MANAGEMENT DISCUSSION AND ANALYSIS

BACKGROUND

Pursuant to the Composite Scheme of Arrangement including Amalgamation of Torrent Power AEC Limited (TPAL), Torrent Power SEC Limited (TPSL) and Torrent Power Generation Limited (TPGL) (transferor companies) with the Company and the reorganisation of capital of the Company (the Scheme), the undertakings of the transferor companies as going concerns are transferred to and vested in the Company with effect from the Appointed Date, i.e., 1st April, 2005.

This is the maiden report of the Company representing the collective operations of the power business of Torrent Group. Prior to the amalgamation, the transferor Companies had their independent operation with the erstwhile TPAL being engaged in generation and distribution of power, TPSL in distribution of power and TPGL in implementation of 1100 MW SUGEN CCPP.

Simultaneously, the Company had extended the Financial Year (FY) 2005-06 to end on 30th September 2006 after obtaining necessary approvals in this regard. The data presented hereinafter for FY 2004-05, wherever required for comparison, is the aggregate of the data of the transferor companies. In order to bring parity, the data for FY 2005-06 (18-months) has been annualised, wherever appropriate, for the purpose of comparison with FY 2004-05 (12-months). However, the annualised data of FY 2005-06 is not exactly comparable because of the seasonal impact on parameters like Sales, Plant Load Factor, Purchase of Power, T&D Loss, etc.

SECTOR OVERVIEW

Based on the current trends it is estimated that the Indian economy will grow at around 8%. There is no disputing the premise that robust infrastructure is a prerequisite for sustaining and enhancing GDP growth. Of the various elements of infrastructure, power would appear to be the most critical and any shortcoming in the sector would have an almost immediate impact on the output and hence, GDP.

Although there has been quantum increase in investment in the Indian power sector, there is still an overall peak shortage of about 12 per cent in the country.

Viewed against this backdrop, the state of Gujarat and Indian power sector generally, provides investment opportunities on all the aspects like adding generation capacity, strengthening transmission, reforming and intensifying distribution etc., for the private sector.

Company

Torrent Power Limited (TPL) is an integrated power company engaged in the generation and distribution of electricity in the cities of Ahmedabad, Gandhinagar and Surat in the state of Gujarat. TPL has a distribution area admeasuring 408 sq. kms. The Company serves about 1.85 million consumers in these cities. The operational generating capacity of the Company is 500 MW, comprising 400 MW coal based thermal power plant at Sabarmati and 100 MW dual fuel gas based combined cycle power plant at Vatva, Ahmedabad.

The Company is also implementing a 1100 MW SUGEN gas based combined cycle mega power plant at village Akhakhol near Surat. The first block of 367 MW of the project is scheduled to go on stream in the third quarter of year 2007.

Performance

The overall performance of the Company during the financial period 2005-06 has been good. The Company generated 5943 MUs of electricity while the purchase of power stood at 5711 MUs. The units of electricity billed to consumers were at 37 MUs excluding an export of 73 MUs of power, showing an increase of 12.82% on annualised basis. The peak system demand in the areas of supply was 1333 MW, showing an increase of 13.93%.

The net sales of electricity of the Company stood at Rs. 3,783 crores and net profit was Rs. 179 crores. The operations in the Surat distribution area were significantly affected by unprecedented floods during August, 2006. More than 85% of the area was submerged in water, requiring the Company to proactively switch off 1720 out of 2003 distribution substations, affecting 3.83 lacs consumers for few days.

The estimated expenditure to be incurred for the replacement of the transformers and consumer services apparatus such as meters, cut outs etc. after the Surat floods is approximately Rs. 35 crores. The revenue expenditure for restoring the services, repairs etc. is estimated to be approximately Rs. 15 crores, of which an amount of Rs. 8.7 crores has already been incurred till 30th September 2006.

In FY 2005-06, the total revenues of the Company stood at Rs. 3,940 crores while the total expenditure was Rs. 3,580 crores.

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), erstwhile Gujarat Electricity Board. 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.

1.1 Sale of Electricity

The net revenue from sale of electricity for the financial period 2005-06 was Rs. 3,783 crores, which constituted about 96% of the total revenue. The Company witnessed demand growth from all major categories of the consumers. The sales of the Company are seasonal in nature. The charges for electricity are based on tariff approved by the Gujarat Electricity Regulatory Commission.

Other major factor contributing to the net sales is the lower T&D loss of 9.67% witnessed during this financial period as against 11.99% during FY 2004-05. 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 period was Rs. 3.74.

2.1 Power Purchase

The total power purchase cost accounts for about 44% of net sales and 46% 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 achieved on generation front, represented by 10.24% growth in generation over FY 2004-05 on an annualised basis, has provided a cushion towards power purchased 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.

2.2 Fuel

The primary fuel used in power generation is coal and natural gas. Expenditure on fuel constituted over 28% 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 fuel.

Business Review – Generation

The operating efficiency of power plants in general has improved during the year. The coal based Sabarmati Thermal Power plant consists of four Stations C, D, E and F built in different phases with capacity of 60 MW, 120 MW, 110 MW and 110 MW respectively. The availability factor (which is a measure of how much time a plant is available to generate power) of these stations improved to 94.91% from 92.32% in FY 2004-05 and the average PLF (which is a measure of capacity utilisation) increased to 93.25% from 86.69% in FY 2004-05.

During the financial period, the Sabarmati plant generated 4906 MUs. The other highlights of the Sabarmati Power Plant are highest utilisation of Ash (94.71%) and continuous 198 "Accident free days work" constituting 3.5 million accident free man-hours work. The PAF for 100 MW Vatva Power Plant, consisting two gas turbines and a steam turbine, was 97.67% up from 88.74% in FY 2004-05 and PLF was 78.87% up from 63.55% in FY 2004-05.

During the financial period, the Vatva plant generated 1037 MUs. It crossed 4009 days accident free work.Further in order to increase the operational efficiency of the coal based generating plant, the Company has awarded a contract for revamping the coal handling facility at the Sabarmati Power Plant, which is about 30 years old. The project is likely to be completed by mid 2007. This will help in debottlenecking coal handling within the plant area facilitating continuous generation by increasing coal crushing and conveyor belt capacity.
With the intra-state Availability Based Tariff (ABT) to be implemented shortly in Gujarat, the Company has already installed ABT based Metering system at various power import and generating points. For the purpose state of art control rooms have been established at Ahmedabad and Surat.

DEVELOPMENT
1100 MW SUGEN Power Project – A Mega Strategic Initiative:

The Company is implementing 1100 MW SUGEN gas based combined cycle power plant at an estimated project cost of Rs. 3,096 crores at village Akhakhol, near Surat following Government of Gujarat’s direction to set up its own generation facilities for the Surat Distribution Area as well as a backward integration move to secure a long term reliable source of supply for its Ahmedabad Distribution Area.

The project achieved financial closure in September 2004 by tying up the entire debt requirement of Rs. 2,167 crores with a consortium led by IDFC. Government of India has accorded Mega Power Project status to the project, which shall bring attached fiscal incentives. Central Electricity Regulatory Commission has accorded its in principle approval to the project cost.

The project will have 3 power blocks, each of 367 MW comprising advanced class gas turbines SGT5 4000F, steam turbines and common generators connected in single shaft configuration along with HRSGs. The Engineering, Procurement and Construction (EPC) Contract was awarded to the consortium of Siemens AG and Siemens Ltd. in June 2005 after following a rigorous and transperent ICB route for the evaluation of technology and suppliers, aided by third party supervisors for monitoring the process.

The design and implementation of this project also take into account the environmental protection and clean environment objectives of the Company. The Environment Impact Assessment of the project has been completed and a complete environment management system is in place.

The Company has already tied up the substantial part of the fuel requirement for the project and discussions are on for the balance with various suppliers. The Gas Transportation Agreement has been executed with Gujarat State Petronet Limited. A joint venture has been formed with Siemens for providing Operations and Maintenance services to the project.

The Project has achieved considerable progress and about 56 per cent of the EPC work has been completed. All essential Non-EPC works viz. intact well, water pipe line, reservoir, compound wall, roads and site office have been completed. The first block is scheduled to commission by the third quarter of 2007.

Power Evacuation Arrangements
Joint Venture with PGCIL

The Company has also entered into a Joint Venture with Power Grid Corporation of India Limited (PGCIL) for setting up dedicated transmission lines of 440 KV for evacuation of power from 1100 MW SUGEN project to Ahmedabad distribution area and to the National Grid through connectivity with PGCIL at Dehgam and Loop In Loop Out of Gandhar- Vapi line.

This will be implemented under the aegis of Torrent Power Transmission Private Limited (TPTPL), which has already applied for the grant of the transmission license to Central Electricity Regulatory Commission. The Company will own 74% of the equity of TPTPL while PGCIL will have the balance. The estimated project cost is Rs. 550 crores and is expected to start soon.

220 KV Transmission Project:

The Company is creating power evacuation facilities for taking the power from the project to Surat distribution area by implementing a 220 KV Transmission Project. The project entails setting up of three 220 KV substations near Surat distribution area and connecting them to 1100 MW SUGEN project through installation of three double circuit 220 KV lines. The detailed engineering for the project is complete and orders for procurement of the major equipments have been placed.

Business Review – Distribution
OPERATIONS

Pursuant to the Scheme, the Company has been vested with the power distribution business of erstwhile Torrent Power AEC Limited and Torrent Power SEC Limited. Torrent Power AEC Ltd. was generating and distributing electricity in cities of Ahmedabad & Gandhinagar with a distribution area admeasuring 356 sq. kms. while Torrent Power SEC Limited had distribution area admeasuring 52 sq. kms. in Surat.

Power Purchase and Sales:

The system peak demand went up from last year’s level of 1170 MW to 1333 MW showing an increase of 13.93%. The details of purchase and sale of power are as follows:

Transmission and Distribution (T&D) Loss

The dedicated efforts of the Company on various fronts including detection of thefts, replacement of defective/stopped meters, Slum Electrification, consumer awareness initiatives etc. as well as strengthening and augmentation of distribution network have brought down the T&D loss to 9.67%, from 11.99% during 2004-05. This is amongst the lowest in the country.

System Network

As at 30th September 2006, the system had a High Tension (HT) mains length of more than 4400 Kms. and Low Tension (LT) mains of more than 16000 Kms. while length of Extra High Voltage mains was more than 290 Kms. The number of EHV Sub-stations was 26, the number of power transformers was 140 and the number of distribution transformers was 6783.

The highlights as regards up-gradation of the system network are:

• Enhancement of power transformation capacity by about 200 MVA by commissioning of a 220 KV sub-station, a 66 KV substation and capacity addition at existing substations taking the total power transformation capacity to about 2554 MVA.

• Enhancement of distribution transformation capacity by about 174 MVA by addition of 594 new distribution transformers and replacement of existing transformers taking the total distribution transformation capacity to about 2780 MVA.

• Commissioning of three 33 KV Sub-stations at AUDA Garden, C. G. Road and Srinandnagar in Ahmedabad.

• 66 KV connectivity established between E and G Receiving Stations by laying 3 Single Core 66 XLPE cable in Surat.

DEVELOPMENT

Bhiwandi Distribution Franchisee:

The Company has been selected as the Distribution Franchisee for Bhiwandi circle of Maharashtra State Electricity Distribution Company Limited (MSEDCL) in first such model in Indian Power Sector. Bhiwandi is a major textile hub of western India catering to 1.6 lacs consumers having an unrestricted demand of about 750 MVA.

The agreement shall be valid for 10 years and during the validity of the agreement the Company would undertake all activities relating to distribution of power in the franchise area as an agent of MSEDCL. The Company would not take over any past liabilities.

The Company would commence its operations in Bhiwandi on signing of the Distribution Franchisee Agreement, which is under discussions.

INDUSTRY STRUCTURE AND DEVELOPMENTS

Power is a critical requirement for economic development. Sustained socio-economic growth substantially hinges upon the availability of adequate and reliable power at reasonable rates.

Industry Structure

Historically, the electricity business has been a monopolistic one. At the state level, the successor entities of the State Electricity Boards dominate generation, transmission and distribution of power. The central public sector companies such as NTPC, NHPC, PGCIL, etc. continue to be the major players in the power sector.

But of late, private sector entities encouraged by the ongoing reforms in the power sector have made significant inroads in the industry. The Ministry of Power prescribes guidelines for all the technical and economic matters, duly assisted by the Central Electricity Authority for technical matters.

The operations and activities of entities in the power sector are regulated by respective regulatory commissions. The Central Electricity Regulatory Commission is responsible for regulating the central sector generating plants and entities engaged in inter-state supply, transmission and trading of power while the State Electricity Regulatory Commissions are responsible for regulating the State level entities.

Developments

Fully realizing the criticality of this sector, the Government has been taking, over the last few years, and is fully committed to take in the future, path-breaking initiatives for the rapid growth of the sector on the legal and regulatory front as well as the business environment front.

With the enactment of the Electricity Act, 2003 and the notification of the National Electricity Policy, the National Electricity Rules, the National Tariff policy and Competitive bidding Guidelines, the Government has created an enabling and investor friendly policy environment.

In January 2006, the Central Government notified the National Tariff Policy (NTP) for the power sector in compliance with Section 3 of the Electricity Act and in continuation of the National Electricity Policy (NEP) passed in February 2005. The tariff policy has set some objectives like ensuring availability of electricity to consumers at reasonable and competitive rates, ensuring financial viability of the sector and attracting investments, promoting transparency, consistency and predictability in regulatory approaches across jurisdictions and encouraging competition and efficiency.

The salient features of the National Tariff Policy, 2006 are as follows:

i) All future requirements of power by distribution licensees to be procured competitively, except in cases of expansion of existing projects.

ii) Tariff of new public sector generation and transmission projects to be decided on the basis of competitive bidding after a period of five years.

iii) The Central Commission to notify the rate of return on equity for generation and transmission projects. The rate of return for transmission may be adopted by the State Electricity Regulatory Commissions (SERCs) for distribution with appropriate modification taking into view the higher risks involved. Either of the two, Return on Equity approach or Return on Capital approach may be adopted by Central Commission.

iv) Any cash resources available to the Company from its share premium account or from its internal resources that are used to fund the equity commitments of the project under consideration should be treated as equity.

v) For financing of future capital cost of projects, a Debt: Equity ratio of 70:30 to be adopted.

vi) The Central Commission to notify the rates of depreciation in respect of generation and transmission assets, which would also be applicable for distribution with appropriate modification as may be evolved by the Forum of Regulators. The rates to be applicable for the purpose of tariff as well as accounting.

vii) The Central Commission, in consultation with the Central Electricity Authority (CEA), to notify operating norms for generation and transmission. The SERC to notify operating norms for distribution.

viii) MYT framework to be adopted from April, 2006. The framework to have a five year control period, which can be relaxed to three years in case of transmission and distribution if considered necessary by regulatory commission.

ix) For generation, a two part tariff structure to be adopted for all long term contracts to facilitate Merit Order Dispatch. Availability Based Tariff (ABT) to be introduced at State level by April, 2006 as per NEP. This framework to be extended to generating stations, including grid connected captive plants as determined by SERC.

x) The national tariff framework for transmission to be developed by CERC taking into consideration the advice of the CEA and to be implemented by 1st April, 2006.

xi) Central Commission to establish (within one year) norms for capital and operating costs, operating standards and performance indicators for transmission lines at different voltage levels.

xii) Investment by transmission developer other than Central Transmission Utility or State Transmission Utility (CTU/STU) would be invited through competitive bids as per Central Government guidelines. Tariff for projects to be developed by CTU/STU after 5 years or as decided by Commission to be determined through competitive bids.

xiii) For Distribution, the State Commission to notify the standards of performance of licensees with respect to quality, continuity and reliability of service for all consumers. The Forum of Regulators to determine basis frame work on service standards.

xiv) Framework for revenue requirement, costs, regulatory asset and tariff design is provided.

xv) Consumers having consumption below 30 units per month may receive a special support through cross subsidy and such tariff should be at least 50% of the average cost of supply.

xvi) The method and formula of determination of cross-subsidy surcharge are indicated. The cross-subsidy surcharge to be brought down progressively so that by year 2010-11, tariffs are within +/- 20% of the average cost of supply.

OUTLOOK AND OPPORTUNITIES

The enactment of the Electricity Act and subsequent introduction of various regulations have opened up myriad opportunities in the Indian Power Sector. Though presently, opportunities for private sector seem to be available mainly in power generation, but it will be more prudent to follow a synchronized approach to make transmission and distribution also easy investment destinations.

The Company plans to expand operations in the areas of power generation, transmission and distribution by taking advantage of opportunities created by regulatory and economic reforms. The Company is actively pursuing various generation projects as well as the distribution franchisees being offered in several states in the country.

In order to obtain fuel security, the Company is also evaluating options for entering into agreements with various companies having experience in coal mining, which would be captive supplies for the generation projects with coal as fuel.

The total installed generation capacity in the country was around 1,26,994 MW at the end of August 2006. The private sector constitutes only 12% of the installed capacity. The existing peak shortage in the country stands around 12% and energy shortage is around 8%.

With the peak demand expected to rise by 2012 to a level of 1,57,107 MW, in order to fully meet both energy and peak demand, there is a need to create adequate reserve capacity margin which would require a capacity addition of over 1,00,000 MW.

The transmission and distribution system also need to be correspondingly augmented to meet the increased demand. If the role of private sector is assumed at 20%, Rs. 90,000 crore investment by the private sector is envisaged in the 11th plan period.

The Government of India is proposing the setting up larged-sized power generation projects of 4000 MW each (called ultra mega projects) with a project cost of approximately Rs. 25,000 crores which are expected to provide economies of scale and faster capacity addition leading to less expensive power.

Government of India has appointed Power Finance Corporation (PFC) as the Nodal Agency to award these projects to private sector players, on the basis of competitive bidding of tariff. The Company has qualified in the PFC invitation for Request for Qualification for these projects. The Company proposes to bid for two projects, one at Mundra in Gujarat based on imported coal and second at Sasan in Madhya Pradesh based on indigenous coal.

The participation of private sector in nuclear power generation may also see light of the day with the historic nuclear deal cooperation between India and the US. In the transmission segment, the target is to create a robust National Grid by 2012 besides strengthening the existing network.

In transmission, so far the role of the private sector has been limited. In accordance with the Electricity Act, as also with the National Electricity Policy, the private sector’s role is expected to increase gradually. It is expected about 10-15 per cent of the transmission system to be developed through the private sector route in the next 10-15 years and the proportion may be more in the next 25 years.

The CTU, PGCIL has invited private participation in various transmission projects through joint venture route wherein 74% equity will be owned by the private investors and PGCIL will have the balance.

Under the new environment, ‘Open Access’ in transmission and supply has become feasible and shall provide fillip to the Company to source power at competitive prices.

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.