AS Tallinna Vesi FINANCIAL RESULTS 31.01.2007
RESULTS OF OPERATIONS - FOR THE 4th QUARTER AND 2006 FINANCIAL YEAR
MANAGEMENT REPORT
Overview
Growth in sales of water and treatment of wastewater, a reduction in costs from
the 2005 IPO and loan re-structuring, and refinement of the Company's asset base
have enabled the company to deliver growth in profitability year on year. The
operating profit for the full year of 2006 was 21.6 mln EUR, which is a 3.5 mln
EUR, or 19.6% increase compared to 2005. During 2006 sales to residential
customers increased by 9.7% year on year, sales to commercial customers within
the service area increased by 10% year on year, and outside the service area
sales increased 59.3% year on year. To continue to improve the quality of
product and service, improve the environment and meet this increased demand the
Company has invested an amount of 15.8 mln EUR in 2006, the highest in the
Company's history and a 10% increase year on year.
Key Financial Indicators
million EUR 4th Q 4th Q Change 12 months 12 months Change
2006 2005 2006 2005
Sales 13,3 9,7 37,2% 44,3 37,8 17,1%
Main operating 9,5 9,0 6,1% 37,7 35,1 7,1%
activities
Other operating 3,7 0,7 434,3% 6,6 2,7 147,1%
activities
Gross profit 6,0 5,6 7,3% 24,0 22,5 6,8%
Gross profit margin % 45,1% 57,6% -21,8% 54,2% 59,4% -8,8%
Operating profit 4,8 4,7 1,1% 21,6 18,1 19,6%
Operating profit margin % 35,9% 48,7% -26,3% 48,7% 47,7% 2,1%
Profit before taxes 4,0 2,7 49,8% 18,9 13,4 40,6%
Profit before taxes margin 30,4% 27,9% 9,2% 42,5% 35,4% 20,1%
Net profit 4,0 2,7 49,8% 15,9 11,1 42,3%
ROA % 2,6% 1,8% 43,8% 10,0% 7,3% 36,6%
Debt to total capital 53,4% 55,3% -3,5% 53,4% 55,3% -3,5%
employed
ROE% 5,5% 4,0% 38,0% 21,5% 16,4% 31,0%
Current ratio 2,2 1,9 11,4% 2,2 1,9 11,4%
Gross profit margin - Gross profit / Net sales
Operating profit margin - Operating profit / Net sales
Profit before taxes margin - Profit before taxes / Net sales
ROA - Net profit /Total Assets
Debt to Total capital employed - Total Liabilities / Total capital employed
ROE - Net profit /Total Equity
Current ratio - Current assets / Current Liabilities
Profit and Loss Statement
2006 Financial Year
Sales
In 2006 total sales from the Company's main operating activities were 37.7 mln
EUR, up 7.1% year-on-year. Sales in the main operating activity principally
comprise of sales of water and treatment of wastewater to domestic and
commercial customers within and outside of the services area, and fees received
from the City of Tallinn for operating and maintaining the stormwater system.
Sales from water and wastewater increased by 10.8%, which was in accordance with
expectations and is largely attributable to the 9.6% increase in water and
sewerage tariffs in 2006 for the Company's residential and commercial customers.
Sales to residential customers increased by 9.7% to 18.5 mln EUR. Sales to
commercial customers within the services area increased by 10% to 15.8 million
EUR in 2006, due to the tariff increase and an increase in volumes sold. Sales
to commercial customers outside of the service area - primarily bulk volumes of
wastewater treatment services provided to the surrounding municipalities -
reached 1.9 million m3 or 0.9 mln EUR, which represents a 66% increase in sales
value compared to 2005. This growth in volumes demonstrates the continuing
success of the company's strategy in connecting new customers and
municipalities.
Sales revenues from other operating activities (mainly connections and
stormwater construction) increased, year on year, by 3.9 mln EUR to 6.6 mln EUR
as a result of an increase in connections income from individual connectees in
both the domestic and commercial sectors.
Gross Margin
For the 2006 financial year the cost of goods sold for the main operating
activity was 14.1 mln EUR, which is an 1.2 mln EUR, or 9.2% increase compared to
the previous year. The main increases were chemical costs, 0.5 mln EUR higher
year on year, environmental taxes, 0.4 mln EUR higher year on year, and other
costs of goods sold, 0.2 mln EUR higher year on year.
The increase in chemical costs in the first half of the year was due to
increased usage of methanol required to reduce the concentration of nitrogen
discharged into the Baltic Sea. Working in partnership with the Ministry of
Environment the Company had targeted the achievement of this key environmental
objective by 30 June 2006. Based upon the measurements taken by the Company this
target has been achieved and approvals have been received from Harju County and
the Environmental Inspectorate. The final report is now with the Ministry of
Environment for their final approval. The Company hopes to receive approval in
the 1st quarter of 2007 and as a result will be able to release a provision
worth 0.9 mln EUR for taxes foregone that would have had to be paid had the
project not been successful. In the second half of the year the Company has
continued to make investments into chemical at comparable levels to the first
half of 2006 to continue to meet this key environmental objective. It is
possible that, against a background of increasing commodity prices, the cost of
chemicals may rise in the future, as the continued achievement of this
objective requires chemical quantities similar to those used in 2006.
The increase in environmental taxes is the result of a 100% rise in tariffs paid
on treated wastewater discharged to the sea. Tariffs have been set by the Law on
Environmental Fees imposed by the Parliament for the period from 2006 to 2009.
During 2006 other costs of good sold increased due to the following factors,
during the 1st quarter of 2006 costs expensed to the Profit and Loss account
were higher as a result of lower salary capitalisations resulting from the
timing of the capital expenditures programme, cost increases were close to zero
during the two middle quarters and were driven higher by labour related
increases in the price of support services contracts in the fourth quarter of
2006.
Profits from other operating activities, which include water, sewerage and storm
water connection construction income were 0.4 mln EUR in 2006, a 0.2 mln EUR
increase from 2005 levels as a consequence of the increased connections
activity.
Gross profit for the 2006 financial year was 24.0 mln EUR, which is an increase
of 1.5 mln EUR, or 6.8% compared to 2005.
Operating margin
For the 2006 financial year marketing expenses were 0.2 mln EUR higher than in
2005. Almost all of this increase resulted from additional depreciation charges
from the new customer management system.
During 2006 general administration expenses were 3.3 mln EUR, which is 0.8 mln
EUR lower than in 2005. In 2005 general administration expenses were inflated
by 1.1 mln EUR of one-off IPO costs. After removing this non-recurring increase
this cost category was 0.3 mln EUR higher than 2005 due to increases in two main
categories. Firstly, an increase in salary costs of 0.1 mln EUR (14%) as a
consequence of increases paid to retain key members of staff, and secondly, an
increase in other general administration expenses of 0.1 mln EUR, the majority
of which was incurred in the fourth quarter for the reasons outlined more fully
in the 4th quarter commentary.
In the 2006 financial year total staff salary costs accounted for 4.3 mln EUR,
which is 0.2 mln EUR lower than in 2005. However, included in the 2005 amount
are 0.4 mln EUR of IPO bonuses paid to all employees. After removing this one
off amount total staff costs increased by 0.2 mln EUR, or 4.2%, year on year.
The average number of staff employed in 2006 decreased by 15 to 322.
For the 2006 financial year, other income was 1.5 mln EUR, including 1.5 mln EUR
from the recognition of profits subsequent to concluding the sale of excess land
in Paljassaare.
For the 2006 financial year the company achieved an operating profit of 21.6 mln
EUR, compared to the operating profit of 18.1 mln EUR achieved in 2005. The
operating profit margin increased from 47.7% to 48.7%.
Financial expenses
Net Financial expenses were 2.7 mln EUR in 2006, which is a decrease of 1.9 mln
EUR compared to 2005. The restructuring of the Company's long-term debt in
November 2005 increased the financial expenses by 1.2 mln EUR i.e. the remaining
savings were due to changes in loan agreement terms after restructuring lowering
the interest rate and increased financial income.
Profit Before Tax
For the 2006 financial year profit before taxes was 18.8 mln EUR, which is an
5.4 mln EUR increase compared to 2005.
4th Quarter of 2006
Sales
In the 4th quarter of 2006 the Company's total sales increased, year on year, by
37.2% to 13.3 mln EUR. Sales from the Company's main operating activities were
9.5 mln EUR.
Sales of water and wastewater treatment were 8.9 mln EUR, a 9.3% increase
compared to the fourth quarter of 2005, resulting from the increase in tariffs
from 1 January 2006 and growth in sales volumes to customers outside the
services area. Included within this amount were the following increase by
sector: Sales to residential customers increased by 8.9% to 4.7 mln EUR, sales
to commercial customers within the service area increased by 8% to 3.9 mln EUR
and sales to customers outside of the services area increased by 46% to 0.3 mln
EUR.
In the 4th quarter of 2006 sales from the operation and maintenance of the
stormwater system decreased by 35.5% to 0.5 mln EUR compared to the same period
in 2005. This reduction reflects the terms and conditions of the latest contract
agreed between the Company and the City of Tallinn, which in 2006 is
contractually agreed and has secured this revenue stream through to 2015.
Sales revenues from other operating activities (mainly connections and
stormwater construction) increased by over 400% to 3.7 mln EUR compared to the
4th quarter of 2005. This was due to a single significant commercial connection
worth approximately 1.9 mln EUR, supplemented by increased volumes of
residential connectees.
Gross Margin
The cost of goods sold for the main operating activity was 3.7 mln EUR in the
4th quarter of 2006, an increase of 0.3 mln EUR or 8.9% from the equivalent
period in 2005. This increase was largely driven by increased chemical costs,
environmental taxes and other cost of goods sold.
In the 4th quarter of 2006 chemical costs increased by 0.1 mln EUR, or 35.5%, to
0.4 mln EUR. As reported in previous periods the Company made significant
investments in chemicals to ensure compliance with a key Ministry of Environment
objective. In the 4th quarter of 2006 the Company has continued to comply with
the same environmental targets for the discharge of nitrogen into the Baltic
Sea, the result of this is an investment level in chemicals comparable to the
first half of the year.
Environmental tax costs increased by 0.1 mln EUR, or 66% and is due to tariff
increases outlined in the analysis of the 2006 financial year.
Other cost of goods sold in the main operating activity increased by 0.1 mln
EUR, or 23% year on year. This was principally due to increased costs on a
number of support services contracts, such as security, vehicle plant hire, and
reflects the significant increase in labour costs in Tallinn
As a result of all of the above the Company's gross profit for the 4th quarter
of 2006 was 6.0 mln EUR, which represents an increase of 0.4 mln EUR, or 7.3%,
compared to the gross profit of 5.6 mln EUR for the 4th quarter of 2005.
Operating Margin
Marketing expenses increased by 0.1 mln EUR to 0.2 mln EUR during the 4th
quarter of 2006 compared to the corresponding period in 2005. This was a result
of increases in salary costs, depreciation and other marketing expenses. These
increases were mainly due to, the recruitment of extra staff to improve the
connections activity, additional depreciation charges relating to the
implementation of the new customer management system, and an increase in postal
and other general expenses.
General administration expenses increased by 0.2 mln EUR to 1.0 mln EUR in the
4th quarter of 2006 as a consequence of an increase in depreciation and other
general administration expenses. The increase in depreciation is a one off cost
resulting from a re-evaluation of the net realizable value of small fixed
assets. Other general expenses are higher as a result of lower salary
capitalisations as the implementation of the 1st phase of the customer
management system comes to a close.
Included within the above cost categories are staff costs. These totaled 1.2 mln
EUR in the 4th quarter of 2006, which is a less than 1% increase compared to the
same period in 2005.
Other net expenses totaled 0.1 mln EUR in 4th quarter 2006 compared to a 0.01
mln EUR income stream in the 4th quarter of 2005.
As a result of all of the above the Company's operating profit for the 4th
quarter of 2006 was 4.8 mln EUR, an increase of 0.05 mln EUR compared to an
operating profit of 4.7 mln EUR achieved in the 4th quarter of 2005.
Financial expenses
Net Financial expenses were 0.7 mln EUR in the 4th quarter of 2006, which is a
decrease of 1.3 mln EUR compared to the 4th quarter of 2005. The restructuring
of the Company's long-term debt in November 2005 increased the 4th quarter
financial expenses by 1.2 mln EUR, with the remaining savings of 0.1 mln EUR due
to improvements in the loan agreement terms after restructuring.
Profit Before Tax
The Company's profit before taxes for the 4th quarter of 2006 was 4.0 mln EUR,
which represents an increase of 1.3 mln EUR, or 49.8%, compared to the profit
before taxes of 2.7 mln EUR for the 4th quarter of 2005.
Balance sheet
The Company's total assets were 158 mln EUR as at 31 December 2006, representing
an increase of 6.3 mln EUR compared to 31 December 2005. Current assets
increased by 3.0 mln EUR, which was largely attributable to an increase in cash
and accounts receivable reflecting increased sales of water and wastewater
treatment services.
Tangible, intangible and unfinished assets were 136.7 mln EUR at 31 December
2006, an increase of 3.3 mln EUR of the fixed asset base during twelve months of
the year. During twelve months of the year the Company has invested 15.8 million
EUR in the following areas: 10.6 mln EUR networks extension and rehabilitation,
2.8 mln EUR Paljassaare wastewater treatment plant and wastewater treatment, 1.1
mln EUR water quality (Ülemiste water treatment plant and raw water) and 1.3 mln
EUR other investments (IT, capital maintenance, meters, etc).
Current liabilities increased by 0.4 mln EUR to 9.8 mln EUR in twelve months of
the year. This was mainly due to increased trade payables, reflecting the higher
levels of investments.
The company continues to maintain its leverage level within its target range of
50-60% with total liabilities to total capital employed of 53.4% as at 31
December 2006. Long-term liabilities stood at 74.5 mln EUR at the end of
December 2006, consisting almost entirely of the outstanding balance of the two
long-term bank loans.
Cash flow
During 2006, the Company generated 20.5 mln EUR of cash flows from operating
activities, an increase of 0.9 mln EUR, or 4.4% compared to the corresponding
period in 2005. The key factor affecting this improvement was a 3.5 mln EUR
increase in operating profit.
In 2006 net cash outflows from investing activities were 4.7 mln EUR, 0.7 mln
EUR less than in 2005. This was largely due to higher proceeds received from
pipelines financed by construction income in 2006 offset by prepayments and
proceeds from the sale of assets.
Cash outflows from financing activities were 13.1 mln EUR during twelve months
of the year, which is 5.6 mln EUR more than the outflows in the corresponding
period in 2005. This significant reduction was mainly due to a net receipt of
2.0 mln EUR from long-term loans in 2005, as well as lower dividend and
corresponding tax payments in 2005.
As a result of all of the above factors, the total cash inflow in twelve months
of 2006 was 2.7 mln EUR compared to a cash inflow of 6.8 mln EUR in twelve
months of 2005. Cash and cash equivalents stood at 15.9 mln EUR as at 31
December 2006.
Employees
As of 31 December 2006 the Company employed 318 people consisting of 227 people
in the Operations division and 91 people in Commercial and Corporate Services.
The number of employees has decreased in Operations division by 16 people since
the beginning of the year as a result of the highly competitive labor market and
not a significant change in the Company's structure.
Dividends and share performance
Based on the results of the 2005 financial year, the Management Board of AS
Tallinna Vesi paid 10.0 mln EUR dividends in June 2006.
As of 31 December 2006 AS Tallinna Vesi shareholders, with a holding over 5%,
were:
United Utilities (Tallinn) BV 35.3%
City of Tallinn 34.7%
Morgan Stanley + Co International Equity client account 6.87%
Citygroup Global Markets Ltd 5.00%
At the end of the reporting period, 31 December 2006, the closing price of the
AS Tallinna Vesi share was 15.01 EUR.
Operational achievements in 2006
- The Company concluded the Nitrogen removal project in Paljassaare
wastewater treatment plant. As a result the nitrogen loads discharged to the
Baltic Sea decreased by 25% over the base year. Total investment into this
project that has lasted over three years was over 1.9 mln EUR. As a result of
achieving the target Tallinn was removed from the HELCOM Baltic Sea hot spot
list. This is a major achievement and a significant recognition of the Company's
contribution to the environment.
- In September 2006 the Company started construction works on the new
Paljassaare sludge processing building. The building will allow for the more
effective and efficient operation and maintenance of this equipment and realise
further benefits in the operation of the wastewater and sludge treatment
processes. This will enable the Company to continue with its environmentally
friendly and cost effective policy of disposing zero sludge to landfill. The
total cost of the project is over 2.6 mln EUR and it is expected to be completed
in the first half of 2007.
- During 2006 we received the final report from the Supervisory Foundation
confirming the Company's compliance with all but one LoS in 2005. The one non-
compliance relates to a new LoS that requires any unplanned interruptions not to
last more than twelve hours. The company failed this LoS on only three occasions
in 2005 due to extraordinary conditions.
- In 2006 the company delivered 15.7 mln EUR in investments in fixed assets.
This is a 10% increase year on year and the highest value in our history.
- In 2006 the new customer management system was implemented. This new system
enables our customer service staff to have all information about any particular
customer including but not limited to, connection contract history, billing
history, payment history and communication history. This allows our staff to
have a complete understanding of customer issues and significantly improves the
speed and quality of our responses.
- Included within the customer management system are a full range of customer
payment options, cash & electronic banking, plus direct debit and payment plans.
To date almost 20% of our customers have signed up for direct debit.
Outlook for 2007
- The solid set of financials achieved in 2006 in a challenging environment
gives the Company a strong basis to start 2007.
- The growth in consumption within the services area is expected to continue
as the economy is still developing at a fast pace
- The contracts in place with the surrounding municipalities, and the
development of these areas, are expected to continue to feed the growth in
volumes outside the services area
- The clear vision developed with its long-term strategic objectives (to
deliver custom service excellence - to deliver operational excellence - to grow
the activity of the company - to deliver shareholder value) will guide the
activity of the Company with a strong emphasis on improving performance.
- The 2007 objectives have been aligned throughout the Company to create a
consistent system aimed at achieving the strategic objectives. They give clear
guidance to each individual member of staff and demonstrate how they contribute
to achieving the Company's objectives.
INCOME STATEMENT
(thousand EUR) IV Quarter IV Quarter 12 months 12 months
2006 2005 2006 2005
Sales from main operating activities 9 517 8 967 37 655 35 146
Revenues from other operating activities 3 746 701 6 650 2 691
Net sales 13 263 9 668 44 305 37 838
Costs of goods sold (main operating activities) -3 721 -3 417 -14 095 -12 914
Costs of goods sold (other operating activities) -3 563 -678 -6 206 -2 450
GROSS PROFIT 5 979 5 573 24 005 22 474
Marketing expenses -158 -94 -612 -433
General administration expenses -968 -786 -3 280 -4 107
Other income/ expenses (-) -95 13 1 485 125
OPERATING PROFIT 4 758 4 707 21 597 18 059
Financial income / expenses (-) -725 -2 014 -2 747 -4 655
PROFIT BEFORE TAXES 4 033 2 693 18 850 13 404
Income tax on dividends 0 0 -2 997 -2 260
NET PROFIT FOR THE PERIOD 4 033 2 693 15 853 11 143
Attributable to:
Equity holders of A-shares 4 033 2 692 15 852 11 143
B-share holder 0,64 0,64 0,64 0,64
Earnings per share in euros 0,20 0,13 0,79 0,56
BALANCE SHEET
(thousand EUR) 31.12.2006 31.12.2005
ASSETS
CURRENT ASSETS
Cash at bank and in hand 15 940 13 234
Customer receivables 4 569 4 265
Accrued income and prepaid expenses 304 338
Inventories 201 202
Assets for sale 105 89
TOTAL CURRENT ASSETS 21 120 18 128
NON-CURRENT ASSETS
Tangible assets 119 969 117 503
Intangible assets 3 361 2 811
Unfinished assets - non connections 5 859 6 058
Unfinished pipelines - new connections 7 488 6 979
Prepayments for fixed assets 179 222
TOTAL NON-CURRENT ASSETS 136 856 133 573
TOTAL ASSETS 157 976 151 701
LIABILITIES
CURRENT LIABILITIES
Current portion of long-term borrowings 30 86
Trade and other payables, incl. dividends 5 448 3 420
Taxes payable 1 950 1 452
Short-term provisions 34 18
Deferred income 2 322 4 382
TOTAL CURRENT LIABILITIES 9 784 9 359
NON-CURRENT LIABILITIES
Finance lease 0 27
Bank loans 74 527 74 471
Other payables 6 6
TOTAL NON-CURRENT LIABILITIES 74 534 74 504
TOTAL LIABILITIES 84 318 83 863
EQUITY CAPITAL
Share capital 12 782 12 782
Share premium 24 734 24 734
Statutory legal reserve 1 278 1 278
Accumulated profit 19 010 17 901
Net profit for the period 15 853 11 143
TOTAL EQUITY CAPITAL 73 658 67 839
TOTAL LIABILITIES AND EQUITY CAPITAL 157 976 151 701
CASH FLOW STATEMENT
(thousand EUR) 12 months 12 months
2006 2005
CASH FLOWS FROM OPERATING ACTIVITIES
Operating profit 21 597 18 059
Adjustment for depreciation 5 180 5 032
Adjustment for income and expenses from constructions -444 -241
Other financial income and expenses -100 -1 279
Profit from sale of fixed assets -1 592 -759
Expensed fixed assets 71 25
Capitalization of operating expenses -1 337 -1 488
Movement in current assets involved in operating activities -265 3 691
Movement in liabilities involved in operating activities 439 410
Interest paid -3 061 -3 825
Total cash flow from operating activities 20 487 19 626
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (incl pipelines construction) -12 274 -12 774
Proceeds from pipelines financed by construction income 7 200 3 355
Proceeds from sale of and prepayments received for fixed -83 3 026
assets
Proceeds from sale of assets and real estate investments 71 748
Interest received 418 324
Total cash flow from investing activities -4 667 -5 322
CASH FLOWS FROM FINANCING ACTIVITIES
Received long-term loans 0 44 503
Repayment of long-term loans 0 -42 500
Finance lease payments -82 -109
Dividends paid -10 034 -7 158
Income tax on dividends -2 997 -2 260
Total cash flow from financing activities -13 113 -7 525
Change in cash and bank accounts 2 706 6 779
CASH AND EQUIVALENTS AT THE BEGINNING OF THE PERIOD 13 234 6 455
CASH AND EQUIVALENTS AT THE END OF THE PERIOD 15 940 13 234
Additional information:
Eteri Harring
Head of Treasury and Investor Relations
+372 6262 225
eteri.harring@tvesi.ee