Waste Business Journal

Veolia Environnement Posts Drop in Income Despite 13% Gain in Revenue

Date: March 6, 2009

Source: Veolia Environnement SA

2008 Annual Results

Good resilience of operating cash flow due to its complementary businesses and despite the impact of the downturn in the economy

Priority for 2009: Positive free cash flow, particularly due to a reduction in net investments by at least €1.6 billion as compared with 2008

• 2008 consolidated revenue up 13.4% to €36,205 million, due in particular to sustained organic growth of 9.6%.

• An increase in operating cash flow of 2% at constant exchange rates to €4,137 million (down 0.6% at current exchange rates).

• Recurring net income attributable to equity holders of the parent of €703 million before the impact of the impairment of intangible assets in the waste management division in Germany, as compared with €926 million in 2007.

• 2008 net income attributable to equity holders of the parent of €405 million as compared with €928 million in 2007, after taking into account the €430 million impairment of goodwill and intangible assets in Veolia Environnement’s waste management division⁽¹⁾.

• Following an average increase of 22% per year over the course of the last four years, the dividend per share is maintained at the same level as in 2007 at €1.21.

• The objective for 2009 is to generate positive free cash flow after payment of the dividend, due to:

  • a reduction in net investments by at least 1.6 billion in 2009, a decrease of 44% as compared with 2008,

  • at least €1 billion of asset disposals in 2009, after €761 million in 2008. Disposal program increased to €3 billion for the 2009-2011 period in order to generate internally the resources for growth,

  • and a reduction of costs of €280 million in 2009. This includes €180 million in connection with the Veolia 2010 Efficiency Plan and €100 million in connection with the waste management division’s new plan to adapt to the current business climate, and in addition to the measures already taken in Germany.

Chairman and Chief Executive Officer Henri Proglio commented: "Veolia Environnement has demonstrated its resilience in the present global economic downturn and has considerable strengths enabling it to rise to the challenges of this environment. For more than 150 years our business has consisted of serving the essential needs of our customers. The nature of our contracts offers good visibility through our recurring cash flows. We have a strong financial structure, an average debt maturity of more than nine years and net liquidity of €4 billion. These strengths and the complementary nature of our businesses allow us to face the current business climate with confidence but also with prudence. In 2009, our efforts will be intensified and focus on the reduction of costs and improving the generation of cash flow".

BUSINESS AND DEVELOPMENT TRENDS

Veolia Environnement continued its growth despite the deterioration in the economic environment, which was particularly acute during the 4th quarter within the Group’s waste management business.

The Group’s consolidated revenue increased by 13.4% (+15.8% at constant exchange rates) to €36,205.5 million in 2008 compared with €31,932.2 million in 2007. Internal growth amounted to 9.6%, driven by dynamic commercial development within all the Group’s businesses and highlighted by work on new engineering and construction contracts in the Water division. The increase in energy prices within the Energy division contributed €473 million to revenue. External growth was 6.2%, particularly due to acquisitions by Veolia Environmental Services (the waste management division) in Germany, Italy and France (total contribution of €828.6 million), by the Energy division in the United States (€303.1 million) and by Veolia Water, primarily in the United Kingdom and Japan (total contribution of approximately €268.4 million).

Revenue from outside France amounted to €21,682.6 million, i.e. 59.9% of total revenue compared with 57.5% in 2007.

The negative impact of foreign exchange rates on revenue of €778.3 million reflects principally the depreciation of the US dollar (-€191.4 million) and the British pound (-€437.3 million) against the Euro, partially offset by the appreciation of the Czech Koruna (+€109.0 million) against the Euro.

DEVELOPMENT

Veolia Environnement won several contracts in its key development areas both in France (Water: Nantes and the Paris area (SIAAP); Energy: a thermal system in Bordeaux etc.), in Europe (Water: Warsaw, Ireland; Environmental Services: London (Southwark), West Berkshire; Energy: Saragossa; Transportation: Bilbao, Germany, etc.), in North America, Asia Pacific (India, Australia, China etc.) and the Middle East (Water: Dubai, Saudi Arabia, Abu Dhabi).

As in 2007, 2008 also demonstrated a strong renewal rate for our contracts.

The Group also completed several targeted acquisitions in line with its development strategy, including, in France, the acquisition of Bartin Recycling Group, a group specializing in the collection and recycling of industrial waste, particularly ferrous and non-ferrous metals, and in Poland through the acquisition of Praterm, a heat production and distribution company.

OPERATING PERFORMANCE

Operating cash flow amounted to €4,137.3 million compared with €4,163.7 million in 2007, an increase of 2% at constant exchange rates (a decrease of 0.6% at current exchange rates). These changes reflect the development of new business activities, the Group’s recent acquisitions, the strong performance of the Energy division and the favorable impact of the productivity plan. These benefits were offset, however, by the following negative impacts:

• foreign exchange movements (-€107 million), reflecting in particular the appreciation of the euro against the other principal currencies where the Group operates;

• the deterioration in operating performance of the Environmental Services (waste management) division, with a particularly unfavorable business climate beginning in the third quarter (prices and volume), despite the restructuring actions taken during the second half of the year (new management team, shutdown of two regional offices, restructuring plan);

• the increase in development costs and other overheads in particular in Asia;

• cost increases, particularly for fuel, not passed on to customers. Operating income amounted to €1,951.3 million in 2008 compared with €2,482.5 million in 2007, a decline of 21.4% at current exchange rates and 18.4% at constant exchange rates. In addition to the factors impacting operating cash flow, this result reflects impairment losses recognized by Veolia Environmental Services in Germany (-€405.6 million), as well as the depreciation and amortization charged as a result of new contracts and recent acquisitions. Recurring operating income amounted to €2,283.2 million compared with €2,454.9 million in 2007, a decrease of 7.0% at current exchange rates and 4.0% at constant exchange rates. This takes into account a €62.6 million impairment charge on intangible assets recognized following the acquisition of the Environmental Services division in Germany.

NET INCOME

Net finance costs increased from €818.8 million in 2007 to €924.7 million in 2008. This increase reflects the increase in average net financial debt and the cost of borrowing from 5.49% in 2007 to 5.61% in 2008 linked to the increased cost of the liquidity.

Other financial income and expenses decreased from net financial income of €4.1 million in 2007 to a net financial expense of €51.2 million in 2008. This change mainly reflects a decrease in gains and losses on the Group’s loans and receivables of €26.8 million, including the absence in 2008 of a €26.5 million gain recognized in 2007 following the resolution of a litigation with the Berlin Lander and foreign exchange losses arising as a result of the appreciation of the euro against certain other currencies.

The Group’s net income tax expense rose to €468.8 million compared with €417.9 million in 2007. The higher tax rate in 2008 is primarily due to a non-recurring tax charge in respect of the Environmental Services business in Germany, the impact of non-activated tax losses and the change in tax law in Germany and the UK.

Net income from discontinued operations changed from a consolidated loss of €11.8 million in 2007 to a profit of €184.2 million in 2008. The main factor underlying the profit for 2008 was the €176.5 million net gain on the divestment of Clemessy and Crystal within the Energy division, including €60 million which was allocated to minority interests.

Net income attributable to equity holders of the parent amounted to €405.1 million in 2008 compared with €927.9 million in 2007. Restated in particular for the positive contribution of discontinued operations and the impairment recorded against goodwill, recurring net income attributable to equity holders of the parent amounted to €658.6 million for 2008 compared with €925.8 million for 2007. Excluding the impact, net of tax, of impairment losses charged against intangible assets following the acquisition of the operations of Veolia Environmental Services in Germany, recurring net income attributable to equity holders of the parent for 2008 amounted to €703 million.

CASH FLOWS

The Group’s cash flow from operations before changes in working capital and income taxes paid amounted to €4,178 million compared with €4,219 million in 2007, a decrease of 1.0%. The Group pursued its portfolio rationalization policy by selling €761 million (compared with €453 million in 2007) of industrial assets and financial disposals, disposing of entities outside of its core development (notably Clemessy and Crystal in the Energy division, for net proceeds of €226 million), and creating new partnerships designed to strengthen the Group’s development capacity. Total cash resources thereby increased from €4,672 million in 2007 to €4,939 million in 2008.

Those resources cover the Group’s interest expense and current tax charge, the totality of its maintenance capital expenditure (€1,860 million), its investment in growth and development linked to existing business (€1,169 million) and its new operating financial assets (€336 million) less repayments of operating financial assets (€358 million) as well as the change in working capital resulting from growth in business.

The Group continued its development efforts and completed new projects and targeted acquisitions amounting to €1,336 million, including in particular its BOT (Build, Operate and Transfer) projects in the UK, China and the Middle East as well as the acquisitions of Bartin Recycling Group in France and Praterm in Poland.

After these investments and the payment of dividends, the Group’s net financial debt amounted to €16.5 billion at December 31, 2008 compared with €15.1 billion at December 31, 2007. The ratio of net financial debt / (cash flow from operations plus cash generated from principal payments on operating financial assets) stood at 3.6X at December 31, 2008 compared with 3.3X at December 31, 2007. The refinancing transactions entered into during the year made it possible to maintain the Group’s average debt maturities in excess of 9 years and to increase the Group’s liquidity, net of ishort-term debt, to €4.0 billion⁽¹⁾.

AFTER-TAX RETURN ON AVERAGE CAPITAL EMPLOYED

In line with the indications given last October, the Group’s after-tax return on average capital employed amounted to 8.4% compared with 10.8% in 2007. Entities that were newly consolidated in 2008, and the Group’s principal acquisitions during 2007, had a negative impact of 1.8%.

DIVIDEND

Veolia Environnement has decided to submit to shareholders, at the Annual General Meeting of Shareholders to be held on May 7, 2009, a dividend per share of €1.21, payable in cash or in shares of Veolia Environnement. These new shares will be issued with a maximum discount of 10% of the average opening price on the Euronext of the shares over the twenty trading days prior to the day of the Annual General Shareholders Meeting less the amount of the dividend. The exdividend date has been set on May 13, 2009. The period during which shareholders may choose the option of the payment of the dividend in cash or in shares will begin on May 13, 2009 and end on May 28, 2009. The 2008 dividend will be paid – in cash or in shares – beginning on June 8, 2009.

⁽¹⁾ Liquidity net of short term debt equals cash and equivalents plus undrawn, confirmed credit lines less current borrowings, bank overdrafts and other cash position items.

OUTLOOK

In the current economic climate, Veolia Environnement has established the generation of positive free cash flow after the payment of dividends as its priority for 2009.

To achieve this objective, the Group expects to reduce its net investments by at least €1.6 billion as compared with 2008, so that net investments in 2009 should not exceed €2 billion. In order to internally generate the resources for growth, Veolia Environnement has expanded its asset disposal plan. Asset disposals should total €3 billion over the 2009–2011 period, with an objective of at least €1 billion in 2009, after nearly €0.8 billion in divestments already completed in 2008. In addition, measures to reduce costs in the amount of €280 million have been identified for 2009, including €180 million in connection with the “2010 Efficiency” plan and €100 million in connection with the waste management division's plan to adapt to the current business climate.

Overall, in light of the Group’s priority to generate positive free cash flow in 2009, we have established an objective for operating cash flow, after deduction of net investments, of approximately €2 billion at constant exchange rates.

Important Disclaimer
Veolia Environnement is a corporation listed on the NYSE and Euronext Paris. This press release contains “forward-looking statements” within the meaning of the provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from the forward-looking statements as a result of a number of risks and uncertainties, many of which are outside our control, including but not limited to: the risk of suffering reduced profits or losses as a result of intense competition, the risk that changes in energy prices and taxes may reduce Veolia Environnement’s profits, the risk that governmental authorities could terminate or modify some of Veolia Environnement’s contracts, the risk that acquisitions may not provide the benefits that Veolia Environnement hopes to achieve, the risk that Veolia Environnement’s compliance with environmental laws may become more costly in the future, the risk that currency exchange rate fluctuations may negatively affect Veolia Environnement’s financial results and the price of its shares, the risk that Veolia Environnement may incur environmental liability in connection with its past, present and future operations, as well as the risks described in the documents Veolia Environnement has filed with the U.S. Securities and Exchange Commission. Veolia Environnement does not undertake, nor does it have, any obligation to provide updates or to revise any forward-looking statements. Investors and security holders may obtain a free copy of documents filed by Veolia Environnement with the U.S.

Media contact: Marie-Claire Camus +33 1 71 75 06 08

Press release also available on our web site:
http://www.veolia-finance.com

Notes

(1) Impairment charge on goodwill of -€343 million, of -€62.6 million on intangible assets identified at the opening balance sheet and a net tax charge of -€24 million linked to the impairment.

(2) To ensure the comparability of financial years, the accounts at 31 December 2007 have been restated by the amount of income from the disposals in 2008 (in particular for Clemessy & Crystal in the Energy division) according to IFRS 5 and are presented in the income statement in the line item “Net income from discontinued operations”. The 2007 revenue for Clemessy and Crystal was €696m.