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Key performance indicators (KPIs)
We use a range of performance indicators, both financial and non-financial, to measure the delivery of the Company’s strategic objective – growth in shareholder value through the efficient operation, financing, and trading of output from our power generation fleet, whilst maintaining the highest levels of safety and environmental performance – and to manage the business.
The most important of these measures are considered KPIs and their targets are determined annually during the business planning process. The KPIs are used by management to compare actual performance during the year, and the latest monthly forecasts, against the annual budgeted targets. Our KPIs, both financial and non-financial, are set out below.
| Financial KPIs | Non-financial KPIs |
|---|---|
| Our financial key performance indicators address two key aspects of the business, its profitability and its cash generation: | Our non-financial key performance indicators address other aspects of the business: safety, environmental and operational 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
We consider PFO and EPS excluding exceptional items and specific IAS 39 mark to market movements to be an appropriate indicator of performance, as these measures:
- exclude significant items which, by virtue of their size or incidence, could potentially distort year-on-year comparisons;
- allow a better understanding of the financial information presented, and specifically the Group’s underlying business performance, by excluding fair value movements on economic hedges;
- assist shareholders and analysts who have expressed a preference for the reporting of results without the inclusion of the effects of exceptional items and specific IAS 39 mark to market movements.
Presenting the Group’s segment and total PFO and the Group’s EPS excluding exceptional items and specific IAS 39 mark to market movements is consistent with the way management measures the Group’s performance in its budgets, forecasts and management accounts on a day-to-day basis.
The explanations of our KPIs follow.
Financial KPIs
Year
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 |
Profit from operations
PFO is a measure of the operating profitability of the Group. It excludes the impact of all non-operating costs from subsidiaries, financing costs and income tax expense, and therefore provides a comprehensive measure of operational performance.
PFO excluding exceptional items and specific IAS 39 mark to market movements has grown at an average compound growth rate of 60% over the last three years reflecting strong financial performance over the period. The results for the current and prior year are also presented in the Consolidated income statement.
This KPI is also used as one of the measures to evaluate Regional Directors’ performance when quantifying their annual bonuses (more information can be found in the Directors’ remuneration report).
Earnings per share
EPS is a measure of the overall profitability of the Group and shareholder returns. It is defined as the profit in pence attributable to each Ordinary Share in the Company, based on the consolidated profit for the 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 39 mark to market movements has grown at an average compound growth rate of 47% over the last three years. The calculation of this year’s result is presented in note 11 to the financial statements.
This KPI is also used as one of the measures to evaluate Directors’ performance when quantifying their annual bonuses and as a performance condition in their long-term incentive plans (more information can be found in the Directors’ remuneration report).
This KPI is also used as a performance condition in the Company’s share-based payment schemes (more information can be found in note 29 of the financial statements).
Free cash flow
Power generation is a capital intensive business and hence it requires the assets within the Group to generate sufficient cash to repay the initial investment in the assets, to provide returns for shareholders and to provide funds for future investment opportunities. We define free cash flow as net cash flow from operating activities after all operating costs, maintenance capital expenditure, interest and tax.
We consider this measure of cash flow to be a key indicator of business performance as it measures the cash generated from the underlying business performance of continuing operating activities.
This is consistent with the way management measures the Group’s performance in its budgets, forecasts and management accounts on a day-to-day basis. This KPI is also 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).
Free cash flow has grown at an average compound growth rate of 84% over the last three years reflecting both an increase in the size of the Group and strong operational and financial performance over the period. The results for the current and prior year are also presented in the consolidated cash flow statement.
Non-financial KPIs
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.
Accident frequency rate
Health and safety is of vital importance in our business. 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 reporting standard and is defined as the number of lost time accidents (LTAs) divided by the number of hours worked, multiplied by 100,000. A LTA is an accident where an individual is away from work for more than one day and is an auditable indicator across a number of industries.
In 2007 the AFR for employees and contractors combined was 0.12. This can be compared with 0.16 for 2006. International Power intends to maintain this improvement by establishing a target of 0.10 for 2008. This does not mean we tolerate unsafe behaviour; we seek to have zero LTAs but targets need to be realistic and challenging.
The data underlying these calculations is submitted by individual plants directly into the corporate reporting system.
Reportable environmental incidents
The environment and how we care for it is central to the business of International Power. We have always had a policy of complying with all applicable environmental regulations. Our power plants are issued with environmental licences by the relevant statutory authorities. Environmental licences require that any environmental incident is reported. We measure our ability to comply with environmental regulations by recording the number of reportable environmental incidents.
In 2006 there were 16 reportable environmental incidents. In 2007 this declined to 13, a significant improvement on the prior year. International Power intends to consolidate this by establishing a target of 12 for 2008. This does not mean we tolerate environmental incidents but targets need to be realistic and challenging.
The underlying data is submitted by individual plants directly into the corporate reporting system.
Technical availability
Technical availability measures when a plant is available for dispatch. Each of our plants will generally be unavailable during some periods in the year due to a combination of planned outages for maintenance and unplanned outages due to operational problems.
Technical availability is calculated by first determining the potential maximum amounts of electricity that could be generated in the year, if all the plants were operated at full output for the entire year. We then deduct from this maximum amount the electricity that could not be produced due to planned and unplanned outages at the plants throughout the year. This number is then expressed as a percentage of the potential maximum electricity that could be generated, where all these quantities are calculated in terms of electrical energy (GWh). An important part of our business is ensuring that our merchant power trading and power purchase agreements are closely aligned to our operational activities and availability planning is a key factor in this regard. The year-to-year variance in the profile of planned outages influences both the achieved and targeted availability.
In 2007 we achieved technical availability of 90%, an increase above the 89.6% achieved in 2006. Taking account of the outage plans for 2008 it is appropriate to set a target of 90% for the plant portfolio.
This calculation is carried out using data submitted by the individual plants directly into the corporate reporting system.
Financial highlights
The 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 in considering the impact of estimates and judgements on the Group’s financial position and results of operations are set out in section Accounting Policies.
In order to allow a full understanding of the financial information presented within the consolidated financial statements, and specifically the Group’s underlying business performance, the Group presents its income statement 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. However, in summary, those items that the Group separately presents as exceptional are items which, in the judgement of the Directors, need to be disclosed separately by virtue of their size or incidence in order to enable a proper understanding of the financial information. Those items that the Group separately present as specific IAS 39 mark to market movements are those mark to market movements recorded in the income statement which relate to: derivative contracts into which the Group has entered in order to economically hedge certain of its physical and financial exposures; and fair value gains and losses on equity conversion features embedded within convertible bonds, so as to separately identify a non-cash movement which, if the conversion 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 statement
| Year ended 31 December 2007 £m |
Year ended 31 December 2006 £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 from operations | 518 | 898 |
| Profit for the year | 529 | 477 |
| Profit attributable to equity holders of the parent | 503 | 410 |
| Earnings per share (basic) | 33.6p | 27.6p |
Cash flow
| Year ended 31 December 2007 £m |
Year ended 31 December 2006 £m |
|
|---|---|---|
| Profit for the year | 529 | 477 |
| 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 the 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 the exceptional profit 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 on compensation for breach of contract.
Balance sheet
| As at 31 December 2007 £m |
As at 31 December 2006 £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 is 17% ahead of 2006. This principally reflects strong performance in Europe, in particular at our UK assets and from 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 in the Regional review sections which follow.
Reconciliation from PFO to PFO excluding exceptional items and specific IAS 39 mark to market movements
| Year ended 31 December 2007 £m |
Year ended 31 December 2006 £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 £m |
Share of joint ventures and associates £m |
Total £m |
Subsidiaries £m |
Share of joint ventures and associates £m |
Total £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 in the Regional Reviews. Corporate costs are discussed in Corporate Costs, Financial position and resources .
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 principally reflects those items discussed under the heading ‘profit from operations’ and also reflects an increase in interest expense offset by a reduction in tax expense (both of which are discussed in Financial position and resources.)
Reconciliation from EPS to EPS excluding exceptional items and specific IAS 39 mark to market movements
| Year ended 31 December 2007 |
Year ended 31 December 2006 |
|
|---|---|---|
| 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 year contributions 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 an increase 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 with counterparties.
Reconciliation from net cash inflow from operating activities to free cash flow
| Year ended 31 December 2007 £m |
Year ended 31 December 2006 £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) |
| Free cash flow | 653 | 456 |
A review of liquidity is included in Liquidity, Financial position and resources.
Dividend
During the year, the Board introduced the payment of an interim dividend. The interim dividend of 2.77 pence per Ordinary Share, was paid to shareholders on 30 October 2007. This interim dividend was calculated on a fixed 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 pence per 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 policy of 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 due to be made on 26 June 2008, following approval at the 2008 AGM, which will be held on 13 May 2008.
Outlook
We believe 2008 will be another year of growth after taking into account reduced output at Rugeley due to the fitting of FGD equipment, lower UK coal spreads, and in the US subdued summer spark spreads following the cool summer in 2007. We remain well positioned to finance and deliver on organic and acquisition growth opportunities across our international portfolio.
Turkey
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