Management report
Chairman´s summary
In the 2nd quarter of 2018, AS Tallinna Vesi once again achieved consistently good financial results, as well as excellent operational performance.
Financial performance
The Group’s total sales during the 2nd quarter of 2018 increased by 8.5% to EUR 15.98 million. We have seen an increase in sales volumes and sales from construction services were also higher. The sales were higher due to the dryer weather and temporary increase in several industrial consumers’ consumption. Sales to private customers increased by 1.8%, and sales to corporate customers by 6.4%.
Group’s net profit was EUR 5.47 million, showing an increase by 28.3% year-on-year. The net profit was mainly impacted by lower income tax costs, related to a reduced dividend payment.
Excellent operational results
The quality of drinking water remained excellent in the 2nd quarter of 2018. Water samples taken from customers’ taps were 100% compliant with all requirements. We are also pleased to see that the average water disruption time to individual properties remained at a high level, being 3 hours 17 minutes in the 2nd quarter of 2018.
The level of leakages in the water network continues to be low. Although 13.00% in the 2nd quarter of 2018 is slightly higher than the result for the same period previous year, this is still an excellent result.
In the 2nd quarter we reviewed our promises to customers, which are to deliver high-quality water, keep the environment safe, respond to our customers´ requests quickly, be accurate in billing and keep to our agreements. In case we fail to keep those promises, we pay compensation to the customer on our own initiative.
A research agency Kantar Emor conducts regular customer satisfaction surveys for AS Tallinna Vesi. In the 2nd quarter, the customer satisfaction index reached 4.1 points on a 5-point scale.
The issues with the sewerage network have reduced, and the number of sewer blockages dropped 25% from 393 in the first six months of 2017 to 295 in 2018. AS Tallinna Vesi continues to improve public awareness about sewer-related issues, to reduce the volume of domestic waste ending up in the sewerage network.
In the 2nd quarter of 2018, the treated effluent at Paljassaare Wastewater Treatment Plant was compliant with all stipulated quality requirements.
Awarded achievements
We are proud of high standards in everything we do. Once again, we have been awarded the highest i.e. a Gold Level mark in the Responsible Business Index. Achieving such a good result in a nationally recognised index demonstrates our systematic approach to the CSR matters.
In a study carried out by research agency Kantar Emor, Tallinna Vesi was often named by people as the most preferred employer in Estonia. We hope that it encourages more young people to choose to get an education in one of the fields that are essential for a water-company.
The Company was also recognised for its engineering project and was awarded with a Ground Engineering Award in the category of “Best international project” for reconstruction of Tihase collector. We would like to thank our partners, especially those from United Utilities and Lemmikäinen Eesti AS. Great cooperation between the partners is fundamental to the success of such a complicated project.
Tariff application
Shortly before the end of the year, the Estonian Supreme Court made a decision on the tariff dispute between Tallinna Vesi and Estonian Competition Authority. The price of water and wastewater service is now subject to approval by the Competition Authority using their methodology. On 28th of February 2018, AS Tallinna Vesi submitted its application for the approval of the new water tariffs to Competition Authority. The tariffs calculated in the Company’s tariff application, are close to the currently applicable water tariffs, which have remained unchanged since 2010.
For Tallinna Vesi this is the first tariff application, which has been submitted based on the Competition Authority’s recommended methodology. The approval process is ongoing, and it is still unclear, when the new tariffs would be approved.
Tallinna Vesi is still awaiting the final verdict from the International Arbitration on whether the investor’s interests have been adversely affected, and whether this should be compensated.
OPERATIONAL INDICATORS FOR SIX 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 | % | 14.1 | 13.3 | 16.2 | |||
| Average duration of water interruptions per property | h | 3.28 | 3.25 | 3.54 | |||
| Sewer blockages | No | 295 | 393 | 367 | |||
| Sewer bursts | No | 50 | 72 | 52 | |||
| Wastewater treatment compliance with environmental standards | % | 100.0 | 100.0 | 100.0 | |||
| Written complaints | No | 69 | 17 | 21 | |||
| Customer contacts regarding water quality | No | 101 | 70 | 48 | |||
| Customer contacts regarding water pressure | No | 183 | 146 | 157 | |||
| Customer contacts regarding blockages and discharge of storm water | No | 516 | 539 | 569 | |||
| Responding written customer contacts within at least 2 work days | % | 100.0 | 100.0 | 99.1 | |||
| Failed promises | No | 31 | 3 | 2 | |||
| Notification of unplanned water interruptions at least 1 h before the interruption | % | 94.4 | 100.0 | 97.9 |
FINANCIAL HIGHLIGHTS FOR THE 2nd QUARTER 2018
The Group’s sales revenues during the 2nd quarter of 2018 were EUR 15.98 million, being up by 8.5% or EUR 1.25 million compared to the same period in 2017.
The gross profit in the 2nd quarter of 2018 was EUR 8.90 million, showing an increase of 4.3% or EUR 0.37 million. Increase in gross profit was related to higher water and wastewater revenues, accompanied by higher construction services related profit and lower electricity costs and depreciation. It was balanced by higher staff and asset maintenance costs.
The operating profit was EUR 7.54 million, showing an increase of 4.9% or EUR 0.36 million, being mainly affected by above-mentioned changes in gross profit.
The net profit for the 2nd quarter of 2018 was EUR 5.47 million, showing an increase by 28.3% or EUR 1.21 million. The net profit was mainly impacted by lower dividend related income tax cost, accompanied by above mentioned changes in the operating profit and by slightly higher financial expenses. The changes in the financial expenses were mostly influenced by the lower positive change in the fair value of swap contracts in the 2nd quarter of 2018 compared to the positive change in the same quarter of 2017. The net profit for the 2nd quarter of 2018 and 2017 without the impact resulted from the change of the fair value of swap contracts was EUR 5.39 million and EUR 4.10 million respectively, being higher by 31.3% or EUR 1.29 million year-on-year.
MAIN FINANCIAL INDICATORS
| EUR million, except key ratios | 2nd quarter | Change 2018/2017 | 6 months | Change 2018/2017 | |||||||||
| 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||
| Sales | 15.98 | 14.73 | 14.50 | 8.5% | 30.06 | 28.51 | 28.87 | 5.4% | |||||
| Gross profit | 8.90 | 8.53 | 8.30 | 4.3% | 17.22 | 16.73 | 16.64 | 2.9% | |||||
| Gross profit margin % | 55.68 | 57.89 | 57.27 | -3.8% | 57.29 | 58.70 | 57.64 | -2.4% | |||||
| Operating profit | 7.54 | 7.18 | 5.84 | 4.9% | 14.34 | 13.67 | 12.47 | 4.9% | |||||
| Operating profit - main business | 7.35 | 7.06 | 5.69 | 4.2% | 14.08 | 13.53 | 12.23 | 4.1% | |||||
| Operating profit margin % | 47.18 | 48.78 | 40.29 | -3.3% | 47.70 | 47.95 | 43.21 | -0.5% | |||||
| Profit before taxes | 7.27 | 6.96 | 5.27 | 4.4% | 13.80 | 13.32 | 10.91 | 3.6% | |||||
| Profit before taxes margin % | 45.47 | 47.25 | 36.38 | -3.8% | 45.91 | 46.72 | 37.80 | -1.7% | |||||
| Net profit | 5.47 | 4.26 | 0.77 | 28.3% | 12.00 | 10.62 | 6.41 | 13.0% | |||||
| Net profit margin % | 34.20 | 28.92 | 5.34 | 18.3% | 39.92 | 37.25 | 22.21 | 7.2% | |||||
| ROA % | 2.32 | 1.96 | 0.37 | 18.3% | 5.16 | 4.95 | 3.10 | 4.3% | |||||
| Debt to total capital employed % | 61.64 | 58.54 | 62.06 | 6.0% | 61.64 | 58.54 | 62.06 | 5.3% | |||||
| ROE % | 5.97 | 4.61 | 0.90 | 29.7% | 13.60 | 11.89 | 7.70 | 14.4% | |||||
| Current ratio | 5.00 | 3.70 | 2.63 | 35.1% | 5.00 | 3.70 | 2.63 | 35.1% | |||||
| Quick ratio | 4.96 | 3.65 | 2.60 | 35.9% | 4.96 | 3.65 | 2.60 | 35.9% | |||||
| Investments into fixed assets | 2.21 | 1.30 | 3.73 | 70.2% | 3.07 | 3.51 | 5.73 | -12.6% | |||||
| 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 2nd QUARTER 2018
Statement of comprehensive income
SALES
As in the 2nd 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 28th 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 2nd of May 2018. From 4th of May the CA started the tariff application review process and has asked for additional information during the 2nd quarter from the Company, who has responded to all the questions on time. On 13th of July the CA started administrative procedure as regards to tariff application and has given time to respond the letter by 13th of August 2018. Also the CA 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. Currently CA has spent 21 days for their procedures to deal with the tariff 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 2nd quarter of 2018 the Group’s total sales were EUR 15.98 million, showing an increase by 8.5% or EUR 1.25 million year-on-year. 83.5% of sales comprise of sales of water and wastewater services to domestic and commercial customers within and outside of the service area. 5.5% of sales are the fees received from the City of Tallinn for operating and maintaining the storm water system and fire hydrants, 9.8% from construction and asphalting services and 1.1% 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.
| 2nd quarter | Variance 2018/2017 | ||||||
| EUR thousand | 2018 | 2017 | 2016 | EUR | % | ||
| Private clients, incl: | 6,427 | 6,313 | 6,200 | 114 | 1.8% | ||
| Water supply service | 3,547 | 3,470 | 3,410 | 77 | 2.2% | ||
| Wastewater disposal service | 2,880 | 2,843 | 2,790 | 37 | 1.3% | ||
| Corporate clients, incl: | 5,525 | 5,193 | 5,070 | 332 | 6.4% | ||
| Water supply service | 3,083 | 2,877 | 2,831 | 206 | 7.2% | ||
| Wastewater disposal service | 2,442 | 2,316 | 2,239 | 126 | 5.4% | ||
| Outside service area clients, incl: | 1,181 | 1,102 | 1,101 | 79 | 7.2% | ||
| Water supply service | 370 | 339 | 346 | 31 | 9.1% | ||
| Wastewater disposal service | 733 | 692 | 686 | 41 | 5.9% | ||
| Storm water disposal service | 78 | 71 | 69 | 7 | 9.9% | ||
| Over pollution fee | 216 | 258 | 211 | -42 | -16.3% | ||
| Total water supply and wastewater disposal service | 13,349 | 12,866 | 12,582 | 483 | 3.8% | ||
| Storm water treatment and disposal and fire hydrants service | 881 | 839 | 924 | 42 | 5.0% | ||
| Construction service, design and asphalting | 1,569 | 864 | 827 | 705 | 81.6% | ||
| Other works and services | 180 | 159 | 164 | 21 | 13.2% | ||
| SALES REVENUES TOTAL | 15,979 | 14,728 | 14,497 | 1,251 | 8.5% | ||
Sales from water and wastewater services were EUR 13.35 million, showing a 3.8% or EUR 0.48 million increase compared to the 2nd quarter of 2017, resulting from the changes in sales volumes as described below:
There has been an increase in private customers’ revenues of 1.8% to EUR 6.43 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 spring has been very dry.
- Sales to corporate customers within the service area increased by 6.4% to EUR 5.52 million. Increase was related to higher consumption in the sales of industrial and other commercial customer segments caused by one-time higher consumptions.
- Sales to customers outside the main service area increased by 7.2% to EUR 1.18 million. It was mainly impacted by an increase in the sales of water supply and wastewater disposal services to different surrounding areas.
- Over pollution fees received have decreased by 16.3% to EUR 0.22 million.
Sales from the operation and maintenance of the main service area storm water and fire hydrant system amounted to EUR 0.88 million, showing an increase of 5.0% or EUR 0.04 million in the 2nd quarter of 2018 compared to the same period in 2017, driven mainly by 3.5% higher storm water volumes.
Sales of construction, design and asphalting services were EUR 1.57 million, increasing by 81.6% or EUR 0.71 million year-on-year. The increase was mainly related to higher pipe construction services revenues during the 2nd quarter of 2018.
COST OF GOODS/ SERVICES SOLD AND GROSS PROFIT
| 2nd quarter | Variance 2018/2017 | ||||||
| EUR thousand | 2018 | 2017 | 2016 | EUR | % | ||
| Water abstraction charges | -303 | -292 | -283 | -11 | -3.8% | ||
| Chemicals | -346 | -352 | -285 | 6 | 1.7% | ||
| Electricity | -698 | -777 | -728 | 79 | 10.2% | ||
| Pollution tax | -233 | -201 | -235 | -32 | -15.9% | ||
| Total direct production costs | -1,580 | -1,622 | -1,531 | 42 | 2.6% | ||
| Staff costs | -1,631 | -1,479 | -1,470 | -152 | -10.3% | ||
| Depreciation and amortization | -1,268 | -1,360 | -1,591 | 92 | 6.8% | ||
| Construction service, design and asphalting | -1,359 | -735 | -675 | -624 | -84.9% | ||
| Other costs of goods/services sold | -1,244 | -1,006 | -928 | -238 | -23.7% | ||
| Other costs of goods/services sold total | -5,502 | -4,580 | -4,664 | -922 | -20.1% | ||
| Total cost of goods/services sold | -7,082 | -6,202 | -6,195 | -880 | -14.2% | ||
The cost of goods sold amounted to EUR 7.08 million in the 2nd quarter of 2018, increasing by 14.2% or EUR 0.88 million compared to the equivalent period in 2017. The increase was mainly influenced by increase in construction and asphalting services related costs, staff and asset maintenance costs, balanced by decrease in electricity and depreciation expenses.
Total direct production costs (water abstraction charges, chemicals, electricity and pollution tax expenses) amounted to EUR 1.58 million, showing a 2.6% or EUR 0.04 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 3.8% to EUR 0.30 million, driven mainly by overall 3.5% increase in abstracted water volumes.
- Chemicals costs decreased slightly by 1.7% to EUR 0.35 million, driven by lower usage of methanol and coagulant to remove pollutants, balanced by higher usage of polymers to remove sludge in the wastewater treatment process, worth respectively EUR +0.01 million, EUR +0.02 million and EUR -0.01 million. Lower chemicals costs in wastewater treatment process were balanced by 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 both EUR -0.01 million.
- Electricity costs decreased by 10.2% to EUR 0.70 million, driven by on average 12.8% lower electricity prices (including networks fees), worth EUR 0.11 million. Lower costs from prices were partly balanced by increase in treated volumes in water and wastewater processes, worth EUR 0.03 million.
- Pollution tax expense increased by 15.9% to EUR 0.23 million, mainly due to higher pollution load of pollutants and by 2.9% increase in treated wastewater volumes, worth respectively EUR -0.02 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 5.50 million, having increased by 20.1% or EUR 0.92 million. The increase came mostly from costs related to construction and asphalting services, accompanied by higher staff and maintenance costs and balanced by decrease in depreciation costs. Increase in construction and asphalting services costs by 84.9% to EUR 1.36 million was related to higher construction services revenues mentioned earlier and project specific changes. Staff costs increase by 10.3% to EUR 1.63 million was related to change of salaries from the beginning of the year for all employees based on CPI increase and higher workload, accompanied by review of bonus reserve in the 2nd quarter of 2018. 21.4% or EUR 0.14 million higher asset maintenance costs were mainly related to timing of different maintenance and repair works in wastewater treatment processes. Decrease in depreciation by 6.8% to EUR 1.27 million was mainly related to lower cost of machinery and equipment depreciation year-on-year.
As a result of all above the Group’s gross profit for the 2nd quarter of 2018 was EUR 8.90 million, showing an increase of 4.3% or EUR 0.37 million, compared to the gross profit of EUR 8.53 million for the comparative period of 2017.
ADMINISTRATIVE AND MARKETING EXPENSES
Administrative and marketing expenses amounted to EUR 1.31 million, having increased by 1.2% or EUR 0.02 million. The increase was mainly related to change in marketing expenses salaries by reasons mentioned in other costs of goods sold and higher postal expenses.
OPERATING PROFIT
As a result of the factors listed above the Group’s operating profit for the 2nd quarter of 2018 amounted to EUR 7.54 million, being 4.9% or EUR 0.36 million higher than in the corresponding period of 2017. The Group’s operating profit from main business was EUR 7.35 million, being 4.2% or EUR 0.29 million higher compared to 2017.
FINANCIAL EXPENSES
The Group’s net financial income and expenses have resulted a net expense of EUR 0.27 million, compared to net expense of EUR 0.23 million in the 2nd quarter of 2017. The increase was mainly impacted by a lower positive change in the fair value of the swap contracts year-on-year and lower interest costs, worth respectively EUR -0.08 million and EUR +0.03 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 0.59 million. Effective interest rate of loans (incl. swap interests) in the 2nd quarter of 2018 was 1.46%, amounting to interest costs of EUR 0.35 million, compared to the effective interest rate of 1.61% and the interest costs of EUR 0.39 million in the 2nd quarter of 2017.
PROFIT BEFORE TAXES AND NET PROFIT
The Group’s profit before taxes for the 2nd quarter of 2018 was EUR 7.27 million, being 4.4% or EUR 0.31 million higher than for the comparative period of 2017. The Group’s net profit for the 2nd quarter of 2018 was EUR 5.47 million, being 28.3% or EUR 1.21 million higher than for the 2nd quarter of 2017, being impacted by the decrease in income tax on dividends, worth EUR 0.90 million. Eliminating the effects of the change of the fair value of swap contracts the Group’s net profit for the 2nd quarter of 2018 and 2017 would have been EUR 5.39 million and EUR 4.10 million respectively, showing an increase of 31.3% or EUR 1.22 million year-on-year.
FINANCIAL RESULTS FOR THE SIX MONTHS OF 2018
Statement of comprehensive income
SALES
During the six months of 2018 the Group’s total sales were EUR 30.06 million, showing an increase by 5.4% or EUR 1.55 million year-on-year. Sales from water and wastewater services for six months of 2018 were 26.21 million, increasing 2.4% or EUR 0.62 million year-on-year. 87.2% of sales comprise of sales of water and wastewater services 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, 6.2% from construction and asphalting services and 1.0% from other works and services.
| 6 months | Variance 2018/2017 | ||||||
| EUR thousand | 2018 | 2017 | 2016 | EUR | % | ||
| Private clients, incl: | 12,855 | 12,660 | 12,538 | 195 | 1.5% | ||
| Water supply service | 7,079 | 6,960 | 6,895 | 119 | 1.7% | ||
| Wastewater disposal service | 5,776 | 5,700 | 5,643 | 76 | 1.3% | ||
| Corporate clients, incl: | 10,667 | 10,256 | 9,952 | 411 | 4,0% | ||
| Water supply service | 5,867 | 5,648 | 5,504 | 219 | 3.9% | ||
| Wastewater disposal service | 4,800 | 4,608 | 4,448 | 192 | 4.2% | ||
| Outside service area clients, incl: | 2,293 | 2,210 | 2,230 | 83 | 3.8% | ||
| Water supply service | 704 | 669 | 654 | 35 | 5.2% | ||
| Wastewater disposal service | 1,421 | 1,375 | 1,355 | 46 | 3.3% | ||
| Storm water disposal service | 168 | 166 | 221 | 2 | 1.2% | ||
| Over pollution fee | 397 | 468 | 382 | -71 | -15.2% | ||
| Total water supply and wastewater disposal service | 26,212 | 25,594 | 25,102 | 618 | 2.4% | ||
| Storm water treatment and disposal service and fire hydrants service | 1,677 | 1,580 | 1,870 | 97 | 6.1% | ||
| Construction service, design and asphalting | 1,853 | 1,045 | 1,588 | 808 | 77.3% | ||
| Other works and services | 314 | 290 | 306 | 24 | 8.3% | ||
| SALES REVENUES TOTAL | 30,056 | 28,509 | 28,866 | 1,547 | 5.4% | ||
During the six months of 2018 there has been an increase in sales to private customers by 1.5% to EUR 12.86 million and to corporate customers within the service area by 4.0% to EUR 10.67 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 2nd quarter of 2018 as the spring has been very dry. Higher sales in corporate clients is related to an increase in the sales of industrial and other commercial customer segments mostly in 2nd quarter of 2018. Sales to customers outside the main service area increased by 3.8% to EUR 2.29 million, being mainly impacted by an increase in the sales of water supply and wastewater disposal services. Over pollution fees received have decreased by 15.2% to EUR 0.40 million.
Sales from the operation and maintenance of the main service area storm water and fire hydrant system in the six months of 2018 amounted to EUR 1.68 million, showing an increase of 6.1% or EUR 0.10 million year-on-year, driven mainly by 8.9% higher storm water volumes.
Sales of construction, design and asphalting services were EUR 1.85 million, increasing by 77.3% or EUR 0.81 million year-on-year. The increase was mainly related to higher pipe construction services revenues during the 2nd quarter of 2018.
COST OF GOODS/ SERVICES SOLD AND GROSS AND OPERATING PROFITS
| 6 months | Variance 2018/2017 | ||||||
| EUR thousand | 2018 | 2017 | 2016 | EUR | % | ||
| Water abstraction charges | -594 | -588 | -575 | -6 | -1.0% | ||
| Chemicals | -781 | -685 | -627 | -96 | -14.0% | ||
| Electricity | -1,457 | -1,630 | -1,538 | 173 | 10.6% | ||
| Pollution tax | -511 | -493 | -571 | -18 | -3.7% | ||
| Total direct production costs | -3,343 | -3,396 | -3,311 | 53 | 1.6% | ||
| Staff costs | -3,224 | -2,900 | -2,888 | -324 | -11.2% | ||
| Depreciation and amortization | -2,551 | -2,711 | -3,023 | 160 | 5.9% | ||
| Construction service, design and asphalting | -1,600 | -874 | -1,349 | -726 | -83.1% | ||
| Other costs of goods/services sold | -2,121 | -1,894 | -1,657 | -227 | -12.0% | ||
| Other costs of goods/services sold total | -9,496 | -8,379 | -8,917 | -1,117 | -13.3% | ||
| Total cost of goods/services sold | -12,839 | -11,775 | -12,228 | -1,064 | -9.0% | ||
During the six months of 2018 the cost of goods sold amounted to EUR 12.84 million, increasing by 9.0% or EUR 1.06 million compared to the equivalent period in 2017. Total direct production costs (water abstraction charges, chemicals, electricity and pollution tax expenses) amounted to EUR 3.34 million, showing a 1.6% or EUR 0.05 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 were at the same level as in the comparative period last year, amounting to EUR 0.59 million.
- Chemicals costs increased by 14.0% to EUR 0.78 million, driven by higher usage of methanol and polymers to remove Nitrogen and sludge from influent in the wastewater treatment process, worth respectively EUR 0.05 million and EUR 0.01 million. It was accompanied by higher dosage of coagulant in water treatment process due to poor raw water quality, worth EUR 0.01 million.
- Electricity costs decreased by 10.6% to EUR 1.46 million, driven by on average 13.2% lower electricity prices (including networks fees), worth EUR 0.23 million. Lower costs from prices were partly balanced by increase in treated volumes in water and wastewater processes, worth EUR 0.06 million.
- Pollution tax expense increased by 3.7% to EUR 0.51 million, mainly due to 3.4% higher treated wastewater volumes, worth EUR 0.02 million.
Other costs of goods sold (staff costs, depreciation, construction and asphalting services costs and other costs of goods sold) amounted to EUR 9.50 million, having increased by 13.3% or EUR 1.12 million. Changes in other costs of foods sold were driven by the same reasons as mentioned in the 2nd quarter results.
The Group’s gross profit for the six months of 2018 was EUR 17.22 million, showing an increase of 2.9% or EUR 0.48 million compared to the comparative period of 2017. The Group’s operating profit for the six months of 2018 amounted to EUR 14.34 million, being 4.9% or EUR 0.67 million higher than in the corresponding period of 2017. The increase in operating profit was driven by the changes in gross profit, accompanied by lower tariff dispute related costs.
FINANCIAL EXPENSES
The Group’s net financial income and expenses have resulted a net expense of EUR 0.54 million, compared to net expense of EUR 0.35 million in the six months of 2017. The increase was mainly impacted by a lower positive change in the fair value of the swap contracts year-on-year and lower interest costs, worth respectively EUR -0.25 million and EUR +0.07 million.
PROFIT BEFORE TAXES AND NET PROFIT
The Group’s profit before taxes for the six months of 2018 were EUR 13.80 million, being 3.6% or EUR 0.48 million higher than for the relevant period of 2017. The Group’s net profit for the six months of 2018 were EUR 12.00 million, being 13.0% or EUR 1.38 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 six months of 2018 would have been EUR 11.84 million, showing an increase by 15.9% or EUR 1.63 million year-on-year.
Statement of financial position
In the six months of 2018 the Group invested into fixed assets EUR 3.07 million. As of 30.06.2018, non-current tangible assets amounted to EUR 174.71 million and total non-current assets amounted to EUR 175.48 million (30.06.2017: EUR 171.67 million and EUR 172.48 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 0.43 million to EUR 8.15 million. Increase mainly derives from higher accrued income and trade receivables, respectively by EUR 0.27 million and EUR 0.13 million, being mainly impacted by construction activities and higher connection points receivables and main services revenues. The collectability rate continues to be high at 99.59% level, compared to 99.45% at the end of June 2017.
Current liabilities have increased by EUR 2.50 million to EUR 12.15 million compared to the year end of 2017. Increase mainly derives from higher in trade and other payables by EUR 1.75 million, being related to higher payables related to pipe construction services and investments, accompanied by higher prepayments for connections by EUR 0.70 million.
Deferred income from connection fees has grown compared to the end of 2017 by EUR 0.84 million to EUR 20.47 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 12th 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%. At the end of September 2017, the Company refinanced its long-term loan in the amount of EUR 37.5 million.
The Group has a Total debt to assets level of 61.6%, in range of 55%-65%, reflecting the Group’s equity profile. In comparative period of 2017 the total debt to assets ratio was 58.5%.
CASH FLOW
As of 30.06.2018, the cash position of the Group is strong. At the end of June 2018, the cash balance of the Group stood at EUR 52.15 million, which is 22.1% of the total assets (30.06.2017: EUR 35.34 million, forming 16.4% of the total assets).
The biggest contribution to the cash flows comes from main operations. During the six months of 2018, the Group generated EUR 17.04 million of cash flows from operating activities, an increase of EUR 1.14 million compared to the corresponding period in 2017. Underlying operating profit continues to be the main contributor to operating cash flows.
In the six months of 2018 the result of net cash flows from investing activities was a cash outflow of EUR 1.67 million, a decrease of EUR 1.09 million compared to the cash outflow of EUR 2.76 million in the six months of 2017. This is made up as follows:
The cash outflows from investments in fixed assets have decreased by EUR 0.94 million compared to 2017 amounting to EUR 3.42 million.
- The compensations received for the construction of pipelines were EUR 1.68 million, showing an increase of EUR 0.12 million compared to the same period of 2017.
In the six months of 2018 cash outflow from financing activities amounted to EUR 8.19 million, decreasing by EUR 3.59 million compared to the same period in 2017. The change was mainly related to lower dividend payment by EUR 3.60 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 he 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 2nd quarter of 2018, the total number of employees was at the same level as for the same period in 2017 amounting to 319 employees. The full time equivalent (FTE) was respectively 308 in 2018 compared to the 309 in 2017. Average number of employees (FTE) during the six months was respectively 299 in 2018 and 305 in 2017.
By gender, employee allocation was as follows:
| As of 30.06.2018 | As of 30.06.2017 | ||||||||||
| Women | Men | Total | Women | Men | Total | ||||||
| Group | 95 | 224 | 319 | 96 | 223 | 319 | |||||
| Management Team | 14 | 15 | 29 | 14 | 13 | 27 | |||||
| Executive Team | 4 | 4 | 8 | 5 | 4 | 9 | |||||
| Management Board | 1 | 2 | 3 | 1 | 2 | 3 | |||||
| Supervisory Board | 1 | 8 | 9 | 0 | 9 | 9 | |||||
The total salary costs were EUR 2.24 million for the 2nd 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 31st 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 26th of June 2018.
SHARE PERFORMANCE
AS Tallinna Vesi is listed on NASDAQ OMX Main Baltic Market with trading code TVEAT and ISIN EE3100026436.
As of 30.06.2018, AS Tallinna Vesi shareholders, with a direct holding over 5%, were:
- United Utilities (Tallinn) BV (35.3%)
- City of Tallinn (34.7%)
During the six months of 2018 the shareholder structure has been relatively stable compared to the end of 2017. At the end of 2nd quarter of 2018 the pension funds shareholding has decreased slightly, being 1.31% of the total shares compared to 1.43% at the end of 2017.
As of 30.06.2018, the closing price of AS Tallinna Vesi share was EUR 10.25, which is 4.2% (2017: -10.7%) lower compared to the closing price of EUR 10.70 at the beginning of the quarter. During the 2nd quarter the OMX Tallinn index decreased by 0.6% (2017: +1.3%).
In the six months of 2018, 2,289 deals with the Company’s shares were concluded (2017: 4,329 deals) during which 439 thousand shares or 2.2% of total shares exchanged their owners (2017: 640 thousand shares or 3.2%).
The turnover of the transactions was EUR 3,884 thousand lower than in 2017 comparative period, amounting to EUR 4.69 million.
CORPORATE STRUCTURE
As of 30.06.2018, 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. Changes in the Supervisory Council members in the 2nd quarter of 2018 were as follows: Mr Simon Roger Gardiner’s and Mr Martin Padley’s terms as Supervisory members were extended (respectively valid until 03.06.2020 and 02.11.2020), Mr Rein Ratas has been recalled from the Supervisory Council member and a new Supervisory Council member Mrs Katrin Kendra was nominated (term valid until 31.05.2020).
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 > 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 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 21st March 2020), Aleksandr Timofejev (with the powers of the Management Board Member until 29th October 2021) and Riina Käi (with the powers of the Management Board Member until 29th October 2021).
Additional information on the members of the Management Board can be found from the Company’s website:
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 2nd 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 | 2nd quarter | 2nd quarter | 6 months | 6 months | 12 months | ||||
| (EUR thousand) | 2018 | 2017 | 2018 | 2017 | 2017 | ||||
| Revenue | 15,979 | 14,728 | 30,056 | 28,509 | 59,815 | ||||
| Costs of goods sold | -7,082 | -6,202 | -12,839 | -11,775 | -25,725 | ||||
| GROSS PROFIT | 8,897 | 8,526 | 17,217 | 16,734 | 34,090 | ||||
| Marketing expenses | -94 | -78 | -206 | -179 | -356 | ||||
| General administration expenses | -1,216 | -1,216 | -2,595 | -2,782 | -5,028 | ||||
| Other income/ expenses (-) | -48 | -48 | -79 | -103 | -17,841 | ||||
| OPERATING PROFIT | 7,539 | 7,184 | 14,337 | 13,670 | 10,865 | ||||
| Interest income | 5 | 4 | 9 | 9 | 15 | ||||
| Interest expense | -279 | -229 | -547 | -359 | -1,502 | ||||
| Other financial income (+)/ expenses (-) | 0 | 0 | 0 | 0 | 543 | ||||
| PROFIT BEFORE TAXES | 7,265 | 6,959 | 13,799 | 13,320 | 9,921 | ||||
| Income tax on dividends | -1,800 | -2,700 | -1,800 | -2,700 | -2,700 | ||||
| NET PROFIT FOR THE PERIOD | 5,465 | 4,259 | 11,999 | 10,620 | 7,221 | ||||
| COMPREHENSIVE INCOME FOR THE PERIOD | 5,465 | 4,259 | 11,999 | 10,620 | 7,221 | ||||
| Attributable to: | 0 | ||||||||
| Equity holders of A-shares | 5,464 | 4,258 | 11,998 | 10,619 | 7,220 | ||||
| B-share holder | 0.60 | 0.60 | 0.60 | 0.60 | 0.60 | ||||
| Earnings per A share (in euros) | 0.27 | 0.21 | 0.60 | 0.53 | 0.36 | ||||
| Earnings per B share (in euros) | 600 | 600 | 600 | 600 | 600 |
| STATEMENT OF FINANCIAL POSITION | |||||||
| (EUR thousand) | 30.06.2018 | 30.06.2017 | 31.12.2017 | ||||
| ASSETS | |||||||
| CURRENT ASSETS | |||||||
| Cash and equivalents | 52,154 | 35,344 | 44,973 | ||||
| Trade receivables, accrued income and prepaid expenses | 8,151 | 6,868 | 7,716 | ||||
| Inventories | 441 | 484 | 457 | ||||
| TOTAL CURRENT ASSETS | 60,746 | 42,696 | 53,146 | ||||
| NON-CURRENT ASSETS | |||||||
| Property, plant and equipment | 174,713 | 171,666 | 174,451 | ||||
| Intangible assets | 771 | 816 | 811 | ||||
| TOTAL NON-CURRENT ASSETS | 175,484 | 172,482 | 175,262 | ||||
| TOTAL ASSETS | 236,230 | 215,178 | 228,408 | ||||
| LIABILITIES AND EQUITY | |||||||
| CURRENT LIABILITIES | |||||||
| Current portion of long-term borrowings | 478 | 244 | 264 | ||||
| Trade and other payables | 7,955 | 7,879 | 6,200 | ||||
| Derivatives | 411 | 622 | 578 | ||||
| Prepayments | 3,308 | 2,806 | 2,609 | ||||
| TOTAL CURRENT LIABILITIES | 12,152 | 11,551 | 9,651 | ||||
| NON-CURRENT LIABILITIES | |||||||
| Deferred income from connection fees | 20,475 | 18,400 | 19,632 | ||||
| Borrowings | 95,239 | 95,709 | 95,565 | ||||
| Derivatives | 181 | 292 | 178 | ||||
| Provision for possible third party claims | 17,522 | 0 | 17,522 | ||||
| Other payables | 47 | 11 | 44 | ||||
| TOTAL NON-CURRENT LIABILITIES | 133,464 | 114,412 | 132,941 | ||||
| TOTAL LIABILITIES | 145,616 | 125,963 | 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 | 52,602 | 51,203 | 47,804 | ||||
| TOTAL EQUITY | 90,614 | 89,215 | 85,816 | ||||
| TOTAL LIABILITIES AND EQUITY | 236,230 | 215,178 | 228,408 | ||||
| CASH FLOW STATEMENT | 6 months | 6 months | 12 months | ||||
| (EUR thousand) | 2018 | 2017 | 2017 | ||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
| Operating profit | 14,337 | 13,670 | 10,865 | ||||
| Adjustment for depreciation/amortisation | 2,839 | 3,005 | 6,170 | ||||
| Adjustment for revenues from connection fees | -141 | -125 | -258 | ||||
| Other non-cash adjustments | -11 | 0 | -26 | ||||
| Profit/loss(+) from sale and write off of property, plant and equipment, and intangible assets | -39 | -11 | -12 | ||||
| Change in current assets involved in operating activities | -427 | 264 | -558 | ||||
| Change in liabilities involved in operating activities | 484 | -902 | 17,064 | ||||
| TOTAL CASH FLOW FROM OPERATING ACTIVITIES | 17,042 | 15,901 | 33,245 | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
| Acquisition of property, plant and equipment, and intangible assets | -3,418 | -4,361 | -9,761 | ||||
| Compensations received for construction of pipelines | 1,676 | 1,554 | 2,698 | ||||
| Proceeds from sales of property, plant and equipment and intangible assets | 67 | 38 | 62 | ||||
| Interest received | 8 | 9 | 15 | ||||
| TOTAL CASH FLOW FROM INVESTING ACTIVITIES | -1,667 | -2,760 | -6,986 | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
| Interest paid and loan financing costs, incl swap interests | -710 | -779 | -1,512 | ||||
| Repayment of finance lease | -120 | -141 | -260 | ||||
| Dividends paid | -7,201 | -10,801 | -10,801 | ||||
| Income tax on dividends | -163 | -63 | -2,700 | ||||
| TOTAL CASH FLOW FROM FINANCING ACTIVITIES | -8,194 | -11,784 | -15,273 | ||||
| CHANGE IN CASH AND CASH EQUIVALENTS | 7,181 | 1,357 | 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 | 52,154 | 35,344 | 44,973 |
Karl Heino Brookes
Chairman of the Management Board
+372 62 62 200
Attachment
