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Email PageStrategy and group overview
our strategy is to deliver growth in shareholder value through power generation, ensuring a balanced international portfolio in terms of markets, fuel, contract type and technology. we create value by the efficient operation, financing, and trading of output from our power generation fleet, whilst maintaining the highest levels of safety and environmental performance. we exercise rigorous financial control in all our investment decisions, and invest in the development of our people for the long-term.
International Power plc is a leading independent power generation
company with interests in
A portfolio approach
We manage risk through a portfolio management approach, which involves maintaining a balance in the portfolio in terms of geographical spread, fuel diversity, technology and contract type. This approach gives us access to multiple opportunities to create value whilst mitigating the risks associated with over exposure to any particular market, fuel, technology or contract type.
Our geographic spread gives us access to growth opportunities whilst reducing the potential impact, on the overall business, of a downturn or adverse performance in any particular market. For example, in 2007 a strong performance in Europe more than offset the impact of challenging market conditions in Australia.
The portfolio approach also extends through to our operational capabilities. We are able to operate a range of power plant technologies, including thermal, hydro, pumped storage and wind. These technologies produce electricity using different fuel types that include gas, oil, coal and renewable sources such as wind and water. This multi-technology expertise allows 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 they wish to liberalise this key sector. Several governments have retained full control of the sector while others have fully liberalised both the production and supply of electricity. The skills required for operating in liberalised (merchant) or non-liberalised (contracted) markets are very different – and we have both.
The government-controlled markets typically offer opportunities to sell power to government bodies via long-term contracts that offer stable returns. Assets in the liberalised or merchant markets are subject to the forces of supply and demand, and these markets are generally more volatile. Both these markets offer attractive risk/reward environments for investments.
International Power maintains a balanced presence in both types of markets,
providing the business with a stable platform of contracted earnings and cash
flow, overlaid by merchant generation which offers greater potential when markets
are favourable. 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.
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 * One year forward hedge position as at 5 March 2008 |
Note: All charts presented based on net MW excluding assets under construction,
as at 5 March 2008.
DELIVERING VALUE WITH A BALANCED INTERNATIONAL PORTFOLIO
Maximising the value of our existing portfolio
Our specific strategies for value enhancement in each country and for each individual plant are tailored to local requirements, but generally we seek to achieve the following:
- Optimise the operations of our power plants We optimise the operation of our power plants through several means, including managing all of our assets to high standards of safety and operating performance; managing our assets on a portfolio basis; closely co-ordinating plant operation with trading activity to maximise the value of our output; standardising management reporting for all investments; and investing in improved plant efficiency.
- Maximise the return from our existing assets We optimise operations as described above and we leverage our investments, particularly by using non-recourse project finance at the asset level; we sell assets if that generates a higher rate of return.
Our growth
* In 2007, International Power sold its interest in Malakoff and signed an agreement with Mitsui to align its percentage holdings in its UK subsidiary power stations. This resulted in the net sale of 935 MW (net) during the year.
The Group has grown significantly in the last five years, increasing its net operational capacity by 8,300 MW through both successful acquisitions and greenfield developments. International Power now 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’s strategic objectives, and we have clear investment criteria to ensure that our acquisitions and greenfield projects deliver value for our shareholders.
Our geographic footprint and in-depth market knowledge present us with multiple growth opportunities, both new-build and acquisition. Wherever possible we seek to source opportunities through our regional knowledge, our extensive industry contacts and existing relationships.
Non-recourse project debt, as a fundamental building block, together with a well balanced capital structure provides us with the flexibility to carry out growth initiatives without overstretching our financial resources. We have access to multiple sources of finance – including strong free cash flow generation from our portfolio, our borrowing facilities and capacity, and through partnering – to execute selected opportunities which meet our investment criteria.
Investment process
Of the numerous opportunities evaluated by regional and corporate business development teams each year, the best projects are submitted to the Investment Committee (ICOM) for initial review and to ensure they are consistent with the Group’s strategic plan. The capital allocation process is centred on a detailed review by the ICOM which comprises the Chief Executive Officer (CEO), Chief Financial Officer (CFO), all regional directors and all corporate function heads.
If projects pass this review they are allocated a budget for detailed due diligence. The project then undergoes further analysis during the due diligence process, at the end of which a detailed review is carried out by the ICOM. Only then is the decision taken as to whether to proceed with the opportunity, subject to Board approval. This process ensures that we fully evaluate the risks and returns of a project prior to making a commitment and that we proceed with only the most value-enhancing deals.
The ICOM review process determines resource allocation and evaluates the costs of due diligence at an early stage so as to avoid potential expenditure on projects that are less likely to succeed. In addition, the process encourages healthy internal competition for capital across regions and functions.
The cross-regional and cross-functional membership of the ICOM ensures that only the most attractive investments are presented to the Board.
The due diligence teams, which are made up of employees from our functional and regional teams, use their varied experiences and skill sets to assess thoroughly all potential projects before they are presented to the ICOM. We ensure that the regional team(s) that will have responsibility for managing the asset after acquisition are fully involved in the due diligence process. We subject new investment opportunities to rigorous evaluation criteria, with a focus on the elements shown below.
Investment evaluation criteria
| Area | Considerations include |
|---|---|
| Financial |
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| Operational |
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| Market |
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| Commercial |
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| People |
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| Ownership |
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| Legal/Regulatory |
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| Property |
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We ensure that all acquisitions and greenfield projects are quickly and efficiently
integrated into our regional business structures. The forecast returns from
investments are built into regional business performance targets and we measure
delivery against these targets at a regional and Group level through our financial
KPIs, profit from operations (PFO), EPS and free cash flow.
The ICOM conducts post investment reviews, for both successful new projects and unsuccessful projects, to ensure we maximise our learning from all experiences.
Our overarching criterion, irrespective of the market structure in which we operate, is that our investments create value for our shareholders over the long-term within our strategic framework.
Core capabilities
Our core capabilities for implementing our strategy can be categorised into the following seven areas:
International Power’s high quality asset portfolio, together with the capabilities of our teams around the world, forms a strong combination for performance optimisation, effective risk management and future growth in earnings and cash flow.
International Power has in-depth experience in plant operations and engineering. This not only helps to ensure smooth plant operations, but also that we understand all operational and technical issues relating to the potential acquisition and upgrade of existing assets or development of new power plants. The Group has skills to execute power projects from inception right through to the delivery of power in the most advanced and complex traded markets of the world.
Greenfield development and construction management We have excellent experience of developing large capital intensive infrastructure projects – from selecting the appropriate site, securing multiple government/stakeholder approvals, project managing the entire construction programme right through to successful commercial operation. Our significant growth in the Middle East is the most graphic example of our greenfield development expertise where we now have interests in six operational projects with 7,300 MW (gross). In 2007, 1,436 MW of additional capacity was brought online in the region, and International Power was successful in its bid for the 2,000 MW, 130 MIGD Fujairah F2 plant, in the UAE – construction of which is now under way and it is expected to be operational by 2010.
Acquisitions We have demonstrated our ability to execute acquisitions at the right time and at the right value, together with the capability to integrate newly acquired assets quickly and seamlessly into the portfolio. Historically, International Power has executed a number of successful acquisitions which have met or exceeded financial and operational performance targets. In 2006 we acquired Coleto Creek and the Levanto wind portfolio, and in 2007 we 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 to deliver specific performance targets. Through regular and robust technical, commercial and financial reviews, the regional offices and corporate headquarters together monitor the performance of each asset in the portfolio. We work to ensure that we maximise fleet efficiencies where we operate plants with similar technologies, for example through global spare parts supply agreements or by bringing certain engineering services in-house. In addition, we have a HS&E Committee which co-ordinates the Group’s activities and enables best practices to be adopted at all plants. This co-ordinated approach helps us manage operational risk and extract the full portfolio benefits. Our strategy to ensure we continue to attract, train and develop employees to manage our growing portfolio is set out in detail in the Employees section pages.
Financing Given the very capital intensive nature of our business, the ability to fund projects is very important. International Power has consistently proven its financing capabilities through the execution of numerous greenfield and acquisition financings, together with refinancings of existing assets. We remain well placed to implement our growth strategy through our ability to access financial markets and through our strong free cash flow generation. We have completed financings and refinancings in different parts of the world, under different circumstances and through the combined use of local and international capital. As examples, in December 2007 we successfully completed the financing of the Fujairah F2 project despite the tightening of the global credit markets and in June we also re-financed the debt facility at Tihama.
Non-recourse project finance is at the core of International Power’s financing strategy and capital structure – this provides the most appropriate level of debt for each asset and excellent risk mitigation for the Group. This source of finance remains available despite the tightening credit conditions.
Plant operations We have comprehensive power station operational experience and skills. Through-life engineering and maintenance plans, meticulously implemented, ensure maximum availability and efficiency in the operation of our plant and are key for delivering value in both our merchant and long-term contracted markets. Effective plant operations are enhanced by ensuring information is shared across the portfolio and key operational staff are rotated to different assets on a regular basis. Safe behaviour and environmental best practice are cornerstones of International Power’s operations, and we share best practices across the portfolio to ensure all of our assets operate to the highest possible safety and environmental standards.
Trading We operate in a number of merchant markets. We have the skills necessary to maximise our returns in these markets, with a practical focus on closely co-ordinating trading and plant operations to optimise value. For us, trading predominately means selling the physical output generated by our plants, which we call asset-backed trading. Our traders operate within strict guidelines and risk policies to ensure our traded position is carefully monitored and managed. This includes matching fuel purchases with power sales and carrying out only a very limited amount of non asset-backed trading. Where possible we will forward sell output if we consider the return is favourable, which secures earnings and cash flow. For example, a large proportion of Rugeley’s 2007 output was forward sold during the high prices of 2006, ensuring good financial returns during 2007, despite market dark spreads falling during the year.
Long-term power contracts expertise We have strong commercial skills to structure and negotiate long-term power and water contracts in regulated markets such as Asia and the Middle East. Under these contracts, key cost risks such as fuel and turbine maintenance are mitigated through long-term hedging and supply arrangements. Availability bonuses incentivise us to keep the plant well maintained in order to minimise the risk of forced outages. Overall, the contracts provide visibility and stability of earnings and cash generation over the long-term.
UK
| 2004 | 2005 |
|---|---|
| Tihama | Uch |
| Canunda | Ras Laffan B |
| Turbogás | Saltend |
| EME Portfolio | |
| 2006 | 2007 |
| Hidd | Maestrale |
| Coleto Creek | Fujairah F2 |
| Levanto | |
| Indian Queens |
Puerto Rico
Oman
Western Australia
