Veolia Water UK Annual Report 2003

Registered Number 2127283

Veolia Water UK PLC (formerly: Vivendi Water UK PLC)

Annual Report

for the year ended 31 December 2003

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Contents

Page Directors and Officers

1

Directors’ Report

2

Independent Auditors’ Report to the Shareholders

8

Consolidated Profit and Loss Account

9

Consolidated Balance Sheet

10

Company Balance Sheet

11

Consolidated Cash Flow Statement

12

Notes to the Consolidated Cash Flow Statement

13

Notes to the Financial Statements

15

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Directors and Officers Directors The Lord Borrie of Abbots Morton, QC J S Gummer J C Banon R A Bienfait M J E Butcher F Darley J B Mangion G Mohr C Roger-Lacan

(Resigned as Chairman and Director 25 September 2003) (Appointed Chairman 25 September 2003) (Managing Director) (Appointed 1 January 2004)

(Resigned 30 November 2003) (Resigned 30 June 2003) (Appointed 15 July 2003)

Secretary R G Castle

Registered Office 37-41 Old Queen Street London SW1H 9JA

Auditors Ernst & Young LLP 1 More London Place London SE1 2AF

Registered Number 2127283

1

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Directors’ Report The Directors submit their report and the audited financial statements of Veolia Water UK PLC for the year ended 31 December 2003. 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 and Ireland.

Dividends and transfers to reserves The consolidated profit after taxation and minority interests amounted to £48.0m (2002: £135.8m).

An interim dividend of £6.25m has been paid during the year (2002: £7m), and the Directors propose a final dividend of £18.75m (2002: £21.5m) in respect of the year ending 31 December 2003. Retained profits of £21.2m (2002: £107.3m) will be transferred to reserves.

Review of business and future developments Turnover at £203.8m for the twelve months compares to £191.7m for the previous year. Profit before tax for the twelve months was £65.8m compared to £155m for the previous year. The previous year’s results include the disposal of the investments in Bristol Water Holdings plc and South Staffordshire Group Plc which realised a pre-tax profit of £92.4m. The Group’s turnover and profit before tax is largely generated by the Group’s regulated water businesses: Three Valleys Water PLC, Tendring Hundred Water Services Limited and Folkestone and Dover Water Services Limited.

After excluding the cost of acquiring an associate of £55.9m, net funds before financing of £10.8m were generated during the year. Net funds at 31 December 2003 were £72.6m compared to £117.7m last year.

Capital expenditure for the twelve months to December, net of contributions from third parties, was £61.2m, compared to £78.5m for the previous year.

During the year the Group continued to develop its activities in the industrial markets with Veolia Water Industrial Outsourcing Limited, formerly Vivendi Water Industrial Outsourcing Limited. On 23rd December 2003 the Company acquired the balance of the share capital of the company from its former joint venture partner, an associate company, Veolia Water Systems Limited.

Directors’ Report (continued) 2

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Review of business and future developments (continued) Southern Water During the year 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 Limited (SWS), a UK water and wastewater operator. This agreement received all the necessary regulatory approvals and closed on 7th May 2003.

In February 2003 the Company entered into an agreement with Southern Water Capital Limited (SWC) relating to the acquisition of First Aqua (JVCo) Limited (FA(JVCo)), pursuant to which, Southern Water Investments Limited (SWI), a newly created subsidiary of the Company, acquired FA(JVCo) in accordance with the terms of an agreement dated May 2002 with First Aqua Holdings Limited (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 the Company holds 19.9%. SWC, which now controls SWS through SWI, granted the Company an option to acquire an additional 5.1% stake in SWI. Pursuant to this agreement, FA (JVCo) also redeemed £374m preferred shares issued to financial investors in March 2002.

On April 28th 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, Veolia Environnement SA has 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.

The SWI Group 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.

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 has treated SWI as an associate in its consolidated accounts for the year ending 31st December 2003.

Directors’ Report (continued)

3

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 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 £646,000 (2002: £506,000).

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.

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.

In March 2004 it was announced that the Company had scored 95.89% in the “Business in the Community (BitC) Corporate Responsibility Index 2003”, positioning it fourth overall and making it leader of the water sector.

The BitC index provides a framework for comparing the management processes and performance of a range of companies in different sectors. It also acts as a benchmark for companies to assess and compare how they integrate responsible practices throughout their organisation.

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 2003. 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.

4

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Directors’ Report (continued) 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 2003 represent 44 days (2002: 34 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 £34,864 (2002: £40,367), together with £79,010 (2002: £49,490) 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 2003

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 2003 Number of ordinary shares 109 -

J C Banon M J E Butcher F Darley J S Gummer C Roger-Lacan

At 31 December 2002 Number of ordinary shares 109 -

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 2003

Granted

Exercised

At 31 December 2003

Exercise Price

Date from which exercisable

Expiry date

(€) J C Banon

5,000 20,000

8,000

-

5,000 20,000 8,000

42.00 37.53 22.50

08.02.04 25.01.05 24.03.06

07.02.09 25.01.10 24.03.11

M J E Butcher

1,550

-

-

1,550

42.00

08.02.04

07.02.09

F Darley

1,550 3,100

3,300

-

1,550 3,100 3,300

42.00 37.53 22.50

08.02.04 25.01.05 24.03.06

07.02.09 25.01.10 24.03.11

23,600 25,000

25,000

-

23,600 25,000 25,000

42.00 37.53 22.50

08.02.04 25.01.05 24.03.06

07.02.09 25.01.10 24.03.11

C RogerLacan

During the year the ordinary shares of Veolia Environnement SA traded between €14.75 and €24.90. The price at the end of the year was €21.63. The €/£ exchange rate was €1.419/£ at 31 December 2003 with an average during the year of €1.4459/£.

6

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Directors’ Report (continued) Statement of Directors’ responsibilities for the Annual Report Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing those financial statements, the Directors are required to: ·

select suitable accounting policies and then apply them consistently;

·

make judgements and estimates that are reasonable and prudent; and

·

prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors confirm that they have complied with these requirements and, having a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future, continue to adopt the going concern basis in preparing the accounts.

Auditors On 22 September 2003, RSM Robson Rhodes LLP resigned from their position as the Company’s auditors. Ernst & Young LLP were subsequently appointed as the Company’s auditors.

By order of the Board

R G Castle Secretary

22 July 2004

7

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

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 balance sheet, the company balance sheet, the consolidated cash flow statement, and notes 1 to 33.

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 As described in the Statement of Directors' Responsibilities the Company's Directors are responsible for the preparation of the financial statements in accordance with United Kingdom law and accounting standards.

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 is not disclosed.

We read the Directors' Report and consider the implications for our report if we become aware of any apparent misstatements within it.

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 2003 and of the Group’s profit for the year then ended and have been properly prepared in accordance with the Companies Act 1985.

Ernst & Young LLP Registered Auditors London

8

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Consolidated Profit and Loss Account Notes

Turnover Cost of sales Gross profit Administrative expenses Other operating income Group operating profit

2

Share of operating profit in: -joint venture -associate Income from other participating interests Preference dividend income from associate Profit on the disposal of fixed assets Profit on the disposal of investments Profit on ordinary activities before interest and taxation Interest receivable and similar income Interest payable and similar charges: -Group -associate Profit on ordinary activities before taxation Tax on profit on ordinary activities

Year ended 31 December 2002 £’000

3

203,831 (112,437) 91,394 (36,293) 2,199

191,705 (100,106) 91,599 (40,505) 1,969

4

57,300

53,063

24,513 180 701 163 535 83,392

28 3,658 6,488 92,439 155,676

7

8,255

5,433

8

(6,375) (19,460) 65,812

(6,080) 155,029

9

(17,139)

(18,177)

48,673 (711) (5)

136,852 (1,045) (5)

47,957 (25,000) (1,722) 21,235

135,802 (28,534) 107,268

Profit on ordinary activities after taxation Equity minority interests Non-equity minority interests Profit on ordinary activities after taxation and minority interests Dividends Non-equity dividends on associates Retained profit for the year

Year ended 31 December 2003 £’000

10 25

There is no difference between profit on ordinary activities before taxation, retained profit for the year stated above, and their historical cost equivalents.

All recognised gains and losses have been included in the profit and loss account. No separate statement of recognised gains and losses is required.

There were no material acquisitions or disposals of subsidiaries during the year. All material activities relate to continuing operations. The notes on pages 15 to 54 form part of these financial statements.

9

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Consolidated Balance Sheet Notes

Fixed assets Intangible assets Tangible Assets Investments Investments in associate

11 12a 13 14

Current assets Stocks Debtors Investments Short term deposits Cash at bank and in hand

16 17 15

18

Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges

19 20

Net assets

31 December 2003 £’000

31 December 2002 £’000

229 549,080 58,632

527,088 50 -

607,941

527,138

1,799 175,967 814 1,006 2,016

1,536 245,633 3,491 7,965

181,602 (154,962)

258,625 (170,878)

26,640

87,747

634,581

614,885

(51,141) (54,874)

(60,229) (47,242)

528,566

507,414

Capital and reserves Called up share capital Other reserves Profit and loss account

24 25 25

500 86,632 437,671

500 86,632 416,436

Equity shareholders’ funds Equity minority interests Non-equity minority interests

27 23 23

524,803 3,716 47

503,568 3,799 47

528,566

507,414

The notes on pages 15 to 54 form part of these financial statements.

The financial statements on pages 9 to 54 were approved by the Board of Directors on 22 July2004 and were signed on its behalf by:

J C Banon Director

R Bienfait Director

10

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Company Balance Sheet Notes

31 December 2003 £’000

31 December 2002 £’000

12b 13

6,283 268,337

6,544 212,821

274,620

219,365

207,410 1,006 3,651

258,905 146

212,067 (60,263)

259,051 (68,048)

Net current assets

151,804

191,003

Total assets less current liabilities

426,424

410,368

Fixed assets Tangible assets Investments

Current assets Debtors Short term deposits Cash at bank and in hand

17

18

Creditors: amounts falling due within one year

20

Provisions for liabilities and charges Net assets

(1,479)

(1,509)

424,945

408,859

Capital and reserves Called up share capital Other reserves Profit and loss account

24 25 25

500 159,315 265,130

500 159,315 249,044

Equity shareholders’ funds

27

424,945

408,859

The notes on pages 15 to 54 form part of these financial statements.

The financial statements on pages 9 to 54 were approved by the Board of Directors on 22 July 2004 and were signed on its behalf by:

J C Banon Director

R Bienfait Director

11

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Consolidated Cash Flow Statement Notes*

Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

123,312

87,963

a

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 from investments Dividends received from associate Dividends paid to minorities Net cash inflow from returns on investments and servicing of finance

8,257 (3,881) (3,755) 180 311

5,497 (2,984) (1,899) 3,658 -

(617)

(634)

495

3,638

Taxation paid

(12,261)

(12,074)

Capital expenditure and financial investment Purchase of fixed assets Contributions to fixed assets received Disposal of fixed assets Purchase of investments Overdraft acquired on investment Cost of investment in associate Disposal of investments

(80,737) 7,236 301 (353) (2,355) (55,944) 2,946

(87,169) 8,010 6,697 (49) 99,192

(128,906)

26,681

Equity dividends paid

(27,768)

(28,534)

Cash (outflow)/inflow before management of liquid resources and financing

(45,128)

77,674

Net cash (outflow)/inflow from capital expenditure and financial investment

Net cash inflow/(outflow) from management of liquid resources

b

44,133

(62,063)

Net cash outflow from financing

b

(14,817)

(6,167)

(Decrease)/Increase in cash

c

(15,812)

9,444

*Notes to the consolidated cash flow statement are on pages 13 and 14.

12

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Consolidated Cash Flow Statement a.

Reconciliation of operating profit to net cash flow from operating activities Year ended 31 December 2003 £’000

Group operating profit Depreciation Amortisation of deferred credit Ammortisation of goodwill (Increase)/decrease in stocks Decrease/(increase) in debtors Increase in creditors and provisions

57,300 40,853 (414) 12 (263) 21,117 4,707

Net cash inflow from operating activities

123,312

Year ended 31 December 2002 £’000 53,063 37,509 (406) 663 (29,427) 26,561 87,963

b.

Analysis of cash flows for headings netted in the consolidated cash flow statement At At 31 December 31 December 2003 2002 £’000 £’000 Management of liquid resources Cash on short-term deposit (1,006) Short-term loans from/(to) Group Undertakings (62,063) 45,139 Net cash inflow/(outflow) from management of liquid resources Financing Financing of assets operated by other parties Capital elements of finance leases Repayments of short-term borrowing Net cash outflow from financing

44,133

(62,063)

(930) (5,467) (8,420)

(695) (3,892) (1,580)

(14,817)

(6,167)

Veolia Water UK PLC includes term deposits and inter-group loans of less than one year as liquid resources.

13

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Consolidated Cash Flow Statement (continued) c.

Analysis of net funds At 31 December 2002 £’000

Net funds: Cash at bank and in hand Bank overdrafts

7,965 (69) 7,896

Liquid resources: Short-term loans to Group Undertakings Cash on short term deposit

Cash flow £’000 (5,949) (9,863) __ (15,812)

At 31 December 2003 £’000 2,016 (9,932) (7,916)

(45,139) 1,006 __ (44,133)

131,543 1,006

8,420 5,467 930 __ 14,817 __

(24,974) (4,667) (22,418)

(45,128)

72,574

Year ended 31 December 2002 £’000

Year ended 31 December 2002 £’000

(Decrease)/increase in cash in the year Cash (outflow)/inflow from increase in liquid resources Cash inflow from decrease in debt and lease financing

(15,812) (44,133) 14,817

9,444 62,063 6,167

Movement in net funds in the year

(45,128)

77,674

Opening net funds

117,702

40,028

Closing net funds

72,574

117,702

176,682 176,682

Debt: Bank loans Finance leases (including sale and leaseback) Debentures Financing of assets operated by third parties

(8,420) (30,441) (4,667) (23,348) (66,876)

Net funds

d.

117,702

132,549

(52,059)

Reconciliation of net cash flow to movement in net funds

14

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

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.

Planning is in progress to ensure correct and appropriate adoption of new International Accounting Standards in 2005. 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.

An interest in an associate acquired in 2003, has been accounted for using the equity method in accordance with FRS 9.

The interest in a joint venture held in 2002 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 acquisitions is capitalised and amortised in accordance with FRS 10.

Goodwill is amoritsed over a life of not greater than 20 years. 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.

15

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

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) 16

VEOLIA WATER UK PLC

1.

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

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.

17

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

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 lives 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 lives of employees as per SSAP 24.

The Group has adopted the disclosure requirements of FRS 17. l)

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.

18

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 2.

Turnover and segmental analysis

Turnover represents income, net of 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 2003 £’000

Year ended 31 December 2002 £’000

Turnover Water supply and related activities: Group and share of joint venture Less share of joint venture

203,831 -

192,565 (860)

Group turnover

203,831

191,705

Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

Operating profit Water supply and related activities: Group and share of joint venture Less: share of joint venture

57,300 -

53,091 (28)

Group operating profit

57,300

53,063

3.

Other operating income

Commission income Rents and sundry income

19

Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

1,593 606

1,399 570

2,199

1,969

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 4.

Operating profit

This is stated after charging / (crediting):

Auditors’ remuneration - for audit services (Ernst & Young LLP) - for audit services (RSM Robson Rhodes LLP) - for regulatory returns (Ernst & Young LLP) - for regulatory returns (RSM Robson Rhodes LLP) - for non-audit services (Ernst & Young LLP) - for non-audit services (RSM Robson Rhodes LLP) Depreciation of tangible fixed assets - infrastructure - owned - leased Operating lease rentals - land and buildings - other Hire of plant and machinery Amortisation of goodwill Amortisation of contributions to capital expenditure Provision against current asset investment 5.

Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

190 86 26 80 10

235 94 371

17,239 19,589 4,025

16,040 17,343 4,126

580 1,911 274 12 (414) 250

549 2,128 183 (406) 2,662

Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

1,324

965

Directors’ remuneration

Aggregate emoluments of the Directors

No Directors exercised share options over ordinary shares in Veolia Environnement SA in the year.

Retirement benefits are accruing to one Director (who is not the highest paid Director) under a defined benefits scheme.

Highest paid Director Aggregate emoluments and benefits (excluding gains on exercise of share options)

20

Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

488

319

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 6.

Staff costs Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

36,336 3,149 4,514 9

33,832 2,747 1,638 61

44,008

38,278

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 2003 Number

Year ended 31 December 2002 Number

1,311 33

1,217 34

1,344

1,251

Water supply and related activities Central services

7.

Interest receivable and similar income

Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

4,630 2,930 695

5,284 149

8,255

5,433

Interest receivable from - Group Undertakings - Convertible Debt - Other

Interest receivable includes income from short term treasury investments.

Interest on convertible debt arises from the Group holding convertible debt in SWIL for a period during the year.

Interest receivable from Group Undertakings is based upon interest rates linked to LIBOR.

21

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

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 Interest payable to Group Undertakings Other

Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

671 2,091

596 2,595

2,454 648 511

2,491 398

6,375

6,080

Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

16,106 1,033

18,177 -

17,139

18,177

9. Taxation

Taxation relates to the following: - Group Undertakings - Associate

Notes to the Financial Statements (continued) 22

VEOLIA WATER UK PLC

9.

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Taxation (continued)

Taxation charge

Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

UK corporation tax at 30% (2002: 30%)

14,584

14,585

Over provision in prior years

(3,504)

Current taxation Share of joint venture current taxation Total current taxation Deferred taxation Net origination and reversal of timing differences for the period Decrease/(increase) in discounting Deferred tax charge for the period Share of joint venture deferred taxation Total deferred taxation Total Group taxation

Tax on associates Tax on profit on ordinary activities

23

(676)

11,080 ______ 11,080 ______

13,909 (6) ______ 13,903 ______

4,709 317 ______ 5,026 ______ 5,026 ______ 16,106 ______

7,167 (2,897) ______ 4,270 4 ______ 4,274 ______ 4,274 ______

1,033 ______ 17,139

______ 18,177

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 9.

Taxation (continued)

Current taxation reconciliation Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

Profit on ordinary activities before taxation excluding associate

60,058

155,029

Theoretical tax at UK corporation tax rate of 30% (2002: 30%) Effects of: - adjustment to tax in respect of prior years - disposal of investments - other expense/(income) that is not tax deductible - accelerated capital allowances - Group relief transactions - short term timing differences - other timing differences

18,017

46,509

(3,504) (161) 1,449 (4,758) 48 (11) ______ 11,080

(676) (24,416) (21) (5,425) (326) (1,742) ______ 13,903

Actual current taxation charge

10.

Dividends

Interim dividend paid of £12.50 per share (2002: £14.032 per share) Final dividend proposed of £37.50 per share (2002: £43.036 per share)

Notes to the Financial Statements (continued)

24

Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

6,250

7,016

18,750 ______

21,518 ______

25,000

28,534

VEOLIA WATER UK PLC

11.

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Intangible Assets

Group

Positive goodwil £’000

Cost At 1 January 2003 On acquisition of subsidiary

241 ______ 241

At 31 December 2003 Amortisation At 1 January 2003 Charge for the period At 31 December 2003

12 ______ 12

Net book value At 31 December 2003

229

At 31 December 2002

-

Positive goodwill arose on the acquistion of 50% of Veolia Water Industrial Outsourcing Limited on 23 December 2003. After the acquisition the Group owned 100% of Veolia Water Industrial Outsourcing Limited. The goodwill is amortised over its estimated life of 20 years.

25

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 12a.

Tangible fixed assets – Group

Group

Cost At 1 January 2003 Additions On acquisition of a subsidiary Transfers Transferred to assets held exclusively for resale Capital contributions Disposals

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

82 -

127,387 2,252

384,696 40,695

330,693 4,887

43,694 21,984

886,552 69,818

-

2,172

1,208

298 24,435

1,531 (27,815)

1,829 -

(1,444)

(1,444)

-

(4)

(7,206) (286)

(2,798)

-

(7,206) (3,088)

At 31 December 2003

82

131,807

419,107

357,515

37,950

946,461

Depreciation At 1 January 2003 Charge for the year On acquisition of a subsidiary

82 -

34,445 3,136

161,253 17,344

163,684 20,373

-

359,464 40,853

-

14

(286)

23 (2,687)

-

23 (2,959)

At 31 December 2003

82

37,595

178,311

181,393

-

397,381

Net book value At 31 December 2003

-

94,212

240,796

176,122

37,950

549,080

At 31 December 2002

-

92,942

223,443

167,009

43,694

527,088

Disposals

The net book value of infrastructure assets is stated after the deduction of grants and contributions amounting to £89,917,000 (2002: £82,516,000) in order to give a true and fair view.

Included in the above at 31 December 2003 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 (5,673)

23,165 (9,695)

68,434 (51,746)

100,292 (67,114)

3,020

13,470

16,688

33,178

26

Vehicles plant and machinery

Total

£’000

£’000

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 12a.

Tangible fixed assets – Group (continued)

Included in the above at 31 December 2002 are fixed assets held under finance leases, as follows: Group

Cost Depreciation

Freehold land, buildings and reservoirs £’000

Mains and other infrastructure assets £’000

Vehicles plant and machinery

Total

£’000

£’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

Short leasehold property

Freehold property

Total £’000

Net book value

12b.

Tangible fixed assets – Company

£’000

£’000

Vehicles, plant and machinery £’000

Company Cost At 1 January 2003 Additions Disposals

82 -

7,528 -

1,275 87 (147)

8,885 87 (147)

At 31 December 2003

82

7,528

1,215

8,825

Depreciation At 1 January 2003 Charge for the year Disposals

82 -

1,284 151 -

975 115 (65)

2,341 266 (65)

At 31 December 2003

82

1,435

1,025

2,542

Net Book Value At 31 December 2003

-

6,093

190

6,283

At 31 December 2002

-

6,244

300

6,544

The leasehold property is the only leased asset held by the Company.

27

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 13.

Fixed asset investments Investment in joint venture £’000

Group

At 1 January 2003 Transfer of status to subsidiary

50 (50) ____ -

At 31 December 2003

The Group purchased the remaining share of the joint venture on 23 December 2003, and consequently the entity has been accounted for as a subsidiary undertaking.

Subsidiary Undertakings £’000

Loans to Group Undertakings £’000

Company At 1 January 2003 Acquisitions Release of impairment provision Payments

34,123 10,303 64 -

178,698 45,149

212,821 10,303 64 45,149

At 31 December 2003

44,490

223,847

268,337

28

Total £’000

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 13.

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 **

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% 99% 99% 99% 87% 98% 74% 92% 77% 100%

*

Ordinary shares

100%

* *

Ordinary shares Ordinary shares

100% 100%

*

Ordinary shares

100%

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 Veolia Water Investment Limited (formerly Vivendi Water Investment Limited) 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.

29

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 14. Investment in associate The investment in associate represents the Group’s share in SWIL. The accounting period for SWIL is the period ending 31 March 2004.

SWIL is an investor in the British water supply and wastewater operations sector.

The Group’s investment in SWIL, which is based on provisional estimates of net tangible assets, comprises: Share of net tangible assets

Loans to subsidiaries

£’000

£’000

9,950

40,000 (40,000) -

At 1 January 2003 On acquisition Redemption of Loan Subscription for Preference Shares Share of Associate Profit

At 31 December 2003

2,692

11,642

-

Preference shares in SWS £’000

Goodwill

Total

£’000

£’000

-

5,990

40,000

-

55,940 (40,000) 40,000

-

-

2,692

40,000

5,990

58,632

The following additional disclosures for SWIL are provided to comply with the requirements of the 25 per cent threshold rule as set out in paragraph 58 of FRS 9.

Group share of associate

Group share of associate £’000

Share of profit and loss account headings Turnover Operating Profit Profit before tax Taxation Profit after tax

58,174 24,513 5,053 1,033 4,020

Share of assets Fixed assets Current assets

553,023 40,954 593,977

Share of liabilities Liabilities due within one year or less Liabilities due after more than one year

(92,037) (450,298) (542,335)

Share of net assets

51,642

The Company has been granted an option to acquire an additional 5.1% stake in SWIL.

30

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 15. Current asset investments Group

Listed investments £’000

Cost At 1 January 2003 Additions Disposals

6,153 (4,302) ______ 1,851

At 31 December 2003 Amounts provided At 1 January 2003 Provided in year Eliminated on disposal At 31 December 2003

2,662 250 (1,890) ______ 1,037

Net book value At 31 December 2003

814

At 31 December 2002

3,491

The net book value of listed investments at 31 December 2003 relates to a 1.85% 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 2003, was £0.814m (2002: £3.491m).

The market value of the investment in Ecofin Water & Power Opportunities plc held at 31 December 2003 based on market prices at 30 June 2004 was £1.203m.

The Company has no current asset investments.

31

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 16.

Stocks and work in progress Group 31 December 31 December 2003 2002 £’000 £’000

Work in progress Raw materials and consumables

320 1,479

119 1,417

1,799

1,536

The Company has no stocks.

17.

Debtors Group 31 December 31 December 2003 2002 £’000 £’000

Trade debtors Loans to Group Undertakings Amounts due from Group Undertakings Amounts due from Joint Venture Assets held exclusively for resale Other debtors Prepayments and accrued income Corporation tax recoverable

Company 31 December 31 December 2003 2002 £’000 £’000

29,720 131,543 1,909

28,196 176,682 3,088

219 174,085 31,563

327 176,682 51,757

1,444 4,082 6,707 562

276 5,079 32,310 2

779 764 -

245 897 28,997 -

175,967

245,633

207,410

258,905

32

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 18.

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 Debentures Trade creditors Loans from Group Undertakings Amounts owed to Group Undertakings Amounts owed to Joint Venture Corporation tax Other taxes and social security Other creditors Dividends Accruals Deferred income

21

Group 31 December 31 December 2003 2002 £’000 £’000

Company 31 December 31 December 2003 2002 £’000 £’000

9,932

8,489

11,204

17,720

6,394

5,009

-

-

22

5,227

5,635

-

-

22

1,094

879

-

-

21

2,500 7,436 -

8,104 -

121 11,168

359 -

8,337

7,049

2,635

1,795

-

516

-

498

20,453 1,896

20,903 3,111

9,022 933

8,992 2,279

9,044 19,273 31,554 31,822

8,699 22,020 49,786 30,678

748 18,750 5,682 -

294 21,518 14,593 -

154,962

170,878

60,263

68,048

33

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 19.

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

20.

Group 31 December 31 December 2003 2002 £’000 £’000

21 22

22

Company 31 December 31 December 2003 2002 £’000 £’000

2,167 19,747

4,667 24,806

-

-

7,067

7,451

-

-

21,324

22,469

-

-

836

836

-

-

51,141

60,229

-

-

Provisions for liabilities and charges

Group

Deferred Tax £’000

Insurance

Pensions

Other

£’000

£’000

£’000

Balance at 1 January 2003 Amount used Amount provided

40,499 5,026

1,070 (321) -

1,857 2,978

2,330 5

Balance at 31 December 2003

45,525

749

4,835

2,335

Company

Balance at 31 December 2003

34

1,486 (56) ______ 1,430

£’000

Leasehold Property £’000

23 26 ______ 49

1,486 (56) ______ 1,430

Pensions

Balance at 1 January 2003 Amount used Amount provided

Leasehold Property £’000

Total £’000 47,242 (377) 8,009 54,874

Total £’000 1,509 (56) 26 1,479

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 20.

Provisions for liabilities and charges (continued)

Deferred taxation (see Note 9) Group 31 December 31 December 2003 2002 £’000 £’000

Company 31 December 31 December 2003 2002 £’000 £’000

Accelerated capital allowances Other timing differences

107,325 (551)

102,567 (502)

-

-

Undiscounted provision for deferred tax Discount

106,774 (61,249)

102,065 (61,566)

-

-

45,525

40,499

-

-

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.

35

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 21.

Borrowings analysis

Loans and bank overdrafts outstanding at the year end comprise: Group 31 December 31 December 2003 2002 £’000 £’000 Amounts repayable within one year Overdrafts Bank loans Debentures

Amounts repayable after one year Debentures

Company 31 December 31 December 2003 2002 £’000 £’000

9,932 2,500

69 8,420 -

11,204 -

9,300 8,420 -

12,432

8,489

11,204

17,720

2,167

4,667

-

-

14,599

13,156

11,204

17,720

Loans and bank overdrafts are repayable as follows: Group 31 December 31 December 2003 2002 £’000 £’000

Company 31 December 31 December 2003 2002 £’000 £’000

Bank loans and overdrafts Repayable: Within one year

9,932

8,489

11,204

17,720

Other borrowings Repayable: Within one year After five years

2,500 2,167

2,500 2,167

-

-

4,667

4,667

-

-

14,599

13,156

11,204

17,720

Details of the security given for bank loans and overdrafts are provided within Note 31.

36

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 21.

Borrowings analysis (continued)

Loans not wholly repayable within five years comprise: Group 31 December 31 December 2003 2002 £’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.

22.

Lease and other financial commitments

Obligations under finance leases are payable as follows: Group 31 December 31 December 2003 2002 £’000 £’000 Within one year In the second to fifth years inclusive After five years

5,227 13,954 5,793

5,635 17,853 6,953

24,974

30,441

Obligations for financing of assets operated by third parties are payable as follows: Group 31 December 31 December 2003 2002 £’000 £’000 Within one year In the second to fifth years inclusive After five years

The Company has no finance lease obligations.

37

1,094 4,830 16,494

879 4,418 18,051

22,418

23,348

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 22.

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 2003 2002 £’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

23.

Other 31 December 31 December 2003 2002 £’000 £’000

333 248

27 248

150 2,964 -

226 2,062 -

581

275

3,114

2,288

15 248

27 248

5 22 -

12 17 -

263

275

27

29

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.

24.

Share capital 31 December 2003 £’000

31 December 2002 £’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

38

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 25.

Profit and loss account and reserves Group Profit and loss £’000

Group Other reserves £’000

Group Total reserves £’000

As at 1 January 2003 Retained profit for the period

416,436 21,235

86,632 -

503,068 21,235

As at 31 December 2003

437,671

86,632

524,303

Company Profit and loss £’000

Company Other reserves £’000

Company Total reserves £’000

As at 1 January 2003 Retained profit for the period

249,044 16,086

159,315 -

408,359 16,086

As at 31 December 2003

265,130

159,315

424,445

The total amount of goodwill arising on acquisitions which has been written off against Group reserves is £74,483,000 (2002: £74,483,000).

26.

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 £41,086,000 (2002: profit £77,268,000).

39

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 27.

Reconciliation of movements in equity shareholders’ funds Group 31 December 31 December 2003 2002 £’000 £’000

Company 31 December 31 December 2003 2002 £’000 £’000

Profit for the year Dividends

46,235 (25,000)

135,802 (28,534)

41,086 (25,000)

77,268 (28,534)

Opening equity shareholders’ funds

21,235 503,568

107,268 396,300

16,086 408,859

48,734 360,125

Closing equity shareholders’ funds

524,803

503,568

424,945

408,859

28.

Capital commitments

Capital expenditure commitments not provided for in these financial statements are: Group 31 December 31 December 2003 2002 £’000 £’000 Contracted

29.

16,120

19,454

Company 31 December 31 December 2003 2002 £’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.

40

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 29.

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 18, 19, 21 and 22.

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 2003

61,991

34,906

27,085

-

As at 31 December 2002

66,945

30,510

36,435

-

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 2003

8.5

26

-

As at 31 December 2002

8.5

27

-

Years

The weighted average period of fixed rate liabilities was calculated without giving effect to £2,167,000 of irredeemable debentures.

41

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 29.

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 2003 £'000

31 December 2002 £'000

18,753 5,361 13,423 24,454 61,991

15,003 5,103 19,668 27,171 66,945

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 2003 £'000

31 December 2002 £'000

35,000

41,580

31 December 2003 £'000

31 December 2002 £'000

2,016 131,543 814 134,373

7,965 176,682 3,491 188,138

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. It is not practical to estimate the fair value of the financing of assets used by the Group and operated by other parties as there is no market in such a liability.

42

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 30.

Pension commitment

Composition of the schemes Veolia Water Supply Companies’ Pension Plan (formerly 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 Veolia Water Supply Companies’ Pension Plan (formerly the Vivendi Water Supply Companies’ Pension Plan) which was closed to new members. 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 2003 were paid by members in accordance with the Rules of the Plan and by the Companies in the Group in the range of 0% to 20% of Pensionable Salary.

Veolia UK Pension Plan (formerly 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 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 Veolia UK Pension Plan over the year ending 31 December 2003 were paid by members in accordance with the Rules of the Plan and by the Company of between 10% and 27% of Pensionable Salary. .

43

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 30.

Pension commitment (continued)

The latest formal valuation of the Plan for the Company, determined by an independent qualified actuary, was at 31 December 2002. 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% 3.8% 2.3%

The valuation as at 31 December 2002 stated the market valuation of the Plan’s assets was £4,965,000 and showed a surplus of £1,075,000.

SSAP 24 The total pensions charge on a SSAP 24 basis for the year ended 31 December 2003 was £4,499,000 (year ended 31 December 2002 £1,348,000), of which employer’s contributions were £1,591,000 (year ended 31 December 2002 £983,000). 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 2003 by a qualified independent actuary. a) Profit and loss reserve and net assets Profit and Loss Reserve at 31 December 2003

Profit and Loss Reserve at 31 December 2002

Net assets At 31 December 2003

Net assets At 31 December 2002

£000

£000

£000

£000

Group

As reported on SSAP 24 basis Net SSAP 24 pensions creditor (net of deferred tax) Excluding SSAP 24 balance FRS 17 pension (liability)/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

437,671

416,436

528,566

507,414

3,086

1,051

3,086

1,051

___________

___________

___________

___________

440,757

417,487

531,652

508,465

(395)

2,848

(395)

2,848

___________

___________

___________

___________

440,362

420,335

531,257

511,313

___________

___________

___________

___________

265,130

249,044

424,945

408,859

34

16

34

16

___________

___________

___________

___________

265,164

249,060

424,979

408,875

(942)

(357)

(942)

(357)

___________

___________

___________

___________

264,222

248,703

424,037

408,518

___________

___________

___________

___________

44

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 30.

Pension commitment (continued)

Supplementary pension disclosures under FRS 17 for the Veolia Water Supply Companies’ Pension Plan b)

Contributions

Under the projected unit method used for FRS 17, the current service cost under the Veolia Water Supply Companies’ Pension Plan will increase as members of the Plan approach retirement. c)

FRS 17 balance sheet information

Group Equities Bonds Gilts/Cash

At 31 December 2003

Value

Split of fund

£’000

% of fund

117,450 24,118 54,510

59.9 12.3 27.8

_________

Fair value of assets Present value of scheme liabilities

196,078 (193,029)

At 31 December 2002 Value

Split of fund

£’000

% of fund

100,483 25,772 53,436

55.9 14.3 29.8

______

__________

______

100.0

179,691 (174,625)

100.0

Long term rate of return expected (% pa)

7.7 5.4 4.8

_________

Actuarial surplus Deferred tax

7.5 5.6 4.5

__________

3,049 (915)

5,066 (1,520)

_________

Actuarial surplus after tax

Long term rate of return expected (% pa)

_________

2,134

3,546

_________

_________

The balance sheet asset would be £2,134,000 (2002: £3,546,000).

At 31 December 2003

Company Equities Bonds Gilts/Cash

Value

Split of fund

£’000

674 139 314

Value

Split of fund

% of fund

Long term rate of return expected (% pa)

£’000

% of fund

59.8 12.3 27.9

7.7 5.4 4.8

501 128 266

_________

Fair value of assets Present value of scheme liabilities Actuarial deficit Deferred tax Actuarial deficit after tax

At 31 December 2002

1,127 (1,283)

______

______

______

100.0

895 (1053)

100.0

______

______

(156) 47

(158) 47

______

______

(109)

(111)

______

______

45

56.0 14.3 29.7

Long term rate of return expected (% pa)

7.5 5.6 4.6

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 30.

Pension commitment (continued)

c)

FRS 17 balance sheet information (continued)

The balance sheet liability would be £109,000 (2002: £111,000). 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 2003

At 31 December 2002

Discount rate Salary growth Retail price index Pension-in payment increases

5.4% pa 4.6% pa 2.6% pa 2.6% pa

5.6% pa 4.3% pa 2.3% pa 2.3% pa

Deferred pensions are re-valued to retirement age in line with the RPI assumption of 2.6% pa (2002: 2.3% pa) unless otherwise prescribed by statutory requirements or the Plan Rules. e)

Analysis of the amount charged to operating profit Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

Group Current service cost

2,417

2,207

Total operating charge

2,417

2,207

Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

f)

Analysis of the amount credited to other finance income

Group Expected return on pension scheme assets Interest on pension scheme liabilities Net return

Notes to the Financial Statements (continued) 46

11,071 (9,626)

14,172 (10,575)

1,445

3,597

VEOLIA WATER UK PLC

30.

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Pension commitment (continued)

g)

Analysis of amount recognised in statement of total recognised gains and losses (STRGL) Year Year ended ended 31 December 31 December 2003 2002 £’000 £’000 Group Actual return less expected return on the pension schemes’ (32,750) 12,687 assets Experience gains and losses arising on the pension schemes’ 11,910 (315) liabilities Changes in assumptions underlying the present value of the (5,160) (14,020) pension schemes’ liabilities Actual loss recognised in STRGL (26,000) (1,648)

h)

Movement in surplus during the year

Group Surplus in scheme at beginning of the year Movement in year: Current service cost Contributions Other finance income Surplus capital restriction Actuarial loss Surplus in scheme at end of the year

47

Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

5,066

29,548

(2,417) 523 1,445 80 (1,648)

(2,207) 128 3,597 (26,000)

3,049

5,066

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Notes to the Financial Statements (continued) 30.

Pension commitment (continued)

h)

Movement in surplus during the year (continued) Year ended 31 December 2003 £’000

Company Deficit in scheme at beginning of the year Movement in year: Current service cost Contributions Other finance charges Actuarial loss Deficit in scheme at end of the year

i)

Year ended 31 December 2002 £’000

(158)

(127)

(27) 96 (67)

(30) 24 (6) (19)

(156)

(158)

History of experience gains and losses Year ended 31 December 2003 £’000

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) 48

12,687 6%

Year ended 31 December 2002 £’000

(32,750) (18%)

(315) 0%

11,910 7%

(1,641) (1%)

(26,000) (15%)

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

30.

Pension commitment (continued)

i)

History of experience gains and losses (continued) Year ended 31 December 2003 £’000

Company Difference between the expected and actual return on schemes’ assets: Amount (£’000) Percentage of schemes’ assets

61 5%

(23) (3%)

1 0%

50 5%

(67) (5%)

(19) (2%)

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

Year ended 31 December 2002 £’000

Supplementary pension disclosures under FRS 17 for the Veolia UK Pension Plan j)

Contributions

Future Company contributions under the Veolia UK Pension Plan are subject to review at the actuarial valuation due as at 31 December 2003. k)

FRS 17 balance sheet information

Group Equities Gilts Fair value of assets Present value of scheme liabilities

At 31 December 2003 Value

Split of fund

£’000

% of fund

6,311 1,559

80.2 19.8

_________

______

7,870 (11,483)

100.0

Long term rate of return expected (% pa)

_________

Actuarial deficit Deferred tax

7.7 4.8

Value

Split of fund

£’000

% of fund

4,046 1,082

78.9 21.1

__________

______

5,128 (6,125) __________

(3,613) 1,084 _________

Actuarial deficit after tax

At 31 December 2002

(997) 299 _________

(2,529) _________

(698) _________

Notes to the Financial Statements (continued)

49

100.0

Long term rate of return expected (% pa)

7.5 4.6

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

30.

Pension commitment (continued)

k)

FRS 17 balance sheet information (continued)

The balance sheet liability would be £2,529,000 (2002: £698,000).

At 31 December 2003

Company Equities Gilts

Value

Split of fund

£’000

2,208 545

Value

Split of fund

% of fund

Long term rate of return expected (% pa)

£’000

% of fund

80.2 19.8

7.7 4.8

1,321 354

_________

Fair value of assets Present value of scheme liabilities

At 31 December 2002

2,753

______

______

100.0

1,675

100.0

______

Actuarial deficit

Actuarial deficit after tax

7.5 4.6

(2,026) ______

(1,190)

Deferred tax

78.9 21.1

______

(3,943)

Long term rate of return expected (% pa)

(351)

357

105

______

______

(833)

(246)

______

______

The balance sheet liability would be £833,000 (2002: £246,000). l) 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 2003

At 31 December 2002

Discount rate Salary growth RPI Pension-in payment increases

5.4% pa 4.6% pa 2.6% pa 2.6% pa

5.6% pa 4.3% pa 2.3% pa 2.3% pa

Deferred pensions are re-valued to retirement age in line with the RPI assumption of 2.6% pa (2002: 2.3% pa) unless otherwise prescribed by statutory requirements or the Plan Rules.

Notes to the Financial Statements (continued) 30.

Pension commitment (continued)

50

VEOLIA WATER UK PLC

m)

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Analysis of the amount charged to operating profit Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

Group Current service cost

1,206

854

Total operating charge

1,206

854

Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

n)

Analysis of the amount credited to other finance income

Group Expected return on pension scheme assets Interest on pension scheme liabilities Net return

o)

416 (461)

303 (249)

(45)

54

Analysis of amount recognised in statement of total recognised gains and losses (STRGL) Year Year ended ended 31 December 31 December 2003 2002 £’000 £’000 Group Actual return less expected return on the pension schemes’ (692) 441 assets Experience gains and losses arising on the pension schemes’ (151) (1,452) liabilities Changes in assumptions underlying the present value of the (251) (1,421) pension schemes’ liabilities Actual loss recognised in STRGL (1,094) (2,432)

Notes to the Financial Statements (continued) 30.

Pension commitment (continued)

51

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

p) Movement in surplus during the year Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

Group (Deficit)/surplus in scheme at beginning of the year Movement in year: Current service cost Contributions Other finance (expense)/income Actuarial loss

(1,206) 1,067 (45) (2,432)

(854) 854 54 (1,094)

Deficit in scheme at end of the year

(3,613)

(997)

(997)

Year ended 31 December 2003 £’000 Company Deficit in scheme at beginning of the year Movement in year: Current service cost Contributions Other finance (expense)/income Actuarial loss Deficit in scheme at end of the year

Notes to the Financial Statements (continued) 30.

Pension commitment (continued)

q) History of experience gains and losses

52

43

Year ended 31 December 2002 £’000

(351)

(5)

(278) 250 (16) (795)

(184) 184 12 (358)

(1,190)

(351)

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Year ended 31 December 2003 £’000 Group Difference between the expected and actual return on schemes’ assets: Amount (£’000) Percentage of schemes’ assets

441 6%

Year ended 31 December 2002 £’000

(692) (13%)

Experience gains and losses on schemes’ liabilities: Amount (£’000) Percentage of the present value of the schemes’ liabilities

(1,452) (13%)

(151) (2%)

Total amount recognised in statement of total recognised gains and losses: Amount (£’000) Percentage of the present value of the schemes’ liabilities

(2,432) (21%)

(1,094) (18%)

Year ended 31 December 2003 £’000

Year ended 31 December 2002 £’000

Company Difference between the expected and actual return on schemes’ assets: Amount (£’000) Percentage of schemes’ assets

195 7%

(174) (10%)

Experience gains and losses on schemes’ liabilities: Amount (£’000) Percentage of the present value of the schemes’ liabilities

(585) (15%)

(100) (5%)

Total amount recognised in statement of total recognised gains and losses: Amount (£’000) Percentage of the present value of the schemes’ liabilities

(795) (20%)

(358) (18%)

Notes to the Financial Statements (continued) 31.

Overdraft facility

The Company acts, with certain other Group companies, as joint and several guarantor of the bank overdraft at Barclays Bank PLC.

53

VEOLIA WATER UK PLC

32.

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

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. 33.

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 KlĂŠber, 75116 Paris, France.

54