Market announcement

Title

Results of operations for the 1st half-year 2017

Message

MANAGEMENT REPORT

CHAIRMAN'S SUMMARY

Tallinna Vesi has had successful first 6 months in 2017, with respect to both
operational and financial performance. 

Consistently high quality of drinking water and final effluent

We are very pleased with our performance regarding water quality, which is
further reinforced by the results of the drinking water samples taken from the
customers’ taps that were 99.93% compliant with all the required quality
standards. 

Together with consistent high-quality water supplied from our treatment plant
on the shore of lake Ülemiste, we further safeguard this quality at the
consumers tap, by completing annual preventative maintenance and targeted
capital investments. This helps to ensure the continued reliability and
performance of the 1,000 km of network that make up Tallinna Vesi’s water
network. 

To further safeguard the supply of high quality drinking water to our
end-users, we are currently exploring the feasibility of an alternative source
of raw water to directly supply the Ülemiste Water Treatment Plant. Once
constructed, this will bypass lake Ülemiste, providing raw water directly from
the inland catchment area, via the Pirita-Ülemiste channel. An environmental
impact study is currently being undertaken, which will be followed by the
detailed design, if no adverse comments are received. 

Water losses in the distribution network have been considerably lower in the
first six months compared to previous years, and are now at 13.33%, compared to
16.22% in 2016. This figure reduces even further if the last 3 months are taken
in isolation – 12.94%. This is the lowest leakage score achieved in the
Company’s history. We also managed to reduce the average water interruption to
3 hours and 15 minutes in 2017, which is testament to the reliability of the
network and the effectiveness of our operational teams, who work on a
continuous 24/7 basis. 

Similar to drinking water, we have achieved excellent results regarding the
final effluent quality leaving our wastewater treatment plant at Paljassaare.
During the first 6 months of this year, all samples complied with the relevant
quality parameters. This provides further confirmation that our treatment
process is effective and able to respond to the ever changing volumes and
consistency of wastewater entering the plant. 

Solid financial performance

In the first 6 months of the year, the Company’s sales revenues were 1.2% lower
year-on-year, which was mainly due to the reduced sale volumes of the Company’s
subsidiary Watercom, and lower revenues from storm water collection service.
However, this decrease was offset by higher volumes of water and wastewater
services. 

Despite the reduction in revenues, the Company’s net profit amounted to EUR
10.62 million, showing an increase of 65.7% year-on-year. Besides the above
factors affecting the sales revenues, the net profit was also impacted by lower
costs related to the tariff dispute, as well as a change in the fair value of
interest SWAP agreements. Reduced income tax on dividends, was a result of the
Company’s decision to pay only part of the dividend in June, with the remainder
being deferred until after important decisions have been received, with respect
to the ongoing tariff dispute. 

With respect to the dispute, we are still awaiting decisions from both the
local courts and International Arbitration. The Supreme Court decided to take
Tallinna Vesi’s Cassation into proceedings, which given previous Court rulings,
was taken as a positive step for the Company. We hope that the final verdict on
this matter would be reached soon. 

Employees are the heart of a successful company

It is the competent staff of Tallinna Vesi who stand behind the excellent
performance of the company and succession planning is one of our key strategic
objectives. Also, our efforts were recently recognised by the Estonian Human
Resource Management Association PARE, awarding Tallinna Vesi the second place
in the category “Best HR Project in 2017”. 

In the first half of 2017, the Company also had re-certification audits
completed, by an external auditor. Both Tallinna Vesi and its subsidiary
Watercom successfully passed the audits that related to our quality and
occupational health and safety management systems. We also submitted our annual
environmental report to the auditors related to 2016, which was drafted in
accordance with the voluntary EU Eco Management and Audit Scheme (EMAS).
Tallinna Vesi received positive feedback, for a well-structured and accurate
report, together with the professionalism and competency of staff interviewed. 

We support good cause initiatives

Along with our main activities, it is important for us to be contributing to
the initiatives that add value and positively impact our surrounding
environment and the children and youth living within the wider Tallinn
communities. Once again provided our support to the Estonian Youth Song and
Dance Celebration, by supplying refreshing drinking water to the events. 

We were also delighted to support the SPIN project that engages youth with
sport through football. SPIN was one of the annual award winners announced by
the UEFA Foundation for Children Awards. 



OPERATIONAL INDICATORS FOR SIX MONTHS OF 2017

Indicator                                                           2017    2016
--------------------------------------------------------------------------------
Drinking water                                                                  
--------------------------------------------------------------------------------
Compliance of water quality at the customers’ tap                  99,9%   99,9%
Water loss in the water distribution network                       13,3%   16,2%
Average duration of water interruptions per property in hours      3,25h   3,54h
Waste water                                                                     
--------------------------------------------------------------------------------
Number of sewer blockages                                            393     367
Number of sewer bursts                                                72      52
Wastewater treatment compliance with environmental standards      100,0%  100,0%
Customer service                                                                
--------------------------------------------------------------------------------
Number of written complaints                                          17      21
Number of customer contacts regarding water quality                   70      48
Number of customer contacts regarding water pressure                 146     157
Number of customer contacts regarding blockages and discharge of     539     569
 storm water                                                                    
Responding written customer contacts within at least 2 work days  100,0%   99,1%
Number of failed promises                                              3       2
Notification of unplanned water interruptions at least 1 h        100,0%   97,9%
 before the interruption                                                        





 Karl Heino Brookes

 Chairman of the Management Board





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 back in 2011.
  -- 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 years, CPI has been lower than at the time the
     claim was originally calculated, with a current undiscounted value of EUR
     72 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 and on the
     26th January 2017, the District Court dismissed AS Tallinna Vesi’s appeal.
  -- The Company submitted its Cassation to the Court on 27th February 2017. 
  -- On 20th of June 2017 Supreme Court decided to open proceedings on AS
     Tallinna Vesi´s appeal in cassation. No hearings have taken place nor
     timetable determined.
  -- 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 2016 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 submitted their Post Hearing Briefs in February 2017, with the
     final verdict expected in the second half of 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 2nd QUARTER 2017

The Group’s sales revenues during the 2nd quarter of 2017 were EUR 14.73
million, being up by 1.6% or EUR 0.23 million compared to the same period in
2016. 

The gross profit in the 2nd quarter of 2017 was EUR 8.53 million, showing an
increase of 2.7% or EUR 0.22 million. Increase in gross profit was mainly
related to higher water and wastewater revenues, which was supported by lower
depreciation and pollution tax expenses. It was balanced by lower storm water
revenues and by higher chemical costs and construction and asphalting related
costs. 

The operating profit was EUR 7.18 million, showing an increase of 23.0% or EUR
1.34 million. The operating profit was in addition to the above mentioned
changes in gross profit impacted by considerably lower tariff dispute related
costs in the 2nd quarter of 2017. 

The net profit for the 2nd quarter of 2017 was EUR 4.26 million, being higher
by 450.3% or EUR 3.49 million. The net profit was mainly impacted by above
mentioned changes in the operating profit, complimented by lower financial
expenses and lower dividend related income tax cost. The changes in the
financial expenses were mostly influenced by the positive change in the fair
value of swap contracts in the 2nd quarter of 2017 compared to the negative
change in the same quarter of 2016. Lower dividend related income tax cost was
influenced by lower dividend pay-out in June 2017, worth in total EUR 1.80
million. The net profit for the 2nd quarter of 2017 and 2016 without the impact
resulted from the change of the fair value of swap contracts was EUR 4.10
million and EUR 0.99 million respectively, being higher by 313.9% or EUR 3.11
million year-on-year. 



MAIN FINANCIAL INDICATORS

                  2nd quarter                         6 months                  
EUR million,       2015   2016   2017  Change      2015   2016   2017  Change   
except key                              2017/201                        2017/201
 ratios                                6                               6        
--------------------------------------------------------------------------------
Sales             13,74  14,50  14,73       1,6%  27,31  28,87  28,51      -1,2%
Gross profit       8,01   8,30   8,53       2,7%  16,08  16,64  16,73       0,6%
Gross profit      58,28  57,27  57,89       1,1%  58,89  57,64  58,70       1,8%
 margin %                                                                       
Operating profit   6,23   5,84   7,18      23,0%  12,92  12,47  13,67       9,6%
Operating profit   6,17   5,69   7,06      24,0%  12,83  12,23  13,53      10,6%
 - main business                                                                
Operating profit  45,34  40,29  48,78      21,1%  47,29  43,21  47,95      11,0%
 margin %                                                                       
Profit before      6,64   5,27   6,96      31,9%  13,02  10,91  13,32      22,1%
 taxes                                                                          
Net profit         2,14   0,77   4,26     450,3%   8,52   6,41  10,62      65,7%
Net profit        15,54   5,34  28,92     441,6%  31,19  22,21  37,25      67,8%
 margin %                                                                       
ROA %              1,06   0,38   1,98     421,9%   4,25   3,14   4,94      57,1%
Debt to total     61,28  62,06  58,54      -5,7%  61,28  62,06  58,54      -5,7%
 capital                                                                        
 employed %                                                                     
ROE %              2,75   1,00   4,77     377,5%  10,97   8,28  11,90      43,8%
Current ratio      3,19   2,63   3,70      40,8%   3,19   2,63   3,70      40,8%
--------------------------------------------------------------------------------

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, design and asphalting services, doubtful debt 



FINANCIAL RESULTS FOR THE 2nd QUARTER 2017

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
business. The Company does not expect significant changes in the consumption in
future. There has been incremental increase in consumption in the past and that
is expected to continue. 

In the 2nd quarter of 2017 the Group’s total sales were EUR 14.73 million,
showing an increase by 1.6% or EUR 0.23 million year-on-year. 87.4% 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, 5.9% 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. 

                                                   2nd quarter         Variance 
                                                                       2017/2016
EUR thousand                                    2017    2016    2015  EUR      %
--------------------------------------------------------------------------------
Private clients, incl:                         6,313   6,200   6,083  113   1.8%
--------------------------------------------------------------------------------
Water supply service                           3,470   3,410   3,345   60   1.8%
Waste water disposal service                   2,843   2,790   2,738   53   1.9%
Corporate clients, incl:                       5,193   5,070   4,891  123   2.4%
--------------------------------------------------------------------------------
Water supply service                           2,877   2,831   2,717   46   1.6%
Waste water disposal service                   2,316   2,239   2,174   77   3.4%
Outside service area clients, incl:            1,102   1,101   1,197    1   0.1%
--------------------------------------------------------------------------------
Water supply service                             339     346     332   -7  -2.0%
Waste water disposal service                     692     686     759    6   0.9%
Storm water disposal service                      71      69     106    2   2.9%
Over pollution fee                               258     211     223   47  22.3%
--------------------------------------------------------------------------------
Total water supply and waste water disposal   12,866  12,582  12,394  284   2.3%
 service                                                                        
                                                                                
Storm water treatment and disposal service       839     924     875  -85  -9.2%
 and fire hydrants service                                                      
Construction service, design and asphalting      864     827     324   37   4.5%
Other works and services                         159     164     149   -5  -3.0%
--------------------------------------------------------------------------------
SALES REVENUES TOTAL                          14,728  14,497  13,742  231   1.6%



Sales from water and wastewater services were EUR 12.87 million, showing a 2.3%
or EUR 0.28 million increase compared to the 2nd quarter of 2016, resulting
from the changes in sales volumes as described below: 

  -- There has been an increase in private customers’ revenues by 1.8% to EUR
     6.31 million. The increase in domestic customer consumption volumes came
     mainly from apartment blocks, which is also our biggest private customer
     group. There was also a slight increase in other private customer groups.
  -- Sales to corporate customers within the service area increased by 2.4% to
     EUR 5.19 million. Increase was mostly related to increase in sales of
     industrial and leisure segments.
  -- Sales to customers outside the main service area have been relatively
     stable, being EUR 1.10 million in both comparative years. It was mainly
     impacted by small increase in the sales of waste water and storm water
     disposal services, which was balanced by the decrease in the sales of water
     supply service.
  -- Over pollution fees
received have increased by 22.3% to EUR 0.26 million.

Sales from the operation and maintenance of the main service area storm water
and fire hydrant system were EUR 0.84 million, showing a decrease of 9.2% or
EUR 0.09 million in the 2nd quarter of 2017 compared to the same period in
2016, driven mainly by 13.8% lower storm water volumes as the spring was quite
dry. 

Sales of construction, design and asphalting services were EUR 0.86 million,
increasing by 4.5% or EUR 0.04 million year-on-year. The increase was mainly
related to higher pipe construction services revenues during the 2nd quarter of
2017. 



COST OF GOODS/ SERVICES SOLD AND GROSS PROFIT

The cost of goods sold amounted to EUR 6.20 million in the 2nd quarter of 2017,
being at the same level compared to the equivalent period in 2016. The change
in cost was mainly influenced by increase in different direct production costs,
other costs of goods sold and construction and asphalting services related
costs, accompanied by decrease in depreciation and pollution tax expenses. 

                                                  2nd quarter         Variance  
                                                                      2017/2016 
EUR thousand                                   2017    2016    2015  EUR       %
--------------------------------------------------------------------------------
Water abstraction charges                      -292    -283    -276   -9   -3.2%
Chemicals                                      -352    -285    -377  -67  -23.5%
Electricity                                    -777    -728    -747  -49   -6.7%
Pollution tax                                  -201    -235    -235   34   14.5%
--------------------------------------------------------------------------------
Total direct production costs                -1,622  -1,531  -1,635  -91   -5.9%
Staff costs                                  -1,479  -1,470  -1,436   -9   -0.6%
Depreciation and amortization                -1,360  -1,591  -1,437  231   14.5%
Construction service, design and asphalting    -735    -675    -271  -60   -8.9%
Other costs of goods/services sold           -1,006    -928    -954  -78   -8.4%
--------------------------------------------------------------------------------
Other costs of goods/services sold total     -4,580  -4,664  -4,098   84    1.8%
--------------------------------------------------------------------------------
Total cost of goods/services sold            -6,202  -6,195  -5,733   -7   -0.1%



Total direct production costs (water abstraction charges, chemicals,
electricity and pollution tax) were EUR 1.62 million, showing 5.9% or EUR 0.09
million increase compared to equivalent period in 2016. 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 3.2% to EUR 0.29 million, driven mainly by 1.1% increase in
     treated water volumes.
  -- Chemicals
costs increased by 23.5% to EUR 0.35 million, driven mainly by 89.9% higher
     methanol price in the wastewater treatment process, worth EUR 0.05 million,
     and higher usage of polymers, worth EUR 0.02 million. Higher total
     year-on-year chemicals costs in wastewater treatment process were
     accompanied by increase in usage of different chemicals in water treatment
     due to higher treated water volumes and higher dosage of different
     chemicals due to poor raw water quality, worth in total EUR 0.02 million.
  -- Electricity costs
increased by 6.7% to EUR 0.78 million. It was related to on average 7.0%
     higher electricity price, worth EUR 0.05 million.
  -- Pollution tax expense
decreased by 14.5% to EUR 0.20 million, mainly due to lower pollution load
     of Nitrogen and 3.4% decrease in treated wastewater volumes, worth
     respectively EUR 0.02 million and EUR 0.01 million.

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 1.8% or EUR 0.08 million. The decrease came mostly
from costs related to depreciation, balanced by increase in other costs of
goods sold and costs related to construction and asphalting services. Decrease
in depreciation by 14.5% to EUR 1.36 million was mainly related to accelerated
depreciation costs in the equivalent period of 2016. Other costs of goods sold
increase is mainly related to timing of asset maintenance works in wastewater
treatment process and higher transportation costs, which in itself was mostly
influenced by use of different rental mechanisms and higher maintenance and
repairs costs of cars. Increase in construction and asphalting services costs
by 8.9% to EUR 0.74 million was related to an increase in construction and
asphalting services revenues mentioned earlier and project specific changes. 

As a result of all above the Group’s gross profit for the 2nd quarter of 2017
was EUR 8.53 million, showing an increase of 2.7% or EUR 0.22 million, compared
to the gross profit of EUR 8.30 million for the comparative period of 2016. 



ADMINISTRATIVE AND MARKETING EXPENSES

Administrative and marketing expenses amounted to EUR 1.29 million, having
decreased by 46.6% or EUR 1.13 million. The decrease was mainly related to
lower tariff dispute related costs. 



OPERATING PROFIT

As a result of the factors listed above the Group’s operating profit for the
2nd quarter of 2017 amounted to EUR 7.18 million, being 23.0% or EUR 1.34
million higher than in the corresponding period of 2016. The Group’s operating
profit from main business was EUR 7.06 million, being 24.0% or EUR 1.37 million
higher compared to 2016. 



FINANCIAL EXPENSES

The Group’s net financial income and expenses have resulted a net expense of
EUR 0.23 million, compared to net expense of EUR 0.57 million in the 2nd
quarter of 2016. The decrease was mainly impacted by a positive change in the
fair value of the swap contracts year-on-year, worth EUR 0.37 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,
amounting to EUR 0.91 million. Effective interest rate of loans (incl. swap
interests) in the 2nd quarter of 2017 was 1.61%, amounting to interest costs of
EUR 0.39 million, compared to the effective interest rate of 1.52% and the
interest costs of EUR 0.37 million in the 2nd quarter of 2016. 



PROFIT BEFORE TAXES AND NET PROFIT

The Group’s profit before taxes for the 2nd quarter of 2017 was EUR 6.96
million, being 31.9% or EUR 1.69 million higher than for the 2nd quarter of
2016. The Group’s net profit for the 2nd quarter of 2017 was EUR 4.26 million,
being 450.3% or EUR 3.49 million higher compared to 2016, impacted by the
decrease in income tax on dividends, worth EUR 1.80 million. Eliminating the
effects of the change in derivatives fair value, the Group’s net profit for the
2nd quarter of 2017 would have been EUR 4.10 million, showing an increase by
313.9% or EUR 3.11 million compared to the relevant period in 2016. 



RESULTS FOR THE SIX MONTHS OF 2017

STATEMENT OF COMPREHENSIVE INCOME

SALES

During the six months of 2017 the Group’s total sales were EUR 28.51 million,
showing a decrease by 1.2% or EUR 0.36 million year-on-year. 

Sales from water and wastewater services for six months of 2017 were EUR 25.59
million, increasing 2.0% or EUR 0.49 million compared to the six months of
2016. 89.8% of sales comprised of sales of water and wastewater services to
domestic and commercial customers within and outside of the service area. 5.5%
of sales are the fees received from the City of Tallinn for operating and
maintaining the storm water system and fire hydrants, 3.7% from construction
and asphalting services and 1.0% from other works and services. 

                                                   6 months           Variance  
                                                                     2017/2016  
EUR thousand                                  2017    2016    2015   EUR       %
--------------------------------------------------------------------------------
Private clients, incl:                      12,660  12,538  12,237   122    1.0%
--------------------------------------------------------------------------------
Water supply service                         6,960   6,895   6,731    65    0.9%
Waste water disposal service                 5,700   5,643   5,506    57    1.0%
Corporate clients, incl:                    10,256   9,952   9,564   304    3.1%
--------------------------------------------------------------------------------
Water supply service                         5,648   5,504   5,287   144    2.6%
Waste water disposal service                 4,608   4,448   4,277   160    3.6%
Outside service area clients, incl:          2,210   2,230   2,446   -20   -0.9%
--------------------------------------------------------------------------------
Water supply service                           669     654     623    15    2.3%
Waste water disposal service                 1,375   1,355   1,531    20    1.5%
Storm water disposal service                   166     221     292   -55  -24.9%
Over pollution fee                             468     382     407    86   22.5%
--------------------------------------------------------------------------------
Total water supply and waste water          25,594  25,102  24,654   492    2.0%
 disposal service                                                               
                                                                                
Storm water treatment and disposal service   1,580   1,870   1,719  -290  -15.5%
 and fire hydrant service                                                       
Construction service, design and             1,045   1,588     667  -543  -34.2%
 asphalting                                                                     
Other works and services                       290     306     271   -16   -5.2%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SALES REVENUES TOTAL                        28,509  28,866  27,311  -357   -1.2%



During the six months of 2017 there has been an increase in sales to private
customers by 1.0% to EUR 12.66 million and 3.1% increase to EUR 10.26 million
in sales to corporate customers within the service area. Increase in sales to
private customers came solely from apartment blocks, while other domestic
customer segments had a slight decrease. Sales increase in corporate customers
is mostly related to industrial and leisure segments. Sales to customers
outside the main service area have decreased by 0.9% to EUR 0.17 million,
mainly due to lower snow melting water and storm water volumes in 2017. Over
pollution fees received have increased by 22.5% to EUR 0.47 million. 

Sales from the operation and maintenance of the main service area storm water
and fire hydrant system in the six months of 2017 were EUR 1.58 million,
showing a decrease of 15.5% or EUR 0.29 million year-on-year, driven mainly by
30.8% lower storm water volumes in 2017. 

Sales of construction, design and asphalting services were EUR 1.05 million,
decreasing by 34.2% or EUR 0.54 million year-on-year. The decrease was mainly
related to lower pipe construction services revenues during 2017 1st quarter. 



COST OF GOODS SOLD AND GROSS AND OPERATING PROFITS

                                                  6 months            Variance  
                                                                     2017/2016  
EUR thousand                                2017     2016     2015   EUR       %
--------------------------------------------------------------------------------
Water abstraction charges                   -588     -575     -546   -13   -2.3%
Chemicals                                   -685     -627     -736   -58   -9.3%
Electricity                               -1,630   -1,538   -1,575   -92   -6.0%
Pollution tax                               -493     -571     -536    78   13.7%
--------------------------------------------------------------------------------
Total direct production costs             -3,396   -3,311   -3,393   -85   -2.6%
Staff costs                               -2,900   -2,888   -2,784   -12   -0.4%
Depreciation and amortization             -2,711   -3,023   -2,830   312   10.3%
Construction service, design and            -874   -1,349     -579   475   35.2%
 asphalting                                                                     
Other costs of goods/services sold        -1,894   -1,657   -1,641  -237  -14.3%
--------------------------------------------------------------------------------
Other costs of goods/services sold        -8,379   -8,917   -7,834   538    6.0%
 total                                                                          
--------------------------------------------------------------------------------
Total cost of goods/services sold        -11,775  -12,228  -11,227   453    3.7%



Total direct production costs (water abstraction charges, chemicals,
electricity and pollution taxes) were EUR 3.40 million, showing an increase of
2.6% or EUR 0.09 million year-on-year. Change in costs came from the decrease
in pollution tax expense, balanced by increase in all other direct production
costs as described below: 

  -- Water abstraction charges
increased by 2.3% to EUR 0.59 million, driven by 0.8% increase in treated
     water volumes.
  -- Chemicals costs
 increased by 9.3% to EUR 0.69 million, driven mainly by on average 42.4%
     higher methanol price and higher use of polymers in wastewater treatment
     process, worth respectively EUR 0.06 million and EUR 0.04 million,
     accompanied by increased water treatment process chemicals costs driven by
     increase in usage and treated volumes, worth EUR 0.03 million. Increased
     costs were balanced by decrease in methanol and coagulant usage in
     wastewater treatment process to remove pollutants, worth respectively EUR
     0.05 million and EUR 0.03 million.
  -- Electricity costs
 have increased by 6.0% to EUR 1.63 million. It was related to on average
     7.6% higher electricity prices and higher cost per m3 used to treat raw
     water in water treatment plant, worth respectively EUR 0.12 million and EUR
     0.02 million, balanced by decrease in treated wastewater volumes, worth EUR
     0.04 million.
  -- Pollution tax expense
 decreased by 13.7% to EUR 0.49 million, driven mainly by 12.8% decrease in
     treated sewage volumes, worth EUR 0.07 million.

Other costs of goods sold (staff costs, depreciation, construction and
asphalting services costs and other costs of goods sold) amounted to EUR 8.38
million, having decreased by 6.0% or EUR 0.54 million compared to the same
period in 2016.  Changes in other costs of goods sold are driven by the same
reasons as mentioned in 2nd quarter results. 

Group’s gross profit for the six months of 2017 was EUR 16.73 million, being
0.6% or EUR 0.10 million higher compared to the same period in 2016. Group’s
operating profit was EUR 13.67 million, showing an increase by 9.6% or EUR 1.20
million during the six months of 2017. The increase in operating profit was
mostly driven by the changes in gross profit mentioned earlier and lower tariff
related costs in 2nd quarter in 2017. 



FINANCIAL EXPENSES

The Group’s net financial income and expenses have resulted a net expense of
EUR 0.35 million, compared to net expense of EUR 1.56 million in the six months
of 2016. The decrease was mainly impacted by a positive change in the fair
value of the swap contracts year-on-year, worth EUR 1.28 million. 



PROFIT BEFORE TAXES AND NET PROFIT

The Group’s profit before taxes for the six months of 2017 was EUR 13.32
million, showing a 22.1% or EUR 2.41 million increase compared to the relevant
period in 2016. The Group’s net profit for the six months of 2017 was EUR 10.62
million, which is 65.7% or EUR 4.21 million higher than the net profit for
equivalent period in 2016. Eliminating the effects of the derivatives fair
value, the net profit for the six months of 2017 would have been EUR 10.21
million, showing an increase by 40.2% or EUR 2.93 million compared to the
relevant period in 2016. 



STATEMENT OF FINANCIAL POSITION

In the six months of 2017 the Group invested into fixed assets EUR 3.51
million. As of 30.06.2017, non-current tangible assets amounted to EUR 171.67
million and total non-current assets amounted to EUR 172.48 million
(30.06.2016: EUR 165.11 million and EUR 165.91 million respectively). 

Compared to the year end of 2016 the trade receivables, accrued income and
prepaid expenses have shown a decrease in the amount of EUR 0.30 million to EUR
6.87 million. The collection rate of receivables continues to be high, being
99.45% compared to 99.76% in the end of June 2016. 

Current liabilities have increased by EUR 0.91 million to EUR 11.55 million
compared to the year end of 2016. Increase mainly derives from increase in
trade and other payables by EUR 0.85 million and increased prepayments of
connections in construction process by EUR 0.07 million. Changes in trade and
other payables were related to dividend income tax liability, balanced by lower
construction activities and investments related liabilities. 

Deferred income from connection fees has grown compared to the end of 2016 by
EUR 1.35 million to EUR 18.40 million and are related to bigger developments in
the beginning of the year. 

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 to assets level as expected of 58.5%, in range of
55%-65%, reflecting the Group’s equity profile. This level is consistent with
the same period in 2016, when the Total debt to assets ratio was also 62.1%. 



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 2nd quarter of 2017 the Group
re-evaluated the liability, which now stands at EUR 44 million (1st quarter of
2017 EUR 43 million), as per note 14 to the accounts. 



CASH FLOW

As of 30.06.2017, the cash position of the Group is strong. At the end of June
2017 the cash balance of the Group stood at EUR 35.34 million, which is 16.4%
of the total assets (30.06.2016: EUR 30.79 million, forming 15.1% of the total
assets). 

The biggest contribution to the cash flows comes from main operations. During
the six months of 2017, the Group generated EUR 15.90 million of cash flows
from operating activities, a decrease of EUR 0.44 million compared to the
corresponding period in 2016. Underlying operating profit continues to be the
main contributor to operating cash flows. 

In the six months of 2017 the result of net cash flows from investing
activities was a cash outflow of EUR 2.76 million, a decrease of EUR 1.62
million compared to the cash outflow of EUR 4.38 million in the six months of
2016. This is made up as follows: 

  -- The cash outflows from investments in fixed assets have decreased by EUR
     1.05 million compared to 2016 amounting to EUR 4.36 million.
  -- The compensations received for the construction of pipelines were EUR 1.55
     million, showing an increase of EUR 0.58 million compared to the same
     period of 2016.

In the six months of 2017 cash outflow from financing activities amounted to
EUR 11.78 million, decreasing by EUR 7.21 million compared to the same period
in 2016. The change was mainly related to decrease in dividends paid by EUR
7.20 million. 



EMPLOYEES

We believe it is important to treat our employees equally, involve them in the
decision-making process and to inform them regularly. We consider the
involvement of our staff in the decision-making process instrumental for them
to understand and be able to support the Company in its pursuits. Our staff can
vary to a large degree in age, nationality, nature of work and in many other
aspects. This requires us to be resourceful and flexible in our communication
with the staff in order to involve, engage and listen to them. This is done
using several opportunities and channels of communication, such as regular
staff meetings with the management, information boards, intranet, informative
letters, team events and a quarterly internal newsletter. Estonian is not a
communication language for quite a number of our staff. Therefore, we organise
Estonian classes at the Company’s expense to make the staff, whose mother
tongue is not Estonian, also feel as part of our unified team. At the same
time, we provide the majority of important information also in Russian. 

We have described our human resource 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 they
have access to the same opportunities as is reasonable and 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,
sexual orientation or marital status. 

At the end of the 2nd quarter of 2017, the total number of employees was 319
compared to 323 at the end of the 2nd quarter of 2016. The full time equivalent
(FTE) was respectively 309 in 2017 compared to the 313 in 2016. Average number
of employees (FTE) during the six months was respectively 305 in 2017 and 310
in 2016. 

By gender, employee allocation was as follows:

As of 30.06.2017   Women  Men  Total
Group                 92  224    316
------------------------------------
------------------------------------
Management Team       14   13     27
Executive Team         5    4      9
Management Board       1    2      3
                                    
Supervisory Board      0    9      9



As of 30.06.2016   Women  Men  Total
Group                 97  226    323
------------------------------------
------------------------------------
Management Team       13   12     25
Executive Team         6    3      9
Management Board       1    2      3
                                    
Supervisory Board      0    9      9



The total salary costs were EUR 2.10 million for the 2nd quarter of 2017,
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. 

The dividend policy has been related keeping the dividends in real term i.e.
dividends amounts have been increased in line with inflation. Every year the
Supervisory Board evaluates the proposal of the dividends to be paid out to the
shareholders and approves it to be presented to the voting to the annual
general meeting of shareholders, considering all circumstances. 

In the annual general meeting of shareholders held on 01.06.2017, the
Supervisory Board propose to pay out 60% of the usual dividend in June 2017,
and defer the decision as regards to the remaining 40%, until after decisions
have been received related to the ongoing tariff dispute. These decisions are
expected later in the year, from both the Supreme Court of Estonia and the
International Arbitration. Proposal of dividend payment of EUR 0.54 per A-share
and total pay-out in the amount of EUR 10.8 million was approved. Dividends
were paid out on 26.06.2017. 



SHARE PERFORMANCE

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

As of 30.06.2017, AS Tallinna Vesi shareholders, with a direct holding over 5%,
were: 

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

During the six months of 2017 the shareholder structure has been relatively
stable compared to the end of 2016. At the end of 2nd quarter 2017 the pension
funds shareholding has decreased, being 1.8% of the total shares compared to
2.1% at the end of 2016. 

As of 30.06.2017, the closing price of AS Tallinna Vesi share was EUR 12.50,
which is 10.7% (2016: -7.4%) lower compared to the closing price of EUR 14.00
at the beginning of the quarter. During the 2nd quarter the OMX Tallinn index
increased by 1.3% (2016: 1.0%). 

In the six months of 2017, 4,329 deals with the Company’s shares were concluded
(2016: 3,171 deals) during which 640 thousand shares or 3.2% of total shares
exchanged their owners (2016: 537 thousand shares or 2.7%). 

The turnover of the transactions was EUR 0.95 million higher than in 2016,
amounting to EUR 8.58 million. 



CORPORATE STRUCTURE

As of 30.06.2017, 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. Changes in the Supervisory Council members in the 2nd
quarter of 2017 were as follows. Mr Mart Mägi has been recalled from the
Supervisory Council and Mr Priit Rohumaa has been elected as a new Supervisory
Council member. Also Mr Allar Jõks’ term as a Supervisory Council member was
extended. 

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: 

https://www.tallinnavesi.ee/en/about-us/corporate-governance/supervisory-council
/ 

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 21st March 2020), Aleksandr Timofejev (with
the powers of the Management Board Member until 29th October 2018) and Riina
Käi (with the powers of the Management Board Member until 29th 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. 





STATEMENT OF COMPREHENSIVE         II         II         6        6        12   
 INCOME                          quarter    quarter    months   months   months 
(EUR thousand)                     2017       2016     2017     2016      2016  
                                                                                
Revenue                            14 728     14 497   28 509   28 866    58 982
Costs of goods sold                -6 202     -6 195  -11 775  -12 228   -25 721
--------------------------------------------------------------------------------
GROSS PROFIT                        8 526      8 302   16 734   16 638    33 261
                                                                                
Marketing expenses                    -78        -69     -179     -195      -365
General administration             -1 216     -2 355   -2 782   -3 883    -7 799
 expenses                                                                       
Other income/ expenses (-)            -48        -37     -103      -87      -470
--------------------------------------------------------------------------------
OPERATING PROFIT                    7 184      5 841   13 670   12 473    24 627
                                                                                
Interest income                         4         13        9       28        41
Interest expense                     -382       -359     -763     -710    -1 447
Other financial income (+)/           153       -221      404     -881      -331
 expenses (-)                                                                   
--------------------------------------------------------------------------------
PROFIT BEFORE TAXES                 6 959      5 274   13 320   10 910    22 890
                                                                                
Income tax on dividends            -2 700     -4 500   -2 700   -4 500    -4 500
                                                                                
NET PROFIT FOR THE PERIOD           4 259        774   10 620    6 410    18 390
--------------------------------------------------------------------------------
COMPREHENSIVE INCOME FOR THE        4 259        774   10 620    6 410    18 390
 PERIOD                                                                         
                                                                                
Attributable to:                                                                
--------------------------------------------------------------------------------
Equity holders of A-shares          4 258        773   10 619    6 409    18 389
B-share holder                       0,60       0,60     0,60     0,60      0,60
                                                                                
Earnings per A share (in             0,21       0,04     0,53     0,32      0,92
 euros)                                                                         
Earnings per B share (in              600        600      600      600       600
 euros)                                                                         







STATEMENT OF FINANCIAL POSITION                                                 
(EUR thousand)                                30.06.2017  30.06.2016  31.12.2016
                                                                                
ASSETS                                                                          
CURRENT ASSETS                                                                  
--------------------------------------------------------------------------------
Cash and equivalents                              35 344      30 785      33 987
Trade receivables, accrued income and              6 868       7 007       7 167
 prepaid expenses                                                               
Inventories                                          484         367         449
--------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                              42 696      38 159      41 603
                                                                                
NON-CURRENT ASSETS                                                              
--------------------------------------------------------------------------------
Property, plant and equipment                    171 666     165 108     171 177
Intangible assets                                    816         805         830
--------------------------------------------------------------------------------
TOTAL NON-CURRENT ASSETS                         172 482     165 913     172 007
--------------------------------------------------------------------------------
TOTAL ASSETS                                     215 178     204 072     213 610
                                                                                
LIABILITIES AND EQUITY                                                          
CURRENT LIABILITIES                                                             
--------------------------------------------------------------------------------
Current portion of long-term borrowings              244         730         264
Trade and other payables                           7 879      10 709       7 030
Derivatives                                          622         628         610
Prepayments                                        2 806       2 465       2 735
--------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                         11 551      14 532      10 639
                                                                                
NON-CURRENT LIABILITIES                                                         
--------------------------------------------------------------------------------
Deferred income from connection fees              18 400      15 412      17 050
Borrowings                                        95 709      95 440      95 795
Derivatives                                          292       1 254         715
Other payables                                        11          18          15
--------------------------------------------------------------------------------
TOTAL NON-CURRENT LIABILITIES                    114 412     112 124     113 575
--------------------------------------------------------------------------------
TOTAL LIABILITIES                                125 963     126 656     124 214
                                                                                
EQUITY                                                                          
--------------------------------------------------------------------------------
Share capital                                     12 000      12 000      12 000
Share premium                                     24 734      24 734      24 734
Statutory legal reserve                            1 278       1 278       1 278
Retained earnings                                 51 203      39 404      51 384
--------------------------------------------------------------------------------
TOTAL EQUITY                                      89 215      77 416      89 396
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY                     215 178     204 072     213 610









CASH FLOW STATEMENT                                       6        6        12  
                                                        months   months   months
(EUR thousand)                                          2017     2016     2016  
                                                                                
CASH FLOWS FROM OPERATING ACTIVITIES                                            
--------------------------------------------------------------------------------
Operating profit                                        13 670   12 473   24 627
Adjustment for depreciation/amortisation                 3 005    3 283    6 406
Adjustment for revenues from connection fees              -125     -106     -218
Other non-cash adjustments                                   0       -7      -15
Profit/loss(+) from sale and write off of property,        -11       -9      -42
 plant and equipment, and intangible assets                                     
Change in current assets involved in operating             264      254       41
 activities                                                                     
Change in liabilities involved in operating               -902      453    1 073
 activities                                                                     
TOTAL CASH FLOW FROM OPERATING ACTIVITIES               15 901   16 341   31 872
                                                                                
CASH FLOWS FROM INVESTING ACTIVITIES                                            
--------------------------------------------------------------------------------
Acquisition of property, plant and equipment, and       -4 361   -5 412  -14 526
 intangible assets                                                              
Compensations received for construction of pipelines     1 554      971    3 002
Proceeds from sales of property, plant and equipment        38       30       50
 and intangible assets                                                          
Interest received                                            9       32       45
--------------------------------------------------------------------------------
TOTAL CASH FLOW FROM INVESTING ACTIVITIES               -2 760   -4 379  -11 429
                                                                                
CASH FLOWS FROM FINANCING ACTIVITIES                                            
--------------------------------------------------------------------------------
Interest paid and loan financing costs, incl swap         -779     -739   -1 510
 interests                                                                      
Repayment of finance lease                                -141     -148     -264
Dividends paid                                         -10 801  -18 001  -18 001
Income tax on dividends                                    -63     -108   -4 500
--------------------------------------------------------------------------------
TOTAL CASH FLOW FROM FINANCING ACTIVITIES              -11 784  -18 996  -24 275
                                                                                
--------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS                      1 357   -7 034   -3 832
                                                                                
--------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE       33 987   37 819   37 819
 PERIOD                                                                         
                                                                                
--------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD      35 344   30 785   33 987






         Karl Heino Brookes
         Chairman of the Management Board
         +372 62 62 200
         [email protected]