MANAGEMENT REPORT
RESULTS OF OPERATIONS - FOR THE 1st QUARTER 2011
Overview
During 2011 the Company’s total sales increased, year on year, by 1.4% to 12.4 mln EUR. The Company’s underlying operating profit from water and wastewater related activities increased by 1.7% to 6.6 mln EUR in 2011 compared to 2010. Profits from other activities (mainly construction and developments) increased by 35.2% to 0.32 mln EUR compared to the 2010. The Company’s profit before taxes was 8.0 mln EUR, which is an increase of 52.6% or 2.8 mln EUR, compared to 2010 as result of change of fair value of financial instruments.
| mln € | 1 Q 2011 | 1 Q 2010 | Change | 3 months 2011 | 3 months 2010 | Change |
| Sales | 12,4 | 12,2 | 1,4% | 12,4 | 12,2 | 1,4% |
| Gross profit | 7,5 | 7,6 | -1,1% | 7,5 | 7,6 | -1,1% |
| Gross profit margin % | 60,6 | 62,2 | -2,5% | 60,6 | 62,2 | -2,5% |
| Operating profit | 6,9 | 6,7 | 2,9% | 6,9 | 6,7 | 2,9% |
| Operating profit - main business | 6,6 | 6,5 | 1,7% | 6,6 | 6,5 | 1,7% |
| Operating profit margin % | 55,7 | 54,9 | 1,5% | 55,7 | 54,9 | 1,5% |
| Profit before taxes | 8,0 | 5,2 | 52,6% | 8,0 | 5,2 | 52,6% |
| Net profit | 8,0 | 5,2 | 52,6% | 8,0 | 5,2 | 52,6% |
| Net profit margin % | 64,4 | 42,8 | 50,5% | 64,4 | 42,8 | 50,5% |
| ROA % | 4,2 | 2,9 | 43,1% | 4,2 | 2,9 | 43,1% |
| Debt to total capital employed | 57,1 | 47,1 | 21,4% | 57,1 | 47,1 | 21,4% |
Gross profit margin – Gross profit / Net sales
Operating profit margin – Operating profit / Net sales
Net Profit margin – Net Profit / Net sales
ROA – Net profit /Total Assets
Debt to Total capital employed – Total Liabilities / Total capital employed
Main business – water and wastewater activities, excl. connections profit and government grants
Profit and Loss Statement
1st quarter 2011
Sales
In the 1st quarter of 2011 the Company’s total sales increased, year on year, by 1.4% to 12.4 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 services were 11.4 mln EUR, a 1.0% increase compared to the 1st quarter of 2010, resulting from the slight rise in sales volumes as described below.
Within the service area, sales to residential customers decreased by 0.7% to 6.0 mln EUR. Sales to commercial customers increased by 5.1% to 4.4 mln EUR. Sales to customers outside of the service area decreased by 4.7% to 0.82 mln EUR in the 1st quarter of 2011. Over pollution fees received were 0.20 mln EUR, a 6.5% decrease compared to the 1st quarter of 2010.
In the 1st quarter of 2011, the volumes sold to residential customers decreased by 0.4% year on year, which is still lower decrease than we faced in previous quarters of 2010.
The volumes sold to commercial customers inside the service area have risen, reflecting a 5.9% increase compared to the same period in 2010. The negative impact from an industrial customer who left our service area from April 2010 was almost balanced by a one off impact from another customer with higher consumption in 1st quarter of 2011 due to issues with the technology. The sales volumes increased mainly due to improvement in leisure sector and related industrial services as result of pick up in tourism sector.
Outside service area sales volumes were 17.6% lower than in the 1st quarter of 2010. The main factor in this decrease was lower storm water volumes in the 1st quarter of 2011 compared to 2010, due to long and cold winter.
The sales from the operation and maintenance of the storm water and fire-hydrant system increased by 6.7% to 0.85 mln EUR in the 1st quarter of 2011 compared to the same period in 2010. 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.
Cost of Goods Sold and Gross Margin
The cost of goods sold for the main operating activity was 4.9 mln EUR in the 1st quarter of 2011, an increase of 0.25 mln EUR or 5.5% from the equivalent period in 2010.
In the 1st quarter of 2011 the Company achieved the beneficial 0.5 coefficient for pollution tax similarly to the 1st quarters of earlier years, and thereby the amount of pollution tax payable was 0.28 mln EUR compared to 0.24 mln EUR in the 1st quarter of 2010. In addition to the increase in volumes in 1st quarter of 2011 the increase in pollution tax payable is generated by the increase in tax rates year on year by 14.8%. To mitigate the nitrogen treatment and tax risk discussed throughout the 2010, we are continuing with the investment into an additional stage of waste water treatment and according to the construction schedule the works should be completed in the beginning of the 3rd quarter of 2011.
Chemical costs were 0.25 mln EUR, representing a 24.4% decrease compared to the corresponding period in 2010 despite of the slight increase in rates. The need to dose chemicals was lower in combination of the volumes, concentration of pollutants and water temperature.
Electricity costs increased by 0.10 mln EUR or 16.2% in the 1st quarter of 2011 compared to the 1st quarter of 2010, mainly due to higher electricity prices as a result of three sites buying electricity from the open market starting from 2nd quarter of 2010.
Salary expenses within costs of goods sold increased in the 1st quarter of 2011, year on year, by 0.12 mln EUR or 11.8% in combination of performance related pay accrual and small increase in salaries. Other salary lines had similar impact.
Other cost of goods sold in the main operating activity decreased 0.01 mln EUR, or 0.9% year on year, mainly due to more efficient operation and less leakage repair works needed compared to 1st quarter of 2010.
As a result of all of the above the Company’s gross profit for the 1st quarter of 2011 was 7.5 mln EUR, which is a decrease of 0.10 mln EUR, or 1.1%, compared to the gross profit of 7.6 mln EUR for the 1st quarter of 2010.
Operating Costs and Operating Margin
Marketing expenses decreased by 0.004 mln EUR to 0.20 mln EUR during the 1st quarter of 2011 compared to the corresponding period in 2010. This is mainly the result of a discussed increase in salaries expenses.
In the 1st quarter of 2011 the General administration expenses increased by 0.06 mln EUR year on year to 0.90 mln EUR. Within this group the salary costs increase was partly related to the transfer of management services to the salary line. Still the increase in consultancies balanced the transferred cost within other costs.
Other net income/expenses
The majority of the income in Other net income/expenses relates to constructions and government grants. The driver for this income stream is the connections activity in Tallinn and reassessment of the profit margins from the activity. Income and expenses from constructions and government grants totaled a net income of 0.32 mln EUR in the 1st quarter of 2011 compared to a net income of 0.23 mln EUR in the 1st quarter of 2010, this line varies throughout the year depending on construction volumes and estimates to the profit margins on projects completed.
The rest of the other income/expenses totaled an income of 0.15 mln EUR in the 1st quarter of 2011 compared to an expense of 0.01 mln EUR in the 1st quarter of 2010. This line was mainly impacted by the excellent debt collection and related decrease in bad debt accrual in the 1st quarter of 2011.
As a result the Company’s underlying operating profit from sales of water and wastewater for the 1st quarter of 2011 totaled 6.6 mln EUR compared to 6.5 mln EUR in the corresponding quarter in 2010. In total the Company’s operating profit for all activities for the 1st quarter of 2011 was 6.9 mln EUR, an increase of 0.2 mln EUR compared to an operating profit of 6.7 mln EUR achieved in the 1st quarter of 2010. Year on year the operating profit for the 1st quarter has increased by 2.9%.
Financial expenses
Net Financial revenues/expenses were 1.1 mln EUR in the 1st quarter of 2011, which is a positive variance of 2.6 mln EUR or 238.4% compared to the net expenses in the 1st quarter of 2010. The movement in net financial costs is mainly the result of revaluation of the fair value of swap agreements as result of increased interest rates and forecasts for the future.
The Company has mitigated majority of the long term floating interest risk with 5 interest swap agreements, each with a principal value of 15 mln EUR. At this point in time the estimated fair value of these swap contracts is still negative, totaling 0.77 mln EUR, with a positive revaluation in the 1st quarter 2011 in the amount of 1.5 mln EUR which offsets the interest costs increase during the 1st quarter of 2011 thus contributing to a net financial income. In the 1st quarter of 2010 the impact of fair value of swap agreements had negative impact to the net financial expenses.
Profit Before Tax
The Company’s profit before taxes for the 1st quarter of 2011 was 8.0 mln EUR, which is 2.8 mln EUR higher than the profit before taxes of 5.2 mln EUR for the 1st quarter of 2010, mainly as the result of the discussed change in fair value of swap agreements.
Balance sheet
During the three months of 2011 the Company invested 2.7 mln EUR into fixed assets. Non-current assets were 150.3 mln EUR at 31 March 2011. Current assets increased by 5.7 mln EUR to 39.4 mln EUR in the three months of the year, with customer receivables decreasing by 1.5 mln EUR and cash at bank increasing by 7.2 mln EUR.
Current liabilities decreased by 0.9 mln EUR to 15.0 mln EUR in the three months of the year. This was mainly due to a 0.9 mln EUR decrease in Trade payables.
The Company has a leverage level as expected of 57.1% with the future target range around 60%. Long-term liabilities stood at 93.4 mln EUR at the end of March 2011, consisting almost entirely of the outstanding balance of three long-term bank loans. As of 31 March 2010 7.5 mln EUR of the total 95 mln EUR loan capital were recorded within short term liabilities in accordance with the signed loan agreements. In the 1st quarter the Company held loan negotiations to ensure the long-term financing. The weighted average interest margin for the total available facility is 0.67%.
Cash flow
During the three months of 2011, the Company generated 9.2 mln EUR of cash flows from operating activities, an increase of 1.6 mln EUR compared to the corresponding period in 2010. 2011 operating cash flows were above 2010 cash flows mainly due to the payments of overdue debts in 2011. Underlying operating profit still continues to be the main contributor to operating cash flows.
In the three months of 2011 net cash outflows from investing activities were 2.0 mln EUR, which is 0.32 mln EUR more than in 2010. This is the combination of increased inflow due to timing of compensations received for the construction of pipelines and even higher increase of the capital expenditures due to different timing year on year. At the end of 1st quarter of 2011 the cash outflows related to the fixed asset investments were 3.8 mln EUR.
There were no cash outflows/inflows from financing activities during the three months of 2011.
As a result of all of the above factors, the total cash inflow in the three months of 2011 was 7.2 mln EUR compared to a cash inflow of 5.9 mln EUR in the three months of 2010. Cash and cash equivalents stood at 20.4 mln EUR as at 31 March 2011 which is 4.2 mln EUR lower than at the corresponding period of 2010.
Employees
At the end of the 1st quarter of 2011, the total number of employees was 315 compared to 318 at the end of the 1st quarter of 2010. The full time equivalent (FTE) was respectively 301 in 2011 compared to the 303 in 2010. The management is looking actively for the efficiencies in processes to balance the increase in individual salaries with more productive company structure.
Corporate structure
At the end of the quarter, 31 March 2011, the Group consisted of 2 companies. The subsidiary Watercom OÜ is wholly owned by AS Tallinna Vesi and consolidated to the results of the Company.
Share performance
AS Tallinna Vesi is listed on OMX Main Baltic Market with trading code TVEAT and ISIN EE3100026436.
As of 31 March 2011 AS Tallinna Vesi shareholders, with a direct holding over 5%, were:
| United Utilities (Tallinn) BV | 35.3% |
| City of Tallinn | 34.7% |
Parvus Asset Management has informed the Company that they own in total 8.96% of the shares of the Company.
At the end of the quarter, 31 March 2011, the closing price of the AS Tallinna Vesi share was 8.705 EUR, which is a 10.33% increase compared to the closing price of 7.89 EUR at the beginning of the quarter. During the same period the OMX Tallinn index rose by 5.54%.
Operational highlights in 2011
· Company’s overall operating performance is continuously good, most of the quality aspects exceeding the level of 2010. The water quality was the best possible with 100% samples taken fully in accordance with the norms instead of the required 95%, and the leakage level was by 0.84% less than in 2010. Response time to customer enquiries has rapidly improved, 89% of customer enquiries responded within 2 days compared to 82% in first quarter of 2010.
· The Company signed the changes to the Nordea’s loan agreement on 27 of April 2011. The original loan agreement for the amount of 37.5 mln EUR was signed in 2005. The repayment term was changed and instead of the semiannual repayments from May 2011 the whole loan amount shall be repaid at the end of 2015. As result of the change the weighted average interest margin will increase to 0.82%.
· Tariffs are still frozen on the 2010 level despite of the fact that on 9 November the Company submitted its tariff application to the new regulator in accordance with best practice regulation for privatized utilities, such as that favoured by Ofwat in the UK and recommended by the World Bank for privatized utilities. In its tariff application the Company has requested that the Competition Authority should expand the definition of regulated asset base to include the privatisation value of the utility. This would ensure the privatisation contract was not unilaterally broken and would respect the investments made in good faith into Estonia by our investors on the basis of that contract.
On 10 December 2010 AS Tallinna Vesi lodged a complaint to the European Commission regarding certain measures adopted by the Estonian authorities. The company believes these measures unilaterally alter the terms of AS Tallinna Vesi's privatization regime, and without any objective justification, any form of meaningful prior discussion, or willingness to engage in dialogue. Therefore they violate EU rules on the freedom of establishment and the free movement of capital (articles 49 and 63 TFEU).
As a consequence of this complaint, on 22 February 2011 the European Commission sent a Request For Information to the Estonian authorities regarding the points raised by AS Tallinna Vesi in its complaint. The Company understands that the Estonian authorities have until the beginning of May to respond to this request.
The Company has published its tariff application on its website and to the Tallinn Stock Exchange and will keep its investors informed of all future developments regarding the further key developments regarding the processing of the tariff application. Still, at this point in time the Company is unable to say what next year’s tariffs will be as it is unclear at the moment how the CA intends to respond to the tariff application and European Commission’s enquiry.
Additional information:
Siiri Lahe
Chief Financial Officer
+372 6262 262
| STATEMENT OF COMPREHENSIVE INCOME | I quarter | I quarter | 12 months |
| (thousand EUR) | 2011 | 2010 | 2010 |
| Revenue | 12 404 | 12 236 | 49 680 |
| Costs of goods sold | -4 882 | -4 628 | -20 684 |
| GROSS PROFIT | 7 522 | 7 608 | 28 996 |
| Marketing expenses | -200 | -204 | -787 |
| General administration expenses | -874 | -818 | -3 652 |
| Other income/ expenses (-) | 464 | 134 | 2 906 |
| OPERATING PROFIT | 6 912 | 6 720 | 27 463 |
| Financial income | 1 752 | 240 | 1 060 |
| Financial expenses | -678 | -1 726 | -3 624 |
| PROFIT BEFORE TAXES | 7 986 | 5 234 | 24 899 |
| Income tax on dividends | 0 | 0 | -8 495 |
| NET PROFIT FOR THE PERIOD | 7 986 | 5 234 | 16 404 |
| COMPREHENSIVE INCOME FOR THE PERIOD | 7 986 | 5 234 | 16 404 |
| Attributable to: | |||
| Equity holders of A-shares | 7 985 | 5 233 | 16 403 |
| B-share holder | 0,64 | 0,64 | 0,64 |
| Earnings per A share (in euros) | 0,40 | 0,26 | 0,82 |
| Earnings per B share (in euros) | 639 | 639 | 639 |
| STATEMENT OF FINANCIAL POSITION | |||
| (thousand EUR) | 31.03.2011 | 31.03.2010 | 31.12.2010 |
| ASSETS | |||
| CURRENT ASSETS | |||
| Cash and equivalents | 20 439 | 24 625 | 13 235 |
| Customer receivables, accrued income and prepaid expenses | 18 559 | 12 927 | 20 088 |
| Inventories | 287 | 238 | 306 |
| Non-current assets held for sale | 76 | 77 | 76 |
| TOTAL CURRENT ASSETS | 39 361 | 37 867 | 33 705 |
| NON-CURRENT ASSETS | |||
| Long-term investment assets | 429 | 0 | 0 |
| Property, plant and equipment | 147 926 | 137 551 | 148 179 |
| Intangible assets | 1 851 | 2 434 | 1 972 |
| Derivatives | 131 | 0 | 0 |
| TOTAL NON-CURRENT ASSETS | 150 337 | 139 985 | 150 151 |
| TOTAL ASSETS | 189 698 | 177 852 | 183 856 |
| LIABILITIES | |||
| CURRENT LIABILITIES | |||
| Current portion of long-term borrowings | 7 607 | 106 | 7 624 |
| Trade and other payables | 5 431 | 4 459 | 6 368 |
| Derivatives | 906 | 1 007 | 963 |
| Short-term provisions | 27 | 171 | 117 |
| Prepayments and deferred income | 1 005 | 740 | 810 |
| TOTAL CURRENT LIABILITIES | 14 976 | 6 483 | 15 882 |
| NON-CURRENT LIABILITIES | |||
| Deferred income from connection fees | 5 810 | 786 | 5 765 |
| Borrowings | 87 449 | 75 056 | 87 428 |
| Derivatives | 0 | 1 265 | 1 304 |
| Other payables | 115 | 115 | 115 |
| TOTAL NON-CURRENT LIABILITIES | 93 374 | 77 222 | 94 612 |
| TOTAL LIABILITIES | 108 350 | 83 705 | 110 494 |
| EQUITY CAPITAL | |||
| Share capital | 12 782 | 12 782 | 12 782 |
| Share premium | 24 734 | 24 734 | 24 734 |
| Statutory legal reserve | 1 278 | 1 278 | 1 278 |
| Retained earnings | 42 554 | 55 353 | 34 568 |
| TOTAL EQUITY CAPITAL | 81 348 | 94 147 | 73 362 |
| TOTAL LIABILITIES AND EQUITY CAPITAL | 189 698 | 177 852 | 183 856 |
| CASH FLOW STATEMENT | 3 months | 3 months | 12 months |
| (thousand EUR) | 2011 | 2010 | 2010 |
| CASH FLOWS FROM OPERATING ACTIVITIES | |||
| Operating profit | 6 912 | 6 720 | 27 463 |
| Adjustment for depreciation/amortisation | 1 394 | 1 407 | 5 620 |
| Adjustment for profit from government grants and connection fees | -315 | -281 | -3 312 |
| Other finance expenses | -2 | -22 | -14 |
| Profit from sale of property, plant and equipment, and intangible assets | 0 | 0 | -3 |
| Expensed property, plant and equipment | 0 | 5 | 70 |
| Change in current assets involved in operating activities | 1 616 | -807 | -8 894 |
| Change in liabilities involved in operating activities | -128 | 588 | 6 297 |
| Interest paid | -290 | -17 | -2 443 |
| Total cash flow from operating activities | 9 187 | 7 593 | 24 784 |
| CASH FLOWS FROM INVESTING ACTIVITIES | |||
| Loans granted | -429 | 0 | 0 |
| Acquisition of property, plant and equipment, and intangible assets | -3 812 | -2 555 | -17 055 |
| Compensations received for construction of pipelines | 2 004 | 768 | 6 139 |
| Proceeds from sale of property, plant and equipment, and intangible assets | 0 | 0 | 16 |
| Interest received | 254 | 127 | 1 110 |
| Total cash flow from investing activities | -1 983 | -1 660 | -9 790 |
| CASH FLOWS FROM FINANCING ACTIVITIES | |||
| Received loans | 0 | 0 | 20 000 |
| Dividends paid | 0 | 0 | -31 956 |
| Income tax on dividends | 0 | 0 | -8 495 |
| Total cash flow from financing activities | 0 | 0 | -20 451 |
| Change in cash and bank accounts | 7 204 | 5 933 | -5 457 |
| CASH AND EQUIVALENTS AT THE BEGINNING OF THE PERIOD | 13 235 | 18 692 | 18 692 |
| CASH AND EQUIVALENTS AT THE END OF THE PERIOD | 20 439 | 24 625 | 13 235 |
