veolia water uk annual report 2003

Registered Number 2127283

Veolia Water UK PLC

(formerly: Vivendi Water UK PLC)

Annual Report

for the year ended 31 December 2003

VEOLIA WATER UK PLC ANNUAL REPORT FOR THE YEAR ENDING 31 DECEMBER 2003

Contents

Page

Directors and Officers 1

Directors’ Report 2

Independent Auditors’ Report to the Shareholders 8

Consolidated Profit and Loss Account 9

Consolidated Balance Sheet 10

Company Balance Sheet 11

Consolidated Cash Flow Statement 12

Notes to the Consolidated Cash Flow Statement 13

Notes to the Financial Statements 15


1

Directors and Officers Directors The Lord Borrie of Abbots Morton, QC (Resigned as Chairman and Director 25 September 2003) J S Gummer (Appointed Chairman 25 September 2003) J C Banon (Managing Director) R A Bienfait (Appointed 1 January 2004) M J E Butcher F Darley J B Mangion (Resigned 30 November 2003) G Mohr (Resigned 30 June 2003) C Roger-Lacan (Appointed 15 July 2003) Secretary R G Castle Registered Office 37-41 Old Queen Street London SW1H 9JA Auditors Ernst & Young LLP 1 More London Place London SE1 2AF Registered Number 2127283


2

Directors’ Report The Directors submit their report and the audited financial statements of Veolia Water UK PLC for the year ended 31 December 2003. The Company changed its name from Vivendi Water UK PLC on 1 May 2003. Principal activities The principal activities of the Group are the investment in and management of long-term interests in the water industry in the United Kingdom and Ireland. Dividends and transfers to reserves The consolidated profit after taxation and minority interests amounted to £48.0m (2002: £135.8m). An interim dividend of £6.25m has been paid during the year (2002: £7m), and the Directors propose a final dividend of £18.75m (2002: £21.5m) in respect of the year ending 31 December 2003. Retained profits of £21.2m (2002: £107.3m) will be transferred to reserves. Review of business and future developments Turnover at £203.8m for the twelve months compares to £191.7m for the previous year. Profit before tax for the twelve months was £65.8m compared to £155m for the previous year. The previous year’s results include the disposal of the investments in Bristol Water Holdings plc and South Staffordshire Group Plc which realised a pre-tax profit of £92.4m. The Group’s turnover and profit before tax is largely generated by the Group’s regulated water businesses: Three Valleys Water PLC, Tendring Hundred Water Services Limited and Folkestone and Dover Water Services Limited. After excluding the cost of acquiring an associate of £55.9m, net funds before financing of £10.8m were generated during the year. Net funds at 31 December 2003 were £72.6m compared to £117.7m last year. Capital expenditure for the twelve months to December, net of contributions from third parties, was £61.2m, compared to £78.5m for the previous year. During the year the Group continued to develop its activities in the industrial markets with Veolia Water Industrial Outsourcing Limited, formerly Vivendi Water Industrial Outsourcing Limited. On 23rd December 2003 the Company acquired the balance of the share capital of the company from its former joint venture partner, an associate company, Veolia Water Systems Limited. Directors’ Report (continued)


3

Review of business and future developments (continued) Southern Water During the year the Company entered into an agreement with a group of institutional investors led by the Royal Bank of Scotland to acquire an indirect minority interest in Southern Water Services Limited (SWS), a UK water and wastewater operator. This agreement received all the necessary regulatory approvals and closed on 7th May 2003. In February 2003 the Company entered into an agreement with Southern Water Capital Limited (SWC) relating to the acquisition of First Aqua (JVCo) Limited (FA(JVCo)), pursuant to which, Southern Water Investments Limited (SWI), a newly created subsidiary of the Company, acquired FA(JVCo) in accordance with the terms of an agreement dated May 2002 with First Aqua Holdings Limited (FAH) and immediately issued new capital to SWC, which is held by The Royal Bank of Scotland and other investors, such that SWC now holds 80.1% of SWI and the Company holds 19.9%. SWC, which now controls SWS through SWI, granted the Company an option to acquire an additional 5.1% stake in SWI. Pursuant to this agreement, FA (JVCo) also redeemed £374m preferred shares issued to financial investors in March 2002. On April 28th 2003, the UK Competition Commission approved the transaction on the condition that we agree to not hold more than 25% of SWI and to refrain from appointing more than two members of SWI’s board of directors and more than three members of SWS’s board of directors. The agreement with SWC closed on 7th May 2003. The Company has invested £50m in SWI and SWS through ordinary and preference share subscriptions. In addition, in connection with SWS’ issuance of preferred shares to several investors for £220m, Veolia Environnement SA has agreed to grant these investors put options which may require it to purchase the preferred shares held by them after five years. SWC has invested £273m in various equity and loan instruments. The SWI Group completed the refinancing of its bridge facilities through a securitisation of its regulated activities involving the issuance of debt instruments using a “ring-fencing” technique commonly used in financings in the water sector and at the same time implemented a corporate reorganisation to simplify the group structure. Having regard to the equity and non-equity interests held by the Company and the other contractual terms surrounding the Company’s investment in SWI and its subsidiaries, the Company has treated SWI as an associate in its consolidated accounts for the year ending 31st December 2003. Directors’ Report (continued)


4

Research and development In addition to the Group's own research and development activities, the Group's water company subsidiaries are committed to participate in research programmes operated by UK Water Industry Research Limited, which undertakes research nationally into all aspects of water industry operations. The Group also participates in and benefits from research undertaken by other companies within the Veolia Environnement SA Group (formerly Vivendi Environnement SA Group). Expenditure in the year was £646,000 (2002: £506,000). Corporate social responsibility In addition to delivering economic growth, the Directors recognise the importance of achieving high standards of environmental and social performance within the Group. Management of the environmental and social dimensions of the business has been incorporated under the banner of corporate social responsibility. Responsibility for environmental and social performance within each subsidiary lies with each respective Board of Directors. These and the main Board are advised by a Corporate Social Responsibility Advisory Committee. As the Group's policies and programmes develop and are interwoven, it is the Board's intention to comply with the Association of British Insurers' disclosure guidelines on corporate social responsibility. In March 2004 it was announced that the Company had scored 95.89% in the “Business in the Community (BitC) Corporate Responsibility Index 2003”, positioning it fourth overall and making it leader of the water sector. The BitC index provides a framework for comparing the management processes and performance of a range of companies in different sectors. It also acts as a benchmark for companies to assess and compare how they integrate responsible practices throughout their organisation. Details of the Group's environmental and social programme, together with performance and targets, can be found in the Veolia Water UK Environmental and Social Report 2003. Copies of the report may be obtained by writing to the Environment Department, Veolia Water UK PLC, 37-41 Old Queen Street, London SW1H 9JA.


5

Directors’ Report (continued) Creditor payment policy The Directors are aware of the need for timely payment for goods and services received. It is Company policy to settle the terms of payment with suppliers when agreeing terms of business and to pay in accordance with contractual and other legal obligations. The payment policy applies to all payments to creditors for revenue and capital supplies of goods and services. Trade creditors (excluding inter-group) at 31 December 2003 represent 44 days (2002: 34 days) of purchases during the year for the Group. Market value of land and buildings The major part of land and buildings included within tangible fixed assets are used for the purpose of providing potable water to the consumer. A significant portion of the Group’s buildings and installations are highly specialised and have a market value only in the context of the provision of a potable water supply. Charitable donations Donations for charitable purposes made by Group companies during the year amounted to £34,864 (2002: £40,367), together with £79,010 (2002: £49,490) of sponsorship. No political contributions were made by the Group. Employee information Group companies consult their staff on matters of concern in the context of their employment. All Group companies continued to carry out their obligations arising from the Health & Safety at Work Act 1974 through consultative committees consisting of management and employee representatives. The Group gives every consideration to applications for employment from disabled persons where the requirements of the job may be covered adequately by a handicapped or disabled person. With regard to existing employees and those who have become disabled during the year, the Group has continued to examine ways and means of providing training and career development wherever appropriate.


6

Directors’ Report (continued) Directors and their interests The Directors’ interests in the share capital of the ultimate parent company, Veolia Environnement SA, were as follows: At 31 December 2003

Number of ordinary shares

At 31 December 2002 Number of ordinary

shares J C Banon 109 109M J E Butcher - -F Darley - -J S Gummer - -C Roger-Lacan - - Veolia Environnement SA operates a share option scheme by which Executive Directors and other executives are able to subscribe for ordinary shares in the ultimate parent company. The interests of the Directors in options over the ordinary shares of Veolia Environnement SA were as follows :

Number of options At

1 January 2003

Granted Exercised At

31 December 2003

Exercise Price

Date from which

exercisable

Expiry date

(€) J C Banon 5,000 - - 5,000 42.00 08.02.04 07.02.09 20,000 - - 20,000 37.53 25.01.05 25.01.10 8,000 - 8,000 22.50 24.03.06 24.03.11 M J E Butcher 1,550 - - 1,550 42.00 08.02.04 07.02.09 F Darley 1,550 - - 1,550 42.00 08.02.04 07.02.09 3,100 - - 3,100 37.53 25.01.05 25.01.10 3,300 - 3,300 22.50 24.03.06 24.03.11 C Roger-Lacan

23,600

-

-

23,600

42.00

08.02.04

07.02.09

25,000 - - 25,000 37.53 25.01.05 25.01.10 25,000 - 25,000 22.50 24.03.06 24.03.11

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


7

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

· make judgements and estimates that are reasonable and prudent; and

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

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors confirm that they have complied with these requirements and, having a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future, continue to adopt the going concern basis in preparing the accounts. Auditors On 22 September 2003, RSM Robson Rhodes LLP resigned from their position as the Company’s auditors. Ernst & Young LLP were subsequently appointed as the Company’s auditors. By order of the Board R G Castle Secretary 22 July 2004


8

Independent Auditors’ Report to the Shareholders of Veolia Water UK PLC We have audited the financial statements which comprise the consolidated proft and loss account, the consolidated balance sheet, the company balance sheet, the consolidated cash flow statement, and notes 1 to 33. This report is made solely to the Company’s shareholders, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s shareholders those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s shareholders, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors As described in the Statement of Directors' Responsibilities the Company's Directors are responsible for the preparation of the financial statements in accordance with United Kingdom law and accounting standards.

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and United Kingdom Auditing Standards.

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors' Report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors' remuneration and transactions with the Company is not disclosed.

We read the Directors' Report and consider the implications for our report if we become aware of any apparent misstatements within it. Basis of audit opinion We conducted our audit in accordance with United Kingdom Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 December 2003 and of the Group’s profit for the year then ended and have been properly prepared in accordance with the Companies Act 1985. Ernst & Young LLP Registered Auditors London


9

Consolidated Profit and Loss Account Notes Year

ended 31 December

2003 £’000

Year ended

31 December 2002

£’000

Turnover 2 203,831 191,705 Cost of sales (112,437) (100,106)Gross profit 91,394 91,599 Administrative expenses (36,293) (40,505)Other operating income 3 2,199

1,969

Group operating profit Share of operating profit in: -joint venture -associate Income from other participating interests Preference dividend income from associate Profit on the disposal of fixed assets

4 57,300

- 24,513

180 701 163

53,063

28-

3,658 -

6,488Profit on the disposal of investments 535 92,439 Profit on ordinary activities before interest and taxation

83,392

155,676

Interest receivable and similar income 7 8,255 5,433 Interest payable and similar charges: -Group 8 (6,375) (6,080)-associate (19,460) -Profit on ordinary activities before taxation 65,812

155,029

Tax on profit on ordinary activities 9 (17,139)

(18,177)

Profit on ordinary activities after taxation 48,673 136,852Equity minority interests Non-equity minority interests

(711) (5)

(1,045)(5)

Profit on ordinary activities after taxation and minority interests

47,957 135,802

Dividends Non-equity dividends on associates

10 (25,000) (1,722)

(28,534) -

Retained profit for the year 25 21,235 107,268

There is no difference between profit on ordinary activities before taxation, retained profit for the year stated above, and their historical cost equivalents. All recognised gains and losses have been included in the profit and loss account. No separate statement of recognised gains and losses is required. There were no material acquisitions or disposals of subsidiaries during the year. All material activities relate to continuing operations. The notes on pages 15 to 54 form part of these financial statements.


10

Consolidated Balance Sheet

Notes 31 December 2003

£’000

31 December 2002 £’000

Fixed assets Intangible assets 11 229 -Tangible Assets 12a 549,080 527,088Investments 13 - 50Investments in associate 14 58,632 - 607,941

527,138

Current assets Stocks 16 1,799 1,536 Debtors 17 175,967 245,633 Investments 15 814 3,491 Short term deposits 1,006 -Cash at bank and in hand 2,016

7,965

181,602 258,625 Creditors: amounts falling due within one year 18 (154,962)

(170,878)

Net current assets 26,640 87,747 Total assets less current liabilities 634,581 614,885 Creditors: amounts falling due after more than one yearProvisions for liabilities and charges

19 20

(51,141) (54,874)

(60,229)(47,242)

Net assets 528,566

507,414

Capital and reserves Called up share capital 24 500 500 Other reserves Profit and loss account

25 25

86,632 437,671

86,632 416,436

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

27 23 23

524,803 3,716

47

503,568 3,799

47

528,566

507,414

The notes on pages 15 to 54 form part of these financial statements. The financial statements on pages 9 to 54 were approved by the Board of Directors on 22 July-2004 and were signed on its behalf by: J C Banon R Bienfait Director Director


11

Company Balance Sheet Notes 31 December

2003 £’000

31 December 2002

£’000 Fixed assets Tangible assets 12b 6,283 6,544 Investments 13 268,337

212,821

274,620

219,365

Current assets Debtors 17 207,410 258,905 Short term deposits 1,006 -Cash at bank and in hand 3,651

146

212,067 259,051 Creditors: amounts falling due within one year 18 (60,263)

(68,048)

Net current assets 151,804

191,003

Total assets less current liabilities 426,424 410,368 Provisions for liabilities and charges

20

(1,479)

(1,509)

Net assets 424,945

408,859

Capital and reserves Called up share capital 24 500 500 Other reserves Profit and loss account

25 25

159,315 265,130

159,315 249,044

Equity shareholders’ funds 27 424,945

408,859

The notes on pages 15 to 54 form part of these financial statements. The financial statements on pages 9 to 54 were approved by the Board of Directors on 22 July 2004 and were signed on its behalf by: J C Banon R Bienfait Director Director


12

Consolidated Cash Flow Statement

Notes* Year ended

31 December 2003 £’000

Year ended

31 December 2002

£’000 Net cash inflow from operating activities a 123,312 87,963 Returns on investments and servicing of finance Interest received 8,257 5,497 Interest paid (3,881) (2,984)Interest element of finance lease rentals Dividends received from investments

(3,755) 180

(1,899)3,658

Dividends received from associate 311 -Dividends paid to minorities (617) (634) Net cash inflow from returns on investments and servicing of finance

495 3,638

Taxation paid

(12,261)

(12,074)

Capital expenditure and financial investment Purchase of fixed assets (80,737) (87,169)Contributions to fixed assets received 7,236 8,010 Disposal of fixed assets Purchase of investments Overdraft acquired on investment Cost of investment in associate Disposal of investments

301 (353)

(2,355) (55,944)

2,946

6,697(49)

--

99,192 Net cash (outflow)/inflow from capital expenditure and financial investment

(128,906) 26,681

Equity dividends paid

(27,768)

(28,534)

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

(45,128) 77,674

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

b

44,133

(62,063)

Net cash outflow from financing b (14,817)

(6,167)

(Decrease)/Increase in cash

c (15,812)

9,444

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


13

Notes to the Consolidated Cash Flow Statement a. Reconciliation of operating profit to net cash flow from operating activities

Year ended

31 December 2003 £’000

Year ended

31 December 2002

£’000 Group operating profit 57,300 53,063 Depreciation Amortisation of deferred credit

40,853 (414)

37,509 (406)

Ammortisation of goodwill 12 - (Increase)/decrease in stocks (263) 663 Decrease/(increase) in debtors 21,117 (29,427) Increase in creditors and provisions 4,707 26,561 Net cash inflow from operating activities 123,312

87,963

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

At 31 December

2003 £’000

At 31 December

2002 £’000

Management of liquid resources Cash on short-term deposit (1,006) - Short-term loans from/(to) Group Undertakings 45,139 (62,063) Net cash inflow/(outflow) from management of liquid resources

44,133 (62,063)

Financing Financing of assets operated by other parties (930) (695) Capital elements of finance leases (5,467) (3,892) Repayments of short-term borrowing (8,420) (1,580) Net cash outflow from financing (14,817)

(6,167)

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


14

Notes to the Consolidated Cash Flow Statement (continued) c. Analysis of net funds At

31 December 2002

£’000

Cash flow

£’000

At 31 December

2003 £’000

Net funds: Cash at bank and in hand 7,965

(5,949) 2,016

Bank overdrafts (69) (9,863) (9,932) __ Liquid resources: Short-term loans to Group Undertakings

7,896

176,682

(15,812)

(45,139)

(7,916)

131,543 Cash on short term deposit - 1,006 1,006 __ 176,682 (44,133) 132,549 Debt: Bank loans (8,420) 8,420 -Finance leases (including sale and leaseback) (30,441) 5,467 (24,974)Debentures (4,667) - (4,667)Financing of assets operated by third parties (23,348) 930 (22,418) __

(66,876)

14,817 __

(52,059)

Net funds 117,702 (45,128) 72,574 d. Reconciliation of net cash flow to movement in net funds Year

ended 31 December

2002 £’000

Year ended

31 December 2002 £’000

(Decrease)/increase in cash in the year (15,812) 9,444Cash (outflow)/inflow from increase in liquid resources (44,133) 62,063 Cash inflow from decrease in debt and lease financing 14,817 6,167 Movement in net funds in the year (45,128) 77,674 Opening net funds 117,702 40,028 Closing net funds 72,574 117,702


15

Notes to the Financial Statements 1. Accounting policies a) Accounting convention The financial statements have been prepared under the historical cost convention in accordance

with applicable Accounting Standards in the United Kingdom and, except for the treatment of certain grants and contributions described below, in accordance with the Companies Act 1985.

b) New accounting standards

FRS 17 “Retirement Benefits” need not be applied in full until financial statements with periods ending on or after 1 January 2005, and as such, the Group has only disclosed those items required under the standard in respect of periods ending on or after 22 June 2002. Planning is in progress to ensure correct and appropriate adoption of new International Accounting Standards in 2005. c) Basis of consolidation

The financial statements include the accounts of Veolia Water UK PLC and its subsidiaries from

their respective dates of acquisition.

In 1998 the water companies entered into a partnership arrangement. Under FRS 9 this has been accounted for as a joint arrangement and not as a separate entity. An interest in an associate acquired in 2003, has been accounted for using the equity method in accordance with FRS 9.

The interest in a joint venture held in 2002 has been included in the consolidated financial statements using the gross equity method in accordance with FRS 9. d) Goodwill

Goodwill arising on acquisitions prior to 31 March 1998, which represents the amounts by which the consideration paid for acquisitions exceeded the fair value of identifiable assets and liabilities, has been written off directly against reserves in the year of acquisition. In the event of a future disposal, this will be charged or credited in the profit and loss account of the business to which it related.

Goodwill arising on acquisitions is capitalised and amortised in accordance with FRS 10. Goodwill is amoritsed over a life of not greater than 20 years.

e) Interest and dividends Bank and short term deposit interest receivable is dealt with on an accruals basis. Income from fixed asset investments is treated as receivable by reference to the date on which the dividend is declared ex-dividend, or in the case of subsidiaries, from the date of recognition in their financial statements.

In accordance with FRS 16, UK dividend income is recorded net of tax credits.


16

Notes to the Financial Statements (continued) 1. Accounting policies (continued)

f) Tangible fixed assets and depreciation Tangible fixed assets comprise: Infrastructure assets - mains and associated underground pipework.

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

Infrastructure assets comprise a network of systems. Expenditure on infrastructure assets, including renewals is treated as an addition and included at cost after deducting grants and contributions. The depreciation charge for infrastructure assets is the estimated level of annual expenditure required to maintain the operating capability of the network which is based on the Company’s independently certified asset management plan.

Disposals of infrastructure assets are calculated based on the estimated lives of the assets

before they are replaced.

Depreciation is provided on all other tangible fixed assets except freehold land and is calculated to write off their cost over their estimated useful lives on a straight line basis. Assets acquired under finance leases are depreciated over the shorter of their useful life or the lease term. The performance of assets is continually monitored and where impairment is identified, fixed assets are written down to their recoverable amount. Any such write down would be charged to operating profit. Tangible fixed assets are reviewed for impairment at the end of each reporting period when the estimated remaining useful economic life of the assets exceeds 50 years. The estimated useful lives of tangible fixed assets are:

Buildings 40 - 100 years Operational structures 15 - 100 years Fixed plant and machinery 3 - 30 years Mobile plant and motor vehicles 4 - 10 years g) Capital contributions Infrastructure charges received in respect of connections to the mains network are

allocated to fixed assets, surface and infrastructure, in accordance with the basis on which the charges are calculated.

Grants and contributions receivable relating to infrastructure assets have been deducted from the cost of tangible fixed assets. This is not in accordance with the Companies Act 1985, which requires fixed assets to be stated at their purchase price or production cost, without deduction of grants, and contributions which are accordingly accounted for as deferred income. This departure from the requirements of the Companies Act 1985 is, in the opinion of the Directors, necessary for the financial statements to show a true and fair view because, whilst a provision is made for the depreciation of infrastructure assets, they do not have determinable finite lives and therefore no basis exists upon which to recognise grants and contributions as deferred income. The effect of the departure on the value of tangible fixed assets is disclosed in Note 11.

Notes to the Financial Statements (continued)


17

1. Accounting policies (continued)

g) Capital contributions (continued)

Capital contributions received in respect of tangible fixed assets, other than infrastructure assets, are deferred and credited to the profit and loss account by instalments over the expected useful lives of the related assets.

h) Fixed and current asset investments

Fixed asset investments are stated at cost less any provisions in respect of permanent diminution in value.

Current asset investments are recorded at the lower of cost and net realisable value. Where net realisable value is lower than cost a provision is made in the profit and loss account for the diminution in value.

i) Stocks and work in progress Stocks and work in progress are valued at the lower of cost or net realisable value.

In accordance with established practice in the water industry no value is placed upon the water in reservoirs, mains or in the course of treatment.

j) Taxation

Deferred tax is provided, except as noted below, on timing differences that have arisen but not reversed by the balance sheet date, where the timing differences result in an obligation to pay more tax, or a right to pay less tax, in the future. Timing differences arise because of differences between the treatment of certain items for accounting and taxation purposes.

In accordance with FRS 19 deferred tax is not provided on timing differences arising from:

a) gains on the sale of non-monetary assets, where on the basis of all available evidence it is more likely than not that the taxable gain will be rolled over into replacement assets.

Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered.

Deferred tax is measured at the tax rates that are expected to apply in the periods when the timing differences are expected to reverse, based on tax rates and law enacted or substantively enacted at the balance sheet date.

Where law or accounting standards require gains and losses to be recognised in the statement of total recognised gains and losses, the related taxation is also taken directly to the statement of total recognised gains and losses in due course.


18

Notes to the Financial Statements (continued) 1. Accounting policies (continued) j) Taxation (continued)

The Group has adopted a policy of discounting deferred tax assets and liabilities to reflect the time value of money. Deferred tax assets and liabilities are discounted using a discount rate equivalent to the post tax yield that could be obtained at the balance sheet date on government bonds with similar maturity dates and currencies. The increase or decrease in the discount deducted in arriving at the deferred tax balance is included in the deferred tax charge or credit in the profit and loss account.

k) Leased assets

An asset acquired under a finance lease is capitalised in the balance sheet and depreciated over the shorter of the lease term and the asset’s useful life. Future instalments under the lease, net of finance charges, are included within creditors.

Rentals payable are apportioned between the finance element, which is charged to the profit and loss account as interest, and the capital, which reduces the outstanding obligation for future instalments. Rentals paid under an operating lease are charged against profits on a straight line basis over the life of the lease.

l) Pension costs

Employer’s contributions towards the costs of benefits arising from the past and present service of employees are charged to the profit and loss account over the average working lives of employees in accordance with the recommendations of qualified actuaries. Any funding surplus or deficit that may arise from time to time is amortised over the average remaining working lives of employees as per SSAP 24. The Group has adopted the disclosure requirements of FRS 17. l) m) Research and development

The costs of research and development are written off in the period in which they are incurred. n) Financial Instruments

Income and expenditure arising on financial instruments is recognised on an accruals basis, and credited or charged to the profit and loss account in the financial period in which it arises.


19

Notes to the Financial Statements (continued) 2. Turnover and segmental analysis Turnover represents income, net of VAT, from the supply of water and its related activities, arising wholly within the United Kingdom and Ireland. Overseas operations are not considered material. The Directors consider this to be one class of business. Turnover relating to unmeasured supplies comprises amounts due to the Group for the accounting period. Amounts received in advance are included in deferred income in the balance sheet. Year

ended 31 December

2003 £’000

Year ended

31 December 2002

£’000 Turnover Water supply and related activities: Group and share of joint venture 203,831 192,565Less share of joint venture -

(860)

Group turnover

203,831

191,705

Year ended

31 December 2003 £’000

Year ended

31 December 2002

£’000 Operating profit Water supply and related activities: Group and share of joint venture 57,300 53,091 Less: share of joint venture -

(28)

Group operating profit

57,300

53,063

3. Other operating income

Year ended

31 December 2003

£’000

Year ended

31 December 2002 £’000

Commission income 1,593 1,399Rents and sundry income 606

570

2,199

1,969


20

Notes to the Financial Statements (continued) 4. Operating profit This is stated after charging / (crediting): Year

ended 31 December

2003 £’000

Year ended

31 December 2002 £’000

Auditors’ remuneration - for audit services (Ernst & Young LLP)

190

-

- for audit services (RSM Robson Rhodes LLP) - 235- for regulatory returns (Ernst & Young LLP) 86 -- for regulatory returns (RSM Robson Rhodes LLP) 26 94- for non-audit services (Ernst & Young LLP) 80 - - for non-audit services (RSM Robson Rhodes LLP) 10 371Depreciation of tangible fixed assets - infrastructure - owned - leased

17,239 19,589

4,025

16,040 17,343

4,126 Operating lease rentals - land and buildings

580

549

- other 1,911 2,128 Hire of plant and machinery 274 183 Amortisation of goodwill 12 -Amortisation of contributions to capital expenditure (414) (406)Provision against current asset investment 250 2,662 5. Directors’ remuneration

Year ended

31 December 2003

£’000

Year ended

31 December 2002 £’000

Aggregate emoluments of the Directors 1,324 965 No Directors exercised share options over ordinary shares in Veolia Environnement SA in the year. Retirement benefits are accruing to one Director (who is not the highest paid Director) under a defined benefits scheme. Year

ended 31 December

2003 £’000

Year ended

31 December 2002 £’000

Highest paid Director Aggregate emoluments and benefits 488 319(excluding gains on exercise of share options)


21

Notes to the Financial Statements (continued) 6. Staff costs Year

ended 31 December

2003 £’000

Year ended

31 December 2002 £’000

Wages and salaries 36,336 33,832Social security costs 3,149 2,747Pension costs 4,514 1,638Other benefits 9

61

44,008

38,278

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

ended 31 December

2003 Number

Year ended

31 December 2002

Number Water supply and related activities 1,311 1,217Central services 33

34

1,344

1,251

7. Interest receivable and similar income

Year ended

31 December 2003 £’000

Year ended

31 December 2002

£’000 Interest receivable from - Group Undertakings

4,630 5,284

- Convertible Debt 2,930 -- Other 695

149

8,255

5,433

Interest receivable includes income from short term treasury investments. Interest on convertible debt arises from the Group holding convertible debt in SWIL for a period during the year. Interest receivable from Group Undertakings is based upon interest rates linked to LIBOR.


22

Notes to the Financial Statements (continued) 8. Interest payable and similar charges Year

ended 31 December

2003 £’000

Year ended

31 December 2002

£’000 Bank interest 671 596Finance leases 2,091 2,595Finance costs of assets used by the Group and operated by other parties

2,454 2,491

Interest payable to Group Undertakings 648 -Other 511

398

6,375

6,080

9. Taxation

Year ended

31 December 2003 £’000

Year ended

31 December 2002

£’000 Taxation relates to the following: - Group Undertakings

16,106 18,177

- Associate 1,033

-

17,139

18,177



23

9. Taxation (continued) Taxation charge Year

ended 31 December

2003 £’000

Year ended

31 December 2002 £’000

UK corporation tax at 30% (2002: 30%) 14,584 14,585 Over provision in prior years (3,504)

(676)

Current taxation 11,080 13,909Share of joint venture current taxation - (6) ______ ______Total current taxation 11,080 13,903 ______ ______Deferred taxation Net origination and reversal of timing differences for the period 4,709 7,167Decrease/(increase) in discounting 317 (2,897) ______ ______Deferred tax charge for the period 5,026 4,270Share of joint venture deferred taxation - 4 ______ ______Total deferred taxation 5,026 4,274 ______ ______Total Group taxation 16,106 4,274 ______ ______ Tax on associates 1,033 - ______ ______Tax on profit on ordinary activities 17,139

18,177


24

Notes to the Financial Statements (continued) 9. Taxation (continued) Current taxation reconciliation Year

ended 31 December

2003 £’000

Year ended

31 December 2002

£’000 Profit on ordinary activities before taxation excluding associate 60,058

155,029

Theoretical tax at UK corporation tax rate of 30% (2002: 30%) 18,017 46,509 Effects of: - adjustment to tax in respect of prior years (3,504) (676) - disposal of investments (161) (24,416) - other expense/(income) that is not tax deductible 1,449 (21) - accelerated capital allowances (4,758) (5,425) - Group relief transactions - (326) - short term timing differences 48 (1,742) - other timing differences (11) - ______ ______Actual current taxation charge 11,080

13,903

10. Dividends Year

ended 31 December

2003 £’000

Year ended

31 December 2002

£’000 Interim dividend paid of £12.50 per share (2002: £14.032 per share) 6,250 7,016

Final dividend proposed of £37.50 per share (2002: £43.036 per share)

18,750 21,518

______ ______

25,000

28,534



25

11. Intangible Assets

Group Positive goodwil £’000 Cost At 1 January 2003 -On acquisition of subsidiary 241 ______At 31 December 2003 241

Amortisation At 1 January 2003 -Charge for the period 12 ______At 31 December 2003 12

Net book value At 31 December 2003 229

At 31 December 2002 -

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


26

Notes to the Financial Statements (continued) 12a. Tangible fixed assets – Group

Group Short Leasehold

Property

Freehold land,

buildings and reservoirs

Mains and other

Infrastructure Assets

Vehicles Plant and

Machinery

Assets in Course of

Construction

Total

£’000 £’000 £’000 £’000 £’000 £’000Cost At 1 January 2003 82 127,387 384,696 330,693 43,694 886,552Additions - 2,252 40,695 4,887 21,984 69,818On acquisition of a subsidiary

298

1,531 1,829

Transfers - 2,172 1,208 24,435 (27,815) -Transferred to assets held exclusively for resale

(1,444) (1,444)

Capital contributions - - (7,206) - - (7,206)Disposals

-

(4)

(286)

(2,798)

-

(3,088)

At 31 December 2003 82

131,807

419,107

357,515

37,950

946,461

Depreciation At 1 January 2003 82 34,445 161,253 163,684 - 359,464 Charge for the year - 3,136 17,344 20,373 - 40,853On acquisition of a subsidiary

23

23

Disposals

-

14

(286)

(2,687)

-

(2,959)


37,595

178,311

181,393

-

397,381

Net book value At 31 December 2003 -

94,212

240,796

176,122

37,950

549,080

At 31 December 2002 -

92,942

223,443

167,009

43,694

527,088

The net book value of infrastructure assets is stated after the deduction of grants and contributions amounting to £89,917,000 (2002: £82,516,000) in order to give a true and fair view. Included in the above at 31 December 2003 are fixed assets held under finance leases, as follows: Group Freehold land,

buildings and

reservoirs

Mains and other

infrastructure assets

Vehicles plant and

machinery

Total

£’000 £’000 £’000 £’000 Cost 8,693 23,165 68,434 100,292 Depreciation (5,673)

(9,695)

(51,746)

(67,114)

Net book value 3,020

13,470

16,688

33,178


27

Notes to the Financial Statements (continued) 12a. Tangible fixed assets – Group (continued) Included in the above at 31 December 2002 are fixed assets held under finance leases, as follows: Group Freehold land,

buildings and

reservoirs

Mains and other

infrastructure assets

Vehicles plant and

machinery

Total

£’000 £’000 £’000 £’000 Cost 8,693 23,165 68,434 100,292 Depreciation (5,399)

(9,558)

(48,134)

(63,091)

Net book value 3,294

13,607

20,300

37,201

12b. Tangible fixed assets – Company Short leasehold

property Freehold property

Vehicles, plant and

machinery

Total

£’000 £’000 £’000 £’000 Company Cost At 1 January 2003 82 7,528 1,275 8,885 Additions - - 87 87Disposals -

-

(147)

(147)


7,528

1,215

8,825

Depreciation At 1 January 2003 82 1,284

975 2,341

Charge for the year - 151 115 266Disposals -

-

(65)

(65)


1,435

1,025

2,542

-

6,093

190

6,283

Net Book Value At 31 December 2003 At 31 December 2002 -

6,244

300

6,544

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


28

Notes to the Financial Statements (continued) 13. Fixed asset investments Group Investment in

joint venture £’000 At 1 January 2003 50 Transfer of status to subsidiary (50) ____ At 31 December 2003 -

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

Subsidiary Undertakings

Loans to Group Undertakings

Total

£’000 £’000 £’000 Company At 1 January 2003 34,123 178,698 212,821 Acquisitions 10,303 - 10,303 Release of impairment provision 64 - 64 Payments - 45,149 45,149 At 31 December 2003 44,490

223,847

268,337


29

Notes to the Financial Statements (continued) 13. Fixed asset investments (continued) Details of investments in which the Group or the Company holds more than 10% of the nominal value of any class of share capital are as follows:

Name of company Type of holding Proportion of voting rights

and shares held

Principal subsidiary undertakings: Water supply and related activities: Veolia Water Capital Funds PLC (formerly Vivendi Water Capital Funds PLC)

* Ordinary shares 100%

Three Valleys Water PLC Ordinary shares 100%North Surrey Water Limited ** Ordinary shares 99% Ordinary non-voting shares

10% preference shares 99%99%

Tendring Hundred Water Services Limited Ordinary shares 99% Ordinary non-voting shares

10% preference shares 87%98%

Folkestone and Dover Water Services Limited Ordinary shares 74% Ordinary non-voting shares 92% 14% preference shares 77%Veolia Water Operations Ireland Limited (formerly Vivendi Water Operations Ireland Limited)


Veolia Water Projects Limited (formerly Vivendi Water Projects Limited)


General Utilities Holdings Limited * Ordinary shares 100%Veolia Water Investment Limited (formerly Vivendi Water Investment Limited)


Veolia Water Industrial Outsourcing Limited (formerly Vivendi Water Industrial Outsourcing Limited)


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


30

Notes to the Financial Statements (continued) 14. Investment in associate The investment in associate represents the Group’s share in SWIL. The accounting period for SWIL is the period ending 31 March 2004. SWIL is an investor in the British water supply and wastewater operations sector. The Group’s investment in SWIL, which is based on provisional estimates of net tangible assets, comprises:

Share of net tangible assets

£’000

Loans to subsidiaries

£’000

Preference shares in

SWS £’000

Goodwill

£’000

Total

£’000 At 1 January 2003 - - - - -On acquisition 9,950 40,000 - 5,990 55,940Redemption of Loan (40,000) (40,000)Subscription for Preference Shares

- - 40,000 - 40,000

Share of Associate Profit 2,692 - - 2,692 At 31 December 2003 11,642

-

40,000

5,990

58,632

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

Group share of associate Group share of associate

£’000 Share of profit and loss account headings Turnover 58,174Operating Profit 24,513Profit before tax 5,053Taxation 1,033Profit after tax 4,020 Share of assets Fixed assets 553,023Current assets 40,954 593,977Share of liabilities Liabilities due within one year or less (92,037)Liabilities due after more than one year (450,298) (542,335) Share of net assets 51,642

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


31

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

Group Listed investments

£’000 Cost At 1 January 2003 6,153 Additions - Disposals (4,302) ______At 31 December 2003 1,851

Amounts provided At 1 January 2003 2,662Provided in year 250Eliminated on disposal (1,890) ______At 31 December 2003 1,037

Net book value At 31 December 2003 814

At 31 December 2002 3,491

The net book value of listed investments at 31 December 2003 relates to a 1.85% shareholding in Ecofin Water & Power Opportunities plc, a company incorporated in Great Britain. The market value of the listed current asset investment held at 31 December 2003, was £0.814m (2002: £3.491m). The market value of the investment in Ecofin Water & Power Opportunities plc held at 31 December 2003 based on market prices at 30 June 2004 was £1.203m. The Company has no current asset investments.


32

Notes to the Financial Statements (continued) 16. Stocks and work in progress Group

31 December 2003

£’000

31 December 2002

£’000 Work in progress 320 119Raw materials and consumables 1,479 1,417 1,799

1,536

The Company has no stocks. 17. Debtors

Group Company 31 December

2003 £’000

31 December 2002

£’000

31 December 2003

£’000

31 December 2002

£’000 Trade debtors 29,720 28,196 219 327Loans to Group Undertakings 131,543 176,682 174,085 176,682Amounts due from Group Undertakings

1,909 3,088 31,563 51,757

Amounts due from Joint Venture - 276 - 245Assets held exclusively for resale 1,444 - - -Other debtors 4,082 5,079 779 897Prepayments and accrued income 6,707 32,310 764 28,997Corporation tax recoverable 562 2 - - 175,967

245,633

207,410

258,905


33

Notes to the Financial Statements (continued) 18. Creditors: amounts falling due within one year

Group Company Notes 31 December

2003 £’000

31 December 2002

£’000

31 December 2003

£’000

31 December 2002

£’000 Bank loans and overdraft

21 9,932 8,489 11,204 17,720

Payments received on account

6,394 5,009 - -

Obligations under finance leases

22 5,227 5,635 - -

Financing of assets operated by other parties

22 1,094 879 - -

Debentures 21 2,500 - - -Trade creditors 7,436 8,104 121 359

Loans from Group Undertakings

- - 11,168 -

Amounts owed to Group Undertakings

8,337 7,049 2,635 1,795

Amounts owed to Joint Venture

- 516 - 498

Corporation tax 20,453 20,903 9,022 8,992Other taxes and social security

1,896 3,111 933 2,279

Other creditors 9,044 8,699 748 294Dividends 19,273 22,020 18,750 21,518Accruals 31,554 49,786 5,682 14,593Deferred income 31,822 30,678 - - 154,962

170,878

60,263

68,048


34

Notes to the Financial Statements (continued) 19. Creditors: amounts falling due after more than one year

Group Company Notes 31 December

2003 £’000

31 December 2002

£’000

31 December 2003

£’000

31 December 2002

£’000 Debentures 21 2,167 4,667 - -Obligations under finance leases

22 19,747 24,806 - -

Accruals and deferred income

7,067 7,451 - -

Financing of assets operated by other parties

22 21,324 22,469 - -

Amounts owed to Group Undertakings

836

836

-

-

51,141

60,229

-

-

20. Provisions for liabilities and charges

Group Deferred Tax

Insurance Pensions Other LeaseholdProperty

Total

£’000 £’000 £’000 £’000 £’000 £’000 Balance at 1 January 2003 40,499 1,070 1,857 2,330 1,486 47,242 Amount used - (321) - - (56) (377)Amount provided

5,026

-

2,978

5

- ______

8,009

Balance at 31 December 2003

45,525

749

4,835

2,335

1,430

54,874

Company Pensions Leasehold

Property Total £’000 £’000 £’000 Balance at 1 January 2003 23 1,486 1,509 Amount used - (56) (56)Amount provided

26 ______

- ______

26

Balance at 31 December 2003

49

1,430

1,479


35

Notes to the Financial Statements (continued) 20. Provisions for liabilities and charges (continued) Deferred taxation (see Note 9)


2003 £’000

31 December 2002

£’000

31 December 2003

£’000

31 December 2002

£’000 Accelerated capital allowances 107,325 102,567 - -Other timing differences (551) (502) - - Undiscounted provision for deferred tax 106,774 102,065 - -Discount (61,249) (61,566) - - Discounted provision for deferred tax 45,525 40,499 - -

The insurance provision represents the amount of liability in respect of excesses on individual claims. This is based on information provided by loss adjusters to insurers on levels of reserve and is calculated on settlement experience. The pension provision represents the difference between the existing funding rate and the maximum liability set out within the actuarial valuation in accordance with the requirements of SSAP 24. The "Other" provision relates to potential claims against a Group company. The information required by FRS 12 is not disclosed on the grounds that it might prejudice the outcome of the claims. The provision for leasehold property is made against anticipated costs incurred on the property being in excess of rental income receivable on existing lease contracts. The release in the year reflects the partial letting of the property.


36

Notes to the Financial Statements (continued) 21. Borrowings analysis Loans and bank overdrafts outstanding at the year end comprise:


2003 £’000

31 December 2002

£’000

31 December 2003

£’000

31 December 2002

£’000 Amounts repayable within one year Overdrafts 9,932 69 11,204 9,300Bank loans - 8,420 - 8,420Debentures 2,500 - - - 12,432 8,489 11,204 17,720Amounts repayable after one year Debentures 2,167 4,667 - - 14,599 13,156 11,204 17,720 Loans and bank overdrafts are repayable as follows:


2003 £’000

31 December 2002

£’000

31 December 2003

£’000

31 December 2002

£’000 Bank loans and overdrafts Repayable:

Within one year 9,932 8,489 11,204 17,720 Other borrowings Repayable:

Within one year 2,500 2,500 - -After five years 2,167 2,167 - - 4,667

4,667

-

-

14,599 13,156 11,204 17,720 Details of the security given for bank loans and overdrafts are provided within Note 31.


37

Notes to the Financial Statements (continued) 21. Borrowings analysis (continued) Loans not wholly repayable within five years comprise: Group

31 December 2003

£’000

31 December 2002

£’000 Irredeemable debenture stock carrying interest of between 3.25% and 5.25%

2,167 _______

2,167_____

The Company has no loans not wholly repayable within five years. 22. Lease and other financial commitments Obligations under finance leases are payable as follows: Group

31 December 2003

£’000

31 December 2002

£’000

Within one year 5,227 5,635In the second to fifth years inclusive 13,954 17,853After five years 5,793 6,953

24,974 30,441

Obligations for financing of assets operated by third parties are payable as follows: Group

31 December 2003

£’000

31 December 2002

£’000 Within one year 1,094 879In the second to fifth years inclusive 4,830 4,418After five years 16,494 18,051

22,418 23,348

The Company has no finance lease obligations.


38

Notes to the Financial Statements (continued) 22. Lease and other financial commitments (continued) The annual levels of commitments under non-cancellable operating leases are detailed in the table below:

Land and buildings Other 31 December

2003 £’000

31 December 2002

£’000

31 December 2003

£’000

31 December 2002

£’000 Group Operating leases which expire: Within one year 333 27 150 226In the second to fifth years inclusive - - 2,964 2,062After five years 248

248

-

-

581

275

3,114

2,288

Company Operating leases which expire: Within one year 15 27 5 12In the second to fifth years inclusive - - 22 17After five years

248

248

-

-

263

275

27

29

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 December

2003 £’000

31 December 2002

£’000 Authorised 500,000 ordinary shares of £1 each

500 500

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

500

500


39

Notes to the Financial Statements (continued) 25. Profit and loss account and reserves Group

Profit and loss

£’000

Group Other

reserves £’000

Group Total

reserves £’000

As at 1 January 2003 416,436 86,632 503,068 Retained profit for the period 21,235

-

21,235

As at 31 December 2003 437,671

86,632

524,303

Company

Profit and loss

£’000

Company Other

reserves £’000

Company Total

reserves £’000

As at 1 January 2003 249,044 159,315 408,359 Retained profit for the period 16,086

-

16,086

As at 31 December 2003 265,130

159,315

424,445

The total amount of goodwill arising on acquisitions which has been written off against Group reserves is £74,483,000 (2002: £74,483,000). 26. Profit for the period As permitted by section 230 of the Companies Act 1985, the parent company’s profit and loss account has not been included in the financial statements. The parent company’s profit for the year after tax and minority interests was £41,086,000 (2002: profit £77,268,000).


40

Notes to the Financial Statements (continued) 27. Reconciliation of movements in equity shareholders’ funds


2003 £’000

31 December 2002

£’000

31 December 2003

£’000

31 December 2002

£’000

Profit for the year 46,235 135,802 41,086 77,268 Dividends (25,000)

(28,534)

(25,000)

(28,534)

21,235 107,268 16,086 48,734Opening equity shareholders’ funds 503,568 396,300 408,859 360,125 Closing equity shareholders’ funds 524,803

503,568

424,945

408,859

28. Capital commitments Capital expenditure commitments not provided for in these financial statements are: Group Company 31 December

2003 £’000

31 December 2002

£’000

31 December 2003

£’000

31 December 2002

£’000 Contracted 16,120 19,454 - - 29. Financial instruments The Group’s financial instruments comprise borrowings, debentures, cash and liquid resources, and various items, such as trade debtors and trade creditors that arise directly from its operations. The main purpose of these financial instruments is to raise finance for the Group’s operations. It is, and has been throughout the year under review, the Group’s policy that no trading in financial instruments shall be undertaken. The main risks arising from the Group’s financial instruments are interest rate risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. These policies have remained unchanged since the beginning of the current year.


41

Notes to the Financial Statements (continued) 29. Financial instruments (continued) The Group finances its operations through a mixture of retained profits, bank borrowings and finance leases. Treasury policies are agreed by the parent company with the individual Group companies (including liquidity and interest rate risks). The Group does not undertake speculative transactions. Interest rate exposure is managed by using a mixture of fixed and floating rate borrowings. Liquidity is managed by utilisation of a mixture of bank overdrafts and short-term borrowings. Further disclosures are included in Notes 18, 19, 21 and 22.

Total

Floating rate financial liabilities

Fixed rate financial

Liabilities

Financial liabilities on

which no interest is

paid £’000 £’000 £’000 £’000

As at 31 December 2003 61,991 34,906 27,085 - As at 31 December 2002 66,945 30,510 36,435 -

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

Fixed rate financial liabilities Financial liabilities

on which no interest is paid

Weighted average interest

rate

Weighted average period

for which rate is fixed

Weighted average period until Maturity

% Years Years As at 31 December 2003 8.5 26 - As at 31 December 2002 8.5 27 -

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


42

Notes to the Financial Statements (continued) 29. Financial instruments (continued) Floating rate borrowings and cash bear interest based on relevant LIBOR equivalents. The maturity profile for the Group’s financial liabilities is:

31 December 2003

31 December 2002

£'000

£'000

In one year or less or on demand 18,753 15,003In more than one year but not more than two years 5,361 5,103In more than two years but not more than five years 13,423 19,668In more than five years 24,454 27,171 61,991 66,945

The Group has various undrawn committed borrowing facilities. The facilities available, in respect of which all conditions precedent had been met, are:

31 December 2003

31 December 2002

£'000 £'000 Expiring in one year or less 35,000 41,580

The Group's financial assets are as follows:

31 December 2003

31 December 2002

£'000 £'000 Cash 2,016 7,965Loans to Group Undertakings 131,543 176,682Listed Investments 814 3,491 134,373 188,138

Loans to Group undertakings bear interest based on relevant LIBOR equivalents. Fair values of financial assets and liabilities Other than the fixed rate liability in respect of the financing of assets by the Group and operated by other parties, the fair values calculated by market interest rates of the financial instruments are not materially different from book values. It is not practical to estimate the fair value of the financing of assets used by the Group and operated by other parties as there is no market in such a liability.


43

Notes to the Financial Statements (continued) 30. Pension commitment

Composition of the schemes Veolia Water Supply Companies’ Pension Plan (formerly Vivendi Water Supply Companies’ Pension Plan)

Until 31 March 1996, the Group’s water subsidiaries participated in The Water Companies’ Association Pension Scheme, which provided benefits based on final pensionable pay. On 1 April 1996 the assets and liabilities of the Group’s water subsidiaries which participated in the Water Companies’ Association Scheme were transferred to a “mirror image” plan called the Veolia Water Supply Companies’ Pension Plan (formerly the Vivendi Water Supply Companies’ Pension Plan) which was closed to new members. This Plan continues to provide benefits on a no less favourable basis than those previously provided for existing members of the Scheme.

The assets of the Plan are held separately to those of the Group, being invested by independent fund managers.

Contributions to the Plan are charged to the profit and loss account so as to spread the cost of pensions over the employees’ working lives with the Group.

The most recent triennial valuation of the Plan for the Company, determined by an independent qualified actuary, was at 31 December 2001. The valuation was made on the “attained age” funding method. The actuarial valuation made the following assumptions: Rate of investment return 6.5% (pre-retirement), 5.5% (post retirement) Rate of increase in remuneration 4.5% Rate of pension increase 2.5%

The valuation as at 31 December 2001 stated the market valuation of the Plan’s assets to be £209.8m and showed a surplus of £13.7m. Contributions to the Plan over the year ended 31 December 2003 were paid by members in accordance with the Rules of the Plan and by the Companies in the Group in the range of 0% to 20% of Pensionable Salary. Veolia UK Pension Plan (formerly Vivendi UK Pension Plan)

A new Scheme was inaugurated as at 1 April 1996, the Générale des Eaux UK Retirement Benefits Scheme. This scheme was merged with the Générale des Eaux UK Pension Plan on 1 April 1998, now known as the Veolia UK Pension Plan which is open to all employees. The Plan provides a selection of benefits based upon final pensionable pay or money purchase according to the members’ wishes.

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


44

Notes to the Financial Statements (continued) 30. Pension commitment (continued) The latest formal valuation of the Plan for the Company, determined by an independent qualified actuary, was at 31 December 2002. The valuation was made on the “projected unit credit” funding method. The actuarial valuation made the following assumptions: - Rate of investment return 6.5% Rate of increase in remuneration 3.8% Rate of pension increase 2.3% The valuation as at 31 December 2002 stated the market valuation of the Plan’s assets was £4,965,000 and showed a surplus of £1,075,000. SSAP 24 The total pensions charge on a SSAP 24 basis for the year ended 31 December 2003 was £4,499,000 (year ended 31 December 2002 £1,348,000), of which employer’s contributions were £1,591,000 (year ended 31 December 2002 £983,000). The profit and loss account charge for pension costs, the accounting policies and the disclosures above are given on the basis of SSAP 24. SSAP 24 is going to be replaced by FRS 17. The additional disclosures which follow are given in preparation for FRS 17 being adopted. They are based on the aforementioned full actuarial reviews, projected forward to 31 December 2003 by a qualified independent actuary. a) Profit and loss reserve and net assets Profit and Loss

Reserve at 31 December 2003 £000

Profit and Loss Reserve at 31 December 2002 £000

Net assets At 31 December 2003 £000

Net assets At 31 December 2002 £000

Group As reported on SSAP 24 basis 437,671 416,436 528,566 507,414Net SSAP 24 pensions creditor (net of deferred tax) 3,086 1,051

3,086 1,051

___________ ___________ ___________ ___________

Excluding SSAP 24 balance 440,757 417,487 531,652 508,465FRS 17 pension (liability)/asset (net of deferred tax) (395) 2,848

(395) 2,848

___________ ___________ ___________ ___________

On FRS 17 basis 440,362 420,335 531,257 511,313 ___________ ___________ ___________ ___________

Company As reported on SSAP 24 basis 265,130 249,044 424,945 408,859Net SSAP 24 pensions creditor (net of deferred tax) 34 16

34 16

___________ ___________ ___________ ___________

Excluding SSAP 24 balance 265,164 249,060 424,979 408,875FRS 17 pension liability (net of deferred tax) (942) (357)

(942) (357)

___________ ___________ ___________ ___________

On FRS 17 basis 264,222 248,703 424,037 408,518 ___________ ___________ ___________ ___________


45

Notes to the Financial Statements (continued) 30. Pension commitment (continued) Supplementary pension disclosures under FRS 17 for the Veolia Water Supply Companies’ Pension Plan b) Contributions

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

At 31 December 2003

At 31 December 2002

Value

Split of fund

Long term rate of return expected

Value

Split of fund


£’000 % of fund (% pa) £’000 % of fund (% pa) Group Equities 117,450 59.9 7.7 100,483 55.9 7.5 Bonds 24,118 12.3 5.4 25,772 14.3 5.6 Gilts/Cash 54,510 27.8 4.8 53,436 29.8 4.5 _________ ______ __________ ______

Fair value of assets 196,078 100.0 179,691 100.0 Present value of scheme liabilities (193,029) (174,625) _________ __________

Actuarial surplus 3,049 5,066 Deferred tax (915) (1,520) _________ _________

Actuarial surplus after tax 2,134 3,546 _________ _________

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

At 31 December 2003

At 31 December 2002

Value

Split of fund


Value

Split of fund


£’000 % of fund (% pa) £’000 % of fund (% pa) Company Equities 674 59.8 7.7 501 56.0 7.5 Bonds 139 12.3 5.4 128 14.3 5.6 Gilts/Cash 314 27.9 4.8 266 29.7 4.6 _________ ______ ______ ______

Fair value of assets 1,127 100.0 895 100.0 Present value of scheme liabilities (1,283) (1053) ______ ______

Actuarial deficit (156) (158) Deferred tax 47 47 ______ ______

Actuarial deficit after tax (109) (111) ______ ______


46

Notes to the Financial Statements (continued) 30. Pension commitment (continued) c) FRS 17 balance sheet information (continued) The balance sheet liability would be £109,000 (2002: £111,000). d) Assumptions

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

In calculating the liabilities of the Plans, the following financial assumptions have been used: Group and Company At 31 December 2003 At 31 December 2002 Discount rate 5.4% pa 5.6% pa Salary growth 4.6% pa 4.3% pa Retail price index 2.6% pa 2.3% pa Pension-in payment increases 2.6% pa 2.3% pa

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

ended 31 December

2003 £’000

Year ended

31 December 2002 £’000

Group Current service cost 2,417

2,207

Total operating charge 2,417

2,207

f) Analysis of the amount credited to other finance income Year

ended 31 December

2003 £’000

Year ended

31 December 2002 £’000

Group Expected return on pension scheme assets 11,071 14,172Interest on pension scheme liabilities (9,626)

(10,575)

Net return 1,445

3,597



47

30. Pension commitment (continued)

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

Year ended

31 December 2003

£’000

Year ended

31 December 2002 £’000

Group Actual return less expected return on the pension schemes’ assets

12,687 (32,750)

Experience gains and losses arising on the pension schemes’ liabilities

(315) 11,910

Changes in assumptions underlying the present value of the pension schemes’ liabilities

(14,020)

(5,160)

Actual loss recognised in STRGL (1,648)

(26,000)

h) Movement in surplus during the year Year

ended 31 December

2003 £’000

Year ended

31 December 2002 £’000

Group Surplus in scheme at beginning of the year 5,066 29,548Movement in year: Current service cost (2,417) (2,207)Contributions 523 128Other finance income 1,445 3,597Surplus capital restriction 80 -Actuarial loss (1,648)

(26,000)

Surplus in scheme at end of the year 3,049

5,066


48

Notes to the Financial Statements (continued) 30. Pension commitment (continued)

h) Movement in surplus during the year (continued) Year

ended 31 December

2003 £’000

Year ended

31 December 2002 £’000

Company Deficit in scheme at beginning of the year (158) (127)Movement in year: Current service cost (27) (30)Contributions 96 24Other finance charges - (6)Actuarial loss (67)

(19)

Deficit in scheme at end of the year (156)

(158)

i) History of experience gains and losses Year

ended 31 December

2003 £’000

Year ended

31 December 2002

£’000 Group Difference between the expected and actual return on schemes’ assets:

Amount (£’000) 12,687 (32,750) Percentage of schemes’ assets 6% (18%) Experience gains and losses on schemes’ liabilities: Amount (£’000) (315) 11,910 Percentage of the present value of the schemes’ liabilities 0% 7% Total amount recognised in statement of total recognised gains and losses:

Amount (£’000) (1,641) (26,000) Percentage of the present value of the schemes’ liabilities (1%) (15%) Notes to the Financial Statements (continued)


49

30. Pension commitment (continued) i) History of experience gains and losses (continued)

Year ended

31 December 2003 £’000

Year ended

31 December 2002 £’000

Company Difference between the expected and actual return on schemes’ assets:

Amount (£’000) 61 (23) Percentage of schemes’ assets 5% (3%) Experience gains and losses on schemes’ liabilities: Amount (£’000) 1 50 Percentage of the present value of the schemes’ liabilities 0% 5% Total amount recognised in statement of total recognised gains and losses:

Amount (£’000) (67) (19) Percentage of the present value of the schemes’ liabilities (5%) (2%)

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

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

k) FRS 17 balance sheet information At 31 December 2003

At 31 December 2002

Value

Split of

fund


Value

Split of fund


£’000 % of fund (% pa) £’000 % of fund (% pa) Group Equities 6,311 80.2 7.7 4,046 78.9 7.5 Gilts 1,559 19.8 4.8 1,082 21.1 4.6 _________ ______ __________ ______

Fair value of assets 7,870 100.0 5,128 100.0 Present value of scheme liabilities (11,483) (6,125) _________ __________

Actuarial deficit (3,613) (997) Deferred tax 1,084 299 _________ _________

Actuarial deficit after tax (2,529) (698) _________ _________



50

30. Pension commitment (continued) k) FRS 17 balance sheet information (continued) The balance sheet liability would be £2,529,000 (2002: £698,000).

At 31 December 2003

At 31 December 2002

Value

Split of fund


Value

Split of fund


£’000 % of fund (% pa) £’000 % of fund (% pa) Company Equities 2,208 80.2 7.7 1,321 78.9 7.5 Gilts 545 19.8 4.8 354 21.1 4.6 _________ ______ ______ ______

Fair value of assets 2,753 100.0 1,675 100.0 Present value of scheme liabilities (3,943) (2,026) ______ ______

Actuarial deficit (1,190) (351) Deferred tax 357 105 ______ ______

Actuarial deficit after tax (833) (246) ______ ______

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

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

In calculating the liabilities of the Plans, the following financial assumptions have been used: Group and Company At 31 December 2003 At 31 December 2002 Discount rate 5.4% pa 5.6% pa Salary growth 4.6% pa 4.3% pa RPI 2.6% pa 2.3% pa Pension-in payment increases 2.6% pa 2.3% pa

Deferred pensions are re-valued to retirement age in line with the RPI assumption of 2.6% pa (2002: 2.3% pa) unless otherwise prescribed by statutory requirements or the Plan Rules. Notes to the Financial Statements (continued) 30. Pension commitment (continued)


51

m) Analysis of the amount charged to operating profit Year

ended 31 December

2003 £’000

Year ended

31 December 2002 £’000

Group Current service cost 1,206

854

Total operating charge 1,206

854

n) Analysis of the amount credited to other finance income Year

ended 31 December

2003 £’000

Year ended

31 December 2002 £’000

Group Expected return on pension scheme assets 416 303Interest on pension scheme liabilities (461)

(249)

Net return (45)

54

o) Analysis of amount recognised in statement of total recognised gains and losses

(STRGL) Year

ended 31 December

2003 £’000

Year ended

31 December 2002 £’000

Group Actual return less expected return on the pension schemes’ assets

441 (692)

Experience gains and losses arising on the pension schemes’ liabilities

(1,452) (151)

Changes in assumptions underlying the present value of the pension schemes’ liabilities

(1,421)

(251)

Actual loss recognised in STRGL (2,432)

(1,094)

Notes to the Financial Statements (continued) 30. Pension commitment (continued)


52

p) Movement in surplus during the year Year

ended 31 December

2003 £’000

Year ended

31 December 2002 £’000

Group (Deficit)/surplus in scheme at beginning of the year (997) 43Movement in year: Current service cost (1,206) (854)Contributions 1,067 854Other finance (expense)/income (45) 54Actuarial loss (2,432)

(1,094)

Deficit in scheme at end of the year (3,613)

(997)

Year

ended 31 December

2003 £’000

Year ended

31 December 2002 £’000

Company Deficit in scheme at beginning of the year (351) (5)Movement in year: Current service cost (278) (184)Contributions 250 184Other finance (expense)/income (16) 12Actuarial loss (795)

(358)

Deficit in scheme at end of the year (1,190)

(351)

Notes to the Financial Statements (continued) 30. Pension commitment (continued) q) History of experience gains and losses


53

Year ended

31 December 2003 £’000

Year ended

31 December 2002 £’000

Group Difference between the expected and actual return on schemes’ assets:

Amount (£’000) 441 (692) Percentage of schemes’ assets 6% (13%) Experience gains and losses on schemes’ liabilities: Amount (£’000) (1,452) (151) Percentage of the present value of the schemes’ liabilities (13%) (2%) Total amount recognised in statement of total recognised gains and losses:

Amount (£’000) (2,432) (1,094) Percentage of the present value of the schemes’ liabilities (21%) (18%) Year

ended 31 December

2003 £’000

Year ended

31 December 2002 £’000

Company Difference between the expected and actual return on schemes’ assets:

Amount (£’000) 195 (174) Percentage of schemes’ assets 7% (10%) Experience gains and losses on schemes’ liabilities: Amount (£’000) (585) (100) Percentage of the present value of the schemes’ liabilities (15%) (5%) Total amount recognised in statement of total recognised gains and losses:

Amount (£’000) (795) (358) Percentage of the present value of the schemes’ liabilities (20%) (18%) Notes to the Financial Statements (continued) 31. Overdraft facility The Company acts, with certain other Group companies, as joint and several guarantor of the bank overdraft at Barclays Bank PLC.


54

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 annual report 2003

Documents

valleys water plc

year ending

water industry

water businesses

directors report

bristol water holdings

dover water services

consolidated profit