MANAGEMENT REPORT
Contractual Highlights
- AS Tallinna Vesi tariffs continue to be on the same level based on temporary injunction granted by the Court for the period of court proceedings to protect the Company from the unilateral breach of privatization agreement by Estonian Authorities.
- AS Tallinna Vesi would like all its shareholders to be fully aware of the facts that the Company was privatised in 2001 with the full support and knowledge of the Estonian national government, with written confirmations from the Prime Minister, the Minister of Finance, and the Competition Authority itself regarding the key terms of the agreements, and utilising the expertise and guidance of the European Bank for Reconstruction and Development (EBRD).
- At the end of May 2012 the District Court ruled that AS Tallinna Vesi’s Services Agreement, that was part of the international privatisation, is a public law contract. AS Tallinna Vesi firmly believes that the terms and conditions of the international privatisation contract that has been deemed a public law contract should not be broken simply by transferring the duties of the regulator from one state institution (the City of Tallinn) to a different state institution (the Competition Authority). A public law contract should enjoy the protection of the Estonian legal system, should the contract not be honoured, then the company will have a claim against the Estonian state.
- Following their investigation, the European Commission announced in May 2014 that it has decided not to proceed with the Company’s complaints in relation to the anti-monopoly bill. The European Commission did not assess the lawfulness of the application of the amendments made to the Anti-Monopoly Bill adopted in 2010 as regards to the Company and it also did not assess or comment upon the water tariffs of AS Tallinna Vesi. In its letter the European Commission was explicit about leaving the legal opinion on the impact on the Company for the court to decide.
- In May 2014, AS Tallinna Vesi submitted a claim against the Competition Authority to the Tallinn Administrative Court to avoid the expiry of monetary claims. The Company claims compensation for potential damages of over 90 million euros for total losses over the lifetime of the international privatisation contract up to 2020. The total compensation claim applies when the tariffs will remain unchanged till 2020. Of this amount, over 50 million euros has been already caused by the Competition Authority’s refusal to approve tariff increases in the period of 2011 – 2013.
- The date of the next local court hearing is not set.
- AS Tallinna Vesi has continuously stated its belief in fully transparent regulation and its willingness to enter into meaningful and evidence-based dialogue that takes into account the privatization contract signed in 2001.
- It has been three years already during which the Company has made intensive effort in trying to agree a solution in order to get the tariff dispute solved. Regretfully it has not been achieved, the Supervisory Council of AS Tallinna Vesi has decided to give notice of potential international arbitration proceedings against the Republic of Estonia for breaching the undertakings it is required to abide by in a bilateral investment treaty, i.e. the obligation of ensuring the fair and equitable treatment of investments protected by this treaty. AS Tallinna Vesi requests that the Republic of Estonia complies with its obligations under the Treaty. In the event that Estonia is unable or unwilling to do so, AS Tallinna Vesi reserves the right to commence international arbitration proceedings against Estonia, on the terms which the parties agreed in the Treaty.
- Average real return on capital invested at privatization is still 6.2% since 2001.
Financial highlights of 2nd quarter 2014
The Group’s sales revenues during the 2nd quarter 2014 have been relatively stable being slightly down compared to the same period in 2013, decreasing 0.9% to 13.37 mln euros. The sales for 6 months in 2014 are in line with the sales in 2013.
The gross profit in the 2nd quarter of 2014 has increased 5.6% or 0.41 mln euros. Increase in gross profit is mainly related to lower pollution tax costs compared to the comparative period in 2013. Although the pollution tax expenses were also elevated in the 2nd quarter 2014 in the relation with heavy metals, still the change is mainly impacted by the incident in wastewater treatment plant in the 2nd quarter 2013, during which the plant could not treat extremely high volumes, causing extra pollution tax of 0.91 mln euros.
The pressure on pollution tax expenses in 2014 is related to the change of the water abstraction permit issued by the Environmental Board at the end of December 2013, the former limit concentrations of heavy metals in treated effluent were reduced 400 times, due to which the Company was not technically able to meet the limit values, although nothing has changed in the efficiency of Company’s operations.
Due to the decrease of the allowed concentration limits the Company has recognised pollution tax on a prudent principle and hence extra pollution tax expenses of 0.35 mln euros were faced in the 2nd quarter of 2014.
In July 2014 the environmental department has issued the draft change of the water permit in which the allowed concentrations have been increased to the currently achievable levels and starting from the 3rd quarter 2014, if the new water permit has been confirmed, we expect to have the pollution tax at the normal level.
The operating profit from Group’s main activities has increased 5.9% to 6.04 mln euros, mainly due to the lower variable costs, which are in more detailed described below. The operating profit for 6 months in 2014 is at the same level with the operating profit for the comparative period in 2013.
The net profit for the 2nd quarter without the extra pollution tax impact in 2013 and 2014 and swap costs impact was 25.3% or 0.39 mln euros lower than in the comparative period last year.
| mln € | 2 Q 2012 | 2 Q 2013 | 2 Q 2014 | Change 14/13 | 6 months 2012 | 6 months 2013 | 6 months 2014 | Change 14/13 |
| Sales | 13,15 | 13,49 | 13,37 | -0,9% | 26,14 | 26,19 | 26,68 | 1,9% |
| Gross profit | 7,81 | 7,32 | 7,73 | 5,6% | 16,05 | 14,85 | 14,99 | 1,0% |
| Gross profit margin % | 59,44 | 54,26 | 57,80 | 6,5% | 61,39 | 56,69 | 56,20 | -0,9% |
| Operating profit | 6,29 | 5,74 | 6,19 | 7,8% | 13,24 | 11,90 | 11,87 | -0,2% |
| Operating profit - main business | 6,39 | 5,76 | 6,04 | 5,9% | 13,21 | 11,92 | 11,73 | -1,6% |
| Operating profit margin % | 47,83 | 42,56 | 46,30 | 8,8% | 50,63 | 45,43 | 44,51 | -2,0% |
| Profit before taxes | 5,62 | 6,36 | 5,55 | -12,7% | 11,92 | 12,57 | 10,61 | -15,6% |
| Net profit | 1,15 | 1,73 | 0,77 | -55,7% | 7,46 | 7,95 | 5,83 | -26,7% |
| Net profit margin % | 8,76 | 12,84 | 5,74 | -55,3% | 28,53 | 30,35 | 21,85 | -28,0% |
| ROA % | 0,61 | 0,88 | 0,39 | -55,9% | 3,96 | 4,05 | 2,96 | -27,0% |
| Debt to total capital employed | 63,07 | 61,65 | 61,91 | 0,4% | 63,07 | 61,65 | 61,91 | 0,4% |
| ROE % | 1,66 | 2,30 | 1,02 | -55,6% | 10,73 | 10,57 | 7,77 | -26,5% |
| Current ratio | 2,57 | 2,31 | 2,89 | 24,9% | 2,57 | 2,31 | 2,89 | 24,9% |
Gross profit margin – Gross profit / Net sales
Operating profit margin – Operating profit / Net sales
Net Profit margin – Net Profit / Net sales
ROA – Net profit /average Total Assets for the period
Debt to Total capital employed – Total Liabilities / Total capital employed
ROE – Net profit / Total equity
Current ratio – Current assets / Current liabilities
Main business – water and wastewater activities, excl. connections profit and government grants, construction services, doubtful debt, other income
RESULTS OF OPERATIONS - FOR THE 2nd QUARTER 2014
Profit and Loss Statement
2nd quarter 2014
Sales
As the Company’s tariffs are frozen at the 2010 tariff level, the changes in the revenues from main activities i.e. from sales of water and wastewater services are fully driven by consumption.
In the 2nd quarter of 2014 the Group’s total sales decreased, year on year, by 0.9% to 13.37 mln euros. 90.8% of sales comprise of sales of water and treatment of wastewater to domestic and commercial customers within and outside of the service area, 5.6% of sales are the fees received from the City of Tallinn for operating and maintaining the storm water system and fire hydrants and 3.6% from other works and services.
Sales of water and wastewater services were 12.14 mln euros, a 0.8% decrease compared to the 2nd quarter of 2013, resulting from the changes in sales volumes as described below.
Within the service area, sales to residential customers were at 6.00 mln euros, showing a 1.5% increase year on year, as revenues from apartment blocks form the biggest share of our residential sales, the biggest increase came also from this client group. Sales to commercial customers decreased by 3.7% to 4.80 mln euros, mainly coming from the sales in industrial sector. Sales to customers outside of the main service area decreased by 1.7% to 1.10 mln euros in the 2nd quarter of 2014. It was mostly affected by wastewater, which in itself is affected by the lower storm water sales. The sales of water was stable. Over pollution fees received were 0.24 mln euros, a 6.2% increase compared to the 2nd quarter of 2013.
| Quarter 2 | Variance 14/13 | ||||
| Revenues from main operating activities | 2014 | 2013 | 2012 | € | % |
| Private clients, incl: | 6 001 | 5 913 | 5 936 | 88 | 1,5% |
| Water supply service | 3 303 | 3 253 | 3 265 | 50 | 1,5% |
| Wastewater disposal service | 2 698 | 2 660 | 2 671 | 38 | 1,4% |
| Corporate clients, incl: | 4 804 | 4 988 | 4 778 | -184 | -3,7% |
| Water supply service | 2 697 | 2 782 | 2 621 | -85 | -3,1% |
| Wastewater disposal service | 2 107 | 2 206 | 2 157 | -99 | -4,5% |
| Outside service area clients, incl: | 1 095 | 1 114 | 1 044 | -19 | -1,7% |
| Water supply service | 283 | 263 | 254 | 20 | 7,6% |
| Wastewater disposal service | 722 | 683 | 622 | 39 | 5,7% |
| Storm water disposal service | 90 | 168 | 168 | -78 | -46,4% |
| Over pollution fee | 238 | 224 | 150 | 14 | 6,3% |
| Storm water treatment and disposal service and fire hydrant service | 750 | 864 | 972 | -114 | -13,2% |
| Construction service and design | 285 | 186 | 44 | 99 | 53,2% |
| Other works and services | 198 | 204 | 221 | -6 | -2,9% |
Outside service area sales volumes were 0.23 mln m3 or 13.9% lower than in the 2nd quarter of 2013. As already mentioned before the main factor in this decrease came from lower storm water volumes.
The sales from the operation and maintenance of the storm water and fire-hydrant system in the main service area have decreased by 13.3% to 0.75 mln euros in the 2nd quarter of 2014 due to lower volumes compared to the same period in 2013. According to the terms and conditions of the contract revenues reflect actual volumes treated and costs for treating the storm water, therefore this cost pass through has no impact on profits.
The sales of construction activities and design services have increased by 53.2% to 0.29 mln euros in the 2nd quarter of 2014 compared to 2nd quarter in 2013, mostly due to mild spring of 2014 allowing construction works to be started earlier.
Cost of Goods Sold and Gross profit
The cost of goods sold for the main operating activity was 5.64 mln euros in the 2nd quarter of 2014, showing 0.53 mln euros or 8.6% decrease compared to the equivalent period in 2013. The cost decrease is mainly influenced by the pollution tax decrease in the 2nd quarter of 2014 as described below.
| Cost of goods sold | Quarter 2 | Variance 14/13 | |||
| 2014 | 2013 | 2012 | € | % | |
| Water abstraction charges | -261 | -248 | -236 | -13 | 5,2% |
| Chemicals | -448 | -426 | -380 | -22 | 5,2% |
| Electricity | -729 | -855 | -899 | 126 | -14,7% |
| Pollution tax | -550 | -1 086 | -227 | 536 | -49,4% |
| Total direct production costs | -1 988 | -2 615 | -1 742 | 627 | -24,0% |
| Staff costs | -1 314 | -1 250 | -1 258 | -64 | 5,1% |
| Depreciation and amortization | -1 321 | -1 285 | -1 294 | -36 | 2,8% |
| Construction service and design | -237 | -149 | -69 | -88 | 59,1% |
| Other costs of goods sold | -783 | -873 | -969 | 90 | -10,3% |
| Other costs of goods sold total | -3 655 | -3 557 | -3 590 | -98 | 2,8% |
| Total cost of goods sold | -5 643 | -6 172 | -5 332 | 529 | -8,6% |
Total direct production costs (water abstraction charges, chemicals, electricity and pollution taxes) decreased by 0.63 mln euros or 24.0% year on year. Biggest decrease came from the decrease in pollution tax. Other changes came from a combination of increase in prices and tax rates and movements in treatment volumes that affected the costs of goods sold together with the following additional factors:
- Water abstraction charges increased only by 0.01 mln euros or 5.2% to 0.26 mln euros in the 2nd quarter of 2014, driven mainly by 5% raise in tax rates (worth 0.01 mln euros).
- Total chemical costs remained broadly flat, increasing 0.02 mln euros or 5.2% to 0.45 mln euros in the 2nd quarter of 2014. Costs change was mainly influenced by the increase in dosage used in sewage treated and chemicals price, which was balanced by decrease in treated.
- Electricity costs decreased by 0.13 mln euros or 14.7% in the 2nd quarter of 2014 compared to the 2nd quarter of 2013. Lower electricity costs are mostly derived from the decrease in electricity price, used volumes and used unit costs, worth 0.17 mln euros. Positive effects are reduced slightly by increased unit costs in waste water treatment plant worth 0.05 mln euros.
- In the 2nd quarter of 2014 the pollution tax expense decreased by 0.54 mln euros or 49.4%. The decrease is related to the incident in the wastewater treatment plant in the 2nd quarter of 2013. Eliminating the one-off influence the pollution tax expenses have increased by 0.37 mln euros or 200.8% in the 2nd quarter of 2014 compared to relevant quarter in 2013.
Similarly to the 1st quarter in 2014 the increase is related to the change in the allowed concentration of heavy metals in treated effluent in the changed water permit issued by the Environmental Board at the end of December 2013. The former limit concentrations of heavy metals in treated effluent were reduced 400 times, due to which the Company was not technically able to meet the limit values, although nothing has changed in the efficiency of Company’s operations.
Due to non-compliance with the amounts allowed the Company accounted for excessive pollution tax costs. The Company has declared and accounted for the pollution tax based on the prudent principles. The Company has recognised losing 0.5 coefficient and accounted for 100 times penalties for heavy metals concentration and associated tax. Due to the new limits 0.35 million euros extra pollution tax expenses occurred. If there had not been the change in the allowed concentrations, the pollution tax expenses would have increased only by 10.9% or 0.02 mln euros.
In July 2014 the environmental department has issued the draft change of the water permit in which the allowed concentrations have been increased to the achievable levels and starting from the 3rd quarter 2014, if the new water permit has been confirmed, we expect to have the pollution tax at the normal level.
Other cost of goods sold (staff costs, depreciation, construction services and other cost of goods sold) in the main operating activity increased by 0.10 mln euros or 2.8%. Most of the increase in costs came from increased costs in construction services provided to outside customers in relation to the higher construction revenues. The profit from construction revenues has remained relatively stable.
Increased construction costs were balanced by the decrease in repair and maintenance costs carried out in the 2nd quarter of 2014. Increased staff costs by 5.1% or 0.06 mln euros mainly relate to higher headcount to provide the construction and asphalting services.
As a result of all of the above the Group’s gross profit for the 2nd quarter of 2014 was 7.73 mln euros, which is an increase of 0.41 mln euros, or 5.6%, compared to the gross profit of 7.32 mln euros for the 2nd quarter of 2013.
Other Operating Costs
General administration expenses increased in total 0.18 mln euros or 13.6%, mainly because of higher consultation and legal fees related to the tariff dispute, and also higher advertising fees.
Other net income/expenses
Other net income increased to a net income of 0.10 mln euros, compared to 0.05 mln euros net expenses in the 2nd quarter of 2013. The result in the 2nd quarter has been influenced by collecting the doubtful receivables.
Operating profit
As a result of above factors the Group’s operating profit for the 2nd quarter of 2014 totalled 6.19 mln euros compared to 5.74 mln euros in the corresponding quarter in 2013, which shows an increase of 0.45 mln euros or 7.8%. Removing the impact of pollution tax in relevant periods the Group’s operating profit had been 1.6% or 0.11 mln euros lower.
Financial expenses
The Group’s net financial expenses amounted to 0.64 mln euros in the 2nd quarter of 2014, which is a negative change of 1.26 mln euros compared to 0.62 mln euros financial income in the 2nd quarter of 2013. The major reason for the decline comes from difference of the change of the fair value of the swap contracts as described below.
The standalone swap agreements have been signed to mitigate the majority of the long term floating interest risk, the interest swap agreements are signed for 75 mln euros and 20 mln euros are still with floating interest rate. At this point in time the estimated fair value of the swap contracts is negative, totalling 2.38 mln euros. Effective interest rate (incl. swap interests) in the 2nd quarter of 2014 was 3.05%, amounting in the interest costs of 0.73 mln euros, compared to the effective interest rate of 3.24% and the interest costs of 0.78 mln euros into the 2nd quarter of 2013.
Other influences for change in financial expenses has been decrease in interest income by 0.14 mln euros or 48.4%.
Profit Before and After Tax
The Group’s profit before taxes for the 2nd quarter of 2014 was 5.55 mln euros, which is 0.81 mln euros or 12.7% lower than the profit before taxes of 6.36 mln euros for the 2nd quarter of 2013, resulting mainly from the impact of the change of the fair value of the swap contracts and also due to decreased pollution tax costs and an increase in professional fees as described above. The profit before taxes for the 2nd quarter without the decreased pollution tax and swap costs impact was 3.7% or 0.23 mln euros lower than in the comparative period last year.
The year on year increase in dividend payment by 0.6 mln euros increased also the income tax on dividends by 0.16 mln euros. The Group’s profit after taxes for the 2nd quarter of 2014 was 0.77 mln euros, which is 0.97 mln euros lower than the profit after taxes of 1.73 mln euros for the 2nd quarter of 2013.
Results for the six months of 2014
During the six months of 2014 the Group’s total sales increased, year on year, by 1.9% to 26.68 mln euros. Sales of water and wastewater treatment were 24.18 mln euros, a 0.9% increase compared to the six months of 2013.
The movements in sales are mostly similar to the movements in the 2nd quarter described above. There has been a slight 0.20 mln euros or 1.7% increase in the sales to residential customers and 0.14 mln euros or 1.4% of decrease in the sales to the commercial clients. The sales revenues from outside service area clients for water and wastewater services has also been relatively stable showing an increase of 0.12 mln euros or 5.8% compared to six months in 2013.
Due to less rainfall in 2013, the revenues from storm water treatment in the first half of 2014 remain 0.12 mln euros or 9.5% higher than in the comparative period in 2013.
The operating profit remained fairly stable decreasing by 0.2% to 11.87 mln euros during the six months of 2014 compared to the six months of 2013. As revenues have been relatively flat, increasing only 1.9% or 0.49 mln euros, then the main reason for a decline comes from the rise in pollution tax expenses (0.32 mln euros year on year), further influenced by the increase in professional services (0.29 mln euros year on year). Pollution tax increase is influenced by two factors: first the pollution tax expenses in 2013 were impacted by the incidents at the wastewater treatment plant in the first part of the year (worth 0.91 mln euros) and by the non-compliance with the heavy metals concentration in six months of 2014 (worth 1.15 mln euros).
Net financial expenses increased by 1.94 mln euros or 286.8%. Mainly influenced by the non-monetary impact of the change in the fair value of the swap contracts the Company has entered. The negative non-monetary impact for 2014 expenses is 0.06 mln euros (2013: positive impact 1.65 mln euros).
The Group’s profit before taxes for the six months of 2014 was 10.61 mln euros, which is a 15.6% decrease compared to the relevant period in 2013. The Group’s net profit for the six months of 2014 was 5.83 mln euros, which is 2.12 mln euros lower than the net profit of 7.95 mln euros in the equivalent period in 2013.
Balance sheet
In the six months of 2014 the Group invested 4.06 mln euros into fixed assets. As of 30 June 2014 non-current fixed assets amounted to 153.53 mln euros and total non-current assets amounted to 154.47 mln euros. (30. June 2013: 150.15 mln euros and 159.49 mln euros respectively).
The reduction in long-term receivables compared to year end by 2.19 mln euros to 0.02 mln euros is mainly related to the reclassification of long term receivable to short term.
Compared to the year end the current liabilities have increased by 3.51 mln euros to 14.73 mln euros in the six months. The movement is mainly related to increased tax liabilities in the amount of 4.82 mln euros, mostly related to the dividend income tax payable in July and Trade payables by 0.53 mln euros, balanced by the decrease in Current portion of long-term borrowings in the amount of 1.98 mln euros.
The Group’s loan balance has remained stable at 95 mln euros. In May 2014, the Company replaced its loan from NIB with the new loan in the amount of 20 mln euros. The weighted average interest margin for the total loan facility is 1.04%.
The Group has a Total debt/Total assets level as expected of 61.9%, in range of 55%-65%, reflecting the Group’s equity profile. This level is consistent with the same period in 2013 when the total debt/total assets ratio was 61.7%.
Biggest share of the rest of the long term liabilities is deferred income from connection fees amounting to 10.75 mln euros (2013: 8.33 mln euros).
In the 4th quarter of 2011 the Group recorded and noted an exceptional contingent liability, which could cause an outflow of economic benefits of up to 36.0 mln euros. In the 3rd quarter of 2013 the Group re-evaluated the liability, which now stands at 34.0 mln euros, as per note 13 to the accounts.
Cash flow
As of 30 June 2014 the cash position of the Group is strong. The cash flows of the Group has continued to be rather stable. At the end of June 2014 the cash balance of the Group stood at 26.57 mln euros, which is 13.5% of the total assets (2013: 20.89 mln, which is 10.7% of the total assets).
The biggest contribution to the cash flows comes from main operations. During the six months of 2014, the Group generated 13.84 mln euros of cash flows from operating activities, a decrease of 1.44 mln euros compared to the corresponding period in 2013.
2014 operating cash flows were below 2013 cash flows due to a change in working capital. Underlying operating profit still continues to be the main contributor to operating cash flows.
The Group’s cash flows from investing activities have also been positive for past two years. In the six months of 2014 net cash flows from investing activities resulted in a cash inflow of 1.02 mln euros, an increase of 0.31 mln euros compared to an inflow of 0.71 mln euros in the six months of 2013. This is made up as follows:
In the six months of 2014 the investments in fixed assets had increased 0.17 mln euros compared to 2013 amounting to 3.62 mln euros.
The compensations received for the construction of pipelines were 4.34 mln euros in the six months of 2014, an increase of 0.79 mln euros compared to same period in 2013. Most of the cash collected for pipes is related to the sewage network extension program which was ended in 2012. The collections will still continue till March 2015. Interests received have also decreased by 0.29 mln euros compared to same period in 2013.
In the six months of 2014, cash outflow from financing amounted to 20.07 mln euros, which is 1.05 mln euros more than in the same period of 2013, mainly due to increased dividend payment and dividend income tax payment by 1.11 mln euros, balanced slightly by lower interest and financing costs by 0.08 mln euros.
Employees
At the end of the 2nd quarter of 2014, the total number of employees was 317 compared to 309 at the end of the 2nd quarter of 2013. The full time equivalent (FTE) was respectively 304 in 2014 compared to the 296 in 2013. The management continues to work actively for the efficiencies in processes to balance the increase in individual salaries and cost pressure from the market with more productive company structure.
Dividends
Dividend allocation to the shareholders is recorded as the liability in the financial statement of the Company at the time when the profit allocation and dividend payment is confirmed by the annual general meeting of shareholders.
According to the dividend policy, which is also published on Company’s website, the Company will maintain dividends to shareholders at the same amount in real terms, i.e. dividends will increase in line with inflation each year.
On the annual general meeting of shareholders held on 20th May 2014, 90 cents dividends per share and the total dividend pay-out from the profit of 2013 net income in the amount of 18.00 mln euros was approved. It is in accordance with the Company’s dividend policy. Compared to 2013 dividends of 87 cents per share, the increase is equal to the inflation.
Dividends were paid out on 13th of June 2014.
Share performance
AS Tallinna Vesi is listed on NASDAQ OMX Main Baltic Market with trading code TVEAT and ISIN EE3100026436.
As of 30 June 2014 AS Tallinna Vesi shareholders, with a direct holding over 5%, were:
| United Utilities (Tallinn) BV | 35.3% |
| City of Tallinn | 34.7% |
Pension funds have continued to hold the share in their portfolios during the 2nd quarter of 2014, owning 2.57% of the total shares compared to 2.47% at the end of 2nd quarter 2013.
As of 30 June 2014, the closing price of the AS Tallinna Vesi share was 13.20 euros, which is a 4.8% (2013: -3.9%) increase compared to the closing price of 12.60 euros at the beginning of the quarter. During the same period the OMX Tallinn index increased by 0.7% (2013: -3.04%).
In the six months of 2014 2 519 deals with the Company’s shares were concluded (2013: 3 261 deals) during which 581 thousand shares or 2.9% exchanged their owners (2013: 1 290 thousand shares or 6.5%).
The turnover of the transactions was 5 667 thousand euros lower than in 2013 amounting to 7 485 thousand euros. The share price has shown an increase despite of the on-going contractual debate.
Operational performance
Similarly to previous years, the 6 months in 2014 can be characterized by stability. Above all, it gives security to our consumers that they are provided with a high-quality drinking water, stable water supply and service of wastewater discharge. In addition to the quality of service, we also concentrate on being a good partner for our customers. The feedback from our customers has become more positive, but despite that we aim to continue making efforts to fulfil customers’ expectations. Operational indicators for 6 months in 2014:
| Indicator | 2013 6 months | 2014 6 months |
| Drinking water | ||
| Compliance of water quality at the customers tap | 99.80% | 99.86% |
| Water loss in the water distribution network | 16.64% | 16.38% |
| Average duration of water interruptions per property | 3.53 h | 2.80 h |
| Wastewater | ||
| Number of sewer blockages | 478 | 434 |
| Number of sewer bursts | 74 | 175 |
| Number of customer contacts regarding flooding, blockages and storm water | 866 | 529 |
| Wastewater treatment compliance with environmental standards | 100% | 100% (excl. Zn and Cu) |
| Customer Service | ||
| Number of written complaints | 73 | 32 |
| Number of customer contacts regarding water quality | 90 | 65 |
| Number of customer contacts regarding water pressure | 326 | 144 |
| Responding written customer contacts within at least 2 work days | 98.6% | 99.0% |
| Number of failed promises | 9 | 21 |
| Notification of unplanned water interruptions at least 1h before the interruption | 97.1% | 97.4% |
Corporate structure
At the end of the quarter, 30 June 2014, 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.
Corporate Governance
Supervisory Council
Supervisory Council plans and organises the management of the Company and supervises the activities of the Management Board. According to AS Tallinna Vesi articles of association Supervisory Council consists of 9 members who are appointed for two years.
Supervisory Council has formed three committees to advise Supervisory Council on audit, remuneration and corporate government matters.
More information about the Supervisory Council and committees can be found in the note 12 to the financial statements as well as from the Company’s webpage:
http://tallinnavesi.ee/images/stories/2013_ar_astv_eng.pdf
http://tallinnavesi.ee/en/Investor/Corporate-Governance/Supervisory-Board
http://tallinnavesi.ee/en/Investor/Corporate-Governance/Audit-Committee
http://tallinnavesi.ee/en/Investor/Corporate-Governance/Corporate-Governance-Report
Management Board
Management Board is a governing body which represents and manages AS Tallinna Vesi in its daily operations in accordance with the legal requirements as well as the Articles of Association. The Management Board must act economically in the most efficient way taking into consideration the interest of the Company and its shareholders and ensure the sustainable development of the Company in accordance with the set objectives and strategy.
To ensure that the company’s interests are met in the best way possible, the Management and Supervisory Boards shall extensively collaborate. Meetings of Management and Supervisory Board members are held at least once a quarter. In those meetings the Management Board informs the Supervisory Council about all significant issues in Company’s business operations, the fulfilment of the company’s short and long-term goals are being discussed and the risks impacting them. For every meeting of the Management Board prepares report and submits the report in advance with the sufficient time for the Supervisory Board to study it.
According to the Articles of Association the Management Board consists of 2-5 members, who are elected for 3 years.
Starting from 2nd of June 2014 there are 3 members of the Management Board of AS Tallinna Vesi: Karl Heino Brookes (Chairman of the Board, with the powers of the Management Board Member until 20 March 2017), Aleksandr Timofejev (with the powers of the Management Board Member until 29 October 2015) and Riina Käi (with the powers of the Management Board Member until 29 October 2015).
Additional information about the members of the Management Board can be found from the Company’s website:
http://tallinnavesi.ee/en/Investor/Corporate-Governance/Management-Board
Future actions & risks
Potential legal claim for breach of international treaty
The Supervisory Council of the Company has given notice of potential international arbitration proceedings against the Republic of Estonia for breaching the undertakings it is required to abide by in the bilateral investment treaty. This follows three years of intensive negotiation to try and reach an amicable settlement, which so far has not been forthcoming.
Additional details surrounding this claim can be found via the following link: https://newsclient.omxgroup.com/cdsPublic/viewDisclosure.action?disclosureId=609264&messageId=754811
Disclosure of relevant papers and perspectives
The Company has published its tariff application and all relevant correspondence with the CA on its website (http://www.tallinnavesi.ee/?op=body&id=728) 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.
In opposite to the Company the CA has requested the Court procedures to be closed. Based on misleading information submitted by the CA the Court approved the CA’s request. ASTV has reapplied for open proceedings.
Still, at this point in time the Company is unable to say what is going to happen to the tariffs before Court judgments. The outcome and lengths of the Court proceedings is outside the control of the Company.
| STATEMENT OF COMPREHENSIVE INCOME | II quarter | II quarter | 6 months | 6 months | 12 months |
| (thousand €) | 2014 | 2013 | 2014 | 2013 | 2013 |
| Revenue | 13 371 | 13 493 | 26 678 | 26 186 | 53 087 |
| Costs of goods sold | -5 643 | -6 172 | -11 686 | -11 341 | -22 505 |
| GROSS PROFIT | 7 728 | 7 321 | 14 992 | 14 845 | 30 582 |
| Marketing expenses | -106 | -175 | -273 | -399 | -690 |
| General administration expenses | -1 535 | -1 351 | -2 900 | -2 479 | -5 060 |
| Other income/ expenses (-) | 104 | -53 | 55 | -70 | -75 |
| , | |||||
| OPERATING PROFIT | 6 191 | 5 742 | 11 874 | 11 897 | 24 757 |
| Financial income | 154 | 1 395 | 288 | 2 237 | 681 |
| Financial expenses | -793 | -779 | -1 549 | -1 562 | -877 |
| PROFIT BEFORE TAXES | 5 552 | 6 358 | 10 613 | 12 572 | 24 561 |
| Income tax on dividends | -4 785 | -4 625 | -4 785 | -4 625 | -4 625 |
| NET PROFIT FOR THE PERIOD | 767 | 1 733 | 5 828 | 7 947 | 19 936 |
| COMPREHENSIVE INCOME FOR THE PERIOD | 767 | 1 733 | 5 828 | 7 947 | 19 936 |
| Attributable to: | |||||
| Equity holders of A-shares | 766 | 1 732 | 5 827 | 7 946 | 19 935 |
| B-share holder | 0,60 | 0,60 | 0,60 | 0,60 | 0,60 |
| Earnings per A share (in euros) | 0,04 | 0,09 | 0,29 | 0,40 | 1,00 |
| Earnings per B share (in euros) | 600 | 600 | 600 | 600 | 600 |
| STATEMENT OF FINANCIAL POSITION | |||
| (thousand €) | 31.06.2014 | 31.06.2013 | 31.12.2013 |
| ASSETS | |||
| CURRENT ASSETS | |||
| Cash and equivalents | 26 566 | 20 892 | 31 786 |
| Trade receivables, accrued income and prepaid expenses | 15 526 | 15 378 | 15 010 |
| Inventories | 441 | 391 | 429 |
| TOTAL CURRENT ASSETS | 42 533 | 36 661 | 47 225 |
| NON-CURRENT ASSETS | |||
| Other long-term receivables | 22 | 8 396 | 2 213 |
| Property, plant and equipment | 153 526 | 150 146 | 152 246 |
| Intangible assets | 919 | 949 | 1 037 |
| TOTAL NON-CURRENT ASSETS | 154 467 | 159 491 | 155 496 |
| TOTAL ASSETS | 197 000 | 196 152 | 202 721 |
| LIABILITIES | |||
| CURRENT LIABILITIES | |||
| Current portion of long-term borrowings | 169 | 149 | 2 146 |
| Trade and other payables | 9 947 | 11 458 | 4 761 |
| Derivatives | 1 764 | 1 883 | 1 816 |
| Prepayments | 2 846 | 2 366 | 2 490 |
| TOTAL CURRENT LIABILITIES | 14 726 | 15 856 | 11 213 |
| NON-CURRENT LIABILITIES | |||
| Deferred income from connection fees | 10 752 | 8 333 | 10 143 |
| Borrowings | 95 846 | 95 680 | 93 618 |
| Derivatives | 620 | 1 040 | 507 |
| Other payables | 21 | 24 | 32 |
| TOTAL NON-CURRENT LIABILITIES | 107 239 | 105 077 | 104 300 |
| TOTAL LIABILITIES | 121 965 | 120 933 | 115 513 |
| EQUITY CAPITAL | |||
| Share capital | 12 000 | 12 000 | 12 000 |
| Share premium | 24 734 | 24 734 | 24 734 |
| Statutory legal reserve | 1 278 | 1 278 | 1 278 |
| Retained earnings | 37 023 | 37 207 | 49 196 |
| TOTAL EQUITY CAPITAL | 75 035 | 75 219 | 87 208 |
| TOTAL LIABILITIES AND EQUITY CAPITAL | 197 000 | 196 152 | 202 721 |
| CASH FLOW STATEMENT | 6 months | 6 months | 12 months |
| (thousand €) | 2014 | 2013 | 2013 |
| CASH FLOWS FROM OPERATING ACTIVITIES | |||
| Operating profit | 11 874 | 11 897 | 24 757 |
| Adjustment for depreciation/amortisation | 2 895 | 2 963 | 5 809 |
| Adjustment for profit from government grants and connection fees | -72 | 0 | -117 |
| Other non-cash adjustments | 24 | -48 | 11 |
| Profit/loss(+) from sale and write off of property, plant and equipment, and intangible assets | 3 | -20 | -138 |
| Change in current assets involved in operating activities | -1 592 | -864 | -433 |
| Change in liabilities involved in operating activities | 703 | 1 348 | -92 |
| Total cash flow from operating activities | 13 835 | 15 276 | 29 797 |
| CASH FLOWS FROM INVESTING ACTIVITIES | |||
| Loans granted | 0 | 0 | 0 |
| 0 | 0 | 3 814 | |
| Acquisition of property, plant and equipment, and intangible assets | -3 618 | -3 445 | -9 187 |
| Proceeds from sales of property, plant and equipment | 4 340 | 3 551 | 7 885 |
| Compensations received for construction of pipelines | 1 | 20 | 165 |
| Interest received | 296 | 583 | 693 |
| Total cash flow from investing activities | 1 019 | 709 | 3 370 |
| CASH FLOWS FROM FINANCING ACTIVITIES | |||
| Received loans | 20 000 | 0 | 0 |
| Repayment of loans | -20 000 | 0 | 0 |
| Interest paid and loan financing costs, incl swap interests | -1 486 | -1 563 | -3 154 |
| Repayment of finance lease | -82 | -64 | -136 |
| Dividends paid | -18 001 | -17 401 | -17 401 |
| Income tax on dividends | -505 | 0 | -4 625 |
| Total cash flow from financing activities | -20 074 | -19 028 | -25 316 |
| Change in cash and bank accounts | -5 220 | -3 043 | 7 851 |
| CASH AND EQUIVALENTS AT THE BEGINNING OF THE PERIOD | 31 786 | 23 935 | 23 935 |
| CASH AND EQUIVALENTS AT THE END OF THE PERIOD | 26 566 | 20 892 | 31 786 |
Karl Heino Brookes
Chairman of the Management Board
+372 6262 201
karl.brookes@tvesi.ee
