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Veolia Water UK Plc Annual Report & Accounts 2005
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Contents 1 2 5 6 8 14 15 19 20 21 22 23 24 25 27
Financial and operating highlights Our business Veolia Environnement Chairman’s Statement Corporate Responsibility Report Directors and Officers Directors’ report Independent auditors’ report to the shareholders Consolidated profit and loss account Consolidated statement of recognised gains and losses Consolidated balance sheet Company balance sheet Consolidated cash flow statement Notes to the consolidated cash flow statement Notes to the financial statements
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Financial and operating highlights The past 12 months have seen strong performances from all our businesses in terms of financial returns, customer service and operational delivery.
Turnover
Group operating profit
£238.5m £73.9m 2004: £211.6m
2004: £59.5m (restated)
•
Leakage targets achieved in all companies
•
‘Five star’ performance achieved on Ofwat’s levels of customer service indicators in all companies
•
Drinking water quality remains very high, with 99.94% compliance rate
•
Largest metering programme in England and Wales
•
Veolia Water UK recognised as the leading water company in the 2005 Business in the Community Corporate Responsibility Index
Veolia Water UK Plc Annual Report & Accounts 2005
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Three Valleys Water's ultrafiltration plant in Bushey, Herts
Our business The Veolia Water UK group comprises three regulated water supply companies in south east England supplying over 3.3m customers (Three Valleys Water, Folkestone & Dover Water and Tendring Hundred Water), and two non-regulated companies: Veolia Water Ireland and Veolia Water Industrial Outsourcing.
Regulated water supply companies
k Folkestone & Dover Water Services Ltd
Tendring Hundred Water Services Ltd
Three Valleys Water PLC
www.fdws.co.uk
www.thws.co.uk
www.3valleys.co.uk
Turnover £15.5m
Turnover £14m
Turnover £199m
Population served (‘000s) 159
Population served (‘000s) 153
Population served (‘000s) 3,054
Employees 78
Employees 65
Employees 868
Customer service performance
1
For the period April 2004–March 2005
Compliance with drinking water regulations 99.95%
Compliance with drinking water regulations 99.92%
Compliance with drinking water regulations 99.98%
Ofwat’s level of service indicators1 #####
Ofwat’s level of service indicators1 #####
Ofwat’s level of service indicators1 #####
Veolia Water UK PLC is the corporate head office, based in London. It has 26 employees.
Veolia Water Ireland provides water and wastewater services to municipal clients in Ireland
www.veoliawater.co.uk
www.veoliawater.ie
Veolia Water Industrial Outsourcing Ltd (VWIO) provides sustainable solutions to water and wastewater management problems for industry. It has 44 employees.
Veolia Water UK companies
k
www.vwio.com
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Veolia Water Industrial Outsourcing multi-service contract with Corus, Trostre
Veolia Water Industrial Outsourcing contract with Johnson Matthey to design, build and operate an effluent treatment plant and recycle water
Folkestone & Dover Water Tendring Hundred Water Three Valleys Water Veolia Water UK Head office - London Veolia Water Industrial Outsourcing office Veolia Water Industrial Outsourcing contracts Veolia Water Ireland Head office - Kilkenny Veolia Water Ireland contracts
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2.
1.
3.
4.
5.
6.
1. Clay Lane water treatment works 2. Mains renewal in Epping 3. Allenby Road Water Tower 4. Stockers Lake 5. Inside the Batchworth plant 6. Heron Lake 7. Kisumu Children Trust, Kenya
7.
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Veolia Environnement is listed in a number of socially responsible investment indices: FTSE4Good, ASPI Eurozone, and Ethibel Sustainability. It has also been selected by the managers of the socially responsible funds Storebrand and Innovest. It was ranked top among French companies and 16th worldwide for its sustainable development reporting by the Global Reporters 2004 survey.
Veolia Environnement Veolia Water is part of Veolia Environnement, the world’s largest environmental services group. In December 2003 Veolia Environnement celebrated 150 years of business. In 2005, as part of its drive for greater transparency and clarity, the group underwent a re-branding exercise. Across the world its 271,000 employees in water, waste management, energy services and transport now operate under a single brand name, Veolia.
“Our main challenge in the coming years will be to move forward with our review of our business model … in response to changes in the societies in which we operate, as well as the social, economic and environmental constraints at work in them. …these businesses are evolving from a traditionally volume-driven
model toward a mixed model in which conserving resources and reducing negative impacts play a growing role in our value-creation process”
Veolia Environnement
Veolia Environnement is the world leader in environmental services. 252,000 employees, operating in 65 countries, serving over 225 million people worldwide.
k
Henri Proglio Chief Executive, Veolia Environnement
Veolia Environnement companies
k Veolia Water World no. 1 in water services. 67,800 employees, in 55 countries, serving 110 million individual customers.
Veolia Environmental Services (formerly Onyx) World no. 2 in waste management. 78,770 employees, in 38 countries.
Veolia Transport (formerly Connex) Europe’s no. 1 private passenger transport company. 61,300 employees, in 24 countries.
Veolia Energy (formerly Dalkia) European no. 1 in energy services. 43,300 employees, in 34 countries.
Veolia Water UK Plc Annual Report & Accounts 2005
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Chairman’s statement Statement from the Rt Hon. John Gummer MP
I am pleased to report that 2005 was a period of strong financial, service and operational performance for Veolia Water UK plc. Consolidated turnover increased by 12.7% to £238.5m and consolidated group operating profit increased by 24.0% to £73.9m (compared with the restated 2004 figures). Our regulated water supply businesses performed well in 2005. All three companies met their targets for customer service performance, leakage, and drinking water quality. Tendring Hundred Water and Folkestone & Dover Water were awarded joint first place in Ofwat’s Overall Performance Assessment of delivery of service to customers. We are proud that Veolia Water UK maintained its position as the leading water company in the UK in terms of corporate responsibility performance and management. Veolia Water UK was again ranked in the top 10 of the Sunday Times’ ‘Top 100 Companies that Count’ (based on Business in the Community’s 2005 Corporate Responsibility Index). The dry winter of 2005, the second in succession, and its impact on water resources has been a central concern for our water supply companies. The south east of England has been experiencing drought since November 2004, having experienced its driest 18 months since the 1930s. To address this, the
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companies have been deploying a twin-track approach of demand management and resource development. Having maximised its resource capacity to meet customer demand, Folkestone & Dover Water Services applied to the Department of the Environment, Food & Rural Affairs for its area to be designated one of water scarcity. This was granted in a landmark ruling on 1 March 2006. It will enable the company to meter customers compulsorily, although this will be done sensitively and the impacts on different types of customer carefully monitored. Despite improving its security of water supply in conjunction with the Environment Agency, Three Valleys Water introduced a hosepipe ban on 3 April 2006 to help reduce demand should the dry weather continue. Folkestone & Dover Water introduced a hosepipe ban on the same date. Tendring Hundred Water does not anticipate any need to restrict water use in 2006. The strategy of the regulated businesses for the remaining four years of the AMP period is to demonstrate good performance in all the regulatory indicators, provide excellent customer service and maintain their leading position in the sector. In December 2004 Ofwat set price limits for each of the five years to 31 March 2010. The price increases will fund programmes to double pipe network
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“ The strategy of the regulated businesses is to demonstrate good performance in all the regulatory indicators, provide excellent customer service and maintain their leading position in the sector.”
renewals, increase household meter penetration substantially, implement targeted capital programmes to exploit unused sources, and increase maintenance of non-infrastructure assets.
parent, Veolia Environnement, and the skills of a talented pool of people to successfully manage operations and risks, Veolia Water UK is perceived by many to be the service provider of choice.
The main challenges we face in achieving this strategy are the cost of labour and competition for contracting resources and skills, demanding efficiency targets, rising energy costs, and continued pressure on security of water supply. As our business strategies are based on corporate responsibility, which is in turn underpinned by risk management, we are confident that risks to the strategy are managed and minimized.
We welcomed to the Board during the year David Alexander who was appointed Managing Director on 1st February 2005.
Our non-regulated business also performed well in 2005. Veolia Water Industrial Outsourcing continue to work in partnership with industry to provide customised, environmentally aware, cost effective water processing, recycling and wastewater management. VWIO’s strategy is to continue to develop commercial and industrial markets by reducing clients’ costs and operational risk, providing access to proven technology and specialist resources, and ensuring the highest environmental and social standards.
Finally I would like to thank the management teams and all employees for their role in contributing to the Group’s success and for their professionalism and commitment during the year.
Rt Hon. John Gummer MP Chairman 27 July 2006
Veolia Water UK will continue to seek to develop opportunities in municipal markets. With its access to the innovations of its global
Veolia Water UK Plc Annual Report & Accounts 2005
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No. 1 No.1 water company in the 2005 Business in the Community Corporate Responsibility Index
95 % + Premier League score in Business in the Environment’s Index of Corporate Environmental Engagement
Corporate responsibility Our approach to corporate responsibility encompasses sustainable development, ethics, traditional safety, health, quality and environmental management systems, and the internal and external management of stakeholder relationships. Our corporate responsibility policy, principles and programmes are overseen by the Corporate Responsibility Advisory Committee to the Board, chaired by the Rt Hon John Gummer.
Benchmarking
Business Management
In the UK, Veolia Water UK plc is recognised as the leading water company in terms of corporate responsibility performance and management. In 2005 it was again ranked in the top 10 of the Sunday Times’ ‘Top 100 Companies that Count’ (based on Business in the Community’s 2005 Corporate Responsibility Index).
Formal environmental, health and safety, and quality systems are fundamental to continuous improvement in our performance. All the regulated businesses’ quality systems meet the ISO 9001:2000 standard. The environmental management systems of Folkestone & Dover Water and VWIO are certified to ISO 14001. Tendring Hundred Water and Three Valleys Water are working to align their integrated management systems with ISO 14001.
The company is also ranked in the ‘Premier League’ (scores over 95%) in Business in the Environment’s Index of Corporate Environmental Engagement. This index benchmarks companies against their peers on the basis of environmental management of and performance in key impact areas.
More detail can be found in the Veolia Water UK Corporate Responsibility Report 2005 at www.veoliawater.co.uk. This contains information on performance primarily in the period April 2004-March 2005.
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Veolia Water UK is committed to encouraging partners, sub-contractors and suppliers to adhere to its corporate responsibility policy and principles. It has developed environmental and social criteria for use in supplier selection and performance procedures.
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Leakage targets achieved in all companies
99.94% 99.94% compliance rate with drinking water regulations. Drinking water quality remains very high
##### Maximum 5-star rating for performance in customer service Checking for leaks
Performance Our business Our goal is to manage water resources to preserve their social, ecological and economic value and to meet our customers’ expectations in terms of the provision of water and related services. We do this by balancing the demand for water against the availability of water resources in the areas where we operate in south east England, while protecting water resources and the environment generally. Veolia Water Industrial Outsourcing works in partnership with industry to provide customised environmental solutions, saving customers money and improving environmental performance. As the south east of England receives just half the average nationwide rainfall all three water supply companies promote water efficiency measures vigorously to bridge the potential gap between demand and supply. Three Valleys Water is increasing its metering programme, aiming to have 44% of domestic properties across its region metered by 2010. Having maximised its resource capacity to meet customer demand, Folkestone & Dover Water Services applied to the Department of the Environment, Food & Rural Affairs for its area to be designated one of water scarcity. This was granted in a landmark ruling on 1 March 2006. This will enable the company to meter customers compulsorily; it aims to have 90% of its 170,000 customers metered by 2015.
Veolia Water UK Plc Annual Report & Accounts 2005
Leakage All three companies met leakage targets for the 2004-5 year set by the Water Services Regulation Authority, the water industry’s economic regulator, with Three Valleys Water and Tendring Hundred Water achieving rates better than their targets. Tendring Hundred Water continues to have the lowest level of leakage per property in the industry. Customer service The Water Services Regulation Authority assesses companies’ overall delivery of service to customers annually. In 2004-5 all three companies achieved a maximum five-star rating for their performance on key customer measures which include water pressure, unplanned interruptions, complaint handling and telephone contact. Folkestone & Dover Water and Tendring Hundred Water achieved the highest scores of all the companies in England and Wales. Drinking water quality We provided drinking water of the highest quality to over 3.3 million people in 2004-5. All three Veolia Water companies’ compliance with the drinking water standards in that year exceeded the industry average, with Folkestone & Dover Water and Tendring Hundred Water achieving mean zonal compliance of 100%.
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20,000 20,000 children and adults visited the Three Valleys Water Education Centre
Three Valleys Water’s purpose built Environment & Education centre at Clay Lane
Educating our future customers in water issues
In the workplace Our goal is to provide employees with the opportunities, resources and environment to allow them to make an effective contribution to the business. Our objective for current and future employees is to ensure no employee or applicant for employment receives less or more favourable treatment, whether through direct or indirect discrimination, on the grounds of race, gender, disability, sexual orientation, religious beliefs, creed, marital or parental status. In line with a Veolia Environnement commitment to promote diversity and combat discrimination we record the composition of our staff. Women make up 37% of the workforce, and 27% of managers. Employees registered as disabled make up 0.4%. Training All Veolia Water UK employees have been provided with personal development plans. During the year, 2,497 employees received training (some employees were trained more than once), representing 1.5% of total gross annual salary. Training courses covered general management, personal development, diversity at work, health and safety, workrelated stress and the disciplinary and grievance policy. Health & safety Health and safety plays an important part in the everyday culture of our companies. During the year, work days lost due to work accidents amounted to 238, compared to 451 in the previous year.
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Turnover Staff turnover for the year was 19.9% compared with 13.5% for the previous year. Employee consultation Veolia Water UK companies work positively and progressively with trades unions. Every two years staff are invited to contribute ideas for the future of the company in an employee survey.
In the community Our goal is to work with and support communities, charities and government towards improving the quality of life. Veolia Water UK employees are actively encouraged to become involved in local community initiatives in the belief that there are benefits for both the community and employees. For example, the charity KitAid, set up in 1998 by Three Valleys Water employee Derrick Williams MBE, recycles football kits from professional football clubs to children and adults in Africa and other parts of the developing world. Members of senior management sit on the boards of local Groundwork trusts. The companies have an ongoing target to develop programmes to support education. Three Valleys Water’s purpose-built Education Centre has received several awards for its work with schoolchildren, focussing primarily on water conservation. During the year, more than 20,000 children and adults either visited the Centre or used its resources to deliver the National Curriculum at more than 120 schools.
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54% 54% of excavated waste reused rather than sent to landfill
Surrey cricketer James Benning hands over cricket kit for the KitAid appeal
Three Valleys Water organises regular liaison meetings with local authority health protection agency officers to communicate drinking water quality issues. In her 2004 report the DWI Chief Inspector cited the company’s approach as an example of good practice.
In the environment Our goal is to seek opportunities to reduce our consumption of natural resources by using alternatives where possible, and by optimising efficiency of use, whilst protecting and enhancing the environment. Energy consumption The carbon dioxide emissions associated with our energy requirements in 2004-5 were 111,500 tonnes, representing a 24% fall since 1995/6. However this fall is not associated with reduced energy consumption but rather changes in the mix of fuels used to generate electricity supplied through the public electricity network. Energy consumption per unit of water put into supply has increased over the last five years. This can be attributed to the use of different water sources and to an increased number of energy-intensive plants, eg membrane and ozone, as a result of the need to treat water to ever higher standards. The water companies were successful during the year in securing all their electricity from renewable sources, which delivered a saving on their Climate Change Levy costs. Fuel consumption Both Three Valleys Water and Folkestone & Dover Water can demonstrate a general downward trend in fuel consumption per
Veolia Water UK Plc Annual Report & Accounts 2005
property connected since 1995/6. All three companies have an ongoing target to maintain improvements in fuel consumption. Waste We are able to monitor the use of aggregates by measuring our own purchases and increasingly by contractually obliging and encouraging our streetworks contractors to record the amounts they use, recycle and dispose of. In 2004-5 we estimate 54% or 128,660 tonnes of excavated material were reused by our companies and contractors rather than their being sent to landfill. By reusing excavated waste we also avoided depleting a natural resource of virgin aggregate. All Veolia Water UK companies have an ongoing target to reduce the amount of waste going to landfill. Biodiversity Our policy is to give particular priority to projects and activities that foster species and habitats which are the subject of Biodiversity Action Plans and are found on our own and adjacent land. Folkestone & Dover Water have partnered with the White Cliffs Countryside Project, which works to enhance and protect the countryside in south east Kent. Tendring Hundred Water is a sponsor of the Essex Biodiversity project, a partnership of over 40 local organisations. Three Valleys Water has long-standing partnerships with conservation groups such as Friends of Stockers Lake, the Herts & Middx Wildlife Trust, and the Wraysbury Lakes Liaison Group.
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Contents
14 15 19 20 21 22 23 24 25 27
Directors and Officers Directors’ report Independent auditors’ report to the shareholders Consolidated profit and loss account Consolidated statement of recognised gains and losses Consolidated balance sheet Company balance sheet Consolidated cash flow statement Notes to the consolidated cash flow statement Notes to the financial statements
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Directors and Officers
Directors
Registered Office
J S Gummer (Chairman)
37-41 Old Queen Street London SW1H 9JA
D W Alexander (Managing Director, Appointed 1 February 2005) J C Banon (Managing Director, up to 1 February 2005) R A Bienfait
Auditors Ernst & Young LLP 1 More London Place London SE1 2AF
Registered Number 2127283
M J E Butcher F Darley (Resigned 31 March 2006) C Roger-Lacan
Secretary K W Taylor
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Directors’ report
The Directors submit their report and the audited financial statements of Veolia Water UK PLC for the year ended 31 December 2005. 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 £72.6m (2004 restated: £45.8m). A dividend of £127.0m has been paid during the year (2004 restated: £235.0m). The Directors do not propose a final dividend (2004: £Nil) in respect of the year ending 31 December 2005. Retained losses of £57.3m (2004 restated: £191.7m) will be transferred to reserves. Review of business and future developments Turnover at £238.5m for the twelve months compares to £211.6m for the previous year. Profit before tax for the twelve months was £90.5m compared to £66.8m (restated) 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 £61.3m (2004: £66.1m) was generated during the year. Net debt at 31 December 2005 was £162.0m compared to £96.3m (restated) last year. Capital expenditure for the twelve months to December, net of contributions from third parties, was £47.0m, compared to £55.7m for the previous year. On 13 October 2005 the Group acquired 510,000 Ordinary shares of £1.00 each in Southern Water Investment Limited, representing 5.1% of the voting share capital, at a cost of £2.55m. This acquisition took the Group’s share of ordinary equity in the Southern Water Group to 25%. Post year end event On 11 April 2006, in conjunction with Veolia Environnement S.A.’s disposal of its investments in the Southern Water Group, Veolia Water Investment Ltd (a wholly owned subsidiary of Veolia Water UK PLC) sold its investments in the Southern Water Group to Southern Water Capital Limited for the sum of £161.2m net of disposal costs. 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. Pension arrangements The Group is committed to maintaining fair and sustainable pension arrangements. For new employees, we offer a choice of defined contribution pension arrangements under the Veolia UK Pension Plan, in which the Group contributes double the contributions made by employees. The Groups two defined benefit pension schemes have been closed to new entrants. The Veolia Water Supply Companies Pension Plan (VWSCPP), which mirrored the provisions of the former Water Companies Association Scheme, was closed in 1996 and its successor, the Veolia UK Pension Plan (VUKPP) final salary scheme was in turn closed in 2004. The Group contributes up to 27% of employees pensionable salary to the above defined benefit schemes, dependent upon the financial status of the divisions of the pension plans.
Veolia Water UK Plc Annual Report & Accounts 2005
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Directors’ report continued
The Group has agreed with the Trustee a contribution plan for the VWSCPP which will ensure that the deficit of £8.9m as advised in the last triannual valuation will be eliminated within 10 years (based on financial assumptions applicable at the last triannual valuation dated 31 December 2004). The results of the triannual valuation for the VUKPP as at 31 December 2005 will be considered during 2006. New accounting standards The financial statements now reflect the full implementation of FRS17 “Retirement Benefits” and the introduction of FRS21 “Events after the Balance Sheet Date”. Prior year comparitors have been restated accordingly. 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 £732,000 (2004: £678,000). Corporate responsibility A summary of our approach to and our performance in Corporate Responsibility is detailed on pages 8 to 11. 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 2005 represent 38 days (2004: 36 days) of purchases during the year for the Group. Market value of land and buildings The major part of land and buildings included within tangible fixed assets are used for the purpose of providing potable water to the consumer. A significant portion of the Group’s buildings and installations are highly specialised and have a market value only in the context of the provision of a potable water supply. Charitable donations Donations for charitable purposes made by Group companies during the year amounted to £121,000 (2004: £71,000), together with £12,000 (2004: £86,000) 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.
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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. 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 2005 Number of ordinary shares
At 31 December 2004 Number of ordinary shares
109 -
109 -
D Alexander J C Banon R A Bienfait M J E Butcher F Darley J S Gummer C Roger-Lacan
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 : At 31 December 2005
Number of options granted
Number of options exercised
At 31 December 2005
1,579* 3,124* 5,000 5,000
-
-
1,579 3,124 5,000 5,000
5,091* 20,151* 8,000
-
-
5,091 20,151 8,000
R A Bienfait
4,000
-
-
M J E Butcher
1,579*
-
F Darley
1,579* 3,124* 3,300 7,607** 24,030* 25,188* 25,000 20,000
D Alexander
J C Banon
C Roger-Lacan
Date from which exercisable
Expiry date
41.25* 37.25* 22.50 24.72
08.02.04 25.01.05 24.03.06 25.12.07
07.02.09 25.01.10 24.03.11 24.12.12
41.25* 37.25* 22.50
08.02.04 25.01.05 24.03.06
07.02.09 25.01.10 24.03.11
4,000
24.72
25.12.07
24.12.12
-
1,579*
41.25*
08.02.04
07.02.09
-
-
1,579 3,124 3,300
41.25* 37.25* 22.50
08.02.04 25.01.05 24.03.06
07.02.09 25.01.10 24.03.11
-
-
7,607 24,030 25,188 25,000 20,000
31.92* 41.25* 37.25* 22.50 24.72
23.06.03 08.02.04 25.01.05 24.03.06 25.12.07
23.06.08 07.02.09 25.01.10 24.03.11 24.12.12
Veolia Water UK Plc Annual Report & Accounts 2005
Exercise price â‚Ź
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Directors’ report continued
* Exercise price and number of options adjusted to maintain the options overall value after taking into account transactions impacting the share capital of Veolia Environnement SA (issue of share subscription warrants on 17th December 2001 and share capital increase with retention of preferential subscription rights on 2nd August 2002). ** The rules of the 2000 plan established a specific calculation for the award of share options. The final number of options to be acquired was linked to the evolution of the Veolia Environnement SA share price compared to the evolution of the DJ Stoxx Europe utility index over a three year period commencing in June 2000. In October 2005 the remuneration committee of Veolia Environnement SA announced that the original options awarded should be factored by 74.71% to reflect the relative movement of the share price against the index above. During the year the ordinary shares of Veolia Environnement SA traded between €25.63 and €39.05. The price at the end of the year was €38.54 (2004: €26.63). The €/£ exchange rate was €1.455/£ at 31 December 2005 with a range during the year of €1.417/£ to €1.510/£. Going concern After making enquiries, the directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the forseeable future. For this reason, they continue to adopt the going concern basis in the financial statements. Statement of Directors responsibilities in respect of the financial statements The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and United Kingdom Generally Accepted Accounting Practice. 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 these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and estimates that are reasonable and prudent; • 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 that disclose with reasonable accuracy at any time the financial position of the group and 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. Auditors The Company’s auditors are Ernst & Young LLP. A resolution to reappoint Ernst & Young LLP as auditors will be put to members at the next Annual General Meeting. By order of the Board
K W Taylor Secretary 27 July 2006
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Independent auditors’ report to the shareholders of Veolia Water UK PLC We have audited the group and parent company financial statements (the "financial statements") of Veolia Water UK PLC for the year ended 31 December 2005 which comprise the Group Profit and Loss Account, the Group and Company Balance Sheets, the Group Cash Flow Statement, the Group Statement of Total Recognised Gains and Losses and the related notes 1 to 35. These financial statements have been prepared under the accounting policies set out therein. This report is made solely to the company's members, 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 members those matters we are required to state to them in an auditors' 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 members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) as set out in the Statement of Directors' Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). 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 other transactions is not disclosed. We read other information contained in the Annual Report, and consider whether it is consistent with the audited financial statements. This other information comprises only the Directors' Report, the Chairman’s Statement and the Corporate Responsibility Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) 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 judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s and 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, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the group’s and the parent company's affairs as at 31 December 2005 and of the group’s loss for the year then ended; and the financial statements have been properly prepared in accordance with the Companies Act 1985. Ernst & Young LLP Registered auditors London 27 July 2006
Veolia Water UK Plc Annual Report & Accounts 2005
19
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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 associate Investments 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 Other finance income/(charges): - Group - Associate Profit on ordinary activities before taxation Tax on profit on ordinary activities 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 for the year
Year ended 31 December 2005 £’000
Restated Year ended 31 December 2004 £’000
3 4
238,464 (132,547) 105,917 (40,397) 8,343 73,863
211,628 (119,029) 92,599 (39,341) 6,262 59,520
7
50,395 1,600 4,253 130,111 8,415
39,424 1,600 2,097 5 102,646 9,762
8
(14,925) (29,284)
(9,771) (34,425)
9
1,393 (5,200) 90,510
2,185 (3,600) 66,797
10
(16,934) 73,576 (1,002) (5) 72,569 (127,000) (2,888) (57,319)
(20,298) 46,499 (733) (5) 45,761 (235,000) (2,465) (191,704)
11 26
There were no material acquisitions or disposals of subsidiaries during the year. All material activities relate to continuing operations. The notes on pages 25 to 55 form part of these financial statements.
20
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Consolidated statement of recognised gains and losses Year ended 31 December 2005 £’000
Restated Year ended 31 December 2004 £’000
Group profit for the financial year
72,569
45,761
Total recognised gains for the financial year
72,569
45,761
Actuarial (loss)/gain recognised in pension schemes - Group - Associate Deferred tax arising on group actuarial (loss)/gain
(19,302) (2,089) 5,791
3,746 1,253 (1,124)
Total gains recognised for the year Prior year adjustment on the full adoption of FRS17 Total gains recognised since last annual report
56,969 (7,160) 49,809
49,636
Veolia Water UK Plc Annual Report & Accounts 2005
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Consolidated balance sheet
31 December 2005 £’000
Restated 31 December 2004 £’000
12 13a 14 15
210 547,786 15 47,500 595,511
222 562,646 40,714 603,582
17 18 16
1,233 140,451 1,851 437 3,013 146,985 (154,652) (7,667) 587,844
1,782 204,599 1,851 1,347 1,878 211,457 (152,294) 59,163 662,745
20 21 31
(252,362) (53,419) (8,662) 273,401
(264,386) (53,051) 1,244 346,552
25 26 26 28 24 24
500 7,649 260,798 268,947 4,416 38 273,401
500 86,632 254,734 341,866 4,648 38 346,552
Notes
Fixed assets Intangible assets Tangible assets Investments Investments in associate Current assets Stocks Debtors Investments Short term deposits Cash at bank and in hand Creditors: amounts falling due within one year Net current (liabilities)/assets Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Net pension (liability)/asset Net assets Capital and reserves Called up share capital Other reserves Profit and loss account Equity shareholders’ funds Equity minority interests Non-equity minority interests
19
The notes on pages 25 to 55 form part of these financial statements.The financial statements on pages 20 to 55 were approved by the Board of Directors on 27 July 2006 and were signed on its behalf by: D W Alexander Director
22
Veolia Water UK Plc Annual Report & Accounts 2005
R A Bienfait Director
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Company balance sheet
31 December 2005 £’000
Restated 31 December 2004 £’000
13b 14
5,292 45,854 51,146
6,064 146,222 152,286
18
247,978 437 281 248,696 (79,005) 169,691 220,837
213,796 1,347 342 215,485 (128,211) 87,274 239,560
Notes
Fixed assets Tangible assets Investments Current assets Debtors Short term deposits Cash at bank and in hand Creditors: amounts falling due within one year Net current assets Total assets less current liabilities
19
Creditors: amounts falling due after more than one year Provisions for liabilities and charges Net pension liability Net assets Capital and reserves Called up share capital Other reserves Profit and loss account Equity shareholders’ funds
20 21 31
(21,881) (1,893) (1,051) 196,012
(25,219) (3,956) (753) 209,632
25 26 26 28
500 195,512 196,012
500 159,315 49,817 209,632
The notes on pages 25 to 55 form part of these financial statements.The financial statements on pages 20 to 55 were approved by the Board of Directors on 27 July 2006 and were signed on its behalf by: D W Alexander Director
Veolia Water UK Plc Annual Report & Accounts 2005
R A Bienfait Director
23
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Consolidated cash flow statement
Net cash inflow from operating activities
Notes*
Year ended 31 December 2005 £’000
Restated Year ended 31 December 2004 £’000
a
131,912
92,363
7,434 (12,585) (849) 3,519 (1,234) (3,715)
9,758 (2,719) (1,345) 2,277 (599) 7,372
Returns on investments and servicing of finance Interest received Interest paid Interest element of finance lease rentals Dividends received from associate Dividends paid to minorities Net cash (outflow)/inflow from returns on investments and servicing of finance Taxation (paid)/received Capital expenditure and financial investment Purchase of fixed assets Contributions to fixed assets received Disposal of fixed assets Purchase of investments Cost of investment in associate Net cash outflow from capital expenditure and financial investment
(20,607)
15,854
(60,995) 10,268 6,988 (20) (2,550) (46,309)
(60,315) 8,210 2,658 (18) (49,465)
Equity dividends paid Cash outflow before management of liquid resources and financing
(127,000) (65,719)
(235,000) (168,876)
Net cash inflow/(outflow) from management of liquid resources
b
64,460
(23,544)
Net cash (outflow)/inflow from financing Decrease in cash
b c
(6,916) (8,175)
184,402 (8,018)
*Notes to the consolidated cash flow statement are on pages 25 and 26.
24
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Notes to the consolidated cash flow statement a. Reconciliation of operating profit to net cash flow from operating activities Year ended 31 December 2005 £’000
Group operating profit Depreciation Amortisation of deferred credit Amortisation of goodwill – intangible assets Amortisation of goodwill – investment in associate Decrease in stocks (Increase)/decrease in debtors Increase/(decrease) in creditors and provisions (Decrease)/increase in pension position Net cash inflow from operating activities
73,863 59,120 (412) 12 426 549 (1,121) 2,127 (2,652) 131,912
Restated Year ended 31 December 2005 £’000
59,520 41,558 (414) 12 300 17 1,925 (12,203) 1,648 92,363
b. Analysis of cash flows for headings netted in the consolidated cash flow statement at 31 December 2005 £’000
Restated at 31 December 2005 £’000
Management of liquid resources Cash on short-term deposit Short-term loans from/(to) group undertakings Net cash inflow/(outflow) from management of liquid resources
910 63,550 64,460
(341) (23,203) (23,544)
Financing Financing of assets operated by other parties Capital elements of finance leases Issue of Bond Non cash movement in Bond liability Redemption of Debentures Net cash (outflow)/inflow from financing
(711) (4,385) 98 (1,918) (6,916)
(942) (8,022) 195,866 (2,500) 184,402
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 & Accounts 2005
25
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Notes to the consolidated cash flow statement (continued) c. Analysis of net debt Restated at 31 December 2004 £’000
Net funds: Cash at bank and in hand Bank overdrafts Liquid resources: Short-term loans to group undertakings Cash on short term deposit Debt: Bond (5.875% guaranteed notes) Finance leases (including sale and leaseback) Debentures Financing of assets operated by third parties Net debt
Cash flow £’000
at 31 December 2005 £’000
1,878 (15,027) (13,149)
1,135 (9,310) (8,175)
3,013 (24,337) (21,324)
154,746 1,347 156,093
(63,550) (910) (64,460)
91,196 437 91,633
(195,866) (19,702) (2,167) (21,476) (239,211) (96,267)
(98) 4,385 1,918 711 6,916 (65,719)
(195,964) (15,317) (249) (20,765) (232,295) (161,986)
d. Reconciliation of net cash flow to movement in net debt Year ended 31 December 2005 £’000
Increase in overdraft in the year Cash (outflow)/inflow from (decrease)/increase in liquid resources Cash inflow/(outflow) from (decrease)/increase in debt and lease financing Movement in net debt in the year Opening net (debt)/funds Closing net debt
26
Veolia Water UK Plc Annual Report & Accounts 2005
Restated Year ended 31 December 2004 £’000
(8,175) (64,460) 6,916 (65,719)
(8,018) 23,544 (184,402) (168,876)
(96,267) (161,986)
72,609 (96,267)
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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 From 1 January 2005, the Group has adopted the full requirements of FRS17 “Retirement Benefits”. The FRS17 pension cost of a defined contribution scheme is equal to the contributions payable to the scheme for the accounting period. The adoption of this new standard represents a change in accounting policy and the comparative figures have been restated accordingly. FRS 21 Events after the Balance Sheet Date From 1 January 2005, the Group has adopted the full requirements of FRS21 “Events after the Balance Sheet Date”. In accordance with FRS21, dividends declared after the balance sheet date, are no longer recognised as a liability at the balance sheet date. The adoption of this new standard represents a change in accounting policy and the comparative figures have been restated accordingly. The effect of the change in accounting policies for both FRS17 and FRS21 was to reduce the brought forward equity shareholders funds by £7,788,000 and to increase the retained loss for 2004 by £16,555,000. 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. 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. 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 and current asset investments is recorded in the financial statements on an accruals basis to the extent that an obligation to pay the Group exists at the balance sheet date. In accordance with FRS 16, UK dividend income is recorded net of tax credits.
Veolia Water UK Plc Annual Report & Accounts 2005
27
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Notes to the financial statements (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
40 - 100 years 15 - 100 years 3 - 30 years 4 - 10 years
g. 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 13a. 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.
28
Veolia Water UK Plc Annual Report & Accounts 2005
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1. Accounting policies (continued) 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. 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.
Veolia Water UK Plc Annual Report & Accounts 2005
29
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Notes to the financial statements (continued) l. Pension costs The Group operates two pension defined benefit pension schemes (both closed to new members) and a defined contribution scheme. The assets of the schemes are held seperately from those of the group. The Group has adopted the requirements of FRS17 “Pension Benefits”. Pension scheme assets are measured using market values. Pension scheme liabilities are measured using the projected unit method and discounted at the rate of return of a high quality corporate bond of equivalent term to the liability. Actuarial gains and losses are recognised in the statement of total recognised gains and losses. Employer’s contributions to the defined contribution scheme are charged to the profit and loss account in the period in which they arise. m. Research and development Research and development costs are written off in the period in which they are incurred. n. Financial Instruments Income and expenditure 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 2005 presentation.
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.
Turnover Water supply and related activities:
Operating profit Water supply and related activities:
30
Veolia Water UK Plc Annual Report & Accounts 2005
Year ended 31 December 2005 £’000
Year ended 31 December 2004 £’000
238,464
211,628
Year ended 31 December 2005 £’000
Restated Year ended 31 December 2004 £’000
73,863
59,250
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2. Turnover and segmental analysis (continued)
Profit on ordinary activities before tax Water supply and related activities: Group Associate
Net assets Water supply and related activities: Net assets Share of net assets of associate Minority interest Group net assets
Year ended 31 December 2005 £’000
Restated Year ended 31 December 2004 £’000
74,599 15,911 90,510
65,398 1,399 66,797
Year ended 31 December 2005 £’000
Restated Year ended 31 December 2004 £’000
225,901 47,500 (4,454) 268,947
305,838 40,714 (4,686) 341,866
3. Other operating income
Commission, Rents and sundry income
Veolia Water UK Plc Annual Report & Accounts 2005
Year ended 31 December 2005 £’000
Year ended 31 December 2004 £’000
8,343 8,343
6,262 6,262
31
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Notes to the financial statements (continued) 4. Operating profit This is stated after charging / (crediting):
Auditors’ remuneration - for audit services (Ernst & Young LLP) - for regulatory returns (Ernst & Young LLP) - for non-audit services (Ernst & Young LLP) Depreciation of tangible fixed assets - infrastructure - owned - leased Operating lease rentals - land and buildings - other Research and development Hire of plant and machinery Amortisation of goodwill Amortisation of contributions to capital expenditure Provision against current asset investment
Year ended 31 December 2005 £’000
Year ended 31 December 2004 £’000
209 126 63
186 142 58
28,783 26,640 3,697
17,231 20,432 3,895
442 2,181 732 170 12 (412) -
256 2,199 678 218 12 (414) (1,037)
5. Directors’ remuneration
Aggregate emoluments of the Directors Company pension contributions to defined benefits scheme
Members of defined benefit schemes
Year ended 31 December 2005 £’000
Year ended 31 December 2004 £’000
1,083 66
830 46
Year ended 31 December 2005
Year ended 31 December 2004
3
2
No Directors exercised share options in Veolia Environnement SA in 2005. Retirement benefits are accruing to two Directors (who are not the highest paid Director) under a defined benefits scheme.
Highest paid Director Aggregate emoluments and benefits (excluding gains on exercise of share options) Company pension contributions to defined benefits scheme
32
Veolia Water UK Plc Annual Report & Accounts 2005
Year ended 31 December 2005 £’000
Year ended 31 December 2004 £’000
281 -
254 35
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6. Staff costs
Wages and salaries Social security costs Pension costs and other benefits
Year ended 31 December 2005 £’000
Year ended 31 December 2004 £’000
36,190 3,139 7,309 46,638
37,296 3,358 5,725 46,379
The average number of employees of the Group during the year was as follows:
Water supply and related activities Central services
Year ended 31 December 2005 £’000 Number
Year ended 31 December 2004 £’000 Number
1,220 23 1,243
1,271 26 1,297
Year ended 31 December 2005 £’000
Year ended 31 December 2004 £’000
8,250 44 121 8,415
9,204 32 526 9,762
7. Interest receivable and similar income
Interest receivable from - Group Undertakings - Bank interest - Other
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 Bonds and Debentures Other
Veolia Water UK Plc Annual Report & Accounts 2005
Year ended 31 December 2005 £’000
Restated Year ended 31 December 2004 £’000
447 1,289 1,144 11,967 78 14,925
70 1,719 1,813 5,886 283 9,771
33
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Notes to the financial statements (continued) 9. Other Finance Income Year ended 31 December 2005 £’000
Expected return on pension scheme assets : VWSCPP Expected return on pension scheme assets : VUKPP Interest on pension scheme liabilities : VWSCPP Interest on pension scheme liabilities : VUKPP
11,964 822 (10,557) (836) 1,393
Restated Year ended 31 December 2004 £’000
12,522 621 (10,283) (675) 2,185
10. Taxation Year ended 31 December 2005 £’000
Restated Year ended 31 December 2004 £’000
12,578 4,356 16,934
18,386 1,912 20,298
Year ended 31 December 2005 £’000
Restated Year ended 31 December 2004 £’000
UK corporation tax at 30% (2004: 30%)
21,716
16,591
(Over)/under provision in prior years Total current taxation
(10,095) 11,621
371 16,962
Deferred taxation Net origination and reversal of timing differences for the period Over provision in prior years Decrease/(increase) in discounting Total deferred taxation Total Group taxation
488 (4,099) 4,568 957 12,578
4,432 (1,310) (1,698) 1,424 18,386
Tax on associates Tax on profit on ordinary activities
4,356 16,934
1,912 20,298
Taxation relates to the following: - Group Undertakings - Associate
Taxation charge
34
Veolia Water UK Plc Annual Report & Accounts 2005
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10. Taxation (continued) Current taxation reconciliation Year ended 31 December 2005 £’000
Restated Year ended 31 December 2004 £’000
Profit on ordinary activities before taxation excluding associate
74,599
65,398
Theoretical tax at UK corporation tax rate of 30% (2004: 30%) Effects of: - adjustment to tax in respect of prior years - other income and expenses that are not tax deductible - accelerated capital allowances - Group relief transactions - short term timing differences - other timing differences Actual current taxation charge
22,380
19,619
(10,095) (995) (132) (329) 792 11,621
371 872 (4,955) (289) 1,437 (93) 16,962
11. Dividends
Interim dividend paid of £254.00 per share (2004: £432.50 per share) Final dividend paid of £Nil per share (2004: £37.50 per share)
Year ended 31 December 2005 £’000
Restated Year ended 31 December 2004 £’000
127,000 127,000
216,250 18,750 235,000
12. Intangible Assets Restated Positive goodwil £’000
Group
Cost At 1 January 2005 (restated) At 31 December 2005
246 246
Amortisation At 1 January 2005 Charge for the period At 31 December 2005
24 12 36
Net book value At 31 December 2005 At 31 December 2004 (restated)
210 222 £241,000 of 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. £5,000 of Goodwill arose on the purchase of additional holdings in Tendring Hundred Water Services Limited. The goodwill is amortised over its estimated life of 20 years.
Veolia Water UK Plc Annual Report & Accounts 2005
35
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Notes to the financial statements (continued) 13a.Tangible fixed assets – Group
Group
Short leasehold property £’000
Freehold land, buildings and reservoirs £’000
Mains and other infrastructure assets £’000
Vehicles plant and machinery £’000
Cost At 1 January 2005 Additions Transfers Capital contributions Disposals At 31 December 2005
82 82
135,821 1,819 3,219 (1,019) 139,840
449,879 30,276 619 (10,268) (440) 470,066
391,614 7,786 16,942 (2,500) 413,842
Depreciation At 1 January 2005 Charge for the year Disposals At 31 December 2005
82 82
40,897 4,930 (223) 45,604
195,042 28,783 (440) 223,385
202,228 25,407 (561) 227,074
Net book value At 31 December 2005 At 31 December 2004
-
94,236 94,924
246,681 254,837
186,768 189,386
Assets in course of construction £’000
23,499 17,382 (20,780) 20,101
-
20,101 23,499
Total £’000
1,000,895 57,263 (10,268) (3,959) 1,043,931
438,249 59,120 (1,224) 496,145
547,786 562,646
The net book value of infrastructure assets is stated after the deduction of grants and contributions amounting to £108,850,000 (2004: £98,582,000) in order to give a true and fair view. Included in the above at 31 December 2005 are fixed assets held under finance leases, as follows:
Group
Cost Depreciation Net book value
Freehold land, buildings and reservoirs £’000
8,419 (6,209) 2,210
Mains and other infrastructure assets £’000
23,165 (9,970) 13,195
Vehicles plant and machinery £’000
68,708 (58,525) 10,183
Total £’000
100,292 (74,704) 25,588
Included in the above at 31 December 2004 are fixed assets held under finance leases, as follows:
Group
Cost Depreciation Net book value
36
Freehold land, buildings and reservoirs £’000
8,419 (5,946) 2,473
Veolia Water UK Plc Annual Report & Accounts 2005
Mains and other infrastructure assets £’000
23,165 (9,833) 13,332
Vehicles plant and machinery £’000
68,708 (55,228) 13,480
Total £’000
100,292 (71,007) 29,285
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13b. Tangible fixed assets – Company Short leasehold property £’000
Vehicles, plant and machinery £’000
Freehold property £’000
Total £’000
Company Cost At 1 January 2005 Additions Disposals At 31 December 2005
82 82
7,528 (870) 6,658
1,195 124 (88) 1,231
8,805 124 (958) 7,971
Depreciation At 1 January 2005 Charge for the year Disposals At 31 December 2005
82 82
1,586 159 (204) 1,541
1,073 68 (85) 1,056
2,741 227 (289) 2,679
Net Book Value At 31 December 2005 At 31 December 2004
-
5,117 5,942
175 122
5,292 6,064
Other Investments £’000
Loans to Group Undertakings £’000
Total £’000
15 15
-
15 15
Other Investments £’000
Subsidiary Undertakings £’000
Loans to Group Undertakings £’000
Total £’000
15 15
43,740 2,099 45,839
The leasehold property is the only leased asset held by the Company.
14. Fixed asset investments
Group At 1 January 2005 Investment At 31 December 2005
Company At 1 January 2005 Additional investment Transfer of loan to current assets At 31 December 2005
102,482 (102,482) -
146,222 2,114 (102,482) 45,854
Other investments refer to the Company’s investment in shares of a joint venture entity which is accounted for in the group accounts as a joint arrangement.
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Notes to the financial statements (continued) 14. 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
Proportion of voting rights and shares held
Nature of business
Type of holding
Water supply and related activities: Veolia Water Capital Funds PLC * Three Valleys Water PLC North Surrey Water Limited **
Holding company Water supply Investment company
Tendring Hundred Water Services Limited
Water supply
Folkestone and Dover Water Services Limited
Water supply
Veolia Water Ireland Limited *
Holding company
Ordinary shares 100% Ordinary shares 100% Ordinary shares 99% Ordinary non-voting shares 99% 10% preference shares 99% Ordinary shares 99% Ordinary non-voting shares 88% 10% preference shares 98% Ordinary shares 74% Ordinary non-voting shares 92% 14% preference shares 76% Ordinary shares 50% Operations shares 100%
Veolia Water Operations Ireland Limited *** Veolia Water Projects Limited General Utilities Holdings Limited * Veolia Water Investment Limited * Veolia Water Industrial Outsourcing Limited *
Water related activities Water related activities Holding company Investment company Water related activities
Principal subsidiary undertakings:
Ordinary shares Ordinary shares Ordinary shares Ordinary shares
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. *** held directly by Veolia Water Ireland Limited All the above companies are incorporated in Great Britain, except Veolia Water Ireland Limited and Veolia Water Operations Ireland Limited, which are incorporated in the Republic of Ireland. Veolia Water Capital Funds PLC is the holding companies for the water supply interests of Veolia Water UK PLC.
15. Investment in associate The investment in associate represents the Group’s share in Southern Water Investments Limited ("SWIL"), a company incorporated in Great Britain. The accounting reference date for SWIL is the 31 March. SWIL is an investor in the British water supply and wastewater operations sector. On 13 October 2005 the Group acquired 510,000 Ordinary shares of £1.00 each in SWIL, representing 5.1% of the voting share capital, at a cost of £2,550,000. At the end of the period the Group held 2,500,000 Ordinary shares of £1.00 each in SWIL, representing 25% of the voting share capital.
38
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15. Investment in associate (continued) The Group also held 40,000 A1 Preference shares of £1.00 each in Southern Water Services Limited ("SWS"), a subsidiary of SWIL. The Group also held 40,000 A2 Preference shares of £0.01 each in SWIL. The total cost of the Group’s entire investment was £58,492,536. 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
On aquisition Redemption of loan Subscription for preference shares Share of associate loss At 31 December 2003 (restated) Share of associate loss Amortisation of goodwill At 31 December 2004 (restated) Share of associate profit On aquisition Amortisation of goodwill At 31 December 2005
9,950 (12,528) (2,578)
Loans to subsidiaries £’000
40,000 (40,000) -
Preference shares in SWS £’000
Goodwill £’000
-
5,994
40,000 40,000
5,994
55,944 (40,000) 40,000 (12,528) 43,416
Total £’000
(2,402) (4,980)
-
40,000
(300) 5,694
(2,402) (300) 40,714
4,662 280 (38)
-
40,000
2,270 (426) 7,538
4,662 2,550 (426) 47,500
On 11 April 2006 Veolia Water Investment Limited (a subsidiary of Veolia Water UK PLC) sold its entire investments in the Southern Water Group to Southern Water Capital Limited for the sum of £161,372,780 (less disposal costs which are anticipated to be in the order of £200,000). 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 £’000
Group share of associate
Share of profit and loss account headings Turnover Operating profit Profit before tax Taxation Profit after tax
112,021 50,395 15,912 (4,356) 11,556
Share of assets Fixed assets Current assets
772,988 99,150 872,138
Share of liabilities Liabilities due within one year or less Liabilities due after more than one year
(46,850) (825,326) (872,176)
Share of net assets
(38)
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Notes to the financial statements (continued) 16. Current asset investments Listed investment £’000
Group
Cost At 1 January 2005 and 31 December 2005
1,851 The net book value of listed investments at 31 December 2005 relates to a 3.1% shareholding in Ecofin Water & Power Opportunities plc ("Ecofin"), a company incorporated in Great Britain. On 29 June 2005, following an Extraordinary General Meeting of the shareholders of Ecofin, the Group agreed to convert 1,850,850 Capital Shares of 1p each in Ecofin into 3,794,242 Ordinary Shares of 1p each in Ecofin. The market value of the listed current asset investment held at 31 December 2005 was £4.534m (2004: £2.327m). The market value of the investment held at 31 December 2005 based on market prices at the date of signing these accounts was £4.079m. The Company has no current asset investments.
17. Stocks and work in progress
Work in progress Raw materials and consumables
Group 31 December 2005 £’000
Group 31 December 2004 £’000
239 994 1,233
196 1,586 1,782
The Company has no stocks.
18. Debtors
Trade debtors Loans to Group Undertakings Amounts due from Group Undertakings Other debtors Prepayments and accrued income Corporation tax recoverable
40
Group 31 December 2005 £’000
Group 31 December 2004 £’000
Company 31 December 2005 £’000
Company Restated 31 December 2004 £’000
33,737 91,196 1,211 3,718 10,589 140,451
31,786 154,746 2,570 4,618 9,233 1,646 204,599
1,573 91,196 154,245 789 175 247,978
249 198,567 13,085 1,334 561 213,796
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19. 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
22 23 23 22
Group 31 December 2005 £’000
Group Restated 31 December 2004 £’000
Company 31 December 2005 £’000
Company Restated 31 December 2004 £’000
24,337 7,818 6,413 1,642 10,597 2,509 19,210 506 6,855 74,765 154,652
15,027 7,808 5,361 1,337 11,533 3,590 28,797 468 6,273 72,100 152,294
27,503 123 33,669 2,071 7,820 168 790 6,861 79,005
15,888 172 84,401 2,928 18,984 216 1,272 4,350 128,211
20. 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
22 22 23 23
Group 31 December 2005 £’000
Group Restated 31 December 2004 £’000
Company 31 December 2005 £’000
Company Restated 31 December 2004 £’000
249 195,964 8,904 19,123 21,881 6,241 252,362
2,167 195,866 14,341 20,139 25,219 6,654 264,386
21,881 21,881
25,219 25,219
Leasehold Property £’000
Total £’000
21. Provisions for liabilities and charges Group
Deferred Tax £’000
Insurance £’000
Balance at 1 January 2005 (restated) Amount reversed Amount used Amount provided Balance at 31 December 2005
48,238 1,598 49,836
857 3 860
Company
Deferred Tax £’000
Balance at 1 January 2005 (restated) Amount reversed Amount used Amount provided Balance at 31 December 2005
(466) (466)
Veolia Water UK Plc Annual Report & Accounts 2005
Other £’000
2,000 (1,500) 364 864
Other £’000
2,000 (1,500) 500
1,956 (97) 1,859
Leasehold Property £’000
1,956 (97) 1,859
53,051 (1,500) (97) 1,965 53,419
Total £’000
3,956 (1,500) (97) (466) 1,893
41
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Notes to the financial statements (continued) Deferred taxation (see Note 10) Group 31 December 2005 £’000
Accelerated capital allowances Other timing differences Undiscounted provision for deferred tax Discount Discounted provision for deferred tax
110,991 (2,648) 108,343 (58,507) 49,836
Group 31 December 2005 £’000
Deferred tax within “Provisions” Deferred tax within “Net Pension” Total Deferred tax at 1 January Deferred tax charged to Profit and loss Deferred tax (credited)/charged to statement of recognised gains and losses Reclassification of deferred tax on actuarial loss to corporation tax Deferred tax reclassified from corporation tax Total Deferred tax at 31 December Analysed as follows: Deferred tax within “Provisions” Deferred tax within “Net Pension” Total Deferred tax at 31 December
Group Restated 31 December 2004 £’000
111,437 (124) 111,313 (63,075) 48,238
Group Restated 31 December 2004 £’000
Company 31 December 2005 £’000
Company Restated 31 December 2004 £’000
(466) (466) (466)
Company 31 December 2005 £’000
-
Company Restated 31 December 2004 £’000
48,238 533 48,771 957
46,976 (752) 46,224 1,424
(323) (323) (13)
(404) (404) (1)
(5,791)
1,124
(291)
190
1,507 679 46,123
174 (175) 48,771
(290) (917)
(108) (323)
49,836 (3,713) 46,123
48,238 533 48,771
(466) (451) (917)
(323) (323)
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. £500,000 of "Other" provision relates to a potential claim against a Group company. £364,000 of “Other” provision relates development expenditure which may not be recoverable. The information required by FRS 12 is not disclosed as it may prejudice the outcome of commercial negotiations. 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.
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22. Borrowings analysis Loans and bank overdrafts outstanding at the year end comprise:
Amounts repayable within one year Overdrafts Amounts repayable after one year Debentures Bonds
Group 31 December 2005 £’000
Group Restated 31 December 2004 £’000
Company 31 December 2005 £’000
Company Restated 31 December 2004 £’000
24,337 24,337
15,027 15,027
27,503 27,503
15,888 15,888
249 195,964 220,550
2,167 195,866 213,060
27,503
15,888
Group 31 December 2005 £’000
Group Restated 31 December 2004 £’000
Company 31 December 2005 £’000
Company Restated 31 December 2004 £’000
24,337
15,027
27,503
15,888
196,213 196,213 220,550
198,033 198,033 213,060
27,503
15,888
Loans and bank overdrafts are repayable as follows:
Bank loans and overdrafts Repayable: Within one year Other borrowings Repayable: After five years
Details of the security given for bank loans and overdrafts are provided within Note 32. Loans not wholly repayable within five years comprise:
Bond Issue of 5.875% Guaranteed notes due 2026 Irredeemable debenture stock carrying interest of between 4.00% and 5.25%
Group 31 December 2005 £’000
Group Restated 31 December 2004 £’000
195,964 249 196,213
195,866 2,167 198,033
The Company has no loans not wholly repayable within five years. On the 30 September 2005 an offer was made to repurchase for cash £1,979,000 of debenture stock and £1,918,000 was duly repurchased and cancelled.
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Notes to the financial statements (continued) 23. Lease and other financial commitments Obligations under finance leases are payable as follows:
Within one year In the second to fifth years inclusive After five years
Group 31 December 2005 £’000
Group 31 December 2004 £’000
6,413 5,829 3,075 15,317
5,361 9,883 4,458 19,702
Obligations for financing of assets operated by third parties are payable as follows:
Within one year In the second to fifth years inclusive After five years
Group 31 December 2005 £’000
Group 31 December 2004 £’000
1,642 5,545 13,578 20,765
1,337 5,100 15,039 21,476
The Company has no finance lease obligations. The annual levels of commitments under non-cancellable operating leases are detailed in the table below: Land and buildings 31 December 2005 £’000
Land and buildings 31 December 2004 £’000
Other 31 December 2005 £’000
Other 31 December 2004 £’000
8 248 256
8 248 256
334 2,580 504 3,418
224 2,442 199 2,865
248 248
248 248
16 16
16 16
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
24. 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.
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25. Share capital
Authorised 500,000 ordinary shares of £1 each Issued, allocated and fully paid 500,000 ordinary shares of £1 each
31 December 2005 £’000
31 December 2004 £’000
500
500
500
500
Group Other reserves £’000
Group Total reserves £’000
26. Profit and loss account and reserves Group Profit and loss £’000
As at 1 January 2004 FRS21 Dividend restatement FRS17 Pension restatement Associate restatement in respect of FRS21 and FRS17 Minority restatement in respect of FRS21 and FRS17 As at 1 January 2004 restated Retained loss for 2004 before restatement FRS21 Dividend restatement FRS17 Pension restatement Bond interest restatement Associate restatement in respect of FRS21 and FRS17 Minority restatement in respect of FRS21 and FRS17 As at 1 January 2005 restated Retained loss for the period Actuarial loss – Group Actuarial loss – Associate Tax on group actuarial loss Transfer from Other Reserves As at 31 December 2005
437,671 18,750 1,630 (15,216) (272) 442,563 (175,149) (18,750) 4,782 (21) 1,243 66 254,734 (57,319) (19,302) (2,089) 5,791 78,983 260,798
Company Profit and loss £’000
As at 1 January 2004 FRS21 Dividend restatement FRS17 Pension restatement As at 1 January 2004 restated Retained loss for 2004 before restatement FRS21 Dividend restatement FRS17 Pension restatement As at 1 January 2005 restated Retained loss for the period Actuarial loss Deferred tax Transfer from Other Reserves As at 31 December 2005
265,130 (2,722) (908) 261,500 (162,360) (49,521) 198 49,817 (13,353) (382) 115 159,315 195,512
86,632 86,632 86,632 (78,983) 7,649
Company Other reserves £’000
524,303 18,750 1,630 (15,216) (272) 529,195 (175,149) (18,750) 4,782 (21) 1,243 66 341,366 (57,319) (19,302) (2,089) 5,791 268,447
Company Total reserves £’000
159,315 159,315 159,315 (159,315) -
424,445 (2,722) (908) 420,815 (162,360) (49,521) 198 209,132 (13,353) (382) 115 195,512
The total amount of goodwill arising on acquisitions which has been written off against Group reserves is £74,483,000 (2004: £74,483,000).
Veolia Water UK Plc Annual Report & Accounts 2005
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Notes to the financial statements (continued) 27. 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 was £113,647,000 (2004 restated: £23,126,000).
28. Reconciliation of movements in equity shareholders’ funds Group Restated 31 December 2004 £’000
Group 31 December 2005 £’000
Profit for the year Other recognised (losses)/gains Deferred tax Profit for the year Less Dividends Movement in equity shareholders’ funds Opening equity shareholders’ funds Closing equity shareholders’ funds
69,681 (21,391) 5,791 54,081 (127,000) (72,919) 341,866 268,947
Company 31 December 2005 £’000
43,296 4,999 (1,124) 47,171 (235,000) (187,829) 529,695 341,866
113,647 (382) 115 113,380 (127,000) (13,620) 209,632 196,012
Company Restated 31 December 2004 £’000
23,126 273 (82) 23,317 (235,000) (211,683) 421,315 209,632
29. Capital and other commitments Capital expenditure commitments not provided for in these financial statements are:
Contracted
Group 31 December 2005 £’000
Group 31 December 2004 £’000
Company 31 December 2005 £’000
Company 31 December 2004 £’000
16,231
14,230
-
-
Other commitments not provided for in these financial statements are:
Indemnity given against Performance bonds Letters of Credit provided to Insurers Closing equity shareholders’ funds
Group 31 December 2005 £’000
Group 31 December 2004 £’000
Company 31 December 2004 £’000
Company 31 December 2003 £’000
8,603 278 8,881
-
8,603 278 8,881
-
Indemnity was provided against third party performance bonds which were issued on behalf of Veolia Water Ireland and its subsidiary undertakings. Letters of credit were provided in respect of all subsidiary undertakings requiring insurance cover in the United Kingdom.
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30. 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. 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 19, 20, 22 and 23.
As at 31 December 2005 As at 31 December 2004 (restated)
Total £’000
Floating rate financial liabilities £’000
Fixed rate financial liabilities £’000
Financial liabilities on which no interest is paid £’000
256,632 254,238
39,654 34,729
216,978 219,509
-
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.
As at 31 December 2005 As at 31 December 2004
Fixed rate financial liabilities
Fixed rate financial liabilities
Financial liabilities on which no interest is paid
Weighted average interest rate %
Weighted average period for which rate is fixed Years
Weighted average period until Maturity Years
6.3 6.2
22 23
-
The weighted average period of fixed rate liabilities was calculated without giving effect to £249,000 (2004: £2,167,000) of irredeemable debentures. Floating rate borrowings and cash bear interest based on relevant LIBOR equivalents.
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Notes to the financial statements (continued) 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 2005 £'000
Restated 31 December 2004 £'000
32,392 3,557 7,817 212,866 256,632
21,725 6,782 8,201 217,530 254,238
31 December 2005 £'000
31 December 2004 £'000
3,013 437 91,196 1,851 96,497
1,878 1,347 154,746 1,851 159,822
The Group's financial assets are as follows:
Cash Short term deposits Loans to Group Undertakings Listed Investments
Loans to Group undertakings bear interest based on relevant LIBOR equivalents. The Group has not adopted FRS25 and FRS26. However, the interest charge and liabilities associated with the £200 million of 5.875% Guaranteed Notes issued by Three Valleys Water Finance PLC (a wholly owned subsidiary of Three Valleys Water PLC) are calculated in accordance with FRS25. Had FRS25 been adopted, the only significant difference to the figures as presented is that the Listed Investment would be stated at its market value of £4,354,000 as opposed to its cost of £1,851,000. 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 31 December 2005.
Long term borrowings – Guaranteed notes
Book Value £'000
Fair Value £'000
195,964
218,000
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.
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31. 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 2004. 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
6.25% (pre-retirement), 5.25% (post retirement) 4.25% 2.75%
The valuation as at 31 December 2004 stated the market valuation of the Plan’s assets to be £206,800,000 and showed a deficit of £8,900,000. Contributions to the Plan over the year ended 31 December 2005 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. The Companies in the Group also made lump sum payments in the year totalling £5.041m. 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 was open to all employees. The Plan provides a selection of benefits based upon final pensionable pay or money purchase according to the members’ wishes. The final salary section of the plan was closed to new members on 30 September 2004. Contributions to the Veolia UK Pension Plan over the year ending 31 December 2005 were paid by members in accordance with the Rules of the Plan and by the Companies in the Group of between 10% and 27% of Pensionable Salary. The latest formal valuation of the Plan for the Company, determined by an independent qualified actuary, was at 31 December 2002. (The triennial valuation of the Plan as at 31 December 2005 is currently being prepared).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
Veolia Water UK Plc Annual Report & Accounts 2005
6.5% 3.8% 2.3%
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Notes to the financial statements (continued) 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. Supplementary pension disclosures under FRS 17 for the Veolia Water Supply Companies’ Pension Plan a. 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.
b.
FRS 17 balance sheet information At 31 December 2005
Value £’000
Group Equities Bonds Gilts/Cash Fair value of assets Present value of scheme liabilities Actuarial (deficit)/surplus Surplus Restriction Recognisable (deficit)/surplus Deferred tax Actuarial (deficit)/surplus after tax
94,306 57,850 81,104 233,260 (238,643) (5,383) (2,202)
Split of fund % of fund
At 31 December 2004
Long term rate of return expected (% pa)
40.4 24.8 34.8 100.0
7.7 5.0 4.2
(7,585) 2,276 (5,309)
Value £’000
82,560 51,601 72,241 206,402 (198,413) 7,989 (2,781)
Company Equities Bonds Gilts/Cash Fair value of assets Present value of scheme liabilities Actuarial surplus/(deficit) Deferred tax Actuarial surplus/(deficit) after tax
629 386 541 1,556 (1,553) 3 (1) 2
40.0 25.0 35.0 100.0
7.5 5.4 4.6
5,208 (1,562) 3,646
At 31 December 2005
Value £’000
Split of fund % of fund
Long term rate of return expected (% pa)
Split of fund % of fund
At 31 December 2004
Long term rate of return expected (% pa)
40.4 24.8 34.8 100.0
7.7 5.0 4.2
Value £’000
524 327 458 1,309 (1,398) (89) 27 (62)
Split of fund % of fund
Long term rate of return expected (% pa)
40.0 25.0 35.0 100.0
c. Assumptions The present value of pension liabilities are estimated by discounting pension commitments, including salary growth, at an AA corporate bond yield.
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Veolia Water UK Plc Annual Report & Accounts 2005
7.5 5.4 4.6
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In calculating the liabilities of the Plans, the following financial assumptions have been used: Group and Company
At 31 December 2005
At 31 December 2004
4.8% pa 4.2% pa 2.7% pa 2.7% pa
5.4% pa 4.6% pa 2.6% pa 2.6% pa
Discount rate Salary growth Retail price index Pension-in payment increases
Deferred pensions are re-valued to retirement age in line with the RPI assumption of 2.7% pa (2004: 2.6% pa) unless otherwise prescribed by statutory requirements or the Plan Rules. d.
Analysis of the amount charged to operating profit
Group Current service cost Total operating charge e.
Year ended 31 December 2005 £'000
Year ended 31 December 2004 £'000
2,673 2,673
2,847 2,847
Year ended 31 December 2005 £'000
Year ended 31 December 2004 £'000
Analysis of the amount credited to other finance income
Group Expected return on pension scheme assets Interest on pension scheme liabilities Net return
11,964 (10,557) 1,407 f.
Analysis of amount recognised in statement of total recognised gains and losses (STRGL) Year ended 31 December 2005 £'000
Group Actual return less expected return on the pension schemes’ assets Experience gains and losses arising on the pension schemes’ liabilities Movement in surplus cap Changes in assumptions underlying the present value of the pension schemes’ liabilities Actual loss/(gain) recognised in STRGL g.
12,522 (10,283) 2,239
16,713 (3,531) 579 (32,024) (18,263)
Year ended 31 December 2004 £'000
4,344 (343) (2,781) 1,220
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 Actuarial (loss)gain (Deficit)/surplus in scheme at end of the year
Veolia Water UK Plc Annual Report & Accounts 2005
Year ended 31 December 2005 £'000
Year ended 31 December 2004 £'000
5,208
3,049
(2,673) 6,736 1,407 (18,263) (7,585)
(2,847) 1,547 2,239 1,220 5,208
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Notes to the financial statements (continued) g.
Movement in surplus during the year (continued) Year ended 31 December 2005 £'000
Company Deficit in scheme at beginning of the year Movement in year: Current service cost Contributions Other financial income Actuarial gain Surlpus/(deficit) in scheme at end of the year h.
Year ended 31 December 2004 £'000
(89)
(156)
(33) 53 3 69 3
(31) 45 5 48 (89)
History of experience gains and losses Year ended 31 December 2005 £'000
Year ended 31 December 2004 £'000
Group Difference between the expected and actual return on schemes’ assets: Amount (£’000) Percentage of schemes’ assets
16,713 7%
4,344 2%
Experience gains and losses on schemes’ liabilities: Amount (£’000) Percentage of the present value of the schemes’ liabilities
(3,531) (1)%
Total amount recognised in statement of total recognised gains and losses: Amount (£’000) Percentage of the present value of the schemes’ liabilities
(18,263) (8)%
(343) 0%
1,220 1%
Year ended 31 December 2005 £'000
Year ended 31 December 2004 £'000
Company Difference between the expected and actual return on schemes’ assets: Amount (£’000) Percentage of schemes’ assets
103 7%
46 4%
Experience gains and losses on schemes’ liabilities: Amount (£’000) Percentage of the present value of the schemes’ liabilities
154 10%
2 0%
69 4%
48 3%
Total amount recognised in statement of total recognised gains and losses: Amount (£’000) Percentage of the present value of the schemes’ liabilities
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31. Pension commitment (continued) Supplementary pension disclosures under FRS 17 for the Veolia UK Pension Plan i. Contributions Future Company contributions under the Veolia UK Pension Plan are subject to review at the next actuarial valuation. j.
FRS 17 balance sheet information At 31 December 2005
Value £’000
Group Equities Gilts Fair value of assets Present value of scheme liabilities Actuarial deficit Deferred tax Actuarial deficit after tax
12,287 3,079 15,366 (20,156) (4,790) 1,437 (3,353)
Split of fund % of fund
At 31 December 2004
Long term rate of return expected (% pa)
80.0 20.0 100.0
7.7 4.2
Value £’000
8,667 2,165 10,833 (14,263) (3,430) 1,029 (2,401)
At 31 December 2005
Value £’000
Company Equities Gilts Fair value of assets Present value of scheme liabilities Actuarial deficit Deferred tax Actuarial deficit after tax
3,756 941 4,697 (6,202) (1,505) 452 (1,053)
Split of fund % of fund
80.0 20.0 100.0
7.5 4.6
At 31 December 2004
Long term rate of return expected (% pa)
80.0 20.0 100.0
Split of fund % of fund
Long term rate of return expected (% pa)
7.7 4.2
Value £’000
2,841 710 3,551 (4,538) (987) 296 (691)
Split of fund % of fund
Long term rate of return expected (% pa)
80.0 20.0 100.0
7.5 4.6
k. 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
Discount rate Salary growth Retail price index Pension-in payment increases
At 31 December 2005
At 31 December 2004
4.8% pa 4.2% pa 2.7% pa 2.7% pa
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 2.7% pa (2004: 2.6% pa) unless otherwise prescribed by statutory requirements or the Plan Rules.
Veolia Water UK Plc Annual Report & Accounts 2005
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Notes to the financial statements (continued) l.
Analysis of the amount charged to operating profit Year ended 31 December 2005 £'000
Year ended 31 December 2004 £'000
1,964 1,964
1,603 1,603
Year ended 31 December 2005 £'000
Year ended 31 December 2004 £'000
Group Current service cost Total operating charge m.
Analysis of the amount credited to other finance income
Group Expected return on pension scheme assets Interest on pension scheme liabilities Net expense
822 (836) (14) n.
Analysis of amount recognised in statement of total recognised gains and losses (STRGL) Year ended 31 December 2005 £'000
Group Actual return less expected return on the pension schemes’ assets Experience gains and losses arising on the pension schemes’ liabilities Changes in assumptions underlying the present value of the pension schemes’ liabilities Actual (loss)/profit recognised in STRGL o.
1,654 (2,693) (1,039)
Year ended 31 December 2004 £'000
655 (70) 585
Movement in surplus during the year Year ended 31 December 2005 £'000
Group Deficit in scheme at beginning of the year Movement in year: Current service cost Contributions Other finance expense Actuarial (loss)/gain Deficit in scheme at end of the year
54
621 (675) (54)
Veolia Water UK Plc Annual Report & Accounts 2005
Year ended 31 December 2004 £'000
(3,430)
(3,613)
(1,964) 1,657 (14) (1,039) (4,790)
(1,603) 1,255 (54) 585 (3,430)
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31. Pension commitment (continued) o.
Movement in surplus during the year (continued) Year ended 31 December 2005 £'000
Company Deficit in scheme at beginning of the year Movement in year: Current service cost Contributions Other finance income/(expense) Actuarial (loss)/gain Deficit in scheme at end of the year p.
Year ended 31 December 2004 £'000
(987)
(1,190)
(424) 355 2 (451) (1,505)
(330) 322 (14) 225 (987)
History of experience gains and losses
Group Difference between the expected and actual return on schemes’ assets: Amount (£’000) Percentage of schemes’ assets
Year ended 31 December 2005 £'000
Year ended 31 December 2004 £'000
1,654 11%
655 6%
Experience gains and losses on schemes’ liabilities: Amount (£’000) Percentage of the present value of the schemes’ liabilities
0%
(70) 0%
Total amount recognised in statement of total recognised gains and losses: Amount (£’000) Percentage of the present value of the schemes’ liabilities
(1,039) (5)%
585 4%
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
Veolia Water UK Plc Annual Report & Accounts 2005
Year ended 31 December 2005 £'000
Year ended 31 December 2004 £'000
495 11%
219 6%
0%
6 0%
(451) (7)%
225 5%
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Notes to the financial statements (continued) 32. Overdraft facility The Company acts, with certain other Group companies, as joint and several guarantor of the bank overdraft at Barclays Bank PLC.
33. 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.
34. Post Year End Event On 11 April 2006 Veolia Water Investment Limited (a wholly owned subsidiary of Veolia Water UK PLC) sold its entire investments in the Southern Water Group to Southern Water Capital Limited for the sum of £161,372,780 (less disposal costs which are anticipated to be in the order of £200,000).
35. Ultimate holding and controlling company Veolia Environnement SA, a company incorporated in France, is the parent undertaking of the smallest group to consolidate the financial statements of Veolia Water UK PLC, and the ultimate parent and controlling company. Copies of the group financial statements are available from the Head Office at 36-38 avenue Kléber, 75116 Paris, France.
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Veolia Water UK Plc 37-41 Old Queen Street, London SW1H 9JA