Tallinna Vesi
Quarterly report

Results of operations for the 3rd quarter 2017

MANAGEMENT REPORT

CHAIRMAN'S SUMMARY

Tallinna Vesi has had successful first 9 months in 2017, with respect to both operational and financial performance.

Reliable water supply and wastewater service

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 99.91% compliant with all the required quality standards. This means only two samples out of 2,225 samples taken, exceeded the allowed limits.

To further safeguard the supply of high quality drinking water to our end-users, we commissioned a new water pipe in the third quarter of 2017, which can provide an alternative supply to nearly 100,000 people in Tallinn. The alternative supply pipe is one of the most important investments of the last decade in securing uninterrupted water supply service to the City. ASTV also opened a new public water tap on the cycle and pedestrian track on Järvevana Road, in order to improve the availability of pure drinking water to the general public.

Water losses in the distribution network have been considerably lower in the first nine months compared to previous years, and are now at 13.52%, compared to 15.39% in 2016. We also managed to reduce the average water interruption time 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.

AS Tallinna Vesi does not compromise on safety or protecting the environment. Our final effluent was once again 100% compliant with the applicable permit requirements during the 9 months of 2017. Maintaining the quality of final effluent is essential to the continued security of the Baltic Sea.

Solid financial performance

In the first 9 months of the year, the Company’s sales revenues were 1.4% 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 partially offset by higher volumes of water and wastewater services.

Despite the reduction in revenues, the Company’s net profit amounted to EUR 17.66 million, showing an increase of 36.5% 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.

In September Tallinna Vesi refinanced its long-term loan in a total amount of 37.5 million euros. Refinancing has generated a reduction in our loan interest risk margin, from 0.95% to 0.79%.

Strong financial results of Tallinna Vesi were recognised at the largest Estonian entrepreneurship competition held by Estonian Chamber of Commerce and Industry. We were awarded with the 3^rd place in the Estonian Companies´ Competitiveness ranking 2017” among service providers.

Raising environmental awareness and supporting the community

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.

One of our objectives is to improve our customers’ awareness of the environmental aspects concerning water supply and wastewater disposal services. For this purpose, we welcomed a large number of visitors during the Open House Day event at Ülemiste Water Treatment Plant in September, and later this year we will also be launching our annual awareness campaign.

For many years, we have been proud to host the annual Ülemiste Lake Run, by opening our sanitary zone for the public on this special occasion. This year the run celebrated its 45^th anniversary.

Good investor relations also continue to be one of our top priorities. In September, we welcomed nearly 100 private investors to our water treatment plant, for an investor themed presentation and site tour.

OPERATIONAL INDICATORS FOR NINE MONTHS OF 2017

 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 5^th of June 2015, the Tallinn Administrative Court dismissed the Company’s complaint in the local tariff dispute. The reasoning for the dismissal, was not disclosed until 12^th 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 11^th of November 2015.
• On 23^rd 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 27^th February 2017.
• On 20^th of June 2017 Supreme Court decided to open proceedings on AS Tallinna Vesi´s appeal in cassation. The time of final decision has not yet been determined.
• In 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 17^th 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 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. The time of final verdict is not announced but it is expected rather at the end of this year or in the beginning of 2018.
• 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 3^rd QUARTER 2017

The Group’s sales revenues during the 3^rd quarter of 2017 were EUR 15.33 million, being down by 1.7% or EUR 0.26 million compared to the same period in 2016.

The gross profit in the 3^rd quarter of 2017 was EUR 8.57 million, showing an increase of 2.2% or EUR 0.18 million. Increase in gross profit was mainly related to higher water and wastewater revenues and construction and asphalting related profit, which was supported by lower electricity and pollution tax expenses. It was balanced by lower storm water revenues and by higher depreciation and chemical costs.

The operating profit was EUR 7.42 million, showing an increase of 9.2% or EUR 0.63 million. In addition to the above-mentioned changes in gross profit, the operating profit was impacted by considerably lower tariff dispute related costs in the 3^rd quarter of 2017.

The net profit for the 3^rd quarter of 2017 was EUR 7.04 million, being higher by 7.9% or EUR 0.52 million. The net profit was mainly impacted by above mentioned changes in the operating profit, and by higher financial expenses. The changes in the financial expenses were mostly influenced by the lower positive change in the fair value of swap contracts in the 3^rd quarter of 2017 compared to the positive change in the same quarter of 2016. The net profit for the 3^rd quarter of 2017 and 2016 without the impact resulted from the change of the fair value of swap contracts was EUR 7.02 million and EUR 6.42 million respectively, being higher by 9.3% or EUR 0.60 million year-on-year.

MAIN FINANCIAL INDICATORS

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, design and asphalting services, doubtful debt

FINANCIAL RESULTS FOR THE 3^rd 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. In the future, the Company does not expect significant changes in the consumption. There has been incremental increase in consumption in the past and that is expected to continue.

In the 3^rd quarter of 2017 the Group’s total sales were EUR 15.33 million, showing a decrease by 1.7% or EUR 0.26 million year-on-year. 81.8% of sales comprise of sales of water and wastewater services to domestic and commercial customers within and outside of the service area. 5.8% of sales are the fees received from the City of Tallinn for operating and maintaining the storm water system and fire hydrants, 11.3% 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.

Sales from water and wastewater services were EUR 12.55 million, showing a 1.7% or EUR 0.22 million increase compared to the 3^rd quarter of 2016, resulting from the changes in sales volumes as described below:

• There has been an increase in private customers’ revenues by 1.5% to EUR 6.15 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 individual houses and other private customer groups.
• Sales to corporate customers within the service area increased by 0.2% to EUR 5.00 million. Increase was mostly related to increase in sales of other and leisure segments.
• Sales to customers outside the main service area have increased by 7.0% to EUR 1.14 million. It was mainly impacted by increase in the sales of waste water and storm water disposal services and complemented by a small increase in the sales of water supply service.
• Over pollution fees received have increased by 18.7% to EUR 0.25 million.

Sales from the operation and maintenance of the main service area storm water and fire hydrant system were EUR 0.89 million, showing a decrease of 8.6% or EUR 0.08 million in the 3^rd quarter of 2017 compared to the same period in 2016, driven mainly by 18.3% lower storm water volumes as the summer was quite dry.

Sales of construction, design and asphalting services were EUR 1.74 million, decreasing by 19.3% or EUR 0.42 million year-on-year. The decrease was mainly related to lower pipe construction services revenues during the 3^rd quarter of 2017.

COST OF GOODS/ SERVICES SOLD AND GROSS PROFIT

The cost of goods sold amounted to EUR 6.77 million in the 3^rd quarter of 2017, decreasing by 6.2% or EUR 0.45 million compared to the equivalent period in 2016. The decrease in cost was mainly influenced by decrease in construction and asphalting services related costs, pollution tax expenses and electricity costs, balanced by increase in chemicals costs, depreciation and other costs of goods sold.

Total direct production costs (water abstraction charges, chemicals, electricity and pollution tax) were EUR 1.66 million, showing 0.4% or EUR 0.01 million decrease 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 2.9% to EUR 0.29 million, driven mainly by overall 0.4% increase in treated water volumes.
• Chemicals costs increased by 20.3% to EUR 0.42 million, driven by 34.1% higher methanol price in the wastewater treatment process, worth EUR 0.03 million, and higher usage of methanol and coagulant, worth in total EUR 0.03 million. Higher total year-on-year chemicals costs in wastewater treatment process were accompanied by increase in costs of different chemicals in water treatment due to higher price and higher dosage of different chemicals due to poor raw water quality, worth in total EUR 0.01 million.
• Electricity costs decreased by 4.7% to EUR 0.72 million. It was related to on average 2.6% lower electricity price, worth EUR 0.02 million.
• Pollution tax expense decreased by 17.1% to EUR 0.23 million, mainly due to lower pollution load of Nitrogen and 8.4% decrease in treated wastewater volumes, worth respectively EUR 0.02 million and EUR 0.02 million.

Other costs of goods sold (staff costs, depreciation, construction and asphalting services costs and other costs of goods sold) amounted to EUR 5.11 million, having decreased by 7.9% or EUR 0.44 million. The decrease came mostly from costs related to construction and asphalting services, balanced by increase in depreciation costs and other costs of goods sold. Increase in depreciation by 6.2% to EUR 1.52 million was mainly related to accelerated depreciation costs in 2017. Other costs of goods sold increase is mainly related to timing of asset maintenance works in wastewater treatment process and higher cleaning costs rising from the new cleaning supplier contract, worth EUR 0.02 million. Decrease in construction and asphalting services costs by 29.3% to EUR 1.44 million was related to a decrease 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 3^rd quarter of 2017 was EUR 8.57 million, showing an increase of 2.2% or EUR 0.18 million, compared to the gross profit of EUR 8.38 million for the comparative period of 2016.

ADMINISTRATIVE AND MARKETING EXPENSES

Administrative and marketing expenses amounted to EUR 1.11 million, having decreased by 28.5% or EUR 0.44 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 3^rd quarter of 2017 amounted to EUR 7.42 million, being 9.2% or EUR 0.63 million higher than in the corresponding period of 2016. The Group’s operating profit from main business was EUR 7.11 million, being 6.2% or EUR 0.42 million higher compared to 2016.

FINANCIAL EXPENSES

The Group’s net financial income and expenses have resulted a net expense of EUR 0.38 million, compared to net expense of EUR 0.27 million in the 3^rd quarter of 2016. The increase was mainly impacted by a negative change in the fair value of the swap contracts year-on-year, worth EUR 0.08 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 0.89 million. Effective interest rate of loans (incl. swap interests) in the 3^rd quarter of 2017 was 1.62%, amounting to interest costs of EUR 0.39 million, compared to the effective interest rate of 1.57% and the interest costs of EUR 0.38 million in the 3^rd quarter of 2016.

PROFIT BEFORE TAXES AND NET PROFIT

The Group’s profit before taxes and net profit for the 3^rd quarter of 2017 were EUR 7.04 million, being 7.9% or EUR 0.52 million higher than for the 3^rd quarter of 2016. Eliminating the effects of the change in derivatives fair value, the Group’s net profit for the 3^rd quarter of 2017 would have been EUR 7.02 million, showing an increase by 9.3% or EUR 0.60 million compared to the relevant period in 2016.

RESULTS FOR THE NINE MONTHS OF 2017

STATEMENT OF COMPREHENSIVE INCOME

SALES

During the nine months of 2017 the Group’s total sales were EUR 43.84 million, showing a decrease by 1.4% or EUR 0.62 million year-on-year.

Sales from water and wastewater services for nine months of 2017 were EUR 38.14 million, increasing 1.9% or EUR 0.71 million compared to the nine months of 2016. 87.0% of sales comprised of sales of water and wastewater services to domestic and commercial customers within and outside of the service area. 5.6% of sales are the fees received from the City of Tallinn for operating and maintaining the storm water system and fire hydrants, 6.3% from construction and asphalting services and 1.0% from other works and services.

During the nine months of 2017 there has been an increase in sales to private customers by 1.1% to EUR 18.81 million and 2.1% increase to EUR 15.26 million in sales to corporate customers within the service area. Increase in sales to private customers came mainly from apartment blocks, accompanied by slight increase in individual houses, 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 increased by 1.7% to EUR 3.35 million, mainly due to higher water and waste water disposal services, decreased by lower snow melting water and storm water volumes in 2017. Over pollution fees received have increased by 21.1% to EUR 0.72 million.

Sales from the operation and maintenance of the main service area storm water and fire hydrant system in the nine months of 2017 were EUR 2.47 million, showing a decrease of 13.1% or EUR 0.37 million year-on-year, driven mainly by 26.2% lower storm water volumes in 2017.

Sales of construction, design and asphalting services were EUR 2.78 million, decreasing by 25.6% or EUR 0.96 million year-on-year. The decrease was mainly related to lower pipe construction services revenues during 2017.

COST OF GOODS SOLD AND GROSS AND OPERATING PROFITS

Total direct production costs (water abstraction charges, chemicals, electricity and pollution taxes) were EUR 5.05 million, showing an increase of 1.6% or EUR 0.08 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 2.5% to EUR 0.87 million, driven by 1.2% increase in treated water volumes.
• Chemicals costs increased by 13.2% to EUR 1.10 million, driven mainly by on average 37.9% higher methanol price and higher use of polymers in wastewater treatment process, worth respectively EUR 0.09 million and EUR 0.04 million, which was 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 0.03 million and EUR 0.02 million.
• Electricity costs have increased by 2.5% to EUR 2.35 million. It was related to on average 4.2% higher electricity prices and higher cost per m³ in treating raw water in water treatment plant, worth respectively EUR 0.10 million and EUR 0.01 million, balanced by decrease in treated wastewater volumes, worth EUR 0.05 million.
• Pollution tax expense decreased by 14.8% to EUR 0.73 million, driven mainly by 11.3% decrease in treated sewage volumes, worth EUR 0.09 million, supplemented by the decreased pollution loads, worth EUR 0.03 million.

Other costs of goods sold (staff costs, depreciation, construction and asphalting services costs and other costs of goods sold) amounted to EUR 13.49 million, having decreased by 6.8% or EUR 0.98 million compared to the same period in 2016.  Changes in other costs of goods sold are driven mainly by the same reasons as mentioned in 3^rd quarter results.

Group’s gross profit for the nine months of 2017 was EUR 25.30 million, being 1.1% or EUR 0.28 million higher compared to the same period in 2016. Group’s operating profit was EUR 21.09 million, showing an increase by 9.5% or EUR 1.82 million during the nine months of 2017. The increase in operating profit was mostly driven by the changes in gross profit mentioned earlier and lower tariff dispute related costs in 2017.

FINANCIAL EXPENSES

The Group’s net financial income and expenses have resulted a net expense of EUR 0.73 million, compared to net expense of EUR 1.83 million in the nine 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 1.21 million.

PROFIT BEFORE TAXES AND NET PROFIT

The Group’s profit before taxes for the nine months of 2017 was EUR 20.36 million, showing a 16.8% or EUR 2.92 million increase compared to the relevant period in 2016. The Group’s net profit for the nine months of 2017 was EUR 17.66 million, which is 36.5% or EUR 4.72 million higher than the net profit for equivalent period in 2016, impacted by the decrease in income tax on dividends, worth EUR 1.80 million. Eliminating the effects of the derivatives fair value, the net profit for the nine months of 2017 would have been EUR 17.23 million, showing an increase by 25.7% or EUR 3.52 million compared to the relevant period in 2016.

STATEMENT OF FINANCIAL POSITION

In the nine months of 2017 the Group invested into fixed assets EUR 5.90 million. As of 30.09.2017, non-current tangible assets amounted to EUR 172.40 million and total non-current assets amounted to EUR 173.20 million (30.09.2016: EUR 167.99 million and EUR 168.80 million respectively).

Compared to the year end of 2016 the trade receivables, accrued income and prepaid expenses have shown an increase in the amount of EUR 0.52 million to EUR 7.68 million. The collection rate of receivables continues to be high, being 99.51% compared to 99.78% at the end of September 2016.

Current liabilities have decreased by EUR 0.52 million to EUR 10.12 million compared to the year end of 2016. Decrease mainly derives from decrease in trade and other payables by EUR 0.72 million and from increased prepayments of connections in construction process by EUR 0.20 million. Changes in trade and other payables were related to lower construction activities and investments related liabilities.                                                                                                                      

Deferred income from connection fees has grown compared to the end of 2016 by EUR 1.80 million to EUR 18.85 million and is 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 0.79%. In the end of September the Company refinanced its long-term loan in the amount of EUR 37.5 million, decreasing the interest risk margin from previous 0.95%.

The Group has a Total debt to assets level as expected of 56.5%, 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 59.6%.

CONTINGENT LIABILITY REGARDING THE TARIFF RISK

In the 4^th 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 3^rd quarter of 2017 the Group re-evaluated the liability, which now stands at EUR 44 million (2^nd quarter of 2017 EUR 44 million), as per note 14 to the accounts.

CASH FLOW

As of 30.09.2017, the cash position of the Group is strong. At the end of September 2017, the cash balance of the Group stood at EUR 39.77 million, which is 18.0% of the total assets (30.09.2016: EUR 30.41 million, forming 14.6% of the total assets).

The biggest contribution to the cash flows comes from main operations. During the nine months of 2017, the Group generated EUR 24.75 million of cash flows from operating activities, an increase of EUR 1.12 million compared to the corresponding period in 2016. Underlying operating profit continues to be the main contributor to operating cash flows.

In the nine months of 2017 the result of net cash flows from investing activities was a cash outflow of EUR 4.16 million, a decrease of EUR 3.10 million compared to the cash outflow of EUR 7.26 million in the nine months of 2016. This is made up as follows:

• The cash outflows from investments in fixed assets have decreased by EUR 3.36 million compared to 2016 amounting to EUR 6.41 million.
• The compensations received for the construction of pipelines were EUR 2.19 million, showing a decrease of EUR 0.25 million compared to the same period of 2016.

In the nine months of 2017 cash outflow from financing activities amounted to EUR 14.80 million, decreasing by EUR 8.98 million compared to the same period in 2016. The change was mainly related to decrease in dividends paid by EUR 7.20 million and income tax on dividends by EUR 1.80 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 3^rd quarter of 2017, the total number of employees was 314 compared to 317 at the end of the 3^rd quarter of 2016. The full time equivalent (FTE) was respectively 302 in 2017 compared to the 307 in 2016. Average number of employees (FTE) during the nine months was respectively 306 in 2017 and 310 in 2016.

By gender, employee allocation was as follows:

The total salary costs were EUR 1.78 million for the 3^rd 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 disputes. 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 30.09.2017, AS Tallinna Vesi shareholders, with a direct holding over 5%, were:  

During the nine months of 2017 the shareholder structure has been relatively stable compared to the end of 2016. At the end of 3^rd quarter 2017 the pension funds shareholding has decreased, being 1.6% of the total shares compared to 2.1% at the end of 2016.

As of 30.09.2017, the closing price of AS Tallinna Vesi share was EUR 12.40, which is 0.8% (2016: 2.2%) lower compared to the closing price of EUR 12.50 at the beginning of the quarter. During the 3^rd quarter the OMX Tallinn index increased by 7.8% (2016: 2.1%).

In the nine months of 2017, 5,890 deals with the Company’s shares were concluded (2016: 4,684 deals) during which 911 thousand shares or 4.6% of total shares exchanged their owners (2016: 753 thousand shares or 3.8%).

The turnover of the transactions was EUR 1.31 million higher than in 2016, amounting to EUR 11.95 million.

CORPORATE STRUCTURE

As of 30.09.2017, 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. There were no changes in the Supervisory Council members in the 3^rd quarter of 2017.

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-Report

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 2^nd 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 21^st March 2020), Aleksandr Timofejev (with the powers of the Management Board Member until 29^th October 2018) and Riina Käi (with the powers of the Management Board Member until 29^th 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=609264&messageId=754811

https://newsclient.omxgroup.com/cdsPublic/viewDisclosure.action?disclosureId=627851&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 62 200
         karl.brookes@tvesi.ee