LATVIJAS GÂZE. Riga, June Alexander Krasnenkov JSC Latvijas Gâze Supervisory Board chairman

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2 SUPERVISORY BOARD REPORT In 2002 JSC Latvijas Gâze operated successfully continuing to increase its market share and attracting new clients; also the best ever recorded financial indices attest to that. Although the prices of heavy fuel oil and natural gas increased constantly in the world markets, the Company succeeded to ensure the growth of profit maintaining the natural gas tariffs on the level of previous years. The Company's net profit amounted to LVL 12,2 mio in the year The stable development rate of Latvian economy, which in 2002 reached one of the highest development rates in Europe the gross domestic product growth of 6,1 %, undeniably influenced the improvement of JSC Latvijas Gâze financial position. In 2002 work was continued to increase the share of natural gas in the energy market and to attract new clients. Altogether 205,06 km of gas transmission and distribution pipelines have been built and preliminary contracts have been concluded for the delivery of more than 273 million m³ of natural gas. Anticipating still higher consumption of natural gas in Latvia and in the neighbouring countries Russia and Estonia the active natural gas volume injected into Inèukalns underground gas storage facility has reached 2,188 billion m³. In the year 2002 the Supervisory Board has received from the Board of Directors regular reports about the most important events in the Company's operations and its development trends. The Supervisory Board has monitored the Board of Directors' activities constantly and followed that the Company's business is carried out in compliance with law, the Company's Charter and the resolutions of the General Meeting; it has reviewed and accepted the budget submitted by the Board of Directors and recommended the General Meeting to approve it, as well as expressed proposals for the improvement of the Board of Directors' activities. The following issues have been the most essential of those considered in the Supervisory Board meetings in 2002: - modernisation and enlargement of Inèukalns UGS facility; - contractual provisions for long-term gas deliveries (till the year 2015); - increase of the natural gas tariffs for its users due to the rapid growth of purchase prices; - cessation of natural gas price regulation for industrial consumers, maintaining it regulation for households only; - sale of long-term investments and capital stakes not connected with the basic activity - issues of the Company's further development strategy aimed at the improvement of its efficiency and competitiveness in the fuel market of Latvia. International auditing firm LLC Pricewaterhouse- Coopers and sworn auditor Juris Lapðe have carried out the audit of JSC Latvijas Gâze consolidated annual accounts for the year ended on 31 December 2002 drawn up in accordance with the Republic of Latvia Law on Consolidated Annual Accounts of Enterprises and of JSC Latvijas Gâze group's financial statements for the year ended on 31 December 2002 drawn up in accordance with the international standards for financial statements. It is acknowledged in the auditor's reports that the aforementioned annual accounts give a true and clear picture of JSC Latvijas Gâze financial standing as of 31 December 2002, its operational results and cash flows in The auditor's reports have been submitted to the Supervisory Board for review, and it has taken them into consideration. The Supervisory Board has recommended the General Meeting of Shareholders to approve JSC Latvijas Gâze annual accounts for the year ended on 31 December 2002 and JSC Latvijas Gâze consolidated annual accounts for the year ended on 31 December The Supervisory Board has acquainted with the draft of profit distribution elaborated by JSC Latvijas Gâze Board of Directors, assents to that and recommends the Company's General Meeting to approve it. On 12 July 2002 the Supervisory Board vice-chairman Vasily Fadeyev ceased activities in JSC Latvijas Gâze Supervisory Board and Alexander Krasnenkov and Kiril Seleznev were elected the new members of the Supervisory Board. Alexander Krasnenkov was elected the Supervisory Board chairman and Fritz Gautier and Juris Savickis were elected his deputies. The Supervisory Board wishes to express sincere gratitude to Vasily Fadeyev for his long and productive service in the Company's Supervisory Board, particularly noting his contribution while performing the duties of the Supervisory Board chairman. The Supervisory Board wishes to express its sincere gratitude to JSC Latvijas Gâze Board of Directors and employees for their successful activities in 2002 that, in spite of the unfavourable trends in the world energy market, ensured the growth of natural gas consumption and the increase of its share in the fuel market as well as further improvement of financial indices. Riga, June 2003 Alexander Krasnenkov JSC Latvijas Gâze Supervisory Board chairman

3 SUPERVISORY BOARD JSC SUPERVISORY BOARD First row from left: Supervisory Board members Kiril Seleznev, Igor Nazarov, Stefan F.Seipl, Yelena Karpel, vice-chairman Juris Savickis, Supervisory Board member Rainer Lehmann. Second row from left: vice-chairman Fritz Gautier, Supervisory Board member Eike Benke, chairman Alexander Krasnenkov, member Matthias Keuchel. Supervisory Board member Vlada Rusakova is not present

4 SUPERVISORY BOARD Pursuant to the Company's Charter the JSC Latvijas Gâze Supervisory Board consists of 11 persons elected by the JSC Latvijas Gâze General Meeting of shareholders for the term of three years. As the state representative Mâris Gailis stepped down from the position of the Supervisory Board chairman on 20 June 2001 and the Privatisation Agency did not nominate a new representative to the Company's Supervisory Board, the JSC Latvijas Gâze Supervisory Board has been working in the composition of 10 members. SINCE 20 JUNE 2001 THE JSC SUPERVISORY BOARD HAS BEEN WORKING IN THE FOLLOWING COMPOSITION: Supervisory Board vice-chairmen: Vasily Fadeyev _ represents the JSC Gazprom stake in the Company; Fritz Gautier _ represents the JSC Ruhrgas Energie Beteiligungs stake in the Company; Supervisory Board members: Matthias Keuchel _ represents the JSC Ruhrgas Energie Beteiligungs stake in the Company; * Eike Benke _ represents the JSC Ruhrgas Energie Beteiligungs stake in the Company; Yelena Karpel _ represents the JSC Gazprom stake in the Company; Vlada Rusakova _ represents the JSC Gazprom stake in the Company; Rainer Lehmann _ represents the JSC E.ON Energie stake in the Company; Stefan F.Seipl _ represents the JSC E.ON Energie stake in the Company; Juris Savickis _ represents the LLC Itera-Latvija stake in the Company; Igor Nazarov _ represents the LLC Itera-Latvija stake in the Company. * Matthias Keuchel is representing the JSC Ruhrgas Energie Beteiligungs stake in the Company since 1 August During the General Meeting of 12 July 2002 the JSC Latvijas Gâze Supervisory Board was reelected, because the JSC Gazprom representative Vasily Fadeyev stepped down. The JSC Gazprom representative Kiril Seleznev was elected to the Company's Supervisory Board instead of Fadeyev. As the former Supervisory Board chairman Mâris Gailis ceased activities in the Company's Supervisory Board, LLC Itera-Latvija nominated its representative to the Company's Supervisory Board electing the JSC Gazprom representative Alexander Krasnenkov. AS OF 12 JULY 2002 THE JSC SUPERVISORY BOARD IS WORKING IN FOLLOWING COMPOSITION: Supervisory Board chairman: Alexander Krasnenkov _ represents the LLC Itera-Latvija stake in the Company; Supervisory Board vice-chairmen: Juris Savickis _ represents the LLC Itera-Latvija stake in the Company; Fritz Gautier _ represents the JSC Ruhrgas Energie Beteiligungs stake in the Company; Supervisory Board members: Matthias Keuchel _ represents the JSC Ruhrgas Energie Beteiligungs stake in the Company; Eike Benke _ represents the JSC Ruhrgas Energie Beteiligungs stake in the Company; Yelena Karpel _ represents the JSC Gazprom stake in the Company; Vlada Rusakova _ represents the JSC Gazprom stake in the Company; Rainer Lehmann _ represents the JSC E.ON Energie stake in the Company; Stefan F.Seipl _ represents the JSC E.ON Energie stake in the Company; Kiril Seleznev _ represents the JSC Gazprom stake in the Company; Igor Nazarov _ represents the LLC Itera-Latvija stake in the Company

5 BOARD OF DIRECTORS Pursuant to the Company's Charter the JSC Latvijas Gâze Board of Directors consists of six persons, which the JSC Latvijas Gâze shareholders elect for the term of three years. Frank Siebert JSC BOARD OF DIRECTORS' COMPOSITION SINCE 15 AUGUST 2000: Board of Directors chairman _ Adrians Dâvis. Board of Directors vice-chairmen _ Frank Siebert; Alexander Mikheyev. Board of Directors members _ Anda Ulpe; Gints Freibergs; Jânis Kalvâns (till ); Uldis Auniòð (since ). Alexander Mikheyev Anda Ulpe Gints Freibergs Jânis Kalvâns Adrians Dâvis Uldis Auniòð

6 Description of SHAREHOLDERS In 2002 changes in the JSC Latvijas Gâze shareholders' stakes took part only among the Company's owners, with the state continuing the sales of the JSC Latvijas Gâze shares owned by it. On 1 January 2002 the JSC Latvijas Gâze paid-up share capital was LVL 39,9 million and the Company's shareholders were the Republic of Latvia (3%), JSC Ruhrgas Energie Beteiligungs (27,11%), JSC Gazprom (25%), LLC Itera-Latvija (25%), JSC E.On. Energie (18,04%), as well as the other owners of shares sold in public offer (1,84%). 3% of the JSC Latvijas Gâze state-owned shares has been sold in the auction organised by Riga Stock Exchange in After this auction the state's stake in JSC Latvijas Gâze reduced down to 0,0003%. JSC SHAREHOLDER STRUCTURE AS OF 31 DECEMBER 2002: (Share capital LVL 39,9 million) Others 3,02% Board of Directors 0,01% JSC "E.ON Energie" 18,79% JSC "Ruhrgas Energie Beteiligungs" 28,18% JSC "Gazprom" 25% LLC "Itera-Latvija" 25% Clients of JSC "Latvijas Gâze": "Grindeks", "Farmaceitiskâ fabrika", "Kalceks", State Medicine Agency etc

7 Description of SHARES The JSC Latvijas Gâze share capital consists of 39,9 million shares with the face value LVL 1,00, of which are ordinary registered shares with voting rights and ordinary shares of the Company's Board of Directors reserve without voting rights. On 1 January 2002 there were shares in public circulation and this amount remained unchanged till the end of the reporting period. The public shares of JSC Latvijas Gâze are being quoted in the Official List of Riga Stock Exchange since 15 February In 2002 the total turnover of the Company's shares in Riga Stock Exchange amounted to LVL or 28,34% of the total net turnover of Riga Stock Exchange. In 2002 the maximum price per JSC Latvijas Gâze share was LVL 6,79 but the minimum price LVL 4,80. The Company's shares are included in the calculation of the price index RICI (Riga Stock Exchange price index) and the capitalisation index DJRSE (Dow Jones Riga Stock Exchange index). On 31 December 2002 JSC Latvijas Gâze was the number one among companies quoted in Latvia and the number three in the Baltic Stock Exchange with its share market capitalisation value reaching LVL (EUR ). It was LVL (EUR ) in the end of the previous reporting period. With the privatisation of JSC Latvijas Gâze continuing, a large-scale auction of shares took place in 2002, which was arranged by Riga Stock Exchange. The public offer of the state-owned 3% or of the JSC Latvijas Gâze shares for privatisation vouchers was started on 20 December The selling price per share was determined in auction, but the auction starting price was LVL 7,00. According to the Cabinet resolution, each participant was allowed to buy not more than 200 JSC Latvijas Gâze shares in the public offer. The public offer validity term was set from 20 December 2001 till 1 February On 14 March 2002 state JSC Privatizâcijas Aìentûra approved the number of the JSC Latvijas Gâze shares sold in public offer shares and the determined market price per share _ LVL 10,85. The state of Latvia retained the ownership of 117 shares. This auction completed the privatisation of JSC Latvijas Gâze, as the result of which the Company gained LVL 28,9 million, the state of Latvia _ LVL 57,3 million and population realised 6,9 million vouchers with the face value LVL 193 million. The Company's Supervisory Board approved the draft of the year 2002 profit distribution on 27 May 2003, providing to pay in dividends 65,5% of the profit (LVL 7,980 million) or LVL 0,20 per share. JSC SHARE MARKET STATISTICS Maximum market price of shares (LVL) 1,95 3,65 11,12 6,79 Minimum market price of shares (LVL) 0,99 1,80 3,54 4,80 Turnover (LVL) Turnover (shares) Capitalisation (LVL) % of total RSE turnover 16,19% 57,75% 59,89% 28,34% % of total RSE capitalisation 29,40% 41,47% 60,77% 52,08% 0,20 0,15 DIVIDEND PER SHARE (LVL) 0,17 0,20 0,10 0,12 0,13 0,05 0,

8 Description of FIELDS OF ACTIVITY The principal objective of Latvijas Gâze group is to ensure stable and reliable natural and liquefied petroleum gas deliveries and sales in Latvia by modernising and developing gas supply systems and related services. THE COMPANY'S BASIC ACTIVITY AREAS: natural gas procurement, storage, transportation of all kinds, distribution and sales; liquefied petroleum gas procurement, storage, transportation of all kinds, distribution and sales; exports and imports of natural and liquefied petroleum gas; natural gas transportation, processing, storage, distribution; installation, adjustment and operation of quantity and quality control equipment and instruments. Clients of JSC "Latvijas Gâze": "Vârpa", "Hanzas maiznîca", "Latgales maiznîca", "Vidzemes maiznîca", "Rîgas dzirnavnieks", "Þ.Lagzdiòa maizes fabrika", "Daugavpils maiznieks", "Cepçjs", "Valmieras cepçjs", "Jelgavas maiznieks", "Zelta Vârpa", "Fazer maiznîca Druva", "Saldus maiznîca", "Saldus maiznieks" etc

9 Description of DESCRIPTION OF LATVIAN ENERGY MARKET Both imported fuels, as natural gas, liquefied petroleum gas, petroleum products and coal, and local fuels, as wood and peat, are used to provide Latvian industries, commercial consumers and households with heat energy. As the fuel for electricity generation, in its turn, mainly natural gas, as well as heavy fuel oil and peat are used. In 2002 the country's total energy consumption remained on the level of the previous year. Natural gas retained the biggest share in the energy market with its share having grown for 0,7% compared to the previous year and amounting to 31,5% but the share of the ecologically harmful fuels like heavy fuel oil, coal and gasoline decreased for 1% in total. Wood and peat retain invariably a rather big share _ 29,1%. In spite of the steep rise of the heavy fuel oil prices in the world, no sharp drop of heavy fuel oil consumption has been observed in That is to be explained by the complicated development of gas supply infrastructure, which did not facilitate wider use of natural gas as the closest alternative for heavy fuel oil. However, demand for natural gas remained high, because the tariffs of natural gas have changed little over the last six years and therefore natural gas is one of the cheapest fuels. In the energy markets of the developed countries the big proportions of natural gas are facilitated not only by its comparatively low cost but by environmental considerations as well, which are incorporated also in the energy consumption directives and norms of European and European Union countries. During the last few years, and particularly in 2002, the natural gas supply infrastructure has been expanded considerably and designs have been elaborated for gas supply construction to Smiltene and Rçzekne, the second biggest town in Latgale region. The growth of the natural gas share depends on the attraction of new consumers but the total energy consumption is determined also by the country's economic development, for example, increase of fuel consumption for production, construction of new buildings, infrastructure development, improvement of the society's standard of living and other conditions. In 2002 the GDP growth of Latvia was one of the highest in Europe _ 6,1%. With the country's stable economic growth continuing, it is anticipated that the total energy consumption will grow steadily over the coming years and the natural gas consumption in Latvia could reach 2 billion m³ in the next few years. In Latvia natural gas is replacing gradually environmentally adverse fuels, for example, heavy fuel oil and coal. Stable growth of natural gas consumption for household needs _ heating of private houses _ is expected. Utilising Inèukalns underground gas storage facility it is possible to provide consumers with an environmentally friendly fuel in any season at any volumes and, taking into account the reserves of Inèukalns underground gas storage facility, it is fully possible to ensure natural gas supplies to the production sector in case of its rapid development. Power generation accounts for the bulk of natural gas consumption _ 60% of the total natural gas volume consumed in Latvia (which is on the level of the last year), but industry accounts for 23% of its consumption and household needs for 6,3%. Most of natural gas has been consumed in Riga and Riga district (59% of the total volume), in Latgale _ in Daugavpils and Preiïi district (7%), in Kurzeme _ in Liepâja and Liepâja district (17%), in Zemgale _ in Jelgava and Bauska district (7%) and in Vidzeme (excluding Riga and Riga district) the highest consumption has been in Cçsis (4%). In 2002 a lively discussion was going on about the natural gas market liberalisation, as well as legal prerequisites have been elaborated for the natural gas market liberalisation. The Public Utilities Commission, in cooperation with JSC Latvijas Gâze, started the elaboration of a new methodology for setting natural gas tariffs. Market liberalisation concerns not only the natural gas market but the electricity market as well, and basically these processes shall be regarded in the context of European Union. The European Union norms regarding the formation of the reserves of petroleum products are being implemented in Latvia. In 2002 the Ministry of Economy of the Republic of Latvia has started the elaboration of a new National Energy Program of Latvia. ENERGY CONSUMPTION IN LATVIA IN 2002 (Source: Central Statistical Bureau) Wood, peat, firewood 29,1% Electricity 9,1% Natural gas 31,5% Liquefied petroleum gas 1,1% Diesel 13,0% Gasoline 8,0% Other petroleum products 3,4% Heavy fuel oil 3,3% Coal 1,5%

10 Description of PERFORMANCE In 2002 JSC Latvijas Gâze sold to its clients 1569,8 million m3 of natural gas. 54,4% of the total natural gas sales volume was sold to the four large consumers _ state JSC Latvenergo, JSC Rîgas Siltums, JSC Liepâjas metalurgs and JSC Daugavpils siltumtîkli. However, the financial dependence on these consumers is decreasing gradually with the attraction of new clients. In 2002 all consumers connected to gas supply since 1997 taken together consumed 371,7 million m³ of natural gas or 23,7% of the total volume, but the average natural gas consumption of consumers connected to gas supply in 2002 reached 25,4 million m³ per year. According to the operative information of the Republic of Latvia Central Statistical Bureau, in 2002 the share of natural gas reached 31,5% in the energy consumption balance of Latvia, besides that, the sales of natural gas have grown for 2,0% compared to The growth of the natural gas sales volume was ensured by gas supply to new sites and the unexpectedly low ambient temperature in the fourth quarter of Total revenues from natural gas and liquefied petroleum gas sales, as well as other basic activity services, amounted to LVL 106,2 million in 2002, but expenses (without administration expenses) amounted to LVL 86,6 million and the basic activity gross profit was LVL 19,6 million. In comparison with the year 2001 the JSC Latvijas Gâze net profit grew for 16% or LVL 1,7 million and reached LVL 12,2 million. In 2002 the net profitability was 11,5% and the return on equity _ 13,1 %. The over-performance of the profit plan was ensured by the increase of the natural gas sales volume, interest income from deposits and the decrease of natural gas purchase costs due to the changes of currency exchange rate. In 2002 the JSC Latvijas Gâze daughter company LLC Latvijas propâna gâze sold gas and rendered services to consumers for the total amount of LVL 6,7 million, and this company ended the year with the profit of LVL 6,1 thousand. Altogether 23,04 thousand tons of liquefied petroleum gas was sold. Sanatorium Rîgas lîcis, which operated with losses during the last years and was sold in a public auction in 2001, ceased economic activities as of 1 January In accordance with the JSC Latvijas Gâze Supervisory Board resolution the shares of JSC Brocçni, which were acquired in 1997 by debt capitalisation, also were sold in the summer of 2002, but on 22 November 2002 the JSC Latvijas Gâze Supervisory Board charged the Board of Directors with arranging the sale of all the LLC Latvijas propâna gâze shares in a closed auction. By selling LLC Latvijas propâna gâze JSC Latvijas Gâze will have turned completely to its basic activity _ the natural gas market. VOLUMES OF NATURAL GAS SOLD TO CONSUMERS (billion cubic metres) NET PROFIT (million LVL) ,6 1192,2 1315,3 1538,5 1569, ,4 7,7 8,2* 10,5* 12,2* * JSC "Latvijas Gâze" concern VOLUMES OF LIQUEFIED PETROLEUM GAS SOLD TO CONSUMERS (thousand tons) NET TURNOVER (million LVL) ,9 27,9 27,6 23,1 23, ,3 83,1 91,9* 105,7* 106,2* * JSC "Latvijas Gâze" concern

11 Description of INVESTMENT, GAS SUPPLY DEVELOPMENT, MODERNISATION In 2002 JSC Latvijas Gâze continued actively the implementation of the investment program for the natural gas system expansion and new consumer connection to gas supply. Important investment has been made in modernisation of the gas supply infrastructure, so as to continue the creation of such a reliable gas supply system in Latvia, the safety of which would fully comply with European standards. Total investment in the gas supply system amounted to LVL 11,48 million in During the year 2002 JSC Latvijas Gâze has concluded natural gas delivery contracts with 142 industrial and commercial users, as well as 1612 individual users. 205,06 km of gas transmission and distribution pipelines have been built to provide these users with natural gas _ that is for 96 km more than in the previous year and 189,8% of the planned construction volume. Total investment for such a large-scale gas pipeline construction amounted to LVL 5,58 million, of this amount LVL 3,31 million was spent on gas supply connection to individual living houses. The most important new clients attraction project in 2002 was gas supply connection in Olaine town. In order to connect to gas supply more than 5000 flats, as well as several considerable industrial and utility consumers in Olaine, there were 15 km of gas pipelines constructed but the total investment amounted to LVL 834 thousand. Gas supply was connected also to Skrunda and several dwelling areas in Riga, Riga district, as well as in Daugavpils. The length of gas pipelines constructed in Skrunda was 3,4 km and the investment amounted to LVL 77 thousand, but in Bieriòi dwelling area in Riga 20,57 km of gas pipeline was constructed investing LVL 537 thousand. During the year 2002 more than 3500 flats, which used centralised liquefied petroleum gas supply previously, were connected to the natural gas supply system. Also, last year 142 preliminary contracts have been concluded with new industrial and utility consumers with the total consumption 273,8 million m³, but the average annual consumption of these consumers' is 19 to 21,1 million m³. LVL 2,57 million was used for process equipment modernisation in gas regulation installations and 99 cabinet-type gas regulation installations have been modernised in compliance with the requirements of European standards for LVL 0,57 million, as well as 147 house regulators have been replaced. For the modernisation of six gas regulation stations, in their turn, LVL 1,08 million has been spent. Thus altogether 68% of cabinet-type gas regulation installations and gas regulation installations, as well as 56% of gas regulation stations have been modernised as of 1 January In order to improve customer service the Company has established modern service centres in Riga and Jûrmala. Proceeding with modernisation of the accounting system work was continued implementing the management information system Oracle Applications, the implementation of the household clients accounting system PUNS-2 has been completed in the whole territory of Latvia, as well as implementation of the customer relationship management and the gas supply development process management system LOGS was started. Connection of gas supply to towns and districts is as important for JSC Latvijas Gâze as it is for the society in general, because, compared to such fuels as coal, heavy fuel oil and other petroleum products, industrial and utility consumers receive both cheaper and more environment friendly fuel natural gas and therefore also a better and greener environment for everyone. JSC "" INVESTMENT (million LVL) ,66 4,12 4,72* 6,91* 11,48* * JSC "Latvijas Gâze" concern

12 Description of INÈUKALNS UNDERGROUND GAS STORAGE Besides being a very important facility of JSC Latvijas Gâze, Inèukalns underground gas storage is of essential importance for the whole country as well _ an enormous volume of natural gas is stored in the facility. During the heating season, when the consumption of natural gas increases four to five times compared to the summertime, consumers in Latvia, Estonia and the western regions of Russia receive fuel directly from Inèukalns underground gas storage facility. Inèukalns underground gas storage facility is one of the largest aquifer gas storage facilities in Europe. In the end of the year 2002 natural gas injection season, the active volume of natural gas in the facility amounted to 2,188 billion m³, but its total volume with cushion gas reached 4,334 billion m³. The facility performs several strategic functions. As the natural gas consumption is high during the heating season, it is impossible to deliver a sufficient amount of fuel via gas transmission mains, which extend over 3500 km and run up to the natural gas fields in the North of Russia. During the heating season natural gas is being distributed to consumers along the entire long delivery route in Russia. Therefore in summertime, when the consumption of natural gas is much lower, gas transmission mains are used to fill Inèukalns underground gas depository, so that natural gas could start its way back to consumers in Latvia, Estonia and Russia during the heating season. For Latvia this is an invaluable advantage. Latvia is the only country in the world, which is able to provide for its natural gas supplies even though natural gas is not produced in its territory. The total potential volume of the facility is 6 to 7 billion m³ of active and cushion gas. In 2002 JSC Latvijas Gâze continued to work hard on the modernisation of Inèukalns underground gas storage facility. Therefore in early 2003 there has been concluded a contract with the USA company Solar Turbines about the manufacturing and delivery of a spare gas compressor. The spare compressor will enhance the security of gas supply and ensure uninterrupted operations of Inèukalns underground gas storage facility all through the season. The total project cost is USD 7,6 million, but it is planned to tie in the compressor to the gas supply system in the third quarter of Installation of this compressor is one of the stages of the investment program of Inèukalns underground gas storage facility, which provides for investment amounting to more than LVL 26 million by In 2002 digital processing and interpretation of the geophysical data of bore wells was continued, which was started in 1999 in cooperation with the State Geology Service. As the result of the work relevant and up-to-date information will be obtained about the geological properties of the rocks of the storage collector layer. The project was launched in 1999 in cooperation with the University of Latvia, JSC Latvijas Gâze shareholder German company Ruhrgas Energie Beteiligungs AG and the experts of Danish company Dong. Although the process equipment of Inèukalns underground gas storage has been constructed more than 30 years ago, the facility functions flawlessly still. This has been achieved by continuous investment in the facility modernisation _ the total investment has exceeded 18 million USD since Yet JSC Latvijas Gâze, recognising the strategic importance of the facility for energy supply, has planned to continue the modernisation in order to improve the facility's safety and reliability even more in the future

13 Description of PERSONNEL In the end of 2002 the JSC Latvijas Gâze concern employed people. The average number of employees in 2002 was people, of which 72,7% were employed in the natural gas supply system and 27,3 % _ in the liquefied petroleum gas system. JSC "" GROUP PERSONNEL EDUCATION CHARACTERISTICS 25% 9% 30% Secondary professional 36% Taking into account the age structure of JSC Latvijas Gâze personnel, also in 2002 great attention was paid to the improvement of the employees' education and qualifications. During the study year 2002/2003 the Company has paid for academic education studies of 37 employees, setting as the priority the studies of engineering sciences at Riga Technical University and I.M.Gubkin Russian State University of Oil and Gas. 36% Secondary Higher Primary 30% 25% 9% 655 employees have improved their qualifications in one or several training programs of the Company's Training Centre and 457 employees have participated in seminars, which JSC Latvijas Gâze arranged in cooperation with foreign companies. CHARACTERISTICS OF THE JSC "" GROUP PERSONNEL AGE During the reporting period significant work has been done in the area of the personnel's social and labour protection. The average monthly salary in the JSC Latvijas Gâze concern was LVL 317, i.e. for 10% more than in The health and life insurance of all JSC Latvijas Gâze employees has been continued during the reporting year, as well as work has been started to assess the working environment risks. In August 2002 the Company's employees with their families and the now retired former employees celebrated the 140 years anniversary of the Latvian gas industry together. There have been also other sports, culture and festive events. 32% 8% 10% 31% 19% years years years Under 30 years 61 and more 32% 31% 19% 10% 8% JSC "" GROUP AVERAGE NUMBER OF EMPLOYEES JSC "" GROUP PERSONNEL'S LENGTH OF SERVICE 14% 6% 0-10 years 54% JSC "" GROUP AVERAGE SALARY (LVL per month) 54% years 26% % years years 14% 6%

14 Description of INTERNATIONAL COOPERATION In the year 2002 JSC Latvijas Gâze cooperated with European energy organisations and gas companies actively. The specialists of JSC Latvijas Gâze shareholders Gazprom, Ruhrgas Energie Beteiligungs and E.ON. Energie participated in one of the most important projects of the last year _ modernisation and development of Inèukalns underground gas storage facility. The technical concept of the modernisation and enlargement of Inèukalns under-ground gas storage facility has been elaborated under the leadership of the workgroup created within the limits of this project, the specification of its economic concept is being continued also this year. Prepared recommendations, after their evaluation by the JSC Latvijas Gâze Supervisory Board, will determine the Company's strategy regarding the further development and use of Inèukalns underground gas storage facility. In 2002 year the Company's representatives continued their activities elaborating the Latvian position in the context of European Union Nordic Dimension and participated in the Nordic Dimension workgroup activities. The project of the Latvian underground gas storage potential development and its integration in the European and Russian gas networks has been recognised as one of the priority projects of Latvia. Energy Sector Restructuring Project for the Republic of Latvia continued in 2002, which was financed from the funds of the European Union PHARE program. It envisaged the study of the gas sector and elaboration of proposals for its further development. The project was carried out by an international consortium lead by Electrowatt-Ekono and involving local experts, including JSC Latvijas Gâze employees. Proposals for the natural gas market development were elaborated taking into account the Latvian position in negotiations with the European Commission regarding the issues of the gas market liberalisation. Main proposals were: - to postpone the gas market liberalisation; - to observe the terms of licences issued to JSC Latvijas Gâze and of contracts concluded with the Company's shareholders. JSC Latvijas Gâze experts took part both in information preparation for the project interim report and the final report and several seminars, which were held during the project implementation. In April 2002 JSC Latvijas Gâze gathered in Riga the representatives of the Baltic Sea Region gas company association Baltic Gas, in order to discuss energy industry issues topical in the Baltic Sea Region. As the General Assembly participants noted in its course, Latvia has prospects in the common gas market of the Baltic Sea countries and the European Union as a gas consumer, an energy resources transit country and a gas depositary. The gas industry infrastructure and ecological situation could be improved in the region by joint efforts of the Baltic Sea countries, because Latvia has unique prospects in the common European and the regional gas market _ the potential storage sites are able to store up to 50 billion cubic metres of gas, which would fully provide for stable gas deliveries to the North European countries. Last year in October JSC Latvijas Gâze became the member of GTE ( Gas Transmission Europe ). Participation in this organisation will give to JSC Latvijas Gâze experience regarding the gas market liberalisation issues, as well as enable the Company to address more successfully the problems of cooperation with the Public Utilities Commission and obtain more information about possibilities of cooperation with the European Commission. JSC Latvijas Gâze is a member of several other international organisations, too, for example, International Gas Union, DVGW (Deutsches Verein des Gas und Wasserfaches), Gas Centre at the United Nations Economic Commission for Europe, World Energy Congress, Nordic Gas Association, etc. Cooperation with these organisations continued in 2002, and the employees of JSC Latvijas Gâze took part in activities organised by these organisations: workgroup meetings, workshops, conferences. The senior officials and experts of JSC Latvijas Gâze also made presentations in several conferences and informed their participants about the Company's activities and projects, as well as visited several foreign gas companies, got acquainted with their experience regarding natural gas price and tariff policy issues, management and accounting of gas flows, energy legislation and other issues

15 Description of GAS AND SOCIETY Being one of the largest enterprises in Latvia, JSC Latvijas Gâze made significant contribution to the development of Latvian culture, education and sports also in By supporting various projects financially the Company attests to its concern about the society and the environment, in which it operates. EDUCATION Highly appreciating the importance of high-quality education in Latvia the Company has supported several education-promoting projects in Latvian schools and major higher education establishments: the most successful students have been supported financially, funds have been granted to schools for purchasing technical equipment and for project implementation. In cooperation with the special purpose program For Education, Science and Culture of Latvian Education Fund JSC Latvijas Gâze grants scholarships to those best students and master program students of Latvian higher education establishments, whose scientific activities are related to gas technology, for several years already. Implementing various education-related projects, in 2002 JSC Latvijas Gâze cooperated with the children's culture and education centre Sâkotne, with the municipalities of Embûte parish in Liepâja district and Engure parish in Tukums district, Riga secondary schools no.49 and no.3, Riga Vocational School of Building and Krimulda secondary school. CULTURE JSC Latvijas Gâze has participated in the implementation of several projects important for the cultural life of Latvia supporting, for example: J. S. Bach's Chamber Music Festival, the exhibition organised by St.Petersburg State Hermitage and the Embassy of Russia Federation, musical charity performance Zemes dziesmas (Earth Songs) devoted to children, the tour of the Israel theatre in Riga, event Talantu nakts (Night of Talents) organised by the Liepâja theatre and other important projects. SPORTS AND HEALTHY LIFE STYLE Sports and healthy life style have been set forward as one of JSC Latvijas Gâze priorities for sponsoring and financial support. As the result of successful cooperation, different projects have been implemented promoting the professional growth of Latvian sportsmen. The Company supports the Olympic movement in Latvia since As a sponsor of the Latvian Olympic Committee, it has supported various Olympic sports - football, shooting, basketball, ice-hockey, sailing, tennis, skiing, rally, javelinthrowing, etc. Funds are being allocated also for the development of youth sports. PROJECTS OF SOCIAL SIGNIFICANCE Recognising that children are the future of our country, JSC "Latvijas Gâze" has provided full or partly financing for various projects of social character participating, for example, in organisation of Christmas celebration events and taking care of presents, in procurement of household items and technical equipment, etc. In 2002 JSC Latvijas Gâze has supported the special boarding school in Rudzâti parish of Preiïi district, Latvian organisation Save the Children, Association For Street Children, public organisation Avots, public organisation Mâras atbalsta centrs (Mâra's Support Centre), Vangaþi children's home, Latvian Association of Orphans, Bauska society of handicapped people, Riga City Vidzeme suburb society of handicapped people, handicapped people's society Aplis (Circle), Riga sports club Nedzirdîgo sports (Sports of the Deaf), Latvian Ailing Children's Culture, Education and Mental Care Fund, Latvian public organisations' union Association of Children's Villages and other public organisations. JSC Latvijas Gâze, together with Latvia Kidney Fund, Latvia Red Cross and the University Children's Hospital, took part also in various public health promotion projects, for example, financing the procurement of a harmonic scalpel for the University Children's Hospital. Clients of JSC "Latvijas Gâze": "Piena kombinâts", "Piensaimnieks", "Latgales piens" etc. Taking into account that the JSC Latvijas Gâze operations are connected with environment and cultural heritage closely, in 2002 funds were allocated for the Gauja National Park Foundation and the restoration of Cesvaine Palace

16 SUMMARISED CONSOLIDATED ANNUAL ACCOUNTS

17 Summarised consolidated ANNUAL ACCOUNTS JSC "Latvijas Gâze" REPORT OF THE BOARD OF DIRECTORS 1. DESCRIPTION OF ACTIVITIES The year 2002 has been a successful one for Joint Stock Company Latvijas Gâze Group. The Group's indices of economic activity improved, facilitated by the reorganisation of the management structure carried out during earlier periods, the optimisation of business processes and investment made for the expansion of the natural gas system. According to the operative information of the Central Statistical Bureau of Latvia, the natural gas share in the energy consumption balance of Latvia reached 31.5% in In comparison with the corresponding period of 2001 the sales of natural gas grew by 2.0%, but of liquefied petroleum gas (LPG) _ decreased for 0.03%. Basically the growth of the natural gas sales volume was ensured by gas supply connection to new objects and the unexpectedly low air temperature during the fourth quarter of In 2002 parent company sold to consumers 1,569.8 mio m³ of natural gas. Of the total natural gas sales volume 54.4% have been sold to the four large consumers _ state JSC Latvenergo, JSC Rîgas Siltums, JSC Liepâjas metalurgs and JSC Daugavpils siltumtîkli. The consumption of state a/s Latvenergo decreased for 9.2 mio m³ in 2002, however, it reached 32.2% of the total consumption. The importance of new clients is increasing in the consumption structure. In 2002 all clients connected to gas supply since 1997 taken together consumed mio m³ of gas or 23.7% of the total consumption. In 2002 natural gas was sold to consumers for tariffs approved by the Energy Supply Regulation Council (ESRC) on (order Nr. 193) and supplemented by the ESRC on 31 July 2001 (order Nr. 138). During the reporting year three times the Company submitted to Public Utilities Commission (PUC) proposals of the natural gas tariff increase but none of them was approved. The average tariff of natural gas sales increased only by 0.5% in 2002, and its changes differed substantially from the average quotation of heavy fuel oil with sulphur contents 3.5% in Rotterdam stock exchange, which increased for 32% during the reporting year. By 21 March 2003 the Company submitted to PUC a new proposal of the natural gas tariff increase, which was prepared according to the tariff calculation methodologies for regulated natural gas services approved by PUC on The total revenues from natural and liquid petroleum gas sales and other basic activity services amounted to mio in 2002, expenses (excl. administration) _ to 86.6 mio, but the basic activity gross profit was 19.6 mio. The health centre Rîgas Lîcis, which operated with losses for the last several years and was sold in a public auction in 2001, ceased economic activities as of 1 January According to the JSC Latvijas Gâze Council resolution also the shares of a/s Brocçni, which were acquired in 1997 by debt capitalisation, were sold in the summer of In 2002 JSC Latvijas Gâze applied to court in order to collect the debt of JSC Daugavpils siltumtîkli for gas delivered in 2001 amounting to 1,808.1 thousand. After the receipt of the court decree the company paid the debt of 2001 in full. Settlement for gas delivered in 2002 was performed according to the concluded mutual agreement. In comparison with the year 2001 the net profit of JSC Latvijas Gâze grew by 16% or 1.7 mio and reached In 2002 the net profitability reached 11.5% and the return on equity _ 13.1%. The profit plan over-fulfilment was ensured by the increase of gas sales volumes, revenue from interest on deposits and the decrease of gas purchasing costs due to the changes of currency exchange rates. LLC Latvijas propâna gâze sold gas and rendered services to consumers for the total amount of 6.7 mio and ended the year with the profit of 6.1 thousand. On 22 November 2002 JSC Latvijas Gâze Council assigned to the Board of Directors arranging the sale of all LLC Latvijas propâna gâze shares in a closed auction. On the day of signing this report the auction has not been hold yet, however, several companies have expressed interest to acquire the shares

18 Summarised consolidated ANNUAL ACCOUNTS JSC "Latvijas Gâze" REPORT OF THE BOARD OF DIRECTORS 2. MOST IMPORTANT ACTIVITIES IN 2002 INTERNATIONAL COOPERATION: Participation in Nordic Dimension workgroup and participation in the elaboration of the position of Latvia regarding Nordic Dimension issues. Participation in Phare project Energy sector restructuring. Activities in association Baltic Gas and organisation of Baltic Gas General Assembly, which took place in April 2002 in Riga. Affiliation of JSC Latvijas Gâze to international organisation GTE (Gas Transmission Europe). ON NATIONAL SCALE: Participation in the elaboration of the National Energy Program of Latvia. Activities of the shareholders' representatives and the Company's officials concerning the issue of the cancellation of natural gas price regulation for industrial consumers and the increase of the existing tariffs, incl. meetings with the top state officials and the Public Utilities Commission. Cooperation with the Public Utilities Commission regarding the elaboration and discussion of the tariff calculation methodologies for regulated services. Cooperation with the state and municipal authorities to ensure the fulfilment of currently valid legal acts. ON JSC SCALE: Work on preparation of the long-term natural gas delivery agreement for the years Elaboration of normative documents in accordance with the European standards. Work on the performance of activities envisaged in the budget, reduction of production costs and improvement of the Company's efficiency. DURING THE REPORTING PERIOD JSC : fulfilled the Council resolution, according to which the active gas volume in Inèukalns UGS has been increased by mio m³. Upon the completion of the injection season of 2002 the active gas volume in Inèukalns UGS reached 2,188 mio m³; constructed 0.12 km of gas transmission pipeline for 7.7 thousand and km of distribution pipelines for the total amount of 5,575.1 thousand. In 2002 the largest JSC Latvijas Gâze gas supply project was the gas supply connection to Olaine town. By investing more than 834 thousand and constructing a 15 km long gas pipeline 5000 flats have been connected to the natural gas system and contracts have been concluded with LLC Olaines íîmiskâ rûpnîca BIOLARS and the municipal Joint Stock Company Olaines ûdens un siltums for the sales of mio m³ over the period of 15 years; in preliminary agreements have been concluded with industrial clients for the delivery of mio m³. The planned average consumption of these clients is in the range between 19.0 and 21.1 mio m³ per year; modernised 43 GRP and 99 SGRP for the total amount of thousand, as well as replaced 147 house regulators. 68% of GRP and SGRP were refurbished as of The modernisation of 64 GRP and 120 SGRP is to be performed yet in order to complete the gas regulation equipment refurbishment; commissioned 6 gas regulation stations (GRS), for the modernisation of which 1.08 mio was spent. 56% of the total number of GRS has been modernised. 17 more GRS are to be modernised within three years time to complete the program;

19 Summarised consolidated ANNUAL ACCOUNTS JSC "Latvijas Gâze" REPORT OF THE BOARD OF DIRECTORS pulled down the old compressor hall at Inèukalns UGS and started the construction site preparation for the construction of the new hall; modern Client Service Centres were created in Riga, at Stirnu street 34, Vagonu Street 20 and in Jûrmala office; in the field of information technologies work was continued implementing the management information system Oracle Applications, implementation of the individual clients' billing system PUNS-2 was completed in the entire territory of Latvia and implementation of the customer relationship management and gas supply process supervision system LOGS was started; ensured the improvement of the electric protection quality of all gas transmission and distribution pipelines by applying intensive measurement methods; was the largest payer of value added tax and the eighth largest taxpayer in Latvia; was successfully quoted in Riga Stock Exchange, being no. 1 among the quoted Latvian companies and no. 3 in the Baltic Stock Exchange by the share market capitalisation. 3. JSC FURTHER DEVELOPMENT For several years already the Company has set as its target preservation of the acquired market share and attraction of new consumers. The expansion and modernisation of the gas supply system, construction of new gas pipelines as well as the development of information technologies and systems will be the Company's priorities also in the future. Topical projects within the next few years will be: participation in international organisations and work groups elaborating energy strategies; provision of spare gas injection capacity at Inèukalns underground gas storage facility; diagnostics of the gas transmission pipelines Pskov-Riga and Riga-Daugavpils by intelligent pigging and assessment of the technical condition of the gas transmission pipelines on the basis of these diagnostics; further modernisation and safety improvement of gas transmission mains and city gas supply systems; cooperation with the Ministry of Economy and other authorities regarding the cancellation of gas price regulation for industrial consumers and discussion and application of European Union directives in Latvia. 4. PREREQUISITES FOR THE IMPROVEMENT OF FINANCIAL AND ECONOMIC PERFORMANCE In order to improve the economic and financial performance of JSC Latvijas Gâze group, to ensure the reliability of gas supplies and fulfilment of guarantees given to foreign investors it is necessary to: ensure further liberalisation of gas prices; amend the Energy Law and other legal acts defining exactly the responsibility of legal entities and individuals for the technical condition and operation safety of gas supply systems, equipment and appliances owned by them; amend legal acts currently in force, including the Law on Protective Zones, in order to facilitate the registration of encumbrances in land books for land, on which gas pipelines and equipment are located