Veolia Water UK Annual Report 2004 by Veolia Water

Registered Number 2127283

Veolia Water UK PLC

Annual Report

for the year ended 31 December 2004

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Contents

Page Directors and Officers

Directors’ Report

Independent Auditors’ Report to the Shareholders

Consolidated Profit and Loss Account

Consolidated Balance Sheet

Company Balance Sheet

Consolidated Cash Flow Statement

Notes to the Consolidated Cash Flow Statement

Notes to the Financial Statements

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Directors and Officers Directors J S Gummer D W Alexander J C Banon R A Bienfait M J E Butcher F Darley C Roger-Lacan

(Chairman) (Managing Director, Appointed 1 February 2005) (Managing Director, up to 1 February 2005) (Appointed 1 January 2004)

Secretary K W Taylor R G Castle

(Appointed 31 July 2004) (Resigned 31 July 2004)

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

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

Registered Number 2127283

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Directors’ Report The Directors submit their report and the audited financial statements of Veolia Water UK PLC for the year ended 31 December 2004. 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 £44.6m (2003: £48.0m). An interim dividend of £216.25m has been paid during the year (2003: £6.25m), and the Directors propose a final dividend of £nil (2003: £18.75m) in respect of the year ending 31 December 2004. Retained losses of £175.1m (2003: Retained Profit of £21.2m) will be transferred to reserves. Review of business and future developments Turnover at £211.6m for the twelve months compares to £200.7m for the previous year. Profit before tax for the twelve months was £63.8m compared to £65.8m for the previous year. 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. Net Cash (before equity dividend payments and financing) of £68.7m was generated during the year. Net debt at 31 December 2004 was £93.7m compared to net funds of £72.6m last year. Capital expenditure for the twelve months to December, net of contributions from third parties, was £55.7m, compared to £61.2m for the previous year. On 4 January 2004, group company, General Utilities Holdings PLC disposed of its subsidiary Psec Limited to a third party, receiving consideration £0.5m. The profit on disposal for the Company arising from the transaction was nil. On 1 January 2004, 100% of the ordinary share capital of Veolia Water Projects Ltd passed from Veolia Water UK PLC to Veolia Water Industrial Outsourcing Ltd (also a subsidiary of Veolia Water UK plc). Refinancing On 24 June 2004, Three Valleys Water PLC (TVW) issued a £200m long dated bond (for a term of 22 years with a coupon of 5.875%), via Three Valleys Water Finance plc (a newly created subsidiary of TVW). On 13 July 2004, this generated net proceeds of £197.2 million, the majority of which was utilised to repay its loan with its parent undertaking, VW Capital Funds PLC. VW Capital Funds PLC subsequently repaid the revolving loan facility provided to it by Veolia Water UK PLC, leaving VW Capital Funds PLC with a cash surplus that it lent to Veolia Water UK PLC on commercial terms. Veolia Water UK PLC has lent surplus funds received to its parent undertaking.

Directors’ Report (continued) 2

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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. Expenditure in the year was £678,000 (2003: £646,000). Corporate 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 responsibility. Corporate responsibility encompasses the expectation that organisations should behave responsibly both to their stakeholders - customers, the community, employees, shareholders, and regulators - and to the environment. Within each subsidiary responsibility for performance in relation to corporate responsibility issues lies with each respective Board of Directors. These and the main Board are advised by a Corporate 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 responsibility. In March 2005 it was announced that the Company had scored 94% in the “Business in the Community (BitC) Corporate Responsibility Index 2004”, the fifth highest score and making it joint 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 corporate responsibility programmes, together with performance and targets, can be found in the Veolia Water UK Corporate Responsibility Report 2004. Copies of the report may be obtained by writing to the Corporate Responsibility Department, Veolia Water UK PLC, 3741 Old Queen Street, London SW1H 9JA, e-mail: info@veoliawater.co.uk.

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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 2004 represent 36 days (2003: 44 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 £71K (2003: £35K), together with £86K (2003: £79K) 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. During the year, the policy of providing employees with information about the group has been continued through the use of the Intranet and newsletters in which employees have also been encourage to present their suggestions and views. Regular meetings are held between local management and employees to allow a free flow of information and ideas.

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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 2004 Number of ordinary shares 109 -

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

At 31 December 2003 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 2004

Granted

Exercised

At 31 December 2004

Exercise Price

Date from which exercisable

Expiry date

08.02.04 25.01.05 24.03.06

07.02.09 25.01.10 24.03.11

(€) J C Banon

5,000 20,000 8,000

M J E Butcher

1,550

42.00

08.02.04

07.02.09

F Darley

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

42.00 37.53 22.50

08.02.04 25.01.05 24.03.06

07.02.09 25.01.10 24.03.11

R A Bienfait

C RogerLacan

42.00 37.53 22.50 -

C Roger-Lacan was granted up to 20,000 share options and R Bienfait up to 4,000 share options at an exercise price of €24.72 on 24th December 2004. The exact number of options (if any) depends upon the achievement by Veolia Environnement of certain Return on Capital Employed levels during the 2005 financial year. During the year the ordinary shares of Veolia Environnement SA traded between €21.02 and €26.63. The price at the end of the year was €26.63. The €/£ exchange rate was €1.410/£ at 31 December 2004 with a range during the year of €1.410/£ to €1.524/£.

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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 group and of the profit or loss of the group 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

State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; 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 group 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 group 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 group has adequate resources to continue in operational existence for the foreseeable future, continue to adopt the going concern basis in preparing the accounts. Auditors The Company’s auditors are Ernst & Young LLP. A resolution to re-appoint the auditor Ernst & Young LLP will be proposed at the next Annual General Meeting.

By order of the Board

K W Taylor Secretary

28 July 2005

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Independent Auditors’ Report to the Shareholders of Veolia Water UK PLC We have audited the group’s financial statements for the year ended 31 December 2004 which comprise the consolidated profit and loss account, the consolidated balance sheet, the company balance sheet, the consolidated cash flow statement, and the related notes 1 to 33. These financial statements have been prepared on the basis of the accounting policies set out therein. 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 Group 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 Group 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 Group'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 2004 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

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Consolidated Profit and Loss Account Notes

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

Share of operating profit in 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 2003 £’000

211,628 (119,029) 92,599 (40,242) 6,262

200,666 (112,437) 88,229 (36,293) 5,364

58,619

57,300

35,824 1,610 2,097 5 98,155

24,513 180 701 163 535 83,392

9,762

8,255

(9,741) (34,425) 63,751

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

(19,381)

(17,139)

44,370 (799) (5)

48,673 (711) (5)

43,566 (216,250) (2,465) (175,149)

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

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 (loss)/profit for the year

Year ended 31 December 2004 £’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 14 to 53 form part of these financial statements.

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Consolidated Balance Sheet Notes

Fixed assets Intangible assets Tangible Assets Investments in associate

11 12a 14

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

16 17 15

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 2004 £’000

31 December 2003 £’000

217 562,646 54,687

229 549,080 58,632

617,550

607,941

1,782 204,599 1,851 1,347 1,878

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

211,457 (155,545)

181,602 (154,962)

55,912

26,640

673,462

634,581

(261,578) (58,228)

(51,141) (54,874)

353,656

528,566

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

24 25 25

500 86,632 262,522

500 86,632 437,671

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

27 23 23

349,654 3,964 38

524,803 3,716 47

353,656

528,566

The notes on pages 14 to 53 form part of these financial statements. The financial statements on pages 8 to 53 were approved by the Board of Directors on 28 July 2005 and were signed on its behalf by:

D W Alexander Director

R A Bienfait Director

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Company Balance Sheet Notes

31 December 2004 £’000

31 December 2003 £’000

12b 13

6,064 146,222

6,283 268,337

152,286

274,620

266,039 1,347 342

207,410 1,006 3,651

267,728 (128,192)

212,067 (60,263)

Net current assets

139,536

151,804

Total assets less current liabilities

291,822

426,424

Fixed assets Tangible assets Investments

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

Creditors: amounts falling due within one year

Creditors: amounts falling due after more than one year Provisions for liabilities and charges

(25,219) (4,018)

(1,479)

20 Net assets

262,585

424,945

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

24 25 25

500 159,315 102,770

500 159,315 265,130

Equity shareholders’ funds

262,585

424,945

D W Alexander Director

R A Bienfait Director

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Consolidated Cash Flow Statement Notes*

Year ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

94,955

123,312

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

9,758 (2,719) (1,345) 2,277

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

(599)

(617)

7,372

495

15,854

(12,261)

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

(60,315) 8,210 2,658 (18) -

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

Net cash outflow from capital expenditure and financial investment

(49,465)

(128,906)

Equity dividends paid

(235,000)

(27,768)

Cash outflow before management of liquid resources and financing

(166,284)

(45,128)

Taxation received/(paid)

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

(23,544)

44,133

Net cash inflow/(outflow) from financing

184,560

(14,817)

Decrease in cash

*Notes to the consolidated cash flow statement are on pages 12 and 13.

(5,268)

(15,812)

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Notes to the Consolidated Cash Flow Statement a.

Reconciliation of operating profit to net cash flow from operating activities Year Ended 31 December 2004 £’000

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

58,619 41,558 (414) 312 17 4,728 (9,865)

Net cash inflow from operating activities

94,955

Year ended 31 December 2003 £’000 57,300 40,853 (414) 12 (263) 21,117 4,707 123,312

Analysis of cash flows for headings netted in the consolidated cash flow statement At At 31 December 31 December 2004 2003 £’000 £’000 Management of liquid resources Cash on short-term deposit (1,006) (341) Short-term loans (to)/from Group Undertakings 45,139 (23,203) (23,544)

44,133

Financing Financing of assets operated by other parties Capital elements of finance leases Issue of Bond Redemption of Debentures Repayments of short-term borrowing

(942) (8,022) 196,024 (2,500) -

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

Net cash inflow/(outflow) from financing

184,560

(14,817)

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

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

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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

Analysis of net funds/(debt) At 31 December 2003 £’000

Net funds: Cash at bank and in hand Bank overdrafts

2,016 (9,932) (7,916)

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

131,543 1,006 132,549

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

(24,974) (4,667) (22,418) (52,059)

Net funds/(debt)

72,574

Cash flow £’000 (138) (5,130) __ (5,268) 23,203 341 __ 23,544

At 31 December 2004 £’000 1,878 (15,062) (13,184) 154,746 1,347 156,093

(196,024) 8,022 2,500 942 __ (184,560) __

(196,024) (16,952) (2,167) (21,476)

(166,284)

(93,710)

(236,619)

Reconciliation of net cash flow to movement in net funds/(debt) Year ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

Incease in overdraft in the year Cash inflow/(outflow) from increase in liquid resources Cash (outflow)/inflow from increase in debt and lease financing

(5,268) 23,544 (184,560)

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

Movement in net debt in the year

(166,284)

(45,128)

72,574

117,702

(93,710)

72,574

Opening net funds Closing net (debt)/funds

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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 â&#x20AC;&#x153;Retirement Benefitsâ&#x20AC;? 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. 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.

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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 â&#x20AC;&#x201C; 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 Companyâ&#x20AC;&#x2122;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) 15

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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.

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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 assetâ&#x20AC;&#x2122;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

Employerâ&#x20AC;&#x2122;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)

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. o)

Comparative figures

Certain prior year figures have been restated to conform with the 2004 presentation.

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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 2004 £’000

Year ended 31 December 2003 £’000

Turnover Water supply and related activities:

211,628

200,666

Group turnover

211,628

200,666

Year Ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

Operating profit Water supply and related activities:

58,619

57,300

Group operating profit

58,619

57,300

Year Ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

Net assets Water supply and related activities: Net assets Share of net assets of associate Minority interest

302,971 54,687 (4,002)

473,698 58,631 (3,763)

Group net assets

353,656

528,566

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Notes to the Financial Statements (continued) 3.

Other operating income

Commission, Rents and sundry income

Year Ended 31 December 2004 £’000

Year Ended 31 December 2003 £’000

6,262

5,364

6,262

5,364

Year Ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

186 142 58 -

190 86 26 80 10

17,231 20,432 3,895

17,239 19,589 4,025

256 2,199 218 12 (414) (1,037)

580 1,911 274 12 (414) 250

Year Ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

830

1,324

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.

Directors’ remuneration

Aggregate emoluments of the Directors

Company pension contributions to defined benefits scheme

Notes to the Financial Statements (continued) 19

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Directors’ remuneration (continued)

Members of defined benefit schemes

Year ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

No Directors exercised share options in Veolia Environnement SA in 2004. Retirement benefits are accruing to two Directors (who are not the highest paid Director) under a defined benefits scheme. Year Year ended ended 31 December 31 December 2004 2003 £’000 £’000 Highest paid Director Aggregate emoluments and benefits 488 254 (excluding gains on exercise of share options) Company pension contributions to defined benefits scheme

Year ended 31 December 2004 £’000

Year Ended 31 December 2003 £’000

37,296 3,358 5,714 11

36,336 3,149 4,514 9

46,379

44,008

The average number of employees of the Group during the year was as follows: Year ended 31 December 2004 Number

Year ended 31 December 2003 Number

Staff costs

Wages and salaries Social security costs Pension costs Other benefits

Water supply and related activities Central services

Notes to the Financial Statements (continued)

1,271 26

1,311 33

1,297

1,344

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Interest receivable and similar income

Interest receivable from - Group Undertakings - Bank interest - Convertible Debt - Other

Year ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

9,204 32 526

4,630 2,930 695

9,762

8,255

Other interest receivable includes income from short term treasury investments. Interest receivable from Group Undertakings is based upon interest rates linked to LIBOR. 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 2004 £’000

Year ended 31 December 2003 £’000

70 1,719

671 2,091

1,813 6,139

2,454 648 511

9,741

6,375

Year ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

17,469 1,912

16,106 1,033

19,381

17,139

9. Taxation

Taxation relates to the following: - Group Undertakings - Associate

Notes to the Financial Statements (continued) 9.

Taxation (continued)

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Taxation charge Year ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

UK corporation tax at 30% (2003: 30%)

16,591

14,584

Under/(over) provision in prior years

371 ______ 16,962 ______

(3,504) ______ 11,080 ______

3,515 (1,310) (1,698) ______ 507 ______ 17,469 ______

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

1,912 ______ 19,381

1,033 ______ 17,139

Total current taxation Deferred taxation Net origination and reversal of timing differences for the period Over provision in prior years (Increase)/decrease in discounting Total deferred taxation Total Group taxation

Tax on associates Tax on profit on ordinary activities

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Notes to the Financial Statements (continued) 9.

Taxation (continued)

Current taxation reconciliation Year ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

Profit on ordinary activities before taxation excluding associate

60,742

60,058

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 that is not tax deductible - accelerated capital allowances - Group relief transactions - short term timing differences - other timing differences

18,222

18,017

371 392 (4,955) (289) 1,437 1,784 ______ 16,962

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

Actual current taxation charge

10.

Dividends

Interim dividend paid of £432.50 per share (2003: £12.50 per share) Final dividend proposed of £Nil per share (2003: £37.50 per share)

Notes to the Financial Statements (continued)

Year ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

216,250

6,250

______

18,750 ______

216,250

25,000

VEOLIA WATER UK PLC

11.

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Intangible Assets

Group

Positive goodwil £’000

Cost At 1 January 2004

241 ______ 241

At 31 December 2004 Amortisation At 1 January 2004 Charge for the period At 31 December 2004

12 12 ______ 24

Net book value At 31 December 2004

217

At 31 December 2003

229

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.

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Notes to the Financial Statements (continued) 12a.

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

Cost At 1 January 2004 Additions Transfers Capital contributions Disposals

82 -

131,807 1,581 3,019 (586)

419,107 39,413 70 (8,211) (500)

357,515 10,879 23,391 (171)

37,950 12,029 (26,480) -

946,461 63,902 (8,211) (1,257)

At 31 December 2004

135,821

449,879

391,614

23,499

1,000,895

Depreciation At 1 January 2004 Charge for the year Disposals

82 -

37,595 3,354 (52)

178,311 17,231 (500)

181,393 20,973 (138)

397,381 41,558 (690)

At 31 December 2004

40,897

195,042

202,228

438,249

Net book value At 31 December 2004

94,924

254,837

189,386

23,499

562,646

At 31 December 2003

94,212

240,796

176,122

37,950

549,080

The net book value of infrastructure assets is stated after the deduction of grants and contributions amounting to £98,582,000 (2003: £89,917,000) in order to give a true and fair view. Included in the above at 31 December 2004 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

8,419 (5,946)

23,165 (9,833)

68,714 (55,230)

100,298 (71,009)

2,473

13,332

13,484

29,289

Notes to the Financial Statements (continued)

Vehicles plant and machinery

Total

£’000

VEOLIA WATER UK PLC

12a.

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Tangible fixed assets – Group (continued)

Included in the above at 31 December 2003 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

8,693 (5,673)

23,165 (9,695)

68,434 (51,746)

100,292 (67,114)

3,020

13,470

16,688

33,178

Short leasehold property

Freehold property

Total £’000

Net book value

12b.

Tangible fixed assets – Company

£’000

Vehicles, plant and machinery £’000

Company Cost At 1 January 2004 Additions Disposals

82 -

7,528 -

1,215 31 (51)

8,825 31 (51)

At 31 December 2004

7,528

1,195

8,805

Depreciation At 1 January 2004 Charge for the year Disposals

82 -

1,435 151 -

1,025 70 (22)

2,542 221 (22)

At 31 December 2004

1,586

1,073

2,741

Net Book Value At 31 December 2004

5,942

122

6,064

At 31 December 2003

6,093

190

6,283

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

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Notes to the Financial Statements (continued) 13.

Fixed asset investments Subsidiary Undertakings £’000

Loans to Group Undertakings £’000

Total

Company At 1 January 2004 Disposal of investment Loan Repayments

44,490 (750) -

223,847 (121,365)

268,337 (750) (121,365)

At 31 December 2004

43,740

102,482

146,222

£’000

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 Three Valleys Water PLC North Surrey Water Limited

* +

Tendring Hundred Water Services Limited

Folkestone and Dover Water Services Limited

Veolia Water Operations Ireland Limited Veolia Water Projects Limited General Utilities Holdings Limited Veolia Water Investment Limited Veolia Water Industrial Outsourcing Limited

* * * *

Ordinary shares 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 Ordinary shares Ordinary shares Ordinary shares Ordinary shares

100% 100% 99% 99% 99% 99% 88% 98% 74% 92% 77% 100% 100% 100% 100% 100%

* 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.

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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 held through a subsidiary, Veolia Water Investments Limited) is based on estimates of net tangible assets, comprising of: Share of net tangible assets £’000

Loans to subsidiaries £’000

Preference shares in SWS £’000

Goodwill

Total

£’000

9,950

40,000 (40,000) -

5,994

40,000

55,944 (40,000) 40,000

390

2,688

On Aquisition Redemption of Loan Subscription for Preference Shares Share of Associate Profit

2,298

At 31 December 2003

12,248

40,390

5,994

58,632

Share of Associate (Loss)/Profit Amortisation of Goodwill

(3,656)

(3,646)

(299)

8,592

40,400

5,695

54,687

At 31 December 2004

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 Loss after tax

94,419 35,824 1,399 (1,912) (514)

Share of assets Fixed assets Current assets

603,766 47,661 651,427

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

(57,213) (585,622) (642,835)

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

Notes to the Financial Statements (continued) 28

8,592

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

15. Current asset investments Group

Listed investments £’000

Cost At 1 January 2004

1,851 ______ 1,851

At 31 December 2004 Amounts provided At 1 January 2004 Provision reversed in the year At 31 December 2004

1,037 (1,037) ______ -

Net book value At 31 December 2004

1,851

At 31 December 2003

814

The net book value of listed investments at 31 December 2004 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 2004, was £2.327m (2003: £0.814m). The market value of the investment in Ecofin Water & Power Opportunities plc held at 31 December 2004 based on market prices at 1 June 2005 was £3.665m. The Company has no current asset investments.

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Notes to the Financial Statements (continued) 16.

Stocks and work in progress Group 31 December 31 December 2004 2003 £’000 £’000

Work in progress Raw materials and consumables

196 1,586

320 1,479

1,782

1,799

The Company has no stocks. 17.

Debtors Group 31 December 31 December 2004 2003 £’000 £’000

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

Company 31 December 31 December 2004 2003 £’000 £’000

31,786 154,746 2,570

29,720 131,543 1,909

249 198,567 65,328

219 174,085 31,563

4,618 9,233 1,646

1,444 4,082 6,707 562

1,334 561 -

779 764 -

204,599

175,967

266,039

207,410

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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 Corporation tax Other taxes and social security Other creditors Dividends Accruals and Deferred income

Group 31 December 31 December 2004 2003 £’000 £’000

Company 31 December 31 December 2004 2003 £’000 £’000

15,062

9,932

15,888

11,204

7,808

6,394

5,577

5,227

1,337

1,094

11,533 -

2,500 7,436 -

172 84,401

121 11,168

3,590

8,337

2,928

2,635

28,797 468

20,453 1,896

18,965 216

9,022 933

6,088 470 74,815

9,044 19,273 63,376

1,272 4,350

748 18,750 5,682

155,545

154,962

128,192

60,263

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Notes to the Financial Statements (continued) 19.

Creditors: amounts falling due after more than one year Notes

Debentures Bonds Obligations under finance leases Financing of assets operated by other parties Corporation tax Accruals and deferred income Amounts owed to Group Undertakings

20.

Group 31 December 31 December 2004 2003 £’000 £’000

Company 31 December 31 December 2004 2003 £’000 £’000

21 21 22

2,167 196,024 11,375

2,167 19,747

20,139

21,324

25,219 6,654

7,067

25,219 -

836

261,578

51,141

25,219

Provisions for liabilities and charges

Group

Deferred Tax £’000

Insurance

Pensions

Other

£’000

Balance at 1 January 2004 Amount used Amount provided

45,525 507

749 108

4,835 2,548

2,335 (2,335) 2,000

1,430 526

54,874 (2,335) 5,689

Balance at 31 December 2004

46,032

857

7,383

2,000

1,956

58,228

Company

Pensions £’000

Balance at 1 January 2004 Amount provided

49 13 ______ 62

Balance at 31 December 2004

Other £’000 2,000 ______ 2,000

Leasehold Property £’000

Leasehold Property £’000 1,430 526 ______ 1,956

Total £’000

Total £’000 1,479 2,539 4,018

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Notes to the Financial Statements (continued) 20.

Provisions for liabilities and charges (continued)

Deferred taxation (see Note 9) Group 31 December 31 December 2004 2003 £’000 £’000

Company 31 December 31 December 2004 2003 £’000 £’000

Accelerated capital allowances Other timing differences

111,437 (2,458)

107,325 (551)

Undiscounted provision for deferred tax Discount

108,979 (62,947)

106,774 (61,249)

46,032

45,525

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.

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Notes to the Financial Statements (continued) 21.

Borrowings analysis

Loans and bank overdrafts outstanding at the year end comprise: Group 31 December 31 December 2004 2003 £’000 £’000 Amounts repayable within one year Overdrafts Debentures

Amounts repayable after one year Debentures Bonds

Company 31 December 31 December 2004 2003 £’000 £’000

15,062 -

9,932 2,500

15,888 -

11,204 -

15,062

12,432

15,888

11,204

2,167 196,024

2,167 -

213,253

14,599

15,888

11,204

Loans and bank overdrafts are repayable as follows: Group 31 December 31 December 2004 2003 £’000 £’000 Bank loans and overdrafts Repayable: Within one year Other borrowings Repayable: Within one year After five years

Company 31 December 31 December 2004 2003 £’000 £’000

15,062

9,932

15,888

11,204

198,191

2,500 2,167

198,191

4,667

213,253

14,599

15,888

11,204

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

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Notes to the Financial Statements (continued) 21.

Borrowings analysis (continued)

Loans not wholly repayable within five years comprise: Group 31 December 31 December 2004 2003 £’000 £’000 Bond Issue of 5.875% Guaranteed notes due 2026 Irredeemable debenture stock carrying interest of between 3.25% and 5.25%

196,024 2,167

2,167

198,191

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 2004 2003 £’000 £’000 Within one year In the second to fifth years inclusive After five years

5,577 6,916 4,459

5,227 13,954 5,793

16,952

24,974

Obligations for financing of assets operated by third parties are payable as follows: Group 31 December 31 December 2004 2003 £’000 £’000 Within one year In the second to fifth years inclusive After five years

The Company has no finance lease obligations.

1,337 5,100 15,039

1,094 4,830 16,494

21,476

22,418

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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 2004 2003 £’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 2004 2003 £’000 £’000

8 248

333 248

224 2,442 199

150 2,964 -

256

581

2,865

3,114

248

15 248

16 -

5 22 -

248

263

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 2004 £’000

31 December 2003 £’000

Authorised 500,000 ordinary shares of £1 each

500

Issued, allocated and fully paid 500,000 ordinary shares of £1 each

500

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Notes to the Financial Statements (continued) 25.

Profit and loss account and reserves

As at 1 January 2004 Retained loss for the period As at 31 December 2004

Group Profit and loss £’000

Group Other reserves £’000

Group Total reserves £’000

437,671 (175,149)

86,632 -

524,303 (175,149)

262,522

86,632

349,154

Company Profit and loss £’000

Company Other reserves £’000

Company Total reserves £’000

265,130 (162,360)

159,315 -

424,445 (162,360)

102,770

159,315

262,085

The total amount of goodwill arising on acquisitions which has been written off against Group reserves is £74,483,000 (2003: £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 £53,890,000 (2003: profit £41,086,000).

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Notes to the Financial Statements (continued) 27.

Reconciliation of movements in equity shareholders’ funds Group 31 December 31 December 2004 2003 £’000 £’000

Company 31 December 31 December 2004 2003 £’000 £’000

Profit for the year Dividends

41,101 (216,250)

46,235 (25,000)

53,890 (216,250)

41,086 (25,000)

Opening equity shareholders’ funds

(175,149) 524,803

21,235 503,568

(162,360) 424,945

16,086 408,859

Closing equity shareholders’ funds

349,654

524,803

262,585

424,945

28.

Capital commitments

Capital expenditure commitments not provided for in these financial statements are: Group 31 December 31 December 2004 2003 £’000 £’000 Contracted

29.

14,230

16,120

Company 31 December 31 December 2004 2003 £’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.

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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

Financial liabilities on which no interest is paid £’000

As at 31 December 2004

251,681

32,014

219,667

As at 31 December 2003

61,991

34,906

27,085

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 Guaranteed Loan notes, irredeemable debentures and the financing of assets used by a Group company and operated by other parties. On 13th July 2004, Three Valleys Water Finance PLC (a wholly owned subsidiary of Three Valleys Water PLC) issued £200 million of 5.875% Guaranteed Notes at an issue price of 98.6%. The Notes mature on 13th July 2026. The issue was guaranteed by Three Valleys Water PLC.

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 2004

6.2

As at 31 December 2003

8.5

Years

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

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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 2004 £'000

31 December 2003 £'000

21,976 4,373 7,643 217,689 251,681

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

The Group has no undrawn committed borrowing facilities (2003: £35,000,000). The Group's financial assets are as follows:

Cash Short term deposits Loans to Group Undertakings Listed Investments

31 December 2004 £'000

31 December 2003 £'000

1,878 1,347 154,746 1,851 159,822

2,016 1,006 131,543 814 135,379

Loans to Group undertakings bear interest based on relevant LIBOR equivalents. Fair values of financial assets and liabilities Set out below is a comparison of the book values and fair values of the financial liabilities of the Group as at 31st December 2004.

Listed Investments

Book Value

Fair Value

£'000

196,024 196,024

210,000 210,000

Other than the calculation above in respect of the Guaranteed Notes and 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.

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Notes to the Financial Statements (continued) 30.

Pension commitment

Composition of the schemes Veolia 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 Group, determined by an independent qualified actuary, was at 31 December 2001. (The triennial valuation of the Plan as at 31st December 2004 is currently being prepared). 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 2004 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 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 2004 were paid by members in accordance with the Rules of the Plan and by the Company of between 10% and 27% of Pensionable Salary.

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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 2004 was £5,350,000 (2003: £4,499,000), of which employer’s contributions were £2,802,000 (2003: £1,591,000). 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 2004 by a qualified independent actuary. a) Profit and loss reserve and net assets Profit and Loss Reserve at 31 December 2004

Profit and Loss Reserve at 31 December 2003

Net assets At 31 December 2004

Net assets At 31 December 2003

£000

262,522

437,671

353,656

528,566

Group

As reported on SSAP 24 basis SSAP 24 pensions creditor (net of deferred tax)

5,168 ____________

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

267,690

3,385 ____________

441,056

5,168

3,385

____________

358,824

531,951

1,245

(395)

1,245

(395)

____________

268,935

440,661

360,069

531,556

____________

102,770

265,130

262,585

424,945

____________

102,813

265,164

262,628

424,979

(753)

(942)

(753)

(942)

____________

102,060

264,222

261,875

424,037

____________

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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 At 31 December 2004

Group Equities Bonds Gilts/Cash

Value

Split of fund

£’000

% of fund

82,560 51,601 72,247

40.0 25.0 35.0

_________

Fair value of assets Present value of scheme liabilities

206,402 (198,413)

At 31 December 2003 Value

Split of fund

£’000

% of fund

117,450 24,118 54,510

59.9 12.3 27.8

______

__________

______

100.0

196,078 (193,029)

100.0

Long term rate of return expected (% pa)

7.5 5.4 4.6

_________

__________

Actuarial surplus Surplus Restriction

7,989 (2,781)

Recognisable Surplus Deferred tax

5,208 (1,562) _________

Actuarial surplus after tax

3,049 3,049 (915) _________

3,646

2,134

_________

The balance sheet asset would be £3,646,000 (2003: £2,134,000).

Notes to the Financial Statements (continued) 43

Long term rate of return expected (% pa)

7.7 5.4 4.8

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

30.

Pension commitment (continued)

FRS 17 balance sheet information (continued)

At 31 December 2004

Company Equities Bonds Gilts/Cash

Value

Split of fund

£’000

524 327 458

Value

Split of fund

% of fund

Long term rate of return expected (% pa)

£’000

% of fund

40.0 25.0 35.0

7.5 5.4 4.6

674 139 314

_________

Fair value of assets Present value of scheme liabilities

1,309 (1,398)

______

100.0

1,127 (1,283)

100.0

______

(89) 27 ______

Actuarial deficit after tax

(156) 47 ______

(62) ______

(109) ______

The balance sheet liability would be £62,000 (2003: £109,000).

59.8 12.3 27.9

______

Actuarial deficit Deferred tax

At 31 December 2003 Long term rate of return expected (% pa)

7.7 5.4 4.8

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Notes to the Financial Statements (continued) 30.

Pension commitment (continued)

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 2004

At 31 December 2003

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

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

Deferred pensions are re-valued to retirement age in line with the RPI assumption of 2.6% pa (2003: 2.6% pa) unless otherwise prescribed by statutory requirements or the Plan Rules. e)

Analysis of the amount charged to operating profit Year ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

Group Current service cost

2,847

2,417

Total operating charge

2,847

2,417

Year ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

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) 45

12,522 (10,283)

11,071 (9,626)

2,239

1,445

VEOLIA WATER UK PLC

30.

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Pension commitment (continued)

Analysis of amount recognised in statement of total recognised gains and losses (STRGL) Year Year ended ended 31 December 31 December 2004 2003 £’000 £’000 Group Actual return less expected return on the pension schemes’ 12,687 4,344 assets Experience gains and losses arising on the pension schemes’ (315) (343) liabilities Changes in assumptions underlying the present value of the (13,940) pension schemes’ liabilities Actual gain/(loss) recognised in STRGL (1,568) 4,001

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 gain/(loss) Surplus in scheme at end of the year

Year ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

3,049

5,066

(2,847) 1,547 2,239 (2,781) 4,001

(2,417) 523 1,445 (1,568)

5,208

3,049

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Notes to the Financial Statements (continued) 30.

Pension commitment (continued)

Movement in surplus during the year (continued) Year ended 31 December 2004 £’000

Company Deficit in scheme at beginning of the year Movement in year: Current service cost Contributions Other financial income Actuarial gain/(loss) Deficit in scheme at end of the year

Year ended 31 December 2003 £’000

(156)

(158)

(31) 45 5 48

(27) 96 (67)

(89)

(156)

History of experience gains and losses

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

Year ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

4,344 2%

12,687 6%

(343) 0%

(315) 0%

4,001 2%

(1,568) (1%)

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

30.

Pension commitment (continued)

History of experience gains and losses (continued) Year Ended 31 December 2004 £’000

Company 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

Year ended 31 December 2003 £’000

46 4%

61 5%

2 0%

1 0%

48 3%

(67) (5%)

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 next actuarial valuation. k)

FRS 17 balance sheet information

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

At 31 December 2004 Value

Split of fund

£’000

% of fund

8,667 2,166

80.0 20.0

Long term rate of return expected (% pa)

Split of fund

£’000

% of fund

6,311 1,559

80.2 19.8

______

__________

______

10,833 (14,263)

100.0

7,870 (11,483)

100.0

__________

(3,430) 1,029 _________

Actuarial deficit after tax

7.5 4.6

Value

_________

Actuarial deficit Deferred tax

At 31 December 2003

(3,613) 1,084 _________

(2,401) _________

(2,529) _________

Notes to the Financial Statements (continued)

Long term rate of return expected (% pa)

7.7 4.8

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

30.

Pension commitment (continued)

FRS 17 balance sheet information (continued)

The balance sheet liability would be £2,401,000 (2003: £2,529,000). At 31 December 2004

Company Equities Gilts

Value

Split of fund

£’000

2,841 710

Value

Split of fund

% of fund

Long term rate of return expected (% pa)

£’000

% of fund

80.0 20.0

7.5 4.6

2,208 545

_________

Fair value of assets Present value of scheme liabilities

At 31 December 2003

3,551

______

100.0

2,753

100.0

______

Actuarial deficit Deferred tax Actuarial deficit after tax

80.2 19.8

______

(4,538)

Long term rate of return expected (% pa)

7.7 4.8

(3,943) ______

(987)

(1,190)

296

357

______

(691)

(833)

______

The balance sheet liability would be £691,000 (2003: £833,000). 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 2004

At 31 December 2003

Discount rate Salary growth RPI Pension-in payment increases

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

Deferred pensions are re-valued to retirement age in line with the RPI assumption of 2.6% pa (2003: 2.6% pa) unless otherwise prescribed by statutory requirements or the Plan Rules.

Notes to the Financial Statements (continued) 30.

Pension commitment (continued)

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Analysis of the amount charged to operating profit Year ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

Group Current service cost

1,603

1,206

Total operating charge

1,603

1,206

Year ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

Analysis of the amount credited to other finance income

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

621 (675)

416 (461)

(54)

(45)

Analysis of amount recognised in statement of total recognised gains and losses (STRGL) Year Year ended ended 31 December 31 December 2004 2003 £’000 £’000 Group Actual return less expected return on the pension schemes’ 441 655 assets Experience gains and losses arising on the pension schemes’ (1,452) (70) liabilities Changes in assumptions underlying the present value of the (1,421) pension schemes’ liabilities Actual loss recognised in STRGL (2,432) 585

Notes to the Financial Statements (continued) 30.

Pension commitment (continued)

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

p) Movement in surplus during the year Year ended 31 December 2004 £’000 Group Deficit in scheme at beginning of the year Movement in year: Current service cost Contributions Other finance expense Actuarial gain/(loss) Deficit in scheme at end of the year

(3,613)

(997)

(1,603) 1,255 (54) 585

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

(3,430)

(3,613)

Year ended 31 December 2004 £’000 Company Deficit in scheme at beginning of the year Movement in year: Current service cost Contributions Other finance expense Actuarial gain/(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

Year ended 31 December 2003 £’000

(1,190)

(351)

(330) 322 (14) 225

(278) 250 (16) (795)

(987)

(1,190)

VEOLIA WATER UK PLC

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

Year ended 31 December 2004 £’000

Year ended 31 December 2003 £’000

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

655 6%

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

(70) 0%

(1,452) (13%)

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

585 4%

(2,432) (21%)

Year ended 31 December 2004 £’000 Company 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

219 6%

441 6%

Year ended 31 December 2003 £’000

195 7%

6 0%

(585) (15%)

225 5%

(795) (20%)

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.

VEOLIA WATER UK PLC

32.

ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2004

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.