The City of Tallinn announced last week that it will form a joint venture with district heating provider Utilitas called Utilitas Tallinna Soojus, of which Utilitas will own two-thirds and the city will own the remaining third.

This is due to the fact that Tallinn, which has leased heat conduits to Utilitas for decades, would be required to purchase them at the end of the contract at the investment cost, which the city fears would be too high.

Priit Koit, the head of the Utilitas group, told ERR that the deal was initiated because financing the investments had become problematic as the lease agreement's expiration date approached. Koit said that they suggested to the city to acquire the assets of Tallinn.

"In other cities where Utilitas provides district heating, the networks are also privately owned. Tallinn did not want to sell the network, so we began alternative negotiations," he explained.

Koidu said that they realized the importance of it several years ago, but the Russia-initiated conflict in February of last year made it even clearer that investments to replace imported fossil fuels cannot be further delayed.

Tallinn City Chancellor Kairi Vaher emphasized the importance of energy security.

"The city itself wants to participate as a strategic partner in activities related to ensuring the continuity of a vital service in the field of district heating," he explained.

"District heating's energy independence from fossil fuels, continuity, energy and price stability, as well as ensuring green investments for the transition to renewable energy — these are the reasons Tallinn considers this cooperation necessary."

Both the city and Utilitas engaged legal and financial advisors in preparation for and negotiation of the deal. The valuation of the assets was conducted by Ernst & Young (EY) and PricewaterhouseCoopers (PwC), and according to Koidu, the two independent auditing firms arrived at nearly identical conclusions. These served as the premise for the negotiations regarding the ownership stake.

"If the joint venture is established, the value of the city's in-kind contribution will be at least €77 million and that of Utilitas will be at least €155 million," Koit added.

The estimated value of the assets leased by Tallinn to Utilitas 22 years ago, as determined by the auditors, is not disclosed to the public.

"An audit firm's valuation of a company's assets is usually not documentation intended for public use because it contains the parties' commercial secrets," Vaher reasoned.

He said the value of the assets acquired from the City of Tallinn 22 years ago has decreased substantially due to loss of value, and that Utilitas has been investing in the heating system for the past 20 years.

To establish the joint venture, both Utilitas and Tallinn will invest capital, resulting in the joint venture being founded with shares from both parties.

The City of Tallinn transfers to the joint venture 32,500 shares in Tallinna Soojus owned by the City and representing 100 percent of the company's share capital.

Utilitas transfers to the joint venture the 7,650,000 shares of Utilitas Tallinn representing 100 percent of the company's share capital, as well as the €121.7 million in financial claims against Utilitas Tallinn arising from the loan agreements between Utilitas and Utilitas Tallinn.

There will be no changes to the companies' assets as a result of the transaction, so the joint venture will control all of the assets the companies currently own: the district heating and district cooling networks in Tallinn and Maardu, the Mustamäe combined heat and power plant, three district heating peak and stand-by plants in Ülemiste, Kristiine, and Mustamäe, two district cooling plants, and smaller local boiler plants. Most of these have been built or reconstructed by Utilitas over a period of 22 years.

During the negotiations, it was agreed that Utilitas would also be required to invest in wastewater and seawater heating systems, Vaher added.

Tallinn and Utilitas both emphasized that the joint venture will have no effect on district heating subscribers.

Tallinn founded Tallinna Soojuus in 1996 and, in 2001, leased all of its networks, production units and land to Utilitas' predecessor, Tallinna Kütte, for 30 years. The lease's history can be seen here.

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