Market announcement

Title

Results of operations for the 1st quarter of 2011

Message

MANAGEMENT REPORT

RESULTS OF OPERATIONS - FOR THE 1st QUARTER 2011



Overview

During 2011 the Company's total sales increased, year on year, by 1.4% to 12.4
mln EUR. The Company's underlying operating profit from water and wastewater
related activities increased by 1.7% to 6.6 mln EUR in 2011 compared to 2010.
Profits from other activities (mainly construction and developments) increased
by 35.2% to 0.32 mln EUR compared to the 2010. The Company's profit before
taxes was 8.0 mln EUR, which is an increase of 52.6% or 2.8 mln EUR, compared
to 2010 as result of change of fair value of financial instruments. 





--------------------------------------------------------------------------------
mln €                      1 Q      1 Q    Change   3 months   3 months   Change
                          2011     2010               2011       2010           
Sales                       12,4     12,2    1,4%       12,4        12,2    1,4%
Gross profit                 7,5      7,6   -1,1%        7,5         7,6   -1,1%
Gross profit margin %       60,6     62,2   -2,5%       60,6        62,2   -2,5%
Operating profit             6,9      6,7    2,9%        6,9         6,7    2,9%
Operating profit - main      6,6      6,5    1,7%        6,6         6,5    1,7%
 business                                                                       
Operating profit margin     55,7     54,9    1,5%       55,7        54,9    1,5%
 %                                                                              
Profit before taxes          8,0      5,2   52,6%        8,0         5,2   52,6%
Net profit                   8,0      5,2   52,6%        8,0         5,2   52,6%
Net profit margin %         64,4     42,8   50,5%       64,4        42,8   50,5%
ROA %                        4,2      2,9   43,1%        4,2         2,9   43,1%
Debt to total capital       57,1     47,1   21,4%       57,1        47,1   21,4%
 employed                                                                       
--------------------------------------------------------------------------------

Gross profit margin - Gross profit / Net sales

Operating profit margin - Operating profit / Net sales

Net Profit margin - Net Profit / Net sales

ROA - Net profit /Total Assets

Debt to Total capital employed - Total Liabilities / Total capital employed

Main business - water and wastewater activities, excl. connections profit and
government grants 



Profit and Loss Statement



1st quarter 2011

Sales



In the 1st quarter of 2011 the Company's total sales increased, year on year,
by 1.4% to 12.4 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 storm water system. 



Sales of water and wastewater services were 11.4 mln EUR, a 1.0% increase
compared to the 1st quarter of 2010, resulting from the slight rise in sales
volumes as described below. 



Within the service area, sales to residential customers decreased by 0.7% to
6.0 mln EUR. Sales to commercial customers increased by 5.1% to 4.4 mln EUR.
Sales to customers outside of the service area decreased by 4.7% to 0.82 mln
EUR in the 1st quarter of 2011. Over pollution fees received were 0.20 mln EUR,
a 6.5% decrease compared to the 1st quarter of 2010. 



In the 1st quarter of 2011, the volumes sold to residential customers decreased
by 0.4% year on year, which is still lower decrease than we faced in previous
quarters of 2010. 



The volumes sold to commercial customers inside the service area have risen,
reflecting a 5.9% increase compared to the same period in 2010. The negative
impact from an industrial customer who left our service area from April 2010
was almost balanced by a one off impact from another customer with higher
consumption in 1st quarter of 2011 due to issues with the technology. The sales
volumes increased mainly due to improvement in leisure sector and related
industrial services as result of pick up in tourism sector. 



Outside service area sales volumes were 17.6% lower than in the 1st quarter of
2010. The main factor in this decrease was lower storm water volumes in the 1st
quarter of 2011 compared to 2010, due to long and cold winter. 



The sales from the operation and maintenance of the storm water and
fire-hydrant system increased by 6.7% to 0.85 mln EUR in the 1st quarter of
2011 compared to the same period in 2010. This is in accordance with the terms
and conditions of the contract whereby the storm water and fire hydrant costs
are invoiced based on actual costs and volumes treated. 



Cost of Goods Sold and Gross Margin



The cost of goods sold for the main operating activity was 4.9 mln EUR in the
1st quarter of 2011, an increase of 0.25 mln EUR or 5.5% from the equivalent
period in 2010. 



In the 1st quarter of 2011 the Company achieved the beneficial 0.5 coefficient
for pollution tax similarly to the 1st quarters of earlier years, and thereby
the amount of pollution tax payable was 0.28 mln EUR compared to 0.24 mln EUR
in the 1st quarter of 2010. In addition to the increase in volumes in 1st
quarter of 2011 the increase in pollution tax payable is generated by the
increase in tax rates year on year by 14.8%. To mitigate the nitrogen treatment
and tax risk discussed throughout the 2010, we are continuing with the
investment into an additional stage of waste water treatment and according to
the construction schedule the works should be completed in the beginning of the
3rd quarter of 2011. 



Chemical costs were 0.25 mln EUR, representing a 24.4% decrease compared to the
corresponding period in 2010 despite of the slight increase in rates. The need
to dose chemicals was lower in combination of the volumes, concentration of
pollutants and water temperature. 



Electricity costs increased by 0.10 mln EUR or 16.2% in the 1st quarter of 2011
compared to the 1st quarter of 2010, mainly due to higher electricity prices as
a result of three sites buying electricity from the open market starting from
2nd quarter of 2010. 



Salary expenses within costs of goods sold increased in the 1st quarter of
2011, year on year, by 0.12 mln EUR or 11.8% in combination of performance
related pay accrual and small increase in salaries. Other salary lines had
similar impact. 



Other cost of goods sold in the main operating activity decreased 0.01 mln EUR,
or 0.9% year on year, mainly due to more efficient operation and less leakage
repair works needed compared to 1st quarter of 2010. 



As a result of all of the above the Company's gross profit for the 1st quarter
of 2011 was 7.5 mln EUR, which is a decrease of 0.10 mln EUR, or 1.1%, compared
to the gross profit of 7.6 mln EUR for the 1st quarter of 2010. 



Operating Costs and Operating Margin



Marketing expenses decreased by 0.004 mln EUR to 0.20 mln EUR during the 1st
quarter of 2011 compared to the corresponding period in 2010. This is mainly
the result of a discussed increase in salaries expenses. 



In the 1st quarter of 2011 the General administration expenses increased by
0.06 mln EUR year on year to 0.90 mln EUR. Within this group the salary costs
increase was partly related to the transfer of management services to the
salary line. Still the increase in consultancies balanced the transferred cost
within other costs. 



Other net income/expenses



The majority of the income in Other net income/expenses relates to
constructions and government grants. The driver for this income stream is the
connections activity in Tallinn and reassessment of the profit margins from the
activity. Income and expenses from constructions and government grants totaled
a net income of 0.32 mln EUR in the 1st quarter of 2011 compared to a net
income of 0.23 mln EUR in the 1st quarter of 2010, this line varies throughout
the year depending on construction volumes and estimates to the profit margins
on projects completed. 



The rest of the other income/expenses totaled an income of 0.15 mln EUR in the
1st quarter of 2011 compared to an expense of 0.01 mln EUR in the 1st quarter
of 2010. This line was mainly impacted by the excellent debt collection and
related decrease in bad debt accrual in the 1st quarter of 2011. 



As a result the Company's underlying operating profit from sales of water and
wastewater for the 1st quarter of 2011 totaled 6.6 mln EUR compared to 6.5 mln
EUR in the corresponding quarter in 2010. In total the Company's operating
profit for all activities for the 1st quarter of 2011 was 6.9 mln EUR, an
increase of 0.2 mln EUR compared to an operating profit of 6.7 mln EUR achieved
in the 1st quarter of 2010. Year on year the operating profit for the 1st
quarter has increased by 2.9%. 



Financial expenses



Net Financial revenues/expenses were 1.1 mln EUR in the 1st quarter of 2011,
which is a positive variance of 2.6 mln EUR or 238.4% compared to the net
expenses in the 1st quarter of 2010. The movement in net financial costs is
mainly the result of revaluation of the fair value of swap agreements as result
of increased interest rates and forecasts for the future. 



The Company has mitigated majority of the long term floating interest risk with
5 interest swap agreements, each with a principal value of 15 mln EUR. At this
point in time the estimated fair value of these swap contracts is still
negative, totaling 0.77 mln EUR, with a positive revaluation in the 1st quarter
2011 in the amount of 1.5 mln EUR which offsets the interest costs increase
during the 1st quarter of 2011 thus contributing to a net financial income. In
the 1st quarter of 2010 the impact of fair value of swap agreements had
negative impact to the net financial expenses. 



Profit Before Tax



The Company's profit before taxes for the 1st quarter of 2011 was 8.0 mln EUR,
which is 2.8 mln EUR higher than the profit before taxes of 5.2 mln EUR for the
1st quarter of 2010, mainly as the result of the discussed change in fair value
of swap agreements. 



Balance sheet



During the three months of 2011 the Company invested 2.7 mln EUR into fixed
assets. Non-current assets were 150.3 mln EUR at 31 March 2011. Current assets
increased by 5.7 mln EUR to 39.4 mln EUR in the three months of the year, with
customer receivables decreasing by 1.5 mln EUR and cash at bank increasing by
7.2 mln EUR. 



Current liabilities decreased by 0.9 mln EUR to 15.0 mln EUR in the three
months of the year. This was mainly due to a 0.9 mln EUR decrease in Trade
payables. 



The Company has a leverage level as expected of 57.1% with the future target
range around 60%. Long-term liabilities stood at 93.4 mln EUR at the end of
March 2011, consisting almost entirely of the outstanding balance of three
long-term bank loans. As of 31 March 2010 7.5 mln EUR of the total 95 mln EUR
loan capital were recorded within short term liabilities in accordance with the
signed loan agreements. In the 1st quarter the Company held loan negotiations
to ensure the long-term financing. The weighted average interest margin for the
total available facility is 0.67%. 



Cash flow



During the three months of 2011, the Company generated 9.2 mln EUR of cash
flows from operating activities, an increase of 1.6 mln EUR compared to the
corresponding period in 2010. 2011 operating cash flows were above 2010 cash
flows mainly due to the payments of overdue debts in 2011. Underlying operating
profit still continues to be the main contributor to operating cash flows. 



In the three months of 2011 net cash outflows from investing activities were
2.0 mln EUR, which is 0.32 mln EUR more than in 2010. This is the combination
of increased inflow due to timing of compensations received for the
construction of pipelines and even higher increase of the capital expenditures
due to different timing year on year. At the end of 1st quarter of 2011 the
cash outflows related to the fixed asset investments were 3.8 mln EUR. 



There were no cash outflows/inflows from financing activities during the three
months of 2011. 



As a result of all of the above factors, the total cash inflow in the three
months of 2011 was 7.2 mln EUR compared to a cash inflow of 5.9 mln EUR in the
three months of 2010. Cash and cash equivalents stood at 20.4 mln EUR as at 31
March 2011 which is 4.2 mln EUR lower than at the corresponding period of 2010. 



Employees



At the end of the 1st quarter of 2011, the total number of employees was 315
compared to 318 at the end of the 1st quarter of 2010. The full time equivalent
(FTE) was respectively 301 in 2011 compared to the 303 in 2010. The management
is looking actively for the efficiencies in processes to balance the increase
in individual salaries with more productive company structure. 



Corporate structure



At the end of the quarter, 31 March 2011, 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. 



Share performance



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



As of 31 March 2011 AS Tallinna Vesi shareholders, with a direct holding over
5%, were: 



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



Parvus Asset Management has informed the Company that they own in total 8.96%
of the shares of the Company. 

At the end of the quarter, 31 March 2011, the closing price of the AS Tallinna
Vesi share was 8.705 EUR, which is a 10.33% increase compared to the closing
price of 7.89 EUR at the beginning of the quarter. During the same period the
OMX Tallinn index rose by 5.54%. 



Operational highlights in 2011



·         Company's overall operating performance is continuously good, most of
the quality aspects exceeding the level of 2010. The water quality was the best
possible with 100% samples taken fully in accordance with the norms instead of
the required 95%, and the leakage level was by 0.84% less than in 2010.
Response time to customer enquiries has rapidly improved, 89% of customer
enquiries responded within 2 days compared to 82% in first quarter of 2010. 



·         The Company signed the changes to the Nordea's loan agreement on 27
of April 2011. The original loan agreement for the amount of 37.5 mln EUR was
signed in 2005. The repayment term was changed and instead of the semiannual
repayments from May 2011 the whole loan amount shall be repaid at the end of
2015. As result of the change the weighted average interest margin will
increase to 0.82%. 



·         Tariffs are still frozen on the 2010 level despite of the fact that
on 9 November the Company submitted its tariff application to the new regulator
in accordance with best practice regulation for privatized utilities, such as
that favoured by Ofwat in the UK and recommended by the World Bank for
privatized utilities. In its tariff application the Company has requested that
the Competition Authority should expand the definition of regulated asset base
to include the privatisation value of the utility. This would ensure the
privatisation contract was not unilaterally broken and would respect the
investments made in good faith into Estonia by our investors on the basis of
that contract. 



On 10 December 2010 AS Tallinna Vesi lodged a complaint to the European
Commission regarding certain measures adopted by the Estonian authorities. The
company believes these measures unilaterally alter the terms of AS Tallinna
Vesi's privatization regime, and without any objective justification, any form
of meaningful prior discussion, or willingness to engage in dialogue. Therefore
they violate EU rules on the freedom of establishment and the free movement of
capital (articles 49 and 63 TFEU). 

As a consequence of this complaint, on 22 February 2011 the European Commission
sent a Request For Information to the Estonian authorities regarding the points
raised by AS Tallinna Vesi in its complaint. The Company understands that the
Estonian authorities have until the beginning of May to respond to this
request. 

The Company has published its tariff application on its website and to the
Tallinn Stock Exchange and will keep its investors informed of all future
developments regarding the further key developments regarding the processing of
the tariff application. Still, at this point in time the Company is unable to
say what next year's tariffs will be as it is unclear at the moment how the CA
intends to respond to the tariff application and European Commission's enquiry. 







Additional information:

Siiri Lahe

Chief Financial Officer

+372 6262 262

[email protected]







STATEMENT OF COMPREHENSIVE INCOME    I quarter  I quarter  12 months
(thousand EUR)                          2011       2010       2010  
                                                                    
Revenue                                 12 404     12 236     49 680
Costs of goods sold                     -4 882     -4 628    -20 684
                                                                    
GROSS PROFIT                             7 522      7 608     28 996
                                                                    
Marketing expenses                        -200       -204       -787
General administration expenses           -874       -818     -3 652
Other income/ expenses (-)                 464        134      2 906
                                                                    
OPERATING PROFIT                         6 912      6 720     27 463
                                                                    
Financial income                         1 752        240      1 060
Financial expenses                        -678     -1 726     -3 624
                                                                    
PROFIT BEFORE TAXES                      7 986      5 234     24 899
                                                                    
Income tax on dividends                      0          0     -8 495
                                                                    
NET PROFIT FOR THE PERIOD                7 986      5 234     16 404
COMPREHENSIVE INCOME FOR THE PERIOD      7 986      5 234     16 404
Attributable to:                                                    
Equity holders of A-shares               7 985      5 233     16 403
B-share holder                            0,64       0,64       0,64
                                                                    
Earnings per A share (in euros)           0,40       0,26       0,82
Earnings per B share (in euros)            639        639        639







STATEMENT OF FINANCIAL POSITION                                                 
(thousand EUR)                                31.03.2011  31.03.2010  31.12.2010
                                                                                
ASSETS                                                                          
CURRENT ASSETS                                                                  
Cash and equivalents                              20 439      24 625      13 235
Customer receivables, accrued income and          18 559      12 927      20 088
 prepaid expenses                                                               
Inventories                                          287         238         306
Non-current assets held for sale                      76          77          76
TOTAL CURRENT ASSETS                              39 361      37 867      33 705
                                                                                
NON-CURRENT ASSETS                                                              
Long-term investment assets                          429           0           0
Property, plant and equipment                    147 926     137 551     148 179
Intangible assets                                  1 851       2 434       1 972
Derivatives                                          131           0           0
TOTAL NON-CURRENT ASSETS                         150 337     139 985     150 151
TOTAL ASSETS                                     189 698     177 852     183 856
                                                                                
LIABILITIES                                                                     
                                                                                
CURRENT LIABILITIES                                                             
Current portion of long-term borrowings            7 607         106       7 624
Trade and other payables                           5 431       4 459       6 368
Derivatives                                          906       1 007         963
Short-term provisions                                 27         171         117
Prepayments and deferred income                    1 005         740         810
TOTAL CURRENT LIABILITIES                         14 976       6 483      15 882
                                                                                
NON-CURRENT LIABILITIES                                                         
Deferred income from connection fees               5 810         786       5 765
Borrowings                                        87 449      75 056      87 428
Derivatives                                            0       1 265       1 304
Other payables                                       115         115         115
TOTAL NON-CURRENT LIABILITIES                     93 374      77 222      94 612
TOTAL LIABILITIES                                108 350      83 705     110 494
                                                                                
EQUITY CAPITAL                                                                  
Share capital                                     12 782      12 782      12 782
Share premium                                     24 734      24 734      24 734
Statutory legal reserve                            1 278       1 278       1 278
Retained earnings                                 42 554      55 353      34 568
TOTAL EQUITY CAPITAL                              81 348      94 147      73 362
TOTAL LIABILITIES AND EQUITY CAPITAL             189 698     177 852     183 856







CASH FLOW STATEMENT                                         3       3       12  
                                                         months  months   months
(thousand EUR)                                            2011    2010    2010  
                                                                                
CASH FLOWS FROM OPERATING ACTIVITIES                                            
Operating profit                                          6 912   6 720   27 463
Adjustment for depreciation/amortisation                  1 394   1 407    5 620
Adjustment for profit from government grants and           -315    -281   -3 312
 connection fees                                                                
Other finance expenses                                       -2     -22      -14
Profit from sale of property, plant and equipment, and        0       0       -3
 intangible assets                                                              
Expensed property, plant and equipment                        0       5       70
Change in current assets involved in operating            1 616    -807   -8 894
 activities                                                                     
Change in liabilities involved in operating activities     -128     588    6 297
Interest paid                                              -290     -17   -2 443
Total cash flow from operating activities                 9 187   7 593   24 784
                                                                                
CASH FLOWS FROM INVESTING ACTIVITIES                                            
Loans granted                                              -429       0        0
Acquisition of property, plant and equipment, and        -3 812  -2 555  -17 055
 intangible assets                                                              
Compensations received for construction of pipelines      2 004     768    6 139
Proceeds from sale of property, plant and equipment,          0       0       16
 and intangible assets                                                          
Interest received                                           254     127    1 110
Total cash flow from investing activities                -1 983  -1 660   -9 790
                                                                                
CASH FLOWS FROM FINANCING ACTIVITIES                                            
Received loans                                                0       0   20 000
Dividends paid                                                0       0  -31 956
Income tax on dividends                                       0       0   -8 495
Total cash flow from financing activities                     0       0  -20 451
                                                                                
Change in cash and bank accounts                          7 204   5 933   -5 457
                                                                                
CASH AND EQUIVALENTS AT THE BEGINNING OF THE PERIOD      13 235  18 692   18 692
                                                                                
CASH AND EQUIVALENTS AT THE END OF THE PERIOD            20 439  24 625   13 235