Results of operations - for the 1st quarter 2016 Attachments:

Tallinna Vesi
Quarterly report

Results of operations - for the 1st quarter 2016

MANAGEMENT REPORT

Chairman's summary

The 1 quarter of 2016 is off to an excellent start. The majority of key performance indicators (KPI) are on track, which given the colder weather and associated increase in network disruption, is very good and a testament of all the hard work done by AS Tallinna Vesi staff, during the winter period.

In the 1 quarter of 2016, the water quality was 100% compliant, according to 6,510 analyses of the 772 samples taken. Average network leakage for the period was 17.51%, which is higher than the same period in 2015 (14.64%), but attributable to the colder ambient temperatures, resulting in a higher number of bursts on the clean water network. With the advent of warmer weather, we hope to see a corresponding reduction in network leakage, helping us to achieve the targeted year end KPI of 15%.

Besides providing premium drinking water, we are also responsible for a wastewater discharge service to nearly one third of Estonia's population (440,000). It is therefore extremely important that the wastewater treatment plant in Paljassaare works effectively and in accordance with the stipulated quality requirements, set by the Estonian Ministry of Environment. During the 1 quarter of 2016, the final effluent leaving Paljassaare was 100% compliant with the stipulated limits and no pollution incidents have occurred on the network.

We continue to make targeted capital investments, renovating or replacing assets based on previous condition surveys and performance data, to ensure the continued reliability of the infrastructure. This includes the 5+5 programme, where 5 km of water and wastewater network is replaced each year.

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

Operational performance for the three months of 2016

Contractual Highlights

• Tariffs of AS Tallinna Vesi continue to be on the same level, based on temporary injunction granted by the Court for the period of court proceedings, to protect the Company from unilateral breach of privatization agreement by the Estonian Authorities.
• 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, that 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 been deemed a public law contract, should enjoy the protection of 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 claims compensation for potential damages over the lifetime of the international privatisation contract up to 2020. The claim estimation includes future volumes and expectations for consumer price index (CPI). As the CPI has been recently lower than at the time of submitting the estimated, the estimated undiscounted value of the claim is around 74 million euros compared to over the 90 million euros submitted. The Court decided to stay the claim proceeding until the main tariff dispute is resolved.
• On 5 of June 2015, the Tallinn Administrative Court dismissed the Company's complaint in local tariff dispute. The reasoning of the dismissal of complaints was released not until 12 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 of November 2015.
• In October 2014, in parallel to the local dispute about tariffs, AS Tallinna Vesi andits 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 from 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 of June 2015, the timetable of the International Arbitration Proceedings was determined, with the final hearing set for November 2016. Procedural orders and decisions issued during the arbitration process, subject to the redaction of the confidential information, are available on theICSID website.
• International Arbitration Proceedings are being held in parallel and separately from local Court dispute.
• There has been no hearings in disputes in the 1 quarter of 2016.
• It has been four years already during which the Company has made intensive effort in trying to agree a solution in order to get the tariff dispute solved. Regretfully it has not been achieved.
• AS Tallinna Vesi has continuously stated its belief in fully transparent regulation and its willingness to enter into meaningful and evidence-based dialogue that takes into account the privatization contract signed in 2001.

Financial highlights of 1 quarter 2016

The Group's sales revenues during the 1 quarter of 2016 were EUR 14.37 million, being up by 5.9% or EUR 0.80 million compared to the same period in 2015.

The gross profit in the 1 quarter of 2016 was EUR 8.34 million, showing an increase by 3.3% or EUR 0.26 million. Increase in gross profit was related to higher water, wastewater and storm water revenues, but moreover with higher revenues from construction and asphalting services, which was balanced by higher costs related to construction and asphalting services and increased staff costs.

The operating profit was EUR 6.63 million, showing a slight decrease by 0.8% or EUR 0.05 million. The operating profit was impacted by the above mentioned changes in gross profit, which was balanced by some increases in staff costs and continuously high legal costs.

The net profit for the 1 quarter of 2016 was EUR 5.64 million, being down by 11.7% or EUR 0.75 million. The net profit was mainly impacted by above mentioned changes in operating profit and higher financial expenses. Higher financial expenses were mostly influenced by the negative change in the fair value of swap contracts in the 1 quarter of 2016. The net profit for the 1 quarter of 2016 and 2015 without the impact resulted from the change of the fair value of swap contracts was EUR 6.29 million and EUR 5.97 million respectively.

Gross profit margin - Gross profit / Net sales

Operating profit margin - Operating profit / Net sales

Net profit margin - Net profit / Net sales

ROA - Net profit /average Total assets for the period

Debt to Total capital employed - Total liabilities / Total capital employed

ROE - Net profit / Total equity

Current ratio - Current assets / Current liabilities

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

RESULTS OF OPERATIONS FOR THE 1 QUARTER 2016

Profit and Loss Statement

1 quarter 2016

Sales

As the Company's tariffs are frozen at the 2010 tariff level, the changes in the revenues from main activities, i.e. from sales of water and wastewater services, are fully driven by consumption.

In the 1 quarter of 2016 the Group's total sales were EUR 14.37 million, showing an increase by 5.9% or EUR 0.80 million year on year. 87.1% of sales comprise of sales of water and wastewater services to domestic and commercial customers within and outside of the service area. 6.6% of sales are the fees received from the City of Tallinn for operating and maintaining the storm water system and fire hydrants and 6.3% from other works and services.

Sales from water and wastewater services were EUR 12.52 million, showing a 2.1% or EUR 0.26 million increase compared to the 1 quarter of 2015, resulting from the changes in sales volumes as described below:

• There has been a slight increase in all residential customer groups within the service area in the 1 quarter of 2016 compared to the same period in 2015 resulting a total increase in private customers' revenues by 3.0% to EUR 6.34 million.
• Sales to commercial customers within the service area have increased by 4.5% to EUR 4.88 million. Increase is mostly related to industrial and other customer segment.
• Sales to customers outside the main service area have shown a decrease by 9.5% to EUR 1.13 million. Wastewater revenues decreased by 13.1% to EUR 0.67 million and storm water revenues decreased by 18.3% to EUR 0.15 million, while water revenues increased by 5.5% to EUR 0.31 million. Decrease in the revenues from customers outside the main service area is mainly related to the sales to Viimsi, as they started to use their new wastewater treatment facilities.
• Over pollution fees received have decreased by 7.1% to EUR 0.17 million.

Sales from the operation and maintenance of the main service area storm water and fire-hydrant system were EUR 0.95 million, showing an increase of 12.0% or EUR 0.10 million in the 1 quarter of 2016 compared to the same period in 2015.

Sales of construction, design and asphalting services were EUR 0.76 million, having increased by 121.2% or EUR 0.42 million year on year. The increase was mainly related to the higher construction revenues resulted from an ongoing big project started at the end of 2015.

Cost of Goods Sold and Gross profit

The cost of goods sold amounted to EUR 6.03 million in the 1 quarter of 2016, showing 9.8% or EUR 0.54 million increase compared to the equivalent period in 2015. The cost increase is mainly influenced by increase in construction and asphalting services related costs and also by higher staff costs.

Total direct production costs (water abstraction charges, chemicals, electricity and pollution tax) were EUR 1.78 million, showing 1.2% or EUR 0.02 million increase year on year. Changes in direct production costs came from a combination of changes in prices and in treated volumes that affected the cost of goods sold together with the following additional factors:

• Water abstraction charges increased by 7.8% to EUR 0.29 million, driven mainly by increase in treated volumes.
• Chemicals costs decreased by 5.0% to EUR 0.34 million, driven mainly by 20.5% lower methanol price used in wastewater treatment, worth EUR 0.034 million, which was balanced by higher usage of methanol in the wastewater treatment process, worth EUR 0.017 million.
• Electricity costs decreased by 2.2% to EUR 0.81 million. Electricity costs decrease was related to lower electricity prices, balanced by higher electricity usage per m in both treatment processes and increase in treated volumes.
• Pollution tax expense increased by 12.0% to EUR 0.34 million, driven mainly by increase in treated volumes compared to the 1 quarter of 2015.

Other costs of goods sold (staff costs, depreciation, construction and asphalting services costs and other costs of goods sold) amounted to EUR 4.25 million, having increased by 13.8% or EUR 0.52 million. Most of the increase came from costs related to construction and asphalting services and higher staff costs. Staff costs increased by 5.2% to EUR 1.42 million. It was partly driven by higher headcount and also increase in salaries compared to the same period in 2015. Increase in construction and asphalting services costs by 119.2% to EUR 0.68 million was related to increased construction and asphalting revenues from a big overcoming project mentioned earlier.

As a result of all above the Group's gross profit for the 1 quarter of 2016 was EUR 8.34 million, showing an increase of 3.3% or EUR 0.26 million, compared to the gross profit of EUR 8.07 million for the comparative period of 2015.

Administrative and marketing expenses

Administrative and marketing expenses were EUR 1.66 million, showing an increase of 22.5% or EUR 0.30 million. Increased legal and consultation fees continue to be at a high level during the time the Company has ongoing local and international disputes. Increase in salary expenses was mostly related to higher headcount but also to some increase in salaries.

Operatingprofit

As a result of the factors listed above the Group's operating profit for the 1 quarter of 2016 totalled EUR 6.63 million, being 0.8% or EUR 0.05 million lower than in the corresponding quarter of 2015. The Group's operating profit from main business was 1.7% or EUR 0.11 million lower compared to 2015.

Financial expenses

The Group's net financial income and expenses have resulted a net expense of EUR 1.00 million, compared to net expense of EUR 0.30 million in the 1 quarter of 2015. It is mainly impacted by a negative change of the fair value of the swap contracts year on year (EUR -1.07 million), which was balanced by decrease in interest costs (EUR 0.39 million).

The standalone swap agreements have been signed to mitigate the majority of the long term floating interest risk. The interest swap agreements are signed for EUR 75 million and EUR 20 million are still with floating interest rate. At this point in time the estimated fair value of the swap contracts is negative, totalling EUR 1.66 million. Effective interest rate of loans (incl. swap interests) in the 1 quarter of 2016 was 1.47%, amounting to interest costs of EUR 0.35 million, compared to the effective interest rate of 3.11% and the interest costs of EUR 0.74 million in the 1 quarter of 2015.

Profit Before and After Tax

The Group's profit before taxes and net profit for the 1 quarter of 2016 was EUR 5.64 million, being 11.7% or EUR 0.75 million lower than for the 1 quarter of 2015, resulting mainly from increased revenues, balanced by the increased costs and net financial expenses as described above. Eliminating the influence of the derivatives fair value, the Group's profit before taxes and net profit for the 1 quarter of 2016 would have been EUR 6.29 million, showing an increase by 5.4% or EUR 0.32 million compared to the relevant period in 2015.

Statement of financial position

In the three months of 2016 the Group invested EUR 2.00 million into fixed assets. As of 31 March 2016 non-current tangible assets amounted to EUR 163.12 million and total non-current assets amounted to EUR 163.91 million (31 March 2015: EUR 157.51 million and EUR 158.35 million respectively).

Compared to the year end of 2015 the receivables and prepayments have shown an increase in the amount of EUR 0.18 million to EUR 7.35 million. Increase is mostly related to construction activities. The collection rate of receivables continues to be high being 99.8% compared to 99.7% in the 1 quarter of 2015.

Current liabilities have increased by EUR 0.55 million to EUR 8.97 million compared to the year end of 2015. The increase in trade and other payables by EUR 0.57 million is related to increased investment related liabilities.

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

The Group has a Total debt/Total assets level as expected of 56.2%, in range of 55%-65%, reflecting the Group's equity profile. This level is consistent with the same period in 2015 when the Total debt/Total assets ratio was 55.9%.

Deferred income from connection fees has grown compared to the end of 2015 by EUR 0.31 million to 15.34 million.

Contingent liability regarding the tariff risk

In the 4 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 36.0 million. In the 4 quarter of 2015 the Group re-evaluated the liability, which now stands at EUR 42.8 million, as per note 13 to the accounts. The re-evaluation is made annually at the end of the year.

Cash flows

As of 31 March 2016 the cash position of the Group is strong. At the end of March 2016 the cash balance of the Group stood at EUR 44.17 million, which is 20.5% of the total assets (31 March 2015: EUR 46.39 million, forming 21.9% of the total assets).

The biggest contribution to the cash flows comes from main operations. During the three months of 2016, the Group generated EUR 8.76 million of cash flows from operating activities, an increase of EUR 0.70 million compared to the corresponding period in 2015. Underlying operating profit continues to be the main contributor to operating cash flows. The collection of receivables continues to be strong.

In the three months of 2016 the result of net cash flows from investing activities was a cash outflow of EUR 2.05 million, a decrease of EUR 2.53 million compared to the cash inflow of EUR 0.48 million in the three months of 2015. This is made up as follows:

• In the three months of 2016 the investments in fixed assets have increased by EUR 0.38 million compared to 2015 amounting to EUR 2.24 million.
• The compensations received for the construction of pipelines were EUR 0.15 million in the three months of 2016, showing a decrease of EUR 2.14 million compared to the same period of 2015. It is mostly related to the extension program for which last payments were received in the 1 quarter of 2015.

In the three months of 2016 cash outflow from financing activities amounted to EUR 0.35 million, decreasing by EUR 0.36 million compared to the same period in 2015. The change was mainly related to reduction in interest payments by EUR 0.34 million related to renewal of swap contracts in 2 quarter of 2015.

Employees

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

At the end of the 1 quarter of 2016, the total number of employees was 319 compared to 313 at the end of the 1 quarter of 2015. The full time equivalent (FTE) was respectively 307 in 2016 compared to the 302 in 2015. Average number of employees (FTE) during the 1 quarter was respectively 309 in 2016 and 301 in 2015.

By gender, employee allocation was as follows:

The total salary cost was EUR 2.08 million, including EUR 0.08 million paid to Management and Supervisory Council members. The off-balance sheet potential salary liability could rise up to EUR 0.08 million should the Council want to replace the current Management Board members.

Dividends

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

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

On the annual general meeting of shareholders on 2 of June 2016 the matter of dividend pay-out will be voted on.

Dividends will be paid out in June 2016.

Share performance

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

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

During the three months of 2016 the shareholder structure has been relatively stable compared to the end of 2015. At the end of 1 quarter 2016 the pension funds owned 1.87% of the total shares compared to 1.89% at the end of 4 quarter 2015.

As of 31 March 2016, the closing price of AS Tallinna Vesi share was EUR 14.80, which is 7.2% (2015: 7.6%) higher compared to the closing price of EUR 13.80 at the beginning of the quarter. During the same period the OMX Tallinn index increased by 8.0% (2015: 14.3%).

In the three months of 2016, 1,514 deals with the Company's shares were concluded (2015: 1,324 deals) during which 258 thousand shares or 1.3% exchanged their owners (2015: 309 thousand shares or 1.5%).

The turnover of the transactions was EUR 0.67 million lower than in 2015, amounting to EUR 3.61 million.

Corporate structure

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

Corporate Governance

Supervisory Council

Supervisory Council plans and organises the management of the Company and supervises the activities of the Management Board. According to AS Tallinna Vesi articles of association Supervisory Council consists of 9 members who are appointed for two years. There has been no changes in Supervisory Council members in the 1 quarter of 2016.

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

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

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

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

http://tallinnavesi.ee/en/Investor/Corporate-Governance/Corporate-Governance-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 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 20 of March 2017), Aleksandr Timofejev (with the powers of the Management Board Member until 29 of October 2018) and Riina Käi (with the powers of the Management Board Member until 29 of October 2018).

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

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

Future actions & risks

Legal claim for breach of international treaty

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

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

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

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 to the Tallinn Stock.

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

Karl Heino Brookes
Chairman of the Management Board
+372 6262 201
karl.brookes@tvesi.ee

Tallinna Vesi AS issued this content on 29 April 2016 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 29 April 2016 06:36:30 UTC

Original Document: http://www.nasdaqbaltic.com/market/?pg=details&instrument=EE3100026436&list=2&tab=news&news_id=283627