MANAGEMENT REPORT
Chairman's summary
In 2016, the Company’s operational and financial performance was excellent. The majority of key performance indicators (KPIs) were delivered, which given the colder weather in the 1st quarter and associated increase in network disruption, was very good and a testament of all the hard work done by AS Tallinna Vesi staff, during that period.
The water quality in 2016 was 99.93% compliant. Only two samples taken from customer taps, out of the 2,948 samples taken, were non-compliant. The average network leakage for the period was 15.07%, which is higher than the same period in 2015 (14.68%), but attributable to the colder ambient temperatures in the 1st quarter in 2016, resulting in a higher number of bursts within the clean water network.
Besides providing quality drinking water, we are also responsible for a wastewater discharge service to nearly one third of Estonia’s population (460,000). It is therefore extremely important that the wastewater treatment plant in Paljassaare works effectively and in accordance with the stipulated quality requirements, set by the Estonian Ministry of Environment. Throughout 2016, the final effluent leaving Paljassaare was 100% compliant with all stipulated limits.
We continue to make targeted capital investments, renovating or replacing assets based on previous condition surveys and performance data, to ensure the continued reliability of the infrastructure. This includes the 5+5 programme, where 5 km of water and 5 km wastewater network are replaced each year. At the end of 2016, we finished the complex repair of Tihase tunnel collector, through which the wastewater from Mustamäe and Õismäe is directed to Paljassaare. We also constructed water pipe in Tondi that now provides a parallel supply to almost 100,000 people.
Delivering good operational and financial performance is only possible through the continued motivation, commitment and performance of AS Tallinna Vesi staff. We remain focused on the development and training of our employees and ensuring appropriate succession plans are in place. An example of this, is the company’s ongoing graduate and apprentice programmes, which will also inject fresh talent into the business for the future.
Operational performance for 2016
| Drinking water 2016 2015 | ||
| Compliance of water quality at the customers’ tap. | 99.93% | 99.86% |
| Water loss in the water distribution Network. | 15.07% | 14.68% |
| Average duration of water interruptions per property in hours. | 3.44 h | 3.22 h |
| Wastewater | ||
| Number of sewer blockages. | 670 | 737 |
| Number of sewer bursts. | 107 | 127 |
| Wastewater treatment compliance with environmental standards | 100% | 100% |
|
Customer Service |
||
| Number of written complaints | 45 | 67 |
| Number of customer contacts regarding water quality | 166 | 115 |
| Number of customer contacts regarding water pressure | 339 | 337 |
| Number of customer contacts regarding blockages and discharge of storm water | 1,190 | 1,061 |
| Responding written customer contacts, within at least 2 working days | 99.46% | 99.20% |
| Number of failed promises | 4 | 9 |
| Notification of unplanned water interruptions, at least 1 h before the interruption | 98.8% | 98.7% |
Contractual Highlights
- Tariffs of AS Tallinna Vesi continue to be on the same level, based on a temporary injunction granted by the Court for the period of court proceedings.
- The Company was privatised in 2001, with the support and knowledge of the Estonian national government.
- At the end of May 2012, the District Court ruled that AS Tallinna Vesi’s Services Agreement, which was part of the international privatisation, is a public law contract.
- AS Tallinna Vesi believes that the terms and conditions of the international privatisation contract, that has previously been deemed a public law contract, should be protected by the Estonian legal system.
- In May 2014, AS Tallinna Vesi submitted a claim against the Competition Authority to the Tallinn Administrative Court to avoid the expiry of monetary claims. The Company is claiming compensation for potential damages over the lifetime of the international privatisation contract, up until 2020. The claim is based on estimated future volumes and level of consumer price index (CPI). In recent months, CPI has been lower than at the time the claim was originally calculated, with a current undiscounted value of EUR 73 million, compared to the original of EUR 90 million.
- On 5th of June 2015, the Tallinn Administrative Court dismissed the Company’s complaint in the local tariff dispute. The reasoning for the dismissal, was not made disclosed until 12th of October 2015. Tallinn Administrative Court, formed an opinion that the tariffs part of the Services Agreement, which has been deemed to be as a public law contract by the Estonian Courts in 2012, is not binding on the Competition Authority. AS Tallinna Vesi filed the appeal to the Tallinn District Court on 11th of November 2015.
- On 23rd November 2016, the hearing in District Court took place with a decision expected on 26th January 2017.
- On 26th January 2017, the District Court dismissed AS Tallinna Vesi’s appeal in the tariff dispute between AS Tallinna Vesi and Competition Authority. The Company has got right to submit the appeal to the Supreme Court by 27th February 2017.
- In October 2014, in parallel to the local dispute about tariffs, AS Tallinna Vesi and its shareholder United Utilities (Tallinn) B.V have commenced international arbitration proceedings against the Republic of Estonia, for breaching the international treaty and more specifically “the fair and equitable treatment” requirement by changes to the law and activities of the public authorities which have deprived AS Tallinna Vesi of tariffs approved according to the Services Agreement concluded as part of the privatisation in 2001. The arbitration will be carried out through the International Centre for the Settlement of Investment Disputes (ICSID), which is part of the World Bank Group.
- On 17th of June 2015, the timetable of the International Arbitration Proceedings was determined. Procedural orders and decisions issued during the arbitration process, subject to the redaction of the confidential information, are available on the ICSID website.
- International Arbitration Proceedings are being held in parallel, and are not linked to the local dispute.
- In February 2016, the Republic of Estonia submitted their Memorial, with AS Tallinna Vesi and United Utilities (Tallinn) B.V, responding with their counter Memorial in June to which Government of Estonia submitted their rejoinder in September 2016.
- The International Arbitration hearings were held on 7-11 and 14-15 November 2016 in Paris.
- Both parties will submit their Post Hearing Briefs before the end of January 2017.
- AS Tallinna Vesi has continuously stated its belief in fully transparent regulation, and its willingness to enter into meaningful and evidence-based dialogue, which takes into account the privatisation contract that was originally signed back in 2001.
Financial highlights for the 4th quarter 2016
The Group’s sales revenues during the 4th quarter of 2016 were EUR 14.52 million, being down by 0.1% or EUR 0.02 million compared to the same period in 2015.
The gross profit in the 4th quarter of 2016 was EUR 8.24 million, showing an increase of 0.8% or EUR 0.06 million. Increase in gross profit was related to higher water, wastewater and storm water revenues from the main service area, profit from construction and asphalting services and lower chemicals costs. It was balanced by lower water, wastewater and storm water revenues from outside of the service area and by higher staff, electricity and other costs of goods sold costs.
The operating profit was EUR 5.36 million, showing a decrease of 20.5% or EUR 1.38 million. The operating profit was impacted by the above mentioned changes in gross profit, which were additionally impacted by higher doubtful receivables expenses and legal costs in the 4th quarter in 2016 compared to the same period in 2015.
The net profit for the 4th quarter of 2016 was EUR 5.45 million, being lower by 12.6% or EUR 0.78 million. The net profit was mainly impacted by above mentioned changes in operating profit, balanced by lower financial expenses. Lower financial expenses were mostly influenced by the positive change in the fair value of swap contracts in the 4th quarter of 2016 compared to the negative change in the same quarter of 2015. The net profit for the 4th quarter of 2016 and 2015 without the impact resulted from the change of the fair value of swap contracts was EUR 4.99 million and EUR 6.38 million respectively, being lower by 21.7% or EUR 1.39 million year on year.
Other main economic indicators
| EUR million | Q4 2014 | Q4 2015 | Q4 2016 |
Change 16/15 |
12 months 2014 | 12 months 2015 | 12 months 2016 |
Change 16/15 |
|
| Sales | 13.31 | 14.53 | 14.52 | -0.1% | 53.24 | 55.93 | 58.98 | 5.5% | |
| Gross profit | 7.95 | 8.18 | 8.24 | 0.8% | 30.84 | 32.25 | 33.26 | 3.1% | |
| Gross profit margin % | 59.71 | 56.26 | 56.75 | 0.9% | 57.93 | 57.66 | 56.39 | -2.2% | |
| Operating profit | 6.61 | 6.75 | 5.36 | -20.5% | 24.83 | 25.58 | 24.63 | -3.7% | |
| Operating profit - main business | 6.56 | 6.67 | 5.52 | -17.3% | 24.53 | 25.27 | 24.44 | -3.3% | |
| Operating profit margin % | 49.62 | 46.41 | 36.94 | -20.4% | 46.63 | 45.73 | 41.75 | -8.7% | |
| Profit before taxes | 6.29 | 6.24 | 5.45 | -12.6% | 22.73 | 24.36 | 22.89 | -6.0% | |
| Net profit | 6.29 | 6.24 | 5.45 | -12.6% | 17.94 | 19.86 | 18.39 | -7.4% | |
| Net profit margin % | 47.24 | 42.91 | 37.56 | -12.5% | 33.70 | 35.51 | 31.18 | -12.2% | |
| ROA % | 3.06 | 2.98 | 2.55 | -14.4% | 8.73 | 9.50 | 8.61 | -9.4% | |
| Debt to total capital employed % | 57.61 | 57.43 | 58.15 | 1.3% | 57.61 | 57.43 | 58.15 | 1.3% | |
| ROE % | 7.22 | 7.01 | 6.10 | -13.0% | 20.59 | 22.31 | 20.57 | -7.8% | |
| Current ratio | 5.35 | 5.40 | 3.91 | -27.5% | 5.35 | 5.40 | 3.91 | -27.5% |
Gross profit margin – Gross profit / Net sales
Operating profit margin – Operating profit / Net sales
Net profit margin – Net profit / Net sales
ROA – Net profit / Average Total assets for the period
Debt to Total capital employed – Total liabilities / Total capital employed
ROE – Net profit / Total equity
Current ratio – Current assets / Current liabilities
Main business – water and wastewater activities, excl. connections profit and government grants, construction and asphalting services, doubtful debt, other income
RESULTS OF OPERATIONS FOR THE 4th QUARTER 2016
Results for the 4th quarter 2016
Statement of comprehensive income
Sales
As the Company’s tariffs are 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 operation. The Company does not expect significant changes in the consumption in future. There has been incremental increase in the past and that is expected to continue.
In the 4th quarter of 2016 the Group’s total sales were EUR 14.52 million, showing a decrease by 0.1% or EUR 0.02 million year on year. 87.9% 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, 5.3% 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.
|
Revenues from main operating activities EUR thousand |
Quarter IV | Variance 16/15 | |||
| 2016 | 2015 | 2014 | EUR | % | |
| Total water supply and waste water disposal service, incl: | 12,763 | 12,545 | 12,340 | 218 | 1.7% |
| Private clients, incl: | 6,352 | 6,232 | 6,139 | 120 | 1.9% |
| Water supply service | 3,495 | 3,437 | 3,390 | 58 | 1.7% |
| Wastewater disposal service | 2,857 | 2,795 | 2,749 | 62 | 2.2% |
| Corporate clients, incl: | 5,128 | 4,942 | 4,848 | 186 | 3.8% |
| Water supply service | 2,813 | 2,726 | 2,681 | 87 | 3.2% |
| Wastewater disposal service | 2,315 | 2,216 | 2,167 | 99 | 4.5% |
| Outside service area clients, incl: | 1,102 | 1,202 | 1,163 | -100 | -8.3% |
| Water supply service | 329 | 341 | 319 | -12 | -3.5% |
| Wastewater disposal service | 689 | 760 | 741 | -71 | -9.3% |
| Storm water disposal service | 84 | 101 | 103 | -17 | -16.8% |
| Over pollution fee | 181 | 169 | 190 | 12 | 7.1% |
| Storm water treatment and disposal service and fire hydrants service | 830 | 801 | 593 | 29 | 3.6% |
| Construction service, design and asphalting | 773 | 1,037 | 228 | -264 | -25.5% |
| Other works and services | 153 | 151 | 149 | 2 | 1.3% |
Sales from water and wastewater services were EUR 12.76 million, showing a 1.7% or EUR 0.22 million increase compared to the 4th quarter of 2015, resulting from the changes in sales volumes as described below:
- There has been an increase in residential customers’ revenues by 1.9% to EUR 6.35 million. 91% of the total increase in domestic customer volumes comes from apartment blocks, which is also our biggest private customer group. There has been also a slight increase in individual houses customer group.
- Sales to commercial customers within the service area have increased by 3.8% to EUR 5.13 million. Increase is mostly related to industrial segment, accompanied by increase in leisure and other commercial customer segments.
- Sales to customers outside the main service area have shown a decrease by 8.3% to EUR 1.10 million. It is mainly driven by decrease in wastewater revenues by 9.3% to EUR 0.69 million. The decline is related to the sales to Viimsi, as they started to use their new wastewater treatment facilities from the beginning of 2016. While the sales to Viimsi have ceased, the sales to other outside areas in total have increased.
- Over pollution fees received have increased by 7.1% to EUR 0.18 million.
Sales from the operation and maintenance of the main service area storm water and fire hydrant system were EUR 0.83 million, showing an increase of 3.6% or EUR 0.03 million in the 4th quarter of 2016 compared to the same period in 2015.
Sales of construction, design and asphalting services were EUR 0.77 million, having decreased by 25.5% or EUR 0.26 million year on year. The decrease was related to lower asphalting services revenues during the quarter.
Cost of goods sold and Gross profit
The cost of goods sold amounted to EUR 6.28 million in the 4th quarter of 2016, showing 1.2% or EUR 0.08 million decrease compared to the equivalent period in 2015. The cost decrease is mainly influenced by decrease in construction and asphalting services related costs and also by lower chemicals costs, which was partly balanced by higher electricity, staff and other costs of goods sold costs.
|
Cost of goods sold EUR thousand |
Quarter IV | Variance 16/15 | |||
| 2016 | 2015 | 2014 | EUR | % | |
| Water abstraction charges | -318 | -282 | -267 | -36 | -12.8% |
| Chemicals | -336 | -400 | -444 | 64 | 16.0% |
| Electricity | -809 | -747 | -743 | -62 | -8.3% |
| Pollution tax | -239 | -234 | -328 | -5 | -2.1% |
| Total direct production costs | -1,702 | -1,663 | -1,782 | -39 | -2.3% |
| Staff costs | -1,569 | -1,481 | -1,157 | -88 | -5.9% |
| Depreciation and amortization | -1,412 | -1,437 | -1,342 | 25 | 1.7% |
| Construction service, design and asphalting | -617 | -951 | -173 | 334 | 35.1% |
| Other costs of goods sold | -979 | -825 | -909 | -154 | -18.7% |
| Other costs of goods sold total | -4,577 | -4,694 | -3,581 | 117 | 2.5% |
| Total cost of goods sold | -6,279 | -6,357 | -5,363 | 78 | 1.2% |
Total direct production costs (water abstraction charges, chemicals, electricity and pollution tax) were EUR 1.70 million, showing 2.3% or EUR 0.04 million increase year on year. 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 12.8% to EUR 0.32 million, driven mainly by increase in treated volumes.
- Chemicals costs decreased by 16.0% to EUR 0.34 million, driven mainly by 23.1% lower methanol price, worth EUR 0.03 million, and by lower usage of coagulant and methanol in the wastewater treatment process, worth respectively EUR 0.04 million and EUR 0.02 million. Savings were balanced by increase in usage of different chemicals in water treatment due to higher treated water volumes and poor raw water quality, worth in total EUR 0.02.
- Electricity costs increased by 8.3% to EUR 0.81 million. It was related to increase in treated volumes and electricity usage, worth EUR 0.07 million, balanced by on average 2.2% lower electricity prices, worth EUR 0.02 million.
- Pollution tax expense increased by 2.1% to EUR 0.24 million, due to increase in treated sewage volumes, balanced by lower pollution load of different pollutants.
Other costs of goods sold (staff costs, depreciation, construction and asphalting services costs and other costs of goods sold) amounted to EUR 4.58 million, having decreased by 2.5% or EUR 0.12 million. The decrease came from costs related to construction and asphalting services, balanced by increase in staff costs and other costs of goods sold costs. Decrease in construction and asphalting services costs by 35.1% to EUR 0.62 million was related to a decrease in construction and asphalting services revenues mentioned earlier. Staff costs increased by 5.9% to EUR 1.57 million. It was mostly driven by the review of bonus reserve in the 4th quarter of 2016. Other costs of goods sold increase is mainly related to higher use of different rental mechanisms, worth EUR 0.05 million.
As a result of all above the Group’s gross profit for the 4th quarter of 2016 was EUR 8.24 million, showing an increase of 0.8% or EUR 0.06 million, compared to the gross profit of EUR 8.18 million for the comparative period of 2015.
Administrative and marketing expenses, other income and expenses
Administrative and marketing expenses were EUR 2.54 million, showing an increase of 86.6% or EUR 1.18 million. Most of the increase came from higher tariff disputes related legal and consultation fees. Legal fees continue to be at a high level during the time the Company has ongoing local and international disputes. Other income and expenses increased by EUR 0.27 million to EUR 0.34 million, being mostly impacted by increase in doubtful receivables.
Operating profit
As a result of the factors listed above the Group’s operating profit for the 4th quarter of 2016 totalled EUR 5.36 million, being 20.5% or EUR 1.38 million lower than in the corresponding quarter of 2015. The Group’s operating profit from main business was 17.3% or EUR 1.15 million lower compared to 2015.
Financial expenses
The Group’s net financial income and expenses have resulted a net income of EUR 0.09 million, compared to net expense of EUR 0.51 million in the 4th quarter of 2015. It was mainly impacted by a positive change of the fair value of the swap contracts year on year, worth EUR 0.60 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, totalling EUR 1.32 million. Effective interest rate of loans (incl. swap interests) in the 4th quarter of 2016 was 1.58%, amounting to interest costs of EUR 0.38 million, compared to the effective interest rate of 1.57% and the interest costs of EUR 0.38 million in the 4th quarter of 2015.
Profit before taxes and Net profit
The Group’s profit before taxes and net profit for the 4th quarter of 2016 was EUR 5.45 million, being 12.6% or EUR 0.78 million lower than for the 4th quarter of 2015, resulting mainly from increased inside service area revenues and decreased net financial expenses, balanced by the increased costs as described above. Eliminating the influence of the derivatives fair value, the Group’s net profit for the 4th quarter of 2016 would have been EUR 4.99 million, showing a decrease by 21.7% or EUR 1.39 million compared to the relevant period in 2015.
Results for the twelve months of 2016
Statement of comprehensive income
Sales
During the twelve months of 2016 the Group’s total sales were EUR 58.98 million, showing an increase by 5.5% or EUR 3.05 million year on year.
Sales from water and wastewater services for twelve months of 2016 were EUR 50.20 million, increasing 1.8% or EUR 0.90 million compared to the twelve months of 2015. 85.1% of sales comprised of sales of water and wastewater services to domestic and commercial customers within and outside of the service area. 6.2% of sales were the fees received from the City of Tallinn for operating and maintaining the storm water system and fire hydrants, 7.6% from construction and asphalting services and 1.0% from other works and services.
|
Revenues from main operating activities EUR thousand |
12 months | Variance 16/15 | |||
| 2016 | 2015 | 2014 | EUR | % | |
| Total water supply and waste water disposal service, incl: | 50,196 | 49,297 | 48,599 | 899 | 1.8% |
| Private clients, incl: | 24,949 | 24,408 | 24,154 | 541 | 2.2% |
| Water supply service | 13,720 | 13,436 | 13,303 | 284 | 2.1% |
| Wastewater disposal service | 11,229 | 10,972 | 10,851 | 257 | 2.3% |
| Corporate clients, incl: | 20,069 | 19,358 | 19,086 | 711 | 3.7% |
| Water supply service | 11,075 | 10,736 | 10,664 | 339 | 3.2% |
| Wastewater disposal service | 8,994 | 8,622 | 8,422 | 372 | 4.3% |
| Outside service area clients, incl: | 4,400 | 4,765 | 4,521 | -365 | -7.7% |
| Water supply service | 1,306 | 1,280 | 1,153 | 26 | 2.0% |
| Wastewater disposal service | 2,709 | 3,011 | 2,957 | -302 | -10.0% |
| Storm water disposal service | 385 | 474 | 411 | -89 | -18.8% |
| Over pollution fee | 778 | 766 | 838 | 12 | 1.6% |
| Storm water treatment and disposal service and fire hydrant service | 3,671 | 3,357 | 3 073 | 314 | 9.4% |
| Construction service, design and asphalting | 4,511 | 2,724 | 944 | 1,787 | 65.6% |
| Other works and services | 604 | 550 | 625 | 54 | 9.8% |
During the twelve months of 2016 there has been a 2.2% or EUR 0.54 million increase in the sales to residential customers and 3.7% or EUR 0.71 million increase in the sales to the commercial customers within the service area. Increase in the sales to residential customers comes from different private customer segments. The sales increase in commercial customers is mostly related to industrial and other customer segments. The sales revenues from outside service area customers for water, wastewater and storm water services have decreased 7.7% or EUR 0.37 million compared to the twelve months of 2015, being mainly influenced by Viimsi having their own wastewater treatment facilities from the beginning of the year as mentioned earlier, balanced by higher sales of services to other outside services areas.
Sales from the operation and maintenance of the main service area storm water and fire hydrant system in the twelve months of 2016 were EUR 3.67 million, showing an increase of 9.4% or EUR 0.31 million year on year.
Sales of construction, design and asphalting services were EUR 4.51 million, increasing by 65.6% or EUR 1.79 million year on year. Increase was mainly a result of different pipe construction projects.
Cost of goods sold and Gross and Operating profits
|
Cost of goods sold EUR thousand |
12 months | Variance 16/15 | |||
| 2016 | 2015 | 2014 | EUR | % | |
| Water abstraction charges | -1,169 | -1,101 | -1,057 | -68 | -6.2% |
| Chemicals | -1,308 | -1,531 | -1,737 | 223 | 14.6% |
| Electricity | -3,107 | -3,035 | -3,032 | -72 | -2.4% |
| Pollution tax | -1,091 | -1,002 | -2,163 | -89 | -8.9% |
| Total direct production costs | -6,675 | -6,669 | -7,989 | -6 | -0.1% |
| Staff costs | -5,729 | -5,603 | -4,880 | -126 | -2.2% |
| Depreciation and amortization | -5,862 | -5,690 | -5,369 | -172 | -3.0% |
| Construction service, design and asphalting | -4,006 | -2,398 | -784 | -1,608 | -67.1% |
| Other costs of goods sold | -3,449 | -3,319 | -3,376 | -130 | -3.9% |
| Other costs of goods sold total | -19,046 | -17,010 | -14,409 | -2,036 | -12.0% |
| Total cost of goods sold | -25,721 | -23,679 | -22,398 | -2,042 | -8.6% |
Total direct production costs (water abstraction charges, chemicals, electricity and pollution taxes) were EUR 6.68 million, showing a slight increase by 0.1% or EUR 0.01 million year on year. Increase in costs came from the decrease in chemicals costs, balanced by increase in all other direct production costs as described below:
- Water abstraction charges increased by 6.2% to EUR 1.17 million, driven by increase in treated volumes.
- Chemicals costs decreased by 14.6% to EUR 1.31 million, driven mainly by on average 30.0% lower methanol price and smaller use of different chemicals to remove pollutants in wastewater treatment process, worth respectively EUR 0.17 million and EUR 0.09 million, balanced by the increased water treatment process chemicals costs driven by increase in usage and treated volumes, worth EUR 0.04 million.
- Electricity costs have increased by 2.4% to EUR 3.11 million. Electricity costs increase was related to increase in treated volumes and in usage, worth EUR 0.18 million, balanced by on average 3.2% lower electricity prices, worth EUR 0.11 million.
- Pollution tax expense increased by 8.9% to EUR 1.09 million, driven mainly by the increase in treated sewage volumes, worth EUR 0.11 million, balanced by lower nitrogen pollution load, worth EUR 0.05 million.
Other costs of goods sold (staff costs, depreciation, construction and asphalting services costs and other costs of goods sold) amounted to EUR 19.05 million, being higher by 12.0% or EUR 2.04 million compared to the same period in 2015. Increase came from higher costs in all other costs of goods sold costs groups impacted mainly by the same reasons as mentioned earlier in 4th quarter results.
The gross profit for the twelve months of 2016 was EUR 33.26 million, being 3.1% or EUR 1.01 million higher compared to the same period in 2015. The operating profit was EUR 24.63 million, showing a decrease by 3.7% or EUR 0.95 million during the twelve months of 2016. The decrease in operating profit was driven mostly by the changes in operating profit mentioned earlier in 4th quarter results.
Financial expenses
The Group’s net financial income and expenses have resulted a net expense of EUR 1.74 million, compared to net expense of EUR 1.22 million in the twelve months of 2015. The net financial expenses were influenced by the decrease in interest costs by EUR 0.68 million, which was supplemented by the negative non-monetary impact of the change in the fair value of the swap contracts the Company has entered. The negative non-monetary impact for 2016 expenses is EUR 0.32 million (2015: positive impact EUR 0.83 million).
Profit before taxes and Net profit
The Group’s profit before taxes for the twelve months of 2016 was EUR 22.89 million, showing a 6.0% or EUR 1.47 million decrease compared to the relevant period in 2015. The Group’s net profit for the twelve months of 2016 was EUR 18.39 million, which is 7.4% or EUR 1.47 million lower than the net profit for equivalent period in 2015. Eliminating the effects of the derivatives fair value, the profit before taxes and the net profit would have been in twelve months of 2016 respectively EUR 23.20 million and EUR 18.70 million (as of 31st December 2015 EUR 23.53 million and EUR 19.03 million respectively).
Statement of financial position
In the twelve months of 2016 the Group invested EUR 14.95 million into fixed assets. As of 31st December 2016 non-current tangible assets amounted to EUR 171.18 million and total non-current assets amounted to EUR 172.01 million (31st December 2015: EUR 162.73 million and EUR 163.63 million respectively).
Compared to the year end of 2015 the receivables and prepayments have shown a decrease in the amount of EUR 0.01 million to EUR 7.17 million. The collection rate of receivables continues to be high, being 99.49% compared to 99.74% in the 4th quarter of 2015.
Current liabilities have increased by EUR 2.22 million to EUR 10.64 million compared to the year end of 2015. Increase mainly derives from increased prepayments of connections in construction process by EUR 0.75 million and increase in trade and other payables by EUR 1.44 million, which is related to increased construction activities and investments related liabilities.
Deferred income from connection fees has grown compared to the end of 2015 by EUR 2.02 million to 17.05 million.
The Group’s loan balance has remained stable at EUR 95 million. The weighted average interest risk margin for the total loan facility is 0.95%.
The Group has a Total debt/Total assets level as expected of 58.1%, in range of 55%-65%, reflecting the Group’s equity profile. This level is consistent with the same period in 2015 when the Total debt/Total assets ratio was 57.4%.
Contingent liability regarding the tariff risk
In the 4th quarter of 2011 the Group evaluated and noted an exceptional off-balance sheet contingent liability, which could cause an outflow of economic benefits of up to EUR 36 million. In the 4th quarter of 2016 the Group re-evaluated the liability, which now stands at EUR 43 million, as per note 14 to the accounts. The re-evaluation is made annually at the end of the year.
Cash flow
As of 31st December 2016 the cash position of the Group is strong. At the end of December 2016 the cash balance of the Group stood at EUR 33.99 million, which is 15.9% of the total assets (31st December 2015: EUR 37.82 million, forming 18.1% of the total assets).
The biggest contribution to the cash flows comes from main operations. During the twelve months of 2016, the Group generated EUR 31.87 million of cash flows from operating activities, an increase of EUR 0.76 million compared to the corresponding period in 2015. Underlying operating profit continues to be the main contributor to operating cash flows.
In the twelve months of 2016 the result of net cash flows from investing activities was a cash outflow of EUR 11.43 million, an increase of EUR 4.56 million compared to the cash outflow of EUR 6.87 million in the twelve months of 2015. This is made up as follows:
- The cash outflows from investments in fixed assets have increased by EUR 1.03 million compared to 2015 amounting to EUR 14.53 million.
- The compensations received for the construction of pipelines were EUR 3.00 million, showing a decrease of EUR 3.50 million compared to the same period of 2015. It is mostly related to the extension program for which last payments were received in the 1st quarter of 2015.
In the twelve months of 2016 cash outflow from financing activities amounted to EUR 24.28 million, decreasing by EUR 0.71 million compared to the same period in 2015. The change was mainly related to reduction in interest payments by EUR 0.67 million related to renewal of swap contracts in the 2nd quarter of 2015. Most of the outflow was comprised of the dividends and income tax on dividends payment, respectively in the amount of EUR 18.00 million and EUR 4.50 million in both years.
Employees
Competent and engaged employees are the key to any business. The Group is committed to creating a work environment where everyone is respected and valued. We have described our human resource management procedures, including but not limited to recruitment, remuneration, evaluation and training 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 that they have access to the same opportunities as is reasonably 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; sexuality orientation or marital status.
At the end of the 4th quarter of 2016, the total number of employees was 311 compared to 323 at the end of the 4th quarter of 2015. The full time equivalent (FTE) was respectively 301 in 2016 compared to the 311 in 2015. Average number of employees (FTE) during the twelve months was respectively 308 in 2016 and 308 in 2015.
By gender, employee allocation was as follows:
| As of 31st December 2016 | Women | Men | Total |
| Group | 87 | 224 | 311 |
| Management Team | 12 | 13 | 25 |
| Executive Team | 4 | 4 | 8 |
| Management Board | 1 | 2 | 3 |
| Supervisory Board | 0 | 9 | 9 |
| As of 31st December 2015 | Women | Men | Total |
| Group | 99 | 224 | 323 |
| Management Team | 11 | 9 | 20 |
| Executive Team | 6 | 3 | 9 |
| Management Board | 1 | 2 | 3 |
| Supervisory Board | 0 | 9 | 9 |
The total salary costs were EUR 2.09 million for the 4th quarter of 2016, 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 0.08 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.
According to the dividend policy, which is also published on Company’s website, the Company will maintain dividends to shareholders at the same amount in real terms, i.e. dividends will increase in line with inflation each year.
In the annual general meeting of shareholders held on 2nd of June 2016, 90 cents dividends per share and the total dividend pay-out from the profit of 2015 net income in the amount of EUR 18.0 million was approved. It is in accordance with the Company’s dividend policy. There has been no change compared to 2014 and 2015 in dividends of 90 cents per share.
Dividends were paid out on 27th of June 2016.
Share performance
AS Tallinna Vesi is listed on NASDAQ OMX Main Baltic Market with trading code TVEAT and ISIN EE3100026436.
As of 31st December 2016 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 2016 the shareholder structure has been relatively stable compared to the end of 2015. At the end of 4th quarter 2016 the pension funds owned 2.11% of the total shares compared to 1.88% at the end of 4th quarter 2015.
As of 31st December 2016, the closing price of AS Tallinna Vesi share was EUR 13.80, which is -1.4% (2015: 0.0%) lower compared to the closing price of EUR 14.00 at the beginning of the quarter. During the same period the OMX Tallinn index increased by 7.4% (2015: 4.1%).
In the twelve months of 2016, 6,502 deals with the Company’s shares were concluded (2015: 7,818 deals) during which 1,048 thousand shares or 5.2% of total shares exchanged their owners (2015: 1,581 thousand shares or 7.9%).
The turnover of the transactions was EUR 7.03 million lower than in 2015, amounting to EUR 14.71 million.
Corporate structure
As of 31st December 2016, the Group consisted of 2 companies. The subsidiary Watercom OÜ is wholly owned by AS Tallinna Vesi and consolidated to the results of the Company.
Corporate Governance
Supervisory Council
Supervisory Council plans and organises the management of the Company and supervises the activities of the Management Board. According to AS Tallinna Vesi articles of association Supervisory Council consists of 9 members, who are appointed for two years. There has been no changes in Supervisory Council members in the 4th quarter of 2016. In the annual general meeting four of the Supervisory Council members were re-elected (more information here).
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 12 to the financial statements as well as from the Company’s webpage:
http://tallinnavesi.ee/en/Investor/Corporate-Governance/Supervisory-Board
http://tallinnavesi.ee/en/Investor/Corporate-Governance/Audit-Committee
http://tallinnavesi.ee/en/Investor/Corporate-Governance/Corporate-Governance-Report
Management Board
Management Board is a governing body, which represents and manages AS Tallinna Vesi in its daily operations in accordance with the legal requirements as well as the Articles of Association. The Management Board must act economically in the most efficient way taking into consideration the interest of the Company and its shareholders and ensure the sustainable development of the Company in accordance with the set objectives and strategy.
To ensure that the company’s interests are met in the best way possible, the Management and Supervisory Boards shall extensively collaborate. Meetings of Management and Supervisory Board members are held at least once a quarter. In those meetings the Management Board informs the Supervisory Council about all significant issues in Company’s business operations, the fulfilment of the company’s short and long-term goals are being discussed and the risks impacting them. For every meeting of the Management Board prepares report and submits the report in advance with the sufficient time for the Supervisory Board to study it.
According to the Articles of Association the Management Board consists of 2-5 members, who are elected for 3 years.
Starting from 2nd of June 2014 there are 3 members of the Management Board of AS Tallinna Vesi: Karl Heino Brookes (Chairman of the Board, with the powers of the Management Board Member until 20th of March 2017), Aleksandr Timofejev (with the powers of the Management Board Member until 29th of October 2018) and Riina Käi (with the powers of the Management Board Member until 29th of October 2018).
Additional information on the members of the Management Board can be found from the Company’s website:
http://tallinnavesi.ee/en/Investor/Corporate-Governance/Management-Board
Future actions & risks
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 2017.
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, both locally as well as internationally. AS Tallinna Vesi has published all relevant materials on its website (http://www.tallinnavesi.ee/en/Investor/Regulation and https://www.tallinnavesi.ee/en/investor/stock-announcements) and to the Tallinn Stock Exchange.
At this point in time the Company will not speculate on future developments and possible outcomes or timing of the proceedings.
Karl Heino Brookes
Chairman of the Management Board
+372 62 62 204
karl.brookes@tvesi.ee
