Gujarat Gas Company

The directors have pleasure in presenting the 28th Annual Report and
 the audited accounts for the year ended on 31 December 2007.
 
 1.  FINANCIAL RESULTS
                                                (Rs. in crores)
 Particulars                           Consolidated      Financials
                                         Current         Previous
                                           Year            Year
 
 Total income                            1,262.12         984.65
 Gross profit before interest, 
 depreciation and tax                      268.78         165.36
 Less: Interest                              0.10           2.20
 Depreciation                               38.44          31.87
 Profit before tax                         230.24         131.29
 Tax expenses                               76.57          43.13
 Net Profit                                153.67          88.16
 Minority Interest                           0.72           0.64
 Profit attributable to Group              152.95          87.52
 Add: Undistributed profit of earlier 
 years                                     279.14         221.42
 Balance available for Appropriation       432.09         308.94
 Less: Appropriations:
 Transfer to general reserve                16.13           9.53
 Special reserve as stipulated by RBI        0.48           0.42
 Preference dividend                         1.08           0.68
 Proposed Equity dividend                   19.23          16.03
 Corporate dividend tax                      4.01           3.14
 Surplus retained                          391.16         279.14
 Earning per Share (Rs.)                    23.65          13.53
 
 Stand-alone      Financials
 Current          Previous
 Year             Year
 
 1,214.69              844.75
 272.88                161.02
 0.19                    3.02
 37.08                  29.60
 235.61                128.40
 76.52                  39.50
 159.09                 88.90
 257.03                196.07
 416.12                284.97
 16.00                   8.89
 1.08                    0.68
 19.23                  16.03
 3.95                    2.34
 375.86                257.03 
 24.61                  13.74
 
 2.  DIVIDEND
 
 Your directors recommend for consideration of the shareholders at the
 Annual General Meeting, payment of 150 % dividend i.e. Rs. 3 per equity
 share of Rs. 2 each and 7.50% dividend i.e. Rs.  0.75 per Redeemable
 Cumulative Non-convertible Preference Share of Rs. 10 each, involving
 total payout of Rs. 23.77 crores, including corporate dividend tax of
 Rs. 3.45 crores.
 
 3.  MANAGEMENT ANALYSIS
 
 3.1. Industry Structure
 
 Your company continues to remain the largest city gas distribution
 company in India. It operates as the main distributor of natural gas in
 the industrial, commercial, domestic and automobile (CNG) segments in
 South Gujarat.
 
 The Government allows producers of natural gas to sell gas from the new
 fields at market determined prices. The gap between the demand for
 natural gas and its availability has been widening over the last few
 years. This has pushed up the prices at which gas is sold by the
 producers. Your company purchases more than 95% of its gas from
 producers at market prices.
 
 Your company has always endeavoured to purchase gas from multiple
 sources thus reducing the risk of disruption and providing supply
 security to its customers. The company purchased gas from the Panna,
 Mukta and Tapti consortium, Cairn Energy, Gujarat State Petroleum
 Corporation Limited, NIKO Resources and Gas Authority of India Limited,
 during the year. However, production constraints at some of these
 sources led to the increase in share of one of the sources in the
 companys gas purchase portfolio.
 
 3.2. Developments
 
 During the year, the Central Government notified the establishment of
 the Petroleum & Natural Gas Regulatory Board with effect from 1st
 October 2007.  On the same day government also brought the provisions
 of the Petroleum & Natural Gas Regulatory Board Act, 2006 (the Act)
 except Section 16.0 in force. The Regulatory Board is empowered to
 regulate the activities of refining, processing, storage,
 transportation, distribution, marketing and sale of petroleum products
 and natural gas.
 
 The Act provides for the authorization of entities for laying,
 building, operating or expanding common carrier, or contract carrier or
 city or local natural gas network infrastructure. The Board in the
 interim has released the draft regulations for Authorisation,
 Exclusivity and Tariff Determination for city gas companies.
 Additionally, they have also released the draft regulations on
 principles of contract & common carrier, authorization of pipelines and
 affiliate code of conduct. Your company has provided inputs to the
 Regulatory Board as and when required. Your company has also studied
 the implications of the draft Regulations and is putting in place
 processes and systems to comply with the same. Clarity on the
 Regulatory provisions is expected to emerge during 2008, when they are
 released in the final form.
 
 The price of crude oil has remained high almost throughout the year.
 This has raised the operating cost for consumers of crude based fuels.
 On the other hand, cost of power supplied by the grid has not changed
 during the year. A significant portion of the companys gas sales is in
 applications to generate power and hence competes with the cost of grid
 power. The company therefore has adopted a balanced approach to gas
 pricing bearing in mind the cost trends of competitive fuel.
 
 Another significant development during the year was the strengthening
 of the Indian Rupee against the US Dollar. The company buys most of its
 gas at dollar denominated prices and hence was able to compensate the
 gas price increases through this route.
 
 As per certain reports, the Government has appointed GAIL as its
 nominee for marketing the gas produced by the Panna, Mukta and Tapti
 fields. If this arrangement is effected, the company may have to buy
 the PMT gas from GAIL.
 
 3.3. Opportunities and Challenges
 
 The above developments along with the following factors have opened up
 new opportunities and challenges for your company.
 
 The large scale industrialization in Gujarat together with strong
 awareness about the advantages of using natural gas have led to very
 strong demand for gas. Enhancement of the gas transmission network in
 the state is further augmenting the demand. This continues to provide
 the opportunity to the company to grow its sales.
 
 The availability of gas is expected to remain short of demand in the
 coming year. This poses a challenge to the company in sourcing adequate
 gas. It also provides an opportunity to optimize the sales portfolio so
 as to maximize profits while considering the long term growth
 strategies.
 
 It is critical for the company to contract additional sources of gas to
 meet the growth in demand over a longer term. The company is focused in
 its efforts in this direction and continues to use its expertise for
 building a multi source portfolio.
 
 The cost of gas purchased by the company is expected to remain high in
 the coming year. The portfolio cost may also be impacted by the
 purchase of LNG, which may have to be purchased at high cost in short
 term contracts.
 
 While opportunities exist to grow the business and add value for the
 stakeholders, challenges revolve around gas sourcing. Gas on gas
 competition is also expected in segments of large volume customers.
 
 3.4. Operations and Market Performance
 
 The companys focus on the retail business has ensured robust growth in
 this sector. The company continues to meet the demand growth in this
 sector by contracting gas ahead of demand and diverting the same to
 retail as the demand grows.
 
 Additional quantities of gas were available from the Tapti Expansion
 field of PMT, starting October, which was ramped up to an average of
 1.43 mmscmd in the fourth quarter. Supplies from Cairn Energy however
 declined during the year as the producers were facing certain problems
 in their wells. The gas supply contract with GSPC came to an end in
 June 2007, thus affecting the purchase volumes. LNG was purchased in
 small quantities to augment retail demand in certain months.
 
 Your company had crossed the significant milestone of 1 billion cubic
 meters of gas sales, in the year 2006. Overall sales in the year 2007
 were 10% higher than the previous year. Sales to the retail sectors
 grew by 20%, the additional demand being met by balancing the sourcing
 portfolio.
 
 The retail sector of the company is mainly constituted by industrial
 units. Gas supplied by the company is used in various applications in
 these units. Robust manufacturing performance and growth in the
 companys markets ensured strong demand in this sector. Margins, which
 were severely affected by increase in gas costs and the weakening of
 the Indian Rupee in the latter half of 2006, could be largely recovered
 in 2007.
 
 Supply of gas to the Vapi GIDC was affected by the delay in working out
 a gas transportation arrangement for the area. Volumes to this area
 were therefore marginal during the year.
 
 Investments in the CNG business over the last few years have yielded
 considerable returns. The company has succeeded in converting more than
 18,000 vehicles to CNG during the year, taking the total converted
 vehicles to above 60,000 in its markets. The sales growth in this
 segment was more than 30% over the previous year.
 
 The company signed and commenced gas supply to more than 25,000
 households during the year.  This is a significant increase over the
 earlier year and has taken the total number of households supplied by
 the company to more than 230,000.
 
 The company had started a Cogeneration business in the year 2006. This
 business grew in 2007 and there were Cogen installations of 10.59 MW by
 the end of 2007. As large investments are involved in this business,
 the company has a risk balanced approach in this segment.
 
 With these positive developments, the consolidated income increased
 from Rs. 984.65 crores to Rs.  1262.12 crores, an increase of
 approximately 28%.  The volume of gas sold increased from 1089 mmscm to
 1196 mmscm. The profit before depreciation, interest and tax has
 increased from Rs. 165.36 crores in the previous year to Rs. 268.78
 crores. Increase in sales, stronger margins and one time take or pay
 income from certain customers who could not meet their contractual
 obligations, were the main contributors to the increase in profits. The
 profit after tax has increased from Rs. 88.16 crores to Rs. 153.67
 crores.
 
 3.5. Future outlook
 
 Industrial growth continues to remain robust in the state of Gujarat.
 While existing units have largely been enhancing their scale of
 capacities, new units and industrial clusters are being set up.
 
 The company will focus on growing its retail market, in the existing
 areas as well as in clusters around the existing areas.
 
 Considerable investments were made in Jhagadia over the last few years.
 More than 0.4 mmscmd of gas was being supplied to the area by end 2007.
 This is expected to increase significantly in 2008.
 
 Your company continues its efforts to work out a solution to supply gas
 to the Vapi GIDC area.  However, constraints on availability of gas in
 the near term may delay the business growth in this area to a two to
 three years time frame, even after a transportation solution is in
 place.
 
 The company expects to invest in network infrastructure in 2008 to
 enable it to receive gas from the Krishna Godavari Basin, from 2009.
 Investments are also planned to augment infrastructure in the existing
 areas of operations which will ensure enhanced supply securities and
 redundancy.
 
 Your company adopts a long term approach to its business growth and
 continues to invest for achieving the same.
 
 3.6 Internal Control System and Risk Management
 
 GGCL has effective internal controls, checks and systems in place
 commensurate with the size of the company and nature of its business. A
 well- defined budget monitoring process, other standard operating
 processes and a detailed authorisation matrix form the basis of
 effective financial controls.  During the year under review, BG Group
 Audit team carried out process reviews of key business activities,
 leading to enhanced assurance. GGCL also has in place a focussed
 internal audit programme.
 
 GGCL has a well-defined system of identifying and mitigating risks.
 Risk identification process starts at the department level. Risks
 identified at the department level are collated in the company-level
 risk register for review and discussion by the Executive Management. On
 the basis of discussion and review, risk ratings and mitigation plans
 are finalised and documented in the Risk Register.  For each key risk,
 responsibility is assigned to the concerned manager. Risk Register
 containing key risks, mitigation plan and responsibility assigned for
 the risks is presented to the Audit Committee for review and
 discussion. To further improve effectiveness of the risk register and
 consequently internal controls environment, GGCL conducted a risk
 management workshop with the assistance of BG Group during the year
 under review.
 
 Your company has also implemented a Value Assurance Framework (VAF) for
 all major projects.  This involves rigorous scrutiny of all aspects of
 a project right from feasibility to commissioning. Also, operational
 effectiveness of various internal controls was tested to facilitate
 certification by the CEO and CFO in compliance with Clause 49 of the
 Listing Agreement. GGCL also carried out self- assessment of its
 governance processes and has formalised action plans for the
 improvement areas.
 
 3.7 Health, Safety, Security and Environment
 
 Outstanding business performance requires outstanding Health, Safety,
 Security & Environment (HSSE) performance. At GGCL, ensuring the
 adherence to HSSE standards is the responsibility of every single
 employee. Each employee has the duty to intervene to prevent unsafe
 actions and to reinforce safe behavior.  GGCLs HSSE policy and systems
 are communicated continuously among employees, in various forms. The
 Asset Integrity Management System is an integral part of the design,
 erection and operation of the companys pipeline network and
 equipments, and reflects the best industry practices. In addition to
 the employees, key personnel of contractors working for GGCL are
 trained in technical skills and competency.
 
 Strong leadership in HSSE and commitment to its standards are spread
 across the organization. The company seeks to deliver continual
 improvement in safe behaviour by setting measurable HSSE goals with
 leading performance indicators being regularly reviewed and monitored
 by the senior management team. This framework provides and facilitates
 a broad set of expectations to help line managers focus on critical
 HSSE needs, forecast and allocate resources, set direction for HSSE
 activities and consistently deliver improved HSSE performance.
 
 GGCL was declared the winner of the BG Chairmans award for exemplary
 efforts during the floods in Surat. The company was also the winner of
 the Gujarat State Safety Award, the G Cube award and received the
 Prashanshaptra from the National Safety Council during the year for its
 performance in the fields of safety and environment.
 
 As a part of its annual plan, GGCL carried out the following activities
 and initiatives:
 
 - During the year, Hazard and Operability Study and Quantitative Risk
 assessment were carried out for new and modified gas installations and
 CNG stations.
 
 - The Safety intervention process and Behaviour Based Safety (BBS)
 process with focus on root cause analysis improved safe behaviour and
 culture across the organisation.
 
 - Employees are encouraged to report Near Miss and Hazards, which
 raise awareness and help to minimize the HSSE risks. A total of 2,423
 Hazard reports and 1,263 Near Miss reports were received during
 2007. Most of the actions emerging out of these, were completed.
 
 - About 1200 GGCLs contract staff were involved in Health & Safety
 programmes by an initiative - Project Takshashila - Let us get basics
 right to reinforce adherence to basic safety rules at site. This has
 improved the compliance to HSSE standards at work sites.
 
 - GGCL management systems - Occupational Health and Safety Management
 System and Environmental Management System were recertified with
 reference to international standards OHSAS 18001 and EMS 14001:2004 by
 an independent body, M/s DNV. Their suggestions are being implemented.
 
 - A team of HSSE experts from BG carried out an audit at GGCL. A detail
 action plan has been made out to implement improvements suggested by
 them.
 
 - GGCL carried out an Emergency Simulation Exercise involving external
 agencies to test its Emergency response and the Business Continuity
 plan.
 
 - Various need based training programmes were imparted to external
 stakeholders. This included defensive driving training for Gujarat
 State Road Transport Corporation, Road safety programme for families
 and the general public, fire fighting training to the employees of
 another company, etc.. HSSE training was also imparted to customers.
 
 - A community health programme was organised by GGCL. About 300 people
 at Ankleshwar were covered under this programme.
 
 Contribution to Society
 
 During the year, your companys focus has been on developing a
 comprehensive strategy for CSR, based on the gaps in development and
 expectations of stakeholders in the companys areas of operations.
 Studies were commissioned by the company for this purpose. These were
 undertaken by reputed experts.
 
 The company has now developed a comprehensive CSR strategy based on the
 recommendations of these experts. The main objective of the strategy is
 to enhance skills of identified groups so as to build potential and
 capacity in the society.
 
 In the meantime, your company focused on CSR initiatives during the
 year 2007. This mainly involved the installation of computers in
 schools, solar lighting, building civic amenities and supporting
 education.
 
 Contribution to Environment
 
 Operation of natural gas network and its associated installations, like
 other modern industrial processes, generates some amount of waste that
 needs to be minimised and disposed off appropriately. Recognising this
 obligation, GGCL carried out its waste disposal operations in a safe
 and controlled manner.
 
 Besides this, GGCL has also undertaken or contributed indirectly in
 various initiatives during the year. This includes:
 
 1.  Reduction in vehicular pollution in Surat district and Bharuch
 district by establishing CNG stations. During the year, five new CNG
 stations were established and two CNG station were upgraded.
 
 2.  Reduced waste generation and improved waste management by
 developing and implementing an Environment Plan with focus on the areas
 of improvement like Total Waste Accounting.
 
 3.  The Green House Gas emission reduction strategy was implemented and
 the target of reduction of 84.02 Tonne C02 Equivalent was achieved.
 
 4.  1900 saplings were planted and the company engaged its contractors
 and customers to plant trees at Kim, Kosamba and Ankleshwar.  GGCL also
 carried out plantation activities in coordination with Ankleshwar
 Industries Association, Central Industrial Security at Ankleshwar and
 the District Forest Office at Palsana.
 
 5.  An Environment awareness Rally was organised by the company in
 Surat on 5th June.
 
 4.  SUBSIDIARIES
 
 4.1 Gujaratgas Trading Company Limited (GTCL)
 
 GTCL, a wholly-owned subsidiary of GGCL, is engaged in the business of
 selling natural gas to select customers in the State of Gujarat.
 
 During the year, GTCL earned a total income of Rs. 157.91 crores
 compared to Rs. 394.32 crores in the previous year. This decrease is on
 account of decrease in the sales volumes. Profit after tax during the
 year under review is (Rs. 1.21 crores) from Rs. 5.27 crores in the
 previous year. The main reason for loss is increase in purchase price
 of Cairn which could not be passed to Essar Steel due to fixed price
 contract.
 
 The accounts of GTCL are a part of this annual report.
 
 4.2 Gujarat Gas Financial Services Limited (GFSL)
 
 GFSL, another subsidiary of GGCL, is providing financial services and
 selling domestic and commercial connections to GGCL customers.  During
 the year under review, the net income was Rs. 5.31 crores as compared
 to Rs. 6.00 crores in the year 2006. The connections undertaken have
 increased from 20,697 in the year 2006 to 25,011 during the year under
 review. The profit after tax was Rs. 2.40 crores.
 
 The accounts of GFSL are a part of this annual report.
 
 5.  FINANCE
 
 Your company continued to have a healthy cash flow. Your company has
 also made adequate provisions for all contingencies, bad debts and
 diminution in value of investments. During the year under review, GGCL
 has not invited any fixed deposits within the meaning of Section 58A of
 the Companies Act, 1956.
 
 6.  STATUTORY INFORMATION
 
 As required under Section 212 of the Companies Act, 1956, the audited
 accounts for the year ended on 31 December 2007 and Auditors Report
 thereon along with the Directors Reports of Gujaratgas Trading Company
 Limited and Gujarat Gas Financial Services Limited, subsidiaries of
 GGCL, are attached to GGCLs balance sheet.
 
 GGCL does not have any employee stock option plan.Similarly, GGCL has
 not passed any resolution for buy-back of shares.
 
 6.1 Energy, Technology and Foreign Exchange
 
 Since the company is not a scheduled industry, the details in respect
 of Form A pursuant to Rule 2 of the Companies (Disclosure of
 Particulars in the Report of Board of Directors) Rules, 1988 are not
 required to be furnished. However, the details in respect of Form B
 pursuant to Rule 2 are submitted as Annexure-1 and forms part of this
 report.
 
 6.2 Human Relations and Particulars of Employees
 
 Your company employed 547 persons as on 31 December 2007.
 
 The company has a strong focus on developing its team and various
 initiatives were undertaken during the year towards this end. A
 programme on Gas Value Chain was organized in association with a
 reputed school in petroleum studies, where a team of employees were
 coached in various aspects of value enhancement in the gas business
 over a nine month period.
 
 Your company has a strong set of values. These are imbibed in the
 employees through various processes. New recruits are initiated to
 these values through Value Alignment exercises.
 
 A competency model was developed during the year. This was designed to
 assess the development needs of the management staff and to build plans
 to improve their skills and managerial ability.
 
 Particulars of employees in receipt of remuneration exceeding the
 limits prescribed under the provisions of Section 217 (2A) of the
 Companies Act, 1956 read with the Companies (Particulars of Employees)
 Rules, 1975 as amended are given at Annexure-2. The company did not
 experience any strike or lock-outs during the year.
 
 6.3 Directors Responsibility Statement
 
 Your directors hereby state
 
 i. that in the preparation of the annual accounts, the applicable
 accounting standards have been followed along with proper explanation
 relating to material departures;
 
 ii. that the directors have selected such accounting policies and
 applied them consistently and made judgements and estimates that are
 reasonable and prudent so as to give a true and fair view of the state
 of affairs of the company as on 31 December 2007 and of the profit of
 the company for the year ended on that date;
 
 iii. that the directors have taken proper and sufficient care for the
 maintenance of adequate accounting records in accordance with the
 provisions of the Companies Act, 1956 for safeguarding the assets of
 the company and for preventing and detecting fraud and other
 irregularities;
 
 iv. that the directors have prepared the annual accounts on a going
 concern basis.
 
 6.4 Report on Corporate Governance
 
 As stipulated by Clause 49 of the Listing Agreement, the Report on
 Corporate Governance is given separately in this Annual Report and
 forms part of this Report. The certificate of Price Waterhouse,
 Statutory Auditors of the company regarding compliance with the
 Corporate Governance Code is enclosed therewith.
 
 7.  AUDITORS AND AUDITORS REPORT
 
 Price Waterhouse, Statutory Auditors of the company, retire at the
 ensuing Annual Genera!  Meeting and are eligible for re-appointment.
 
 The notes to the accounts referred to in the Auditors Report are
 self-explanatory and therefore, do not call for any further comments.
 
 8.  DIRECTORS
 
 Mr. William Adamson and Mr. B. S. Shantharaju have resigned since the
 last annual general meeting. The Board of Directors places on record
 its sincere appreciation for the valuable services rendered by them
 during their tenure.
 
 Mr. Shaleen Sharma took over as the Managing Director during the year
 under review. Your Directors have appointed him as an Additional
 Director and the Managing Director effective from 1 July 2007. Also,
 Mr. Rajeev Khanna has been appointed as an Additional Director during
 the year under review. They hold office till the conclusion of the
 forthcoming Annual General Meeting. Your company has received a notice
 under Section 257 of the Companies Act, 1956 proposing their
 candidature as directors.
 
 Mr. Hasmukh Shah, Chairman retires by rotation at the ensuing Annual
 General Meeting. Being eligible, he has offered himself for
 re-appointment.
 
 For perusal of the shareholders, a brief resume of the directors being
 appointed or re-appointed, nature of their expertise, their
 shareholding in the company, the names of the companies in which they
 hold directorship and the details of membership of the committees of
 the Board are given in the explanatory statement to the Notice.  The
 Board of Directors recommends their appointment / re-appointment.
 
 9.  APPRECIATION
 
 Your directors appreciate the continued support received from the
 customers. Your directors place on record their appreciation to the
 employees for their dedicated performance.
 
 Your directors wish to acknowledge the support and assistance received
 from Cairn Energy led consortium, GAIL, ONGC, GSPCL, NIKO, Panna Mukta
 and Tapti consortium, the Central and the State Governments, suppliers,
 CNG franchisees and the financial institutions namely HDFC Bank, State
 Bank of India, ICICI Bank and Standard Chartered Bank.
 
 Your directors express their gratitude to its promoter, The BG Group
 for their valuable contribution throughout the year. Directors also
 thank all the shareholders for their continuing support to the company
 and to the neighbouring communities in the areas of operation of the
 company.
 
                                         For and on behalf of the Board
 
                                                          Rajeev Khanna
                                                               Chairman
 Date   : February 20, 2008
 Place : Ahmedabad