Latvijas Gaze

Quarterly Report • Nov 25, 2016

Unaudited interim condensed financial statements for the 9 months period ended 30 September 2016

Prepared in compliance with the International Financial Reporting Standards as Adopted by the European Union

3
MANAGEMENT BOARD 4
MANAGEMENT REPORT 5
STATEMENT OF BOARD RESPONSIBILITY 8
CORPORATE INFORMATION9
STATEMENT OF PROFIT OR LOSS10
10
BALANCE SHEET11
12
13
14

COUNCIL

(Term of office from March 22, 2016 till March 22, 2019)

Kirill Seleznev (Кирилл Селезнев), 1974, Chairman of the Council Since March 20, 2003 - Head of Gas and Liquid Hydrocarbon Marketing and Processing division of PJSC "Gazprom" Juris Savickis, 1946

Deputy Chairman of the Council

Since 1996, President of LLC "ITERA Latvija"

Oliver Giese, 1967 Deputy Chairman of the Council Since 2011, Senior Vice President Infrastructure Management E.ON Global Commodities SE/E.ON Ruhrgas, Düsseldorf/Essen, Germany

Guillaume Rivron, 1972 Council member

Since 2010, Investment Director Marguerite Adviser S.A. (France)

Hans-Peter Floren, 1961 Council member

Since 2014, CEO FAKT Energy AG (Essen, Germany)

Oleg Ivanov (Олег Иванов), 1974 Council member

Since 2014, Head of Department for Gas Business Planning, Efficiency Management and Development, PJSC "NK "Rosneft""

Nikolay Dubik (Николай Дубик), 1971 Council member

Since 2008, Member of Management Committee of PJSC "Gazprom", Head of legal Department

Vitaly Khatkov (Виталий Хатьков), 1969 Council member

Since 2015, Head of the Department for Pricing and Economic Expert Analysis of PJSC "Gazprom"

Elena Mikhaylova (Елена Михайлова), 1977 Council member Since 2012, Member of the Gazprom Management Committee, Head of the Asset Management and Corporate Relations Department of PJSC "Gazprom"

Jörg Tumat, 1969 Council member

Since 2013, Member of the Board of E.ON Russia

Nicolás Merigó Cook, 1963 Council member

Since 2010, Chief Executive Officer Marguerite Adviser S.A. (Luxembourg)

MANAGEMENT BOARD

(Term of office from August 16, 2015 to August 15, 2018 )

Aigars Kalvītis, 1966 Chairman of the Board

In 1995, Latvia University of Agriculture Master Degree Economics

Alexander Frolov (Александр Фролов), 1980 Deputy Chairman of the Board In 2014, MBA of Applied Administration under the programme "Administration of Oil and Gas Corporation in Global Environment", graduated from the St. Petersburg State University of Economics (Higher School of Economics), St. Petersburg, Russia

Sebastians Grēblinghofs, 1979 Deputy Chairman of the Board (from September 1, 2016 till August 31, 2019)

In 2004, Maastricht University/ Netherlands Master Degree Economics

Mario Nullmeier, 1964 Deputy Chairman of the Board (from January 1, 2014 till August 31, 2016)

Gints Freibergs, 1959 Member of the Board

In 1984, Riga Polytechnic Institute, Engineer, heat power industry

Zane Kotāne, 1977 Member of the Board

In 2014, Riga Business School Master of Business Administration Degree

MANAGEMENT REPORT

Key Figures

The Joint Stock Company "Latvijas Gāze" (hereinafter – the Company) is a vertically integrated natural gas transmission, storage, distribution and sale operator in Latvia. The Company ensures natural gas supply to 443.2 thousand customers in Latvia and during heating season also to Estonia, the North-western part of

Key performance figures	2016	2015
(mio m3 unless specified otherwise)	9M	9M
Natural gas sales in Latvia	920	863
Number of customers	443	443
(addresses), thousand
Number of employees, average	1,271	1,258
Length of distribution lines, km	5,053	4,987
Length of transmission lines, km	1,191	1,191

Russia, and Lithuania from the Inčukalns Underground Gas Storage Facility.

The Company's main goal in 2016 is to prepare for the reorganisation of the Company in compliance with the requirements of the Energy Law by unbundling the operating segments whilst protecting the shareholders' interests.

Key financial figures (thous. EUR)	2016 9M	2015 9M
Net turnover	251,446	308,103
EBITDA	47,152	49,409
EBITDA, %	18.8	16.0
EBIT	22,035	24,101
EBIT, %	8.8	7.8
Profit for the year	18,260	19,582
Net profit margin, %	7.3	6.4
Earnings per share, EUR	0.46	0.49
P/E	16.61	18.71

EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortisation

P/E – price over earnings ratio

BRENT oil and natural gas sales price

Description of operation environment

The year 2016 saw low prices in the global oil markets, with influence on both the average natural gas purchase price and the 9-month revenue of Latvijas Gāze.

Although in 2016 there began an increase in the oil prices, the natural gas sale price for the Latvian consumers is decreasing further due to being linked to the average oil products price of previous 9 months. The prices of future financial instruments suggest a possible gradual price rise in the oil and gas markets.

EBIT – Earnings Before Interest, Taxes

• The sales volume was 0.92 billion m³ 6.6% higher than in 9 months of 2015.
• Due to the natural gas price drop, the total revenue was lower than in 9 months of 2015, still the EBITDA margin increased year-on-year reaching 18.8%.

ON SEPTEMBER 2, 2016 THE SHAREHOLDERS' MEETING OF THE JSC "LATVIJAS GĀZE" RESOLVED TO ESTABLISH THE JOINT STOCK COMPANY "CONEXUS BALTIC GRID"

Operational results of segments

The Company has four operating segments: gas transmission (includes the transmission of natural gas through high-pressure pipelines to deliver it to a distribution system or directly to consumers), gas storage (the storage of natural gas at the Inčukalns Underground Gas Storage Facility), gas distribution (includes the transmission of natural gas through high-, mid- and low-pressure pipelines) and gas trade (includes the purchase of natural gas for sale and the sale of natural gas to consumers). The information included in the operating segments corresponds to the information used by the person in charge of making operational decisions.

In 9 months of 2016 the EBITDA were 47.8 million EUR, which, combined with a declining turnover, gave an increase in the EBITDA margin to 19 % from 16% the year before.

In terms of carrying value of assets, the largest operating segment is distribution, with its assets comprising 37.1% of the total assets of the Company. Distribution is also the segment with the largest number of people employed, as its staff comprises 59% of the Company's employees. The segment's EBITDA in 9 months of 2016 were 16.6 million EUR constituting the highest EBITDA proportion in the Company – 34.6% of the Company's total EBITDA. The segment's turnover

and profitability is affected by the volume of natural gas sold in Latvia and the spread of customers across consumption tiers.

The transmission segment earns income from both natural gas consumption in Latvia and international natural gas deliveries, as well as from natural gas movement upon injection into or withdrawal from the Inčukalns Underground Gas Storage. The segment's EBITDA in 9 months of 2016 were 9.4 million EUR, 19.8% of the Company's total EBITDA. The transmission segment is the second largest in terms of carrying value of assets. Amounting to 186.4 million EUR, the segment's assets account for 27.9% of the Company's total assets in 9 months of 2016.

The storage segment's EBITDA in 9 months of 2016 were 10.1 million EUR making it the third largest by this criterion.

The natural gas trade segment is the largest in terms of net turnover. The segment's revenue is 183.6 million EUR, which makes 73% of the Company's total revenues. Following a drop in the natural gas sale price, the segment's revenues fell by 22.2% against 9 months of 2015. The segment's EBITDA, however, increased by 1.8 million EUR year-on-year, mainly due to an increase in the volume of natural gas sold.

Shares and shareholders

The Company's shares have been listed on the NASDAQ OMX Riga stock exchange since February 15, 1999, and its ticker code has been GZE1R since August 1, 2004. The total number of securities has not changed since 1999.

Development of the Company's share price and OMX Riga GI and OMX Baltic GI indexes (30.09.2013 – 30.09.2016)

LV0000100899
GZE1R
Second list
1.40 EUR
39,900,000
25,328,520
None

Source: Nasdaq Riga

The Company's shares are included in the baskets of the following indexes: OMXBBGI, OMXBBCAPGI, OMXBGI, OMXRGI. OMX Baltic is a Baltic-level index of all shares. Its basket consists of the shares of the Official and Second list of Baltic exchanges. The index reflects the current situation and changes at NASDAQ OMX Riga.

The Company's capitalisation value in 9 months of 2016 reached EUR 303.24 million – EUR 63.04 million less than in 9 months of the previous reporting period. In terms of stock market capitalisation, the Company ranked number one among companies listed on Nasdaq Riga and number six among those listed on Nasdaq Baltic.

On September 5, 2016, following the resolution by the Meeting of Shareholders of September 2 (pursuant to the requirements of the Energy Law) to spin off the unified natural gas transmission and storage operator from the Company by setting up a sister joint stock company "Conexus Baltic Grid", the price of the Company's shares on the stock exchange dropped by 25.14%. When purchasing the Company's shares after September 2, shareholders are no longer eligible to become shareholders of the to-be-established unified transmission and storage operator, which explains the rapid changes in the share price.

Development of the Company's share price and turnover (30.09.2013-30.09.2016)

Share sales information (01.01.2014-30.09.2016)

	2014 9M	2015 9M	2016 9M
Share price (EUR):
First	9.390	9.140	9.790
Highest	10.400	10.400	11.100
Lowest	8.900	9.110	5.550
Average	9.515	9.666	10.230
Last	10.000	9.980	10.700
Change	6.50%	9.19%	9.30%
Number of transactions	655	709	792
Number of shares traded	62,235	76,085	70,832
Turnover (million EUR)	0.592	0.735	0.725
Capitalisation ( million EUR)	399.000	398.202	426.930

Source: Nasdaq Riga

Subsequent events

On October 4, 2016 the Company completed the injection of natural gas into the Inčukalns Underground Gas Storage. For the needs of Latvia in the 2016/2017 season, there was 1,250 million m3 of natural gas injected, with the total active natural gas volume at the storage reaching 1,530.3 million m3.

Subsequently to the reporting period, the Company decided to sign a contract with the Latvian branch of OP Corporate bank plc on the refinancing of the capital investments made by the Company in the natural gas transmission and storage segment in 2014, 2015 and 2016. The amount of the loan is 35,000,000 EUR with a term of 5 years..

STATEMENT OF BOARD RESPONSIBILITY

The management of the Joint Stock Company "Latvijas Gāze" (hereinafter – the Company) is responsible for the preparation of the Company's financial statements.

The unaudited interim condensed financial statements for the 9 months period ended September 30, 2016, have been prepared in compliance with the International Financial Reporting Standards as adopted by the European Union and provide a true and fair view of the Company's financial position, operational results and cash flows in all key aspects.

The unaudited interim condensed financial statements of the Company for the 9 months period ended September 30, 2016 were approved by the Board of Directors on November 25, 2016.

The financial statements were approved by the Board of the JSC "Latvijas Gāze" on November 25, 2016 and they are signed on behalf of the Board by:

Aigars Kalvītis Chairman of the Board

Zane Kotāne Member of the Board

CORPORATE INFORMATION

Company	JSC Latvijas Gāze, Joint Stock Company
Registration number, place and date of registration	000300064 Riga, March 25, 1991 Reregistered in Commercial Register December 20, 2004 with common registration number No 40003000642
Address	Vagonu street 20, Riga LV-1009, Latvia www.lg.lv
Major shareholders	PJSC "Gazprom" (34,0%) Marguerite Gas I.S.a.r.l. (28,97%) Uniper Ruhrgas International GmbH (18,26%) ITERA Latvija SIA (16,0%)
Corporate Governance Report	www.lg.lv
Financial Year	January 1 - September 30, 2016

STATEMENT OF PROFIT OR LOSS

	Note	01.01.2016- 30.09.2016	01.01.2015- 30.09.2015 (Restated)
		EUR'000	EUR'000
Revenue	2	251,446	308,103
Other income	3	3,371	4,660
Raw materials and consumables used	4	(174,893)	(231,278)
Personnel expenses	5	(23,546)	(21,265)
Depreciation, amortisation and impairment of property, plant and equipment		(25,117)	(25,308)
Other operating expenses	6	(9,226)	(10,811)
Operating profit		22,035	24,101
Financial income, net		68	87
Profit before taxes		22,103	24,188
Corporate income tax		(3,843)	(4,606)
Profit for the period		18,260	19,582

STATEMENT OF OTHER COMPREHENSIVE INCOME

	01.01.2016-	01.01.2015-
	30.09.2016	30.09.2015
	EUR'000	EUR'000
Profit for the period	18,260	19,582
Other comprehensive income - items that will not be reclassified to profit or loss
in subsequent periods
Revaluation of property, plant and equipment	7,663	118
Net (income) or expenses recognised as other comprehensive income	7,663	118
Total comprehensive income for the period	25,923	19,700

The Notes on pages 14-26 are integral part of these Financial Statements.

The financial statements were approved by the Board of the JSC "Latvijas Gāze" on November 25, 2016 and they are signed on behalf of the Board by:

Aigars Kalvītis Chairman of the Board

Zane Kotāne Member of the Board

BALANCE SHEET

	Note	30.09.2016	31.12.2015
		EUR'000	EUR'000
ASSETS
Non-current assets
Intangible assets		2,750	2,282
Property, plant and equipment	7	556,453	557,450
Trade receivables		8	8
Total non-current assets		559,211	559,740
Current assets
Inventories	8	27,662	56,519
Advances for inventories		42,632	24,228
Trade receivables		30,739	27,873
Current income tax receivable		6,631	1,956
Other current assets		849	492
Cash and cash equivalents		95,454	79,207
Total current assets		203,967	190,275
TOTAL ASSETS		763,178	750,015
LIABILITIES
Equity
Share capital	11	55,860	55,860
Share premium		20,376	20,376
Reserves	11	484,407	478,059
Retained earnings		46,359	57,108
Total equity		607,002	611,403
Non-current liabilities
Deferred income	9	27,526	27,948
Employee benefit obligations		5,508	5,233
Deferred tax liabilities		52,398	52,398
Total non-current liabilities		85,432	85,579
Current liabilities
Trade payables		13,417	11,794
Deferred revenues	9	17,912	1,213
Other liabilities	10	39,415	40,026
Total current liabilities		70,744	53,033
TOTAL LIABILITIES		763,178	750,015

The Notes on pages 14-26 are integral part of these Financial Statements.

The financial statements were approved by the Board of the JSC "Latvijas Gāze" on November 25, 2016 and they are signed on behalf of the Board by:

Aigars Kalvītis Chairman of the Board

Zane Kotāne Member of the Board

STATEMENT OF CHANGES IN EQUITY

	Share capital	Share premium	Reserves	Retained earnings	Total
	EUR'000	EUR'000	EUR'000	EUR'000	EUR'000
December 31, 2014	55,860	20,376	491,944	42,002	610,182
Transactions with owners:
Dividends	-	-	-	(28,728)	(28,728)
Total transactions with owners	-	-	-	(28,728)	(28,728)
Transfers to reserves	-	-	828	(828)	-
Reclassification	-	-	(11,350)	11,350	-
Property, plant and equipment disposed	-	-	(3,288)	3,288	-
Deferred tax for property, plant and equipment disposed	-	-	493	(493)	-
Other comprehensive income:					-
Other comprehensive income	-	-	(568)	-	(568)
Profit for the year	-	-	-	30,517	30,517
Total other comprehensive income	-	-	(568)	30,517	29,949
December 31, 2015	55,860	20,376	478,059	57,108	611,403
Transactions with owners:
Dividends	-	-	-	(30,324)	(30,324)
Total transactions with owners	-	-	-	(30,324)	(30,324)
Reclassification	-	-	(1)	1	-
Property, plant and equipment disposed	-	-	(1,314)	1,314	-
Other comprehensive income:	-
Other comprehensive income	-	-	7,663	-	7,663
Profit for the year	-	-	-	18,260	18,260
Total other comprehensive income	-	-	7,663	18,260	25,923
September 30, 2016	55,860	20,376	484,407	46,359	607,002

The Notes on pages 14-26 are integral part of these Financial Statements.

STATEMENT OF CASH FLOW

	30.09.2016	30.09.2015
	EUR'000	EUR'000
Cash flows from operating activities
Profit before corporate income tax	22,103	24,189
Adjustments:
- depreciation of property, plant and equipment	24,359	24,501
- amortization of intangible assets	763	815
- provisioning (except provisions for doubtful debts)	303	(1,954)
- income from participating interests	(912)	(891)
- losses on sale of property, plant and equipment	265	984
Changes in working capital:
- to accounts receivable	(3,225)	38,230
- to advances for inventories	(18,403)	(100,115)
- to inventories	28,860	26,260
- to accounts payable	14,330	10,097
Corporate income tax paid	(4,674)	(5,256)
Net cash flow from operating activities	63,769	16,860
Cash flow from investing activities
Payments for property, plant and equipment	(16,006)	(20,019)
Proceeds from sale of property, plant and equipment	39	114
Payments for intangible assets	(1,231)	(529)
Net cash (outflow)/inflow from investing activities	(17,198)	(20,434)
Cash flow from financing activities
Dividends paid	(30,324)	(28,728)
Net cash outflow from financing activities	(30,324)	(28,728)
Net cash flow	16,247	(32,302)
Cash and cash equivalents at the beginning of the reporting period	79,207	51,124
Cash and cash equivalents at the end of the reporting period	95,454	18,822

The Notes on pages 14-26 are integral part of these Financial Statements.

NOTES TO THE FINANCIAL STATEMENTS

Segment reporting

The Company has four operating segments: gas transmission (includes the transmission of natural gas through high-pressure pipelines to deliver it to a distribution system or directly to consumers), gas storage (the storage of natural gas at the Inčukalns Underground Gas Storage Facility), gas distribution (includes the transmission of natural gas through high-, mid- and low-pressure pipelines) and gas trade (includes the purchase of natural gas for sale and the sale of natural gas to consumers).

All revenues of the Company are from regulated activities. Based on regulatory framework for Latvian consumers invoices are issued at end user tariff which includes fees for all services provided without further specification of revenues for each service. As invoices are issued by trading segment, external revenues are allocated to the trading segment and subsequently internally reclassified to the segment which has provided relevant service. The external revenues for gas transmission and storage represent revenues from clients outside Latvia.

The information included in the operating segments corresponds to the information used by the Management Board in making operational decisions and allocating resources.

1. Segment reporting

30.09.2016	Gas	Gas	Gas	Gas	TOTAL
	transmission	storage	distribution	sale
	EUR'000	EUR'000	EUR'000	EUR'000	EUR'000
Revenue from external customers	1,832	8,237	626	32	10,727
Internal revenue/expenses	14,429	9,705	33,006	183,578	240,719
Segment profit before taxes	(113)	3,844	7,709	11,269	22,709
Segment assets	186,406	153,678	247,811	79,829	667,724
Depreciation and amortisation	9,561	6,241	8,860	454	25,117
Purchase of property, plant and equipment and intangible assets	4,756	8,020	4,350	111	17,237
EBITDA	9,448	10,085	16,569	11,724	47,826

30.09.2015	Gas	Gas	Gas	Gas	TOTAL
(Restated)	transmission	storage	distribution	sale
	EUR'000	EUR'000	EUR'000	EUR'000	EUR'000
Revenue from external customers	4,096	11,926	631	28	16,681
Internal revenue/expenses	14,060	9,418	31,900	236,044	291,422
Segment profit before taxes	977	7,321	6,342	9,461	24,101
Depreciation and amortisation	10,639	5,413	8,814	442	25,308
Purchase of property, plant and equipment and intangible assets	7,915	7,662	4,705	266	20,548
EBITDA	11,616	12,734	15,156	9,903	49,409
Segment assets 31.12.2015	187,301	146,068	251,130	86,308	670,807

Segment information comparison

	01.01.2016- 30.09.2016	01.01.2015- 30.09.2015 (Restated)
	EUR'000	EUR'000
Segment profit	22,709	24,101
Costs not attributable to segments	(674)	-
Financial income, net	68	87
Profit before taxes	22,103	24,188
	30.09.2016	31.12.2015
Segment assets	667,724	670,807
Cash	95,454	79,207
Total assets	763,178	750,015

Statement of profit or loss

2. Revenues

Revenues	01.01.2016- 30.09.2016	01.01.2015- 30.09.2015
	EUR'000	EUR'000
Natural gas trade	240,719	291,422
Natural gas storage and transportation	10,099	16,050
Other revenue	628	631
	251,446	308,103

3. Other income

Other income	01.01.2016-	01.01.2015-
	30.09.2016	30.09.2015
	EUR'000	EUR'000
Other income	240,719	291,422
Income from construction of service lines	915	894
Penalties	841	1,043
	3,371	4,660

4. Raw materials and consumables used

	01.01.2016-	01.01.2015-
Costs of materials	30.09.2016	30.09.2015
	EUR'000	EUR'000
Natural gas purchase	169,202	222,673
Costs of materials, spare parts and fuel	4,023	6,230
Natural gas for technological purposes	1,668	2,375
	174,893	231,278

5. Personnel expenses

Personnel expenses	01.01.2016-	01.01.2015-
	30.09.2016	30.09.2015
	EUR'000	EUR'000
Wages and salaries	17,827	16,393
State social insurance contributions	4,229	3,510
Life, health and pension insurance	1,250	1,031
Other personnel costs	240	331
	23,546	21,265

6. Other operating expenses

Other operating expenses	01.01.2016-	01.01.2015-
	30.09.2016	30.09.2015
	EUR'000	EUR'000
Expenses for maintenance of premises and other services	2,770	3,216
Office and other administrative costs	1,737	722
Taxes and duties	1,631	1,806
Sale and advertising costs	1,214	703
Other costs	1,091	3,590
Costs of IT system maintenance, communications and transport	783	774
	9,226	10,811

Balance sheet

7. Property, plant and equipment

	Land	Cushion gas	Buildings, constructions	Machinery and equipment	Other fixed assets	Costs of items under construction	TOTAL
	EUR'000	EUR'000	EUR'000	EUR'000	EUR'000	EUR'000	EUR'000
31.12.2015	2,584	9,377	1,077,534	135,018	20,961	12,482	1,257,956
Additions	-	-	160	385	497	8,611	9,653
Reclassified	-	-	798	386	(1)	(1,183)	-
Revaluated	-	-	6,850	(2,038)	127	-	4,939
Disposals	-	-	(338)	(208)	(301)	(3)	(850)
30.09.2016	2,584	9,377	1,085,004	133,543	21,283	19,907	1,271,698
Depreciation
31.12.2015	-	-	607,880	77,319	15,307	-	700,506
Calculated	-	-	16,830	5,558	1,713	-	24,101
Revaluated	-	-	2,625	(4,679)	(368)	-	(2,422)
Disposals	-	-	(319)	(2,380)	(396)	-	(3,095)
Reclassified	-	-	44	(42)	(2)	-	-
30.09.2016	-	-	627,060	75,776	16,254	-	719,090
Net book value as at 30.09.2016	2,584	9,377	458,595	58,703	5,116	22,078	556,453
Net book value as at 31.12.2015	2,584	9,377	469,654	57,699	5,654	12,482	557,450

	Land	Cushion gas	Buildings, constructions	Machinery and equipment	Other fixed assets	Costs of items under construction	TOTAL
	EUR'000	EUR'000	EUR'000	EUR'000	EUR'000	EUR'000	EUR'000
31.12.2014	2,584	9,377	1,054,386	133,904	20,956	16,739	1,237,946
Additions	-	-	-	-	-	31,543	31,543
Reclassified	-	-	32,069	2,507	1,212	(35,788)	-
Revaluated	-	-	195	2	-	-	197
Disposals	-	-	(9,116)	(1,395)	(1,207)	(12)	(11,730)
31.12.2015	2,584	9,377	1,077,534	135,018	20,961	12,482	1,257,956
Depreciation
31.12.2014	-	-	589,655	71,954	14,662	-	676,271
Calculated	-	-	24,205	6,655	1,837	-	32,697
Disposals	-	-	(5,980)	(1,290)	(1,192)	-	(8,462)
31.12.2015	-	-	607,880	77,319	15,307	-	700,506
Net book value as at 31.12.2015	2,584	9,377	469,654	57,699	5,654	12,482	557,450
Net book value as at 31.12.2014	2,584	9,377	464,731	61,950	6,294	16,739	561,675

8. Inventories

Inventories	30.09.2016	31.12.2015
	EUR'000	EUR'000
Natural gas and fuel	23,258	4,348
Materials and spare parts	4,817	52,592
Allowance for slow-moving inventory	(413)	(421)
	27,662	56,519

Allowance for impairment of slow-moving and obsolete inventories	30.09.2016	31.12.2015
	EUR'000	EUR'000
Allowance at the beginning of the year	421	438
Costs included in profit or loss statement	-	3
Released in profit or loss statement	(8)	(11)
Written down	-	(9)
Allowance at the end of the period	413	421

9. Deferred income

Deferred income	30.09.2016	31.12.2015
	EUR'000	EUR'000
Revenue from trade of natural gas
Short-term part	16,682	-
	16,682	-
Income from residential and corporate customers' contributions to construction of gas pipelines
Long-term part	19,124	19,344
Short-term part	963	946
	20,087	20,290
Income from EC co-financing
Long-term part	8,402	8,604
Short-term part	267	267
	8,669	8,871
Total deferred revenues
Long-term part	27,526	27,948
Short-term part	17,912	1,213
Changes of deferred income
Balance at the beginning of the year	29,161	29,526
Received from residential and corporate customers during reporting period	17,189	827
Included in income of reporting year	(912)	(1,192)
Total transfer to next period	45,438	29,161

10. Other liabilities

Other liabilities	30.09.2016	31.12.2015
	EUR'000	EUR'000
Prepayments received	13,995	12,153
Other current liabilities	6,836	6,897
Accrued costs	8,034	5,877
Provision for taxes	3,843	-
Value added tax	2,837	9,066
Vacation pay reserve	1,245	1,245
Excise tax	739	2,519
Salaries	696	781
Social security contributions	486	888
Real estate tax	289	17
Personnel income tax	247	554
Natural resource tax	168	29
	39,415	40,026

Other information

11. Shares and shareholders

Equity	30.09.2016 % of total share capital	30.09.2016 Number of shares	31.12.2015 % of total share capital	31.12.2015 Number of shares
Equity
Registered (closed issue) shares	36.52	14,571,480	36.52	14,571,480
Bearer (public issue) shares	63.48	25,328,520	63.48	25,328,520
	100.00	39,900,000	100.00	39,900,000
Shareholders
Uniper Ruhrgas International GmbH (including registered (closed issue) shares 7,285,740)	47.23	18,846,385	47.23	18,846,385
Itera Latvija LLC	16.00	6,384,001	16.00	6,384,001
PJSC "Gazprom" (including registered (closed issue) shares 7,285,740)	34.00	13,566,701	34.00	13,566,701
State-owned shares*	0.00	117	0.00	117
Bearer (public issue) shares	2.77	1,102,796	2.77	1,102,796
	100.00	39,900,000	100.00	39,900,000

*The state-owned shares are held by the Ministry of Economy of the Republic of Latvia.

As at September 30, 2016, the registered, signed and paid share capital consists of 39,900,000 ordinary shares with a par value of EUR 1.40 each. All shares have equal voting rights and rights to dividends.

Reserves	30.09.2016	31.12.2015
	EUR'000	EUR'000
Revaluation reserve	379,865	373,217
Employee benefits revaluation reserve	(815)	(815)
Other reserves	105,357	105,357
	484,407	478,059

12. Financial risk management

The Company is exposed to credit risk on its financial assets and to liquidity risk due to high seasonality of natural gas sales. The Company acquires and sells most of the services and goods in Euros, thus there is no significant exposure to foreign exchange risk. All operations of the Company are financed from own funds, thus there is no exposure to interest rate risks. Financial assets and liabilities arise from core business activities of the Company and are all measured at amortised costs.

Credit risk

The Company is exposed to credit risk, which is a risk of material losses arising in a case when counterparty is not able to fulfil its contractual obligations to the Company. The credit risk is critical to the operations of the Company, so it is important to manage this risk effectively. The credit risk arises from cash and cash equivalents, as well as credit exposure to customers, including outstanding receivables and committed transactions.

Concentration of credit risk

Similarly to the fact that the sales of the Company are exposed to high concentration risk, also outstanding

Credit risk management practices

The credit risk management is performed by the trading segment of the Company under supervision of the management board member responsible for commercial operations. For largest customers the Company uses individual credit risk management policies, which include several practices such as, initial credit limit assessment, detailed monitoring of financial measures, as well as frequent billing practice to avoid accumulation of current debt. In case of initial doubts, clients are placed for regular monitoring at the Board level, and, if required, additional collaterals are required to secure provision of services and sale of natural gas. For smaller customers, the Company has approved detailed credit risk management policies, describing basic steps for monitoring the progress and managing legally

Liquidity risk

Liquidity risk is associated with ability of the Company to settle its obligations within agreed due dates. Due to high seasonality of operations of the Company, cash inflows are also exposed to high fluctuations within the year and most of revenues are generated during the first and the fourth quarter of the year. At the same time operational costs related to maintenance works are

13. Critical accounting estimates and judgements

The preparation of the financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company's accounting policies. IFRS requires that in preparing the financial statements, management of the Company makes estimates and assumptions that affect the reported amounts of assets and liabilities and required disclosure at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The areas involving a higher degree of judgment and thus having significant risk of casing a material receivables are exposed to high concentration risk, thus source of credit risk is mainly associated with top five customers of the Company.

mandatory communication with the clients before insolvency procedure can be initiated. In case of customer becoming doubtful, the Company establishes provision and starts legal proceeding to collect the debt.

For managing credit risk associated with cash and cash equivalents, the Company has approved financial asset management policy. Based on internal guidelines all credit institutions with which the Company cooperates are graded once in a quarter, taking into account their financial measures as well as non-financial indicators. Based on the assessment, limits for current accounts with one institution as well as deposit limits are defined and regularly monitored. Due to low interest rates, as at September 30, 2016, cash and cash equivalents represented only current account balances with credit institutions.

distributed evenly through the year, while dividend payments from prior year are usually done in the third quarter of the year.

The Company uses cash flow planning tools to manage liquidity risk. The Company prepares yearly, quarterly and monthly cash flows to identify operational cash flow requirements. The Company has record on attracting short term credit line, in case if such need arises.

adjustments to the carrying amounts of assets and liabilities within the next financial year are revaluation of property, plant and equipment, determination of frequency of revaluations, the management assumptions and estimates in determination of useful lives of property, plant and equipment and recoverable amount of accounts receivable and inventories.

Revaluation of property, plant and equipment

The management determines fair value and the remaining useful life of buildings and constructions and equipment and machinery based on valuations performed by independent certified valuators in accordance with real estate valuation standards and based on the average construction costs relevant for the reporting year. The Company's internal policy is to perform the revaluations when there are indications that average construction costs and/or purchase prices related to the buildings, gas transmission and distribution system and equipment have changed significantly.

Recoverable amount of trade receivables

As individual assessment is not possible due to the large number of individual balances, only the significant debtors are assessed individually. Receivables that are not individually assessed for impairment are classified into groups of receivables based on days overdue and are collectively assessed for impairment, using historical loss experience.

14. Changes in presentation and disclosures in the

financial statements

During the reporting period, the management has revised the profit and loss statement classification method and changed to the classification using the nature of expenses method. The Company uses such classification also for the internal decision making and in

15. Key accounting policies

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. Where it is necessary comparatives are reclassified.

Basis of preparation

The financial statements are prepared in accordance with the International Reporting Standards (IFRS) as adopted for use in the European Union.

Inventory valuation

Upon valuation of inventories, the management relies on its best knowledge taking into consideration historical experience, general background information and potential assumptions and conditions of future events. In determining the impairment of inventories, the sales potential as well as the net realisable value of inventory is taken into consideration.

Recognition of revenues using the leveraged consumption payment scheme

Customers, who settle payments using the leveraged consumption payment scheme, when paying bills (commercial users and private persons, who perform an operating activity), perform the readings of meters twice a year and determine the leveraged consumption for the winter season (November to April) and summer season. Customers are invoiced on the monthly basis. Customers who are residents (household customers) settle accounts using the leveraged consumption payment scheme in the self-service order. Customers perform the readings of meters (depending on consumption) once a year or when tariffs are changed. All customers of the households are invoiced on a monthly basis by summing the leveraged consumption for which a seasonal rate is applied.

such manner external reporting is more aligned with practices how operations of the Company are actually managed. In order to provide comparative information, also prior year classification is adjusted.

The financial statements are prepared under historical cost convention, as modified by revaluation of property, plant and equipment as disclosed in the note below.

When preparing the unaudited interim condensed financial statements for the 9 months period ended September 30, 2016, adjustments have been made to the comparative indicators of 2015 so as to ensure comparability of the respective statements.

All amounts shown in these financial statements are presented in thousands of Euros (EUR), unless identified otherwise.

Property, plant and equipment

Property, plant and equipment are tangible items that are held for use in supply on goods and services and are expected to be used during more than one period. The key groups within property, plant and equipment for the Company are buildings and constructions, which include gas transmission and distribution pipelines, as well as equipment and machinery, which mostly relates to operations of Incukalns undergroud storage and technical transmission and distribution of gas.

Buildings and constructions (including gas transmission and distribution system) and equipment and machinery are stated at fair value as determined under the policy of revaluation of fixed assets approved by the Board, less accumulated depreciation and impairment charge. Revaluation shall be made with sufficient regularity to ensure the carrying amount not differs materially from that which would be determined using fair value at the end of the reporting period. All other property, plant and equipment groups (including land and cushion gas) are stated at historical cost, less accumulated depreciation and impairment charge. Historical cost includes expenditure directly attributable to the acquisition of the items.

Assets purchased, but not yet ready for the intended use or under installation process are classified under Assets under construction. Subsequent costs are included in the asset's carrying amount or recognised as separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the profit or loss statement for the financial period when they are incurred.

Upon revaluation of property, plant and equipment, the accumulated depreciation is changed in proportion to changes in the gross value of the property, plant and equipment revalued. Increases in the carrying amount arising on revaluation of buildings, gas transmission and distribution system and equipment are credited to Revaluation reserve in shareholders' equity. Decreases that offset previous increases of the same asset are charged against revaluation reserve directly in equity; any further decreases are charged to the profit or loss statement. The revaluation surplus is transferred to retained earnings on the retirement or disposal of the asset.

Land, cushion gas, advances and assets under construction are not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revaluated amounts to their residual values over their estimated useful lives, as follows:

	years
Buildings	60 - 100
Constructions, including gas transmission and distribution system	40 - 50
Machinery and equipment	5 - 20
Other fixed assets	3.33 - 10

An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.

Gains or losses on disposals are determined by comparing carrying amount with proceeds and are charged to the profit or loss statement during the period when they are incurred. When the revaluated assets are sold, the amounts included in Revaluation reserve are transferred to retained earnings.

Intangible assets

Intangible assets primarily consist of software licences and patents. Intangible assets have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of intangible assets over their useful lives. Generally intangible assets are amortised over a period of 5 years.

Impairment of non-financial assets

All Company's non-financial assets have a finite useful life (except land and cushion gas). Assets that are subject to amortization or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Non-financial assets that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

Financial assets

The Company classifies all its financial assets as Loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. Receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for assets with maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets. Receivables are classified as 'trade receivables', 'other current assets' and 'cash and cash equivalents' in the balance sheet.

Inventories

The cost of natural gas in the Inčukalns underground storage and in gas transmission pipelines is accounted separately using the first-in first-out (FIFO) method based on the total natural gas movement. The cost of natural gas is composed of the gas purchase cost. The cost of materials, spare parts and other inventories is determined using the weighted average method.

Inventories are recorded at the lowest of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less completion and selling expenses. The value of outdated, slow-moving or damaged inventories has been provisioned for.

Trade receivables

Trade receivables are recognised initially at fair value and subsequently carried at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of trade receivables. Significant financial difficulties of the debtor, the probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivables are impaired. The amount of the allowance is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. Changes in the allowances are included in the profit or loss statement.

If, in the subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the reversal of the previously recognised impairment loss is recognised in the profit or loss statement.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand, balances of current accounts with banks and deposits held at call with banks with original term less than 90 days and other short-term highly liquid investments.

Share capital and dividend authorised

Ordinary shares are classified as equity. Incremental external costs directly attributable to the issues of new shares, are shown in equity as a deduction, net of tax, from the proceeds. Dividend distribution to the Company's shareholders is recognized as a liability in the Company's financial statements in the period in which the dividends are approved by the Company's shareholders.

Provisions

Provisions for legal claims are recognised when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognised for future operating losses.

Provisions are measured at the present value of managements best estimate of the expenditure required to settle the present obligation at the end of the reporting period.

Vacation pay reserve

The amount of accrual for unused annual leave is determined by multiplying the average daily wage of employees for the last six months of the reporting year by the amount of accrued but unused annual leave at the end of the reporting year.

Employee benefits

Bonus plans

The Company recognises a liability and expense for bonuses, based on a formula that takes into consideration the profit attributable to the Company's shareholders after certain adjustments. The Company recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation.

Social security and pension contributions

The Company pays social security contributions for state pension insurance to the state funded pension scheme in compliance with the Latvian legislation. The state funded pension scheme is a fixed-contribution pension plan whereby the Company has to make payments in an amount specified by law. The Company also pays contributions to an external fixed-contribution private pension plan. The Company does not incur legal or constructive obligations to pay further contributions if the state funded pension scheme or private pension plan is unable to meet its liabilities towards employees. The social security and pension contributions are recognised as an expense on an accrual basis and are included within staff costs.

Post-employment and other employee benefits

Under the Collective Agreement, the Company provides certain benefits upon termination of employment and over the rest of life to employees whose employment conditions meet certain criteria. The amount of benefit liability is calculated based on the current salary level and the number of employees who are entitled or may become entitled to receive those payments, as well as based on actuarial assumptions. The benefit obligation is calculated once per year.

The present value of the benefit obligation is determined by discounting the estimated future cash outflows using the market rates on government bonds. Actuarial gains and losses arisen from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise.

Deferred income tax

The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss, it is not accounted for.

Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the temporary differences will reverse.

The principal temporary differences arise from different intangible asset amortization and property, plant and equipment depreciation rates, revaluation of property, plant and equipment, as well as provisions for slowmoving inventory, accrued expenses for unused annual leave and bonuses, accruals for post-employment and other employee benefits and provisions for bad and doubtful debts where the management is of the opinion that they will meet the criteria stated in Article 9 of the law "On Corporate Income Tax". Deferred income tax asset is recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

Increase in deferred income tax liability that results from revaluation of property, plant and equipment is charged to other comprehensive income as deduction from respective increase in the Revaluation reserve. Decrease in deferred income tax liability that results from depreciation of revalued property, plant and equipment is charged to the income statement.

Current income tax

Income tax is assessed for the period in accordance with Latvian tax legislation. The tax rate stated by Latvian tax legislation is 15 percent.

Trade payables

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as noncurrent liabilities.

Revenue recognition

The Company recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Company's activities as described below. The Company bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

Revenue from trade of natural gas

Sales are recognised upon delivery of gas, net of value added tax and discounts, but including the excise tax. Sales of natural gas to residential customers are recorded on the basis of meter readings reported by customers. Where relevant, this includes an estimate of the sales volume of gas supplied between the date of the last meter reading and the year-end. Natural gas sales to corporate customers are recognised based on invoice issued according to meter reading of customers.

Revenue from transportation and storage of natural gas

Income from the rendering of services is recognised upon performance of services, net of value added tax and discounts. Income on natural gas transmission and storage is recognised based on the actual amount of transmitted and stored gas, which are determined by meter readings.

Interest income

Interest income is recognised using the effective interest rate method. Interest income on term deposits is classified as Other income and interest on cash balances is classified as Finance income.

Penalties income

Contractual penalties, incl. periodic penalties for late payments for natural gas supplied, are recognised when it is certain that the economic benefits associated with the transaction will flow to the Company. Hence, recognition usually coincides with the receipt of penalty.

Income from residents' and enterprises' contribution to financing of construction works

The income from residents' and enterprises' contribution to financing of construction works of gas pipelines is accounted for as deferred income and gradually included in the profit or loss statement over the useful life of the fixed assets, 30 to 40 years on average.

Other income

Income from the rendering of services are recognised when rendered.

Related parties

Related parties are defined as the Company's major shareholders, members of the Council and the Board, their close relatives and companies in which they have a significant influence or control.

Grants

EC funding related to property, plant and equipment is recognized as deferred income and is credited to the income statement systematically over the expected lives of the related assets.