Business Model
Introduction
International Power plc is a leading independent electricity generating company with interests in over 32,000MW (gross) of power generating capacity, located in 21 countries. We add value and manage risk through a portfolio management approach, which involves maintaining a balance in the portfolio in terms of geographical spread, fuel diversity and contract type. This portfolio approach gives us access to multiple opportunities to create value whilst mitigating the risks associated with over exposure to any particular market, fuel or contract type.
Note: As at 10 August 2009.
Our strategy
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.
Our portfolio approach
We manage our business 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 adverse performance in any particular market. 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 renewables. These technologies produce electricity using different fuel types that include gas, oil, coal and renewable sources such as wind, water and solar. This multi-technology expertise allows us to capture opportunities that are best suited to the market in question.
As electricity is critical 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, contracted markets typically offer opportunities to sell power to government bodies via long-term Power Purchase Agreements (PPAs) that offer stable returns. Assets in the 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 long-term contracted earnings and cash flow, overlaid by merchant generation which offers greater potential for superior returns when market conditions are favourable. We also ensure that lessons learnt in any particular market – for example, experience of the environmental legislation in Europe relating to Carbon Dioxide (CO2) emissions trading – are shared across the business.
Maximising the value of an 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 sites to high standards of safety and operating performance; managing our business on a portfolio basis; closely co-ordinating plant operations with trading to maximise the value of our output; standardising management reporting for all investments; and investing in improved plant efficiency.
- Maximise the return from our portfolio We optimise operations as described above and we leverage our investments, particularly by using non-recourse finance at the project company level. We sell businesses if this generates a higher rate of return.
Our growth
The Group has grown significantly in the last five years, increasing its net operational capacity by over 10,000MW through both successful acquisitions and greenfield developments. International Power now has an operational interest in over 45 power stations, with 32,358MW of gross capacity, and owns net operating capacity of 20,648MW.
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. Clearly in the current economic climate where capital availability is constrained, financial prudence is key and we will be very selective in our capital allocation programmes, and will invest our capital even more carefully. 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 our existing relationships.
Note: As at 31 December 2008.
For more information on ‘Our growth’ and ‘Investment process’ please visit our Online Annual Report.
Our capabilities
The Company's 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 which is shared throughout the portfolio. This not only helps to ensure excellent 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.
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.
Financing Given the very capital-intensive nature of our business we maintain access to multiple sources of finance, which include strong free cash flow generation from our portfolio, project finance, corporate borrowing facilities, and capital from our partners. Non-recourse project finance is key to International Power’s financing strategy and overall capital structure, as this provides the opportunity to raise an appropriate level of debt for individual businesses and represents excellent risk mitigation for the Group.
Asset management All our investments are expected 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. In addition, we have a global Health, Safety and Environment (HS&E) management committee which co-ordinates the Group’s activities and enables best practice to be adopted at all plants. This co-ordinated approach helps us manage operational risk and extract the full portfolio benefits.
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 plants and are key for delivering value in both our merchant and long-term contracted markets. Effective plant operations are enhanced by an integrated Operations and Engineering team across the Group, ensuring information is shared across the portfolio and key operational staff are rotated 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 plants 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 within pre-defined limits and carrying out only a limited amount of non asset-backed trading. We forward sell our output when we consider the commercial returns are favourable, but we often retain some uncontracted capacity as mitigation against unplanned outages and to benefit from upsides in the short-term market.
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, the majority of our income is delivered from having our plant available, and key cost risks such as fuel and turbine maintenance are very significantly mitigated through long-term hedging and supply arrangements. Availability bonuses incentivise us to keep the plant well maintained in order to generate superior returns. Overall, the contracts provide visibility and stability of earnings and cash generation over the long-term.
