##### 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 1934ORx
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2003ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from
to


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 RegisteredOrdinary 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
    
    1,107,091,994


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.

x Yes
    
    o No


Indicate by check mark which financial statement item the registrant has
elected to follow.

o Item 17
    
    x Item 18


---

---





---



##### Table of Contents



TABLE OF CONTENTS Item 1.
    
    Identity of Directors, Senior Management and Advisors
    
    
    5Item 2.
    
    Offer Statistics and Expected Timetable
    
    
    5Item 3.
    
    Key Information
    
    
    6Item 4.
    
    Information on the Company
    
    
    19Item 5.
    
    Operating and Financial Review and Prospects
    
    
    30Item 6.
    
    Directors, Senior Management and Employees
    
    
    56Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    75Item 8.
    
    Financial Information
    
    
    76Item 9.
    
    The Offer and Listing
    
    
    77Item 10.
    
    Additional Information
    
    
    79Item 11.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    86Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    86Item 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    87Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    87Item 15.
    
    Controls and Procedures
    
    
    87Item 16.
    
    [Reserved]
    
    
    88Item 17
    
    Financial Statements
    
    
    89Item 18.
    
    Financial Statements
    
    
    89Item 19.
    
    Exhibits
    
    
    90EXHIBIT 8EXHIBIT 99.1EXHIBIT 99.2
 - 2 -




---



##### Table of Contents



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 450 Fifth Street, N.W., 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.
Pursuant to the indenture governing our 2 per cent. Senior Convertible Notes
due 2005, we have agreed to furnish to the SEC quarterly financial information.
Such quarterly information will be furnished to the SEC within 90 days
following the end of each of our first three fiscal quarters. We have also
agreed to file our annual report on Form 20-F with the SEC within 120 days
following the end of each fiscal year for so long as those Notes remain
outstanding. Certain of these documents are also available at the
International Power website at www.ipplc.com. The information on our website
is not a part of this annual report. FORWARD-LOOKING STATEMENTS This annual report includes forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, which we refer to
herein as the Securities Act, and Section 21E of the Securities Exchange Act of
1934, as amended, which we refer to herein as the Exchange Act. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us and the markets within which we operate,
including, among other things:  
    
    our lack of long-term power purchase agreements with respect to
a significant portion of our projects;
    
    our default under certain facilities and potential inability to
renegotiate such 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; - 3 -




---



##### Table of Contents




    
    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;
    
    our projects are subject to risks which may restrict their
ability to pay dividends or make other distributions to us;
    
    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;
    
    market prices for power in the markets where some of our
projects operate have been volatile and 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; and
    
    in connection with our demerger from Innogy, we indemnified
Innogy and received indemnities from Innogy in respect of liabilities
arising before the demerger. 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. - 4 -




---



##### Table of Contents



PART I 
 Item 1. Identity of Directors, Senior Management and Advisors Not Applicable 
 Item 2. Offer Statistics and Expected Timetable Not Applicable - 5 -




---



##### Table of Contents



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 18. Financial Statements and other financial statements. Prior to
30 September 2000, we were incorporated under the name National Power PLC. On
30 September 2000, we demerged substantially all of our UK businesses into
Innogy Holdings plc, or Innogy and we were incorporated under the name
International Power plc with effect from that date. Consequently, the selected
consolidated financial information set forth below for the periods ended prior
to the demerger do not reflect our results of operations, financial condition
or cash flows as they would have been had we operated as a separate entity
during the periods prior to the demerger. In addition, during 2000, we changed
our financial year end from 31 March to 31 December. Consequently, our first
financial period to 31 December is comprised of the nine months ended 31
December 2000. As a result of these events, our results of operations,
financial condition and cash flows for the periods ended prior to 31 December
2000 are not directly comparable with other periods presented in this annual
report. Our consolidated financial statements have been prepared in accordance
with UK GAAP, which differs in certain significant respects from US GAAP.
Information relating to the nature and effect of such differences is summarised
in note 35 to our consolidated financial statements included elsewhere in this
document. - 6 -




---



##### Table of Contents



Profit and loss data for our total Group, which includes our continuing
and discontinued activities: 9 monthsended 31
    
    Year endedYear ended 31 December
    
    December
    
    31 March2003(1)
    
    2003
    
    2002
    
    2001
    
    2000
    
    2000($ in millions,except pershare data)
    
    (£ in millions, except per share data)UK GAAP  GroupTurnover: Group and share of joint ventures and associates
    
    
    2,271
    
    
    
    1,273
    
    
    
    1,129
    
    
    
    1,103
    
    
    
    2,340
    
    
    
    4,421Less: share of joint ventures and associates turnover
    
    
    (751
    )
    
    
    (421
    )
    
    
    (412
    )
    
    
    (546
    )
    
    
    (483
    )
    
    
    (670
    )Group turnover
    
    
    1,520
    
    
    
    852
    
    
    
    717
    
    
    
    557
    
    
    
    1,857
    
    
    
    3,751Operating
costs - ordinary
    
    
    (1,297
    )
    
    
    (727
    )
    
    
    (509
    )
    
    
    (392
    )
    
    
    (1,680
    )
    
    
    (3,185
    )Operating
costs - exceptional
    
    
    (721
    )
    
    
    (404
    )
    
    
    (103
    )
    
    
    (2
    )
    
    
    (227
    )
    
    
    (1,393
    )Excluding exceptional items
    
    
    223
    
    
    
    125
    
    
    
    208
    
    
    
    165
    
    
    
    177
    
    
    
    566Exceptional items
    
    
    (721
    )
    
    
    (404
    )
    
    
    (103
    )
    
    
    (2
    )
    
    
    (227
    )
    
    
    (1,393
    )Operating (loss)/profit
    
    
    (498
    )
    
    
    (279
    )
    
    
    105
    
    
    
    163
    
    
    
    (50
    )
    
    
    (827
    )Share of
operating profit of joint ventures and associates  - ordinary
    
    
    227
    
    
    
    127
    
    
    
    149
    
    
    
    161
    
    
    
    110
    
    
    
    140Share of operating profit of joint ventures and associates -
exceptional
    
    
    62
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income from fixed asset investments  ordinary
    
    
    59
    
    
    
    33
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    Income from fixed asset investments  exceptional
    
    
    
    
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    Operating (loss)/profit and fixed asset investment income
    
    
    (150
    )
    
    
    (84
    )
    
    
    327
    
    
    
    324
    
    
    
    60
    
    
    
    (687
    )Non-operating exceptional items
    
    
    48
    
    
    
    27
    
    
    
    
    
    
    
    32
    
    
    
    (105
    )
    
    
    1,296Excluding exceptional items
    
    
    509
    
    
    
    285
    
    
    
    388
    
    
    
    326
    
    
    
    287
    
    
    
    706Exceptional items
    
    
    (611
    )
    
    
    (342
    )
    
    
    (61
    )
    
    
    30
    
    
    
    (332
    )
    
    
    (97
    )(Loss)/profit on ordinary activities before interest and taxation
    
    
    (102
    )
    
    
    (57
    )
    
    
    327
    
    
    
    356
    
    
    
    (45
    )
    
    
    609Net interest payable and similar charges  ordinary
    
    
    (198
    )
    
    
    (111
    )
    
    
    (132
    )
    
    
    (123
    )
    
    
    (111
    )
    
    
    (192
    )Net interest payable and similar charges  exceptional
    
    
    (28
    )
    
    
    (16
    )
    
    
    
    
    
    
    (29
    )
    
    
    
    
    
    
    (Loss)/profit on ordinary activities before taxation
    
    
    (328
    )
    
    
    (184
    )
    
    
    195
    
    
    
    204
    
    
    
    (156
    )
    
    
    417Tax on (loss)/profit on ordinary activities
    
    
    (50
    )
    
    
    (28
    )
    
    
    (76
    )
    
    
    (64
    )
    
    
    (29
    )
    
    
    521(Loss)/profit on ordinary activities after taxation
    
    
    (378
    )
    
    
    (212
    )
    
    
    119
    
    
    
    140
    
    
    
    (185
    )
    
    
    938Minority
interests - equity
    
    
    (12
    )
    
    
    (7
    )
    
    
    (6
    )
    
    
    (2
    )
    
    
    (4
    )
    
    
    34Excluding exceptional items
    
    
    202
    
    
    
    113
    
    
    
    173
    
    
    
    137
    
    
    
    143
    
    
    
    529Exceptional items
    
    
    (592
    )
    
    
    (332
    )
    
    
    (60
    )
    
    
    1
    
    
    
    (332
    )
    
    
    443(Loss)/profit for the financial period
    
    
    (390
    )
    
    
    (219
    )
    
    
    113
    
    
    
    138
    
    
    
    (189
    )
    
    
    972Ordinary dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (175
    )Demerger dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (392
    )
    
    
    Retained (loss)/profit
    
    
    (390
    )
    
    
    (219
    )
    
    
    113
    
    
    
    138
    
    
    
    (581
    )
    
    
    797Basic earnings/(loss) per share:Basic excluding exceptional items
    
    
    18.2
    
    
    
    10.2
    
    
    
    15.5
    p
    
    
    12.3
    p
    
    
    12.8
    p
    
    
    43.5
    pAttributable to exceptional items
    
    
    (53.3
    )
    
    
    (29.9
    )
    
    
    (5.4
    )p
    
    
    
    
    
    
    (29.7
    )p
    
    
    36.4
    pBasic including exceptional items
    
    
    (35.1
    )
    
    
    (19.7
    )
    
    
    10.1
    p
    
    
    12.3
    p
    
    
    (16.9
    )p
    
    
    79.9
    pDiluted earnings per share
    
    
    (35.1
    )
    
    
    (19.7
    )
    
    
    10.1
    p
    
    
    12.0
    p
    
    
    (16.9
    )p
    
    
    79.8
    pDividends per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.0
    p
   Note:(1)
    
    Amounts translated for convenience at the noon-buying rate on 31 December
2003 of £1.00 = $1.7842. - 7 -




---



##### Table of Contents



Selected profit and loss account data for our continuing operations (ie,
excluding Innogy, which was demerged from the Group on 30 September 2000) for
all periods presented. 9 months ended
    
    Year endedYear ended 31 December
    
    31 December
    
    31 March2003(1)
    
    2003
    
    2002
    
    2001
    
    2000
    
    2000($ in millions,except pershare data)
    
    
    
    
    
    
    
    
    
    (£ in millions, except per share data)UK GAAP  ContinuingTurnover: Group and share of joint ventures and associates
    
    
    2,271
    
    
    
    1,273
    
    
    
    1,129
    
    
    
    1,103
    
    
    
    762
    
    
    
    1,021Less: share of joint ventures and associates turnover
    
    
    (751
    )
    
    
    (421
    )
    
    
    (412
    )
    
    
    (546
    )
    
    
    (478
    )
    
    
    (664
    )Group turnover
    
    
    1,520
    
    
    
    852
    
    
    
    717
    
    
    
    557
    
    
    
    284
    
    
    
    357Operating
costs - ordinary
    
    
    (1,297
    )
    
    
    (727
    )
    
    
    (509
    )
    
    
    (392
    )
    
    
    (225
    )
    
    
    (303
    )Operating
costs - exceptional
    
    
    (721
    )
    
    
    (404
    )
    
    
    (103
    )
    
    
    (2
    )
    
    
    
    
    
    
    (320
    )Excluding exceptional items
    
    
    223
    
    
    
    125
    
    
    
    208
    
    
    
    165
    
    
    
    59
    
    
    
    54Exceptional items
    
    
    (721
    )
    
    
    (404
    )
    
    
    (103
    )
    
    
    (2
    )
    
    
    
    
    
    
    (320
    )Operating (loss)/profit
    
    
    (498
    )
    
    
    (279
    )
    
    
    105
    
    
    
    163
    
    
    
    59
    
    
    
    (266
    )Share of
operating profit of joint ventures and associates - ordinary
    
    
    227
    
    
    
    127
    
    
    
    149
    
    
    
    161
    
    
    
    108
    
    
    
    137Share of operating profit of joint ventures and associates -
exceptional
    
    
    62
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income from fixed asset investments  ordinary
    
    
    59
    
    
    
    33
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    Income from fixed asset investments  exceptional
    
    
    
    
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    Operating (loss)/profit and fixed asset investment income
    
    
    (150
    )
    
    
    (84
    )
    
    
    327
    
    
    
    324
    
    
    
    167
    
    
    
    (129
    )Non-operating exceptional items
    
    
    48
    
    
    
    27
    
    
    
    
    
    
    
    32
    
    
    
    (99
    )
    
    
    (14
    )Excluding exceptional items
    
    
    509
    
    
    
    285
    
    
    
    388
    
    
    
    326
    
    
    
    167
    
    
    
    191Exceptional items
    
    
    (611
    )
    
    
    (342
    )
    
    
    (61
    )
    
    
    30
    
    
    
    (99
    )
    
    
    (334
    )(Loss)/profit on ordinary activities before interest and taxation
    
    
    (102
    )
    
    
    (57
    )
    
    
    327
    
    
    
    356
    
    
    
    68
    
    
    
    (143
    )Net interest payable and similar charges  ordinary
    
    
    (198
    )
    
    
    (111
    )
    
    
    (132
    )
    
    
    (123
    )
    
    
    (81
    )
    
    
    (96
    )Net interest payable and similar charges  exceptional
    
    
    (28
    )
    
    
    (16
    )
    
    
    
    
    
    
    (29
    )
    
    
    
    
    
    
    (Loss)/profit on ordinary activities before taxation
    
    
    (328
    )
    
    
    (184
    )
    
    
    195
    
    
    
    204
    
    
    
    (13
    )
    
    
    (239
    )Taxation
    
    
    (50
    )
    
    
    (28
    )
    
    
    (76
    )
    
    
    (64
    )
    
    
    (29
    )
    
    
    (50
    )(Loss)/profit after taxation
    
    
    (378
    )
    
    
    (212
    )
    
    
    119
    
    
    
    140
    
    
    
    (42
    )
    
    
    (289
    )Minority interests
    
    
    (12
    )
    
    
    (7
    )
    
    
    (6
    )
    
    
    (2
    )
    
    
    (4
    )
    
    
    34Excluding exceptional items
    
    
    202
    
    
    
    113
    
    
    
    173
    
    
    
    137
    
    
    
    53
    
    
    
    81Exceptional items
    
    
    (592
    )
    
    
    (332
    )
    
    
    (60
    )
    
    
    1
    
    
    
    (99
    )
    
    
    (336
    )(Loss)/profit for the financial period
    
    
    (390
    )
    
    
    (219
    )
    
    
    113
    
    
    
    138
    
    
    
    (46
    )
    
    
    (255
    )Ordinary dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (175
    )Demerger dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (392
    )
    
    
    Retained (loss)/profit
    
    
    (390
    )
    
    
    (219
    )
    
    
    113
    
    
    
    138
    
    
    
    (438
    )
    
    
    (430
    )Basic earnings/(loss) per share:Basic excluding exceptional items
    
    
    18.2
    
    
    
    10.2
    
    
    
    15.5
    p
    
    
    12.3
    p
    
    
    4.8
    p
    
    
    6.6
    pAttributable to exceptional items
    
    
    (53.3
    )
    
    
    (29.9
    )
    
    
    (5.4
    )p
    
    
    
    
    
    
    (8.9
    )p
    
    
    (27.6
    )pBasic including exceptional items
    
    
    (35.1
    )
    
    
    (19.7
    )
    
    
    10.1
    p
    
    
    12.3
    p
    
    
    (4.1
    )p
    
    
    (21.0
    )pDiluted earnings per share
    
    
    (35.1
    )
    
    
    (19.7
    )
    
    
    10.1
    p
    
    
    12.0
    p
    
    
    (4.1
    )p
    
    
    (20.9
    )pDividends per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.0
    )p
   Note:(1)
    
    Amounts translated for convenience at the noon-buying rate on 31 December
2003 of £1.00 = $1.7842. - 8 -




---



##### Table of Contents



Balance Sheet data for our total Group, which involved the assets and
liabilities of Innogy as at 31 March 2000 and 1999: As at 31 December
    
    As at 31 March2003(1)
    
    2003
    
    2002
    
    2001
    
    2000
    
    2000($ in millions,except sharedata)
    (£ in millions, except share data)Balance Sheet Information:UK GAAP Data  GroupTotal fixed assets
    
    
    4,615
    
    
    
    2,587
    
    
    
    2,981
    
    
    
    3,152
    
    
    
    3,028
    
    
    
    4,281Total current assets
    
    
    1,727
    
    
    
    968
    
    
    
    1,031
    
    
    
    826
    
    
    
    260
    
    
    
    2,828Total current liabilities
    
    
    (1,509
    )
    
    
    (846
    )
    
    
    (1,405)
    (2)
    
    
    (615
    )
    
    
    (358
    )
    
    
    (1,185
    )Net current assets/(liabilities)
    
    
    218
    
    
    
    122
    
    
    
    (374
    )
    
    
    211
    
    
    
    (98
    )
    
    
    1,643Total assets
    
    
    6,342
    
    
    
    3,555
    
    
    
    4,012
    
    
    
    3,978
    
    
    
    3,288
    
    
    
    7,109Total assets less current liabilities
    
    
    4,833
    
    
    
    2,709
    
    
    
    2,607
    
    
    
    3,363
    
    
    
    2,930
    
    
    
    5,924Total long-term liabilities and provisions
    
    
    (2,046
    )
    
    
    (1,147
    )
    
    
    (838
    )
    
    
    (1,666
    )
    
    
    (1,344
    )
    
    
    (3,673
    )Net assets employed
    
    
    2,787
    
    
    
    1,562
    
    
    
    1,769
    
    
    
    1,697
    
    
    
    1,586
    
    
    
    2,251Capital stock (excluding long-term debt and
redeemable preferred stock)
    
    
    988
    
    
    
    554
    
    
    
    559
    
    
    
    559
    
    
    
    559
    
    
    
    558Other capital and reserves
    
    
    1,729
    
    
    
    969
    
    
    
    1,181
    
    
    
    1,111
    
    
    
    975
    
    
    
    1,584Shareholders funds - equity
    
    
    2,717
    
    
    
    1,523
    
    
    
    1,740
    
    
    
    1,670
    
    
    
    1,534
    
    
    
    2,142Minority interest  equity
    
    
    70
    
    
    
    39
    
    
    
    29
    
    
    
    27
    
    
    
    52
    
    
    
    109Total equity
    
    
    2,787
    
    
    
    1,562
    
    
    
    1,769
    
    
    
    1,697
    
    
    
    1,586
    
    
    
    2,251Issued and fully paid ordinary shares (millions of shares)
    
    
    1,107
    
    
    
    1,107
    
    
    
    1,118
    
    
    
    1,118
    
    
    
    1,117
    
    
    
    1,116
   Note:(1)
    
    Amounts translated for convenience at the noon-buying rate on 31 December
2003 of £1.00 = $1.7842. As at and for the
    
    As at and for the9 months ended
    
    financial year endedAs at and for the financial year ended December
    
    31 December(1)
    
    31 March(1)2003(2)
    
    2003
    
    2002
    
    2001
    
    2000
    
    2000($ in millions, exceptper share data)
    
    (£ in millions, except per share data)US GAAP
Data  Group(3)
Shareholders funds-equity
    
    
    3,176
    
    
    
    1,780
    
    
    
    1,757
    
    
    
    1,770
    
    
    
    1,656
    
    
    
    3,069Net (loss)/income(4)(5)
    
    
    (30
    )
    
    
    (17
    )
    
    
    73
    
    
    
    26
    
    
    
    (190
    )
    
    
    1,490Basic (loss)/earnings per share
    
    
    (2.7
    )p
    
    
    (1.5
    )p
    
    
    6.5
    p
    
    
    2.3
    p
    
    
    (17.0
    )p
    
    
    122.5
    pDiluted (loss)/earnings per share
    
    
    (2.7
    )p
    
    
    (1.5
    )p
    
    
    6.5
    p
    
    
    2.3
    p
    
    
    (17.0
    )p
    
    
    122.4
    p
   Note:(1)
    
    The US GAAP profit and loss account data includes the results of Innogy
for all periods presented through 30 September 2000, the effective date of
the demerger.(2)
    
    Amounts translated for convenience at the noon-buying rate on 31 December
2003 of £1.00 = $1.7842.(3)
    
    The main differences between UK and US GAAP, which are relevant to our
consolidated profit and loss accounts and balance sheets, are described in
note 35 of our consolidated financial statements.(4)
    
    Net(loss)/income is stated after the cumulative effect of accounting
policy changes. Accounting changes gave rise to a profit and loss account
charge of £16 million in the financial year 31 March 2000; a £1 million
credit in the year ended 31 December 2001, a £44 million charge in the
year ended 31 December 2002 and nil in the year ended 31 December 2003 .
These are described in note 35 of our consolidated financial statements.(5)
    
    With effect from 1 January 2002, we adopted Statement of Financial
Accounting Standards No. 142 - Goodwill and Other Intangible Assets. As a
result, goodwill is no longer subject to amortisation. If goodwill had
not been amortised for the other periods presented, net income would have
increased by £4 million in the year ended 31 December 2001, £22 million in
the nine months ended 31 December 2000 and £42 million in the year ended
31 March 2000.   - 9 -




---



##### Table of Contents



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 2003,
the noon buying rate was £1.00 = $1.7842. High
    
    Low
    
    Average Rate
    
    End of Period(dollars per pound)Year ended 31 December 2003
    
    
    1.7842
    
    
    
    1.5500
    
    
    
    1.6448
    
    
    
    1.7842Year ended 31 December 2002
    
    
    1.6095
    
    
    
    1.4074
    
    
    
    1.4450
    
    
    
    1.6095Year ended 31 December 2001
    
    
    1.5045
    
    
    
    1.3730
    
    
    
    1.4382
    
    
    
    1.4543Nine months ended 31 December 2000
    
    
    1.5980
    
    
    
    1.4005
    
    
    
    1.4845
    
    
    
    1.4955Year ended 31 March 2000
    
    
    1.6765
    
    
    
    1.5515
    
    
    
    1.6084
    
    
    
    1.5922
 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 March 2004. High
    
    Low(dollars per pound)2004March
    
    
    1.8680
    
    
    
    1.7943February
    
    
    1.9045
    
    
    
    1.8182January
    
    
    1.8511
    
    
    
    1.79022003December
    
    
    1.7842
    
    
    
    1.7200November
    
    
    1.7219
    
    
    
    1.6693October
    
    
    1.7025
    
    
    
    1.6598
 - 10 -




---



##### Table of Contents



Risk Factors We set forth below the major risks our business faces. A significant portion of our projects operate without long-term power purchase
agreements (PPAs), and are therefore vulnerable to market forces to determine
the price and amount of power they sell. A significant portion 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). In particular, the majority of our generation
facilities in North America and in the United Kingdom sell all of their output
without long-term contracts. As merchant plants, these projects are subject
to market forces to determine the amount and price of power that they sell. If
our plants are unsuccessful in selling power 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. ANP Funding I, the owner of our wholly owned North American plants, may not be
able to meet all future costs, including interest payments, under the terms of
its $1,375 million non-recourse project finance facility. ANP Funding I, LLC, or Funding, the owner of our wholly owned generation
facilities in the United States: Bellingham, Blackstone, Hays, Midlothian I and
II and Milford, is party to a $1,375 million principal amount non-recourse
project finance facility, the US facility, used to finance the construction of
our generation facilities in Texas and Massachusetts. In light of continued
weak wholesale electricity prices in the United States, including the ERCOT
(Texas) and NEPOOL (New England) electricity markets, Funding is currently in
default of its obligations under the US facility and is continuing to seek to
renegotiate the structure of the US facility with the lenders under that
facility. There can be no assurance, however, that Funding will be able to
renegotiate the terms of the US facility in a manner acceptable to Funding, or
at all. In the event of failure to renegotiate the US facility, the lenders
thereunder may foreclose on their security and take possession of our
generation facilities owned by Funding. In accordance with the terms of the US
facility, the obligations of Funding to the lenders are without recourse to
International Power. If Funding cannot successfully renegotiate the structure
of the US facility, or the lenders seek to enforce their rights under the US
facility, there can be no assurance that the lenders under the US facility will
not seek recourse to International Power. 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 three areas: 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.
For example, the carbon allocation and emission limitation
regulations being introduced across Europe could impact the
utilisation levels of our plant and affect our profitability. While we
believe our existing projects have the requisite approvals and that we operate
our business in compliance - 11 -




---



##### Table of Contents



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. We cannot assure you 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. Generally, changes in the legal or regulatory structure in any country in
which we operate could 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 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, 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 cannot assure you 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 cost we
incurred. We must assess external factors, such as the regulatory environment and market
conditions, 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 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 cannot assure you 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 power plant. - 12 -




---



##### Table of Contents



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
(financing without recourse to our resources beyond our equity commitment to
the project). Based on our balance sheet at 31 December 2003, we had £1,435
million of indebtedness. In the event of a default under a financing agreement
which 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 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. 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 maintain investment grade credit ratings in order to trade in their
respective markets. In the event such subsidiaries or affiliates were unable
to maintain the required credit rating, 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 - 13 -




---



##### Table of Contents



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 which employ advanced technology may not achieve the levels of
operating performance expected by the manufacturers of the facilities. New plants (for example, our plants in the United States) may employ
recently developed and technologically complex equipment, which has limited or
no operating history. Facilities which utilise such equipment may not achieve
the levels of output or efficiency specified within the contract with the
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, 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, power purchase agreements 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. - 14 -




---



##### Table of Contents



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 and conduct our trading
activities. 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
cannot assure you that equipment failures in the future will not have a
significant adverse effect on our business or results of operations. 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 operations are subject to varying degrees of unionisation. 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 by
contractors and their employees, we cannot assure you 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;
    
    currency repatriation;
    
    unexpected changes in regulatory requirements;
    
    changes to tax legislation; and
    
    castrostrophic 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 decide to write down the value of any
existing or future investments that are affected. - 15 -




---



##### Table of Contents



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.
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 conditions. Our operations in emerging market 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 and Thailand. 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 cannot assure you
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, including
in Pakistan, Turkey and the Middle East. Market prices for power in the markets where some of our projects operate have
been volatile and depressed in recent 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 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 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 - 16 -




---



##### Table of Contents



markets and may, in certain circumstances, require us to write down the
value of our existing and future assets in those markets as we have done this
year with our US business. 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 our output, 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 recently constructed plants in the
United States rely on Alstom for most of their equipment, warranties and spare
parts. Alstom has reported a Euro 1,488
million net loss for the fiscal year 2003 within its 20-F filed with
the SEC on 15 October 2003. 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 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 and
Turkey, 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 Innogy and received indemnities
from Innogy in respect of liabilities arising before the demerger. The demerger was designed to separate our business from Innogys
businesses and operations. Pursuant to the demerger agreement between Innogy
and us, Innogy indemnified us - 17 -




---



##### Table of Contents



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 Innogy on an
after-tax basis against certain liabilities, litigation and claims arising out
of certain of our operations and to indemnify Innogy against certain tax
liabilities payable by Innogy. Should Innogy 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 Innogy prior to any payment in respect of such
indemnities being received from Innogy, our cash flow could be materially
adversely affected. As part of the demerger, Innogy 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 Innogy and us pursuant
to the indemnity arrangements described above. We will indemnify Innogy in
connection with certain tax liabilities and Innogy 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. - 18 -




---



##### Table of Contents



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, or CEGB, under the Electricity Act 1989. We
demerged substantially all our UK businesses into Innogy Holdings plc 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 12 countries across four continents. We commenced our
international activities in 1992 when we led a consortium that purchased from
Electricidad de Portugal the then-unfinished 600 MW Pego power station in
Portugal. Since our demerger in October 2000 we have increased our
international presence by building new generating assets in the United States,
Oman and the United Arab Emirates, or UAE, and through the acquisition of
plants in Australia, the UAE and the United Kingdom. As at 31 December 2003,
our operating power plants had a total capacity of 16,840 megawatts, or MW,
gross (one million watts equal one megawatt) or 11,087 MW net. We currently
have further capacity of 6,060 MW gross, or 1,655 MW net under construction in
Australia, the UAE and Saudi Arabia and are in the process of developing power
projects in the United States and Italy. As at 31 December 2003, our net
capacity in operation and under construction was 12,696 MW. We generate
electricity from gas, oil and coal. 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. 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 competitive
merchant markets. We are headquartered in London and, for reporting purposes, we organize
our business into five segments: North America, Europe, the Middle East,
Australia and Rest of the World. We operate regional support offices in the
United States, Australia, the United Kingdom and the UAE. Business Environment In the United Kingdom and the United States, wholesale power prices are
characterized by weakness, largely due to oversupply in a highly competitive
market with low margins for wholesale power generation. However, 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 offtake agreements. 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 is one of our strengths; the benefits were clearly demonstrated
in 2003 with strong performances in areas such the Czech Republic, Portugal,
Turkey, Malaysia and Thailand and the maintenance of good performance in areas
such as Australia and Pakistan, which offset downward pressure in other
regions. - 19 -




---



##### Table of Contents



Our Future Strategy Our future strategy is twofold: firstly, we look to maximise the value of
our existing portfolio of investments; secondly, we continue 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 which could involve the joint venturing of
assets 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 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 part planning, so as
to minimise the loss of generation during 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
successfully prepare 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 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; and
    
    Trade assets to maximise value: we intend to be a net
accumulator of assets and 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 assets if we expect it to
produce a higher return by selling or if we can obtain elsewhere a
comparable return with lower risk. Future Investments We will subject new investment opportunities to rigorous evaluation
criteria, with a focus on the following elements:  
    
    Economic return: new investments must meet stringent economic
return criteria based on the principle 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 - 20 -




---



##### Table of Contents



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 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. 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
potential 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 investments 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 will 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 contracted output (i.e.
under PPAs) and uncontracted output (i.e., merchant plants); 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. - 21 -




---



##### Table of Contents



Facilities As at 31 December 2003, we had interests in power generation facilities in
operation representing in aggregate 16,840 MW (gross) and 11,087 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 while others, located in the Middle East also act as
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 proportion 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
hedging contracts that fix the price at which we sell output over the period of
the hedging 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. - 22 -




---



##### Table of Contents



The table below sets out details in relation to our operating power plants
and plants under construction as at 31 December 2003. Grosscapacity MW
    
    Net capacity MWheat
    
    heat(4)Gross
    
    
    
    
    
    desal (MIGD)
    
    desal (MIGD)capacity MW
    
    Net capacity MW
    
    steam (million
    
    steam (millionPlant
    
    Fuel
    
    power
    
    power
    
    lbs/hr)
    
    lbs/hr)OperatingNorth AmericaHartwell, Georgia, USA
    
    Gas (OCGT(1))
    
    
    310
    
    
    
    155Oyster Creek, Texas, USA
    
    Gas (Cogen/CCGT(2))
    
    
    425
    
    
    
    213
    
    
    
    100 MW
    
    
    
    50 MWHays, Texas, USA(3)(7)
    
    Gas (CCGT)
    
    
    1,100
    
    
    
    1,100Midlothian I and II, Texas,
USA(3)
    
    Gas (CCGT)
    
    
    1,650
    
    
    
    1,650Blackstone, Massachusetts,
USA(3)
    
    Gas (CCGT)
    
    
    570
    
    
    
    570Milford, Massachusetts, USA
    
    Gas (CCGT)
    
    
    160
    
    
    
    160Bellingham, Massachusetts,
USA(3)
    
    Gas (CCGT)
    
    
    570
    
    
    
    570North America total in
operation
    
    
    
    
    
    
    4,785
    
    
    
    4,418
    
    
    
    100 MW
    
    
    
    50 MWEuropeEOP, the Czech Republic(5)
    
    Coal/Gas
    
    
    585
    
    
    
    580
    
    
    1,945 MW
    
    1,925 MWDeeside, United Kingdom(6)
    
    Gas (CCGT)
    
    
    500
    
    
    
    500Rugeley, United Kingdom
    
    Coal
    
    
    1,050
    
    
    
    1,050Tejo Energia (Pego), Portugal
    
    Coal
    
    
    600
    
    
    
    270Uni-Mar (Marmara), Turkey
    
    Gas (CCGT)
    
    
    480
    
    
    
    160Elcogas, Spain
    
    Gas (IGCC)
    
    
    335
    
    
    
    15Europe total in operation
    
    
    
    
    
    
    3,550
    
    
    
    2,575
    
    
    1,945 MW
    
    1,925 MWMiddle EastAl Kamil, Oman
    
    Gas (OCGT)
    
    
    285
    
    
    
    285
    
    
    
    
    
    
    
    Arabian Power Company (Umm Al
    
    Gas (CCGT)/Nar), UAE
    
    desalination
    
    
    870
    
    
    
    174
    
    
    
    162 MIGD
    
    
    
    32 MIGDMiddle East total in operation
    
    
    
    
    
    
    1,155
    
    
    
    459
    
    
    162 MIGD
    
    32 MIGDAustraliaHazelwood, Victoria
    
    Coal
    
    
    1,610
    
    
    
    1,480Synergen, South Australia
    
    Various (OCGT)
    
    
    360
    
    
    
    360Pelican Point, South Australia
    
    Gas (CCGT)
    
    
    485
    
    
    
    485SEA Gas pipeline, South
Australia
(8)
    
    
    
    
    
    
    n/a
    
    
    
    n/aAustralia total in operation
    
    
    
    
    
    
    2,455
    
    
    
    2,325
    
    
    
    
    
    
    
    Rest of WorldHUBCO, Pakistan
    
    Oil
    
    
    1,290
    
    
    
    270KAPCO, Pakistan
    
    Gas/Oil (CCGT)
    
    
    1,600
    
    
    
    575Malakoff, Malaysia(5)
    
    Gas (OC/CCGT)
    
    
    1,895
    
    
    
    355Thai National Power (Pluak
Daeng), Thailand
    
    Gas (Cogen)
    
    
    110
    
    
    
    110
    
    
    
    20 MW
    
    
    
    20 MWRest of World total in
operation
    
    
    
    
    
    
    4,895
    
    
    
    1,310
    
    
    
    20 MW
    
    
    
    20 MWTotal in operation around the
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,065 MW
    
    1,995 MWworld
    
    
    
    
    
    
    16,840
    
    
    
    11,087
    
    
    
    162 MIGD
    
    
    
    32 MIGD
 - 23 -




---



##### Table of Contents



Gross capacity MW
    
    Net capacity MW
    
    Gross capacity MW
    
    Net capacity MWPlant
    
    Fuel
    
    power
    
    power
    
    heat
    
    heat(4)Under constructionArabian Power Company
    
    Gas (CCGT)/(Umm Al Nar Expansion), UAE
    
    desalination
    
    
    1,550
    
    
    
    310
    
    
    
    25 MIGD
    
    
    
    5 MIGDGas (CCGT)/Shuweihat S1, UAE
    
    desalination MIGD
    
    
    1,500
    
    
    
    300
    
    
    
    100 MIGD
    
    
    
    20 MIGDSaudi Aramco Cogen Projects,
Saudi Arabia
    
    Gas (Cogen)
    
    
    1,074
    
    
    
    644
    
    
    4.5m lbs/hr
    
    2.7m lbs/hrMalakoff,
Malaysia(5)
    
    Coal
    
    
    1,890
    
    
    
    355125 MIGD
    
    
    
    25 MIGDTOTAL under construction
    
    
    
    
    
    
    6,014
    
    
    
    1,609
    
    
    4.5m lbs/hr
    
    2.7m lbs/hr
   (1)
    
    Open cycle gas turbine. Turbines, generally fuelled by natural gas or
diesel oil, are used to drive generators to produce electricity.(2)
    
    Combined cycle gas turbine. Turbines, generally fuelled by natural gas,
are used to drive generators to produce electricity. The exhaust gases
are then passed through a boiler to produce steam, which in turn drives an
additional turbine coupled to a generator.(3)
    
    Capacity shown for these assets is the nameplate capacity.(4)
    
    Net capacity - group share of gross capacity.(5)
    
    Gross capacity amounts shown for EOP and Malakoff represents the actual
net interest owned directly or indirectly by EOP and Malakoff,
respectively.(6)
    
    The 250MW mothballed unit at Deeside was returned to service in October
2003.(7)
    
    The generation capacity at Hays, Texas was mothballed in January 2004.(8)
    
    687KM gas pipeline from Victoria to South Australia. Construction and Development We currently have a range of power projects under construction and in
development throughout the world. As at 31 December 2003, we had interest in
power generation facilities under construction in the Middle East and Malaysia
representing an aggregate capacity of 6,014 MW gross and 1,609 MW net. We also
have power projects in development in the United States and Italy. In the Middle East, we commenced construction of the Shuweihat S1 power
and water plant in Abu Dhabi during May 2002. The first two of five gas
turbines and the first of six multi-stage flash desalination units have been
successfully commissioned and we expected to commence commercial operation
during the second half of 2004. Once operational, the power and water output
from the plant will be sold to the Abu Dhabi Water and Electricity Company
(ADWEC) under a 20-year offtake agreement. In April 2003, we acquired a 20%
interest in the 850 MW Umm Al Nar water and power plant as part of a consortium
including Tokyo Electric Power Company and Mitsui & Co. Limited. We also own
70% of an operating company that operates and maintains the plant. Umm Al Nar
sells its water and power to 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 US$ 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 is currently expected to commence commercial
operation in mid-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. We will own 60% of the
consortium investment vehicle and contribute a maximum equity investment of US$
78 million. These four plants are expected to commence operation during 2006
with a total capacity of 1,074 MW and be capable of producing 4.5 million
lbs/hr of steam. These plants will provide all of their output of power and
steam to Saudi Aramco pursuant to a 20-year offtake agreement. In Australia,
we have - 24 -




---



##### Table of Contents



commenced construction of our first wind power project in Canunda in South
Australia. We expect to commence operation in the second half of 2005. All of
the power output from this generating facility will be sold to Australian Gas
and Light Company pursuant to a 10-year offtake agreement. In North America, we have entered into a joint venture partnership with
KeySpan Energy Development Corp. to prepare a proposal to the Long Island Power
Authority (LIPA) for the development of between 250MW to 600MW of new
generation capacity utilising our site at Brookhaven. We have not yet received
a formal response from LIPA to our proposal and we have no indication whether
it will ultimately be successful. In Italy, we have interests in a number of
projects under development. In addition, we have commenced a project to
further develop the open-cast coal mine at Hazelwood in Australia. We expect
that this project will extend the life of the mine and provide coal reserves to
support generation at Hazelwood until the end of 2009. Lastly, Malakoff made
two acquisitions in Malaysia in 2003. It acquired 100% of PraiPower, a 350MW
CCGT plant and 90% of the equity interest in Tanjung Bin, a 2,100MW coal-fired
plant. Both acquisitions are backed by long-term PPAs with Tenaga Nasional
Berhad, Malaysias leading utility. Operation 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. Additionally, we have
70% and 45% interests in the operations companies for the Umm Al Nar and Pego
power stations, respectively. 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 and coal in those markets where we have merchant
assets. In the short term, the primary focus of our electricity trading activities
is to secure a market for a substantial proportion of the output from our
plants which have commenced operation or are under construction. Our fuel strategy is to obtain necessary supplies of gas and coal at
prevailing market prices. This strategy is supported by our gas and coal
trading activities. We pursue a mixture of market price indexed supply
contracts and transportation agreements from liquid supply points to our
plants. Fuel purchasing and power sales are made on a portfolio basis where
economies of scale exist. - 25 -




---



##### Table of Contents



We implement comprehensive energy risk management policies, procedures and
controls in each country in which we have energy trading activities. The risk
framework is designed to facilitate the identification, measurement, monitoring
and reporting of risk. See Internal ControlRisk Identification and
Management. In the United States, we have a small trading team responsible for buying
fuel and selling the output of our US operations. In the United Kingdom, we
have a small trading team responsible for buying the gas and coal for and
selling the output of our UK stations, Deeside and Rugeley. In Australia, our
trading and marketing activities are principally focused on hedging the revenue
generated by our assets and sold in Victoria, New South Wales and South
Australia. 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 2003. Approximate numberof employeesNorth America
    
    
    212Europe
    
    
    746Middle East
    
    
    342Australia
    
    
    591Rest of World
    
    
    362Corporate and development
    
    
    163Total group employees
    
    
    2,416
 Subsidiaries Our principal subsidiary undertakings are set forth in note 15 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 which 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 contracts in respect of industrial illness and injury. Innogy 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. - 26 -




---



##### Table of Contents



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 Corporate 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 members of NALOO. An appeal against the Commissions
findings was brought by a faction of SWSMA, which was initially ruled out of
time, but an appeal was reinstated. Progress with this claim will be
influenced by the outcome of the NALOO appeal. The European Court has ruled
that the Commission is under an obligation to investigate the complaint by
NALOO. The Company, PowerGen plc, British Coal Corporation and the Commission
have 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.
The ruling confirmed 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. The Commission ruled
on the complaint in 1998 and did not make any findings against the Company. Innogy 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 unlikely 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 most of the countries where we operate or are seeking
to operate projects, national regulatory authorities regulate us. 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 several projects within that particular
country if the projects are located in different states and/or localities. The Portuguese government has commenced discussions with incumbent
generators to make changes to existing long-term Power Purchase Agreements
(PPAs). These discussions are targeted to enable the Portuguese market to
integrate with the new liberalised Iberian wholesale power market that is due
to commence operation in 2006. These discussions are at an early stage and are
likely to continue into the second half of 2004. We believe that the
government intends to preserve the value in these contracts and therefore we
expect to be kept economically whole through this process. - 27 -




---



##### Table of Contents



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 We believe that good environmental performance is critical to all aspects
of our business. We are committed to achieving the best possible environmental performance,
and in order to achieve this standard and seek continuous improvement we intend
to:  
    
    comply with all applicable environmental regulations and seek
effective working relationships with appropriate agencies;
    
    implement management systems for environmental performance and
seek external accreditation to demonstrate compliance wherever we
can;
    
    include action plans and measurable environmental targets in
our business plans and in personal incentive arrangements at all
location levels;
    
    seek input from our employees, neighbours, regulators and those
who work with us by ensuring that we maintain a transparent mechanism
of stakeholder engagement at various levels;
    
    use natural resources efficiently and in a more sustainable way
through integrating environmental, social and economic factors into
business decisions, goals and objectives; and
    
    report our performance honestly and openly. In our business of electricity generation, the key environmental issue is
emissions to air, water and land. We aim to limit these emissions within
strictly defined levels, ensuring compliance with government regulations in the
countries in which we operate. Environment, health and safety (EH&S) management is wholly integrated
within our business management processes. We review our EH&S performance
alongside our financial and engineering performance. We carry out EH&S audits
as part of our combined compliance audit process together with financial,
technical and other operational reviews. Risks and management systems Assessing and minimising environmental risks takes place early in our
business planning cycleeither during the project development stage or when we
review potential additions to our portfolio of operational plant. When
building or upgrading plant, we use modern, low-emission equipment. We operate
plants using environmental management systems such as ISO 14001, the
international standard for environmental management systems, to ensure good
environmental controls and performance. We also strive to make continual
improvements in plant efficiency, thereby reducing emissions for each unit of
electricity we generate. Health and safety is a paramount management priority, although the forms
of management systems and controls vary around the world. Four of our power
stations have - 28 -




---



##### Table of Contents



implemented certified health and safety management systems to OHSAS 18001
or the equivalent national standard. In 2003 we undertook a review of our key
health and safety performance for each of our assets. This has been driven by
a desire for open dialogue with our employees and to move towards a more
proactive stance on the management of H&S issues. As a result of this review
we have developed a set of more comprehensive targets to be achieved in 2004,
including a number designed to encourage the prevention of H&S incidents. - 29 -




---



##### Table of Contents



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. Overview We are an international wholesale power generator and developer arising
out of the demerger of Innogy from National Power, which was effective as at 30
September 2000. Presentation of Financial Information We prepare our financial statements in accordance with UK GAAP, which
differs in certain significant respects from US GAAP. Information relating to
the nature and effect of such differences is summarised in note 35 to our
consolidated financial statements included elsewhere in this document. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United Kingdom. As such, we
are required to make certain estimates, judgements and assumptions that we
believe are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements, the reported amounts of revenues and expenses
during the periods presented and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates using historical
experience, consultation with experts and other methods that we consider
reasonable in the particular circumstances to ensure full compliance with UK
GAAP and best practice. Actual results may differ significantly from our
estimates, the effect of which is recognised in the period in which the facts
that give rise to the revision become known. Our accounting policies are detailed on pages F-10 to F-15. The table
below identifies the areas where significant judgements are required normally
due to the uncertainties involved in the application of certain accounting
policies. Accounting Policy
    
    Judgements/uncertainties affecting applicationFixed asset valuation
    
    
    
    Determination of trigger event indicating
impairment and measurement of fair value using
projected cash flows, together with risk
adjusted discount rates, or other more
appropriate methods of valuation.
    
    Determination of useful lives and residual
value of assets.
 - 30 -




---



##### Table of Contents



Accounting Policy
    
    Judgements/uncertainties affecting applicationConsolidation policy - trade
investments, associates, joint
ventures and subsidiaries
    
    
    
    Determination of the extent of
influence the group has over the
operations and strategic direction
of entities in which it holds an
equity stake.Tax provisions
    
    
    
    Determination of appropriate
provisions for taxation, taking
into account anticipated decisions
of tax authorities.
    
    Assessment of our ability to
utilise tax benefits through future
earnings and tax planning.
 Of the accounting policies identified in the above table, we believe that
the following policies are the most critical in considering the impact of
estimates and judgements on our financial position and results of operations. Fixed asset valuation Tangible fixed assets: The original cost of greenfield-developed assets includes relevant
borrowing and development costs:  
    
    We capitalize interest on borrowings relating to major capital
projects with long periods of development during construction and
write it off as part of the total cost over the useful life of the
asset.  
    
    We capitalize project development costs (including appropriate
direct internal costs) once the Board confirms that it is virtually
certain that the project will proceed to completion. We charge depreciation of plants so as to write down the assets to their
residual value over their estimated useful lives.  
    
    We depreciate gas turbines and related equipment 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.  
    
    We consider coal plant on an individual basis. The estimated average remaining useful life of our plant, machinery and
equipment is approximately 23 years. If the estimated average useful life of
our plant, machinery and equipment decreased by five years, our annual
depreciation expense would increase by approximately £30 million. - 31 -




---



##### Table of Contents



Tangible fixed assets and fixed asset investments: Our management regularly considers whether there are any indications of
impairment to the carrying values of fixed assets or investments (e.g. the
impact of current adverse market conditions). Impairment reviews are generally
based on risk adjusted discounted cash flow projections that inevitably require
estimates of discount rates and future market prices over the remaining lives
of the assets. Although there are observable market prices for electricity and
gas for one to two years into the future, the market prices used in the
impairment review beyond this period are based on managements projections.
The key assumptions underlying these projections relate to new entrant
pricing, i.e. the market prices of electricity and gas considered necessary
for a new entrant to enter the market and build new capacity. Managements
projections take account of estimates for both the amount and timing of new
entrant pricing having considered demand and supply projections, the capital
cost and efficiency of new plant and the returns required from new entrants. Although during the year ended 31 December 2003, the best estimate of
impairment of our US merchant plant amounted to £404 million, a range of
possible outcomes to the review was possible if different assumptions had been
used. For example, a 1% decrease in the discount rate would have reduced the
impairment charge by approximately £35 million; a reduction in capital cost for
new entrants by $25/kW would have increased the impairment charge by
approximately £40 million and a delay by one year for new entrant pricing to be
achieved would have increased the impairment by £25 million. Consolidation policy - trade investments, associates, joint ventures and
subsidiaries The determination of the level of influence we have over a business is
often a mix of contractually defined and subjective factors that can be
critical to determining the appropriate accounting treatment of entities in the
consolidated accounts. Generally, in the case of joint ventures and
associates, we achieve influence through board representation and by obtaining
rights of veto over significant actions. We generally treat investments where we hold less than 20% of the entitys
equity as trade investments. The balance sheet carries trade investments at
cost less amounts written off and records income earned on the receipt of
dividends from the investment. In those circumstances where we own between 20% and 50% of the entitys
equity and have significant influence over its operating and financial
policies, we generally treat the entity as an associated undertaking or joint
venture. Equally, where we hold a substantial interest (but less than 20%) in
an entity and are able to exert significant influence over its operations, we
treat it as an associated undertaking or joint venture. Conversely, although
we generally treat a holding of more than 20% of the equity as an associated
undertaking or joint venture, where we are unable to exert significant
influence over the operations of the entity, we treat it as a trade investment.
We account for associated undertakings and joint ventures using the equity
method of accounting, which involves including our share of operating profit,
interest and tax on the respective lines of the profit and loss account, and
our share of net assets within the fixed asset investments caption in the
balance sheet. In addition, we provide voluntary disclosure of the amount of
net debt held by these entities, although in accordance with UK GAAP, we do not
include this net debt in the consolidated balance sheet. - 32 -




---



##### Table of Contents



We generally consolidate entities in which we hold in excess of 50% of the
equity and where we exert control over the strategic direction of the entity.
However, if we were to hold in excess of 50% of the equity but were unable to
exert dominant influence over the strategic direction or operations of the
entity, we would account for the entity as an associated undertaking or joint
venture. 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 segmental basis due to the
effect of weather and other conditions on demand for electricity in the
specific geographic regions in which we operate. However, our operations are
not materially affected by seasonality on a group level because of the
geographic diversity of our operations. Where applicable, effects of
seasonality are described in the section below titled Segment Comparative
Performance. Effect of Market Prices We sell the output from our power generation facilities under the
provisions of fixed price medium term offtake agreements, long term PPAs, or
through merchant sales at prevailing market rates. 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 (Spark Spread) 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. During 2003, we sold the majority of our output from our generation
facilities in North America, Australia and the United Kingdom on a merchant
basis. In North America, wholesale market prices were weak throughout 2003.
Uncertainty surrounding the market structures in NEPOOL and ERCOT and wide
ranging counterparty credit issues have led to a contraction in liquidity.
These factors have led to a sharp reduction in the amount of new plant
development and construction in the United States. Due to uneconomic prices,
we mothballed our modern 1,100 MW combined cycle gas turbine (CCGT) Hays power
station in Texas in January 2004 for an indefinite period. Nevertheless, we
believe the pace of recovery will depend on the extent to which existing
generators withdraw uneconomic plant. We expect that pricing will remain weak
in our markets for the foreseeable future. In the United Kingdom, wholesale market prices increased during the summer
of 2003 but were off-set by fuel price increases later in the year. Delivered
coal prices reached historic highs, driven largely by the cost of freight.
However, in order to provide additional support for our contracted capacity
during the winter period, we returned the 250 MW mothballed unit at - 33 -




---



##### Table of Contents



the Deeside plant to service in October 2003. In Australia, there was a
high level of hedge cover for 2003 insulating the Australian businesses against
the low spot price outturns. The low spot prices have put pressure on the
forward curve in the wholesale market although, as yet, the forward curve has
not fully responded. 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
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, have adopted exchange controls. These governments have adopted
foreign currency exchange controls, including established fixed exchange rates
for both currencies against the US dollar. 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. Change in segment reporting During 2003, we redefined our business segments and management structure
to reflect the increased strategic focus on power generation projects in the
Middle East. As a result, we currently report our business on the basis of
five geographic segments: North America, Europe, the Middle East, Australia and
Rest of the World. We commenced operations at Al Kamil in Oman and Umm Al Nar
in the UAE during 2003. Prior to that date, all our projects in the Middle
East were under construction. - 34 -




---



##### Table of Contents



Results of operations The following table shows certain financial data from our consolidated
profit and loss account for the current period and the two preceding financial
periods. Year ended
    
    Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December
    
    31 December2003(1)
    
    2003
    
    2002
    
    2001($ millions)
    
    (£ millions)Turnover: group and share of joint
ventures and associates
    
    
    2,271
    
    
    
    1,273
    
    
    
    1,129
    
    
    
    1,103Less: share of joint ventures turnover
    
    
    (243
    )
    
    
    (136
    )
    
    
    (122
    )
    
    
    (139
    )Less: share of associates turnover
    
    
    (508
    )
    
    
    (285
    )
    
    
    (290
    )
    
    
    (407
    )Group turnover
    
    
    1,520
    
    
    
    852
    
    
    
    717
    
    
    
    557Operating costs - ordinary
    
    
    (1,297
    )
    
    
    (727
    )
    
    
    (509
    )
    
    
    (392
    )Operating costs - exceptional
    
    
    (721
    )
    
    
    (404
    )
    
    
    (103
    )
    
    
    (2
    )Operating (loss)/profit
    
    
    (498
    )
    
    
    (279
    )
    
    
    105
    
    
    
    163Share of operating profit of:Joint ventures
    
    
    57
    
    
    
    32
    
    
    
    26
    
    
    
    27Associates
    
    
    232
    
    
    
    130
    
    
    
    123
    
    
    
    134Income from fixed asset investments 
ordinary
    
    
    59
    
    
    
    33
    
    
    
    31
    
    
    
    Income from fixed asset investments 
exceptional
    
    
    
    
    
    
    
    
    
    
    42
    
    
    
    Operating (loss)/profit and fixed
asset investment income
    
    
    (150
    )
    
    
    (84
    )
    
    
    327
    
    
    
    324Profit on sale of operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32Profit on sale of fixed asset
investments - exceptional
    
    
    48
    
    
    
    27
    
    
    
    
    
    
    
    (Loss)/profit on ordinary activities
before interest and taxation
    
    
    (102
    )
    
    
    (57
    )
    
    
    327
    
    
    
    356Interest receivable and similar income
    
    
    75
    
    
    
    42
    
    
    
    24
    
    
    
    24Interest payable and similar charges 
ordinary
    
    
    (216
    )
    
    
    (121
    )
    
    
    (121
    )
    
    
    (100
    )Interest payable and similar charges 
exceptional
    
    
    (28
    )
    
    
    (16
    )
    
    
    
    
    
    
    (29
    )Share of net interest of joint
ventures and associates
    
    
    (57
    )
    
    
    (32
    )
    
    
    (35
    )
    
    
    (47
    )(226
    )
    
    
    (127
    )
    
    
    (132
    )
    
    
    (152
    )(Loss)/profit on ordinary activities
before taxation
    
    
    (328
    )
    
    
    (184
    )
    
    
    195
    
    
    
    204Tax on (loss)/profit on ordinary
activities
    
    
    (50
    )
    
    
    (28
    )
    
    
    (76
    )
    
    
    (64
    )(Loss)/profit on ordinary activities
after taxation
    
    
    (378
    )
    
    
    (212
    )
    
    
    119
    
    
    
    140Minority interests  equity
    
    
    (12
    )
    
    
    (7
    )
    
    
    (6
    )
    
    
    (2
    )(Loss)/profit for the financial year
    
    
    (390
    )
    
    
    (219
    )
    
    
    113
    
    
    
    138
     (1)
    
    Amounts translated for convenience at the noon-buying rate on 31 December
2003 of £1.00 = $1.7842. - 35 -




---



##### Table of Contents



Segment Comparative Performance The table below sets forth our results of operations for the periods
indicated by our business segments. Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001(£ in millions)TurnoverNorth America
    
    
    414
    
    
    
    315
    
    
    
    237Europe(1)
    
    
    474
    
    
    
    440
    
    
    
    521Middle East(1)
    
    
    33
    
    
    
    
    
    
    
    Australia
    
    
    224
    
    
    
    226
    
    
    
    194Rest of World
    
    
    128
    
    
    
    148
    
    
    
    151Gross turnover
    
    
    1,273
    
    
    
    1,129
    
    
    
    1,103Less: turnover of joint ventures
    
    
    (136
    )
    
    
    (122
    )
    
    
    (139
    )Less: turnover of associates
    
    
    (285
    )
    
    
    (290
    )
    
    
    (407
    )Net turnover
    
    
    852
    
    
    
    717
    
    
    
    557Profit before interest and tax (excluding exceptional items)North America
    
    
    2
    
    
    
    99
    
    
    
    93Europe(1)
    
    
    103
    
    
    
    100
    
    
    
    141Middle East(1)
    
    
    23
    
    
    
    9
    
    
    
    Australia
    
    
    101
    
    
    
    101
    
    
    
    72Rest of World
    
    
    84
    
    
    
    108
    
    
    
    48Segmental operating profit
    
    
    313
    
    
    
    417
    
    
    
    354Corporate costs
    
    
    (28
    )
    
    
    (29
    )
    
    
    (28
    )Profit before interest and tax (excluding exceptional items)
    
    
    285
    
    
    
    388
    
    
    
    326Exceptional items
    
    
    (342
    )
    
    
    (61
    )
    
    
    30(Loss)/profit before interest and tax
    
    
    (57
    )
    
    
    327
    
    
    
    356Interest - ordinary
    
    
    (111
    )
    
    
    (132
    )
    
    
    (123
    )Interest - exceptional
    
    
    (16
    )
    
    
    
    
    
    
    (29
    )Tax
    
    
    (28
    )
    
    
    (76
    )
    
    
    (64
    )Minority interests  equity
    
    
    (7
    )
    
    
    (6
    )
    
    
    (2
    )(Loss)/profit for the financial year
    
    
    (219
    )
    
    
    113
    
    
    
    138
   (1)
    
    In 2002 and 2001, our Europe and Middle East
segments were combined within a single reported segment Europe
and Middle East. Exceptional
items before interest and tax (discussed on page 46) are
analysed by business segment below: Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001(£ in millions)Exceptional itemsNorth America
    
    
    (404
    )
    
    
    
    
    
    
    Europe
    
    
    7
    
    
    
    (103
    )
    
    
    20Middle East
    
    
    
    
    
    
    
    
    
    
    Australia
    
    
    
    
    
    
    
    
    
    
    Rest of World
    
    
    55
    
    
    
    42
    
    
    
    2Corporate costs
    
    
    
    
    
    
    
    
    
    
    8(342
    )
    
    
    (61
    )
    
    
    30
 - 36 -




---



##### Table of Contents



Trading Performance Year ended 31 December 2003 as compared with the year ended 31 December 2002 NORTH AMERICA Year ended 31
    
    Year ended 31December 2003
    
    December 2002£m
    
    £mTurnover
    
    
    414
    
    
    
    315PBIT (pre-exceptional items)
    
    
    2
    
    
    
    99Exceptional items
    
    
    (404
    )
    
    
    PBIT
    
    
    (402
    )
    
    
    99
 Our North American business region consists of plants in Texas,
Massachusetts and Georgia. We also conduct energy trading activities in North
America, which are principally focussed on selling the physical output of our
plants. However, we also perform limited proprietary trading that is subject
to clear risk limits. Gross turnover in our North American business region increased by 31% from
£315 million during the year ended 31 December 2002 to £414 million in 2003.
The increase in gross turnover reflects a full years performance at a
generation capacity of 4,418 MW, following completion of our construction
program at the Hays plant in Texas and the Bellingham plant in Massachusetts
during 2002. The increase in generating capacity was substantially offset,
however, by lower wholesale electricity prices in the United States. See
Factors Affecting Results of OperationsEffect of
Market Prices. Due to
uneconomic prices, we mothballed our 1,100 MW combined cycle gas turbine Hays
power station in January 2004 for an indefinite period. In addition, in light
of continued reduced levels of wholesale electricity prices and future price
forecasts in the ERCOT (Texas) and NEPOOL (New England) markets, we reviewed
the balance sheet book values of our generating facilities in the United States
during 2003. This review resulted in an impairment of those assets by an
aggregate amount of $663 million (£404 million). We recognized this amount as
an exceptional charge. Our share of turnover from joint ventures in the region
increased 17% during the year ended 31 December 2003 to £70 million (17% of
gross turnover) compared with our share of turnover in the year ended 31
December 2002. Due to the current trading conditions in the North American market, we
have limited the amount of our output sold pursuant to forward contracts, as we
do not wish to lock in prices at this low point of the wholesale electricity
price cycle. Where we see opportunities to add value and reduce risk, we
forward contract, but we would need to see an improvement in forward prices
before we significantly increase our contracted position. During the year ended 31 December 2003, we recorded other operating income
of £27 million from Alstom relating to compensation payments in respect of
income we lost during the year as a result of construction delays and
consequent plant unavailability, as well as compensation for reduced output and
efficiency arising out of ongoing technical problems with our turbines. These
payments were in addition to payments of £102 million during the year ended 31
December 2002, £80 million during the year ended 31 December 2001 and £28 - 37 -




---



##### Table of Contents



million with respect to the nine months ended 31 December 2000. Alstom is
both the manufacturer of the GT24B gas turbines and the principal contractor
for the construction of our plants in Texas and Massachusetts. During 2003 we
have accepted into service the majority of the turbines provided by Alstom and
accordingly we do not expect to receive further liquidated damages related to
Alstoms non-performance. During the year ended 31 December 2003, the Group
also recorded US$169 million (£94 million) from Alstom in relation to
compensation for plants not achieving the long-term performance levels
specified in the original contracts. These amounts have been recorded as a
reduction in the cost of the plant and therefore not included in income. Operating costs consist of both fixed operating costs, such as
depreciation, payroll and property taxes, and variable operating costs, such as
fuel costs. Our fixed costs base has remained at a similar level to 2002,
despite the increased plant capacity in 2003. This is due to reduced
depreciation resulting from the lower carrying value of plant following
compensation payments for shortfalls in long-term performance levels. Where
appropriate, we seek to minimise the impact of fluctuations in fuel supply cost
by locking in our fuel supply at the same time that we sell our output.
However, during 2003 fuel costs increased significantly compared to the year
ended 31 December 2002 partly due to the increased capacity but also due to
significant increases in gas prices. Profit before interest and tax, excluding exceptional items decreased to
£2 million in the year ended 31 December 2003 from £99 million in 2002. This
was due to a combination of low spark spreads and declining compensation
payments from Alstom. EUROPE Year ended 31
    
    Year ended 31December 2003
    
    December 2002£m
    
    £mTurnover
    
    
    474
    
    
    
    440PBIT (pre-exceptional items)
    
    
    103
    
    
    
    100Exceptional items
    
    
    7
    
    
    
    (103
    )PBIT
    
    
    110
    
    
    
    (3
    )
 To reflect our current management structure, we report the results of our
Middle East business for the year ended 31 December 2003 as a separate region
rather than with the European business results. Accordingly, the results of
operations of our Europe and Middle East businesses during the year ended 31
December 2003 are not comparable with the results of operations for the Europe
and Middle East business during the year ended 31 December 2002. Our European business region consists of plants in the United Kingdom, the
Czech Republic, Portugal and Turkey. Gross turnover in our European business
region increased by 7.7% from £440 million in the year ended 31 December 2002
to £474 million the year ended 31 December 2003. Notwithstanding the poor
wholesale prices in the United Kingdom, turnover at Rugeley increased as a
result of a change from revenue earned as a fee under a tolling agreement in
2002 to revenues from sales of electricity in a merchant market in 2003.
Deesides turnover fell over the same period reflecting weak wholesale prices.
Improved performance - 38 -




---



##### Table of Contents



from our assets in Turkey and the Czech Republic under long-term and
medium-term supply agreements, contributed higher turnover in these areas.
Turnover from joint ventures and associates for the year ended 31 December 2003
of £237 million increased 3% from £231 million for the year ended 31 December
2002. Wholesale electricity prices in the United Kingdom continued at very low
levels during the period, although they showed some improvement in the second
half of 2003. See Factors Affecting Results of OperationsEffect of Market
Prices and Item 3. Key InformationRisk FactorsMarket prices for power
in the markets where some of our projects operate have been volatile and
depressed in recent years. We continue to limit the amount of output from
Deeside and Rugeley we sell pursuant to forward contracts, as we do not wish to
lock in prices at this low point of the market cycle. Outside the United
Kingdom, the output from our generation facilities is subject to medium term
offtake agreements and long term PPAs that are not as exposed to direct
fluctuations in wholesale electricity prices. Operating costs consists of both fixed operating costs, such as
depreciation, payroll and property taxes, and variable operating costs, such as
fuel costs. Our variable costs during the period increased as a result of
significant increases in gas and coal prices in the United Kingdom and the need
to buy coal at Rugeley following the termination of the tolling agreement. Profit before interest and tax increased from a loss before interest and
tax of £3 million during the year ended 31 December 2002 to a profit before
interest and tax of £110 million during the year ended 31 December 2003. This
increase primarily reflects increased turnover discussed above as well as the
effect of an exceptional gain of £7 million on the sale of an investment asset
in the Czech Republic as compared with an exceptional charge of £103 million
related to the impairment of assets in the United Kingdom during the prior
period. Profit before interest and tax, excluding exceptional items increased
by 3% from £100 million during the year ended 31 December 2002 to £103 million
during the year ended 31 December 2003, despite the difficult trading
environment in the UK, principally as a result of improved performance within
the Czech Republic. MIDDLE EAST Year ended 31
    
    Year ended 31December 2003
    
    December 2002£m
    
    £mTurnover
    
    
    33
    
    
    
    PBIT (pre-exceptional items)
    
    
    23
    
    
    
    9Exceptional items
    
    
    
    
    
    
    PBIT
    
    
    23
    
    
    
    9
 Our Middle East business region consists of a 100% interest in Al Kamil
Power Company SAOC, a power plant located in Oman, a 20% interest in Shuweihat
CMS International Power Company, a power and water plant under construction in
the UAE and a 20% interest in Arabian Power Company, a power and water plant
located in the UAE. Al Kamil reached Commercial Operation Date on 17 July 2003
and the interest in Arabian Power Company was acquired on 1 July 2003.
Turnover during the year ended 31 December 2003 was - 39 -




---



##### Table of Contents



£33 million. We have long term contracts in place for all the output from
our generation facilities in the Middle East until at least 2017. Profit before interest and tax, representing turnover, less operating
costs, was £23 million during the year ended 31 December 2003, the first year
of operations in our Middle East business region. AUSTRALIA Year ended 31
    
    Year ended 31December 2003
    
    December 2002£m
    
    £mTurnover
    
    
    224
    
    
    
    226PBIT (pre-exceptional items)
    
    
    101
    
    
    
    101Exceptional items
    
    
    
    
    
    
    PBIT
    
    
    101
    
    
    
    101
 Our Australian business region consists of the Hazelwood plant in Victoria
and the Pelican Point plant in South Australia, together with the Synergen
peaking units dispersed in South Australia. Further, the construction of the
687 km SEA Gas pipeline was completed on 1 January 2004 on schedule and on
budget. The pipeline will be used to transport gas from the Minerva gas field
offshore from Victoria by the end of 2004 predominantly for Pelican Point.
Additionally, during 2004 we commenced the construction of the 46 MW Canunda
Power wind farm scheduled for full commercial operation in 2005. We also
conduct energy trading activities, and in line with our business in North
America, these are principally focused on hedging the physical output of our
plants. However, we also perform limited proprietary trading, which is subject
to defined risk limits. Turnover in Australia remained essentially flat during the year ended 31
December 2003, decreasing from £226 million in the year ended 31 December 2002
to £224 million in the year ended 31 December 2003. This reflects the fact
that, while electricity prices in Victoria and South Australia were lower in
2003 than during the prior period, most of our revenue was protected by forward
contracts. In addition, we have forward contracts in place for most of the
output from our generation facilities in Australia for the remainder of 2004. Profit before interest and tax remained flat at £101 million during both
the year ended 31 December 2003 and 31 December 2002, as did other variable and
fixed costs. We have minimal exposure to fuel price risk due to our ownership
of the open cast lignite mine at Hazelwood and the long-term gas supply
arrangements for Pelican Point. REST OF WORLD Year ended 31
    
    Year ended 31December 2003
    
    December 2002£m
    
    £mTurnover
    
    
    128
    
    
    
    148PBIT (pre-exceptional items)
    
    
    84
    
    
    
    108Exceptional items
    
    
    55
    
    
    
    42PBIT
    
    
    139
    
    
    
    150
 - 40 -




---



##### Table of Contents



Our Rest of World portfolio consists principally of plants in Pakistan,
Malaysia and Thailand. During 2003, Malakoff in Malaysia acquired 100% of Prai
Power, a 350 MW CCGT plant and 90% equity interest in Tanjung Bin, a 2,100 MW
coal-fired plant bringing our total net installed capacity to 1,310 MW. During
the period we sold a 5% shareholding in HUBCO generating cash proceeds of £21
million. We have booked an exceptional gain of £52 million, reflecting the
profit on this sale and the reversal of a previous impairment provision. In
addition, we concluded our divestments in China, realising an exceptional gain
of £3 million in 2003. Gross turnover decreased by 13% from £148 million in the year ended 31
December 2002 to £128 million in the year ended 31 December 2003. This was
mainly due to a reduction in turnover from our associates in the region. During the year ended 31 December 2003, we received dividends from KAPCO
(treated as a cost investment) of £33 million, compared with £31 million in
2002. During 2002, we received a total dividend of £73 million. The additional
£42 million related to the settlement of past receivables and was therefore
recorded as an exceptional item due to its non-recurring nature. We have long-term PPAs for each of our plants in this region and therefore
financial performance is not subject to fluctuations in energy prices. In
common with most PPAs, availability is the key factor in determining
profitability and all our plants continue to maintain excellent standards. Variable and fixed costs remained very flat at our subsidiary in the
region during the year. The lower profit was largely attributable to a lower
share of profit from our associates. Malakoff profits remained level, however
our share of profits from HUBCO in 2002 benefited from the finalisation of the
settlement agreement. Profit before interest and tax, excluding exceptional items, decreased by
7.3% from £150 million during the year ended 31 December 2002 to £139 million
during the year ended 31 December 2003. Year ended 31 December 2002 as compared with the year ended 31 December 2001 NORTH AMERICA Year ended 31
    
    Year ended 31December 2002
    
    December 2001£m
    
    £mTurnover
    
    
    315
    
    
    
    237PBIT (pre-exceptional items)
    
    
    99
    
    
    
    93Exceptional items
    
    
    
    
    
    
    PBIT
    
    
    99
    
    
    
    93
 - 41 -




---



##### Table of Contents



During the year ended 31 December 2002, we completed our 3,890 MW
construction program in the United States when the last two units at Hays, our
1,100 MW plant in Texas, and our 570 MW plant at Bellingham in Massachusetts,
commenced commercial operation. Accordingly, our total net installed capacity
in North America increased during the period to 4,418 MW. In addition, we
received final regulatory approval to commence construction of a 540 MW plant
in Brookhaven on Long Island in New York, however, no construction has as yet
commenced. We have subsequently entered into a joint venture partnership with
KeySpan Energy Development Corp. to seek to utilise this site. We also
conducted energy trading activities in North America, which were principally
focussed on selling the physical output of our plants. However, we also
performed limited proprietary trading that was subject to defined risk limits. Gross turnover in our North American business region increased by 33% from
£237 million during the year ended 31 December 2001 to £315 million in 2002.
The increase in gross turnover principally reflected the increase in generating
capacity during the period from a maximum capacity of 3,020 MW as at 31
December 2001 to a maximum capacity of 4,415 MW as at 31 December 2002. The
increase in generating capacity was offset, however, by lower wholesale
electricity prices in our markets. See Factors Affecting Results of
OperationsEffect of Market Prices. As a result of these lower wholesale
electricity prices, our share of turnover from joint ventures during the year
ended 31 December 2002 was £60 million (19% of gross turnover), a decrease of
22% as compared to the year ended 31 December 2001. During the year ended 31 December 2002, we recorded other operating income
of £102 million from Alstom relating to compensation payments in respect of
income we lost during the year as a result of construction delays and
consequent plant unavailability, as well as compensation for reduced output and
efficiency arising out of ongoing technical problems with Alstoms turbines.
These payments were in addition to payments of £80 million during the year
ended 31 December 2001 and £28 million with respect to the nine months ended 31
December 2000. Operating costs consist of both fixed operating costs, such as
depreciation, payroll and property taxes, and variable operating costs, such as
fuel costs. Our fixed cost base increased in line with the completion of the
construction programme and the commencement of commercial operations of our new
units at Hays and our new plant at Bellingham. Variable costs tracked our
profile of physical output. Where appropriate, we sought to minimise the
impact of fluctuations in fuel supply cost by locking in our fuel supply at the
same time that we sold our output. Profit before interest and tax in the region increased by 6% from £93
million during the year ended 31 December 2001 to £99 million during the year
ended 31 December 2002. The increase in profit before interest and tax
primarily reflects the increased generating capacity, together with the impact
of the continued compensation payments from Alstom. - 42 -




---



##### Table of Contents



EUROPE Year ended 31
    
    Year ended 31December 2002
    
    December 2001£m
    
    £mTurnover
    
    
    440
    
    
    
    521PBIT (pre-exceptional items)
    
    
    100
    
    
    
    141Exceptional items
    
    
    (103
    )
    
    
    20PBIT
    
    
    (3
    )
    
    
    161
 Our European business region consists of plants in the United Kingdom, the
Czech Republic, Portugal and Turkey. In March 2002, as a result of uneconomic
wholesale electricity prices in the England and Wales electricity market, we
mothballed half the generation capacity of our Deeside power station. In
November 2002, the boiler house roof collapsed at one of EOPs combined heat
and power plants in the Czech Republic, resulting in a loss of heat supply for
eleven days and full power output for four weeks. In November 2002, TXUEET
entered administration. We had a tolling agreement with TXUEET which covered
the full capacity of our Rugeley power station through to the end of 2005. As
a result of TXUEETs administration, the tolling agreement was terminated.
While we were entitled to an early termination payment and continued to take
all necessary steps to maximise recovery, Rugeley became responsible for the
purchase of fuel and sale of power (functions previously undertaken by TXUEET)
and is consequently exposed to fluctuations in wholesale electricity prices. Gross turnover in our Europe business region decreased by 16% from £521
million in the year ended 31 December 2001 to £440 million in the year ended 31
December 2002. The decrease reflects the impact on the current period of our
disposal of our 25% equity ownership in UFG in Spain during the prior year as
well as the impact of mothballing half the generation capacity of our Deeside
power station, partially offset by a full years contribution from Rugeley,
which we acquired in July 2001. Turnover from joint ventures and associates in
the region during 2002 was £231 million (52% of the regions gross turnover), a
decrease of 35% as compared to 2001, again reflecting the sale of UFG. Wholesale electricity prices in the United Kingdom dropped to very low
levels during the period, reflecting generation overcapacity. See Factors
Affecting Results of OperationsEffect of Market Prices and Item 3. Key
InformationRisk FactorsMarket prices for power in the markets where some of
our projects operate have been volatile and depressed in recent years. While
we continue to seek to sell forward our output from Deeside and Rugeley, we
have limited the amount of output we sell pursuant to forward contracts and the
duration of those forward contracts, as we do not wish to lock in prices at
this low point of the market cycle. Consequently, output from Deeside and,
since the termination of its tolling agreement with TXUEET, Rugeley has been
exposed to fluctuations in market prices. In recognition of the uncertainty on
the timing of wholesale electricity price recovery, during the period we wrote
down the value of our Deeside plant by £45 million and of our Rugeley plant by
£58 million. We recorded both of those amounts as exceptional items. - 43 -




---



##### Table of Contents



Outside the United Kingdom, the output from our generation facilities is
subject to medium term offtake agreements and long term PPAs that are not as
exposed to direct fluctuations in wholesale electricity prices. Operating cost consists of both fixed operating costs, such as
depreciation, payroll and property taxes, and variable operating costs, such as
fuel costs. Our variable costs during the period increased as a result of the
loss of the tolling contract for Rugeley, under which TXUEET was responsible
for purchasing all the coal for Rugeley, and the additional costs associated
with the repair of the boiler house roof and boilers at EOP. Profit before interest and tax, excluding exceptional items, decreased by
23% from £141 million during the year ended 31 December 2001 to £109 million
during the year ended 31 December 2002. This decrease primarily reflected
reduced turnover as well as increased operating costs discussed above. MIDDLE EAST Year ended 31
    
    Year ended 31December 2002
    
    December 2001£m
    
    £mTurnover
    
    
    
    
    
    
    PBIT (pre-exceptional items)
    
    
    9
    
    
    
    Exceptional items
    
    
    
    
    
    
    PBIT
    
    
    9
    
    
    
    
 The £9 million profit in the year ended 31 December 2002, the first year
we separately reported our Middle East Region was principally attributable to
the recovery of development costs previously written off. - 44 -




---



##### Table of Contents



AUSTRALIA Year ended 31
    
    Year ended 31December 2002
    
    December 2001£m
    
    £mTurnover
    
    
    226
    
    
    
    194PBIT (pre-exceptional items)
    
    
    101
    
    
    
    72Exceptional items
    
    
    
    
    
    
    PBIT
    
    
    101
    
    
    
    72
 Our Australian business region consists of the Hazelwood plant in Victoria
and the Pelican Point plant in South Australia, together with the Synergen
peaking units dispersed in South Australia. We conducted energy trading
activities, and in line with our business in North America, these were
principally focused on hedging the physical output of our plants. However, we
also performed limited proprietary trading, which was subject to defined risk
limits. Turnover in Australia increased by 16% from £194 million in the year ended
31 December 2001 to £226 million in the year ended 31 December 2002. This
increase in turnover principally reflected improved electricity prices in
Victoria and South Australia. In Victoria, the average price secured in 2001
was approximately A$41 per MW hour as compared to A$40 per MW hour in 2000. We
had forward contracts in place for most of the output from our generation
facilities in Australia for most of 2003. Profit before interest and tax increased by 40% from £72 million in the
year ended 31 December 2001 to £101 million in the year ended 31 December 2002.
This increase principally reflected improved margins as a result of improved
wholesale electricity prices. We had minimal exposure to fuel price risk due
to our ownership of the open cast lignite mine at Hazelwood and the long-term
gas supply arrangements for Pelican Point. REST OF WORLD Year ended 31
    
    Year ended 31December 2002
    
    December 2001£m
    
    £mTurnover
    
    
    148
    
    
    
    151PBIT (pre-exceptional items)
    
    
    108
    
    
    
    48Exceptional items
    
    
    42
    
    
    
    2PBIT
    
    
    150
    
    
    
    50
 Our Rest of World portfolio consists principally of plants in Pakistan,
Malaysia and Thailand. During 2002, the capacity of our existing plant in
Malaysia was increased by 14% bringing our total net installed capacity to
1,350 MW. Following the resolution of a tariff dispute between HUBCO, KAPCO
and WAPDA during 2002 we began to receive regular dividend payments from HUBCO
and KAPCO for the first time in over three years. During the period, we
received a dividend payment of £73 million from KAPCO, of which £42 million - 45 -




---



##### Table of Contents



related to the settlement of prior year receivables. We treated this £42
million payment as an exceptional item due to its non-recurring nature. Gross turnover decreased by 2% from £151 million in the year ended 31
December 2001 to £148 million in the year ended 31 December 2002. Our share of
turnover from associates in this category during the year ended 31 December
2002 was £122 million, an increase of 4% as compared to the year ended 31
December 2001 of £118 million. We had long-term PPAs for each of our plants in this region and therefore
financial performance was not subject to fluctuations in energy prices. In
common with most PPAs, availability was the key factor in determining
profitability and all our plants maintained excellent standards. Profit before interest and tax, excluding exceptional items, increased by
125% from £48 million during the year ended 31 December 2001 to £108 million in
2002. The increase in operating profit principally reflected the resumption of
dividends from KAPCO. According to the settlement agreement between
International Power, KAPCO and WAPDA (the sole customer for KAPCOs output),
WAPDA will continue to settle outstanding balances with KAPCO. Exceptional Items Year ended 31 December 2003 During the year ended 31 December 2003, we recorded the following
operational exceptional items:  
    
    The impairment of our plants in the United States by
$663 million (£404 million); and  
    
    The reversal of a past impairment with respect to our
investment in HUBCO in Pakistan of £35 million. We reviewed the carrying values of our merchant plants in the United
States (Hays, Midlothian, Blackstone, Bellingham and Milford) following a share
decline in both current and forward electricity prices in the ERCOT (Texas) and
NEPOOL (New England) electricity markets. Based on a risk adjusted discount
rate of 9.7% to the post-tax cash flows expected from the plants over their
remaining lives, we recorded an impairment of £404 million. Additionally, we recorded the following non-operational exceptional items:  
    
    Profit on the disposal of a 5% shareholding in HUBCO of £17 million;  
    
    Profit on the disposal of a Czech fixed asset
investment of £7 million held by EOP in Czech Republic; and  
    
    A gain relating to the final disposal of assets in
China of £3 million. Year ended 31 December 2002 During the year ended 31 December 2002, we recorded the following three
exceptional items: - 46 -




---



##### Table of Contents




    
    the write-down of the Deeside plant by £45 million;  
    
    the write-down of the Rugeley plant by £58 million;  
    
    the recognition of dividend income of £42 million from KAPCO in
Pakistan, which relates to the settlement of prior year receivables. We reviewed the carrying values of our Deeside and Rugeley plants
following the sharp decline in both current and forward electricity prices in
the United Kingdom. Deeside has been exposed to market prices since the
offtake contract with Innogy terminated at the end of March 2002. As a
response to these uneconomic wholesale prices, we mothballed half of the
capacity (namely 250 MW) at that time. Rugeley has been exposed to market
prices since November 2002, when the tolling contract with TXUEET, was
terminated as a result of TXUEETs placement in administration. We determined
carrying values of the plants by applying a risk-adjusted discount rate of 8%
to the post-tax cash flows expected from the plants over their remaining useful
lives. KAPCO resumed paying us dividends in 2002. Dividends in 2002 included a
payment of £42 million in respect of receivables relating to earlier
periodscollection was a direct result of the settlement of the dispute between
KAPCO and WAPDA in 2001. We have treated this amount as exceptional because of
its non-recurring nature. Year ended 31 December 2001 During the year ended 31 December 2001, we recorded five exceptional
items:  
    
    We reassessed an onerous lease provision to take account of the
anticipated results of the rent reviews and to reflect the impact of
previously vacant space which was leased during the year. As a
result of this reassessment, £8 million of the provision was
released.  
    
    During the period we provided £10 million in respect of a bank
guarantee given on behalf of our trade investment, Elcogas. It is
probable that the guarantee will be called to prevent Elcogas from
breaching capital structure requirements under the Spanish Commercial
Code.  
    
    On 25 July 2001, the group sold its investment in Unión Fenósa
Generacion S.A., or UFG, realising a profit of £30 million.  
    
    During the period the China exit provision (created in the nine
month period ended 31 December 2000) was reassessed following the
disposal of the majority of its remaining investments in China. As a
result of this reassessment, £2 million of the provision was
released.  
    
    The exceptional interest charge of £29 million represents the
cost of cancelling the existing interest rate swaps and amortising
capitalised arrangement fees in connection with the successful
refinancing of the non-recourse debt facility for the Hazelwood power
plant in Victoria, Australia. - 47 -




---



##### Table of Contents



Other Costs Corporate costs We operate from a corporate office in London, and a small engineering
office in Swindon, where our corporate and business functions are based to
support our worldwide operations. Continued control resulted in a modest
decrease in the cost of providing these services, from £29 million for the year
ended 31 December 2002 to £28 million for the year ended 31 December 2003. In addition, we operate regional business support offices in the United
States, Australia, the United Kingdom and UAE. These offices vary in size dependent on the scale of operations in the
region, and apart from the United States and Australia, are primarily focused
on business development. We supported our US business from offices in Houston,
Texas and Marlborough, Massachusetts until 2002, when we decided to close our
Houston office and combine these activities in Marlborough; we have made
significant progress in achieving this consolidation. We incurred the majority
of the one-off costs of approximately £3 million associated with this
consolidation in 2002. Net interest Net interest payable during the year ended 31 December 2003 was £127
million, a decrease of 4% as compared with £132 million during the year ended
December 31, 2002. Interest payable during the year ended 31 December 2003
included an exceptional interest charge of £16 million. This exceptional
interest charge related to the write-off of unamortised facility costs in the
United States and the United Kingdom that were or are currently under
negotiations. In the United Kingdom, we restructured the non-recourse debt
facility for Rugeley and reduced the principal amount of this facility to £90
million from £160 million. In the US, our ANP bank facility is currently in
default and ANP is continuing to seek to renegotiate the structure of the ANP
Bank Facility with the lender under that facility. As it is not possible to
reliably estimate the nature or timing of any renegotiated facility the
capitalised fees were written off. Excluding exceptional interest charges, net
interest payable during the year ended 31 December 2003 decreased by 16%. Net interest payable during the year ended 31 December 2002 was £132
million, a decrease of 13% as compared with £152 million during the year ended
31 December 2001. Interest payable during the year ended 31 December 2001
included an exceptional interest charge of £29 million. This exceptional
interest charge represents the cost of cancelling interest rate swaps and
amortising capitalised arrangement fees in connection with the refinancing of
the A$1.2 billion non-recourse debt facility for the Hazelwood power plant in
Victoria, Australia. Excluding exceptional items, net interest payable
increased by 7% from £123 million during the year ended 31 December 2001. During the year ended 31 December 2003, corporate and subsidiary
operations accounted for interest payable of £79 million (comprising gross
interest of £123 million, primarily associated with bonds, bank loans and
overdrafts, offset by £23 million interest receivable, foreign exchange gains
of £19 million and by capitalised interest of £2 million) as compared - 48 -




---



##### Table of Contents



with £97 million during the year ended 31 December 2002 (comprising gross
interest of £126 million, offset by £24 million interest receivable and by
capitalised interest of £5 million), a decrease of 19%. During the year ended 31 December 2003, associated companies and joint
ventures had a net interest payable of £32 million, as compared with £35
million during the prior period. Consolidated interest cover (excluding extraordinary items) during the
year ended 31 December 2003 was 2.6 times, as compared with 2.9 times during
the year ended 31 December 2002. As at 31 December 2003, we were within all
financial and interest coverage covenants under the terms of our financing
agreements. Taxation The tax charge for the year was £28 million, compared with £76 million for
the year ended 31 December 2002. The substantial decrease in the tax charge
reflects an exceptional tax credit of £26 million principally relating to a net
write back of deferred taxes following the impairment of our plants in the
United States. Excluding exceptional items, the tax charge for the year ended
31 December 2003 was £54 million. This tax charge represents an effective tax
rate of 31% compared to 30% in the prior period. We have continued to benefit from the utilisation of tax losses and the
availability of certain overseas tax concessions. These concessions are
expected to expire in the medium term. - 49 -




---



##### Table of Contents



Liquidity The following table shows cash flow for the periods indicated. Year ended 31 December2003
    
    2002
    
    2001(£ millions)Net cash inflow from operating activities
    
    
    184
    
    
    
    276
    
    
    
    274Dividends received from associates and joint ventures
    
    
    68
    
    
    
    84
    
    
    
    59Dividends received from fixed asset investments  ordinary (KAPCO)
    
    
    33
    
    
    
    31
    
    
    
    Cash flow from operating activities and dividend receipts (excluding exceptionals)
    
    
    285
    
    
    
    391
    
    
    
    333Dividends received from fixed asset investment - exceptional (KAPCO)
    
    
    
    
    
    
    42
    
    
    
    Return on investments and servicing of finance - ordinary (excluding KAPCO
dividends)
    
    
    (84
    )
    
    
    (88
    )
    
    
    (105
    )Return on investments and servicing of finance - exceptional (excluding KAPCO
dividends)
    
    
    (4
    )
    
    
    (25
    )
    
    
    Tax
    
    
    (14
    )
    
    
    (20
    )
    
    
    (1
    )Capital expenditure and financial investment  ordinary
    
    
    (74
    )
    
    
    (159
    )
    
    
    (406
    )Capital expenditure and financial investment  exceptional
    
    
    11
    
    
    
    
    
    
    
    Acquisitions and disposals  ordinary
    
    
    
    
    
    
    (144
    )
    
    
    318Acquisitions and disposals  exceptional
    
    
    24
    
    
    
    
    
    
    
    Net cash inflow/(outflow) before management of liquid resources and financing
    
    
    144
    
    
    
    (3
    )
    
    
    139Management of liquid resources
    
    
    (20
    )
    
    
    
    
    
    
    (48
    )Financing activities
    
    
    (260
    )
    
    
    210
    
    
    
    406(Decrease)/increase in cash
    
    
    (136
    )
    
    
    207
    
    
    
    497Returns on investments and servicing of finance - ordinaryDividends received from fixed asset investments (KAPCO)
    
    
    33
    
    
    
    31
    
    
    
    Net interest paid and similar charges
    
    
    (84
    )
    
    
    (88
    )
    
    
    (105
    )(51
    )
    
    
    (57
    )
    
    
    (105
    )Returns on investments and servicing of finance - exceptionalDividends received from fixed asset investments (KAPCO)
    
    
    
    
    
    
    42
    
    
    
    Net interest paid and similar charges
    
    
    (4
    )
    
    
    (25
    )
    
    
    (4
    )
    
    
    17
    
    
    
    
 We have included the sub-total cash flow from operating activities and
dividend receipts (excluding exceptionals) within the above liquidity table,
as this represents total cash flow from our operating assets before financing,
tax and capital expenditure. We believe that the presentation of this measure
provides useful information to our investors. Cash flow from operating activities and dividend receipts (excluding
exceptionals) for the year ended 31 December 2003 decreased by 27% to £285
million as compared with £391 million for the year ended 31 December 2002. The
principal reasons include lower operating profit performance from the US and
the UK and a reduction in dividend receipts from joint ventures and associates.
Cash flow from operating activities and dividend receipts (excluding
exceptional items) for the year ended 31 December 2002 increased by 17% to £391
million as compared with £333 million for the year ended 31 December 2001. This
increase principally reflected improved profit performance, particularly in
Australia and the United States, as well as an increase in dividend receipts
from joint ventures and associates, including the resumption of dividends from
KAPCO and HUBCO in Pakistan. - 50 -




---



##### Table of Contents



We received an exceptional dividend from a fixed asset investment during
the year ended 31 December 2002 in relation to the payment by KAPCO of
receivables related to earlier periods. Net interest paid and similar charges was £88 million during the year
ended 31 December 2003, a decrease of 22% as compared with £113 million during
the year ended 31 December 2002. Net interest paid and similar charges
excluding exceptional items was £84 million, a decrease of 5% from £88 million
in 2002. This includes payments for interest, debt issuance cost and dividends
paid to minority interests and is net of receipts of interest income and
dividend income. This decrease reflects a small reduction in average debt
levels over the course of the year, together with a slightly lower cost of
debt. Similarly, the decrease in the year ended 31 December 2002 compared with
2001 also reflected a decrease in average debt levels and a slightly lower
average cost of debt in 2002. During the year ended 31 December 2003, we
recorded an exceptional cash outflow under returns on investment and servicing
of finance of £4 million in connection with costs associated with renegotiating
the £160 million non-recourse facility for Rugeley which was reduced to £90
million in August 2003. During the year ended 31 December 2002, we also
recorded an exceptional cash outflow of £25 million in connection with costs
associated with refinancing and significantly extending the maturity of the
A$1.2 billion non-recourse debt facility associated with our power plant at
Hazelwood in Australia. Capital expenditure to maintain the operating capacity of our power
stations has increased to £64 million compared with the previous two years
which were stable at £48 million, reflecting the completion of our new build
capacity in Massachusetts and Texas in 2002. Capital expenditure to increase
our operating capacity amounted to £57 million as compared to £96 million in
the previous year, reflecting spend on the build of our US and Al Kamil plants.
Capital expenditure to increase our operating capacity during the year ended 31
December 2002 was significantly lower than in 2001 (£358 million) reflecting
the progressive completion of our US new build programme. During the year ended
31 December 2003, the Group received £56 million from contractors in relation
to compensation for plants not achieving the long-term performance levels
specified in the original contracts. Acquisitions and disposals during the year ended 31 December 2003
principally comprises cash receipts from the sale of a 5% holding in HUBCO and
from the sale of our investment in VCE (Czech Republic). Acquisitions and
disposals during the year ended 31 December 2002 principally comprise the final
payment of £133 million to TXUEET in respect of the acquisition of Rugeley
power station in the United Kingdom. Capital Resources We are of the opinion that the working capital is sufficient for the
companys present requirements. The following table shows our net debt position as at 31 December 2003,
2002 and 2001. 2003
    
    2002
    
    2001£m
    
    £m
    
    £mCash and liquid resources
    
    
    743
    
    
    
    842
    
    
    
    643Euro dollar bonds
    
    
    
    
    
    
    (37
    )
    
    
    (41
    )Convertible bonds
    
    
    (200
    )
    
    
    (231
    )
    
    
    (248
    )Loans - non-recourse
    
    
    (1,235
    )
    
    
    (1,386
    )
    
    
    (1,251
    )Net debt
    
    
    (692
    )
    
    
    (812
    )
    
    
    (897
    )
 - 51 -




---



##### Table of Contents



Net debt as at 31 December 2003 was £692 million as compared with £812
million as at 31 December 2002. Our net debt excludes our share of joint
ventures and associates debt. Our share of joint ventures and associates
debt was £712 million as at 31 December 2003 as compared with £503 million as
at 31 December 2002. 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 these amounts, we have disclosed them separately. The non-recourse financing agreements to which certain of our subsidiaries
are party contain contractual restrictions which limit the ability of such
subsidiaries to distribute freely cash dividends to us while such non-recourse
financing is outstanding. In particular, the terms of our $1,375 million
non-recourse facility to finance American National Power, or ANP, the operator
of our North American plants, substantially limit the ability of ANP to
distribute cash dividends to us while the facility is outstanding. The decrease in our net debt during the period reflects a strong operating
cash flow of the business and the positive impact of translation of net debt
balances denominated in foreign currencies, offset by the write-off of
unamortised facility fees in the US. Net debt at 31 December 2003 is shown net
of facility fees of £15 million, which have been capitalised and offset against
the debt in accordance with accounting standard FRS 4. At 31 December 2003,
82% of our borrowing was at fixed rates after taking into account interest rate
swaps. The weighted average interest rate of the fixed rate debt was 7%. On 31 December 2003, we had aggregated debt financing of £1,435 million
denominated principally in US dollars, Australian dollars, Sterling and Czech
Koruna. Of this amount £531 million and £83 million is due for repayment
within one year and two years, respectively, with the majority of the remaining
balance due after 2008. The decrease in debt due within one year resulted from £82 million of the
Rugeley debt being reclassified as non current after it was renegotiated. £74
million of this debt was also repaid during the year. Debt due within one year
also reduced as a result of the redemption of US$254 million of the 2%
Convertible US Dollar Bonds 2005. At the end of December 2002 there was £231
million disclosed in current debt which has now been repaid. At 31 December 2003, we were in discussions with bank groups in relation
to claimed defaults on the non-recourse debt for the US merchant portfolio. As
these issues were not formally resolved at 31 December 2003, the debt at ANP
has been reported as current non-recourse debt in our accounts. Year ended 31 December 2002 Net debt as at 31 December 2002 was £812 million as compared with £897
million as at 31 December 2001. Our share of joint ventures and associates
debt was £503 million as at 31 December 2002 as compared with £487 million as
at 31 December 2001. The decrease in our net debt during the period reflects increased
operating cash flow and the positive impact of the translation of debt
denominated in foreign currencies, which amounted to £98 million over the
course of the year. Net debt at 31 December 2002 is shown net of facilities
fees of £27 million, which have been capitalised and offset against the debt in - 52 -




---



##### Table of Contents



accordance with accounting standard FRS 4. At 31 December 2002, 77% of our
borrowing was at fixed rates after taking account of interest rate swaps. The
weighted average interest rate of the fixed rate debt was 6%. On 31 December 2002, we had aggregated debt financing of £1,654 million
denominated principally in US dollars, Australian dollars, Sterling, Thai Baht
and Czech Koruna. Of this amount, £1,078 million and £39 million is due for
repayment within one year and two years, respectively, with the majority of the
remaining balance due after 2007. The substantial increase in debt due within one year arises as a result of
events in both the United Kingdom and the United States. In the United
Kingdom, TXUEET was placed in administration and our tolling contract was
terminated. The termination of the tolling contract was an event of default
under the £160 million non-recourse term loan that we used to finance our
acquisition of Rugeley. Consequently, that debt was reported as current
non-recourse debt at 31 December 2002. On 29 August 2003, we reached formal
agreement with our bank group resolving these issues and therefore the debt at
Rugeley has been redesignated to its contractual maturity. At 31 December 2002 in the United States, following a number of refuted
technical events of default, we were in discussions with our bank group. These
alleged events of default principally related to the availability of insurance
cover for terrorism (which we have now obtained but was not generally available
post-11 September 2001), our alleged failure to elect early completion of
performance recovery periods and our alleged failure to achieve an agreed
commercial operation date. In May 2003, our bank group waived all these
claimed technical defaults and this debt was redesignated to its original
maturity. Commitments and contingent liabilities The following table summarises our principal contractual financial
obligations at 31 December 2003, certain of which are described in the
consolidated financial statements and notes. Further analysis of these
individual obligations is provided in notes 20, 21, 30, 31 and 32 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 periodContractual obligations
    
    Total
    
    Less than 1 year
    
    1-3 years
    
    3-5 years
    
    More than 5 years(£ in millions)Short-term debt
    
    
    531
    
    
    
    531
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt
    
    
    904
    
    
    
    
    
    
    
    113
    
    
    
    211
    
    
    
    580Property leases
    
    
    67
    
    
    
    5
    
    
    
    10
    
    
    
    14
    
    
    
    38Capital commitments
    
    
    75
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    Commitments for the supply and transportation of fuel
    
    
    666
    
    
    
    74
    
    
    
    128
    
    
    
    169
    
    
    
    295Total contractual obligations
    
    
    2,243
    
    
    
    685
    
    
    
    251
    
    
    
    394
    
    
    
    913
 Our contingent liabilities at 31 December 2003 are described in note 32 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 - 53 -




---



##### Table of Contents



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. Off Balance Sheet Arrangements Our associates are off balance sheet arrangements. Our share of joint
ventures and associates debt was £712 million as at 31 December 2003 as
compared with £503 million as at 31 December 2002. - 54 -




---



##### Table of Contents



- 55 -




---



##### Table of Contents



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 and for the financial
policies of the Group. The Board currently consists of a Chairman, four
Executive Directors and three Non-Executive Directors. Our Articles of
Association provide that at each Annual General Meeting (AGM) of shareholders
one third of the Directors will retire (on a rotating basis) and are eligible
for re-appointment at such meeting. The following table sets forth the age and
function of each of our Directors and executive officers. Directors and Executive Officers
    
    Age
    
    Position heldSir Neville Simms
    
    
    59
    
    
    ChairmanPhilip Cox
    
    
    52
    
    
    Chief Executive Officer and DirectorMark Williamson
    
    
    46
    
    
    Chief Financial Officer and DirectorStephen Riley
    
    
    42
    
    
    Executive Director, Europe and DirectorAnthony (Tony) Concannon
    
    
    40
    
    
    Executive Director, Australia and DirectorAnthony (Tony) Isaac
    
    
    62
    
    
    Non-Executive DirectorJohn (Jack) Taylor
    
    
    65
    
    
    Non-Executive DirectorAdri Baan
    
    
    60
    
    
    Non-Executive DirectorStephen Ramsay
    
    
    42
    
    
    Company Secretary
 Sir Neville Simmsbecame a Non-Executive Director of National Power in
August 1998 and was appointed Chairman of International Power in October 2000.
He is currently Chairman of Carillion plc, and a member of the Presidents
Committee of the CBI. Philip Coxjoined the Company on 1 May 2000 from Invensys plc and became
Chief Financial Officer in October 2000. 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 Williamsonjoined the Company in September 2000 from the Simon Group
plc, and became Group Financial Controller responsible for the Companys
financial reporting. Mark was appointed Chief Financial Officer of
International Power in December 2003. His responsibilities include financial
control and reporting, tax and risk management. Stephen (Steve) Rileyjoined 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 head of the European region. Stephen was appointed to the
Board in January 2004. Anthony (Tony) Concannonjoined the business in 1982. In October 2000
Tony became International Powers Country Manager for the United Kingdom. He
took up his current role leading the Australian business in August 2003.
Anthony was appointed to the Board in January 2004. Anthony (Tony) Isaacbecame a Non-Executive Director of the Company in
October 2000 and is the Senior Independent Director. He is the Chief Executive
of The BOC Group plc and is a Non-Executive Director of Schlumberger Limited. - 56 -




---



##### Table of Contents



John (Jack) Taylorhas 37 years experience in project finance, private
equity and international banking. Having served as the Asian Development
Banks Director-Infrastructure, Energy, and Financial Sectors Department West
and Private Sector Group, following a 30-year career as a senior executive with
The Chase, Jack is today active in private equity in the UK, Europe and Asia. Adri Baanbecame one of our Non-Executive Directors in June 2002. He was
previously CEO of Philips Consumer Electronics, Member of the Board of
Management. He is currently on the Boards of ASMI, KVWS, ICI PLC and Wolters
Kluwver. The Chairman and all independent Non-Executive Directors (Tony Isaac, Jack
Taylor and Adri Baan) are members of the Audit Committee, Remuneration
Committee and the Appointments Committee. All Executive Directors are members
of the Risk Committee. Stephen Ramsaybecame our Company Secretary and Corporate Counsel in
October 2000. He joined the company in 1996 as the Company Secretary and
General Counsel of National Wind Power. In 1998 he joined our international
legal group where he worked on international projects. As Company Secretary,
he is responsible for our secretariat department and corporate legal issues. 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. Senior Management
    
    Age
    
    Position heldIan Nutt
    
    
    51
    
    
    President of ANPRanald Spiers
    
    
    48
    
    
    Regional Director, Middle EastPeter Barlow
    
    
    50
    
    
    Director of Corporate FinanceVince Harris
    
    
    52
    
    
    Regional Director, Rest of the World and Chief
Executive Officer of Hub Power CompanyGareth Griffiths
    
    
    33
    
    
    Director of Global TradingKen Teasdale
    
    
    51
    
    
    Director of Operations and EngineeringPenny Chalmers
    
    
    37
    
    
    Director of Global ResourcesSean Neely
    
    
    38
    
    
    Director of Mergers & AcquisitionsKen Oakley
    
    
    41
    
    
    Group Tax Manager
 Ian Nuttis the President of ANP. In his last role he was our head of
Global Operations and, in addition, played a critical role in asset management.
He has 28 years experience in development, operation and maintenance of power
plants. - 57 -




---



##### Table of Contents



Ranald Spiersis head of our Middle East region. He has been with us for
eleven years, having previously worked for BP for twelve years across a wide
spectrum of industries, including petrochemicals, detergents, oil refining,
downstream gas, advanced materials and aerospace. Peter Barlowis the head of Corporate Finance for International Power and
is responsible for funding and bank relationships. Peter joined us in 1998 and
has been especially involved in Corporate Finance, Project Finance and Treasury
activities since that time. Vince Harrisis the new head of Rest of the World and CEO of the Hub Power
Company in Pakistan. He was responsible for managing the disposal of our
Chinese assets. He is a chartered engineer and has 34 years experience in the
power generation industry. Gareth Griffithsis the director of Global Trading with responsibility for
our trading operations in the UK, USA and Australia. He has 11 years
experience in the industry and was previously Vice President, Marketing and
Trading for our US business. Ken Teasdaleis our director of Operations and Engineering. He is a
chartered electrical engineer and a chartered mechanical engineer. He has over
30 years experience in the industry and was previously CEO of Hazelwood Power
Company, a 1,610 MW power station at Victoria, Australia. Penny Chalmersis our director of Global Resources. She is responsible
for group human resources including staffing and support of development of
information technology and corporate communications. Penny has 16 years
experience in the energy sector and has been with us since 1997. Sean Neelymanages the Mergers and Acquisitions Group. He has 10 years
experience in the industry. As well as acquisitions he has previous experience
in strategic planning and project finance. Ken Oakleymanages our Corporate Tax function. He joined us in October
2000, and is a chartered accountant and chartered tax advisor. Corporate Governance The Board The full Board met on nine occasions during the year. Tony Isaac was
unable to attend two of these meetings. All other Directors were in attendance
on the relevant meeting dates. Meetings of the Chairman and the Non-Executive
Directors are also held without the Executive Directors being present. During
2003, two such meetings took place. The Non-Executive Directors intend to meet
once a year without the Chairman present. This meeting will be chaired by Tony
Isaac, the Senior Independent Non-Executive Director, and will include a review
of the Chairmans performance. From January to 30 November 2003, the Board comprised the Chairman (Sir
Neville Simms); a Non-Executive Deputy Chairman (Peter Giller); two Executive
Directors (David Crane and Philip Cox) and three Non-Executive Directors (Tony
Isaac, Jack Taylor and Adri Baan). Tony Isaac is the Senior Independent
Non-Executive Director. The three Non- - 58 -




---



##### Table of Contents



Executive Directors are considered to be independent. Peter Giller was
not considered to be independent because of his former role as Chief Executive
Officer of the Company. On 30 November 2003, David Crane resigned as a Director. On 11 December
2003 Philip Cox succeeded him as Chief Executive Officer. Also on 11 December
2003 Mark Williamson was appointed as Chief Financial Officer and an Executive
Director. Peter Giller resigned as Deputy Chairman and as a Director on 31
December 2003. On 1 January 2004, Steve Riley and Tony Concannon were
appointed as Executive Directors. The Board believes that it now has the
skills and experience necessary to provide effective leadership and control of
the Company. For the majority of 2003 the effectiveness of the Board was underpinned by
a balance between Executive and Non-Executive Directors. Whilst there is at
present one more Executive Director than independent Non-Executive Directors,
the Chairman of the Company retains the casting vote. The Board is currently
seeking to recruit a new Non-Executive Director. The Board has also indicated
that it intends to appoint an additional Executive Director to head our US
business in due course. In accordance with the Combined Code and our Articles of Association, all
Directors submit themselves for re-election at least every three years and
newly appointed Directors are subject to election by shareholders at the first
Annual General Meeting (AGM) after their appointment. Arrangements are in
place to ensure that newly appointed Directors receive comprehensive briefing,
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 the three
recently appointed directors Tony Concannon, Steve Riley and Mark Williamson
have already attended a course arranged through the Institute of Directors. A programme of continuous training is provided for the Directors.
Directors are also kept informed of changes to the regulatory regime such as
the revised Combined Code, new institutional investor guidelines and the
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. 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. The Board has responsibility for defining strategy, ensuring the
successful implementation of approved projects/proposals and for the financial
policies of the Group. It maintains a schedule of all matters requiring
specific Board approval. Throughout 2003 this included all strategy decisions
and significant capital investment proposals. 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 our overall
performance of the Group is reviewed against approved budgets. At least once a
year, the CEO presents a corporate strategy plan to the Board for review and
approval. Each investment decision is made in the context of this plan. - 59 -




---



##### Table of Contents



The Board has established business values and standards for the Company,
which provide a framework for the Company to balance the interests of all its
stakeholders in the conduct of its business. The Companys Code of Business
Conduct has been formally adopted by the Board and is set out on the Companys
website. This code includes a whistle blowing procedure and is in the process
of being disseminated throughout the Group. A questionnaire on Board performance is completed by each Director and
discussed with the Chairman and the Company Secretary. The results of this
questionnaire are discussed with the Board as a whole. Overall these
evaluations confirmed that the Directors considered that the Board and its
Committees worked effectively. The contribution by individual Directors to
Board and Committee meetings was considered to be high. The review did
highlight the imbalance of the Board and, following the departure of David
Crane, it was decided to widen and strengthen the Executive Director team of
the Company. 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. In addition to his role as Chairman of the Company, Sir Neville Simms is
also Chairman of Carillion plc. The Board believes this does not compromise
his role as Chairman of the Company. Philip Cox is also a Non-Executive Director of Wincanton plc. Non-Executive Directors and their Function Through membership of the Board Committees, the Non-Executive Directors
have responsibilities for: ensuring that systems of internal control and risk
management are appropriate and effective; evaluating the performance of
management in meeting targets and objectives; setting the remuneration of
Executive Directors; the appointment of Executive Directors; and senior
management succession planning. We have established the following committees: the Audit Committee, the
Remuneration Committee and the Appointments Committee. Audit Committee The Audit Committee is responsible for selecting and fixing the
remuneration of external auditors and reviewing 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 - 60 -




---



##### Table of Contents



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. The Audit Committee is comprised of all the independent Non-Executive
Directors of the Company and the Chairman. Whilst the revised Combined Code
states that the Audit Committee should be comprised of independent
Non-Executive Directors only, the Board believes that due to the importance of
the role of the Audit Committee, particularly in reviewing the role of the
external auditors and internal control systems, it is appropriate for the
Chairman to be a member of this 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. During 2003 the Audit Committee met on four occasions. Tony Isaac
and Jack Taylor attended each of these meetings, whilst Adri Baan and Sir
Neville Simms attended three meetings each. Time is set aside for the Committee to meet the external auditors without
executive management present and these sessions have been extended to include
the head of the Groups internal audit function. In addition to the members of
the Committee, regular attendees at the Audit Committee meetings included
representatives of the external auditors, the Chief Executive Officer, the
Chief Financial Officer, the Group Financial Controller 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 is comprised of all of the independent Non-Executive
Directors of the Company and the Chairman. The Chairman of the Committee is
Adri Baan. The Human Resources Manager of International Power acts as
secretary to the Committee. Whilst the revised Combined Code states that the
Remuneration Committee should be comprised of independent non-executive
directors only, the Board believes that given the importance of executive
remuneration to the Company and the Chairmans role in maintaining contact with
its principal shareholders on Directors remuneration, it is appropriate that
the Chairman of the Company be a member of the Committee. During 2003 the
Remuneration Committee met on four occasions. Sir Neville Simms, Adri Baan and
Jack Taylor attended each of these meetings whilst Tony Isaac attended two
meetings. Appointments Committee The Appointments Committee is responsible for matters of management
succession and the identification and appointment of Directors. The Committee
is comprised of the Chairman and all of the independent Non-Executive Directors
of the Company. The Chairman of the Committee is Sir Neville Simms. The Human
Resources Manager of International Power acts as secretary to the Committee.
During 2003 the Committee met on three occasions. Sir Neville Simms was in
attendance at all three meetings, whilst Adri Baan, Tony Isaac and Jack Taylor
attended two meetings each. - 61 -




---



##### Table of Contents



When reviewing candidates for the appointment of Chief Executive Officer,
the Appointments Committee instructed Spencer Stuart, external search
consultants. The appointment of Philip Cox was made following full evaluation
of internal and external candidates, after taking into account their past
experience, their personal achievements and other factors such as their
knowledge and experience of the global electricity industry and the business
environment of International Power. For the other executive positions filled
in December 2003 and in January 2004, the Appointments Committee evaluated the
balance of skills, knowledge and experience required for the business. In
appointing Mark Williamson, Steve Riley and Tony Concannon, the Committee was
satisfied that the candidates knowledge of the Group and the industry, and
their past performance as senior managers, matched the skills and personal
attributes necessary for the roles. Relations with shareholders The Board is accountable to shareholders for the performance and
activities of the Group. We ensure that our AGM provides shareholders with an opportunity to
receive comprehensive information on all aspects of our 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. In line with best practice, we aim to
ensure that the notice of the AGM and the annual report are sent to
shareholders at least 20 working days before the AGM. We also run, 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 Chief Executive Officer and the Chief Financial Officer. 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 would be
inappropriate. The Non-Executive Directors do not have any direct
communications with institutional investors, primarily to avoid potential
confusion over channels of communication. 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 all stock exchange announcements are available to
shareholders on our website, www.ipplc.com, in the investor relations section. Accountability and audit The Board is mindful of its responsibility to present a balanced and
understandable assessment of our financial position and prospects, both to
investors and regulatory authorities. The annual report, preliminary, interim
and quarterly results are the principal means of achieving this objective. - 62 -




---



##### Table of Contents



An explanation of the respective responsibilities of the Directors and
auditors in connection with the financial statements is set out on page F-2,
F-3 and F-4 of our consolidated financial statements. The Audit Committee approves 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 rigorous approval process for all other services. Internal control The Board has responsibility for our systems of internal control and for
monitoring and reviewing their effectiveness. We have systems in place to meet the requirements of the Combined Code and
the Turnbull Guidance. Any system of internal control is designed to manage rather than eliminate
the risk of failure to achieve business objectives. The systems can only
provide reasonable, and not absolute, assurance against material financial
misstatement or loss. The principal features of our systems of internal
control are: Control Environment The Board encourages a culture of integrity and openness. We have an
organisational structure with clear lines of accountability and authority
across our worldwide operations, supported by appropriate reporting procedures.
Each of the regional businesses is accountable to the Chief Executive Officer,
and is managed within the strategic guidelines and delegated authorities
adopted by the Board. Control Procedures We have established control procedures in each of our operations to
safeguard the Groups assets from loss or misuse and to ensure appropriate
authorisation and recording of financial transactions. We have risk management
procedures in place for our operations, including our energy marketing and
trading activities, which are overseen by the Global Commodities Risk
Committee, which comprises executive and senior management, and is Chaired by
the Global Risk Manager. The group treasury function operates under defined
policies and under the oversight of the Treasury Committee, chaired by the
Chief Financial Officer. All acquisition and investment decisions are subject
to disciplined investment appraisal processes. 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 risks and sensitivities underlying the projections. - 63 -




---



##### Table of Contents



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 profit and loss account and cash flow. Detailed reports are
presented to the Board on a regular basis. Performance review. Each business unit is subject to a performance review
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 appraisal committee comprising the Executive Directors and senior
managers. Major projects are subject to Board review and approval. Risk Identification and Management There is a continuous process for identifying, evaluating and managing the
key risks we face. Activities are co-ordinated by the Risk Committee, which is
chaired by the Chief Financial Officer, 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 our
strategy and objectives. We conduct assessments for all material entities. As part of the annual business planning process, we identify the key risks
associated with achievement of principal objectives and quantify their impact.
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. 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.
These committees are made up of the Global and Local Risk Managers, Directors
and senior managers. 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 - 64 -




---



##### Table of Contents



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, our 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 our 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. Annual self-certification statements of compliance with procedures are
provided by business unit managers. 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 UK Combined Code on Corporate Governance During the year the service agreements for both David Crane and Philip Cox
contained a provision whereby if, before 31 December 2004, their service
agreements were terminated by reason of a change of control of the Company,
then their notice periods would be increased from 12 months to 24 months. This
provision was agreed by the Remuneration and Appointments Committee upon the
resignation of Peter Giller as CEO at the end of 2002 to provide security for
the Executive Directors in the event of a change of control. David Cranes
provision lapsed upon his resignation. Philip Coxs service agreement still has
this provision in place. However, if no change of control takes place before
31 December 2004, then his notice period in the event of a change of control
reverts to 12 months. In all other respects, we have complied with the provisions of the
Combined Code throughout the period of the review. Compliance with the revised Combined Code The revised Combined Code applies to financial reporting years beginning
on or after 1 November 2003; therefore the first reporting year to which the
revised Combined Code applies for International Power is the year beginning 1
January 2004. The Board believes that it is broadly compliant with the
requirements of the revised Combined Code. The Chairman, however, is a member
of the Audit and Remuneration Committees. An explanation as to why the Company
feels this is appropriate is provided in the narrative above. Other principal
areas of variance with the revised Code requirements have already been outlined
in the corporate governance report for 2003. - 65 -




---



##### Table of Contents



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 2002 (the
Act) as it applies to foreign issuers. The Board continues to monitor the new
rules arising from the Act and arrangements are also being developed to ensure
that the Company will be able to report on its systems of internal controls
over financial reporting as required for year ended 31 December 2005. As recommended by the US Securities and Exchange Commission (SEC), the
Company has established a Disclosure Committee comprising the Company
Secretary, the head of Internal Audit and representatives of the investor
relations, finance and company secretariat departments. The Committee meets
regularly and is responsible for performing an oversight and advisory role in
the disclosure process for the content and form of the annual report and Form
20-F. The Committee makes recommendations to the CEO, the CFO and the
executive management on the adequacy of process to permit the signing of
certifications required by the Act. In November 2003, the SEC approved changes to the listing standards of the
New York Stock Exchange (NYSE) related to the corporate governance practices of
listed companies. Under these rules, listed foreign private issuers, such as
International Power, must disclosure any significant ways in which their
corporate governance practices differ from those followed by US domestic
companies under the NYSE listing standards. There are no significant
differences in the corporate governance practices undertaken by International
Power as compared to those followed by US domestic companies under the NYSE
standards. Under the terms of the NYSE rules, Sir Neville Simms is deemed to
be an independent Director as all the payments he receives from the Company are
in respect of Directors fees and therefore his membership of the Audit
Committee, Remuneration Committee and Appointments Committee is in accordance
with the requirements of the NYSE corporate governance rules. The terms of
reference of the Appointments Committee only relate to succession issues rather
than corporate governance principles, which are currently reserved to the Board
as a whole. Directors and Executive Officers Interests As of 26 April 2004 (the latest practicable date prior to the publication
of this annual 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 PowerOrdinaryDirector
    
    Shares NumberSir Neville Simms
    
    
    125,377Philip Cox
    
    
    67,132Mark Williamson
    
    
    46,292Steve Riley
    
    
    30,977Tony Concannon
    
    
    15,761Adri Baan
    
    
    25,483Tony Isaac
    
    
    15,483Jack Taylor
    
    
    11,978
 - 66 -




---



##### Table of Contents



None of the Directors has any non-beneficial interest in any of our
ordinary shares. Save as set out in the table above, 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. Compensation of Directors and Officers The table below shows the aggregate remuneration of our Directors for the
year ended 31 December 2003 and compares it with the figures for the year ended
31 December 2002. AggregateremunerationPerformance
    
    Performance
    
    Payment in
    
    
    
    year torelated bonus
    
    related bonus
    
    lieu of
    
    Other
    
    31 DecemberSalary
    
    Fees
    
     cash
    
     shares
    
    pension
    
    benefits
    
    2003£
    
    £
    
    £
    
    £
    
    £
    
    £
    
    £Sir Neville Simms(6)
    
    
    
    
    
    
    192,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192,500P G Cox(7)
    
    
    357,056
    
    
    
    
    
    
    
    71,411
    
    
    
    96,762
    
    
    
    68,911
    
    
    
    15,881
    
    
    
    610,021D W Crane(2)
    
    
    435,417
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,625
    
    
    
    16,883
    
    
    
    582,925P Giller(3)(4)(5)
    
    
    
    
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000M D Williamson
    
    
    14,113
    
    
    
    
    
    
    
    2,399
    
    
    
    3,251
    
    
    
    
    
    
    
    736
    
    
    
    20,499J D Taylor(1)
    
    
    
    
    
    
    35,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,000A E Isaac(1)
    
    
    
    
    
    
    42,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,500A Baan(1)
    
    
    
    
    
    
    37,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,500D Hendrix(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    806,586
    
    
    
    407,500
    
    
    
    73,810
    
    
    
    100,013
    
    
    
    199,536
    
    
    
    33,500
    
    
    
    1,620,945 [Additional columns below] [Continued from above table, first column(s) repeated] Aggregateremunerationyear to31 December2002£Sir Neville Simms(6)
    
    
    175,000P G Cox(7)
    
    
    509,632D W Crane(2)
    
    
    513,311P Giller(3)(4)(5)
    
    
    675,843M D Williamson
    
    
    J D Taylor(1)
    
    
    30,000A E Isaac(1)
    
    
    35,000A Baan(1)
    
    
    17,500D Hendrix(1)
    
    
    12,500Total
    
    
    1,968,786   Notes(1)
    
    The International Power plc Non-Executive Directors fees were reviewed
as at 1 July 2003. The basic fee effective from this date, which covers
Board membership (i.e. attendance at Board meetings, general duties as
Directors, and their membership of Board Committees) is £40,000 (increased
from £30,000). In addition, Tony Isaac receives an additional fee of
£5,000 per annum for his role as Senior Independent Director. With effect
from 1 July 2003 Tony Isaac also receives £5,000 per annum for his role as
Chairman of the Audit Committee, and Adri Baan receives an additional fee
of £5,000 per annum for his role as Chairman of the Remuneration
Committee.(2)
    
    As a result of David Cranes resignation and him having been a member of
the Pension Scheme for less than 12 months, he was refunded his Pension
Scheme contributions which are included in the table above. He also
received a company car allowance and private medical insurance, both of
which are included in other benefits. These arrangements ceased on 30
November 2003.(3)
    
    On 2 October 2000, Peter Giller received a one-off conditional award of
677,564 Ordinary Shares in the Company in respect of his three year term
of employment (subject to the rules of the Restricted Share Plan). One
third of the Ordinary Shares conditionally awarded to him (being 225,854)
were issued to him on 2 October 2001 and a further third (225,855) were
released on 2 October 2002. The final third (225,855) were issued to him
on termination of his service agreement on 31 December 2002. The 2002
total remuneration stated in the table above reflects: 9/12 of the value
of his 2002 release, based on the share price at 2 October 2002 of 82.875p
per share at the time of the vesting of the shares; and 3/12 of the
remaining third released to him on 31 December 2002 based on a share price
of 95.125p per share. In addition, during 2002 he was provided with a
weekly cash supplement of £1,100 in respect of housing costs.(4)
    
    As part of Peter Gillers termination of his service agreement he
received, on 31 December 2002, the balance of his 2003 Restricted Share
Plan release and the full release of his 2002 Performance Share Plan award
of 255,102 shares. Both these releases were based on a share price of
95.125p and are reflected in the 2002 total remuneration shown in the
table above. He also received, as part of termination arrangements, a
relocation allowance of £25,000.(5)
    
    As part of Peter Gillers role as Deputy Chairman and Non-Executive
Director, he received a fee of £100,000. This arrangement terminated on
31 December 2003.(6)
    
    The Chairmans fee was reviewed as at 1 July 2003 (rather than 2 October
2002, as stated in his original contract). The fee effective from this
date is £210,000 (from £175,000).(7)
    
    Philip Cox was appointed Chief Executive Officer on 11 December 2003.
The increase in his salary, effective 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 Philip Coxs 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-share in the above table has been calculated using a share
price of 135.5p (being the mid-market quoted price for 23 February 2004).(8)
    
    Mark Williamson was appointed an Executive Director on 11 December 2003.
His remuneration from that date is included in the above table. The value
of the Performance related bonus-share in the above table has been
calculated using a share price of 135.5p (being the mid-market quoted
price for 23 February 2004). - 67 -




---



##### Table of Contents



Summary of emoluments and benefits 9 monthsYear ended
    
    Year ended
    
    Year ended
    
    ended31 December
    
    31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001
    
    2000£000
    
    £000
    
    £000
    
    £000Aggregate emoluments
    
    
    1,621
    
    
    
    1,565
    
    
    
    1,747
    
    
    
    2,041Termination payments
    
    
    
    
    
    
    404
    
    
    
    
    
    
    
    1,805Performance Share Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-Term Incentive Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Highest paid Director The aggregate emoluments of the highest paid Director, Philip Cox, were
£610,021 (year ended 31 December 2002: Peter Giller £675,843; year ended 31
December 2001: Peter Giller £530,998). 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. The Demerger Long Term Incentive Plan
ceased operation on 2 October 2003, and no awards were made under this Plan. In
2003 the Company has 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. As outlined last year, Peter Giller, effective from 1 January 2003, moved
to the position of Deputy Chairman and Non-Executive Director for an initial
period of one year. This arrangement terminated on 31 December 2003. The
other Non-Executive Directors are appointed on a three year fixed term, annual
fixed fee basis. David Crane resigned his position of Chief executive Officer on 30
November 2003 and Philip Cox was promoted from his role as Chief Financial
Officer to replace him. The Board was then further strengthened through the
appointment of Mark Williamson (Chief Financial officer), Steve Riley
(Executive Director Europe), and Tony Concannon (Executive Director Australia). 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 forgone. If we terminate Philip Coxs employment otherwise than
for cause (termination which is not in accordance with the terms of their
service agreement) we shall, at his request, pay to him, by way of liquidated
damages, a lump sum payment as described above. Philip Cox may terminate
employment by giving not less than six months notice. For a limited period
only (1 January 2003 to 31 December 2004), if the service agreement for Philip
Cox is terminated for a change of control, the notice period is increased to 24
months. For termination through the temporary change of control provision
referred to above, this payment increases to 250% of annual basic salary (not
in addition to the 24-months notice). The date upon which this contract was
entered into was 25 February 2003. - 68 -




---



##### Table of Contents



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 (not in addition to the 12-months notice) which will be
paid on a monthly basis until the Executive 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 1st January. In 2003, Philip Cox was entitled to participate in annual bonus
arrangements providing 30% of prevailing annual salary for the achievement of
pre-set financial and non-financial objectives, rising to 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, 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 years 2004 and 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 are 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. In order
to maintain our Chairman and Non-Executive Directors fee levels at a
comparable scale to the market place, the Company has, effective from 1 July
2003 increased these fees. In order to receive this increase, the Chairman and
Non-Executive Directors have committed to use the net value of the increase,
each year, to purchase International Power shares. In addition, as part of a
new shareholding requirement, they will also be required to hold these shares
until their appointment terminates. Under the terms of this increase the
Chairman is paid £210,000 per annum (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, 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. - 69 -




---



##### Table of Contents



The date of expiry of the current terms of appointment for each of the
Non-Executive Directors and their current fees are as follows: Expected expiry of
    
    Total fees andcurrent terms
    
    other benefits(£)Non-Executive DirectorsSir Neville Simms(1)
    
    
    
    
    
    
    210,000Adri Baan
    
    Until the 2006 AGM
    
    
    45,000Tony Isaac
    
    Until the 2006 AGM
    
    
    50,000Jack Taylor
    
    Until the 2005 AGM
    
    
    40,000Peter Giller
    
    31 December 2003
    
    
    100,000
   (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 a suite of share-based plans under which employees may acquire our
ordinary shares. These plans form an integral part of our strategy to: provide
appropriate reward and retention strategies for employees; align employee and
shareholders interest through incentive targets based on clear operational and
financial metrics; ensure our ability to recruit; motivate and retain staff;
enable all our employees to participate in these programmes, where appropriate. This suite of share-based plans includes a saving related share option
scheme open to staff in the United Kingdom. Over 85% of eligible staff
currently participate in the scheme, saving between £10 and £250 per month,
with the option to purchase shares at a discount at the end of a chosen three
or five-year saving period. We also operate, for UK staff, the International
Power Approved and Unapproved Executive Share Option Schemes (ESOS) and the
International Power Sharesave Plan. We also have in place a Global Executive Share Option Plan (designed for
executives who are resident outside of the United Kingdom), The International
Power Global Sharesave Plan (open to employees in certain countries outside of
the United Kingdom). The Global Executive Share Option Plan and the Global
Sharesave Plan are both in operation. At demerger in October 2000 we established the Demerger Share Plan, which
was open to all UK based employees (except Directors) employed at demerger.
Awards were made to eligible employees at demerger, the shares required to meet
those awards at vesting in October 2003 being held in trust. No shares have
been specifically purchased in respect of awards made under this plan, as we
are utilising the balance of shares unallocated from two former employee share
plans that ceased operation at demerger. This plan ceased operation on 2
October 2003. Additionally we operate a Performance Share Plan, which shareholders
approved at the 2002 AGM and which is open to Executive Directors and certain
other employees. During 2002 we purchased and placed in trust a total of
1,273,138 shares in respect of awards made under this Plan, at a total cost of
£2.5 million. Of these shares, the Remuneration Committee released 255,102
shares to Peter Giller on 31 December 2002 following the cessation of his term
in office. - 70 -




---



##### Table of Contents



Finally, a one-off long-term incentive plan (the Demerger LTIP) was also
established at demerger for Executive Directors and a small number of senior
managers. To date, no awards have been made in respect of this Plan. This plan
ceased operation on 2 October 2003. Executive Share Options have been granted to executives in four counties
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. Whilst Executive Directors are eligible to participate in all of the
listed Plans, David Crane and Philip Cox only participated in the Demerger
Long-Term Incentive Plan, the 2002 performance share Plan, the Approved and
Unapproved Executive Share Option Plans and the International Power Sharesave
Plan. Tony Concannon, Steve Riley and Mark Williamson participate in the 2002
Performance Share Plan, the Approved and Unapproved Executive Share Option
Plans and the International Power Sharesave Plan. They also participate in the
Demerger Share Plan. The vesting of any awards made under each of the Demerger Long-Term
Incentive Plan and the 2002 Performance Share Plan and the ability to exercise
options granted under the Approved and Unapproved Executive Share Option Plans
and the Global Executive Share Option Plan are all subject to the satisfaction
of performance conditions for each award or option grant under each plan is
given in the Directors remuneration report. The exercise of options under the
Sharesave Plan is not subject to any performance condition. The release of
shares under the Demerger Share Plan, being an all employee share plan, was
also not subject to any performance condition. Options to Purchase Our Securities Summary of Outstanding Options The table below sets forth options to purchase our ordinary shares
outstanding as of 26 April 2004 (the latest practicable date prior to the
printing of this document): Exercise PriceIssuable
    
    perGrant
    
    Exercise
    
    Ordinary
    
    OrdinaryPlan
    
    Date
    
    Dates
    
    Shares
    
    ShareApproved Executive Plan
    
    3 October 2000
    
    
    2003-2010
    
    
    
    390,583
    
    
    
    311.75p22 March 2001
    
    
    2004-2011
    
    
    
    545,273
    
    
    
    235.00p19 September 2001
    
    
    2004-2011
    
    
    
    49,731
    
    
    
    217.00p24 May 2002
    
    
    2005-2012
    
    
    
    715,021
    
    
    
    196.00p10 March 2003
    
    
    2006-2013
    
    
    
    1,383,458
    
    
    
    70.00p2 March 2004
    
    
    2007-2014
    
    
    
    578,802
    
    
    
    138.75pUnapproved Executive Plan
    
    3 October 2000
    
    
    2003-2010
    
    
    
    2,271,002
    
    
    
    311.75p22 March 2001
    
    
    2004-2011
    
    
    
    1,371,599
    
    
    
    235.00p19 September 2001
    
    
    2004-2011
    
    
    
    116,047
    
    
    
    217.00p24 May 2002
    
    
    2005-2012
    
    
    
    3,147,947
    
    
    
    196.00p10 March 2003
    
    
    2006-2013
    
    
    
    8,392,036
    
    
    
    70.00p2 March 2004
    
    
    2007-2014
    
    
    
    5,498,959
    
    
    
    138.75pGlobal Executive Share Plan
    
    10 March 2003
    
    
    2006-2013
    
    
    
    695,343
    
    
    
    70.00p2 March 2004
    
    
    2007-2014
    
    
    
    315,989
    
    
    
    138.75pExecutive Share Option Plan
    
    18 December 1992
    
    
    1995-2002
    
    
    
    13,838
    
    
    
    180.40p15 December 1993
    
    
    1996-2003
    
    
    
    52,935
    
    
    
    297.94p30 November 1994
    
    
    1997-2004
    
    
    
    101,858
    
    
    
    336.21p
 - 71 -




---



##### Table of Contents



Exercise PriceIssuable
    
    perGrant
    
    Exercise
    
    Ordinary
    
    OrdinaryPlan
    
    Date
    
    Dates
    
    Shares
    
    Share13 December 1995
    
    
    1998-2005
    
    
    
    290,736
    
    
    
    306.14p23 December 1996
    
    
    1999-2006
    
    
    
    472,639
    
    
    
    323.22p2 December 1997
    
    
    2000-2007
    
    
    
    555,541
    
    
    
    386.09p1 December 1998
    
    
    2001-2008
    
    
    
    761,052
    
    
    
    352.61p2 June 1999
    
    
    2002-2009
    
    
    
    33,206
    
    
    
    331.42pGlobal Sharesave Plan
    
    17 January 2003
    
    
    2006
    
    
    
    850,120
    
    
    
    79.00p17 January 2003
    
    
    2008
    
    
    
    725,610
    
    
    
    79.00p3 October 2003
    
    
    2006
    
    
    
    167,610
    
    
    
    110.00p3 October 2003
    
    
    2008
    
    
    
    138,998
    
    
    
    110.00pSharesave Plan
    
    27 October 2000
    
    
    2003
    
    
    
    775
    
    
    
    250.00p18 April 2001
    
    
    2004
    
    
    
    12,159
    
    
    
    188.00p18 April 2001
    
    
    2006
    
    
    
    8,976
    
    
    
    188.00p11 October 2001
    
    
    2004
    
    
    
    6,780
    
    
    
    200.00p11 October 2001
    
    
    2006
    
    
    
    5,905
    
    
    
    200.00p1 October 2002
    
    
    2005
    
    
    
    1,028,370
    
    
    
    90.00p1 October 2002
    
    
    2007
    
    
    
    2,445,500
    
    
    
    90.00p3 October 2003
    
    
    2006
    
    
    
    120,917
    
    
    
    110.00p3 October 2003
    
    
    2008
    
    
    
    64,833
    
    
    
    110.00p
 The table below sets forth the awards we made to our Executive Directors
as part of our 2002 Performance Share Plan as of 31 December 2003. Market
    
    
    
    
    
    No. ofNo. of
    
    
    
    
    
    
    
    
    
    value of an
    
    
    
    
    
    sharesshares
    
    Conditional
    
    
    
    
    
    Ordinary
    
    
    
    
    
    underunder
    
    awards
    
    
    
    
    
    Share as at
    
    
    
    
    
    award as ataward as at
    
    made
    
    
    
    
    
    date of
    
    End of
    
    311 January
    
    during the
    
    Date of
    
    award
    
    performance
    
    December2003
    
    year
    
    award
    
    (pence)
    
    period
    
    2003P G Cox
    
    
    148,724
    
    
    
    
    
    
    24 May 2002
    
    
    196p
    
    
    31 December 2004
    
    
    148,724175,879
    
    
    10 March 2003
    
    
    70p
    
    
    31 December 2005
    
    
    175,879500,000
    
    
    10 March 2003
    
    
    70p
    
    
    31 December 2005
    
    
    500,000Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    824,603M D Williamson
    
    
    31,530
    
    
    
    
    
    
    24 May 2002
    
    
    196p
    
    
    31 December 2004
    
    
    31,53088,286
    
    
    10 March 2003
    
    
    70p
    
    
    31 December 2005
    
    
    88,286Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,816
 In addition to the awards listed above, on 2 March 2004 we made further
conditional awards to our Executive Directors as shown below: - 72 -




---



##### Table of Contents



Market value of an OrdinaryConditional awards
    
    shares as at date of awardmade 2 March 2004
    
    (pence)
    
    End of performance periodP G Cox
    
    
    342,342
    
    
    
    138.75
    
    
    31 December 2006M D Williamson
    
    
    180,180
    
    
    
    138.75
    
    
    31 December 2006S Riley
    
    
    169,139
    
    
    
    138.75
    
    
    31 December 2006A P Concannon.
    
    
    169,139
    
    
    
    138.75
    
    
    31 December 2006
 Summary of Directors Options under the Executive Share Options Plans The table below sets forth the awards we made to certain of our Directors
under both the Approved and Unapproved Executive Share Option Plans as of 31
December 2003. No. of sharesNo. of shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    under optionunder option
    
    Granted
    
    Exercise
    
    
    
    
    
    
    
    
    
    as at 31as at 1 January
    
    during the
    
    price per
    
    Exercise period
    
    Exercise period
    
    December2003
    
    year
    
    share
    
    from
    
    to
    
    2003P G Cox
    
    
    15,306
    (1)
    
    
    
    
    
    
    196p
    
    
    24 May 2005
    
    24 May 2012
    
    
    15,306133,418
    (2)
    
    
    
    
    
    
    196p
    
    
    24 May 2005
    
    24 May 2012
    
    
    133,418500,000
    (2)
    
    
    70p
    
    
    10 March 2006
    
    10 March 2013
    
    
    500,000Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    648,724M D Williamson
    
    
    4,811
    (1)
    
    
    
    
    
    
    311.75p
    
    
    3 October 2003
    
    3 October 2010
    
    
    4,81147,265
    (2)
    
    
    
    
    
    
    311.75p
    
    
    3 October 2003
    
    3 October 2010
    
    
    47,2656,382
    (1)
    
    
    
    
    
    
    235p
    
    
    22 March 2004
    
    22 March 2011
    
    
    6,38214,893
    (2)
    
    
    
    
    
    
    235p
    
    
    22 March 2004
    
    22 March 2011
    
    
    14,89331,530
    (2)
    
    
    
    
    
    
    196p
    
    
    24 May 2005
    
    24 May 2012
    
    
    31,53088,285
    (2)
    
    
    70p
    
    
    10 March 2006
    
    10 March 2013
    
    
    88,285Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173,166
   (1)
    
    Approved Executive Share Options(2)
    
    Unapproved Executive Share Options In addition to the options listed above, on 2 March 2004 we made further
additional grants of Unapproved Executive Share options to our Executive
Directors as shown below: No. of options granted on
    
    Exercise Price per
    
    Exercise period2 March 2004
    
    share
    
    from
    
    Exercise period toP G Cox
    
    
    342,342
    
    
    
    138.75
    
    
    2 March 2007
    
    2 March 2014M D Williamson
    
    
    180,180
    
    
    
    138.75
    
    
    2 March 2007
    
    2 March 2014S Riley
    
    
    169,369
    
    
    
    138.75
    
    
    2 March 2007
    
    2 March 2014A P Concannon
    
    
    169,369
    
    
    
    138.75
    
    
    2 March 2007
    
    2 March 2014
 Summary of Directors Options under the Sharesave Plan: As of 26 April 2004 (the latest practicable date prior to the printing of
this annual report), our Directors held options to purchase an aggregate of
47,650 ordinary shares. - 73 -




---



##### Table of Contents



ExerciseNo. of shares
    
    Price per
    
    Exercise period
    
    Exercise periodGrant Date
    
    under option
    
    share
    
    from
    
    toP G Cox
    
    1 October 2002
    
    
    18,250
    
    
    
    90p
    
    
    24 December 2007
    
    24 June 2008M D Williamson
    
    1 October 2002
    
    
    10,500
    
    
    
    90p
    
    
    24 December 2005
    
    24 June 2006S Riley
    
    1 October 2002
    
    
    10,500
    
    
    
    90p
    
    
    24 December 2005
    
    24 June 2006A P Concannon.
    
    1 October 2002
    
    
    8,400
    
    
    
    90p
    
    
    24 December 2005
    
    24 June 2006Total
    
    
    
    
    
    
    47,650
 Gains made on Directors Share Options In the financial period ended 31 December 2003, no Directors exercised
share options, therefore no gains were realised. - 74 -




---



##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions Major Shareholders As at 26 April 2004 (the latest practicable date prior to the publication
of this document) the following persons had notified the company of the
following interests in 3% or more of our issued share capital pursuant to the
Companies Act 1985: PercentageNumber of
    
    of IssuedOrdinary
    
    ShareShares
    
    CapitalNameBriTel Fund Trustees Ltd.
    
    
    51,778,561
    
    
    
    4.67
    %AXA S.A.
    
    
    39,905,357
    
    
    
    3.60
    %Legal & General Investment Management Ltd.
    
    
    34,230,622
    
    
    
    3.09
    %Morley Fund Management Ltd.
    
    
    33,897,293
    
    
    
    3.06
    %
 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 26 April 2004, the total amount of our voting securities owned by
our Directors and executive officers as a group was 338,483 shares, or 0.03% 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 26 April 2004 (the latest practicable date prior to the publication of
this document) there were 745 registered holders of 207,117 of our shares with
addresses in the United States, and 1 registered holder of 599,343 of our
registered ADSs (equivalent to 5,993,430 ordinary shares), whose combined
holdings constituted approximately 0.056% 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. - 75 -




---



##### Table of Contents



Item 8. Financial Information Consolidated Statements and Other Financial Information See Item 18. Financial Statements for our audited consolidated
financial statements filed as part of this annual report. - 76 -




---



##### Table of Contents



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
    
    ADSsAverage
    
    
    
    
    
    
    
    
    
    Averagedaily
    
    
    
    
    
    
    
    
    
    dailyHigh
    
    Low
    
    trading
    
    High
    
    Low
    
    tradingCalendar Year
    
    p
    
    p
    
    volume
    
    $
    
    $
    
    volume2001First Quarter
    
    
    267.50
    
    
    
    210.00
    
    
    
    9,401,855
    
    
    
    39.75
    
    
    
    31.00
    
    
    
    15,252Second Quarter
    
    
    326.80
    
    
    
    264.00
    
    
    
    12,744,804
    
    
    
    46.55
    
    
    
    37.20
    
    
    
    15,294Third Quarter
    
    
    327.30
    
    
    
    193.80
    
    
    
    10,202,442
    
    
    
    46.52
    
    
    
    28.50
    
    
    
    5,758Fourth Quarter
    
    
    237.00
    
    
    
    189.50
    
    
    
    6,706,164
    
    
    
    34.70
    
    
    
    27.10
    
    
    
    2,9022002First Quarter
    
    
    216.50
    
    
    
    173.25
    
    
    
    9,059,042
    
    
    
    30.70
    
    
    
    25.24
    
    
    
    3,550Second Quarter
    
    
    221.00
    
    
    
    160.25
    
    
    
    8,115,733
    
    
    
    31.76
    
    
    
    24.95
    
    
    
    1,725Third Quarter
    
    
    165.00
    
    
    
    84.00
    
    
    
    11,455,032
    
    
    
    25.45
    
    
    
    13.35
    
    
    
    6,637Fourth Quarter
    
    
    106.50
    
    
    
    83.50
    
    
    
    7,743,650
    
    
    
    16.50
    
    
    
    13.10
    
    
    
    4,7232003First Quarter
    
    
    104.50
    
    
    
    70.00
    
    
    
    7,246,030
    
    
    
    16.77
    
    
    
    11.10
    
    
    
    2,803Second Quarter
    
    
    131.50
    
    
    
    84.75
    
    
    
    9,336,725
    
    
    
    21.97
    
    
    
    13.21
    
    
    
    2,060Third Quarter
    
    
    160.00
    
    
    
    127.50
    
    
    
    12,451,129
    
    
    
    25.57
    
    
    
    20.59
    
    
    
    4,161Fourth Quarter
    
    
    140.00
    
    
    
    113.25
    
    
    
    10,565,594
    
    
    
    23.43
    
    
    
    19.40
    
    
    
    1,0812004First Quarter
    
    
    147.00
    
    
    
    122.25
    
    
    
    11,725,602
    
    
    
    27.05
    
    
    
    21.66
    
    
    
    2,716Most Recent 6 months2003October
    
    
    140.00
    
    
    
    130.50
    
    
    
    5,371,869
    
    
    
    23.43
    
    
    
    22.46
    
    
    
    950November
    
    
    134.00
    
    
    
    113.50
    
    
    
    20,860,483
    
    
    
    22.64
    
    
    
    19.40
    
    
    
    1,505December
    
    
    124.50
    
    
    
    113.25
    
    
    
    6,449,303
    
    
    
    21.99
    
    
    
    19.40
    
    
    
    8952004January
    
    
    136.75
    
    
    
    122.25
    
    
    
    11,707,994
    
    
    
    24.65
    
    
    
    21.66
    
    
    
    830February
    
    
    140.50
    
    
    
    125.25
    
    
    
    13,538,970
    
    
    
    26.40
    
    
    
    22.86
    
    
    
    5,174March
    
    
    147.00
    
    
    
    133.25
    
    
    
    10,164,839
    
    
    
    27.05
    
    
    
    24.56
    
    
    
    2,326Five Most Recent Financial YearsYear ended 31 March 1999
    
    
    614.00
    
    
    
    453.50
    
    
    
    5,123,252
    
    
    
    40.63
    
    
    
    30.88
    
    
    
    6,706Year ended 31 March 2000
    
    
    534.50
    
    
    
    297.80
    
    
    
    6,687,731
    
    
    
    87.81
    
    
    
    48.28
    
    
    
    17,0399 months ended 31 December 2000
    
    
    421.00
    
    
    
    236.50
    
    
    
    6,805,633
    
    
    
    65.78
    
    
    
    33.00
    
    
    
    24,099Year ended 31 December 2001
    
    
    327.30
    
    
    
    189.50
    
    
    
    8,440,012
    
    
    
    46.55
    
    
    
    27.10
    
    
    
    9,913Year ended 31 December 2002
    
    
    221.00
    
    
    
    83.50
    
    
    
    9,114,647
    
    
    
    31.76
    
    
    
    13.10
    
    
    
    4,239Year ended 31 December 2003
    
    
    160.00
    
    
    
    70.0
    
    
    
    9,944,841
    
    
    
    25.57
    
    
    
    11.10
    
    
    
    2,506
   (1)
    
    On 30 September, the effective date of the demerger, the share price of
our registered ADSs opened on the NYSE at $68.50 and the share price of
our ordinary shares opened on the London Stock Exchange at 295 pence. On 26 April 2004 (the latest practicable date prior to the publication of
this document) there were 743 registered holders of 206,250 of our shares with
addresses in the United States, - 77 -




---



##### Table of Contents



and 1 registered holder of 599,343 of our registered ADSs (equivalent to 5,993,430
ordinary shares), whose combined holdings constituted approximately 0.056% 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. Dividends We did not pay any dividends on our ordinary shares or ADSs for the
financial year ended 31 December 2003, and we do not intend to pay a dividend
in 2004 as our current working capital facility contains significant
restrictions on the payment by us of any dividends and certain other
distributions (whether in cash or in kind) for the duration of the credit
facility. Our policy with respect to future dividends is constantly under
review by the Board of Directors. - 78 -




---



##### Table of Contents



Item 10. Additional Information Our ordinary share capital as at the close of business on 31 December 2004
was as follows: Authorised
    
    IssuedNumber
    
    Amount (£)
    
    Number
    
    Amount (£)Ordinary shares of 50 pence each
    
    
    1,700,000,000
    
    
    
    850,000,000.00
    
    
    
    1,107,091,994
    
    
    £
    553,645,997Deferred shares of 1 pence each
    
    
    21
    
    
    
    0.21
    
    
    
    21
    
    
    
    0.21Special rights redeemable preference share
    
    
    1
    
    
    
    1.00
    
    
    
    0
    
    
    
    0
 Since 1 January 2004, 403,867 shares have been allotted pursuant to the
Companys employee Share Option Schemes for an aggregate consideration of
£285,285. We have also authorised the allotment of ordinary shares to be issued upon
conversion of International Power (Cayman) Limiteds 2 per cent. senior
convertible notes, 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 As of 31 December 2000, our authorised share capital was £850,000,001.21,
consisting of 1,700,000,000 ordinary shares of 50p each (ordinary shares), a
Special Share of £1 and 21 deferred shares of 1 pence each. As of 31 December
2000, our issued share capital was £558,048,376.71, consisting of 1,116,096,753
ordinary shares of 50 pence each and 21 deferred shares of 1 pence each. 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 2001 and 31 December 2001, 97,308 shares were allotted
under the Share Option Schemes for an aggregate consideration of £236,755.01. Between 1 January 2002 and 31 December 2002, 3,057 shares were allotted
under the Share Option Schemes for an aggregate consideration of £5,746. 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. By a special resolution passed on 12 June 2001, 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 £13,968,264, each authority expiring at the
conclusion of the AGM held on 23 May 2002. 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 expiring at the conclusion of the AGM to
be held in 2004. - 79 -




---



##### Table of Contents



Save as disclosed above since 1 April 2000 to 14 April 2004 (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. Material contracts 2% Convertible US Dollar Bonds 2005 On 24 November 2000, International Power (Cayman) Limited, or Cayman, a
wholly-owned subsidiary company incorporated in the Cayman Islands, issued
$357.6 million 2% convertible notes due 2005, convertible into preference
shares of Cayman at the holders option, exchangeable for our ordinary shares,
and unconditionally guaranteed on a senior unsecured basis by us. The notes are convertible into Preference Shares of Cayman, which are
exchangeable for our ordinary shares at a conversion price of £3.00 at any time
between 4 January 2001 and 23 November 2005. Each $1,000 principal amount of
notes will entitle the holder to convert such principal amount into paid up
value of preference shares of Cayman of $1,000. Investors may elect to receive
their ordinary shares in the form of American Depositary Receipts. On 24
November 2003, $254 million of the notes were redeemed at the holders option at
a redemption price of 107.1% of its principal amount, together with accrued and
unpaid interest. The balance of $103 million will remain for a further 2 year
period at an effective interest rate of 4.6%. If the conversion option is
exercised the unput convertible unsecured notes will be redeemable on 24
November 2005 at a redemption price of 112.4% of their principal amount. - 80 -




---



##### Table of Contents



On 26 March 2004, Cayman offered to purchase for cash, on the terms and
subject to the conditions set out in an offer document dated 23 March 2004 any
and all of the notes. Concurrently with the offer to purchase the notes,
Cayman solicited from the holders of the notes consents to certain amendments
to the indenture governing the notes and the preference share guarantee
relating to the notes. The offer was conditional upon the valid tender of the
notes and delivery of related consents of at least a majority of the aggregate
principal amount of the outstanding notes not subject to any rights of
withdrawal, as well as the execution and delivery of a supplement to the
indenture and an amended and restated preference share guarantee. The
conditions of the offer were met and, as such, 52,222,000 of notes were
tendered leaving $51,280,000 aggregate principal amount of notes outstanding. 3.75% Convertible US Dollar Bonds On 22 August 2003, International Power (Jersey) Limited, a wholly-owned
subsidiary company incorporated in Jersey, issued $252.5 million 3.75%
convertible notes due 2023, convertible into Preference Shares of International
Power (Jersey) Limited at the holders option, immediately exchangeable for
Ordinary Shares of, and unconditionally guaranteed by, International Power plc. The notes are convertible into Ordinary Shares of International Power plc
at a conversion price of £2.00 at any time between 2 October 2003 and 12 August
2023. Each $1,000 principal amount of notes will entitle the holder to convert
into a $1,000 paid up value of Preference Shares of International Power
(Jersey) Limited. The notes may be redeemed at the holders option at their principal
amount, together with accrued interest, to the date fixed for redemption. If the conversion option is not exercised, the convertible unsecured notes
will be redeemed on 22 August 2023 at a redemption price equivalent to their
principal amount. Premium on redemption of convertible bonds Provision is made for the possible premium on redemption and included
within carrying amount of the bonds. At 31 December 2003, the amount accrued
was £13 million. The finance cost charged in the profit and loss account
comprises the aggregate of the coupon on the convertible unsecured notes and
the proportion of the premium on redemption that relates to the financial year. 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 - 81 -




---



##### Table of Contents



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 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). This
summary also does not address the foreign personal holding company rules. 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 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. 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 - 82 -




---



##### Table of Contents



taxable to a US Holder as foreign source dividend income and, generally,
will not be eligible for the dividends received deduction allowed to
corporations. Distributions in excess of current and accumulated earnings and
profits of International Power plc will be treated as a non-taxable return of
capital to the extent of the US Holders tax basis in the ordinary shares or
ADSs and thereafter as capital gain. Generally, a US Holders tax basis in the
ordinary shares or ADSs will equal the amount that the US Holder paid for the
shares or ADSs less any distributions from International Power plc other than
dividends. In the case of non-corporate US Holders, dividends generally will
be taxed at a rate equal to the rate for long-term capital gains. 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. Dividends paid by International Power plc generally will
constitute foreign source income in the passive income basket or, in the case
of certain US Holders, the financial services income basket. In certain
circumstances, a US Holder may be unable to claim foreign tax credits (and may
instead be allowed deductions) for foreign taxes imposed on a dividend if the
US Holder (i) has not held the ordinary shares or ADSs for at least 16 days in
the 30-day period beginning 15 days before the ex-dividend date; (ii) is 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; or (iii) holds the ordinary shares in arrangements in which the US
Holders expected profit, after non-US taxes, is insubstantial. 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 (other than an exchange
of ADSs for ordinary shares) or ordinary shares, a US Holder generally will
recognise capital gain or loss for US federal income tax purposes 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 not more than one year at the time of such sale or
other taxable disposition, such gain or loss will be short-term capital gain or
loss. Short-term capital gain generally will be taxed at the same rates as
ordinary income. 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. Losses will be
treated as foreign source to the extent that the US Holder received dividends
that were includible in the financial services income basket during the
24-month period prior to the sale. - 83 -




---



##### Table of Contents



Exchange of Pounds Sterling Dividends paid or proceeds from the sale or other taxable disposition of
ordinary shares or ADSs in pounds sterling will be included in the taxable
income of a US Holder in a US dollar amount calculated by reference to the
exchange rate in effect on the day the dividends are received by the Depositary
(in the case of ADSs) or the US Holder (in the case of ordinary shares) or,
with respect to a sale or other taxable disposition of ordinary shares or ADSs,
on the day of such sale or other taxable disposition, regardless of whether the
pounds sterling are converted into US dollars. If dividends or proceeds
received in pounds sterling are converted into US dollars on the day they are
received, the US Holder generally will not be required to recognise foreign
currency gain or loss in respect of such income. If the amount so received is
converted into US dollars at an exchange rate different from the one used for
including such dividends or proceeds in the gross income of the US Holder, any
difference in US dollars between the amount included in the gross income of a
US Holder and the actual amount received by the US Holder will be treated as
foreign currency gain or loss, and such gain or loss will be treated as US
source ordinary income or loss. Passive Foreign Investment Company Generally, for US federal income tax purposes, International Power plc
will be a passive foreign investment company (or 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 recognized 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. International Power plcs belief that it is not a PFIC and
its expectation that it will not become a PFIC in the future are based on its
current and planned activities and may change in the future. The determination
of whether International Power plc is a PFIC is made annually. Accordingly, it
may be possible that it 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 fails to report all interest and dividends required to be
shown on its US federal income tax returns, or the IRS otherwise notifies the
payer. Certain US Holders (including, among others, corporations) are not
subject to backup withholding. Backup - 84 -




---



##### Table of Contents



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. US Holders should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining this exemption. - 85 -




---



##### Table of Contents



Item 11. Quantitative and Qualitative Disclosures About Market Risk See
pages F-47 to F-53 of our audited consolidated financial pages. 
 Item 12. Description of Securities Other than Equity Securities Not applicable - 86 -




---



##### Table of Contents



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 Controls
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
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 Controls 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 or 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. - 87 -




---



##### Table of Contents



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. 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 to our independent
external auditors for the years ended 31 December 2003 and 2002: Year ended 31
    
    Year ended 31December 2003
    
    December 2002£m
    
    £mAudit Fees
    
    
    1.0
    
    
    
    0.7Audit-Related Fees
    
    
    0.4
    
    
    
    0.6Tax Fees
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    Total Fees
    
    
    1.4
    
    
    
    1.3
 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. - 88 -




---



##### Table of Contents



PART III 
 Item 17 Financial Statements See Item 18. Financial Statements 
 Item 18. Financial Statements See pages F-1 to F-69. - 89 -




---



##### Table of Contents



Item 19. Exhibits EXHIBITNUMBER
    
    DESCRIPTION OF EXHIBIT1.2*
    
    Memorandum and Articles of Association of International Power plc8.0
    
    Subsidiaries99.1
    
    Certificate of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 200299.2
    
    Certificate of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
   *
    
    Incorporated by reference to International Power plc and National Power
PLCs Form 20-Fs filed in prior years. - 90 -




---



##### Table of Contents



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 PLCBy:Mark WilliamsonChief Financial Officer and Director
 - 91 -




---



##### Table of Contents



Certification Pursuant to Rule 13a-15(e)and 15d-15(e)of the Securities
Exchange Act of 1934 I, Philip Cox, certify that:  1.
    
    I have reviewed this annual report on Form 20-F of International Power
plc;2.
    
    Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;3.
    
    Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;4.
    
    The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:  (a)
    
    designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;(b)
    
    evaluated the effectiveness of the registrants disclosure
controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this annual report
based on such evaluation; and(c)
    
    disclosed in this annual report any change in the registrants
internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and  5.
    
    The registrants other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrants auditors and the audit committee of registrants board
of directors (or persons performing the equivalent functions):  (a)
    
    all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial
information; and - 92 -




---



##### Table of Contents



(b)
    
    any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls over financial reporting; and  6.
    
    The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses. Philip CoxChief Executive Officer
    

Date:
 - 93 -




---



##### Table of Contents



Certification Pursuant to Rule 13a-15(e)and 15d-15(e)of the Securities
Exchange Act of 1934 I, Mark Williamson, certify that:  1.
    
    I have reviewed this annual report on Form 20-F of International Power
plc;2.
    
    Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;3.
    
    Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;4.
    
    The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:  (a)
    
    designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;(b)
    
    evaluated the effectiveness of the registrants disclosure
controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this annual report
based on such evaluation; and(c)
    
    disclosed in this annual report any change in the registrants
internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and  5.
    
    The registrants other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrants auditors and the audit committee of registrants board
of directors (or persons performing the equivalent functions):  (d)
    
    all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial
information; and - 94 -




---



##### Table of Contents



(e)
    
    any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls over financial reporting; and  6.
    
    The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses. Mark Williamson
Chief Financial Officer
    

Date:
 - 95 -




---



##### Table of Contents



Index to the Financial Statements PageStatement of Directors responsibilities
    
    
    F-2Independent auditors reports
    
    
    F-3Consolidated profit and loss accounts for the year ended 31 December
2003, the year ended 31 December 2002 and the year ended 31 December
2001
    
    
    F-5Consolidated balance sheets as at 31 December 2003 and 31 December 2002
    
    
    F-7Consolidated cash flow statements for the year ended 31 December 2003,
the year ended 31 December 2002 and the year ended 31 December 2001
    
    
    F-8Consolidated statement of total recognised gains and losses and
reconciliation of movements in equity shareholders funds for the year
ended 31 December 2003, the year ended 31 December 2002 and the year
ended 31 December 2001
    
    
    F-9Notes to the consolidated financial statements
    
    
    F-10
 F-1




---



##### Table of Contents



Statement of Directors responsibilities In respect of the preparation of the financial statements The following statement, which should be read in conjunction with the statement
of auditors responsibilities included in their reports below, is made with a
view to distinguishing for shareholders the respective responsibilities of the
Directors and auditors in relation to the financial statements. UK Company law
requires the Directors to prepare financial statements for each financial
period which give a true and fair view of the state of affairs of the Company
and of the Group and of the profit or loss for that period. In preparing those
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;
    
    state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the
financial statements; and
    
    prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the Company and the Group will
continue in business. The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and to enable them to ensure that the 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. F-2




---



##### Table of Contents



Independent Auditors Report To the Board of Directors and Shareholders of International Power plc We have audited the accompanying consolidated balance sheets of International
Power plc and subsidiaries as at 31 December 2003 and 31 December 2002, the
related consolidated profit and loss accounts, consolidated cash flow
statements, consolidated statements of total recognised gains and losses and
reconciliation of movements in equity shareholders funds for the years ended
31 December 2003, 31 December 2002 and 31 December 2001. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of
certain consolidated companies, the statements of which reflect total assets
constituting 30% as at 31 December 2003 (2002: 22%) and group turnover
constituting 19% in the year ended 31 December 2003 (2002: 22%; 2001: 25%) of
the related consolidated totals. These statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as
it relates to the amounts included for these companies, is based solely on the
reports of the other auditors. We conducted our audits in accordance with generally accepted auditing
standards in the United Kingdom and the United States of America. 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 and the report of the other
auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of International Power plc and its
subsidiaries as of 31 December 2003 and 31 December 2002, and the results of
their operations and their cash flows for each of the year ended 31 December
2003, the year ended 31 December 2002 and the year ended 31 December 2001 in
conformity with generally accepted accounting principles in the United Kingdom. Generally accepted accounting principles in the United Kingdom vary in certain
significant respects from generally accepted accounting principles in the
United States of America. Application of generally accepted accounting
principles in the United States of America would have affected net income for
the years ended 31 December 2003, 31 December 2002 and 31 December 2001 and
shareholders funds-equity as of 31 December 2003 and 31 December 2002 to the
extent summarised in note 35 to the consolidated financial statements. KPMG Audit PlcLondon, England
Chartered Accountants 
Registered Auditor
26 February 2004
    
    8 Salisbury Square
London EC4Y 8BB
 F-3




---



##### Table of Contents



Independent Auditors Report To the Board of Directors of Hazelwood Power Partnership We have audited the balance sheets of Hazelwood Power Partnership as of 31
December 2003 and 31 December 2002 and the related profit and loss accounts and
cash flow statements for the year ended 31 December 2003, the year ended 31
December 2002 and year ended 31 December 2001. These financial statements are
the responsibility of Hazelwood Power Partnerships management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with generally accepted auditing
standards in Australia, the United Kingdom and the United States of America.
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 audit provides a reasonable basis
for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hazelwood Power Partnership as
of 31 December 2003 and 31 December 2002, and the results of its operations and
its cash flows of the year ended 31 December 2003, the year ended 31 December
31 2002 and the year ended 31 December 2001, in conformity with accounting
principles generally accepted in Australia. Accounting principles generally accepted in Australia differ in certain
significant respects from accounting principles generally accepted in the
United Kingdom. Application of accounting principles generally accepted in the
United Kingdom would have affected results of operations for the year ended 31
December 2003, the year ended 31 December 2002 and the year period ended 31
December 2001 and net assets as at 31 December 2003 and 31 December 2002 to the
extent summarised in notes 30 and 31 to the financial statements of Hazelwood
Power Partnership. Accounting principles generally accepted in the United Kingdom differ in
certain significant respects from accounting principles generally accepted in
the United States of America. Application of accounting principles generally
accepted in the United States of America would have affected results of
operations for the year ended 31 December 2003, the year ended 31 December 2002
and the year ended 31 December 2001 and net assets as at 31 December 2003 and
31 December 2002 to the extent summarised in notes 30 and 31 to the financial
statements of Hazelwood Power Partnership. ERNST & YOUNG
Melbourne Australia
9 March 2004 F-4




---



##### Table of Contents



CONSOLIDATED PROFIT AND LOSS ACCOUNTS Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 DecemberNote
    
    
    2003
    
    
    
    2002
    
    
    
    2001£m
    
    
    
    £m
    
    
    
    £mTurnover: group and share of joint ventures and associates
    
    
    
    
    
    
    1,273
    
    
    
    1,129
    
    
    
    1,103Less: share of joint ventures turnover
    
    
    
    
    
    
    (136
    )
    
    
    (122
    )
    
    
    (139
    )Less: share of associates turnover
    
    
    
    
    
    
    (285
    )
    
    
    (290
    )
    
    
    (407
    )Group turnover
    
    
    2
    
    
    
    852
    
    
    
    717
    
    
    
    557Net operating costs  ordinary
    
    
    3
    
    
    
    (727
    )
    
    
    (509
    )
    
    
    (392
    )Net
operating costs  exceptional
    
    
    9
    
    
    
    (404
    )
    
    
    (103
    )
    
    
    (2
    )Operating (loss)/profitExcluding exceptional items
    
    
    
    
    
    
    125
    
    
    
    208
    
    
    
    165Exceptional items
    
    
    
    
    
    
    (404
    )
    
    
    (103
    )
    
    
    (2
    )Operating (loss)/profit
    
    
    
    
    
    
    (279
    )
    
    
    105
    
    
    
    163Share of operating profit of:Joint ventures
    
    
    
    
    
    
    32
    
    
    
    26
    
    
    
    27Associates  ordinary
    
    
    
    
    
    
    95
    
    
    
    123
    
    
    
    134Associates - exceptional
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    Income from fixed asset investments  ordinary
    
    
    
    
    
    
    33
    
    
    
    31
    
    
    
    Income from fixed asset investments  exceptional
    
    
    9
    
    
    
    
    
    
    
    42
    
    
    
    33
    
    
    
    73
    
    
    
    Operating (loss)/profit and income from fixed asset investments
    
    
    
    
    
    
    (84
    )
    
    
    327
    
    
    
    324Non operating exceptional itemsProfit on sale of fixed asset investments
    
    
    9
    
    
    
    24
    
    
    
    
    
    
    
    Profit on sale of operations
    
    
    9
    
    
    
    3
    
    
    
    
    
    
    
    32(Loss)/profit on ordinary activities before interest and taxationExcluding exceptional items
    
    
    
    
    
    
    285
    
    
    
    388
    
    
    
    326Exceptional items
    
    
    
    
    
    
    (342
    )
    
    
    (61
    )
    
    
    30(Loss)/profit on ordinary activities before interest and taxation
    
    
    2
    
    
    
    (57
    )
    
    
    327
    
    
    
    356Interest receivable and similar income
    
    
    5
    
    
    
    42
    
    
    
    24
    
    
    
    24Interest payable and similar charges  ordinary
    
    
    6
    
    
    
    (121
    )
    
    
    (121
    )
    
    
    (100
    )Interest payable and similar charges  exceptional
    
    
    6
    
    
    
    (16
    )
    
    
    
    
    
    
    (29
    )Share of net interest of joint ventures and associates
    
    
    5,6
    
    
    
    (32
    )
    
    
    (35
    )
    
    
    (47
    )(127
    )
    
    
    (132
    )
    
    
    (152
    )(Loss)/profit on ordinary activities before taxation
    
    
    
    
    
    
    (184
    )
    
    
    195
    
    
    
    204Tax on (loss)/profit on ordinary activities
    
    
    10
    
    
    
    (28
    )
    
    
    (76
    )
    
    
    (64
    )(Loss)/profit on ordinary activities after taxation
    
    
    
    
    
    
    (212
    )
    
    
    119
    
    
    
    140Minority interests  equity
    
    
    
    
    
    
    (7
    )
    
    
    (6
    )
    
    
    (2
    )(Loss)/profit for the financial yearExcluding exceptional items
    
    
    
    
    
    
    113
    
    
    
    173
    
    
    
    137Exceptional items
    
    
    
    
    
    
    (332
    )
    
    
    (60
    )
    
    
    1(Loss)/profit for the financial year
    
    
    
    
    
    
    (219
    )
    
    
    113
    
    
    
    138
 F-5




---



##### Table of Contents



CONSOLIDATED PROFIT AND LOSS ACCOUNTS  (CONTINUED) Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 DecemberNote
    
    
    2003
    
    
    
    2002
    
    
    
    2001Earnings/(loss) per share
    
    
    11Basic excluding exceptional items
    
    
    
    
    
    
    10.2p
    
    
    
    15.5p
    
    
    
    12.3pAttributable to exceptional items
    
    
    
    
    
    
    (29.9)p
    
    
    
    (5.4)p
    
    
    
    Basic including exceptional items
    
    
    
    
    
    
    (19.7)p
    
    
    
    10.1p
    
    
    
    12.3pDiluted earnings per share
    
    
    
    
    
    
    (19.7)p
    
    
    
    10.1p
    
    
    
    12.0pDividends per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 The results for the years ended 31 December 2003, 2002 and 2001 derive from
continuing operations. There were no material changes in the activities of the
entities consolidated in these financial statements and no material
acquisitions or disposals. The accompanying notes are an integral part of these consolidated financial
statements. F-6




---



##### Table of Contents



CONSOLIDATED BALANCE SHEETS As at 31
    
    As at 31December
    
    DecemberNote
    
    2003
    
    2002£m
    
    £mFixed assetsIntangible assetsGoodwill, net
    
    
    
    
    
    
    7
    
    
    
    8Negative goodwill, net
    
    
    
    
    
    
    (6
    )
    
    
    (7
    )Net goodwill
    
    
    12
    
    
    
    1
    
    
    
    1Tangible fixed assets
    
    
    13
    
    
    
    2,048
    
    
    
    2,473Fixed asset investmentsJoint ventures:Share of gross assets
    
    
    
    
    
    
    337
    
    
    
    300Share of gross liabilities
    
    
    
    
    
    
    (211
    )
    
    
    (198
    )Net investment in joint ventures
    
    
    
    
    
    
    126
    
    
    
    102Net investment in associates
    
    
    
    
    
    
    315
    
    
    
    303Other investments
    
    
    
    
    
    
    97
    
    
    
    102Total fixed asset investments
    
    
    14
    
    
    
    538
    
    
    
    507Total fixed assets
    
    
    
    
    
    
    2,587
    
    
    
    2,981Current assetsStocks
    
    
    17
    
    
    
    65
    
    
    
    55Debtors
    
    
    18
    
    
    
    160
    
    
    
    134Investments
    
    
    19
    
    
    
    70
    
    
    
    43Cash at bank and in hand
    
    
    
    
    
    
    673
    
    
    
    799Total current assets
    
    
    
    
    
    
    968
    
    
    
    1,031Total assets
    
    
    
    
    
    
    3,555
    
    
    
    4,012Creditors: amounts falling due within one year
    
    
    20Secured loans without recourse
    
    
    
    
    
    
    (531
    )
    
    
    (810
    )Other current liabilities
    
    
    
    
    
    
    (315
    )
    
    
    (595
    )(846
    )
    
    
    (1,405
    )Net current assets/(liabilities)
    
    
    
    
    
    
    122
    
    
    
    (374
    )Total assets less current liabilities
    
    
    
    
    
    
    2,709
    
    
    
    2,607Creditors: amounts falling due after more than one year
    
    
    21
    
    
    
    (909
    )
    
    
    (583
    )Provisions for liabilities and charges
    
    
    22
    
    
    
    (238
    )
    
    
    (255
    )Net assets employed
    
    
    2
    
    
    
    1,562
    
    
    
    1,769Capital and reservesCalled up share capital
    
    
    24/25
    
    
    
    554
    
    
    
    559Share premium account
    
    
    25
    
    
    
    289
    
    
    
    289Capital redemption reserve
    
    
    25
    
    
    
    145
    
    
    
    140Capital reserve
    
    
    25
    
    
    
    422
    
    
    
    422Profit and loss account
    
    
    25
    
    
    
    113
    
    
    
    330Shareholders funds  equity
    
    
    25
    
    
    
    1,523
    
    
    
    1,740Minority interests  equity
    
    
    
    
    
    
    39
    
    
    
    29Total equity
    
    
    
    
    
    
    1,562
    
    
    
    1,769
 The accompanying notes are an integral part of these consolidated financial
statements. F-7




---



##### Table of Contents



CONSOLIDATED CASH FLOW STATEMENTS Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 DecemberNote
    
    2003
    
    2002
    
    2001£m
    
    £m
    
    £mNet cash inflow from operating activities
    
    
    26
    
    
    
    184
    
    
    
    276
    
    
    
    274Dividends received from associates and joint ventures
    
    
    26
    
    
    
    68
    
    
    
    84
    
    
    
    59Returns on investments and servicing of finance  ordinary
    
    
    26Dividends received from fixed asset investments  ordinary
    
    
    
    
    
    
    33
    
    
    
    31
    
    
    
    Net interest paid and similar charges
    
    
    
    
    
    
    (84
    )
    
    
    (88
    )
    
    
    (105
    )Returns on investments and servicing of finance  ordinary
    
    
    
    
    
    
    (51
    )
    
    
    (57
    )
    
    
    (105
    )Returns on investments and servicing of finance  exceptional
    
    
    26Dividends received from fixed asset investments 
exceptional
    
    
    
    
    
    
    
    
    
    
    42
    
    
    
    Net interest paid and similar charges  exceptional
    
    
    
    
    
    
    (4
    )
    
    
    (25
    )
    
    
    Returns on investments and servicing of finance  exceptional
    
    
    
    
    
    
    (4
    )
    
    
    17
    
    
    
    Tax
    
    
    
    
    
    
    (14
    )
    
    
    (20
    )
    
    
    (1
    )Capital expenditure and financial investment  ordinary
    
    
    26
    
    
    
    (74
    )
    
    
    (159
    )
    
    
    (406
    )Capital
expenditure and financial investment  exceptional
    
    
    26
    
    
    
    11
    
    
    
    
    
    
    
    Acquisitions and disposals  ordinary
    
    
    26
    
    
    
    
    
    
    
    (144
    )
    
    
    318Acquisitions and disposals  exceptional
    
    
    26
    
    
    
    24
    
    
    
    
    
    
    
    Net cash inflow/(outflow) before management of liquid
resources and financing activities
    
    
    
    
    
    
    144
    
    
    
    (3
    )
    
    
    139Management of liquid resourcesMovement in short-term investments
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    (48
    )Financing activities
    
    
    26
    
    
    
    (260
    )
    
    
    210
    
    
    
    406(Decrease)/increase in cash in the year
    
    
    
    
    
    
    (136
    )
    
    
    207
    
    
    
    497
 CONSOLIDATED RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £m(Decrease)/increase in cash in the year
    
    
    29
    
    
    
    (136
    )
    
    
    207
    
    
    
    497Cash outflow/(inflow) from
decrease/(increase) in debt and lease
financing
    
    
    29
    
    
    
    247
    
    
    
    (210
    )
    
    
    (406
    )Cash outflow from increase in liquid resources
    
    
    29
    
    
    
    20
    
    
    
    
    
    
    
    48Change in net debt resulting from cash flows
    
    
    
    
    
    
    131
    
    
    
    (3
    )
    
    
    139Translation differences
    
    
    
    
    
    
    11
    
    
    
    98
    
    
    
    17Other non-cash movements
    
    
    
    
    
    
    (22
    )
    
    
    (10
    )
    
    
    18Movement in net debt in the year
    
    
    
    
    
    
    120
    
    
    
    85
    
    
    
    174Net debt at the start of the year
    
    
    
    
    
    
    (812
    )
    
    
    (897
    )
    
    
    (1,071
    )Net debt at the end of the year
    
    
    29
    
    
    
    (692
    )
    
    
    (812
    )
    
    
    (897
    )
 The accompanying notes are an integral part of these consolidated financial
statements. F-8




---



##### Table of Contents



CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £m(Loss)/profit for the financial year
    
    
    (219
    )
    
    
    113
    
    
    
    138Exchange differences on the retranslation of net investments
and related borrowings (net of £7 million tax (2002: £10
million))
    
    
    15
    
    
    
    (42
    )
    
    
    (4
    )Share of recognised (loss)/profit of associated undertaking
    
    
    
    
    
    
    (1
    )
    
    
    2Total recognised gains and losses relating to the financial year
    
    
    (204
    )
    
    
    70
    
    
    
    136
 RECONCILIATION OF MOVEMENTS IN EQUITY SHAREHOLDERS FUNDS Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £m(Loss)/profit for the financial year
    
    
    
    
    
    
    (219
    )
    
    
    113
    
    
    
    138Other recognised gains and losses relating to the year
    
    
    25
    
    
    
    15
    
    
    
    (43
    )
    
    
    (2
    )Share buyback
    
    
    25
    
    
    
    (13
    )
    
    
    
    
    
    
    Net (reduction from)/additions to shareholders funds
    
    
    
    
    
    
    (217
    )
    
    
    70
    
    
    
    136Opening shareholders funds
    
    
    
    
    
    
    1,740
    
    
    
    1,670
    
    
    
    1,534Closing
shareholders funds
    
    
    
    
    
    
    1,523
    
    
    
    1,740
    
    
    
    1,670
 The accompanying notes are an integral part of this consolidated financial
information. F-9




---



##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Principal accounting policies The following accounting policies have been applied consistently in dealing
with items which are considered material in relation to the Groups
consolidated financial statements. i Basis of preparation of accounts The financial statements of International Power plc and its subsidiary
undertakings (the Group) are prepared under the historical cost convention and
in accordance with UK generally accepted accounting principles (UK GAAP),
except for the departures noted below. Certain energy-based futures contracts used for proprietary trading are marked
to market using externally derived market prices. This is a departure from the
general provisions of Schedule 4 of the Companies Act 1985. An explanation of
this departure is given in note xv. UK GAAP varies in certain respects from US GAAP. Application of US GAAP would
have affected shareholders equity and results of operations for each of the
periods presented to the extent summarised in note 35. ii Basis of consolidation The consolidated financial statements include the financial statements of the
Company and all of its subsidiary undertakings up to 31 December 2003. The
results of subsidiary undertakings acquired or disposed of in the year are
included in the consolidated profit and loss account from the date of
acquisition or up to the date of disposal. An associate is an undertaking in which the Group has a long-term participating
interest, usually from 20% to 50% of the equity voting rights, and over which
it exercises significant influence. A joint venture is an undertaking in which
the Group has a long-term participating interest and over which it exercises
joint control. The Groups share of the profits less losses of associates and
of joint ventures is included in the consolidated profit and loss account and
its interest in their net assets is included in fixed asset investments in the
consolidated balance sheet. Purchased goodwill (both positive and negative) arising on consolidation in
respect of acquisitions before 1 April 1998, when FRS 10 (Goodwill and
Intangible Assets) was adopted, was set off against reserves in the year of
acquisition. When a subsequent disposal occurs any related goodwill previously
set off to reserves is taken back through the profit and loss account as part
of the profit or loss on disposal. Purchased goodwill (representing the excess of the fair value of the
consideration given over the fair value of the separable net assets acquired)
arising on consolidation in respect of acquisitions since 1 April 1998 is
capitalised. Positive goodwill is fully amortised by equal annual instalments
over its estimated useful life, currently not more than 20 years. Negative goodwill arising on consolidation in respect of acquisitions since 1
April 1998 is included within fixed assets and is released to the profit and
loss account in the periods in which the fair values of the non-monetary assets
purchased on the same acquisition are recovered, whether through amortisation
or sale. F-10




---



##### Table of Contents



On the subsequent disposal or termination of a business acquired since 1 April
1998, the profit or loss on disposal or termination is calculated after
charging/(crediting) the unamortised amount of any related goodwill/(negative
goodwill). iii Income recognition Turnover, from plants subject to power purchase agreements (PPAs), is
recognised in accordance with the contract terms in respect of owned assets or
in accordance with note x for leased assets. Turnover from merchant plants
is recognised as output is delivered after taking account of related hedging
contracts. Liquidated damages (LDs), in respect of late commissioning, are
included in other operating income. Proprietary trading income is recognised on
the basis of completed contracts and the mark-to-market value of outstanding
contracts at the period end. iv Pension costs For defined benefit arrangements, pension contributions are charged to the
profit and loss account so as to spread the cost of pensions over employees
working lives. The regular cost is attributed to individual years using the
projected unit credit method. Variations in pension costs, which are
identified as a result of actuarial valuations, are amortised over the average
expected remaining working lives of employees. Differences between the amounts
funded and the amounts charged to the profit and loss account are treated as
either provisions or prepayments in the balance sheet. For defined contribution arrangements, contributions are charged to the profit
and loss account as they fall due. v Environmental liabilities Provision for environmental liabilities is made when expenditure on remedial
work is probable and the Group is obliged, either legally or constructively
through its environmental policies, to undertake such work. Where the amount is
expected to be incurred over the long-term, the amount recognised is the
present value of the estimated future expenditure and the unwinding of the
discount is included within interest payable and similar charges. vi Foreign exchange The profits or losses of overseas subsidiary undertakings, associates and joint
ventures are translated into sterling at average rates of exchange. Balance
sheets of subsidiary undertakings and net investments in associates and joint
ventures are translated at closing rates. Exchange differences arising on the retranslation at closing rates of foreign
currency denominated balance sheets and net investments in associates and joint
ventures, together with the adjustment to convert the balance of retained
profits to closing rates, are taken directly to reserves. Transactions denominated in foreign currencies arising in the normal course of
business are translated into sterling at the exchange rate ruling on the date
payment takes place unless related or matching forward foreign exchange
contracts have been entered into, when the rate specified in the contract is
used. Monetary assets and liabilities expressed in foreign currencies that are F-11




---



##### Table of Contents



not covered by hedging arrangements are translated into sterling at the rates
of exchange ruling at the balance sheet date and any difference arising on the
retranslation of those amounts is taken to the profit and loss account. vii Interest Interest on borrowings relating to major capital projects with long periods of
development is capitalised during their construction and written-off as part of
the total cost over the useful life of the asset. All other interest is charged
to the profit and loss account as incurred. Included within the interest charge
in the profit and loss account is the unwinding of discounts on long-term
provisions. viii Tangible fixed assets Tangible fixed assets are stated at original cost less accumulated depreciation
and any provision for impairment in value. In the case of assets constructed by
the Group, related works, commissioning and borrowing costs as defined under
FRS 15 (Tangible Fixed Assets) are included in cost. Assets in the course of
construction are included in tangible fixed assets on the basis of expenditure
incurred at the balance sheet date. Project development costs (including appropriate direct internal costs) are
capitalised from the point that the Board confirms that it is virtually certain
that the project will proceed to completion. Development expenditure is principally incurred in identifying and developing
investment opportunities and typically includes feasibility studies, pre-bid
costs, legal, professional and other related advisory costs. Depreciation is calculated so as to write-down the cost of tangible fixed
assets to their residual value evenly over their estimated useful lives.
Estimated useful lives are reviewed periodically, taking into account
commercial and technological obsolescence as well as normal wear and tear,
provision being made where the carrying value may not be recoverable. Tangible fixed assets are reviewed for impairment if events or changes in
circumstances indicate that the carrying amount may not be recoverable. When a
review for impairment is conducted, the recoverable amount is assessed by
reference to the net present value of expected future cash flows of the
relevant income generating unit or disposal value, if higher. If an asset is
impaired, a provision is made to reduce its carrying amount to the estimated
recoverable amount. The discount rate applied is based upon the groups
weighted average cost of capital with appropriate adjustment for risks
associated with the relevant unit. F-12




---



##### Table of Contents



The depreciation charge is based on the following estimates of useful lives: YearsPower stations
    
    
    20-40Fixtures, fittings, tools and equipment
    
    
    4-5Computer equipment and software
    
    
    3-5Combined cycle gas turbine (CCGT) hot gas path parts, on average
    
    
    2-4
 Freehold land is not depreciated. ix Decommissioning costs Provision has been made for the estimated decommissioning costs at the end of
the useful economic life of the Groups power stations and generating assets on
a discounted basis. Capitalised decommissioning costs are depreciated over the
useful lives of the related assets. The unwinding of the discount is included
in interest payable and similar charges. x Leased assets As lesseeAssets leased under finance leases are capitalised and depreciated
over the shorter of the lease periods and the estimated operational lives of
the assets. The interest element of the finance lease repayments is charged to
the profit and loss account in proportion to the balance of the capital
repayments outstanding. Rentals payable under operating leases are charged to
the profit and loss account on a straight-line basis. As lessorRentals receivable under finance leases are allocated to accounting
periods to give a constant periodic rate of return on the net cash investment
in the lease in each period. The amounts due from lessees under finance leases
are recorded in the balance sheet as a debtor at the amount of the net
investment in the lease after making provision for bad and doubtful debts
receivable. xi Fixed asset investments Fixed asset investments (other than joint ventures and associates which are
discussed in note ii) are stated at cost less provision for any impairment in
value. xii Current asset investments Current asset investments are stated at the lower of cost and market value.
These are included as liquid resources within the cash flow statement. xiii Stocks Plant spares, operating stocks of fuel and consumables are valued at the lower
of cost and net realisable value. These are included as current assets. F-13




---



##### Table of Contents



xiv Deferred taxation Deferred taxation is provided on timing differences, arising from the different
treatment for accounts and taxation purposes of transactions and events
recognised in the financial statements of the current year and previous years.
Deferred taxation is calculated at the rates at which it is estimated that tax
will arise. Deferred tax assets and liabilities are not discounted. xv Financial instruments The Group uses a range of derivative instruments, including interest rate
swaps, options, energy-based futures contracts and foreign exchange contracts
and swaps. Derivative instruments are used for hedging purposes, apart from
energy-based futures contracts, some of which are used for trading purposes.
Interest differentials on derivative instruments are charged to the profit and
loss account as interest costs in the period to which they relate. Accounting
for foreign currency transactions is described in the foreign exchange policy
in note vi. Changes in the market value of futures trading contracts are
reflected in the profit and loss account in the period in which the change
occurs. Energy-based futures contracts used for proprietary trading purposes are marked
to market using externally derived market prices and subsequent movements in
fair value reflected through the profit and loss account. This is not in
accordance with the general provisions of Schedule 4 of the Companies Act 1985,
which requires that these contracts be stated at the lower of cost and net
realisable value or that, if revalued, any revaluation difference be taken to a
revaluation reserve. However, the Directors consider that these requirements
would fail to provide a true and fair view of the results for the year since
marketability of energy trading contracts enables decisions to be taken
continually on whether to hold or sell them. Accordingly the measurement of
profit in any period is properly made by reference to market values. The effect
of the departure on the financial statements is to reduce the loss for the year
by £1 million (2002: increase the profit by £2 million) and decrease the net
assets at 31 December 2003 by £4 million (2002: £nil). xvi Debt instruments New borrowings are stated at net proceeds received after deduction of issue
costs. The issue costs of debt instruments are charged to the profit and loss
account over the life of the instrument. xvii Interest rate management Exposure to movements in interest rates can be managed by the use of debt
instruments, swaps, options and forward rate agreements. All financial
instruments are transacted with respect to a known debt or cash position and
are accounted for on an accruals basis. Interest differentials on derivative
instruments are charged to the profit and loss account as interest costs in the
period to which they relate. Should derivative instruments be terminated early as a result of the removal of
the underlying debt or cash position, the realised gain or loss that arises
will be recognised immediately. If, however, the relevant debt or cash position
remains, and there has been no material change in the allocation of risk
between counterparties, the realised gain or loss from terminated instruments
will be amortised over the life of that original hedged position. F-14




---



##### Table of Contents



xviii Foreign exchange management In accordance with our policy, exposure to movements in foreign exchange rates
is managed by the use of debt instruments, forward contracts, swaps and
options. The notional amounts of derivative instruments are revalued at the
exchange rates prevailing at the balance sheet date and the exchange gains or
losses are taken directly to reserves and included in the consolidated
statement of total recognised gains and losses in accordance with SSAP 20
(Foreign Currency Translation). xix Use of estimates in the preparation of financial information The preparation of financial information in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial information and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. xx Exceptional items Under UK GAAP, an item is considered exceptional if it derives from ordinary
activities and is considered of such significance that separate disclosure is
needed if the financial statements are to give a true and fair view. All
exceptional items, other than those listed below are included under the
statutory line-item to which they relate. The following items are required to
be separately disclosed after operating profit on the face of the profit and
loss account:  
    
    profits or losses in the sale or termination of an operation;
    
    costs of a fundamental reorganisation or restructuring having a
material effect on the nature and focus of the groups operations; and
    
    profits or losses on the disposal of fixed assets. 2 Segmental analysis We are a global energy group comprising international power generation
activities. The international operations are managed on a geographical basis,
reflecting the different characteristics within each geographical market. F-15




---



##### Table of Contents



aBy class of business Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £mGroup turnoverElectricity generation
    
    
    1,273
    
    
    
    1,129
    
    
    
    1,103Corporate
    
    
    
    
    
    
    
    
    
    
    1,273
    
    
    
    1,129
    
    
    
    1,103Less: turnover of joint ventures
    
    
    (136
    )
    
    
    (122
    )
    
    
    (139
    )Less: turnover of associates
    
    
    (285
    )
    
    
    (290
    )
    
    
    (407
    )852
    
    
    
    717
    
    
    
    557
 Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £mProfit before interest and
taxation (excluding all
exceptional items)Electricity generation
    
    
    313
    
    
    
    417
    
    
    
    354Corporate costs
    
    
    (28
    )
    
    
    (29
    )
    
    
    (28
    )285
    
    
    
    388
    
    
    
    326
 bBy geographical area Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £mGroup turnoverNorth America
    
    
    414
    
    
    
    315
    
    
    
    237Europe
    
    
    474
    
    
    
    440
    
    
    
    521Middle East
    
    
    33
    
    
    
    
    
    
    
    Australia
    
    
    224
    
    
    
    226
    
    
    
    194Rest of World
    
    
    128
    
    
    
    148
    
    
    
    1511,273
    
    
    
    1,129
    
    
    
    1,103Less: turnover of joint ventures
    
    
    (136
    )
    
    
    (122
    )
    
    
    (139
    )Less: turnover of associates
    
    
    (285
    )
    
    
    (290
    )
    
    
    (407
    )852
    
    
    
    717
    
    
    
    557
 Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £mProfit before interest and taxNorth America
    
    
    2
    
    
    
    99
    
    
    
    93Europe
    
    
    103
    
    
    
    100
    
    
    
    141Middle East
    
    
    23
    
    
    
    9
    
    
    
    Australia
    
    
    101
    
    
    
    101
    
    
    
    72Rest of World
    
    
    84
    
    
    
    108
    
    
    
    48313
    
    
    
    417
    
    
    
    354Corporate costs
    
    
    (28
    )
    
    
    (29
    )
    
    
    (28
    )Profit before interest and tax
(excluding exceptional items)
    
    
    285
    
    
    
    388
    
    
    
    326Exceptional items
    
    
    (342
    )
    
    
    (61
    )
    
    
    30(Loss)/profit before interest and tax
    
    
    (57
    )
    
    
    327
    
    
    
    356
 F-16




---



##### Table of Contents



North America profit before interest and tax includes other income in respect
of the late commissioning and performance recovery of new power plants
amounting to £27 million (year ended 31 December 2002: £102 million; year ended
31 December 2001: £80 million). Sales of electricity generated in each geographic region are made solely to
customers in the same geographic region. In the year ended 31 December 2003, loss before tax derived from UK operations
was £88 million (2002: loss of £111 million; 2001: profit of £2 million.) Exceptional items before interest and tax are analysed by geographic region as
follows: Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £mExceptional itemsNorth America
    
    
    (404
    )
    
    
    
    
    
    
    Europe
    
    
    7
    
    
    
    (103
    )
    
    
    20Middle East
    
    
    
    
    
    
    
    
    
    
    Australia
    
    
    
    
    
    
    
    
    
    
    Rest of World
    
    
    55
    
    
    
    42
    
    
    
    2Corporate Costs
    
    
    
    
    
    
    
    
    
    
    8Exceptional items before interest and tax
    
    
    (342
    )
    
    
    (61
    )
    
    
    30
 We also incurred an exceptional interest charge of £16 million during the year
ended 31 December 2003 (year ended 31 December 2001: £29 million). Further
details are given in note 9. Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £mDepreciationNorth America
    
    
    53
    
    
    
    53
    
    
    
    32Europe
    
    
    18
    
    
    
    23
    
    
    
    28Middle East
    
    
    2
    
    
    
    
    
    
    
    Australia
    
    
    33
    
    
    
    33
    
    
    
    31Rest of World
    
    
    2
    
    
    
    2
    
    
    
    4108
    
    
    
    111
    
    
    
    95
 Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £mCapital ExpenditureNorth America
    
    
    55
    
    
    
    107
    
    
    
    295Europe
    
    
    15
    
    
    
    30
    
    
    
    201Middle East
    
    
    1
    
    
    
    18
    
    
    
    7Australia
    
    
    58
    
    
    
    24
    
    
    
    26Rest of World
    
    
    
    
    
    
    3
    
    
    
    67129
    
    
    
    182
    
    
    
    596
 Capital expenditure is analysed below: F-17




---



##### Table of Contents



Year ended
    
    Year ended 31
    
    Year ended 3131 December
    
    December
    
    December2003
    
    2002
    
    2001£m
    
    £m
    
    £mAdditions to tangible fixed assets
    
    
    121
    
    
    
    175
    
    
    
    399Tangible fixed assets acquired with subsidiary undertakings
    
    
    
    
    
    
    
    
    
    
    197Additions to fixed asset investments
    
    
    8
    
    
    
    7
    
    
    
    129
    
    
    
    182
    
    
    
    596
 F-18




---



##### Table of Contents



cNet assets employed by division Net operating assets31 December
    
    31 DecemberGeographical analysis by origin
    
    2003
    
    2002£m
    
    £mNorth America
    
    
    671
    
    
    
    1,197Europe
    
    
    549
    
    
    
    536Middle
East
    
    
    72
    
    
    
    75Australia
    
    
    976
    
    
    
    787Rest of World
    
    
    315
    
    
    
    303Corporate and development
    
    
    (56
    )
    
    
    (66
    )Net operating assets
    
    
    2,527
    
    
    
    2,832Borrowings
    
    
    (1,435
    )
    
    
    (1,654
    )Cash and short-term deposits
    
    
    743
    
    
    
    842Deferred tax
    
    
    (205
    )
    
    
    (219
    )Taxation
    
    
    (86
    )
    
    
    (53
    )Goodwill - on acquisition of associated undertakings
    
    
    17
    
    
    
    20Goodwill - on acquisition of subsidiary undertakings
    
    
    1
    
    
    
    1Net assets per consolidated balance sheet
    
    
    1,562
    
    
    
    1,769
 3 Net operating costs before exceptional items Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £mCost of sales
    
    
    729
    
    
    
    558
    
    
    
    383Other operating costs.
    
    
    64
    
    
    
    85
    
    
    
    105Other operating income
    
    
    (66
    )
    
    
    (134
    )
    
    
    (96
    )727
    
    
    
    509
    
    
    
    392
 Other operating income includes compensation for the late commissioning of
plants, billings in respect of operations and maintenance services and profit
on sale of development sites. The impact of exceptional items on the above line items would be to increase
cost of sales by £404 million and £103 million in the years ended 31 December
2003 and 2002 and to increase other operating costs by £2 million in the year
ended 31 December 2001. F-19




---



##### Table of Contents



4 Profit/(loss) on ordinary activities before taxation Profit/(loss) on ordinary activities before taxation is stated after
charging/(crediting): Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £mDepreciation of tangible fixed assets
    
    
    108
    
    
    
    111
    
    
    
    95Amortisation of intangible fixed assets
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Other amortisation
    
    
    1
    
    
    
    2
    
    
    
    Development costs net of recoveries and amounts capitalised
    
    
    14
    
    
    
    8
    
    
    
    18Operating exceptional items (Note 9)
    
    
    369
    
    
    
    103
    
    
    
    2Property lease rentals payable (net of recoveries)
    
    
    3
    
    
    
    2
    
    
    
    3Profit on disposal of fixed assets (excluding
exceptional items)
    
    
    
    
    
    
    
    
    
    
    (1
    )Foreign exchange (gains)/losses net
    
    
    (19
    )
    
    
    7
    
    
    
    1Auditors remuneration  statutory audit:Fees due to the lead auditors, KPMG
    
    
    1.0
    
    
    
    0.7
    
    
    
    0.7Fees due to other auditors
    
    
    0.1
    
    
    
    0.1
    
    
    
    1.1
    
    
    
    0.8
    
    
    
    0.7Auditors remuneration  other fees paid to the lead
auditors and their associates for services:Accounting consultations
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.6Due diligence assistance
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.4
 The Audit Committee and the firm of external auditors have safeguards to avoid
the possibility that the auditors objectivity and independence could be
compromised. These safeguards include the implementation of a policy on the use
of the external auditor for non-audit related services. This policy has been
revised during the year to incorporate the provisions of the Sarbanes-Oxley Act
2002 and subsequent Securities and Exchange Commission (SEC) rules. Where it is
deemed that the work to be undertaken is of a nature that is generally
considered reasonable to be completed by the auditor of the Group for sound
commercial and practical reasons, the conduct of such work will be permissible
provided that it has been pre-approved by the Audit Committee. Examples of
pre-approved services include the completion of regulatory audits, provision of
taxation and regulatory advice, reporting to the SEC and the completion of
certain financial due diligence work. All these services are also subject to a
pre-determined fee limit. Any work performed in excess of this limit must be
approved by the Chief Financial Officer and the Audit Committee. 5 Interest receivable and similar income Year ended31 December
    
    Year ended
    
    Year ended2003
    
    31 December 2002
    
    31 December 2001£m
    
    £m
    
    £ma) Group interest receivable and similar incomeInterest receivable and similar income
    
    
    23
    
    
    
    24
    
    
    
    24Foreign exchange gains (net)
    
    
    19
    
    
    
    
    
    
    
    Total Group interest receivable and similar income
    
    
    42
    
    
    
    24
    
    
    
    24
 F-20




---



##### Table of Contents



6 Interest payable and similar charges Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £ma) Group interest payable and similar chargesInterest on:Bank loans and overdrafts
    
    
    101
    
    
    
    102
    
    
    
    103Other borrowings
    
    
    22
    
    
    
    24
    
    
    
    16123
    
    
    
    126
    
    
    
    119Finance charges on discounting of deferred consideration
    
    
    
    
    
    
    
    
    
    
    4Interest capitalised
    
    
    (2
    )
    
    
    (5
    )
    
    
    (23
    )Group interest payable and similar charges  ordinary
    
    
    121
    
    
    
    121
    
    
    
    100Exceptional interest (note 9)
    
    
    16
    
    
    
    
    
    
    
    29Total Group interest payable and similar charges
    
    
    137
    
    
    
    121
    
    
    
    129b) Interest payable of associates and joint venturesShare of interest payable of joint ventures
    
    
    10
    
    
    
    12
    
    
    
    14Share of interest payable of associates
    
    
    22
    
    
    
    23
    
    
    
    3332
    
    
    
    35
    
    
    
    47
 7 Directors and employees remuneration Salaries and other staff costs, including Directors remuneration, were as
follows: Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £mWages and salaries
    
    
    68
    
    
    
    63
    
    
    
    62Social security costs
    
    
    4
    
    
    
    3
    
    
    
    3Pension costs (note 8)
    
    
    6
    
    
    
    5
    
    
    
    4Total employees remuneration
    
    
    78
    
    
    
    71
    
    
    
    69Less: amount capitalised as part of assets in the course of construction
    
    
    (1
    )
    
    
    (1
    )
    
    
    (4
    )Total staff costs
    
    
    77
    
    
    
    70
    
    
    
    65
 Employee numbers The average number of employees during the financial year, analysed by
geographic segment was: Year ended
    
    Year ended 31
    
    Year ended 3131 December
    
    December
    
    December2003
    
    2002
    
    2001North America
    
    
    212
    
    
    
    207
    
    
    
    200Europe
    
    
    746
    
    
    
    749
    
    
    
    643Middle East
    
    
    342
    
    
    
    43
    
    
    
    17Australia
    
    
    591
    
    
    
    593
    
    
    
    586Rest of World
    
    
    362
    
    
    
    367
    
    
    
    752Corporate and development
    
    
    163
    
    
    
    146
    
    
    
    134Average number of employees  continuing business
    
    
    2,416
    
    
    
    2,125
    
    
    
    2,332
 8 Pension scheme funding UK:The majority of pensions for UK employees are funded through the
industry-wide scheme, the Electricity Supply Pension Scheme (ESPS), which is a
defined benefit scheme with assets invested in separate trustee administered
funds. The ESPS is divided into sections, and the F-21




---



##### Table of Contents



International Power Group of the ESPS was opened to members on 1 April 2002 and
employees past service rights were transferred into the Group later that year. For 2002 SSAP 24 disclosures, the pension expense was taken to be equal to the
contributions paid, as assets and liabilities in respect of members
pensionable service prior to 1 April 2002 were not transferred to the Group
until late 2002. Pension costs for 2003 have been calculated using assumptions consistent with
those used to assess the initial rate of contributions paid by the Group, and
based on market conditions at the start of the accounting period. The pension cost for 2003 is £3.1 million, comprising £2.6 million regular cost
and £0.5 million variation cost. The principal assumptions used to calculate these pension costs are set out
below: Pre-retirement investment return
    
    6.5%paPost-retirement investment return
    
    5.0%paSalary increases
    
    3.8%paPension increases in deferment
    
    2.5%paPension increases in payment
    
    2.7%pa
 The actuarial value of assets as at 31 March 2003, the date of the first formal
valuation, was £33 million. The accrued liabilities valued on the projected
unit credit method using assumptions set out below, were £43 million. The
market value of assets was, therefore, 77% of accrued liabilities. Arrangements
have been made to make good the past service deficit over the average future
working lifetime of the membership (calculated to be approximately 12 years). The principal assumptions used for the 31 March 2003 valuation are: Pre-retirement investment return
    
    6.6%paPost-retirement investment return
    
    5.1%paSalary increases
    
    4.1%paPension increases in deferment
    
    2.7%paPension increases in payment
    
    2.7%pa
 AUSTRALIA:Employees at Hazelwood participate in a standard Australian
superannuation fund called Equipsuper. This plan provides benefits primarily
for employees in the electricity, gas and water industry, and was developed
from the scheme sponsored by the State Electricity Commission of Victoria. At 31 December 2003, the actuarial value of assets was 104% of accrued
liabilities. The assets were £54 million and liabilities were £52 million.
The pension cost for 2003 was £2 million. The principal assumptions are set out below: Valuation date
    
    31 December 2003Principal assumptions:Investment return
    
    7.5%paSalary increases
    
    5.0%paPensions increases
    
    
    n/a
 F-22




---



##### Table of Contents



In other countries, employees are members of local social security schemes and
in some cases defined contribution plans. The charge for 2003 in respect of
defined contribution plans was £1 million. FRS 17 In accordance with the requirements of FRS 17 (Retirement Benefits), this note
discloses the main financial assumptions made in valuing the liabilities of the
schemes and the fair value of assets held. However, as permitted by FRS 17, the
costs, accruals and prepayments recorded in the financial statements continue
to be reported under the requirements of SSAP 24 (Accounting for Pension
Costs). The valuation used for FRS 17 disclosures for the UK schemes has been based on
the most recent actuarial valuations at 30 November 2001, 31 March 2002 and 31
March 2003, and updated by independent qualified actuaries to take account of
the FRS 17 reporting requirements for assessing the liabilities of the schemes
at 31 December 2003. The Group operates a number of defined benefit schemes for employees of its
overseas businesses. Full actuarial valuations of these schemes have been
carried out within the last three years and results have been updated to 31
December 2003 by qualified independent actuaries. The assumptions used to calculate scheme liabilities under FRS 17 are: 31 December 2003
    
    31 December 2002
    
    31 December 2001Financial assumptions
    
    UK
    
    Australia
    
    UK
    
    Australia
    
    UK
    
    Australia%
    
    %
    
    %
    
    %
    
    %
    
    %Discount rate
    
    
    5.40
    
    
    
    7.50
    
    
    
    5.50
    
    
    
    7.00
    
    
    
    5.80
    
    
    
    7.25Rate of increase in salaries
    
    
    4.30
    
    
    
    4.00
    
    
    
    3.80
    
    
    
    4.00
    
    
    
    4.00
    
    
    
    4.00Inflation rate
    
    
    2.80
    
    
    
    3.00
    
    
    
    2.30
    
    
    
    3.50
    
    
    
    2.50
    
    
    
    3.00Increase in deferred benefits
during deferment
    
    
    2.90
    
    
    
    n/a
    
    
    
    2.50
    
    
    
    n/a
    
    
    
    2.60
    
    
    
    n/aIncreases to pensions payments
    
    
    2.90
    
    
    
    n/a
    
    
    
    2.50
    
    
    
    n/a
    
    
    
    2.60
    
    
    
    n/a
 F-23




---



##### Table of Contents



The amounts required to be disclosed by FRS 17 in respect of the performance
statements were: Analysis of amounts that would have been charged to operating profit in respect
of defined benefit schemes 2003
    
    2002£m
    
    £mCurrent service
    
    
    (5
    )
    
    
    (3
    )Past service cost
    
    
    
    
    
    
    (1
    )Total operating charge
    
    
    (5
    )
    
    
    (4
    )
 Analysis of amounts that would have been credited to other finance income 2003
    
    2002£m
    
    £mExpected return on schemes assets
    
    
    5
    
    
    
    5Interest on schemes liabilities
    
    
    (5
    )
    
    
    (4
    )Net return
    
    
    
    
    
    
    1
 Analysis of amounts that would have been recognised in the consolidated
statement of recognised gains and losses 2003
    
    2002£m
    
    £mActual return less expected return on schemes assets
    
    
    5
    
    
    
    (11
    )Experience gains/(losses) arising on schemes liabilities
    
    
    (3
    )
    
    
    (1
    )Changes in assumptions underlying the present value of schemes liabilities
    
    
    (7
    )
    
    
    (5
    )Currency translation adjustment
    
    
    1
    
    
    
    Actuarial loss recognised in the consolidated statement of total recognised gains and losses
    
    
    (4
    )
    
    
    (17
    )
 History of experience gains and losses 2003
    
    2002Difference between the actual and expected return on schemes assets:Amount (£m)
    
    
    5
    
    
    
    (11
    )Percentage of schemes assets
    
    
    5
    %
    
    
    15
    %Experience gains and losses on schemes liabilities:Amount (£m)
    
    
    (3
    )
    
    
    (1
    )Percentage of schemes liabilities
    
    
    3
    %
    
    
    1
    %Total amount recognised in the consolidated statement of total recognised gains and losses:Amount (£m)
    
    
    (4
    )
    
    
    (17
    )Percentage of the present value of schemes liabilities
    
    
    4
    %
    
    
    22
    %
 F-24




---



##### Table of Contents



The assets in the schemes and expected rates of return (weighted averages)
were: 31 December 2003
    
    31 December 2002
    
    31 December 2001UK
    
    Australia
    
    
    
    
    
    UK
    
    Australia
    
    
    
    
    
    UK
    
    Australia%
    
    %
    
    
    
    
    
    %
    
    %
    
    
    
    
    
    %
    
    %Long term
rate of return expectedEquities
    
    
    7.8
    
    
    
    7.6
    
    
    
    
    
    
    
    7.0
    
    
    
    7.5
    
    
    
    
    
    
    
    7.4
    
    
    
    7.5Bonds
    
    
    5.1
    
    
    
    4.8
    
    
    
    
    
    
    
    4.5
    
    
    
    5.5
    
    
    
    
    
    
    
    4.9
    
    
    
    5.5Other
    
    
    6.6
    
    
    
    6.1
    
    
    
    
    
    
    
    4.8
    
    
    
    5.5
    
    
    
    
    
    
    
    
    
    
    
    5.5
 UK
    
    Australia
    
    Total
    
    UK
    
    Australia
    
    Total
    
    UK
    
    Australia
    
    Total£m
    
    £m
    
    £m
    
    £m
    
    £m
    
    £m
    
    £m
    
    £m
    
    £mAssets in schemesEquities
    
    
    36
    
    
    
    35
    
    
    
    71
    
    
    
    27
    
    
    
    24
    
    
    
    51
    
    
    
    19
    
    
    
    23
    
    
    
    42Bonds
    
    
    5
    
    
    
    14
    
    
    
    19
    
    
    
    4
    
    
    
    12
    
    
    
    16
    
    
    
    16
    
    
    
    12
    
    
    
    28Other
    
    
    4
    
    
    
    5
    
    
    
    9
    
    
    
    3
    
    
    
    4
    
    
    
    7
    
    
    
    
    
    
    
    5
    
    
    
    5Total market value of assets
    
    
    45
    
    
    
    54
    
    
    
    99
    
    
    
    34
    
    
    
    40
    
    
    
    74
    
    
    
    35
    
    
    
    40
    
    
    
    75Present value of scheme liabilities
    
    
    (58
    )
    
    
    (50
    )
    
    
    (108
    )
    
    
    (43
    )
    
    
    (36
    )
    
    
    (79
    )
    
    
    (39
    )
    
    
    (25
    )
    
    
    (64
    )(Deficit)/ surplus in the scheme
    
    
    (13
    )
    
    
    4
    
    
    
    (9
    )
    
    
    (9
    )
    
    
    4
    
    
    
    (5
    )
    
    
    (4
    )
    
    
    15
    
    
    
    11Related deferred tax
asset/(liability)
    
    
    4
    
    
    
    (1
    )
    
    
    3
    
    
    
    3
    
    
    
    (1
    )
    
    
    2
    
    
    
    1
    
    
    
    (5
    )
    
    
    (4
    )Net pension (liability)/asset
    
    
    (9
    )
    
    
    3
    
    
    
    (6
    )
    
    
    (6
    )
    
    
    3
    
    
    
    (3
    )
    
    
    (3
    )
    
    
    10
    
    
    
    7
 Other assets principally comprise property and cash. If the above amounts had been recognised in the financial statements, the
Groups net assets and profit and loss reserve at 31 December would be as
follows: 2003
    
    2002
    
    2001£m
    
    £m
    
    £mNet assetsNet assets excluding pension asset/(liability)
    
    
    1,562
    
    
    
    1,769
    
    
    
    1,697FRS 17 pension (liability)/asset
    
    
    (6
    )
    
    
    (3
    )
    
    
    7Net assets including FRS 17 pension (liability)/asset
    
    
    1,556
    
    
    
    1,766
    
    
    
    1,704ReservesProfit and loss reserve excluding pension asset/(liability)
    
    
    113
    
    
    
    330
    
    
    
    260Net pension (liability)/asset
    
    
    (6
    )
    
    
    (3
    )
    
    
    7Profit and loss reserve including FRS 17 pension (liability)/asset
    
    
    107
    
    
    
    327
    
    
    
    267
 Movement in (deficit)/surplus during the year: 2003
    
    2002£m
    
    £m(Deficit)/surplus in the schemes at the beginning of the year
    
    
    (5
    )
    
    
    11Current service cost
    
    
    (5
    )
    
    
    (3
    )Contributions
    
    
    5
    
    
    
    4Past service cost
    
    
    
    
    
    
    (1
    )Other finance income
    
    
    
    
    
    
    1Actuarial loss
    
    
    (4
    )
    
    
    (17
    )Deficit in the schemes at the end of the year
    
    
    (9
    )
    
    
    (5
    )
 F-25




---



##### Table of Contents



9 Exceptional items Year ended
    
    Year ended 31
    
    Year ended 3131 December
    
    December
    
    December2003
    
    2002
    
    2001£m
    
    £m
    
    £mNet operating exceptional items charged/(credited):Impairment provisions
    
    
    404
    
    
    
    103
    
    
    
    Reversal of HUBCO impairment
    
    
    (35
    )
    
    
    
    
    
    
    Release of provision in respect of onerous property lease
    
    
    
    
    
    
    
    
    
    
    (8
    )Bank guarantee charge in respect of a trade investment
(note 32)
    
    
    
    
    
    
    
    
    
    
    10Net operating exceptional items
    
    
    369
    
    
    
    103
    
    
    
    2Exceptional income from investmentsBacklog dividend received
    
    
    
    
    
    
    (42
    )
    
    
    Total operating exceptional items and investment income
    
    
    369
    
    
    
    61
    
    
    
    2Non-operating exceptional items credited:Profit on disposal of fixed asset investments
    
    
    (24
    )
    
    
    
    
    
    
    (30
    )Sale/termination of Chinese operations
    
    
    (3
    )
    
    
    
    
    
    
    (2
    )Non-operating exceptional items
    
    
    (27
    )
    
    
    
    
    
    
    (32
    )Exceptional interest charges:Write off of unamortised finance charges
    
    
    16
    
    
    
    
    
    
    
    29Exceptional interest payable and similar charges
    
    
    16
    
    
    
    
    
    
    
    29Total exceptional items before attributable taxation
    
    
    358
    
    
    
    61
    
    
    
    (1
    )Taxation on exceptional items
    
    
    (26
    )
    
    
    (1
    )
    
    
    Total exceptional items after attributable taxation
    
    
    332
    
    
    
    60
    
    
    
    (1
    )
 Year ended 31 December 2003 During the year ended 31 December 2003, the Group wrote down the value of its
US merchant plant by £404 million. The carrying values of our US plant were
reviewed following the sharp decline in both current and forward electricity
prices in ERCOT and NEPOOL markets in the US. This resulted in impairment of
our US merchant plant (Hays, Midlothian, Blackstone, Bellingham and Milford).
The revised book values were determined by applying a risk adjusted discount
rate of 9.7% to the post-tax cash flows expected from the plants over their
remaining useful lives. During the year, we have sold a 5% shareholding in HUBCO in line with our
policy of selectively monetising investments at the appropriate time,
generating cash of £21 million. Our equity interest in HUBCO now totals 20.7%.
We have booked exceptional gains of £52 million, reflecting the profit on this
sale and the reversal of a previous impairment provision. We also sold our investment in VCE (Czech Republic) realising an exceptional
gain of £7 million and concluded our divestments in China, realising an
exceptional gain of £3 million. The exceptional interest charge results from the write-off of unamortised
facility costs in the US and the UK. F-26




---



##### Table of Contents



Year ended 31 December 2002 During the year ended 31 December 2002, the Group wrote down the value of its
Deeside plant and its Rugeley plant by £45 million and £58 million
respectively. The carrying values of our Deeside and Rugeley plants were
reviewed following the sharp decline in both current and forward electricity
prices in the UK. During the year, Kot Addu Power Company (KAPCO) in Pakistan resumed the payment
of dividends (including the settlement of past receivables). A gross dividend
of £73 million was received (the first since 1998), of which £42 million that
related to the settlement of past receivables and has accordingly been treated
as exceptional because of its non-recurring nature. Year ended 31 December 2001 The group accounts for the year ended 31 December 2001 record five exceptional
items: An onerous lease provision was reassessed in the period to take account
of the anticipated results of rent reviews and to reflect the impact of
previously vacant space which was leased during the year. As a result of this
reassessment, £8 million of the provision was released. During the period, the Group provided £10 million in respect of a bank
guarantee given on behalf of its trade investment, Elcogas. It is probable that
the guarantee will be called to prevent Elcogas from breaching capital
structure requirements under the Spanish Commercial Code. On 25 July 2001, the group sold its investment in Union Fenosa Generacion SA,
realising a profit of £30 million. Further details of the disposal are given in
note 28. During the period the China exit provision (created in the nine month period
ended 31 December 2000) was reassessed following the disposal of the majority
of the groups remaining investments in China. As a result of this
reassessment, £2 million of the provision was released. The exceptional interest charge of £29 million represents the cost of
cancelling the existing interest rate swaps and amortising capitalised
arrangement fees in connection with the successful refinancing of the
non-recourse debt facility for the Hazelwood power plant in Victoria,
Australia. F-27




---



##### Table of Contents



10 Tax on profit on ordinary activities aAnalysis of charge in year Year ended
    
    Year ended 31
    
    Year ended 3131 December
    
    December
    
    December2003
    
    2002
    
    2001£m
    
    £m
    
    £mCurrent taxationUK Corporation tax at 30% (2002: 30%; 2001: 30%)
    
    
    26
    
    
    
    25
    
    
    
    1Foreign taxation
    
    
    13
    
    
    
    21
    
    
    
    29Share of joint ventures taxation
    
    
    2
    
    
    
    2
    
    
    
    2Share of associates taxation
    
    
    16
    
    
    
    17
    
    
    
    26Total current taxation charge for year
    
    
    57
    
    
    
    65
    
    
    
    58Deferred taxationOrigination and reversal of timing differences
    
    
    (30
    )
    
    
    11
    
    
    
    1Share of joint ventures deferred taxation
    
    
    1
    
    
    
    
    
    
    
    Share of associates deferred taxation
    
    
    
    
    
    
    
    
    
    
    5Total deferred taxation (credit)/charge for year
    
    
    (29
    )
    
    
    11
    
    
    
    6Total taxation charge for the year
    
    
    28
    
    
    
    76
    
    
    
    64Included in the tax on profits are the following
amounts relating to exceptional items:Operating exceptional items (deferred tax)
    
    
    (27
    )
    
    
    (14
    )
    
    
    Exceptional income from investments (current tax)
    
    
    
    
    
    
    13
    
    
    
    Non-operating exceptional items (current tax)
    
    
    2
    
    
    
    
    
    
    
    Exceptional interest charges (current tax)
    
    
    (1
    )
    
    
    
    
    
    
    Taxation credit in exceptional items
    
    
    (26
    )
    
    
    (1
    )
    
    
    
 The deferred tax credit of £29 million for the year ended 31 December 2003
derives from foreign operations. bReconciliation of current tax charge The tax charge for the year on ordinary activities varied from the standard
rate of UK corporation tax as follows: Year ended 31 December
    
    Year ended 31 December
    
    Year ended 31 December2003
    
    2002
    
    2001Current
    
    Deferred
    
    
    
    
    
    Current
    
    Deferred
    
    
    
    
    
    Current
    
    DeferredTax
    
    tax
    
    Total
    
    tax
    
    tax
    
    Total
    
    tax
    
    tax
    
    Total£m
    
    £m
    
    £m
    
    £m
    
    £m
    
    £m
    
    £m
    
    £m
    
    £mCorporation tax at 30%
    
    
    52
    
    
    
    
    
    
    
    52
    
    
    
    77
    
    
    
    
    
    
    
    77
    
    
    
    61
    
    
    
    
    
    
    
    61Permanent differences
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    5
    
    
    
    
    
    
    
    5Origination or reversal of
timing differences
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    (25
    )
    
    
    25
    
    
    
    
    
    
    
    (6
    )
    
    
    6
    
    
    
    Tax holidays
    
    
    (10
    )
    
    
    
    
    
    
    (10
    )
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )Effect on tax rate applied to
overseas earnings
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    4
    
    
    
    
    
    
    
    4
    
    
    
    7
    
    
    
    
    
    
    
    7Tax charge for the year before
exceptional items
    
    
    56
    
    
    
    (2
    )
    
    
    54
    
    
    
    52
    
    
    
    25
    
    
    
    77
    
    
    
    58
    
    
    
    6
    
    
    
    64Exceptional items
    
    
    1
    
    
    
    (27
    )
    
    
    (26
    )
    
    
    13
    
    
    
    (14
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Tax charge/(credit) for the year
    
    
    57
    
    
    
    (29
    )
    
    
    28
    
    
    
    65
    
    
    
    11
    
    
    
    76
    
    
    
    58
    
    
    
    6
    
    
    
    64
 The effective tax rate for exceptional items in 2003, 7.3%, is lower
than the UK statutory tax rate of 30%, principally due to the
recognition of a valuation allowance in respect of potential assets
created by the impairment which are not expected to be recovered in
the near term. This is offset by the tax benefits associated with
non-taxable disposals and impairment reversals. The rate on
exceptional items also reflects differing foreign tax rates. F-28




---



##### Table of Contents



11 Earnings per share (EPS) Year ended
    
    Year ended
    
    Year ended31 December 2003
    
    31 December 2002
    
    31 December 2001Earnings per share
    
    pence
    
    pence
    
    penceBasicBefore exceptional items
    
    
    10.2
    
    
    
    15.5
    
    
    
    12.3Exceptional items
    
    
    (29.9
    )
    
    
    (5.4
    )
    
    
    After exceptional items
    
    
    (19.7
    )
    
    
    10.1
    
    
    
    12.3DilutedBefore exceptional items
    
    
    10.1
    
    
    
    15.5
    
    
    
    12.0Exceptional items
    
    
    (29.9
    )
    
    
    (5.4
    )
    
    
    After exceptional items
    
    
    (19.7
    )
    
    
    10.1
    
    
    
    12.0
 Basic of calculation Earnings£m
    
    
    
    £m
    
    
    
    £mProfit attributable to shareholders before exceptional items
    
    
    113
    
    
    
    173
    
    
    
    137Exceptional items
    
    
    (332
    )
    
    
    (60
    )
    
    
    1Profit attributable to shareholders after exceptional items.
    
    
    (219
    )
    
    
    113
    
    
    
    138Reduction in interest charge assuming conversion of the
Convertible US Dollars Bonds 2005
    
    
    
    
    
    
    
    
    
    
    7Earnings after exceptional items and taking into account
applicable dilutive instruments
    
    
    (219
    )
    
    
    113
    
    
    
    145
 Number
of ordinary sharesMillion
    
    Million
    
    MillionWeighted average number of issued ordinary shares
    
    
    1,114.1
    
    
    
    1,117.6
    
    
    
    1,117.5Weighted average number of shares held by Employee Share
Ownership Plans (ESOPs)
    
    
    (3.2
    )
    
    
    (2.2
    )
    
    
    (1.0
    )1,110.9
    
    
    
    1,115.4
    
    
    
    1,116.5Dilutive potential ordinary sharesEmployee share schemes
    
    
    9.2
    
    
    
    2.6
    
    
    
    0.3Convertible US Dollar Bonds 2005
    
    
    
    
    
    
    
    
    
    
    83.8Weighted average number of ordinary shares taking account
of applicable dilutive instruments
    
    
    1,120.1
    
    
    
    1,118.0
    
    
    
    1,200.6
 FRS 14 requires presentation of diluted earnings per share when a company could
be called upon to issue shares that would decrease net profit or increase net
loss per share. A net loss per share would only be increased by the exercise of
out-of-the-money share options. Since it seems inappropriate to assume that
option holders would act irrationally, no adjustment has been made for
out-of-the-money options and hence diluted EPS (after exceptional items) equals
basic EPS (after exceptional items). F-29




---



##### Table of Contents



12 Intangible assets Goodwill
    
    Negative goodwill
    
    Total£m
    
    £m
    
    £mCostAt 1 January 2003
    
    
    10
    
    
    
    (10
    )
    
    
    Exchange rate differences
    
    
    1
    
    
    
    (1
    )
    
    
    At 31 December 2003
    
    
    11
    
    
    
    (11
    )
    
    
    AmortisationAt 1 January 2003
    
    
    (2
    )
    
    
    3
    
    
    
    1(Charged)/credited in the year
    
    
    (2
    )
    
    
    2
    
    
    
    At 31 December 2003
    
    
    (4
    )
    
    
    5
    
    
    
    1Net book valueAt 31 December 2003
    
    
    7
    
    
    
    (6
    )
    
    
    1At 31 December 2002
    
    
    8
    
    
    
    (7
    )
    
    
    1
 Goodwill arising on the acquisition of associated undertakings and joint
ventures is set out in note 14  fixed asset investments. 13 Tangible fixed assets Freehold land
    
    Plant, machinery
    
    Assets in course ofand buildings
    
    and equipment
    
    construction
    
    Total£m
    
    £m
    
    £m
    
    £mCostAt 1 January 2003
    
    
    82
    
    
    
    2,903
    
    
    
    88
    
    
    
    3,073Additions
    
    
    4
    
    
    
    68
    
    
    
    48
    
    
    
    120Compensation for long-term
performance shortfalls
    
    
    
    
    
    
    (127
    )
    
    
    
    
    
    
    (127
    )Reclassifications and transfers
    
    
    2
    
    
    
    98
    
    
    
    (111
    )
    
    
    (11
    )Disposals
    
    
    (1
    )
    
    
    (5
    )
    
    
    
    
    
    
    (6
    )Exchange rate differences
    
    
    2
    
    
    
    76
    
    
    
    (2
    )
    
    
    76At 31 December 2002
    
    
    89
    
    
    
    3,013
    
    
    
    23
    
    
    
    3,125Depreciation and diminution in valueAt 1 January 2003
    
    
    18
    
    
    
    582
    
    
    
    
    
    
    
    600Provided during the year
    
    
    3
    
    
    
    105
    
    
    
    
    
    
    
    108Impairment
    
    
    
    
    
    
    404
    
    
    
    
    
    
    
    404Compensation for long-term
performance shortfalls
    
    
    
    
    
    
    (33
    )
    
    
    
    
    
    
    (33
    )Reclassifications and transfers
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Disposals
    
    
    
    
    
    
    (3

    )
    
    
    
    
    
    
    (3
    )Exchange rate differences
    
    
    1
    
    
    
    5
    
    
    
    
    
    
    
    6At 31 December 2003
    
    
    22
    
    
    
    1,055
    
    
    
    
    
    
    
    1,077Net book valueAt 31 December 2003
    
    
    67
    
    
    
    1,958
    
    
    
    23
    
    
    
    2,048At 31 December 2002
    
    
    64
    
    
    
    2,321
    
    
    
    88
    
    
    
    2,473
 Interest capitalised in the year was £2 million. On a cumulative basis, the net
book value of interest capitalised is £85 million. The total value of land that is not depreciated included within freehold land
and buildings is £27 million (31 December 2002: £28 million). F-30




---



##### Table of Contents



14 Fixed asset investments Joint ventures
    
    Associated undertakingsShare of net
    
    Share of net
    
    
    
    
    
    Otherassets
    
    assets
    
    Goodwill
    
    investments
    
    Total£m
    
    £m
    
    £m
    
    £m
    
    £mAt 1 January 2003
    
    
    102
    
    
    
    283
    
    
    
    20
    
    
    
    102
    
    
    
    507Share of post-tax profit
    
    
    19
    
    
    
    94
    
    
    
    (2
    )
    
    
    
    
    
    
    111Additions
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    10Distribution and loan repayments
    
    
    (10
    )
    
    
    (58
    )
    
    
    
    
    
    
    (1
    )
    
    
    (69
    )Disposals
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )
    
    
    (8
    )Reclassifications and transfers
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Amortisation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Exchange rate differences
    
    
    
    
    
    
    (17
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (19
    )At 31 December 2003
    
    
    126
    
    
    
    298
    
    
    
    17
    
    
    
    97
    
    
    
    538
 Included within the Groups share of net assets of joint ventures and
associated undertakings is net debt of £712 million (31 December 2002: £503
million). These obligations are generally secured by the assets of the
respective joint venture or associate borrower and are not guaranteed by
International Power or any other Group company. Group share of associated
undertakings net assets
    
    31 December 2003
    
    31 December 2002£m
    
    £mShare of fixed and long-term assets
    
    
    821
    
    
    
    602Share of current assets
    
    
    226
    
    
    
    2211,047
    
    
    
    823Share of liabilities due within one year
    
    
    (79
    )
    
    
    (157
    )Share of liabilities due after more than one year
    
    
    (670
    )
    
    
    (383
    )(749
    )
    
    
    (540
    )Share of net assets
    
    
    298
    
    
    
    283
 Group share of joint ventures net assets
    
    31 December 2003
    
    31 December 2002£m
    
    £mShare of fixed and long-term assets
    
    
    302
    
    
    
    260Share of current assets
    
    
    35
    
    
    
    40337
    
    
    
    300Share of liabilities due within one year
    
    
    (37
    )
    
    
    (46
    )Share of liabilities due after more than one year
    
    
    (174
    )
    
    
    (152
    )(211
    )
    
    
    (198
    )Share of net assets
    
    
    126
    
    
    
    102
 Year ended
    
    Year ended
    
    Year endedGroup share of results of associated undertakings and joint
    
    31 December
    
    31 December
    
    31 Decemberventures
    
    2003
    
    2002
    
    2001£m
    
    £m
    
    £mShare of turnover
    
    
    421
    
    
    
    412
    
    
    
    546Share of operating profit
    
    
    162
    
    
    
    149
    
    
    
    161Share of net income - group
    
    
    111
    
    
    
    95
    
    
    
    81
 The Group investments that are listed on a recognised stock market are those in
The Hub Power Company Limited (HUBCO) and Malakoff Berhad. Both are associated
undertakings. F-31




---



##### Table of Contents



At 31 December 2003, the Groups share of HUBCO was valued at £90 million
(2002: £126 million) on the major Pakistan stock markets and the Groups share
in Malakoff Berhad was valued at £128 million (2002: £108 million) on the Kuala
Lumpur stock market. Market values for both Group shareholdings were in excess
of the respective book values at the year end. Kot Addu Power Company Limited (KAPCO), in which the Group holds 36% of the
shares, is classified as a trade investment because International Power does
not exercise significant influence over the company. In the year ended 31 March
2000, our investment in KAPCO was written down by £44 million. F-32




---



##### Table of Contents



15 Investments in subsidiary undertakings Country ofincorporation and
    
    
    
    PercentageName and nature of business
    
    registration
    
    Type of share
    
    shareholdingHazelwood Power Partnership*
    
    Australia
    
    Partners Capital
    
    
    92
    %(Power generation)Elektrárny Opatovice A.S.*
    
    Czech Republic
    
    Ordinary Shares
    
    
    99
    %(Power generation)International Power Global Developments Limited
    
    England and Wales
    
    Ordinary Shares
    
    
    100
    %(Project
development  overseas)Pelican
Point Power Limited*
    
    England and Wales
    
    Ordinary Shares
    
    
    100
    %(Power generation)Rugeley Power Limited
    
    England and Wales
    
    Ordinary Shares
    
    
    100
    %(Power generation)Deeside Power Development Company Limited
    
    England and Wales
    
    Ordinary Shares
    
    
    100
    %(Power generation)International Power Fuel Company Limited
    
    England and Wales
    
    Ordinary Shares
    
    
    100
    %(Fuel supplies)National Power International Holdings BV*
    
    The Netherlands**
    
    Ordinary Shares
    
    
    100
    %(Investment holding company)Synergen Power Pty Limited*
    
    Australia
    
    Ordinary Shares
    
    
    100
    %(Power generation)Thai National Power Company Limited*
    
    Thailand
    
    Ordinary Shares
    
    
    100
    %(Power generation)Midlothian Energy Limited Partnership*
    
    US
    
    Partners Capital
    
    
    100
    %(Power generation)Milford Power Limited Partnership*
    
    US
    
    Partners Capital
    
    
    100
    %(Power generation)ANP Funding I, LLC*
    
    US
    
    Ordinary Shares
    
    
    100
    %(Financing company)International Power (Cayman) Limited
    
    Cayman Islands**
    
    Ordinary Shares
    
    
    100
    %(Financing company)IPR Insurance Company Limited*
    
    Guernsey
    
    Ordinary Shares
    
    
    100
    %(Insurance captive)International Power (Jersey) Limited
    
    Jersey**
    
    Ordinary Shares
    
    
    100
    %(Financing company)International Power (Finance) Limited
    
    England and Wales
    
    Ordinary Shares
    
    
    100
    %(Financing company)ANP Blackstone Energy Company, LLC*
    
    US
    
    Ordinary Shares
    
    
    100
    %(Power generation)ANP Bellingham Energy Company, LLC*
    
    US
    
    Ordinary Shares
    
    
    100
    %(Power generation)Hays Energy Limited Partnership*
    
    US
    
    Partners Capital
    
    
    100
    %(Power generation)International Power Holdings Limited
    
    England and Wales
    
    Ordinary Shares
    
    
    100
    %(Investment holding company)Advanced Turbine Products LLC*
    
    US
    
    Partners Capital
    
    
    82
    %(Manufacturer of turbine parts)Al Kamil Power Company SAOC*
    
    Oman
    
    Ordinary Shares
    
    
    100
    %(Power generation)Tihama Power Generation Company Limited
    
    Saudi Arabia
    
    Ordinary Shares
    
    
    60
    %(Power generation)International Power Australia Holdings (1) Limited*
    
    England and Wales
    
    Ordinary Shares
    
    
    100
    %(Investment holding company)
 All subsidiary undertakings operate in their country of incorporation, except
as indicated below. All subsidiary undertakings have December year ends. The
Group also has a number of overseas branch offices. * Held by an intermediate subsidiary undertaking.  Operates in Australia. ** Operates in the UK F-33




---



##### Table of Contents



16 Investments in associates and joint ventures Country ofincorporation,registration and
    
    Accounting
    
    
    
    PercentageName and nature of business
    
    operation
    
    period end
    
    Type of share
    
    shareholdingAssociated undertakingsMalakoff Berhad*
    
    Malaysia
    
    31 August
    
    Ordinary Shares
    
    
    18
    %(Power generation)The Hub Power Company Limited*
    
    Pakistan
    
    30 June
    
    Ordinary Shares
    
    
    21
    %(Power generation)Carbopego  Abastecimento de Combustiveis, S.A.*
    
    Portugal
    
    31 December
    
    Ordinary Shares
    
    
    33
    %(Fuel supplies)Pegop  Energia Electrica, S.A.*
    
    Portugal
    
    31 December
    
    Ordinary Shares
    
    
    45
    %(Power station operations)Tejo Energia  Producao e Distribuicao de
Energia Electrica, S.A.*
    
    Portugal
    
    31 December
    
    Ordinary Shares
    
    
    45
    %(Power generation)Shuweihat CMS International Power Company PJSC*
    
    UAE
    
    31 December
    
    Ordinary Shares
    
    
    20
    %(Power generation)Uni-Mar Enerji Yatirimlari A.S.*
    
    Turkey
    
    31 December
    
    Ordinary Shares
    
    
    33
    %(Power generation)Arabian Power Company PJSC
    
    UAE
    
    31 December
    
    Ordinary Shares
    
    
    20
    %(Power generation)Joint venturesPraska Teplárenská A.S.*
    
    Czech Republic
    
    31 December
    
    Ordinary Shares
    
    
    49
    %(Power generation)Hartwell Energy Limited Partnership*
    
    US
    
    31 December
    
    Partners Capital
    
    
    50
    %(Power generation)Oyster Creek Limited Partnership*
    
    US
    
    31 December
    
    Partners Capital
    
    
    50
    %(Power generation)South East Australia Pty Limited*
    
    Australia
    
    31 December
    
    Ordinary Shares
    
    
    33
    %(Gas pipeline)
 * Held by an intermediate subsidiary undertaking 17 Stocks 31 December
    
    31 December2003
    
    2002£m
    
    £mPlant spares
    
    
    18
    
    
    
    14Fuel stocks
    
    
    18
    
    
    
    15Consumables
    
    
    29
    
    
    
    26Total stocks
    
    
    65
    
    
    
    55
 F-34




---



##### Table of Contents



18 Debtors 31 December
    
    31 December2003
    
    2002£m
    
    £mAmounts recoverable within one year:Trade debtors (net)
    
    
    50
    
    
    
    48Other debtors
    
    
    54
    
    
    
    23Prepayments and accrued income
    
    
    53
    
    
    
    59Total amounts recoverable within one year
    
    
    157
    
    
    
    130Amounts recoverable after more than one year:Other debtors
    
    
    3
    
    
    
    4Total amounts recoverable after more than one year
    
    
    3
    
    
    
    4Total debtors
    
    
    160
    
    
    
    134
 Provision for doubtful debts is analysed below: 31 December2003
    
    31 December 2002
    
    31 December 2001£m
    
    £m
    
    £mBrought forward
    
    
    (17
    )
    
    
    (11
    )
    
    
    (4
    )Charged to profit and loss
    
    
    
    
    
    
    (6
    )
    
    
    (7
    )Carried forward
    
    
    (17
    )
    
    
    (17
    )
    
    
    (11
    )
 19 Current asset investments 31 December
    
    31 December2003
    
    2002£m
    
    £mUnlisted investments
    
    
    70
    
    
    
    43
 Current asset investments are primarily short-term money market deposits used
for fund management and treasury purposes. 20 Creditors: amounts falling due within one year 31 December 2003
    
    31 December 2002£m
    
    £mTrade creditors
    
    
    71
    
    
    
    106Other creditors
    
    
    58
    
    
    
    34Other taxation and social security
    
    
    
    
    
    
    Corporation tax
    
    
    86
    
    
    
    53Accruals and deferred income
    
    
    100
    
    
    
    134Bank loans (secured)
    
    
    531
    
    
    
    81061⁄4% Euro Dollar Bonds 2003
    
    
    
    
    
    
    372% Convertible US Dollar Bonds 2005
    
    
    
    
    
    
    231Total Bonds
    
    
    
    
    
    
    268Total creditors: amounts falling due within one year
    
    
    846
    
    
    
    1,405
 The bank loans are secured by fixed and floating charges over the assets of
certain subsidiary undertakings. F-35




---



##### Table of Contents



Secured loans without recourse Secured bank loans without recourse are those where the obligation to repay
lies solely on the assets of the subsidiary undertaking concerned. At 31 December 2003, we were in discussions with bank groups in relation to
claimed technical defaults on the non-recourse debt for the US merchant asset
portfolio. As these issues were not fully resolved at 31 December 2003, the
debt at ANP has been reported as current non-recourse debt in our accounts. 21 Creditors: amounts falling due after more than one year 31 December 2003
    
    31 December 2002£m
    
    £mOther creditors
    
    
    5
    
    
    
    7Bank loans (secured):Between one and five years
    
    
    262
    
    
    
    138In more than five years
    
    
    442
    
    
    
    438Total bank loans
    
    
    704
    
    
    
    5762% Convertible US Dollar Bonds 2005
    
    
    62
    
    
    
    3.75% Convertible US Dollar Bonds 2005
    
    
    138
    
    
    
    Total Bonds
    
    
    200
    
    
    
    Total creditors: amounts falling due after more than one year
    
    
    909
    
    
    
    583
 The bank loans are secured by a fixed and floating charge over the assets of
certain subsidiary undertakings. Convertible bonds 2% Convertible US Dollar Bonds 2005 On 24 November 2000, International Power (Cayman) Limited, a wholly-owned
subsidiary company incorporated in the Cayman Islands, issued US$357 million 2%
convertible notes due 2005, convertible into preference shares of International
Power (Cayman) Limited at the holders option, exchangeable for Ordinary Shares
of, and fully and unconditionally guaranteed on a senior unsecured basis by
International Power plc. International Power (Cayman) Limited is a finance
subsidiary with no assets, operations, revenues or cash flows other than those
related to the issuance and repayment of the securities being registered. The notes are convertible into Ordinary Shares of International Power plc at a
conversion price of 300p at any time between 4 January 2001 and 23 November
2005. The last reported trading value of the Companys Ordinary Shares prior
to the date of issue of the convertible notes was 246.25p. Each US$1,000
principal amount of notes will entitle the holder to convert into a US$1,000
paid up value of preference shares of International Power (Cayman) Limited.
Investors may elect to receive their Ordinary Shares in the form of American
Depositary Receipts. On 24 November 2003, US$254 million of the notes were redeemed at the holders
option at a redemption price of 107.1% of their principal amount. The balance
of US$103 million will remain for a further two-year period at an effective
interest rate of 4.6%. F-36




---



##### Table of Contents



The unput convertible unsecured notes will be redeemed on 24 November 2005 at
a redemption price of 112.4% of their principal amount. Accordingly the
convertible bond is now shown within long-term liabilities. 3.75% Convertible US Dollar Bonds 2005 On 22 August 2003, International Power (Jersey) Limited, a wholly-owned
subsidiary company incorporated in Jersey, issued US$252.5 million 3.75%
convertible notes due 2023, convertible into preference shares of International
Power (Jersey) Limited at the holders option, exchangeable for Ordinary Shares
of, and fully and unconditionally guaranteed on a senior unsecured basis by
International Power plc. The notes are convertible into Ordinary Shares of International Power plc at a
conversion price of 200p at any time between 2 October 2003 and 12 August 2023.
Each US$1,000 principal amount of notes will entitle the holder to convert into
a US$1,000 paid up value of Preference Shares of International Power (Jersey)
Limited. The notes may be redeemed at the holders option at their principal amount,
together with accrued interest, to the date fixed for redemption. If the conversion option is not exercised, the convertible unsecured notes will
be redeemed on 22 August 2023 at a redemption price equivalent to their
principal amount. Premium on redemption of convertible notes Provision is made for the possible premium on redemption of the 2005 and 2023
convertible bonds. This is included within the carrying amount of the bonds.
At 31 December 2003, the amount accrued was £8 million (31 December 2002: £13
million). The finance cost charged in the profit and loss account comprises
the aggregate of the coupon on the convertible unsecured notes and the
proportion of the premium on redemption that relates to the financial year. 22 Provisions for liabilities and charges RationalisationandDeferred tax
    
    restructuring
    
    Other
    
    Total£m
    
    £m
    
    £m
    
    £mAt 1 January 2003
    
    
    219
    
    
    
    11
    
    
    
    25
    
    
    
    255Charged to the profit and loss account
    
    
    28
    
    
    
    1
    
    
    
    1
    
    
    
    30Credited to profit and loss account
    
    
    (58
    )
    
    
    
    
    
    
    (4
    )
    
    
    (62
    )Provision utilised/ released
    
    
    
    
    
    
    (3
    )
    
    
    (2
    )
    
    
    (5
    )Transfer to corporation tax
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (4
    )Foreign exchange
    
    
    20
    
    
    
    
    
    
    
    4
    
    
    
    24At 31 December 2003
    
    
    205
    
    
    
    9
    
    
    
    24
    
    
    
    238
 Provisions for rationalisation and restructuring include an onerous lease
provision of £5 million (31 December 2002: £6 million) and a provision for
staff relocation of £4 million (31 December 2002: £5 million). The onerous
lease provision is based on an estimate of the present value of future net cash
flows, discounted at an appropriate rate in accordance with FRS12 (Provisions,
Contingent Liabilities and Contingent Assets). The relocation provision was
created at £7 million as part of the exceptional cost of £25 million for
restructuring charged to the profit and F-37




---



##### Table of Contents



loss account in the nine month period
ended 31 December 2000. The severance provision was for the termination of 113
employees. These employees were from a broad cross section of head office
staff. During the year, relocation benefits of £1 million (year ended 31
December 2002: nil) were paid and charged against the liability. The remainder of other provisions primarily relates to site restoration and
long service leave provisions in Australia. These liabilities are not expected
to arise in the short-term. The group has a provision of £7 million (31
December 2002: £6 million) for mine site restoration in Australia. The
provision is based on the current Mine Rehabilitation Plan as endorsed by the
regulatory authority. These costs have been estimated on the basis of current
costs, current legal requirements and current technology. The provision is
based on the present value of these costs. The ultimate amount of the
restoration obligations that will be incurred cannot be predicted with
certainty due to the impact of changes in environmental legislation, technology
and other factors. However, management does not believe that the ultimate
resolution of this matter, after considering the amounts provided, will have a
material impact on the consolidated balance sheet or consolidated profit and
loss account. 23 Deferred taxation Deferred taxation accounted for in the consolidated balance sheet and the
potential amounts of deferred taxation are: As at
    
    As at31 December
    
    31 December2003
    
    2002£m
    
    £mFull potential deferred tax liabilities:Tangible fixed assets accelerated capital allowances
    
    
    (175
    )
    
    
    (237
    )Other timing differences
    
    
    (21

    )
    
    
    (24
    )Dividends of overseas subsidiary undertakings
    
    
    (16
    )
    
    
    (17
    )Total gross deferred tax liabilities
    
    
    (212
    )
    
    
    (278
    )Less: deferred tax liabilities not provided
    
    
    
    
    
    
    Total deferred tax liabilities provided
    
    
    (212
    )
    
    
    (278
    )Full potential deferred tax assets:Provisions
    
    
    3
    
    
    
    2Tax losses
    
    
    86
    
    
    
    45Other timing differences
    
    
    35
    
    
    
    12Total gross deferred tax assets
    
    
    124
    
    
    
    59Less: deferred tax assets not recognised
    
    
    (117
    )
    
    
    Total deferred tax asset recognised
    
    
    7
    
    
    
    59Net deferred tax liability provided
    
    
    (205
    )
    
    
    (219
    )
 Deferred tax assets would be offset against suitable taxable profits when they
arise. Of the £86 million deferred tax asset in respect of tax losses (gross losses
£230 million), £83 million (gross loss £221 million) can be carried forward for
a period of between 12 and 20 years, the balance can be carried forward
indefinitely. A valuation allowance of £117 million has been made in the year. Due to
deterioration in performance of the relevant businesses in the period there is
no longer significant certainty that losses will be recovered against future
taxable income. Unless there is significant improvement in underlying
performance this valuation allowance is expected to remain in the near term. Undistributed earnings at the
Companys foreign subsidiaries amounted to approximately £37 million at
31 December 2003. These earnings are considered to be indefinitely
reinvested and, accordingly, no tax has been provided thereon. Upon
distribution of those earnings in the form of dividends, the Company
would be subject to UK tax (subject to an adjustment for foreign tax
credits). Determination of the amount of unrecognised deferred tax
liability is not practicable because of the complexities associated
with its hypothetical calculation. 24 Share capital F-38




---



##### Table of Contents



Authorised Ordinary
    
    Issued and fully paid OrdinaryShares of 50p
    
    Shares of 50pNumber
    
    £m
    
    Number
    
    £mBalance at 1 January 2003
    
    
    1,700,000,000
    
    
    
    850
    
    
    
    1,117,561,520
    
    
    
    559Issue of shares under the Sharesave Scheme
    
    
    
    
    
    
    
    
    
    
    1,944
    
    
    
    Issue of shares under Executive Share Option Scheme
    
    
    
    
    
    
    
    
    
    
    180,853
    
    
    
    Shares brought back and cancelled
    
    
    
    
    
    
    
    
    
    
    (10,652,323
    )
    
    
    (5
    )Balance at 31 December 2003
    
    
    1,700,000,000
    
    
    
    850
    
    
    
    1,107,091,994
    
    
    
    554
 Deferred shares The Company has 21 Deferred Shares of 1 pence each in issue. These shares were
issued to ensure the demerger was effected as efficiently as possible. The
holders of Deferred Shares have no rights to receive dividends or to attend or
vote at any general meeting. Unclassified share Further to the redemption of the Special Share in August 2000, the Companys
authorised share capital includes one unclassified share of £1. Employee share schemes a) Share Option Plans The Company operates the following share plans for which shares may be issued
by the Company out of authorised but unissued share capital upon exercise of
options: the 2002 Performance Share Plan; the UK Approved and Unapproved
Executive Share Option Plans; the Global Executive Share Option Plan; the UK
Approved Sharesave Plan and the Global Sharesave Plan. The UK Approved
Sharesave Plan and the Global Sharesave Plan are savings related and enable
employees to invest up to a maximum of £250 per month. F-39




---



##### Table of Contents



Sharesave Scheme
    
    Executive Share Option SchemeNumber of
    
    Weighted
    
    Number of
    
    WeightedOrdinary
    
    average
    
    Ordinary
    
    averageNote
    
    Shares
    
    exercise price
    
    Shares
    
    exercise pricemillion
    
    Pence
    
    million
    
    penceOptions outstanding at 31 December 2000
    
    
    i
    
    
    
    1.9
    
    
    
    260
    
    
    
    9.9
    
    
    
    335Granted
    
    
    
    
    
    
    1.5
    
    
    
    194
    
    
    
    2.2
    
    
    
    234Exercised/lapsed
    
    ii
    
    
    (1.8
    )
    
    
    262
    
    
    
    (4.5
    )
    
    
    344Options outstanding at 31 December 2001
    
    
    i
    
    
    
    1.6
    
    
    
    200
    
    
    
    7.6
    
    
    
    302Granted
    
    
    
    
    
    
    3.7
    
    
    
    90
    
    
    
    4.1
    
    
    
    196Exercised/lapsed
    
    ii
    
    
    (1.6
    )
    
    
    188
    
    
    
    (0.5
    )
    
    
    322Options outstanding at 31 December 2002
    
    
    
    
    
    
    3.7
    
    
    
    90
    
    
    
    11.2
    
    
    
    262Granted
    
    
    
    
    
    
    2.2
    
    
    
    86
    
    
    
    11.8
    
    
    
    70Exercised/lapsed
    
    
    
    
    
    
    (0.2
    )
    
    
    90
    
    
    
    (0.3
    )
    
    
    70Options outstanding at 31 December 2003
    
    
    i
    
    
    
    5.7
    
    
    
    89
    
    
    
    22.7
    
    
    
    164Options exercisable at 31 December 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.9
    
    
    
    328Options exercisable at 31 December 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.3
    
    
    
    347Options exercisable at 31 December 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.6
    
    
    
    349
 i Options outstanding Number of Ordinary SharesYear ended
    
    Year endedOption
    
    Date
    
    31 December
    
    31 Decemberprice
    
    exercisable
    
    2003
    
    2002Sharesave schemes
    
    
    307.51p
    
    
    
    2003
    
    
    
    
    
    
    
    4,486250.00p
    
    
    
    2003
    
    
    
    775
    
    
    
    775188.00p
    
    
    
    2004
    
    
    
    12,159
    
    
    
    18,856188.00p
    
    
    
    2006
    
    
    
    8,976
    
    
    
    17,952200.00p
    
    
    
    2004
    
    
    
    6,780
    
    
    
    6,780200.00p
    
    
    
    2006
    
    
    
    7,592
    
    
    
    16,02990.00p
    
    
    
    2005
    
    
    
    1,076,670
    
    
    
    1,181,04090.00p
    
    
    
    2007
    
    
    
    2,492,950
    
    
    
    2,492,950100.00p
    
    
    
    2006
    
    
    
    291,557
    
    
    
    110.00p
    
    
    
    2008
    
    
    
    216,667
    
    
    
    79.00p
    
    
    
    2006
    
    
    
    875,724
    
    
    
    79.00p
    
    
    
    2008
    
    
    
    748,259
    
    
    
    Executive share option schemes
    
    
    297.94p
    
    
    
    1996-2003
    
    
    
    52,935
    
    
    
    54,085336.21p
    
    
    
    1997-2004
    
    
    
    101,858
    
    
    
    101,858306.14p
    
    
    
    1998-2005
    
    
    
    290,736
    
    
    
    290,736323.23p
    
    
    
    1999-2006
    
    
    
    472,639
    
    
    
    472,639386.09p
    
    
    
    2000-2007
    
    
    
    555,541
    
    
    
    555,541352.61p
    
    
    
    2001-2008
    
    
    
    761,052
    
    
    
    766,660331.42p
    
    
    
    2002-2007
    
    
    
    33,206
    
    
    
    33,206311.75p
    
    
    
    2003-2010
    
    
    
    2,689,810
    
    
    
    2,704,525235.00p
    
    
    
    2004-2011
    
    
    
    1,935,593
    
    
    
    1,949,477217.00p
    
    
    
    2004-2011
    
    
    
    165,778
    
    
    
    165,778196.00p
    
    
    
    2005-2012
    
    
    
    4,038,393
    
    
    
    4,056,78770.00p
    
    
    
    2006-2013
    
    
    
    11,609,290
    
    
    
    Performance Share Plan 2002
    
    
    84.00p
    
    
    
    2005-2006
    
    
    
    3,807,057
    
    
    
    Total options outstanding at the end of the year
    
    
    
    
    
    
    
    
    
    
    32,251,997
    
    
    
    14,890,160
 The weighted average remaining contractual life of options outstanding at 31
December 2003 is shown below: F-40




---



##### Table of Contents



Weighted averageremainingcontractual lifeyearsSharesave Schemes
    
    
    4Executive Share Option Schemes
    
    
    9Total options outstanding at 31 December 2003
    
    
    8
 ii Options exercised Option
    
    Number ofprice
    
    Options
    
    Nominal value
    
    Consideration£
    
    £31 December 2001Sharesave Schemes
    
    
    246.01p
    
    
    
    80,318
    
    
    
    40,159
    
    
    
    197,590307.51p
    
    
    
    1,902
    
    
    
    951
    
    
    
    5,849282.23p
    
    
    
    5,663
    
    
    
    2,832
    
    
    
    15,983Executive Share Option Schemes
    
    
    180.40p
    
    
    
    9,425
    
    
    
    4,712
    
    
    
    17,003Total options exercised during the year ended31 December 2001
    
    
    
    
    
    
    97,308
    
    
    
    48,654
    
    
    
    236,42531 December 2002Sharesave Schemes
    
    
    188.00p
    
    
    
    3,057
    
    
    
    1,529
    
    
    
    5,747Total options exercised during the year ended31 December 2002
    
    
    
    
    
    
    3,057
    
    
    
    1,529
    
    
    
    5,74731 December 2003Sharesave Schemes
    
    
    70.00p
    
    
    
    180,853
    
    
    
    90,426
    
    
    
    126,597Executive Share Option Schemes
    

    
    90.00p
    
    
    
    1,944
    
    
    
    972
    
    
    
    1,750Total options exercised during the year ended31 December 2003
    
    
    
    
    
    
    182,797
    
    
    
    91,398
    
    
    
    128,347
 b) Profit Sharing Share Scheme In addition to the above, the Company operates an Inland Revenue Approved
Profit Sharing Scheme. No further appropriations have been made in respect of
this Scheme. On 26 May 2003, 454,825 shares in International Power plc,
representing the balance of the shares held in trust were released to 1,885
present and former employees of the Group. No further appropriations were made
in respect of this scheme during the year. c) Demerger Share Plan At demerger, the Board of the Company established the Demerger Share Plan to
provide an incentive to those employees (other than Executive Directors) who
were remaining in continuous full-time employment with the Company. On 3
October 2000, the Board made conditional awards of 288,359 shares to 181
employees of the Company. No specific purchases of shares have been made in
respect of this Plan to date as the Company is utilising the balance of shares
unallocated from two former employee share plans that ceased operation at
demerger to meet the vesting of conditional awards under the Demerger Share
Plan. During the year, a total of 15,241 shares were released to individuals
ceasing employment with the Company in F-41




---



##### Table of Contents



accordance with their entitlement under
the rules of the Demerger Share Plan. On 3 October 2003, the Demerger Share
Plan vested and a total of 244,094 were released to employees. d) 2002 Performance Share Plan At the AGM in May 2003, shareholders approved the establishment of the 2002
Performance Share Plan. The Company granted an option to acquire 3,807,057
Ordinary Shares in the Company at an option price of 84 pence per share. This
option can only be exercised to the extent required to satisfy conditional
awards made on 10 March 2003 under the 2002 Performance Share Plan. These
conditional awards can only vest after the end of the relevant performance
period and only to the extent to which performance conditions have been
achieved. The performance period ends on 31 December 2005. No shares were
released in respect of this plan during 2003. e) Managers share bonus arrangements During 2003 a total of 1,800,000 shares in International Power were acquired in
respect of the annual incentive arrangements for Executive Directors and senior
managers for a consideration of £1.5 million. These shares have been placed in
an Employee Share Ownership Trust. f) Employee Share Schemes The Group takes advantage of the exemption granted under UITF 17 (Employee
Share Schemes) whereby no compensation expense need be recorded for SAYE
employee schemes. 25 Reserves Share
    
    Capital
    
    
    
    
    
    
    
    
    
    Total share-Share
    
    premium
    
    redemption
    
    Capital
    
    Profit and
    
    holderscapital
    
    account
    
    reserve
    
    reserve
    
    loss account
    
    funds-equity£m
    
    £m
    
    £m
    
    £m
    
    £m
    
    £mAt 1 January 2001
    
    
    559
    
    
    
    289
    
    
    
    140
    
    
    
    422
    
    
    
    124
    
    
    
    1,534Profit for the financial year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    138Other recognised gains and
losses relating to the year
(net)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )At 31 December 2001
    
    
    559
    
    
    
    289
    
    
    
    140
    
    
    
    422
    
    
    
    260
    
    
    
    1,670
 Share
    
    Capital
    
    
    
    
    
    
    
    
    
    Total share-Share
    
    premium
    
    redemption
    
    Capital
    
    Profit and
    
    holderscapital
    
    account
    
    reserve
    
    reserve
    
    loss account
    
    funds-equity£m
    
    £m
    
    £m
    
    £m
    
    £m
    
    £mAt 1 January 2002
    
    
    559
    
    
    
    289
    
    
    
    140
    
    
    
    422
    
    
    
    260
    
    
    
    1,670Profit for the financial year
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113
    
    
    
    113Other recognised gains and
losses relating to the year
(net)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43
    )
    
    
    (43
    )At 31 December 2002
    
    
    559
    
    
    
    289
    
    
    
    140
    
    
    
    422
    
    
    
    330
    
    
    
    1,740
 F-42




---



##### Table of Contents



Share
    
    Capital
    
    
    
    
    
    
    
    
    
    Total share-Share
    
    premium
    
    redemption
    
    Capital
    
    Profit and
    
    holderscapital
    
    account
    
    reserve
    
    reserve
    
    loss account
    
    funds-equity£m
    
    £m
    
    £m
    
    £m
    
    £m
    
    £mAt 1 January 2003
    
    
    559
    
    
    
    289
    
    
    
    140
    
    
    
    422
    
    
    
    330
    
    
    
    1,740


Share
    
    Capital
    
    
    
    
    
    
    
    
    
    Total share-Share
    
    premium
    
    redemption
    
    Capital
    
    Profit and
    
    holderscapital
    
    account
    
    reserve
    
    reserve
    
    loss account
    
    funds-equity£m
    
    £m
    
    £m
    
    £m
    
    £m
    
    £mShare buyback
    
    
    (5
    )
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    (13
    )
    
    
    (13
    )Profit for the financial year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (219
    )
    
    
    (219
    )Other recognised gains and
losses relating to the year
(net)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    15At 31 December 2003
    
    
    554
    
    
    
    289
    
    
    
    145
    
    
    
    422
    
    
    
    113
    
    
    
    1,523
 The share premium account, capital redemption reserve and capital reserve are
not distributable. The cumulative amount of goodwill set off to reserves prior to the adoption of
FRS 10, on acquisition of subsidiary undertakings, is £95 million (31 December
2002: £95 million). There is a current prohibition on the payment of dividends by the Company by
the terms of a Credit Facility, dated 16 October 2003. The Company makes
returns to shareholders by making share buybacks. The Company will review its
dividend policy at the end of 2004, based on cash flow performance and business
outlook. 26 Notes to the cash flow statement a Reconciliation of operating (loss)/ profit to net cash inflow from operating activities Year ended31 December
    
    Year ended
    
    Year ended2003
    
    31 December 2002
    
    31 December 2001£m
    
    £m
    
    £mOperating (loss)/ profit
    
    
    
    
    
    
    (279
    )
    
    
    105
    
    
    
    163Impairment
    
    
    14
    
    
    
    404
    
    
    
    103
    
    
    
    125
    
    
    
    208
    
    
    
    163Depreciation
    
    
    14
    
    
    
    108
    
    
    
    111
    
    
    
    95Goodwill amortisation
    
    
    13
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Other amortisation
    
    
    15
    
    
    
    1
    
    
    
    2
    
    
    
    Loss on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Movement in working capital:(Increase)/decrease in stocks
    
    
    
    
    
    
    (5
    )
    
    
    (29
    )
    
    
    7(Increase)/decrease in debtors
    
    
    
    
    
    
    (25
    )
    
    
    19
    
    
    
    (21
    )(Decrease)/increase in creditors
    
    
    
    
    
    
    (13
    )
    
    
    (37
    )
    
    
    48Movement in provisions
    
    
    
    
    
    
    (7
    )
    
    
    3
    
    
    
    (18
    )Net cash inflow from operating activities
    
    
    
    
    
    
    184
    
    
    
    276
    
    
    
    274
 b Dividends received from joint ventures and associates Year ended31 December
    
    Year ended
    
    Year ended2003
    
    31 December 2002
    
    31 December 2001£m
    
    £m
    
    £mDividends from joint ventures
    
    
    10
    
    
    
    12
    
    
    
    7Dividends from associates
    
    
    58
    
    
    
    72
    
    
    
    52Total dividends received from associates and joint ventures
    
    
    68
    
    
    
    84
    
    
    
    59
 F-43




---



##### Table of Contents



c            Returns on investments and servicing of finance Year ended31 December
    
    Year ended
    
    Year ended2003
    
    31 December 2002
    
    31 December 2001£m
    
    £m
    
    £mDividends received from fixed asset investments
    
    
    33
    
    
    
    31
    
    
    
    Other interest received
    
    
    26
    
    
    
    24
    
    
    
    24Debt and loan interest paid
    
    
    (105
    )
    
    
    (102
    )
    
    
    (97
    )Debt issue costs paid
    
    
    (3
    )
    
    
    (8
    )
    
    
    (32
    )Dividends paid to minority shareholders
    
    
    (2
    )
    
    
    (2
    )
    
    
    Returns on
investments and servicing of finance - ordinary
    
    
    (51
    )
    
    
    (57
    )
    
    
    (105
    )Other financing costs paid  exceptionalDividends received from fixed asset investments
    
    
    
    
    
    
    42
    
    
    
    Refinancing charges
    
    
    (4
    )
    
    
    (25
    )
    
    
    (4
    )
    
    
    17
    
    
    
    Net cash outflow from returns on investment and servicing
of finance
    
    
    (55
    )
    
    
    (40
    )
    
    
    (105
    )
 d            Capital expenditure and financial investment Year ended31 December
    
    Year ended
    
    Year ended2003
    
    31 December 2002
    
    31 December 2001£m
    
    £m
    
    £mPurchase of tangible fixed assets
    
    
    (121
    )
    
    
    (144
    )
    
    
    (406
    )Receipts from sale of fixed assets
    
    
    1
    
    
    
    
    
    
    
    Compensation for long-term performance shortfalls
    
    
    56
    
    
    
    
    
    
    
    Purchase of shares for employee share schemes
    
    
    (2
    )
    
    
    (2
    )
    
    
    Cash paid in respect of net investment hedges
    
    
    
    
    
    
    (13
    )
    
    
    Loan advanced to joint ventures
    
    
    (8
    )
    
    
    
    
    
    
    Net cash outflow from capital expenditure and
financial investment  ordinary
    
    
    (74
    )
    
    
    (159
    )
    
    
    (406
    )Net cash outflow from capital expenditure and
financial investment  exceptional:Receipts from sale of fixed asset investment
    
    
    11
    
    
    
    
    
    
    
    Net cash outflow from capital expenditure and
financial investment
    
    
    (63
    )
    
    
    (159
    )
    
    
    (406
    )
 F-44




---



##### Table of Contents



e            Acquisitions and disposals Year ended31 December
    
    Year ended
    
    Year ended2003
    
    31 December 2002
    
    31 December 2001Note
    
    £m
    
    £m
    
    £mPurchase of subsidiary undertakings
    
    
    27
    
    
    
    
    
    
    
    (144
    )
    
    
    (68
    )Cash proceeds on sale of subsidiary undertakings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Receipts from sale of investment in associate
    
    
    28
    
    
    
    
    

    
    
    
    
    
    
    372Acquisitions and disposals  ordinary
    
    
    
    
    
    
    
    
    
    
    (144
    )
    
    
    318Acquisitions and disposals  exceptional
Receipts from partial disposal of investment in HUBCO
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    Receipts from sale of subsidiaries
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    Acquisitions and disposals  exceptional
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    Net cash inflow/(outflow) from acquisitions and
disposals
    
    
    
    
    
    
    24
    
    
    
    (144
    )
    
    
    318
 f            Financing activities Year ended31 December
    
    Year ended
    
    Year ended2003
    
    31 December 2002
    
    31 December 2001£m
    
    £m
    
    £mBank loans
    
    
    (247
    )
    
    
    210
    
    
    
    406Share buyback
    
    
    (13
    )
    
    
    
    
    
    
    Net cash (outflow)/inflow from financing
    
    
    (260
    )
    
    
    210
    
    
    
    406
 27Acquisitions During the three accounting periods to 31 December 2003 the group made the
following acquisitions, all of which have been accounted for by the acquisition
method of accounting: Year ended 31 December 2003 In April 2003, the Group acquired a 20% interest in Arabian Power Company (Umm
Al Nar). A US$440 million equity bridge facility was provided to Arabian Power
Company in July 2003. The Groups obligation under the facility at 31 December
2003 is a letter of credit for US$88 million. Year ended 31 December 2002 On 13 July 2001, the Group acquired Rugeley Power Limited. Deferred
consideration of £133 million (including accrued interest) was paid in January
2002 in respect of this acquisition. In addition, the Group has made minor acquisitions and made final payments in
respect of past acquisitions during 2002. These have had an insignificant
impact on the cash flows of the Group. F-45




---



##### Table of Contents



Year ended 31 December 2001 On 13 July 2001, the Group acquired Rugeley Power Limited. The assessment of
net assets acquired and the consideration payable are given below: Fair valueBook value
    
    adjustments
    
    Fair value£m
    
    £m
    
    £mTangible fixed assets
    
    
    197
    
    
    
    
    
    
    
    197Stocks
    
    
    7
    
    
    
    
    
    
    
    7Debtors
    
    
    5
    
    
    
    
    
    
    
    5Creditors
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )Total net assets acquired
    
    
    200
    
    
    
    
    
    
    
    200Negative goodwill
    
    
    
    
    
    
    
    
    
    
    (3
    )Consideration
    
    
    
    
    
    
    
    
    
    
    197Consideration comprises:Cash
    
    
    
    
    
    
    
    
    
    
    68Deferred consideration
    
    
    
    
    
    
    
    
    
    
    129Total cash consideration
    
    
    
    
    
    
    
    
    
    
    197
 This acquisition contributed £10 million to Group profit before interest and
taxation during the year ended 31 December 2001. 28 Disposals On 25 July 2001, the Group sold its 25% equity stake in Union Fenosa Generacion
SA. The net assets disposed of and profit on disposal are detailed below: £mCash consideration
    
    
    372Less: investment in associated undertaking
    
    
    (342
    )Profit on disposal
    
    
    30
 Information in respect of sale of UFG On 25 July 2001, the group sold its 25% stake in UFG to UFGs parent, UEF, for
cash consideration of 600 million Euros (£372 million). At 31 December 2000,
UFG was included in the consolidated financial statements as an equity
investment with a carrying value of £360 million. For the year ended 31 March
2000, the nine months ended 31 December 2000 and the year ended 31 December
2001, the net portion of equity income of UFG recorded was £13 million, £5
million and £13 million, respectively. Additionally, during the year the Group disposed of the majority of its
remaining investments in China for net consideration of £14 million. F-46




---



##### Table of Contents



29 Net debt Analysis of net debt Other non-cash1 January 2002
    
    Exchange differences
    
    movements
    
    Cash flow
    
    31 December 2002£m
    
    £m
    
    £m
    
    £m
    
    £mCashCash at bank and in hand
    
    
    596
    
    
    
    (4
    )
    
    
    
    
    
    
    207
    
    
    
    799Liquid resourcesCurrent asset investments
    
    
    47
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    43Debt financingLoans due within one year
    
    
    (112
    )
    
    
    9
    
    
    
    (715
    )
    
    
    (29
    )
    
    
    (847
    )Loans due after more than one year
    
    
    (1,180
    )
    
    
    69
    
    
    
    716
    
    
    
    (181
    )
    
    
    (576
    )Convertible bond
    
    
    (248
    )
    
    
    24
    
    
    
    (7
    )
    
    
    
    
    
    
    (231
    )Total debt financing
    
    
    (1,540
    )
    
    
    102
    
    
    
    (6
    )
    
    
    (210
    )
    
    
    (1,654
    )Net debt
    
    
    (897
    )
    
    
    98
    
    
    
    (10
    )
    
    
    (3
    )
    
    
    (812
    )
 Other non-cash1 January 2003
    
    Exchange differences
    
    movements
    
    Cash flow
    

    31 December 2003£m
    
    £m
    
    £m
    
    £m
    
    £mCashCash at bank and in hand
    
    
    799
    
    
    
    10
    
    
    
    
    
    
    
    (136
    )
    
    
    673Liquid resourcesCurrent asset investments
    
    
    43
    
    
    
    7
    
    
    
    
    
    
    
    20
    
    
    
    70Debt financingLoans due within one year
    
    
    (847
    )
    
    
    56
    
    
    
    63
    
    
    
    197
    
    
    
    (531
    )Loans due after more than one year
    
    
    (576
    )
    
    
    (85
    )
    
    
    (81
    )
    
    
    38
    
    
    
    (704
    )Convertible bonds
    
    
    (231
    )
    
    
    23
    
    
    
    (4
    )
    
    
    12
    
    
    
    (200
    )Total debt financing
    
    
    (1,654
    )
    
    
    (6
    )
    
    
    (22
    )
    
    
    247
    
    
    
    (1,435
    )Net debt
    
    
    (812
    )
    
    
    11
    
    
    
    (22
    )
    
    
    131
    
    
    
    (692
    )
 30 Financial instruments and related disclosures Policies Treasury policy seeks to ensure that adequate financial resources are available
for the development of the Groups business whilst managing its currency,
interest rate and counterparty credit risks. The Groups treasury policy is not
to engage in speculative transactions. Group treasury acts within clearly
defined guidelines that are approved by the Board. The following disclosures are provided in accordance with FRS 13 (Derivatives
and other financial instruments). Financial instruments comprise net debt (see
note 29) together with other instruments deemed to be financial instruments
including long-term debtors and creditors and provisions for liabilities and
charges. a            Short-term debtors and creditors Short-term debtors and creditors have been excluded from all the following
disclosures other than the currency risk disclosures as relevant. The fair
value of short-term debtors and creditors F-47




---



##### Table of Contents



approximates to the carrying value because of their short maturity. In
accordance with FRS 13, deferred tax has been excluded from the following
disclosures. b            Interest rate risk The Groups policy is to fix interest rates for a significant portion of the
debt. Where project finance is utilised, our policy is to align the maturity of
the debt with the contractual terms of the customer off-take agreement. Where
appropriate, the Group will fix interest rates using forward rate or interest
rate swap agreements. Significant interest rate management programmes and
instruments require the specific approval of the Board. Derivatives are only
transacted in relation to existing or known future positions and not in
relation to speculative transactions. At 31 December 2003, 82% of our borrowing
was at fixed rates after taking account of interest rate swaps. The weighted
average interest rate of fixed rate debt was 7%. Interest rate risk profile of financial liabilities The interest rate profile of the financial liabilities of the Group was as
follows: 31 December 2003
    
    31 December 2002Floating rate
    
    Fixed rate
    
    
    
    
    
    Floating rate
    
    Fixed ratefinancial
    
    financial
    
    
    
    
    
    financial
    
    financialliabilities
    
    liabilities
    
    Total
    
    liabilities
    
    liabilities
    
    Total£m
    
    £m
    
    £m
    
    £m
    
    £m
    
    £mCurrencySterling
    
    
    7
    
    
    
    84
    
    
    
    91
    
    
    
    59
    
    
    
    112
    
    
    
    171US Dollar
    
    
    128
    
    
    
    639
    
    
    
    767
    
    
    
    194
    
    
    
    777
    
    
    
    971Australian Dollar
    
    
    117
    
    
    
    437
    
    
    
    554
    
    
    
    110
    
    
    
    377
    
    
    
    487Czech Koruna
    
    
    9
    
    
    
    37
    
    
    
    46
    
    
    
    34
    
    
    
    17
    
    
    
    51Others
    
    
    
    
    
    
    15
    
    
    
    15
    
    
    
    1
    
    
    
    16
    
    
    
    17Total
    
    
    261
    
    
    
    1,212
    
    
    
    1,473
    
    
    
    398
    
    
    
    1,299
    
    
    
    1,697
 All the Groups creditors falling due within one year (other than bank and
other borrowings) are excluded from the above tables either due to the
exclusion of short-term items or because they do not meet the definition of
financial liabilities. There are no material financial liabilities on which
interest is not paid. The effect of the groups interest swaps at 31 December 2003 was to classify
£437 million of floating rate Australian Dollar borrowings as fixed rate, £438
million of floating rate US Dollar borrowings as fixed rate, £84 million of
floating rate sterling borrowings as fixed rate and £37 million of variable
rate Czech Koruna borrowings as fixed rate, in the above table. In addition to the above, the Groups provisions are considered to be floating
rate financial liabilities as, in establishing the provisions, the cash flows
have been discounted. The floating rate financial liabilities comprise bank borrowings bearing
interest rates fixed in advance for various time periods up to 12 months by
reference to LIBOR for that time period. The figures in the tables below take
into account interest rate and currency swaps used to manage the interest rate
and currency profile of financial liabilities and financial assets. F-48




---



##### Table of Contents



31 December 2003
    
    31 December 2002Fixed rate financial liabilities
    
    Fixed rate financial liabilitiesWeighted average
    
    
    
    
    
    Weighted averageWeighted average
    
    period for which
    
    Weighted average
    
    period for whichinterest rate
    
    rate is fixed
    
    interest rate
    
    rate is fixed%
    
    Years
    
    %
    
    YearsCurrencySterling
    
    
    7.09
    
    
    
    5
    
    
    
    7.09
    
    
    
    6US Dollar
    
    
    6.16
    
    
    
    2
    
    
    
    5.08
    
    
    
    3Australian Dollar
    
    
    8.01
    
    
    
    6
    
    
    
    8.01
    
    
    
    7Czech Koruna
    
    
    3.98
    
    
    
    3
    
    
    
    13.02
    
    
    
    Others
    
    
    7.25
    
    
    
    3
    
    
    
    7.25
    
    
    
    4Weighted average.
    
    
    6.84
    
    
    
    4
    
    
    
    6.23
    
    
    
    4
 Interest rate risk profile of financial assets The Group had the following financial assets as at 31 December 2003: 31 December 2003
    
    31 December 2002Floating rate
    
    Fixed rate
    
    
    
    
    
    Floating rate
    
    Fixed ratefinancial assets
    
    financial assets
    
    Total
    
    financial assets
    
    financial assets
    
    Total£m
    
    £m
    
    £m
    
    £m
    
    £m
    
    £mCurrencySterling
    
    
    412
    
    
    
    
    
    
    
    412
    
    
    
    158
    
    
    
    
    
    
    
    158US Dollar
    
    
    147
    
    
    
    
    
    
    
    147
    
    
    
    266
    
    
    
    
    
    
    
    266Euro
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    307
    
    
    
    
    
    
    
    307Australian Dollar
    
    
    157
    
    
    
    
    
    
    
    157
    
    
    
    101
    
    
    
    
    
    
    
    101Czech Koruna
    
    
    21
    
    
    
    
    
    
    
    21
    
    
    
    6
    
    
    
    
    
    
    
    6Others
    
    
    7
    
    
    
    
    
    
    
    7
    
    
    
    8
    
    
    
    
    
    
    
    8Total
    
    
    746
    
    
    
    
    
    
    
    746
    
    
    
    846
    
    
    
    
    
    
    
    846
 The cash deposits comprise deposits placed in money market funds, and a variety
of investments with maturities up to three months. All investments are in
publicly quoted stocks or treasury instruments. Letters of credit totalling
£132 million are supported on a cash collateral basis at 31 December 2003. c            Currency exposures Currency translation exposure. In common with other international companies,
the results of the Groups foreign currency denominated 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. This translation has no impact on the
cash flow of the Group. 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 F-49




---



##### Table of Contents



committed, by using foreign currency contracts and similar instruments. As at
31 December 2003 and 31 December 2002, these exposures were not considered to
be material. Currency exposures comprise the monetary assets and liabilities of the Group
that are not denominated in the operating (or functional) currency of the
operating unit involved, other than certain non-sterling borrowings treated as
hedges of net investments in overseas operations. It is not Group policy to
hedge currency translation through forward contracts or currency swaps. d            Maturity of financial liabilities The maturity profile of our financial liabilities, other than short-term
creditors and accruals, was as follows: 31 December 2003
    
    31 December 2002£m
    
    £mIn one year or less, or on demand
    
    
    531
    
    
    
    1,078From one to two years
    
    
    97
    
    
    
    39From two to three years
    
    
    35
    
    
    
    27From three to four years
    
    
    76
    
    
    
    25From four to five years
    
    
    138
    
    
    
    76On more than five years
    
    
    596
    
    
    
    452Total
    
    
    1,473
    
    
    
    1,697
 As discussed in note 20, the Group is in discussions with bank groups in
relation to claimed technical defaults on the non-recourse debt for the US
merchant asset portfolio. Until these issues are resolved and documented, the
debt at ANP is reported as current non-recourse debt in our accounts. e            Borrowing facilities The Group has substantial borrowing facilities available to it. The undrawn
committed facilities available at 31 December 2003 in respect of which all
conditions precedent have been met are detailed below. F-50




---



##### Table of Contents



31 December 2003
    
    31 December 2002Facility
    
    Undrawn
    
    Available
    
    Undrawn
    
    Available£m
    
    £m
    
    £m
    
    £m
    
    £mUS$450 million Corporate revolving credit facility
(October 2006)1
    
    
    251
    
    
    
    129
    
    
    
    129
    
    
    
    
    
    
    
    US$570 million Corporate revolving credit facility
(October 2003)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    279
    
    
    
    279US$1,215 million ANP Funding 1 construction and term
loan (June 2006)2
    
    
    679
    
    
    
    
    
    
    
    
    
    
    
    110
    
    
    
    US$120 million ANP Funding 1 revolving credit facility
(June 2006)2
    
    
    67
    
    
    
    50
    
    
    
    
    
    
    
    66
    
    
    
    US$40 million ANP Funding 1 bank support facility
(June 2006)2
    
    
    22
    
    
    
    22
    
    
    
    
    
    
    
    25
    
    
    
    Czk 1,000 million EOP revolving credit facility
(May 2007)
    
    
    22
    
    
    
    22
    
    
    
    22
    
    
    
    17
    
    
    
    17Czk 2,000 million EOP term facility (May 2007)
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    US$99 million Al Kamil term facility (April 2017)
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    £30 million Corporate letter of credit facility3
    
    
    30
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1£14 million Subsidiary facilities in various currencies
    
    
    14
    
    
    
    7
    
    
    
    3
    
    
    
    21
    
    
    
    2Total
    
    
    1,184
    
    
    
    231
    
    
    
    155
    
    
    
    522
    
    
    
    299
 (1)
    
    The drawn element of the US$450 million Corporate revolving credit
facility relates to letters of credit issued.(2)
    
    As disclosed in note 20, the Group is in discussions with bank groups in
relation to non-recourse debt for ANP Funding 1. The undrawn portion of
these facilities has therefore been shown as unavailable in the above
table, and will become substantially available when these issues have been
formally resolved and documented.(3)
    
    These facilities include a £30 million letter of credit facility which
becomes committed for any letters of credit that have been drawn. At 31
December 2003, £29 million of letters of credit had been drawn from this
facility. Uncommitted facilities available at 31 December 2003 were: 31 December 2003
    
    31 December 2002Total
    
    Drawn
    
    Undrawn
    
    Total
    
    Drawn
    
    Undrawn£m
    
    £m
    
    £m
    
    £m
    
    £m
    
    £mFacilityBank borrowing and overdraft facilities
    
    
    25
    
    
    
    
    
    
    
    25
    
    
    
    37
    
    
    
    
    
    
    
    37Thai National Power working capital facility
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    1Pelican Point working capital facility
    
    
    4
    
    
    
    
    
    
    
    4
    
    
    
    3
    
    
    
    
    
    
    
    330
    
    
    
    
    
    
    
    30
    
    
    
    41
    
    
    
    
    
    
    
    41
 Bank borrowing facilities are normally reaffirmed by the banks annually,
although they can theoretically be withdrawn at any time. f            Fair values of financial assets and liabilities Set out below is a comparison by category of book values and fair values of all
our financial assets and liabilities as at 31 December 2003: Primary financial instruments held or issued to finance the International Power
Groups operations 31 December 2003
    
    31 December 2002Book value
    
    Fair value
    
    Book value
    
    Fair value£m
    
    £m
    
    £m
    
    £mShort-term borrowings and current portion
of long-term borrowings
    
    
    (531
    )
    
    
    (531
    )
    
    
    (1,078
    )
    
    
    (1,078
    )Long-term borrowings
    
    
    (942
    )
    
    
    (953
    )
    
    
    (619
    )
    
    
    (621
    )Cash deposits and current asset investments
    
    
    746
    
    
    
    746
    
    
    
    846
    
    
    
    846
 F-51




---



##### Table of Contents



Derivative financial instruments held to manage the interest rate, currency
profile and exposure to energy prices Year endedYear ended 31 December 2003
    
    31 December 2002Book
    
    Fair
    
    Gain/
    
    Gross
    
    Gross
    
    Gross
    
    Grossvalue
    
    value
    
    (loss)
    
    gain
    
    (loss)
    
    gain
    
    (loss)£m
    
    £m
    
    £m

    £m
    
    £m

    £m

    £mInterest rate swaps and similar instruments
    
    
    
    
    
    
    (38
    )
    
    
    (38
    )
    
    
    
    
    
    
    (38
    )
    
    
    
    
    
    
    (71
    )Currency swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forward foreign currency contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Energy derivatives
    
    
    
    
    
    
    37
    
    
    
    37
    
    
    
    100
    
    
    
    (63
    )
    
    
    69
    
    
    
    (39
    )
 The methods and assumptions used to estimate fair values of financial
instruments are as follows:  (i)
    
    For investments of up to three months, trade debtors, other debtors and
prepayments, trade creditors, other current liabilities and long-term and
short-term borrowings, the book value approximates to fair value because
of their short maturity.(ii)
    
    The fair value of investments maturing after three months has been
estimated using quoted market prices.(iii)
    
    The fair value of long-term borrowings and interest rate swaps has been
calculated using market prices, when available, or the net present value
of future cash flows arising.(iv)
    
    The fair value of our forward exchange contracts, foreign currency swaps
and foreign currency options has been calculated using the market rates in
effect at the balance sheet dates.(v)
    
    The fair value of energy derivatives is measured using market based
methodologies that provide a consistent measure across diverse energy
products. Within the above fair values, only the financial assets and
liabilities have been marked-to-market as defined by the requirements of
the accounting standard. g            Hedges As explained above, our policy is to hedge where possible the following
exposures:  (i)
    
    Interest rate risk - using interest rate swaps, options and forward rate
agreements.(ii)
    
    Structural and transactional currency exposures - using currency
borrowings, forward foreign currency contracts, currency options and
swaps.(iii)
    
    Currency exposures on future expected sales - using currency swaps,
forward foreign currency contracts, currency options and swaps.(iv)
    
    Energy price fluctuations - using physical hedges through the operation
of energy supply and trading activities together with financial products. Gains and losses on instruments used for hedging are not recognised until the
exposure that is being hedged is itself recognised. Unrecognised gains and
losses on instruments used for hedging, and the movements therein, are as
follows: F-52




---



##### Table of Contents



Foreign
    
    Energy
    
    Total netDebt
    
    exchange
    
    derivatives
    
    gain/(loss)£m
    
    £m
    
    £m
    
    £mUnrecognised gains and (losses) on hedges at 1 January 2003
    
    
    (71
    )
    
    
    (1
    )
    
    
    30
    
    
    
    (42
    )Gains and (losses) arising in previous periods that were
recognised in the year ended 31 December 2003
    
    
    (1
    )
    
    
    (1
    )
    
    
    25
    
    
    
    23Gains and (losses) arising in previous years that were not
recognised in the year
    
    
    (70
    )
    
    
    
    
    
    
    5
    
    
    
    (65
    )Gains and (losses) arising in the year ended 31 December
2003 that were not recognised in the year
    
    
    32
    
    
    
    
    
    
    
    32
    
    
    
    64Unrecognised gains and (losses) on hedges at 31 December 2003
    
    
    (38
    )
    
    
    
    
    
    
    37
    
    
    
    (1
    )Of which:Gains and (losses) expected to be recognised in the year
ending 31 December 2004
    
    
    (3
    )
    
    
    
    
    
    
    30
    
    
    
    27Gains and losses expected to be recognised in the year
ending 31 December 2005 or later
    
    
    (35
    )
    
    
    
    
    
    
    7
    
    
    
    (28
    )
 The hedging of structural currency exposures associated with foreign currency
net investments are recognised in the consolidated balance sheet. h            Counterparty credit risk The Groups policy is to manage its credit exposure to trading and financial
counterparties within clearly defined limits. Energy trading activities are
strictly monitored and controlled through delegated authorities and procedures,
which include specific criteria for the management of counterparty credit
exposures in each of our key regions. Counterparty exposure via customer
offtake agreements is monitored and managed by the local asset team with
assistance from Group treasury where appropriate. In addition, Group treasury
manages the Group wide counterparty credit exposure on a consolidated basis,
with active and close involvement of the Global Risk Manager. Financial
counterparty credit exposure is limited to relationship banks and commercial
paper with strong investment grade credit ratings. We are exposed to credit related losses in the event that counterparties to
traded contracts and financial instruments do not perform according to the
terms of the contract or instrument. With regard to financial instruments
subject to credit risk, we select counterparties with appropriate ratings for
the size, type and duration of the instrument involved. A small proportion of
counterparties trading energy are below investment grade. For those energy
market transactions with counterparties below investment grade, and which are
not supported by appropriate collateral, reserves are carried against the
trading risk. Exposures within this band are restricted and closely monitored
within narrow limits. We do not expect any significant credit loss to result
from non-performance of instruments or traded contracts. The immediate credit exposure of financial instruments is represented by those
financial instruments that have a net positive fair value by counterparty at 31
December 2003. At 31 December 2003, the exposures for interest rate swaps,
currency swaps and forward exchange contracts were not considered to be
material. Contracts for differences also involve a degree of credit risk. This
risk is controlled by appropriate authorisation and monitoring procedures. F-53




---



##### Table of Contents



31 Commitments Lease and capital commitments Year ended
    
    Year ended31 December 2003
    
    31 December 2002£m
    
    £mCapital commitments: contracted but not provided
    
    
    75
    
    
    
    54Property leases (annual commitment):Expiring within one year
    
    
    1
    
    
    
    1Expiring between one and five years
    
    
    
    
    
    
    Expiring after five years
    
    
    5
    
    
    
    5
 Fuel purchase and transportation commitments At 31 December 2003, the estimated minimum commitment for the supply and
transportation of fuel from all sources was £0.7 billion (31 December 2002:
£0.6 billion). The longest of such contracts extends to the year 2021. 32 Contingent liabilities a Legal proceedings against the Company The Company is aware of the following matters, which involve or may involve
legal proceedings against the Group:  (i)
    
    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.Innogy has agreed to indemnify us on an after-tax basis to the extent of
50% of any liability that we may incur whether directly or indirectly as a
consequence of those proceedings to the extent such liability is not
insured by Electra Insurance Limited.(ii)
    
    In June 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 members of NALOO. An appeal against
the Commissions findings was brought by a faction of SWSMA, which was
initially ruled out of time, but an appeal was reinstated. Progress with
this claim will be influenced by the outcome of the NALOO appeal. The
European Court has ruled that the Commission is under an obligation to
investigate the complaint by NALOO. The Company, PowerGen plc, British
Coal Corporation and the Commission have appealed against the ruling to
the European Court of Justice which delivered judgement on 2 October 2003
for the main part dismissing the appeal. The ruling confirmed 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 F-54




---



##### Table of Contents



stage. The Commission ruled on the complaint in 1998 and did not make any
findings against the Company.Innogy has agreed to indemnify us on an after-tax basis to the extent of
50 % of any liability that we 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 consolidated
balance sheet, that it is unlikely that the matters referred to above will, in
aggregate, have a material effect on the Groups financial position, results of
operations or liquidity. b Taxation The Company is aware of a number of issues which are, or may be, the subject of
disputes with the tax authorities in the territories where the Group has
operations. The principal exposures where significant amounts of tax could
potentially arise are in respect of potential exposures relating to the UK tax
losses generated from the acquisition of Australian subsidiaries and related
financing arrangements. Discussions are continuing with the UK Inland Revenue
to reach agreement on these issues. c Bonds and guarantees Various growth and expansion projects are supported by bonds and letters of
credit issued by the Company totalling £424 million. £11 million of this is in
respect of the loan facilities of its Elcogas investment which was provided for
in the year ended 31 December 2001. In February 2004, this guarantee and the
Companys loan obligations have been cancelled following the disposal of the
investment. Energy trading activities relating to merchant plant are supported by letters
of credit and guarantees totalling £110 million. d Indemnities We demerged substantially all our UK businesses into Innogy Holdings plc on 30
September 2000. The demerger was designed to separate our business from
Innogys businesses and operations. Pursuant to the demerger agreement between
Innogy and us, Innogy indemnified us on an after-tax basis against certain
liabilities, litigation and claims arising out of certain events that occurred
prior to demerger. Similarly, we agreed to indemnify Innogy on an after-tax
basis against liabilities, litigation and claims arising out of certain events
that occurred prior to demerger. In addition we agreed to indemnify Innogy
against certain tax liabilities payable by Innogy that arose prior to demerger. As part of the demerger, Innogy took ownership of certain UK subsidiaries with
a number of open tax issues relating to periods when these subsidiaries were
owned by us. The amount of taxable profits and losses for such periods has not
yet been agreed with the Inland Revenue. 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 Innogy and us pursuant to the
indemnity arrangements. We will indemnify Innogy in connection with certain tax
liabilities and Innogy will indemnify us against certain other tax liabilities,
in each case on an after-tax basis. F-55




---



##### Table of Contents



As disclosed in note (b) above, the Directors are of the opinion that adequate
provision has been made for the settlement of any taxation liabilities that
might arise. With respect to the indemnities provided to Innogy, we are not
aware of any claims arising which may call on the Companys indemnities and on
this basis it is impracticable to quantify any potential exposure under these
indemnities. 33 Related party transactions Operations and maintenance contracts In the course of normal operations, the Group has contracted on an arms length
basis to provide power station operation and maintenance services to joint
ventures and associated undertakings. During the year the Group derived income
of £37 million (year ended 31 December 2002: £16 million) in respect of these
arrangements, which have been netted off against operating costs in the
accounts. Included in creditors is £nil (2002: £2 million) in relation to these
contracts. 34 Post balance sheet events In February 2004, the Group sold its investment in Elcogas, Spain. This
investment had been fully provided against and the release of a guarantee will
result in an exceptional gain in the first quarter of 2004. F-56




---



##### Table of Contents



35 Financial information prepared under US Generally Accepted Accounting Principles (GAAP) Our financial information is prepared in accordance with UK GAAP, which differs
in certain significant aspects from US GAAP. The effects of such differences on
net income and net assets are set out below. Effect on profit after tax (net income) of significant differences between UK
and US GAAP Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001Note
    
    £m
    
    £m
    
    £mNet income(Loss)/profit attributable to ordinary shareholders under UK GAAP
    
    
    
    
    
    
    (219
    )
    
    
    113
    
    
    
    138Adjustments:Pensions
    
    
    (a
    )
    
    
    
    
    
    
    2
    
    
    
    6Impairment of plant:Impairment of US plant
    
    
    (b
    )
    
    
    404
    
    
    
    
    
    
    
    Reinstatement of HUBCO impairment
    
    
    (b
    )
    
    
    (35
    )
    
    
    
    
    
    
    Impairment of UK plant
    
    
    (b
    )
    
    
    
    
    
    
    102
    
    
    
    Impact on depreciation charge
    
    
    (b
    )
    
    
    (7
    )
    
    
    (3
    )
    
    
    (5
    )Purchase accounting and goodwill:Impairment of goodwill
    
    
    (c
    )
    
    
    (28
    )
    
    
    (51
    )
    
    
    Fair value and purchase accounting
    
    
    (c
    )
    
    
    3
    
    
    
    2
    
    
    
    (1
    )Development expenditure
    
    
    (d
    )
    
    
    1
    
    
    
    1
    
    
    
    1Onerous property lease provision
    
    
    (e
    )
    
    
    2
    
    
    
    
    
    
    
    9Liquidated damages and associated costs
    
    
    (f
    )
    
    
    (19
    )
    
    
    (71
    )
    
    
    (57
    )Restructuring costs
    
    
    (g
    )
    
    
    (3
    )
    
    
    3
    
    
    
    Derivatives and hedging activities
    
    
    (h
    )
    
    
    (35
    )
    
    
    5
    
    
    
    (18
    )Deferred finance costs
    
    
    (i
    )
    
    
    12
    
    
    
    
    
    
    
    Disposal of investments:Disposal of a 5% holding in HUBCO
    
    
    (j
    )
    
    
    1
    
    
    
    
    
    
    
    Disposal of a business
    
    
    (j
    )
    
    
    
    
    
    
    
    
    
    
    (27
    )Retranslation of foreign currency denominated subsidiary
    
    
    (k
    )
    
    
    
    
    
    
    18
    
    
    
    Deferred tax
    
    
    (l
    )
    
    
    1
    
    
    
    (16
    )
    
    
    (46
    )Stock compensation schemes
    
    
    (m
    )
    
    
    (2
    )
    
    
    
    
    
    
    Tax effect of US GAAP adjustments
    
    
    
    
    
    
    (93
    )
    
    
    12
    
    
    
    25Net (loss)/income under US GAAP before cumulative effect of accounting policy
changes
    
    
    
    
    
    
    (17
    )
    
    
    117
    
    
    
    25Cumulative effect of US GAAP accounting policy changes:Derivatives and hedging activities
    
    
    (h
    )
    
    
    
    
    
    
    
    
    
    
    1Impairment of goodwill
    
    
    (c
    )
    
    
    
    
    
    
    (44
    )
    
    
    Tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss)/income under US GAAP
    
    
    
    
    
    
    (17
    )
    
    
    73
    
    
    
    26
 F-57




---



##### Table of Contents



Year ended31 December
    
    Year ended
    
    Year ended2003
    
    31 December 2002
    
    31 December 2001(Loss)/earnings per share:(Loss)/earnings per share under US GAAP
before cumulative effect of accounting
policy changesBasic and diluted
    
    
    (1.5)p
    
    
    
    10.5p
    
    
    
    2.2p(Loss)/earnings per share under US GAAP
after cumulative effect of accounting
policy changeBasic and diluted
    
    
    (1.5)p
    
    
    
    6.5p
    
    
    
    2.3p(Loss)/earnings per ADS:(Loss)/earnings per ADS before
cumulative effect of accounting policy
changes*Basic and diluted
    
    £
    (0.15
    )
    
    £
    1.05
    
    
    £
    0.22(Loss)/earnings per ADS after cumulative
Effect of accounting policy changes*Basic and diluted
    
    £
    (0.15
    )
    
    £
    0.65
    
    
    £
    0.23
  *
    
    Calculated using a ratio of ten ordinary shares to one ADS. Effect on shareholders funds of significant differences between UK and US GAAP As at
    
    As at31 December
    
    31 DecemberNote
    
    2003
    
    2002£m
    
    £mShareholders funds - equityTotal
shareholders funds - equity under UK GAAP
    
    
    
    
    
    
    1,523
    
    
    
    1,740Adjustments:Pensions
    
    
    (a
    )
    
    
    10
    
    
    
    9Impairment of plant
    
    
    (b
    )
    
    
    547
    
    
    
    199Purchase accounting and goodwill
    
    
    (c
    )
    
    
    (20
    )
    
    
    9Development expenditure
    
    
    (d
    )
    
    
    (15
    )
    
    
    (17
    )Onerous property lease provision
    
    
    (e
    )
    
    
    (1
    )
    
    
    (3
    )Liquidated damages and associated costs
    
    
    (f
    )
    
    
    (144
    )
    
    
    (140
    )Restructuring costs
    
    
    (g
    )
    
    
    
    
    
    
    3Derivatives and hedging activities
    
    
    (h
    )
    
    
    (1
    )
    
    
    (41
    )Deferred finance costs
    
    
    (i
    )
    
    
    12
    
    
    
    Stock compensation schemes
    
    
    (m
    )
    
    
    (3
    )
    
    
    (1
    )Employee
share trust arrangements
    
    
    (n
    )
    
    
    (2
    )
    
    
    (1
    )Deferred tax
    
    
    (l
    )
    
    
    (48
    )
    
    
    (49
    )Cumulative tax effect of US GAAP adjustments
    
    
    
    
    
    
    (78
    )
    
    
    49Total
shareholders funds - equity under US GAAP
    
    
    
    
    
    
    1,780
    
    
    
    1,757
 Significant differences between UK and US accounting principles a Pension costs The key differences between UK (SSAP 24) and US GAAP in relation to defined
benefit pension plans are:  
    
    Under UK GAAP the effect of variations in cost can be accumulated at
successive valuations and amortised on an aggregate basis. Under US GAAP
the amortisation of the transition asset and the costs of past service
benefit improvements are separately tracked: F-58




---



##### Table of Contents



experience gains/losses are dealt with on an aggregate basis but amortised only
if outside a 10 per cent corridor.
    
    UK GAAP allows measurements of plan assets and
liabilities to be based on the result of the latest
actuarial valuation. US GAAP requires measurement of
plan assets and liabilities to be made at the date of
the financial statements or up to three months prior
to that date. A valuation was performed as at 31
December 2003 in accordance with SFAS No. 87. For the purposes of disclosure in accordance with US GAAP, the pension costs of
our major defined benefit pension plans have been presented in accordance with
the requirements of SFAS 87 and SFAS 132 in the following tables. The funded status of our major defined pension plans under SFAS No. 87 is as
follows: As at
    
    As at
    
    As at31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £mChange in benefit obligationBenefit obligation at start of period
    
    
    79
    
    
    
    64
    
    
    
    2,859Benefit obligation of countries added in current year
    
    
    
    
    
    
    
    
    
    
    29Service cost
    
    
    5
    
    
    
    3
    
    
    
    3Interest cost
    
    
    6
    
    
    
    4
    
    
    
    4Employee contributions
    
    
    2
    
    
    
    2
    
    
    
    1Plan amendments
    
    
    
    
    
    
    1
    
    
    
    Actuarial loss/(gain)
    
    
    10
    
    
    
    7
    
    
    
    (4
    )Business combinations
    
    
    
    
    
    
    
    
    
    
    (2,824
    )Benefit payments and expenses
    
    
    (2
    )
    
    
    (1
    )
    
    
    (2
    )Exchange rate loss/(gain)
    
    
    7
    
    
    
    (1
    )
    
    
    (2
    )Benefit obligation at end of period
    
    
    107
    
    
    
    79
    
    
    
    64Change in plan assetsFair value of plan assets at start of period
    
    
    74
    
    
    
    75
    
    
    
    2,969Assets of countries added in current year
    
    
    
    
    
    
    
    
    
    
    39Actual return on plan assets
    
    
    11
    
    
    
    (6
    )
    
    
    5Company contributions
    
    
    5
    
    
    
    4
    
    
    
    1Employee contributions
    
    
    2
    
    
    
    2
    
    
    
    1Business combinations
    
    
    
    
    
    
    
    
    
    
    (2,937
    )Benefit payments and expenses
    
    
    (2
    )
    
    
    (1
    )
    
    
    (2
    )Exchange rate gain/(loss)
    
    
    9
    
    
    
    
    
    
    
    (2
    )Fair value of plan assets at end of period
    
    
    99
    
    
    
    74
    
    
    
    74Reconciliation of funded status and total amount
recognisedFunded status at end of period
    
    
    (8
    )
    
    
    (5
    )
    
    
    10Unrecognised net loss/(gain)
    
    
    19
    
    
    
    13
    
    
    
    (4
    )Unrecognised prior service cost
    
    
    1
    
    
    
    1
    
    
    
    Prepaid/(accrued) pension cost
    
    
    12
    
    
    
    9
    
    
    
    6Amounts recognised in the Statement of Financial
Position at the end of the yearPrepaid benefit cost
    
    
    14
    
    
    
    12
    
    
    
    10(Accrued) benefit liability
    
    
    (5
    )
    
    
    (3
    )
    
    
    (4
    )Intangible asset
    
    
    1
    
    
    
    
    
    
    
    Accumulated other comprehensive income
    
    
    2
    
    
    
    
    
    
    
    Total recognised
    
    
    12
    
    
    
    9
    
    
    
    6
 F-59




---



##### Table of Contents



The net periodic pension cost under SFAS No. 87 comprised: Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001Service cost
    
    
    5
    
    
    
    3
    
    
    
    3Interest cost
    
    
    6
    
    
    
    4
    
    
    
    4Expected return on assets
    
    
    (5
    )
    
    
    (5
    )
    
    
    (5
    )Amortisation of:Unrecognised (gains) and losses
    
    
    
    
    
    
    
    
    
    
    (7
    )Net periodic pension cost/(benefit) under US GAAP
    
    
    6
    
    
    
    2
    
    
    
    (5
    )Additional informationIncrease in minimum liability included in other
comprehensive income
    
    
    2
    
    
    
    
    
    
    
    
 The weighted average assumptions used to determine benefit obligations at 31
December were: Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001Discount rate
    
    
    6.40
    %
    
    
    6.20
    %
    
    
    6.50
    %Rate of compensation increases
    
    
    4.20
    %
    
    
    3.90
    %
    
    
    4.00
    %Pension increases
    
    
    2.90
    %
    
    
    2.50
    %
    
    
    2.60
    %
 The weighted average assumptions used to determine expense at 31 December were: Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001Discount rate
    
    
    6.20
    %
    
    
    6.50
    %
    
    
    6.40
    %Expected return on assets
    
    
    7.00
    %
    
    
    6.70
    %
    
    
    6.50
    %Rate of compensation increases
    
    
    3.90
    %
    
    
    4.00
    %
    
    
    4.00
    %Pension increases
    
    
    2.50
    %
    
    
    2.60
    %
    
    
    2.60
    %
 Plan assets International Powers pension plans weighted average allocations at 31
December by asset category are as follows: At 31 December
    
    At 31 December2003
    
    2002Equities
    
    
    71.00
    %
    
    
    69.00
    %Bonds
    
    
    20.00
    %
    
    
    22.00
    %Other
    
    
    9.00
    %
    
    
    9.00
    %Total
    
    
    100.00
    %
    
    
    100.00
    %
 F-60




---



##### Table of Contents



b Impairment of plant Under UK GAAP, an impairment provision is recognised when the discounted cash
flows are less than the carrying amount of the related assets. Under US GAAP,
an impairment provision for assets is made when the undiscounted expected
future cash flows fail to recover the carrying amounts of the related assets.
Accordingly, a US GAAP difference arises when the carrying amount of the assets
is greater than the discounted future cash flows but less than the undiscounted
future cash flows. This difference in the carrying value results in different
levels of depreciation under UK and US GAAP. Under UK GAAP, an impairment may be reversed when the recoverable amount
exceeds the carrying amount. Under US GAAP, recognition of subsequent
recoveries in fair value is prohibited. Accordingly, the HUBCO impairment
reversed in 2003 under UK GAAP has been reinstated for US GAAP. c Purchase accounting and goodwill Under UK GAAP, goodwill arising on acquisitions after 1 April 1998, accounted
for under the purchase method, is capitalised in the balance sheet and
amortised over a period not exceeding 20 years. Prior to that date such
goodwill arising on acquisitions was and remains eliminated against reserves.
Under US GAAP, goodwill arising on purchase business combinations is
capitalised in the balance sheet. With effect from 1 January 2002 goodwill is
not subject to amortisation but is evaluated for impairment annually or
whenever changes in circumstances indicate that goodwill might be impaired.
Goodwill impairments were recorded in 2003 and 2002. A cumulative charge of £44
million was made on 1 January 2002 on adoption of the new US standard SFAS 142
 Goodwill and Intangible Assets. If goodwill was not subject to amortisation
in the year ended 31 December 2001 net income under US GAAP would have
increased by £4 million. d Development expenditure Under UK GAAP, the Group capitalises certain development expenditure as
described in more detail in accounting policy note viii. US GAAP requires such
costs to be expensed as incurred. e Onerous property lease provision Under UK GAAP, a provision in respect of an onerous property lease is stated on
a discounted basis. Under US GAAP, this provision is measured on an
undiscounted basis. Accordingly, the impact of the discounting is reversed
under US GAAP. f Liquidated damages and associated costs Under UK GAAP, liquidated damages relating to amounts receivable from
contractors in respect of the late commissioning of new power plants are
recorded as income when they represent compensation for lost earnings. This is
offset by certain costs, including interest and costs associated with the
rectification of the plant, which are expensed in the period in which
liquidated damages are recorded as revenue. Under US GAAP, this net amount is
recorded as a reduction in the cost of the asset, regardless of the nature of
the compensation. These differences in the asset cost result in different
levels of depreciation under UK and US GAAP. F-61




---



##### Table of Contents



Those receipts that relate to compensation for plants not achieving long-term
performance levels are recorded as a reduction in the cost of the assets under
both UK and US GAAP. g Restructuring costs Under UK GAAP, when a decision has been taken to restructure the business and a
constructive obligation has been created to meet the qualifying expenditure,
the necessary provision is made. Under US GAAP, the requirements for charging
restructuring costs to income are more prescriptive and include the need for
all significant actions arising from the restructuring plan to be determined
and the completion dates to be identified by the balance sheet date.
Accordingly, the charge for restructuring costs made under UK GAAP in 2002 was
reversed and charged to the profit and loss account in 2003 under US GAAP. h Derivatives and hedging activities Under UK GAAP, the group recognises only derivatives of a speculative nature at
fair value on the balance sheet. Gains and losses arising on other derivative
instruments are deferred until the hedged transactions actually occur. Under US GAAP, the group recognises all qualifying derivatives (including
certain derivatives embedded in other instruments) at fair value on the balance
sheet. Gains and losses arising on derivatives that do not meet the US GAAP
hedge accounting criteria, along with the accretion of the discounted value of
debt where bifurcation is required, are recognised in the profit and loss.
Gains and losses on the groups derivatives that qualify for cash flow hedge
accounting are initially recognised in reserves (to the extent that the hedge
is effective) and subsequently reclassified to profit and loss as the hedged
item impacts earnings. Any ineffective element of these hedges is immediately
recognised in earnings. Under US GAAP, movements in the fair value of the cash settlement option
embedded within the convertible bond prior to cancellation resulted in a charge
to income. This option was cancelled in 2001 and US GAAP required that the
cumulative adjustment of £23 million be retained in shareholders funds rather
than being released to earnings. i Deferred finance costs For UK GAAP purposes an exceptional interest charge of £12 million has been
recorded in 2003 in relation to the write off of deferred costs in respect of
the ANP facility. The facility is currently in technical default and
negotiations with the banks are ongoing. It is not possible to reliably
estimate the nature of the timing of any renegotiated facility. For US GAAP
purposes the deferred finance costs remain capitalised as amounts continue to
be outstanding under the ANP facility. j Disposal of investments Applying the accounting differences between UK and US GAAP can result in
differences in the carrying values of net assets under UK and US GAAP. For
example, when a foreign asset is sold, under US GAAP the cumulative translation
adjustment is taken into the profit and loss account as part of the gain or
loss on sale, whereas under UK GAAP this would remain in reserves. As a
consequence of this, different gains or losses may result on the subsequent
disposal of the asset. F-62




---



##### Table of Contents



k Retranslation of foreign currency denominated subsidiary During 2001, the group disposed of its interest in UFG and retained
approximately Euro 450 million of these funds in a Euro-denominated foreign
enterprise with the intention of reinvesting the proceeds into Euro-denominated
generating assets. Under UK GAAP, this foreign enterprise retained its Euro
functional currency, with exchange gains and losses being recorded in reserves.
Under US GAAP, its functional currency is that of its parent and, as such,
gains and losses on translation of these funds are recognised through the
income statement. l Deferred taxation Under UK GAAP a deferred tax asset or liability is not recognised on the
difference between the tax and book values of an asset or liability that
existed at the date of a business combination. Under US GAAP, deferred tax is
recognised on this difference. During 2002, under US GAAP deferred tax adjustments of £18 million (2001: £41
million) were made as a result of new information arising in the period. Under
UK GAAP, these deferred tax adjustments were recognised as part of the prior
year adjustment in the year ended 31 December 2001 arising on the adoption of
FRS 19 (Deferred Tax). m Stock compensation schemes Under UK GAAP, no compensation expense is recorded for the Sharesave Scheme
under the exemption granted under UITF 17. For other stock compensation
schemes, the intrinsic value, being the difference between the book value of
the shares before granting the options and the option price, is charged over
the period of performance to which the award relates (the vesting period). Under US GAAP, the compensation expense for both schemes is measured as the
difference between the market value of the shares at the date of grant and the
option price and is spread over the same vesting period. Share options which are exercisable if certain performance criteria are
achieved are accounted for as variable awards and compensation expense is
calculated at the end of each year by reference to the market price of the
shares that are considered likely to vest and are recognised over the vesting
period. We have adopted the disclosures of SFAS 123, Accounting for Stock-Based
Compensation, but we continue to measure our stock-based compensation cost in
accordance with APB 25 and its related interpretations. If we had measured our
compensation expense based on the fair value method of FAS-123, the net
(loss)/income would have been the illustrative amounts shown below: Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £mNet (loss)/ income under US GAAPAs reported
    
    
    (17
    )
    
    
    73
    
    
    
    26Add back: Compensation expense under APB 25 (net of tax)
    
    
    1
    
    
    
    
    
    
    
    Deduct: Compensation expense under SFAS 123 (net of tax)
    
    
    (3
    )
    
    
    (3
    )
    
    
    (4
    )Illustrative
    
    
    (19
    )
    
    
    70
    
    
    
    22
 F-63




---



##### Table of Contents



Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £mBasic (loss)/ earnings per shareAs reported
    
    
    (1.5
    )p
    
    
    6.5
    p
    
    
    2.3
    pIllustrative
    
    
    (1.7
    )p
    
    
    6.2
    p
    
    
    1.9
    pDiluted (loss)/ earnings per shareAs reported
    
    
    (1.5
    )p
    
    
    6.5
    p
    
    
    2.3
    pIllustrative
    
    
    (1.7
    )p
    
    
    6.2
    p
    
    
    1.9
    p
 The weighted average fair value of Executive Share Options granted to employees
during the year ended 31 December 2003 was £0.22 (year ended 31 December 2002:
£1.16). The weighted average fair value of Sharesave Scheme Options granted to
employees during the year ended 31 December 2003 was £0.44 (year ended 31
December 2002: £0.36). The fair value of grants made during the year have been estimated using the
Black-Scholes option pricing model. The key assumptions used by us are
summarised below: Risk-freeInterest
    
    Expected Life
    
    Volatility
    
    Dividend yield%
    
    Years
    
    %
    
    %Share Option Scheme1996 Executive share option scheme
    
    
    8.09
    
    
    3 to 10
    
    
    24.50
    
    
    
    4.601997 Executive share option scheme
    
    
    8.22
    
    
    3 to 10
    
    
    24.50
    
    
    
    6.201997 Sharesave scheme - 5 year period before exercise
    
    
    7.80
    
    
    5 to 5.5
    
    
    24.50
    
    
    
    6.101998 Executive share option scheme
    
    
    6.89
    
    
    3 to 10
    
    
    32.50
    
    
    
    4.901998 Sharesave scheme - 5 year period before exercise
    
    
    6.90
    
    
    5 to 5.5
    
    
    32.50
    
    
    
    4.701999 Executive share option scheme
    
    
    5.48
    
    
    3 to 10
    
    
    37.50
    
    
    
    5.321999 Sharesave scheme - 5 year period before exercise
    
    
    5.40
    
    
    5 to 5.5
    
    
    37.50
    
    
    
    5.271999 Sharesave scheme - 3 year period before exercise
    
    
    5.45
    
    
    3 to 3.5
    
    
    37.50
    
    
    
    5.272000 Executive share option plans (approved and unapproved)
    
    
    5.21
    
    
    3 to 10
    
    
    39.00
    
    
    Nil2000 Sharesave scheme - 5 year period before exercise
    
    
    5.50
    
    
    4 to 5
    
    
    42.00
    
    
    Nil2000 Sharesave scheme - 3 year period before exercise
    
    
    5.61
    
    
    2 to 3
    
    
    47.00
    
    
    Nil2001 Executive share option scheme (22 March 2001)
    
    
    4.59
    
    
    3 to 10
    
    
    40.61
    
    
    Nil2001 Executive share option scheme (19 September 2001)
    
    
    4.96
    
    
    3 to 10
    
    
    42.26
    
    
    Nil2001 Sharesave scheme (18 April 2001) - 5 year period before exercise
    
    
    4.97
    
    
    5.2 to 5.7
    
    
    53.20
    
    
    Nil2001 Sharesave scheme (18 April 2001) - 3 year period before exercise
    
    
    4.88
    
    
    3.2 to 3.7
    
    
    61.09
    
    
    Nil2001 Sharesave scheme (11 October 2001) - 5 year period before exercise
    
    
    5.15
    
    
    5.1 to 5.6
    
    
    45.80
    
    
    Nil2001 Sharesave scheme (11 October 2001) - 3 year period before exercise
    
    
    5.12
    
    
    3.1 to 3.6
    
    
    50.45
    
    
    Nil2002 Executive share option scheme (24 May 2002)
    
    
    5.26
    
    
    3 to 10
    
    
    43.49
    
    
    Nil2002 Sharesave scheme (1 October 2002) - 5 year period before exercise
    
    
    4.32
    
    
    5.2 to 5.7
    
    
    44.32
    
    
    Nil2002 Sharesave Scheme (1 October 2002) - 3 year period before exercise
    
    
    4.09
    
    
    3.2 to 3.7
    
    
    47.92
    
    
    Nil2003 Executive share option scheme (10 March 2003)
    
    
    4.09
    
    
    3 to 10
    
    
    22.33
    
    
    Nil2003 Global Executive share option plan (10 March 2003)
    
    
    4.09
    
    
    3 to 10
    
    
    22.33
    
    
    Nil2003 Sharesave scheme (3 October 2003) 5 year period before exercise
    
    
    4.62
    
    
    5.2 to 5.7
    
    
    26.41
    
    
    Nil2003 Sharesave scheme (3 October 2003) 3 year period before exercise
    
    
    4.45
    
    
    3.2 to 3.7
    
    
    28.20
    
    
    Nil2003 Global Sharesave plan (17 January 2003) 5 year period before exercise
    
    
    4.24
    
    
    5.2 to 5.7
    
    
    26.98
    
    
    Nil2003 Global Sharesave plan (17 January 2003) 3 year period before exercise
    
    
    4.04
    
    
    3.2 to 3.7
    
    
    28.14
    
    
    Nil2003 Global Sharesave plan (3 October 2003) 5 year period before exercise
    
    
    4.62
    
    
    5.2 to 5.7
    
    
    26.41
    
    
    Nil2003 Global Sharesave plan (3 October 2003) 3 year period before exercise
    
    
    4.45
    
    
    3.2 to 3.7
    
    
    28.20
    
    
    Nil
 n            Employee Share Trust Arrangements Under UK GAAP, Ordinary Shares in the Company held by the employee share trusts
are included at historical book value. Under US GAAP, such shares are
classified as treasury stock and presented at their historical cost as a
deduction to shareholders equity. F-64




---



##### Table of Contents



o            Statement of cash flows: basis of preparation Our statement of cash flows is prepared in accordance with FRS 1 Cash Flow
Statements, the objectives and principles of which are substantially consistent
with SFAS 95 Statement of Cash Flows under US GAAP. The principal differences
between FRS 1 and SFAS 95 relate to classification. The format of the UK statement employs nine headings compared with three in
SFAS 95. The cash flows within the UK headings of Net cash inflow from
operating activities, Dividends received from associates and joint ventures,
Returns on investments and servicing of finance and Tax would all be
included as operating activities under SFAS 95. Cash flows from capital
expenditure and financial investment, acquisitions and disposals and
management of liquid resources would be included as investing activities
under SFAS 95. Equity dividends paid and Financing would be included as
financing activities under SFAS 95. In addition, under FRS 1, cash represents cash at bank and deposits repayable
on demand less bank overdrafts. Under SFAS 95 the definition of cash excludes
overdrafts but is widened to include cash equivalents, comprising short-term
highly liquid investments. Set out below is a summary consolidated statement of cash flows Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £mNet cash provided by operating activities
    
    
    183
    
    
    
    300
    
    
    
    227Net cash used in investing activities
    
    
    (39
    )
    
    
    (303
    )
    
    
    (88
    )Net cash (used in)/ provided by financing activities
    
    
    (260
    )
    
    
    210
    
    
    
    406Effect of exchange rate changes on cash
    
    
    17
    
    
    
    (4
    )
    
    
    (9
    )Reclassification to fixed asset investments
    
    
    
    
    
    
    (4
    )
    
    
    Net (decrease)/ increase in cash and cash equivalents
    
    
    (99
    )
    
    
    199
    
    
    
    536Cash and cash equivalents at beginning of period
    
    
    842
    
    
    
    643
    
    
    
    107Cash and cash equivalents at end of period
    
    
    743
    
    
    
    842
    
    
    
    643Cash and cash equivalentsCash
    
    
    673
    
    
    
    799
    
    
    
    596Investments and short-term deposits which were within 3months of maturity when acquired
    
    
    70
    
    
    
    43
    
    
    
    47743
    
    
    
    842
    
    
    
    643
 p            Reformatted condensed UK GAAP Income Statement The following Income Statement has been prepared in accordance with Article 10
of Regulation S-X using the Groups UK GAAP Profit and Loss account numbers. Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £mNet revenue
    
    
    884
    
    
    
    733
    
    
    
    573Operating expensesCost of sales
    
    
    (729
    )
    
    
    (558
    )
    
    
    (383
    )Impairment charges
    
    
    (404
    )
    
    
    (103
    )
    
    
    Sales, general and administrative expenses
    
    
    (28
    )
    
    
    (29
    )
    
    
    (28
    )Other operating income
    
    
    66
    
    
    
    134
    
    
    
    96
 F-65




---



##### Table of Contents



Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2003
    
    2002
    
    2001£m
    
    £m
    
    £mOther operating costs
    
    
    (68
    )
    
    
    (72
    )
    
    
    (95
    )Operating (loss)/income
    
    
    (279
    )
    
    
    105
    
    
    
    163Income from equity method investments
    
    
    111
    
    
    
    95
    
    
    
    81Dividend income
    
    
    33
    
    
    
    73
    
    
    
    Minority interests
    
    
    (7
    )
    
    
    (6
    )
    
    
    (2
    )Net interest expense
    
    
    (95
    )

    
    
    (97
    )
    
    
    (105
    )Profit on sale of investments
    
    
    27
    
    
    
    
    
    
    
    32(Loss)/income before income taxes
    
    
    (210
    )
    
    
    170
    
    
    
    169Income taxes
    
    
    (9
    )
    
    
    (57
    )
    
    
    (31
    )Net (loss)/income
    
    
    (219
    )
    
    
    113
    
    
    
    138Earnings per shareBasic
    
    
    (19.7)p
    
    
    
    10.1p
    
    
    
    12.3pDiluted
    
    
    (19.7)p
    
    
    
    10.1p
    
    
    
    12.0p
 The Groups presentation of its consolidated profit and loss account for the
three years ended 31 December 2003, on page F-5, separately disclosing
exceptional items, has been prepared in accordance with FRS 3 (Reporting
Financial Performance). This presentation provides a sufficient degree of
prominence in respect of the exceptional items necessary, under UK GAAP, to
give a true and fair view of the results of the Group in the three years ended
31 December 2003. q            Classification Differences Consolidated profit and loss accounts  (i)
    
    Under UK GAAP, Turnover: group and share of joint ventures and
associates includes turnover from joint ventures and associates,
accounted for using the equity method of £421 million, £412 million and
£546 million for the year ended 31 December 2003, the year ended 31
December 2002 and the year ended 31 December 2001, respectively. Under US
GAAP, these amounts would be shown as a single amount after operating
profit/(loss) for all periods presented.(ii)
    
    Under UK GAAP, Net interest payable and similar charges includes the
Groups proportionate share of interest expense of joint ventures and
associates accounted for using the equity method of £32 million, £35
million and £47 million for the year ended 31 December 2003, the year
ended 31 December 2002 and the year ended 31 December 2001, respectively.
Under US GAAP, these amounts would be shown as a single amount after
operating profit/(loss) for all periods presented.(iii)
    
    Under UK GAAP, Tax on profit/(loss) on ordinary activities includes
the Groups proportionate share of income taxes of joint ventures and
associates accounted for using the equity method of £19 million, £19
million and £33 million for the year ended 31 December 2003, the year
ended 31 December 2002 and the year ended 31 December 2001, respectively.
Under US GAAP, these amounts would be shown as a single amount after
operating profit/(loss) for all periods presented.(iv)
    
    Under UK GAAP, certain items are separately identified and described as
exceptional items and earnings per share is presented before and after
exceptional items. Under US GAAP, there is no presentation and separate
identification of exceptional items and earnings per share is not
presented before and after exceptional items. Net operating F-66




---



##### Table of Contents



costs-exceptional of £369 million, £103 million and £2 million for the
year ended 31 December 2003, the year ended 31 December 2002 and the year
ended 31 December 2001, respectively, would be classified as operating
expenses and not presented as extraordinary items under US GAAP.
Income from investments  exceptional of £42 million for the year ended
31 December 2002 would be classified income from investments and not
presented as an extraordinary item under US GAAP. Non-operating
exceptional items of £27 million income, £nil and £32 million income for
the year ended 31 December 2003, the year ended 31 December 2002 and the
year ended 31 December 2001, respectively, would not be presented as
extraordinary items under US GAAP. Interest payable and similar
charges-exceptional of £16 million and £29 million in the year ended 31
December 2003 and year ended 31 December 2001, respectively would not be
presented as an extraordinary item under US GAAP.(v)
    
    Under UK GAAP, billings of £32 million (year ended 31 December 2002: £16
million; year ended 31 December 2001: £16 million) in respect of operating
and maintenance services are recorded net of charges from suppliers and
classified as other income, which is netted against other operations
expenses. Under US GAAP, the gross amount of these billings would be
reported as revenue. Balance sheet Under UK GAAP, negative goodwill of £6 million at 31 December 2003 (31 December
2002: £7 million), is presented as a separately identified deduction from
positive goodwill. Under US GAAP, these amounts would be allocated to tangible
fixed assets. Issue costs of £15 million (31 December 2002: £27 million) have been offset
against the carrying amount of the debt under UK GAAP. Under US GAAP, the issue
costs would be similarly deferred in the balance sheet but presented as an
other asset. Under UK GAAP, net deferred tax liabilities are classified as provisions for
liabilities and charges. Under US GAAP, deferred tax liabilities and assets are
classified as current or non-current and offset based on the classification of
the related asset or liability for financial reporting. Deferred tax assets
related to carryforwards are classified according to the expected reversal date
of the carryforward. r            Recently issued accounting pronouncements (US GAAP) SFAS 143, Accounting for Asset Retirement Obligations

In June 2001, the US Financial Accounting Standards Board issued SFAS 143. This
standard requires that the fair value of a liability for an asset retirement
obligation be recognised in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalised as part of the carrying amount of the long-lived asset. The
adoption of SFAS 143 did not have a material effect on the results or net
assets of the Group. SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities

In June 2002, the US Financial Accounting Standards Board issued SFAS 146. This
statement addresses financial reporting and accounting for costs associated
with exit or disposal activities. This statement requires that a liability for
a cost associated with an exit or disposal activity be recognised when the
liability is incurred, at the fair value of the liability. This Statement is F-67




---



##### Table of Contents



effective for exit or disposal activities that are initiated after 31 December
2002. The adoption of SFAS 146 did not have a material effect on the results or
net assets of the Group. SFAS 148, Accounting for Stock-Based Compensation  Transition and Disclosure,
an amendment of FASB Statement No. 123 In December 2002, the US Financial Accounting Standards Board issued SFAS 148.
This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. The Company continues to apply the provisions of APB 25. In
addition, this Statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements.
The disclosures required by SFAS 148 are set forth in Note 35(m). SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities In April 2003, the US Financial Accounting Standards Board issued SFAS 149.
This Statement amends and clarifies financial reporting for derivative
instruments, including certain derivatives instruments embedded in other
contracts for hedging activities. This statement is effective for contracts
entered into or modified after 30 June 2003, and has not had a material effect
on the results or net assets of the Group. SFAS 150, Accounting for certain financial instruments with characteristics of
both debt and equity In May 2003, the US Financial Accounting Standards Board issued SFAS 150. This
statement establishes how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. Some financial
instruments will be classified as a liability, and others will be classified as
equity. This statement is effective for financial instruments entered into or
modified after 31 May 2003 and has not had a material effect on the results or
net assets of the Group. SFAS 132 (Revised 2003), Employers Disclosures about Pensions and Other
Post-Retirement Benefits In December 2003, the US Financial Accounting Standards Board issued SFAS 132
(Revised). This Statement is effective, subject to certain exemptions, for
fiscal years ending on or after 15 December 2003. The new disclosure
requirements have been included in note 35 (a). FIN No. 46R Consolidation of Variable Interest Entities In January 2003, the US Financial Accounting Standards Board issued FASB
Interpretation Number (FIN) 46, Consolidation of Variable Interest Entities,
and in December 2003 a revised interpretation was issued (FIN 46R) that
clarified certain provisions of FIN 46 and provided additional scope
exemptions. FIN 46R requires a party to consolidate a variable interest entity
if the party absorbs the majority of the expected losses and/or receives a
majority of the entitys expected residual returns (primary beneficiary). An
entity is a variable interest entity if (a) the total equity investment at risk
is not sufficient to permit the entity to finance its activities without
additional subordinated financial support or (b) as a group the holders of the
equity investment at risk lack characteristics of a controlling financial
interest, including direct or indirect ability through voting rights or similar
rights to make decisions about an entitys activities, the obligation to absorb
the expected losses of the entity and the right to receive the F-68




---



##### Table of Contents



expected residual returns of the entity. FIN 46R is effective for the Companys
financial statements ending 31 December 2004. Management is currently
evaluating the effect that the adoption of FIN 46R will have on the Groups
results of operations and financial condition. F-69