Market announcement

Title

Results of operations for the 4th quarter 2016

Message

MANAGEMENT REPORT

Chairman's summary

In 2016, the Company’s operational and financial performance was excellent. The
majority of key performance indicators (KPIs) were delivered, which given the
colder weather in the 1st quarter and associated increase in network
disruption, was very good and a testament of all the hard work done by AS
Tallinna Vesi staff, during that period. 

The water quality in 2016 was 99.93% compliant. Only two samples taken from
customer taps, out of the 2,948 samples taken, were non-compliant. The average
network leakage for the period was 15.07%, which is higher than the same period
in 2015 (14.68%), but attributable to the colder ambient temperatures in the
1st quarter in 2016, resulting in a higher number of bursts within the clean
water network. 

Besides providing quality drinking water, we are also responsible for a
wastewater discharge service to nearly one third of Estonia’s population
(460,000). It is therefore extremely important that the wastewater treatment
plant in Paljassaare works effectively and in accordance with the stipulated
quality requirements, set by the Estonian Ministry of Environment. Throughout
2016, the final effluent leaving Paljassaare was 100% compliant with all
stipulated limits. 

We continue to make targeted capital investments, renovating or replacing
assets based on previous condition surveys and performance data, to ensure the
continued reliability of the infrastructure. This includes the 5+5 programme,
where 5 km of water and 5 km wastewater network are replaced each year. At the
end of 2016, we finished the complex repair of Tihase tunnel collector, through
which the wastewater from Mustamäe and Õismäe is directed to Paljassaare. We
also constructed water pipe in Tondi that now provides a parallel supply to
almost 100,000 people. 

Delivering good operational and financial performance is only possible through
the continued motivation, commitment and performance of AS Tallinna Vesi staff.
We remain focused on the development and training of our employees and ensuring
appropriate succession plans are in place. An example of this, is the company’s
ongoing graduate and apprentice programmes, which will also inject fresh talent
into the business for the future. 



Operational performance for 2016

                                                                  
Drinking water                                                                  
                                   2016                     2015                
--------------------------------------------------------------------------------
- 
Compliance of water quality at the customers’ tap.                99.93%  99.86%
--------------------------------------------------------------------------------
Water loss in the water distribution Network.                     15.07%  14.68%
--------------------------------------------------------------------------------
Average duration of water interruptions per property in hours.    3.44 h  3.22 h
--------------------------------------------------------------------------------
Wastewater                                                                      
--------------------------------------------------------------------------------
- 
Number of sewer blockages.                                         670     737  
--------------------------------------------------------------------------------
Number of sewer bursts.                                            107     127  
--------------------------------------------------------------------------------
Wastewater treatment compliance with environmental standards       100%    100% 
--------------------------------------------------------------------------------
Customer Service                                                                
--------------------------------------------------------------------------------
- 
Number of written complaints                                        45      67  
--------------------------------------------------------------------------------
Number of customer contacts regarding water quality                166     115  
--------------------------------------------------------------------------------
Number of customer contacts regarding water pressure               339     337  
--------------------------------------------------------------------------------
Number of customer contacts regarding blockages and discharge of   1,190   1,061
 storm water                                                                    
--------------------------------------------------------------------------------
Responding written customer contacts, within at least 2 working   99.46%  99.20%
 days                                                                           
--------------------------------------------------------------------------------
Number of failed promises                                            4       9  
--------------------------------------------------------------------------------
Notification of unplanned water interruptions, at least 1 h        98.8%   98.7%
 before the interruption                                                        
--------------------------------------------------------------------------------



Contractual Highlights

  -- Tariffs of AS Tallinna Vesi continue to be on the same level, based on a
     temporary injunction granted by the Court for the period of court
     proceedings.
  -- The Company was privatised 
in 2001, with the support and knowledge of the Estonian national
     government.

  -- At the end of May 2012, the District Court ruled that AS Tallinna Vesi’s
     Services Agreement, which was part of the international privatisation, is a
     public law contract.
  -- AS Tallinna Vesi believes that the terms and conditions of the
     international privatisation contract, that has previously been deemed a
     public law contract, should be protected by the Estonian legal system.
  -- In May 2014, AS Tallinna Vesi submitted a claim against the Competition
     Authority to the Tallinn Administrative Court to avoid the expiry of
     monetary claims. The Company is claiming compensation for potential damages
     over the lifetime of the international privatisation contract, up until
     2020. The claim is based on estimated future volumes and level of consumer
     price index (CPI). In recent months, CPI has been lower than at the time
     the claim was originally calculated, with a current undiscounted value of
     EUR 73 million, compared to the original of EUR 90 million.
  -- On 5th of June 2015, the Tallinn Administrative Court dismissed the
     Company’s complaint in the local tariff dispute. The reasoning for the
     dismissal, was not made disclosed until 12th of October 2015. Tallinn
     Administrative Court, formed an opinion that the tariffs part of the
     Services Agreement, which has been deemed to be as a public law contract by
     the Estonian Courts in 2012, is not binding on the Competition Authority.
     AS Tallinna Vesi filed the appeal to the Tallinn District Court on 11th of
     November 2015.
  -- On 23rd November 2016, the hearing in District Court took place with a
     decision expected on 26th January 2017.
  -- On 26th January 2017, the District Court dismissed AS Tallinna Vesi’s
     appeal in the tariff dispute between AS Tallinna Vesi and Competition
     Authority. The Company has got right to submit the appeal to the Supreme
     Court by 27th February 2017.
  -- I
n October 2014, in parallel to the local dispute about tariffs, AS Tallinna
     Vesi and its shareholder United Utilities (Tallinn) B.V have commenced
     international arbitration proceedings against the Republic of Estonia, for
     breaching the international treaty and more specifically “the fair and
     equitable treatment” requirement by changes to the law and activities of
     the public authorities which have deprived AS Tallinna Vesi of tariffs
     approved according to the Services Agreement concluded as part of the
     privatisation in 2001. The arbitration will be carried out through the
     International Centre for the Settlement of Investment Disputes (ICSID),
     which is part of the World Bank Group.
  -- On 17th of June 2015, the timetable of the International Arbitration
     Proceedings was determined. Procedural orders and decisions issued during
     the arbitration process, subject to the redaction of the confidential
     information, are available on the
ICSID website
. 
  -- International Arbitration Proceedings are being held in parallel, and are
     not linked to the local dispute
.
  -- In February 2016, the Republic of Estonia submitted their Memorial, with AS
     Tallinna Vesi and United Utilities (Tallinn) B.V, responding with their
     counter Memorial in June to which Government of Estonia submitted their
     rejoinder in September 2016.
  -- The International Arbitration hearings were held on 7-11 and 14-15 November
     2016 in Paris.
  -- Both parties will submit their Post Hearing Briefs before the end of
     January 2017.
  -- AS Tallinna Vesi has continuously stated its belief in fully transparent
     regulation, and its willingness to enter into meaningful and evidence-based
     dialogue, which takes into account the privatisation contract that was
     originally signed back in 2001.



Financial highlights for the 4th quarter 2016

The Group’s sales revenues during the 4th quarter of 2016 were EUR 14.52
million, being down by 0.1% or EUR 0.02 million compared to the same period in
2015. 

The gross profit in the 4th quarter of 2016 was EUR 8.24 million, showing an
increase of 0.8% or EUR 0.06 million. Increase in gross profit was related to
higher water, wastewater and storm water revenues from the main service area,
profit from construction and asphalting services and lower chemicals costs. It
was balanced by lower water, wastewater and storm water revenues from outside
of the service area and by higher staff, electricity and other costs of goods
sold costs. 

The operating profit was EUR 5.36 million, showing a decrease of 20.5% or EUR
1.38 million. The operating profit was impacted by the above mentioned changes
in gross profit, which were additionally impacted by higher doubtful
receivables expenses and legal costs in the 4th quarter in 2016 compared to the
same period in 2015. 

The net profit for the 4th quarter of 2016 was EUR 5.45 million, being lower by
12.6% or EUR 0.78 million. The net profit was mainly impacted by above
mentioned changes in operating profit, balanced by lower financial expenses.
Lower financial expenses were mostly influenced by the positive change in the
fair value of swap contracts in the 4th quarter of 2016 compared to the
negative change in the same quarter of 2015. The net profit for the 4th quarter
of 2016 and 2015 without the impact resulted from the change of the fair value
of swap contracts was EUR 4.99 million and EUR 6.38 million respectively, being
lower by 21.7% or EUR 1.39 million year on year. 

Other main economic indicators

EUR million       Q4      Q4      Q4    Change     12       12      12    Change
                 2014    2015    2016    16/15   months   months  months   16/15
                                                 2014     2015     2016         
--------------------------------------------------------------------------------
Sales            13.31   14.53   14.52   -0.1%    53.24    55.93   58.98    5.5%
Gross profit      7.95    8.18    8.24    0.8%    30.84    32.25   33.26    3.1%
Gross profit     59.71   56.26   56.75    0.9%    57.93    57.66   56.39   -2.2%
 margin %                                                                       
Operating         6.61    6.75    5.36  -20.5%    24.83    25.58   24.63   -3.7%
 profit                                                                         
Operating         6.56    6.67    5.52  -17.3%    24.53    25.27   24.44   -3.3%
 profit - main                                                                  
 business                                                                       
Operating        49.62   46.41   36.94  -20.4%    46.63    45.73   41.75   -8.7%
 profit margin                                                                  
 %                                                                              
Profit before     6.29    6.24    5.45  -12.6%    22.73    24.36   22.89   -6.0%
 taxes                                                                          
Net profit        6.29    6.24    5.45  -12.6%    17.94    19.86   18.39   -7.4%
Net profit       47.24   42.91   37.56  -12.5%    33.70    35.51   31.18  -12.2%
 margin %                                                                       
ROA %             3.06    2.98    2.55  -14.4%     8.73     9.50    8.61   -9.4%
Debt to total    57.61   57.43   58.15    1.3%    57.61    57.43   58.15    1.3%
 capital                                                                        
 employed %                                                                     
ROE %             7.22    7.01    6.10  -13.0%    20.59    22.31   20.57   -7.8%
Current ratio     5.35    5.40    3.91  -27.5%     5.35     5.40    3.91  -27.5%
--------------------------------------------------------------------------------

Gross profit margin – Gross profit / Net sales

Operating profit margin – Operating profit / Net sales

Net profit margin – Net profit / Net sales

ROA – Net profit / Average Total assets for the period

Debt to Total capital employed – Total liabilities / Total capital employed

ROE – Net profit / Total equity

Current ratio – Current assets / Current liabilities

Main business – water and wastewater activities, excl. connections profit and
government grants, construction and asphalting services, doubtful debt, other
income 



RESULTS OF OPERATIONS FOR THE 4th QUARTER 2016

Results for the 4th quarter 2016

Statement of comprehensive income

Sales

As the Company’s tariffs are frozen at the 2010 tariff level, the changes in
the main activities revenues, i.e. from sales of water and wastewater services,
are fully driven by consumption with no considerable seasonality in the main
operation. The Company does not expect significant changes in the consumption
in future. There has been incremental increase in the past and that is expected
to continue. 

In the 4th quarter of 2016 the Group’s total sales were EUR 14.52 million,
showing a decrease by 0.1% or EUR 0.02 million year on year. 87.9% of sales
comprise of sales of water and wastewater services to domestic and commercial
customers within and outside of the service area. 5.7% of sales are the fees
received from the City of Tallinn for operating and maintaining the storm water
system and fire hydrants, 5.3% from construction and asphalting services and
1.1% from other works and services. The construction and asphalting services
sales are more seasonal and the Company continues to seek possibilities to keep
and to grow these services revenues. 

Revenues from main operating activities           Quarter IV          Variance  
EUR thousand                                                           16/15    
                                              2016    2015    2014   EUR       %
Total water supply and waste water          12,763  12,545  12,340   218    1.7%
 disposal service, incl:                                                        
Private clients, incl:                       6,352   6,232   6,139   120    1.9%
Water supply service                         3,495   3,437   3,390    58    1.7%
Wastewater disposal service                  2,857   2,795   2,749    62    2.2%
Corporate clients, incl:                     5,128   4,942   4,848   186    3.8%
Water supply service                         2,813   2,726   2,681    87    3.2%
Wastewater disposal service                  2,315   2,216   2,167    99    4.5%
Outside service area clients, incl:          1,102   1,202   1,163  -100   -8.3%
Water supply service                           329     341     319   -12   -3.5%
Wastewater disposal service                    689     760     741   -71   -9.3%
Storm water disposal service                    84     101     103   -17  -16.8%
Over pollution fee                             181     169     190    12    7.1%
                                                                                
Storm water treatment and disposal service     830     801     593    29    3.6%
 and fire hydrants service                                                      
Construction service, design and               773   1,037     228  -264  -25.5%
 asphalting                                                                     
Other works and services                       153     151     149     2    1.3%



Sales from water and wastewater services were EUR 12.76 million, showing a 1.7%
or EUR 0.22 million increase compared to the 4th quarter of 2015, resulting
from the changes in sales volumes as described below: 

  -- There has been an increase in residential customers’ revenues by 1.9% to
     EUR 6.35 million. 91% of the total increase in domestic customer volumes
     comes from apartment blocks, which is also our biggest private customer
     group. There has been also a slight increase in individual houses customer
     group.
  -- Sales to commercial customers within the service area have increased by
     3.8% to EUR 5.13 million. Increase is mostly related to industrial segment,
     accompanied by increase in leisure and other commercial customer segments.
  -- Sales to customers outside the main service area have shown a decrease by
     8.3% to EUR 1.10 million. It is mainly driven by decrease in wastewater
     revenues by 9.3% to EUR 0.69 million. The decline is related to the sales
     to Viimsi, as they started to use their new wastewater treatment facilities
     from the beginning of 2016. While the sales to Viimsi have ceased, the
     sales to other outside areas in total have increased.
  -- Over pollution fees received have increased by 7.1% to EUR 0.18 million.

Sales from the operation and maintenance of the main service area storm water
and fire hydrant system were EUR 0.83 million, showing an increase of 3.6% or
EUR 0.03 million in the 4th quarter of 2016 compared to the same period in
2015. 

Sales of construction, design and asphalting services were EUR 0.77 million,
having decreased by 25.5% or EUR 0.26 million year on year. The decrease was
related to lower asphalting services revenues during the quarter. 



Cost of goods sold and Gross profit

The cost of goods sold amounted to EUR 6.28 million in the 4th quarter of 2016,
showing 1.2% or EUR 0.08 million decrease compared to the equivalent period in
2015. The cost decrease is mainly influenced by decrease in construction and
asphalting services related costs and also by lower chemicals costs, which was
partly balanced by higher electricity, staff and other costs of goods sold
costs. 

Cost of goods sold                                Quarter IV          Variance  
EUR thousand                                                           16/15    
                                              2016    2015    2014   EUR       %
Water abstraction charges                     -318    -282    -267   -36  -12.8%
Chemicals                                     -336    -400    -444    64   16.0%
Electricity                                   -809    -747    -743   -62   -8.3%
Pollution tax                                 -239    -234    -328    -5   -2.1%
Total direct production costs               -1,702  -1,663  -1,782   -39   -2.3%
Staff costs                                 -1,569  -1,481  -1,157   -88   -5.9%
Depreciation and amortization               -1,412  -1,437  -1,342    25    1.7%
Construction service, design and              -617    -951    -173   334   35.1%
 asphalting                                                                     
Other costs of goods sold                     -979    -825    -909  -154  -18.7%
Other costs of goods sold total             -4,577  -4,694  -3,581   117    2.5%
Total cost of goods sold                    -6,279  -6,357  -5,363    78    1.2%



Total direct production costs (water abstraction charges, chemicals,
electricity and pollution tax) were EUR 1.70 million, showing 2.3% or EUR 0.04
million increase year on year. Changes in direct production costs came from a
combination of changes in prices and in treated volumes that affected the cost
of goods sold together with the following additional factors: 

  -- Water abstraction charges increased by 12.8% to EUR 0.32 million, driven
     mainly by increase in treated volumes.
  -- Chemicals costs decreased by 16.0% to EUR 0.34 million, driven mainly by
     23.1% lower methanol price, worth EUR 0.03 million, and by lower usage of
     coagulant and methanol in the wastewater treatment process, worth
     respectively EUR 0.04 million and EUR 0.02 million. Savings were balanced
     by increase in usage of different chemicals in water treatment due to
     higher treated water volumes and poor raw water quality, worth in total EUR
     0.02.
  -- Electricity costs increased by 8.3% to EUR 0.81 million. It was related to
     increase in treated volumes and electricity usage, worth EUR 0.07 million,
     balanced by on average 2.2% lower electricity prices, worth EUR 0.02
     million.
  -- Pollution tax expense increased by 2.1% to EUR 0.24 million, due to
     increase in treated sewage volumes, balanced by lower pollution load of
     different pollutants.

Other costs of goods sold (staff costs, depreciation, construction and
asphalting services costs and other costs of goods sold) amounted to EUR 4.58
million, having decreased by 2.5% or EUR 0.12 million. The decrease came from
costs related to construction and asphalting services, balanced by increase in
staff costs and other costs of goods sold costs. Decrease in construction and
asphalting services costs by 35.1% to EUR 0.62 million was related to a
decrease in construction and asphalting services revenues mentioned earlier.
Staff costs increased by 5.9% to EUR 1.57 million. It was mostly driven by the
review of bonus reserve in the 4th quarter of 2016. Other costs of goods sold
increase is mainly related to higher use of different rental mechanisms, worth
EUR 0.05 million. 

As a result of all above the Group’s gross profit for the 4th quarter of 2016
was EUR 8.24 million, showing an increase of 0.8% or EUR 0.06 million, compared
to the gross profit of EUR 8.18 million for the comparative period of 2015. 



Administrative and marketing expenses, other income and expenses

Administrative and marketing expenses were EUR 2.54 million, showing an
increase of 86.6% or EUR 1.18 million. Most of the increase came from higher
tariff disputes related legal and consultation fees. Legal fees continue to be
at a high level during the time the Company has ongoing local and international
disputes. Other income and expenses increased by EUR 0.27 million to EUR 0.34
million, being mostly impacted by increase in doubtful receivables. 



Operating profit

As a result of the factors listed above the Group’s operating profit for the
4th quarter of 2016 totalled EUR 5.36 million, being 20.5% or EUR 1.38 million
lower than in the corresponding quarter of 2015. The Group’s operating profit
from main business was 17.3% or EUR 1.15 million lower compared to 2015. 



Financial expenses

The Group’s net financial income and expenses have resulted a net income of EUR
0.09 million, compared to net expense of EUR 0.51 million in the 4th quarter of
2015. It was mainly impacted by a positive change of the fair value of the swap
contracts year on year, worth EUR 0.60 million. 

The standalone swap agreements have been signed to mitigate the majority of the
long term floating interest risk. The interest swap agreements are signed for
EUR 75 million and EUR 20 million are still with floating interest rate. At
this point in time the estimated fair value of the swap contracts is negative,
totalling EUR 1.32 million. Effective interest rate of loans (incl. swap
interests) in the 4th quarter of 2016 was 1.58%, amounting to interest costs of
EUR 0.38 million, compared to the effective interest rate of 1.57% and the
interest costs of EUR 0.38 million in the 4th quarter of 2015. 



Profit before taxes and Net profit

The Group’s profit before taxes and net profit for the 4th quarter of 2016 was
EUR 5.45 million, being 12.6% or EUR 0.78 million lower than for the 4th
quarter of 2015, resulting mainly from increased inside service area revenues
and decreased net financial expenses, balanced by the increased costs as
described above. Eliminating the influence of the derivatives fair value, the
Group’s net profit for the 4th quarter of 2016 would have been EUR 4.99
million, showing a decrease by 21.7% or EUR 1.39 million compared to the
relevant period in 2015. 



Results for the twelve months of 2016

Statement of comprehensive income

Sales

During the twelve months of 2016 the Group’s total sales were EUR 58.98
million, showing an increase by 5.5% or EUR 3.05 million year on year. 

Sales from water and wastewater services for twelve months of 2016 were EUR
50.20 million, increasing 1.8% or EUR 0.90 million compared to the twelve
months of 2015. 85.1% of sales comprised of sales of water and wastewater
services to domestic and commercial customers within and outside of the service
area. 6.2% of sales were the fees received from the City of Tallinn for
operating and maintaining the storm water system and fire hydrants, 7.6% from
construction and asphalting services and 1.0% from other works and services. 

Revenues from main operating activities           12 months           Variance  
EUR thousand                                                           16/15    
                                             2016    2015    2014    EUR       %
Total water supply and waste water         50,196  49,297  48,599    899    1.8%
 disposal service, incl:                                                        
Private clients, incl:                     24,949  24,408  24,154    541    2.2%
Water supply service                       13,720  13,436  13,303    284    2.1%
Wastewater disposal service                11,229  10,972  10,851    257    2.3%
Corporate clients, incl:                   20,069  19,358  19,086    711    3.7%
Water supply service                       11,075  10,736  10,664    339    3.2%
Wastewater disposal service                 8,994   8,622   8,422    372    4.3%
Outside service area clients, incl:         4,400   4,765   4,521   -365   -7.7%
Water supply service                        1,306   1,280   1,153     26    2.0%
Wastewater disposal service                 2,709   3,011   2,957   -302  -10.0%
Storm water disposal service                  385     474     411    -89  -18.8%
Over pollution fee                            778     766     838     12    1.6%
                                                                                
Storm water treatment and disposal          3,671   3,357   3 073    314    9.4%
 service and fire hydrant service                                               
Construction service, design and            4,511   2,724     944  1,787   65.6%
 asphalting                                                                     
Other works and services                      604     550     625     54    9.8%



During the twelve months of 2016 there has been a 2.2% or EUR 0.54 million
increase in the sales to residential customers and 3.7% or EUR 0.71 million
increase in the sales to the commercial customers within the service area.
Increase in the sales to residential customers comes from different private
customer segments. The sales increase in commercial customers is mostly related
to industrial and other customer segments. The sales revenues from outside
service area customers for water, wastewater and storm water services have
decreased 7.7% or EUR 0.37 million compared to the twelve months of 2015, being
mainly influenced by Viimsi having their own wastewater treatment facilities
from the beginning of the year as mentioned earlier, balanced by higher sales
of services to other outside services areas. 

Sales from the operation and maintenance of the main service area storm water
and fire hydrant system in the twelve months of 2016 were EUR 3.67 million,
showing an increase of 9.4% or EUR 0.31 million year on year. 

Sales of construction, design and asphalting services were EUR 4.51 million,
increasing by 65.6% or EUR 1.79 million year on year. Increase was mainly a
result of different pipe construction projects. 



Cost of goods sold and Gross and Operating profits

Cost of goods sold                             12 months          Variance 16/15
EUR thousand                                                                    
                                          2016     2015     2014     EUR       %
Water abstraction charges               -1,169   -1,101   -1,057     -68   -6.2%
Chemicals                               -1,308   -1,531   -1,737     223   14.6%
Electricity                             -3,107   -3,035   -3,032     -72   -2.4%
Pollution tax                           -1,091   -1,002   -2,163     -89   -8.9%
Total direct production costs           -6,675   -6,669   -7,989      -6   -0.1%
Staff costs                             -5,729   -5,603   -4,880    -126   -2.2%
Depreciation and amortization           -5,862   -5,690   -5,369    -172   -3.0%
Construction service, design and        -4,006   -2,398     -784  -1,608  -67.1%
 asphalting                                                                     
Other costs of goods sold               -3,449   -3,319   -3,376    -130   -3.9%
Other costs of goods sold total        -19,046  -17,010  -14,409  -2,036  -12.0%
Total cost of goods sold               -25,721  -23,679  -22,398  -2,042   -8.6%



Total direct production costs (water abstraction charges, chemicals,
electricity and pollution taxes) were EUR 6.68 million, showing a slight
increase by 0.1% or EUR 0.01 million year on year. Increase in costs came from
the decrease in chemicals costs, balanced by increase in all other direct
production costs as described below: 

  -- Water abstraction charges increased by 6.2% to EUR 1.17 million, driven by
     increase in treated volumes.
  -- Chemicals costs decreased by 14.6% to EUR 1.31 million, driven mainly by on
     average 30.0% lower methanol price and smaller use of different chemicals
     to remove pollutants in wastewater treatment process, worth respectively
     EUR 0.17 million and EUR 0.09 million, balanced by the increased water
     treatment process chemicals costs driven by increase in usage and treated
     volumes, worth EUR 0.04 million.
  -- Electricity costs have increased by 2.4% to EUR 3.11 million. Electricity
     costs increase was related to increase in treated volumes and in usage,
     worth EUR 0.18 million, balanced by on average 3.2% lower electricity
     prices, worth EUR 0.11 million.
  -- Pollution tax expense increased by 8.9% to EUR 1.09 million, driven mainly
     by the increase in treated sewage volumes, worth EUR 0.11 million, balanced
     by lower nitrogen pollution load, worth EUR 0.05 million.

Other costs of goods sold (staff costs, depreciation, construction and
asphalting services costs and other costs of goods sold) amounted to EUR 19.05
million, being higher by 12.0% or EUR 2.04 million compared to the same period
in 2015. Increase came from higher costs in all other costs of goods sold costs
groups impacted mainly by the same reasons as mentioned earlier in 4th quarter
results. 

The gross profit for the twelve months of 2016 was EUR 33.26 million, being
3.1% or EUR 1.01 million higher compared to the same period in 2015. The
operating profit was EUR 24.63 million, showing a decrease by 3.7% or EUR 0.95
million during the twelve months of 2016. The decrease in operating profit was
driven mostly by the changes in operating profit mentioned earlier in 4th
quarter results. 



Financial expenses

The Group’s net financial income and expenses have resulted a net expense of
EUR 1.74 million, compared to net expense of EUR 1.22 million in the twelve
months of 2015. The net financial expenses were influenced by the decrease in
interest costs by EUR 0.68 million, which was supplemented by the negative
non-monetary impact of the change in the fair value of the swap contracts the
Company has entered. The negative non-monetary impact for 2016 expenses is EUR
0.32 million (2015: positive impact EUR 0.83 million). 



Profit before taxes and Net profit

The Group’s profit before taxes for the twelve months of 2016 was EUR 22.89
million, showing a 6.0% or EUR 1.47 million decrease compared to the relevant
period in 2015. The Group’s net profit for the twelve months of 2016 was EUR
18.39 million, which is 7.4% or EUR 1.47 million lower than the net profit for
equivalent period in 2015. Eliminating the effects of the derivatives fair
value, the profit before taxes and the net profit would have been in twelve
months of 2016 respectively EUR 23.20 million and EUR 18.70 million (as of 31st
December 2015 EUR 23.53 million and EUR 19.03 million respectively). 



Statement of financial position

In the twelve months of 2016 the Group invested EUR 14.95 million into fixed
assets. As of 31st December 2016 non-current tangible assets amounted to EUR
171.18 million and total non-current assets amounted to EUR 172.01 million
(31st December 2015: EUR 162.73 million and EUR 163.63 million respectively). 

Compared to the year end of 2015 the receivables and prepayments have shown a
decrease in the amount of EUR 0.01 million to EUR 7.17 million. The collection
rate of receivables continues to be high, being 99.49% compared to 99.74% in
the 4th quarter of 2015. 

Current liabilities have increased by EUR 2.22 million to EUR 10.64 million
compared to the year end of 2015. Increase mainly derives from increased
prepayments of connections in construction process by EUR 0.75 million and
increase in trade and other payables by EUR 1.44 million, which is related to
increased construction activities and investments related liabilities. 

Deferred income from connection fees has grown compared to the end of 2015 by
EUR 2.02 million to 17.05 million. 

The Group’s loan balance has remained stable at EUR 95 million. The weighted
average interest risk margin for the total loan facility is 0.95%. 

The Group has a Total debt/Total assets level as expected of 58.1%, in range of
55%-65%, reflecting the Group’s equity profile. This level is consistent with
the same period in 2015 when the Total debt/Total assets ratio was 57.4%. 



Contingent liability regarding the tariff risk

In the 4th quarter of 2011 the Group evaluated and noted an exceptional
off-balance sheet contingent liability, which could cause an outflow of
economic benefits of up to EUR 36 million. In the 4th quarter of 2016 the Group
re-evaluated the liability, which now stands at EUR 43 million, as per note 14
to the accounts. The re-evaluation is made annually at the end of the year. 



Cash flow

As of 31st December 2016 the cash position of the Group is strong. At the end
of December 2016 the cash balance of the Group stood at EUR 33.99 million,
which is 15.9% of the total assets (31st December 2015: EUR 37.82 million,
forming 18.1% of the total assets). 

The biggest contribution to the cash flows comes from main operations. During
the twelve months of 2016, the Group generated EUR 31.87 million of cash flows
from operating activities, an increase of EUR 0.76 million compared to the
corresponding period in 2015. Underlying operating profit continues to be the
main contributor to operating cash flows. 

In the twelve months of 2016 the result of net cash flows from investing
activities was a cash outflow of EUR 11.43 million, an increase of EUR 4.56
million compared to the cash outflow of EUR 6.87 million in the twelve months
of 2015. This is made up as follows: 

  -- The cash outflows from investments in fixed assets have increased by EUR
     1.03 million compared to 2015 amounting to EUR 14.53 million.
  -- The compensations received for the construction of pipelines were EUR 3.00
     million, showing a decrease of EUR 3.50 million compared to the same period
     of 2015. It is mostly related to the extension program for which last
     payments were received in the 1st quarter of 2015.

In the twelve months of 2016 cash outflow from financing activities amounted to
EUR 24.28 million, decreasing by EUR 0.71 million compared to the same period
in 2015. The change was mainly related to reduction in interest payments by EUR
0.67 million related to renewal of swap contracts in the 2nd quarter of 2015.
Most of the outflow was comprised of the dividends and income tax on dividends
payment, respectively in the amount of EUR 18.00 million and EUR 4.50 million
in both years. 



Employees

Competent and engaged employees are the key to any business. The Group is
committed to creating a work environment where everyone is respected and
valued. We have described our human resource management procedures, including
but not limited to recruitment, remuneration, evaluation and training policies.
We follow equality principles in selecting and managing people which translates
into providing, when feasible, equal opportunities to everyone. Understanding
and appreciating the diversity of our staff, we ensure that everyone is treated
fairly and equally and that they have access to the same opportunities as is
reasonably practicable. We aim to ensure that no employees are discriminated
against due to, but not exclusive to, age; gender; religion; cultural or ethnic
origin; disability; sexuality orientation or marital status. 

At the end of the 4th quarter of 2016, the total number of employees was 311
compared to 323 at the end of the 4th quarter of 2015. The full time equivalent
(FTE) was respectively 301 in 2016 compared to the 311 in 2015. Average number
of employees (FTE) during the twelve months was respectively 308 in 2016 and
308 in 2015. 

By gender, employee allocation was as follows:

As of 31st December 2016  Women  Men  Total
Group                        87  224    311
-------------------------------------------
-------------------------------------------
Management Team              12   13     25
Executive Team                4    4      8
Management Board              1    2      3
                                           
Supervisory Board             0    9      9



As of 31st December 2015  Women  Men  Total
Group                        99  224    323
-------------------------------------------
-------------------------------------------
Management Team              11    9     20
Executive Team                6    3      9
Management Board              1    2      3
                                           
Supervisory Board             0    9      9



The total salary costs were EUR 2.09 million for the 4th quarter of 2016,
including EUR 0.05 million paid to Management and Supervisory Council members
(excluding social taxes). The off-balance sheet potential salary liability
could rise up to EUR 0.08 million should the Council want to replace the
current Management Board members. 



Dividends

Dividend allocation to the shareholders is recorded as a liability in the
financial statement of the Company at the time when the profit allocation and
dividend payment is confirmed by the annual general meeting of shareholders. 

According to the dividend policy, which is also published on Company’s website,
the Company will maintain dividends to shareholders at the same amount in real
terms, i.e. dividends will increase in line with inflation each year. 

In the annual general meeting of shareholders held on 2nd of June 2016, 90
cents dividends per share and the total dividend pay-out from the profit of
2015 net income in the amount of EUR 18.0 million was approved. It is in
accordance with the Company’s dividend policy. There has been no change
compared to 2014 and 2015 in dividends of 90 cents per share. 

Dividends were paid out on 27th of June 2016.

                                        

Share performance

AS Tallinna Vesi is listed on NASDAQ OMX Main Baltic Market with trading code
TVEAT and ISIN EE3100026436. 

As of 31st December 2016 AS Tallinna Vesi shareholders, with a direct holding
over 5%, were: 

United Utilities (Tallinn) BV  35.3%
------------------------------------
City of Tallinn                34.7%
------------------------------------



During the twelve months of 2016 the shareholder structure has been relatively
stable compared to the end of 2015. At the end of 4th quarter 2016 the pension
funds owned 2.11% of the total shares compared to 1.88% at the end of 4th
quarter 2015. 

As of 31st December 2016, the closing price of AS Tallinna Vesi share was EUR
13.80, which is -1.4% (2015: 0.0%) lower compared to the closing price of EUR
14.00 at the beginning of the quarter. During the same period the OMX Tallinn
index increased by 7.4% (2015: 4.1%). 

In the twelve months of 2016, 6,502 deals with the Company’s shares were
concluded (2015: 7,818 deals) during which 1,048 thousand shares or 5.2% of
total shares exchanged their owners (2015: 1,581 thousand shares or 7.9%). 

The turnover of the transactions was EUR 7.03 million lower than in 2015,
amounting to EUR 14.71 million. 



Corporate structure

As of 31st December 2016, the Group consisted of 2 companies. The subsidiary
Watercom OÜ is wholly owned by AS Tallinna Vesi and consolidated to the results
of the Company. 



Corporate Governance

Supervisory Council

Supervisory Council plans and organises the management of the Company and
supervises the activities of the Management Board. According to AS Tallinna
Vesi articles of association Supervisory Council consists of 9 members, who are
appointed for two years. There has been no changes in Supervisory Council
members in the 4th quarter of 2016. In the annual general meeting four of the
Supervisory Council members were re-elected (more information here). 

Supervisory Council has formed three committees to advise Supervisory Council
on audit, remuneration and corporate governance matters. 

More information about the Supervisory Council and committees can be found in
the note 12 to the financial statements as well as from the Company’s webpage: 

http://tallinnavesi.ee/en/Investor/Corporate-Governance/Supervisory-Board

http://tallinnavesi.ee/en/Investor/Corporate-Governance/Audit-Committee

http://tallinnavesi.ee/en/Investor/Corporate-Governance/Corporate-Governance-Rep
ort 



Management Board

Management Board is a governing body, which represents and manages AS Tallinna
Vesi in its daily operations in accordance with the legal requirements as well
as the Articles of Association. The Management Board must act economically in
the most efficient way taking into consideration the interest of the Company
and its shareholders and ensure the sustainable development of the Company in
accordance with the set objectives and strategy. 

To ensure that the company’s interests are met in the best way possible, the
Management and Supervisory Boards shall extensively collaborate. Meetings of
Management and Supervisory Board members are held at least once a quarter. In
those meetings the Management Board informs the Supervisory Council about all
significant issues in Company’s business operations, the fulfilment of the
company’s short and long-term goals are being discussed and the risks impacting
them. For every meeting of the Management Board prepares report and submits the
report in advance with the sufficient time for the Supervisory Board to study
it. 

According to the Articles of Association the Management Board consists of 2-5
members, who are elected for 3 years. 

Starting from 2nd of June 2014 there are 3 members of the Management Board of
AS Tallinna Vesi: Karl Heino Brookes (Chairman of the Board, with the powers of
the Management Board Member until 20th of March 2017), Aleksandr Timofejev
(with the powers of the Management Board Member until 29th of October 2018) and
Riina Käi (with the powers of the Management Board Member until 29th of October
2018). 

Additional information on the members of the Management Board can be found from
the Company’s website: 

http://tallinnavesi.ee/en/Investor/Corporate-Governance/Management-Board



Future actions & risks

Legal claim for breach of international treaty

In May 2014, the Supervisory Council of the Company gave notice of potential
international arbitration proceedings against the Republic of Estonia for
breaching the undertakings it is required to abide by in the bilateral
investment treaty. 

In October 2014 AS Tallinna Vesi and its shareholder United Utilities (Tallinn)
B.V have commenced international arbitration proceedings against the Republic
of Estonia for breach of the Agreement on the Encouragement and Reciprocal
Protection of Investments between the Kingdom of The Netherlands and the
Republic of Estonia. 

The claim was filed as three years of intensive negotiation to try and reach an
amicable settlement that has not happened. 

The hearings of international arbitration took place in Paris in November 2016
and the decision is expected in 2017. 

Additional details related with the claim can be found via the following links:

https://newsclient.omxgroup.com/cdsPublic/viewDisclosure.action?disclosureId=609
264&messageId=754811 

https://newsclient.omxgroup.com/cdsPublic/viewDisclosure.action?disclosureId=627
851&messageId=779161 



Disclosure of relevant papers and perspectives

The Company will keep the investment community informed of all relevant
developments of the tariff dispute, both locally as well as internationally. AS
Tallinna Vesi has published all relevant materials on its website
(http://www.tallinnavesi.ee/en/Investor/Regulation and
https://www.tallinnavesi.ee/en/investor/stock-announcements) and to the Tallinn
Stock Exchange. 

At this point in time the Company will not speculate on future developments and
possible outcomes or timing of the proceedings. 








         Karl Heino Brookes
         Chairman of the Management Board
         +372 62 62 204
         [email protected]