Tata Power Company Ltd

1.1 Global Energy Demand

The global average per capita consumption of energy is currently at about 2,500 kWh. Itis said that the basic minimum need of energy for a decent quality of life is about 4,500to 5,000 kWh per capita¹. Further, global population is expected to rise fromabout 6.8 billion currently to about 9 billion by 2050 and then stabilize².Therefore, no matter which way one looks at energy demand viz. either to just provide abasic quality of life to the existing population or to take care of the needs of another2.2 billion people, the world will need more energy.

While the rate of growth in energy consumption is expected to be very high in growingeconomies like China, India, Africa, South America, etc., the growth in energy consumptionin absolute terms is projected to be the highest in China followed by North America,India, Middle East, etc. For the power sector, growth in absolute energy consumption ismore relevant than just percentage change in energy consumption. Further, it is also seenthat the ability to pay in markets that have high energy growth rates is weaker ascompared to the developed markets.

In absolute terms, the United States of America (USA) is by far the largest consumer ofenergy followed by China and Western Europe. Japan, South Korea, the Middle East andRussia are the other big consumers. In comparison, India's energy consumption today ismuch lower but is expected to be around the current levels of Japan, South Korea, andothers by 20 3 0³.

With evolving consumer needs and technology, energy and electricity are getting morefungible. Electricity, however, is the most convenient form of energy and, hence, it isexpected that its share of delivered energy will rise from the current 17% to 20% by 2030⁴.

The key factors that will shape the energy / electricity markets will be climate changeand energy security. The key drivers for the power sector will be based on:

• World moving towards the optimal energy mix based on low carbon and low cost.

• Focus on increasing the overall system efficiency through technologybreakthroughs.

• New delivery models like decentralized generation.

1.2 Global Energy Supply

The World has fossil fuel reserves that are projected to last for 91 years based oncurrent consumption levels and around 45 years based on increasing consumption trends (SeeChart 1). Russia has sizeable energy consumption and also one of the largest reserves.Saudi Arabia, South Africa and Australia are other regions of large reserves with a farlower domestic consumption and, hence, can play a major role in the global trade ofenergy.

Chart 1: Fossil fuel reserves of key countries (2010)

* The totals do not add up due to rounding off.

1 Internal Analysis

2 U.S. Energy Information Administration (EIA)

3 EIA

4 EIA

5 BP Statistical Review

Oil is the most widely traded commodity primarily because of its ease of handling andusage. However, oil exports are largely controlled by countries of the Middle East, Russiaand Nigeria.The major oil importers are the USA, Western Europe,China, India and Japan.Increasing cost of oil production, falling reserves and increasing demand are likely topush oil prices upwards⁶.

Volume of gas as a traded commodity is fast increasing, facilitated by improvingLiquefied Natural Gas (LNG) infrastructure. The major gas consumers are the USA, WesternEurope and Japan, whereas the main suppliers are Russia and countries in the Middle East.The discovery of shale gas in North America could, however, dramatically change the gassupply scenario, leading to drop in demand and stranded LNG capacity, resulting in lowergas prices in the near term⁷.

Sea-borne coal trade, especially thermal coal, accounts for only about 15% of the totalcoal consumption. The main importers of coal are the USA, China, India, Western Europe,Korea and Japan. The main suppliers are Russia, Indonesia, Australia, South Africa andColombia. The USA has the largest reserves of coal but is currently not exploiting them.Growing demand for energy in China and bottlenecks in internal supply in India areexpected to drive global demand for coal in the near term.

At a macro level, this implies limited fossil fuel supply and that many people might intheir lifetime see fossil fuel availability taper off. Hence, prices of fossil fuels areexpected to rise. This would also lead to an increase in electricity prices. Since majorconsuming economies like Western Europe, Japan, South Korea and China do not havesufficient domestic resources, nuclear power and renewable sources would be more importantto fulfill their energy requirements.

1.3 Market Structure

While primary energy sources like coal, gas and oil are global commodities, electricityhas traditionally been a more local / regional commodity. However, with internationalgrids getting connected, the picture hereunder might change.

Chart 2: International Grids (Existing and Planned)⁸

Globally, a structure seems to be evolving where electricity generation and retail willbe open to competition and the wires will be a natural monopoly and available to all. Thepower generated will be sold to a common pool on the basis of 'Least marginal cost ofsupply' wherefrom all retailers will buy their supply needs. The markets will permitdirect hedging contracts between the retailers and generators to manage price volatilityin the common pool.

India has different models of power sale ranging from an integrated utility (the oldState Electricity Board [SEB] structure), to a 'single buyer' (MoU based / regulatedgeneration), to 'wholesale competition' (Ultra Mega Power Projects [UMPPs], Case 1) andretail competition (Mumbai). Migration to developed market structure is expected to occuras soon as the gap between demand and supply is narrowed.

While the electricity market structure is subject to a high degree of regulation, thebasic input to electricity i.e. fuel, remains free of all control and can provideopportunities for a deregulated play over a longer term (in India fuel is not yet free ofall control - coal mines are still 'allocated' and oil and gas prices are stilladministered).

An analysis of the value chain from fuel to electricity generation to transmission todistribution and finally to retail suggests that the maximum value lies on the fuel sidefollowed by generation. The volatility of returns in fuel, however, is higher as comparedto that in generation.

6 EIA, FACTS, Internal Analysis

7 EIA, FACTS, McKinsey Gas Report, Internal Analysis

8 Internal analysis, various websites

1.4 India Scenario

Current per capita consumption of electricity in India is about 733 kWh⁹which would have to grow 7-8 fold to provide a decent quality of life. At a GDP growthrate of 5-9%, the demand is expected to grow to about 2 times the current demand by 2017¹⁰.It is expected that with the 12th five year plan (2017), India might have sufficient baseload capacity. However, with economic growth, there will still be a need to add 115 GW to190 GW of base load capacity between 2020 and 2030 i.e. about 12,000 MW to 19,000 MW everyyear. Hence, there would be a need to continue adding base load capacity in the 13th and14th five year plans as well¹¹.

The expected growth would mean that about 40,000 MW will be under construction everyyear. About 75,000 to 80,000 new skilled workers would be required only for constructionand operations in the power sector¹². However, the power sector facescompetition from both infrastructure sectors and other industries such as InformationTechnology (IT) for skilled manpower. Further, at an average cost of Rs. 6 crores per MWcovering all forms of generation, India will need Rs. 240,000 crores to Rs. 300,000 croresas capital, with an additional requirement of about Rs. 60,000 crores to Rs. 80,000 croresper year. Hence, people development and funding are critical to cater to the growingdemand.

The major fuel source for base load capacity addition is expected to be coal. However,availability of domestic coal is a challenge on account of various bottlenecks such ascapacity expansion of Coal India Limited, coal block allocation, tribal land acquisition,environmental and forest clearances, etc. This is further compounded by issues around landacquisition for the power plant, water availability and ash disposal for domesticcoal-based plants. As per the annual report of FY11 released by the Ministry of Coal, theprojected coal demand in FY12 is 713 Million Tonnes (MT) (including both coking andnon-coking coal), while the likely supply is expected to be 592 MT. This would leave adeficit of about 120 MT which would need to be made up by imported coal or blended coal asper plant design. This would lead to increased demand for imported coal, resulting in arise in fuel cost for generating companies.

In view of the inherent risks and challenges in developing and executing new projectsand rising fuel costs, the cost of generation is likely to increase. However, thepolitical will to pass on these costs to consumers has been rather weak, thereby forcingGovernments to increase subsidy bills. It is ironic that while the consumers are willingto pay for diesel generation sets and invertors, from which the cost of power is veryhigh, they are unwilling to pay for power from the utilities. People need to be educatedand prepared for price increases and Governments need to address this communicationchallenge. Unless the challenge of an increasing subsidy bill is addressed urgently, itcould become another serious bottleneck in capacity addition.

Currently, the power sector relies excessively on coal-based generation. When theclimate change movement gathers momentum, India will need to move away from coal to otherpower generation sources such as hydro and nuclear. Even without the challenge of climatechange, just the sheer need for more energy and the need for self-reliance will drive theIndian power sector towards energy efficiency, conservation and cleaner power.

Towards this end, the Company has enunciated a path for sustainability to address thefallouts and opportunities. It has undertaken various initiatives in areas such asEnvironment, Architecture, Community Development, Advocacy, Renewables, New Technology,Green Buildings, New Models of Development, etc.It has established the Tata Power EnergyClub for creating mass awareness on energy conservation across the country and establishedrenewable energy generation as part of the approach.

Nuclear power is considered to be another option for India, given the shortage ofadequate existing energy sources. The three stage process adopted by India that usesreprocessed spent fuel in fast breeder reactors, eventually moving to a Thorium-basedcycle, would offer the long term solution, provided concerns arising out of safety issuesincluding the recent incident at Fukushima in Japan get addressed appropriately.

1.5.1 Generation

The total power generation in the country during FY11 was 811.10 Billion Units (BUs)which comprised primarily 664.91 BUs from thermal, followed by 114.29 BUs from hydro,26.28 BUs from nuclear and import of 5.61 BUs from Bhutan. The average thermal plant loadfactor was 75.07%. The installed generating capacity in the country (as shown in Chart 3)as on 31st March, 2011, was 173.626 GW¹³. The base load deficit during the yearwas about 73,000 MUs and the average peak load deficit for the year was about 12,910 MW¹⁴.

9 Central Electricity Authority (CEA) Monthly Review of Power Sector, March 2011

10 McKinsey and Co. 'Powering India - the Road to 2017', Internal projections

11 EIA, Internal Analysis

12 Internal Analysis

13 CEA, Infraline reports

14 CEA

1.5.2 Capacity Addition

The capacity addition in the 9th and 10th five year plans put together was 46.534 GW.The revised 11th plan (2007-2012) target is 62.000 GW. Capacity commissioned during 11thplan (upto 31st March, 2011) was 41.297 GW. The expected capacity addition, although muchhigher than earlier five year plans, is, however, still short of the revised target.

1.5.3 Fuel Availability - Coal

Current domestic coal supply has been affected by environmental restrictions on coalmining because of which Coal India Limited (CIL) has not been able to ramp up productionto planned levels, as also, a large quantity of coal has not been transported from themines (about 60 MT as per CIL). This has impacted generation availability of domesticcoal-based plants in the country. As many as 28 plants amounting to a capacity of about30,000 MW, were facing critical fuel stock situation with a coal stock of less than 7days, as per the CEA monthly report. The production of CIL in FY11 was 431 MT of coal,with non-coking coal production of 390 MT. This is significantly lower than the demand.Import of coal is, therefore, being resorted to during the last few years and utility-wiseallocation is being made by the Ministry of Power in consultation with CEA. The import ofcoal is set to rise from about 100 MT per annum (MTPA) currently to over 150 MTPA by 2013¹⁵.

1.5.4 Fuel Availability - Gas

The installed generation capacity of gas-based power stations as on 31st March, 2011,was about 17.706 GW. Although the Ministry of Petroleum and Natural Gas has come up withguidelines for allocation of domestic gas, there is uncertainty in domestic gas supplywith respect to quantity as well as price. Production from KG D-6 of Reliance IndustriesLimited, India's largest producing gas field, has dropped significantly during the lastfew months. Due to this uncertainty, gas projects that have requested for gas have beenput on hold by the concerned authorities in the power sector till further clarity emergeson the production scenario. Under such circumstances, new gas-based capacities areunlikely to come up in the near future, till the above issues are resolved. Imported LNG,which is a direct substitute for domestic natural gas, is at almost double the price. Inthis way, electricity produced from imported LNG makes the cost of generation relativelyhigher to merit dispatch on a base load basis.

1.5.5 Transmission

The rate of growth of the transmission network (at voltages of 220 kV and above) duringthe past decade has been at about 6-7% per annum. The inter-regional transmission capacityhas increased from 5.050 GW (end of 9th plan) to about 22 GW by March 2011. However, thisstill falls short of the 14% per annum growth in transmission capacity targeted in the11th plan. The Government policy plans to increase inter-regional transmission capacity to58.700 GW by 2015. It is expected that thereafter, inter-regional transmission will not bea constraint¹⁶. New Inter-State Transmission Charges and Losses Regulations,2010, came into effect from 1st April, 2011.

1.5.6 Distribution

Power distribution still remains a segment that needs significant reform, as this wouldhave a direct impact on the sector's commercial viability and ultimately on the consumersand generators. The sector has been plagued by high distribution losses (as high as35-40%) and low billing recovery, resulting in poor financial health of the utilities.After the mediocre results of the Accelerated Power Development and Reforms Programme(APDRP), the Government has introduced the Revised Accelerated Power Development and

15 CEA, CIL reports

16 CEA, Infraline reports

Reforms Programme (R-APDRP). The programme is to be implemented in two phases. Thefocus of the first phase is on implementation of IT systems for distribution. This is tobe followed by large scale distribution franchising in the second phase in order to removeinefficiencies. The reform of the distribution sector is also crucial for the success ofthe generation sector as the generation companies cannot sell power to financiallyunviable entities¹⁷.

At least 25% financial savings could be accrued by reducing distribution losses.Thiscan help offset the increase in fuel and energy costs.

The 13th Finance Commission has advocated that the States need to address the problemof losses in the power sector in a time-bound manner. In its recommendations, it hasincluded the following recommendations, among others:

i) Reduction of Transmission and Distribution (T&D) losses should be attemptedthrough metering, feeder separation, introduction of High Voltage Distribution Systems(HVDS), metering of distribution transformers and strict anti-theft measures. Distributionfranchising and Electricity Services Company (ESCO)-based structures should be consideredfor efficiency improvement.

ii) Unbundling needs to be carried out on priority basis and open access totransmission strengthened."

The Company, with its integrated operation and significant experience in public privatepartnerships in all areas of the value chain, is well poised to address opportunities inthe sector as they arise.

Alternate models for distribution, particularly decentralized generation usingrenewable energy sources could be effectively used to address the needs of the country'srural and semi-rural communities.

1.5.7 Power Trading

The Electricity Act, 2003 (EA 2003), recognised power trading as a new segment apartfrom generation, transmission and distribution. Tata Power Trading Company Limited was thefirst company to be granted a license by the Central Electricity Regulatory Commission(CERC) in June 2004. Power trading has since enabled the country as a whole to balance itspower surpluses and deficits and has helped to optimally utilise its generation resources.Electricity traded in the short term power market has gradually increased to nearly 7% ofthe generation, of which close to 5% is via bilateral trading and the balance 2% isthrough power exchanges. Power trading has been continuously evolving since its inceptionand the increase in volumes reflects the confidence of market participants. Open access togenerators and consumers, increased share of merchant power in upcoming independent powerplants, banking of power, establishment of distribution franchisees and supply of power toSpecial Economic Zones, etc. is expected to lead to further growth in power tradingbusiness in the future. With these increased opportunities, however, the competition hasalso grown fierce due to increase in number of CERC licensed traders from 13 in FY05 to 39in FY11¹⁸.

While the outlook for power trading is bright in the longer term, the sector iscurrently facing several challenges that need to be addressed by the regulators andpolicymakers.The financial condition of the distribution sector is a matter forconcern.This is limiting their purchases and constraining their ability to pay for powerprocured. Distribution companies (discoms) prefer to shed load rather than purchase power,resulting in lower off-take and dampened prices in the merchant market. It is a paradox inthe Indian market that consumers have to invest in generating expensive power using backuppower equipment while inexpensive power remains un-dispatched due to load shedding bydiscoms. In addition, the unwillingness of discoms to allow for open access to theirconsumers in spite of the provisions in EA 2003 is acting as a barrier to further growthand competition in the sector. A combination of tariff increases, distribution reforms,open access and enforcement of the 'obligation to serve' is required going forward.

2.1.1 Generation

• The country needs to add substantial generation capacity but magnitude ofaddition is skewed region / state wise. Hence, certain regions of the country could offersignificant opportunities for investment in generation facilities.

• Policy directions do not indicate any significant development with respect toaddressing peaking power shortage. Gas-based generation capacity and decentralizedgeneration opportunities may emerge under these circumstances.

• Bidding on domestic coal-based UMPPs, which got delayed due to various reasons,seems to be gathering steam. The Government is committed to float more such opportunitiesin the near term. It has already started the bidding process for two UMPPs in Orissa andChhattisgarh.

17 CEA, Infraline reports

18 CERC

2.1.2 Distributed Generation

• The need for access to reliable electricity would drive opportunities indecentralised distributed generation. This would require innovative business models with amix of technologies to address this market and the Company is working on these.

2.1.3 Renewables

• The National Solar Mission has presented an opportunity to grow the solargeneration portfolio of the Company and the Company is looking forward to a 300 MW marketfor installed capacity by 2013.

• Strengthening of Renewable Energy Certificate (REC) mechanism is expected tohelp manage the liquidity in the renewable energy market by allowing States that lackrenewable energy sources to meet their Renewable Purchase Obligation (RPO). This wouldstimulate growth in the renewable energy space. There could be significant opportunitiesin this space depending on how the REC market evolves, and also on whether regulatorspenalise discoms that do not meet RPO.

2.1.4 Distribution

• While there have been declarations of intent at the Central Government level onprivatizing distribution, a lot still needs to be done. The Government has recently set upa sub-group in the Planning Commission on Public Private Partnership in distribution andthe Company is actively participating in the process.

• The Planning Commission has proposed to give incentives to SEBs putting inefforts towards reducing losses.

• Distribution franchisee model has been accepted by a few States as the route tobring private investments in the distribution business. However, there has been littleinclination to implement it.

2.1.5 Transmission

• The recent regulatory interventions have paved the wayfor private sectorparticipation in build-up ofnewtransmission systems.

• Transmission would remain a strategic playforthe Company, based onopportunitiesthat come up.

The Company is reviewing each opportunity in the above areas as it presents itself andis participating in chosen opportunities.

2.2 International

• Several countries across the globe are liberalizing their energy sector. This isexpected to open up opportunities for growth and participation.

• The Company is uniquely positioned, being an integrated playerfrom resourcestomanaging retail customers.

• Asa part of its international strategy, the Company is looking for integratedenergy value chain opportunities across the world. The Company aims to be significant inchosen geographies it operates in.

• The Company will seekopportunities to acquire energy resources across the globe,over and above de-risking of domesticfuel availability.

• The Company is also looking for opportunities in capacity addition acrossvarious geographies.

3. RISKS, THREATS AND CONCERNS

The large opportunity for additional generation capacity created by high economicgrowth will be subject to a lot of risks which the Government and utilities will need toaddress:

• Domestic coal supply remains a big concern with environmental factors weighingnegatively. While domestic coal supply is inadequate to meet current demand, there is notenough infrastructure in both, the exporting countries and India, to handle largequantities of coal for import into India. This is likely to lead to higher fuel costs,which will need to be passed on to the consumers.

• Price of imported coal is a cause of serious concern as, in the recent past, theprice of coal has gone up from about USD 50 per tonne to over USD 80 per tonne.

• Shortage of domestic gas and expensive LNG imports would hamper the financialviability of gas-based power plants without policy intervention.

• Delays in land acquisition, environmental clearances and other approvals remainan area of concern.

• Lack of water is another threat to the capacity addition plans, since about 79%of the upcoming capacity will be in areas of water scarcity. There is a need to addressthis through de-salination plants or building more coastal power plants.

• The rising subsidy bill ofdiscoms needsto be addressed for the long termviability of the sector in India.

• Another cause of concern faced by the infrastructure sector, and the powersector in particular, is the lack of skilled manpower.

• The availability and cost of capital for funding of new projects could also be acause of concern, given that power projects are capital intensive and that Reserve Bank ofIndia has been increasing key interest rates, with commercial banks and lenders followingsuit. The economic and monetary policies will need to play a key role in ensuring thatthese projects receive timely funds.

• The imposition of export restrictions or levy of taxes by energy exportingcountries could make the cost of imported energy into India even more expensive andunaffordable for the common man.

• The lower tariff hikes being approved by regulatory commissions are resulting inan increasing size of the regulatory assets of discoms. This is leading to increasedborrowing by discoms to run day-to-day operations, and an increased burden on theconsumers on account of interest costs. The inability or unwillingness of regulatorycommissions to address the issue of pass through of increased costs to consumers couldresult in financial stress for the discoms.

• Regulatory assets are adjustments provided by the regulatory commissions whichare non-cash in nature and would need to be liquidated during the subsequent tarifforders. The increasing quantum of regulatory assets pose a challenge to the discoms ascash has to be arranged from alternate sources.

• Risks pertaining to Mundra UMPP:

• Coastal Gujarat Power Limited (CGPL), a subsidiary of the Company implementingthe Mundra UMPP, has committed to charging no escalation on 55% of the cost of coal in itsPower Purchase Agreement (PPA). This exposes CGPL to any unfavourable movement in coalprices over the term of the PPA. Given the volatility in the fuel prices and significantincreases in the recent years, this may have a material adverse effect on Tata PowerGroup's revenues and results of operation.

• During the year, Tata Power has assessed the cash flows expected to be generatedby CGPL over the useful life of the assets of 40 years and concluded that there is noimpairment. In estimating the future cash flows, management of CGPL, based on externallyavailable information, has made certain assumptions relating to future fuel prices, futurerevenues, operating parameters and the asset's useful life, which management of CGPLbelieves reasonably reflects the future expectation of these items.

• However, if these assumptions change adversely consequent to changes in futureconditions that affect these, CGPL may incur an impairment loss and, consequently, theCompany may have to provide for diminution in the value of its investment in CGPL. Theassumptions will be monitored on periodic basis by the management of CGPL and adjustmentswill be made if external conditions relating to the assumptions indicate that suchadjustments are appropriate.

4.1 Standalone results

Tata Power recorded a Profit after Tax of Rs. 941.49 crores during the financial yearended 31st March, 2011 (FY10: Rs. 938.76 crores). The diluted earnings per share was atRs. 39.60 for FY11 (FY10: Rs. 38.60) while the basic earnings per share for FY11 was atRs. 40.84 (FY10: Rs. 40.77).

The analysis of major items of the financial statements is shown below:

a) Revenue

Revenue from power supply is lower mainly on account of lower fuel costs that arepassed on to the consumers. Higher revenue from contracts is mainly contributed byStrategic Electronics Division (SED) and Services division. Increase in other revenue isprimarily on account of the change in accounting policy in respect of Capital / Serviceline contributions received from consumers. Such contributions, which were hithertoaccounted for and carried forward as a liability, are now being accounted as income overthe average life of the related assets.

b) Other Income

Dividend income is higher mainly on account of higher dividend declared by Af-TaabInvestment Company Limited during the year. Interest income is higher primarily on accountof higher interest from subsidiaries and interest on income tax refunds. Other income alsoincludes a profit of Rs. 16.26 crores on buyback of shares by a subsidiary company.

c) Cost of Power Purchased and Cost of Fuel

Figures in Rs. crores

Cost of Power Purchased was higher as a result of higher quantum of power purchased dueto increased changeover customers as well as availability of power at a lower cost fromexternal sources (on account of low merchant rates) than from Unit 6 generation, as thelatter is based on oil as feedstock.

d) Staff Expenses

Figures in Rs. crores

Staff cost was higher during the current financial year mainly due to annual increasesin salary, as also due to induction of new executives.

e) Operation and Other Expenses

Operation and Other Expenses have increased primarily on account of higher spend onrepairs and maintenance of plant and machinery at Trombay and Lodhivali. Componentsconsumed have increased on account of increase in business volumes of SED.

Figures in Rs. crores

Increase in gross block mainly represents the capex incurred in the Mumbai Transmissionand Distribution divisions. Increase in Capital Work-in-Progress is on account of the newwind capacity that is being added to increase the contribution of renewable energysources.

Accordingly, the depreciation charge in FY11 was higher at Rs. 510.14 crores (FY10: Rs.477.94 crores).

Figures in Rs. crores

Increase in investments is mainly on account of additional equity contributed by theCompany to CGPL (Rs. 1,096.50 crores) and Maithon Power Limited (MPL) (Rs. 318.20 crores)during the year. A 120 MW unit being set up by the Company's subsidiary, Industrial EnergyLimited at Jojobera was commissioned in March 2011.

Figures in Rs. crores

The reduction in net current assets is mainly on account of higher sundry creditors.

i) Borrowings

Increase in secured loans is on account of new debenture borrowings of Rs. 600 crores.Increase in unsecured loans is on account of buyer's credit facility of Rs. 503 croresavailed for the purchase of fuel.

While the interest charge in FY11 was marginally higher at Rs. 416.89 crores (FY10: Rs.406.64 crores), finance charges were substantially higher at Rs. 45.13 crores (FY10: Rs.16.35 crores). This was essentially due to higher hedging cost of Rs. 39.61 crores (FY10:Rs. 10.26 crores)

Figures in Rs. crores

* includes wealth tax and FBT

Current tax is lower primarily on account of higher share of dividend income during theyear and also due to MAT credit accounted during the year. Deferred tax is lower onaccount of lower wind capitalisation during the year.

Figures in Rs. crores

The net worth of the Company has increased by 6% during the year on account of profitsof the year transferred to Reserves. 4.2 Consolidated Results

The consolidated financials are summarized below:

Figures in Rs. crores

The increase in Total Income was primarily on account of the higher coal pricerealization in Indonesian Coal Companies. Royalty towards coal mining was higher duringthe year (FY11: Rs. 765.83 crores, FY10: Rs. 695.37 crores) due to higher coal prices.Coal processing charges were lower during the year (FY11: Rs. 1,667.52 crores, FY10: Rs.1,719.40 crores) due to lower quantity of coal sold. There was a net capitalisation of Rs.362.84 crores on account of deferred stripping cost in FY11 as compared to a net charge ofRs. 119.53 crores in FY10. The charge in FY10 was based on a revised technical report. TheCompany's share of deferred stripping as at 31st March, 2011, was Rs. 740.88 crores ascompared to Rs. 389.52 crores as at 31st March, 2010.

Interest charge was higher primarily on account of additional loans taken by theCompany's subsidiaries. A large share of the increase in interest charge is on account ofNorth Delhi Power Limited where the tariff recoverable amount has increased to Rs.2,172.06 crores as on 31st March, 2011 (FY10: Rs. 1,015.63 crores) and which is beingfunded by higher borrowings.

Provision for Tax stood at Rs. 975.56 crores, as against Rs. 628.66 crores in theprevious year. The increase is mainly due to increased profits of Indonesian CoalCompanies. The Consolidated PAT is higher mainly on account of increased profits ofIndonesian Coal Companies. The Consolidated PAT growth would have been higher, but for theforeign exchange gain of Rs. 358.13 crores in FY10 in CGPL as compared to Rs. 122.86crores in FY11.

5. RISK MANAGEMENT PROCEDURE AND STRUCTURE

Risk Management as a formal exercise began in the Company in 2004 - well before theClause 49 mandate. Risks are evaluated based on the probability and impact of each risk.The Risk Register contains the mitigation plans for eleven categories of risks. RiskOwners prepare their risk plans which include responsibilities and timelines. These areperiodically updated for the actions taken. Seven Risk Management Sub-Committees (RMSCs)closely monitor and review the risk plans. The Company's Risk Management Committee (RMC)comprises the Executive Directors, Chief Risk Officer and other senior managers. The RMCmeets every quarter to review the risk plans and to suggest further mitigation actionpoints. During the year, divisional RMSCs reviewed the major risks at the business unitlevel. A consultant benchmarked the Risk Management Process and certain improvements inthe process were implemented.

An update on the major risks is presented to the Audit Committee of Directors (AuditCommittee) at quarterly Audit Committee meetings. The major risks include volatility inprices of fuel and availability of fuel, country risk regarding coal investments, costcompetitiveness of generation, project execution related risks, stricter emission normsimpacting generation and projects, volume risk due to open access, impact of globalfinancial turmoil, major threats from terrorism / sabotage, etc. The Risk ManagementPolicy is reviewed and revised annually. The major risk areas are covered in the riskbased Internal Audit Plan.

• Internal controls and systems

The Internal Audit function has been outsourced to a firm of Chartered Accountants whoconduct the audit on the basis of an Annual Audit Plan. The Internal Audit processincludes review and evaluation of effectiveness of the existing processes, controls andcompliances. It also ensures adherence to policies and systems and mitigation of theoperational risks perceived for each area under audit. The departmental performance israted through the Control Effectiveness Index given by the Internal Auditors. Significantobservations including recommendations for improvement of the business processes arereviewed by the management before reporting to the Audit Committee. The Audit Committeethen reviews the Internal Audit reports and the status of implementation of the agreedaction plan.

6. INFORMATION TECHNOLOGY

With significant movements in distribution / retail segment and upcoming generationprojects, the focus of IT operations during the year was primarily towards IT enablementof business processes to help business to ensure sustainability and competitiveness. Thesame was achieved with implementation of IT enabled systems for land records, invoicesprocessing, SAP-PM implementation and fuel approval memos. SAP continues to remain thebase platform and all other state-of-the-art non-SAP systems have been integrated withSAP. Value engineering studies were conducted and systems such as GIS, business analytics,SAP-CRM and roll out of generation billing and power purchase / sale for MPL and CGPL arethe key projects that have been taken up recently. On the IT infrastructure front, adisaster recovery center was setup at different seismic zone. Green IT initiatives such aswidespread video conferencing facilities to reduce travel and upgrading to power efficientservers have been completed.

7. CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis, describing the Company'sobjectives, projections and estimates may be forward-looking statements within the meaningof applicable securities laws and regulations. Actual results may vary from thoseexpressed or implied, depending upon economic conditions, Government policies and otherincidental / related factors.