Financial results for the 4th Quarter 2018
The 4th quarter of 2018 was successful for AS Tallinna Vesi, with respect to both operational and financial performance. Tallinna Vesi´s sales have increased year-on-year, as well as operating and net profit. The operational performance once again reflects the high standards achieved in the supply of pure drinking water to the inhabitants, treatment of wastewater and the maintenance of the water and sewerage networks and customer service.
Solid financial performance
In the 4th quarter of 2018, the Company’s sales revenues were 1.6% higher year-on-year. Sales to domestic customers increased by 2.6% in the 4th quarter, also, the sales related to construction and asphalting services increased considerably by 8.8%. However, the sales of storm water disposal and treatment services dropped both within the main service area and in surrounding municipalities due to lower level of precipitation.
The gross profit of the 4th quarter of 2018 was EUR 8.38 million, showing a decrease of 4.7%, which was mainly due to increased sales from water and wastewater services, accompanied by higher chemicals and asset maintenance costs. The operating profit of Tallinna Vesi was EUR 5.29 million and net profit EUR 5.01 million.
Reliable water supply and wastewater service
The quality of drinking water remained at a very good level throughout 2018. This performance was verified with 100% compliance, of water samples from customer taps during the 4th quarter of 2018. At the end of last year, we completed a further campaign to promote environmental awareness in the wider community, and encourage people to drink tap water as opposed to bottled water.
In order to ensure the reliability of service to our consumers, we made several significant investments in the water and wastewater networks during 2018. The largest examples of which include the reconstruction of network in Gonsiori, Tammsaare and Tondi streets as well as the junction of Põhja and Kalasadama streets.
Adding to the high quality of drinking water, the percentage of leakage was even lower than in previous years. In the 4th quarter of 2018, water losses dropped to 13.07% in comparison with 14.69% during 2017. Maintaining a low levels of leakage is important in preserving raw water, and is a testament to our effectiveness in managing and investing in the wider water network and infrastructure.
Compliance of wastewater treatment with the environmental requirements, is a key indicator reflecting our efforts to minimise the environmental impact, resulting from wastewater incidents. Throughout 2018, our final treated effluent was 100% compliant with the parameters in our current water permit.
Raising environmental awareness and supporting the community
As per previous years, close cooperation with the community has continued throughout 2018, when we contributed to the environmental education of children, youngsters and adults. We held numerous water seminars in nurseries and schools, and hosted several tours of our water and wastewater treatment plants. In cooperation with Tallinn City Museum, an exhibition on water was opened at Kiek in de Kök, and many lectures and seminars were subsequently organised.
In 2018 we opened new public water taps in Kadriorg, Energy Discovery Centre and concluded agreement for the installation of a drinking water fountain in SuperSkypark, at the newly opened T1 Mall of Tallinn. We will continue to improve the availability of tap water in public spaces during 2019.
AS Tallinna Vesi is still in the process of setting the new water- and wastewater services tariffs.
In December, Competition Authority issued a decision on Tallinna Vesi’s application for the approval of the prices of water services and related extra services in Tallinn and Saue service area. Competition Authority decided to approve the prices of extra services, however, refused to approve the prices of water services. In the beginning of 2019 AS Tallinna Vesi challenged Competition Authority´s decision and is now waiting for the next steps.
AS Tallinna Vesi is still waiting for the decision in the arbitration proceedings regarding the possible damages claim.
OPERATIONAL INDICATORS FOR 2018
|Compliance of water quality at the customers’ tap||%||99.9||99.9||99.9|
|Losses in the water distribution network||%||13.7||13.8||15.1|
|Average duration of water interruptions per property||h||3.27||3.14||3.44|
|Wastewater treatment compliance with environmental standards||%||100.0||100.0||100.0|
|Number of complaints*||No||158||36||45|
|Customer contacts regarding water quality||No||258||219||166|
|Customer contacts regarding water pressure||No||439||298||339|
|Customer contacts regarding blockages and discharge of storm water||No||1,043||1,111||1,190|
|Responding written customer contacts within at least 2 work days||%||100.0||99.9||99.5|
|Notification of unplanned water interruptions at least 1 h before the interruption||%||95.2||98.2||98.8|
*Until 2018, this figure included only the customer complaints received in writing. The number for 2018 includes the complaints received both in writing and by phone.
FINANCIAL HIGHLIGHTS FOR THE 4th QUARTER 2018
The Group’s sales revenues during the 4th quarter of 2018 were EUR 16.23 million, being up by 1.6% or EUR 0.26 million compared to the same period in 2017.
The gross profit in the 4th quarter of 2018 was EUR 8.38 million, showing a decrease of 4.7% or EUR 0.41 million. Decrease in gross profit was related to lower storm water treatment and disposal service and fire hydrants service revenues accompanied by higher chemicals and asset maintenance costs and other costs of goods/services sold. It was balanced by higher water and wastewater revenues accompanied by higher construction services related profit and lower electricity costs and pollution tax expenses.
The operating profit was EUR 5.29 million, showing an increase of 151.8% or EUR 15.52 million. In addition to above-mentioned changes in gross profit, the operating profit was also impacted by lower expense for provision formed for the possible third-party claims accompanied by higher administrative and marketing expenses and lower net other expenses. The operating profit for the 4th quarter of 2018 and 2017 without the impact resulted from the change of provision for the possible third-party claims was EUR 6.84 million and EUR 7.30 million, being lower by 6.3% or EUR 0.46 million year-on-year.
The net profit for the 4th quarter of 2018 was EUR 5.01 million, showing an increase by 148.0% or EUR 15.45 million. The net profit was mainly impacted by above mentioned changes in the operating profit, accompanied by 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 4th quarter of 2018 compared to the positive change in the same quarter of 2017. The net profit for the 4th quarter of 2018 and 2017 without the impact resulted from the change of the fair value of swap contracts and the change of provision for the possible third-party claims was EUR 6.53 million and EUR 6.95 million respectively, being lower by 6.0% or EUR 0.42 million year-on-year.
MAIN FINANCIAL INDICATORS
except key ratios
|4th quarter||Change 2018/ 2017||12 months||Change 2018/ 2017|
|Gross profit margin %||51.61||55.04||56.75||-6.2||%||54.45||56.99||56.39||-4.5||%|
|Operating profit before depreciation and amortisation||6.75||-8.79||6.87||176.8||%||32.46||16.80||30.83||93.2||%|
|Operating profit before depreciation and amortisation margin %||41.57||-55.00||47.34||175.6||%||51.70||28.08||52.28||84.1||%|
|Operating profit - main business||5.06||-10.40||5.52||148.6||%||26.21||10.24||24.44||156.0||%|
|Operating profit margin %||32.61||-64.00||36.94||150.9||%||42.91||18.16||41.75||136.2||%|
|Profit before taxes||5.01||-10.44||5.45||148.0||%||25.95||9.92||22.89||161.6||%|
|Profit before taxes margin %||30.88||-65.36||37.56||147.3||%||41.33||16.59||38.81||149.2||%|
|Net profit margin %||30.88||-65.36||37.56||147.3||%||38.47||12.07||31.18||218.6||%|
|Debt to total capital employed %||58.85||62.43||58.15||-5.7||%||58.85||62.43||58.15||-5.7||%|
|Investments into fixed assets||3.04||3.58||4.78||-15.0||%||10.40||9.47||14.95||9.7||%|
|Payout ratio %||na||99.72||58.73||na||na||99.72||58.73||na|
Gross profit margin – Gross profit / Net sales
Operating profit before depreciation and amortisation – Operating profit + depreciation and amortisation
Operating profit before depreciation and amortisation margin – Operating profit before depreciation and amortisation / 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 4th QUARTER 2018
Statement of comprehensive income
As in the 4th 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. With its decision from 4th of December 2018 CA did not approve the prices of water and wastewater services in Tallinn and Saue service area. With the same decision CA approved prices for services directly related to water and wastewater services. On 6th of December 2018 CA notified the company of the initiation of a supervisory review procedure, to which the Company is expected to file its response by 30th of January 2019. On 3rd of January 2019 the Company challenged CA’s decision dated 4th of December 2018 for refusing to approve the prices of water and wastewater services, that AS Tallinna Vesi applied for in Tallinn and Saue service area. On 13th of September 2018 the Company submitted supplemented tariff application additionally to Tallinn and Saue area also to Harku and surrounding areas water companies. CA has informed the Company that the supplemented application meets also all the requirements and that they have extended the review from 30 days to 90 days starting as the application is complicated. 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 the tariffs. The tariffs could also change if the CA establishes temporary water tariffs in accordance with the procedure specified in applicable law.
In the 4th quarter of 2018 the Group’s total sales were EUR 16.23 million, showing an increase by 1.6% or EUR 0.26 million year-on-year. 82.1% of sales comprise of sales of water and wastewater services to domestic and commercial customers within and outside of the service area. 6.6% of sales are the fees received from the City of Tallinn for operating and maintaining the storm water system and fire hydrants, 10.1% 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.
| ||4th quarter||Variance 2018/2017|
|Private clients, incl:||6,587||6,417||6,352||170||2.6||%|
|Water supply service||3,600||3,532||3,495||68||1.9||%|
|Wastewater disposal service||2,987||2,885||2,857||102||3.5||%|
|Corporate clients, incl:||5,299||5,150||5,128||149||2.9||%|
|Water supply service||2,898||2,787||2,813||111||4.0||%|
|Wastewater disposal service||2,401||2,363||2,315||38||1.6||%|
|Outside service area clients, incl:||1,240||1,326||1,102||-86||-6.5||%|
|Water supply service||380||342||329||38||11.1||%|
|Wastewater disposal service||749||752||689||-3||-0.4||%|
|Storm water disposal service||111||232||84||-121||-52.2||%|
|Over pollution fee||202||205||181||-3||-1.5||%|
|Total water supply and wastewater disposal service||13,328||13,098||12,763||230||1.8||%|
|Storm water treatment and disposal and fire hydrants service||1,078||1,200||830||-122||-10.2||%|
|Construction service, design and asphalting||1,640||1,507||773||133||8.8||%|
|Other works and services||183||169||153||14||8.3||%|
|SALES REVENUES TOTAL||16,229||15,974||14,519||255||1.6||%|
Sales from water and wastewater services were EUR 13.33 million, showing a 1.8% or EUR 0.23 million increase compared to the 4th quarter of 2017, resulting from the changes in sales volumes as described below:
- There has been an increase in private customers’ revenues of 2.6% to EUR 6.59 million. The increase in domestic customer consumption volumes came mainly from apartment blocks, which is also our biggest private customer group, accompanied by an increase in an individual houses’ consumption.
- Sales to corporate customers within the service area increased by 2.9% to EUR 5.30 million. Increase was related to higher consumption in the sales of all commercial customer segments caused by slightly higher average consumption of different customers.
- Sales to customers outside the main service area decreased by 6.5% to EUR 1.24 million. It was mainly impacted by a decrease of storm water disposal service, balanced partly by an increase in the sales of water supply service to Rae area.
- Over pollution fees received have decreased by 1.5% to EUR 0.20 million.
Sales from the operation and maintenance of the main service area storm water and fire hydrant system were EUR 1.08 million, showing a decrease of 10.2% or EUR 0.12 million in the 4th quarter of 2018 compared to the same period in 2017, driven mainly by 53.8% lower storm water volumes, balanced by higher cost per m3.
Sales of construction, design and asphalting services were EUR 1.64 million, increasing by 8.8% or EUR 0.13 million year-on-year. The increase was mainly related to higher pipe construction and asphalting services revenues during the 4th quarter of 2018.
COST OF GOODS AND SERVICES SOLD AND GROSS PROFIT
The cost of goods and services sold amounted to EUR 7.85 million in the 4th quarter of 2018, increasing by 9.4% or EUR 0.67 million compared to the equivalent period in 2017. The increase was mainly influenced by an increase in other costs of goods/services sold, accompanied by higher construction and asphalting services related expenses and chemicals and asset maintenance costs. Higher costs were partly balanced by a decrease in pollution tax and electricity expenses.
| ||4th quarter||Variance 2018/2017|
|Water abstraction charges||-294||-295||-318||1||0.3||%|
|Total direct production costs||-1,804||-1,909||-1,702||105||5.5||%|
|Depreciation and amortis|
|Construction service, design and asphalting||-1,388||-1,328||-617||-60||-4.5||%|
|Other costs of goods/services sold||-1,690||-998||-919||-692||-69.3||%|
|Other costs of goods/services sold total||-6,050||-5,273||-4,577||-777||-14.7||%|
|Total cost of goods/services sold ||-7,854||-7,182||-6,279||-672||-9.4||%|
Total direct production costs (water abstraction charges, chemicals, electricity and pollution tax expenses) amounted to EUR 1.80 million, showing a 5.5% or EUR 0.11 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:
- Chemicals costs increased by 23.4% to EUR 0.50 million, driven mainly by on average 33.6% higher price of methanol and by higher usage of methanol to remove Nitrogen, worth respectively EUR 0.05 million and EUR 0.03 million. Higher chemicals costs in wastewater treatment process were accompanied by higher prices of chlorine and coagulant, worth in total EUR 0.01 million.
- Electricity costs decreased by 8.6% to EUR 0.78 million, driven mainly by 32.5% lower wastewater volumes, worth EUR 0.11 million. Lower costs were partly balanced by increase in treated volumes in water treatment process and refilling of Paunküla reservoir, worth respectively EUR 0.02 million and EUR 0.03 million.
- Pollution tax expense decreased by 33.7% to EUR 0.25 million, mainly due to 32.5% lower treated wastewater volumes, worth EUR 0.12 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 6.05 million, having increased by 14.7% or EUR 0.78 million. The increase came mostly from other costs of goods/services sold and costs related to construction and asphalting services by following reasons:
- Construction and asphalting services costs increased by 4.5% to EUR 1.39 million, mainly due to higher construction and asphalting services revenues mentioned earlier and project specific changes.
- Other costs of goods/services sold increased by 69.3% to EUR 1.69 million, mainly because of higher asset maintenance costs and costs for sludge disposal. Asset maintenance costs increased by 49.6% or EUR 0.45 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 4th quarter of 2018 was EUR 8.38 million, showing a decrease of 4.7% or EUR 0.41 million, compared to the gross profit of EUR 8.79 million for the comparative period of 2017.
ADMINISTRATIVE AND MARKETING EXPENSES, OTHER INCOME AND EXPENSES
Administrative and marketing expenses amounted to EUR 1.42 million, having increased by 8.0% or EUR 0.11 million. The increase was mainly related to higher IT services and tariff dispute related costs.
Other income and expenses amounted to net expenses of EUR 1.66 million, having decreased by 90.6% or EUR 16.04 million. The decrease was mostly impacted by EUR 15.98 million lower provision for third party claims accompanied by profit from sale of some cars. The provision takes into account three years of possible difference in the prices between the tariffs approved by the City of Tallinn in 2010 and the best knowledge of application of CA methodology. The estimation of 40% of the full amount has not been changed since 2017. Still the Company does not consider itself liable to customers for any claims related to the tariffs applied until the new tariffs approved by the Competition Authority are duly implemented. Additional information in Note 5 to the abbreviated accounts.
As a result of the factors listed above the Group’s operating profit for the 4th quarter of 2018 amounted to EUR 5.29 million, being 151.8% or EUR 15.52 million higher than in the corresponding period of 2017. The Group’s operating profit from main business was EUR 5.06 million, being 148.6% or EUR 15.46 million higher compared to 2017. Eliminating the effect of the change of provision for the possible third-party claims the operating profit for the 4th quarter of 2018 and 2017 would have been EUR 6.84 million and EUR 7.30 million, being lower by 6.3% or EUR 0.46 million year-on-year.
The Group’s net financial income and expenses have resulted a net expense of EUR 0.28 million, compared to net expense of EUR 0.22 million in the 4th quarter of 2017. The increase was mainly impacted by lower positive change in the fair value of the swap contracts year-on-year and lower interest costs, worth respectively EUR -0.10 million and EUR +0.04 million.
The standalone swap agreements have been signed to mitigate the long-term floating interest risk. The interest swap agreements are signed for EUR 45 million, EUR 50 million are with floating interest rate. At this point in time the estimated fair value of the swap contracts is negative, amounting to EUR 0.38 million. Effective interest rate of loans (incl. swap interests) in the 4th quarter of 2018 was 1.31%, amounting to interest costs of EUR 0.32 million, compared to the effective interest rate of 1.46% and the interest costs of EUR 0.35 million in the 4th quarter of 2017.
PROFIT BEFORE TAXES AND NET PROFIT
The Group’s profit before taxes and net profit for the 4th quarter of 2018 was EUR 5.01 million, being 148.0% or EUR 15.45 million higher than for the comparative period of 2017. Eliminating the effects of the change of the fair value of swap contracts and the change of provision for the possible third-party claims the Group’s net profit for the 4th quarter of 2018 and 2017 would have been EUR 6.53 million and EUR 6.95 million respectively, showing a decrease of 6.0% or EUR 0.42 million year-on-year.
FINANCIAL RESULTS FOR THE TWELVE MONTHS OF 2018
Statement of comprehensive income
During the twelve months of 2018 the Group’s total sales were EUR 62.78 million, showing an increase by 5.0% or EUR 2.97 million year-on-year. Sales from water and wastewater services for twelve months of 2018 were 52.53 million, increasing 2.5% or EUR 1.29 million year-on-year. 83.7% of sales comprise of sales of water and wastewater services to domestic and commercial customers within and outside of the service area. 5.7% of sales are the fees received from the City of Tallinn for operating and maintaining the storm water system and fire hydrants, 9.6% from construction and asphalting services and 1.1% from other works and services.
| ||12 months||Variance 2018/2017|
|Private clients, incl:||25,765||25,225||24,949||540||2.1||%|
|Water supply service||14,179||13,872||13,720||307||2.2||%|
|Wastewater disposal service||11,586||11,353||11,229||233||2.1||%|
|Corporate clients, incl:||21,246||20,407||20,069||839||4.1||%|
|Water supply service||11,733||11,210||11,075||523||4.7||%|
|Wastewater disposal service||9,513||9,197||8,994||316||3.4||%|
|Outside service area clients, incl:||4,680||4,678||4,400||2||0.0||%|
|Water supply service||1,465||1,346||1,306||119||8.8||%|
|Wastewater disposal service||2,893||2,833||2,709||60||2.1||%|
|Storm water disposal service||322||499||385||-177||-35.5||%|
|Over pollution fee||837||927||778||-90||-9.7||%|
|Total water supply and wastewater disposal service||52,528||51,237||50,196||1,291||2.5||%|
|Storm water treatment and disposal service and fire hydrants service||3,562||3,668||3,671||-106||-2.9||%|
|Construction service, design and asphalting||6,000||4,287||4,511||1,713||40.0||%|
|Other works and services||690||623||604||67||10.8||%|
|SALES REVENUES TOTAL||62,780||59,815||58,982||2,965||5.0||%|
During the twelve months of 2018 there has been an increase in sales to private customers by 2.1% to EUR 25.76 million and to corporate customers within the service area by 4.1% to EUR 21.25 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 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 4th quarter results. Sales to customers outside the main service area stayed at the same level amounting to EUR 4.68 million, being impacted by an increase in the sales of water supply and wastewater disposal services, balanced almost fully by lower storm water disposal services sales. Over pollution fees received have decreased by 9.7% to EUR 0.84 million.
Sales from the operation and maintenance of the main service area storm water and fire hydrant system in the twelve months of 2018 amounted to EUR 3.56 million, showing a decrease of 2.9% or EUR 0.11 million year-on-year, driven mainly by 30.8% lower storm water volumes, balanced partly by higher cost per m3.
Sales of construction, design and asphalting services were EUR 6.00 million, increasing by 40.0% or EUR 1.71 million year-on-year. The increase was mainly related to higher pipe construction services revenues as the Company won some big procurements in Tallinn and other parts of Estonia.
COST OF GOODS AND SERVICES SOLD AND GROSS AND OPERATING PROFITS
| ||12 months||Variance 2018/2017|
|Water abstraction charges||-1,187||-1,168||-1,169||-19||-1.6||%|
|Total direct production costs||-6,743||-6,962||-6,675||219||3.1||%|
|Depreciation and amortisation||-5,177||-5,577||-5,862||400||7.2||%|
|Construction service, design and asphalting||-5,240||-3,638||-4,006||-1,602||-44.0||%|
|Other costs of goods/services sold||-5,151||-3,764||-3,449||-1,387||-36.8||%|
|Other costs of goods/services sold total||-21,851||-18,763||-19,046||-3,088||-16.5||%|
|Total cost of goods/services sold ||-28,594||-25,725||-25,721||-2,869||-11.2||%|
During the twelve months of 2018 the cost of goods sold amounted to EUR 28.59 million, increasing by 11.2% or EUR 2.87 million compared to the equivalent period in 2017. Total direct production costs (water abstraction charges, chemicals, electricity and pollution tax expenses) amounted to EUR 6.74 million, showing a 3.1% or EUR 0.22 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 1.6% to EUR 1.19 million, driven mainly by overall 2.5% increase in abstracted water volumes.
- Chemicals costs increased by 16.2% to EUR 1.74 million, driven by on average 17.9% 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 0.10 million, EUR 0.06 million and EUR 0.03 million. It was additionally accompanied by higher dosage of coagulant due to poor raw water quality, higher coagulant and chlorine prices and by 2.5% higher treated water volumes in water treatment process, worth respectively EUR 0.02 million, prices impact in total EUR 0.03 million and EUR 0.01 million.
- Electricity costs decreased by 10.8% to EUR 2.85 million, driven by on average 9.4% lower electricity prices (including networks fees), worth EUR 0.30 million. Lower costs from prices were accompanied by 14.6% lower wastewater volumes and were partly balanced by 2.5% increase in treated water volumes and by 6.9% higher consumption of electricity per m3 in water treatment process, worth respectively EUR +0.12 million, EUR -0.02 million and EUR -0.05 million.
- Pollution tax expense decreased by 12.5% to EUR 0.96 million, mainly due to 14.6% lower treated wastewater volumes, balanced partly by higher concentration of BOD7, worth respectively EUR +0.16 million and EUR -0.03 million.
Other costs of goods sold (staff costs, depreciation, construction and asphalting services costs and other costs of goods sold) amounted to EUR 21.85 million, having increased by 16.5% or EUR 3.09 million. Changes in other costs of goods sold were mainly driven by the same reasons as mentioned in the 4th quarter results. It was additionally accompanied by 8.6% higher staff costs amounting to EUR 6.28 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 reviewed bonus reserve at the end of 4th quarter of 2018. The higher costs were partly balanced by 7.2% lower depreciation and amortisation costs, which was mainly impacted by lower accelerated depreciation and cost of machinery and equipment depreciation year-on-year.
The Group’s gross profit for the twelve months of 2018 was EUR 34.19 million, showing a slight increase of 0.3% or EUR 0.10 million compared to the comparative period of 2017. The Group’s operating profit for the twelve months of 2018 amounted to EUR 26.94 million, being 147.9% or EUR 16.07 million higher than in the corresponding period of 2017. Eliminating the effect of the change of provision for the possible third-party claims mentioned in 4th quarter results the operating profit for 2018 and 2017 would have been EUR 28.49 million and EUR 28.39 million, being at the same level year-on-year.
The Group’s net financial income and expenses have resulted a net expense of EUR 0.99 million, compared to net expense of EUR 0.94 million in the twelve months of 2017. The increase was mainly impacted by lower positive change in the fair value of the swap contracts year-on-year, balanced by lower interest costs, worth respectively EUR -0.19 million and EUR +0.14 million.
PROFIT BEFORE TAXES AND NET PROFIT
The Group’s profit before taxes for the twelve months of 2018 were EUR 25.95 million, being 161.6% or EUR 16.03 million higher than for the relevant period of 2017. The Group’s net profit for the twelve months of 2018 were EUR 24.15 million, being 234.4% or EUR 16.93 million higher than for the equivalent period of 2017. Eliminating the effects of the change of the derivatives fair value and the change of provision for the possible third-party claims the Group’s net profit for the twelve months of 2018 would have been EUR 24.59 million, showing an increase by 4.4% or EUR 1.05 million year-on-year.
Statement of financial position
In the twelve months of 2018 the Group invested into fixed assets EUR 10.40 million. As of 31.12.2018, non-current tangible assets amounted to EUR 179.19 million and total non-current assets amounted to EUR 179.85 million (31.12.2017: EUR 174.45 million and EUR 175.26 million respectively).
Compared to the year end of 2017 the trade receivables, accrued income and prepaid expenses have been relatively stable showing only a slight decrease of EUR 0.09 million to EUR 7.63 million. The collectability rate continues to be high at 99.7% level, compared to 99.8% at the end of December 2017.
Current liabilities have increased by EUR 3.38 million to EUR 13.03 million compared to the year end of 2017, mainly deriving from reclassification of two installments of NIB loan from long-term to short-term liability.
Deferred income from connection fees has grown compared to the end of 2017 by EUR 3.11 million to EUR 22.75 million.
Provision for possible third party claims has grown compared to the end of 2017 by EUR 1.55 million to EUR 19.07 million by changes mentioned in 4th quarter Other income and expenses results. Additionally, 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 62.4%.
As of 31.12.2018, the cash position of the Group is strong. At the end of December 2018, the cash balance of the Group stood at EUR 61.77 million, which is 24.7% of the total assets (31.12.2017: EUR 44.97 million, forming 19.7% of the total assets).
The biggest contribution to the cash flows comes from main operations. During the twelve months of 2018, the Group generated EUR 34.29 million of cash flows from operating activities, an increase of EUR 1.05 million compared to the corresponding period in 2017. Underlying operating profit continues to be the main contributor to operating cash flows.
In the twelve months of 2018 the result of net cash flows from investing activities was a cash outflow of EUR 6.84 million, a slight decrease of EUR 0.14 million compared to the cash outflow of EUR 6.99 million in the twelve months of 2017. This is made up as follows:
- The cash outflows from investments in fixed assets has increased by EUR 0.98 million compared to 2017 amounting to EUR 10.74 million.
- The compensations received for the construction of pipelines were EUR 3.72 million, showing an increase of EUR 1.02 million compared to the same period of 2017.
In the twelve months of 2018 cash outflow from financing activities amounted to EUR 10.65 million, decreasing by EUR 4.62 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.
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 4th quarter of 2018, the total number of employees was 310 compared to 312 at the end of the same period in 2017. The full time equivalent (FTE) was respectively 296 in 2018 compared to the 300 in 2017. Average number of employees during the twelve months was 316 in both years of 2018 and in 2017.
By gender, employee allocation was as follows:
| ||As of 31.12.2018||As of 31.12.2017|
The total salary costs were EUR 2.19 million for the 4th 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 be up to EUR 0.09 million should the Council want to replace the current Management Board members.
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.
AS Tallinna Vesi is listed on Nasdaq Baltic Main List with trading code TVEAT and ISIN EE3100026436.
As of 31.12.2018, AS Tallinna Vesi shareholders, with a direct holding over 5%, were:
- United Utilities (Tallinn) BV (35.3%)
- City of Tallinn (34.7%)
During the twelve months of 2018 the shareholder structure has been relatively stable compared to the end of 2017. At the end of the 4th quarter of 2018 the pension funds shareholding has decreased, being 1.33% of the total shares compared to 1.43% at the end of 2017.
As of 31.12.2018, the closing price of AS Tallinna Vesi share was EUR 9.60, which is 5.9% (2017: -17.7%) lower compared to the closing price of EUR 10.20 at the beginning of the quarter. During the 4th quarter the OMX Tallinn index decreased by 4.4% (2017: +1.3%).
In the twelve months of 2018, 3,983 deals with the Company’s shares were concluded (2017: 8,476 deals) during which 765 thousand shares or 3.8% of total shares exchanged their owners (2017: 1,345 thousand shares or 6.7%).
The turnover of the transactions was EUR 8.54 million lower than in 2017 comparative period, amounting to EUR 7.95 million.
As of 31.12.2018, 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.
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 4th 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 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:
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 1st half of 2019.
Additional details related with the claim can be found via the following links:
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||4th quarter||4th quarter|| ||12 months||12 months|
|(EUR thousand)||2018||2017|| ||2018||2017|
| || || || || || |
|Costs of goods sold ||-7,854||-7,182|| ||-28,594||-25,725|
|GROSS PROFIT||8,375||8,792|| ||34,186||34,090|
| || || || || || |
|Marketing expenses||-93||-101|| ||-386||-356|
|General administration expenses||-1,330||-1,217|| ||-5,025||-5,028|
|Other income/ expenses (-)||-1,660||-17,698|| ||-1,836||-17,841|
|OPERATING PROFIT||5,292||-10,224|| ||26,939||10,865|
| || || || || || |
|Interest income||7||3|| ||21||15|
|Interest expense||-287||-219|| ||-1,010||-959|
|Other financial income (+)/ expenses (-)||0||0|| ||0||0|
|PROFIT BEFORE TAXES||5,012||-10,440|| ||25,950||9,921|
| || || || || || |
|Income tax on dividends||0||0|| ||-1,800||-2,700|
| || || || || || |
|NET PROFIT FOR THE PERIOD||5,012||-10,440|| ||24,150||7,221|
|COMPREHENSIVE INCOME FOR THE PERIOD||5,012||-10,440|| ||24,150||7,221|
| || || || || || |
|Attributable to:|| || || || || |
|Equity holders of A-shares||5,011||-10,441|| ||24,149||7,220|
|B-share holder||0.60||0.60|| ||0.60||0.60|
| || || || || || |
|Earnings per A share (in euros)||0.25||-0.52|| ||1.21||0.36|
|Earnings per B share (in euros)||600||600|| ||600||600|
|STATEMENT OF FINANCIAL POSITION|| || |
| || || |
|ASSETS|| || |
|CURRENT ASSETS|| || |
|Cash and equivalents||61,769||44,973|
|Trade receivables, accrued income and prepaid expenses||7,631||7,716|
|TOTAL CURRENT ASSETS||69,898||53,146|
| || || |
|NON-CURRENT ASSETS|| || |
|Property, plant and equipment||179,185||174,451|
|TOTAL NON-CURRENT ASSETS||179,850||175,262|
| || || |
|LIABILITIES AND EQUITY|| || |
|CURRENT LIABILITIES|| || |
|Current portion of long-term borrowings||3,823||264|
|Trade and other payables||6,047||6,200|
|TOTAL CURRENT LIABILITIES||13,032||9,651|
| || || |
|NON-CURRENT LIABILITIES|| || |
|Deferred income from connection fees||22,745||19,632|
|Provision for possible third party claims||19,068||17,522|
|TOTAL NON-CURRENT LIABILITIES||133,951||132,941|
| || || |
|EQUITY|| || |
|Share capital ||12,000||12,000|
|Statutory legal reserve||1,278||1,278|
|TOTAL LIABILITIES AND EQUITY||249,748||228,408|
| || || |
| || || |
| || || |
| || || |
|CASH FLOW STATEMENT||12 months||12 months|
| || || |
|CASH FLOWS FROM OPERATING ACTIVITIES|| || |
|Adjustment for depreciation/amortisation||5,790||6,170|
|Adjustment for revenues from connection fees||-295||-258|
|Other non-cash adjustments||-20||-26|
|Profit/loss(+) from sale and write off of property, plant and equipment, and intangible assets||-115||-12|
|Change in current assets involved in operating activities||54||-558|
|Change in liabilities involved in operating activities||1,939||17,064|
|TOTAL CASH FLOW FROM OPERATING ACTIVITIES||34,292||33,245|
| || || |
|CASH FLOWS FROM INVESTING ACTIVITIES|| || |
|Acquisition of property, plant and equipment, and intangible assets||-10,736||-9,761|
|Compensations received for construction of pipelines ||3,716||2,698|
|Proceeds from sales of property, plant and equipment and intangible assets||160||62|
|TOTAL CASH FLOW FROM INVESTING ACTIVITIES||-6,843||-6,986|
| || || |
|CASH FLOWS FROM FINANCING ACTIVITIES|| || |
|Interest paid and loan financing costs, incl swap interests||-1,394||-1,512|
|Repayment of finance lease||-258||-260|
|Income tax on dividends ||-1,800||-2,700|
|TOTAL CASH FLOW FROM FINANCING ACTIVITIES||-10,653||-15,273|
| || || |
|CHANGE IN CASH AND CASH EQUIVALENTS||16,796||10,986|
| || || |
|CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD||44,973||33,987|
| || || |
|CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD||61,769||44,973|
Karl Heino Brookes
Chairman of the Management Board
+372 62 62 200