Net profit in July-September dropped to Rs 915.67 crore as compared to Rs 985.38 crore a year ago.
"Major reason for decline in profit after tax is the Rs 377 crore loss suffered on LPG," GAIL Chairman and Managing Director B C Tripathi told reporters here.
While price realised on sale of LPG was 19 per cent higher at Rs 50,000 per tonne, the segment suffered loss as the company had to shell out Rs 700 crore to in fuel subsidies.
Upstream firms like ONGC and GAIL make up for more than one-third of the losses that fuel retailers suffer on sale of diesel, domestic LPG and kerosene at government controlled rates.
Also, GAIL had to use imported gas (LNG) for manufacturing cooking gas after supplies from Reliance Industries' KG-D6 fields dried-up, he said.
Following sharp drop in production at KG-D6, supplies to power stations and LPG extraction plants of GAIL have stopped since July.
Tripathi said the profits was also impacted because of drop in gas that GAIL transported during the quarter to 95 million standard cubic meters per day from 106 mmscmd.
"This was primarily because of lower supplies of gas from KG-D6 and less production from (western offshore) Panna-Mukta and Tapti fields," he said.
GAIL transports gas produced from RIL's KG-D6 fields to end consumers for a fee.
He said the government has assured that GAIL's contribution to fuel subsidiy will be limited to what the company has already paid in the first two quarters, i.e Rs 1,400 crore.
Last fiscal, the company had to shell out Rs 2,687 crore on this account.
GAIL shares fell 2.4 per cent to Rs 343.60 at the close on the Bombay Stock Exchange (BSE).
The company had in second quarter of last fiscal gave Rs 786 crore in fuel subsidy to retailers like Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp.
Its turnover increased from Rs 11,664.37 crore, to Rs 14,224.37 crore in the second quarter of 2013-14 fiscal.
Tripathi said GAIL imported 11 shiploads or cargoes of liquefied natural gas (LNG) in the first half of current fiscal and will import 19 cargoes in during the remainder period of the 2013-14 fiscal.
It will resume import of LNG at the Dabhol terminal in Maharashtra next month, he said, adding that shipments had stopped during monsoon period as the port does not have a breakwater to guard ships against rought sea.
During July-September, the sales from natural gas trading increased by 28 per cent to Rs 12,378 crore as against Rs 9,697 crore in the corresponding period of the last year.
The revenues from natural gas transmission business increased by 8 per cent to Rs 1,067 crore while petrochemical sales rose 29 per cent to Rs 1,134 crore.
During the second quarter of the current financial year, the natural gas sales stood at 78.58 mmscmd against 80.70 mmscmd a year ago.
Gas transmission slipped to 95.21 mmscmd from 105.64 mmscmd in the corresponding period last year. Petrochemical production was 114,000 tonnes against 113,000 tonnes.