REG - Indus Gas Limited - Financial Results <Origin Href="QuoteRef">INDII.L</Origin> - Part 3

Indus GasAnnouncement

22/09/2015 07:10

- Part 3: For the preceding part double click  ID:nRSV7661Zb 

determine when a
tangible asset is impaired. This determination requires significant judgment
to evaluate indicators triggering impairment. The Group monitors internal and
external indicators of impairment relating to its tangible assets. The
management has assessed that no such indicators have occurred or exists as at
31 March 2015 to require impairment testing of property, plant and equipment. 
 
Estimates used in the preparation of the consolidated financial statements 
 
Useful life and residual value of tangible assets 
 
The Group reviews the estimated useful lives of property, plant and equipment
at the end of each annual reporting period. Specifically, production assets
are depreciated on a basis of unit of production (UOP) method which involves
significant estimates in respect of the total future production and estimate
of reserves. The calculation of UOP rate of depreciation could be impacted to
the extent that the actual production in future is different from the
forecasted production. During the financial year, the directors determined
that no change to the useful lives of any of the property, plant and equipment
is required. The carrying amounts of property, plant and equipment have been
summarised in Note 7. 
 
Recognition of provision for decommissioning cost 
 
As per the PSC, the Group is required to carry out certain decommissioning
activities on gas wells. The ultimate decommissioning costs are uncertain and
cost estimates can vary in response to many factors including changes to
relevant legal requirements, the emergence of new restoration techniques or
experience at other production sites. The expected timing and amount of
expenditure can also change, for example, in response to changes in reserves
or changes in laws and regulations or their interpretation. As a result, there
could be adjustments to the provisions established which would affect future
financial results. The liabilities estimated in respect of decommissioning
provisions have been summarised in Note 15. 
 
Impairment testing 
 
As explained above, the management carried out impairment testing of property,
plant and equipment of the Block on 19 November 2013 on submission of
integrated declaration of commerciality report by Focus Energy Limited to the
Directorate General of Hydrocarbons, ONGC, the Government of India and the
Ministry of Petroleum and Natural Gas. An impairment loss is recognized for
the amount by which the asset's or cash generating unit's carrying amount
exceeds its recoverable amount. To determine the recoverable amount,
management estimates expected future cash flows from the Block and determines
a suitable interest rate in order to calculate the present value of those cash
flows. In the process of measuring expected future cash flows management makes
assumptions about future gross profits. These assumptions relate to future
events and circumstances. In most cases, determining the applicable discount
rate involves estimating the appropriate adjustment to market risk and the
appropriate adjustment to asset-specific risk factors. 
 
The recoverable amount was determined based on value-in-use calculations,
basis gas reserves confirmed by an independent competent person. Selling price
of the gas is based on existing selling price to GAIL which has been agreed
for a period of three years which is expiring on September 2015 and
henceforth, the prices would be reviewed periodically and reassessed mutually
by the parties. The discount rate calculation is based on the Company's
weighted average cost of capital adjusted to reflect pre-tax discount rate and
amounts to 10% p.a. Management believes that no reasonably possible changes in
the assumptions may lead to impairment of property, plants and equipment and
intangible assets of the Block. 
 
Deferred tax assets 
 
The assessment of the probability of future taxable income in which deferred
tax assets can be utilized is based on the management's assessment, which is
adjusted for specific limits to the use of any unused tax loss or credit. The
tax rules in the jurisdictions in which the Group operates are also carefully
taken into consideration. If a positive forecast of taxable income indicates
the probable use of a deferred tax asset, especially when it can be utilized
without a time limit, then deferred tax asset is usually recognized in full. 
 
27.   BASIS OF GOING CONCERN ASSUMPTION 
 
The Group has current liabilities amounting to US$ 47,126,214 the majority of
which is towards current portion of borrowings from banks and related parties,
primarily to Focus. As at 31 March 2015, the amounts due for repayment within
the next 12 months to banks are US$  18,389,976, which the Group expects to
meet from its internal generation of cash from operations. Further, the Group
continues to widen the funding options available and has established a
Multicurrency Medium Term Note ("MTN") Programme with the SGX in Singapore for
up to US$ 300 Million. Out of which, the Group has successfully placed SGD 100
Million Senior Unsecured Notes as first tranche of the MTN Programme,
subsequent to the year end. The net proceeds will be utilised towards further
development expenditure on the Block. Depending upon the funding requirement
and subject to potential availability of financing on reasonable terms, the
Group may draw further tranches against this MTN Programme in future. Based on
this, the consolidated financial statements have been prepared on the going
concern basis. 
 
28.   CAPITAL MANAGEMENT POLICIES 
 
The Group's objectives when managing capital are to safeguard the Group's
ability to continue as a going concern in order to provide returns for
shareholders and benefits for other stakeholders and to maintain an optimal
capital structure to reduce the cost of capital. 
 
The Group manages the capital structure and makes adjustments to it in the
light of changes in economic conditions and the risk characteristics of the
underlying assets. The Group monitors capital on the basis of the gearing
ratio. This ratio is calculated as net debt divided by total capital. 
 
Debt is calculated as total liabilities (including 'current and non-current
liabilities' as shown in the consolidated Statement of Financial Position).
Total equity is calculated as 'equity' as shown in the consolidated Statement
of Financial Position plus total debt. 
 
 Total debt (A)                421,000,173     355,953,141     
 Total equity (B)              88,160,440      71,915,850      
 Total capital employed (A+B)  509,160,613     427,868,991     
 Gearing ratio                 82.69 per cent  83.19 per cent  
 
 
Gearing ratio 
 
82.69 per cent 
 
83.19 per cent 
 
The gearing ratio has marginally reduced since the previous year due to
proportionately greater increase in equity as compared to increase in the
draw-down of loans from banks and related party to fund additional
exploration, evaluation and development activities for the Group. 
 
The Group is not subject to any externally imposed capital requirements. There
were no changes in the Group's approach to capital management during the
year. 
 
29.   FINANCIAL INSTRUMENTS AND RISK MANAGEMENT 
 
A summary of the Group's financial assets and liabilities by category are
mentioned in the table below: 
 
The carrying amounts of the Group's financial assets and liabilities
recognised at the end of the reporting period are as follows: 
 
 Non-current assets                                                                
 Loans and receivables                                                             
 - Security deposits                                     6,225        885          
 Current assets                                                                    
 Loans and receivables                                                             
 - Trade receivables                                     5,330,484    7,847,404    
 - Cash and cash equivalents                             12,251,533   977,028      
 Total financial assets under loans and receivables      17,588,242   8,825,317    
 Non-current liabilities                                                           
 Financial liabilities measured at amortised cost:                                 
 - Long term debt from banks                             200,293,945  85,266,117   
 - Payable to related parties                            120,288,834  112,947,262  
 Current liabilities                                                               
 Financial liabilities measured at amortised cost:                                 
 - Current portion of long term debt from banks          18,389,976   17,301,889   
 - Current portion of payable to related parties         23,446,172   96,783,891   
 - Accrued expenses and other liabilities                168,809      126,478      
 Total financial liabilities measured at amortised cost  362,587,736  312,425,637  
 
 
Total financial liabilities measured at amortised cost 
 
362,587,736 
 
312,425,637 
 
The fair value of the financial assets and liabilities described above closely
approximates their carrying value on the statement of financial position
date. 
 
Risk management objectives and policies 
 
The Group finances its operations through a mixture of loans from banks and
related parties and equity. Finance requirements such as equity, debt and
project finance are reviewed by the Board when funds are required for
acquisition, exploration and development of projects. 
 
The Group treasury functions are responsible for managing fund requirements
and investments which includes banking and cash flow management. Interest and
foreign exchange exposure are key functions of treasury management to ensure
adequate liquidity at all times to meet cash requirements. 
 
The Group's principal financial instruments are cash held with banks and
financial liabilities to banks and related parties and these instruments are
for the purpose of meeting its requirements for operations. The Group's main
risks arising from financial instruments are foreign currency risk, liquidity
risk, commodity price risk and credit risks. Set out below are policies that
are used to manage such risks: 
 
Foreign currency risk 
 
The functional currency of each entity within the Group is US$ and the
majority of its business is conducted in US$. All revenues from gas sales are
received in US$ and substantial costs are incurred in US$. No forward exchange
contracts were entered into during the year. 
 
Entities within the Group conduct the majority of their transactions in their
functional currency other than finance lease obligation balances which are
maintained in Indian Rupees and amounts of cash held in GBP. All other
monetary assets and liabilities are denominated in functional currencies of
the respective entities. The currency exposure on account of liabilities which
are denominated in a currency other than the functional currency of the
entities of the Group as at 31 March 2015 and 31 March 2014 is as follows: 
 
                      Functional currency  Foreign currency     31 March 2015  31 March 2014  
 Total exposure                                                 62,406         89,424         
 Short term exposure  US$                  Great Britain pound  62,406         89,424         
 
 
The Group's currency exposure risk towards GBP is insignificant and
accordingly the movement in foreign currency will not have a material impact
on the consolidated financial statements. 
 
Liquidity risk 
 
Ultimate responsibility for liquidity risk management rests with the Board of
Directors, which has established an appropriate liquidity risk management
framework for the management of the Group's short-, medium- and long-term
funding and liquidity management requirements. The Group manages liquidity
risk by maintaining adequate reserves, banking facilities and reserve
borrowing facilities, by continuously monitoring forecast and actual cash
flows, and by matching the maturity profiles of financial assets and
liabilities. 
 
The table below summaries the maturity profile of the Group's financial
liabilities based on contractual undiscounted payments for the liquidity
analysis 
 
 31 March 2015                                                                                                 
 Non-interest bearing                -           168,809    -           -            -            168,809      
 Variable interest rate liabilities  23,446,172  4,689,367  13,766,519  147,229,561  57,136,920   246,268,539  
 Fixed interest rate liabilities     -           -          -           -            120,288,834  120,288,834  
                                                                                                               
                                     23,446,172  4,858,176  13,766,519  147,229,561  177,425,754  366,726,182  
 
 
23,446,172 
 
4,858,176 
 
13,766,519 
 
147,229,561 
 
177,425,754 
 
366,726,182 
 
 31 March 2014                                                                                                
 Non-interest bearing                -           126,478    -           -           -            126,478      
 Variable interest rate liabilities  96,783,891  4,857,924  14,273,906  58,573,526  26,076,167   200,565,414  
 Fixed interest rate liabilities     -           -          -           -           112,947,262  112,947,262  
                                                                                                              
                                     96,783,891  4,984,402  14,273,906  58,573,526  139,023,429  313,639,154  
 
 
96,783,891 
 
4,984,402 
 
14,273,906 
 
58,573,526 
 
139,023,429 
 
313,639,154 
 
Interest rate risk 
 
The Group's policy is to minimize interest rate risk exposures on the
borrowing from the banks and the sum payable to Focus Energy Limited. Interest
rate on the sum payable to Focus Energy Limited is linked to actual interest
incurred by Focus capped between 6.5 per cent and 10 per cent on the
chargeable sum (as defined under amendment in agreement for assignment of
participating interest). Borrowing from the Gynia Holdings Ltd. is at fixed
interest rate and therefore, doesn't expose the Group to risk from changes in
interest rate.  The Group is exposed to changes in market interest rates
through bank borrowings at variable interest rates. Interest rate on US$ 110
million bank borrowing is 5 per cent plus LIBOR; on US$ 40 million bank
borrowing is 4 per cent plus LIBOR and on US$ 180 million bank borrowing is
4.1 per cent plus LIBOR (detailed in Note 14). 
 
The Group's interest rate exposures are concentrated in US$. 
 
The analysis below illustrates the sensitivity of profit and equity to a
reasonably possible change in interest rates. Based on volatility in interest
rates in the previous 12 months, the management estimates a range of 50 basis
points to be approximate basis for the reasonably possible change in interest
rates. All other variables are held constant. 
 
                  + 0.50 per cent  - 0.50 per cent  
 31 March 2015    1,694,864        (1,694,864)      
 31 March 2014    996,759          (996,759)        
 
 
996,759 
 
(996,759) 
 
Since the loans are taken specifically for the purpose of exploration and
evaluation, development and production activities and according to the Group's
policy the borrowing costs are capitalised to the cost of the asset and hence
changes in the interest rates do not have any immediate adverse impact on the
profit or loss. 
 
Commodity price risks 
 
The Group's share of production of gas from the Block is sold to GAIL. The
price has been agreed for a period of three years which is expiring in
September 2015 and henceforth, the same would be reviewed periodically and
reassessed mutually by the parties. No commodity price hedging contracts have
been entered into. 
 
Credit risk 
 
The Group has made short-term deposits of surplus funds available with banks
and financial institutions of good credit repute and therefore, doesn't
consider credit risk to be significant. Other receivables such as security
deposits and advances with related parties, do not comprise of a significant
cumulative balance and thus do not expose the Group to a significant credit
risk. The Group has concentration of credit risk as all the Group's trade
receivables are held with GAIL, its only customer. However, GAIL has a
reputable credit standing and hence the Group does not consider credit risk in
respect of these to be significant. None of the financial assets held by the
Group are past due. 
 
30.   SUBSEQUENT EVENTS 
 
Subsequent to year end 31 March 2015, the Company has established a
Multicurrency Medium Term Note ("MTN") Programme with the SGX in Singapore and
raised SGD 100 million (refer Note 27 for details). 
 
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