PROFITFROM OPERATIONS INCREASEDTO £904 MILLION EARNINGSPER

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

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


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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


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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.


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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)

Net assets 3,007 2,740

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

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


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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

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4

3

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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

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Documents

PROFITFROM OPERATIONS INCREASEDTO £904 MILLION EARNINGSPER