MANAGEMENT REPORT
RESULTS OF OPERATIONS - FOR THE 1st QUARTER 2008
Overview
In the 1st quarter of 2008 the Company's total sales increased, year on year, by
2.9% to 13.5 mln EUR. Total water and sewerage services sale volumes increased
by 0.4%. Within the service area sales to residential customers increased by
9.5% year on year, sales to commercial customers increased by 10.0% year on
year, and sales to customers outside of the service area increased by 43.0% year
on year, reaching 0.8 mln m3 or 0.4 mln EUR. The Company's profit before taxes
was 5.7 mln EUR, which is a 6.1% decrease compared to 2007. Eliminating the
one-off nitrogen provision release in the 1st quarter of 2007, profit before tax
increased by 9.1%. The Company invested 2.1 mln EUR, of which 0.86 mln EUR was
invested in network extension and developments.
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| mln EUR | Q 1 | Q 1 | Change | Q 1 | Q 1 2007 | Change |
| | 2008 | 2007 | | 2008 | underlying| |
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| Sales | 13,5 | 13,1 | 2,9% | 13,5 | 13,1 | 2,9% |
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| Main operating | 11,6 | 10,3 | 12,3% | 11,6 | 10,3 | 12,3% |
| activities | | | | | | |
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| Other operating | 1,9 | 2,8 | -31,4% | 1,9 | 2,8 | -31,4% |
| activities | | | | | | |
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| Gross profit | 7,6 | 7,7 | -2,2% | 7,6 | 6,9 | 9,9% |
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| Gross profit | 56,0% | 58,8% | -4,9% | 56,0% | 52,4% | 6,9% |
| margin % | | | | | | |
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| Operating profit | 6,4 | 6,8 | -5,3% | 6,4 | 5,9 | 8,4% |
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| Operating profit | 47,4% | 51,5% | -7,9% | 47,4% | 45,0% | 5,4% |
| margin % | | | | | | |
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| Profit before | 5,7 | 6,1 | -6,1% | 5,7 | 5,2 | 9,1% |
| taxes | | | | | | |
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| Profit before | 42,4% | 46,4% | -8,7% | 42,4% | 39,9% | 6,1% |
| taxes margin | | | | | | |
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| Net profit | 5,7 | 6,1 | -6,1% | 5,7 | 5,2 | 9,1% |
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| ROA % | 3,4% | 3,8% | -9,0% | 3,4% | 3,2% | 5,8% |
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| Debt to total | 49,3% | 50,7% | -2,7% | 49,3% | 50,7% | -2,7% |
| capital employed | | | | | | |
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Gross profit margin - Gross profit / Net sales
Operating profit margin - Operating profit / Net sales
Profit before taxes margin - Profit before taxes / Net sales
ROA - Net profit /Total Assets
Debt to Total capital employed - Total Liabilities / Total capital employed
Profit and Loss Statement
1st quarter 2008
Sales
In the 1st quarter of 2008 the Company's total sales increased, year on year, by
2.9% to 13.5 mln EUR. Sales from the Company's main operating activities were
11.6 mln EUR. Sales in the main operating activity principally comprise of sales
of water and treatment of wastewater to domestic and commercial customers within
and outside of the service area, and fees received from the City of Tallinn for
operating and maintaining the stormwater system.
Sales of water and wastewater services were 10.8 mln EUR, a 12.1% increase
compared to the 1st quarter of 2007, resulting from the 11.7% increase in
tariffs from 1 January 2007 for the Company's residential and commercial
customers combined with the factors described below.
Included within this amount were the following increases by sector: within the
service area sales to residential customers increased by 9.5% to 5.7 mln EUR.
Sales to commercial customers increased by 10.0% to 4.5 mln EUR. Sales to
customers outside of the service area - primarily bulk volumes of wastewater
treatment services provided to the surrounding municipalities - increased by
43.0% reaching 832 thousand m3 or 0.4 mln EUR. Over pollution fees received were
0.14 mln EUR higher than in the 1st quarter of 2007.
In the 1st quarter of 2008, the volumes sold to residential customers dropped
1.9% or 143 thousand m3. In our opinion this is partly explainable by the mild
winter and people moving to the surrounding areas of Tallinn. The Company has
billed more properties than in the 1st quarter of 2007, but a combination of the
factors described above has led to the slight reduction in this group.
The volumes sold to commercial customers inside the service area decreased
compared to the relevant period in 2007 due to several factors combined. Part of
the reduction in sales volumes in Tallinn is due to companies moving to the
surrounding municipalities, attracted by cheaper real estate prices. In addition
the sales in 1st quarter of 2008 compared to the 1st quarter of 2007 were
impacted by the fact that one of the Company's biggest industrial customers
moved its facilities out of our area at the end of 2007, this resulted in a
volume loss of 69 thousand m3 in the 1st quarter of 2008. 1st quarter includes
also an exceptional sales totaling 43 thousand m3 for a particular customer who
historically has used its own well.
The real estate market seems to have reached a point of stagnation. Even though
the number of new apartments and business buildings constructed in Tallinn has
continued to increase, a large share of new buildings remain vacant as
commercial customers as well as people in need of space are moving to
surrounding areas due to more affordable real estate prices.
This trend is also reflected in the Company's sales to surrounding areas, which
has increased by 43.0% compared to the same period last year. This reflects the
success of the Company's strategy to re-capture customers leaving Tallinn. The
Company is actively looking for the further expansion opportunities into the
neighboring municipalities.
The sales from the operation and maintenance of the stormwater and firehydrant
system increased by 9.8% to 0.63 mln EUR in the 1st quarter of 2008 compared to
the same period in 2007. This is in accordance with the terms and conditions of
the contract whereby the stormwater and fire hydrant costs are invoiced based on
actual costs and volumes treated. This is contractually agreed up to 2020.
Sales revenues from other operating activities, mainly connections and
stormwater construction, totaled 1.9 mln EUR which is 0.88 mln EUR less than in
the 1st quarter of 2007. In this line the revenue is recorded when it is
probable that the revenues will flow to the company. According to the new
contract concluded with the City of Tallinn on 30th November 2007, the revenue
flow will be more even throughout the year. Before 2008 a considerable amount of
works and revenues were confirmed in the first quarter. Starting from March 2008
the revenue in this line is mainly calculated using the service area domestic
water sales volumes and fixed development rate per cubic meter.
Cost of Goods Sold and Gross Margin
The cost of goods sold for the main operating activity was 4.2 mln EUR in the
1st quarter of 2008, an increase of 1.4 mln EUR or 47.4% from the equivalent
period in 2007. Still the underlying costs increased only by 0.5 mln EUR or
13.5% compared to 1st quarter of 2007, as the 2007 1st quarter results were
impacted by release of the pollution tax accrual which reduced the costs by 0.85
mln EUR.
In the 1st quarter of 2008 the Company has for the fifth successive quarter
recorded zero failures in all pollution measures taken, and as a result the
amount of pollution tax payable reduced by 0.19 mln EUR. This is offset by an
increase in tax rates year on year of 20%. As the pollution level of the
incoming sewerage does vary and the company does not have full control over
stormwater outlets regarding the pollution, we cannot guarantee the achievement
will be repeated in all following quarters of 2008.
The chemical costs were 0.29 mln EUR, this represents an 11.7% decrease compared
to the corresponding period in 2007. This result is the combination of volumes
treated and chemicals dosed, whilst chemical prices stay high, an increase in
this cost line can be expected later in the year.
Electricity costs increased by 0.02 mln EUR or 3.7% in the 1st quarter of 2008
compared to the 1st quarter of 2007 due to higher electricity prices combined
with volumes treated.
Salary expenses increased by 0.24 mln EUR or 28.5% due to number of factors.
Firstly, increased headcount from the new services launched. Secondly, a highly
competitive labour market has led to significant salary inflation. Finally in
the 1st quarter of 2008 the Company restructured and combined departments.
Eliminating these structural changes would give us 18.6% increase in salaries.
This is in line with the increase in average salaries in the Estonian market,
which according to the latest statistics has increased around 20% year on year.
Other cost of goods sold in the main operating activity increased by 0.15 mln
EUR, or 23.7% year on year. This was due to higher costs on a number of support
service contracts, such as transport, security services, maintenance cost,
reflecting the significant increase in labour and services costs in Tallinn. The
Company has taken advantage of the fall in the construction market and
eliminated part of this cost inflation by signing new framework contract at more
competitive prices by end of the quarter. The specific impact to costs increase
was around 0.05 mln EUR in 1st quarter 2008, but we do not assume to repeat it
during the following quarters.
The cost pressure sets the challenge to the management to identify the further
efficiency opportunities through review of processes, procedures and
procurements for example.
As a result of all of the above the Company's gross profit for the 1st quarter
of 2008 was 7.6 mln EUR, which is a decrease of 0.17 mln EUR, or 2.2%, compared
to the gross profit of 7.7 mln EUR for the 1st quarter of 2007. Comparing 1st
quarter gross profit for 2008 to underlying gross profit of the 1st quarter of
2007 there was an increase of 9.9% or 0.68 mln EUR.
Operating Costs and Operating Margin
Marketing expenses increased by 0.01 mln EUR to 0.22 mln EUR during the 1st
quarter of 2008 compared to the corresponding period in 2007. This is partly
the result of the overall salary increase, supplemented by the increase in
depreciation charges due to the Customer Information and Billing system (KLIF).
General administration expenses increased by 0.01 mln EUR to 0.93 mln EUR in the
1st quarter of 2008 as a consequence of an increase in salaries due to the
overall salaries inflation and redundancy packages accounted to 1st quarter of
2008.
Included within all the above cost categories are staff costs. These totaled 1.5
mln EUR in the 1st quarter of 2008, which is a 0.31 mln EUR increase compared to
the same period in 2007, as mentioned earlier this was due to the wide revision
of salaries at the beginning of 2008, supplemented by extra salary cost due to
new activities and redundancy costs totaling 0.08 mln EUR. Without these items
the salary increase would have been 0.23 mln EUR or slightly above 19%.
Other net income/expenses totaled an expense of 0.01 mln EUR in the 1st quarter
of 2008 compared to an income of 0.15 mln EUR in the 1st quarter of 2007- in 1st
quarter of 2007 there was a 0.15 mln EUR recovery of doubtful debt.
As a result of all of the above the Company's operating profit for the 1st
quarter of 2008 was 6.4 mln EUR, a decrease of 0.36 mln EUR compared to an
operating profit of 6.8 mln EUR achieved in the 1st quarter of 2007. Compared to
the underlying operating profit in the 1st quarter of 2007, the operating profit
has increased 8.4% or 0.49 mln EUR in 1st quarter of 2008.
Financial expenses
Net Financial expenses were 0.68 mln EUR in the 1st quarter of 2008, which is an
increase of 0.02 mln EUR or 2.4% compared to the 1st quarter of 2007. The
Company's interest costs have increased by 12.2% compared to the 1st quarter of
2007. This is due to the fact that half of the Company's loans are connected to
the 6 month Euribor rate, which was 4.686% in the 1st quarter of 2008 compared
to 3.736% in the 1st quarter of 2007. The increase in interest expenses is
partially offset by an increase in financial income earned during the 1st
quarter of 2008, as a result of a more favourable cash position and increasing
interest rates.
Profit Before Tax
The Company's profit before taxes for the 1st quarter of 2008 was 5.7 mln EUR,
which is 0.37 mln EUR lower than the profit before taxes of 6.1 mln EUR for the
1st quarter of 2007. Looking at the underlying profit for the 1st quarter of
2007 compared to same period of 2008 there has been an increase of 9.1% or 0.48
mln EUR.
Balance sheet
During the three months of 2008 the Company invested 2.1 mln EUR into fixed
assets. Non-current assets were 138.5 mln EUR at 31 March 2008. Current assets
increased by 4.5 mln EUR to 28.4 mln EUR in the three months of the year,
including cash at bank which increased by 9.5 mln EUR.
Current liabilities decreased by 2.4 mln EUR to 10.4 mln EUR in the three months
of the year. This was mainly due to decrease in Trade and other payables
compared to 2007 year end, as a result of payment of 2007 end capital
investments invoices in 1st quarter of 2008.
The company continues to maintain its leverage level within its target range of
around 50% with total liabilities to total capital employed of 49.3% as at 31
March 2008. Long-term liabilities stood at 71.9 mln EUR at the end of March
2008, consisting almost entirely of the outstanding balance on the two long-term
bank loans.
Cash flow
During 1st quarter of 2008, the Company generated 7.9 mln EUR of cash flows from
operating activities, an increase of 2.4 mln EUR compared to the corresponding
period in 2007. Underlying operating profit continues to be the main driver for
growth, supplemented by debt collection in 1st quarter of 2008.
In the 1st quarter of 2008 net cash inflows from investing activities were 1.7
mln EUR, which is 3.9 mln EUR more than in 2007. This was mainly due to some
large construction revenue invoices that were due and paid in the 1st quarter
2008, offset by increased investment payments. In the 1st quarter the company
invested 2.1 mln EUR - 1.5 mln EUR networks extension and rehabilitation, 0.31
mln EUR Paljassaare wastewater treatment plant and sludge treatment, 0.06 mln
EUR water quality (Ülemiste water treatment plant and raw water) and 0.19 mln
EUR other investments (IT, capital maintenance, meters, etc).
There were no cash outflows from financing activities during 1st quarter
compared to cash outflow of 0.02 mln EUR during the 1st quarter of 2007.
As a result of all of the above factors, the total cash inflow in the 1st
quarter of 2008 was 9.5 mln EUR compared to a cash inflow of 3.2 mln EUR in the
three months of 2007. Cash and cash equivalents stood at 20.9 mln EUR as at 31
March 2008.
Employees
At the end of the 1st quarter of 2008, the number of employees was 317, compared
to 313 at the end of the 1st quarter of 2007.
Dividends and share performance
Based on the results of the 2007 financial year, the Management Board of the
company proposed to pay 15,914,640 EUR of dividends. Of this 639 EUR will be
paid to the owner of the B-share and 15,914,000 EUR, i.e. 0.8 EUR per share to
the owners of the A-shares. Management Board proposed to pay the dividends on
13 June 2008, based on the list of shareholders, which will be fixed at 23.59 on
30 May 2008.
As of 31 March 2008 AS Tallinna Vesi shareholders, with a direct holding over
5%, were:
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| United Utilities (Tallinn) BV | 35.3% |
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| City of Tallinn | 34.7% |
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| Nordea Bank Finland Plc clients account trading | 8.78% |
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| Morgan Stanley + Co International Equity client | 6.81% |
| account | |
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At the end of the quarter, 31 March 2008, the closing price of the AS Tallinna
Vesi share was 12.50 EUR, which is a 3.6% decrease compared to the closing price
of 12.96 EUR at the beginning of quarter, significantly outperforming the market
as the OMX Tallinn index dropped by 14.0% during the quarter.
Operational highlights in the 1st quarter of 2008
The company implemented the development component in 1st quarter 2008 according
to the Services Agreement Amendment which was signed with the City of Tallinn on
30 November 2007. The Services Agreement is extended until 2020 and the
k-coefficient is also fixed until 2020 - 2% in years 2009 to 2010 and 0% in
years 2011 to 2020. No extra capital expenditures (in addition to maintenance
capex and extensions program agreed in the contract) can be imposed on the
company until 2020. According to the agreement the network extension
constructions must be completed by March 2011. To compensate the Company for the
construction and financing costs a specific development component is included
into the main services area domestic water tariff starting from 1 March 2008 to
the end of 2017 and the City of Tallinn will compensate the stormwater
constructions every month 0.28 mln EUR until the end of 2011. The development
component shall be compensated to the customers with direct payment to the
company by the City of Tallinn. The component is bigger during the construction
period (0.58 EUR per m3 until 31 December 2011 and 0.39 EUR per m3 in years 2012
to 2017).
From the beginning of the year water and wastewater tariffs increased as
approved by the City Council in 2007. The tariff increase was 11.7% in the main
service area and was similar outside the main service area, depending on
individual contracts within the municipalities.
The wastewater treatment performance with all outfall effluent samples at all
locations was in the 1st quarter compliant with requirements and as a
consequence the environmental charges for the quarter attracted a 50% reduction.
As a result of the excellent treatment results the company saved 0.18 mln EUR
from environmental taxes in 1st quarter of 2008.
The usage of the web based self service has increased by 4 times compared to the
31 March 2007, more than 10% of invoices were issued via web.
We are pleased to report the compliance with all requirements of the Levels of
Services established by the contract concluded with the City of Tallinn.
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| INCOME STATEMENT |I Quarter | I Quarter | 12 months |
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| (thousand EUR) | 2008 | 2007 | 2007 |
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| | | | |
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| Sales from main operating activities | 11 561 | 10 298 | 41 436 |
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| Revenues from other operating activities | 1 940 | 2 828 | 11 021 |
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| Net sales | 13 501 | 13 126 | 52 457 |
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| | | | |
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| Costs of goods sold (main operating | -4 228 | -2 869 | -13 848 |
| activities) | | | |
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| Costs of goods sold (other operating | -1 718 | -2 535 | -10 110 |
| activities) | | | |
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| | | | |
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| GROSS PROFIT | 7 555 | 7 722 | 28 499 |
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| | | | |
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| Marketing expenses | -216 | -202 | -866 |
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| General administration expenses | -928 | -913 | -3 633 |
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| Other income/ expenses (-) | -5 | 153 | 118 |
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| | | | |
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| OPERATING PROFIT | 6 406 | 6 761 | 24 118 |
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| | | | |
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| Financial income / expenses (-) | -686 | -670 | -2 827 |
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| | | | |
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| PROFIT BEFORE TAXES | 5 720 | 6 091 | 21 291 |
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| | | | |
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| Income tax on dividends | 0 | 0 | -3 533 |
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| | | | |
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| NET PROFIT FOR THE PERIOD | 5 720 | 6 091 | 17 757 |
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| | | | |
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| Attributable to: | | | |
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| Equity holders of A-shares | 5 719 | 6 090 | 17 757 |
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| B-share holder | 0,64 | 0,64 | 0,64 |
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| | | | |
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| Earnings per share in euros | 0,29 | 0,30 | 0,89 |
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| BALANCE SHEET | | | |
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| (thousand EUR) |31.03.2008|31.03.2007 |31.12.2007 |
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| | | | |
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| ASSETS | | | |
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| CURRENT ASSETS | | | |
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| Cash at bank and in hand | 20 908 | 18 551 | 11 403 |
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| Commercial paper | 0 | 631 | 0 |
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| Customer receivables | 6 848 | 7 401 | 11 838 |
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| Accrued income and prepaid expenses | 334 | 273 | 331 |
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| Inventories | 250 | 201 | 233 |
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| Assets for sale | 71 | 97 | 72 |
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| TOTAL CURRENT ASSETS | 28 411 | 27 153 | 23 877 |
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| | | | |
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| NON-CURRENT ASSETS | | | |
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| Tangible assets | 128 721 | 121 833 | 127 375 |
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| Intangible assets | 3 035 | 3 249 | 3 140 |
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| Unfinished assets - non connections | 1 760 | 4 077 | 3 070 |
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| Unfinished pipelines - new connections | 4 800 | 5 254 | 5 756 |
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| Prepayments for fixed assets | 202 | 206 | 345 |
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| TOTAL NON-CURRENT ASSETS | 138 518 | 134 618 | 139 686 |
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| TOTAL ASSETS | 166 929 | 161 771 | 163 562 |
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| | | | |
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| LIABILITIES | | | |
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| | | | |
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| CURRENT LIABILITIES | | | |
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| Current portion of long-term borrowings | 2 665 | 11 | 2 651 |
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| Trade and other payables, incl. dividends | 3 492 | 4 046 | 5 558 |
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| Taxes payable | 1 513 | 1 269 | 1 693 |
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| Short-term provisions | 159 | 49 | 143 |
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| Deferred income | 2 553 | 2 100 | 2 691 |
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| TOTAL CURRENT LIABILITIES | 10 382 | 7 475 | 12 736 |
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| | | | |
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| NON-CURRENT LIABILITIES | | | |
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| Bank loans | 71 932 | 74 541 | 71 932 |
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| Other payables | 7 | 6 | 7 |
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| TOTAL NON-CURRENT LIABILITIES | 71 940 | 74 548 | 71 939 |
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| TOTAL LIABILITIES | 82 321 | 82 023 | 84 675 |
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| | | | |
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| EQUITY CAPITAL | | | |
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| Share capital | 12 782 | 12 782 | 12 782 |
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| Share premium | 24 734 | 24 734 | 24 734 |
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| Statutory legal reserve | 1 278 | 1 278 | 1 278 |
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| Accumulated profit | 40 093 | 34 863 | 22 336 |
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| Net profit for the period | 5 720 | 6 091 | 17 757 |
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| TOTAL EQUITY CAPITAL | 84 607 | 79 749 | 78 887 |
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| | | | |
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| TOTAL LIABILITIES AND EQUITY CAPITAL | 166 929 | 161 771 | 163 562 |
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| CASH FLOW STATEMENT |I Quarter | I Quarter | 12 months |
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| (thousand EUR) | 2008 | 2007 | 2007 |
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| | | | |
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| CASH FLOWS FROM OPERATING ACTIVITIES | | | |
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| Operating profit | 6 406 | 6 761 | 24 118 |
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| Adjustment for depreciation | 1 415 | 1 259 | 5 064 |
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| Adjustment for income and expenses from | -222 | -293 | -911 |
| constructions | | | |
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| Other financial income and expenses | -26 | -15 | -101 |
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| Profit from sale of fixed assets | 0 | 1 | -155 |
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| Expensed fixed assets | 0 | 0 | 30 |
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| Capitalization of operating expenses | -360 | -297 | -1 263 |
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| Movement in current assets involved in | 845 | -979 | -2 049 |
| operating activities | | | |
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| Movement in liabilities involved in | -206 | -929 | -21 |
| operating activities | | | |
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| Interest paid | 0 | -1 | -3 386 |
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| Total cash flow from operating activities | 7 852 | 5 508 | 21 326 |
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| | | | |
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| CASH FLOWS FROM INVESTING ACTIVITIES | | | |
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| Acquisition of fixed assets (incl | -4 621 | -3 327 | -16 997 |
| pipelines construction) | | | |
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| Proceeds from pipelines financed by | 6 018 | 934 | 6 509 |
| construction income | | | |
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| Proceeds from sale of and prepayments | 0 | 1 | 25 |
| received for fixed assets | | | |
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| Proceeds from sale of assets and real | 0 | 0 | 15 |
| estate investments | | | |
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| Interest received | 255 | 145 | 676 |
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| Total cash flow from investing activities | 1 653 | -2 248 | -9 773 |
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| | | | |
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| CASH FLOWS FROM FINANCING ACTIVITIES | | | |
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| Finance lease payments | 0 | -20 | -30 |
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| Dividends paid | 0 | 0 | -12 527 |
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| Income tax on dividends | 0 | 0 | -3 533 |
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| Total cash flow from financing activities | 0 | -20 | -16 091 |
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| | | | |
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| Change in cash and bank accounts | 9 505 | 3 241 | -4 537 |
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| | | | |
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| CASH AND EQUIVALENTS AT THE BEGINNING OF | 11 403 | 15 940 | 15 940 |
| THE PERIOD | | | |
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| | | | |
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| CASH AND EQUIVALENTS AT THE END OF THE | 20 908 | 19 181 | 11 403 |
| PERIOD | | | |
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Additional information:
Siiri Lahe
Chief Financial Officer
+372 6262 262
siiri.lahe@tvesi.ee
