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Corporate costs
Corporate 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 sub tenants that they are terminating their lease.
Interest
Net interest expense at £308 million is £60 million higher than 2006. This is mainly due to the impact of additional debt relating to Maestrale and a full year impact of Levanto which was acquired in November 2006.
Foreign exchange
The impact of the strengthening of sterling on the results of our overseas operations, compared to 2006, is a reduction in EPS of 0.5 pence. The majority of this impact relates to the translation of the profits of US dollar denominated operations.
Tax
The Group tax charge has reduced by £9 million to £113 million (2006: £122 million). As announced in our interim results, this includes the impact of reduced UK deferred tax balances following the lowering of the standard rate of UK corporation tax from 30% to 28% with effect from 1 April 2008. Minority interests in our UK assets also benefited from this change in tax rate. The Group also benefited from reductions in tax rates in the Czech Republic, Germany and Italy during 2007 and this has contributed to lowering the effective tax rate for 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 have treated this tax credit as an exceptional item due to its magnitude and the proximity of the enactment of the change of rate to the date of the acquisition.
Exceptional items and specific IAS 39 mark to market movements
Exceptional 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
The specific IAS 39 mark to market movements reported in the period amount to a charge before tax of
Tax on mark to market movements during the year was a credit of £96 million (2006: expense of £10 million). Tax on the
Cash flow
A summary of the Group’s cash flow is set out below:
| 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 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) |
| Free cash flow | 653 | 456 |
| 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 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.
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 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.
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 the disposal 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 not paid in 2006.
Foreign exchange movements include the effect of retranslating opening debt balances denominated in foreign currency into sterling at the year end exchange rate. The majority of this impact relates to retranslation of euro and Australian dollar denominated debt.
Summary balance sheet
A summarised, reclassified Group balance sheet is set out below:
| As at 31 December 2007 £m |
As at 31 December 2006 £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 wind farms and the remaining 50% of Simply Energy.
The acquisition of Maestrale also increased property, plant and equipment in August by
Net debt has increased by £1,087 million in the year, and includes net debt in acquired subsidiaries of
Net debt and capital structure
Group net debt
| As at 31 December 2007 £m |
As at 31 December 2006 £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 respective joint venture or associate borrower and are not guaranteed by International Power plc or any other Group company. 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 convertible bonds. 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
Secured non-recourse finance
The 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 this strategy, 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 of non-recourse project finance to US$550 million (£276 million) and extending the tenor to 2025. In addition the Group raised non-recourse facilities of €302 million (£222 million) to support the acquisition of Maestrale.
Corporate and Group debt
On 31 December 2007 we had aggregated debt financing of
Aggregated debt financing of
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 rating of BB with stable outlook and Moody’s maintained its rating of B2 with stable outlook.
Short-term deposits
Surplus funds are placed for short periods in investments that carry low credit risk and are readily realisable in major currencies.
Interest rate policy
The 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 tariff and 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 size to variable rate cash and cash equivalents. Significant interest rate management programmes and instruments require 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 contractual terms of the customer offtake agreement.
Accounting policies
A discussion follows on the policies we believe to be the most critical in considering the impact of estimates and judgements on the Group’s financial position and results of operations.
Critical accounting policies and estimates
We prepare our consolidated financial statements in compliance with International Financial Reporting Standards (IFRSs) as adopted by the EU. As such, we are required to make certain estimates, judgements and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenue and expenses during the periods presented and the related disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates using historical experience, consultation with experts and other methods considered reasonable in the particular circumstances to ensure full compliance with IFRSs and best practice. Actual results may differ significantly from our estimates, the effect of which is recognised in the period in which the facts that give rise to the revision become known.
Our Group accounting policies are detailed in note 1 to the consolidated financial statements. The table at the end of this section identifies some of the areas where significant judgements are required, normally due to the uncertainties involved in the application of certain accounting policies.
Income recognition
Most of our income is derived from owning and operating power plants worldwide. In merchant markets the Group enters into various types of hedging or forward contracts for the buying and selling of commodities related to this activity: principally sales of electricity and the purchase of fuel for our own power plants. These contracts typically fall within the definition of derivative financial instruments and as such are required to be fair valued. Accounting for these contracts as cash flow hedges allows, to the extent the hedge is effective, the changes in value of the derivatives to be deferred in a hedging reserve within equity. In order to achieve cash flow hedge accounting it is necessary for the Group to determine, on an on-going basis, whether a forecast transaction is both highly probable and whether the hedge is effective. This requires both subjective 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 the power plant owning company to receive payment (known as a ‘capacity payment’) for the provision of electrical capacity whether or not the offtaker requests electrical output. In these situations, where there is a long-term contract to sell electricity output and electrical capacity, it is necessary for the Group to evaluate the contractual arrangements and determine whether they constitute a form of lease or a service contract. Where the arrangements are determined to be or to contain a form of lease, an evaluation is then required of where the substantial risks and rewards of ownership reside, in order to determine the form of lease it represents. For those arrangements determined to be finance leases, it is necessary to calculate the proportion of total capacity payments which should be treated as finance income, capital repayment and as a fee for service provision. For operating leases it is necessary to calculate the split between minimum lease payments and fees for service provision.
The Group receives amounts from contractors in respect of late commissioning and under performance of new power plants. Receipts which relate to compensation for lost revenue are treated as income when the compensation is due and payable by the contractor. Those receipts that relate to compensation for plants not achieving long-term performance levels specified in the original contracts are recorded as a reduction in the cost of the assets.
Fair values of energy derivatives
The Group has prepared its financial statements in accordance with the presentation requirements of
The Group estimates the fair value of its energy derivative contracts by reference to forward price curves. A forward price curve represents the Group’s view as to the prices at which customers would currently contract for delivery or settlement of commodities, such as power or gas, at future dates. Generally the forward price curve is derived from published price quotations in an active market, over the short-term horizon period, and from valuation techniques over the more distant horizon period. Assumptions which underpin the long-term price curve 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 would be economic for companies to enter the market and build additional capacity (‘new entrant pricing’). The assumptions used during the application of valuation techniques will directly impact the shape of the forward price curve. The forward price curves are only estimates of future prices and thus possess inherent uncertainty and subjectivity.
Recoverable amount of long-life assets
The original cost of greenfield developed power plants and other assets includes relevant borrowings and development costs:
- Interest on borrowings relating to major capital projects with long periods of development is capitalised during construction and then amortised over the useful life of the asset.
- Project development costs (including appropriate direct internal costs) are capitalised when it is virtually certain that the project will proceed to completion and income will be realised.
Depreciation of plant is charged so as to write down the value of the asset to its residual value over its estimated useful life:
- Gas plant is depreciated over 30 years to a 10% residual value, unless the circumstances of the project or life of specific components indicate a shorter period or a lower residual value.
- Wind farms, coal and hydro plants are considered on an individual basis.
Management regularly considers whether there are any indications of impairment to carrying values of the 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 the current carrying amount of the asset with the present value of the expected future cash flows of the respective cash-generating unit and its fair value less costs to sell. The calculations are generally based on risk adjusted discounted cash flow projections that require estimates of discount rates and future market prices over the remaining lives of the assets.
Fair values on acquisition
The Group is required to bring assets and liabilities acquired in business combinations on to the Group balance sheet at their fair value. Power plant and equipment usually have long operating lives, and are often bought with associated long-term contracts such as PPAs. Hence determination of the fair values of these long-life assets and contracts can require a significant amount of judgement.
Consolidation policy — amount of influence
The determination of the level of influence the Group has over a business is often a mix of contractually defined and subjective factors that can be critical to the appropriate accounting treatment of entities in the consolidated financial statements. At entities which are not subsidiaries we achieve influence through Board representation and by obtaining rights of veto over significant actions. We generally treat investments where the Group holds less than 20% of the equity as investments available for sale. These investments available for sale are carried at market value where market prices are available. Where quoted market prices in an active market are not available, and where fair value cannot be reliably measured, unquoted equity instruments are measured at cost.
Where the Group owns between 20% and 50% of the equity of an entity and is in a position to exercise significant influence over the entity’s operating and financial 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 to exert significant influence over its operations, we also treat that entity as an associate.
A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. Where we recognise our interest in a joint venture as a jointly controlled entity we use the equity method of accounting. Sometimes we may apply the equity method to a joint venture where we do not possess an equal shareholding to the other venturers, because the venturers are bound by a contractual arrangement and the contractual arrangement establishes joint control.
Exceptional items and specific IAS 39 mark to market movements
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 effect of the exceptional items and specific IAS 39 mark to market movements.
The Directors consider that items of income or expense which are material by virtue of their nature and amount should be disclosed separately if the financial statements are to fairly present the financial position and financial performance of the Group. The Directors label these items collectively as ‘exceptional items’.
Determining which transactions are to be considered exceptional in nature is often a subjective matter. However, circumstances that the Directors believe would give rise to exceptional items for separate disclosure would include:
- disposals of interests in businesses;
- discontinued operations;
- impairments and impairment reversals.
All exceptional items are included on the appropriate income statement line to which they relate. In addition, for clarity, separate disclosure is made of all such items in one column on the face of the income statement.
Those items that the Group separately present as specific IAS 39 mark to market movements in the income statement principally relate to derivative contracts into which the Group has entered in order to economically hedge certain of its physical and financial exposures.
Taxation
The income tax expense recorded in the income statement is dependent on the profit for the year and 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 tax authorities in the various tax jurisdictions in which International Power operates.
It is necessary to consider the extent to which deferred tax assets should be recognised based on an assessment of the extent to which they are regarded as recoverable.
Provisions
Within the Group there are a number of long-term provisions. The carrying amount of these provisions is estimated based on assumptions about items such as the risk adjustment to cash flows or discount rates used, future changes in prices and estimates of costs. For example, the pensions liability is based on assumptions relating to discount rates used, future changes in salaries, expected mortality, and future increases in pension payments. We regularly review the assumptions underlying provision calculations, and pensions assumptions are reviewed on an annual basis. However, a change in estimates could have a material impact on the carrying amount of these provisions.
| Accounting Policy | Critical accounting judgements and key sources of uncertainty derive from the determination of: |
|---|---|
| Income recognition |
|
| Fair values of energy derivatives |
|
| Recoverable amount of long-life assets |
|
| Fair values on acquisition |
|
| Consolidation policy – amount of influence |
|
| Items of income and expense which require separate disclosure – ‘exceptional items’ |
|
| Taxation |
|
| Provisions |
|
Pakistan
UAE
Texas
