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 LNG Limited (KLL) draw comfort from its strong parentage in reputed public sector enterprises, especially GAIL () 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 (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 of . 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 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 , 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. (PLL) with capacity of 17.5 MMTPA and utilization of 92% during April 2020- September 2020.

2 CARE Ratings Limited

Press Release

Key Rating Weaknesses Moderate financial risk profile with leveraged capital structure During FY18-FY20 (April 2017- March 2020), the total operating income (TOI) has grown at a CAGR of 25% with KLL reporting TOI of Rs. 497.47 crore including regasification income of Rs. 484.86 crore in FY20, an increase of 48.6% y-o-y basis (FY19: Rs. 334.69 crore). In FY20, KLL received 27 LNG cargoes (FY19: 19, FY18: 17) at a regasification rate of Rs. 50.24/MMBTU. The company generated PBILDT Margin of 60.11 % in FY20 (FY19: 41.35%, FY18: 50.55%) due to higher number of cargoes received. The capital structure of KLL remains leveraged with overall gearing ratio at 16.49x as on March 31, 2020 mainly on account high debt and lower tangible net worth given past losses. The debt in books of KLL is in form of inter corporate loan from GAIL of Rs. 3813 crore which is expected to increase further after sanctioning of debt for breakwater construction. Further interest coverage ratio of the company has improved to 1.62 for FY20 (PY: 0.44) due to increase in PBILDT and decrease in interest expense as no interest cost was payable to lenders in H2FY20 as per one time settlement for debt.

H1FY21 performance: KLL has posted TOI of Rs. 113.76 crore in H1FY21 (Rs. 69.40 crore in H1FY20) as it re-gasified 19.0 TBTU of LNG at regasification rate of Rs. 51.75/MMBTU by receiving 4 cargoes whereas it re-gasified 12.3 TBTU of LNG at regasification rate of Rs. 49.29 /MMBTU by receiving 3 cargoes. H1FY21’s TOI is only 28% of projected TOI of FY21 because without breakwater terminal is only operational during non-monsoon period i.e. (October–April). The PBILDT margin is 36.64% in H1FY21 whereas in H1FY20 it posted loss at PBILDT level.

Ongoing Capex plans At present KLL’s LNG terminal is not all weather terminal because of partially completed breakwater (~30%) due to which cargoes are only received during the non- monsoon period (October–April). Therefore construction of balance breakwater is essential for successful unloading of LNG cargo and for operating the facilities throughout the year. It will increase the cargo handling capacity to 80 cargoes per year (5 MMTPA) from present capacity of 30 cargoes per year (1.875 MMTPA). The balance work of breakwater is being looked after by GAIL as owner’s engineer and has given the contract to Larsen & Tourbo limited for completion of balance work on L-1 basis at LNG terminal end. The construction is expected to be completed by March 31, 2023. The cost estimate for capex (including breakwater, heating system, truck loading and other civil work) is of Rs. 1215.94 crore which will be funded by debt to equity ratio of 70:30. The equity will be brought by GAIL or will be met by internal accruals and the debt requirement will be met by loans from banks/financial institutions. For ramping up of operations of LNG terminal, completion of breakwater within envisaged cost and timeline is essential.

Liquidity: Adequate KLL reported gross cash accruals of Rs. 74 crore in FY20 (including use or pay charges from GAIL of Rs. 15.80 crore received on July, 2019) and has received use or pay charges of Rs. 45.69 crore from GAIL on August, 2020 for CY19. The company has an operating cycle of 206 days in FY20 (PY: 155 days) on account of increase in inventory days from 173 days in FY19 to 242 days in FY20. The inventory pertains to system used gas generated during the regasification process. It has no working capital limits sanctioned from bank and has cash & bank balance of Rs. 291 crore as on September 30, 2020.

Analytical Approach: Standalone; factoring linkages with GAIL (India) Limited in form of Inter corporate loan and operational support in terms of use or pay agreement and management personnel.

Applicable criteria CARE’s Criteria on assigning Outlook to Credit Ratings CARE’s Policy on Default Recognition CARE’s methodology for financial ratios (Non-Financial Sector) Rating Methodology: Factoring Linkages in Ratings CARE’s methodology for service companies

About the Company Konkan LNG Ltd (KLL), formerly known as Konkan LNG Private Limited (KLPL) was incorporated on December 4, 2015 for taking over the Re-Gasified LNG (R-LNG) business under the demerger scheme of Ratnagiri Gas & Power Private Limited (RGPPL, rated CARE D; as per dated October 19, 2020). The R-LNG Terminal has capacity of approximately 5 MMTPA (Million Metric Tonnes Per Annum) with breakwater at Dabhol, Maharashtra. The shareholders of KLL as on March 31, 2020 are GAIL (India) Ltd (69.06%), NTPC Ltd (20.22%) & MPEB (10.72%). Pursuant to debt resolution plan of KLL on March 27, 2020, GAIL’s shareholding has increased from 40.92% to 69.06% (Equity) & to 77.37% (Equity +CCCPS) as on March 31, 2020 and accordingly KLL became a subsidiary of GAIL (India) Limited.

3 CARE Ratings Limited

Press Release

Brief Financials (Rs. crore) FY19(A) FY20(A) Total operating income 334.69 497.47 PBILDT 138.39 299.04 PAT -352.50 270.27 Overall gearing (times) NM 16.49 Interest coverage (times) 0.44 1.62 A: Audited; NM: Not Meaningful

Status of non-cooperation with previous CRA: Not Applicable Any other information: Not Applicable Rating History for last three years: Please refer Annexure-2

Annexure-1: Details of Instruments/Facilities Name of the Date of Coupon Maturity Size of the Issue Rating assigned along Instrument Issuance Rate Date (Rs. crore) with Rating Outlook Fund-based - LT-Term Loan - - December 2032 4598.00 CARE A+; Stable Non-fund-based-Short Term - - - 10.00 CARE A1+

Annexure-2: Rating History of last three years

Current Ratings Rating history Date(s) & Date(s) & Name of the Type Rating Date(s) & Date(s) & Sr. Amount Rating(s) Rating(s) Instrument/Bank Rating(s) Rating(s) No. Outstanding assigned assigned Facilities assigned in assigned in (Rs. crore) in 2019- in 2018- 2020-2021 2017-2018 2020 2019 1)Withdrawn 1)CARE C Fund-based - LT- 1. LT - - (11-May-20) - (07-Mar- - Term Loan 19) 1)Withdrawn 1)CARE D Fund-based - LT- 2. LT - - (11-May-20) - (07-Mar- - Term Loan 19) CARE Fund-based - LT- 3. LT 4598.00 A+; - - - - Term Loan Stable Non-fund-based- CARE 4. ST 10.00 - - - - Short Term A1+

Annexure 3: Complexity level of various instruments rated for this Company Sr. No. Name of the Instrument Complexity Level 1. Fund-based - LT-Term Loan Simple 2. Non-fund-based-Short Term Simple

Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to [email protected] for any clarifications.

4 CARE Ratings Limited

Press Release

Contact us

Media Contact: Name: Mradul Mishra Contact no.: +91-22-6837 4424 Email ID – [email protected] Analyst Contact: Name: Nitesh Ranjan Tel: 011- 45333239 Email: [email protected] Business Development Contact: Name: Swati Agrawal Contact no. : +91-11-4533 3200 Email ID: [email protected]

About CARE Ratings: CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit Assessment Institution (ECAI) by the Reserve (RBI). CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices. Disclaimer CARE’s ratings are opinions on the likelihood of timely payment of the obligations under the rated instrument and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE’s ratings do not convey suitability or price for the investor. CARE’s ratings do not constitute an audit on the rated entity. CARE has based its ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. CARE or its subsidiaries/associates may also have other commercial transactions with the entity. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is, inter-alia, based on the capital deployed by the partners/proprietor and the financial strength of the firm at present.The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. CARE is not responsible for any errors and states that it has no financial liability whatsoever to the users of CARE’s rating. Our ratings do not factor in any rating related trigger clauses as per the terms of the facility/instrument, which may involve acceleration of payments in case of rating downgrades. However, if any such clauses are introduced and if triggered, the ratings may see volatility and sharp downgrades . **For detailed Rationale Report and subscription information, please contact us at www.careratings.com

5 CARE Ratings Limited