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Georgian State Electrosystem LLCBringing Light to You!

2010 ANNUAL REPORT

This document contains forward-looking statements based on currently available plans and forecasts. Given the dynamics of the energy sector development, the company can-not guarantee the accuracy and completeness of these forward-looking statements. Unforeseen circumstances include, but are not limited to, exceptional income and ex-pense items, unexpected economic, political and foreign exchange developments. State-ments issued by the company must always be assessed in the context of the events, risks and uncertainties of the market and environment in which the company operates. These factors could lead to actual results being materially different from those expected.

1

About Us

Message from the Chairman

Georgian Power System at a Glance

Company Profile

Financial Overview

Dispatch

Transmission

Capital Investment Projects

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4

6

16

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Georgian State Electrosystem LLC

Bringing Light to You!

GeorGian State electroSyStem2

About us

Mission - To provide transmission and dispatch services in an effective and sustainable manner to

satisfy the needs of our customers.

Vision - GSE will be a competent, profitable and learning Transmission and Dispatch company by

world standards that excels at satisfying the needs of our customers and that it will be a sought after

employer where people desire to work.

VAlues

■ Honesty

■ Loyalty

■ Integrity

■ Transparency

■ Respect

■ Customer focus

■ Professionalism

■ Discipline

■ Teamwork

■ Adaptability/Pro-activeness

GeorGiAn stAte electrosystem LLC (GSE)One of the Key Players on the Georgian Energy Market

Providing Power Transmission and Dispatch Services.

We control the entire power system to ensure system availability for uninterrupted and reliable

power supply:

■ Our dispatch gets system information online, operatively reacts to any system fault or emergen-

cies, ensures remote control and efficient restoration after incidents.

■ The fully operational SCADA & Telecommunications system enables Dispatch to effectively control

system load, imports, exports, frequency and transit and has all the required information to ensure

system reliability and efficiency.

We transfer the electricity imported or generated in Georgia to distribution companies, direct cus-

tomers or our neighboring countries.

3

strAteGic objectiVes

The acquisition and effective management of funds to make GSE a financially viable and independent company.

The development and implementation of policies and procedures for the effective re-cruitment, deployment, maintenance and accelerated training and development of skilled employees for GSE.

The effective management of assets to ensure the long-term performance and sus-tainability of the GSE network.

The effective management of the Georgian power system by GSE Dispatch, sup-ported by reliable telecommunications and SCADA systems.

The procurement, installation and operation of state-of-the-art equipment and facilities to enhance productivity in GSE.

The development of GSE involvement in international electricity transmission and dis-patch related services.

The repositioning of GSE in a dynamic political and socio-economic environment.

The effective delegation of decision making to enhance productivity.

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subsidiAries

Energotrans LLC, with 100% GSE shareholding, a special purpose vehicle responsible for reha-

bilitation/construction and operation of 500/400kV interconnection line between Turkey and Geor-

gia as well as of a new 500/400/220kV substation with HVDC back-to-back plant in Akhaltsikhe.

Karcal Enerji JSC, the other GSE subsidiary, with 99% GSE shareholding, a general licensee for

wholesale power trading in Turkey established for facilitating power exchange operations between

Georgia and Turkey.


In response to the unprecedented challenges seen in the worldwide economy over the past few years, I’m extremely pleased to report that our performance in the year under review was highly satisfactory. We were successful in pursuing our strategy of operational ef-ficiency, in general, and continued to move forward to ensuring secure, reliable and effective operation of power system.

For making some financial highlights, it can be said with certainty, that the financial condition of GSE has been significantly improved and even surpassed our expecta-tions for the recent years. An average annual level of collection for invoiced sales for 2009-2010 totals 100% that is unprecedented for the last decade, indeed. The independent auditors’ report for consolidated fi-nancial statements of GSE and its subsidiaries for the year 2010 shows that the financial statements give a true and fair view of the company’s financial position, finan-cial performance and cash flows in accordance with In-ternational Financial Reporting Standards. This was also the case for 2009 and we hope that we’ll continue to get an unqualified audit report for the next years to come.

By virtue of the favorable investment climate in energy sector for the development/use of Georgia’s huge hy-dropower resources, a number of potential investors still continue to express their keen interests in the con-struction of small and medium size hydro power plants, with some large construction contracts already being in place. In this context, the enhancement of transmission

system capacity and stability, that entails the construc-tion of HV interconnection facilities and infrastructure compatible with Turkish and European power systems, is directly aimed at handling surplus hydropower and fa-cilitating the fulfillment of important energy policy ob-jective for Georgia to become a net renewable exporter and energy trading hub for the Region.

We were quick to recognize the magnitude of energy policy and strategic development objectives of the country and embarked on implementation of a long term strategic development program to further improve our business efficiency in line with modern utility prac-tices, with the main focus on transmission and dispatch performance improvement and continuous training of our staff to meet high engineering and operational stan-dards.

2010 saw significant activity on our efforts to imple-ment the Black Sea Transmission Network (BSTN) Project aimed at providing 700MW capacity intercon-nection between Caucasus/Russian electricity network and Turkish electricity network through rehabilita-tion/construction of 500kV overhead line Gardabani-Akhaltsikhe-Zestaponi, construction of 400kV inter-connection line from Akhaltsikhe to Turkish border and construction of a new 500/400/220kV substation Akhaltsikhe, with arrangement of HVDC back to back plant in Akhaltsikhe. With its scope and budget of about EUR 300 million, this highly important project financed by the EC NIF, European banks (KfW, EBRD and EIB) and Government of Georgia will significantly contribute to Georgia’s integration in energy networks of the European Union and ensure effective partner-ship in diversification of energy supplies from the Cas-pian Region to Europe.

In consideration of complexity and time constraints imposed on project completion, one may claim, and we would also admit, that the project is highly challeng-ing. Indeed, the winter time construction, short delivery time and shut down coordination may pose certain dif-ficulties, but we remain steadfast in the belief that the project schedule is feasible and we can succeed in ful-filling the expectations from renewable developers and traders to have the first 350MW unit of back to back station available in summer 2012 to start commercial operation and export 350MW to Turkey.

messAGe From the chAirmAn

5

Another very important project aimed at the enhance-ment of transmission capacity started in 2010 with the financial support of USAID within the frames of Geor-gia’s Power and Gas Infrastructure Project. The project activities include rehabilitation of 220kV Senaki-1,2 OHLs, as well as associated rehabilitation works at sub-stations, and introduction of smart grid technologies in our transmission assets. This project is planned to be completed in 2012 and is expected to ensure significant increase in power transmission capacity through 220kV grid, the possibilities for transmission of power gen-erated by planned Namakhvani HPP into Turkey and supply of increased capacity to Poti free industrial zone (100MW).

In July 2010, the Asian Development Bank (ADB) ap-proved a project preparatory technical assistance to the Government in the amount of 1,2 million USD to pre-pare a feasibility study and due diligence for Regional Power Transmission Enhancement Project. The tech-nical assistance is co-financed by ADB and the Gov-ernment of Spain, which is provided on a grant basis and administered by ADB. The project activities are expected to include the expansion of SCADA, substa-tion automate/protection systems and construction of 220kV substation in Khorga, with total value of about 67 million USD, including GSE contribution of about 19 million USD.

A “can do” culture and experienced employees have always been cornerstones of our business. Apart from our commitment to implement donor funded large-scale regional projects, we designed and successfully implemented, with GSE’s own resources and funds, a number of capital projects and rehabilitation activities in 2010. The construction of 220/110kV double-circuit transmission line Menji-Khorga-Poti, with the length of 36km (that provided reliable power supply to Poti Free Industrial Zone), as well as large-scale rehabilita-tion works carried out in GSE substations and OHLs during the year, can be listed among the major accom-plishments of the year 2010.

The careful analysis of transmission system perfor-mance and intensive management intervention pro-grams enabled us to focus corrective initiatives on system problematic areas traditionally resulting in sys-tem disturbances. Continuous efforts during 2010, ad-

dressed to the replacement of outdated and obsolete electrical equipment with new modernized ones, helped us to reduce operational expenses and improve reliabil-ity of system operations.

At the same time, based on the detailed transmission planning, we elaborated a Strategic Development Plan of the company targeted at enhancement of transmis-sion capacity and stability to handle surplus hydropower and meet expectations of renewable energy developers. The long-term development objectives involve about 240 million USD additional investments in the trans-mission assets of the company for 2011-2017. For this purpose, negotiations and project preparatory activities with international financial institutions are already in progress to implement some new capital projects that include, but are not limited to, the modernization of substation automate/protection systems and construc-tion of new 500/220/110kV substations and overhead lines. Noteworthy, that GSE plans to finance, only from its own resources, the capital investment projects with the total value of about 16 million USD only in 2011. As we look ahead, we know 2011 will be another chal-lenging year. Nevertheless, we believe that with its flex-ible business model, strong commitment and improved financial position, GSE is well positioned to progress in 2011. We will continue to manage our business to en-sure sustainable development, identifying and executing prospects for opportunistic growth, while at the same time focusing on our operating efficiency and I remain confident that our cautious, long-term approach offers the best prospects of continuing success.

And finally, as ever sincere thanks must go to our loyal staff, whose unstinting efforts ensure the continued progress of the company. On behalf of the board, I would like to thank all of our employees for their con-tinued hard work and commitment.

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Sulkhan Zumburidze,Chairman of Management Board/

Rehabilitation Manager


GeorGiAn Power system At A GlAnce

7

POWER SUPPLY OF GEORGIAGEORGIAN STATE ELECTROSYSTEM

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By virtue of significant reforms in the power sector, Georgia has achieved dramatic improve-

ments in provision of electricity services over the last few years.

ElEctricity MarkEt StructurE


■ The electricity market has been very effective in improving payment discipline, with its em-

phasis on direct contracting resulting in massively reduced non-payment problems.

■ The sector has been restructured and is largely privatized, with distribution fully owned and

operated by foreign strategic investors and most of the generation assets privatized with the

exception of the Enguri Hydropower Plant (HPP), the largest HPP with an installed capacity

of 1,300 MW that supplies around half of the country’s electricity needs.

MOENR - Ministry of Energy and Natural ResourcesGNEWSRC - Georgian National Energy and Water Supply Regulatory Commission GSE - Georgian State ElectrosystemESCO - Electricity System Commercial OperatorPP - Power Plant (generation)

Policy makerRegulatory environmentEnergy (power flows)DispatchCommercial transactions

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AnnuAl enerGy bAlAnce

Forecast for 2020 (bil l ion KWh)

While some imports are still required, supplies generally now meet demand. Domestic

electricity demand has been flat, even during a period of rapid economic growth and is un-

likely to be able to absorb all planned hydro power investments.

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■ Since 2007 the levels of generation production have surpassed the annual demand, so

there is now a surplus which is incrementally increasing each year and is available for export.

■ In 2010, Georgia exported 1.5 billion kWh of electricity power, accounting for 15% of the

country’s total electricity generation.

■ Combined with the strong seasonality of electricity demand and hydro plant output and their

inverse relationship - with demand peaking in winter and hydro output in summer - this means

electricity exports are vital to the development of hydro resources.


The potential for Georgia to capitalize upon its tremendous hydropower resources is real, proven and economically viable. Significant investments are needed however in transmission infrastruc-ture and improved energy technologies to expand and develop the domestic power grid, provide interconnections with neighboring markets, reduce waste in energy use and ensure affordable access to reliable energy services. Such developments will reduce and diversify power imports and expand power export opportunities to Turkey and other markets – contributing substantively to Georgia’s GDP growth.


hydro Power resources

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■ Out of about 26000 rivers, 300 are capable for energy production with annual total potential of 15,000 MW;

■ Current average annual production equals to 12% total hydro generation capacity;

The power sector policy of Georgia has a strong focus on efficient utilization of power resources,rehabilitation of existing generation, transmission and distribution facilities, and interconnectionwith neighboring countries to promote energy trade, including transit. Due to the favorable geo-graphic location, Georgia will act as a transit country in import-export and transit operations ofenergy carriers in the Caucasus region. This will move the Caucasus countries closer towardsestablishing a regional power market which facilitates flexible and mutually profitable crossbor-der energy exchanges and results in regional energy resources being used in an efficient and environment-friendly way.


GEORGIA will act as a regional hub for energy dispatch and transit through the Caucasus

area.


■ The power sector policy has a strong focus on efficient utilization of power resources, re-

habilitation of existing generation, transmission and distribution facilities, and interconnection

with neighboring countries to promote energy trade, including transit.

■ Of Georgia’s potential export markets, Turkey is the most attractive given its summer peak

in demand, projected capacity shortfalls and high market prices. Russia is, however, Geor-

gia’s current largest electricity trading partner. There is also the possibility for transit trade

from Azerbaijan, Armenia and Russia to Turkey.

■ Through the power transit in Turkey, it is expected that the rich energy resources in the

Caucasus could eventually be exported to the European market. This will move the Cauca-

sus countries closer towards establishing a regional power market which facilitates flexible

and mutually profitable cross-border energy exchanges and results in regional energy re-

sources being used in an efficient and environment-friendly way.

GEORGIA’s energy policy is to exploit the country’s hydro resources to end dependency on

imports and domestic thermal generation with imported fuel and to take advantage of export

opportunities.

■ The country possesses tremendous untapped hydropower resources. Its hydro-power

potential is estimated at up to 80 billion kilowatt hour (kWh) per year, of which up to 50 billion

kWh are economically attractive.

■ The current system consists of about 60 HPPs with a maximal output capability of 8.0–9.5

billion kWh per year, i.e. 15% of the economically feasible potential.

■ Hydro power investment will be led by private developers with the Government taking a

facilitating role.

■ It is estimated that an additional 1,400 MW of new HPPs by 2016 – 2017 can be added to

the existing 2,510 MW of HPPs, providing an additional 3.8 billion kWh of capacity available

for export at an economic value to Georgia of about $300 million per year.

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PrioritiES of GEorGian PowEr SEctor

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Development of Hydropower Resources.

Enlarging the capacity and ensuring the stability of power transmission

system of Georgia.

Increasing the reliability of the connection between the eastern and west-

ern parts of Georgian power system.

Construction of new interconnection compatible with Turkish and Euro-

pean power systems.

Providing transmission capacities to Turkey as the most promising power

export market for surplus hydro-power.

Taking on a transit role in the Region.



Interconnection CapacityVoltage (kV) Routing 2010 2015 2020

Export capacity (MW)



500kV Russia-Georgia (North-West)Kavkasioni OHL

600 600 600

Georgia AzerbaijanMukhrani OHL

600 600

400 kV Georgia-Turkey - 700 1050Georgia-Armenia - - 600

330kV Georgia-Azerbaijan (East)Gardabani OHL

160 250 250

220kV Russia-Georgia (North-West)Salkhino OHL

160 160 160

Georgia-Turkey (South-West)Adjara OHL

160 160 160

Georgia-Armenia (South-East)Alaverdi OHL

160 160 160

110kV Russia-Georgia Java OHL

60 60 60

Russia-Georgia Dariali OHL

60 60 60

Armenia-GeorgiaNinotsminda OHL

50 50 50

Armenia-GeorgiaLalvari OHL

40 40 40

Existing and New Power PlantsYear Power Plant Installed capacity

(MW)Generation Annual genera-

tion (mln kWh)Winter Summer2010 Operating power plants 3328 1630 1789 10046.4

HPP 2598 1207 1789 9367.8TPP 730 423 0 678.6

2015 15 HPPs 411.8 196.4 393.6 2143Wind power plant 50 35 35 100Tkibuli TPP 150 150 0 600New power plants 611.8 381.4 428.6 2843Total 3939.8 2011.4 2217.6 12889

2020 15 HPPs 1672.3 541.1 1641.4 6165.67Tkibuli TPP 150 150 0 600New power plants 1822.3 691.1 1641.4 6765.7Total 5762 2702.5 3859 19654.7

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who we Are

Georgian State Electrosystem LLC (GSE) is a 100% state-owned limited liability company providing transmis-

sion and exclusive dispatch services to about 50 eligible companies in Georgia. GSE was formed in 2002 from

the merger of JSC “Electrogadatsema” and JSC “Electrodispetcherizatsia”. These two entities were them-

selves established in 1999 and 2000 respectively to own the transmission assets of the state utility Sakenergo

and to manage the national dispatch centre. Based on the transmission and dispatch tariffs established by the

independent regulator (GNERC-Georgian National Energy and Water Regulatory Commission) GSE carries

out technical control over the entire power system to ensure the availability of the system for uninterrupted

and reliable power supply; and transfers, without the right of purchase or sale, the electricity imported or gen-

erated in Georgia to distribution companies, direct customers or the power systems of neighboring countries.

GSE operates under perpetual electricity transmission license No.12-004 and dispatching license No.13-004

obtained from the GNERC on December 20, 2002.

comPAny ProFile

disPAtch

The National Control (Dispatch) Centre, or NCC,

of Georgia is located at GSE headquarters, in

the center of Tbilisi. The NCC provides control

over the operations of Georgian power sys-

tem and ensures overall system reliability and

proper operation of 500/330/220/110/35 trans-

mission facilities under the normal operational

mode, as well as in emergencies. The NCC is

equipped with state-of-art technologies and en-

ables Dispatch to get the system information on-

line, ensure remote control and efficient restora-

tion after incidents. The dispatch is able to get

accurate information from substations and, as a

result of upgraded data base, operatively reacts

to any system faults or emergencies.

Annual average volume of electricity dispatched

for the last three years totals about 8,5 billion

kWh.

17

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trAnsmission

Georgia’s transmission network operates at 500kV, 330kV, 220kV, 110kV and 35kV voltages. A backbone

500kV transmission line (“Kavkasioni” – “Imereti”- “Kartli-2”- “Kartli-1”) connects Russia and the large gen-

erators (notably Enguri HPP) in the north-west to Tbilisi with a further 330kV inter-connection to Azerbaijan.

There is a reasonably extensive 220kV grid connecting other demand centres and generators. The Georgian

grid is inter-connected with Russia at 500kV and 220kV (through Abkhazia), with Azerbaijan at 330kV and

with Armenia and Turkey at 220kV. There are also isolated 110kV connections with Armenia and Russia. An

overview of existing interconnections is provided below.

Interconnection Capacity

Voltage (kV) Routing Export capacity (MW)

500kV Russia-Georgia (North-West)Kavkasioni OHL

600MW

330kV Georgia-Azerbaijan (East)Gardabani OHL

250MW

220kV Russia-Georgia (North-West)Salkhino OHLGeorgia-Turkey (South-West)Adjara OHLGeorgia-Armenia (South-East)Alaverdi OHL

160MW

160MW*

160MW

110kV Russia-Georgia Java OHLRussia-Georgia Dariali OHLArmenia-GeorgiaNinotsminda OHLArmenia-GeorgiaLalvari OHL

60MW

60MW

50MW

40MW

The 500kV line, 330kV interconnection with Azerbaijan and 220kV interconnection lines with Turkey are owned

by JSC Sakrusenergo, 50%-owned by the State and 50%-owned by Russia’s Federal Grid Company.

The majority of the 220kV and part of 110kV lines and 35kV network which is used for transmission services is

owned by GSE, which is also responsible for transmission system operation and owns the National Dispatch

Centre.

*Operating in an “island” mode


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The total length of Georgian power system transmission lines equals to 11,297km. GSE’s transmission as-

sets include 220/110/35kV overhead lines with the total length of 2,938km and 91 substations with the total

installed capacity of 8,400MW, including three (3) strategically important 500kV substations and seventeen

(17) 220kV substations throughout the territory of Georgia.

GSE Transmission Capacity

Lines Substations

Voltage Length (km) Voltage No. Capacity

220kV

110kV

35kV

1583.3

893.2

461.8

500kV

220kV

110kV

35kV

3

17

24

47

3439.3

4371.4

410.6

178.9

GSE has established a 100%-owned subsidiary, EnergoTrans, which owns the 500kV Vardzia and Zekari

lines and 400kV DC Meskheti interconnection with Turkey currently under construction as part of the Black

Sea Transmission Network Project. The new lines will provide additional security to Georgia’s transmission

network, by adding a second west-east 500kV link, and create up to 1,050 MW export capacity to Turkey.

2010

Independent auditor, Grant Thornton Amyot LLC audited the consolidated financial statements of GSE

and its subsidiaries for the year 2010 and, for the second year in a row, gave a clean opinion.

oPerAtinG reVenue

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2010 HIGHLIGHTS

reVenues

+16.51%

Revenues from dispatch and transmis-

sion services rose by

ebitdA

x3.7 to 40,9 million

EBITDA increased by a factor of

cAPitAl exPenditures

32.2 million GEL

Acquisition of Property, Equipment and Intan-

gible Assets amounted to

exPenses

-2% as expressed by a % of sales

Administrative expenses decreased by


As of December 31, 2010, the number of GSE employees totaled 1,119, that slightly exceeded the relevant data of 2009.

nuMbEr of EMPloyEES in 2010

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We are striving for the accomplishment of the Company’s mission and strategic objectives and strongly believe that GSE will be a competent, profitable and learning transmission and dispatch company by world standards that excels at satisfying the needs of our customers and that will be a sought after employer with the basic values of honesty, loyalty, integrity, transparency, respect, customer focus, professionalism, discipline, teamwork, adaptability /

pro-activeness, where people desire to work.

hr strAteGy

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nuMbEr of EMPloyEES 2005-2010

traininG in 2010

As the continuous availability of well-trained, developed and motivated staff is a prerequisite for meeting the busi-ness objectives of any organization, the implementation of sustainable training, performance management and motiva-tion programs continued to be among the top priorities of our company for the year 2010.

Intensive training/retraining courses con-ducted in 2010 for GSE employees in-cluded, inter alia, operations and safety regulations, relay protection, metering/measurement, procurement, information technologies, foreign language, etc.

Special attention has been paid to the im-plementation of internship programs. For this purpouse GSE actively cooperats with Technical University of Georgia and oth-er universities. Consequently, after care-ful selection and examination process in 2010, GSE employed 16 out of the total 27 interns who had attended the program and successfully passed exams.


Sulkhan ZUMBURIDZEChairman of Management Board and Rehabilitation Manager

Mamuka SKHILADZEMember of Management Board

mAnAGement boArd

Mamuka PAPUASHVILIMember of Management Board

Ucha UCHANEISHVILIMember of Management Board

Zurab EZUGBAIAMember of Management Board

Mikheil ZIBZIBADZEChief Operations Manager

Maya PITSKHELAURIInternational Projects Manager

Giorgi SHARKOVMember of Management Board


FinAnciAl oVerView

The year 2010 was noted for a double-digit growth in revenues and aggressive expansion of capital proj-ects. The Company was able to fulfill and surpass all the covenants established by the bank creditors and the Rehabilitation Plan.

The company was able to meet the targeted rev-enues and expense levels in excess, as set by the Rehabilitation Plan. Administrative expenses decreased by 2% as expressed by percentage of sales, which reflects the company’s effort to cut fixed expenses. The amount of funds saved on opera-tional costs was allocated towards to completion of strategic projects of rehabilitation and construction. The company’s cash management remains strong, driven primarily by the fast system of collection from the customers. The level of collection for invoiced sales totaled 100% again in 2010. Effective method of collection has boosted the company’s short-term liquidity and working capital.

The improved financial condition allowed GSE to implement a number of capital projects with its own resources. For illustration, the total capital expen-ditures made in 2004-2010 for the upgrade/reha-bilitation of transmission & dispatch system made up about GEL 205,2 million, including 101,8 million from GSE’s own funds. The capital expenditures of about GEL 28,4 million made by GSE only during 2010 equals to 54.9% of its income from operating activities, that is much higher than the relevant fig-ure of the year 2009.

Gradual increase in generation over 2004-2010 re-sulted in sharp decrease in imported electricity from 2005, with sustained trend of increase by 8-9% in export in 2007-2009 and drastic increase by 50.3% in 2010 against 2009. Consequently, we saw sig-nificant increase in billings for transmission and dis-patch services and, similarly, in operating incomes from export operations.

Revenues 2009-2010

Capital Expenditure (mln GEL)

Collections %

Export Dynamics

Thou

sand

GE

LkW

/Hr

* GEL and Lari are used Interchangeably in this report.

25

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Revenues from dispatch and transmission rose by 16.51%, reflecting rebounding of an overall demand for electricity and real GDP growth of 6.4% in the country.

Earnings before interest, taxes, depreciation and amortization increased by a factor of x3.7 to 41 mln GEL (2009: 11mnl GEL), which best reflects an accelerated positive trend of growth in the company from operations after correcting for Interest, Depreciation and Taxes.

Administrative expenses decreased by 2% as a percentage of sales.

Operating Profit, which includes depreciation expense, rose significantly from a loss of 17,3mln to a profit of 3,7 mln.

Acquisition of Property, Equipment and Intangible Assets amounted to 32,2 mln GEL (2009: 45,5 mln).

We marked several significant accomplishments in 2010 in im-provement of financial position of the company

Grant Thornton Amyot LLC audited the consolidated financial statements of GSE (hereinafter “the Company”) and its subsidiaries (hereinafter collectively referred to as “the Group”) for the year ended December 31, 2010. For the second year in a row, the auditor gave a clean opinion for the audit, stating that:

“. . . the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as of December 31, 2010, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Finan-cial Reporting Standards”.

The consolidated financial condition of the Group for the year ended December 31, 2010 is dem-onstrated in the consolidated statements of comprehensive income, profit and loss, changes in equity as well as the cash flows statements extracted from the Independent Auditor’s Report, as given below.

Billing kWhr Billing & Collection

Mill

ion

kWhr

Mill

ion

GE

L


Independent auditor’s reportGrant Thornton Amyot LLC

8/1 Vagharshyan Str.0012 Yerevan, Armenia

T +374 10 260 964F +374 10 260 961

www.gta.am

To the owner of Georgian State Electrosystem Limited Liability Company

We have audited the consolidated financial statements of Georgian State Electrosystem LLC (the “Parent company”) and its subsidiaries (the “Group”), which comprise consolidated statement of financial position as of December 31, 2010, and the consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated finan-cial statements in accordance with International Financial Reporting Standards. This responsibil-ity includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstate-ment, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclo-sures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the con-solidated financial statements in order to design audit procedures that are appropriate in the cir-cumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit includes evaluating the appropriateness of accounting policies used and

Independent auditor’s report

Audited consolidAted FinAnciAl stAtements 2010

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the reasonableness of accounting estimates made by management, as well as evaluating the over-all consolidated financial statement presentation.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements give a true and fair view of the consoli-dated financial position of the Group as of December 31, 2010, and of its consolidated finan-cial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards.


(In thousand GEL) As of December 31, 2010

As of December 31, 2009

Assets

Non-current assetsProperty and equipment 359,337 352,518 Intangible Assets 4,474 279 Deferred income tax assets 3,654 - Prepayment to suppliers 143,909 -

511,374 352,797 Current assetsInventories 8,354 4,113 Trade and other receivables 10,932 14,687 Current income tax assets - 1,169 Cash and cash balances 39,833 16,163

59,119 36,132

Total assets 570,493 388,929

Equity and liabilities

Share capital 447,522 427,079 Unregistered capital 9,829 9,829 Revaluation reserve 89,923 100,261 Foreign currency translation reserve 22 (3)Accumulated Loss (338,318) (352,449)Equity attributable to owners of parent 208,978 184,717

Non-controlling interest 4 10 Total equity 208,982 184,727

Non-current liabilities Loans 245,443 109,699 Restructured liabilities 55,724 54,251 Grant related to assets 23,910 5,286 Differed income tax liability - 2,177 Differed Value Added Tax 1,372 8,023

326,449 179,436

Current liabilitiesShort-term portion of long-term loans 9,551 7,328 Trade and other payables 22,998 17,438 Current income tax liability 2,513 -

35,062 24,766 Total equity and liabilities 570,493 388,929

consolidAted stAtement oF FinAnciAl Position

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(In thousand GEL) Year ended December 31, 2010

Year ended December 31, 2009

Revenue 50,085 42,872 Other operating income 12,012 41,046

62,097 83,918

Network operating costs (4,485) (3,516)Administrative expenses (3,271) (3,661)Payroll and employee benefits (14,552) (13,333)Depreciation, amortization and impairment (30,591) (66,778)Other operating expenses, net (5,522) (13,923)

Results from operating activities 3,676 (17,293)

Finance income 2,923 4,480 Finance cost (9,813) (8,353)Other financial items 3,740 (2,938)Profit/(loss) before tax 526 (24,104)

Income tax credit 3,261 26,743 Profit for the year 3,787 2,639

Other comprehensive income

Revaluation of property and equipment - 131,515 Deferred income tax on revaluation - (19,727)Foreign currency translation difference 25 (3)Total comprehensive income for the year 3,812 114,424

Attributable to owners of parent 3,793 2,639 Attributable to non-controlling interest holders (6) -

consolidAted stAtement oF comPrehensiVe income

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currency

The consolidated financial statements have been prepared in accordance with International Finan-cial Reporting Standards (“IFRS”). The national currency of Georgia is the Georgian lari, which is the Groups functional currency. These financial statements are presented in Georgian lari (unless other-wise stated), rounded to the nearest thousand.

bAses oF meAsurement

The financial statements have been prepared on the historical cost basis with the exception of restruc-tured liabilities, which are stated at present value, and property and equipment which are stated at revalued amount.


consolidAted stAtement oF chAnGe in equity

(In thousand GEL) Issued Share capital

Unregistered share capital

Revaluation reserve

Foreign currency translation reserve

Accumulated profit Total attributable to own-ers of parent

Non-controlling interest Total Equity

as of January, 2009 381,136 2,089 - - (365,367) 17,858 - 17,858 Correction of prior period error - - - - (1,248) (1,248) - (1,248)Restated balance 381,136 2,089 - - (366,615) 16,610 - 16,610

Profit for the year - - - - 2,639 2,639 - 2,639 Other comprehensive income - - 111,788 (3) - 111,785 - 111,785 Realization of revaluation reserve, net of tax - - (11,527) - 11,527 - - -Total comprehensive income for the year 381,136 2,089 100,261 (3) (352,449) 131,034 - 131,034

Issue of share capital 46,424 9,829 - - - 56,253 - 56,253 Decrease of share capital (481) (2,089) - - - (2,570) - (2,570)Non-controlling interest - - - - - - 10 10Transaction with owners 45,943 7,740 - - - 53,683 10 53,693

as of December 31, 2009 427,079 9,829 100,261 (3) (352,449) 184,717 10 184,727

as of January 1, 2010 427,079 9,829 100,261 (3) (352,449) 184,717 10 184,727 Loss for the year - - - - 3,793 3,793 (6) 3,787 Other comprehensive income for the year - - - 25 - 25 - 25 Total comprehensive income for the year - - - 25 3,793 3,818 (6) 3,812

Issue of share capital 20,443 - - - - 20,443 - 20,443 Transaction with owners 20,443 - - - - 20,443 - 20,443

“Realization of revaluation reserve, net of tax” - - (10,338) - 10,338 - - -as of December 31, 2010 447,522 9,829 89,923 22 (338,318) 208,978 4 208,982

nAture oF oPerAtions And GenerAl inFormAtion

Georgian State Electrosystem LLC (the “Company”) was established under the laws of Georgia by means of merger of Electrogadatsema JSC and Electrodispetcherizatsia – 2000 LLC and is their legal successor in title. The Company was established by Vake-Saburtalo Regional court on November 12, 2002. The sole owner of the Company is the State of Georgia.

The registered address of the Company is 2 Baratashvili Street, Tbilisi 0105, Georgia.During 2010 the average number of the Group’s employees was 1,135 (2009: 1,108).

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(In thousand GEL) Issued Share capital

Unregistered share capital

Revaluation reserve

Foreign currency translation reserve

Accumulated profit Total attributable to own-ers of parent

Non-controlling interest Total Equity

as of January, 2009 381,136 2,089 - - (365,367) 17,858 - 17,858 Correction of prior period error - - - - (1,248) (1,248) - (1,248)Restated balance 381,136 2,089 - - (366,615) 16,610 - 16,610

Profit for the year - - - - 2,639 2,639 - 2,639 Other comprehensive income - - 111,788 (3) - 111,785 - 111,785 Realization of revaluation reserve, net of tax - - (11,527) - 11,527 - - -Total comprehensive income for the year 381,136 2,089 100,261 (3) (352,449) 131,034 - 131,034

Issue of share capital 46,424 9,829 - - - 56,253 - 56,253 Decrease of share capital (481) (2,089) - - - (2,570) - (2,570)Non-controlling interest - - - - - - 10 10Transaction with owners 45,943 7,740 - - - 53,683 10 53,693

as of December 31, 2009 427,079 9,829 100,261 (3) (352,449) 184,717 10 184,727

as of January 1, 2010 427,079 9,829 100,261 (3) (352,449) 184,717 10 184,727 Loss for the year - - - - 3,793 3,793 (6) 3,787 Other comprehensive income for the year - - - 25 - 25 - 25 Total comprehensive income for the year - - - 25 3,793 3,818 (6) 3,812

Issue of share capital 20,443 - - - - 20,443 - 20,443 Transaction with owners 20,443 - - - - 20,443 - 20,443

“Realization of revaluation reserve, net of tax” - - (10,338) - 10,338 - - -as of December 31, 2010 447,522 9,829 89,923 22 (338,318) 208,978 4 208,982

On June 18, 2002 within the framework of the “Electricity Market Support Project” (the “EMSP”), financed by the International Development Association (the “IDA”) and the Credit Bank for Reconstruction (the “KfW”), the State of Georgia, represented by the Ministry of Energy of Georgia, Electrogadatsema JSC, Electrodispetcherizatsia – 2000 LLC and ESBI Georgia Limited concluded a performance-based manage-ment contract for the Company. Based on this contract, ESBI Georgia Limited took charge of the manage-ment of the Company on March 3, 2003. The project was completed in 2007, with Georgian directorate taking over the management of the Company.

The principle activities of the Parent company and subsidiaries (the “Group”) are electricity transmission and dispatching over the entire territory of Georgia that are regulated by the law on Electricity and Natu-ral Gas. The Group operates under perpetual electricity transmission license No 12-004 and dispatching license No 13-004 obtained from the Georgian National Energy Regulation Committee on December 20, 2002.


FinAnciAl rehAbilitAtion PlAn

On July 6, 2004, due to continuous substantial operating losses and sustained severe liquidity problems, the management announced insolvency and applied for rehabilitation in accordance with the amendments to the Georgian Law on Bankruptcy Proceedings. On July 9, 2004 the court granted the Company a Postponement of Bankruptcy (Rehabilitation) for a period of 18 months.

On January 9, 2006 the Company presented a financial Rehabilitation Plan, agreed with more than 50% of its creditors, to the court. The court approved the plan on January 30, 2006, terminating bankruptcy proceedings and granting the Company a period of 15 years to achieve rehabilitation. A new revised Rehabilitation Plan has been developed by the Company and approved by Tbilisi City Court on November 11, 2008.

The new Rehabilitation Plan sets out the strategic targets of the Company for the coming 15 years, as well as defines the main operating and financial objectives of the Company. According to the Rehabilitation Plan, the Rehabilitation Manager has been appointed to undertake the governance of the Company throughout the entire rehabilitation period. All rights and responsibilities of the Company, except the right to liquidate the Company have been conveyed to the Rehabilitation Manager.

bAses oF consolidAtion

Subsidiaries are those enterprises, which are controlled by the Group. Control exists when theCompany has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The financial statements of the subsidiaries are included in the con-solidated financial statements from the date when control effectively commences until the date that control effectively ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest.

The excess of purchase consideration over the Group’s share in the net fair value of the identifiable assets, liabilities and contingent liabilities is recorded as goodwill. If the cost of acquisition is less than the Company’s share in the net fair value of identifiable assets, liabilities and contingent liabilities of the subsidiary acquired the difference is recognized directly in the consolidated statement of comprehensive income.

Non-controlling interest is the interest in subsidiaries not held by the Group. Non-controlling interest at the reporting date represents the non-controlling shareholders’ share in the net fair value of identifiable assets, liabilities and contingent liabilities of the subsidiary at the acquisition date and the minorities’ share in move-ments in equity since the acquisition date. Non-controlling interest is presented within equity.

Losses allocated to holders of non-controlling interest do not exceed the non-controlling interest in the equity of the subsidiary unless there is a binding obligation of the holders of non-controlling interests to fund the losses. All such losses are allocated to the Group.

trAnsActions eliminAted on consolidAtion

Intra-group balances and transactions, and any unrealized gains arising from intra-group transactions, are elimi-nated in presenting the consolidated financial statements.

notes

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consolidAted stAtement oF cAsh Flow

(In thousand GEL) Year Ended December 31, 2010

Year Ended December 31, 2009

Cash flows from operating activities 3,787 2,639

Profit/(Loss) after taxationAdjustments for: Depreciation, amortization and impairment 30,591 74,295 Finance costs 9,813 8,353 Finance income (2,923) (4,480)Income tax credit (3,261) (26,743)Loss on disposal of property and equipment 11,229 1,672 Allowance for doubtful receivables 115 (1,101)Loss/(income) from amortization of grants (528) (528)Reversal of impairment of property and equipment - (39,406)Deferred VAT recycled to profit and loss (6,651) - Foreign exchange (gain)/loss (3,740) 2,938 Operating profit before working capital changes 38,432 17,639

Changes in trade and other receivables 3,420 16,132 Change in inventories (4,241) (86)Change in trade and other payables 5,899 (5,897)Cash generated from operations 43,510 27,788

Interest paid (5,597) (4,873)Income tax paid - (717)Net cash from operating activities 37,913 22,198

Cash flows from investing activitiesAcquisition of property and equipment and intangible assets

(32,151) (45,450)

Prepayment made to suppliers (143,909) - Interest received 2,923 3,158 Net cash used in investing activities (173,137) (42,292)

Cash flows from financing activities Proceeds from issue of share capital 20,000 612 Repayment of deferred liability (3,701) (24)Loans received, net 142,767 21,350 Net cash from financing activities 159,066 21,938

Net increase in cash and bank balances 23,842 1,844 Foreign exchange effect on cash (197) 26 Effect of translation of financial statements 25 - Cash and bank balances at the beginning of the year 16,163 14,293 Cash and bank balances at the end of the year 39,833 16,163


ProPerty And equiPment

(In thousand GEL) Land, buildings and constructions Power transmission lines

Equipment, vehicles and other Construction in progress Total

Costas of January, 2009 16,083 335,155 151,479 78,319 581,036 Elimination of accumulated depreciation as a result of revaluation

(8,623) (293,386) (100,613) (21,562) (424,184)

Revaluation surplus 25,651 54,084 51,777 3 131,515 Reversal of impairment 1,710 35,040 858 1,798 39,406 Additions 13,206 2,960 4,406 72,150 92,722 Disposals (19) - (54) (1,118) (1,191)Internal movement 10,140 2,462 2,678 (15,280) - As of December 31, 2009 58,148 136,315 110,531 114,310 419,304 Additions 460 - 338 47,127 47,925 Disposals - - (1,467) (10,010) (11,477)Internal movement 2,359 15,206 47,435 (65,000) - as of December 31, 2010 60,967 151,521 156,837 86,427 455,752

Accumulated depreciation and impairmentAs of January 1, 2009 8,623 293,386 100,613 21,562 424,184 Charge for the year 2,758 13,871 10,257 - 26,886 Eliminated on revaluation (8,623) (293,386) (100,613) (21,562) (424,184)Impairment 10,886 71 14,871 14,072 39,900 Internal movement (7) - 7 - - As of December 31, 2009 13,637 13,942 25,135 14,072 66,786 Charge for the year 2,728 13,294 13,855 - 29,877 Eliminated on disposal - - (248) - (248)As of December 31, 2010 16,365 27,236 38,742 14,072 96,415

Carrying amountas of December 31, 2009 44,511 122,373 85,396 100,238 352,518 as of December 31, 2010 44,602 124,285 118,095 72,355 359,337

ProPerty And equiPment

Property and equipment held for use in the supply of services, or for administrative purposes, are stated in the statement of financial position at their revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amounts do not differ materially from those that would be determined using fair values at the reporting date.

Depreciation is charged to the consolidated statement of comprehensive income on a straight line basis over the estimated useful lives of the individual assets. Depreciation commences when assets are available for use. The estimated useful lives are as follows: buildings and constructions 20 years, power transmission lines 20 years, vehicles and equipment 5 years, other 6-7 years.

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(In thousand GEL) Land, buildings and constructions Power transmission lines

Equipment, vehicles and other Construction in progress Total

Costas of January, 2009 16,083 335,155 151,479 78,319 581,036 Elimination of accumulated depreciation as a result of revaluation

(8,623) (293,386) (100,613) (21,562) (424,184)

Revaluation surplus 25,651 54,084 51,777 3 131,515 Reversal of impairment 1,710 35,040 858 1,798 39,406 Additions 13,206 2,960 4,406 72,150 92,722 Disposals (19) - (54) (1,118) (1,191)Internal movement 10,140 2,462 2,678 (15,280) - As of December 31, 2009 58,148 136,315 110,531 114,310 419,304 Additions 460 - 338 47,127 47,925 Disposals - - (1,467) (10,010) (11,477)Internal movement 2,359 15,206 47,435 (65,000) - as of December 31, 2010 60,967 151,521 156,837 86,427 455,752

Accumulated depreciation and impairmentAs of January 1, 2009 8,623 293,386 100,613 21,562 424,184 Charge for the year 2,758 13,871 10,257 - 26,886 Eliminated on revaluation (8,623) (293,386) (100,613) (21,562) (424,184)Impairment 10,886 71 14,871 14,072 39,900 Internal movement (7) - 7 - - As of December 31, 2009 13,637 13,942 25,135 14,072 66,786 Charge for the year 2,728 13,294 13,855 - 29,877 Eliminated on disposal - - (248) - (248)As of December 31, 2010 16,365 27,236 38,742 14,072 96,415

Carrying amountas of December 31, 2009 44,511 122,373 85,396 100,238 352,518 as of December 31, 2010 44,602 124,285 118,095 72,355 359,337

In preparing the financial statements, transactions in currencies other than the functional currency are recorded at the rates of exchange defined by the National Bank of Georgia prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates defined by the National Bank of Georgia prevailing on the balance sheet date, which is 1.7728 Georgian lari for 1 US dollar and 2.3500 Georgian lari for 1 Euro as of December 31, 2010 (December 31, 2009: 1.6858 Geor-gian lari for 1 US dollar and 2.4195 Georgian lari for 1 Euro). Non-monetary items that are measured in terms of historic cost in a foreign currency are not retranslated.

ForeiGn currency trAnsActions


Additions to property and equipment mainly represent the cost of equipment and capital works implemented in the framework of energy sector development and rehabilitation projects financed by international financial institutions via sub-loans from the Ministry of Finance of Georgia.

Additions of Georgian lari 47,925 thousand (2009: Georgian lari 92,722 thousand) include capitalized ex-penditure of Georgian lari 22,808 thousand (2009: Georgian lari 40,337 thousand), including capitalized bor-rowing costs of Georgian lari 1,088 thousand (2009: lari 2,337 thousand) and acquisitions of Georgian lari 22,352 thousand (2009: Georgian lari 36,985 thousand).

Included in the additions is also contribution by the shareholder amounting to Georgian lari 443 thousand (2009: Georgian lari 15,849 thousand), which has been treated as replenishment of the share capital (refer to note 9). The additions have been recorded at the fair value of the contributed assets, determined at the date of transaction by an independent valuer.

Property and equipment of the Group at the carrying amount of Georgian lari 73,214 thousand have been pledged as a security for loans and deferred obligations to the Ministry of Finance of Georgia as of Decem-ber 31, 2010 (December 31, 2009: Georgian lari 91,015 thousand). Included in ‘Property and equipment’ are constructions, power transmission lines and equipment at the carrying amount of Georgian lari 8,566 thousand (2009: Georgian lari 13,344 thousand), which are located on the territory of Abkhazia. Since the Georgian-Abkhaz conflict in 1991 the territory of Abkhazia is considered a disputed region, hence the Group has very limited control over the assets located on this territory.

The carrying amount of property and equipment not in use as of December 31, 2010 is Georgian lari 2,565 thousand (as of December 31, 2009: Georgian lari 4,511 thousand).

As of December 31, 2010 the cost of fully depreciated property, and equipment amounts to Georgian lari 11,185 thousand (as of December 31, 2009: nil).

reVAluAtion oF ProPerty And equiPment

As of December 31, 2010 the Group’s property and equipment are presented at their revalued amount. The revaluation was performed by an independent valuating company as of January 1, 2009.

Due to the nature and use of the Group’s fixed assets the replacement (cost analysis) method was applied for specialized assets and the comparative method was applied for non-specialized assets if the market data on comparable assets was sufficiently available.

Under comparative method the fair value is determined by reference to market prices ruling during the near-est time period for the similar asset.

Under replacement (cost analysis) method the fair value is determined by reference to the total expenditures required to construct a similar asset, reduced by the estimated depreciation, which includes physical deple-tion, economical and functional depreciation as of the date of the valuation.

Had the Group’s property and equipment been presented at cost less accumulated depreciation, their carry-ing amount would amount to Georgian lari 308,684 thousand as of December 31, 2010(as of December 31, 2009: Georgian lari 205,528 thousand).

notes

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Subsidiary Ownership Country Date of incorporation Industry Date of acquisition

Energotrans 100% Georgia December 12, 2002 Energy February 10, 2009

Karcal Enerji 99% Turkey August 4, 2009 Energy August 4, 2009

subsidiAries

restructures liAbilities

In thousand Georgian lari As of December 31, 2010 As of December 31, 2009

Trade payables 29,665 24,494 Payables to the State budget 79,270 85,655 Loans and interest accrued 6,958 9,273

115,893 119,422

Fair value adjustment (60,169) (65,171) 55,724 54,251

According to Ordinance No.66 of the Government of Georgia dated February 10, 2009 on Some Mea-sures Facilitating Construction of 500/400kV Interconnection Line between Georgia and Turkey, and sub-ject to Order No.1-3/64 of LEPL Enterprise Management Agency dated February 20, 2009, GSE became 100% shareholder and the sole partner of Energotrans LLC.

In 2009, GSE and some other Georgian companies established JSC Karcal Enerji (full name: KARCAL Energi Electrik Toptan Ticaret Anonim Sirketi). The company has been operating since July, 30, 2009 as a general licensee for wholesale power trading in Turkey facilitating power exchange operations between Georgia and Turkey. GSE holds 99% of shares and other founders of the company are Energotrans LLC (with 0,4% shareholding), Energy System Commercial Operator LLC (ESCO – 0,2%), Enguri HPP LLC (0,2%) and Vardnili HPPs Cascade LLC (0,2%).

Restructured liabilities represent the amounts originated before the rehabilitation commencement date, January 30, 2006, the repayment of which has been deferred due to financial difficulties of the com-pany. On November 28, 2008 the new Rehabilitation Plan has been approved by the court. According to the new Rehabilitation Plan, the payment of these debts has been deferred until 2010, thereafter the amounts will be repaid until 2023, the end of rehabilitation period.

The main creditor of the company is the Ministry of Finance of Georgia. The amounts payable to the Ministry are taxes and duties, as well as loans and interest accrued, which are secured by the company’s property.

Restructured liabilities are presented at discounted value. Following the approval of the newRehabilitation Plan, in 2008 the company has estimated the fair value of deferred payables in 2009, to effect the amendments in the repayment terms. The fair value had been determined by discounting future cash flows at the average market interest rate of 9.57% and the gain from fair value was recognized in finance income.

notes


loAn And borrowinGs

Loan received from International Development Association (IDA) via sub-loan from the Ministry of Finance of Georgia for the implementation of electricity market development and rehabilitation within the framework of Electricity Market Support Project (the “EMSP”), matures in 13 years and bears a weighted average interest rate of 1.05% annually (2009: 7.79% annually). Loans received from Credit Bank for Reconstruction (KfW) via sub-loan from the Ministry of Finance of Georgia comprise four loans which mature in 13, 16, 26 and 28 years and bear a weighted average interest rate of 1.94% annually (2009: 1.94% annually). These loans are received for the implementation of the following projects: Electricity market development and rehabilita-tion within the framework of EMSP; “Energy IV” project – for energy sector rehabilitation; “Sector Program Power Supply” project and “Regional Power Network Rehabilitation 1” project. The company completed the disbursement of the loan issued IDA in 2010. Loan disbursements for EMSP and Energy IV are completed. Disbursements for SPPS and RPTR are schedule to end in the middle of 2011.

Within the framework of the Rehabilitation Plan, current interest and commitment charges arising on the loans received are payable as they fall due. The repayment of principal, accrued interest, penalties and commitment charges that were due at the rehabilitation commencement date, which is January 30, 2006, is deferred until 2010. Deferred obligations amounting to Georgian GEL 9,273 thousand (2009: Georgian GEL 9,273 thousand) should be repaid during the period from 2010 to 2023 in accordance with the Rehabilitation Plan. No additional penalties are charged on the deferred amounts.

notes

GrAnts relAted to Assets

In 2000 the company received a grant amounting to Georgian GEL 10,571 thousand denominated in US dollars from RWE Energy Limited, a foreign entity based on Essen, Germany, to rehabilitate a part of its transmission network for its subsequent use in joint operations. The grant is amortized over 20 years, which is the estimated useful life of the energy transmission network.

deFerred VAlue Added tAx liAbility

During 2010 the Company has written off overdue receivables of Georgian GEL 277,190 thousand and the respective VAT of Georgian GEL 6,651 thousand has been credited to the consolidated statement of com-prehensive income (included in other operating income).

shAre cAPitAl

The share capital of the Company consists of one share, which belongs to the State of Georgia. During the year the share capital of the Company increased by Georgian GEL 20,443 thousand (2009: increased by Georgian GEL 54,163 thousand). On February 10, 2009 the State of Georgia, the owner of Energotrans LLC, transferred 100% shares of Energotrans LLC to the Company. The share capital of the Company increased by the nominal amount of the shares transferred.

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criticAl Account estimAtes

The property and equipment of the Group include power transmission network located in Kakheti at the car-rying amount of Georgian lari 4,014 thousand (as of December 31, 2009: Georgian lari 4,960 thousand). Cur-rently these assets do not generate sufficient revenues to cover operation costs of the network. The Group management intends to sell the unit and is currently seeking a buyer. In 2009 the fair value of the unit has been assessed by an independent valuer at Georgian lari 8,500 thousand. The Group management believes that the fair value of the asset as of December 31,

2010 has not changed significantly from prior year and therefore, the carrying amount of the assets is fully recoverable.

risk FActors

The Group undertakes certain transactions denominated in foreign currencies. Hence, exposures to ex-change rate fluctuations arise. The Group is exposed to interest rate risk as it borrows funds at both fixed and floating rates. This risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings.

At the reporting date there was no significant concentration of credit risk, which refers to the risk that counter-party will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties as a means of mitigating risk of financial loss from default. The Group has made provisions of Georgian lari 73,469 thousand as of December 31, 2010 (De-cember 31, 2009: Georgian lari 108,548 thousand) for overdue receivables. Beside the risk on receivables, the maximum exposure to credit risk is represented by the carrying amount of each financial asset in the statement of financial position.

The Group’s policy is to run a prudent liquidity management policy by means of holding sufficient cash and bank balances, as well as highly liquid assets for making all operational and debt service related payments when those become due.

The Group considers expected cash flows from financial assets in assessing and managing liquidity risk, particularly its cash resources and trade receivables. The Group’s cash resources and trade receivables are less than the current cash outflow requirements. The Company intends to manage liquidity risk through revenue earned in subsequent months, as well as through utilization of undrawn borrowing facilities.


trAnsmission And disPAtch oPerAtions

d i s PAt c h

t r A n s m i s s i o n

c A P i tA l i n V e s t m e n t s


Dispatch

The Georgian power system is characterized by seasonal asymmetry of power generation and con-sumption, with relatively low consumption and high generation of HPPs in summer, and high consump-tion and low generation of HPPs in winter period. Annual average volume of electricity dispatched for the last three years totals about 8,9 billion kWh.

2010 Statistics Total

Peak consumption (mln kWh) 31.3

Peak load (MW) 1,620.0Generation by seasonal power plants (mln kWh) 2,839 .0Generation by regulatory power plants (mln kWh) 6,524 .0

Generation by thermal plants (mln kWh) 676.0

Export (mln kWh) 1,524.2Import (mln kWh) 223.7Total consumption (mln kWh) 8,739.9Total generation (mln kWh) 10,040.7

mln

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2010

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There is a significant generation-load regional imbalance within the Georgian power system: two-thirds of Georgia’s energy resource is lo-cated in the Northwest, while two thirds of the domestic demand is located in eastern Georgia.

Georgia has an operational generating capacity of around 3,900 MW comprising a mix of hydro and thermal power plants (HPPs and TPPs). The dominant generator is the Enguri HPP with an in-stalled capacity of 1,300 MW and an operational capacity of 1,180 MW, and which is responsible around one-third of total electricity generation in Georgia. The other large HPP is Vardnili. To-gether, the Enguri HPP and Vardnili cascade with other smaller HPPs provide around 1,800 MW of regulating HPP capacity (i.e. with reservoirs).

The total existing operational capacity makes up 3172 MW, including 2512 MW of HPPs and 660 MW of TPPs. It is estimated that an additional 1,400 MW of new HPPs by 2016-2017 will be added to the existing 2,512 MW of HPPs that will provide an additional 3,8 billion kWh of capacity available for export.

Noteworthy, that most of the potential export market is located in countries south of Georgia. Many of these countries such as Turkey, Iran and Iraq are experiencing rapid growth in electricity demand.

Domestic electricity demand has stayed fairly constant over the past years ranging between 8-9 billion kWh per annum. Although the demand declined slightly in 2009 that coincided with re-cession in Georgia triggered by the global eco-nomic crisis, the pattern of economic growth and flat or falling demand can be attributed to con-tinuing improvements in the efficiency of energy use and reductions in losses.

Since 2007 the levels of generation production have surpassed the annual demand and even a rapid economic growth is unlikely to be able to absorb all planned hydro power investments.

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Georgia’s reliance on imports and thermal gen-eration has fallen over time as hydro output in-creases. In 2006, hydro generation totaled 5.4 billion kWh meeting 65% of demand. By 2009 this had risen to 7,4 billion kWh meeting 86% of demand and, over the year of 2010, hydro gener-ation has already reached 8,8 billion kWh. While changes in hydrological conditions will partly account for this, rehabilitation of existing hydro plants has also increased their operating capaci-ties.

Export-Import by Months 2010

Export-Import by Countries 2010

Georgia has been a net exporter of electricity since 2007. While Georgia has interconnections with Russia, Turkey, Azerbaijan and Armenia, the vast majority of its trade is with the first two countries. Trade with Russia comprises imports in winter months to meet Georgian demand with exports in summer months when Georgia has excess hydro output. Trade with Azerbaijan fol-lows a similar pattern although volumes are much smaller. There are very small quantities of exports to Armenia. Trade with Turkey is in the form of exports during summer months.

Power GenerAtion, consumPtion, exPort And imPort


The growth in electricity exports relative to imports can be seen clearly in the pattern of Georgia’s electricity trade with Russia as depicted in the diagrams. Since 2007, exports have increased every year. In 2010, Georgia has exported 1.5 billion kWh in total, of which 1.1 billion kWh was exported to Russia. This represents an increase of over 100% on the equivalent period in 2009.

Thus, in consideration of current developments, the rough estimates for the next 10 years show that annual domestic consumption of electricity will increase up to about 10-12 billion kWh, annual genera-tion will rise up to 15-17 billion kWh and accordingly, up to about 5-7 billion will subject to export per annum.

Export Dynamics by Lines 2007-2010

2007

2009

2008

2010

Dispatch

However, to develop the hydropower potential and expand power export as envisaged by overall poli-cy in the power sector and especially to attract private sector capital for these investments, two critical technical issues need to be resolved: (i) ensuring the stability, reliability, and efficiency of Georgia’s power transmission and dispatch systems and (ii) enlarging the transmission capacity and providing market access to the most promising export markets for surplus power.

Georgia has already entered into agreements with neighboring countries to expand power trade and several new cross-border interconnection lines with adjacent countries are scheduled to be commis-sioned in 2012-2015. At present, the domestic transmission network capacity is not fully reliable and the operation system still remains fragile, increasing the potential risk of system blackouts, which hinders existing and future power swap or export potential. To reduce such impacts, more investment is required on substation rehabilitation and enhancement of transmission facilities. For this purpose, GSE plans to implement a number of capital investment projects focused, inter alia, on replacement/rehabilitation of digital control and protection systems in all GSE substations to achieve full functional-ity of the existing supervisory control and data acquisition system (SCADA) and Energy Management System (EMS) for efficient power dispatch operation.

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Blackouts

Technical Losses %

Frequency Deviation

In 2010, from time to time, the power system op-erated in parallel mode with Russian and Azeri power systems. By the end of August power sys-tem operated in parallel mode with Armenian and respectively Iran power systems.

Energy generation by seasonal power stations totalled 2,840 million kWh which on average to-talled 7,78 million kWh per 24 hours. The energy balance with:

■ The Russian power system totalled -903.31 million kWh (import 214 million kWh and export 1,117 million kWh).

■ The Azerbaijan power system totalled -4.24 million kWh (import 10.14 million kWh and export 14.34 million kWh).

■ The Armenian power system totalled -89.45 million kWh (import 0.00 million kWh and export 89.45 million kWh).

■ The Turkish power system totalled -303.6 mil-lion kWh (import 0.00 million kWh and export 303.6 million kWh).

The peak load of 1620 MW and the maximum daily energy consumption of 31,25 million KWh were fixed on December 31, 2010.

Although the completion of rehabilitation works at 500kV substation Gardabani and replacement of secondary equipment in the rest of substations significantly reduced the duration of planned maintenance and emergency outages, we could not avoid total and partial blackouts of the sys-tem in July and August due to the emergency outages of 500kV Imereti and Kartli-2 OHLs. This experience shows the necessity of modern digital control and relay protection systems to be introduces in all existing substations in the next few years to come.

The system frequency was stable and within ac-ceptable tolerances for the majority of the year. Average frequency rate was kept within stan-dard frequency deviations and ranged between 49.05-50.27 Hz.

Generation Million kWh Thermal power plant 676.62 Regulatory hydropower plant 6524.59 Seasonal hydropower plant 2,839.57 Import 223.69 Russia 213.55 Azerbaijan 10.14 Armenia 0.00 Turkey 0.00 Export 1,524.24 Russia 1,116.86 Azerbaijan 14.34 Armenia 89.45 Turkey 303.59


Providing transmission/transportation services throughout the territory of Georgia, GSE serves as a basic link in the chain between generators and consumers.

As part of the management initiative GSE trans-mission reviewed its entire business operation in order to improve business efficiency and ensure further development in line with modern utility practices, with the main focus on performance improvement. This was an exercise of vital im-portance for the future successful operation of GSE as a transmission company.

Careful analysis aimed at effective management of transmission system enabled us to focus cor-rective initiatives on system problematic areas traditionally resulting in system disturbances, thus posing serious threat to overall system avail-ability and reliability. It can be said with certainty, that availability and reliability of transmission

system assets improved vastly due to intensive management intervention programs implement-ed during the year 2010.

Detailed transmission planning was targeted not only at the rehabilitation/major repair of equip-ment in fault, but also involved the review of general condition of all transmission assets of the company, including their service-life and de-preciation estimates. All such efforts enabled us to ensure effective prevention from emergencies and timely replacement of old equipment.

Careful analysis of annual key performance in-dicators showed sharp reduction in the number of faults/damages of electrical equipment and transmission lines, as well as the significant de-crease in the number of 220/110kV transmission line emergency outages, resulting in improved network reliability and uninterrupted/secure pow-er transmission and supply, in general.

However, 2010 statistics for total and partial blackouts got worse as compared with the previ-ous two years that clearly demonstrates the ne-cessity of urgent measures to find solutions to the encountered problems and further improve system reliability and stability. To this end, the ef-forts continued during the year to replace old and obsolete primary equipment with new modern-ized ones. The table below shows the dynamics of primary equipment rehabilitation/replacement over the past ten years.

trAnsmission

HV Equipment Rehabilitated/Replaced2000-2007 2008 2009 2010

Breaker 80 41 68 107 Disconnector 78 11 238 272 Current Transformer 48 9 49 153 Voltage Transformer 8 7 17 41 Autotransformer 5 5 4 1 Transformer 12 6 6 13 Reactor 2 3 1 0 Surge Arrestor 35 2 98 56 Battery Charger 13 1 4 0 Battery 16 1 5 0 Total: 297 86 490 643

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No doubt, that we’ve made significant progress in successful implementation of capital invest-ment projects for the last few years.

Major accomplishments of the year 2010 in-clude, inter alia, the successful completion of two KfW funded regional transmission rehabilitation projects with the total value of EUR 18,3 million. Rehabilitation works were carried out basically at 500/330/220kV substation Gardabani and these projects, together with the successfully completed Electricity Market Support Project co-financed by the World Bank (~USD 36 million) and KfW (~EUR 12,7 million), ensured improved trans-boundary trade of power with neighboring countries, safe electricity supply, improved stabil-ity of the system & interconnection networks and reduced emergency faults and outages.

The other major accomplishment of 2010 is the construction of a new 220/110kV double-circuit OHL Menji-Khorga-Poti (36km) that ensured power supply to Poti Free Industrial Zone. Note-worthy, that this project was successfully com-pleted by the end of December and was fully funded from GSE’s own financial resources.

Commencement of works for rehabilitation of 220kV substation Navtlugi and 110kV substation Gardabani can be highlighted as one more sig-nificant capital investment projects of the year. As a result of this project that is planned to be completed by the end of 2011 these two substa-tion will be equipped with state-of-art technolo-gies.

We fully recognize the magnitude of energy pol-icy and strategic development objectives of the country that entails, among other things, the en-hancement of transmission system capacity and stability through construction of HV interconnec-tion facilities and infrastructure compatible with Turkish and European power systems. There-fore, in 2010 we embarked on implementation of a long term strategic development program with the main focus on transmission and dispatch performance improvement. And, what is pleas-ing to say in this context is that the involvement

cAPitAl inVestments

of donors in the power sector tends to become more and more intensive as they continue to direct their resources to feasible energy infra-structure development projects in Georgia. The following chapter describes that capital invest-ment projects initiated with the financial support of international financial institutions.


2010 saw intensive activities on our efforts to implement the Black Sea Transmission Net-work (BSTN) Project aimed at providing 700MW capacity interconnection between Caucasus/Russian electricity network and Turkish electric-ity network through rehabilitation/construction of 500kV overhead line Gardabani-Akhaltsikhe-Ze-staponi and construction of 400kV interconnec-tion line from Akhaltsikhe to Turkish border, as well as the construction of a new 500/400/220kV substation with HVDC back to back plant in Akhaltsikhe.

The Project scope and budget of about 300 mil-lion EUR is unprecedented for the last few de-cades and, after successful completion, this highly important project financed by the Europe-

an Commission (EC) Neighborhood Investment Facility (NIF), Kreditanstalt fuer Wiederaufbau (KfW), European Bank for Reconstruction and Development (EBRD), European Investment Bank (EIB) and Government of Georgia will significantly contribute to Georgia’s integration in energy networks of the European Union and ensure effective partnership in diversification of energy supplies from the Caspian Region to Eu-rope.

Following the procurement process for selection of main contractors through International Com-petitive Bidding, the turnkey works contracts with successful bidders have been fully effective and operational since September 2010. The scope of works under the project has been divided into

cAPitAl inVestments

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three project components and the turnkey works contracts were awarded to:

■ KEC (India) for rehabilitation/construction of 500kV overhead line Gardabani-Akhaltsikhe-Zestaponi, as well as construction of 400kV in-terconnection line from Akhaltsikhe to Turkish border;

■ Siemens (Austria) for construction of a new 500/400/220kV substation Akhaltsikhe and ex-pansion of existing substations;

■ Siemens (Germany) for construction/arrange-ment of HVDC back to back plant in Akhaltsikhe - as networks are not synchronized, intercon-nection requires Back to Back converter station, which will allow “exchange of energy” without

blAck seA trAnsmission network Project

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bringing network interferences from both sides. Energotrans LLC, fully owned subsidiary of GSE, serves as a project executing agency, or special purpose vehicle for implementation of this Proj-ect, carrying out overall control, supervision and monitoring over the performance by the contrac-tors of all project-related works and activities as per the approved time schedule. The project is implemented according to high environmental standards and in full compliance with the Envi-ronmental and Social Action Plan as provided under the loan and project agreements.

Notwithstanding the complexity and time con-straints imposed on project completion - winter time construction, short delivery time and shut down coordination - that makes the project high-ly challenging, we remain confident in the belief that the project schedule is feasible and we can succeed in timely completion of the project.

Works for rehabilitation/construction of 500/400kV overhead lines are expected to be completed in July 2012 and the works for con-struction of a new 500/400/220kV substation Akhaltsikhe, with HVDC back to back plant are scheduled to be accomplished in spring 2013. It is expected that the first 350MW unit of back-to-back station will be available in summer 2012 to start commercial operation and export 350MW to Turkey to fulfill the expectations from renewable developers and traders.

Energotrans and GSE closely cooperate with the Turkish counterparts to ensure that all terms and conditions under the Construction Agreement for 400kV Borchka (Turkey)-Akhaltsikhe(Georgia) Interconnection Line signed on September 9, 2009 between the Turkish commercial operator TEIAS and GSE are fulfilled for joint success-ful operation of interconnection facility after the completion of the Project.

We strongly believe, that the completion of this project will facilitate the energy export to Tur-key, as the most promising power export market for surplus hydropower, and will strengthen and greatly contribute to the role of Georgia as of en-ergy transit corridor in the Region.


cAPitAl inVestment Projects

Black Sea Transmission Net-work Project will significantly contribute to Georgia’s inte-gration in energy networks of the European Union, ensure effective partnership in diversi-fication of energy supplies from the Caspian Region to Europe

and will:

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blAck seA trAnsmission network Project

■ Increase stability and reliability of Georgian power system;

■ Ensure uninterrupted power supply throughout the territory of the country;

■ Improve power supply to the South of Georgia;

■ Provide a strong precondition for economic development;

■ Enable export of surplus energy;

■ Ensure reliability of power export, import and transit operations.



usAid - enerGy inFrAstructure exPAnsion ProGrAm

In line with the economically viable hydro power development strategy of Georgia, the significant in-vestments are needed in transmission infrastructure and improved energy technologies to expand and develop the domestic power grid, provide interconnections with neighboring markets, reduce waste in energy use and ensure affordable access to reliable energy services. Such developments will reduce and diversify power imports and expand power export opportunities to Turkey and other markets – con-tributing substantially to Georgia’s GDP growth. The reconstruction of critical power transmission infrastructure is one of the key elements of Energy Infrastructure Expansion program implemented under the USAID Assistance Agreement (No.AAG-114-G-10-00001) between the United States of America and Georgia dated February 25, 2010, as amended on September 29, 2010.

The Energy Infrastructure Expansion program includes the Power and Gas Infrastructure Project (PGIP) which provides technical design assistance, other technical services and reconstruction/reha-bilitation works to support power and gas transmission improvements being undertaken by USAID on behalf of the Government of Georgia.

The Transmission Infrastructure Development Component (the Project) includes, but is not limited to, the following project activities:

Rehabilitation/reconstruction of critical HV power transmission facilities and infrastructure owned and operated by GSE, including 220kV Sena-ki-1,2 overhead lines and associated substations Menji and Tskaltubo. The rehabilitation of existing lines and substa-tions is expected to improve Georgia’s capability to route power domestically and handle surplus hydropower by exporting significant volumes to Turkey and beyond. In particular, these reha-bilitation/reconstruction activities are expected to ensure significant increase in power trans-mission capacity through 220kV grid, the pos-sibilities for transmission of power generated by planned Namakhvani HPP into Turkey and sup-ply of increased capacity to Poti free industrial zone (100MW).

Introduction/deployment of smart grid technolo-gies, monitoring systems and computer-aided engineering software for GSE’s transmission networks, with capacity building effort to ensure that skills are in place to manage technological improvements over the longer term.

The deployment of state-of-art smart grid tech-nologies and engineering software, with capacity building efforts, are directed towards improved power management, transformer fault monitor-ing, protection improvement, reliable transmis-sion operation and trade facilitation. This assis-tance is expected to increase electricity reliability throughout the power transmission network, re-duce energy insecurity and vulnerability and vir-tually eliminate the risk of power supply interrup-tion in Georgia.

1 2

The project is planned to be completed in 2012. After the successful completion, the Project will sig-nificantly increase energy flows in parallel mode with 500kV OHLs Imereti and Kartli-2 via the 220kV backbone; provide possibilities for transmission of power generated by planned Namakhvani HPP into Turkey; ensure reliable supply of increased capacity, including to Poti free industrial zone (100MW) and increased stability and reliability of Georgian power system.

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Adb - reGionAl Power trAnsmission enhAncement Project

Georgia’s clear energy strategies and endeavor to develop a regional power market comprising Tur-key, Azerbaijan, Armenia and Russia, with Georgia serving as a transmission hub and as a seasonal exporter of environmentally clean hydropower, have encouraged the donors to direct their resources to feasible energy infrastructure development projects in Georgia.

One more upcoming large-scale project for improvement of GSE’s transmission facilities and infra-structure will be implemented with the financial support of the Asian Development Bank (ADB). In July 2010, ADB approved a project preparatory technical assistance to the Georgian Government in the amount of 1,2 million USD for the Regional Power Transmission Enhancement Project (the Proj-ect). The technical assistance (TA) is carried out under the Technical Assistance Frameworks Agree-ment between the Government and ADB dated September 1, 2008 and is co-financed by ADB and the Government of Spain on a grant basis. The consultants assigned under the TA program prepared a feasibility study and due diligence for preparing a loan for the Project and undertake pre-construction consulting services.

The Project is an integral part of Georgia’s power sector development plan and the selected compo-nents are under GSE’s investment priorities. The project objective is to enhance regional power trade through rehabilitation and improvement of existing substations and construction of a new substation. The total estimated value of the Project is about 60 million USD, including GSE’s contribution of about 15 million USD.

The Regional Power Transmission Enhancement Project will include, but will not be limited to, the fol-lowing activities:

Substation Rehabilitation and Improvement: Re-habilitation of 12 existing substations through the installation of modern digital control and relay protection systems to achieve full usage of the functions of the existing supervisory control and data acquisition system (SCADA) and Energy Management System (EMS) for efficient power dispatch operation.

A New Substation: Construction of a new 220/110 kV substation Khorga with 220kV and 110 kV line bays and associated equipment. Success-ful completion of construction will strengthen the transmission network and support the industrial growth of Poti, the Free Industrial Zone, as well as the energy supply to Turkey.

1 2

The international competitive bidding for selection of main contractors for the Project is scheduled to be announced in autumn 2011 and, provided the negotiations between the ADB and Government over the loan and project agreements are successful, the physical works under the Project will start in spring 2012 and finish in 2015.

The Project outcome will be a more reliable, stable and efficient power operation system to meet increasing demand for power export. Specifically, the project will improve the situation in GSE sub-stations and will shorten the outages and maintenance, improve the power quality criteria by modern substation automation and protection systems and will increase the installed substation transformer capacity of GSE by additional 400 MVA.



construction oF 500/220 kV substAtion jVAri And AssociAted trAnsmission lines

Construction of a new 500/220kV substation in Jvari and new 500kV and 220kV transmission lines, with the total length of about 70km is one of the key investment priorities of GSE. The estimated value of the project is 40 million USD and will substantially be financed from the savings made on the pro-curement of the other project components of the present scope of the Black Sea Transmission Network Project (BSTN) being implemented with the financial support of EC NIF, KfW, EBRD and EIB. Supervi-sion, monitoring and control over the implementation of this project will be carried out by Energotrans LLC, fully owned subsidiary of GSE, acting as a project executing agency for BSTN project.

The project activities will include the construction of:

■ About 2 x 8km of 500kV overhead line as tie-in of the 500kV Kavkasioni line

■ About 60 km of 220kV double-circuit overhead line from Jvari to Khorga.

■ Construction of a new 500/220kV substation at Jvari.

The international competitive bidding for selection of main contractors for the Project is planned to be announced in early 2012 and, provided the approvals from the Government and donors are received as scheduled, the physical works under the project will start in summer 2012 and finish in 2014.

The project is aimed at construction of by-pass routes to transmit energy generated by Enguri HPP to western Georgia, the Free Industrial Zone Poti and to Turkey. At the same time it will allow the transfer of more energy from west to east Georgia.

PlAnned cAPitAl Projects 2011

In addition to the current donor-funded capital projects, GSE plans to implement from its own resourc-es, and/or further attract investments for, new transmission infrastructure development projects for the next few years to fulfill the expectations of traders and developers of renewable energy.

Total 16 million USD capital investments will be made from GSE’s own funds only in 2011 that will include, inter alia:

■ construction of 500kV interconnection line (9,7km) with Azerbaijan and arrangement of 2 complete

500kV bays at substation Gardabani;

■ complete replacement of secondary equipment at 220kV substation Navtlugi and at 110kV switch-

yard of Gardabani;

■ reconstruction of 110kV OHL Trialeti (42 towers);

■ replacement of all out-of-date current & voltage transformers and surge arresters (850 units in total)

in 220kV substations;

■ replacement of 220/110kV circuit breakers (23 units);

■ implementation/commissioning of the fibre optic communication and commissioning of differential

protection functionality on 500kV OHL Imereti, Kartli-1 and Kartli-2;

■ Implementation of an Emergency Control System (ECS) in Ksani, Zestaponi, Enguri and in 7 substa-

tions of Tbilisi area to avoid system break-down in case of tripping of the 500kV OHL Imereti and/or

Kartli-2.

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PlAnned cAPitAl Projects 2012-2016

For the next few years to come GSE plans to implement capital projects with the total estimated re-quired investments of 130 million USD, including:

construction oF 400kV interconnection line with ArmeniA.

The project activities will include: ■ Construction of 400kV transmission line from Marneuli to Hrazdan with the total length of about 40 km; ■ 3x267MVA autotransformer with single 267MVA reserve phase; ■ Construction of associated bays including 500/400kV relay protection and automation.

The project will increase transmission capacity and facilitate trade and power exchange operations with and between our neighbors.

construction oF 500kV trAnsmission line From jVAri to AkhAltsikhe.

Project activities will include:■ Construction of 500kV OHL Jvari-Akhaltsikhe with the length of about 180km;■ Construction of bays at the associated substations.

The project will ensure parallel backbone of 500kV Imereti and Zekari OHL and transmission of capacity to Tortum (Turkey) via Akhaltsikhe.

construction oF 500kV switchGeAr in substAtion tskAltubo.

Project activities will include:■ Construction of a 500kV switchgear in substation Tskaltubo;■ Looping-in of Imereti OHL to the substation;■ Looping-in of 500kV Jvari-Akhaltsikhe OHL to the substation; ■ Installation of 3X167+167 MVA autotransformer, 500/200kV.

The project will ensure transmission of capacity generated by the HPPs planned to be built in the upper reaches of the Rioni River .

construction oF 500kV switchGeAr And 500/220kV connection At substAtion mArneuli.

Project activities will include:■ Construction of a 500kV switchgear; ■ Looping-in of Vardzia OHL to substation Marneuli; ■ Looping-in of Mukhrani Veli OHL to the substation; ■ Installation of a 500/220kV, 801 MVA autotransformer at the substation;■ Looping-in of Koda-2 OHL to the substation.

The project will improve the reliability of power supply to Akhaltsikhe substation for transmission to Turkey and ensure uninterrupted power supply of Tbilisi in case of 500/220kV AT failures at substations Garda-bani and Ksani.


Georgian State Electrosystem LLC

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We are close to the accomplishment of the Company’s mission and strategic objectives and strongly believe that GSE will be a competent, profitable and learning transmis-sion and dispatch company by world standards that excels at satisfying the needs of

our cu tomers and that will be a sought after employer with the basic values of honesty, loyalty,integrity, transparency, respect, customer focus, professionalism, discipline,

teamwork, adaptability/pro-activeness, where people desire to work.

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