veolia water uk annual report 2006

Veolia Water UK PlcAnnual Report & Accounts 2006

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Veolia Water UK Plc37 - 41 Old Queen Street, London SW1H 9JA

Veolia Water UK Plc Annual Report & Accounts 2006 1

Financial and operating highlights2006 showed strong performances from all ourbusinesses in terms of financial returns, customerservice and operational delivery.

1 Financial and operating highlights

2 Our business

5 Veolia Environnement

6 Statement from the Rt Hon John Gummer

8 Corporate responsibility and Performance

14 Directors and Officers15 Directors’ report19 Independent auditors’ report to the shareholders20 Consolidated profit and loss account21 Consolidated statement of recognised gains and losses22 Consolidated balance sheet23 Company balance sheet24 Consolidated cash flow statement25 Notes to the consolidated cash flow statement27 Notes to the financial statements

£256.4m2005: £238.9m (restated)

Turnover

£66.1m2005: £74.2m (restated)

Group operating profit

• All three water companies met their targets for customer service performance and drinkingwater quality

• All three water companies outperformed their leakage targets

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

• Largest metering programme in England and Wales

• Veolia Water UK recognised as leading water company (2005 Business in the CommunityCorporate Responsibility Index)

Contents

Veolia Water UK companies

Veolia Water UK PLCis the corporate head office, based in London.It has 26 employees.

www.veoliawater.co.uk

Veolia Water Irelandprovides water andwastewater services to municipal clients in Ireland

www.veoliawater.ie

Veolia Water IndustrialOutsourcing Ltd (VWIO)provides sustainablesolutions to water andwastewater managementproblems for industry.It has 44 employees.

www.vwio.com

Veolia Water UK Plc Annual Report & Accounts 2006 32 Veolia Water UK Plc Annual Report & Accounts 2006

Our businessThe Veolia Water UK group comprises three regulatedwater supply companies in South East Englandsupplying over 3.3m customers (Three Valleys Water,Folkestone & Dover Water and Tendring HundredWater), and two non-regulated companies: VeoliaWater Ireland and Veolia Water Industrial Outsourcing.

Regulated water supply companies

Three Valleys Water PLC

Turnover£206.4m

Population served (‘000s)3,054

Employees868

www.3valleys.co.uk

Compliance with drinking water regulations99.98%

Ofwat’s level of service indicators1

��

Tendring Hundred Water Services Ltd

Turnover£14.3m

Population served (‘000s)153

Employees65

www.thws.co.uk



��

Folkestone & DoverWater Services Ltd

Turnover£15.8m

Population served (‘000s)159

Employees78

www.fdws.co.uk



��

1

For the period April 2005–March 2006

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

Customer service performance

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

Folkestone & Dover Water Tendring Hundred WaterThree Valleys Water

Veolia Water UK Head office – London

Veolia Water Industrial Outsourcing officeVeolia Water Industrial Outsourcing contracts

Veolia Water Ireland Head office - KilkennyVeolia Water Ireland contracts


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

Veolia EnvironmentalServicesWorld number 2 in wastemanagement. 89,502employees serving over 45 million customers in 35 countries

Veolia TransportEurope’s number 1private passengertransport company.81,897 employees in 30 countries. 2.7 billionjourneys made in 2006.

Veolia EnergyEuropean number 1 in energy services.48,789 employees in 34 countries.

Veolia Environnement companies

Veolia Environnement

Veolia EnvironnementVeolia Environnement isthe world leader inenvironmental services.298,498 employeesoperating in 67 countries.

“2006 marked the moment when our strategy converged withthe near-universal awakening to the scale of environmentalchallenges. Our research and our advances are heading in thesame direction as the world at large."Henri Proglio, Chairman and Chief Executive Officer Veolia Environnement

Veolia Environnement is listed in all the major sociallyresponsible stock market indexes, demonstrating VeoliaEnvironnement’s long-term commitment to environmentaland social issues. It has been part of the FTSE4Good indexsince September 2004, and of the ASPI eurozone (AdvancedSustainable Performance Index) since March 2005.In 2006,Veolia Environnement’s share was selected to form part of the Dow Jones Sustainability Indexes (DJSI):DJSI Stoxx & DJSI World. Also in 2006, UK consulting firmSustainAbility rated Veolia Environnement’s SustainableDevelopment report among the world’s top 50 for thesecond consecutive year.

Veolia WaterWorld number 1 in water services, 77,900employees in 59 countriesserving 117 millioncustomers in water andwastewater services.

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

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


Veolia Water UK will continue to seek to develop opportunities in municipal and industrial markets related to the provision andtreatment of water and waste water. With its access to theinnovations of its global parent, Veolia Environnement, and the skillsof a talented pool of people to successfully manage operations andrisks, Veolia Water UK is perceived by many to be the service providerof choice.

Finally I would like to thank the management teams and allemployees for their role in contributing to the Group’s success andfor their professionalism and commitment during the year.

6 Veolia Water UK Plc Annual Report & Accounts 2006

Chairman’s StatementStatement from the Rt Hon. John Gummer

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

Our regulated water supply businesses performed well in 2006.All three companies met their targets for customer serviceperformance, leakage, and drinking water quality. Tendring Hundred Water was awarded first place in Ofwat’s OverallPerformance Assessment of delivery of service to customers.

We are proud that Veolia Water UK maintained its position as theleading water company in the UK in terms of corporate responsibilityperformance and management. Veolia Water UK was again rankedin the top 10 of the Sunday Times’‘Top 100 Companies that Count’(based on Business in the Community’s 2006 CorporateResponsibility Index).

The South East of England has experienced the driest period ofweather since 1933 and in particular two sucessive dry winters in2004 and 2005. The level of water resource continues to be a keyissue for the water companies. To address this issue in the longterm, the companies have been deploying a twin-track approach of demand management and resource development. Havingmaximised its resource capacity to meet customer demand,Folkestone & Dover Water Services applied to the Department of the Environment, Food & Rural Affairs for its area to be designatedone of water scarcity. This was granted in a landmark ruling on 1 March 2006. It will enable the company to meter customerscompulsorily, although this will be done sensitively and the impacts on different types of customer carefully monitored.

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

The strategy of the regulated businesses for the remaining threeyears of the AMP period is to demonstrate good performance in allthe regulatory indicators, provide excellent customer service andmaintain their leading position in the sector. In December 2004Ofwat set price limits for each of the five years to 31 March 2010.The price increases will fund programmes to double pipe networkrenewals, increase household meter penetration substantially,implement targeted capital programmes to exploit unused sources,and increase maintenance of non-infrastructure assets.

The main challenges we face in achieving this strategy are the costof labour and competition for contracting resources and skills,demanding efficiency targets, rising energy costs, and continuedpressure on security of water supply. As our business strategies arebased on corporate responsibility, which is in turn underpinned byrisk management, we are confident that risks to the strategy aremanaged and minimized.

Our non-regulated business performed well in 2006. Veolia WaterIndustrial Outsourcing continue to work in partnership withindustry to provide customised, environmentally aware, costeffective water processing, recycling and wastewater management.Veolia Water Industrial Outsourcing’s strategy is to continue todevelop commercial and industrial markets by reducing clients’costs and operational risk, providing access to proven technologyand specialist resources, and ensuring the highest environmentaland social standards. Veolia Water Operations Ireland secured newmunicipal operating contracts during the year and continued todevelop its business in partnership with other members of theVeolia Group.

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

“ With its access to the innovations of its global parent, Veolia Environnement, and the skills of a talented pool of people to successfully manage operations and risks, Veolia Water UK is perceived by many to be the service provider of choice.”

Rt Hon John Gummer MPChairmanJuly 2007


Our approach to corporateresponsibility encompassessustainable development, ethics,traditional safety, health, qualityand environmental managementsystems, risk management and theinternal and external managementof stakeholder relationships.Our corporate responsibility policy,principles and programmes areoverseen by the Board, chaired by the Rt Hon John Gummer.More detail can be found in the VeoliaWater UK Corporate ResponsibilityReport 2006 at www.veoliawater.co.uk.This contains information onperformance primarily in the period April 2005 to March 2006.

BenchmarkingIn the UK, Veolia Water UK Plc is recognised as the leading watercompany in terms of corporate responsibility performance andmanagement. In 2006 it achieved a top 10 placing in the SundayTimes’‘Top 100 Companies that Count’ being awarded the rankingof joint 7th and leading water company, with a score of 97.5%.This is based on Business in the Community’s 2005 CorporateResponsibility Index.

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

Business ManagementFormal environmental, health and safety, and quality systems arefundamental to continuous improvement in our performance.All the regulated businesses’ quality systems meet the ISO9001:2000 standard. The environmental management systems of Folkestone & Dover Water Services Limited and Veolia WaterIndustrial Outsourcing Limited are certified to ISO 14001. TendringHundred Water Services Limited and Three Valleys Water PLC areworking to align their management systems with ISO 14001.

Veolia Water UK Plc is committed to encouraging partners,sub-contractors and suppliers to adhere to its corporate responsibilitypolicy and principles. It has developed environmental and socialcriteria for use in supplier selection and performance procedures.

Our businessOur goal is to manage water resources to preserve their social, ecological and economic value and to meet ourcustomers’ expectations in terms of the provision of water and related services.

We do this by balancing the demand for water against theavailability 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 withindustry to provide customised sustainable environmental solutions,saving customers money and improving environmental performance.

The south-east of England receives just half the average nationwiderainfall. All three water supply companies promote water efficiencymeasures vigorously to bridge the potential gap between demandand supply. Three Valleys Water PLC is increasing its meteringprogramme, aiming to have 44% of domestic properties across itsregion metered by 2010. Having maximised its resource capacity to meet customer demand, Folkestone & Dover Water ServicesLimited applied to the Department of the Environment, Food &Rural Affairs for its area to be designated one of water scarcity. Thiswas granted in a landmark ruling on 1 March 2006. This will enablethe company to meter customers compulsorily; it aims to have 90%of its 170,000 customers metered by 2015.

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

LeakageAll three companies met leakage targets for the 2005/6 year setby the Water Services Regulation Authority, the water industry’seconomic regulator, with Three Valleys Water PLC and TendringHundred Water Services Limited achieving rates better than theirtargets. Folkestone & Dover Water Services Limited beat their targetby almost 5%. Tendring Hundred Water Services Limited continuesto have the lowest level of leakage per property in the industry.

Customer serviceThe Water Services Regulation Authority (Ofwat) assessescompanies’ overall delivery of service to customers annually.In 2005/6 Tendring Hundred Water Services Limited was awardedfirst place amongst all the water supply companies in England andWales. This is the fourth time in five years that the Company hastopped the Overall Performance Assessment ranking and the firsttime that a company has done so with a perfect score. Folkestone & Dover Water Services Limited also maintained excellent levels of customer service despite significant increases in all types ofcustomer contact as a result of the company’s application for areaof water scarcity status. Three Valleys Water PLC was in the topperformance band in four of the five indicators. All of our companieshave targets to maintain high levels of customer service.

Drinking water qualityWe provided drinking water of the highest quality to over 3.3 millionpeople in 2005/6. The quality of the drinking water we supply to ourcustomers continues to be of a very high standard, with ThreeValleys Water PLC exceeding the industry average.

PerformanceCorporate responsibility

Celebrating fitting the lastmeter at LyddDetecting leaks


In the workplaceOur 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 noemployee or applicant for employment receives less or morefavourable treatment, whether through direct or indirectdiscrimination, on the grounds of race, gender, disability, sexualorientation, religious beliefs, creed, marital or parental status. In linewith a Veolia Environnement SA commitment to promote diversityand combat discrimination we record the composition of our staff.Women make up 38% of the workforce, and 30% of managers.Employees registered as disabled make up 0.4%.

TrainingAll Veolia Water UK Plc companies have introduced the personaldevelopment system to provide a more structured approach toemployee learning and career development. In 2006/7 Three ValleysWater PLC aims to combine the current employee PerformanceReview and Personal Development Plan into an Annual DevelopmentPlan. This will allow the company to focus on employees’ technicaland personal competencies and make it easier to identifyappropriate training needs.

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

Health & safetyHealth and safety plays an important part in the everyday culture ofour companies. There were no fatalities in our water companies in2005/6. Work days lost due to work accidents amounted to 431,compared with 238 in the previous year. This increase reflects theinclusion of motor vehicle related injuries in the accident statistics.

Staff turnoverStaff turnover decreased slightly to 19.4% compared to 19.9% for theprevious year.

Employee consultationVeolia Water UK Plc companies work positively and progressivelywith trades unions. Every two years staff are invited to contributeideas for the future of the company in an employee survey.

In the communityOur goal is to work with and support communities, charitiesand government towards improving the quality of life.

Veolia Water UK Plc employees are actively encouraged to becomeinvolved in local community initiatives in the belief that there arebenefits for both the community and employees. For example, thecharity KitAid, set up in 1998 by Three Valleys Water PLC employeeDerrick Williams MBE, recycles football kits from professionalfootball clubs to children and adults in Africa and other parts of the developing world. Members of senior management sit on theboards of local Groundwork trusts.

The companies have an ongoing target to develop programmes to support education. Three Valleys Water PLC’s purpose-builtEducation Centre has received several awards for its work withschoolchildren, focussing primarily on water conservation. Duringthe year, more than 21,000 children and adults either visited theCentre or used its resources to deliver the National Curriculum at more than 120 schools.

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

In the environmentOur goal is to seek opportunities to reduce our consumption ofnatural resources by using alternatives where possible, and byoptimising efficiency of use, whilst protecting and enhancing the environment.

Energy consumptionThe annual carbon dioxide emissions associated with all our energyrequirements for water supply, offices and transport were 105,400tonnes, which is a 28% fall, or 41,300 tonne reduction since 1995/96.This fall is not associated with reduced energy consumption,however, but rather with changes in the mix of fuels used togenerate electricity supplied through the public electricity network.Energy consumption per unit of water put into supply has increasedover the last five years. This can be attributed to the use of differentwater sources and to an increased number of energy-intensiveplants, eg membrane and ozone, as a result of the need to treatwater to increasingly higher standards. Energy consumption hasalso increased due to the need for additional pumping as a resultof changing climate conditions, including hot weather and flooding.

Fuel consumption Both Three Valleys Water PLC and Folkestone & Dover Water Services Limited can demonstrate a general downward trend in fuel consumption per property connected since 1995/6. All threecompanies have an ongoing target to maintain improvements in fuel consumption.

WasteWe are able to monitor the use of aggregates by measuring ourown purchases and increasingly by contractually obliging andencouraging our contractors to record the amounts they use, recycleand dispose. In 2005/6, we estimate that of the 283,500 tonnes ofmaterial excavated by our companies and contractors, 52% or122,700 tonnes were recycled rather than being sent to landfill,compared to 128,660 tonnes last year. All Veolia Water UK Plccompanies have an ongoing target to reduce the amount of wastegoing to landfill.

BiodiversityOur policy is to give particular priority to projects and activities thatfoster species and habitats which are the subject of BiodiversityAction Plans and are found on our own and adjacent land.

Folkestone & Dover Water Services Limited have partnered with the White Cliffs Countryside Project, which continues to enhance and protect the countryside in south east Kent.A recent survey, which formed part of the Sussex Emerald MothConservation Project, concluded that Dungeness provides a better habitat now than it had before the project started.

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

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

Folkestone & Dover Water’s roadshowon water conservation

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

Installing a bird box

Hilfield Reservoir

12 Veolia Water UK Plc Annual Report & Accounts 2006 Veolia Water UK Plc Annual Report & Accounts 2006 13

Contents

14 Directors and Officers15 Directors’ report19 Independent auditors’ report to the shareholders20 Consolidated profit and loss account21 Consolidated statement of recognised gains and losses22 Consolidated balance sheet23 Company balance sheet24 Consolidated cash flow statement25 Notes to the consolidated cash flow statement27 Notes to the financial statements


Directors’ report

DirectorsJ S Gummer(Chairman)

D W Alexander(Managing Director,Appointed 1 February 2005)

J C Banon(Managing Director,up to 1 February 2005)

R A Bienfait

M J E Butcher

F Darley(Resigned 31 March 2006)

C Roger-Lacan

SecretaryK W Taylor

Registered Office37-41 Old Queen StreetLondonSW1H 9JA

AuditorsErnst & Young LLP1 More London PlaceLondonSE1 2AF

Registered Number2127283

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

Principal activitiesThe principal activities of the Group are the investment in andmanagement of long-term interests in the water industry in theUnited Kingdom and Ireland.

Dividends and transfers to reservesThe consolidated profit after taxation and minority interestsamounted to £160.4m (2005 restated: £72.8m). A dividend of £123.9mhas been paid during the year (2005: £127.0m). The Directors do notpropose a final dividend (2005: £Nil) in respect of the year ending 31 December 2006. A retained profit of £35.9m (2005 restated:retained loss of £57.1m) will be transferred to reserves.

Review of business and future developmentsThe group’s key financial and other performance indicators duringthe year were as follows:

2006 2005 Change£’000 £’000 %

Group turnover 256,390 238,903 7%

Operating profit 66,075 74,200 -1 1 %

Profit before tax 178,879 90,807 97%

Profit after tax 161,155 73,787 118%

Shareholders’ funds 313,522 274,796 14%

Net debt 78,385 161,988 -52%

Capital expenditure 90,338 46,995 92%

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

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

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

Profit after tax increased by 118% in the year to £161.2m. As reportedabove this was primarily due to the disposal of investments during2006. Net interest and tax charges (excluding those charges due tothe equity accounting of associates) remained broadly in line withthat incurred in 2005.

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

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

Net debt reduced from £162.0m at the end of 2005 to £78.4m at31 December 2006.

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

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

Principal risks and uncertainties

Economic and regulatory riskThe water industry in the UK comprises a number of regionalmonopolies which are subject to economic and technical regulation.Water charges are set by Ofwat (the economic regulator for thewater and sewerage industry in England and Wales) on a five yearlycycle. With a significant proportion of the Group’s activities investedin regulated water businesses, determinations issued by Ofwat canhave a significant impact on profits and cashflows.

Security riskThe Group has risks to the security of its supply of water tocustomers and the security of its assets and employees.

Security of supplyA large part of the water business operates in some of the driestand water scarce regions in the country. Combined with the growthof hosebuilding in our operating regions, these factors placepressures on the supply and demand balance, heightening the riskof having insufficient water to supply customers.

The Group has a number of operational measures to address thisrisk. In addition the Group actively promotes water efficiencyamongst its customers, and has an active drought managementplan to address risk of supply shortage.

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

Directors and Officers


Directors’ report (continued)

Environmental and water quality riskThe water companies are required to provide potable water of thehighest standard compliant with relevant legislation (including theWater Framework Directive), as administered by Ofwat, the DrinkingWater Inspectorate and the Environment Agency.

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

Environmental and water quality risks are also applicable where the non regulated business provides water related services to publicauthorities and industry.

Competition riskThe water companies currently operate as regional monopolies of water supply. There is a risk that further legislation may beintroduced to reduce that monopoly position with all or a certaingroup of customers.

Where competition is permitted for the regulated water supply tocertain large commercial customers, entrants can apply for licencesto supply water to these commercial customers within the watercompanies operating region. Failure of the water companies tocomply with the relevant statutory requirements could result infines being imposed or reference to the Competition Commission.

Health and safety riskThe risk to the Group that the health and safety of employees isadversely impacted through performance of their duties. The riskimpacts can range from loss of working days to compensationpayments for negligence. The Group has a dedicated Health and Safety team who work towards identifying and mitigatingthese risks.

Delivery riskThe water companies are required to deliver a significant capitalinvestment programme consisting of a number of capital projects.There are risks to these projects on the timing of delivery andresourcing. Failure to deliver significant elements of the capitalprogramme could lead to adverse adjustments to the watercompanies regulatory capital value at the next periodic review byOfwat, and potentially enforcement action by the EnvironmentAgency, the Drinking Water Inspectorate or Ofwat.

Climate change riskClimate change will directly impact the water industry. Veolia WaterUK is currently investigating the impacts that this change will haveon the supply of drinking water in the regions in which it operates.

Liquidity riskThe Group’s regulated business is required to deliver mandatorycapital investment requirements generating an ongoing need forfinancing. The Group is subject to variability of cashflow due to thebilling cycle within the regulated business and the uncertainty oftiming of customer payments. Variability in cashflows is primarilymanaged through the use of short-term borrowing facilities. Furtherdisclosure on the management of liquidity risk is included in note 32.

Credit riskThe 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 norights 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 creditmanagement to reduce the impact of this risk.

Pension arrangementsThe Group is committed to maintaining fair and sustainablepension arrangements. For new employees, we offer a choice ofdefined contribution pension arrangements under the Veolia UKPension Plan, in which the Group contributes double thecontributions made by employees.

The Group’s two defined benefit pension schemes have been closedto new entrants. The Veolia Water Supply Companies Pension Plan(VWSCPP), which mirrored the provisions of the former WaterCompanies Association Scheme, was closed in 1996 and its successor,the Veolia UK Pension Plan (VUKPP) final salary scheme was in turnclosed in 2004.

The Group contributes up to 39% of employees pensionable salaryto the above defined benefit schemes, dependent upon the financialstatus of the divisions of the pension plans.

The Group has agreed with the Trustee a contribution plan for theVWSCPP which will ensure that the deficit of £8.9m as advised inthe last triannual valuation will be eliminated within 10 years (based on financial assumptions applicable at the last triannualvaluation dated 31 December 2004).

The Group has agreed with the Trustee a contribution plan for theVUKPP which will ensure that the deficit of £1.3m as advised in thelast triannual valuation will be eliminated within 10 years (based onfinancial assumptions applicable at the last triannual valuationdated 31 December 2005).

Research and developmentIn addition to the Group’s own research and development activities,the Group’s water company subsidiaries are committed toparticipate in research programmes operated by UK Water IndustryResearch Limited, which undertakes research nationally into allaspects of water industry operations. The Group also participates inand benefits from research undertaken by other companies withinthe Veolia Environnement SA. Expenditure in the year was £702,000(2005: £732,000).

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

Corporate responsibilityA summary of our approach to and our performance in CorporateResponsibility is detailed on pages 4 to 8.

Creditor payment policyThe Directors are aware of the need for timely payment for goodsand services received. It is the Group policy to settle the terms ofpayment with suppliers when agreeing terms of business and topay in accordance with contractual and other legal obligations.The payment policy applies to all payments to creditors for revenueand capital supplies of goods and services.

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

Market value of land and buildingsThe major part of land and buildings included within tangible fixedassets are used for the purpose of providing potable water to theconsumer. A significant portion of the Group’s buildings andinstallations are highly specialised and have a market value only inthe context of the provision of a potable water supply.

Charitable and political donationsDonations for charitable purposes made by Group companies duringthe year amounted to £136,000 (2005: £121,000).

No political contributions were made during the year.

Employee informationGroup companies consult their staff on matters of concern in thecontext of their employment.

All Group companies continued to carry out their obligations arisingfrom the Health & Safety at Work Act 1974 through consultativecommittees consisting of management and employee representatives.The Group gives every consideration to applications for employmentfrom disabled persons where the requirements of the job may becovered adequately by a handicapped or disabled person.

With regard to existing employees and those who have becomedisabled during the year, the Group has continued to examine ways and means of providing training and career developmentwherever appropriate.

During the year, the policy of providing employees with informationabout the group has been continued through the use of the intranetand newsletters in which employees have also been encourage topresent their suggestions and views. Regular meetings are heldbetween local management and employees to allow a free flow ofinformation and ideas.

Directors and their interestsThe Directors of the Company who served during the year were:

J S Gummer (Chairman)D W Alexander (Managing Director)J C BanonR A BienfaitM J E ButcherF Darley (Resigned 31 March 2006)C Roger-Lacan

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

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

Going concernAfter making enquiries, the directors have a reasonable expectationthat the Group and the Company have adequate resources tocontinue in operational existence for the forseeable future. For thisreason, they continue to adopt the going concern basis in thefinancial statements.

Disclosure of information to the auditorsSo far as each person who was a director at the date of approvingthis report is aware, there is no relevant audit information, beinginformation needed by the auditor in connection with preparing itsreport, of which the auditor is unaware. Having made enquiries offellow directors and the group’s auditor, each director has taken allthe steps that he is obliged to take as a director in order to makehimself aware of any relevant information and to establish that theauditor is aware of that information.


Independent auditors’ report to theshareholders of Veolia Water UK Plc

Directors’ report (continued)

Statement of directors’ responsibilities in respect of thefinancial statementsThe directors are responsible for preparing the Annual Reportand the financial statements in accordance with applicable United Kingdom law and United Kingdom Generally AcceptedAccounting Practice.

Company law requires the directors to prepare financial statementsfor each financial year that give a true and fair view of the state ofaffairs of the company and of the group. In preparing these financialstatements, 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 beenfollowed, subject to any material departures disclosed andexplained in the financial statements;

• prepare the financial statements on the going concern basisunless it is inappropriate to presume that the company willcontinue in business.

The directors are responsible for keeping proper accounting recordsthat disclose with reasonable accuracy at any time the financialposition of the group and enable them to ensure that the financialstatements comply with the Companies Act 1985. They are alsoresponsible for safeguarding the assets of the company and hencefor taking reasonable steps for the prevention and detection offraud and other irregularities.

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

AuditorsSo far as each person who was a director at the date of approvingthis report is aware, there is no relevant audit information, beinginformation needed by the auditor in connection with preparing its report, of which the auditor is unaware. Having made enquiriesof fellow directors and the group’s auditor, each director has takenall the steps that he/she is obliged to take as a director in order tomade himself/herself aware of any relevant audit information andto establish that the auditor is aware of that information.

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

By order of the Board

R A BienfaitDirectorJuly 2007

We have audited the group and parent company financialstatements (the “financial statements”) of Veolia Water UK Plc forthe year ended 31 December 2006 which comprise the Group Profitand Loss Account, the Group and Company Balance Sheets, theGroup Cash Flow Statement, the Group Statement of TotalRecognised Gains and Losses and the related notes 1 to 36. Thesefinancial statements have been prepared under the accountingpolicies set out therein.

This report is made solely to the company’s members, as a body, inaccordance with Section 235 of the Companies Act 1985. Our auditwork has been undertaken so that we might state to the company’smembers those matters we are required to state to them in anauditors’ report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyoneother than the company and the company’s members as a body, forour audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditorsThe directors are responsible for preparing the Annual Report andthe financial statements in accordance with applicable UnitedKingdom law and Accounting Standards (United Kingdom GenerallyAccepted Accounting Practice) as set out in the Statement ofDirectors’ Responsibilities.

Our responsibility is to audit the financial statements in accordancewith relevant legal and regulatory requirements and InternationalStandards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statementsgive a true and fair view and are properly prepared in accordancewith the Companies Act 1985. We also report to you if, in our opinion,the Directors’ Report is not consistent with the financial statements.

In addition we report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all theinformation and explanations we require for our audit, or ifinformation specified by law regarding directors’ remuneration andother transactions is not disclosed.

We read other information contained in the Annual Report, andconsider whether it is consistent with the audited financialstatements. This other information comprises only the Chairman’sStatement, the Corporate Responsibility Report and the Directors’Report. We consider the implications for our report if we becomeaware of any apparent misstatements within them. Ourresponsibilities do not extend to any other information.

Basis of audit opinionWe conducted our audit in accordance with International Standardson Auditing (UK and Ireland) issued by the Auditing Practices Board.An audit includes examination, on a test basis, of evidence relevantto the amounts and disclosures in the financial statements. It alsoincludes an assessment of the significant estimates and judgmentsmade by the directors in the preparation of the financial statements,and of whether the accounting policies are appropriate to thegroup’s and company’s circumstances, consistently applied andadequately disclosed.

We planned and performed our audit so as to obtain all theinformation and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonableassurance that the financial statements are free from materialmisstatement, whether caused by fraud or other irregularity or error.In forming our opinion we also evaluated the overall adequacy ofthe presentation of information in the financial statements.

OpinionIn our opinion:• the financial statements give a true and fair view, in accordance

with United Kingdom Generally Accepted Accounting Practice, ofthe state of the group’s and the parent company’s affairs as at31 December 2006 and of the group’s profit for the year then ended;

• the financial statements have been properly prepared inaccordance with the Companies Act 1985; and

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

Ernst & Young LLPRegistered auditorLondonJuly 2007

RestatedYear ended Year ended

31 December 31 December2006 2005

Notes* £’000 £’000

Turnover 2 256,390 238,903

Cost of sales (156,962) (132,548)

Gross profit 99,428 106,355

Administrative expenses (41,652) (40,498)

Other operating income 3 8,299 8,343

Group operating profit 4 66,075 74,200

Share of operating profit in associate 17,445 50,395

Preference dividend income from associate 800 1,600

Total operating profit 84,320 126,195

Profit on the disposal of fixed assets 5 818 4,253

Profit on the disposal of investments 5 112,743 -

Profit on ordinary activities before interest and taxation 197,881 130,448

Interest receivable and similar income 8 7,578 8,415

Interest payable and similar charges:- Group 9 (14,661) (14,965)

- Associate (13,422) (29,284)

Other finance income/(charges):- Group 10 2,153 1,393

- Associate (650) (5,200)

Profit on ordinary activities before taxation 178,879 90,807

Tax on profit on ordinary activities 11 (17,724) (17,020)

Profit on ordinary activities after taxation 161,155 73,787

Equity minority interests (727) (1,008)

Non-equity minority interests (5) (5)

Profit on ordinary activities after taxation and minority interests 160,423 72,774

Dividends 12 (123,900) (127,000)

Non-equity dividends on associates (620) (2,888)

Retained profit/(loss) for the year 27 35,903 (5 7, 1 1 4 )

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


Restated Year ended Year ended


£’000 £’000

Group profit for the financial year 160,423 72,774

Total recognised gains for the financial year 160,423 72,774

Actuarial gain/(loss)- Group 1,230 (19,297)

- Associate 2,056 (2,089)

Deferred tax arising on group actuarial gain/(loss) (370) 5,789

Total gains recognised for the year 163,339 57,177

Prior year adjustment on the full adoption of FRS20 (135) -

Total gains recognised since last annual report 163,204 57,177

Consolidated profit and loss account Consolidated statement ofrecognised gains and losses


Company balance sheet

Restated31 December 31 December

2006 2005

Notes* £’000 £’000

Fixed assetsTangible assets 14b 5,216 5,292

Investments 15 45,854 45,854

51,070 51,146

Current assetsDebtors 19 240,892 247,978

Short term deposits - 437

Cash at bank and in hand 59 281

240,951 248,696

Creditors: amounts falling due within one year 20 (52,017) (79,015)

Net current assets 188,934 169,681

Total assets less current liabilities 240,004 220,827

Creditors: amounts falling due after more than one year 21 (13,990) (21,966)

Provisions for liabilities and charges 22 (1,318) (1,864)

Net pension liability 33 (436) (1,051)

Net assets 224,260 195,946

Capital and reservesCalled up share capital 26 500 500

Other reserves 27 - -

Profit and loss account 27 223,760 195,446

Equity shareholders’ funds 29 224,260 195,946

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

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

D W Alexander R A BienfaitDirector Director

Restated31 December 31 December

2006 2005

Notes* £’000 £’000

Fixed assetsIntangible assets 13 198 210

Tangible assets 14a 571,401 547,786

Investments 15 15 15

Investments in associate 16 - 47,500

571,614 595,5 1 1

Current assetsStocks 18 1,057 1,233

Debtors 19 199,436 142,817

Investments 17 - 1,851


Cash at bank and in hand 583 3,013

201,076 149,351

Creditors: amounts falling due within one year 20 (155,200) (155,502)

Net current assets/(liabilities) 45,876 (6,151)

Total assets less current liabilities 617,490 589,360

Creditors: amounts falling due after more than one year 21 (242,178) (252,540)

Provisions for liabilities and charges 22 (5,806) (3,583)

Deferred tax 22 (48,579) (49,779)

Net pension liability 33 (7,405) (8,662)

Net assets 313,522 274,796

Capital and reservesCalled up share capital 26 500 500

Other reserves 27 7,649 7,649

Profit and loss account 27 300,988 262,169

Equity shareholders’ funds 29 309,137 270,318

Equity minority interests 25 4,347 4,440

Non-equity minority interests 25 38 38

313,522 274,796

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

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

D W Alexander R A BienfaitDirector Director

Consolidated balance sheet


Notes to the consolidated cash flow statementConsolidated cash flow statement



Notes* £’000 £’000

Net cash inflow from operating activities a 133,842 131,910

Returns on investments and servicing of financeInterest received 8,424 7,434

Interest paid (13,574) (12,585)

Interest element of finance lease rentals (1,245) (849)

Dividends received from associate 800 3,519

Dividends paid to minorities (824) (1,234)

Net cash outflow from returns on investments and servicing of finance (6,419) (3,715)

Taxation paid (18,379) (20,607)

Capital expenditure and financial investment

Purchase of fixed assets (79,529) (60,995)

Contributions to fixed assets received 9,489 10,268

Disposal of fixed assets 1,420 6,988

Purchase of investments - (20)

Cost of investment in associate - (2,550)

Sale of investment in associate 161,373 -

Sale of other investments 5,704 -

Net cash inflow/(outflow) from capital expenditure and financial investment 98,457 (46,309)

Equity dividends paid (123,900) (127,000)

Cash inflow/(outflow) before management of liquid resources and financing 83,601 (65,721)

Net cash (outflow)/inflow from management of liquid resources b (55,425) 64,460

Net cash outflow from financing b (6,556) (6,916)

Increase/(decrease) in cash d (21,620) (8,177)

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

a. Reconciliation of operating profit to net cash flow from operating activitiesRestated

Year ended Year ended31 December 31 December

2006 2005

£’000 £’000

Group operating profit 66,075 74,200

Depreciation 66,114 59,120

Amortisation of deferred credit (415) (412)

Amortisation of goodwill – intangible assets 12 12

Amortisation of goodwill – investment in associate 426 426

Decrease in stocks 177 549

Decrease/(increase) in debtors 5,801 (1,560)

(Decrease)/increase in creditors and provisions (5,935) 3,331

Increase/(decrease) in pension position 1,587 (3,756)

Net cash inflow from operating activities 133,842 131,910

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


2006 2005

£’000 £’000

Management of liquid resourcesDecrease in cash on short-term deposit 437 910

(Increase)/decrease in short-term loans due from group undertakings (55,862) 63,550

Net cash (outflow)/inflow from management of liquid resources (55,425) 64,460

FinancingDecrease in financing of assets operated by other parties (1,103) (7 1 1 )

Decrease in capital elements of finance leases (5,368) (4,385)

Non cash movement in bond liability 105 98

Redemption of debentures (190) (1,918)

Net cash outflow from financing (6,556) (6,916)

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


Notes to the financial statements

1. Accounting policies

a. Basis of accountingThe financial statements have been prepared under the historicalcost convention in accordance with applicable accounting standards,except for the treatment of certain grants and contributions, inaccordance with the Companies Act 1985.

b. New accounting standardsIn preparing the financial statements for the current year, theCompany has adopted FRS 20 ‘share-based payment’. The adoptionof FRS 20 has resulted in a change in accounting policy for sharebased-payment transactions. FRS 20 requires the fair value ofoptions and share awards which ultimately vest to be charged tothe profit and loss account over the vesting or performance period.For equity-settled transactions the fair value is determined at thedate of the grant using an appropriate pricing model. For cash-settledtransactions fair value is established initially at the grant date andat each balance sheet date thereafter until the awards are settled.If an award fails to vest as the result of certain types of performancecondition not being satisfied, the charge to the income statementwill be adjusted to reflect this.

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

c. Basis of consolidationThe financial statements include the accounts of Veolia Water UKPLC 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 andnot as a separate entity.

Entities, other than subsidiary undertakings or joint ventures,in which the group has a participating interest and over whoseoperating and financial policies the group exercises a significantinfluence are treated as associates. An interest in an associateacquired in 2003, has been accounted for using the equity method,up till the date of disposal, in accordance with FRS 9.

As permitted by section 230 of the Companies Act 1985, the parentcompany’s profit and loss account has not been included in thefinancial statements.

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

Goodwill arising on acquisitions is capitalised and amortised inaccordance with FRS 10. Goodwill is amoritsed over a life of notgreater than 20 years.

e. Interest and dividendsBank and short term deposit interest receivable is dealt with on anaccruals basis.

f. Bad debt provisioningThe bad debt provision is calculated by applying a range of differentpercentages to debt of different ages. These percentages also varybetween categories of debt. Higher percentages are applied to thosecategories of debt which are considered to be of greater risk andalso to debt of greater age. The value of the bad debt provision issensitive to the specific percentages applied.

g. Revenue recognitionRevenue is recognised in accordance with FRS 5 in the period inwhich it is earned. The company does not recognise revenues wherepayment is received in advance. However payments made in theprevious period in respect of the current year will be recorded asrevenue in the current period.

h. Capital contributionsInfrastructure charges received in respect of connections to themains network are allocated to fixed assets, surface andinfrastructure, in accordance with the basis on which the chargesare calculated.

Grants and contributions receivable relating to infrastructure assetshave been deducted from the cost of tangible fixed assets. This isnot in accordance with the Companies Act 1985, which requiresfixed assets to be stated at their purchase price or production cost, without deduction of grants, and contributions which areaccordingly accounted for as deferred income. This departure fromthe requirements of the Companies Act 1985 is, in the opinion of the Directors, necessary for the financial statements to show a trueand fair view because, whilst a provision is made for the depreciationof infrastructure assets, they do not have determinable finite livesand therefore no basis exists upon which to recognise grants andcontributions as deferred income. The effect of the departure on thevalue of tangible fixed assets is disclosed in Note 14a.

Notes to the consolidated cash flow statement(continued)

c. Analysis of net debtAt At

31 December 31 December2005 Cash flow 2006

£’000 £’000 £’000

Net funds:Cash at bank and in hand 3,013 (2,430) 583

Bank overdrafts (24,337) 24,050 (287)

(21,324) 21,620 296

Liquid resources:Short-term loans to group undertakings 91,196 55,862 147,058

Cash on short term deposit 437 (437) -91,633 55,425 147,058

Debt:Bond (5.875% guaranteed notes) (195,964) (105) (196,069)

Finance leases (including sale and leaseback) (15,317) 5,368 (9,949)

Debentures (249) 190 (59)

Financing of assets operated by third parties (20,765) 1,103 (19,662)

(232,295) 6,556 (225,739)

Net debt (161,986) 83,601 (78,385)

d. Reconciliation of net cash flow to movement in net debtRestated


2006 2005

£’000 £’000

Decrease/(increase) in overdraft in the year 21,620 (8,177)

Cash inflow/(outflow) from increase/(decrease) in liquid resources 55,425 (64,460)

Cash inflow from decrease in debt and lease financing 6,556 6,916

Movement in net debt in the year 83,601 (65,721)

Opening net debt (161,986) (96,265)

Closing net debt (78,385) (161,986)


Notes to the financial statements (continued)

1. Accounting policies (continued)

i. Fixed and current asset investmentsFixed asset investments are stated at cost less any provisions inrespect of permanent diminution in value.

j. Stocks and work in progressStocks and work in progress are valued at the lower of cost or netrealisable value. In accordance with established practice in the waterindustry no value is placed upon the water in reservoirs, mains or inthe course of treatment. Work in progress for chargeable services isvalued at cost.

k. Tangible fixed assets and depreciationTangible 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 oninfrastructure assets, including renewals is treated as an additionand included at cost after deducting grants and contributions.

The depreciation charge for infrastructure assets is the estimatedlevel of annual expenditure required to maintain the operatingcapability of the network which is based on each Group companiesindependently certified asset management plan.

Disposals of infrastructure assets are calculated based on theestimated lives of the assets before they are replaced.

Depreciation is provided on all other tangible fixed assets exceptfreehold land and is calculated to write off their cost over theirestimated useful lives on a straight line basis. Assets acquired underfinance leases are depreciated over the shorter of their useful life orthe lease term. The performance of assets is continually monitoredand where impairment is identified, fixed assets are written downto their recoverable amount. Any such write down would be chargedto operating profit. Tangible fixed assets are reviewed for impairmentat the end of each reporting period when the estimated remaininguseful economic life of the assets exceeds 50 years. The estimateduseful lives of tangible fixed assets are:

Buildings 40 – 100 yearsOperational structures 15 – 100 yearsFixed plant and machinery 3 – 30 yearsMobile plant and motor vehicles 3 – 10 years

l. Deferred taxationDeferred tax is provided, except as noted below, on timing differencesthat have arisen but not reversed by the balance sheet date, wherethe timing differences result in an obligation to pay more tax, or aright to pay less tax, in the future. Timing differences arise becauseof differences between the treatment of certain items foraccounting and taxation purposes.

In accordance with FRS 19 deferred tax is not provided on timingdifferences 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 upliftprices to those ruling when an acquisition is made.

Deferred tax assets are recognised to the extent that it is regardedas more likely than not that they will be recovered. Deferred tax ismeasured at the tax rates that are expected to apply in the periodswhen the timing differences are expected to reverse, based on taxrates and law enacted or substantively enacted at the balance sheet date.

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

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

m. Leased assetsAssets financed by leasing are included in tangible fixed assets andthe net obligation to pay future rentals is included within creditors.Instalments are apportioned between the finance element, which ischarged to the Profit and Loss Account as interest, and the capitalelement, which reduces the outstanding obligation for futureinstalments.

Rentals paid under an operating lease are charged against profits ona straight-line basis over the life of the lease.

n. Pension costsThe Group operates two defined benefit pension schemes (bothclosed to new members) and a defined contribution scheme.

The assets of the schemes are held seperately from those ofthe group.

Pension scheme assets are measured using market values. Pensionscheme liabilities are measured using the projected unit methodand discounted at the rate of return of a high quality corporate bondof equivalent term to the liability.

Actuarial gains and losses are recognised in the statement of totalrecognised gains and losses.

Employer’s contributions to the defined contribution scheme arecharged 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 netpension liability.

o. Research and developmentResearch and development costs are written off in the period inwhich they are incurred.

p. Financial InstrumentsIncome and expenditure on financial instruments is recognised onan accruals basis, and credited or charged to the profit and lossaccount in the financial period in which it arises.

q. Comparative figuresCertain prior year figures have been restated to conform with the2006 presentation.

r. ProvisionsA provision is recognised when the group has a legal or constructiveobligation as a result of a past event and it is probable that anoutflow of economic benefits will be required to settle the obligation.


3. Other operating incomeYear ended Year ended


£’000 £’000

Commission, rents and sundry income 8,299 8,343

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


2006 2005

£’000 £’000

Auditors’ remuneration- for audit services 199 209

- for regulatory returns 147 126

- for non-audit services (Income accrual investigation) 32 -

- for non-audit services 26 63

Depreciation of tangible fixed assets - infrastructure 33,721 28,783

- owned 29,226 26,640

- leased 3,376 3,697

Impairment of tangible fixed assets- impairment of fixed assets - 207

- reversal of impairment of fixed assets (207) -

Operating lease rentals- land and buildings 343 442

- other 2,337 2,181

Research and development 702 732

Hire of plant and machinery 239 170

Amortisation of goodwill 12 12

Amortisation of contributions to capital expenditure (415) (412)


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



£’000 £’000

TurnoverWater supply and related activities: 256,390 238,903



£’000 £’000

Operating profitWater supply and related activities 66,075 74,200



£’000 £’000

Profit on ordinary activities before taxWater supply and related activities 175,506 74,896

Associate 3,373 1 5, 9 1 1

178,879 90,807



£’000 £’000

Net assetsWater supply and related activities 313,522 227,296

Share of net assets of associate - 47,500

Minority interest (4,385) (4,478)

Group net assets 309,137 270,318



5. Exceptional itemsYear ended Year ended


£’000 £’000

Recognised below operating profit:Profit on disposal of fixed asset investments - Southern Water Investments Limited 108,889 -

- Ecofin Water and Power Opportunities PLC 3,854 -

112,743 -

Profit on disposal of fixed assets 818 4,253

1 1 3,561 4,253

Minoritity interests’ share of profit on disposal of fixed assets 35 36

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


2006 2005

£’000 £’000

Charge on profit on disposal of fixed asset investments 704 -Charge on profit on disposal of fixed assets 237 1,275

941 1,275

6. Directors’ remunerationYear ended Year ended


£’000 £’000

Aggregate emoluments of the Directors 843 1,083

Company pension contributions to defined benefits scheme 52 66


2006 2005

Members of defined benefit schemes 3 3

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


2006 2005

£’000 £’000

Highest paid DirectorAggregate emoluments and benefits (excluding gains on exercise of share options) 276 281

Company pension contributions to defined benefits scheme - -

7. Staff costsYear ended Year ended


£’000 £’000

Wages and salaries 36,416 36,190

Social security costs 3,103 3,139

Pension costs and other benefits 6,208 7,309

45,727 46,638

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


2006 2005

Number Number

Water supply and related activities 1,222 1,220

Central services 36 23

1,258 1,243

8. Interest receivable and similar incomeYear ended Year ended


£’000 £’000

Interest receivable from- Group Undertakings 7,478 8,250

- Bank interest 56 44

- Other 44 121

7,578 8,415

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

9. Interest payable and similar chargesRestated


2006 2005

£’000 £’000

Interest payable to Group Undertakings 15 -

Bank interest 333 447

Interest on finance leases 854 1,289

Finance costs of assets used by the Group and operated by other parties 1,341 1,144

Interest on bonds and debentures 1 1 ,874 1 1 ,967

Other interest 244 1 1 8

14,661 14,965


11. Taxation (continued)

Current taxation reconciliationRestated


2006 2005

£’000 £’000

Profit on ordinary activities before taxation (excluding associate) 175,506 74,896

Theoretical tax at UK corporation tax rate of 30% (2005: 30%) 52,652 22,469

Effects of:- adjustment to tax in respect of company with tax rate 12.5% (10) (6)

- adjustment to tax in respect of prior years (908) (10,095)

- other income and expenses that are not tax deductible (33,212) (992)

- accelerated capital allowances (623) (132)

- short term timing differences (448) (329)

- other timing differences 1,875 823

Actual current taxation charge 19,326 1 1 ,738

12. DividendsYear ended Year ended


£’000 £’000

Interim dividend paid of £164.20 per share (2005: £254.00 per share) 82,100 127,000

Interim dividend paid of £83.60 per share (2005: £nil per share) 41,800 -

123,900 127,000

13. Intangible assetsPositive goodwil

Group £’000

CostAt 1 January and 31 December 2006 246

AmortisationAt 1 January 2006 36

Charge for the period 12

At 31 December 2006 48

Net book valueAt 31 December 2006 198

At 31 December 2005 210

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


10. Other finance incomeYear ended Year ended


£’000 £’000

Expected return on pension scheme assets : VWSCPP 13,424 11 ,964

Expected return on pension scheme assets : VUKPP 1,152 822

Interest on pension scheme liabilities : VWSCPP (1 1 ,331) (10,557)

Interest on pension scheme liabilities : VUKPP (1,035) (836)

Interest on non-executive directors pension (57) -

2,153 1,393

11. TaxationRestated


2006 2005

£’000 £’000

Taxation relates to the following:- Group Undertakings 18,325 12,664

- Associate (601) 4,356

17,724 17,020

Taxation chargeRestated


2006 2005

£’000 £’000

UK corporation tax at 30% (2005: 30%) 20,234 21,833

Over provision in prior years (908) (10,095)

Total current taxation 19,326 1 1 ,738

Deferred taxationNet origination and reversal of timing differences for the period 1,076 457

Over provision in prior years (138) (4,099)

(Increase)/decrease in discounting (1,939) 4,568

Total deferred taxation (1,001) 926

Total Group taxation 18,325 12,664

Tax on associates (601) 4,356

Tax on profit on ordinary activities 17,724 17,020


14b. Tangible assets – CompanyShort term Vehicles,

leasehold Freehold plant andproperty property machinery Total

£’000 £’000 £’000 £’000

CompanyCostAt 1 January 2006 82 6,658 1,231 7,971

Additions - - 125 125

At 31 December 2006 82 6,658 1,356 8,096

DepreciationAt 1 January 2006 82 1,541 1,056 2,679

Charge for the year - 133 68 201

At 31 December 2006 82 1,674 1,124 2,880

Net Book ValueAt 31 December 2006 - 4,984 232 5,216

At 31 December 2005 - 5,1 1 7 175 5,292

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

15. Fixed asset investmentsOther

investments Total£’000 £’000

GroupAt 1 January 2006 and 31 December 2006 15 15

Other Subsidiaryinvestments undertakings Total

£’000 £’000 £’000

CompanyAt 1 January 2006 and 31 December 2006 15 45,839 45,854

Other investments refer to the Company’s investment in shares of a joint venture entity which is accounted for in the groupaccounts as a joint arrangement.


14a. Tangible assets – GroupFreehold Mains and

Short term land, other Vehicles Assets inleasehold buildings and infrastructure plant and course ofproperty reservoirs assets machinery construction Total

Group £’000 £’000 £’000 £’000 £’000 £’000

CostAt 1 January 2006 82 139,840 470,066 413,842 20,101 1,043,931

Additions - 7,239 43,139 24,433 25,017 99,828

Transfers - 430 12 1 1 ,088 (11 ,530) -

Capital contributions - - (9,490) - - (9,490)

Disposals - (658) (917) (1,554) - (3,129)

At 31 December 2006 82 146,851 502,810 447,809 33,588 1,131,140

DepreciationAt 1 January 2006 82 45,603 223,385 227,075 - 496,145

Charge for the year - 4,086 34,719 27,517 - 66,322

Disposals - (151) (917) (1,453) - (2,521)

Reversal of impairment - - - (207) - (207)

At 31 December 2006 82 49,538 257,187 252,932 - 559,739

Net book valueAt 31 December 2006 - 97,313 245,623 194,877 33,588 571,401

At 31 December 2005 - 94,237 246,681 186,767 20,101 547,786

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

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

Freehold land, Mains and other Vehiclesbuildings and infrastructure plant and

reservoirs assets machinery TotalGroup £’000 £’000 £’000 £’000

Cost 8,419 23,165 68,708 100,292

Depreciation (6,469) (10,107) (61,503) (78,079)

Net book value 1,950 13,058 7,205 22,213

Included in the above at 31 December 2005 are fixed assets held under finance leases, as follows:

Freehold land Mains and other Vehiclesbuildings and infrastructure plant and

reservoirs assets machinery TotalGroup £’000 £’000 £’000 £’000

Cost 8,419 23,165 68,708 100,292

Depreciation (6,209) (9,970) (58,525) (74,704)

Net book value 2,210 13,195 10,183 25,588



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

Proportion ofvoting rights

Name of company Nature of business Type of holding and shares held

Principal subsidiary undertakings: Water supply and related activities:Veolia Water Capital Funds Ltd * (formerly Veolia Holding company Ordinary shares 100%

Water Capital Funds Plc)Three Valleys Water PLC Water supply Ordinary shares 100%

Veolia Water Capital Services Ltd Investment company Ordinary shares 100%

Veolia Water Projects Ltd Water related activities Ordinary shares 100%

General Utilities Holdings Ltd * Holding company Ordinary shares 100%

Veolia Water Investment Ltd * Investment company Ordinary shares 100%

Veolia Water Industrial Outsourcing Ltd * Water related activities Ordinary shares 100%

Tendring Hundred Water Services Ltd Water supply Ordinary shares 99%

Ordinary non-voting shares 88%10% preference shares 98%

Folkestone and Dover Water Services Ltd Water supply Ordinary shares 74%

Ordinary non-voting shares 92%14% preference shares 76%

North Surrey Water Ltd ** Investment company Ordinary shares 99%

Ordinary non-voting shares 99%

10% preference shares 99%

Veolia Water Ireland Ltd * Holding company Ordinary shares 50%

Operations shares 100%

Veolia Water Operations Ireland Ltd *** Water related activities

* 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 mainactivity 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 IrelandLimited, which are incorporated in the Republic of Ireland. Veolia Water Capital Funds Limited is the holding company for the watersupply interests of Veolia Water UK Plc.

16. Investments in associateOn 11 April 2006 the Company sold its investments in Southern Water Investments Ltd (SWIL) and Southern Water Services Ltd(SWSL) for the net sum of £161,372,780. The investment was comprised of 2,500,000 Ordinary Shares of £1.00 each and 40,000 A2Preference shares of £0.01 each in SWIL and 40,000 A1 Preference shares of £1.00 each in SWSL.

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

Share of net Loans to Preferencetangible assets subsidiaries shares in SWS Goodwill Total

£’000 £’000 £’000 £’000 £’000

On aquisition 9,950 40,000 - 5,994 55,944

Redemption of loan - (40,000) - - (40,000)

Subscription for preference shares - - 40,000 - 40,000

Share of associate loss (12,528) - - - (12,528)

At 31 December 2003 (restated) (2,578) - 40,000 5,994 43,416

Share of associate loss (2,402) - - - (2,402)

Amortisation of goodwill - - - (300) (300)

At 31 December 2004 (restated) (4,980) - 40,000 5,694 40,714

Share of associate profit 4,662 - - - 4,662

On aquisition 280 - - 2,270 2,550


At 31 December 2005 (38) - 40,000 7,538 47,500

Share of associate profit 5,410 - - - 5,410


Disposal of investment (5,372) - (40,000) (7,1 1 2) (52,484)

At 31 December 2006 - - - - -

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

Group share of associate

Group share of associate at date of disposal £’000

Share of profit and loss account headingsTurnover 39,342

Operating profit 17,445

Profit before tax 3,373

Taxation 601

Profit after tax 3,974

Share of assetsFixed assets 791,220

Current assets 91,800

883,020

Share of liabilitiesLiabilities due within one year or less (57,048)

Liabilities due after more than one year (820,600)

(877,648)

Share of net assets at date of disposal 5,372


17. Current asset investmentsListed

investmentsGroup £’000

CostAt 1 January 2006 1,851

Disposal of investment (1,851)

At 31 December 2006 -

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

The Company has no current asset investments.

18. StocksGroup Group


£’000 £’000

Work in progress 217 239

Raw materials and consumables 840 994

1,057 1,233

The Company has no stocks.

19. DebtorsGroup

Group Restated Company Company31 December 31 December 31 December 31 December

2006 2005 2006 2005

£’000 £’000 £’000 £’000

Trade debtors 37,069 33,758 108 1,573

Loans to parent company 147,058 91,196 147,058 91,196

Loans to other group undertakings - - 87,973 40,000

Amounts due from group undertakings 1,195 1,210 5,571 1 1 4,244

Other debtors 5,988 6,063 55 789

Prepayments and accrued income 8,126 10,590 127 176

199,436 142,817 240,892 247,978


20. Creditors: amounts falling due within one yearGroup Company

Group Restated Company Restated31 December 31 December 31 December 31 December

2006 2005 2006 2005

Notes £’000 £’000 £’000 £’000

Bank loans and overdraft 23 287 24,337 - 27,503

Payments received on account 1 1 ,260 7,818 - -

Obligations under finance leases 24 1,876 6,413 - -

Financing of assets operated by other parties 24 1,644 1,642 - -

Trade creditors 12,091 10,597 34 123

Loans from Group Undertakings - - 25,291 33,669

Amounts owed to Group Undertakings 3,789 2,509 6,667 2,071

Corporation tax 28,380 19,867 16,979 7,820

Other taxes and social security 2,853 526 1,146 179

Other creditors 5,544 6,932 378 789

Accruals and deferred income 87,476 74,861 1,522 6,861

155,200 155,502 52,017 79,015

21. Creditors: amounts falling due after more than one yearGroup Company


2006 2005 2006 2005

Notes £’000 £’000 £’000 £’000

Debentures 23 59 249 - -

Bonds 23 196,069 195,964 - -

Obligations under finance leases 24 8,073 8,904 - -

Financing of assets operated by other parties 24 18,018 19,123 - -

Corporation tax 13,873 21,881 13,873 21,881

Accruals and deferred income 6,086 6,419 1 1 7 85

242,178 252,540 13,990 21,966

22. Provisions for liabilities and charges Deferred Leasehold

tax Insurance Other property TotalGroup £’000 £’000 £’000 £’000 £’000

Balance at 1 January 2006 (restated) 49,779 860 864 1,859 53,362

Transfers to creditors due within one year - - (500) - (500)

Amount reversed (1,200) - - - (1,200)

Amount utilised/released - (183) - (378) (561)

Amount provided - 980 2,304 - 3,284

Balance at 31 December 2006 48,579 1,657 2,668 1,481 54,385

Deferred Leaseholdtax Other property Total

Company £’000 £’000 £’000 £’000

Balance at 1 January 2006 (restated) (495) 500 1,859 1,864

Transfers to creditors due within one year - (500) - (500)

Amount utilised/released - - (378) (378)

Amount provided 82 250 - 332

Balance at 31 December 2006 (413) 250 1,481 1,318


22. Provisions for liabilities and charges

Deferred taxation (see Note 11)Group Company


2006 2005 2006 2005

£’000 £’000 £’000 £’000

Accelerated capital allowances 1 1 1 ,698 1 1 0,991 (79) -

Other timing differences (2,782) (2,705) (444) (495)

Undiscounted provision for deferred tax 108,916 108,286 (523) (495)

Discount (60,337) (58,507) 1 1 0 -

Discounted provision for deferred tax 48,579 49,779 (413) (495)

Group CompanyGroup Restated Company Restated

31 December 31 December 31 December 31 December2006 2005 2006 2005

£’000 £’000 £’000 £’000

Deferred tax within “Provisions” 49,779 48,210 (495) (13)

Deferred tax within “Net Pension” (3,713) 533 (451) (323)

Total deferred tax at 1 January 46,066 48,743 (946) (336)

Deferred tax (credited)/charged to profit and loss account (1,001) 926 79 (27)

Deferred tax charged/(credited) to statement of recognised gains and losses 370 (5,789) 267 (293)

Reclassification of deferred tax on actuarial loss to corporation tax - 1,507 - -

Deferred tax reclassified from corporation tax (30) 679 - (290)

Total deferred tax at 31 December 2006 45,405 46,066 (600) (946)

Analysed as follows:Deferred tax within “Provisions” 48,579 49,779 (413) (495)

Deferred tax within “Net Pension” (3,174) (3,713) (187) (451)

Total deferred tax at 31 December 2006 45,405 46,066 (600) (946)

The insurance provision represents the amount of liability in respect of excesses on individual claims. This is based on informationprovided by loss adjusters to insurers on levels of reserve and is calculated on settlement experience.

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

The provision for leasehold property is made against anticipated costs incurred on the property being in excess of rental incomereceivable on existing lease contracts. The release in the year reflects the partial letting of the property.


23. Borrowings analysis

Loans and bank overdrafts outstanding at the year end comprise:

Group Group Company Company31 December 31 December 31 December 31 December

2006 2005 2006 2005

£’000 £’000 £’000 £’000

Amounts repayable within one yearOverdrafts 287 24,337 - 27,503

287 24,337 - 27,503

Amounts repayable after one year Debentures 59 249 - -Bonds 196,069 195,964 - -

196,415 220,550 - 27,503

Loans and bank overdrafts are repayable as follows:


2006 2005 2006 2005

£’000 £’000 £’000 £’000

Bank loans and overdraftsRepayable:Within one year 287 24,337 - 27,503

Other borrowingsRepayable:After five years 196,128 196,213 - -

196,128 196,213 - -196,415 220,550 - 27,503

Loans not wholly repayable within five years comprise:

Group Group31 December 31 December

2006 2005

£’000 £’000

Bond issue of 5.875% Guaranteed notes due 2026 196,069 195,964

Irredeemable debenture stock carrying interest of between 4.00% and 5.25% 59 249

196,128 196,213

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

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


24. Lease and other financial commitments

Obligations under finance leases are payable as follows:

Group Group31 December 31 December

2006 2005

£’000 £’000

Within one year 1,876 6,413

In the second to fifth years inclusive 4,998 5,829

After five years 3,075 3,075

9,949 15,317

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


£’000 £’000

Within one year 1,644 1,642

In the second to fifth years inclusive 5,875 5,545

After five years 12,143 13,578

19,662 20,765

The Group has no finance lease obligations.The annual levels of commitments under non-cancelled operating leases are detailed in the table below:

Land & buildings Land & buildings Other Other31 December 31 December 31 December 31 December

2006 2005 2006 2005

£’000 £’000 £’000 £’000

GroupOperating leases which expire:Within one year 8 8 855 334

In the second to fifth years inclusive 15 - 3,403 2,580

After five years 248 248 2,227 504

271 256 6,485 3,418

CompanyOperating leases which expire:Within one year - - 6 -

In the second to fifth years inclusive - - 26 16

After five years 248 248 - -

248 248 32 16

25. Minority interests

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

26. Share capital31 December 31 December

2006 2005

£’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


27. Profit and loss account and reservesGroup Group Group

profit and loss other reserves total reserves£’000 £’000 £’000

As at 1 January 2005 254,734 86,632 341,366

FRS20 share based payments restatement (70) - (70)

Restatement re accrued income error 1,251 - 1,251

Minority restatement in respect of FRS20 and income error (17) - (17)

As at 1 January 2005 restated 255,898 86,632 342,530

Before restatements:Retained loss for 2005 (57,319) - (57,319)

Actuarial loss – Group (19,302) - (19,302)

Deferred tax arising on group actuarial loss 5,791 - 5,791

Actuarial loss – associate (2,089) - (2,089)

Transfer from other reserves 78,983 (78,983) -


Restatement re accrued income error 279 - 279

Minority restatement in respect of FRS20 and income error (5) - (5)


Retained loss for the period 35,903 - 35,903

Actuarial gain – Group 1,230 - 1,230

Actuarial gain – Associate 2,056 - 2,056

Tax on group actuarial gain (370) - (370)

Transfer from other reserves - - -

As at 31 December 2006 300,988 7,649 308,637

Company Company Companyprofit and loss other reserves total reserves

£’000 £’000 £’000

As at 1 January 2005 49,817 159,315 209,132



Before restatements:Retained loss for 2005 (13,353) - (13,353)

Actuarial loss (382) - (382)

Deferred tax arising on actuarial loss 1 15 - 115

Transfer from other reserves 159,315 (159,315) -


As at 1 January 2006 restated 195,445 - 195,445

Retained loss for the period 27,692 - 27,692

Actuarial loss 890 - 890

Deferred tax (267) - (267)

As at 31 December 2006 223,760 - 223,760

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

28. Profit for the periodAs permitted by section 230 of the Companies Act 1985, the parent company’s profit and loss account has not been included in thefinancial statements. The parent company’s profit for the year after tax was £151,591,000 (2005 restated: £113,615,000).


29. Reconciliation of movements in equity shareholders’ fundsGroup Company


2006 2005 2006 2005

£’000 £’000 £’000 £’000

Profit for the year 159,803 69,886 151,591 113,615

Other recognised gains/(losses) 3,286 (21,386) 890 (389)

Deferred tax (370) 5,789 (267) 1 1 7

Profit for the year 162,719 54,289 152,214 113,343

Less dividends (123,000) (127,000) (123,900) (127,000)

Movement in equity shareholders’ funds 38,819 (72,711) 28,314 (13,657)

Opening equity shareholders’ funds 270,318 343,029 195,946 209,603

Closing equity shareholders’ funds 309,137 270,318 224,260 195,946

30. Share based payments

Share options in Veolia Environnement SA Share options, exerciseable on a cash basis, reflect the wider responsibilities within the Veolia Environnement SA organisation of the individual concerned, and are not awarded solely on the basis of the Group’s performance, are awarded to the executivedirectors by the parent company, Veolia Environnement SA, against a broad range of criteria including:- Seniority- Performance of the Company- Contribution of the executive to the Company- Performance of Veolia Water UK PLC and Veolia Environnement SA

The market price of the shares at 31 December 2006 was €58.40 (2005: €38.54) and the range during the year was €36.49 to€58.40. There are no performance criteria to be met before the share options are exercisable. The €/£ exchange rate was €1.484/£ as at 31 December 2006 with a range during the period of €1.426/£ to €1.496/£.

Strike price adjusted to take account of transactions impacting the share capital of the Company (issue of share subscriptionwarrants of 17 December 2001 and share capital increase with retention of preferential subscription rights on 2 August 2002).The initial strike price for plans for 2001 and 2002 are €42.00 and €37.53.

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


30. Share based payments (continued)

Outstanding Options plans at the end of 2006 were as follows:

2006 2004 2003 2002 2001

Grant date 28/03/06 24/12/04 24/03/03 28/01/02 02/08/01

Vesting conditions 4 years service 3 years service 3 years service 3 years service 3 years serviceplus performanceconditions for certain plans

Purchase term After By tranches of By tranches of By tranches of After 4 years 1/3 over 3 years 1/3 over 3 years 1/3 over 3 years 3 years

Strike price (in euros) 44.75 24.72 22.50 37.25* 41.25*

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

2006 2006 2005 2005

number WAEP (Euro’s) number WAEP (Euro’s)

Outstanding as at 1 January (*) 128,766 30.61 128,766 30.61

Granted in the year 29,100 44.75 - -

Forfeited/exercised in the year - - - -

Outstanding as at 31 December 157,866 33.21 128,766 30.61

Exercisable as 31 December 101,366 32.20 61,566 38.46

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

For share options outstanding at 31 December 2006, the weighted average remaining contractual life is 2.15 years (2005: 1.94 years)

The estimated fair value of each option granted in 2006, calculated using the Black Scholes method is €14.77 (2005 : nil). The rangeof exercise prices for options outstanding at the end of the year was €22.50 - €44.75 (2005: €22.50 - €41.25)

The fair value of share options granted in 2006 is estimated as at the date of grant using the Black Scholes model, taking intoaccount the terms and conditions upon which the options were granted.

The following underlying assumptions were used in the calculation:Share price at date of grant €44.75

Expected volatility 31.51%Expected life 5.5 yearsRisk free rate 3.69%Expected dividend yield 1.92%

The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur.The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not be theactual outcome.

No options were granted in 2005.

The estimated fair value of each option granted in 2004, calculated using the binomial method, is €6.56 (2003 : €5.09). This valueis based on the following underlying assumptions: share price of €25.89, expected volatility of 21.45%, expected dividend yield of2.1%, risk-free rate of 3.4%. The number of options granted is based on the level of ROCE, which is taken into account in calculatingboth the number of options vested and the compensation expense.



31. Capital and other commitmentsCapital expenditure commitments not provided for in these financial statements are:


2006 2005 2006 2005

£’000 £’000 £’000 £’000

Contracted 15,1 1 7 16,231 - -

Other commitments not provided for in these financial statements are:


2006 2005 2006 2005

£’000 £’000 £’000 £’000

Indemnity given against performance bonds 12,288 8,603 12,288 8,603

Letters of credit provided to insurers 41 278 41 278

Closing equity shareholders’ funds 12,329 8,881 12,329 8,881

Indemnity was provided against third party performance bonds which were issued on behalf of Veolia Water Ireland and itssubsidiary undertakings.

Letters of credit were provided in respect of all subsidiary undertakings requiring insurance cover in the United Kingdom.

32. Financial instruments and risk managementThe Group’s financial instruments comprise borrowings, debentures, cash and liquid resources, and various items, such as tradedebtors and trade creditors that arise directly from its operations. The main purpose of these financial instruments is to raisefinance 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 agreespolicies for managing each of these risks and they are summarised below. These policies have remained unchanged since thebeginning of the current year.

The Group finances its operations through a mixture of retained profits, bank borrowings and finance leases. Treasury policies areagreed by the parent company with the individual Group companies (including liquidity and interest rate risks). The Group doesnot undertake speculative transactions. Interest rate exposure is managed by using a mixture of fixed and floating rateborrowings. Liquidity is primarily managed by the utilisation of short-term borrowings.

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

Floating rate Fixed ratefinancial financial

Total liabilities liabilities£’000 £’000 £’000

As at 31 December 2006 226,026 10,236 215,790

As at 31 December 2005 256,632 39,654 216,978

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 Groupcompany and operated by other parties.

32. Financial instruments and risk management (continued)On 13th July 2004, Three Valleys Water Finance PLC (a wholly owned subsidiary of Three Valleys Water PLC) issued £200 million of5.875% Guaranteed Notes at an issue price of 98.6%. The Notes mature on 13th July 2026. The issue was guaranteed by ThreeValleys Water PLC.

Weighted average Weighted average period interest rate for which rate is fixed

% Years

As at 31 December 2006 6.2 21

As at 31 December 2005 6.3 22

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

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

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


£’000 £’000

In one year or less or on demand 3,807 32,392

In more than one year but not more than two years 3,292 3,557

In more than two years but not more than five years 7,581 7,817

In more than five years 211,346 212,866

226,026 256,632

The Group’s financial assets are as follows:


£’000 £’000

Cash 583 3,013


Loans to Group Undertakings 147,058 91,196

Listed investments - 1,851

147,641 96,497

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

The Group has not adopted FRS26. However, the interest charge and liabilities associated with the £200 million of 5.875%Guaranteed Notes issued by Three Valleys Water Finance PLC (a wholly owned subsidiary of Three Valleys Water PLC) are calculatedin accordance with FRS26.

Fair values of financial assets and liabilitiesSet out below is a comparison of the book values and fair values of the financial liabilities of the Group as at 31 December 2006.

Book value Fair value£’000 £’000

Long term borrowings – guaranteed notes 196 209

Other than the calculation above in respect of the Guaranteed Notes and the fixed rate liability in respect of the financing ofassets by the Group and operated by other parties, the fair values calculated by market interest rates of the financial instrumentsare not materially different from book values. It is not practical to estimate the fair value of the financing of assets used by theGroup and operated by other parties as there is no market in such a liability.

Fixed rate financial liabilities


33. Pension commitmentsThe Group operates two defined benefit pension schemes; theVeolia Water Supply Companies’ Pension Plan (VWSCPP) and theVeolia UK Pension Plan (VUKPP).

Veolia Water Supply Companies’ Pension Plan Until 31 March 1996, the Group’s water subsidiaries participated inThe Water Companies’ Association Pension Scheme, which providedbenefits based on final pensionable pay. On 1 April 1996 the assetsand liabilities of the Group’s water subsidiaries which participatedin 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’ PensionPlan) which was closed to new members. This plan continues toprovide benefits on a no less favourable basis than those previouslyprovided 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 thePlan are charged to the profit and loss account so as to spread thecost 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 at31 December 2004. The valuation was made on the “attained age” funding method. The actuarial valuation made the following assumptions:

Rate of investment return 6.25% (pre-retirement),5.25% (post retirement)

Rate of increase in remuneration 4.25%Rate of pension increase 2.75%

The valuation as at 31 December 2004 stated the market valuationof the Plan’s assets to be £206,800,000 and showed a deficit of£8,900,000.

Contributions to the Plan over the year ended 31 December 2006were paid by members in accordance with the Rules of the Plan andby the Companies in the Group in the range of 0% to 21% ofPensionable Salary. The Companies in the Group also made lumpsum payments in the year totalling £553,000.

Veolia UK Pension Plan A new Scheme was inaugurated as at 1 April 1996, the Générale desEaux UK Retirement Benefits Scheme. This scheme was merged withthe Générale des Eaux UK Pension Plan on 1 April 1998, now knownas the Veolia UK Pension Plan. The Plan provides a selection ofbenefits based upon final pensionable pay or money purchaseaccording to the members’ wishes. The final salary section of the planwas closed to new members on 30 September 2004.

Contributions to the Veolia UK Pension Plan over the year ending 31 December 2006 were paid by members in accordance with theRules of the Plan and by the Companies in the Group of between17% and 39% of Pensionable Salary.

The latest formal valuation of the Plan for the Company, determinedby 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 6.2% (pre-retirement) 4.75% (post-retirement)

Rate of increase in remuneration 4.25%Rate of pension increase 2.75%

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

Non Executive Directors PlanA provision of £1.1m (£0.8m after tax) was created in the year inrespect of unfunded pension obligations to former employees andnon executive directors of some Group companies.

Supplementary pension disclosures under FRS 17 for the VeoliaWater Supply Companies’ Pension Plan

a. ContributionsUnder the projected unit method used for FRS 17, the current servicecost under the Veolia Water Supply Companies’ Pension Plan willincrease as members of the Plan approach retirement. Contributionsfor the year amounted to £3,580,000.

b. FRS 17 balance sheet informationAt 31 December 2006 At 31 December 2005

Long term Long term rate of return rate of return

Value Split of fund expected Value Split of fund expected£’000 % of fund (% pa) £’000 % of fund (% pa)

GroupEquities 97,716 40.7 7.7 94,306 40.4 7.7

Bonds 71,132 29.6 5.2 57,850 24.8 5.0

Gilts/cash 71,195 29.7 4.2 81,104 34.8 4.2

Fair value of assets 240,043 100.0 233,260 100.0

Present value of scheme liabilities (241,092) (238,643)

Actuarial deficit (1,049) (5,383)

Surplus restriction (3,525) (2,202)

Recognisable deficit (4,574) (7,585)

Deferred tax 1,372 2,276

Actuarial surplus after tax (3,202) (5,309)

At 31 December 2006 At 31 December 2005



CompanyEquities 622 40.8 7.7 629 40.4 7.7

Bonds 453 29.7 5.2 386 24.8 5.0

Gilts/cash 450 29.5 4.2 541 34.8 4.2



Actuarial surplus 41 3

Deferred tax (12) (1)

Actuarial surplus after tax 29 2

c. AssumptionsThe 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 2006 At 31 December 2005

Discount rate 5.0% pa 4.8% paSalary growth 4.4% pa 4.2% paRetail price index 2.9% pa 2.7% paPension-in-payment increases 2.9% pa 2.7% pa

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

d. Analysis of the amount charged to operating profit


2006 2005

£’000 £’000

GroupCurrent service cost 3,261 2,673

Total operating charge 3,261 2,673



h. History of experience gains and losses


2006 2005

£’000 £’000

GroupDifference between the expected and actual return on schemes’ assets:Amount (£’000) 2,112 16,713

Percentage of schemes’ assets 1% 7%

Experience gains and losses on schemes’ liabilities:Amount (£’000) (242) (3,531)

Percentage of the present value of the schemes’ liabilities 0% (1)%

Total amount recognised in statement of total recognised gains and losses:Amount (£’000) 599 (18,263)

Percentage of the present value of the schemes’ liabilities 0% 8%


2006 2005

£’000 £’000

CompanyDifference between the expected and actual return on schemes’ assets:Amount (£’000) 5 103


Experience gains and losses on schemes’ liabilities:Amount (£’000) 24 154


Total amount recognised in statement of total recognised gains and losses:Amount (£’000) 29 69


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

i. ContributionsCompany contributions under the Veolia UK Pension Plan were reviewed following the actuarial valuation as at 31 December 2005.Contributions made in the year to 31 December 2006 were £1,501,000.

j. FRS 17 balance sheet information




GroupEquities 17,401 80.0 7.7 12,287 80.0 7.7

Gilts 4,350 20.0 4.2 3,079 20.0 4.2



Actuarial deficit (4,908) (4,790)

Deferred tax 1,472 1,437

Actuarial deficit after tax (3,436) (3,353)


33. Pension commitments (continued)e. Analysis of the amount credited to other finance income


2006 2005

£’000 £’000

GroupExpected return on pension scheme assets 13,424 1 1 ,964

Interest on pension scheme liabilities (1 1 ,331) (10,557)

Net return 2,093 1,407

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


2006 2005

£’000 £’000

GroupActual return less expected return on the pension schemes’ assets 2,1 1 2 16,713

Experience gains and losses arising on the pension schemes’ liabilities (242) (3,531)

Movement in surplus cap (1,323) 579

Changes in assumptions underlying the present value of the pension schemes’ liabilities 52 (32,024)

Actual gain/(loss) recognised in STRGL 599 (18,263)

g. Movement in surplus during the year


2006 2005

£’000 £’000

Group(Deficit)/surplus in scheme at beginning of the year (7,585) 5,208

Movement in year:Current service cost (3,261) (2,673)

Contributions 3,580 6,736

Other finance income 2,093 1,407

Actuarial gain/(loss) 599 (18,263)

Deficit in scheme at end of the year (4,574) (7,585)


2006 2005

£’000 £’000

CompanySurplus/(deficit) in scheme at beginning of the year 3 (89)

Movement in year:Current service cost (40) (33)

Contributions 33 53

Other financial income 16 3

Actuarial gain 29 69

Surplus in scheme at end of the year 41 3


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


2006 2005

£’000 £’000

GroupActual return less expected return on the pension schemes’ assets 1,074 1,654

Experience gains and losses arising on the pension schemes’ liabilities 300 -

Changes in assumptions underlying the present value of the pension schemes’ liabilities (715) (2,693)

Actual profit/(loss) recognised in STRGL 659 (1,039)

o. Movement in deficit during the year


2006 2005

£’000 £’000

GroupDeficit in scheme at beginning of the year (4,790) (3,430)

Movement in year:Current service cost (2,394) (1,964)

Contributions 1,501 1,657

Other finance income/(expense) 1 1 7 (14)

Actuarial gain/(loss) 659 (1,039)

Deficit in scheme at end of the year (4,907) (4,790)


2006 2005

£’000 £’000

CompanyDeficit in scheme at beginning of the year (1,505) (987)

Movement in year:Current service cost (51 1 ) (424)

Contributions 458 355

Other finance income 33 2

Actuarial gain/(loss) 861 (451)

Deficit in scheme at end of the year (664) (1,505)

p. History of experience gains and losses


2006 2005

£’000 £’000

GroupDifference between the expected and actual return on schemes’ assets:Amount (£’000) 1,074 1,654

Percentage of schemes’ assets 5% 1 1 %

Experience gains and losses on schemes’ liabilities:Amount (£’000) 300 -


Total amount recognised in statement of total recognised gains and losses:Amount (£’000) 659 (1,039)

Percentage of the present value of the schemes’ liabilities 2% (5%)


33. Pension commitments (continued)j. FRS 17 balance sheet information (continued)




CompanyEquities 6,599 80.0 7.7 3,756 80.0 7.7

Gilts 1,650 20.0 4.2 941 20.0 4.2



Actuarial deficit (664) (1,505)

Deferred tax 199 452

Actuarial deficit after tax (465) (1,053)

k. AssumptionsThe present value of pension liabilities are estimated by discounting pension commitments, including salary growth, at an AAcorporate bond yield.

In calculating the liabilities of the Plans, the following financial assumptions have been used:

Group and Company At 31 December 2006 At 31 December 2005

Discount rate 5.0% pa 4.8% paSalary growth 4.4% pa 4.2% paRPI 2.9% pa 2.7% paPension-in-payment increases 2.9% pa 2.7% pa

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

l. Analysis of the amount charged to operating profit


2006 2005

£’000 £’000

GroupCurrent service cost 2,395 1,964

Total operating charge 2,395 1,964

m. Analysis of the amount credited to other finance income


2006 2005

£’000 £’000

GroupExpected return on pension scheme assets 1,152 822

Interest on pension scheme liabilities (1,035) (836)

Net income/(expense) 1 1 7 (14)

p. History of experience gains and losses (continued)


2006 2005

£’000 £’000

CompanyDifference between the expected and actual return on schemes’ assets:Amount (£’000) 422 495


Experience gains and losses on schemes’ liabilities:Amount (£’000) 669 -


Total amount recognised in statement of total recognised gains and losses:Amount (£’000) 861 (451)

Percentage of the present value of the schemes’ liabilities 10% (7%)

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

q. Movement in surplus during the year


2006 2005

£’000 £’000

GroupDeficit in scheme at the beginning of the year - -

Current service cost (1,144) -

Contributions 131 -

Other financial income (57) -

Actuarial loss (30) -

Deficit in scheme at end of the year (1,100) -

Deferred tax 330 -

Actuarial loss (770) -

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

The change in the financial statements was communicated to Ofwat and the Group has therefore decided to adjust its results for2005 in respect of this matter.

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

35. Related party transactionsIn accordance with the exemption in FRS 8, the Company has not disclosed transactions with other entities, for which 90% or moreof the voting rights are controlled by the parent company, Veolia Environnement SA.

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


56 Veolia Water UK Plc Annual Report & Accounts 2006

veolia water uk annual report 2006

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