Financial Statement 2010

Principal activities, trading review and future developments

These Financial Statements include the results of Veolia Environmental Services (UK) Plc and its subsidiary undertakings (“the Group”). The principal activity of the Group is the provision of waste management services to the public and private sectors, including waste collection, recycling, disposal and environmental cleansing.

The Directors consider the key performance indicators of the Group to be Group turnover, Group operating profit and net financial debt. The Group’s major non-financial key performance indicators revolve around Health & Safety monitoring.

Group turnover from continuing operations for the year ended 31 December 2010 was £1,210,450,000 (2009: £1,173,253,000), which represented a 3% increase. This is due to the progression of PFI contracts, most significantly the first full year of trading under the Merseyside Waste Disposal Authority contract, as well as an increase in Landfill Tax rates in the year.

The Group operating profit was £100,901,000 (2009: £86,678,000), an increase of 16%. The Group’s portfolio of integrated contracts with various municipal bodies continues to perform strongly and this performance has underpinned the increase in profits in the year.

The net financial debt at 31 December 2010 was £172,233,000 (2009: £214,927,000). Net financial debt is defined as total debtors, plus cash less total creditors (excluding pension liabilities and provisions).

Net interest payable, excluding other finance income, of £2,298,000 (2009: £3,221,000) related mainly to interest on floating-rate inter-company loans with the Group’s parent, and fixed-rate external bonds and finance leases offset by both fixed and floating interest receivable from the financial assets. The change in the year is mainly due to the reduction in net financial debt, as noted above.

The taxation charge for the year was £42,564,000 (2009: £40,471,000) and a reconciliation of the total tax charge to the standard rate of Corporation Tax is set out in note 9 to the Financial Statements.

The Group continued to improve its Health & Safety record in the year, building on the prior year's success in having all activities of the Group being certified compliant with ISO 14001, the environmental management standard. There were 6.9 (2009: 25.9) Lost Time Incidents for every million hours worked and the Group continues to look at how to improve accident reporting.

The Directors believe the Group will continue to deliver a strong financial performance in the coming year.

Dividends

The Directors do not recommend the payment of a dividend (2009: £ nil).

Risks and uncertainties

The Directors consider the following to summarise the key risks and uncertainties facing the Group:

Long-term integrated contracts, such as PFI contracts

The Group has significant exposure to such contracts at a number of locations. The contracts generally
result in a municipal body passing the operating and financing risk of running significant waste management
plant in return for guaranteed revenues, subject to a long-term contract.

While each contract is different and negotiated separately, the common risks arising from such
contracts include:

• Technological risk – ensuring the plant meet current and future environmental legislation
• Operational risk – ensuring the plant can process a certain amount of waste over an extended period
• Financial risk – there are many elements involved in assessing the financial viability of each contract, with revenues arising from operational management fees payable by the municipal party, fees due from third parties who may be given access to the contracted facilities, and the sale of by-products such as electricity, heat and recyclates. Costs arise from expenses incurred in the complicated planning process, infrastructure build costs, operational expenses and plant maintenance, including diversion costs during shut-downs

These risks are managed by significant levels of contract negotiation prior to the Group agreeing to undertake such a contract, and by ongoing customer liaison subsequent to contract signing. The Group is experienced in working with our customers in this way and, in the same way that contractual negotiation mitigates risks on the Group’s revenues, contracts are also placed with key suppliers for the provision of the plant to manage the financial risks thus associated.

Price risks relating to recyclates

Driven by the EU, national and local government bodies are urging greater recycling targets and, as a result, recycling activities and the impact of the recyclates arising are growing in importance to the Group. Recyclate prices for metals, plastics and paper are all driven by global supply/demand trends and, especially, by the growth in the Chinese and Indian economies. The capture and sale of recyclates affects the Group in two significant ways: firstly, the Group has exposure to movements in the value of such recyclates; and secondly, the more waste that is recycled sees less waste being taken to landfill, another of the Group’s major activities.

Falling landfill demand coupled with increased costs

Landfill operation continues to be heavily regulated. Areas subject to significant regulation include the emission of gasses and leachates, site restoration and aftercare, and operational standards. Meeting and exceeding this regulation incurs significant costs to the business and these costs need to be passed on to the users of the landfill sites. Coupled with these increased expenses, landfill users also face the annual increase in the Landfill Tax of £8 per tonne, from £40 per tonne, from 1 April 2009 through to 2013. The combination of these two extra costs will impact on demand for landfill.

The business is also subject to risks surrounding environmental legislation, Health & Safety issues, business continuity and the actions of customers and competitors. The Group has implemented risk controls and loss mitigation plans.

Financial risk management policies

It is the Group’s objective to manage its financial risks so as to minimise the adverse effects of fluctuation in the financial markets on the Group’s profits and cash flows. Specific policies are detailed in note 19.

The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk and foreign currency risk. The Board reviews and agrees policies for managing each of these risks, and they are summarised in the following sections. The Group also monitors the market price risk arising from all financial instruments.

Interest rate risk

The Group borrows at both fixed and floating rates of interest, to generate the desired interest profile and to manage the Group’s exposure to interest rate fluctuations. The Group’s policy is to obtain funds from within the Veolia SA Group at variable rates, with operating leases taken out as necessary at fixed rates.

Liquidity risk

The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of Group loans, bonds and operating leases. Short-term flexibility is achieved by the use of overdraft facilities.

Foreign currency risk

Some of the Group’s current investing activities in PFI-style integrated contracts require payment to contractors in euros. The Group occasionally uses forward currency contracts, to eliminate the currency exposures on any individual transactions for which payment is anticipated more than one month after the Group has entered into a firm commitment for a sale or purchase. The forward currency contracts must be in the same currency as the hedged item. It is the Group’s policy not to enter into forward contracts until a firm commitment is in place.

Directors

The Directors serving during the year and since the year-end were as follows:

• J D Mallet
• J C Banon (resigned 31 December 2010)
• P Bellon-Serre
• D Gasquet
• G Kuch
• J M Kutner
• F Devos
• T Spaul (appointed 9 February 2011)

Directors’ Insurance

The company has granted an indemnity to its Directors against liability in respect of proceedings brought by third parties, subject to the conditions set out in section 234 of the Companies Act 2006. Such qualifying
third-party indemnity provision remains in force as at the date of approving the Directors’ Report.

Employees

During the year, the Group continued to provide employees with relevant information and to seek their views on matters of common concern through their representatives and line managers. Priority is given to ensuring that employees are aware of all significant matters affecting the Group’s trading position and of any significant organisational changes.

It is the policy of the Group to support the employment of disabled persons where possible, both in recruitment and by retention of employees who become disabled while in the employment of the Group, as well as generally through training and career development.

Payment of suppliers

It is the Group’s payment policy, in respect of all suppliers, to settle the terms of payment with suppliers when agreeing the terms and conditions under which business is to be transacted, to ensure that suppliers are made aware of the terms of payment and to abide by these terms of payment. The amount owed by the company to trade creditors at the year-end in proportion to the amounts invoiced by suppliers during the year, expressed as a number of days, was nil days (2009: nil).

Derivatives and other financial instruments

The Group’s principal financial instruments, other than derivatives, comprise group loans, bonds, finance leases and hire-purchase contracts, financial receivables, cash and short-term deposits.

The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial instruments, such as trade debtors and trade creditors, which arise directly from its operations.

The Group occasionally enters into forward currency contracts. The purpose is to manage currency risks arising from the Group’s operations and its sources of finance. There are no significant interests in derivatives in the current financial year.

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

Going concern

The Group’s business activities, together with the factors likely to affect its future development, performance and position, are set out earlier in the Directors’ Report, including the financial position of the Group. Its liquidity position and borrowing facilities are summarised in the Balance Sheet and are described further in notes 18 and 19 to the Financial Statements.

Note 19 to the Financial Statements also includes: the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk.

The Group has considerable financial resources together with long-term contracts with a number of customers across different industries. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.

After making enquiries, the Directors have a reasonable expectation that the company and the Group have adequate resources to continue in operational existence for the foreseeable future.

Accordingly, they continue to adopt the going-concern basis in preparing the Annual Report and accounts.
 

Auditors

Having made enquiries of fellow Directors and of the company’s auditors, each of the Directors confirms that:

• to the best of each Director’s knowledge and belief, there is no information relevant to the preparation of their Report of which the company’s auditors are unaware; and
• each Director has taken all the steps a Director might reasonably be expected to have taken to be aware of relevant audit information and to establish that the company’s auditors are aware of that information.

A resolution to reappoint Ernst & Young LLP will be proposed at the forthcoming Annual General Meeting.

Consolidation tables

Consolidated profit and loss accounts

For the year ended 31 December 2010

*See the full Financial Statement

Consolidated statement of total recognised gains and losses

For the year ended 31 December 2010

*See the full Financial Statement

Consolidated balance sheet

at 31 December 2010

*See the full Financial Statement