Management's Discussion & Analysis forming part of the Directors' Report for the year ended on 31st March, 2015 A. INDUSTRY OVERVIEW The Indian economy in 2014-15 has portrayed a promising outlook with controlled inflation coupled with the lower global crude oil prices. As a matter of fact, the IMF strengthened its growth forecast FY 2014-15 to 7.2% with India improving the way of measuring economic output. The year was positive for oil & gas sector with some of the major initiatives by the Government of India being: • Deregulation of diesel prices. • Proposal for reviving stranded power plants in the Country. • Providing support from Power System Development Fund (PSDF) to stranded gas based power plants leading to improved utilization of gas based power generation. • Expediting environmental clearances for critical infrastructure projects enabling fast paced development, strong focus on creating a nation-wide gas grid of 15,000 Kms pipelines. • CGD segment being accorded highest priority for gas allocation. • Alignment of domestic gas price from 4.2 $/MMBTU to international indices linked price. • Likelihood of according a brmium on gas explored from High Temperature & High Pressure (HTHP) & Deep Water blocks, as announced. • Encouraging response received to CGD bidding round 5 & 6 initiated by PNGRB covering 44 Geographical Areas in various parts of the Country. • Grant of Authorizations for CGD development in 8 new Geographical Areas (GAs) bid under 4th CGD bidding round conducted by PNGRB. ENABLERS & INHIBITORS FOR GAS INDUSTRY The year 2014-15 witnessed a mix of enablers and inhibitors in the gas industry. Production from one of the major domestic source, namely RIL's KG D6 field constantly lowered during the year and was at a level of 11.5 MMSCMD during January-March, 2015 making it imperative for India to rely on LNG imports for meeting the burgeoning demand. However, the said situation got a boost from lowering spot LNG prices. Spot LNG prices which hovered at around 14 $/MMBTU in the beginning of the year spiraled down to around 7.5 US$/MMBTU levels by March, 2015 in tandem with crude oil prices. During past quarter of Q1 2015-16, LNG imports steadily increased owing to falling LNG prices during the year thereby reducing the Country's oil dependency to that extent and improving the capacity utilization of the pipeline of your Company. On the other hand, the gas industry is tethered with infrastructure bottlenecks owing to non-availability of pipeline connectivity in major demand centres of the nation which is brventing natural gas from reaching the end consumer, as is the case in one of the newly developed LNG terminals in Southern India (i.e. lack of pipeline connectivity to end consumers). Another terminal in West Coast of India is intermittently operational due to lack of break water facilities. However, the infrastructure outlook looks positive with estimates that Country's regassification capacity would reach from current levels of 18.7 MTPA to over 45 MTPA by 2020 boosting LNG import into the Country. It may be noted that construction activities are progressing well at GSPC LNG, of GSPC Group, and the terminal is expected to commission by FY 2017-18. Further to unveiling of "LNG Terminal Policy" by the State in 2012, wherein several entities have evinced interest in developing LNG terminal along the Coast of Gujarat, setting up of the 4th LNG terminal in the State would not only increase India's regassification capacity but also make Gujarat gateway of LNG into the Country. Early signs of volume improvement have been encouraging for your Company, like availability of significant regassification capacity coupled with commissioning of Cross Country Pipeline projects, increasing energy requirement of the Country and a positive outlook for Spot LNG prices. B. REGULATORY FRAMEWORK In July 2014, PNGRB re-determined the levelized tariff for GSPL's High Pressure Gujarat Gas Grid. However, your Company has filed appeal in the Appellate Tribunal for Electricity (APTEL) against PNGRB Tariff Order for the high brssure & low brssure network as the factors considered in tariff determination were incongruent with your Company's submissions and interbrtation of regulations. In this regard, APTEL has pronounced the Order in favour of your Company and has asked PNGRB to re-compute the transportation tariff ensuring regulated rate of return to your Company, which is under process. Further, ongoing legal issues / proceedings underline that there are quite a few areas of dispute between the PNGRB and entities which is a concern from the perspective of the sector. C. OPPORTUNITIES AND CHALLENGES Your Company provides gas transmission service to various customers, through the infrastructure it has developed, thereby enabling access to gas. An important milestone of merging two CGD companies namely GSPC Gas Company Limited and Gujarat Gas Company Limited into a new entity named Gujarat Gas Limited, the largest gas retailing company in the Country was achieved by GSPC Group. Your Company has a total shareholding of 25.76% in the merged entity, Gujarat Gas Ltd. It is noteworthy to mention that Gujarat Gas Limited, is the largest CGD Company in the Country selling around 6.2 MMSCMD of gas more than 10.25 Lacs households, having 234 CNG stations sbrad across Gujarat and covering 19 of 33 Districts of the State. During the year 2014-15, PNGRB has issued Grant of Authorisation to Gujarat Gas Limited for development of CGD network in the Geographical Area of Kutch West, Valsad, Hazira, Jamnagar, Bhavnagar, Thane district (Maharashtra) and Union Territory of Dadra & Nagar Haveli GAs. Further, Sabarmati Gas Limited, wherein your Company holds 13.75 % stake is selling around 0.7 MMSCMD of gas to around 244 industrial customers, more than 0.86 lacs households, around 471 customers in commercial segment and 38 CNG stations in the State. In February 2015, your Company emerged as a successful bidder for development of City Gas Distribution (CGD) network in Amritsar Geographical Area (GA), authorization for which was received on 5th May, 2015. By promoting / developing critical gas infrastructure, your Company continues to play a pivotal role of infrastructure provider acting as an energy channel between sources and gas consumers. D. OPERATIONS AND FUTURE OUTLOOK Your Company owns and operates the largest gas transmission network in Gujarat totaling to approximately 2192 Kms (as on 31st March, 2015). The gas grid of the Company has reached 24 of 33 Districts in Gujarat. Further, your Company through the Special Purpose Vehicles, namely GSPL India Gasnet Limited(GIGL) and GSPL India Transco Limited(GITL) is focusing on development of 3 pan-India pipeline projects namely Mallavaram — Bhopal — Bhilwara - Vijaipur Pipeline, Mehsana - Bhatinda Pipeline and Bhatinda — Jammu - Srinagar Pipeline. The said Pipelines with a total length of approx 4291 Kms would be traversing through 9 States and 59 Districts of the Country and thereby improving the capacity utilization of LNG terminals as well as GSPL's Gujarat gas grid. GIGL & GITL - Project Status: GIGL and GITL are in the final stages of receiving statutory approvals for development of Pipeline and Right of Use (ROU) acquisition is under progress. Your Company is pleased to inform you that significant progress has been made in this regard. With Government of India (GoI) initiatives in terms of (a) revival of old fertilizer plants (b) revival of stranded gas based power generation and subsidy support (c) expedition of CGD bidding process by PNGRB across various GAs (d) proposed financial support to infrastructure projects through Viability Gap Funding (VGF) the prospects for upcoming gas infrastructure projects and overall gas demand are promising as these initiatives would unleash the latent & untapped energy demand of the Country. Your Company intends to develop these pipeline projects progressively over the next few years based upon improvement in the demand-supply scenario. Development of these Cross Country Pipelines are strategically very critical not only for the SPVs, but also for your Company as it would enable optimum utilization of GSPL's Gujarat Gas Grid. E. PERFORMANCE PROFILE The Company continues to expand its gas grid to reach new markets and connect to new supply sources. The infrastructure developed by the Company enabled the flow of LNG and domestic gas from various sources including KG Basin to reach various regions of Gujarat. The Company has managed with a lean manpower strength on account of its well thought out strategy of developing major pipeline projects on EPC (Engineering, Procurement and Construction) Model. The Company transported 8395 MMSCM of natural gas during the year, a increase of 9% over last year's volumes transportation of 7693 MMSCM. Income from transportation of gas for the year was Rs. 1023.05 Crore, an increase of 1.36% over last year's figure of Rs. 1009.31 Crore. Gross Income has increased by 1%. Profit After Tax for the year was Rs. 410.36 Crore as compared to Rs. 419.15 Crore in the brvious year, recording decrease of 2%. The Net Worth of the Company has increased from Rs. 3294.83 Crore to Rs. 3623.05 Crore. During the year, Gross Block of Assets increased from Rs. 4710.57 Crore to Rs. 4819.29 Crore. The Company continues to have a healthy Debt Equity Ratio of less than 1. Wind Power Project: Your Company believes that renewable energy sources can offer enormous economic, social, and environmental benefits and India has the highest potential for effective use of the renewable energy sources like wind power. Considering the cost benefit which a Wind Power Project can offer, your Company ventured into and has successfully completed commissioning of the Wind Power Project of 52.5 MW at Maliya Miyana, Rajkot and Gorsar - Adodar, Porbandar in the State of Gujarat. The Company has generated 10,42,47,114 units of power from the same which resulted in the revenue of approx Rs. 37.51 Crores in the year. F. RISK MANAGEMENT AND INTERNAL CONTROL SYSTEMS Risk Management: The Company has a well-defined Risk Management Framework. The Board of Directors of the Company has adopted a Risk Management Policy and put in place a framework for reviewing the major Risks. The Company is focusing on development of a "Risk Culture" that encourages all employees to identify Risks and associated opportunities and to respond to them with effective actions. Your company feels, at brsent following are the major Risks which may pose major threat for the Company. 1. Availability of Natural Gas Gas based power plants, fertilizer manufacturing units, city gas distribution units etc. which account for approx 47% capacity in GSPL's network are dependent on the low priced domestic natural gas. The production of natural gas in India has reduced substantially as much as 40% in last five years. Due to low production levels of domestic natural gas, there have been major cuts in the allocation of domestic natural gas and if the similar trend continues in future, there may be further cut in the allocation of domestic natural gas and may have adverse impact on Company. Due to low levels of domestic natural gas production, India is heavily dependent on imported RLNG for its balance requirements. Imported RLNG accounts for around 80% in the Company's network. Import of RLNG in India is hugely impacted by the international prices. In the recent past, there have been high fluctuations in the prices of RLNG at the international markets and the same has created the huge uncertainty in terms of cost of natural gas. Further, cheaper alternate fuels owing to sharp decline in crude oil prices may affect the competitiveness / affordability of natural gas. Such low levels of production of domestic natural gas and high price volatility is a major risk for the Company's gas transportation business. 2. Regulatory Risk The Petroleum and Natural Gas Regulatory Board (PNGRB) has been constituted in 2007 as regulatory body to regulate the natural gas pipeline business in India. The transportation tariff for the natural gas pipeline existing at that time is fixed by PNGRB. PNGRB has framed Regulations on various aspects like technical and safety requirements, transportation tariff, access code, authorization, capacity determinations etc. and many more are likely to come in future. In recent past, there have been many instances wherein the actions / decisions of Regulatory Board have been challenged before various courts. This has created an uncertain regulatory environment and it poses a major risk for the Company. 3. Safety and Operational Risk The changing technologies and the natural ageing of existing facilities pose the risk of Pipelines and stations Aged Pipelines are prone to unplanned shutdowns, increased maintenance and operating costs. Deployment of new technologies in line with Pipeline Integrity Management Systems and ongoing maintenance processes are key to enhancing the reliability of operations and reduction in operating costs and maximising the life of assets, while improving the safety of operating conditions. Pipeline system's safety is also a major challenge and small operational issue and safety issues may cause major safety hazards, disrupt operations at large levels, pose danger to life, property and safety of people and penalties from statutory / regulatory bodies and reputation of the organisation may also be at stake. . Internal Control Systems: The Company has a proper and adequate system of Internal Controls commensurate with its size of operations and nature of business. The Company's Internal Control Systems are further supplemented by extensive programs of audits, i.e. Internal Audit, Proprietary Audit by the Comptroller & Auditor General of India (C&AG) and Statutory Audit by Statutory Auditors appointed by the C&AG. The Internal Control System is designed to ensure that all financials and other records are reliable for brparing financial statements and other data and for maintaining accountability of assets and compliance with statutory requirements. The Company has mapped a number of business processes on to SAP system, thereby leading to significant improved controls & transparency. Your Company also continues to invest in Information Technology to support various business processes. G. HUMAN RESOURCES During the year, the Company did not experience any strikes or lockouts. The increasing human capital aspirations are a major challenge for the Company. In order to remain competitive it is imperative that Company has to hire and retain sufficient number of skilled talent so as to strengthen its technical and project management skills. The Company employed 221 employees as on 31st March, 2015 (Previous year: 239 employees). The Company believes that training and personnel development is of vital importance to create a climate where people maximize their technical skills and inner potential which can help the Company in capitalizing the emerging business opportunities through their involvement. During the year, employees were sent for various training programs and seminars in line with the Annual Training Calendar to enhance employee skills/knowledge. The Company has in place an attractive policy of performance linked incentive to encourage and reward employee performance. The Company has managed to achieve substantial growth with a lean organization structure. Forward Looking Statements: This Annual Report contains forward-looking statements, which may be identified by words like will, believes, plans, expects, intends, estimates or other words of similar meaning. All statements that address expectations or projections about the future, including but not limited to statements about the Company's strategy for growth and market position are forward-looking statements. Forward-looking statements are based on certain assumptions and expectations of future events. The Company cannot guarantee that the assumptions and expectations are accurate or will be realized. The Company's actual results, performance or achievements could differ materially from those projected in any such forward looking statements. The Company assumes no responsibility to amend, modify or revise any forward looking statements, on the basis of any subsequent developments, information or event. |