CHAIRMAN'S STATEMENT In 2007, Tallinna Vesi made steady progress on its route towards its strategic objectives and delivered good results. Customer service has improved as clearly demonstrated by the results of the independent satisfaction survey, operational efficiency has improved with the achievement of our best ever water and treated effluent quality, the Company has launched a new activity demonstrating its will to grow, and finally a solid set of financial results, with growth in turnover and profit. Customer Service Excellence Providing our Customers with excellent service is a prime objective for the Company. We are pleased that the customer satisfaction survey independently carried out by TNS Emor at the end of 2007 demonstrated a significant improvement regarding customer relationships. The index indicating customer satisfaction has increased from 73 to 79 on a scale of 100, this places the company in the top 10% of world utility companies. A lot has been done to achieve this improvement. Beside the educational message continuously circulated across the Company about the need for customer focus, we have developed and implemented some additional tools and restructured our organization. Following the new Customer Management System that went live in 2006, we developed in early 2007 a web based interface, giving our clients more possibilities to easily manage their accounts. This interface, along with new billing functionalities (direct debit, e-invoice) has had tremendous success. The internal organization has also been reviewed. Looking at our activities from a customer point of view, client related processes have been analysed and the customer and network management activities have been reorganized to better support these processes and deliver better customer service. Being an environmental company and dealing with a product that impacts the life of one third of the Estonian population every day, we have a very special responsibility towards our clients, the Community and the Environment. Besides focusing on the quality of product and the quality of service, we have further engaged with the Community, supporting social and educational projects. We have this year completed ‘Randur Tilk' a computer based educational game about water. This game will be distributed to all schools in Estonia with the aim to raise the environmental awareness of the younger generation. Operational Excellence The team greatly improved the quality and efficiency of operation and can be credited with several real successes. The water quality delivered to our customers was the highest ever achieved. We know that this is one of the most important factors for the satisfaction of our clients. Each day, throughout the process: from catchment area to water network operation via water treatment plant in a joint effort the teams are looking for every possible way to improve the water quality even further. The quality of the treated effluent was also the highest ever achieved. The large investments carried out during the last years in the wastewater treatment plant (particularly to treat nitrogen pollution and to improve sludge processing) coupled with the highly professional skills of the team enable us to treat the pollution of the Capital city and its surrounding municipalities to a level that is fully compliant with EU standards. Health and Safety of our people is of paramount importance for us. In 2007, international occupational health and safety management system (OHSAS) certificate was awarded to the Company after a successful audit in May. This is great recognition for the work that has been done to improve the working conditions of our staff, but we are even more proud of the fact that in 2007 there were simply no work accidents. Being able to improve our operation efficiency results from a combination of two factors: the commitment of our people and the large investment programme that we have carried out in 2007 and during the previous years. In 2007 we have continued to invest heavily (18.2 mln euros) on water quality, with improvements made in the catchment area, the water treatment plant and continuous renewal of our distribution network. We have also invested in wastewater treatment with the completion of the nitrogen treatment project. This project received the final approval of the Ministry of Environment and together with the completion of the sludge treatment plant we are able to keep under control the quality of the treated effluent. These investments give us the possibility to improve our operational efficiency and the quality of our product, and in addition they also help us to reduce our environmental impact. This is apparent in the high quality and fully compliant treated effluent discharged to Tallinn Bay, full reuse of sludge as soil conditioner and better use of the water resource with control of the amount of water lost in leakages. Taking care of the environment is something that we have included in our actions and will continue to do in the future. Growing the activity of the Company One of our ambitions is to grow the activity of the Company by focussing on our core competences and developing our core business: management of water and wastewater assets. In 2007 we have launched the trademark ‘Veemees' (Waterman). This activity is very closely linked to our core activity. Veemees is operating on the private side of the connection and proposes to our clients to take care of their plumbing problems, small pipe construction works inside their plots and houses. The volume of activity remained modest in 2007 but we expect it to grow because it corresponds to a real demand from clients. Our work to bring public water and sewerage network to the citizens of Tallinn has continued in 2007, and we have laid down another 14.9 km of pipe. We have also continued to extend the stormwater network by an additional 10.4 km. This construction activity will improve the service to customers, enlarge our area of activity but also improve the protection of the environment. Our cooperation with the municipalities surrounding Tallinn is an important component of our development activity. With spare capacity at our plants, we can provide the surrounding municipalities with a large quantity of good quality, EU compliant water and we can collect their effluent and treat it to EU standards. Physical connections have been built between our network and the territories of the municipalities, we are already providing water and receiving wastewater and we are ready to accompany the surrounding municipalities in their development during the following years. Delivering Shareholder Value An important milestone was delivered in 2007 with the signing of the amendment to the Services Agreement which sets the rights and obligation of the Company and the City of Tallinn. The amendments shall significantly accelerate the construction of the sewerage network and ensure its provision for the City by March 2011 (currently 97% of the City is covered with sewerage network). The amendment to the Agreement places the responsibility for the delivery of the programme on the Company. This amendment ensures an excellent visibility for the revenue of the company until 2020, extended term of the agreement, and sustainability of the profitability level as the K-coefficient is fixed until the end of the contract period. The financial results of 2007 have been good, in steady progress compared to 2006, with turnover increased by 18.4% and profit before tax increased by 12.9%. In terms of revenue, the volumes sold to domestic customers were almost constant and a small decrease was registered from the commercial customers mainly due to one industrial consumer leaving Tallinn. The volumes from the surrounding municipalities have shown a good increase reflecting the intense development of these areas. The connection activity was also very dynamic generating a 65.7% increase in turnover. Overall the total revenue increased to 52.5 mln euros. The Company has been successful in managing its cost despite an inflationary environment. Cost of goods sold has decreased by 1.75%. When taking out the exceptional items, the underlying increase of cost of goods sold would have been 4.5%, which is a remarkable performance considering the inflationary situation of some items (especially wages) in Estonia. This was achieved by a strong cost control culture and a constant focus on efficient improvement. In 2007, the Company increased its dividend payment to shareholder by 25%. It was great that the Company was recognized by its peers and awarded the title of ‘Most Competitive Service Company' in Estonia by the Estonian Chamber of Commerce and Industry and the Estonian Employer's Confederation. The Company stays committed to achieve high standards of corporate governance. Our aim is to be transparent in our ways of working, corporate disclosures and relation with shareholders and stakeholders. Once again in 2007 this was recognized by the financial community as the Company was nominated by the OMX Baltic Stock Exchange for the quality of its investor relations. A Team effort All this has only been possible because of the fantastic effort the team has put into the Company and I want to pay tribute to them for their commitment. The employee opinion survey carried out in 2007 has seen the index increasing by 10%. This is a very positive result, and we will continue to work on our human resource strategy to improve further this result. In 2007, we invested significant time and energy on our human resource strategy and policy and have developed a set of values: Commitment Customer Focus Teamwork Creativity We do believe that behaving according to these values will strongly support the achievement of our strategic objectives. A new remuneration system, based on performance achievement, will be implemented from the beginning of 2008. It includes an assessment on behaviour and how we live our values. We have a clear vision for the future of the Company. To achieve this vision we have set clear long term strategic objectives. We set every year Company's annual objectives derived from the strategic objectives, and finally we cascade down these company's objectives into individual objectives. This is the heart of our performance management system and it has proven to be an efficient way to drive the Company towards success. We will continue to use this methodology in 2008. All in all, in 2007, the Company performed well and delivered good results. This is another step in building a strong foundation for the future. In 2008, with our strategic objectives as a target, we will continue to stay focussed on delivering a high level of performance. -------------------------------------------------------------------------------- | INCOME STATEMENT (thousand EUR) | 2007 | 2006 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Sales from main operating activities | 41 436 | 37 655 | -------------------------------------------------------------------------------- | Revenues from other operating activities | 11 021 | 6 650 | -------------------------------------------------------------------------------- | Net sales | 52 457 | 44 305 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Costs of goods sold (main operating activities) | -13 848 | -14 095 | -------------------------------------------------------------------------------- | Costs of goods sold (other operating activities) | -10 110 | -6 206 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | GROSS PROFIT | 28 499 | 24 005 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Marketing expenses | -866 | -612 | -------------------------------------------------------------------------------- | General administration expenses | -3 633 | -3 280 | -------------------------------------------------------------------------------- | Other income/ expenses (-) | 118 | 1 485 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | OPERATING PROFIT | 24 118 | 21 597 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Financial income / expenses (-) | -2 827 | -2 747 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | PROFIT BEFORE TAXES | 21 291 | 18 850 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Income tax on dividends | -3 533 | -2 997 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | NET PROFIT FOR THE PERIOD | 17 757 | 15 853 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Attributable to: | | | -------------------------------------------------------------------------------- | Equity holders of A-shares | 17 757 | 15 852 | -------------------------------------------------------------------------------- | B-share holder | 0,64 | 0,64 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Earnings per share in euros | 0,89 | 0,79 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | BALANCE SHEET (thousand EUR) | 2007 | 2006 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | ASSETS | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | CURRENT ASSETS | | | -------------------------------------------------------------------------------- | Cash and equivalents | 11 403 | 15 940 | -------------------------------------------------------------------------------- | Customer receivables | 11 838 | 4 569 | -------------------------------------------------------------------------------- | Accrued income and prepaid expenses | 331 | 304 | -------------------------------------------------------------------------------- | Inventories | 233 | 201 | -------------------------------------------------------------------------------- | Assets for sale | 72 | 105 | -------------------------------------------------------------------------------- | TOTAL CURRENT ASSETS | 23 877 | 21 120 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | NON-CURRENT ASSETS | | | -------------------------------------------------------------------------------- | Tangible assets | 127 375 | 119 969 | -------------------------------------------------------------------------------- | Intangible assets | 3 140 | 3 361 | -------------------------------------------------------------------------------- | Unfinished assets - non connections | 3 070 | 5 859 | -------------------------------------------------------------------------------- | Unfinished pipelines - new connections | 5 756 | 7 488 | -------------------------------------------------------------------------------- | Prepayments for fixed assets | 345 | 179 | -------------------------------------------------------------------------------- | TOTAL NON-CURRENT ASSETS | 139 686 | 136 856 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | TOTAL ASSETS | 163 562 | 157 976 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | LIABILITIES AND EQUITY | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | CURRENT LIABILITIES | | | -------------------------------------------------------------------------------- | Current portion of long-term borrowings | 2 651 | 30 | -------------------------------------------------------------------------------- | Trade and other payables | 5 558 | 5 448 | -------------------------------------------------------------------------------- | Taxes payable | 1 693 | 1 950 | -------------------------------------------------------------------------------- | Short-term provisions | 143 | 34 | -------------------------------------------------------------------------------- | Deferred income | 2 691 | 2 322 | -------------------------------------------------------------------------------- | TOTAL CURRENT LIABILITIES | 12 736 | 9 784 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | NON-CURRENT LIABILITIES | | | -------------------------------------------------------------------------------- | Borrowings | 71 932 | 74 527 | -------------------------------------------------------------------------------- | Other payables | 7 | 6 | -------------------------------------------------------------------------------- | TOTAL NON-CURRENT LIABILITIES | 71 939 | 74 534 | -------------------------------------------------------------------------------- | TOTAL LIABILITIES | 84 675 | 84 318 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | EQUITY | | | -------------------------------------------------------------------------------- | Share capital | 12 782 | 12 782 | -------------------------------------------------------------------------------- | Share premium | 24 734 | 24 734 | -------------------------------------------------------------------------------- | Statutory legal reserve | 1 278 | 1 278 | -------------------------------------------------------------------------------- | Accumulated profit | 22 336 | 19 010 | -------------------------------------------------------------------------------- | Net profit for the period | 17 757 | 15 853 | -------------------------------------------------------------------------------- | TOTAL EQUITY | 78 887 | 73 658 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | TOTAL LIABILITIES AND EQUITY | 163 562 | 157 976 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | CASH FLOW STATEMENT (thousand EUR) | 2007 | 2006 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | CASH FLOWS FROM OPERATING ACTIVITIES | | | -------------------------------------------------------------------------------- | Operating profit | 24 118 | 21 597 | -------------------------------------------------------------------------------- | Adjustment for depreciation | 5 064 | 5 180 | -------------------------------------------------------------------------------- | Adjustment for income and expenses from | -911 | -444 | | constructions | | | -------------------------------------------------------------------------------- | Other financial income and expenses | -101 | -34 | -------------------------------------------------------------------------------- | Profit from sale of fixed assets | -155 | -1 592 | -------------------------------------------------------------------------------- | Expensed fixed assets | 30 | 71 | -------------------------------------------------------------------------------- | Capitalization of operating expenses | -1 263 | -1 337 | -------------------------------------------------------------------------------- | Change in current assets involved in operating | -2 049 | -265 | | activities | | | -------------------------------------------------------------------------------- | Change in liabilities involved in operating | -21 | 383 | | activities | | | -------------------------------------------------------------------------------- | Interest paid | -3 386 | -3 071 | -------------------------------------------------------------------------------- | Total cash flow from operating activities | 21 326 | 20 487 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | CASH FLOWS FROM INVESTING ACTIVITIES | | | -------------------------------------------------------------------------------- | Acquisition of fixed assets (incl pipelines | -16 997 | -12 274 | | construction) | | | -------------------------------------------------------------------------------- | Proceeds from pipelines financed by construction | 6 509 | 7 200 | | income | | | -------------------------------------------------------------------------------- | Proceeds from sale of and prepayments received/ | 25 | -83 | | repaid(-) for fixed assets | | | -------------------------------------------------------------------------------- | Proceeds from sale of assets for sale and of real | 15 | 71 | | estate investments | | | -------------------------------------------------------------------------------- | Interest received | 676 | 418 | -------------------------------------------------------------------------------- | Total cash flow used in investing activities | -9 773 | -4 667 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | CASH FLOWS FROM FINANCING ACTIVITIES | | | -------------------------------------------------------------------------------- | Finance lease payments | -30 | -82 | -------------------------------------------------------------------------------- | Dividends paid | -12 527 | -10 034 | -------------------------------------------------------------------------------- | Income tax on dividends | -3 533 | -2 997 | -------------------------------------------------------------------------------- | Total cash flow used in financing activities | -16 091 | -13 113 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | Change in cash and bank accounts | -4 537 | 2 706 | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | CASH AND EQUIVALENTS AT THE BEGINNING OF THE | 15 940 | 13 234 | | PERIOD | | | -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- | CASH AND EQUIVALENTS AT THE END OF THE PERIOD | 11 403 | 15 940 | -------------------------------------------------------------------------------- Additional information: Siiri Lahe Chief Financial Officer +372 6262 262 siiri.lahe@tvesi.ee