah F2 in Abu Dhabi (a new build 2,000 MW,130 MIGD plant, which we have just startedconstructing), we are using Alstom GT26Btechnology which, when taking into account thepower it produces and the heat generated for thedesalination process, has an efficiency of over 60%.We have dedicated resources within our operationsand engineering teams to review technology trendsand advances to ensure we are best positioned toparticipate in the drive towards a lower carbonenvironment internationally.

We are actively reviewing the thermal efficiency at our power stations and implementing improvementprogrammes. These range from steam turbineupgrades, to reducing works power, to improvingcombustion conditions. For example, high efficiencysteam turbines are being retro-fitted to Units 1 and 2at Hazelwood power station in Australia.

Investing in low carbon fossil fuel generationIn 2007, we commenced investing in thedevelopment of low carbon initiatives, includingcarbon capture and storage.

Hazelwood, in Australia, burns brown coal which islow in NOx and SOx emissions, but produces higherCO2 emissions due to its high moisture content. Wehave secured A$80 million of funding from both theVictorian and federal government to develop a way ofdrying the brown coal before burning it. The fluidisedbed coal drying plant will reduce the moisture contentfrom 60% to 12%, using waste heat from the powerplant. As part of this project we are also developing apilot carbon capture plant that will remove up to 25tonnes of CO2 from Hazelwood’s flue gas every day.The project also involves fitting a new highly efficientturbine. The financing documents for this project weresigned with the federal and Victorian governmentsduring 2007 and we have now reached agreementwith a supplier (Alstom) for the technology required.

We are also researching the potential of tidal power,using turbines to generate electricity from tidal flow.In 2007, we entered into a collaboration to developtidal turbine technology.


Expanding renewablesOur expansion strategy at present focuses oncountries where wind energy operates withinfavourable regulatory regimes, many of which are inEurope. In 2007 we acquired a further 660 MW ofoperational wind generation, and 132 MW ofcapacity which was under construction becameoperational during the year. Our wind portfolio nowhas an aggregate capacity of 1,199 MW. We areseeking to further expand our renewables portfolioorganically, through working with developers wherewe bring construction, financing, operational andcommercial skills, and by acquisition.

Reducing sulphur dioxide emissionsWe are investing significant capital in FGD, a processthat is retrofitted to coal fired power stations toremove sulphur from emissions. FGD is already fittedat our coal plant in the Czech Republic and at thePaiton plant in Indonesia, and we are installing it atPego in Portugal, and Rugeley in the UK. Installation ofFGD at Rugeley and Pego will enable them to complywith the revised EU LCPD’s restrictions on sulphurdioxide emissions. We have chosen thelimestone/gypsum FGD process for Rugeley, in linewith all other existing or planned FGD power stationsin England. More information about the FGD processcan be found in the case study ‘Reducing sulphuremissions’ on page 61.

Health and safety We are committed to the best possible health andsafety performance. 2007 was the third successiveyear in which our KPI accident frequency rate wasreduced. Very few of the reported accidents werecaused by plant equipment or management systemsfailures. The majority of the accidents involved falling,tripping or incorrect lifting of heavy equipment.

International Power deeply regrets the death of one of our contractors at Paiton in Indonesia. In November2007, a contract employee drowned after falling from a jetty at night while unloading coal. He was notwearing a life jacket, a mandatory requirement. We carried out a full investigation, and immediatelyintroduced a revised set of recommendations foravoiding similar incidents.

DuPont carried out a review of safety managementacross International Power in the fourth quarter of2006 and first quarter of 2007. The assessment wascarried out at our London headquarters, Rugeley(UK), Ras Laffan B (Qatar), Pego (Portugal), Paiton(Indonesia) and Hays (Texas). Having reviewed oursafety policy, observed practices in the field andconducted employee interviews, DuPont declaredthat, ‘International Power has a good safetyperformance, and employees at stations exhibit highsafety awareness’. DuPont further acknowledged thatwithin joint ventures and associates, InternationalPower frequently provides operational and safetyguidance. DuPont provided feedback to sitemanagers, produced a report of findings and made recommendations for improvement. Allrecommendations have now been acted upon.

We developed a behavioural safety programme for all employees to reduce the number of incidents,including unsafe behaviours and accidents, resulting in lost time. We encourage staff to identify at-riskbehaviour and complacency, and take correctiveaction before an incident occurs. The programme was operational across the majority of InternationalPower’s plants by the end of 2007.

Social investmentElectricity, fresh water and heating are requirementsof modern life – this gives us considerable reach andglobal impact on people’s lives. We, in turn, accept areciprocal responsibility to conduct our business witha genuine concern for the world around us, and inparticular where our business has a direct effect.

We support the communities in which we operate by acting as a responsible neighbour and employer,and contributing towards the improvement of localamenities such as health and education services. Forexample, at HUBCO we co-sponsor eye camps wheresimple eye surgery is provided for individuals whocannot afford treatment and without it would havebeen blind.


Hays,Texas

This is just one aspect of the health care programmein the Hub area. The mobile medical services andcommunity health centres serve 25 villages in thevicinity of the power station on a daily basis, treatingover 47,000 patients during 2007.

Our commitment to education is evident with allregions supporting local schools through sportingequipment, computer hardware, sponsorship ofevents and prizes. Staff also give their time freelywithin their communities offering support for many activities.

We encourage our staff to participate whereverpossible and support them fully in their endeavours.

Each year our regional businesses propose projects of special note for corporate Flagship status, of up to £100,000 in value.

In 2007 we went further by selecting two majorprojects, each requiring funds in the region of£100,000.

■ The Grace Berglund Centre in Victoria, Australia, is using the award to fund the creation of a new‘child friendly’ reception area. Originally built as acombined school and adult training centre forpeople with cerebral palsy or with physical andmultiple disabilities, the Centre now providestherapy support, clinics, equipment fittings andassessments. The Award also covers the purchaseof specialised transport.

■ The Hope Centre, based in Jeddah, Saudi Arabia, is a multilingual, multicultural centre for childrenwith special needs, and is unique within theKingdom, in that it caters for both physical andmental disabilities. This is the first Flagship Award in the Middle East and is being used to fundadditional teachers in the essential and specialisedskills required for this important work. The Awardalso covers the purchase of transport and necessaryequipment for the Centre.

In addition to our Flagship Awards, in recent years our charitable policy has been refined to support fourmajor charities from our corporate centre. These areCrisis, The Queen Elizabeth Foundation, Sight Saversand Wellchild. Each is supported on a three-yearrolling programme with an annual sum of £20,000,allowing us to build a longer-term relationship and at the same time giving the charity the security offunding for a defined timeframe. Further informationon our relationship with these charities is available onour website.

The Company also operates a ‘Give As You Earn’scheme to facilitate personal charity donations by ourstaff. We also match monies that our employees raisefor charity.

In 2007 International Power and its subsidiariescontributed £1,195,985 to charitable causes andother community projects. Companies in which wehave a minority shareholding (associates and jointventures) contributed a further £251,028.


Hazelwood,Victoria


CR performance indicatorsOur CR performance indicators can be found in the following table.

2007 2006 2005

Total electricity output (kWh) 89,628 80,653 67,581

Environment

CO2 emissions Total (’000 tonnes) 65,695 61,206 52,294Per kWh (kg) equivalent 0.694 0.715 0.736

SO2 emissions Total (tonnes) 93,000 87,000 77,000Per kWh (kg) equivalent 0.00098 0.00101 0.00109

NOx emissions Total (tonnes) 73,000 75,000 74,000Per kWh (kg) equivalent 0.00077 0.00088 0.00104

Particulate emissions Total (tonnes) 7,000 7,000 6,000Per kWh (kg) equivalent 0.00007 0.00008 0.00009

Number of reportable environmental incidents (KPI) 13 16 16Number of environmental prosecutions 1 0 0

Health and safety

Accident rate for employees and contractors (KPI) 0.12 0.16 0.23Fatalities 1 1 0

Social investment

Community investment from International Power and its subsidiaries 1,195,985 1,050,000 1,173,707

Community investment from companies in which we have a minority shareholding 251,028 346,000 662,132

Note: As an energy company we provide electricity, heat, steam and water to our customers. In order toconsider all process outputs and provide a more accurate representation of our total outputs, in 2005 wedeveloped a methodology which has allowed us to calculate our data normalised by kWh equivalent. Thismethodology is available by request.


CASE STUDY WIND GENERATION

Wind turbines are being used increasingly to harness the naturally produced energygenerated by wind. The turbines use athree-bladed rotor with slender, taperedaerofoil sections that can be adjusted tooptimise performance, according to windspeeds or to stop the machine by stalling or turning out of the wind. The rotor isfixed on the end of a horizontal shaft,attached to the support tower, which drivesa gearbox. This in turn drives a smallershaft at higher speeds inside a generator.The rotor is upwind of the tower to avoidthe shock waves to the rotor that wouldotherwise occur as each blade passes thelee of the tower.

The voltage from a wind turbine is only 690volts – a small multiple of household voltage –so it is increased via transformers to make itsuitable for transmission to the local grid.

The rotor, shaft, gearbox and generator, andsometimes the first transformer, are located in a housing, called a nacelle, on the top of thetower. The nacelle is turned on a platform at the top of the tower so as to face the wind. The tower is usually made of tubular steelsections but occasionally a lattice (like atransmission pylon) or hollow concrete tower is used. The whole system is controlled bycomputers within each tower, which continuallyadjust the blade pitch and monitor for faults,operating hours and power output. Thecomputers are also linked to a control centre,where all machines can be monitored andcontrolled remotely.

All of International Power’s wind turbines are of the types described above, made by leadingmanufacturers. Mostly they have been acquiredafter construction, and the operations andmaintenance is generally contracted out to acombination of the original developers andmanufacturers. International Power does, however,still take an active role in the management of itswind farm portfolio and is one of the world’sleading owners of wind turbines.

IPR European wind portfolio,Germany, Italy, France and the Netherlands

IPR European wind portfolio, Germany, Italy, France and the Netherlands

Canunda, South Australia

International Power operates in a highlycomplex business environment and anincreasingly competitive international market for key skills and talent. Werecognise that the capability and endeavourof our employees makes us competitive,most critically in the areas of greenfielddevelopment and construction management,acquisitions, managing existing assets,project finance, plant operations, trading theoutput from our assets and relationshipmanagement with key industry stakeholders.

Consequently, we place the highest priority on theselection and retention, engagement, training anddevelopment of staff at all levels, whether employedby us directly or, as is often the case, by oursubsidiaries, joint ventures or associates.

In light of our strategy to balance risk throughoperating a broad portfolio of technologies in a rangeof markets, our asset ownership structures often leadto the sharing of influence over people issues. Oursenior management team establishes the importantprinciples, guidelines and standards of goodgovernance by which employees at our assets areemployed. This ensures an appropriate measure ofconsistency, whilst affording the flexibility to plantmanagers to respect national cultures and complywith local employment regimes.

Employees80

EMPLOYEES

A WORLD CLASSBUSINESS NEEDSSKILLED ANDTALENTED STAFF

International Power and its subsidiaries employsapproximately 3,700 people in 20 countries.

Our global expatriate and regional seniormanagement teams are responsible for managing our power plants to ensure we embed our values,operate effectively, monitor investments and drivegrowth in the business. It is for this reason that wecontinue to invest heavily in the development of thisgroup and have in place a balanced, yet highlyleveraged, incentive structure focused on performanceat plant, regional and Group level.

We continue to operate a number of share-basedlong-term incentive plans and see these as an integralpart of our strategy to align the interests of managersand many employees with the Group’s performance.

As a consequence of rapid growth throughacquisition, in recent years we have acquired newgroups of skilled people, from whom we can learnand with whom we can share best practice.

We value our reputation as a caring employer, rootedin the communities in which we operate. We seek to attract and retain high calibre employees locally,where possible, including those with often scarcequalifications, skills and experience.

In line with our FIRST core values, which are set outon page 96, we endeavour also to ensure that all of our staff conduct themselves in a manner of thehighest integrity at all times. A Code of Conduct isused by employees and their managers to provideguidance on the standards of conduct that the Grouprequires from its staff.

CommunicationsClear communication links are critical to enhancebusiness and commercial awareness throughout our business.

Corporate publications, the International Powerwebsite, employee awareness briefings from executivemanagement and team briefings are all used topromote communications and an understanding of the development and application of policies and strategy.

We continue to invest in the latest technology to aidrapid communication with all staff around the world.

Learning and developmentWe continue to focus on the development of ouremployees to ensure the business continues to bewell placed for the future. 2007 saw an increasingfocus on developing high performing and highpotential international managers.

Global leadership programmes for high potentialmanagers, which began in 2006, continued as a partnership between International Power andAshridge Business School, with two additional groupssuccessfully completing programmes in May andOctober 2007. The participants were drawn fromevery region and represented the diverse skill setspresent within the Group, providing an excellentopportunity for knowledge sharing.

Given our rapid growth over recent years, in 2007 we also reviewed the behavioural competencies thatwill be critical to the Group in future. These willincreasingly provide a platform for monitoring andguiding leadership behaviours across our keyinternational and corporate management population.

By way of illustration of some of the training activitiesat our plants, we continue to operate a behaviour-based safety initiative as a way to improve powerstation health and safety management. Thisprogramme, ‘Fresh Eyes’, focuses on people ratherthan plant or procedures. It involves a colleagueobserving their peers and giving feedback on safebehaviour and unsafe behaviour. This has helped usmaintain the highest levels of health, safety andenvironmental standards.

Recruitment activity from within the Group hascontinued to grow successfully in 2007, with anincrease in global and domestic relocations.Systematic advertising and the broad internalcommunication of vacancies have allowed employeesto seek out opportunities within the Group. Labourturnover remains low. The launch of our 2008graduate development programme should supportthe further strengthening of our people developmentfrom within the Group.


Equal opportunities and diversity in the workplaceIn line with our core cultural values and in recognitionof the very wide diversity of our employees andbusiness partners across the globe, InternationalPower remains fully committed to the provision of equal opportunities and the elimination ofdiscrimination of any type in our Group. Thisapproach extends itself to the fair treatment of people with disabilities in relation to recruitment,training and development.

Further, we believe wholeheartedly that it makessound business sense to benefit from the wideranging knowledge and experience of individuals in allsectors of the societies in which we have a presence.

In recognition of this, cultural awareness and diversitytraining is provided to our employees prior toundertaking international assignments.

A number of our plants are active participants indiversity organisations. For example, in the UK,Rugeley power station is accredited with the ‘Positiveabout Disability’ standard. All businesses areencouraged to seek ‘Investors in People’ status.

International Power uses a variety of techniques forassessing job applications as part of its selectionprocess. Where external selection techniques areimplemented, management work hard to ensure thatthe providers are able to demonstrate that theirmethodologies are free of bias. Internal selectionprocesses revolve around objective assessment of the candidates.

Rewarding employeesIn summary, our approach to rewarding employees is to provide:

■ an interesting and challenging job which suits theskills of the employee;

■ appropriate learning and developmentopportunities;

■ opportunities for personal progression;

■ competitive pay and benefits;

■ an emphasis on long-term incentive and short-term bonus plans, as well as a broadcommitment to employees owning shares in International Power plc;

■ an emphasis on the communication of totalrewards, which seeks to place a positive value on many of the intangibles of the employmentrelationship.

The Group operates a range of pension plansinternationally, with defined benefit arrangements in the UK and Australia. In 2007, a strategic review of our UK pension arrangements was initiated and we continue to consult with employees and theirrepresentatives to ensure the most appropriatesolution is achieved for the Group and our employees.No changes are being considered which effectexisting employees.

International Power has in place a number of share-based incentive plans under which employees of theCompany and its subsidiary companies may acquireshares in International Power plc. These plans form an integral part of the Group’s strategy to provideappropriate reward and retention strategies foremployees and to align employee and shareholderinterests through incentive targets based on clearfinancial criteria.

Executive Share Options are granted to employees in 13 countries. The Global Sharesave Plan is inoperation in five countries, whereby employees savefor three or five-year periods to purchase InternationalPower shares at a discounted price. We are restrictedfrom offering these plans more widely because oflegislation relating to securities.

Employees82


DIRECTORS’ REMUNERATION REPORT

This report to shareholders by the Remuneration Committeecontains all relevant information required to be disclosed bythe Company regarding the remuneration of Directors.

Specifically, the following subject areas are covered:

■ the role of the Remuneration Committee;

■ advice to the Remuneration Committee and some of the key topicsdiscussed during 2007;

■ the principles of the Executive Director remuneration policy, followedby detailed information on the various components of ExecutiveDirector reward;

■ information on Directors’ service contracts;

■ Non-Executive Director terms and shareholding requirements;

■ audited information relating to the Directors’ aggregate remunerationand compensation and Directors’ interests in the Company’s shares.

The role of the Remuneration CommitteeThe Committee is responsible for:

■ the establishment of the remuneration policy for Executive Directors;

■ the determination of the compensation and terms of employment(including any termination arrangements) of Executive Directors andother senior executives of the Company;

■ approving all Company share plan and pension plan arrangementsincluding the establishment and measurement of all performanceconditions;

■ monitoring the total compensation of Executive Directors in light of Group and individual performance.

In undertaking its responsibilities, the Remuneration Committee isguided by the strategic priorities of the Group and the measures usedto monitor financial performance. The Committee also takes account of the changing nature of the business and its markets both in the UK and internationally.

The Committee has reviewed compliance with the Combined Code on reward-related matters and confirms that the Company hascomplied with all aspects.

The following independent Non-Executive Directors are members of the Remuneration Committee: Sir Neville Simms, John Roberts, Tony Isaac, Alan Murray and Struan Robertson. John Roberts replacedAdri Baan as Chairman of the Remuneration Committee in October2007. The Committee met four times during the year.

Advice to the Remuneration CommitteeThe Remuneration Committee has access to external independentremuneration advice. The Committee undertook a review of advisers in2007 and Towers Perrin were re-appointed to provide specialist adviceon Executive Director and senior management remuneration. TowersPerrin did not undertake any other services on behalf of the Companyduring the year ended 31 December 2007.

In addition, the Committee received advice from the director of global resources on all aspects of remuneration. The CEO attendedCommittee meetings to report on Executive Directors’ performance(other than his own).

During 2007, Committee meetings covered a number of areas including the following topics:

January ■ Establishment of 2007 annual bonus performance targets

March ■ Approval of 2006 performance bonus

■ Performance Share Plans and Share Options new awards

■ Performance Share Plans and Share Options – vesting of2004 awards

■ Review of selection process to review RemunerationCommittee advisers

■ Directors’ remuneration report

October ■ Review of Executive Director total compensation

■ Update on Executive Director pay trends in UK and US

■ Review of comparator groups to be used for remunerationbenchmarking

December ■ Executive Director annual salary review

■ Executive Director annual bonus structure

The principles of the remuneration policy for Executive DirectorsThe Committee has based its Executive Director remuneration policy on the following principles to ensure that it remains relevant to business needs:

CompetitiveTotal remuneration levels in comparison to our chosen comparatorgroup are reviewed on an annual basis in order to ensure they arecompetitive and thereby to ensure that International Power can retainand motivate top calibre executives.

In determining the salaries and benefits of the Executive Directors, the Committee has regard to the treatment of staff and management generally within the Group, to ensure that an appropriate balance is maintained.

Balanced and performance relatedThe remuneration of the Executive Directors incorporates both fixed and variable elements.

Fixed elements – including salary, pension and benefits – are provided as part of a competitive employment package.

Variable elements are based upon the achievement of specific and measurable shared and individual performance objectives over both the short- and long-term, that align the Executives’ rewards with the creation of value for shareholders.

Shareholder alignedRemuneration packages include significant opportunities to acquire, and obligations to retain, International Power shares, consistent with our strategy of building a strong share ownership culture.

The Committee intends to maintain these principles for 2008 in thatthe Committee believes they are delivering fair and proportionaterewards to the Executive Directors based on the Group’s performance,and it will continue to monitor and consider changes in light ofdeveloping market practice.

84 Directors’ Remuneration Report

Total remuneration summary for Executive Directors

Element Purpose Fixed/variable Criteria for award Performance conditions

Base salary To recognise skills, experience andresponsibility.

Fixed Increases to base salary areconsidered upon changes toresponsibilities and reflect inflationand market movements.

The Committee reserves the rightto award nil annual increases inlight of Group and personalperformance.

Pension and othercontractual benefits

Pension and other contractualbenefits (e.g. car allowance andhealthcare) are provided as part of a competitive overall package.

Fixed Pension and other contractualbenefits provision are reviewedperiodically in light of marketchanges.

Not applicable.

Annual bonus Annual bonus is provided toreward success against theGroup’s annual performancetargets.

Variable A mix of Group and regionalfinancial measures apply, alongwith personal objectivesappropriate to each Director.

Threshold, target and maximumlevels of performance exist forfinancial measures which includeour financial KPIs, EPS, free cashflow and PFO, and appropriatepersonal objectives are establishedfor each Director.

Performance Share Plan

Shares are awarded conditionallyon an annual basis and held intrust for three years to rewardGroup performance over thisperiod.

Variable The extent to which sharesawarded conditionally are releasedis dependent upon Groupperformance in respect ofabsolute EPS and relative TSRtargets (weighted on a 50:50basis).

In respect of EPS, vesting of 25%of this element is permitted if thethreshold EPS target is achieved,with full vesting if the EPS stretchtarget is achieved.

In respect of TSR, vesting of 25%of this element is permitted formedian TSR performance againstthe Company’s selectedComparator Group. Full vesting is permitted for upper quartileperformance.

Comparator groupUntil October 2007 our pay policy for the Executive Directors was to be competitive around the median of the FTSE 51-100 group of companies excluding Financial Services companies.

In October 2007, the Remuneration Committee reviewed the appropriateness of the peer group and decided that this should be changed to the FTSE 41-80 group of companies excluding Financial Services companies in order to reflect more accurately the Company’s increasing market capitalisation over recent years.

The components of remuneration packagesThe table below sets out the various components of the remunerationpackage for the Executive Directors, which reflect a mix of fixedelements and variable, performance-related elements relating tofinancial and personal targets over the short and medium-term.

The package comprises a market competitive base salary, performancerelated annual cash bonus, a long-term share-related incentive, pensionbenefits and other benefits including a healthcare programme and acompany car allowance.

Note:

Earnings per share and regional profit from operations both exclude exceptional items and specific IAS 39 mark to market movements.


THE RELATIONSHIP BETWEEN FIXED AND VARIABLE ELEMENTS

Minimum

Threshold

Target

Maximum

0% 50% 100% 150% 200% 250% 300% 350% 400%

Base salary Benefits Bonus PSP

The relationship between fixed and variable elementsThe following chart demonstrates the approximate value of both the fixedand variable elements of the overall package over a range of performanceoutcomes for a typical International Power Executive Director.

As can be seen in the diagram, Executive Director remuneration packagesare structured to provide significant rewards for superior performance.

Base salaryAt the time of the 2007 salary review the Committee determined that, unless there were changes of role, salary increases would be made on the basis of inflation and market movements. This approachwas followed in setting salaries for the Executive Directors from 1 January 2008, as set out below, where 2007 salaries are also shown for comparison.

Name Salary at Salary at 20081 January 2007 1 January 2008 Increase

Philip Cox £650,000 £700,000 7.7%Mark Williamson £382,000 £405,000 6.0%Tony Concannon £350,000 £370,000 5.7%Steve Riley £350,000 £370,000 5.7%Bruce Levy US$750,000 US$795,000 6.0%

Annual bonusInternational Power’s Executive Directors are eligible to participate in anannual performance bonus plan, which is awarded for the achievementof stretching individual and collective, financial and non-financial targetsover the financial year.

The maximum annual bonus opportunity for all Executive Directors was100% of base salary in 2007. The target level of payout for each of thefinancial measures was set at 67% of the maximum and this becamepayable upon achieving budgeted levels of performance. No bonus waspayable under any of the financial measures unless at least 90% of thebudgeted performance was achieved in 2007. Maximum awards undereach area became payable when year-end performance levels exceededbudget by at least 10%.

The table below sets out for each Executive Director the performancemeasures, which reflect the extent to which the RemunerationCommittee believes they are both relevant to the Executive Director’srole and open to influence by the individual. The Committee undertakesan annual review into whether the most appropriate measures are usedfor the Executive Directors’ bonus arrangements. Earnings per share,free cash flow and profit from operations are the KPIs used to monitorthe performance of the business on a daily basis. In addition, allExecutive Directors have a common personal, non-financial objectiverelating to health and safety.

Maximum 2007 and 2008 bonus achievable (% of salary)

Performance measures

Group Group Region Region Personal Totalearnings free cash profit free cash objectives

per share flow from flowExecutive Director operations

Philip Cox 60% 30% n/a n/a 10% 100%Mark Williamson 60% 30% n/a n/a 10% 100%Tony Concannon 30% 15% 30% 15% 10% 100%Steve Riley 30% 15% 30% 15% 10% 100%Bruce Levy 30% 15% 30% 15% 10% 100%

All awards under the bonus plan are non-pensionable.

The details of these payments are set out in the Directors’ aggregateremuneration table.


TOTAL SHAREHOLDER RETURN (TSR) 600 550 500 450 400 350 300 250 200 150

2003 2004 2005 2006 2007

100 50

International Power net total return index

Source: Datastream

FTSE 100 net total return index

The graph above shows the TSR performance of International Power’sshares relative to the FTSE 100 index between 2003 and 2007.

Share Plans for Executive Directors

Performance Share Plan

Eligibility for conditional awardsUnder the International Power 2002 Performance Share Plan Executive Directors are eligible annually for the following conditionalaward of shares:

■ the equivalent of 200% of base salary for the Chief Executive;

■ the equivalent of 150% of base salary for the other ExecutiveDirectors.

Performance conditionsAwards made conditionally under this Plan are held in trust and vestsubject to a performance assessment at the end of a three-yearperformance period against the targets put in place at thecommencement of each cycle.

Awards made conditionally between 2002 and 2005 inclusiveincorporated a performance condition that reflected growth in EPSbefore exceptional items and specific IAS 39 mark to marketmovements only.

For awards made from 2006, the performance conditions reflect bothan absolute target for growth in EPS before exceptional items andspecific IAS 39 mark to market movements and a relative totalshareholder return (TSR) performance measure. This ensures thatvesting is in alignment with a key underlying performance measure as presented in the Group’s financial statements, and the inclusion of a significant TSR element recognises shareholders’ wishes to include a relative, market-based measure when assessing performance.

For the conditional awards made in 2006 and 2007, 50% of the awardshave been subject to a TSR performance condition measured againstcompanies in the FTSE 51-100, whilst 50% of the award is subject tothe achievement of a specific EPS, before exceptional items and specificIAS 39 mark to market movements, growth target.

For the purposes of assessing performance, TSR and EPS measures aretreated separately, so that if one element of performance does notachieve the required level, the other element may still count towardsvesting provided that it has achieved the required level of performance.

Given that the principal performance measures for the Company’s shareplans are based on growth in EPS before exceptional items and specificIAS 39 mark to market movements and TSR, the Committee will alsotake into account, and adjust appropriately for, the enhancement effectsof any purchase and subsequent cancellation of shares, or placing ofshares into treasury, by the Company.

Before releasing any award in respect of the TSR element, theRemuneration Committee will also seek to satisfy itself that the Group’sTSR performance is a genuine reflection of the true underlyingperformance of the Group.

For 2008, the performance requirements in respect of the TSR elementremain as for 2006 and 2007, with the exception that the comparatorgroup now comprises FTSE 41-80 companies.

Benefits on vestingThe method of calculating an Executive Director’s entitlement to sharesupon vesting is as set out below:

■ In respect of the TSR element, 25% of the maximum vests formedian TSR performance and the maximum vests for upper quartileperformance.

■ In respect of the EPS element, 25% of the maximum vests forperformance at the threshold target established by the RemunerationCommittee and the maximum vests when the stretch target isachieved.

■ Straight line pro-rating will apply for performance between thethreshold and maximum data points for both the TSR and EPSgrowth elements.


Date of award Performance period Threshold performancecondition

Maximum performancecondition

Vesting rate

2 March 2004 1 January 2004 to 31 December 2006

30% of the award will vest ifEPS performance for the yearended 31 December 2006 isnot less than 8.2p.

100% of the award will vest ifEPS performance for the yearended 31 December 2006 isequal to or greater than 11.5p.

Vesting will be pro-rated forEPS performance betweenthese two points.

2006 EPS 22.4p: Performance condition exceeded. 100% of the award vested on 12 March 2007.


30% of the award will vest ifEPS performance for the yearended 31 December 2007 isnot less than 13.7p.

100% of the award will vest ifEPS performance for the yearended 31 December 2007 isequal to or greater than 15.0p.


2007 EPS 27.1p: Performance condition exceeded. 100% of the award vested on 11 March 2008.


12.5% of the award will vest ifEPS performance for the yearending 31 December 2008 isnot less than 21.0p.

50% of the award will vest ifEPS performance for the yearending 31 December 2008 isequal to or greater than 24.0p.


12.5% of the award will vest atthe median of FTSE 51-100companies’ TSR performancefor the three years ending 31 December 2008.

50% of the award will vest at the upper quartile of FTSE 51-100 companies’ TSRperformance for the three yearsending 31 December 2008.

Vesting will be pro-rated forTSR performance betweenthese two points.


12.5% of the award will vest ifEPS performance for the yearending 31 December 2009 isnot less than 27.0p.

50% of the award will vest ifEPS performance for the yearending 31 December 2009 isequal to or greater than 34.0p.


12.5% of the award will vest atthe median of FTSE 51-100companies’ TSR performancefor the three years ending 31 December 2009.

50% of the award will vest at the upper quartile of FTSE 51-100 companies’ TSRperformance for the three yearsending 31 December 2009.

Vesting will be pro-rated forTSR performance betweenthese two points.

Performance Share Plan awardsThe specific performance and vesting arrangements for all conditionalPerformance Share Plan awards made between 2004 and 2007 are setout in the following table.

Performance Share Plan vesting in 2008As a consequence of the result of the three-year performance periodfor the March 2005 conditional awards, the following shares under the2002 Performance Share Plan will be released to the ExecutiveDirectors on 11 March 2008:

Performance Shares

Philip Cox 292,887

Mark Williamson 172,942

Tony Concannon 158,995

Steve Riley 158,995

Bruce Levy 158,995


2008 conditional awardsAfter the release of its preliminary results, the Company will makePerformance Share Plan conditional awards to Philip Cox equivalent to200% of his base salary and to Mark Williamson, Tony Concannon,Steve Riley and Bruce Levy equivalent to 150% of their base salaries.

For the 2008 Performance Share Plan awards, covering the three-yearperformance period 2008-2010, the Remuneration Committee hasdetermined the following to comprise appropriate EPS performancetargets which have been set on a cumulative basis over three years:

■ The threshold EPS performance condition has been set at 87 pence,which represents a 3.4% compound annual growth on 2007 EPSperformance.

■ The maximum EPS performance condition has been set at 94 pence,which represents a 7.45% compound annual growth on 2007 EPSperformance.

Executive Share Option Plans

Eligibility for awardsInternational Power operates a range of Approved, Unapproved andGlobal Executive Share Option Plans for the benefit of seniormanagement and other employees. The Executive Directors have alsohistorically been entitled to grants under these Plans and one Directoralso holds options under another pre demerger National Power Plan.

With effect from 1 January 2006, the Executive Directors have nolonger been eligible to participate in new awards under any of theCompany’s Executive Share Option Schemes.

Performance conditionsIn accordance with the rules at the time, no performance conditions are attached to the National Power ‘Legacy’ Unapproved Options, which were granted to Tony Concannon prior to the demerger fromNational Power.

For all other awards made previously to the Executive Directors underthe Approved, Unapproved and Global Executive Share Option Plans,the performance conditions were based exclusively on EPS growth asthis reflected the underlying business performance of the Group, aspresented in the financial statements.

No retesting has been permitted in respect of any share option grant.

Given that the principal performance measures for the Company’s shareoption plans are based on growth in EPS, the Committee has alwaysresolved to take into account, and adjust appropriately for, theenhancement effects of any purchase and subsequent cancellation ofshares, or placing of shares into treasury, by the Company.

Benefits on exerciseThe method of calculating an Executive Director’s ability to exerciseOptions has been subject to the following conditions:

■ The exercise of 30% of each year’s grant is permitted where EPSperformance over the fixed three-year performance period is not lessthan the threshold target for EPS established by the RemunerationCommittee at the outset.

■ The exercise of 100% of each year’s grant is permitted where EPSperformance over the fixed three-year performance period is equalto or greater than the stretch target for EPS established by theRemuneration Committee at the outset.

■ Straight line pro-rating has applied to EPS performance between thethreshold and stretch data points.

The following table comprises a summary of the performance periodsand performance conditions relating to those Executive Share Optionsgrants made under International Power Executive Share Option Planswhich may still be exercised by one or more of the Executive Directors.

Date of award Performance period Threshold performancecondition

Maximum performancecondition

Vesting rate

3 October 2000 1 January 2001 to 31 December 2003

Fully exercisable if average annual growth in normalised earnings per International Power share for the financial reporting period ended on 31 December 2000 to the reporting period ended on 31 December 2003 is equal to or exceeds 7%.

Performance condition achieved.

24 May 2002 1 January 2002 to 31 December 2004

Fully exercisable if average annual EPS growth over the performance period is not less than RPI+4%.

Performance condition not achieved but options may still be exercised on grounds of ill healthretirement or redundancy only.


Fully exercisable if EPS for the 2006 financial year is not less than 8.7p.

2006 EPS 22.4p: Performance condition met. 100% of the award fully exercisable from 2 March 2007.


30% of the award will beexercisable if EPS performancefor the year ended 31 December 2007 is not less than 13.7p.

100% of the award will beexercisable if EPS performancefor the year ended 31 December 2007 is equal to or greater than 14.5p.


2007 EPS 27.1p: Performance condition met. 100% of the award fully exercisable from 11 March 2008.


Directors’ service contracts

Philip CoxPhilip Cox has a service contract subject to 12-months’ notice by theCompany. For termination other than for cause, he may receive apayment of 125% of annual basic salary (which includes the 12-months’notice) to take account of the value of contractual benefits. The dateupon which this contract was entered into was 25 February 2003.

Mark Williamson, Steve Riley and Tony ConcannonMark Williamson, Steve Riley and Tony Concannon have servicecontracts which are subject to 12-months’ notice by the Company. For termination other than for cause, these Executive Directors mayreceive a payment of 125% of annual basic salary (which includes the12-months’ notice), which will be paid on a monthly basis until theExecutive Director secures alternative employment, up to a maximum of 12 monthly payments. The date upon which these contracts wereentered into was 23 February 2004.

Bruce LevyBruce Levy has a US-appointment agreement which is subject to 12-months’ notice by the Company. For termination other than forcause, he may receive a payment of 125% of annual basic salary (whichincludes the 12-months’ notice), which will be paid in semi-monthlyinstalments, plus benefit continuation. If the Company elects to releaseBruce Levy from the restrictive covenants in his contract, he can berequired to account for any salary received to reduce the amount ofthese semi-monthly payments, to a maximum of 24 semi-monthlypayments. The date upon which his agreement was entered into was 21 December 2005.

Executive Director service contracts terminate automatically on the datethey reach normal retirement age which is 22 September 2011 forPhilip Cox, 16 December 2015 for Bruce Levy, 29 December 2017 forMark Williamson, 16 August 2021 for Steve Riley and 17 December2023 for Tony Concannon.

Executive Directors Date of commencement Notice period

Philip Cox 25 February 2003 12 months

Mark Williamson 23 February 2004 12 months

Tony Concannon 23 February 2004 12 months

Steve Riley 23 February 2004 12 months

Bruce Levy 21 December 2005 12 months

As a result of the 2007 stretch performance target applicable to thefinal grant of Executive Share Options made to the Executive Directorsin 2005 having been exceeded, the following Options becomeexercisable from 11 March 2008:

Executive Share Options

Philip Cox 292,887

Mark Williamson 172,942

Tony Concannon 158,995

Steve Riley 158,995

Bruce Levy 158,995

Pension benefitsThe pension arrangements for Philip Cox and Mark Williamson areprovided through the Senior Section of the International Power Groupof the Electricity Supply Pension Scheme, which is an Her Majesty’sRevenue and Customs (HMRC) registered scheme. The scheme providesfor: a normal retirement age of 60; an accrual rate that targets two-thirds of pensionable salary at normal retirement age; four times salarydeath-in-service benefits; a widow’s pension of two-thirds of Executive’spension; and Executive’s contribution of 6% of salary up to 15% of anearnings cap based on the limits previously imposed by HMRC.

The benefits provided through the scheme are also restricted by an earnings cap based on that previously imposed by HMRC. Tocompensate for this, the scheme benefits are supplemented by theCompany arranging additional life assurance cover and providing a non-pensionable cash allowance. The cash allowance is 33% of salary less anallowance for actual pension provision and the cost of the additional lifeassurance cover.

The pension arrangements for Tony Concannon and Steve Riley are alsoprovided through the Senior Section of the International Power Groupof the Electricity Supply Pension Scheme. As they are not restricted bythe HMRC earnings limit, the scheme provides for them: a normalretirement age of 60; an accrual rate that targets two-thirds ofpensionable salary at normal retirement age; four times salary death-in-service benefits; a widow’s pension of two-thirds of Executive’s pension;and Executive’s contribution of 6% of salary. The Company does notsupplement this arrangement.

The pension arrangements for Bruce Levy are provided through a 401kSavings Plan, a Retirement Plan and a Supplemental Retirement Plan,which are money-purchase schemes operated by International PowerAmerica, up to a cost to the Company of 33% of salary.

Further information on the Executive Directors’ pension benefits for2007 can be found within the audited section of this Report.


Non-Executive DirectorsThe Chairman of International Power plc, Sir Neville Simms, has a letter of appointment with a 12-month notice period. The letter of appointment was signed on 22 February 2000. The other Non-Executive Directors are appointed on a three-year fixed-term, annualfixed-fee basis. Their appointment is reviewed at the end of each three-year period and extended for a period of one to three years if both parties agree.

Sir Neville Simms’ contract will expire at the 2010 AGM, following his 65th birthday, or earlier, subject to the above notice period.

Non-Executive Directors Date contract commenced Contract expiry

Sir Neville Simms 22 February 2000 12 months’ notice

Tony Isaac 2 October 2000 AGM May 2009

Struan Robertson 27 September 2004 AGM May 2008

John Roberts 18 May 2006 18 May 2009

Alan Murray 1 July 2007 AGM May 2010

Non-Executive Directors’ feesThe annual fees for the Non-Executive Directors in 2007 are set outbelow:

Sir Neville Simms £250,000

Tony Isaac £60,000

Adri Baan £55,000

Struan Robertson £45,000

John Roberts £45,000

Alan Murray £45,000

The above fees for the Non-Executive Directors comprise a basic fee of£45,000, which covers Board membership duties (i.e. attendance atBoard meetings, general duties as Directors and their membership ofBoard committees) and where applicable a fee of £10,000 per annumfor chairing each of the Audit and Remuneration Committees and a feeof £5,000 per annum for acting as Senior Independent Director.

With effect from 1 January 2008, the Chairman’s fees were increasedfrom £250,000 to £285,000 per annum to reflect the growing size andcomplexity of the Group and in order to maintain competitiveness inlight of market trends. With effect from the same date, the basic fee forall other Non-Executive Directors was also increased by £5,000 to£50,000 and a £5,000 fee was introduced for Committee participation.The fees for chairing a committee and acting as Senior IndependentDirector remain unchanged. From 1 January 2008, a new Boardcommittee has been set up to cover health, safety and environmentalmatters, which also attracts a Chairmanship fee of £10,000.

Audited contentThe detail of the Directors’ remuneration, pensions and interests inshare options and long-term incentive plans as disclosed on pages 91 to 95 have been audited by the Company’s external auditor.


2007 Directors’ remuneration and interests

Directors’ aggregate remunerationThe table below shows the aggregate remuneration of the Directors of International Power plc for the year ended 31 December 2007.

Salary Fees Performance Payment in Other Aggregate Aggregaterelated bonus lieu of benefits remuneration remuneration

– cash pension year to year to31 December 31 December

2007 2006£ £ £ £ £ £ £

Sir Neville Simms – 250,000 – – – 250,000 250,000

Philip Cox 650,000 – 520,000 144,950 16,204 1,331,154 1,373,621

Mark Williamson 382,000 – 324,700 90,916 13,565 811,181 819,870

Tony Concannon 350,000 – 157,500 – 143,501 651,001 706,330

Steve Riley 350,000 – 297,500 – 49,350 696,850 734,008

Bruce Levy 374,551 – 243,458 123,602 28,111 769,722 1,129,268

Tony Isaac – 60,000 – – – 60,000 60,000

Adri Baan – 55,000 – – – 55,000 55,000

Struan Robertson – 45,000 – – – 45,000 45,000

John Roberts – 45,000 – – – 45,000 27,944

Alan Murray – 22,500 – – – 22,500 –

Total 2,106,551 477,500 1,543,158 359,468 250,731 4,737,408 5,201,041

Notes

1. For Philip Cox, the payment in lieu of pension detailed in the above table sets out the contributions made in respect of a pension cash allowance(£136,450) and the cost of providing supplementary life assurance above the notional pensions cap (£8,500). He also received a car allowanceand private medical insurance, which are included in ‘Other benefits’.

2. For Mark Williamson, the payment in lieu of pension detailed in the above table sets out the contributions made in respect of a pension cashallowance (£88,416) and the cost of providing supplementary life assurance above the notional pensions cap (£2,500). He also received a carallowance and private medical insurance, which are included in ‘Other benefits’.

3. The ‘Other benefits’ entry of £143,501 for Tony Concannon comprises elements delivered from the UK (£43,637) and in Australia (£38,228).From the UK, a car allowance, private medical insurance, relocation support (which is tapering off from a previous relocation) and certainelements of the expatriate package are provided. The balance of the expatriate package (rent, utility costs and children’s schooling fees) isprovided locally in Australia.

Also included within the ‘Other benefits’ disclosure for 2007 are taxes paid by the Company in the UK and Australia, net of hypothetical tax paid by Tony Concannon in 2007, under the Company’s expatriate policy. The net tax liability for 2007 has been estimated by the Company’staxation specialists to be £61,636. The disclosure for 2006, calculated on the same basis, has been re-stated by a negative adjustment of£51,530. The fluctuations over the past two years are explained by changes in Tony Concannon’s personal tax treatment, a change in hisresidency status mid-year and the general balancing mechanism which operates between estimated, accrued and actual taxes under theCompany’s expatriate taxation policy.

4. The ‘Other benefits’ entry for Steve Riley incorporates a company car allowance, private medical insurance, the payment of children’s schoolingfees and the value of relocation support.

5. Bruce Levy’s payment in lieu of pension figure comprises contributions to a 401k Savings Plan (US$12,115), a Retirement Plan (US$17,385) and a Supplemental Retirement Plan (US$218,000). He also received a car allowance (US$21,600), medical and dental insurance (US$6,458),disability and life insurance (US$3,231) and relocation support (US$25,000), the total of which is included under ‘Other benefits’. The valuesshown in the above table have been converted from US dollars to sterling using the average annual exchange rate of 2.002.

6. Tony Isaac received a basic fee of £45,000 plus an additional fee of £5,000 for his role as Senior Independent Director and £10,000 for his roleas Chairman of the Audit Committee.

7. Adri Baan received a basic fee plus an additional £10,000 for his role as Chairman of the Remuneration Committee.

8. Alan Murray was appointed on 1 July 2007, hence he received only half the basic fee of £45,000 during 2007.

9. Jack Taylor resigned as a Director on 17 May 2006 and hence has been excluded from the above table. His aggregate remuneration in 2006 was£22,500.


Directors’ pension benefits

Increase in accrued benefit Transfer value of accrued benefit

Accrued benefit Transfer valueAt 31 December including excluding At 31 December At 31 December Increase less of increase in

2007 inflation inflation 2007 2006 Directors’ accrued pensioncontributions excluding

inflation less Directors’

contributions£ £ £ £ £ £ £

Philip Cox 20,000 4,600 4,000 382,900 292,200 74,100 60,800

Mark Williamson 27,500 4,600 3,800 441,200 362,200 62,400 44,600

Steve Riley 119,300 13,800 10,000 1,768,300 1,551,200 194,400 125,200

Tony Concannon 111,800 12,900 9,200 1,489,200 1,307,900 158,600 100,500

■ The accrued benefit, as at 31 December 2007, is the pension entitlement which would be paid annually on retirement based on service to theend of 2007. In addition to the pension shown above, Mark Williamson has an entitlement to an accrued lump sum of £359, Steve Riley has anentitlement to an accrued lump sum of £197,199 and Tony Concannon has an entitlement to an accrued lump sum of £187,166, payable onretirement in each case. The normal retirement age is 60.

■ Dependants’ pensions on death are 58% of members’ pension in respect of service prior to 2 October 2000 and two-thirds of members’pension in respect of service thereafter. On death-in-service a lump sum of four times salary is payable. On death within the first five years of retirement, a lump sum is payable equal to the balance outstanding of the first five years’ pension payments.

■ Post-retirement increases are expected to be in line with inflation (guaranteed up to the level of 5% p.a. and discretionary above that level).

■ The transfer value has been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11.

■ Members of the pension scheme have the option to pay Additional Voluntary Contributions: neither the contributions, nor the resulting benefitsare included in the above table.

■ In addition to the above entitlements, cash allowances of £136,450 and £88,416 were paid to Philip Cox and Mark Williamson respectivelyduring 2007. These allowances are explained in the notes to the Directors’ aggregate remuneration table on page 91, alongside an explanationof the £123,602 in pension contributions payable in 2007 to three arrangements in respect of Bruce Levy.


Directors’ interests

The following information shows the interests of the Directors as at the end of the financial year in the Company’s Performance Share Plans,Executive Share Option Plans and the Sharesave Plan.

Long-term incentive plans

i) 2002 Performance Share PlanConditional rights awarded over International Power plc Ordinary Shares under the 2002 Performance Share Plan held by Directors at 1 January 2007 and 31 December 2007 (together with details of awards made and vested during the period) were as follows:

As at Awards Market value End of Awards Market value As at1 January made(1) as at date performance vested(2) on vesting 31 December

2007 of award period date 2007(pence) (pence)

Philip Cox 384,529 123.53 31 December 2006 (384,529) 372.75 –292,887 179.25 31 December 2007 292,887434,163 281.00 31 December 2008 434,163

334,835 388.25 31 December 2009 334,835

1,111,579 334,835 (384,529) 1,061,885

Mark Williamson 202,384 123.53 31 December 2006 (202,384) 372.75 –172,942 179.25 31 December 2007 172,942192,170 281.00 31 December 2008 192,170

147,385 388.25 31 December 2009 147,385

567,496 147,385 (202,384) 512,497

Tony Concannon 190,240 123.53 31 December 2006 (190,240) 372.75 –158,995 179.25 31 December 2007 158,995176,156 281.00 31 December 2008 176,156

135,222 388.25 31 December 2009 135,222

525,391 135,222 (190,240) 470,373

Bruce Levy 158,995 179.25 31 December 2007 158,995184,432 281.00 31 December 2008 184,432

149,918 388.25 31 December 2009 149,918

343,427 149,918 – 493,345

Steve Riley 190,240 123.53 31 December 2006 (190,240) 372.75 –158,995 179.25 31 December 2007 158,995176,156 281.00 31 December 2008 176,156

135,222 388.25 31 December 2009 135,222

525,391 135,222 (190,240) 470,373

(1)Awards made on 12 March 2007: The performance conditions that must be satisfied for the vesting of awards are provided earlier in theremuneration report on page 86.

(2)Awards vested on 14 March 2007: The aggregate of the theoretical gain made by Directors on the vesting of the Performance Share PlanAwards during the year was £3,605,957 (2006: £2,724,824). This is calculated by reference to the closing mid-market price of the shares on thedate of vesting, disregarding whether such shares were sold or retained and is stated before tax.


ii) Executive Share OptionsOptions over International Power plc Ordinary Shares granted under the National Power Legacy Executive Share Option Scheme, the International Power UK Approved and Unapproved Executive Share Option Plans and the Global Executive Share Option Plan held by Directors at 1 January 2007 and 31 December 2007 (together with details of options exercised during the period), were as follows:

As at Exercise Exercised Date of Market Exercise Exercise As at1 January price per during the exercise value on period from period to 31 December

2007 share year date of 2007(pence) exercise

(pence)

Philip Cox 17,191 174.50 24.05.2005 24.05.2012 17,191149,859 174.50 24.05.2005 24.05.2012 149,859384,529 123.53 (384,529) 14.03.2007 372.75 02.03.2007 02.03.2014 –292,887 179.25 11.03.2008 11.03.2015 292,887

844,466 (384,529) 459,937

Mark Williamson 5,403 277.55 02.10.2003 02.10.2010 5,40330,624 277.55 (30,624) 04.04.2007 417.00 02.10.2003 02.10.2010 –

7,168 209.22 22.03.2004 22.03.2011 7,16816,728 209.22 (16,728) 04.04.2007 417.00 22.03.2004 22.03.2011 –35,415 174.50 24.05.2005 24.05.2012 35,415

202,384 123.53 (202,384) 04.04.2007 417.00 02.03.2007 02.03.2014 –172,942 179.25 11.03.2008 11.03.2015 172,942

470,664 (249,736) 220,928

Tony Concannon 6,950 343.73 (6,950) 14.03.2007 372.75 02.12.2000 02.12.2007 –7,873 313.92 01.12.2001 01.12.2008 7,8733,377 277.55 02.10.2003 02.10.2010 3,377

19,139 277.55 02.10.2003 02.10.2010 19,1394,480 209.22 22.03.2004 22.03.2011 4,480

10,455 209.22 22.03.2004 22.03.2011 10,4556,447 174.50 24.05.2005 24.05.2012 6,447

17,835 174.50 24.05.2005 24.05.2012 17,835190,240 123.53 (190,240) 14.03.2007 372.75 02.03.2007 02.03.2014 –158,995 179.25 11.03.2008 11.03.2015 158,995

425,791 (197,190) 228,601

Bruce Levy 158,995 179.25 11.03.2008 11.03.2015 158,995

158,995 158,995

Steve Riley 12,001 343.73 (12,001) 14.03.2007 372.75 02.12.2000 02.12.2007 –13,904 313.92 (13,904) 14.03.2007 372.75 01.12.2001 01.12.2008 –31,608 174.50 24.05.2005 24.05.2012 31,608

190,240 123.53 (190,240) 14.03.2007 372.75 02.03.2007 02.03.2014 –158,995 179.25 11.03.2008 11.03.2015 158,995

406,748 (216,145) 190,603

Notes:

1. Options exercisable prior to October 2003 were granted under the National Power Legacy Executive Share Option Scheme (Tony Concannonand Steve Riley) to which no performance conditions applied.

2. Options exercisable from October 2003 were granted under the International Power Approved and Unapproved Executive Share Option Plans(Philip Cox, Mark Williamson, Tony Concannon and Steve Riley) and the Global Executive Share Option Plan (Bruce Levy).

3. Details of the performance conditions attaching to options capable of exercise from October 2003 are set out on page 88 of the Directors’remuneration report.

4. Options exercisable from October 2003, March 2004, March 2006, March 2007 and March 2008 achieved their performance criteria in full and are capable of exercise in total.

5. Options that became exercisable from May 2005 did not meet their performance criteria.

6. The aggregate of the theoretical gain made by Directors on the exercise of Executive Share Options during the year was £2,591,633 (2006: £2,154,335). This is calculated by reference to the difference between the mid-market closing price of an International Power Ordinary Share on the date of exercise and the exercise price of the options, disregarding whether such shares were sold or retained on exercise,and is stated before taxation.


iii) Sharesave OptionsOptions over International Power plc Ordinary Shares granted under the International Power Sharesave Plan and Global Sharesave Plan held byDirectors at 1 January 2007 and 31 December 2007 (together with details of options exercised during the period), were as follows:

As at Granted Exercised Market Option Exercise Exercise As at1 January value price period from period to 31 December

2007 (pence) (pence) 2007

Philip Cox(1) 20,499 (20,499) 464.75 80.12 24.12.2007 24.06.2008 –

2,467 389.00 01.01.2011 30.06.2011 2,467

Mark Williamson(1) 8,050 200.00 01.03.2011 31.08.2011 8,050

Tony Concannon(1) 8,050 200.00 01.03.2011 31.08.2011 8,050

Bruce Levy(2) 8,050 200.00 01.03.2011 31.08.2011 8,050

Steve Riley(1) 4,675 200.00 01.03.2009 31.08.2009 4,675

(1)Options held under the UK Approved Sharesave Scheme. Date of exercise by Philip Cox was 24 December 2007.

(2)Options held under the Global Sharesave Scheme.

Shares held in trustAs at 31 December 2007, a total of 253,990 Ordinary Shares of the Company were held in two separate Employee Share Ownership Trusts (31 December 2006: 1,241,452). Being potential beneficiaries of these shares, the Directors (together with all other employees of the Company andits subsidiaries) have an interest in these shares. During the year, 1,230,108 shares were acquired and placed into Trust by way of the exercise of theoutstanding balance of the share option granted to the Trustee in 2003. The option exercise price was 74.79 pence per share. The total cost of theacquisition was £919,998.

Directors’ beneficial interests as at 31 December 2007 (unaudited)The beneficial interest of the Directors in office at 31 December 2007 in the Ordinary Shares of the Company are shown in the table below:

At 31 December 2007 At 1 January 2007

Sir Neville Simms 178,220 178,220

Philip Cox 775,504 528,133

Mark Williamson 125,097 121,000

Tony Concannon 153,518 123,278

Bruce Levy 90,364 90,364

Steve Riley 189,902 112,226

Adri Baan 38,801 38,801

Tony Isaac 25,501 25,501

Alan Murray(1) – –

Struan Robertson 3,163 3,163

John Roberts 25,000 25,000

(1)Date of appointment as a Director 1 July 2007. Alan Murray purchased 10,000 Ordinary Shares of the Company on 12 March 2008.

No Director had, at any time during the financial year, any beneficial interest in the shares of any subsidiary undertaking.

The middle market quotation of an International Power plc Ordinary Share as at the close of business on 31 December 2007 was 453.50p (2006: 381.75p) and the daily quotations during the year ranged from 351.50p to 489.00p.

John RobertsChairman of the Remuneration Committee

On behalf of the Board of Directors of International Power plc

5 March 2008

Our core values96

OUR CORE VALUES

FINANCIAL DISCIPLINEINTEGRITY OF COMMUNICATIONRESPECT FOR THE INDIVIDUALSAFE BEHAVIOURTEAM FIRST CULTURE

FIRST is translated into practical guidance throughInternational Power’s business policies. These cover thecommunications, environment, health and safety, equalopportunities, procurement, ethical business practices,conduct in the community and charitable contributions. A Board-approved staff handbook, the International PowerCode of Business Conduct, which incorporates all relevantInternational Power policies (to guide the Company’s activitiesin all regions), has been distributed throughout the Group.

Financial disciplineOur aim of long-term financial success depends upon financial discipline.While as a growing Company we are entrepreneurial in our approachto investments, we are aware of our duty to protect and enhanceshareholder value.

Financial discipline means:

■ making realistic risk assessments to value potential investments;

■ not overpaying for assets we acquire or develop;

■ ensuring that risk can be managed and properly priced;

■ cutting out extravagance and waste in business-related expenditures,including administrative and overhead costs.

Integrity of communicationInternational Power is managed on the basis of honesty, integrity,openness and fairness in business dealings, both internally and externally.Good business decisions are based on full and good quality informationpresented clearly and concisely, in time, and with neither a positive nornegative bias. This applies equally to information flowing to and frommanagement. We seek to build sustainable business relationships basedon honest communication.

We will ensure that any corporate reports and any other externalcommunications are complete, understandable and truthful and reflectthe proper operations of the business. At the same time, we will respectour confidentiality obligations.

Respect for the individualInternational Power is staffed at all levels by highly skilled professionals witha range of expertise. Mutual respect is a key priority, demonstrated by:

■ respecting the opinions of colleagues;

■ zero tolerance for physical or verbal abuse;

■ hiring new professionals with not only the right competences, butalso the proper attitude and work ethic to integrate withinInternational Power;

■ applying equal opportunities to all, regardless of nationality, gender,ethnicity or religion;

■ operating our business to the highest professional standards withzero tolerance for any person who compromises these standards.

While we do not guarantee lifetime employment, we do believe everyInternational Power professional should have ample opportunity to usehis or her existing skills and develop new ones to the full. Ifcircumstances change, International Power and the individual will worktogether to find a mutually acceptable solution.

Safe behaviourIt is relatively easy to introduce corporate policies and procedures whichdemand compliance, but in essence all unsafe acts or omissions can beavoided if the right attitude and a safe behaviour is automatically appliedto everything we do.

This safe behaviour will deliver our goal of zero accidents and zeroincidents whilst at work and can equally apply when not at work. Wetherefore need to understand the right things to do and make sure thatthey are performed properly, with no short-cuts or excuses – in short,to behave safely all day, every day.

Team first cultureOur business has evolved from a technology-driven industry into one in which technical skill, project development expertise, construction andprocurement know-how, trading capability, financial, IT, legal, humanresources, communications, accounting and tax acumen all play asubstantial part. Such a complex business depends upon teamwork, with each employee bringing his or her individual skills and expertise to the fore.

Teamwork requires complete sharing of necessary information, inclusionrather than exclusion and a ‘lend a hand’ philosophy at all levels of theorganisation. Meeting our customers’ needs calls for us to be customer-focused and responsive. We want our customers to know our team andrespect its capabilities and performance.


IntroductionThe Directors submit their report and the InternationalPower plc Group and parent company audited financial statements for the year ended 31 December 2007. Theprincipal activity of International Power plc (the Company) is to act as the holding company for a group of companiesand a number of associated companies and joint ventures(the Group). The principal activities of the Group are thegeneration and sale of electricity, and closely relatedactivities such as district heating and desalination.

Business reviewThe Company is required to present a fair review of the business andthe Group during the year ended 31 December 2007 and of theposition of the Group at the end of the financial year and a descriptionof the principal risks and uncertainties facing the Group (known as a ‘Business Review’). The information that fulfils the requirements of the Business Review can be found in the following sections of the Annual Report:

■ Business and financial review: pages 8 to 60;

■ Current Directors’ biographical details and Directors who servedthrough the year: pages 62 and 63;

■ Corporate governance: pages 67 to 71;

■ Employees: pages 80 to 82;

■ Directors’ remuneration: pages 83 to 95

which are incorporated in this review by reference.

DividendFollowing the payment of the 2007 interim dividend of 2.77p perOrdinary Share, paid on 30 October 2007, the Directors propose to pay a final dividend of 7.39p per Ordinary Share in respect of the yearended 31 December 2007, making a total dividend for 2007 of 10.16p (2006: 7.9p).

Charitable and political donationsThe Group does not make political donations. Details of charitabledonations are set out in the Corporate responsibility section on pages 77 and 78.

Research and developmentPure research is not a core element of the business of the Company.For the period under review, the Company did not undertake anyexpenditure on research and development. The Company will look to take advantage of technical advances as they arise and will continueto seek to develop power stations in the regions in which the Groupoperates making effective use of current and new technology as andwhen available.

Share capitalThe Company’s share capital consists of Ordinary Shares of 50p eachwhich rank pari passu with each other in respect of all rights, includingdividend, voting and return of capital. The Company has an unclassifiedshare of £1.00 and 21 deferred shares of one pence each, which carryno rights.

During the period 1 January 2007 to 31 December 2007 the Companydid not purchase any of its Ordinary Shares.

Resolutions will be proposed at the 2008 AGM to renew for a furtheryear the Directors’ general authority to allot shares; to renew for a yearthe partial disapplication of shareholders’ statutory pre-emption rightsover Ordinary Shares; and to renew the authority to purchase aproportion of the Company’s shares.

An explanation of these and other resolutions being proposed at the2008 AGM will be provided in the Notice of AGM, which will be sent to shareholders during April 2008.

Shares held in trustAs at 31 December 2007 253,990 Ordinary Shares of the Companywere held in trust for the benefit of employees of the Company and its subsidiaries. These shares had a nominal value of £126,995 and amarket value of £1,151,845. The employee share plan for which theseshares may be utilised is the 2002 Performance Share Plan.

Employee share schemesNo employee share schemes have any rights regarding control of theCompany.

Substantial shareholdingsAs at the date of this report, the Company is aware of interests in 3%or more of the issued share capital of the Company on behalf of theorganisations as shown in the table below.Substantial shareholdings Number of shares

AXA S.A. 172,827,826 11.49%

Invesco Perpetual 95,854,537 6.38%

Legal and General Group plc 60,765,891 4.04%

Standard Life 58,397,077 3.88%

Fidelity Management & Research Co. 55,475,789 3.69%

Going concernThe Directors are satisfied that the Company and the Group haveadequate resources to continue to operate for the foreseeable future.Accordingly, the Directors continue to adopt the ‘going concern’ basisfor the preparation of the financial statements.

DIRECTORS’ REPORT

Directors’ report98

Disclosure of information to the auditorThe Directors who held office at the date of approval of this Directors’Report confirm that, so far as they are each aware, there is no relevantaudit information of which the Company’s auditor is unaware; and eachDirector has taken all the steps that he ought to have taken as aDirector to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of this information.

AuditorA resolution to re-appoint KPMG Audit Plc as auditor of the Companyand to authorise the Directors to agree the auditor’s remuneration willbe proposed at the forthcoming AGM.

Amendments to the Company’s Articles of AssociationAny amendment to the Company’s Articles of Association requires aspecial resolution (75% majority) to be passed at a duly held meeting of the shareholders.

Appointment and replacement of DirectorsThe Board has the power to appoint and replace any Director. AnyDirector appointed by the Board has to offer him/her self for re-electionat the Company’s next AGM. The Company’s shareholders may byordinary resolution (simple majority) appoint or remove any person asDirector. All Directors offer themselves for re-election every three years.There is no agreement in place between the Company and any of theDirectors providing for compensation for loss of office or employmentthat occurs because of a takeover bid.

Restrictions and transfers of securitiesThere are no restrictions on the transfer of securities in the Company or on voting rights except in the circumstances set out in the Articles of Association of the Company (for example, failure to disclose interestin shares and non-payment of calls).

Significant agreementsThere are no significant agreements to which the Company is a partywhich take effect, alter or terminate upon a change of control.

Prompt payment policyThe Company aims to observe the highest standard of business practiceas both a buyer and seller of products and services. The Company’saverage number of days outstanding in respect of trade creditors at 31 December 2007 was 33 days.

By order of the Board

Stephen RamsayCompany Secretary5 March 2008


STATEMENT OF DIRECTORS’ RESPONSIBILITIESin respect of the Annual Report and the financial statements

The Directors are responsible for preparing the Annual Report and the Group and parent company financial statements, in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice).

The Group financial statements are required by law and IFRSs as adopted by the EU to present fairly the financial position and performance of the Group. The Companies Act 1985 provides, in relation to such financial statements, that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation.

The parent company financial statements are required by law to give a true and fair view of the state of affairs of the parent company.

In preparing each of the Group and parent company financial statements, the Directors are required to:

■ select suitable accounting policies and then apply them consistently;

■ make judgements and estimates that are reasonable and prudent;

■ for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU;

■ for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosedand explained in the parent company financial statements; and

■ prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the parent companyand enable them to ensure that its financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonablyopen to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Directors’ report, Directors’ remuneration report and corporate governancestatement that comply with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UKgoverning the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Consolidated financial statements for the year ended 31 December 2007100

INDEPENDENT AUDITOR’S REPORTto the members of International Power plc

We have audited the Group and parent company financial statements (the ‘financial statements’) of International Power plc for the year ended 31 December 2007which comprise the consolidated income statement, the consolidated and Company balance sheets, the consolidated statement of changes in equity, the consolidatedcash flow statement and the related notes to the consolidated and Company financial statements. These financial statements have been prepared under the accountingpolicies set out therein. We have also audited the information in the Directors’ remuneration report that is described as having been audited.

This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertakenso that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullestextent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work,for this report, or for the opinions we have formed.

Respective responsibilities of Directors and auditors The Directors’ responsibilities for preparing the Annual Report and the consolidated financial statements in accordance with applicable law and International FinancialReporting Standards (IFRSs) as adopted by the EU, and for preparing the parent company financial statements and the Directors’ remuneration report in accordancewith applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) are set out in the statement of Directors’ responsibilities on page 99.

Our responsibility is to audit the financial statements and the part of the Directors’ remuneration report to be audited in accordance with relevant legal and regulatoryrequirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors’remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We also report to you whether, in our opinion, the information given in the Directors’ report is consistent with the financial statements.The information given in the Directors’ report includes that specific information that is cross-referred in the Business Review section of the Directors’ report.

In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is not disclosed.

We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the 2006 Combined Code specified for ourreview by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internalcontrol cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.

We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implicationsfor our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to anyother information.

Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includesexamination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ remuneration report to be audited. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficientevidence to give reasonable assurance that the financial statements and the part of the Directors’ remuneration report to be audited are free from materialmisstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of informationin the financial statements and the part of the Directors’ remuneration report to be audited.

Opinion In our opinion:

■ the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the Group’s affairs as at 31 December 2007and of its profit for the year then ended;

■ the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation;

■ the parent company financial statements give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state of the parentcompany’s affairs as at 31 December 2007;

■ the parent company financial statements and the part of the Directors’ remuneration report to be audited have been properly prepared in accordance with theCompanies Act 1985; and

■ the information given in the Directors’ report is consistent with the financial statements.

KPMG Audit PlcChartered accountants 8 Salisbury SquareRegistered auditor London 5 March 2008 EC4Y 8BB


CONSOLIDATED INCOME STATEMENTfor the year ended 31 December 2007


Results Exceptional Results for Results Exceptional Results forexcluding items and the year excluding items and the year

exceptional specific exceptional specific items and IAS 39 items and IAS 39

specific IAS 39 mark to specific IAS 39 mark tomark to market mark to marketmarket movements(i) market movements(i)

movements(i) movements(i)

Note £m £m £m £m £m £m

2 Revenue: Group and share of joint ventures and associates 3,872 (387) 3,485 3,645 138 3,783

15 Less: share of joint ventures’ revenue (340) – (340) (373) (6) (379)

15 Less: share of associates’ revenue (820) – (820) (820) – (820)

2 Group revenue 2,712 (387) 2,325 2,452 132 2,584

Cost of sales (1,927) (2) (1,929) (1,807) (32) (1,839)

Gross profit 785 (389) 396 645 100 745

3 Other operating income 96 – 96 83 19 102

3 Other operating expenses (163) (9) (172) (163) – (163)

2/15 Share of results of joint ventures and associates 186 12 198 208 6 214

Profit from operations 904 (386) 518 773 125 898

8 Disposal of interests in businesses – 289 289 – – –

4 Finance income 77 – 77 53 – 53

5 Finance expenses (385) (16) (401) (301) (26) (327)

Net finance costs (308) (16) (324) (248) (26) (274)

Profit before tax 596 (113) 483 525 99 624

9 Tax expense (113) 159 46 (122) (25) (147)

3 Profit for the year 483 46 529 403 74 477

Attributable to:

Minority interests 77 (51) 26 71 (4) 67

Equity holders of the parent 406 97 503 332 78 410

11 Earnings per share:

Basic 27.1p 33.6p 22.4p 27.6p

Diluted 25.7p 31.8p 21.3p 26.2p

All results are from continuing operations.

(i) The Group separately presents certain items as exceptional. These are items which, in the judgement of the Directors, need to be disclosed separately by virtue of their size or incidence in order for the reader to obtain a proper understanding of the financial information. In addition, in order to assist the reader to understand the underlying business performance, the Group separately discloses within the income statement specific IAS 39 mark to market movements (refer to notes 1 and 8).


CONSOLIDATED BALANCE SHEETat 31 December 2007


Note £m £m

Non-current assets

12 Goodwill 733 226

13 Other intangible assets 168 199

14 Property, plant and equipment 5,721 4,435

15 Investments in joint ventures and associates 1,279 1,264

16 Other investments 13 26

17 Finance lease receivables 1,252 1,045

18 Other long-term receivables 91 94

19 Deferred tax assets 142 93

22 Derivative financial assets 45 38

Total non-current assets 9,444 7,420

Current assets

20 Inventories 158 141

21 Trade and other receivables 726 402

17 Finance lease receivables 41 33

22 Derivative financial assets 223 243

Assets held for trading – 42

23 Cash and cash equivalents 1,161 980

2,309 1,841

24 Non-current assets classified as held for sale – 128

Total current assets 2,309 1,969

Total assets 11,753 9,389

Current liabilities

25 Loans and bonds 539 241

22 Derivative financial liabilities 508 204

27 Trade and other payables 709 529

Current tax liabilities 203 142

28 Provisions 83 58

Total current liabilities 2,042 1,174

Non-current liabilities

25 Loans and bonds 5,284 4,356

22 Derivative financial liabilities 326 226

Other payables 30 40

7 Retirement benefit obligations 22 25

28 Provisions 91 126

19 Deferred tax liabilities 951 702

Total non-current liabilities 6,704 5,475

Total liabilities 8,746 6,649


Equity

30 Share capital 751 746

30 Share premium account 411 402

30 Capital redemption reserve 145 145

30 Capital and revaluation reserves 413 422

30 Hedging and translation reserves (49) (72)

30 Retained earnings 1,173 819

Total equity attributable to equity holders of the parent 2,844 2,462

Minority interests 163 278

Total equity 3,007 2,740

The financial statements were approved by the Board of Directors and authorised for issue on 5 March 2008 and signed on its behalf by

Philip Cox Mark Williamson

Chief Executive Officer Chief Financial Officer


CONSOLIDATED STATEMENT OF CHANGES IN EQUITYfor the year ended 31 December 2007

Share Share Capital Capital Revaluation Hedging Translation Retained Attributable Minority Totalcapital premium redemption reserve reserve reserve reserve earnings to equity interests

account reserve holders ofthe parent

£m £m £m £m £m £m £m £m £m £m £m

Net loss on cash flow hedges – – – – – (111) – – (111) (11) (122)

Revaluation deficit on step acquisition – – – – (12) – – – (12) – (12)

Exchange differences recognised on net investment hedges – – – – – – (15) – (15) (2) (17)

Exchange differences arising on translation of foreign operations – – – – (1) (3) 132 – 128 9 137

Tax on items taken directly to equity – – – – 4 24 (4) – 24 (1) 23

Net (loss)/income recognised directly in equity – – – – (9) (90) 113 – 14 (5) 9

Profit for the year – – – – – – – 503 503 26 529

Total recognised income and expense for the year – – – – (9) (90) 113 503 517 21 538

Issue of shares 5 9 – – – – – – 14 – 14

Minority interests inacquisitions and disposals – – – – – – – – – (101) (101)

Distributions – – – – – – – (160) (160) (35) (195)

Other movements – – – – – – – 11 11 – 11

Total movements during the year 5 9 – – (9) (90) 113 354 382 (115) 267

At 1 January 2007 746 402 145 422 – 6 (78) 819 2,462 278 2,740

At 31 December 2007 751 411 145 422 (9) (84) 35 1,173 2,844 163 3,007

Share Share Capital Capital Revaluation Hedging Translation Retained Attributable Minority Totalcapital premium redemption reserve reserve reserve reserve earnings to equity interests

account reserve holders ofthe parent

£m £m £m £m £m £m £m £m £m £m £m

Net gain on cash flow hedges – – – – – 167 – – 167 6 173

Exchange differences recognised on net investment hedges – – – – – – 4 – 4 1 5

Exchange differences arising on translation of foreign operations – – – – – 4 (131) – (127) (15) (142)

Tax on items taken directly to equity – – – – – (47) – – (47) (9) (56)

Net income/(loss) recognised directly in equity – – – – – 124 (127) – (3) (17) (20)

Profit for the year – – – – – – – 410 410 67 477

Total recognised income and expense for the year – – – – – 124 (127) 410 407 50 457

Issue of shares 9 8 – – – – – – 17 – 17

Minority interests inacquisitions and disposals – – – – – – – – – (1) (1)

Distributions – – – – – – – (67) (67) (54) (121)

Other movements – – – – – – – 13 13 – 13

Total movements during the year 9 8 – – – 124 (127) 356 370 (5) 365

At 1 January 2006 737 394 145 422 – (118) 49 463 2,092 283 2,375

At 31 December 2006 746 402 145 422 – 6 (78) 819 2,462 278 2,740


CONSOLIDATED CASH FLOW STATEMENTfor the year ended 31 December 2007


2007 2006Note £m £m

Cash flows from operating activitiesProfit for the year 529 477Adjustments for:

9 Tax expense (46) 1474/5 Net finance costs 324 27415 Share of profit of joint ventures and associates (198) (214)13/14 Depreciation of property, plant and equipment and amortisation of intangible assets 320 2733 (Profit)/loss on sale of property, plant and equipment (2) 58 Exceptional gains and losses before tax (233) (55)8 Specific IAS 39 mark to market movements 342 (64)

Other non-cash movements (5) (42)Decrease in provisions (38) (9)Decrease in finance lease receivables 35 14Proceeds from sale of property, plant and equipment 7 –

Other cash movements 9 (7)Dividends received from joint ventures and associates 145 113Purchase of property, plant and equipment – maintenance (71) (128)Net purchase of intangible assets (48) –Operating cash flows before movements in working capital 1,070 784Increase in inventories (2) (18)(Increase)/decrease in trade and other receivables (88) 22Increase/(decrease) in trade and other payables 42 (28)Decrease in assets held for trading 44 9Cash generated from operations 1,066 769Taxes paid (101) (57)Interest paid (374) (293)Interest received 62 37Free cash flow 653 456Cash flows relating to exceptional items:

Receipt from TXU administrators – exceptional – 14Receipt of compensation for breach of contract – exceptional – 5

Net cash inflow from operating activities 653 475

Cash flows from investing activitiesPurchase of property, plant and equipment – growth (160) (142)Government grants received 1 –

31 Acquisitions (net of cash acquired), and increase in stake, of subsidiaries (778) (650)31 Acquisitions of joint ventures, associates and investments (13) (64)

Investments in (net of returns from) joint ventures, associates and investments (1) 24Proceeds from partial disposal of UK subsidiaries 168 –Proceeds from disposal of investments 250 1Net cash outflow from investing activities (533) (831)

Cash flows from financing activities10 Dividends paid (160) (67)

Proceeds from share issue 13 15Proceeds from new loans and bonds 616 1,340Repayment of loans and bonds (423) (495)Funding from minority interests 63 7Funding repaid to minority interests (29) (4)Distributions paid to minority interests (35) (54)Net cash inflow from financing activities 45 742

Net increase in cash and cash equivalents 165 386Cash and cash equivalents at beginning of the year 980 620Effect of foreign exchange rate changes thereon 16 (26)

23 Cash and cash equivalents at end of the year 1,161 980


NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS for the year ended 31 December 2007

1 Accounting policies

a) General informationInternational Power plc (the Company) is a public limited company incorporatedand domiciled in the United Kingdom. The address of its registered office isdisclosed on the last page of this Annual Report. The consolidated financialstatements of the Company for the year ended 31 December 2007 comprisethe Company and its subsidiaries (together referred to as the Group) and theGroup’s interest in joint ventures and associates. The parent company financialstatements present information about the Company as a separate entity and notabout its Group. The principal activities of the Group are described in note 2.

b) Statement of complianceEuropean Union (EU) law (IAS Regulation EC 1606/2002) requires that theconsolidated financial statements, for the year ended 31 December 2007, beprepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU (Adopted IFRSs). These Group financial statements havebeen prepared and approved by the Directors in accordance with Adopted IFRSs.

The Company has elected to prepare its parent company financial statements in accordance with UK GAAP. The parent company financial statements arepresented on pages 165 to 174.

c) Adoption of new and revised StandardsThe following standards, amendments and interpretations to existing standards,issued by the International Accounting Standards Board and the InternationalFinancial Reporting Interpretations Committee, are applicable to the Group forthe first time in the current year and have been adopted by the Group with noimpact on the Group’s accounting policies or on its results or net assets includedwithin these consolidated financial statements:

■ IFRS 7 (Financial Instruments: Disclosures), effective for annual accountingperiods beginning on or after 1 January 2007, and a complementaryamendment to IAS 1 (Presentation of Financial Statements – CapitalDisclosures). IFRS 7 supersedes IAS 30 (Disclosures in the Financial Statementsof Banks and Similar Financial Institutions) and the disclosure requirements ofIAS 32 (Financial Instruments: Disclosure and Presentation). The application of IFRS 7 and the amendment to IAS 1 have not affected the results or netassets of the Group as they only require additional disclosures relating to theGroup’s use of financial instruments and the exposures to the risks they create,and the management of capital;

■ IFRIC 7 (Applying the Restatement Approach under IAS 29 FinancialReporting in Hyperinflationary Economies);

■ IFRIC 8 (Scope of IFRS 2);

■ IFRIC 9 (Reassessment of Embedded Derivatives);

■ IFRIC 10 (Interim Financial Reporting and Impairment).

The Group has applied the following EU adopted interpretation in advance of itseffective date.

■ IFRIC 11 (IFRS 2 – Group and Treasury Share Transactions) is applicable to theGroup for years commencing on or after 1 January 2008. It provides guidanceon the application of IFRS 2 (Share-based Payment) to transactions which aresettled by the purchase of own shares and transactions in which employees of asubsidiary receive rights to shares of a parent company. The application of thisinterpretation had no impact on the Group’s results or net assets.

The following Adopted IFRS was available for early application but has not beenapplied by the Group in these financial statements:

■ IFRS 8 (Operating Segments) is applicable for years commencing on or after 1 January 2009. The new standard replaces IAS 14 (Segment Reporting) andrequires an entity to report segment information on the same basis as thatreported to management for decision making purposes. The application of IFRS 8 in 2007 would not have affected the results or net assets as the standardis concerned only with disclosure. The adoption of this standard is not expectedto have a significant impact on the Group’s disclosures as management identifyand measure the results of reportable operating segments on a regional basis as set out in these consolidated financial statements;

The following standards and interpretations have been issued by the IASB andIFRIC, but have not been adopted by the European Commission (and publishedin the EU Official Journal) for their application to become mandatory:

■ IAS 23 (Borrowing Costs – Revised), effective for annual accounting periodsbeginning on or after 1 January 2009. The revised standard requires thecapitalisation of borrowing costs, to the extent they are directly attributable to the acquisition, production or construction of a qualifying asset as part ofthe cost of that asset. Previously there was an option to expense all borrowingcosts as incurred. Because the Group always capitalises borrowing costsincurred on qualifying assets, the revisions to IAS 23 have no impact on eitherthe Group’s accounting policies or its results or net assets;

■ IAS 1 (Presentation of Financial Statements – Revised), effective for accountingperiods beginning on or after 1 January 2009. The revised standard aims toenhance the usefulness of information presented in the financial statementsincluding the introduction of a new statement of comprehensive income thatcombines all items of income and expense recognised in profit or losstogether with ‘other comprehensive income’. The application of the revisedstandard will not affect the results or net assets of the Group as it is onlyconcerned with presentation and disclosures;

■ IFRS 3 (Business Combinations – Revised), complementary amendments to IAS 27 (Consolidated and Separate Financial Statements – Revised), andconsequential amendments to IAS 28 (Investments in Associates) and IAS 31(Interests in Joint Ventures), effective for business combinations in annualaccounting periods of the Group beginning on or after 1 January 2010. The revised standard will make many changes to how future businesscombinations will be accounted for, including accounting for acquisition costs,contingent consideration, step acquisitions, partial disposals of an investment in a subsidiary and partial disposals of associates and joint ventures. As therevised standard is to be applied prospectively it is not possible to quantify itslikely impact;

■ IFRIC 12 (Service Concession Arrangements) is effective for annual accountingperiods beginning on or after 1 January 2008. This interpretation sets outgeneral principles on recognising and measuring the obligations and relatedrights in service concession arrangements. As the Group’s long-term powerpurchase agreements which are affected by the adoption of IFRIC 12 arealready determined to be or to contain finance leases, and the considerationreceivable by the operator in each case gives rise to financial assets, the impactof adopting IFRIC 12 is not expected to have a material impact on the Group;

■ IFRIC 13 (Customer Loyalty Programmes) is applicable to the Group for theyears commencing on or after 1 January 2009. It addresses the accounting ofan entity that grants loyalty award credits to its customers as part of a salestransaction. The adoption of this interpretation is not expected to have anysignificant impact on the Group’s results because it does not have anycustomer loyalty programmes;

■ IFRIC 14 (IAS 19 – The Limit on a Defined Benefit Asset, Minimum FundingRequirements and their Interaction) is effective for annual accounting periodsbeginning on or after 1 January 2008. It addresses when refunds orreductions in future contributions to defined benefit pension schemes can be regarded as a defined benefit asset, particularly when a minimum fundingrequirement exists. Based on actuarial advice, management does not currentlyexpect adoption of this interpretation to a have a significant impact on theGroup’s results.


1 Accounting policies continued

d) Basis of preparationThese consolidated financial statements have been prepared using the historicalcost convention, modified for certain items carried at fair value, as stated in theseaccounting policies.

In order to allow a better understanding of the financial information presented,and specifically the Group’s underlying business performance, the Group presentsits income statement in three columns such that it identifies (i) results excludingexceptional items and specific IAS 39 mark to market movements, (ii) the effectof exceptional items and specific IAS 39 mark to market movements and (iii) results for the year. For the purposes of clarity, in the explanation of the basis of preparation applied in these consolidated financial statements, wedescribe these columns as the ‘left hand column’, the ‘middle column’ and the ‘right hand column’ respectively.

Those items that the Group separately present as exceptional are items which, in the judgement of the Directors, need to be disclosed separately by virtue oftheir size or incidence in order to obtain a proper understanding of the financialinformation. The Group discloses exceptional items in the middle column.

The Group enters into derivative contracts to economically hedge certain of itsphysical and financial exposures. In relation to commodities trading, the Groupconsiders economic hedges to be those which are asset backed, i.e. where theGroup is either forward selling electricity from its own generation capacity orforward buying fuel for its own generation capacity. In respect of interest rateswaps and other treasury related derivatives the Group considers economichedges to be those which hedge existing assets, liabilities and firm commitments.

Some of these economic hedges achieve own use treatment under IAS 39 andare accounted for on an accruals basis. Some are accounted for as cash flowhedges under IAS 39 with fair value gains and losses recorded in the hedgingreserve. Where derivative contracts do not achieve the own use treatment andthe Group could not, or has not sought to, apply cash flow hedge accounting,IAS 39 requires the derivative contract to be measured at fair value (marked to market) with fair value gains and losses recognised in the income statement.The Group separately presents these mark to market movements on economichedges, in the middle column, to assist the reader’s understanding of underlyingbusiness performance and to provide a more meaningful presentation.

For economic hedges, where fair value gains and losses are recorded in theincome statement, in the period in which the economically hedged transactionsettles, the settlement amount of the derivative, being the cumulative fair valuegains and losses recognised in the current and prior periods, is presented in the left hand column so that the transaction is measured at its contracted price (i.e. the spot price less the fair value gain or loss on the derivative contractat that date).

As the cumulative mark to market movements have already been recognised in the middle column in the current and prior periods, an equal but oppositeamount is presented in the middle column so that cumulatively the amountrecognised in the middle column in respect of such economic hedges is zero.

By presenting fair value gains and losses in this manner, the left hand column isnot affected by mark to market movements and therefore reflects the underlyingbusiness performance at contracted prices.

The amortisation of derivatives, which are acquired with a fair value other thanzero, is always recorded in the left hand column. This is achieved by presenting an equal but opposite amount in the middle column, such that specific IAS 39mark to market movements presented in the middle column are shown net ofthe amortisation during the period.

Ineffectiveness in qualifying cash flow hedges under IAS 39 can arise frombusiness combinations, where the fair value of the derivatives at acquisition is not equal to zero, or as a result of the difference between the contractual profileof the economic hedge and the profile of transactions defined as the hedgeditem. IAS 39 requires ineffectiveness in qualifying cash flow hedges to berecorded in the income statement, and therefore the Group records thisineffectiveness in the middle column when it relates to an economic hedge.

Mark to market movements of the fair value of embedded derivatives inconvertible bonds, which relate to conversion features where the functional

currency of the issuer and other factors preclude the conversion feature beingtreated as equity in the consolidated financial statements, are treated as specificIAS 39 mark to market movements and as such are presented in the middlecolumn. The Directors consider the fair value gains and losses of theseembedded derivatives should be appropriately disclosed within specific IAS 39mark to market movements, in the middle column, so as to separately identify anon-cash movement which, if the conversion option is exercised, will ultimatelybe extinguished by the issue of equity.

Mark to market movements relating to proprietary trading activities, therevaluation of assets held for trading and amortisation of derivatives which are acquired with a fair value other than zero comprise part of the Group’sunderlying business performance and are appropriately, in the judgement of the Directors, included within the left hand column.

The right hand column presents the results for the year, showing all gains and losses recorded in the consolidated income statement.

To the extent that exceptional items are separately identified in the incomestatement, they are also separately identified in the cash flow statement underthe respective heading to which they relate.

The fair values of certain assets and liabilities acquired as part of the Levanto windfarm portfolio in November 2006 have been revised following the completion ofan independent third party valuation exercise during 2007 (refer to note 31). Inaccordance with IFRS 3 (Business Combinations) the 2006 balance sheet hasbeen re-presented.

e) Basis of consolidationThe consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) up to 31 December each year. Control is achieved where the Company has the powerto govern the financial and operating policies of an investee entity so as to obtainbenefits from its activities. In assessing control, the potential voting rights that are currently exercisable or convertible are taken into account.

On acquisition, the assets, liabilities and contingent liabilities of a subsidiary aremeasured at their fair values at the date of acquisition. Any excess of the cost ofacquisition over the fair values of the identifiable net assets acquired is recognisedas goodwill. Any deficiency of the cost of acquisition below the fair values of theidentifiable net assets acquired (i.e. discount on acquisition) is credited to theincome statement in the period of acquisition.

The interest of minority shareholders is stated at the minority’s proportion of the fair values of the assets, liabilities and contingent liabilities recognised.Subsequently, any losses applicable to the minority interest in excess of theminority interest in the subsidiary’s equity are allocated against the interests of the parent, except when there is a binding obligation to fund those losses and the minority is in a position to do so.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from when control commences or up to when control ceases, as appropriate.

Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring the accounting policies used into line with those used by the Group.

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

f) Revenue recognitionCertain power plants sell their output in merchant markets, where electricity issold through existing power exchanges, pool arrangements or through bilateralcontracts with third parties. In these markets, revenue from energy sales is eitherrecorded at the spot price obtained through pool or spot mechanisms when theelectrical output is delivered, or as set out below, when electricity is delivered inaccordance with the terms of any related hedging or forward contracts.

(i) Because power is a non-financial item, forward contracts entered into andwhich continue to be held for the purpose of delivery (and sale) of powergenerated by our own power plants (known as ‘own use’ contracts) can beaccounted for under accruals accounting, i.e. revenue for energy sales isrecognised as output is delivered in accordance with the forward contract;


(ii) All other forward contracts, which are considered to be derivatives and do notqualify for ‘own use’, are recognised at fair value with changes in fair valuerecorded in the income statement. Where the Group applies cash flow hedgeaccounting changes in fair values are deferred in a hedging reserve withinequity and only reclassified to earnings when the hedged transaction affectsearnings. In addition, to the extent that there is ineffectiveness in the cash flowhedge accounting of forward contracts, changes in fair values of the forwardcontracts are taken to the income statement in the period.

Other power plants sell their output under power purchase agreements (PPAs).Under such arrangements it is usual for the Group to receive payment for theprovision of electrical capacity whether or not the offtaker requests the electricaloutput (capacity payments) and for the variable costs of production (energypayments). In such situations, revenue is recognised in respect of capacitypayments as:

(i) finance income (in accordance with note 1(r)) where the PPA is considered to be or to contain a finance lease;

(ii) operating lease minimum lease payments, on a straight-line basis (inaccordance with note 1(r)) where the PPA is considered to be or to contain an operating lease; or

(iii)service income in accordance with the contractual terms, to the extent thatthe capacity has been made available to the contracted offtaker during theperiod. Where the PPAs extend over more than one accounting period,service income is recognised in each accounting period at the fair value of the Group’s performance under the contract in each period.

Under lease arrangements, those payments which are not included withinminimum lease payments are accounted for as service income (outlined in (iii) above).

Energy payments under PPAs are recognised in revenue in all cases as thecontracted output is delivered.

Liquidated damages (LDs), in respect of late commissioning, are included in other operating income.

Proprietary trading income is recognised on the basis of completed contracts and the mark to market value of outstanding contracts at the period end.

Interest income is accrued on a time basis, by reference to the principaloutstanding and at the effective interest rate applicable, which is the rate thatexactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

g) Foreign currenciesThese Group financial statements are presented in sterling, which is the functionaland presentational currency of the Company. The functional currencies of Groupentities are principally determined by the primary economic environment inwhich the respective entity operates. Transactions entered into by Group entitiesare translated into the functional currencies of those entities at the exchange rateruling at the date of transaction. Foreign exchange gains and losses resulting fromthe settlement of such transactions and from the translation at the exchange rateruling at the balance sheet date of monetary assets and liabilities denominated inforeign currencies are recognised in the income statement.

Foreign currency non-monetary items measured in terms of historical cost aretranslated at the rate of exchange at the date of the transaction. Exchangedifferences on non-monetary items are recognised in line with whether the gainor loss on the non-monetary item itself is recognised in the income statement or in equity.

In order to hedge its exposure to certain foreign exchange risks, the Groupenters into forward contracts and options (refer note 1(q)), the accounting policyon derivative financial instruments for details of the Group’s accounting policies in respect of such derivative financial instruments.

The net assets of the Group’s overseas subsidiaries, joint ventures and associatesare translated at exchange rates prevailing on the balance sheet date. Income andexpense items are translated at the average exchange rates for the period whichapproximate to actual rates.

Goodwill and fair value adjustments arising on the acquisition of a foreign entityare treated as assets and liabilities of the foreign entity and translated at theclosing rate.

Exchange differences arising are recognised in the Group’s translation reserve,which is a component of equity. Such translation differences are recognised asincome or as expenses in the income statement in the period of disposal of thenet investment in foreign operations.

In respect of foreign operations, any differences that have arisen before 1 January 2004, the date of transition to Adopted IFRSs, are presented as part of retained earnings.

h) GoodwillGoodwill arising on consolidation represents the excess of the cost of acquisitionover the Group’s interest in the fair value of the identifiable assets, liabilities andcontingent liabilities of a subsidiary, joint venture or associate at the date ofacquisition.

Goodwill arising on acquisition of joint ventures and associates is included in thecarrying amount of the investment.

Goodwill arising on acquisitions before the date of transition to Adopted IFRSshas been retained at the previous UK GAAP amounts subject to being tested forimpairment at that date. Goodwill written off to reserves under UK GAAP priorto 1998 has not been reinstated and is not included in determining anysubsequent profit or loss on disposal.

Goodwill is recognised as an asset and reviewed for impairment annually andwhen there are indications of impairment. Any impairment is recognisedimmediately in the income statement and is not subsequently reversed.

On disposal of a subsidiary, joint venture or associate, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

i) Other intangible assetsEmission allowances An intangible asset is recognised on receipt of allocatedemission allowances and recorded at the fair value on allocation. The fair value of the grant is also recognised on receipt and deducted from the value of theintangible asset. As a result no net asset or liability is shown on the balance sheetat initial recognition.

Emission allowances are recognised at cost when purchased. As emissionallowances are utilised they are charged to the income statement within cost ofsales. To the extent that these allowances were received by way of grant there isnil charge to the income statement for their utilisation. At the balance sheet datethe net carrying amount of emission allowances held is compared with the fairvalue to assess for impairment.

Forward contracts for sales and purchases of emission allowances are measuredat fair value.

A provision is made for the estimated shortfall between emission allowances held and the anticipated requirement and is charged to the income statement ona pro-rata basis according to current and expected future emissions throughoutthe accounting period based on the market value of those allowances.

Contracts and rights ‘Contracts and rights’ is the term we use to describeintangible assets, acquired in business combinations separately from goodwill,arising from identifiable contractual or other legal rights where their fair valuescan be measured reliably. These include ‘in the money’ commodity contracts,which qualify as ‘own use’ contracts in accordance with the requirements of IAS 39. On acquisition, these contracts and rights are classified as intangibleassets and carried at cost less accumulated amortisation and impairment losses (refer accounting policy note 1(o)) where cost represents fair value at the acquisition date. The intangible asset is then amortised on a systematic basis in accordance with the pattern in which the future economic benefit of the contract is expected to be consumed by the entity. Intangible assets withindefinite useful lives are not amortised. An intangible asset with an indefiniteuseful life is tested for impairment by comparing its recoverable amount with its carrying amount annually, and whenever there is an indication that theintangible asset may be impaired.



j) Property, plant and equipmentProperty, plant and equipment are stated at original cost less accumulateddepreciation and any provision for impairment in value. The property, plant andequipment of certain of the Group’s US operations, which had been revalued tofair value on 1 January 2004, the date of transition to IFRSs, are measured on thebasis of deemed cost, being the revalued amount at the date of that revaluation.In the case of assets constructed by the Group, related works, commissioning andborrowing costs as defined under IAS 23 (Borrowing costs) (refer accountingpolicy note 1(w)) are included in cost. Assets in the course of construction areincluded in property, plant and equipment on the basis of expenditure incurred atthe balance sheet date.

Depreciation is calculated on a component part basis so as to write-down thecost of property, plant and equipment to its residual value systematically over its estimated useful life. Estimated useful lives, residual values and depreciationmethods are reviewed annually, taking into account commercial and technologicalobsolescence as well as normal wear and tear, provision being made where thecarrying value exceeds the recoverable amount.

The depreciation charge is based on the following estimates of useful lives:

Years

Civil works 25-80

Power stations and wind farms 20-60

Fixtures, fittings, tools and equipment 3-10

Computer equipment and software 3-5

Combined cycle gas turbine (CCGT) hot gas path parts,on average 2-4

Leasehold improvements Life of lease

Freehold land is not depreciated.

k) Government grantsContributions received towards the cost of property, plant and equipment arerecognised at fair value. The grant is deducted from the cost of the relatedproperty, plant and equipment to derive the carrying amount of the asset. Thegrant is recognised as income over the life of a depreciable asset by way of areduced depreciation charge.

l) Project development costsProject development costs are principally incurred in identifying and developinginvestment opportunities and typically include feasibility studies, pre-bid costs, legal,professional and other related advisory costs. These costs (including appropriatedirect internal costs) are recognised as expenses as incurred, except that directlyattributable costs are capitalised when it is virtually certain that the project willproceed to completion and income will be realised. Such capitalised costs areamortised over the life of the related property, plant and equipment or contract.

m) Investments in joint ventures and associatesA joint venture is an entity over whose activities the Group has joint control,established by contractual agreement.

An associate is an entity over which the Group is in a position to exercisesignificant influence, but not control or joint control, through participation in thefinancial and operating policy decisions of the investee. Significant influence is thepower to participate in the financial and operating policy decisions of the investeebut is not control or joint control over these policies.

The results, assets and liabilities of joint ventures and associates are incorporatedin these financial statements using the equity method of accounting except whenclassified as held for sale. The results are presented after interest, tax and minorityinterests. Investments in joint ventures and associates are carried in the balancesheet at cost as adjusted by post-acquisition changes in the Group’s share of thenet assets of the joint venture or associate, less any impairment in the value ofindividual investments. Losses of the joint ventures and associates in excess of theGroup’s interest in those joint ventures and associates are not recognised unlessthe Group has a legal or constructive obligation to fund those losses.

Any excess of the cost of acquisition over the Group’s share of the fair values of the identifiable assets, liabilities and contingent liabilities of the joint venture or associate at the date of acquisition is recognised as goodwill within thecarrying amount. Any deficiency of the cost of acquisition below the Group’sshare of the fair values of the identifiable net assets of the joint venture orassociate at the date of acquisition (i.e. discount on acquisition) is credited to the income statement in the period of acquisition.

Where a Group company transacts with a joint venture or associate of theGroup, profits and losses are eliminated to the extent of the Group’s interest in the relevant joint venture or associate. Losses may provide evidence of an impairment of the asset transferred in which case appropriate provision is made for impairment.

n) Other investments Other investments consist of available for sale investments in debt and equityinstruments which are measured at market prices where available. Where quotedmarket prices in an active market are not available, and where fair value cannotbe reliably measured, unquoted equity instruments are measured at cost lessimpairment.

o) Impairment of assets excluding goodwillAt each balance sheet date, the Group reviews the carrying amounts of its property, plant and equipment, other intangible assets and those otherinvestments measured at cost, to determine whether there is any indication thatthose assets have suffered an impairment loss. If any such indication exists, therecoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any.

Recoverable amount is the higher of fair value less costs to sell and value in use.In assessing value in use, the estimated future cash flows are discounted to theirpresent value using a pre-tax discount rate that reflects current marketassessments of the time value of money and the risks specific to the asset forwhich the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss isrecognised as an expense immediately.

At each balance sheet date, an assessment is made to determine whether thereis any indication that an impairment loss recognised in prior periods may nolonger exist or has decreased. Where such an indication exists, an impairmentloss is reversed to the extent that the asset’s carrying value does not exceed thecarrying amount that would have been determined, net of depreciation oramortisation, if no impairment loss had been recognised.

p) Non-current assets held for saleNon-current assets classified as held for sale are measured at the lower of theasset’s previous carrying amount and fair value less costs to sell. No depreciationis charged on assets classified as held for sale.

Non-current assets are classified as held for sale if their carrying amount will berecovered through a sale transaction rather than through continuing use. Thiscondition is regarded as met only when the sale is highly probable and the assetis available for immediate sale in its present condition. Management must becommitted to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

q) Derivative financial instrumentsThe Group’s operating activities expose it to price risks associated with selling its generation output. The Group is also exposed to price risks associated withthe purchase of its fuel requirements and to financial risks of changes in foreigncurrency exchange rates and interest rates. The Group uses a range of derivativeinstruments, including energy based futures and forward contracts, swaps andoptions to hedge its risk to changes in power prices, fuel costs, foreign exchangerates and interest rates. Derivative financial instruments are only used for hedgingpurposes apart from energy based futures contracts, some of which are used forproprietary trading purposes.

The use of financial derivatives is governed by the Group’s risk managementpolicies approved by the Board of Directors, which provide written principles on the use of financial derivatives consistent with the Group’s risk managementstrategy.


Derivative financial instruments are recognised at fair value at the date a derivativecontract is entered into and are subsequently remeasured to their fair value ateach balance sheet date. The gain or loss on subsequent fair value measurementis recognised in the income statement unless the derivative qualifies for hedgeaccounting when recognition of any resultant gain or loss depends on the natureof the item being hedged. Subsequent to initial recognition, the fair values offinancial instruments measured at fair value that are quoted in an active marketare based on bid prices for assets held and offer prices for liabilities held. If themarket for a financial instrument is not active, its fair value is established by using valuation techniques. These valuation techniques include comparison with similar instruments where market observable prices exist, discounted cashflow analysis, option pricing models and other valuation techniques commonlyused by market participants.

All regular way purchases and sales of financial assets are recognised on the trade date, being the date that the Group commits to purchase or sell the assets. Regular way transactions require delivery of assets within the time frame generally established by regulation or convention in the market place.

Cash flow hedges Changes in the fair value of derivative financial instrumentsthat are designated and are effective as hedges of future cash flows arerecognised directly in equity and the ineffective portion is recognised immediatelyin the income statement.

Amounts accumulated in equity are recycled to the income statement in theperiod in which the hedged item also affects the income statement. However, ifthe hedged item results in the recognition of a non-financial asset or liability, theamounts accumulated in equity on the hedging instrument are transferred fromequity and included in the initial measurement of the cost of the asset or liability.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge accounting. At that time, for forecast transactions, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecastedtransaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement.

Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise.

Fair value hedges For an effective hedge of an exposure to changes in fairvalue of a recognised asset or liability or an unrecognised firm commitment, thehedged item is adjusted for changes in fair value attributable to the risk beinghedged with the corresponding entry in net income. Gains or losses fromremeasuring the derivative, or for non-derivatives, the foreign currencycomponent of its carrying amount, are recognised in net income.

Hedge of a net investment in a foreign operation Hedges of netinvestments in foreign operations are accounted for on a similar basis to cashflow hedges. Effective gains or losses on the hedging instrument are recognisedin the translation reserve, with ineffective gains or losses recognised in financecosts in the income statement. Cumulative gains or losses in equity are taken to the income statement on disposal of the foreign operation.

Embedded derivatives Derivatives embedded in other financial instrumentsor other non-financial host contracts are treated as separate derivatives whentheir risks and characteristics are not closely related to those of the host contractsand the host contracts are not carried at fair value.

Any unrealised gains or losses on such separated derivatives are reported in theincome statement.

r) LeasingA lease is defined as an agreement whereby the lessor conveys to the lessee, in return for a payment or a series of payments, the right to use a specific assetfor an agreed period of time. The definition can include arrangements such aslong-term PPAs, where power plants are specifically designated to fulfil therequirements of an agreement.

Finance leases – Group as lessor Where the Group determines a long-term PPA to be or to contain a lease, and where the offtaker has the principalrisks and rewards of ownership of the power plant through its contractualarrangements with the Group, the arrangement is considered a finance lease. As discussed in note 1(f), capacity payments are apportioned between capitalrepayments relating to the provision of the plant, finance income and serviceincome. The finance income element of the capacity payment is recognised asrevenue, using a rate of return specific to the plant to give a constant periodicrate of return on the net investment in each period. The service income elementof the capacity payment is the difference between the total capacity payment andthe amount recognised as finance income and capital repayments and recognisedas revenue as it is earned.

Arrangements that do not convey the right to use a specific asset through theterm of the agreement result in the continued recognition of property, plant andequipment, rather than a finance lease receivable, which is depreciated over itseconomic life.

The amounts due from lessees under finance leases are recorded in the balancesheet as financial assets, classified as finance lease receivables, at the amount ofthe net investment in the lease after making provision for bad and doubtful debts.

Operating leases – Group as lessor An operating lease is any lease otherthan a finance lease. Thus where the Group determines a long-term PPA to be orto contain a lease, and where the Group retains the principal risks and rewards ofownership of the power plant, the arrangement is considered an operating lease.

For operating leases, the power plant is capitalised as property, plant andequipment and depreciated over its economic life.

Rental income from operating leases is recognised on a straight-line basis overthe term of the arrangement.

Operating leases – Group as lessee Rentals payable under operating leasesare charged to income on a straight-line basis over the term of the relevant lease.

Benefits received and receivable as an incentive to enter into an operating leaseare also spread on a straight-line basis over the lease term.

Where a leasehold property is vacant, or sublet under terms such that the rentalincome is less than the head lease rental cost, provision is made for the bestestimate of unavoidable lease payments during the vacancy or on the anticipatedfuture shortfall of sub-lease income compared with the head-lease expense.

s) InventoriesPlant spares, operating stocks of fuel and consumables are valued at the lower of cost and net realisable value. Cost comprises direct materials and, whereapplicable, direct labour costs and those overheads that have been incurred inbringing the inventories to their present location and condition. Cost is calculatedusing the weighted average method.

t) Cash and cash equivalentsCash and cash equivalents comprise bank balances and cash held by the Groupand short-term deposits with an original maturity of three months or less. Bankoverdrafts that are repayable on demand and form part of the Group’s cashmanagement are included as a component of cash and cash equivalents for the purpose of the cash flow statement.

u) Loans and bondsInterest-bearing borrowings are recognised initially at fair value less attributabletransaction costs. Subsequent to initial recognition, interest-bearing borrowingsare stated at amortised cost with any difference between cost and redemptionvalue being recognised in the income statement over the period of theborrowings on an effective interest basis.

v) Convertible bondsConvertible bonds are regarded as compound instruments, consisting of a liability component and either an equity component or an embedded derivative component.

At the date of issue, the fair value of the liability component is estimated usingthe prevailing market interest rate for similar non-convertible debt. The differencebetween the proceeds of issue of the convertible bonds and the fair valueassigned to the liability component represents the value of either an equitycomponent or an embedded derivative component attributable to theembedded option to convert the bonds into equity of the Group.



IAS 32 states that a derivative contract that will be settled by the entity receivingor delivering a fixed number of its own equity instruments in exchange for a fixedamount of cash or another financial asset is an equity instrument. It also statesthat a contract that will be settled by the entity delivering or receiving a fixednumber of its own equity instruments in exchange for a variable amount of cashor another financial asset is a financial asset or financial liability. For the purposesof the consolidated financial statements, when making the assessment ofwhether a convertible bond, when exercised, gives rise to the exchange of a fixed or variable amount of cash, or other financial asset, the functional currencyof the issuing company relative to the currency denomination of the bonds isconsidered in addition to other features within the bond.

For convertible bonds issued by the Group where there is a difference betweenthe currency of the bond and the functional currency of the issuing company, the embedded option to convert the bonds is recorded as a derivative liabilitybecause it is not a contract to exchange a fixed number of shares for a fixedamount of bonds. The embedded derivative liability component is separatelyidentified and measured at fair value through profit or loss.

For convertible bonds issued by the Group where the currency of the bond and the functional currency of the issuing company are the same, i.e. where on conversion of the bonds a fixed number of shares is exchanged for a fixedamount of bonds, the value of the embedded option to convert the bonds is recorded within equity on initial recognition.

Issue costs are apportioned between the liability and embedded optioncomponents of the convertible bonds (recorded as equity or as a derivativeliability) based on their relative carrying amounts at the date of issue.

The interest expense on the liability component is calculated by applying theprevailing market interest rate for similar non-convertible debt to the liabilitycomponent of the instrument. This interest expense, recognised in the incomestatement, is calculated using the effective interest method, i.e. the differencebetween the interest expense on the liability component and the interest paid is added to the carrying amount of the convertible bond.

w) Borrowing costsBorrowing costs directly attributable to the acquisition, construction orproduction of qualifying assets, which are assets that necessarily take a substantialperiod of time to be prepared for their intended use or sale, are added to thecost of those assets, until such time as the assets are substantially ready for theirintended use or sale. As referred to in note q), to the extent that variable rateborrowings are used to finance a qualifying asset and are hedged in an effectivecash flow hedge of interest rate risk, the hedging gain or loss relating to theeffective portion of the derivative is removed from the hedging reserve andrecognised as part of the initial carrying amount of the asset. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costseligible for capitalisation.

All other borrowing costs are recognised in profit or loss in the period in whichthey are incurred.

x) ProvisionsProvisions are recognised when the Group has a present obligation as a result of a past event, it is probable that the Group will be required to settle thatobligation and the amount can be reliably estimated. Provisions are measured at the Directors’ best estimate of the expenditure required to settle the obligationat the balance sheet date, and are discounted to present value where the effect is material.

y) Decommissioning costsProvision is made for reliably estimated decommissioning costs at the end of the useful economic life of the Group’s power stations and generating assets, if and when a legal or constructive obligation arises, on a discounted basis. The amount provided represents the present value of the expected costs. An amount equivalent to the initial provision is capitalised within property, plant and equipment and is depreciated over the useful lives of the related assets. The unwinding of the discount is included within finance costs.

Where there is a subsequent change in estimate of decommissioning costs, the present value of the change is recognised in the cost of property, plant and equipment.

z) Environmental liabilitiesProvision for environmental liabilities is made when expenditure on remedialwork is probable, the Group is obliged, either legally or constructively through itsenvironmental policies, to undertake such work and the amount can be reliablyestimated. Where the amount is expected to be incurred over the long-term, theamount recognised is the present value of the estimated future expenditure andthe unwinding of the discount is included within finance costs.

aa) TaxThe tax expense represents the sum of the expected tax payable on taxableincome for the year, including adjustments in respect of prior periods anddeferred tax. Taxable profit differs from accounting profit, as reported in theincome statement, because it excludes items of income or expense that aretaxable or deductible in other years and it further excludes items that are nevertaxable or deductible. The Group’s liability for current tax is calculated using taxrates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financial statementsand the corresponding tax bases used in the computation of taxable profit, and isaccounted for using the balance sheet liability method. Deferred tax liabilities aregenerally recognised for all taxable temporary differences and deferred tax assetsare recognised to the extent that it is probable that taxable profits will beavailable against which deductible temporary differences can be utilised. Suchassets and liabilities are not recognised if the temporary difference arises fromgoodwill, not deductible for tax purposes, or from the initial recognition (otherthan in a business combination) of other assets and liabilities in a transaction thataffects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising oninvestments in subsidiaries, joint ventures and associates. Where the Group is ableto control the reversal of the temporary difference and it is probable that thetemporary difference will not reverse in the foreseeable future, no deferred taxliability is recognised.

The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficient taxableprofits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the periodwhen the liability is settled or the asset is realised. Deferred tax is charged orcredited in the income statement, except when it relates to items charged orcredited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and deferred tax liabilities are only offset to the extent thatthere is a legally enforceable right to offset current tax assets and current taxliabilities, they relate to taxes levied by the same taxation authority and the Groupintends to settle its current tax assets and liabilities on a net basis or to realise anasset and settle a liability simultaneously.

ab) Pension schemesPayments to defined contribution pension plans are charged as an expense asthey fall due. Payments made to state managed defined benefit pension plans are dealt with as payments to defined contribution plans where the Group’sobligations under the plans are equivalent to those arising in a definedcontribution pension plan.

For defined benefit pension plans, the cost of providing benefits is determinedusing the projected unit credit method, with actuarial valuations being carried out at each balance sheet date.

The corridor method is applied in recognising actuarial gains and losses. Gainsand losses in an individual scheme are recognised to the extent they exceed thegreater of 10% of the gross assets or gross liabilities of the scheme. The amountrecognised in the following year is the excess amortised over the remainingaverage service lives of the employees in the scheme and is recognised in theincome statement.

The net defined benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligations adjusted for unrecognisedactuarial gains and losses and unrecognised service costs and as reduced by thefair value of the plan assets. Any asset resulting from this calculation is limited to unrecognised actuarial losses and past service cost plus the present value of available refunds and reductions in future contributions to the plan.


ac) Share-based paymentsThe Group issues equity-settled share-based payments to certain employees.Equity-settled share-based payments are measured at fair value (excluding theeffect of non-market-based vesting conditions) at the date of grant. The fair valuedetermined at the date of grant of the equity-settled share-based payments isexpensed on a straight-line basis over the vesting period, based on the Group’sestimate of the shares that will eventually vest and where applicable, adjusted forthe effect of non-market-based vesting conditions including service conditions.

For the Group’s Executive Share Option Plans the fair values are measured usingthe Black-Scholes pricing model. The expected lives used in these models havebeen adjusted, based on management’s best estimate, for the effects of non-transferability, any exercise restrictions and behavioural considerations.

For conditional awards, made under the 2002 Performance Share Plan, without a market-related performance condition, the fair values have been calculated as the face value of the award, discounted for the non-entitlement to dividendsduring the vesting period.

Where conditional awards, made under the 2002 Performance Share Plan,contain a market-related performance condition, the fair values are measuredusing a Monte Carlo simulation method.


2 Segment reporting

The Group is a global energy business that operates solely in one business segment, that of electricity generation. The international operations are managed on a geographical basis, reflecting the different characteristics within each geographical market. The Group reports its primary segment information by geographicsegment as this reflects how results are reported for management purposes in the day-to-day management of the business. In presenting information on the basis of geographical segments, segment revenues and segment assets are based in the geographical location of both customers and assets. There is no inter-segmentalrevenue. Refer to notes 37 and 38 for a list of significant entities within each region.


Subsidiaries Share of joint Total Subsidiaries Share of joint Totalventures and ventures and

associates associates£m £m £m £m £m £m

a) Revenue (excluding exceptional itemsand specific IAS 39 mark to market movements)

North America 705 172 877 732 183 915

Europe 1,462 399 1,861 1,266 411 1,677

Middle East 72 113 185 51 99 150

Australia 439 84 523 378 107 485

Asia 34 392 426 25 393 418

2,712 1,160 3,872 2,452 1,193 3,645

Revenue (including exceptional itemsand specific IAS 39 mark to market movements)

North America 677 172 849 761 183 944

Europe 1,300 399 1,699 1,426 411 1,837

Middle East 72 113 185 51 99 150

Australia 242 84 326 321 113 434

Asia 34 392 426 25 393 418

2,325 1,160 3,485 2,584 1,199 3,783

b) Profit from operations (excluding exceptional items and specific IAS 39 mark to market movements)

North America 108 28 136 73 28 101

Europe 521 53 574 381 69 450

Middle East 44 24 68 32 20 52

Australia 83 (1) 82 121 3 124

Asia 14 82 96 3 88 91

770 186 956 610 208 818

Corporate costs (52) – (52) (45) – (45)

718 186 904 565 208 773

Exceptional items and specific IAS 39 mark to market movements included within profit from operations (386) 125

Profit from operations (including exceptional items and specific IAS 39mark to market movements) 518 898

Profit from operations (including exceptional items and specific IAS 39 mark to market movements)

North America 91 24 115 83 28 111

Europe 329 54 383 547 68 615

Middle East 44 24 68 32 20 52

Australia (106) 15 (91) 64 10 74

Asia 14 81 95 3 88 91

372 198 570 729 214 943

Corporate costs (52) – (52) (45) – (45)

Profit from operations (including exceptional items and specific IAS 39mark to market movements) 320 198 518 684 214 898



2007 2006£m £m

Profit from operations (including exceptional items andspecific IAS 39 mark to market movements) 518 898

Disposal of interests in businesses – exceptional 289 –

Net finance costs – excluding exceptional items and specific IAS 39 mark to market movements (308) (248)

Net finance costs – exceptional items and specific IAS 39 mark to market movements (16) (26)

Profit before tax 483 624

Tax expense – excluding exceptional items and specific IAS 39 mark to market movements (113) (122)

Tax expense – exceptional items and specific IAS 39 mark to market movements 159 (25)


An analysis of exceptional items and specific IAS 39 mark to market movements is included in note 8.Year ended Year ended


£m £m

c) Depreciation and amortisation expenses (excluding exceptional items)

North America 60 52

Europe 187 150

Middle East 3 3

Australia 66 63

Asia 3 2

319 270

Corporate costs 1 3

320 273

Depreciation and amortisation expenses are included within profit from operations. In 2007 the intangible assets relating to the unamortised fair value of the gassupply agreement acquired with Saltend in 2005 was impaired. The charge of £47 million is not included within the Europe total in the above table. In 2006 animpairment reversal of £36 million relating to Deeside power plant was recorded in the income statement. This impairment reversal is not included within the Europe total in the above table (refer to note 8).


2007 2006£m £m

d) Additions to property, plant and equipment

North America 29 62

Europe 141 83

Middle East 3 47

Australia 57 34

Asia 1 9

231 235

Corporate – 1

231 236


2 Segment reporting continued


Goodwill Contracts Emission Goodwill Contracts Emissionand rights allowances and rights allowances

£m £m £m £m £m £m

e) Expenditure on goodwill and other intangible assets

North America – – 2 40 37 64

Europe 393 69 67 – 12 39

Middle East – 1 – – – –

Australia 71 – – – – –

464 70 69 40 49 103

The table above includes both purchased goodwill and intangible assets recognised on the acquisition of subsidiaries during the year in addition to expenditureincurred on other intangible assets.

31 December 2007 31 December 2006

Segment Investments Total Segment Investments Totalassets in joint assets in joint

ventures and ventures andassociates associates

£m £m £m £m £m £m

f) Segment assets

North America 1,445 180 1,625 1,502 184 1,686

Europe 5,625 390 6,015 3,490 363 3,853

Middle East 355 88 443 366 92 458

Australia 2,262 10 2,272 1,879 43 1,922

Asia 68 611 679 194 582 776

9,755 1,279 11,034 7,431 1,264 8,695

Corporate 577 – 577 601 – 601

Segment assets excluding current and deferred tax assets 10,332 1,279 11,611 8,032 1,264 9,296

Current and deferred tax assets 142 93


In 2006 the Asia region segment assets included assets held for sale amounting to £128 million.


Segment Investments Total Segment Investments Totalliabilities in joint liabilities in joint

ventures and ventures andassociates associates

£m £m £m £m £m £m

g) Segment liabilities

North America 1,070 – 1,070 1,134 – 1,134

Europe 3,349 – 3,349 2,016 – 2,016

Middle East 342 – 342 336 – 336

Australia 1,783 – 1,783 1,330 – 1,330

Asia 55 – 55 55 – 55

6,599 – 6,599 4,871 – 4,871

Corporate 993 – 993 934 – 934

Segment liabilities excluding current and deferred tax liabilities 7,592 – 7,592 5,805 – 5,805

Current and deferred tax liabilities 1,154 844

Total liabilities 8,746 6,649

The analysis of total assets and liabilities includes all attributable goodwill and excludes intercompany balances, which have been eliminated on consolidation. Corporate assets and liabilities include cash held at the corporate level, included in cash and cash equivalents; corporate borrowings, included in loans and bonds; and provisions.


3 Profit for the year


2007 2006£m £m

Profit for the year is stated after charging/(crediting):

Amortisation of other intangible assets 115 105

Depreciation of property, plant and equipment 205 168

Development costs, net of recoveries and amounts capitalised 5 3

Exceptional items before tax (note 8) (233) (55)

Specific IAS 39 mark to market movements before tax (note 8) 346 (44)

Liquidated damages and insurance recoveries for property, plant and equipment (9) (6)

Minimum lease payments under operating leases recognised as an expense in the year 6 3

(Profit)/loss on disposal of property, plant and equipment (2) 5

Amount removed from translation reserve on disposal of a foreign operation (2) –

Profit from operations is stated after the share of results of joint ventures and associates but before disposal of interests in businesses, finance income, finance expenses and tax. Other operating income includes compensation for the late commissioning of plants, billings in respect of operations and maintenance services and profit on sale of development sites. Other operating expenses comprise corporate costs, Group-wide general administrative overheads and project development expenses.


2007 2006£m £m

Auditors’ remuneration

Fees payable to the Company’s auditor for the audit of the Company’s consolidated financial statements 0.5 0.5

Fees payable to the Company’s auditor and their associates for other services:

Audit of the Company’s subsidiaries pursuant to legislation 2.0 2.0

Other services pursuant to legislation 0.1 1.4

Tax services 0.1 0.1

Services relating to corporate finance transactions entered into or proposed to be entered into by or on behalf of the Company or the Group 0.2 0.2

2.9 4.2

‘Other services pursuant to such legislation’ in 2006 relates principally to reporting to the Securities and Exchange Commission, interim reviews and additional audit work relating to the Group’s compliance with the requirements of Section 404 of the Sarbanes-Oxley Act 2002 (which relate to internal controls over financial reporting).

‘Services relating to corporate finance transactions’ incorporate due diligence assistance on potential and completed acquisitions during the year and reviews of financial models for funding purposes.

The Audit Committee and the firm of external auditors have safeguards in place to avoid the possibility that the auditors’ objectivity and independence could be compromised. These safeguards include the implementation of a policy on the use of the external auditor for non-audit related services.

Where it is deemed that the work to be undertaken is of a nature that is generally considered reasonable to be completed by the auditor of the Company for soundcommercial and practical reasons, the conduct of such work will be permissible provided that it has been pre-approved by the Audit Committee. Examples of pre-approved services include the completion of regulatory audits, provision of taxation and regulatory advice, and the completion of certain financial due diligencework. All these services are also subject to a predefined fee limit. Any work performed in excess of this limit must be approved by the Chief Financial Officer and the Audit Committee.


4 Finance income

Year ended Year ended 31 December 31 December

2007 2006£m £m

Group finance income

Interest income on financial assets not at fair value through profit or loss on:

– available-for-sale financial assets 1 –

– loans to joint ventures and associates 14 16

– cash and cash equivalents 61 35

Group interest income calculated using the effective interest method for financial assets that are not at fair value through profit or loss 76 51

Group finance income on assets at fair value through profit or loss – net gain on remeasurement of assets held for trading 1 2

Total Group finance income 77 53

The net gain on remeasurement of assets held for trading includes interest and dividend income.

Interest income comprises interest earned from bank deposits and other financial assets. Included within share of results of joint ventures and associates is interestincome of £23 million (2006: £21 million).

Gains and losses reflected directly in equity are shown in notes 25 and 32.

5 Finance expenses


2007 2006£m £m

Group finance expenses excluding exceptional items and specific IAS 39 mark to market movements

Interest on:

– bank loans and overdrafts 283 226

– other loans and bonds 91 77

– unwinding discount on provisions 1 1

– other payables 8 6

Total interest expense calculated using the effective interest method 383 310

Less: amounts capitalised in the cost of qualifying assets (5) (9)

Group finance expense on liabilities not at fair value through profit or loss excluding exceptional items and specific IAS 39 mark to market movements 378 301

Specific IAS 39 mark to market movements on derivative financial instruments 16 26

Other foreign exchange losses 7 –

Total Group finance expenses 401 327

Gains and losses reflected directly in equity are shown in notes 25 and 32.

Included within share of results of joint ventures and associates is interest expense of £118 million (2006: £121 million). Specific IAS 39 mark to market movementsincluded within interest expense of joint ventures and associates amount to an expense of £4 million (2006: £1 million).

Specific IAS 39 mark to market movements comprise fair value gains and losses on interest rate swaps used for hedging purposes and on the 3.25% convertible euro bonds 2013 (refer to note 8).


6 Employee benefit costs and employee numbers

Employee benefit costs, including Directors’ remuneration, were as follows:Year ended Year ended


£m £m

Wages and salaries 139 129

Social security costs 10 11

Contributions to defined contribution plans 4 4

Charge for defined benefit plans (note 7) 8 10

Share-based payments – equity settled 7 9

168 163

Less: amount capitalised as part of property, plant and equipment (3) (4)

Total employee benefit costs 165 159

Remuneration of the Directors, who are the key management personnel of the Group, is set out below in aggregate. Further details of Directors’ remuneration alongwith information concerning shareholdings, options and retirement benefits are set out in the audited part of the Directors’ remuneration report on pages 83 to 95.There are no personnel, other than the Directors, who as key management have authority and responsibility for planning, directing and controlling the activities,directly or indirectly, of International Power plc. No member of key management had any material interest during the year in a contract of significance (other than a service contract) with the Company or any of its subsidiaries.


2007 2006£m £m

Short-term employee benefits 5 5

Post employment benefits 1 1

Share-based payments 2 2

Total employee benefit costs of key management personnel 8 8

The average number of employees during the financial year, analysed by geographic segment was:Year ended Year ended


Number Number

North America 338 276

Europe 1,252 1,196

Middle East 566 625

Australia 783 769

Asia 599 628

Corporate and development 183 177

Average number of employees 3,721 3,671


7 Retirement benefit obligations

Group entities operate pension arrangements in order to provide pension benefits to retired employees. Benefits granted have been developed to reflect local practiceand may be provided through defined benefit or defined contribution schemes.

The main defined benefit plans are in the UK and Australia:

UK: The majority of pensions for UK employees are funded through the industry-wide scheme, the Electricity Supply Pension Scheme (ESPS), which is a definedbenefit scheme with assets invested in separate trustee administered funds. The ESPS is divided into sections, and the International Power Group of the ESPS wasopened to members on 1 April 2002 and employees’ past service rights were transferred into the Group later that year.

The majority of employees taken on in First Hydro, as part of the acquisition of the EME portfolio, are members of another section of the ESPS, the First Hydro Group.

The liabilities and costs shown in the disclosures for the UK schemes are based on the most recent actuarial valuations at 31 March 2007. The results of thesevaluations have been updated to 31 December 2007 by independent qualified actuaries to take account of the requirements of IAS 19.

At 31 December 2007, 52% of the pension liability of the First Hydro Group and 85% of the International Power Group of the ESPS related to members in service.

AUSTRALIA: Employees at Hazelwood and Loy Yang B participate in a standard Australian superannuation fund called Equipsuper. This plan provides benefitsprimarily for employees in the electricity, gas and water industry, and was developed from the scheme sponsored by the State Electricity Commission of Victoria.Employees at Synergen participate in the Electricity Industry Superannuation Scheme.

The liabilities and costs shown in the disclosures for the Australian schemes are based on the most recent actuarial valuations at 30 November 2007, projected toDecember 2007. The results of these valuations have been updated by independent qualified actuaries to take account of the requirements of IAS 19.

The liabilities and costs for IAS 19 were determined using the projected unit method. The Group has decided to recognise gains and losses through the incomestatement over the expected working lifetime of active employees to the extent that gains or losses are in excess of the ‘corridor’ (10% of the greater of the definedbenefit obligation and the plan assets).

The charge for 2007 in respect of defined contribution plans was £4 million (2006: £4 million).

At 31 December 2007, 98% of the membership relating to the Australian schemes consists of members in service.

The Group used the following financial assumptions to calculate the scheme liabilities under IAS 19:

31 December 2007 31 December 2006 31 December 2005 31 December 2004

Financial assumptions UK Australia UK Australia UK Australia UK Australia% % % % % % % %

Discount rate 5.8 5.3 5.1 4.9 4.7 4.6 5.3 4.5

Rate of increase in salaries 4.9 4.3 4.6 4.3 4.4 4.0 4.4 4.0

Inflation rate 3.4 3.0 3.1 3.0 2.9 3.0 2.9 3.0

Increase to deferred benefits during deferment 3.4 n/a 3.1 n/a 2.9 n/a 3.0 n/a

Increases to pensions payments 3.4 n/a 3.1 n/a 2.9 n/a 2.9 n/a

The mortality assumptions used have a significant impact on scheme liabilities for the UK plans.

The mortality assumptions at 31 December 2007 have been updated and are now based on a standard table derived from 1999-2002 census data. The mortalitytables allow for additional longevity improvements reflecting specific trends in the UK population regarding certain age groups. The following table of average lifeexpectancies illustrates the assumptions used:


Mortality assumptions UK UK UK UKyears years years years

Life expectancy for a member aged 60 at year-end

Men 25.9 22.8 22.8 22.8

Women 28.5 26.1 26.1 26.1

Life expectancy for a member aged 60 in 20 years’ time

Men 27.3 23.7 23.7 23.7

Women 29.5 27.2 27.2 27.2

The plans in Australia provide lump sums at retirement and therefore the mortality assumption is much less important.


The amounts charged to profit from operations, recorded in the income statement, in relation to the defined benefit pension plans for the year ended 31 December 2007 were as follows:


2007 2006£m £m

Current service cost 11 11

Expected return on schemes’ assets (16) (13)

Interest on schemes’ liabilities 12 10

Amortisation of past service cost 1 –

Curtailment cost – 2

Total operating charge 8 10

The assets in the schemes and expected rates of return (weighted averages) were:


UK Australia UK Australia UK Australia UK Australia

Long-term rate of return expected: % % % % % % % %

Equities 8.0 7.8 7.5 7.8 7.1 7.5 7.5 7.3

Bonds 5.2 5.1 4.7 4.6 4.4 5.0 4.9 4.8

Other 6.7 6.0 6.2 5.9 6.0 5.9 6.0 5.5

Total long-term rate of return expected 7.5 7.0 7.1 6.7 6.6 6.7 7.0 6.5

The expected rates of return reflect the Group’s best estimate of the investment returns that will be earned on each asset class. These returns are based on adviceprovided by independent qualified actuaries.

The expected rates of return on bonds reflect the plans’ mix between index-linked, government and corporate bonds. An equity risk premium is added to long-termgovernment bond yields to give the expected rate of return on equities.

Other assets principally comprise cash and property. The expected return on cash is derived from short-term interest rates and the return on cash instruments. The expected return on other assets such as property is determined by adding an appropriate risk premium to government bonds in the relevant country.


UK Australia Total UK Australia Total UK Australia Total UK Australia TotalAssets in schemes: £m £m £m £m £m £m £m £m £m £m £m £m

Equities 116 68 184 108 55 163 84 52 136 66 44 110

Bonds 20 18 38 17 15 32 14 17 31 11 16 27

Other 19 23 42 10 21 31 16 15 31 12 10 22

Total market value of assets 155 109 264 135 91 226 114 84 198 89 70 159

The reconciliation of the schemes’ (deficits)/surpluses to the balance sheet amount is:


UK Australia Total UK Australia Total UK Australia Total UK Australia Total£m £m £m £m £m £m £m £m £m £m £m £m

Total market value of assets 155 109 264 135 91 226 114 84 198 89 70 159

Present value of scheme liabilities (176) (93) (269) (158) (83) (241) (151) (79) (230) (114) (70) (184)

(Deficit)/surplus in the scheme (21) 16 (5) (23) 8 (15) (37) 5 (32) (25) – (25)

Unrecognised actuarial losses/(gains) 1 (18) (17) – (10) (10) 12 (7) 5 – (4) (4)

Unrecognised asset due to limit in IAS 19 para 58(b) – – – – – – – – – – – –

Pension liability before deferred tax (20) (2) (22) (23) (2) (25) (25) (2) (27) (25) (4) (29)


7 Retirement benefit obligations continued

Movements in fair value of assets:Year ended Year ended


£m £m

At 1 January 226 198

Expected return on assets 16 13

Actuarial gains 4 9

Employer contributions 11 12

Scheme participants’ contributions 3 3

Benefits paid (5) (3)

Expenses, taxes and premiums paid – (1)

Exchange differences 9 (5)

At 31 December 264 226

Movements in defined benefit obligations:Year ended Year ended


£m £m


Service cost 11 11

Interest cost 12 10

Actuarial gains (2) (6)

Scheme participants’ contributions 3 3

Benefits paid (5) (3)

Expenses, taxes and premiums paid – (1)

Settlements, curtailments and amendments 1 2



The sensitivities regarding the principal assumptions used to measure the scheme liabilities at 31 December 2007 are:

Assumption Change in assumption Impact on scheme liabilities

Discount rate Increase by 0.5% Decrease by 7.5%

Rate of increase in salaries Increase by 0.5% Increase by 3.0%

Inflation Increase by 0.5% Increase by 7.4%

Rate of mortality (UK plans only) Pensioners live one year longer Increase by 3.0%

History of asset experience gains and lossesThe transition date for conversion to Adopted IFRSs for International Power was 1 January 2004 and therefore the following historical data has been presented fromthat date. This will be built up into a rolling five-year record next year.

Year ended Year ended Year ended Year ended31 December 31 December 31 December 31 December

2007 2006 2005 2004

Difference between the actual and expected return on schemes’ assets:

Amount (£m) 4 9 16 9

Percentage of schemes’ assets 2% 4% 8% 6%

Experience gains/(losses) on schemes’ liabilities*:

Amount (£m) 5 (2) 11 7

Percentage of the present value of schemes’ liabilities 2% 1% 5% 4%

*Does not include the effect of changes in assumptions.

Contributions in 2008The Group expects to make contributions of approximately £7 million to its defined benefit pension arrangements in 2008.


8 Exceptional items and specific IAS 39 mark to market movements

In accordance with the basis of preparation outlined in note 1, the Group separately presents exceptional items and specific IAS 39 mark to market movements to allow a better understanding of the financial information presented, and specifically the Group’s underlying business performance.

Those items that the Group separately present as exceptional are items which, in the judgement of the Directors, need to be disclosed separately by virtue of their size or incidence in order to obtain a proper understanding of the financial information.

The Group enters into derivative contracts to economically hedge certain of its physical and financial exposures. Where these contracts do not achieve own usetreatment, hedge accounting or wholly effective hedge effectiveness under IAS 39, the Group separately presents the mark to market movements on these contracts,recorded within the income statement to allow an understanding of underlying business performance.

Mark to market movements on convertible bonds, where the conversion option, if exercised, will ultimately be extinguished by the issue of equity are also separatelypresented to allow an understanding of the underlying business performance.


2007 2006£m £m

Mark to market movements (387) 132

Amounts recognised in revenue (387) 132

Impairment of Saltend gas contract (47) –

Impairment reversal of Deeside plant – 36

Mark to market movements 45 (68)

Amounts recognised in cost of sales (2) (32)

Compensation in respect of the tolling agreement with TXU – 14

Compensation in respect of breach of contract – 5

Amounts recognised in other operating income – 19

Provision against investment in BioX (9) –

Amounts recognised in other operating expenses (9) –

Mark to market movements 12 6

Amounts recognised in share of results of joint ventures and associates 12 6

Disposal of investment in Malakoff 115 –

Partial disposal of UK subsidiaries 174 –

Amounts recognised in disposal of interests in businesses 289 –

Mark to market movements (16) (26)

Amounts recognised in finance expenses (16) (26)

Taxation on impairment of Saltend gas contract 14 –

Remeasurement of deferred tax assets and liabilities associated with acquisition of Maestrale 49 –

Taxation on Deeside plant impairment reversal – (11)

Taxation on compensation in respect of the tolling agreement with TXU – (4)

Taxation on mark to market movements 96 (10)

Exceptional taxation and taxation on exceptional items and specific IAS 39 mark to market movements 159 (25)

Total exceptional items and specific IAS 39 mark to market movements after attributable taxation 46 74


8 Exceptional items and specific IAS 39 mark to market movements continued

At 31 December 2007, the intangible asset relating to the unamortised fair value of the gas supply agreement, acquired with Saltend in 2005, was impaired followinga reduction in the gas forward price curve. A charge of £47 million and associated tax credit of £14 million are classified as exceptional items.

On 30 June 2007 the Group made a full provision against its investment in BioX due to increases in palm oil prices.

On 30 April 2007 the Group completed the sale of its interests in the Malakoff wholesale power generation business to MMC Corporation resulting in a profit ondisposal of £115 million (refer to note 24).

On 20 June 2007 the Group completed the formation of a new partnership with Mitsui & Co., Ltd (Mitsui). The partnership created a common ownership platformfor the UK assets, excluding Derwent, and equalised returns from Paiton. A profit on disposal of £174 million was recorded on the partial disposal of Deeside, Rugeleyand Indian Queens (refer to note 31).

On 28 December 2007 a change in the standard rate of Italian corporation tax from 37.5% to 31.4%, effective from 1 January 2008, was approved by the Italiangovernment. Consequently all relevant deferred tax assets and liabilities as at 31 December 2007 have been remeasured at 31.4%. The resulting net credit of £49 million relating to reducing the net deferred tax liabilities of the Maestrale acquisition has been presented as an exceptional item due to its magnitude andproximity of the date of change in standard rate of tax to the date of acquisition.

At the end of 2006 the Group carried out a review of the recoverable amount of its Deeside power plant based on its estimated value in use. This led to the fullimpairment reversal of the remaining £36 million impairment charge previously booked against this asset. A tax charge of £11 million was recorded on this item.

In the year ended 31 December 2006, Rugeley Power received further payments from TXU Administrators amounting to £16 million. An exceptional gain of £14 million was recorded, net of payments to creditors. A tax charge of £4 million was recorded on this item.

In June 2006 the Group received a settlement of £10 million following the conclusion of an international arbitration action under ICC rules for breach of contractentered into in 2000 to transfer operating rights over three power plants in Turkey. An exceptional gain of £5 million was recorded, net of cost recoveries.

Specific IAS 39 mark to market movements are separately identified within the preceding table described as ‘mark to market movements’. For the year ended 31 December 2007 the impact of these adjustments on profit before tax is a loss of £346 million and on tax expense a credit of £96 million. For the year ended 31 December 2006 the impact of these adjustments on profit before tax is a profit of £44 million and on tax expense a charge of £10 million.

The mark to market movements recognised within finance expenses includes a charge of £17 million in respect of the fair value gains and losses on the 3.25%convertible euro bonds 2013. (Year ended 31 December 2006 is a charge of £28 million).


9 Tax


2007 2006£m £m

a) Tax expense for the year

Current tax charge

UK corporation tax charge 68 52

Foreign tax 52 40

Adjustments in respect of prior years 4 6

Total current tax charge for the year 124 98

Deferred tax charge

Origination and reversal of temporary differences (168) 64

Benefits of tax losses recognised (2) (15)

Total deferred tax (credit)/charge for the year (170) 49

Tax expense excluding exceptional items and specific IAS 39 mark to market movements 113 122

Exceptional tax credit (49) –

Tax expense on exceptional items and specific IAS 39 mark to market movements (110) 25

Total income tax (credit)/expense for the year (46) 147

Included in the tax expense are the following amounts relating to exceptional items and specific IAS 39 mark to market movements, included in:


2007 2006£m £m

Revenue (deferred tax) (101) 33

Cost of sales (deferred tax) (4) (4)

Other operating income (current tax) – 4

Finance expenses (deferred tax) (5) (8)

Tax expense on exceptional items and specific IAS 39 mark to market movements (110) 25

The deferred tax charge is derived as follows: £54 million from UK operations (2006: £46 million) and £116 million from foreign operations (2006: £3 million).Year ended Year ended


£m £m

Tax (credited)/charged to:

Income statement (46) 147

Equity 25 (43)

(21) 104


9 Tax continued


Results excluding Results including Results excluding Results includingexceptional items exceptional items exceptional items exceptional items

and specific and specific and specific and specificIAS 39 mark IAS 39 mark IAS 39 mark IAS 39 mark

to market to market to market to marketmovements movements movements movements

£m £m £m £m

b) Reconciliation of tax expense to accounting profit

Profit before tax (before exceptional items and specific IAS 39mark to market movements) 596 596 525 525

Exceptional items and specific IAS 39 mark to market movements – (113) – 99

Profit before tax 596 483 525 624

Tax at domestic tax rate of 30% (2006: 30%) 179 145 158 187

Tax effect of:

Different tax rates of subsidiaries operating in other jurisdictions 4 4 14 14

Share of results of joint ventures and associates (42) (42) (38) (38)

Tax holidays (8) (8) (10) (10)

Expenses not deductible/(income not taxable) in determining taxable profit 10 (63) (4) (6)

Utilisation of tax losses not previously recognised (4) (7) (4) (6)

Change in tax rate (31) (80) – –

Adjustment to prior year provisions 5 5 6 6

Tax expense for the year 113 (46) 122 147

Included in profit before tax excluding exceptional items and specific IAS 39 mark to market movements is a tax charge of £60 million (2006: £55 million) relating to the Group’s share of results of joint ventures and associates. The £42 million shown above (2006: £38 million) represents 70% of this tax charge (2006: 70%). The remaining 30% is already included within the tax charge calculated at the domestic tax rate.

Included in profit before tax including exceptional items and specific IAS 39 mark to market movements is a tax charge of £60 million (2006: £54 million) relating to the Group’s share of results of joint ventures and associates. The £42 million shown above (2006: £38 million) represents 70% of this tax charge (2006: 70%). The remaining 30% is already included within the tax charge calculated at the domestic tax rate.

The statutory tax rate in the UK has been reduced from 30% to 28% with effect from 1 April 2008. Tax rate reductions have also occurred in Italy, Germany and the Czech Republic. The effect of these rate changes is included in the above amounts.

10 Dividends

At the Company’s Annual General Meeting (AGM) held on 15 May 2007, shareholders approved the payment of a final dividend of 7.9p (2006: 4.5p) per Ordinary Share to shareholders registered on the Company share register on 25 May 2007. This dividend amounted to £118 million (2006: £67 million) and was paid on 26 June 2007.

An interim dividend of 2.77p per Ordinary Share, proposed by the Directors, was paid on 30 October 2007. This dividend amounted to £42 million (2006: £nil).

In respect of the current year, the Directors propose a dividend of 7.39p per Ordinary Share, to be paid on 26 June 2008. The dividend is subject to approval byshareholders at the Company’s AGM and has not been included as a liability at 31 December 2007. There are no tax consequences to the Company from theestimated total dividend to be paid of £111 million.


11 Earnings per share (EPS)

Earnings per share is presented both before exceptional items and specific IAS 39 mark to market movements and after exceptional items and specific IAS 39 mark to market movements in order to allow a better understanding of the financial information presented, and specifically the Group’s underlying business performance.Further details of the exceptional items and specific IAS 39 mark to market movements can be found in note 8 to these consolidated financial statements.


2007 2006pence pence

a) Earnings per share (basic)

Before exceptional items and specific IAS 39 mark to market movements 27.1 22.4

After exceptional items and specific IAS 39 mark to market movements 33.6 27.6

b) Earnings per share (diluted)

Before exceptional items and specific IAS 39 mark to market movements 25.7 21.3

After exceptional items and specific IAS 39 mark to market movements 31.8 26.2

c) Basis of calculation (basic) – earnings £m £m

Profit attributable to equity holders of the parent before exceptional itemsand specific IAS 39 mark to market movements 406 332

Exceptional items and specific IAS 39 mark to market movements (net of tax and minority interests) 97 78

Profit attributable to equity holders of the parent after exceptional itemsand specific IAS 39 mark to market movements 503 410

d) Basis of calculation (diluted) – earnings £m £m

Profit attributable to equity holders of the parent before exceptional itemsand specific IAS 39 mark to market movements 406 332

After tax dilutive effect of interest on convertible bonds 6 7

Profit attributable to equity holders of the parent before exceptional itemsand specific IAS 39 mark to market movements for the purposes of diluted EPS 412 339

Exceptional items and specific IAS 39 mark to market movements (net of tax and minority interests) 97 78

Profit attributable to equity holders of the parent after exceptional itemsand specific IAS 39 mark to market movements for the purposes of diluted EPS 509 417

e) Basis of calculation (basic) – number of Ordinary Shares Million Million

Weighted average number of issued Ordinary Shares for the purposes of basic EPS 1,498.5 1,486.2

Weighted average number of shares held by Employee Share Ownership Trusts (ESOTs) (0.5) (1.4)

Weighted average number of shares 1,498.0 1,484.8

f) Basis of calculation (diluted) – number of Ordinary Shares Million Million

Weighted average number of shares – basic 1,498.0 1,484.8

Dilutive potential Ordinary Shares:

Employee share schemes 10.8 14.0

Convertible bond 92.8 91.1

Weighted average number of Ordinary Shares for the purposes of diluted EPS 1,601.6 1,589.9

In July 2006 the Group issued 3.25% convertible euro bonds 2013, which in 2007 and 2006 were anti-dilutive and have therefore been excluded from the dilutedearnings per share calculation. In future periods this financial instrument could potentially dilute basic earnings per share.


12 Goodwill


£m £m

Carrying amount


Acquired through business combinations 464 40



The £464 million acquired through business combinations in 2007 relates to Maestrale (£360 million), Simply Energy (£71 million), Saltend (£23 million) and First Hydro (£10 million). Refer to note 31 for further details of the acquisitions.

Given the geographical diversity of the Group’s power plants and the nature of their operations, for impairment testing purposes the Directors consider that eachpower plant owning subsidiary is a separate cash generating unit. The following cash generating units have significant carrying amounts of goodwill:


£m £m

Maestrale (Europe) 391 –

First Hydro (Europe) 163 153

Simply Energy (Australia) 80 –

Coleto Creek (North America) 37 38

Turbogás (Europe) 28 26

Saltend (Europe) 23 –

International Power Opatovice (Europe) 9 8

Others 2 1

733 226

The Group tests goodwill for impairment annually or when there is an indication that goodwill might be impaired. The cash generating units’ recoverable amounts aredetermined from value in use calculations. These are based on projected cash flows, which may extend forward as much as 40 years, from individual project whole lifeasset models. These cash flows have been discounted using rates in the range 6% to 13% on a pre-tax basis. Key assumptions include the discount rates and marketprices for electricity and fuel costs over the lives of the assets. These market prices are considered in the light of forward price curves (which represent the Group’sview as to prices at which customers would currently contract for delivery or settlement of commodities, such as power or gas, at future dates) and forecast demandand supply growth over the lives of the assets. Electricity prices beyond the period of an observable market are determined by reference to long-term market priceassumptions relating to the prices of commodities such as oil, the cost of constructing and financing the building of new power plants, and the prices at which it wouldbe economic for companies to enter the market and build additional capacity (‘new entrant pricing’). The projected cash flows extend over the whole of the assets’expected lives as this best reflects the long-term nature of the returns generated by the long-life assets. Pre-tax risk adjusted discount rates take into account currentmarket assessments of the time value of money and risks specific to the respective cash generating unit.


13 Other intangible assets

Contracts Emission Totaland rights allowances

£m £m £m

Cost

At 1 January 2006 234 – 234

Additions – 39 39

Acquisition of subsidiaries 49 64 113

Disposals – (39) (39)

Exchange differences (1) (3) (4)

At 31 December 2006 282 61 343

Additions 1 57 58

Acquisition of subsidiaries 69 12 81


Exchange differences 2 1 3

At 31 December 2007 354 121 475

Amortisation and impairments

At 1 January 2006 40 – 40

Amortisation charge for the year 101 4 105

Exchange differences – (1) (1)

At 31 December 2006 141 3 144

Amortisation charge for the year 66 49 115

Impairments 47 – 47

Exchange differences 1 – 1

At 31 December 2007 255 52 307

Carrying amount

At 1 January 2006 194 – 194

At 31 December 2006 141 58 199

At 31 December 2007 99 69 168

Contracts and rights are amortised over the period in which benefits are expected to arise. The contracts and rights acquired in 2007 principally relate to fixed-price offtake agreements and favourable contracts acquired as part of the Maestrale acquisition and our other European wind farm acquisitions. The amortisation of thesecontracts are included in revenue. The acquired contracts and rights in 2006 relate to commodity contracts acquired as part of the acquisitions of Coleto Creek andIndian Queens. The amortisation of these contracts is charged to cost of sales in the income statement. In addition, fixed price offtake agreements were acquired as partof the acquisition of Levanto. Amortisation of these agreements is included in revenue. In 2007 the carrying amount of the Saltend gas contract was impaired in full.

Intangible assets with a carrying amount of £81 million (2006: £97 million) are subject to fixed and floating charges from banks providing borrowing facilities whichare non-recourse to the Company.

The Group has recognised any emission allowances, allocated to the Group for no consideration, net of the fair value of the grant. As a result, no net asset or liability is shown on the balance sheet at initial recognition. The amortisation of any emission allowances purchased or acquired through business combinations is charged to cost of sales in the income statement over the period in which benefits are expected to arise.

As part of the European Union (EU) Emissions Trading Scheme (EUETS), designed to reduce greenhouse gas emissions in the EU over the medium term, the Groupwas granted emission allowances amounting to £62 million in respect of the year ended 31 December 2007 (2006: £49 million).


14 Property, plant and equipment

Land and Plant, machinery Assets in course Totalbuildings and equipment of construction

£m £m £m £m

Cost

At 1 January 2006 180 4,540 316 5,036

Additions 3 169 64 236

Acquisition of subsidiaries 5 653 64 722

Disposals – (13) – (13)

Reclassifications and transfers (20) (19) (314) (353)

Exchange differences (4) (254) (36) (294)

At 31 December 2006 164 5,076 94 5,334

Additions 4 60 167 231

Government grants received – – (1) (1)

Acquisition of subsidiaries 2 977 85 1,064

Disposals (11) (12) – (23)

Reclassifications and transfers 1 91 (136) (44)

Exchange differences 10 275 20 305

At 31 December 2007 170 6,467 229 6,866

Accumulated depreciation

At 1 January 2006 34 795 – 829

Depreciation charge for the year 10 158 – 168

Disposals – (8) – (8)

Impairment reversal – (36) – (36)

Reclassifications (7) 7 – –

Exchange differences (1) (53) – (54)

At 31 December 2006 36 863 – 899

Depreciation charge for the year 10 195 – 205

Disposals (6) (12) – (18)

Exchange differences 3 56 – 59

At 31 December 2007 43 1,102 – 1,145

Carrying amount

At 1 January 2006 146 3,745 316 4,207

At 31 December 2006 128 4,213 94 4,435

At 31 December 2007 127 5,365 229 5,721

Interest capitalised in the year was £5 million (2006: £1 million), at an average capitalisation rate of 7%. On a cumulative basis, after taking into account exchangedifferences and depreciation, the carrying amount of interest capitalised is £64 million (2006: £60 million).

The total value of land, included within land and buildings, that is not depreciated is £41 million (2006: £46 million).

Property, plant and equipment with a carrying amount of £5,377 million (2006: £4,163 million) is subject to fixed and floating charges from banks providingborrowing facilities which are non-recourse to the Company.

In 2007 reclassifications and transfers consist of amounts moved from assets in course of construction to plant, machinery and equipment and to finance leasereceivables and inventories.

Property, plant and equipment with a carrying amount of £1 million (2006: £nil) is subject to finance lease arrangements.


15 Investments in joint ventures and associates

Summarised financial information in respect of the Group’s joint ventures and associates is set out below:


£m £m

a) Joint ventures’ net assets (including goodwill)

Non-current assets 1,173 1,220

Current assets 225 316


Current liabilities (123) (204)

Non-current liabilities (565) (588)

Total liabilities (688) (792)

Net assets 710 744

Group’s share of joint ventures’ net assets 346 365

b) Associates’ net assets (including goodwill)

Non-current assets 5,847 5,630

Current assets 1,298 1,247


Current liabilities (724) (695)

Non-current liabilities (3,975) (3,788)

Total liabilities (4,699) (4,483)


Group’s share of associates’ net assets 933 899


2007 2006£m £m

c) Results of joint ventures

Revenue 693 771


Group’s share of results of joint ventures

Share of revenue 340 379

Share of profit for the year 59 59

d) Results of associates

Revenue 2,501 2,501


Group’s share of results of associates

Share of revenue 820 820

Share of profit for the year 139 155

At 31 December 2007 the Group’s investments that are listed on a recognised stock market are those in The Hub Power Company Limited (HUBCO) and Kot AdduPower Company Limited (KAPCO). HUBCO and KAPCO are considered associates and International Power continues to apply the equity method of accounting toHUBCO despite its shareholding being less than 20% (refer to note 38). The Group’s share of HUBCO and KAPCO was valued at £50 million (2006: £46 million)and £125 million (2006: £108 million), respectively, on the major Pakistan stock markets. Market values for Group shareholdings in these investments were in excessof the respective carrying amounts at the year end.

A subsidiary, Al Kamil, is listed on the Muscat Securities Market and was valued at £15 million on 31 December 2007 (2006: £14 million). The Group owns 65% of Al Kamil.

Included within the Group’s share of net assets of joint ventures and associates is net debt of £1,297 million (2006: £1,524 million). These obligations are generallysecured by the assets of the respective joint venture or associate borrower and are not guaranteed by International Power plc or any other Group company.

A full list of significant joint ventures and associates is included in note 38.


16 Other investments


£m £m

Investments available-for-sale

Carrying amount

At 1 January 26 4

Additions – 23

Disposals (2) (1)

Provisions (9) –

Repayments (1) –

Exchange differences (1) –


The Group owns debt instruments and minority shareholdings in a number of businesses related to power generation. The debt instruments are stated at fair valuebased on an estimate of their discounted cash flows. The equity instruments are not quoted but are shares in privately owned companies. There is no market for these investments. Therefore the fair value of the equity instruments cannot be measured reliably and the carrying amount has been determined by using the cost of acquiring the shares in these companies.

It is not currently the intention of the Company to dispose of these investments, although circumstances may change.

During 2007 the Group fully provided against its investment in BioX (refer to note 8). The provision arose from an assessment of the prospective cash flows of thebusiness following a significant increase in palm oil prices.

17 Finance lease receivablesPresent value of

minimum lease payments

31 December 31 December 31 December 31 December2007 2006 2007 2006

£m £m £m £m

Minimum lease payments:

Within one year 41 33 127 110

Later than one year and not later than five years 184 144 500 427

After five years 939 828 1,529 1,389

1,164 1,005 2,156 1,926

Add: unguaranteed residual value (after five years) 129 73

Gross investment in the lease 2,285 1,999

Less: unearned finance income (992) (921)

Total finance lease receivables 1,293 1,078

Analysed as:

Non-current finance lease receivables (recoverable after 12 months) 1,252 1,045

Current finance lease receivables (recoverable within 12 months) 41 33


Analysed as:

Present value of minimum lease payments 1,164 1,005

Add: unguaranteed residual value 129 73


International Power’s business is the generation of electricity. The Group enters into arrangements such as long-term PPAs to secure contracted revenues for a longperiod of time. Some of these arrangements are determined to be or to contain finance leases. The tenors of the finance leases are usually a substantial portion of the assets’ useful economic lives.

The interest rate inherent in the lease is fixed at the contract date for all of the lease term. The average effective interest rate contracted is approximately 7% perannum (2006: 8% per annum).

The fair value of the Group’s finance lease receivables as at 31 December 2007 is estimated at £1,226 million (2006: £1,106 million) based on discounting estimatedcash flows at the market rate.

Excluding assets which are constructed by the Group, the cost of assets acquired by the Group during the year for onward finance leasing was £126 million (2006: £273 million).

There are no finance lease receivables past due. Finance lease receivables are with strong investment grade counterparties including the Portuguese and Germangovernments.


18 Other long-term receivables


£m £m

Total other long-term receivables 91 94

At 31 December 2007 receivables with a carrying amount of £7 million (2006: £6 million) were past due for more than six months for which an impairment loss has not been recognised. Offsetting liabilities are held against these receivables.

19 Deferred tax

Deferred tax accounted for in the consolidated balance sheet and the potential amounts of deferred tax are:31 December 31 December

2007 2006£m £m

Deferred tax liabilities:

Property, plant and equipment accelerated capital allowances (989) (569)

Other temporary differences (35) (277)

Investments in subsidiaries, joint ventures and associates (59) (57)

Total deferred tax liabilities (1,083) (903)


£m £m

Deferred tax assets:

Provisions – 43

Tax losses 139 161

Other temporary differences 279 245

Total gross deferred tax assets 418 449

Less: deferred tax assets not recognised (144) (155)

Total deferred tax assets 274 294

Net deferred tax liabilities (809) (609)

Deferred tax assets will be offset against suitable taxable profits when they arise.

Of the £139 million (2006: £161 million) deferred tax asset in respect of tax losses, £95 million (2006: £106 million) can be carried forward for a period of between 15 and 21 years. The balance can be carried forward indefinitely. Of the £139 million (2006: £161 million) of losses, £44 million has been recognised (2006: £55 million).

At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries, associates and joint ventures was £1,154 million (2006: £888 million). At 31 December 2007 a deferred tax provision of £59 million (2006: £57 million) has been recognised in respect of temporarydifferences which are likely to reverse in the near future or where the Group is unable to control the reversal of the timing difference.

Calculation of the potential deferred tax liability for the total aggregate undistributed earnings has not been undertaken as the Group is in a position to control thetiming of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. If the temporary differences were to reverse in the future, it is probable that the majority of the potential tax liability would be covered by tax credits in respect of tax paid locally.

Certain deferred tax assets and liabilities have been offset in accordance with the Group’s accounting policy. The following is the analysis of the deferred tax balances(after offset) for balance sheet purposes.


£m £m

Deferred tax liabilities (951) (702)

Deferred tax assets 142 93

Net deferred tax liabilities (809) (609)

As outlined in note 9, changes to the tax rates in certain jurisdictions were enacted or substantively enacted during 2007.


19 Deferred tax continued

Movement in temporary differences during the year:1 January Recognised Other Recognised Acquisition of Exchange 31 December

2007 in income movements in equity subsidiaries differences 2007£m £m £m £m £m £m £m

Property, plant and equipment 330 (80) 345 – 337 57 989

Other temporary differences 222 (95) (354) (21) 22 (13) (239)

Dividends of overseas subsidiaries, associates and joint ventures 57 5 (3) – – – 59

609 (170) (12) (21) 359 44 809

1 January Recognised Other Recognised Acquisition of Exchange 31 December2006 in income movements in equity subsidiaries differences 2006

£m £m £m £m £m £m £m

Property, plant and equipment 306 (17) 12 – 41 (12) 330

Other temporary differences 133 49 (8) 43 – 5 222

Dividends of overseas subsidiaries, associates and joint ventures 40 17 1 – – (1) 57

479 49 5 43 41 (8) 609

20 Inventories


£m £m

Plant spares 27 26

Fuel inventories 47 55

Consumables 84 60

Total inventories 158 141

Inventories with a carrying amount of £95 million (2006: £116 million) are subject to fixed and floating charges of project finance facilities at various power plantsubsidiaries. These project finance facilities are non-recourse to International Power plc. Included within cost of sales are £211 million (2006: £288 million) of inventories recognised as an expense in the year. Inventories with a carrying amount of £2 million (2006: £nil) were written down during the year and recorded as an expense in the income statement.

21 Trade and other receivables


£m £m

Trade receivables 221 142

Other receivables 375 157

Accrued income 49 –

645 299

Prepayments 81 103

Total trade and other receivables 726 402

The Directors consider that the carrying amounts of trade and other receivables approximate to their fair value. Total trade and other receivables are stated net of thefollowing provisions for irrecoverable amounts.


£m £m

At 1 January 23 16

Amounts provided for during the year – 7



Trade receivables, other receivables and accrued income are analysed as follows:


Retail Corporate Government Total Retail Corporate Government Total£m £m £m £m £m £m £m £m

Not overdue 35 397 185 617 1 251 38 290

Up to 1 month past due 3 – – 3 – – – –

Between 1 and 3 months past due 2 – – 2 – – – –

Between 3 and 6 months past due 4 – – 4 – – – –

More than 6 months past due – 19 – 19 – 9 – 9

At 31 December 44 416 185 645 1 260 38 299

Retail energy sales are those to residential, commercial, and industrial customers to cover end-use purposes. This mostly comprises sales to customers of SimplyEnergy in South Australia and Victoria in Australia. Corporate energy sales are principally to merchant trading counterparties in the wholesale power market andcomprise electricity utility companies, who require energy to meet retail sales requirements, and market makers such as large investment banks. In the precedingtable, the term ‘Government‘ is used to describe customers who are either owned directly by government or the State or are institutions backed by guarantees fromgovernment. Sales to these customers are typically administered under long-term power purchase agreements. Customers will include water and electricity authoritieslocated in Asia, the Middle East and Europe.

The majority of the trade receivables which are not overdue relate to merchant trading counterparties for whom we hold collateral in the form of parent companyguarantees, letters of credit and cash held as security. Corporate receivables more than six months overdue relate to contractual disputes where we have significantcounter claims or offsetting liabilities.

The preceding table shows £28 million (4%) of debtors are overdue and, of these, £25 million (4%) relates to outstanding amounts greater than one month past due. As at 31 December 2007, all the merchant trading and PPA counterparties have demonstrated a consistent payment history and no defaults have beenregistered in 2007 (2006: £nil). Management maintain a bad debt provision appropriate to the limited likelihood of retail, merchant and power purchase agreementpayment defaults.

Concentrations of credit risk relating to the Group’s wholesale power sales are limited due to the diversity of unrelated customers for our power plants locatedworldwide. For the Group’s retail business in Australia, Simply Energy, concentration of credit risk is limited due to the customer base being both large and unrelated.Power purchase agreements and tolling agreements with major institutions can potentially have high concentration risk but this risk is mitigated by the diversity ofsimilar arrangements within our worldwide portfolio.

22 Derivative financial instruments


Assets Liabilities Assets Liabilities£m £m £m £m

Energy derivatives 208 734 236 362

Interest rate swaps 30 24 15 9

Options over equity 30 76 30 59

268 834 281 430

Current 223 508 243 204

Non-current 45 326 38 226

268 834 281 430

The Group utilises interest rate swaps to manage its interest rate exposures by swapping an element of its borrowings from floating rates to fixed rates. As at 31 December 2007, the total notional value of interest rate swaps was £2,289 million (2006: £2,007 million).

The Group owns purchased call options over the equity of various energy related businesses. The Group already has an equity interest in some of these businesses.The Group has also issued convertible bonds which can convert into Ordinary Shares of International Power plc. The conversion feature in the 3.25% convertible euro bond is accounted for as an embedded derivative (refer to note 25).

The Group sometimes utilises foreign currency exchange contracts to manage its foreign exchange rate exposures. As at 31 December 2007, the total notional value of these contracts was £15 million (2006: £45 million) and the mark to market was £nil (2006: £nil).


23 Cash and cash equivalents

Cash and cash equivalents comprise bank balances and cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates to their fair value.


£m £m

Cash at bank 672 378

Short-term deposits 489 602

Cash and cash equivalents in the cash flow statement 1,161 980

The total cash and cash equivalents balance includes £377 million (2006: £211 million) of cash which is considered to be ‘restricted’ as it is primarily to secureamounts required for debt repayments and letters of credit.

24 Assets held for sale

The sale of the Group’s investment in the Malakoff wholesale power generation business to MMC Corporation was completed on 30 April 2007. This resulted inproceeds of £249 million and a profit on disposal of £115 million. The profit on disposal is included in ‘Disposal of interests in businesses’ in the income statement(refer to note 8).

25 Loans and bonds

An analysis of the interest-bearing loans and bonds, which are measured at amortised cost, is as follows:


Face value Carrying Face value Carryingamount amount

£m £m £m £m

a) Secured interest-bearing loans and bonds

Current liabilities

Secured bank loans(1) 357 352 235 231

Secured bonds(1) 12 12 10 10

369 364 245 241


Secured bank loans(1) 4,296 4,256 3,255 3,209

Secured bonds(1) 634 682 626 677

4,930 4,938 3,881 3,886

Total secured interest-bearing loans and bonds 5,299 5,302 4,126 4,127

b) Unsecured interest-bearing loans and bonds

Current liabilities

Loans from minority interests(2) 24 24 – –

Preferred equity facility(3) 151 151 – –

175 175 – –


Loans from minority interests(2) 91 91 81 81

Preferred equity facility(3) – – 153 152

3.75% Convertible US dollar bonds 2023(4) 127 115 129 113

3.25% Convertible euro bonds 2013(5) 169 140 155 124

387 346 518 470

Total unsecured interest-bearing loans and bonds 562 521 518 470

c) Total interest-bearing loans and bonds

Current liabilities 544 539 245 241

Non-current liabilities 5,317 5,284 4,399 4,356

Total interest-bearing loans and bonds 5,861 5,823 4,644 4,597


A description of the foregoing items is as follows:

(1) Secured interest-bearing loans and bondsSecured bank loans comprise amounts borrowed from commercial banks. Secured bonds comprise those relating to the financing of First Hydro and the Levanto wind farm portfolio.

The bank loans and bonds with a carrying amount of £5,302 million (2006: £4,127 million) are secured by fixed and floating charges over the assets of certainsubsidiaries. Substantially all of the Group’s power stations, generating assets and other operating assets are financed under facilities which are non-recourse toInternational Power plc and secured solely on the assets of the subsidiary concerned.

Although not in default of principal or interest payment terms, at 31 December 2007 the Group had borrowings of £62 million in technical default which could haveallowed the lender to demand accelerated repayment of the loan. At 31 December 2007 the loan is classified as a current liability on the balance sheet. The technicaldefaults were cured during the first quarter of 2008.

(2) Loans from minority interestsLoans from minority interests comprise both term loans and working capital facilities provided by minority shareholders in subsidiaries. These loans and working capital facilities are provided on an unsecured basis for various maturity periods and have interest terms based on fixed or floating rates as specified in each individual agreement.

(3) Preferred equity facilityThe preferred equity facility comprises US$300 million in preference shares which were issued by Impala Magpie Limited to Mitsui Power Ventures Limited for thepurposes of financing the acquisition of the EME portfolio which was completed in December 2004.

Impala Magpie Limited is a 70% owned subsidiary of International Power plc and Mitsui Power Ventures Limited is a wholly-owned subsidiary of Mitsui & Co of Japan. Mitsui Power Ventures Limited is International Power’s partner in IPM Eagle LLP, which is the owner of assets formerly owned by Edison Mission Energy, and IPM (UK) Power Holdings Limited, which is the owner of certain UK generating assets.

The preference shares entitle the holder to a preferred dividend coupon of US dollar LIBOR plus 2%. The preference shares are redeemable from 16 December 2008and may also be redeemed if funds become available following the sale of certain assets.

International Power (Impala), a wholly-owned subsidiary of International Power plc, has granted Mitsui Power Ventures Limited a put option to sell 70% of thepreference shares it holds on the date of exercise. The put option is exercisable in certain circumstances, including where Impala Magpie Limited fails to redeem thepreference shares on maturity.

Although the preference shares are unsecured, International Power plc has agreed to guarantee International Power (Impala)’s obligations to Mitsui & Co of Japan and Mitsui Power Ventures Limited.

(4) 3.75% Convertible US dollar bonds 2023On 22 August 2003, International Power (Jersey) Limited, a wholly-owned subsidiary company incorporated in Jersey, issued US$252.5 million 3.75% convertiblenotes due 2023, convertible into preference shares of International Power (Jersey) Limited at the holder’s option, immediately exchangeable for Ordinary Shares of,and unconditionally guaranteed by, International Power plc.

The notes are convertible into Ordinary Shares of International Power plc at a conversion price of 168p at any time up to 12 August 2023. Each US$1,000 principalamount of notes will entitle the holder to convert into a US$1,000 paid-up value of preference shares of International Power (Jersey) Limited. The notes may beredeemed at the holder’s option at their principal amount, together with accrued interest, to the date fixed for redemption.

The convertible bonds mature in August 2023 but with bondholders having the right to put the bond back to the Group in August 2010, 2013, 2018 and 2023.

If the conversion option is not exercised, the convertible unsecured notes will be redeemed on 22 August 2023 at a redemption price equivalent to their principalamount.

Following the extinguishment of a cash settlement option on 17 January 2005, the remaining conversion feature, being an equity call option held by the bondholderswas recognised in equity. The remaining debt element of the convertible bond accretes to par value over the life of the bond at a constant periodic rate based on itscarrying amount.

The interest charged for the year is calculated by applying an effective interest rate of 3.65% to the liability component for the period since the convertible US dollarbond was issued. This is in addition to the coupon interest rate of 3.75% per annum.

The Directors estimate the fair value of the liability component of the convertible US dollar bonds at 31 December 2007 to be approximately £122 million (31 December 2006: £114 million). This fair value has been determined by reference to the market price at 31 December 2007.


25 Loans and bonds continued

(5) 3.25% Convertible euro bonds 2013On 20 July 2006, International Power Finance (Jersey) II Limited, a wholly-owned subsidiary company incorporated in Jersey, issued €230 million 3.25% convertiblenotes due 2013, convertible into preference shares of International Power Finance (Jersey) II Limited at the holder’s option, immediately exchangeable for OrdinaryShares of, and unconditionally guaranteed by, International Power plc.

The notes are convertible into Ordinary Shares of International Power plc at a conversion price of 384p at any time up to 20 July 2013. Each €50,000 principalamount of notes will entitle the holder to convert into a €50,000 paid-up value of preference shares of International Power Finance (Jersey) II Limited. The notes maybe redeemed at the holder’s option at their principal amount, together with accrued interest, to the date fixed for redemption.

If the conversion option is not exercised, the convertible unsecured notes will be redeemed on 20 July 2013 at a redemption price equivalent to their principal amount.

The net proceeds received from the issue of the convertible bond have been split between the debt element and an embedded derivative component. This embedded derivative component represents the fair value of the equity conversion call option held by the bondholders.

The interest charged for the year is calculated by applying an effective interest rate of 3.39% to the liability component for the period since the convertible euro bond was issued. This is in addition to the coupon interest rate of 3.25% per annum.

The Directors estimate the fair value of the liability component of the convertible euro bonds at 31 December 2007 to be approximately £137 million (31 December 2006: £133 million). This fair value has been determined by reference to the market price at 31 December 2007.

Hedge of net investment in overseas operationsThe Group has loans denominated in foreign currencies that have been designated as hedges of the net investment in foreign operations in Europe and Australia. The value of these non-derivative financial liabilities, used as hedging instruments, at the balance sheet date was:


£m £m

Euro 165 150

Australian dollar 38 37

203 187

The foreign exchange loss of £17 million (2006: gain of £5 million) on re-translation of these loans has been taken to the translation reserve on consolidation.

Maturity of borrowingsThe following table is an analysis of the contractual undiscounted cash flows relating to loans and bonds and a reconciliation from undiscounted cash flows, includinginterest coupons, to carrying amounts:

31 December 2007

Due within Due between Due between Due after Total Impact of Impact of Carrying1 year 1 and 2 years 2 and 5 years 5 years undiscounted other interest amount

cash flows non-cash coupons/items discounting

£m £m £m £m £m £m £m £m

Secured bank loans 528 603 2,623 2,222 5,976 (50) (1,318) 4,608

Secured bonds 73 61 180 995 1,309 (2) (613) 694

Loans from minority interests 41 17 150 – 208 – (93) 115

Preferred equity facility 167 – – – 167 – (16) 151

3.75% convertible US dollar bonds 2023 6 5 14 178 203 (1) (87) 115

3.25% convertible euro bonds 2013 8 5 17 172 202 (2) (60) 140

823 691 2,984 3,567 8,065 (55) (2,187) 5,823

31 December 2006



£m £m £m £m £m £m £m £m

Secured bank loans 471 519 1,481 2,227 4,698 (50) (1,208) 3,440

Secured bonds 69 59 186 1,033 1,347 (5) (655) 687

Loans from minority interests 21 9 71 – 101 – (20) 81

Preferred equity facility 13 169 – – 182 – (30) 152

3.75% convertible US dollar bonds 2023 7 5 14 185 211 (2) (96) 113

3.25% convertible euro bonds 2013 7 5 15 163 190 (2) (64) 124

588 766 1,767 3,608 6,729 (59) (2,073) 4,597

Other non-cash items represent debt issue costs. The above table assumes the convertible bonds are redeemed by the payment of cash at maturity.


26 Net debt

Analysis of changes in net debt1 January On acquisition Other Cash flow Exchange 31 December

2007 of subsidiaries non-cash differences 2007(excluding cash) movements

£m £m £m £m £m £m

Cash and cash equivalents 980 – – 165 16 1,161

Assets held for trading 42 – 1 (44) 1 –

Total funds 1,022 – 1 121 17 1,161

Loans due within one year (231) (68) – (67) (10) (376)

Loans due after more than one year (3,290) (693) (11) (167) (186) (4,347)

Secured bonds due within one year (10) – – (1) (1) (12)

Secured bonds due after more than one year (677) – 2 12 (19) (682)

Preferred equity facility (152) – (1) – 2 (151)

Convertible bonds (237) – (9) – (9) (255)

Total debt (4,597) (761) (19) (223) (223) (5,823)

Net debt (3,575) (761) (18) (102) (206) (4,662)

1 January On acquisition Other Cash flow Exchange 31 December2006 of subsidiaries non-cash differences 2006

(excluding cash) movements£m £m £m £m £m £m

Cash and cash equivalents 620 – – 386 (26) 980

Assets held for trading 52 – 2 (9) (3) 42

Total funds 672 – 2 377 (29) 1,022

Loans due within one year (187) (26) (96) 73 5 (231)

Loans due after more than one year (2,802) (40) 84 (756) 224 (3,290)

Secured bonds due within one year – (10) – – – (10)

Secured bonds due after more than one year (445) (233) 3 – (2) (677)

Preferred equity facility (173) – – – 21 (152)

Convertible bonds (125) – 24 (152) 16 (237)

Total debt (3,732) (309) 15 (835) 264 (4,597)

Net debt (3,060) (309) 17 (458) 235 (3,575)

27 Trade and other payables


£m £m

Trade payables 184 85

Other payables 222 226

Accruals 268 206

Deferred income 35 12

Total trade and other payables 709 529

The Directors consider the carrying amounts of trade and other payables approximate to their fair value. All trade and other payables are expected to fall due withinone year.


28 Provisions

Commodity Leave Site Other Totalcontracts provisions restoration

£m £m £m £m £m

At 1 January 2007 133 17 16 18 184

Acquisitions 17 – – 3 20

Provisions made during the year 3 3 2 13 21

Provisions utilised during the year (53) (3) – – (56)

Unwinding discount – – 1 – 1

Exchange differences (1) 2 2 1 4

At 31 December 2007 99 19 21 35 174


£m £m

Current liabilities 83 58

Non-current liabilities 91 126

Total provisions 174 184

Commodity contracts added in 2007 principally relate to onerous customer contracts fair valued as part of the acquisition of Simply Energy (refer to note 31). Most of this provision will unwind during 2008 and will be credited to revenue in the income statement.

The carrying amount of existing commodity contracts brought forward from 2006 relate to ‘out of the money’ power sales contracts acquired as part of theacquisition of Coleto Creek in 2006. When the provision is utilised it is credited to revenue in the income statement. This provision is expected to be mostly utilised by 2014.

‘Other’ provisions principally relate to onerous property leases and disputed contractual amounts and penalties. £10 million has been provided for during the year forthe expected vacancy period for leased premises at Senator House in London. The lease provision is expected to be utilised within the next three years.


29 Share-based payments

a) Number of shares and exercise prices under Share Option PlansThe Group operates the following employee share plans for which shares may be issued by the Group out of authorised but unissued share capital upon exercise ofoptions: the UK Approved Sharesave Plan and the Global Sharesave Plan; the UK Approved and Unapproved Executive Share Option Plans, the Global Executive ShareOption Plan and the 2002 Performance Share Plan. The total number of options outstanding at the end of the year was as follows:

Number of Ordinary Shares

Option Date Year ended Year endedprice range exercisable 31 December 31 December

2007 2006

Sharesave Plans 70.33p-389.00p 2006-2013 6,429,720 6,021,436

Executive Share Option Plans 62.32p-388.25p 2000-2016 14,695,753 21,294,173

2002 Performance Share Plan 74.79p 2003 onwards – 1,230,108

Total options outstanding 21,125,473 28,545,717

Details of each Plan are set out on the following pages:

i) Sharesave PlansThe UK Approved Sharesave Plan and the Global Sharesave Plan are savings related and enable employees in the UK and a number of other jurisdictions to invest upto a maximum of £250 (or foreign currency equivalent) per month for the purpose of acquiring shares in the Group. The option prices are fixed at a discount of 20%to the market value of the Company’s Ordinary Shares as at the date of grant of the option. Options are exercisable at the prices set out below. The option exerciseperiod commences either three or five years after the option has been granted (determined at the time that the employee enters into the savings agreement) and if the options remain unexercised after a period of six months following the beginning of the option exercise period, the options expire. Except for certain specificcircumstances (e.g. redundancy) options lapse if the employee leaves the Group before the option exercise period commences. Details of the share optionsoutstanding at the end of the year are as follows:


Option Date Year ended Year endedprice exercisable 31 December 31 December

2007 2006

178.06p 2006-2007 – 6,631

80.12p 2007-2008 1,985,637 2,578,756

97.93p 2006-2007 – 79,672

97.93p 2008-2009 69,582 69,582

70.33p 2008 570,644 591,812

97.93p 2007 – 149,183

97.93p 2009 99,331 99,331

200.00p 2009 1,314,025 1,362,177

200.00p 2011 1,035,019 1,084,292

389.00p 2011 606,225 –

389.00p 2013 749,257 –

6,429,720 6,021,436

The number and weighted average exercise prices of Sharesave Plan share options are as follows:


Number of Weighted Number of Weighted Ordinary average Ordinary average

Shares exercise price Shares exercise pricepence pence

Options outstanding at beginning of the year 6,021,436 129.15 4,861,349 79.07

Granted during the year 1,365,425 389.00 2,535,694 200.00

Exercised during the year (830,476) 87.10 (1,196,959) 74.24

Expired during the year – – (37,857) 75.41

Forfeited during the year (126,665) 186.68 (140,791) 157.26

Options outstanding at end of the year 6,429,720 188.63 6,021,436 129.15

Options exercisable at end of the year 1,985,637 86,303

The weighted average share price at the date of exercise for Sharesave Plan share options exercised during the year was 435.21 pence (2006: 287.15 pence). The share options outstanding at the end of the year have exercise prices in a range from 70.33 pence to 389.00 pence as outlined in the table above.

For these share options outstanding at the end of the year the weighted average remaining contractual life is 1.36 years (2006: 2.36 years).


29 Share-based payments continued

ii) Executive Share Option PlansThe UK Approved and Unapproved Executive Share Option Plans and the Global Executive Share Option Plan are discretionary employee share option plans. Optionsare granted to those employees selected to participate in the Plan at the discretion of the Directors of the Company. The exercise price of the options is fixed at themarket value of the Company’s Ordinary Shares as at the date that the options are granted. The option exercise period is between the third and tenth anniversaries of the date of grant of the options and if the options are not exercised before the expiry of the tenth anniversary of the date of grant then the options lapse. Except for certain specific circumstances (e.g. redundancy) options lapse if the employee leaves the Group before the option exercise period commences or if the employeeresigns from the Company. Details of the share options outstanding at the end of the year are as follows:


Option Date Year ended Year endedprice exercisable 31 December 31 December

2007 2006

343.73p 2000-2007 – 440,687

313.92p 2001-2008 210,568 586,630

277.55p 2003-2010 667,968 1,527,844

209.22p 2004-2011 342,766 631,668

193.19p 2004-2011 – 49,959

174.50p 2005-2012 2,968,750 3,329,619

62.32p 2006-2013 297,040 622,483

123.53p 2007-2014 644,297 6,228,318

179.25p 2008-2015 5,000,370 5,215,424

281.00p 2009-2016 2,502,846 2,661,541

388.25p 2009-2016 2,061,148 –

14,695,753 21,294,173

The number and weighted average exercise prices of Executive Share Options are as follows:


Number of Weighted Number of Weighted Ordinary average Ordinary average

Shares exercise price Shares exercise pricepence pence

Options outstanding at beginning of the year 21,294,173 186.60 32,687,124 145.14

Granted during the year 2,095,124 388.25 2,671,718 281.00

Exercised during the year (7,826,019) 162.29 (13,073,207) 104.51

Expired during the year (26,044) 343.73 (27,589) 287.76

Forfeited during the year (841,481) 200.50 (963,873) 152.77

Options outstanding at end of the year 14,695,753 227.22 21,294,173 186.60

Options exercisable at end of the year 5,131,389 7,188,890

The weighted average share price at the date of exercise for Executive Share Options exercised during the year was 407.32 pence (2006: 293.26 pence). The share options outstanding at the end of the year have exercise prices in a range from 62.32 pence to 388.25 pence as outlined in the table above.

For these share options outstanding at the end of the year the weighted average remaining contractual life is 5.8 years (2006: 6.8 years).


iii) 2002 Performance Share PlanUnder this Plan, Directors and certain senior managers of the Group are awarded conditional awards over Ordinary Shares in the Company. These conditional awards may vest three years after the awards have been made subject to the satisfactory performance of a performance condition (determined at the time that theconditional awards are made). In 2003 the Group granted to the Trustee of the International Power Employee Share Ownership Trust an option to acquire 3,807,057Ordinary Shares in the Company at an option price of 84 pence per share. Following a rights issue in 2004, the number of shares under option was increased to4,276,215 and the option exercise price was adjusted to 74.79 pence per share. This option could only be exercised to the extent required to satisfy conditionalawards made under the Performance Share Plan. These conditional awards can only vest after the end of the relevant performance period and only to the extent to which the performance conditions have been satisfied.

During 2006 the Trustee exercised this option to the extent of 3,046,107 shares in respect of Performance Share Plan awards released in March 2006. During 2007the Trustee exercised this option over the remaining 1,230,108 shares in respect of Performance Share Plan awards released in March 2007.

b) Fair value of options under Share Option Plans

i) Sharesave PlansThe estimated fair value of the options granted during the year was 136 pence per share (2006: 82 pence per share).

These fair values were calculated using the Black-Scholes option pricing model. The inputs into the model were as follows:2007 2006

Weighted average share price 473p 250p

Weighted average exercise price 389p 200p

Expected volatility 25% 30%

Expected life 4 years 4 years

Risk free rate 4.44% 4.16%

Expected dividend yield 2.70% 2.36%

ii) Executive Share Option PlansThe estimated fair value of the options granted during the year was 76 pence per share (2006: 61 pence per share).

These fair values were calculated using the Black-Scholes option pricing model. The inputs into the model were as follows:2007 2006

Weighted average share price 384p 269p

Weighted average exercise price 388p 281p

Expected volatility 25% 30%

Expected life 4 years 4 years

Risk free rate 5.11% 4.39%

Expected dividend yield 2.70% 2.36%

Expected volatility was determined by calculating the historical volatility of the Company’s share price over the previous six years. The expected life used in the modelhas been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

iii) 2002 Performance Share PlanNo performance share plan options were granted during the current or prior year.


30 Share capital and reserves

Authorised Issued and fully paidOrdinary Shares of 50p Ordinary Shares of 50p

Number £m Number £m

At 1 January 2007 2,266,000,000 1,133 1,492,052,910 746

Issue of shares under Executive Share Option Plan – – 7,826,019 4

Issue of shares under the Sharesave Plan – – 830,476 –

Issue of shares under Performance Share Plan – – 1,230,108 1

At 31 December 2007 2,266,000,000 1,133 1,501,939,513 751



At 1 January 2006 2,266,000,000 1,133 1,474,736,637 737


Issue of shares under the Sharesave Plan – – 1,196,959 1


At 31 December 2006 2,266,000,000 1,133 1,492,052,910 746

Ordinary SharesOrdinary Shares rank equally between each other with regard to the right to receive dividends and also in a distribution of assets on the winding up of the Company.

Deferred sharesThe Company has 21 Deferred Shares of 1 pence each in issue. These shares were issued to ensure the demerger of International Power and Innogy in 2000 waseffected as efficiently as possible. The holders of Deferred Shares have no rights to receive dividends or to attend or vote at any general meeting.

Unclassified shareFurther to the redemption of the Special Share in August 2000, the Company’s authorised share capital includes one unclassified share of £1.


Attributable to equity holders of the parent

Share Share Capital Capital Revaluation Hedging Translation Retained Totalcapital premium redemption reserve reserve reserve reserve earnings equity

account reserve£m £m £m £m £m £m £m £m £m

At 1 January 2007 746 402 145 422 – 6 (78) 819 2,462

Profit for the year – – – – – – – 503 503

Other recognised income and expenses relating to the year – – – – (9) (90) 113 – 14

Issue of shares 5 9 – – – – – – 14

Distributions – – – – – – – (160) (160)

Other movements – – – – – – – 11 11

At 31 December 2007 751 411 145 422 (9) (84) 35 1,173 2,844


Share Share Capital Capital Revaluation Hedging Translation Retained Totalcapital premium redemption reserve reserve reserve reserve earnings equity

account reserve£m £m £m £m £m £m £m £m £m

At 1 January 2006 737 394 145 422 – (118) 49 463 2,092

Profit for the year – – – – – – – 410 410

Other recognised income and expenses relating to the year – – – – – 124 (127) – (3)

Issue of shares 9 8 – – – – – – 17

Distributions – – – – – – – (67) (67)

Other movements – – – – – – – 13 13

At 31 December 2006 746 402 145 422 – 6 (78) 819 2,462

The share capital represents the authorised Ordinary Shares in the Company issued at par which carry a right to participate in the distribution of dividends or capital of the Company.

A number of International Power plc Ordinary Shares are held in Employee Share Ownership Trusts (ESOTs). These shares are held by the ESOTs to meetawards made under the Company’s 2002 Performance Share Plan. At 31 December 2007, the ESOTs held 253,990 International Power plc Ordinary Shares(2006: 1,241,452). At 31 December 2007 the market value of these shares was £1,151,845 (2006: £4,739,243). The maximum number of Ordinary Sharesrequired to meet all outstanding awards (assuming full vesting of those awards) as at 31 December 2007 was 6,139,922 (2006: 6,444,745).

The share premium account represents the difference between the issue price and the nominal value of shares issued.

The capital redemption reserve was created in March 1995 when the Company purchased and then cancelled approximately 98 million of its Ordinary Shares in conjunction with HM Treasury’s sale of its remaining 40% shareholding in the Company. The reserve was subsequently increased in the years ended 31 March 1996, 31 March 2000 and 31 December 2003 when further share purchases were made and these shares were cancelled. The capital redemption reserveis not distributable.

The capital reserve was vested in the Company at 31 March 1990 under the Transfer Scheme whereby the net assets of the Central Electricity Generating Board(CEGB) were divided among the CEGB successor companies. It is not distributable.

The revaluation reserve comprises the deficit arising from the revaluation of certain intangible assets as part of the step acquisition of Simply Energy on 16 August 2007 (refer to note 31a).

The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactionsthat have not yet occurred and to cumulative gains and losses on hedging instruments that no longer meet the criteria for hedge accounting, until the forecasttransaction occurs.

The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations that are not integral to the operations of the Company, as well as from the translation of liabilities that hedge the Company’s net investment in foreign operations (refer to note 32d).

£424 million (2006: £527 million) of the Group’s retained earnings is not distributable as it arose from unrealised gains on intra-group transfers.


31 Acquisitions and disposals

a) Simply EnergyOn 7 July 2005, iPower Pty Limited, a wholly-owned subsidiary of International Power plc, completed a retail energy partnership agreement with EnergyAustralia. The consideration was £27 million for a 50% share of the partnership. The retail energy partnership sells electricity and gas to retail customers in Victoria and South Australia. In the Group accounts, the retail partnership was accounted for as a jointly controlled entity and its results were accounted for under the equitymethod with effect from 7 July 2005.

On 16 August 2007, the Group completed the acquisition of the remaining 50% of the EnergyAustralia and International Power Australia retail energy partnership,through its subsidiary IP Retail Pty Limited, for £56 million. Following the completion of this transaction the business was renamed Simply Energy. The results of Simply Energy have been consolidated as a subsidiary from this date using the acquisition method.

The details of the transaction, result and fair value adjustments arising from the change in ownership are shown below:Acquiree’s Fair value Fair value

carrying adjustments to the amount Group

£m £m £m

Other intangible assets 6 (6) –

Trade receivables 19 – 19

Other receivables 1 – 1

Prepayments and accrued income 35 – 35

Derivative financial assets 40 – 40

Cash and cash equivalents 4 – 4

Bank loans (25) – (25)

Trade payables (27) – (27)

Other payables (2) – (2)

Deferred tax (20) 7 (13)

Provisions – (17) (17)

Net assets acquired 31 (16) 15

Goodwill arising on acquisition 71

Fair value of net assets acquired and goodwill 86

Components of cost of acquisition

Consideration for initial 50% shareholding in July 2005 27

Consideration for remaining 50% shareholding 56

Total cost of acquisition 83

Earnings under equity method of initial 50% shareholding (while Simply Energy was a jointly controlled entity) 11

Revaluation deficit on step acquisition (8)

Fair value of net assets acquired and goodwill 86

Consideration for remaining 50% shareholding 56

Cash and cash equivalents acquired (4)

Net cash outflow to the Group 52

In the period from 17 August 2007 to 31 December 2007, Simply Energy contributed £88 million of revenue and £2 million to the Group’s profit from operations(both excluding exceptional items and specific IAS 39 mark to market movements). Including exceptional items and specific IAS 39 mark to market movements, it contributed to the Group £85 million of revenue and incurred a loss from operations of £3 million.

It also contributed £14 million to the Group’s net operating cash flows and paid £1 million in respect of net interest and £nil in respect of tax.

The fair value adjustments are made to reflect the fair value of the net assets acquired and principally represent the recognition of the fair value of non-contractualcustomer relationships included by the acquiree as intangible assets, the recognition of provisions for unprovided amounts in respect of onerous customer contracts,and the associated deferred tax on the temporary timing difference created by the fair value adjustments.


Goodwill acquired in a business combination represents a payment made by the acquirer in anticipation of future economic benefits from assets that are not capableof being individually identified and separately recognised. In the case of Simply Energy, goodwill is generated by non-contractual customer relationships and synergiesexisting within the acquired business, such as the value of the assembled workforce. Synergies expected to be achieved as a result of combining Simply Energy with the International Power Group also contribute to goodwill.

Goodwill is recognised on the acquisition of Simply Energy as a result of the continuing recognition of goodwill previously recognised in July 2005 on the acquisition of the initial 50% interest in the jointly controlled entity. Further goodwill arises on consolidation following the acquisition in August 2007.

The revaluation deficit comprises the adjustment to the fair values in August 2007 of customer relationships and customer contracts which were treated as ‘own use’in accounting for the initial 50% interest in the retail partnership under the equity method.

It is impracticable to state what the impact would have been on Group revenue and profit for the year had the acquisition been completed on 1 January 2007 due tothe difficulty in ascertaining the valuation of assets and liabilities at that time.

b) MaestraleOn 31 August 2007 International Power plc, through wholly owned subsidiaries, completed the acquisition of the 636 MW Maestrale wind farm portfolio whichcomprised 581 MW in operation and 55 MW under construction. Maestrale was acquired from private investors connected with the Matrix Group and CJS CapitalPartners Limited. The wind farm portfolio is located onshore in Germany and, predominantly, in southern Italy. The results of Maestrale have been consolidated as a subsidiary from 31 August 2007 using the acquisition method.

The details of the transaction, results and provisional fair value adjustments arising from the change in ownership are shown below:Acquiree’s Fair value Fair value

carrying adjustments to the amount Group

£m £m £m

Other intangible assets – 64 64

Property, plant and equipment 343 675 1,018

Finance lease receivable 75 22 97

Inventory 11 – 11

Trade receivables 20 – 20

Other receivables 124 – 124

Derivative financial assets 4 – 4

Cash and cash equivalents 44 – 44

Bank loans (41) – (41)

Trade payables (20) – (20)

Other payables (8) – (8)

Accruals (56) – (56)

Current tax liabilities (18) – (18)

Bank loans (652) – (652)

Deferred tax (65) (283) (348)

Provisions (3) – (3)

Net assets acquired (242) 478 236

Minority interests in net assets acquired (1)

Goodwill arising on acquisition 360

Group’s share of net assets acquired and goodwill 595

Satisfied by:

Cash consideration paid (including £2 million acquisition costs) 595

Cash and cash equivalents acquired (44)

Net cash outflow to the Group 551


31 Acquisitions and disposals continued

In the period from 1 September 2007 to 31 December 2007, Maestrale contributed £40 million of revenue and £9 million to the Group’s profit from operations (both including and excluding exceptional items and specific IAS 39 mark to market movements). It also contributed £22 million to the Group’s net operating cashflows and paid £18 million in respect of net interest and £4 million in respect of tax.

The fair value adjustments are made to reflect the fair value of the net assets acquired. These principally represent the recognition of intangible assets consisting ofcontract-based intangibles and the value of green certificates held at the date of acquisition, the recognition of operating plant and assets under construction as well as finance leases at fair value. Deferred tax is also recognised for the temporary timing difference created by the fair value adjustments.

Goodwill arises on the acquisition of the Maestrale wind farm portfolio as a result of value, attributed to future cash flows associated with the expected repowerings of the assets and the resulting life extension of the tariff regimes, in excess of the amount that can be attributed to property, plant and equipment.

Due to the proximity of the acquisition to the year end, the complexity of the business and the number of entities acquired, the fair values attributed to the acquiredassets and liabilities are provisional and may be revised. Similarly for the same reasons, it is impracticable to state what the impact would have been on Group revenueand profit for the year had the acquisition been completed on 1 January 2007 due to the difficulty in ascertaining the valuation of assets and liabilities at that time.

c) Other acquisitions and disposals

New partnership with MitsuiOn 20 June 2007, International Power completed the formation of a new partnership with Mitsui & Co., Ltd (Mitsui). The partnership created a common ownershipplatform for the UK assets, (excluding Derwent), held 75% International Power and 25% Mitsui, and equalised the returns from Paiton, Indonesia. This follows theExtraordinary General Meeting on 15 June 2007, when shareholders voted in favour of the transaction.

As part of this agreement, International Power sold a 25% equity interest in Deeside, Rugeley and Indian Queens to Mitsui and acquired an additional 5% equityinterest in First Hydro and Saltend. Mitsui provided a £200 million credit facility to support trading activities of the UK assets. International Power also acquired theright to additional returns from Paiton equivalent to 9.2% of Paiton’s earnings and cash distributions.

The sale and purchase of the interests in the UK assets and Paiton resulted in a net cash payment of £106 million to International Power. Gross proceeds of £168 million and a profit on disposal of £174 million were recorded on the partial disposal of Deeside, Rugeley and Indian Queens.

Acquisition of other European wind farmsDuring 2007 International Power also acquired 100% of the voting equity instruments or partners’ capital of the following businesses:

■ In July 2007 a 16 MW operational wind farm, located at Delfzijl-Zuid in the Netherlands;

■ In September 2007 the 28 MW Schkortleben operational wind farm, located in Germany, from e.n.o. energy;

■ In December 2007 a 15 MW operational wind farm, located at Delfzijl-Zuid in the Netherlands;

■ In December 2007 the 20 MW Karstaedt operational wind farm, located in Germany.

Total consideration for all acquisitions amounted to £50 million. Consideration of £2 million remains unpaid at the year end.

d) Acquisition of subsidiaries net of cash and cash equivalents acquiredIn addition to the net cash outflow to the Group of £52 million relating to the acquisition of Simply Energy and the net cash outflow of £551 million relating to the acquisition of Maestrale, net cash outflows of £46 million arose on the acquisition of the other European wind farms and £129 million relating to the purchase of an additional 5% equity interest in First Hydro and Saltend, and rights to additional returns from Paiton. This results in a total net cash outflow to the Group of £778 million (2006: £650 million).

e) Fair value hindsight adjustments – acquisitions during 2006The fair values of certain assets and liabilities associated with the purchase of the Levanto portfolio of onshore wind farms, predominantly located in France and Germany, which took place in November 2006 have been revised. This follows the conclusion of an independent third party fair valuation exercise commissionedduring 2007. As a result of the finalisation of the valuation, the following changes have been made to the acquired assets and liabilities. Property, plant and equipmentof €20 million, intangible assets of €22 million and receivables of €4 million have been recognised. The fair values of finance lease receivables have been reducedfrom €419 million to €395 million and loan and bond creditors have increased from €414 million to €427 million. Corresponding deferred tax adjustments havealso been applied to these changes in fair values.


32 Financial instruments

a) Carrying amounts and fair values of financial assets and liabilitiesSet out below is a comparison by category of the carrying amounts and fair values of all the Group’s financial assets and liabilities as at 31 December 2007:


Carrying Fair value Carrying Fair valueamount amount

£m £m £m £m

Financial assets

Cash and cash equivalents 1,161 1,161 980 980

Available-for-sale:

Other investments 13 13 26 26

Loans and receivables:

Finance lease receivables 1,293 1,226 1,078 1,106

Other long-term receivables 22 22 29 29

Trade receivables 221 221 142 142

Other receivables and accrued income 424 424 157 157

At fair value through profit or loss:

Assets held for trading – – 42 42

Derivative financial assets not designated in a cash flow hedge relationship 236 236 164 164

Designated cash flow hedge relationships:

Derivative financial assets designated and effective as cash flow hedging instruments 32 32 117 117

Total financial assets 3,402 3,335 2,735 2,763

Financial liabilities

Financial liabilities at amortised cost:

Trade payables 184 184 85 85

Other payables (current) 222 222 226 226

Accruals 268 268 206 206

Other payables (non-current) 30 30 40 40

Secured bank loans 4,608 4,608 3,440 3,439

Secured bonds 694 749 687 736

Preferred equity facility 151 151 152 152

Convertible bonds 255 259 237 247

Loans from minority interests 115 115 81 81

Provisions 63 63 43 43

At fair value through profit or loss:

Derivative financial liabilities not designated in a cash flow hedge relationship 729 729 322 322

Designated cash flow hedge relationships:

Derivative financial liabilities designated and effective as cash flow hedging instruments 105 105 108 108

Total financial liabilities 7,424 7,483 5,627 5,685


32 Financial instruments continued

The methods and assumptions used to estimate fair values of financial assets and liabilities are as follows:

(i) Other investments comprise minority shareholdings held in privately owned, unquoted companies as well as debt instruments where there is no active marketavailable to value them. Where the fair value of the equity instruments cannot be reliably measured, the fair value shown is recorded at cost. The debtinstruments are stated at fair value based on an estimate of the discounted cash flows.

(ii) The fair value of finance lease receivables and other long-term receivables have been estimated by discounting estimated cash flows. Discount rates in the rangeof 4% to 10% have been applied.

(iii) Due to their short maturities, the fair values of trade receivables, other receivables and accrued income have been stated at their book values.

(iv) Fair values of derivative financial instruments:

Energy derivatives are measured by reference to forward price curves using discounted cash flows and other similar quantification techniques. A forward pricecurve represents the Group’s view as to the prices at which customers would currently contract for delivery or settlement of commodities at future dates. Anelectricity price curve is derived from published price quotations in an active market, over the short-term horizon period, and from valuation techniques over the more distant horizon period. Discount rates in the range of 7% to 10% have been applied. The prices in the distant horizon period are determined byreference to long-term market price assumptions relating to the prices of commodities such as oil, the cost of constructing and financing the building of newpower plants, and the prices at which it would be economic for companies to enter the market and build additional capacity (‘new entrant pricing’).

Interest rate swaps are measured by reference to both third party bank confirmations and discounted cash flows using the yield curves and spot rates in effect at the balance sheet date.

The fair value of the Group’s foreign currency and equity conversion options have also been measured by reference to third party bank confirmations andthrough calculations using market rates in effect at the balance sheet date.

(v) The fair value of assets held for trading have been calculated using quoted market prices.

(vi) Due to their short maturities, the fair values of trade payables, other payables and accruals have been stated at their book values.

(vii) The fair values of all bank loans, bonds, convertible bonds, the preferred equity facility and loans from minority interests have been calculated using market priceswhere available or the present value of estimated future cash flows. Discount rates in the range of 4% to 15% have been applied.

(viii) Provisions are measured at the Directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material. Consequently the fair value has been presented as book value. Discount rates in the range of 5% to 6% have been applied.

As explained in (iv) above, prices for valuing energy derivatives outside of an active market are derived from long-term assumptions. Changes to these long-termassumptions could have a significant impact on the modelled price. For example, reasonable increases in the assumed cost of construction could increase modelledlong-term power prices in the order of 10%, while reasonable variations in the assumed long-term cost of oil could have an impact in the order of 30% on modelledlong-term power prices.

Most of our energy derivatives settle within the period covered by an active market and hence these variations in long-term price assumptions have a limited impacton our derivative valuations. We have one long-term derivative contract for power, which was acquired with the Loy Yang B plant in Australia. The contract is openuntil 2016. Reasonable changes in assumed construction costs could affect the value of this derivative in the order of A$30 million. Changes in the long-term cost ofoil are less significant, since energy prices in Australia are currently not closely linked to world oil prices.

Refer to note 32 f) (i) for sensitivity analysis. Refer to note 39, ‘Critical accounting judgements and key sources of estimation uncertainty’, for further information on the valuation techniques used and the assumptions applied in determining the fair values of financial assets and liabilities.


b) Derivative financial instrumentsThe following table discloses the carrying amount of financial instruments, which are carried at fair value in the balance sheet, that have been valued using a techniquebased on market observable inputs and those that been valued using non-market observable inputs:


Valuation Valuation Valuation Valuation technique technique technique technique– market – non-market – market – non-market

observable observable observable observableinputs inputs inputs inputs

Assets held for trading

Carrying amount (£m) – – 42 –

Percentage of total carrying amount – – 100% –

Derivative financial assets

Carrying amount (£m) 234 34 245 36

Percentage of total carrying amount 87% 13% 87% 13%

Derivative financial liabilities

Carrying amount (£m) (681) (153) (291) (139)

Percentage of total carrying amount 82% 18% 68% 32%

(447) (119) (4) (103)

In the merchant markets of Australia, the US and the UK, market observable inputs are usually defined as published forward curves. Typically observable market datafor forward power prices is available in Australia, the US and the UK for between two and three years. For interest rate swaps all forward rates are deemed to be fromobservable markets.

Non-market observable inputs are typically defined as price forecasts for a particular commodity, which are derived from the Group’s in-house modelling. Non-marketobservable inputs are not published and often form part of a valuation technique when a forward curve is deemed illiquid. A number of modelling techniques exist togenerate these forecasts, but a standard approach that the Group follows for valuing forward power sales is to look at the economics of a new-entrant power plant.

When a new-entrant is believed to be required in a particular market, the long-term power price assumed will cover the new-entrant’s cost and target return. That is, power prices reflect the ‘new-entrant cost’ level from this particular point.

As explained on pages 18 to 20 of the business and financial review, the Group’s policy is to hedge various exposures.

Energy price risk: We use commodity contracts to fix the prices we achieve for the electrical output from our power stations and the cost of fuel inputs to our powerstations. For the purposes of presentation which follows, we group the financial products and commodity contracts used for this purpose, which are classified asderivatives, under the heading ‘Energy derivatives’.

Interest rate risk: Principally we use pay-fixed, receive-variable interest rate swaps. We also use options and forward rate agreements. For the purposes of presentationwhich follows, we group these derivative financial instruments under the heading ‘Interest rate swaps’.

Foreign currency risk: For structural and transactional currency exposures and currency exposures on future expected sales we use foreign currency borrowings,forward foreign currency contracts, currency options and swaps. For the purposes of presentation which follows, we group these derivative financial instruments underthe heading ‘Other derivatives’. This category also encompasses options over equity. The Group owns purchased call options over the equity of various energy relatedbusinesses. The Group already has an equity interest in some of these businesses. The Group has convertible bonds which can convert into Ordinary Shares ofInternational Power plc. The conversion feature in the 3.25% convertible euro bond is accounted for as an embedded derivative (refer to note 25).



The carrying amount of these derivative financial instruments at the reporting date and whether these derivatives are designated in a formal hedging relationship is analysed as follows:


Assets Liabilities Assets Liabilities£m £m £m £m

Cash flow hedges


Interest rate swaps 24 24 15 8

32 105 117 108

Not designated in a qualifying hedge relationship


Interest rate swaps 6 – – 1

Other derivatives 30 76 30 59

236 729 164 322

268 834 281 430

Current 223 508 243 204

Non-current 45 326 38 226

268 834 281 430

The Group has no financial assets or financial liabilities which have been designated at fair value through profit or loss at initial recognition.

The following table shows the carrying amounts, net gains and losses, cash flows and other movements relating to the Group’s derivative financial instruments and where the movements in the income statement are recorded.


Energy Interest rate Other Total Energy Interest rate Other Totalderivatives swaps derivatives derivatives swaps derivatives

£m £m £m £m £m £m £m £m

At 1 January (126) 6 (29) (149) (394) (25) – (419)

Specific IAS 39 mark to marketmovements recognised in:

– revenue (387) – – (387) 132 – – 132

– cost of sales 45 – – 45 (68) – – (68)

– interest – 1 (17) (16) – 2 (28) (26)

Other movements in the income statement 24 3 – 27 51 6 – 57

Movement in the hedging reserve (85) (10) – (95) 140 22 – 162

Cash flow (8) – – (8) 2 – (1) 1

Acquisitions 40 4 – 44 – – – –

Exchange differences (29) 2 – (27) 11 1 – 12

At 31 December (526) 6 (46) (566) (126) 6 (29) (149)

‘Other movements in the income statement’ comprise mark to market movements on proprietary trading activities, i.e. on non-asset backed trader, and theamortisation of derivatives acquired with a fair value other than zero. Mark to market movements on asset backed hedges are included within ‘specific IAS 39 mark to market movements’ (refer to note 1).


c) Cash flow hedging reserve movementsThe cash flow hedging reserve balance at 31 December 2007 and the periods in which the cash flows are expected to occur are as follows:


Energy Interest rate Total Energy Interest rate Totalderivatives swaps derivatives swaps

£m £m £m £m £m £m

Cash flows expected in:

Less than 12 months (42) (2) (44) 22 (1) 21

1-2 years (11) (12) (23) (12) − (12)

2-5 years (3) (11) (14) (7) (2) (9)

More than 5 years – (3) (3) – 6 6

Unrecognised (losses)/gains at 31 December (56) (28) (84) 3 3 6

The amounts shown in the preceding table are expected to affect profit or loss in the same period as the cash flows.

The following table identifies the movements in the cash flow hedging reserve during the year, including where gains and losses have been recognised in the income statement.


Energy Interest rate Total Energy Interest rate Totalderivatives swaps derivatives swaps

£m £m £m £m £m £m

At 1 January 3 3 6 (103) (15) (118)

(Losses) and gains recognised in the hedging reserve during the year (32) (35) (67) 37 15 52

(Losses) and gains arising in previous years that reversed during the year (22) 1 (21) 67 2 69

Amount removed from hedging reserve and included within the income statement during the year due to settlement of contracts. Recognised in:

Group revenue 95 – 95 (4) – (4)

Share of joint ventures and associates – 2 2 – – –

Net finance costs – (3) (3) – – –

Cash settlement of derivatives during the year (95) 1 (94) 4 1 5

Ineffectiveness recognised in profit or loss 1 – 1 (1) – (1)

Amount removed from hedging reserve and included within a non-financial item during the year – – – – (1) (1)

Exchange differences (6) 3 (3) 3 1 4

At 31 December (56) (28) (84) 3 3 6



d) Hedge of a net investmentAn economic foreign currency exposure arises from net investments in Group entities whose functional currency differs from the parent’s. An accounting exposure arisesfrom differences between the functional currency of the net investments and the Group’s presentation currency. Changes in exchange rates between the functionalcurrency of the net investment and that of its parent will cause the amount of the net investment to vary.

In the absence of hedge accounting, foreign exchange gains and losses on retranslating the net assets of a foreign operation would be taken to reserves, whilst those onthe loan would be recognised in the income statement. This creates a mismatch in foreign currency translation. When net investment hedging is applied, this mismatchis eliminated.

The Group, as part of its hedging strategy, has therefore chosen to borrow some debt denominated in foreign currencies in order to hedge the net investments incertain foreign operations within its portfolio. As the hedging instruments are foreign currency borrowings rather than derivatives, no fair values for these instrumentsare included within the fair value of derivatives disclosed on the balance sheet.

Gains and losses recognised in the translation reserve for hedges of net investments are shown in note 25 and as a separate line item in the Statement of Changes in Equity.

e) Risk identification and risk managementThere is a continuous process for identifying, evaluating and managing the key risks faced by the Group. Activities are co-ordinated by the Risk Committee, which ischaired by the CFO, and has responsibility, on behalf of the Board, for ensuring the adequacy of systems for identifying and assessing significant risks, that appropriatecontrol systems and other mitigating actions are in place, and that residual exposures are consistent with the Group’s strategy and objectives. Assessments are conductedfor all material entities.

The Group owns power plants in various locations around the world including merchant markets in the US, Australia and Europe. Plant ownership in the merchantmarkets exposes the Company to highly volatile and unpredictable commodity prices (including those relating to power and gas) and trading and risk managementteams exist in each region to manage the exposure by trading a range of products including physical and financial forwards and futures. A Global Commodities RiskCommittee together with the regional risk management teams are responsible for ensuring an adequate risk framework is in place in each region. Local RiskCommittees operate in each region and they are responsible for ensuring that the risk framework is applied and that they manage their respective positions incompliance with these Board approved limits.

Treasury policy seeks to ensure that adequate financial resources are available for the management and development of the Group’s business whilst managing its marketrisks and credit risks. The Group’s treasury policy is not to engage in speculative transactions. Group treasury acts within clearly defined guidelines that are approved bythe Board.

The capital structure of the Group is presented in the balance sheet. Note 30 provides details on equity and note 25 on loans and bonds. Short and medium-termfunding requirements are provided by a variety of loan facilities with a range of counterparties and maturities. Longer term funding or funding for a particularly largetransaction may be sourced from a combination of these facilities and suitable long-term instruments, such as bonds, or by raising additional equity. Identification of totalfunding and phasing is achieved via a detailed cash flow forecast which is reviewed and updated on a monthly basis.

Project development activities can, on occasions, require credit support in the normal course of business. This is provided by established funding facilities or via additionalbilateral facilities with related project banks. At the individual business level we finance our projects with non-recourse debt in order to insulate the Group from adverseevents at the project level, limiting our balance sheet exposure to a given project to the loss of the equity in that project.

Credit exposure to trading and financial counterparties is managed within clearly defined limits, policies and procedures. Financial counterparty risk is restricted toarrangements with relationship banks, money market funds and commercial paper with investment grade ratings. All credit exposures are monitored daily by localregional management and reported to senior management on a monthly basis.

f) Market riskMarket risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Group is exposed tochanges in: commodity prices in the merchant markets in which it operates; interest rates; and foreign currency exchange rates. A significant number of the Group’sprojects operate without power purchase agreements and are, therefore, vulnerable to market forces which determine the price and amounts of power sold and fuelpurchased. In particular, the majority of our plants in the UK within our Europe region, North America, and Australia, operate on a merchant basis.

(i) Energy trading and market riskThe Group hedges exposures that arise from the ownership and operation of power plants and related sales of electricity and purchases of fuel by using derivatives tooptimise the return achieved from these assets. The Group uses commodity derivative financial instruments to convert floating or indexed electricity and fuel prices tofixed prices. This lessens the Group’s vulnerability to reductions in electricity prices for the electricity it generates and to increases in fuel prices for the fuel it consumes in its power plants. Commodity derivative financial instruments also provide a way to meet customers’ pricing requirements while achieving a price structure consistentwith the Group’s overall pricing strategy.

The Group’s trading operations are carried out subject to global and local policies and procedures. A similar structure is in place in each region covering monetary,volumetric and term limits. Metrics and limits applied to the trading books include Value-at-Risk (VaR), stop/loss, credit, fuel mismatch, term, volume, approved tradersand approved products. Position reports are produced on a regular basis for both the trading and plant books.

The Group accounts for certain derivative financial instruments relating to energy sales and fuel purchases as cash flow hedges where the forecast transaction is highlyprobable and the hedge is assessed as effective. The Group’s coal purchase contracts are typically treated as ‘own use’ because they are both entered into and continueto be held for the purpose of the Group’s electricity production requirements and they are not net settled.

Sensitivity analysis As stated earlier, when hedging the output of our generation assets it is our policy to both forward sell the power and forward buy the corresponding fuel at the sametime in order to lock in the ‘spread’. The spread is the difference between the cost of fuel to generate a unit of electricity and the price at which that unit of electricity issold. Spreads are usually expressed in terms of price per MWh. When gas is used as fuel the difference is called ‘spark spread’ and when coal is used as the fuel it iscalled ‘dark spread’.

From a management perspective, once the spread relating to the future output from a generation asset is forward contracted, the asset is considered hedged. To theextent that future output has not been forward contracted in this manner it is considered unhedged. Management review on an ongoing basis the extent to whichgeneration output is unhedged.


However, in accordance with the requirements of IFRS 7 (Financial Instruments: Disclosures) the following sensitivity analysis shows the impact on the Group’s resultsof changes in market prices as a result of entering into financial instruments including derivatives. Specifically, this sensitivity shows the impact on the Group’s resultsarising from changes in the fair value of forward contracts which are entered into to hedge the future output of our generation assets following a change in forwardmarket prices.

The table below shows the impact on equity and profits of a 20 percent increase in the forward curves for both electricity sales prices and gas purchase prices as ifthey had occurred on 31 December 2007. This could be viewed as the opportunity cost of our forward contracting if prices had changed in this manner. It should alsobe noted that if there were to be a 20 per cent decrease in forward prices, the results of the sensitivity analysis would produce an opposite impact on profits andequity to that shown.

The movement of forward price curves by 20 per cent is believed to be a reasonable approximation of how much markets can move, on average, over any given year.In some years markets will be less volatile and in other years they may be more volatile.

The following assumptions have been applied in the performance of these sensitivities:

■ All qualifying cash flow hedges at 31 December would continue to be fully effective in achieving cash flow hedge accounting;

■ Commodity contracts that qualify for the own use treatment continue to do so, and thus this sensitivity has no impact for these contracts. These typically includecoal purchase contracts.

The results are presented net of deferred tax but before minority interests.Impact on Impact on Impact on Impact onprofit for total equity profit for total equitythe year the year

2007 2007 2006 2006+/– +/– +/– +/–£m £m £m £m

20% increase in forward price curves for electricity (296) (357) (227) (285)

20% increase in forward price curves for gas 52 52 30 29

This sensitivity analysis highlights that because we hedge the spark spread, i.e. the sales price of electricity and the cost of gas, at the same time, there is little netimpact on the fair value of our derivative contracts to changes in the forward price curves to sell electricity and to purchase gas. However, for the dark spread, wherethe cost of coal is contracted in advance but is accounted for as ‘own use’, only the electricity sales contracts are exposed to fair value gains and losses arising fromchanges in the forward curves because these are considered commodity derivative financial instruments. Therefore, from an accounting perspective, forwardcontracting of dark spread at coal plants potentially gives rise to more volatility in earnings. However, to the extent that fair value gains and losses are recorded in anyperiod within either the income statement or the hedging reserve (when applying cash flow hedge accounting) ultimately they will reverse by the time of delivery.

It should be noted that changes in the fair value of derivatives, which are entered into for economic hedging purposes (refer to basis of preparation in note 1), arerecorded in the ‘middle column’ in the Group’s income statement and therefore the fair value gains and losses have no impact on underlying business performance.

To the extent that our power plants are not already contracted, and spreads change as assumed above, it is likely that the future profitability of our coal plants wouldalso improve, because they would contract into the higher dark spreads.

It also means that if plants are unavailable at the point in time at which power should be delivered under the contract, the mark to market position represents theanticipated net cost of purchasing power and selling fuel in the markets to fulfil the contractual obligations and in that instance the unrealised fair value gains and losseswould become realised.

(ii) Interest rate riskVariability in interest payments can introduce volatility into project returns and corporate funding costs. We mitigate this risk by fixing borrowing rates, principally by using forward rate or interest rate swap agreements. A limited number of our PPAs also have interest rate pass through mechanisms. Significant interest ratemanagement programmes and instruments require the specific approval of the Board.

The Group’s policy is fix interest rates for up to 75% of its debt portfolio over the medium to long-term. At individual project company level, it is usually a condition of the non-recourse debt funding that project companies maintain a certain minimum level of fixed rate debt, typically 70%. This complements the Group’s policy. The overall level of the Group’s fixed rate debt is monitored and reported to senior management on a monthly basis.

154 Consolidated financial statements for the year ended 31 December 2007


A forward rate agreement is a contract in which one party pays a fixed interest rate and receives a floating interest rate equal to a reference rate specified at the timeof entering into the contract. The payments are calculated over a notional amount over a certain period with the differential being settled at the termination date. Aninterest rate swap is an agreement between two parties to exchange pre-determined interest payments, based on a notional principal amount, over an agreed periodof time.

At 31 December 2007, including the impact of ‘receive variable: pay fixed’ interest rate swaps, £3,587 million (62%) (2006: £3,187 million and 71%) of total debthad fixed interest rates. In 2007 the weighted average interest rate of fixed rate debt, taking into account the effect of ‘receive variable: pay fixed’ interest rate swaps on floating rate debt, was 7% (2006: 7%). The Group accounts for certain interest rate swaps as cash flow hedges where the forecast transaction is considered highlyprobable and the hedge is assessed as effective.

The effect of the Group’s interest rate swaps effectively replaced £806 million (2006: £796 million) of floating rate Australian dollar borrowings, £759 million (2006: £869 million) of floating rate US dollar borrowings, £297 million (2006: £300 million) of floating rate sterling borrowings, £83 million (2006: £7 million) of floating rate Czech koruna borrowings and £344 million (2006: £35 million) of floating rate euro borrowings with fixed rate borrowings.

The floating rate financial liabilities comprise bank borrowings bearing interest rates fixed in advance for various time periods up to 12 months by reference to officialmarket rates e.g. LIBOR.

When we use project finance in companies with power purchase agreements, our policy is to align the maturity of the debt with the contractual terms of the powerpurchase agreement.

Sensitivity analysis The sensitivity analysis below shows the impact of a 100 basis point parallel increase in the interest rate yield curve as if it had occurred on 31 December.

The following assumptions have been applied in the performance of this sensitivity:

■ The impact of this sensitivity has only been recorded for changes in the fair value of derivative financial instruments, which have their fair value gains and lossesrecorded within the financial statements; assets available-for-sale; and assets held for trading as the Group does not designate any other financial asset at fair valuethrough profit or loss and these are the only significant financial instruments whose carrying amounts change as a result of changes in interest rates. All otherfinancial instruments are carried at amortised cost and hence no adjustment has been applied;

■ No impact is recorded from changes in interest rates on employee benefits (including pensions), provisions and other financial assets and liabilities;

■ All qualifying cash flow hedges at 31 December would continue to be fully effective in achieving cash flow hedge accounting;

■ Fair value gains and losses on interest rate swaps which do not qualify for hedge accounting as at 31 December are reflected solely in the income statement.

The results are presented net of deferred tax but before minority interests.

Impact on Impact on Impact on Impact onprofit for total equity profit for total equitythe year the year

2007 2007 2006 2006+/– +/– +/– +/–£m £m £m £m

Increase in yield curve by 100 basis point parallel shift 8 49 (3) 33

A second sensitivity analysis calculates the impact on profitability of a 100 basis point increase in interest rates on unhedged interest-bearing loans and bonds, i.e. those which are subject to a floating rate of interest, i.e. where there is no ‘receive variable: pay fixed’ interest rate swap, and on cash balances on which variablerates of interest are earned. The calculation is performed as follows. The year end cash balance is deducted from the year end unhedged floating rate loans and bonds.The net borrowing is multiplied by 1 percent. In 2007 this equated to £8 million before tax (2006: £3 million).

(iii) Foreign currency riskInternational Power operates in 20 countries worldwide which exposes it to foreign currency exchange risks. These relate to translation, transaction and economic risks.

Treasury policy is to hedge a reasonable proportion of the Group’s translation exposures by borrowing in the same currency as the underlying investment. Any residual translation exposure will result in fluctuating sterling profits and balance sheet asset and liability movements which are not related to underlying businessperformance. In countries with historically weak currencies we aim to have PPA tariffs denominated in a major international currency. This protects future returns fromlarge and rapid devaluations. Group translation exposure is monitored and reported to senior management on a monthly basis.

For the purposes of preparing the consolidated financial statements, the income statement results of the Group’s foreign operations are translated into sterling at the average exchange rates for the period concerned. The balance sheets of foreign operations are translated into sterling at the closing exchange rates.

Currency translation exposures comprise the monetary assets and liabilities of the Group that are not denominated in the functional currency of the operating unitinvolved, other than borrowings treated as hedges of net investments in overseas operations.

In order to hedge the net assets of foreign operations, borrowings are generally in the same currency as the underlying investment. The Group aims to hedge areasonable proportion of its non-sterling assets in this way. It is not our policy to hedge currency translation through foreign exchange contracts or currency swaps.

Currency transaction exposure arises where a business unit makes sales and purchases in a currency other than its functional currency. Transaction exposure also arises on the remittance from overseas of dividends or surplus funds. The Group’s policy is to match transaction exposure where possible, and hedge remainingtransactions as soon as they are committed, by using foreign currency contracts and similar instruments. All external currency instruments used to manage transactionexposure are transacted by Group treasury or under the guidance of Group treasury. Identification of potential transaction exposures is achieved via a detailed cashflow forecast by local currency which is reviewed and updated on a monthly basis.


As noted in 32b), to hedge our foreign exchange risks for transactional currency exposures and currency exposures on future expected sales we use both non-derivative financial instruments, such as foreign currency borrowings, and derivative financial instruments, such as forward foreign currency contracts, currency optionsand swaps. When we use derivative financial instruments to hedge our exposures to foreign currency risk, the Group may choose to account for these as either fairvalue hedges or cash flow hedges if they meet the hedge accounting criteria set out in IAS 39.

Sensitivity analysis The following sensitivity analysis shows the impact of currency translation exposures arising from monetary assets and liabilities of the Group that are not denominatedin the functional currencies of International Power plc or of its subsidiaries. It shows the impact on the Group’s consolidated income statement by changing the yearend exchange rate of sterling against all other currencies. To the extent that there are monetary assets and liabilities denominated in sterling in subsidiaries with non-sterling functional currencies, the impact of a change in the year end exchange rate is determined. To the extent that there are monetary assets and liabilitiesdenominated in non-sterling currencies in International Power plc or its subsidiaries with sterling functional currencies, the impact of a change in year end exchangerate is determined.

The following assumptions have been applied in the performance of this sensitivity:

■ The results of foreign exchange gains and losses on the retranslation of foreign currency denominated loans, that are treated as net investment hedges, are not recorded within the impact on the Group income statement, as these foreign exchange gains and losses are recorded within the translation reserve;

■ The exposure on translating the financial statements of subsidiaries into the sterling presentation currency of the consolidated financial statements are notincluded in the sensitivity analysis;

■ No sensitivity has been applied to the results of joint ventures and associates.

The results are presented before tax and minority interests.Impact on Impact onprofit for profit forthe year the year

2007 2006+/– +/–£m £m

10% strengthening of sterling 11 20

10% weakening of sterling (15) (26)

g) Credit riskWe are exposed to credit-related losses in the event that counterparties to traded contracts and financial instruments do not perform according to the terms of thecontract or instrument.

The Group’s policy is to manage its credit exposure to trading and financial counterparties within clearly defined limits. Energy trading activities are strictly monitoredand controlled through delegated authorities and procedures, which include specific criteria for the management of counterparty credit exposures in each of our key regions. Counterparty exposure via customer power purchase agreements (agreements to sell power) is monitored and managed by the local asset team withassistance from Group treasury where appropriate. The impact of an individual PPA default is minimised by the geographical diversity and large number of projects inwhich the Group is involved. In addition, the non-recourse nature of the funding arrangements, which limits our exposure to our equity commitment in a project, alsoprovides limited credit exposure to the Group.

For the majority of the Group’s commodity trading arrangements we have master netting agreements which establish legally enforceable rights of set-off that reducethe credit exposure of the Group in the event of counterparty default. Where possible, the Group will also enter into ISDA (International Swaps and DerivativesAssociation) master agreements to mitigate its credit exposure to financial instruments.

In the normal course of business there may be occasions when we have a significant concentration of credit risk with one counterparty in order to minimisesettlement risk on major transactions. This risk is normally only applicable for a short period of days and is always with an existing relationship bank with a stronginvestment grade rating.



Group treasury manages the Group-wide counterparty credit exposure on a consolidated basis for financial counterparties, with the active and close involvement of the global risk manager. Financial counterparty credit exposure is limited to relationship banks and commercial paper with strong investment gradecredit ratings.

With regard to financial instruments subject to credit risk, International Power selects counterparties with appropriate ratings for the size, type and duration of theinstrument involved. A small proportion of counterparties trading energy are below investment grade. For those energy market transactions with counterparties belowinvestment grade, and which are not supported by appropriate collateral, reserves are carried against the trading risk. Exposures within this band are restricted andclosely monitored within narrow limits.

The immediate credit exposure of financial instruments is represented by those financial instruments that have a net positive fair value by counterparty at 31 December 2007.

The Group considers its maximum exposure to credit risk to be:31 December 31 December

2007 2006£m £m

Cash and cash equivalents(1) 1,161 980

Available-for-sale financial assets 13 26

Loans and receivables (refer to note 32a)(2) (3) 1,960 1,406

Financial assets at fair value through profit or loss

– assets held for trading – 42

– derivative financial assets(3) 236 164

Designated cash flow hedge relationships

– derivative financial assets(3) 32 117

Total financial assets 3,402 2,735

(1) The majority of cash balances and short-term deposits are held with strong investment grade banks or financial institutions.

(2) Finance lease receivables are with strong investment grade counterparties including the Portuguese and German governments.

(3) The majority of trade receivables and derivative financial assets relate to merchant trading counterparties for whom we hold collateral in the form of parentcompany guarantees, letters of credit and cash held as security.

As at 31 December 2007 there were no significant financial guarantees or third party obligations that increase the credit risk of the financial assets set out above.

International Power holds £79 million at 31 December 2007 (31 December 2006: £171 million) in collateral as security for the above financial assets. Collateral heldas security includes parent company guarantees (of appropriate credit worthiness), letters of credit issued by investment grade banks and cash margining as set out inthe following table:


£m £m

Parent company guarantee 31 112

Letters of credit – 1

Cash margining 48 58

79 171

During 2007 we have not needed to take possession of collateral available to us in order to settle any outstanding debts owed to us.

If the Group was to take possession of collateral or to call on other credit enhancements (e.g. guarantees), and the assets held as security were not readily convertibleinto cash, we would regularly update our estimates of value and develop a realistic plan for monetisation. We would defend rigorously our right to recoup anyoutstanding amounts from arrangements which ultimately do not fully settle a liability.

Although we have seen no direct evidence of changes to the credit risk of our counterparties, the current focus on financial liquidity in all international markets hasintroduced increased financial volatility. We use market knowledge, changes in credit ratings and other techniques to identify significant changes to the financial profileof our counterparties.

h) Liquidity riskLiquidity risk is the risk the Group will encounter difficulty in meeting its obligations associated with its financial liabilities as they fall due. The Group’s treasury functionis responsible for managing liquidity. The Group’s approach to managing liquidity is to ensure that it has sufficient headroom under both normal and abnormalconditions. It manages this through the use of regularly updated cash flow forecasts and a financial headroom analysis which is used to determine fundingrequirements for a rolling five year period.

The Group holds additional collateral from counterparties in the form of parent company guarantees and letters of credit of £180 million at 31 December 2007 (31 December 2006: £73 million). This collateral only becomes enforceable if existing exposures increase or additional trading with that counterparty is contracted.


i) Borrowing facilitiesThe Group has substantial borrowing facilities available to it. The undrawn committed facilities available at 31 December 2007 in respect of which all conditionsprecedent have been met at that date amount to £586 million (2006: £667 million):


Facility Undrawn Available Facility Undrawn Available£m £m £m £m £m £m

US dollar Corporate revolving credit facility (October 2010)(1) 427 425 425 327 322 322

US dollar ANP Funding 1 revolving credit facility (May 2010)(2) 55 42 42 56 40 40

US dollar Tihama term facility (December 2021) – – – 249 – –

Australian dollar Canunda facility (December 2014) – – – 37 – –

Sterling Rugeley FGD construction facility (July 2014) 145 57 9 145 129 129

Sterling Rugeley working capital and credit facility (July 2014) 195 97 32 195 100 100

Czech koruna IPO revolving credit facility (May 2012) 138 24 24 24 24 24

Sterling Corporate letter of credit facilities(3) 323 – – 324 11 11

Subsidiary facilities in various currencies 156 54 54 110 41 41

Total 1,439 699 586 1,467 667 667

(1) The drawn element of the US dollar Corporate revolving credit facility relates to letters of credit issued of £2 million (2006: £5 million).

(2) The ANP Funding 1 revolving credit facility includes a US$50 million supported and US$60 million unsupported working capital credit facility with capacity to issue letters of credit. At 31 December 2007, £4 million (2006: £4 million) and £9 million (2006: £12 million) of letters of credit had been drawn from each of these facilities respectively.

(3) The Corporate letter of credit facilities can be utilised to issue letters of credit. At 31 December 2007, £323 million of letters of credit had been drawn from these facilities (2006: £324 million) and £173 million of cash and cash equivalents was used as collateral in relation to these facilities (2006: £212 million).

Uncommitted facilities available at 31 December 2007 were:


Total Drawn Undrawn Total Drawn Undrawn£m £m £m £m £m £m

Facility

Bank borrowing and overdraft facilities 50 – 50 35 – 35

Subsidiary facilities in various currencies 44 3 41 11 2 9

94 3 91 46 2 44

Uncommitted facilities of £94 million (2006: £46 million) include an undrawn and available cash element of £52 million (2006: £37 million). Also included is £39 million (2006: £7 million) of undrawn and available credit lines for the purposes of issuing letters of credit and guarantees in the normal course of business.

Bank borrowing facilities are normally reaffirmed by the banks annually although they can theoretically be withdrawn at any time.



The following table is an analysis of the contractual undiscounted cash flows relating to financial liabilities at the balance sheet date and a reconciliation fromundiscounted cash flows to carrying amounts:

31 December 2007



£m £m £m £m £m £m £m £m

Non-derivative financial liabilities

Loans and bonds (note 25) 823 691 2,984 3,567 8,065 (55) (2,187) 5,823

Other financial liabilities 697 18 23 64 802 – (35) 767


Net payments

– Energy derivatives 388 145 129 249 911 – (177) 734

– Interest rate swaps 7 12 5 1 25 – (1) 24

– Other derivatives – – – – – 76 – 76

Total financial liabilities 1,915 866 3,141 3,881 9,803 21 (2,400) 7,424

31 December 2006



£m £m £m £m £m £m £m £m

Non-derivative financial liabilities

Loans and bonds (note 25) 588 766 1,767 3,608 6,729 (59) (2,073) 4,597

Other financial liabilities 530 19 30 61 640 – (40) 600


Net payments

– Energy derivatives 134 61 92 202 489 – (127) 362

– Interest rate swaps 1 7 2 – 10 – (1) 9

– Other derivatives – – – – – 59 – 59

Total financial liabilities 1,253 853 1,891 3,871 7,868 – (2,241) 5,627

The net payments relating to interest rate swaps have been calculated based on the yield curves as at 31 December 2007 and 31 December 2006. Net paymentsunder the interest rate swaps represent the projected net settlement amounts under the swaps. The variable interest payments, of the loans to which the swaps relate,are included in the maturity analysis table in note 25 and included in ‘loans and bonds’ above.

The above tables do not include forecast data for liabilities which may be incurred in the future which are not contracted as at 31 December 2007.

Refer to note 34 for a breakdown of the Group’s commitments and to note 35 for a summary of the Group’s bonds and guarantees. An assessment of the Group’scurrent liquidity position is given in the ‘Business and financial review’ section of the Annual Report on page 56.

The disclosure of derivatives in the consolidated balance sheet has been made in line with management’s view of the Group’s operating cycle. This reclassifies certainenergy derivative cash flows shown above due after more than one year to being due within one year.


33 Operating lease arrangements

The Group as lessee31 December 31 December

2007 2006£m £m

At 31 December, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:

Within one year 13 9

In the second to fifth years inclusive 46 33

After five years 140 63

199 105

Offset by future minimum receipts under non-cancellable operating subleases. (3) (5)

Operating lease payments substantially represent rentals payable by the Group for office properties and wind turbine equipment.

The Group as lessorInternational Power’s business is the generation of electricity. The Group enters into arrangements such as long-term PPAs to secure contracted revenues for a longperiod of time. Some of these arrangements are determined to be or to contain operating leases. At 31 December 2007 the Group had contracted to receive fromofftakers the following minimum lease payments:


£m £m

Within one year 9 9

In the second to fifth years inclusive 38 38

After five years 41 51

Total minimum lease payments 88 98


£m £m

Operating lease income earned during the year 9 10

34 Commitments

Fuel purchase and transportation commitmentsAt 31 December 2007, the Group’s subsidiaries had contractual commitments to purchase and/or transport coal and fuel oil. Based on contract provisions, which consist of fixed prices, subject to adjustment clauses in some cases, these minimum commitments are currently estimated to aggregate to £494 million (2006: £385 million) expiring within one year, £1,811 million (2006: £1,373 million) expiring between one and five years and £1,063 million (2006: £880 million)expiring after more than five years.

Capital commitmentsCapital commitments, contracted but not provided in 2007 amount to £90 million (2006: £174 million).

35 Contingent liabilities

a) Legal proceedingsThe Company is aware of the following matters, which involve or may involve legal proceedings against the Group:

(i) Claims and potential claims by or on behalf of current and former employees, including former employees of the Central Electricity Generating Board (CEGB), and contractors in respect of industrial illness and injury.

RWE npower has agreed to indemnify International Power plc on an after-tax basis to the extent of 50% of any liability that the Company may incur whetherdirectly or indirectly as a consequence of those proceedings to the extent such liability is not insured by Electra Insurance Limited.

(ii) In 1994 separate complaints were made by the National Association of Licensed Opencast Operators (NALOO) and the South Wales Small Miners Association(SWSMA) to the European Commission against the Company, PowerGen plc, British Coal Corporation and HM Government. The complaint alleges violations ofEU competition law arising out of the coal purchasing arrangements entered into by the CEGB prior to 1 April 1990 and requests the Commission to find that the CEGB’s practices violated EU law. NALOO and SWSMA allege that such a finding would be grounds for a claim for damages in the English courts by theirrespective members. The Commission ruled on the complaint in 1998 and did not make any findings against the Company. Appeals against the Commission’sfindings were brought by NALOO and SWSMA. The SWSMA appeal was initially ruled out of time, but on appeal a faction was allowed to proceed. Progress withthis claim will be influenced by the outcome of the NALOO appeal. At first instance, the European Court ruled that the Commission is under an obligation toinvestigate the complaint by NALOO. The Company, PowerGen plc, British Coal Corporation and the Commission appealed against the ruling to the EuropeanCourt of Justice which delivered a judgment on 2 October 2003 for the main part dismissing the appeal. In its judgment, the court decided that the Commissionhas the power to investigate and in June 2007 the Commission gave a ruling in favour of the Company and PowerGen plc; SWSMA have appealed this ruling. It isnot practicable to estimate legal costs or probable damages, at this stage. RWE npower has agreed to indemnify International Power on an after-tax basis to theextent of 50% of any liability that the Company may incur whether directly or indirectly as a consequence of those proceedings.


35 Contingent liabilities continued

b) TaxationThe Company is aware of a number of issues which are, or may be, the subject of disputes with the tax authorities in the territories where the Group has operations,including its joint ventures and associates. The Directors are of the opinion, having regard to the professional advice received, that adequate provision has been madefor the settlement of any tax liabilities that might arise.

c) Collateral, bonds and guaranteesThe Group has pledged financial assets with carrying amounts totalling £1,752 million as collateral as at 31 December 2007 (31 December 2006: £1,441 million).These comprise finance lease receivables (refer to note 17), cash margining in support of commercial arrangements and trade receivables.

Various growth and expansion projects are supported by bonds, letters of credit and guarantees issued by the Group totalling £475 million (31 December 2006:£442 million). Energy trading activities relating to merchant plant are supported by letters of credit and guarantees issued by the Group totalling £430 million (31 December 2006: £487 million).

d) Joint ventures and associates

(i) Legal proceedingsA number of the Group’s joint ventures and associates, particularly in the Middle East, are involved in major construction projects. The Company is aware of a numberof issues which may be the subject of disputes with the EPC contractors responsible for the construction projects. The Directors are of the opinion, having regard toprofessional advice received, that adequate provision has been made for the settlement of any liabilities that may arise out of these disputes.

(ii) Bonds and guaranteesThe Group’s joint ventures and associates also have various growth and expansion projects that are supported by bonds, letters of credit and guarantees. The Group’sshare of these bonds, letters of credit and guarantees amount to £82 million. These obligations are normally secured by the assets of the respective joint venture orassociate. Any amounts guaranteed by International Power plc or any other Group subsidiary are included within bonds and guarantees disclosed in note 35(c).

36 Related party transactions

The key management personnel of International Power plc comprises the Chairman, Executive Directors and Non-Executive Directors. The compensation of keymanagement personnel can be found in note 6 and the Directors’ remuneration report set out on pages 83 to 95 of the Annual Report.

(i) Operations and maintenance contractsIn the course of normal operations, the Group has contracted on an arm’s length basis to provide power station operation and maintenance services to joint ventures and associates. During the year the Group derived income of £55 million (2006: £50 million) from these arrangements. Included in trade receivablesis £5 million (2006: £8 million) in relation to these contracts.

(ii) Retail supply contractsIn the course of normal operations, the Group has contracted on an arm’s length basis to provide power and gas to joint ventures and associates involved in retailsupply. During the year the Group derived income of £36 million (2006: £34 million) from these arrangements. Included in trade receivables is £nil (2006: £3 million)in relation to these contracts.

(iii) Transportation contractsIn the course of normal operations, the Group has contracts in place, in relation to fuel transportation, with one of its jointly controlled entities. During the year, the Group incurred costs of £8 million (2006: £8 million) in relation to these contracts.


37 Subsidiaries

The Group has the following significant investments in subsidiaries which are all indirectly held by International Power plc, unless otherwise stated.Country of Group

incorporation and effectiveName and nature of business registration Type of share shareholding

North America

ANP Bellingham Energy Company, LLC (power generation) US Ordinary Shares 100%

ANP Blackstone Energy Company, LLC (power generation) US Ordinary Shares 100%

ANP Funding I, LLC (financing company) US Ordinary Shares 100%

Coleto Creek Power LP (power generation) US Partners’ Capital 100%

Hays Energy Limited Partnership (power generation) US Partners’ Capital 100%

Midlothian Energy Limited Partnership (power generation) US Partners’ Capital 100%

Milford Power Limited Partnership (power generation) US Partners’ Capital 100%

Europe

International Power Opatovice A.S. (power generation) Czech Republic Ordinary Shares 100%

First Hydro Company (power generation) England and Wales Ordinary Shares 75%

First Hydro Finance plc (financing company) England and Wales Ordinary Shares 75%

Indian Queens Power Limited (power generation) England and Wales Ordinary Shares 75%

IPM Energy Trading Limited (energy trading) England and Wales Ordinary Shares 75%

Rugeley Power Limited (power generation) England and Wales Ordinary Shares 75%

Saltend Cogeneration Company Limited (power generation) England and Wales Ordinary Shares 75%

Deeside Power Limited (power generation) Gibraltar(1) Ordinary Shares 75%

IP Maestrale Investments Limited (investment holding company) Gibraltar(1) Ordinary Shares 100%

International Power Levanto Holdings BV (investment holding company) Netherlands(2) Ordinary Shares 100%

Turbogás – Produtora Enérgetica S.A (power generation) Portugal Ordinary Shares 60%

Electro Metalurgica del Ebro SL (power generation) Spain Ordinary Shares 64%

Ibérica de Enérgías SL (power generation) Spain Ordinary Shares 70%

Middle East

Al Kamil Power Company SAOG (power generation) Oman Ordinary Shares 65%

Tihama Power Generation Company Limited (power generation) Saudi Arabia Ordinary Shares 60%

Australia

Canunda Power Pty Limited (power generation) Australia Ordinary Shares 100%

Gippsland Power Pty Limited (power generation) Australia Ordinary Shares 70%

Hazelwood Power Partnership (power generation) Australia Partners’ Capital 92%

Latrobe Power Partnership (power generation) Australia Partners’ Capital 70%

Perth Power Partnership (power generation) Australia Partners’ Capital 49%

Simply Energy (retail supplier) Australia Partners’ Capital 100%

Synergen Power Pty Limited (power generation) Australia Ordinary Shares 100%

Pelican Point Power Limited (power generation) England and Wales(3) Ordinary Shares 100%

Asia

Thai National Power Company Limited (power generation) Thailand Ordinary Shares 100%

Corporate

IPM Eagle LLP (investment holding company) England and Wales Partners’ Capital 70%

Normanglade 4 LLP (financing company) England and Wales Partners’ Capital 70%

IPR Insurance Company Limited(4) (insurance captive) Guernsey Ordinary Shares 100%

International Power (Jersey) Limited (financing company) Jersey(1) Ordinary Shares 100%

International Power Finance (Jersey) II Limited (financing company) Jersey(1) Ordinary Shares 100%


37 Subsidiaries continued

All subsidiaries operate in their country of incorporation, except as indicated below. All subsidiaries have a 31 December year end. The Group also has a number of overseas branch offices.

(1) Operates in the UK.

(2) International Power Levanto Holdings BV owns indirectly, through wholly-owned subsidiaries, equity relating to the Nuon portfolio and bonds relating to the Breeze portfolio of the Levanto wind farm portfolio. As required, we consolidate 100% of the results of the Levanto wind farm portfolio.

(3) Operates in Australia.

(4) Held directly by International Power plc.

38 Joint ventures and associates

The Group has the following significant investments in joint ventures and associates which are all indirectly held by International Power plc.Country of Group

incorporation and Accounting effectiveName and nature of business operation period end Type of share shareholding

Joint ventures

North America

EcoEléctrica LP (power generation) Bermuda(1) 31 December Partners’ Capital 35%

Hartwell Energy Limited Partnership (power generation) US 31 December Partners’ Capital 50%

Oyster Creek Limited Partnership (power generation) US 31 December Partners’ Capital 50%

Europe

Prazská Teplárenská A.S. (power generation) Czech Republic 31 December Ordinary Shares 49%

Australia

South East Australia Gas Pty Limited (gas pipeline) Australia 30 June Ordinary Shares 33%

Associates

Europe

Derwent Cogeneration Limited (power generation) England and Wales 31 March Ordinary Shares 23%

Opus Energy Limited (retail supplier) England and Wales 31 March Ordinary Shares 30%

ISAB Energy Srl (power generation) Italy 31 December Ordinary Shares 34%

Carbopego – Abastecimento de Combustiveis, S.A. (fuel supplies) Portugal 31 December Ordinary Shares 50%

Pegop – Energia Electrica, S.A. (power station operations) Portugal 31 December Ordinary Shares 50%

Tejo Energia – Producao e Distribuicao de Energia Electrica, S.A.

(power generation) Portugal 31 December Ordinary Shares 50%

Uni-Mar Enerji Yatirimlari A.S. (power generation) Turkey 31 December Ordinary Shares 33%

Middle East

Hidd Power Company BSC(c) (power generation and desalination) Bahrain 31 December Ordinary Shares 40%

Q Power QSC (power generation and desalination) Qatar 31 December Ordinary Shares 40%

Arabian Power Company PJSC (power generation and desalination) UAE 31 December Ordinary Shares 20%

Fujairah Asia Power Company PJSC (power generation and desalination) UAE 31 December Ordinary Shares 20%

Shuweihat CMS International Power Company PJSC

(power generation and desalination) UAE 31 December Ordinary Shares 20%

Asia

PT Paiton Energy Company (power generation) Indonesia 31 December Ordinary Shares 41%

Kot Addu Power Company Limited (power generation) Pakistan 30 June Ordinary Shares 36%

The Hub Power Company Limited(2) (power generation) Pakistan 30 June Ordinary Shares 17%

Uch Power (Pvt) Limited (power generation) Pakistan 31 December Ordinary Shares 40%

All joint ventures and associates operate in their country of incorporation except as identified.

(1) Operates in Puerto Rico.

(2) International Power continues to equity account for HUBCO, despite its shareholding being less than 20%, as it continues to exert and has the power to exertsignificant influence over the entity. At HUBCO, International Power continues to have significant board representation.


39 Critical accounting judgements and key sources of estimation uncertainty

The Group’s accounting policies are set out in note 1 to these financial statements. Management is required to exercise significant judgement in the application ofthese policies. Areas which management believe require the most critical accounting judgements are as follows (apart from those policies involving estimation whichare outlined in (b) below).

a) Critical accounting judgements in applying the Group’s accounting policies

Cash flow hedge accountingThe Group enters into various types of hedging or forward contracts for the buying and selling of commodities: principally sales of electricity and the purchase of fuelfor its own power plants. In merchant markets these contracts typically fall within the definition of derivative financial instruments and accordingly have to be marked to market. Accounting for these contracts as cash flow hedges allows, to the extent the hedges are effective, the change in values of the derivatives to be deferred inequity. In order to achieve cash flow hedge accounting it is necessary for the Group to determine, on an on-going basis, whether a forecast transaction is both highlyprobable and whether the hedge is effective. This requires both subjective and objective measures of determination.

Income recognition from long-term PPAsWhen power plants sell their output under long-term PPAs it is usual for the power plant owning company to receive payment (known as a ‘capacity payment’) forthe provision of electrical capacity whether or not the offtaker requests electrical output. In these situations, where there is a long-term contract to sell electricityoutput and electrical capacity, it is necessary for the Group to evaluate the contractual arrangements and determine whether they constitute a form of lease or aservice contract.

For those arrangements determined to be or to contain leases, further judgements are required to determine whether the arrangement is a finance or operatinglease. This assessment requires an evaluation of where the substantial risks and rewards of ownership reside. For finance leases it is necessary to calculate theproportion of total capacity payments which should be treated as finance income, capital repayment and as a fee for service provision. For operating leases it isnecessary to determine the allocation of total capacity payments between minimum lease payments and fees for service provision.

Evaluation of levels of control and influenceThe determination of the level of influence the Group has over a business is often a mix of contractually defined and subjective factors that can be critical to theappropriate accounting treatment of entities in the consolidated financial statements. We achieve control or influence through Board representation and by obtainingrights of veto over significant actions. We generally treat investments where the Group holds less than 20% of the equity as investments available for sale. Theseinvestments available for sale are carried at market value where market prices are available. Where quoted market prices in an active market are not available, andwhere fair value cannot be reliably measured, unquoted equity instruments are measured at cost.

Where the Group owns between 20% and 50% of the equity of an entity and is in a position to exercise significant influence over the entity’s operating and financialpolicies, we treat the entity as an associate. Equally, where the Group holds a substantial interest (but less than 20%) in an entity and has the power to exert significantinfluence over its operations, we also treat that entity as an associate. This treatment is applied to our interest in The Hub Power Company in Pakistan of which weown 17% (refer to note 38). Where the Group has the power to control the operations of an entity, and it has less than 50% of the equity, we treat the entity as asubsidiary when required.

A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. Where we recognise ourinterest in a joint venture as a jointly controlled entity we use the equity method of accounting. Sometimes we may apply the equity method to a joint venture wherewe do not posses an equal shareholding to the other venturers, because the venturers are bound by a contractual arrangement and the contractual arrangementestablishes joint control.

Exceptional itemsThe Directors consider that items of income or expense which are material by virtue of their nature and amount should be disclosed separately if the financialstatements are to fairly present the financial position and financial performance of the entity. The Directors label these items collectively as ‘exceptional items’.

Determining which transactions are to be considered exceptional in nature is often a subjective matter. However, circumstances that the Directors believe would give rise to exceptional items for separate disclosure would include:

(i) disposals of interests in businesses;

(ii) discontinued operations;

(iii) impairments and impairment reversals.

All exceptional items are included on the appropriate income statement line item to which they relate. In addition, for clarity, separate disclosure is made of all items in one column on the face of the income statement.

TaxationThe income tax expense recorded in the income statement is dependent on the profit for the year and the tax rates in effect at the balance sheet date, unless new tax rates have been enacted or substantively enacted.

The level of current and deferred tax recognised is also dependent on subjective judgements as to the outcome of decisions to be made by the tax authorities in the various tax jurisdictions around the world in which International Power operates. It is necessary to consider the extent to which deferred tax assets should berecognised based on an assessment of the extent to which they are regarded as recoverable.


39 Critical accounting judgements and key sources of estimation uncertainty continued

b) Key sources of estimation uncertainty

Useful economic lives of property, plant and equipmentThe original cost of greenfield developed power plant and other assets includes relevant borrowings and development costs:

(i) Interest on borrowings relating to major capital projects with long periods of development is capitalised during construction and then amortised over the usefullife of the asset;

(ii) Project development costs (including appropriate direct internal costs) are capitalised when it is virtually certain that the contract will proceed to completion andincome will be realised.

Depreciation of plant and other assets is charged so as to write down the value of those assets to their residual value over their respective estimated useful lives. TheDirectors are required to assess the useful economic lives and residual values of the assets so that depreciation is charged on a systematic and proportionate basis tothe current carrying amount. It is Group policy to depreciate gas plant over 30 years to a 10% residual value, unless the circumstances of the project or life of specificcomponents indicate a shorter period or a lower residual value. Coal plants, hydro plants and wind farms are considered on an individual basis. Our depreciation livesare disclosed in the accounting polices (note 1).

Fair values of energy derivativesThe Group has presented its financial statements in accordance with the presentation requirements of IAS 32 “Financial Instruments: Presentation and Disclosure”, the disclosure requirements of IFRS 7 “Financial Instruments: Disclosures” and the accounting requirements of IAS 39 “Financial Instruments: Recognition andMeasurement”. In accordance with IAS 39, the Group records its derivative contracts on its balance sheet at fair value (unless they qualify for ‘own use’ treatment).Changes in the value of its derivative contracts in each period are recorded in the income statement unless the required hedge accounting criteria are met which allows the movement in fair value to be recorded within equity. The Group estimates the fair value of its energy derivative contracts by reference to forward pricecurves. A forward price curve represents the Group’s view as to the prices at which customers would currently contract for delivery or settlement of commodities,such as power or gas, at future dates. Generally the forward price curve is derived from published price quotations in an active market, over the short-term horizonperiod, and from valuation techniques over the more distant horizon period. Assumptions which underpin the long-term price curve relate to the prices ofcommodities such as oil, the cost of constructing and financing the building of new power plants, and the prices at which it would be economic for companies toenter the market and build additional capacity (‘new entrant pricing’). The assumptions used during the application of valuation techniques will directly impact theshape of the forward price curve. The forward price curves are only estimates of future prices and thus possess inherent uncertainty and subjectivity. As disclosed in note 32, at 31 December 2007 only 13% (2006: 13%) of the carrying amount of derivative assets are based on non-market observable inputs and only 18% (2006: 32%) of the carrying amount of derivative financial liabilities are based on non-market observable inputs.

Fair values on acquisitionThe Group is required to bring acquired assets and liabilities on to the Group balance sheet at their fair value. Power plant and equipment usually have long operatinglives, and are often bought with associated long-term contracts such as PPAs. Hence determination of the fair values of these long-life assets and contracts can requirea significant amount of judgement. Fair values on our major acquisitions are disclosed in note 31 to these financial statements. In determining the fair values of assets,liabilities and contingent liabilities as part of the acquisitions of Simply Energy and Maestrale we have used the services of professional firms of valuers.

Impairment analysisManagement regularly considers whether there are any indications of impairment to the carrying amounts of the Group’s long-life assets, including goodwill and otherintangible assets and the Group’s power plant and other property, plant and equipment. As a minimum, the recoverability of goodwill is tested on an annual basis. Thisincludes a review of market conditions in both the short-term and long-term. Impairment reviews require a comparison of the current carrying amount of the assetwith the present value of the expected future cash flows of the comparable cash generating unit and its fair value less costs to sell. The reviews are generally based on pre-tax risk adjusted discounted cash flow projections that require estimates of discount rates and future market prices over the remaining lives of the assets. Webenchmark the results of this testing against post-tax risk adjusted cash flows, discounted on a post-tax basis. At each balance sheet date, consideration is also given asto whether there is any indication that an impairment loss recognised in prior periods has reversed. As disclosed in note 8, the Group has impaired an intangible assetrelating to the unamortised fair value of the gas supply agreement, acquired with Saltend in 2005, following a reduction in the gas forward price curve. The charge of£47 million and associated tax credit of £14 million are classified as exceptional items. In 2006 the Group carried out a review of the recoverable amount of itsDeeside power plant based on its estimated value in use. This led to the full impairment reversal of the remaining £36 million impairment charge previously bookedagainst this asset. A tax charge of £11 million was recorded on this item.

ProvisionsWithin the Group there are a number of long-term provisions. The carrying amount of these provisions is estimated based on assumptions about such items as therisk adjustment to cash flows or discount rates used, future changes in prices and estimates of costs. For example, the pensions liability is based on assumptionsrelating to discount rates used, future changes in salaries, expected mortality and future increases in pension payments. We review these assumptions regularly, and forpensions annually. However, a change in estimates could have a material impact on the carrying amount of these provisions. In relation to pensions liabilities, the resultof a sensitivity analysis relating to actuarial assumptions is included in note 7.

40 Events after the balance sheet date

There are no events after the balance sheet date to report.

41 Events subsequent to the date of the auditor’s report

On 19 March 2008, International Power acquired an additional 31% shareholding in Uch Power (Pvt) Limited for a total cash consideration of US$86 million (£43 million). The acquisition takes the Group’s total holding in Uch Power (Pvt) Limited to 71%.


COMPANY BALANCE SHEETat 31 December 2007


(restated)Note £m £m

Fixed assets

5 Tangible assets 2 2

6 Investments:

Subsidiary undertakings 4,263 3,982

Other investments 1 1

Total fixed asset investments 4,264 3,983

Total fixed assets 4,266 3,985

Current assets

7 Debtors 128 181

Cash at bank and in hand 246 329

Total current assets 374 510

8 Creditors: amounts falling due within one year (1,719) (1,559)

Net current liabilities (1,345) (1,049)

Total assets less current liabilities 2,921 2,936

4 Retirement benefit obligations (12) (8)

9 Provisions for liabilities and charges (42) (35)


Capital and reserves

10/11 Called up share capital 751 746

11 Share premium account 411 402

11 Capital redemption reserve 145 145

11 Capital reserve 415 415

11 Profit and loss account 1,145 1,185

Shareholders’ funds – equity 2,867 2,893

The financial statements were approved by the Board of Directors and authorised for issue on 5 March 2008 and signed on its behalf by

Philip Cox Mark Williamson

Chief Executive Officer Chief Financial Officer

Company financial statements for the year ended 31 December 2007166

NOTES TO THE COMPANY FINANCIAL STATEMENTS for the year ended 31 December 2007

1 Accounting policies

a) Basis of preparationThe financial statements have been prepared under applicable law and UKAccounting Standards (UK Generally Accepted Accounting Practice) using thehistorical cost convention, modified for certain items carried at fair value, as statedin the accounting policies.

The following accounting policies have been applied consistently in dealing withitems which are considered material in relation to the financial statements, exceptas noted below.

Under section 230(4) of the Companies Act 1985 the Company is exempt fromthe requirement to present its own profit and loss account.

As the results of the Company are being presented together with itsconsolidated financial statements (refer to pages 101 to 164), the Company hastaken advantage of the exemption contained in FRS 8 and has therefore notdisclosed transactions or balances with entities which form part of the Group (or investees of the Group qualifying as related parties). In addition, the Companyhas also taken advantage of the exemption in FRS 29 (Financial Instruments:Disclosures) not to present Company only information as the disclosuresprovided in the notes to the consolidated financial statements comply with therequirements of this standard.

The Company has adopted UITF abstract 44 (IFRIC Interpretation 11) FRS 20(IFRS 2) – Group and Treasury Share Transactions for the first time in the yearended 31 December 2007.

The prior year comparatives have been restated with the effect of increasing thenet assets by £3 million and a credit to the profit and loss account of £1 million.

In addition the Company has reclassified the prior year deferred tax asset on thepension scheme, liability from provisions to Retirement benefit obligations (referto note 4).

The Company has not adopted the amendments to FRS 17 (RetirementBenefits) requiring additional disclosure of the scheme’s assets and liabilities. Thisamendment applies to accounting periods beginning on or after 6 April 2007.

b) Income recognitionDividend income from subsidiary undertakings is recognised in the profit and lossaccount on receipt of the cash.

c) Foreign currenciesForeign currency monetary assets and liabilities are translated at the rate ofexchange at the balance sheet date. Foreign currency non-monetary itemsmeasured in terms of historical cost are translated at the rate of exchange at thedate of the transaction. Exchange differences on monetary items are dealt with in the profit and loss account. Exchange differences on non-monetary items arerecognised in line with whether the gain or loss on the non-monetary item itselfis recognised in the profit and loss account or in equity.

d) Pension schemesThe Company operates a pension scheme (by participating in the InternationalPower section of the Electricity Supply Pension Scheme) providing benefits basedon final pensionable pay. The assets of the scheme are held separately from thoseof the Company.

Pension scheme assets are measured using market values. Pension schemeliabilities are measured using a projected unit credit method and discounted atthe current rate of return on a high quality corporate bond of equivalent termand currency to the liability.

The pension scheme surplus (to the extent that it is recoverable) or deficit isrecognised in full. The movement in the scheme surplus/deficit is split betweenoperating charges, finance items and, in the statement of total recognised gainsand losses, actuarial gains and losses.

For defined contribution arrangements, contributions are charged to the profitand loss account as they fall due.

e) Operating leasesRentals payable under operating leases are charged to income on a straight-linebasis over the term of the relevant lease.

Benefits received and receivable as an incentive to enter into an operating leaseare also spread on a straight-line basis over the lease term.

Where a leasehold property is vacant, or sublet under terms such that the rentalincome is less than the head lease rental cost, provision is made for the bestestimate of unavoidable lease payments during the vacancy or on the anticipatedfuture shortfall of sub-lease income compared with the head-lease expense.

f) Tangible fixed assetsTangible fixed assets are stated at original cost less accumulated depreciation and any provision for impairment in value.

Depreciation is calculated so as to write-down the cost of tangible fixed assets to their residual value evenly over their estimated useful lives.

The depreciation charge is based on the following estimates of useful lives:

Years

Fixtures, fittings, tools and equipment 3-10

Computer equipment and software 3-5

Leasehold improvements Life of lease

g) Fixed asset investmentsInvestments in subsidiary undertakings are stated at cost less provision forimpairment.

h) Deferred taxationDeferred taxation is provided on timing differences, arising from the differenttreatment for accounts and taxation purposes of transactions and eventsrecognised in the financial statements of the current year and previous years.Deferred taxation is calculated at the rates at which it is estimated that tax willarise. Deferred tax assets and liabilities are not discounted.

i) Loans and bondsInterest-bearing borrowings are recognised initially at fair value less attributabletransaction costs. Subsequent to initial recognition, interest-bearing borrowingsare stated at amortised cost with any difference between cost and redemptionvalue being recognised in the income statement over the period of theborrowings on an effective interest basis.

j) Financial guaranteesWhere the Company enters into financial guarantee contracts to guarantee theindebtedness of other companies within its group, the Company considers theseto be insurance arrangements, and accounts for them as such. In this respect, theCompany treats the guarantee contract as a contingent liability until such time asit becomes probable that the Company will be required to make a paymentunder the guarantee.


k) Share-based paymentsThe Company issues equity-settled share-based payments to certain employees.Equity-settled share-based payments are measured at fair value (excluding theeffect of non-market-based vesting conditions) at the date of grant. The fair valuedetermined at the date of grant of the equity-settled share-based payments foremployees of the Company is expensed on a straight-line basis over the vestingperiod, based on the Company’s estimate of the shares that will eventually vestand where applicable, adjusted for the effect of non-market-based vestingconditions.

For the Group’s Executive Share Option Plans the fair values are measured usingthe Black-Scholes pricing model. The expected lives used in these models havebeen adjusted, based on management’s best estimate, for the effects of non-transferability, any exercise restrictions and behavioural considerations.

For conditional awards, made under the 2002 Performance Share Plan, withouta market-related performance condition, the fair values have been calculated asthe face value of the award discounted for the non-entitlement to dividendsduring the vesting period.

Where conditional awards, made under the 2002 Performance Share Plan,contain a market-related performance condition, the fair values are measuredusing a Monte Carlo simulation method.

The fair value determined at the date of grant of the equity settled share-basedpayments for employees of subsidiaries of the Company is recognised as anincrease in investment in subsidiary undertakings on a straight-line basis over thevesting period, based on the same estimates.

l) Equity instrumentsEquity instruments issued by the Company are recorded at the proceedsreceived, net of direct issue costs.

m) Derivative financial instrumentsThe Company has adopted the Group accounting policies for derivatives as setout in note 1 to the consolidated financial statements.

n) ProvisionsProvisions are recognised when the Company has a present obligation as a resultof a past event, it is probable that the Company will be required to settle thatobligation and the amount can be reliably estimated. Provisions are measured at the Directors’ best estimate of the expenditure required to settle the obligationat the balance sheet date, and are discounted to present value where the impactis material.


2 Profit of the parent company

The profit of the parent company for the financial year amounted to £118 million (2006 (restated): £933 million). By virtue of Section 230(4) of the Companies Act1985, the Company is exempt from presenting a separate profit and loss account.

The auditor’s remuneration for audit and other services is disclosed in note 3 to the consolidated financial statements.

3 Employees

The average number of persons employed by the Company (including Directors) during the year, analysed by category, was as follows:


2007 2006Number Number

Based in UK 203 179

Based overseas 27 33

230 212

The aggregate payroll costs of these persons were as follows:


2007 2006(restated)

£m £m

Wages and salaries 25 21

Share-based payments 5 8

Social security costs 3 5

Other pension costs 7 8

40 42

For details of the Company’s share-based payments, refer to note 29 to the consolidated financial statements.

Remuneration of the Directors is set out in note 6 to the consolidated financial statements and in the audited section of the Directors’ remuneration report on pages 83 to 95.


4 Pension arrangements

The Company is part of the industry-wide pension scheme, the Electricity Supply Pension Scheme (ESPS), which is a defined benefit scheme with assets invested in separate trustee administered funds as described in note 7 to the consolidated financial statements.

The valuation used for the FRS 17 disclosure at 31 December 2007 has been based on a full assessment of the liabilities of the International Power section of theElectricity Supply Pension Scheme at 31 March 2007 updated by independent qualified actuaries to reflect the requirements of FRS 17.

The major assumptions used by the actuary were:Year ended Year ended Year ended

31 December 31 December 31 December2007 2006 2005

% % %

Inflation assumption 3.4 3.1 2.9

Rate of increase in salaries 4.9 4.6 4.4

Rate of increase of pensions in payment 3.4 3.1 2.9

Rate of increase of deferred pensions 3.4 3.1 2.9

Rate used to discount plan liabilities 5.8 5.1 4.7

The assets in the scheme and the expected rates of return were:

31 December 2007 31 December 2006 31 December 2005

Long-term Value Long-term Value Long-term Valuerate of return rate of return rate of return

% £m % £m % £m

Equities 8.0 78 7.5 71 7.1 60

Bonds 5.7 11 5.0 8 4.6 7

Other 6.7 11 6.4 9 6.0 7

Total market value of assets 100 88 74

Present value of scheme liabilities (117) (100) (92)

Deficit in scheme (17) (12) (18)

Related deferred tax asset 5 4 5

Net pension liability (12) (8) (13)

Analysis of amounts charged to operating profit:Year ended Year ended


£m £m

Current service cost 7 6

Settlement/curtailment cost – 2

Total operating cost 7 8

Analysis of amounts credited to other finance income:2007 2006

£m £m

Expected return on pension plan assets 6 5

Interest on pension plan liabilities (5) (4)

Net return 1 1

Analysis of amount recognised in statement of total recognised gains and losses:2007 2006

£m £m

Actual return less expected return on pension scheme assets (2) 2

Experience losses arising on the scheme liabilities (6) –

Changes in assumptions underlying the present value of the scheme liabilities 2 5

Actuarial (loss)/gain recognised in statement of total recognised gains and losses (6) 7


4 Pension arrangements continued

Analysis of movement in deficit during the year:Year ended Year ended


£m £m

Deficit in scheme at 1 January (12) (18)

Current service cost (7) (6)

Settlement/curtailment cost – (2)

Contributions 7 6

Other finance income 1 1

Actuarial (loss)/gain (6) 7

Deficit in scheme at 31 December (17) (12)

History of experience gains and losses:Year ended Year ended Year ended Year ended Year ended

31 December 31 December 31 December 31 December 31 December2007 2006 2005 2004 2003

Difference between the actual and expected return on pension scheme assets:

Amount (£m) (2) 2 9 3 4

Percentage of scheme assets 2% 2% 12% 5% 9%

Experience (losses)/gains arising on the scheme liabilities:

Amount (£m) (6) – (6) 4 –

Percentage of the present value of scheme liabilities 5% – 7% 6% –

Total amount recognised in statement of total recognised gains and losses:

Amount (£m) (6) 7 (6) – 4

Percentage of the present value of scheme liabilities 5% 7% 7% – 7%

5 Tangible fixed assets

Freehold Plant, Totalland and machinery and buildings equipment

£m £m £m

Cost

At 1 January 2007 2 8 10

Additions – 1 1


At 31 December 2007 2 6 8

Depreciation

At 1 January 2007 1 7 8

Provided during the year – 1 1



Net book value




6 Fixed asset investments

Subsidiary undertakings

Investment Loans to Other Totalinvestments

£m £m £m £m

At 1 January 2006 (restated) 2,571 496 1 3,068

Additions 515 1,426 – 1,941

Capitalisation of loan due from subsidiary undertakings 52 (52) – –

Distribution and loan repayments – (323) – (323)

Disposals (974) – – (974)

Impairment loss charged (70) – – (70)

Impairment loss reversed 311 45 – 356

Exchange differences – (15) – (15)

At 31 December 2006 2,405 1,577 1 3,983

Additions 1,346 183 – 1,529

Distribution and loan repayments – (1,015) – (1,015)

Disposals (250) – – (250)

Exchange differences – 17 – 17

At 31 December 2007 3,501 762 1 4,264

Details of the principal subsidiary undertakings, associates and joint ventures are provided in notes 37 and 38 to the consolidated financial statements.

7 Debtors


£m £m

Amounts falling due within one year:

Due from subsidiary undertakings 99 135

Other debtors 10 11

Corporation tax 16 30

Prepayments and accrued income 3 5

Total debtors 128 181

8 Creditors: amounts falling due within one year


£m £m

Trade creditors 1 1

Amounts due to subsidiary undertakings 1,654 1,491

Other creditors 21 19

Other taxation and social security – 1

Accruals and deferred income 43 47

Total creditors: amounts falling due within one year 1,719 1,559


9 Provisions

Deferred Other Totaltax£m £m £m

At 1 January 2006 27 11 38

Credited to profit and loss (2) (1) (3)

At 31 December 2006 25 10 35

Charged to profit and loss – 10 10

Credited to profit and loss (2) (1) (3)

At 31 December 2007 23 19 42

‘Other’ provisions comprise a provision for onerous property leases and legacy pension commitments relating to other members of the Electricity Supply PensionScheme. £10 million has been provided for during the year for the expected vacancy period for leased premises at Senator House. The lease provision is expected tobe mostly utilised within the next three years. The remaining liabilities are not expected to arise in the short-term. The Directors are uncertain as to the timing of whenthese provisions will be utilised.

10 Share capital



At 1 January 2007 2,266,000,000 1,133 1,492,052,910 746


Issue of shares under the Sharesave Plan – – 830,476 –


At 31 December 2007 2,266,000,000 1,133 1,501,939,513 751



At 1 January 2006 2,266,000,000 1,133 1,474,736,637 737


Issue of shares under the Sharesave Plan – – 1,196,959 1


At 31 December 2006 2,266,000,000 1,133 1,492,052,910 746

Ordinary SharesOrdinary Shares rank equally between each other with regard to the right to receive dividends and also in a distribution of assets on the winding up of the Company.

Deferred sharesThe Company has 21 Deferred Shares of 1 pence each in issue. These shares were issued to ensure the demerger of International Power and Innogy in 2000 was effected as efficiently as possible. The holders of Deferred Shares have no rights to receive dividends or to attend or vote at any general meeting.

Unclassified shareFurther to the redemption of the Special Share in August 2000, the Company’s authorised share capital includes one unclassified share of £1.


11 Share capital and reserves


Called up Share Capital Capital Profit Totalshare premium redemption reserve and loss shareholders’

capital account reserve account funds – equity

£m £m £m £m £m £m

At 1 January 2007 (restated) 746 402 145 415 1,185 2,893

Profit for the year – – – – 118 118

Issue of shares 5 9 – – – 14

Dividends – – – – (160) (160)

Actuarial loss on pension (net of deferred tax) – – – – (4) (4)

Other movements – – – – 6 6

At 31 December 2007 751 411 145 415 1,145 2,867

Attributable to equity holders to the parent

Called up Share Capital Capital Profit Totalshare premium redemption reserve and loss shareholders’

capital account reserve account funds –equity

£m £m £m £m £m £m

At 1 January 2006 737 394 145 415 307 1,998

Prior year adjustments – – – – 2 2

At 1 January 2006 (restated) 737 394 145 415 309 2,000

Profit for the year (restated) – – – – 933 933

Issue of shares 9 8 – – – 17

Dividends – – – – (67) (67)

Actuarial gain on pension (net of deferred tax) – – – – 5 5

Other movements – – – – 5 5

At 31 December 2006 (restated) 746 402 145 415 1,185 2,893

The share premium account, capital redemption reserve and capital reserve are not distributable.

A number of International Power plc Ordinary Shares are held in Employee Share Ownership Trusts (ESOTs). These shares are held by the ESOTs to meet awardsmade under the Company’s 2002 Performance Share Plan. At 31 December 2007, the ESOTs held a total of 253,990 International Power plc Ordinary Shares (2006: £1,241,452). At 31 December 2007 the market value of these shares was £1,151,845 (2006: £4,739,243). The maximum number of shares required to meet all outstanding awards (assuming full vesting of those awards) at 31 December 2007 was 6,139,222 (2006: 6,444,745).

£424 million (2006: £527 million) of the Company’s profit and loss reserve is not distributable as it arose from unrealised gains on intra-group transfers.

As stated in note 1, changes in UK GAAP have occurred arising from the implementation of UITF 44. This has resulted in an addition to shareholders’ funds at 1 January 2006 of £2 million. The impact on the profit and loss account for the year ended 31 December 2006 was an increase of £1 million.

12 Commitments

Lease commitments31 December 31 December

2007 2006£m £m

Property leases (annual commitment):

Expiring within one year 1 –

Expiring between one and five years – –

Expiring after five years 5 5


13 Contingent liabilities

a) Legal proceedings against the CompanyDetails of legal proceedings against the Company are shown in note 35 to the consolidated financial statements.

b) TaxationDetails of contingent liabilities relating to tax issues are shown in note 35 to the consolidated financial statements.

c) Bonds and guaranteesVarious growth and expansion projects are supported by bonds, letters of credit and guarantees issued by the Company totalling £472 million (2006: £292 million). This includes International Power plc’s guarantee of International Power (Impala)’s obligations to Mitsui & Co of Japan and Mitsui Power Ventures Limited (as set out in note 25 to the consolidated financial statements). Energy trading activities relating to merchant plant are supported by letters of credit and guarantees issued by theCompany totalling £299 million (2006: £418 million).

d) Convertible bondsAs set out in note 25 to the consolidated financial statements International Power plc has guaranteed the 3.75% Convertible US dollar bonds 2023 issued byInternational Power (Jersey) Limited and the 3.25% Convertible euro bonds 2013 issued by International Power Finance (Jersey) II Limited.

14 Related party disclosures

The Company has taken advantage of the exemption contained in FRS 8 and has therefore not disclosed transactions or balances with entities which form part of the Group.


FIVE-YEAR FINANCIAL SUMMARY

The following tables are the consolidated income statements, the consolidated income statements excluding exceptional items and specific IAS 39 mark to market movements and the summary balance sheets for the five years ended 31 December 2007. For the year ended 31 December 2003 results have beenprepared under UK GAAP. They have been re-presented under an IFRS format, in the table below, to aid comparability.

Consolidated income statementsYear ended Year ended Year ended Year ended Year ended

31 December 31 December 31 December 31 December 31 December2007 2006 2005 2004 2003(IFRS) (IFRS) (IFRS) (IFRS) (UK GAAP)

£m £m £m £m £m

Revenue: Group and share of joint ventures and associates 3,485 3,783 2,936 1,267 1,273

Less: share of joint ventures’ and associates’ revenue (1,160) (1,199) (1,003) (499) (421)

Group revenue 2,325 2,584 1,933 768 852

Cost of sales (1,929) (1,839) (1,513) (637) (1,133)

Gross profit/(loss) 396 745 420 131 (281)

Other operating income 96 102 122 56 66

Other operating expenses (172) (163) (129) (67) (64)

Share of results of joint ventures and associates 198 214 198 113 195

Profit/(loss) from operations 518 898 611 233 (84)

Disposal of interests in businesses 289 – 10 4 27

Finance income 77 53 53 30 42

Finance expenses (401) (327) (255) (138) (169)

Profit/(loss) before tax 483 624 419 129 (184)

Tax expense 46 (147) (89) (25) (28)

Profit/(loss) for the year 529 477 330 104 (212)

Attributable to:

Minority interests 26 67 45 6 7

Equity holders of the parent 503 410 285 98 (219)

Basic earnings/(loss) per share 33.6p 27.6p 19.4p 7.5p (17.6)p

Diluted earnings/(loss) per share 31.8p 26.2p 18.5p 7.4p (17.6)p

The share of results from joint ventures and associates for the year ended 31 December 2003, presented under UK GAAP in the above table, is shown beforeinterest, taxation and minority interests.

With effect from 1 January 2004, we reverted to the equity method of accounting for our 36% stake in KAPCO and now account for it as an associate. KAPCO hadpreviously been accounted for as a trade investment with dividend receipts recorded in income from investments. To aid comparability the dividends received in 2003have been included in the share of results of joint ventures and associates in the above table.

Five-year financial summary176

Consolidated income statements excluding exceptional items and specific IAS 39 mark to market movements

Year ended Year ended Year ended Year ended Year ended31 December 31 December 31 December 31 December 31 December

2007 2006 2005 2004 2003(IFRS) (IFRS) (IFRS) (IFRS) (UK GAAP)

£m £m £m £m £m

Revenue: Group and share of joint ventures and associates 3,872 3,645 2,980 1,267 1,273

Less: share of joint ventures’ and associates’ revenue (1,160) (1,193) (1,000) (499) (421)

Group revenue 2,712 2,452 1,980 768 852

Cost of sales (1,927) (1,807) (1,570) (637) (729)

Gross profit 785 645 410 131 123

Other operating income 96 83 64 56 66

Other operating expenses (163) (163) (129) (78) (64)

Share of results of joint ventures and associates 186 208 191 113 160

Profit from operations 904 773 536 222 285

Finance income 77 53 53 30 42

Finance expenses (385) (301) (255) (107) (153)

Profit before tax 596 525 334 145 174

Tax expense (113) (122) (68) (25) (54)

Profit for the year 483 403 266 120 120

Attributable to:

Minority interests 77 71 52 8 7

Equity holders of the parent 406 332 214 112 113

Basic earnings per share 27.1p 22.4p 14.6p 8.6p 9.1p

The comments set out below the table on the preceding page also apply to the results presented above.

Consolidated balance sheets

As at As at As at As at As at31 December 31 December 31 December 31 December 31 December

2007 2006 2005 2004 2003(IFRS) (IFRS) (IFRS) (IFRS) (UK GAAP)

£m £m £m £m £m

Non-current assets 9,444 7,420 6,592 5,667 2,585

Inventories 158 141 110 91 65

Other current asset receivables and derivatives 990 806 676 238 160

Cash and cash equivalents and assets held for trading 1,161 1,022 672 612 743

Current assets 2,309 1,969 1,458 941 968

Current liabilities (2,042) (1,174) (1,305) (551) (847)

Non-current liabilities (6,704) (5,475) (4,370) (3,999) (1,146)

Net assets 3,007 2,740 2,375 2,058 1,560

Net debt 4,662 3,575 3,060 2,752 692

Gearing 155% 130% 129% 134% 44%

Debt capitalisation 61% 57% 56% 57% 31%

Capital expenditure (including acquisitions) 1,072 1,080 847 1,549 130


SHAREHOLDER PROFILEas at 31 December 2007

Category of holdingsNumber Percentage Ordinary Percentage

of shareholders of total Shares of issued shareholders share capital

Private individual 386,220 98.85 173,077,818 11.52

Nominee companies 4,221 1.08 1,308,325,118 87.11

Limited and public limited companies 209 0.05 2,835,480 0.19

Other corporate bodies 82 0.02 12,537,127 0.84

Pension funds, insurance companies and banks 18 0.00 5,163,970 0.34

Total 390,750 100.00 1,501,939,513 100.00

Range of holdingsNumber Percentage Ordinary Percentage

of shareholders of total Shares of issued shareholders share capital

1 – 199 94,770 24.25 14,406,087 0.96

200 – 499 209,674 53.66 60,527,268 4.03

500 – 999 57,279 14.66 39,094,863 2.60

1,000 – 4,999 25,811 6.61 45,077,531 3.00

5,000 – 9,999 1,791 0.46 11,847,529 0.79

10,000 – 49,999 680 0.17 13,362,240 0.89

50,000 – 99,999 142 0.04 10,176,022 0.68

100,000 – 499,999 316 0.08 76,834,761 5.12

500,000 – 999,999 96 0.02 67,864,799 4.52

1,000,000 – highest 191 0.05 1,162,748,413 77.41

Total 390,750 100.00 1,501,939,513 100.00

Shareholder information178

SHAREHOLDER SERVICES AND INFORMATION

Annual General Meeting (AGM)The 2008 AGM will be held on Tuesday 13 May 2008. Further details will be set out in the Notice of the AGM to be sent out in April 2008.

Electronic votingFor the AGM you can register your vote electronically by logging on to thefollowing website: www.sharevote.co.uk. You will need your voting referencenumbers (the three 8-digit numbers shown on your Proxy Form). Alternatively, if you have already registered for a shareview portfolio with Equiniti, then log onto your portfolio at www.shareview.co.uk and click on company meetings.

Receive your Annual Report onlineIf you have access to the Internet, in future you can receive your copy of theAnnual Report by registering with www.shareview.co.uk. This is a serviceoffered by Equiniti that also enables you to check your holdings in many UKcompanies and helps you to organise your investments electronically. Once youhave registered for a portfolio, you can also use this service to change youraddress details online as well as register your vote for a company’s GeneralMeeting safely, securely and privately.

Dividend Reinvestment Plan (DRIP)As an alternative to receiving a cash dividend you can choose to reinvest your money in the Company’s shares by using a Dividend Reinvestment Plan. The DRIP works by reinvesting your dividend money by way of buying shares in the open market. If you would like to receive further information and anapplication form for the International Power DRIP, please contact Equiniti on 0871 384 2268.

Individual Savings Accounts (ISAs)Information on the International Power corporate ISA, which offers a tax-efficientway of holding shares, can be obtained from Equiniti Financial Services Limited,who can be contacted on 0871 384 2244.

Shareholder enquiriesIf you have any queries on the following:

■ transfer of shares;

■ change of name or address;

■ lost share certificates;

■ lost or out-of-date dividend cheques and payment of dividends directly into a bank or building society account;

■ death of the registered holder of shares;

■ receiving duplicate copies of this report;

■ receiving the Summary Annual Report or the Annual Report in addition to the electronic version of the report;

please contact Equiniti on 0871 384 2082 or write to them at Equiniti, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA, quotingInternational Power and including your shareholder reference number (found on your share certificate).

Additional information can be found on the Equiniti Limited website at www.equiniti.com.

Share dealing servicesEquiniti have in place a low-cost share dealing service for both the purchase and sale of shares. This is a postal service only. For information on the low-cost dealing service, or to obtain a dealing form, please contact Equiniti on 0871 384 2082.

Shareview dealingEquiniti also offer a telephone and internet share dealing service, details ofwhich can be found on their website www.shareview.co.uk/dealing.This arrangement is available at any time during market trading hours andprovides an easy and convenient facility to trade shares offering real time pricesthrough a range of market makers and giving you control of when and for howmuch you wish to trade your shares. Full terms and conditions for this service areavailable on the Shareview website. You should note that for sales, the maximumonline trade size is £25,000 and for purchases £20,000. To trade over thetelephone, please call 08456 037 037.

Calls to Equiniti 0871 numbers are charged at 8p per minute from a BT landline.Other telephony provider’s costs may vary.

Share priceOur latest share price information is available on our website atwww.ipplc.com/ipr/investors/shareinfo. This link will provide you withInternational Power’s latest share price, historical closing prices and volumes and an interactive share price graph.

In addition, you can now access the latest share price on your Blackberry, PDA or mobile phone at http://mobile.ipplc.com.

Contact details

General enquiriesPlease contact:Stephen RamsayCompany SecretaryInternational Power plcSenator House, 85 Queen Victoria StreetLondon EC4V 4DPTel: 020 7320 8706

Corporate investor & media enquiriesPlease contact:Aarti SinghalHead of CommunicationsInternational Power plcSenator House, 85 Queen Victoria StreetLondon EC4V 4DPTel: 020 7320 8600

WebsiteThe International Power website – www.ipplc.com contains the 2007 Annual Report and Summary Annual Report, along with a wide range ofother information on the Group. The Annual Report and Summary Annual Reportcan be found at: www.ipplc.com/ipr/investors/reports.

The website also hosts an Alert Servicewww.ipplc.com/ipr/siteservices/alerts, where you can sign up for e-mail alerts of news releases, reports, results and presentations, and events.

Corporate social responsibilityFurther information on corporate social responsibility is available on our websitewww.ipplc.com/ipr/environment/corpresp.

FINANCIAL CALENDAR

Interim Management Statement 8 May 2008

Annual General Meeting 13 May 2008

Ex-dividend date 21 May 2008

Dividend payment date 26 June 2008

Announcement of interim results for the period ended 30 June 2008 7 August 2008

Interim Management Statement 6 November 2008


GLOSSARY

AGM Annual General Meeting of shareholders of the Company.

Asset-backed trading The selling of the physical output generated by our power stations.

Availability A measure giving the proportion of electrical energy that was actually available to be generated during the period, after takingaccount of both planned and unplanned outages, expressed as a percentage of the maximum potential electrical energygeneration.

Bond Security that obligates the issuing company to make specified payments to the bondholders.

Capacity (installed) Generator capacity (megawatts), usually indicated on a nameplate physically attached to the generator.

CCGT Combined cycle gas turbine – the combination of a gas turbine (GT) and steam turbine (ST) in a configuration that enableselectricity to be generated directly from a generator driven by the GT and, by using exhaust gases from the GT to produce steam, a ST coupled to the same generator or another generator.

CO2 Carbon dioxide.

Cogeneration The simultaneous generation of electricity and heat in the form of steam, typically where the need for both arises for industrial or commercial purposes and where the steam is generated by utilising the waste heat from electricity generation.

Combined Code The Code which sets out the expected corporate governance standards for companies listed on the London Stock Exchange.

Corridor approach Under this approach to recognising surpluses and deficits in defined benefit pension plans, actuarial gains and losses are notrecognised immediately. Only when the cumulative gains or losses fall outside the corridor is a specified portion recognised in theincome statement from the following year onwards. The corridor is 10% of the present value of the pension rights accrued or ofthe fund assets at market value, if greater.

CR Corporate responsibility.

Dark spread The difference between the coal cost to generate electricity and the price at which electricity is sold.

Debt capitalisation Net debt divided by the sum of the net debt and total equity.

Demerger The process whereby National Power split its UK and international operations into separate businesses.

Desalination plant Plant which produces drinking water from sea water.

Emission allowances Under various environmental schemes, emission allowances are required to cover the amount of relevant emissions made by a power station. Cap and trade schemes are a common type of scheme. Under a cap and trade scheme, operators are required to purchase sufficient emission allowances to cover their actual emissions, and the operator may or may not be granted an initialvolume of allowances. Examples of such schemes include the EU Emissions Trading Scheme (EUETS) which covers emissions of CO2, based on a cap and trade system. Other examples include the Clean Air Act in the US which covers emissions of NOx and SOx.

EPS Earnings per share, calculated by dividing the profit after interest, tax and minority interests by the weighted average number ofshares in issue.

FGD Flue gas desulphurisation – a process which removes sulphur from the flue gas emissions of a coal plant.

Forced outage rate A measure giving the proportion of electrical energy that was actually unavailable for generation during the period, after takingaccount of planned and unplanned outages, expressed as a percentage of the maximum potential electrical energy generation.

Form 20-F An annual filing with the Securities and Exchange Commission (SEC), similar to an annual report and accounts.

Functional currency The currency of the primary economic environment in which the entity operates.

Gearing Net debt divided by total equity.

Generator nameplate The maximum output of a generator, under specific conditions designated by the manufacturer.

Greenfield Building a power plant on a new undeveloped site.

Hedge contracts A contract that gives protection against risks of future price movements.

HSE Health, safety and environment.

HUBCO The Hub Power Company.

IFRSs International Financial Reporting Standards.

ISO 14001 The international standard of environment management systems.

JBIC Japan Bank for International Cooperation.

KAPCO The Kot Addu Power Company.

KPI Key performance indicator.

LNG Liquefied natural gas.

Load factor The proportion of electricity actually sold, compared with the maximum possible sales of electricity at maximum net capacity.

LTIP Long-term incentive plan.

Merchant market A merchant market is a deregulated market.

Glossary180

Merchant plant Our merchant plants operate in deregulated markets selling power into the traded market without long-term power purchaseagreements (PPAs).

Mitsui Mitsui & Co. of Japan.

MIGD Millions of imperial gallons per day.

MW Megawatt; one MW equals 1,000 kilowatts.

MWth One megawatt of thermal power.

National Allocation Plan The Plan issued under the EU Emissions Trading Scheme that sets out how greenhouse gas emission allowances will be allocatedto affected industry sectors and the carbon-producing assets within the relevant sector.

NOx Oxides of nitrogen.

Non–recourse debt Debt secured on an asset, and where the lender has no recourse to the shareholder.

O&M Operations and maintenance, usually used in the context of operating and maintaining a power station.

OCGT Open cycle gas turbine – turbines, typically fuelled by gas or diesel oil, are used to drive the generators to produce electricity.

Offtake agreement Power purchase agreement between a company owning a power station and its customer (the offtaker) whereby the customertakes the electricity generated by a power station.

OHSAS 18001 Occupational Health and Safety Assessment Series 18001. A management system specification, developed by British StandardsInstitute, for health and safety which is compatible with ISO 9001:1994 (Quality) and ISO 14001:1996 (Environmental)management.

Peak load The maximum demand for electricity during a specified high demand period. This may require use of plant (for example pumpedstorage) that is kept in reserve for peak periods.

PPA Power Purchase Agreement (see also Offtake agreement).

Proprietary trading The trading of commodities for the purposes of making a profit, when the commodity, such as electricity, is not generated by ourown power stations or purchased for use by our own power stations, Also known as non-asset backed trading.

Put To sell a security back to the issuer at a pre-determined price.

Recourse debt Debt where the lender has recourse to parties other than the borrower, usually a parent company or shareholder.

Reserve margin The amount of available plant reserve capacity above the system’s peak electricity requirements.

RPI Retail Price Index.

SO2 Sulphur dioxide.

SOx Sulphur oxides.

Spark Spread The difference between the gas cost to generate electricity and the price at which electricity is sold.

Spread The difference between the fuel costs to generate electricity and the price at which electricity is sold.

Technical Availability A measure giving the proportion of electrical energy that was actually available to be generated during the period, after takingaccount of both planned and unplanned outages, expressed as a percentage of the maximum potential electrical energygeneration.

Turnbull Guidance The Turnbull Guidance expands upon the Combined Code requirements for the Directors’ review of the effectiveness of theGroup’s system of internal controls.

US Sarbanes-Oxley Act The Sarbanes-Oxley Act of 2002 was enacted in reaction to the highly publicised bankruptcies of Enron and WorldCom and is concerned with strictly enforcing corporate governance and financial disclosure.

It is important to us that our Annual Report is produced in an environmentallyresponsible manner, including the sourcing of materials. This Annual Report is printed in the UK by Royle Print, a Carbon Neutralcompany, on Revive 75 Silk (cover) andMatt (text pages) which contains 75% post consumer waste, using soya-based inks and water-based sealants. The printerand paper-manufacturing mill are bothaccredited with ISO 14001 EnvironmentalManagement systems standard and both areForestry Stewardship Council accredited.

When you have finished with this item, pleasedispose of it in your recycled paper waste.

Our Company – learn moreabout International Power’sassets and global reach

Shareholder information – visit the dedicated site forInternational Powershareholders and investors

Environment and society – get the full picture aboutInternational Power, theenvironment and corporateresponsibility

Designed and produced by Roundelwww.roundel.com

Board and senior managementphotography by Orla Deevy

Satellite images: front cover and page 36 Michael Dunning/Getty Images; back cover, pages 42, 46 and 50Worldsec/NASA/Alamy; page 32Stocktrek Images/Alamy.

The International Powerwebsite has a wealth of detailedand up-to-date informationabout the Company and itsbusiness activities:

www.ipplc.com

Registered Office, International Power plc, Senator House, 85 Queen Victoria Street, London EC4V 4DP

Registered in England and WalesNo: 2366963

Published by International Power plc

www.ipplc.com

Documents

Annual Report 2007 - Investis Digital