Latvijas Gaze

Quarterly Report • May 28, 2015

"Latvijas Gāze" Joint Stock Company

Unaudited Financial Report of 3 months of 2015

Prepared in accordance with the International Financial Reporting Standards as adopted by the EU

Riga, 2015

Information on the Company 3
Report of the Board of Directors 5
Statement of Director's responsibility 11
Balance sheet 12
Income statement 13
Statement of comprehensive income 13
Statement of cash flows 14
Statement of changes in equity 15
Notes to the financial statements 16

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, 2015

Board members (term of office of the Board – August 16, 2012 to August 16, 2015, for Mario Nullmeier term is January 1, 2014 to December 31, 2016) - 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
Mario Nullmeier – Board member, Vice Chairman of the Board Since 2005 Head of the Baltic Office of E.ON Ruhrgas International AG in Tallinn, Estonia 2000 Master Degree in Global Business Administration		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 Since 1997 Board member of the JSC "Latvijas Gāze"; involved in gas industry since 1984 1984 Polytechnical Institute of Riga, engineer in industrial heat power	Names, surnames and posts of Council members (before January 1, 2014)	Adrians Dāvis – Chairman of the Board Alexander Miheyev (Александр Михеев) – Board member, Vice-Chairman of the Board Jörg Tumat - Board member, Vice-Chairman of the Board Anda Ulpe - Board member Gints Freibergs - Board member

Council members (term of office of the Council - January 1, 2014 to December 31, 2016) – names, surnames, posts, recent professional experience and education

4

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 442.6 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.

1. Operation of the Company in the reporting period

In 3 months of the year 2015, the Company sold to the consumers 422.3 million m³ of natural gas. In comparison with the respective period of 20134 the natural gas sales decreased by 13.6 % due to the differences in outdoor air temperature and investments by heat supply companies in the use of renewable energy resources and a partial replacement of fossil fuels with woodchip.

Over 3 months of 2015, the consumers were sold natural gas and provided services for EUR 158.1 million, which is by 15.4 % less than in the respective period of 2014.

The decrease of income year-on-year stems from the lower natural gas sales volume and fact that during 3 months of 2015, due to changes in oil product quotations and currency rates, the residential and industrial customers were applied differential natural gas sale end-user tariffs corresponding to a natural gas sale price 3.9% below that of the 3 months of 2014. The income saw decrease both in the industrial and household sector.

The Company completed 3 months of 2015 with a profit of EUR 1.5 million, which is 71.1% lower than in the respective period 2014 when the Company profited EUR 5.2 million.

Within the framework of the capital investment programme, EUR 4.7 million of investment funds was spent over 3 months of 2015, mostly on the renovation of gas transmission and distribution pipelines and the reconstruction of wells.

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

The key indices of the Company:

	2015 Q1 EUR'000	2014 Q1 EUR'000	2013 Q1 EUR'000
Net turnover	158 088	186 812	250 479
Profit before income tax, interest payments, depreciation and amortization (EBITDA)	13 442	18 025	19 807
Profit before income tax, interest payments, depreciation and amortization to net turnover
(EBITDA %)	7.20	9.65	7.91
Profit of operational activity	4 975	9 632	11 482
Profitability of operational activity (%)	2.66	5.16	4.58
Profit of reporting period	1 503	5 179	6 092
Commercial profitability (%)	0.80	2.77	2.43
Total liquidity	2.44	1.92	2.42
Total assets	795 234	857 594	799 956
Equity	611 762	613 979	613 387
Return on assets (ROA), %	0.18	0.62	0.76
Return on equity (ROE), %	0.25	0.84	0.99
Number of shares	39 900	39 900	39 900
	EUR	EUR	EUR
Profit per share	0.038	0.130	0.153
P/E	257.50	72.11	58.72
BV	15.33	15.39	15.37
P/BV	0.63	0.61	0.58

2. Research and development

In order to ensure an uninterrupted natural gas supply to users and the safe operation of the gas supply system in the long term, the Company has developed the "Plan of Measures for the Improvement of Safety of the Gas Supply System of the Joint Stock Company "Latvijas Gāze" 2010-2015". It has been prepared based on the conclusions made by the Russian companies "Gazobezopasnostj" and "Lentransgaz", 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 the equipment and modernisation options. The plan of measures envisions investments in the improvement of safety with the total amount of EUR 72 million.

Share price at the end of the period 9.700 9.360 8.964

In 2011 the OAO "Gazprom VNIIGAZ" developed a program for the modernisation of technological equipment and the improvement of operational safety at the Inčukalns UGS until 2025. The concept covers two development scenarios – with and without increasing natural gas storage capacity. The projected costs are EUR 360 million and EUR 190 million respectively. On the basis of this document, the Company drew up a project "Modernisation and Expansion of Inčukalns UGS" and another project jointly with the JSC "Lietuvos Dujos" "Increasing the Capacity of Interconnection between Latvia and Lithuania". Both projects were featured in the

Report of the Board of Directors (continued)

2. Research and development (continued)

first list of projects of common European interest. In 2014, the JSC "Latvijas Gāze" submitted the project of modernisation and expansion of the Inčukalns UGS to the European Commission for funding, but the European Commission has not yet granted any funds. The second list of projects of common European interest is now being compiled, and the Company has repeatedly submitted both projects for inclusion, as stipulated by the Infrastructure Regulation.

3. International cooperation

The year 2014 saw further work on the implementation of projects of common European interest. The European Commission continued the evaluation of projects of Polish-Lithuanian and Finnish-Estonian gas transmission pipeline interconnections and a regional liquefied natural gas terminal in Finland or Estonia.

The first round of submission of projects for co-funding began in May 2014. Within the required timeframe the Company submitted documents on the first stage of the project of modernisation of the Inčukalns UGS. Under the European Commission decision dated November 21, 2014, the project has not been recommended for co-funding, as in the first round the selection was limited to gas projects ensuring the diversification of gas supply sources and the necessary interconnections.

The European Commission has promoted the construction of the Polish-Lithuanian interconnection (GIPL) and a further study on the Finnish-Estonian interconnection for cofunding, whereas the construction of a liquefied natural gas terminal in Finland has not been selected.

The second list of projects of common European interest is currently under preparation, and the Company has repeatedly submitted both projects for inclusion in the list, as stipulated in the Infrastructure Regulation.

4. Shares and shareholders

The composition of shareholders of the Company¹ as of December 31, 2014 and previous 2 periods:

Share	31.12.2014.	31.12.2013.	31.12.2012.
"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 %

¹ Shareholders owning at least 5 % of capital

Report of the Board of Directors (continued)

4. Shares and shareholders

The composition of shareholders of the Company as to the industries they represent as of December 31, 2014:

The number of shares held by the members of the Board and the Council of the Company as of December 31, 2014:

Board members		Number of shares
Chairman of the Board	Adrians Dāvis	417
Vice-Chairman of the Board	Mario Nullmeier	0
Vice-Chairman of the Board	Alexander Miheyev	0
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	Juris Savickis	0
Vice-Chairman of the Council	Achim Saul	0
Council member	Matthias Kohlenbach	0
Council member	Jörg Tumat	0
Council member	Uwe H. Fip	0
Council member	Rainer Link	0
Council member	Vlada Rusakova	0
Council member	Nikolay Dubik	0
Council member	Elena Karpel	0
Council member	Elena Michaylova	0

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. The total number of securities has not changed since 1999.

ISIN	LV0000100899
Exchange code	GZE1R
List	Second list
Nominal value	1.40 EUR
Total number of securities	39 900 000
Number of securities in public trading	25 328 520
Guaranteers of liquidity	None

Report of the Board of Directors (continued)

	2015 Q1	2014 Q1	2013 Q1	2012 Q1	2011 Q1
Share price (EUR):
First	9.140	9.390	8.694	8.388	6.830
Highest	9.970	10.200	9.291	8.964	9.106
Lowest	9.130	8.920	8.580	7.854	6.545
Average	9.351	9.431	8.830	8.410	7.000
Last	9.700	9.360	8.964	8.889	8.755
Change	6.13%	-0.32%	3.11%	5.97%	28.18%
Number of transactions	338	482	400	441	400
Number of shares traded	38 300	46 533	44 392	42 689	117 120
Turnover (million EUR)	0.358	0.439	0.391	0.359	0.82
Capitalization (million
EUR)	387.030	373.464	357.664	354.671	349.325

4. Shares and shareholders

Source: NASDAQ OMX Riga

The capitalization value of the Company in 3 months of 2015 reached EUR 387.0 million by EUR 13.5 million 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 Riga and the 5 th place among companies quoted at Nasdaq Baltic (2014: accordingly 1st and 5th).

The dynamics of the Company share price and indexes.

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

Report of the Board of Directors (continued)

4. Shares and shareholders (continued)

The Company share price and changes of OMX Riga GI and OMX Baltic GI (01.01.2012. - 31.03.2015.)

Indexes/Shares	01.01.2012.	31.03.2015.	Change
OMX Riga	371.16	421.39	+13.53%
OMX Baltic GI	325.54	504.56	+54.99%
GZE1R (EUR)	8.041	9.700	+20.64%

Chairman of the Board A. Dāvis

Board meeting minutes No. 22 (2015) Riga, May 22, 2015

Statement of Director's responsibility

The Board of Directors of the Joint Stock Company "Latvijas Gāze" (hereinafter – the Company) is responsible of the preparation of the interim financial statements of the Company. Interim financial statements of the Company are not audited.

The financial statements on pages 12 to 17 are prepared in accordance with the underlying accounting records and source documents and present fairly the financial position of the Company as of 31 March 2015 and the result of its operations and cash flows for the period ended 31 March 2015.

The financial statements are prepared in accordance with International Financial Reporting Standards on a going concern basis. Appropriate accounting policies have been applied on a consistent basis. The Board of Directors in the preparation of the financial statements has made prudent and reasonable judgements and estimates.

The Board of Directors of JSC "Latvijas Gāze" is responsible for the maintenance of proper accounting records, the safeguarding of the Company's assets and the prevention and detection of fraud and other irregularities in the Company. The Board of Directors is also responsible for operating the Company in compliance with the legislation of the Republic of Latvia.

On behalf of the Board of Directors,

Adrians Dāvis Chairman of the Board

Riga, 22nd May 2015

Balance sheet

	Note	31.03.2015. EUR'000	31.03.2014. EUR'000
ASSETS
Non-current assets
Property, plant and equipment		558 141	562 046
Intangible assets		1 998	2 527
Trade receivables		8	9
Total non-current assets		560 147	564 582
Current assets
Inventories	1	8 437	127 119
Trade receivables		36 083	37 366
Current income tax receivable		2 273	3 588
Other current assets		93 763	62 363
Cash and cash equivalents		94 531	62 576
Total current assets		235 087	293 012
TOTAL ASSETS		795 234	857 594
EQUITY AND LIABILITIES
Equity
Share capital		55 860	56 773
Share premium		20 376	20 376
Revaluation reserve		376 366	378 126
Post-employment benefits and other employee benefits revaluation reserve		(80)	-
Other reserves		115 676	113 887
Retained earnings		43 564	44 817
Total equity		611 762	613 979
Liabilities
Non-current liabilities
Deferred income tax liabilities Accruals for post employment benefits		54 645	56 447
and other employee benefits		4 486	6 034
Deferred income		28 146	28 594
Total non-current liabilities		87 277	91 075
Current liabilities
Trade payables		35 118	92 219
Corporate income tax payable		3 487	4 502
Deferred income		1 190	1 165
Other current liabilities		56 400	54 654
Total current liabilities		96 195	152 540
Total liabilities TOTAL EQUITY AND		183 472	243 615
LIABILITIES		795 234	857 594

Income statement

		31.03.2015.	31.03.2014.
	Note	EUR'000	EUR'000
Revenue	2	158 088	186 812
Cost of sales	3	(141 641)	(166 069)
Gross profit		16 447	20 743
Administrative expenses	4	(2 148)	(2 346)
Other income	5	1 075	1 406
Other expenses	6	(10 399)	(10 171)
Operating profit		4 975	9 632
Finance income	7	15	49
Profit before income tax		4 990	9 681
Income tax expense		(3 487)	(4 502)
Profit for the period		1 503	5 179

Statement of comprehensive income

Other comprehensive income

Tax sections, net Revaluation of property, plant and equipment - gross	78	81
Other comprehensive income for the period, net of tax	78	81
Profit for the period	1 503	5 179
Total comprehensive income for the period	1 581	5 260

Statement of cash flows

	31.03.2015. EUR'000	31.03.2014. EUR'000
Cash flow from operating activities
Cash generated from operations	106 246	56 583
Interest received	29	64
Income tax paid	(1 804)	(1 900)
Net cash generated from operating activities	104 471	54 747
Cash flow from investing activities
Purchase of property, plant and equipment	(4 631)	(3 981)
Purchase of intangible assets	(50)	(60)
Proceeds from sale of property, plant and equipment	17	16
Term deposits	(56 400)	(21 700)
Net cash used in investing activities	(61 064)	(25 725)
Net cash (used in) / generated from financing activities	-	-
Net (decrease) / increase in cash and cash equivalents	43 407	29 022
Cash and cash equivalents at the beginning of the year	51 124	33 554
Cash and cash equivalents at the end of the year	94 531	62 576

Statement of changes in equity

	Share capital	Share premium	Revaluation reserve	Employee benefits revaluation reserve	Other reserves	Retained earnings	Total
	EUR'000	EUR'000	EUR'000	EUR'000	EUR'000	EUR'000	EUR'000
31 December, 2013 Income in year	56 773	20 376	378 103	-	113 887	39 582	608 721
2014, total	-	-	24	-	-	5 236	5 260
Rounding	-	-	(1)	-	-	(1)	(2)
31 March, 2014	56 773	20 376	378 126	-	113 887	44 817	613 979
31 December, 2014 Income in year 2015, total Rounding	55 860 - -	20 376 - -	376 348 19 (1)	(80) - -	115 676 -	42 002 1 562 -	610 182 1 581 (1)
31 March, 2015	55 860	20 376	376 366	(80)	115 676	43 564	611 762

Notes to the financial statements

		31.03.2015.	31.03.2014.
		EUR'000	EUR'000
1	INVENTORIES
	Materials and spare parts
	(at net realisable value)	5 960	6 887
	Gas and fuel (at cost)	2 477	120 232
		8 437	127 119
2	REVENUE
	Income from natural gas sales to industrial
	customers	129 071	154 399
	Income from natural gas sales to residential
	customers	23 270	25 590
	Income from transmission and storage of
	natural gas	5 561	6 624
	Other services	186	199
		158 088	186 812
3	COST OF SALES
	Purchase of natural gas	126 869	150 307
	Salaries	3 355	3 933
	Social insurance contributions	785	909
	Life, health and pension insurance	257	262
	Materials and spare parts Depreciation and amortisation	894 8 265	1 096 8 154
	Other	1 216	1 408
		141 641	166 069
4	ADMINISTRATIVE EXPENSES
	Salaries	867	1 047
	Social insurance contributions	186	227
	Life, health and pension insurance	44	49
	Maintenance and utilities	240	248
	Real estate tax	353	274
	Depreciation and amortisation	177	212
	Bank charges	26	28
	Provisions for impairment of bad
	and doubtful debts, net	(90)	(42)
	Other expenses	345	303
		2 148	2 346
5	OTHER INCOME Penalties from customers	626	772
	Income from contribution to financing of
	construction works	230	222
	Provisions for slow moving and obsolete
	inventories impairment	5	4
	Other income	214	407
	Income from increase in exchange rates, net	-	1
		1 075	1 406

6 OTHER EXPENSES

	10 399	10 171
Other expense	10 252	10 044
Expense from increase in exchange rates, net	2	-
Loss from sale of fixed assets	51	27
Sponsorship	6	1
Depreciation and amortisation	25	26
Social insurance contributions	6	8
Salaries	42	52
Materials	15	13

EXPENSES BY NATURE

12 491 12 333
(90)	(42)
909	1 109
5 542	6 487
8 467	8 392
126 869
	150 307

7 FINANCE INCOME, NET

Finance income
- Interest income	15	49