Torrent Power Ltd

I. INDUSTRY STRUCTURE AND DEVELOPMENTS

I. I Power Sector in India

Enactment of the Electricity Act, 2003, has brought about various policy and regulatory initiatives. The Government of India (Gol) has issued the Rural Electrification Policy recently in addition to already announced National Electricity Policy and National Tariff Policy with an objective to provide electricity to all households by2009. The Central and the State regulatory institutions in the country are seen to be getting more forward looking and have passed various regulatory orders on Annual Revenue Requirement (ARR), Tariff formulation including Multi Year Tariff, Open Access, Intrastate Availability Based Tariff, etc. The Appellate Tribunal for Electricity (ATE) has also become active and functional as a body to address grievances against the orders of Central and State Commissions. The Indian power sector appears to be progressing well on the policy initiative and regulation front. The key to Indian reform is improving efficiencies in the power distribution sector. While the Regulatory Commissions are pressing for faster reduction of Aggregate Technical and Commercial (AT&C) losses, its implementation and results are slow. As has been the experience, strong political support is needed to achieve the desired results and ensure fiscal sustenance of the sector. In addition to the above, the institutionalisation of the competitive bidding process for capacity addition in generation as well as transmission projects, with the Centre / States offering green-field ventures with key clearances in place would encourage investments, bring competitive tariffs for the benefit of consumers and see quicker execution of projects.

I.I.I Generation

This year marked the commencement of the 11 th Five Year Plan. About 21,200 MW of capacity got added in the 10th Plan against a target of 41,100 MW. Focused efforts are, therefore, required to implement the targeted 80,000 MW in the 11 th Five Year Plan by 2012.

Encouraged by the success of the UMPP route followed by the Gol, many states are initiating the process of inviting bids for mini UMPPs (on the lines of the UMPP route). In addition to this, states are also inviting competitive tariff based bids for sourcing their short-term as well as long-term power requirements. This is an encouraging development for the sector and besides bringing transparency would also make tariff competitive. Fuels such as coal and gas would also need to be dovetailed in terms of capacity allocations and linkages so that capacity addition programs can progress smoothly.

1.1.2 Fuel for Power Generation

With the sharp increase in the Crude Oil prices and the gap between the demand and supply of gas in the country, the fuel scenario has become highly volatile. Uncertainty about the supply of gas and the price of gas has become a matter of serious concern. It is expected that with the discovery of gas in Krishna-Godavari-Mahanadi Basin, the availability of gas will ease over the next 3-5 years. Till this gas becomes available at affordable price, the coal will remain the mainstay for the power generation.

On the coal front also, the rapid increase in the prices in the international market has made the imported coal less attractive. The Government of India has initiated steps in promoting coal based generation at pit head by identifying and offering Captive Coal Blocks to the power sector. While this has received an overwhelming response, there is a lack of clear policy and speed in Coal Block allocation which needs to be set right. The private players in the sector have also shown great interest for acquiring coal mines both in India and abroad to securitise the fuel supply over a long period. With the acquisitions of such interest, the availability of coal may improve to some extent. However, the sector has to recognize that the days of cheap fuel will not return.

1.1.3 Transmission

Development of select transmission projects through private sector participation has been initiated. Fourteen transmission projects have been identified for development through tariff based competitive bidding. Power Grid Corporation of India Limited has also been asked by the Gol to study and plan transmission lines for evacuation of power from the proposed power projects to the beneficiary states. This is yet another initiative which needs to be dovetailed with the capacity addition program of generation in diverse geographical locations to the load-centers in other parts of the country.

1.1.4 Distribution and State Electricity Boards

Efficiency improvement in the power distribution sector is fundamental to power reforms. The Gol's initiative of Accelerated Power Development & Reform Programme as a vehicle to drive reforms in the distribution sector, has not yielded much needed impetus to discipline and improve consumer services. This is now being reviewed in order to link performance improvement incentives with investments, fiscal discipline and improved services. Similarly, some states have taken the initiative of performance based franchise model for management of areas burdened with dilapidated networks and extensive AT & C losses. In the meanwhile, successful models like the privatisation in Bhiwandi distribution at Maharashtra need to be replicated across more states, if sustainable and impactful change needs to be achieved.

1.1.5 Renewable Energy

There has been an increased focus on renewable energy. Many utilities as well as private developers are going ahead with plans to develop wind farms, bio fuel based projects and solar projects. For renewable energy projects to be viable, Government/Regulatory support would need to continue. Similarly, the Government could enjoin land allocations to encourage large scale development of wind farms and solar farms.

2. OUTLOOK

Given the growing demand-supply gap, the Indian Power Sector continues to be fundamentally attractive. The additional capacity required to be built is huge. In this context, we believe that the Generation sector would be of great interest to investors. A lot will depend however upon the Central and State Governments' resolve to address issues concerning Distribution sector reforms, expeditious clearances (land and environment in particular) and allocation/ linkage of fuel. On the infrastructure side, with imported coal expected to bridge the demand supply gap, adequate port capacity build-up will also need to be in place. One more area needing immediate attention is creating necessary infrastructure and addressing the issue of trained manpower necessary to implement large sized projects.

Given India's requirement of capacity to be built up in the next 10-15 years, it is important that the country recognizes to balance Carbon and Non-carbon based Generation. Both Nuclear and Hydro Power have the potential to fulfill this need; however, this would require the Government's support on policy, rehabilitation and resettlement (R&R) and environmental issues. Renewables on the other hand can provide impetus to distributed generation, thereby obviating the need to invest heavily into transmission and distribution networks.

3. OPPORTUNITIES ANDTHREATS

On the lines of the process followed for the 4000 MW UMPPs, the Gol has proposed that the states identify opportunities for development of 1000+ MW power projects, under competitive tariff based bidding. This would bring tremendous investment opportunities to existing power sector players. The Gol has also been encouraging the concept of Merchant Power Plant to meet the peak demand in the country. This would also provide support to power trading markets. Policy guidelines in this respect are under finalisation and need expeditious conclusion. The current pace of reform in the distribution and fuel sector continues to be a concern and will be critical to attract large investments in generation capacity. Integrated planning of railways, mines, ports, etc. and reforms to facilitate acquisition of land for power projects are other areas that need Gol attention.

4.1 Profile

The Company is primarily engaged in the business of generation, transmission and distribution of electricity with operations in the states of Gujarat and Maharashtra. The Ahmedabad and Surat Licence Area operations in Gujarat contributed about 82.21 % of the power business revenues and Bhiwandi Franchise in Maharashtra contributed about 17.79%.

4.2 Sales

The sales were higher at 9418.41 million units (MUs) as against 7199.72 MUs during the previous year. Sales to various consumers of the Company during the year compared to the previous year are as under:

4.3 Generation

Ahmedbad Sabarmati (SBI) Power Station of 400 MW generated 3425 MUs as against 3257 MUs during previous year. Vatva Station of 100 MW generated 554 MUs as against 598 MUs during previous year. The generation at gas based plant at Vatva was largely affected by poor availability of gas.

4.4 Transmission and Distribution

The Company is constantly upgrading and augmenting its network to achieve the multi pronged objectives viz. to meet the demand of its consumers, to reduce the T&D losses and to improve reliability of the network to serve its consumers better. In this regard, the Company has enhanced its network by capacity creation at receiving stations, distribution sub-stations and laying of HT & LT network. The highlights of the system network upgradation for Ahmedabad, Gandhinagarand Surat license area are as under:

• Enhancement of power transformation capacity by about 371 MVA by commissioning of two 220 kV sub-stations at Surat and one 33 kV sub-station at Ahmedabad taking the total power transformation capacity including intermediate power transformation capacity to about45l5MVA.

* Enhancement of distribution transformation capacity by about 113 MVA by addition of 321 new distribution transformers and replacement of existing transformers, taking the total distribution transformation capacity to about 2959 MVA.

The efforts of the Company in strengthening and augmenting the system network have helped in reducing the average number of interruptions per consumer to 12.24 for the year as compared to 8 interruptions during the 6 months of 2006-07. Similarly, the average consumer hours lost during the year were 11.08 as compared to6.32duringthe6monthsof2006-07.

The Company has made substantial investment for strengthening and augmenting the existing network in Bhiwandi area to reduce the T&D losses and to cater to the consumer demand with improved quality of supply. During the year under report, the Company has added 51 distribution transformers, replaced 889 transformers and revamped 2200 distribution transformer centers in Bhiwandi area. Further, the Company added about 31 ckms. of overhead and 65 ckms. of underground network of 22 kVto augment its distribution capacity and relieve the overloaded existing feeders in Bhiwandi area.

5.1 1147.5 MW SUGEN Power Project

The Company will commission its most ambitious 1147.5 MW gas based power project at SUGEN near Surat by end of FY2008-09.

5.2 New Projects

The Company has a long-term strategic growth plan, in order to enable it to capitalise on opportunities. The Company is currently pursuing development of several projects to achieve growth. These are:

SUGEN Expansion

The Company is planning to increase its project capacity by additional 3000 MW. SUGEN II and SUGEN III both will add 1500 MW in each phase at SUGEN site. Land adjacent to SUGEN project has been identified and acquisition process for the same has commenced.

Dahej

The Company has been named as co-developer for Dahej SEZ near Bharuch in Gujarat state and is authorised to put up generation project upto 1500 MW. The Company is planning to set up approximately 400 MW gas based combined cycle power plant in the first phase through a new Special Purpose Vehicle, Torrent Energy Limited. The Contour survey &Geo-Technical investigation for the project has been completed. Further, bids have been invited under international competitive bidding process for awarding EPC contract.

Pipavav

The Company is planning to set up a 2000+ MW coal based thermal power project in Pipavav in Amreli District of Gujarat. Torrent Pipavav Generation Limited has been incorporated as a subsidiary of the Company for development of the project. Land for the project is under possession of Gujarat Power Corporation Limited which will be transferred to the Company. Fuel will be supplied from Baitarni Coal Block in Talchar Coal Field, Orissa.

Morga

The Company's bid to supply power to GMDC on the basis of coal to be supplied by GMDC from Morga-11 Coal Block, Chhattisgarh has been accepted. The Company is planning to set up 1,000+ MW coal based thermal power project in Chhattisgarh for this purpose. A Memorandum of Understanding (MOU) has been signed with the Chhattisgarh government and Chhattisgarh State Electricity Board for development of the project.

6. CLEAN DEVELOPMENT MECHANISM

The Company made an application for registration of its SUGUN project to UNFCCC. After considerable efforts spread over more than three years, the project has been approved as eligible for Clean Development Mechanism (CDM) benefits on Nth August, 2007. Methodology proposed by Torrent Power Limited got approved and has been accepted for application to similar projects anywhere in the world. Consequently, SUGEN plant will be eligible to earn Carbon Credits (CER's) on the commencement of generation.

7. FINANCING

During the year, the Company raised long-term loans of Rs. 1100 Crores from various financial institutions and banks. The term loans including working capital loans and Accelerated Power Development and Reform Programme loans outstanding as at 31st March, 2008 were Rs. 2537 Crores (Previous Period Rs. 1627 Crores). During the year, an amount of Rs. 499 Crores (Previous Period Rs. 817 Crores) has been drawn for the 1147.5 MW SUGEN CCPP and Rs. 680 Crores for ongoing CAPEX (Previous Period Nil). The Company has repaid an amount of Rs. 57.96 Crores (Previous Period Rs. 27.13 Crores) towards term loans including loan under APDRP.

The Company's long-term debt is rated AA- by credit rating agency, while for working capital loans; the Company is rated PI + by credit rating agency suggesting the highest rating.

8. RISK AND CONCERNS

The Company has systems in place for identifying potential risks and taking measures to mitigate those risks. The Risk Management Policy of the Company addresses all potential risks including Fuel Risks (availability and pricing), Regulatory Risks (Tariff Regulation, Environment Regulation, etc.), Consumer Risks (Revenue Realisation, Transmission Risks), Asset Risks (Natural Calamity, etc.), Human Resource Risks and IT Risks.

The power generation plants use coal and gas as fuel. While domestic coal production and price has remained stable during the period under consideration, the increased usage of coal and capacity addition would increase the gap between demand and supply and in turn necessitate use of imported coal. High dependence on domestic coal could, therefore, expose the Company to potential availability risks. In respect of imported coal, the price instability due to increased demand in the international market, increase in crude price and transportation constraints alongwith foreign exchange variation would expose the Company to the potential availability and price risk. The Company has taken necessary steps to maintain continuous supply of fuel and in turn generation.

The Company's business growth is mainly driven by the industrial and commercial activities which depend on economic growth. The Company's Ahmedabad, Gandhinagar and Surat distribution areas have witnessed high growth on account of increase in commercial and industrial activities in last few years and it is expected that growth in demand for energy would continue to rise in line with economic growth. However, any reduction in economic growth would expose the Company to potential business risk.

The Company procures substantial quantity of power for supply from GUVNL. The demand supply gap in Gujarat may impact the availability of power from GUVNL. The upcoming 1147.5 MW SUGEN project shall help in bridging the demand supply gap in existing distribution businesses, leaving potential of sale of power outside Gujarat.

The Electricity Act, 2003 provides for competition in supply of electricity through second licensee in the Company's existing license area of operation. However, the established distribution network and track record of supplying reliable and quality power would give edge to the Company to meet with such competition.

The GERC has notified regulations, prescribing various norms and standards of performance for the licensees and provided for penalties for deviating from the prescribed standards of performance. The Company has been able to improve its performance vis-a-vis GERC's prescribed standards of performance. The GERC has notified Multi Year Tariff (MYT) regulations requiring determination of tariff under the new regime. However, the Company has equipped itself to meet with the regulatory requirements.

All the significant parameters concerning the commissioning of SUGEN project have been already tied up. The capacity utilisation during the commercial operations of the project will require uninterrupted supply of fuel, i.e. Natural Gas (NG) / Regasified LNG (RLNG). At present in the world and in the country, there is a mismatch of demand and supply of NG/RLNG, resulting into higher cost of fuel. However, the project enjoys partial certainty of availability of fuel at reasonable price and for the balance portion, if uninterrupted supplies are not available, to that extent the commercial operations will suffer from the utilisation of full capacity. At the same time, possibility of purchase of fuel on spot basis exists which may partially mitigate the risk. The power generated from the plant is proposed to be used mainly in the Company's distribution areas. The risk of unutilised capacity can be mitigated by sale of surplus power at competitive rates on spot basis. The activation of Indian Energy Exchange will help this process.

The Company has been able to reduce the T&D losses in its recently acquired distribution franchise for Bhiwandi. However, it is required to make further investments in network for reducing technical losses and to cater to the additional demand. The further reduction of commercial losses necessitates improvements in metering and billing processes. The Company can be subjected to the financial risk, if its efforts do not yield the desired results.

The operations of the Company are subject to certain risks generally associated with power generation, transmission and distribution businesses, and the related transportation, receipt and storage of fuels and environmental issues.

9. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACIES

The Company has appointed a reputed firm of Chartered Accountants to carry out Assurance audit. The audit process includes review and evaluation of effectiveness of the existing processes, controls and compliance. It also ensures adherence to policies and systems and mitigation of the operational risks perceived for each area under audit. Significant observations including recommendations for improvement of the business processes were reported to the Audit Committee of the Board which reviewed the audit reports and the status of implementation of the agreed action plan.

10. FINANCIAL PERFORMANCE OF THE COMPANY

During the current year, the total income of Rs. 3722.00 Crores was higher by 28.67% as compared to Rs. 1446.35 Crores in the previous period, as detailed below:

10.1 Revenue

The revenue of the Company comprises primarily sale of electricity, which is sourced from its own generation as well as purchase from Gujarat Urja Vikas Nigam Limited (GUVNL) and Maharashtra State Electricity Distribution Company Limited (MSEDCL). The Company also derives revenue from related services namely hire of meters, street light maintenance contracts, contract / consultancy services, etc. and interest/dividend earned on investments.

10.1.1 Sale of Electricity

The Company witnessed demand growth from all major categories of the consumers. The charges for electricity are based on tariff and FPPPA approved by the Gujarat Electricity Regulatory Commission (GERC) and Maharashtra Electricity Regulatory Commission (MERC). Other major factors contributing to the sales were inclusion of Bhiwandi Circle and reduction in T&D losses. The Company also exports power to GUVNL in case power generated is more than system demand. The average revenue realisation per unit sold during the financial year was Rs. 3.81 as compared to Rs. 3.79 of the previous year.

10.1.2 Other Income

Other Income of Rs. 88.21 Crores for the period under review comprises revenues from related business activities like hire of meters - Rs. 34.01 Crores, Street Lighting Maintenance contracts -Rs. 4.51 Crores besides other recurring items like interest and dividend on investments and deposits, sale of scrap, bad debts recovery, etc.

10.2. Expenditure

The expenditure incurred is on purchase of power, fuels used for power generation and other generation, distribution, administration & other expenses including employees' costs, insurance, etc.

10.2.1 Power Purchase

The total power purchase cost accounts for about 53% (Previous Period 52%) of sales and 58% (Previous Period 55%) of the total expenditure. For power supplies in Ahmedabad and Gandhinagar, demand of power is met through own generation capacity of 500 MW and purchase of power from GUVNL. The higher efficiency maintained on generation front has provided a cushion towards power purchase from GUVNL. For the supply of power to Surat, the entire requirement is sourced from GUVNL. The rates for power purchase from GUVNL are approved by GERC. In case of Bhiwandi, the Company is required to pay for power purchase cost as per the Distribution Franchise Agreement to MSEDCL.

10.2.2 Fuel

The other primary fuel used in power generation is coal and natural gas. Expenditure on fuel constituted 22% (Previous Period 24%) of the total expenditure. The usage of fuel is also linked with the higher generation achieved by the Company. The coal used by the Company is procured both indigenously as well as imported. The Company makes conscious efforts to monitor the availability as well as optimise the sources of different fuels.

10.2.3 Operating Costs

The other Operating Costs (generation, distribution, administration and other expenses) consist primarily of repair and maintenance of buildings, plant and machinery, employees' remuneration and benefit expenses, insurance, etc. These expenses represent 13.86% (Previous Period 15.42%) of the total expenditure.

10.2.4 Depreciation

The depreciation charged to the profit and loss account during the year is Rs. 156 Crores (Previous Period Rs. 68 Crores). A proportionate amount of Service Line Contribution and APDRP Grant attributable to depreciation on assets created against such Service Line Contribution and APDRP Grant is adjusted against depreciation for the period. The net depreciation after such transfer from Service Line Contribution and APDRP Grant is Rs. 148 Crores (Previous Period Rs. 65 Crores). Depreciation on assets relating to 1147.5 MW SUGEN CCPP is treated as pre-operative expenses pending capitalisation.

10.2.5 Interest and Finance Charges

The interest charges consist primarily of interest expense on Term Loans, Working Capital Loan and interest on security deposits placed with us by consumers of electricity.

Borrowing costs amounting to Rs. 223 Crores (Previous Period Rs. 52 Crores) are capitalised during the year.

10.2.6 Taxation

The Company has provided for Rs. 79.77 Crores (Previous Period Rs. 16.77 Crores) in respect of current taxes, Rs. 1.06 Crores (Previous Period Rs. 0.54 Crore) in respect of Fringe Benefit Tax and Rs. 61.22 Crores (Previous Period Rs. 40.60 Crores) towards Deferred Tax Liability.

10.3 Net Profit after Tax

The net margin of the Company is 5.84% (Previous Period 5.17%) of the net sales for the year under review.

10.4 Appropriation to Reserves & Surplus

Out of the profits forthe year, an amount of Rs. 140 Crores (Previous Period Rs. 5.07 Crores) has been transferred to the General Reserve.

10.5 Net Worth

The net worth of the Company at the end of the financial year was Rs. 2890 Crores (Previous Period Rs. 2705 Crores).

10.6 Resource Allocation

a) Fixed Assets

The gross fixed assets as on 31st March, 2008 were Rs. 3689 Crores as compared to Rs. 2985 Crores in the previous year.

b) Working Capital

The net current assets as on 31st March, 2008 were Rs. (207) Crores as compared to Rs. (330) Crores in the previous year.

11. HUMAN RESOURCE MANAGEMENT

Continuous efforts are made to redefine the business processes leading to increase in productivity and overall improvement in the quality of work. Several training and development initiatives including training and upgradation of technical skills, consumer orientation, self and organisational development, team building, managerial effectiveness, series of in-house presentations, etc. have been a constant feature during the year under review.

12. SUBSIDIARIES

12.1 Torrent Power Grid Limited

Torrent Power Grid Limited, a public-private joint venture in power transmission in India partnered by the Company with Power Grid Corporation of India Limited, has commenced implementation of the project.

12.2 Torrent Pipavav Generation Limited

The Company is planning to set up 2000 + MW coal based thermal power project in Pipavav. Torrent Pipavav Generation Limited has been incorporated as a subsidiary company on 25th September, 2007, for development of the project.

13. SOCIAL CAPITAL

As a part of its commitment to the development of the society, the Torrent Group is undertaking many projects which seek to touch thousands of lives in Ahmedabad, Surat and Bhiwandi under the programme called "Sparsh" which was launched in January, 2005. "Sparsh" strives to make a positive difference in the quality of life in the areas of health, education, public amenities and community development, involving the individual and collective will and effort of about 10000 members of the Torrent Parivar. Some of the activities undertaken in Ahmedabad, Surat and Bhiwandi include tree plantation, health checkup camp, cleaning of water tanks, refurbishing of schools.

The Company has been a significant contributor to the social capital of the cities and the state of power supply. A value added statement, particularly as regards society, is summarised below which details the contribution made by the Company towards the state exchequer, employment generation, creditors and lenders, and investors.

Value Added Statement

As seen from the above, your Company has added a value of Rs. 1242.36 Crores to the social capital during the year 2007-08.

14. CAVEAT

Statements in the Management Discussion and Analysis, describing the Company's objectives, projections and estimates, are forward-looking statements and progressive within the meaning of applicable security laws and regulations. Actual results may vary from those expressed or implied, depending upon economic conditions, Government Policies and other incidental/related factors.