RESULTS OF OPERATIONS FOR THE 4th QUARTER 2017

MANAGEMENT REPORT

CHAIRMAN'S SUMMARY

The performance of AS Tallinna Vesi in 2017 once again reflects the high standards achieved in the supply of pure drinking water to the inhabitants, treatment of wastewater, maintenance of the water and sewerage networks and customer service.

The Group’s total sales increased by 1.4% to 59.82 million, as we witnessed an increase in sales in all our main water supply and waste water disposal related services. Sales to private customers increased by 1.1% and sales to corporate customers by 1.7%. Sales to customers outside the main service area have increased by 6.3% to EUR 4.68 million, mainly due to higher storm and waste water disposal services. Group’s net profit for 2017 was EUR 7.22 million – this result is 60.7% lower than in 2016 as was mainly influenced by the provision for possible third-party claims, related to recent decision from the Supreme Court, if potential customer claims are to be recognised by the courts. The Company is of a position, that we have acted on the legal bases.

Long-awaited decision

Shortly before the end of the year, the Estonian Supreme Court made a decision on the tariff dispute between Tallinna Vesi and Estonian Competition Authority. Unfortunately, the final verdict was a disappointment to Tallinna Vesi and we were unsuccessful with our Cassation. Despite the fact that the court did not find any reasons to doubt the legality of the Services Agreement, signed with the City of Tallinn, it still decided that the Competition Authority is not bound by the agreement. For Tallinna Vesi, the decision means that from now it will have to operate under new conditions. The price of water and wastewater service, is now subject to approval by the Competition Authority using their methodology.

However, the dispute is not entirely over for Tallinna Vesi. We are still awaiting the final verdict from the International Arbitration, on whether the investor’s interests have been adversely affected, and whether this should be compensated.

Nevertheless, the company continues its everyday operations, with the utmost priority to ensure uninterrupted high-quality services for customers.

Record low level of leakages in the water network

For Tallinna Vesi it has always been important to use natural resources sparingly and in a responsible way. Thanks to the preventive maintenance and targeted capital investments into the networks and committed performance of our team in 2017, we achieved the lowest level of leakages of all time within our water network – 13.82%. This means that Tallinna Vesi has managed to reduce water losses by more than one percentage point during one year (15.07% in 2016).

We belong to the top of European utilities

Tallinna Vesi’s customer satisfaction levels continue to be evenly high in all segments. Our customers gave us significantly higher ratings than the average level of European utilities sector. According to the survey carried out by Kantar Emor, the Company scored 88-92 TRI*M index points against the European average of 65 points.

Tallinna Vesi received 36 written complaints from customers. The number of complaints concerning water pressure, blockages and draining of storm water has dropped considerably. The Company managed to keep its promises in almost all cases.

Reliable and high-quality service

Besides the high standards of customer service, customer satisfaction is strongly affected above all by a reliable and high-quality service. We do not compromise the quality of drinking water and once again this is demonstrated by high level of compliance with the stipulated standards, at 99.93%. End-users’ trust in the quality of tap water among users also remains high –75% of them drink tap water.

In order to ensure the reliability of service to our consumers, numerous considerable investments were made in 2017, the largest of which was providing an alternative pipe to supply consumers in Mustamäe, Õismäe and Harku. The average duration of water interruptions per property dropped to 3 hours and 8 minutes (3.14 hours) in 2017 (3.44 hours in 2016).

The number of blockages has also reduced gradually over the years and in 2017 reached 654 blockages (670 in 2016). In order to inform people more of their own role in avoiding unpleasant sewer blockages, we launched an awareness campaign in 2017 to remind them that trash must not be thrown to the toilet.

We care for the environment

Tallinna Vesi’s focus lied on contributing to the local community and promoting environmental education also in 2017. We organised water seminars in nurseries and schools, we hosted numerous tour groups in our water and wastewater treatment plants and organised doors-open days.

Besides our long-term sponsorship projects, we are also committed to making pure drinking water available in public spaces and allowing people to choose a more environmentally friendly alternative to bottled water. In 2017, we opened several new public water taps and plan to continue setting them up also in 2018.

OPERATIONAL INDICATORS FOR TWELVE MONTHS OF 2017

 Karl Heino Brookes

 Chairman of the Management Board

FINANCIAL HIGHLIGHTS FOR THE 4^th QUARTER 2017

The Group’s sales revenues during the 4^th quarter of 2017 were EUR 15.97 million, being up by 10.0% or EUR 1.46 million compared to the same period in 2016.

The gross profit in the 4^th quarter of 2017 was EUR 8.79 million, showing an increase of 6.7% or EUR 0.55 million. Increase in gross profit was mainly related to higher water, wastewater and storm water revenues and construction and asphalting related profit, and lower depreciation. It was balanced by higher pollution tax and chemical costs.

The operating profit was -EUR 10.22 million, showing a decrease of 290.6% or -EUR 15.59 million. In addition to the above-mentioned changes in gross profit, the operating profit was mainly impacted by the provision for possible third-party claims in the amount of EUR 17.52 million and lower tariff dispute related costs in the 4^th quarter of 2017.

The net profit for the 4^th quarter of 2017 was -EUR 10.44 million, being lower by 291.5% or EUR 15.89 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 4^th quarter of 2017 compared to the positive change in the same quarter of 2016. The net profit for the 4^th quarter of 2017 and 2016 without the impact resulted from the change of the fair value of swap contracts and provision for possible third-party claims was EUR 6.95 million and EUR 4.99 million respectively, being higher by 39.1% or EUR 1.95 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 4^th QUARTER 2017

STATEMENT OF COMPREHENSIVE INCOME

SALES

As in 2017 the Company’s tariffs were 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.

At the end of 2017, the Supreme Court made a negative decision as regards to the Company’s cassation as a result of which the Company’s tariffs will be regulated under the Competition Authority’s methodology.

In the 4^th quarter of 2017 the Group’s total sales were EUR 15.97 million, showing an increase by 10.0% or EUR 1.46 million year-on-year. 82.0% of sales comprise of sales of water and wastewater services to domestic and commercial customers within and outside of the service area. 7.5% of sales are the fees received from the City of Tallinn for operating and maintaining the storm water system and fire hydrants, 9.4% 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 13.10 million, showing a 2.6% or EUR 0.34 million increase compared to the 4^th quarter of 2016, resulting from the changes in sales volumes as described below:

• There has been an increase in private customers’ revenues by 1.0% to EUR 6.42 million. The increase in domestic customer consumption volumes came mainly from apartment blocks, which is also our biggest private customer group. At the same time, there was a slight decrease in individual houses and other private customer groups.
• Sales to corporate customers within the service area increased by 0.4% to EUR 5.15 million. Increase was mostly related to increase in sales of other commercial customer segments.
• Sales to customers outside the main service area have increased by 20.3% to EUR 1.33 million. It was mainly impacted by increase in the sales of storm water and waste water disposal services and complemented by a small increase in the sales of water supply service.
• Over pollution fees received have increased by 13.3% to EUR 0.21 million.

Sales from the operation and maintenance of the main service area storm water and fire hydrant system were EUR 1.20 million, showing an increase of 44.6% or EUR 0.37 million in the 4^th quarter of 2017 compared to the same period in 2016, driven mainly by 109.6% higher storm water volumes as the weather was quite rainy.

Sales of construction, design and asphalting services were EUR 1.51 million, increasing by 95.0% or EUR 0.73 million year-on-year. The increase was mainly related to higher pipe construction services revenues during the 4^th quarter of 2017.

COST OF GOODS/ SERVICES SOLD AND GROSS PROFIT

The cost of goods sold amounted to EUR 7.18 million in the 4^th quarter of 2017, increasing by 14.4% or EUR 0.90 million compared to the equivalent period in 2016. The increase in cost was mainly influenced by increase in construction and asphalting services related costs, pollution tax expenses, chemicals and electricity costs, balanced by decrease in water abstraction charges costs and depreciation.

Total direct production costs (water abstraction charges, chemicals, electricity and pollution tax) were EUR 1.91 million, showing 12.2% or EUR 0.21 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 decreased by 7.2% to EUR 0.30 million, driven mainly by overall 4.3% decrease in water volumes.
• Chemicals costs increased by 19.3% to EUR 0.40 million, driven by 27.4% higher methanol price in the wastewater treatment process, worth EUR 0.02 million, and higher usage of coagulant, worth in total EUR 0.02 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 increased by 3.7% to EUR 0.84 million. It was related to increase in treated volumes, worth EUR 0.10 million, which was balanced by on average 7.5% lower electricity price, worth EUR 0.08 million.
• Pollution tax expense increased by 56.5% to EUR 0.37 million, mainly due to 46.3% increase in treated wastewater volumes and higher pollution load of pollutants, worth respectively EUR 0.12 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 5.27 million, having increased by 15.2% or EUR 0.70 million. The increase came mostly from costs related to construction and asphalting services, balanced by decrease in depreciation costs. Decrease in depreciation by 4.3% to EUR 1.35 million was mainly related to accelerated depreciation costs decrease year-on-year. Increase in construction and asphalting services costs by 115.2% to EUR 1.33 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 4^th quarter of 2017 was EUR 8.79 million, showing an increase of 6.7% or EUR 0.55 million, compared to the gross profit of EUR 8.24 million for the comparative period of 2016.

ADMINISTRATIVE AND MARKETING EXPENSES

Administrative and marketing expenses amounted to EUR 1.32 million, having decreased by 48.1% or EUR 1.22 million. The decrease was mainly related to lower tariff dispute related costs.

OTHER INCOME / EXPENSES

Other income/expenses amounted to expenses of EUR 17.70 million, having increased EUR 17.36 million. The increase was mainly due to tariff dispute related potential liability provision for possible third-party claims, if those are to be recognised by the court, worth EUR 17.52 million. The provision takes into account three years of possible difference in prices between the tariffs approved by City of Tallinn in 2010 and the tariffs calculated based on Competition Authorities methodology. The estimation takes into account approximately 40% of the total previous contingent liability. Still the Company does not consider itself liable to customers for any claims related to the tariffs applied until the new tariffs approved by the Competition Authority are duly implemented. Additional information in Note 5 to the abbreviated accounts.

OPERATING PROFIT

As a result of the factors listed above the Group’s operating profit for the 4^th quarter of 2017 amounted to -EUR 10.22 million, being EUR 15.59 million lower than in the corresponding period of 2016. The Group’s operating profit from main business was -EUR 10.40 million, being 288.4% or EUR 15.92 million lower compared to 2016.

FINANCIAL EXPENSES

The Group’s net financial income and expenses have resulted a net expense of EUR 0.22 million, compared to net income of EUR 0.10 million in the 4^th 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 0.32 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 0.76 million. Effective interest rate of loans (incl. swap interests) in the 4^th quarter of 2017 was 1.46%, amounting to interest costs of EUR 0.35 million, compared to the effective interest rate of 1.58% and the interest costs of EUR 0.38 million in the 4^th quarter of 2016.

PROFIT BEFORE TAXES AND NET PROFIT

The Group’s profit before taxes and net profit for the 4^th quarter of 2017 were -EUR 10.44 million, being 291.5% or EUR 15.89 million lower than for the 4^th quarter of 2016. Eliminating the effects of the change of the fair value of swap contracts and provision for possible third party claims the Group’s net profit for the 4^th quarter of 2017 and 2016 would have been EUR 6.95 million and EUR 4.99 million respectively, showing an increase of 39.1% or EUR 1.95 million year-on-year.

RESULTS FOR THE TWELVE MONTHS OF 2017

STATEMENT OF COMPREHENSIVE INCOME

SALES

During the twelve months of 2017 the Group’s total sales were EUR 59.82 million, showing an increase by 1.4% or EUR 0.83 million year-on-year.

Sales from water and wastewater services for twelve months of 2017 were EUR 51.24 million, increasing 2.1% or EUR 1.04 million compared to the twelve months of 2016. 85.7% of sales comprised of sales of water and wastewater services to domestic and commercial customers within and outside of the service area. 6.1% of sales are the fees received from the City of Tallinn for operating and maintaining the storm water system and fire hydrants, 7.2% from construction and asphalting services and 1.0% from other works and services.

During the twelve months of 2017 there has been an increase in sales to private customers by 1.1% to EUR 25.23 million and 1.7% increase to EUR 20.41 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 attributable to all customer segments. Sales to customers outside the main service area have increased by 6.3% to EUR 4.68 million, mainly due to higher storm and waste water disposal services, accompanied by slightly increased water supply volumes in 2017. Over pollution fees received have increased by 19.2% to EUR 0.93 million.

Sales from the operation and maintenance of the main service area storm water and fire hydrant system in the twelve months of 2017 were EUR 3.67 million, showing a decrease of 0.1% or EUR 0.01 million year-on-year, driven mainly by lower cost per m3, which was balanced by 4.1% higher storm water volumes in 2017.

Sales of construction, design and asphalting services were EUR 4.29 million, decreasing by 5.0% or EUR 0.22 million year-on-year. The decrease was mainly related to lower pipe construction services revenues during 2017.

COST OF GOODS SOLD AND AND GROSS AND OPERATING PROFITS

Total direct production costs (water abstraction charges, chemicals, electricity and pollution taxes) were EUR 6.96 million, showing an increase of 4.3% or EUR 0.29 million year-on-year. Change in costs came from the increase in all other direct production costs, except marginal decrease in water abstraction charges as described below:

• Water abstraction charges decreased by 0.1% to EUR 1.17 million, driven by 0.3% decrease in water volumes.
• Chemicals costs increased by 14.8% to EUR 1.50 million, driven mainly by on average 34.7% higher methanol price and higher use of polymers in wastewater treatment process, worth respectively EUR 0.12 million and EUR 0.04 million, which was accompanied by increased water treatment process chemicals costs driven by increase in usage, worth EUR 0.04 million. Increased costs were balanced by decrease in methanol usage in wastewater treatment process to remove pollutants, worth EUR 0.03 million.
• Electricity costs have increased by 2.8% to EUR 3.19 million. It was related to on average 0.9% higher electricity prices and higher cost per m³ in network distribution, worth respectively EUR 0.03 million and EUR 0.02 million, accompanied by increase in treated wastewater volumes, worth EUR 0.03 million.
• Pollution tax expense increased by 0.8% to EUR 1.10 million, driven mainly by 2.5% increase in treated sewage volumes, worth EUR 0.03 million, balanced by the decreased pollution loads, worth 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 18.76 million, having decreased by 1.5% or EUR 0.28 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 4^th quarter results. In 2017, due to the favourable weather, the construction work could also be done during the 4^th quarter, compensating lower volumes of construction work in previous quarters.

Group’s gross profit for the twelve months of 2017 was EUR 34.09 million, being 2.5% or EUR 0.83 million higher compared to the same period in 2016. Group’s operating profit was EUR 10.87 million, showing a decrease by 55.9% or EUR 13.76 million during the twelve months of 2017. The decrease in operating profit was mostly driven by the changes in gross profit and by the provision for possible third-party claims in 2017 mentioned earlier.

FINANCIAL EXPENSES

The Group’s net financial income and expenses have resulted a net expense of EUR 0.94 million, compared to net expense of EUR 1.74 million in the twelve 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 0.89 million.

PROFIT BEFORE TAXES AND NET PROFIT

The Group’s profit before taxes for the twelve months of 2017 was EUR 9.92 million, showing a 56.7% or EUR 12.97 million decrease compared to the relevant period in 2016. The Group’s net profit for the twelve months of 2017 was EUR 7.22 million, which is 60.7% or EUR 11.17 million lower than the net profit for equivalent period in 2016, impacted mainly by the provision for possible third-party claims, mentioned earlier, worth -EUR 17.52 million and by the decrease in income tax on dividends, worth EUR 1.80 million. Eliminating the effects of the derivatives fair value and the effect of possible third party claims the net profit for the twelve months of 2017 would have been EUR 24.17 million, showing an increase by 29.2% or EUR 5.47 million compared to the relevant period in 2016.

STATEMENT OF FINANCIAL POSITION

In the twelve months of 2017 the Group invested into fixed assets EUR 9.47 million. As of 31.12.2017, non-current tangible assets amounted to EUR 174.45 million and total non-current assets amounted to EUR 175.26 million (31.12.2016: EUR 171.18 million and EUR 172.01 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 0.55 million to EUR 7.72 million. The collection rate of receivables continues to be high, being 99.83% compared to 99.49% at the end of December 2016.

Current liabilities have decreased by EUR 0.99 million to EUR 9.65 million compared to the year end of 2016. Decrease mainly derives from decrease in trade and other payables by EUR 0.83 million and from decreased prepayments of connections in construction process by EUR 0.13 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 2.58 million to EUR 19.63 million and is related to bigger developments in the beginning of the year.

At the end of 2017, the Company has formed a provision of EUR 17.52 million for possible third-party claims as a result of the Supreme Court Decision from 12^th December 2017. More detailed information about the provision is in Note 5 to the financial statements.

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 62.4%, in range of 55%-65%, reflecting the Group’s equity profile. In 2016 the total debt to assets ratio was 58.1%.

CASH FLOW

As of 31.12.2017, the cash position of the Group is strong. At the end of December 2017, the cash balance of the Group stood at EUR 44.97 million, which is 19.7% of the total assets (31.12.2016: EUR 33.99 million, forming 15.9% of the total assets).

The biggest contribution to the cash flows comes from main operations. During the twelve months of 2017, the Group generated EUR 33.25 million of cash flows from operating activities, an increase of EUR 1.37 million compared to the corresponding period in 2016. Underlying operating profit continues to be the main contributor to operating cash flows.

In the twelve months of 2017 the result of net cash flows from investing activities was a cash outflow of EUR 6.99 million, a decrease of EUR 4.44 million compared to the cash outflow of EUR 11.43 million in the twelve months of 2016. This is made up as follows:

• The cash outflows from investments in fixed assets have decreased by EUR 4.77 million compared to 2016 amounting to EUR 9.76 million.
• The compensations received for the construction of pipelines were EUR 2.70 million, showing a decrease of EUR 0.30 million compared to the same period of 2016.

In the twelve months of 2017 cash outflow from financing activities amounted to EUR 15.27 million, decreasing by EUR 9.00 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 4^th quarter of 2017, the total number of employees was 312 compared to 311 at the end of the 4^th quarter of 2016. The full time equivalent (FTE) was respectively 300 in 2017 compared to the 301 in 2016. Average number of employees (FTE) during the twelve months was respectively 305 in 2017 and 308 in 2016.

By gender, employee allocation was as follows:

The total salary costs were EUR 2.17 million for the 4^th 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 Company’s dividend policy up to 2017 was related to 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. 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.  Future dividends are also evaluated by the Supervisory Board, who makes the proposal to annual general meeting. 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 31.12.2017, AS Tallinna Vesi shareholders, with a direct holding over 5%, were:  

During the twelve months of 2017 the shareholder structure has been relatively stable compared to the end of 2016. At the end of 4^th quarter 2017 the pension funds shareholding has decreased, being 1.4% of the total shares compared to 2.1% at the end of 2016.

As of 31.12.2017, the closing price of AS Tallinna Vesi share was EUR 10.20, which is 17.7% (2016: -1.4%) lower compared to the closing price of EUR 12.40 at the beginning of the quarter. During the 4^th quarter the OMX Tallinn index increased by 1.3% (2016: 7.4%).

In the twelve months of 2017, 8,476 deals with the Company’s shares were concluded (2016: 6,502 deals) during which 1,345 thousand shares or 6.7% of total shares exchanged their owners (2016: 1,048 thousand shares or 5.2%).

The turnover of the transactions was EUR 1.77 million higher than in 2016, amounting to EUR 16.48 million.

CORPORATE STRUCTURE

As of 31.12.2017, 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 4^th quarter of 2017 were as follows. Mr Brendan Francis Murphy’ and Mr Priit Lello’ terms as a Supervisory Council member were extended (respectively until 28.10.2019 and 16.11.2019).

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

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 1^st half of 2018.

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