Latvijas Gaze

Quarterly Report • May 31, 2012

"Latvijas Gāze" Joint Stock Company

Unaudited Financial Report of 3 months of 2012

Prepared in accordance with the International Financial Reporting Standards

Riga, 2012

Information on the Company 3
Report of the Board of Directors 5
Balance sheet11
Income statement12
Statement of comprehensive income12
Statement of cash flows13
Statement of changes in equity14
Notes to the financial statements15

Information on the Company

Name of the Company	JSC Latvijas Gāze
Legal status of the Company	Joint Stock Company
Registration number, venue and date	000300064 Riga, March 25, 1991
	Reregistered in the Commercial Register December 20, 2004 with common registration No 40003000642
Address	Vagonu Street 20 Riga, LV – 1009 Latvia
Major shareholders	E.ON Ruhrgas International GmbH (47.2 %) Gazprom OJSC (34.0 %) ITERA Latvija LLC (16.0 %)
Reporting period	January 1 – March 31, 2012

Board members – names, surnames, posts, recent professional experience and education

Adrians Dāvis – Chairman of the Board Since 1997 – Chairman of the Board of the JSC "Latvijas Gāze"; involved in gas industry since 1965

1997 Physical Energy Institute of Latvian Science Academy, academic degree of doctor in engineering (Dr.sc.ing.).

Alexander Miheyev (Александр Михеев) – Board member, Vice-Chairman of the Board

Since 2003 First Deputy Head of the Marketing, Gas and Liquid Hydrocarbon Processing Department of the OJSC Gazprom; involved in gas industry since 1968

1968 Graduated from the Moscow Oil and Gas Industry Institute named after I. M. Gubkin and obtained the qualifications of engineer in design and operation of oil and gas pipelines, gas storage facilities and oil tanks

Anda Ulpe – Board member

Since 1997 Board member of the JSC "Latvijas Gāze"; involved in gas industry since 1984

2002 the University of Latvia, Master Degree of Social Sciences in Economics

Gints Freibergs – Board member

involved in gas industry since 1998.

Jörg Tumat – Board member, Vice-Chairman of the Board (since 2006)

2001 – 2006 E.ON Ruhrgas AG / Ruhrgas AG. Eastern Gas Purchase Department, Head of Division; OJSC "Gazprom" share and eastern gas purchase contracts;

Since 1997 Board member of the JSC "Latvijas Gāze"; involved in gas industry since 1984

2001 – 2004 the University of Hagena, Diploma in Business Administration (Dipl.-Betriebswirt)

1984 Polytechnical Institute of Riga, engineer in industrial heat power

Council members (since July 2, 2010) – names, surnames, posts, recent professional experience and education

Juris Savickis – Vice-Chairman of the Council, Represents the interest of LLC ITERA Latvija

Since 1996 LLC "ITERA Latvija", president

1970 – 1972 Polytechnical Institute of Riga, Graduate school 1983 - 1984 University of Qualification Raising for Executives, Faculty of International Relations

Joachim Hockertz – Council member, Represents the interest of E.ON Ruhrgas International GmbH

2000 – 2002 Head of the Baltic Office of Ruhrgas AG Since 2002 E.ON Ruhrgas International AG

1989 – 1992 Max Plank Institute in Mulheim-am-Ruhr, PhD

Uwe Fip – Council member, Represents the interest of E.ON Ruhrgas International GmbH

Since 2002 E.ON Ruhrgas AG – Senior Vice-President, Head of Eastern Department of Gas Supplies

Master in Oil Engineering, Degree in Business Management (Diploma – Merchant)

(within the framework of the Ministtry of Foreign Affairs), Diploma of Commercial Department, which equals to a Master of Economics: an economist with knowledge of foreign languages (Italian and English)

Names, surnames and posts of Council members (before July 2, 2010)

Since 2004 Gazprom's Council Member by the resolution of the Company's Shareholders' Meeting

1968 Korotchenko Kiev Institute of National Economy getting specialty in Industry Planning

Vlada Rusakova (Влада Русакова) – Council member, Represents the interest of OJSC Gazprom

Since 2003 Head of the Strategic Development Department, OJSC Gazprom

Since 2003 Board member of the OJSC Gazprom

1977 Graduated from the Moscow Oil and Gas Industry Institute named after I. M. Gubkin and obtained the qualifications of engineer in design, planning and operation of oil and gas pipelines, gas storage facilities and oil tanks Kirill Selezņev (Кирилл Селезнев) – Chairman of the Council Juris Savickis – Vice-Chairman of the Council Achim Saul – Vice-Chairman of the Council Joachim Hockertz – Council member Uwe Fip – Council member Mario Nullmeier – Council member Heinz Watzka – Council member Yelena Karpel (Елена Карпель) – Council member Alexander Krasnenkov (Александр Красненков) – Council member Vlada Rusakova (Влада Русакова) – Council member Igor Nazarov (Игорь Назаров) – Council member

Report of the Board of Directors

The Joint Stock Company "Latvijas Gāze" (hereinafter – the Company) is the only natural gas transmission, storage, distribution and sale operator in Latvia. The company supplies natural gas to 441.7 thousand customers in Latvia, and in winter – also to Estonia, the Northwestern part of Russia and Lithuania from the Inčukalns Underground Gas Storage Facility (hereinafter – Inčukalns UGS).

The goal of the Company is to strengthen its leading position in the fuel market of Latvia by enhancing the accessibility of natural gas, facilitating the diversity of its consumption and ensuring for consumers in Latvia one the most stable supplies in Europe.

The vision of the Company is to make Latvia one of the largest natural gas storage hubs in Europe by using the unique geological structures of our country.

The mission of the Company is to contribute to the economy of the Baltic region by ensuring the security of energy supplies, the development of the industry and the competitiveness of prices.

The underlying principles of financial activity of the Company are as follows:

• investments in modernization of the infrastructure related to natural gas supply stability and security;
• investments in the development of infrastructure and the quality of service;
• competitive price of natural gas and services;
• profit that enables the company to make investments and pay dividends in compliance with the international natural gas industry practice. Such amount of profit is regulated by the Public Utility Commission of the Republic of Latvia by setting the level of capital return (currently the capital return is set to 8.0 % of the regulated asset basis).

1. Operation of the Company in the reporting period

In 3 months of 2012, the Company sold to the consumers 635.6 million nm³ of natural gas. Compared to the respective period of 2011, natural gas sales have decreased by 9.9 %, still being 0.1 % or 0.6 million nm³ above the volume planned in the budget of 2012.

The gas injection season at the Inčukalns UGS began on April 25, 2012. Upon starting natural gas injection, the reserves of active gas at the Inčukalns UGS were 144.72 million nm³ .

Over 3 months of 2012, the consumers have been sold natural gas and provided services for LVL 178.0 million, which is by 22.1 % more than in the respective period of 2011 and by 0.6 % more than budgeted.

The rise of income over the respective period of 2011 has taken place because in the 1st quarter of 2012 the industrial and residential customers were applied differential natural gas sale end-user tariffs corresponding to a natural gas sale price, which was by 31.2 % higher than in the 1st quarter of 2011. Compared to 2011, the income grew in both the industrial and the household customers sector.

The Company completed 3 months of 2012 with a profit of LVL 3.9 million, which is by 41.8 % less than in the respective period of 2011 when the profit amounted to LVL 6.7 million.

Within the framework of the capital investment programme, LVL 1.24 million of investment funds were spent over 3 months of 2012, mostly on the renovation of gas transmission and distribution pipelines, the modernization of technological equipment.

Report of the Board of Directors (continued)

1. Operation of the Company in the reporting period (continued)

The key indices of the Company:

	2012 Q1	2011 Q1	2010 Q1	2012 Q1	2011 Q1	2010 Q1
	LVL'000	LVL'000	LVL'000	EUR'000	EUR'000	EUR'000
Net turnover	178 028	145 818	126 481	253 311	207 479	179 966
Profit before income tax, interest payments, depreciation and amortization (EBITDA) Profit before income tax,	20 045	15 721	15 897	28 522	22 369	22 619
interest payments, depreciation and amortization to net turnover (EBITDA %)	11.26%	10.78%	12.57%	11.26%	10.78%	12.57%
Profit of operational activity	8 104	10 491	10 645	11 531	14 927	15 146
Profitability of operational activity (%)	4.55%	7.19%	8.42%	4.55%	7.19%	8.42%
Profit of reporting period	3 937	6 683	6 701	5 602	9 509	9 535
Commercial profitability (%)	2.21%	4.58%	5.30%	2.21%	4.58%	5.30%
Total liquidity	2.45	1.84	2.32	2.45	1.84	2.32
Total assets	562 118	482 788	436 947	799 822	686 945	621 720
Equity	433 143	345 648	335 764	616 307	491 813	477 749
Return on assets (ROA)	0.75%	1.45%	1.53%	0.75%	1.45%	1.53%
Return on equity (ROE)	1.01%	1.96%	2.01%	1.01%	1.96%	2.01%
Number of shares	39 900	39 900	39 900	39 900	39 900	39 900
	LVL	LVL	LVL	EUR	EUR	EUR
Profit per share	0.099	0.167	0.168	0.140	0.238	0.239
Share price over earnings per share (P/E)	63.31	36.74	30.07	63.31	36.74	30.07
Share book value (BV)	10.86	8.66	8.42	15.45	12.33	11.97
Price to book value (P/BV)	0.58	0.71	0.60	0.58	0.71	0.60
Share price at the end of period	6.247	6.153	5.050	8.889	8.755	7.190

2. Research and development

In order to ensure uninterrupted natural gas supply to consumers and safe operation of the natural gas supply system, the Company has developed the "Action plan for the safety improvement of the Joint Stock Company "Latvijas Gāze" gas supply system 2010-2015". It was prepared based on the adjudgments of the Russian companies "Gazobezopasnostj" and "Lentransgaz", the institutes "VNIIGAZ" and "Giprospecgaz", as well as the German companies "Pipeline Engineering GmbH", "Untergrundspeicher und Geotechnologie – Systeme GmbH", "E.ON Engineering GmbH", "E.ON Ruhrgas International AG" and other partners regarding the technical condition of equipment and modernization possibilities.

The action plan envisages investment in safety improvement in the total amount of LVL 50.6 million (EUR 72.0 million). This basically includes projects that are required for the improvement of system operation safety, the gasification of new units and the improvement of stability of gas supply throughout the region.

Report of the Board of Directors (continued)

3. International cooperation

Work on attracting and adopting funds from European Commission (hereinafter – EC). On 17th August 2010 the Company received from EC resolution Nr C (2010) 5554 dated 13.08.2010. on receiving financial grant for Action No. EEPR-2009-INTg-RF-LV-LT-SI2.566527/SI2.566531/SI2.566541/SI2.566543 in accordance with Regulation EC No. 663/2009 on establishing a programme to aid economic recovery by granting Community financial assistance to projects in the field of energy. In accordance with this resolution a total of EUR 10.0 million was granted – EUR 7.5 million for reconstruction of 15 wells at the Inčukalns UGS and EUR 2.5 million for construction of a new underwater pass and receiving trap inspection with gauges.

As at May 20, 2012, LVL 22.4 million has been spent on the project – EUR 14.5 million on the modernization of 15 wells at the Inčukalns UGS and EUR 7.9 million construction of a new underwater pass and receiving trap inspection with gauges.

As at May 20, 2012, funding has been received from the EC in the amount of EUR 7.0 million (on April 17, 2011 – EUR 1.95 million, on April 1, 2012 – EUR 5.05 million).

4. Shares and shareholders

The composition of shareholders of the Company¹ as of December 31, 2011 and previous 2 periods:

Share	31.12.2011.	31.12.2010.	31.12.2009.
"E.ON Ruhrgas International" GmbH	47.2%	47.2%	47.2%
"Gazprom" OJSC	34.0%	34.0%	34.0%
"Itera Latvija" LLC	16.0%	16.0%	16.0%
Others	2.8%	2.8%	2.8%
TOTAL	100.0 %	100.0 %	100.0 %

The composition of shareholders of the Company as to the industries they represent as of December 31, 2011:

Report of the Board of Directors (continued)

1 Shareholders owning at least 5 % of capital

4. Shares and shareholders (continued)

Board members		Number of shares
Chairman of the Board	Adrians Dāvis	417
Vice-Chairman of the Board	Joerg Tumat	900
Vice-Chairman of the Board	Alexander Miheyev	417
Board member	Anda Ulpe	729
Board member	Gints Freibergs	416
Council members		Number of shares
Chairman of the Council	Kirill Seleznev	0
Vice-Chairman of the Council	Peter Frankenberg	0
Vice-Chairman of the Council	Juris Savickis	0
Council member	Joachim Hockertz	0
Council member	Uwe Fip	0
Council member	Mario Nullmeier	0
Council member	Heinz Watzka	0
Council member	Yelena Karpel	0
Council member	Alexander Krasnenkov	0
Council member	Vlada Rusakova	0
Council member	Igor Nazarov	0

The number of shares held by the members of the Board and the Council of the Company as of December 31, 2011:

The price of the shares of the Company at NASDAQ OMX Riga in 3 months of 2012 and in the respective period of previous years.

As from February 15, 1999, the shares of the Company are quoted at the NASDAQ OMX Riga exchange, and their trading code as from August 1, 2004 is GZE1R.

ISIN	LV0000100899
Exchange code	GZE1R
List	Second list
Nominal value	1.00 LVL
Total number of securities	39 900 000
Number of securities in public trading	25 328 520
Guaranteers of liquidity	None

	2012 Q1	2011 Q1	2010 Q1	2009 Q1	2008 Q1
Share price (LVL):
First	5.895	4.800	4.57	4.55	7.25
Highest	6.300	6.400	5.33	5.23	8.20
Lowest	5.520	4.600	4.57	3.45	6.40
Average	5.910	4.922	5.01	3.99	7.54
Last	6.247	6.153	5.05	3.49	7.20
Change	5.97%	28.19%	10.50%	-23.30%	-0.69%
Number of transactions	441	400	184	253	515
Number of shares traded	42 689	117 120	11 150	15 040	11 880
Turnover (million LVL)	0.252	0.576	0.056	0.059	0.090
Capitalization (million
LVL)	249.255	245.505	201.495	139.251	287.280

Source: NASDAQ OMX Riga

Report of the Board of Directors (continued)

4. Shares and shareholders (continued)

The capitalization value of the Company in 3 months of 2012 reached 249.3 million lats - by 3.8 million lats more than in 3 months of the previous reporting period. By share market capitalization the Company took the 1st place among companies quoted at NASDAQ OMX RIGA and the 3rd place among companies quoted at NASDAQ OMX Baltic (2011 Q1: accordingly 1st and 5th).

The dynamics of the Company share price and indexes.

The shares of the Company are	OMXBGI, OMXBPI, OMXRGI
included in the following index
baskets

OMX Baltic

An index of all shares, Baltic-wide. Its basket consists of the shares of the Official and Second list of the Baltic exchanges. The index reflects the current situation and changes in the Baltic market overall.

OMX Riga

An index of all shares, local. Its basket consists of the shares of the Official and Second list of the NASDAQ OMX Riga exchange. The index reflects the current situation and changes in the NASDAQ OMX Riga exchange.

The Company share price and changes of OMX Riga GI and OMX Baltic GI (01.01.2008. - 31.03.2012.)

Report of the Board of Directors (continued)

4. Shares and shareholders (continued)

Indexes/Shares	01.01.2008.	31.03.2012.	Change
OMX Riga GI	595.30	391.44	-34.24%
OMX Baltic GI	515.40	351.53	-31.79%
The Company's share
price (LVL)	7.12	6.25	-12.26%

Chairman of the Board A. Dāvis

Board meeting minutes No. 23 (2012) Riga, May 30, 2012

Balance sheet

	Note	31.03.2012. LVL'000	31.03.2011. LVL'000	31.03.2012. EUR'000	31.03.2011. EUR'000
ASSETS
Non-current assets
Property, plant and equipment		403 501	314 609	574 130	447 648
Intangible assets		1 951	2 160	2 776	3 073
Trade receivables		1 898	3	2 701	4
Total non-current assets		407 350	316 772	579 607	450 725
Current assets
Inventories	1	20 144	8 863	28 662	12 611
Trade receivables		42 142	35 383	59 963	50 345
Current income tax receivable		4 229	1 163	6 017	1 655
Other current assets		30 467	841	43 351	1 197
Cash and cash equivalents		57 786	119 766	82 222	170 412
Total current assets		154 768	166 016	220 215	236 220
TOTAL ASSETS		562 118	482 788	799 822	686 945
EQUITY AND LIABILITIES
Equity
Share capital		39 900	39 900	56 773	56 773
Share premium		14 320	14 320	20 376	20 376
Revaluation reserve	2	268 707	185 737	382 335	264 280
Other reserves		76 883	71 910	109 395	102 319
Retained earnings	3	33 333	33 781	47 428	48 065
Total equity		433 143	345 648	616 307	491 813
Liabilities
Non-current liabilities
Deferred income tax liabilities Accruals for post employment benefits and other employee		41 204	27 822	58 628	39 587
benefits		4 380	5 236	6 232	7 450
Deferred income		20 272	13 770	28 844	19 593
Total non-current liabilities		65 856	46 828	93 704	66 630
Current liabilities
Trade payables		16 068	38 622	22 863	54 954
Corporate income tax payable		4 334	5 083	6 167	7 232
Deferred income Other current liabilities		3 568 39 149	8 756 37 851	5 077 55 704	12 459 53 857
Total current liabilities		63 119	90 312	89 811	128 502
Total liabilities		128 975	137 140	183 515	195 132
TOTAL EQUITY AND LIABILITIES		562 118	482 788	799 822	686 945

Income statement

		31.03.2012.	31.03.2011.	31.03.2012.	31.03.2011.
	Note	LVL'000	LVL'000	EUR'000	EUR'000
Revenue	4	178 028	145 818	253 311	207 479
Cost of sales	5	(163 077)	(127 438)	(232 038)	(181 327)
Gross profit		14 951	18 380	21 273	26 152
Administrative expenses	6	(1 800)	(1 572)	(2 561)	(2 237)
Other income	7	1 998	755	2 843	1 074
Other expenses	8	(7 045)	(7 072)	(10 024)	(10 062)
Operating profit		8 104	10 491	11 531	14 927
Finance income	9	168	45	239	64
Finance expenses	9	-	-	-	-
Finance income, net	9	168	45	239	64
Profit before income tax		8 272	10 536	11 770	14 991
Income tax expense		(4 335)	(3 853)	(6 168)	(5 482)
Profit for the period		3 937	6 683	5 602	9 509

Statement of comprehensive income

Other comprehensive income

Total comprehensive income for the period		87 605	6 688	124 651	9 516
Profit for the period		3 937	6 683	5 602	9 509
Other comprehensive income for the period, net of tax		83 668	5	119 049	7
Deffered income tax liability arising on the revaluation of property, plant and equipment	2	(14 761)	-	(21 003)	-
Tax sections, net Revaluation of property, plant and equipment - gross	2	98 429	5	140 052	7

Statement of cash flows

	31.03.2012. LVL'000	31.03.2011. LVL'000	31.03.2012. EUR'000	31.03.2011. EUR'000
Cash flow from operating activities
Cash generated from operations	54 227	86 136	77 158	122 560
Interest received	176	69	250	98
Income tax paid	(1 796)	(1 169)	(2 555)	(1 663)
Net cash generated from operating
activities	52 607	85 036	74 853	120 995
Cash flow from investing activities
Purchase of property, plant and equipment Proceeds from sale of property, plant and	(1 218)	(2 718)	(1 733)	(3 867)
equipment	7	5	10	7
Purchase of intangible assets	(24)	(130)	(34)	(185)
Received term deposits	9 207	-	13 100	-
Term deposits	(27 850)	-	(39 627)	-
Net cash used in investing activities	(19 878)	(2 843)	(28 284)	(4 045)
Net cash (used in) / generated from financing activities	-	-	-	-
Net (decrease) / increase in cash and cash equivalents	32 729	82 193	46 569	116 950
Cash and cash equivalents at the beginning of the year	25 057	37 573	35 653	53 462
Cash and cash equivalents at the end of the year	57 786	119 766	82 222	170 412

Statement of changes in equity

	Share capital	Share premium	Revaluation reserve	Other reserves	Retained earnings	Total
	LVL'000	LVL'000	LVL'000	LVL'000	LVL'000	LVL'000
31 December, 2010 Income in year 2011,	39 900	14 320	185 754	71 910	27 076	338 960
total	-	-	(17)	-	6 705	6 688
31 March, 2011	39 900	14 320	185 737	71 910	33 781	345 648
31 December, 2011 Income in year 2012,	39 900	14 320	185 105	76 883	29 329	345 537
total	-	-	83 601	-	4 004	87 605
Rounding	-	-	1	-	-	1
31 March, 2012	39 900	14 320	268 707	76 883	33 333	433 143

	Share capital EUR'000	Share premium EUR'000	Revaluation reserve EUR'000	Other reserves EUR'000	Retained earnings EUR'000	Total EUR'000
31 December, 2010 Income in year 2011,	56 773	20 376	264 303	102 319	38 525	482 296
total Rounding	- -	- -	(24) 1	- -	9 540 -	9 516 1
31 March, 2011	56 773	20 376	264 280	102 319	48 065	491 813
31 December, 2011 Income in year 2012,	56 773	20 376	263 381	109 395	41 730	491 655
total Rounding			118 954		5 697 1	124 651 1
31 March, 2012	56 773	20 376	382 335	109 395	47 428	616 307

Notes to the financial statements

		31.03.2012.	31.03.2011.	31.03.2012.	31.03.2011.
		LVL'000	LVL'000	EUR'000	EUR'000
1	INVENTORIES
	Materials and spare parts
	(at net realisable value)	2 973	2 926	4 230	4 163
	Gas and fuel (at cost)	17 171	5 937	24 432	8 448
		20 144	8 863	28 662	12 611
2	REVALUATION RESERVE
	At the beginning of the period Revaluation of property, plant and	185 105	185 754	263 381	264 304
	equipment	98 429	5	140 052	7
	Deferred income tax liability
	arising on the revaluation of
	property, plant and equipment Disposal of revalued property,	(14 761)	-	(21 003)	-
	plant and equipment	(67)	(22)	(95)	(31)
	Rounding	1	-	-	-
	At the end of the period	268 707	185 737	382 335	264 280
3	RETAINED EARNINGS
	At the beginning of the period	29 329	27 076	41 731	38 525
	Disposal of revalued property, plant and equipment	67	22	95	31
	Profit for the period	3 937	6 683	5 602	9 509
	At the end of the period	33 333	33 781	47 428	48 065
4	REVENUE
	Sales per customers' groups are as follows:
	Income from natural gas sales to
	industrial customers	151 106	122 560	215 005	174 387
	Income from natural gas sales to residential customers	20 915	18 172	29 759	25 856
	Income from transmission and
	storage of natural gas	5 858	5 019	8 335	7 141
	Other services	149	67	212	95
		178 028	145 818	253 311	207 479
5	COST OF SALES
	Purchase of natural gas	145 853	117 238	207 530	166 815
	Salaries	2 566	2 602	3 651	3 702
	Social insurance contributions Life, health and pension insurance	585 194	594 197	832 276	845 280
	Materials and spare parts	1 080	835	1 537	1 188
	Depreciation and amortisation	11 676	5 073	16 614	7 218
	Other	1 123	899	1 598	1 279
		163 077	127 438	232 038	181 327

6 ADMINISTRATIVE EXPENSES

	1 800	1 572	2 561	2 237
Other expenses	207	211	295	300
and doubtful debts, net	(27)	(43)	(38)	(61)
Provisions for impairment of bad
Bank charges	23	23	33	33
Depreciation and amortisation	189	129	269	184
Real estate tax	190	164	270	233
Maintenance and utilities	184	214	262	304
Life, health and pension insurance	34	35	48	50
Social insurance contributions	176	146	250	208
Salaries	824	693	1 172	986

7 OTHER INCOME

	1 998	755	2 843	1 074
rates, net	676	-	962	-
Income from increase in exchange
Other income	668	59	951	84
obsolete inventories impairment	17	36	24	51
financing of construction works Provisions for slow moving and	147	143	209	203
Penalties from customers Income from contribution to	490	517	697	736

8 OTHER EXPENSES

- 6 834	398 6 549	75 - 9 724	14 566 9 318
53	10
21	30	30	43
76	28	108	40
6	5	9	7
46	38	65	54
9	14	13	20

6 303 1 550 (38) 12 287	12 090
	(61)
	1 208
	6 132
	7 442
16 991
	166 815
	207 530

9 FINANCE INCOME, NET

Finance income, net	168	45	239	64
Finance expenses - Interest expenses	-	-	-	-
	168	45	239	64
Finance income - Interest income	168	45	239	64