The City of Tallinn and Utilitas have agreed to enter into a joint venture

We are advising Tallinn City Government in concluding a cooperation agreement to create a joint venture in the field of district heating, AS Utilitas Tallinna Soojus, which will be 33.34% owned by the City of Tallinn and 66.66% by the private limited company Utilitas. The joint venture will be a holding company that manages investments in the Tallinn area, but the provision of heating service will be continued by Utilitas Tallinn.

Energy independence and stable price

According to the Mayor of Tallinn Mihhail Kõlvart, there will be an opportunity to build innovative energy solutions through the joint venture, which will ensure energy independence and stability of the price of heating. “The reconstruction of networks and investments in new renewable energy sources, such as wastewater and seawater heat pumps, and the exploitation of biogas potential, will provide Tallinn residents with district heating based on renewable energy and will allow Tallinn to move realistically towards climate neutrality,” said Mihhail Kõlvart.

The strategic goal of the city is to ensure the availability of environmentally friendly district heating solutions and the functioning of vital services on the territory of the City of Tallinn, and for this, the district heating network must be constantly modernised, and the necessary large investments made.

Investing in the future

As a result of the transaction, the City of Tallinn, and Utilitas will establish a new company, AS Utilitas Tallinna Soojus. The City of Tallinn will make a non-monetary contribution to the new association with the shares of Tallinna Soojus and Utilitas, for its part, with the shares of Utilitas Tallinn. Utilitas Tallinn and Tallinna Soojus will henceforth be subsidiaries of the new joint venture. The creation of a joint venture between the City of Tallinn and Utilitas must be approved by the Tallinn City Council and the Competition Authority.

In recent decades, Utilitas has made large-scale investments into Tallinn’s district heating, significantly increasing the security of supply and the share of local renewable fuels. Utilitas plays a leading role in the development, preparation, and updating of the business plan for the new company. The business plan aims to complete the renewal of the district heating network in accordance with the Tallinn Unified District Heating Network Development Plan and to achieve carbon-neutral district heating and cooling supply by 2030 at the latest.

The investments of the joint venture will be financed by internal cash flows, loans taken from shareholders and third parties, and contributions to the share capital of the joint venture. Utilitas undertakes to finance the investments into carbon-neutral production assets of up to EUR 225 million, without affecting the share of the city’s and Utilitas’ shareholdings in the joint venture. Tallinn does not assume any financial obligations in connection with the financing of the joint venture or the provision of any other financial assistance.

Long-term cooperation

On 31 October 2001, an enterprise lease and operation agreement was signed between Tallinna Soojus and Tallinna Küte (today’s Utilitas Tallinn), based on which Utilitas has been managing and developing the district heating network for the past 22 years. The current form of cooperation does not allow for the construction of new renewable generation capacity, as the remaining eight-year contract period does not give banks the necessary confidence for financing investments with a payback period of 25-30 years.

In addition, according to the current contract, the lessee, i.e. Utilitas Tallinn, must return the leased property to the city at the end of the contract, and the city must compensate for the investments made by the lessee in the assets. The amount of compensation depends on the investments made and, based on the investments carried out to date alone, the compensation obligation is estimated at 250 million euros by the end of 2031. With the creation of the joint venture, the City of Tallinn will be released from its compensation obligation.

Our services and client team

We are advising the Tallinn City Government on all legal issues related to the project and the joint venture to be established, and we conducted a legal audit and supported the client in the preparation and negotiation of transaction documents. We will continue to advise the client in questions related to obtaining a merger clearance from the Estonian Competition Authority.

The transaction project team is led by partner Toomas Prangli and counsel Lauri Liivat. The project’s various advisory areas are managed by partner Kaupo Lepasepp and counsel Piret Lappert, Piibe Lehtsaar, Kaspar Endrikson and Kadri Härginen. The core team also includes partner Carri Ginter, senior associates Liisa Maria Kuuskmaa and Mario Sõrm and associate Kadri Puu.