Financial Statements Proposed Resolutions

ANNUAL REPORT 2006 _ WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 Index_

08_ 42_

2006 ANNUAL REPORT ACTIVITIES EVOLUTION

10_ Letter to the Shareholders 44_ Water and Sewerage

16_ Board of directors 54_ Health

18_ Stock Market Performance 60_ Inspection and Certiﬁ cation

24_ Highlights 68_ Other Activities

28_ Sustainability and Commitment

32_ Agbar Foundation

40_ CETaqua WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 72_ 252_

FINANCIAL STATEMENTS PROPOSED RESOLUTIONS

74_ Sociedad General de Aguas de Barcelona, S.A.

134_ Sociedad General de Aguas de Barcelona, S.A. Grup Agbar WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 Water & Wastewater

Health

Inspection & Certiﬁ cation

AGBAR GROUP

The Agbar Group operates in areas related with services to the general population: integral water cycle, health, and inspection and certifi cation, among others. Our international expansion, with a presence in fi ve continents, confi rms our leadership and potential for growth as a company that serves more than 37 million inhabitants worldwide, with a workforce of over 25,000 employees, consolidated revenues of 3,121 million euros and a net income attributed to the Parent Company of 167.3 million euros in 2006.

CONTRIBUTION BY SEGMENT TO OPERATING REVENUES AND INCOME

Operating revenues 2006 IFRS Operating income 2006 IFRSB

45,7% 67,2%

34,9% 24,4%

17,4% 11,4%

2,0% OTHERS -3,0% WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 WWaterater & WWastewaterastewater

HHealthealth

IInspectionnspection & CCertiﬁertiﬁ cationcation

HIGHLIGHTS

Share price in 2006 Stock Market Perfomance in 2006

29,00 160 28,00 155 27,00 150 26,00 145 140 25,00 135 24,00 130 23,00 125 22,00 120 21,00 115 20,00 110 19,00 105 18,00 100 17,00 95 JAN FEB MAR APR MAY JUN JUL AUG SET OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SET OCT NOV DEC

(Values in euros) (Index base 100 = 30/12/05) High Low Close AGBAR IBEX-35 IBEX-MID CAP Gral. Madrid

INTERNATIONAL PRESENCE

Andorra Colombia Denmark Holland Mexico Slovakia Argentina Costa Rica Ecuador India Nicaragua South Korea Australia Cuba Germany Italy Nigeria Spain Belgium Chile Finland Japan Panama United Kingdom Brazil China France Luxembourg Portugal United States Canada Czech Republic Guatemala Malaysia Singapore WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 _2006 ANNUAL REPORT

10_ Letter to the Shareholders 16_ Board of Directors 18_ Stock Market Performance 24_ Highlights 28_ Sustainability and Commitment 32_ Agbar Foundation 40_ CETaqua WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 9_ WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_1 AGBAR GROUP: 2006 ANNUAL REPORT

Letter to the Shareholders_

On the occasion of the presentation of the Annual Accounts and the Manage- ment Report for 2006, I would also like to submit to you the results achieved by the Agbar Group in 2006 and to highlight our will to continue working in order to achieve added value for the Company, pre-empt demands by administrations and the public, and reinforce the ethics and responsible commitment underlying our activity. The Board presents reasonably positive results. In the past few months, we have seen the end of the transition period for the restructuring of the business portfolio, which has led to very signifi cant extraordinary results, and a horizon on which the Company relies more and more on its capacity to generate recurrent profi t. From this standpoint, one can say that the balance for 2006 is satisfactory, since the Group’s three strategic sectors evolved positively, and this is shown in the rise in both revenue and operating income. Acquisitions and important operations within the Water and Wastewater, Health and Inspection and Certifi cation sectors enable us to face the future in good condition. This is our conviction. It is also the main theme running through the report you are holding in your hands, which is presented in a new form and according to the standards of good corporate governance.

A POSITIVE ECONOMIC FRAMEWORK 2006 was marked by signiﬁ cant growth in the world’s economy, with relatively contained inﬂ ationary pressures thanks to moderate oil prices in the second half of the year, although that did not prevent rises in interest rates. The main motor was again the United States (despite the real estate crisis the country is currently experiencing, which could have adverse effects on the global economy) together with sustained growth in China and India, and Japan’s relative recovery. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_1 LETTER TO THE SHAREHOLDERS

“Operations in Agbar Group’s three basic sectors evolved positively in 2006” 11_

The Spanish economy closed 2006 with 3.9% growth, 0.4% higher than in 2005 and 0.1% higher than the Spanish Government’s forecast. This growth is set against a more stable background, since it is more dependent on the foreign sector and on higher investment in capital goods. However, Spain’s trade defi cit has continued to grow faster than that of neighbouring countries. This is undoubtedly an obstacle to sustainable growth of the Spanish economy in the medium term. The Government foresees a positive scenario for the next two years, with 3.4% growth in 2007 and infl ationary pressures in check. Throughout 2006, infl ation was better behaved. The Consumer Price Index (CPI) was 2.7%, one point less than in 2005 and closer to the Government’s initial target. But, at 0.8% above that in the rest of our European partners, infl ation has still continued to weigh down competitiveness. In spite of some worrying geopolitical events which could impact upon energy prices, the background against which the Group’s activity will develop in the next few months, both in Spain and abroad, forms a favourable framework for the consolidation and expansion of our business units.

THE FOUNDATIONS OF GROUP GROWTH Over the year, the Group continued to create the grounds for sustained growth. It opted for the growth-profi tability binomial, focusing on three main sectors (Water and Wastewater, Health, Inspection and Certifi cation), with an important disinvest- ment from activities without the same value for the Group. Along these lines, dis- investment from the Installations and Construction sector was completed, with the selling of the remaining 40% stake in ACSA and the transfer of the total 50% stake in EMTE. Within the same strategy, Agbar left Argentina and Uruguay, as it believed it was not possible to achieve the profi tability and safety objectives the Company had established. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_1 AGBAR GROUP: 2006 ANNUAL REPORT

This strategy was completed with important acquisitions, among which Bristol Water Group, in the Water and Wastewater sector in the United Kingdom, stands out; the RTD Group, involved in certiﬁ cation in Holland; the K1 Group, a company dealing with vehicle inspections (MOT) in Finland; and the acquisition by Adeslas of three clinics in Spain. After this reorganization of activities, it can safely be said that the Agbar Group has the solid foundations to face the challenges of the next few years, from the standpoint of a reinforced leadership in the markets in which it operates.

HIGHLIGHTS OF THE YEAR Net profi t as attributed to the Parent Company reached 167.3 million euros. Its fall compared to 2005 was due to lower, non-recurrent, atypical results, higher taxes and higher profi t attributed to minority shareholders. Net turnover reached the fi gure of 3,044 million euros, 13.5% higher than in the previous year. Interna- tional turnover increased signifi cantly, from 15.7% to 21.3%, a rise due largely to the activities developed by Agbar Chile and Bristol Water (Water), and RTD (Inspection and Certifi cation). Operating income (EBIT) reached 372.1 million euros, 22.8% more than in the previous year. Without taking into consideration variations in the fi eld of consolidation and exchange rate evolution, organic growth of EBIT was 3.3%. This, however, would be over 10% if it did not include several non-recurrent, adverse impacts. As in other years, the item “Other Results” stands out, reaching 107.3 million euros and includes capital gains from several operations, including sales of stakes in EMTE (50%), ACSA (40%), and Aguas Décima (100%), as well as the transfer of stakes in Applus+, Caja Madrid (2.90%) and Unión Fenosa (2.32%). Corporate tax expenditure for 2006 includes 15.3 million euros in extraordinary charges, due to re-estimation of advance and deferred taxes for the Agbar Group, as a result of variations in the tax rates in Spain, and 9.3 million euros due to tax effects derived from the restructuring of the portfolio in Chile. Net profi t attributed to minority shareholders amounted to 140.8 million euros, compared with 86 million the previous year, the increase corresponding mainly to the minority shareholders in Aguas Andinas. In consolidated terms, investment made by the Group’s companies as a whole was 909.5 million euros, of which 209.5 million corresponds to tangible fixed assets, 98.8 million to intangible fixed assets and 601.2 million to financial investments. The work developed by all the Group’s employees, as well as the effort made by the management team, were the determining factors in the achievement of the year’s result. At the end of the year, the total number of staff in the Group’s companies stood at 27,000, of whom 21,000 corresponded to the companies consolidated by global integration. Sociedad General de Aguas de Barcelona, S.A., Parent Company of the Agbar Group, attained a turnover of 233.5 million euros, a 1.4% increase on 2005 due to a moderate increase in average water charges and drop in water consumption resulting from the successful adoption of conservation habits. Net profi t for the Water sector was 142.8 million euros, 25.7% higher than in the previous year. The increase in extraordinary results (112.6 million euros in 2006, compared to 52 million in 2005), due to capital gains from the sale of stakes and the reversion of provisions over Ar- gentine affi liates, was the reason for the improved operating results. At the close of 2006, equity for Aguas de Barcelona amounted to 1,173.5 million euros, 6.9% higher than in 2005, and represented a 79.7% cover for total fi xed assets. In 2006, the volume of investment made by Sociedad General de Aguas de Barcelona amounted to 302.7 million euros, of which 45.8 million corresponded to investment in tangible fi xed assets and 256.6 million to fi nancial investment. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_1 LETTER TO THE SHAREHOLDERS

WATER, THE GROUP’S CORE BUSINESS Consolidated operating revenue for 2006 from the activities related to Water and Wastewater amounted to 1,427.1 million euros, 17.2% higher than for the previous year and representing 45.7% of turnover for the whole Group. Investment made by this sector amounts to 590.8 million euros. In 2006, the Water and Wastewater sector achieved a 99% contract renewal ratio in Spain, which shows the trust placed in our management activity by town councils and citizens. The metropolitan area of Barcelona excluded, the Group was awarded 24 new contracts relating to the integral cycle of water and equivalent to 159,069 inhabitants, and 24 contracts were renewed relating to the supply of water to a population of 688,336 inhabitants. Within the Wastewater activity, the addition of new contracts and renewals amounted to the operation of Wastewater Treatment Plants with a load equivalent to 673,410 inhabitants. 13_ The Group’s main international action in the Water sector was the acquisition of Bristol Water Group, which supplies water, under a permanent licence, to one million people. This is a particularly interesting operation, if the fact that the British water market is highly regulated, mature and stable is taken into account. In Chile, IAM, in which Agbar holds a 56.6% stake, sold 1.1% of the shares of Aguas Andinas, which underlines the essentially managing nature of the Agbar Group. IAM still controls Aguas Andinas, with a stake of over 50%. A new strategic plan for the Aguas Andinas Group, the Aura Plan, began to be implemented and will govern the direction the company takes until 2008.

HEALTH SECTOR LEADER Within the health insurance activity, Adeslas, whose majority shareholder is the Ag- bar Group, maintained its indisputable position as leader, with, by the end of the year, 2,384,836 policyholders, a 5.2% increase on 2005. If participation in IMQ (Basque Country) and Lince Servicios Sanitarios (Ciudad Real) insurance companies, and the presence of portfolios shared through coinsurance or reinsurance, is taken into account, the total number of policyholders was 2,707,146, so the company is clearly health insurance leader in Spain. Aside from its increased portfolio, the Adeslas group also grew thanks to the acquisition of three new clinics: two in the Canary Islands and one in Vitoria. Adeslas’ presence as a hospital manager and in terms of services offered to policyholders increased considerably as a result. Consolidated operating revenue within the Health sector reached 1,088 million euros, 10.2% higher than in the previous year, accounting for 34.9% of the total operating revenues of the Agbar Group. Investment in 2006 amounted to 49.8 million euros.

THE PATH OF APPLUS+ The Inspection and Certifi cation business unit went through a complex year marked by a restructuring of the shareholders, with the result that the Agbar Group holds 53.1%; Unión FENOSA, 25 %; and Caja Madrid, 21.9%, due to signifi cant acquisitions and to the change in the management team as derived from the failed corporate operation between the former team and the company Candover. Within Technical Vehicle Inspection (MOT), Applus+ acquired the Finnish company K1, the second operator in the country, which enables the Group to consolidate its position in the north of Europe after entering Denmark in 2005. Expansion in the US continued, too, with a new contract with New York State and the renewal for two years of the Massachusetts contract. In Spain, Applus+ has benefi ted from statutory changes relating to the obligation for mopeds to undergo roadworthiness tests and the reduced frequency of the fi rst test for motorcycles, now four years instead of fi ve. In Catalonia, the Catalan Gov- ernment decided to extend the vehicle inspection concessionary rights of Applus+, which expired on 23 July 2006, for 18 months. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_1 AGBAR GROUP: 2006 ANNUAL REPORT

Within the Certifi cation activity, mention must be made of the acquisition of the Dutch group Röntgen Technische Dienst (RTD), specialist in industrial non-destructive testing, and present in Europe, North America and Australia. Applus+ also consolidated its leadership in this activity thanks to new contracts in Mexico, Chile and Colombia. In Spain, it reached different agreements and alliances with the main strategic companies. Within the Engineering, Test and Approval activity, Applus+ IDIADA became international as 60% of its total turnover was generated abroad. Its expansion in Asia is quite signifi cant, where signature of a project with the Indian Government to create a domestic infrastructure for automobile trial and development should be high- lighted. In Europe, Applus+ IDIADA acquired the Czech company Airon Technic, which has 50 expert design engineers and enables Applus+ IDIADA to increase its presence in Germany and Central Europe. Consolidated operating revenue from the Inspection and Certifi cation sector amounted to 442.8 million euros, 31% up on the previous year. This activity as a whole accounts for 17.4% of Agbar Group’s total consolidated operating revenue. In 2006, investment in the sector totalled 268.2 million euros.

FINANCIAL SOLIDITY AND 2006 DIVIDEND At the end of 2006, the Agbar Group had a high level of ﬁ nancial solidity which will enable its different business units to continue to grow. Taking into account the impact of the purchase of Bristol Water Group and the RTD Group, the two main rating agencies lowered their ratings. Moody’s rating is currently A2, with a stable outlook, and the rating given by Standard & Poor’s is A, with a stable outlook. The good results achieved by the Agbar Group in 2006 were also acknowledged by the stock market, where the share recorded one of its highest annual revalua- tions and reached an all-time high. Within this context of ﬁ nancial stability and of a low level of risk, the Board of Directors decided to increase the share capital by 1,481,653 euros. This increase was totally subscribed, with the result that the capital subscribed at the end of 2006 was 149,965,688 euros. Thanks to the good results for 2006, the Board has continued its policy of increasing the dividend to distribute to shareholders. Adding the dividend agreed upon in December 2006 to that proposed at the 2007 General Shareholders’ Meeting, the total dividend for the year will amount to over 67 million euros. As for the Board of Directors, on 31 January 2006 the previous Chairman Ricard Fornesa Ribó resigned and was appointed Honorary Chairman in recognition of the special mark he left on the Company. I was appointed Chairman thanks to the trust placed in me by the other members of the Board and the Shareholders. Furthermore, Manuel Raventós Negra was appointed 2nd Vice-Chairman. On the occasion of the General Meeting, and because his mandate had expired, Philippe Brongniart left his position on the Board and was replaced by Gérard Lamarche.

TRANSPARENCY AND RESPONSIBILITY In 2006, the Agbar Group launched an ambitious research, development and innovation initiative in relation to the integral water cycle through the creation of the Centro Tecnológico del Agua (CETaqua, Technological Water Centre), a project between the Technical University of Catalonia (Universitat Politècnica de Catalunya) and the scientifi c research centre, CSIC (Consejo Superior de Investigaciones Científi cas). With CETaqua, intended to become an international reference in its fi eld, the Group aims to pre-empt future needs, developing technologies and management models that meet the demands of citizens and administrations. We have also reoriented the objectives of the Agbar Foundation, whose activities aim to develop and disseminate the ideas and values inspiring the Agbar Group as a service provider group with a global vocation and committed to the quality of life of people and respect for the environment. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_1 LETTER TO THE SHAREHOLDERS

In order to show our commitment to the values underlying good corporate governance, we have once again published the Agbar Group Sustainability Report, whose approach and contents have been updated, and the corresponding Annual Corpo- rate Governance Report. With the same effort and enthusiasm that have characterized Aguas de Barcelona throughout its 140-year history, the Agbar Group will continue working to earn your trust and support.

Jordi Mercader Agbar Group Chairman 15_ WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_2 AGBAR GROUP: 2006 ANNUAL REPORT 01_2

Board of Directors_

Composition of the Board of Directors and its Committees at 31 December 2006

BOARD OF DIRECTORS

NAME POSITION NATURE Jorge Mercader Miró Chairman Executive Gérard Mestrallet 1st Vice-Chairman Domanial Manuel Raventós Negra 2nd Vice-Chairman External Enrique Corominas Vila Director External Jean-Louis Chaussade Director Domanial Feliciano Fuster Jaume Director Independent Bernard Guirkinger Director Domanial Miquel Noguer Planas Director External Jean-Pierre Hansen Director Domanial Gérard Lamarche Director Domanial Juan Rosell Lastortras Director Independent Juan Antonio Samaranch Torelló Director External Nueva Compañía de Inversiones, S.A. (Individual Representing, Director Domanial Juan Abelló Gallo) Alejandro García-Bragado Dalmau Secretary Non-Director José Antonio Félez Gutiérrez Deputy Secretary Non-Director WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_2 BOARD OF DIRECTORS

17 _

EXECUTIVE COMMITTEE

The Executive Committee of the Board of Directors is formed by:

NAME POSITION NATURE Jorge Mercader Miró Chairman Executive Manuel Raventós Negra Director External Jean-Louis Chaussade Director Domanial Juan Rosell Lastortras Director Independent The Secretary of the Board of Directors Secretary Non-Director

AUDIT AND CONTROL COMMITTEE

The Audit and Control Committee is formed by:

NAME POSITION NATURE Enrique Corominas Vila Chairman External Jean-Louis Chaussade Director Domanial Juan Rosell Lastortras Director Independent The Secretary of the Board of Directors Secretary Non-Director

APPOINTMENT & REMUNERATION COMMITTEE

The Appointment & Remuneration Committee is formed by:

NAME POSITION NATURE Juan Antonio Samaranch Torelló Chairman External Manuel Raventós Negra Director External Jean-Louis Chaussade Director Domanial The Secretary of the Board of Directors Secretary Non-Director

At present there are no other Committees with vested powers. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_3 AGBAR GROUP: 2006 ANNUAL REPORT 01_3

Stock Market Performance_

2006 was an outstanding year on the stock market. Share price rises were ac- companied by low volatility, high trading volumes, and mergers and acquisitions. European markets, marked by the growth of corporate proﬁ ts, the good economic outlook, and expectations for major shareholder movements, rose by more than US stock markets, while Latin American markets beneﬁ ted from the increase in raw material prices.

AGUAS DE BARCELONA SHARE PRICE IN 2006

29,00 28,00 27,00 26,00 25,00 24,00 23,00 22,00 21,00 20,00 19,00 18,00 17,00 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

(Values in euro) High Low Close

In Spain, the high level of corporate activity throughout the year was one of the driving factors for the market. The Ibex-35 ended the year at 14,146.5 points, after breaking record highs on various occasions and revaluing by 31.8% in the year. The IGBM closed at 1,554.93 points, up 34.5% in the year. In addition to WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_3 STOCK MARKET PERFORMANCE

19_

Trading volumes on the Stock Market broke the barrier of one million million euros

these levels of revaluation, there were records in trading volumes, dividends, corporate profi ts, and in stock market listings. Never before had the Spanish market recorded trading volume and capitalization above a million million euros, refl ecting the development of new fi nancial products and increased investor interest in equity. Likewise, shareholder remuneration rose to EUR 23 billion, three times the level of 2000. All these factors have helped to make 2006 the best year ever for the Spanish stock market.

RISES AND CORRECTIONS In the fi rst months of the year, following the sharp rises at the start of 2006, the Spanish market underwent corrections due to the entry of money which had waited until the start of the year to take positions. These adjustments, which led to Spanish equity values returning to levels of the end of 2005, were triggered by the tension of high oil prices, the weakness of the US economy, and by signs of rising infl ation, with forward interest rates increasing. In the second half of the year the Stock Market came into its own, and accumulated signifi cant gains. Catalysts were the high liquidity of investors, thanks to a long period of historically low interest rates, excellent corporate earnings, which beat all expectations, and the sustained growth of the world economy. Rumours on mergers and acquisitions also had a major impact on the market. In this context, the performance of Aguas de Barcelona shares was no exception, and they closed the year at EUR 27.75, up 54.2% in 2006. The strong performance led to a record high of EUR 28.20 being reached, and the average price for 2006 was EUR 23.08. At the end of 2006, the company’s market capitalisation was EUR 4,160 million. Traded volume in 2006 was EUR 3,115 million, compared to EUR 1,142 million in 2005, which represents a rise of 172.8%. The number of shares traded rose 106.7% to 135.4 million from 65.5 million in 2005. As has become usual, the highest trading WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_3 AGBAR GROUP: 2006 ANNUAL REPORT

Aguas de Barcelona 2 Volume (millions)

Bristol Water IPO launched

K1 bought

2005 dividend paid

RTD bought

Jan 06 Feb 06 Mar 06 Apr 06 May 06 Jun 06 volumes were recorded in January and June, corresponding to the payments of dividends, and in the last months of the year, due to window dressing by funds. Regardless of the fact that 2006 was the year with highest trading ever on the Spanish stock market, the sharp rise in trading volume in Aguas de Barcelona shares is a clear illustration of the growing interest of investors in the company. This increase has also been helped by the arrival of new derivative products, such as warrants on the water sector, which include Agbar, and by speculation that Agbar would be involved in a corporate movement.

WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_3 STOCK MARKET PERFORMANCE

The high level of corporate activity was one of the drivers of the stock market

21_

Closing 2006 Share Price & Volumes Traded share price (EUR)

EMTE sold

2006 dividend announced

Bristol Water IPO ends Announced that AGS to be included in Ibex-35

2005 supplementary dividend paid

06 Jul 06 Aug 06 Sep 06 Oct 06 Nov 06 Dec 06

AGBAR, A STOCK WITH HIGH POTENTIAL As a consequence of the high trading volumes in Aguas de Barcelona, the technical advisory committee of the Ibex, in its 12 December 2006 meeting, decided that it should again form part of the Ibex-35 index from 2 January 2007. For Aguas de Barcelona shares, the year begin with rises based on the future potential of the share price, reﬂ ecting the well thought out asset reorganisation carried out by the Group, and the stock market listing of 49.9% of the Chilean unit IAM, which allowed Agbar to increase its capacity for investments. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_3 AGBAR GROUP: 2006 ANNUAL REPORT

In the spring and summer of 2006, after suffering a slight correction in March, news such as the acquisition of the Finnish vehicle inspection company KI, the Dutch certifi cation company RTD, and the friendly bid for 100% of shares of Bristol Water Group, plc., were welcomed by the market, which understood that these acquisitions could increase the scale and international exposure of the group, and increase its stability by focusing on developed countries and on its core businesses. Another factor which served to help the share price revaluation was the increase from previous years in the dividend paid on 2005 earnings, announced in the Annual General Meeting of shareholders on 20 May 2006. In September, the shares rose signifi cantly, and this lasted into October, when record levels were hit. After a slight decline in November, due to a period of profi t taking, December crowned a spectacular year, with new share price rises based on rumours of corporate movements which would directly or indirectly affect the shareholder structure. The rises recorded by Aguas de Barcelona shares beat all the expectations of the market. The change of strategy adopted by Grupo Agbar, combined with excellent earnings and speculation about a possible corporate operation involving Agbar, led to a surge in the share price to unexpected levels in early 2007. Consequently, over the course of 2006 the fi nancial community continuously increased its target prices for the stock, awarding it increasingly higher revaluation potential. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_3 STOCK MARKET PERFORMANCE

Aguas de Barcelona shares returned to the IBEX-35 at the start of 2007

23_

STOCK MARKET PERFORMANCE IN 2006

160 155 150 145 140 135 130 125 120 115 110 105 100 95 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

(Index base 100 = 30.12.05) AGBAR IBEX-35 IBEX-MID CAP Gral. Madrid WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_4 AGBAR GROUP: 2006 ANNUAL REPORT 01_4

Highlights_

AGBAR GROUP CONSOLIDATED DATA

2006/2005

PROFIT & LOSS ACCOUNT DEC 2006 IFRS DEC 2005 IFRS VAR. (%)

Operating revenue 3,121.8 2,748.8 13.6% Operating cashﬂ ow 579.9 480.6 20.7% Operating income 372.1 303.0 22.8% Operating margin 11.9% 11.0% Net income 308.0 338.1 (8.9%) Net margin 9.9% 12.3% Net income attributed to Parent Company 167.3 252.1 (33.7%)

Million euros

In 2005, the EMTE and ACSA groups represented the Installations and Construction activity segment. This segment disappeared when these shares were sold in 2006. In application of what is set forth in IFRS 5 on interrupted activities, their contribution to the proﬁ t and loss account, both for 2005 and 2006, is submitted as discontinued. For this reason, some of the data presented here for 2005 may differ from those contained in the 2005 Annual Report. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_4 HIGHLIGHTS

25_

DEBT DEC 2006 IFRS DEC 2005 IFRS VAR. (%)

Total net equity 2,648.1 2,569.1 3.1% Net debt (*) 1,599.6 994.1 60.9% Net debt/Net equity 60.4% 38.7%

Net debt/(Net equity + Net debt) 37.7% 28.7%

Million euros * Net debt includes ﬁ nancial liabilities (current and non-current) and provisions for Argentina reduced by short-term investments, cash and equivalent means and long-term derivatives.

CREDIT RATING 2006 2005

Standard & Poor’s AA+ Moody’s A2 A1

CONSOLIDATED INVESTMENT 2006 2005

Intangible ﬁ xed assets 98.8 36.0 Tangible ﬁ xed assets 209.5 193.8 Investments 601.2 143.7 Total consolidated investment 909.5 373.5

Million euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_4 AGBAR GROUP: 2006 ANNUAL REPORT

DIVIDENDS 2006 2005 VAR. (%)

Proposed distribution of dividend (million euros) 67.4 64.0 5.4% Proposed distribution of dividend by share (euros) 0.455 0.435 Pay out 40.3% 25.4%

SHARE INFORMATION 2006 2005 VAR. (%)

Closing price (euros) 27.75 18.00 54.2% EPS Earnings per share (euros) 1.12 1.71 P/E R (Closing price/EPS, euros) 24.78 10.53

ATTRIBUTABLE ROE 2006 2005

Attributable ROE 10.4% 17.9%

(Net proﬁ t attributed to Parent Co./Average Equity Parent Company)

CONSOLIDATED STAFF 2006 2005 VAR. (%)

Consolidated staff 20,351 23,175 (12.2%)

DETAIL OF OPERATING REVENUES AND INCOME BY SEGMENT

OPERATING REVENUES OPERATING INCOME

2006 2005 VAR. % ON 2006 2005 VAR. % ON SEGMENT IFRS IFRS DEC 2005 IFRS IFRS DEC 2005

Water & Wastewater (*) 1,427.1 1,217.6 17.2% 250.0 183.7 36.1% Health 1,088.0 987.4 10.2% 90.9 79.6 14.1% Inspection and Certiﬁ cation 542.8 414.4 31.0% 42.4 36.4 16.8% Other 63.8 129.4 (50.7%) (11.3) 3.3 NA Agbar Group 3,121.8 2,748.8 13.6% 372.1 303.0 22.8%

Million euros * Corporate holding incl.

DETAIL OF INVESTMENTS IN THE YEAR BY SEGMENT

2006

INTANGIBLE TANGIBLE INVEST- SEGMENT TOTAL ASSETS ASSETS MENT

Water & 89.1 169.1 332.5 590.8 Wastewater (*) Health 2.8 19.5 27.5 49.8 Inspection and 6.8 20.3 241.1 268.2 Certiﬁ cation Other 0.1 0.6 0.0 0.7 Agbar Group 98.8 209.5 601.2 909.5

Million euros * Corporate holding incl. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_4 HIGHLIGHTS

CONTRIBUTION BY SEGMENT TO OPERATING REVENUES AND INCOME

Operating revenues 2006 IFRS Operating income 2006 IFRS

D -3.0% A 67.2% A 45.7%

C 11.4% D 2.0%

C 17.4% B 34.9% B 24.4% 27_

A Water & Wastewater (corporate holding incl.) B Health C Inspection and Certiﬁ cation D Other

INTERNATIONAL PRESENCE

Andorra Denmark Mexico Argentina Ecuador Nicaragua Australia Germany Nigeria Belgium Finland Panama Brazil France Portugal Canada Guatemala Singapore Colombia Holland Slovakia Costa Rica India South Korea Cuba Italy Spain Chile Japan United Kingdom China Luxembourg United States Czech Republic Malaysia WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_5 AGBAR GROUP: 2006 ANNUAL REPORT 01_5

Sustainability and commitment to stakeholders_

For the Agbar Group, sustainability represents and involves taking an integral vision of business. Economic growth must be combined with respect for and protection of the environment, and a socially responsible attitude. This view, increasingly shared by the economic world and contained in different business codes of conduct must inspire the behaviour of a group like the Agbar Group, whose raison d’être is to provide services of a high, social added value. The Sustainability Report presented herein demonstrates this conviction and is the result of the updating of patterns of behaviour in matters of sustainability that the Group undertook eight years ago, when it published its fi rst Report on Environmental Activity. In accordance with the standards of rigour and transparency that must govern information about actions and commitments, the 2006 Report provides more detailed information on the three business units: Water and Wastewater, Health and Inspection and Certifi cation. The Report was drawn up according to the criteria of the 2006 version of the Global Reporting Initiative Guidelines and it presents in a balanced and reasoned fashion the economic, environmental and social performance of the organization. The contents of the Report have been submitted to external audit for the fi rst time.

_ 1 Vision, mission and values

In 2006, the Agbar Group updated its vision, mission and values, highlighting the role that different stakeholders have for the different companies that form the organization.

VISION To be the business group of reference in ours areas of activity. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_5 SUSTAINABILITY AND COMMITMENT

29_

Sustainability is the balance between growth, the environment and a responsible attitude to society

MISSION Management of services that help towards the quality of life of people and generate value for the stakeholders.

VALUES _ Excellence in the provision of services. _ Innovation geared at the improvement of products, processes and services. _ Promoting dialogue and commitment vis-à-vis the stakeholders. _ Developing sustainable business based on economic, social and environmental responsibility.

_ 2 Stakeholders

Consistent with the redefi nition of its values, the Agbar Group has organized its objectives within the specifi c strategies for each activity sector of its companies in such a way as to meet the demands of each stakeholder group. In this way, specifi c commitments have been defi ned for each group and in some cases they have been subsequently specifi ed in more detail for each scope of activity. Obviously, not all the stakeholders within the Agbar Group carry the same weight for the different sectors, and this is shown in the actions carried out in interaction with each of these groups, which are contained in due form in each section. The priority stakeholders as defi ned by the Agbar Group are: _ Shareholders and Investors; _ Clients; _ Employees; _ Public Administrations; _ Society: the environment and the local community. (Relations of the Agbar WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_5 AGBAR GROUP: 2006 ANNUAL REPORT

Group with Society are presented, particularly the impact of its operations on the environment and actions in support of the local community); _ Suppliers; _ Professional Associations and Other Organizations (new stakeholder group deﬁ ned in 2006).

_ 3 Commitment to stakeholders

SHAREHOLDERS AND INVESTORS _ Creating added value for investors through sustainable and responsible actions. _ Facilitating communication with the shareholders through the appropriate channels, in a transparent way and emphasizing bidirectionality. _ Taking into consideration the concerns and needs of socially responsible funds, beyond purely economic interest.

CLIENTS _ Improving the quality of the services and products that Agbar offers and getting closer to the speciﬁ c needs of each segment. _ Innovating the offer, by offering a bonus of comfort and reliability. _ Establishing effective communication, by improving communication channels; promoting distance channels that allow for higher availability.

EMPLOYEES _ Establishing plans for training and development follow-up that provide opportunities for promotion and improvement, both at personal and professional levels. _ Favouring and improving the communication channels and dialogue tools that help towards participation in the achievement of the common objectives. _ Focusing on the health and safety of the employees by promoting training in that area.

PUBLIC ADMINISTRATIONS _ Offering a ﬁ rst-class quality service, within the framework of sustainability. _ Maintaining a policy of transparent relations through an easy dialogue aiming at the best choice for the user of services. _ Acting proactively in relation to the regulatory evolution of each sector, by pre- empting future requirements, in order to guarantee the provision of services and products. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_5 SUSTAINABILITY AND COMMITMENT

The Agbar Group drives application of environmental management systems

31_

SOCIETY: THE ENVIRONMENT _ Applying the Corporate Environmental Code, which includes the implementation of environmental management systems, and promoting good practices, both inter- nally and among the Group’s suppliers.

SOCIETY: THE LOCAL COMMUNITY _ Getting involved in the improvement of the quality of life of the local community in which we operate, through communication and awareness creation-actions and offering the experience that the Group has in each activity sector.

SUPPLIERS _ Establishing relations based on the principles of integrity and honesty. _ Promoting transparent relations and objective criteria for selection. _ Promoting sustainable practices among suppliers.

PROFESSIONAL ASSOCIATIONS AND OTHER ORGANIZATIONS _ Promoting the assumption of best practices in any of the Group’s activities, contributing to the creation of a reliable scenario for stakeholders as a whole. _ Contributing human and technical knowledge to the solving of problems shared in the different activity sectors and in the economic, environmental and social areas. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_6 AGBAR GROUP: 2006 ANNUAL REPORT 01_6

Agbar Foundation_

The Agbar Foundation, established in 1998, completed during 2006 a process leading to the integrated restructuring of its activities relating to R&D&I, knowledge management, sustainable development and the sponsorship, patronage and promotion of the Agbar Museum (Museu Agbar de les Aigües). The current organization of the Founda- tion has been structured since early 2007 around three areas (Events and Publications, Sponsorship and Patronage, and the Agbar Museum). Similarly, the R&D&I activity has been directed towards a new technological centre, all the social commitment at corporate level has been integrated and new activities for awareness creation and dissemination of the values inspiring the Agbar Group have been incorporated. The most remarkable events in 2006 centred on the impulse given to R&D&I, the creation of the new Technological Water Centre (CETaqua) and joining the international technological alliance R+i Alliance, as well as other important events such as the completion of the Group’s fourth Annual Sustainability Report, the renewal and enlargement of the BITA portal, the temporary exhibition Torres i Temps, and the expansion of the activities organized by the Museum.

BUDGET DISTRIBUTION

GENERAL STRUCTURE 22% INNOVATION 36%

MUSEU AGBAR DE LES AIGÜES 17%

Total Agbar grants: KNOWLEDGE 8,649,000 euros SUSTAINABILITY 19% MANAGEMENT 6% Total budget: 9,597,000 euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_6 AGBAR FOUNDATION

33_

The Agbar Foundation completed a restructuring of its activities in 2006

EVOLUTION OF ANNUAL BUDGETS *

12.000

10.000

8.000

6.000

4.000

2.000

0 19992000 2001 2002 2003 2004 2005 2006 * Thousands of euros

_ 1 Innovation

ACTIVITIES _ Internal R&D&I promotion: coordination of the Group’s strategy; enhancing syn- ergy between companies and between business units; identiﬁ cation, characteriza- tion and dissemination of Group R&D&I; support of project management: grants, patents, taxation, search for partners, etc.; management of promotion tools (projects, grant holding, activities, etc.); and dissemination of results. _ Further development of relationships with the technological environment: creation of and participation in technological networks and strategic organizations; further enhancement of relationships with universities and organizations involved in R&D&I; and technological watch. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_6 AGBAR GROUP: 2006 ANNUAL REPORT

IMPORTANT ACTIONS IN 2006 The Innovation Area takes approximately 37% of the Foundation’s budget (3,552,000 euros), equivalent to 36% of the effective subsidy granted for six main activities:

BUDGET DISTRIBUTION AND R&D&I *

AGBAR GROUP’S R&D&I R+I ALLIANCE 1.8 PROJECT GRANTS 0.23

MANAGEMENT CONTRACTS WITH AGBAR FOUNDATION AGBAR GROUP COMPANIES 0.17 PROJECTS 0.45

FUNDS TO SUBSIDIZE SUPPORT OF AGBAR GROUP’S AGBAR GROUP’S R&D&I PROJECTS 0.80 R&D&I INITIATIVES 0.10

* Millions of euros

In 2006, 16 R&D&I projects were subsidized and a total of 22 new grants were given for R&D&I projects of the Agbar Group companies. In order to join efforts and share common objectives in R&D&I within the water ﬁ eld, in early 2006 the Agbar Founda- tion joined R+i Alliance. This joint initiative of the water companies of the Suez Group in France, the United Kingdom and the United States enabled the Agbar Group to take part in the execution of 17 projects, with a total 2006 budget of 2.2 million euros. As in previous years, technological innovation was disseminated through the organization of the 6th Innovation Days held on 8-12 May at the different Group’s premises, in order to promote the Group’s R&D&I and further enhance relationships with the technological environment. Within the framework of the Ingenio 2010 programme and second wave of CENIT (National Strategic Consortia for Technical Research) projects, the presentation of a proposal under the title Desarrollos tecnológicos hacia el ciclo urbano del agua au- tosostenible (SOSTAQUA) (Technological developments towards the self-sustainable urban water cycle) was coordinated. This project is headed by Aguas de Barcelona and companies such as Emuasa, Clabsa, Canaragua and Labaqua participate in it, as well as another 11 external companies and 12 universities. The initiative plans for a 25 million euro budget in four years. The Ministry of Industry’s CDTI (Industrial Technological Development Centre) decided in favour of this project, with a grant covering 49.23% of the budget. Also, in collaboration with the Group’s companies, a report was published on Agbar Group’s 2005 R&D&I activities, in effect a summary WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_6 AGBAR FOUNDATION

The Agbar Foundation supported ﬁ nancially 16 R&D&I projects and gave 22 new grants

35_

of R&D&I activities on digital support and describing the main projects carried out in the different sectors covered by the Agbar Group.

_ 2 Knowledge management

ACTIVITIES _ Development of the BITA Portal: an information and alert system. _ Training Workshops: dissemination of services provided by BITA. _ Knowledge Management: projects for Group companies.

MAIN ACTIONS IN 2006 _ Development of the BITA Portal: an information and alert system. BITA continued to improve the services integrating the portal (reviews, regulations and legal provisions, patents and public tenders). It also created new services, like the Bank of Images, a service that aims to gather together the whole pho- tographic collection of the Agbar Group. Agbar’s historical collection of photos, digitized in part in 2005, was completed in 2006 with another 9,000 images. _ Dissemination: information workshops for small groups about the information and alert services provided by the BITA Portal. _ Customized projects for knowledge management: generation of customized projects depending on the typical needs of each sector of activity: _ Agbar Water: _ Dissemination of the Technical Observatory of Aguas Andinas (design of the customized bulletin and its sending to users); _ Argos: incorporating the BITA search engine into Argos; _ Technological watch bulletin from Agbar’s Network management (design of technical specifi cations and upgrading of the former ones). _ Health: _ Increasing the Technical Regulations and Legal Provisions Service in matters of health, within the municipal and regional scopes; _ Analysis of the internal data fi le on Adeslas projects (study for the development of a customized project); _ Inspection and Certifi cation: _ Dissemination of Applus+ public tenders relating to gas fuels; _ Textile Control –a project for management and dissemination of reports on textile inspections. _ Installations and Construction _ Customization of the Public Tender service for EMTE. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_6 AGBAR GROUP: 2006 ANNUAL REPORT

DOCUMENTS AND INQUIRIES ON THE BITA PORTAL IN 2006 In 2006, a total of 501,580 documents was gathered and 149,449 inquiries were made from the different services currently offered on the Bita Portal.

BITA PORTAL STATISTICS FOR 2006

2006

TOTAL INQUIRIES 149,449 Average number per day 696 Number of users 8,541 Total searches 7,814 Total documents 501,580

INQUIRIES BY SERVICE Articles 47,581 Technical Regulations 6,307 Books 4,696 Seminars 2,397 Images 51,129

INQUIRIES BY ACTIVITY SECTOR Water 75,724 Health 9,242 Inspection and Certification 37,363 Installations and Construction 14,682 Other 12,438 WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_6 AGBAR FOUNDATION

The Agbar Foundation collaborated in initiatives with a high commitment to sustainability

37_

_ 4 Sustainability

ACTIVITIES _ Internal promotion of sustainable development _ Coordination of the Agbar Group Sustainable Development Comittee. _ Drafting of the Sustainability Report. _ Promoting actions to improve relations with stakeholders. _ Disseminating the Group’s environmental knowledge and sustainability- related actions. _ Coordination of the funding of sociocultural, training, research and dissemination projects _ Planning of the funding. _ Active participation and visibility. _ Follow-up and monitoring of the projects and actions carried out.

MAIN ACTIONS IN 2006 As in previous years, the Agbar Foundation collaborated in initiatives involving a high commitment to sustainability, particularly in terms of the environment and, more speciﬁ cally, the integral water cycle. In this way, the relationship with universities and other institutions promoting the training of people in sustainability values, through courses, lectures, seminars and any other training tools, was further developed. Similarly, the Foundation collaborated with associations and institutions of prestige. In 2006, the most relevant initiatives were: _ Agbar Group Sustainability Report: publication of the 2005 Report following the guidelines proposed by the Global Reporting Initiative (GRI). In 2006, in collaboration with the activity sectors and areas of the Group, adaptation of the report to the new version of the GRI guidelines was started. It was presented in Amsterdam in October 2006 and it will be the one the Group will follow for its next report. _ Water in the Cities of the 21st Century: Day Session held on 12 June, in the Agbar Tower Auditorium and organized by the UNESCO Centre in Catalonia and the Agbar Foundation, with the support of the United Nations Global Water Resources Evaluation Program. At the event, which was attended by some 150 people, the Catalan version of the executive summary of the second United Nations Report on the Development of Water Resources was ofﬁ cially presented. _ Business and Territory Seminar: held on 1 December in the Agbar Foundation Auditorium and organized by the Xarxa de Custòdia del Territori and the Projecte Rius. 70 participants attended the event, including representatives for businesses, administrations and civil society. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_6 AGBAR GROUP: 2006 ANNUAL REPORT

_ Agbar Chair on Business and Sustainable Development: it was established in 2000 as a space for refl ection and for the analysis of new and innovative ideas about the role of businesses in respect of the environment and society, and to encourage operative plans within this fi eld. In 2006, a new phase was started, in collaboration with the Autonomous University of Barcelona, with the purpose of addressing the challenges involved in the achievement of the Agbar Group corporate commitments within the framework of sustainability, and in connection with the changes occurring in the fi eld of water and the relevant public policies.

INVESTMENT IN SOCIAL ACTIONS BY TYPE OF COLLABORATION

RESEARCH AND DISSEMINATION 42%

INVOLVEMENT WITH FORMATIVE 22% THE COMMUNITY 36% Total budget 2006: 1,333,000 euros

_ 5 Agbar Museum

ACTIVITIES _ Conservation of the industrial heritage: housed in an industrial building in the modernist style, the original machinery of a steam-powered hydraulic plant is beau- tifully preserved in situ. _ Exhibition activity: the permanent exhibition is dedicated to the discovery of water as a substance, as well as a tour of the history of water supply in a big city. The museum also aims to host outstanding temporary exhibitions. _ Educational activity: school activities, experimental workshops and dissemination activities for everyone are carried out. _ Sociocultural activities: music, theatre, storytelling, cinema in the open air, theme weeks, activities for the family, etc. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_6 AGBAR FOUNDATION

The Agbar Museum was visited by 35,525 people in 2006

39_

MAIN ACTIONS IN 2006 Throughout 2006, the Agbar Museum had a total of 35,525 visitors: 15,915 visited the permanent exhibition; 4,428 the temporary exhibitions; and 15,182 took part in the different activities organized by the Museum. _ The exhibition activity Torres i temps. Tres històries de Barcelona. 1905, 2005, 2105, opened between October 2005 and March 2006. It was a view of the city from the perspective of some of its most representative buildings: the towers. This exhibition, organized by the Museum, was held in Depósito Circular and had 2,304 visitors in 2006. _ The educational activity increased up to 48%, from the 8,830 school visitors in 2005 to the 14,028 recorded in 2006. Similarly, the total number of visiting stu- dents doubled in 2006. It is important to mention that the Agbar Foundation joined the Consell de Coordinació Pedagògica de l’Institut Municipal d’Educació de Bar- celona (Pedagogic Coordination Council of the Municipal Education Institute of Barcelona), which is a recognition of the educational work developed by the Mu- seum. Also, the Museum was awarded the Bonaplata 2006 Prize, in the Dissemi- nation Category, by the Col·legi d’Enginyers de Catalunya (Offi cial Association of Catalan Engineers). _ The activity for families centred in 2006 on the start-up of specifi c programmes, such as Hacdoshoh!!! and A tot vapor!, in recognition of the diversity of visitors to the museum. _ Hacdoshoh!!! takes place in the museum garden, in the space called El Bosc de les Aigües (The Forest of Water), involving parents and children in a number of experiments and games to learn about water properties. _ A tot vapor! aims to explain steam through a dynamic visit to the permanent exhibition. The tour starts with a ride on a small steam-powered train in the garden area. _ The cultural activity in 2006 was increased by including a comprehensive music programme (young musicians and themes relating to water), cinematography (winning fi lms from the Festival del Riu and a summer season), and other shows (Festival de Pallassos de Cornellà, Pell d’Aigua by artist Pep Bou, etc.). WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_7 AGBAR GROUP: 2006 ANNUAL REPORT: 01_7

CETaqua, Water Technological Centre_

Last 23 November, CETaqua (Water Technological Centre) was formally created by the agreement between Sociedad General de Aguas de Barcelona (80%), the Technical University of Catalonia (10%) and the scientifi c research centre CSIC (Consejo Superior de Investigaciones Científi cas, 10%). CETaqua is the commitment made by the Agbar Group to lead advanced technology and management relating to the integral service of water supply and treatment. CETaqua is an organization for the integration and management of innovation, technological development and research within the large fi eld of water, with greater emphasis on urban services and a domestic and international vocation. Therefore, its mission is to promote, carry out and disseminate research, technological development and innovation (R&D&I) in the integral management of water as an essential nature resource and an environmental element.

OBJECTIVES The objectives of CETaqua are: performing applied research and technological development activities, carrying out and applying research projects, disseminating scientiﬁ - cally the results from research, implementing special technical assistance operations, collaborating in doctorate programs and managing technological knowledge.

SCOPE The priority actions (theme lines or areas) for this Water Technological Centre are alternative water resources (desalinization and reutilization of water); critical events (fl oods, drought) and other events (city rainwater; water-related health and environmental risks (emerging and pathogen pollutants); water purifi cation and treatment; mud and smell control; and effi cient management of network systems and operating costs. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 01_7 WATER TECHNOLOGICAL CENTRE

41_

CETaqua is a technological innovation management organization

CLIENTS TARGETED The activity developed by CETaqua is targeted mainly at public and private companies and institutions, both domestic and international, whose activities deal directly or indirectly with the integral water cycle. In order to achieve its objectives, CETaqua will avail itself of a large and progressive network of experts in each of the theme areas related to the integral management of water. The network will gradu- ally shape up through framework agreements and/or speciﬁ c contracts and even through permanent collaborations.

BENEFITS The expected beneﬁ ts are access to expert knowhow; increase in the technological level (that will lead to the creation of new initiatives); transfer of knowledge to companies; improved management of assets and operations; improved social percep- tions; access to new contracts and/or renewal of current ones; and development of new activities incidental to the current business.

SOSTAQUA PROJECT Activity started at the centre in early 2007. One of the fi rst projects managed by CETaqua is SOSTAQUA, an initiative in which four companies of the Agbar Group (Clabsa, Emuasa, Labaqua and Canaragua), fi ve large companies (Degremont, Dow, Cementos Molins, Solvay and Sener) and six small and medium-sized enterprises (Cric, Remosa, Sineria, Enviros, Auma and STC) participate. Its budget is 25 million euros and the planned period of time to carry it out is four years. The project includes subcontracting for a total of nearly nine million euros and is based on 44 independent, pre-industrial and non-applicable development lines of work, which cover the different fi elds of water, water residues, energy and environmental health control. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 _ACTIVITIES EVOLUTION

44_ Water and Wastewater 54_ Health 60_ Inspection and Certiﬁ cation 68_ Other Activities WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 43_ WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_1 AGBAR GROUP: 2006 ANNUAL REPORT 02_1

Water and Wastewater_

The Agbar Group, one of the world leaders in the water industry, is the ﬁ rst private operator in municipal water management in Spain. It also enjoys a signiﬁ cant international presence. Having as some of its priorities the protection of the environment and improved quality and service, Agbar Water carries out activities involving water collection, treatment, transport and distribution as well as collection and transport of liquid waste, and wastewater treatment and reutilization. The Group also develops environmental consultancy, hydraulic engineering and sewage projects as well as projects involving water distribution, water treatment plants and desalination facilities. Thanks to its commitment and eagerness to get better, Agbar Water helps improve the quality of life of over 22 million people.

_ 1 Activities in Spain

Concentrating its efforts in offering ﬁ rst-class quality, under a policy of respect for and optimization of resources, the Agbar Group kept its leadership in the complete water management market in Spain throughout 2006.

RENEWAL OF THE CONCESSION IN ALICANTE The Agbar Group has had the concession for the water and sewer system service provided by Aguas Municipalizadas de Alicante (AMAEM) renewed. The contract ends in 2016, but it has been extended to 2036. This renewal results from the approval of the master plans related to drinking water supply, sewer system and treated water reutilization works that AMAEN drafted three years ago. The corporation, which serves about 725,000 inhabitants within the metropolitan area of the capital city of Alicante, ﬁ nances and executes projects valued at 54.8 million euros. Its global scope encompasses the municipal territories of Alicante, San Vicente de Raspeig, San Juan, Petrel, Monforte del Cid and El Campello. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_1 WATER AND WASTEWATER

45_

The Agbar group helps improve the quality of life of 22 million people

MAIN CAPITAL CITIES AND TOWNS (MUNICIPALITIES) MANAGED IN SPAIN

Viveiro Carballo Llanes Castro Urdiales Betanzos Cangas de Narcea Santiago O Carballiño Zarautz de Compostela Erandio Aguilar Zuia Santa Uxia de Ribeira Pontferrada de Campo Guernika Pontevedra Astorga O Barco Briviesca Sabiñánigo San Adrián Puigcerdà Roses Olot Ourense Santo Domingo Berga Palafrugell de la Calzada Benavente Palencia Palamós Granollers Zaragoza Mollet Pineda de Mar Valladolid Mollerussa Valls Premià de Mar Zamora Calatayud Tàrrega Barcelona Cuéllar Cervera i area metropolitana Alcañiz Tarragona Amposta Salou Mondéjar Cambrils

Arenas de Maó San Pedro Pla de Mallorca Plasencia

Las Pedroñeras Paterna Ses Salines Torrent Santanyí Ciudad Villanueva Real Albacete de la Serena Daimiel Benidorm Don Benito Tobarra Elx Villa Joiosa Puertollano Almargo Jumilla Cieza Alicante Oriola Santa Pola Úbeda Guardamar La Carlota Alcantarilla Montilla Torrevella Lorca Murcia Lucena Granada Marchena i area Cartagena metropolitana Águilas Llanos de Ariane La Oliva San Cristóbal Rincón de Adra Tacoronte la Victoria Roquetas de la Laguna de Mar Pájara Torremolinos Teide San Fernando Marbella Estepona Arona Valverde WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_1 AGBAR GROUP: 2006 ANNUAL REPORT

KEY DATA: DOMESTIC

SPAIN

SUPPLY Municipalities served 1,131 Total population served (inhabitants) 12,347,431 Total number of clients 5,741,611 Volume delivered to the network (m3/year) 1,273,562,950 Number of Drinking Water Treatment Plants 211 in operation Total treatment capacity (m3/day) 2,430,775 Total length of distribution network (km) 54,504

WASTEWATER

Sewage Municipalities served with sewer system 355 Total population served with sewer system (inhabitants) 6,214,227 Length of sewage network and sewers (in thousands of km) 17,811

Treatment Municipalities served with water treatment 478 Contracts linked to treatment activities 556 Equivalent pollution load (inhabitants) 11,049,432 Total treatment capacity (m3/day) 1,845,495

INCREASED PRESENCE IN MURCIA In May, Aquagest Levante, S.A. acquired 49% in the mixed company Sermube- niel, S.A., for 632,000 euros. The remaining 51% of shares belongs to the City Council of Beniel. Sermubeniel holds the administrative concession for the water, sewage system, rubbish collection, municipal building cleaning, and maintenance of green spaces services in this municipality in Murcia. Moreover, reorganization of the businesses covered by the Agbar Group meant that the Territorial Management Division for the Spanish Levant was divided into two areas: the Valencia Community (Aquagest Levante, S.A.), and the Murcia Region (Aquagest Región de Murcia, S.A). The Group has been present in Murcia since 1975, and it serves 70% of the population. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_1 WATER AND WASTEWATER

The Agbar Group has been awarded 24 new water- related contracts

47_

ENHANCING ITS LEADERSHIP IN ANDALUSIA In July 2006, Aquagest Sur, S.A. started to manage the supply services for Algarrobo (Malaga) and La Carlota (Cordoba), due to the acquisition of 100% of Sociedad An- daluza de Abastecimientos, S.L. from Compañía Meridional de Aguas, S.A., for 3.24 million euros. Subsequently, the company merged with Aquagest Sur, S.A. These measures fall within the agreement between Unicaja, Caja Granada and the Agbar Group to develop the leading position of Aquagest Sur, S.A. further in Andalusia.

NEW INVESTMENTS IN CATALONIA AND THE BALEARICS _ In March 2006, Agbar increased its stake in the company Aguas del Término de Calvià, S.A. (Aterca) thanks to the additional acquisition of 10.96% of its capital. Aterca serves about 8,000 inhabitants and it holds the license for drinking water supply in Santa Ponsa, Costa de la Calma, Rotes Velles and Urbanización el Toro, in Calvià (The Balearics), for a 50-year period ending in 2028. _ In March, the City Council of Cambrils (Tarragona) awarded the mixed company Secomsa Aigües, S.L., with 49% of its capital held by Sorea, an administrative concession for the town’s complete water cycle for 25 years. Furthermore, on March 14, AIE Sorea-Searsa-Aqualia (FCC Group) was incorporated, with 37.5%, 50% and 12.5% share respectively. AIE is the private partner-operator in the mixed enterprise formed by Consorci de la Costa Brava (Costa Brava Consortium) for management of the treatment facilities in the region. _ In the last quarter of 2006, Sorea acquired Grupo Aigües de Cabrera for the total amount of 30.7 million euros. Among the companies within this Group, there stands out the 64.8% share in Aigua de Rigat, S.A., a company that supplies water to the towns of Igualada, Vilanova del Camí, Òdena, la Pobla de Claramunt, la Torre de Claramunt and Copons (Barcelona). _ In July, Agbar Water obtained joint certifi cation on its management system for the Catalonia and the Balearics business unit, according to ISO 9001:2000 standard. The certifi cation includes all the municipalities and facilities managed and where this innovative model is applied. Thanks to this step, the unit has extended its certifi cation scope to the 351 municipalities and facilities that it manages - 191 more than those certifi ed before - with a total population of 4,391,061 inhabitants.

COMMERCIAL ACTIVITY The Agbar Group was awarded the management of 24 new contracts relating to the drinking water activity and serving about 159,000 people. Moreover, 24 contracts covering a population of 688,000 inhabitants were renewed. Similarly, mention must be made of the fact that in the month of June the Group was awarded the reading and maintenance contract for the pool of meters in Zaragoza for a two-year period, WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_1 AGBAR GROUP: 2006 ANNUAL REPORT

plus an equal period extension. Service is provided in Zaragoza (647,000 inhabitants and 310,526 subscribers) since 1970. Among the other contracts renewed in 2006, mention should be made of the one for Alicante. The contract renewal ratio for 2006 stood at 99%. On the other hand, in the wastewater activity, the Group was awarded 24 tenders, between new contracts and renewals, in order to serve 307,290 inhabitants. Reus (94,407 inhabitants) and Pla- sencia (39,596 inhabitants) must be mentioned. As for the treatment activity, the Group was awarded 20 contracts for management of wastewater treatment plants, which involves managing a pollution load equivalent to 673,410 people. In this respect, mention must be made of the awards related to Girona (207,142 inhabitants), Elda (106,657 inhabitants), and Granollers (57,796 inhabitants).

_ 2 Sociedad General de Aguas de Barcelona, S.A.

RESOURCES AND TREATMENT The water resources from the Ter-Llobregat river system recorded, throughout the ﬁ rst semester in 2006, a slight recovery in the volume of water. This recovery helped restore the amount of water stored in reservoirs. In the second semester, the volume of water in the reservoirs decreased. Therefore, 2006 ended with 323.1 million m3 of water in the reservoirs, which accounts for 53% of the system’s maximum capacity.

OPTIMIZATION OF RESOURCES _ A commitment to desalination activity: one of the main actions implemented in the year was the construction of the desalination plant in Barcelona – an action that helps increase the volume of water available and is framed within a geographical area with a shortfall in water resources. On the other hand, the public enterprise Aigües Ter-Llobregat awarded the joint venture formed by Agbar, Dragados, Drace and Dé- grémont the tender for construction and subsequent management of the desalination plant for the Barcelona area. Its budget amounts to 150 million euros and the plant will have a production capacity of 60 million m3/year. The project, 75% of which is funded by the European Union, plans on the construction of the facility and its management up to 2010. _ Other actions: in 2006, the third phase of the reverse osmosis plant for the Besòs aquifer was executed. It adds to the other two phases currently in operation. Another main action involved compliance with the health requirements under Royal Decree 140/2003. In this respect, the project for adapting the treatment process at the Sant Joan Despí plant was carried out – application of membrane ﬁ ltration technologies. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_1 WATER AND WASTEWATER

Aguas de Barcelona closed the year with 1,368,911 customers, 1.1% higher than in 2005

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TOWNS WITHIN THE BARCELONA METROPOLITAN AREA SUPPLIED BY AGUAS DE BARCELONA

Castellbisbal

Barberà Badia Sant Andreu de la Barca del Vallès

Sant Cugat Pallejà El Papiol del Vallès Ripollet Molins Montcada Torrelles de Llobregat Sant Vicenç de Rei Cerdanyola dels Horts del Vallès Begues Sant Feliu de Llobregat Santa Coloma Tiana de Gramenet Sant Coloma de Cervelló Sant Just Desvern Sant Joan Despí Montgat Sant Climent Esplugues Barcelona de Llobregat de Llobregat Badalona Cornellà de Llobregat Sant Adrià del Besòs Sant Boi de Llobregat L’Hospitalet Castelldefels de Llobregat

El Prat de Gavà Lobregat CUSTOMERS 1,368,911 Viladecans POPULATION 2,828,235 SUPPLIED AREA 426 km2

Managed by Aigües de Barcelona DRINKING WATER NETWORK Managed by Agbar Group companies 4,470 km Others DRINKING WATER PRODUCTION 237,700,000 m3 WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_1 AGBAR GROUP: 2006 ANNUAL REPORT

COMMERCIAL ACTIVITY In order to strengthen the trust placed in it by customers, Agbar developed activities to improve processes and services. In this sense, a Letter of Commitments was drafted with the aim of increasing the value of quality, on the basis of the user’s needs and expectations. As stated in the letter, Agbar undertakes to com- pensate the user economically if it fails to fulfi l any of the following commitments: _ Registering a new service within four days. _ Replying to complaints within 10 days. _ Accurate meter reading. _ Immediate warning to customer is there is excessive consumption. _ Taking immediate steps to update data. _ The number of water supply customers rose to 1,368,911 (1.1% higher than in 2005), and the population served is 2,828,235 inhabitants, according to the Instituto Nacional de Estadística [Spanish Institute for Statistics], which means an increase by 17,800 people. The policy of elimination of supply controlled by fl ume and its replacement with water supplied directly and measured by meter has resulted in a reduction by 613 supplies by fl ume and 3,025 water deposits. In 2006, 1,162,490 requests from customers were attended to, which means 0.85 contacts per customer. The main contact channel was the telephone (77%), followed by contacts at commercial offi ces (14%) and on the Web (9%). Another key fact was that the percentage of complaints dealt with at commercial offi ces dropped (-14%). Also, the payment of bills at commercial offi ces continued to drop (+ 5%). _ As for supply contracts, household contracts account for 87.5% of customers; 11.9% contracts are for commercial and industrial purposes; and the remaining 0.6% corresponds to municipal supply and other distributors. Consequently, in 2006, 185.5 million of cubic metres (65% for domestic consumption; 26% for commercial and industrial purposes; 6% for municipal public consumption; and 3% for other distributors) were invoiced. The trend for lower water consumption also continued in 2006: 116.1 litres per person/day – 3.5% lower than in 2005. The drop in household consumption is worth mentioning: 2.5% lower. _ The weighted average increase in the rates was 3.1%. The rates were approved by Entitat Metropolitana de Serveis Hidràulics i Tractament de Residus [Metropolitan Entity for Hydraulic Services and Waste Treatment]. As for collection of payments, 2006 closed with a 0.8% increase in payment collection through banks, thanks to the high level of payments by direct debit (91.1%). This is followed by a higher acceptance of the telephone as a channel for payment (payment against a card), with a 31.2% increase and over 4 million euros managed. Manage- ment of unpaid bills achieved to recover 97.3% of bad debt. This improvement shows how effective it is to have communication and availability of a large network of colla- WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_1 WATER AND WASTEWATER

The Agbar Group acquired Bristol Water Group plc for 256.6 million euros

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borating bank offi ces and post offi ces. Among them, there stands out the positive evolution of the Post Offi ce as a channel for the payment of bills (over 3 million euros were managed through it).

_ 3 International activities

THE UNITED KINGDOM The Agbar Group identifi ed the United Kingdom as a development market due to its maturity, stability and highly regulatory characteristics. On 21 April 2006 the Group announced the launch of a takeover bid over all the shares of the company Bristol Water Group plc. The takeover bid, unanimously supported by the Board of Direc- tors of the Company, was declared “unconditional” on 15 May 2006, as the Agbar Group secured 84.7% of the share capital of the company, which eventually became 100% owned by the Group. The operation involved paying 175 million sterling pounds (256.6 million euros), on the basis of 10.60 pounds (15.54 euros) per share. The British regulatory body for the water market (OFWAT) started in June a public process for consultation and modifi cation of the service license held by Bristol Water (Bristol Water Group plc operator). This body stated that there were no regulatory problems, vis-à-vis the operation and modifi cation of the licence held by Bristol Water, just for the registration of the change in ownership. OFWAT understood that Agbar was a group with proven international expertise and fi nancial and operational capacity to undertake the investment with guarantee. Bristol Water Group plc has 400 employees and supplies water under a permanent licence to nearly one million people in the city of Bristol and in the surrounding area in Somerset, Gloucestershire and Wiltshire. The General Shareholders’ Meeting held in June passed a resolution whereby offi cers Manuel Navarro (CEO of the Bristol Water Group), Juan Antonio Guijarro and Manuel Cermerón joined the Board of Directors of the company.

CHILE Inversiones Aguas Metropolitanas, S.A. (IAM), 56.6% of which is held by Agbar, sold in April 2006, at the Stock Exchange, 1.1% of the shares it held in Aguas Andinas (67,308,616 shares; A series). The average price per share was 182 Chilean pesos, and the operation amounted to 12,250 million Chilean pesos (19.7 million euros). As a result, IAM controls Aguas Andinas thanks to its 50.1% stakeholding. In April, the strategic plan for Aguas Andinas, Plan Aura, was also started. It establishes the strategies that will serve as the basis for work for the company until 2008, and, among other projects for the future, it includes the construction of a 28.5km trap sewer system (Mapocho Urbano Limpio project); the coming into service of six new WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_1 AGBAR GROUP: 2006 ANNUAL REPORT

KEY DATA: INTERNATIONAL

UK & CHILE COLOMBIA CUBA MEXICO TOTAL

SUPPLY Municipalities served 62 Total population served (inhabitants) 7,005,179 895,000 500,000 650,000 9,050,179 Total number of clients 1,924,171 Volume delivered to the network (m3/year) 794,562,233 Number of Drinking Water Treatment 34 Plants in operation Total treatment capacity (m3/day) 2,996,434 Total length of distribution network (km) 19,136

WASTEWATER

Sewage Municipalities served with 49 sewer system (1) Total population served with sewer 5,818,873 system (2) (inhabitants) Length of sewage network 9,980 (km) Treatment Municipalities served with 49 water treatment (3) Number of Wastewater Treatment 15 Plants in operation Equivalent pollution load (3) 3,830,748 (inhabitants) Total treatment capacity (3) 1,008,143 (m3/day)

(1) Only the number of municipalities where the sewer system is managed in one of the two possible modalities: Urban Drainage Advanced Manage- ment or Only Cleaning. (2) Only the inhabitants of locations where the sewer system is managed in one of the two possible modalities: Urban Drainage Advanced Manage- ment or Only Cleaning. (3) Miscellaneous municipalities and data where we operate the Wastewater Treatment Plants. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_1 WATER AND WASTEWATER

IAM, in which Agbar holds a stake, controls over 50% of the Chilean company Aguas Andinas

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state-of-the-art combination sewer cleaning trucks in the metropolitan area of San- tiago; and the opening of the Nature Reserve Aguas de Ramón, a 3,300 hectare pre- mountainous Andean area open to the local community. Finally, Inversiones Aguas Metropolitanas, S.A. (IAM) recently joined (January 2007) the main indicator at the Trade Stock Exchange in Santiago, with 0.6846% weighting on the indicator.

MEXICO The company Aguas de Saltillo, S.A. de C.V. (Mexico) developed in 2006 a model for Quality Management based on ISO 9001:2000 standard, in order to guarantee that the service fulﬁ ls both legal and the customer’s requirements. Implementa- tion of this system has made it possible to have a better control of processes, standardize procedures and apply a method for continued improvement.

URUGUAY Agbar has withdrawn from Uruguay as a result of its decision to disinvest from non- strategic businesses and sectors. Consequently, Agbar and the Government of Uru- guay concluded the purchase-sale of the stake held by Agbar in Aguas de la Costa – equivalent to 60% of the capital. The total price of the operation amounted to 2.7 million euros. The Agbar Group had joined the company Aguas de la Costa in 1997, when it became a shareholder of the Uruguayan company together with S.T.A Inge- nieros (30%) and Benencio, S.A (10%).

INTERNATIONAL PRESENCE

Colombia Cuba Chile Spain Mexico United Kingdom WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_2 AGBAR GROUP: 2006 ANNUAL REPORT 02_2

Health_

The signifi cant presence of the Agbar Group in the health sector is built on Adeslas, a health insurance company that several years ago became the domestic market leader through its volume of premiums and number of clients, placing itself at the same time at the head of the largest private health care group. This success demonstrates that its strategy was intelligent and well structured. The characteristics of the Spanish health care model mean that the cover that private insurance provides is usually parallel to that provided by the State, with the ensuing diffi culty of attracting a high number of clients and above all maintaining and increasing the portfolio over time. The offer of services whose quality is daily compared by users, sometimes under extreme conditions of sensitivity, is just as important as strong discipline in controlling all kinds of costs, a particularly diffi cult aim if one bears in mind the technical expenses of such insurance and the way health care demand behaves. The sector also requires the presence of a large product portfolio facilitating good market segmentation and a sustained and powerful marketing effort. For many years, health insurance would be taken out on the advice of relatives and friends, but today you can compete only if you have commercial networks readily available with a sound trademark backing them.

_ 1 Market and products

The transformation experienced by Adeslas in the last 15 years and, more speciﬁ cally, its outstanding growth in the last ﬁ ve years, has been achieved thanks to the above arguments. In 2006, the portfolio increased by 115,412 policyholders compared to 2005. If, to this exclusive Adeslas portfolio, we add the insurance companies from the Basque Country and Ciudad Real, in which Adeslas holds a stake, as well as the portfolios it shares with companies in Asturias, Cantabria and Navarra, the number WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_2 HEALTH

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Adeslas increased its client portfolio by 115,412 policyholders in 2006

of policyholders rises to 2,707,146. As well as having the leading Spanish health insurance portfolio, Adeslas heads the segments into which this activity is divided: policyholders under agreements with public administrations, and private holders. At present, the position of Adeslas in the Spanish market is as follows:

POSITION OF ADESLAS IN THE SPANISH MARKET

2006

Number of policyholders 2,384,836 Doctors 33,000 Medical assistance centres 1,100 Own hospitals 11 Privately-managed public hospital 1 Dental clinics 7 Own medical centres 26 Hospitals and clinics with state subsidies 300 Customer service ofﬁ ces 214

The insurance of groups has been for some years an important source of growth for health insurance companies, among other reasons because of the tax advan- tages of insurance paid by companies for their employees and their relatives, similar to those for the self-employed under the direct estimate tax system. Adeslas approaches the segment of group insurance policies through a speciﬁ c commercial strategy based on ﬂ exibility so as to adapt its standard covers to the demands raised by each group and customer service mechanisms that solve any WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_2 AGBAR GROUP: 2006 ANNUAL REPORT

problem quickly and effi ciently. At the end of 2006, the company had over 4,400 group policies, which guarantee the provision of general medical or dental care for more than 815,000 people. This fi gure does not include the people registered with the state mutual insurance companies. One of the new groups insured in 2006 was Bank of Spain employees and their families. Another factor helping development of health care insurance is dental care, partly due to the lower cover provided by the national health system and partly due to the changes occurring in this activity, which is now more accessible to a higher number of users. Adeslas also leads dental care insurance, with a portfolio of close to half a million of policyholders. In this case, not only does Adeslas rely on the services agreed with prestigious clinics and professionals in the fi eld, over 1,000 in Spain, but it also relies on the growing expansion of its own health care resources. In 2006, two new dental clinics were opened in Hortaleza and Sanchinarro, in the north of Madrid; the former, with fi ve surgeries; and the latter, with nine. At present, Adeslas owns 11 clinics, where General Dental Health care, Dental Hygiene and Aesthetics, Endodontic Treatment, Orthodontics, Children’s Dental Care and Dental Surgery services are offered.

ADESLAS JOVEN AND ADESLAS PRIMERA The diffi culties of a market where potential clients already have another insurance cover, that provided by the public system, force private companies to offer the best possible value-for-money for insurance products, and for a range of differentiated and specifi c products that meet the needs of clients. Two products launched in 2005, Adeslas Joven (Adeslas for the “young”) and Adeslas Primera (Adeslas “fi rst care”) penetrated the market successfully and was awarded best ideas of the year in the health care category by the journal Actualidad Económica. These two types of insurance offer users an inviting health care cover with lower premiums and a higher contribution by the policyholder to the cost of services. The doors are thus open for more people to take out private health care insurance. On the other hand, the company continues to focus on promoting health as one of its main strategies. Bearing this in mind, it develops prevention programmes that are incorporated into its best insurance products. Among initiatives of this kind carried out in 2006 was the cholesterol and heart evaluation and control programme, presented by Adeslas’ managing director and the chairman of Pfi zer, which collaborates in the project. The programme is based upon a preventive medicine tool for early detection and treatment of high cholesterol levels and cardiovascular risk, as promoted by the Adeslas medical centres, with educational materials and telephone services provided by expert personnel. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_2 HEALTH

More than 4,400 group policies taken out with Adeslas guarantee health care for 815,000 people

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_ 2 Collaboration with the Public Health System

The Spanish health care model guarantees the provision of health care to all citizens on an equal basis, and with a high standard of quality. As a result, it is a valua- ble instrument for all and we should all make an effort to maintain it. However, the public health system can have a good ally in the private sector, which has management tools that can improve the efﬁ ciency levels of the system while at the same time maintaining the quality of services, which helps towards the sustainability of the model itself. Some experiences within the framework of the Spanish health care system de- monstrate the above, and Adeslas participates in them. One of them is the over- 30s’ health care cover model enjoyed by Spanish civil servants and their families, and in which Adeslas has always been present. Muface, Isfas and Mugeju are the three mutual insurance companies run by the State that, complementing the Sta- te pension system, assume the provision of health care assistance for the group represented by civil servants, some 2.5 million people. In accordance with their rules and provisions, the mutual companies enter into health care provision agreements with both the public health system and the private insurance companies that apply to join the agreement, provided that the private companies comply with the necessary requirements. Given this choice, holders registered with State mutual insurance companies can choose every time they change their post and, in any case, once a year. That about 87% of those in the group able to choose a private health insurance company do so, proves how such companies perform. As for Adeslas, it is the one that, for each mutual insurance company, has the highest number of people insured; with a total of 806,455 at the end of 2006.

HOSPITAL MANAGEMENT Another formula for public-private collaboration, in which Adeslas has been a pioneer, is the indirect management of a health care area or department. This experience started in the Valencia Region: Adeslas became the majority shareholder in the Temporary Business Association (TBA) that, in 1997, was awarded the public tender on the start-up of Hospital de la Ribera in Alzira (in Valencia’s 11th department). The TBA headed by Adeslas assumes the provision of primary care and specialized care through the payment of a premium for each person domiciled in this department, and the investment to be made by the TBA during the term of the concessionary rights is also amortized on that premium. It is a formula that not only saves the State investing in the construction of hospitals, health care centres and similar, but also represents over 25% savings on the average budget per citizen under the WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_2 AGBAR GROUP: 2006 ANNUAL REPORT

public health system in the Valencia region; and quality remains in place, as shown by the results of opinion polls carried out among patients at Hospital de la Ribera, in which satisfaction stands at 8.35 points out of 10. Testament to how well Hospital de la Ribera is doing lies in the fact that, for the ﬁ fth consecutive year, it has been selected for the Top-20 Benchmarks programme for excellence by the consultancy ﬁ rm Lasist, and is top of the category for large general hospitals. Investment by the TBA holding the concessionary rights goes beyond this hospital, though. As well as other projects at health care centres in Sueca, Benifayó and Favara, the Alzira II-Sant Patrons integrated health care centre, in Alzira, was completed, and opened by the President of the Valencia Regional Government in early 2006, after investment of over seven million euros. Other health care related investments are in progress in Cullera and Carlet.

_ 3 Strategic operations

After obtaining authorization from the Ministry of Economy and Public Finances, in 2006 Adeslas took over Inisas, the insurance company that it acquired in 2005 from Sociedad Española de Participación Industrial (SEPI). The Spanish Cabinet authorized Adeslas to acquire 30% in Lince Servicios Sanitarios, a health insurance company also operating a surgery and hospital service provision business in Ciudad Real. The agreement with Global Consulting Partners, current shareholder of Lince, foresees Adeslas taking charge of the management of both activities. Adeslas currently aims to increase and develop its own hospital group. To this end, during the year it bought Policlínica San José, the main private hospital in Vitoria- Gasteiz. This entailed a 26 million euro investment and reinforces Adeslas’ position in the Basque Country, where, in 2005, it had acquired 25% in IMQ Seguros, the main health insurer in the territory. Another important acquisition concerned 90% of the companies owning the clinics Santa Catalina (Las Palmas de Gran Canaria) and Santa Cruz de Tenerife, in the city of the same name. Total investment is 27 million euros and it provides a new perspective for the development of Adeslas on the ar- chipelago of the Canary Islands. Thanks to all these acquisitions, Adeslas is already a majority shareholder in the companies that own 11 hospitals and whose management it is assuming. The company provides its group of hospitals with common management procedures and the necessary tools to guarantee the best standards of quality in the provision of health care services, obtaining ISO 9001:2000 certiﬁ cations for the services provided at all its centres, the best guarantee for patients. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_2 HEALTH

Adeslas moved ahead by creating its own hospital group through acquisition of several clinics

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_ 4 The challenge of health care management

The philosophy of Adeslas is that health insurance demands total involvement in the provision of health care services, so that patients can always have the response they need, independently from the complexity of their illness and the place where they live. For this reason, apart from agreements with over 33,000 professionals and 300 health care establishments, the company has its own hospital group and is increasing the number of dental clinics that it owns. So, from year to year, the network of Adeslas centres is growing and the capacity of the other resources included in its medical organization is strengthened, so patients receive integrated and easy care. In September 2006, Adeslas opened a centre of this type in Cordoba. It is the 26th centre that Adeslas has in this province, in which over 27,000 policyholders already use the company’s services. Following the same idea of quality and service, Adeslas opened new ofﬁ ces in Palencia, where it has over 12,000 policyholders, about two thirds of the total portfolio that the health insurance sector has in that province. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_3 AGBAR GROUP: 2006 ANNUAL REPORT 02_3

Inspection and Certification_

Inspection and certiﬁ cation activity started in Grupo Agbar in 1995. Since then, acquisitions, projects, and the development and diversiﬁ cation of activities have tur- ned the sector into a key part of the Group’s organisation and structure. Applus+ has evolved from the automotive sector to operate as a certifying institution in a range of other sectors. Applus+, which has a workforce of 8,371 people, is present in around thirty countries.

Germany United States Andorra Finland Argentina France Australia Guatemala Belgium Netherlands Brazil India Canada Italy Colombia Japaa South Korea Luxembourg Costa Rica Malaysia Chile Mexico China Nicaragua Denmark Nigeria Ecuador Panama Slovakia Portugal Spain Czech Republic Singapore WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_3 INSPECTION AND CERTIFICATION

61_

Applus+ inspects, tests, and veriﬁ es processes in over 25 different sectors

INTERNATIONAL PRESENCE WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_3 AGBAR GROUP: 2006 ANNUAL REPORT

The highest diversification of activities has taken place in the area of certification. Applus+ inspects, tests, and designs processes in over 25 industrial sectors, including energy, telecommunications, construction, environment, agri- foodstuffs, the implementation of ISO standards and petrochemicals, among others. The high level of technology that is supplied is reflected in the five technological and R&D centres of the company and in the award of over 100 accredited certifications. The area of technical inspection of vehicles was the initial activity of Applus+, based on checking inspected vehicles. In this sector, it is by far the leader in Spain (3,211,076 vehicles inspected), and it is also present in the US (9,727,252), Denmark (792,724) and Finland (262,417). Applus+ Idiada has in its facilities in l’Albornar (Tarragona) laboratories and tracks for testing, which allow it to serve as a partner for the automotive industry in engineering and homologation services. In January 2006, Grupo Agbar sold to Unión Fenosa a 2.32% stake in Applus+. In April it then sold 2.9% to Sociedad de Pro¬moción y Participación Empresarial Caja de Madrid, S.A. After this transaction, the share ownership of Applus+ is as follows: Sociedad General de Aguas de Barcelona, S.A. (53.1%), Unión Fenosa S.A. (25.0%) and Sociedad de Promoción y Participación Empresarial Caja de Madrid S.A. (21.9%).

_ 1 Technical Inspection of Vehicles

ACQUISITION OF K1, NUMBER TWO OPERATOR IN FINLAND On 28 May, Applus+ acquired K1, the number two company in vehicle inspection in Finland, for 42 million eur. K1 was founded in 1995 and carries out 20% of inspections in Finland. It has 230 employees and has 36 inspection centres in 29 locations.

CONTINUING EXPANSION IN THE US _ Contract obtained in the state of New York. In December, the state of New York awarded Applus+ Technologies, the US subsidiary of Applus+, a technological contract for automating practical driving exams in the next ﬁ ve years. This technology , DrivewatchTM, will be used by 170 inspectore, with annual volume of 550,000 exams. _ Extension of the contract for vehicle inspection in the state of Mas¬sachusetts. Before the end of the contract, the state of Massachusetts renewed for another two years the concession of Applus+ Technologies for inspecting emissions. _ Acquisition of AutoLogic LLC. On 18 August the company completed the purchase of the technology company AutoLogic LLC, dedicated to the design and pro- WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_3 INSPECTION AND CERTIFICATION

Applus+ has a workforce of 8,371 people, and is present in around thirty countries

63_

duction of diagnostic equipment and software for both the market for controlling polluting gases and for vehicle safety inspection. This acquisition complements the services of Applus+ in the US. _ ISO 9001:2000 certifi cation. Applus+ Technologies obtained in 2006 the ISO 9001:2000 certifi cation, and was the fi rst company in the vehicle emissions inspection sector in the US to obtain it.

STABILISATION OF POSITION IN DENMARK The market share of Applus+ Danmark has stabilised at 50%, after the liberali- sation of the Danish market in 2005, which led to the arrival of multiple competitors. In order to rebalance its costs structure and to make it more ﬂ exible, Applus+ Danmark has carried out a readjustment of its operational and administrative workforce, has outsourced some services (cleaning, call centre), and has closed or sold non-strategic stations.

LATIN AMERICA: THE GROWTH IS IN CHILE Applus Revisiones Técnicas de Chile, S.A., which owns the concession for vehicle inspection in Chile’s Region V, completed the construction of its plants and started operations in January 2006. Applus Chile S.A, which owns the concession for vehicle inspection in the metropolitan region of Santiago de Chile, maintained its leadership position and reached market share of 30%, competing against four other companies.

AWARD OF VEHICLE INSPECTION CONCESSION IN ANDORRA On 2 August 2006 it was announced that the contract for managing the technical inspections of vehicles in Andorra had been awarded to ITV i Serveis, S.A., in which Applus+ and Automòbil Club d’Andorra (ACA) have stakes. The contract, which has a duration of 10 years, which can be extended to 25 years, involves assuming the existing station of Sant Julià de Lòria, as well as providing a mobile station.

SPAIN: REGULATORY CHANGES AND EXTENSIONS _ Regulatory changes. On 21 June, Royal Decree 711/2006 was published, modi- fying regulations on vehicle inspection. Highlights are the introduction of inspection to scooters, with the fi rst inspection after three years and then every two years. The frequency was also changed for motorbikes, which will have their fi rst inspection after four years, down from fi ve. Each region will determine when inspections will start, in a maximum of three years. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_3 AGBAR GROUP: 2006 ANNUAL REPORT

_ Extension of concessions. On 4 July the Generalitat de Catalunya approved an extension of 18 months for the vehicle inspection concessions that Applus+ had been awarded and which expired on 23 July that year. _ Reorganisation of automotive companies. On 4 January, Applus Iteuve Tech- nology, S.L. completed the acquisition of the 25% that it did not control in Applus Iteuve Alicante S.A., for 9.9 million euros. Subsequently, on 8 September, the public deed of the merger was awarded, by which Applus Iteuve Technology, S.L. absorbed Applus Iteuve Alicante, S.A.

_ 2 Certiﬁ cation

INTEGRATION AND EXPANSION OF ACCREDITATIONS _ In 2006 the merger was completed of the accreditations of industrial safety at Applus Norcontrol, as an inspecting institution, a controlling body for national regulations, and as a notifi ed organisation in European directives. Applus+ was the fi rst Spanish institution to obtain accreditations from the Entidad Nacional de Acredita- ción (ENAC) for the OC type (control organisation). In addition, the areas of action have increased, with the authorization from the Ministry of Development to inspect recreational boating. _ In the agri-foodstuffs area, in terms of accreditations, 2006 ended with fi ve product certifi cations, and 87 testing parameters accredited by ENAC, and with a new accredited centre for testing in Lleida. _ LGAI Technological Center, S.A. obtained accreditation as Verifi er of Reports on Greenhouse Gas Emissions nr VEGEH-001-06, awarded by the department of En- vironment and Housing of the Generalitat de Catalunya. _ Applus+ obtained the recognition of the German laboratory VDE for carrying out electrical safety tests on household appliances. Consequently, the results of Applus+ are accepted without the need for supervision. Finally, Applus+ has consolidated its position in the area of legal audits of safety in the workplace. In 2006, it made audits for clients including Ernst & Young, Gas Natural, Siemens, Ocaso Seguros, Real Casa de la Moneda, Grupo Anaya, Schering Plough, ABM Hagermayer, Tudela Veguín.

CERTIFICATION IN SPAIN _ Strong position in the energy and telecommunications sector in 2006. In 2006 Applus+ completed its market studies of the needs of the various electricity companies for diagnostic services and predictive maintenance of underground networks. The predictive maintenance service provided in high tension electricity equipment WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_3 INSPECTION AND CERTIFICATION

Applus+ obtained the accreditation of ENAC as a new control body

65_

continues to experience the high growth rates of recent years. In 2004-2005 growth was 21%, and in 2005-2006 it was 25%, with revenues of over three million euros. In 2006, Grupo Agbar began to expand in new areas in its Network Division, such as Technical and Optional Direction of Works and Electrical Facilities Engineering. This responds to signiﬁ cant demand in the market, adding value to the traditional services of supervising works and trials. _ Collaboration agreements and alliances. As a result of the leading position of Applus+ in the sector, the group has a framework agreement with Unión Fenosa Ge¬neración for technical assistance, supervision and inspection in combined cycle plants; contracts for supervision and technical assistance for the maintenance of wind farms; supervision of desulphurisation in fossil fuel plants of Endesa, Hidrocantábrico and Unión Fenosa; the supervision and au- thentication of combined cycle plants for Enel, Unión Fenosa, Electrabel, AES and Gas Natu¬ral; and new inspection contracts with Gas Natural, Enagás and CLH. In the nuclear energy sector, with rising demands from the Council of Nuclear Se- curity on existing plants, there has been a major drive in the activities of inspection and supervision in the electrical and mechanical areas and in instrumentation and control. In addition, the position of Applus+ as leader of the market for inspections in the petrochemical sector has been strengthened, with the inspections agreement reached with Cepsa, which completes the presence of Applus+ in all the major petrochemical complexes of the sector and in the main companies of the sector, such as Repsol, BP and now Cepsa. Finally, in the telecommunications area, collaboration agreements have been signed with Motorola España, S.A. and its subsidiary Telcel, S.A. for the supervision and inspection of mobile networks. Likewise, the roll-out of the Yoigo (formerly Xfe- ra) network has been started for Ericsson, in the area of radioelectric certiﬁ cation, design and consulting for rolling out 3G mobile telephony networks. Applus+ was selected because of its technical ability and its geographical presence, and the collaboration will continue in 2007 and 2008.

MOST IMPORTANT CONTRACTS BY BUSINESS AREA _ Project Management Area. Applus+ has been awarded the project for integrated management of the corporate headquarters of Lubasa in Valencia until the end of 2008. The offer of Applus+ was made in collaboration with the French architect Jean Nouvel. _ Area of Industrial Building/ Laboratories. Applus+ has joined the Board of AOC- TI (the association of independent organisms for technical control), which includes over 25 companies, and is the vice-chairman of the association. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_3 AGBAR GROUP: 2006 ANNUAL REPORT

_ Area of Facilities Management. Applus+ has consolidated itself as a leading company because of its understanding and technology for consulting services and certifi cation of energy effi ciency in buildings. . _ Infrastructure Area. Applus+ has a signifi cant position in regional infrastructure managers, including GISA (Catalonia), SPI/ACEUSA (Galicia), GIASA (Andalusia) and GICAMAN (Castilla-La Mancha). Applus+ has a portfolio of around 20 million euros here. _ Novotec was responsible for co-ordinating the health and safety of the dismantling of the Windsor building, with zero accidents. Novotec was also awarded the task of safety co-ordination in the construction of the Repsol tower. _ Applus+ Environment (Labaqua) Applus+ Environment (Labaqua) won the con- test from Iberdrola Distribución Eléctrica, for Analysis of samples of dielectric oils, derived from the transformers of Iberdrola Distribución Eléctrica, from 2006 to 2010, for a total of around 600,000 euros.

CERTIFICATION IN INTERNATIONAL MARKETS Applus+ has begun to carry out its fi rst international certifi cations, supported by the certifi cation infrastructure of the recently created offi ce in Shanghai, and the existing offi ces in Latin America. _ Acquistion of Dutch company RTD. The group completed in April the acquisition of the Dutch company Technische Dienst (RTD) for 178.8 million euros. It specialises in carrying out non-destructive tests and inspections to ensure the quality and completeness of technical facilities. The group has subsidiaries in the Netherlands, Germany, Canada, the US, France, the Czech Republic and Australia. In addition, in 2006 two new subsidiaries were established in the United Kingdom and Singapore. In 2006, as in previous years, RTD experienced a sharp rise in activity, helped by the expansion of its main client base, the energy and petrochemical industry. _ Adjudications in Latin America. 2006 saw the defi nitive consolidation of Applus+ as one of the leading inspection and control companies in Latin America, as it grew by 44% and closed the year with a wide portfolio of projects across all sectors and business lines. _ In 2006, Applus+ México signed major contracts for inspection and consulting in the petrochemical, energy and industrial sector. In addition, Applus+ México became one of the top six certifi cation companies nationally in quality management systems, by number of certifi cates issued.. _ Applus+ Colombia experienced high growth (80%), due to the diversifi - cation of its services and its active policy for sales development from its 13 offi ces. These results have not gone unnoticed, as the World Confederation of Businesses awareded it a Bizz Award WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_3 INSPECTION AND CERTIFICATION

The conﬁ dence of the international sector allowed Applus+ Idiada to increase sales by 14%

67_

_ Applus+ Chile continues at the head of the consulting and inspection market and consolidated its position in the construction sector. Revenue growth was over 40%. In the environmental area, the ﬁ rst services were provided for the National Energy Commission. _ Applus+ Guatemala has been able to overcome the limitations of its small market, has broadened its portfolio of services and products, and recorded growth of 50% from the previous year. _ Applus+ Panamá has become the leader in the sector and is in an excellent position ahead of the new business that will be derived from the enlargement of the Panama canal.

_ 3 Applus+ Idiada

In 2006, sales of Applus+ Idiada rose by 14% from the previous year. This increase is testimony to the confi dence of the international automotive sector in Applus+ Idiada (60% of total business) for the development of its products. It has also maintained and increased its presence in the European sector, in spite of the environment of continuing crisis, and the heavy pressure on costs, and Applus+ acquired Czech company Airon Technic, which is managed Applus+ Idiada. This acquisition strengthened its presence in Central Europe and Germany, enabling an increase in the activities of Applus+ Idiada, by providing a more complete service, including design. Since July, Applus+ Idiada has had a new offi ce in Poznan (Poland), providing homologation services. Likewise, in January Applus+ Idiada signed with the Indian government a project to create a national infrastructure for automotive testing and development over six years. This project gives Applus+ Idiada a privileged position in the market and in the Indian automotive industry. Since September, Applus+ Idiada has had an offi ce in Delhi. In 2006, the structure of Applus+ Idiada Chi¬na was strengthened with the incorporation of local engineers. In the second half of the year, new projects with European and Asian clients were signed, with a high engineering component, particularly in the areas of passive and active security. In 2006, committed investments were 15 million euros. In Spain, a highlight was the construction of a wet handling track (for driving in the rain), the construction of an anechoic chamber, and improvements to facilities in the engine area. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_4 AGBAR GROUP: 2006 ANNUAL REPORT 02_4

Other activities_

_ 1 Shared Services

Agbar Servicios Compartidos (Aserco), Agbar Shared Services, and its affi liated company Comagua again focused on the Group’s clients throughout 2006, for whom they have continued to generate effi ciencies. The services currently provided correspond to information technologies, remote control systems, supply chains, space management and work centres. The company also carries out personalized services for different companies, mainly pertaining to the Agbar Agua business. During the year, Aserco transferred its registered offi ce to the Agbar Tower in Barcelona.

INFORMATION TECHNOLOGY SERVICES The agreement with Applus+ was extended in the last quarter, adding new telecommunications services, data process management centres and support throughout Spain. The 2006-2010 Systems Plan, diagnosing and improving the present systems and specifying requirements and projects for the different areas, was started up for Agbar Agua and Agbar Holding. The systems plan that has been executed for Aigües Segarra Garrigues, S.A. has also been drafted and presented, and includes a proposal for commercial, ﬁ nancial and technical solutions. Development of a common commercial application is also underway, which will provide solutions for Agbar and Aguas Andinas, as well as the remaining Agbar Agua companies.

REMOTE CONTROL SERVICES The Agbar Group has supplied and installed control panels, remote stations, instrumentation equipment, electric material and control centres at facilities for drinking water treatment, waste water treatment, transport and distribution of drinking and waste water: Aguas de la Habana, Aigües d’Elx, Mancomunidad del Río Eresma, Cartagena, Torrepacheco, Estepona, Manilva and Alcantarilla, amongst others. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_4 OTHER ACTIVITIES

69_

Aserco provides telecommunications, data processing and space management services

SUPPLY CHAIN SERVICES With regard to procurement, the ﬁ rst agreements with suppliers have now been obtained for Bristol Water plc. Apart from formalizing contracts with 129 suppliers, an important number of annual purchasing contracts for 2007 have been agreed. A big effort is being made to obtain a reduction in inventory within the framework of continuous improvement. For this, we have proceeded with the purchase and optimization of warehouses for the Agbar Agua Territorial Management Centre.

BUILDING MANAGEMENT SERVICES Aserco has executed a series of ofﬁ ce and industrial bay remodelling projects in different municipalities served by Agbar Agua: Begur, Girona, Granollers, Maó, Pa- lafrugell, Sant Cugat del Vallès and Torroella de Montgrí. It has also supervised the construction project involving the new headquarters for the Home Affairs Depart- ment of the Regional Government of Catalonia (Passeig de Sant Joan/Diputació). As far as operation management services for work centres is concerned, operation of the group’s headquarter facilities in the Agbar Tower has also been managed under this rubric, as have the different buildings in the area of Barcelona..

_ 2 ASM Group

INCREASE IN ACTIVITY The ASM Group increased sales by 12.04% in 2006. This growth is of particular importance in areas that do not bear much weight within the Group, thus allowing an extension of the scope of action as well as growth expectations. Operations in Andalusia, Aragon and the Canary Islands grew by 41.4%, 53.8% and 87.3%, respectively, over the year. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_4 AGBAR GROUP: 2006 ANNUAL REPORT

OPENING OF NEW DELEGATIONS With the aim of reinforcing ASM’s presence in Andalusia, ASM Andalusia opened a Marbella Delegation in June, with the double objective of rationalizing distribution structures in the province of Malaga and exploiting the area’s commercial potential. The Seville Delegation opened in October. These new delegations are part of strategy of consolidation in the region, from which all clients of the ASM network will beneﬁ t and the company will proﬁ t from synergies with the production facilities already existing in the area.

TECHNOLOGICAL INNOVATION Centralization of the company’s operating applications using CITRIX technology, which started in 2005, was completed during 2006. Likewise, installation of ACD (Automatic Call Directory) began in the client attention department, applicable to the entire ASM Group, along with migration to IP voice technology. This is the ﬁ rst phase of a project that will be completed in the year 2007 with the installation of the new CTI/CRM application.

QUALITY COMMITMENT The process of obtaining ISO-9001:2000 certifi cation for the entire ASM organization started in February of 2005. Development of audits and fi nal multi-location certifi cation was entrusted to Applus+. This operation fi nished in April, when the certifi cation was obtained.

MARKETING RELATIONS ASM organized and participated in professional trade fairs and congresses pertaining to the transport and logistics sector and in sectors linked to potential clients. Presence in these forums has allowed ASM to embrace the latest advances in logistics matters and future trends in the sector, contact new clients and access new geographical and sector markets, thus consolidating relationships between ASM and its partners and clients. ASM also organized the 3rd Logistics, Optical and Audiology Transport Con- gress, which was held in Gran Canaria at the beginning of March. This congress has become an open and plural forum for debate in which the latest advances in logistics matters are assessed on an annual basis, with the main protagonists intervening in the different links of the logistics chain regularly reporting to the congress. Debate and the views of the principal experts are a feature of the congress, which deals with many questions and arrives at useful conclusions. This year ASM was also present at the second Transport Logistic China 2006 trade fair, which took place in Shanghai in September with the objective of ﬁ nding Chinese WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 02_4 OTHER ACTIVITIES

ASM Group increased its presence in Andalusia, Aragon and the Canary Islands

71_

companies that wish to distribute their products through a company such as ASM in Spain, Andorra and Portugal, as well as to make contact with potential partners, share experiences and rub shoulders with other Spanish sector companies present at the event. Leading companies from the transport sector, ports services sector and logistics operators were at the trade fair, which counted upon 3,000 exhibitors from 33 countries and more than 9,000 visitors from 81 countries. Finally, the Electronic Commerce and Direct Marketing Federation (FECE-MD) held its 26th Concentra event towards the beginning of March at Madrid’s Palacio de Congresos. This fair is a meeting point at which the principal professionals from the electronic commerce and direct marketing sector come together to present current and future trends, new formats and the latest in Internet publicity and marketing. At the event, ASM presented its logistics services for direct marketing campaigns adapted to the speciﬁ c needs of each client.

_ 3 Tax Collection

The Agbar Group develops an extensive range of technical assistance services for local institutions in the area of tax and revenue management, through the company Tribugest Gestión de Tributos, its subsidiaries and TBA. These services cover management of the entire tax cycle, ranging from determination of amounts right through to notifi cation, processing and settlement of sanctions, as well as all related activities (property valuation, inventory of assets, training, tax inspection, etc.), and all of this duly following the strictest of quality parameters. Tribugest is 60% owned by the Agbar Group and 40% by BCL (BBVA Group). It is the indisputable market leader, with a potential, both fi nancial and commercial, far higher than any of the other competitors and has extensive experience within the scope of local administrations, thus contributing great value in terms of effi ciency and effectiveness. The company’s contracts in Melilla and Lugo were renewed, demonstrating the satisfaction of Tribugest’s clients. In addition, new contracts were awarded in Ciudad Real, Maó and Figueres and the Ponferrada contract was renewed. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 _FINANCIAL STATEMENTS

74_ Financial Statements 120_ Financial Statements appendix 136_ Consolidated Financial Statements 236_ Consolidated Financial Statements appendix WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 73_ WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT 03_1 Financial statements & management report_

_78 Balance sheets at 31 December 2006 and 2005

_80 Income Statements for the Years ended 31 December 2006 and 2005

_82 1 Company Activities

_83 2 Basis of presentation of the financial statementes

_84 3 Distribution of profit and dividends

_84 4 Accounting policies

_90 5 Intangible Assets

_91 6 Property, plant and equipment

_92 7 long and short-term investments

_96 8 Shareholder's equity

_99 9 Other provisons

_99 10 Bank borrowings

_99 11 Payable to Group companies and associates

_100 12 Tax matters

_104 13 Obligations and other guarantees

_107 14 Incomes and expenses

_109 15 Remuneration of and obligations to the members of the Board of Directors

_109 16 Disclosures under Article 114 of the Securities Market Law introduced by Law 26/2003 of 17 July

_110 17 Disclosures under Article 127 ter.4 of the Spanish Companies Law, introduced by Law 26/2003 of 17 July

_111 18 Information on the Environment WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

_111 19 Situation of the water business investments in Argentina

_113 20 Events after the balance sheet date 75_

_113 21 Statements of changes in financial position

_116 22. Explanation added for translation to English

_117 Director's Report for the year ended 31 December 2006

_120 Annexos WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT 03_1 Financial statements and directors’report_ WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

77_ WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

Translation of ﬁ nancial statements originally issued in Spanish. In the event of a discrepancy, the spanish-language version prevails.

BALANCE SHEETS AT 31 DECEMBER 2006 AND 2005

(Thousands of Euros)

ASSETS 31-12-06 31-12-05

NON-CURRENT ASSETS: Intangible assets (Note 5) 42,735 51,359 Concessions, patents, licences, trademarks and other 7,253 7,253 Merger goodwill 53,310 53,310 Computer software 53,286 52,372 Rights on assets 38,421 38,169 Accumulated amortisation (109,535) (99,745) Property, plant and equipment (Note 6) 428,283 413,744 Land and buildings 106,700 104,235 Pipelines 575,129 563,789 Other ﬁ xtures, machinery, tools and furniture 163,560 151,675 Advances and property, plant and equipment in the course of construction 35,967 24,534 Other items of property, plant and equipment 10,350 9,349 Accumulated depreciation (463,423) (439,838) Long-term investments (Note 7) 1,000,604 1,033,539 Investments in Group companies 844,495 871,671 Loans to Group companies 2,991 3,491 Investments in Associates 111,103 115,220 Loans to Associates 89,667 17,440 Long-term investment securities 29,612 7,282 Other loans 13,120 1,519 Long-term deposits and guarantees given 13,172 12,435 Long-term tax receivables (Note 12) 134,372 165,513 Allowances (237,928) (161,032) Total non-current assets 1,471,622 1,498,642

DEFERRED CHARGES 4,300 34,524

CURRENT ASSETS: Inventories 2,228 2,149 Accounts receivable 408,410 159,924 Trade receivables for sales and services 50,452 51,317 Receivable from Group companies 229,997 72,368 Receivable from Associates 2,517 2,468 Sundry accounts receivable 118,461 3,534 Employee receivables 60 68 Tax receivables (Note 12) 14,279 37,437 Allowances (7,356) (7,268) Short-term investments (Note 7-e) 98,427 203,779 Loans to Group companies 28,862 45,445 Loans to Associates - 449 Short-term investment securities 61,285 155,680 Other loans 8,280 2,205 Cash 10,357 5,372 Accrual accounts 1,077 - Total current assets 520,499 371,224

TOTAL ASSETS 1,996,421 1,904,390 WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

SHAREHOLDERS’ EQUITY AND LIABILITIES 31-12-06 31-12-05

SHAREHOLDERS’ EQUITY (Note 8) Share capital 149,966 148,489 Share premium 178,366 178,366 Revaluation reserves 128,061 128,061 Reserves- 604,572 554,883 Legal reserve 29,698 29,404 Other reserves 574,643 525,248 Differences due to adjustment of share capital to euros 231 231 Proﬁ t for the year 142,794 113,559 79_ Interim dividend paid during the year (Note 8) (25,929) (25,729) Treasury shares for capital reduction (4,309) - Total shareholders’ equity 1,173,521 1,097,629

DEFERRED INCOME 31,443 13,837

PROVISIONS FOR CONTINGENCIES AND CHARGES: Financial reversion reserve 913 760 Other provisions (Note 9) 68,832 154,641 Total provisions for contingencies and expenses 69,745 155,401

NON-CURRENT LIABILITIES: Bank borrowings (Note 10) - 43,832 Payable to Group companies and associates (Note 11) 286,525 286,525 Other payables 31,489 22,058 Other payables 11,465 1,679 Long-term guarantees and deposits received 12,782 12,097 Long-term taxes payable (Note 12) 7,242 8,282 Uncalled capital payments payable 10,912 7,612 Group companies 7,612 7,612 Associates 3,300 - Total non-current liabilities 328,926 360,027

CURRENT LIABILITIES: Bank borrowings (Note 10) 193,037 47,017 Loans and other payables 190,245 44,154 Interest payable 2,792 2,863 Payable to Group companies and associates (Note 11) 42,091 97,829 Payable to Group companies 41,980 87,952 Payable to associates 111 9,877 Other payables 62,683 50,349 Advances received on orders 1,237 1,154 Accounts payable for purchases and services 61,446 49,195 Other non-trade payables 92,479 80,485 Taxes payable (Note 12) 58,061 44,662 Remuneration payable 3,727 4,050 Other payables 30,659 31,741 Short-term guarantees and deposits received 32 32 Operating allowances 1,657 1,252 Accrual accounts 839 564 Total current liabilities 392,786 277,496

TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 1,996,421 1,904,390

Las Notas 1 a 21 y los AnexosThe accompanying I y II descritos Notes en la 1 Memoria to 22 and forman Appendixes parte integrante I and II are del an balanceintegral partde situación of the 2006 al 31 income de diciembr statemente de WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005

(Thousands of Euros)

DEBIT 2006 2005

EXPENSES:

Procurements 75,864 80,672 Cost of raw materials and other consumables used 49,736 51,435 Other external expenses 26,128 29,237 Staff costs (Note 14-b) 70,391 71,754 Wages, salaries and similar expenses 46,643 44,058 Employee beneﬁ t costs 23,748 27,696 Depreciation and amortisation charge 37,242 36,765 Change in operating allowances 330 1,190 Other operating expenses 99,756 122,392 Outside services 93,433 115,909 Taxes other than income tax 4,643 4,491 Other current operating expenses 1,680 1,992 Total operating expenses 283,583 312,773

Proﬁ t from operations 6,613 -

Finance and similar costs 39,978 29,326 On debts to Group companies 14,866 15,845 On debts to third parties and similar costs 25,076 13,130 Losses on investments 36 351 Change in investment valuation allowances 1,766 1,829 Total ﬁ nance costs 41,744 31,155

Financial proﬁ t 43,414 46,590

Proﬁ t from ordinary activities 50,027 44,661

Change in allowances for intangible assets, property, plant and equipment and control portfolio 12,343 - Losses on intangible assets, property plant and equipment and control portfolio 11,558 34,213 Extraordinary expenses 89,421 96,847 Total extraordinary expenses 113,322 131,060

Extraordinary proﬁ t (Note 14-d) 112,624 52,013

Proﬁ t before tax 162,651 96,674

Income tax (Note 12) 19,857 (16,885)

Proﬁ t for the year 142,794 113,559 WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

CREDIT 2006 2005

INCOME:

Revenue (Note 14a) 233,512 230,318 Sales 219,313 214,447 Services 14,199 15,871

Work on non-current assets (Note 14a) 45,922 71,783 81_

Other operating income 10,762 8,743 Total operating income 290,196 310,844

Loss from operations - 1,929

Income from equity investments 79,570 66,151 Group companies (Appendix I) 76,915 64,469 Associates (Appendix II) 2,640 1,636 Non-Group companies 15 46 Other interest and similar income 5,195 10,575 Group companies 1,399 4,859 Associates 1,766 1,830 Other interest 133 2,605 Income from investments 1,897 1,281 Exchange gains 393 1,019 Total ﬁ nance income 85,158 77,745

Change in allowances for intangible assets, property, plant and equipment and control portfolio - 47,115 Gains on disposal of intangible assets, property, plant and equipment and control portfolio 113,238 101,322 Gains on transactions involving treasury shares and own debentures 4,474 2,758 Extraordinary proﬁ t 108,234 31,878 Total extraordinary proﬁ t 225,946 183,073

The accompanying Notes 1 to 22 and Appendixes I and II are an integral part of the 2006 income statement. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

SOCIEDAD GENERAL DE AGUAS DE BARCELONA, S.A.

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2006

_ 1 1. Company activities

Sociedad General de Aguas de Barcelona, S.A. (”Agbar” or “the Company”) has its registered ofﬁ ce in Barcelona at Avenida Diagonal 211 (AGBAR Tower). It was incorporated on 20 January 1882, in Paris, and adapted its bylaws to the current Spanish Companies Law by means of a public deed authorised by Barcelona Notary Public, Raúl Vall Vilardell, on 5 June 1991, recorded under number 2,136 of his protocol and registered at the Mercantile Registry of Barcelona in volume 8,880, on Sheet no. 62, Page B-16,487, entry no. 1,032. Agbar’s objects are: “A To provide public services under any legally-admitted form of management, including, where necessary, the design, execution and construction of the relevant infrastructure works and equipment, and to manufacture, construct and supply all manner of equipment and components, and, in particular, to provide public services related to: _ The supply of water in the various high-pressure and low-pressure distribution systems to both public and private entities and individuals for industrial and household use. _ The collection, treatment, removal and recycling of solid waste. _ The treatment and puriﬁ cation of wastewater and all manner of liquid waste, including direct reuse of such water. _ Sewerage systems. _ Irrigation systems. _ Hydraulic and civil works.

B To operate and market all manner of natural springs, including therapeutic mineral springs. C To promote and assist technological development by incorporating and investing in research and development entities, such as foundations, associations and public and private education centres. D To promote, develop and support activities in the ﬁ elds of information technology, cybernetics and automated processes. E To purchase all manner of rural and urban properties, and construct all manner of buildings for use or sale, lease or any other operation. F To study, design, construct, manufacture, supply, maintain and preserve works and facilities of all types, systems and, in general, control, operation and management mechanisms related to electricity, electronics, telecommunications and energy generation activities, and data collection, transfer and online transmission. The Company may also develop, implement and maintain computer and online software, automatism and remote control, voice and data reception and transmission and remote sensing software, and, in general, software for collecting, processing and transferring data in all areas of economic activity. G To provide technical inspection, technical audit and quality control, testing, analysis, research and development, accreditation and certiﬁ cation services in any manufacturing or services industries. H To carry out indirectly, i.e., by holding shares in other companies incorporated for this purpose, private insurance operations in accordance with the provisions of Private Insurance Law 30/1995, of 8 November, and complying with all applicable requirements. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

I To purchase and operate, indirectly, health establishments for hospitalisation and medical/surgical assistance, in addition to all medical and healthcare activities in relation to this object, by holding shares in other companies. J To act as a holding company, in order to incorporate or invest, as a partner or shareholder, in other companies of any type and with any objects, including associations and civil law partnerships, by subscribing to or purchasing and holding shares, without encroaching on any of the activities inherent to collective investment schemes, broker-dealers, or other entities governed by special laws. K To purchase and sell domestic or foreign shares, debentures and any other fi xed- income or equity securities, in relation to the above activities, and to invest as found- ers in companies or entities to be incorporated for the same purposes. 83_ The direct and, where applicable, indirect performance of any activities which are reserved under special legislation are excluded. The Company shall not perform any activity for which the law lays down specifi c conditions or limitations, unless they are complied with in full.” Agbar’s core business is the distribution and supply of water in Barcelona and it holds the right to perform this service for an indefi nite period. Agbar also engages in this activity in other municipalities in the metropolitan area of Barcelona, such as L’Hospitalet de Llobregat, Badalona and Santa Coloma de Gramenet, among others. On 9 September 2004, the Company signed a framework agreement with the Metropolitan Water and Waste Treatment Services Entity (“EMSHTR”) for the following four years to supply water to the Barcelona metropolitan area. The strategic aim of this agreement is to promote and ensure that citizens receive a service managed under the principles of quality, sustainability and utmost respect for the environment. The fi rst consequence of this agreement was the new focus of the investment policy, involving the promotion of projects for the recovery of water resources in the metropolitan area and the development of clean solutions in processes affecting the environment, in addition to other projects to improve and extend infrastructures and increase effi ciency. The Company invested EUR 37,648 thousand in this area in 2006. On 1 February 2007, the Metropolitan Entity approved a two-year extension to the current rate-making framework agreement, with an option for a further two-year extension.

_ 2 Basis of presentation of the ﬁ nancial statements

FAIR PRESENTATION The accompanying fi nancial statements were prepared from the Company’s accounting records and are presented in accordance with the Order of the Ministry of Economy and Finance dated 10 December 1998, approving the standards adapting the Spanish National Chart of Accounts for Water Supply and Water Treatment Companies, and with the Spanish Companies Law and, accordingly, they present fairly the Company’s net worth, fi nancial position and results of operations. These 2006 fi nancial statements, which were prepared by the Company’s directors, will be submitted for approval by the shareholders at the Annual General Meeting. The Company considers that they will be approved without any changes. The fi nancial statements for 2005 were approved by the shareholders at the Annual General Meeting held on 19 May 2006. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

_ 3 Distribution of proﬁ t and dividends

At the Annual General Meeting held on 19 May 2006 the Company’s shareholders approved a fi nal dividend out of 2005 profi t of EUR 0.26 gross per share, which was paid out from 6 July 2006. On 12 December 2006, the Company’s Board of Directors declared an interim dividend out of 2006 profi t of EUR 0.175 gross per share payable on the then outstanding shares bearing dividend rights (Code number ISIN ES0141330C19), which was paid out from 11 January 2007. The Company’s provisional liquidity statement, prepared in accordance with the applicable legislation, evidencing the existence of suffi cient liquidity and earnings for the distribution of the interim dividend, is as follows, in thousands of euros:

2006

Proﬁ t before tax for the period 1 January to 99,172 31 October 2006 (*) Estimated income tax 128 Planned transfer to the legal reserve (295) LIMIT FOR THE DISTRIBUTION OF INTERIM DIVIDENDS 99,005

Cash balance upon declaration of interim 444,032 dividend (12/12/06) (**) Increase in cash balances within one year 1,026,667 Decrease in cash balances within one year (1,247,994) PROJECTED CASH BALANCE IN DECEMBER 2006 222,705

Thousands of Euros (*) Latest accounting close available at 12 December 2006. (**) Cash includes funds available on credit accounts.

The proposed distribution of Agbar’s 2006 net proﬁ t is as follows:

THOUSANDS OF EUROS

Interim dividend distributed 25,929 Final dividend 41,486 Voluntary reserves 75,084 Legal reserve 295 2006 NET PROFIT 142,794

_ 4 Accounting policies

The principal accounting policies used by the Company in preparing its ﬁ nancial statements for 2006, in accordance with the standards established by the Spanish National Chart of Accounts adapted for Water Supply and Water Treatment Compa- nies, were as follows:

A INTANGIBLE ASSETS Intangible assets are measured at cost or production cost and amortised in accordance with the following policies (see Note 5): _ Administrative concessions are amortised on a straight-line basis according to their duration. _ Computer software is amortised on a straight-line basis over a period of ﬁ ve years. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

_ Surface rights on urban properties are amortised on a straight-line basis over the term of these rights. _ Rights of use in relation to the location of pipelines are amortised on a straight-line basis over a period of 50 years. _ Rights on leased assets are amortised on a straight-line basis over the shorter of the useful life of the asset and the minimum term of the associated contracts. Staff salary costs and the costs related to designing, installing and bringing these intangible assets into service are capitalised. The costs capitalised in this connection in 2006 are recognised as “Work on Non-current Assets” in the accompanying income statement. 85_ Items in progress are transferred to intangible assets in use once the related development period has ended.

B PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are measured at acquisition or production cost revalued pursuant to the applicable legislation including Royal Decree-Law 7/1996, of 7 June (see Notes 6 and 8). The costs of expansion, modernisation or improvements leading to increased productivity, capacity or efﬁ ciency or to a lengthening of the useful lives of the assets are capitalised. Staff salary costs and the costs related to designing, installing and bringing the items of property, plant and equipment into service (cost of warehouse materials and any other applicable external costs) are capitalised. The costs capitalised in this connection in 2006 are recognised as “Work on Non-current Assets” in the accompanying income statement. Repair and maintenance costs are recognised as an expense in the year in which they are incurred. The Company depreciates its property, plant and equipment by the straight-line method, based on the remaining years of estimated useful life of the assets, as follows:

USEFUL LIFE

YEARS OF

Structures 20 to 50 Pipelines 20 to 34 Machinery 12 Other ﬁ xtures, tools and furniture 4 to 20 Other items of property, plant and equipment 12.5 WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

C LONG- AND SHORT-TERM INVESTMENTS Investments in short- and long-term fi xed-income and equity securities are recognised as follows: _ Investments in the equity of Group companies and Associates: At the lower of acquisition cost and underlying carrying amounts of the investments, adjusted for the unrealised gains disclosed at the time of acquisition and still existing at year-end. Provisions are made by taking into account changes in equity, if applicable, of the investee. _ Listed securities (excluding equity investments in Group companies and Associates): (excluding equity investments in Group companies and associates): at the lower of acquisition cost and market. Market value is deemed to be the lower of the average market price in the last quarter of the year and the year-end market price. When explicit or implicit unmatured accrued interest exists at year-end, the securities are revalued by comparing their market price with the aggregate of their acquisition price and the unmatured accrued interest at year-end. _ Unlisted securities (excluding equity investments in Group companies and Associates): Aat acquisition cost, less any required allowances for decline in value if cost was higher than their underlying carrying amounts at year-end, adjusted by the amount of the unrealised gains disclosed at the time of acquisition and still existing at year-end. _ Securities in foreign companies: the policy described in the above three paragraphs are applied according to the characteristics of the company. To calculate underlying carrying amount or market value, as appropriate, the exchange rate prevailing at year-end is used to convert the original currency to euros. _ Cash surplus is invested in short-term fi xed-income securities which are recognised at cost. Interest income is calculated in the year in which it accrues by the interest method. Unrealised losses detected according to the foregoing measurement bases and still existing at year-end are recognised in “Long-Term Investments - Allowances” or “Short-Term Investments- Allowances” in the accompanying balance sheet. The accompanying fi nancial statements refer to the individual Company. A separate set of consolidated fi nancial statements of the Agbar Group has been prepared and, accordingly, these fi nancial statements do not refl ect the effects of applying consolidation methods. The main aggregates of the Agbar Group’s 2006 consolidated fi nancial statements prepared in accordance with International Financial Reporting Standards approved by the Regulations of the European Commission (EU-IFRSs) are as follows, in thousands of euros: WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

AGBAR GROUP CONSOLIDATED AMOUNTS

TOTAL ASSETS 6,302,688

NET WORTH 2,648,132 of the Parent 1,679,629 of the minority shareholders 968,503

REVENUE 3,043,988 NET PROFIT FOR THE YEAR: 308,017 87_ Attributed to the Parent 167,253 Attributed to minority interests 140,764

Thousands of Euros

D TREASURY SHARES The treasury shares held by the Company are listed shares and are recognised at the lowest of the following amounts: cost price, listed price at year-end and average listed price in the last quarter of the year. If the Company’s Annual General Meeting resolves to use the treasury shares to carry out a capital reduction, the acquisition cost of these shares is deducted from the Company’s net worth.

E INVENTORIES Raw and auxiliary materials are measured at the lower of average cost and market. Work in progress basically consists of work performed for third parties and is measured at production cost (materials added, labour and direct manufacturing expenses). The Company, where applicable, recognises the allowances required to reﬂ ect the impairment of inventories due to obsolescence or to present fairly their net realisable value.

F PENSION OBLIGATIONS The Company took out defi ned benefi t pension plans, whose purpose is to guarantee that employees hired prior to 1 January 1991 receive a retirement pension (and its possible derivatives: death of spouse and death of parent) supplementing social security system benefi ts. Additionally, the collective bargaining agreement in force at Agbar provides that all permanent employees hired on or after 1 January 1991 who have passed the probationary period qualify for membership in a defi ned contribution pension plan under Pension Plans and Funds Law 8/1987, of 8 June, covering retirement, death of spouse, disability and death of parent benefi ts. Pursuant to current Spanish law, and, specifi cally, Spanish Pension Plans and Funds Law 8/1987, of 8 June, and Royal Decree 1588/1999, of 15 October, approving the Regulations on pension obligation arrangements by companies with employees and benefi ciaries, in 2002 the Company externalised all of its obligations and, for this purpose, took out a mixed pension plan based on the nature of the contingencies covered (defi ned contribution for retirement and defi ned benefi t for risks of disability and death during active working life) with a management company. Additionally, to complete the fi nancing of the remaining defi ned benefi t obligations, it took out the relevant insurance policies. Lastly, the Com- pany completed the externalisation process in 2005 as it took out an insurance policy to cover the retirement premiums. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

The amount of the defi ned benefi t retirement pension obligations was determined using the following techniques: _ Measurement method: The measurement method used in the actuarial valuations was the projected unit credit method. Pension liabilities are measured on the basis of the current value of the benefi ts to which the employees are entitled, bearing in mind the employees’ years of service. _ Actuarial assumptions used: unbiased and mutually compatible. Specifi - cally, the most signifi cant actuarial assumptions used were:

ASSUMPTION

RPI and social security contribution 2.0% base growth Maximum social security pension and salary 2.5% growth Nominal discount rate 5.0% Mortality tables for employees in service PERMF 2000 combined (death plus disability) with ITOM 77 Mortality tables for retired employees PERMF 2000

G INCOME TAX The expense for income tax of each year is calculated on the basis of accounting profi t before tax, increased or decreased, as appropriate, by the permanent differences from taxable profi t, net of tax relief and tax credits, excluding tax withholdings and prepayments (see Note 12). The difference, where applicable, between taxable profi t and the carrying amount of income or expense is recognised as a deferred tax asset or liability, as appropriate. In addition, pursuant to current applicable legislation on tax credits and tax assets, the Company only recognises the tax assets and deferred tax assets which according to its estimates may be used over the next ten years.

H TRANSACTIONS IN CURRENCIES OTHER THAN THE EURO _ Changes in the market values of fi nancial instruments designated as foreign exchange hedges on investments in foreign companies are recognised as extraordinary profi t or loss for the year, offsetting the opposite effects arising from the revaluation of these investments, up to the limit of the revaluation. The surplus, if any, is recognised in the “Deferred Charges” or “Deferred Income” balance sheet accounts, as appropriate. _ Other non-euro currency payables and receivables are translated to euros at the exchange rate ruling at the transaction date, and are adjusted at year-end to the exchange rates then prevailing. Exchange gains or losses are classifi ed in terms of the year in which they fall due and the currency. The exchange losses arising in each group of currencies are taken to income, whereas unrealised exchange gains are recognised as “Deferred Income” on the liability side of the balance sheet. However, unrealised gains are credited to income to the extent of any exchange losses in the same homogenous group charged to income in prior years or in the current year. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

I INCOME AND EXPENSE RECOGNITION Income and expense are recognised on an accrual basis, i.e. when the actual fl ow of the related goods and services occurs, regardless of when the resulting monetary or fi nancial fl ow arises (see Note 14). However, in accordance with the accounting principle of prudence, the Company only recognises realised income at year-end, whereas foreseeable contingencies and losses, including possible losses, are recognised as soon as they become known.

J SUPPLIES NOT YET BILLED The Company recognises water actually supplied as water sales, including the amount of water supplied but not yet billed at 31 December. At 31 December 89_ 2006, this amount totalled EUR 28,355 thousand and was recognised under “Ac- counts Receivable - Trade Receivables for Sales and Services” on the asset side of the accompanying balance sheet.

K INFORMATION ON THE ENVIRONMENT Environmental assets are considered to be assets used on a lasting basis in the Com- pany’s operations whose main purpose is to minimise the impact on the environment and to protect and enhance the environment through the reduction or elimination of the pollution caused in the future by the Company’s operations (see Note 18). These assets, like all other tangible assets, are measured at acquisition or production cost revalued in accordance with applicable legislation including Royal Decree- Law 7/1996, of 7 June (see Note 4-b). The Company depreciates these items on a straight-line basis over the remaining years of estimated useful life of these assets as detailed in Note 4-b. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

_ 5 Intangible assets

The detail of this heading in the accompanying balance sheet and of the changes therein in 2006 is as follows:

Balance at Additions or Disposals or Transfers Balance at 1-1-2006 charges reductions 31-12-2006

Concessions, patents, licences, trademarks and other: Cost 7,253 - - - 7,253 Accumulated amortisation (2,593) (123) - - (2,716) 4,660 (123) - - 4,537

Merger goodwill: Cost 53,310 - - - 53,310 Accumulated amortisation (53,310) - - - (53,310) - - - - -

Computer software: Cost 52,372 95 (2) 821 53,286 Accumulated amortisation (41,781) (5,760) 2 - (47,539) 10,591 (5,665) - 821 5,747

Rights on assets: Rights on assets used under licence Cost 1,539 144 - 108 1,791 Accumulated amortisation (118) (22) - - (140) 1,421 122 - 108 1,651

Rights on leased assets: Cost 36,630 - - - 36,630 Accumulated amortisation (1,943) (3,887) - - (5,830) 34,687 (3,887) - - 30,800 36,108 (3,765) - 108 32,451

Total: Cost 151,104 239 (2) 929 152,270 Accumulated amortisation (99,745) (9,792) 2 - (109,535)

Total 51,359 (9,553) - 929 42,735

Thousands of Euros

At 31 December 2006, “Concessions, Patents, Licences, Trademarks and Other” includes the contribution made by the Company to Institut Municipal de Promoció Urbanística, S.A. in relation to a portion of the service ducts for the Barcelona ring roads (“Rondas”), totalling EUR 4,165 thousand, net. In 2005 the Company recognised as intangible assets some of the non-structural investments made in the new head offi ce (“Agbar Tower”), classifying them as “Rights on Leased Assets”. These investments relate mainly to interior design and to the fi t-out of the installations. The transfers in 2006 (EUR 929 thousand) relate to the cost of certain projects that had previously been recognised as property, plant and equipment in the course of construction and were reclassifi ed to the corresponding intangible asset heading depending on their nature (see Note 6). Fully amortised intangible assets at 31 December 2006 amounted to EUR 84,646 thousand. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

_ 6 Property, plant and equipment

The detail of this heading in the accompanying balance sheet and of the changes therein in 2006 is as follows:

Balance at Additions or Disposals or Transfers Balance at 1-1-2006 charges reductions 31-12-2006

Land and structures: Cost 104,235 2,215 (1,057) 1,307 106,700 Accumulated depreciation (42,915) (2,442) 241 - (45,116) 61,320 (227) (816) 1,307 61,584 91_ Pipelines: Cost 563,789 9,690 (3,420) 5,070 575,129 Accumulated depreciation (311,284) (18,263) 2,485 - (327,062) 252,505 (8,573) (935) 5,070 248,067

Machinery: Cost 156 - - - 156 Accumulated depreciation (48) (18) - - (66) 108 (18) - - 90

Other ﬁ xtures, tools and furniture: Cost 151,519 8,987 (1,110) 4,008 163,404 Accumulated depreciation (79,173) (5,958) 657 (34) (84,508) 72,346 3,029 (453) 3,974 78,896

Advances and property, plant and equipment in the course of construction: Cost 24,534 23,980 (654) (11,893) 35,967 24,534 23,980 (654) (11,893) 35,967

Other items of property, plant and equipment: Cost 9,349 930 (508) 579 10,350 Accumulated depreciation (6,418) (769) 482 34 (6,671) 2,931 161 (26) 613 3,679

Total: Cost 853,582 45,802 (6,749) (929) 891,706 Accumulated depreciation (439,838) (27,450) 3,865 - (463,423)

Total 413,744 18,352 (2,884) (929) 428,283 Thousands of Euros

The most signiﬁ cant additions in 2006 relate to the renovation of the distribution and transmission network (amounting to EUR 27,542 thousand), to the construction of the building that will house Barcelona Sur management and the technical operation departments (amounting to EUR 7,199 thousand), and to the extension and renovation of the production facilities (amounting to EUR 6,108 thousand). The net balance of the transfers made in 2006 (EUR 929 thousand) relate to the cost of certain projects in progress which were reclassiﬁ ed to the corresponding intangible asset account depending on their nature (see Note 5). In 1996 the Company revalued its property, plant and equipment pursuant to Royal Decree-Law 7/1996, of 7 June, with payment of a single 3% tax. The revaluation was made at the maximum rates authorised by the aforesaid Royal Decree-Law. The revaluation surplus, net of the single 3% tax, was credited to “Revaluation Reserves” in the accompanying balance sheet (see Note 8-d), against the appropriate revalued asset accounts, without altering the recognised accumulated depreciation amount. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

The accounts affected by the revaluation and its effect at 31 December 2006, are as follows:

INCREASE IN ACCUMULATED NET COST DEPRECIATION EFFECT

Land and structures 11,492 (3,828) 7,664 Pipelines 97,967 (67,672) 30,295 Other ﬁ xtures, tools and 7,681 (6,946) 735 furniture Other items of property, plant 218 (217) 1 and equipment

TOTAL 117,358 (78,663) 38,695

Thousands of Euros

The increase in cost resulting from the revaluation will be depreciated over the tax periods in the remaining useful lives of the revalued assets. The 1996 revaluation increased the 2006 depreciation charge by EUR 4,990 thousand and it is estimated that it will increase the 2007 depreciation charge by approximately EUR 3,159 thousand. Fully depreciated property, plant and equipment at 31 December 2006 amounted to EUR 231,075 thousand. The Company’s projected expenditure on property, plant and equipment in 2007 amounts to EUR 43,313 thousand.

_ 7 Long and short-term investments

The changes in 2006 in the balances of the “Long-Term Investments” and “Short- Term Investments” accounts were as follows:

Balance at Additions or Disposals or Transfers Balance at 1-1-2006 charges reversals 31-12-2006

Long-term investments: Investments in Group companies 871,671 264,181 (291,360) 3 844,495 Loans to Group companies 3,491 - (500) - 2,991 Investments in Associates 115,220 3,558 (10,542) 2,867 111,103 Loans to Associates 17,440 - (88) 72,315 89,667 Long-term investment securities- Investment in other companies 5,000 - (38) (2,870) 2,092 Derivatives - 25,238 - - 25,238 Other 2,282 - - - 2,282 Other loans 1,519 11,834 (233) - 13,120 Deposits and guarantees 12,435 754 (17) - 13,172 Long-term tax receivables 165,513 12,037 (43,178) - 134,372 Allowances (161,032) (84,452) 7,556 - (237,928)

Total long-term investments 1,033,539 233,150 (338,400) 72,315 1,000,604

Short-term investments 203,779 8,527 (112,301) (1,578) 98,427

Thousands of Euros

A INVESTMENTS IN GROUP COMPANIES AND ASSOCIATES Appendixes I and II provide a detail of Group companies and Associates, respectively, and information related thereto at 31 December 2006. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

The changes in “Investments in Group Companies and Associates” in 2006 were as follows, in thousands of euros:

INCORPO- RATION/ TOTAL SALES/ TRANS- COMPANY PURCHASE CAPITAL ADDITIONS DISPOSALS FERS INCREASE

Group companies: Bristol Water Group, Ltd 256,622 - 256,622 -- Compañía de Seguros 93_ 2-2-- Adeslas, S.A. Agbar Latinoamérica, S.A. -5757-- Tribugest, Gestión - 7,500 7,500 -- de Tributos, S.A. Agbar Chile, S.A. ---(142,422) - Emte, S.A. --- (65,583) - Inversiones Aguas del --- (65,002) - Gran Santiago, S.A. Applus Servicios --- (10,941) - Tecnológicos, S.L. Aguas de la Costa, S.A. --- (5,808) - Reneva, S.A. ---(1,604) - Aquagest Levante, S.A. ----(16,059) Aquagest Región de Murcia, S.L. ----16,059 Aguas de la Plata, S.L. ----3 TOTAL Group companies 256,624 7,557 264,181 (291,360) 3

Associates: Aigües de Segarra Garrigues, S.A. 3,443 - 3,443 - 2,867 Mina Pública d´Aigües 66-66-- de Terrassa, S.A. Aguas de Sabadell, S.A. 49-49-- Acsa – Agbar Construcción, S.A. --- (6,670) - Aguas Cordobesas, S.A. --- (3,655) - Clavegueram de Barcelona, S.A. - - - (217) - TOTAL Associates 3,558 - 3,558 (10,542) 2,867

Thousands of Euros

_ Group companies _ Bristol Water Group Ltd. On 21 April 2006, the Company announced the launch of a takeover bid for the entire share capital of the UK company Bristol Water Group, Ltd., which manages the supply to the city of Bristol and some areas of the Somerset, Bath and South Gloucestershire counties. This takeover bid was targeted at all shareholders and holders of share options issued by Bristol Wa- ter Group, Ltd., and was formalised as a cash purchase with a consideration of GBP 10.6 per share. The shareholders were also entitled to receive a special ﬁ nal dividend of 22.5 pence per share. The investment to acquire 100% of this group totalled EUR 256,622 thousand. _ Tribugest Gestión de Tributos, S.A. On 26 December 2006, Tribugest Gestión de Tributos, S.A. carried out a share capital increase by converting the loans it had obtained from the mercantile shareholders Sociedad General de Aguas de Barcelona, S.A. and Banco de Crédito Local de España, S.A. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

_ Agbar Chile,S.A. and Inversiones Aguas del Gran Santiago, S.A. Due to the reorganisation of the Chilean portfolio in 2006, in December the Company sold 13.40% of Inversiones Aguas del Gran Santiago, S.A. and 49.98% of Agbar Chile, S.A. to Agbar Conosur Limitada (wholly-owned indirectly by Agbar), retaining control over these companies. The aggregate gain on these transactions was EUR 18,483 thousand (see Note 14-d). At 31 December 2006, the heading “Receivable from Group Companies” in the accompanying balance sheet included a balance of EUR 225 million relating to the outstanding debt in relation to these transactions. _ Emte Group. On 22 December 2006, under a purchase and sale agreement entered into with Solduga, S.A., the Agbar Group transferred to this company its entire 50% equity interest in Emte, S.A., generating a gain before tax of EUR 38,796 thousand (see Note 14-d). _ Applus Servicios Tecnológicos, S.L. In 2006, under the global agreements entered into in November 2005 between Agbar, Unión Fenosa, S.A. and Sociedad de Promoción y Participación Empresarial, S.A. (SPPE), equity interests in Applus Servicios Tecnológicos, S.L. were sold in two transactions. The agreements allowed Corporación Financiera Caja de Madrid, S.A. (through SPPE) to enter the shareholder structure of Applus Servicios Tecnológicos, S.L. In January 2006 a 2.32% interest in Applus Servicios Tecnológicos, S.L. was sold to Unión Fenosa, S.A., giving rise to a gain before tax of EUR 11,377 thousand (see Note 14-d). In April 2006 a 2.90% equity interest in Applus Servicios Tecnológicos, S.L. was sold to Sociedad de Promoción y Participación Empresarial, S.A., giving rise to a gain before tax of EUR 14,360 thousand (see Note 14-d). As a result of this transaction, Applus is 53.1% owned by Agbar, 25% by Unión Fenosa, S.A. and 21.9% by SPPE. _ Aguas de la Costa, S.A. On 8 September 2006, the Company sold its 60% equity interest in Aguas de la Costa, S.A. to the Uruguayan state-owned company Administración de las Obras Sanitarias del Estado, generating a gain before tax of EUR 709 thousand. _ Aquagest, Región de Murcia, S.A. In 2006 Aquagest Levante, S.A. was partially spun off by the unbundling and transfer en bloc of some of its assets and liabilities to the newly-created beneﬁ ciary company, Aquagest, Región de Murcia, S.A.

_ Associates _ Acsa – Agbar Construcción, S.A. On 10 November 2005, the Company executed the sale to Finycar, S.L. (Sorigué Group) of 60% of the share capital of Acsa - Agbar Construcción, S.A. The sale agreement included an option on the remaining 40%, exercisable in subsequent years. On 23 June 2006, this option was exercised early. This sale generated a gain of EUR 17,991 thousand before tax (see Note 14-d).

B LOANS TO GROUP COMPANIES AND ASSOCIATES The increase by transfers under “Loans to Associates” include the following items: _ The purchase of secured loans that Aguas Argentinas, S.A. had obtained from multilateral entities, discounted by 27%, for which Agbar disbursed EUR 64 million. This purchase gave rise to a proﬁ t of EUR 15,829 thousand before tax as a result of the overprovision recognised (see Note 14-d). _ Payment of the EUR 8.5 million performance bond provided for Aguas Argen- tinas, S.A. by Agbar, due to the Government of Argentina’s decision (established in a presidential decree) to terminate the concession contract for the provision of the potable water and water treatment service in the city of Buenos Aires and to transfer management of this service to a newly-created public body (Agua y Saneamientos Argentinos, S.A.). The disposals under “Loans to Group Companies” relate to the early repayment of EUR 500 thousand from the Agbar Foundation. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

C OTHER LOANS The addition to “Other Loans” includes EUR 11,834 thousand to be collected in 2009 for the sale of 40% of ACSA – Agbar Construcción, S.A. by Finycar, S.L. (Sorigué group). The remaining collectible balance, which amounts to EUR 13,578 thousand, matures in 2007 and is recognised under “Sundry Accounts Receivable”.

D LONG-TERM TAX RECEIVABLES “Long-term Tax Receivables” includes the deferred tax assets and tax assets described in Note 12. The additions include basically the applicable new tax credits. The disposals and reversals relate mainly to the tax credit on the provisions recognised in the past for employee welfare schemes, the investment valuation allowanc- 95_ es for the Argentine companies and the provisions for the impact of tax legislation amendments, amounting to EUR 10,642 thousand (see Note 12).

E ALLOWANCES “Allowances” includes allowances totalling EUR 85,253 thousand, EUR 7,900 thousand and EUR 1,497 thousand for the full amount of the investments in Aguas Argentinas, S.A., Aguas Provinciales de Santa Fe, S.A. and Aguas Cordobesas, S.A., respectively. It also includes a EUR 20,992 thousand allowance for the investment in Interagua, S.A. arising basically from the investment held by this company in Aguas Provinciales de Santa Fe, S.A. (see Note 19), and a EUR 89,667 thousand allowance for all the loans granted to Argentine associates, among which are those mentioned in Note 7-b above.

F SHORT-TERM INVESTMENTS The breakdown of the balance of this heading at 31 December 2006 is as follows:

Tribugest – Gestión de Tributos, S.A. 12,000 Agbar Global Market, S.A., Sole-Shareholder Company 9,000 Agencia Servicios Mensajería, S.A. 7,500 Inusa Sociedad de Inmuebles, S.A. 350 Accrued interest 12 Total loans to Group companies 28,862

Aguas Provinciales de Santa Fe, S.A. 8,839 Accrued interest 1,949 Allowances (10,788) Total loans to Associates -

SHORT-TERM INVESTMENT SECURITIES 61,285

OTHER LOANS 8,280

TOTAL SHORT-TERM INVESTMENTS 98,427 Thousands of Euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

The net balances recognised under “Loans to Group Companies” and “Loans to As- sociates” earn interest at market rates, and there are no doubts as to the investees’ capacity to repay the loans as and when planned. “Short-Term Investment Securities” includes the short-term placements of cash surpluses at banks.

_ 8 Shareholders’ equity

The changes in 2006 in equity accounts in the accompanying balance sheet were as follows:

Share Share Revalua- Legal Voluntary Difference 2006 Interim Final Treasury Total Capital Premium tion Reserve Reserves Due to Proﬁ t Dividend Dividend Shares Reserves Adjustment for of Capital Capital to Euros Reduction

Balances at 1 January 2006

148,489 178,366 128,061 29,404 525,248 231 113,559 (25,729) - - 1,097,629

Distribution of 2005 proﬁ t

- - - 294 49,311 - (113,559) 25,729 38,225 - -

2005 ﬁ nal dividend

- - - - 84 - - - (38,225) - (38,141)

Capital increase (Series A)

1,477 ------1,477

2006 proﬁ t

------142,794 - - - 142,794

Share option plan

------(4,309) (4,309)

2006 interim dividend

------(25,929) - - (25,929)

Balances at 31 December 2006

149,966 178,366 128,061 29,698 574,643 231 142,794 (25,929) - (4,309) 1,173,521

Thousands of Euros

A SHARE CAPITAL AND TREASURY SHARES FOR CAPITAL REDUCTION The share capital subscribed at 31 December 2006 amounted to EUR 149,965,688 and was represented by 149,965,688 fully subscribed and paid-up ordinary shares of EUR 1 par value each. All the shares are book-entry shares. The Company’s Annual General Meeting held on 25 May 2001 approved a EUR 2,260,000 capital increase, through the issue of 2,260,000 class B redeemable shares of EUR 1 par value each with a EUR 12.30 issue premium per share. The purpose of issuing redeemable shares was to provide the Company with coverage for the May 2001 Plan. The capital increase was partially subscribed by the ﬁ nancial WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

institution “la Caixa”, which subscribed for 1,800,375 shares, all of which were fully paid up. This fi nancial institution held these shares until the options had been exercised by the May 2001 Plan benefi ciaries or until expiry of the plan. As a result of the completion of the twelfth and fi nal period of the “May 2001 Option Plan”, the Company exercised the purchase option on all of the 584,442 redeemable class B shares, which were converted into class A shares, thereby eliminating the distinction of classes of shares, since all the shares representing the share capital stemmed from the same class. 260,461 of the above-mentioned 584,442 shares relate to options exercised by the benefi ciaries of the above-mentioned Option Plan in the last notice period, and 323,981 shares were “surplus” shares; accordingly, they were held as treasury shares for the purpose of retiring them, upon reduction of the 97_ share capital by the appropriate nominal amount. The Company’s Board of Directors, at the meeting held on 29 September 2006, making use of the power granted by the Annual General Meeting held on 30 May 2003, resolved to increase the share capital by up to EUR 1,481,653, through the issue and allotment of 1,481,653 Class A ordinary, book-entry shares of EUR 1 par value each. Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores (Iberclear) was the entity in charge of keeping these shares in the book-entry accounts. The pre-emptive subscription period was from 31 October to 14 November 2006, inclusive. Upon expiry of the subscription period, 1,476,477 shares had been subscribed and paid up. The public deed for the capital increase was executed on 20 November 2006. The shares representing the Company’s share capital have the status of securities and are governed by the provisions of the Securities Market Law. At 31 December 2006, the only Company shareholder with a holding of 10% or more was Hisusa, Holding de Infraestructuras y Servicios Urbanos, S.A. (an investee of Suez-Environnement España, S.L. –Suez Group– and Caixa Hold- ing, S.A.U. –the “la Caixa” Group–), with an ownership interest, discounting the treasury shares, of 47.97%.

B AUTHORISED CAPITAL The Company’s Annual General Meeting held on 30 May 2003 resolved to authorise the Board of Directors to increase capital on one or several occasions within fi ve years through cash contributions and issues of Class A ordinary shares for up to a total of EUR 72,214 thousand, with express authorisation to delegate such decision to the Executive Committee, thereby rendering invalid the previous authorisation granted by the General Meeting on 20 May 1998, to the extent not used and as appropriate. At 31 December 2006, capital increases authorised but not completed totalled EUR 66,376 thousand. The Board of Directors was empowered to exclude the pre-emptive subscription right on any shares issued under the aforesaid authorisation, when required in the Compa- ny’s interest. This power may also be delegated to the Executive Committee. The aforesaid Annual General Meeting of 30 May 2003 also authorised the Com- pany’s Board of Directors to issue, on one or several occasions, within a period of fi ve years, up to EUR 500 million in debentures and other fi xed-income, ordinary mortgage-backed securities convertible into, and/or exchangeable for shares of, the Company, with the power to sub-delegate to the Executive Committee and/or the Chairman, thereby rendering invalid the authorisation granted by the General Meet- ing on 20 May 1998, to the extent not used. The Meeting decided to increase the share capital, from then onwards and at any time, up to the maximum amount of EUR 500 million, or, in any case, by the amount necessary for the purposes of conversion into shares of the fi xed-income securities convertible into shares that may be issued under this authorisation. Upon expiry of its period of validity, this authori- WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

sation will become null and void to the extent not used. At 31 December 2006, this power had not yet been used by the Board of Directors.

C SHARE PREMIUM The Consolidated Spanish Companies Law expressly permits the use of the share premium account balance to increase capital and does not establish any speciﬁ c restrictions as to its use.

D REVALUATION RESERVE Upon expiry of the three-year period for review by the tax authorities of the balance of “Revaluation Reserve Royal Decree-Law 7/1996, of June 7”, this balance can be used, free of tax, to offset accounting losses (both prior years’ accumulated losses and current year losses) or losses which might arise in the future and to increase capital. From 1 January 2007, the balance of this account can be taken to unrestricted reserves, provided that the monetary surplus has been realised. The surplus will be deemed to have been realised in respect of the portion on which depreciation has been taken for accounting purposes or when the revalued assets have been transferred or derecognised. Also, if assets held under ﬁ nance leases are revalued, the aforementioned use may not take place before the purchase option has been exercised. If the balance of this account were used in a manner other than that provided for in Royal Decree-Law 7/1996, it would be subject to tax.

E LEGAL RESERVE Under the Consolidated Companies Law, 10% of net proﬁ t for each year must be transferred to the legal reserve until the balance of this reserve reaches at least 20% of the share capital. The legal reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount. Otherwise, until the legal reserve exceeds 20% of share capital, it can only be used to offset losses, provided that sufﬁ cient other reserves are not available for this purpose.

F VOLUNTARY RESERVES All of the voluntary reserves at 31 December 2006 are unrestricted, except for the amount associated with start-up costs, research and development expenditure and the merger goodwill in the accompanying balance sheet, where appropriate, as established in Article 194 of the Consolidated Companies Law. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

_ 9 Other provisions

The changes in the “Provision for Contingencies and Charges - Other Provisions” account in 2006 were as follows: Other provisions

Beginning balance 154,641 Period provisions 10,130 Provisions used (2,537) Transfers (505) 99_ Provisions reversed (92,897)

ENDING BALANCE 68,832 Thousands of Euros

“Period Provisions” includes basically EUR 6,796 thousand of period provisions for contingencies associated with the sales of investees during the year and EUR 1,466 thousand of period provisions for royalties associated with water purchases. “Provisions Reversed” basically includes the write-off of the provisions for the investments in Argentina (see Note 19) amounting to EUR 88,144 thousand, due to the purchase of secured debt and the payment of the performance bond relating to Aguas Argentinas, S.A.’s concession (see Note 7-b).

_ 10 Bank borrowings

The breakdown of “Bank Borrowings” at 31 December 2006 is as follows:

Limit Short Term Total

Loans - 37,243 37,243 Credit facilities 597,150 153,002 153,002 Interest - 2,792 2,792 TOTAL - 193,037 193,037 Thousands of Euros

At 31 December 2006, “Loans” includes two loan transactions amounting to EUR 25,243 thousand and EUR 12,000 thousand, maturing in 2007, which were subject to interest rate swap agreements in the past. The Company holds interest rate swaps on both loans (see Note 13-c). Of the total credit facility limit, EUR 537,150 thousand fall due in 2007 and EUR 60,000 thousand fall due in 2008. The amount used of the credit facilities relates to drawdowns in pounds sterling to partially ﬁ nance the acquisition of the Bristol Water Group (see Note 7-a). These facilities bear interest tied to Libor plus a spread, and mature in 2007. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

_ 11 Payable to Group companies and associates

The balance under “Non-current Liabilities - Payable to Group companies and Asso- ciates” relates to loans taken by the Company from its subsidiary Agbar International B.V. which relate to the issue of EuroNotes amounting to EUR 286,525 thousand which mature in 2009. All these loans bear interest at ﬂ oating rates tied to 3-month or 6-month Euribor plus a spread, except for a tranche of EUR 121,605 thousand which matures in 2009 and bears interest at a ﬁ xed rate of 6.205% p.a. The breakdown of the balance under “Current Liabilities - Payable to Group Compa- nies and Associates” is as follows:

Inversiones ﬁ nancieras temporales a 31 de diciembre de 2006

Trade payables: Agbar Servicios Compartidos, S.A. 5,544 Sorea, Sociedad Regional de Abastecimiento de Aguas, S.A. 706 Agbar Mantenimiento, S.A. 303 Aguas de Levante, S.A. 177 Adasa Sistemas, S.A. 60 Other 76 Total Group company trade payables 6,866

Loans and current accounts received from Group companies: Agbarex, S.L., Sole-Shareholder Company 17,745 Agbar Mantenimiento, S.A. 6,362 Agbar International B.V. 4,760 Applus Servicios Tecnológicos, S.L. 3,032 Other 1,086 Total loans and current accounts received from Group companies: 32,985

Short-term interest on payables to Group companies: Agbar International B.V. 1,981 Other 148 Total short-term interest on payables to Group companies: 2,129

TOTAL PAYABLES TO GROUP COMPANIES 41,980

TOTAL TRADE PAYABLES TO ASSOCIATES 111

TOTAL PAYABLES TO GROUP COMPANIES AND ASSOCIATES 42,091 Thousands of Euros

Loans received from Group companies bear interest at rates tied to Euribor.

_ 12 Tax matters

Since 1993, the Company has been subject to income tax under the consolidated tax regime, as the Parent of the Agbar Group. This corporate Group is required to be taxed under this system for an indefi nite period provided that it does not waive application of such regime. Income tax is calculated on the basis of accounting profi t determined by application of generally accepted accounting principles, which does not necessarily coincide with taxable profi t. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

The reconciliation of Agbar’s individual accounting proﬁ t to the individual taxable proﬁ t for income tax purposes at 31 December 2006 is as follows:

Accounting proﬁ t for the year 162,651 (before tax) Permanent differences (9,302) Tax base 153,349 Timing differences (65,138) TAXABLE PROFIT 88,211 Thousands of Euros 101_ The most signiﬁ cant permanent differences relate to donations to the Agbar Foun- dation (which have no tax effect since tax credits are applicable in this connection) amounting to EUR 8,649 thousand, and to contributions to the employee welfare scheme amounting to EUR 6,480 thousand. The negative permanent differences are basically due to the exemption of the gain on the sale of the 49.98% equity interest in Agbar Chile, S.A. for EUR 28,503 thousand. Timing differences include the recovery of 10% of the pension obligations externalised in 2002 (EUR 19,663 thousand) and the recovery of the valuation allowances for the Argentine portfolio (EUR 16,419 thousand) and of the provision for maximum risks in Argentina (EUR 15,829 thousand), which was not tax-deductible. The income tax expense in 2006 was calculated as follows:

Tax base 153,349 35% tax charge 53,672 2006 tax credits (50,413) Adjustment of 2005 income tax expense (2,250) Change to tax rate 10,642 Other adjustments 8,206 INCOME TAX 19,857

Thousands of Euros

The Company has recognised as an income tax expense for 2006 the impact on the balance of the deferred tax assets and liabilities arising from changes to the tax rates: from 35% in 2006 to 32.5% in 2007 and 30% from 2008 onwards. The amount of these deferred tax assets and liabilities was re-estimated by applying the tax rate of the year in which the related reversals will foreseeably take place, giving rise to a net income tax expense of EUR 10,642 thousand. “Other Adjustments” includes the tax of EUR 7,992 thousand charged in Chile on the sale of the equity interests in Agbar Chile, S.A. and Inversiones Aguas del Gran Santiago, S.A. The tax credits taken are as follows:

For double taxation of dividends 35,297 For reinvestment of extraordinary proﬁ t 11,748 Other tax credits 3,368 TOTAL TAX CREDITS 50,413

Thousands of Euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 Expiration Year

03_1 AGBAR GROUP: 2006 ANNUAL REPORT

The gains obtained in 2006 eligible for tax credits on reinvestment of extraordinary proﬁ t and the year of reinvestment were as follows:

TAX CREDITS GAINS (THOUSANDS HOLDING PERIOD (THOUSANDS REINVESTMENT YEAR OF EUROS) EXPIRATION YEAR OF EUROS)

58,738 11,748 2006 2009

The breakdown of these gains is as follows:

Sale of Applus Servicios Tecnológicos, 25,737 S.A. shares Sale of Emte, S.A. shares 20,849 Sale of Acsa, S.A. shares. 11,060 Other 1,092 TOTAL 58,738

Thousands of Euros

The detail of the tax credits for reinvestment of extraordinary proﬁ t from gains obtained in prior years, where the reinvested assets are still required to be held by the Company, is as follows:

YEAR AMOUNT REINVESTMENT HOLDING GAIN (THOUSANDS YEAR PERIOD GENERATED OF EUROS) EXPIRATION YEAR

2003 2,575 2003 2008 2003 10,819 2004 2007 2004 11,792 2004 2007 2004 1,594 2004 2009 2005 3,348 2005 2008 2005 11,161 2006 2009 41,289

The temporary differences between accounting and tax methods of recognition of certain income and expenses for income tax purposes gave rise to deferred tax assets and liabilities at 31 December 2006 which were recognised under “Long-Term Tax Receivables” and “Long-Term Taxes Payable”, respectively, in the ﬁ nancial statements: WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

Cumulative Differences Cumulative Effect in the Tax Bases on the Tax Liability

Deferred tax assets: Pension fund 100,623 30,793 Provision for maximum risks in Argentina 106,791 32,102 Valuation allowance for the Argentine portfolio 6,551 2,030 Allowance for doubtful debts in Argentina 4,109 1,233 Amortisation of merger goodwill 7,994 2,465 Provision for contingent liabilities 10,606 3,182 Other 10,991 3,495 Tax assets: Tax credits not taken - 59,072 Total deferred tax assets and tax credits: 247,665 134,372 103_

Deferred tax liabilities: Individual- Amortisation RDL 2/1985 and Law 12/1988 3,434 1,030 Amortisation RDL 3/1993 14,560 4,396 Arising from eliminations on tax consolidation 4,817 1,816 Total deferred tax liabilities: 22,811 7,242

Thousands of Euros

As indicated earlier, the cumulative effect on the tax liability of the temporary differences was calculated by applying the tax rate that will foreseeably be applicable in the year in which those differences will reverse. The breakdown of short-term tax receivables and payables is as follows:

RECEIVABLE PAYABLE

Income tax 5,529 - VAT 8,750 - Personal income tax - 1,270 Social security taxes payable - 1,111 Rates - 38,638 Other - 17,042 TOTAL 14,279 58,061

Thousands of Euros

The income tax audit for the period 1995 to 1998 gave rise to tax assessments amounting to approximately EUR 28 million. At 31 December 2006, the Company had appealed against these assessments at the Central Economic-Administrative Tribunal. The outcome of the proceedings is not expected to give rise to any signifi - cant impact that has not been considered. The Company also fi led an appeal with the Central Economic-Administrative Tribu- nal against the income tax assessments issued to the Company for the period 1999 to 2001, which claim an amount of approximately 41 million. As in the foregoing case, the outcome of these proceedings is not expected to give rise to any signifi - cant impact that has not been considered. At 31 December 2006, the penalties of EUR 12 million and EUR 25 million proposed by the National Inspection Offi ce to the Company in relation to income tax for the periods 1995 to 1998 and 1999 to 2001, respectively, were also in dispute at the same Central Economic-Administrative Tribunal. The Company has two reports issued by external tax advisers, one per period reviewed, evidencing the inadmissibil- ity of the penalties proposed. Consequently, the Company has not recognised any provision in its fi nancial statements in this connection. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

In addition, the Company is open to inspection for the following taxes: VAT and personal income tax for 2003 to 2006, and income tax for 2002 to 2005. The inspection of the open years is not expected to give rise to any signifi cant impacts that have not been considered in the preparation of these fi nancial statements. The 1992 fi nancial statements included the accounting disclosure requirements applicable to mergers, spin-offs, contributions of assets and share exchanges, as set forth in Spanish Law 29/1991, of 16 December, which adapts certain tax regulations to the directives and regulations of the European Communities, for the Company to take tax credits for the merger of Sociedad General Aguas de Barcelona, S.A., Corporación Agbar, S.A. and Aplicaciones del Agua, S.A. Also, pursuant to Spanish Corporation Tax Law 43/1995, the 1997 fi nancial statements included the accounting disclosure requirements applicable to the dissolution without liquidation of Agbar Salud, S.A. and subsequent inclusion of all of this company’s assets and liabilities in Agbar.

_ 13 Obligations and other guarantees

A GUARANTEES FOR CONCESSIONS AND FINANCING The breakdown of the most signifi cant guarantees is as follows: _ Agbar acquired an obligation to Banco Santander de Chile for a maximum of CLF 1.97 million (EUR 51.5 million) with respect to the credit lines received by the concession holders Intermodales La Cisterna (CLF 1.72 million) and Quinta Normal (CLF 0.25 million). _ Agbar issued guarantees to JPMorgan (CLF 1 million) and Banco Santander (CLF 0.3 million) for the interest rate swaps which the concession holder In- termodal La Cisterna entered into for the same amounts totalling CLF 1.3 million (EUR 34 million). _ Agbar guarantees the construction risk relating to the irrigation canal building work performed by ACSA Sorigué to the banks fi nancing the work for Aigües Segarra Garrigues. At 2006 year-end this guarantee was for a maximum amount of EUR 18.1 million. _ The guarantees given to multilateral fi nancial institutions (International Fi- nancial Corporation, the Inter-American Development Bank, and the Euro- pean Investment Bank) in connection with their fi nancing of investee companies in Argentina total a maximum of USD 7.3 million (EUR 5.6 million), of which USD 3.6 million relate to Aguas Provinciales de Santa Fe, S.A. and USD 3.7 million to Aguas Cordobesas, S.A. _ Santander Central Hispano continues to hold a guarantee provided by Agbar amounting to MXN 50 million (EUR 3.5 million) in relation to fi nancing provided to Interagbar de México, S.A. de C.V.

B EURO MEDIUM TERM NOTE ISSUE _ Agbar International, B.V. LNotes were issued under the Euro Medium Term Note Programme by Agbar International B.V., a wholly-owned subsidiary of Agbar whose issues and associated derivatives are backed by a joint, several and irrevocable guarantee from Agbar, as set out in the information memorandum of the programme. In 2006 Agbar International, B.V. did not issue any new Euro Medium Term Notes and redeemed the August 2001 issue of USD 25 million and the December 2002 issue of JPY 3,000 million. An issue of debentures amounting to EUR 500 million which carries a fi xed coupon of 6% and matures in November 2009 remains in force. The subsidiary has arranged swaps with various fi nancial institutions totalling EUR 371 million with the same maturities and payment dates as the securities issued. These hedges ensure that the company receives a fi xed rate that is the same as that of the issue in exchange for the payment of fl oating interest tied to six-month Euribor, thus covering the gap WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

between the interest on the issue and the interest received from the Agbar Group borrowers. _ Agbar Capital, S.A. On 20 July 2006, Agbar Capital, S.A., a subsidiary of the Company, arranged an issue under a Euro Medium Term Note (EMTN) programme for a maximum amount of EUR 2,000 million, none of which had been used at 31 December 2006. Any future issue of Euro notes by this company will be backed by the joint, several and irrevocable guarantee from Agbar, as set out in the information memorandum of the programme.

C INTEREST AND EXCHANGE RATE HEDGES The following tables summarise the hedges arranged by the Company: 105_ _ Foreign currency hedges. Currency hedges aim to protect the value of international investments from translation differences by creating ﬁ nancing synthetically in the same currency as that of the foreign investment.

ORIGINAL NOTIONAL AMOUNT MATURITY CURRENCY Original Equivalent 2007 2008 2009 Subse- Currency Value in Euros quent Years Portfolio CLP 112,637,192 160,581 - 7,753 51,323 101,505 hedge Accounts CLP 154,996,335 220,971 110,727 67,474 42,770 receivable hedge Total Chilean 267,633,527 381,552 110,727 75,227 94,093 101,505 pesos Portfolio GBP 65,000 96,700 96,700 - - hedge Total Pounds 65,000 96,700 96,700 - - - Sterling Total currency - 478,252 207,427 75,227 94,093 101,505 sales Accounts USD 2,100 1,595 1,595 - - - payable hedge Total US 2,100 1,595 1,595 - - - dollars Total currency -1,595 1,595 - - - purchases WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

_ Interest rate hedges

NOTIONAL AMOUNT MATURITY Original Equivalent 2007 2008 Currency Value in Euros Chilean 65,000,000 92,667 51,323 41,344 peso Total ﬁ xed 65,000,000 92,667 51,323 41,344 rate hedge

In addition to the foregoing hedges, Agbar also holds two interest rate swaps, linked to two long-term loans of EUR 25,243 thousand and EUR 12,000 thousand maturing in 2007. The swap for the ﬁ rst loan enables it to accrue interest at a ﬂ oating rate tied to Euribor less a 0.10% spread. The swap for the second loan enables it to accrue interest tied to Euribor plus a 0.10% spread (see Note 10).

D OTHER OBLIGATIONS _ Agbar Tower. The owner of the “Agbar Tower”, at Avenida Diagonal 197-211, Barcelona, is Caixa d’Estalvis i Pensions de Barcelona, “la Caixa”, which in turn held a fi nance lease with Layetana Inmuebles, S.L (Sole-Shareholder Company). On 25 November 2004 the Company entered into a sub-lease on this building with Laye- tana Inmuebles, S.L (Sole-Shareholder Company). The sub-lease was signed for a minimum period of ten years, renewable for two additional periods of ten years each, optional for the Company but mandatory for Layetana Inmuebles, S.L. (Sole-Shareholder Company). If after expiry of the initial period of ten years the Company fails to renew the sub-lease for at least another ten years, the Company must indemnify Layetana Inmuebles, S.L. (Sole-Shareholder Company) for a sum equal to a one-year rent at the rate in force at that time. After expiry of the renewal period, where applicable, the parties may automatically extend the term of the sub-lease for further ten-year periods, provided that notice is not given by one of the parties at least one year in advance of the successive expiry dates. The sub-lease expressly authorises the Company to sub- lease to third parties. Also on 25 November 2004, the Company, Layetana Inmuebles, S.L. (Sole-Share- holder Company) and “la Caixa” entered into a contract establishing the events and regulations affecting the exercise of an option to buy and an option to sell the “Agbar Tower”. The Company holds a purchase option which may be exercised between 15 November 2009 and 15 November 2014. “la Caixa” may exercise a sale option within the same period and on the same conditions as those set forth for the purchase option. The market value appraisals of the building commissioned by the Company revealed that the value of the purchase and sale options on the “Agbar Tower” do not signifi cantly differ from their market value. On 28 December 2006, Layetana Inmuebles, S.L. entered into a contract to assign the fi nance lease and guarantees with Azurelau, S.L.U., whereby the former transferred to the latter all of the rights and obligations arising from the fi nance lease on the Agbar Tower. This transaction was approved by “la Caixa” as the fi nancial lessor of the building. As a result, Azurelau, S.L.U. is now the sub-lessor vis-à-vis the Company. In turn, Layetana Inmuebles, S.L. remains jointly and severally liable to Sociedad General de Aguas de Barcelona, S.A. for all of the obligations and liabilities of Azurelau, S.L.U. The Company’s directors concluded that the “Agbar Tower” lease contract does not qualify as a fi nance lease and, therefore, for accounting purposes it was treated as an operating lease. _ Employee benefi t obligations. In 2002 Agbar externalised its employee pension obligations (see Note 4-f). This externalisation entailed, on the one hand, the sur- render of the insurance policies held by the Company in the past to cover a portion WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

of its obligations to certain groups of the Company’s employees, amounting to EUR 147,362 thousand, and, on the other hand, the contribution of EUR 199,790 thousand to a pension plan set up under Law 8/1987 and a contribution to an insurance policy to cover any contributions to the plan that exceed the statutory limits. To complete the fi nancing of the remaining defi ned benefi t obligations, the corresponding insurance policies were taken out. Lastly, Agbar completed the externalisation process in 2005 by arranging an insurance policy to cover the retirement bonus. At 31 December 2006, according to the latest actuarial calculations, pension obligations to employees amounted to EUR 214,156 thousand. The present value of the pension liabilities includes a portion of the obligations to the Company’s former directors. At that date, benefi ts instruments had been executed with external fi nancial 107_ institutions which adequately cover pension obligations and liabilities to Company employees.

_ 14 Income and expenses

A OPERATING INCOME The breakdown of revenue in 2006 is as follows:

Water sales 207,628 Income from connection services and fees 11,680 Sales of by-products and waste 5 Services provided 14,199 TOTAL 233,512

Thousands of Euros

“Work on Non-current Assets” in 2006 relates to the following items:

Work for other companies 33,382 Materials consumed 3,986 Staff costs 3,254 Other 5,300 TOTAL 45,922

Thousands of Euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

B STAFF COSTS The breakdown of staff costs at 31 December 2006 is as follows:

Wages and salaries 46,592 Termination beneﬁ ts 51 Employer social security costs 11,105 Pensions and retirement costs 22 Contribution to pension fund 8,557 Other employee beneﬁ t costs 4,064 TOTAL 70,391

Thousands of Euros

“Contribution to Pension Fund” includes contributions to the pension plan and insurance policy premiums (see Notes 4-f and 13-d). The number of employees at 31 December 2006, by category, was as follows:

Qualiﬁ ed staff 220 Middle managers and supervisors 280 Skilled employees 344 Trainees and assistants 161 TOTAL 1,005

The average number of employees in 2006 was 1,013.

C OTHER OPERATING EXPENSES The fees for the audit of the Company’s 2006 ﬁ nancial statements amount to EUR 175 thousand. Additionally, the fees for other professional services charged by the auditor or by other entities related to the auditor during 2006 amounted to EUR 248 thousand.

D EXTRAORDINARY PROFIT The breakdown of extraordinary proﬁ t in 2006 is as follows:

INCOME EXPENSES NET Sale of Acsa – Agbar Construcción, 17,991 - 17,991 S.A. (Note 7-a) Sale of Emte, S.A. (Note 7-a) 38,796 - 38,796 Sale of Agbar Chile, S.A. (Note 7-a) 28,503 - 28,503 Sale of Inversiones Aguas del Gran - (10,020) (10,020) Santiago, S.A. (Note 7-a) Sale of Applus Servicios 25,737 - 25,737 Tecnológicos, S.L. (Note 7-a) Contribution to Agbar Foundation - (8,649) (8,649) Argentine provisions (Note 9) 88,665 (72,836) 15,829 Other 26,254 (21,817) 4,437 EXTRAORDINARY PROFIT (LOSS) 225,946 (113,322) 112,624

Thousands of Euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

E TRANSACTIONS WITH GROUP COMPANIES AND ASSOCIATES The transactions carried out by the Company in 2006 with Group companies and associates were as follows:

INCOME / GROUP ASSOCIATES TOTAL (EXPENSES) COMPANIES Sales 5,750 1,443 7,193 Procurements (4,154) - (4,154) Services provided 5,302 - 5,302 109_ Services received (30,522) - (30,522) Interest received 1,399 1,766 3,165 Interest paid (14,866) - (14,866) Dividends received 76,915 2,640 79,555

Thousands of Euros

_ 15 Remuneration of and obligations to the members of the Board of Directors

The total remuneration earned in 2006 by the members of the Company’s Board of Directors was EUR 444 thousand. Attendance fees and other bylaw-stipulated emoluments earned by the members of the Company’s Board of Directors totalled EUR 548 thousand and EUR 1,454 thousand in 2006. In all cases the remuneration refers to the functions of the members of the Company’s Board of Directors, for the discharge of their duties both at the Company and the various Group companies and associates. The pension obligations accrued to former and current members of the Company’s Board of Directors at 31 December 2006, covered by insurance policies taken out for this purpose, totalled EUR 12,900 thousand. In 2006 the Company contributed EUR 68 thousand to these policies to cover obligations in this connection.

_ 16 Disclosures under Article 114 of the Securities Market Law introduced by Law 26/2003 of 17 July

In 2006 no transactions took place between the directors and the Agbar Group companies outside the ordinary course of business or under non-arm’s length conditions. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

_ 17 Disclosures under Article 127 ter.4 of the Spanish Companies Law, introduced by Law 26/2003 of 17 July

In 2006 the Board Members Jordi Mercader Miró, Enrique Corominas Vila, Miguel Noguer Planas and Juan Rosell Lastortras had no ownership interests in the capital of, nor held positions or discharged functions in, other companies engaged in activities which are identical, similar or complementary to the activities that constitute the objects of Agbar, nor did they take part in this type of activities as independent professionals or as employees, and so notiﬁ ed the Company. However, the following Board members notiﬁ ed the Company of the relevant details of their interests, positions, functions or activities in other companies:

NAME OR COMPANY COMPANY POSITION OWNERSHIP NAME OF BOARD INTEREST MEMBER Suez, S.A. Chairman-CEO 0.002% Gérard Mestrallet Suez Environnement Chairman 0.000% Manuel Raventós Caifor, S.A. General Manager 0.000% Negra Suez Environnement Chairman-CEO 0.000% Degrémont Chairman 0.000% Lyonnaise des Eaux France Board Member 0.000% Société des Eaux Board Member 0.000% de Marseille Jean-Louis Chaussade Chairman of the Board Terralys 0.000% (since 1 March 2006) SITA France Board Member 0.000% United Water Inc. Director 0.000% United Water Resources Director 0.000% Fomento de Construcciones - 0.003% Feliciano Fuster Jaume y Contratas, S.A. Endesa, S.A. - 0.000% Lyonnaise des Eaux France Chairman-CEO 0.000% Ondeo Industrial Solutions Chairman 0.000% Degrémont Board Member 0.000% Sté des Eaux de Marseille Board Member 0.000% Sté des Eaux du Nord Board Member 0.000% Bernard Guirkinger Lydec Board Member 0.000% SITA France Board Member 0.000% Board Member Terralys 0.000% (since 1 March 2006) Suez Environnement UK Ltd. Board Member (Director) 0.000% Board Member (Director) SITA Holdings UK. Ltd. 0.000% (until 7 July 2006) Suez Environnement Board Member 0.000% Jean-Pierre Hansen Suez, S.A. Chief Operating Ofﬁ cer 0.000% Acea, S.P.A. Board Member 0.000% Suez Environnement Board Member 0.000% Gérard Lamarche Leo Holding CY Director 0.000% Ondeo North America Director 0.000% Juan Antonio Caifor, S.A. Board Member 0.000% Samaranch Torelló Nueva Compañía de Inversiones, S.A. 10.001% Sacyr Vallehermoso, S.A. Second Deputy Chairman (individual representative: (indirect) Juan Abelló Gallo) WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

In 2006 the above Board members, Gérard Mestrallet, Manuel Raventós Negra, Jean-Louis Chaussade, Feliciano Fuster Jaume, Bernard Guirkinger, Jean-Pierre Hansen, Gérard Lamarche, Juan Antonio Samaranch Torelló and Nueva Compañía de Inversiones, S.A. did not carry out as independent professionals or as employees any activities which are identical, similar or complementary to the activities that constitute Agbar’s objects. Ricardo Fornesa Ribó, Chairman and Board Member of the Company from 1 Janu- ary to 31 January 2006, had no ownership interests in the capital of companies engaged in activities which are identical, similar or complementary to the activities that constitute the objects of Agbar, nor did he take part in this type of activities as an independent professional or as an employee, although he did hold the position of 111_ Chairman of Caifor, S.A. during the above period.

_ 18 Information on the environment

At 31 December 2006, the Company had non-current assets designed to help reduce the environmental impact and to protect and enhance the environment. The breakdown of the most signiﬁ cant environmental assets is as follows:

Network output improvement plan 11,626 Sludge treatment plant, St Joan Despí potable water treatment plant 4,129 Other environmental assets 3,255 TOTAL 19,010

Thousands of Euros

Similarly, in 2006 the Company incurred expenses in connection with the protection and enhancement of the environment. The expenses relating to recurring maintenance activities totalled EUR 1,463 thousand. The Company also made contributions to the Agbar Foundation totalling EUR 8,649 thousand in 2006. This Founda- tion earmarks a signiﬁ cant portion of its annual budget for environmental protection and enhancement projects. At 31 December 2006, the Company had not recognised any provision in respect of potential environmental risks since it considers that there are no material contingencies associated with potential lawsuits, indemnities or other items. Additionally, the Company has two insurance policies and other security plans affording reasonable coverage of any possible contingency which could arise from their environmental activities.

_ 19 Situation of the water business investments in Argentina

IMPACT OF THE ARGENTINE CRISIS In 2002, the crisis in Argentina led to the repeal of the Convertibility Law by Law 25,561 of 6 January 2002 which declared a state of emergency. This also led to the elimination of the indexing of public utilities rates and resulted in Agbar, following the principle of prudence, making provisions to write off the value of its investments in Argentina and cover the maximum liability that could be contractually claimed from it. The balance remaining of these provisions at 2006 year-end amounted to EUR 11,805 thousand and covers all of the remaining liabilities acquired in connection with the water businesses in Argentina. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

CLAIMS FILED BY AGBAR In 2003 Agbar and the European partners in the concessions ﬁ led three complaints with the International Investment Disputes Arbitration Centre (CIADI) against the State of Argentina for failure to protect the investments in Aguas Argentinas, S.A., Aguas Provinciales de Santa Fe, S.A. and Aguas Cordobesas, S.A. Notably in the cases of Aguas Argentinas, S.A. and Aguas Provinciales de Santa Fe, S.A., the tribunal declared itself to have jurisdiction in 2006. In the case of Aguas Cordobesas, S.A., the complaint was withdrawn when a 12% ownership interest was sold in De- cember 2006.

PRESENT STATE OF AGUAS ARGENTINAS On 21 March 2006, Aguas Argentinas, S.A. was notifi ed of the decision by the government of Argentina, made by presidential decree, to terminate the concession contract for the provision of the potable water and water treatment service in the city of Buenos Aires and to transfer management of these services to a newly-created public entity (Agua y Saneamientos Argentinos, S.A.). This resulted in the payment of the EUR 8.5 million performance bond relating to Agbar’s concession. Due to the above termination, Aguas Argentinas, S.A. declared that it had begun preventive insolvency proceedings on 28 April 2006. The procedural steps relating to these proceedings have been followed and at 2006 year-end, the creditor verifi cation stage was reached. At the same time, Aguas Argentinas, S.A. instituted the necessary legal action before the Argentine courts against the State of Argentina to claim the economic damages caused by the above termination. In the fi rst quarter of 2006 Agbar and the other shareholder guarantors of Aguas Argentinas, S.A. bought the secured loans owed by the concession-holder to multilateral entities. This purchase, which was discounted by 27%, involved a payment by Agbar of EUR 64 million and resulted in the recognition of a profi t of EUR 15.8 million before tax as a result of the overprovision recognised. In 2006 various creditors of Aguas Argentinas, mainly mutual funds, grouped under a company called Aguas Lenders Recovery Group LLC, fi led a complaint at the New York courts against the Suez Group, the Agbar Group and the successor to the Aguas Argentinas concession. They are claiming damages of no less than USD 130 million. The directors of Agbar and its legal advisors consider that this complaint lacks grounds and is unlikely to prosper.

PRESENT STATE OF AGUAS PROVINCIALES DE SANTA FE At the beginning of 2006, Aguas Provinciales de Santa Fe, S.A. declared that it was being dissolved as a result of its negative net worth situation. Its liquidation is currently in progress. Also in 2006 the Provincial Government terminated the concession which was passed on to a newly created public entity called Aguas Santafesinas, S.A. As with the case of Aguas Argentinas, the economic damages resulting from this termination are being claimed at local courts. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

PRESENT STATE OF AGUAS CORDOBESAS On 22 December 2006 the Agbar Group sold to the local group Roggio 12% of the shares of Aguas Cordobesas, S.A. Following the sale, it holds a 5% interest.

_ 20 Events after the balance sheet date

On 15 March 2007 Agbar received notiﬁ cation of the start of an inspection relating to income tax for the years 2002 to 2004 and to other taxes for the years 2003 and 2004. 113_

_ 21 Statements of changes in ﬁ nancial position

The statements of changes in ﬁ nancial position for the years ended 31 December 2006 and 2005, indicating the sources and applications of funds, may be summarised as follows:

APPLICATION OF FUNDS 2006 2005 SOURCE OF FUNDS 2006 2005

Funds obtained from operations 65,284 14,987 Start-up and debt arrangement costs 4,300 34,524 Shareholders’ contributions 1,477 1,469

Additions to- Non-current liabilities- Intangible assets 239 29.163 Debt securities and other similar liabilities - 6,589 Property, plant and equipment 45,802 43,669 Payable to Group companies 24,000 78,200 Long-tem investments 377,880 8,583 Other long-term payables 10,687 1,784 Capital payments payable 3,300 -

Acquisition of treasury shares 4,309 Dividends 64,070 61,830 Disposal of- Intangible assets - 12,375 Property, plant and equipment 2,491 42,592 Repayment or transfer to short term Long-term investments 396,219 167,604 of non-current liabilities- Bank borrowings 43,832 16,266 Payable to Group companies 24,000 32,270 Early amortisation or transfer to short Other payables - 11,911 term of long-term investments- Capital payments payable - 1,364 Write-off of long-term investments 870 136,185 Write-off of long-term deferred tax liabilities 1,256 5,959 Transfers/Write-offs of deferred tax assets 32,536 14,629

Deferred income - 3,528 Deferred income 65,851 3,456

Provisions for contingencies and charges 3,042 5,817 Total funds applied 568,730 254,884 Total funds obtained 602,715 479,870

Funds obtained in excess of funds Funds applied in excess of funds applied (increase in working capital) 33,985 224,986 obtained (decrease in working capital) - -

TOTAL 602,715 479,870 TOTAL 602,715 479,870 Thousand of Euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

The change in working capital for the years ended 31 December 2006 and 2005 may be summarised as follows, in thousands of euros:

2006 2005

INCREASE DECREASE INCREASE DECREASE

Inventories 79 - 323 - Accounts receivable 249,563 - 67,671 - Accounts payable - 115,290 29,392 - Short-term - 105,352 123,381 - investments Cash 4,985 - 4,219 - TOTAL 254,627 220,642 224,986 -

Net change 33,985 - 224,986 - in working capital

Thousands of Euros

The reconciliation of accounting proﬁ t to the funds obtained from operations is as follows, in thousands of euros:

2006 2005

ACCOUNTING PROFIT 142,794 113,559 Add: Pension provision and other provisions 10,130 38,121 Depreciation and amortisation charge 37,242 36,765 Losses on disposals of intangible assets, property, plant 11,558 34,213 and equipment and long-term investments Changes in intangible asset, property, plant and 12,343 - equipment and long-term investment allowances Amortisation of deferred charges - 593 Transfer to the reversion fund 153 153 Write-off of deferred tax assets due to change in 10,642 - tax legislation Less: Gains on disposal of property, plant and equipment (113,238) (101,322) and long-term investments Changes in intangible asset, property, plant - (47,115) and equipment and long-term investment allowances Provisions for contingencies and charges reversed (20,582) (28,753) Recognised deferred tax assets (12,037) (28,056) Deferred income (13,721) (3,171)

FUNDS OBTAINED FROM / (APPLIED IN) 65,284 14,987 OPERATIONS

Thousands of Euros

_ 22 Explanation added for translation to English These ﬁ nancial statements are presented on the basis of accounting principles generally accepted in Spain. Certain accounting practices applied by the Company that conform with generally accepted accounting principles in Spain may not conform with generally accepted accounting principles in other countries. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

SOCIEDAD GENERAL DE AGUAS DE BARCELONA, S.A.

DIRECTORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2006

_ 1 Earnings analysis

Revenue in 2006 totalled EUR 233,512 thousand, up 1.39% on 2005. This increase was mostly due to a modest rise in the average water rate, since usage 115_ dropped by 1.18%. The volume of water consumed in 2006 reached 184.3 hm3 (2005: 186.5 hm3). The Company’s profi t from ordinary activities amounted to EUR 50,027 thousand (2005: EUR 44,661 thousand). This increase was mainly attributable to stronger operating profi t, as a result of the cost containment and reduction strategy applied, and the higher income obtained from the dividends distributed by the subsidiaries. Extraordinary profi t amounted to EUR 112,624 thousand and basically included the gain generated on the sale of EMTE, S.A. (EUR 38,796 thousand), the profi t obtained from the sale to a Group company of 49.977% of Agbar Chile, S.A. (EUR 28,500 thousand), the gain on the sale of 5.22% of Applus Servicios Tecnológicos, S.L. (EUR 25,737 thousand), the gain on the sale of 40% of ACSA (EUR 17,991 thousand) and the reversals of provisions for contingencies and charges recorded in 2002 for the Argentine subsidiaries (EUR 15,829 thousand). The income tax expense amounted to EUR 19,857 thousand. This amount included tax credits totalling EUR 50,413 thousand generated in 2006 and an extraordinary expense of EUR 10,642 thousand that arose from the re-calculation of deferred tax assets and liabilities due to changes to the tax rates established in recent tax reforms in Spain. As a result, net profi t in 2006 amounted to EUR 142,794 thousand, up 25.74% on 2005.

_ 2 Investments

In 2006 the Company made investments totalling EUR 302,786 thousand, which included EUR 239 thousand for intangible assets, EUR 45,802 thousand for property, plant and equipment and EUR 256,745 thousand for long-term investments, which included notably the acquisition of the Bristol Water Group for EUR 256,622 thousand. On 21 April 2006, the Company announced the launch of a takeover bid for the entire share capital of the UK water services company Bristol Water Group, Ltd. This takeover bid was targeted at all shareholders and holders of share options issued by this company and was formalised as a cash purchase involving a consideration of GBP 10.6 per share. The shareholders of Bristol Water Group, Ltd who availed themselves of the takeover bid were also entitled to receive a special ﬁ nal dividend of 22.5 pence per share. The amount ultimately disbursed for the purchase of all company shares was GBP 175 million (EUR 256.6 million). For 2007, investments are projected to reach approximately EUR 43,313 thousand and include all the property, plant and equipment for water supply infrastructures and equipment.

WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

_ 3 Business performance analysis

On 9 September 2004, the Company signed a framework agreement with the Met- ropolitan Water and Waste Treatment Services Entity (EMSHTR) for the following four years to supply water to the metropolitan area of Barcelona. The strategic aim of this agreement is to promote and ensure that citizens receive a service managed under the principles of quality, sustainability and utmost respect for the environment. The fi rst consequence of this agreement was the new focus of the investment policy, involving the promotion of projects for the recovery of water resources in the metropolitan area and the development of clean solutions in processes affecting the environment, in addition to other projects to improve and extend infrastructures and increase effi ciency. The Company entered into a commitment with EMSHTR for investments totalling EUR 37,512 thousand to be made in this area in 2007. This agreement also aims to guarantee a high standard of service. For this reason, certain management indicators were defi ned to determine the effective service level and to promote continual improvement in certain business areas (water quality, environmental management, and customer service management). The average rate increase authorised for 2006 under the previous agreement was 3.11%. This increase is 4.87% for 2007. In 2006 Aquagest Levante, S.A. was partially spun off by the unbundling and transfer en bloc of some of its assets and liabilities to the newly-created benefi ciary company, Aquagest Región de Murcia, S.A. On 8 September 2006, the Company sold its 60% equity interest in Aguas de la Costa, S.A. to the Uruguayan state-owned company Administración de las Obras Sanitarias del Estado, generating a gain before tax of EUR 709 thousand. Due to the reorganisation of the Chilean portfolio in 2006, in December the Company sold 13.40% of Inversiones Aguas del Gran Santiago, S.A. and 49.98% of Agbar Chile, S.A. to Agbar Conosur Limitada (wholly-owned indirectly by Agbar), retaining control over these companies. The aggregate gain on these transactions was EUR 18,483 thousand. At 31 December 2006, the heading “Receivable from Group Com- panies” in the accompanying balance sheet included a balance of EUR 225 million relating to the outstanding debt in relation to these transactions. On 22 December 2006 the Company sold a portion of its equity interest in Aguas Cordobesas, S.A. (representing 12.2% of its share capital) to Roggio, S.A., generating a gain before tax of EUR 199 thousand on the sale. With regard to Aguas Argentinas, S.A., in 2006 Agbar and the other guarantor shareholders of this company purchased the secured loans taken out by the concession-holder with multilateral entities. Agbar disbursed EUR 64 million for this acquisition, on which a 27% discount applied, and recognised a profi t of EUR 15.8 million before tax on the transaction, due to the overprovision recognised. Addi- tionally, the EUR 8.5 million performance bond provided for the concession held by Aguas Argentinas, S.A. was paid, due to the Government of Argentina’s decision to terminate the contract granted for the potable water and water treatment service concession for the city of Buenos Aires and to transfer management of this service to a newly-created public body. In 2006, under the global agreements entered into in November 2005 between the Agbar Group, Unión Fenosa, S.A. and Sociedad de Promoción y Participación Empresarial, S.A. (SPPE), equity interests in Applus Servicios Tecnológicos, S.L. were sold in two transactions. The agreements allowed Corporación Financiera Caja de Madrid, S.A. (through SPPE) to enter the shareholder structure of Applus Servicios Tecnológicos, S.L. In January 2006 a 2.32% equity interest in Applus Servicios Tecnológicos, S.L. was sold to Unión Fenosa, S.A., generating a gain before tax of EUR 11,377 thousand. In April 2006, a 2.90% equity interest in Applus Servicios Tecnológicos, S.L. was sold to Sociedad de Promoción y Par- ticipación Empresarial Caja de Madrid, S.A., generating a gain before tax of EUR 14,360 thousand. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

On 10 November 2005, the Company executed the sale of 60% of the share capital of Acsa, Agbar Construcción, S.A. to Finycar, S.L. (Sorigué Group). This sale agreement included an option to buy the remaining 40%, to be exercised in subsequent years. On 23 June 2006, this option was exercised early by prior agreement. The sale generated a gain of EUR 17,991 thousand before tax. In the same transaction, the Company acquired the equity interest held by Acsa, Agbar Construcción S.A. in Canal Segarra Garrigues, S.A. for EUR 3,300 thousand. In December 2006 Reneva, S.A. was sold at a gain of EUR 89 thousand. On 26 December 2006, Tribugest, Gestión de Tributos, S.A. carried out a EUR 12,500 thousand capital increase, by converting into equity the loans it had obtained from the mercantile shareholders Sociedad General de Aguas de Barce- 117_ lona, S.A. (EUR 7,500 thousand) and Banco de Crédito Local de España, S.A. (EUR 5,000 thousand). The Company’s equity at 31 December 2005 amounted to EUR 1,173,521 thousand and provided 79.74% cover of its net non-current assets.

_ 4 Main risks and uncertainties

The Company operates both in Spain and abroad (mainly Chile and the UK). It is therefore subject to various critical factors, such as sustainable business development (strategy, market, operations, technology, environment, fi nancing, etc.) and the regulatory framework within which it operates. The ultimate aim of the premise underlying the Company’s general risk policy is to generate sustainable value for its stakeholders. Accordingly, the critical factors, from the point of view of the absence of certainty, are considered from their two-fold perspective as generators of risk (to be avoided, mitigated, shared or accepted) and of opportunities. A permanent challenge for the Company’s governing and managing bodies in setting their strategy is the determination of an optimum balance between risks and opportunities that maximises value. As a result of these general policies, the Company’s management and organisational structure was designed to ensure that the required control procedures are in place to assess, control and mitigate the main risks. In this connection, the Board of Directors carries out supervisory functions in relation to the performance of the business and the control systems in place, both directly and through its committees (the Executive Committee and the Audit and Control Committee). The Company’s governing and managing structure mentioned above, together with the control systems in place, allow the analysis and monitoring of the Group’s various risks, which can be categorised as follows: _ Context risks: economic performance (growth and downturn), laws and regulations (specifi c, labour, tax, personal data protection, IFRS, etc.), country risk (sovereign and political), access to the fi nancial markets, competition, business (mature businesses and new businesses) and innovation. _ Operational and process risks: operational (contracting, renewal, provision of services and customer credit), technological and information processing, human capital, integrity and fraud. _ Financial risks: liquidity, credit, currency and interest rate. _ Decision-making information risks: associated with operating, fi nancial and strategic information. _ Corporate reputation risks: Transparency (listed group) and sustainability (environmental and social responsibility risks). WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

In general, the Company considers Risk as any threat that an event, action or omission may prevent it from achieving its objectives and implementing its strategies successfully and, in particular, those which may compromise the economic proﬁ t- ability of its activities, its ﬁ nancial solvency, compliance with the various applicable laws and its corporate reputation.

_ 5 Financial risk management policies and objectives

The main fi nancial risk management objectives are to ensure the availability of funds to comply duly with fi nancial obligations and to protect the euro value of the Com- pany’s economic fl ows, assets and liabilities. This management activity comprises the identifi cation of risks, the determination of tolerance to each risk, the hedging of fi nancial risks, and the control of existing hedging transactions. To achieve these objectives, fi nancial risk management is based on covering all signifi cant and intolerable exposures as long as suitable instruments exist and the hedging cost is affordable.

_ 6 Treasury shares

On 20 June 2006 the CNMV was notiﬁ ed of Sociedad General de Aguas de Bar- celona, S.A.’s ownership of 323,981 treasury shares. These shares were “surplus” shares of the May 2001 Option Plan and therefore they were they were held as treasury shares for the purpose of retiring them, upon reduction of the Company’s share capital by the appropriate nominal amount.

_ 7 Environment and human resources

Within the framework of the movement towards sustainable development of society, Agbar aims to give an example of maximum responsibility in all of its activities. This commitment takes shape in the inclusion of economic, environmental and social considerations in all of the activities carried out by the Company. The Company has compiled the principles governing the behaviour of the organisation and all its professionals into a Code of Ethics and Professional Conduct. This Code sets out the values that identify the organisation and establishes the principles expected to be followed by employees, while including them in decision-making, strategies, processes and activities. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS-DIRECTOR’S REPORT

119_ WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 AGBAR GROUP: 2006 ANNUAL REPORT

SOCIEDAD GENERAL DE AGUAS DE BARCELONA AND AGBAR GROUP COMPANIES

ANNEXES TO THE FINANCIAL STATEMENTS CORRESPONDING TO THE FIS- CAL YEAR ENDING 31 DECEMBER 2006

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

HOLDING COMPANY AND CORPORATIONS

*Agbar Capital, S.A. Sole-Shareholder Company F 61 (2) (14) 45 100 - Avda. Diagonal, 211 08018 Barcelona *Agbarex S.L., Sole-Shareholder Company F Avda. Diagonal, 211 9.210 27.780 2.351 18.418 100 08018 Barcelona *Fundació Agbar, Centre d’Estudis i Investigació del Medi Ambient 1.022 68 - - 100 Ctra. Sant Joan Despí, núm. 1 08940 Cornellà de Llobregat *Agbar Servicios Compartidos, S.A. F Avda. Diagonal, 211 5.121 5.359 193 10.306 100 - 08018 Barcelona **Comercial de Aguas S.A. (COMAGUA) Alona, 33 1.710 4.444 2.518 - - 75 03007 Alicante *Agbar Global Market, S.A., Sociedad Unipersonal F 5.054 8.410 (239) 12.360 100 - Girona, 176 Barcelona **INUSA Sociedad de Inmuebles, S.A. Ava. Ricardo Soriano, 72, 4ª D 2.000 (690) (64) - - 50 29600 Marbella (Málaga) *Agbar International B.V. Strawinskylaan, 3105 18 2.003 165 2.025 100 - 1077 ZX Amsterdam (Holanda)

WATER AND WATER TREATMENT

Domestic *Agbar Mantenimiento, S.A. F Berguedà, 20-24 2.193 3.726 2.833 5.278 100 - 08029 Barcelona *Aquagest Levante, S.A. F Los Doscientos, 6, Entlo. C, esc. Izqda. 11.055 12.232 14.540 6.738 100 - 03007 Alicante

(F) Companies in the consolidated tax group * Companies in which Agbar has a direct ownership interest ** to ****** Companies in which Agbar has an indirect ownership at various levels WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_1 FINANCIAL STATEMENTS - DIRECTORS’ REPORT

APPENDIX I

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

**Ingeniería, Tecnología y Servicios del Agua 121_ y Medio Ambiente, S.L., Sociedad Unipersonal (Sedelam) F 301 193 385 - - 100 Ntra. Sra. de los Buenos Libros, 3 30008 Murcia *Aquagest Región de Murcia, S.A. F Ntra. Sra. de los Buenos Libros, 3 8.085 7.858 508 16.059 100 - 30008 Murcia *Cetaqua, Centro Tecnológico del Agua, Fundación Privada 500 - - - 80 - Avda. Diagonal, 211 08018 Barcelona *Hidroser, Servicios Integrales del Agua, S.A Príncipe de Vergara, 110 1.455 297 (84) 834 50 - 28002 Madrid *Interagua, Servicios Integrales del Agua, S.A., Sociedad Unipersonal F 774 5.290 1.201 14.547 100 - Avda. Diagonal, 211 08018 Barcelona *Sociedad de Explotación de Aguas Residuales, S.A. (SEARSA) 2.062 1.014 153 1.647 50 - Bruc, 49, 3º 1ª 08009 Barcelona *Sociedad Española de Aguas Filtradas, S.A. (Aguas Filtradas) 1.087 486 204 888 50 - Jacometrezo, 4 3º 28013 Madrid *SOREA, Sociedad Regional de Abastecimiento de Aguas, S.A. F 110.445 47.589 16.194 126.427 100 - Avda. Diagonal, 211 08018 Barcelona **Aguas Término de Calvià, S.A. Gran Via Puig de Castellet, 1 150 1.284 41 - - 80 Complejo Boulevard, Bloque 3, local 2 Santa Ponça 07180 Calvià (Mallorca) **Aigües de Cabrera, S.L. Comarca, 47 682 3.503 - - - 100 08700 Igualada (Barcelona) ***Aigua de Rigat, S.A. Comarca, 47 08700 666 7.206 - - - 65 Igualada (Barcelona) ***Construccions i Rebaixos, S.L. Minerva, 11 08700 61 1.124 - - - 100 Igualada (Barcelona)

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

**Aigües Sant Pere de Ribes, S.A. F Onze de Setembre, 4 bjs. Dcha. 1.000 247 191 - - 97 08810 Sant Pere de Ribes (Barcelona) **Anaigua, Companyia d’Aigües de l’Alt Penedès i l’Anoia, S.A., Societat Unipersonal F 767 (72) (15) - - 100 Avda. Diagonal, 211 08018 Barcelona **Aquagest Sur, S.A. Avda. Luis de Morales, 32, Ediﬁ cio Fórum, 82.151 4.024 5.506 - - 50 Planta 4 M6 41018 Sevilla **Netaigua Serveis de l’Aigüa, S.A. F Avda. Diagonal, 211 100 - (1) - - 100 08018 Barcelona **Aquagest, Promoción Técnica y Financiera de Abastecimientos de Agua, S.A. F 29.482 28.524 9.535 - - 100 Avda. Diagonal, 211 08018 Barcelona ***Asturagua, S.A. Marqués de Santa Cruz, 10, 3º 364 2.231 1.335 - - 50 33007 Oviedo (Asturias) ***Aguas del Norte, S.A. (ANSA) F Avda. Lehendakari Aguirre 1.743 (538) 150 - - 100 Etorbidea, 29 - 6º 48014 Bilbao ***Aguas de Valladolid, S.A., Sole-Shareholder Co. F 12.000 (1.338) 178 - - 100 General Ruiz, 1 47004 Valladolid ***Gestión de Aguas de Aragón, S.A. F Plaza Antonio Beltrán Martinez, 1,7ª Edif. 570 420 242 - - 100 Trovador 50001 Zaragoza

***Canaragua, S.A. F Avda. Manuel Hermoso Rojas, 4, 1ª Of. 6-7 2.404 51.904 7.178 - - 90 38003 Sta. Cruz de Tenerife

****Pozos y Recursos del Teide, S.A. F San Agustín, 8 70 1.233 263 - - 100 38201 La Laguna (Sta. Cruz de Tenerife)

International

United Kingdom *Bristol Water Group, Ltd PO Box 218, Bridgwater Road 1.545 52.114 (251) 256.622 100 - Bristol BS99 7AU UK

APPENDIX I

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

**Bristol Water Holding, Ltd 123_ PO Box 218, Bridgwater Road 11.157 14.291 298 - - 100 Bristol BS99 7AU UK ***Bristol Water Core Holding, Ltd PO Box 218, Bridgwater Road 8.923 - - - - 100 Bristol BS99 7AU UK ****Bristol Water, plc Box 218, Bridgwater Road 8.923 86.594 8.472 - - 100 Bristol BS99 7AU UK ***Verdan Group, Ltd PO Box 218, Bridgwater Road 1.171 795 (1.242) - - 100 Bristol BS99 7AU UK ****Bristol Water Services, Ltd PO Box 218, Bridgwater Road - (1.161) (35) - - 100 Bristol BS99 7AU UK

Central America *Interagbar de México, S.A. de C.V. Avda. Hidalgo, 107 - Centro Histórico 2.880 1.225 979 4.612 100 - Delegación Cuauhtemoc 06300 México Distrito Federal South America *Agbar Chile, S.A. El Golf 40, Piso 13 249.999 98.047 40.583 142.554 100 Santiago de Chile (Chile) **Cía. Hisp. Amer. Serv., S.A. (CHAS) Avda.Isidora Goyenechea, 3642 piso 4 13.260 (273) 14.061 - - 50 Las Condes - Santiago de Chile (Chile) ***Brisaguas Avda.Isidora Goyenechea, 3642 piso 4 1.938 (460) (63) - - 26 Las Condes - Santiago de Chile (Chile) *Agbar Lationamérica, S.A. Isidora Goyenechea N°2939 Depto11 57 28.850 3.170 57 100 - Las Condes - Santiago de Chile (Chile) ***Agbar ConoSur, Ltd. Isidora Goyenechea N°2939 Depto11 - 28.860 2.980 - - 100 Las Condes - Santiago de Chile (Chile) **S.C. Intermodal La Cisterna Monjitas, 392 oﬁ cina 701 10.229 20 - - - 69 SANTIAGO DE CHILE **Inversiones Aguas del Gran Santiago, S.A. El Golf 40, Piso 13 320.454 107.076 40.310 - - 100 Santiago de Chile (Chile)

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

***Inversiones Aguas Metropolitanas, S.A. El Golf 40, Piso 13 623.845 13.604 66.666 - - 57 Santiago de Chile (Chile) ****Aguas Andinas, S.A. Avda. Presidente Balmaceda, 1398 174.900 211.413 129.238 - - 28 Santiago de Chile (Chile) *****Análisis Ambientales, S.A. Camilo Henriquez, 540 295 1.080 759 - - 28 Puente Alto (Santiago de Chile) *****Eco-Riles, S.A. Avda.Presidente Balmaceda, 1398 389 1.649 1.304 - - 28 Santiago de Chile (Chile) *****Gestión y Servicios, S.A. Avda.Presidente Balmaceda, 1398 866 (1.205) 1.355 - - 28 Santiago de Chile (Chile) *****Comercial Orbi II, S.A. Avda. Santa María 6910-A 186.975 (71.197) 6.130 - - 28 Vicatura - Santiago de Chile (Chile) ******Aguas Manquehue, S.A. Avda.Presidente Balmaceda, 1398 10.148 7.990 3.242 - - 28 Santiago de Chile (Chile) ******Aguas Cordillera, S.A. Presidente Balmaceda 1398 52.380 29.627 18.968 - - 28 Santiago de Chile (Chile) *******Aguas Los Dominicos, S.A. Avda.Presidente Balmaceda, 1398 3.493 4.875 1.416 - - 28 Santiago de Chile (Chile)

HEALTHCARE *Compañía de Seguros Adeslas, S.A. Príncipe de Vergara, 110 53.060 132.179 58.511 55.380 55 - 28002 Madrid **Adeslas Dental, S.A. Príncipe, 21 443 284 1.111 - - 55 28012 Madrid **Adeslas Dental Barcelona, S.A. Príncipe de Vergara, 110 91 (28) 265 - - 55 28002 Madrid **General de Inversiones Alavesas, S.A. Plaza Amárica, 4 1.200 - (1) - - 55 01005 Vitoria

**General de Inversiones Tormes, S.A. 5.000 (296) (144) - - 55 Arco, 7-9 Salamanca

**Granada Salud, S.A. Pedro Antonio de Alarcón, 60 bajos 313 101 20 - - 55 18002 Granada

APPENDIX I

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

**Grupo Iquimesa, S.L., Sociedad 125_ Unipersonal 6.000 28.197 1.827 - - 55 Plaza Amárica, 4 bajos 01005 Vitoria ***Iquimesa Servicios Sanitarios, S.L. Plaza Amárica, 4 bajos 205 1.071 13 - - 55 01005 Vitoria **Infraestructuras y Servicios de Alzira, S.A. Carretera de Corbera, Km 1 1.250 575 252 - - 28 46600 Alzira (Valencia) **Unión Médica Regional, S.L. Príncipe de Vergara, 110 8.889 44.159 5.600 - - 55 28002 Madrid ***Alianza Médica Leridana, S.A. Bisbe Torres, 13 1.418 964 139 - - 43 25002 Lleida ***Casa de Reposo Sanatorio Perpetuo Socorro,S.A. 3.065 3.473 1.263 - - 41 Doctor Gómez Ulla, 15 03013 Alicante ****Hemodinámica Intervencionista de Ali- cante, S.A. 270 248 153 - - 27 Doctor Gómez Ulla, 15 03013 Alicante ****Tomografía Axial Computerizada de Alicante, S.A. 467 845 166 - - 23 Pl. Dr Gómez Ulla 15 03013 Alicante ***Centro Médico de Zamora, S.A. Rda. San Torcuato, 15 325 77 (129) - - 45 49006 Zamora ***Clínica Ntra. Sra. de América, S.A. Arturo Soria, 103 7.020 1.383 1.759 - - 53 28043 Madrid ***Clínica Parque San Antonio, S.A. Avda. Pintor Sorolla, 2 3.104 635 916 _ - 54 29016 Málaga ****Unidad de Radiología Cardiovascular Andaluza, S.A. 138 1.031 497 - - 28 Avda. Pintor Sorolla, 2 29016 Málaga ***Gestión Sanitaria Gallega, S.L., Sole-Shareholder Company 1.522 3.446 1.171 - - 55 Vía Norte, 54 36206 Vigo (Pontevedra)

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

***Plaza Salud 24, S.A. Príncipe de Vergara, 110 225 83 322 - - 27 28002 Madrid ***Sanatorio Nuestra Señora de la Salud de Granada, S.A. 2.848 (882) 1.672 - - 55 Ntra. Sra. De la Salud s/n 18014 Granada ***Sanatorio Virgen del Mar-Cristóbal Cas- tillo, S.A, 213 3.924 1.550 - - 54 Ctra. Mami, Km 1 s/n 04120 Almería

***UMR Canarias, S.L., Sociedad Unipersonal 500 - (11) - - 55 Perojo, 6 Las Palmas de Gran Canaria

****Clínica Santa Catalina, S.A. León y Castillo, 292 1.328 7.058 - - - 49 Las Palmas de Gran Canaria ****Clínica Santa Cruz de Tenerife, S.A. Enrique Wolfson, 8 1.329 (520) - - - 49 Santa Cruz de Tenerife ****Limpieza y Mantenimiento Hospitalarios, S.L. Perojo, 6 3 52 - - - 49 Las Palmas de Gran Canaria

INSPECTION AND CERTIFICATION

Domestic *Applus Servicios Tecnológicos, S.L. Campus de la Universitat Autònoma de Barcelona Carretera d’accés a la Facultat de 134.488 165.320 19.196 111.282 53 - Medicina s/n. Bellaterra, Cerdanyola del Vallès (Barcelona) **Applus Automotive Services, S.L.U. Campus de la Universitat Autònoma de Barcelona Carretera d’accés a la facultat de 838 (495) 127 - - 53 medicina s/n. Bellaterra, Cerdanyola del Vallès (Barcelona) **Applus Iteuve Technology, S.L. Campus de la Universitat Autònoma de Barcelona Carretera d’accés a la facultat de 24.722 30.941 15.588 - - 53 medicina s/n Bellaterra, Cerdanyola del Vallès (Barcelona)

APPENDIX I

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

***Applus ECA ITV, S.A. 127_ Campus de la Universitat Autònoma de Barcelona Carretera d’accés a la facultat de 1.202 5.242 12.260 - - 27 medicina s/n Bellaterra, Cedanyola del Vallès (Barcelona) ***Applus Iteuve Andalucía, S.A. Pol. Industrial Juncaril, Parcelas 317 y 318 523 3.628 597 - - 31 18210 Peligros (Granada) ***Applus Iteuve Euskadi, S.A. Lemandabide, 13 60 3.974 1.302 - - 53 Vitoria **Idiada Automotive Technology, S.A. L’Arbornar, s/n Apartado de correos 20 1.500 4.570 3.253 - - 36 43710 Sta. Oliva (Tarragona) ***CTAG-IDIADA Safety Technology, SL. Polígono Industrial A Granxa, Prc. 249-250 300 398 121 - - 18 Porriño (Pontevedra) **LGAI Technological Center, S.A. Campus de la Universitat Autònoma de Barcelona Carretera d’accés a la Facultat de 288.000 (100.047) (3.678) - - 50 Medicina s/n Bellaterra, Cerdanyola del Vallès (Barcelona) ***Applus Norcontrol, S.L.U. Carretera N-VI, Km 582, C.P. 15.168 120 34.938 (897) - - 50 15168 Sada ( A Coruña) ****Novotec Consultores, S.A., Sociedad Unipersonal Campezo,1 Ediﬁ cio 4. Parque Empresarial 2.029 7.968 (875) - - 50 las Mercedes 28022 Madrid ****Indulab 2000, S.L. Dos de Maig, 283-285 180 60 36 - - 50 08025 Barcelona ***** Laboratoris i Serveis Agroalimentaris, S.L. Pare Gallisa, 19 entlo. 11 73 22 - - 50 08500 Vic (Barcelona) ***Irtapplus, S.L. Campus de la Universitat Autònoma de Barcelona Carretera d’accés a la Facultat de 1.969 95 (38) - - 44 Medicina s/n Bellaterra, Cerdanyola del Vallès (Barcelona)

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

****Applus Agroambiental, S.A. Partida Setsambs, s/n 1.051 162 59 - - 33 Sidamon (Lleida) ***Laboratorio de Control de Aguas, S.A. (Labaqua) 693 4.676 2.338 - - 52 Alona, 33 03007 Alicante

International

Germany **Applus Deutschland, Gmbh Ruwerstrasse, 9, 500 (403) 72 - - 53 41464 Neuss (Alemania) ***Idiada Fahrzeugtechnik, GmbH Nürnberger Strasse 250 (130) (1) - - 36 D-85055 Ingolstadt (Alemania) ***RTD Holding Deutschland GmbH Industriestr. 34 1.000 6.962 3.652 - - 53 D-44894 Bochum. (Alemania) ****Röntgen Technischer Dienst GmbH Industriestr. 34 1.586 2.845 - - - 53 D-44894 Bochum. (Alemania) **** Compra GmbH Gesellschaft für Qualitätssicherung & Rückbau 53 1.232 - - - 53 Elisabethstr. 8 D-50226 Frechen (Alemania) Denmark ***Applus DanmarK A/S Masnedogade 28, 32.312 112 (3.420) - - 53 2100 Copenhagen (Dinamarca) Slovakia ****RTD Slovakia, S.R.O. Vlcie hrdlo SR-824 12 6 (4) (2) - - 53 Bratislava, Slovakia Finland **K1 Katsastajat, OY 250 5.371 513 - - 53 Tuotekat 8B 21200 Raisio (Finlandia) France ***RTD France, S.A.S. 14 rue André Sentuc 37 (123) (304) - - 53 69200 Venissieux (France)

APPENDIX I

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

Luxembourg 129_ **Applus Automotive Technology Luxembourg, SARL 100 122 254 - - 42 8 rue du Moulin L-6914 Roodt-sur-Syre (Luxembourg) Netherlands ***Röntgen Technische Dienst NV Energielaan 10a 199 437 356 - - 53 2950 Kapellen (Belgium) **Röntgen Technische Dienst Holding, B.V. - Rtd 21 22.693 11.097 - - 53 Delftweg 144 3046 NC Rotterdam (The Netherlands) ****RTD International, B.V. Delftweg 144 4 44 - - - 53 3046 NC Rotterdam (The Netherlands) ***Röntgen Technische Dienst Bv Delftweg 144 2.723 21.357 7.085 - - 53 3046 NC Rotterdam (The Netherlands) Portugal ****Applus Portugal Ltda. Largo da Lagoa, 15-H, Linda a Velha 130 (173) 30 - - 51 Concelho de Oeiras (Portugal) Czech Republic **Airon TechniK, A.S. Havlickova, 57 328 994 325 - - 37 508 01 Horice (Czech Republic) ***RTD Quality Services, S.R.O. U Stadionu 89 73 1.209 566 - - 53 530 02 Pardubice (Czech Republic) Africa ***** RTD QUALITY SERVICES NIGERIA, Ltd. B&B GOS Yard, NPA Express Way, Ekpan, 11 (151) (5) - - 53 Warri, Delta State, Nigeria North America ****RTD Quality Services Canada, Inc. 1431 – 70 Avenue 130 329 2.086 - - 53 Edmonton. Alberta T6P 1N5 (Canada) **Applus Inc. 2711 Centerville Road, Suite 400. 30.372 (7.454) (837) - - 53 Wilmington (New Castle), Delaware, USA

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

***Applus Technologies Inc. 4525 E. Skyline Drive, Suite 121 245 23.520 3.975 - - 53 Tucson, USA ***Applus Autologic, Inc. Souht Corporate Circle, suite nº 2 1.150 (1) 30 - - 53 Sussex, Wisconsin 53089, USA ****RTD Quality Services USA, Inc. 10540 Rockley Road, Suite 300 1 394 471 - - 53 Houston Texas 770 Central America ***Applus México, S.A. de CV Avda. de las Fuentes 41-A-1003, 14 132 150 - - 50 Colonia Lomas de Tecamachalco (Naucalpan), Estado de México ****Norcontrol Inspección, S.A. de C.V. Blvd. Manuel Ávila Camacho, 88 Piso 9 Loma de Chupultepec Palmas 639 (148) (128) - - 50 y Reformas Miguel Hidalgo México D.F. C.P. 11000 ****Norcontrol Guatemala, S.A. 18 Calle 5-56 Zona 10 Edif. Unicentro Nivel 399 (106) (737) - - 50 13 Ofi cina 13-02 Departamento de Guatemala ****Norcontrol Nicaragua, S.A. Ciudad de Masaya, Rep. de Nicaragua 66 14 23 - - 50 Centro BAC, piso 6, Km. 4 ½ Carretera a Masaya Apdo. LM-249 Managua ***LGAI Panamá, S.A. Edifi cio Torre Banco General, piso 9 30 (15) (10) - - 50 Calle Aquilino de la Guardia Ciudad de Panamá (Panamá) ***LGAI Centro América y Caribe, S.A. Urbanización Los Colegios, Centro 11 7 18 - - 50 Comercial Plaza Dorada, local 9 San José (Costa Rica) ****Norcontrol Panamá, S.A. Avda. Diógenes de la Rosa, Edifi cio nº 812 220 84 111 - - 50 Albrook (Panamá) South America ***Applus Serviços Tecnológicos do Brasil, Ltda. Rua Bernardino de Campos, 98, 4ª, 6.783 121 (133) - - 53 sala 1 Sao Paulo - SP (Brasil) ****Norcontrol Colombia, Ltda. Carrera, 7, 721 Torre B, puerta 14 1.367 58 400 - - 50 Bogotá D.C. (Colombia)

APPENDIX I

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT 131_ **Applus Revisiones Técnicas Chile, S.A. 471 48 (195) - - 53 Santiago de Chile (Chile)

***Applus Chile, S.A. El Golf, 40, piso 13 3.281 (347) 102 - - 53 Los Condes, Santiago de Chile (Chile) ***LGAI Chile, S.A. Marchant Pereira, 10, piso 14 90 (71) 5 - - 50 Providencia, Santiago de Chile (Chile) ****Norcontrol Chile, S.A. Ciudad y Comuna de Santiago. 798 106 148 - - 50 Calle Teatinos, 333 Santiago de Chile (Chile)

Oceania RTD Steeltest PTY, Ltd. 2 Thorpe Way 60 850 181 - - 53 Kwinana WA 6167, Australia

BUSINESSES IN DEVELOPMENT *Agencia Servicios Mensajería, S.A. F Miguel Fleta, 14-16 3.065 1.492 (1.313) 2.437 80 - 28037 Madrid **ASM Transporte Urgente Andalucía, S.A. Lima 7 121 188 230 - - 56 29006 Málaga **Mallorca Servicios Mensajería, S.L. Gremi Boters, 44 10 157 17 - - 56 07009 Palma de Mallorca *Aguas de Levante, S.A. (ADL) F Girona, 176 1.688 444 348 2.474 100 - Barcelona *Tribugest, Gestión de Tributos, S.A. Avda. Diagonal, 309, 2n A 1.470 14.065 (14.508) 616 60 - 08013 Barcelona

OWNERSHIP INTEREST THOSUANDS OF EUROS HELD BY AGBAR ASSOCIATE SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIVIDENDS RECEIVED BY AGBAR IN 2005 DIRECT INDIRECT

WATER AND WATER TREATMENT

Domestic ***Aguas de Albacete Avda Isabel la Católica, 4 bajos 7.500 3 6 - - - 74 02005 Albacete ****Aguas de Arona Plaza del Cristo de la Salud, 1 781 66 29 - - - 74 38640 Arona (Santa Cruz de Tenerife) **Aguas de Cieza, S.A. José Pérez Gómez, 2 bis 1.503 110 133 - - - 49 30530 Cieza (Murcia) ****Aguas de Telde, Gestión Integral del Servicio, S.A. 7.020 (1.834) 58 - - - 45 Matías Zurita, 12 35200 Teide (Gran Canaria) **Aguas del Arco Mediterráneo, S.A. Caballero de Rodas, 22 1.803 2.698 1.600 - - - 74 03180 Torrevieja (Alicante) **Aguas Municipalizadas de Alicante Empresa Mixta (AMAEM) 15.887 11.584 4.112 - - - 50 Alona, 31-33 03007 Alicante ***Aguas Vega-Sierra Elvira, S.A. (AGUASVIRA) Plaza Cuba, s/n Ediﬁ cio Tres Coronas 1.202 240 1.355 - - - 20 18230 Atarfe (Granada) ***Aguas y Saneamientos de Torremolinos, S.A. (ASTOSAM) 2.344 1.215 1.198 - - - 25 Loma de los Riscos, 2 29620 Torremolinos ***AIE Bahía Gaditana Carretera Nacional IV, Km 683 4.658 - 532 - - - 11 11100 San Fernando (Cádiz) **Aigües de l’Alt Empordà, S.A. (ADAMSA) Lluís Companys, 43 60 12 57 - - - 49 17480 Roses (Girona) **Aigües de Cullera, S.A. Plaza de la Sal, 4 1.893 83 274 - - - 48 46400 Cullera (València) *Aigües de Segarra-Garrigues, S.A. Pl. del Carme, 15, 1r, 1a 15.000 (1.997) 355 6.309 - 22 - 25300 Tàrrega (Lleida) **Aigües d’Osona Bisbe Morgades, 46 entl. 2a 60 28 (8) - - - 46 08500 Vic (Barcelona) **Aigües Municipals de Paterna, S.A. Plaza Ingeniero Castells, 1 2.116 - 60 - - - 49 46920 Paterna (Valencia) **Aigües i Sanejament d’Elx, E.M. Joan Carles I, 53 bajos 12.261 236 1.202 - - - 49 03202 Elx (Alacant)

APPENDIX II

OWNERSHIP INTEREST THOSUANDS OF EUROS HELD BY AGBAR ASSOCIATE SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIVIDENDS RECEIVED BY AGBAR IN 2005 DIRECT INDIRECT

*Clavegueram de Barcelona, S.A. (CLABSA) 133_ Acer, 16 3.606 498 1.085 1.947 323 54 - 08038 Barcelona **Companyia d’Aigües de Palamós Pl. Padró, 1 1.969 402 90 - - - 56 17230 Palamós (Girona) **Conducció del Ter, S.L. (CONTER) Bourg de Peaje, 89-97 18 4 54 - - - 48 17220 Sant Feliu de Guíxols (Girona) **Depuradora d’Osona Historiador Ramon d’Abadal i de Vinyals, 5 210 46 484 - - - 25 08500 Vic (Barcelona) **Drenatges Urbans del Besòs Avinguda Sant Julià, 241 300 43 82 - - - 50 08400 Granollers (Barcelona) **E.M. Aguas de Jumilla Avenida de Levante, 32 601 93 207 - - - 49 30520 Jumilla (Murcia) **E.M. Aguas de Lorca Príncipe Alonso, 2 3.005 471 1.025 - - - 49 30800 Lorca (Murcia) ***E. M. Aguas de Montilla Antonio Gala, 2 1.000 19 66 - - - 25 14550 Córdoba E.M. d’Aigües de la Costa Brava, S.A. Plaça Josep Pla, 4 3r, 1a 600 - 197 - - - 42 17001 Girona **Empresa Mixta de Aguas Residuales de Alicante, S.A. (EMARASA) 1.965 1.485 1.147 - - - 50 Alona, 31-33 03007 Alicante **Empresa Mixta d’Aigües de l’Horta, S.A. Placeta de l’Era, 12 1.803 239 514 - - - 49 46900 Torrent (València) ***Empresa Municipal de Abastecimiento y Saneamiento de Granada, S.A. (EMASAGRA) 2.656 1.451 2.796 - - - 24 Molinos, 58-60 18009 Granada **Empresa Municipal de Aguas y Saneamiento de Murcia, S.A. (EMUASA) 6.087 7.261 3.823 - - - 49 Plaza Circular, 9 30008 Murcia **Empresa Municipal Mixta d’Aigües de Tarragona, S.A. (EMATSA) 361 1.817 2.500 - - - 49 Avinguda Pau Casals, 13-15 43003 Tarragona *Girona, S.A. Travessia del Carril, 2, 6è 3a 1.200 1.805 440 630 57 31 - 17001 Girona

OWNERSHIP INTEREST THOSUANDS OF EUROS HELD BY AGBAR ASSOCIATE SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIVIDENDS RECEIVED BY AGBAR IN 2005 DIRECT INDIRECT

*Mina Pública d’Aigües de Terrassa, S.A. 4.856 13.252 1.702 3.497 312 32 - Societat, 26 08221 Terrassa (Barcelona) **Secomsa Aigües, S.L. Raval de Gràcia, 38 6 2.500 19 - - - 49 43850 Cambrils (Tarragona) **Serveis de Cervera i la Segarra 118 942 139 - - - 49 Plaça Major, 1 baixos 25200 Cervera (Lleida) **Sorea Rubatec AIE Passeig de Sant Joan, 43 baixos 240 - 207 - - - 45 08009 Barcelona ***Simmar-Serveis Integrals del Maresme Plaça Miquel Biada, 1 301 61 319 - - - 36 08302 Mataró (Barcelona) **Sorea-Searsa-Aqualia AIE Conde de Jaruco-Deurado 400 - - - - - 63 17310 Lloret de Mar (Girona) **Sermubeniel, S.A. José Antonio, 4 1.261 (56) (13) - - - 49 30130 Beniel (Murcia) ***Teidagua, S.A. San Agustín, 8 4.129 137 721 - - - 50 38201 La Laguna (Sta. Cruz de Tenerife)

International

Central America **Aguas de Saltillo, Sociedad Anónima de Capital Variable 13.670 1.076 2.224 - - - 49 De la Fuente, 433 Zona Centro 25000 Saltillo Coahuaila (México) ****Sociedad Concesionaria para la Gestión y Fomento de los Servicios de Acueducto, Alcantarillado, Saneamiento y Drenaje Pluvial, S. A. (Aguas de La Habana) 6.074 76 467 - - - 41 Fomento, s/n, esq. Recreo y Suarte Palatino Cerro La Habana (Cuba)

South America *Aguas de Cartagena, S.A.,E.S.P. (ACUACAR) Edif. Chambacú, Piso 2 Torices 9.864 2.141 3.219 3.056 891 46 - Sector Papayal, Carrera 13B, 26-87 Cartagena de Indias (Colombia) *Aguas Argentinas, S.A. Cerrito, 388 planta 1ª 39.562 34.048 (125.236) - - 25 - Buenos Aires (Argentina) CP1010 *Aguas Cordobesas, S.A. La Voz del interior, 5507 7.443 3.713 7.668 - - 5 - Córdoba (Argentina) H5008HJY

APPENDIX II

OWNERSHIP INTEREST THOSUANDS OF EUROS HELD BY AGBAR ASSOCIATE SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIVIDENDS RECEIVED BY AGBAR IN 2005 DIRECT INDIRECT

*Aguas Provinciales Santa Fe, S.A. 135_ 9 de julio, 2824, 1r piso 14.887 (46.991) (13.675) - - 25 15 3000 Santa Fe (Argentina)

HEALTHCARE ****Iquimesa Seguros de Salud, S.A.U Pza. América, 3 Bajos 1.055 85 2.240 - - - 14 01005 Vitoria ***Igualatorio Médico Quirúrgico de Bilbao Máximo Aguirre, 18 14.326 26.790 9.312 - - - 14 48011 Bilbao **Salamanca Análisis Clínicos, S.A. Pozo Hilera, 6 75 1.486 109 - - - 11 37002 Salamanca **Sanatorio Médico-Quirúrgico Cristo Rey, S.A. Paseo de la Estación, 40 103 3.092 124 - - - 21 23008 Jaén

INSPECTION AND CERTIFICATION

International

South America **Iteuve Inspección Técnica de Vehículos Reconquista, 1048, 9º 171 (135) 26 - - - 53 Buenos Aires (Argentina) ***Applus Iteuve Argentina, S.A. Reconquista, 1048, 9º 3.638 (1.407) 188 - - - 53 Buenos Aires (Argentina) TOTAL 15.439 1.583

* Companies in which Agbar has a direct ownership interest ** to ****** Companies in which Agbar has a indirect ownership interest at various levels WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT 03_2 Consolidated ﬁ nancial statements and management report

_140 Consolidated balance sheets at 31 December 2006 and 2005

_142 Consolidate Income Statements for the Years ended 31 December 2006 and 2005

_143 Consolidate Statements of Recognised Income and Expense for the years ended 31 December 2006 and 2005

_144 Consolidated Cash Flow Statements for the years ended 31 December 2006 and 2005 (Indirect Method)

_145 1 Group Activities

_147 2 Basis of presentation of the consolidated financial statementes

_150 3 Changes in Scope of Consolidation

_159 4 Accounting policies

_169 5 Financial risk management policy

_170 6 Segment reporting

_173 7 Discontinued operations

_175 8 Intangible Assets

_176 9 Property, plant and equipment

_180 10 Non-current financial assets

_181 11 Investments accounted for using the equity method

_183 12 Goodwill

_184 13 Inventories

_185 14 Trade and other receivable

_185 15 Current financial assets

_186 16 Equity WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

_193 17 Financial liabilities

_199 18 Provisions 137_

_200 19 Pension obligations

_204 20 Obligations and contingencies

_206 21 Tax matters

_209 22 Operating income and expenses

_210 23 Impairment loses

_211 24 Financial loss

_211 25 Proceeds on sale of non-current assets

_212 26 Earning per share

_213 27 Share Options Plan

_213 28 Related party transactions

_215 29 Remuneration of senior executives

_215 30 Disclosures on the Board of Directors

_217 31 Information on the environment

_218 32 Situation of the water business investments in Argentina

_219 33 Events after the balance sheets date

_219 34 Explanation added for translation to English

_220 Consolidated Director's Report for the year ended 31 December 2006

_236 Annexos WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

03_2 Consolidated ﬁ nancial statements and consolidated directors’report_ WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

139_ WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

Translation of ﬁ nancial statements originally issued in Spanish. In the event of a discrepancy, the spanish-language version prevails.

CONSOLIDATED BALANCE SHEETS AT 31 DECEMBER 2006 AND 2005

ASSETS NOTE 31-12-06 31-12-05

Intangible assets 8 649,219 614,675

Property, plant and equipment 9 2.457,987 2,168,587

Non-current ﬁ nancial assets 10 308,076 222,372

Investments accounted for using the equity method 11 145,465 132,074

Deferred tax assets 21 213,702 233,504

Goodwill on consolidation 12 972,375 532,096

Non-current assets 4,746,824 3,903,308

Inventories 13 29,069 28,385 Trade and other receivables 14 973,019 782,742 Current ﬁ nancial assets 15 135,431 221,974 Current tax assets 15,860 7,528 Prepaid expenses 10,862 5,893 Cash and cash equivalents 391,623 435,696 Non-current assets held for sale - 218,423

Current assets 1,555,864 1,700,641

TOTAL ASSETS 6,302,688 5,603,949 WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

EQUITY AND LIABILITIES Note 31-12-06 31-12-05

Share capital 149,642 147,597 Share premium 174,381 167,390 Revaluation reserve 128,061 128,061 Other reserves 1,082,734 869,186 Translation differences 3,487 10,579 Net proﬁ t for the year attributable to the Parent 167,253 252,113 Interim dividend for the year (25,929) (25,572)

Equity of the Parent 1,679,629 1,549,354 Equity of minority interests 968,503 1,019,777 141_

Total equity 16 2,648,132 2,569,131

Non-current fi nancial liabilities 17 1,602,975 1,217,264 Debt instruments and other held-for-trading liabilities 818,515 766,662 Bank borrowings and other fi nancial liabilities 702,413 409,349 Other non-current fi nancial liabilities 82,047 41,253 Deferred tax liabilities 21 216,426 120,732 Provisions 18 107,893 178,500 Other non-current liabilities 57,566 52,019

Non-current liabilities 1,984,860 1,568,515

Current fi nancial liabilities 17 562,940 367,574 Debt instruments and other held-for-trading liabilities 19,815 201,798 Bank borrowings and other fi nancial liabilities 536,973 155,532 Other current fi nancial liabilities 6,152 10,244 Trade payables 1,037,546 924,687 Current tax liabilities 50,142 37,389 Provisions 2,524 1,609 Other current liabilities 16,544 15,826 Liabilities associated with non-current assets held for sale - 119,218

Current liabilities 1,669,696 1,466,303

TOTAL EQUITY AND LIABILITIES 6,302,688 5,603,949 (Thousands of Euros) The accompanying Notes 1 to 34 and Appendixes I and II are an integral part of the consolidated balance sheet at 31 December 2006. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005

Note 2006 2005

Revenue 3,043,988 2,682,468 Other operating income 77,828 66,357

Operating income 6 3,121,816 2,748,825

Procurements (1,318,706) (1,153,909) Staff costs 22 (730,220) (689,006) Other operating expenses (585,370) (500,106) Work on non-current assets 92,396 74,752

Operating expenses (2,541,900) (2,268,269)

OPERATING CASH FLOW 579,916 480,556

Depreciation and amortisation charge (207,827) (177,509)

PROFIT FROM OPERATIONS 372,089 303,047

Impairment losses 23 (6,359) (4,346) Financial loss 24 (74,090) (59,471) Result of investments accounted for using the equity method 11 18,439 14,250 Proceeds from sale of non-current assets 25 90,187 147,679 Other proﬁ t/(loss) 17,064 (8,595)

PROFIT F ROM CONTINUING OPERATIONS BEFORE TAX 417,330 392,564

Income tax 21 (114,986) (65,722)

NET PROFIT FROM CONTINUING OPERATIONS 302,344 326,842

Proﬁ t from discontinued operations after tax 5,673 11,228

NET PROFIT 308,017 338,070

Net proﬁ t attributable to minority interests 16 (140,764) (85,957)

NET PROFIT ATTRIBUTABLE TO THE PARENT 167,253 252,113

Earnings per share: A) Basic 26 1.12 1.71 B) Diluted 26 1.12 1.70

(Thousands of Euros) The accompanying Notes 1 to 34 and Appendixes I and II are an integral part of the consolidated income statement for 2006. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSE FOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005

Note 2006 2005 Of Of Total Of Of Total the Minority the Minority Parent Interests Parent Interests

Net proﬁ t/loss recognised directly in equity 18,365 (89,250) (70,885) 85,461 53,632 139,093 143_ In voluntary reserves (5,380) 100 (5,280) 26,789 - 26,789 - Actuarial gains/losses on pensions 19 (5,439) - (5,439) (6,142) - (6,142) - Business combinations at market value 3b - - - 36,213 - 36,213 - Tax effect 1,809 - 1,809 (3,282) - (3,282) - Adjustment due to change in tax legislation 21 (1,750) 100 (1,650) - - -

In revaluation reserves for unrealised assets and liabilities 30,837 770 31,607 48,203 2,167 50,370 - Available-for-sale investments 31,438 522 31,960 44,628 - 44,628 - Financial derivatives (811) 396 (414) 5,500 3,334 8,834 - Tax effect 210 (148) 61 (1,925) (1,167) (3,092)

In translation differences (7,092) (90,119) (97,211) 10,469 51,465 61,934 - Change in net translation differences 16f (7,092) (90,119) (97,211) 10,469 51,465 61,934

Net proﬁ t for the year 167,253 140,764 308,017 252,113 85,957 338,070

Total income and expense recognised in the year 185,618 51,514 237,132 337,574 139,589 477,163

(Thousands of Euros) The accompanying Notes 1 to 34 and Appendixes I and II are an integral part of the consolidated statement of recognised income and expense for 2006. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

CONSOLIDATED CASH FLOW STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005 (INDIRECT METHOD)

31-12-06 31-12-05

Proﬁ t before tax 417,330 392,564

Adjustments to profi t: 177,629 80,728 Depreciation, amortisation, impairment and provisions 219,736 191,677 Financial loss 74,090 59,471 Results of companies accounted for using the equity method (18,439) (14,250) Proceeds from sale of assets (90,187) (147,678) Other results not giving rise to cash fl ows (2,133) (2,349) Actuarial gains/losses on pensions (5,439) (6,142) Cash fl ows from operations 594,959 473,292

Cash ﬂ ows from changes in working capital (133,940) 13,064

Cash ﬂ ows from income tax payments 6,987 (46,159)

NET CASH FLOWS FROM OPERATING ACTIVITIES 468,006 440,197

Investments in property, plant and equipment and intangible assets (308,349) (229,794) Investments in long-term ﬁ nancial assets (601,172) (143,706) Cash ﬂ ows from investments (909,521) (373,500)

Disposal of property, plant and equipment and intangible assets 22,477 44,076 Disposal of long-term ﬁ nancial assets 230,940 514,463 Cash ﬂ ows from disposals 253,417 558,539

Cash ﬂ ows from change in current ﬁ nancial assets 163,898 (90,452)

Interest received 38,197 26,439 Dividends received from companies accounted for using the equity method, discontinued operations and third parties 22,786 20,141 Guarantees given and statutory payments (74,566) (15,641) Other cash ﬂ ows (13,583) 30,939

NET CASH FLOWS FROM INVESTING ACTIVITIES (505,789) 125,526

Capital increases 9,035 9,399 Capital increases subscribed by minority shareholders 5,429 - Dividends paid to shareholders of the Parent (63,797) (58,816) Dividends paid to minority shareholders in investees (129.846) (62,613) Own ﬁ nancing cash ﬂ ows (179,179) (112,031)

Change in non-current fi nancial liabilities 65,408 (143,143) Change in current fi nancial liabilities 221,854 (7,749) Change in other long-term payables 7,066 (37,346) Interest paid (114,894) (87,832) External fi nancing cash fl ows 179,435 (276,070)

NET CASH FLOWS FROM FINANCING ACTIVITIES 256 (388,101)

Exchange rate effect on cash (6,546) 4,042

TOTAL NET CASH FLOWS (44,073) 181,664

Cash and cash equivalents at beginning of year 435,696 254,031

Cash and cash equivalents at end of year 391,623 435,696

CHANGE IN CASH AND CASH EQUIVALENTS (44,073) 181,664

(Thousands of Euros) The accompanying Notes 1 to 34 and Appendixes I and II are an integral part of the consolidated cash ﬂ ow statement for 2006. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

SOCIEDAD GENERAL DE AGUAS DE BARCELONA AND INVESTEES COMPOSING THE AGBAR GROUP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2006

_ 1 1. Group activities

Sociedad General de Aguas de Barcelona, S.A. (”Agbar”) is the Parent of the 145_ Group (“Agbar Group”) and has its registered office in Barcelona at Avenida Diagonal 211 (AGBAR Tower). It was incorporated on 20 January 1882, in Paris, and adapted its bylaws to the current Spanish Companies Law by means of a public deed authorised by Barcelona Notary Public, Raúl Vall Vilardell, on 5 June 1991, recorded under number 2,136 of his protocol and registered at the Mer- cantile Registry of Barcelona in volume 8,880, on Sheet no. 62, Page B-16,487, entry no. 1,032. Agbar’s objects are: “A To provide public services under any legally-admitted form of management, including, where necessary, the design, execution and construction of the relevant infrastructure works and equipment, and to manufacture, construct and supply all manner of equipment and components, and, in particular, to provide public services related to: _ The supply of water in the various high-pressure and low-pressure distribution systems to both public and private entities and individuals for industrial and household use. _ The collection, treatment, removal and recycling of solid waste. _ The treatment and purifi cation of wastewater and all manner of liquid waste, including direct reuse of such water. _ Sewerage systems. _ Irrigation systems. _ Hydraulic and civil works. B To operate and market all manner of natural springs, including therapeutic mineral springs. C To promote and assist technological development by incorporating and investing in research and development entities, such as foundations, associations and public and private education centres. D To promote, develop and support activities in the fi elds of information technology, cybernetics and automated processes. E To purchase all manner of rural and urban properties, and construct all manner of buildings for use or sale, lease or any other operation. F To study, design, construct, manufacture, supply, maintain and preserve works and facilities of all types, systems and, in general, control, operation and management mechanisms related to electricity, electronics, telecommunications and energy generation activities, and data collection, transfer and online transmission. The Company may also develop, implement and maintain computer and online software, automatism and remote control, voice and data reception and transmission and remote sensing software, and, in general, software for collecting, processing and transferring data in all areas of economic activity. G To provide technical inspection, technical audit and quality control, testing, analysis, research and development, accreditation and certifi cation services in any manufacturing or services industries. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

H To carry out indirectly, i.e., by holding shares in other companies incorporated for this purpose, private insurance operations in accordance with the provisions of Private Insurance Law 30/1995, of 8 November, and complying with all applicable requirements. I To purchase and operate, indirectly, health establishments for hospitalisation and medical/surgical assistance, in addition to all medical and healthcare activities in relation to this object, by holding shares in other companies. J To act as a holding company, in order to incorporate and invest, as a partner or shareholder, in other companies of any type and with any objects, including associations and civil law partnerships, by subscribing to or purchasing and holding shares, without encroaching on any of the activities inherent to collective investment schemes, broker-dealers, or other entities governed by special laws. K To purchase and sell domestic or foreign shares, debentures and any other fi xed- income or equity securities, in relation to the above activities, and to invest as found- ers in companies or entities to be incorporated for the same purposes. The direct and, where applicable, indirect performance of any activities which are reserved under special legislation are excluded. The Company shall not perform any activity for which the law lays down specifi c conditions or limitations, unless they are complied with in full.” Agbar’s core business is the distribution and supply of water in Barcelona and it holds the right to perform this service for an indefi nite period. Agbar also engages in this activity in other municipalities in the metropolitan area of Barcelona, such as L’Hospitalet de Llobregat, Badalona and Santa Coloma de Gramenet, among others. On 9 September 2004, the Parent signed a framework agreement with the Metro- politan Water and Waste Treatment Services Entity (“EMSHTR”) for the following four years to supply water to the Barcelona metropolitan area. The strategic aim of this agreement is to promote and ensure that citizens receive a service managed under the principles of quality, sustainability and utmost respect for the environment. The fi rst consequence of this agreement was the new focus of the investment policy, involving the promotion of projects for the recovery of water resources in the metropolitan area and the development of clean solutions in processes affecting the environment, in addition to other projects to improve and extend infrastructures and increase effi ciency. The Parent invested EUR 37,648 thousand in this area in 2006 (2005: 37,496 thousand). On 1 February 2007 the Metropolitan Entity approved a two-year extension to the current rate-making framework agreement, with an option for a further two-year extension. The main activities carried out in 2006 by the Agbar Group, either directly by the Par- ent or via companies within this Group (see Appendixes I and II) were the following: _ Potable water, including collection and supply of water and integrated services in cities and towns through concession and rental agreements. _ Healthcare. _ Inspection and certifi cation. _ Assembly and maintenance of water installations. _ Transport and courier services. _ Tax management services. _ Construction and engineering (as indicated in Note 7, this business activity was discontinued in December 2006). WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

_ 2 Basis of presentation of the consolidated ﬁ nancial statements

ACCOUNTING STANDARDS APPLIED The consolidated fi nancial statements for 2006 were prepared by the Parent’s Board of Directors and will be submitted for approval by Agbar’s Annual General Meeting, and it is considered that they will be approved without any changes. The consolidated fi nancial statements of the Agbar Group for 2005 were approved by Agbar’s shareholders at the Annual General Meeting held on 19 May 2006. 2005 was the fi rst year in which the Agbar Group presented consolidated fi nancial 147_ statements under International Financial Reporting Standards (IFRSs). The accompanying consolidated fi nancial statements of the Agbar Group for 2006 were prepared by the Parent’s directors in accordance with IFRSs as adopted by the European Union, in conformity with Regulation (EC) no. 1606/2002 of the European Parliament and of the European Council. They were prepared from the individual accounting records of Agbar and of each of the consolidated companies (detailed in Appendixes I and II) and they present fairly the Agbar Group’s equity, fi nancial position and results of operations under IFRSs. IFRSs provide for certain alternative treatments regarding their application. The standards applied by the Agbar Group in the preparation of the accompanying consolidated fi nancial statements for 2006 are detailed in Note 4 ‘Accounting Policies’. The accounting policies used to prepare these consolidated fi nancial statements comply with all IFRSs in force at the date of their presentation. The application in 2006 of the new IFRSs, IFRS interpretations (IFRICs) or amendments to existing IFRSs whose application is mandatory for 2006 did not give rise to a material effect on these consolidated fi nancial statements. The Agbar Group elected not to take early adoption of IFRSs, of IFRS amendments or of IFRICs issued in 2006 and adopted by the European Union but not mandato- rily applicable in 2006. However, the Group considers that the application of these standards and standard interpretations would not have a material effect on the consolidated fi nancial statements. The most signifi cant standards and interpretations are as follows: _ IAS 1 “Presentation of Financial Statements”, which requires that new disclosures be included to enable users of the consolidated fi nancial statements to evaluate the objectives, policies and procedures to manage capital. _ IFRS 7 “Financial Instruments: Disclosures”, which requires disclosures that enable users of the consolidated fi nancial statements to evaluate the signifi cance of the Group’s fi nancial instruments and the nature and extent of risks arising from such fi nancial instruments. The Agbar Group also elected not to take early adoption of the IFRSs issued but not adopted by the European Union whose application will be mandatory in future years. However, the Group considers that their application would not have material effects on these consolidated fi nancial statements. The most signifi cant standards and interpretations issued most notably include: _ IFRS 8 “Operating Segments”, which will supersede IAS 14 “Segment Reporting”. _ IFRIC 12 “Service Concession Arrangements”.

COMPARATIVE INFORMATION As indicated in Note 7, the business segment “Construction and Facilities” was discontinued in 2006. Accordingly, pursuant to IFRS 5, the accompanying consolidated ﬁ nancial statements for 2005, included for comparison purposes, have been restated to adjust the contributive effect of the discontinued business segment. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

Therefore, the consolidated ﬁ nancial statements for 2005 included in these consolidated ﬁ nancial statements for comparison purposes differ from those prepared by the Board of Directors and approved by the Parent’s Annual General Meeting held on 19 May 2006.

BASIS OF CONSOLIDATION The accompanying consolidated fi nancial statements include the fi nancial statements of the companies controlled by the Company at 31 December of each year. Control is presumed to exist when the Company has the power to establish the fi nancial and operating policies of its investees. The results of investees acquired or disposed of during the year are included in consolidated profi t from the date on which control was effectively taken or until control was lost, as appropriate. When necessary, if the accounting policies and measurement bases used in preparing the accompanying consolidated fi nancial statements differ from those used by some of the consolidated companies, the required adjustments and reclassifi cations are made on consolidation to unify the policies and methods used and to make them compliant with IFRSs. The subsidiaries or associates of Agbar detailed in Appendixes I and II have been included in consolidation. The methods used to determine the consolidation method applicable to each of the companies composing the Agbar Group were as follows: _ Full consolidation. a) Direct or indirect ownership interests of more than 50%, and companies over which effective control is exercised through the ownership of a majority of the voting rights in their representation and decision-making bodies. b) Investees owned 50% or less, but which are effectively controlled by Ag- bar or another company in the Agbar Group. _ Proportionate consolidation. Ownership interests greater than or equal to 20% in companies managed jointly with other shareholders (jointly controlled companies). _ Equity method. Direct or indirect ownership interests in the following cases: a) Companies owned 20% or more, but less than 50% (except when this holding carries no signifi cant infl uence). b) Companies owned 50% or more in which effective management is not exercised, or jointly exercised, by Agbar or any Agbar Group company, but in which signifi cant infl uence is exercised. c) Companies owned less than 20% in which signifi cant infl uence is exercised due to signifi cant transactions between the investor and the associate, an exchange of executive personnel between the companies or the provision of essential technical data. There are no signifi cant investments in the Agbar Group whose functional currency is other than the local currency of denomination of its fi nancial statements. The classifi cation of the consolidated reserves between “Fully and Proportionately Consolidated Companies” and “Companies Accounted for Using the Equity Meth- od” has been made on the basis of the consolidation method used for each consolidated company or subgroup. All signifi cant balances and transactions between the Agbar Group companies have been eliminated from the accompanying fi nancial statements, and those relating to jointly controlled companies have been eliminated in proportion to the ownership interest held, including the amount of any cross-holdings. The tax effect that may arise as a result of including the results and reserves of the consolidated companies in the Parent is also not included in the accompanying fi nancial statements since, according to IAS 12, it is considered that no transfers of reserves that are subject to additional taxation will be made. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

The equity of minority interests represents the portion attributable to them of equity and results at 31 December 2006 and 2005 of the fully consolidated companies and is shown under the total equity balance in the accompanying consolidated balance sheet and under “Net Profi t Attributable to Minority Interests” in the accompanying consolidated income statement. The Group has used the purchase method in all cases of business combinations that occurred subsequent to the date of transition to IFRS when accounting for these transactions and has recognised as goodwill arising from the combination the difference between the cost of the combination and the net fair value of the acquired company’s identifi ed and recognised assets, liabilities and contingent liabilities. 149_ CURRENCY These consolidated fi nancial statements are presented in euros since this is the currency of the primary economic environment in which the Group operates. Transac- tions in functional currencies other than the euro are recognised in accordance with the policies described in Note 4-u.

RESPONSIBILITY FOR THE INFORMATION AND FOR THE ESTIMATES MADE The information contained in these consolidated fi nancial statements is the responsibility of the Parent’s directors, who have verifi ed that the various controls established in order to ensure the quality of the fi nancial and accounting information prepared by them have worked effectively. In the Group’s accompanying consolidated financial statements judgements and estimates were occasionally made by the Parent’s management and of the consolidated companies in order to quantify certain assets, liabilities, income, expenses and obligations reported therein. These estimates relate basically to the following: _ The useful life of property, plant and equipment and intangible assets (see Notes 4-a and 4-b). _ The measurement of goodwill arising on consolidation (see Note 4-h). _ The impairment losses on certain assets (see Note 4-d) _ The assumptions used in the actuarial calculation of the pension obligations (see Note 4-p), _ The assumptions used in the calculation of the fair value of fi nancial instruments (see Note 4-n), _ Income from unbilled supplies (Note 4-s), _ Provisions for obligations to third parties and contingent liabilities (see Notes 4-o and 20), _ The risks and obligations arising from the investments in Argentina (see Note 32), _ The risks arising from tax inspections (see Notes 20-b and 21), and _ The measurement of the purchase and sale options on the Agbar Tower (see Note 20). Although these judgements and estimates were made on the basis of the best information available at 31 December 2006 and 2005 on the events analysed, events (economic events, changes to legislation, etc.) that take place in the future might make it necessary to change these judgements and estimates (upwards or downwards) in coming years, which would be recognised in the related consolidated income statement or in consolidated equity, as appropriate. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

_ 3 Changes in Scope of Consolidation

A Changes in 2006 The main changes in the scope of consolidation in 2006 with respect to 2005 and the relevant information related thereto are as follows: _ Acquisition of 100% of the Bristol Water Group. Full consolidation. On 21 April 2006, the Parent announced the launch of a takeover bid for the entire share capital of the UK company Bristol Water Group, Ltd., which manages the supply to the city of Bristol and some areas of the Somerset, Bath and South Glouces- tershire counties. This takeover bid was targeted at all shareholders and holders of share options issued by Bristol Water Group, Ltd., and was formalised as a cash purchase with a consideration of GBP 10.6 per share. The shareholders were also entitled to receive a special fi nal dividend of 22.5 pence per share. The investment to acquire 100% of this group totalled EUR 256,622 thousand. Control was effectively taken on 1 July 2006 and, accordingly, the consolidated fi - nancial statements for 2006 only include six months of activity of this group. The key fi gures in the balance sheet upon inclusion are as follows, in thousands of euros:

BALANCE ALLOCATION FINAL SHEET UPON OF BALANCE INCLUSION GOODWILL SHEET Non-current assets 330,810 56,474 387,284 excluding goodwill Goodwill - 229,184 229,184 Other net (50,569) (7,496) (58,065) total assets Bank borrowings and other ﬁ nancial (261,575) (40,206) (301,781) liabilities, net Equity 18,666 237,956 256,622 Acquisition price 256,622 Goodwill before 237,956 allocation Thousands of euros

_ Acquisition of 100% of the RTD Group. Full consolidation. In April 2006, the Agbar Group, through its subsidiary Applus Servicios Tecnoló- gicos, S.L., acquired 100% of Röntgen Technische Dienst Holding, BV (the RTD Group’s Parent), with head ofﬁ ce in Rotterdam. The RTD Group’s main activities consist of industrial non-destructive testing and other inspection services in the chemical, petrochemical and energy industries. The investment to acquire 100% of the share capital of this group totalled EUR 178,841 thousand. Control was effectively taken on 1 May 2006 and, accordingly, the consolidated ﬁ nancial statements for 2006 only include eight months of activity of this group. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

The key ﬁ gures in the balance sheet upon inclusion are as follows, in thousands of euros:

BALANCE ALLOCATION FINAL SHEET UPON OF BALANCE INCLUSION GOODWILL SHEET Non-current assets 36,384 2,286 38,670 excluding goodwill Goodwill - 151,989 151,989 Other net 1,237 (583) 654 total assets 151_ Bank borrowings and other ﬁ nancial (12,472) - (12,472) liabilities, net Equity 25,149 153,692 178,841 Acquisition price 178,841 Goodwill before 153,692 allocation

Thousands of euros

_ Acquisition of 100% of K1 Kasastajat, OY. Full consolidation. The agreements adopted on 26 May 2006 were executed on 9 November 2006 by signing a share purchase agreement whereby Applus Servicios Tecnológicos, S.L., a subsidiary of the Agbar Group, acquired 100% of the share capital of K1 Kasastajat, OY, Finland’s second operator of vehicle technical inspection services. The amount paid for this acquisition was 41,961 thousand. These agreements also provided for an earn-out payment of up to a maximum of EUR 3,600 thousand that is conditional on meeting an earnings threshold in 2006 and 2007. Control was effectively taken on 1 October 2006 and, accordingly, the consolidated ﬁ nancial statements for 2006 only include three months of activity of this company. The key ﬁ gures in the balance sheet upon inclusion are as follows, in thousands of euros:

BALANCE ALLOCATION FINAL SHEET UPON OF BALANCE INCLUSION GOODWILL SHEET Non-current assets 2,740 - 2,740 excluding goodwill Goodwill - 39,939 39,939 Other net total assets (3,047) - (3,047) Bank borrowings and 5,929 - 5,929 other ﬁ nancial liabilties, net Equity 5,622 39,939 45,561 Amount paid 41,961 Maximum earn-out 3,600 outstanding Goodwill before 39,939 allocation

Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

_ Sale of the investment in Emte, S.A. On 22 December 2006, the Agbar Group entered into a contract with Solduga, S.A. to sell it all of its shares in the capital of Emte, S.A., representing 50%. The price of this transaction totalled EUR 107,250 thousand and generated a pre-tax proﬁ t of EUR 15,052 thousand. The consolidated income statement for 2006 includes this company’s activity as a discontinued operation for the whole year (see Note 7).

_ Sale of the investment in Acsa – Agbar Construcción, S.A. On 10 November 2005, the Agbar Group executed the sale of 60% of the share capital of Acsa - Agbar Construcción, S.A. to Finycar, S.L. (Sorigué Group). This sale agreement included an option to buy the remaining 40%, to be exercised in subsequent years. The early exercise of this option was agreed upon and executed on 23 June 2006. The transaction price, discounting the deferred second payment to net present value, amounted to EUR 24,660 thousand and generated a pre-tax gain of EUR 13,171 thousand. The consolidated income statement for 2006 includes the proceeds on this sale to date (see Note 7).

_ Sale of the investment in Aguas Décima, S.A. A 99% interest in Aguas Décima (50% owned by Agbar) was sold in October 2006. The selling price totalled EUR 30,494 thousand and generated a pre-tax gain of EUR 14,875 thousand. The consolidated income statement for 2006 includes nine months of activity of this group. The key ﬁ gures of the balance sheet upon exclusion are as follows, in thousands of euros:

BALANCE SHEET UPON EXCLUSION

Total assets 26,715 Total liabilities 11,533 Total equity (excluding net proﬁ t for the period) 13,476

Net proﬁ t for the period 1,706 Carrying amount of the 99% interest 15,030 Expenses associated with the disposal (589) Disposal price 30,494 GAIN ON THE DISPOSAL BEFORE TAX EFFECT 14,875 AND MINORITY INTERESTS (NOTE 25) Thousands of euros

_ Sale of the investment in Aguas de la Costa, S.A. On 8 September 2006 the Parent sold its 60% ownership interest in Aguas de la Costa, S.A. to a Uruguayan state-owned company. The transaction price amounted to USD 3,400 thousand (EUR 2,674 thousand) and generated a gain before tax of EUR 975 thousand. The consolidated income statement for 2006 includes the activity of this group up to the date of sale. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

The key ﬁ gures of the balance sheet upon exclusion are as follows, in thousands of euros:

BALANCE SHEET UPON EXCLUSION

Total assets 4.960 Total liabilities 2.698 Total equity (excluding net proﬁ t for the 1.780 period)

Net proﬁ t for the period 482 Carrying amount of the 60% interest 1.357 153_ Expenses associated with the disposal (342) Disposal price 2.674 GAIN ON THE DISPOSAL BEFORE TAX EFFECT 975

Thousands of euros

_ Sale of 5.22% of Applus Servicios Tecnológicos, S.L. Two sales of investments in Applus Servicios Tecnológicos, S.L. were made in 2006 as part of the global agreements reached in November 2005 between Agbar, Unión Fenosa, S.A. and Sociedad de Promoción y Participación Empresarial, S.A. (SPPE). By virtue of these agreements, Corporación Financiera Caja de Madrid, S.A. (through SPPE) became a shareholder of Applus Servicios Tecnológicos, S.L. In January 2006 a 2.32% interest in Applus Servicios Tecnológicos, S.L. was sold to Unión Fenosa, S.A., giving rise to a gain before tax of EUR 6,995 thousand. In April 2006 a 2.90% interest in Applus Servicios Tecnológicos, S.L. was sold to So- ciedad de Promoción y Participación Empresarial, S.A., giving rise to a gain before tax of EUR 8,882 thousand. As a result of this transaction, Applus is 53.1% owned by Agbar, 25% owned by Unión Fenosa, S.A. and 21.9% owned by SPPE.

_ Sale of 1.1% of Aguas Andinas, S.A. In April 2006, Inversiones Aguas Metropolitanas, S.A. (IAM), 56.6% owned by Agbar, sold 1.1% of the shares of Aguas Andinas, S.A. by placing them on the Chilean stock market. The selling price totalled CLP 12,251 million (approximately EUR 19.7 million). Following this transaction, IAM holds a 50.10% ownership interest in Aguas Andinas, S.A.

B Changes in 2005 The main changes in the scope of consolidation in 2005 with respect to 2004 and the relevant information related thereto are as follows:

_ Acquisition of 100% of Applus Calidad y Medioambiente, S.A. (Acyma) Full consolidation. On 2 February 2005, the resolutions adopted in December 2004 by the annual general meetings of Applus Servicios Tecnológicos, S.L. and Soluziona, S.A. were recorded in a public deed. The meetings approved the partial spin-off of Soluziona, S.A. (spun-off company) to Applus Servicios Tecnológicos, S.L. (beneﬁ ciary). The spin-off of Soluziona, S.A. was a portfolio spin-off at market value, involving all the shares of Soluziona Calidad y Medioambiente, S.L., Sole-Shareholder Company (currently Applus Calidad y Medioambiente, S.L.) valued at EUR 100 million. The Agbar Group acquired 100% of the shares in Applus Calidad y Medioambiente, S.A. for 24.99% of the shares of Applus. Following the acquisition, Applus was 75.01% WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

owned by Agbar and 24.99% by Unión Fenosa, S.A. The agreement also included certain mechanisms aimed at providing liquidity should Unión Fenosa, S.A. wish to sell its shares in Applus. The waiving of this mechanism on particular dates by Soluziona, S.A. would imply the automatic increase of its interest in Applus by 3% without compensation, i.e. by means of a capital increase against reserves in which the Agbar Group would waive its subscription rights. The key ﬁ gures in the balance sheet upon inclusion are as follows, in thousands of euros:

BALANCE ALLOCATION FINAL SHEET UPON OF BALANCE INCLUSION GOODWILL SHEET Non-current assets 16,533 - 16,533 excluding goodwill Goodwill - 76,896 76,896 Other net total assets 22,425 - 22,425 Bank borrowings and other ﬁ nancial (15,854) - (15,854) liabilities, net Equity 23,104 76,896 100,000 Acquisition price 100,000 Goodwill before 76,896 allocation Thousands of euros

_ Transfer of 13.68% of Applus Servicios Tecnológicos, S.L. (Applus) On 29 December 2005, Agbar and Unión Fenosa, S.A. waived the liquidity mechanism agreed following the entry of Unión Fenosa, S.A. into the share capital of Applus and, in compensation for this, Agbar transferred 3% of Applus to Unión Fenosa, S.A. as agreed. As a result of this transaction, it recognised a gain of EUR 36,213 million before tax, for the difference between the consolidated value of Ap- plus transferred in the acquisition of Acyma and the market value received upon contribution of this company. On the same date, Agbar, Unión Fenosa, S.A. and Sociedad de Promoción y Par- ticipación Empresarial, S.A. (“SPPE”, an investee of Corporación Caja de Madrid, S.A.) executed the agreements signed on 16 November 2005, by virtue of which SPPE invested in the share capital of Applus with a 19% stake via a capital increase involving a cash contribution of EUR 133 million. As a result of this transaction, Applus was 58.32% owned by Agbar, 22.68% owned by Unión Fenosa, S.A. and 19% owned by SPPE. In relation to SPPE’s investment in Applus, the Agbar Group recognised in proﬁ t for the year in the consolidated income statement the difference between the amount received in cash upon the transfer of 13.68% of Applus to SPPE and the consolidated value of this interest at the transaction date, amounting to EUR 41,569 thousand before tax (see Note 25). Finally, Agbar agreed to sell and Unión Fenosa agreed to buy an additional 2.32% of Applus in the ﬁ rst quarter of 2006. Agbar also granted to SPPE an option to buy an additional 2.9% of Applus which can be exercised by the end of 2006.

_ Acquisition of 100% of Inisas Compañía de Seguros y Reaseguros, S.A. Full consolidation. In December 2005 Compañía de Seguros Adeslas, S.A. acquired all the shares in the insurance company Inisas Compañía de Seguros y Reaseguros, S.A., as awarded by SEPI, Spain’s state-owned holding company, as part of a privatisation process, for EUR 16,038 thousand. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

The key ﬁ gures in the balance sheet upon inclusion are as follows, in thousands of euros:

BALANCE ALLOCATION FINAL SHEET UPON OF BALANCE INCLUSION GOODWILL SHEET Non-current assets 163 - 163 excluding goodwill Goodwill - 13,555 13,555 Other net total assets (2,829) - (2,829) Bank borrowings and 155_ other ﬁ nancial 5,149 - 5,149 liabilities, net Equity 2,483 13,555 16,038 Acquisition price 16,038 Goodwill before 13,555 allocation Thousands of euros

_ Acquisition of 25% of Instituto Médico Quirúrgico (IMQ). Equity method. On 29 December 2005, the Agbar Group, through Compañía de Seguros Ades- las, S.A., signed an agreement to buy 25% of the share capital of IMQ Seguros (Igualatorio Médico Quirúrgico Group) for EUR 40,644 thousand, which included the contribution of all the shares held by Adeslas in Iquimesa Seguros de Salud, S.A., Sole-Shareholder Company. The agreement also includes a five- year option for Adeslas to buy 20% of the aforementioned company.

_ Acquisition of 100% of Applus Danmark A/S. Full consolidation. On 17 January 2005, the Agbar Group, through the wholly-owned company Applus Danmark A/S, signed an agreement to buy the national network of vehicle inspection centres in Denmark as a result of the deregulation process carried out in Denmark. Once the acquisition was approved by the Finance Committee of the Danish parliament, the Agbar Group became the leading private operator in the Danish industry. The investment totalled EUR 62,073 thousand. The key figures in the balance sheet upon inclusion are as follows, in thousands of euros:

BALANCE ALLOCATION FINAL SHEET UPON OF BALANCE INCLUSION GOODWILL SHEET Non-current assets 49,429 - 49,429 excluding goodwill Goodwill - 21,301 21,301 Other net total assets (18,366) - (18,366) Bank borrowings and other ﬁ nancial 9,709 - 9,709 liabilities, net Equity 40,772 21,301 62,073 Acquisition price 62,073 Goodwill before 21,301 allocation Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

_ Sale of 23.5% of Inversiones Aguas Metropolitanas, S.A. In November 2005, the Agbar Group and the Suez Group, both shareholders of the Chilean company Inversiones Aguas Metropolitanas, S.A. (“IAM”), with 80.1% and 19.9% stakes, respectively, concluded a process to place 49.9% of this company on the stock market. IAM also holds 51.2% of Aguas Andinas, S.A. During this process, 10% of IAM’s shares were placed on the Chilean market and 33.4% were placed on the international market, with 23.5% of these percentages relating to the Agbar Group, which at 31 December 2005 held a 56.6% interest in IAM. The price obtained for the placement of the Agbar Group’s 23.5% interest totalled CLP 113,384 million. As a result of this transaction, the Suez Group ceased to be a shareholder of IAM, in which it had a joint management agreement signed with Agbar in previous years. Consequently, at 31 December 2005, Agbar exercised effective control over the management of IAM and, therefore, consolidated this company by the full consolidation method.

_ Sale of 50% of Aquagest Sur, S.A. The Agbar Group, Unicaja and Caja Granada completed their negotiations in relation to the acquisition by the two savings banks of 50% of the share capital of Aquagest Sur, S.A. for EUR 73,532 thousand. This transaction was carried out via Hidrocart- era, S.L., which is jointly owned by Unicaja and Caja Granada. The agreements reached with the purchasers as a result of this sale allow the Agbar Group to keep control of this company and, therefore, the consolidation method for this company remains unchanged. This transaction generated a pre-tax proﬁ t of EUR 30,900 thousand (see Note 25).

_ Sale of 60% of Acsa – Agbar Construcción, S.A. On 10 November 2005, the Agbar Group executed the sale of 60% of the share capital of Acsa - Agbar Construcción, S.A. to Finycar, S.L. (Sorigué Group). The sale agreement included an option on the remaining 40% of the capital which can be exercised in two tranches (20.5% and 19.5%, respectively) commencing from the second and fourth anniversary of the execution date of purchase of the initial 60%. The selling price of the 60% interest was established at EUR 34,607 thousand. The value of the options on the remaining 40% is based on the price paid for the initial 60% and is also referenced to the change in the underlying carrying amount of ACSA up to the options exercise date, with Agbar still assuming the risks from holding its current 40% stake. The key ﬁ gures of the balance sheet upon exclusion are as follows, in thousands of euros:

BALANCE SHEET UPON EXCLUSION

Total assets 171,258 Total liabilities 146,208 Total equity (excluding net proﬁ t for the period) 21,398 Net proﬁ t for the period 3,652 Carrying amount of the 60% interest 15,029 Disposal price 34,607 GAIN ON THE DISPOSAL BEFORE TAX EFFECT 19,578 (NOTE 25)

Thousands of euros

_ Sale of 10% of Compañía de Seguros Adeslas, S.A. In 2002, 24.6% of the share capital of Adeslas was sold to the French group Mé- deric. The agreement for the sale of the interest in Adeslas included the option to buy WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

up to an additional 20.4%. The selling price of the remaining 20.4% was established in three different options. The ﬁ rst option (0.4%) was exercised in 2003. On 28 Sep- tember 2004, Médéric exercised the second option, on 10%. Finally, on 29 Septem- ber 2005, Médéric exercised the third and last option to buy 10% of Compañía de Seguros Adeslas, S.A. The price of the last 10% totalled EUR 59,850 thousand and generated a pre-tax gain of EUR 41,060 thousand (see Note 25). At 31 December 2005, Agbar held 54.79% of Adeslas and no additional disposals of shares are planned.

_ Sale of the investment in AGM Contacta, S.L. On 16 December 2005, the Parent sold 100% of AGM Contacta, S.L. to the Konec- 157_ ta Group for EUR 7,000 thousand. Settlement of this sale was structured in three tranches: the fi rst, with a value of EUR 3,500 thousand, due on the signing of the sale agreement; the second, of EUR 2,000 thousand, due on 31 December 2006; the third amount, of EUR 1,500 thousand, due on 31 December 2007, is subject to fulfi l- ment of specifi c targets with a major customer of this company and has therefore not yet been recognised. The key fi gures of the balance sheet upon exclusion are as follows, in thousands of euros:

BALANCE SHEET UPON EXCLUSION

Total assets 26,668 Total liabilities 16,112 Total equity (excluding net proﬁ t for the period) 10,419 Net proﬁ t for the period 137 Carrying amount 10,556 Disposal price 5,500 LOSS ON THE DISPOSAL BEFORE TAX EFFECT (5,056) (NOTE 25) Thousands of euros

_ Sale of the investment in Aguas Guariroba, S.A. On 11 October 2005, the Group entered into an agreement to transfer the whole of its equity interest in the Brazilian company Aguas Guariroba, S.A. to a Brazilian consortium for BRL 57 million (approximately EUR 21,245 thousand). The key ﬁ gures of the balance sheet upon exclusion are as follows, in thousands of euros:

BALANCE SHEET UPON EXCLUSION

Total assets 113,889 Total liabilities 85,380 Total equity (excluding net proﬁ t for the period) 27,828 Net proﬁ t for the period attributable to the Group 681 Carrying amount 28,509 Disposal price 21,245 LOSS ON THE DISPOSAL BEFORE TAX (7,264) EFFECT (NOTE 25) Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

_ Sale of the investment in Iteuve Portugal, Ltda. On 23 March 2005, the Group company Applus Iteuve Technology, S.L. sold 100% of Iteuve Portugal, Ltda. to Sociedad Controlo Tecnico Automovel, S.A. for EUR 19,432 thousand. The key ﬁ gures of the balance sheet upon exclusion are as follows, in thousands of euros:

BALANCE SHEET UPON EXCLUSION

Total assets 8,090 Total liabilities 3,131 Total equity (excluding net proﬁ t for the period) 4,317 Net proﬁ t for the period 642 Carrying amount 4,959 Disposal price 19,432 GAIN ON THE DISPOSAL 14,473 Write-down of indirect goodwill (4,326) NET GAIN ON THE DISPOSAL BEFORE TAX EFFECT 10,147

Thousands of euros

C Changes in the method of consolidation The most signiﬁ cant change of consolidation method in 2006 and 2005 relates to the Inversiones Aguas Metropolitanas Group (IAM). In November 2005, as a result of the public placement of IAM’s shares, Agbar took effective control of this company, which it had shared with the Suez Group until then. Until the placement the proﬁ ts had been proportionately recognised, at 80.1%, but thereafter they were fully consolidated on the basis of a 56.6% investment.

_ 4 Accounting policies

The principal accounting policies used in preparing the consolidated ﬁ nancial statements for 2006 and 2005, in accordance with International Financial Reporting Standards and the interpretations in force at the time of preparing these consolidated ﬁ nancial statements, were as follows:

A INTANGIBLE ASSETS Intangible assets are recognised initially at acquisition or production cost, including the allocation of goodwill based on the related independent valuations, if applicable, and are subsequently measured at cost less any accumulated amortisation and any applicable accumulated impairment losses. On the date of transition to IFRS (see Note 2-a), the Agbar Group elected to measure intangible assets at acquisition cost adjusted for accumulated amortisation under Spanish GAAP at 31 December 2003 and, accordingly, it did not elect to use their market values. Staff salary costs and the costs related to designing, installing and bringing intangible assets into service are capitalised. These costs are presented as a reduction to “Operating Expenses” in the accompanying consolidated income statement. Administrative concessions or similar items are amortised on a straight-line basis according to their duration. This item includes the concession royalty initially paid and, where appropriate, the present value of the future payments which are deemed to be necessary upon reversion of the assets. All other intangible assets are amortised in accordance with the following policies (see Note 8): WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

_ Computer software is amortised on a straight-line basis over a period of three to ﬁ ve years, except for speciﬁ c assets which may be amortised over longer periods, based on independent technical studies. _ Surface rights on urban properties are amortised on a straight-line basis over the term of these rights. _ Rights of use in relation to the location of pipelines are amortised on a straight-line basis over a period of 50 years. Items in progress are transferred to intangible assets in use once the development period has ended.

B PROPERTY, PLANT AND EQUIPMENT 159_ Property, plant and equipment are stated at acquisition or production cost revalued pursuant to the applicable legislation including Royal Decree-Law 7/1996, of 7 June (see Note 9), plus the allocation of goodwill based on independent valuations, where applicable. On the date of transition to IFRS (see Note 2-a), the Agbar Group elected to measure the items of property, plant and equipment at acquisition cost adjusted for accumulated amortisation under Spanish GAAP at 31 December 2003 and, accordingly, it did not elect to use their market values. The costs of expansion, modernisation or improvements leading to increased productivity, capacity or efﬁ ciency or to a lengthening of the useful lives of the assets are capitalised. Staff salary costs and the costs associated with the design, installation and putting into operation of the items of property, plant and equipment are capitalised. These costs are presented as a reduction to “Operating Expenses” in the accompanying consolidated income statement. Repair and maintenance costs are recognised as an expense in the year in which they are incurred. The companies depreciate property, plant and equipment on a straight-line basis over the remaining years of estimated useful life, as follows:

YEARS OF USEFUL LIFE

2006 2005

Structures 10 to 100 10 to 50 Plant and machinery 4 to 20 4 to 20 Pipelines 10 to 100 10 to 34 Other items of property, plant and equipment 4 to 12,5 4 to 12,5

As a result of the inclusion of the Bristol Water Group in the Agbar Group’s scope of consolidation, certain assets associated with the storage, transportation and high-pressure distribution of water have been added to the Group whose nature differs signiﬁ cantly from that of the assets held by other Group companies also engaged in the water supply business. Consequently, the range of years of useful life of the constructions (civil works) and pipelines in 2006 is higher than in 2005. The new assets added to the Group include most notably reservoirs (dams) and high-pressure water distribution canal systems. The costs of ﬁ tting out and improving assets taken on lease by the Group are included under “Structures”. These costs are amortised over the shorter of their estimated useful life and the minimum duration of the rental agreement. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

The depreciation method used for reversible assets guarantees that they will be fully depreciated by the end of the concession period. Assets which may be out of use continue to be depreciated through the effective date of derecognition.

C GOVERNMENT GRANTS Non-refundable government grants received are measured at the amount granted. Grants related to income are taken directly to income. Grants related to assets are recognised in income in proportion to the period depreciation of the assets associated with these grants. In the case of non-depreciable assets, the grants are recognised in income in the year in which the assets are disposed of, impaired or derecognised. On the date of transition to IFRS (see Note 2-a), the Agbar Group elected to present grants related to assets as reductions of the carrying amount of the assets to which they relate, rather than presenting them as deferred income in the consolidated balance sheet.

D IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS The carrying amount of the property, plant and equipment and intangible assets with fi nite useful lives is analysed at the balance sheet date to determine if there is any indication that they have suffered an impairment loss. If any such indication exists, the recoverable amount of the assets is estimated in order to determine the impairment loss suffered. Where the asset analysed in itself does not generate cash fl ows that are independent from other assets, the Group estimates the fair value of the cash-generating unit to which the asset belongs. Intangible assets with an indefi nite useful life not subject to systematic amortisation are tested for impairment annually, or when there is an indication that the asset has suffered an impairment loss. Recoverable amount is the higher of fair value less costs to sell and value in use. In order to estimate value in use, the future cash fl ows of the asset analysed (or of the cash-generating unit to which it belongs) are discounted to their present value using a discount rate that refl ects both the time value of money and the risk specifi c to the asset. Where the recoverable amount of an asset is estimated to be less than its carrying amount, the difference is recognised with a charge to “Impairment Losses” in the consolidated income statement. Asset impairment losses recognised are reversed with a credit to this heading when the related recoverable amounts are estimated to increase, thereby increasing the value of the asset up to the limit of the carrying amount that the asset would have had if no write-down had taken place, except for goodwill, which is not reversible.

E LEASES

_ Finance leases Finance leases are deemed to be leases in which the risks and rewards relating to the leased asset are transferred to the lessee, which normally has the option to purchase the leased asset upon termination of the lease, under the conditions agreed upon execution thereof. Assets held under fi nance leases are classifi ed under “Property, Plant and Equipment” based on the nature of the leased asset. A liability is recognised for the same amount, which is the lower of the fair value of the leased asset and the aggregate of the present values of the amounts payable to the lessor plus the price of exercising the purchase option. These assets are depreciated using criteria similar to those applied to the items of property, plant and equipment of the same nature taken as a whole. The fi nance costs associated with the lease are charged to the consolidated income statement on the basis of the effective interest rate on the lease. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

_ Operating leases In operating leases, the ownership of the leased asset and the risks relating to the leased asset remain with the lessor. Operating lease costs are systematically recognised as an expense.

F FINANCIAL ASSETS The Agbar Group determines the most appropriate classifi cation for each fi nancial asset on the date of its acquisition and such classifi cation is revised at the end of each year. Current and non-current fi nancial assets are classifi ed into the following categories: _ Held-for-trading fi nancial assets: assets acquired mainly for the purpose of gen- 161_ erating a profi t as a result of changes in value. The assets included in this category are recognised at fair value in the accompanying consolidated balance sheet, and changes in value are recognised in the accompanying consolidated income statement under “Finance Costs” or “Finance Income”, as appropriate. _ Loans and receivables: these are measured at market value when recognised in the balance sheet, and subsequently at amortised cost using the effective interest rate. The Agbar Group makes the appropriate provisions with a charge to income for the difference between the amount of the receivables expected to be recovered and the carrying amount at which they are recognised. _ Held-to-maturity investments: these are fi nancial assets that the Agbar Group has the intention and ability to hold to the date of maturity, and are recognised at amortised cost using the effective interest rate. _ Available-for-sale fi nancial assets: these are any assets that do not fall under any of the above three categories. These investments are carried at market value at year-end in the consolidated balance sheet. In the case of unlisted companies, market value is obtained through alternative methods such as comparison with similar transactions, or, where suffi cient information is available, through the discount of the expected cash fl ows. Changes in market value are charged or credited to the “Asset and Liability Revaluation Reserves” under consolidated equity. On disposal of these investments, the cumulative reserves are recognised in full in the consolidated income statement. Investments in the share capital of unlisted companies whose market values cannot be measured reliably are recognised at acquisition cost.

G INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD Investments accounted for using the equity method are stated at the value of the share of the net assets of the company, increased by the carrying amount of the goodwill existing at the reporting date (see Note 11).

H GOODWILL ON CONSOLIDATION Any differences between the cost of the investments in the share capital of the Group companies or associates and the related underlying carrying amounts, adjusted at the date of fi rst-time consolidation, are allocated as follows: _ If they are attributable to specifi c assets and liabilities of the companies acquired, adjusting the value of the assets and liabilities whose market values differ from the carrying amounts shown in their balance sheets. _ If they are attributable to specifi c unrecognised intangible assets, recog- nising them explicitly in the consolidated balance sheet. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

_ The remaining amount is recognised as goodwill arising on consolidation, which is allocated to one or more speciﬁ c cash-generating units. Goodwill is only recognised when it has been acquired for consideration and represents, therefore, a payment made by the acquirer in anticipation of future economic beneﬁ ts from assets of the acquired company. At the end of each reporting period goodwill is reviewed for impairment (i.e. a reduction in value to below its carrying amount) and if there is impairment, goodwill is written down with a charge to the consolidated income statement. An impairment loss recognised for goodwill must not be reversed in a subsequent period (see Note 4-d). On the sale of a Group company or associate, the attributable amount of goodwill, if any, is included in the determination of the gain or loss on the sale.

I INVENTORIES Inventories are stated at weighted average cost and comprise materials purchased and, where applicable, direct labour costs and any other costs that have been incurred in bringing the inventories to their present location and condition.

J TRADE RECEIVABLES FOR SALES AND SERVICES Trade receivables are recognised at their recoverable amount, i.e. reduced as appropriate by the adjustments required to cover the balances in the event that they can reasonably be classiﬁ ed as doubtful receivables in the circumstances.

K CURRENT FINANCIAL ASSETS These relate mainly to cash surpluses arising on ﬁ xed-income or equity securities maturing or being disposed of within three to twelve months. These investments are recognised at acquisition price. Interest income is calculated in the year in which it accrues by the interest method.

L CASH AND CASH EQUIVALENTS This heading includes balances with banks and highly liquid current ﬁ nancial assets maturing in less than three months.

M DEBENTURES, BONDS AND BANK BORROWINGS AND OTHER FINANCIAL LIABILITIES Loans, debentures and similar ﬁ nancial liabilities are initially recognised at the proceeds received, net of the costs incurred in the transaction. In subsequent years, they are measured at amortised cost using the effective interest rate, except in the case of transactions for which hedging agreements have been entered into, which are recognised as described in the section below.

N FINANCIAL DERIVATIVES AND HEDGE ACCOUNTING The Group’s use of fi nancial derivatives is governed by its fi nancial risk management policies, which provide guidelines for their use (see Note 5). The Group does not use derivate fi nancial instruments for speculative purposes, but rather they are used solely as hedging instruments to eliminate or signifi cantly reduce certain interest rate and currency risks relating to its assets (see Note 17-c). The accounting treatment of derivative instrument hedges is as follows: _ Fair value hedges Changes in the market value of the derivative fi nancial instruments designated as hedges and of the hedged item attributable to the hedged risk are charged or credited to “Financial Loss” in the consolidated income statement. _ Cash fl ow hedges and hedges of net investments in foreign operations The effective portion of changes in the market value of these derivative fi - nancial instruments is recognised directly in equity, whereas the ineffective WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

portion is recognised in the consolidated income statement. The amount recognised in equity is not transferred to the consolidated income statement until the results of the hedges are recognised therein or until the maturity date of these transactions. If hedge accounting is discontinued, the loss or gain accumulated in equity at that date is retained until the hedged transaction occurs, at which time it is reversed against the gain or loss on this transaction. The market value of the various ﬁ nancial instruments relates to their market price at year-end. In the case of derivatives not tradeable in organised markets, the Agbar Group measures these derivatives using assumptions based on prevailing market conditions. 163_

O PROVISIONS AND CONTINGENT LIABILITIES The two items included under this measurement basis are: _ Provisions: the Agbar Group recognises a provision where it has a commitment or an obligation to a third party arising from past events, the settlement of which will give rise to an outfl ow of economic benefi ts whose amount and/or timing are not known with certainty but can be reasonably reliably estimated. Provisions are quantifi ed on the basis of the best information available on the event and the consequences of the event and are reviewed and adjusted at the end of each year. Provisions are used to cater for the specifi c risks for which they were originally recognised, and are fully or partially reversed when such risks cease to exist or are reduced. _ Contingent liabilities: contingent liabilities are possible obligations that arise from past events and whose future existence and associated loss is estimated to be unlikely. In accordance with IFRSs, the Agbar Group does not recognise any provision in this connection. However, as required, they are disclosed in Note 20.

P PENSION OBLIGATIONS Agbar and several Group companies have pension obligations, the most signifi cant being those relating to the Parent and the Bristol Water Group (see Note 19). _ Nature of the Parent’s obligations The Parent took out defi ned benefi t pension plans, whose purpose is to guarantee that employees hired prior to 1 January 1991 receive a retirement pension (and its possible derivatives: death of spouse and death of parent) supplementing social security system benefi ts. Additionally, the collective bargaining agreement in force at Agbar provides that all permanent employees hired after 1 January 1991 who have passed the probationary period qualify for membership in a defi ned contribution pension plan under Pension Plans and Funds Law 8/1987, of 8 June, covering retirement, death of spouse, disability and death of parent benefi ts. Pursuant to current Spanish law, and, specifi cally, Spanish Pension Plans and Funds Law 8/1987, of 8 June, and Royal Decree 1588/1999, of 15 October, approving the Regulations on pension obligation arrangements by companies with employees and benefi ciaries, in 2002 the Parent externalised all of its obligations and, for this purpose, took out a mixed pension plan based on the nature of the contingencies covered (defi ned contribution for retirement and defi ned benefi t for risks of disability and death during active working life) with a management company. Additionally, to complete the fi nancing of the remaining defi ned benefi t obligations, it took out the relevant insurance policies. Lastly, the Parent completed the externalisation process in 2005 as it took out an insurance policy to cover the retirement premiums. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

_ Nature of the Bristol Water Group’s obligations Bristol Water plc took out defi ned benefi t pension plans, whose purpose is to guarantee that employees hired prior to 31 December 2001 receive a retirement pension (and its possible derivatives: death of spouse and death of parents) based on fi nal pensionable salary. Additionally, under the current collective bargaining agreement of Bristol Water plc, based on current UK legislation, all employees joining the company on or after 31 December 2001 who have not joined a defi ned benefi t pension scheme under ex- ceptional conditions qualify for membership of a defi ned benefi t pension plan. Bristol Water Group Ltd., the Parent of the group comprising Bristol Water plc, jointly with other small and medium-sized UK water and water treatment companies, set up the Water Companies’ Pension Scheme (WCPS) pursuant to current UK legislation (essentially the 1973 Water Act) to secure professional management of the funds covering its defi ned benefi t pension obligations to its employees. The WCPS is made up of separate sections dealing separately with each company’s pension liabilities and related plan assets. The investments are made by investment managers appointed by members of the Control Committee (Trustees). Verdan Group Ltd., a wholly-owned subsidiary of Bristol Water Group, Ltd. that was engaged in non-regulated business activities in the past, has defi ned benefi t pension obligations, basically to former employees. Bristol Water Group Ltd. is considering transferring the risk associated with the remaining obligations assumed vis-à-vis the employees of Verdan Group Ltd. by means of a buy-out of the pension scheme liabilities with an insurance company. _ Measurement policies The amount of the defi ned benefi t retirement pension obligations was determined using the following techniques: _ Measurement method: The measurement method used in the actuarial valuations was the projected unit credit method, which is the method accepted under IFRSs. Pension liabilities are measured on the basis of the current value of the benefi ts to which the employees are entitled, bearing in mind the employees’ years of service. _ Actuarial assumptions used: unbiased and mutually compatible. Specifi - cally, the most signifi cant actuarial assumptions used were:

ASSUMPTION

PARENT

RPI and social security contribution base 2.0% growth Maximum social security pension and 2.5% salary growth Nominal discount rate 5.0% Mortality tables for employees in service PERMF 2000 combined (death plus disability) with ITOM 77 Mortality tables for retired employees PERMF 2000 WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

ASSUMPTION

BRISTOL WATER GROUP

Retail price index growth (RPI) 3.1% Salary growth rate 5.1% Nominal discount rate 5.2% Mortality tables for employees in service A92 Mortality tables for retired employees PA92 165_

_ The estimated retirement age of each employee is the fi rst at which the employee is entitled to retire pursuant to labour and social security laws in force in each country taking into account, where appropriate, any labour agreements that may be reached at any point under current applicable legislation. Regular yearly contributions, basically consisting of the ordinary cost plus a risk premium, where appropriate, are charged to the consolidated income statement for the year. At the balance sheet date, the excess of the present value of the defi ned benefi t liabilities over the fair value of the plan assets is recognised as a liability in the consolidated balance sheet. If this calculation gives a negative difference, it is recognised as an asset in the balance sheet only in respect of the portion relating to the present value of any future economic benefi t that could be available in the form of plan re- demptions or reductions in future plan contributions. Actuarial gains and losses which may arise as a result of increases or decreases in the present value of the defi ned benefi t liabilities or changes in the fair value of plan assets are directly recognised in consolidated equity under “Actuarial Gains/Losses on Pensions”. This method of accounting for actuarial gains and losses was the alternative selected by the Agbar Group in 2005 through the adoption of IAS 19 “Employee Benefi ts”. Actuarial gains and losses arise from variances between the estimated and actual performance of actuarial assumptions or the restatement of established actuarial assumptions. The causes of such gains and losses include the following: _ the effect of changes in estimates of the rates of employee turnover, mortality, early retirement and employee salary increase, and the effect of changes in benefi ts due to variances in infl ation, and _ the differences between the actual and projected return on plan assets.

Q TRADE PAYABLES Debts are stated at current value. Debts due to be settled within 12 months are clas- siﬁ ed as current items and those due to be settled within more than 12 months as non-current items. This heading also includes the claims provisions, recognised in the Healthcare segment, which at 31 December 2006 amounted to EUR 182,974 thousand (31 Decem- ber 2005: EUR 173,215 thousand). These provisions include the estimates made on a case-by-case basis by the Agbar Group insurance companies of liabilities arising from claims not yet settled or paid at the reporting date, as well as an overall estimate, based on past experience, of the liabilities which might arise for the companies as a result of losses incurred prior to year-end but not yet reported. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

R INCOME TAX, DEFERRED TAXES AND TAX ASSETS The current income tax expense includes both the current tax arising from the application of the tax rate to the taxable profi t for the year, after deducting the tax credits allowable for tax purposes, and the change in deferred tax assets and liabilities and in tax loss and tax credit carryforwards. Deferred tax assets and liabilities include temporary differences expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and their tax bases, and tax loss and tax credit carryforwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realised or the liability is settled. Deferred tax liabilities are recognised for all taxable temporary differences, while deferred tax assets are recognised only to the extent that it is considered probable that the consolidated companies will have suffi cient taxable profi ts in the future against which the deferred tax asset can be utilised. Deferred tax assets and liabilities arising from direct charges or credits to asset or liability accounts are also recognised in equity. Tax assets (tax loss and tax credit carryforwards) are recognised only to the extent that it is considered probable that the consolidated companies will have suffi cient taxable profi ts in the future against which the tax assets can be utilised. The deferred taxes and tax assets recognised are reassessed at each balance sheet date in order to ascertain whether they still exist, and the appropriate adjustments are made on the basis of the fi ndings of the analyses performed.

S INCOME AND EXPENSE RECOGNITION Income and expense are recognised on an accrual basis, i.e. when the actual fl ow of the related goods and services occurs, regardless of when the resulting monetary or fi nancial fl ow arises. Following the principles included in the IFRS conceptual framework, the Group recognises accrued income in addition to all associated necessary expenses. Sales of goods are recognised when the goods are delivered and the risks and rewards incidental to ownership have been substantially transferred. Dividend income from investments in fi nancial assets is recognised as the shareholders become eligible to dividend payment. Gains and losses arising from the sale or retirement of an asset are determined as the difference between their carrying amount and their selling price and recognised in profi t. _ Construction contracts. Where the outcome of a contract can be estimated reliably, contract revenue is recognised by reference to the stage of completion at the balance sheet date, i.e. by the proportion that costs incurred for work performed to date bear to the estimated total costs through completion. Where the outcome of a contract cannot be estimated reliably, contract revenue is recognised to the extent of costs incurred that are reasonably expected to be recovered in the future. If it is probable that contract costs will exceed total contract revenue, the expected loss is recognised immediately. _ Supplies not yet billed. Where applicable, the Parent and the investees recognise water actually supplied as water sales, including the amount of water supplied but not yet billed at 31 December. For the Agbar Group companies in the water and water treatment segments, water sales amounted to EUR 114,431 thousand at 31 December 2006 (31 December 2005: EUR 114,465 thousand), and are recognised under “Current Assets - Trade and Other Receivables” in the consolidated balance sheets at 31 December 2006 and 2005.

T EARNINGS PER SHARE Basic earnings per share are calculated by dividing net profit attributable to the Parent by the weighted average number of ordinary shares outstanding during the year. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

Diluted earnings per share are calculated by dividing net diluted proﬁ t attributable to the Parent by the weighted average number of ordinary shares outstanding during the year, adjusted by the weighted average number of ordinary shares that would have been outstanding assuming the conversion of all the potential ordinary shares into ordinary shares of the Parent. For these purposes, it is considered that the shares are converted at the beginning of the year or at the date of issue of the potential ordinary shares, if the latter were issued during the current period. In the case of Agbar, earnings per share are diluted due to the effect of the redeemable class B shares which covered the share option plan called “May 2001 Plan”.

U TRANSACTIONS IN FUNCTIONAL 167_ CURRENCIES OTHER THAN THE EURO The Group’s functional currency is the euro. Therefore, all balances and transactions in currencies other than the euro are deemed to be denominated in “foreign currency”. Following is a detail of the equivalent value of the main balances held in foreign currency, based on the nature of the items comprised, in thousands of euros:

NATURE OF THE BALANCES

2006

US CHILEAN DANISH POUNDS DOLLARS PESOS KRONE STERLING Non-current 78,865 1,471,233 67,968 669,233 assets Other net as- (57,300) (1,039,259) (32,701) (361,830) sets/liabilities Net (21,565) (431,974) (35,267) (307,403) borrowings

2005

US CHILEAN DANISH DOLLARS PESOS KRONE Non-current 97,747 1,696,801 72,789 assets Other net assets/ (58,032) (1,225,209) (47,021) liabilities Net (39,715) (471,592) (25,768) borrowings

Thousands of euros

Balances in foreign currencies are translated to euros in two consecutive phases: 1 Translation of foreign currencies to the subsidiaries’ functional currencies. Transactions in foreign currencies by consolidated companies are initially recognised in their respective ﬁ nancial statements at the equivalent value in their functional currencies based on the exchange rates prevailing at the date of the transaction. Subsequently, for the purpose of their presentation in the individual ﬁ nancial statements, the consolidated companies translate the balances in foreign currencies to their functional currencies using the exchange rates prevailing at the balance sheet date. Any exchange differences are charged or credited to the income statement. 2 Translation to euros of balances held in the functional currencies of the subsidiaries whose functional currency is other than the euro. The balances in the WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

fi nancial statements of consolidated companies whose functional currency is other than the euro are translated to euros as follows: _ Assets and liabilities are translated by applying the exchange rates prevailing at the reporting date. _ Income, expenses and cash fl ows are translated at the average exchange rates for the year. _ Net assets are translated at historical exchange rates. Differences arising in the translation process are included under “Equity - Translation Differences”. Goodwill and fair value adjustments arising on the acquisition of foreign companies are treated as foreign currency assets and liabilities of such companies and translated at the exchange rates prevailing at the balance sheet date. In order to protect its portfolio of international investments from the exposure to foreign currency fl uctuation risks, the Group makes use of certain fi nancial hedging instruments -net investment hedges- (Note 17-c). The respective Agbar Group companies using these hedges intend to maintain them as long as the investment in the related subsidiary is held. The measurement differences in euros arising from such net investment hedging instruments are recognised against “Translation Differences” in the accompanying consolidated balance sheet. The average and closing rates used in the translation to euros of the balances in foreign currencies were as follows:

1 EURO 2006 2005

AVERAGE CLOSING AVERAGE CLOSING Chilean Pesos 666.10 701.43 695.74 607.01 US Dollars 1.26 1.32 1.24 1.18 Danish Krone 7.46 7.44 7.46 7.44 Pounds Sterling 0.68 0.67 - -

V INFORMATION ON THE ENVIRONMENT Environmental assets are considered to be assets used on a lasting basis in the operations of the Agbar Group companies whose main purpose is to minimise the impact on the environment and to protect and enhance the environment through the reduction or elimination of the pollution caused in the future by the Agbar Group’s operations. These assets, like all other tangible assets, are measured at acquisition or production cost revalued in accordance with applicable legislation including Royal Decree-Law 7/1996, of 7 June. The companies depreciate these items on a straight-line basis over the remaining years of estimated useful life of these assets as detailed in Note 4-b.

W DISCONTINUED OPERATIONS A discontinued operation is a business segment that it has been decided to abandon and/or dispose of in full whose assets, liabilities and net proﬁ t or loss can be distin- guished physically, operationally and for ﬁ nancial reporting purposes. The income and expenses of the discontinued operations are presented separately in the income statement, and the net assets and liabilities are also presented separately under current assets and current liabilities in the consolidated balance sheet, respectively. In 2006, after the sales of Acsa – Agbar Construcción, S.A. and Emte, S.A. (Note 3-a), the Agbar Group discontinued the Construction and Facilities business segment (see Note 7). WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

X CONSOLIDATED CASH FLOW STATEMENT The following terms are used in the consolidated cash fl ow statement with the mean- ings specifi ed: and/or d _ Net cash fl ows: infl ows and outfl ows of cash and cash equivalent fi nancial assets, which are short-term, highly liquid investments that are subject to an insignifi cant risk of changes in value. _ Operating activities: the principal revenue-producing activities of the Group’s business and other activities that are not investing or fi nancing activities. _ Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents. _ Financing activities: activities that result in changes in the amount and composi- 169_ tion of the equity and borrowings of the Group that are not operating activities.

_ 5 Financial risk management policy

The main purpose of the Agbar Group’s fi nancial risk management activity is to assure the availability of funds for the timely fulfi lment of fi nancial obligations and to protect the value in euros of the Group’s economic fl ows and assets and liabilities. This management activity comprises the identifi cation of risks, the determination of tolerance to each risk, the hedging of fi nancial risks, and the control of the hedging arrangements established. The Agbar Group’s policy is to hedge all signifi cant and intolerable risk exposures as long as there are appropriate instruments for this purpose and the hedging cost is reasonable. The Group’s fi nancial risk management activity is carried out in a single and integrated manner so as to identify the existence of natural hedges between and within the various lines of business and thus optimise the arrangement of hedges in the markets. All external hedging arrangements, including those relating to subsidiaries, are subject to centralised approval and trading processes at Group level. Following are the main fi nancial risks faced by the Group and the practices established:

CURRENCY RISK The increased volatility of foreign exchange markets with respect to other markets (such as interest rate markets) and the signifi cant international activity of the Agbar Group as a long-term investor in countries outside the euro zone make translation risk (loss of value in euros of non-current fi nancial assets in countries whose currency is not the euro) the most signifi cant fi nancial risk for the Group. To manage translation risk, the Agbar Group takes the following measures: _ If the fi nancial market of the country in which the investment is made allows for adequate fi nancing to be obtained in terms of timing and cost, hedging is naturally obtained through fi nancing taken in the same currency as that of the investment. _ If the above is not possible, the Group determines asset and liability sensitivity to exchange rate fl uctuations on the basis of the size and severity (volatility) of the risk exposure. If such asset and liability sensitivity is unaccept- able, exposure is reduced by using exchange rate derivative instruments. With respect to the currency risk associated with transactions, the export or import of products or services is of limited signifi cance for the Group. Some companies whose functional currency is the euro are recipients of fl ows in the currencies of their international subsidiaries, mainly relating to dividends and/or technical assistance (management fees). Basically considering the amounts and WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

periods involved, the Group circumstantially takes hedges to assure the counterparty value in euros of these transactions.

INTEREST RATE RISK Interest rate risk relates to the effect on profi t or loss of rises in interest rates which increase borrowing costs. Exposure to this risk is signifi cantly mitigated by the natural hedging offered by businesses in which infl ation and/or interest rates are factors which are part of the periodical rate and price review process. The remaining exposure is assessed periodically and, taking into consideration the projected interest rate fl uctuations and the main borrowing currencies, the desirable fi xed-rate protection levels and periods are determined. The established structure is achieved by means of new fi nancing arrangements at fi xed rates and/or the use of interest rate derivatives.

LIQUIDITY RISK Liquidity risk relates to the possibility that the adverse situations in the capital markets prevent the Agbar Group from fi nancing, at reasonable market prices, its obligations relating to both non-current fi nancial assets and working capital requirements, or that the Agbar Group may be unable to carry out its business plans using stable fi nancing sources. The Agbar Group takes various preventive measures to manage liquidity risk: _ The capital structure of each company is established taking into account the higher or lower degree of volatility of their cash generation. _ Debt repayment periods and schedules are established on the basis of the nature of the needs being fi nanced. _ The Group diversifi es its sources of fi nancing through continued access to fi nancing and capital markets. _ The Group secures credit facility commitments involving suffi cient amounts and fl exibility levels.

FINANCIAL COUNTERPARTY RISK The credit risk arising from potential breach of a fi nancial counterparty’s obligations is managed by means of the following measures: _ Establish maximum credit risk exposure limits for each counterparty fi nancial institution with which the Group operates. _ Require the counterparty to maintain a suffi cient credit rating.

_ 6 Segment reporting

BUSINESS SEGMENTS For management reasons, the Group is currently structured into the following four business segments: _Water and Water treatment (including the holding company and the corporations) _ Healthcare _ Inspection and certiﬁ cation _ Other In 2005 the Agbar Group also comprised another segment, “Construction and Facilities”, which was disposed of in 2006. Pursuant to IFRS 5 on discontinued operations, the Group presented this segment’s contribution to the consolidated income statements for 2006 and 2005 and to the 2005 consolidated balance sheet as discontinued operations (see Note 7). The main activities in which the Group is engaged are detailed in Note 1 to the ﬁ - nancial statements. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

At 31 December 2006 and 2005, proﬁ t/loss by segment was as follows, in thousands of euros:

Water and Wa- Healthcare Inspection and Other Total ter treatment Certiﬁ cation 2006 Revenue 1,375,052 1,070,667 534,555 63,714 3,043,988

Operating income 1,427,147 1,088,028 542,845 63,796 3,121,816

Operating expenses (1,016,993) (980,917) (470,612) (73,378) (2,541,900) Depreciation and amortisation charge (160,116) (16,243) (29,784) (1,684) (207,827)

Proﬁ t from operations 250,038 90,868 42,449 (11,266) 372,089

Impairment losses (6,359) 171 _ Financial loss (74,090) Result of investments accounted for using the equity method 18,439 Proceeds on sale of non-current assets 90,187 Other results 17,064

Proﬁ t from continuing operations before tax 417,330

Income tax (114,986)

Net proﬁ t from continuing operations 302,344

Proﬁ t from discontinued operations after tax 5,673

Net proﬁ t 308,017

Net proﬁ t attributable to minority interests (140,764)

Net proﬁ t attributable to the Parent 167,253

Water and Wa- Healthcare Inspection and Other Total ter treatment Certiﬁ cation 2005 Revenue 1,175,399 971,167 406,748 129,154 2,682,468

Operating income 1,217,611 987,378 414,432 129,404 2,748,825

Operating expenses (897,130) (893,416) (355,240) (122,483) (2,268,269) Depreciation and amortisation charge (136,757) (14,325) (22,834) (3,593) (177,509)

Proﬁ t from operations 183,724 79,637 36,358 3,328 303,047

Impairment losses (4,346) Financial loss (59,471) Result of investments accounted for using the equity method 14,250 Proceeds on sale of non-current assets 147,679 Other (8,595)

Proﬁ t from continuing operations before tax 392,564

Income tax (65,722)

Net proﬁ t from continuing operations 326,842

Proﬁ t from discontinued operations after tax 11,228

Net proﬁ t 338,070

Net proﬁ t attributable to minority interests (85,957)

Net proﬁ t attributable to the Parent 252,113

Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

The detail, by segment, of the main consolidated balance sheet items at 31 Decem- ber 2006 and 2005 is as follows, in thousands of euros:

Water and Wa- Healthcare Inspection and Other Total ter treatment Certiﬁ cation 2006 Non-current assets excluding goodwill (*) 3,268,328 245,650 200,791 8,614 3,723,383 Goodwill 434,921 59,439 478,015 - 972,375 Other net total assets (323,710) (212,328) 67,664 20,348 (448,026)

Net total assets 3.379.539 92,761 746,470 28,962 4,247,732

Equity of the Parent 1,679,629 Equity of minority interests 968,503 Bank borrowings and other ﬁ nancial liabilities, net (**) 1,599,600 Total equity and bank borrowings and other ﬁ nancial liabilities, net 4,247,732

Water and Wa- Healthcare Inspection and Other Total ter treatment Certiﬁ cation 2005 Non-current assets excluding goodwill (*) 2,895,163 211,516 217,401 11,881 3,335,961 Goodwill 241,076 51,948 238,960 112 532,096 Other net total assets (299,982) (187,882) 46,545 37,335 (403,984) Net assets of discontinued operations - - - 99,205 99,205

Net total assets 2,836,257 75,582 502,906 148,533 3,563,278

Equity of the Parent 1,549,354 Equity of minority interests 1,019,777 Bank borrowings and other ﬁ nancial liabilities, net (**) 994,147

Total equity and bank borrowings and other ﬁ nancial liabilities, net 3,563,278

Thousands of Euros (*) “Non-Current Assets Excluding Goodwill” includes non-current assets less goodwill and long-term derivatives. (*) Net fi nancial debt comprises fi nancial liabilities (current and non-current) and the Argentina provisions, reduced by current fi nancial assets, cash and cash equivalents and long-term derivatives.

The aggregate headcount in the various segments at 2006 and 2005 year-ends is as follows:

2006 2005

Water and Water treatment 14,099 18,455 Healthcare 3,622 3,477 Inspection and Certiﬁ cation 8,371 6,292 Other 906 4,502 TOTAL 26,998 32,726

Employees

The decrease under “Water and Water treatment” is mainly due to the termination of the concession contract of Aguas Argentinas, S.A. (see Note 32).

GEOGRAPHICAL SEGMENTS The Group’s operations are mainly located in Spain, Chile and the United Kingdom. For reporting purposes, Agbar has identiﬁ ed the following geographical segments: Spain, Other EU countries, Other OECD countries and Rest of the world. The detail of consolidated revenue in these segments is as follows, in thousands of euros: WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

2006 2005

Spain 2,395,318 2,262,621 Other EU countries 199,831 69,509 Other OECD countries 64,193 44,238 Rest of the world 384,646 306,100 TOTAL 3,043,988 2,682,468

Thousands of euros

The detail by geographical segment of the Group’s assets and expenditure on 17 3 _ property, plant and equipment and intangible assets is as follows, in thousands of euros: 2006 2005

ASSETS INVESTMENTS ASSETS IINVESTMENTS IN PROPERTY, IN PROPERTY, PLANT AND PLANT AND EQUIPMENT EQUIPMENT AND INTANGIBLE AND INTANGIBLE ASSETS ASSETS Spain 3,416,039 209,612 2,874,515 180,744 Other EU countries 1,147,770 38,356 758,274 4,396 Other OECD countries 106,738 1,226 118,151 5,082 Rest of the world 1,632,141 59,155 1,853,009 39,572 Miles de euros TOTAL 6,302,688 308,349 5,603,949 229,794 _ 7 Discontinued operations

In 2005 the groups Emte (50% owned) and Acsa (40% owned) made up the “Cons- truction and Facilities” business segment. This segment ceased to exist as a result of the sale of these investments in 2006 and, pursuant to IFRS 5 on discontinued operations, the Group presented this segment’s contribution to the consolidated income statement and consolidated balance sheet as discontinued operations, both in 2005 and 2006. The proﬁ t after tax contributed by this business segment in 2006 (up to the date of disposal) and 2005 is as follows:

2006 2005

Operating income 238,260 374,583 Operating expenses (229,552) (352,955) Depreciation and amortisation charge (1,983) (3,225)

Proﬁ t from operations 6,725 18,403

Impairment losses - (229) Financial loss (1,945) (952) Result of companies accounted for using the equity method 86 (674) Proceeds on sale of non-current assets 172 (22) Other proﬁ t 2,100 19

Proﬁ t before minority interests and tax 7,138 16,545

Income tax (1,465) (5,317)

Proﬁ t from discontinued operations 5,673 11,228 after tax Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

The net cash ﬂ ows contributed by this business segment in 2006 (up to the date of disposal) and 2005 were as follows:

2006 2005

Net cash fl ows from (26,361) 13,890 operating activities Net cash fl ows from (23,236) (30,386) investing activities Net cash fl ows from 51,326 15,457 fi nancing activities TOTAL NET CASH FLOWS 1,729 (1,039)

Thousands of euros

The detail of the net assets and liabilities of the business segment discontinued in 2005 is as follows:

CONSTRUCTION AND FACILITIES

Non-current assets excluding goodwill 10,638 Goodwill 48,834 Other non-current assets 10,949 Other current assets 148,002 TOTAL ASSETS OF DISCONTINUED OPERATIONS 218,423

Non-current liabilities 10,072 Current liabilities 109,146 TOTAL CURRENT AND NON-CURRENT LIABILITIES 119,218 OF DISCONTINUED OPERATIONS

Thousands of euros

The gain obtained on the disposal of this business segment in 2006 was as follows:

CONSTRUCTION AND FACILITIES

Total assets 265,749 Total liabilities 166,367 Total equity (excluding net proﬁ t 93,709 for the period) Net proﬁ t for the period 5,673 Carrying amount 99,233 Disposal price including discount to net present value 131,910 Dividends, adjustments and provisions for disposal (4,454) GAIN ON THE DISPOSAL BEFORE TAX 28,223 EFFECT

Thousands of euros

The post-tax gain on the disposal of this business segment amounted to EUR 23,707 thousand and the related tax charge amounted to EUR 4,516 thousand. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

_ 8 Intangible assets

CHANGES IN 2006 The changes in 2006 in intangible assets and in the related accumulated amortisation were as follows, in thousands of euros:

Balance at Changes Invest- Transfers Disposals Transla- Balance 1 January in Scope ments tion at 31 2006 or Method or Provi- Differen- December of sions ces 2006 Consoli- dation Cost: 17 5 _ Administrative concessions 605,426 35,487 82,268 (76,259) (22,608) (13,228) 611,086 Computer software 129,246 22,063 10,007 953 (3,510) (2,132) 156,627 Goodwill acquired 13,009 86 2,129 - (106) - 15,118 Other 173,013 1,690 4,420 60,202 (13,324) (10,501) 215,500

Total cost 920,694 59,326 98,824 (15,104) (39,548) (25,861) 998,331

Accumulated amortisation (306,019) (13,041) (56,110) 3,570 18,197 4,291 (349,112)

Intangible assets, net 614,675 46,285 42,714 (11,534) (21,351) (21,570) 649,219

Thousands of euros

Other” includes principally water rights and rights of use on assets assigned by third parties. The main changes in the scope of consolidation in 2006 relate to the assets contributed by the Aigües de Cabrera Group, with a net effect of EUR 33.2 million, by the Bristol Water Group, with a net effect of EUR 7 million, and by the RTD Group, with a net effect of EUR 1.6 million. Period investments, amounting to EUR 98,824 thousand, were focused on the Water and Water treatment segment and mainly included new administrative concessions. The disposals under administrative concessions basically relate to the change of consolidation method for Aguas de Albacete, S.A., from full consolidation to the equity method (see Note 11). The decrease in translation differences is basically due to the effect of the depreciation of the Chilean peso (13.5% with respect to 2005 year-end) on the intangible assets of the Group’s Chilean subsidiaries. At 31 December 2006, fully amortised intangible assets totalled EUR 168,354 thousand.

CHANGES IN 2005

Balance Changes Invest- Transfers Disposals Transla- Balance at 1 in Scope ments or tion at 31 January or Method Provisions Differen- December 2005 of ces 2005 Consoli- dation Cost: Administrative concessions 566,948 (24,037) 13,990 33,043 (318) 15,800 605,426 Computer software 116,096 2,860 7,847 3,726 (3,398) 2,115 129,246 Goodwill acquired 4,990 7,900 8,125 (8,007) - 1 13,009 Other 128,154 40,663 6,081 2,519 (19,703) 15,299 173,013

Total cost 816,188 27,386 36,043 31,281 (23,419) 33,215 920,694

Accumulated amortisation (254,705) (1,597) (49,458) (4,582) 9,451 (5,128) (306,019)

Intangible assets, net 561,483 25,789 (13,415) 26,699 (13,968) 28,087 614,675

Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

The changes in scope or method of consolidation for 2005 basically include the effect of the change of consolidation method for the Inversiones Aguas Metropolitanas Group, from proportionate consolidation to full consolidation (see Note 3-c), of the absorption of Applus Danmark, A/S and of the sale of Sociedad Aguas Guariroba, S.A. At 31 December 2005, fully amortised intangible assets totalled EUR 127,460 thousand.

ADMINISTRATIVE CONCESSIONS The item “Administrative Concessions” recognises the amounts paid to various public bodies in connection with the rights to operate the various services provided by the Agbar Group, which basically include management of potable water, hospital management and technical vehicle inspection. These concessions are amortised on a straight-line basis over the term of the related management contracts. The additions to the heading “Administrative Concessions” mainly include amounts paid for the award or renewal of concessions. The number of administrative concessions managed by the Agbar Group for services relating to management of the full water cycle totalled approximately 840 at 31 December 2006 (31 December 2005: 770). Of these contracts, only 9 in 2006 (13 in 2005) were for administrative concessions outside Spain, spread among the various geographical areas where the Agbar Group is established. The administrative concessions expire on different dates, ranging from 2007 to 2074. Approximately 240 contracts will expire over the next ﬁ ve years. In line with the historical trend, it is expected that a high proportion of these contracts will be renewed. The average period for the whole concession portfolio was 18 years at both 31 December 2006 and 2005. The detail of the costs of administrative concessions, by company or subgroup, is as follows:

2006 2005

Water and water treatment: Sorea Group 415,921 331,790 Aquagest Levante Group 64,928 95,912 Aquagest Región de Murcia Group 50,648 - Agbar 7,254 7,254 Agbar Chile – Agbar Latin America Goups 160 98,293 Agbar Global Market, S.A. 51 51 Other segments: Adeslas Group 38,519 38,519 Applus Servicios Tecnológicos Group 33,601 33,600 Other 4 7

Total cost 611,086 605,426

Accumulated amortisation (167,259) (150,268)

Administrative concessions, net 443,827 455,158 Thousands of euros

_ 9 Property, plant and equipment

CHANGES IN 2006 The changes in 2006 in the property, plant and equipment accounts and in the related accumulated depreciation and provisions were as follows, in thousands of euros: WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

Balance at Changes Invest- Transfers Disposals Transla- Balance 1 January in Scope ments or tion at 31 2006 or Method Provisions Differen- December of ces 2006 Consoli- dation

Cost: Land and structures 706,078 172,530 9,605 4,091 (10,251) (41,606) 840,447 Plant and machinery 582,857 238,525 31,237 12,812 (9,297) (43,150) 812,984 Pipelines 2,011,153 225,965 30,770 23,969 (35,088) (170,825) 2,085,944 Other items 656,751 37,712 34,860 11,663 (13,342) (53,160) 674,484 Advances and property, plant and equipment in the course of construction 126,822 11,294 103,054 (65,017) (791) (10,065) 165,297 Grants (28,663) (905) (16,083) (239) 13,074 - (32,816) 177 _ Total costs 4,054,998 685,121 193,443 (12,721) (55,695) (318,806) 4,546,340

Accumulated depreciation (1,886,411) (219,687) (152,189) 1,584 26,581 141,769 (2,088,353)

Property, plant and equipment, net 2,168,587 465,434 41,254 (11,137) (29,114) 177,037) Thousands 2,457,987 of euros

The main changes in the scope of consolidation in 2006 relate to the assets contributed by the Bristol Water Group, for a net amount of EUR 382.1 million, by the “UMR Canarias” subgroup, for a net amount of EUR 29.0 million, and to the inclusion of the RTD Group, involving a net amount of EUR 15.7 million. Period investments, which totalled EUR 209,526 thousand disregarding the grants received during the year, were focused on the Water and Water treatment segment. As indicated in relation to the changes in intangible assets in 2006, the decrease in translation differences is basically due to the effect that the depreciation of the Chilean peso (13.5% with respect to 2005 year-end) also had on property, plant and equipment. At 31 December 2006, fully depreciated property, plant and equipment totalled EUR 825,141 thousand. At 31 December 2006, the carrying amount of property, plant and equipment held outside Spain totalled EUR 1,582,275 thousand, of which EUR 1,122,632 thousand related to Chile and 405,387 thousand related to the UK. At 31 December 2006, the Group companies had commitments to invest in items of property, plant and equipment, basically associated with the water and water treatment service concessions, totalling EUR 551 million.

CHANGES IN 2005 The changes in 2005 in the property, plant and equipment accounts and in the related accumulated depreciation and provisions were as follows, in thousands of euros:

Balance at Changes Invest- Transfers Disposals Transla- Balance 1 January in Scope ments or tion Diffe- at 31 2005 or Method Provisions rences December of Conso- 2005 lidationn

Cost: Land and structures 538.574 87.714 35.019 22.091 (25.703) 48.383 706.078 Plant and machinery 450.095 62.711 20.738 15.064 (12.595) 46.844 582.857 Pipelines 1.542.585 236.599 23.718 7.115 (3.985) 205.121 2.011.153 Other items of property, plant and equipment 471.542 104.002 29.484 2.635 (14.085) 63.173 656.751 Advances and property, plant and equipment in the course of construction 90.930 13.208 84.793 (68.595) (1.703) 8.189 126.822 Grants (25.465) 259 (7.747) (1.307) 5.597 - (28.663)

Total cost 3.068.261 504.493 186.005 (22.997) (52.474) 371.710 4.054.998

Accumulated depreciation (1.391.934) (237.775) (128.427) (2.502) 25.568 (151.341) (1.886.411)

Property, plant and equipment, net 1.676.327 266.718 57.578 (25.499) (26.906) 220.369 2.168.587 Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

The changes in scope or method of consolidation in 2005 mainly include the effect of the change of consolidation method for the Inversiones Aguas Metropolitanas Group, from proportionate consolidation to full consolidation (see Note 3-c), of the absorption of Applus Danmark, A/S and of the exclusion of AGM Contacta, S.L. and Aguas Guariroba, S.A. Period investments, which totalled EUR 193,752 thousand disregarding the grants received during the year, were focused on the Water and Water treatment segment. The disposals in 2005 include the sale by the Parent, to the Catalonia Autono- mous Community Government, of the buildings housing the former head ofﬁ ce in Paseo de San Juan, the gross value of which amounted to EUR 45.1 million (net: EUR 17.6 million). The increase in translation differences is basically due to the effect of the 25% appreciation of the Chilean peso in 2005 with respect to 2004 year-end. At 31 December 2005, fully depreciated property, plant and equipment totalled EUR 540,525 thousand. At 31 December 2005, the carrying amount of property, plant and equipment held outside Spain totalled EUR 1,367,307 thousand, of which EUR 1,300,235 thousand related to Chile.

REVALUATION OF ASSETS Pursuant to Royal Decree-Law 7/1996, of 7 June, several Agbar Group companies revalued their property, plant and equipment in 1996. The revaluation surplus, net of the single 3% tax, was recognised under equity (see Note 16-d). The accounts affected by this revaluation and its effect at 31 December 2006 and 2005 are as follows, in thousands of euros:

2006 2005 Increase in Accumula- Net Effect Increase in Accumula- Net Effect Cost ted Depre- Cost ted Depre- ciation ciation

Land and structures 12,976 (4,580) 8,396 13,091 (4,239) 8,852 Plant and machinery 7,822 (7,757) 65 8,104 (7,149) 955 Water pipelines 104,726 (72,901) 31,825 105,430 (69,305) 36,125 Other items of property, plant and equipment 1,692 (1,635) 57 1,904 (1,841) 63 Total 127,216 (86,873) 40,343 128,529 (82,534) 45,995

Thousands of euros

The foregoing increase in cost is depreciated over the remaining useful life of the revalued assets. The increase in depreciation which arose in this connection amounted to EUR 5,364 thousand in 2006 (2005: EUR 5,882 thousand). This increase is expected to amount to EUR 3,493 thousand in 2007. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

REVERSIBLE ASSETS A portion of the property, plant and equipment and non-current ﬁ nancial assets of certain Agbar Group companies is subject to reversion to the public authorities at the end of the concession periods. The revalued cost of the items of property, plant and equipment affected by this reversion at 31 December 2006 and 2005 is as follows, in thousands of euros:

2006 2005 Gross Accumula- Net Coste Amortiza- Coste Cost ted Depre- effect bruto ción neto ciation acumulada 17 9 _ Sorea, Soc. Regional Abast. Aguas, S.A. 70,741 (37,635) 33,106 63,685 (34,117) 29,568 Applus Iteuve Tecnology, S.L. 23,960 (12,096) 11,864 23,772 (11,060) 12,712 Applus ECA-ITV, S.A. 19,577 (7,034) 12,543 19,525 (6,343) 13,182 Compañía de Seguros Adeslas, S.A. 13,007 (1,864) 11,143 9,641 (783) 8,858 Aquagest Levante, S.A. 7,964 (3,264) 4,700 8,419 (1,429) 6,990 Aquagest Región de Murcia, S.A. 7,361 (1,390) 5,971 - - - Idiada Automotive Techonlogy, S.A. 7,255 (1,529) 5,726 6,681 (2,249) 4,432 Canaragua, S.A. 5,518 (4,000) 1,518 5,228 (3,453) 1,775 Applus Iteuve Euskadi, S.A. 3,918 (1,373) 2,545 3,864 (1,250) 2,614 Iteuve Alicante, S.A. 3,906 (1,422) 2,484 - - - Sociedad Española de Aguas Filtradas, S.A 2,919 (1,136) 1,783 2,592 (543) 2,049 Applus Iteuve Andalucia, S.A. 2,820 (1,649) 1,171 2,822 (1,567) 1,255 Aquagest Sur, S.A. 2,466 (352) 2,114 3,278 (1,233) 2,045 Aigües de Sant Pere de Ribes, S.A. 1,331 (717) 614 1,303 (658) 645 Companyia d Aigües de l Alt Penedès i l Anoia, S.A. 85 (24) 61 85 (21) 64 Applus Technologies, Inc - - - 2,570 (2,260) 310

Total 172,828 (75,485) 97,343 153,465 (66,966) 86,499

Thousands of euros

ASSETS HELD UNDER FINANCE LEASES The assets held by the Agbar Group under ﬁ nance leases at 31 December 2006 have an original cost of EUR 54.6 million (31 December 2005: EUR 4.1 million). At 2006 year-end, payments outstanding under these ﬁ nance leases totalled EUR 33.4 million. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

_ 10 Non-current ﬁ nancial assets

Changes in the various accounts of “Non-Current Financial Assets” in 2006 and 2005 were as follows, in thousands of euros:

Balance at Changes Additions Transfers Disposals Transla- Balance 1 January in Scope or Provi- tion at 31 2006 or Method sions Differen- December of ces 2006 Consoli- dation

Assets held for trading: Long-term derivatives 35,253 - 31,437 4,781 (20,370) (35) 51,066

Loans and receivables: Loans to companies accounted for using the equity method 1,331 - 27,269 7,272 (607) - 35,265 Long-term loans 81,764 24 23,423 (6,672) (9,807) (1,279) 87,453 Trade receivables 1,687 - - (547) - - 1,140

Held-to-maturity investments: Deposits and guarantees 29,372 173 4,738 64 (1,606) (7) 32,734

Available-for-sale ﬁ nancial assets: Investments in other companies 70,166 638 30,875 (1,686) (256) 416 100,153 Fixed-income securities 2,913 354 - (2,734) (154) - 379

Other: Capital payments payable (114) - - - - - (114)

Total ﬁ nancial assets 222,372 1,189 117,742 478 (32,800) (905) 308,076

Balance at Changes Additions Transfers Disposals Transla- Balance 1 January in Scope or tion at 31 2005 or Method Provisions Differen- December of ces 2005 Consoli- dation

Assets held for trading: Long-term derivatives - 412 47,248 2 (12,409) - 35,253

Loans and receivables: Loans to companies accounted for using the equity method 5,669 (2,701) 704 (2,337) (4) - 1,331 Long-term loans 77,371 381 15,011 (4,957) (7,756) 1,714 81,764 Trade receivables 2,644 - - (957) - - 1,687

Held-to-maturity investments: Deposits and guarantees 25,489 632 3,203 660 (620) 8 29,372

Available-for-sale ﬁ nancial assets: Investments in other companies 26,112 1,036 31,583 18,432 (6,939) (58) 70,166 Fixed-income securities 1,425 (342) (369) 3,258 (1,059) - 2,913

Other: Capital payments payable (328) - (114) 328 - - (114)

Total ﬁ nancial assets 138,382 (582) 97,266 14,429 (28,787) 1,664 222,372

Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

The line “Investments in Other Companies” includes the shares of Suez, S.A. owned by the Agbar Group. Pursuant to IAS 39, this ownership interest is measured at market value, which amounts to EUR 93,464 thousand at 2006 year-end (2005: EUR 62,658 thousand). This measurement gave rise to a net unrealised gain of EUR 75,434 thousand in 2006 (2005: 44,628 thousand). The “Long-Term Loans” relate mainly to fi nancing granted to public entities, primarily city councils, for which the municipal water supply service is managed. The maturity dates of the long-term fi xed-income securities and other non-current fi nancial assets at 31 December 2006 and 2005 were as follows, in thousands of euros: 181_ 2006 2008 2009 2010 IN OR AFTER 2011 TOTAL

Loans to companies accounted for using the 4,261 18,180 3,188 97,089 122,718 equity method and other long-term loans Fixed-income securities 377 2 - - 379 Long-term derivatives 2,311 9,141 1,293 38,321 51,066 Deposits and guarantees 2,369 1,098 2 29,265 32,734 TOTAL 9,318 28,421 4,483 164,675 206,897

Thousands of euros

2005 2007 2008 2009 IN OR AFTER 2010 TOTAL

Loans to companies accounted for using the 6,171 23,352 3,873 49,699 83,095 equity method and other long-term loans Fixed-income securities 2,774 139 - - 2,913 Long-term derivatives - 276 965 34,012 35,253 Deposits and guarantees 1,527 788 60 26,997 29,372 TOTAL 10,472 24,555 4,898 110,708 150,633

Thousands of euros

_ 11 Investments accounted for using the equity method

The changes in 2006 and 2005 in investments in associates (see Appendix II) were as follows, in thousands of euros:

Balance at Changes Proﬁ t Dividend Transla- Other Balance at 1 January in Scope Distribu- tion 31 Dec- or Method tions Differen- ember of Conso- ces lidation 2006 132,074 13,951 18,439 (14,504) (2,192) (2,303) 145,465 2005 88,327 38,772 14,250 (11,809) 2,534 - 132,074 Thousands of euros In 2006 the main change in the scope or method of consolidation relates to the change of consolidation method for Aguas de Albacete, S.A., from full consolidation to the equity method. Also, Igualatorio Médico-Quirúrgico, S.A. (Iquimesa Group) was consolidated in 2005. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

The detail of this heading at 31 December 2006 and 2005 is as follows, in thousands of euros:

2006 2005

Water and water treatment Aguas Municipalizadas de Alicante, E.M. (Amaem) 9,142 8,890 Aguas de Saltillo, S.A. de C.V. 8,316 8,645 Empresa Municipal de Aguas y Saneamiento de Murcia, S.A. (Emuasa) 7,807 7,496 Aigües i Sanejament d’Elx, S.A. 6,538 6,432 Mina Pública d’Aigües de Terrassa, S.A. 6,360 6,062 Empresa Municipal de Abastecimiento y Saneamiento de Granada, S.A. (Emasagra) 6,060 6,672 Aguas de Cartagena, S.A. E.S.P. (Acuacar) 5,899 6,296 Empresa Municipal Mixta d’Aigües de Tarragona, S.A. (Ematsa) 5,638 6,227 Aguas de Albacete, S.A. 5,556 - Aguas del Arco Mediterráneo, S.A. 4,248 3,592 Aigües del Segarra Garrigues, S.A. 3,081 - Aguas de la Habana 2,856 3,156 Aguas del Telde, Gestión Integral del Servicio, S.A. 2,622 2,593 Clavegueram de Barcelona, S.A. (Clabsa) 2,533 2,551 Secomsa Aigües, S.L. 2,449 - Teidagua, S.A. 2,374 2,301 Aguas y Saneamiento de Torremolinos, S.A. (Astosam) 2,258 2,249 Aguas de Lorca, S.A. 1,654 1,717 Aguas Vega-Sierra Elvira, S.A. (Aguas Vira) 1,414 2,761 Companyia d’Aigües de Palamós, S.A. 1,370 1,341 Empresa Mixta de Aguas Residuales de Alicante, S.A. (Emarasa) 1,354 1,278 Aguas de Cieza, S.A. 1,253 1,274 Edar Cádiz – San Fernando, A.I.E. (Bahía Gaditana) 1,131 1,147 E.M. Aigües de l’Horta, S.A. 1,098 1,098 Girona, S.A. 1,082 1,001 Aigües Municipals de Paterna, S.A. 1,066 - Aigües de Cullera, S.A. 941 938 Empresa dÁigües i Serveis de Cervera i la Segarra, S.L. 886 894 Aguas de Arona, S.A. 679 690 Sermubeniel, S.A. 584 - Aguas de Montilla, S.A. 527 499 Empresa Mixta dÁigües de la Costa Brava, S.A. 465 - Aguas de Jumilla, S.A. 386 390 Grupo Sorea-Rubatec 339 310 Drenatges Urbans del Besòs, S.L. 213 177 Aigües dÓsona, S.A. 181 127 Other 135 136 Total 100,495 88,940

Healthcare Iquimesa Group 38,592 38,048 Sanatorio Médico-Quirúrgico Cristo Rey, S.A. 1,548 1,501 Salamanca Laboratorio Clínico, S.A. 336 318 Total 40,476 39,867

Inspection and certiﬁ cation segment Applus Argentina, S.A. 2,419 2,675 RTD Holding B.V. 1,525 - I.T.V. Inspección Técnica de Vehículos, S.A. 550 592 Total 4,494 3,267

Total companies accounted for using the equity method 145,465 132,074

Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

_ 12 Goodwill

The changes in 2006 and 2005 were as follows, in thousands of euros:

2006 2005

Beginning balance at 1 January 532,096 336,307 Additions 486,239 168,431 Disposals (10,850) (12,067) Write-downs (Note 23) (4,599) (3,488) 183_ Translation differences (30,511) 42,913 BALANCE AT 31 DECEMBER 972,375 532,096

Thousands of euros

CHANGES IN 2006 The main additions in 2006 relate to the goodwill arising on the acquisitions of the Bristol Water Group (EUR 234.6 million), of the RTD Group (152.0 million) and of K1 (EUR 39.9 million) (see Note 3). The disposals basically relate to the sale of 1.1% of Aguas Andinas, S.A. The translation differences include the exchange rate changes arising in goodwill held on investments in other countries. The decrease in translation differences arose basically as a result of the goodwill associated with the Agua Chile Group due to the 13.5% depreciation of the Chilean peso from December 2005.

CHANGES IN 2005 The most signiﬁ cant additions in 2005 relate to the acquisition of Acyma (EUR 77 million) and the purchase of Applus Danmark, A/S (EUR 21.3 million). Additions also include the increased goodwill, amounting to EUR 46.2 million, which arose from the change of consolidation method for the IAM Group with respect to that used in 2004. In 2005 the disposals primarily relate to the sale of Iteuve Portugal, Ltda. In 2005 translation differences include, basically, the effect on the goodwill associated with the Agua Chile Group caused by the 25% appreciation of the Chilean peso from December 2004. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

DETAIL OF GOODWILL The detail of net goodwill at the end of 2006 and 2005 is as follows, in thousands of euros:

2006 2005

Applus Group 478,015 238,960 Bristol Water Group 234,553 - Agbar Chile– Agbar Latin America 189,922 229,815 Groups Adeslas Group 59,439 51,948 Interagua Servicios Integrales del 6,213 6,633 Agua, S.A.U. Sorea Group 3,375 3,691 Aquagest Levante Group 858 937 Tribugest - 112 TOTAL GOODWILL ON 972,375 532,096 CONSOLIDATION

Thousands of euros

IMPAIRMENT TEST According to the impairment tests performed, which are based on the estimates and projections available to the Agbar Group, the projected proﬁ t attributable to the investments with associated goodwill, taken individually, exceed their consolidated carrying amounts in all cases, except, primarily, for the goodwill relating to Iteuve Andalucía, which was written down by EUR 3,719 thousand in 2006 (2005: EUR 1,026 thousand) (see Note 23). Additionally, as described in Note 3, in 2006 and 2005 partial sales were made of interests held by the Agbar Group in the Agbar Chile Group and in the Applus Group, which revealed that there are no recoverability problems in respect of the goodwill associated with these investments, which, on a combined basis, account for 69% of all the goodwill existing at 31 December 2006.

_ 13 Inventories

The detail of the Agbar Group’s inventories at 31 December 2006 and 2005 is as follows, in thousands of euros:

2006 2005

Merchandise inventories 19,636 19,529 Raw materials and other 8,830 6,096 supplies Work in progress 441 2,739 Finished goods 162 21 TOTAL INVENTORIES 29,069 28,385

Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

_ 14 Trade and other receivables

The detail of this heading under current assets in the consolidated balance sheet is as follows, in thousands of euros:

2006 2005

Trade receivables for sales and 732,396 667,726 services Current tax assets 28,741 33,118 Receivables from companies 185_ accounted for using the equity 28,446 28,780 method Other receivables 183,436 53,118 TOTAL RECEIVABLES 973,019 782,742 Thousands of euros

The balance of “Other Receivables” at 31 December 2006 includes the amount outstanding on the sale of the investment in Emte, S.A. (see Note 3-a).

_ 15 Current fi nancial assets At 31 December 2006, the balance of “Current Financial Assets”, totalling EUR 135,431 thousand (2005: EUR 221,974 thousand), basically includes current interest-earning fi nancial assets held by the various Group companies. At 2006 year-end, this balance is concentrated mainly in the Healthcare segment, with EUR 115,940 thousand (2005: EUR 69,188 thousand), and in the Inspection and Certifi cation segment, with EUR 7,537 thousand (2005: EUR 93,232 thousand).

WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

_ 16 Equity

The changes in 2006 and 2005 in “Equity” in the accompanying consolidated balance sheet were as follows, in thousands of euros:

Share Share Revaluation Legal Voluntary Capital Premium Reserves Reserve Reserves

Balance at 1/01/05 145,531 160,057 128,061 29,174 418,153

First-time application of IAS 32 and 39 - - - - 31,245 Distribution of 2004 profi t - - - 230 38,688 Final dividend for 2004 - - - - - Capital increase (Series A) 1,469 - - - - Share option plan (May plan) 597 7.333 - - - Profi t recognised in equity - - - - 43,747 2005 profi t ------Interim dividend for 2005 - - - - - Changes in the scope of consolidation and other - - - - (437)

Balance at 31/12/05 147,597 167,390 128,061 29,404 531,396

Distribution of 2005 profi t - - - 294 27,861 Final dividend for 2005 - - - - - Capital increase (Series A) 1,477 - - - - Share option plan (May plan) 568 6,991 - - - Profi t recognised in equity - - - - 25,457 2006 profi t - - - - - Interim dividend for 2006 - - - - - Changes in the scope of consolidation and other - - - - (225)

Balance at 31/12/06 149,642 174,381 128,061 29,698 584,489

SHARE CAPITAL AND TREASURY SHARES The share capital subscribed at 31 December 2006 amounted to EUR 149,965,688 and was represented by 149,965,688 fully subscribed and paid-up ordinary shares of EUR 1 par value each, of which 323,981 were held as treasury shares and are shown as a reduction of the capital amount in the consolidated balance sheet (see Note 27). All the shares are book-entry shares. The Parent’s Annual General Meeting held on 25 May 2001 approved a capital increase of EUR 2,260 thousand, through the issue of up to 2,260,000 class B redeemable shares of EUR 1 par value each with a EUR 12.30 issue premium per share. The purpose of issuing redeemable shares was to provide the Company with coverage for the May 2001 Option Plan (see Note 27). The capital increase was only partially subscribed by the fi nancial institution “la Caixa”, which subscribed for 1,800,375 shares, all of which were fully paid up. This fi nancial institution held these shares until the options had been exercised by the May 2001 Plan benefi ciaries or until expiry of the plan. As a result of the completion of the twelfth and fi nal period of the “May 2001 Option Plan”, the Parent exercised the purchase option on all of the 584,442 redeemable class B shares, which were converted into class A shares, thereby eliminating the distinction of classes of shares, since all the shares representing the share capital stemmed from the same class. 260,461 of the above-mentioned 584,442 shares relate to options exercised by the benefi ciaries of the above-mentioned Option Plan in the last notice period, and 323,981 shares were “surplus” shares; accordingly, they were held as treasury shares for the purpose of retiring them, upon reduction of the share capital by the appropriate nominal amount. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

Reserves at Difference due to Translation Net Proﬁ t Interim Final Equity Held Total Consolidated Adjustment of Differences Attributable to Dividend Dividend by Minority Companies Capital to Euros the Parent Interests

189,766 231 110 216,123 (23,053) - 341,984 1,606,137

------31,245 118,389 - - (216,123) 23,053 35,763 ------(35,763) - (35,763) ------1,469 187_ ------7,930 - - 10,469 - - - 53,632 107,848 - - - 252,113 - - 85,957 338,070 - - - - (25,572) - - (25,572) ------538,204 537,767

308,155 231 10,579 252,113 (25,572) - 1,019,777 2,569,131

160,161 - - (252,113) 25,572 38,225 ------(38,225) - (38,225) ------1,477 ------7,559 - - (7,092) - - - (89,250) (70,885) - - - 167,253 - - 140,764 308,017 - - - - (25,929) - - (25,929) ------(102,788) (103,013)

468,316 231 3,487 167,253 (25,929) - 968,503 2,648,132

Thousands of Euros

The Board of Directors of Agbar, at a meeting held on 29 September 2006, making use of the power granted by the Annual General Meeting held on 30 May 2003, resolved to increase the share capital by up to EUR 1,481,653, through the issue and allotment of 1,481,653 ordinary, book-entry shares of EUR 1 par value each. Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores (Iberclear) was the entity in charge of keeping these shares in the book- entry accounts. The pre-emptive subscription period was from 31 October to 14 November 2006. Upon expiry of the subscription period, 1,476,477 shares had been subscribed and paid up. The public deed for the capital increase was executed on 20 November 2006. The shares representing the Parent’s share capital have the status of securities and are governed by the provisions of the Securities Market Law. At 31 December 2006, the only shareholder of the Parent with a holding of 10% or more was Hisusa, Holding de Infraestructuras y Servicios Urbanos, S.A. (an investee of Suez-Environnement España, S.L. –Suez Group– and Caixa Holding, S.A.U. –the “la Caixa” Group–), with an ownership interest, discounting the treasury shares, of 47.97%. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

AUTHORISED CAPITAL The Parent’s Annual General Meeting held on 30 May 2003 resolved to authorise the Board of Directors to increase capital on one or several occasions within fi ve years through cash contributions and issues of class A ordinary shares for up to a total of EUR 72,214 thousand, with express authorisation to delegate such decision to the Executive Committee, thereby rendering invalid the previous authorisation granted by the General Meeting on 20 May 1998, to the extent not used and as appropriate. At 31 December 2006, capital increases authorised but not completed totalled EUR 66,376 thousand. The Board of Directors was empowered to exclude the pre-emptive subscription right on any share issued under the aforesaid authorisation, when required in the Parent’s interest. This power may also be delegated to the Executive Committee. The aforesaid Annual General Meeting of 30 May 2003 also authorised the Parent’s Board of Directors to issue, on one or several occasions, within a period of fi ve years, up to EUR 500 million in debentures and other fi xed-income, ordinary mortgage- backed securities convertible into, and/or exchangeable for, shares of the Parent, with the power to sub-delegate to the Executive Committee and/or the Chairman, thereby rendering invalid the authorisation granted by the General Meeting on 20 May 1998, to the extent not used. The Meeting decided to increase the share capital, from then onwards and at any time, up to the maximum amount of EUR 500 million, or, in any case, by the amount necessary for the purposes of conversion into shares of the fi xed-income securities convertible into shares that may be issued under this authorisation. Upon expiry of its period of validity, this authorisation will become null and void to the extent not used. At 31 December 2006, this power had not yet been used by the Board of Directors.

SHARE PREMIUM The Consolidated Spanish Companies Law expressly permits the use of the share premium account balance to increase capital and does not establish any speciﬁ c restrictions as to its use.

REVALUATION RESERVE The surplus, net of the single 3% tax, attributable to the Agbar Group, resulting from the revaluation of property, plant and equipment carried out in 1996 (see Note 9), totalled EUR 146,437 thousand. This amount, according to its origin, is recognised under “Revaluation Reserves” or “Reserves at Consolidated Companies”, amounting to date to EUR 128,061 thousand and EUR 18,376 thousand, respectively. Pursuant to Royal Decree-Law 7/1996, upon expiry of the three-year period for review by the tax authorities of the balance of this surplus, this balance can be used, free of tax, to increase capital and to offset accounting losses (both prior years’ accumulated losses and current year losses) or losses which might arise in the future. From 1 January 2007, the balance of this account can be taken to unrestricted reserves, provided that the monetary surplus has been realised. The surplus will be deemed to have been realised in respect of the portion on which depreciation has been taken for accounting purposes or when the revalued assets have been transferred or derecognised. Also, if assets held under ﬁ nance leases are revalued, the aforementioned use may not take place before the purchase option has been exercised. If the balance of this account were used in a manner other than that provided for in Royal Decree-Law 7/1996, it would be subject to tax.

OTHER RESERVES _ Legal reserve: Under the Consolidated Companies Law, 10% of net proﬁ t for each year must be transferred to the legal reserve until the balance of this reserve reaches at least 20% of the share capital. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

The legal reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount. Otherwise, until the legal reserve exceeds 20% of share capital, it can only be used to offset losses, provided that sufﬁ cient other reserves are not available for this purpose. _ Voluntary reserves: All of the Parent’s voluntary reserves at 31 December 2006 and 2005 are unrestricted, except for the amount associated with start-up costs, research and development expenditure and the Parent’s merger goodwill, where appropriate, as established in Article 194 of the Consolidated Companies Law. _ Reserves at fully or proportionately consolidated companies: The breakdown of the balance of this heading in the accompanying consolidated 189_ balance sheet at 31 December 2006 and 2005 is as follows:

2006 2005

Applus Servicios Tecnológicos Group 102,829 101,870 Agbarex, S.L.U 94,172 63,398 Adeslas Group 59,887 49,770 Sorea Group 56,087 29,211 Aquagest Levante Group 18,058 11,197 Agbar Servicios Compartidos Group 1,015 837 Agbar Mantenimiento, S.A 641 641 Tribugest Gestión de Tributos, S.A. 517 (214) EMTE Group - 15,546 Aguas de la Costa, S.A. - (4,482) Reneva, S.A. -(7) Agbar Capital, S.A. (1) - Agbar International, BV (4) (629) Aigües de Sant Pere de Ribes, S.A. (116) - INUSA Sociedad de Inmuebles, S.A. (212) (150) Sociedad Española de Aguas Filtradas, S.A. (307) (325) Interagbar de México Group (509) (1,071) Aguas de Levante, S.A. (ADL) (518) (555) Sociedad de Explotación de Aguas Residuales, (523) (493) S.A. (Searsa) Hidroser, Servicios Integrales del Agua, S.A. (1,378) (1,430) Agbar Chile – Agbar Latin America Groups (8,022) (11,861) Agbar Global Market, S.A. Sole-Shareholder (8,756) (9,469) Company Agencia Servicios Mensajería, S.A. (10,918) (11,062) Interagua Group (21,814) (21,908) Consolidation adjustments and eliminations not 185,347 89,822 attributable to the companies TOTAL 465,475 298,636 Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

The amounts included above in the line “Consolidation Adjustments and Eliminations not Attributable to the Companies” primarily relate to the ﬁ nal dividends distributed by the Agbar Group companies during the year and to the allowances recognised by the Parent for investments in Agbar Group companies. _ Reserves at companies accounted for using the equity method: The detail of “Reserves at Companies Accounted For Using the Equity Method” in the consolidated balance sheet at 31 December 2006 and 2005 is as follows, in thousands of euros:

2006 2005

Aguas Municipales de Alicante Empresa Mixta 5,307 4,894 (AMAEM) Mina Pública d´Aigües de Terrassa, S.A. 2,322 2,130 Resto Grupo Aguagest Levante 2,108 1,122 Empresa Municipal de Aguas y Saneamiento de 2,020 1,854 Murcia, S.A. (EMUASA) Aguas de Cartagena , S.A., E.S.P. (ACUACAR) 1,510 2,973 Instituto Médico Quirúrgico (IMQ) 525 - ITV Inspección Técnica de Vehículos 105 7 Grupo Acsa- Agbar Construcción - 10,367 Applus Argentina, S.A. (10,999) (12,036) Other (57) (1,792) TOTAL 2,841 9,519

Thousands of euros

TRANSLATION DIFFERENCES The breakdown of “Translation Differences” in the consolidated balance sheet at 31 December 2006 and 2005 is as follows, in thousands of euros:

2006 2005

Agbar Chile – Agbar Latin America Groups 2,097 6,933 Aguas de Cartagena, S.A. E.S.P. (Acuacar) 933 1,540 Applus Servicios Tecnológicos Group (Brazil) 383 (19) Applus Servicios Tecnológicos Group (USA) 235 451 Applus Servicios Tecnológicos Group (Chile) 85 119 Bristol Water Group (UK) 71 - Applus Servicios Tecnológicos Group (Mexico) 32 52 Applus Airon Tecnic, A/S (Czech Republic) 22 - Applus Servicios Tecnológicos Group 10 159 (Other - Latin America) Aguas de la Costa, S.A. (Uruguay) - 539 EMTE Group (Chile) -14 Acsa Agbar Construcción Group - (48) Applus Danmark, A/S (3) 26 Interagbar de México, S.A. de C.V. (49) 529 RTD Quality Services (67) - Aguas de la Habana (125) 216 Applus Servicios Tecnológicos Group (Argentina) (137) 68 TOTAL 3,487 10,579

Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

The Agbar Group took certain foreign currency hedges on financial investments in foreign companies to mitigate the effect of the volatility of exchange rates thereon (see Note 17-c). The economic effect arising from these foreign currency hedges is recognised as translation differences, as is the effect with opposite sign arising from the inclusion of these investments in the consolidated balance sheet.

NET PROFIT ATTRIBUTABLE TO THE PARENT The detail of the consolidated companies’ contributions to the consolidated net proﬁ t for 2006 and 2005 is as follows, in thousands of euros: 191_ 2006 2005

Agbar Chile – Agbar Latin America Groups 39,031 22,319 Adeslas Group 34,738 31,458 Sorea Group 33,856 51,763 Agbar 19,453 84,355 Aquagest Levante Group 16,317 17,593 Applus Servicios Tecnológicos Group 9,476 19,472 Bristol Water Group 7,018 - Emte Group (Note 7) 5,225 7,504 Agbar Mantenimiento, S.A. 2,833 2,431 Agbarex, 2,351 2,554 Aguas de Cartagena, S.A. E.S.P. (Acuacar) 1,330 978 Interagbar de México Group 1,031 171 Interagua Group 822 2,879 Mina Pública d’Aigües de Terrassa, S.A. 542 501 Clavegueram de Barcelona, S.A. (Clabsa) 528 376 Aquagest Región de Murcia, S.A. 508 - Agbar Servicios Compartidos Group 494 177 Acsa Agbar Construcción Group (Note 7) 434 3,652 Aguas de Levante, S.A. 347 112 Aguas de la Costa, S.A. 289 358 Agbar International B.V. 165 625 Girona, S.A. 138 134 Sociedad de Explotación de Aguas Residuales, 109 133 S.A. (Searsa) Sociedad Española de Aguas Filtradas, S.A. 102 183 Agbar Global Market, S.A. 87 714 Aigües de Segarra-Garrigues, S.A. 55 - Águas Guariroba, S.A. - 681 AGM Contacta Group - 137 Agbar Capital, S.A. (15) (1) Reciclaje de Neumáticos de Valencia, S.A. (25) (24) Inusa Sociedad de Inmuebles, S.A. (31) (63) Hidroser, Servicios Integrales del Agua, S.A. (42) 65 Agencia Servicios Mensajería Group (1,058) 145 Tribugest Gestión de Tributos, S.A. (8,855) 731 TOTAL 167,253 252,113

Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

EQUITY OF MINORITY INTERESTS This heading in the consolidated balance sheet shows the amount of the minority shareholders’ interests in fully consolidated companies. This amount includes the share of these minority shareholders in consolidated net proﬁ t for the year and is detailed in the heading “Net Proﬁ t Attributable to Minority Interests” in the consolidated income statement. The detail of the equity of minority shareholders is as follows, in thousands of euros:

2006 2005 Share Proﬁ t Total Share Proﬁ t Total Capital and Capital and Reserves Reserves Agbar Chile – Agbar Latin America Groups 470,399 94,501 564,900 604,667 41,289 645,956 Applus Servicios Tecnológicos Group 190,389 17,189 207,578 179,525 11,214 190,739 Adeslas Group 97,007 29,733 126,740 86,621 26,918 113,539 Sorea Group 54,538 3,856 58,394 50,818 3,700 54,518 Agbar Servicios Compartidos Group 2,777 1,259 4,036 2,774 961 3,735 Sociedad de Explotación de Aguas Residuales, S.A. (Searsa) 1,538 109 1,647 1,569 133 1,702 ASM Group 1,096 (193) 903 995 100 1,095 Sociedad Española de Aguas Filtradas, S.A. 787 102 889 769 183 952 Hidroser, Servicios Integrales del Agua, S.A. 876 (42) 834 825 65 890 Inusa Sociedad de Inmuebles, S.A. 655 (32) 623 718 (63) 655 Tribugest Gestión de Tributos, S.A. 6,268 (5,903) 365 781 487 1,268 Aguas de la Costa, S.A. - - - 1,243 239 1,482 Emte Group - - - 650 73 723 Reciclaje de Neumáticos de Valencia, S.A. - - - 1,456 (22) 1,434 Other companies 1,409 185 1,594 409 680 1,089

Total 827,739 140,764 968,503 933,820 85,957 1,019,777

Thousands of euros

DIVIDENDS AND DISTRIBUTION OF PROFIT On 20 December 2005, the Parent’s Board of Directors declared an interim dividend out of 2005 profi t of EUR 0.175 gross per share payable on both Class A shares (Code number ISIN ES0141330C19) and Class B shares (Code number ISIN ES0141330F16) from 11 January 2006. At the Annual General Meeting held on 19 May 2006, the Parent’s shareholders approved an interim dividend out of 2005 profi t of EUR 0.26 gross per share payable from 6 July 2006. On 12 December 2006, the Parent’s Board of Direc- tors declared an interim dividend out of 2006 profi t of EUR 0.175 gross per share (Code number ISIN ES0141330C19) payable on all outstanding shares bearing dividend rights. This dividend was paid from 11 January 2007. The interim dividend included in the changes of consolidated equity in 2006 is shown net of the effect of the treasury shares held by the Parent. The Parent’s provisional liquidity statements, prepared in accordance with the applicable legislation, evidencing the existence of suffi cient liquidity and earnings for the distribution of the interim dividends, are as follows, in thousands of euros:

2006 2005

Proﬁ t before tax for the period 1 January to 31 October 2006 and 2005 (*) 99,172 95,931 Estimated income tax 128 (1,533) Planned transfer to the legal reserve (295) (294)

Limit for the distribution of interim dividends 99,005 94,104

Cash balance available upon declaration of interim dividend (12/12/2006 and 20/12/2005) (**) 444,032 476,534 Increase in cash balances within one year 1,026,667 843,148 Decrease in cash balances within one year (1,247,994) (752,728)

Projected cash balance in December 2006 and 2005 222.705 566.954 Thousands of euros. (*) Latest accounting close available at 12/12/2006 and 20/12/2005. (**) Cash includes balances available on credit accounts. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

The proposed distribution of the Parent’s net proﬁ t for 2006 and 2005, obtained in accordance with Spanish GAAP, is as follows, in thousands of euros:

2006 2005

Interim dividend distributed 25,929 25,729 Final dividend 41,486 38,225 Voluntary reserves 75,084 49,311 Legal reserve 295 294

Net proﬁ t of the Parent for the year 142,794 113,559 193_

Thousands of euros

The dividends paid in 2006 on Class B shares, totalling EUR 156 thousand (2005: EUR 493 thousand), are not considered as such under IFRSs but recognised as current ﬁ nance costs.

_ 17 Financial liabilities

DEBT INSTRUMENTS AND OTHER HELD-FOR-TRADING LIABILITIES The breakdown at 31 December 2006 and 2005 is as follows, in thousands of euros:

2006 LONG TERM SHORT TERM TOTAL

Euro note issues (EMTN) 513,016 - 513,016 Bonds 260,024 19,228 279,252 Reimbursable Financial 45,475 587 46,062 Contributions (AFR) TOTAL 818,515 19,815 838,330

2005 LONG TERM SHORT TERM TOTAL

Euro note issues (EMTN) 553,068 28,458 581,526 Bonds 171,050 171,309 342,359 Reimbursable Financial 42,544 2,031 44,575 Contributions TOTAL 766,662 201,798 968,460

Thousands of euros

_ Euro note issues At 31 December 2006, the balance of “Euro Note Issues” (EMTN) relates to the debenture issue by Agbar International B.V. amounting to EUR 500 million, with a fi xed 6% coupon, maturing in November 2009. This subsidiary entered into swaps with various fi nancial institutions for a total of EUR 371 million with the same maturities and payment dates as those of the securities issued. As a result of these hedges, Agbar International B.V. is entitled to receive a fi xed rate equal to the issue rate in exchange for payment of a variable rate linked to the six-month Euribor, thereby fully covering the spread between the interest on the issue and the returns on loans to Agbar Group companies (see Note 17-c). WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

Agbar International B.V. is a wholly-owned subsidiary of Agbar and the above issue and associated fi nancial products are jointly and irrevocably guaranteed by Agbar, as indicated in the prospectuses for the above issues. At 31 December 2005, the balance of this heading also included the following debenture issues: _ A USD 25 million bond issue, with a coupon linked to three-month Libor plus a spread, which matured in August 2006. Agbar International B.V. entered into a swap linked to this transaction, through which the dollar debt was converted into euro debt, with an equivalent value fi xed at EUR 28,458 thousand from the date of arrangement to maturity. _ A JPY 3,000 million debenture issue, with a fi xed coupon of 0.5675%, maturing in 2007, which was redeemed early in July 2006. Agbar International B.V. entered into a swap linked to this transaction, which was also redeemed early at the same date, through which the yen debt was converted into euro debt, with an equivalent value fi xed at EUR 23,943 thousand from the date of arrangement to maturity. On 20 July 2006, Agbar Capital, S.A., a subsidiary of the Parent, executed a Euro Medium Term Note (EMTN) Programme for a maximum of EUR 2,000 million from which no drawdowns had been made at 31 December 2006. Any future euro note issue by this company will be jointly and irrevocably guaranteed by Agbar, as indicated in the programme prospectus.

_ Bonds The balance of “Bonds” at 2006 year-end relates to issues of bearer bonds, not convertible into shares, launched in Chilean Unidades de Fomento (CLF, Chilean index-linked Pesos) by Aguas Andinas, S.A., broken down as follows: A Issue of CLF 2,666 thousand maturing in December 2010. B Issue of CLF 1,650 thousand maturing in June 2012. C Issue of CLF 1,800 thousand maturing in September 2022. D Issue of CLF 5,000 thousand maturing in December 2026. The above issues total a sum equal to EUR 279,252 thousand. In January 2006 three issues by Aguas Cordillera, S.A. for a total of CLF 302 thousand matured. In addition, in 2006 a CLF 4,800 thousand issue by Aguas Andinas, S.A. maturing in June 2009 was redeemed early and CLF 634 thousand of the issue described in A) above were redeemed in part.

_ Reimbursable Financial Contributions (AFR) The Reimbursable Financial Contributions relate to long-term promissory notes issued by Aguas Andinas Group companies.

BANK BORROWINGS AND OTHER FINANCIAL LIABILITIES The breakdown of bank borrowings and other financial liabilities at 31 December 2006 and 2005 in the accompanying consolidated balance sheet is as follows, in thousands of euros:

2006 LIMIT SHORT TERM LONG TERM TOTAL

Loans - 133,111 604,882 737,993 Credit facilities 1,230,628 383,126 66,007 449,133 Discounted bills 6,204 727 2,180 2,907 Finance leases - 4,436 29,053 33,489 Derivatives - 332 - 332 Interest - 15,241 291 15,532 TOTAL 536,973 702,413 1,239,386

Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

2005 LIMIT SHORT TERM LONG TERM TOTAL

Loans - 64,754 362,822 427,576 Credit facilities 886,701 36,789 42,284 79,073 Discounted bills 6,678 - - - Finance leases - 790 1,728 2,518 Derivatives - 44,396 2,515 46,911 Interest - 8,803 - 8,803 TOTAL 155,532 409,349 564,881

Thousands of euros 195_

The interest rates on the credit facilities and the loans are linked to Euribor and Libor. The breakdown by maturity of the Group’s long-term bank borrowings and other ﬁ nancial liabilities at 31 December 2006 and 2005 is as follows:

SUBSE- 2007 2008 2009 2010 QUENT TOTAL YEARS

2006 - 196,141 43,811 42,819 419,642 702,413 2005 171,102 98,685 38,048 6,478 95,036 409,349

Thousands of euros

At 31 December 2006, the undrawn balance on the credit facilities totalled EUR 781,495 thousand, of which approximately 86% mature in 2007, and the rest in 2008-2010. At 31 December 2005, the undrawn balance on the credit facilities totalled EUR 807,628 thousand, of which approximately 69% mature in 2006, and the rest in 2007-2009. The breakdown by currency of bank borrowings and other ﬁ nancial liabilities is as follows, in thousands of euros:

2006 EURO POUND CHILEAN US OTHER TOTAL STERLING PESO DOLLAR

Loans 217,701 302,720 108,184 35,308 74,080 737,993 Credit facilities 243,679 153,002 34,160 17,765 527 449,133 Discounted 2,907----2,907 bills Finance 3,310 29,876 27 94 182 33,489 leases Derivatives --332--332 Interest 10,974 3,475 292 791 - 15,532 TOTAL 478,571 489,073 142,995 53,958 74,789 1,239,386

Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

2005 EURO CHILEAN US OTHER TOTAL PESO DOLLAR

Loans 159,391 157,314 72,491 38,380 427,576 Credit facilities 79,073 ---79,073 Discounted ----- bills Finance 1,885 495 30 108 2,518 leases Derivatives - 44,396 - 2,515 46,911 Interest 7,565 1,072 166 - 8,803 TOTAL 247,914 203,277 72,687 41,003 564,881

Thousands of euros

FINANCIAL DERIVATIVES All of the derivative instruments held by the Agbar Group were taken out for hedging purposes in line with the Group’s ﬁ nancial risk management policy (see Note 5). A summary of the hedges entered into by the Group using swaps and the purchases and sales of forwards is as follows:

_ Currency hedges:

2006 ORIGINAL NOTIONAL AMOUNT MATURITY CURRENCY (THOUSANDS) Original Euro 2007 2008 2009 Subse- Currency Equivalent quent Value at Years Year-End Exchange Rate Hedge of Chilean CLP 274,826,600 391,807 115,133 75,227 99,942 101,505 Peso assets Hedge of Pound GBP 65,000 96,700 96,700 --- Sterling assets Hedge of US Dollar USD 50,700 38,497 18,223 - 5,087 15,187 assets Total currency 527,004230,056 75,227 105,029 116,692 sale Hedge of US Dollar USD 3,600 2,733 2,733 --- liabilities Total currency 2,733 2,733 - - - purchase

Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

2005 ORIGINAL NOTIONAL AMOUNTS MATURITY CURRENCY (THOUSANDS) Original Euro 2006 2007 2008 Subse- Currency Equivalent quent Value at Years Year-End Exchange Rate Hedge of Chilean CLP 308,371,641 508,014 199,259 94,245 72,725 141,785 Peso assets Hedge of US Dollar USD 50,648 42,933 5,635 20,344 - 16,954 assets 197_ Total currency 550,947204,894 114,589 72,725 158,739 sale Hedge of US Dollar USD 129,400 109,689 109,689 - - - liabilities Hedge of Japane- JPY 3,000,000 21,551 - 21,551 - - se Yen liabilities Total currency 131,240109,689 21,551 - - purchase

Currency hedges aim to protect the value of international investments from translation differences by creating ﬁ nancing synthetically in the same currency as that of the foreign investment.

_ Interest rate hedges:

2006 NOTIONAL AMOUNTS MATURITY (THOUSANDS) Original Euro 2007 2008 2009 2010 Subse- Currency Equivalent quent Value at Years Year-End Exchange Rate

Chilean Peso 65,000,000 92,667 51,323 41,344 - - -

US Dollar 48,000 36,447 - 14,427 - - 22,020

Unidades 1,300 33,984 - - - - 33,984 de Fomento *

Danish Krone 251,000 33,722 - - - 33,722 -

Euro* 20,000 20,000 - - - - 20,000

Total ﬁ xed rate 216,820 51,323 55,771 - 33,722 76,004 hedge

Euro 371,000 371,000 - - 371,000 - -

Total ﬂ oating rate 371,000 - - 371,000 - - hedge

* These hedges start in 2007. Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

2005 NOTIONAL AMOUNTS MATURITY (THOUSANDS) Original Euro 2006 2007 2008 2009 2010 Subse- Currency Equivalent quent Value at Years Year-End Exchange Rate

Chilean Peso 83,510,250 137,575 89,801 47,774 - - -

US Dollar 48,000 40,688 - 16,106 - -24,582

Danish Krone 251,000 33,754 ----33,754 -

Total ﬁ xed rate 212,017 89,801 63,880 - 33,75424,582 hedge

Euro 371,000 371,000 ---371,000 --

Total ﬂ oating rate 371,000 - - - 371,000 - - hedge

In addition to the derivatives shown in the above tables, at 2006 and 2005 year- ends, Agbar had also entered into two interest-rate swaps linked to two long-term loans amounting to EUR 25,243 thousand and EUR 12,000 thousands, both maturing in 2007. The swap on the fi rst loan may earn a fl oating interest rate linked to the Euribor less a spread of 0.10%. The interest rate swap on the second loan may earn an interest rate linked to the Euribor plus a spread of 0.10%. The average fi nancing cost at year-end for the main currencies, taking into account the effect of the derivatives, is as follows:

EURO CHILEAN POUND US PESO STERLING DOLLAR

2006 5.1% 6.3% 5.9% 5.5% 2005 4.1% 6.6% - 4.8%

The average ﬁ nancing cost at year-end for all currencies, taking into account the effect of the derivatives, was 5.9% for 2006 (2005: 5.8%). WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

_ 18 Provisions

The changes in the heading “Provisions” were as follows:

2006 2005

Beginning balance 178,500 165,901

Additions 26,251 27,968 Amounts transferred/released 1,300 (16,430) Reversals (82,329) (548) Argentina provisions (15,829) 1,609 199_

Ending balance 107,893 178,500

Thousands of euros

PROVISIONS FOR LAWSUITS, CLAIMS OUTSTANDING AND OTHER ITEMS This item includes provisions made to cover the risks arising from lawsuits, claims outstanding and other items amounting to EUR 91,448 thousand at 2006 year-end (2005 year-end: EUR 72,539 thousand). The provisions made constitute a fair and reasonable estimate of the effect which could arise from the resolution of such lawsuits and claims on the Group’s equity. They were quantiﬁ ed by the Parent’s and the consolidated companies’ management, with the assistance of their advisors, considering the circumstances speciﬁ c to each case. The main lawsuits or claims outstanding, relating to both 2006 and 2005, are as follows: _ Proceedings conducted at the Central Administrative Economic Tribunal in relation to the Parent’s income tax assessments for 1995 to 1998, for which a sum of approximately EUR 28 million was claimed. The resolution of these proceedings is not expected to result in unforeseen material effects. _ Proceedings conducted at the Central Administrative Economic Tribunal in relation to the Parent’s income tax assessments for 1999 to 2001, for which a sum of approximately EUR 41 million was claimed. The resolution of these proceedings is not expected to result in unforeseen material effects. _ Proceedings relating to a claim against Aguas Andinas, S.A. for losses and damages connected with the emission of odours from various wastewater treatment plants. The total amount claimed is EUR 31 million; however, the company believes that the claims are groundless and estimates the economic risk at a substantially lower amount. _ Criminal proceedings conducted in Valencia against an anaesthetist, which could have an effect on Compañía de Seguros Adeslas, S.A. for subsidiary civil liability. To cover the possible liabilities, the company deposited a bond of EUR 2.1 million. In addition, at 2005 year-end there was a claim for breach of contract, brought by Abfall – Verwertungs Gmbh (AVG) against Ecocat, S.L., a company belonging to the Cespa Group, which was sold on 5 November 2003. The Agbar Group provided guarantees to the purchaser of the Cespa Group in relation to a possible unfavour- able outcome for Ecocat, S.L. in connection with this lawsuit. Lastly, this claim was settled by common accord in 2006, resulting in a pay-out similar to the provision created for that purpose. This heading also includes provisions for obligations and guarantees acquired by Group companies and connected with corporate transactions conducted. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

ARGENTINA PROVISIONS The provisions covering all of the remaining liabilities acquired in relation to the water businesses in Argentina (see Notes 20-a and 33) amount to EUR 11,805 thousand at 2006 year-end (2005 year-end: EUR 102,230 thousand). The fall in this provision is mainly due to the purchase by Agbar and the other shareholder guarantors of Aguas Argentinas, S.A. of the guaranteed loans owed by the concession holder to the multilateral entities. This purchase, discounted by 27%, involved a payment by Agbar of EUR 63,865 thousand and resulted in the recognition of a proﬁ t of EUR 15,829 thousand before tax as a result of the overprovision recognised. Also in 2006, as a result of the termination of the concession of Aguas Argenti- nas, S.A., the performance bond relating to the concession in question was paid in the amount of EUR 8,450 thousand, which was provided for in full. The current situation of the investments in Argentina is described in Note 32.

PROVISIONS FOR PENSIONS The heading “Provisions” in the consolidated balance sheet includes the pension obligations of the Aguas Andinas Group companies, which are not required by law to be externalised. These obligations amount to EUR 4,640 thousand at 2006 year-end (2005 year-end: EUR 3,731 thousand).

_ 19 Pension obligations

The Agbar Group has externalised its pension obligations, the most significant being those relating to the Parent and the Bristol Water Group (see Note 4-p).

PARENT The amounts recognised in the income statement under the heading “Staff Costs” in relation to the deﬁ ned beneﬁ t plans, at the 2006 and 2005 year-ends are as follows, in thousands of euros:

2006 2005

Expense relating to regular deﬁ ned beneﬁ t 2,073 2,131 contributions Risk premium expenditure 467 923 EXPENSE RECOGNISED FOR THE DEFINED 2,540 3,054 BENEFIT PLANS

Thousands of euros

The regular contributions relate to the increase in the present value of the obligations resulting from employee services in the current year. In addition, the amounts recognised in the income statement under the heading “Staff Costs” in relation to the defined benefit plans totalled EUR 968 thousand in 2006 (2005: EUR 970 thousand). WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

The table below shows the present value of the accrued deﬁ ned beneﬁ t obligations and the fair value of the assets covering these obligations at each year-end, according to the latest available actuarial studies, in thousands of euros:

2006 2005

Present value of accrued deﬁ ned beneﬁ t 214,156 212,770 obligations Fair value of plan assets 209,373 211,228 NET LIABILITY RECOGNISED 4,783 1,542 IN THE CONSOLIDATED BALANCE SHEET 201_

Thousands of euros

The present value of the obligations includes a portion of the commitments assumed in relation to former members of the Parent’s Board of Directors (see Note 30-a). The changes in the present value of the accrued defined benefit obligations in the current period were as follows, in thousands of euros:

2006 2005

At 1 January 212,770 214,676 Cost of services provided 2,079 2,152 Borrowing costs (updated) 10,742 10,841 Actuarial gains and losses 5,210 4,670 Beneﬁ ts paid and settlements (16,645) (19,569) AT 31 DECEMBER 214,156 212,770

Thousands of euros

The changes in the fair value of plan assets in the current period were as follows, in thousands of euros:

2006 2005

At 1 January 211,228 210,401 Expected return on plan assets 10,561 10,520 Actuarial gains and losses (2,004) 843 Contributions from sponsors 6,836 8,312 Beneﬁ ts paid and settlements (17,248) (18,848) AT 31 DECEMBER 209,373 211,228

Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

The breakdown of the changes in the net liability for the year relating to deﬁ ned be- neﬁ t obligations in the consolidated balance sheet is as follows:

2006

Net liability at 1 January 2006 1,542 Actuarial losses recognised in the consolidated 3,545 statement of recognised income and expense Expense recognised in the income statement 2,073 Other changes and net adjustments (2,377) NET LIABILITY AT 31 DECEMBER 2006 4,783

Thousands of euros

The actuarial losses recognised in the consolidated statement of recognised income and expense are lower than those resulting from the actuarial study mainly due to the favourable fi nal annualized fi gure of the general RPI in Spain at December 2006 (2.7%) compared with the assumption supported when the actuarial study in question was performed (3.6%). The pension fund’s portfolio, associated with the current participants, represents approximately a third of the plan assets and mainly comprises fi xed-income securities and liquid assets (approximately 75%). The cumulative rate of return on the Fund’s portfolio was 4.24% in 2006 (2005: 8.74%). The rest of the plan assets, associated with the group of benefi ciary employees, consist of qualifying insurance policies, the fl ows of which exactly match the insured benefi ts, both in terms of amount and timing of payment (“matching policies”) with guaranteed returns. In addition, the obligation arising from the retirement premium is covered by a guaranteed return insurance policy.

BRISTOL WATER GROUP The amounts recognised in the income statement under the heading “Staff Costs” in relation to the deﬁ ned beneﬁ t plans held by each company are as follows, in thousands of euros:

BRISTOL VERDAN WATER PLC. GROUP LTD.

Expense relating to regular deﬁ ned beneﬁ t 280 49 contributions Risk premium expenditure 27 - EXPENSE RECOGNISED FOR THE DEFINED 307 49 BENEFIT PLANS

Thousands of euros

The regular contributions relate to the increase in the present value of the obligations resulting from employee service in the current year. In addition, the amount recognised in the income statement under the heading “Staff Costs” relating to the defined benefit pension plan of Bristol Water plc. totals EUR 27 thousand and relates to the second half of 2006, since the Agbar Group took effective control on 1 July 2006 (see Note 3-a). WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

The table below shows the present value of the accrued defined benefit obligations and the fair value of the assets covering these obligations in each employee group at 2006 year-end, in thousands of euros:

BRISTOL VERDAN WATER PLC. GROUP LTD.

Present value of accrued defi ned benefi t 185,273 13,899 obligations Fair value of plan assets 193,070 13,899 Surplus recognised in non-current fi nancial 203_ assets in the consolidated balance sheet 7,797 - (note 4-p)

Thousands of euros

The changes in the present value of the accrued deﬁ ned beneﬁ t obligations in each employee group in the second half of 2006 were as follows, in thousands of euros:

BRISTOL VERDAN WATER PLC. GROUP LTD.

At 1 July 173,316 13,389 Cost of services provided 1,458 - Borrowing costs (updated) 4,456 347 Contributions (employees) 402 - Actuarial gains and losses 9,222 272 Beneﬁ ts paid (3,581) (109) AT 31 DECEMBER 185,273 13,899

Thousands of euros

The changes in the fair value of plan assets relating to each employee group in the second half of 2006 were as follows (in thousands of euros):

BRISTOL VERDAN WATER PLC. GROUP LTD.

At 1 July 180,904 13,389 Expected return on plan assets 5,634 298 Actuarial gains and losses 7,660 321 Contributions (sponsor and employees) 2,453 - Beneﬁ ts paid (3,581) (109) AT 31 DECEMBER 193,070 13,899

Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

The breakdown of the changes in the net surplus for the year relating to deﬁ ned bene- ﬁ t obligations in the consolidated balance sheet is as follows, in thousands of euros:

BRISTOL VERDAN WATER PLC. GROUP LTD.

Net surplus at 1 July 2006 7,587 - Actuarial losses recognised in the consolidated 1,894 - statement of recognised income and expense Expense recognised in the income statement 280 49 Other changes and net adjustments (1,964) (49) NET SURPLUS AT 31 DECEMBER 2006 7,797 -

Thousands of euros

The main categories of plan assets, expressed as a percentage of the total fair value of the assets relating to each section, are as follows:

BRISTOL VERDAN WATER PLC. GROUP LTD.

Equity securities 62% 46% Fixed income securities 38% 54% TOTAL 100% 100%

Thousands of euros

The cumulative rate of return on the portfolio of plan assets for the second half of 2006 was 3.1% (equivalent to an annual rate of 6.2%).

_ 20 Obligations and contingencies

A OBLIGATIONS _ Guarantees for fi nancing and other contracts: The breakdown of the most signifi cant guarantees is as follows: _ Agbar acquired an obligation to Banco Santander de Chile, for a maximum of CLF 1.97 million (EUR 51.5 million) with respect to the credit lines received by the concession holders Intermodales La Cisterna (CLF 1.72 million) and Quinta Normal (CLF 0.25 million). _ Agbar issued guarantees to JPMorgan (CLF 1 million) and Banco Santander (CLF 0.3 million) for the interest rate swaps which the concession holder In- termodal La Cisterna entered into for the same amounts totalling CLF 1.3 million (EUR 34 million). _ Agbar guarantees the construction risk relating to the irrigation canal building work performed by ACSA Sorigué, to the banks fi nancing the work for Aigües Segarra Garrigues, S.A. At 2006 year-end this guarantee was for a maximum amount of EUR 18.1 million. _ The guarantees given to multilateral fi nancial institutions (International Fi- nance Corporation, the Inter-American Development Bank, and the European Investment Bank) in connection with their fi nancing of investee companies in Argentina total a maximum of USD 7.3 million (EUR 5.6 million), with USD 3.6 million relating to Aguas Provinciales de Santa Fe, S.A. and USD 3.7 million to Aguas Cordobesas, S.A. _ Santander Central Hispano continues to hold a guarantee provided by Agbar amounting to MXN 50 million (EUR 3.5 million) in relation to fi nancing provided to Interagbar de México, S.A. de C.V. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

_ Agbar Tower: The owner of the “Agbar Tower”, at Avenida Diagonal 197-211, Barcelona, is Caixa d’Estalvis i Pensions de Barcelona, “la Caixa”, which in turn held a fi nance lease with Layetana Inmuebles, S.L (Sole-Shareholder Company). On 25 November 2004 the Parent entered into a sub-lease on this building with Layetana Inmuebles, S.L (Sole-Shareholder Company). The sub-lease was signed for a minimum period of ten years, renewable for two additional periods of ten years each, optional for the Parent but mandatory for Laye- tana Inmuebles, S.L. (Sole-Shareholder Company). If after expiry of the initial period of ten years the Parent fails to renew the sub-lease for at least another ten years, the Parent must indemnify Layetana Inmuebles, S.L. (Sole-Shareholder Company) for a 205_ sum equal to a one-year rent at the rate in force at that time. After expiry of the renewal period, where applicable, the parties may automatically extend the term of the sub-lease for further ten-year periods, provided that notice is not given by one of the parties at least one year in advance of the successive expiry dates. The sub-lease expressly authorises the Parent to sub-lease to third parties. Also on 25 November 2004, the Parent, Layetana Inmuebles, S.L. (Sole-Shareholder Company) and “la Caixa” entered into a contract establishing the events and regulations affecting the exercise of an option to buy and an option to sell the “Agbar Tower”. The Parent holds a purchase option which may be exercised between 15 November 2009 and 15 November 2014. “la Caixa” may exercise a sale option within the same period and on the same conditions as those set forth for the purchase option. The market value appraisals of the building commissioned by the Company have revealed that the value of the purchase and sale options on the “Agbar Tower” do not signifi cantly differ from their market value. On 28 December 2006, Layetana Inmuebles, S.L. (Sole-Shareholder Company) entered into a contract to assign the fi nance lease and guarantees with Azurelau, S.L.U., whereby the former transferred to the latter all of the rights and obligations arising from the fi nance lease on the Agbar Tower. This transaction was approved by “la Caixa” as the fi nancial lessor of the building. As a result, Azurelau, S.L.U. is now the sublessor vis-à-vis the Parent. In turn, Layetana Inmuebles, S.L. remains jointly and severally liable to the Parent for all of the obligations and liabilities of Azurelau, S.L.U. The Parent’s directors concluded that when the Agbar Tower became effectively oc- cupied, the rental agreement for the building did not qualify under IAS 17 to be considered a fi nance lease and, therefore, for accounting purposes, it was treated as an operating lease. Any possible treatment of this transaction as a fi nance lease would not have had any signifi cant effect on the total assets and liabilities or consolidated equity of the Agbar Group .

B CONTINGENCIES The main contingencies at 31 December 2006 arise from the penalties proposed by the National Tax Inspection Offi ce (ONI) against the Parent, amounting to EUR 12 million, in relation to income tax for 1995 to 1998, and to EUR 25 million in relation to income tax for 1999 to 2001. Agbar has reports issued by external tax advisors, one for each inspection, upholding that the penalties are unjusti- fi ed and, for this reason, it has not made any provision in this connection in its consolidated fi nancial statements. In 2006, certain creditors of Aguas Argentinas fi led a complaint against the Suez Group, the Agbar Group and the successor to the concession of Aguas Argenti- nas, S.A., claiming damages of no less than USD 130 million (see Note 32). The directors of the Agbar Group and its legal advisors consider that this complaint lacks grounds and, as a result, that its outcome will not have a signifi cant adverse effect on the Group. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

_ 21 Tax matters

CONSOLIDATED TAX GROUP Sociedad General de Aguas de Barcelona, S.A. and its subsidiaries located in Spain, in which it holds a direct or indirect interest of 75% or more, are subject to income tax under the tax consolidation system which was ﬁ rst used in 1993. This group of companies is bound to be taxed under this system indeﬁ nitely unless it waives its application. Compañía de Seguros Adeslas, S.A. and Applus Servicios Tecnológicos, S.L., together with their respective Spanish subsidiaries, also form consolidated tax groups.

RECONCILIATION OF TAXABLE PROFIT TO THE INCOME TAX EXPENSE The income tax expense is calculated on the basis of accounting profi t, which does not necessarily coincide with taxable profi t. The reconciliation of profi t before tax to the taxable profi t and the calculation of the income tax expense are as follows, in thousands of euros:

2006 2005

Proﬁ t before tax 417,330 392,564 Permanent differences 775 (30,647)

Taxable proﬁ t 418,105 361,917

Tax calculated at the tax rates in force in each country 115,378 103,723 Accrued tax credit for reinvestment of extraordinary proﬁ t (13,240) (20,457) Other accrued tax credits (5,689) (17,544) Effect of tax rate change in Spain 15,304 - Other 3,233 -

Income tax expense 114,986 65,722

Thousands of euros

The various fully or proportionately consolidated foreign subsidiaries calculate their income tax expense in accordance with their respective legislation.

The main applicable tax rates are as follows: _ Spain 35% _ Chile 17% _ United Kingdom 30% _ USA 40% The provision for income tax payable is recognised under “Current Tax Liabilities” in the consolidated balance sheet and the amounts receivable under “Current Tax Assets”.

REINVESTMENT TAX CREDIT The capital gains obtained in Spain on the disposal of certain non-current assets entitle taxpayers to take an income tax credit on the condition that they reinvest the entire amount received and retain the assets in which the reinvestment is made for five years, in the case of property, and three years in the case of movable assets. At 2006 year-end the detail, in thousands of euros, of the reported tax credits for reinvestment of extraordinary proﬁ ts, whose reinvested assets are still subject to the mandatory holding requirement, is as follows: WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

PROFIT REINVESTED TAX CREDIT YEAR YEAR OF EXPIRY EARNED IN INCOME OF OF HOLDING REINVESTMENT PERIOD REQUIREMENT

2003 12,874 2,575 2003 2008 2003 74,617 14,923 2004 2007 2003 2,220 444 2003 2008 2004 58,957 11,792 2004 2007 2004 15,340 3,068 2004 2007 2004 7,971 1,594 2004 2009 207_ 2005 16,740 3,348 2005 2008 2005 55,805 11,161 2006 2009 2005 29,740 5,948 2006 2009 2006 58,738 11,748 2006 2009 2006 7,460 1,492 2006 2009 68,093

Thousands of euros

CHANGE TO TAX RATE IN SPAIN The Agbar Group companies located in Spain recognised as an income tax expense for 2006 the impact on the balance of deferred tax assets and liabilities of the change in Spanish tax rates from 35% in 2006 to 32.5% in 2007 and to 30% from 2008. For these purposes, the deferred tax liabilities were recalculated by applying the tax rate for the year in which they are expected to be reversed. This recalculation resulted in a net income tax expense of EUR 15,304 thousand and a decrease in reserves of EUR 1,650 thousand.

DEFERRED TAXES AND TAX ASSETS The detail, for 2006 and 2005, of the deferred tax assets and liabilities due to temporary differences between the accounting and tax methods of recognition of certain income and expenses, and of the tax assets recognised in the consolidated ﬁ nancial statements, is as follows, in thousands of euros: WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

EFFECT ON TAX PAYABLE 2006 2005

Deferred tax assets: Pension fund of the Parent 41,624 55,475 Provision for maximum risk on investments in Argentina 32,102 44,195 Valuation allowance for investments in Argentina 2,030 19,342 Value allocated in the acquisition of the Bristol Water Group 9,471 - Asset write-downs 6,909 6,735 Amortisation of merger goodwill 5,584 7,278 Provision for contingencies, Parent 4,831 4,030 Other 31,136 31,143 133,687 168,198

Tax assets: Reinvestment tax credits of Parent 27,927 20,457 Other tax credits of Parent 31,145 29,053 Offset of tax loss carryforwards and other 20,943 15,796 80,015 65,306

Deferred tax assets and tax assets 213,702 233,504

Accelerated tax depreciation at the Bristol Water Group 74,756 - Value allocated in the acquisition of the Bristol Water Group 17.180 - Value allocated in the acquisition of the Aguas Andinas Group 62.095 77.879 Value allocated in the acquisition of the Aigües de Cabrera Group 9.974 - Accelerated tax depreciation at Parent 5.426 6.596 Other 46.995 36.257 Deferred tax liabilities 216.426 120.732

Thousands of euros

“Other Tax Credits of Parent” mainly includes tax credits for export activities. Since 1993, in accordance with current Spanish tax legislation, the group of companies included in the taxation group has taken tax credits for export activities amounting to EUR 88 million in the income tax returns. Similarly, at 31 December 2006, the said companies had reported unused tax credits for export activities in the amount of EUR 15 million. No signiﬁ cant unforeseen impacts are expected to arise from the outcome of contingent issues relating to these tax credits as a result of potential inspections which could affect their recoverability. The changes in 2006 and 2005 in “Deferred Tax Assets” were as follows:

Balance at 1 Changes Translation Change in Additions/ Balance January in Consoli- Differences Tax Reductions at 31 dation Legislation and December Scope or Transfers Method

Deferred tax assets: 2006 233,504 16,417 (1,051) (18,369) (16,799) 213,702 2005 221,557 (648) 2,831 - 9,764 233,504

Deferred tax liabilities: 2006 120,732 92,488 (10,483) (1,415) 15,104 216,426 2005 86,094 14,286 18,304 - 2,049 120,732

Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

YEARS OPEN FOR REVIEW BY THE TAX AUTHORITIES In general, the Spanish Agbar Group companies have the last four years open for review by the tax inspection authorities. However, this period may vary for companies subject to other tax regulations. The directors of the Parent do not expect any additional signiﬁ cant tax liabilities to arise for the Agbar Group as the result of a potential tax audit of the years open to inspection.

_ 22 Operating income and expenses

A AUDITORS’ FEES 209_ The fees for services provided in 2006 and 2005 by the auditors of the financial statements of the various Group companies are as follows, in thousands of euros:

2006 2005

OTHER OTHER AUDI- PRINCIPAL PRINCIPAL AUDITORS TORS OF AUDITOR* AUDITOR* OF SUBSIDIARIES SUBSIDIARIES Auditing services 2,025 730 2,169 312 Other professional 744 309 1,089 - services TOTAL 2,768 1,039 3,258 312

Thousands of euros. * Principal auditor and other related entities.

B STAFF COSTS The breakdown of staff costs in 2006 and 2005 is as follows, in thousands of euros:

2006 2005

Wages, salaries and similar costs 571,572 534,321 Employee beneﬁ t costs 127,397 127,088 Other staff costs 31,251 27,597 TOTAL 730,220 689,006

Thousands of euros

The 2006 staff costs include a total of EUR 5.4 million in contributions to the pension plans and the insurance policies covering the other pension obligations acquired by the Agbar Group. The 2005 staff costs include a total of EUR 8.9 million relating to the Parent in the same connection. The average consolidated headcount of the Agbar Group in 2006 and 2005, taking into account the consolidation method and percentage used in the preparation of the consolidated ﬁ nancial statements, was as follows:

2006 2005

Fully consolidated companies 20,351 22,069 Proportionately consolidated companies - 1,106 TOTAL CONSOLIDATED AVERAGE HEADCOUNT 20,351 23,175 WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

The aggregate headcount of the Agbar Group, without taking into account the consolidation method or percentage used in the preparation of the consolidated ﬁ nancial statements, by category, was as follows:

2006 2005

Parent and Group and jointly controlled companies: Qualiﬁ ed staff 6,900 5,241 Middle managers and supervisors 2,582 1,780 Skilled employees 7,277 7,366 Trainees and assistants 4,546 7,898 21,305 22,285 Associates: Qualiﬁ ed staff 1,424 1,847 Middle managers and supervisors 468 910 Skilled employees 2,779 4,496 Trainees and assistants 1,022 3,188 5,693 10,441 TOTAL 26,998 32,726

C LEASES The expenditure on operating leases recognised in the 2006 consolidated income statement was EUR 45,834 thousand (2005: EUR 34,020 thousand). In the case of the Agbar Tower, rental expenditure amounted to EUR 9.6 million in 2006 (2005: EUR 9.3 million). The operating lease obligations yet to be paid and not cancellable, broken down by maturity, are as follows, in thousands of euros:

2006 2005

Due within one year 36,004 24,155 Due within one to ﬁ ve years 102,883 86,036 Due in more than ﬁ ve years 136,929 133,866

Thousands of euros

_ 23 Impairment losses

The detail of impairment losses at 31 December 2006 and 2005 is as follows, in thousands of euros:

2006 2005 (Losses) / Gain (Losses) / Gain

Intangible assets (1,530) (96) Property, plant and equipment 76 (291) Investments in and loans to non-Group companies (306) (471) Goodwill on consolidation (Note 12) (4,599) (3,488)

Impairment losses (6,359) (4,346)

Thousands of euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

_ 24 Financial loss

The breakdown by type of the Group’s ﬁ nancial loss at 31 December 2006 and 2005 is as follows, in thousands of euros:

2006 2005

Finance income: Income from equity investments in non-Group companies 2,606 1,922 Finance income from associates 2,567 466 Finance income from non-Group companies 31,698 23,670 Exchange gains 3,628 2,026 211_ Finance income from derivatives transactions 163 276 Total ﬁ nance income 40,662 28,360

Finance costs: Finance costs from associates (1.859) (55) Finance costs from non-Group companies (111.532) (86.992) Exchange losses (1.172) (508) Finance costs from derivatives transactions (189) (276) Total ﬁ nance costs (114.752) (87.831)

Financial loss (74.090) (59.471)

Thousands of euros

The increase in fi nancial costs from non-Group companies includes the impact of the greater fi nancing volume associated with the acquisition of holdings and the contribution of fi nancial debt from such holdings, notably that of the Bristol Water and RTD Groups.

_ 25 Proceeds on sale of non-current assets

The detail of the proceeds received on sales of assets in 2006 and 2005 is as follows:

2006 2005 Gains Losses Gains Losses

On disposals or reductions of intangible assets 2,984 (1,075) 2,527 (208) On disposals or reductions of property, plant and equipment 14,261 (830) 27,309 (2,221) On sale of equity investments in Group companies 75,317 (143) 149,680 (30,824) On sale of equity investments in non-Group companies - (327) 1,550 (134) 92,562 (2,375) 181,066 (33,387)

Proceeds on sale of 90,187 147,679 non-current assets

Thousands of euros

“Gains on Disposals or Reductions of Property, Plant and Equipment” in 2006 basically includes the gain of EUR 8,013 thousand on the disposal of the buildings in the Inspection and Certiﬁ cation segment and, in 2005, the gain on the disposal of the buildings in Paseo de San Juan in Barcelona (former head ofﬁ ce) for EUR 25,200 thousand. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

In 2006, “Gains on Sale of Equity Investments in Group Companies” mainly includes the gains generated on the sales of 5.22% of Applus Servicios Tecnológi- cos, S.L. (EUR 15,877 thousand) and of the interests in Emte, S.A. (EUR 15,052 thousand), Aguas Décima (EUR 14,875 thousand) and in Acsa - Agbar Construc- ción, S.A. (EUR 13,171 thousand). “Gains on Sale of Equity Investments in Group Companies” in 2005 basically included the gains on the sales of 13.68% of Applus Servicios Tecnológicos, S.L. (EUR 41,569 thousand), of 10% of Compañía de Seguros Adeslas, S.A. (EUR 41,060 thousand), of 50% of Aquagest Sur, S.A. (EUR 30,900 thousand), of 60% of Acsa – Agbar Construcción, S.A. (EUR 19,578 thousand) and of the interest in Iteuve Portugal, S.L. (EUR 10,147 thousand). “Losses on Sale of Equity Investments in Group Companies” in 2005 basically includes the losses on the disposal of Aguas Guariroba, S.A. amounting to EUR 7,264 thousand and the losses on the sale of AGM Contacta, S.L. amounting to EUR 20,056 thousand. The losses on the sale of AGM Contacta, S.L. do not include the EUR 15 million in income relating to the application of the provision for that investment which was set up in prior years and is recognised in “Other Proﬁ t/(Loss)” in the consolidated income statement. As a result, the total impact of this sale, before the tax effect, amounts to EUR 5,056 thousand in losses.

_ 26 Earnings per share

The calculation of basic earnings per share in 2006 and 2005 is as follows:

2006 2005

Net proﬁ t attributable to the Parent (thousands 167,253 252,113 of euros) Weighted average number of ordinary shares 149,389,253 147,102,739 BASIC EARNINGS PER SHARE (EUROS) 1,12 1,71

The calculation of diluted earnings per share in 2006 and 2005 is as follows:

2006 2005

Net profi t attributable to the Parent (thousands of euros) 167,253 252,113 Dilutive effect of potential ordinary shares: Decrease in net fi nance costs 99 340 Diluted net profi t attributable to the Parent 167,352 252,453

Weighted average number of ordinary shares 149,389,253 147,102,739 Dilutive effect of potential ordinary shares: Options on shares 207,200 1,242,241 Weighted average ordinary shares 149,596,453 148,344,980

Diluted earnings per share (euros) 1.12 1.70 WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

_ 27 Share option plans

The Parent’s Annual General Meeting held on 25 May 2001 approved a share option plan for the employees of the Parent and the Spanish Group companies on the headcount at 25 May 2001 (“the May Plan”). Under the May Plan, each beneﬁ ciary was assigned a number of shares equivalent in total to 5% of their gross annual remuneration, at a strike price of EUR 13.30, with fractions being rounded off by default. The period and conditions of exercise started two years after approval of the Plan and ended after three years, i.e. on 26 May 2003 and 26 May 2006. Therefore, at 2006 year-end the May 2001 Plan had matured in full. In 2006 beneﬁ ciaries of the May Plan gave notice of exercise for a total of 568,338 213_ options (307,877 in the period concluded at the end of February and 260,461 in the period up to the end of May). The detail of the changes in the share options is shown in the following table:

2006 2005 2004

1 January 806,365 1,450,539 1,800,375 Options exercised (568,338) (596,220) (11,836) Options cancelled - - (300,000) Surplus options (238,027) (47,954) (38,000) 31 DECEMBER - 806,365 1,450,539

Following the ﬁ nalisation and veriﬁ cation of the requests made in the last exercise period of the May Plan, the Parent ascertained that a total of 323,981 options had not been exercised. The shares relating to these unexercised options were repur- chased by the Parent and are included among the treasury shares at 2006 year-end (see Note 16-a).

_ 28 Related party transactions

Transactions with signiﬁ cant shareholders in 2006 were part of normal trading and took place under normal market conditions.

TRANSACTIONS WITH THE SUEZ GROUP In 2006 the Suez Group charged EUR 2,496 thousand (EUR 1,151 thousand in 2005) to Sociedad General de Aguas de Barcelona, S.A. for technical assistance services provided to the Chilean company Inversiones Aguas Metropolitanas, S.A. In 2006 the Agbar Foundation acquired from Suez Environnement, Société Anonyme, a 25% interest in R+i ALLIANCE, Société par Actions Simpliﬁ ée, a subsidiary of the Suez Group, for EUR 10 thousand. The Agbar Foundation also made contributions to R&D projects and to the company R+i ALLIANCE, Société par Actions Simpliﬁ ée, totalling EUR 1,791 thousand. In 2006 Agbarex collected dividends from Suez, S.A. amounting to EUR 2,382 thousand. In November 2005 the Agbar Group and the Suez Group, as shareholders of the Chilean company Inversiones Aguas Metropolitanas S.A. (“IAM”), which in turn held 51.2% of Aguas Andinas S.A., concluded a process for the placement of 49.9% of IAM. As a result of this transaction, 10% of the shares in IAM were placed in the Chilean market and 33.4% in the international market. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

Of these percentages, 23.5% relates to the Agbar Group (see Note 3-b), which now holds a 56.6% interest in IAM.

TRANSACTIONS WITH THE “LA CAIXA” GROUP “la Caixa” is a minority shareholder of Hisusa Holding de Infraestructuras y Servicios Urbanos, S.A., a shareholder of the Parent.

_ Financing: Loans to the Agbar consolidated Group at 31 December 2006 totalled EUR 101.3 million (2005: EUR 82.2 million), most of which had long-term maturities. There are credit lines with a total limit of EUR 337 million at 31 December 2006 (2005: EUR 273.7 million), of which EUR 103.2 million had been drawn down at that time (EUR 45.3 million). Most of these lines expire in 2007. At 31 December 2006, the limit of the guarantees given amounted to EUR 151.8 million (EUR 172.8 million in 2005), of which EUR 97.6 million had been drawn down at that time (EUR 111.9 million in 2005). Interest rate hedges totalled EUR 237.4 million at 2006 year-end in notional amounts, of which EUR 14.4 million mature in 2008, EUR 203 million in 2009 and EUR 20 million in 2018. Currency hedges totalled EUR 57.4 million in notional equivalent value and mature in 2007. At 2005 year-end interest rate hedges totalled EUR 219.2 million in notional amounts, of which EUR 16.2 million matured in 2008 and EUR 203 million in 2009. Currency hedges totalled EUR 20.1 million in notional equivalent value and mature in 2007. “la Caixa” is the dealer for the Euro Medium Term Note (EMTN) Programmes of Agbar Capital, S.A. and Agbar International, B.V. ‘la Caixa’ is also one of the main institutions involved in the Agbar Group’s collection and payment operations.

_ May 2001 Options Plan: The conclusion of the “May 2001 Plan” and of the necessary procedures also saw the expiry of the term of the share subscription and purchase option contract dated 20 July 2001, executed between the Parent, Caixa d’Estalvis i Pensions de Barce- lona “la Caixa” and Invercaixa Valores S.V.B., S.A., in relation to the subscription of redeemable Class B shares (see Note 16-a).

_ Agbar Tower: The owner of the building known as the “Agbar Tower” is Caixa d’Estalvis i Pensions de Barcelona “la Caixa”, which in turn held a finance lease with Laye- tana de Inmuebles, S.L. (Sole-Shareholder Company). On 25 November 2004 Agbar entered into a sub-lease on this building with Layetana Inmuebles, S.L (Sole-Shareholder Company). On 28 December 2006, Layetana Inmuebles, S.L. (Sole-Shareholder Company) entered into a contract to assign the finance lease and guarantees with the entity Azurelau, S.L.U., whereby the former transferred to the latter all of the rights and obligations arising from the finance lease on the Agbar Tower (see Note 20-a).

_ Pensions : In accordance with current legislation, the Parent externalised its pension obligations through a pension plan and complementary insurance policies whose manager, which is responsible for managing and running them under the supervision of the Control Committee, is Vidacaixa, S.A., de Seguros y Reasegu- ros, and the fund depositary is Caja de Ahorros y Pensiones de Barcelona “la Caixa” (see Note 19). WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

OTHER TRANSACTIONS The amounts charged by Compañía de Seguros Adeslas, S.A., a 54.8%-owned investee of Sociedad General de Aguas de Barcelona, S.A., to “la Caixa” for insurance premiums on its employees in 2006 totalled EUR 8,989 thousand (2005: EUR 8,321 thousand). Tribugest, Gestión de Tributos, S.A. charged services in 2006 to Caja de Ahorros y Pensiones de Barcelona “la Caixa” amounting to EUR 990 thousand in relation to back-ofﬁ ce services, tax management and mail and package delivery services. Emte, S.A., a 50%-owned company of Sociedad General de Aguas de Barcelona, S.A., acquired the facility management business of Servihabitat XXI, a company owned by the ”la Caixa” Group, for EUR 750,000 in 2005. 215_

_ 29 Remuneration of senior executives

The remuneration to key executives of the Agbar Group, which includes monetary remuneration and contributions to the pensions systems, totalled EUR 5,136 thousand in 2006 (2005: EUR 6,806 thousand). The pension obligations accrued to key executives of the Agbar Group at 31 Dec- ember 2006, covered by insurance policies taken out for this purpose, totalled EUR 10,422 thousand (2005: EUR 8,638 thousand).

_ 30 Disclosures on the Board of Directors

A REMUNERATION OF AND OBLIGATIONS TO THE MEMBERS OF THE BOARD OF DIRECTORS The total remuneration earned in 2006 by the members of the Board of Directors of the Parent was EUR 444 thousand (2005: EUR 245 thousand). Attendance fees and other bylaw-stipulated emoluments earned by the members of the Parent’s Board of Directors totalled EUR 548 thousand and EUR 1,454 thousand in 2006 (2005: EUR 607 thousand and EUR 1,861 thousand). In all cases the remuneration refers to the functions of the members of the Board of Directors of the Parent, for the discharge of their duties both at the Parent and the various Group companies and associates. The pension obligations accrued to the former and current members of the Board of Directors of the Parent at 31 December 2006, covered by policies taken out for this purpose, totalled EUR 12,900 thousand (31 December 2005: EUR 12,115 thousand). In 2006 the Parent contributed EUR 68 thousand to these policies to cover obligations in this connection (2005: EUR 1,516 thousand).

B DISCLOSURES UNDER ARTICLE 114 OF THE SECURITIES MARKET LAW INTRODUCED BY LAW 26/2003 OF 17 JULY In 2006 and 2005 no transactions took place between the directors and the Agbar Group companies outside the ordinary course of business or under non-arm’s length conditions. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

C DISCLOSURES UNDER ARTICLE 127 TER.4 OF THE SPANISH COMPANIES LAW, INTRODUCED BY LAW 26/2003 OF 17 JULY

In 2006 the Board Members Jordi Mercader Miró, Enrique Corominas Vila, Miguel Noguer Planas and Juan Rosell Lastortras had no ownership interests in the capital of, nor held positions or discharged functions in, other companies engaged in activities which are identical, similar or complementary to the activities that constitute the objects of Agbar, nor did they take part in this type of activities as independent professionals or as employees, and so notiﬁ ed the Company. However, the following Board members notiﬁ ed the Company of the relevant details of their interests, positions, functions or activities in other companies:

NAME OR COMPANY COMPANY POSITION OWNERSHIP NAME OF BOARD INTEREST MEMBER Suez, S.A. Chairman-CEO 0.002% Gérard Mestrallet Suez Environnement Chairman 0.000%

Manuel Raventós Negra Caifor, S.A. Board Member 0.000%

Suez Environnement General Manager 0.000% Degrémont Chairman 0.000% Lyonnaise des Eaux France Board Member 0.000% Société des Eaux Board Member 0.000% de Marseille Jean-Louis Chaussade Chairman of the Board Terralys 0.000% (since 1 March 2006) SITA France Board Member 0.000% United Water Inc. Director 0.000% United Water Resources Director 0.000% Fomento de Construcciones - 0.003% Feliciano Fuster Jaume y Contratas, S.A. Endesa, S.A. - 0.000% Lyonnaise des Eaux France Chairman-CEO 0.000% Ondeo Industrial Solutions Chairman 0.000% Degrémont Board Member 0.000% Sté des Eaux de Marseille Board Member 0.000% Sté des Eaux du Nord Board Member 0.000% Bernard Guirkinger Lydec Board Member 0.000% SITA France Board Member 0.000% Board Member Terralys 0.000% (since 1 March 2006) Suez Environnement UK Ltd. Board Member (Director) 0.000% Board Member (Director) SITA Holdings UK. Ltd. 0.000% (until 7 July 2006) Suez Environnement Board Member 0.000% Jean-Pierre Hansen Suez, S.A. Chief Operating Ofﬁ cer 0.000% Acea, S.P.A Board Member 0.000% Suez Environnement Board Member 0.000% Gérard Lamarche Leo Holding CY Director 0.000% Ondeo Northamerica Director 0.000% Juan Antonio Caifor, S.A. Board Member 0.000% Samaranch Torelló Nueva Compañía de Inversiones, S.A. (indivi- 10.001% Sacyr Vallehermoso, S.A. Second Deputy Chairman dual representative: Juan (indirect) Abelló Gallo) WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

In 2006 the above Board members, Gérard Mestrallet, Manuel Raventós Negra, Jean-Louis Chaussade, Feliciano Fuster Jaume, Bernard Guirkinger, Jean-Pierre Hansen, Gérard Lamarche, Juan Antonio Samaranch Torelló and Nueva Compañía de Inversiones, S.A. did not carry out as independent professionals or as employees any activities identical, similar or complementary to the activities that constitute Agbar’s objects. Ricardo Fornesa Ribó, Chairman and Board Member of the Company from 1 Janu- ary to 31 January 2006, had no ownership interests in the capital of companies engaged in activities which are identical, similar or complementary to the activities that constitute the objects of Agbar, nor did he take part in this type of activities as an independent professional or as an employee, although he did hold the position of 217_ Chairman of Caifor, S.A. during the above period.

_ 31 Information on the environment

At 31 December 2006 and 2005, the Parent and some Agbar Group companies had non-current asset items, the purpose of which was to help minimise the environmental impact and to protect and enhance the environment. The detail these items and their carrying amount at year-end is as follows, in thousands of euros:

2006 2005

Agbar network output improvement plan 11,626 8,572 Sludge treatment plant, St Joan Despí potable water 4,129 4,317 treatment plant Sludge treatment plant (Chile) 3,506 - Alfaz Pí-Benitachell desalination plant 2,530 2,898 Fuel deposits (Bristol) 1,331 - Sludge treatment plant (Bristol) 756 - Other 3,505 1,298 TOTAL 27,383 17,085

Thousands of euros

Similarly, in 2006 and 2005 the Agbar Group incurred expenses in connection with the protection and enhancement of the environment. The expenses relating to recurring maintenance activities totalled EUR 1,771 thousand and EUR 1,303 thousand, respectively. The Parent also made contributions to the Agbar Foundation totalling EUR 8,649 thousand in 2006 (2005: EUR 5,892 thousand). This Foundation earmarks a signiﬁ cant portion of its annual budget for environmental protection and enhancement projects. Additionally, the Agbar Group companies have insurance policies and other security plans affording reasonable coverage of any possible contingency which could arise from their environmental activities. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

_ 32 Situation of the water business investments in Argentina

PRESENT STATE OF AGUAS ARGENTINAS On 21 March 2006, Aguas Argentinas, S.A. was notifi ed of the decision by the government of Argentina, made by presidential decree, to terminate the concession contract for the provision of the potable water and water treatment service in the city of Buenos Aires and to transfer management of these services to a newly-created public body (Agua y Saneamientos Argentinos, S.A.). This resulted in the payment of the performance bond relating to Agbar in the amount of EUR 8.5 million. Due to the above termination, Aguas Argentinas, S.A. declared that it had begun preventive insolvency proceedings on 28 April 2006. The procedural steps relating to these proceedings have been followed and at 2006 year-end, the creditor verifi cation stage was reached. At the same time, Aguas Argentinas, S.A. instituted the necessary legal action before the Argentine courts against the State of Argentina to claim the economic damages caused by the above termination. In addition, in the fi rst quarter of 2006 Agbar and the other shareholder guarantors of Aguas Argentinas, S.A. bought the loans owed by the concession-holder to multilateral entities. The purchase, which was made with a 27% discount, involved a payment by Agbar of EUR 64 million and resulted in the recognition of income, as a result of the overprovision recognised, of EUR 15.8 million before tax. In 2006 various creditors of Aguas Argentinas, mainly mutual funds, grouped under a company called Aguas Lenders Recovery Group LLC, fi led a complaint at the New York courts against the Suez Group, the Agbar Group and the successor to the Aguas Argentinas concession. They are claiming damages of no less than USD 130 million. The directors of Agbar and its legal advisors consider that this complaint lacks grounds and is unlikely to prosper.

PRESENT STATE OF AGUAS PROVINCIALES DE SANTA FE At the beginning of 2006, Aguas Provinciales de Santa Fe, S.A. declared that it was being dissolved as a result of its negative equity situation. Its liquidation is currently in progress. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

Also in 2006 the Provincial Government terminated the concession which was passed on to a newly created public entity called Aguas Santafesinas, S.A. As with the case of Aguas Argentinas, the economic damages resulting from this termination are being claimed at local courts.

PRESENT STATE OF AGUAS CORDOBESAS On 22 December 2006 the Agbar Group sold to the local group Roggio 12% of the shares of Aguas Cordobesas, S.A. Following the sale, it holds a 5% interest.

_ 33 Events after the balance sheet date 219_

On 15 March 2007 Agbar received notiﬁ cation of the start of an inspection relating to income tax for the years 2002 to 2004 and to other taxes for the years 2003 and 2004.

_ 34 Explanation added for translation to English

These consolidated ﬁ nancial statements are presented on the basis of IFRSs as adopted by the European Union. Certain accounting practices applied by the Group that conform with IFRSs may not conform with other generally accepted accounting principles. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

SOCIEDAD GENERAL DE AGUAS DE BARCELONA AND INVESTEES COMPOSING THE AGBAR GROUP

CONSOLIDATED DIRECTORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2006

_ 1 Earnings analysis

In 2006, as in the preceding year, the Group showed a satisfactory organic performance in all of its main lines of business which is evidenced by the growth of both income and profi t from operations. The net profi t attributed to the Parent amounted to EUR 167.3 million in 2006. The fall with respect to the previous year is a result of the lower atypical non-recurring profi ts, a higher tax charge and a greater allocation of profi ts to the minority shareholders. The reorganisation of the portfolio of businesses conducted by the Agbar Group in recent years also resulted in signifi cant extraordinary profi ts in 2006, albeit below the levels reached in 2005. In this context, in 2006, all of the interests relating to the Fa- cilities and Construction segment were sold and signifi cant acquisitions were made, including the Bristol Water Group, in the Water and Water treatment segment, and the RTD Group, in the Inspection and Certifi cation segment. Their contributions to profi ts for the year were restricted to the months of effective control in 2006. The effect of the changes in the scope of consolidation and the performance of exchange rates on consolidated income and profi t from operations was as follows:

OPERATING PROFIT FROM INCOME OPERATIONS

December 2005 IFRS 2.748,8 303,0 Scope Effects Inﬂ ows 265,4 65,8 Efecte Perímetre Outﬂ ows (109,5) (11,9) Total 155,9 53,9 Rate Effect Total 11,9 5,5 Organic Growth 205,2 9,7 December 2006 IFRS 3.121,8 372,1

Milions of euros. The 2005 ﬁ gures were re-established and uniﬁ ed with those for 2006, to present the dis- continuance of activities in the Facilities and Construction segment.

The scope of consolidation effect highlights the Agbar Group’s taking up of high net operating income activities, notably those of the Bristol Water and RTD Groups. It must also be taken into account that in 2005, Inversiones Aguas Metropolitan- as, S.A. (IAM), the company that currently owns 50.1% of Aguas Andinas, S.A., was 80.1% proportionately consolidated, whereas in 2006 it was fully consolidated since Agbar effectively took control following the public share placement process that took place in November 2005 and the resulting exit of the Suez Group with which it had hitherto shared control of IAM. The main impact of the change in interest rates has been on the Chilean Peso which appreciated 4.4% in 2006 (average exchange rate: 666 CLP/EUR in 2006 compared to 696 CLP/EUR in 2005). The Agbar Group’s consolidated Operating Income for 2006 totalled EUR 3,121.8 million compared to EUR 2,748.8 million in 2005, up 13.6%. Excluding the effects of the changes in the scope of consolidation and of exchange rate ﬂ uctuations, the organic growth in the Agbar Group’s activities was around 7.8%. This organic growth was mainly concentrated in the Water and Water treatment and Healthcare segments. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

The Profi t from Operations, which totalled EUR 372.1 million compared with EUR 303.0 million in 2005, showed growth of 22.8%. Excluding the effects of the changes in the scope of consolidation and of interest rate fl uctuations, the organic growth in the Agbar Group’s profi t from operations was around 3.3%, with notable contributions from the Water and Water treatment and Healthcare segments. The profi t from operations for 2006 includes non-recurring negative impacts without which its organic growth would have been over 10%. With respect to Financial Loss, fi nance costs were driven up by the fl uctuations in the Agbar Group’s main fi nancing currencies, the Euro and Chilean Peso, and by the increased fi nancing associated with the acquisition of ownership interests and the debt belonging to the acquired companies (basically the Bristol Water 221_ Group and the RTD Group). The Proceeds on Sale of Non-Current Assets, together with Other Profi t, amounted to EUR 107.3 million in 2006. These relate to one-off, non recurring disposals of assets and recoveries of provisions. They basically include the following items: _ Reversals, amounting to EUR 15.8 million, of provisions set up to cover the maximum risk relating to guarantees and liabilities of Aguas Argentinas. The provisions covering all of the remaining liabilities acquired in relation to the water businesses in Argentina amount to EUR 11.8 million. _ Gains recognised on two sales of investments by Applus Servicios Tecnológicos, S.L., as part of the global agreements reached in November 2005 between Agbar, Unión Fenosa, S.A. and Sociedad de Promoción y Participación Empresarial, S.A. (SPPE), whereby Corporación Financiera Caja de Madrid, S.A. (through SPPE) acquired an ownership interest in Applus Servicios Tecnológicos, S.L: _ The sale in January 2006 of a 2.32% interest in Applus Servicios Tecnológ- icos, S.L. to Unión Fenosa, S.A., giving rise to a gain of EUR 7.0 million. _ The sale in April 2006 of a 2.90% ownership interest in Applus Servicios Tecnológicos, S.L. to Sociedad de Promoción y Participación Empresarial Caja de Madrid, S.A., giving rise to a gain of EUR 8.9 million. _ A gain of EUR 15.0 million on the sale of the 50% ownership interest in EMTE. _ A gain of EUR 14.9 million on the sale of the ownership interest in Aguas Décima. _ A gain of EUR 13.2 million on the sale of the remaining 40% ownership interest in ACSA. _ EUR 9.5 million in profi t relating to compensation for early termination, as part of the contractual re-negotiations of the Water and Water treatment segment in Spain. _ A gain of EUR 8.0 million on the disposal of properties relating to the Inspection and Certifi cation segment. In 2005 the proceeds on the sale of non-current assets and other profi t amounted to EUR 139.1 million and basically included the gains on the sales of 13.68% of Applus (EUR 41.6 million), of 10% of Adeslas (EUR 41.1 million), of 50% of Aquagest Sur (EUR 31.0 million), of 60% of ACSA (EUR 19.6 million) and of 100% of Iteuve Portugal, Ltda. (EUR 10.1 million). They also included the gain on the sale of the buildings of the former head offi ce in Paseo de San Juan in Barcelona (EUR 25.2 million). The income tax expense for 2006 includes a EUR 24.6 million extraordinary charge. This amount includes EUR 15.3 million relating to the recalculation of the deferred tax assets and liabilities of the Agbar Group as a result of the change in the tax rates provided in the recent tax reforms in Spain. The remaining EUR 9.3 million relate to the tax effects of the reorganisation of the investments in Chile. The net profi t attributable to minority shareholders totals EUR 140.8 million compared with EUR 86.0 million in 2005 and mainly relates to the minority shareholders of Aguas Andinas, S.A. (a company in which the Agbar Group has an indirect ownership interest of 28.4%), of Applus Servicios Tecnológicos, S.L. (a 53.1%-owned investee) WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

and of Compañía de Seguros Adeslas, S.A. (a 54.8%-owned investee). The growth with respect to 2005 was mainly due to the increase in the minority shareholders ﬁ gure at Aguas Andinas, as a result of the change of consolidation method. The net proﬁ t attributable to the Parent amounts to EUR 167.3 million, a 33.7% decrease on 2005 due to the reasons explained above.

_ 2 Contribution by segment

The breakdown and segment performance of operating income and proﬁ t from operations in 2006 and 2005 is as follows:

OPERATING INCOME PROFIT FROM OPERATIONS

% Change/ Dec %Change/ Dec Dec 2006 ifrs Dec 2006 ifrs 2005 2005 Water and Water treat- 1.427,1 17,2% 250,0 36,1% ment (*) Healthcare 1.088,0 10,2% 90,9 14,1% Inspection and Certiﬁ ca- 542,8 31,0% 42,4 16,8% tion Other 63,8 (50,7%) (11,3) n/a AGBAR GROUP 3.121,8 13,6% 372,1 22,8%

Milions of euros. (*) Includes Holding Company and Corporations.

The main issue to note is the growth in both operating income and profi t from operations in all of the Agbar Group’s main business segments. _ Water and Water treatment: there was an improvement in business in most of the domestic companies in this segment and a positive performance in the IAM Group (Chile) due to the impact of the rate rises, the appreciation of the average exchange rate for the Chilean Peso and the change in the consolidation method for IAM. In addition, 2006 includes six months of activity of the Bristol Water Group. _ Healthcare: the improvement in operating income and profi t from operations is mainly due to the increase in the number of insureds and average premiums. _ Inspection and Certifi cation: the growth in operating income and profi t from operations mainly resulted from the inclusion of eight months of activity of the Neth- erlands certifi cation group RTD, which was acquired in the fi rst half of 2006. _ Other: the decreased contribution to the consolidated fi gures in 2006 is basically a result of the exclusion from the scope of consolidation of the company AGM Contacta, S.L., which was sold in December 2005, and of the costs associated with the restructuring of the levies collection business. The relative contribution of the segments is as follows:

OPERATING INCOME PROFIT FROM OPERATIONS

Dec 2006 Dec 2005 Dec 2006 Dec 2005 Contribution Contribution Contribution Contribution Water and Water treat- 45,7% 44,3% 67,2% 60,6% ment (*) Healthcare 34,9% 35,9% 24,4% 26,3% Inspection and Certiﬁ ca- 17,4% 15,1% 11,4% 12,0% tion Other 2,0% 4,7% (3,0%) 1,1% AGBAR GROUP 100% 100% 100% 100% WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

_ 3 Capital expenditure

Capital expenditure made in 2006 by the Agbar Group’s fully or proportionately consolidated companies totalled EUR 909.5 million, of which EUR 209.5 million related to property, plant and equipment, EUR 98.8 million to intangible assets and EUR 601.2 million to non-current fi nancial assets. Of this total investment, 34.9% was made in Spain and the remaining 65.1% in the Group’s foreign investees. It should also be noted that 63.8% of the total capital expenditure was made in the companies in the water and water treatment segment. Capital expenditure in intangible assets and property, plant and equipment was mainly concentrated in the Water and Water treatment segment. The expendi- 223_ ture on intangible assets basically relates to the investments in Administrative Concessions and expenditure on property, plant and equipment relates to those required for the domestic and international water operations. Expenditure on non-current fi nancial assets mainly includes the acquisitions of the Bristol Water Group (belonging to the water business in the UK) for EUR 256.6 million, of the RTD Group (engaged in the certifi cation business in the Netherlands) for EUR 178.8 million and of the K1 Group (engaged in the inspection business in Finland) for EUR 42.0 million.

_ 4 Net borrowings

Net borrowings, calculated as the difference between the current and non-current ﬁ nancial liabilities, plus the provisions for maximum risk relating to Argentina, and current ﬁ nancial assets, cash and cash equivalents and long-term derivatives increased from EUR 994.1 million to EUR 1,599.6 million. The increase in net borrowings is mainly a result of the considerable investments made in the year, as described in the preceding section, as well as the inclusion of the net borrowings of the Bristol and RTD Groups which amount to EUR 307 million and EUR 15 million, respectively, at year-end.

_ 5 Business performance analysis

WATER AND WATER TREATMENT In 2006 the Water and Water treatment business segment closed with major achievements at domestic and international levels.

_ Water and Water treatment in Spain _ Renewal of the Alicante concession One of the Agbar Group’s signifi cant achievements in 2006 was the renewal of the water and sewerage service concession of Aguas Municipalizadas de Alicante, Em- presa Mixta (AMAEM), approved on 11 July 2006 by the Alicante City Council. The contract, which ended in 2016, was extended to 14 May 2036. The renewal resulted from the approval of the master plans for the building work required for the management of the potable water supply services, sewerage services and the re-use of purifi ed water in Alicante which AMAEM drew up three years ago. The company will have to fi nance and perform investment projects valued at EUR 54.8 million. AMAEM serves a population of 725,000 inhabitants and has a distribution network of over 1,800 km of pipes. Its management area covers the municipalities of Alicante, San Vicente del Raspeig, San Juan, Petrel, Monforte del Cid and el Campello. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

_ Increased presence in Murcia In May 2006, Aquagest Levante, S.A. acquired 49% of the mixed company Ser- mubeniel, S.A. The remaining 51% of the shares belong to Beniel City Council in Murcia. Sermubeniel has the administrative concession contracts for water services, sewerage services, domestic refuse collection, street cleaning, cleaning and hygiene for municipal buildings and comprehensive maintenance of gardens and green areas in the municipality of Beniel (9,814 inhabitants) for 23 years. Aquagest Levante has therefore become the private partner in this mixed company and the operator for the above contracts until 2028. As part of the Agbar Group’s business reorganisation process in the autonomous community of Valencia and the region of Murcia, on 1 October 2006, the territorial management unit of the Levante zone spun off, separating the autonomous community of Valencia, with Aquagest Levante, S.A. as the managing company, from the Murcia region, through the creation of Aquagest Región de Murcia, S.A. The Agbar Group has had a presence in the autonomous community of Murcia since 1975 and a leadership position, as it supplies 70% of the population of Murcia.

_ Stronger leadership in Andalusia As part of the agreement reached in 2005 between Unicaja, Caja Granada and the Ag- bar Group to strengthen the leadership of Aquagest Sur in Andalusia, on 28 July 2006, Aquagest Sur, S.A. took over management of the supply services of Algarrobo (Ma- laga) and La Carlota (Cordoba) through the acquisition of 100% of Sociedad Andaluza de Abastecimientos, S.L. (serving 16,763 inhabitants) from Compañía Meridional de Aguas, S.A., for EUR 3.24 million. Subsequently, Sociedad Andaluza de Abastecimien- tos, S.L. merged with Aquagest Sur, S.A, the latter being the absorbing entity.

_ New investments in Catalonia and the Balearic Islands In March 2006, Agbar increased its ownership interest in Aguas del Término de Calvià, S.A. (ATERCA), through the acquisition of an additional 10.96% of its share capital. The acquisition was made on the same terms as the initial interest (Agbar purchased a 69.11% interest for EUR 5 million in August 2005) and involved the purchase of various share packages from the company’s minor shareholders. ATERCA is the holder of the concession contract to supply potable water in the areas of Santa Ponsa, Costa de la Calma, Rotes Velles and Urbanización el Toro in the Municipality of Calvià (Balearic Islands), for a period of 50 years, ending in 2028. The area supplied has a population of nearly 8,000 inhabitants. Also in March 2006 the City Council of Cambrils (Tarragona), with 23,555 inhabitants, awarded the mixed company Secomsa Aigües, S.L., 49% owned by Sorea, the administrative concession for the full water cycle in the municipality for a period of 25 years. The mixed company commenced its activities in the same month of March 2006. On 14 March 2006 the Economic Interest Grouping (EIG) AIE Sorea-Searsa-Aqualia (FCC Group) was formed with interests of 37.5%, 50% and 12.5%, respectively. The EIG is the private partner operating the mixed company formed with the Costa Brava Consortium on 23 March 2006 to manage the region’s water treatment facilities. The private partner’s stake is 66.7%, while the Consortium contributes the remaining 33.3% of the mixed company’s capital. In the last quarter of 2006, Sorea acquired the Aigües de Cabrera Group for a total of EUR 30.7 million. Notable among the companies making up that group is the 64.8% interest in Aigua de Rigat, S.A., a company which supplies water to the towns of Igualada, Vilanova del Camí, Òdena, la Pobla de Claramunt, la Torre de Claramunt and Copons (Barcelona).

_ Commercial activities The Agbar Group’s commercial activities in Spain have enabled it to win management of 24 new contracts in 2006 related to the potable water business, serving 159,000 WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

inhabitants. Of particular note are the awards of contracts for Cambrils in Tarragona (23,555 inhabitants); Beniel in Murcia (9,814 inhabitants); Churriana de la Vega in Gra- nada (8,679 inhabitants); Ortigueira in A Coruña (7,697 inhabitants); Breña Alta in Las Palmas de Gran Canaria (7,461 inhabitants); Selva and Mancor de la Vall in the Balear- ic Islands (4,185 inhabitants) and Balenyà in Barcelona (3,421 inhabitants). The Aigües de Cabrera Group in l Anoia in Barcelona (60,000 inhabitants) was also acquired. Likewise, a total of 24 contracts related to the potable water business were renewed, serving a population of 688,000 inhabitants. Special mention must be made of the award in June of the reading and maintenance contract for the water meters in Zaragoza for a period of two years, extended for a further two years. The service in Zaragoza, which has a population of 647,000 inhabitants and 310,526 custom- 225_ ers, has been provided since 1970. Notable among the other renewed contracts are those relating to the following locations: Alicante (186,000 inhabitants); Plasencia in Cáceres (39,596 inhabitants); Mancomunidad de Vegas Altas in Extremadura (24,282 inhabitants); Cullera in Valencia (23,261 inhabitants); Tavernes de Valldigna in Valencia (17,675 inhabitants); L Escala in Girona (14,705 inhabitants); Zumárraga in Guipúzcoa (10,070 inhabitants) and Camargo in Cantabria (13,049 inhabitants). The renewal rate of contracts in 2006 was 99%. In the sewerage business, the Group was awarded 24 tenders, including both new contracts and renewals, serving 307,290 inhabitants, most notably the following: Reus in Tarragona (94,407 inhabitants); Plasencia in Cáceres (39,596 inhabitants); Sitges in Barcelona (24,470 inhabitants) and Cambrils in Tarragona (26,209 inhabitants). In the treatment business, the Agbar Group was awarded 20 contracts to manage wastewater treatment stations (EDARs), representing the polluting load of a population of 673,410 inhabitants, most notably the following contracts: Costa Brava Consortium in Girona (207,142 inhabitants); Elda in Alicante (106,657 inhabitants); Granollers in Barcelona (57,796 inhabitants); la Garrotxa in Girona (43,779 inhabitants); Santa Pola in Alicante (25,494 inhabitants); Benicarló in Castellón (23,552 inhabitants) and Ca- latayud in Zaragoza (20,263 inhabitants). _ Strengthening the desalination business In July 2006, Aigües Ter-Llobregat announced the award of the tender for the construction and subsequent management of the desalinisation plant for the metropolitan area of Barcelona to the joint venture made up of Sociedad General Aguas de Barcelona, S.A., the construction company DRAGADOS, the engineering ﬁ rm DRACE and the desalination technology specialist DÉGRÉMONT. The budget for the tender amounts to EUR 150 million and the plant will have a production capacity of 60 Hm3 per year. The project, which will be 75% ﬁ nanced out of European Union cohesion funds, is divided into two stages: construction of the facility (2007-2008) and facility management in the following two years (2009-2010).

_ International water and Water treatment business

_ United Kingdom The Agbar Group has identiﬁ ed the United Kingdom as a market in which it hopes to develop. The water market in the UK is of particular interest due to its high degree of regulation, maturity and stability. On 21 April 2006 the launch of a takeover bid was announced for all of the shares of the UK company Bristol Water Group plc. The takeover bid, unanimously recom- mended by the company’s Board of Directors, was declared “unconditional” on 15 May 2006, when the Agbar Group secured 84.7% of the UK company’s capital and, ﬁ nally, it became wholly owned by the Agbar Group. The transaction involved the payment of approximately GBP 175 million (EUR 256.6 million) at the rate of GBP 10.60 (EUR 15.54) per share. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

On 17 June, the economic regulator for the water and sewerage industry in England and Wales (OFWAT) began a consultation paper process to determine whether there was a need to amend the service licence held by Bristol Water (the operating company of Bristol Water Group Plc.) as a result of the takeover by Agbar. This process is required in any concentration process in the British water market. OFWAT aimed to validate Agbar’s capacity to be the owner of a regulated water business in the United Kingdom, and ensure that Bristol Water could continue to adequately operate the service in accordance with the requirements stipulated by the licence and the regulator. OFWAT stated that there were no regulatory problems involved in the process and announced that it did not intend to amend Bristol Water’s licence except for the need to mention the change of ownership. OFWAT believes that the Agbar Group has suffi cient fi nancial and operating capacity to undertake the investment with guarantees and a proven track record in the water business both in Spain and abroad. Bristol Water Group Ltd., which has a headcount of around 400 employees, supplies water through a permanent licence to around one million people, covering a supply area of 2,400 km2 and serving the city of Bristol, as well as Somerset, Gloucestershire and Wiltshire. The Annual General Meeting of 19 July 2006 approved the incorporation onto the Board of Bristol Water Group Ltd. of the executives Manuel Navarro (appointed Chief Executive Offi cer of the Group), Juan Antonio Guijarro and Manuel Cermerón.

_ Chile In April 2006, Inversiones Aguas Metropolitanas, S.A. (IAM), 56.6% owned by Agbar, sold 1.1% of the shares of Aguas Andinas, S.A. (67,308,616 Series A shares) by placing them on the Chilean stock market. The average price per share was CLP 182 and the transaction totalled CLP 12,250 million (EUR 19.7 million). Following this transaction, IAM has sole control over Aguas Andinas with a 50.102% ownership interest. The funds collected were transferred in full to the shareholders through a capital reduction performed in June. Also in April 2006 a new strategic plan for the Aguas Andinas Group, the Aura Plan, was begun which includes the strategic objectives on which the Company’s work will be based until 2008. In June 2006, Aguas Andinas submitted an environmental impact study for the Mapocho Urbano Limpio project, an initiative involving the construction and operation of a 28.5 km interceptor collector to eliminate the 21 dumps of served water that are currently made into the Mapocho river as it ﬂ ows through the city of Santiago. On 15 December 2006, the Aguas de Ramón natural park was opened which is an area in the foothills of the Andes spanning 3,300 hectares, open to the community, with circuits of paths and an environmental education and information centre. This park, the largest in the metropolitan area of Santiago de Chile, was made possible thanks to a joint undertaking between Aguas Andinas, the association of municipalities Protege and the National Forestry Corporation (CONAF), on land lent by CORFO. From January 2007, IAM has been included in the main benchmark indicator of the Santiago stock exchange (the Index of Selective Share Prices, IPSA) with a weighting of 0.6846% of the indicator. Due to the above, together with Aguas Andinas, they attain a weighting of 0.9288% of the IPSA.

_ Uruguay Agbar withdrew from Uruguay, as part of its decision to divest itself of all of the Group’s non-strategic companies and segments. Therefore, on 8 September 2006, Agbar and the State Health Works Administration (OSE) closed an agreement for Ag- bar to sell its 60% interest in Aguas de la Costa. The price set for the transaction was EUR 2.7 million (USD 3.4 million). The Agbar Group acquired an interest in Aguas de la Costa in December 1997, becoming a shareholder in the company together with S.T.A Ingenieros (30%) and Benencio, S.A (10%). WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

_ Environmental quality and management In November 2006, the laboratory of Sociedad General de Aguas de Barcelona, S.A. passed the audit to perform the analysis of seawater in accordance with ISO 17025, thereby becoming one of the pioneering laboratories in this fi eld in Spain. This process was begun once Agbar had been awarded the El Prat desalination plant project. At a preliminary stage, Agbar has audited 18 parameters for the classifi cation of seawater and expects to be able to complete all the parameters of interest next year. In 2006, Aguas de Saltillo (Mexico) developed a quality management model based on ISO 9001:2000, in order to ensure that the service offered conforms to customer and legal requirements. The implementation of this quality system, 227_ which was audited externally, has enabled improvements to be made in the control of processes, procedures to be standardized and a methodology for ongoing improvement to be obtained. Of particular note in relation to the quality management system was the award by Ap- plus in July 2006 of a joint certifi cate to the Agbar Water management system for the “Catalonia and Balearic Islands” business unit, in accordance with ISO 9.001:2000. This unit comprises various Agbar companies engaged in the full water cycle. The certifi cate covers all of the municipalities and facilities managed, without exception, that apply the innovative management model implemented by this business unit. With this step, Catalonia and the Balearic Islands have extended the scope of their certifi cation business to the 351 municipalities and facilities managed, 191 more than were certifi ed to date, with a population of 4,391,061 inhabitants.

HEALTHCARE

_ Strategic processes One of the present objectives of Adeslas, the Agbar Group’s insurance company that leads the health insurance market in Spain, is the growth of its hospital group. Transactions in this connection in 2006 included the purchase of Policlínica San José, the main private hospital in Vitoria-Gasteiz, representing an investment of EUR 26 million and reinforcing the Company’s position in the Basque Country, where in 2005 it took up a 25% stake in IMQ Seguros, the largest health insurance company in the territory. Adeslas also acquired 90% of the companies that own Clínica Santa Catalina in Las Palmas de Gran Canaria and Clínica Santa Cruz de Tenerife, in that city. The total investment was EUR 24.3 million and offers new prospects for the development of the Company’s activities in the Canary Islands. Adeslas now has a majority presence in companies owning eleven hospitals, whose management it has assumed. Its commitment to service quality helped it to secure ISO 9001:2000 certiﬁ cation for a sound guarantee for the patients of these centres. In its capacity as a private health insurance company, in 2006 Adeslas absorbed Inisas, the insurer which it acquired from SEPI in 2005 as part of the privatisation process launched by the latter.

_ More and better services: the Adeslas Medical Centres Provinces are the reference market for healthcare services and health insurance, because users want rapid and easy access to healthcare. Adeslas is aware of this and, in addition to offering the services of a panel of over 27,000 doctors and 280 hospitals, in some provinces it reinforces this offering with Adeslas medical centres, which are modern clinics providing the most appropriate specialities in each place. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

In September it opened a clinic in Cordoba, bringing the number of these medical centres up to twenty-six, with modern facilities enjoyed by the Company’s more than 27,000 insureds in the province. Adeslas also opened new ofﬁ ces in Palencia in 2006 where it has 12,000 insureds, around two-thirds of the total portfolio held by the healthcare industry there.

_ Roll-out of dental care Adeslas is also the leader in Spain in dental care insurance, with a portfolio of around half a million insureds at the end of 2006. However, its activity is not only based on numerous cooperating clinics and prestigious professionals in this speciality, numbering over a thousand throughout Spain, but also on the growing deployment of its own healthcare resources. This year new dental clinics were opened in Hortaleza and Sanchinarro in the Northern Madrid area. The fi rst has fi ve dental offi ces and the second has nine. Adeslas therefore now has eleven of its own clinics, offering general dentistry, dental hygiene and cosmetic dentistry, endodontics, orthodontics, paediatric dentistry and oral surgery.

_ Prevention For several years now Adeslas has been working on incorporating healthcare prevention programmes into the coverage of its insurance policies and contracts. The Chief Executive Ofﬁ cer of Adeslas and the Chairman of Pﬁ zer gave a public presentation on the Cholesterol Programme – Assessment and Control of Cardio-Vascular Risk, a preventive medicine tool for the early detection and treatment of high cholesterol and cardio-vascular risk, promoted by the Adeslas medical centres using educational material and a telephone helpline staffed by specialised nurses. In addition, over 850 teachers have used the Clikasalud.com internet portal in 2006, developed by Adeslas, to work with their pupils on the prevention of ill- nesses and on acquiring healthy habits in relation to such issues as drugs, lei- sure, sex and social relationships. This promotion of disease prevention aims to provide a different way of understanding health that also gives the Adeslas brand an identity. Along these lines, using the message “What about you? What’s your choice?” to draw the public’s attention, in October and November 2006 Adeslas launched a television adver- tising campaign with the agency JWT.

_ Cooperation with the public healthcare system On 2 February 2006, the President of the Autonomous Community Government of Valencia opened a new integrated healthcare centre in Alzira (Valencia) called Alzira II - Sants Patrons, which involved an investment of over EUR 7 million for the joint venture company Ribera Salud UTE, the concession-holder for healthcare services in the autonomous community’s Health Department. Ribera Salud UTE, whose majority partner is Adeslas, built and has managed the Hospital de La Ribera in Alzira since 1999, which in 2006 was included for the ﬁ fth time in the large general hospital category in the TOP-20 BENCHMARKS FOR EX- CELLENCE programme, carried out the by consulting ﬁ rm Iasist.

_ The healthcare debate In April the “Tenth Specialised Conference on Liability in Healthcare” was held, which was organised by Recoletos Conferencias y Formación and sponsored by Adeslas. Representatives of the legal profession and other specialists de- bated the main issues of this subject of particular interest for the entire healthcare system, both public and private, assessing the latest developments in case law and expert opinion. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

As in previous years, in October Adeslas sponsored the “Ninth Conference on Private Healthcare in Spain and its Role in the National Health System”, also organised by the Recoletos Group. The conference was attended by the top representatives of the health departments of some autonomous communities, together with leading personalities in the private sector.

_ Extension of the insurance portfolio Adeslas ended 2006 with 2,384,836 insureds, up 115,412 on 2005 (5.2%). If, in addition to the portfolio strictly relating to the Company, the portfolios of the insurance companies in the Basque Country (the IMQ Group) and Ciudad Real (Lince Servicios Sanitarios) are included, in which the Company has a minority shareholding, togeth- 229_ er with the shared portfolios through co-insurance and reinsurance arrangements in Asturias, Cantabria and Navarre, the total number of insureds reaches 2,707,146. This is not only the leading portfolio in the health insurance industry in absolute terms but also in each of the two segments into which the industry is usually divided, namely the segment relating to insureds in cooperation arrangements with the public authorities and strictly private customers. Group insurance for companies and other private institutions is also a basic developing line of business. At the end of 2006, Adeslas had more than 4,400 policies of this type in force, whose general healthcare or dental coverage beneﬁ ted around 815,000 people. In this context, in 2006 the Bank of Spain awarded Adeslas the health insurance for its personnel. To the more than 5,100 employees of the Bank are added the insurance policies that they have voluntarily taken out for their family members, representing a total of more than 8,000 people. At the end of December, Adeslas entered into an agreement with Port Aventura enabling it to offer its products to the theme park’s employees and visitors.

INSPECTION AND CERTIFICATION

_ Technical vehicle inspection

_ The acquisition of K1, Finland’s second vehicle inspection operator On 28 May 2006 Applus+ acquired the K1 Group, the second vehicle inspection operator in Finland, for EUR 42 million. This transaction was executed in a sale and purchase deed dated 9 November 2006, following completion of the merger of the companies making up the Group. K1 was founded in 1995 and performs 20% of inspections in the country, and has 230 employees and 36 inspection centres in 29 locations in Finland.

_ Continuing expansion in the United States On 21 December 2006, Applus+ Technologies, the US subsidiary of Applus+, was awarded a contract with the State of New York to offer pioneering technology to au- tomate practical driving tests. This innovative technology, developed by Applus+, is called DrivewAtchTM, and replaces paper by digitalising test forms and synchronis- ing all of the data relating to the practical tests with the trafﬁ c authorities’ database. DrivewAtchTM will be used by 170 inspectors with an average annual volume of 550,000 practical tests. The State of Massachusetts extended for two further years Applus+ Technologies’ current emissions inspection concession before it expired. On 18 August 2006 the purchase of the entire share capital of the US technological company AutoLogic LLC was formalised. This company is engaged in the design WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

and production of leading-edge diagnostic equipment and software for the control of polluting gases and for vehicle security inspections, and is the perfect comple- ment for the services currently offered by Applus+ in the United States.

_ Stabilised position in Denmark Following the deregulation of the Danish market in 2005, leading to the arrival of many competitors, the market share of Applus+ Danmark has stabilised at 50%, in a very competitive environment. To rebalance its costs structure and make it more ﬂ exible, Applus+ Danmark has readjusted its workforce, both operational and structural, decentralised certain services (cleaning, call centre) and closed or sold losing or non-strategic stations.

_ Latin America: Chile In Chile, Applus Revisiones Técnicas de Chile, the vehicle inspection concession-holder in Region V, completed construction of its plants and obtained approval to start operating from January 2006. Applus Chile S.A., the vehicle inspection concession-holder in the Metropolitan Region of Santiago de Chile, maintained its leadership position, with 30% of the market, in which four concession-holders compete against each other.

_ Spain: changes in legislation and concession renewals On 4 July 2006, the Catalonia Autonomous Community Government approved a new 18-month extension for the technical vehicle inspection (ITV) concessions granted to Applus+ which expired on 23 July 2006.

In accordance with the measures contained in the Road Safety Special Plan, on 21 June 2006, Royal Decree 711/2006 was published amending certain regulations concerning ITV legislation in Spain. Of particular note was the introduction of technical inspections for motor scooters, establishing that the fi rst inspection must be carried out when the vehicle is three years old and then every two years. The frequency of inspections for motorbikes has also been changed and they will now fi rst be inspected when they are four years old instead of at fi ve years old at present. Each autonomous community will determine the start date for inspections according to the needs in terms of facilities, within three years.

_ Certiﬁ cation

_ Integration and extension of certifi cation approvals In 2006 the process to merge the industrial safety approvals and authorisations in Applus Norcontrol as an Inspection Entity and Control Body for national regulations and Notifi ed Body for European directives was completed. In addition, Applus+ was the fi rst national and multi-location entity to obtain type OC approval (Control Body) from ENAC (Spanish National Accreditation Body). Furthermore, the scope of action in statutory inspections was extended, with the approval of the Ministry for Develop- ment, to the inspection of recreational vessels. Applus+ consolidated its position in the provision of Occupational Risk Prevention Legal Audits and in 2006 it performed audits of representative clients such as: Ernst & Young, Gas Natural, Siemens, Ocaso Seguros, Real Casa de la Moneda and the Anaya Group.

_ Policy on cooperation agreements and alliances Notable results of the leading position achieved by Applus+ in the Energy industry were as follows: _ The framework agreement with Unión Fenosa Generación for technical assistance, supervision and inspection at Combined Cycle Stations. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

_ The supervision and technical assistance agreements for the maintenance of wind parks (Vestas and Neo Energy). _ The supervision of desulphurisation plants for thermal power stations belonging to Endesa, Hidrocantábrico and Unión FENOSA. _ The supervision and legalisation of new combined cycle stations for ENEL, Unión Fenosa, Electrabel, AES and Gas Natural. _ The new inspection contracts with Gas Natural, ENAGAS and CLH. The leading position of Applus+ in the inspection market for the petrochemical industry was reinforced with the achievement of an inspections framework agreement with CEPSA. With this agreement, the presence is complete in all of the large petrochemical complexes and the major groups REPSOL, BP and CEPSA. 231_ In the area of telecommunications, in 2006 cooperation framework agreements were signed with Motorola España, S.A. and its subsidiary Telcel, S.A. for the supervision and inspection of mobile networks. In addition, the project to roll out the Yoigo network (formerly Xfera) was undertaken for Ericsson for which Applus+ was selected for its technical capacity and geographical deployment. This cooperation will extend throughout 2007 and 2008.

_ Main contracts by business area In the area of Project Management, Applus+ won the Integrated Management project for the corporate head ofﬁ ce of Lubasa in Valencia, which is scheduled to last until the end of 2008. The bid submitted by Applus+ had the support of the prestigious architect Jean Nouvel. In the area of Infrastructure, Applus+ has a portfolio of Technical Assistance services for site management projects worth around EUR 20 million. Applus+ achieved a signiﬁ cant positioning in the market for Regional Infrastructure Man- agers in all of the Spanish autonomous communities, including most notably: GISA (Catalonia), SPI/ACEUSA (Galicia), GIASA (Andalusia) and GICAMAN (Cas- tille La Mancha). Novotec was in charge of health and safety coordination during the dismantling of the Windsor tower (Madrid), which is being taken as a model project since it achieved the “zero-accident” rate. Subsequently, Novotec was the winning bidder for the health and safety coordination project at the Repsol Tower building site. Labaqua was the winning bidder of the competition called by Iberdrola Dis- tribución Eléctrica entitled (in translation) Analysis of Dielectric Oil Samples, Taken from Transformer Facilities of Iberdrola Distribución Eléctrica, years 2006 to 2010, worth an approximate total of EUR 600 thousand.

_ Certifi cation in international markets As part of its international expansion, Applus+ issued the fi rst certifi cations with the support of the certifi cation infrastructure recently set up in Shanghai and that already existing in Latin America.

_ Acquisition of the Dutch Group RTD On 6 April 2006 the Dutch group Röntgen Technische Dienst (RTD) was acquired for EUR 178.8 million. This group specialises in industrial non-destructive testing and inspection services to ensure the quality and integrity of technical facilities, so as to expand the life cycle, reduce the maintenance costs and guarantee the security of these facilities. This corporate group has subsidiaries in the Netherlands, Germany, Canada, United States, France, Czech Republic and Australia. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

Another two subsidiaries were later created: Applus+ RTD UK Ltd in the Unit- ed Kingdom (to serve the UK and the North Sea markets) and Applus+ RTD Pte Ltd in Singapore (to operate the Asian market). In 2006, as in prior years, the RTD Group’s activity experienced robust growth, boosted by the expansion of its main customer group: the energy and petrochemical industries.

_ Main contracts won in Latin America In 2006 Applus México signed major contracts for inspection and consulting projects in the petrochemical industry (inspection of 300 km of pipelines in Monterrey for Gas Natural), the energy industry (implementation of an integrated management system for the Federal Commission) and the manufacturing industry (inspections and tests for ICA Flúor across the whole country). Also, signifi cant work was carried out in the fi eld of certifi cation positioning it as one of Mexico’s six largest issuers of Quality Management System certifi - cates (in terms of the number of certifi cates issued). Applus Colombia achieved substantial growth (around 80%) through the diversifi cation of its services and a very active commercial development policy, through its 13 offi ces throughout the country. In Chile, Applus+ continued at the forefront of the country’s consulting and inspection companies, and consolidated its position in the building industry in 2006. Revenue from the inspection and certifi cation business grew at over 40% on 2005. In the area of environmental activity it won the fi rst service contracts with the National Energy Commission.

_ Vehicle engineering, testing and accreditation - Applus+ IDIADA In 2006 the sales of Applus+ IDIADA were up 14% on 2005. 60% of the total revenue was from sales to the international market, a percentage higher than in 2005, reﬂ ecting the increasing number of foreign carmakers, mainly from Asia, who entrust their product development projects to Applus+ IDIADA. Efforts were also made to retain and extend the presence in Europe, in spite of the crisis environment and the strong pressure on costs. In this connection, on 20 January 2006 Applus+ closed the acquisition of the Czech company Airon Technic, whose activity, carried out by 50 expert design engineers, is being managed by Ap- plus+ IDIADA. This acquisition reinforced the presence in Central Europe and Ger- many and broadened the scope of services of Applus+ IDIADA as it offered a more comprehensive service range, including design activities (CAD). Similarly, on 27 January 2006 an agreement was signed with the Government of India for a six-year project to create a national vehicle testing and development infrastructure. With this project Applus+ IDIADA earned a priviledged position in India’s automotive industry and market. Applus+ IDIADA has had an ofﬁ ce in the city of Delhi since 1 September 2006. The investment committed in 2006 totalled EUR 15 million. The most notable investments made in Spain included the construction of a wet handling track, the construction of an anechoic chamber and improvements to the driving line testing area.

_ 6 Main risks and uncertainties

The AGBAR Group carries on its activity in various business areas (mainly the Full Water Cycle, Health Insurance and Inspection and Certiﬁ cation) and has a national and international presence (mainly in Chile and the UK, in Water, and in the Neth- erlands, in Inspection and Certiﬁ cation). As a result, it is subject to various critical factors associated with each of its businesses and locations. These factors relate both to sustainable development of the various businesses (strategy, market, op- WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

erations, technology, environment, fi nancing, etc.) and to the regulatory framework within which they are carried out. The ultimate aim of the premise underlying the AGBAR Group’s general risk policy is to generate sustainable value for its stakeholders. Accordingly, the critical factors associated with each one of the lines of business, from the point of view of the absence of certainty, are considered from their two-fold perspective as generators of risk (to be avoided, mitigated, shared or accepted) and of opportunities. A permanent challenge for the AGBAR Group’s governing and managing bodies in setting their strategy is to determine an optimum balance between risks and opportunities that maximises value. As a result of the AGBAR Group’s general policies and diversifi cation, the Group’s 233_ management and organisational structure, based on the Corporation and the Busi- ness Units, was designed to ensure that the required control procedures are in place to assess, control and mitigate the main risks. In this connection, the Board of Directors carries out supervisory functions in relation to the performance of the business and the control systems in place, both directly and through its committees (the Executive Committee and the Audit and Control Com- mittee). Additionally, the various Management Committees established (the Group’s Management Committee, the Corporate Management Committee and each Business Unit’s Management Committee), based on the frequency of their meetings, constitute a key factor for the assessment, monitoring and evolution of the main risks. The AGBAR Group’s governing and managing structure mentioned above, together with the control systems in place, allow the analysis and monitoring of the Group’s various risks, at both Corporate and Business Unit level, which can be categorised as follows: _ Context risks: economic performance (growth and downturn), laws and regulations (specifi c, labour, tax, personal data protection, IFRS, etc.), country risk (sovereign and political), access to the fi nancial markets, competition, business (mature businesses and new businesses) and innovation. _ Operational and process risks: operational (contracting, renewal, provision of services and customer credit), technological and information processing, human capital, integrity and fraud. _ Financial risks: liquidity, credit, currency and interest rate. _ Decision-making information risks: associated with operating, fi nancial and strategic information. _ Corporate reputation risks: Transparency (listed group) and sustainability (environmental and social responsibility risks). In general, the AGBAR Group considers Risk as any threat that an event, action or omission may prevent it from achieving its objectives and implementing its strategies successfully and, in particular, those which may compromise the economic profi tability of its activities, its fi nancial solvency, compliance with the various applicable laws and its corporate reputation.

_ 7 Financial risk management policies and objectives

The main fi nancial risk management objectives are to ensure the availability of funds to comply with fi nancial obligations in a timely fashion and to protect the euro value of the Group’s economic fl ows, assets and liabilities. The risk management policy designed by the Agbar Group to achieve these objectives is set out in Note 5 to the consolidated fi nancial statements. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

_ 8 Treasury shares

On 20 June 2006 the CNMV was notiﬁ ed of Sociedad General de Aguas de Bar- celona, S.A.’s ownership of 323,981 treasury shares. These shares were “surplus” shares of the May 2001 Option Plan and therefore they are held as treasury shares for the purpose of retiring them, upon reduction of the Company’s share capital by the appropriate nominal amount.

_ 9 Environment and human resources

Within the framework of the movement towards sustainable development of society, the Agbar Group aims to give an example of maximum responsibility in all of its activities. This commitment takes shape in the inclusion of economic, environmental and social considerations in all of the activities carried out by the Group. Environmental commitment, the pursuit of maximum quality standards, technological progress and vocation of service underlie all of the Group’s decisions in its progress towards sustainable development. Thus, the Group, through its Foundation and its companies, takes initiatives which are consistent with the promotion of sustainable development. For this purpose, and to support its vocation for public service and strengthen its ties with society, it enters into support arrangements with entities having a presence in the areas where it operates. The Agbar Group’s Sustainability Report reﬂ ects the environmental, social and economic commitment of the Group in the course of its activities. To this end, it reports indicators and activities in these areas within the various business segments of the Agbar Group: Water, Healthcare, and Inspection and Certiﬁ cation. The Agbar Group was a pioneer in stating the principles of conduct for the organisation and its people as a whole in a Code of Corporate Ethical Standards and Pro- fessional Conduct for the Agbar Group companies. This Code sets out the values that identify the organisation and establishes the principles expected to be followed by the Group companies and their employees, including them in decision-making, strategies, processes and activities. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 CONSOLIDATED FINANCIAL STATEMENTS

235_ WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 03_2 AGBAR GROUP: 2006 ANNUAL REPORT

SOCIEDAD GENERAL DE AGUAS DE BARCELONA AND AGBAR GROUP COMPANIES

ANNEXES TO THE FINANCIAL STATEMENTS CORRESPONDING TO THE FIS- CAL YEAR ENDING 31 DECEMBER 2006

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

HOLDING COMPANY AND CORPORATIONS

WATER AND WATER TREATMENT

APPENDIX I

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

**Ingeniería, Tecnología y Servicios del Agua 237_ y Medio Ambiente, S.L., Sociedad Unipersonal (Sedelam) F 301 193 385 - - 100 Ntra. Sra. de los Buenos Libros, 3 30008 Murcia *Aquagest Región de Murcia, S.A. F Ntra. Sra. de los Buenos Libros, 3 8.085 7.858 508 16.059 100 - 30008 Murcia *Cetaqua, Centro Tecnológico del Agua, Fundación Privada 500 - - - 80 - Avda. Diagonal, 211 08018 Barcelona *Hidroser, Servicios Integrales del Agua, S.A Príncipe de Vergara, 110 1.455 297 (84) 834 50 - 28002 Madrid *Interagua, Servicios Integrales del Agua, S.A., Sociedad Unipersonal F 774 5.290 1.201 14.547 100 - Avda. Diagonal, 211 08018 Barcelona *Sociedad de Explotación de Aguas Residuales, S.A. (SEARSA) 2.062 1.014 153 1.647 50 - Bruc, 49, 3º 1ª 08009 Barcelona *Sociedad Española de Aguas Filtradas, S.A. (Aguas Filtradas) 1.087 486 204 888 50 - Jacometrezo, 4 3º 28013 Madrid *SOREA, Sociedad Regional de Abastecimiento de Aguas, S.A. F 110.445 47.589 16.194 126.427 100 - Avda. Diagonal, 211 08018 Barcelona **Aguas Término de Calvià, S.A. Gran Via Puig de Castellet, 1 150 1.284 41 - - 80 Complejo Boulevard, Bloque 3, local 2 Santa Ponça 07180 Calvià (Mallorca) **Aigües de Cabrera, S.L. Comarca, 47 682 3.503 - - - 100 08700 Igualada (Barcelona) ***Aigua de Rigat, S.A. Comarca, 47 08700 666 7.206 - - - 65 Igualada (Barcelona) ***Construccions i Rebaixos, S.L. Minerva, 11 08700 61 1.124 - - - 100 Igualada (Barcelona)

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

***Canaragua, S.A. F Avda. Manuel Hermoso Rojas, 4, 1ª Of. 6-7 2.404 51.904 7.178 - - 90 38003 Sta. Cruz de Tenerife

****Pozos y Recursos del Teide, S.A. F San Agustín, 8 70 1.233 263 - - 100 38201 La Laguna (Sta. Cruz de Tenerife)

International

United Kingdom *Bristol Water Group, Ltd PO Box 218, Bridgwater Road 1.545 52.114 (251) 256.622 100 - Bristol BS99 7AU UK

APPENDIX I

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

**Bristol Water Holding, Ltd 239_ PO Box 218, Bridgwater Road 11.157 14.291 298 - - 100 Bristol BS99 7AU UK ***Bristol Water Core Holding, Ltd PO Box 218, Bridgwater Road 8.923 - - - - 100 Bristol BS99 7AU UK ****Bristol Water, plc Box 218, Bridgwater Road 8.923 86.594 8.472 - - 100 Bristol BS99 7AU UK ***Verdan Group, Ltd PO Box 218, Bridgwater Road 1.171 795 (1.242) - - 100 Bristol BS99 7AU UK ****Bristol Water Services, Ltd PO Box 218, Bridgwater Road - (1.161) (35) - - 100 Bristol BS99 7AU UK

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

**General de Inversiones Tormes, S.A. 5.000 (296) (144) - - 55 Arco, 7-9 Salamanca

**Granada Salud, S.A. Pedro Antonio de Alarcón, 60 bajos 313 101 20 - - 55 18002 Granada

APPENDIX I

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

**Grupo Iquimesa, S.L., Sociedad 241_ Unipersonal 6.000 28.197 1.827 - - 55 Plaza Amárica, 4 bajos 01005 Vitoria ***Iquimesa Servicios Sanitarios, S.L. Plaza Amárica, 4 bajos 205 1.071 13 - - 55 01005 Vitoria **Infraestructuras y Servicios de Alzira, S.A. Carretera de Corbera, Km 1 1.250 575 252 - - 28 46600 Alzira (Valencia) **Unión Médica Regional, S.L. Príncipe de Vergara, 110 8.889 44.159 5.600 - - 55 28002 Madrid ***Alianza Médica Leridana, S.A. Bisbe Torres, 13 1.418 964 139 - - 43 25002 Lleida ***Casa de Reposo Sanatorio Perpetuo Socorro,S.A. 3.065 3.473 1.263 - - 41 Doctor Gómez Ulla, 15 03013 Alicante ****Hemodinámica Intervencionista de Ali- cante, S.A. 270 248 153 - - 27 Doctor Gómez Ulla, 15 03013 Alicante ****Tomografía Axial Computerizada de Alicante, S.A. 467 845 166 - - 23 Pl. Dr Gómez Ulla 15 03013 Alicante ***Centro Médico de Zamora, S.A. Rda. San Torcuato, 15 325 77 (129) - - 45 49006 Zamora ***Clínica Ntra. Sra. de América, S.A. Arturo Soria, 103 7.020 1.383 1.759 - - 53 28043 Madrid ***Clínica Parque San Antonio, S.A. Avda. Pintor Sorolla, 2 3.104 635 916 _ - 54 29016 Málaga ****Unidad de Radiología Cardiovascular Andaluza, S.A. 138 1.031 497 - - 28 Avda. Pintor Sorolla, 2 29016 Málaga ***Gestión Sanitaria Gallega, S.L., Sole-Shareholder Company 1.522 3.446 1.171 - - 55 Vía Norte, 54 36206 Vigo (Pontevedra)

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

***UMR Canarias, S.L., Sociedad Unipersonal 500 - (11) - - 55 Perojo, 6 Las Palmas de Gran Canaria

INSPECTION AND CERTIFICATION

APPENDIX I

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

***Applus ECA ITV, S.A. 243_ Campus de la Universitat Autònoma de Barcelona Carretera d’accés a la facultat de 1.202 5.242 12.260 - - 27 medicina s/n Bellaterra, Cedanyola del Vallès (Barcelona) ***Applus Iteuve Andalucía, S.A. Pol. Industrial Juncaril, Parcelas 317 y 318 523 3.628 597 - - 31 18210 Peligros (Granada) ***Applus Iteuve Euskadi, S.A. Lemandabide, 13 60 3.974 1.302 - - 53 Vitoria **Idiada Automotive Technology, S.A. L’Arbornar, s/n Apartado de correos 20 1.500 4.570 3.253 - - 36 43710 Sta. Oliva (Tarragona) ***CTAG-IDIADA Safety Technology, SL. Polígono Industrial A Granxa, Prc. 249-250 300 398 121 - - 18 Porriño (Pontevedra) **LGAI Technological Center, S.A. Campus de la Universitat Autònoma de Barcelona Carretera d’accés a la Facultat de 288.000 (100.047) (3.678) - - 50 Medicina s/n Bellaterra, Cerdanyola del Vallès (Barcelona) ***Applus Norcontrol, S.L.U. Carretera N-VI, Km 582, C.P. 15.168 120 34.938 (897) - - 50 15168 Sada ( A Coruña) ****Novotec Consultores, S.A., Sociedad Unipersonal Campezo,1 Ediﬁ cio 4. Parque Empresarial 2.029 7.968 (875) - - 50 las Mercedes 28022 Madrid ****Indulab 2000, S.L. Dos de Maig, 283-285 180 60 36 - - 50 08025 Barcelona ***** Laboratoris i Serveis Agroalimentaris, S.L. Pare Gallisa, 19 entlo. 11 73 22 - - 50 08500 Vic (Barcelona) ***Irtapplus, S.L. Campus de la Universitat Autònoma de Barcelona Carretera d’accés a la Facultat de 1.969 95 (38) - - 44 Medicina s/n Bellaterra, Cerdanyola del Vallès (Barcelona)

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

****Applus Agroambiental, S.A. Partida Setsambs, s/n 1.051 162 59 - - 33 Sidamon (Lleida) ***Laboratorio de Control de Aguas, S.A. (Labaqua) 693 4.676 2.338 - - 52 Alona, 33 03007 Alicante

International

APPENDIX I

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

Luxembourg 245_ **Applus Automotive Technology Luxembourg, SARL 100 122 254 - - 42 8 rue du Moulin L-6914 Roodt-sur-Syre (Luxembourg) Netherlands ***Röntgen Technische Dienst NV Energielaan 10a 199 437 356 - - 53 2950 Kapellen (Belgium) **Röntgen Technische Dienst Holding, B.V. - Rtd 21 22.693 11.097 - - 53 Delftweg 144 3046 NC Rotterdam (The Netherlands) ****RTD International, B.V. Delftweg 144 4 44 - - - 53 3046 NC Rotterdam (The Netherlands) ***Röntgen Technische Dienst Bv Delftweg 144 2.723 21.357 7.085 - - 53 3046 NC Rotterdam (The Netherlands) Portugal ****Applus Portugal Ltda. Largo da Lagoa, 15-H, Linda a Velha 130 (173) 30 - - 51 Concelho de Oeiras (Portugal) Czech Republic **Airon TechniK, A.S. Havlickova, 57 328 994 325 - - 37 508 01 Horice (Czech Republic) ***RTD Quality Services, S.R.O. U Stadionu 89 73 1.209 566 - - 53 530 02 Pardubice (Czech Republic) Africa ***** RTD QUALITY SERVICES NIGERIA, Ltd. B&B GOS Yard, NPA Express Way, Ekpan, 11 (151) (5) - - 53 Warri, Delta State, Nigeria North America ****RTD Quality Services Canada, Inc. 1431 – 70 Avenue 130 329 2.086 - - 53 Edmonton. Alberta T6P 1N5 (Canada) **Applus Inc. 2711 Centerville Road, Suite 400. 30.372 (7.454) (837) - - 53 Wilmington (New Castle), Delaware, USA

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT

APPENDIX I

OWNERSHIP THOSUANDS OF EUROS INTEREST HELD BY AGBAR

GROUP COMPANY SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIRECT INDIRECT 247_ **Applus Revisiones Técnicas Chile, S.A. 471 48 (195) - - 53 Santiago de Chile (Chile)

Oceania RTD Steeltest PTY, Ltd. 2 Thorpe Way 60 850 181 - - 53 Kwinana WA 6167, Australia

OWNERSHIP INTEREST THOSUANDS OF EUROS HELD BY AGBAR ASSOCIATE SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIVIDENDS RECEIVED BY AGBAR IN 2005 DIRECT INDIRECT

WATER AND WATER TREATMENT

APPENDIX II

OWNERSHIP INTEREST THOSUANDS OF EUROS HELD BY AGBAR ASSOCIATE SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIVIDENDS RECEIVED BY AGBAR IN 2005 DIRECT INDIRECT

*Clavegueram de Barcelona, S.A. (CLABSA) 249_ Acer, 16 3.606 498 1.085 1.947 323 54 - 08038 Barcelona **Companyia d’Aigües de Palamós Pl. Padró, 1 1.969 402 90 - - - 56 17230 Palamós (Girona) **Conducció del Ter, S.L. (CONTER) Bourg de Peaje, 89-97 18 4 54 - - - 48 17220 Sant Feliu de Guíxols (Girona) **Depuradora d’Osona Historiador Ramon d’Abadal i de Vinyals, 5 210 46 484 - - - 25 08500 Vic (Barcelona) **Drenatges Urbans del Besòs Avinguda Sant Julià, 241 300 43 82 - - - 50 08400 Granollers (Barcelona) **E.M. Aguas de Jumilla Avenida de Levante, 32 601 93 207 - - - 49 30520 Jumilla (Murcia) **E.M. Aguas de Lorca Príncipe Alonso, 2 3.005 471 1.025 - - - 49 30800 Lorca (Murcia) ***E. M. Aguas de Montilla Antonio Gala, 2 1.000 19 66 - - - 25 14550 Córdoba E.M. d’Aigües de la Costa Brava, S.A. Plaça Josep Pla, 4 3r, 1a 600 - 197 - - - 42 17001 Girona **Empresa Mixta de Aguas Residuales de Alicante, S.A. (EMARASA) 1.965 1.485 1.147 - - - 50 Alona, 31-33 03007 Alicante **Empresa Mixta d’Aigües de l’Horta, S.A. Placeta de l’Era, 12 1.803 239 514 - - - 49 46900 Torrent (València) ***Empresa Municipal de Abastecimiento y Saneamiento de Granada, S.A. (EMASAGRA) 2.656 1.451 2.796 - - - 24 Molinos, 58-60 18009 Granada **Empresa Municipal de Aguas y Saneamiento de Murcia, S.A. (EMUASA) 6.087 7.261 3.823 - - - 49 Plaza Circular, 9 30008 Murcia **Empresa Municipal Mixta d’Aigües de Tarragona, S.A. (EMATSA) 361 1.817 2.500 - - - 49 Avinguda Pau Casals, 13-15 43003 Tarragona *Girona, S.A. Travessia del Carril, 2, 6è 3a 1.200 1.805 440 630 57 31 - 17001 Girona

OWNERSHIP INTEREST THOSUANDS OF EUROS HELD BY AGBAR ASSOCIATE SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIVIDENDS RECEIVED BY AGBAR IN 2005 DIRECT INDIRECT

International

APPENDIX II

OWNERSHIP INTEREST THOSUANDS OF EUROS HELD BY AGBAR ASSOCIATE SHARE CAPITAL RESERVES PROFIT FOR THE YEAR AMOUNT CARRYING DIVIDENDS RECEIVED BY AGBAR IN 2005 DIRECT INDIRECT

*Aguas Provinciales Santa Fe, S.A. 251_ 9 de julio, 2824, 1r piso 14.887 (46.991) (13.675) - - 25 15 3000 Santa Fe (Argentina)

INSPECTION AND CERTIFICATION

International

* Companies in which Agbar has a direct ownership interest ** to ****** Companies in which Agbar has a indirect ownership interest at various levels WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 _PROPOSED RESOLUTIONS WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 253_ WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 04_1 AGBAR GROUP: 2006 ANNUAL REPORT

Proposed resolutions_

PROPOSED RESOLUTIONS ADOPTED BY THE BOARD OF DIRECTORS ON 2 MAY 2007 FOR SUBMISSION TO THE ORDINARY GENERAL SHAREHOLDERS’ MEETING OF SOCIEDAD GENERAL DE AGUAS DE BARCELONA, S.A., CALLED FOR 29 JUNE 2007 (FIRST ANNOUNCEMENT) AND FOR THE FOLLOWING DAY, 30 JUNE 2007 (SECOND ANNOUNCEMENT).

_ 1 Approve the individual annual accounts, including the balance sheet, profi t and loss account and report, and the consolidated annual accounts, including the balance sheet, profi t and loss account, statement of recognized income and expenditure, cash fl ow statement and report, corresponding to the fi nancial year 2006, and the respective management reports, verifi ed together with the individual and consolidated management reports by the company’s account auditors. Also approve the administration of the Board of Directors, the Chairmanship and the Company Management. The individual annual accounts and management report are printed on the back of 50 sheets of offi cial headed paper, class 8, numbered between OH8355941 and OH8355990 inclusive, and on the back of a sheet of offi cial-headed paper, same class 8, numbered OH8355991, and the consolidated annual accounts and their respective management report can be read on the back of 105 sheets of offi cial headed paper, class 8, numbered between OH8355831 and OH8355935 inclusive, and on the back of a sheet of offi cial-headed paper, same class 8, numbered OH8355936 and have been verifi ed by the auditing company Deloitte, S.L.

_ 2 Approve the Proposed Application of Proﬁ t for the ﬁ nancial year 2006, formulated by the Board of Directors in the following terms and authorize the Board of Directors to determine the due date and method of payment of the supplementary dividend:

Net proﬁ t 2006 142,793,733.91 Legal reserve 295,295.40 Paid-out interim dividend 25,928,915.25 Supplementary dividend 41,486,264.40 Voluntary reserve 75,083,258.86

* Amounts in euros WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 04_1 PROPOSED RESOLUTIONS

255_

_ 3 (Pending formulation by a future Board meeting).

_ 4 Re-elect as the company’s account auditors for the individual and consolidated accounts and for a period of a year, i.e. for the year 2008, the company Deloitte, S.L.

_ 5 Reduce the share capital of the company by 323,981 euros, for the amortization of 323,981 of the Company’s own shares, each of one euro par value, having acquired them from the subscribing entity, in the exercising of the right of option to buy awarded by the Company, having become surplus to the now completed May 2001 Options Plan, established with the aim of increasing the capital agreed upon on 25 May 2001, by virtue of which the said shares were issued. As a result of the reduction, the share capital shall be set at 149,641,707 euros. The reduction of capital shall be done so with the aim of amortizing the previously referred to own shares and as they have become surplus to the now completed May 2001 Options Plan, established to issue and suppress the right of preferential subscription in the capital increase agreed upon on 25 May 2001. The reduction of capital, through the amortization of own shares, shall be carried out as quickly as possible once the corresponding announcements have been published. The reduction of capital, by the amortization of own shares, shall be accounted for in the relevant capital and reserve accounts. Once the reduction in capital is brought about, Sections 5 & 6 of the company’s Articles of Association will be rewritten to become as follows:

“Section 5 – Share capital. The share capital is of ONE HUNDRED AND FORTY-NINE MILLION, SIX HUNDRED AND FORTY ONE, SEVEN HUNDRED AND SEVEN (149,641,707) EUROS and is entirely subscribed and disbursed.”

“Section 6 – Shares. The share capital is made up of 149,641,707 shares each of one euro of par value, represented through account entries. The shares which are representative of the capital stock have the feature of bearer securities and are governed pursuant to what is set forth in the regulatory policy of the Stock Market. The shares are indivisible. The rules of joint ownership and the establishing of rights “in rem” on shares, or their attachment, shall be established as WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 04_1 AGBAR GROUP: 2006 ANNUAL REPORT

in Sections 66 to 73 of the Modiﬁ ed Text of the Public Limited Companies Act.”

Authorize, without distinction, the Board of Directors, Executive Committee, Chairman and Secretary so that any one of them, with the widest possible powers, can carry out this resolution, publish the corresponding announcements, make known the new drafting of Sections 5 & 6 of the Articles of Association, vouch for the reduction of capital for the said purpose before the Spanish Stock Market Commission, the Stock Exchanges and the Spanish Central Securities Depository (IBERCLEAR), as well as agree to whatever action and document that should be necessary or conve- nient to carry out fully the resolution.

_ 6 Acknowledge existence of the modiﬁ cation of the Board of Directors’ Regulati- ons, made by the Board in its meeting of 2 May 2007, affecting Sections 4, 5, 9, 11, 12, 13, 14, 16, 17, 19, 26 and 30.

_ 7 Authorize the Board of Directors so that it can, either by itself or through its de- legates or representatives, directly on behalf of the Company, or indirectly through a subsidiary company, acquire derivatively the Company’s own shares, under the form of purchase or swap, or any other form permitted by law, up to a maximum amount of 7,482,085 shares, at a price or value not exceeding by more than 15% or less than 15% the closing price of the day before. This authorization will be valid for a maximum period of 18 months starting from the adoption of this resolution, with the remaining requirements of Article 75 of the Public Limited Companies Act and will cease to have effect in the areas not used of the authorization granted on this matter by the Ordinary General Meeting of 19 May 2006.

_ 8 Authorize the Board of Directors to proceed to execute the resolutions adopted, with powers of rectiﬁ cation, complementation, execution, development and subs- titution in favour of the Chairman, or any other Director, moreover authorizing, es- pecially its Chairman and Secretary, so that any of them indistinctly can proceed to legalize in a public document the resolutions which can be registered, signing to that effect any public or private documents, even those of a repairing, rectifying, complementing or clarifying nature, which may be necessary to complete their registration in the Mercantile Registry.

PROPOSED RESOLUTION REFERRING TO POINT 3 OF THE AGENDA OF THE ORDINARY GENERAL MEETING OF SHAREHOLDERS CONVENED FOR THE 29 JUNE 2007, AT THE FIRST NOTICE, AND FOR THE FOLLOWING DAY, 30 JUNE, AT THE SECOND NOTICE, FORMULATED BY THE BOARD OF DIRECTORS OF SOCIEDAD GENERAL DE AGUAS DE BARCELONA, S.A. IN ITS MEETING OF 25 MAY 2007 AND AT THE PROPOSAL OF THE APPOINTMENT AND REMUNERATI- ON COMMISSION, MEETING PREVIOUSLY ON THAT SAME DAY.

a) Establish as 12 the number of members of the Board of Directors. b) Re-elect Mr Juan Rosell Lastortras as Director, of the independent director type, for the statutory period of 5 years. WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 04_1 PROPOSED RESOLUTIONS

257_ WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 04_1 AGBAR GROUP: 2006 ANNUAL REPORT

Published by Dirección Corporativa de Marketing Grupo Agbar Av. Diagonal, 211 - 08018 Barcelona Tel. 933 422 000 Fax 933 422 662 www.agbar.es

Design & Production MRM WorldWide www.mrmww.es

Legal Deposit WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442 Av. Diagonal, 211 _ 08018 Barcelona Tel. 93 342 20 00 _ Fax 93 342 26 62 www.agbar.es WorldReginfo - 55e28e9b-e3ff-41cc-974f-1728fd238442