20-F 1 u50395e20vf.htm FORM 20-F e20vf
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
     
(Mark One)    
o
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2005
OR
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to
OR
 
o
  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    Date of event requiring this shell company report 
Commission file number: 1-13644
 
INTERNATIONAL POWER PLC
(Exact Name of Registrant as Specified in its Charter)
England and Wales
(Jurisdiction of Incorporation or Organization)
Senator House, 85 Queen Victoria Street, London EC4V 4DP, United Kingdom
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange on Which Registered
     
Ordinary shares of 50p each
  New York Stock Exchange*
American Depositary Shares each of which
represents ten ordinary shares
  New York Stock Exchange
Not for trading but only in connection with the registration of the American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission.
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
      Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
     
Ordinary Shares of 50p each   1,474,736,637
      Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes þ          No o
      If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.     Yes o          No þ
      Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o
      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ          Accelerated filer o          Non-accelerated filer  o
      Indicate by check mark which financial statement item the registrant has elected to follow.     Item 17 þ          Item 18 o
      If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No þ
 
 


 

TABLE OF CONTENTS
                 
 Item 1.    Identity of Directors, Senior Management and Advisors     2  
 Item 2.    Offer Statistics and Expected Timetable     2  
 Item 3.    Key Information     2  
 Item 4.    Information on the Company     12  
 Item 5.    Operating and Financial Review and Prospects     22  
 Item 6.    Directors, Senior Management and Employees     43  
 Item 7.    Major Shareholders and Related Party Transactions     61  
 Item 8.    Financial Information     61  
 Item 9.    The Offer and Listing     62  
 Item 10.    Additional Information     63  
 Item 11.    Quantitative and Qualitative Disclosures About Market Risk     68  
 Item 12.    Description of Securities Other than Equity Securities     68  
 Item 13.    Defaults, Dividend Arrearages and Delinquencies     68  
 Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds     68  
 Item 15.    Controls and Procedures     68  
 Item 16.    [Reserved]     68  
 Item 16A.    Audit Committee Financial Expert     68  
 Item 16B.    Code of Ethics     69  
 Item 16C.    Principal Accountant Fees and Services     69  
 Item 16D.    Exemptions from the Listing Standards for Audit Committees     69  
 Item 16E.    Purchases of Equity Securities by the Issuer and Affiliated Purchasers     69  
 Item 17.    Financial Statements     70  
 Item 18.    Financial Statements     70  
 Item 19.    Exhibits     70  
 Exhibit 1.1
 Exhibit 4.1
 Exhibit 4.2
 Exhibit 8
 Exhibit 12.1
 Exhibit 12.2
 Exhibit 13.1
 Exhibit 13.2

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WHERE YOU CAN FIND MORE INFORMATION
      We file annual reports with and furnish other information to the Securities and Exchange Commission, or SEC, from time to time. You may read and copy any document filed or furnished by us at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. In addition, because the American Depositary Shares representing our ordinary shares, which we refer to as ADSs, are listed on the New York Stock Exchange, reports and other information concerning us can also be inspected at the office of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
FORWARD-LOOKING STATEMENTS
      This annual report contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to herein as the Exchange Act. These forward-looking statements involve known and unknown risks, uncertainties and other factors which are in some cases beyond our control and may cause our actual results or performance to differ materially from those expressed or implied by such forward looking statements, including, among other things:
  •  our lack of long-term power purchase agreements with respect to a significant portion of our projects;
 
  •  our ability to integrate recent acquisitions, as well as future acquisitions, with our existing operations.
 
  •  our exposure to counterparty credit risk;
 
  •  market prices for power in the markets where some of our projects operate are volatile and could be depressed for years;
 
  •  some of our projects operate without long-term fuel supply agreements, and we are therefore vulnerable to market forces to obtain fuel;
 
  •  our reliance on single suppliers and single customers at some of our facilities;
 
  •  our being subject to extensive government regulation and the potential that we may not be able to comply with existing regulations and requirements or changes in such regulations or requirements;
 
  •  our potential inability to recover costs incurred during unsuccessful power project development and acquisition activities;
 
  •  assessments of external factors, such as the regulatory environment and market conditions, many years into the future that may not be borne out by events;
 
  •  our minority interest in certain of our project companies that might limit our ability to exercise complete control over their construction and operation in certain circumstances;
 
  •  the potential unavailability of financing on acceptable terms in the future;
 
  •  our potential obligation to guarantee the obligations of our subsidiaries and other affiliates in connection with their trading activities;
 
  •  the possibility that our projects under construction may not commence operation as scheduled;
 
  •  the possibility that new plants that employ advanced technology may not achieve the levels of operating performance expected by the manufacturers of the facilities;
 
  •  the potential that we may forfeit our interest in certain projects if such project achieves performance below expected levels of output or efficiency or fails to make specified payments under its financing obligations;
 
  •  our power generation facilities may experience equipment failures or otherwise not operate as planned;
 
  •  the disruption of operation or delay of completion of construction of projects due to the activities of unions;

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  •  our reliance on information technology for trading and corporate business;
 
  •  our projects are subject to risks which may restrict their ability to pay dividends or make other distributions to us;
 
  •  our post-tax earnings are subject to uncertainties due to the changing and increasingly complex nature of tax legislation;
 
  •  our potential inability to obtain insurance for certain risks under terms acceptable to us;
 
  •  exchange rate fluctuations could negatively affect our financial conditions and results of operations through the amount of our equity contributions to, and distributions from, our international projects;
 
  •  our operations in emerging market countries could expose us to economic, political and other risks, including unexpected changes in regulatory and legal regimes;
 
  •  in connection with our demerger from Innogy (now called RWE npower), we indemnified RWE npower and received indemnities from RWE npower in respect of liabilities arising before the demerger; and
 
  •  limits to the due diligence we are able to conduct in connection with acquisitions.
      In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report may not occur. No one undertakes any obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or other circumstances occurring after the date of this annual report.
PART I
Item 1. Identity of Directors, Senior Management and Advisors
      Not Applicable
Item 2. Offer Statistics and Expected Timetable
      Not Applicable
Item 3. Key Information
Selected Financial Data
      The selected financial information set forth below has been derived from our audited consolidated financial statements and the notes thereto set forth in “Item 17. Financial Statements” and other financial statements. The results for the year ended 31 December 2004 are not directly comparable to the results for the year ended 31 December 2005 due to the acquisition of the EME assets in December 2004 and Saltend in July 2005 and our decision not to restate the comparatives to take into account the requirements of the accounting standards applicable to financial instruments (IAS 32 and IAS 39), in accordance with the exemptions available under IFRS 1.
      Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board as adopted by the European Union (Adopted IFRS), which differ in certain significant respects from US GAAP. Information relating to the nature and effect of such differences as they relate to us is summarised in note 44 to our consolidated financial statements included elsewhere in this document. IFRSs as adopted by the EU differ in certain respects from IFRSs as issued by the International Accounting Standards Board (IASB). However, the Group financial statements for the years presented would be no different had the Group applied IFRSs as issued by the IASB.
      Under EU legislation, we were required to report our consolidated results under Adopted IFRS for accounting periods commencing on or after 1 January 2005. As a result of the need to present comparatives as well as current year numbers under Adopted IFRS, our date of transition to Adopted IFRS is 1 January 2004. Therefore, we have only presented information in the tables below with respect to our two most recent financial years, in accordance with instruction G to Form 20-F.

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      Income statement data for our total Group:
                           
    Year Ended 31 December
     
    2005(1)   2005   2004
             
    ($ in    
    millions,   (£ in millions,
    except per   except per share
    share data)   data)
Adopted IFRS — Group
                       
Revenue: Group and share of joint ventures and associates
    5,046       2,936       1,267  
Less: share of joint ventures’ revenue
    (531 )     (309 )     (144 )
Less: share of associates’ revenue
    (1,193 )     (694 )     (355 )
                   
Group revenue
    3,322       1,933       768  
Cost of sales — ordinary
    (2,690 )     (1,565 )     (637 )
Cost of sales — exceptional
    89       52        
                   
Cost of sales
    (2,601 )     (1,513 )     (637 )
                   
 
Excluding exceptional items
    632       368       131  
 
Exceptional items
    89       52        
                   
Gross profit
    721       420       131  
Other operating income — ordinary
    110       64       56  
Other operating income — exceptional
    100       58        
                   
Other operating income
    210       122       56  
Other operating expenses — ordinary
    (221 )     (129 )     (78 )
Other operating expenses — exceptional
                11  
                   
Other operating expenses
    (221 )     (129 )     (67 )
Share of results of joint ventures and associates
    340       198       113  
                   
 
Excluding exceptional items
    861       501       222  
 
Exceptional items
    189       110       11  
                   
Profit from operations
    1,050       611       233  
Disposal of investments — exceptional
    17       10       4  
Finance income
    91       53       30  
Finance expenses — ordinary
    (438 )     (255 )     (107 )
Finance expenses — exceptional
                (31 )
                   
Finance expenses
    (438 )     (255 )     (138 )
                   
Profit before tax
    720       419       129  
Income tax expense — ordinary
    (95 )     (55 )     (25 )
Income tax expense — exceptional
    (58 )     (34 )      
                   
Income tax expense
    (153 )     (89 )     (25 )
                   
Profit for the year
    567       330       104  
                   
Attributable to:
                       
Minority interests — ordinary
    77       45       8  
Minority interests — exceptional
                (2 )
                   
Minority interests
    77       45       6  
Equity holders of the parent — ordinary
    342       199       112  
Equity holders of the parent — exceptional
    148       86       (14 )
                   
Equity holders of the parent
    490       285       98  

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    Year Ended 31 December
     
    2005(1)   2005   2004
             
    ($ in    
    millions,   (£ in millions,
    except per   except per share
    share data)   data)
Earnings per share:
                       
 
Basic excluding exceptional items
    23.2 cents       13.5p       8.6p  
 
Basic including exceptional items
    33.3 cents       19.4p       7.5p  
 
Diluted excluding exceptional items
    22.3 cents       13.0p       8.5p  
 
Diluted including exceptional items
    31.8 cents       18.5p       7.4p  
Dividends per share
    4.3 cents       2.5p        
      Balance Sheet data for our total Group:
                         
    As at 31 December
     
    2005(1)   2005   2004
             
    ($ in millions)    
        (£ in millions)
Balance Sheet Information:
                       
Adopted IFRS — Group
                       
Total non-current assets
    11,330       6,592       5,667  
Total current assets
    2,506       1,458       941  
                   
Total assets
    13,836       8,050       6,608  
                   
Total current liabilities
    (2,234 )     (1,300 )     (545 )
Total non-current liabilities
    (7,520 )     (4,375 )     (4,005 )
                   
Total liabilities
    (9,754 )     (5,675 )     (4,550 )
                   
Net assets
    4,082       2,375       2,058  
                   
Capital Stock (excluding long-term debt and redeemable preferred stock)
    1,267       737       737  
Other capital and reserves
    2,329       1,355       1,096  
                   
Total equity attributable to equity holders of the parent
    3,596       2,092       1,833  
Minority interests
    486       283       225  
                   
Total equity
    4,082       2,375       2,058  
                   
Issued and fully paid ordinary shares (million of shares)
    1,475       1,475       1,473  
                                                 
    As at and for the Financial Year Ended 31 December
     
    2005(1)   2005   2004   2003   2002   2001
                         
    ($ in                    
    millions,   (£ in millions, except per share data)
    except per    
    share    
    data)    
US GAAP Data — Group
                                               
Total equity attributable to equity holders
    3,881       2,258       2,054       1,767       1,746       1,795  
Net income
    411       239       61       15       28       28  
Basic earnings per share
    28.0 cents       16.3p       4.7p       1.2p       2.2p       2.2p  
Diluted earnings per share
    26.8 cents       15.6p       4.6p       1.2p       2.2p       2.1p  
 
Note:
(1)  Amounts translated for convenience at the noon-buying rate on 31 December 2005 of £1.00 = $1.7188.

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Exchange Rate Information
      The tables below provide, for the periods indicated, the period end, average, high and low exchange rates between the pound and the dollar, expressed in dollars per pound, based on the noon buying rates. The average rates for each period reflect the average of the noon buying rates on the last business day of each month during the relevant period. On 31 December 2005, the noon buying rate was £1.00 = $1.7188.
                                 
    High   Low   Average Rate   End of Period
                 
    (Dollars per pound)
Year ended 31 December 2005
    1.9292       1.7138       1.8204       1.7188  
Year ended 31 December 2004
    1.9482       1.7544       1.8333       1.9160  
Year ended 31 December 2003
    1.7842       1.5500       1.6448       1.7842  
Year ended 31 December 2002
    1.6095       1.4074       1.4450       1.6095  
Year ended 31 December 2001
    1.5045       1.3730       1.4382       1.4543  
      The table below sets forth the high and low exchange rates between the pound and the dollar expressed in dollars per pound, for each of the months in the six-month period ended 31 May 2006.
                 
    High   Low
         
    (Dollars per pound)
2006
               
May
    1.8911       1.8286  
April
    1.8220       1.7389  
March
    1.7567       1.7256  
February
    1.7807       1.7343  
January
    1.7885       1.7404  
2005
               
December
    1.7740       1.7188  

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Risk Factors
      We set forth below the major risks our business faces.
A significant number of the projects in which we have an interest operate without long-term PPAs, and are therefore vulnerable to market forces to determine the price and amount of power they sell.
      A significant number of the projects in which we have an interest do not have fixed price long-term offtake agreements (commonly referred to as power purchase agreements, or PPAs) and sell their output at prevailing market rates. As at December 31, 2005, approximately 35% of total capacity of our power generation facilities was sold under long-term agreements, with the remainder sold on a merchant basis. In particular, the majority of our power generation facilities in North America, the United Kingdom and Australia sell all of their output as “merchant” plants. These projects are subject to market forces to determine the amount and price of power that they sell. If these plants are unable to sell electricity in amounts or at prices that are sufficient to meet their costs, they may not be able to generate enough cash to service their own debt or to make distributions to us.
We may have difficulty integrating and operating recent acquisitions, as well as any future acquisitions, with our existing operations.
      The period from the fourth quarter of 2004 to date has been characterised by a high level of acquisitions. For example, we completed the acquisition of the 1200 MW Saltend plant in the UK on 28 July 2005 in a 70/30 partnership with Mitsui & Co. Limited of Japan. We continue to pursue further acquisitions.
      To date the financial and operational performance of acquired businesses have been in line with our expectations at the time of acquisition. However the integration and operation of any future acquisitions may expose us to certain risks, including the following:
  •  Difficulty in integrating the acquired businesses in a cost-effective manner, including the establishment of effective management information and financial control systems;
 
  •  Unforeseen legal, regulatory, contractual, labour or other issues arising out of the acquisitions;
 
  •  Significant unexpected liabilities or contingencies arising from the acquisitions, for which we are not fully indemnified;
 
  •  Potential disruptions to our ongoing business caused by senior management’s focus on the acquired companies; and
 
  •  Performance of acquired assets may not meet our expectations or plans.
      If we are unable to integrate successfully our recent acquisitions or any businesses we may acquire in the future, it could have a negative impact on the results of our operations or our financial condition.
We are subject to counterparty credit risk from the vendors of acquired companies
      Under the terms of the acquisition agreements, vendors give certain representations, warranties, indemnities and covenants in our favour. Our ability to recover any amounts in respect of those representations, warranties, indemnities and covenants is dependent, amongst other things, on the continued solvency of the respective vendors or any guarantor of their obligations. In addition, the liability of each of the vendors is limited. If we experience costs or other losses associated with our acquisitions for which the vendors are unable to indemnify us, or in excess of the limits on the liability of the vendors, it could have a negative impact on the results of our operations or our financial condition.
Market prices for power in the markets where some of our projects operate are volatile and could be depressed for years.
      In recent years, power markets throughout the world have been characterised by new market entrants, regulatory changes and other factors which have contributed to market prices for power that are volatile and sometimes uneconomic; we believe the primary cause for these low prices is oversupply in a highly competitive

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market. On occasions oversupply effects may be exacerbated by vertically integrated competitors (companies with generation and supply interests) that may behave in a manner that shifts profitability out of generation into the retail sector of the industry. Accordingly, we may experience difficulty in charging prices that provide those projects with sufficient cash to service debt and make distributions to us until such time as that oversupply is rectified. Furthermore, to the extent that market prices continue to be uneconomic, this may have an adverse effect on our business performance in the relevant markets and may, in certain circumstances, require us to write down the value of our existing and future assets in those markets.
Some of our projects operate without long term fuel supply agreements, and we are therefore vulnerable to market forces to obtain fuel.
      Some of our projects, where we do not have PPAs or shorter term forward sales contracts for the output of our plants, do not have long term fuel supply agreements. Therefore, if we are unable to purchase fuel or transport it to the project, we are unable to generate electricity or sell output. Additionally, if we have contracted to sell electricity, but we are unable to obtain the necessary fuel (or obtain it at our expected price) we may suffer a loss of revenue and we may be required to purchase electricity at the prevailing market price from other sources to meet our contractual obligations.
Our reliance on single suppliers and single customers (which could be government controlled entities) at some of our facilities exposes us to financial risks if either should fail to perform their obligations.
      We often rely on a single supplier for the provisions of equipment, materials or fuels required to operate a facility and, at times, we rely on a single customer (which could be a government controlled entity) or a few customers to purchase all or a significant portion of a facility’s output under PPAs. In addition, we rely on a limited number of suppliers for equipment (including spare parts) that a significant proportion of the plants in our portfolio commonly use. In particular, our most recently constructed plants in the United States rely on Alstom for most of their equipment, warranties and spare parts. Alstom has suffered a number of years of losses and has required substantial financial support from the French government.
      Any interruption or delay in the supply of equipment, materials or fuels, or our inability to obtain such supplies within a reasonable amount of time, would impair our ability to meet our obligations, cause us to experience delays or incur additional costs. In addition, the failure of any one customer to fulfil its contractual obligations to the facility could have a material adverse effect on such facility’s financial results and could prevent the facility from continuing its operations.
Our operations are subject to extensive government regulation, and our inability to comply with existing regulations and requirements or changes in applicable regulations and requirements may have a negative impact on our business, results of operations or financial condition.
      Our operations are subject to extensive regulation in each of the countries in which we operate. Regulation that specifically applies to our business generally covers four areas: corporate governance and company law, regulation of energy markets, the environment and health and safety. The degree of regulation to which we are subject varies according to the country where a particular project company is located and may be materially different from one country to another. While we believe our existing projects have the requisite approvals and that we operate our business in compliance with applicable laws, we remain subject to a varied and complex body of laws and regulations that both public officials and private parties may seek to enforce. In addition, new regulations can be introduced which may affect our projects. For example, the EU emissions trading scheme for carbon dioxide credits commenced on 1 January 2005, but the impact of the scheme on certain assets is still uncertain due to delays in approval of relevant national allocation plans for the period from 1st January 2008. It also remains unclear to what extent we will be able to purchase offset carbon credits under the Clean Development Mechanism, which we refer to as CDM and Joint Initiative, which we refer to as JI, schemes which have been established under the Kyoto Protocol climate change agreement. We can give no assurance that the introduction of new laws or other future regulatory developments in countries in which we conduct our business will not have a material adverse effect on our business, results of operations or financial condition.

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      Generally, changes in the legal or regulatory structure in any country in which we operate could: lead to increases in costs which we may not be able to recover; impose restrictions on the operations of our businesses; and make it more difficult to enforce our rights under agreements relating to these projects.
Power project development and acquisition activities may not be successful and we may not recover the costs incurred in these activities.
      Although we will actively manage the costs involved in the preliminary steps in the development of a project or the acquisition of assets, the preparation involved in determining whether a project or an acquisition is feasible, economically attractive or capable of financing may require us to expend significant sums.
      In connection with the development of a new (greenfield) power generation facility, we must generally obtain governmental permits and approvals and overcome local opposition (if any), as well as negotiate land purchase or leasing agreements, equipment procurement and construction contracts, operation and maintenance agreements, fuel supply and transportation agreements, offtake arrangements and obtain sufficient equity capital and debt financing. Similarly, the acquisition of assets may also entail obtaining substantial regulatory approvals, securing the consent of partners, offtakers and other relevant parties, obtaining the necessary environmental and other permits and financing commitments and performing a significant amount of due diligence.
      However, we can give no assurance that any particular power development project or acquisition opportunity will ultimately prove feasible or economically justifiable or that we will acquire all necessary consents or authorisations to proceed. If we are unable to complete the contemplated development project or acquisition we may not be able to recover the costs we incurred.
We must assess external factors, such as the regulatory environment, and market conditions, including distortions due to government initiatives, particularly in relation to climate change, many years into the future; these assessments may not be borne out by events.
      In order to decide to invest in a new power project or to acquire assets, we must make certain assumptions about the price at which we can sell our output and the costs of fuel in order to assess whether we will be able to recover the incurred cost of such activities. It is our current policy, particularly with respect to the development of greenfield power generation facilities, to enter into PPAs to sell the output from our power generation facilities. However, there may be circumstances where it becomes uneconomic to enter into such agreements or such agreements may be terminated prior to their maturity date. In those circumstances, we aim to sell our output through merchant sales or shorter term forward sales contracts. Merchant sales are exposed to electricity sales price fluctuations. We can give no assurance that sales prices achieved through short-term contracts or merchant sales will be sufficient to enable us to recover the incurred cost of developing or acquiring the relevant power plant.
We own a minority interest in certain of our project companies and we may not, therefore, be able to exercise complete control over their construction or operation in certain circumstances.
      Although we seek to exert a degree of influence with respect to the management and operation of our projects by negotiating to obtain positions on management committees or to share control of the project with our co-venturers, we may not always succeed in achieving or maintaining our position. In those circumstances, we may be dependent on our co-venturers to construct and operate such projects, who may not always approach projects in the manner we would if we were in control. We may also have to rely on their approval to receive distributions of funds from projects or to transfer our interest in projects.
Financing may not be available to us on acceptable terms in the future.
      We have financed our existing power generation facilities from a variety of sources, including corporate debt and limited recourse project financing (that is, financing without recourse to our resources beyond our equity commitment to the project). As at 31 December 2005, we had £3,651 million of gross indebtedness. In the event of a default under a financing agreement that we either choose not to cure or cannot cure, the lenders would generally have rights to the relevant plant and any related assets. In the event of foreclosure after a default, we

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might not retain any interest in the plant. A bankruptcy of a major subsidiary may also constitute an event of default under our corporate debt agreements.
      While we intend to seek to finance our activities from corporate debt and limited recourse financing when appropriate, market conditions and other factors may prevent similar financing for future facilities or may limit our ability to refinance existing facilities. In addition, market conditions may limit the number of financial institutions that are willing to provide financing to companies in our industry either in the form of corporate debt or on a limited recourse basis. Consequently, while we do not believe our existing levels of indebtedness will significantly affect our ability to borrow funds in the future in order to finance new facilities or refinance existing facilities, it is possible that we may be unable to obtain the financing we require on terms satisfactory to us.
      Our lenders may also require us to guarantee the indebtedness under future facilities. This would render our general corporate funds vulnerable in the event of a default by the plant or subsidiary. Additionally, the terms of our financings may restrict our ability to guarantee future debt, which could adversely affect our ability to fund new projects. The terms of our current financing agreements do not limit the ability of our subsidiaries to incur non-recourse or lease financing for investment in new projects.
We may be required to guarantee the obligations of our subsidiaries or other affiliates arising in connection with their trading activities.
      In certain circumstances, our subsidiaries and other affiliates are required to be of a certain financial standing in order to trade in their respective markets. In the event such subsidiaries or affiliates were unable to maintain the required financial standing, we might be obliged to guarantee their obligations or otherwise provide credit support to enable them to continue to operate. Accordingly, in such circumstances, we might be required to finance the obligations of such subsidiaries or other affiliates which may, in turn, have an adverse effect on our financial condition.
Our projects under construction may not commence operation as scheduled.
      The commencement of operation of a newly constructed power generation facility involves many risks, including:
  •  environmental, engineering and construction risks relating to cost overruns, delays and performance;
 
  •  the breakdown or failure of equipment or processes; and
 
  •  start-up problems.
      These risks may significantly delay the commencement of operations of such projects. Delay in the commencement of operations may adversely affect our business performance.
New plants that employ advanced technology may not achieve the levels of operating performance expected by the manufacturers of the facilities.
      New plants may employ recently developed and technologically complex equipment, which has limited or no operating history. Facilities that utilise such equipment may not achieve the contractual levels of output or efficiency specified by the original equipment manufacturer to construct the facility. The manufacturer may not be able to rectify fully the performance deficiencies and, whilst the supplier will be liable for damages to compensate for these shortfalls, this may lead, for example, to power generation facilities operating below their nameplate capacity.
If a project achieves performance below expected levels of output or efficiency, or fails to make specified payments under its financing obligations or to meet certain performance levels, we may forfeit our interest in the project.
      We maintain insurance to protect against the risk of equipment failure. In addition, we generally obtain warranties for limited periods relating to the construction of each project and its equipment in varying degrees, and contractors and equipment suppliers are obligated to meet certain performance levels. The insurance,

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warranties or performance guarantees may not be adequate to cover lost revenues or increased expenses. As a result, a project may be unable to fund principal and interest payments under its financing obligations and may operate at a loss. A default under such a financing obligation could result in the loss of our interest in a power generation facility.
      In addition, PPAs entered into with an offtaker early in the development phase of a project may entitle the offtaker to terminate the agreement, or to receive liquidated damages if a project fails to achieve commercial operation or certain operating levels by specified dates, or fails to make specified payments. The exercise of a termination right may trigger the default provisions in a financing agreement (rendering such debt immediately due and payable). As a result, the project may be rendered insolvent and we may lose our interest in the project company.
Our power generation facilities may experience equipment failures or may otherwise not operate as planned.
      The continued operation of power generation facilities involves many risks, including the failure or performance below expected levels of output or efficiency of our power generation equipment or other equipment, including information technology used to operate our plants. This may lead to power generation facilities operating below their nameplate capacity. If we have committed to sell electricity under a contract and we cannot generate that electricity due to mechanical failure, we may suffer a loss, either through loss of revenue or due to penalties under the contract. We may also be required to purchase electricity at prevailing market rates from other sources or to make capacity payments to our customers. We can give no assurance that equipment failures in the future will not have a significant adverse effect on our business or results of operations.
Our energy trading and corporate businesses are heavily reliant on our information technology (IT) infrastructure.
      Our energy trading and corporate businesses rely heavily on our IT infrastructure. We utilise our IT infrastructure to, among other things, conduct our trading operations, monitor our positions and measure risk. If our IT infrastructure were to fail, such failure could lead to an inability to monitor our positions and conduct trading, and could therefore lead to increased costs in our positions and potentially a loss of revenue. Any increase in costs or loss of revenue could have an adverse effect on our financial condition and results of operations. In addition, a protracted loss of information stored in our IT systems could compromise our ability to comply with our statutory reporting requirements.
Our power generation facilities and our contractors or various development projects are subject to varying degrees of unionisation, which may disrupt operation or delay completion of construction projects.
      Our relationships with the unions have generally been good, save for unauthorised strikes by some members of the Hazelwood workforce following unrest at other power stations in Victoria, Australia in November 2000. While to date our development projects have not been adversely affected by disputes with contractors and their employees, we can give no assurance that future industrial action may not significantly disrupt our operations or delay construction of our development projects.
Our projects are subject to risks which may restrict their ability to pay dividends or make other distributions to us.
      Our projects are subject to risks that have the potential to restrict them from paying dividends or making other distributions to us, including uncertainties associated with the following:
  •  economic and political instability;
 
  •  our relationship with government controlled offtakers;
 
  •  potential restrictions on currency repatriation;

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  •  changes in regulatory requirements;
 
  •  changes to tax legislation
 
  •  catastrophic events such as terrorist activities, earthquakes, landslides, fire, floods, explosion or similar events.
      If any of the above events were to occur, this may adversely affect our business performance and we might be required to write down the value of any existing or future investments that are affected.
Our post-tax earnings are subject to uncertainties due to the changing and increasingly complex nature of tax legislation.
      Our financial projections are based on assumptions over the nature of national tax regimes and international tax treaties and when investing in new projects we are required to make projections about the nature of tax regimes many years into the future and these projections may not be borne out by events. Furthermore, where tax authorities do not agree with our interpretation of tax legislation it can take many years to arrive at a final determination of the tax liability. Whilst we have made provisions for amounts which are subject to a final determination, including 100% provisions where we believe amounts will become payable, we cannot be certain that the determinations will accord with our assessment of our liabilities.
We may not be able to obtain insurance for certain risks under terms acceptable to us.
      We generally seek to insure our projects against known risks in accordance with common industry practice. However, we may not be able to obtain insurance, particularly against acts of terrorism or expropriation under terms, including amount of premium payable and deductibles, that are acceptable to us. Furthermore, pursuant to the terms of certain of our debt facilities, our failure to obtain insurance against certain risks, including acts of terrorism, could constitute an event of default. An event of default under one or more of our debt facilities could have a material adverse effect on our financial condition.
Exchange rate fluctuations could negatively affect our financial condition and results of operations through the amount of our equity contributions to, and distributions from, our international projects.
      We are subject to risks of currency exchange rate fluctuations. We earn a substantial portion of our revenue in currencies other than the pound sterling, particularly the US dollar, Australian dollar and euro. Fluctuations in currency exchange rates can affect, on a pound sterling equivalent basis, the amount of our equity contributions to, and distributions from, our international projects, and therefore might have an adverse effect on our financial condition.
Our operations in certain countries expose us to economic, political and other risks that could have an adverse effect on our financial condition and results of operations.
      We have projects and production facilities in emerging market countries, including Turkey, Pakistan, Malaysia, Thailand and Indonesia. We may continue to expand our presence in these and other emerging markets where our operations are subject to certain risks and uncertainties. Emerging markets are typically less developed commercially and have significantly different social and political structures from those typically found in the United States or Western Europe. Malaysia, Thailand and other Asian countries where we have operations experienced severe economic crises from 1997 to 1999, and we can give no assurance that similar circumstances will not recur in the future. Economic deterioration in these countries could adversely affect our financial condition or results of operations. In addition, military activity and political instability in certain countries in these regions, such as Iraq and Afghanistan, could have a negative impact on the business prospects and results of operations of our production facilities and development projects in Pakistan, Turkey and the Middle East. For example, during the past year the gas pipeline that supplies our Uch plant in Pakistan was blown up during a dispute between the central government and local factions. In this instance the pipeline was rapidly repaired and there was no material financial impact on us.

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Our operations in emerging market countries expose us to risks related to unexpected changes in regulatory or legal regimes.
      In certain of the countries in which we operate, such as Pakistan, Turkey and Indonesia, ownership of power plants by independent companies is permitted by specific exemptions to national law. Our ability to continue operations in these countries or to earn a profit from our operations in these countries could be negatively affected by changes in laws or regulations, such as the imposition of restrictions on foreign ownership, expropriation or repatriation of earnings. In addition, the countries in which we operate or in which we seek to expand our operations could impose high tariffs or increase taxes, which would result in increased barriers to entry.
In connection with the demerger, we indemnified RWE npower (formerly called Innogy) and received indemnities from RWE npower in respect of liabilities arising before the demerger.
      The demerger was designed to separate our business from RWE npower’s businesses and operations. Pursuant to the demerger agreement between RWE npower and us, RWE npower indemnified us on an after-tax basis against certain liabilities, litigation and claims arising out of certain of their operations as well as against certain tax liabilities payable by us. Similarly, we agreed to indemnify RWE npower on an after-tax basis against certain liabilities, litigation and claims arising out of certain of our operations and to indemnify RWE npower against certain tax liabilities payable by RWE npower. Should RWE npower fail to make payments to us that it is required to make under indemnities it has given to us and, as a result, we have to make such payments in its place, our financial position could be materially adversely affected. Additionally, should we be required to make payments to third parties in respect of any liabilities for which we are in receipt of an indemnity from RWE npower prior to any payment in respect of such indemnities being received from RWE npower, our cash flow could be materially adversely affected.
      As part of the demerger, RWE npower took ownership of certain UK subsidiaries with a number of unresolved tax issues relating to periods when we owned these subsidiaries. The amount of taxable profits and losses for such periods has not yet been agreed with the Inland Revenue, and we can provide no guarantee as to the availability of tax losses going forward. To the extent that these issues result in additional tax liabilities, an assessment will be made on us. Liability for these exposures will be allocated between RWE npower and us pursuant to the indemnity arrangements described above. We will indemnify RWE npower in connection with certain tax liabilities and RWE npower will indemnify us against certain other tax liabilities, in each case on an after-tax basis. We may not be able to deduct any indemnity payments we make for tax purposes. However, certain tax liabilities are not indemnified and other liabilities may have been understated, or unforeseen additional liabilities may exist that will have an impact on us.
Item 4. Information on the Company
      International Power plc was formerly named National Power PLC, an entity created in March 1990 as part of the privatisation of the UK’s Central Electricity Generating Board under the Electricity Act 1989. We demerged substantially all of our UK businesses into Innogy Holdings plc (now RWE npower) on 2 October 2000, effective as of 30 September 2000, and retained substantially all our international businesses. Our registered office is at Senator House, 85 Queen Victoria Street, London EC4V 4DP, United Kingdom, +44 (0)20 7320 8600.
      We are an international wholesale power generator and developer with interests in 18 countries across four continents. We commenced our international activities in 1992 and in particular since the demerger in October 2000 we have established an international portfolio; building new generating assets in the United States, Australia, Qatar, Bahrain, Saudi Arabia, Oman and the United Arab Emirates, or UAE and through the acquisition of plants in Australia, the UAE, Indonesia, Italy, Spain, Puerto Rico, Portugal and the United Kingdom. As at 6 March 2006, our operating power plants had a total capacity of 28,793 megawatts, or MW, gross (one million watts equal one megawatt) or 16,642 MW net and have further capacity of 5,562 MW gross, or 1,729 MW net under construction in Asia and the Middle East. As at 6 March 2006, our net capacity in operation and under construction was 18,371 MW. We generate electricity from gas, oil, coal, wind and water (hydro). We also engage in complementary activities such as mining coal and transporting gas by pipeline in Australia, desalinating water in the Middle East and providing steam for district heating systems in Europe. We also have

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interests in retail businesses in Australia and the UK. We sell much of the power we generate to single customers pursuant to fixed price long-term offtake agreements. However, a significant portion of the power we generate, particularly power generated by our facilities in the United States, the United Kingdom and Australia is sold to customers through competitive merchant markets.
      We are headquartered in London and, for reporting purposes, we organise our business into five segments: North America, Europe, the Middle East, Australia and Asia. We operate regional support offices in each of these regions.
Business Environment
      We operate an international portfolio of assets, and demand-supply cycles vary across regions. In addition, we sell a significant proportion of the power we generate through long-term PPAs. This diversification reduces our exposure to short-term market cycles. Our strategy to have a diverse asset portfolio which is both geographically diverse and a mix of contracted and merchant plant has allowed us to offset relatively weaker results of operations in some regions, for example Australia and the United States, with relatively better results of operations in other areas such as the Czech Republic, UK and the Middle East.
      The Texas power market showed further signs of recovery during 2005 as pricing levels increased from the low levels in 2003 and 2004. Market prices improved, driven by the demand for peak power (up 3% to 60,300 MW), a warm summer and a reduction in surplus generation following the retirements and mothballing of inefficient plant in 2004 and 2005. The reserve margin in Texas is 24% as of 31 December 2005, and we expect a further reduction this year. In Texas, gas fired generation typically sets the marginal price for power, which means that the relatively high efficiency of our gas fired plants provides an economic advantage when gas prices are high.
      In New England, the underlying reserve margin is now estimated at 20%. In this market, oil fired generation has a greater role in determining the market price of power, therefore the relatively high efficiency of our gas fired plants does not enjoy the same benefits of a high gas price environment as in Texas. Overall, spark spreads showed a smaller recovery than we experienced in Texas. The first quarter of 2004 benefited from some very high, short duration, price spikes which lifted the full year spreads that year. Excluding this, the underlying spreads for 2005 were ahead of 2004.
      In January 2006 the New England system operator reported progress on the establishment of a capacity payment mechanism (a Forward Procurement Market instead of the previously proposed LICAP system). The details of the proposed capacity market are expected to be disclosed in the fourth quarter of 2006. This is a positive development for the New England market and is designed to ensure improved security of supply and encourage the provision of reliable generation, particularly at times of peak demand.
      In the UK, the rising oil price was a key factor in driving up the price of gas, which, in turn, generally sets the price of power. Whilst this helped improve financial performance at Rugeley (which is coal fired with relatively stable fuel costs), underlying spreads for gas fired generation have not improved to the same extent.
Recent Acquisitions
      On 20 April 2006, we announced that ANP had agreed to acquire the 632 MW coal fired Coleto Creek power generation facility for a total cash consideration of US$1.14 billion (approximately £640 million). The acquisition will be 75% funded by project non-recourse debt. Our investment will be US$288 million (approximately £162 million) and will be funded from current liquid resources. The remaining consideration (US$852 million), together with working capital requirements, will be funded by a fully underwritten non-recourse debt facility of US$935 million (£525 million). Coleto Creek Capital Power was built in 1980 and is located in Goliad County, which is within the South Zone of the ERCOT market. Coal is sourced from the Powder River Basin and is transported to the plant by rail. Existing, multi-year contracts are in place for coal supply and rail transportation. The majority of the plant’s output is forward contracted to 2009. Additional forward contracts have been agreed and will be put in place through to 2013 for approximately 50% of the plant’s

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output. The credit support required for these forward hedging arrangements will be provided within the financing facility. The acquisition is subject to regulatory approval and is expected to complete by the end of June 2006.
      On 22 January 2006, together with partners Suez Energy International and Sumitomo Corporation, we agreed to acquire the Al Hidd independent power and water project in Bahrain and we signed a 22-year power and water purchase agreement (PWPA) with the Ministry of Electricity and Water for its output. The PWPA will cover the output from the existing 910 MW CCGT and 30 MIGD water desalination facility, together with the output from a new-build 60 MIGD desalination expansion, which is expected to be in operation by the end of 2007. The total project cost is estimated to be US$1.25 billion (£714 million), which is intended to be funded by a mix of debt and equity in an 85:15 ratio. The total estimated project cost includes the purchase price for the existing plant and the cost of the 60 MIGD extension. For our 40% share our equity investment will be US$75 million (£43 million).
      On 28 July 2005, we successfully completed the acquisition of the 1,200 MW CCGT Saltend power plant in Hull, England, in a 70:30 partnership with Mitsui & Co., Ltd of Japan. Saltend was acquired from Calpine Corporation for a total consideration of £495 million. The total consideration includes the valuation of the plant and the associated gas and power contracts, and the acquisition was funded by a mix of debt and equity in a 55:45 ratio.
      In December 2004, we completed the acquisition of the EME Portfolio, consisting of nine power generation projects in six countries through IPM, our 70/30 limited liability partnership with Mitsui. The EME Portfolio comprises various projects located in Europe, Australia, Asia and North America. Through our participation in IPM, we now own 3,076 MW (net) of generating assets (following the sale of the Valley Power peaking plant to Snowy Hydro in October 2005), which complements our existing portfolio by adding quality assets in our core markets. The net cash consideration for the assets listed above was $1.9 billion (£968 million) of which our net cash outflow was approximately £375 million, with the remainder of the acquisition price funded by Mitsui and bank finance. The integration of the EME Portfolio assets has proceeded well.
      In November 2004, we acquired a 75% shareholding in Turbogás, a 990MW combined cycle gas turbine, or CCGT, power plant located near Porto in Portugal, from RWE Power AG for 195 million (£135 million). We subsequently increased our interest with the purchase of a further 5% shareholding in January 2005. In December 2004, Energias de Portugal, referred to as EdP, exercised an option to increase its shareholding in the plant to 40%, resulting in a final ownership of a 60% interest (representing a net capacity of 594 MW). Turbogás has strengthened our position in the Iberian market by adding fuel diversity and scale to our existing position alongside Pego — we now have an interest in two assets that represent a market share of some 17% in Portugal.
Our Strategy
      Our strategy is to maximise the value of our portfolio, and ensure that all acquisitions and greenfield projects are quickly and efficiently integrated into our regional business structures. Over the longer term, we intend to seek investment opportunities that meet our project evaluation and financial return criteria, which are, in essence, to improve our financial return to shareholders while reducing the risk inherent in our business. We will consider entering into alliances with other companies that could involve joint ventures, or the taking or giving of minority interests, if we believe such alliances will enable us to implement our strategy, whether in relation to particular markets or more generally. Our principal regions of focus will continue to be North America, Europe, the Middle East and Australia although we may consider investment in other regions.
Maximising Value From Our Portfolio
      We own a geographically diverse portfolio of power plants. Our specific strategies for value enhancement in each country and for each individual asset will be tailored to local requirements, but generally we will seek to achieve the following:
  •  Optimise the operations of our power plants: we intend to optimise the operations of our power plants through several means, including managing all of our assets to high standards of operating performance; managing our assets on a portfolio basis, particularly with regard to contingency and strategic spare parts

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  planning, so as to minimise the loss of generation during planned and forced outages; closely coordinating plant operation with trading activity to maximise the value of our uncontracted output; standardising management reporting for all investments; and utilising our management experience to prepare successfully certain of our plants for the introduction of competition in the relevant energy market;
 
  •  Leverage our existing assets: we intend to leverage our investments to enhance earnings in several ways, including financing at a variety of corporate, project and intermediate corporate levels, capturing operational, trading, and administrative economies of scale in asset aggregation, capitalising on market knowledge derived through asset ownership and leveraging off the skills, expertise and ideas of the personnel we and our associates employ;
 
  •  Trade assets to maximise value: we expect to increase the size of our portfolio over time. However, as part of our strategy of seeking to maximise the value of our investments, we will sell an asset if this generates a higher return, or if we can obtain a comparable return with lower risk elsewhere; and
 
  •  Seek effective routes to market: we intend to seek to improve our access and routes to the market in those geographic areas where it is appropriate. In July 2005, for example, we formed a partnership with EnergyAustralia to supply power and gas to customers, predominately in South Australia and Victoria, and in May 2006, we acquired a 30% equity interest in Opus Energy, an independent supplier of electricity in the UK that focuses on the small business sector.

Future Investments
      We will subject new investment opportunities to rigorous evaluation criteria, with a focus on the following elements:
  •  Financial return: new investments must meet stringent financial return criteria. We use a range of financial criteria in our project evaluations, but the fundamental principle is that we must reasonably believe any prospective capital investment will yield, on an after-tax cash flow basis, a return in excess of a target spread (adjusted for risk) over our estimated weighted average cost of capital. As part of this evaluation, we test investment projections to ensure that they are both reasonable over the life of the investment and balanced in terms of timing of cash flow, based on realistic assumptions;
 
  •  Market suitability: we intend to invest in countries that have a track record of respecting foreign direct investment, that offer a significant opportunity for future investment and growth, have strong market fundamentals in terms of demand/supply balance and that complement our portfolio of assets; and
 
  •  Degree of control: we do not intend to invest in minority positions where we are not in a position to contribute directly to the realisation of projected return on investment. We do not intend to make passive investments. We are prepared to share management control of our investments where we have partners that have complementary or equivalent commercial, technical and operating expertise.
      We will seek to minimise our financing costs while maintaining flexibility by utilising a wide range of financing structures and financial instruments, including project level financing, corporate bonds, equity and hybrid debt-equity securities, including both private placements and public issuances of both equity and debt instruments.
      In addition to pursuing the development and acquisition of single assets, we will also seek to acquire portfolios of generation assets if they become available on attractive terms.
      In conjunction with our focus on value enhancing growth opportunities, we also remain committed to deliver our dividend policy, which is to progressively increase our payment ratio to 40% over the medium term.

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Portfolio Asset Management
      With respect to both our existing assets and our prospective investments, we intend to manage our portfolio in a manner which optimises our return, while mitigating the risks inherent in our business. In particular, we intend to manage on a portfolio basis with regard to the following:
  •  Geopolitical diversity: to manage the political risk inherent in foreign direct investment in a strategic industry, we intend to concentrate the majority of our portfolio in the developed countries of North America, Europe, Middle East and Australia. In this regard, we will also give careful consideration to the nature of the regulatory risk associated with our investments in the countries in which we invest;
 
  •  Resource allocation and industry cycles: we believe the various electricity markets in which we operate may be subject to periodic intervals of supply-demand imbalance. We intend to use our resources and operate our trading and marketing operations in a manner that seeks to anticipate these periods of surplus and shortfall in supply;
 
  •  Offtake arrangements — merchant versus contracted: we intend to maintain a balance in our portfolio between long-term contracted assets (i.e. principally under PPAs) and merchant plant (either short term contracted, or uncontracted); and
 
  •  Technology and fuel type: with due account to the environmental factors which tend to favour gas-fired generation over coal-fired generation in many markets, we intend to maintain a portfolio of generation assets employing various technologies and primary fuels. We believe a blend of fuel types and technology both strengthens our portfolio and improves the security of supply in our markets.
Developing Closely Linked Businesses
      Together with generating power, we use our capabilities to successfully and profitably develop closely linked businesses. These include wholesale production of fresh water through seawater desalination, production and distribution of steam, district heating via cogeneration, a small but growing electricity retail business, open-cast coal mining and gas transportation.
Facilities
      As at 6 March 2006, we had interests in power generation facilities in operation representing in aggregate 28,793 MW (gross) and 16,642 MW (net). In addition to generating electricity, some of our plants are cogeneration facilities that also produce steam, which we sell to industrial users and district heating schemes. In the Middle East our power plants also have adjacent plants for desalinating water.
      We sell the output either under the provisions of long-term PPAs or through direct sales into competitive markets in those countries where such a market exists.
      The portion of output from power stations that we sell into a competitive market is exposed to price fluctuations in such markets. Our various trading operations can limit our exposure to a degree by entering into forward contracts that fix the price at which we sell output over the period of the forward contract.
      Fuel for power stations in which we have invested include natural gas, coal and oil, which are sourced either under long-term supply contracts or via market purchases.

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      The table below sets out details in relation to our operating power plants and plants under construction as at 6 March 2006.
                                                 
                    Gross Capacity   Net Capacity
        Gross       Net   Heat (MWth(1))   Heat (MWth)
        Capacity       Capacity   Desal (MIGD(2))   Desal (MIGD)
        Power   IPR   Power   Steam (million   Steam (million
Assets in Operation   Fuel/Type   MW   Ownership %   MW   lbs/hr)   lbs/hr)
                         
North America
                                               
Hartwell, Georgia
    Gas (OCGT)       310       50       155                  
Hays, Texas(3)
    Gas (CCGT)       1,100       100       1,100                  
Midlothian, Texas(3)
    Gas (CCGT)       1,650       100       1,650                  
Oyster Creek, Texas
    Gas (Cogen/CCGT)       425       50       213       100 MWth       50 MWth  
Bellingham, Massachusetts(3)
    Gas (CCGT)       570       100       570                  
Blackstone, Massachusetts(3)
    Gas (CCGT)       570       100       570                  
Milford, Massachusetts
    Gas (CCGT)       160       100       160                  
EcoEléctrica, Puerto Rico
    LNG (CCGT)       524       35       183                  
                                     
North America total in operation
            5,309               4,601       100 MWth       50 MWth  
                                     
Europe
                                               
International Power Opatovice, Czech Republic(4)(5)
    Coal/gas (Cogen)       585       99       580       1,945 MWth       1,925 MWth  
ISAB, Italy
    Gas (IGCC)       528       34       181                  
Tejo Energia (Pego), Portugal
    Coal       600       50       300                  
Turbogás, Portugal
    Gas (CCGT)       990       60       594                  
Spanish Hydro, Spain
    Hydro       84       67       57                  
Uni-Mar (Marmara), Turkey
    Gas (CCGT)       480       33       160                  
Deeside, United Kingdom
    Gas (CCGT)       500       100       500                  
Derwent, United Kingdom
    Gas (CCGT)       214       23       50                  
First Hydro, United Kingdom
    Pumped Storage       2,088       70       1,462                  
Rugeley, United Kingdom
    Coal/50 MW of OCGT       1,050       100       1,050                  
Saltend, United Kingdom
    Gas (CCGT/Cogen)       1,200       70       840       0.30m lbs/hr       0.21m lbs/hr  
                                     
Europe total in operation
            8,319               5,774                  
                                     
Middle East
                                               
Al Hidd, Bahrain(6)
    Gas (CCGT)/desalination       910       40       364       30 MIGD       12 MIGD  
Al Kamil, Oman
    Gas (OCGT)       285       65       185                  
Shuweihat S1, UAE
    Gas (CCGT)/desalination       1,500       20       300       100 MIGD       20 MIGD  
Umm Al Nar, UAE
    Gas (CCGT)/desalination       870       20       174       162 MIGD       32 MIGD  
                                     
Middle East total in operation
            3,565               1,023       292 MIGD       64 MIGD  
                                     
Australia
                                               
Hazelwood, Victoria
    Coal       1,635       92       1,500                  
Synergen, South Australia
    Gas/distillate       360       100       360                  
Pelican Point, South Australia
    Gas (CCGT)       485       100       485                  
SEA Gas pipeline, Victoria(7)
    N/A       N/A       33       N/A                  
Canunda, South Australia
    Wind/renewable       46       100       46                  
Loy Yang B, Victoria
    Coal       1,000       70       700                  
EnergyAustralia(8)
    N/A       N/A       50       N/A                  
Kwinana, Western Australia
    Gas (CCGT)       118       49       58                  
                                     
Australia total in operation
            3,644               3,149                  
                                     
Asia
                                               
Paiton, Indonesia
    Coal       1,230       31       385                  
Malakoff, Malaysia(5)
    Gas (OCGT/CCGT)       3,130       18       567                  
HUBCO, Pakistan
    Oil       1,290       17       214                  
KAPCO, Pakistan
    Gas/oil (CCGT)       1,600       36       575                  
Uch, Pakistan
    Gas/oil (CCGT)       586       40       234                  
TNP (Pluak Daeng), Thailand
    Gas (Cogen)       120       100       120       7.7 MWth (9)     7.7 MWth  
                                     
Asia total in operation
            7,956               2,095       7.7 MWth       7.7 MWth  
                                     
Total in operation around the world
            28,793               16,642                  
                                     

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                    Gross Capacity   Net Capacity
        Gross       Net   Heat (MWth(1))   Heat (MWth)
        Capacity       Capacity   Desal (MIGD(2))   Desal (MIGD)
        Power   IPR   Power   Steam (million   Steam (million
Assets Under Construction   Fuel/Type   MW   Ownership %   MW   lbs/hr)   lbs/hr)
                         
Al Hidd, Bahrain
    Desalination             40             60 MIGD       24 MIGD  
Malakoff, Malaysia(5)
    Coal       1,890       18       342                  
Ras Laffan B, Qatar
    Gas (CCGT)/desalination       1,025       40       410       60 MIGD       24 MIGD  
Tihama, Saudi Arabia
    Gas (Cogen)       1,074       60       644       4.5m lbs/hr       2.7m lbs/hr  
TNP (Pluak Daeng), Thailand
    Gas (Cogen)       23       100       23                  
Umm Al Nar Expansion, UAE
    Gas (CCGT)/desalination       1,550       20       310       25 MIGD       5 MIGD  
                                     
Total under construction around the world
            5,562               1,729                  
                                     
 
(1)  MWth = One megawatt of thermal power.
 
(2)  MIGD = millions of imperial gallons per day.
 
(3)  Capacity shown for these assets is the nameplate capacity.
 
(4)  In October 2005, Elektrárny Opatovice (EOP) changed its name to International Power Opatovice.
 
(5)  Gross capacity amount shown for International Power Opatovice and Malakoff represents the actual net interest owned directly or indirectly by International Power Opatovice and Malakoff, respectively.
 
(6)  Hidd acquisition is expected to complete in July 2006.
 
(7)  687 km gas pipeline (33% owned by International Power) from Victoria to South Australia.
 
(8)  EnergyAustralia (50% owned by International Power) services circa 275,000 electricity and gas retail accounts in Victoria and South Australia.
 
(9)  District cooling system capacity.
Construction and Development
      We currently have a range of power projects under construction and in development throughout the world. As at 6 March 2006, we had interest in power generation facilities under construction in the Middle East, Malaysia and Thailand representing an aggregate capacity of 5,562 MW gross and 1,729 MW net.
      International Power’s business in the Middle East has increased significantly over the last few years and continues to grow through the addition of new greenfield and brownfield projects.
      In April 2003, we acquired a 20% interest in the 870 MW Umm Al Nar water and power plant as part of a consortium including Tokyo Electric Power Company and Mitsui. We also own 70% of an operating company that operates and maintains the plant. Umm Al Nar sells its water and power to Abu Dhabi Water & Electricity Company (ADWEC) under a 23-year offtake agreement. While operating the existing plant, we have also agreed to develop a new power and water plant adjacent to the existing plant. In July 2003, the consortium secured a $1.77 billion non-recourse facility to fund the acquisition and the associated new plant construction project. The new plant will have an installed capacity of 1,550 MW and 25 MIGD. All three new gas turbines have been fired and synchronised and full commercial operation is expected to commence in the first half of 2006. Under the terms of the contract, ADWEC will also purchase the entire output from the new plant when it reaches commercial operation.
      In December 2003, we announced that, together with our partner Saudi Oger, we had entered into an agreement with Saudi Aramco to develop, own and operate four cogeneration plants in Saudi Arabia (Tihama). We own 60% of the consortium investment vehicle and will contribute a maximum equity investment of $78 million. Construction of the 1,074 MW, 4.5 million lbs/hr of steam project is progressing well. Commercial operation is expected at the first site, Uthmaniyah, in the first half of 2006. The other three cogeneration plants, Shedgum, Ras Tanura and Ju’aymah, are scheduled to commence commercial operations in the last quarter of 2006. These plants will provide all of their output of power and steam to Saudi Aramco pursuant to a 20-year

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offtake agreement. In February 2005, we secured a 40% interest in Ras Laffan B, a 1,025 MW, 60 MIGD plant under development in Qatar. Construction of the facility has commenced, with completion expected in 2008.
      In addition, on 22 January 2006, along with our partners Suez Energy International of France and Sumitomo Corporation of Japan, we signed an agreement to acquire the Al Hidd independent power and water project in Bahrain, which will be 40% owned by us. The consortium also signed a 22-year PWPA with the Ministry of Electricity and Water for its output. The PWPA covers the output from the existing 910 MW combined cycle gas turbine (CCGT) and 30 MIGD water desalination facility, together with the output from a new-build 60 MIGD desalination expansion, which is expected to be in operation by the end of 2007.
      Malakoff, in Malaysia, now has 1,890 MW of new capacity under construction, representing its 90% equity interest in Tanjung Bin, a 2,100 MW coal fired plant, which is expected to be operational in the fourth quarter of 2006. In April 2005, Malakoff acquired a further 19% shareholding in the 1,303 MW CCGT Lumut power plant. This increased Malakoff’s net installed capacity to 3,130 MW, which translates to net capacity of 567 MW for International Power. The entire output from this new capacity is contracted under long-term PPAs with Tenaga Nasional Berhad, Malaysia’s national electricity company.
      At Pluak Daeng, Thailand, a project is currently under development to add 23 MW of incremental capacity to service the growing needs of local industrial customers. This is expected to be completed by the second half of 2006.
Operations and Maintenance
      Where appropriate, particularly if we control a project, we manage our own operation and maintenance services for our power plants either by contract through special purpose operation and maintenance subsidiaries or by establishing the asset-owning company as an owner-operator of the project with our technical expertise and experienced personnel. In addition, we currently carry out the operation and maintenance services for the Marmara power station in Turkey and the Hub River power station in Pakistan, referred to as HUBCO. Additionally, we have 70%, 50% and 50% interests respectively in the operations companies for the Umm Al Nar, Shuweihat and Pego power stations, and through our interest in IPM, we have an 85% interest in the operations company for Paiton in Indonesia and from the Turbogas acquisition, we have a 73% interest in its operations company, Portugen in Portugal. We will also have a key operational role at the Tihama projects once construction is completed.
Trading Activities
      We have energy trading activities in the United States, the United Kingdom and in Australia.
      Our trading activities principally relate to supporting our merchant generating business, and we act as wholesale marketers rather than as pure financial traders. We aim to increase the return on our assets while hedging the market risk associated with the output of the plants. In support of this objective, and in order to obtain greater transparency to market pricing, we buy and sell electricity, gas, coal and emissions products in those markets where we have merchant assets.
      We hedge our physical generating capacity by selling forward our electrical output, and purchasing our fuel input, as and when commercially appropriate and within approved control limits. This is accomplished through a range of financial and physical products. Our limited proprietary trading operations use similar methods.
      We implement comprehensive energy risk management policies, procedures and controls in each country in which we have energy trading activities that sit within International Power’s overall risk framework. The risk framework is designed to facilitate the identification, measurement, monitoring and reporting of risk. See “Item 6. Directors, Senior Management and Employees — Corporate Governance — Internal Control — Risk identification and management” and also “Item 6. Directors, Senior Management and Employees — Corporate Governance — Internal Control — Energy marketing and trading”. For each of the businesses that operate in merchant energy markets, local risk committees have been established to oversee the management of the market, credit, operational, legal and regulatory risks arising from the marketing and trading activities. The committees

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are made up of the trading manager, global and local risk managers, regional directors and senior managers. The local risk committees report to our Global Commodities Risk Committee.
      In the United Kingdom, the United States and Australia we have commercial teams responsible for buying and selling the fuel, power and emissions associated with our merchant assets. We also perform limited proprietary trading in the United States and Australia that is subject to defined risk limits.
Employees
      The table below sets out the average number of employees of the Group employed for the year ended 31 December 2005.
         
    Approximate Number
    of Employees
     
North America
    220  
Europe
    1,136  
Middle East
    615  
Australia
    742  
Asia
    633  
Corporate and development
    233  
       
Total group employees
    3,579  
       
Subsidiaries
      Our principal subsidiary undertakings are set forth in note 17 of our consolidated financial statements.
Legal Proceedings
      Save as disclosed below, we are not or have not been involved in any legal or arbitration proceedings which may have, or have had during the 12 months preceding the date of this document, a significant effect on our financial position or results of operations nor, so far as we are aware, are any such proceedings pending or threatened.
      We are aware of the following claims and potential claims that involve or could involve legal proceedings against us:
      Claims and potential claims by or on behalf of current and former employees, including former employees of the Central Electricity Generating Board (CEGB), and contractors in respect of industrial illness and injury.
      RWE npower has agreed to indemnify International Power on an after-tax basis to the extent of 50% of any liability that the Company may incur whether directly or indirectly as a consequence of those proceedings to the extent such liability is not insured by Electra Insurance Limited.
      In 1994 separate complaints were made by the National Association of Licensed Opencast Operators (NALOO) and the South Wales Small Miners’ Association (SWSMA) to the European Commission against the Company, PowerGen plc, British Coal Corporation and HM Government. The complaint alleges violations of EU Competition law arising out of the coal purchasing arrangements entered into by the CEGB prior to 1 April 1990 and requests the Commission to find that the CEGB’s practices violated EU law. NALOO and SWSMA allege that such a finding would be grounds for a claim for damages in the English Courts by their respective members. The Commission ruled on the complaint in 1998 and did not make any findings against the Company at that time. Appeals against the Commission’s findings were brought by NALOO and SWSMA. The SWSMA appeal was initially ruled out of time, but on appeal, a faction was allowed to proceed. Progress with this claim will be influenced by the outcome of the NALOO appeal. At first instance, the European Court ruled that the Commission is under an obligation to investigate the complaint by NALOO. The Company, PowerGen plc, British Coal Corporation and the Commission appealed against the ruling to the European Court of Justice which delivered a judgment on 2 October 2003 for the main part dismissing the appeal. In its judgment, the Court

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decided that the Commission has the power to investigate and the matter is now with the Commission for consideration. It is not practicable to estimate legal costs or possible damages at this stage.
      RWE npower has agreed to indemnify International Power on an after-tax basis to the extent of 50% of any liability that the Company may incur whether directly or indirectly as a consequence of those proceedings.
      The Directors are of the opinion, having regard to legal advice received, the Group’s insurance arrangements and provisions carried in the balance sheet, that it is remote that the matters referred to above will, in aggregate, have a material effect on the Group’s financial position, results of operations or liquidity.
Regulation
      Our business is subject to extensive regulation by governmental agencies in each of the countries in which we operate. Regulation that applies specifically to our business generally covers three areas: regulation of energy markets; environmental regulation; and regulation of health and safety. The degree of regulation to which we are subject varies according to the country where a particular project is located, and may be materially different from one country to another. In some countries, such as the United States and Australia, there are various additional layers of regulation at the state, regional and/or local level. In countries such as these, the degree of state, regional and/or local regulation may also be materially different for projects within that particular country if the projects are located in different states and/or localities.
      The development of an Iberian wholesale power market is an objective for both the Portuguese and Spanish Governments but a number of issues arising from the need to establish a common regulatory framework and significant M&A activity are delaying the implementation of that market. We maintain our view that the Portugese government intends to preserve the value in our PPA contracts at our assets in this region and therefore we expect to be kept economically whole through this process.
      The allocation of emissions certificates, under the ETS, was confirmed by the Portuguese environmental authorities for Tejo Energia and Turbogás in accordance with our expectation, reflecting the historical levels of emissions at both plants. Any costs or gains arising from this Scheme are passed through to the Power Purchaser in accordance with the terms of the existing PPAs. Tejo Energia’s plans to comply with the new emissions limits, arising from the implementation of LCPD and IPPC, are progressing well and the new equipment is expected to be operational during 2008. Pego is neutral to this capital and operational cost, as all costs are fully recoverable under the terms of the existing PPA.
      The UK Government’s revised Phase 1 National Allocation Plan, published in February 2005 and detailing carbon credit allocations for the period 2005-07, was rejected by the EU in April 2005. Allocations were therefore made according to the UK’s provisional submission made in 2004 (3.34 million tonnes per annum of CO2 for Rugeley, 0.94 million tonnes for Deeside, and 2.48 million tonnes for Saltend). A subsequent appeal by the UK Government through the Court of First Instance resulted in the EU being forced to reconsider this decision. However they once again rejected the revised plan. The UK Government announced in April 2006 that it was not prepared to take further legal action, thereby confirming the provisional allocations as final.
      In December 2005 International Power announced its intention to install Flue Gas Desulphurisation (FGD) equipment at its 1,000 MW coal fired Rugeley power station in the UK, and to opt-in to the European LCPD. Coal fired plants had the option of either fitting FGD and having greater operational flexibility, or choosing to opt out of the directive saving significant capital expenditure, but being forced into a limited operating schedule from January 2008. This decision was primarily based on the anticipated longer term CO2 allocations for coal fired plant in the UK under Phase 2 of the EU Emissions Trading Scheme.
      The UK Government published a draft allocation methodology for generators in April 2006 indicating that opted-in plant will receive nearly double the level of allowances of opted-out plant under Phase 2. It is currently consulting more widely on its draft National Allocation Plan for Phase 2. It is expected that this will be finalised by the end of 2006. With respect to Saltend and Derwent, a new CHP sector is proposed which is expected to award business as usual allocations for the CHP capacity at these stations.

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      In June 2005, the Competition Directorate of the European Commission launched inquiries into the European Gas and Electricity markets. International Power submitted formal questionnaire responses to the inquiry along with all other market participants. Following its survey, the Commission reported that it had identified significant competition issues in many of the EU’s member states (but not the UK) and that it would be considering further action against some of the major European incumbent utilities in order to improve market access and levels of competition.
      The Czech National Allocation Plan (NAP) was approved by the EU in April 2005 and the Czech government set out the respective sector/company allocations on the 20 July under government directive 315. All IPR owned assets in the Czech Republic were granted CO2 allowances in excess of their needs and most of the expected surplus for years 2005 and 2006 has already been sold. Discussions concerning NAP 2 allocations are expected to commence post national elections (June 2006) with national proposals expected to be submitted to Brussels by the end of 2006/early 2007.
      While we believe our existing projects have the requisite approvals and that we operate our business in compliance with applicable laws, we remain subject to a varied and complex body of laws and regulations that both public officials and private parties may seek to enforce.
Environment, Health and Safety Review
      During 2005, our Health, Safety and Environment Committee was active through inter-regional working groups to harmonise Group-wide policies and met formally four times to manage and communicate health, safety and environmental (HSE) issues. The formal Committee supports the more regular local HSE committee meetings. Continuous communication with individual assets is carried out on an ‘as required’ basis. HSE issues were reported, through the CEO, at main Board meetings throughout the year.
      As well as monitoring performance, the Health, Safety and Environment Committee identifies and pools best practice, and encourages employees to learn from the experience of their colleagues around the world.
      A continuing target for 2006, carried over from 2005, is to review the CSR credentials of our key EPC suppliers. At the same time we work with suppliers to ensure that they understand and can respond to our own CSR policies.
      We recognise that regulatory requirements and local cultures differ widely but we are also keen to ensure that all employees are aware of the most appropriate health and safety principles in order to ensure their individual safe behaviour. In 2005 we achieved our target of progressively implementing behavioural safety training systems at a number of our locations. We are now confident that we will be able to build on this achievement and have set a 2006 target to implement behavioural safety initiatives across all of our assets, globally.
      By evaluating initiatives and incidents from inside and outside the Company, we are able to refine our health and safety systems. Information is distributed Company-wide as Health and Safety Information Memoranda. Lessons learned are used to promote awareness and encourage best practice.
      A key driver of Company policy in the last two years has been to establish a cohesive and consistent approach to HSE management. During 2005, the majority of our assets improved their environmental management systems by moving towards full ISO14001 certification, a programme that will continue to be promoted and encouraged in 2006. A new target for 2006 is to ensure that all International Power assets are certified or are at least working towards certification with the International Health and Safety standard OHSAS 18001 or directly equivalent country standard e.g. AS/ NZS 4801 by the end of the year. Progress reports against both these targets will be monitored at the Company’s quarterly HSE meetings.
Item 5. Operating and Financial Review and Prospects
      You should read the following discussion and analysis of our financial performance together with our consolidated financial statements and the notes thereto included elsewhere in this annual report.

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Overview
      We are an international wholesale power generator and developer with interests in 18 countries across four continents. As at 6 March 2006, our operating power plants, located in Australia, Bahrain, Czech Republic, Indonesia, Italy, Malaysia, Oman, Pakistan, Puerto Rico, Portugal, Spain, Thailand, Turkey, the UAE, the United Kingdom, and the United States, had a total capacity of 28,793 megawatts, or MW, gross (one million watts equal one megawatt) or 16,642 MW net and have further capacity of 5,562 MW gross, or 1,729 MW net under construction in Asia and the Middle East. As at 6 March 2006, our net capacity in operation and under construction was 18,371 MW.
      We generate electricity from gas, oil, coal, wind and water (hydro). We also engage in complementary activities such as mining coal and transporting gas by pipeline in Australia, desalinating water in the Middle East and providing steam for district heating systems in Europe. We sell much of the power we generate to single customers pursuant to fixed price long-term offtake agreements, known as power purchase agreements or PPAs. However, a significant portion of the power we generate, particularly power generated by our facilities in the United States, the United Kingdom and Australia is sold to customers through competitive merchant markets.
Presentation of Financial Information
      We prepare our financial statements in accordance with Adopted IFRS, which differs in certain significant respects from US GAAP. This is our first annual report and accounts to be presented under Adopted IFRS. Comparative information, which was originally presented under UK GAAP in our annual report on Form 20-F for the year ended 31 December 2004, has been restated on the same basis. Information relating to the nature and effect of such differences as they apply to us is summarised in note 43 to our consolidated financial statements included elsewhere in this document.
      The financial information included in the financial statements has been prepared on the basis of all applicable IFRSs issued by the International Accounting Standards Board as adopted by the EU (Adopted IFRSs). As required by IFRS 1 (First-time Adoption of International Financial Reporting Standards) the Group is required to explain how the transition from UK GAAP to IFRS has affected its reported financial position and financial performance. In accordance with these requirements we set out in note 43 to the financial statements:
  •  a reconciliation of equity reported under UK GAAP to equity under Adopted IFRS as at 1 January 2004 and 31 December 2004;
 
  •  a reconciliation of the profit reported under UK GAAP for the year ended 31 December 2004 to profit reported under Adopted IFRS.
      IFRS 1 states that an entity shall use the same accounting policies in its opening IFRS balance sheet, throughout all periods presented in its first IFRS financial statements and for all periods presented thereafter. In order to facilitate the transition to IFRS, it also allows adoption options and exemptions in the initial application of certain IFRSs. The Group has applied the following options (which are outlined in note 1 to the financial statements):
  •  Business combinations prior to 1 January 2004 have not been restated (in accordance with IFRS 3 Business Combinations). As a result, the carrying amount of goodwill under UK GAAP at 31 December 2003 is the deemed cost of goodwill at 1 January 2004 for Adopted IFRS purposes. The impact of this election (not restating business combinations prior to 1 January 2004 in accordance with IFRS 3 Business Combinations) is that the allocation of fair values between tangible assets, intangible assets, goodwill and other assets and liabilities may have been different and thus the subsequent amortisation charges may also have been impacted.
 
  •  The Group elected to measure its property, plant and equipment of its US merchant fleet, owned by American National Power, at the date of transition to Adopted IFRS at its fair value and use that fair value as its deemed cost at that date. The US merchant fleet is still subject to impairment testing following indications of impairment but, following this election, an impairment reversal will not arise from the recoverable amount of the assets exceeding their carrying values as it is not group policy to revalue

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  property, plant and equipment. The subsequent depreciation charge is also affected by the extent to which an impairment reversal is or is not required.
 
  •  Cumulative foreign exchange differences in reserves have been deemed to be zero at 1 January 2004. Because the cumulative amount of exchange differences arising on the retranslation of foreign operations are recorded in equity rather than the income statement, and because the cumulative exchange difference is recycled to the income statement on disposal of such a foreign operation, the profit or loss on disposal of a foreign operation will differ to the extent foreign exchange differences have or have not been recognised on the transition to Adopted IFRS at 1 January 2004.
 
  •  The Group has recognised the pension schemes’ surpluses and deficits in full as at 1 January 2004, with a corresponding adjustment to reserves. The Group has used the ‘corridor’ method to recognise actuarial gains and losses arising after the date of transition. If the Group had not recognised all the cumulative actuarial gains and losses at the date of transition to Adopted IFRS but instead only recognised those actuarial gains and losses consistent with the on-going application of the ‘corridor’ method, then gains and losses recorded in the income statement (recognised and amortised on a straight line basis over the average remaining service life of the employees) during 2004 and thereafter may have been different.

      In accordance with the exemptions available under IFRS 1, the Group has decided not to restate the comparatives to take into account the requirements of the accounting standards applicable to financial instruments (IAS 32 and IAS 39). Hence, for 2004 the information presented in the financial statements in respect of financial instruments is measured, recorded and presented in accordance with UK GAAP. Derivatives have been recognised at fair value at 1 January 2005, with a corresponding charge or credit to reserves. The adjustments made to the balance sheet at 1 January 2005, to reflect the adoption of IAS 32 and IAS 39, are also outlined in detail in note 43 to the financial statements.
      Those areas which have the most significant impact on the Group’s reported position and financial performance during 2004 and as at 1 January 2005 under IFRS compared with the previously reported results under UK GAAP are:
  •  the cessation of goodwill amortisation;
 
  •  differences in accounting for deferred tax, principally with respect to fair value adjustments on acquisition;
 
  •  dividends declared and not approved at the balance sheet date — these are not included as liabilities in the financial statements;
 
  •  the present value of net pension scheme obligations recognised on balance sheet (excluding actuarial gains and losses not recognised);
 
  •  the recognition of a charge to the income statement for share-based payments;
 
  •  split accounting of convertible debt in order to recognise both debt and equity components;
 
  •  recognition on the balance sheet at fair value of all qualifying derivatives;
 
  •  deferral of fair value mark to market gains and losses within hedging reserves for qualifying cash flow hedges.
      A detailed description of the IFRS transition adjustments is included in note 43 to the Group’s financial statements.
Critical Accounting Policies and Estimates
      We prepare our consolidated financial statements in compliance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board as adopted by the European Union. 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

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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 ongoing 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 IFRS 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.
      The list below 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 • correct revenue recognition policy based on the contractual arrangements in place and the allocation of the risks and rewards of ownership of the plant
 
• appropriate accounting treatment of receipts from contractors
 
Recoverable amount of property, plant and equipment • indications of impairment and the measurement of fair value using projected cash flows, together with risk adjusted discount rates, or other more appropriate methods of valuation
 
Fair values on acquisition • useful economic life and residual value of certain assets
 
• fair values of assets and liabilities acquired and hence how much of the purchase price is attributed to goodwill arising on acquisition of a business
 
Consolidation policy — amount of influence • extent of influence the Group is in a position to exercise over the operations, strategic direction and financial policies of entities in which it holds an equity stake
 
Items of income and expense that require separate disclosure — ‘exceptional’ items • items of income or expense, which are material by virtue of their nature and amount, which require separate disclosure. The Directors consider these items most appropriately disclosed as ‘exceptional’
 
Taxation • appropriate provisions for taxation taking into account anticipated decisions of tax authorities
 
• assessment of the ability to utilise tax benefits through future earnings
Income recognition
      The majority 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 its own power plants. These contracts typically fall within the definition of derivative financial instruments and where required have to be marked to market. 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 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.

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      When our power plants sell their output under long-term 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 purchase 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 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 and for operating leases the split between rental 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.
Recoverable amount of property, plant and equipment
      The original cost of greenfield developed power plant 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 turbines and related equipment are 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.
 
  •  Coal and hydro plant is considered on an individual basis.
      Management regularly considers whether there are any indications of impairment to carrying values of property, plant and equipment and other assets (e.g. the impact of current adverse market conditions). Impairment reviews 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 acquired assets and liabilities 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 accounts. 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.

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      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 or jointly controlled entity. 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 treat it as an associate or jointly controlled entity.
Exceptional items
      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 consider these items most appropriately disclosed as ‘exceptional’.
      All exceptional items are included under the appropriate income statement line item 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.
Taxation
      The level of tax provisioning is dependent on subjective judgement as to the outcome of decisions to be made by the tax authorities in the various tax jurisdictions in which we operate.
      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.
Factors Affecting Results of Operations
Cyclical Nature of Electricity Industry
      Our industry, particularly where merchant markets operate, is cyclical in nature. Different countries and geographic regions in which we operate have their own demand-supply cycles and there is no single global cycle. We seek to restrict the impact of the cyclical nature of the industry through the geographic diversity of our operations.
Seasonality
      We are at times subject to seasonality on a segment basis due to the effect of weather and other conditions on demand for electricity in the specific geographic regions in which we operate. Overall the first and last quarters are our strongest quarters, driven by the seasonal profile of our European and Australian portfolios. Where applicable, effects of seasonality are described in the following section entitled “Segment Comparative Performance”.
Effect of Market Prices
      We sell much of the power we generate to single customers pursuant to PPAs. However, a significant portion of the power we generate, particularly power generated by our facilities in the United States and the United Kingdom, is sold to customers through wholesale or merchant markets at prevailing market rates. During 2005, we sold the majority of our output from our generation facilities in North America, Australia and the United Kingdom on a merchant basis. Merchant sales are exposed to price fluctuations. Our trading operations can limit this exposure by entering into options, forward power sale agreements and fuel purchase contracts, known as hedges that fix the gross margin at which we sell output over the contracted period. In addition, we are able to utilise the peak load flexibility of a number of our plants, to take advantage of favourable price opportunities as they arise.
International Operations
      The international nature of our business subjects us to economic, political and business risks that have the potential to restrict the ability of our projects from making dividends or other distributions to us. We may not be

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fully capable of insuring against or otherwise mitigating these risks, which include currency exchange rate fluctuations, economic and political instability, currency repatriation, expropriation and unexpected changes in regulatory requirements.
      In particular, our operations in emerging markets expose us to economic, political and other risks that could have an adverse effect on our financial condition and results of operations. Emerging markets are typically less developed commercially and have significantly different social and political structures from those found in the United States or Western Europe. We believe there are currently no economic restrictions on the ability of our subsidiaries to transfer funds to us.
      Certain jurisdictions in which we conduct operations, such as Malaysia and Thailand, continue to apply exchange controls relating to the remittance of cash out of their respective countries. These controls have not had a material effect on our ability to conduct operations in these countries and we do not foresee that they will have a material effect in the near future, although the long-term impact of such controls is not predictable due to dynamic economic conditions that also affect or are affected by other regional or global economies.
Recent Developments
      The acquisition of Saltend was completed in July 2005 in a 70:30 partnership with Mitsui & Co., Ltd of Japan. Saltend is a 1,200 MW combined cycle gas turbine (CCGT) cogeneration plant located near Hull, England. The plant primarily sells its output in the England and Wales power market, and supplies approximately 7% of its power and steam output to the adjacent BP Chemicals site.
      In accordance with an agreement with the Australian Competition and Consumer Commission (ACCC), following the acquisition of the EME international generation portfolio in 2004, we sold the 300 MW Valley Power peaking plant in Victoria to Snowy Hydro in October 2005.
      In January 2006, International Power, together with partners Suez Energy International of France and Sumitomo Corporation of Japan, announced it had agreed to acquire the Al Hidd independent power and water project in Bahrain. Al Hidd is a 910 MW combined cycle gas turbine (CCGT) and 30 MIGD water desalination facility. An expansion is planned to build a new 60 MIGD desalination facility, which is expected to be in operation by the end of 2007. Financial close occurred in April 2006, and payment of the purchase price will be made in early July 2006.
      In April 2006 International Power plc’s wholly owned subsidiary, American National Power Inc., agreed to acquire the Coleto Creek Power generation facility from Topaz Power Group, a joint venture between Carlyle/ Riverstone and Sempra Generation (a subsidiary of Sempra Energy), for a total cash consideration of US$1.14 billion (£640 million). Coleto Creek Power is a 632 MW pulverised coal fired generation plant located in Texas. The acquisition is subject to regulatory approval and expected to complete in the third quarter of 2006.
      In May 2006, MMC Corporation Berhad announced that it intended to acquire the whole of Malakoff Berhad’s assets and liabilities for a total cash consideration of 9.3 billion Malaysian ringgit (MYR) (approximately £1.4 billion). MMC’s proposed offer to Shareholders represents a distribution of 10.35 MYR per share, a premium of 5.7% and 13.0% over the five-day and three-months weighted average price of Malakoff’s Shares. In respect of our 18% shareholding in Malakoff, this offer equates to approximately £250 million, which would be substantially above the book value for this asset. We have indicated that we are in principle receptive to this initiative by MMC.

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Results of operations
      The following table shows certain financial data from our consolidated income statement for the current period and the preceding financial period.
                           
    Year Ended 31 December
     
    2005(1)   2005   2004
             
    ($ in    
    millions,   (£ in millions,
    except per   except per share
    share data)   data)
Adopted IFRS — Group
                       
Revenue: Group and share of joint ventures and associates
    5,046       2,936       1,267  
Less: share of joint ventures’ revenue
    (531 )     (309 )     (144 )
Less: share of associates’ revenue
    (1,193 )     (694 )     (355 )
                   
Group revenue
    3,322       1,933       768  
Cost of sales — ordinary
    (2,690 )     (1,565 )     (637 )
Cost of sales — exceptional
    89       52        
                   
Cost of sales
    (2,601 )     (1,513 )     (637 )
                   
 
Excluding exceptional items
    632       368       131  
 
Exceptional items
    89       52        
                   
Gross profit
    721       420       131  
Other operating income — ordinary
    110       64       56  
Other operating income — exceptional
    100       58        
                   
Other operating income
    210       122       56  
Other operating expenses — ordinary
    (221 )     (129 )     (78 )
Other operating expenses — exceptional
                11  
                   
Other operating expenses
    (221 )     (129 )     (67 )
Share of results of joint ventures and associates
    340       198       113  
                   
 
Excluding exceptional items
    861       501       222  
 
Exceptional items
    189       110       11  
                   
Profit from operations
    1,050       611       233  
Disposal of investments — exceptional
    17       10       4  
Finance income
    91       53       30  
Finance expenses — ordinary
    (438 )     (255 )     (107 )
Finance expenses — exceptional
                (31 )
                   
Finance expenses
    (438 )     (255 )     (138 )
                   
Profit before tax
    720       419       129  
Income tax expense — ordinary
    (95 )     (55 )     (25 )
Income tax expense — exceptional
    (58 )     (34 )      
                   
Income tax expense
    (153 )     (89 )     (25 )
                   
Profit for the year
    567       330       104  
                   
Attributable to:
                       
Minority interests — ordinary
    77       45       8  
Minority interests — exceptional
                (2 )
                   
Minority interests
    77       45       6  
Equity holders of the parent — ordinary
    342       199       112  
Equity holders of the parent — exceptional
    148       86       (14 )
                   
Equity holders of the parent
    490       285       98  
                   
Earnings per share:
                       
 
Basic excluding exceptional items
    23.2 cents       13.5p       8.6p  
 
Basic including exceptional items
    33.3 cents       19.4p       7.5p  
 
Diluted excluding exceptional items
    22.3 cents       13.0p       8.5p  
 
Diluted including exceptional items
    31.8 cents       18.5p       7.4p  
Dividends per share:
    4.3 cents       2.5p        
      Following the implementation of IFRS, the Group has decided to continue with its separate presentation of certain items as exceptional. These are items which, in the judgement of the Directors, need to be disclosed

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separately, by virtue of their size or incidence in order for the reader to obtain a proper understanding of the financial information.
Segment Comparative Performance
      The table below sets forth our results of operations for our business segments for the periods indicated.
                                                 
            Share of        
        Joint Ventures    
    Subsidiaries   and Associates   Total
             
    Year Ended   Year Ended   Year Ended
    31 December   31 December   31 December
             
    2005   2004   2005   2004   2005   2004
                         
    (£ in millions)
Revenue
                                               
North America
    523       188       171       72       694       260  
Europe
    990       308       397       212       1,387       520  
Middle East
    24       24       43       30       67       54  
Australia
    369       223       51       8       420       231  
Asia
    27       25       341       177       368       202  
                                     
      1,933       768       1,003       499       2,936       1,267  
                                     
Profit/(loss) from operations (excluding exceptional items)
                                               
North America
    20       (29 )     29       8       49       (21 )
Europe
    205       52       55       45       260       97  
Middle East
    12       13       12       7       24       20  
Australia
    119       96       6       2       125       98  
Asia
    6       9       96       51       102       60  
                                     
Segmental profit from operations
    362       141       198       113       560       254  
Corporate costs
    (59 )     (32 )                 (59 )     (32 )
                                     
Profit from operations (excluding exceptional items)
    303       109       198       113       501       222  
Operating exceptional items
    110       11                   110       11  
                                     
Profit from operations (including operating exceptional items)
    413       120       198       113       611       233  
Disposal of investments — exceptional
                                    10       4  
Financing costs — ordinary
                                    (202 )     (77 )
Financing costs — exceptional
                                          (31 )
Income tax expense — ordinary
                                    (55 )     (25 )
Income tax expense — exceptional
                                    (34 )      
                                     
Profit for the financial year
                                    330       104  
                                     

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      Exceptional items included in profit from operations and disposal of investments (discussed on page 36) are analysed by business segment below:
                 
    Year Ended   Year Ended
    31 December   31 December
    2005   2004
         
    (£ in millions)
Exceptional items included in profit from operations
               
Europe
    110       11  
             
Exceptional items included in profit from operations
    110       11  
             
Exceptional items included in disposal of investments
               
Corporate
    3        
Asia
    7       4  
             
Exceptional items included in disposal of investments
    10       4  
             
      The segmental profit from operations after exceptional items for the year ended 31 December 2005 is £370 million for Europe (31 December 2004: Europe profit from operations of £108 million).
Trading Performance
Year ended 31 December 2005 is compared with the year ended 31 December 2004
NORTH AMERICA
                 
    Year Ended   Year Ended
    31 December   31 December
    2005   2004
         
    (£ in millions)
Revenue
    694       260  
             
Profit/(loss) from operations (pre-exceptional items)
    49       (21 )
Exceptional items
           
             
Profit/(loss) from operations
    49       (21 )
             
      Our North American business region consists of plants in Texas, Massachusetts, Georgia and Puerto Rico. The majority of our North American plants, namely Midlothian and Hays in Texas and Blackstone, Bellingham and a portion of the capacity at Milford in New England, sell their output in the wholesale market at prevailing rates, where we conduct energy trading activities. These are principally focused on selling the physical output of and purchasing fuel for our plants. However, we also perform limited proprietary trading that is subject to clear risk limits.
      The North American portfolio also includes plants that sell capacity and energy under long-term contracts. These contracted assets include Milford, where 56% of output is subject to a long-term contract, Hartwell and Oyster Creek. In addition, output from the EcoEléctrica plant is contracted under a long-term PPA until 2021.
      North America generated gross revenue of £694 million during the year ended 31 December 2005 (2004: £260 million), an increase of 167% compared to 2004. Our share of revenue from joint ventures in the region increased 138% during the year ended 31 December 2005 to £171 million compared with our share of revenue from joint ventures in the year ended 31 December 2004 of £72 million, due to the first full year of contribution from EcoEléctrica.
      Profit from operations amounted to £49 million compared to a loss from operations of £21 million for the year ended 31 December 2004. The increase of £70 million reflects the improvements in the Texas and New England markets and the acquisition of EcoEléctrica.

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      Operating costs consist of both fixed operating costs, such as depreciation, payroll and property taxes, and variable operating costs, such as fuel costs. These costs have increased in 2005, compared to 2004, due to the increase in output in Midlothian, de-mothballing of the Hays plant in Texas in the spring of 2005 and the acquisition of Eco Eléctrica in Puerto Rico.
      The Texas power market showed further signs of recovery during 2005 as pricing levels increased from the low levels in 2003 and 2004. Market prices improved driven by the demand for peak power (up 3% to 60,300 MW), a warm summer and a reduction in surplus generation following the retirements and mothballing of inefficient plant in 2004 and 2005. The current reserve margin in Texas is 24%. In Texas, gas fired generation typically sets the marginal price for power which means that the relatively high efficiency of our gas fired plants provides an economic advantage when gas prices are high.
      In New England, the underlying reserve margin is now estimated at 20%. In this market, oil fired generation has a greater role in determining the market price of power, therefore the relatively high efficiency of our gas fired plants does not enjoy the same benefits of a high gas price environment as in Texas. Overall, spark spreads showed a smaller recovery than we experienced in Texas. The first quarter of 2004 benefited from some very high, short duration, price spikes which lifted the full year spreads that year. Excluding this, the underlying spreads for 2005 were ahead of 2004.
      In January 2006 the New England system operator reported progress on the establishment of a capacity payment mechanism (a Forward Procurement Market instead of the previously proposed LICAP system). The details of the proposed capacity market are expected to be disclosed in Q4 2006. This is a positive development for the New England market and is designed to ensure improved security of supply and encourage the provision of reliable generation, particularly at times of peak demand.
EUROPE
                 
    Year Ended   Year Ended
    31 December   31 December
    2005   2004
         
    (£ in millions)
Revenue
    1,387       520  
             
Profit from operations (pre-exceptional items)
    260       97  
Exceptional items
    110       11  
             
Profit from operations
    370       108  
             
      Our European business region consists of plants in the United Kingdom, the Czech Republic, Spain, Portugal, Turkey and Italy.
      Europe generated revenue of £1,387 million (2004: £520 million), an increase of 167%, and profit from operations of £370 million, up from £108 million in 2004. Key contributors to this growth in earnings were First Hydro, ISAB, Turbogás and Saltend, together with a strong improvement in earnings at Rugeley. Spanish Hydro, International Power Opatovice (previously called EOP), Pego and Uni-Mar also performed well.
      Profit from operations for the year ended 31 December 2005 includes exceptional gains of £110 million, consisting of the impairment reversal at Rugeley and the compensation in relation to the tolling agreement with TXU. Profit from operations for the year ended 31 December 2004 included an exceptional gain of £11 million, which is a release of a provision relating to a guarantee following the sale of our investment in Elcogas.
      Revenue from joint ventures and associates for the year ended 31 December 2005 of £397 million increased 87% from £212 million for the year ended 31 December 2004.
      Operating costs have increased accordingly, due to the first full year of contributions from the acquired EME assets and the first part year contribution from Saltend.

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      First Hydro delivered a strong contribution to profits with a robust performance in both the UK wholesale electricity and balancing services markets. High levels of availability and reliability in 2005 once again enabled First Hydro successfully to provide reserve capacity and rapid response services in the market.
      In the UK, the rising oil price was a key factor in driving up the price of gas which, in turn, generally sets the price of power. Whilst this helped improve financial performance at Rugeley (which is coal fired with relatively stable fuel costs), underlying spreads for gas fired generation have not improved to the same extent.
      As a result of the improvement in outlook for dark spreads, we performed a review of the carrying value of Rugeley which was impaired in 2002. As a consequence of this review, we fully reversed the remaining impairment at Rugeley of £52 million.
      In February 2006, we confirmed our intention to install flue gas desulphurisation (FGD) equipment at Rugeley. FGD equipment will allow Rugeley to reduce sulphur emissions and operate at a higher load factor. This decision was primarily based on the anticipated longer-term CO2 allocations for coal fired plant in the UK. We are currently negotiating an Engineering, Procurement and Construction (EPC) contract for this project.
      During 2005 Rugeley received £68 million in partial settlement in respect of our claim for compensation for the termination of the TXU tolling agreement in November 2002. A further £15 million was received in January 2006, taking total receipts to £83 million.
      The acquisition of Saltend was completed in July 2005 in a 70:30 partnership with Mitsui & Co., Ltd of Japan. Approximately 7% of the plant’s generating capacity and all of the plant’s steam output is contracted to BP Chemicals Limited until 2015 with the balance of the power output sold into the UK power market. As Saltend was acquired with a gas contract for its fuel supply, its fuel cost has been largely unaffected by the volatility of UK gas prices in the year. Saltend has delivered a strong financial performance.
      In Portugal, Turbogás and Pego continue to perform well with high availability and a high utilisation by the offtaker, REN. In December 2005, we acquired an additional 5% shareholding in the 600 MW Pego power plant (and small additional shareholdings in the associated fuel and O&M companies) from EdF for a consideration of £5 million, increasing our ownership to 50%, or 300 MW (net). International Power Opatovice delivered another good performance in 2005 due to a strong demand for power and district heating.
      The acquisition of a 75% shareholding in Turbogás was completed in November 2004, followed by the purchase of a further 5% interest in the plant in January 2005. Following the exercise by EdP of its option to increase its shareholding in the plant from 20% to 40%, our final ownership in Turbogás totals 60% (net capacity of 594 MW). Also, in 2004 we acquired interests in four plants in Europe as part of the EME Portfolio, namely First Hydro, Derwent, ISAB and Spanish Hydro.
MIDDLE EAST
                 
    Year Ended   Year Ended
    31 December   31 December
    2005   2004
         
    (£ in millions)
Revenue
    67       54  
             
Profit from operations (pre-exceptional items)
    24       20  
Exceptional items
           
             
Profit from operations
    24       20  
             
      Our Middle East business region consists of a 65% interest in Al Kamil in Oman, a 20% interest in Shuweihat in the UAE, a 40% interest in Al Hidd in Bahrain (acquired in 2006) and a 20% interest in Umm Al Nar, also in the UAE. The region’s entire output is contracted under long-term power purchase (or power and water purchase) agreements, primarily with the local government or with government entities (such as the Abu Dhabi Water & Electricity Company).

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      Revenue in the Middle East increased to £67 million during the year ended 31 December 2005 (2004: £54 million), a 24% increase, and profit from operations increased to £24 million from £20 million in 2004, a 20% increase. These increases were mainly due to the first full year of operation at Shuweihat in the UAE, where the overall commercial availability for both power and water was at a very high (99%) level.
      Operating costs have shown a corresponding increase due to the first full year of operations at Shuweihat.
      The existing plant at Umm Al Nar in the UAE also delivered high levels of availability for power and water, both in excess of 90% and well above its Power and Water Purchase Agreement (PWPA) requirements. In relation to plant expansion, all three new gas turbines have been fired and synchronised with the grid in open-cycle mode and full commercial operation is expected in the second half of 2006.
      Construction at the four Tihama sites in Saudi Arabia, for Saudi Aramco — Ju’aymah, Ras Tanura, Shedgum and Uthmaniyah, together comprising 1,074 MW and 4.5m lbs/hr of steam — is progressing well. Uthmaniyah is at the most advanced stage of construction and is expected to commence operation in the first half of 2006. Overall, the Tihama construction programme is on track to conclude in the last quarter of 2006, with the four plants progressively reaching commercial operation throughout this year.
      In Qatar, the financing for the Ras Laffan B (1,025 MW, 60 MIGD) power and water plant was completed in April 2005. The financing was strongly supported by a consortium of major local and international banks. International Power’s equity contribution amounts to US$72 million (£42 million) for its 40% share in this project. Construction commenced in the first half of 2005 with final completion expected in 2008.The output from Ras Laffan B is contracted to Qatar General Electricity and Water Corporation (KAHRAMAA) under a 25-year PWPA.
      International Power now has six projects in five countries in the Middle East region with a project enterprise value of some US$6.5 billion (£3.8 billion) and an equity commitment of around US$400 million (£233 million).
AUSTRALIA
                 
    Year Ended   Year Ended
    31 December   31 December
    2005   2004
         
    (£ in millions)
Revenue
    420       231  
             
Profit from operations (pre-exceptional items)
    125       98  
Exceptional items
           
             
Profit from operations
    125       98  
             
      Our Australian business consists of the Hazelwood and the Loy Yang B plants in Victoria, the Pelican Point plant and Canunda Wind farm in South Australia, together with the Synergen peaking units dispersed throughout South Australia and the Kwinana plant in Western Australia. We have two joint ventures in Australia, the SEA Gas pipeline, which is a 687 km gas pipeline from Victoria to South Australia and EnergyAustralia, an electricity and gas retail operation in Victoria and South Australia.
      In accordance with an undertaking to the Australian Competition and Consumer Commission (ACCC), we sold the 300 MW Valley Power peaking plant in Victoria to Snowy Hydro in October 2005. Our generation capacity in Australia now totals 3,149 MW (net), predominantly in Victoria and South Australia where our market share of capacity is now approximately 25% and 24% respectively. Our market share of the national electricity market generation is now approximately 9%. We generally sell our output in the National Electricity Market predominantly in the Victoria and South Australia “regions” on a rolling basis, ensuring we are forward contracted for one to three years. For 2006, in excess of 80% of expected merchant output has been contracted.
      Revenue in Australia rose to £420 million during the year ended 31 December 2005 (2004: £231 million), an increase of 82%. Profit from operations increased to £125 million (2004: £98 million), an increase of 28%,

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reflecting contributions from acquisitions and development projects, principally Loy Yang B, Kwinana, EnergyAustralia and Canunda.
      Operating costs have increased substantially, due to Loy Yang B and Kwinana being included for the full year for the first time and, as expected, profit from operations from Hazelwood was down on 2004 due to the completion of contracts placed in prior years. Hazelwood’s average achieved price in 2005 was once again ahead of the underlying market price for electricity.
      Canunda, our new-build 46 MW wind farm in South Australia, successfully started commercial operation in March 2005 and is fully contracted under a long-term PPA. Canunda has 23 wind turbines of 2 MW each, currently the largest wind turbines in Australia, and can produce enough power to supply 30,000 homes.
      At Hazelwood, our largest brown coal fired generator in Victoria, the development of our existing open cast mine progressed on plan. Over the last three years, we have progressively been developing a large-scale infrastructure to mine a new area called the West Field, and in June 2005 a milestone was reached where 100% of the coal used by Hazelwood power station (namely 17 million tonnes per annum) was sourced from this new coal field. In September 2005, an agreement was reached with the Victorian government for a mining licence variation to the new West Field mine which allows access to additional coal and in return Hazelwood undertook to limit its life-time emission of CO2 to 445 million tonnes. This is an important step to provide long-term security of supply of coal for Hazelwood.
      International Power and EnergyAustralia, an experienced retailer in the Australian market, established a 50:50 partnership to provide electricity and gas to retail customers predominantly in Victoria and South Australia. Since formation in July 2005, this retail partnership has increased the number of power and gas accounts from 175,000 to 275,000. This additional route to customers provides a partial hedge for our generation assets in Australia.
ASIA
                 
    Year Ended   Year Ended
    31 December   31 December
    2005   2004
         
    (£ in millions)
Revenue
    368       202  
             
Profit from operations (pre-exceptional items)
    102       60  
Exceptional items
           
             
Profit from operations
    102       60  
             
      Our Asia portfolio consists of plants in Pakistan, Malaysia, Thailand and Indonesia. In February 2005, we completed the acquisition of a 40% shareholding in Uch, a 586 MW gas fired plant in Pakistan, from EON UK plc. The entire output from the plant is sold to WAPDA under a long-term PPA until 2023.
      Revenue in Asia increased to £368 million for the year ended 31 December 2005 from £202 million in 2004, an increase of 82%, with a corresponding increase in profit from operations to £102 million from £60 million in 2004, an increase of 70%. This growth in revenue and earnings is primarily attributable to Paiton, which contributed its first full year of profits since its acquisition in December 2004. In 2005, Paiton consistently generated high levels of output and achieved availability levels significantly in excess of its PPA requirements.
      HUBCO and KAPCO in Pakistan continue to deliver a good performance. Both companies are listed on the Karachi Stock Exchange and as at 3 March 2006 the market value of International Power’s shareholding in HUBCO and KAPCO totalled £186 million. Uch, in Pakistan, delivered a solid contribution since acquisition in February 2005.
      At Thai National Power (TNP), we are expanding our 120 MW plant by 23 MW to meet growing local demand for power. The construction of the expansion is expected to complete by the second half of 2006, and we have already refinanced the existing debt to provide the necessary funding.

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      In April 2005, Malakoff acquired a further 19% shareholding in the 1,303 MW CCGT Lumut power plant. This increased Malakoff’s net installed capacity to 3,130 MW, which translates to net capacity of 567 MW for International Power.
           Exceptional Items
      We consider that items of income and 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. We label these items collectively as ‘exceptional items’.
Year ended 31 December 2005
      During the year ended 31 December 2005, net exceptional gains of £120 million were booked, comprising:
  •  £58 million compensation in respect of the tolling agreement with TXU;
 
  •  £52 million on the impairment reversal of Rugeley plant;
 
  •  £4 million profit on disposal of Tri Energy;
 
  •  £3 million profit on sale of land in Thailand; and
 
  •  £3 million profit on sale of shares in Interconnector UK.
      There is no tax charge on the profit on disposal of Tri Energy. The tax charge on all other exceptional items amounted to £34 million.
Year ended 31 December 2004
      During the year ended 31 December 2004, we recorded the following exceptional items:
  •  £11 million release of a provision relating to a guarantee following the sale of an investment in Elcogas;
 
  •  £4 million profit on the disposal of a further 4% share in HUBCO;
 
  •  £15 million charge to finance costs from the cessation of the interest rates swaps as part of the restructuring of the ANP debt facility; and
 
  •  £16 million charge to finance costs associated with debt raising and debt restructuring.
      There was no exceptional tax charge in 2004.
Other Costs
Corporate costs
      Our headquarters is in London, where corporate and business functions are based to support our worldwide operations. In addition, we operate regional business support offices in the UK, the US, Australia, the Czech Republic, Italy, Singapore and the UAE. These offices vary in size dependent on the scale of operations.
      Corporate costs at £59 million are £27 million higher than 2004. This is due to the significant growth and complexity of the Group, together with some costs which may not necessarily recur such as higher employee share scheme costs and a provision for certain CEGB legacy pension liabilities.

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Additional segmental information
      Because IFRS requires the results of joint ventures and associates to be presented on the face of the income statement after interest, taxation and minority interest in arriving at profit from operations, management believe that the following table, which presents the segmental analysis of profit from operations for joint ventures and associates before deducting interest, taxation and minority interest, is helpful to the readers’ understanding of the results of the company because the results of subsidiaries, associates and joint ventures are then presented on a comparable basis. This is also a form of presentation which is comparable to UK GAAP requirements with which the reader may be familiar. Profit from operations (including results from joint ventures and associates before interest, taxation and minority interest) is used by management to make asset performance comparisons.
                                                 
    Year Ended 31 December 2005   Year Ended 31 December 2004
         
        Share of Joint           Share of Joint    
        Ventures and           Ventures and    
    Subsidiaries   Associates   Total   Subsidiaries   Associates   Total
                         
    £ (in millions)
Profit from operations (including results from JVs and associates before interest, tax and minority interest and excluding exceptional items)
                                               
North America
    20       43       63       (29 )     16       (13 )
Europe
    205       96       301       52       61       113  
Middle East
    12       27       39       13       16       29  
Australia
    119       10       129       96       6       102  
Asia
    6       169       175       9       80       89  
                                     
      362       345       707       141       179       320  
Corporate costs
    (59 )           (59 )     (32 )           (32 )
                                     
      303       345       648       109       179       288  
                                     
Reconciliation of segment result between IFRS and alternative presentational format
      Because IFRS requires the results of joint ventures and associates to be presented on the face of the income statement after interest, taxation and minority interest in arriving at profit from operations, management believe that the following table, which presents the adjustments (add backs) to the total profit from operations which are required to obtain profit from operations including results from joint ventures and associates before interest, taxation and minority interest, is helpful to management’s and the readers’ understanding of our results. This is because the results of subsidiaries are presented on a comparable profit before interest, taxation and minority interest basis within profit from operations. It is also the form of presentation with which the reader may be familiar (as it is the requirement of UK GAAP to present the results of operations of joint ventures and associates before interest, taxation and minority interests). Profit from operations (including results from joint ventures and associates before interest, taxation and minority interest) is used by management to make asset performance comparisons.
                 
    Year Ended   Year Ended
    31 December   31 December
    2005   2004
         
    £ (in millions)
Profit from operations (excluding exceptional items)
    501       222  
Add back:
               
Share of JVs’ and associates’ interest
    90       46  
Share of JVs’ and associates’ taxation
    56       17  
Share of JVs’ and associates’ minority interest
    1       3  
             
Profit from operations (including results from JVs and associates before interest, tax and minority interest)
    648       288  
             

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Effective tax rate and interest cover ratio (pre-exceptional items)
      Our management believe that the following table, which presents adjustments to the finance expense, income tax expense and minority interests by adding back the respective amounts relating to joint ventures and associates, allows the readers to obtain a better understanding of the effective tax rate and interest cover ratio. Without this re-presentation, the reader would not be able to ascertain the total consolidated income tax expense or finance expense of the Group because the interest, taxation and minority interests of joint ventures and associates are, in accordance with IFRS requirements, subsumed within profit from operations. The effective tax rate, following adjustment for joint ventures’ and associates’ interest, taxation and minority interests, is used by management in its internal financial reporting, budgeting and planning.
                 
    Year Ended   Year Ended
    31 December   31 December
    2005   2004
         
    £ (in millions)
Profit from operations (excluding exceptional items)
    501       222  
Add back:
               
Share of JVs’ and associates’ interest
    90       46  
Share of JVs’ and associates’ taxation
    56       17  
Share of JVs’ and associates’ minority interest
    1       3  
             
Profit before total interest and tax expense
    648       288  
Total net interest expense (including share of JVs and associates)
    (292 )     (123 )
             
Profit before total tax expense
    356       165  
Total income tax expense (including share of JVs and associates)
    (111 )     (42 )
             
Profit after tax
    245       123  
Total minority interest (including share of JVs and associates)
    (46 )     (11 )
             
Profit attributable to the equity holders (excluding exceptional items)
    199       112  
             
Effective tax rate
    31 %     25 %
Interest cover ratio
    2.2 x     2.3 x
Net interest
      Net interest payable during the year ended 31 December 2005 was £202 million (excluding exceptional items), as compared with £77 million (excluding exceptional items) during the year ended 31 December 2004. This is mainly due to the impact of additional debt relating to the EME, Turbogás and Saltend acquisitions. 2004 also benefited from interest income earned on cash reserves held in contemplation of the EME and Turbogás acquisitions.
      Interest payable during the year ended 31 December 2004 included an exceptional interest charge of £31 million. The exceptional interest charge in 2004 comprises a £15 million charge from the cessation of the interest rate swaps as part of the restructuring of the ANP debt facility and £16 million of costs associated with debt raising and debt restructuring.
      Consolidated interest cover (excluding exceptional items) during the year ended 31 December 2005 was 2.2 times, as compared with 2.3 times during the year ended 31 December 2004. Interest cover is calculated by dividing profit before total interest and tax expense (excluding joint ventures’ and associates’ interest, tax and minority interest) by the total net interest expense (including joint ventures’ and associates’ interest). The Directors consider it appropriate to calculate interest cover in this way, as joint ventures and associates constitute a significant share of our business.

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Taxation
      The tax charge (excluding the tax effect of exceptional items) at £55 million is £30 million up on the 2004 charge. This is mainly due to higher profitability and an increase in the effective tax rate from 25% to 31%. This higher tax rate reflects the tax profile of the EME portfolio and the reducing benefit of foreign tax holidays.
Liquidity
      The summarised, reclassified presentation of the movement in Group net debt is set out below:
                 
    Year Ended
    31 December
     
    2005   2004
         
    (£ millions)
Profit for the year (post exceptionals)
    330       104  
Adjustment for non-cash items (see note below)(1)
    180       91  
Dividends received from joint ventures and associates
    92       69  
Movements in working capital
    (21 )     3  
Capital expenditure — maintenance
    (72 )     (59 )
Other cash movements
    3        
Tax and interest paid
    (227 )     (104 )
             
Free cash flow
    285       104  
Finance costs — exceptional
    (5 )     (26 )
Refinancing costs capitalised on acquisition debt
    (7 )     (22 )
Capital expenditure for growth projects
    (188 )     (158 )
Returns from investments/capital expenditure — other financial investments
    48       (61 )
Acquisitions
    (571 )     (1,195 )
Disposals
    211       17  
Receipt from TXU administrators — exceptional
    58        
Dividends paid
    (37 )      
Proceeds from share/rights issue
    2       286  
Funding from minorities
    80       165  
Foreign exchange and other
    (181 )     62  
             
Increase in net debt
    (305 )     (828 )
Opening net debt
    (2,745 )     (692 )
Transitional adjustment on first time adoption of IAS 39
    44        
Net cash/(debt) on acquisition of subsidiaries
    27       (1,225 )
             
Closing net debt
    (2,979 )     (2,745 )
             
 
(1)  Non-cash items include income statement charges for interest, tax, depreciation, the share of profit of joint ventures and associates, the exceptional profit on the TXU settlement and the reversal of Rugeley impairment.
      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. The Directors consider free cash flow to be an appropriate indicator of cash generating performance as it measures the cash generated from operating activities, excluding those cash flows relating to exceptional items.

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      Free cash flow for the year ended 31 December 2005 was £285 million, an increase of £181 million compared to 2004. This increase reflects the underlying profitability of the assets acquired in 2004 and 2005 together with improving margins in the UK and US merchant markets.
      Dividends from joint ventures and associates of £92 million are up £23 million from 2004, reflecting the portfolio expansion.
      Capital expenditure for growth projects at £188 million principally comprises spend on the Tihama project in Saudi Arabia, together with the Hazelwood West Field mine extension and the completion of the Canunda wind farm project.
      Acquisitions of £571 million in 2005 mainly relates to Saltend, together with the retail partnership with EnergyAustralia and some final spend relating to the IPM acquisition. Disposals of £211 million relate to the sale of Tri Energy, Italian Wind and Valley Power, together with the sale of 20% of Turbogás relating to EdP pre-emption rights. Foreign exchange and other includes an exchange charge of £160 million on retranslation of net debt balances held to finance our overseas investments, which have increased by a similar amount.
      In June 2005 we took the opportunity to refinance our existing corporate revolving credit facility of US$450 million to increase the size to US$640 million, extend the tenure to June 2008 (with the option to extend for a further two years, subject to agreement by the bank syndicate) and improve the commercial terms.
Capital Resources
      We are of the opinion that our working capital is sufficient for our present requirements.
      The following table shows our net debt position as at 31 December 2005 and 2004.
                 
    2005   2004
         
    (£ millions)
Cash and cash equivalents
    620       565  
Assets held for trading
    52       47  
Convertible bonds
    (125 )     (158 )
Other bonds
    (445 )     (449 )
Secured bank loans and preferred equity
    (3,081 )     (2,750 )
             
Net debt
    (2,979 )     (2,745 )
             
Year ended 31 December 2005
      The above net debt of £2,979 million excludes the Group’s share of joint ventures’ and associates’ net debt of £1,625 million (2004: £1,285 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 Directors are satisfied that we have adequate resources to continue in operation for the foreseeable future. Our credit facilities form part of these resources and we have sufficient credit facilities in place to fund and support adequately existing operations and to finance the purchase of new assets. These facilities comprise a revolving credit facility and convertible bond. The revolving credit facility of US$640 million (£373 million) expires in June 2008 but can be extended by a further two years subject to bank approval. The convertible bond of US$252 million (£125 million) matures in August 2023 but with bond holders having the right to ‘put’ the bond back to the Group in August 2010, 2013, 2018 and 2023. In addition, the Group has uncommitted bilateral credit lines from various banks at its disposal at the corporate level.
      The remaining portion of the 2% convertible bond of US$51 million (£29 million) matured in November 2005 and was fully repaid at a redemption price of 112.4% of its principal amount.

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Year ended 31 December 2004
      The above net debt of £2,745 million excludes the Group’s share of joint ventures’ and associates’ net debt of £1,285 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 large year-on-year increase in net debt is principally due to the acquisition of the EME portfolio.
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 asset or intermediate holding company level, wherever that is practical.
      During 2005 an additional £275 million of non-recourse debt was secured in relation to the financing of Saltend. This was more than offset by a reduction in debt of £185 million relating to the disposal of assets, planned principal repayments of £56 million and TXU proceeds of £58 million which were used to repay non-recourse debt at Rugeley. Foreign exchange and other non-cash movements increased the sterling value of non-recourse debt by £160 million, principally due to the strengthening of the US dollar during 2005.
      In July 2004, the ANP facility was successfully restructured and refinanced and the maturity period of the debt extended to 2010. In addition, an interest ‘roll-up’ was agreed on $399 million (£222 million) of the loan amount, which lowers the cash interest burden on the business by allowing interest obligations to be rolled over until the assets generate improved cash flow. As part of this debt restructuring, International Power agreed to provide, over two years, new funds of $175 million (£97 million) for our US business. The restructuring allowed for a reduction in International Power’s credit support of trading activity to $100 million (£55 million) from $150 million (£83 million). This restructuring, together with the other agreed terms, provides a stable and long-term capital structure for our US business and was a significant achievement through which we retained 100% equity ownership of the US merchant assets. The acquisition of the EME Portfolio in December 2004 resulted in a significant increase in net debt.
Corporate and Group debt
      During 2005 both Standard & Poor’s and Moody’s reviewed the credit rating at corporate level. Standard & Poor’s maintained the rating of BB-, but upgraded the outlook from negative to stable and Moody’s maintained its rating of B2 with stable outlook. In January 2006 a rating from Fitch was issued of BB with stable outlook.
      On 31 December 2005 we had aggregated debt financing of £3,651 million denominated principally in US dollars, Australian dollars, sterling, euro, Czech koruna and Thai baht. Of this amount, £187 million is due for repayment in 2006, with the majority of the remaining balance due after 2010.

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Commitments and contingent liabilities
      The following table summarises our principal contractual financial obligations at 31 December 2005, certain of which are described in the consolidated financial statements and notes. Further analysis of these obligations is provided in notes 27 and 37 to the financial statements. We expect to be able to fund such obligations from ongoing operations and our existing or replacement resources and facilities.
                                         
    Payments Due by Period
     
        Less Than   1-3   3-5   More Than
Contractual Obligations   Total   1 Year   Years   Years   5 Years
                     
    (£ in millions)
Short-term debt
    187       187                    
Long-term debt
    3,291             320       783       2,188  
Preferred equity facility
    173             173              
Property leases
    54       6       6       15       27  
Capital commitments
    82       61       15       2       4  
Commitments for the supply and transportation of fuel
    604       96       85       97       326  
                               
Total contractual obligations
    4,391       350       599       897       2,545  
                               
      Our contingent liabilities at 31 December 2005 are described in note 38 to the consolidated financial statements. We monitor all contingent liabilities, including matters relating to the environment, via a process of consultation and evaluation which includes senior management, internal and external legal advisers and internal and external technical advisers. This process results in conclusions with respect to potential exposure and we make or adjust provisions accordingly by reference to accounting principles. Management believes that we have adequately provided for contingencies which are likely to become payable in the future. None of these contingencies is material to our financial condition, results of operations or liquidity.
Currency translation exposure
      Consistent with the majority of other international companies, the results of the Group’s foreign operations are translated into sterling at the average exchange rates for the period concerned. The balance sheets of foreign operations are translated into sterling at the closing exchange rates. In order to hedge the net assets of foreign operations, borrowings are generally in the same currency as the underlying investment. The Group aims to hedge a reasonable proportion of its non-sterling assets in this way.
      It is our policy not to hedge currency translation through foreign exchange contracts or currency swaps.
Currency transaction exposure
      This arises where a business unit makes actual sales and purchases in a currency other than its functional currency. Transaction exposure also arises on the remittance from overseas of dividends or surplus funds. The Group’s policy is to match transaction exposure where possible, and hedge remaining transactions as soon as they are committed, by using foreign currency contracts and similar instruments.
Interest rate risk
      The Group’s policy is to fix interest rates for a significant portion of the debt (61% as at 31 December 2005) 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 69%. The level of fixed interest rate debt has increased in 2005 as the hedging strategy for the EME Portfolio was implemented in January 2005. Significant interest rate management programmes and instruments require specific approval of the Board. The weighted average interest of the fixed rate debt was 7% in 2005. Where project finance is utilised, our policy is to align the maturity of the debt with the contractual terms of the customer offtake agreement.

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Off Balance Sheet Arrangements
      Our share of joint ventures’ and associates’ net debt was £1,625 million as at 31 December 2005 as compared with £1,285 million as at 31 December 2004. 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.
Item 6. Directors, Senior Management and Employees
Board of Directors and Executive Officers
      We operate under the overall direction of our Board of Directors (the “Board”), which has responsibility for defining strategy, ensuring the successful implementation of approved projects/proposals, the financial policies of the Group and also for reviewing the risk policies and profile of the Group. The Board currently consists of a Chairman, five Executive Directors and four Non-Executive Directors. Our Articles of Association provide that all directors submit themselves for re-election every three years and newly appointed Directors are subject to election by shareholders at the first Annual General Meeting (AGM) of shareholders after their appointment. The following table sets forth the age and function of each of our Directors and executive officers.
             
Directors and Executive Officers   Age   Position Held
         
Sir Neville Simms
    61     Chairman
Philip Cox
    54     Chief Executive Officer and Director
Mark Williamson
    48     Chief Financial Officer and Director
Bruce Levy
    50     Executive Director, North America and Director
Stephen (Steve) Riley
    44     Executive Director, Europe and Director
Anthony (Tony) Concannon
    42     Executive Director, Australia and Director
Adri Baan
    63     Non-Executive Director
Anthony (Tony) Isaac
    64     Non-Executive Director
Struan Robertson
    56     Non-Executive Director
John Roberts
    60     Non-Executive Director
Stephen Ramsay
    44     Company Secretary and General Counsel
      Sir Neville Simms became a Non-Executive Director of National Power in August 1998 and was appointed Chairman of International Power in October 2000. He is currently a member of the President’s Committee of the CBI, a Governor of Ashridge Management College, Chairman of the BRE Trust and Chairman of the government’s Sustainable Procurement Task Force. Sir Neville was a Non-Executive Director of the Bank of England from 1995 to 2002.
      Philip Cox joined the Company on 1 May 2000 from Invensys plc as Chief Financial Officer. Philip was appointed Chief Executive Officer of International Power in December 2003. He has responsibility for the overall management of the business and the delivery of its strategy. He is a Non-Executive Director of Wincanton plc.
      Mark Williamson was appointed Chief Financial Officer of International Power in December 2003. His responsibilities include financial control and reporting, tax and risk management. Mark joined the Company in September 2000 from the Simon Group plc as the Group Financial Controller with responsibility for the Company’s financial reporting.
      Bruce Levy runs American National Power (ANP). He joined the Company on 1 December 2004 having previously worked for US power company GPU, where he was senior Vice President and Chief Financial Officer. Bruce was appointed to the Board in June 2005.
      Stephen (Steve) Riley joined the business in 1985, holding senior positions in two UK power stations. He was appointed International Power’s Managing Director, Australia in January 2000. In August 2003 he took up his current position as Executive Director, Europe. Steve was appointed to the Board in January 2004.

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      Anthony (Tony) Concannon is a chartered engineer. He joined the industry in 1982 and has worked in a number of business areas including; power station operations, trading and international business development (based in Asia). He took on his role as International Power’s Managing Director, Australia in August 2003. Tony was appointed to the Board in January 2004.
      Adri Baan became a Non-Executive Director of the Company in June 2002. He is the Chairman of the Remuneration Committee. He was previously CEO of Philips Consumer Electronics, Member of the Board of Management of Royal Philips Electronics. He is currently on the Boards of KVWS, ICI PLC, OCÉ, Hagemeyer and Wolters Kluwer.
      Anthony (Tony) Isaac became a Non-Executive Director of the Company in October 2000. He is the Senior Independent Director and Chairman of the Audit Committee. He is the Chief Executive of The BOC Group plc and is a Non-Executive Director of Schlumberger Limited.
      Struan Robertson became a Non-Executive Director of the Company on 1 October 2004. He was Group Chief Executive of Wates Group Ltd until January 2004. Before that he had a 25-year international career with BP plc, during which time he held a number of senior roles, including Chief Executive Officer of BP Oil Trading International and Executive Chairman of BP Asia Pacific. He is currently a Non-Executive Director at Forth Ports plc, Henderson TR Pacific Investment Trust plc and Tomkins plc. Previously he was the Senior Independent Director at WS Atkins plc.
      John Roberts became a Non-Executive Director on 18 May 2006. He has recently retired from the post of Chief Executive Officer of United Utilities. Before that, he was Chief Executive Officer of Hyder Utilities and of Manweb.
      Stephen Ramsay is our Company Secretary and General Counsel. He joined the Company in 1996, after 10 years as a solicitor in private practice, first working at National Wind Power and then in the international legal group before becoming Company Secretary in October 2000.
      The business address of each of our Directors and executive officers is Senator House, 85 Queen Victoria Street, London EC4V 4DP, United Kingdom.
Management of the Group
      Management of our regional businesses is vested in our regional directors, who report directly to executive management, as necessary, with respect to business development, prospective investments and overall strategic direction. The regional directors work closely with our international portfolio and risk management teams to ensure that our generation assets are optimised and synchronised in terms of financial controls, operational performance and associated trading and marketing. Our regional directors are supported by legal, technical, financial, asset management and trading personnel. In addition, we provide overall strategic direction and, as necessary, specialised technical support and funding.
      The following table sets forth key members of our senior management as at the date of this report.
             
Senior Management   Age   Position Held
         
Ranald Spiers
    51     Regional Director, Middle East
Peter Barlow
    52     Head of Corporate Finance
Vince Harris
    55     Regional Director, Asia
Gareth Griffiths
    35     Head of Global Trading
Penny Chalmers
    40     Head of Corporate Services
Sean Neely
    41     Head of Mergers & Acquisitions
Ken Oakley
    43     Group Tax Manager
      Ranald Spiers is head of our Middle East region. He has been with us for 13 years, having previously worked for the BP Group for 12 years across a wide spectrum of industries, including petrochemicals, detergents, oil refining, downstream gas, advanced materials and aerospace.

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      Peter Barlow is the head of corporate finance for International Power and is responsible for funding and bank relationships. He is also primarily responsible for the relationship with Mitsui. Peter joined us in 1998 and has been especially involved in corporate finance, project finance and treasury activities since that time.
      Vince Harris is the head of our Asia region and was previously head of one of the UK’s first cogeneration businesses prior to becoming CEO of HUBCO in Pakistan. He is a chartered engineer and has 37 years’ experience in the power generation industry.
      Gareth Griffiths manages global trading, with responsibility for our trading operations in the UK, US and Australia. He has 13 years’ experience in the industry and was previously Vice President, Marketing and Trading for our US business.
      Penny Chalmers heads up our corporate services. She is responsible for Group human resources, information technology and corporate communications. Penny has 18 years’ experience in the energy sector and has been with us since 1997.
      Sean Neely heads up mergers and acquisitions at International Power. He is a chartered accountant with 14 years’ experience in the power sector. He joined us in October 1998, and has a background in project finance and investment banking.
      Ken Oakley joined the Group as head of tax in October 2000 and has responsibility for managing the Group’s tax affairs. After qualifying as a chartered accountant and chartered taxation adviser, he now has 12 years’ experience in the commercial tax sector.
      During the year ended 31 December 2005, Ken Teasdale (head of operations and engineering) also served as a key member of our senior management team. Since the year end, Ken Teasdale has retired from the Company. He will be replaced with effect from 3 July 2006 by Ed Metcalfe, who is the executive managing director of Arabian Power Company, and was previously responsible for our operations in South Australia, specifically Pelican Point, Synergen and SEA Gas.
Corporate Governance
      In 2005 the effectiveness of the Board was underpinned by a balance between Executive and Non-Executive Directors. The Board believes that it has the skills and experience necessary to provide effective leadership and control of the Company.
      Bruce Levy joined the Board on 1 June 2005 as an Executive Director with responsibility for the North American business. There were no other changes during the year. At the end of the year the Board comprised of the Chairman (Sir Neville Simms), Executive Directors (Philip Cox, Mark Williamson, Tony Concannon, Steve Riley and Bruce Levy) and four Non-Executive Directors (Tony Isaac, Jack Taylor, Adri Baan and Struan Robertson). Sir Neville Simms was considered independent on his appointment as Chairman and the four Non-Executive Directors are considered to be independent. Tony Isaac is the Senior Independent Director.
      The structure of the Board is not in strict compliance with the Combined Code in that the number of Non-Executive Directors is less than the number of Executive Directors. However, the Directors consider that the Board currently works effectively to carry out its duties and that the Non-Executive Directors have a strong independent presence at Board meetings to provide an effective counter balance to the Executive Directors. The size and structure of the Board is kept under review.

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      The full Board met seven times during 2005. Attendance by Directors at these and the Board committee meetings held during the year are detailed in the following table:
                                 
            Remuneration   Appointments
    Board (Seven   Audit Committee   Committee (Four   Committee (One
    Meetings)   (Eight Meetings)(1)   Meetings)   Meeting)
                 
Sir Neville Simms
    7       6       4       1  
Philip Cox
    7       N/A       N/A       N/A  
Adri Baan
    7       5       4       1  
Tony Concannon
    7       N/A       N/A       N/A  
Tony Isaac
    7       8       4       1  
Bruce Levy(2)
    4       N/A       N/A       N/A  
Steve Riley
    7       N/A       N/A       N/A  
Struan Robertson
    7       7       4       1  
Jack Taylor
    7       8       4       1  
Mark Williamson
    7       N/A       N/A       N/A  
 
(1)  The Audit Committee held three main meetings relating to the preliminary statement, the interim statement and audit planning. All members of the Committee attended these meetings. The remainder of the meetings related to quarterly results and U.S. reporting issues.
 
(2)  Bruce Levy joined the Board of Directors on 1 June 2005 and attended all Board meetings held since his appointment.
      In addition to the above meetings, a meeting of the Chairman and the Non-Executive Directors was held without the Executive Directors being present. The Non-Executive Directors also met without the Chairman being present. This meeting was chaired by Tony Isaac, the Senior Independent Director, and included a review of the Chairman’s performance.
Board Membership
      In accordance with the Combined Code and the Company’s Articles of Association, all Directors submit themselves for re-election every three years and newly appointed Directors are subject to election by shareholders at the first AGM after their appointment. In addition, the Board seeks to maintain a balance between continuity and new blood amongst the Non-Executive Directors.
      In accordance with this policy, Jack Taylor stepped down as a Non-Executive Director at the 2006 AGM and was replaced by John Roberts. The Board used an external agency to recruit John Roberts. Bruce Levy, who was appointed to the Board on 1 June 2005 and Tony Isaac submitted themselves for re-election for a further term of up to three years at the AGM held on 17 May 2006. Tony Isaac had been a Non-Executive Director of the Company for nearly six years and the Board had therefore assessed whether it was appropriate for him to be re-elected as a Director. Following a review of his performance and contribution to the Board, the commitment to the role demonstrated by him, the need for Board continuity following the retirement of Jack Taylor and his role as Chairman of the Audit Committee, the Board decided that it was appropriate for Tony Isaac to seek re-election for a further term as a Director of the Company. Both Directors were duly re-elected by shareholders.
Board Training
      Arrangements are in place to ensure that newly appointed Directors receive a comprehensive briefing on the Company, and training is provided for Directors on their roles and their legal obligations to ensure that they are fully conversant with their responsibilities as Directors. In accordance with this policy, Bruce Levy received training on his role and responsibilities as a Director following his appointment to the Board. A programme of continuous training is also provided for the Directors. Periodically the Board meets at the site of one of the Group’s assets and briefings are also given at Board meetings on particular parts of the business, including regional and functional reviews. During 2005 the Board visited the Group’s business in North America where it

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met the regional management team and received a briefing about the local business operations. At other times the Board has also received a presentation on health, safety and environmental management from the head of operations, and a presentation on investor relations from the head of corporate communications. Directors are also kept informed of changes to the regulatory regime such as the revised UK Listing Rules, new institutional investor guidelines and the US Sarbanes-Oxley Act. All of the Directors have access to the advice and services of the Company Secretary and also to external independent advice should they so wish.
Insurance
      The Company has in place appropriate insurance cover in respect of legal action against its Directors.
Operation of the Board
      The Board has responsibility for defining strategy, ensuring the successful implementation of approved projects/proposals and for the financial policies of the Group. It also reviews the risk policies and profile of the Group. It maintains a schedule of all matters requiring specific Board approval. Throughout 2005 this included all strategy decisions and significant capital investment proposals and acquisitions. The Board receives information on capital expenditure projects and investment proposals in advance of Board meetings, as well as management reports on the operational and financial performance of the business. Financial performance is monitored on a monthly basis and the overall performance of the Group is reviewed against approved budgets. At least once a year, the Chief Executive Officer (CEO) presents a corporate strategy plan to the Board for review and approval. Each investment decision is made in the context of this plan.
      The Board has established our business values and standards, which provide a framework for us to balance the interests of all our stakeholders in the conduct of our business. Our Code of Business Conduct has been formally adopted by the Board and is set out on our website. This code includes a whistle blowing procedure.
      In respect of Board performance for 2005, the Board appointed an external facilitator to carry out the assessment. The assessment was in two parts. The first took the form of a questionnaire completed by each Director relating to the role and performance of the Board, including its committees, and Board priority tasks including strategy and safety. The results of this assessment were reviewed by the whole Board. The second part of the assessment took the form of a questionnaire completed by each Director relating to the effectiveness of individual Directors. The results of this part were reviewed by the Chairman in respect of the whole Board and by each Director for his own performance. The results of the review demonstrated that the Board members were extremely satisfied with the operation of the Board. The contribution by individual Directors to Board and Committee meetings was considered to be high.
Chairman and Chief Executive Officer
      There is a clear division of responsibilities at the head of the Company between the roles of the Chairman and the CEO. The Chairman is responsible for the leadership and effective operation of the Board, in terms of its agenda, decision making and the utilisation of the skills and experience of the Directors. He monitors, with the assistance of the Company Secretary, the information provided to the Board to ensure that it is sufficient, pertinent, timely and clear. The Chairman is also responsible for ensuring that there is effective engagement and communication with shareholders. The CEO is responsible for the running of the Company, and leading the executive and operational teams in implementing the strategies approved by the Board.
      Philip Cox is also a Non-Executive Director of Wincanton plc. His remuneration from this role is retained by him. His remuneration for the year ended 31 March 2005 was £28,000.
Non-Executive Directors and their Function
      Through membership of the Board committees, the Non-Executive Directors have responsibilities for: overseeing that systems of internal control and risk management are appropriate and effective; managing the relationship with the external auditors; evaluating the performance of management in meeting targets and

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objectives; setting the remuneration of Executive Directors; appointing Executive Directors; and planning senior management succession.
Board Committees
      The Company has established the following committees: the Audit Committee; the Remuneration Committee; and the Appointments Committee. No person other than a committee member is entitled to attend the meetings of these committees, except at the invitation of the Committee. The full terms of reference for each Committee are available on the Company’s website: www.ipplc.com.
Audit Committee
      The Committee selects and fixes the remuneration of the external auditors and reviews the effectiveness of the external audit process. The Committee also ensures policies and procedures are in place to ensure that the external auditors remain independent. In addition to reviewing the Group’s accounts, results announcements, risk management and accounting policies, the Committee monitors the effectiveness of internal control systems for the Board. The Committee monitors the work of the internal audit function and its progress against the Group’s annual internal audit plan, and also reviews reports from the external auditors.
      During 2005 the Audit Committee was comprised of all the independent Non-Executive Directors of the Company and the Chairman. At the end of 2005 the Chairman, Sir Neville Simms, resigned from his membership of the Audit Committee. The Audit Committee Chairman is Tony Isaac, who is a Fellow of the Chartered Institute of Management Accountants and, before becoming Chief Executive of The BOC Group plc, was its Group Finance Director. The Company Secretary acts as secretary to the Committee.
      Time was set aside for the Committee to meet each of the external auditors and the head of internal audit without executive management present. In addition to the members of the Committee, regular attendees at the Audit Committee meetings included representatives of the external auditors, the CEO, the CFO, other Executive Directors, the head of financial reporting and the head of internal audit.
Remuneration Committee
      The Remuneration Committee is responsible for monitoring the performance of the Executive Directors of the Company against targets, and making recommendations to the Board on remuneration.
      The Committee comprises all of the independent Non-Executive Directors of the Company and the Chairman. The Chairman of the Committee is Adri Baan. The Company Secretary acts as secretary to the Committee and the head of human resources at International Power acts as adviser to the Committee. Towers Perrin acts as external adviser to the Committee.
Appointments Committee
      The Appointments Committee is responsible for matters of management succession and the identification and appointment of Directors. The Committee comprises of the Chairman and all of the independent Non-Executive Directors of the Company. The Chairman of the Committee is Sir Neville Simms. The head of human resources acts as secretary to the Committee.
Relations with Shareholders
      The Board is accountable to shareholders for the performance and activities of the Group. International Power ensures that its AGM provides shareholders with an opportunity to receive comprehensive information on all aspects of the Group’s business activities and to question senior management about business issues and prospects.
      All proxy votes are counted and the level of proxy votes lodged for each resolution is reported at the AGM and on the Company’s website. In line with best practice, the Company aims to ensure that the notice of AGM and the Annual Report are sent to shareholders at least 20 working days before the AGM.

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      International Power also runs, within the terms of the regulatory framework, frequent contact programmes with industry analysts and institutional investors to discuss matters of strategy and financial performance. Contact is made principally by the CEO and the CFO. On issues of major importance the Chairman communicates with major shareholders. The Senior Independent Non-Executive Director (Tony Isaac) is also available as an alternative point of contact if shareholders have concerns over the Chairman’s performance or where contact with the Chairman or other communication channels would be inappropriate. At each Board meeting an update is given on movements in major shareholdings and on contact programmes between the Executive Directors and institutional shareholders. Reports issued by financial analysts on the Company are circulated to Board members. These summaries and reports enable the Directors to gain an understanding of the views and opinions of those with an interest in the Company. All results presentations and stock exchange announcements are available to shareholders on the Company’s website www.ipplc.com.
Accountability and Audit
      The Board is mindful of its responsibility to present a balanced and understandable assessment of International Power’s financial position and prospects, both to investors and regulatory authorities. The Annual Report, preliminary, interim and quarterly results announcements are the principal means of achieving this objective.
      An explanation of the respective responsibilities of the Directors and external auditors in connection with the financial statements is set out on pages F-2 to F-3 of our consolidated financial statements. Our Directors are satisfied that we have adequate resources to continue to operate for the foreseeable future. Accordingly, Directors continue to adopt the ‘going concern’ basis for the preparation of the financial statements.
      The Audit Committee has a process in place to approve all non-audit services provided by the external auditor to ensure that the objectivity and independence of the external auditor is not compromised. In line with the requirements of the Sarbanes-Oxley Act, our procedures specify the services from which the external auditor is excluded and the approval process for all other services.
Internal Control
      The Board has responsibility for the Group’s system of internal control and for monitoring and reviewing its effectiveness.
      Systems are in place to meet the requirements of the Combined Code and Turnbull Guidance and procedures and systems are being implemented to ensure compliance with the requirements of the Sarbanes-Oxley Act.
      Any system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve business objectives. The system can only provide reasonable, and not absolute, assurance against material financial misstatement or loss. The principal features of the Group’s systems of internal control are:
Control Environment
      The Board encourages a culture of integrity and openness. The Company has an organisation structure with clear lines of accountability and authority across its worldwide operations, supported by appropriate reporting procedures. Each of the regional businesses is accountable to the CEO and is managed within the strategic guidelines and delegated authorities adopted by the Board. An executive management team, chaired by the CEO and comprising the Executive Directors, regional directors and functional heads, meets regularly to discuss issues facing the Group.
Control Procedures
      Control procedures have been established in each of the Company’s operations to safeguard the Group’s assets from loss or misuse and to ensure appropriate authorisation and recording of financial transactions. All acquisition and investment decisions are subject to disciplined investment appraisal processes. Risk management procedures are in place for the Company’s operations, including its energy marketing and trading activities, which are overseen by the Global Commodities Risk Committee, which comprises executive and senior

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management, and is chaired by the global risk manager. The Group treasury function operates under defined policies and the oversight of the Treasury Committee, chaired by the CFO.
Performance reporting and information
      Corporate plan: Executive management submits an annual corporate plan to the Board for approval. The plan for each business unit is the quantified assessment of its planned operating and financial performance for the next financial year, together with strategic reviews for the following four years. Group management reviews the plans with each operational team. The individual plans are based on key economic and financial assumptions and incorporate an assessment of the risk and sensitivities underlying the projections.
      Performance monitoring: Monthly performance and financial reports are produced for each business unit, with comparisons to budget. Reports are consolidated for overall review by executive management, together with forecasts for the income statement and cash flow. Detailed reports are presented to the Board on a regular basis.
      Performance review: Each business unit is subject to performance reviews with Group management regularly during the year. Actual results and forecasts for the year are compared to budget. Key operational and financial results are reviewed together with the risk profile and business environment of the reporting unit.
      Investment projects: These are subject to formal review and authorisation procedures with designated levels of authority, including a review by an Investment Committee chaired by the CEO and comprising the Executive Directors and senior managers. Major projects are subject to Board review and approval.
      Corporate reporting: The Company has a Disclosure Committee which is chaired by the Company Secretary and is comprised of members from the internal audit, corporate communications, human resources, company secretariat and financial reporting departments. It reviews the Annual Report, the Summary Annual Report and 20-F, and also monitors compliance with disclosures required under UK and US reporting regulations.
Risk identification and management
      There is a continuous process for identifying, evaluating and managing the key risks faced by the Company. Activities are co-ordinated by the Risk Committee, which is chaired by the CFO, and has responsibility, on behalf of the Board, for ensuring the adequacy of systems for identifying and assessing significant risks, that appropriate control systems and other mitigating actions are in place, and that residual exposures are consistent with the Company’s strategy and objectives. Assessments are conducted for all material entities.
      As part of the annual business planning process, the key risks associated with achievement of the business’ principal objectives are identified and their impact quantified. During the year, significant changes in the risk profile are highlighted through the business performance reports. The principal risks are reviewed by the Risk Committee, which provides reports to the Board and the Audit Committee.
      Our risk identification processes enable us to identify risks which can be partly or entirely mitigated through use of insurance, or which we can self-insure. We negotiate best available premium rates with insurance providers on the basis of our extensive risk management procedures. Risks to which we pay particular attention include business interruption, Directors’ and officers’ liability and property damage.
Energy marketing and trading
      The objective of the Group’s energy marketing and trading operations is to maximise the return from the purchase of fuel and the sale of the associated output.
      For each of the businesses that operate in merchant energy markets, local risk committees have been established to oversee the management of the market, operational and credit risks arising from the marketing and trading activities. The committees are made up of the trading manager, global and local risk managers, Directors and senior managers.

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      The Group hedges its physical generating capacity by selling forward its electrical output, and purchasing its fuel input, as and when commercially appropriate and within approved control limits. This is accomplished through a range of financial and physical products. Our limited proprietary trading operations use similar methods.
      Energy market risk on our asset and proprietary portfolios is measured using various techniques including Value-at-Risk (VaR). VaR is used where appropriate and provides a fair estimate of the net losses or gains which could be recognised on our portfolios over a certain period and given a certain probability; it does not provide an indication of actual results. Scenario analyses are used to estimate the economic impact of sudden market movements on the value of our portfolios. This supplements the other techniques and methodologies and captures additional market risks.
Monitoring
      The Board reviews the effectiveness of established internal controls through the Audit Committee which receives reports from management, the Risk Committee, the Group’s internal audit function and the external auditors on the systems of internal control and risk management arrangements.
      Internal audit reviews the effectiveness of internal controls and risk management through a work programme which is based on the Company’s objectives and risk profile and is agreed with the Audit Committee. Findings are reported to operational and executive management, with periodic reporting to the Audit Committee.
      Business unit managers provide annual self-certification statements of compliance with procedures. These statements give assurance that controls are in operation and confirm that programmes are in place to address any weaknesses in internal control. The certification process embraces all areas of material risk. Internal audit reviews the statements and reports any significant issues to the Audit Committee.
Compliance with the Combined Code
      There were three areas where the Board was not fully compliant with the requirements of the revised Combined Code throughout 2005. After 1 June 2005, following the appointment of Bruce Levy as an Executive Director, there was a majority of Executive Directors over the Non-Executive Directors. The Board has reviewed the structure of the Board and has concluded there is no need at this time to appoint another Non-Executive Director, other than as a replacement for Jack Taylor.
      Throughout 2005, the Chairman of the Board, Sir Neville Simms, was a member of both the Audit and Remuneration committees. The Code requires that the Chairman of the Company should not be a member of either the Audit Committee or the Remuneration Committee. At the end of 2005 Sir Neville Simms’ involvement in both the Audit and Remuneration committees was reviewed by the Board. Following the review, and taking into account the views of institutional investors, Sir Neville Simms agreed to resign from the Audit Committee, but retains his membership of the Remuneration Committee. The Chairman of the Remuneration Committee, Adri Baan, is an independent Non-Executive Director and there are three other independent Non-Executive Directors as members of the Committee. Therefore Sir Neville Simms was not in a position to exert any control over the affairs of the Remuneration Committee.
      The Senior Independent Director does not have a contact programme to communicate with institutional investors, primarily to avoid potential confusion over channels of communication. During 2005 no institutional shareholder has requested such communication.
      In all other respects, the Company has complied with the provisions of the Combined Code throughout the period of the review.
US corporate governance compliance
      The Company has securities registered in the US and, as a result, it is required to comply with those provisions of the Sarbanes-Oxley Act of 2002 (the Act) as it applies to foreign private issuers. The Board continues to monitor the new rules arising from the Act and arrangements are also being developed to ensure that

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the Company will be able to report on its systems of internal controls over financial reporting as required as at 31 December 2006.
Directors’ and Executive Officers’ Interests
      As of 23 June 2006 (the latest practicable date prior to the publication of this report) the Directors and their immediate families had the beneficial interests in our ordinary shares shown in the table below (including options and awards over), such interests being those: (1) which are required to be notified by each Director to us pursuant to section 324 or 328 of the Companies Act; or (2) which are required pursuant to section 325 of the Companies Act to be shown by the Register of Directors’ interests maintained under section 325 of the Companies Act or which are interests of a connected person of a Director which would, if the connected person were a Director, be required to be disclosed above, and the existence of which is known to or could, with reasonable diligence, be ascertained by that Director.
         
    International Power
    Ordinary Shares
Director   Number
     
Sir Neville Simms
    178,220  
Philip Cox
    728,133  
Mark Williamson
    239,218  
Bruce Levy
    90,364  
Steve Riley
    205,161  
Tony Concannon
    163,394  
Adri Baan
    38,801  
Tony Isaac
    25,501  
Struan Robertson
    3,163  
John Roberts
     
Stephen Ramsay (Executive Officer)
    30,000  
      None of the Directors has any non-beneficial interest in any of our ordinary shares.
      Save as set out in the previous table and under the section entitled “Current Board of Directors” and “Options to Purchase our Securities”, no Director nor any person connected with a Director as aforesaid has at the date of this document or is expected to have any interest in our share capital.

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Compensation of Directors and Officers
      The table below shows the aggregate remuneration of our Directors for the year ended 31 December 2005 and compares it with the figures for the year ended 31 December 2004.
2005 Directors’ remuneration and interests
Directors’ aggregate remuneration
      The table below shows the aggregate remuneration of the International Power plc Directors for the year ended 31 December 2005.
                                                                 
                            Aggregate   Aggregate
            Performance   Performance   Payment in       Remuneration   Remuneration
            Related Bonus —   Related Bonus —   Lieu of   Other   Year to 31   Year to 31
    Salary   Fees   Cash   Shares   Pension   Benefits   December 2005   December 2004
                                 
    £   £   £   £   £   £   £   £
Sir Neville Simms(2)
          210,000                               210,000       210,000  
Philip Cox(3)
    525,000             181,125       518,923       101,325       16,024       1,342,397       979,401  
Mark Williamson(4)
    310,000             106,950       306,412       64,480       13,331       801,173       526,859  
Tony Concannon(5)
    285,000             86,925       249,040             107,183       728,148       520,586  
Steve Riley(6)
    285,000             98,325       281,701             100,035       765,061       556,179  
Bruce Levy(7)
    164,838             56,869       162,930       49,451       19,817       453,905        
Tony Isaac(1)
          50,000                               50,000       50,000  
Adri Baan(1)
          45,000                               45,000       45,000  
Jack Taylor(1)
          40,000                               40,000       40,000  
Struan Robertson(1)
          40,000                               40,000       10,000  
                                                 
Total
    1,569,838       385,000       530,194       1,519,006       215,256       256,390       4,475,684       2,938,025  
                                                 
 
(1)  The International Power plc Non-Executive Directors’ basic fee, which covers Board membership (i.e. attendance at Board meetings, general duties as Directors, and their membership of Board Committees) was £40,000. In addition, Tony Isaac received an additional fee of £5,000 per annum for his role as Senior Independent Director. Tony Isaac also received £5,000 per annum for his role as Chairman of the Audit Committee, and Adri Baan received an additional fee of £5,000 per annum for his role as Chairman of the Remuneration Committee. Struan Robertson joined the Company on 1 October 2004.
 
(2)  Sir Neville Simms’ fee for 2005 was £210,000 per annum.
 
(3)  For Philip Cox, the payment in lieu of pension detailed in the above table sets out the contributions made to his death-in-service insurance premium and Funded Unapproved Retirement Benefits Scheme. He also received a company car allowance and private medical insurance, both of which are included in “Other benefits”. The value of the performance related bonus shares in the above table has been calculated using a share price of 286.50p (being the closing price for 3 March 2006).
 
(4)  For Mark Williamson, the payment in lieu of pension detailed in the above table sets out the contributions made to his death-in-service insurance premium and Funded Unapproved Retirement Benefits Scheme. He also received a company car allowance and private medical insurance, both of which are included in “Other benefits”. The value of the performance related bonus shares in the above table has been calculated using a share price of 286.50p (being the closing price for 3 March 2006).
 
(5)  Tony Concannon was appointed an Executive Director on 1 January 2004. He received a company car allowance and private medical insurance, both of which are included in “Other benefits”. Also included in “Other benefits” is the value of his relocation and expatriate support. The value of the performance related bonus shares in the above table has been calculated using a share price of 286.50p (being the closing price on 3 March 2006). In addition, International Power Australia Pty Ltd incurs local charges regarding taxation of remuneration. For 2005, this cost is £318,028 (2004: £167,213). Tony Concannon funded 57.9% (2004: 64.9%) of these costs.

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(6)  Steve Riley was appointed an Executive Director on 1 January 2004. He received a company car allowance and private medical insurance, both of which are included in “Other benefits”. Also included in “Other benefits” is the value of his relocation and repatriation support. The value of the performance related bonus shares in the above table has been calculated using a share price of 286.50p (being the closing price for 3 March 2006).
 
(7)  Bruce Levy was appointed an Executive Director on 1 June 2005. His salary from that date is included in the above table. The payment in lieu of pension detailed in the above table sets out the contributions made to Bruce Levy’s 401k Savings Plan, a Retirement Plan and a Supplemental Retirement Plan. He also received a company car allowance and private medical insurance, both of which are included in “Other benefits”. Also included in “Other benefits” is the value of his relocation support. The value of the performance related bonus-shares in the above table has been calculated using a share price of 286.50p (being the closing price on 3 March 2006). The values shown in the above table have been converted from US dollar to sterling using the average annual exchange rate of 1.82.
Summary of emoluments and benefits
                                         
    Year Ended 31 December
     
    2005   2004   2003   2002   2001
                     
    £000
Aggregate emoluments
    4,476       2,938       1,621       1,565       1,747  
Termination payments
                      404        
Performance Share Plan
                             
Long-Term Incentive Plan
                             
Highest paid Director
      The aggregate emoluments of the highest paid Director, Philip Cox, were £1,342,397, (year ended 31 December 2004: Philip Cox £979,401).
Current Board of Directors
      The intention of the Board is to align the interests of Directors and, through the employee share plans, employees with those of shareholders. In particular, the 2002 Performance Share Plan and Executive Share Option Scheme, both approved by shareholders at the 2002 AGM, (the “Long Term Incentive Plans”) in which the Executive Directors participate are designed to unite and incentivise Executive Directors to achieve defined performance conditions over the three-year life of each award. In 2003 the Company introduced two new areas of remuneration policy for Executive Directors and senior managers related to paying bonuses in shares and share retention, both of which are detailed in this report.
      The Chairman of International Power plc, Sir Neville Simms, has a letter of appointment with a 12-month notice period. The letter of appointment was signed on 22 February 2000. The other Non-Executive Directors are appointed on a three-year fixed-term, annual fixed-fee basis. Their appointment is reviewed at the end of the three-year period and extended for a period of one to three years if both parties agree.
      Philip Cox’s employment can be terminated by us giving not less than 12 months’ notice, or automatically on reaching his 60th birthday. We may terminate Philip Cox’s employment immediately without notice, provided we make a lump sum payment equivalent to 125% of prevailing annual salary for the notice period foregone. Philip Cox may terminate his employment by giving not less than six months’ notice. The date on which this contract was entered into was 25 February 2003.
      Mark Williamson (appointed a Director on 11 December 2003), Steve Riley and Tony Concannon (appointed Directors on 1 January 2004) have service contracts which are subject to 12-months’ notice by the Company. For termination by the Company, an Executive Director may receive a payment of 125% of annual basic salary (which includes the 12-months’ notice) which will be paid on a monthly basis until the Executive

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Director secures alternative employment, up to a maximum of 12 monthly payments. The date upon which these contracts were entered into was 23 February 2004.
      Each of the Executive Directors’ salaries will be reviewed annually by the Board, effective from 1 January.
      In 2004, Philip Cox was entitled to participate in annual bonus arrangements providing a maximum of 60% of basic salary for exceptional performance exceeding the objectives determined by the Remuneration Committee.
      In order to increase the share ownership of Executive Directors and senior management, and to further increase the alignment of remuneration package to shareholder return, the bonus award for this period has been made part in cash and part in shares. As part of the new share retention arrangements introduced in 2003, these shares (less a proportion of the shares sold to meet taxation liabilities) are required to be held until January 2007. An Executive Director may dispose of these shares prior to January 2007 if his total beneficial interest in the shares of the Company is equal to or greater than 100% of his base salary. It is intended that the bonuses payable for the performance year 2005 will also be paid part in cash and part in shares, subject to the above retention arrangements.
      Each of the Executive Directors is also entitled to participate in the Long Term Incentive Plans and the “Save As You Earn” Plan, as described below, subject to meeting the eligibility criteria.
      Each of the Executive Directors is provided with a motor car allowance under our existing motor car arrangements and membership of our health care plan and medical screening plan. We have a travel insurance policy which includes personal accident insurance. These arrangements apply to Executive Directors.
      Sir Neville Simms was appointed our Chairman on 2 October 2000. During the financial year ended 31 December 2005, he was paid £210,000 (plus reasonable expenses). He is required to devote approximately 100 days per annum to the performance of his duties. His appointment continues to our AGM held following his 65th birthday in 2010, unless terminated by us for good cause or by either party on giving the other not less than one year’s notice in writing. The Non-Executive Directors do not have agreements providing for compensation in the event of early termination of their appointment. Effective from 1 January 2006, non-Executive Directors are paid a basic annual fee of £45,000 per annum plus £5,000 per annum for chairing a board committee and £10,000 per annum for being the Senior Independent Director.
      The date of expiry of the current terms of appointment for each of the Non-Executive Directors are as follows:
         
    Expected Expiry of
    Current Terms
     
Non-Executive Directors
       
Sir Neville Simms(1)
     
Adri Baan
    Until the 2007 AGM  
Tony Isaac
    Until the 2009 AGM  
Struan Robertson
    Until the 2008 AGM  
John Roberts
    Until the 2009 AGM  
 
(1)  Sir Neville Simms’ contract can be terminated on 12 months’ written notice by either party, or automatically at the 2010 AGM following his 65th birthday.
Employee Share Plans
      We have in place a number of share-based plans under which employees of the Group and its subsidiary companies may acquire Ordinary Shares in International Power plc. These plans form an integral part of the Group’s strategy to provide appropriate reward and retention strategies for employees, to align employee and shareholder interests through incentive targets based on clear operational and financial criteria and to recruit, motivate and retain employees.

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      These employee share plans are:
  •  the 2002 Performance Share Plan (an annual plan open to Executive Directors and a small number of senior managers)
 
  •  the International Power Approved Executive Share Option Scheme (a discretionary plan open to selected employees)
 
  •  the International Power Unapproved Executive Share Option Plan (a discretionary plan open to selected employees)
 
  •  the Global Executive Share Option Plan (a discretionary plan open to selected executives resident outside of the UK)
 
  •  the International Power Sharesave Plan (open to all UK resident employees)
 
  •  the International Power Global Sharesave Plan (open to employees in certain jurisdictions outside of the UK).
      All of the listed plans are currently in operation.
      Executive Share Options have been granted to executives in seven countries outside the UK and the Global Sharesave Plan is now in operation in four countries outside the UK. As the Group continues to grow and employee numbers continue to increase, we anticipate that the extension of share plans to overseas jurisdictions will continue apace.
      Executive Directors (Philip Cox, Mark Williamson, Tony Concannon and Steve Riley) participate in the 2002 Performance Share Plan, the Approved and Unapproved Executive Share Option Plans and the International Power Sharesave Plan.
      The vesting of any awards made under the 2002 Performance Share Plan and the ability to exercise options granted under the Approved, Unapproved Executive Share Option Plans and the Global Executive Share Option Plan are all subject to the satisfaction of performance conditions. The exercise of options under the Sharesave Plan is not subject to any performance condition.
      Following the Rights Issue, the Remuneration Committee, in accordance with the plan rules, adjusted the number of options and shares under the above plans, the option prices, and the associated performance conditions. All the details referred to herein reflect these adjustments.

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Options to Purchase Our Securities
Summary of Outstanding Options
      The table below sets forth options to purchase our ordinary shares outstanding as of 23 June 2006 (the latest practicable date prior to the printing of this document):
                                 
            Issuable   Exercise Price
    Grant   Exercise   Ordinary   per Ordinary
Plan   Date   Dates   Shares   Share (p)
                 
Approved Executive Plan
    3 October 2000       2003-2010       343,480       277.55  
      22 March 2001       2004-2011       308,541       209.22  
      19 September 2001       2004-2011       24,710       193.19  
      24 May 2002       2005-2012       678,108       174.50  
      10 March 2003       2006-2013       246,502       62.32  
      2 March 2004       2007-2014       594,232       123.53  
      11 March 2005       2008-2015       499,306       179.25  
      8 March 2006       2009-2016       323,854       281.00  
Unapproved Executive Plan
    3 October 2000       2003-2010       1,988,936       277.55  
      22 March 2001       2004-2011       717,863       209.22  
      19 September 2001       2004-2011       49,057       193.19  
      24 May 2002       2005-2012       2,765,762       174.50  
      10 March 2003       2006-2013       2,276,907       62.32  
      2 March 2004       2007-2014       5,595,663       123.53  
      11 March 2005       2008-2015       4,553,846       179.25  
      8 March 2006       2009-2016       2,216,393       281.00  
Global Executive Share Plan
    10 March 2003       2006-2013       62,388       62.32  
      2 March 2004       2007-2014       221,448       123.53  
      11 March 2005       2008-2015       285,242       179.25  
      8 March 2006       2008-2016       122,931       281.00  
Executive Share Option Plan
    23 December 1996       1999-2006       390,665       287.76  
      2 December 1997       2000-2007       485,041       343.73  
      1 December 1998       2001-2008       696,158       313.92  
Global Sharesave Plan
    17 January 2003       2006       278,453       70.33  
      17 January 2003       2008       582,969       70.33  
      3 October 2003       2006       107,329       97.93  
      3 October 2003       2008       104,477       97.93  
      4 January 2006       2009       384,114       200.00  
      4 January 2006       2011       229,643       200.00  
Sharesave Plan
    11 October 2001       2006       6,631       178.06  
      1 October 2002       2007       2,632,053       80.12  
      3 October 2003       2006       104,158       97.93  
      3 October 2003       2008       69,582       97.93  
      4 January 2006       2009       975,386       200.00  
      4 January 2006       2011       868,112       200.00  
Performance Share Plan
    28 March 2003       2006       1,230,108       74.79  

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Summary of Directors’ 2002 Performance Share Plan Awards
      The table below sets forth the outstanding awards we have made to our Executive Directors under the 2002 Performance Share Plan as of 31 December 2005.
                                                 
                Market        
    No. of           Value of        
    Shares   Conditional       an       No. of
    Under   Awards       Ordinary       Shares
    Award as   Made/       Share as at       Under
    at   (Lapsed)       Date of   End of   Award as at
    1 January   During the       Award   Performance   31 December
    2005   Year   Date of Award   (Pence)   Period   2005
                         
Philip Cox
    167,051       (167,051 )     24 May 2002       174.50       31 December 2004        
      759,169             10 March 2003       62.32       31 December 2005       759,169  
      384,529             2 March 2004       123.53       31 December 2006       384,529  
            292,887       11 March 2005       179.25       31 December 2007       292,887  
                                     
Total awards
    1,310,749       125,836                               1,436,585  
                                     
Mark Williamson
    35,415       (35,415 )     24 May 2002       174.50       31 December 2004        
      99,164             10 March 2003       62.32       31 December 2005       99,164  
      202,384             2 March 2004       123.53       31 December 2006       202,384  
            172,942       11 March 2005       179.25       31 December 2007       172,942  
                                     
Total awards
    336,963       137,527                               474,490  
                                     
Tony Concannon
    24,282       (24,282 )     24 May 2002       174.50       31 December 2004        
      67,994             10 March 2003       62.32       31 December 2005       67,994  
      190,240             2 March 2004       123.53       31 December 2006       190,240  
            158,995       11 March 2005       179.25       31 December 2007       158,995  
                                     
Total awards
    282,516       134,713                               417,229  
                                     
Bruce Levy(1)
          158,995       11 March 2005       179.25       31 December 2007       158,995  
                                     
Total awards
          158,995                               158,995  
                                     
Steve Riley
    31,608       (31,608 )     24 May 2002       174.50       31 December 2004        
      88,505             10 March 2003       62.32       31 December 2005       88,505  
      190,240             2 March 2004       123.53       31 December 2006       190,240  
            158,995       11 March 2005       179.25       31 December 2007       158,995  
                                     
Total awards
    310,353       127,387                               437,740  
                                     
 
(1)  On appointment as a Director 1 June 2005
      In addition to the awards listed above, on 8 March 2006 we made further conditional awards to our Executive Directors as shown below:
                         
        Market Value of an    
    Conditional Awards   Ordinary Shares as    
    Made 8 March   at Date of Award    
    2006   (Pence)   End of Performance Period
             
Philip Cox
    434,163       281       31 December 2008  
Mark Williamson
    192,170       281       31 December 2008  
Steve Riley
    176,156       281       31 December 2008  
Tony Concannon
    176,156       281       31 December 2008  
Bruce Levy
    184,432       281       31 December 2008  

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Summary of Directors’ Options under the Executive Share Options Plans
      The table below sets forth the awards we have made to certain of our Directors under both the Approved and Unapproved Executive Share Option Plans as of 31 December 2005.
                                                 
    No. of Shares                   No. of Shares
    Under       Exercise           Under
    Option as at       Price per           Option as at
    1 January   Granted/   Share   Exercise   Exercise   31 December
    2005   (Lapsed)   (Pence)   Period from   Period to   2005
                         
Philip Cox
    17,191 (1)             174.50       24.05.2005       24.05.2012       17,191  
      149,859 (2)             174.50       24.05.2005       24.05.2012       149,859  
      561,616 (2)             62.32       10.03.2006       10.03.2013       561,616  
      384,529 (2)             123.53       02.03.2007       02.03.2014       384,529  
              292,887 (2)     179.25       11.03.2008       11.03.2015       292,887  
                                     
Total options
    1,113,195       292,887                               1,406,082  
                                     
Mark Williamson
    5,403 (1)             277.55       02.10.2003       02.10.2010       5,403  
      30,624 (2)             277.55       02.10.2003       02.10.2010       30,624  
      7,168 (1)             209.22       22.03.2004       22.03.2011       7,168  
      16,728 (2)             209.22       22.03.2004       22.03.2011       16,728  
      35,415 (2)             174.50       24.05.2005       24.05.2012       35,415  
      99,164 (2)             62.32       10.03.2006       10.03.2013       99,164  
      202,384 (2)             123.53       02.03.2007       02.03.2014       202,384  
              172,942 (2)     179.25       11.03.2008       11.03.2015       172,942  
                                     
Total options
    396,886       172,942                               569,828  
                                     
Tony Concannon
    7,189 (3)             287.76       23.12.1999       23.12.2006       7,189  
      6,950 (3)             343.73       02.12.2000       02.12.2007       6,950  
      7,873 (3)             313.92       01.12.2001       01.12.2008       7,873  
      3,377 (1)             277.55       02.10.2003       02.10.2010       3,377  
      19,139 (2)             277.55       02.10.2003       02.10.2010       19,139  
      4,480 (1)             209.22       22.03.2004       22.03.2011       4,480  
      10,455 (2)             209.22       22.03.2004       22.03.2011       10,455  
      6,447 (1)             174.50       24.05.2005       24.05.2012       6,447  
      17,835 (2)             174.50       24.05.2005       24.05.2012       17,835  
      67,994 (2)             62.32       10.03.2006       10.03.2013       67,994  
      190,240 (2)             123.53       02.03.2007       02.03.2014       190,240  
              158,995 (2)     179.25       11.03.2008       11.03.2015       158,995  
                                     
Total options
    341,979       158,995                               500,974  
                                     
Bruce Levy
            158,995 (4)(5)     179.25       11.03.2008       11.03.2015       158,995  
                                     
Total options
            158,995                               158,995  
                                     
Steve Riley
    12,722 (3)     (12,722 )     272.55       13.12.1998       13.12.2005        
      12,302 (3)             287.76       23.12.1999       23.12.2006       12,302  
      12,001 (3)             343.73       02.12.2000       02.12.2007       12,001  
      13,904 (3)             313.92       01.12.2001       01.12.2008       13,904  
      5,674 (1)             277.55       02.10.2003       02.10.2010       5,674  
      32,155 (2)             277.55       02.10.2003       02.10.2010       32,155  
      6,810 (1)             209.22       22.03.2004       22.03.2011       6,810  
      18,282 (2)             209.22       22.03.2004       22.03.2011       18,282  
      31,608 (2)             174.50       24.05.2005       24.05.2012       31,608  
      88,505 (2)             62.32       10.03.2006       10.03.2013       88,505  
      190,240 (2)             123.53       02.03.2007       02.03.2014       190,240  
              158,995 (2)     179.25       11.03.2008       11.03.2015       158,995  
                                     
Total options
    424,203       146,273                               570,476  
                                     

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(1)  International Power Approved Executive Share Options
 
(2)  International Power Unapproved Executive Share Options
 
(3)  National Power “Legacy” Unapproved Executive Share Options
 
(4)  International Power Global Executive Share Options
 
(5)  On appointment as a Director 1 June 2005
Summary of Directors’ Options under the Sharesave Plan
      The table below sets forth the awards we have made to our Executive Directors under the Sharesave Plan as at 31 December 2005:
                                         
        No. of Shares   Exercise        
        Under   Price per   Exercise   Exercise
    Grant Date   Option   Share   Period from   Period to
                     
Philip Cox
    1 October 2002       20,499       80.12p       24 December 2007       24 June 2008  
Mark Williamson
    1 October 2002       11,793       80.12p       24 December 2005       24 June 2006  
                               
Total
            32,292                          
                               
      In addition to the above, we granted further Sharesave options to our executive directors, as follows:
                                         
        No. of Shares   Exercise        
        Under   Price per   Exercise   Exercise
    Grant Date   Option   Share   Period from   Period to
                     
Mark Williamson
    4 January 2006       8,050       200.00p       1 March 2011       31 August 2011  
Steve Riley
    4 January 2006       4,675       200.00p       1 March 2009       31 August 2009  
Tony Concannon
    4 January 2006       8,050       200.00p       1 March 2011       31 August 2011  
Bruce Levy(1)
    4 January 2006       8,050       200.00p       1 March 2011       31 August 2011  
                               
Total
            28,825                          
                               
 
(1)  Options granted under the Company’s global sharesave plan
Gains made on Directors’ Share Options
      In the financial period ended 31 December 2005, the following sharesave options were exercised by Directors:
                                 
    No. of            
    Shares       Exercise Price   Market Value on
    Exercised   Date of Exercise   per Share   Date of Exercise
                 
Steve Riley
    11,793       28 December 2005       80.12p       242.25p  
Tony Concannon
    9,435       28 December 2005       80.12p       242.25p  
                         
Total
    21,228                          
                         
      All shares were retained by Directors, therefore no gains were realised.

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Item 7. Major Shareholders and Related Party Transactions
Major Shareholders
      As at 15 June 2006 (the latest practicable date prior to the publication of this document) the following persons had notified us of the following interests in 3% or more of our issued share capital pursuant to the Companies Act 1985:
                 
        Percentage
    Number of   of Issued
    Ordinary   Share
Name   Shares   Capital
         
Legal and General Investment Management Limited
    58,779,494       3.96 %
Standard Life Investments Limited
    58,397,077       3.93 %
AXA S.A. 
    74,899,385 (1)     5.03 %(2)
 
(1)  Announced Pre Rights Issue.
 
(2)  Percentage figure relates to issued share capital Pre Rights Issue.
      Our major shareholders have identical voting rights to the other shareholders.
      Save as disclosed above, so far as is known to the Directors, there is no person who directly or indirectly is or will be interested in 10% or more of our issued share capital. So far as is known to the Directors, there is no person who could, directly or indirectly, jointly or severally, exercise control over us.
      As of 15 June 2006, the total amount of our voting securities owned by our Directors and executive officers as a group was 1,701,955 shares, or 0.11% of the issued share capital. For a table showing the amount of our ordinary shares owned by our Directors and executive officers on an individual basis, see “Item 6. Directors Senior Management and Employees — Directors’ and Executive Officers’ Interests”.
      Other than as set forth in “Current Directors”, none of our Directors or executive officers has or have any non-beneficial interest in any of our ordinary shares.
Number of US Holders
      On 23 June 2006 (the latest practicable date prior to the publication of this document) there were 835 registered holders of 613,130 of our shares with addresses in the United States, and 1 registered holder of 1,873,752 of our registered ADSs (equivalent to 18,737,520 ordinary shares), whose combined holdings constituted approximately 1.30% of our total issued share capital. Some of our shares are held by brokers and other nominees (in the form of our shares), and as a result the above numbers may not be representative of the actual number of beneficial holders or of the number of our shares beneficially held by persons in the United States.
Related Party Transactions
      During the last three financial years, neither we nor any of our subsidiaries has been, or is now, a party to any material transaction or proposed transaction in which any Director, any other executive officer, any spouse or other relative of any of the foregoing, or any relative of such spouse, has or was to have a direct or indirect material interest.
      For further information on related party transactions, see note 39 to our audited consolidated financial statements.
Item 8. Financial Information
Consolidated Statements and Other Financial Information
      See “Item 17. Financial Statements” for our audited consolidated financial statements filed as part of this annual report.

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Item 9. The Offer and Listing
      Our shares are listed on the London Stock Exchange. Our registered ADSs are listed on the New York Stock Exchange under the symbol “IPR”.
      Each ADS represented four shares until 18 August 2000. Since 18 August 2000, each ADS represents ten shares.
      The following table sets out for the periods indicated, the highest and lowest closing middle-market quotations as well as the average daily trading volume, for our ordinary shares, as derived from the London Stock Exchange Daily Official List, and for our ADSs, as reported on the Dow Jones Index and adjusted to reflect an ADS to ordinary share ratio of one to ten.
                                                 
    Ordinary Shares   ADSs
         
        Average       Average
        Daily       Daily
        Trading   High   Low   Trading
Calendar Year   High p   Low p   Volume   $   $   Volume
                         
2003
                                               
First Quarter
    104.50       70.00       7,246,030       16.77       11.10       2,803  
Second Quarter
    131.50       84.75       9,336,725       21.97       13.21       2,060  
Third Quarter
    160.00       127.50       12,451,129       25.57       20.59       4,161  
Fourth Quarter
    140.00       113.25       10,565,594       23.43       19.40       1,081  
2004
                                               
First Quarter
    147.00       122.25       11,725,602       27.05       21.66       2,716  
Second Quarter
    154.00       137.75       9,104,300       28.60       24.65       2,300  
Third Quarter
    147.25       129.75       13,915,100       27.60       24.80       3,300  
Fourth Quarter
    160.75       148.50       12,352,000       30.85       26.70       5,700  
2005
                                               
First Quarter
    186.00       153.59       15,719,200       36.45       29.48       8,300  
Second Quarter
    206.00       178.00       9,289,500       37.49       33.80       6,800  
Third Quarter
    250.25       204.50       12,337,800       45.44       36.12       5,900  
Fourth Quarter
    252.25       218.00       9,375,300       45.18       39.10       6,400  
Most Recent 6 months
                                               
2005
                                               
December
    250.00       239.50       7,764,200       44.65       42.01       6,000  
2006
                                               
January
    276.00       243.00       14,292,500       50.00       43.01       8,600  
February
    295.75       270.25       13,340,000       51.89       48.00       10,300  
March
    288.25       268.50       13,135,300       51.30       47.79       6,100  
April
    308.25       281.50       11,894,300       55.40       49.64       5,100  
May
    308.00       265.75       14,664,300       58.25       50.55       21,900  
Five Most Recent Financial Years
                                               
Year ended 31 December 2001
    327.30       189.50       8,440,012       46.55       27.10       9,913  
Year ended 31 December 2002
    221.00       83.50       9,114,647       31.76       13.10       4,239  
Year ended 31 December 2003
    160.00       70.00       9,944,841       25.57       11.10       2,506  
Year ended 31 December 2004
    160.75       122.25       11,428,900       30.85       21.66       3,600  
Year ended 31 December 2005
    252.25       153.59       11,651,900       45.44       29.48       6,900  

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Dividends
      The Board recommended a final dividend of 4.5p per Ordinary Share (2004: 2.5p), an increase of 80% year-on-year and representing a pay-out ratio of 33% of pre-exceptional EPS. We have increased our pay-out ratio earlier than planned (previously 30%), in light of our strong financial performance. Our intention is to progressively move towards a dividend pay-out ratio of 40% in the medium-term remains unchanged.
      Payment of this dividend, to shareholders registered on the Company Share register on 26 May 2006, was made on 23 June 2006 following approval at the 2006 AGM, which was held on 17 May 2006.
Item 10. Additional Information
      Our ordinary share capital as at the close of business on 31 December 2005 was as follows:
                                 
    Authorised   Issued
         
    Number   Amount (£)   Number   Amount (£)
                 
Ordinary shares of 50 pence each
    2,266,000,000       1,133,000,000       1,474,736,637       737,368,319  
Deferred shares of 1 pence each
    21       0.21       21       0.21  
Special rights redeemable preference share
    1       1.00       0       0  
      Since 1 January 2006, 13,080,101 shares have been allotted pursuant to the Company’s employee Share Option Schemes for an aggregate consideration of £10,583,418.
      We have also authorised the allotment of ordinary shares to be issued upon conversion of International Power (Jersey) Limited’s 3.75 per cent. convertible US dollar bonds and upon exercise of outstanding stock options. See “— History of the Share Capital for the Last Three Years” and “Options to Purchase our Securities — Outstanding Options”.
History of the Share Capital for the Last Three Years
      The alterations in our share capital in the preceding three years (the latest practicable date prior to the publication of this document) are set out below:
      Between 1 January 2003 and 31 December 2003, 182,797 shares were allotted under the Share Option Schemes for an aggregate consideration of £128,347. In addition to these allotments, between 1 January 2003 and 31 December 2003, a total of 10,652,323 ordinary shares were purchased by the Company for an aggregate consideration of £12,847,593. Following purchase, these 10,652,323 shares were cancelled by the Company.
      Between 1 January 2004 and 31 December 2004, 636,238 shares were allotted under the share option schemes for an aggregate consideration of £450,420.
      Our rights issue closed on 14 September 2004. On 20 September 2004, a total of 365,540,834 ordinary shares were issued at 82 pence per share in a 33 for 100 rights issue. Of the total £285,743,483 raised net of £14 million in expenses, £182,770,417 was credited to share capital and £102,973,066 to the share premium account.
      Between 1 January 2005 and 31 December 2005, 1,467,571 shares were allotted under the Share Option Schemes for an aggregate consideration of £1,556,716.54. There were no further movements in share capital in this period.
      By a special resolution passed on 19 May 2003, shareholders gave authority for the disapplication of statutory pre-emption provisions of section 89 of the Companies Act in respect of our ordinary shares having an aggregate nominal value of £27,939,038, this authority expired at the conclusion of the AGM held in 2004.
      By a special resolution passed on 12 May 2004, shareholders gave authority for the disapplication of the statutory pre-emption provisions of Section 89 of the Companies Act in respect of our ordinary shares having an aggregate nominal value of £27,684,876, this authority expired at the conclusion of the AGM held in 2005.

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      By an ordinary resolution passed on 25 November 2004, shareholders gave authority for our authorised share capital to be increased from £850,000,001.21 to £1,133,000,001.21 by the creation of 566,000,000 ordinary shares.
      By an ordinary resolution dated 17 May 2005, in accordance with Section 80 of the Companies Act 1985, our shareholders generally and unconditionally authorised the Directors to exercise all of our powers to allot relevant securities (as defined within Section 80(2) of the Act, being our ordinary shares) up to an aggregate nominal value of £245,559,084, this authority expiring at the conclusion of our Annual General Meeting to be held in 2006 or on 17 August 2006, whichever is the earlier.
      Additionally, by a Special Resolution passed on 17 May 2005, our shareholders gave authority for the disapplication of the statutory pre-emption provisions of Section 89 of the Companies Act 1985) up to an aggregate nominal value of £36,833,862, this authority expiring at the conclusion of our Annual General Meeting to be held in 2006 or on 17 August 2006, whichever is the earlier
      Save as disclosed above since 31 December 2003 to 15 June 2006 (the latest practicable date prior to the publication of this document) there have been no changes in our issued share capital and no material changes in the issued share capital of any of our subsidiaries other than intra-group issues by wholly-owned subsidiaries, pro rated issues by partly owned subsidiaries or changes in the capital structure of subsidiaries which have remained wholly-owned throughout the period.
      Save as referred to in this paragraph and under “Employee Share Plans”:
  •  neither we nor any of our subsidiaries have granted any commission, discounts or other special terms in the three years immediately preceding the date of this document, in connection with the issue or sale of any of our share or loan capital or that of any of our subsidiaries;
 
  •  none of our share capital nor that of any of our subsidiaries is under option or is agreed conditionally or unconditionally to be put under option; and
 
  •  none of our share capital nor that of any of our subsidiaries has, within three years before the date of this document, been issued or agreed to be issued or is now proposed to be issued fully or partly paid either for cash or for a consideration other than cash to any person not being another member of the Group.
Memorandum and Articles of Association
      Our Memorandum and Articles of Association have been described as part of our annual report for 2002 filed on Form 20-F with the US Securities and Exchange Commission and are hereby incorporated by reference. On 17 May 2006, our Articles of Association were amended to modify the provisions thereof relating to the indemnification of our officers and directors and the power to purchase insurance. This amendment in response to a change in English law that permits public limited companies to indemnify officers and directors to a greater extent than was previously possible. A copy of our revised Memorandum and Articles of Association has been filed as an exhibit to this annual report on Form 20-F.
Material contracts
Coleto Creek Purchase and Sale Agreement
      On 19 April 2006, ANP ERCOT Acquisition, LLC, or ANP ERCOT, and Topaz Power Group GP, LLC and Topaz Power Group LP, LLC entered into an agreement relating to the purchase and sale of the 632 MW coal fired Coleto Creek power generation facility for a total cash consideration of US$1.14 billion (approximately £640 million). Our investment will be US$288 million (approximately £162 million) and will be funded by a fully underwritten non-recourse debt facility of US$935 million (approximately £525 million).
      Closing under the purchase and sale agreement is subject to customary conditions, including obtaining necessary financing. The purchase and sale agreement contains representations, warranties, indemnities and covenants customary for a transaction of this nature.

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Saltend Purchase and Sale Agreement
      On 28 May 2005, Calpine UK Holdings Limited, Calpine Corporation, Quintana Canada Holdings, LLC, Normantrail (UK CO 3) Limited, International Power plc and Mitsui & Co., Ltd. entered into an agreement for the purchase and sale of the 1,200 MW CCGT Saltend power plant in Hull, England. We purchased this plant in a 70:30 partnership with Mitsui & Co., Ltd of Japan for a total consideration of £495 million. The acquisition closed on 28 July 2005 and was funded by a mix of debt and equity in a 55:45 ratio.
      Closing under the purchase and sale agreement was subject to customary conditions, including obtaining certain regulatory approvals and having in place necessary financing. The purchase and sale agreement contains representations, warranties, indemnities and covenants customary for a transaction of this nature.
The Rights Issue Underwriting Agreement
      On 30 July 2004, International Power plc and Morgan Stanley Securities Limited, Cazenove and Morgan Stanley & Co. International Limited entered into the Rights Offer Underwriting Agreement, or underwriting agreement, pursuant to which the underwriters agreed, subject to certain conditions, to underwrite the new ordinary shares to be issued pursuant to the rights issue (other than those new ordinary shares in respect of which the Directors have given irrevocable undertakings to take up their rights). The underwriters agreed to use reasonable endeavours to procure subscribers for the new ordinary shares not taken up under the rights issue at a price not less than the issue price for the new ordinary shares and the expenses of the underwriters in procuring such subscribers, failing which the underwriters jointly and severally agreed to subscribe (or procure subscribers) for any such shares at the issue price.
      The Underwriters were entitled to offer any new ordinary shares not taken up under the rights issue (i) within the United States to qualified institutional buyers in private placement transactions not involving a public offering, and (ii) outside of the United States in offshore transactions in accordance with Regulation S under the United States Securities Act of 1933, as amended. In consideration of such underwriting, we agreed to pay the underwriters a commission of 0.5% of the total value at the issue price of the number of underwritten new ordinary shares in respect of the first 42 days from the date of the underwriting agreement, a further commission of 0.5% of the total value at the issue price of the number of underwritten new ordinary shares for each additional period of seven days (or part thereof) after the expiry of the initial period of 42 days, a further commission, in our absolute discretion, of 0.5% of the aggregate value at the issue price of the number of underwritten new ordinary shares and a further commission of 2% of the total value of the underwritten new ordinary shares at the issue price upon the obligations of the underwriters under the underwriting agreement becoming unconditional in all respects (which occurred on 23 August 2004).
      The underwriting agreement contains standard warranties and indemnities for underwriting agreements of this nature given by us to the underwriters, including indemnification for liabilities under the United States Securities Act of 1933. There are no time or value limits on claims under the warranties and indemnities.
Exchange Controls
      There are no governmental laws, decrees or regulations that restrict or that affect the export or import of capital, including, but not limited to foreign exchange capital restrictions, or that affect the remittance of dividends or other payments to non-resident holders of our securities.
Taxation
      The following is a summary of the material US federal income tax consequences of the ownership and disposition of ordinary shares or ADSs by a US Holder (as defined below) that holds the ordinary shares or ADSs as capital assets. The discussion does not cover all aspects of US federal income taxation that may be relevant to, or the actual tax effect that any of the matters described herein will have on the ownership or disposition of ordinary shares or ADSs by particular investors and does not address state, local, foreign or other tax laws. In particular, this summary does not address US federal income tax considerations applicable to investors that own (directly or indirectly) 10% or more (by vote or value) of our voting stock, nor does this summary discuss all of

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the tax considerations that may be relevant to certain types of investors subject to special treatment under the US federal income tax laws (such as financial institutions, banks, insurance companies, certain U.S. expatriates, investors liable for the alternative minimum tax, individual retirement accounts and other tax-deferred accounts, regulated investment companies, tax-exempt organisations, dealers in securities or currencies, securities traders that elect mark-to-market tax accounting, investors that will hold the ordinary shares or ADSs as part of straddles, hedging transactions or conversion transactions for US federal income tax purposes or investors whose functional currency is not the US dollar).
      The summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed Treasury Regulations thereunder, administrative rulings and court decisions, all in effect as of the date of this annual report and all subject to change at any time, perhaps with retroactive effect.
      As used herein, the term US Holder means a beneficial owner of ordinary shares or ADSs that is, for US federal income tax purposes, (i) a citizen or individual resident of the United States (ii) a corporation, or other entity treated as a corporation, created or organised in or under the laws of the United States or any State thereof, (iii) an estate the income of which is subject to US federal income tax without regard to its source or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more US persons (as defined in the Code) have the authority to control all substantial decisions of the trust or if the trust has made a valid election under Treasury Regulations to be treated as a domestic trust. If a partnership holds ordinary shares or ADSs, the tax treatment of a partner in such partnership generally will depend upon the status of the partner and the activities of the partnership. Therefore, partners of a partnership holding ordinary shares or ADSs should consult their own tax advisors regarding the US federal income tax consequences of beneficially owning ordinary shares or ADSs through a partnership.
      The summary of US federal income tax consequences set out below is for general information only. US Holders should consult their own tax advisors as to the particular tax consequences to them of owning ordinary shares and ADSs, including the applicability and effect of state, local, foreign and other tax laws and possible changes in the tax laws.
US Holders of ADSs
      For US federal income tax purposes, a US Holder of ADSs generally will be treated as the owner of the ordinary shares that such ADSs represent, and references herein to ordinary shares refer also to ADSs representing the ordinary shares.
Dividends
      General. Subject to the discussions under “Passive Foreign Investment Company” below, the US dollar value of distributions paid by International Power plc out of its current or accumulated earnings and profits (as determined for US federal income tax purposes) will generally be taxable to a US Holder as foreign source dividend income and, will not be eligible for the dividends received deduction allowed to corporations with respect to dividend received from US corporations. Certain dividends received by non-corporate taxpayers through taxable years beginning on or before 31 December 2008 are subject to a reduced maximum tax rate of 15 per cent. so long as (i) the taxpayer meets specified holding period requirements, (ii) the taxpayer is not under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property, (iii) the ADSs are readily tradable on an established securities market in the United States and (iv) the company paying the dividend is not a “passive foreign investment company” (or a PFIC) for the year of distribution or the prior year. International Power plc believes that its dividends are generally eligible for this reduced US tax rate.
      For the purposes of the foreign tax credit limitation, foreign source income is classified into one of several baskets, and the credit for foreign taxes on income in any basket is limited to US federal income tax allocable to that income. The US Foreign Credit tax rules are very complex. US Holders should consult their own advisors with respect to the application of these rules in their particular circumstances.

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Exchange of ADSs for Ordinary Shares
      No gain or loss will be recognised upon an exchange of ADSs for the US Holder’s proportionate interest in ordinary shares. A US Holder’s tax basis in the ordinary shares will be the same as the US Holder’s tax basis in the ADSs surrendered, and the holding period of the ordinary shares will include the holding period of the ADSs.
Sale or Other Taxable Disposition
      Subject to the discussions under “Passive Foreign Investment Company” below, upon a sale or other taxable disposition of ADSs or ordinary shares, a US Holder generally will recognise capital gain or loss for US federal income tax purposes in an amount equal to the difference, if any, between the amount realised on the sale or other taxable disposition and the US Holder’s tax basis in the ADSs or ordinary shares at the time of such sale or other taxable disposition. If the US Holder has held the ordinary shares or ADSs for more than one year at the time of such sale or other taxable disposition, such gain or loss will be long-term capital gain or loss. In the case of non-corporate US Holders, long-term capital gain generally will be taxed at a rate not exceeding 15% of such gain. In the case of corporate US Holders, such gain generally is taxed at the same rate as ordinary income.
Passive Foreign Investment Company
      Generally, for US federal income tax purposes, International Power plc will be a PFIC, for any taxable year if either (i) 75% or more of its gross income is “passive” income or (ii) 50% or more of the value of its assets, determined on the basis of a quarterly average, is attributable to assets that produce or are held for the production of passive income. Passive income generally includes dividends, interest, royalties and rents not arising from the active conduct of a trade or business, and gains from the sale of assets that produce such income. If International Power plc is a PFIC in any taxable year that a US Holder owns ordinary shares or ADSs, the US Holder may be subject to tax at ordinary income rates, and pay interest, on (a) a portion of any gain recognised on the sale of the ordinary shares or ADSs and (b) any “excess distribution” paid on the shares or ADSs (generally, a distribution in excess of 125% of the average annual distributions paid by us in the three preceding taxable years).
      Based on its current activities and assets, International Power plc does not believe that it is a PFIC, and does not expect to become a PFIC in the foreseeable future. However, the determination of whether a company is a PFIC is made annually. Accordingly, it may be possible that International Power plc will be a PFIC in the current or any future year due to changes in its asset or income composition.
Backup Withholding and Information Reporting
      Payments of dividends and other proceeds with respect to ordinary shares or ADSs by a US paying agent or other US intermediary will be reported to the IRS and to the US Holder as may be required under applicable Treasury Regulations. Backup withholding may apply to these payments if the US Holder fails to provide an accurate taxpayer identification number or certification of exempt status or otherwise company with the backup withholding rules. Certain US Holders (including, among others, corporations) can establish that they are not subject to backup withholding and information reporting. Backup withholding is not an additional tax. The amount or any backup withholding collected from a payment to a US Holder will be allowed as a credit against the US Holder’s US federal income tax liability and may entitle the US Holder to a refund, provided that certain information is furnished to the IRS in a timely manner.

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Item 11. Quantitative and Qualitative Disclosures About Market Risk
      See pages F-57 to F-69 of our audited consolidated financial pages.
Item 12. Description of Securities Other than Equity Securities
      Not applicable
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
      Not applicable
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
      Not applicable
Item 15. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
      As recommended by the U.S. Securities and Exchange Commission, or SEC, we have established a Disclosure Controls Committee. The Disclosure Committee reports to our Chief Executive Officer, Chief Financial Officer and to the Audit Committee. It is chaired by the Company Secretary and Corporate Counsel and the members consist of senior managers from finance, internal audit, corporate services and investor relations. It has responsibility for considering the materiality of information and on a timely basis, determination of the disclosure and treatment of material information. The Disclosure Committee also has responsibility for the timely filing of reports with the SEC and the formal review of the contents of our Annual Report on Form 20-F.
      Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this annual report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that material information relating to us and our consolidated subsidiaries is recorded, processed, summarised and reported in a timely manner.
      There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention of overriding of such controls and procedures. In addition, we have limited influence over the controls and procedures of entities in which we hold a minority interest. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Changes in Internal Controls
      There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect such controls subsequent to the Evaluation Date.
      We are in the process of implementing a plan to align our internal control systems with the requirements established in Section 404 of the Sarbanes Oxley Act. Section 404 requires that, in addition to the annual audit, management prepares a report on the design, maintenance and periodic evaluation of our internal control system for financial reporting, which is to be accompanied by an attestation report by our external auditor.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
      Tony Isaac is our Audit Committee financial expert as defined in the rules promulgated under the Sarbanes-Oxley Act of 2002.

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Item 16B. Code of Ethics
      We have a code of ethics as defined in the rules promulgated under the Sarbanes-Oxley Act of 2002. The text of the code is available on our website at www.ipplc.com.
Item 16C. Principal Accountant Fees and Services
      The selection of our independent external auditors was approved by the Audit Committee. Following is a summary of the fees paid to our independent external auditors for the years ended 31 December 2005 and 2004:
                 
    Year Ended   Year Ended
    31 December 2005   31 December 2004
         
    (£ in millions)
Audit fees
    1.6       1.2  
Audit-related fees
    0.4       0.4  
Other fees
    0.6       1.5  
             
Total Fees
    2.6       3.1  
             
      All other fees in 2005 and 2004 related principally to due diligence assistance. In 2005, fees of £0.1 million were paid to KPMG Audit Plc in respect of due diligence assistance and capitalised as part of acquisition costs relating to Saltend. During 2004, fees of £1.3 million were paid to KPMG Audit Plc for assurance services provided in connection with the Group’s acquisitions of the international assets of Edison Mission Energy (EME). These fees were capitalised as part of the costs of acquisition and are included in other fees in the above table.
Item 16D. Exemptions from the Listing Standards for Audit Committees
      Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
      Not applicable.

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PART III
Item 17. Financial Statements
      See pages F-1 to F-92.
Item 18. Financial Statements
      See “Item 17. Financial Statements”.
Item 19. Exhibits
         
Exhibit    
Number   Description of Exhibit
     
  1 .1   Memorandum and Articles of Association of International Power plc
 
  4 .1   Coleto Creek Purchase and Sale Agreement
 
  4 .2   Saltend Purchase and Sale Agreement
 
  8 .0   Subsidiaries
 
  12 .1   Certificate of Chief Executive Officer pursuant to Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934
 
  12 .2   Certification of Chief Financial Officer pursuant to Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934
 
  13 .1   Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
  13 .2   Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES
      The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorised the undersigned to sign this annual report on its behalf.
  INTERNATIONAL POWER PLC
  By:  /s/ Mark Williamson
 
 
  Mark Williamson
  Chief Financial Officer and Director

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Index to the Financial Statements
         
    Page
     
Statement of Directors’ responsibilities
    F-2  
    F-3  
    F-4  
    F-5  
    F-6  
    F-7  
    F-8  

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Statement of Directors’ responsibilities
In respect of the annual report and the financial statements
      The Directors are responsible for preparing the Annual Report and the Group and Company financial statements, in accordance with applicable law and regulations.
      Company law requires the Directors to prepare Group and Company financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU.
      The Group financial statements are required by law and IFRSs as adopted by the EU to present fairly the financial position and performance of the Group. The Companies Act 1985 provides, in relation to such financial statements, that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation.
      The Company financial statements are required by law to give a true and fair view of the state of affairs of the parent company.
      In preparing each of the Group and Company financial statements, the Directors are required to:
  •  select suitable accounting policies and then apply them consistently;
 
  •  make judgements and estimates that are reasonable and prudent;
 
  •  for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU;
 
  •  for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements;
 
  •  prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business.
      The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
      Under applicable law and regulations, the Directors are also responsible for preparing a Directors’ report, Directors’ remuneration report and corporate governance statement that comply with that law and those regulations.
      The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

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Report of independent registered public accounting firm
To the Board and Members of International Power plc
      We have audited the accompanying consolidated balance sheets of International Power plc and subsidiaries (“the Group”) as of 31 December 2004 and 31 December 2005, and the related consolidated income statements, consolidated statements of changes in equity and consolidated cash flow statements for each of the years in the two-year period ended 31 December 2005. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Power plc and subsidiaries as of 31 December 2005 and 2004 and the results of their operations and their cash flows for each of the years in the two-year period ended 31 December 2005 in conformity with International Financial Reporting Standards (“IFRS”) as adopted by the European Union.
      As referred to in note 1 (o) to the consolidated financial statements, International Power plc changed its method of accounting for certain financial instruments with effect from January 1, 2005, upon the adoption of International Accounting Standards 32 and 39.
      IFRS as adopted by the European Union vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 44 to the consolidated financial statements.
     
KPMG Audit Plc
   
London, England
  8 Salisbury Square
Chartered Accountants
  London EC4Y 8BB
6 March 2006
Except as to notes 41 and 44, as to which the date is 30 June 2006

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CONSOLIDATED INCOME STATEMENT
                                                           
        Year Ended 31 December 2005   Year Ended 31 December 2004
             
        Excluding       Including   Excluding       Including
        Exceptional   Exceptional   Exceptional   Exceptional   Exceptional   Exceptional
    Note   Items   Items   Items   Items   Items   Items
                             
        £m   £m   £m   £m   £m   £m
Revenue: Group and share of joint ventures and associates
    2       2,936             2,936       1,267             1,267  
Less: share of joint ventures’ revenue
    15       (309 )           (309 )     (144 )           (144 )
Less: share of associates’ revenue
    15       (694 )           (694 )     (355 )           (355 )
                                           
Group revenue
    2       1,933             1,933       768             768  
Cost of sales
    8       (1,565 )     52       (1,513 )     (637 )           (637 )
                                           
Gross profit
            368       52       420       131             131  
Other operating income
    8       64       58       122       56             56  
Other operating expenses
    8       (129 )           (129 )     (78 )     11       (67 )
Share of results of joint ventures and associates
    2/15       198             198       113             113  
                                           
Profit from operations
            501       110       611       222       11       233  
Disposal of investments
    8             10       10             4       4  
Finance income
    4       53             53       30             30  
Finance expenses
    5/8       (255 )           (255 )     (107 )     (31 )     (138 )
                                           
Net financing costs
            (202 )           (202 )     (77 )     (31 )     (108 )
                                           
Profit before tax
            299       120       419       145       (16 )     129  
Income tax expense
    8/9       (55 )     (34 )     (89 )     (25 )           (25 )
                                           
Profit for the year
    3       244       86       330       120       (16 )     104  
                                           
Attributable to:
                                                       
Minority interests
            45             45       8       (2 )     6  
Equity holders of the parent
            199       86       285       112       (14 )     98  
                                           
Earnings per share:
    11                                                  
 
Basic
            13.5 p             19.4 p     8.6 p             7.5 p
 
Diluted
            13.0 p             18.5 p     8.5 p             7.4 p
Dividends per share
            2.5 p             2.5 p                    
                                           
      Following the implementation of IFRS, the Group has decided to continue with its separate presentation of certain items as exceptional. These are items which, in the judgement of the Directors, need to be disclosed separately, by virtue of their size or incidence in order for the reader to obtain a proper understanding of the financial information (refer to note 8).
The accompanying notes are an integral part of these consolidated financial statements.

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