Management Discussion and Analysis

The world economy is still grappling with the legacy of the global financial crisis. Global growth was lower than expected and picked up marginally in 2014 to 2.6%. The key features of the lack luster global recovery have been accommodative monetary policies, falling commodity prices, and weak international trade. The key policy challenge for developing countries is to adjust monetary and fiscal policies in the short-term while addressing headwinds to growth and implementing structural reforms in the long-term.

The Indian economy is in a recovery mode and grew at 7.3% in 2014-15 compared to the growth rate of 6.8% in 2013-14. We also saw an increase in per capita income at current prices during 2014-15 which rose by 9.2% to Rs. 87,748 as against Rs 80,388 in the brvious fiscal. According to a report of World Bank, India is on course to overtake China as the world's fastest growing economy in the next two years. The policy implementation has stepped up during the fourth quarter, supported by opening up of the coal industry to private investors, deregulation of diesel prices, liberalization of labor laws, and linking of cash transfers with efforts to increase financial inclusion.

The power sector in India has witnessed credible growth in FY 201415 meeting the targets for generation growth (8% growth vis-a-vis the targeted 5.77%), capacity addition (installation of 22,566 MW compared to the target of 17,830 MW) and successful auctioning and allocation of a number of coal blocks. However, lower asset utilization (PLF ~66%), peak power deficit, stranded generation capacity and transmission congestion continues to be matters of concern. As on 31st March, 2015, the all India installed capacity stood at 267.6 GW with Coal based capacity at 164.6 GW, Gas based at 23 GW, Nuclear at 5.78 GW, Hydro at 41.2 GW and Renewables at 31.7 GW. Addition of 22,101 ckt km of transmission lines till March 2015 has created better transmission availability and should boost the power market which is still evolving.

In the evolving legislative, policy and regulatory environment, power markets will continue to occupy a central position. Given the challenges of a buildup in supbrssion of demand and simultaneous capacity addition with stranded assets, the industry needs some quick wins and support of all stakeholders for establishing a path to confidence. There is a need to relook at the inefficient plants which in addition to their primary resource consumptions are also blocking other infrastructure (rail network, evacuation facility etc), which otherwise can be made available for other projects for bringing efficiency in the sector.

The Government of India is working on a mission to achieve electrification of remaining 20,000 villages by 2020 through measures like off-grid solar power generation. The aim is to extend 24 hour power supply to each household by 2022. Capacity addition for both thermal and renewable energy has been planned to achieve this target along with distribution reforms.

Presently, Long term power market is saddled with many problems such as demand supply mismatch in long term horizon, revision in Standard Bidding Documents for procurement of power, challenges in fuel supplies and disputes related to compensatory tariff etc. and resolution of same may

take substantial time. In this scenario, it becomes pertinent for stakeholders to explore the medium term window which may take care up to 3-7 years. The 3-7 years span shall be a good period for assessing revenue certainty, tariff reset, matching of demand supply and other key factors for power sector. The medium term market provides an opportunity to venture into new areas in the fast evolving Power Market.

On a regulatory and policy framework, The Amendments to the Electricity Act -2003 which is brsently at Parliamentary Standing Committee on Energy, provides for newer opportunity for your company in scaling up energy business. The amendment shall encourage competition in supply of power to retail consumers through separation of carriage and content, we feel, it is imperative to progressively reduce and eliminate cross subsidy surcharge in a definitive timeline for success of this model. The regulatory and policy change shall bring in transparent business competitiveness in electricity market which shall have deep impact in broadening the market for your company.

Renewable Energy is expected to be a significant part of the future of our industry. However, grid connectivity and availability, ancillary services and creation of market for renewable energy are essential. There is also a need to strengthen Renewable Energy Certificate (REC) market. Enabling alternative markets such as bilateral trade of RECs through traders will help creating more liquidity.

The policy level developments in the power sector are opening up many opportunities for business and investment in particular the opportunities in coal mining, supply to retail consumers, energy efficiency services and development of renewable energy projects. Your company endeavors to create value for its business from such opportunities.

The power market in the year has been a summation of trends caused by the industry's transient state, leading to volatility in short term traded volumes. The overall Short Term Power Market in FY15 contracted by about 5% from 105 BUs in FY14 to 99 BUs in FY15. The Bilateral Trades (Traders +TAM) contracted by about 4%, Power Exchanges (PXs) by ~5% and UI by ~9%. Bilateral Trades constituted ~51.6%, Power Exchanges ~19% and UI ~19.6% of the Short Term Market.

Despite the volatility in the power market, your company has maintained its leadership position with a market share of 39% (including Cross Border Trades). In FY15, your company's trading volumes are higher by 6% to 37,137 MUs compared to 35,130 MUs in FY14. Due to grid constraints between WR-NR, NEW-SR and also in S1-S2, the power flow was restricted resulting in a traded volume loss of about 11 BUs.

Your company continues to consolidate in its core trading business with improvement in average margin realizations. The average margin realized by PTC from its trading operations was 4.6 Paisa / unit compared to 4.1 paisa / unit in FY14 an increase of 11%.

In the medium-term business, there are significant developments. Power flow of 100 MW to a state in the Southern-Region on medium-term basis has commenced during the year. Further, power flow for the long term to State in the Northern-Region for 361 MW has been brponed from originally scheduled FY17 to FY 16.

In addition to the above, Power Sale Agreements had earlier been executed by PTC with various State Utilities/Procurers for sale of total 704 MW power from 1000 MW (4x250 MW) JP Karcham Wangtoo Project. During the year, your company has successfully operationalized 504 MW out of this to various Distribution Companies in the Northern Region.

Cross-border transactions remain a vital part of the portfolio of your company and has contributed to more than 18% of the total traded volumes in FY15. The Cross-border trade with Bhutan in FY15 was 4,966 MUs and with Nepal was 155 MUs. Increasing the same focus, we have signed PPA from a 118 MW hydro project in Bhutan. The agreement was signed after PTC winning the tender floated by the developer. Further, your company has executed Back-to Back sale agreement for sale of power from the project on long term basis with a State in NER on 10th Dec, 2014. We are also supplying 250 MW power to Bangladesh resulting in trading volume of 1624 MUs.

Your company is continuously exploring and developing new businesses. PTC Retail business unit is one such initiative that caters to industrial and commercial consumers by facilitating competitive supply of power to optimize their power procurement costs. It is expanding its business area and clients, adding institutions like Airport Authority of India and Delhi Metro Rail Corporation in its portfolio. The retail business has traded 3.4 BUs in the financial year.

Further, your company has been granted funds from prosperity fund by the British High Commission on behalf of Government of United Kingdom for brparing the Indian power market for carriage and content separation through collaboration with the UK. PTC will be working in close association with key stakeholders in implementing business of supply licensee (introduced in draft Amendment to Electricity Act 2003) in India. Regulatory provisions envisaged for increasing competition in power supply business are expected to provide larger avenues in future.

Your company is also facilitating scheduling of solar power, a first of its kind transaction, for 750 MW solar projects to be set up under the VGF scheme issued by Solar Energy Corporation of India. Your company has also signed an MoU with MNRE & NIWE, along with NTPC, POWERGRID, PFC, IREDA and GPCL for undertaking development of offshore wind power project and its evacuation and integration into grid. We are aiming towards building a strong environmental stewardship in our business strategy in line with government's focus on renewable energy.

Your company has also taken a step towards increasing its brsence in the energy efficiency sector. We are providing project management consultancy for street lightning projects in two identified circles in a Southern Region State. We are making efforts to execute various energy efficiency projects for delivering a range of products and services to consumers. Further, your company is providing advisory solutions to petroleum refineries and other bulk consumers for enhancing their grid transmission capacity. The solutions will enable them reap market benefits of the Open Access Market.

Our subsidiaries have also shown noteworthy progress during the year. PTC India Financial Services Ltd. (PFS) recorded revenue of t 8,019 million during FY15 compared to revenue of Rs 5,462 million during FY14. Interest income for FY15 stood at Rs 7,416 million compared to Rs 4,200 million during FY14, thus registering an increase of about 77%. The profit before tax and profit after tax for FY15 stood at Rs 2,453 million and t 1,609 million respectively. Net interest income increased to Rs 3,414 million, thereby recording a growth of over 60% during FY15. Earnings per share for the financial year were at Rs 2.86 per share.

PTC's other subsidiary is PTC Energy Ltd.(PEL). During FY 2014-15, PEL imported and sold 0.06 million MT of coal as against 0.43 million MT in FY 2013-14. PEL is actively exploring the opportunities for investment in to renewable energy sector.

Going forward, your company's focus is on balanced development of trading business portfolio for sustained growth with a strategy to maintain and enhance brsence in multiple business segments like for the utilities as well as to the non-utilities (retail). Long term volume is expected to move to more than 50% of total trading volume in 2-3 years from ~40% in 2014-15. We expect steady growth in business volumes backed by a robust business model, built on multiple segments. Your company is well positioned to benefit from improvements in policy & regulatory environment with its strong balance sheet, robust cash flows, and experience from a 16 years' operating history.

Domestic Trading

Your Company has completed another significant year of its operations. Trading volumes of your company have grown by maintaining the continuous interaction with customers, providing innovative solutions and managing the key power portfolio of some states. Your Company remains the front runner in the power trading market. PTC achieved the highest trading volume of 37,137 MUs during FY 2014-15 against the brvious year's figure of 35130 MUs which is growth of 6% over the brvious year. PTC achieved Short term trading volume of 11,137 MUs during 2014-15 despite of severe transmission constraints on various interregional links. The Company also carried out a significant number of energy banking transactions during the year which has contributed to the overall trading volume.

PTC's volume on power exchanges during 2014-15 reached 9,658 MUs against the brvious year figure of 8,088 MUs which has seen an increase of 19.4% over the brvious year.

Your Company extended its existing agreements with Government of Himachal Pradesh, Tripura and various CPPs/IPPs for sale of their surplus power. Negotiations are in the advance stage with some other surplus States/Utilities for signing agreements on similar lines. Your company has also been able to add many other utilities and CPP/IPPs as clients both through Bilateral and Power exchange routes. The remarkable additions to the list of clientele are Nagaland, Meghalaya, Manipur etc.

Long Term Agreements for Purchase of power

(A) Commissioned Projects

i. Power Projects commissioned before FY 2014-15 - The existing Long-term arrangements where projects have been commissioned before FY 201415:1912 MW

ii. Power Projects commissioned during FY 2014-15 - The Long-term arrangements where projects commissioned in FY 2014-15: 340 MW

(iii) Power Projects Expected to be commissioned in FY 2015-16 - Pipeline which would be commissioned in FY 2015-16: 1231 MWs

(B) Power Purchase Agreements finalized in 2014-15

During the year, PTC entered into Power Purchase Agreements with M/s. Tangsibji Hydro Energy Limited (THyE) for about 118 MW power from their Nikachu hydro power project being developed in Bhutan, through a Competitive Bidding Process.

PTC has in its portfolio long term Power Purchase Agreements (PPAs) with the generators for a cumulative capacity of about 11,586 MW for further sale of power to Discoms which includes Cross-Border power trade. The projects are based on domestic coal, imported coal, gas and hydro and other renewable energy resources.

(C) Memorandum of Understanding / Agreement finalized in 2014-15

In addition to the above projects, PTC has also signed MoUs/MoAs with number of Project developers during FY 2014-15 for purchase of power aggregating to approximately 120 MW. Cumulative MoUs/MoAs at the end of the year by PTC is around 8,500 MW based on domestic coal, imported coal, wind and hydro resources.

Agreements for Sale of Power

As per the Tariff Policy of Government of India, the long term power procurement by the SEBs/ DISCOMs has to be necessarily done through competitive bidding. As such, sale of power to the State Utilities has to be through participation in the bidding process. Till now, PTC has participated in competitive bids invited by State Utilities/Private Discoms like Rajasthan, UP, AP, MP, Kerala and Tamil Nadu (Long term and Medium term) and has bid for about 4,379 MW aggregate capacities.

I. Power Sale Agreements (PSAs) executed during FY 2014-15

i). PTC has executed Power Sale Agreement with Assam Power Distribution Company Limited (APDCL) for the total contracted capacity of about 85 MW to be purchased from 118 MW Hydro power project being developed by M/s. Tangsibji Hydro Energy Limited (THyE) in Bhutan. The Power flow under the PSA is expected to commence during FY 2019-20.