AUDITED RESULTS OF OPERATIONS - 2006 (EUR)

Tallinn, ESTONIA


In 2006, our Company has again improved its performance: its operating          
performance, with a very high water quality level and a treated effluent quality
now compliant with all EU standards; its customer service performance with the  
full deployment of a new customer relationship management and billing software; 
its financial performance with a strong set of results. The dynamism of our     
employees was instrumental in reaching this level of performance.               

2006 has seen the full deployment of our new client relationship and billing    
software. The new system gathers in one place information that was stored       
previously in different databases. This enables a much more complete and        
accurate overview of each client's information, and thus a much more accurate   
and diligent response to any client's request. This new system brings a lot more
possibilities to interact with the client in a friendly and effective way. The  
web interface gives the possibility for each client to have access to their own 
information and engage in dialogue easily with the Company. In addition, new    
billing functionalities offer, for example direct debit and e-invoice.          

The Guaranteed Standard Scheme (‘Our Promises') implemented in 2006 was very    
well received by our clients. This scheme, in which we pay a monetary           
compensation in case we fail to deliver on our promises, demonstrates how far we
are engaged to continuously improve the quality of our service.                 

Our employees drive the performance of the Company and they deserve credit for  
what has been achieved in 2006. The strong cost control culture of the Company  
enabled a good set of financial results to be achieved in a situation where the 
cost pressure was significant. The shift from a production culture towards a    
service culture is underway however there is more to be done to achieve the     
level of excellence we desire. A full review of the human ressources strategy   
has been started and the outcome will be implemented in 2007, providing to all  
our employees an environment in which they can develop their full potential.    
Our health and safety performance, whilst still at a good level, has fallen     
compared to the previous years. Focus on this key area will be enhanced in 2007.
                                                                                
An extensive investment programme of 15.8 mln euros was carried out, to renew,  
upgrade and develop the asset base of the Company. The main areas of investment 
were networks and water quality (11.7 mln euros), and treated wastewater quality
(2.8 mln euros). In 2005 the Company invested 14.2 mln euros overall of which   
8.4 mln euros was in networks and water quality, and 1.9 mln euros in treated   
wastewater quality. This ongoing investment programme is a key contributor to   
the good level of operational performance in 2006. The water quality has been   
100% compliant for microbiological standards and 99.55% compliant for all       
standards. With this level of quality, the Company is already delivering        
compliance with the new standards that come into force 1st January 2007. The    
leakage level stands at 19.3%, more than 6% below contractual target, and       
continues to be closely monitored. In addition to these good technical results, 
we are constantly looking at the possibility to improve and streamline the      
organization. A project to review and simplify our internal processes was       
initiated and will be continued in 2007.                                        

The Company has been heavily investing in different projects. The nitrogen      
project, total investment of 3.5 mln euros, which aimed to reduce the amount of 
nitrogen discharged to the Baltic Sea was successfully completed. As a result,  
Tallinn was removed from the HELCOM (Environmental body monitoring the quality  
of the Baltic sea) hotspots list. This international recognition is a great     
achievement for the Company, the City of Tallinn and Estonia. The construction  
of 13 hectares of composting fields, which enable us to turn all our sludge     
production into a good quality soil conditioner used for greenery works and     
reforestation, is now almost completed and already in use. The Paljassaare waste
water treatment plant, is not only treating effluent to a very high level of    
quality and composting its sludge, but also turning the gas produced during the 
treatment process into electricity, and is now a reference in terms of          
recycling.  On the clean water side, the biomanipulation project to improve the 
condition of lake Ülemiste continues.                                           

As we provide one of life's essential services, we have a very special          
responsibility to the Community. The Company is well aware of this fact and has 
been focusing on the quality of product delivered and the quality of service    
provided to its clients, who are the community. In addition we have pursued our 
investment and our support into several educational and social projects.        

Our out performance in delivering the Services Agreement in Tallinn gives us a  
strong market position and we are well positioned to build on our current       
success. Focusing on our core activity, water and wastewater services, we have  
expanded our service area: a way to maximise the excess capacity of our assets  
and share our economy of scale with the municipalities surrounding Tallinn. We  
will continue to focus on our core activity, and seek to expand geographically. 
In addition, a review of potential routes for growing the Company in activities 
closely related to water and wastewater, has been undertaken. The growth        
prospects look promising.                                                       

The Company understands the importance of high standards of governance and      
transparency in its actions and reporting, and this is described in more detail 
in the corporate governance section of this report.                             

The Company has in 2006 delivered a strong set of financial results achieved in 
a challenging environment. Revenue, supported by the strong economic growth of  
the country, has grown year on year. A growth in volumes of water and waste     
water sold was recorded, originating from a moderate increase in consumption in 
the main service area of Tallinn and from a very sharp increase in the new      
contracts signed with other municipalities. Despite pressure on labour costs,   
increases in environmental taxes, more stringent consents that have triggered an
increase in chemical consumption, and the high level of inflation, the Company  
has succeeded in improving its profit after tax to 15.9 mln euros. In parallel, 
the Company has invested 15.8 mln euros in new assets.                          
The share price increased by 11.35%  in 2006, and the dividend paid out amounted
to 0.5 euros/share. The Company is committed to stay focused on creating        
shareholder value.                                                              

A review of the strategy established the 4 strategic objectives aligned with our
vision:                                                                         
-To deliver Customer Service Excellence                                         
-To deliver Operational Excellence                                              
-To Grow the Activity of the Company                                            
-To deliver Shareholder Value                                                   
The 2007 Company's objectives, with a strong emphasis on improving performance, 
have been cascaded down and all the objectives have been aligned throughout the 
Company.                                                                        

With the commitment and hard work of all its employees, with the support of its 
Supervisory Board and Shareholders, with constructive cooperation with all its  
business partners,  especially the City of Tallinn, the Company has developed   
strong foundations for the future.                                              

We intend to build on these strong foundations and continue to meet our business
objectives.                                                                     

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| INCOME STATEMENT                                  |           |              |
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| (thousand EUR)                                    |      2006 |         2005 |
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| Sales from main operating activities              |    37 655 |       35 146 |
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| Revenues from other operating activities          |     6 650 |        2 691 |
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| Net sales                                         |    44 305 |       37 838 |
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| Costs of goods sold (main operating activities)   |   -14 095 |      -12 914 |
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| Costs of goods sold (other operating activities)  |    -6 206 |       -2 450 |
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| GROSS PROFIT                                      |    24 005 |       22 474 |
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| Marketing expenses                                |      -612 |         -433 |
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| General administration expenses                   |    -3 280 |       -4 107 |
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| Other income/ expenses (-)                        |     1 485 |          125 |
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| OPERATING PROFIT                                  |    21 597 |       18 059 |
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| Financial income / expenses (-)                   |    -2 747 |       -4 655 |
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| PROFIT BEFORE TAXES                               |    18 850 |       13 404 |
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| Income tax on dividends                           |    -2 997 |       -2 260 |
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| NET PROFIT FOR THE PERIOD                         |    15 853 |       11 143 |
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| Attributable to:                                  |           |              |
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| Equity holders of A-shares                        |    15 852 |       11 143 |
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| B-share holder                                    |      0,64 |         0,64 |
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| Earnings per share in euros                       |      0,79 |         0,56 |
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| BALANCE SHEET                                     |           |              |
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| (thousand EUR)                                    |                          |
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| ASSETS                                            |      2006 |         2005 |
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| CURRENT ASSETS                                    |           |              |
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| Cash at bank and in hand                          |    15 940 |       13 234 |
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| Customer receivables                              |     4 569 |        4 265 |
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| Accrued income and prepaid expenses               |       304 |          338 |
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| Inventories                                       |       201 |          202 |
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| Assets for sale                                   |       105 |           89 |
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| TOTAL CURRENT ASSETS                              |    21 120 |       18 128 |
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| NON-CURRENT ASSETS                                |           |              |
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| Tangible assets                                   |   119 969 |      117 503 |
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| Intangible assets                                 |     3 361 |        2 811 |
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| Unfinished assets - non connections               |     5 859 |        6 058 |
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| Unfinished pipelines - new connections            |     7 488 |        6 979 |
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| Prepayments for fixed assets                      |       179 |          222 |
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| TOTAL NON-CURRENT ASSETS                          |   136 856 |      133 573 |
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| TOTAL ASSETS                                      |   157 976 |      151 701 |
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| LIABILITIES AND EQUITY                            |           |              |
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| CURRENT LIABILITIES                               |           |              |
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| Current portion of long-term borrowings           |        30 |           86 |
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| Trade and other payables                          |     5 448 |        3 420 |
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| Taxes payable                                     |     1 950 |        1 452 |
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| Short-term provisions                             |        34 |           18 |
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| Deferred income                                   |     2 322 |        4 382 |
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| TOTAL CURRENT LIABILITIES                         |     9 784 |        9 359 |
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| NON-CURRENT LIABILITIES                           |           |              |
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| Borrowings                                        |    74 527 |       74 498 |
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| Other payables                                    |         6 |            6 |
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| TOTAL NON-CURRENT LIABILITIES                     |    74 534 |       74 504 |
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| TOTAL LIABILITIES                                 |    84 318 |       83 863 |
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| EQUITY                                            |           |              |
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| Share capital                                     |    12 782 |       12 782 |
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| Share premium                                     |    24 734 |       24 734 |
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| Statutory legal reserve                           |     1 278 |        1 278 |
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| Accumulated profit                                |    19 010 |       17 901 |
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| Net profit for the period                         |    15 853 |       11 143 |
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| TOTAL EQUITY                                      |    73 658 |       67 839 |
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| TOTAL LIABILITIES AND EQUITY                      |   157 976 |      151 701 |
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| CASH FLOW STATEMENT                               |           |              |
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| (thousand EUR)                                    |      2006 |         2005 |
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| CASH FLOWS FROM OPERATING ACTIVITIES              |           |              |
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| Operating profit                                  |    21 597 |       18 059 |
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| Adjustment for depreciation                       |     5 180 |        5 032 |
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| Adjustment for income and expenses from           |      -444 |         -241 |
| constructions                                     |           |              |
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| Other financial income and expenses               |       -34 |       -1 279 |
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| Profit from sale of fixed assets                  |    -1 592 |         -759 |
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| Expensed fixed assets                             |        71 |           25 |
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| Capitalization of operating expenses              |    -1 337 |       -1 488 |
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| Change in current assets involved in operating    |      -265 |        3 691 |
| activities                                        |           |              |
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| Change in liabilities involved in operating       |       383 |          410 |
| activities                                        |           |              |
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| Interest paid                                     |    -3 071 |       -3 825 |
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| Total cash flow from operating activities         |    20 487 |       19 626 |
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| CASH FLOWS FROM INVESTING ACTIVITIES              |           |              |
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| Proceeds from sale of shares of associated        |         0 |            0 |
| company                                           |           |              |
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| Acquisition of fixed assets (incl pipelines       |   -12 274 |      -12 774 |
| construction)                                     |           |              |
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| Proceeds from pipelines financed by construction  |     7 200 |        3 355 |
| income                                            |           |              |
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| Proceeds from sale of and prepayments received/   |       -83 |        3 026 |
| repaid for fixed assets                           |           |              |
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| Proceeds from sale of assests for sale and of     |        71 |          748 |
| real estate investments                           |           |              |
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| Interest received                                 |       418 |          324 |
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| Total cash flow used in investing activities      |    -4 667 |       -5 322 |
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| CASH FLOWS FROM FINANCING ACTIVITIES              |           |              |
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| Received long-term loans                          |         0 |       44 503 |
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| Repayment of long-term loans                      |         0 |      -42 500 |
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| Finance lease payments                            |       -82 |         -109 |
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| Dividends paid                                    |   -10 034 |       -7 158 |
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| Income tax on dividends                           |    -2 997 |       -2 260 |
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| Total cash flow used in financing activities      |   -13 113 |       -7 525 |
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| Change in cash and bank accounts                  |     2 706 |        6 779 |
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| CASH AND EQUIVALENTS AT THE BEGINNING OF THE      |    13 234 |        6 455 |
| PERIOD                                            |           |              |
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| CASH AND EQUIVALENTS AT THE END OF THE PERIOD     |    15 940 |       13 234 |
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Addittional information:                                                        
Reigo Marosov                                                                   
Head of Public Relations                                                        
+372 6262 209                                                                   
reigo.marosov@tvesi.ee

Attachments

annual report eur eng.pdf annual report eek eng.pdf