Tallinna Vesi : Results of Operations - for the 1st quarter 2015 Attachments:

MANAGEMENT REPORT

Contractual Highlights

• AS Tallinna Vesi tariffs 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 the unilateral breach of privatization agreement by Estonian Authorities.
• AS Tallinna Vesi would like all its shareholders to be fully aware of the facts that the Company was privatised i n 2001 with the full support and knowledge of the Estonian national government, with written confirmations from the Prime Minister and the Minister of Finance regarding the key terms of the agreements, and utilising the expertise and guidance of the European Bank for Reconstruction and Development (EBRD).
• 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 firmly believes that the terms and conditions of the international privatisation contract that has been deemed a public law contract should not be broken simply by transferring the duties of the regulator from one state institution (the City of Tallinn) to a different state institution (the Competition Authority). A public law contract should enjoy the protection of the Estonian legal system, should the contract not be honoured, then the company will have a claim against the Estonian state.
• In addition , two experts that were included in the dispute, presented their independent expert opinions which were of the view that the tariff regulation methodology chosen in the Services Agreement, is an internationally recognised tariff methodology and complied with the PWSSA in force at the time of the privatisation. AS Tallinna Vesi hopes that the expert opinions facilitate swifter resolution of the complaints submitted by the Company against the Competition Authority since 1st of June 2011.
• In 2015, there has been three hearings in the local court as regards to the tariff dispute. The decision from the Administrative court is expected in May 2015. At the same time, the Company would like to stress that this decision will not likely to be final, as both parties may appeal it to the next degree of jurisdiction.

• 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 of over 90 million euros for total losses over the lifetime of the international privatisation contract up to 2020. The total compensation claim applies when the tariffs will remain unchanged till 2020. Of this amount, around 50 million euros has been already caused by the Competition Authority's refusal to approve tariff increases in the period of 2011 - 2013. The Court decided to stay the claim proceeding until the main tariff dispute is resolved.
• It has been three 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.

• In October 2014, AS Tallinna Vesi and 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 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.
• 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.
• Average real return on capital invested at privatization is still 6.2% since 2001.

Financial highlights of 1st quarter 2015

The Group's sales revenues during the 1st quarter 2015 have increased, being up 2.0% to 13.57 mln euros compared to the same period in 2014.

The gross profit in the 1st quarter of 2015 has increased 11.2% or 0.81 mln euros. Increase in gross profit is mainly related to lower pollution tax costs compared to the comparative period in 2014.

The pollution tax has been lower in 1st quarter of 2015 compared to the same period last year as at the beginning of 2014 the Group had problems with 400 times lowered allowed concentrations of heavy metals in the treated effluent, compared to the previous water permit limits. The problem was resolved with the issuance of the revised water permit in September 2014. In the revised water permit the concentration limits for heavy metals have been removed. The revised water permit is valid till the end of 1st quarter 2018.

The operating profit from Group's main activities has increased 18.3% to 6.66 mln euros, mainly due to the lower pollution tax costs, but also due to lower administrative costs.

The net profit for the 1st quarter without the additional exceptional changes that affected the pollution tax in 2014 and impact that resulted from the change of the fair value of swap contracts was 1.4% or 0.08 mln euros higher than in the comparative period last year.

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 services, doubtful debt, other income

RESULTS OF OPERATIONS - FOR THE 1st QUARTER 2015

Profit and Loss Statement

1st quarter 2015

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 1st quarter of 2015 the Group's total sales increased, year on year, by 2.0% to 13.57 mln euros. 90.4% of sales comprise of sales of water and wastewater services to domestic and commercial customers within and outside of the service area. 6.2% of sales are the fees received from the City of Tallinn for operating and maintaining the storm water system and fire hydrants and 3.4% from other works and services.

Sales of water and wastewater services were 12.26 mln euros, a 1.8% increase compared to the 1st quarter of 2014, resulting from the changes in sales volumes as described below.

Within the service area, sales to residential customers were at 6.15 mln euros, showing a 1.8% increase year on year, as revenues from apartment blocks form the biggest share of our residential sales, the biggest increase came also from this client group. Sales to commercial customers increased by 0.4% to 4.67 mln euros. Sales to customers outside of the main service area has increased by 9.1% to 1.25 mln euros. 38.8% or 0.05 mln euros increase in stormwater revenues were accompanied by higher water and wastewater sales respectively 0.04 mln euros and 0.02 mln euros. Over pollution fees received were 0.19 mln euros, a 5.2% decrease compared to the 1st quarter of 2014.

The sales from the operation and maintenance of the storm water and fire-hydrant system in the main service area have decreased by 14.8% to 0.84 mln euros in the 1st quarter of 2015 compared to the same period in 2014.

The sales of construction activities and design services have increased by 163.1% to 0.34 mln euros in the 1st quarter of 2015 compared to 1st quarter of 2014.

Cost of Goods Sold and Gross profit

The cost of goods sold for the main operating activity was 5.49 mln euros in the 1st quarter of 2015, showing 0.55 mln euros or 9.1% decrease compared to the equivalent period in 2014. The cost decrease is mainly influenced by lower pollution tax costs, which is balanced by the increased construction services costs in the 1st quarter of 2015.

Total direct production costs (water abstraction charges, chemicals, electricity and pollution taxes) decreased by 0.83 mln euros or 32.1% year on year. Biggest decrease came from pollution tax. Other changes came from a combination of changes in prices and tax rates and movements in treatment volumes that affected the cost of goods sold together with the following additional factors:

• Water abstraction charges increased slightly by 0.01 mln euros or 2.3% to 0.27 mln euros in the 1st quarter of 2015, driven mainly by 5% raise in tax rates.
• Total chemicals costs decreased by 0.05 mln euros or 12.6% to 0.36 mln euros in the 1st quarter of 2015. Costs change were mainly influenced by the decrease in dosage used and chemicals price in sewage treated, which was balanced by increase in treated volumes. Chemicals costs were higher in water treatment mainly due to raw water quality.
• Electricity costs decreased by 0.01 mln euros or 1.1% in the 1st quarter of 2015 compared to the 1st quarter of 2014. Lower electricity costs were mostly derived from the decrease in electricity price and unit costs used, worth 0.04 mln euros. Positive effects were slightly reduced by increased volumes in treatment plants, worth 0.03 mln euros.
• In the 1st quarter of 2015 the pollution tax expense were lower by 0.78 mln euros or 72.1%. Lower costs are related to the change in the allowed concentration of heavy metals in treated effluent in the changed water permit effective in the first two quarters in 2014. Eliminating the one-off impact, the pollution tax expenses have been stable increasing only by 0.03 mln euros or 12.7% in the 1st quarter of 2015 compared to the relevant period in 2014.

Without the above mentioned influence, the main contribution to increased pollution tax costs came from increased volumes treated in the amount of 0.05 mln euros and increased tax rates in the amount of 0.21 mln euros, balanced by the decreased pollution load in the amount of 0.23 mln euros.

Other costs of goods sold (staff costs, depreciation, construction services and other cost of goods sold) in the main operating activity increased by 0.28 mln euros or 8.2%. Most of the increase came from increase in construction services and depreciation costs, balanced by the decrease in other costs.

In 2015 the construction activities have been started earlier than in 2014 due to favourable weather conditions, increasing the costs related to construction in the 1st quarter compared to the same period in 2014. Increased staff costs by 9.8% or 0.12 mln euros are mainly related to the Group having a higher headcount to provide more efficient and broader range of insourced services. Decrease in other costs were related to less maintenance works.

As a result of all above the Group's gross profit for the 1st quarter of 2015 was 8.07 mln euros, which is increased by 0.81 mln euros or 11.2%, compared to the gross profit of 7.26 mln euros for the 1st quarter of 2014.

Other Operating Costs

General administration expenses decreased in total 0.15 mln euros or 11.1%. The consultation and legal fees and their timing continue to have an impact on the administrative expenses.

Othernet income/expenses

Other net costs resulted a net expense of 0.04 mln euros, compared to 0.05 mln euros net expense in the 1st quarter of 2014. The results in the 1st quarters have mainly been influenced by the change in amount of doubtful receivables.

Operatingprofit

As a result of the factors listed above the Group's operating profit for the 1st quarter of 2015 totalled 6.68 mln euros compared to 5.68 mln euros in the corresponding quarter in 2014, which shows an increase of 1.00 mln euros or 17.6%. Removing the pollution tax impact in relation to the concentration limits for heavy metals, the Group's operating profit had been 3.0% or 0.19 mln euros higher.

Financial expenses

The Group's net financial expenses have decreased 0.32 euros or 51.6% amounting to 0.30 mln euros in the 1st quarter of 2015. It is mainly impacted by a positive change of the fair value of the swap contracts. Positive impact is balanced by a decline in interest income.

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 75 mln euros and 20 mln euros are still with floating interest rate. At this point in time the estimated fair value of the swap contracts is negative, totalling 1.43 mln euros. Effective interest rate (incl. swap interests) in the 1st quarter of 2015 was 3.13%, amounting in the interest costs of 0.74 mln euros, compared to the effective interest rate of 3.07% and the interest costs of 0.73 mln euros into the 1st quarter of 2014. In April 2015, the Company signed 4 SWAP contracts in the notional amount of 45 mln euros. The contracts will become effective from the 1st of June 2015 after the existing contracts have finished. The interest rates fixed in the new contracts are on average 2.9% lower than for the contracts that will come to an end.

Profit Before and After Tax

The Group's profit before and after taxes for the 1st quarter of 2015 was 6.38 mln euros, which is 1.32 mln euros or 26.1% higher than the profit before taxes of 5.06 mln euros for the 1st quarter of 2014, resulting mainly from increased revenues and lower pollution tax costs, professional fees and net financial expenses as described above. Eliminating the influence of the pollution tax and derivatives fair value, the Group's profit before and after taxes for the 1st quarter of 2015 would have been 5.97 mln euros, which is 1.4% or 0.08 mln euros increase compared to the relevant period in 2014.

Balance sheet

In the three months of 2015 the Group invested 1.53 mln euros into fixed assets. As of 31 March 2015 non-current tangible assets amounted to 157.51 mln euros and total non-current assets amounted to 158.35 mln euros. (31. March 2014: 152.41 mln euros and 153.41 mln euros respectively).

Compared to the year end of 2014 there has been a reduction in receivables and prepayments in the amount of 1.53 mln euros to 6.73 mln euros which is mainly related to collection of money for network extension program.

Compared to the year end of 2014 the current liabilities have decreased by 0.97 mln euros to 7.86 mln euros. The movement is mainly related to the decrease in the fair value of the derivatives in the amount of 0.40 mln euros and change in prepayments in the amount of 0.65 mln euros.

The Group's loan balance has remained stable at 95 mln euros. The weighted average interest risk margin for the total loan facility is 1.04%.

The Group has a Total debt/Total assets level as expected of 55.9%, in range of 55%-65%, reflecting the Group's equity profile. This level is consistent with the same period in 2014 when the total debt/total assets ratio was 55.8%.

Biggest share of the rest of the long term liabilities is deferred income from connection fees amounting to 13.54 mln euros (2014: 10.35 mln euros).

In the 4th quarter of 2011 the Group recorded and noted an exceptional contingent liability, which could cause an outflow of economic benefits of up to 36.0 mln euros. In the 4th quarter of 2014 the Group re-evaluated the liability, which now stands at 40.1 mln euros, as per note 13 to the accounts.

Cash flows

As of 31 March 2015 the cash position of the Group is strong. At the end of March 2015 the cash balance of the Group stood at 46.39 mln euros, which is 21.9% of the total assets (2014: 38.19 mln, which was 18.3% of the total assets).

The biggest contribution to the cash flows comes from main operations. During the three months of 2015, the Group generated 8.06 mln euros of cash flows from operating activities, an increase of 1.09 mln euros compared to the corresponding period in 2014.

In 2015 the operating cash flows were above 2014 cash flows due to a change in operating profit and working capital. Underlying operating profit still continues to be the main contributor to operating cash flows. The collection of receivables is continuously strong.

The Group's cash flows from investing activities have also been positive for past two years. In the three months of 2015 the result of net cash flows from investing activities was a cash inflow of 0.48 mln euros, an increase of 0.34 mln euros compared to the inflow of 0.14 mln euros in the three months of 2014. This is made up as follows:

In the three months of 2015 the investments in fixed assets have increased 0.35 mln euros compared to 2014 amounting to 1.86 mln euros.

The compensations received for the construction of pipelines were 2.29 mln euros in the three months of 2015, an increase of 0.76 mln euros compared to same period of 2014. Most of the cash collected for pipes is related to the sewage network extension program which was ended in 2012. The collection for extension program ended in March 2015.

In the three months of 2015, cash outflow from financing amounted to 0.71 mln euros, which is on the same level compared to previous year.

Employees

At the end of the 1st quarter of 2015, the total number of employees was 313 compared to 304 at the end of the 1st quarter of 2014. The full time equivalent (FTE) was respectively 302 in 2015 compared to the 291 in 2014. The management continues to work actively for the efficiencies in processes to balance the increase in individual salaries and cost pressure from the market with more productive company structure.

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 27th of May 2015 the matter of dividend pay-out will be voted on. It will be in accordance with the Company's dividend policy.

Dividends will be paid out in June 2015.

Share performance

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

As of 31 March 2015 AS Tallinna Vesi shareholders, with a direct holding over 5%, were:

During the three months of 2015 the shareholder structure has been relatively stable compared to the end of 2014. At the end of 1st quarter 2015 the pension funds owned 1.65% of the total shares compared to 1.54% at the end of 4th quarter 2014.

As of 31st March 2015, the closing price of the AS Tallinna Vesi share was 14.10 euros, which is a 7.6% (2014: 5.9%) increase compared to the closing price of 13.10 euros at the beginning of the quarter. During the same period the OMX Tallinn index increased by 14.3% (2014: -2.6%).

In the three months of 2015 1 324 deals with the Company's shares were concluded (2014: 1 255 deals) during which 309 thousand shares or 1.5% exchanged their owners (2014: 263 thousand shares or 1.3%).

The turnover of the transactions was 1 005 thousand euros lower than in 2014 amounting to 4 277 thousand euros. The share price has shown an increase despite of the on-going contractual debate.

Operational performance

Similarly to previous years, the first quarter of 2015 can be characterised by stability. Above all, it gives security to all consumers that they are provided with a high-quality drinking water, stable water supply and wastewater discharging service. In addition to the quality of service, we also concentrate on being a good partner for our customers. The feedback from the customers has become more and more positive, but despite of that we aim to continue making efforts to meet and exceed the customers' expectations.

Operational indicators for the 1st quarter of 2015

Corporate structure

At the end of the quarter, 31 March 2015, 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.

Supervisory Council has formed three committees to advise Supervisory Council on audit, remuneration and corporate government 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 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 20 March 2017), Aleksandr Timofejev (with the powers of the Management Board Member until 29 October 2015) and Riina Käi (with the powers of the Management Board Member until 29 October 2015).

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 surrounding this 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 has published its tariff application and all relevant correspondence with the CA on its website (http://www.tallinnavesi.ee/en/Investor/Regulation ) and to the Tallinn Stock Exchange and will keep its investors informed of all future developments regarding the further key developments regarding the processing of the tariff application.

In opposite to the Company the CA has requested the Court procedures to be closed. Based on misleading information submitted by the CA the Court approved the CA's request. ASTV has reapplied for open proceedings.

At this point in time the Company is unable to say what is going to happen to the tariffs before Court judgments and outcome of an arbitration. The outcome and lengths of the Court proceedings and arbitration is outside the control of the Company.

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

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