Press Releases
Published by CFO Europe
April 2002
Philip Cox
Company: International Power
Category: Planning and performance management
Staff at the international electricity generator get a whole new set of metrics to improve how they run their business. Back in the summer of 2000, Philip Cox had a pretty straightforward job to do. As the new CFO of UK-based International Power (IP), he hit the road in order to explain to the investor community how a demerger in a few months' time would make the company one of the world's leading independent electricity generators with plants in over 20 countries. The focus of the new company, which was once part of former state-owned National Power, would be on a no-dividend, high-growth strategy requiring plenty of cash and a strong balance sheet. But sailing through road show presentations was one thing. Making sure that IP's staff could deliver on the promises Cox and his fellow executives made during them was quite another. Indeed, Cox returned to the company's new offices in London knowing that IP had precious little time to turn its strategy into action. After all, investors aren't known for their patience. It was clear to the finance chief that the company needed a new, standardised set of performance targets to keep its global staff focused on the challenges at hand. "We started by getting the basics right," he says. That included, among other things, handing over responsibility of the P&Ls for each asset to individual managers, stepping up the frequency of performance reviews and designing new incentive programmes. The message from Cox to his team: cash flow held the key to hitting IP's target of a compound annual growth rate of 30% between 2000 and 2005. "This is a capital-intensive business and we invest in pretty chunky assets," says Cox. "So not only do we need to know what to invest in, but we also must be sure that we have the liquidity and really manage it when we've got it. That was an area I spent a lot of time with to be sure we got it right." To this end, Cox's finance team intensified their quest for better visibility into how each part of the business was performing, drilling straight down to the departmental level. "We needed clear and accurate P&L reporting by asset and by region," he explains. "We don't want to take the operating responsibility away from the asset managers. But we want-and need-to know what is happening so we can plan and allocate resources and get into the critical issues quickly." So under Cox's watchful eye, operational leaders now manage their individual P&Ls and are held personally accountable for the performance of their units. In the field As such, regular performance reviews are now an important part of IP's culture. At least once a quarter, each asset in each region undergoes a thorough inspection by Cox's team. "One thing that was going to happen early in the life of IP was that there was going to be a big emphasis on reviews to make sure that all investments out-earned our weighted average cost of capital by 3%, even for projects in the early stages of development." Meanwhile, to increase accountability, Cox worked closely with IP's human resource department to put in place a new bonus structure for staff. Now, for example, functional managers are eligible to receive bonuses of up to 50% of their salary depending on how well they meet performance targets that they and their bosses set at the beginning of every year. Managers from project development and acquisitions can receive up to 100% of their salaries if their goals are met. "It's important that people see a cheque at the end of the year for their achievements," says Cox. It goes without saying that each asset in IP's portfolio has to pull its weight and under performing investments are dealt with swiftly. The focus on asset performance was certainly evident last July, when IP sold its 25% stake in UFG, a Spanish electricity generator that it had inherited from National Power. The plant, despite producing around 6% of IP's kilowatt output in Europe, wasn't seen as performing to the standards Cox and his team were now demanding. It had to go, even if the sale meant temporarily reducing its output in Europe. "It was pretty good housekeeping," says Philip Green, a utilities analyst at Goldman Sachs. "The stake had given them no control and no real growth prospects, so it was ditched. That tells me that they're looking at the return on investment at all times." The disposal added about £370m (E600m) to IP's cash reserves, and showed industry watchers just how serious its executives were about dealing quickly with under performers. "We want to make decisions and move on," says Cox. Ultimately, Cox reckons, the ability for IP to make quick decisions has hinged on one thing: communication. "The last thing we need is to have pockets of staff around the company that just don't communicate," he says. That's why Cox encourages members of his finance team to don hard hats and tour round IP's power plants with local engineers. "Finance isn't allowed to sit in an ivory tower," says Gail Brown, assistant controller of IP. "Philip expects us to be integrated with the business." Along with onsite visits, Cox invites engineers to come to headquarters and give presentations. He has also introduced two "global forums"-one in Boston, the other in Lisbon-which gathered about 200 managers from all parts of the organisation. The idea, Cox says, was to use the forums to have each regional manager give a presentation about how their assets perform. "That way everyone knows each other's numbers", be it cash flow, return on invested capital or the output of each power station. On top of that, he notes, "the forum drives home the message that they need to understand their businesses." The forums also gave Cox an opportunity to explain the new changes to the firm's external reporting process. This entailed shifting from a fiscal to a calendar year-end, and adopting quarterly reporting-so that "we would have the 'touch and feel' of our US peer group," and make benchmarking against them easier. Cox concedes that there is still a lot of work to be done, but beams when he points to how IP has been able to shed the old culture of a former nationalised industry, "where it was difficult to find individual managers who took responsibility for how a company performed." He also has reason to be proud of the performance that the crew at IP turned in for 2001. For its first full-year results, IP's underlying profit before interest, tax and exceptionals in 2001 was £326m on turnover of £1.1 billion. Operating cash flow was £333m, compared with just £11m for the nine months ended December 31st 2000. Not a bad set of results given that 2001 was arguably one of the toughest years for the electricity industry as a whole. First, there were the severe power shortages in California, which was followed by the post-Enron fallout. And while IP neither owns assets in California nor runs its business like Enron once did, its share price has been punished along with the rest of the sector. Last summer, IP's shares were trading around 300p; today, they're at the 200p mark. Even so, the investor community lauds Cox and the rest of IP's management team. "In a world where the peer group has singularly failed to live up to expectations, IP stands above the rest," says Goldman's Green. "What is now uppermost in all investor's minds-not just in the power sector-are credit quality, cash flow and balance sheet strength. All of that is there with IP." Yet amid such praise, Cox keeps his feet on the ground. "This isn't an intellectual exercise," he says. "You can't be too introspective about it. In our case, we need to remember that not only do we have a business to run, but we also have a business to grow." Name: Philip Cox Age: 50 Nationality: British A Cambridge graduate and chartered accountant, he began his career at Lucas, a UK car parts firm. He moved in 1989 to Siebe, a UK industrial controls firm, and became CFO. In 2000 he joined International Power as CFO.
