Press Release Konkan LNG Limited (Revised) December 02, 2020 Ratings Amount Facilities/Instruments Ratings Rating Action (Rs. crore) CARE A+; Stable Long Term Bank Facilities 4,598.00 Assigned (Single A Plus; Outlook: Stable ) CARE A1+ Short Term Bank Facilities 10.00 Assigned (A One Plus ) 4,608.00 Total Bank Facilities (Rs. Four Thousand Six Hundred Eight Crore Only) Details of instruments/facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The ratings assigned to the bank facilities of Konkan LNG Limited (KLL) draw comfort from its strong parentage in reputed public sector enterprises, especially GAIL (India) Limited (GAIL), which has majority shareholding and has provided sustained operational and financial support. The rating also take into cognizance the company’s experienced and professional management team, limited risks of offtake and pricing backed by a long-term use-or-pay agreement with GAIL with a yearly escalation in regasification rate providing revenue visibility, and a favourable industry scenario. The ratings, however, factor the company’s moderate financial risk profile that had constrained its capacity for timely debt servicing in the past. However, it is significantly offset by the expectation of adequate support from GAIL to fund any cash losses in future. The ratings also take into account the company’s ongoing capex plan to complete the breakwater facilities. Rating Sensitivities Positive Factors Completion of breakwater facilities within envisaged cost and timeline leading to sustained improvement in operating income and PBILDT margin above Rs. 900 crore and 60% respectively Increase in shareholding of GAIL (India) limited with sustained improvement in operational parameters Negative factors: Any lag in financial and operational support or reduction in shareholding by GAIL (India) Limited Sustained losses at PAT level leading to decline in tangible net worth Detailed description of the key rating drivers Key Rating Strengths Strong parentage of GAIL (India) Limited with significant presence in natural gas value chain GAIL (India) Ltd. (GAIL) is India's principal gas transmission and distribution company with over 12,400 Km of pipeline network, out of total pipeline network in India of ~17,500 Km (i.e. 70.86% of country's pipeline)and natural gas handling capacity of 253 million metric standard cubic metres per day (MMSCMD) as on March 31, 2020. It was set up by the Government of India (GoI) in August 1984 for development of the natural gas sector across the country. As on March 31, 2020, the GOI had 51.76% stake in the company and the balance is held by various institutions and public. The company’s activities range from gas transmission and distribution to processing (for fractionating liquefied petroleum gas (LPG), propane, Special Boiling Point (SBP) solvent and pentane), transmission of LPG, production and marketing of petrochemicals like High density polyethylene (HDPE) and Linear low-density polyethylene (LLDPE) and leasing bandwidth in telecommunications. The company has developed adequate LNG import tie ups for supply of natural gas both domestically and internationally. The company sourced around 50% of its total gas requirement through domestic sources and remaining ~50% through imported gas - RLNG (Long-term RLNG, Mid Term RLNG and Spot) for which it has long term LNG contract of around 14 million metric tonnes per annum (MMTPA) from USA, Russia and Qatar. Through various equity and joint venture participations, GAIL has extended its presence in power, liquefied natural gas (LNG) re-gasification, city gas distribution (CGD) and Exploration & Production (E&P). Experienced and professional management team KLL is being managed by professional and experienced management team nominated by GAIL & National Thermal Power Corporation (NTPC) Limited with exposure to various aspects of the gas industry in India. Shri E.S. Ranganathan, Chairman nominated by GAIL is an Instrumentation & Control Engineer and an MBA with specialization in Marketing and has close to 35 1 CARE Ratings Limited Press Release years of rich and diverse experience in oil & gas sector, particularly in project execution along with operation & maintenance (O&M) of natural gas pipelines, marketing, business development and business information systems. Shri Pankaj Patel, Chief executive officer is B.E. in Electrical Engineering from M.A.C.T, Bhopal and has over 33 years of experience in natural gas sector, mainly in construction and O&M of natural gas & LPG pipelines. Presence of long-term use-or-pay mechanism providing revenue visibility KLL has entered into a 20 years agreement with GAIL, commenced from April 1st, 2018 for regasification of LNG at its Dabhol facility in Ratnagiri district of Maharashtra. Under the agreement, GAIL has booked capacity of 30 cargoes per year without breakwater and 80 cargoes per year with breakwater construction. GAIL is responsible for importing LNG and bringing at terminal where KLL will provide regasification service i.e. storage and regasification of LNG and supply to delivery point of GAIL. The regasification rate paid by GAIL has been fixed at Rs.46.94per metric million british thermal unit (MMBTU) for CY18 (April 2018- December 2018, after commencement of contract) with yearly revision at 5% per annum escalation. GAIL will pay 75% of regasification rate for the annual use or pay deficiency which arrives if quantity off taken is less than 80% of RLNG quantity i.e. 24 cargoes without breakwater and 50% of RLNG quantity i.e. 40 cargoes with breakwater. Thus with the agreement in place exposure of KLL gets limited in terms of off-take and price risk. In CY18 and CY19, GAIL brought 10 cargoes out of obligation of 17 cargoes (April to December, 1st year of contract) and 19 cargoes out of obligation of 24 cargoes therefore KLL was entitled to receive use or pay charges of Rs. 15.80 crore (inclusive of GST) and Rs. 45.69 crore (inclusive of GST) respectively. Upon payment of use or pay charges, GAIL get make-up rights for next 5 years from the year of payment which entitle it to avail regasification services for use or pay deficient quantity in respect of which GAIL has paid use or pay charges. GAIL can exercise make-up rights only after fulfilling its obligation for present year and has to pay 25% of the regasification rate applicable in the year for which make up rights is utilized. In CY20, till November 17, 2020 GAIL brought 27 cargoes thus fulfilling its obligation for present year and is entitled to utilize its makeup rights acquired during CY18 & CY19. Demonstrated support of GAIL (India) Limited post demerger of Ratnagiri Gas and Power Private Limited GAIL has demonstrated explicit support to KLL in terms of fund infusion, project execution and implementation of one time settlement (OTS) for debt resolution issues between KLL and lenders. Post demerger and approval of capex plan for construction of breakwater facility and cash loss funding by lenders in debt to equity ratio of 1: 1, KLL’s account was declared NPA by Canara Bank, one of the lenders of KLL as on March 31, 2018 w.e.f April 1, 2009 citing the reason of incomplete restructuring as per the RBI circular, dated February 12, 2018. Till March 2019, only first tranche of Rs. 395 crore was disbursed, halting any further disbursement by lenders. GAIL brought capital of Rs. 395 crore (Rs. 143 crore in the form of equity and Rs. 252 crore in the form of CCCPS) as a promoter contribution to match the contribution of lenders thus increasing the shareholding of GAIL from 25.50% to 40.92% (Equity) and to 56.71% (Equity + CCCPS) as on March 31, 2019. In March 2020, there was OTS between KLL and lenders for which tripartite agreement was signed between GAIL, KLL and lenders where GAIL has paid Rs. 2700 crore in lieu of debt of Rs. 3705 crore and interest of Rs. 108 crore as one time settlement to lenders. And in turn lenders has simultaneously novated the residual debt aggregating to Rs. 1113 crore along with entire security/charge on the assets of KLL in favour of GAIL and transferred their equity share to GAIL thus further increasing its shareholding to 69.06% (Equity) & 77.37% (Equity +CCCPS) as on March 31, 2020. Apart from financial support in past, GAIL is also looking after the balance work of breakwater construction as owner’s engineer and will be bringing equity as promoter contribution of 30% for capex and for any cash short fall if required. Favourable Industry scenario India’s natural gas market is characterised by a supply deficit, primarily due to low domestic production and inadequate transmission and distribution infrastructure. Natural gas consumption has increased by 5.2% during FY20 compared with the 2.7% growth rate achieved during FY19 whereas domestic production of natural gas (gross) has fallen at a CAGR of 0.8% during FY16-20 thus increasing its reliance on imports of LNG which have increased at a CAGR of 12% during FY16-20 signifying the growing need for natural gas in the Indian economy. Due to COVID-19, consumption of natural gas has fallen by 6.5% on a y-o-y basis during 7MFY21 and imports of LNG has fallen by 0.9% as compared to 9.6% increase during 7MFY20 but imports dependency based on consumption has increased to 54.6% during 7MFY21 as compared to 51.5% during 7MFY20. The imports of LNG are expected to increase by 5% till end of FY21 plugging the structural gap between domestic demand and production. With every subsequent unlock of economy there is improvement in overall macros of natural gas industry. There is also push from government to transform India into a gas based economy and increase natural gas share of consumption to 15% from the entire energy basket from the current 6% by 2030 At present, nameplate capacity of 6 operating terminal is about 42.5 MMTPA with a overall capacity utilization of 58% dominated by Petronet LNG Ltd.