Market announcement

Title

Results of operations for the 1st quarter 2013

Message

MANAGEMENT REPORT

Contractual Highlights

  -- AS Tallinna Vesi tariffs continue to be on the same level based on
     temporary
injunction granted by the Court for the period of court proceedings to
     protect the Company from the unilateral breach of privatization agreement
     by Estonian Authorities (more information available at end of the paper
     from section Contractual tariff debate).
  -- At the end of May 2012 the District Court ruled that AS Tallinna Vesi’s
     Services Agreement, that was part of the international privatisation, is a
     public law contract,
overturning the Competition Authority’s claim that the tariff mechanism
     specified in the Services Agreement is allegedly a civil law agreement that
     the company cannot rely on in an administrative court.
AS Tallinna Vesi firmly believes that the terms and conditions of the
     international privatisation contract that has been deemed a public law
     contract should not be broken simply by transferring the duties of the
     regulator from one state institution (the City of Tallinn) to a different
     state institution (the Competition Authority). A public law contract should
     enjoy the protection of the Estonian legal system, should the contract not
     honoured then the company will have a claim against the Estonian state.
  -- AS Tallinna Vesi would like all its shareholders to be fully aware of the
     facts that the Company was privatised
i
n 2001 with the full support and knowledge of the Estonian national
     government, with written confirmations from the Prime Minister, the
     Minister of Finance, and the Competition Authority itself regarding the key
     terms of the agreements, and utilising the expertise and guidance of the
     European Bank for Reconstruction and Development (EBRD). In addition to
     approving the framework of the privatisation the State of Estonia directly
     benefited as the sovereign guarantee it had been required to provide to
     EBRD to secure the then municipal AS Tallinna Vesi’s loans was passed to
     the Strategic Investor on privatisation. As this privatisation and these
     loans were EBRD sponsored projects, then the state of Estonia was required
     to object if the project did not comply with the PWSSA, it is noteworthy
     that it did not, in fact it voted in favour of both the privatisation and
     loan re-financing.
  -- During the 1st quarter of 2013 initial court proceedings commenced. AS
     Tallinna Vesi believes in open and transparent regulation and requested
     open court proceedings. On the other hand, the Competition Authority
     believes its methodology to be a “business secret” hence it requested
     closed court proceedings. On 20th of March 2013 the Administrative Court
     rules that the court proceedings would be partially closed, meaning that
     there could be no public discussion of the Competition Authority’s
     methodology, whilst all other aspects of the hearing will be  held in open
     proceedings, i.e all information can be made available to the public.
  -- Discussion of the complaint submitted to the EU Commission is on-going.
  -- Average real return on capital invested at privatization is still 6.2%
     since 2001.

The Company has continuously stated its belief in fully transparent regulation
and its willingness to enter into meaningful and evidence-based dialogue that
takes into account the privatization contract signed in 2001. 



RESULTS OF OPERATIONS - FOR THE 1st QUARTER 2013

Financial highlights of 1st quarter 2013

In the 1st quarter of 2013 the Company’s underlying performance was good and
stable, continuously focused on the improvement of operational performance and
customer service. 

During the three months of 2013 the Company’s total sales decreased, year on
year, by 2.3% to 12.7 mln euros. Sales of water and wastewater treatment were
down by 1.5% to 11.7 mln euros compared to the three months of 2012. These
decreases in sales are due to lower sales volumes during 2013, as the 1st
quarter in 2013 was one day shorter than the comparative period in 2012. 

The operating profit from the Company’s main business activity decreased by 0.7
mln euros or 10.4% to 6.2 mln euros during the three months of 2013 compared to
the three months of 2012. As a comparison Total operating profit decreased by
11.4% during the same period as a result of completion of the sewage extension
construction program in 2012, and therefore there were no revenues from
government grants in 2013. 

The Company’s profit before taxes for the first quarter in 2013 was 6.2 mln
euros, which is a 0.1 mln euros or 1.5% decrease compared to the relevant
period in 2012. The Company’s net profit for first quarter of 2013 was 6.2 mln
euros, which is 0.1 mln euros or 1.5% smaller than the net profit of 6.3 mln
euros in the equivalent period in 2012. 

mln €                             1 Q 2011  1 Q 2012  1 Q 2013  Change 13/12
----------------------------------------------------------------------------
Sales                                 12,4      13,0      12,7         -2,3%
Gross profit                           7,5       8,2       7,5         -8,1%
Gross profit margin %                 60,6      63,0      59,3         -5,9%
Operating profit                       6,9       6,9       6,2        -11,4%
Operating profit - main business       6,6       6,9       6,2        -10,4%
Operating profit margin %             55,7      53,5      48,5         -9,3%
Profit before taxes                    8,0       6,3       6,2         -1,5%
Net profit                             8,0       6,3       6,2         -1,5%
Net profit margin %                   64,4      48,5      49,0          0,9%
ROA %                                  4,2       3,2       3,0         -5,3%
Debt to total capital employed        57,1      57,0      55,9         -1,9%
ROE %                                  9,8       7,4       6,8         -7,6%
Current ratio                          2,6       5,5       5,4         -1,8%
----------------------------------------------------------------------------

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

ROE – Net profit / Total equity

Current ratio – Current assets / Current liabilities

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



Profit and Loss Statement

1st quarter 2013

Sales

In the 1st quarter of 2013 the Company’s total sales decreased, year on year,
by 2.3% to 12.7 mln euros. 91% of sales comprise of sales of water and
treatment of wastewater to domestic and commercial customers within and outside
of the service area, 5% of sales from fees received from the City of Tallinn
for operating and maintaining the storm water system and 4% from other works
and services. 

Sales of water and wastewater services were 11.7 mln euros, a 1.5% decrease
compared to the 1st quarter of 2012, resulting from the decrease in sales
volumes as described below. 

Within the service area, sales to residential customers were at 5.9 mln euros,
a 2.0% decrease year on year. Sales to commercial customers increased by 0.8%
to 4.6 mln euros, mainly due to industrial customers. Sales to customers
outside of the main service area decreased by 8.7% to 1.0 mln euros in the 1st
quarter of 2013. Over pollution fees received were 0.18 mln euros, a 2.3%
increase compared to the 1st quarter of 2012. 

As result of same tariffs billable in 2013 compared to 2012 the sales volumes
reflect the same variances in main services area as prescribed above. 

Outside service area sales volumes were 18.8% lower than in the 1st quarter of
2012. The main factor in this decrease was lower storm water volumes balanced
by some increase in sewerage service due to connection of small areas in
neighbouring municipalities. This resulted in a sales decrease year on year by
8.7%; the sales decrease is lower than volumes decrease as storm water tariffs
are lower than sewage tariffs. 

The sales from the operation and maintenance of the storm water and
fire-hydrant system in the main service area decreased by 17.4% to 0.73 mln
euros in the 1st quarter of 2013 compared to the same period in 2012. According
to the terms and conditions of the contract revenues reflect actual volumes
treated and costs for treating the storm water, therefore this cost pass
through has no impact on profits. 



Cost of Goods Sold and Gross profit

The cost of goods sold for the main operating activity was 5.2 mln euros in the
1st quarter of 2013, an increase of 0.36 mln euros or 7.5% from the equivalent
period in 2012. The cost increase is mainly the result of released provisions
positive effect in the first quarter of 2012 in the amount of 0.44 mln euros. 

Total variable costs increased by 0.49 mln euros or 37.3% year on year, without
the impact of one off provision release the real increase of variable costs was
0,06 mln euros or 3,3%. The change came from a combination of increase in
prices and tax rates and movements in treatment volumes that affected the
variable costs together with the following additional factors: 

  -- Water abstraction charges increased only by 0.01 mln euros or 2.5% to 0.25
     mln euros in the 1st quarter of 2013, despite of 5% increase in tax rates
     mainly due to positive impact from 1.1% less leakages than 2012 and smaller
     production volumes.
  -- Total chemical costs increased by 0.06 mln euros or 15.1% to 0.42 mln
     euros. Chemicals costs increased due to an increase in chemicals price
     worth 0.04 mln euros (0.03 mln euros coming from methanol price increase by
     20%) and increased coagulant usage due to bad raw water quality amounting
     to 0.01 mln euros.
  -- Electricity costs in total stayed flat in the 1st quarter of 2013 compared
     to the 1st quarter of 2012. Increased electricity prices, which on average
     have increased 3% with an adverse effect of 0.03 mln euros, have been
     balanced by positive effect of decreased treatment volumes.
  -- Pollution tax increased by 0.43 mln euros or 200.9% in the 1st quarter of
     2013, mainly related to released provision in the first quarter of 2012.
     Pollution tax increase due to the 15% increase in tax rates was balanced by
     improved pollutants removal process and decrease in volumes.

To mitigate the external price risk of maintenance services the Company
switched from outsourcing to insourcing in various areas in the 3rd quarter of
2012. Total fixed cost of goods sold in the main operating activity decreased
by 0.13 mln euros or 3.8%. 

As a result of all of the above the Company’s gross profit for the 1st quarter
of 2013 was 7.5 mln euros, which is a decrease of 0.7 mln euros, or 8.1%,
compared to the gross profit of 8.2 mln euros for the 1st quarter of 2012. 



Other Operating Costs

Marketing expenses and General administration expenses stayed mostly flat
during the 1st quarter of 2013 compared to the corresponding period in 2012,
with the exception of overall salary costs increase by 0.07 mln euros. 



Other net income/expenses

Other net income decreased by 0.05 mln euros or 156.3% to a net expense of 0.02
mln euros, compared to 0.03 mln euros net income in the 1st quarter of 2012. 

In previous years the majority of the income in Other net income/expenses has
been related to constructions and government grants. As the major programs were
almost entirely completed by end of 2011, the revenues from this activity have
ceased. In the 1st quarter of 2013 there were no profits from constructions and
government grants compared to a net income of 0.08 mln euros in the 1st quarter
of 2012. 

The rest of the other income/expenses totalled an expense of 0.02 mln euros in
the 1st quarter of 2013 compared to an expense of 0.05 mln euros in the 1st
quarter of 2012. 



Operating profit

As a result of above factors the Company’s operating profit from main services
for the 1st quarter of 2013 totalled 6.2 mln euros compared to 6.9 mln euros in
the corresponding quarter in 2012. In total the Company’s operating profit for
all activities for the 1st quarter of 2013 was 6.2 mln euros, which shows a
decrease of 0.70 mln euros compared to an operating profit of 6.9 mln euros
achieved in the 1st quarter of 2012. Year on year the operating profit for the
1st quarter has decreased by 11.4%. 



Financial expenses

Net Financial expenses/income were 0.06 mln euros in the 1st quarter of 2013,
which is a decrease of 0.70 mln euros in expenses compared to -0.64 mln euros
net expenses in the 1st quarter of 2012. In 2012 the financial costs were
mainly impacted from the non-cash revaluation of the fair value of swap
agreements, in the 1st quarter of 2012 the revaluation impact was negative by
0.22 mln euros and in the relevant quarter of 2013 the revaluation impact was
positive by 0,56 mln euros. 

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
75 mln euros and 20 mln euros is thereby still with floating interest rate. At
this point in time the estimated fair value of the swap contracts is negative,
totalling 4.0 mln euros. 

Effective interest rate (incl. swap interests) in the 1st quarter of 2013 was
3.28%, amounting in the interest costs of 0.78 mln euros, compared respectively
to 3.39% and 0.82 mln euros in the 1st quarter of 2012. 



Profit Before and After Tax

The Company’s profit before and after taxes for the 1st quarter of 2013 was 6.2
mln euros, which is 0.09 mln euros lower than the profit before and after taxes
of 6.3 mln euros for the 1st quarter of 2012, resulting from the movements in
fair value of financial instruments and released provisions as described above. 



Balance sheet

In the three months of 2013 the Company invested 0.95 mln euros into fixed
assets. As of 31 March 2013 non-current fixed assets amounted to 150.0 mln
euros and total non-current assets amounted to 155.7 mln euros. 

Current assets increased by 8.0 mln euros to 50.6 mln euros in the three months
mainly due to increased cash at bank. In the three months of 2013, cash at bank
increased by 8.6 mln euros. 

Current liabilities decreased by 0.56 mln euros to 9.3 mln euros in the three
months due to decreased customer prepayments, payments to suppliers and fair
value of financial instruments – the latter being a technical transaction
rather than an increase in current liabilities. 

The Company has a Total debt/Total assets level as expected of 55.9%, in range
of 55%-65%, reflecting the beginning of the year equity profile. This level is
consistent with the same period in 2012 when the total debt/total assets ratio
was 57.0%. 

Long-term liabilities stood at 106.1 mln euros at the end of March 2013,
consisting mainly of the outstanding balance of three long-term bank loans
totalling 95 mln euros. The first repayment of loans or refinancing should take
place at the end of 2014. The weighted average interest margin for the total
loan facility is 0.96%. The rest of long term liabilities reflect mainly the
accounting record of deferred income from connection fees. 

In the 4th quarter of 2011 the Company recorded an exceptional contingent
liability, which could cause an outflow of economic benefits of up to 36.0 mln
euros, as per note 13 to the accounts. Considering that the court proceedings
are continuously on-going, the Management has not changed the evaluation of the
contingent liability. 



Cash flow

During the three months of 2013, the Company generated 8.3 mln euros of cash
flows from operating activities, an increase of 0.96 mln euros compared to the
corresponding period in 2012. 2013 operating cash flows were above 2012 cash
flows mainly due to changes in trade debtors and payables. Underlying operating
profit still continues to be the main contributor to operating cash flows. 

In the three months of 2013 net cash flows from investing activities resulted
in a cash inflow of 1.0 mln euros, a decrease of 0.21 mln euros compared to an
inflow of 1.2 mln euros in the three months of 2012. This is mainly due to
lower capex spent on assets acquisitions and compensations for construction of
pipelines. 

In the three months of 2012 the cash outflows related to the fixed asset
investments were 1.6 mln euros compared to 1.7 mln euros spent in the same
period of 2012, a decrease of 0.08 mln euros. The compensations received for
the construction of pipelines were 2.4 mln euros in the three months of 2013, a
decrease of 0.42 mln euros compared to same period in 2012. In 2013 the Company
did not give further loans to AS Maardu Vesi. In 2012 the loan granted to AS
Maardu Vesi amounted to 0.23 mln EUR. 

In the three months of 2013, cash outflow from financing amounted to 0.76 mln
euros due to interests paid and loan financing costs, which is 0.04 mln euros
more than in the same period of 2012. 

As a result of all of the above factors, the total cash inflow in the three
months of 2013 was 8.6 mln euros compared to a cash inflow of 7.9 mln euros in
2012. Cash and cash equivalents stood at 32.5 mln euros as of 31 March 2013,
which is 9.9 mln euros higher than at the corresponding period of 2012. 



Employees

At the end of the 1st quarter of 2013, the total number of employees was 309
compared to 310 at the end of the 1st quarter of 2012. The full time equivalent
(FTE) was respectively 295 in 2013 compared to the 298 in 2012. The management
continues to work actively for the efficiencies in processes to balance the
increase in individual salaries and cost pressure from the market with more
productive company structure. 



Corporate structure

At the end of the quarter, 31 December 2012, 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 NASDAQ OMX Main Baltic Market with trading code
TVEAT and ISIN EE3100026436. 

As of 31 March 2013 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 owned in total 1.10% of the shares of the Company as
per Company’s best information as of 31 March 2013. As Parvus has reduced their
holding in the Company pension funds have continued to increase their
portfolios during the 1st quarter of 2013, owning 2.43% of the total shares
compared to 1.25% at the end of 1st quarter 2012. 

At the end of the quarter, 31 March 2013, the closing price of the AS Tallinna
Vesi share was 10.40 euros, which is a 13.04% increase compared to the closing
price of 9.20 euros at the beginning of the quarter. During the same period the
OMX Tallinn index rose by 14.17%. In the 1st quarter the Company’s share price
was mainly impacted by the on-going contractual debate, interim court decisions
and impending dividend payment announcement. 



Operational highlights in 1st quarter 2013

Indicator                                                          2012    2013 
                                                                    Q1      Q1  
--------------------------------------------------------------------------------
Drinking water                                                                  
--------------------------------------------------------------------------------
- 
Compliance of water quality at the customers tap                   100%   99,87%
--------------------------------------------------------------------------------
Water loss in the water distribution network                      17.64%  17.44%
--------------------------------------------------------------------------------
Average duration of water interruptions per property, h           2.86 h  3.12 h
--------------------------------------------------------------------------------
Number of customer contacts regarding water pressure               204     147  
--------------------------------------------------------------------------------
Wastewater                                                                      
--------------------------------------------------------------------------------
- 
Number of sewer blockages                                          218     251  
--------------------------------------------------------------------------------
Number of customer contacts regarding blockages and storm water    418     422  
--------------------------------------------------------------------------------
Wastewater treatment compliance with environmental standards       100%    100% 
--------------------------------------------------------------------------------
Customer service                                                                
--------------------------------------------------------------------------------
Responding written customer contacts within at least 2 work days   99.2%   99.1%
--------------------------------------------------------------------------------
Number of written contacts                                          44      38  
--------------------------------------------------------------------------------
Number of failed promises                                            3       3  
--------------------------------------------------------------------------------
Notification of unplanned water interruptions at least 1 h         88.9%   96.0%
 before the interruption                                                        
--------------------------------------------------------------------------------



Complaint to European Commission

In parallel, on 10th 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). The
process is on-going. 



Disclosure of relevant papers and perspectives

The Company has published its tariff application and all relevant
correspondence with the CA on its website
(http://www.tallinnavesi.ee/?op=body&id=728) 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. 

In opposite to the Company the CA has requested the Court procedures to be
closed. Based on misleading information submitted by the CA the Court approved
the CA’s request. ASTV has reapplied for open proceedings. 

Still, at this point in time the Company is unable to say what is going to
happen to the tariffs before Court judgments and what would be the next steps
by the European Commission. The outcome and lengths of the Court proceedings is
outside the control of the Company. 



Additional information:

Ian John Alexander Plenderleith

Chairman of the Management Board

+372 6262 201

[email protected]



STATEMENT OF COMPREHENSIVE INCOME    I quarter  I quarter  12 months
(thousand €)                            2013       2012       2012  
                                                                    
Revenue                                 12 693     12 993     52 924
Costs of goods sold                     -5 169     -4 809    -20 337
                                                                    
GROSS PROFIT                             7 524      8 184     32 587
                                                                    
Marketing expenses                        -223       -216       -772
General administration expenses         -1 127     -1 051     -4 740
Other income/ expenses (-)                 -18         32      1 696
                                                                    
OPERATING PROFIT                         6 156      6 949     28 771
                                                                    
Financial income                           846        391      1 591
Financial expenses                        -788     -1 034     -3 297
                                                                    
PROFIT BEFORE TAXES                      6 214      6 306     27 065
                                                                    
Income tax on dividends                      0          0     -4 466
                                                                    
NET PROFIT FOR THE PERIOD                6 214      6 306     22 599
COMPREHENSIVE INCOME FOR THE PERIOD      6 214      6 306     22 599
Attributable to:                                                    
Equity holders of A-shares               6 213      6 305     22 598
B-share holder                            0,60       0,60       0,60
                                                                    
Earnings per A share (in euros)           0,31       0,32       1,13
Earnings per B share (in euros)            600        600        600



STATEMENT OF FINANCIAL POSITION                                                 
(thousand €)                                     31.03.201  31.03.201  31.12.201
                                                         3          2          2
                                                                                
ASSETS                                                                          
CURRENT ASSETS                                                                  
Cash and equivalents                                32 511     22 636     23 935
Trade receivables, accrued income and prepaid       17 748     21 531     18 323
 expenses                                                                       
Inventories                                            362        271        356
TOTAL CURRENT ASSETS                                50 621     44 438     42 614
                                                                                
NON-CURRENT ASSETS                                                              
Other long-term receivables                          5 647      6 380      7 560
Property, plant and equipment                      148 913    145 915    149 400
Intangible assets                                    1 102      1 502      1 154
TOTAL NON-CURRENT ASSETS                           155 662    153 797    158 114
TOTAL ASSETS                                       206 283    198 235    200 728
                                                                                
LIABILITIES                                                                     
                                                                                
CURRENT LIABILITIES                                                             
Current portion of long-term borrowings                118         29        115
Trade and other payables                             5 272      4 855      5 482
Derivatives                                          1 949      1 780      2 039
Prepayments                                          1 994      1 378      2 252
TOTAL CURRENT LIABILITIES                            9 333      8 042      9 888
                                                                                
NON-CURRENT LIABILITIES                                                         
Deferred income from connection fees                 8 285      6 922      7 892
Borrowings                                          95 692     95 150     95 717
Derivatives                                          2 066      2 931      2 538
Other payables                                          20          9         20
TOTAL NON-CURRENT LIABILITIES                      106 063    105 012    106 167
TOTAL LIABILITIES                                  115 396    113 054    116 055
                                                                                
EQUITY CAPITAL                                                                  
Share capital                                       12 000     12 000     12 000
Share premium                                       24 734     24 734     24 734
Statutory legal reserve                              1 278      1 278      1 278
Retained earnings                                   52 875     47 169     46 661
TOTAL EQUITY CAPITAL                                90 887     85 181     84 673
TOTAL LIABILITIES AND EQUITY CAPITAL               206 283    198 235    200 728



CASH FLOW STATEMENT                                          3       3      12  
                                                          months  months  months
(thousand €)                                               2013    2012    2012 
                                                                                
CASH FLOWS FROM OPERATING ACTIVITIES                                            
Operating profit                                           6 156   6 949  28 771
Adjustment for depreciation/amortisation                   1 487   1 434   5 879
Adjustment for profit from government grants and              -2     -78  -2 043
 connection fees                                                                
Other non-cash adjustments                                   -20       4    -153
Profit/loss(+) from sale and write off of property,          -20      -1      -6
 plant and equipment, and intangible assets                                     
Change in current assets involved in operating               350    -631    -160
 activities                                                                     
Change in liabilities involved in operating activities       369    -321    -568
Total cash flow from operating activities                  8 320   7 356  31 720
                                                                                
CASH FLOWS FROM INVESTING ACTIVITIES                                            
Loans granted                                                  0    -227    -765
Acquisition of property, plant and equipment, and         -1 634  -1 717     -10
 intangible assets                                                           011
Proceeds from sales of property, plant and equipment          20       1      38
Compensations received for construction of pipelines       2 350   2 769  11 198
Interest received                                            281     401   1 585
Total cash flow from investing activities                  1 017   1 227   2 045
                                                                                
CASH FLOWS FROM FINANCING ACTIVITIES                                            
Interest paid and loan financing costs, incl swap           -731    -717  -3 272
 interests                                                                      
Repayment of finance lease                                   -30       0     -61
Dividends paid                                                 0       0     -16
                                                                             801
Income tax on dividends                                        0       0  -4 466
Total cash flow from financing activities                   -761    -717     -24
                                                                             600
                                                                                
Change in cash and bank accounts                           8 576   7 866   9 165
                                                                                
CASH AND EQUIVALENTS AT THE BEGINNING OF THE PERIOD       23 935  14 770  14 770
                                                                                
CASH AND EQUIVALENTS AT THE END OF THE PERIOD             32 511  22 636  23 935






         Ian John Alexander Plenderleith
         Chairman of the Management Board
         +372 6262 201
         [email protected]