MANAGEMENT REPORT
RESULTS OF OPERATIONS - FOR THE 4th QUARTER 2007
2007 Overview
In 2007 the Company's total sales increased, year on year, by 18.4% to 52.5 mln
EUR. Total water and sewerage services sales volumes increased by 0.3%. Sales to
residential customers increased by 10.5% year on year, sales to commercial
customers within the service area increased by 7.5% year on year, and sales to
commercial customers outside of the service area increased by 32.2% reaching
2.46 mln m3 or 1.13 mln EUR year on year. The Company's profit before taxes was
21.3 mln EUR, which is a 12.9% increase compared to 2006. The Company invested
18.3 mln EUR, of which 9.2 mln EUR was invested in network extension and
developments.
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| mln EUR | 4 Q | 4 Q | Change | 12 | 12 | Change |
| | 2007 | 2006 | | months | months | |
| | | | | 2007 | 2006 | |
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| Sales | 17,3 | 13,3 | 30,3% | 52,5 | 44,3 | 18,4% |
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| Main operating | 10,6 | 9,5 | 11,3% | 41,4 | 37,7 | 10,0% |
| activities | | | | | | |
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| Other operating | 6,7 | 3,7 | 78,5% | 11,0 | 6,6 | 65,7% |
| activities | | | | | | |
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| Gross profit | 7,1 | 6,0 | 19,3% | 28,5 | 24,0 | 18,7% |
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| Gross profit | 41,3% | 45,1% | -8,5% | 54,3% | 54,2% | 0,3% |
| margin % | | | | | | |
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| Operating profit | 6,0 | 4,8 | 25,4% | 24,1 | 21,6 | 11,7% |
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| Operating profit | 34,5% | 35,9% | -3,7% | 46,0% | 48,7% | -5,7% |
| margin % | | | | | | |
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| Profit before | 5,2 | 4,0 | 29,9% | 21,3 | 18,9 | 12,9% |
| taxes | | | | | | |
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| Profit before | 30,3% | 30,4% | -0,3% | 40,6% | 42,5% | -4,6% |
| taxes margin | | | | | | |
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| Net profit | 5,2 | 4,0 | 29,9% | 17,8 | 15,9 | 12,0% |
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| ROA % | 3,3% | 2,6% | 28,3% | 11,4% | 10,3% | 10,6% |
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| Debt to total | 51,8% | 53,4% | -3,0% | 51,8% | 53,4% | -3,0% |
| capital employed | | | | | | |
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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
Profit and Loss Statement
4th quarter 2007
Sales
In the 4th quarter of 2007 the Company's total sales increased, year on year, by
30.3% to 17.3 mln EUR. Sales from the Company's main operating activities were
10.6 mln EUR. 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 service area, and fees received from the City of Tallinn for
operating and maintaining the storm water system.
Sales of water and wastewater treatment were 9.7 mln EUR, a 9.5% increase
compared to the 4th quarter of 2006, resulting from the 10.8% increase in
tariffs from 1 January 2007 for the Company's residential and commercial
customers combined with the factors described below.
Included within this amount were the following increases by sector: Sales to
residential customers increased by 10.4% to 5.2 mln EUR. Sales to commercial
customers within the service area increased by 7.9% to 4.1 mln EUR. Sales to
commercial customers outside of the service area - primarily bulk volumes of
wastewater treatment services provided to the surrounding municipalities -
increased by 24.7% reaching 711 000 m3 or 0.3 mln EUR. Over pollution fees
received were 6 th EUR lower than in the 4th quarter of 2006.
In the 4th quarter of 2007, the volumes sold to residential customers stayed at
a similar level to that in 2006. Volumes sold in 2007 have dropped 0.3% or 90
thousand m3, mainly because of the rainy summer in 2007 (compared to 2006) when
water used for gardening purposes reduced considerably. This loss of sales is
more than recovered (+0.2 mln EUR extra sales as specified below) in the storm
water disposal and fire hydrant services line, as due to the rainy year, the
treatment volumes of storm water increased.
The volumes sold to commercial customers inside the service area decreased
compared to the relevant period in 2006 due to several factors combined. Most of
the reduction in sales volumes in Tallinn is due to companies moving to the
surrounding municipalities, attracted by cheaper real estate prices. Most of
these customers are re-captured through the bulk-supply contracts signed with
the surrounding municipalities, but not always. For example in the 2nd quarter
of 2007, one of the Company's biggest industrial customers moved its facilities
out of our area, resulting in a volume loss of 68 000 m3 in the 4th quarter
only. We have recognized that the overall economic situation and the heat on the
real estate market have also had a negative effect on the Company's commercial
sales.
Statistics show, that starting from May the tourist flow to Tallinn has slowed
down, still exceeding 2005 level, but slightly below 2006. Also the real estate
market seems to have reached a point of stagnation. Even though the number of
new apartments and business buildings constructed in Tallinn has continued to
increase, a large share of new buildings remain vacant as commercial customers
as well as people in need of space are moving to surrounding areas due to more
affordable real estate prices. This trend is also reflected in the Company's
sales to surrounding areas, which has increased by 24.7% compared to the same
period last year.
The sales from the operation and maintenance of the stormwater and firehydrant
system increased by 36.8% to 0.7 mln EUR in the 4th quarter of 2007 compared to
the same period in 2006. This is in accordance with the terms and conditions of
the contract whereby the storm water and fire hydrant costs are invoiced based
on actual costs and volumes treated. This is contractually agreed up to 2020.
Sales revenues from other operating activities, mainly connections and storm
water construction, totaled 6.7 mln EUR which is 2.9 mln EUR higher than in the
4th quarter of 2006. This line depends on construction completion and the
revenue is recorded when it is probable that the revenues will flow to the
company.
Cost of Goods Sold and Gross Margin
The cost of goods sold for the main operating activity was 3.8 mln EUR in the
4th quarter of 2007, an increase of 0.08 mln EUR or 2.1% from the equivalent
period in 2006.
In the 4th quarter of 2007 the Company has for the fourth successive quarter
recorded zero failures in all pollution measures taken, and as a result the
amount of pollution tax payable reduced by 0.11 mln EUR in quarter, partly
balanced by increase in tax rates year on year by 20%.
The chemical costs decreased although larger amount of wastewater was treated in
the 4th quarter of 2007 compared to the 4th quarter of 2006. The decrease was
mainly due to fluctuations in methanol price, which was extremely high in 4th
quarter 2006. The chemical costs were 0.3 mln EUR, which represents a 14.5%
decrease compared to the corresponding period in 2006.
Electricity costs increased by 0.01 mln EUR or 3.7% due to higher electricity
prices and the increased volume of wastewater treated in the 4th quarter of 2007
compared to the 4th quarter of 2006.
Salaries expenses increased by 0.2 mln EUR or 23%, partly as a consequence of
the highly competitive labour market and rapidly growing salaries, but the 4th
quarter is also impacted by the annual bonuses and correction of the holiday
reserve. Eliminating the 4th quarter exceptional items the salaries increase is
still in all categories below the overall increase in average salaries in the
Estonian market, which according to the latest statistics has increased by more
than 20% year on year.
Other cost of goods sold in the main operating activity increased by 0.03 mln
EUR, or 4.3% year on year. In the 4th quarter other costs increased due to
increased costs on a number of support services contracts, such as transport,
security services, reflecting 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 2007 was 7.1 mln EUR, which represents an increase of 1.15 mln EUR, or 19.3%,
compared to the gross profit of 6 mln EUR for the 4th quarter of 2006.
Operating Costs and Operating Margin
Marketing expenses increased by 0.09 mln EUR to 0.24 mln EUR during the 4th
quarter of 2007 compared to the corresponding period in 2006. This is partly
the result of the overall salary increases, but particularly in this group it is
impacted by formation of the new business unit focusing on new business
development in 2007. The increase in depreciation charges accounted within
marketing expenses is due to the inclusion of the depreciation related to the
completion of the last stage of implementation of the Customer Information and
Billing system (KLIF).
General administration expenses increased by 6 th EUR to 0.98 mln EUR in the 4th
quarter of 2007 as a consequence of an increase in salaries as described above.
The other general administration expenses include approximately 0.03 mln EUR
rental cost of computers resulting from switching from owning the computers into
the lease contracts- a corresponding reduction can be found in the depreciation
charge. . A switch from old billing related modules to new software, recorded
within marketing expenses complements the reduction in this line.
Included within the above cost categories are staff costs. These totaled 1.5 mln
EUR in the 4th quarter of 2007, which is a 0.34 mln EUR or 29% increase compared
to the same period in 2006, which as mentioned earlier was due to exceptional
items and the wide revision of salaries at end of 2006.
Other net income/expenses totaled an income of 0.06 mln EUR in the 4th quarter
of 2007 compared to a cost of 0.09 mln EUR in the 4th quarter of 2006, mainly
because of a 0.13 mln EUR profit from the sale of one small plot.
As a result of all of the above the Company's operating profit for the 4th
quarter of 2007 was 6 mln EUR, an increase of 1.2 mln EUR compared to an
operating profit of 4.8 mln EUR achieved in the 4th quarter of 2006.
Financial expenses
Net Financial expenses were 0.73 mln EUR in the 4th quarter of 2007, which is an
increase of 6 th EUR or 0.8% compared to the 4th quarter of 2006. The Company's
interest costs have increased by 14.6% compared to the 4th quarter of 2006. This
is due to the fact that half of the Company's loans are connected to the 6 month
Euribor rate, which was 4.686% in the 4th quarter of 2007 compared to 3.736% in
the 4th quarter of 2006. The increase in interest expenses is partially offset
by an increase in financial income earned during the 4th quarter of 2007, as a
result of a more favourable cash position and increasing interest rates.
Profit Before Tax
The Company's profit before taxes for the 4th quarter of 2007 was 5.2 mln EUR,
which is 1.2 mln EUR higher than the profit before taxes of 4.0 mln EUR for the
4th quarter of 2006.
Results for the twelve months of 2007
During the twelve months of 2007 the Company's total sales increased, year on
year, by 18.4% to 52.5 mln EUR. Sales from the Company's main operating
activities were 41.4 mln EUR. Sales of water and wastewater services were 38.3
mln EUR, a 9.2% increase worth of 3.2 mln EUR compared to the twelve months of
2006. The revenues from other operating activities, mainly connections and storm
water construction, totaled 11.0 mln EUR in 2007.
The Company's profit before taxes for the twelve months of 2007 was 21.3 mln
EUR, which is 2.4 mln EUR higher than the profit before taxes of 18.9 mln EUR in
2006. The results for the twelve months of 2007 were impacted by 2 one-offs,
first by the fact that the Ministry of Environment gave final approval to the
success of the nitrogen project, which resulted in the release of a provision
worth 0.85 mln EUR for environmental taxes in the 1st quarter and secondly by
0.13 mln EUR profit from sale of one small plot in the 4th quarter. The results
for the twelve months of 2006 were impacted by the sale of excess land in
Paljassaare worth 1.5 mln EUR. When eliminating these one-offs, the underlying
profit before tax has increased by 3 mln EUR to 20.3 mln EUR i.e. 17.3%
year-on-year.
Balance sheet
During the twelve months of 2007 the Company invested 18.3 mln EUR into fixed
assets. Non-current assets were 139.6 mln EUR at 31 December 2007. Current
assets increased by 2.8 mln EUR to 23.9 mln EUR in the twelve months of the
year, which was largely attributable to an increase in customer receivables
payable in 1st quarter 2008.
Current liabilities increased by 3.0 mln EUR to 12.8 mln EUR in the twelve
months of the year. This was mainly due to transfer of current portion of the
long-term borrowings from non-current liabilities to current liabilities.
The company continues to maintain its leverage level within its target range of
50-60% with total liabilities to total capital employed of 51.8% as at 31
December 2007. Long-term liabilities stood at 71.9 mln EUR at the end of
December 2007, consisting almost entirely of the outstanding balance on the two
long-term bank loans.
Cash flow
During the twelve months of 2007, the Company generated 21.3 mln EUR of cash
flows from operating activities, an increase of 0.8 mln EUR compared to the
corresponding period in 2006. Operating profit continues to be the main driver
for growth.
In the twelve months of 2007 net cash outflows from investing activities were
9.8 mln EUR, which is 5.1 mln EUR more than in 2006. This was mainly due to some
big construction revenue invoices that are due in the 1st quarter 2008, but also
impacted by increased investment levels. In the twelve months of the year, the
company invested 18.3 mln EUR - 13.7 mln EUR networks extension and
rehabilitation, 2.95 mln EUR Paljassaare wastewater treatment plant and
wastewater treatment, 0.75 mln EUR water quality (Ülemiste water treatment plant
and raw water) and 0.86 mln EUR other investments (IT, capital maintenance,
meters, etc).
Cash outflows from financing activities were 16.1 mln EUR during the twelve
months of the year compared to cash outflow of 13.1 mln EUR during the twelve
months of 2006, reflecting increased dividend payments and related taxes.
As a result of all of the above factors, the total cash outflow in the twelve
months of 2007 was 4.5 mln EUR compared to a cash inflow of 2.7 mln EUR in the
twelve months of 2006. Cash and cash equivalents stood at 11.4 mln EUR as at 31
December 2007.
Employees
At the end of the 4th quarter of 2007, the number of employees was 312, compared
to 318 at the end of the 4th quarter of 2006.
Dividends and share performance
Based on the results of the 2006 financial year, the Annual General Meeting of
shareholders of AS Tallinna Vesi voted to pay 12,527,322 EUR of dividends. Of
this 639 EUR was paid to the owner of the B-share and 12,526,683 EUR, i.e. 0.6
EUR per share to the owners of the A-shares. Dividends were paid on 15 June
2007.
As of 31 December 2007 AS Tallinna Vesi shareholders, with a direct holding over
5%, were:
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| United Utilities (Tallinn) BV | 35.3% |
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| City of Tallinn | 34.7% |
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| Nordea Bank Finland Plc clients account trading | 7.71% |
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| Morgan Stanley + Co International Equity client | 6.81% |
| account | |
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At the end of the quarter, 31 December 2007, the closing price of the AS
Tallinna Vesi share was 12.96 EUR, which is a 10.6% decrease compared to the
closing price of 14.50 EUR at the beginning of quarter, outperforming the market
as the OMX Tallinn index dropped by 17.5% during the quarter.
Operational achievements in 2007
In the 4th quarter the Services Agreement Amendment was signed with the City of
Tallinn. The Services Agreement is extended until 2020 and the k-coefficient is
also fixed until 2020 - 2% in years 2009 to 2010 and 0% in years 2011 to 2020.
No extra capital expenditures (in addition to maintenance capex and extensions
program agreed in the contract) can be imposed on the company until 2020.
According to the agreement the network extension constructions must be completed
by March 2011. To compensate the Company for the construction and financing
costs a specific development component is included into the domestic water
tariff starting from 1 March 2008 to the end of 2017 and the City of Tallinn
will compensate the storm water constructions every month until the end of 2011.
The development component shall be compensated to the customers with direct
payment to the company by the City of Tallinn. The component is bigger during
the construction period (0.58 EUR per m3 until 31 December 2011 and 0.39 EUR per
m3 in years 2012 to 2017).
Earlier, on 26 September the City Council approved the ‘basic' tariffs for water
and wastewater services for 2008. The tariff increase is going to be at the
expected level, i.e. 11.7%.
The work on the new Paljassaare sludge processing building was completed and
commissioning activities ended with full hand over in the beginning of November
2007. The project provides for the more effective and efficient operation and
maintenance of this equipment and will realise further benefits in the operation
of the wastewater and sludge treatment processes. The sludge composting
fields were completed in the 3rd quarter and these have been taken into full
operation. These projects 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 was over 2.6 mln EUR.
- The wastewater treatment performance with all outfall effluent samples
at all locations was all year long compliant with requirements and as a
consequence the environmental charges for the year attracted a 50% reduction. As
a result of the excellent treatment results the company saved 0.45 mln EUR from
environmental taxes in 2007.
- In the 3rd quarter the OHSAS (i.e. health and safety) accreditation was
awarded to the company and the certification was formally presented to the
company on 26th October.
In the 3rd quarter the Estonian Chamber of Commerce nominated the company for
the award of the Most Competitive Service Providing Company and we were
acknowledged as the best in this category. The customers also acknowledge the
work done by the Company to improve the services it provides. According to the
survey carried out in December 2007 the customers' satisfaction index increased
from 73 in 2006 to 79 at end of 2007.
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| INCOME STATEMENT | | | | |
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| (thousand EUR) | IV | IV | 12 | 12 |
| |Quarter | Quarter | months | months |
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| | 2007 | 2006 | 2007 | 2006 |
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| | | | | |
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| Sales from main operating activities | 10 591 | 9 517 | 41 436 | 37 655 |
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| Revenues from other operating | 6 688 | 3 746 | 11 021 | 6 650 |
| activities | | | | |
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| Net sales | 17 278 | 13 263 | 52 457 | 44 305 |
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| | | | | |
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| Costs of goods sold (main operating | -3 801 | -3 721 | -13 848 | -14 095 |
| activities) | | | | |
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| Costs of goods sold (other operating | -6 348 | -3 563 | -10 110 | -6 206 |
| activities) | | | | |
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| | | | | |
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| GROSS PROFIT | 7 130 | 5 979 | 28 499 | 24 005 |
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| | | | | |
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| Marketing expenses | -245 | -158 | -866 | -612 |
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| General administration expenses | -976 | -968 | -3 633 | -3 280 |
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| Other income/ expenses (-) | 60 | -95 | 118 | 1 485 |
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| | | | | |
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| OPERATING PROFIT | 5 968 | 4 758 | 24 118 | 21 597 |
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| | | | | |
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| Financial income / expenses (-) | -730 | -725 | -2 827 | -2 747 |
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| | | | | |
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| PROFIT BEFORE TAXES | 5 238 | 4 033 | 21 291 | 18 850 |
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| | | | | |
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| Income tax on dividends | 0 | 0 | -3 533 | -2 997 |
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| | | | | |
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| NET PROFIT FOR THE PERIOD | 5 238 | 4 033 | 17 757 | 15 853 |
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| | | | | |
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| Attributable to: | | | | |
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| Equity holders of A-shares | 5 238 | 4 033 | 17 757 | 15 852 |
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| B-share holder | 0,64 | 0,64 | 0,64 | 0,64 |
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| | | | | |
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| Earnings per share in euros | 0,26 | 0,20 | 0,89 | 0,79 |
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| | | | | |
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| | | | | |
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| BALANCE SHEET | | | | |
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| (thousand EUR) | | | 31.12. | 31.12. |
| | | | 2007 | 2006 |
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| | | | | |
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| ASSETS | | | | |
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| | | | | |
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| CURRENT ASSETS | | | | |
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| Cash at bank and in hand | | | 11 403 | 15 940 |
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| Customer receivables | | | 11 838 | 4 569 |
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| Accrued income and prepaid expenses | | | 335 | 304 |
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| Inventories | | | 233 | 201 |
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| Assets for sale | | | 72 | 105 |
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| TOTAL CURRENT ASSETS | | | 23 881 | 21 120 |
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| | | | | |
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| NON-CURRENT ASSETS | | | | |
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| Tangible assets | | | 127 375 | 119 969 |
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| Intangible assets | | | 3 140 | 3 361 |
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| Unfinished assets - non connections | | | 3 070 | 5 859 |
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| Unfinished pipelines - new | | | 5 756 | 7 488 |
| connections | | | | |
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| Prepayments for fixed assets | | | 345 | 179 |
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| TOTAL NON-CURRENT ASSETS | | | 139 686 | 136 856 |
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| | | | | |
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| TOTAL ASSETS | | | 163 567 | 157 976 |
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| | | | | |
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| LIABILITIES | | | | |
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| | | | | |
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| CURRENT LIABILITIES | | | | |
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| Current portion of long-term | | | 2 679 | 30 |
| borrowings | | | | |
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| Trade and other payables, incl. | | | 5 558 | 5 448 |
| dividends | | | | |
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| Taxes payable | | | 1 697 | 1 950 |
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| Short-term provisions | | | 143 | 34 |
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| Deferred income | | | 2 691 | 2 322 |
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| TOTAL CURRENT LIABILITIES | | | 12 767 | 9 784 |
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| | | | | |
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| NON-CURRENT LIABILITIES | | | | |
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| Bank loans | | | 71 905 | 74 527 |
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| Other payables | | | 7 | 6 |
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| TOTAL NON-CURRENT LIABILITIES | | | 71 912 | 74 534 |
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| TOTAL LIABILITIES | | | 84 679 | 84 318 |
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| | | | | |
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| EQUITY CAPITAL | | | | |
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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 | | | 22 336 | 19 010 |
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| Net profit for the period | | | 17 757 | 15 853 |
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| TOTAL EQUITY CAPITAL | | | 78 887 | 73 658 |
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| | | | | |
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| TOTAL LIABILITIES AND EQUITY CAPITAL | | | 163 567 | 157 976 |
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| | | | | |
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| | | | | |
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| CASH FLOW STATEMENT | | | | |
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| (thousand EUR) | | | 12 | 12 |
| | | | months | months |
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| | | | 2007 | 2006 |
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| CASH FLOWS FROM OPERATING ACTIVITIES | | | | |
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| Operating profit | | | 24 118 | 21 597 |
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| Adjustment for depreciation | | | 5 064 | 5 180 |
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| Adjustment for income and expenses | | -911 | -444 |
| from constructions | | | |
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| Other financial income and expenses | | | -101 | -34 |
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| Profit from sale of fixed assets | | | -155 | -1 592 |
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| Expensed fixed assets | | | 30 | 71 |
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| Capitalization of operating expenses | | | -1 263 | -1 337 |
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| Movement in current assets involved | | -2 053 | -265 |
| in operating activities | | | |
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| Movement in liabilities involved in | | | -17 | 383 |
| operating activities | | | | |
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| Interest paid | | | -3 386 | -3 071 |
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| Total cash flow from operating | | | 21 326 | 20 487 |
| activities | | | | |
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| | | | | |
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| CASH FLOWS FROM INVESTING ACTIVITIES | | | | |
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| Acquisition of fixed assets (incl | | | -16 997 | -12 274 |
| pipelines construction) | | | | |
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| Proceeds from pipelines financed by | | 6 509 | 7 200 |
| construction income | | | |
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| Proceeds from sale of and prepayments | 25 | -83 |
| received/returned(-) for fixed assets | | |
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| Proceeds from sale of assets and real | | 15 | 71 |
| estate investments | | | |
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| Interest received | | | 676 | 418 |
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| Total cash flow from investing | | | -9 773 | -4 667 |
| activities | | | | |
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| | | | | |
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| CASH FLOWS FROM FINANCING ACTIVITIES | | | | |
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| Finance lease payments | | | -30 | -82 |
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| Dividends paid | | | -12 527 | -10 034 |
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| Income tax on dividends | | | -3 533 | -2 997 |
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| Total cash flow from financing | | | -16 091 | -13 113 |
| activities | | | | |
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| | | | | |
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| Change in cash and bank accounts | | | -4 537 | 2 706 |
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| | | | | |
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| CASH AND EQUIVALENTS AT | | 15 940 | 13 234 |
| THE BEGINNING OF THE | | | |
| PERIOD | | | |
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| | | | | |
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| CASH AND EQUIVALENTS AT | | 11 403 | 15 940 |
| THE END OF THE PERIOD | | | |
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Additional information:
Siiri Lahe
Chief Financial Officer
+372 6262 262
siiri.lahe@tvesi.ee