Börsiteade

Pealkiri

Results of Operations - for the 2nd quarter 2014

Teade

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.
  -- AS Tallinna Vesi would like all its shareholders to be fully aware of the
     facts that the Company was privatised in 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).
  -- 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. 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 be honoured, then the company will have a claim against
     the Estonian state.

  -- Following their investigation, the European Commission announced in May
     2014 that it has decided not to proceed with the Company’s complaints in
     relation to the anti-monopoly bill. The European Commission did not assess
     the lawfulness of the application of the amendments made to the
     Anti-Monopoly Bill adopted in 2010 as regards to the Company and it also
     did not assess or comment upon the water tariffs of AS Tallinna Vesi. In
     its letter the European Commission was explicit about leaving the legal
     opinion on the impact on the Company for the court to decide.
  -- 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 claims compensation for potential damages of
     over 90 million euros for total losses over the lifetime of the
     international privatisation contract up to 2020. The total compensation
     claim applies when the tariffs will remain unchanged till 2020. Of this
     amount, over 50 million euros has been already caused by the Competition
     Authority’s refusal to approve tariff increases in the period of 2011 –
     2013.
  -- The date of the next local court hearing is not set.

  -- AS Tallinna Vesi 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.

  -- It has been three years already during which the Company has made intensive
     effort in trying to agree a solution in order to get the tariff dispute
     solved. Regretfully it has not been achieved, the Supervisory Council of AS
     Tallinna Vesi has decided to give notice of potential international
     arbitration proceedings against the Republic of Estonia for breaching the
     undertakings it is required to abide by in a bilateral investment treaty,
     i.e. the obligation of ensuring the fair and equitable treatment of
     investments protected by this treaty. AS Tallinna Vesi requests that the
     Republic of Estonia complies with its obligations under the Treaty. In the
     event that Estonia is unable or unwilling to do so, AS Tallinna Vesi
     reserves the right to commence international arbitration proceedings
     against Estonia, on the terms which the parties agreed in the Treaty.

  -- Average real return on capital invested at privatization is still 6.2%
     since 2001.



Financial highlights of 2nd quarter 2014



The Group’s sales revenues during the 2nd quarter 2014 have been relatively
stable being slightly down compared to the same period in 2013, decreasing 0.9%
to 13.37 mln euros. The sales for 6 months in 2014 are in line with the sales
in 2013. 

The gross profit in the 2nd quarter of 2014 has increased 5.6% or 0.41 mln
euros. Increase in gross profit is mainly related to lower pollution tax costs
compared to the comparative period in 2013. Although the pollution tax expenses
were also elevated in the 2nd quarter 2014 in the relation with heavy metals,
still the change is mainly impacted by the incident in wastewater treatment
plant in the 2nd quarter 2013, during which the plant could not treat extremely
high volumes, causing extra pollution tax of 0.91 mln euros. 

The pressure on pollution tax expenses in 2014 is related to the change of the
water abstraction permit issued by the Environmental Board at the end of
December 2013, the former limit concentrations of heavy metals in treated
effluent were reduced 400 times, due to which the Company was not technically
able to meet the limit values, although nothing has changed in the efficiency
of Company’s operations. 

Due to the decrease of the allowed concentration limits the Company has
recognised pollution tax on a prudent principle and hence extra pollution tax
expenses of 0.35 mln euros were faced in the 2nd quarter of 2014. 

In July 2014 the environmental department has issued the draft change of the
water permit in which the allowed concentrations have been increased to the
currently achievable levels and starting from the 3rd quarter 2014, if the new
water permit has been confirmed, we expect to have the pollution tax at the
normal level. 

The operating profit from Group’s main activities has increased 5.9% to 6.04
mln euros, mainly due to the lower variable costs, which are in more detailed
described below. The operating profit for 6 months in 2014 is at the same level
with the operating profit for the comparative period in 2013. 

The net profit for the 2nd quarter without the extra pollution tax impact in
2013 and 2014 and swap costs impact was 25.3% or 0.39 mln euros lower than in
the comparative period last year. 



mln €           2 Q     2 Q     2 Q     Change     6        6        6    Change
                2012    2013    2014    14/13    months   months  months   14/13
                                                 2012     2013     2014         
--------------------------------------------------------------------------------
Sales           13,15   13,49   13,37    -0,9%    26,14    26,19   26,68    1,9%
Gross profit     7,81    7,32    7,73     5,6%    16,05    14,85   14,99    1,0%
Gross profit    59,44   54,26   57,80     6,5%    61,39    56,69   56,20   -0,9%
 margin %                                                                       
Operating        6,29    5,74    6,19     7,8%    13,24    11,90   11,87   -0,2%
 profit                                                                         
Operating        6,39    5,76    6,04     5,9%    13,21    11,92   11,73   -1,6%
 profit -                                                                       
 main                                                                           
 business                                                                       
Operating       47,83   42,56   46,30     8,8%    50,63    45,43   44,51   -2,0%
 profit                                                                         
 margin %                                                                       
Profit before    5,62    6,36    5,55   -12,7%    11,92    12,57   10,61  -15,6%
 taxes                                                                          
Net profit       1,15    1,73    0,77   -55,7%     7,46     7,95    5,83  -26,7%
Net profit       8,76   12,84    5,74   -55,3%    28,53    30,35   21,85  -28,0%
 margin %                                                                       
ROA %            0,61    0,88    0,39   -55,9%     3,96     4,05    2,96  -27,0%
Debt to total   63,07   61,65   61,91     0,4%    63,07    61,65   61,91    0,4%
 capital                                                                        
 employed                                                                       
ROE %            1,66    2,30    1,02   -55,6%    10,73    10,57    7,77  -26,5%
Current ratio    2,57    2,31    2,89    24,9%     2,57     2,31    2,89   24,9%
--------------------------------------------------------------------------------

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 services, doubtful debt, other income 



RESULTS OF OPERATIONS - FOR THE 2nd QUARTER 2014

Profit and Loss Statement

2nd quarter 2014

Sales

As the Company’s tariffs are frozen at the 2010 tariff level, the changes in
the revenues from main activities i.e. from sales of water and wastewater
services are fully driven by consumption. 

In the 2nd quarter of 2014 the Group’s total sales decreased, year on year, by
0.9% to 13.37 mln euros. 90.8% of sales comprise of sales of water and
treatment of wastewater to domestic and commercial customers within and outside
of the service area, 5.6% of sales are the fees received from the City of
Tallinn for operating and maintaining the storm water system and fire hydrants
and 3.6% from other works and services. 

Sales of water and wastewater services were 12.14 mln euros, a 0.8% decrease
compared to the 2nd quarter of 2013, resulting from the changes in sales
volumes as described below. 

Within the service area, sales to residential customers were at 6.00 mln euros,
showing a 1.5% increase year on year, as revenues from apartment blocks form
the biggest share of our residential sales, the biggest increase came also from
this client group. Sales to commercial customers decreased by 3.7% to 4.80 mln
euros, mainly coming from the sales in industrial sector. Sales to customers
outside of the main service area decreased by 1.7% to 1.10 mln euros in the 2nd
quarter of 2014. It was mostly affected by wastewater, which in itself is
affected by the lower storm water sales. The sales of water was stable. Over
pollution fees received were 0.24 mln euros, a 6.2% increase compared to the
2nd quarter of 2013. 

                                                       Quarter 2      Variance  
                                                                       14/13    
Revenues from main operating activities         2014   2013   2012   €       %  
Private clients, incl:                         6 001  5 913  5 936    88    1,5%
Water supply service                           3 303  3 253  3 265    50    1,5%
Wastewater disposal service                    2 698  2 660  2 671    38    1,4%
Corporate clients, incl:                       4 804  4 988  4 778  -184   -3,7%
Water supply service                           2 697  2 782  2 621   -85   -3,1%
Wastewater disposal service                    2 107  2 206  2 157   -99   -4,5%
Outside service area clients, incl:            1 095  1 114  1 044   -19   -1,7%
Water supply service                             283    263    254    20    7,6%
Wastewater disposal service                      722    683    622    39    5,7%
Storm water disposal service                      90    168    168   -78  -46,4%
Over pollution fee                               238    224    150    14    6,3%
                                                                                
Storm water treatment and disposal service       750    864    972  -114  -13,2%
 and fire hydrant service                                                       
Construction service and design                  285    186     44    99   53,2%
Other works and services                         198    204    221    -6   -2,9%



Outside service area sales volumes were 0.23 mln m3 or 13.9% lower than in the
2nd quarter of 2013. As already mentioned before the main factor in this
decrease came from lower storm water volumes. 

The sales from the operation and maintenance of the storm water and
fire-hydrant system in the main service area have decreased by 13.3% to 0.75
mln euros in the 2nd quarter of 2014 due to lower volumes compared to the same
period in 2013. 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. 

The sales of construction activities and design services have increased by
53.2% to 0.29 mln euros in the 2nd quarter of 2014 compared to 2nd quarter in
2013, mostly due to mild spring of 2014 allowing construction works to be
started earlier. 



Cost of Goods Sold and Gross profit

The cost of goods sold for the main operating activity was 5.64 mln euros in
the 2nd quarter of 2014, showing 0.53 mln euros or 8.6% decrease compared to
the equivalent period in 2013. The cost decrease is mainly influenced by the
pollution tax decrease in the 2nd quarter of 2014 as described below. 



Cost of goods sold                      Quarter 2        Variance 14/13
                                  2014    2013    2012     €       %   
Water abstraction charges          -261    -248    -236    -13     5,2%
Chemicals                          -448    -426    -380    -22     5,2%
Electricity                        -729    -855    -899    126   -14,7%
Pollution tax                      -550  -1 086    -227    536   -49,4%
Total direct production costs    -1 988  -2 615  -1 742    627   -24,0%
Staff costs                      -1 314  -1 250  -1 258    -64     5,1%
Depreciation and amortization    -1 321  -1 285  -1 294    -36     2,8%
Construction service and design    -237    -149     -69    -88    59,1%
Other costs of goods sold          -783    -873    -969     90   -10,3%
Other costs of goods sold total  -3 655  -3 557  -3 590    -98     2,8%
Total cost of goods sold         -5 643  -6 172  -5 332    529    -8,6%
                                                                       





Total direct production costs (water abstraction charges, chemicals,
electricity and pollution taxes) decreased by 0.63 mln euros or 24.0% year on
year. Biggest decrease came from the decrease in pollution tax. Other changes
came from a combination of increase in prices and tax rates and movements in
treatment volumes that affected the costs of goods sold together with the
following additional factors: 

  -- Water abstraction charges increased only by 0.01 mln euros or 5.2% to 0.26
     mln euros in the 2nd quarter of 2014, driven mainly by 5% raise in tax
     rates (worth 0.01 mln euros).
  -- Total chemical costs remained broadly flat, increasing 0.02 mln euros or
     5.2% to 0.45 mln euros in the 2nd quarter of 2014. Costs change was mainly
     influenced by the increase in dosage used in sewage treated and chemicals
     price, which was balanced by decrease in treated.
  -- Electricity costs decreased by 0.13 mln euros or 14.7% in the 2nd quarter
     of 2014 compared to the 2nd quarter of 2013. Lower electricity costs are
     mostly derived from the decrease in electricity price, used volumes and
     used unit costs, worth 0.17 mln euros. Positive effects are reduced
     slightly by increased unit costs in waste water treatment plant worth 0.05
     mln euros.
  -- In the 2nd quarter of 2014 the pollution tax expense decreased by 0.54 mln
     euros or 49.4%. The decrease is related to the incident in the wastewater
     treatment plant in the 2nd quarter of 2013. Eliminating the one-off
     influence the pollution tax expenses have increased by 0.37 mln euros or
     200.8% in the 2nd quarter of 2014 compared to relevant quarter in 2013.

Similarly to the 1st quarter in 2014 the increase is related to the change in
the allowed concentration of heavy metals in treated effluent in the changed
water permit issued by the Environmental Board at the end of December 2013. The
former limit concentrations of heavy metals in treated effluent were reduced
400 times, due to which the Company was not technically able to meet the limit
values, although nothing has changed in the efficiency of Company’s operations. 

Due to non-compliance with the amounts allowed the Company accounted for
excessive pollution tax costs. The Company has declared and accounted for the
pollution tax based on the prudent principles. The Company has recognised
losing 0.5 coefficient and accounted for 100 times penalties for heavy metals
concentration and associated tax. Due to the new limits 0.35 million euros
extra pollution tax expenses occurred. If there had not been the change in the
allowed concentrations, the pollution tax expenses would have increased only by
10.9% or 0.02 mln euros. 

In July 2014 the environmental department has issued the draft change of the
water permit in which the allowed concentrations have been increased to the
achievable levels and starting from the 3rd quarter 2014, if the new water
permit has been confirmed, we expect to have the pollution tax at the normal
level. 

Other cost of goods sold (staff costs, depreciation, construction services and
other cost of goods sold) in the main operating activity increased by 0.10 mln
euros or 2.8%. Most of the increase in costs came from increased costs in
construction services provided to outside customers in relation to the higher
construction revenues. The profit from construction revenues has remained
relatively stable. 

Increased construction costs were balanced by the decrease in repair and
maintenance costs carried out in the 2nd quarter of 2014. Increased staff costs
by 5.1% or 0.06 mln euros mainly relate to higher headcount to provide the
construction and asphalting services. 

As a result of all of the above the Group’s gross profit for the 2nd quarter of
2014 was 7.73 mln euros, which is an increase of 0.41 mln euros, or 5.6%,
compared to the gross profit of 7.32 mln euros for the 2nd quarter of 2013. 



Other Operating Costs

General administration expenses increased in total 0.18 mln euros or 13.6%,
mainly because of higher consultation and legal fees related to the tariff
dispute, and also higher advertising fees. 



Other net income/expenses

Other net income increased to a net income of 0.10 mln euros, compared to 0.05
mln euros net expenses in the 2nd quarter of 2013. The result in the 2nd
quarter has been influenced by collecting the doubtful receivables. 



Operating profit

As a result of above factors the Group’s operating profit for the 2nd quarter
of 2014 totalled 6.19 mln euros compared to 5.74 mln euros in the corresponding
quarter in 2013, which shows an increase of 0.45 mln euros or 7.8%. Removing
the impact of pollution tax in relevant periods the Group’s operating profit
had been 1.6% or 0.11 mln euros lower. 



Financial expenses

The Group’s net financial expenses amounted to 0.64 mln euros in the 2nd
quarter of 2014, which is a negative change of 1.26 mln euros compared to 0.62
mln euros financial income in the 2nd quarter of 2013. The major reason for the
decline comes from difference of the change of the fair value of the swap
contracts as described below. 

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 are still with floating interest rate. At this
point in time the estimated fair value of the swap contracts is negative,
totalling 2.38 mln euros. Effective interest rate (incl. swap interests) in the
2nd quarter of 2014 was 3.05%, amounting in the interest costs of 0.73 mln
euros, compared to the effective interest rate of 3.24% and the interest costs
of 0.78 mln euros into the 2nd quarter of 2013. 

Other influences for change in financial expenses has been decrease in interest
income by 0.14 mln euros or 48.4%. 



Profit Before and After Tax

The Group’s profit before taxes for the 2nd quarter of 2014 was 5.55 mln euros,
which is 0.81 mln euros or 12.7% lower than the profit before taxes of 6.36 mln
euros for the 2nd quarter of 2013, resulting mainly from the impact of the
change of the fair value of the swap contracts and also due to decreased
pollution tax costs and an increase in professional fees as described above.
The profit before taxes for the 2nd quarter without the decreased pollution tax
and swap costs impact was 3.7% or 0.23 mln euros lower than in the comparative
period last year. 

The year on year increase in dividend payment by 0.6 mln euros increased also
the income tax on dividends by 0.16 mln euros. The Group’s profit after taxes
for the 2nd quarter of 2014 was 0.77 mln euros, which is 0.97 mln euros lower
than the profit after taxes of 1.73 mln euros for the 2nd quarter of 2013. 



Results for the six months of 2014

During the six months of 2014 the Group’s total sales increased, year on year,
by 1.9% to 26.68 mln euros. Sales of water and wastewater treatment were 24.18
mln euros, a 0.9% increase compared to the six months of 2013. 

The movements in sales are mostly similar to the movements in the 2nd quarter
described above. There has been a slight 0.20 mln euros or 1.7% increase in the
sales to residential customers and 0.14 mln euros or 1.4% of decrease in the
sales to the commercial clients. The sales revenues from outside service area
clients for water and wastewater services has also been relatively stable
showing an increase of 0.12 mln euros or 5.8% compared to six months in 2013. 

Due to less rainfall in 2013, the revenues from storm water treatment in the
first half of 2014 remain 0.12 mln euros or 9.5% higher than in the comparative
period in 2013. 

The operating profit remained fairly stable decreasing by 0.2% to 11.87 mln
euros during the six months of 2014 compared to the six months of 2013. As
revenues have been relatively flat, increasing only 1.9% or 0.49 mln euros,
then the main reason for a decline comes from the rise in pollution tax
expenses (0.32 mln euros year on year), further influenced by the increase in
professional services (0.29 mln euros year on year). Pollution tax increase is
influenced by two factors: first the pollution tax expenses in 2013 were
impacted by the incidents at the wastewater treatment plant in the first part
of the year (worth 0.91 mln euros) and by the non-compliance with the heavy
metals concentration in six months of 2014 (worth 1.15 mln euros). 

Net financial expenses increased by 1.94 mln euros or 286.8%. Mainly influenced
by the non-monetary impact of the change in the fair value of the swap
contracts the Company has entered. The negative non-monetary impact for 2014
expenses is 0.06 mln euros (2013: positive impact 1.65 mln euros). 

The Group’s profit before taxes for the six months of 2014 was 10.61 mln euros,
which is a 15.6% decrease compared to the relevant period in 2013. The Group’s
net profit for the six months of 2014 was 5.83 mln euros, which is 2.12 mln
euros lower than the net profit of 7.95 mln euros in the equivalent period in
2013. 



Balance sheet

In the six months of 2014 the Group invested 4.06 mln euros into fixed assets.
As of 30 June 2014 non-current fixed assets amounted to 153.53 mln euros and
total non-current assets amounted to 154.47 mln euros. (30. June 2013: 150.15
mln euros and 159.49 mln euros respectively). 

The reduction in long-term receivables compared to year end by 2.19 mln euros
to 0.02 mln euros is mainly related to the reclassification of long term
receivable to short term. 

Compared to the year end the current liabilities have increased by 3.51 mln
euros to 14.73 mln euros in the six months. The movement is mainly related to
increased tax liabilities in the amount of 4.82 mln euros, mostly related to
the dividend income tax payable in July and Trade payables by 0.53 mln euros,
balanced by the decrease in Current portion of long-term borrowings in the
amount of 1.98 mln euros. 

The Group’s loan balance has remained stable at 95 mln euros. In May 2014, the
Company replaced its loan from NIB with the new loan in the amount of 20 mln
euros. The weighted average interest margin for the total loan facility is
1.04%. 

The Group has a Total debt/Total assets level as expected of 61.9%, in range of
55%-65%, reflecting the Group’s equity profile. This level is consistent with
the same period in 2013 when the total debt/total assets ratio was 61.7%. 

Biggest share of the rest of the long term liabilities is deferred income from
connection fees amounting to 10.75 mln euros (2013: 8.33 mln euros). 

In the 4th quarter of 2011 the Group recorded and noted an exceptional
contingent liability, which could cause an outflow of economic benefits of up
to 36.0 mln euros. In the 3rd quarter of 2013 the Group re-evaluated the
liability, which now stands at 34.0 mln euros, as per note 13 to the accounts. 



Cash flow

As of 30 June 2014 the cash position of the Group is strong. The cash flows of
the Group has continued to be rather stable. At the end of June 2014 the cash
balance of the Group stood at 26.57 mln euros, which is 13.5% of the total
assets (2013: 20.89 mln, which is 10.7% of the total assets). 

The biggest contribution to the cash flows comes from main operations. During
the six months of 2014, the Group generated 13.84 mln euros of cash flows from
operating activities, a decrease of 1.44 mln euros compared to the
corresponding period in 2013. 

2014 operating cash flows were below 2013 cash flows due to a change in working
capital. Underlying operating profit still continues to be the main contributor
to operating cash flows. 

The Group’s cash flows from investing activities have also been positive for
past two years. In the six months of 2014 net cash flows from investing
activities resulted in a cash inflow of 1.02 mln euros, an increase of 0.31 mln
euros compared to an inflow of 0.71 mln euros in the six months of 2013. This
is made up as follows: 

In the six months of 2014 the investments in fixed assets had increased 0.17
mln euros compared to 2013 amounting to 3.62 mln euros. 

The compensations received for the construction of pipelines were 4.34 mln
euros in the six months of 2014, an increase of 0.79 mln euros compared to same
period in 2013. Most of the cash collected for pipes is related to the sewage
network extension program which was ended in 2012. The collections will still
continue till March 2015. Interests received have also decreased by 0.29 mln
euros compared to same period in 2013. 

In the six months of 2014, cash outflow from financing amounted to 20.07 mln
euros, which is 1.05 mln euros more than in the same period of 2013, mainly due
to increased dividend payment and dividend income tax payment by 1.11 mln
euros, balanced slightly by lower interest and financing costs by 0.08 mln
euros. 



Employees

At the end of the 2nd quarter of 2014, the total number of employees was 317
compared to 309 at the end of the 2nd quarter of 2013. The full time equivalent
(FTE) was respectively 304 in 2014 compared to the 296 in 2013. 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. 



Dividends

Dividend allocation to the shareholders is recorded as the 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. 

On the annual general meeting of shareholders held on 20th May 2014, 90 cents
dividends per share and the total dividend pay-out from the profit of 2013 net
income in the amount of 18.00 mln euros was approved. It is in accordance with
the Company’s dividend policy. Compared to 2013 dividends of 87 cents per
share, the increase is equal to the inflation. 

Dividends were paid out on 13th of June 2014.



Share performance

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

As of 30 June 2014 AS Tallinna Vesi shareholders, with a direct holding over
5%, were: 

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

Pension funds have continued to hold the share in their portfolios during the
2nd quarter of 2014, owning 2.57% of the total shares compared to 2.47% at the
end of 2nd quarter 2013. 

As of 30 June 2014, the closing price of the AS Tallinna Vesi share was 13.20
euros, which is a 4.8% (2013: -3.9%) increase compared to the closing price of
12.60 euros at the beginning of the quarter. During the same period the OMX
Tallinn index increased by 0.7% (2013: -3.04%). 

In the six months of 2014 2 519 deals with the Company’s shares were concluded
(2013: 3 261 deals) during which 581 thousand shares or 2.9% exchanged their
owners (2013: 1 290 thousand shares or 6.5%). 

The turnover of the transactions was 5 667 thousand euros lower than in 2013
amounting to 7 485 thousand euros. The share price has shown an increase
despite of the on-going contractual debate. 



Operational performance

Similarly to previous years, the 6 months in 2014 can be characterized by
stability. Above all, it gives security to our consumers that they are provided
with a high-quality drinking water, stable water supply and service of
wastewater discharge. In addition to the quality of service, we also
concentrate on being a good partner for our customers. The feedback from our
customers has become more positive, but despite that we aim to continue making
efforts to fulfil customers’ expectations. Operational indicators for 6 months
in 2014: 

Indicator                                              2013 6     2014 6 months 
                                                       months                   
--------------------------------------------------------------------------------
Drinking water                                                                  
--------------------------------------------------------------------------------
- 
Compliance of water quality at the customers tap       99.80%         99.86%    
--------------------------------------------------------------------------------
Water loss in the water distribution network           16.64%         16.38%    
--------------------------------------------------------------------------------
Average duration of water interruptions per property   3.53 h         2.80 h    
--------------------------------------------------------------------------------
Wastewater                                                                      
--------------------------------------------------------------------------------
- 
Number of sewer blockages                                478           434      
--------------------------------------------------------------------------------
Number of sewer bursts                                   74            175      
--------------------------------------------------------------------------------
Number of customer contacts regarding flooding,          866           529      
 blockages and storm water                                                      
--------------------------------------------------------------------------------
Wastewater treatment compliance with environmental       100%     100% (excl. Zn
 standards                                                           and Cu)    
--------------------------------------------------------------------------------
Customer Service                                                                
--------------------------------------------------------------------------------
- 
Number of written complaints                             73             32      
--------------------------------------------------------------------------------
Number of customer contacts regarding water quality      90             65      
--------------------------------------------------------------------------------
Number of customer contacts regarding water pressure     326           144      
--------------------------------------------------------------------------------
Responding written customer contacts within at least    98.6%         99.0%     
 2 work days                                                                    
--------------------------------------------------------------------------------
Number of failed promises                                 9             21      
--------------------------------------------------------------------------------
Notification of unplanned water interruptions at        97.1%         97.4%     
 least 1h before the interruption                                               
--------------------------------------------------------------------------------



Corporate structure

At the end of the quarter, 30 June 2014, 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. 

Supervisory Council has formed three committees to advise Supervisory Council
on audit, remuneration and corporate government 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/images/stories/2013_ar_astv_eng.pdf

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-Rep
ort 



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 20 March 2017), Aleksandr Timofejev (with the
powers of the Management Board Member until 29 October 2015) and Riina Käi
(with the powers of the Management Board Member until 29 October 2015). 

Additional information about 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

Potential legal claim for breach of international treaty

The Supervisory Council of the Company has given 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. This follows three years of intensive negotiation to try and
reach an amicable settlement, which so far has not been forthcoming. 

Additional details surrounding this claim can be found via the following link:
https://newsclient.omxgroup.com/cdsPublic/viewDisclosure.action?disclosureId=609
264&messageId=754811 



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. The outcome and lengths of the
Court proceedings is outside the control of the Company. 





STATEMENT OF COMPREHENSIVE         II         II         6        6        12   
 INCOME                          quarter    quarter    months   months   months 
(thousand €)                       2014       2013     2014     2013      2013  
                                                                                
Revenue                            13 371     13 493   26 678   26 186    53 087
Costs of goods sold                -5 643     -6 172  -11 686  -11 341   -22 505
                                                                                
GROSS PROFIT                        7 728      7 321   14 992   14 845    30 582
                                                                                
Marketing expenses                   -106       -175     -273     -399      -690
General administration             -1 535     -1 351   -2 900   -2 479    -5 060
 expenses                                                                       
Other income/ expenses (-)            104        -53       55      -70       -75
                                                                  ,             
OPERATING PROFIT                    6 191      5 742   11 874   11 897    24 757
                                                                                
Financial income                      154      1 395      288    2 237       681
Financial expenses                   -793       -779   -1 549   -1 562      -877
                                                                                
PROFIT BEFORE TAXES                 5 552      6 358   10 613   12 572    24 561
                                                                                
Income tax on dividends            -4 785     -4 625   -4 785   -4 625    -4 625
                                                                                
NET PROFIT FOR THE PERIOD             767      1 733    5 828    7 947    19 936
COMPREHENSIVE INCOME FOR THE          767      1 733    5 828    7 947    19 936
 PERIOD                                                                         
Attributable to:                                                                
Equity holders of A-shares            766      1 732    5 827    7 946    19 935
B-share holder                       0,60       0,60     0,60     0,60      0,60
                                                                                
Earnings per A share (in             0,04       0,09     0,29     0,40      1,00
 euros)                                                                         
Earnings per B share (in              600        600      600      600       600
 euros)                                                                         





STATEMENT OF FINANCIAL POSITION                                                 
(thousand €)                                  31.06.2014  31.06.2013  31.12.2013
                                                                                
ASSETS                                                                          
CURRENT ASSETS                                                                  
Cash and equivalents                              26 566      20 892      31 786
Trade receivables, accrued income and             15 526      15 378      15 010
 prepaid expenses                                                               
Inventories                                          441         391         429
TOTAL CURRENT ASSETS                              42 533      36 661      47 225
                                                                                
NON-CURRENT ASSETS                                                              
Other long-term receivables                           22       8 396       2 213
Property, plant and equipment                    153 526     150 146     152 246
Intangible assets                                    919         949       1 037
TOTAL NON-CURRENT ASSETS                         154 467     159 491     155 496
TOTAL ASSETS                                     197 000     196 152     202 721
                                                                                
LIABILITIES                                                                     
                                                                                
CURRENT LIABILITIES                                                             
Current portion of long-term borrowings              169         149       2 146
Trade and other payables                           9 947      11 458       4 761
Derivatives                                        1 764       1 883       1 816
Prepayments                                        2 846       2 366       2 490
TOTAL CURRENT LIABILITIES                         14 726      15 856      11 213
                                                                                
NON-CURRENT LIABILITIES                                                         
Deferred income from connection fees              10 752       8 333      10 143
Borrowings                                        95 846      95 680      93 618
Derivatives                                          620       1 040         507
Other payables                                        21          24          32
TOTAL NON-CURRENT LIABILITIES                    107 239     105 077     104 300
TOTAL LIABILITIES                                121 965     120 933     115 513
                                                                                
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                                 37 023      37 207      49 196
TOTAL EQUITY CAPITAL                              75 035      75 219      87 208
TOTAL LIABILITIES AND EQUITY CAPITAL             197 000     196 152     202 721



CASH FLOW STATEMENT                                       6        6        12  
                                                        months   months   months
(thousand €)                                            2014     2013     2013  
                                                                                
CASH FLOWS FROM OPERATING ACTIVITIES                                            
Operating profit                                        11 874   11 897   24 757
Adjustment for depreciation/amortisation                 2 895    2 963    5 809
Adjustment for profit from government grants and           -72        0     -117
 connection fees                                                                
Other non-cash adjustments                                  24      -48       11
Profit/loss(+) from sale and write off of property,          3      -20     -138
 plant and equipment, and intangible assets                                     
Change in current assets involved in operating          -1 592     -864     -433
 activities                                                                     
Change in liabilities involved in operating                703    1 348      -92
 activities                                                                     
Total cash flow from operating activities               13 835   15 276   29 797
                                                                                
CASH FLOWS FROM INVESTING ACTIVITIES                                            
Loans granted                                                0        0        0
                                                             0        0    3 814
Acquisition of property, plant and equipment, and       -3 618   -3 445   -9 187
 intangible assets                                                              
Proceeds from sales of property, plant and equipment     4 340    3 551    7 885
Compensations received for construction of pipelines         1       20      165
Interest received                                          296      583      693
Total cash flow from investing activities                1 019      709    3 370
                                                                                
CASH FLOWS FROM FINANCING ACTIVITIES                                            
Received loans                                          20 000        0        0
Repayment of loans                                     -20 000        0        0
Interest paid and loan financing costs, incl swap       -1 486   -1 563   -3 154
 interests                                                                      
Repayment of finance lease                                 -82      -64     -136
Dividends paid                                         -18 001  -17 401  -17 401
Income tax on dividends                                   -505        0   -4 625
Total cash flow from financing activities              -20 074  -19 028  -25 316
                                                                                
Change in cash and bank accounts                        -5 220   -3 043    7 851
                                                                                
CASH AND EQUIVALENTS AT THE BEGINNING OF THE PERIOD     31 786   23 935   23 935
                                                                                
CASH AND EQUIVALENTS AT THE END OF THE PERIOD           26 566   20 892   31 786










         Karl Heino Brookes
         Chairman of the Management Board
         +372 6262 201
         [email protected]