veolia water uk annual report 2008

Veolia Water UK PlcAnnual Report2007/08

Veolia Water UK Plc Annual Report 2007/082

Contents

3 DirectorsandOfficers

4 Chairman’sStatement

6 CorporateResponsibility

10 Directors’Report

15 IndependentAuditors’ReporttotheMembers

17 ConsolidatedProfitandLossAccount

18 ConsolidatedStatementofTotalRecognisedGains andLosses19 ConsolidatedBalanceSheet20 CompanyBalanceSheet

21 ConsolidatedCashFlowStatement

22 NotestotheConsolidatedCashFlowStatement

24 NotestotheFinancialStatements

Thisreportisforthe15monthsperiodended31March2008

Veolia Water UK Plc Annual Report 2007/08 3

Directors and Officers

DirectorsJ S Gummer (Chairman)F Devos (Appointed 13 December 2007, Chief Executive Officer from 1 January 2008)D W Alexander (Managing Director – up to 31 December 2007)J C BanonR A Bienfait M J E ButcherC Roger-Lacan (Resigned 19 May 2008)J D Mallet (Appointed 27 September 2007)O M Bret (Appointed 2 October 2008)E Petit (Appointed 7 July 2008)P R L Guitard (Appointed 7 July 2008)

Company SecretaryK W Taylor (Resigned 31 March 2008)M J E Butcher (Appointed 31 March 2008)

Registered Office37-41 Old Queen StreetLondon SW1H 9JA

AuditorsErnst & Young LLP1 More London PlaceLondon SE1 2AF

Registered Number2127283


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

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

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

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

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

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

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

Chairman’s Statement

Rt Hon John Gummer MP Chairman, Veolia Water UK Plc23 December 2008


penetration, implement targeted capital programmes to exploit unused sources, and increase maintenance of non-infrastructure assets.

The main challenges we face in achieving this strategy are the cost of labour and competition for contracting resources and skills, demanding efficiency targets, rising energy costs, and continued pressure on security of water supply, particularly for the water-stressed area of Folkestone and Dover Water. As our business strategies are based on corporate responsibility, which is in turn underpinned by risk management, we are confident that risks to the strategy are managed and minimised.

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

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

Finally I would like to thank the management teams and all employees for their role in contributing to the Group’s success and for their professionalism and commitment during the period.

We are now the UK’s second largest provider of outsourcing solutions to the water industry


Ourapproachtocorporateresponsibilityencompassessustainabledevelopment,ethics,traditionalsafety,health,qualityandenvironmentalmanagementsystems,riskmanagementandtheinternalandexternalmanagementofstakeholderrelationships.

Ourcorporateresponsibilitypolicy,principlesandprogrammesareoverseenbytheBoard,chairedbytheRtHonJohnGummer.MoredetailcanbefoundintheVeoliaWaterUKCorporateResponsibilityReview2008 atwww.veoliawater.co.uk.ThiscontainsinformationonperformanceprimarilyintheperiodApril2007toMarch2008.

BenchmarkingIn the UK, Veolia Water UK PLC is recognised as a leading water company in terms of corporate responsibility performance and management. In 2008 it again achieved leading status (Platinum band) in Business in the Community’s Corporate Responsibility Index, published in the Sunday Times as the ‘Top 100 Companies that Count’.

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

Business managementFormal environmental, health and safety, and quality systems are fundamental to continuous improvement in our performance. All the regulated businesses’ quality systems meet the ISO 9001:2000 standard. The integrated management system of Folkestone & Dover Water Services Limited also meets the requirements of ISO 14001 (environmental management), and OHSAS 18001 (occupational health management). The environmental management system of Veolia Industrial Water Outsourcing Limited is certified to the ISO 14001 standard, as is the system at a Three Valleys Water Plc site; more sites will be certified in 2008. Tendring Hundred Water Services Limited is working to align its management systems with ISO 14001.

Veolia Water UK PLC is committed to encouraging partners, sub-contractors and suppliers to adhere to its corporate responsibility policy and principles. It has developed environmental and social criteria for use in supplier selection and performance procedures.

Corporate Responsibility


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

Platinum

Performance

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

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

The south-east of England receives just half the average nationwide rainfall. All three regulated water companies promote water efficiency measures vigorously to bridge the potential gap between demand and supply. Three Valleys Water PLC is increasing its metering programme, aiming to have 44% of domestic properties across its region metered by 2010. Having maximised its resource capacity to meet customer demand, Folkestone and Dover Water Services Limited applied to the Department of the Environment, Food & Rural Affairs for its area to be designated one of water scarcity. This was granted in

a landmark ruling in 2006. This will enable the company to meter customers compulsorily; it aims to have 90% of its 170,000 customers metered by 2015.

LeakageAll three regulated water companies achieved leakage rates better than their targets set by Ofwat (the Water Services Regulation Authority), the water industry’s economic regulator. Tendring Hundred Water Services Limited continues to have the lowest level of leakage per property in the industry.

Customer serviceOfwat assesses companies’ overall delivery of service to customers annually. In 2007/8 Tendring Hundred Water Services Limited was again awarded first place amongst all 22 water supply companies in England and Wales. This is the sixth time in seven years that the Company has led the Overall Performance Assessment ranking. Three Valleys Water Plc was ranked 6th in the industry, its highest position ever; Folkestone and Dover Water Services Limited was ranked 19th, mainly as a result of its water resource issues. All of our companies have targets to maintain high levels of customer service.

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

90%

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

3.3million


Drinking water qualityWe provided drinking water of the highest quality to over 3.3 million people in 2007. The quality of the drinking water we supply to our customers continues to be of a very high standard, with Folkestone and Dover Water Services Limited and Three Valleys Water PLC exceeding the industry average.

In the 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 no employee or applicant for employment receives less or more favourable treatment, whether through direct or indirect discrimination, on the grounds of race, gender, disability, sexual orientation, religious beliefs, creed, marital or parental status. In line with a Veolia Environnement SA commitment to promote diversity and combat discrimination we record the composition of our staff. Women make up 39% of the workforce, and 22% of managers. Employees registered as disabled make up 0.4%. TrainingAll Veolia Water UK PLC companies have introduced the personal development system to provide a more structured approach to employee learning and career development.

During the year 3,193 Veolia Water UK PLC employees received training (some employees were trained more than once), of whom 946 were managers (these figures are for the 2007 calendar year). Training courses covered general management, personal development, diversity at work, health and safety, work-related stress and the disciplinary and grievance policy.

Health & safetyHealth and safety plays an important part in the everyday culture of our companies. There were no fatalities in our water companies in 2007/8. Work days lost due to work accidents amounted to 657, compared with 431 in 2006/7.

Staff turnoverStaff turnover decreased slightly to 18% compared to 19.4% for the previous year.

Employee consultationVeolia Water UK PLC companies work positively and progressively with trades unions. Every year staff are invited to contribute ideas for the future of the company in an employee survey.

In the communityVeolia Water UK PLC employees are actively encouraged to become involved in local community initiatives in the belief that there are benefits for both the community and employees. For example, the charity KitAid, set up in 1998 by Three Valleys Water PLC employee Derrick

Williams MBE, recycles football kits from professional football clubs to children and adults in Africa and other parts of the developing world. Members of senior management sit on the boards of local Groundwork trusts.

The companies have an ongoing target to develop programmes to support education. Three Valleys Water PLC’s purpose-built Environment & Education Centre has received several awards for its work with schoolchildren, focussing primarily on water conservation. During the year, more than 17,000 children and adults received advice from staff at the Centre.

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

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

17,000

Staff turnover.

18%


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

Energy consumptionThe annual carbon dioxide emissions associated with all our energy requirements for water supply, offices and transport were 119,500 tonnes, which is an 18% or 27,200 tonne reduction since 1995/96. However this reduction is not associated with reduced energy consumption but rather changes in the mix of fuels used to generate electricity supplied through the public electricity network. Energy consumption per unit of water put into supply has increased over the last six years. This can be attributed to the use of different water sources and to an increased number of energy-intensive plants, e.g. membrane and ozone, as a result of the need to treat water to increasingly higher standards. Energy consumption has also increased due to the need for additional pumping as a result of changing climate conditions, including hot weather and flooding.

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

target to maintain improvements in fuel consumption.

WasteWe are able to monitor the use of aggregates by measuring our own obliging and encouraging our contractors to record the amounts they use, recycle and dispose. In 2007/8, we estimate that of the 97,200 tonnes of material excavated by our companies and contractors, 53% or 51,100 tonnes were recycled rather than being sent to landfill, compared to 52% last year. All Veolia Water UK PLC companies have an ongoing target to reduce the amount of waste going to landfill.

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

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

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

Three Valleys Water PLC has long-standing partnerships with conservation groups including Natural

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

of excavated waste recycled.

53%

of water treatment waste recycled.

100%


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

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

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

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

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

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

Profit after tax decreased by 54.8% in the period to £72.9m. As reported above the prior year higher amount was primarily due to the disposal of investments during 2006. Net interest and tax charges (excluding those charges due to the equity accounting of associates and joint

ventures) remained broadly in line with that incurred in 2006.

Equity dividends paid during the period were £29.0m compared to £123.9m in 2006. Net debt increased from £78.4m at the end of 2006 to £157.6m at 31 March 2008.

The group acquired the Thames Water Services Ltd in November 2007, a company that held the interest of some of Thames Water’s UK non-regulated activities. Capital expenditure excluding acquisitions for the fifteen months to March 2008 was £135.3m net of contributions from third parties, compared to £90.4m for the previous year. The main factor behind the increase excluding a £27m effect of a longer period was the increase of the rate of main renewals at Three Valleys Water PLC.

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

Directors’ Report

2008 2006 Change £’000 £’000 % 15 mths 12 mths

Group turnover 355,666 256,390 38.7Operating profit 88,443 66,075 33.7Profit before tax 88,382 178,879 -50.6Profit after tax 72,874 161,155 -54.8Shareholders’ funds 340,679 313,612 8.6Net debt 157,590 78,385 101.0 Capital expenditure 147,612 90,438 63.2

Review of business and future developmentsThe group’s key financial and other performance indicators during the period were as follows:


Principalrisksanduncertainties

Economic and regulatory riskThe water industry in the UK comprises a number of regional monopolies which are subject to economic and technical regulation. Water charges are set by OFWAT (the economic regulator for the water and sewerage industry in England and Wales) on a five yearly cycle. With a significant proportion of the Group’s activities invested in regulated water businesses, determinations issued by OFWAT can have a significant impact on profits and cashflows.

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

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

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

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

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

Failure to provide an uninterrupted water supply fit for consumption could result in significant public health issues, environmental damage, loss of reputation and fines. Environmental and water quality risks are also applicable where the non regulated business provides water related services to public authorities and industry.

Competition riskThe regulated water companies currently operate as regional monopolies of water supply to all but large non-household customers. There is a risk that further legislation may be introduced to reduce that monopoly position with all or a certain group of customers.

Where competition is permitted for the regulated water supply to certain large non-household customers, entrants can apply for licences to supply water to

these commercial customers within the water companies operating region. Failure of the water companies to comply with the relevant statutory requirements could result in fines being imposed or reference to the Competition Commission.

Health and safety riskThe risk to the Group that the health and safety of employees is adversely impacted through performance of their duties. The risk ranges from an injury resulting in the loss of working days to an incident leading to compensation payments for negligence. The Group has a dedicated Health and Safety team who work towards identifying and mitigating these risks.

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

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


Liquidity riskThe Group’s regulated business is required to deliver mandatory capital investment requirements generating an ongoing need for financing. The Group is subject to variability of cashflow due to the billing cycle within the regulated business and the uncertainty of timing of customer payments. Variability in cashflows is primarily managed through the use of short-term borrowing facilities. Further disclosure on the management of liquidity risk is included in note 30.

Credit 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 no rights to terminate the service in the event of non payment. This risk is spread over a large number of low value customer accounts. The Group ensures that sufficient resources are allocated to credit management to reduce the impact of this risk.

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

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

entrants. The Veolia Water Supply Companies Pension Plan (VWSCPP), which mirrored the provisions of the former Water Companies Association Scheme, was closed in 1996 and its successor, the Veolia UK Pension Plan (VUKPP) final salary scheme was in turn closed in 2004.

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

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

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

Research and developmentIn addition to the Group’s own research and development activities, the Group’s water company subsidiaries are committed to participate in research programmes operated by UK Water Industry Research Limited, which

undertakes research nationally into all aspects of water industry operations. The Group also participates in and benefits from research undertaken by other companies within the Veolia Environnement SA. Expenditure in the period was £455,000 (2006: £702,000).

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

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

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

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

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


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

Charitable and political donationsDonations for charitable purposes made by Group companies during the period amounted to £131,000 (2006: £136,000).

No political contributions were made during the period.

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

All Group companies continued to carry out their obligations arising from the Health & Safety at Work Act 1974 through consultative committees consisting of management and employee representatives. The Group gives every consideration to applications for employment from disabled persons where the requirements of the job may be covered adequately by a handicapped or disabled person.

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

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

J S Gummer (Chairman)

D W Alexander (Managing Director up to 31 December 2007)

F Devos (Appointed 13 December 2007, Chief Executive Officer from 1 January 2008)

J C Banon

R A Bienfait

M J E Butcher

C Roger-Lacan (Resigned 19 May 2008)

J D Mallet (Appointed 27 September 2007)

O M Bret (Appointed 2 October 2008) E Petit (Appointed 7 July 2008)

P R L Guitard (Appointed 7 July 2008)

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

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

Going concernAfter making enquiries, the directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the forseeable future. For this reason, they continue to adopt the going concern basis in the financial statements.

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


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

By order of the Board

R A BienfaitDirector23 December 2008

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

Company law requires the directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the company and of the group. In preparing these financial statements, the directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgments and estimates that are reasonable and prudent;

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

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

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the group and enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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


We have audited the group and parent company financial statements (the “financial statements”) of Veolia Water UK plc for the 15 month period ended 31 March 2008 which comprise the Consolidated Profit and Loss Account, the Consolidated Statement of Total Recognised Gains and Losses, the Consolidated and Company Balance Sheets, the Consolidated Cash Flow Statement and the related notes 1 to 33. These financial statements have been prepared under the accounting policies set out therein.

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

Respective responsibilities of directors and auditorsThe directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

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

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

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


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

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

OpinionIn our opinion:

• the financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the group’s and the parent company’s affairs as at 31 March 2008 and of the group’s profit for the 15 month period then ended;

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

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

Ernst & Young LLPRegistered auditorLondon23 December 2008


Consolidated Profit and Loss Account 15 month period Year ended

ended 31 March 2008 31 December 2006

Notes £’000 £’000

Turnover (including share of joint ventures) - Existing 334,261 256,390- Acquisition 32,064 – 2 366,325 256,390Less: Share of joint ventures (10,659) –Group turnover 355,666 256,390Cost of sales (216,013) (156,962)Gross profit 139,653 99,428Administrative expenses (66,197) (41,652)Other operating income 3 14,987 8,299Group operating profit 4 - Existing business 89,847 66,075- Acquisitions after £0.8m (2006: £nil) goodwill amortisation (1,404) –Group operating profit 88,443 66,075Share of operating profit in joint ventures 1,640 –Share of operating profit in associate 41 17,445Income from associates and dividends – 800 90,124 84,320Profit on the disposal of fixed assets 4,887 –Profit on the disposal of investments 5 – 113,561Total operating profit 95,011 197,881Net interest payable and similar charges 8 (9,382) (21,155)Other finance income 9 2,753 2,153Profit on ordinary activities before taxation 88,382 178,879

Tax on profit on ordinary activities 10 (15,508) (17,724) Profit on ordinary activities after taxation 72,874 161,155Equity minority interests (1,238) (727)Non-equity minority interests (5) (5)

Retained profit for the period 71,631 160,423

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


15 month period ended Year ended

31 March 2008 31 December 2006

£’000 £’000

Profit for the period - Group 70,590 155,439- Joint ventures 1,032 –- Associates 9 4,984Profit for the period attributable to members of the parent company 71,631 160,423 Actuarial (loss) / gain - Group (21,742) 1,230- Associate – 2,056Deferred tax arising on Group actuarial gain/(loss) 5,792 (370)Share based payment 103 – Total gains recognised for the period 55,784 163,339 Prior year adjustment on the full adoption of FRS20 – (135) Total gains recognised since last annual report 55,784 163,204

Consolidated Statement of Total Recognised Gains and Losses


Consolidated Balance Sheet Notes Restated


£’000 £’000

Fixed assets Intangible assets 12 44,640 198Tangible assets 13a 634,904 571,401Investments in joint ventures - Share of gross assets 218,699 15- Share of gross liabilities (216,733) –- Goodwill arising on acquisition 9,096 – 14 11,062 15Investments in associate 14 2,148 – 692,754 571,614 Current assets Stocks 16 2,867 1,057Debtors 17 146,463 199,436Cash at bank and in hand 7,878 583 157,208 201,076

Creditors: amounts falling due within one year 18 (206,180) (155,110)

Net current (liabilities) /assets (48,972) 45,966 Total assets less current liabilities 643,782 617,580Creditors: falling due after more than one year 19 (236,615) (242,178)Provisions for liabilities and charges 20 (4,579) (5,806)Deferred tax 20 (40,859) (48,579)Net pension liability 31 (21,050) (7,405)Net assets 340,679 313,612

Capital and reserves Called up share capital 24 500 500Other reserves 25 7,649 7,649Profit and loss account 25 327,862 301,078 Equity shareholders’ funds 27 336,011 309,227Equity minority interests 23 4,630 4,347Non-equity minority interests 23 38 38 340,679 313,612 The notes on pages 24 to 67 form part of these financial statements. The financial statements on pages 17 to 67 were approved by the Board of Directors on 23 December 2008 and were signed on its behalf by:

F Devos R A Bienfait Director Director

19


Company Balance Sheet Notes 31 March 2008 31 December 2006

£’000 £’000

Fixed assets Tangible assets 13b 5,015 5,216Investments 14 45,854 45,854

50,869 51,070

Current assets Debtors 17 274,947 240,892Cash at bank and in hand – 59 274,947 240,951

Creditors: amounts falling due within one year 18 (70,992) (52,017)

Net current assets 203,955 188,934

Total assets less current liabilities 254,824 240,004

Creditors: amounts falling due after more than one year 19 (6,925) (13,990)Provisions for liabilities and charges 20 (1,313) (1,318) Net pension liability 31 (629) (436) Net assets 245,957 224,260 Capital and reserves Called up share capital 24 500 500 Other reservesProfit and loss account 25 245,457 223,760 25 – – Equity shareholders’ funds 27 245,957 224,260

The notes on pages 24 to 67 form part of these financial statements.

The financial statements on pages 17 to 67 were approved by the Board of Directors on 23 December 2008 and were signed on its behalf by:

F Devos R A BienfaitDirector Director


Consolidated Cash Flow Statement Notes* 15 month period Restated

ended Year ended


£’000 £’000

Net cash inflow from operating activities a 148,402 133,842 Returns on investments and servicing of finance Interest received 9,361 8,424 Interest paid (13,679) (13,574)Interest element of finance lease rentals (1,375) (1,245)Dividends received from associate 1,225 800Dividends paid to minorities (888) (824) Net cash outflow from returns on investments and servicing of finance (5,356) (6,419) Taxation paid (26,758) (18,379)

Capital expenditure and financial investment Purchase of fixed assets (141,083) (79,529)Contributions to fixed assets received 12,260 9,489 Disposal of fixed assets 4,961 1,420Acquisitions and disposalsPurchase of subsidiary undertakings (60,146) – Net cash acquired with subsidiary undertakings 11,709 –Sale of investment in associate – 161,373Sale of other investments – 5,704

Net cash (outflow)/ inflow from capital expenditure and financial investment (172,299) 98,457

Equity dividends paid (29,000) (123,900) Cash (outflow)/ inflow before management of liquid resources and financing (85,011) 83,601

Net cash (inflow)/ outflow from management of liquid resources b 85,319 (55,425)

Net cash outflow from financing b (4,435) (6,556)

(Decrease) / increase in cash d (4,127) 21,620 *Notes to the consolidated cash flow statement are on pages 22 and 23.


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



£’000 £’000

Group operating profit 88,443 66,075Depreciation 79,711 66,114Amortisation of deferred credit (450) (415)Amortisation of goodwill – intangible assets 752 12Amortisation of goodwill – joint ventures and associate 187 426(Increase) / decrease in stocks (203) 177(Increase) /decrease in debtors (44,562) 5,801Increase/(decrease) in creditors and provisions 22,139 (5,935)Increase in pension position 2,385 1,587 Net cash inflow from operating activities 148,402 133,842

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



£’000 £’000

Management of liquid resources Decrease in cash on short-term deposit – 437Decrease / (increase) in short-term loans due from group undertakings 85,319 (55,862) Net cash inflow/(outflow) from management of liquid resources 85,319 (55,425) Financing Decrease in financing of assets operated by other parties (1,551) (1,103)Decrease in capital elements of finance leases (2,998) (5,368)Non cash movement in bond liability 126 105Debentures (12) (190) Net cash outflow from financing (4,435) (6,556)

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


Notes to the Consolidated Cash Flow Statementc. Analysis of net debt

At Acquired At

31 December 2006 Cash flow during the period 31 March 2008

£’000 £’000 £’000 £’000

Net funds:Cash at bank and in hand 583 (4,379) 11,709 7,913Bank overdrafts (287) 252 - (35) Liquid resources:Loans to parent and other group undertakings 296 (4,127) 11,709 7,878 147,058 (109,099) 17,877 55,836 Debt: Bond (5.875% guaranteed notes) (196,069) (126) - (196,195)Finance leases (including sale and leaseback) (9,949) 2,998 - (6,951)Debentures (59) 12 - (47)Financing of assets operated by third parties (19,662) 1,551 - (18,111) (225,739) 4,435 - (221,304) Net debt (78,385) (108,791) 29,586 (157,590)

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



£’000 £’000

(Decrease) /increase in overdraft in the period (4,127) 21,620Cash (outflow) /inflow from liquid resources – parent (109,099) 55,425 Cash inflow from liquid resources - acquired loan & cash 29,586 -Cash inflow from decrease in debt and lease financing 4,435 6,556Movement in net debt in the period (79,205) 83,601

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

Closing net debt (157,590) (78,385)


Notes to the Financial Statements1. Accounting policies

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

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

(b) New accounting standards Share-based payment

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

(c) Basis of consolidationThe financial statements include the accounts of Veolia Water UK PLC and its subsidiaries from their respective dates of acquisition.

In 1998 the water companies entered into a partnership arrangement. Under FRS 9 this has been accounted for as a joint arrangement and not as a separate entity.

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

Interest in joint ventures are accounted for using the gross equity method.

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

(d) Goodwill

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

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

(e) Interest and dividends

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


Notes to the Financial Statements (f) Bad debt provisioning

The bad debt provision is calculated by applying a range of different percentages to debt of different ages. These percentages also vary between categories of debt. Higher percentages are applied to those categories of debt which are considered to be of greater risk and also to debt of greater age. The value of the bad debt provision is sensitive to the specific percentages applied.

(g) Revenue recognitionRevenue is recognised in accordance with FRS 5 in the period in which it is earned. The company does not recognise revenues where payment is received in advance. However payments made in the previous period in respect of the current year will be recorded as revenue in the current period.

(h) Capital contributionsInfrastructure charges received in respect of connections to the mains network are allocated to fixed assets, surface and infrastructure, in accordance with the basis on which the charges are calculated.

Grants and contributions receivable relating to infrastructure assets have been deducted from the cost of tangible fixed assets. This is not in accordance with the Companies Act 1985, which requires fixed assets to be stated at their purchase price or production cost, without deduction of grants, and contributions which are accordingly accounted for as deferred income. This departure from the requirements of the Companies Act 1985 is, in the opinion of the Directors, necessary for the financial statements to show a true and fair view because, whilst a provision is made for the depreciation of infrastructure assets, they do not have determinable finite lives and therefore no basis exists upon which to recognise grants and contributions as deferred income. The effect of the departure on the value of tangible fixed assets is disclosed in Note 13a.

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

( j) Stocks and work in progress

Stocks and work in progress are valued at the lower of cost or net realisable value. In accordance with established practice in the water industry no value is placed upon the water in reservoirs, mains or in the course of treatment. Work in progress for chargeable services is valued at cost.


Notes to the Financial Statements (k) Tangible fixed assets and depreciation Tangible fixed assets comprise: Infrastructure assets – mains and associated underground pipework. Other assets – land and buildings, operational structures, fixed plant, motor vehicles and mobile plant.

Infrastructure assets comprise a network of systems. Expenditure on infrastructure assets, including renewals is treated as an addition and included at cost after deducting grants and contributions.

The depreciation charge for infrastructure assets is the estimated level of annual expenditure required to maintain the operating capability of the network which is based on each Group companies’ independently certified asset management plan.

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

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

Buildings 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 differences that have arisen but not reversed by the balance sheet date, where the timing differences result in an obligation to pay more tax, or a right to pay less tax, in the future. Timing differences arise because of differences between the treatment of certain items for accounting and taxation purposes.In accordance with FRS 19 deferred tax is not provided on timing differences arising from:

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

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

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

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


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

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

(m) Leased assetsAssets financed by leasing are included in tangible fixed assets and the net obligation to pay future rentals is included within creditors. Installments are apportioned between the finance element, which is charged to the profit and loss account as interest, and the capital element, which reduces the outstanding obligation for future instalments.

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

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

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

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

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

Employer’s contributions to the defined contribution scheme are charged to the profit and loss account in the period in which they arise.

Certain companies in the Group have unfunded obligations to pay pensions to former employees and non-executive directors. A provision in respect of this obligation is included within the net pension liability.

(o) Research and developmentResearch and development costs are written off in the period in which they are incurred.

(p) Financial InstrumentsIncome and expenditure on financial instruments is recognised on an accruals basis, and credited or charged to the profit and loss account in the financial period in which it arises.

(q) Comparative figures Certain prior year figures have been restated to conform with the 2008 presentation.

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

2. Turnover and segmental analysis

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



£’000 £’000

Turnover Water supply and related activities: Continuing operations 334,261 256,390Acquisitions 32,064 – 366,325 256,390

Less joint ventures (10,659) –Group share of turnover 355,666 256,390

Operating profit Water supply and related activities Continuing operations 89,847 66,075Acquisitions (1.404) – 88,043 66,075Analysed as follows: Group 88,443 66,075Share of joint ventures’ operating profit 1,640 –Share of associate operating profit 41 –Total operating profit: group and share of joint ventures and associate 90,124 66,075


Notes to the Financial Statements


Notes to the Financial Statements2. Turnover and segmental analysis (continued)



£’000 £’000

Profit on ordinary activities before taxation Water supply and related activities 88,061 175,506Joint ventures 302 –Associate 19 3,373 88,382 178,879

Net assets Water supply and related activities 327,469 313,612Share of net assets of joint ventures 11,062 –Share of net asset of associate 2,148 –Minority interest (4,668) (4,385)Group net assets 336,011 309,227

3. Other operating income



£’000 £’000

Commission, rents and sundry income 14,987 8,299 14,987 8,299


Notes to the Financial Statements4. Group operating profit

This is stated after charging/(crediting):



£’000 £’000

Auditors’ remuneration- for audit services 428 199- for regulatory returns 357 147- non-audit services (Income accrual & DG8 investigation and due diligence on acquisition of Thames Water Services Limited) 287 58Depreciation of tangible fixed assets - infrastructure 41,784 33,721- owned (other) 33,095 29,226- leased 3,174 3,376Impairment of tangible fixed assets- reversal of impairment of fixed assets - (207)Operating lease rentals- land and buildings 640 343- other 2,861 2,337Research and development 455 702Hire of plant and machinery 320 239Amortisation of goodwill - subsidiaries 752 12 - joint ventures 154 – - associates 33 –Amortisation of contributions to capital expenditure (518) (415)

5. Exceptional items



£’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 – 3,854 112,743Profit on disposal of fixed assets – 818 – 113,561 Minoritity interests’ share of profit on disposal of fixed assets – 35


Notes to the Financial Statements5. Exceptional items (continued)

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



£’000 £’000

Charge on profit on disposal of fixed asset investments – 704Charge on profit on disposal of fixed assets – 237 – 941

6. Directors’ remuneration



£’000 £’000

Aggregate emoluments of the Directors 1,359 843 Company pension contributions to defined benefits scheme 78 52



Members of defined benefit schemes 3 3 Retirement benefits are accruing to three Directors (who are not the highest paid Director) under a defined benefits scheme. 15 month period ended Year ended


£’000 £’000

Highest paid director Aggregate emoluments and benefits (excluding gains on exercise of share options) 528 276

Company pension contributions to defined benefits scheme – –


Notes to the Financial Statements7. Staff costs



£’000 £’000

Wages and salaries 58,085 36,416Social security costs 5,105 3,103Pension costs and other benefits 7,190 6,208 70,380 45,727

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



Water supply and related activities 1,901 1,222Central services 42 36

1,943 1,258


Notes to the Financial Statements8. Interest receivable and similar income



£’000 £’000

Interest receivable - Group Undertakings 9,161 7,478- Bank interest 184 56- Other - 44Group interest and similar charges receivable 9,345 7,578Share of joint ventures’ interest receivable 247 -Share of associate interest receivable 10 -Total interest receivable 9,602 7,578Interest payable - Interest payable to group undertakings (45) (15)- Bank interest (25) (333)Interest on finance leases (780) (854)Finance costs of assets used by the Group and operated by other parties (1,578) (1,341)Interest on bonds and debentures (14,817) (11,874)Other interest (309) (244)Group interest and similar charges payable (17,554) (14,661)Share of joint ventures’ interest payable (1,430) -Share of associate interest payable - (14,072)Total interest payable (18,984) (28,733) Net interest payable and similar charges (9,382) (21,155)

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

9. Other finance income



£’000 £’000

Expected return on pension scheme assets : VWSCPP 17,438 13,424Expected return on pension scheme assets : VUKPP 2,254 1,152Interest on pension scheme liabilities : VWSCPP (14,865) (11,331)Interest on pension scheme liabilities : VUKPP (1,999) (1,035)Interest on non-executive directors pension (75) (57) 2,753 2,153


Notes to the Financial Statements10. Taxation

15 month period Restated

ended Year ended


£’000 £’000

Taxation relates to the following:- Group Undertakings 16,228 18,325- Joint ventures (730) –- Associate 10 (601) 15,508 17,724

Taxation charge UK corporation tax at 30% (2006: 30%) 23,999 20,234 Over provision in prior years (73) (908) Total current taxation 23,926 19,326 Deferred taxation Net origination and reversal of timing differences for the period 3,660 1,076Over provision in prior years 304 (138)Effect of decreased tax rate on closing liability/change in tax law (9,339) –Increase in discounting (2,323) (1,939) Total deferred taxation (7,698) (1,001) Total Group taxation 16,228 18,325 Tax on joint ventures (730) –Tax on associate 10 (601) Tax on profit on ordinary activities 15,508 17,724


Notes to the Financial Statements10. Taxation (continued)

Current taxation reconciliation 15 month period ended Restated Year ended


£’000 £’000

Profit on ordinary activities before taxation (excluding joint ventures & associate) 89,618 175,506

Theoretical tax at UK corporation tax rate of 30% (2006: 30%) 26,885 52,652Effects of: - adjustment to tax in respect of company with tax rate 12.5% (30) (10)- adjustment to tax in respect of prior years (73) (908)- other income and expenses that are not tax deductible 947 (33,212)- accelerated capital allowances (3,104) (623)- short term timing differences 33 (448)- other timing differences (732) 1,875 Actual current taxation charge 23,926 19,326

11. Dividends



£’000 £’000

Interim dividend paid of £58 per share (2006: £164.20 per share) 29,000 82,100Interim dividend paid of nil (2006: £83.60 per share) – 41,800 29,000 123,900


Notes to the Financial Statements12. Intangible assets

Positive goodwill Contract costs Total

Group £’000 £000 £000

Cost At 1 January 2007 246 – 246 Additions 37,094 – 37,094 Acquired (See note 15) – 8,100 8,100 At 31 March 2008 37,340 8,100 45,440 Amortisation At 1 January 2007 48 – 48 Charge for the period 631 121 752 At 31 March 2008 679 121 800 Net book value At 31 March 2008 36,661 7,979 44,640 At 31 December 2006 198 – 198

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


Notes to the Financial Statements13a. Tangible assets – Group

Short term Freehold land, Mains and other Vehicles, Assets in

leasehold property buildings and infrastructure plant and course of

reservoirs assets machinery construction Total

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

Cost

At 1 January 2007 82 146,851 502,810 447,809 33,588 1,131,140Additions – 13,504 71,100 35,567 27,441 147,612Acquired – 294 – 7,673 – 7,967Transfers – 1,403 8,487 8,436 (18,326) –Capital contributions – – (12,291) – – (12,291)Disposals – (60) (938) (354) – (1,352)At 31 March 2008 82 161,992 569,168 499,131 42,703 1,273,076 Depreciation At 1 January 2007 82 49,538 257,187 252,932 – 559,739Charge for the period – 4,511 41,784 33,416 – 79,711Disposals – (5) (938) (335) – (1,278)At 31 March 2008 82 54,044 298,033 286,013 – 638,172 Net book value At 31 March 2008 – 107,948 271,135 213,118 42,703 634,904 At 31 December 2006 – 97,313 245,623 194,877 33,588 571,401

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


Notes to the Financial Statements13a. Tangible assets – Group (continued)

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

Freehold land, buildings Mains and other Vehicles, plant

and reservoirs infrastructure assets and machinery Total

Group £’000 £’000 £’000 £’000

Cost 8,419 23,165 68,708 100,292Depreciation (6,773) (10,244) (64,236) (81,253)Net book value 1,646 12,921 4,472 19,039

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

Freehold land, buildings Mains and other Vehicles, plant

and reservoirs infrastructure assets and machinery Total

Group £’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

13b. Tangible assets – Company

Short term Vehicles, plant

leasehold property Freehold property and machinery Total

Company £’000 £’000 £’000 £’000

Cost At 1 January 2007 82 6,658 1,356 8,096Additions – – 68 68At 31 March 2008 82 6,658 1,424 8,164DepreciationAt 1 January 2007 82 1,674 1,124 2,880Charge for the period – 166 103 269

At 31 March 2008 82 1,840 1,227 3,149Net Book Value

At 31 March 2008 – 4,818 197 5,015 At 31 December 2006 – 4,984 232 5,216 The leasehold property is the only leased asset held by the Company.

14. Fixed asset investments

2008 2006

Group £’000 £’000

Joint ventures (a) 11,062 15 Associate (b) 2,148 – At 31 March 2008 13,210 15

a) Investment in joint ventures 2008 2006

£’000 £’000

At 1 January 2007 15 15Acquired - Net assets 1,987 – - Goodwill 9,250 – 11,237 –Dividends received from joint ventures (1,225) –Share of profits retained 1,186 – At 31 March 2008 11,198 –Accumulated amortisation of goodwill At 1 January – – Charge for the period (154) – At 31 March 2008 (154) – Net book amount at 31 March 2008 Fixed assets 109,582 15 Current assets 109,117 – Share of gross assets 218,699 15 Liabilities due within one year (162,991) – Liabilities due after more than one year (53,742) – Share of gross liabilities (216,733) – Share of net assets 1,966 15 Goodwill 9,096 – Total fixed asset investments 11,062 15

Other investments refer to the Company’s investment in shares of a joint venture entity which is accounted for in the group accounts as a joint arrangement. The share of net assets above include a loan to a joint venture Sterling Water Seafield Holdings Limited amounting to £17,877,000 at 31 March 2008.


Notes to the Financial Statements


Notes to the Financial Statements14. Fixed asset investments (continued)

b) Investment in associate Share of net

tangible assets Goodwill Total

£000 £000 £000

At acquisition (28 November 2007) 139 2,000 2,139 Share of profits retained 42 – 42 Amortisation of goodwill – (33) (33) 181 1,967 2,148

Company Undertakings

Other investments subsidiary Total

£’000 £’000 £’000

At 1 January 2007 and 31 March 2008 15 45,839 45,854

Details of the principal investments in which the Group or the Company holds more than 10% of the nominal value of any class of share capital are as follows:

Name of company Proportion of voting

Nature of business Type of holding rights and shares held

Principal subsidiary undertakings: Water supply and related activities:

Veolia Water Capital Funds Ltd * Holding company Ordinary shares 100%(formerly Veolia 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%


Notes to the Financial Statements14. Fixed asset investments (continued)

Name of company

Proportion of voting

Nature of business Type of holding rights and shares held

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 Enterprise Limited Investment company Ordinary shares 100%Veolia Water Outsourcing Limited Water related activities Ordinary shares 100%Veolia Water Nevis Limited Water related activities Ordinary shares 100%Glen Water (Holding) Limited Waste water services Ordinary shares 50%MUJV Limited General construction Ordinary shares 50%OTW Services Limited Waste recycling Ordinary shares 50%Sterling Water Seafield Holdings Limited Waste water services Ordinary shares 49%Sterling Water (2003) Limited Waste water services Ordinary shares 25% 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 main activity is to manage its financial resources to maximise returns to the Company’s shareholders.

*** held directly by Veolia Water Ireland Limited.

All the above companies are incorporated in Great Britain, except Veolia Water Ireland Limited and Veolia Water Operations Ireland Limited, which are incorporated in the Republic of Ireland. Veolia Water Capital Funds Limited is the holding company for the water supply interests of Veolia Water UK PLC.


Notes to the Financial Statements15. Acquisitions

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

Book Values Initial Fair values Provisional

prior to acquisition Adjustments Fair values

£000 £000 £000

Intangible assets 8,100 – 8,100Tangible assets 8,173 (206) 7,967Stock 6,147 – 6,147Debtors 20,993 – 20,993Creditors (56,563) (4,259) (60,822)Provisions (2,294) (2,521) (4,815)Taxation 1,998 349 2,347Cash 11,709 – 11,709Loan payable 18,051 – 18,051Share of joint venture assets 1,987 – 1,987Share of associate assets 139 – 139 Net assets 18,440 (6,637) 11,803 Goodwill 48,343 Consideration 60,146Satisfied by: Cash 56,071Costs associated with the acquisition 4,075 60,146

The book values of the net assets and liabilities have been taken from the management accounts and statutory accounts of the subsidiaries, joint ventures and associate undertaking. The fair value adjustments contain some provisional amounts as indicated, which will be finalized in the 2009 financial statements when the detailed investigation has been completed.

The fair value adjustments to creditors relate to liabilities not fully reflected in the balance sheet at the date of acquisition. These include retirement provisions of £0.8m, redundancy costs of £1.8m, and £2.0m bonus arrangements.

Changes to the taxation balances mainly reflect adjustments to provisions such as pension liabilities and the expected net liabilities from the business acquired.


Notes to the Financial Statements16. Stocks

Group Group


£’000 £’000

Work in progress 887 217Raw materials and consumables 1,980 840 2,867 1,057

The Company has no stocks.

17. Debtors

Group Group Company Company

31 March 2008 31 December 2006 31 March 2008 31 December 2006

£’000 £’000 £’000 £’000

Due within one year

Trade debtors 50,288 37,069 1,390 108Loans to parent company 55,836 147,058 55,971 147,058Loans to other group undertakings - - 202,731 87,973Amounts due from group undertakings 6,519 1,195 2,455 5,571Other debtors 6,470 5,988 10,532 55Prepayments and accrued income 27,350 8,126 1,868 127 146,463 199,436 274,947 240,892

18. Creditors: amounts falling due within one year

Group Company

Group Restated Company Restated

Notes 31 March 2008 31 December 2006 31 March 2008 31 December 2006

£’000 £’000 £’000 £’000

Bank loans and overdraft 21 – 287 35 –Payments received on account 30,298 11,260 – –Obligations under finance leases 22 1,203 1,876 – –Financing of assets operated by other parties 22 1,568 1,644 – –Trade creditors 19,107 12,091 2,444 34Loans from group undertakings – – 32,651 25,291Amounts owed to group undertakings 2,211 3,789 250 6,667Corporation tax 33,286 28,380 28,063 16,979Other taxes and social security 1,944 2,853 473 1,146Other creditors 17,209 5,544 1,124 378Accruals and deferred income 99,354 87,386 5,952 1,522 206,180 155,110 70,992 52,017


Notes to the Financial Statements19. Creditors: falling due after more than one year


Notes 31 March 2008 31 December 2006 31 March 2008 31 December 2006

£’000 £’000 £’000 £’000

Debentures 21 47 59 – –Bonds 21 196,195 196,069 – –Obligations under finance leases 22 5,749 8,073 – –Financing of assets operated by other parties 22 16,572 18,018 – –Corporation tax 6,925 13,873 6,925 13,873Accruals and deferred income 11,127 6,086 – 117 236,615 242,178 6,925 13,990

20. Provisions for liabilities and charges

Other provisions

Group Deferred tax Insurance Other Leasehold property Total

£’000 £’000 £’000 £’000 £’000

Balance at 1 January 2007 48,579 1,657 2,668 1,481 5,806Amount utilised/released (8,293) – (2,050) (669) (2,719)Amount provided 573 593 899 – 1,492 Balance at 31 March 2008 40,859 2,250 1,517 812 4,579

Other provisions

Company Leasehold Total incl.

Deferred tax Other property Deferred tax

£’000 £’000 £’000 £’000

Balance at 1 January 2007 (413) 250 1,481 1,318Amount utilised/released – (50) (669) (719)Amount provided 116 598 – 714

Balance at 31 March 2008 (297) 798 812 1,313


Notes to the Financial Statements20. Provisions for liabilities and charges (continued)



£’000 £’000 £’000 £’000

Accelerated capital allowances 105,263 111,698 (79) (79)

Other timing differences (1,738) (2,782) (218) (444)

Undiscounted provision for deferred tax 103,525 108,916 (297) (523)Discount (62,666) (60,337) – 110

Discounted provision for deferred tax 40,859 48,579 (297) (413) Group Group Company Company


£’000 £’000 £’000 £’000

Deferred tax within “Provisions” 48,579 49,779 (413) (495)Deferred tax within “Net pension” (3,299) (3,713) (187) (451) Total deferred tax at 1 January 45,280 46,066 (600) (946)Deferred tax (credited)/charged to profit and loss account (8,429) (1,001) 116 79 Deferred tax charged/(credited) to statement of recognised gains and losses (5,791) 370 (155) 267 Reclassification of deferred tax on actuarial loss to corporation tax - - - - Deferred tax reclassified from corporation tax 914 (30) 97 - Deferred tax acquired 709 - - -Total deferred tax 32,683 45,405 (542) (600) Analysed as follows: Deferred tax within “Provisions” 40,859 48,579 (297) (413)Deferred tax within “Net pension” (8,176) (3,174) (245) (187) Total deferred tax 32,683 45,405 (542) (600)


Notes to the Financial Statements20. Provisions for liabilities and charges (continued)

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

£1,517,000 of “Other” provisions represent forecasted costs in excess of contracted value for rechargeable development work in progress.

The provision for leasehold property is made against anticipated costs incurred on the property being in excess of rental income receivable on existing lease contracts. The release in the period reflects the partial letting of the property and the element of the onerous lease obligation transferred to a third parties.

21. Borrowings analysis

Loans and bank overdrafts outstanding at the year end comprise:



£’000 £’000 £’000 £’000

Amounts repayable within one year Overdrafts 35 287 35 – 35 287 35 –Amounts repayable after one year Debentures 47 59 – –Bonds 196,195 196,069 – – 196,277 196,415 35 –

Loans and bank overdrafts are repayable as follows: Group Group Company Company


£’000 £’000 £’000 £’000

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


Notes to the Financial Statements21. Borrowings analysis (continued)

Loans not wholly repayable within five years comprise:

Group Group


£’000 £’000

Bond issue of 5.875% guaranteed notes due 2026 196,195 196,069Irredeemable debenture stock carrying interest of between 4.00% and 5.25% 47 59 196,242 196,128

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

22. Lease and other financial commitments

Obligations under finance leases are payable as follows: Group Group


£’000 £’000

Within one year 1,202 1,876In the second to fifth years inclusive 5,749 4,998After five years – 3,075 6,951 9,949 Obligations for financing of assets operated by third parties are payable as follows:

Group Group


£’000 £’000

Within one year 1,538 1,644In the second to fifth years inclusive 4,589 5,875After five years 11,983 12,143 18,110 19,662 The Group has no finance lease obligations.


Notes to the Financial Statements22. Lease and other financial commitments (continued)

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

Land and buildings Other


£’000 £’000 £’000 £’000

Group

Operating leases which expire: Within one year 10 8 306 855In the second to fifth years inclusive – 15 235 3,403After five years 1,795 248 1,631 2,227 1,805 271 2,172 6,485 Company

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

23. Minority interests

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

24. Share capital


£’000 £’000

Authorised500,000 ordinary shares of £1 each 500 500 Issued, allocated and fully paid500,000 ordinary shares of £1 each 500 500


Notes to the Financial Statements25. Profit and loss account and reserves

Group Group Group

profit and loss account other reserves total reserves

£’000 £’000 £’000

As at 1 January 2006 restated 262,169 7,649 269,818Retained loss for the period 35,903 – 35,903Actuarial gain – Group 1,230 – 1,230Actuarial gain – associate 2,056 – 2,056Tax on group actuarial gain (370) – (370) As at as previously stated 31 December 2006 300,988 7,649 308,637

Transfer of share option reserves from creditors 90 – 90 As at 1 January 2007 restated 301,078 7,649 308,727

Profit for the period 71,631 – 71,631Actuarial loss – Group (21,742) – (21,742)Tax on actuarial loss 5,792 – 5,792Share based payment 103 – 103Dividends (29,000) – (29,000) As at 31 March 2008 327,862 7,649 335,511


Notes to the Financial Statements25. Profit and loss account and reserves (continued)

Company Company Company

profit and loss account other reserves total reserves

£’000 £’000 £’000

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

Retained loss for the period 27,692 – 27,692Actuarial loss 890 – 890Deferred tax (267) – (267) As at 31 December 2006 223,760 – 223,760

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

26. Profit for the period

As permitted by section 230 of the Companies Act 1985, the parent company’s profit and loss account has not been included in the financial statements. The parent company’s profit for the year after tax was £51,031,000 (2006 restated : £151,591,000).


Notes to the Financial Statements27. Reconciliation of movements in equity shareholders’ funds

Group

Group Restated Company Company


£’000 £’000 £’000 £’000

Profit for the period 71,631 159,803 51,031 151,591 Other recognised gains /(losses) (21,756) 3,286 (554) 890Deferred tax 5,792 (370) 155 (267)Share based payment 117 90 65 –Profit for the year 55,784 162,809 50,697 152,214Less dividends (29,000) (123,900) (29,000) (123,900)

Movement in equity shareholders’ funds 26,784 38,909 21,697 28,314 Opening equity shareholders’ funds 309,227 270,318 224,260 195,946 Closing equity shareholders’ funds 336,011 309,227 245,957 224,260

28. Share-based payments

Share options in Veolia Environnement SA Share options reflect the wider responsibilities within the Veolia Environnement SA organisation of the individual concerned, and are not awarded solely on the basis of the Group’s performance. The share options are awarded to the executive directors by the parent company, Veolia Environnement SA, against a broad range of criteria including:

- Seniority- Performance of the Company- Contribution of the executive to the Company- Performance of Veolia Water UK PLC and Veolia Environnement SA

The market price of the shares at 31 March 2008 was a44.16 (2006: a58.40) and the range during the period was a42.57 to a63.28. There are no performance criteria to be met before the share options are exercisable. The a/£ exchange rate was a1.327 /£ as at 31 March 2008 with a range during the period of a1.257/£ to a1.506/£.

Strike price adjusted to take account of transactions impacting the share capital of the Company (issue of share subscription warrants of 17 December 2001 and share capital increase with retention of preferential subscription rights on 2 August 2002). The initial strike price for plans for 2001, 2002, 2003, 2004 and 2006 are a42.00, a37.53, a22.50, a24.72 and a44.75.

The pre tax expense recognised for share based payments in respect of employee services received during the period to 31 March 2008 is £114,000 (2006: £76,326). The closing balance of share option expenses credited to other reserves amounted to £365,576 (2006: £251,576).


Notes to the Financial Statements28. Share based payments (continued)

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

2007 2006 2004

Grant date 17/07/07 28/03/06 24/12/04

Vesting conditions 4 years service 4 years service 3 years service plus performance conditions for certain plans

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

Strike price (in euros) 57.05 44.75 24.72

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

2008 number 2008 WAEP 2006 2006 WAEP

(Euro’s) number (Euro’s)

Outstanding as at 1 January (*) 158,200 33.21 128,766 30.61Granted in the year 2,601 33.51 29,100 44.75Forfeited/exercised in the period (20,971) 30.65 Outstanding as at 31 December 139,830 33.60 157,866 33.21 Exercisable as at 31 December 94,491 28.27 101,366 32.20

(*) Included within this balance are options over 61,566 (2006: 61,566) shares that have not been recognised in accordance with FRS 20 as the options were granted on or before 7 November 2002.

For share options outstanding at 31 March 2008, the weighted average remaining contractual life is 4.15 years (2006: 2.15 years).

The estimated fair value of each option granted during the period, calculated using the Black Scholes method is a13.91 (2006 : a14.77).

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


Notes to the Financial Statements28 Share based payments (continued)

2007 2006

Share price at date of grant a57.05 a44.75Expected volatility 21.75% 22.60%Expected life 6.0 years 6.0 yearsRisk free rate 4.59% 3.69%Expected dividend yeild 2.00% 1.92%

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

No options were granted in 2005.

The estimated fair value of each option granted in 2004, calculated using the binomial method, is a6.56 (2003:a5.09). This value is based on the following underlying assumptions: share price of a25.89 expected volatility of 21.45%, expected dividend yield of 2.1%, risk-free rate of 3.4%. The number of options granted is based on the level of ROCE, which is taken into account in calculating both the number of options vested and the compensation expense.

29. Capital and other commitments

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



£’000 £’000 £’000 £’000

Contracted 18,417 15,117 – –

Other commitments not provided for in these financial statements are:



£’000 £’000 £’000 £’000

Indemnity given against performance bonds 44,109 12,288 44,109 12,288Letters of credit provided to insurers 41 41 41 41 Closing equity shareholders’ funds 44,150 12,329 44,150 12,329 Indemnity was provided against third party performance bonds which were issued on behalf of Veolia Water Ireland and other Group undertakings.

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


Notes to the Financial Statements30. Financial instruments and risk management

The Group’s financial instruments comprise borrowings, debentures, cash and liquid resources, and various items, such as trade debtors and trade creditors that arise directly from its operations. The main purpose of these financial instruments is to raise finance for the Group’s operations.

It is, and has been throughout the period under review, the Group’s policy that no trading in financial instruments shall be undertaken.

The main risks arising from the Group’s financial instruments are interest rate risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. These policies have remained unchanged since the beginning of the current year.

The Group finances its operations through a mixture of retained profits, bank borrowings and finance leases. Treasury policies are agreed by the parent company with the individual Group companies (including liquidity and interest rate risks). The Group does not undertake speculative transactions. Interest rate exposure is managed by using a mixture of fixed and floating rate borrowings. Liquidity is primarily managed by the utilisation of short-term borrowings.

Further disclosures are included in Notes 18, 19, 21 and 22.

Total Floating rate Fixed rate

financial liabilities financial liabilities

£’000 £’000 £’000

As at 31 March 2008 221,314 6,952 214,362As at 31 December 2006 226,026 10,236 215,790

The total liabilities include loans, overdrafts, finance leases, debentures and financing of assets operated by other parties. All financial liabilities and assets are denominated in Sterling.

Fixed rate financial liabilities include Guaranteed Loan notes, irredeemable debentures and the financing of assets used by a Group company and operated by other parties.


Notes to the Financial Statements30. Financial instruments and risk management (continued)

On 13 July 2004, Three Valleys Water Finance PLC (a wholly owned subsidiary of Three Valleys Water PLC) issued £200 million of 5.875% Guaranteed Notes at an issue price of 98.6%. The Notes mature on 13 July 2026. The issue was guaranteed by Three Valleys Water Plc.

Fixed rate financial liabilities

Weighted average

Weighted average period for which

interest rate rate is fixed

% Years

As at 31 March 2008 6.2 21As at 31 December 2006 6.2 21

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

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

The maturity profile for the Group’s financial liabilities is: 31 March 2008 31 December 2006

£’000 £’000

In one year or less or on demand 2,741 3,807In more than one year but not more than two years 2,564 3,292In more than two years but not more than five years 7,784 7,581In more than five years 208,225 211,346 221,314 226,026

The Group’s financial assets are as follows: Cash 7,878 583Short term deposits – –Loans to Group Undertakings 55,836 147,058Listed investments – – 63,714 147,641

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

The Group has not adopted FRS 26 Financial instruments: Recognition and measurement. However, the interest charge and liabilities associated with the £200 million of 5.875% Guaranteed Notes issued by Three Valleys Water Finance Plc (a wholly owned subsidiary of Three Valleys Water Plc) are calculated in accordance with FRS26.


Notes to the Financial Statements30. Financial instruments and risk management (continued)

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 March 2008.

Book value Fair value £m £m Long term borrowings – guaranteed notes 195 208

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

31. Pension commitments

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

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

The assets of the plan are held separately to those of the Group, being invested by independent fund managers. Contributions to the Plan are charged to the profit and loss account so as to spread the cost of pensions over the employees’ working lives with the Group.

The most recent triennial valuation of the Plan for the Group, determined by an independent qualified actuary, was at 31 December 2004. The valuation was made on the “attained age” funding method. The actuarial valuation made the following assumptions:

Rate of investment return 6.25% (pre-retirement), 5.25% (post retirement)Rate of increase in remuneration 4.25%Rate of pension increase 2.75%


Notes to the Financial Statements31. Pension commitments (continued)

Veolia Water Supply Companies’ Pension Plan (continued)The valuation as at 31 December 2004 stated the market valuation of the Plan’s assets to be £172.0m with a funding level of 95%.

Contributions to the Plan over the period ended 31 March 2008 were paid by members in accordance with the Rules of the Plan and by the Companies in the Group in the range of 0% to 21% of Pensionable Salary. The Companies in the Group also made lump sum payments in the period totalling £0.5m (2006: £0.6m).

Non Executive Directors PlanA provision of £1.3m (£0.9m after tax) was created in the period in respect of unfunded pension obligations to former employees and non executive directors of some Group companies.

Veolia UK Pension Plan A new Scheme was inaugurated as at 1 April 1996, the Générale des Eaux UK Retirement Benefits Scheme. This scheme was merged with the Générale des Eaux UK Pension Plan on 1 April 1998, now known as the Veolia UK Pension Plan was open to all employees. The Plan provides a selection of benefits based upon final pensionable pay or money purchase according to the members’ wishes. The final salary section of the plan was closed to new members on 30 September 2004.

Contributions to the Veolia UK Pension Plan over the period ending 31 March 2008 were paid by members in accordance with the Rules of the Plan and by the Companies in the Group of between 17% and 39% of Pensionable Salary.

The latest formal valuation of the Plan for the Company, determined by an independent qualified actuary, was at 31 December 2005. The valuation was made on the “attained age” funding method. The actuarial valuation made the following assumptions:

Rate of investment return 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 March 2008 stated the market valuation of the Plan’s assets was £7,027,000 and showed a deficit funding level of 89%.

Total pension charge including defined contributions scheme for the period ended 31 March 2008 was £5.2m (2006 – £5.1m).



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

a) Contributions

Under the projected unit method used for FRS 17, the current service cost under the Veolia Water Supply Companies’ Pension Plan will increase as members of the Plan approach retirement. Contributions for the year amounted to £4,168,000.

b) FRS 17 balance sheet information At 31 March 2008 At 31 December 2006

Long term rate of Long term rate

Value Split of fund return expected Value Split of fund of return expected

£’000 % of fund (% pa) £’000 % of fund (% pa)

GroupEquities 91,756 40.0 7.9 97,716 40.7 7.7Bonds 66,589 29.0 6.8 71,132 29.6 5.2Gilts/cash 71,234 31.0 4.4 71,195 29.7 4.2

Fair value of assets 229,579 100.0 240,043 100.0Present value of scheme liabilities (248,869) (241,092)

Actuarial deficit (19,290) (1,049)Surplus restriction (2,127) (3,525)

Recognisable deficit (21,417) (4,574)Deferred tax 5,997 1,372

Actuarial deficit after tax (15,420) (3,202)

At 31 March 2008 At 31 December 2006

Long term rate of Long term rate

Value Split of fund return expected Value Split of fund of return expected


CompanyEquities 751 40% 7.9 622 40.8 7.7Bonds 545 29% 6.8 453 29.7 5.2Gilts/cash 583 31% 4.4 450 29.5 4.2

Fair value of assets 1,879 100% 1,525 100.0 Present value of scheme liabilities (1,918) (1,484)

Actuarial (deficit) / surplus (39) 41 Deferred tax 11 (12)

Actuarial surplus after tax (28) 29



c) Assumptions

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


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

d) Analysis of the amount charged to operating profit 15 month period ended Year ended


£’000 £’000

Group Current service cost 3,630 3,261

Total operating charge 3,630 3,261

e) Analysis of the amount credited to other finance income



£’000 £’000

Group

Expected return on pension scheme assets 17,438 13,424Interest on pension scheme liabilities (14,865) (11,331)

Net return (2,573) 2,093



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



£’000 £’000

Group Actual return less expected return on the pension schemes’ assets 19,319 2,112Experience gains and losses arising on the pension schemes’ liabilities – (242)Movement in surplus cap (1,398) (1,323)Changes in assumptions underlying the present value of the pension schemes’ liabilities 2,033 52

Actual gain/(loss) recognised in STRGL 19,954 599

g) Movement in (deficit)/surplus during the period 15 month period ended Year ended


£’000 £’000

Group

Deficit in scheme at beginning of the period (4,574) (7,585)Movement in period: Current service cost (3,630) (3,261)Contributions 4,168 3,580Other finance income 2,573 2,093Actuarial (loss) / gain (19,954) 599

Deficit in scheme at end of the period (21,417) (4,574)

Company

Surplus in scheme at beginning of the period 41 3Movement in period: Current service cost (55) (40)Contributions 71 33Other financial income 22 16Actuarial gain (118) 29

Surplus in scheme at end of the period (39) 41



h) History of experience gains and losses



£’000 £’000

Group Difference between the expected and actual return on schemes’ assets: Amount (£’000) 19,319 2,112Percentage of schemes’ assets 8% 1%

Experience gains and losses on schemes’ liabilities: Amount (£’000) – (242)Percentage of the present value of the schemes’ liabilities –% 0%

Total amount recognised in statement of total recognised gains and losses: Amount (£’000) 19,954 599Percentage of the present value of the schemes’ liabilities 8% 0%

Company Difference between the expected and actual return on schemes’ assets: Amount (£’000) 140 5Percentage of schemes’ assets 7% 0%

Experience gains and losses on schemes’ liabilities: Amount (£’000) – 24Percentage of the present value of the schemes’ liabilities –% 2%

Total amount recognised in statement of total recognised gains and losses: Amount (£’000) 118 29Percentage of the present value of the schemes’ liabilities 6% 2%



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

i) Contributions

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

j) FRS 17 balance sheet information At 31 March 2008 At 31 December 2006

Long term rate of Long term rate of

Value Split of fund return expected Value Split of fund return expected


GroupEquities 19,555 80.0 7.7 17,401 80.0 7.7Gilts 4,897 20.0 4.2 4,350 20.0 4.2

Fair value of assets 24,452 100.0 21,751 100.0 Present value of scheme liabilities (29,605) (26,659)

Actuarial deficit (5,153) (4,908)Deferred tax 1,443 1,472

Actuarial deficit after tax (3,710) (3,436)


Long term rate of Long term rate of

Value Split of fund return expected Value Split of fund return expected


CompanyEquities 7,269 80.0 7.9 6,599 80.0 7.7Gilts 1,820 20.0 4.4 1,650 20.0 4.2

Fair value of assets 9,089 100.0 8,249 100.0

Present value of scheme liabilities (9,924) (8,913)

Actuarial deficit (835) (664) Deferred tax 234 199

Actuarial deficit after tax (601) (465)



j) FRS 17 balance sheet information (continued)

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


Split of fund Long term rate of Long term rate of

Value return expected Value Split of fund return expected


Group (Veolia Outsourcing)Equities 11,022 97.0 6.8 – – –Gilts 341 3.0 4.4 – – Fair value of assets 11,363 100.0 – –

Present value of scheme liabilities (12,725) –

Actuarial deficit (1,362) – Deferred tax 381 –

Actuarial deficit after tax (981) –

k) Assumptions

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

Group and Company


Discount rate 6.1% pa 5.0% paSalary growth 5.0% pa 4.4% pa RPI 3.5% pa 2.9% pa Pension-in-payment increases 3.5% pa 2.9% pa

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



l) Analysis of the amount charged to operating profit



£’000 £’000

Group Current service cost 2,578 2,395

Total operating charge 2,578 2,395

m) Analysis of the amount credited to other finance income 15 month period ended Year ended


£’000 £’000

Group Expected return on pension scheme assets 2,016 1,152Interest on pension scheme liabilities (1,755) (1,035)

Net income 261 117

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



£’000 £’000

Group Actual return less expected return on the pension schemes’ assets 1,930 1,074Experience gains and losses arising on the pension schemes’ liabilities – 300Changes in assumptions underlying the present value of the pension schemes’ liabilities (1,337) (715)

Actual profit recognised in STRGL 593 659



o) Movement in deficit during the year 15 month period ended Year ended


£’000 £’000

Group Deficit in scheme at beginning of the period (4,907) (4,790)Movement in period:Current service cost (2,578) (2,394)Contributions 2,665 1,501Other finance income/(expense) 261 117Actuarial (loss) / gain (593) 659

Deficit in scheme at end of the period (5,152) (4,907)



£’000 £’000

Company Deficit in scheme at beginning of the period (664) (1,505)Movement in period: Current service cost (536) (511)Contributions 626 458Other finance income 175 33Actuarial (loss) /gain (436) 861

Deficit in scheme at end of the period (835) (664)



£’000 £’000

Group (Veolia Outsourcing) Deficit acquired at 27 November 2008 (485) – Movement in period: Current service cost (223) –Contributions 240 –Other finance income (6) –Actuarial loss (888) –

Deficit in scheme at end of the period (1,362) –



p) History of experience gains and losses 15 month period ended Year ended


£’000 £’000

Group Difference between the expected and actual return on schemes’ assets: Amount (£’000) 1,930 1,074Percentage of schemes’ assets 8% 5%

Experience gains and losses on schemes’ liabilities: Amount (£’000) 0 300Percentage of the present value of the schemes’ liabilities 0% 1%




£’000 £’000

Company Difference between the expected and actual return on schemes’ assets: Amount (£’000) 787 422

Percentage of schemes’ assets 9% 5%

Experience gains and losses on schemes’ liabilities: Amount (£’000) 0 669

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




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

q) Movement in surplus during the year



£’000 £’000

Group Deficit in scheme at the beginning of the periodCurrent service cost (1,100) (1,144)Contributions 177 131Other financial income (75) (57)Actuarial loss (307) (30)

Deficit in scheme at end of the period (1,305) (1,100)Deferred tax 365 330

Actuarial loss (940) (770)

32. Related party transactions

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

33. Ultimate holding and controlling company

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

veolia water uk annual report 2008

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