Veolia Water UK Annual Report 2006

Veolia Water UK Plc Annual Report & Accounts 2006

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Contents 1

Financial and operating highlights

2

Our business

5

Veolia Environnement

6

Statement from the Rt Hon John Gummer

8

Corporate responsibility and Performance

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

Financial and operating highlights 2006 showed strong performances from all our businesses in terms of financial returns, customer service and operational delivery.

• All three water companies met their targets for customer service performance and drinking water quality • All three water companies outperformed their leakage targets

• Largest metering programme in England and Wales • Veolia Water UK recognised as leading water company (2005 Business in the Community Corporate Responsibility Index)

• Folkestone & Dover Water granted “water scarcity status” in industry first Turnover

£256.4m 2005: £238.9m (restated)

Group operating profit

£66.1m 2005: £74.2m (restated)

Veolia Water UK Plc Annual Report & Accounts 2006

1

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.

Veolia Water Industrial Outsourcing’s contract with L’Oréal, South Wales

Regulated water supply companies Folkestone & Dover Water Tendring Hundred Water Three Valleys Water

Filter beds at Three Valleys Water’s ultrafiltration plant, Bushey, Herts

Folkestone & Dover Water Services Ltd

Tendring Hundred Water Services Ltd

Three Valleys Water PLC

Turnover £15.8m

Turnover £14.3m

Turnover £206.4m

Population served (‘000s) 159

Population served (‘000s) 153

Population served (‘000s) 3,054

Employees 78

Employees 65

Employees 868

www.fdws.co.uk

www.thws.co.uk

www.3valleys.co.uk

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

Customer service performance Compliance with drinking water regulations 99.95%

Compliance with drinking water regulations 99.95%

Compliance with drinking water regulations 99.98%

Ofwat’s level of 1 service indicators #####

Ofwat’s level of 1 service indicators #####

Ofwat’s level of 1 service indicators ####

Veolia Water UK companies

Veolia Water UK PLC

Veolia Water Ireland

is the corporate head office, based in London.

It has 26 employees.

provides water and wastewater services to municipal clients in Ireland

www.veoliawater.co.uk

www.veoliawater.ie 1

provides sustainable solutions to water and wastewater management problems for industry.

It has 44 employees.

www.vwio.com

For the period April 2005–March 2006

2

Veolia Water Industrial Outsourcing Ltd (VWIO)

Veolia Water UK Plc Annual Report & Accounts 2006

Veolia Water UK Plc Annual Report & Accounts 2006

3

Veolia Environnement Veolia Water is part of Veolia Environnement, the world’s largest environmental services group with a history dating back to the 1850s.

Veolia Environnement offers public and private sector clients a broad array of services under a single brand, designed to protect the environment and conserve natural resources. Water cycle management, waste recovery and recycling, energy efficiency, transportation of people and goods – all over the world Veolia Environnement supplies comprehensive solutions that reconcile economy with ecology in pursuit of sustainable development.

“2006 marked the moment when our strategy converged with the near-universal awakening to the scale of environmental challenges. Our research and our advances are heading in the same direction as the world at large."

Henri Proglio, Chairman and Chief Executive Officer Veolia Environnement

Our performance-based contractual approach, long-standing experience in the public-private partnership model, the shared expertise of our 298,498 employees and the quality of our Research and Development have made us a leader in our sector.

Veolia Environnement

Veolia Environnement

Veolia Environnement is listed in all the major socially responsible stock market indexes, demonstrating Veolia Environnement’s long-term commitment to environmental and social issues. It has been part of the FTSE4Good index since September 2004, and of the ASPI eurozone (Advanced Sustainable Performance Index) since March 2005.

In 2006,Veolia Environnement’s share was selected to form part of the Dow Jones Sustainability Indexes (DJSI): DJSI Stoxx & DJSI World. Also in 2006, UK consulting firm SustainAbility rated Veolia Environnement’s Sustainable Development report among the world’s top 50 for the second consecutive year.

Veolia Environnement is the world leader in environmental services.

298,498 employees operating in 67 countries.

Veolia Environnement companies

Veolia Water World number 1 in water services, 77,900 employees in 59 countries serving 117 million customers in water and wastewater services.

Veolia Environmental Services World number 2 in waste management. 89,502 employees serving over 45 million customers in 35 countries

Veolia Transport

Veolia Energy

Europe’s number 1 private passenger transport company.

81,897 employees in 30 countries. 2.7 billion journeys made in 2006.

European number 1 in energy services.

48,789 employees in 34 countries.

Veolia Water UK Plc Annual Report & Accounts 2006

5

Chairman’s Statement Statement from the Rt Hon. John Gummer

I am pleased to report that 2006 showed strong performance for Veolia Water UK Plc. Consolidated turnover increased by 7.3% to £256.4m and consolidated profit on ordinary activities before taxation increased by 96% to £178.9m.

Our regulated water supply businesses performed well in 2006.

All three companies met their targets for customer service performance, leakage, and drinking water quality. Tendring Hundred Water was awarded 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 2006 Corporate Responsibility Index).

The strategy of the regulated businesses for the remaining three 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 renewals, increase household meter penetration substantially, implement targeted capital programmes to exploit unused sources, and increase maintenance of non-infrastructure assets.

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.

Veolia Water UK will continue to seek to develop opportunities in municipal and industrial markets related to the provision and treatment of water and waste water. With its access to the innovations of its global 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.

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.

“ With its access to the innovations of its global 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.”

Rt Hon John Gummer MP The South East of England has experienced the driest period of weather since 1933 and in particular two sucessive dry winters in 2004 and 2005. The level of water resource continues to be a key issue for the water companies. To address this issue in the long term, the 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.

In April 2006 Three Valleys Water and Folkestone & Dover Water imposed a hosepipe ban. The Companies’ main concern was to protect customers’ supplies in 2007, expecially in the event of a third dry winter. The hose pipe ban was lifted by Folkestone & Dover Water in October 2006 and by Three Valleys Water in January 2007.

6

Veolia Water UK Plc Annual Report & Accounts 2006

Our non-regulated business performed well in 2006. Veolia Water Industrial Outsourcing continue to work in partnership with industry to provide customised, environmentally aware, cost effective water processing, recycling and wastewater management.

Veolia Water Industrial Outsourcing’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. Veolia Water Operations Ireland secured new municipal operating contracts during the year and continued to develop its business in partnership with other members of the Veolia Group.

Chairman July 2007

During 2006, Veolia Water UK sold its minority investment in the Southern Water Group at a substantive profit.

Veolia Water UK Plc Annual Report & Accounts 2006

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Corporate responsibility

Our approach to corporate responsibility encompasses sustainable development, ethics, traditional safety, health, quality and environmental management systems, risk management and the internal and external management of stakeholder relationships.

Our corporate responsibility policy, principles and programmes are overseen by the Board, chaired by the Rt Hon John Gummer.

More detail can be found in the Veolia Water UK Corporate Responsibility Report 2006 at www.veoliawater.co.uk.

This contains information on performance primarily in the period April 2005 to March 2006.

Detecting leaks

8

Veolia Water UK Plc Annual Report & Accounts 2006

Performance

Benchmarking

Our business

In the UK, Veolia Water UK Plc is recognised as the leading water company in terms of corporate responsibility performance and management. In 2006 it achieved a top 10 placing in the Sunday Times’‘Top 100 Companies that Count’ being awarded the ranking of joint 7th and leading water company, with a score of 97.5%.

This is based on Business in the Community’s 2005 Corporate Responsibility Index.

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.

This index benchmarks companies against their peers on the basis of environmental and social management and performance in key impact areas. In Business in the Community’s words, we are “at the vanguard of the business community, showing by example what it means to be a Company that Counts”.

Business Management 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 Services Limited and Veolia Water Industrial Outsourcing Limited are certified to ISO 14001. Tendring Hundred Water Services Limited and Three Valleys Water PLC are working to align their management systems with ISO 14001.

Veolia Water UK Plc 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.

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 Limited works in partnership with industry to provide customised sustainable environmental solutions, saving customers money and improving environmental performance.

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 PLC 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 Limited 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.

Following two extremely dry winters and in line with other water companies in the South East, in spring 2006, Three Valleys Water PLC and Folkestone & Dover Water Services Limited imposed hosepipe bans as a precautionary measure, in order to safeguard the security of future water supplies.

Leakage All three companies met leakage targets for the 2005/6 year set by the Water Services Regulation Authority, the water industry’s economic regulator, with Three Valleys Water PLC and Tendring Hundred Water Services Limited achieving rates better than their targets. Folkestone & Dover Water Services Limited beat their target by almost 5%. Tendring Hundred Water Services Limited continues to have the lowest level of leakage per property in the industry.

Customer service The Water Services Regulation Authority (Ofwat) assesses companies’ overall delivery of service to customers annually.

In 2005/6 Tendring Hundred Water Services Limited was awarded first place amongst all the water supply companies in England and Wales. This is the fourth time in five years that the Company has topped the Overall Performance Assessment ranking and the first time that a company has done so with a perfect score. Folkestone & Dover Water Services Limited also maintained excellent levels of customer service despite significant increases in all types of customer contact as a result of the company’s application for area of water scarcity status. Three Valleys Water PLC was in the top performance band in four of the five indicators. All of our companies have targets to maintain high levels of customer service.

Drinking water quality We provided drinking water of the highest quality to over 3.3 million people in 2005/6. The quality of the drinking water we supply to our customers continues to be of a very high standard, with Three Valleys Water PLC exceeding the industry average.

Celebrating fitting the last meter at Lydd

Veolia Water UK Plc Annual Report & Accounts 2006

9

Folkestone & Dover Water’s roadshow on water conservation

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 SA commitment to promote diversity and combat discrimination we record the composition of our staff.

Women make up 38% of the workforce, and 30% of managers.

Employees registered as disabled make up 0.4%.

Training All Veolia Water UK Plc companies have introduced the personal development system to provide a more structured approach to employee learning and career development. In 2006/7 Three Valleys Water PLC aims to combine the current employee Performance Review and Personal Development Plan into an Annual Development Plan. This will allow the company to focus on employees’ technical and personal competencies and make it easier to identify appropriate training needs.

In 2005 1,240 Veolia Water UK Plc employees received training (some employees were trained more than once), of whom 218 were managers (these figures are for the 2005 calender year). Training courses covered general management, personal development, diversity at work, health and safety, work-related stress and the disciplinary and grievance policy.

Health & safety Health and safety plays an important part in the everyday culture of our companies. There were no fatalities in our water companies in 2005/6. Work days lost due to work accidents amounted to 431, compared with 238 in the previous year. This increase reflects the inclusion of motor vehicle related injuries in the accident statistics.

Learning about water at Three Valleys Water’s Environment & Education Centre

Staff turnover Staff turnover decreased slightly to 19.4% compared to 19.9% for the previous year.

Employee consultation Veolia Water UK Plc 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 Plc 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 PLC 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 PLC’s purpose-built Education Centre has received several awards for its work with schoolchildren, focussing primarily on water conservation. During the year, more than 21,000 children and adults either visited the Centre or used its resources to deliver the National Curriculum at more than 120 schools.

Our companies regularly engage with their stakeholders about their requirements and expectations, using various means of communication.

Hilfield Reservoir

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 annual carbon dioxide emissions associated with all our energy requirements for water supply, offices and transport were 105,400 tonnes, which is a 28% fall, or 41,300 tonne reduction since 1995/96.

This fall is not associated with reduced energy consumption, however, but rather with 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 increasingly higher standards. Energy consumption has also increased due to the need for additional pumping as a result of changing climate conditions, including hot weather and flooding.

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 Services Limited have partnered with the White Cliffs Countryside Project, which continues to enhance and protect the countryside in south east Kent.

A recent survey, which formed part of the Sussex Emerald Moth Conservation Project, concluded that Dungeness provides a better habitat now than it had before the project started.

Tendring Hundred Water Services Limited is a sponsor of the Essex Biodiversity project, a partnership of over 40 local organisations.

Three Valleys Water PLC has long-standing partnerships with conservation groups such as Friends of Stockers Lake, the Herts & Middx Wildlife Trust, and the Wraysbury Lakes Liaison Group. As part of its on-going strategy to develop its biodiversity strategy, Three Valleys Water PLC carried out biodiversity surveys on 12 company sites. The results will assist in enhancing habitat management.

Fuel consumption Both Three Valleys Water PLC and Folkestone & Dover Water Services Limited can demonstrate a general downward trend in fuel consumption per 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 contractors to record the amounts they use, recycle and dispose. In 2005/6, we estimate that of the 283,500 tonnes of material excavated by our companies and contractors, 52% or 122,700 tonnes were recycled rather than being sent to landfill, compared to 128,660 tonnes last year. All Veolia Water UK Plc companies have an ongoing target to reduce the amount of waste going to landfill.

Installing a bird box

10

Veolia Water UK Plc Annual Report & Accounts 2006

Veolia Water UK Plc Annual Report & Accounts 2006

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Contents 14 15 19 20 21 22 23 24 25 27

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Veolia Water UK Plc Annual Report & Accounts 2006

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

Veolia Water UK Plc Annual Report & Accounts 2006

13

Directors and Officers Directors

Secretary K W Taylor

Directors’ report

The Directors submit their report and the audited financial statements of Veolia Water UK Plc for the year ended 31 December 2006.

Equity dividends paid during the year were £123.9m compared to £127.0m in 2005.

Principal activities

Net debt reduced from £162.0m at the end of 2005 to £78.4m at 31 December 2006.

J S Gummer

(Chairman)

Registered Office

D W Alexander

(Managing Director, Appointed 1 February 2005)

37-41 Old Queen Street London SW1H 9JA

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 J C Banon

Auditors

(Managing Director, up to 1 February 2005)

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

R A Bienfait

The consolidated profit after taxation and minority interests amounted to £160.4m (2005 restated: £72.8m). A dividend of £123.9m has been paid during the year (2005: £127.0m). The Directors do not propose a final dividend (2005: £Nil) in respect of the year ending 31 December 2006. A retained profit of £35.9m (2005 restated: retained loss of £57.1m) will be transferred to reserves.

Capital expenditure for the twelve months to December 2006, net of contributions from third parties, was £90.3m, compared to £47.0m for the previous year. The main factor behind the 92% increase was the doubling of the rate of main renewals at the Group’s main subsidiary (Three Valleys Water PLC). Capital expenditure is a key component of the Ofwat economic regulatory regime.

The Group will continue to invest in and manage it’s long-term interests in the water industry in the United Kingdom and Ireland.

M J E Butcher F Darley

Registered Number

(Resigned 31 March 2006)

2127283

Review of business and future developments

Principal risks and uncertainties

The group’s key financial and other performance indicators during the year were as follows:

Economic and regulatory risk

C Roger-Lacan Group turnover Operating profit Profit before tax Profit after tax Shareholders’ funds Net debt Capital expenditure

2006 £’000

2005 £’000

Change %

256,390 66,075 178,879 161,155 313,522 78,385 90,338

238,903 74,200 90,807 73,787 274,796 161,988 46,995

7% -1 1 % 97% 118% 14% -52% 92%

Group turnover increased by 7% during the year primarily due to the impact of tariff changes within the regulated water businesses.

The water industry in the UK comprises a number of regional monopolies which are subject to economic and technical regulation.

Water charges are set by Ofwat (the economic regulator for the water and sewerage industry in England and Wales) on a five yearly cycle. With a significant proportion of the Group’s activities invested in regulated water businesses, determinations issued by Ofwat can have a significant impact on profits and cashflows.

Security risk The Group has risks to the security of its supply of water to customers and the security of its assets and employees.

Operating profit fell by 11% compared to 2005 to £66.0m, predominately due to higher operating costs within the regulated activities, particularly relating to infrastructure renewal, depreciation, energy and water resource and treatment costs.

Security of supply A large part of the water business operates in some of the driest and water scarce regions in the country. Combined with the growth of hosebuilding in our operating regions, these factors place pressures on the supply and demand balance, heightening the risk of having insufficient water to supply customers.

Profit before tax at £178.9m was 97% higher than 2005. The sale of Southern Water Investments Limited was the significant factor behind this increase. In total, the sale of investments realised a profit before tax of £112.7m in the year.

The Group has a number of operational measures to address this risk. In addition the Group actively promotes water efficiency amongst its customers, and has an active drought management plan to address risk of supply shortage.

Profit after tax increased by 118% in the year to £161.2m. As reported above this was primarily due to the disposal of investments during 2006. Net interest and tax charges (excluding those charges due to the equity accounting of associates) remained broadly in line with that incurred in 2005.

Threats of terrorism Acts of terrorism that threaten particularly our operational sites, offices and mains infrastructure and water supply would severely disrupt business and operations.

Net cash of £207.5m was generated during the year (before equity dividend payments and financing), compared to a net cash outflow of £61.3m in 2005. This increase was primarily due to the sale of investments, offset in part by an increase in the cash spend on fixed assets.

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Veolia Water UK Plc Annual Report & Accounts 2006

Veolia Water UK Plc Annual Report & Accounts 2006

15

Directors’ report (continued)

Environmental and water quality risk

Liquidity risk

Research and development

The water companies are required to provide potable water of the highest standard compliant with relevant legislation (including the Water Framework Directive), as administered by Ofwat, the Drinking Water Inspectorate and the Environment Agency.

The Group’s regulated business is required to deliver mandatory capital investment requirements generating an ongoing need for financing. The Group is subject to variability of cashflow due to the billing cycle within the regulated business and the uncertainty of timing of customer payments. Variability in cashflows is primarily managed through the use of short-term borrowing facilities. Further disclosure on the management of liquidity risk is included in note 32.

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 £702,000 (2005: £732,000).

Failure to provide an uninterrupted water supply fit for consumption, could result in significant public health issues, environmental damage, loss of reputation and fines.

The Group’s main credit risk is in relation to trade debtors.

There is a statutory requirement within the regulated business to provide a water supply to domestic water customers with no rights to terminate the service in the event of non payment. This risk is spread over a large number of low value customer accounts.

The Group ensures that sufficient resources are allocated to credit management to reduce the impact of this risk.

New accounting standards

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.

In preparing the financial statements for the current year, the Company has adopted FRS 20 ‘share-based payment’. (See Note 1).

Directors and their interests

Pension arrangements

Creditor payment policy

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 Directors are aware of the need for timely payment for goods and services received. It is the Group 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.

Credit risk Environmental and water quality risks are also applicable where the non regulated business provides water related services to public authorities and industry.

Competition risk The water companies currently operate as regional monopolies of water supply. There is a risk that further legislation may be introduced to reduce that monopoly position with all or a certain group of customers.

Where competition is permitted for the regulated water supply to certain large commercial customers, entrants can apply for licences to supply water to these commercial customers within the water companies operating region. Failure of the water companies to comply with the relevant statutory requirements could result in fines being imposed or reference to the Competition Commission.

Health and safety risk The risk to the Group that the health and safety of employees is adversely impacted through performance of their duties. The risk impacts can range from loss of working days to compensation payments for negligence. The Group has a dedicated Health and Safety team who work towards identifying and mitigating these risks.

The Group’s 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 39% of employees pensionable salary to the above defined benefit schemes, dependent upon the financial status of the divisions of the pension plans.

Delivery risk The water companies are required to deliver a significant capital investment programme consisting of a number of capital projects.

There are risks to these projects on the timing of delivery and resourcing. Failure to deliver significant elements of the capital programme could lead to adverse adjustments to the water companies regulatory capital value at the next periodic review by Ofwat, and potentially enforcement action by the Environment Agency, the Drinking Water Inspectorate or Ofwat.

Climate change risk Climate change will directly impact the water industry. Veolia Water UK is currently investigating the impacts that this change will have on the supply of drinking water in the regions in which it operates.

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Veolia Water UK Plc Annual Report & Accounts 2006

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.

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 Directors of the Company who served during the year were:

Corporate responsibility A summary of our approach to and our performance in Corporate Responsibility is detailed on pages 4 to 8.

Trade creditors (excluding inter-group) at 31 December 2006 represent 31 days (2005: 38 days) of purchases during the year for the Group.

(Chairman) (Managing Director)

(Resigned 31 March 2006)

None of the Directors have any interests in the shares of the Company.

In accordance with Statutory Instrument 1985/802, the interest of the Directors in the shares of Veolia Environnement SA (the ultimate parent company) are not required to be disclosed.

Going concern 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.

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.

Disclosure of information to the auditors Charitable and political donations Donations for charitable purposes made by Group companies during the year amounted to £136,000 (2005: £121,000).

No political contributions were made during the year.

The Group has agreed with the Trustee a contribution plan for the VUKPP which will ensure that the deficit of £1.3m 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 2005).

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

Employee information Group companies consult their staff on matters of concern in the context of their employment.

So far as each person who was a director at the date of approving this report is aware, there is no relevant audit information, being information needed by the auditor in connection with preparing its report, of which the auditor is unaware. Having made enquiries of fellow directors and the group’s auditor, each director has taken all the steps that he is obliged to take as a director in order to make himself aware of any relevant information and to establish that the auditor is aware of that information.

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.

Veolia Water UK Plc Annual Report & Accounts 2006

17

Directors’ report (continued)

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 that give a true and fair view of the state of affairs of the company and of the group. 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;

Independent auditors’ report to the shareholders of Veolia Water UK Plc Auditors So far as each person who was a director at the date of approving this report is aware, there is no relevant audit information, being information needed by the auditor in connection with preparing its report, of which the auditor is unaware. Having made enquiries of fellow directors and the group’s auditor, each director has taken all the steps that he/she is obliged to take as a director in order to made himself/herself aware of any relevant audit information and to establish that the auditor is aware of that information.

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

• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; • 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.

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

We have audited the group and parent company financial statements (the “financial statements”) of Veolia Water UK Plc for the year ended 31 December 2006 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 36. These financial statements have been prepared under the accounting policies set out therein.

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 Chairman’s Statement, the Corporate Responsibility Report and the Directors’ Report. We consider the implications for our report if we become aware of any apparent misstatements within them. Our responsibilities do not extend to any other information.

Basis of audit opinion 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.

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.

Respective responsibilities of directors and auditors R A Bienfait Director July 2007

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.

In addition we report to you if, in our opinion, 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 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 2006 and of the group’s profit for the year then ended; • the financial statements have been properly prepared in accordance with the Companies Act 1985; and • the information given in the directors’ report is consistent with the financial statements.

Ernst & Young LLP Registered auditor London July 2007

18

Veolia Water UK Plc Annual Report & Accounts 2006

Veolia Water UK Plc Annual Report & Accounts 2006

19

Consolidated profit and loss account

Consolidated statement of recognised gains and losses Notes*

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

2

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 profit/(loss) for the year

Restated Year ended 31 December 2005 £’000

256,390 (156,962) 99,428 (41,652) 8,299 66,075

238,903 (132,548) 106,355 (40,498) 8,343 74,200

17,445 800 84,320

50,395 1,600 126,195

818 112,743 197,881 7,578

4,253 130,448 8,415

9

(14,661) (13,422)

(14,965) (29,284)

10

2,153 (650) 178,879

1,393 (5,200) 90,807

11

(17,724) 161,155 (727) (5) 160,423 (123,900) (620) 35,903

(17,020) 73,787 (1,008) (5) 72,774 (127,000) (2,888) (5 7, 1 1 4 )

3 4

Share of operating profit in associate Preference dividend income from associate Total operating profit 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

Year ended 31 December 2006 £’000

5 5 8

12 27

Year ended 31 December 2006 £’000

Restated Year ended 31 December 2005 £’000

Group profit for the financial year

160,423

72,774

Total recognised gains for the financial year

160,423

72,774

Actuarial gain/(loss) - Group - Associate Deferred tax arising on group actuarial gain/(loss) Total gains recognised for the year Prior year adjustment on the full adoption of FRS20 Total gains recognised since last annual report

1,230 2,056 (370) 163,339 (135) 163,204

(19,297) (2,089) 5,789 57,177 57,177

All material activities relate to continuing operations. The notes on pages 25 to 56 form part of these financial statements.

20

Veolia Water UK Plc Annual Report & Accounts 2006

Veolia Water UK Plc Annual Report & Accounts 2006

21

Consolidated balance sheet

Company balance sheet

Notes*

Fixed assets Intangible assets Tangible assets Investments Investments in associate

13 14a 15 16

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

18 19 17

Creditors: amounts falling due within one year Net current assets/(liabilities) Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Deferred tax Net pension liability 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

20

21 22 22 33

26 27 27 29 25 25

The notes on pages 25 to 56 form part of these financial statements.

31 December 2006 £’000

Restated 31 December 2005 £’000

198 571,401 15 571,614

210 547,786 15 47,500 595,5 1 1

1,057 199,436 583 201,076 (155,200) 45,876 617,490 (242,178) (5,806) (48,579) (7,405)

1,233 142,817 1,851 437 3,013 149,351 (155,502) (6,151) 589,360 (252,540) (3,583) (49,779) (8,662)

313,522

274,796

500 7,649 300,988 309,137 4,347 38 313,522

500 7,649 262,169 270,318 4,440 38 274,796

31 December 2006 £’000

Restated 31 December 2005 £’000

14b 15

5,216 45,854 51,070

5,292 45,854 51,146

19

240,892 59 240,951 (52,017) 188,934 240,004

247,978 437 281 248,696 (79,015) 169,681 220,827

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

20

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

21 22 33

(13,990) (1,318) (436) 224,260

(21,966) (1,864) (1,051) 195,946

26 27 27 29

500 223,760 224,260

500 195,446 195,946

The notes on pages 25 to 56 form part of these financial statements.

The financial statements on pages 20 to 56 were approved by the Board of Directors on 26th July 2007 and were signed on its behalf by:

D W Alexander Director

R A Bienfait Director

The financial statements on pages 20 to 56 were approved by the Board of Directors on 26th July 2007 and were signed on its behalf by:

D W Alexander Director

22

R A Bienfait Director

Veolia Water UK Plc Annual Report & Accounts 2006

Veolia Water UK Plc Annual Report & Accounts 2006

23

Consolidated cash flow statement

Notes to the consolidated cash flow statement

Notes*

Net cash inflow from operating activities

a

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 from returns on investments and servicing of finance

Year ended 31 December 2006 £’000

Restated Year ended 31 December 2005 £’000

133,842

131,910

8,424 (13,574) (1,245) 800 (824) (6,419)

7,434 (12,585) (849) 3,519 (1,234) (3,715)

Taxation paid Capital expenditure and financial investment

(18,379)

(20,607)

Purchase of fixed assets Contributions to fixed assets received Disposal of fixed assets Purchase of investments Cost of investment in associate Sale of investment in associate Sale of other investments Net cash inflow/(outflow) from capital expenditure and financial investment

(79,529) 9,489 1,420 161,373 5,704 98,457

(60,995) 10,268 6,988 (20) (2,550) (46,309)

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

(123,900) 83,601

(127,000) (65,721)

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

b

(55,425)

Net cash outflow from financing Increase/(decrease) in cash

b d

(6,556) (21,620)

*Notes to the consolidated cash flow statement are on pages 25 and 26.

24

Veolia Water UK Plc Annual Report & Accounts 2006

64,460 (6,916) (8,177)

a. Reconciliation of operating profit to net cash flow from operating activities Year ended 31 December 2006 £’000

Group operating profit Depreciation Amortisation of deferred credit Amortisation of goodwill – intangible assets Amortisation of goodwill – investment in associate Decrease in stocks Decrease/(increase) in debtors (Decrease)/increase in creditors and provisions Increase/(decrease) in pension position Net cash inflow from operating activities

66,075 66,114 (415) 12 426 177 5,801 (5,935) 1,587 133,842

Restated Year ended 31 December 2005 £’000

74,200 59,120 (412) 12 426 549 (1,560) 3,331 (3,756) 131,910

b. Analysis of cash flows for headings netted in the consolidated cash flow statement Year ended 31 December 2006 £’000

Management of liquid resources Decrease in cash on short-term deposit (Increase)/decrease in short-term loans due from group undertakings Net cash (outflow)/inflow from management of liquid resources

437 (55,862) (55,425)

Financing Decrease in financing of assets operated by other parties Decrease in capital elements of finance leases Non cash movement in bond liability Redemption of debentures Net cash outflow from financing

(1,103) (5,368) 105 (190) (6,556)

Restated Year ended 31 December 2005 £’000

910 63,550 64,460

(7 1 1 ) (4,385) 98 (1,918) (6,916)

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

Veolia Water UK Plc Annual Report & Accounts 2006

25

Notes to the consolidated cash flow statement

Notes to the financial statements

(continued) 1.

c. Analysis of net debt At 31 December 2005 £’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

3,013 (24,337) (21,324)

Cash flow £’000

(2,430) 24,050 21,620

At 31 December 2006 £’000

583 (287) 296

91,196 437 91,633

55,862 (437) 55,425

147,058 147,058

(195,964) (15,317) (249) (20,765) (232,295) (161,986)

(105) 5,368 190 1,103 6,556 83,601

(196,069) (9,949) (59) (19,662) (225,739) (78,385)

d. Reconciliation of net cash flow to movement in net debt Year ended 31 December 2006 £’000

Decrease/(increase) in overdraft in the year Cash inflow/(outflow) from increase/(decrease) in liquid resources Cash inflow from decrease in debt and lease financing Movement in net debt in the year Opening net debt Closing net debt

Restated Year ended 31 December 2005 £’000

21,620 55,425 6,556 83,601

(8,177) (64,460) 6,916 (65,721)

(161,986) (78,385)

(96,265) (161,986)

Accounting policies

a. Basis of accounting The financial statements have been prepared under the historical cost convention in accordance with applicable accounting standards, except for the treatment of certain grants and contributions, in accordance with the Companies Act 1985. b. New accounting standards In preparing the financial statements for the current year, the Company has adopted FRS 20 ‘share-based payment’. The adoption of FRS 20 has resulted in a change in accounting policy for share based-payment transactions. FRS 20 requires the fair value of options and share awards which ultimately vest to be charged to the profit and loss account over the vesting or performance period.

For equity-settled transactions the fair value is determined at the date of the grant using an appropriate pricing model. For cash-settled transactions fair value is established initially at the grant date and at each balance sheet date thereafter until the awards are settled.

If an award fails to vest as the result of certain types of performance condition not being satisfied, the charge to the income statement will be adjusted to reflect this.

The Group has adopted FRS 20 share-based payments. This has resulted in an increase in operating costs of £86,095 (2005: £101,611), an increase in accruals of £9,770 (2005: £10,988) and a decrease in the deferred tax provision of £25,829 (2005: £29,049). 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.

Entities, other than subsidiary undertakings or joint ventures, in which the group has a participating interest and over whose operating and financial policies the group exercises a significant influence are treated as associates. An interest in an associate acquired in 2003, has been accounted for using the equity method, up till the date of disposal, 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.

26

Veolia Water UK Plc Annual Report & Accounts 2006

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. f. Bad debt provisioning The bad debt provision is calculated by applying a range of different percentages to debt of different ages. These percentages also vary between categories of debt. Higher percentages are applied to those categories of debt which are considered to be of greater risk and also to debt of greater age. The value of the bad debt provision is sensitive to the specific percentages applied. g. Revenue recognition Revenue is recognised in accordance with FRS 5 in the period in which it is earned. The company does not recognise revenues where payment is received in advance. However payments made in the previous period in respect of the current year will be recorded as revenue in the current period. h. 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 14a.

Veolia Water UK Plc Annual Report & Accounts 2006

27

Notes to the financial statements (continued) 1.

Accounting policies (continued)

i. Fixed and current asset investments Fixed asset investments are stated at cost less any provisions in respect of permanent diminution in value. j. 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. Work in progress for chargeable services is valued at cost.

l. Deferred 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:

k. Tangible fixed assets and depreciation Tangible fixed assets comprise:

a) revaluation gains on land and buildings, unless there is a binding agreement to sell them at the balance sheet date;

Infrastructure assets – mains and associated underground pipework.

Other assets – land and buildings, operational structures, fixed plant, motor vehicles and mobile plant.

b) 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;

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.

c) fair value adjustment gains to fixed assets and stock to uplift prices to those ruling when an acquisition is made.

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 each Group companies 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 3 – 10 years

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.

n. Pension costs The Group operates two 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.

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.

Certain companies in the Group have unfunded obligations to pay pensions to former employees and non-executive directors.

A provision in respect of this obligation is included within the net pension liability. o. Research and development Research and development costs are written off in the period in which they are incurred.

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.

p. 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.

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.

q. Comparative figures Certain prior year figures have been restated to conform with the 2006 presentation. r. Provisions A provision is recognised when the group has a legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation.

m. Leased assets Assets financed by leasing are included in tangible fixed assets and the net obligation to pay future rentals is included within creditors.

Instalments are apportioned between the finance element, which is charged to the Profit and Loss Account as interest, and the capital element, 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.

28

Veolia Water UK Plc Annual Report & Accounts 2006

Veolia Water UK Plc Annual Report & Accounts 2006

29

Notes to the financial statements (continued) 2. Turnover and segmental analysis

3. Other operating income

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.

Year ended 31 December 2006 £’000

Turnover Water supply and related activities:

Operating profit Water supply and related activities

Profit on ordinary activities before tax Water supply and related activities Associate

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

30

Veolia Water UK Plc Annual Report & Accounts 2006

Restated Year ended 31 December 2005 £’000

Year ended 31 December 2006 £’000

Year ended 31 December 2005 £’000

8,299

8,343

Year ended 31 December 2006 £’000

Year ended 31 December 2005 £’000

199 147 32 26

209 126 63

33,721 29,226 3,376

28,783 26,640 3,697

Commission, rents and sundry income

4. Group operating profit This is stated after charging/(crediting):

256,390

238,903

Year ended 31 December 2006 £’000

Restated Year ended 31 December 2005 £’000

66,075

74,200

Year ended 31 December 2006 £’000

Restated Year ended 31 December 2005 £’000

175,506 3,373 178,879

74,896 1 5, 9 1 1 90,807

Year ended 31 December 2006 £’000

Restated Year ended 31 December 2005 £’000

313,522 (4,385) 309,137

Auditors’ remuneration - for audit services - for regulatory returns - for non-audit services (Income accrual investigation) - for non-audit services Depreciation of tangible fixed assets - infrastructure - owned - leased Impairment of tangible fixed assets - impairment of fixed assets - reversal of impairment of fixed assets Operating lease rentals - land and buildings - other Research and development Hire of plant and machinery Amortisation of goodwill Amortisation of contributions to capital expenditure

(207)

207 -

343 2,337 702 239 12 (415)

442 2,181 732 170 12 (412)

227,296 47,500 (4,478) 270,318

Veolia Water UK Plc Annual Report & Accounts 2006

31

Notes to the financial statements (continued) 5. Exceptional items

7.

Year ended 31 December 2006 £’000

Recognised below operating profit: Profit on disposal of fixed asset investments - Southern Water Investments Limited - Ecofin Water and Power Opportunities PLC Profit on disposal of fixed assets Minoritity interests’ share of profit on disposal of fixed assets

Staff costs

Year ended 31 December 2005 £’000

108,889 3,854 112,743 818 1 1 3,561 35

4,253 4,253 36

Year ended 31 December 2006 £’000

Year ended 31 December 2005 £’000

704 237 941

1,275 1,275

Aggregate emoluments of the Directors Company pension contributions to defined benefits scheme

Members of defined benefit schemes

Year ended 31 December 2005 £’000

843 52

1,083 66

Year ended 31 December 2006

Year ended 31 December 2005

3

3

36,416 3,103 6,208 45,727

36,190 3,139 7,309 46,638

Year ended 31 December 2006 Number

Year ended 31 December 2005 Number

1,222 36 1,258

1,220 23 1,243

Year ended 31 December 2006 £’000

Year ended 31 December 2005 £’000

7,478 56 44 7,578

8,250 44 121 8,415

The average number of employees of the Group during the year was as follows:

Water supply and related activities Central services

8. Interest receivable and similar income

6. Directors’ remuneration Year ended 31 December 2006 £’000

Year ended 31 December 2005 £’000

Wages and salaries Social security costs Pension costs and other benefits

The tax effect in the profit and loss account relating to the exceptional items is:-

Charge on profit on disposal of fixed asset investments Charge on profit on disposal of fixed assets

Year ended 31 December 2006 £’000

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.

9. Interest payable and similar charges

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

Year ended 31 December 2006 £’000

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 2006

276 -

Year ended 31 December 2005 £’000

281 -

Year ended 31 December 2006 £’000

Restated Year ended 31 December 2005 £’000

15 333 854 1,341 1 1 ,874 244 14,661

447 1,289 1,144 1 1 ,967 118 14,965

Interest payable to Group Undertakings Bank interest Interest on finance leases Finance costs of assets used by the Group and operated by other parties Interest on bonds and debentures Other interest

Veolia Water UK Plc Annual Report & Accounts 2006

33

Notes to the financial statements (continued) 10. Other finance income

11. Taxation (continued) Year ended 31 December 2006 £’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 Interest on non-executive directors pension

13,424 1,152 (1 1 ,331) (1,035) (57) 2,153

Year ended 31 December 2005 £’000

11,964 822 (10,557) (836) 1,393

11. Taxation Year ended 31 December 2006 £’000

Taxation relates to the following: - Group Undertakings - Associate

18,325 (601) 17,724

Restated Year ended 31 December 2005 £’000

12,664 4,356 17,020

Current taxation reconciliation

Profit on ordinary activities before taxation (excluding associate) Theoretical tax at UK corporation tax rate of 30% (2005: 30%) Effects of: - adjustment to tax in respect of company with tax rate 12.5% - adjustment to tax in respect of prior years - other income and expenses that are not tax deductible - accelerated capital allowances - short term timing differences - other timing differences Actual current taxation charge

Year ended 31 December 2006 £’000

UK corporation tax at 30% (2005: 30%)

20,234

21,833

Over provision in prior years Total current taxation

(908) 19,326

(10,095) 1 1 ,738

Restated Year ended 31 December 2005 £’000

175,506

74,896

52,652

22,469

(10) (908) (33,212) (623) (448) 1,875 19,326

(6) (10,095) (992) (132) (329) 823 1 1 ,738

12. Dividends

Taxation charge Restated Year ended 31 December 2005 £’000

Year ended 31 December 2006 £’000

Interim dividend paid of £164.20 per share (2005: £254.00 per share) Interim dividend paid of £83.60 per share (2005: £nil per share)

Year ended 31 December 2006 £’000

Year ended 31 December 2005 £’000

82,100 41,800 123,900

127,000 127,000

13. Intangible assets Positive goodwil £’000

Group

Cost At 1 January and 31 December 2006

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

1,076 (138) (1,939) (1,001) 18,325

457 (4,099) 4,568 926 12,664

Tax on associates Tax on profit on ordinary activities

(601) 17,724

4,356 17,020

246

Amortisation At 1 January 2006 Charge for the period At 31 December 2006

36 12 48

Net book value At 31 December 2006 At 31 December 2005

198 210

The goodwill is amortised over its estimated life of 20 years.

34

Veolia Water UK Plc Annual Report & Accounts 2006

Veolia Water UK Plc Annual Report & Accounts 2006

35

Notes to the financial statements (continued) 14a. Tangible assets – Group

14b. Tangible assets – Company Short term leasehold property £’000

Group

Freehold land, buildings and reservoirs £’000

Mains and other infrastructure assets £’000

Vehicles plant and machinery £’000

Cost At 1 January 2006 Additions Transfers Capital contributions Disposals At 31 December 2006

82 82

139,840 7,239 430 (658) 146,851

470,066 43,139 12 (9,490) (917) 502,810

413,842 24,433 1 1 ,088 (1,554) 447,809

Depreciation At 1 January 2006 Charge for the year Disposals Reversal of impairment At 31 December 2006

82 82

45,603 4,086 (151) 49,538

223,385 34,719 (917) 257,187

227,075 27,517 (1,453) (207) 252,932

Net book value At 31 December 2006 At 31 December 2005

Assets in course of construction £’000

Freehold property £’000

Vehicles, plant and machinery £’000

Total £’000

Company Cost At 1 January 2006 Additions At 31 December 2006

82 82

6,658 6,658

1,231 125 1,356

7,971 125 8,096

Depreciation At 1 January 2006 Charge for the year At 31 December 2006

82 82

1,541 133 1,674

1,056 68 1,124

2,679 201 2,880

Net Book Value At 31 December 2006 At 31 December 2005

-

4,984 5,1 1 7

232 175

5,216 5,292

Other investments £’000

Total £’000

15

15

Other investments £’000

Subsidiary undertakings £’000

Total £’000

15

45,839

45,854

Total £’000

20,101 1,043,931 25,017 99,828 (11,530) (9,490) (3,129) 33,588 1,131,140

-

Short term leasehold property £’000

496,145 66,322 (2,521) (207) 559,739

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

-

97,313 94,237

245,623 246,681

194,877 186,767

33,588 20,101

571,401 547,786

15. Fixed asset investments

The net book value of infrastructure assets is stated after the deduction of grants and contributions amounting to £118,222,000 (2005: £108,850,000) in order to give a true and fair view.

Group

Included in the above at 31 December 2006 are fixed assets held under finance leases, as follows: Freehold land, Mains and other buildings and infrastructure reservoirs assets £’000 £’000

Group

Cost Depreciation Net book value

8,419 (6,469) 1,950

23,165 (10,107) 13,058

At 1 January 2006 and 31 December 2006 Vehicles plant and machinery £’000

68,708 (61,503) 7,205

Total £’000

100,292 (78,079) 22,213

Included in the above at 31 December 2005 are fixed assets held under finance leases, as follows: Freehold land Mains and other buildings and infrastructure reservoirs assets £’000 £’000

Group

Cost Depreciation Net book value

36

8,419 (6,209) 2,210

Veolia Water UK Plc Annual Report & Accounts 2006

23,165 (9,970) 13,195

Vehicles plant and machinery £’000

68,708 (58,525) 10,183

Company

At 1 January 2006 and 31 December 2006

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.

Total £’000

100,292 (74,704) 25,588

Veolia Water UK Plc Annual Report & Accounts 2006

37

Notes to the financial statements (continued) 15. Fixed asset investments (continued)

16. Investments in associate

Details of principal 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:

On 11 April 2006 the Company sold its investments in Southern Water Investments Ltd (SWIL) and Southern Water Services Ltd (SWSL) for the net sum of £161,372,780. The investment was comprised of 2,500,000 Ordinary Shares of £1.00 each and 40,000 A2 Preference shares of £0.01 each in SWIL and 40,000 A1 Preference shares of £1.00 each in SWSL.

Proportion of voting rights and shares held

Name of company

Nature of business

Type of holding

Principal subsidiary undertakings: Veolia Water Capital Funds Ltd * (formerly Veolia Water Capital Funds Plc) Three Valleys Water PLC Veolia Water Capital Services Ltd Veolia Water Projects Ltd General Utilities Holdings Ltd * Veolia Water Investment Ltd * Veolia Water Industrial Outsourcing Ltd * Tendring Hundred Water Services Ltd

Water supply and related activities: Holding company

Ordinary shares

100%

Folkestone and Dover Water Services Ltd

Water supply

North Surrey Water Ltd **

Investment company

Veolia Water Ireland Ltd *

Holding company

Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary non-voting shares 10% preference shares Ordinary shares Ordinary non-voting shares 14% preference shares Ordinary shares Ordinary non-voting shares 10% preference shares Ordinary shares Operations shares

100% 100% 100% 100% 100% 100% 99% 88% 98% 74% 92% 76% 99% 99% 99% 50% 100%

Veolia Water Operations Ireland Ltd ***

Water related activities

Water supply Investment company Water related activities Holding company Investment company Water related activities Water supply

* 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.

The consolidated book value of the investment at the date of disposal was £52,484,000, realising a profit before tax of £108,889,000. The Group’s investment in SWIL (which was held through a subsidiary, Veolia Water Investments Limited) was based on estimates of net tangible assets and could be analysed as follows: Share of net tangible assets £’000

Loans to subsidiaries £’000

Preference shares in SWS £’000

Goodwill £’000

40,000 40,000

5,994 5,994

55,944 (40,000) 40,000 (12,528) 43,416

On aquisition Redemption of loan Subscription for preference shares Share of associate loss At 31 December 2003 (restated)

9,950 (12,528) (2,578)

Share of associate loss Amortisation of goodwill At 31 December 2004 (restated)

(2,402) (4,980)

-

40,000

(300) 5,694

(2,402) (300) 40,714

Share of associate profit On aquisition Amortisation of goodwill At 31 December 2005

4,662 280 (38)

-

40,000

2,270 (426) 7,538

4,662 2,550 (426) 47,500

Share of associate profit Amortisation of goodwill Disposal of investment At 31 December 2006

5,410 (5,372) -

-

(40,000) -

(426) (7,1 1 2) -

5,410 (426) (52,484) -

40,000 (40,000) -

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.

*** 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 Limited is the holding company for the water supply interests of Veolia Water UK Plc.

Group share of associate £’000

Group share of associate at date of disposal

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

39,342 17,445 3,373 601 3,974

Share of assets Fixed assets Current assets

791,220 91,800 883,020

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

(57,048) (820,600) (877,648)

Share of net assets at date of disposal

38

Veolia Water UK Plc Annual Report & Accounts 2006

Total £’000

5,372

Veolia Water UK Plc Annual Report & Accounts 2006

39

Notes to the financial statements (continued) 20. Creditors: amounts falling due within one year

17. Current asset investments Listed investments £’000

Group

Cost At 1 January 2006 Disposal of investment

Notes

1,851 (1,851)

At 31 December 2006

-

The Group sold its total holding of 3,794,242 1p Ordinary Shares in Ecofin Water & Power Opportunities PLC for £5,704,936 in three tranches between 26 October 2006 and 22 November 2006, realising a pre-tax profit of £3,854,000.

The Company has no current asset investments.

Bank loans and overdraft Payments received on account Obligations under finance leases Financing of assets operated by other parties Trade creditors Loans from Group Undertakings Amounts owed to Group Undertakings Corporation tax Other taxes and social security Other creditors Accruals and deferred income

23 24 24

18. Stocks

Work in progress Raw materials and consumables

Group 31 December 2006 £’000

Group 31 December 2005 £’000

217 840 1,057

239 994 1,233 Debentures Bonds Obligations under finance leases Financing of assets operated by other parties Corporation tax Accruals and deferred income

19. Debtors

Trade debtors Loans to parent company Loans to other group undertakings Amounts due from group undertakings Other debtors Prepayments and accrued income

Group 31 December 2006 £’000

Group Restated 31 December 2005 £’000

Company 31 December 2006 £’000

Company 31 December 2005 £’000

37,069 147,058 1,195 5,988 8,126 199,436

33,758 91,196 1,210 6,063 10,590 142,817

108 147,058 87,973 5,571 55 127 240,892

1,573 91,196 40,000 1 1 4,244 789 176 247,978

23 23 24 24

Group

Deferred tax £’000

Balance at 1 January 2006 (restated) Transfers to creditors due within one year Amount reversed Amount utilised/released Amount provided Balance at 31 December 2006

49,779 (1,200) 48,579

Balance at 1 January 2006 (restated) Transfers to creditors due within one year Amount utilised/released Amount provided Balance at 31 December 2006

Veolia Water UK Plc Annual Report & Accounts 2006

Company 31 December 2006 £’000

Company Restated 31 December 2005 £’000

287 1 1 ,260 1,876 1,644 12,091 3,789 28,380 2,853 5,544 87,476 155,200

24,337 7,818 6,413 1,642 10,597 2,509 19,867 526 6,932 74,861 155,502

34 25,291 6,667 16,979 1,146 378 1,522 52,017

27,503 123 33,669 2,071 7,820 179 789 6,861 79,015

Group 31 December 2006 £’000

Group Restated 31 December 2005 £’000

Company 31 December 2006 £’000

Company Restated 31 December 2005 £’000

59 196,069 8,073 18,018 13,873 6,086 242,178

249 195,964 8,904 19,123 21,881 6,419 252,540

13,873 117 13,990

21,881 85 21,966

Insurance £’000

Other £’000

Leasehold property £’000

Total £’000

22. Provisions for liabilities and charges

Company

40

Group Restated 31 December 2005 £’000

21. Creditors: amounts falling due after more than one year

Notes

The Company has no stocks.

Group 31 December 2006 £’000

860 (183) 980 1,657

Deferred tax £’000

(495) 82 (413)

864 (500) 2,304 2,668

Other £’000

1,859 (378) 1,481

Leasehold property £’000

500 (500) 250 250

Veolia Water UK Plc Annual Report & Accounts 2006

1,859 (378) 1,481

53,362 (500) (1,200) (561) 3,284 54,385

Total £’000

1,864 (500) (378) 332 1,318

41

Notes to the financial statements (continued) 22. Provisions for liabilities and charges

23. Borrowings analysis

Deferred taxation (see Note 11)

Loans and bank overdrafts outstanding at the year end comprise: Group 31 December 2006 £’000

Accelerated capital allowances Other timing differences Undiscounted provision for deferred tax Discount Discounted provision for deferred tax

1 1 1 ,698 (2,782) 108,916 (60,337) 48,579

Group 31 December 2006 £’000

Group Restated 31 December 2005 £’000

1 1 0,991 (2,705) 108,286 (58,507) 49,779

Group Restated 31 December 2005 £’000

Company 31 December 2006 £’000

(79) (444) (523) 110 (413)

Company 31 December 2006 £’000

Company Restated 31 December 2005 £’000

(495) (495) (495)

Company Restated 31 December 2005 £’000

Group 31 December 2006 £’000

Group 31 December 2005 £’000

Company 31 December 2006 £’000

Company 31 December 2005 £’000

287 287

24,337 24,337

-

27,503 27,503

59 196,069 196,415

249 195,964 220,550

-

27,503

Group 31 December 2006 £’000

Group 31 December 2005 £’000

Company 31 December 2006 £’000

Company 31 December 2005 £’000

287

24,337

-

27,503

196,128 196,128 196,415

196,213 196,213 220,550

-

27,503

Group 31 December 2006 £’000

Group 31 December 2005 £’000

196,069 59 196,128

195,964 249 196,213

Amounts repayable within one year Overdrafts Amounts repayable after one year Debentures Bonds

Loans and bank overdrafts are repayable as follows:

Deferred tax within “Provisions” Deferred tax within “Net Pension” Total deferred tax at 1 January Deferred tax (credited)/charged to profit and loss account Deferred tax charged/(credited) 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 2006

49,779 (3,713) 46,066 (1,001) 370 (30) 45,405

48,210 533 48,743 926 (5,789) 1,507 679 46,066

(495) (451) (946) 79 267 (600)

(13) (323) (336) (27) (293) (290) (946)

Bank loans and overdrafts Repayable: Within one year Other borrowings Repayable: After five years

Analysed as follows: Deferred tax within “Provisions” Deferred tax within “Net Pension” Total deferred tax at 31 December 2006

48,579 (3,174) 45,405

49,779 (3,713) 46,066

(413) (187) (600)

(495) (451) (946)

Loans not wholly repayable within five years comprise:

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. £768,000 of “Other” provisions represent forecasted costs in excess of contracted value for rechargeable development work in progress. £1,900,000 of “Other” provisions are in respect of remediation work required on construction activities undertaken for third parties.

Bond issue of 5.875% Guaranteed notes due 2026 Irredeemable debenture stock carrying interest of between 4.00% and 5.25%

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.

The Group has no loans not wholly repayable within five years.

42

Veolia Water UK Plc Annual Report & Accounts 2006

The Group redeeemed debenture stock amounting to £190,000 during the year.

Veolia Water UK Plc Annual Report & Accounts 2006

43

Notes to the financial statements (continued) 27. Profit and loss account and reserves

24. Lease and other financial commitments

Group profit and loss £’000

Obligations under finance leases are payable as follows:

Within one year In the second to fifth years inclusive After five years

Group 31 December 2006 £’000

Group 31 December 2005 £’000

1,876 4,998 3,075 9,949

6,413 5,829 3,075 15,317

Group 31 December 2006 £’000

Group 31 December 2005 £’000

1,644 5,875 12,143 19,662

1,642 5,545 13,578 20,765

Other 31 December 2006 £’000

Other 31 December 2005 £’000

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 The Group has no finance lease obligations.

The annual levels of commitments under non-cancelled operating leases are detailed in the table below: Land & buildings Land & buildings 31 December 31 December 2006 2005 £’000 £’000

Group Operating leases which expire: Within one year In the second to fifth years inclusive After five years

Company Operating leases which expire: Within one year In the second to fifth years inclusive After five years

8 15 248 271

8 248 256

855 3,403 2,227 6,485

334 2,580 504 3,418

248 248

248 248

6 26 32

16 16

25. 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.

As at 1 January 2005 FRS20 share based payments restatement As at 1 January 2005 restated Before restatements: Retained loss for 2005 Actuarial loss Deferred tax arising on actuarial loss Transfer from other reserves FRS20 share based payments restatement As at 1 January 2006 restated Retained loss for the period Actuarial loss Deferred tax As at 31 December 2006

Group total reserves £’000

254,734 (70) 1,251 (17) 255,898

86,632 86,632

341,366 (70) 1,251 (17) 342,530

(57,319) (19,302) 5,791 (2,089) 78,983 (67) 279 (5) 262,169 35,903 1,230 2,056 (370) 300,988

(78,983) 7,649 7,649

(57,319) (19,302) 5,791 (2,089) (67) 279 (5) 269,818 35,903 1,230 2,056 (370) 308,637

Company profit and loss £’000

Company other reserves £’000

Company total reserves £’000

49,817 (30) 49,787

159,315 159,315

209,132 (30) 209,102

(13,353) (382) 115 159,315 (37) 195,445 27,692 890 (267) 223,760

(159,315) -

(13,353) (382) 115 (37) 195,445 27,692 890 (267) 223,760

The total amount of goodwill arising on acquisitions which has been written off against Group reserves is £74,483,000 (2005: £74,483,000).

26. Share capital

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

44

As at 1 January 2005 FRS20 share based payments restatement Restatement re accrued income error Minority restatement in respect of FRS20 and income error As at 1 January 2005 restated Before restatements: Retained loss for 2005 Actuarial loss – Group Deferred tax arising on group actuarial loss Actuarial loss – associate Transfer from other reserves FRS20 share based payments restatement Restatement re accrued income error Minority restatement in respect of FRS20 and income error As at 1 January 2006 restated Retained loss for the period Actuarial gain – Group Actuarial gain – Associate Tax on group actuarial gain Transfer from other reserves As at 31 December 2006

Group other reserves £’000

Veolia Water UK Plc Annual Report & Accounts 2006

31 December 2006 £’000

31 December 2005 £’000

500 500

500 500

28. 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 £151,591,000 (2005 restated: £113,615,000).

Veolia Water UK Plc Annual Report & Accounts 2006

45

Notes to the financial statements (continued) 30. Share based payments (continued)

29. Reconciliation of movements in equity shareholders’ funds Group 31 December 2006 £’000

Profit for the year Other recognised gains/(losses) Deferred tax Profit for the year Less dividends Movement in equity shareholders’ funds Opening equity shareholders’ funds Closing equity shareholders’ funds

159,803 3,286 (370) 162,719 (123,000) 38,819 270,318 309,137

Group Restated 31 December 2005 £’000

69,886 (21,386) 5,789 54,289 (127,000) (72,711) 343,029 270,318

Company 31 December 2006 £’000

151,591 890 (267) 152,214 (123,900) 28,314 195,946 224,260

Company Restated 31 December 2005 £’000

113,615 (389) 117 113,343 (127,000) (13,657) 209,603 195,946

30. Share based payments Share options in Veolia Environnement SA Share options, exerciseable on a cash basis, reflect the wider responsibilities within the Veolia Environnement SA organisation of the individual concerned, and are not awarded solely on the basis of the Group’s performance, are awarded to the executive directors by the parent company, Veolia Environnement SA, against a broad range of criteria including: - Seniority - Performance of the Company - Contribution of the executive to the Company - Performance of Veolia Water UK PLC and Veolia Environnement SA The market price of the shares at 31 December 2006 was €58.40 (2005: €38.54) and the range during the year was €36.49 to €58.40. There are no performance criteria to be met before the share options are exercisable. The €/£ exchange rate was €1.484/£ as at 31 December 2006 with a range during the period of €1.426/£ to €1.496/£.

Strike price adjusted to take account of transactions impacting the share capital of the Company (issue of share subscription warrants of 17 December 2001 and share capital increase with retention of preferential subscription rights on 2 August 2002).

The initial strike price for plans for 2001 and 2002 are €42.00 and €37.53.

The pre tax expense recognised for share based payments in respect of employee services received during the year to 31 December 2006 is £76,326 (2005: £90,081). The closing balance of share option expenses credited to other reserves amounted to £251,576 (2005: £175,250).

Outstanding Options plans at the end of 2006 were as follows: 2006 28/03/06 4 years service

2004 24/12/04 3 years service plus performance conditions for certain plans

2003 24/03/03 3 years service

2002 28/01/02 3 years service

2001 02/08/01 3 years service

Purchase term

After 4 years

By tranches of 1/3 over 3 years

By tranches of 1/3 over 3 years

By tranches of 1/3 over 3 years

After 3 years

Strike price (in euros)

44.75

24.72

22.50

37.25*

41.25*

Grant date Vesting conditions

The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in share options during the year held by directors and employees of the Group.

Outstanding as at 1 January (*) Granted in the year Forfeited/exercised in the year Outstanding as at 31 December Exercisable as 31 December

2006 number

2006 WAEP (Euro’s)

2005 number

2005 WAEP (Euro’s)

128,766 29,100 157,866 101,366

30.61 44.75 33.21 32.20

128,766 128,766 61,566

30.61 30.61 38.46

(*) Included within this balance are options over 61,566 (2005: 61,566) shares that have not been recognised in accordance with FRS 20 as the options were granted on or before 7 November 2002.

For share options outstanding at 31 December 2006, the weighted average remaining contractual life is 2.15 years (2005: 1.94 years) The estimated fair value of each option granted in 2006, calculated using the Black Scholes method is €14.77 (2005 : nil). The range of exercise prices for options outstanding at the end of the year was €22.50 - €44.75 (2005: €22.50 - €41.25) The fair value of share options granted in 2006 is estimated as at the date of grant using the Black Scholes model, taking into account the terms and conditions upon which the options were granted.

The following underlying assumptions were used in the calculation: Share price at date of grant €44.75 Expected volatility 31.51% Expected life 5.5 years Risk free rate 3.69% Expected dividend yield 1.92% The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur.

The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not be the actual outcome.

No options were granted in 2005.

The estimated fair value of each option granted in 2004, calculated using the binomial method, is €6.56 (2003 : €5.09). This value is based on the following underlying assumptions: share price of €25.89, expected volatility of 21.45%, expected dividend yield of 2.1%, risk-free rate of 3.4%. The number of options granted is based on the level of ROCE, which is taken into account in calculating both the number of options vested and the compensation expense.

46

Veolia Water UK Plc Annual Report & Accounts 2006

Veolia Water UK Plc Annual Report & Accounts 2006

47

Notes to the financial statements (continued) 31. Capital and other commitments

32. Financial instruments and risk management (continued)

Capital expenditure commitments not provided for in these financial statements are:

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.

Contracted

Group 31 December 2006 £’000

Group 31 December 2005 £’000

Company 31 December 2006 £’000

Company 31 December 2005 £’000

15,1 1 7

16,231

-

As at 31 December 2006 As at 31 December 2005

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

Fixed rate financial liabilities Weighted average Weighted average period interest rate for which rate is fixed % Years

Group 31 December 2006 £’000

Group 31 December 2005 £’000

Company 31 December 2006 £’000

Company 31 December 2005 £’000

12,288 41 12,329

8,603 278 8,881

12,288 41 12,329

8,603 278 8,881

6.2 6.3

21 22

The weighted average period of fixed rate liabilities was calculated without giving effect to £59,000 (2005: £249,000) of irredeemable debentures.

Floating rate borrowings and cash bear interest based on relevant LIBOR equivalents.

The maturity profile for the Group’s financial liabilities is:

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.

32. Financial instruments and risk management

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

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.

The Group’s financial assets are as follows:

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 primarily managed by the utilisation of short-term borrowings.

Further disclosures are included in Notes 20, 21, 23 and 24.

As at 31 December 2006 As at 31 December 2005

Total £’000

Floating rate financial liabilities £’000

Fixed rate financial liabilities £’000

226,026 256,632

10,236 39,654

215,790 216,978

Cash Short term deposits Loans to Group Undertakings Listed investments

31 December 2006 £’000

31 December 2005 £’000

3,807 3,292 7,581 211,346 226,026

32,392 3,557 7,817 212,866 256,632

31 December 2006 £’000

31 December 2005 £’000

583 147,058 147,641

3,013 437 91,196 1,851 96,497

Loans to Group undertakings bear interest based on relevant LIBOR equivalents.

The Group has not adopted 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 FRS26.

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 2006.

Book value £’000

Fair value £’000

196

209

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.

Long term borrowings – guaranteed notes

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.

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.

48

Veolia Water UK Plc Annual Report & Accounts 2006

Veolia Water UK Plc Annual Report & Accounts 2006

49

Notes to the financial statements (continued) 33. Pension commitments

Veolia UK Pension Plan

The Group operates two defined benefit pension schemes; the Veolia Water Supply Companies’ Pension Plan (VWSCPP) and the Veolia UK Pension Plan (VUKPP).

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. 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.

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:

b. FRS 17 balance sheet information

Contributions to the Veolia UK Pension Plan over the year ending 31 December 2006 were paid by members in accordance with the Rules of the Plan and by the Companies in the Group of between 17% and 39% of Pensionable Salary.

The latest formal valuation of the Plan for the Company, determined by an independent qualified actuary, was at 31 December 2005.

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

6.2% (pre-retirement) 4.75% (post-retirement) 4.25% 2.75%

The valuation as at 31 December 2005 stated the market valuation of the Plan’s assets was £15,579,000 and showed a deficit of £1,278,000.

Non Executive Directors Plan 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 2006 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 21% of Pensionable Salary. The Companies in the Group also made lump sum payments in the year totalling £553,000.

A provision of £1.1m (£0.8m after tax) was created in the year in respect of unfunded pension obligations to former employees and non executive directors of some Group companies.

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. Contributions for the year amounted to £3,580,000.

At 31 December 2006

Value £’000

Group Equities Bonds Gilts/cash Fair value of assets Present value of scheme liabilities Actuarial deficit Surplus restriction Recognisable deficit Deferred tax Actuarial surplus after tax

Split of fund % of fund

97,716 71,132 71,195 240,043 (241,092) (1,049) (3,525) (4,574) 1,372 (3,202)

40.7 29.6 29.7 100.0

At 31 December 2005 Long term rate of return expected (% pa)

7.7 5.2 4.2

Value £’000

94,306 57,850 81,104 233,260 (238,643) (5,383) (2,202) (7,585) 2,276 (5,309)

At 31 December 2006

Value £’000

Company Equities Bonds Gilts/cash Fair value of assets Present value of scheme liabilities Actuarial surplus Deferred tax Actuarial surplus after tax

622 453 450 1,525 (1,484) 41 (12) 29

Split of fund % of fund

40.8 29.7 29.5 100.0

Split of fund % of fund

Long term rate of return expected (% pa)

40.4 24.8 34.8 100.0

7.7 5.0 4.2

At 31 December 2005 Long term rate of return expected (% pa)

7.7 5.2 4.2

Value £’000

Split of fund % of fund

629 386 541 1,556 (1,553) 3 (1) 2

Long term rate of return expected (% pa)

40.4 24.8 34.8 100.0

7.7 5.0 4.2

c. 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 2006

At 31 December 2005

5.0% pa 4.4% pa 2.9% pa 2.9% pa

4.8% pa 4.2% pa 2.7% pa 2.7% pa

Deferred pensions are re-valued to retirement age in line with the RPI assumption of 2.9% pa (2005: 2.7% pa) unless otherwise prescribed by statutory requirements or the Plan Rules. d. Analysis of the amount charged to operating profit Year ended 31 December 2006 £’000

Year ended 31 December 2005 £’000

3,261 3,261

2,673 2,673

Group Current service cost Total operating charge

50

Veolia Water UK Plc Annual Report & Accounts 2006

Veolia Water UK Plc Annual Report & Accounts 2006

51

Notes to the financial statements (continued) 33. Pension commitments (continued)

h. History of experience gains and losses

e. Analysis of the amount credited to other finance income Year ended 31 December 2006 £’000

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

13,424 (1 1 ,331) 2,093

Year ended 31 December 2005 £’000

1 1 ,964 (10,557) 1,407

Analysis of amount recognised in statement of total recognised gains and losses (STRGL) Year ended 31 December 2006 £’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 gain/(loss) recognised in STRGL

2,1 1 2 (242) (1,323) 52 599

Year ended 31 December 2005 £’000

16,713 (3,531) 579 (32,024) (18,263)

g. Movement in surplus during the year Year ended 31 December 2006 £’000

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

Year ended 31 December 2005 £’000

(7,585)

5,208

(3,261) 3,580 2,093 599 (4,574)

(2,673) 6,736 1,407 (18,263) (7,585)

Year ended 31 December 2006 £’000

Year ended 31 December 2005 £’000

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

2,112 1%

16,713 7%

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

(242) 0%

(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

599 0% Year ended 31 December 2006 £’000

Year ended 31 December 2005 £’000

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

5 0%

103 7%

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

24 2%

154 10%

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

29 2%

69 4%

Supplementary pension disclosures under FRS 17 for the Veolia UK Pension Plan i.

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

52

Veolia Water UK Plc Annual Report & Accounts 2006

3 (40) 33 16 29 41

Contributions

Company contributions under the Veolia UK Pension Plan were reviewed following the actuarial valuation as at 31 December 2005.

Contributions made in the year to 31 December 2006 were £1,501,000. j.

Year ended 31 December 2006 £’000

FRS 17 balance sheet information

Year ended 31 December 2005 £’000

At 31 December 2006

Value £’000

(89) (33) 53 3 69 3

(18,263) 8%

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

17,401 4,350 21,751 (26,659) (4,908) 1,472 (3,436)

Split of fund % of fund

80.0 20.0 100.0

At 31 December 2005 Long term rate of return expected (% pa)

7.7 4.2

Value £’000

Split of fund % of fund

12,287 3,079 15,366 (20,156) (4,790) 1,437 (3,353)

Veolia Water UK Plc Annual Report & Accounts 2006

80.0 20.0 100.0

Long term rate of return expected (% pa)

7.7 4.2

53

Notes to the financial statements (continued) 33. Pension commitments (continued) j.

n. Analysis of amount recognised in statement of total recognised gains and losses (“STRGL”)

FRS 17 balance sheet information (continued) At 31 December 2006

Value £’000

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

Split of fund % of fund

6,599 1,650 8,249 (8,913) (664) 199 (465)

80.0 20.0 100.0

Long term rate of return expected (% pa)

Value £’000

7.7 4.2

3,756 941 4,697 (6,202) (1,505) 452 (1,053)

Split of fund % of fund

Long term rate of return expected (% pa)

80.0 20.0 100.0

7.7 4.2

In calculating the liabilities of the Plans, the following financial assumptions have been used: At 31 December 2006

At 31 December 2005

5.0% pa 4.4% pa 2.9% pa 2.9% pa

4.8% pa 4.2% pa 2.7% pa 2.7% pa

Deferred pensions are re-valued to retirement age in line with the RPI assumption of 2.9% pa (2005: 2.7% pa) unless otherwise prescribed by statutory requirements or the Plan Rules. l.

Analysis of the amount charged to operating profit

Group Current service cost Total operating charge

Year ended 31 December 2006 £’000

Year ended 31 December 2005 £’000

2,395 2,395

1,964 1,964

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

Year ended 31 December 2006 £’000

54

Veolia Water UK Plc Annual Report & Accounts 2006

1,654 (2,693) (1,039)

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

1,152 (1,035) 117

Year ended 31 December 2005 £’000

822 (836) (14)

Year ended 31 December 2005 £’000

(4,790)

(3,430)

(2,394) 1,501 117 659 (4,907)

(1,964) 1,657 (14) (1,039) (4,790)

Year ended 31 December 2006 £’000

Year ended 31 December 2005 £’000

(1,505)

(987)

(51 1 ) 458 33 861 (664)

(424) 355 2 (451) (1,505)

p. History of experience gains and losses Year ended 31 December 2006 £’000

m. Analysis of the amount credited to other finance income

Group Expected return on pension scheme assets Interest on pension scheme liabilities Net income/(expense)

1,074 300 (715) 659

Year ended 31 December 2006 £’000

The present value of pension liabilities are estimated by discounting pension commitments, including salary growth, at an AA corporate bond yield.

Discount rate Salary growth RPI Pension-in-payment increases

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 profit/(loss) recognised in STRGL

Year ended 31 December 2005 £’000

o. Movement in deficit during the year

k. Assumptions

Group and Company

Year ended 31 December 2006 £’000

At 31 December 2005

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

Year ended 31 December 2005 £’000

1,074 5%

1,654 11%

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

300 1%

0%

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

659 2%

Veolia Water UK Plc Annual Report & Accounts 2006

(1,039) (5%)

55

Notes to the financial statements (continued)

p. History of experience gains and losses (continued) Year ended 31 December 2006 £’000

Year ended 31 December 2005 £’000

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

422 5%

495 11%

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

669 8%

0%

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

861 10%

(451) (7%)

Supplementary pension disclosures under FRS 17 for the Non Executive Directors Plan q. Movement in surplus during the year Year ended 31 December 2006 £’000

Group Deficit in scheme at the beginning of the year Current service cost Contributions Other financial income Actuarial loss Deficit in scheme at end of the year Deferred tax Actuarial loss

Year ended 31 December 2005 £’000

(1,144) 131 (57) (30) (1,100) 330 (770)

-

34. Tendring Hundred Water Services Limited unbilled measured income error During 2006 one of the Group subsidiaries, Tendring Hundred Water Services Limited, discovered an error in their estimate of unbilled measured income. As a consequence, Tendring Hundred Water Services Limited submitted to Companies House a Supplementary Note to the Annual Report and Financial Statements for the year ended 31 December 2005.

The change in the financial statements was communicated to Ofwat and the Group has therefore decided to adjust its results for 2005 in respect of this matter.

The effect of this restatement is to increase the Group profit and loss reserves, as at 31 December 2005, by £1.5m.

35. 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.

36. 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 Annual Report & Accounts 2006