Financial results for the 3rd Quarter 2018

Management report

Chairman´s summary

Tallinna Vesi has had successful first 9 months in 2018, with respect to both operational and financial performance.

Solid financial performance

In the first 9 months of the year, the Company’s sales revenues were 7.6% higher year-on-year, which was mainly due to increased sales from water and wastewater services, accompanied by significantly higher revenues from construction and asphalting services. Revenues from sales to private customers increased by 2.8% and sales to corporate customers by 5.6%. 

The gross profit in the 3^rd quarter of 2018 was EUR 8.59 million, showing a slight increase of 0.3%. Increase in gross profit was attributable to higher water and wastewater revenues and lower electricity costs and depreciation. The operating profit of Tallinna Vesi was EUR 7.31 million and net profit EUR 7.14 million.

We are also glad to witness further growth in our non-regulated business. Watercom has achieved excellent results by growing its revenues 44.5% year-on-year. Strong financial results of Watercom were also recognised by Äripäev.  For the first time ever, Watercom was listed among TOP10 most successful infrastructure construction companies in a list put together by business daily Äripäev. The Company achieved the 10^th place out of 94 companies.

Reliable water supply and wastewater service

We are very pleased with our performance regarding water quality, which is further reinforced by the results of the drinking water samples taken from the customers’ taps that were 99.87% compliant with all the required quality standards.

To further safeguard the supply of high-quality drinking water to our end-users, we continue to make targeted capital investments, renovating and replacing assets on the basis of previous condition surveys and performance data, to ensure the continued reliability of the network.

Water losses in the distribution network continue to be at a low level - in the 3^rd quarter, the level of leakages in our network was 13.6%. This is an excellent result. We also managed to reduce the average water interruption time to 3 hours and 5 minutes.

AS Tallinna Vesi does not compromise on safety or protecting the environment. Our final effluent was once again 100% compliant with the applicable permit requirements during the 9 months of 2018. Maintaining the quality of final effluent is essential to the continued security of the Baltic Sea.

Raising environmental awareness and supporting the community

Along with our main activities, it is important for us to be contributing to the initiatives that add value and positively impact our surrounding environment and the children and youth living within the wider Tallinn communities.

Each month, our employees are giving public lectures and water seminars to educate children about water. In Tallinna Vesi´s water seminars, children learn about water cycle, water saving, process of cleaning water and wastewater and ways to avoid blockages.

One of our objectives is to improve our customers’ awareness of the environmental aspects concerning water supply and wastewater disposal services. For this purpose, we welcomed a large number of visitors during the Open House Day event at Paljassaare Wastewater Treatment Plant in September, and we intend to carry out another campaign in autumn, and during winter, to promote drinking tap water among our customers and end-users. The campaign is aimed at growing the number of people drinking tap water, and in turn further promote environmental awareness in the wider community.

For many years, we have been proud to host the annual Ülemiste Lake Run, by opening our sanitary zone for the public on this special occasion. This provides us with an opportunity to proudly showcase our main source of raw water.

OPERATIONAL INDICATORS FOR NINE MONTHS OF 2018

Indicator	Unit	2018	2017	2016
Compliance of water quality at the customers’ tap	%	99.9	99.9	99.9
Losses in the water distribution network	%	13.9	13.5	15.4
Average duration of water interruptions per property	h	3.18	3.26	3.51
Sewer blockages	No	443	520	503
Sewer bursts	No	65	109	73
Wastewater treatment compliance with environmental standards	%	100.0	100.0	100.0
Written complaints*	No	115	29	29
Customer contacts regarding water quality	No	205	177	108
Customer contacts regarding water pressure	No	348	240	247
Customer contacts regarding blockages and discharge of storm water	No	759	812	909
Responding written customer contacts within at least 2 work days	%	100.0	99.9	99.0
Failed promises	No	33	3	4
Notification of unplanned water interruptions at least 1 h before the interruption	%	96.6	98.7	98.4

*In 2018, the methodology for counting complaints was changed. In 2016 and 2017, only written complaints were counted. Since 2018, both written and oral complaints are counted.

FINANCIAL HIGHLIGHTS FOR THE 3^rd QUARTER 2018

The Group’s sales revenues during the 3^rd quarter of 2018 were EUR 16.49 million, being up by 7.6% or EUR 1.16 million compared to the same period in 2017.

The gross profit in the 3^rd quarter of 2018 was EUR 8.59 million, showing a slight increase of 0.3% or EUR 0.02 million. Increase in gross profit was related to higher water and wastewater revenues and lower electricity costs and depreciation. It was balanced by higher staff and asset maintenance costs and other costs of goods/services sold.

The operating profit was EUR 7.31 million, showing a decrease of 1.5% or EUR 0.11 million, being mainly affected by above-mentioned changes in gross profit, accompanied by higher administrative and marketing expenses and higher net other expenses.

The net profit for the 3^rd quarter of 2018 was EUR 7.14 million, showing an increase by 1.4% or EUR 0.10 million. The net profit was mainly impacted by above mentioned changes in the operating profit, accompanied by lower financial expenses. The changes in the financial expenses were mostly influenced by the higher positive change in the fair value of swap contracts in the 3^rd quarter of 2018 compared to the positive change in the same quarter of 2017. The net profit for the 3^rd quarter of 2018 and 2017 without the impact resulted from the change of the fair value of swap contracts was EUR 6.96 million and EUR 7.02 million respectively, being lower by 0.9% or EUR 0.06 million year-on-year.

MAIN FINANCIAL INDICATORS

EUR million, except key ratios	3rd quarter			Change 2018/2017	9 months			Change 2018/2017
	2018	2017	2016		2018	2017	2016
Sales	16.49	15.33	15.60	7.6%	46.55	43.84	44.46	6.2%
Gross profit	8.59	8.57	8.38	0.3%	25.81	25.30	25.02	2.0%
Gross profit margin %	52.10	55.86	53.75	-6.7%	55.45	57.71	56.27	-3.9%
Operating profit	7.31	7.42	6.79	-1.5%	21.65	21.09	19.27	2.6%
Operating profit - main business	7.07	7.11	6.69	-0.5%	21.15	20.64	18.93	2.5%
Operating profit margin %	44.31	48.39	43.55	-8.4%	46.50	48.10	43.33	-3.3%
Profit before taxes	7.14	7.04	6.53	1.4%	20.94	20.36	17.44	2.8%
Profit before taxes margin %	43.28	45.93	41.85	-5.8%	44.98	46.44	39.22	-3.2%
Net profit	7.14	7.04	6.53	1.4%	19.14	17.66	12.94	8.4%
Net profit margin %	43.28	45.93	41.85	-5.8%	41.11	40.28	29.10	2.1%
ROA %	2.97	3.23	3.17	-7.8%	8.11	8.13	6.21	-0.2%
Debt to total capital employed %	59.89	56.47	59.56	6.1%	59.89	56.47	59.56	6.1%
ROE %	7.58	7.59	8.09	-0.2%	20.85	19.03	14.96	9.6%
Current ratio	4.99	4.74	3.46	5.3%	4.99	4.74	3.46	5.3%
Quick ratio	4.96	4.69	3.42	5.8%	4.96	4.69	3.42	5.8%
Investments into fixed assets	4.29	2.39	4.45	79.5%	7.36	5.90	10.18	24.7%
Payout ratio %	na	99.72	58.73	na	na	99.72	58.73	na

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 / Average Total equity for the period

Current ratio – Current assets / Current liabilities

Quick ratio – (Current assets – Stocks) / Current liabilities

Payout ratio - Total Dividends per annum/ Total Net Income per annum

Main business – water and wastewater activities, excl. connections profit and government grants, construction, design and asphalting services, doubtful debt

FINANCIAL RESULTS FOR THE 3^rd QUARTER 2018

Statement of comprehensive income

SALES

As in the 3^rd quarter of 2018 the Company’s tariffs were frozen at the 2010 tariff level, the changes in the main activities revenues, i.e. from sales of water and wastewater services, are fully driven by consumption with no considerable seasonality in the main business. In the future, the Company does not expect significant changes in the consumption. There has been incremental increase in consumption in the past and that is expected to continue.

At the end of 2017, the Supreme Court made a negative decision as regards to the Company’s cassation, as a result of which, the Company’s tariffs will be regulated under the Competition Authority’s (CA) methodology. On 28^th February 2018 Company submitted its tariff application for Tallinn and Saue area to the CA. The tariffs applied for were similar to the water and wastewater tariffs currently charged in the area. The amended tariff application was submitted on 2^nd of May 2018. From 4^th of May the CA started the tariff application review process and has asked for additional information during the 2^nd and 3^rd quarter from the Company, who has responded to all the questions on time. On 13^th of September 2018 the Company submitted supplemented tariff application additionally to Tallinn and Saue area also to Harku and surrounding areas water companies. The CA has informed the Company that they have extended the tariff application from 30 days to 90 days starting from receiving the application, which meets all the requirements as the application is complicated to review the application. The new tariffs that will be approved and applied in the area will be known after the full process is completed and Competition Authority has approved new tariffs.

In the 3^rd quarter of 2018 the Group’s total sales were EUR 16.49 million, showing an increase by 7.6% or EUR 1.16 million year-on-year. 78.7% of sales comprise of sales of water and wastewater services to domestic and commercial customers within and outside of the service area. 4.9% of sales are the fees received from the City of Tallinn for operating and maintaining the storm water system and fire hydrants, 15.2% from construction and asphalting services and 1.2% from other works and services. The construction and asphalting services sales are more seasonal and the Company continues to seek possibilities to keep and to grow these services revenues.

	3rd quarter			Variance 2018/2017
EUR thousand	2018	2017	2016	EUR	%
Private clients, incl:	6,322	6,148	6,059	174	2.8	%
Water supply service	3,499	3,380	3,330	119	3.5	%
Wastewater disposal service	2,823	2,768	2,729	55	2.0	%
Corporate clients, incl:	5,281	5,000	4,989	281	5.6	%
Water supply service	2,969	2,775	2,758	194	7.0	%
Wastewater disposal service	2,312	2,225	2,231	87	3.9	%
Outside service area clients, incl:	1,146	1,143	1,068	3	0.3	%
Water supply service	381	336	323	45	13.4	%
Wastewater disposal service	722	706	665	16	2.3	%
Storm water disposal service	43	101	80	-58	-57.4	%
Over pollution fee	238	254	214	-16	-6.3	%
Total water supply and wastewater disposal service	12,987	12,545	12,330	442	3.5	%
Storm water treatment and disposal and fire hydrants service	807	888	972	-81	-9.1	%
Construction service, design and asphalting	2,507	1,735	2,150	772	44.5	%
Other works and services	193	164	145	29	17.7	%
SALES REVENUES TOTAL	16,494	15,332	15,597	1,162	7.6	%

Sales from water and wastewater services were EUR 12.99 million, showing a 3.5% or EUR 0.44 million increase compared to the 3^rd quarter of 2017, resulting from the changes in sales volumes as described below:

• There has been an increase in private customers’ revenues of 2.8% to EUR 6.32 million. The increase in domestic customer consumption volumes came mainly from apartment blocks, which is also our biggest private customer group, accompanied by increase in an individual houses segment water consumption as the summer was very dry.
• Sales to corporate customers within the service area increased by 5.6% to EUR 5.28 million. Increase was related to higher consumption in the sales of industrial and other commercial customer segments caused by one-time higher consumptions and slightly higher average consumption of different customers.
• Sales to customers outside the main service area increased slightly by 0.3% to EUR 1.15 million. It was mainly impacted by an increase in the sales of water supply and wastewater disposal services to different surrounding areas, balanced almost fully by a decrease of storm water disposal service.
• Over pollution fees received have decreased by 6.3% to EUR 0.24 million.

Sales from the operation and maintenance of the main service area storm water and fire hydrant system amounted to EUR 0.81 million, showing a decrease of 9.1% or EUR 0.08 million in the 3^rd quarter of 2018 compared to the same period in 2017, driven mainly by 46.4% lower storm water volumes, balanced partly by higher cost per m³.

Sales of construction, design and asphalting services were EUR 2.51 million, increasing by 44.5% or EUR 0.77 million year-on-year. The increase was mainly related to higher pipe construction and asphalting services revenues during the 3^rd quarter of 2018.

COST OF GOODS/ SERVICES SOLD AND GROSS PROFIT

The cost of goods sold amounted to EUR 7.90 million in the 3^rd quarter of 2018, increasing by 16.7% or EUR 1.13 million compared to the equivalent period in 2017. The increase was mainly influenced by an increase in construction and asphalting services related costs and chemicals, staff and asset maintenance costs and other costs of goods/services sold, balanced by decrease in electricity, pollution tax and depreciation expenses.

	3rd quarter			Variance 2018/2017
EUR thousand	2018	2017	2016	EUR	%
Water abstraction charges	-298	-285	-277	-13	-4.6	%
Chemicals	-468	-415	-345	-53	-12.8	%
Electricity	-626	-724	-760	98	13.5	%
Pollution tax	-204	-233	-281	29	12.4	%
Total direct production costs	-1,596	-1,657	-1,663	61	3.7	%
Staff costs	-1,453	-1,288	-1,273	-165	-12.8	%
Depreciation and amortization	-1,261	-1,515	-1,427	254	16.8	%
Construction service, design and asphalting	-2,251	-1,441	-2,039	-810	-56.2	%
Other costs of goods/services sold	-1,339	-866	-812	-473	-54.6	%
Other costs of goods/services sold total	-6,304	-5,110	-5,551	-1,194	-23.4	%
Total cost of goods/services sold	-7,900	-6,767	-7,214	-1,133	-16.7	%

Total direct production costs (water abstraction charges, chemicals, electricity and pollution tax expenses) amounted to EUR 1.60 million, showing a 3.7% or EUR 0.06 million decrease compared to the equivalent period in 2017. Changes in direct production costs came from a combination of changes in prices and in treated volumes that affected the cost of goods sold together with the following additional factors:

• Water abstraction charges increased by 4.6% to EUR 0.30 million, driven mainly by overall 4.4% increase in abstracted water volumes.
• Chemicals costs increased by 12.8% to EUR 0.47 million, driven by on average 28.9% higher price of methanol, balanced by lower usage of methanol to remove Nitrogen, worth respectively EUR -0.03 million and EUR +0.02 million. Higher chemicals costs in wastewater treatment process were accompanied by 5.6% higher treated water volumes and higher dosage of coagulant and chlorine in water treatment process due to poor raw water quality and higher prices of chlorine and coagulant, worth respectively each EUR -0.01 million.
• Electricity costs decreased by 13.5% to EUR 0.63 million, driven by on average 11.8% lower electricity prices (including networks fees), worth EUR 0.07 million. Lower costs from prices were accompanied by 20.8% lower wastewater volumes and were partly balanced by increase in treated volumes in water treatment processes, worth respectively EUR +0.05 million and EUR -0.03 million.
• Pollution tax expense decreased by 12.4% to EUR 0.20 million, mainly due to 20.8% lower treated wastewater volumes, balanced by higher pollution load of BOD7 and Nitrogen, worth respectively EUR +0.05 million and EUR -0.03 million in total.          

Other costs of goods sold (staff costs, depreciation, construction and asphalting services costs and other costs of goods sold) amounted to EUR 6.30 million, having increased by 23.4% or EUR 1.19 million. The increase came mostly from costs related to construction and asphalting services, accompanied by higher staff and maintenance costs and other costs of goods/services sold and were partly balanced by decrease in depreciation costs by following reasons:

• Staff costs increased by 12.8% to EUR 1.45 million, driven by change of salaries from the beginning of the year for all employees based on CPI and change in salary system of skilled workers in 2017 and individual changes in 2018, accompanied by review of bonus reserve in the 3^rd quarter of 2018.
• Construction and asphalting services costs increased by 56.2% to EUR 2.25 million, mainly due to higher construction and asphalting services revenues mentioned earlier and project specific changes.
• Depreciation decreased by 16.8% to EUR 1.26 million, mainly due to lower accelerated depreciation and cost of machinery and equipment depreciation year-on-year.
• Other costs of goods/services sold increased by 54.6% to EUR 1.34 million, mainly because of higher asset maintenance costs and costs for sludge disposal. Asset maintenance costs increased by 38.2% or EUR 0.25 million, driven mainly by higher different maintenance and repair works related costs in water and wastewater treatment processes and higher repairs costs on stormwater network.

As a result of all above the Group’s gross profit for the 3^rd quarter of 2018 was EUR 8.59 million, showing a slight increase of 0.3% or EUR 0.02 million, compared to the gross profit of EUR 8.57 million for the comparative period of 2017.

ADMINISTRATIVE AND MARKETING EXPENSES, OTHER INCOME AND EXPENSES

Administrative and marketing expenses amounted to EUR 1.19 million, having increased by 7.2% or EUR 0.08 million. The increase was mainly related to changes in staff costs by reasons mentioned in other costs of goods/services sold and higher tariff dispute related costs.

Other income and expenses increased by EUR 0.06 million to EUR 0.10 million, being mostly impacted by positive changes in doubtful receivables in 2017 compared to negative change in 2018 and higher other income in 2017.

OPERATING PROFIT

As a result of the factors listed above the Group’s operating profit for the 3^rd quarter of 2018 amounted to EUR 7.31 million, being 1.5% or EUR 0.11 million lower than in the corresponding period of 2017. The Group’s operating profit from main business was EUR 7.07 million, being 0.5% or EUR 0.04 million lower compared to 2017.

FINANCIAL EXPENSES

The Group’s net financial income and expenses have resulted a net expense of EUR 0.17 million, compared to net expense of EUR 0.38 million in the 3^rd quarter of 2017. The decrease was mainly impacted by higher positive change in the fair value of the swap contracts year-on-year and lower interest costs, worth respectively EUR 0.16 million and EUR 0.04 million.

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 EUR 75 million and EUR 20 million are still with floating interest rate. At this point in time the estimated fair value of the swap contracts is negative, amounting to EUR 0.41 million. Effective interest rate of loans (incl. swap interests) in the 3^rd quarter of 2018 was 1.46%, amounting to interest costs of EUR 0.36 million, compared to the effective interest rate of 1.62% and the interest costs of EUR 0.39 million in the 3^rd quarter of 2017.

PROFIT BEFORE TAXES AND NET PROFIT

The Group’s profit before taxes and net profit for the 3^rd quarter of 2018 was EUR 7.14 million, being 1.4% or EUR 0.10 million higher than for the comparative period of 2017. Eliminating the effects of the change of the fair value of swap contracts the Group’s net profit for the 3^rd quarter of 2018 and 2017 would have been EUR 6.96 million and EUR 7.02 million respectively, showing a decrease of 0.9% or EUR 0.06 million year-on-year.

FINANCIAL RESULTS FOR THE NINE MONTHS OF 2018

Statement of comprehensive income

SALES

During the nine months of 2018 the Group’s total sales were EUR 46.55 million, showing an increase by 6.2% or EUR 2.71 million year-on-year. Sales from water and wastewater services for nine months of 2018 were 39.20 million, increasing 2.8% or EUR 1.06 million year-on-year. 84.2% of sales comprise of sales of water and wastewater services to domestic and commercial customers within and outside of the service area. 5.3% of sales are the fees received from the City of Tallinn for operating and maintaining the storm water system and fire hydrants, 9.4% from construction and asphalting services and 1.1% from other works and services.

	9 months			Variance 2018/2017
EUR thousand	2018	2017	2016	EUR	%
Private clients, incl:	19,178	18,808	18,597	370	2.0	%
Water supply service	10,579	10,339	10,225	240	2.3	%
Wastewater disposal service	8,599	8,469	8,372	130	1.5	%
Corporate clients, incl:	15,947	15,256	14,942	691	4.5	%
Water supply service	8,835	8,423	8,262	412	4.9	%
Wastewater disposal service	7,112	6,833	6,680	279	4.1	%
Outside service area clients, incl:	3,440	3,353	3,298	87	2.6	%
Water supply service	1,086	1,005	977	81	8.1	%
Wastewater disposal service	2,143	2,081	2,020	62	3.0	%
Storm water disposal service	211	267	301	-56	-21.0	%
Over pollution fee	635	722	596	-87	-12.0	%
Total water supply and wastewater disposal service	39,200	38,139	37,433	1,061	2.8	%
Storm water treatment and disposal service and fire hydrants service	2,483	2,468	2,841	15	0.6	%
Construction service, design and asphalting	4,360	2,780	3,738	1,580	56.8	%
Other works and services	507	454	451	53	11.7	%
SALES REVENUES TOTAL	46,550	43,841	44,463	2,709	6.2	%

During the nine months of 2018 there has been an increase in sales to private customers by 2.0% to EUR 19.18 million and to corporate customers within the service area by 4.5% to EUR 15.95 million. The increase in domestic customer consumption volumes came mainly from apartment blocks, which is also our biggest private customer group, accompanied by increase in an individual houses segment in the 2^nd and 3^rd quarter of 2018 as the spring and summer were very dry. Higher sales in corporate clients is related to an increase in the sales of industrial and other commercial customer segments by reasons mentioned in 3^rd quarter results. Sales to customers outside the main service area increased by 2.6% to EUR 3.44 million, being mainly impacted by an increase in the sales of water supply and wastewater disposal services, balanced by lower storm water disposal services sales. Over pollution fees received have decreased by 12.0% to EUR 0.64 million.

Sales from the operation and maintenance of the main service area storm water and fire hydrant system in the nine months of 2018 amounted to EUR 2.48 million, showing a slight increase of 0.6% or EUR 0.02 million year-on-year, driven mainly by higher cost per m³, balanced by 13.6% lower storm water volumes.

Sales of construction, design and asphalting services were EUR 4.36 million, increasing by 56.8% or EUR 1.58 million year-on-year. The increase was mainly related to higher pipe construction services revenues as the Company has won some big jobs/procurements in Tallinn and other parts of Estonia.

COST OF GOODS/ SERVICES SOLD AND GROSS AND OPERATING PROFITS

	9 months			Variance 2018/2017
EUR thousand	2018	2017	2016	EUR	%
Water abstraction charges	-892	-873	-852	-19	-2.2	%
Chemicals	-1,249	-1,100	-972	-149	-13.5	%
Electricity	-2,082	-2,354	-2,297	272	11.6	%
Pollution tax	-715	-726	-852	11	1.5	%
Total direct production costs	-4,938	-5,053	-4,973	115	2.3	%
Staff costs	-4,677	-4,188	-4,161	-489	-11.7	%
Depreciation and amortization	-3,812	-4,227	-4,449	415	9.8	%
Construction service, design and asphalting	-3,852	-2,315	-3,389	-1,537	-66.4	%
Other costs of goods/services sold	-3,460	-2,759	-2,470	-701	-25.4	%
Other costs of goods/services sold total	-15,801	-13,489	-14,469	-2,312	-17.1	%
Total cost of goods/services sold	-20,739	-18,542	-19,442	-2,197	-11.8	%

During the nine months of 2018 the cost of goods sold amounted to EUR 20.74 million, increasing by 11.8% or EUR 2.20 million compared to the equivalent period in 2017. Total direct production costs (water abstraction charges, chemicals, electricity and pollution tax expenses) amounted to EUR 4.94 million, showing a 2.3% or EUR 0.12 million decrease compared to the equivalent period in 2017. Changes in direct production costs came from a combination of changes in prices and in treated volumes that affected the cost of goods sold together with the following additional factors:

• Water abstraction charges increased by 2.2% to EUR 0.89 million, driven mainly by overall 2.9% increase in abstracted water volumes.
• Chemicals costs increased by 13.5% to EUR 1.25 million, driven by on average 11.3% higher methanol price, accompanied by higher usage of methanol and polymers to remove Nitrogen and sludge from influent in the wastewater treatment process, worth respectively EUR 0.04 million, EUR 0.03 million and EUR 0.02 million. It was additionally accompanied by higher dosage of coagulant due to poor raw water quality, higher different chemicals prices and by 2.9% higher treated water volumes in water treatment process, worth respectively EUR 0.02 million, EUR 0.02 million and EUR 0.01 million.
• Electricity costs decreased by 11.6% to EUR 2.08 million, driven by on average 12.6% lower electricity prices (including networks fees), worth EUR 0.30 million. Lower costs from prices were partly balanced by 2.9% increase in treated water volumes and by 5.3% higher consumption of electricity per m³ in water treatment process, worth in total EUR 0.05 million.
• Pollution tax expense decreased by 1.5% to EUR 0.72 million, mainly due to 5.3% lower treated wastewater volumes, balanced by higher concentration of Nitrogen and BOD7, worth respectively EUR +0.04 million, EUR -0.03 million and EUR -0.01 million.

Other costs of goods sold (staff costs, depreciation, construction and asphalting services costs and other costs of goods sold) amounted to EUR 15.80 million, having increased by 17.1% or EUR 2.31 million. Changes in other costs of foods sold were driven by the same reasons as mentioned in the 3^rd quarter results.

The Group’s gross profit for the nine months of 2018 was EUR 25.81 million, showing an increase of 2.0% or EUR 0.51 million compared to the comparative period of 2017. The Group’s operating profit for the nine months of 2018 amounted to EUR 21.65 million, being 2.6% or EUR 0.56 million higher than in the corresponding period of 2017.

FINANCIAL EXPENSES

The Group’s net financial income and expenses have resulted a net expense of EUR 0.71 million, compared to net expense of EUR 0.73 million in the nine months of 2017. The decrease was mainly impacted by lower interest costs balanced by lower positive change in the fair value of the swap contracts year-on-year, worth respectively EUR +0.10 million and EUR -0.09 million.

PROFIT BEFORE TAXES AND NET PROFIT

The Group’s profit before taxes for the nine months of 2018 were EUR 20.94 million, being 2.8% or EUR 0.58 million higher than for the relevant period of 2017. The Group’s net profit for the nine months of 2018 were EUR 19.14 million, being 8.4% or EUR 1.48 million higher than for the equivalent period of 2017. Eliminating the effects of the change of the derivatives fair value the Group’s net profit for the nine months of 2018 would have been EUR 18.80 million, showing an increase by 9.1% or EUR 1.57 million year-on-year.

Statement of financial position

In the nine months of 2018 the Group invested into fixed assets EUR 7.36 million. As of 30.09.2018, non-current tangible assets amounted to EUR 177.64 million and total non-current assets amounted to EUR 178.35 million (30.09.2017: EUR 172.40 million and EUR 173.20 million respectively).

Compared to the year end of 2017 the trade receivables, accrued income and prepaid expenses have shown an increase in the amount of EUR 0.46 million to EUR 8.18 million. Increase mainly derives from higher accrued income and trade receivables, respectively by EUR 0.16 million and EUR 0.29 million, being mainly impacted by construction activities and higher connection points receivables and main services revenues. The collectability rate continues to be high at 99.7% level, compared to 99.5% at the end of September 2017.

Current liabilities have increased by EUR 3.45 million to EUR 13.10 million compared to the year end of 2017. Increase mainly derives from higher short-term debt obligations and in trade and other payables by respectively EUR 1.77 million and EUR 1.33 million. Increase in debt obligations is related to reclassification of 1^st payment of NIB loan from long-term to short-term loan. The higher trade and other payables are related to payables related to pipe construction services and investments, accompanied by higher prepayments for connections by EUR 0.61 million.

Deferred income from connection fees has grown compared to the end of 2017 by EUR 1.93 million to EUR 21.56 million.

Provision for possible third party claims has not changed compared to the end of 2017. At the end of 2017, the Company formed a provision of EUR 17.52 million for possible third-party claims as a result of the Supreme Court Decision from 12^th December 2017. More detailed information about the provision is in Note 5 to the financial statements.

The Group’s loan balance has remained stable at EUR 95 million. The weighted average interest risk margin for the total loan facility is 0.79%.

The Group has a Total debt to assets level of 59.9%, in range of 55%-65%, reflecting the Group’s equity profile. In comparative period of 2017 the total debt to assets ratio was 56.5%.

CASH FLOW

As of 30.09.2018, the cash position of the Group is strong. At the end of September 2018, the cash balance of the Group stood at EUR 56.76 million, which is 23.3% of the total assets (30.09.2017: EUR 39.77 million, forming 18.0% of the total assets).

The biggest contribution to the cash flows comes from main operations. During the nine months of 2018, the Group generated EUR 26.12 million of cash flows from operating activities, an increase of EUR 1.38 million compared to the corresponding period in 2017. Underlying operating profit continues to be the main contributor to operating cash flows.

In the nine months of 2018 the result of net cash flows from investing activities was a cash outflow of EUR 4.08 million, a slight decrease of EUR 0.08 million compared to the cash outflow of EUR 4.16 million in the nine months of 2017. This is made up as follows:

• The cash outflows from investments in fixed assets has increased by EUR 0.51 million compared to 2017 amounting to EUR 6.92 million.
• The compensations received for the construction of pipelines were EUR 2.75 million, showing an increase of EUR 0.56 million compared to the same period of 2017.

In the nine months of 2018 cash outflow from financing activities amounted to EUR 10.26 million, decreasing by EUR 4.54 million compared to the same period in 2017. The change was mainly related to lower dividend payment and related tax payment by EUR 4.50 million.

EMPLOYEES

We believe it is important to treat our employees equally, involve them in the decision-making process and to inform them regularly. We consider the involvement of our staff in the decision-making process instrumental for them to understand and be able to support the Company in its pursuits. Our staff can vary to a large degree in age, nationality, nature of work and in many other aspects. This requires us to be resourceful and flexible in our communication with the staff in order to involve, engage and listen to them. This is done using several opportunities and channels of communication, such as regular staff meetings with the management, information boards, intranet, informative letters, team events and a quarterly internal newsletter. Estonian is not a communication language for quite a number of our staff. Therefore, we organize Estonian classes at the Company’s expense to make the staff, whose mother tongue is not Estonian, also feel as part of our unified team. At the same time, we provide the majority of important information also in Russian.

We have described our human resource policies. We follow equality principles in selecting and managing people, which translates into providing, when feasible, equal opportunities to everyone. Understanding and appreciating the diversity of our staff, we ensure, that everyone is treated fairly and equally and they have access to the same opportunities as is reasonable and practicable. We aim to ensure, that no employees are discriminated against due to, but not exclusive to age, gender, religion, cultural or ethnic origin, disability, sexual orientation or marital status.

At the end of the 3^rd quarter of 2018, the total number of employees was 310 compared to 314 at the end of the same period in 2017. The full time equivalent (FTE) was respectively 296 in 2018 compared to the 302 in 2017. Average number of employees during the nine months was respectively 316 in 2018 and 315 in 2017.

 By gender, employee allocation was as follows:

	As of 30.09.2018			As of 30.09.2017
	Women	Men	Total	Women	Men	Total
Group	88	222	310	92	222	314
Management Team	14	15	29	14	13	27
Executive Team	4	4	8	4	4	8
Management Board	1	2	3	1	2	3
Supervisory Board	1	8	9	0	9	9

The total salary costs were EUR 2.00 million for the 3^rd quarter of 2018, including EUR 0.05 million paid to Management and Supervisory Council members (excluding social taxes). The off-balance sheet potential salary liability could rise up to EUR 0.09 million should the Council want to replace the current Management Board members.

DIVIDENDS

Dividend allocation to the shareholders is recorded as a 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.

The Company’s dividend policy up to 2017 was related to keeping the dividends in real term i.e. dividends amounts have been increased in line with inflation. Every year the Supervisory Council evaluates the proposal of the dividends to be paid out to the shareholders and approves it to be presented to the voting to the Annual General Meeting of shareholders, considering all circumstances. In the Annual General Meeting held on 31^st May 2018, the Supervisory Board proposed to pay out EUR 0.36 per A share and 600 EUR per B share, which is equal to earnings per share in 2017. The proposal was approved by Annual General Meeting and the dividend pay-out was made on 26^th of June 2018.

SHARE PERFORMANCE

AS Tallinna Vesi is listed on Nasdaq Baltic Main List with trading code TVEAT and ISIN EE3100026436.

As of 30.09.2018, AS Tallinna Vesi shareholders, with a direct holding over 5%, were:

• United Utilities (Tallinn) BV (35.3%)
• City of Tallinn (34.7%)

During the nine months of 2018 the shareholder structure has been relatively stable compared to the end of 2017. At the end of the 3^rd quarter of 2018 the pension funds shareholding has stayed the same level as at the end of the 2^nd quarter, being 1.31% of the total shares compared to 1.43% at the end of 2017.

As of 30.09.2018, the closing price of AS Tallinna Vesi share was EUR 10.20, which is 0.5% (2017: -0.8%) lower compared to the closing price of EUR 10.25 at the beginning of the quarter. During the 3^rd quarter the OMX Tallinn index decreased by 3.4% (2017: +7.8%).

In the nine months of 2018, 3,014 deals with the Company’s shares were concluded (2017: 5,890 deals) during which 546 thousand shares or 2.7% of total shares exchanged their owners (2017: 911 thousand shares or 4.6%).

The turnover of the transactions was EUR 6,163 thousand lower than in 2017 comparative period, amounting to EUR 5.78 million.

CORPORATE STRUCTURE

As of 30.09.2018, 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. There were no changes made in the Supervisory Council members in the 3^rd quarter of 2018.

Supervisory Council has formed three committees to advise Supervisory Council on audit, remuneration and corporate governance matters.

More information about the Supervisory Council and committees can be found in the note 14 to the financial statements as well as from the Company’s webpage:

About us > Management board > Supervisory council

About us > Audit committee

About us > Principles of 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 Board and Supervisory Council 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 Council 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 2^nd 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 21^st March 2020), Aleksandr Timofejev (with the powers of the Management Board Member until 29^th October 2021) and Riina Käi (with the powers of the Management Board Member until 29^th October 2021).

Additional information on the members of the Management Board can be found from the Company’s website:

About us > Management board

LEGAL CLAIM FOR BREACH OF INTERNATIONAL TREATY

In May 2014, the Supervisory Council of the Company gave 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.

In October 2014 AS Tallinna Vesi and its shareholder United Utilities (Tallinn) B.V have commenced international arbitration proceedings against the Republic of Estonia for breach of the Agreement on the Encouragement and Reciprocal Protection of Investments between the Kingdom of The Netherlands and the Republic of Estonia.

The claim was filed as three years of intensive negotiation to try and reach an amicable settlement that has not happened.

The hearings of international arbitration took place in Paris in November 2016 and the decision is expected in 2^nd half of 2018.

Additional details related with the claim can be found via the following links:

https://newsclient.omxgroup.com/cdsPublic/viewDisclosure.action?disclosureId=609264&messageId=754811

https://newsclient.omxgroup.com/cdsPublic/viewDisclosure.action?disclosureId=627851&messageId=779161

DISCLOSURE OF RELEVANT PAPERS AND PERSPECTIVES

The Company will keep the investment community informed of all relevant developments of the tariff dispute. AS Tallinna Vesi has published all relevant materials on its website (https://tallinnavesi.ee/en/investor/stock-announcements/) and to the Tallinn Stock Exchange.

STATEMENT OF COMPREHENSIVE INCOME	3rd quarter	3rd quarter		9 months	9 months		12 months
(EUR thousand)	2018	2017		2018	2017		2017
Revenue	16,494	15,332		46,550	43,841		59,815
Costs of goods sold	-7,900	-6,767		-20,739	-18,542		-25,725
GROSS PROFIT	8,594	8,565		25,811	25,299		34,090
Marketing expenses	-87	-76		-293	-255		-356
General administration expenses	-1,100	-1,031		-3,695	-3,813		-5,028
Other income/ expenses (-)	-97	-39		-176	-142		-17,841
OPERATING PROFIT	7,310	7,419		21,647	21,089		10,865
Interest income	5	3		14	12		15
Interest expense	-176	-380		-723	-740		-959
Other financial income (+)/ expenses (-)	0	0		0	0		0
PROFIT BEFORE TAXES	7,139	7,042		20,938	20,361		9,921
Income tax on dividends	0	0		-1,800	-2,700		-2,700
NET PROFIT FOR THE PERIOD	7,139	7,042		19,138	17,661		7,221
COMPREHENSIVE INCOME FOR THE PERIOD	7,139	7,042		19,138	17,661		7,221
Attributable to:
Equity holders of A-shares	7,138	7,041		19,137	17,660		7,220
B-share holder	0.60	0.60		0.60	0.60		0.60
Earnings per A share (in euros)	0.36	0.35		0.96	0.88		0.36
Earnings per B share (in euros)	600	600		600	600		600

STATEMENT OF FINANCIAL POSITION
(EUR thousand)	30.09.2018	30.09.2017			31.12.2017
ASSETS
CURRENT ASSETS
Cash and equivalents	56,756	39,767			44,973
Trade receivables, accrued income and prepaid expenses	8,181	7,684			7,716
Inventories	441	472			457
TOTAL CURRENT ASSETS	65,378	47,923			53,146
NON-CURRENT ASSETS
Property, plant and equipment	177,639	172,402			174,451
Intangible assets	709	793			811
TOTAL NON-CURRENT ASSETS	178,348	173,195			175,262
TOTAL ASSETS	243,726	221,118			228,408
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current portion of long-term borrowings	2,032	246			264
Trade and other payables	7,531	6,308			6,200
Derivatives	301	630			578
Prepayments	3,239	2,934			2,609
TOTAL CURRENT LIABILITIES	13,103	10,118			9,651
NON-CURRENT LIABILITIES
Deferred income from connection fees	21,562	18,851			19,632
Borrowings	93,626	95,607			95,565
Derivatives	112	263			178
Provision for possible third party claims	17,522	0			17,522
Other payables	48	23			44
TOTAL NON-CURRENT LIABILITIES	132,870	114,744			132,941
TOTAL LIABILITIES	145,973	124,862			142,592
EQUITY
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	59,741	58,244			47,804
TOTAL EQUITY	97,753	96,256			85,816
TOTAL LIABILITIES AND EQUITY	243,726	221,118			228,408
CASH FLOW STATEMENT	9 months	9 months			12 months
(EUR thousand)	2018	2017			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Operating profit	21,647	21,089			10,865
Adjustment for depreciation/amortisation	4,263	4,670			6,170
Adjustment for revenues from connection fees	-216	-191			-258
Other non-cash adjustments	-11	-19			-26
Profit/loss(+) from sale and write off of property, plant and equipment, and intangible assets	-48	-17			-12
Change in current assets involved in operating activities	-458	-534			-558
Change in liabilities involved in operating activities	946	-250			17,064
TOTAL CASH FLOW FROM OPERATING ACTIVITIES	26,123	24,748			33,245
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment, and intangible assets	-6,922	-6,414			-9,761
Compensations received for construction of pipelines	2,752	2,194			2,698
Proceeds from sales of property, plant and equipment and intangible assets	79	44			62
Interest received	11	12			15
TOTAL CASH FLOW FROM INVESTING ACTIVITIES	-4,080	-4,164			-6,986
CASH FLOWS FROM FINANCING ACTIVITIES
Interest paid and loan financing costs, incl swap interests	-1,075	-1,099			-1,512
Repayment of finance lease	-184	-204			-260
Dividends paid	-7,201	-10,801			-10,801
Income tax on dividends	-1,800	-2,700			-2,700
TOTAL CASH FLOW FROM FINANCING ACTIVITIES	-10,260	-14,804			-15,273
CHANGE IN CASH AND CASH EQUIVALENTS	11,783	5,780			10,986
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD	44,973	33,987			33,987
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD	56,756	39,767			44,973

Karl Heino Brookes

Chairman of the Management Board

+372 62 62 200

karl.brookes@tvesi.ee

Attachment

• Q3 2018 final report ENG