Registered Number 2127283
Veolia Water UK PLC (formerly: Vivendi Water UK PLC)
Annual Report for the year ended 31 December 2002
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Contents
Page Directors and Officers
1
Directors’ Report
2
Independent Auditors’ Report to the Shareholders
8
Consolidated Profit and Loss Account
9
Consolidated Statement of Total Recognised Gains and Losses
10
Consolidated Balance Sheet
11
Company Balance Sheet
12
Consolidated Cash Flow Statement
13
Notes to the Consolidated Cash Flow Statement
14
Notes to the Financial Statements
16
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Directors and Officers Directors The Lord Borrie of Abbots Morton, QC J C Banon M J E Butcher F Darley J S Gummer J B Mangion G Mohr S Murray C Roger-Lacan
Chairman (Appointed as Chairman 3 December 2002) Managing Director
(Resigned 30 June 2003) (Resigned 3 December 2002) (Appointed 15 July 2003)
Secretary R G Castle
Registered Office 37-41 Old Queen Street London SW1H 9JA
Auditors RSM Robson Rhodes LLP 186 City Road London EC1V 2NU
Registered Number 2127283
1
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Directors’ Report The Directors submit their report and the audited financial statements of Veolia Water UK PLC for the year ended 31 December 2002. The comparative figures are for the nine months period ended 31 December 2001. The Company changed its name from Vivendi Water UK PLC on 1 May 2003. Principal activities The principal activities of the Group are the investment in and management of long-term interests in the water industry in the United Kingdom, Ireland and South Asia. Dividends and transfers to reserves The consolidated profit after taxation and minority interests amounted to £135.8m (2001: £48.1m). An interim dividend of £7.0m has been paid during the year (2001: £22.0m), and the Directors propose a final dividend of £21.5m (2001: £21.5m) in respect of the year ending 31 December 2002. Retained profits of £107.3m (2001: £4.6m) will be transferred to reserves. Review of business and future developments Turnover at £189.0m for the twelve months compares to £142.2m for the previous nine months. Profit before tax for the twelve months was £155.0m compared to £60.1m for the corresponding nine months. The disposal of the investments in Bristol Water Holdings plc and South Staffordshire Group Plc realised a pre-tax profit of £92.4m in the year. Net funds before financing of £77.7m were generated during the year, resulting in net funds of £117.7m compared to £40.0m last year. Capital expenditure for the twelve months to December, net of contributions from third parties, was £78.5m, compared to £45.8m for the previous nine months. The year has seen a record level of investment for a twelve months period with substantial expenditure at both treatment works and on the water mains network. Despite a challenging operating environment, operational performance (levels of service, water quality compliance, and serviceability to customers) has been maintained. Leakage will continue as a focus of attention and increased resources remain in place as the regulated business strives to meet its extremely demanding targets.
2
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Directors’ Report (continued) Review of business and future developments (continued) During the year the Group continued to develop its activities in the industrial and international markets with Veolia Water Industrial Outsourcing Limited, formerly Vivendi Water Industrial Outsourcing Limited, (a joint venture with an associate company, Vivendi Water Systems Limited). A number of contracts were secured during the year in both the public and private sectors in Ireland, South Asia and the United Kingdom. In February 2003, the Company entered into an agreement with a group of institutional investors led by The Royal Bank of Scotland to acquire an indirect minority interest in Southern Water Services Ltd (SWS), a UK water and wastewater operator. This agreement received all the necessary regulatory approvals and closed on 7th May 2003. It represented the final step in our acquisition of an interest in SWS. In March 2002, First Aqua Holdings Limited (FAH) agreed to acquire the Southern Water Group (Southern Water) from Scottish Power at an enterprise value of £2 billion. The purchase agreement was executed in April 2002. In May 2002, the Company agreed to acquire First Aqua (JVCo) Ltd (FA(JVCo)), Southern Water’s holding company, from FAH on terms equivalent to the initial purchase by FA(JVCo) of Southern Water. Through this acquisition, we sought to control a recognised major operator in the UK water market, in a dynamic geographic area, and particularly to gain access to the UK treatment market in order to generate synergies with our other UK activities. In the context of this transaction, our ultimate parent, Veolia Environnement SA (VE) granted a put option to and held a call option from a group of financial investors that had acquired £374m of FA(JVCo)’s preferred shares. These shares have since been redeemed by FA(JVCo) and the put and call options have therefore lapsed. The acquisition of FA(JVCo) Ltd was approved by the European Commission on 23rd August 2002, but remained subject to the approval of UK regulatory authorities and the arrangement of long-term non-recourse financing to refinance the existing debt of FA(JVCo) and SWS. Having concluded that the closing conditions set forth in the May 2002 agreement had not been satisfied, the Company renounced seeking to acquire a controlling interest in SWS. In February 2003, we entered into an agreement with Southern Water Capital Limited (SWC) relating to the acquisition of FA(JVCo), pursuant to which, Southern Water Investments Ltd (SWI), a newly created subsidiary of the Company, acquired FA(JVCo) in accordance with the terms of the May 2002 agreement with FAH and immediately issued new capital to SWC, which is held by The Royal Bank of Scotland and other investors, such that SWC now holds 80.1% of SWI and we hold 19.9%. SWC, which now controls Southern Water through SWI, has also granted us an option to acquire an additional 5.1% stake in SWI. Pursuant to this agreement, FA (JVCo) also redeemed the £374m preferred shares issued to financial investors in March 2002. On April 28, 2003, the UK Competition Commission approved the transaction on the condition that we agree to not hold more than 25% of SWI and to refrain from appointing more than two members of SWI’s board of directors and more than three members of SWS’s board of directors. The agreement with SWC closed on 7th May 2003. The Company has invested £50m in SWI and SWS through ordinary and preference share subscriptions. In addition, in connection with SWS’ issuance of preferred shares to several investors for £220m, VE have agreed to grant these investors put options which may require it to purchase the preferred shares held by them after five years. SWC has invested £273m in various equity and loan instruments.
3
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Directors’ Report (continued) Review of business and future developments (continued) The SWI Group has completed the refinancing of its bridge facilities through a securitisation of its regulated activities involving the issuance of debt instruments using a “ring-fencing” technique commonly used in financings in the water sector and at the same time implemented a corporate reorganisation to simplify the group structure. At 31st December 2002, debtors shown in the balance sheet included £28m in respect of transaction costs incurred to that date. Since the year end, additional costs of £6m were incurred in respect of the Company’s agreement with SWC. SWI agreed to indemnify the Company for certain fees and other costs incurred by it in connection with the acquisition by SWI of FA(JVCo) and an amount of £27.2m was received by the Company on 23rd July 2003. Having regard to the equity and non equity interests held by the Company and the other contractual terms surrounding the Company’s investment in SWI and its subsidiaries, the Company intends to treat SWI as an associate in its consolidated accounts for the year ending 31st December 2003. Research and development In addition to the Group's own research and development activities, the Group's water company subsidiaries are committed to participate in research programmes operated by UK Water Industry Research Limited, which undertakes research nationally into all aspects of water industry operations. The Group also participates in and benefits from research undertaken by other companies within the Veolia Environnement SA Group (formerly Vivendi Environnement SA Group). Expenditure in the year was £506,000 (2001: £518,000). Corporate social responsibility In addition to delivering economic growth, the Directors recognise the importance of achieving high standards of environmental and social performance within the Group. Management of the environmental and social dimensions of the business has been incorporated under the banner of corporate social responsibility.
4
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Directors’ Report (continued) Corporate social responsibility (continued) Responsibility for environmental and social performance within each subsidiary lies with each respective Board of Directors. These and the main Board are advised by a Corporate Social Responsibility Advisory Committee. As the Group's policies and programmes develop and are interwoven, it is the Board's intention to comply with the Association of British Insurers' disclosure guidelines on corporate social responsibility. Details of the Group's environmental and social programme, together with performance and targets, can be found in the Veolia Water UK Environmental and Social Report 2002. Copies of the report may be obtained by writing to the Environment Department, Veolia Water UK PLC, 37-41 Old Queen Street, London SW1H 9JA. Creditor payment policy The Directors are aware of the need for timely payment for goods and services received. It is Company policy to settle the terms of payment with suppliers when agreeing terms of business and to pay in accordance with contractual and other legal obligations. The payment policy applies to all payments to creditors for revenue and capital supplies of goods and services. Trade creditors (excluding inter-group) at 31 December 2002 represent 34 days (2001: 36 days) of purchases during the year for the Group. Market value of land and buildings The major part of land and buildings included within tangible fixed assets are used for the purpose of providing potable water to the consumer. A significant portion of the Group’s buildings and installations are highly specialised and have a market value only in the context of the provision of a potable water supply. Charitable donations Donations for charitable purposes made by Group companies during the year amounted to £40,367 (2001: £33,168), together with £49,490 (2001: £40,868) of sponsorship. No political contributions were made by the Group. Employee information Group companies consult their staff on matters of concern in the context of their employment. All Group companies continued to carry out their obligations arising from the Health & Safety at Work Act 1974 through consultative committees consisting of management and employee representatives. The Group gives every consideration to applications for employment from disabled persons where the requirements of the job may be covered adequately by a handicapped or disabled person. With regard to existing employees and those who have become disabled during the year, the Group has continued to examine ways and means of providing training and career development wherever appropriate.
5
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Directors’ Report (continued) Directors and their interests The Directors’ interests in the share capital of the ultimate parent company, Veolia Environnement SA, were as follows: At 31 December 2002 Number of ordinary shares 109 -
J C Banon Lord Borrie M J E Butcher F Darley J S Gummer J B Mangion G Mohr
At 31 December 2001 Number of ordinary shares 93 -
Veolia Environnement SA operates a share option scheme by which Executive Directors and other executives are able to subscribe for ordinary shares in the ultimate parent company. The interests of the Directors in options over the ordinary shares of Veolia Environnement SA were as follows : Number of options At 1 January 2002
Granted
Exercised
At 31 December 2002
Exercise Price
Date from which exercisable
Expiry date
(€) J C Banon
5,000 -
20,000
-
5,000 20,000
42.00 37.53
08.02.04 25.01.05
07.02.09 25.01.10
M J E Butcher
1,550
-
-
1,550
42.00
08.02.04
07.02.09
F Darley
1,550 -
3,100
-
1,550 3,100
42.00 37.53
08.02.04 25.01.05
07.02.09 25.01.10
J B Mangion
1,900 -
4,800
-
1,900 4,800
42.00 37.53
08.02.04 25.01.05
07.02.09 25.01.10
30,000 30,000 -
30,000
-
30,000 30,000 30,000
32.50 42.00 37.53
23.06.03 08.02.04 25.01.05
23.06.08 07.02.09 25.01.10
G Mohr
During the year the ordinary shares of Veolia Environnement SA traded between €17.18 and €38.67. The price at the end of the year was €21.91. The €/£ exchange rate was €1.538/£ at 31 December 2002 with an average during the year of €1.586/£.
6
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Directors’ Report (continued) Statement of Directors’ responsibilities for the Annual Report The Directors are required by United Kingdom company law to prepare financial statements for each financial period that give a true and fair view of the state of affairs of the Company and the Group as at the end of the financial period and of the profit or loss of the Group for that period. The Directors confirm that suitable accounting policies have been used and applied consistently and reasonable and prudent judgements and estimates have been made in the preparation of the financial statements for the year ending 31 December 2002. The Directors also confirm that the applicable United Kingdom accounting standards have been followed and that the financial statements have been prepared on a going concern basis. The Directors are responsible for keeping proper accounting records, for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for ensuring that the Directors’ Report and other information included in the Annual Report is prepared in accordance with company law in the United Kingdom. Auditors On 3 May 2003, RSM Robson Rhodes, the Group’s auditors, transferred their business to RSM Robson Rhodes LLP. The Directors have consented to treating the appointment of RSM Robson Rhodes as extending to RSM Robson Rhodes LLP and a resolution to re-appoint RSM Robson Rhodes LLP will be proposed at the forthcoming Annual General Meeting. By order of the Board
R G Castle Secretary
31 July 2003
7
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Independent Auditors’ Report to the Shareholders of Veolia Water UK PLC We have audited the financial statements which comprise the consolidated proft and loss account, the consolidated statement of total recognised gains and losses, the consolidated balance sheet, the company balance sheet, the consolidated cash flow statement, and notes 1 to 32. This report is made solely to the Company’s shareholders, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s shareholders those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s shareholders, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors The Directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with applicable law and United Kingdom Accounting Standards are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and United Kingdom Auditing Standards. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors’ Report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and transactions with the Company and the members of the Group is not disclosed. We read the information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any information outside the Annual Report. Basis of audit opinion We conducted our audit in accordance with United Kingdom Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 December 2002 and of the Group’s profit for the year then ended and have been properly prepared in accordance with the Companies Act 1985. RSM Robson Rhodes LLP Chartered Accountants and Registered Auditors London, England
8
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Consolidated Profit and Loss Account Notes
Turnover Cost of sales
2
Year ended 31 December 2002 £’000
9 Months ended 31 December 2001 £’000
189,041 (100,106)
142,183 (70,770) 71,413 (33,140) 3,321
Gross profit Administrative expenses Other operating income
3
88,935 (40,505) 4,633
Group operating profit
4
53,063
41,594
7 8
28 3,658 6,488 92,439 5,433 (6,080)
7 2,768 451 14,204 5,256 (4,193)
Share of operating profit in joint venture Income from other participating interests Profit on the disposal of fixed assets Profit on the disposal of investments Interest receivable and similar income Interest payable and similar charges Profit on ordinary activities before taxation Tax on profit on ordinary activities
9
155,029
60,087
(18,177)
Profit on ordinary activities after taxation Equity minority interests Non-equity minority interests
136,852 (1,045) (5)
(11,279) _ 48,808 (697) (4)
Profit on ordinary activities after taxation and minority interest
135,802
48,107
Dividends
10
(28,534)
(43,518)
Retained profit for the year
23
107,268
4,589
There is no difference between profit on ordinary activities before taxation, retained profit for the year stated above, and their historical cost equivalents. There were no material acquisitions or disposals of businesses during the year. All material activities relate to continuing operations. The notes on pages 14 to 49 form part of these financial statements.
9
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Consolidated Statement of Total Recognised Gains and Losses
Profit for the financial period and total recognised gains and losses relating to the year Prior year adjustment for deferred tax in respect of first time application of FRS19 Prior year adjustment for impact of deferred tax in respect of first time application of FRS19 on minority interests Total gains and losses recognised since last annual report
10
Year ended 31 December 2002 £’000
9 Months ended 31 December 2001 £’000
135,802
48,107
-
(37,156)
-
589
135,802
11,540
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Consolidated Balance Sheet Notes Fixed assets Tangible assets Investments
11a 12
Current assets Stocks Debtors Investments Cash at bank and in hand
14 15 13
Creditors: amounts falling due within one year
16
Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges
17 18
Net assets
31 December 2002 £’000
31 December 2001 £’000
527,088 50
486,262 4,762
527,138
491,024
1,536 245,633 3,491 7,965
2,199 154,853 8,145 1,700
258,625 (170,878)
166,897 (149,455)
87,747
17,442
614,885
508,466
(60,229) (47,242)
(66,140) (42,533)
507,414
399,793
Capital and reserves Called up share capital Other reserves Profit and loss account
22 23 23
500 86,632 416,436
500 86,632 309,168
Equity shareholders’ funds Equity minority interests Non-equity minority interests
25 21 21
503,568 3,799 47
396,300 3,446 47
507,414
399,793
The notes on pages 14 to 49 form part of these financial statements. The financial statements on pages 9 to 49 were approved by the Board of Directors on 31 July 2003 and were signed on its behalf by:
J C Banon Director
J B Mangion Director
11
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Company Balance Sheet Notes
31 December 2002 £’000
31 December 2001 £’000
11b 12
6,544 212,821
6,608 246,260
219,365
252,868
258,905 146
159,333 18
259,051 (68,048)
159,351 (50,555)
Net current assets
191,003
108,796
Total assets less current liabilities
410,368
361,664
Fixed assets Tangible assets Investments
Current assets Debtors Cash at bank and in hand
15
Creditors: amounts falling due within one year
16
18
Provisions for liabilities and charges Net assets
(1,509)
(1,539)
408,859
360,125
Capital and reserves Called up share capital Other reserves Profit and loss account
22 23 23
500 159,315 249,044
500 159,315 200,310
Equity shareholders’ funds
25
408,859
360,125
The notes on pages 14 to 49 form part of these financial statements. The financial statements on pages 9 to 49 were approved by the Board of Directors on 31 July 2003 and were signed on its behalf by:
J C Banon Director
J B Mangion Director
12
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Consolidated Cash Flow Statement Notes*
Year ended 31 December 2002 £’000
9 Months ended 31 December 2001 £’000
87,963
72,658
5,497 (2,984) (1,899) 3,658 (634)
4,880 (2,261) (912) 2,768 (365)
3,638
4,110
Taxation paid
(12,074)
(10,884)
Capital expenditure and financial investment Purchase of fixed assets Contributions to fixed assets received Disposal of fixed assets Purchase of investments Disposal of investments
(87,169) 8,010 6,697 (49) 99,192
(42,900) 5,700 557 25,110
26,681
(11,533)
(28,534)
(52,215)
77,674
2,136
Net cash inflow from operating activities Returns on investments and servicing of finance Interest received Interest paid Interest element of finance lease rentals Dividends received Dividends paid to minorities
a
Net cash inflow from returns on investments and servicing of finance
Net cash inflow/(outflow) from capital expenditure and financial investment Equity dividends paid Cash inflow before management of liquid resources and financing Net cash outflow from management of liquid resources
b
(62,063)
(11,086)
Net cash outflow from financing
b
(6,167)
(1,778)
Increase/(decrease) in cash
c
9,444
(10,728)
*Notes to the consolidated cash flow statement are on pages 14 and 15.
13
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Consolidated Cash Flow Statement a.
Reconciliation of operating profit to net cash flow from operating activities Year ended 31 December 2002 £’000
Group operating profit Depreciation Amortisation of deferred credit Decrease in stocks Increase in debtors Increase in creditors and provisions Net cash inflow from operating activities
9 Months ended 31 December 2001 £’000
53,063 37,509 (406) 663 (29,427) 26,561
41,594 27,670 (305) 219 (12,215) 15,695
87,963
72,658
b.
Analysis of cash flows for headings netted in the consolidated cash flow statement At At 31 December 31 December 2002 2001 £’000 £’000 Management of liquid resources Cash on short-term deposit 31,626 Short-term loans to Group Undertakings (42,712) (62,063) (62,063)
(11,086)
Financing Financing of assets operated by other parties Capital elements of finance leases Repayments of short-term borrowing
(695) (3,892) (1,580)
(450) (1,328) -
Net cash outflow from financing
(6,167)
(1,778)
Net cash outflow from management of liquid resources
Veolia Water UK PLC includes term deposits and inter-group loans of less than a year as liquid resources.
14
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Consolidated Cash Flow Statement (continued) c.
Analysis of net funds
At 31 December 2001 £’000
Net funds: Cash at bank and in hand Bank overdrafts
1,700 (3,248) _ (1,548)
Liquid resources: Short-term loans to Group Undertakings Debt: Bank loans Finance leases (including sale and leaseback) Debentures Financing of assets operated by third parties
Net funds d.
Cash flow £’000 6,265 3,179 __ 9,444
At 31 December 2002 £’000 7,965 (69) 7,896
114,619 __ 114,619
62,063 __ 62,063
176,682
(10,000) (34,333) (4,667) (24,043) __ (73,043) __
1,580 3,892 695 __ 6,167 __
(8,420) (30,441) (4,667) (23,348)
40,028
77,674
117,702
Year ended 31 December 2002 £’000
9 Months ended 31 December 2001 £’000
176,682
(66,876)
Reconciliation of net cash flow to movement in net funds
Increase/(decrease) in cash in the year Cash inflow from increase in liquid resources Cash inflow/(outflow) from decrease/(increase) in debt and lease financing
9,444 62,063
(728) 11,086
6,167
(8,222)
Movement in net funds in the year
77,674
2,136
Opening net funds
40,028
37,892
Closing net funds
117,702
40,028
e.
Material non-cash transaction
Following the sale of the investment in Bristol Water Holdings plc, the Group received shares with a nominal value of £6,152,550 in Ecofin Water & Power Opportunities plc in part consideration (see Note 12).
15
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements 1.
Accounting policies a)
Accounting convention
The financial statements have been prepared under the historical cost convention in accordance with applicable Accounting Standards in the United Kingdom and, except for the treatment of certain grants and contributions described below, in accordance with the Companies Act 1985. b)
New accounting standards
FRS 17 “Retirement Benefits� need not be applied in full until financial statements with periods ending on or after 1 January 2005, and as such, the Group has only disclosed those items required under the standard in respect of periods ending on or after 22 June 2002. c)
Basis of consolidation
The financial statements include the accounts of Veolia Water UK PLC and its subsidiaries from their respective dates of acquisition. In 1998 the water companies entered into a partnership arrangement. Under FRS 9 this has been accounted for as a joint arrangement and not as a separate entity. The interest in a joint venture has been included in the consolidated financial statements using the gross equity method in accordance with FRS 9. d)
Goodwill
Goodwill arising on acquisitions prior to 31 March 1998, which represents the amounts by which the consideration paid for acquisitions exceeded the fair value of identifiable assets and liabilities, has been written off directly against reserves in the year of acquisition. In the event of a future disposal, this will be charged or credited in the profit and loss account of the business to which it related. Goodwill arising on future acquisitions will be capitalised and amortised in accordance with FRS 10. e)
Interest and dividends
Bank and short term deposit interest receivable is dealt with on an accruals basis. Income from fixed asset investments is treated as receivable by reference to the date on which the dividend is declared ex-dividend, or in the case of subsidiaries, from the date of recognition in their financial statements. In accordance with FRS 16, UK dividend income is recorded net of tax credits.
16
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 1.
Accounting policies (continued) f)
Tangible fixed assets and depreciation
Tangible fixed assets comprise: Infrastructure assets - mains and associated underground pipework. Other assets – land and buildings, operational structures, fixed plant, motor vehicles and mobile plant. Infrastructure assets comprise a network of systems. Expenditure on infrastructure assets, including renewals is treated as an addition and included at cost after deducting grants and contributions. The depreciation charge for infrastructure assets is the estimated level of annual expenditure required to maintain the operating capability of the network which is based on the Company’s independently certified asset management plan. Disposals of infrastructure assets are calculated based on the estimated lives of the assets before they are replaced. Depreciation is provided on all other tangible fixed assets except freehold land and is calculated to write off their cost over their estimated useful lives on a straight line basis. Assets acquired under finance leases are depreciated over the shorter of their useful life or the lease term. The performance of assets is continually monitored and where impairment is identified, fixed assets are written down to their recoverable amount. Any such write down would be charged to operating profit. Tangible fixed assets are reviewed for impairment at the end of each reporting period when the estimated remaining useful economic life of the assets exceeds 50 years. The estimated useful lives of tangible fixed assets are: Buildings Operational structures Fixed plant and machinery Mobile plant and motor vehicles g)
40 - 100 years 15 - 100 years 3 - 30 years 4 - 10 years
Capital contributions
Infrastructure charges received in respect of connections to the mains network are allocated to fixed assets, surface and infrastructure, in accordance with the basis on which the charges are calculated. Grants and contributions receivable relating to infrastructure assets have been deducted from the cost of tangible fixed assets. This is not in accordance with the Companies Act 1985, which requires fixed assets to be stated at their purchase price or production cost, without deduction of grants, and contributions which are accordingly accounted for as deferred income. This departure from the requirements of the Companies Act 1985 is, in the opinion of the Directors, necessary for the financial statements to show a true and fair view because, whilst a provision is made for the depreciation of infrastructure assets, they do not have determinable finite lives and therefore no basis exists upon which to recognise grants and contributions as deferred income. The effect of the departure on the value of tangible fixed assets is disclosed in Note 11.
Notes to the Financial Statements (continued) 17
VEOLIA WATER UK PLC
1.
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Accounting policies (continued) g)
Capital contributions (continued)
Capital contributions received in respect of tangible fixed assets, other than infrastructure assets, are deferred and credited to the profit and loss account by instalments over the expected useful lives of the related assets. h)
Fixed and current asset investments
Fixed asset investments are stated at cost less any provisions in respect of permanent diminution in value. Current asset investments are recorded at the lower of cost and net realisable value. Where net realisable value is lower than cost a provision is made in the profit and loss account for the diminution in value. i)
Stocks and work in progress
Stocks and work in progress are valued at the lower of cost or net realisable value. In accordance with established practice in the water industry no value is placed upon the water in reservoirs, mains or in the course of treatment. j)
Taxation
Deferred tax is provided, except as noted below, on timing differences that have arisen but not reversed by the balance sheet date, where the timing differences result in an obligation to pay more tax, or a right to pay less tax, in the future. Timing differences arise because of differences between the treatment of certain items for accounting and taxation purposes. In accordance with FRS 19 deferred tax is not provided on timing differences arising from: a)
gains on the sale of non-monetary assets, where on the basis of all available evidence it is more likely than not that the taxable gain will be rolled over into replacement assets.
Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Deferred tax is measured at the tax rates that are expected to apply in the periods when the timing differences are expected to reverse, based on tax rates and law enacted or substantively enacted at the balance sheet date. Where law or accounting standards require gains and losses to be recognised in the statement of total recognised gains and losses, the related taxation is also taken directly to the statement of total recognised gains and losses in due course.
18
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 1.
Accounting policies (continued) j)
Taxation (continued)
The Group has adopted a policy of discounting deferred tax assets and liabilities to reflect the time value of money. Deferred tax assets and liabilities are discounted using a discount rate equivalent to the post tax yield that could be obtained at the balance sheet date on government bonds with similar maturity dates and currencies. The increase or decrease in the discount deducted in arriving at the deferred tax balance is included in the deferred tax charge or credit in the profit and loss account. k)
Leased assets
An asset acquired under a finance lease is capitalised in the balance sheet and depreciated over the shorter of the lease term and the asset’s useful life. Future instalments under the lease, net of finance charges, are included within creditors. Rentals payable are apportioned between the finance element, which is charged to the profit and loss account as interest, and the capital, which reduces the outstanding obligation for future instalments. Rentals paid under an operating lease are charged against profits on a straight line basis over the life of the lease. l)
Pension costs
Employer’s contributions towards the costs of benefits arising from the past and present service of employees are charged to the profit and loss account over the average working life of employees in accordance with the recommendations of qualified actuaries. Any funding surplus or deficit that may arise from time to time is amortised over the average remaining working life of employees as per SSAP 24. The Group has adopted the disclosure requirements of FRS17. m)
Research and development
The costs of research and development are written off in the period in which they are incurred. n)
Financial Instruments
Income and expenditure arising on financial instruments is recognised on an accruals basis, and credited or charged to the profit and loss account in the financial period in which it arises.
19
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 2.
Turnover and segmental analysis
Turnover represents income, excluding VAT, from the supply of water and its related activities, arising wholly within the United Kingdom and Ireland. Overseas operations are not considered material. The Directors consider this to be one class of business. Turnover relating to unmeasured supplies comprises amounts due to the Group for the accounting period. Amounts received in advance are included in deferred income in the balance sheet. Year ended 31 December 2002 £’000 Turnover Water supply and related activities: Group and share of joint venture Less share of joint venture
189,901 (860)
Group turnover
189,041 Year ended 31 December 2002 £’000
Operating profit Water supply and related activities: Group and share of joint venture Less: share of joint venture
53,091 (28)
Group operating profit
53,063
3.
Other operating income
Commission income Rents and sundry income
20
9 Months ended 31 December 2001 £’000 142,641 (458) __ 142,183 9 Months ended 31 December 2001 £’000 41,601 (7) _ 41,594
Year ended 31 December 2002 £’000
9 Months ended 31 December 2001 £’000
4,063 570
3,020 301
4,633
3,321
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 4.
Operating profit
This is stated after charging / (crediting):
Auditors’ remuneration - for audit services - for regulatory returns - for non-audit services Depreciation of tangible fixed assets - infrastructure - owned - leased Operating lease rentals - land and buildings - other Hire of plant and machinery Amortisation of contributions to capital expenditure Provision against current asset investment 5.
Year ended 31 December 2002 £’000
9 Months ended 31 December 2001 £’000
235 94 371
143 91 23
16,040 17,343 4,126
10,702 12,418 4,550
549 2,128 183 (406) 2,662
454 1,580 114 (305) -
Directors’ remuneration
Aggregate emoluments of the Directors
Year ended 31 December 2002 £’000
9 Months ended 31 December 2001 £’000
965
702
No Directors exercised share options over ordinary shares in Veolia Environnement SA in the year. Retirement benefits are accruing to two Directors (neither of whom are the highest paid Director) under a defined benefits scheme.
Highest paid Director Aggregate emoluments and benefits (excluding gains on exercise of share options)
21
Year ended 31 December 2002 £’000
9 Months ended 31 December 2001 £’000
319
215
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 6.
Staff costs Year ended 31 December 2002 £’000
9 Months ended 31 December 2001 £’000
33,832 2,747 1,638 61
24,970 2,009 846 146
38,278
27,971
Wages and salaries Social security costs Pension costs Other benefits
The average number of employees of the Group during the year was as follows: Year ended 31 December 2002 Number
9 Months ended 31 December 2001 Number
1,217 34
1,236 34
1,251
1,270
Water supply and related activities Central services
7.
Interest receivable and similar income Year ended 31 December 2002 £’000
9 Months ended 31 December 2001 £’000
5,284 149
3,737 1,519
5,433
5,256
Interest receivable from - Group Undertakings - Other
Interest receivable includes income from short term treasury investments. Interest receivable from Group Undertakings is based upon interest rates linked to LIBOR.
22
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 8.
Interest payable and similar charges
Bank interest Finance leases Finance costs of assets used by the Group and operated by other parties Other
Year ended 31 December 2002 £’000
9 Months ended 31 December 2001 £’000
596 2,595
97 1,905
2,491 398
1,901 290
6,080
4,193
Year ended 31 December 2002 £’000
9 Months ended 31 December 2001 £’000
14,585
13,817
9. Taxation Taxation charge
UK corporation tax at 30% (2001: 30%) Over provision in prior years
(676)
Current taxation Share of joint venture current taxation Total current taxation Deferred taxation Net origination and reversal of timing differences for the period Increase in discounting Deferred tax charge/(credit) for the period Share of joint venture deferred taxation Total deferred taxation Tax on profit on ordinary activities
23
(1,616)
13,909 (6) ______ 13,903 ______
12,201 5 ______ 12,206 ______
7,167 (2,897) ______ 4,270 4 ______ 4,274 ______
2,699 (3,626) ______ (927) ______ (927) ______
18,177
11,279
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 9.
Taxation (continued)
Current taxation reconciliation
Profit on ordinary activities before taxation Theoretical tax at UK corporation tax rate of 30% (2001: 30%) Effects of: - adjustment to tax in respect of prior years - disposal of investments - other (income)/expense that is not tax deductible - accelerated capital allowances - group relief transactions - short term timing differences Actual current taxation charge 10.
Year ended 31 December 2002 £’000
9 Months ended 31 December 2001 £’000
155,029
60,087
46,509
18,026
(676) (24,416) (21) (5,425) (326) (1,742) ______ 13,903
(1,616) (1,907) 332 (2,852) 223 ______ 12,206
Dividends
Interim dividend paid of £14.032 per share (2001: £44.00 per share) Final dividend proposed of £43.036 per share (2001: £43.036 per share)
24
Year ended 31 December 2002 £’000
9 Months ended 31 December 2001 £’000
7,016
22,000
21,518 ______
21,518 ______
28,534
43,518
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 11 a.
Tangible fixed assets – Group
Group
Short Leasehold Property
Freehold land buildings and reservoirs
Mains and other Infrastructure Assets
Vehicles Plant and Machinery
Assets in Course of Construction
Total
£’000
£’000
£’000
£’000
£’000
£’000
Cost At 1 January 2002 Additions Transfers Capital contributions Disposals
82 -
118,770 1,735 7,033 (151)
349,362 43,834 39 (8,010) (529)
305,473 6,689 19,684 (1,153)
36,154 34,296 (26,756) -
809,841 86,554 (8,010) (1,833)
At 31 December 2002
82
127,387
384,696
330,693
43,694
886,552
Depreciation At 1 January 2002 Charge for the year Disposals
82 -
31,365 3,086 (6)
145,742 16,040 (529)
146,390 18,383 (1,089)
-
323,579 37,509 (1,624)
At 31 December 2002
82
34,445
161,719
163,684
-
359,464
Net book value At 31 December 2002
-
92,942
223,443
167,009
43,694
527,088
At 31 December 2001
-
87,405
203,620
159,083
36,154
486,262
Balances brought forward from 31 December 2001 have been reanalysed to identify the value of assets in the course of construction. The net book value of infrastructure assets is stated after the deduction of grants and contributions amounting to £82,516,000 (2001: £71,135,000) in order to give a true and fair view. Included in the above at 31 December 2002 are fixed assets held under finance leases, as follows: Group
Cost Depreciation Net book value
Freehold land Buildings and reservoirs £’000
Mains and other infrastructure assets £’000
8,693 (5,399)
23,165 (9,558)
68,434 (48,134)
100,292 (63,091)
3,294
13,607
20,300
37,201
25
Vehicles plant and machinery
Total
£’000
£’000
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 11 a.
Tangible fixed assets – Group (continued)
Included in the above at 31 December 2001 are fixed assets held under finance leases, as follows: Group
Freehold land Buildings and reservoirs £’000
Mains and other infrastructure assets £’000
8,693 (5,103)
23,165 (9,421)
68,434 (44,441)
100,292 (58,965)
3,590
13,744
23,993
41,327
Vehicles, plant and machinery £’000
Total
Cost Depreciation Net book value
Vehicles plant and machinery
Total
£’000
£’000
11 b. Tangible fixed assets – Company Short leasehold property
Freehold property
£’000
£’000
Company Cost At 1 January 2002 Additions Disposals
82 -
7,518 10 -
1,117 169 (11)
8,717 179 (11)
At 31 December 2002
82
7,528
1,275
8,885
Depreciation At 1 January 2002 Charge for the year Disposals
82 -
1,133 151 -
894 92 (11)
2,109 243 (11)
At 31 December 2002
82
1,284
975
2,341
Net Book Value At 31 December 2002
-
6,244
300
6,544
At 31 December 2001
-
6,385
223
6,608
The leasehold property is the only leased asset held by the Company.
26
£’000
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 12.
Fixed asset investments
Group
At 1 January 2002 Disposals Share of profits At 31 December 2002
Listed investments £’000
Investment in joint venture £’000
Total £’000
4,761 (4,761) ______ -
1 49 ____ 50
4,762 (4,761) 49 ______ 50
The market value of listed investments listed at 31 December 2002 was £Nil (2001: £119m).
Company At 1 January 2002 Impairment Payments At 31 December 2002
Subsidiary Undertakings £’000
Loans to Group Undertakings £’000
Total £’000
97,918 (63,795) -
148,342 30,356
246,260 (63,795) 30,356
34,123
178,698
212,821
On 18 October 2002, a dividend of £80,000,000 was received by the Company from General Utilities Holdings Limited. Declaration of the dividend had the effect of reducing the value of the Company’s investment by £63,795,000, and accordingly an impairment provision has been included to this amount.
27
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 12.
Fixed asset investments (continued)
Details of investments in which the Group or the Company holds more than 10% of the nominal value of any class of share capital are as follows: Name of company
Type of holding
Proportion of voting rights and shares held
Principal subsidiary undertakings: Water supply and related activities: Veolia Water Capital Funds PLC (formerly * Vivendi Water Capital Funds PLC) Three Valleys Water PLC North Surrey Water Limited ** Tendring Hundred Water Services Limited Folkestone and Dover Water Services Limited Veolia Water Operations Ireland Limited * (formerly Vivendi Water Operations Ireland Limited) Veolia Water Projects Limited (formerly Vivendi * Water Projects Limited) General Utilities Holdings Limited *
Ordinary shares
100%
Ordinary shares Ordinary shares Ordinary non-voting shares 10% preference shares Ordinary shares Ordinary non-voting shares 10% preference shares Ordinary shares Ordinary non-voting shares 14% preference shares Ordinary shares
100% 99% 97% 99% 99% 87% 98% 74% 92% 77% 100%
Ordinary shares
100%
Ordinary shares
100%
Ordinary shares
50%
Others – joint venture: Veolia Water Industrial Outsourcing Limited (formerly Vivendi Water Industrial Outsourcing Limited) * held directly by Veolia Water UK PLC ** following the sale of all the company’s assets and liabilities to Three Valleys Water PLC on 1 October 2000, the company’s main activity is to manage its financial resources to maximise returns to the company’s shareholders. All the above companies are incorporated in Great Britain, except Veolia Water Operations Ireland Limited, which is incorporated in the Republic of Ireland. Veolia Water Capital Funds PLC is the holding company for the water supply interests of Veolia Water UK PLC. The principal activity of Veolia Water Industrial Outsourcing Limited is the treatment of water and other industrial water services.
28
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 12.
Fixed asset investments (continued)
On 26 February 2002, a subsidiary undertaking, General Utilities Holdings Limited, accepted an offer of £12.95 per share from Ecofin Water & Power Opportunities plc for the acquisition of its investment in Bristol Water Holdings plc. The Group received £16,856,000 in cash, together with a 6% stake in Ecofin Water & Power Opportunities plc, in conclusion of the transaction. The 6% stake in Ecofin Water & Power Opportunities plc comprised of 3,101,700 Income Shares with a nominal value of 1p each and 3,050,850 Capital Shares with a nominal value of 1p each. The total nominal value of the shares acquired was £6,152,550. The tax charge on this transaction was £3,316,000. On 15 October 2002, General Utilities Holdings Limited accepted an offer of £4.30 per share from Collins Stewart Limited in respect of its entire share capital held in South Staffordshire Group Plc. The consideration paid in cash amounted to £84,791,657. In accordance with the substantial shareholding provisions of the Finance Act 2002, no tax has been provided on this transaction. 13.
Current asset investments
Group
Listed investments £’000
Cost At 1 January 2002 Additions Disposals
8,145 6,153 (8,145) ______ 6,153
At 31 December 2002 Amounts provided At 1 January 2002 Provided in year At 31 December 2002
2,662 ______ 2,662
Net book value At 31 December 2002
3,491
At 31 December 2001
8,145
The net book value of listed investments at 31 December 2002 relates to a 6% shareholding in Ecofin Water & Power Opportunities plc, a company incorporated in Great Britain. The market value of the listed current asset investment held at 31 December 2002, was £3.491m (2001: £22m). The market value of the investment in Ecofin Water & Power Opportunities plc held at 31 December 2002 based on market prices at 30 July 2003 was £3.978m. Subsequent to the year end as a result of disposals, the shareholding in this investment has reduced to 3.3%. The Company has no current asset investments.
29
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 14.
Stocks and work in progress Group 31 December 31 December 2002 2001 £’000 £’000
Work in progress Raw materials and consumables
119 1,417
245 1,954
1,536
2,199
The Company has no stocks. 15.
Debtors Group 31 December 31 December 2002 2001 £’000 £’000
Trade debtors Loans to Group Undertakings Amounts due from Group Undertakings Amounts due from Joint Venture Other debtors Prepayments and accrued income Corporation tax recoverable
Company 31 December 31 December 2002 2001 £’000 £’000
28,196 176,682 22333,088
27,536 114,619 2,997
327 176,682 51,757
31 114,619 42,758
276 5,079 32,310 2
407 3,684 4,898 712
245 897 28,997 -
362 515 686 362
245,633
154,853
258,905
159,333
30
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 16.
Creditors: amounts falling due within one year Notes
Bank loans and overdraft Payments received on account Obligations under finance leases Financing of assets operated by other parties Trade creditors Amounts owed to Group Undertakings Amounts owed to Joint Venture Corporation tax Other taxes and social security Other creditors Dividends Accruals Deferred income
19
Group 31 December 31 December 2002 2001 £’000 £’000
Company 31 December 31 December 2002 2001 £’000 £’000
8,489
13,248
17,720
17,997
5,009
5,836
-
-
20
5,635
4,661
-
-
20
879
938
-
-
8,104 7,049
7,916 4,159
359 1,795
3 1,439
516
114
498
4
20,903 3,111
19,733 959
8,992 2,279
6,931 168
8,699 22,020 49,786 30,678
7,208 21,996 32,061 30,626
294 21,518 14,593 -
174 21,518 2,321 -
170,878
149,455
68,048
50,555
31
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 17.
Creditors: amounts falling due after more than one year Notes
Debentures Obligations under finance leases Accruals and deferred income Financing of assets operated by other parties Amounts owed to Group Undertakings
18.
Group 31 December 31 December 2002 2001 £’000 £’000
19 20
20
Company 31 December 31 December 2002 2001 £’000 £’000
4,667 24,806
4,667 29,672
-
-
7,451
7,858
-
-
22,469
23,107
-
-
836
836
-
-
60,229
66,140
-
-
Provisions for liabilities and charges
Group
Deferred Tax £’000
Insurance
Pensions
£’000
£’000
Other Leasehold Property £’000 £’000
Balance at 1 January 2002 Amount released Amount used Amount provided
36,229 (785) 5,055
1,013 (454) 511
1,136 (82) 803
-
Balance at 31 December 2002
40,499
1,070
1,857
2,330
Company
2,616 (286)
Pensions £’000
Balance at 1 January 2002 Amount released Amount used Amount provided
23
Balance at 31 December 2002
23
32
1,539 (53) ______ 1,486
Leasehold Property £’000 1,539 (53) ______ 1,486
Total £’000 42,533 (1,153) (507) 6,369 47,242
Total £’000 1,539 (53) 23 1,509
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 18.
Provisions for liabilities and charges (continued)
Deferred taxation (see Note 9) Group 31 December 31 December 2002 2001 £’000 £’000
Company 31 December 31 December 2002 2001 £’000 £’000
Accelerated capital allowances Other timing differences
102,567 (502)
97,142 (2,244)
-
-
Undiscounted provision for deferred tax Discount
102,065 (61,566)
94,898 (58,669)
-
-
40,499
36,229
-
-
Discounted provision for deferred tax
The insurance provision represents the amount of liability in respect of excesses on individual claims. This is based on information provided by loss adjusters to insurers on levels of reserve and is calculated on settlement experience. The pension provision represents the difference between the existing funding rate and the maximum liability set out within the actuarial valuation in accordance with the requirements of SSAP 24. The "Other" provision relates to potential claims against a Group company. The information required by FRS 12 is not disclosed on the grounds that it might prejudice the outcome of the claims. The provision for leasehold property is made against anticipated costs incurred on the property being in excess of rental income receivable on existing lease contracts. The release in the year reflects the partial letting of the property.
33
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 19.
Borrowings analysis
Loans and bank overdrafts outstanding at the year end comprise: Group 31 December 31 December 2002 2001 £’000 £’000 Amounts repayable within one year Overdrafts Bank loans Amounts repayable after one year Debentures
Company 31 December 31 December 2002 2001 £’000 £’000
69 8,420
3,248 10,000
9,300 8,420
7,997 10,000
8,489
13,248
17,720
17,997
4,667
4,667
-
-
13,156
17,915
17,720
17,997
Loans and bank overdrafts are repayable as follows: Group 31 December 31 December 2002 2001 £’000 £’000
Company 31 December 31 December 2002 2001 £’000 £’000
Bank loans and overdrafts Repayable: Within one year
8,489
13,248
17,720
17,997
Other borrowings Repayable: Between two and five years After five years
2,500 2,167
2,500 2,167
-
-
4,667
4,667
-
-
13,156
17,915
17,720
17,997
Details of the security given for bank loans and overdrafts are provided within Note 29.
34
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 19.
Borrowings analysis (continued)
Loans not wholly repayable within five years comprise: Group 31 December 31 December 2002 2001 £’000 £’000 Irredeemable debenture stock carrying interest of between 3.25% and 5.25%
2,167 _______
2,167 _____
The Company has no loans not wholly repayable within five years. 20.
Lease and other financial commitments
Obligations under finance leases are payable as follows: Group 31 December 31 December 2002 2001 £’000 £’000 Within one year In the second to fifth years inclusive After five years
5,635 17,853 6,953
4,661 20,768 8,904
30,441
34,333
Obligations for financing of assets operated by third parties are payable as follows: Group 31 December 31 December 2002 2001 £’000 £’000 Within one year In the second to fifth years inclusive After five years
The Company has no finance lease obligations.
35
879 4,418 18,051
938 4,688 18,419
23,348
24,045
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 20.
Lease and other financial commitments (continued)
The annual levels of commitments under non-cancellable operating leases are detailed in the table below: Land and buildings 31 December 31 December 2002 2001 £’000 £’000 Group Operating leases which expire: Within one year In the second to fifth years inclusive After five years
Company Operating leases which expire: Within one year In the second to fifth years inclusive After five years
21.
Other 31 December 31 December 2002 2001 £’000 £’000
27 248
248
226 2,062 -
200 1,584 -
275
248
2,288
1,784
27 248
248
12 17 -
42 -
275
248
29
42
Minority interests
In the case of holdings in ordinary stock the minority interests are stated as a relevant proportion of net assets. Non-equity interests primarily represent irredeemable preference shares which hold no voting rights. 22.
Share capital
31 December 2002 £’000
31 December 2001 £’000
Authorised 500,000 ordinary shares of £1 each
500
500
Issued, allocated and fully paid 500,000 ordinary shares of £1 each
500
500
36
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 23.
Profit and loss account and reserves Group Profit and loss £’000
Group Other reserves £’000
Group Total reserves £’000
As at 1 January 2002 Retained profit for the period
309,168 107,268
86,632 -
395,800 107,268
As at 31 December 2002
416,436
86,632
503,068
Company Profit and loss £’000
Company Other reserves £’000
Company Total reserves £’000
As at 1 January 2002 Retained profit for the period
200,310 48,734
159,315 -
359,625 48,734
As at 31 December 2002
249,044
159,315
408,359
The total amount of goodwill arising on acquisitions which has been written off against Group reserves is £74,483,000 (2001: £74,483,000). 24.
Profit for the period
As permitted by section 230 of the Companies Act 1985, the parent company’s profit and loss account has not been included in the financial statements. The parent company’s profit for the year after tax and minority interests was £77,268,000 (2001: profit £21,759,000).
37
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 25.
Reconciliation of movements in equity shareholders’ funds Group 31 December 31 December 2002 2001 £’000 £’000
Company 31 December 31 December 2002 2001 £’000 £’000
Profit for the year Dividends
135,802 (28,534)
48,107 (43,518)
77,268 (28,534)
21,759 (43,518)
Opening equity shareholders’ funds
107,268 396,300
4,589 391,711
48,734 360,125
(21,759) 381,884
Closing equity shareholders’ funds
503,568
396,300
408,859
360,125
26.
Capital commitments
Capital expenditure commitments not provided for in these financial statements are: Group 31 December 31 December 2002 2001 £’000 £’000 Contracted 27.
19,454
21,001
Company 31 December 31 December 2002 2001 £’000 £’000 -
-
Financial instruments
The Group’s financial instruments comprise borrowings, debentures, cash and liquid resources, and various items, such as trade debtors and trade creditors that arise directly from its operations. The main purpose of these financial instruments is to raise finance for the Group’s operations. It is, and has been throughout the year under review, the Group’s policy that no trading in financial instruments shall be undertaken. The main risks arising from the Group’s financial instruments are interest rate risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. These policies have remained unchanged since the beginning of the current year.
38
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 27.
Financial instruments (continued)
The Group finances its operations through a mixture of retained profits, bank borrowings and finance leases. Treasury policies are agreed by the parent company with the individual Group companies (including liquidity and interest rate risks). The Group does not undertake speculative transactions. Interest rate exposure is managed by using a mixture of fixed and floating rate borrowings. Liquidity is managed by utilisation of a mixture of bank overdrafts and short-term borrowings. Further disclosures are included in Notes 16, 17, 19 and 20. Total
Floating rate financial liabilities
Fixed rate financial Liabilities
£’000
£’000
£’000
Financial liabilities on which no interest is paid £’000
As at 31 December 2002
66,945
30,510
36,435
-
As at 31 December 2001
76,293
37,581
38,712
-
The total liabilities include loans, overdrafts, finance leases, debentures and financing of assets operated by other parties. All financial liabilities and assets are denominated in Sterling. Fixed rate financial liabilities include loans, irredeemable debentures and the financing of assets used by a Group company and operated by other parties. Fixed rate financial liabilities Weighted average interest rate
Financial liabilities on which no interest is paid Weighted average period until Maturity
%
Weighted average period for which rate is fixed Years
As at 31 December 2002
8.5
27
-
As at 31 December 2001
8.5
28
-
Years
The weighted average period of fixed rate liabilities was calculated without giving effect to £2,167,000 of irredeemable debentures.
39
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 27.
Financial instruments (continued)
Floating rate borrowings and cash bear interest based on relevant LIBOR equivalents. The maturity profile for the Group’s financial liabilities is:
In one year or less or on demand In more than one year but not more than two years In more than two years but not more than five years In more than five years
31 December 2002 £'000
31 December 2001 £'000
15,003 5,103 19,668 27,171 66,945
18,847 5,875 22,081 29,490 76,293
The Group has various undrawn committed borrowing facilities. The facilities available, in respect of which all conditions precedent had been met, are:
Expiring in one year or less
31 December 2002 £'000
31 December 2001 £'000
41,580
40,000
31 December 2002 £'000
31 December 2001 £'000
7,965 176,682 3,491 188,138
1,700 114,619 12,907 129,226
The Group's financial assets are as follows:
Cash Loans to Group Undertakings Listed Investments
Loans to Group undertakings bear interest based on relevant LIBOR equivalents. Fair values of financial assets and liabilities Other than the fixed rate liability in respect of the financing of assets by the Group and operated by other parties, the fair values calculated by market interest rates of the financial instruments are not materially different from book values. The fair value of assets used by the Group and operated by other parties is estimated to be £33,441,958 (book value £23,348,000). At 31 December 2001 the fair value was £33,664,320 (book value £24,045,000).
40
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 28.
Pension commitment
Composition of the schemes Vivendi Water Supply Companies’ Pension Plan Until 31 March 1996, the Group’s water subsidiaries participated in The Water Companies’ Association Pension Scheme, which provided benefits based on final pensionable pay. On 1 April 1996 the assets and liabilities of the Group’s water subsidiaries which participated in the Water Companies’ Association Scheme were transferred to a “mirror image” plan called the Vivendi Water Supply Companies’ Pension Plan which was closed to new members. The Plan is in the process of changing its name to the Veolia Water Supply Companies’ Pension Plan. This Plan continues to provide benefits on a no less favourable basis than those previously provided for existing members of the Scheme. The assets of the Plan are held separately to those of the Group, being invested by independent fund managers. Contributions to the Plan are charged to the profit and loss account so as to spread the cost of pensions over the employees’ working lives with the Group. The most recent triennial valuation of the Plan for the Company, determined by an independent qualified actuary, was at 31 December 2001. The valuation was made on the “attained age” funding method. The actuarial valuation made the following assumptions: Rate of investment return Rate of increase in remuneration Rate of pension increase
6.5% (pre-retirement), 5.5% (post retirement) 4.5% 2.5%
The valuation as at 31 December 2001 stated the market valuation of the Plan’s assets to be £209.8m and showed a surplus of £13.7m. Contributions to the Plan over the year ended 31 December 2002 were paid by members in accordance with the Rules of the Plan and by the Company in the range of 0% to 20% of Pensionable Salary. Vivendi UK Pension Plan A new Scheme was inaugurated as at 1 April 1996, the Générale des Eaux UK Retirement Benefits Scheme. This scheme was merged with the Générale des Eaux UK Pension Plan on 1 April 1998, now known as the Vivendi UK Pension Plan (and which is in the process of changing its name to the Veolia UK Pension Plan), which is open to all employees. The Plan provides a selection of benefits based upon final pensionable pay or money purchase according to the members’ wishes. Contributions to the Vivendi UK Pension Plan over the year ending 31 December 2002 were paid by members in accordance with the Rules of the Plan and by the Company of between 3% and 27% of Pensionable Salary.
41
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 28.
Pension commitment (continued)
The latest formal valuation of the Plan for the Company, determined by an independent qualified actuary, was at 1 January 2000. The valuation was made on the “projected unit credit” funding method. The actuarial valuation made the following assumptions: Rate of investment return Rate of increase in remuneration Rate of pension increase
6.5% 5.0% 3.0%
The valuation as at 1 January 2000 stated the market valuation of the Plan’s assets was £1,482,000 and showed a surplus of £148,000. SSAP 24 The total pensions charge on a SSAP 24 basis for the year ended 31 December 2002 was £1,348,000, of which employer’s contributions were £983,000 (period ended 31 December 2001 £658,000). The profit and loss account charge for pension costs, the accounting policies and the disclosures above are given on the basis of SSAP 24. SSAP 24 is going to be replaced by FRS 17. The additional disclosures which follow are given in preparation for FRS 17 being adopted. They are based on the aforementioned full actuarial reviews, projected forward to 31 December 2002 by a qualified independent actuary. Comparative figures have been omitted in accordance with the transitional rules of FRS 17. Supplementary pension disclosures under FRS 17 a) Contributions Under the projected unit method used for FRS 17, the current service cost under the Vivendi Water Supply Companies’ Pension Plan will increase as members of the Plan approach retirement. Future Company contributions under the Vivendi UK Pension Plan are subject to review at the actuarial valuation due as at 31 December 2002.
42
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 28.
Pension commitment (continued)
b) FRS 17 balance sheet information
At 31 December 2002 Value
Split of fund
£’000
% of fund
Group Equities Bonds Gilts/Cash
104,529 25,772 54,518
56.5 14.0 29.5
Fair value of assets
184,819
Present value of scheme liabilities Actuarial surplus Deferred tax Actuarial surplus after tax
_________
At 31 December 2001
Long term rate of return expected (% pa)
7.5 5.6 4.5
______
100.0
(180,750)
Value
Split of fund
£’000
% of fund
115,390 29,285 67,530
54.4 13.8 31.8
__________
______
212,205
100.0
Long term rate of return expected (% pa)
8.0 6.0 5.0
(182,603)
_________
__________
4,069
29,602
(1,221)
(8,881)
_________
_________
2,848
20,721
_________
_________
The balance sheet asset would be £2,848,000 (2001: £20,721,000). At 31 December 2002
Company Equities Bonds Gilts/Cash Fair value of assets Present value of scheme liabilities Actuarial loss Deferred tax Actuarial loss after tax
At 31 December 2001 Value
Split of fund
% of fund
Long term rate of return expected (% pa)
£’000
% of fund
70.9 5.0 24.1
7.5 5.6 4.5
344 18 108
Value
Split of fund
£’000
1,822 128 620
_________
______
2,570
100.0
(3,079)
______
______
470
100.0
(608)
______
______
(509)
(132)
-
-
______
______
(509)
______
The balance sheet liability would be £509,000 (2001: £132,000).
43
73.2 3.8 23.0
(132)
______
Long term rate of return expected (% pa)
8.0 6.0 5.0
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 28.
Pension commitment (continued)
c) Profit and loss reserve and net assets Profit and Loss Reserve at 31 December 2002 £000
Group As reported on SSAP 24 basis Net SSAP 24 pensions creditor (net of deferred tax) Excluding SSAP 24 balance FRS 17 pension asset (net of deferred tax) On FRS 17 basis
Company As reported on SSAP 24 basis Net SSAP 24 pensions creditor (net of deferred tax) Excluding SSAP 24 balance FRS 17 pension liability (net of deferred tax) On FRS 17 basis
Profit and Loss Reserve at 31 December 2001 £000
Net assets At 31 December 2002 £000
Net assets At 31 December 2001 £000
416,436
309,168
507,414
399,793
1,051
796
1,051
796
___________
__________
________
__________
417,487
309,964
508,465
400,589
2,848
20,721
2,848
___________
__________
420,335
330,685
__________
___________
249,044
200,310
___________
16
-
20,721
___________
__________
511,313
421,310
408,859
360,125
16
__________
___________
__________
__________
__________
249,060
200,310
408,875
360,125
(509)
(132)
___________
__________
248,551
200,178
___________
__________
44
(509)
___________
408,366
___________
(132)
___________
359,993
___________
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 28.
Pension commitment (continued)
d) Assumptions The present value of pension liabilities are estimated by discounting pension commitments, including salary growth, at an AA corporate bond yield. In calculating the liabilities of the Plans, the following financial assumptions have been used: Group and Company
At 31 December 2002
At 31 December 2001
Discount rate Salary growth RPI Pension-in payment increases
5.6% pa 4.3% pa 2.3% pa 2.3% pa
6.0% pa 4.5% pa 2.5% pa 2.5% pa
Deferred pensions are re-valued to retirement age in line with the RPI assumption of 2.3% pa (2001: 2.5% pa) unless otherwise prescribed by statutory requirements or the Plan Rules. e) Analysis of the amount charged to operating profit
Group Current service cost
Year ended 31 December 2002 £’000 3,061
________
Total operating charge
3,061
________
f) Analysis of the amount credited to other finance income
Group Expected return on pension scheme assets Interest on pension scheme liabilities
Year ended 31 December 2002 £’000 14,475 (10,824) ________
Net return
3,651
________
45
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Notes to the Financial Statements (continued) 28.
Pension commitment (continued)
g) Analysis of amount recognised in statement of total recognised gains and losses (STRGL) Year ended 31 December 2002 £’000 Group Actual return less expected return on the pension schemes’ assets Experience gains and losses arising on the pension schemes’ liabilities Changes in assumptions underlying the present value of the pension schemes’ liabilities
(33,442) 11,759 (5,411)
Actual loss recognised in STRGL
(27,094)
________
________
h) Movement in surplus during the year Year ended 31 December 2002 £’000 Group Surplus in schemes at beginning of the year Movement in year: Current service cost Contributions Other finance income Actuarial loss
29,591 (3,061) 982 3,651 (27,094) ________
Surplus in schemes at end of the year
4,069
________
Notes to the Financial Statements (continued) 46
VEOLIA WATER UK PLC
28.
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Pension commitment (continued)
h) Movement in surplus during the year (continued) Year ended 31 December 2002 £’000 Company Deficit in scheme at beginning of the year Movement in year: Current service cost Contributions Other finance income Actuarial loss
(132) (214) 208 6 (377)
________
Deficit in scheme at end of the year
(509)
________
i) History of experience gains and losses
Year ended 31 December 2002
Group Difference between the expected and actual return on schemes’ assets: Amount (£’000) Percentage of schemes’ assets Experience gains and losses on schemes’ liabilities: Amount (£’000) Percentage of the present value of the schemes’ liabilities Total amount recognised in statement of total recognised gains and losses: Amount (£’000) Percentage of the present value of the schemes’ liabilities
Notes to the Financial Statements (continued)
47
(33,442) (18%) 11,759 7% (27,094) (15%)
VEOLIA WATER UK PLC
28.
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
Pension commitment (continued)
i) History of experience gains and losses (continued) Year ended 31 December 2002 Company Difference between the expected and actual return on scheme assets: Amount (£’000) Percentage of scheme assets Experience gains and losses on scheme liabilities: Amount (£’000) Percentage of the present value of the scheme liabilities Total amount recognised in statement of total recognised gains and losses: Amount (£’000) Percentage of the present value of the scheme liabilities 29.
(197) (8%) (50) (2%) (377) (12%)
Overdraft facility
The Company acts, with certain other Group companies, as joint and several guarantor of the bank overdraft at Barclays Bank PLC. 30.
Related party transactions
In accordance with the exemption in FRS 8, the Company has not disclosed transactions with other entities, for which 90% or more of the voting rights are controlled by the parent company, Veolia Environnement SA. 31.
Ultimate holding and controlling company
Veolia Environnement SA, a company incorporated in France, is the parent undertaking of the smallest group to consolidate the financial statements of Veolia Water UK PLC, and the ultimate parent and controlling company. Copies of the group financial statements are available from the Head Office at 36-38 avenue Kléber, 75116 Paris, France. 32.
Post balance sheet event
Pursuant to an agreement dated 7th May 2002 with First Aqua Holdings Limited and an agreement dated 4th February 2003 with Southern Water Capital Limited (SWC), which is owned by The Royal Bank of Scotland and other investors, and following regulatory clearance on 28th April 2003, Southern Water Investments Limited (SWI), a newly formed, wholly owned subsidiary of the Company acquired First Aqua (JVCo) Limited (FA(JVCo)) on 7th May 2003 and immediately issued new capital to SWC, such that SWC now holds 80.1% of SWI and the Company holds 19.9%, with a call option over a further 5.1% in SWI. The Company has subscribed for £9.95m of ordinary shares in SWI and a further £40m of preferred shares in Southern Water Services Limited (SWS).
Notes to the Financial Statements (continued) 32.
Post balance sheet event (continued)
48
VEOLIA WATER UK PLC
ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2002
At 31st December 2002, debtors shown in the balance sheet included £28m in respect of transaction costs incurred to that date. Since the year end, additional costs of £6m were incurred in respect of the Company’s agreement with SWC. SWI agreed to indemnify the Company for certain fees and other costs incurred by it in connection with the acquisition by SWI of FA(JVCo) and an amount of £27.2m was received by the Company on 23rd July 2003. Having regard to the equity and non equity interests held by the Company and the other contractual terms surrounding the Company’s investment in SWI and its subsidiaries, the Company intends to treat SWI as an associate in its consolidated accounts for the year ending 31st December 2003.
49