Market announcement

Title

Additional information about the regulatory discussions and contract performance

Message

To ensure the shareholders AS Tallinna Vesi are able to be fully informed of
the regulatory and contract discussion the company has reorganised the
information on its website. Furthermore some additional documents have been
disclosed to ensure the greater visibility and to facilitate open and fact
based discussions. 

The information disclosed on 25 May was split between Tariff application and
WACC discussions, however as a resulf of our changes the information about the
Regulation is available in the following structure: 

1.     Regulatory discussion

2.     2011 tariff application

3.     WACC discussions

4.     Contract performance and investor returns

The focus of section 1 is to enable all shareholders to understand how the CA's
tariff methodology has been developed. ASTV would like to point out that the
professional questions sent to the regulator were raised with a view to
ensuring that the privatisation contract and the interests of all stakeholder
groups were taken into account. ASTV would like to highlight the extremely
short time period for developing the methodology. The Estonian Authorities
elaborated the methodology in less than 3 months, whereas according to the
World Bank recommendations the implementation of such regulation requires
consultation with all stakeholders and the standard time frame is 1,5 to 2
years. In addition we would like to highlight the lack of consultation, and the
unwillingness of the Competition Authority to consider any of the points raised
by the water industry in the elaboration process of its methodology. 

In section 2 we highlight our approach to the tariff application. ASTV applied
on the basis of the Services Agreement that is in compliance with PWSSA. In
addition, to assist the Competition Authority, we sent an independently
verified analysis of the profits made by ASTV in the first ten years of the
contract, and completed all the tables required by the CA's recommended
methodology. 

We would like to highlight that AS Tallinna Vesi asked the independent expert
Oxera to confirm the real rates of return on invested capital after the
privatization. During the period from 2001 to 2010 the average real rate of
return has been 6.5%. Oxera's analysis can be found from the section 2. 

In section 3 we comment on the CA's approach to calculating the WACC (or rate
of justified profitability). Here we would like to highlight the fact that ASTV
sent a significant number of questions to the CA to better understand the logic
behind its methodology. To date a large majority of these questions are still
unanswered. 

In section 4 we have focussed on the performance of the contract since 2001.
Here we have looked at the aims of the privatisation in terms of improvements
in the quality of service, and the financial returns made by the investor on
the 85m Euro paid for 50.4% of the equity in 2011. 

We would highlight that the investor has fulfilled all is obligations to
increase the quality of the water services in Tallinn since privatization. The
considerable and independently verified increase across all service levels has
been illustrated in the table Operational performance disclosed in this
section. For example the water quality has been increased from 43.5% to 99.5%
and leakage level has been reduced from above 32% to a level below 22% after
privatization. 

In addition we have prepared a simple model with the investor cash flows as per
the privatization contract . From the disclosed models it can be seen that the
IRR for investors from dividends only has been -5.4 %, and when including the
capital restructuring the IRR would be only 1.7%. 

AS Tallinna Vesi believes it is the responsibility of government authorities in
any EU member state to ensure that any changes in law, or implementation of
such laws must be done in such a way as to ensure that complies with EU
legislation and basic legal principles. This is especially the case when an
investor has signed a long term contract in good faith, and in return for the
increase in quality of services and capital it has invested, has a justified
expectation of the returns permitted over the period of the contract. 


         Priit Koff
         Head of Public Relations
         AS Tallinna Vesi
         +372 62 62 209
         [email protected]