Veolia Water UK Annual Report 2008 by Veolia Water

Veolia Water UK Plc Annual Report 2007/08

Contents

Directors and Officers

Chairman’s Statement

Corporate Responsibility

Directors’ Report

Independent Auditors’ Report to the Members

Consolidated Profit and Loss Account

Consolidated Statement of Total Recognised Gains and Losses

Company Balance Sheet

Consolidated Cash Flow Statement

Notes to the Consolidated Cash Flow Statement

Notes to the Financial Statements

Consolidated Balance Sheet

This report is for the 15 months period ended 31 March 2008

Veolia Water UK Plc Annual Report 2007/08

Directors and Officers

Directors

J S Gummer F Devos D W Alexander J C Banon R A Bienfait M J E Butcher C Roger-Lacan J D Mallet O M Bret E Petit P R L Guitard

(Chairman) (Appointed 13 December 2007, Chief Executive Officer from 1 January 2008) (Managing Director â&#x20AC;&#x201C; up to 31 December 2007)

(Resigned 19 May 2008) (Appointed 27 September 2007) (Appointed 2 October 2008) (Appointed 7 July 2008) (Appointed 7 July 2008)

Company Secretary K W Taylor M J E Butcher

(Resigned 31 March 2008) (Appointed 31 March 2008)

Registered Office

37-41 Old Queen Street London SW1H 9JA

Auditors

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

Registered Number 2127283

Veolia Water UK Plc Annual Report 2007/08

Chairman’s Statement

Rt Hon John Gummer MP Chairman, Veolia Water UK Plc 23 December 2008

I am pleased to report that the period January 2007 to March 2008 showed strong performance for Veolia Water UK plc. Consolidated turnover increased to £355.7m and group operating profit increased to £88.4m, for the fifteen month period to March 2008. In November 2007 we acquired elements of the UK non-regulated business of Thames Water. This acquisition means we are now the UK’s second largest provider of outsourcing solutions to the water industry. We now operate in the UK’s four capital cities.

Three Valleys Water achieved sixth place, its highest ever position.

We are proud that Veolia Water UK maintained its position as a leading water company in the UK in terms of corporate responsibility performance and management. Veolia Water UK was again ranked in the top band (Platinum Ranking) of the Sunday Times’ ‘Top 100 Companies that Count’ (based on Business in the Community’s 2007 Corporate Responsibility Index).

2007/08 was a period of increased planning for the water companies, as they prepared and consulted the public on their 25-year Strategic Direction Statements and draft Water Resource Management Plans. These long-term plans will serve as context for the 2010-2015 and future business plans.

The operational performance of our regulated water supply businesses in 2007/8 was strong. All three companies met their targets for customer service performance, leakage, and drinking water quality. Tendring Hundred Water was again ranked industry leader in Ofwat’s Overall Performance Assessment of delivery of service to customers, while

Veolia Water UK Plc Annual Report 2007/08

Both Three Valleys Water and Tendring Hundred Water acted during the year to remedy errors uncovered in data reported to Ofwat. In 2007 Three Valleys Water uncovered some mis-reporting of non-financial data; in 2006 Tendring Hundred Water uncovered an error in the calculation of measured income accrual. Both companies reported the errors immediately to Ofwat and abated prices to their customers.

The strategy of the regulated businesses for the remaining two years of the current AMP period is to demonstrate good performance in all the regulatory indicators, provide excellent customer service and maintain their leading position in the sector. The price limits set by Ofwat for the five years to 31 March 2010 are funding programmes to double pipe network renewals, increase substantially household meter

penetration, 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, particularly for the water-stressed area of Folkestone and Dover Water. 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 minimised.

Veolia Water Outsourcing, continues to work in partnership with industry to provide customised, environmentally aware, cost effective water processing, recycling and wastewater management solutions. Veolia Water Operations Ireland provides outsourced waste and waste water solutions to local municipalities in the Republic of Ireland and has secured a number of new contracts during the period.

We are now the UKâ&#x20AC;&#x2122;s second largest provider of outsourcing solutions to the water industry

Finally I would like to thank the management teams and all employees for their role in contributing to the Groupâ&#x20AC;&#x2122;s success and for their professionalism and commitment during the period.

Our non-regulated businesses have also performed well in 2007. The strategy of Veolia Water Outsourcing is to serve both existing and potential new clients in the municipal, commercial and industrial sectors. We aim to enhance the service experienced by customers, reduce costs, improve efficiency and manage operational risk. Veolia Water Outsourcing will seek to develop opportunities in these markets where it can deploy the vast array of innovations and proven technology of its global parent, Veolia Environnement SA and the skills of the talented pool of Veolia employees. Veolia Water Industrial Outsourcing, part of

Veolia Water UK Plc Annual Report 2007/08

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 Review 2008 at www.veoliawater.co.uk. This contains information on performance primarily in the period April 2007 to March 2008.

Benchmarking

In the UK, Veolia Water UK PLC is recognised as a leading water company in terms of corporate responsibility performance and management. In 2008 it again achieved leading status (Platinum band) in Business in the Community’s Corporate Responsibility Index, published in the Sunday Times as the ‘Top 100 Companies that Count’. 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 integrated management system of Folkestone & Dover Water Services Limited also meets the requirements of ISO 14001 (environmental management), and OHSAS 18001 (occupational health management). The environmental management system of Veolia Industrial Water Outsourcing Limited is certified to the ISO 14001 standard, as is the system at a Three Valleys Water Plc site; more sites will be certified in 2008. Tendring Hundred Water Services Limited is working to align its 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.

Veolia Water UK Plc Annual Report 2007/08

90%

We aim to have 90% of our 170,000 customers in the Folkestone area metered by 2015.

3.3

million

We provided drinking water of the highest quality to over 3.3 million people in 2007.

Platinum Veolia Water UK was again ranked in the top band (Platinum Ranking) of the Sunday Times’ ‘Top 100 Companies that Count’ (based on Business in the Community’s 2007 Corporate Responsibility Index).

Performance Our business

Our goal is to manage water resources to preserve their social, ecological and economic value and to meet our customers’ expectations in terms of the provision of water and related services. We do this by balancing the demand for water against the availability of water resources in the areas where we operate in south-east England, while protecting water resources and the environment generally. Veolia Water Industrial Outsourcing 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 regulated water 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 and 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

Veolia Water UK Plc Annual Report 2007/08

a landmark ruling in 2006. This will enable the company to meter customers compulsorily; it aims to have 90% of its 170,000 customers metered by 2015. Leakage All three regulated water companies achieved leakage rates better than their targets set by Ofwat (the Water Services Regulation Authority), the water industry’s economic regulator. Tendring Hundred Water Services Limited continues to have the lowest level of leakage per property in the industry. Customer service Ofwat assesses companies’ overall delivery of service to customers annually. In 2007/8 Tendring Hundred Water Services Limited was again awarded first place amongst all 22 water supply companies in England and Wales. This is the sixth time in seven years that the Company has led the Overall Performance Assessment ranking. Three Valleys Water Plc was ranked 6th in the industry, its highest position ever; Folkestone and Dover Water Services Limited was ranked 19th, mainly as a result of its water resource issues. 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 2007. The quality of the drinking water we supply to our customers continues to be of a very high standard, with Folkestone and Dover Water Services Limited and Three Valleys Water PLC exceeding the industry average.

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 39% of the workforce, and 22% of managers. Employees registered as disabled make up 0.4%.

During the year 3,193 Veolia Water UK PLC employees received training (some employees were trained more than once), of whom 946 were managers (these figures are for the 2007 calendar 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 2007/8. Work days lost due to work accidents amounted to 657, compared with 431 in 2006/7. Staff turnover Staff turnover decreased slightly to 18% compared to 19.4% for the previous year. Employee consultation Veolia Water UK PLC companies work positively and progressively with trades unions. Every year staff are invited to contribute ideas for the future of the company in an employee survey.

In the community

All Veolia Water UK PLC companies have introduced the personal development system to provide a more structured approach to employee learning and career development.

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

Veolia Water UK Plc Annual Report 2007/08

Training

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 PLCâ&#x20AC;&#x2122;s purpose-built Environment & Education Centre has received several awards for its work with schoolchildren, focussing primarily on water conservation. During the year, more than 17,000 children and adults received advice from staff at the Centre. Our companies engage regularly with their stakeholders about their requirements and expectations, using various means of communication.

17,000

Children and adults encouraged to save water by the Education Centre.

18% Staff turnover.

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 119,500 tonnes, which is an 18% or 27,200 tonne reduction since 1995/96. However this reduction is not associated with reduced energy consumption but rather changes in the mix of fuels used to generate electricity supplied through the public electricity network. Energy consumption per unit of water put into supply has increased over the last six years. This can be attributed to the use of different water sources and to an increased number of energyintensive plants, e.g. 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. Fuel consumption Both Three Valleys Water PLC and Folkestone and 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 obliging and encouraging our contractors to record the amounts they use, recycle and dispose. In 2007/8, we estimate that of the 97,200 tonnes of material excavated by our companies and contractors, 53% or 51,100 tonnes were recycled rather than being sent to landfill, compared to 52% last year. All Veolia Water UK PLC companies have an ongoing target to reduce the amount of waste going to landfill. Biodiversity Our policy is to give particular priority to projects and activities that foster species and habitats which are the subject of Biodiversity Action Plans and are found on our own and adjacent land.

England, RSPB, Friends of Stockers Lake, the Herts & Middx Wildlife Trust, and the Wraysbury Lakes Liaison Group. These partnerships help the company to enhance and manage biodiversity on its sites as well as manage the needs of the different groups that use the facilities.

53%

of excavated waste recycled.

100%

of water treatment waste recycled.

Folkestone and Dover Water Services Limited works with the White Cliffs Countryside Project, Natural England and the RSPB to enhance and protect the countryside in south east Kent. 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 including Natural

Veolia Water UK Plc Annual Report 2007/08

Directors’ Report

The Directors submit their report and the audited financial statements of Veolia Water UK PLC for the 15 month period ended 31 March 2008. During the period, the company changed its financial year end from 31 December to 31 March to align with the regulatory year end of water companies. Comparative figures are shown for the twelve months ended December 2006.

Group turnover increased by 38.7% during the period primarily due to the extended reporting period in 2008 and to £32.1m from newly acquired businesses and the impact of tariff changes within the regulated water businesses.

Principal activities

Group operating profit increased by 33.7% compared to 2006 to £88.4m, predominately due to the extended reporting period as well as the improved performance in the regulated businesses.

Dividends and transfers to reserves

Profit before tax at £88.4m was 50.6% lower than 2006. The 2006 value included non recurring items such as the profit on the sale of our interests in Southern Water.

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.

The consolidated profit after taxation and minority interests amounted to £71.6m (2006 restated: £160.4m). A dividend of £29.0m has been paid during the period (2006: £123.9m). The Directors do not propose a final dividend period ended 31 March 2008. A retained profit of £26.8m will be transferred to reserves.

Profit after tax decreased by 54.8% in the period to £72.9m. As reported above the prior year higher amount 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 and joint

Review of business and future developments

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

2008 £’000 15 mths

2006 £’000 12 mths

Change %

Group turnover Operating profit Profit before tax Profit after tax Shareholders’ funds Net debt Capital expenditure

355,666 88,443 88,382 72,874 340,679 157,590 147,612

256,390 66,075 178,879 161,155 313,612 78,385 90,438

38.7 33.7 -50.6 -54.8 8.6 101.0 63.2

Veolia Water UK Plc Annual Report 2007/08

ventures) remained broadly in line with that incurred in 2006. Equity dividends paid during the period were £29.0m compared to £123.9m in 2006. Net debt increased from £78.4m at the end of 2006 to £157.6m at 31 March 2008. The group acquired the Thames Water Services Ltd in November 2007, a company that held the interest of some of Thames Water’s UK non-regulated activities. Capital expenditure excluding acquisitions for the fifteen months to March 2008 was £135.3m net of contributions from third parties, compared to £90.4m for the previous year. The main factor behind the increase excluding a £27m effect of a longer period was the increase of the rate of main renewals at Three Valleys Water PLC. The Group will continue to invest in and manage its long-term interests in the water industry in the United Kingdom and Ireland.

Principal risks and uncertainties Economic and regulatory risk

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 Groupâ&#x20AC;&#x2122;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.

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 house building in our operating regions, these factors place pressures on the supply and demand balance, heightening the risk of having insufficient water to supply customers. 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.

Threats of terrorism

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

Environmental and water quality risk

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. Failure to provide an uninterrupted water supply fit for consumption could result in significant public health issues, environmental damage, loss of reputation and fines. 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 regulated water companies currently operate as regional monopolies of water supply to all but large non-household customers. 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 non-household customers, entrants can apply for licences to supply water to

Veolia Water UK Plc Annual Report 2007/08

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 ranges from an injury resulting in the loss of working days to an incident leading to compensation payments for negligence. The Group has a dedicated Health and Safety team who work towards identifying and mitigating these risks.

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 companiesâ&#x20AC;&#x2122; 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.

Liquidity risk

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 30.

Credit risk

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.

Pension arrangements

The Group is committed to maintaining fair and sustainable pension arrangements. For new employees, we offer a choice of defined contribution pension arrangements under the Veolia UK Pension Plan, in which the Group contributes double the contributions made by employees.

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.

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 period was £455,000 (2006: £702,000).

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.

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

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 triennial valuation will be eliminated within 10 years (based on financial assumptions applicable at the last triennial valuation dated 31 December 2004). 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 triennial valuation will be eliminated within 10 years (based on financial assumptions applicable at the last triennial valuation dated 31 December 2005).

Research and development

The Group’s two defined benefit pension schemes have been closed to new

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

Veolia Water UK Plc Annual Report 2007/08

New accounting standards

Corporate responsibility

A summary of our approach to and our performance in Corporate Responsibility is detailed on pages 6 to 9.

Creditor payment policy

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. Trade creditors (excluding inter-group) at 31 March 2008 represent 31 days (2006: 28 days) of purchases during the year for the Group.

Market value of land and buildings

The major part of land and buildings included within tangible fixed assets are used for the purpose of providing potable

water to the consumer. A significant portion of the Group’s buildings and installations are highly specialised and have a market value only in the context of the provision of a potable water supply.

Charitable and political donations

Donations for charitable purposes made by Group companies during the period amounted to £131,000 (2006: £136,000). No political contributions were made during the period.

Employee information

Group companies consult their staff on matters of concern in the context of their employment. All Group companies continued to carry out their obligations arising from the Health & Safety at Work Act 1974 through consultative committees consisting of management and employee representatives. The Group gives every consideration to applications for employment from disabled persons where the requirements of the job may be covered adequately by a handicapped or disabled person. With regard to existing employees and those who have become disabled during the year, the Group has continued to examine ways and means of providing training and career development wherever appropriate.

During the year, the policy of providing employees with information about the group has been continued through the use of the intranet and newsletters in which employees have also been encourage to present their suggestions and views. Regular meetings are held between local management and employees to allow a free flow of information and ideas.

Directors and their interests

The Directors of the Company who served during the period were: J S Gummer (Chairman) D W Alexander (Managing Director up to 31 December 2007) F Devos (Appointed 13 December 2007, Chief Executive Officer from 1 January 2008) J C Banon R A Bienfait M J E Butcher C Roger-Lacan (Resigned 19 May 2008) J D Mallet (Appointed 27 September 2007) O M Bret (Appointed 2 October 2008)

P R L Guitard (Appointed 7 July 2008) 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

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

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.

E Petit (Appointed 7 July 2008)

Veolia Water UK Plc Annual Report 2007/08

Auditors

The Company’s auditors are Ernst & Young LLP. A resolution to reappoint Ernst & Young LLP as auditors will be put to members at the next Annual General Meeting. By order of the Board

R A Bienfait Director 23 December 2008

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; • state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

Veolia Water UK Plc Annual Report 2007/08

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.

Independent auditors’ report to the members of Veolia Water UK Plc

We have audited the group and parent company financial statements (the “financial statements”) of Veolia Water UK plc for the 15 month period ended 31 March 2008 which comprise the Consolidated Profit and Loss Account, the Consolidated Statement of Total Recognised Gains and Losses, the Consolidated and Company Balance Sheets, the Consolidated Cash Flow Statement and the related notes 1 to 33. These financial statements have been prepared under the accounting policies set out therein. This report is made solely to the company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors

The directors’ responsibilities 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) are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We read other information contained in the Annual Report, and consider whether it is consistent with the audited financial statements. This other information comprises only the directors’ report, the Chairman’s Statement and the Corporate Responsibility Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

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 whether in our opinion the information given in the directors’ report is 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.

Veolia Water UK Plc Annual Report 2007/08

Basis of audit opinion

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s and company’s circumstances, consistently applied and adequately disclosed.

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 March 2008 and of the group’s profit for the 15 month period then ended; • the financial statements have been properly prepared in accordance with the Companies Act 1985; and

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.

• the information given in the directors’ report is consistent with the financial statements.

Veolia Water UK Plc Annual Report 2007/08

Ernst & Young LLP Registered auditor London 23 December 2008

Consolidated Profit and Loss Account 15 month period

Year ended

ended 31 March 2008

31 December 2006

Notes

£’000

Turnover (including share of joint ventures) - Existing 334,261 - Acquisition 32,064 2 366,325 Less: Share of joint ventures (10,659) Group turnover 355,666 Cost of sales (216,013) Gross profit 139,653 Administrative expenses (66,197) Other operating income 3 14,987 Group operating profit 4 - Existing business 89,847 - Acquisitions after £0.8m (2006: £nil) goodwill amortisation (1,404) Group operating profit 88,443 Share of operating profit in joint ventures 1,640 Share of operating profit in associate 41 Income from associates and dividends – 90,124 Profit on the disposal of fixed assets 4,887 Profit on the disposal of investments 5 – Total operating profit 95,011 Net interest payable and similar charges 8 (9,382) Other finance income 9 2,753 Profit on ordinary activities before taxation 88,382

£’000

256,390 – 256,390 – 256,390 (156,962) 99,428 (41,652) 8,299 66,075 – 66,075 – 17,445 800 84,320 – 113,561 197,881 (21,155) 2,153 178,879

(15,508)

(17,724)

Profit on ordinary activities after taxation Equity minority interests Non-equity minority interests

72,874 (1,238) (5)

161,155 (727) (5)

Retained profit for the period

71,631

Tax on profit on ordinary activities

160,423

All material activities relate to continuing operations. The notes on pages 24 to 67 form part of these financial statements.

Veolia Water UK Plc Annual Report 2007/08

Consolidated Statement of Total Recognised Gains and Losses

15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

70,590 1,032 9 71,631

155,439 – 4,984 160,423

Profit for the period - Group - Joint ventures - Associates Profit for the period attributable to members of the parent company Actuarial (loss) / gain - Group - Associate Deferred tax arising on Group actuarial gain/(loss) Share based payment Total gains recognised for the period Prior year adjustment on the full adoption of FRS20 Total gains recognised since last annual report

Veolia Water UK Plc Annual Report 2007/08

(21,742) – 5,792 103 55,784 – 55,784

1,230 2,056 (370) –

163,339 (135) 163,204

Consolidated Balance Sheet

Notes

Restated

31 March 2008

31 December 2006

£’000

Fixed assets Intangible assets 12 44,640 Tangible assets 13a 634,904 Investments in joint ventures - Share of gross assets 218,699 - Share of gross liabilities (216,733) - Goodwill arising on acquisition 9,096 14 11,062 Investments in associate 14 2,148 692,754 Current assets Stocks 16 2,867 Debtors 17 146,463 Cash at bank and in hand 7,878 157,208 Creditors: amounts falling due within one year

198 571,401 15 – – 15 – 571,614 1,057 199,436 583 201,076

(206,180)

(155,110)

Net current (liabilities) /assets Total assets less current liabilities Creditors: falling due after more than one year 19 Provisions for liabilities and charges 20 Deferred tax 20 Net pension liability 31 Net assets

(48,972)

45,966

643,782 (236,615) (4,579) (40,859) (21,050) 340,679

617,580 (242,178) (5,806) (48,579) (7,405) 313,612

500 7,649 327,862

500 7,649 301,078

336,011 4,630 38

309,227 4,347 38

340,679

313,612

Capital and reserves Called up share capital 24 Other reserves 25 Profit and loss account 25 Equity shareholders’ funds 27 Equity minority interests 23 Non-equity minority interests 23

The notes on pages 24 to 67 form part of these financial statements. The financial statements on pages 17 to 67 were approved by the Board of Directors on 23 December 2008 and were signed on its behalf by:

F Devos Director

R A Bienfait Director Veolia Water UK Plc Annual Report 2007/08

Company Balance Sheet Notes

31 March 2008

31 December 2006

£’000

Fixed assets Tangible assets 13b 5,015 Investments 14 45,854

5,216 45,854

50,869

51,070

Current assets Debtors 17 274,947 Cash at bank and in hand – 274,947 Creditors: amounts falling due within one year

(70,992)

240,892 59 240,951 (52,017)

Net current assets

203,955

188,934

Total assets less current liabilities

254,824

240,004

Creditors: amounts falling due after more than one year 19 Provisions for liabilities and charges 20 Net pension liability 31 Net assets Capital and reserves Called up share capital 24 Other reserves Profit and loss account 25 25 Equity shareholders’ funds 27

(6,925) (1,313) (629)

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

245,957

224,260

500

245,457 – 245,957

223,760 – 224,260

F Devos Director 20

R A Bienfait Director Veolia Water UK Plc Annual Report 2007/08

Consolidated Cash Flow Statement Notes*

15 month period

Restated

ended

Year ended

31 March 2008

31 December 2006

£’000

148,402

133,842

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 Taxation paid

9,361 (13,679) (1,375) 1,225 (888)

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

(5,356)

(6,419)

(26,758)

(18,379)

(141,083) 12,260 4,961

(79,529) 9,489 1,420

(60,146) 11,709 – –

– – 161,373 5,704

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

(172,299)

98,457

Equity dividends paid

(29,000)

(123,900)

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

(85,011)

83,601

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

85,319

(55,425)

Net cash outflow from financing

(4,435)

(6,556)

(Decrease) / increase in cash

(4,127)

21,620

Capital expenditure and financial investment Purchase of fixed assets Contributions to fixed assets received Disposal of fixed assets Acquisitions and disposals Purchase of subsidiary undertakings Net cash acquired with subsidiary undertakings Sale of investment in associate Sale of other investments

*Notes to the consolidated cash flow statement are on pages 22 and 23.

Veolia Water UK Plc Annual Report 2007/08

Notes to the Consolidated Cash Flow Statement a.

Reconciliation of operating profit to net cash flow from operating activities 15 month period ended 31 March 2008

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

£’000

88,443 79,711 (450) 752 187 (203) (44,562) 22,139 2,385 148,402

Year ended 31 December 2006 £’000

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

Analysis of cash flows for headings netted in the consolidated cash flow statement

15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

Management of liquid resources Decrease in cash on short-term deposit Decrease / (increase) in short-term loans due from group undertakings Net cash inflow/(outflow) from management of liquid resources Financing Decrease in financing of assets operated by other parties Decrease in capital elements of finance leases Non cash movement in bond liability Debentures Net cash outflow from financing

– 85,319

437 (55,862)

85,319

(55,425)

(1,551) (2,998) 126 (12)

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

(4,435)

(6,556)

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 2007/08

Notes to the Consolidated Cash Flow Statement c.

Analysis of net debt Acquired

31 December 2006

At Cash flow

during the period

31 March 2008

£’000

11,709 -

7,913 (35)

Net funds: Cash at bank and in hand 583 (4,379) Bank overdrafts (287) 252 Liquid resources: Loans to parent and other group undertakings 296 (4,127) 147,058 (109,099) Debt: Bond (5.875% guaranteed notes) (196,069) (126) Finance leases (including sale and leaseback) (9,949) 2,998 Debentures (59) 12 Financing of assets operated by third parties (19,662) 1,551 (225,739) 4,435 Net debt (78,385) (108,791)

11,709 17,877

7,878 55,836

- - - - -

(196,195) (6,951) (47) (18,111) (221,304)

29,586

(157,590)

Reconciliation of net cash flow to movement in net debt

15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

(Decrease) /increase in overdraft in the period Cash (outflow) /inflow from liquid resources – parent Cash inflow from liquid resources - acquired loan & cash Cash inflow from decrease in debt and lease financing Movement in net debt in the period

(4,127) (109,099) 29,586 4,435 (79,205)

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

Opening net debt

(78,385)

(161,986)

Closing net debt

(157,590)

(78,385)

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 1.

Accounting policies

(a)

Basis of accounting The financial statements have been prepared under the historical cost convention in accordance with applicable UK accounting standards, except for the treatment of certain grants and contributions, in accordance with the Companies Act 1985.

The Company has changed its accounting reference date from December to March.

(b)

New accounting standards Share-based payment UITF Abstract 44, ‘FRS 20 – Group and treasury share transactions’, was early adopted for the 15 months period ended 31 March 2008. UITF Abstract 44 provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options over a parent’s shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. This adoption of this interpretation is a change in accounting policy resulting in a cumulative credit of £117,000 to the profit and loss reserve.

(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. Interest in an associate acquired has been accounted for using the equity method. Interest in joint ventures are accounted for using the gross equity method. As permitted by section 230 of the Companies Act 1985, the parent company’s profit and loss account has not been included in the financial statements.

(d)

(e)

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. Interest and dividends Bank and short term deposit interest receivable is dealt with on an accruals basis.

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements (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 13a.

(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.

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements (k)

Tangible fixed assets and depreciation Tangible fixed assets comprise: Infrastructure assets – mains and associated underground pipework. Other assets – land and buildings, operational structures, fixed plant, motor vehicles and mobile plant. Infrastructure assets comprise a network of systems. Expenditure on infrastructure assets, including renewals is treated as an addition and included at cost after deducting grants and contributions. The depreciation charge for infrastructure assets is the estimated level of annual expenditure required to maintain the operating capability of the network which is based on 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

(l)

40 – 100 years 15 – 100 years 3 – 30 years 3 – 10 years

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

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

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements Where law or accounting standards require gains and losses to be recognised in the statement of total recognised gains and losses, the related taxation is also taken directly to the statement of total recognised gains and losses in due course. The Group has adopted a policy of discounting deferred tax assets and liabilities to reflect the time value of money. Deferred tax assets and liabilities are discounted using a discount rate equivalent to the post tax yield that could be obtained at the balance sheet date on government bonds with similar maturity dates and currencies. The increase or decrease in the discount deducted in arriving at the deferred tax balance is included in the deferred tax charge or credit in the profit and loss account. (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. Installments 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.

(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. Employerâ&#x20AC;&#x2122;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.

(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.

(q)

Comparative figures Certain prior year figures have been restated to conform with the 2008 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.

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 2.

Turnover and segmental analysis

Turnover represents income, net of VAT, from the supply of water and its related activities, arising wholly within the United Kingdom and Ireland. Overseas operations are not considered material. The Directors consider this to be one class of business.

15 month period ended

Year ended

31 March 2008

31 December 2006

Turnover Water supply and related activities: Continuing operations Acquisitions

£’000

334,261 32,064 366,325

256,390 – 256,390

Less joint ventures Group share of turnover

(10,659) 355,666

– 256,390

89,847 (1.404) 88,043

66,075 – 66,075

88,443 1,640 41 90,124

66,075 – – 66,075

Operating profit Water supply and related activities Continuing operations Acquisitions Analysed as follows: Group Share of joint ventures’ operating profit Share of associate operating profit Total operating profit: group and share of joint ventures and associate

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 2.

Turnover and segmental analysis (continued)

15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

Profit on ordinary activities before taxation Water supply and related activities Joint ventures Associate

88,061 302 19

175,506 – 3,373

88,382

178,879

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

327,469 11,062 2,148 (4,668) 336,011

313,612 – – (4,385) 309,227

Other operating income

15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

14,987 14,987

8,299 8,299

Commission, rents and sundry income

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 4.

Group operating profit

This is stated after charging/(crediting): 15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

428 357

199 147

287

41,784 33,095 3,174

33,721 29,226 3,376

Auditors’ remuneration - for audit services - for regulatory returns - non-audit services (Income accrual & DG8 investigation and due diligence on acquisition of Thames Water Services Limited) Depreciation of tangible fixed assets - infrastructure - owned (other) - leased Impairment of tangible 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 - subsidiaries - joint ventures - associates Amortisation of contributions to capital expenditure

- 640 2,861 455 320 752 154 33 (518)

(207) 343 2,337 702 239 12 – – (415)

Exceptional items

15 month period ended

Year ended

31 March 2008

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 – –

108,889 3,854 112,743 818 113,561

–

Minoritity interests’ share of profit on disposal of fixed assets

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 5.

Exceptional items (continued)

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

15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

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

– – –

704 237 941

Directors’ remuneration

15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

1,359

843

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

15 month period ended

Members of defined benefit schemes Retirement benefits are accruing to three Directors (who are not the highest paid Director) under a defined benefits scheme.

Year ended

31 March 2008

31 December 2006

15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

528

276

–

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

Company pension contributions to defined benefits scheme

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 7.

Staff costs

15 month period ended

Year ended

31 March 2008

31 December 2006

Wages and salaries Social security costs Pension costs and other benefits

£’000

58,085 5,105 7,190

36,416 3,103 6,208

70,380

45,727

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

15 month period ended

Water supply and related activities Central services

Veolia Water UK Plc Annual Report 2007/08

Year ended

31 March 2008

31 December 2006

1,901 42

1,222 36

1,943

1,258

Notes to the Financial Statements 8.

Interest receivable and similar income

15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

9,161 184 - 9,345 247 10 9,602

7,478 56 44 7,578 7,578

Interest receivable - Group Undertakings - Bank interest - Other Group interest and similar charges receivable Share of joint ventures’ interest receivable Share of associate interest receivable Total interest receivable Interest payable - 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 Group interest and similar charges payable Share of joint ventures’ interest payable Share of associate interest payable Total interest payable Net interest payable and similar charges

(45) (25) (780) (1,578) (14,817) (309) (17,554) (1,430) - (18,984)

(15) (333) (854) (1,341) (11,874) (244) (14,661) (14,072) (28,733)

(9,382)

(21,155)

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

Other finance income

15 month period ended

Year ended

31 March 2008

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

Veolia Water UK Plc Annual Report 2007/08

17,438 2,254 (14,865) (1,999) (75) 2,753

13,424 1,152 (11,331) (1,035) (57) 2,153

Notes to the Financial Statements 10.

Taxation

15 month period

Restated

ended

Year ended

31 March 2008

31 December 2006

£’000

Taxation relates to the following: - Group Undertakings - Joint ventures - Associate

16,228 (730) 10 15,508

18,325 – (601) 17,724

23,999

20,234

Taxation charge UK corporation tax at 30% (2006: 30%) Over provision in prior years Total current taxation Deferred taxation Net origination and reversal of timing differences for the period Over provision in prior years Effect of decreased tax rate on closing liability/change in tax law Increase in discounting Total deferred taxation Total Group taxation Tax on joint ventures Tax on associate Tax on profit on ordinary activities

Veolia Water UK Plc Annual Report 2007/08

(73)

(908)

23,926

19,326

3,660 304 (9,339) (2,323)

1,076 (138) – (1,939)

(7,698)

(1,001)

16,228

18,325

(730) 10 15,508

– (601) 17,724

Notes to the Financial Statements 10.

Taxation (continued)

Current taxation reconciliation

15 month period ended

Restated Year ended

31 March 2008

31 December 2006

£’000

89,618

175,506

26,885

52,652

Profit on ordinary activities before taxation (excluding joint ventures & associate)

Theoretical tax at UK corporation tax rate of 30% (2006: 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

11.

(30) (73) 947 (3,104) 33 (732) 23,926

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

Dividends

15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

29,000 – 29,000

82,100 41,800 123,900

Interim dividend paid of £58 per share (2006: £164.20 per share) Interim dividend paid of nil (2006: £83.60 per share)

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 12.

Intangible assets

Group

Positive goodwill

Contract costs

Total

£’000

£000

Cost

At 1 January 2007 Additions Acquired (See note 15) At 31 March 2008 Amortisation At 1 January 2007 Charge for the period At 31 March 2008 Net book value At 31 March 2008 At 31 December 2006

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

Veolia Water UK Plc Annual Report 2007/08

246 37,094 –

– – 8,100

246 37,094 8,100

37,340 48 631

8,100

45,440

– 121

48 752

679

121

800

36,661

7,979

44,640

198

–

198

Notes to the Financial Statements 13a.

Tangible assets – Group

Short term

Freehold land,

Mains and other

Vehicles,

leasehold property

buildings and

infrastructure

plant and

reservoirs

assets

machinery

construction

Total

£’000

Group Cost

Assets in course of

At 1 January 2007 82 146,851 502,810 447,809 Additions – 13,504 71,100 35,567 Acquired – 294 – 7,673 Transfers – 1,403 8,487 8,436 Capital contributions – – (12,291) – Disposals – (60) (938) (354) At 31 March 2008 82 161,992 569,168 499,131 Depreciation At 1 January 2007 82 49,538 257,187 252,932 Charge for the period – 4,511 41,784 33,416 Disposals – (5) (938) (335) At 31 March 2008 82 54,044 298,033 286,013 Net book value At 31 March 2008 – 107,948 271,135 213,118 At 31 December 2006 – 97,313 245,623 194,877

33,588 27,441 – (18,326) – – 42,703

1,131,140 147,612 7,967 – (12,291) (1,352) 1,273,076

– – – –

559,739 79,711 (1,278) 638,172

42,703

634,904

33,588

571,401

The net book value of infrastructure assets is stated after the deduction of grants and contributions amounting to £130,513,000 (2006: £118,222,000) in order to give a true and fair view.

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 13a.

Tangible assets – Group (continued)

Included in the above at 31 March 2008 are fixed assets held under finance leases, as follows:

Group

Cost Depreciation Net book value

Freehold land, buildings

Mains and other

Vehicles, plant

and reservoirs infrastructure assets

and machinery

Total

£’000

8,419 (6,773) 1,646

£’000

23,165 (10,244) 12,921

68,708 (64,236) 4,472

100,292 (81,253) 19,039

Included in the above at 31 December 2006 are fixed assets held under finance leases, as follows:

Freehold land, buildings

Mains and other

Vehicles, plant

and reservoirs infrastructure assets

and machinery

Total

£’000

Group £’000 Cost 8,419 Depreciation (6,469) Net book value 1,950

13b.

Tangible assets – Company

Company

23,165 (10,107) 13,058

Short term

68,708 (61,503) 7,205

100,292 (78,079) 22,213

Vehicles, plant

leasehold property

Freehold property

and machinery

Total

£’000

6,658 – 6,658

1,356 68 1,424

8,096 68 8,164

1,674 166

1,124 103

2,880 269

1,840

1,227

3,149

–

4,818

197

5,015

–

4,984

232

5,216

Cost At 1 January 2007 82 Additions – At 31 March 2008 82 Depreciation At 1 January 2007 82 Charge for the period – At 31 March 2008 Net Book Value At 31 March 2008 At 31 December 2006 The leasehold property is the only leased asset held by the Company.

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 14.

Fixed asset investments

Group

2008

2006

£’000

Joint ventures (a) Associate (b) At 31 March 2008 a) Investment in joint ventures

11,062 2,148

15 –

13,210

2008

2006

£’000

At 1 January 2007 Acquired - Net assets - Goodwill Dividends received from joint ventures Share of profits retained At 31 March 2008 Accumulated amortisation of goodwill At 1 January Charge for the period At 31 March 2008 Net book amount at 31 March 2008 Fixed assets Current assets Share of gross assets Liabilities due within one year Liabilities due after more than one year Share of gross liabilities Share of net assets Goodwill Total fixed asset investments

1,987 9,250 11,237 (1,225) 1,186

– – – – –

11,198

–

– (154)

– –

(154)

–

109,582 109,117 218,699

15 – 15

(162,991) (53,742) (216,733)

– – –

1,966 9,096

15 –

11,062

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. The share of net assets above include a loan to a joint venture Sterling Water Seafield Holdings Limited amounting to £17,877,000 at 31 March 2008.

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 14.

Fixed asset investments (continued)

b) Investment in associate

Share of net tangible assets

Goodwill

Total

£000

2,000 – (33) 1,967

2,139 42 (33) 2,148

At acquisition (28 November 2007) Share of profits retained Amortisation of goodwill

139 42 – 181

Company

Undertakings

Other investments

subsidiary

Total

£’000

At 1 January 2007 and 31 March 2008

45,839

45,854

Details of the 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: Name of company Nature of business Type of holding

Proportion of voting rights and shares held

Principal subsidiary undertakings: Water supply and related activities: Veolia Water Capital Funds Ltd * Holding company Ordinary shares (formerly Veolia Water Capital Funds PLC) Three Valleys Water PLC Water supply Ordinary shares Veolia Water Capital Services Ltd Investment company Ordinary shares Veolia Water Projects Ltd Water related activities Ordinary shares General Utilities Holdings Ltd * Holding company Ordinary shares Veolia Water Investment Ltd * Investment company Ordinary shares Veolia Water Industrial Outsourcing Ltd * Water related activities Ordinary shares Tendring Hundred Water Services Ltd Water supply Ordinary shares Ordinary non-voting shares 10% preference shares

Veolia Water UK Plc Annual Report 2007/08

100% 100% 100% 100% 100% 100% 100% 99% 88% 98%

Notes to the Financial Statements 14.

Fixed asset investments (continued)

Name of company Nature of business Type of holding Folkestone and Dover Water Services Ltd Water supply Ordinary shares Ordinary non-voting shares 14% preference shares North Surrey Water Ltd ** Investment company Ordinary shares Ordinary non-voting shares 10% preference shares Veolia Water Enterprise Limited Investment company Ordinary shares Veolia Water Outsourcing Limited Water related activities Ordinary shares Veolia Water Nevis Limited Water related activities Ordinary shares Glen Water (Holding) Limited Waste water services Ordinary shares MUJV Limited General construction Ordinary shares OTW Services Limited Waste recycling Ordinary shares Sterling Water Seafield Holdings Limited Waste water services Ordinary shares Sterling Water (2003) Limited Waste water services Ordinary shares Veolia Water Ireland Ltd * Holding company Ordinary shares Operations shares Veolia Water Operations Ireland Ltd *** Water related activities

Proportion of voting rights and shares held

74% 92% 76% 99% 99% 99% 100% 100% 100% 50% 50% 50% 49% 25%

50% 100%

* held directly by Veolia Water UK PLC. ** following the sale of all the Company’s assets and liabilities to Three Valleys Water PLC on 1 October 2000, the Company’s main activity is to manage its financial resources to maximise returns to the Company’s shareholders. *** held directly by Veolia Water Ireland Limited. All the above companies are incorporated in Great Britain, except Veolia Water Ireland Limited and Veolia Water Operations Ireland Limited, which are incorporated in the Republic of Ireland. Veolia Water Capital Funds Limited is the holding company for the water supply interests of Veolia Water UK PLC.

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 15.

Acquisitions

On 28 November 2007 the group acquired the entire issued share capital of Thames Water Services Limited for a consideration of £60,146,000. The investment in Thames Water Services Limited has been included in the company’s balance sheet at provisional fair values of the company, its subsidiary, joint ventures and its associate undertaking at the date of acquisition.

Book Values

Initial Fair values

Provisional

prior to acquisition

Adjustments

Fair values

£000

Intangible assets 8,100 – Tangible assets 8,173 (206) Stock 6,147 – Debtors 20,993 – Creditors (56,563) (4,259) Provisions (2,294) (2,521) Taxation 1,998 349 Cash 11,709 – Loan payable 18,051 – Share of joint venture assets 1,987 – Share of associate assets 139 – Net assets 18,440 (6,637) Goodwill Consideration Satisfied by: Cash Costs associated with the acquisition

8,100 7,967 6,147 20,993 (60,822) (4,815) 2,347 11,709 18,051 1,987 139 11,803 48,343 60,146 56,071 4,075 60,146

The book values of the net assets and liabilities have been taken from the management accounts and statutory accounts of the subsidiaries, joint ventures and associate undertaking. The fair value adjustments contain some provisional amounts as indicated, which will be finalized in the 2009 financial statements when the detailed investigation has been completed. The fair value adjustments to creditors relate to liabilities not fully reflected in the balance sheet at the date of acquisition. These include retirement provisions of £0.8m, redundancy costs of £1.8m, and £2.0m bonus arrangements. Changes to the taxation balances mainly reflect adjustments to provisions such as pension liabilities and the expected net liabilities from the business acquired.

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 16.

Stocks

Group

31 March 2008

31 December 2006

£’000

887 1,980

217 840

2,867

1,057

Work in progress Raw materials and consumables The Company has no stocks.

17.

Debtors

Group

Company

31 March 2008

31 December 2006

31 March 2008

31 December 2006

£’000

Due within one year Trade debtors 50,288 37,069 1,390 Loans to parent company 55,836 147,058 55,971 Loans to other group undertakings - - 202,731 Amounts due from group undertakings 6,519 1,195 2,455 Other debtors 6,470 5,988 10,532 Prepayments and accrued income 27,350 8,126 1,868 146,463 199,436 274,947

18.

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

Creditors: amounts falling due within one year

Group

Company

Group

Restated

Company

Restated

Notes

31 March 2008

31 December 2006

31 March 2008

31 December 2006

£’000

Bank loans and overdraft 21 – 287 Payments received on account 30,298 11,260 Obligations under finance leases 22 1,203 1,876 Financing of assets operated by other parties 22 1,568 1,644 Trade creditors 19,107 12,091 Loans from group undertakings – – Amounts owed to group undertakings 2,211 3,789 Corporation tax 33,286 28,380 Other taxes and social security 1,944 2,853 Other creditors 17,209 5,544 Accruals and deferred income 99,354 87,386 206,180 155,110 Veolia Water UK Plc Annual Report 2007/08

35 – – – 2,444 32,651 250 28,063 473 1,124 5,952 70,992

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

Notes to the Financial Statements 19.

Creditors: falling due after more than one year

Group

Company

Notes

31 March 2008

31 December 2006

31 March 2008

31 December 2006

£’000

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

– – – – 6,925 – 6,925

– – – – 13,873 117 13,990

Debentures 21 Bonds 21 Obligations under finance leases 22 Financing of assets operated by other parties 22 Corporation tax Accruals and deferred income

47 196,195 5,749 16,572 6,925 11,127 236,615

20. Provisions for liabilities and charges Group

Other provisions

Deferred tax

Insurance

Other

Leasehold property

Total

£’000

2,668 (2,050) 899

1,481 (669) –

5,806 (2,719) 1,492

1,517

812

4,579

Other provisions

Balance at 1 January 2007 48,579 1,657 Amount utilised/released (8,293) – Amount provided 573 593 Balance at 31 March 2008 40,859 2,250

Company

Leasehold

Total incl.

Deferred tax

Other

property

Deferred tax

£’000

Balance at 1 January 2007 Amount utilised/released Amount provided Balance at 31 March 2008

(413) – 116

250 (50) 598

1,481 (669) –

1,318 (719) 714

(297)

798

812

1,313

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 20.

Provisions for liabilities and charges (continued)

Group

Company

31 March 2008

31 December 2006

31 March 2008

31 December 2006

£’000

Accelerated capital allowances 105,263

111,698

(79)

(1,738)

(2,782)

(218)

(444)

103,525 (62,666)

108,916 (60,337)

(297) –

(523) 110

40,859

48,579

(297)

(413)

Other timing differences Undiscounted provision for deferred tax Discount Discounted provision for deferred tax

Group

Company

31 March 2008

31 December 2006

31 March 2008

31 December 2006

£’000

Deferred tax within “Provisions” 48,579 Deferred tax within “Net pension” (3,299) Total deferred tax at 1 January 45,280 Deferred tax (credited)/charged to profit and loss account (8,429) Deferred tax charged/(credited) to statement of recognised gains and losses (5,791) Reclassification of deferred tax on actuarial loss to corporation tax - Deferred tax reclassified from corporation tax 914 Deferred tax acquired 709 Total deferred tax 32,683 Analysed as follows: Deferred tax within “Provisions” 40,859 Deferred tax within “Net pension” (8,176) Total deferred tax 32,683

49,779 (3,713)

(413) (187)

(495) (451)

46,066 (1,001)

(600) 116

(946) 79

370 - (30) - 45,405

(155) - 97 - (542)

267 (600)

48,579 (3,174)

(297) (245)

(413) (187)

45,405

(542)

(600)

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 20.

Provisions for liabilities and charges (continued)

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. £1,517,000 of “Other” provisions represent forecasted costs in excess of contracted value for rechargeable development work in progress. 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 period reflects the partial letting of the property and the element of the onerous lease obligation transferred to a third parties.

21.

Borrowings analysis

Loans and bank overdrafts outstanding at the year end comprise:

Group

Company

31 March 2008

31 December 2006

31 March 2008

31 December 2006

£’000

Amounts repayable within one year Overdrafts 35 287 35 35 287 35 Amounts repayable after one year Debentures 47 59 – Bonds 196,195 196,069 – 196,277 196,415 35 Loans and bank overdrafts are repayable as follows:

– – –

Group

Company

31 March 2008

31 December 2006

31 March 2008

31 December 2006

£’000

Bank loans and overdrafts Repayable: Within one year 35 287 35 Other borrowings Repayable: After five years 196,242 196,128 – 196,277 196,415 35

– –

Veolia Water UK Plc Annual Report 2007/08

–

– –

Notes to the Financial Statements 21.

Borrowings analysis (continued)

Loans not wholly repayable within five years comprise:

Group

31 March 2008

31 December 2006

£’000

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

196,195 47

196,069 59

196,242

196,128

During the period the group repurchased for cancellation debenture stock amounting to £12,000.

22.

Lease and other financial commitments

Obligations under finance leases are payable as follows:

Group

31 March 2008

31 December 2006

£’000

Within one year In the second to fifth years inclusive After five years Obligations for financing of assets operated by third parties are payable as follows:

1,202 5,749 –

1,876 4,998 3,075

6,951

9,949

Group

31 March 2008

31 December 2006

£’000

1,538 4,589 11,983

1,644 5,875 12,143

18,110

19,662

Within one year In the second to fifth years inclusive After five years The Group has no finance lease obligations.

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 22.

Lease and other financial commitments (continued)

The annual levels of commitments under non-cancellable operating leases are detailed in the table below:

Land and buildings

Other

31 March 2008

31 December 2006

31 March 2008

31 December 2006

£’000

Group Operating leases which expire: Within one year 10 8 306 In the second to fifth years inclusive – 15 235 After five years 1,795 248 1,631 1,805 271 2,172

855 3,403 2,227 6,485

Company Operating leases which expire: Within one year – – 6 In the second to fifth years inclusive – – 26 After five years 1,547 248 – 1,547 248 32

6 26 – 32

23.

Minority interests

In the case of holdings in ordinary stock the minority interests are stated as a relevant proportion of net assets. Non-equity interests primarily represent irredeemable preference shares which hold no voting rights.

24.

Share capital

31 March 2008 31 December 2006 £’000 £’000 Authorised 500,000 ordinary shares of £1 each 500 500 Issued, allocated and fully paid 500,000 ordinary shares of £1 each 500 500

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 25.

Profit and loss account and reserves

Group

profit and loss account

other reserves

total reserves

£’000

262,169 35,903 1,230 2,056 (370)

7,649 – – – –

269,818 35,903 1,230 2,056 (370)

300,988

7,649

308,637

As at 1 January 2006 restated Retained loss for the period Actuarial gain – Group Actuarial gain – associate Tax on group actuarial gain As at as previously stated 31 December 2006

£’000

Transfer of share option reserves from creditors As at 1 January 2007 restated

–

301,078

7,649

308,727

Profit for the period Actuarial loss – Group Tax on actuarial loss Share based payment Dividends

71,631 (21,742) 5,792 103 (29,000)

As at 31 March 2008

327,862

Veolia Water UK Plc Annual Report 2007/08

– – – – – 7,649

71,631 (21,742) 5,792 103 (29,000) 335,511

Notes to the Financial Statements 25.

Profit and loss account and reserves (continued)

Company

profit and loss account

other reserves

total reserves

£’000

195,445

–

195,445

As at 1 January 2006 restated

Retained loss for the period Actuarial loss Deferred tax As at 31 December 2006

27,692 890 (267) 223,760

Profit for the period 51,031 Actuarial loss (554) Tax on actuarial loss 155 Shared based payment 65 Dividends (29,000) As at 31 March 2008 245,457 The total amount of goodwill arising on acquisitions written off against Group reserves is £74,483,000. 26.

– – –

27,692 890 (267)

–

223,760

– – – – – –

51,031 (554) 155 65 (29,000) 245,457

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 £51,031,000 (2006 restated : £151,591,000).

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 27.

Reconciliation of movements in equity shareholders’ funds

Group

Restated

Company

31 March 2008

31 December 2006

31 March 2008

31 December 2006

£’000

Profit for the period Other recognised gains /(losses) Deferred tax Share based payment Profit for the year Less dividends

71,631 (21,756) 5,792 117 55,784 (29,000)

Movement in equity shareholders’ funds 26,784 Opening equity shareholders’ funds 309,227 Closing equity shareholders’ funds 336,011

28.

159,803 3,286 (370) 90 162,809 (123,900)

51,031 (554) 155 65 50,697 (29,000)

38,909

21,697

28,314

270,318

224,260

195,946

309,227

245,957

224,260

151,591 890 (267) – 152,214 (123,900)

Share-based payments

Share options in Veolia Environnement SA Share options 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. The share options 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 March 2008 was a44.16 (2006: a58.40) and the range during the period was a42.57 to a63.28. There are no performance criteria to be met before the share options are exercisable. The a/£ exchange rate was a1.327 /£ as at 31 March 2008 with a range during the period of a1.257/£ to a1.506/£. 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, 2002, 2003, 2004 and 2006 are a42.00, a37.53, a22.50, a24.72 and a44.75. The pre tax expense recognised for share based payments in respect of employee services received during the period to 31 March 2008 is £114,000 (2006: £76,326). The closing balance of share option expenses credited to other reserves amounted to £365,576 (2006: £251,576).

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 28.

Share based payments (continued)

Outstanding Options plans at the end of the period (31 March 2008) were as follows:

2007

2006

2004

Grant date

17/07/07

28/03/06

24/12/04

Vesting conditions 4 years service 4 years service

3 years service plus performance conditions for certain plans

Purchase term After 4 years After 4 years

By tranches of 1/3 over 3 years

Strike price (in euros)

24.72

57.05

44.75

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.

2008 number

2008 WAEP

2006

2006 WAEP

(Euroâ&#x20AC;&#x2122;s)

number

(Euroâ&#x20AC;&#x2122;s)

Outstanding as at 1 January (*) 158,200 Granted in the year 2,601 Forfeited/exercised in the period (20,971) Outstanding as at 31 December 139,830 Exercisable as at 31 December 94,491

33.21 33.51 30.65 33.60

128,766 29,100

30.61 44.75

28.27

101,366

157,866

33.21

32.20

(*) Included within this balance are options over 61,566 (2006: 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 March 2008, the weighted average remaining contractual life is 4.15 years (2006: 2.15 years). The estimated fair value of each option granted during the period, calculated using the Black Scholes method is a13.91 (2006 : a14.77). 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.

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 28

Share based payments (continued)

Share price at date of grant Expected volatility Expected life Risk free rate Expected dividend yeild

2007

2006

a57.05 21.75% 6.0 years 4.59% 2.00%

a44.75 22.60% 6.0 years 3.69% 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 a6.56 (2003:a5.09). This value is based on the following underlying assumptions: share price of a25.89 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.

29.

Capital and other commitments

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

Group

Company

31 March 2008

31 December 2006

31 March 2008

31 December 2006

£’000

Contracted 18,417

15,117

–

Other commitments not provided for in these financial statements are:

Group

Company

31 March 2008

31 December 2006

31 March 2008

31 December 2006

£’000

12,288 41

44,109 41

12,288 41

44,150

12,329

Indemnity given against performance bonds 44,109 Letters of credit provided to insurers 41 Closing equity shareholders’ funds 44,150

12,329

Indemnity was provided against third party performance bonds which were issued on behalf of Veolia Water Ireland and other Group undertakings. Letters of credit were provided in respect of all subsidiary undertakings requiring insurance cover in the United Kingdom.

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 30.

Financial instruments and risk management

The Group’s financial instruments comprise borrowings, debentures, cash and liquid resources, and various items, such as trade debtors and trade creditors that arise directly from its operations. The main purpose of these financial instruments is to raise finance for the Group’s operations. It is, and has been throughout the period 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 18, 19, 21 and 22. Total

Floating rate

Fixed rate

financial liabilities

£’000

As at 31 March 2008 As at 31 December 2006

221,314 226,026

6,952 10,236

214,362 215,790

The total liabilities include loans, overdrafts, finance leases, debentures and financing of assets operated by other parties. All financial liabilities and assets are denominated in Sterling. Fixed rate financial liabilities include Guaranteed Loan notes, irredeemable debentures and the financing of assets used by a Group company and operated by other parties.

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 30.

Financial instruments and risk management (continued)

On 13 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 13 July 2026. The issue was guaranteed by Three Valleys Water Plc.

Fixed rate financial liabilities

Weighted average

period for which

interest rate

rate is fixed

Years

As at 31 March 2008 As at 31 December 2006

6.2 6.2

21 21

The weighted average period of fixed rate liabilities was calculated without giving effect to £47,000 (2006: £59,000) 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:

31 March 2008

31 December 2006

£’000

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

2,741 2,564 7,784 208,225 221,314

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

The Group’s financial assets are as follows: Cash Short term deposits Loans to Group Undertakings Listed investments

7,878 – 55,836 – 63,714

583 – 147,058 – 147,641

Loans to Group undertakings bear interest based on relevant LIBOR equivalents. The Group has not adopted FRS 26 Financial instruments: Recognition and measurement. 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.

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 30.

Financial instruments and risk management (continued)

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 March 2008. Long term borrowings – guaranteed notes

Book value £m

Fair value £m

195

208

Other than the fixed rate liability in respect of the financing of assets by Three Valleys operated by other parties, the fair values calculated by market interest rates of the financial instruments are not materially different from book values.

31.

Pension commitments

The Group operates two defined benefit pension schemes; the Veolia Water Supply Companies’ Pension Plan (VWSCPP) and the Veolia UK Pension Plan (VUKPP). Veolia Water Supply Companies’ Pension Plan Until 31 March 1996, the Group’s water subsidiaries participated in The Water Companies’ Association Pension Scheme, which provided benefits based on final pensionable pay. On 1 April 1996 the assets and liabilities of the Group’s water subsidiaries which participated in the Water Companies’ Association Scheme were transferred to a “mirror image” plan called the Veolia Water Supply Companies’ Pension Plan (formerly the Vivendi Water Supply Companies’ Pension Plan) which was closed to new members. This plan continues to provide benefits on a no less favourable basis than those previously provided for existing members of the Scheme. The assets of the plan are held separately to those of the Group, being invested by independent fund managers. Contributions to the Plan are charged to the profit and loss account so as to spread the cost of pensions over the employees’ working lives with the Group. The most recent triennial valuation of the Plan for the Group, determined by an independent qualified actuary, was at 31 December 2004. The valuation was made on the “attained age” funding method. The actuarial valuation made the following assumptions: Rate of investment return Rate of increase in remuneration Rate of pension increase

6.25% (pre-retirement), 5.25% (post retirement) 4.25% 2.75%

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 31.

Pension commitments (continued)

Veolia Water Supply Companies’ Pension Plan (continued) The valuation as at 31 December 2004 stated the market valuation of the Plan’s assets to be £172.0m with a funding level of 95%. Contributions to the Plan over the period ended 31 March 2008 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 period totalling £0.5m (2006: £0.6m). Non Executive Directors Plan A provision of £1.3m (£0.9m after tax) was created in the period in respect of unfunded pension obligations to former employees and non executive directors of some Group companies. Veolia UK Pension Plan A new Scheme was inaugurated as at 1 April 1996, the Générale des Eaux UK Retirement Benefits Scheme. This scheme was merged with the Générale des Eaux UK Pension Plan on 1 April 1998, now known as the Veolia UK Pension Plan was open to all employees. The Plan provides a selection of benefits based upon final pensionable pay or money purchase according to the members’ wishes. The final salary section of the plan was closed to new members on 30 September 2004. Contributions to the Veolia UK Pension Plan over the period ending 31 March 2008 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 March 2008 stated the market valuation of the Plan’s assets was £7,027,000 and showed a deficit funding level of 89%. Total pension charge including defined contributions scheme for the period ended 31 March 2008 was £5.2m (2006 – £5.1m).

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 31.

Pension commitments (continued)

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 £4,168,000. b)

FRS 17 balance sheet information

At 31 March 2008 At 31 December 2006

Long term rate of

Value

Group Equities Bonds Gilts/cash

Split of fund

return expected

Value

% of fund

(% pa)

£’000

% of fund

91,756 66,589 71,234

40.0 29.0 31.0

7.9 6.8 4.4

97,716 71,132 71,195

40.7 29.6 29.7 100.0

229,579

100.0

240,043

(248,869)

(241,092)

Actuarial deficit Surplus restriction

(19,290) (2,127)

(1,049) (3,525)

(21,417) 5,997

(4,574) 1,372

Actuarial deficit after tax (15,420)

(3,202)

Value

£’000

% of fund

751 545 583

40% 29% 31%

Fair value of assets Present value of scheme liabilities

1,879

Split of fund

Long term rate of Value

Split of fund

(% pa)

£’000

% of fund

7.9 6.8 4.4

622 453 450

40.8 29.7 29.5

100%

1,525

100.0

(1,918)

return expected

(1,484)

Actuarial (deficit) / surplus Deferred tax

(39) 11

41 (12)

Actuarial surplus after tax

(28)

(% pa)

7.7 5.2 4.2

At 31 March 2008 At 31 December 2006

Company Equities Bonds Gilts/cash

Long term rate of return expected

£’000

Fair value of assets Present value of scheme liabilities

Recognisable deficit Deferred tax

Split of fund

Veolia Water UK Plc Annual Report 2007/08

Long term rate of return expected (% pa)

7.7 5.2 4.2

Notes to the Financial Statements 31.

Pension commitments (continued)

Assumptions

The present value of pension liabilities are estimated by discounting pension commitments, including salary growth, at an AA corporate bond yield. In calculating the liabilities of the Plans, the following financial assumptions have been used:

At 31 March 2008 At 31 December 2006

Group and Company Discount rate 6.1% pa 5.0% pa Salary growth 5.1% pa 4.4% pa Retail price index 3.5% pa 2.9% pa Pension-in-payment increases 3.5% pa 2.9% pa Deferred pensions are re-valued to retirement age in line with the RPI assumption of 3.5% pa (2006: 2.9% pa) unless otherwise prescribed by statutory requirements or the Plan Rules. d)

Analysis of the amount charged to operating profit

15 month period ended

Year ended

31 March 2008

31 December 2006

Group Current service cost

£’000

3,630

3,261

Total operating charge

3,630

3,261

Analysis of the amount credited to other finance income

15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

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

17,438 (14,865)

Net return

(2,573)

Veolia Water UK Plc Annual Report 2007/08

13,424 (11,331) 2,093

Notes to the Financial Statements 31. Pension commitments (continued)

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

15 month period ended

Year ended

31 March 2008

31 December 2006

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

£’000

19,319 – (1,398) 2,033

2,112 (242) (1,323) 52

Actual gain/(loss) recognised in STRGL

19,954

599

Movement in (deficit)/surplus during the period

15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

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

(4,574)

(7,585)

(3,630) 4,168 2,573 (19,954)

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

Deficit in scheme at end of the period

(21,417)

(4,574)

Company Surplus in scheme at beginning of the period Movement in period: Current service cost Contributions Other financial income Actuarial gain

(55) 71 22 (118)

(40) 33 16 29

Surplus in scheme at end of the period

(39)

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 31.

Pension commitments (continued)

History of experience gains and losses

15 month period ended

Year ended

31 March 2008

31 December 2006

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

£’000

19,319 8%

2,112 1%

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

– –%

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

19,954 8%

599 0%

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

140 7%

5 0%

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

– –%

24 2%

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

118 6%

29 2%

Veolia Water UK Plc Annual Report 2007/08

(242) 0%

Notes to the Financial Statements 31.

Pension commitments (continued)

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

Contributions

Company contributions under the Veolia UK Pension Plan were reviewed following the actuarial valuation as at 31 December 2005. Contributions made in the 15 month period to 31 March 2008 were £2,665,000.

FRS 17 balance sheet information

Value

Group Equities Gilts

At 31 March 2008 At 31 December 2006

Long term rate of

Split of fund

return expected

£’000

% of fund

(% pa)

£’000

% of fund

19,555 4,897

80.0 20.0

7.7 4.2

17,401 4,350

80.0 20.0

100.0

21,751

100.0

(29,605)

(26,659)

Actuarial deficit Deferred tax

(5,153) 1,443

(4,908) 1,472

Actuarial deficit after tax

(3,710)

(3,436)

Fair value of assets Present value of scheme liabilities

24,452

Value

Split of fund

Long term rate of return expected (% pa)

7.7 4.2

At 31 March 2008 At 31 December 2006

Long term rate of

Value

Split of fund

£’000

% of fund

Company Equities Gilts

7,269 1,820

80.0 20.0

Fair value of assets

9,089

Present value of scheme liabilities

(9,924)

return expected

Value

Split of fund

(% pa)

£’000

% of fund

7.9 4.4

6,599 1,650

80.0 20.0

100.0

8,249

100.0

Long term rate of return expected (% pa)

7.7 4.2

(8,913)

Actuarial deficit Deferred tax

(835) 234

(664) 199

Actuarial deficit after tax

(601)

(465)

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 31.

Pension commitments (continued)

FRS 17 balance sheet information (continued)

During the period, as part of the acquisition detailed in note 15, the group opened a new division of the Veolia UK Pension scheme to receive employees from the former Thames Water businesses acquired.

At 31 March 2008 At 31 December 2006

Split of fund

Long term rate of

Value

return expected

Value

Split of fund

return expected

£’000

% of fund

(% pa)

£’000

% of fund

97.0 3.0

6.8 4.4

– –

– – –

100.0

–

(12,725)

–

Group (Veolia Outsourcing) Equities 11,022 Gilts 341 Fair value of assets 11,363 Present value of scheme liabilities Actuarial deficit Deferred tax Actuarial deficit after tax

(1,362) 381 (981)

(% pa)

– – –

Assumptions

Discount rate Salary growth RPI Pension-in-payment increases

At 31 March 2008 At 31 December 2006

6.1% pa 5.0% pa 3.5% pa 3.5% pa

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

Deferred pensions are re-valued to retirement age in line with the RPI assumption of 3.5% pa (2006: 2.9% pa) unless otherwise prescribed by statutory requirements or the Plan Rules.

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 31.

Pension commitments (continued) l)

Analysis of the amount charged to operating profit

15 month period ended

Year ended

31 March 2008

31 December 2006

Group Current service cost

£’000

2,578

2,395

Total operating charge

2,578

2,395

Analysis of the amount credited to other finance income

15 month period ended

Year ended

31 March 2008

31 December 2006

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

£’000

2,016 (1,755)

1,152 (1,035)

Net income

261

117

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

15 month period ended

Year ended

31 March 2008

31 December 2006

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

£’000

1,930 – (1,337)

1,074 300 (715)

Actual profit recognised in STRGL

593

659

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 31.

Pension commitments (continued)

Movement in deficit during the year

15 month period ended

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

Year ended

31 March 2008

31 December 2006

£’000

(4,907)

(4,790)

(2,578) 2,665 261 (593)

(2,394) 1,501 117 659

(5,152)

(4,907)

15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

(664)

(1,505)

(536) 626 175 (436)

(511) 458 33 861

(835)

(664)

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

15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

Group (Veolia Outsourcing) Deficit acquired at 27 November 2008 Movement in period: Current service cost Contributions Other finance income Actuarial loss Deficit in scheme at end of the period

Veolia Water UK Plc Annual Report 2007/08

(485)

–

(223) 240 (6) (888)

– – – –

(1,362)

–

Notes to the Financial Statements 31.

Pension commitments (continued)

History of experience gains and losses

15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

1,930 8%

1,074 5%

Group Difference between the expected and actual return on schemes’ assets: Amount (£’000) Percentage of schemes’ assets Experience gains and losses on schemes’ liabilities: Amount (£’000) Percentage of the present value of the schemes’ liabilities

0 0%

300 1%

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

593 2%

659 2%

15 month period ended

Year ended

31 March 2008

31 December 2006

£’000

787

422

669

Percentage of the present value of the schemes’ liabilities

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

436 4%

861 10%

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

Veolia Water UK Plc Annual Report 2007/08

Notes to the Financial Statements 31.

Pension commitments (continued)

Supplementary pension disclosures under FRS 17 for the Non Executive Directors Plan q)

Movement in surplus during the year

15 month period ended

Year ended

31 March 2008

31 December 2006

Group Deficit in scheme at the beginning of the period Current service cost Contributions Other financial income Actuarial loss

£’000

(1,100) 177 (75) (307)

(1,144) 131 (57) (30)

Deficit in scheme at end of the period Deferred tax

(1,305) 365

(1,100) 330

Actuarial loss

(940)

(770)

32.

Related party transactions

In accordance with the exemption in FRS 8, the Company has not disclosed transactions with other entities, for which 90% or more of the voting rights are controlled by the parent company, Veolia Environnement SA. 33.

Ultimate holding and controlling company

Veolia Environnement SA, a company incorporated in France, is the parent undertaking of the smallest group to consolidate the financial statements of Veolia Water UK PLC, and the ultimate parent and controlling company. Copies of the group financial statements are available from the Head Office at 36-38 avenue Kléber, 75116 Paris, France.

Veolia Water UK Plc Annual Report 2007/08