Power Grid Corporation of India Ltd

Economic outlook

The Growth rate of the country’s Gross Domestic Product improved to 7.2 per centin 2009-10 after dipping to 6.7 per cent during 2008-09, mitigating the apprehension thatthe impact of the economic slowdown which started in the developed world would persist inIndia for some time. To bring the economy to still higher growth path, electricitycertainly is one of the key drivers. The focus on investments in Power sector has beencontinuing and the economic activity in the Sector has shown better growth in 2009-10 overthe preceding year.

Sectoral outlook

The 11^th Plan originally envisaged a capacity addition of 78,700 MW. Therevised mid term appraisal target for total capacity addition is now 62,374 MW, which isabout three times the capacity addition that took place in the 10^th Plan. Interms of capacity addition, the revised targets of Centre and States for the Eleventh Planare as under:

Revised Targets for Capacity addition during Eleventh Plan

Note: The actual capacity addition as on 31^st March, 2010 was 22,301.7 MW.

Source: Document on Mid-Term Appraisal of the eleventh Five Year Plan. PlanningCommission, GoI

The revised targets of Capacity addition during Eleventh Plan, Source-wise areas under:

Source: Document on Mid-Term Appraisal of the Eleventh Five Year Plan. PlanningCommission, GoI

The Installed Generation Capacity as on 30-06-2010 is as under:

@ Based on data as on 31.01.2010.

Source :CEA website- www.cea.nic.in

The scenario of power generation by power utilities during 2009-10 in the thermal,nuclear, and hydro has been as under:

Power Generation by Utilities (Billion KWh)

* Provisional based on Actual cum Assessment

Data Source: CEA website- www.cea.nic.in

Decline in hydroelectric power generation was mainly due to poor monsoons. Coal basedgeneration of power constituted around 80 per cent of thermal generation and around 67 percent of the total generation of power for the year. Coal- based power generation wasconstrained by the shortage in domestic supply of coal and the non-materialization ofplanned imports.

Electricity Generation Target/Achievement for the year 2010-11 is as under:

Source :CEA website- www.cea.nic.in

The All India Annual per Capita consumption of Electricity figures are as under:

Source :CEA website- www.cea.nic.in

The All India Village Electrification as on 31.03.2010 is 497950 (83.9%)as against489532 as on 31.03.2009(82.4%).

Power supply position 2010-11 (June, 10)*

* Provisional

Source :*CEA website- www.cea.nic.in

POWERGRID - the company

POWERGRID is a "Navratna" company since 1^st May, 2008 whichprovides us with powers to undertake new transmission projects of any amount withoutGovernment approval. POWERGRID is also entrusted with role of Central Transmission Utility("CTU") by GoI. In this role, the company operates as one of the chief agenciesresponsible for the planning and development of the country’s nationwide powertransmission network, including interstate networks.

Growth in Transmission:

Keeping in view the large incremental capacity addition requirements of the currentPlan and to fulfill the macro objective of Power sector i.e. 'Power to All by 2012',POWERGRID is oriented towards implementation of generation evacuation schemes,strengthening of regional grids, development of an integrated National Grid withflexibility for power transfer from one region to another. POWERGRID as on 31^stMarch, 2010:

> Owns and operates a transmission network of about 75,290 ckt kms ofinter-State transmission Lines, 124 nos. of EHV & HVDC substations withtransformation capacity of about 83,100 MVA,

> Inter-regional power transfer capacity of about 20,800MW,

> Maintained the transmission system availability at 99.77% at par with theInternational utilities.

> Wheeled about 50% of the total power generated in the Country through itstransmission network.

The Company has undertaken development of certain transmission lines with privateparties, in public-private Joint Ventures. The detail in this regard has been providedlater in the discussion. The commercial and operational performance and projectimplementation are in the Directors’ Report.

Overcoming Construction Challenges

POWERGRID would be implementing major quantum of works towards transmission developmentin the next few years. In addition, many projects under consultancy assignments are beingexecuted. This entails multi-dimensional challenges relating mainly to accessibility,construction feasibility, technical restrictions, conservation of environment and Right ofWay, etc. POWERGRID, apart from using modern techniques for route alignment andoptimization of line length of transmission lines, vendor development, etc. has takenfollowing measures to meet the massive task:

• Land availability for Sub-stations

Land availability, particularly in suburbs of cities, is becoming an issue where largeEHV/UHV Sub-stations are proposed. In order to suitably address this issue, establishmentof Gas Insulated Sub-stations (GIS) have been taken up. Presently, there exist two numbersof GIS Sub-stations and about sixteen numbers of GIS Sub-stations have been approved to betaken for implementation.

• Providing training to enhance availability of skilled manpower forconstruction

To achieve target set for Transmission Sector, availability of adequate trained andskilled manpower is essential. POWERGRID, as part of Corporate Social Responsibility, hasrecently considered taking up the Scheme initially for training approximately 1000 workmenfor tower erection and transmission line stringing activities.

• Standardisation

The standardisation of designs / drawings / type testing of various equipments /items by POWERGRID has helped in minimizing post award engineering activities for regularpackages. Accordingly POWERGRID, for the first time in transmission history, has takenpioneering effort to construct 1200 kV S/C transmission line for which transmission lineparameters & tower designs have been developed In-house and 3 numbers of 1200 kV S/Ctowers have been successfully tested by March, 2010.

• Forest Clearances

Forest Clearance under the Forest (Conservation) Act,1980 has always been a lengthyprocess due to involvement of different position starting from Range Officer to SecretaryForest at State Level and from Asstt. Inspector General (AIG) of Forests to Minister ofEnvironment & Forests at Government of India level. But concerted efforts of POWERGRIDtowards various requirements of forest clearance and proper follow up resulted in gettingthe forest clearance on time for most of the transmission lines. However, with the issueof MoEF Circular dated 30.07.09 and 03.08.09 written consent of concerned Gram Sabha hasbeen made compulsory under the Scheduled Tribes and Other Traditional Forest Dwellers(Recognition of Forest Rights) Act, 2006 (FRA, 2006) for the entire proposal involvingdiversion of forest land under the Forest (Conservation) Act, 1980. This has added to theprocess of forest clearance resulting in enormous delay even if "in-principle"clearance has already been issued.

Transmission projects per se are having negligible impact on forest / environment andits habitant including the tribal people, as such projects apart from being a linearprojects are drawn substantially high above the ground avoiding possible encounter withsuch sensitive areas as well as habitations without any change in land use pattern. Inview of above mentioned facts and to facilitate timely completion of projects, matter ofexemption of transmission project from the purview of FRA, 2006 provisions has been takenup with the Ministry of Environment and Forests through Ministry of Power.

During the F.Y. 2009-10, POWERGRID has obtained "in-principle" approval fromMoEF for approx. 380 hectare of forest for lines like 400 kV Rourkela-Raigargh,Kameng-Balipara, Kankroli-Jodhpur, Durgapur-Jamshedpur etc. and final approval for 540hectares of forest land after complying with the stipulated conditions of in-principleapproval for lines like 765 kV Seoni-Bina, 500 kV Ballia-Bhiwadi, 400 kV Damoph-Bhopal,Jamshedpur-Baripada, Edamon-Cochin, Korba-Birsingpur etc.

Integrated Management Policy:

POWERGRID is committed to:

• establish and maintain an efficient and effective "National Grid" withdue regard to time, cost, technology and value addition,

• sustainable development through conservation of natural resources and adoptingenvironment friendly technology on principles of Avoidance, Minimization and Mitigation,

• ensure safe, occupational hazard free and healthy work environment,

to the satisfaction of stakeholders in all areas of its activities and shall endeavorto improve continually its management systems and practices in conformity to legal andregulatory provisions.

Internal Control

POWERGRID has a comprehensive Internal Control Mechanism to verify the Accounting andFinancial Management System, adequacy of controls, material checks, financial proprietyaspects and compliance implementation mechanism. Audit Plan in respect of Internal Auditand Physical Verification for the Financial Year 2010-11 has been finalized with in-houseAudit Department and experienced firms of Chartered Accountants. POWERGRID is alsoupdating its Internal Audit Manual in consultation with M/s Deloitte Haskins & Sells.

As on 31^st March, 2010, the Company has an Audit Committee in place as perclause 49 of the Listing Agreement, which has three Independent Directors and oneNon-Executive Director as members.

Risk Management Procedure

POWERGRID has undertaken development of ‘Enterprise Risk ManagementFramework’ and ‘Internal Control Framework in accordance with Clause 49 of thelisting agreement with consultancy services provided by M/s KPMG. The draft‘Enterprise-wide Risk Management Policy & Procedures’ has already beenprepared and is under finalization. This Policy will complement other specific riskmanagement programs, policies and tools already in use within POWERGRID.

Comparison of Fiscal 2010 to Fiscal 2009

Your company’s total income in Fiscal 2010 was Rs. 7503.58crore, which representedan increase of 22.23% over the total income of Rs. 6138.72crore in Fiscal 2009. In Fiscal2010, transmission and transmission-related activities constituted 89.3% of our totalincome, with the balance coming from our consultancy, telecommunication businesses andother incomes.

Revenue from Operations

The revenue was higher in Fiscal 2010 as compared to Fiscal 2009 mainly on account ofrevenue recognition as per new norms notified for the block period 2009-14, full yearimpact of transmission assets worth Rs. 3733.74 crore commissioned during fiscal 2009 andthe commissioning of new transmission assets worth Rs. 3609.82 crore during fiscal 2010including the major projects Sipat-II Supplementary; NLC-II;North- West TransmissionCorridor; Northern Region System Strengthening –V. The projects commissionedin Fiscal 2010 have generated revenue from the date of commercial operation during theyear.

Tariff norms

Our charges for transmission customers are governed by tariff norms determined by theCentral Electricity Regulatory Commission (CERC) pursuant to central government tariffpolicy and legislation. As per the Tariff Policy issued by Government of India (GoI) on 6^thJanuary, 2006, CERC shall be guided by the Tariff Policy while specifying the terms andconditions for the determination of tariff. The tariff policy inter-alia states that therates of depreciation notified by CERC would be applicable for the purpose of tariff aswell as accounting.

CERC has vide its notification dated 19^th January, 2009 notified the tariffregulations for the tariff Block 2009-14. Under the tariff regulations applicable for thetariff Block 2009-14, we are permitted to charge our customers transmission charges forrecovery of annual fixed cost ("AFC") consisting of components - return onequity, interest on outstanding debt, depreciation, operation and maintenance expenditure,interest on working capital.

Earlier, tariff norms allowed us to recover income tax and this was in addition to thereturn on equity. From the tariff Block 2009-2014, the Return on equity shall be computedon pre-tax basis, at the base rate of 15.5% by grossing up the base rate for the taxfactor. In case of projects commissioned on or after 1st April, 2009, an additional returnon Equity of 0.5% will be allowed if such projects are completed within the timelinespecified under the CERC tariff regulations for the tariff Block 2009-14.

As regards interest on debt, under the CERC tariff regulations for the tariff Block2009-14, the normative loan outstanding as on 1.4.2009 shall be worked out by deductingthe cumulative repayment as admitted by the Commission up to 31.3.2009 from the grossnormative loan.

The repayment of loan capital for the year of the tariff period 2009-14 is deemed to beequal to the depreciation allowed for that year. The Advance against depreciation whichwas being allowed in the previous years to cover shortfall in our repayment of debts hasbeen done away with, in the tariff block 2009-2014 and depreciation rates have beenreworked. Despite any moratorium period availed by your company, the repayment of loan isconsidered for tariff from the first year of commercial operation of the project and shallbe equal to the annual depreciation allowed.

For interest on working capital, the working capital amount is calculated as - (i)consisting of receivables equivalent to two months of fixed cost; (ii) maintenance spares@ 15% of operation and maintenance expenses; and (iii) operation and maintenance expensesfor one month. Rate of interest on working capital for the year is on normative basis andis equal to the short-term Prime Lending Rate of State Bank of India as on 1.4.2009 or on1st April of the year in which the transmission system, is declared under commercialoperation, whichever is later.

The transmission charge (inclusive of incentive) payable for a calendar month for atransmission system or part thereof is as per the following:

AFC x ( NDM / NDY ) x ( TAFM / NATAF )

Where,

AFC = Annual fixed cost specified for the year, in Rupees

NATAF = Normative annual transmission availability factor, in per cent

NDM = Number of days in the month

NDY = Number of days in the year

TAFM = Transmission system availability factor for the month, in Percent.

Recovery of transmission charge and incentive is permitted to your company on theachievement of the operational norms as under.

Under the tariff norms prescribed by CERC for the tariff Block 2009-2014 we are alsoprovided with an incentive if the availability of our transmission network is above 98% inrespect of alternating current systems, above 95% in respect of HVDC back-to-back Stationssystems and above 92% in respect of HVDC bi-pole links and penalized if the availabilityof our network is below 98%, 95% or 92%, respectively. The Availability Incentives are nowlinked with monthly transmission charges as against being linked to equity in the tariffblock of 2004-09.

The tariff norms prescribed by CERC for the tariff Block 2009-2014 prescribe that theTransmission charges corresponding to any plant capacity for which a beneficiary has notbeen identified and contracted shall be paid by the concerned generating company.

The tariff regulations for the Block 2009-14 allow us to share the proceeds of carboncredit from approved CDM projects in the manner that 100% of the gross proceeds on accountof CDM to be retained by the company in the first year after the date of commercialoperation of the transmission system; and in the second year, the share of thebeneficiaries shall be 10% which shall be progressively increased by 10% every year tillit reaches 50%, whereafter the proceeds shall be shared in equal proportion, by thecompany, and the beneficiaries.

Foreign Exchange Rate Variation:

Your company under the tariff regulations for the tariff block 2009-14 has an option tohedge foreign exchange exposure in respect of the interest on foreign currency loan andrepayment of foreign loan acquired for the transmission system, in part or full andrecover the cost of hedging of foreign exchange rate variation corresponding to thenormative foreign debt, in the relevant year.

If hedging of the foreign exchange exposure is not undertaken, the extra rupeeliability towards interest payment and loan repayment corresponding to the normativeforeign currency loan in the relevant year is permissible provided it is not attributableto POWRGRID or its suppliers or contractors. During the financial year 2009-10, no hedgingfor foreign exchange exposure has been taken by your company.

Regulatory provisions enabled for development of Transmission Systems

Subsequent to the Tariff Regulations issued by CERC for the tariff block 2009-14, CERChas undertaken many Regulatory initiatives. The significant being as under i) TheRegulations on CERC (Grant of Connectivity, Long Term Access & Medium Term Open Accessin inter-State Transmission and related matters), which shall facilitate in providingtransmission products of different varieties and ensuring level playing field amongdifferent categories of market players have been made effective from 01.01.2010 along withthe standardized procedures.

ii) The CERC vide its order dt. 31.05.2010 has granted regulatory approval to theproposal of POWERGRID for the following nine numbers of High Capacity Power TransmissionCorridors which have a tentative cost estimates of about Rs. 58000 crore:

1 HCPTC – I (Transmission System Associated with Phase-I Generation Projects inOrissa)

2 HCPTC – II (Transmission System Associated with IPP projects in Jharkhand)

3 HCPTC – III (Transmission System Associated with IPP projects in Sikkim)

4 HCPTC – IV (Transmission System Associated with IPP projects in Bilaspurcomplex, Chattisgarh & IPPs in Madhya Pradesh)

5 HCPTC – V (Transmission System Associated with IPP projects in Chattisgarh)

6 HCPTC – VI (Transmission System Associated with IPP projects in KrishnapatnamArea, Andhra Pradesh)

7 HCPTC – VII (Transmission System Associated with IPP projects in Tuticorin Area,Tamil Nadu)

8 HCPTC – VIII (Transmission System Associated with IPP projects in SrikakulamArea, Andhra Pradesh)

9 HCPTC – IX (Transmission System Associated with IPP projects in Southern Regionfor transfer of power to other regions).

These transmission corridors mainly comprises high technology 765kV AC and 800kV6000MW/600kV 4000MW HVDC system.This approval has been given in the context of theprovisions of Tariff Policy notified in 2006 which stipulated that prior agreement withthe users would not be a pre-condition for network expansion and the transmissionutilities should undertake network expansion after identifying the requirements inconsonance with the National Electricity Plan and in consultation with the stakeholders,and taking up the execution after due regulatory approvals.

iii) The Regulations on ‘Grant of Regulatory Approval for execution of inter-StateTransmission Scheme to Central Transmission Utility’ notified on 31.05.2010,streamlines the procedure for according regulatory approval to Central TransmissionUtility for network expansion in consonance with the National Electricity Plan whichstipulates that prior agreement with the beneficiaries would not be a pre-condition fornetwork expansion. The regulations are effective from 30.06.2010.

iv) The Regulations on ‘Sharing of Inter-State Transmission charges &losses’ factors distance & direction sensitivity in transmission charges andlosses besides quantum of power flow, in line with the Tariff policy. The regulations havebeen notified on 15.06.2010 and shall come into force from 01.01.2011.

v) CERC has issued orders on Benchmarking of capital cost of the transmission lines andsub-stations during April and June, 2010 respectively, for prudence check of the capitalcost of Transmission system by the Regulator at the time of tariff determination.

vi) The Regulations on ‘Procedures for calculating the expected revenue fromtariffs and charges’ notified on 12.04.2010 provide a framework for the Regulator tokeep a track on the performance of the utilities which would be helpful in determinationof norms for the next tariff period. These regulations have been made effective from16.04.2010.

Short Term Open Access

One of the goals of the Electricity Act, 2003 is to provide electricity generators andusers with open access to electric power transmission systems on a non-discriminatorybasis, when capacity is available and such access will not disrupt regular fixed chargeaccess or network operation. Our portion of revenue from the short term open access chargeis accounted for as revenue from operations. During the year, as RLDC, we also chargeshort term open access customers a separate fee for the scheduling of their access throughthe relevant load dispatch centres. Your companys’ Transmission income from shortterm open access(STOA) was Rs. 124.18crore in Fiscal 2010, an increase of 199.8% overTransmission income from short term open access of Rs. 41.42crore in Fiscal 2009. Theincrease in income in STOA is on account of increase in volume in Bilateral STOATransactions/Collective Transactions; revision in the rate of transmission charges by CERCwith effect from 15-06-2009 from 03 Paise/06 Paise/09 Paise Per Unit to 08 Paise/16Paise/24 Paise Per Unit for Intra-Region, Adjacent Regions, through one or more regiontransactions in STOA Bilateral, respectively; and increase in Transmission Charge rate forCollective Transactions through Power Exchanges from 03 Paise/Unit to 10 Paise/Unit foreach point of injection and each point of drawal.

Revenue from Other Services

Your company also earns revenue from consultancy (including for project management andsupervision services) and from our telecommunication business. Our consultancy incomemainly consists of fees from the RGGVY, the execution of transmission- and communicationsystem-related projects on a turnkey basis and technical consulting assignments for Indianstate utilities and utilities in other countries. There has been an increase inconsultancy revenue from Rs. 215.90crore in Fiscal 2009 to Rs. 269.17crore in Fiscal 2010,an increase of 24.67%. The Telecom revenue grew by 5.27 % over Fiscal 2009.

The revenue from our telecommunication business is mainly on account of leasingbandwidth of our fibre-optic lines.

Provisions Written Back

The provisions written back were Rs. 0.21crore in Fiscal 2010, as against Rs. 0.04crorein Fiscal 2009.

Other Income

Your company’s other income was Rs. 375.92 crore in Fiscal 2010, a decrease of16.22% over the other income of Rs. 448.69crore in Fiscal 2009.

The other income decreased mainly because there had been decrease in interest incomefrom investments in Banks because in the Fiscal 2009 there was interest earning on theunutilized IPO proceeds. There is decease in interest income on tax free bonds on accountof repayment of bonds. Besides, there is decrease in Lease income from State-sector ULDCupgrades. Under the Financial lease, the principle amount will increase and the leaserentals will decrease each year.

Expenditures

Your company’s total expenditures (excluding prior period expenditures) were Rs.4780.99crore in Fiscal 2010, an increase of 24.51% over the total expenditures of Rs.3839.79crore in Fiscal 2009. The total expenditures as a percentage of total income were63.72% in Fiscal 2010 compared to 62.55% in Fiscal 2009.

Employees’ Remuneration and Benefits

Employees’ remuneration and benefits expenses include salaries and wages,incentives, allowances, benefits, contributions to provident and other funds and welfareexpenses.

Your company had 9,162 employees on our payroll as of March 31, 2010, compared to 8,214employees as of March 31, 2009. Employees’ remuneration and other benefits increasedby 12.86% to Rs. 726.70 crore in Fiscal 2010 from Rs. 643.88 crore in Fiscal 2009. Theincrease is due to an increase in the number of employees, increase in Dearness allowance,provision for implementation of pay revision for the supervisors and workmen pending theimplementation of their pay revision. The increase is also partially the result of thecapitalization of transmission assets worth Rs. 3609.82crore in Fiscal 2010 becauseemployee remuneration that was earlier capitalized during the construction of the projectis now treated as an operating expense subsequent to the commissioning of the project.Employees’ remuneration and benefits represented about 10% of our total income inFiscal 2010.

Transmission, Administration and Other Expenses

Transmission, administration and other expenses consist primarily of costs of therepair and maintenance of buildings, plant and machinery and power charges. Otheritems in this category include expenditures for travel, security, vehicle hire charges,insurance and rent, rates & taxes on our properties.

Transmission, administration and other expenses increased by 23.28% to Rs.507.43 crore in Fiscal 2010 from Rs. 411.61 crore in Fiscal 2009. The increase is onaccount of the capitalization of transmission assets worth Rs. 3609.82 crore in Fiscal2010 as certain expenses that were earlier being capitalized during the construction ofthe project are now treated as an operating expense subsequent to the commissioning of theproject. The increase is also due to lesser amount transferred to Incidental Expenditureduring Construction (refer Note 15 of Schedule 28: Notes on Accounts).

Depreciation

The company has been providing depreciation at the rates notified for the purpose ofrecovery of tariff. MOP had issued Tariff Policy on 6^th January, 2006 whichprovides that rates of depreciation notified by CERC would be applicable for the purposeof tariffs as well as for accounting.

The CERC norms for the block year 2009-14, specify depreciation @ 5.28%(T/L & S/s)in first 12 years and there after recovery based on residual value over the residual lifewill be allowed, in place of average 2.91% depreciation in the block of 2004-09. In caseof the existing projects, the balance depreciable value as on 1.4.2009 has been worked outby deducting the cumulative depreciation as admitted by the Commission upto 31.3.2009 fromthe gross depreciable value of the assets.

By charging depreciation at the aforesaid rates the depreciation charge for the year islower by Rs. 50.69 crore (previous year Rs. 781.29 crore) as compared to the depreciationas per rates provided in the Schedule XIV of the Companies Act, 1956 [refer Notes 14(b) ofSchedule 28: Notes on Accounts].

Your company’s depreciation increased by about 80.96% to Rs. 1979.69crore inFiscal 2010 from 1093.97crore in Fiscal 2009. The increase was mainly because of thechange in depreciation rates under the tariff norms for the tariff block 2009-14,commissioning of new transmission assets worth Rs. 3609.82 crore and full-year impact inFiscal 2010 of transmission assets Rs. 3733.74 crore which were commissioned during Fiscal2009.

Currently, the technical life of each depreciable asset class as prescribed by CERC isas follows:

• transmission lines – 35 years

• substations – 25 years

We depreciate the assets of our consultancy and telecom businesses on the straight linemethod as per rates specified in Schedule XIV of the Companies Act, 1956.

ULDC assets other than assets identified to be transferred to Power System OperationCorporation are depreciated @ 6.67% per annum as determined by CERC for levellised tariff.

Interest and Finance Charges

Interest and finance charges decreased by 6.03% to Rs. 1543.24 crore in Fiscal 2010from Rs. 1642.27crore in Fiscal 2009. The decrease was mainly because of reduction ofinterest on foreign currency loans due to decrease in LIBOR from 1.74% as on 31.03.2009 to0.44% as on 31.03.2010.

These charges include rebates to state power utilities amounting to Rs. 77.68crore onaccount of prompt payment and guarantee fees of Rs. 65.88crore(net of IEDC) payable to theGoI for giving guarantees to the lenders of our foreign currency loans.

Deferred Revenue Expenditure Written Off

Deferred revenue expenditure written off decreased by 2.7% to Rs. 1.78 crore in Fiscal2010 from Rs. 1.83 crore in Fiscal 2009. This decrease was on account that it was the lastyear (fifth year) of amortization of expenditure for certain projects (refer AccountingPolicy 11).

Profit before Tax

Your company’s profit before tax in Fiscal 2010 was Rs. 2626.32 crore, an increaseof 17.85% over profit before tax of Rs. 2228.57 crore in Fiscal 2009.

Provision for Tax

In Fiscal 2010, we provided for Rs. 421.91 crore of Minimum Alternate Tax, compared toRs. 478.60 crore in Fiscal 2009. The decrease, in spite of increase in Book-profit, wasprimarily due to the reason that MAT provision in fiscal 2009 included Rs. 160.35 crore onaccount of MAT for the earlier years.

Provision for deferred tax is made in respect of temporary differences mainly onaccount of higher depreciation rates available under income tax provisions.

Profit after Tax

Your company’s Profit after Tax in Fiscal 2010 was Rs. 2040.94 crore, an increaseof 20.72 % over our Profit after Tax of Rs. 1690. 61 crore in Fiscal 2009.

LIQUIDITY AND CAPITAL RESOURCES

Your company depends on both internal and external sources of liquidity to provideworking capital and to fund capital requirements. Historically, the capital expenditureshave been funded with internally generated funds, grants and equity contributions by theGovernment and debt financing. As at March 31, 2010, your company had cash and cashequivalents of Rs. 3277.64crore. As at March 31, 2010, we also had committed and undrawnLetter of Credit facilities of approximately Rs. 35.11crore and unutilized Bank GuaranteesRs. 269.55 crore for capital requirements and committed and undrawn cash credit facilitiesof approximately Rs. 270crore ("cash credit") towards our working capitalfacilities.

Cash Flows

Net Cash from Operating Activities

Your company’s net cash flows from operating activities are principally used toservice long-term debt, for capital expenditures, for investments and for dividends.

The net cash from operating activities was Rs. 6619.17 crore in Fiscal 2010 as againstRs. 6590.64 crore in Fiscal 2009. Changes in current assets and liabilities that had acurrent period cash flow impact of increase in working capital of Rs. 609.63 crore,primarily from an increase in advance from customers and other liabilities.

Net Cash (Used in) Investment Activities

Your company’s net cash used in investing activities was Rs. 9660.86crore inFiscal 2010 as against Rs. 9156.75crore in Fiscal 2009. This reflected expenditures onfixed assets and capital work-in-progress as well as construction stores and advances paidto contractors for capital expenditure of Rs. 10052.66crore, investment in jointventures/subsidiaries of Rs. 47.06 crore and receipt of interest and dividend income ofRs. 140.78 crore.

Net Cash from Financing Activities

In Fiscal 2010, your company’s net cash flow from financing activities was Rs.3890.45crore as against Rs. 3129.40crore in Fiscal 2009. Your company raised Rs. 8023.73crore of new borrowings. These borrowings included principally Rupee denominated bonds andforeign currency borrowings. In addition, short term loan of Rs. 1250 crore wasalso raised. The company repaid Rs. 2142.72crore of borrowings and paid interest andfinance charges of Rs. 1474.68 crore. In the Fiscal 2010, we paid dividends of Rs. 505.08crore comprising final dividend for Fiscal 2009 and an interim dividend for Fiscal 2010.The dividend for the financial year 2009-10 including the final dividend proposed of 10%is Rs. 631.34 crore. The dividend payout works to 30.93% of PAT.

Capital Expenditures

Your company’s capital expenditures are primarily for the installation of newtransmission capacity and the expansion of existing capacity. Our capital expenditure inFiscal 2010 and Fiscal 2009, were Rs. 10,617 crore and Rs. 8167 crore, respectively.Capital expenditure budget for Fiscal 2011 has been approved for Rs. 12,900 crore.Your company’s capital expenditure budgets are subject to modification as a result ofa variety of factors, changes to expansion plans and similar other factors.

Return on Equity

The Return on Equity that we were generally permitted in Fiscal 2010 on transmissionassets under our tariffs has been 15.5%. Our actual Return On Equity for fiscal 2010 forour entire business is 12.83% as against 11.57% in Fiscal 2009. This is mainly due to :(i) locking of equity funds in capital work-in-progress as per CERC norms, (ii) the SEBbonds, that we hold under the One Time Settlement, earn a maximum tax-free Return of 8.5%per annum.

Fixed Assets

Your company’s total fixed assets after depreciation were Rs. 32061.26crore andRs. 31128.44 crore as at March 31, 2010 and March 31, 2009, respectively. Our fixed assetsconsist of plant and machinery such as transmission lines, substations, HVDC and ULDCequipment and other transmission equipment; buildings; land; office equipment; fixtures;etc. Fixed assets value (Net Block) increased by 3% in Fiscal 2010 as compared to Fiscal2009. These increases are mainly due to the commissioning of new transmission assets.

Capital Work-in-Progress and Construction Stores and Advances

Your company’s capital work-in-progress was Rs. 10242.37 crore and Rs. 6533.43crore, as at March 31, 2010 and 2009, respectively. The cost of materials consumed,erection charges and other expenses incurred for the implementation of projects are shownin the balance sheet as capital work-in-progress, pending capitalization of the completedproject. The change in this amount is due to capitalization of a number of transmissionprojects on commissioning of these projects and due to undertaking of new transmissionprojects. Construction stores and advances were Rs. 10,179.81 crore and Rs. 6752.57 croreas at March 31, 2010 and 2009, respectively. These amounts represent the new as well asongoing capital expenditure on transmission assets. The increase in these amounts ismainly due to the undertaking of new transmission projects.

Investments

Your company’s investments mainly consist of bonds issued by the SEBs as part ofthe One Time Settlement. We have also invested Rs. 12crore in equity shares of PTC IndiaLimited; Rs. 229.32crore in Powerlinks Transmission Limited, the joint venture between usand The Tata Power Company Limited through which the Tala Transmission Project wasconstructed; Rs. 23.40 crore in Torrent Power Grid Limited; Rs. 45.50 crore in JaypeePowergrid Limited; Rs. 3.39 crore in Parbati Koldam Transmission Company Limited; Rs. 0.01crore in Teestavalley Power Transmission Limited; Rs. 23.10crore in North EastTransmission Ltd.; 0.62 crore in Energy Efficiency Services Ltd.;0.88crore in NationalHigh Power Test Laboratory Ltd; Rs. 5 lakhs in Power System Operation Corporation, asubsidiary of our Company and Rs. 4 lakhs ( after diminution of one lakh) in ByrnihatTransmission company Ltd. Our total investments were Rs. 1453.22 crore and Rs. 1592.83crore as at March 31, 2010 and March 31, 2009, respectively.

Loans and Advances

Your company’s total loans and advances as at March 31, 2010 and March 31, 2009,respectively, were Rs. 3302.40crore and 2827.99crore. Loans and advances include advancesunder the One Time Settlement amounting to Rs. 107.98 crore in respect of DESU/DVB, aDelhi utility, loans to employees, lease receivables (representing certain capitalexpenditures made by the company in respect of the State-sector ULDCs of all five Regions,for which the constituents of those Regions are reimbursing the Company on a finance leasebasis), loans and advances to contractors, advance income tax, TDS and other deposits withtax authorities. The increase in loans and advances from Fiscal 2009 to Fiscal 2010 wasprincipally due to increase in amount recoverable from the Constituents on account of UIcharges which are payable to certain other constituents.

Other Current Assets

Our other current assets as at March 31, 2010 and March 31, 2009 respectively, were Rs.487.52 crore and Rs. 1384.92 crore. Other current assets mainly include interest accruedon investments under the One Time Settlement and interest accrued on term deposits.

Other current assets decreased by 64.80% in Fiscal 2010 as compared to Fiscal 2009 dueto decrease in deferred Foreign Currency Fluctuation Asset in other current assets in viewof appreciation of Rupee against US dollar.

Inventories

Inventories are valued at lower of the cost, determined on weighted average basis, andnet realizable value. The costs of inventories were Rs. 344.90 crore, as at March 31,2010. Our inventories consists of transmission line items such as tower parts, conductors,insulators and other items, and substation items such as transformers, circuit breakers,ICTs and other items. The cost of our inventories increased in Fiscal 2010 as comparedwith Fiscal 2009, on account of your company continuing to expand the transmission networkand capitalization of new projects.

Sundry Debtors

Sundry debtors consist mainly of receivables relating to transmission services, andalso receivables from consultancy services and telecom services. Our sundry debtorsamounts as on March 31, 2010 and March 31, 2009 were Rs. 2214.86 crore and Rs. 1373.56crore, respectively. Sundry debtors increased by 61.25% in Fiscal 2010 as compared toFiscal 2009. The increase from Fiscal 2009 to Fiscal 2010 was mainly due to revenuerecognition for existing projects as per new tariff norms notified CERC for the tariffBlock 2009-14, whereas billing was done as per tariff notified under 2004 of norms (refernote no. 17 of schedule 28); and also due to time lags between the provision andaccounting of transmission services on certain new projects on accrual basis and theformal notification by CERC of the tariffs relating to those projects in Fiscal 2010.

Substantially, all of our receivables are covered by Letters of Credit pursuant to theOne Time Settlement Scheme, following which we have no significant debt collectionproblems.

The comparison of actuals with Financial MOU targets is given below:-

Indebtedness

We rely on both Rupee and foreign currency denominated borrowings. A significant partof our external funding has been through long-term foreign currency loans frommultilateral agencies such as The World Bank and the Asian Development Bank, with ourperformance under such loans guaranteed by the GoI.

The following table sets forth, by currency, our outstanding debt and the periodsduring which debt amounts mature or payment is otherwise due. Currency conversions are asof 31^st March, 2010:

Secured Loans

Your company’s secured loans as at March 31, 2010 and March 31, 2009 were Rs.31345.78 crore and Rs. 25288.25 crore, respectively. Secured loans include amounts raisedfrom our private placement of bonds, term loans from banks, loans from the InternationalBank for Reconstruction and Development, Asian Development Bank and Bank of India. Due tothe increased investment in new projects during the last year, our borrowings haveincreased substantially.

Most of the secured loans have been secured by floating charges on the moveable andimmoveable properties of the Company. The following table presents the secured debt as at31^st March, 2010:

*Loans guaranteed by the Government were Rs. 9021.03crore.

Unsecured Loans

Our unsecured loans as at March 31, 2010 and March 31, 2009 were Rs. 3071.01 crore andRs. 3177.18 crore, respectively. Unsecured loans mainly include loans from foreignfinancial institutions such as the European Investment Bank, Kreditanstalt frWiederaufbau in Germany and Scandinavia Enskilda Bank in Sweden and term loans from thePower Finance Corporation and short term loans from Banks.

The following table presents our unsecured debt as at March 31, 2010:

*Loans guaranteed by the Government were Rs. 1265.59crore.

Advance Against Depreciation (AAD)

Advance against depreciation is a component of tariff that we were permitted to chargeunder CERC regulations for the tariff Block 2004-09, to cover shortfall in respect ofdepreciation in a year on assets, for repayment of debts. This AAD was restrictedconsidering a 10-year loan repayment schedule. AAD was accounted for as an advance untilthe tenure of the loan. Subsequent to repayment of the loan, AAD was transferred toincome on a pro-rata basis for the remaining useful life of the asset, the useful life ofthe asset governed by CERC regulations. AAD has been done away with in the tariff block2009-2014 and depreciation rate have been reworked. Due to change in these tariff normsand the depreciation rates w.e.f. 1.04.2010, the outstanding AAD has been taken totransmission income after 12 years from the date of commercial operation. (refer Schedule28-Note No.18& Accounting Policy No.12.1.4.2.)

Current Liabilities

Your company’s current liabilities as at 31^st March, 2010 were Rs.7634.60 crore. The current liabilities include sundry creditors, advances from customers,security deposits, retention money withheld by us and other liabilities.

Current liabilities were 24.68% higher at March 31, 2010 compared to March 31, 2009.The increase is partly due to liabilities to some of the beneficiaries on account of UIdues which have been accounted for on accrual basis. Similar amount has been accounted foras receivable from the beneficiaries and included under loans and advances. Thesefluctuations are also due to the commissioning of particular projects at different timesof the year in different fiscal years. When projects are commissioned, the liabilitiesrelating to them are capitalized. If commissioning occurs in the early part of a fiscalyear, the related liabilities are usually paid before the end of the fiscal year. Infiscal years when current liabilities are higher, there tends to be more projectscommissioned toward the end of the fiscal year, whose related liabilities have not beenpaid by the end of the fiscal year. Variations in the amounts of advances received underconsultancy contracts also result in current liability fluctuations.

Contingent Liabilities

The following table sets forth the principal components of our contingent liabilitiesas at March 31, 2010 and March 31, 2009:

Contingent liabilities increased by 13.98% in Fiscal 2010 compared to Fiscal 2009. Theincrease was mainly due to increase in Service Tax liability to Rs. 2,820.68 crore(including interest of Rs. 537.71 Crore) for the period from 1^st May, 2006 toFebruary, 2010 for the company as a whole.

CBEC vide Notification No. 11/2010 dated 27.02.2010 has exempted Transmission of Powerfrom the Service Tax. The Dept. of Revenue, Ministry of Finance vide Notification No.45/2010-Service Tax dated 20.07.2010 has directed that the Service Tax payble ontransmission of power shall not required to be paid during the period up to 26th day ofFebruary, 2010. With this exemption, the estimated amount of Contingent liability onaccount of Service tax liability of Rs. 2,820.68 crore (including interest of Rs.537.71 crore) would no more exist.

A) Powerlinks Transmission Limited (POWERLINKS):

• Main Objective and Capital Structure

The Company was incorporated to undertake the implementation of Transmission Linesassociated with Tala HEP, East-North interconnector and Northern Region TransmissionSystem. This was POWERGRID’s first public - private partnership in PowerTransmission. POWERGRID and TATA POWER are the Joint Venture Partners in this JointVenture Company and hold 49% and 51% equity, respectively. As on 31.03.2010, POWERLINKShas Authorized share capital of Rs. 4,83,60,00,000/- and paid-up capital of Rs.4,68,00,00,000/- out of which POWERGRID holds Shares of Rs. 229.32crore and TATA POWERhold shares of Rs. 238.68 crore. POWERLINKS successfully commissioned the project inAugust, 2006. POWERLINKS has given a dividend of 18 % for Fiscal 2010.

• Financial Highlights of the Company:

*Face value per Share is Rs. 10/- each.

B) JAYPEE POWERGRID Limited (JPL):

• Main Objective and Capital Structure

The main objective of the Company is to implement a transmission system to evacuatepower to be generated by 1000 MW Karcham Wangtoo Hydro Electric Power Project in KinnaurDistrict in Himachal Pradesh. The power under the system is to be evacuated from Wangtooto Abdullapur. During the year, Jaiprakash Hydro Power Limited, the main JV partner gotmerged with Jaiprakash Power Ventures Limited. As on 31.03.2010, JPL has Authorized sharecapital of Rs. 300 crore and paid-up capital of Rs. 175 crore divided into 17,50,00,000equity shares of Rs. 10 each. Jaiprakash Power Ventures Limited and POWERGRID individuallyholds 74% and 26%, respectively as on 31.03.2010. The Company has got the TransmissionLicence in Oct. 2007. Since the project is under implementation, there is no operatingprofit.

C) Torrent Powergrid Limited (TPL):

• Main Objective and Capital Structure

The main objective of the Company is to establish transmission system associated with1100MW Gas Based project being implemented by Torrent Power Generation Ltd. (TPGL) atAkhakhol in Surat District of Gujarat. POWERGRID and Torrent Power Transmission PrivateLtd. are the Joint Venture Partners in this Company and hold 26% and 74% equity,respectively. As on 31.03.2010, TPL has Authorized share capital of Rs. 125 crore andpaid-up capital of Rs. 90 crores. The Company has got the Transmission License in May,2007. Since the project is under implementation, there is no operating profit.

D) Parbati Koldam Transmission Company Limited

POWERGRID entered into a Joint Venture Agreement on 23^rd November, 2007 withReliance Energy Limited (REL) now Reliance Infra, for implementation of transmission linesassociated with Parbati-II (800 MW) HEP and Koldam (800 MW) HEP. The Company named‘Parbati Koldam Transmission Company Limited’ existing with POWERGRID to take upimplementation of Parbati and Koldam Transmission systems through Joint venture route wasconverted to JVC. As on 31.03.2010, PKTL has Authorized share capital of Rs. 198 crore andpaid-up capital of Rs. 13.05 crores. The Company has got the Transmission License inSeptember, 2008 and Financial closure process for the project is underway. Accordingly,there is no operating profit.

E) Teestavalley Power Transmission Limited

POWERGRID entered into a Joint Venture Agreement with Teesta Urja Limited on 23^rdNovember, 2007 on 26% equity -POWERGRID and 74% equity Teesta Urja Limited (TUL) forimplementation of transmission lines (i) Teesta-III to Mangan pooling station 400kV D/Cline; and (ii) Mangan pooling station to New pooling station at Kishanganj 400k/V D/C lineassociated with 1200 MW Teesta-III Hydro Electric Power Project. The Company has got theTransmission Licence in Fiscal 2009.

F) North East Transmission Company Ltd.(NETC):

POWERGRID entered into a Joint Venture Agreement in February, 2009 with ONGC TripuraPower Project Company Ltd. (OPTC) and Government of Tripura for establishment ofTransmission Line of 400kV D/C Palatana Bongaigoan Transmission Project associated with726 MW Palatana Gas base Power Project in the state of Tripura. The Joint Venture Companyis named ‘North East Transmission Company Limited’. OTPC, the generating Companyis a joint venture of ONGC Ltd., Government of Tripura and Infrastructure Leasing &Finance Services Ltd., (IL&FS Ltd.). The Company has got the Transmission Licence inFiscal 2009. As on 31.03.2010, NETC has Authorized capital of Rs. 600 crore and paid-upshare capital of Rs. 74.72 crore.

G) National High Power Test Laboratory Private Limited:

POWERGRID entered into a Joint Venture Agreement in April, 2009 with equalparticipation with NTPC Ltd., NHPC Ltd. and Damodar Valley Corporation for setting up anOn-line High Power Test Laboratory for short circuit test facility in the country. TheJoint Venture Company is named ‘National High Power Test Laboratory PrivateLimited’. As on 31.03.2010, the company has Authorized share capital of Rs. 10 croreand paid-up capital of Rs. 3.5 crore. Since the project is under implementation, theincome statement is not prepared.

H) Energy Efficiency Services Limited:

POWERGRID entered into a Joint Venture Agreement in November, 2009 with equalparticipation with NTPC Ltd., Power Finance Corporation Ltd. and Rural ElectrificationCorporation Ltd. The JV Company will promote measures of Energy efficiency, EnergyConservation and Climate Change. The Joint Venture Company is named ‘EnergyEfficiency Services Limited’. As on 31.03.2010, the company has Authorized sharecapital of Rs. 190 crore and capital of Rs. 2.5 crore and share application money of Rs.24.375 crore.

Power System Operation Corporation Ltd (POSOCO) was incorporated as a wholly ownedsubsidiary of POWERGRID on 20.03.2009. POSOCO, will be responsible for Independent SystemOperation. The certificate of commencement of business of the company has been obtained on23^rd March, 2010. POWERGRID has obtained the consent of Shareholders underSection 293 (1) (a) of the Companies Act, 1956, for transfer of the ownership, physicalpossession and control of movable assets relating to Regional Load Despatch Centers &National Load Despatch Center to POSOCO. The book value of the movable assets is approx.Rs. 184.78 crore as on 31.03.2009 and the said transfer will be made on updated book valueof the assets to be transferred as on the date of transfer. Presently, the finalization ofagreements for transfer are in process. The transfer agreements would be executed onreceipt of notification u/s 27(2) of the Electricity Act, 2003. As on 31.03.2009, POSOCOhas Authorized share capital of Rs. 2,00crore and paid-up capital of Rs. 5,00,000/-.

Pending transfer of Assets / Liabilities to POSOCO, the revenue, expenses, assets andliabilities have been depicted as a separate segment. The CERC has through notificationdated 18.09.2009 issued separate regulations for Fees and charges of RLDC and relatedmatters and revenue of Power System Operation assets has been recognized based on thesenorms.

J) Powergrid IL&FS Transmission Pvt. Ltd.

POWERGRID entered into a Joint Venture Agreement in January, 2008 with IL&FS fordevelopment of Intra-state Transmission/ Sub-transmission projects in different States ofthe Country and outside India. The Joint Venture Company named ‘POWERGRID IL&FSTransmission Private Limited’ was set up with shareholding pattern on 50:50 basis.Since, POWERGRID IL&FS Transmission Pvt. Ltd. was not having any developmentalprojects, it has approved by the JVC and POWERGRID Board to be wound up. The process ofdissolution of the same has been taken up by IL&FS, the Joint Venture Partner.

K) Byrnihat Transmission Company Limited

The subsidiary viz. Byrnihat Transmission Company Limited ("BTCL") wasincorporated on 23.03.2006 to take up implementation of Misa Byrnihat Transmission line onJV route. The said Transmission line was taken up for execution by POWERGRID as aconsultancy work. Byrnihat Transmission Company Limited was not doing any business and hasbeen approved by the POWERGRID Board to be wound up. The process of dissolution of thesame has been taken up.

Cautionary Statement

Statement in the Management Discussion and Analysis and Directors’ Reportdescribing the Company’s objectives, projections and estimates, are forward-lookingstatements and progressive within the meaning of applicable laws and regulations. Actualresults may vary from those expressed or implied, depending upon economic conditions,Government Policies and other incidental factors. Readers are cautioned not to place unduereliance on the forward looking statements.