International Power: Full Year Results

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International Power today announces its preliminary results for the year ended 31 December 2008 and reports on key developments to date.

Sir Neville Simms, Chairman of International Power, said: "I am pleased to report a 20% increase in EPS(i) to 32.4p driven by higher profit from operations in Australia and North America, a record year at First Hydro in the UK, and good performance from our long-term contracted asset base. The Board is pleased to recommend a full-year dividend of 12.15p per share, up 20%. Looking ahead, in the absence of a significant improvement in pricing in the US and the UK, it is likely that Group profitability in 2009 will be lower than in 2008. However, the long-term fundamentals of our markets remain attractive and this together with our strong financial position means International Power is well placed for the future.”
Financial highlights – excluding exceptional items and specific IAS 39 mark to market movements(i)

    * Profit from operations of £1,050 million (2007: £904 million) – up 16% (9% at constant exchange rates)
    * EPS of 32.4p (2007: 27.1p) – up 20% (13% at constant exchange rates)
    * Free cash flow(ii) of £513 million (2007: £653 million) – down 21% (28% at constant exchange rates)
    * Full-year dividend of 12.15p per share proposed (2007: 10.16p) – up 20%

Portfolio growth – capacity additions of some 3GW (net) announced in 2008

    * Completed acquisitions:
          o 1,857MW (gross) portfolio of peaking plants in North America
          o additional 40% in 1,008MW (gross) gas-fired Turbogás plant, Portugal
          o additional 31% in 572MW (gross) Uch plant, Pakistan

    * Greenfield projects:
          o reached financial close and began construction of Elecgas 830MW (gross) project, Portugal
          o reached financial close for the T-Power 420MW (gross) project, Belgium

Profit from operations(i)     Year ended 31 December
£m     2007
North America     177     136
Europe     581     574
Middle East     69     68
Australia     168     82
Asia     104     96
Regional total     1,099     956
Corporate costs     (49)     (52)
Profit from operations     1,050     904

Financial highlights - including exceptional items and specific IAS 39 mark to market movements

    * Profit from operations of £1,156 million (2007: profit of £518 million)
    * EPS of 44.2p (2007: 33.6p)

(i) Excluding exceptional items and specific IAS 39 mark to market movements. For analysis and explanation of exceptional items and specific IAS 39 mark to market movements, please see notes 1 and 4 to the consolidated financial statements on pages 19 and 22.
(ii) Free cash flow is set out in the summary of the Group’s cash flow on page 9.

All reference to financial performance in this commentary excludes the impact of exceptional items and specific IAS 39 mark to market movements (unless stated otherwise).

North America
Profit from operations in North America was up at £177 million, from £136 million last year, primarily due to much improved contributions from the Hays and Coleto Creek plants in Texas. Our contracted assets, EcoEléctrica, Hartwell and Oyster Creek, all performed well and delivered a consistent financial performance.

Hays, in south Texas, benefited from a significantly higher achieved spark spread, which increased from $10/MWh in 2007 to $21/MWh in 2008, as a result of higher demand and transmission constraints, particularly during the second quarter of the year. The plant continued to deliver a strong performance in the second half of the year reflecting a high zonal premium, driven by supply constraints. The load factor increased to 65%, from 45% in 2007. At Midlothian, in north Texas, the load factor fell from 55% to 40%, at a slightly reduced spark spread of $13/MWh (2007: $14/MWh), due to a relatively cool summer and additional supply from wind generators.

Coleto Creek achieved a dark spread of $30/MWh at a significantly higher load factor of 90% compared to 75% in 2007, when the plant had a two-month planned outage to install dust emission control equipment. The output at Coleto Creek is heavily forward contracted (75%) for 2009.

In New England, the average achieved spark spread for Blackstone and Bellingham increased from $16/MWh to $19/MWh but at a reduced load factor of 45% (2007: 60%), mainly due to lower running in the first quarter, and cooler weather during the summer. Earnings in New England continue to be underpinned by capacity payments under the Forward Capacity Market (FCM) where prices have been determined through to May 2012. In 2008, capacity payments accounted for some 50% of profit from operations at Blackstone and Bellingham.

The New England states are now participating in the Regional Greenhouse Gas Initiative (RGGI), a cap and trade CO2 reduction programme which commenced in January 2009. The first two CO2 auctions, held in September 2008 and December 2008, cleared at $3.07/ton and $3.38/ton of CO2 respectively.

In July 2008, we successfully completed the acquisition of the 1,857MW portfolio of four modern peaking generation facilities, located in Pennsylvania, New Jersey and Maryland (PJM) and Midwest Independent System Operator (MISO) power pools, for a total consideration of $864 million (£436 million). In PJM, where three of the plants are located, the capacity price has been established through to May 2012 under the Reliability Pricing Mechanism, with the next capacity auction (for the period June 2012 to May 2013) planned for May 2009. The 616MW peaking plant located in MISO has a capacity tolling agreement until the end of 2012. We expect this acquisition to provide an attractive return on investment, largely underpinned by capacity payments.

Whilst long-term fundamentals in Texas and New England remain attractive, both markets face near-term challenges. Since the second half of 2008, power prices in both markets have seen a material decline, primarily driven by a significant reduction in gas prices, expectations that demand growth will slow on the back of the poor economic outlook, and reduced trading liquidity. Assuming no significant improvement in forward prices, profit from operations in the current year from these markets would be lower than that achieved in 2008. We have forward contracted 45% of our expected merchant CCGT output in Texas and 30% in New England for 2009.

Profit from operations in Europe increased to £581 million in 2008 (2007: £574 million). In the UK First Hydro performed particularly well. The region also benefited from a first time full-year contribution from the Maestrale wind farm portfolio and a strong performance at International Power Opatovice, in the Czech Republic. Together these factors helped offset the impact of the extended outage at Rugeley. Our contracted assets in Iberia and Turkey also delivered good financial and operational performance.

In 2008, the UK power market was impacted by high levels of plant unavailability which was driven by unplanned plant outages at nuclear plants and by extended outages at coal-fired power stations that were undergoing Flue Gas Desulphurisation (FGD) installation. These factors, together with a particularly high gas price environment in the middle of 2008, resulted in a tight market with increased prices which benefited our plants, particularly First Hydro and Deeside.

First Hydro performed very strongly, benefiting from volatile prices and increased spreads in the short-term market. Deeside was able to benefit from its largely uncontracted position, which enabled it to capture higher short-term spreads at a higher load factor. Saltend continued to operate at a high load factor benefiting from its lower cost of gas, supplied under an indexed gas contract which expires in 2015.

Rugeley had a major extended outage during 2008 and the units returned to service in late September and early October.

The FGD equipment installation at Rugeley has experienced a further delay and is now anticipated to be completed in the second quarter of 2009. Primarily due to this delay, we now expect Rugeley to achieve a lower than previously forecast spread in 2009. Rugeley has been able to maintain generation levels through the use of ultra-low sulphur coal, despite the delay, but this alternative coal is more expensive than Rugeley’s normal intake and has resulted in some re-scheduling of original deliveries to 2010. In addition, part of Rugeley’s output had been forward sold via gas hedges (a proxy for power sales) to facilitate sales during periods where liquidity in the forward power market was low. These gas hedges have been adversely impacted by the gradual decline in 2009 market spark spreads. As a result we now expect Rugeley to achieve a clean spread of £15/MWh, down from £18/MWh, and a pre-carbon spread of £20/MWh at a load factor of 75% in 2009. For 2010, which will benefit from the re-scheduled coal, we expect a clean spread of £21/MWh and a pre-carbon spread of £27/MWh.

Looking forward, we expect relatively less tension in the supply / demand position in the UK in 2009, as plants previously on outage return to service and new capacity is brought online. For 2009 we have forward contracted 90% of our expected output at Rugeley, 90% at Saltend, and 30% at Deeside.

In the Czech Republic, profit from operations increased from 2007 as the business benefited from rising power prices. During 2008, Czech power prices continued to follow German prices which were driven up by strong prices for coal, oil and gas. In addition, reported profits benefited from a significant strengthening of the Czech koruna.

At ISAB in Italy, profit from operations in 2008 benefited from a rise in oil prices. This strong performance helped to offset the impact of the major incident in October. Both units at ISAB were offline until 15 December, when one unit was returned to service. Work on the second unit is underway and it is expected to be back online in the middle of 2010. Discussions with insurance providers are continuing, and we expect the impact of this outage to be largely covered by business interruption insurance.

The Maestrale wind farm portfolio delivered a first time full-year contribution, following its acquisition in the second half of 2007. Operational availability of the portfolio has been good, however wind levels and resulting load factors in 2008 were lower than long-term averages. In November, the Italian government announced a new Decree which set a price of €98/MWh for the sale of Green Certificates (from 2007 and 2008), which are a significant source of income for wind farms in Italy, demonstrating the government’s commitment to ensuring an attractive economic environment for renewable generation.

We have continued to build on our European wind portfolio with a further 81MW coming online. In addition, construction is underway on the new 30MW PEG project in Italy, in which International Power has a 75% share, and this is expected to be completed in 2009. International Power’s European wind portfolio now comprises 1,179MW of operational capacity.

In Portugal both our plants, Pego and Turbogás, continue to operate well. Construction of FGD and Selective Catalytic Reduction (SCR) equipment at Pego has now been completed. The Elecgas 830MW (gross) CCGT project, which is located adjacent to Pego, reached financial close in March 2008 and is on track to become operational in 2011. In addition, we completed the acquisition of an additional 40% shareholding in Turbogás, the 1,008MW gas-fired plant located in Portugal, and an additional 27% shareholding in the associated operations and maintenance company Portugen, for a total cash consideration of €127 million (£101 million). International Power now owns 100% of Turbogás and Portugen.

In December 2008, the T-Power project in Belgium was successfully financed at attractive terms. The project, located at Tessenderlo in Eastern Belgium, is co-owned by International Power, Siemens Project Ventures and Tessenderlo Chemie, and will be constructed by Siemens under a full turn-key EPC contract. Once operational in 2011, the output from T-Power will be sold to Essent Trading International S.A. (a wholly owned subsidiary of Essent NV, the largest energy supplier in the Netherlands) under a 15-year tolling agreement with a five-year extension option. Natural gas will be supplied by Essent under the tolling agreement.

Middle East
In the Middle East, profit from operations was £69 million in 2008 (2007: £68 million). The region benefited from the completion of the Ras Laffan B project in Qatar and additional desalination capacity at Hidd in Bahrain. However, profit in 2007 included a development fee for the Fujairah F2 project.

Construction at Ras Laffan B was completed in June 2008 with the final 135MW and 15MIGD being finished ahead of schedule. The plant now has an overall capacity of 1,055MW and 60MIGD, and is operating under the first full-year of its 25-year Power and Water Purchase Agreement.

In Bahrain, the final phase (48MIGD) of the desalination extension at Hidd achieved commercial operation in May. The plant is now fully operational with a capacity of 1,006MW and 90MIGD.

In the UAE, the construction programme for the Fujairah F2 project (2,000MW, 130MIGD) is well underway. Activities across the whole site have progressed well during the year; a large number of the underground foundations and other civil works have been completed and the first gas turbine has arrived on site.

Profit from operations increased significantly to £168 million from £82 million in 2007, principally reflecting significantly improved contributions from Hazelwood and Loy Yang B. The region also benefited from a strong performance at Synergen, which captured high spot prices during the summer months. The rest of the portfolio performed well and delivered a good financial performance.

Hazelwood, in Victoria, achieved a significantly higher average price of A$43/MWh (2007: A$32/MWh), at a slightly lower load factor of 75%. A strong forward contracted position and good operational performance in the second half of the year helped deliver these results. For 2009 we have forward contracted 80% of the expected output at Hazelwood.

During the first two months of 2009, Victoria and South Australia experienced a major heat wave, causing the most severe bush fires in Victoria in recorded history and all-time record levels of demand and price volatility in the electricity market. The transmission network was under significant strain, and there were two instances of load shedding. Good levels of availability across our portfolio ensured the impact of these events was financially neutral on our business.

Details of the proposed emissions trading scheme (due to start from July 2010) were announced in a White Paper in mid December. The current proposals are for a minimum 5% reduction in CO2 emissions against 2000 levels by 2020, with the potential for this target to rise to 15% (pending the UN meeting in Copenhagen planned to be held at the end of 2009). Under the proposals, there is currently a period of five years where, in effect, no charge will be applied for a portion of emissions from coal-fired power plants, and our Hazelwood and Loy Yang B assets would be eligible for this relief. The details of the proposals are yet to be finalised, with the government aiming to introduce the legislation into Parliament in May 2009. Draft legislation was released yesterday, and we are currently working through the details. Overall, it is too early to draw firm conclusions at this stage.

Profit from operations in Asia increased from £96 million in 2007 to £104 million, primarily as a result of a strong performance from Paiton and an increased contribution from Uch, where an additional 31% stake was acquired in March 2008. These factors more than offset the sale of Malakoff in May 2007. All our contracted assets in the region continue to deliver good operational performance and our plants in Indonesia and Thailand have maintained strong payment records.

In Pakistan, payments from the state-owned customer, the Water and Power Development Authority, were delayed in 2008. However, our plants are continuing to receive payments for the majority of current output and have also been receiving interest on overdue amounts. Our share of the overdue receivable is $149 million (£108 million). There are a number of initiatives currently underway to resolve the cash flow issue in Pakistan, including an International Monetary Fund (IMF) US$7.6 billion loan package. A key condition of the IMF loan is that the government of Pakistan has to implement a plan to clear the overdue receivables in the energy sector. We remain confident of a satisfactory outcome.

In August, PT Paiton Energy, the project company in which International Power has a 40.5%* interest, signed a 30-year PPA with PT PLN, the Indonesian state utility, for the proposed 815MW coal-fired Paiton 3 plant in Indonesia. The project is covered by a fixed-price EPC contract and the main equipment will be supplied by Mitsubishi Heavy Industries Ltd. The project will be located within the existing Paiton complex and is expected to be fully operational by the end of 2012. Financial close is now expected in the second quarter of this year.

In March, International Power completed the acquisition of an additional 31% shareholding in Uch, the 572MW gas-fired plant located in Pakistan. Total consideration was US$93 million (£47 million). The acquisition, from affiliates of Tenaska Holdings (L) Corp, takes International Power’s total holding in Uch to 71%.

* The ownership percentage includes interests held via IPM Eagle LLP, a 70/30 partnership between International Power and Mitsui. International Power’s 40.5% interest in PT Paiton Energy also includes a 9.2% economic interest.

Corporate costs
Corporate costs at £49 million (2007: £52 million) are £3 million lower than 2007.

Net interest expense at £368 million is £60 million higher than 2007; mainly due to the interest expense relating to acquisitions made during 2007 and 2008.

The Group tax charge has increased by £10 million to £123 million. The effective tax rate for the year was 22% (2007: 26%) after the release of provisions relating to prior year tax, following the satisfactory resolution of some historic tax issues. Excluding these items, the effective tax rate would have been 27%. In 2007, the effective rate benefited from the impact of tax rate changes in the UK, Czech Republic, Germany and Italy.

Foreign exchange
The weakening of sterling, principally against the Czech koruna, US dollar and euro, on the re-translation of profits from foreign operations has benefited EPS by 1.9p in comparison with 2007.

Exceptional items and specific IAS 39 mark to market movements
Exceptional losses before and after tax of £57 million comprise the impairment of our Milford plant by £37 million and a £20 million charge for Australian stamp duty arising from our acquisition of the Loy Yang B and Valley Power plants in 2004.

The specific IAS 39 mark to market movements reported in profit before tax for the year are gains of £290 million (2007: losses of £346 million), £163 million of which relates to decreases in forward commodity prices in the UK, US and Australia, £150 million to fair value gains on the 3.25% and 4.75% convertible euro bonds, and £23 million to losses on interest rate swaps.

Tax on mark to market movements during the year was a charge of £92 million (2007: a credit of £96 million).

The Group has US tax losses of US$593 million (£412 million). As a result of the acquisition of IPA Central (the portfolio of four peaking plants in PJM and MISO in North America), certain of these tax losses have now been recognised as deferred tax assets on the balance sheet. This has resulted in an exceptional tax credit of £59 million.

Cash Flow
A summary of the Group’s cash flow is set out below:
    Year ended
31 December
2008     Year ended
31 December



Profit for the year     759     529
Depreciation, amortisation and other movements(i)     411     406
Exceptional items     57     (233)
Specific IAS 39 mark to market movements     (172)     342
Dividends from joint ventures and associates     135     145
Capital expenditure – maintenance     (108)     (71)
Net sale / (purchase) of intangible assets     25     (48)
Net increase in working capital     (109)     (4)
Tax and net interest paid     (485)     (413)
Free cash flow     513     653
Australian stamp duty - exceptional     (7)     -
Debt-financing costs capitalised on acquisition debt     (33)     (2)
Capital expenditure – growth     (156)     (160)
Purchase of intangibles – growth     (8)     -
Investments in joint ventures, associates and investments     (58)     (1)
Acquisitions     (614)     (841)
Disposals     -     418
Dividends paid     (166)     (160)
Proceeds from share issue     10     13
Net receipts from / (payments to) minority interests     28     (35)
Foreign exchange and other     (1,163)     (261)
Increase in net debt     (1,654)     (376)
Opening net debt     (4,662)     (3,575)
Net debt on acquisition of subsidiaries     (2)     (711)
Closing net debt     (6,318)     (4,662)

(i) Depreciation, amortisation and other movements are set out in the consolidated cash flow statement. They include income statement charges for interest, tax, depreciation, and the share of profit of joint ventures and associates.

Free cash flow for the year ended 31 December 2008 was £513 million, a decrease of £140 million compared with 2007. This decrease is driven by an increase in maintenance capital expenditure of £37 million, principally at Rugeley, Hazelwood and Saltend; and an increase in net interest paid of £87 million. In addition, there was a working capital increase in the year of £109 million due to stock building at Rugeley and a reversal of some one-off working capital benefits in 2007.

Specific IAS 39 mark to market movements and exceptional items, as described on the previous page, have been reversed out of the profits for the year in calculating free cash flow.

Growth capital expenditure was £156 million in the year (2007: £160 million) and mainly related to fitting FGD at Rugeley, the west field mine extension at Hazelwood and further construction in our European wind portfolio.

Acquisitions of £614 million in 2008 include the four peaking facilities in North America and additional shareholdings in Turbogás and Uch.

Net debt has increased by £1,656 million between 2007 and 2008, of which £1,282 million is attributed to currency translation impacts. Overall, over 85% of International Power’s total debt is represented by non-recourse project finance.

Summary balance sheet
A summarised, reclassified Group balance sheet is set out below:
    As at
31 December
2008     As at
30 June
2008     As at
31 December


Goodwill and intangibles     1,137     991     901
Property, plant and equipment     7,318     5,961     5,721
Investments     1,803     1,480     1,292
Long-term receivables and others     1,943     1,626     1,530
    12,201     10,058     9,444
Net current liabilities (excluding net debt items)     (137)     (644)     (387)
Non-current liabilities (excluding net debt items)     (1,611)     (1,473)     (1,388)
Net debt     (6,318)     (4,934)     (4,662)
Net assets     4,135     3,007     3,007
Gearing     153%     164%     155%
Debt capitalisation     60%     62%     61%
Net debt – JVs/Associates     (1,820)     (1,336)     (1,297)

Goodwill and intangibles, property, plant and equipment, and investments have increased by £2,344 million during the year, with the majority of this increase relating to the weakening of sterling. The acquisition of the portfolio of North American peaking plants in July also contributed an increase in property, plant and equipment of £480 million at that time.

The financial position of the Group remains strong, with good liquidity and strong free cash flow generation. At 31 December 2008 the business had £354 million of cash (30 June 2008: £357 million, 31 December 2007: £290 million) at the corporate level and £775 million (30 June 2008: £1,129 million, 31 December 2007: £871 million) at the asset level. Debt within the Group comprises three convertible bonds with a book value of £900 million and £6,547 million of project level debt. The Group has a corporate revolver of US$850 million which is predominantly used for letters of credit, bid bonds and short-term liquidity requirements.

Debt capitalisation has decreased marginally to 60% (31 December 2007: 61%).

During 2008, International Power and its partners raised a total of £919 million (gross), £516 million (net) of project finance to fund acquisitions and greenfield development projects in North America and Europe. In addition International Power issued €700 million (£550 million) of senior convertible bonds, due in 2015. These significant financings were successfully completed in a challenging banking market in 2008, with all deals completed on attractive terms.

The Board is proposing a final dividend of 8.59 pence per share, bringing the full-year dividend to 12.15 pence per ordinary share (2007: 10.16 pence per share), an increase of 20% year–on-year. Payment of this final dividend to shareholders registered on the Company share register on 5 June 2009 is due to be made on 9 July 2009, following approval at the 2009 AGM which will be held on 21 May 2009.

We have a well established portfolio of long-term contracted assets which continues to perform well. We are also well positioned in our key merchant markets, although forward pricing in the UK and the US does not reflect the attractive long-term market fundamentals. In the absence of a significant improvement in pricing in these two markets, it is likely that Group profitability in 2009 will be lower than in 2008. However, our assets are well placed to capture value, from both market recovery and short-term pricing volatility. The financial position of the Group remains strong, with good corporate liquidity and no material refinancings in 2009. We expect to continue to deliver strong free cash flow in 2009.

Achieved Spreads and Load Factors
    Year ended 31 December
    2009     2008     2007
      Forecast     Actual     Actual
North America             
New England             
Spark spread ($/MWh)     $19     $19     $16
Load factor     50%     45%     60%
Contracted position     30%           
Texas (Hays)             
Spark spread ($/MWh)     $11     $21     $10
Load factor     55%     65%     45%
Contracted position     45%           
Texas (Midlothian)             
Spark spread ($/MWh)     $13     $13     $14
Load factor     35%     40%     55%
Contracted position     45%         
Texas (Coleto Creek)                 
Dark spread ($/MWh)     $27     $30     $29
Load factor     95%     90%     75%
Contracted position     75%           

United Kingdom             
Dark spread (£/MWh)     £20     £9     £34
Load factor     75%     35%     65%
Contracted position     90%           
Spark spread (£/MWh)     £15     £30     £23
Load factor     55%     70%     50%
Contracted position     30%           

Achieved power price (A$/MWh)     A$45     A$43     A$32
Load factor     80%     75%     80%
Contracted position     80%           


    * New England: Spark spreads include income from the Forward Capacity Market and exclude the cost of CO2. The 2008 expected spark spread, disclosed at the Interim Results, of $27/MWh included Milford PPA revenue
    * Dark spreads at Coleto Creek exclude the cost of SO2 credits
    * The forward contracted positions at Coleto Creek and Rugeley include sales via gas hedges
    * Spreads at Rugeley and Deeside exclude the cost of CO2 and are adjusted to reflect the fuel optimisation achieved by trading our coal and gas assets as a portfolio

This document includes certain forward-looking statements. These statements are based on current expectations and projections of the Group about future events. However, by their nature forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will or may occur in the future. Actual results may differ from those expressed in such statements, depending on a variety of factors including, but not limited to, the economic and business circumstances occurring from time to time in the countries in which the Group operates, changes in trends in the general, global or regional economies, changes in trends in the global energy sector, changes in regulation and natural disasters or other calamities.

For further information please contact:
Investor Contact:     Media Contact:
Aarti Singhal     Beth Akers
+44 (0)20 7320 8681     +44 (0)20 7320 8622

About International Power
International Power plc is a leading independent electricity generating company with 33,211MW gross (21,342MW net) in operation and 3,280MW gross (978MW net) under construction. International Power has power plants in operation or under construction in Australia, the United States of America, the United Kingdom, Belgium, the Czech Republic, France, Germany, Italy, the Netherlands, Portugal, Spain, Turkey, Bahrain, Oman, Qatar, Saudi Arabia, the UAE, Indonesia, Pakistan, Thailand and Puerto Rico. International Power is listed on the London Stock Exchange with ticker symbol IPR. The Company website is:
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