6-K 1 veoliafiling.htm VEOLIA FORM 6-K VEOLIA ENVIRONNEMENT 2007 Reference Document



 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


FORM 6-K


REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 OF

THE SECURITIES EXCHANGE ACT OF 1934


For the month of April 2008

Commission File No. 001-15248


 

VEOLIA ENVIRONNEMENT

(Exact name of registrant as specified in its charter)

 


36-38, avenue Kléber, 75116 Paris, France


(Address of principal executive offices)

 


Indicate by check mark whether the Registrant files or will file

annual reports under cover of Form 20-F or Form 40-F

Form 20-F

Form 40- F


Indicate by check mark whether the Registrant is submitting the

Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes

No


Indicate by check mark whether the Registrant is submitting the

Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes

No


Indicate by check mark whether the Registrant, by furnishing the

information contained in this Form, is also thereby furnishing the information to the

Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934

Yes

No


(If “Yes” is marked, indicate below the file number assigned to the

Registrant in connection with Rule 12g3-2(b): 82- )


 

 



Included herein is a free translation into English of our document de référence (the "Reference document"), filed by us with the French Autorité des marchés financiers on March 31, 2008 under number D.08-172, and provided solely for the convenience of English speaking readers. This document does not include the annexes to the French version of the Reference document. Our Annual Report on Form 20-F, when filed, will contain substantially all of the information set forth in the Reference document and certain additional information not included therein. We are required to file the Annual Report on Form 20-F with the U.S. Securities and Exchange Commission by no later than June 30, 2008.


We make some forward-looking statements in the Reference document. When we use the words "aim(s)," "expect(s)," "feel(s)," "will," "may," "believe(s)," "anticipate(s)" and similar expressions in the Reference document, we are intending to identify those statements as forward-looking. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. You should not place undue reliance on these forward-looking statements, which speak only as of the date of the Reference document. In particular, from time to time in the Reference document we state our expectations in terms of revenue to be generated under new contracts recently won or awarded or from new investments made and new assets or operations acquired, though we may have not yet commenced operations under these new contracts nor begun operating these new assets and operations at the time we make these statements. These revenue estimates are based on our management's current assumptions regarding future sales volumes and prices, which are subject to a number of risks and uncertainties that may cause actual sales volumes and prices to differ materially from those projected. As a result, actual revenue recorded under these new contracts or from these new investments, assets and operations may differ materially from those set forth in the Reference document. Other than in connection with applicable securities laws, we undertake no obligation to publish revised forward-looking statements to reflect events or circumstances after the date of the Reference document or to reflect the occurrence of unanticipated events. We urge you to carefully review and consider the various disclosures we make concerning the factors that may affect our business, including the disclosures made in Chapter 4 "Risk Factors" and Chapter 9 "Examination of Financial Condition and Results".


Unless otherwise indicated, information and statistics presented in the Reference document regarding market trends and our market share relative to our competitors are based on our own research and various publicly available sources.





 





This is a free translation into English of Veolia Environnement’s document de référence (the “Reference Document”), filed by Veolia Environnement with the French Autorité des marchés financiers on March 31, 2008 under number D.08-172, and is provided solely for the convenience of English-speaking readers. This document does not include the annexes to the French version of the Reference Document. Veolia Environnement’s Annual Report on Form 20-F, when filed, will contain substantially all of the information set forth in this Reference Document and certain additional information not included herein. Veolia Environnement is required to file the Annual Report on Form 20-F with the U.S. Securities and Exchange Commission by no later than June 30, 2008.

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2007 REFERENCE DOCUMENT



Pursuant to article 28 of European Regulation n° 809/2004, the following documents are incorporated by reference in this reference document: (i) the consolidated financial statements for the 2006 fiscal year and the corresponding statutory auditor’s report, included on pages 158 et. seq. and on pages 281 and 282, respectively, of Veolia Environnement’s reference document for the 2006 fiscal year, filed with the AMF on April 3, 2007 under number D.07-0264, and (ii) the consolidated financial statements for the 2005 fiscal year and the corresponding statutory auditor’s report, included on pages 168 et. seq. and on pages 277 and 278, respectively, of Veolia Environnement’s reference document for the 2005 fiscal year, filed with the AMF on April 6, 2006 under number D.06-0231.



This reference document was filed with the Autorité des marchés financiers on March 31, 2008, pursuant to Article 212-13 of its general regulations. This reference document may be used in connection with a financial transaction if supplemented by a note d’opération approved by the Autorité des marchés financiers.









TABLE OF CONTENTS1


Chapter 1 PERSONS ASSUMING RESPONSIBILITY FOR THE REFERENCE DOCUMENT

3

1.1

Person assuming responsibility for information contained herein

3

1.2

Certification

3

Chapter 2 PERSONS RESPONSIBLE FOR AUDITING THE FINANCIAL STATEMENTS

4

2.1

Principal Statutory Auditors

4

2.2

Deputy Statutory Auditors

4

Chapter 3 SELECTED FINANCIAL INFORMATION

5

Chapter 4 RISK FACTORS

6

4.1

Risks relating to the issuer

6

4.2

Risk Management

10

4.3

Audit and internal controls

19

4.4

Ethics and vigilance

20

4.5

Insurance

21

Chapter 5 INFORMATION RELATING TO THE ISSUER

24

5.1

History and development of the Company

24

5.2

Investments

25

Chapter 6 BUSINESS OVERVIEW

27

6.1

Principal business activities

27

6.2

Market overview

62

6.3

Environmental regulation, policies and compliance

71

Chapter 7 ORGANIZATIONAL CHART

85

Chapter 8 PROPERTY, PLANTS AND EQUIPMENT

88

Chapter 9 OPERATING AND FINANCIAL REVIEW

89

9.1

Results of operations in 2007

89

9.2

Accounting and financial information

92

9.3

Financing

103

9.4

Return on capital employed (ROCE)

109

9.5

Statutory auditors’ fees

111

9.6

Outlook

111

Chapter 10 CASH FLOW AND CAPITAL

112

Chapter 11 RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

113

11.1

Research and Development (R&D)

113

11.2

Patents and licenses

117

Chapter 12 TREND INFORMATION

118

12.1

Trends

118

12.2

Recent developments

118



1 The format of this reference document follows that set forth in Annex I of European Regulation n° 809/2004, adopted pursuant to European Directive 2003/71/EC.



1




Chapter 13 FORECASTS OR ESTIMATES OF RESULTS

120

13.1

Forecasts

120

13.2

Statutory Auditors’ Report on profit forecasts

120

13.3

Objectives and outlook

121

Chapter 14 BOARD OF DIRECTORS, MANAGEMENT AND SUPERVISORY BODIES

122

14.1

Board of Directors of the Company

122

14.2

Legal judgments, bankruptcies, conflicts of interest and other information

134

Chapter 15 COMPENSATION AND BENEFITS OF DIRECTORS AND SENIOR EXECUTIVES

135

15.1

Compensation of the chairman and chief executive officer and of directors

135

15.2

Retirement and other benefits

139

15.3

Compensation of executive committee members

140

Chapter 16 FUNCTIONING OF BOARD OF DIRECTORS, MANAGEMENT AND SUPERVISORY BODIES

141

16.1

Functioning of supervisory bodies and management

141

16.2

Operation of corporate governance bodies of Veolia Environnement

147

Chapter 17 EMPLOYEES – HUMAN RESOURCES

153

17.1

Human resources policy

153

17.2

Corporate information (NRE Law)

160

17.3

Stock option plans

166

17.4

Award of free shares

171

17.5

Employee profit-sharing

172

17.6

Purchases, sales or transfers of the Company’s shares
by members of the board of directors and officers

173

Chapter 18 PRINCIPAL SHAREHOLDERS

177

18.1

Shareholders of Veolia Environnement as of December 31, 2007

177

18.2

Evolution in the ownership of share capital

178

Chapter 19 RELATED PARTY TRANSACTIONS

180

Chapter 20 FINANCIAL INFORMATION CONCERNING THE ASSETS, FINANCIAL CONDITION
AND RESULTS OF THE ISSUER

181

20.1

Consolidated Financial Statements

181

20.2

Statutory Financial Statements

333

20.3

Dividend policy

381

20.4

Litigation

382

20.5

Material changes in financial condition or commercial position

387

Chapter 21 ADDITIONAL INFORMATION CONCERNING SHARE CAPITAL
AND ARTICLES OF ASSOCIATION

388

21.1

Information concerning share capital

388

21.2

Provisions of the Company’s articles of association

402

Chapter 22 SIGNIFICANT CONTRACTS

406

Chapter 23 THIRD PARTY INFORMATION, EXPERT STATEMENTS AND DECLARATION OF INTERESTS

407

Chapter 24 DOCUMENTS AVAILABLE TO THE PUBLIC

408

Chapter 25 INFORMATION REGARDING COMPANY INTERESTS

409




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CHAPTER 1
PERSONS ASSUMING RESPONSIBILITY FOR THE REFERENCE DOCUMENT

1.1

Person assuming responsibility for information contained herein

Mr. Henri PROGLIO, Chairman and Chief Executive Officer of Veolia Environnement (hereafter, the “Company” or “Veolia Environnement”).

1.2

Certification

I certify, after having taken all reasonable measures to ensure the accuracy thereof, that the information contained in this reference document is, to the best of my knowledge, true and does not omit any information that could make it misleading.

I certify that, to the best of my knowledge, the financial statements have been prepared in accordance with applicable accounting standards and provide an accurate view of the financial condition and results of operation of the Company and all of the companies within its scope of consolidation, and the management report presents a faithful and accurate picture of the business, results and financial condition of the Company and the companies within its scope of consolidation, as well as the principal risks and uncertainties that they face.

I have obtained a letter (lettre de fin de travaux) from the statutory auditors indicating that they have verified the information relating to the Company’s financial condition and the financial statements included in this document. They also confirm that they have read this document in its entirety. This letter contains no observations.

The forecasted financial information appearing in this document has been the subject of reports prepared by the statutory auditors and included in Chapter 13, paragraph 13.2.



Chairman and Chief Executive Officer

Henri PROGLIO



3





CHAPTER 2
PERSONS RESPONSIBLE FOR AUDITING THE FINANCIAL STATEMENTS

2.1

Principal Statutory Auditors

• KPMG SA

Member of KPMG International

Commissaire aux comptes, Member of the Compagnie régionale de Versailles

A company represented by Messrs. Jay NIRSIMLOO and Baudouin GRITON,

1 Cours Valmy, 92923 Paris La Défense Cedex.


Appointed by the combined general shareholders’ meeting of May 10, 2007 to replace Salustro Reydel, for a period of 6 fiscal years, expiring at the end of the general shareholders’ meeting called to approve the financial statements for the fiscal year ending December 31, 2012.


• ERNST & YOUNG and Others

Commissaire aux comptes, Member of the Compagnie régionale de Versailles

A company represented by Messrs. Jean BOUQUOT and Patrick GOUNELLE,

41, rue Ybry, 92576 Neuilly-sur-Seine Cedex.


Appointed on December 23, 1999, with a term that was renewed at the general shareholders’ meeting held on May 12, 2005 for a period of 6 fiscal years, expiring at the end of the general shareholders’ meeting called to approve the financial statements for the fiscal year ending December 31, 2010.

2.2

Deputy Statutory Auditors

• Mr. Philippe MATHIS

1, cours Valmy, 92923 Paris-La-Défense Cedex

Appointed by the combined general shareholders’ meeting of May 10, 2007 for a period of 6  fiscal years, expiring at the end of the general shareholders’ meeting called to approve the financial statements for the fiscal year ending December 31, 2012.

• AUDITEX

Tour Ernst & Young, Faubourg de l’Arche, 92037 La Défense Cedex

Appointed on May 12, 2005, for a term of 6 fiscal years, expiring at the end of the general shareholders’ meeting called to approve the financial statements for the fiscal year ended December 31, 2010.




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CHAPTER 3
SELECTED FINANCIAL INFORMATION2

Figures in accordance with IFRS standards


In millions of euros

December 31, 2007

December 31, 2006

December 31, 2005

Revenues from ordinary activities

32,628.2

28,620.4

25,570.4

Operating income

2,496.9

2,132.9

1,892.9

Net income attributable to equity holders of the parent

927.9

758.7

622.2

Diluted earnings per share (in euros)

2.13

**1.89

**1.56

Basic earnings per share (in euros)

2.16

**1.90

**1.57

Dividends paid

419.7

336.3

265.4

Dividend per share distributed during the fiscal year (in euros)

1.05

0.85

0.68

Total assets

46,306.9

40,123.7

36,381.0

Total current assets

17,214.0

14,956.4

13,544.5

Equity attributable to equity holders of the parent

7,612.9

4,360.8

3,790.2

Minority interest

2,577.8

2,192.6

1,888.0

Operating cash flow*

4,178.3

3,850.1

3,518.4

Recurring operating income

2,469.2

2,222.2

1,903.6

Recurring net income attributable to equity holders of the parent

933.2

762.0

630.2

Net financial debt

15,124.5

14,674.9

13,870.6

*

Operating cash flow = cash flow from continuing operations before tax and financial elements.

**

The diluted and undiluted net earnings per share were recalculated on a retrospective basis in accordance with the IAS 33 accounting standard. In both cases, the July 2007 capital increase has been taken into account.


2 The terms included in the table (other than operating cash flow) are defined in chapter 9, §9.2.1 infra.




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CHAPTER 4
RISK FACTORS

4.1

Risks relating to the issuer

4.1.1

Risks relating to Veolia Environnement’s activities

Veolia Environnement may suffer reduced profits or losses as a result of intense competition.

The Company’s business is highly competitive and requires substantial human and capital resources. Large international competitors and local niche companies serve each of the markets in which Veolia Environnement competes. Accordingly, the Company must make constant efforts to remain competitive and convince potential clients of the quality and cost value of its service offerings. Competitors may also introduce new technology or services that the Company would have to match in order to remain competitive, which could result in significant development costs.

In addition, the Company performs a substantial portion of its business under contracts, often of a long-term nature, with governmental authorities and clients from the industrial and commercial services sectors. These contracts are often awarded through competitive bidding, at the end of which the Company may not be retained even though it may have incurred significant expenses in order to prepare the bid.

Over the course of performing certain contracts, the Company may also be requested by its public or private clients to modify the terms of these contracts, whether called for under the contract or not. These modifications may concern the services provided under the contract, related investments required or billing terms.

Finally, the Company’s contracts may not be renewed at the end of their term, which in the case of important contracts may oblige the Company to undertake a costly reorganization or restructuring of assets and operations covered by the contract when the contract does not provide for the transfer of the related assets and employees to the succeeding operator and/or adequate indemnification to cover Veolia Environnement’s costs of termination.

The Company’s business operations in some countries may be subject to additional risks.

While the Group’s operations are concentrated mainly in Europe and North America (sales generated outside of these regions represented approximately 12 % of the Group’s total revenue in 2007), the Group conducts business in markets around the world. The risks associated with conducting business in some countries outside of Europe, the United States and Canada can include slower payment of invoices, which is sometimes aggravated by the absence of legal recourse for non-payment, nationalization, social, political and economic instability, increased currency exchange risk and currency repatriation restrictions, among other risks. The Company may not be able to insure or hedge against these risks. Furthermore, the Company may not be able to obtain sufficient financing for its operations in these countries. The establishment of public utility fees and their structure can depend on political decisions that may impede for several years any increase in fees that no longer allow coverage of service costs and appropriate compensation for a private operator.

The occurrence of unfavorable events or circumstances in certain countries may lead the Company to record exceptional provisions or depreciation charges in connection with its operations in these countries, which could have a material adverse effect on Veolia Environnement’s results.



6





Changes in the prices of fuel and other commodities may reduce the Company’s profits.

The prices of the Company’s supplies of fuel and other commodities, which represent significant operating expenses for its businesses, are subject to marked fluctuations. Although most of the Company’s contracts contain tariff adjustment provisions that are intended to reflect possible variations in prices of the Company’s supplies using certain pricing formulas, such as price index formulas, there may be developments that could prevent the Company from being fully protected against such increases, such as delays between fuel price increases and the time the Company is allowed to raise its prices to cover the additional costs (including taxes) or the Company’s failure to update an outdated cost structure formula. In addition, a sustained increase in supply costs and/or related taxes beyond the price levels provided for under the Company’s adjustment clauses could reduce the Company’s profitability to the extent that it is not able to increase its prices sufficiently to cover such additional costs (see Section 6.2.7 infra).

The Company has conducted and may continue to conduct acquisitions, the impact of which could be less favorable for its activities and results than anticipated, or which could affect its financial situation.

As part of its business strategy, the Company has conducted and continues to carry out acquisitions of varying sizes, some of which are significant at the Group level. These acquisitions involve numerous risks, including the following: (i) the assumptions used in the underlying business plans may not prove to be accurate, in particular with respect to synergies and expected commercial demand; (ii) the Company may not integrate acquired businesses, technologies, products, personnel and operations effectively; (iii) the Company may fail to retain key employees, customers and suppliers of the companies acquired; (iv) the Company may be required or wish to terminate pre-existing contractual relationships, which could be costly and/or on unfavorable terms; and (v) the Company may increase its indebtedness to finance these acquisitions. As a result, it is possible that the expected benefits of completed or future acquisitions may not materialize within the time periods or to the extent anticipated, or affect the Company’s financial condition.

The Group’s business is affected by variations in weather conditions

Certain of the Company's businesses are subject to seasonal variations. Dalkia realizes the bulk of its operating results in the first and fourth quarters of the year, corresponding to periods in which heating is used in Europe. In the water sector, household water consumption tends to be higher between May and September in the northern hemisphere. Accordingly, these two businesses may be affected by significant deviations from seasonal weather norms. This risk is offset in certain cases, first by the variable compensation terms included in contracts, and second by the geographical distribution of the Group’s businesses. The impact of weather conditions, together with the seasonal nature of the Group’s businesses, may affect the Company’s results.


The Group’s operations are subject to geopolitical, criminal and terrorist risks.

Water is a strategic resource in terms of public health. Accordingly, the Group’s activities must comply with laws and regulations that seek to safeguard water resources, production sites and treatment facilities against criminal or terrorist acts. The Company’s activities in the areas of waste management, energy services and public transportation are also subject to similar risks. The Company may also have employees who work or travel in areas where the risk of criminal acts, kidnapping or terrorism is either temporarily or permanently elevated. As a result, despite the safety measures that the Company has attempted to implement, any one of its activities may fall victim to criminal or terrorist acts in the future. If an attack were to occur, it could negatively affect the Company’s image and have a material adverse effect on its results.



7






4.1.2

Legal and contractual risks

The Company’s long-term contracts may limit its capacity to quickly and effectively react to unfavorable general economic changes.

The initial circumstances or conditions under which the Company enters into a contract may change over time, which may result in adverse economic consequences. Such changes vary in nature and foreseeability. Certain contractual mechanisms may help in addressing the changes and restoring the intial balance of the contract. Their implementation may be triggered more or less automatically by the occurrence of a given event (price adjustment clauses for instance), or they may require a contract revision or amendment procedure requiring the agreement of both parties or of a third party. In any case, however, the Company’s actions must remain within the scope of the contract and it cannot terminate unilaterally and suddenly a business that it believes to be unprofitable, or change its features. The Company’s compensation, whether it consists of a price paid by the client or a fee levied from end users based on an agreed-upon schedule, may not be changed at any time in line with changes in the Company’s costs and demand. These constraints have an impact on the Company’s behavior as an economic agent, and are particularly meaningful because its contracts are often entered into for long periods of time.

The rights of governmental authorities to unilaterally terminate or modify the Company’s contracts could have a negative impact on its revenue and profits.

Contracts with governmental authorities make up a significant percentage of the Company’s revenue. In numerous countries, including France, governmental authorities may modify or terminate contracts under certain circumstances, unilaterally but generally with indemnification. In other cases, however, the Company may not be entitled to or be able to obtain full indemnification in the event its contracts are terminated by governmental counterparties.

The Company may make significant investments in projects without being able to obtain required approvals.

To engage in business, Veolia Environnement must in most cases obtain a contract and sometimes obtain, or renew, various permits and authorizations from regulatory authorities. The competition and/or negotiation process that must be followed in order to obtain such contracts is often long, costly, complex and hard to predict. The same applies to the authorization process for activities that may harm the environment which are often preceded by increasingly complex studies and public investigations. The Company may invest significant resources in a project or public tender without obtaining the right to engage in the desired business nor sufficient compensation or indemnities to cover the cost of its investments, for instance as a result of a failure to obtain necessary permits or authorizations, or approvals from antitrust authorities, or because authorizations are subject to conditions that force the Company to abandon certain of its development projects. These situations increase the overall cost of the Company’s activities. In addition, if the Company does not obtain the desired business or is forced to withdraw from a public tender, its business may not grow as much or as profitably as it hopes.

4.1.3

Environmental and health risks

The Company incurs significant costs of compliance with various environmental, health and safety laws and regulations.

The Company has made and will continue to make significant capital and other expenditures to comply with its environmental, health and safety obligations as well as to manage the health protection of the services it provides. The Company is continuously required to incur expenditures to ensure that the installations that it operates comply with applicable legal, regulatory and administrative requirements (see §6.3.1 infra), including general precautionary or preventative measures, or to advise its clients so that they undertake the necessary actions for the compliance of their installations.



8





The costs related to these preventative measures are recorded as either operating expenses or as industrial investments. Industrial investments in all areas totaled €2,642 million in 2007 (compared to €2,197 million in 2006).

Each of the Company’s operations, moreover, may become subject to stricter general or specific laws and regulations, and correspondingly greater compliance expenditures, in the future. If the Company is unable to recover these expenditures through higher tariffs, this could adversely affect its operations and profitability. Moreover, the scope of application of environmental, health, safety and other laws and regulations is becoming increasingly broad. These laws and regulations now govern any discharge in a natural environment, the collection, transport, treatment and disposal of all types of waste, the rehabilitation of old sites at the end of operations, as well as ongoing operations at new or old facilities.

The Company’s operations and activities may cause it to incur liability or other damages that it might be required to compensate.

The increasingly broad laws and regulations under which the Company operates, exposes it to higher risk of liability, in particular environmental liability, including in connection with assets that Veolia Environnement no longer owns and activities that have been discontinued. For example, a French law dated July 30, 2003, relating to the prevention of technological and environmental risks and the conduct of remediation activities, has strengthened the regulatory framework that applies to discontinued operations and closed sites and installations, which requires, in some instances, that reserves be established in respect of such discontinued operations. In addition, the Company may be required to pay fines, repair damage or undertake improvement works, even when it has conducted its activities with care and in total conformity with operating permits. Regulatory authorities may also require Veolia Environnement to conduct investigations and undertake remedial activities, curtail operations or close facilities temporarily in connection with applicable laws and regulations, including to prevent imminent damage or in light of expected changes in those laws and regulations.

In addition, the Company often operates installations that do not belong to it, and therefore does not always have the power to make the investment decisions required to bring these installations into compliance with new regulatory norms. In instances where the client on whose behalf these installations are operated refuses to make the required investments, the Company may be forced to terminate its operations.

In the event of an accident or other incident, the Company could also become subject to claims for personal injury, property damage or damage to the environment (including natural resources). These potential liabilities may not always be covered by insurance, or may be only partially covered. The obligation to compensate for such damages might have a material adverse effect on the Company’s activities, its resources, or its profitablity. Accordingly, the Group pays great attention to controlling sanitary risks, both those present in its installations and those in the form of environmental pollution which conventional treatment methods cannot fully treat. In particular, the Group’s subsidiaries continuously strive to manage the risk of legionella at certain sensitive sites (including cooling towers, air-conditioning networks and sanitary hot water networks) as well as, for example, human exposure to chemical products.

Specific measures are required in connection with technological risks.

The Company’s subsidiaries may, as part of their outsourcing contracts, be involved in the operation of top tier Seveso sites (AS classification under the ICPE category “Installations Classified for the Protection of the Environment”) or lower tier sites (or the foreign equivalent) for industrial clients (particularly petroleum or chemical industry sites). In these instances, the Group must handle the provision of services with even greater care, given the more dangerous nature of the products, waste, effluents and emissions to be treated, as well as the close proximity of installations managed by the Group to client sites.



9





The regulatory regime governing Seveso facilities applies only within the European Union, but the Group operates several similar sites outside of this region that are often subject to the same level of heightened regulation by foreign governments.

Among the facilities that Veolia Environnement owns and operates in France, one has been categorized a lower tier “Seveso” facility (not classified as AS under ICPE nomenclature). It is a hazardous waste incineration facility operated by SARP Industries (Veolia Propreté) at Limay (Yvelines). The manipulation of waste and hazardous products in this facility can, in the case of an accident, cause serious damage to the environment, inhabitants or employees, exposing the Company to potentially substantial liabilities.

4.1.4

Risks related to financial markets

Currency exchange and interest rate fluctuations

Veolia Environnement holds assets, earns income and incurs expenses and liabilities in a variety of currencies. The Group’s financial statements are presented in euro. Therefore, when it prepares its financial statements, it must translate its assets, liabilities, income and expenses in other currencies into euro at then-applicable exchange rates. Consequently, increases and decreases in the value of the euro in respect of these other currencies can affect the value of these items in its financial statements, even if their value has not changed in their original currency. For example, an increase in the value of the euro may result in a decline in the reported value, in euro, of the Company’s interests held in foreign currencies.

At the end of 2007, the Company’s net financial debt excluding the fair value of hedging instruments amounted to €15,125 million, of which 26% was subject to variable rates and 74% to fixed rates, including 9% subject to variable rates with caps. The Company’s results of operations and financial condition may be affected by changes in prevailing market rates of interest (see Chapter 20, §20.1, note 30 to the consolidated financial statements). Fluctuations in interest rates may also impact the Company’s future growth and investment strategy since a rise in interest rates may force Veolia Environnement to finance acquisitions or investments or refinance existing debt at a higher cost in the future.

For a description of the management of market-related financial risks faced by the Group (interest rate risk, foreign currency risk, equity risk, counterparty risk and liquidity risk), see also paragraph 4.2.2.4 below and Chapter 20, paragraph 20.1, note 30 to the consolidated financial statements.

4.2

Risk Management

4.2.1

Implementation of a coordinated policy for risk management

Veolia Environnement’s ability to build long-lasting relationships with its customers is based on its capacity to manage risks on behalf of its customers. By implementing a coordinated risk prevention and risk management system, the Group addresses this element of fundamental importance for its development.

In order to strengthen its ability to anticipate, analyze and weigh various risks and ensure the development of an adequate policy for managing risks, the Group created a risk department at the end of 2004.

The goals of the risk management department are to ensure that the following actions are carried out within the Group to manage risks:

• Identify and anticipate: ensure the ongoing oversight of the Group’s risks in order to guarantee that none of them are overlooked or underestimated, and also to anticipate changes in the nature or intensity of the risks;



10





• Organize: ensure that the principal identitifed risks are addressed by the organization at the most appropriate level within the Group. Numerous operational risks are managed at the subsidiary level; others, which require a particular expertise or are of an essentially horizontal or strategic nature, are handled at the divisional and/or Veolia Environnement level.

• Monitor: ensure that the organizations and methods that have been set up are effective for the reduction of the risks that have been identified.

• Inform: the implementation of a coordinated risk management scheme is an important factor in corporate decision-making. Management of the Company’s risks enhances the Group’s development and the predictability of its results.

The risk department is responsible for ensuring the consistency of the overall risk management process throughout the Group through a process of identifying events that may prevent the Group from reaching its objectives. The risk department helps define corrective action plans and manages the process as a whole. It also oversees the implementation of rules of conduct that will create an internal environment that is both consistent with and favorable to a mastery of risks.

As part of the internal audit department’s undertakings in connection with the Sarbanes-Oxley Act of 2002 (see §4.3.3 infra), a mapping of major risks was performed in 2006 at the Group and division levels. The Group now has a detailed analysis of risks and a ranking of the principal risks and a true management tool whose objective it is to build growth and improve the forecasting of the Group’s development and results.

After having assembled a list of standard risks and a risk management standard (référentiel) tied to other established benchmarks, a detailed listing and evaluation of Group risks was conducted through interviews with approximately 150 high level managers (“process pilots”) of the Group. This evaluation, which was conducted at each division, was completed with a uniform methodology aiming to analyze gross risk, control levels in place and residual risks.

The risks that were identified by “process pilots” were grouped together, analyzed and ranked in order to identify the principal risks. Each risk was assigned “risk pilots” who were responsible for the design and implementation of action plans in coordination with risk managers from the divisions and from Veolia Environnement.

The principal issues identified were:

• Development control. Dynamics within Veolia Environnement’s markets require the company to be selective in choosing projects and investments. In addition, the integration of new contracts into the Group’s policies and practices requires a high level of rigor.

• The constant reinforcement of Veolia Environnement’s distinctive strengths. Veolia Environnement occupies a unique position in its market, based on technical expertise (resulting from its teams’ experience and the strength of its research and development), on its sense of service and its organization, and on its legal, financial, and labor relations expertise. Maintaining these essential strengths is a major area of focus. For this reason, in September 2006 the Company’s Board of Directors formed a strategic committee for research, innovation and sustainable development in order to continue to improve these strengths (see Section 16.2.1.3 infra). This is also the reason why the company has engaged in “knowledge management” actions to ensure that all Veolia Environnement clients can profit from these areas of expertise.



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• Internal control of all sorts, especially financial and operational, is also essential. Veolia Environnement’s continuing objective is to maintain a balance between the decentralization that is necessary for its service activities, the best operational and financial controls, and the spreading of expertise and best practices. Accordingly, an overhaul of the financial reporting system has been conducted and training programs have been expanded.

• Environmental and health concerns are central concerns for the company. Veolia Environnement is committed to providing full professional guarantees regarding the quality of the products it distributes and the services it offers, including with respect to environmental norms (especially with regards to air emissions and legionella concentrations) and security. In order to strengthen environmental risk management, the Group has enacted, in coordination with its four divisions, an Environmental Management System (“EMS”) based on the requirements of ISO norm 14001 with a view to continually improving its environmental performance (see §4.2.2.3 infra). In order to optimize its sanitary risk management, the Group also conducts voluntary prevention and monitoring actions under a global sanitation approach, in particular in the context of multi-service offerings (which include the conduct of internal and external identification audits and industrial risk prevention, and negotiation of specific insurance guarantees).

The risk management strategy has had the following preliminary results:

• a global and structured vision of risks faced by the Group;

• as a result of significant involvement in this project, a trend towards a pooling of practices and experiences between and among divisions and Veolia Environnement;

• an established organization to capitalize on current risk management mechanisms (for example relating to financial, legal, insurance and environmental risk management) and to deploy action plans and related controls;

• the strengthening of the Company’s controls over horizontal risks;

• the restructuring and deployment of insurance programs of the Group to strengthen its development, taking into account the knowledge of the risks, protecting assets and the reputation of the Group and finally improving the competitiveness of programs (simplification, improvement of coverage and outside premiums and comparable conditions);

• the structuring of an annual internal audit program based on a mapping of major risks faced by the Group.

In addition to the major mapping of risks, a steering organization was put in place, enabling the Group to strengthen its management of major risks, while favoring common initiatives among the divisions. The conduct of committee meetings, the agendas of which were organized based on the priorities identified in the risk mapping, enabled the launching of horizontal projects and the global coordination of risk management at the Group level. This project is conducted in close collaboration between the Company and its divisions. This convergence of tools and practices, implemented by the “risk management” professionals, will enable the implementation of effective reporting methods and will create the necessary conditions for the review of the mapping process.



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The Group’s risk committee, chaired by Veolia Environnement’s senior executive vice-president, met four times in 2007. In accordance with its work program, the risk committee studied the implementation of specific action plans to address significant operational risks, such as the reliability and security of informational systems, emergency communications within the Group, the integration and management of human skills within the Group, the plans for business continuity, and the detection and prevention of fraud. Following Veolia Environnement’s example, each of the divisions has, since the end of 2006, formed its own risk committee to improve its management and control of operational risks and follow through with the deployment of the action plans.

By firmly grounding itself in corporate processes and systematically taking into account the fundamental stakes within the organization, whether operational, legal, regulatory or governance-related, risk management fits within Veolia Environnement’s system aimed at continually improving the company’s global risk management infrastructure.

A review and analysis of the action plans implemented to manage or reduce risks is being performed within the divisions and the Company. This preliminary step has already enabled the prioritization of actions intended to improve the identification and thus the control of operational, commercial and financial risks.

4.2.2

Continuation and strengthening of targeted actions

4.2.2.1

Employee safety

The labor-intensive requirements of the Goup’s businesses, their nature, the wide dispersion of Veolia Environnement’s employees on the ground (in particular on public roads and at customers sites), and civil interest make the management of employee safety particularly important. For that reason, in September 2007 the executive committee declared 2008 as “Veolia Environnement World Safety Year”.

The director of human resources is responsible for this project, which is at the heart of the Veolia Environnement’s corporate policies: i.e., to promote the Group’s actions with regard to the prevention of professional health, and security risks.

A working group including experts from the divisions and from Veolia Environnement’s safety and health departments, as well as representatives of other departments within the Group, was created to formulate a proposal for an action plan that would be submitted to the Group’s executive committee for approval of the goals and timetable.

4.2.2.2

Management of legal risks

Veolia Environnement places great importance on the management of legal risks given the nature of its business, environmental services, an area that has been subject to increasingly complex regulation.

The nature of Veolia Environnement’s activities (management of local public services with operations in more than 70 countries and relationships with a variety of representatives and counterparties) has led Veolia Environnement to adopt legal compliance rules to guide Veolia Environnement’s employees in their activities and in the preparation of legal documents and to ensure compliance with such rules. In particular, these rules cover litigation and large operating contract reporting, competition law, ethics, standard contractual clauses, sponsorship and patronage and commercial intermediaries. The rules also cover the Group’s legal structure, delegation of powers and follow-up, and selection of directors.



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As a company with shares listed on Eurolist by NYSE Euronext Paris and on the New York Stock Exchange, Veolia Environnement must also adhere to certain rules relating to:

• Publications: Veolia Environnement has a disclosure committee whose role it is to supervise and verify the collection and dissemination of information included in the Company’s French document de reference and U.S. Form 20-F (see §16.2.2.1 infra).

• Corporate Governance: In particular, Veolia Environnement must adhere to rules governing the make-up and functioning of the board of directors and its committees, relations between these entities and management and the furnishing of information to shareholders. It must also ensure the proper application of regulations applicable to listed companies (see Chapter 16 infra).

• Insider Trading: To help prevent insider trading, Veolia Environnement has adopted a code of conduct governing trading in the Company’s shares, which is regularly updated. Pursuant to this code, the Group’s senior managers are deemed to be “permanent insiders” and trading by any of them in the Company’s shares is prohibited except during strictly defined periods, provided that they do not hold inside material information during such periods. These measures also cover so-called “occasional” insiders and in general all persons possessing privileged information. The Company has revised its code of conduct in 2006 to take into account new regulatory obligations imposed upon issuers and their executives, such as establishing a list of named “insiders” and reporting trades in the Company’s shares effected by certain members of management, and the updating of the Code in 2007.

The legal departments of Veolia Environnement and each division help ensure, on a daily basis, the adequate management of Veolia Environnement’s legal risks. This is performed in tight liaison with operating teams in the field and consistently with the Group’s overall risk management process.

4.2.2.3

Management of health and environmental risks

The environment and health are at the heart of Veolia Environnement’s concerns. Veolia Environnement aims to provide its professional guarantee on the quality of products it distributes and the services it provides, as well as on compliance with security and environmental norms (especially relating to air emissions and legionella concentration). The risks that the Veolia Environnement Group is confronted with are related in particular to the recovery of installations in as-is condition, to the fact that the Group is not always in charge of determining the needed investments, and to the inconsistent levels of customer awareness of these subjects. Veolia Environnement’s regulatory compliance efforts relate mainly to air pollution (including, for example, the control of emissions from Veolia Environnement’s transportation vehicles, its heat generation plants and its waste incineration facilities), water quality (relating to both the quality of drinking water and the disposal of wastewater and other effluents) and the protection of land and biodiversity (including through restrictions on rejected waste and the use of landfills).

In order to better manage its environmental risks, the Group in coordination with its four divisions has implemented an “Environmental Management System” (EMS) based on ISO Standard 14001, which aims to constantly improve its environmental performances throughout the world. In this respect, quantifiable objectives relating to the monitoring of compliance of high-priority installations have been set.

Moreover, in application of existing norms, and in consideration of the recommendations of internal and external experts, Veolia Environnement implements control and maintenance measures either directly or in collaboration with the owners of installations when Veolia Environnement is not the owner thereof.



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As such, the incineration facilities are subject to regular verifications so as to control atmospheric emissions, in particular the level of dioxins, furans and heavy metals. When Veolia Environnement designs new installations, it strives to provide technical specifications that are more demanding than those then prevailing in the market. For older installations, Veolia Environnement regularly conducts improvement work on its own facilities and strongly recommends to the owners of facilities that they do the same. The Group has implemented a semi-continuous control system for dioxins at incineration facilities that it operates.

However, believing that mere compliance with regulatory norms does not suffice to ensure adequate control of health risks, Veolia Environnement has also voluntarily taken a number of steps to establish strict vigilance and prevention procedures in the context of a global health policy, particularly with respect to its multi-service offerings (for example, sanitary diagnosis and checkpoint controls and inspections).

Faced with the systematic risk of being held jointly liable with its clients in connection with serious pollution or accidents, Veolia Environnement strives to satisfy its own obligations while helping to ensure that clients do the same. In particular, when Veolia Environnement operates a “Seveso” facility or its foreign equivalent, Veolia Environnement closely monitors the implementation of safety and hygiene measures at these sites. The imposition of more stringent regulatory standards regarding these sites, effective in France following enactment of a July 30, 2003 law relating to the prevention of technological risks, requires Group employees to undergo specialized training, participate in industrial clients’ hygiene and safety committee meetings and respect such clients’ policy for the prevention of major accidents. Seveso facilities are also subject to internal control measures that seek to prevent accidents and protect employees, the public and the environment. In addition to policies for the prevention of major accidents, there are also safety and operational plans that apply to these facilities, as well as crisis intervention measures coordinated with governmental authorities in the event of accident.

Given the nature and potential seriousness of all of the risks mentioned above, the Group has implemented three principal types of actions to help control and cover these risks. First, in order to prevent accidents that may harm people, property or the environment, the Group has implemented an environmental management system (EMS) which includes obtaining certifications and general evaluations (in particular ISO Standard 1400, internal etc). Second, internal or external audits to identify and prevent industrial risks (fire, machine breakdown, environmental damage, etc.) are conducted regularly. Third, the Group has purchased insurance to cover civil and general liability resulting from fortuitous or accidental pollution (see §4.5 infra).

All of these actions are implemented by the Group’s operating units in coordination with the technical, legal and health departments and EMS. The research and development department as well as the legal department and Veolia Environnement’s office in Brussels also contribute to this effort.

In May 2007, an environmental performance division was formed to reinforce the Preventive measures undertaken by the Group. The environmental performance department’s mission is notably to:

• adapt the Group’s environmental policies, in particular through the creation of best practice standards; and

• structure a management system aimed at ensuring the evaluation and the optimization of the environmental performance of the Veolia Environnement Group and the implementation of Group standards.

The environmental performance department works closely with the sustainable development department to apply the environmental policies of the Group, and with the risk management committee (see §4.2.1 supra) address environmental risks. The process is carried out with the technical directors of the divisions of the Veolia Environnement Group.



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4.2.2.4

Financial risk management

Through financial and operational business, the Group is exposed to market risks, such as interest rate risk, foreign exchange risk and liquidity risk. To avoid having to bear all of these risks, the Company has put in place management guidelines relating to these uncertainties, in order to ensure better risk control. The Treasury department of Veolia Environnement is directly responsible for the implementation and the follow up of these regulations. The Treasury department is responsible for helping divisions and their teams to identify and cover exposure in different countries around the world. This department relies, in part, on a treasury management system, which allows for the continued monitoring of the principal indicators for liquidity and for all major financial instruments (rate/change). The control of operations and the monitoring of limits, ensuring the security of the operations, is under the responsibility of the Middle and Back Office team working for the financial department. Reports are completed daily, weekly and monthly, thus allowing the Company’s senior management to stay abreast of market changes and of any important events affecting, on the one hand, the liquidity of the Group (actual and anticipated) and, on the other hand, the value of the Group’s portfolio of derivative products, and finally, the details of the operations and the consequences on the allocation between fixed and variable rate debt.

The interest rate risk management policy is decided in a centralized fashion. The Group utilizes all of the interest rate risk management tools available on the market, including interest rate swaps and options.

Foreign exchange risk is linked to the international business of the Group, which is conducted in more than 70 countries, and which generates cash flows in numerous different currencies. Because both income and expenses are usually in the currency of the country where the Group is conducting business, the Group’s exposure to exchange rate risks from service activities is relatively low. This risk is covered on a case-by-case basis (in particular through currency options), generally when binding bids are submitted. To manage foreign exchange risk linked to debts and accounts receivable, the Company has established a policy aimed at financing its subsidiaries in local currency consisting of financially backing its subsidiaries in currencies by asset class (debt and accounts receivable).

The liquidity of the Group is ensured through Veolia Environnement. The implementation and the management of important new financings are centralized in the aim of optimizing the management of present and future liquidity. The Group is financed through bank loans, commercial paper, international bond offerings, as well as the international private placement market.

See also Chapter 20, paragraph 20.1, note 30 of the consolidated financial accounts.

4.2.2.5

Railway security risk management

Veolia Transport is subject to operational risks (train circulation, security of persons, preventative maintenance of assets) and employee and safety risks (criminal actions, assaults, vandalism, sabotage). The Group has implemented a railway safety plan since 2004 with a view to analyzing the various security measures taken in coordination with security and hygiene measures. In this context, the Group has initiated a review of legal and regulatory obligations and their mastery by local departments were carried out beginning in the first quarter of 2005.

Security is managed at the level of the countries that have implemented a security management system (SMS) in accordance with national regulations.

In France, in the railway security domain, Veolia Transport was awarded a security certificate by the Etablissement Public de Sécurité Ferroviaire as a result of the establishment of a Security Management System (SGS). A National Railway Security Center, whose role is to operate and verify the implementation of the SGS disposals in order to guarantee a high level of railway security, was created.



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Outside France, processes are underway to copy and adapt the organization of controls created in France, while also considering the lessons learned from the international inquiry conducted the previous year.

In 2007, Veolia Transport started to handle a new type of transportation in France: the transport of hazardous materials. The administrative authorizations were obtained after updating the documentation, training employees and integrating this new risk in the internal monitoring system. Global indicators of railway security were devised and published in collaboration with French administrative authorities. It is expected that they will be applied to all of the Company’s railway activities in 2008.

4.2.2.6

Information technology (IT) risks management

The Group’s IT department has conducted an analysis of IT risks. Four significant measures have been taken to prevent information technology risks: action plans relating to back-ups, the restoration of information and applications, resumption of activity plans and continuing activity plans; the security of information and the reinforcement of access controls to information technology infrastructures and applications; the documentation and the automization of information exchanges and interfaces between applications and the establishment of a multi-year plan for information systems by division.

4.2.2.7

Geopolitical, criminal or terrorist risks management

Veolia Environnement management created a security watch committee to address criminal and terrorist risks in 2003. The committee is in charge of informing, protecting and acting with respect to employees. It brings together security professionals as well as representatives from Group headquarters and each division.

The committee has four missions:

Information. Each month, the committee prepares a map of the risks for countries in which Veolia Environnement operates and circulates it to all the entities of the Group.

Prevention. Employee trips to high-risk countries are subject to authorization by the Group’s human resources department. Advice on behavior and vigilance is circulated. In high-risk countries where Veolia Environnement has operating units, the Group has established security plans to ensure the safety of employees and their families.

Training. Training on behavior to adopt in dangerous situations.

Action in crisis situations. Whenever necessary, the Group assembles a special security crisis committee. The mission of such committees is to make all decisions necessary to ensure the safety of employees and their families.

In France, pursuant to anti-terrorism measures (“Vigipirate”), a 2006 decree organizes the security of economic activities considered to be of vital importance. The purpose is to respond to the risks of malice, sabotage, and terrorism, and to avoid attacks on the nation’s military or economic potential or which affect its capacity to survive, as well as risks to the health of the population and the environment.

These measures enable the French state to ensure that all operators designated to be of vital importance take steps that are consistent with those that the government will have ordered or recommended on the national level. A list of these activities was created by an order dated June 2, 2006. Three of Veolia Environnement’s activities are specifically affected: water, energy and transport management. For each of these sectors, a national security directive (NSD) will be developed in 2008 under the supervision of a coordinating minister.

Once notice of the directive has been given, the major operators within the relevant sectors will have six months to develop a security plan covering their activities, and a maximum period of two years to develop a specific protection plan for each of their points of vital importance.



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The chairman and chief executive officer of Veolia Environnement is one of 24 members of a national committee appointed by order of the French Prime Minister in October 2006 to oversee the sectors conducting activities of vital importance. This is a consulting organization presided by the general Secretary of National Defense, created in order to ensure the coordination between the State, local elected officials, and operators.

The committee’s recommendations will then be implemented by a working group in which the risk management department participates, along with other operators, under the supervision of the State’s Director of Protection and Security.

4.2.2.8

Crisis management

In order to respond as rapidly and as effectively as possible to serious incidents or accidents, the Group has created protocols at several levels. First, Veolia Environnement’s alert procedure, implemented in 2003 in connection with the crisis management plan, was reorganized during the summer of 2007 and will be implemented in January 2008. The Group’s new alert procedure is based on the use of a single call number, managed by a director, open 24 hours a day, 7 days per week. This new procedure enables an immediate and permanent reporting of the alerts originating from the divisions. Next, depending on the seriousness of the situation (which will be evaluated based on pre-determined criteria), the incident may be handled either at the level of the divisions, with information being constantly communicated to Group headquarters, or by a special crisis unit that may be assembled consisting of representatives from the Group and the division involved. During any crisis, responses are proposed to the Group chairman and executive committee who are kept informed as the situation evolves. The Group also keeps a record of the crisis unit’s activities so that a full analysis can be conducted once the crisis has passed.

One potential crisis scenario that has been carefully prepared within the Group is the occurrence of a flu pandemic through the mutation of the H5N1 virus of the avian flu, considered by the WHO to be a high risk that could threaten world health safety. Since 2005, the Veolia Environnement Group has been mobilized in order to be able to maintain its core activities under such circumstances.

In 2007, new tools were developed and provided to the individuals in charge of the flu pandemic response on a dedicated extranet site. They now have access throughout the world to the essential principles governing the Group’s pandemic preparation, the policies for the protection of employees allowing the Group to ensure fair and homogenous levels of protection throughout the Group, to specific procedures, and to internal and external communication tools. An informational brochure was distributed to all of the correspondents to allow for a local implementation.

With regards to contingency plans, the risk department created the plan for the Group headquarters and contributes to those of the division headquarters. In accordance with the recommendations of the government plan, the goal is to maintain, on a temporary and reduced basis, the principle critical flows in case of a shortage of human resources. Upon the request of the Company’s management, the contingency plan of the Group will be used to respond to threats, including those that would require the transfer and recovery of activities to a remote site.

In parallel, the divisions are implementing the contingency plans for the continuation of their essential services.

In 2008, simulation exercises and audits will allow for the maintenance of the mobilization and the improvement of the Veolia Environnement Group’s ability to handle the occurrence of this major health risk. An audit grid of pandemic flu was developed. It will be integrated in the internal audit grid during 2008, after its publication and that of the pandemic referential of the Group to operators, for an auto-evaluation and, if needed, to make necessary adjustments.



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4.3

Audit and internal controls

4.3.1

Internal controls

The internal control department, a branch of the Group’s financial department, is responsible for coordinating the work of other departments in identifying, standardizing and making more reliable the key processes for producing the Group’s financial information.

The internal control department employs a network of internal control personnel present in each division and operating unit. It carries out its work with three main objectives:

• formalizing and updating the key processes for developing financial information, which are then summarized and broadly distributed throughout all levels of the Group;

• harmonizing financial management systems relating to their implementation;

• ensuring that employees possess the requisite skills and have the necessary resources at their disposal to effectively produce the Group’s financial information.

The internal control department relies initially on the effective management of all of the Group’s business processes, including non-finance related processes (commercial, technical, human resources, legal and economic). It follows up with a rigorous evaluation of the application of the Group’s rules, overseen by the internal audit department.

Internal controls, in every respect, especially financial and operational, are also essential to Veolia Environnement. The Group’s continuing objective is to maintain a balance between decentralization that is necessary for its service activities, the best operational and financial controls, and the spreading of expertise and best practices. Accordingly, an overhaul of the financial reporting system has been achieved, and training programs have been expanded.

4.3.2

Internal audit

The objective of the internal audit department of Veolia Environnement is to evaluate risk management processes, monitoring and corporate governance practices, and to seek improvements based on a systematic and methodical approach. This evaluation covers all components of internal controls and in particular the accuracy and integrity of financial information, the effectiveness and efficiency of operations, the protection of assets and compliance with laws, regulations and contracts.

The internal audit department operates based on two principal mechanisms:

• first, the implementation of an annual audit program approved by the accounts and audit committee, and

• second, a detailed and formal evaluation of internal control in preparation for the internal control report published every year beginning at the closing of the 2006 fiscal year, in accordance with the measures laid out by the Sarbanes-Oxley Act of 2002.

In 2006, the Group’s internal audit department was certified by the French Audit and Internal Control Institute. This certification, which was confirmed in 2007, relates to professional norms and benchmarks and demonstrates the internal audit department’s ability to fully accomplish its responsibilities. In addition, several of our internal auditors have obtained the “Certified Internal Auditor” (CIA) diploma, the only internal audit certification recognized around the world.



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4.3.3

Regulatory context

Over the last several years, several laws have reinforced companies’ reporting and internal control obligations.

Veolia Environnement is subject to the obligations of the financial security law of August 1, 2003, which requires chairmen of listed sociétés anonymes to report to shareholder meetings the conditions under which the work of the board of directors is prepared and organized and the internal control procedures enacted by the company, as well as principles and rules decided by the board of directors to determine compensation and benefits of any nature granted to senior officers and directors. This report, as well as the statutory auditors’ report prepared pursuant to respectively, paragraphs 6 and 7 of article L.225-237, and the last paragraph of article L225-235, of the French Commercial Code, will be presented at the general shareholders’ meeting to be held on May 7, 2008, and are attached to this reference document3.

In addition, as a company listed on the New York Stock Exchange (NYSE), Veolia Environnement is subject to the requirements of the U.S. Sarbanes-Oxley Act of 2002, in particular section 404 thereof relating to internal control over financial reporting. This law provides that the chief executive officer and the chief financial officer attest to the effectiveness of internal controls over financial reporting every year beginning at the end of 2006.

As a French company listed in the United States, Veolia Environnement must comply with both sets of regulations.

In this context, in 2005 Veolia Environnement launched a process which allowed the Company to certify the efficiency of the internal controls at the Group level by December 31, 2006. This internal control process was renewed in 2007 and is based primarily on the deployment in 400 branches of an electronic application with questionnaires and tests that will enable the traceability of audits. Over 1,100 people contributed to this corporate project, while over 80,000 controls were conducted, 20,000 of which were accompanied by tests.

This task, directed by the internal audit department, is implemented in concert with IT system management when necessary and in close collaboration with the auditors and under the supervision of the accounts and audit committee of Veolia Environnement.

This analysis was conducted based on the following criteria: potential impact on internal financial control and level of dissemination (percentage of entities indicating a risk and verification of the significance of the entities concerned).

On this basis, action plans were implemented beginning in 2007 relating primarily to the documentation of financial procedures, the separation of tasks and information technology security. They produced net improvements, and will be pursued with a view to their continuing improvement.

Legal requirements aside, this project allowed several notable changes, in particular the appropriation of a rigorous evaluation process adapted to the decentralized culture and organization of the Group, and a positive reinforcement trend not only of rules but also of collective awareness of these subjects.

4.4

Ethics and vigilance

Veolia Environnement’s presence in nearly 70 countries around the world requires it to implement a set of principles in order to ensure compliance with various human rights norms and governance standards set forth under international laws and treaties.


3 Available in the French version of the reference document.



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These principles must take into account the Company’s cultural diversity and emphasize environmental protection above all, which is one of the Company’s foremost concerns. In addition, they must integrate the Company’s traditional values, which are based on a close relationship with clients, consumers and civil society and the autonomy of each of the Company’s operating divisions.

To this end, the Company implemented the “Ethics, Commitment and Responsibility” program in February 2003, which was updated in late 2004 and early 2008. This program is intended to guide the daily behavior of Veolia Environnement’s employees. As part of the program, an ethics correspondent has been appointed in each division.

The program reaffirms the fundamental values shared by all of Veolia Environnement’s employees, including, for example, the need for strict observance of the laws in effect in the different countries where Veolia Environnement operates, loyalty towards Veolia Environnement’s clients and towards consumers, sustainable development, a sense of solidarity (tolerance, respect of others and social dialogue), management of risks and effective corporate governance.

In March 2004, Veolia Environnement created an ethics committee to examine and settle any questions relating to the ethics program. The ethics committee is comprised of three members and may pursue any matter that it wishes regarding Group ethics. Employees may also freely consult with the committee. The ethics committee must act independently and hold the information relating to the matters it treats confidential.

From October 2004 to December 2005, the Group held fourteen training seminars relating to the “Ethics, Commitment and Responsibility” program, including three outside of France, for over 400 Group managers. Veolia Environnement continued these actions by developing and deploying as of 2007 a training program and seminars on compliance with antitrust laws, open internationally to several thousand managers of the Group.

In addition, since 2005, Veolia Environnement has implemented a reporting procedure to help combat fraud, which is overseen by the risk director and the financial services director.

4.5

Insurance

4.5.1

Objectives

Veolia Environnement Group’s procurement policy for insurance policies for all of its operating divisions has the following objectives:

• maintaining common insurance policies to establish a coherent risk transfer and coverage policy in order to maximize economies of scale, while taking into account the specificities of Veolia Environnement’s businesses and legal or contractual constraints; and

• optimizing the thresholds and the means for accessing the insurance or reinsurance markets through use of appropriate deductibles.

In 2007, Veolia Environnement continued to seek to optimize the amount of insurance premiums it pays to outside insurers.



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4.5.2

Implementation of insurance policy

4.5.2.1

Insurance policy

Veolia Environnement’s strategy with respect to insurance is to (i) establish a global insurance coverage policy to cover Veolia Environnement’s activities, based on the needs expressed by its subsidiaries in particular, (ii) select and sign contracts with outside providers (brokers, insurers, loss adjusters, etc.), (iii) manage consolidated subsidiaries specializing in insurance or reinsurance coverage, and (iv) lead and coordinate the network of insurance managers present among Veolia Environnement’s principal subsidiaries.

4.5.2.2

Implementation

The implementation of an insurance coverage policy aimed at covering risk is carried out in coordination with Veolia Environnement’s global risk management process (see §4.2 supra). Implementation takes into account the insurability of risks related to Veolia Environnement’s activities, by the market availability of insurance and reinsurance, and the relationship between premiums and the level of coverage, exclusions, limits, sub-limits and deductibles.

Veolia Environnement undertook actions in 2007 principally related to:

• the readjustment of retention levels (retained risk) on the basis of an analysis of risks and loss history and an evaluation of the costs and coverage proposed by insurers;

• the continuation of efforts to identify, prevent and protect against risks in particular due to a rating system for the “property damage and business interruption” risk profile for Veolia Environnement’s most important facilities throughout the world;

• the communication of detailed information regarding the Company to the insurance and reinsurance markets;

• the renegotiation of general liability and property coverage;

• extending the Group’s coverage; and

• the organization of broker services for placement and administration of Group insurance programs.

4.5.3

Main Group’s insurance policies

4.5.3.1

General liability

A general civil liability and environmental damage program was subscribed to on July 1, 2005, around the world (excluding the U.S. and Canada) for a period of three years. Principal coverage is up to €50 million per claim and per year. For the U.S. and Canada, different contracts cover general liability and damage to the environment on behalf of Group subsidiaries, based on local conditions, in an amount of up to US$50 million per claim and per year.

For all Group subsidiaries worldwide, an insurance program provides excess coverage for up to US $450 million, thereby giving the Group total coverage of US$500 million throughout the insurance period. This program includes coverage for environmental liability for damage sustained by third parties as a result of a sudden and accidental event.



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The liability for terrorism policy was renewed under the general liability program on July 1, 2007 for a twelve-month period with a total coverage of US$ 165 million per claim per year.

Further, certain activities, such as a maritime transport, automobile and construction, have their own specific insurance policies.

4.5.3.2

Property damage and business interruption policies

All four of Veolia Environnement’s divisions maintain property damage insurance policies to cover assets that they own as well as those that they operate on behalf of clients. The Group’s global insurance program provides either “business interruption” coverage or “additional cost of working” coverage depending on such subsidiaries’ exposure and their capacity to use internal or external solutions to ensure service continuity. These policies contain standard insurance market terms.

The level of premiums, deductibles and sub-limits for exceptional socio-political or natural events reflects the terms proposed, or sometimes imposed, by insurers in the markets in which the risk is underwritten. Group insurance coverage implemented on January 1, 2007 for a term of three years, carries a limit per claim of up to €300 million per claim. Some of this coverage contains further sub-limits per claim or per year.

4.5.4

Self-insured retention and deductibles

For any insured claim or loss, Veolia Environnement remains liable for the deductible amount set out in the policy. The amount may range from several thousand euros to more than one million euros.

In 2007, Codeve Insurance Company Limited, Veolia Environnement’s insurance subsidiary, had a retention (retained risk) of €2.5 million per claim for property damage and associated financial losses, and €5 million for insurance of general liabilities.

Regarding both property damage and general liability, Codeve Insurance Company Limited has put in place reinsurance contracts in order to limit its exposure to frequency risks (“stop loss”-type contracts) and risks tied to intensity (excess claim-type contracts).

In general, the insurance coverage described above constantly evolves as a function of ongoing risk evaluation, market conditions and insurance coverage available. Veolia Environnement attempts to have its known accidental or operating risks covered by the insurance markets when this market exists and when it is economically feasible to do so.



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CHAPTER 5
INFORMATION RELATING TO THE ISSUER

5.1

History and development of the Company

5.1.1

History

The Company traces its roots back to the creation of Compagnie Générale des Eaux by Imperial decree on December 14, 1853. During the same year, Compagnie Générale des Eaux won its first public service concession for the distribution of water in the city of Lyon, France. The Company developed its municipal water distribution activities in France by obtaining concessions in Nantes (1854), Nice (1864), the water distribution services of Paris for 50 years (1860) and its suburbs (1869).

In 1980, Compagnie Générale des Eaux reorganized its water activities by regrouping all of its design, engineering and execution activities relating to drinking water and wastewater treatment facilities under its subsidiary Omnium de Traitement et de Valorisation (OTV). At the same time, Compagnie Générale des Eaux expanded its business during the 1980s with the acquisition of Compagnie Générale d’Entreprises Automobiles (CGEA, which would become Connex and Onyx, and later Veolia Transport and Veolia Propreté) and Compagnie Générale de Chauffe and Esys-Montenay (which would merge to become Dalkia). It also began significant international expansion.

In 1998, Compagnie Générale des Eaux changed its name to “Vivendi” and renamed its main water subsidiary “Compagnie Générale des Eaux”.

In April 1999, in order to better distinguish the separate existence of its two main businesses, communications and environmental services, Vivendi created “Vivendi Environnement” to conduct all of its environmental management activities, which were then conducted under the names Vivendi Water (water), Onyx (waste management), Dalkia (energy services) and Connex (transportation).

On July 20, 2000, Vivendi Environnement shares were listed on the Premier Marché of Euronext Paris, which became the Eurolist of Euronext Paris on February 21, 2005 and Euronext Paris since January 1, 2008.

In August 2001, Vivendi Environnement shares were included in the CAC 40, the main equity index published by Euronext, and in October 2001 were listed in the form of American Depositary Shares for trading on the New York Stock Exchange.

From 2002 to 2004, Vivendi (formerly known as Vivendi Universal), progressively decreased its stake in the Company, and has held only 5.3% of the Company’s shares since December 2004. Since July 6, 2006, Vivendi no longer holds shares in Veolia Environnement. (see §18.2 infra).

In April 2003, the Company changed its name to Veolia Environnement.

In 2002, Veolia Environnement undertook a significant restructuring in order to refocus on its core environmental services activities. This restructuring was completed in 2004 with the sale of various U.S. subsidiaries within its water division conducting certain non-core activities, and with the sale of Veolia Environnement’s indirect interest in Fomento de Construcciones y Contratas (FCC), a Spanish company whose activities include construction and cement services, as well as other services related to the environment.

On November 3, 2005, Veolia Environnement unveiled a new branding system for the Group. The Group’s water, waste management and transportation divisions currently operate under the same name: “Veolia” (see §6.2.5 infra).



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5.1.2

General information regarding the Company

Company Name and Registered Office

Since April 30, 2003, the name of the Company has been Veolia Environnement. The Company’s abbreviated name is VE.

The Company’s registered office is located at 36/38, avenue Kléber, 75116 Paris. The telephone number is (33) 1 71 75 00 00.

Legal Form and Applicable Law

Veolia Environnement is a French société anonyme à conseil d’administration subject to the provisions of Livre II of the French Commercial Code (Code de commerce).

Date of Formation and Term

The Company was formed on November 24, 1995, for a term of 99 years beginning on the date of its license in the Registre du commerce et des sociétés, i.e., for a term lasting until December 18, 2094.

Commercial Registry

The Company is licensed in the commercial registry of Paris under number 403 210 032. The Company’s APE code is 741J.

5.2

Investments

The Group’s investments (industrial, financial and new operating financial assets) amounted to €5,029 million in 2007, compared to €4,010 million in 2006 and €3,495 million in 2005.

A detailed description of the investments made in 2007 as well as their financing is set forth in chapter 9, paragraphs 9.3.4 (Capital Expenditures); 9.3.2 (Sources of Funds), 9.3.3 (Divestitures) and in chapter 20, paragraph 20.1, note 5 (Concession Intangible Assets), note 7 (Property, Plant and Equipment), note 10 (Non-Current and Current Operating Financial Assets) and note 43 (Segment Reporting) of the consolidated financial statements.

Veolia Environnement’s investment strategy is focused on environmental activities, primarily in Europe, in Asia, and in North America.

This investment policy can take several forms:

• Veolia Environnement makes certain growth-related investments (financial and industrial investments) in order to capture new markets, increase its capacity, or extend its services. Some investments in particular may be made over several years, notably in certain types of concession contracts. Veolia Environnement also makes financial investments in the companies with which it contracts, particularly in the context of privatizations and targeted acquisitions. All of these investments are carefully reviewed in order to ensure that they conform to the Group’s standards in terms of profitability, financial structure and risks.

• The Group also carries out (industrial) maintenance investments consisting in renovation and/or maintaining existing infrastructure so as to extend their lifespan or to improve their efficiency.

In both cases, industrial investments are divided among a large number of entities and are made pursuant to budgetary authorizations.



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The Group’s most significant investments concern the acquisitions of the company that holds the Braunschweig contract in 2005 for the sum of €374 million, of the company Cleanaway UK in 2006 for the sum of €745 million and finally the companies Sulo, TMT, Thermal North America and the non regulated activities of Thames Water in 2007, for €1.450 billion, €338 million based on an enterprise value of 100%, US $788 million (enterprise value) and €233 million respectively (see chapter 9, note 1.2). The acquisitions of Cleanaway UK, Sulo, TMT and Thermal North America represent a cumulative investment of nearly €3.1 billion. In order to preserve its future investment capability, the Group has carried out a €2.6 billion capital increase which was completed in July 2007.

Finally, the Group is often faced with numerous types of price adjustment clauses in the context of its divestiture and acquisition activities. As of the date hereof, none of these price adjustments is likely to have a significant impact at the Group level.

The Group regularly studies and analyzes growth opportunities. In this respect, it acquired, at the beginning of 2008, Bartin Recycling Group in France and Praterm in Poland (see chapter 20, paragraph 20.1, note 44 of the consolidated financial statements).




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CHAPTER 6
BUSINESS OVERVIEW

6.1

Principal business activities

6.1.1

General description of Veolia Environnement

Veolia Environnement is an environmental services provider, and is the only major provider, to offer a complete range of services.4 Veolia Environnement is able to provide its clients with a full-service package tailored to fit their individual needs, which may include, for example, supplying water, recycling wastewater, collecting, treating and recycling waste, supplying heating and cooling services, and generally optimizing the industrial processes used in their facilities.

Veolia Environnement’s operations are conducted primarily through four divisions, each of which specializes in a single business sector: Veolia Eau (Water), Veolia Énergie (Dalkia) (Energy Services), Veolia Propreté (Environmental Services) and Veolia Transport (Transportation). Through these divisions, Veolia Environnement currently provides drinking water to more than 78 million people and treats sewer water for 53 million people in the world, treats nearly 66 million tons of waste, satisfies the energy requirements of hundreds of thousands of buildings for its industrial, municipal and individual clients and transports approximately 2.7 billion passengers per year. Veolia Environnement strives to offer services to clients combining those offered by each of its four divisions and which are packaged either in the form of a single multi-service contract, or several individual contracts.

The following table breaks down Veolia Environnement’s consolidated revenue for 2007 by geographic market and division, after elimination of all inter-company transactions.

2007 Revenues*


(in millions of euro)

Water

Environmental Services

Energy Services

Transportation

Total

Europe

8,190.5

6,889.4

6,566.1

4,291.8

25,937.8

Of which:

 France

4,927.2

3,332.0

3,852.2

2,144.5

14,255.9

 Other Europe

3,263.3

3,557.4

2,713.9

2,147.3

11,681.9

Americas

582.5

1,449.0

19.3

738.9

2,789.7

Rest of the World

2,154.4

875.9

311.0

559.4

3,900.7

Of which:

 South America

104.4

163.1

143.3

28.5

439.4

Africa-Middle East

1,017.3

100.7

56.3

17.8

1,192.1

 Asia-Pacific

1,032.6

612.1

111.4

513.1

2,269.2

Total

10,927.4

9,214.3

6,896.4

5,590.1

32,628.2

*

Revenue from ordinary activities under IFRS.



4 Unless otherwise indicated, information and statistics presented herein regarding market trends and Veolia Environnement’s market share relative to its competitors are based on Veolia Environnement’s own research and various publicly available sources.



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6.1.2

Strategy

6.1.2.1

Veolia Environnement’s strategy

Veolia Environnement intends to continue to reinforce its position as the leading provider of environmental services. Its strategy focuses on developing the most appropriate environmental service solutions for its municipal and industrial clients; maintaining its geographical diversification; developing a significant presence in growth markets with high potential, and accelerating synergies between different businesses within the Group.

By strengthening its position as the leading provider of environmental services worldwide, Veolia Environnement continues to implement its business model aimed at improving its economic and financial performance. This performance is a result of economies of scale and constantly evolving levels of technological expertise, combined with significant levels of research investment, long-term commitments to clients, and managed risk.

By providing the most appropriate environmental services, Veolia Environnement is able to optimize its client relations

While preserving its local character, the Company has become a major player in both the services and concessions business. The Group has achieved a unique position within these two client segments. Last year it was able to reinforce its core business in large European countries through targeted acquisitions in the United Kingdom, Germany and Italy.

With regard to its municipal clients, the Group has added to its impressive portfolio of existing French and European cities (Prague, Bucharest, Nottingham, Braunschweig), and has also achieved a number of commercial successes in the United States (Indianapolis, Chicago, Boston…) and in the Asia Pacific region (Canton, Shanghai, Incheon, Melbourne). The Group has thus proven its ability to participate in large privatizations and win bids for large projects.

The Group has also conducted a significant portion of its business with its industrial and commercial clients, particularly for the provision of energy and waste management services. Veolia Environnement has also created a new business portfolio comprising large industrial accounts (Peugeot, Novartis, Renault…), which significantly contributes to its multi-service contracts.

Successful geographic diversification

Concurrently with the expansion of its business in France by an average annual rate of over 5% per year since 2000, the share of Veolia Environnement’s international business has continued to increase.

Beyond Europe, which has become the Group’s domestic market, Veolia Environnement has also achieved strong positions in the United States and Asia. The Group has taken on a major role in energy services in the United States. There is little risk that the Group’s significant presence in industrialized countries will decrease as it is for the most part unaffected by outsourcing and restructuring issues.

The Company has also developed a significant presence in emerging and developing countries. The Group regularly adds new contracts and expands its energy services activities in China. The Group’s economic position within these areas of the world is much more significant than what the proportion of its revenues earned in these areas suggests.

A strategy focused on growth and high-potential markets

The Group’s strategy is to focus on growth markets. An increasing awareness of the challenges relating to sustainable development and its impact on environmental policies has resulted in significant growth opportunities.



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Faced with increasingly restrictive regulations and in order to keep up with competition, more and more industrial companies outsource environmental services through long-term partnerships. Their partners generally work on all of their worldwide industrial sites and tend to provide a full range of services.

Expansion within municipal markets is primarily the result of a combination of demographic factors: an increase in population size on the one hand, and the urban growth rate on the other. Growth is also a function of economic activity and living standards. The tightening of environmental restrictions and related regulations in response to these developments has fueled to Veolia Environnement’s growth. One recent confirmation of the growth potential within these markets is the success of desalination projects in the Middle East.

The economic constraints imposed on Veolia Environnement’s industrial and municipal clients increases their need to reduce water and energy consumption and waste production. The Group’s position as a service rather than utility provider generally allows it to leverage this trend.

Additional growth potential in related businesses

Because of its expertise, commercial relations, and geographical distribution, Veolia Environnement possesses several important advantages that allow it to develop services that are directly related to its environmental services. These opportunities result from new demand relating to changes in the economic, ecological and political landscapes and which are all related to the promotion of sustainable development. Examples of this trend include green fuels, wind energy and residential services.

Synergies between Veolia Environnement’s various businesses accelerate the Group’s growth

In its environmental services business, which involves both public authorities and industrial clients, the Group benefits from considerable synergies between its water, waste management, transportation and energy service divisions. Because the group offers a complete range of services, Veolia Environnement’s customers have broadened the range of services they seek from the Company.

This synergy is particularly evident within countries or municipalities where demographic changes, urbanization and economic development have accelerated significantly. In these areas, Veolia Environnement has been called upon to resolve the growing environmental problems faced by its clients. It offers a significant competitive advantage over funds or other financial investors, who have been weakened by the current market crisis.

Strong economic and financial resources

Veolia Environnement’s solid position results from market growth trends, but also from the Company’s competitive assets, including its technological and technical expertise, its financial stability, its geographic presence, and its experience in providing environmental services in compliance with regulatory requirements. The success of the capital increase that was completed in July 2007 also strengthened the Group’s financial capacity, thus ensuring its development and reducing its exposure to market fluctuations.

Size advantages

The Group’s size alone provides it with significant synergies. In addition, its presence in all segments of the value chain generates numerous vertical integrations that allow it to maximize added values.

Changes in technology and know-how

The Company has been expanding its Research and Development activities for a long period of time. Research and Development is essential for the Company to be able to complete its assignments and allow it to remain sensitive to the needs of its clients. Since 2000, Veolia Environnement has centralized its R&D business under one unique organization which is now supported by the strategic research, innovation and sustainable development committee created in 2006 by its board of directors.



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The Group also benefits from the technical exchanges in horizontal program areas such as prevention of legionnaires disease, treatment and recycling of sediment, bioenergy, management of High Environmental Quality buildings, etc.

Long-term contracts

Veolia Environnement makes long-term commitments to its clients. Its human resources policy, which focuses on, among other things, providing training to its employees, allows the company to focus on the long term, in particular through the considerable professional efforts of Veolia Expertise (Veolia Compétences), a program that was renewed in 2007 allowed extensive recruitment in France in 2005 and 2006.

Moreover, aside from its social, environmental and ethical aspects, sustainable development directly influences clients’ expectations, and is thus an essential element in the company’s commercial communication. Sustainable development trends have led the Company to change from a volume-maximization to a resource management-optimization economic model.

Managed risks

Given its growth objective, Veolia Environnement has implemented a management and risk calculation policy, the highlight of which in 2006 included the mapping of the major risks at the Group and division levels. By implementing a coordinated risk prevention and management plan, the Company has addressed this issue that is of fundamental significance for its long-term development.

These strategic elements have allowed Veolia Environnement to establish a profitable growth platform with room for future accelerated growth.

6.1.2.2

Veolia Environnement’s strategy by division

Water

Veolia Environnement’s water division intends to continue to expand its services around the world, while striving to ensure the quality and safety of the water it provides, the conservation of natural resources and the protection of the environment.

The growth potential of the international market for water services is enhanced by four main factors:

• population growth and higher urban density,

• reinforcement of environmental standards and health regulations,

• growing acceptance of the delegated management model and public-private partnerships as alternatives to public management, and

• refocusing by industrial clients on their core businesses.



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Given this growth potential, Veolia Environnement will continue to be selective in order to optimize the allocation of its resources, its operating costs and its profitability. In order to take advantage of market opportunities, the Veolia Eau division relies on its technical expertise, its experience in managing client relations and the mobilization of local teams in order to anticipate the future needs of public authorities. It also continues to provide training to its employees in order to meet future challenges. Its technical expertise in various desalination methods, and wastewater recycling in particular, represents a major effort to adapt to ongoing changes in market conditions.

Going forward, the water division will seek to capitalize on long-term international development opportunities, the maturing of its larger contracts and productivity gains resulting from efficiency programs that have been implemented (relating to purchases, information systems and sharing of best practices).

Environmental Services

Through its Veolia Propreté division, Veolia Environnement intends to become one of the world leaders in the waste management sector. As is the case with the Group’s other businesses, the waste management sector is showing signs of consistent and lasting demand, which has been reinforced by the tightening of environmental rules and regulations coupled with increased public demand in a number of countries. As a result, experts who can provide long-term services under cost-effective conditions and in compliance with environmental regulations are becoming highly sought after.

Within this favorable market environment in Europe, the United States and the Asia-Pacific region, Veolia Propreté has the following priorities for the waste management division:

• enhance its waste treatment capabilities and develop its technological expertise in waste treatment and recovery;

• strengthen its services offering to industrial clients by capitalizing on its mastery of the entire waste management chain, while seeking to generate synergies with the Group’s other operating divisions;

• increase the profitability of its activities by renegotiating fees, maximizing productivity and reducing structural costs, while ensuring that all of its activities contribute to the development of high value-added services.

Energy Services

Through its Veolia Énergie division, Veolia Environnement is the European leader in the energy services sector.

The opportunities in the sector are significant, due to increases in energy prices and public awareness of environmental problems, which have undeniably encouraged searches for solutions such as Dalkia’s initiatives to reduce the effects of greenhouse gases and encourage energy conservation.

Dalkia’s development strategy is focused primarily on heating and cooling networks, the management of service sector buildings and retail centers, the handling of industrial utilities, and energy provision and services in the health sector.

It includes the following geographical priorities:

• growth in Southern Europe (Italy, Spain etc) by participating in the trend toward market consolidation and by developing the Group’s multiservice offers aimed at the private sector;

• pursuing growth in the area of large heating networks, particularly in France and in Central and Eastern Europe, and the large cooling networks in the Middle East;



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• pursuing growth in North America by offering management services for networks, industrial utilities and shopping malls; and

• the development of activities in China (networks and industrial utilities) and in Australia.

These priorities will depend on the Group’s ability to offer, in the context of deregulated energy markets in Europe, innovative technical solutions focused on energy efficiency that often combine Veolia Environnement’s expertise in several areas. The Group also aims to promote its integrated outsourcing services to public clients as well as to service sector and industrial clients, by combining optimized services for facilities management (heating, air-conditioning, utilities, electricity, lighting).

Transportation

Through its Veolia Transport division, Veolia Environnement aims to become a major transportation service provider on a worldwide scale.

Between 2000 and 2030, the proportion of the world population living in urban areas is expected to increase from 50% to 60%, and urban transportation needs are expected to increase by 50% (source: International Association of Public Transport). These demographic changes will likely increase concerns relating to the environment and urban congestion, with public transportation services constituting a major concern for local authorities and inhabitants of large cities. Transportation always has an impact on the image and identity of a large city, its economic development, urban renewal projects, and local solidarity.

The major challenges in this sector are related to the ever-increasing need for new transport infrastructures, to environmental concerns, and to the growing demand for the customization of mass transportation.

Veolia Transportation’s strategy is to improve its performance in its basic passenger transportation activity with the following priorities:

• Continued efforts to address marketing, innovation and environmental concerns in order to continue to better satisfy clients;

• A focus on local or regional passenger transportation;

• Selective growth based on the attractiveness of markets and the intensity of local competition;

• Continued growth in related activities such as railway freight given the synergies and importance for the environment.

6.1.3

Major developments in 20075

Share capital increase with preferential subscription rights

On July 6, 2007, Veolia Environnement announced the success of its share capital increase with preferential subscription rights for an amount of €2.6 billion. The subscription period lasted from June 14 to June 27 included. The offering was successful, with total demand amounting to approximately €3.84 billion. The offer was 1.5 times over-subscribed. The gross amount of the capital increase was EUR 2,581,469,688 (including issuance premium) and resulted in the creation of 51,941,040 new shares.


5 The major developments occurring between January 1, 2008 and the date of filing of this reference document are described in chapter 12 below.



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As a result of this capital increase, Veolia Environnement reinforced its shareholders equity and increased its financial flexibility in order to maintain its growth following the announcement of several significant acquisitions since June 2006 and an investment program for 2007-2009.

New projects and acquisitions

In 2007, the Group reinforced its position within its business sectors with a series of new, targeted acquisitions which it hopes will generate growth and cost synergies.

The Group achieved more than €2.5 billion in external growth opportunities in its priority development areas during the 2007 fiscal year alone. Following the acquisition of Cleanaway UK (UK third waste management provider) in June 2006, the acquisitions of SULO (German second waste treatment operator) and TMT (first Italian private operator on the thermal waste treatment market) announced in April and May 2007, of TNAI (largest American private portfolio of heating and cooling networks) in June 2007, and part of the non-regulated activities of Thames Water which was finalized in November 2007 were the most significant.

The Company intends to continue this strategy in 2008 and 2009 by making value-generating investments that either lead to operational cost synergies, or accelerate development based on technological or commercial leverage in its prioritized geographical areas and on growth markets, in compliance with its investment criteria.

Innovation and new areas of activity

Veolia Environnement seeks to offer its clients innovative solutions that meet all of their sustainable development concerns. This goal has led the Group to study the development of new areas of activity related to its traditional activities and expertise and which all further the sustainable development perspective. In 2007, Veolia Environnement created a department of new areas of activity, which mobilizes and relies on the existing teams and skills of the Group’s operational entities.

Several new areas of activity have already been identified and have been the object of initial projects or studies. The common feature of these new areas of activity is that they encourage growth and enhance the activities of Veolia Environnement Group’s divisions. Examples include biofuels, wind generation or residential services. Other areas have been the focus of initiatives and investigations, such as air quality, ecological transportation, or sustainable development (ecological neighborhoods and buildings).

In the field of renewable energies, the Group has developed the production of biofuels, a strong growth market. Veolia Environnement favors the production of biofuel from waste, for example with used cooking oils. Indeed, this solution presents a very positive environmental balance and the recycling of these oils is an integral part of the waste treatment process. This project, which mobilizes the industrial skills of SARP Industries, creates significant synergies not only with the historical activities of the Company (notably recycling and collection) but also in terms of the prospects for the Group’s fleets of vehicles. The first plant to produce biofuel from used cooking oils will open in 2008 in Limay. It will have a production capacity of 40,000 tons per year, which may grow to 80,000 tons per year.

The market for wind-generated energy also shows a strong growth potential sustained by continued support policies. It is attractive in certain countries of Europe and above all in the United States and in Asia where development potential is considerable. In 2007, Veolia acquired 50% of the capital of Eolfi, which currently operates 26 MW in France and is building 12 sites that represent an additional 120 MW capacity. At the end of 2008, Eolfi’s production capacity is expected to reach more than 150 MW. In addition, numerous projects are pending abroad, notably in Greece, Poland and Asia. With Eolfi, the Company can meet the expectations of its clients, local communities and industrials, who also wish to include a “wind generated energy” dimension in their sustainable development projects. Eolfi will allow the Group to optimize certain real estate assets that are ideal sites for wind turbines.



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Finally, in the residential services sector, Veolia Environnement, through its subsidiary Proxiserve, has occupied a significant position within the market for individual boiler maintenance. More recently, Proxiserve has successfully developed a profitable and expanding domestic assistance activity (in plumbing). The millionth assistance contract was executed in November 2007. Based on these activities, Veolia Environnement intends to develop a whole range of services that will meet the concerns relating to sustainable housing for individuals: energy diagnosis, installation of renewable energy equipment (heating pumps, flat plate collectors, etc.) maintenance of installations, assistance and repair for heating, plumbing and electricity. The activities relating to services to individuals are provided under a common brand, Veolia Habitat Services.

A significant presence on the desalination market

The scarcity of resources linked to the irrigation of land, drought, floods that degrade the quality of water, or the over-development of ground water tables, combined with growing needs for water (population density growth), are a major challenge for the production of drinkable water in certain arid regions, in particular those regions where such phenomena are exacerbated and reduce the availability of water. The desalination of seawater is therefore expected to become one of the main alternative production methods for drinkable water in the coming decades.

Veolia Eau, which has more than 100 years of desalination experience, is one of the few companies that can offer a complete range of services and innovative solutions, and is therefore in a strong position within this rapidly expanding market thanks to its subsidiaries specialized in construction and thanks to its operational experience. The commercial successes in recent years speak for themselves.

In terms of design and construction, the Company is a leader in thermal and reverse osmosis desalination processes and has at its disposal numerous references in all types of existing treatments within the various entities of Veolia Eau Solutions & Technologies (SIDEM, WESTGARTH…). In 2006 and 2007, Veolia Eau Solutions & Technologies won significant contracts in the Middle East, in Bahrain, Saudi Arabia and in the Fujairah Emirate. The Group also benefits from established operational expertise and has strong experiences, for instance in Ashkelon (Israel), the operation of which began in September 2005. In 2006 and 2007, Veolia Eau won two contracts in Australia relating to the design, construction and operation of reverse osmosis desalination units to supply water to the cities of the Gold Coast and Sydney.

Market share forecasts for the desalination of seawater, taking into account all techniques, estimate that production will increase by more than 10% per year between now and 2015. Mediterranean countries (Algeria, Libya, Spain), China, Australia and the Middle East (Saudi Arabia, Emirates) will multiply their desalinated water production capacity by a factor of 2 to 10, with the countries of the Persian Gulf adding reverse osmosis to thermal desalination techniques (distillation).

Sustained activity growth and relevance of the sustainable growth model

Since its listing, Veolia Environnement has achieved various milestones with regards to its independence and organization, culminating in 2004 with the sale of non-strategic American assets and its holding in the Spanish company FCC. Refocusing the Group’s activities on environmental services, within the framework of long-term contracts, placed the Group, as early as 2005, in a favorable position to sustain its rank as worldwide leader in environmental services within the framework of a consistent strategy relying on proven capabilities.



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The 2007 fiscal year was another example of a year with profitable growth, in accordance with the objectives of Veolia Environnement. With revenue growth of 14.9% (at constant exchange rate) in 2007, demonstrating continued commercial dynamism, and recurring operating income growth of 11.9% (at a constant exchange rate), the Group confirmed its capacity to grow in a profitable manner. The increase in recurring net income attributable to the equity holders of the parent of 22.5% and the ROCE after taxation of 10.9%, which has increased significantly since 2002, reflect increasing profitability for shareholders. The coming to maturity of contracts makes it possible to pursue the improvement of profitability and confirm of the relevance of the profitable growth model. For that purpose, the Company continues to pay close attention to the quality of its agreement portfolios and the selectivity of its investments.

Selection of Veolia Environnement in the Dow Jones Sustainability Index (DJSI) and FTSE4Good indexes

Created respectively in 1999 and 2001, the Dow Jones Sustainability Index (DJSI) and FTSE4Good select companies based on their performance with regards to sustainable development. Veolia Environnement was included in the Dow Jones Sustainability Index and in the composition of FTSE4Good beginning in September 2007.

These classifications underscore in particular the Company’s performance in its relationships with its stakeholders, in particular with regard to human resource management as well as vis-à-vis clients and local communities. In addition, the Environmental Management System of Veolia Environnement (see § 4.2 above and 6.3.3 below) constitutes a significant factor in its selection by these indices.

Veolia Environnement is also part of the ASPI Eurozone index (Advanced Sustainable Performance Indices). The ASPI Eurozone index, launched in March 2002, is composed of the 120 principal stocks of the Eurozone selected according to social, environmental and corporate governance criteria.


6.1.4

Description of Veolia Environnement’s principal businesses

6.1.4.1

Water

Veolia Environnement, through its water division Veolia Eau – Compagnie Générale des Eaux, is the world’s leading provider of water and wastewater services for public authorities and industrial companies. In addition, Veolia Eau, through its subsidiary Veolia Water Solutions & Technologies, is the world leader in the conception of technological solutions and the construction of structures for the performance of such services. Veolia Eau provides drinking water to more than 78 million people around the world and supplies 53 million people in the world with drinking water, and manages more than 4,400 operating contracts.

At the end of 2007, Veolia Eau had approximately 82,867 employees around the world.6 The water division has a permanent presence in more than 60 countries, principally in France for historical reasons, but also in the United Kingdom, Germany, Italy, Belgium, the Netherlands, the Czech Republic, Slovakia and Romania. It is pursuing targeted growth in Russia, Armenia and Hungary. Asia-Pacific (mainly China, Korea, Japan and Australia) also remains an important development objective, with the signing of a number of significant contracts with municipal and industrial clients over the past several years. Veolia Eau has a presence in the United States through its contracts for the operation and maintenance of water and wastewater treatment plants, including its contract with the city of Indianapolis. Finally, Veolia Eau also has established a presence in the Middle East and Africa, primarily in Morocco and Gabon.


6 As of December 31, 2007, including Proactiva’s 1,939 employees who are active in the water business.



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Thanks to its network of research centers in France and abroad, Veolia Eau has mastered numerous technologies and tools within the water sector. Veolia Eau is therefore able to offer highly skilled services in the areas of sanitary protection, spillage reduction, productivity enhancement of water networks and plants and preservation of resources.

Given the combination of its strong local presence and more than 150 years of experience providing services to public authorities and industrial clients, Veolia Eau’s technical expertise is a significant advantage in the extremely competitive water services market.

Increased demand within the water services market has been substantially driven by clients seeking to optimize the management of their existing resources, whether they be public authorities seeking to respond to the trend towards urbanization, or industrial clients. New solutions, such as desalination (an example of which is the turnkey contract executed in 2007 to provideone of the largest sea water desalination plants in the world in Saudi Arabia) or re-use of treated water, may also be needed depending on an individual client’s circumstances.

The following table shows the consolidated revenue and operating income of the Water division, after elimination of all inter-company transactions.

Water*

(in millions of euro)

2007

2006

Change

2007/2006

Revenue**

10,927.4

10,087.6

8.3%

Operating income

1,267.7

1,160.6

9.2%

*

Includes Veolia Environnement’s share in the results of the water activities of Proactiva, Veolia Environnement’s joint venture with FCC.

**

Revenue from ordinary activities under IFRS.


Overview of Veolia Eau

Veolia Eau manages municipal drinking water and/or wastewater services on five continents thanks to a geographical organization featuring a strong local presence. Contracts with public authorities are typically long-term and range from 10 to 20 years in length, but may reach up to 50 years in length in certain circumstances. These contracts take on various forms, all of which are adapted to the needs and goals of the public authority, and may include outsourcing contracts, public-private partnerships, concessions, BOT (Build, Operate & Transfer) contracts, DBO (Design, Build & Operate) contracts and others. They are generally contracts that involve the operation, design or construction of installations, with the public authority usually remaining the owner of the assets (except in the United Kingdom) and retaining authority over water policy. Recent legislative changes have enabled Veolia Environnement to integrate more elaborate mechanisms in its contracts allowing it to share in the added value (productivity gains, improvement in the level of services, efficiency criteria, etc.). Public authorities often rely on Veolia Eau to manage client relations; and the Company is constantly improving the efficiency of its systems and its specific information systems. In certain countries where public authorities have sought to either implement new water and wastewater treatment systems or to improve the functioning of existing ones, Veolia Eau offers feasibility studies and technical assistance, which may include research plans, network modeling and financial analysis. Veolia Eau’s outsourcing contracts with industrial and commercial clients generally last from 3 to 10 years, although certain contracts have terms of up to 20 years.



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Service Contracts with Public Authorities and Industrial Clients

The main focus of Veolia Environnement’s water business is on water and wastewater management services for public authorities and industrial clients. Veolia Eau provides integrated services that cover the entire water cycle. Its activities include the management and operation of large-scale, customized drinking water plants, wastewater decontamination and recycling plants, drinking water distribution networks and wastewater collection networks. Veolia Eau also manages client relations, providing billing services and call centers.

Veolia Eau and its subsidiaries have provided outsourced water services to public authorities in France and in the rest of the world for more than 150 years under long-term contracts tailored to local environments. Currently, Veolia Eau and its subsidiaries are attempting to capitalize on the worldwide trend towards delegated management of municipal drinking water and wastewater treatment services.

Veolia Eau continues to develop its service offerings for industrial clients using its local presence in various areas and its adapted service organization. It has accordingly become active within this market in France, the United Kingdom, Germany and the Czech Republic, as well as in Asia (South Korea and China in particular) and the United States. Veolia Eau also contributes to the development of common service offerings of the Group, in particular in Europe with VE Industries (as discussed further below).

Engineering and Technological Solutions for the Treatment of Water

Through Veolia Water Solutions & Technologies, Veolia Eau is one of the world’s leading designers of technological solutions and of the construction of facilities necessary to provide water services on behalf of public authorities and industrial and commercial clients. In addition, Veolia Water Solutions & Technologies designs, assembles, manufactures, installs and operates modular standardized and semi-standardized water and wastewater equipment and systems designed to treat water for municipal and industrial uses. A local technical assistance network is available at all times for the upkeep, maintenance and after-sale service of these installations.

Veolia Eau treats groundwater, surface water, brackish or seawater, wastewater and refined sludge. Thanks to the combination of physical, chemical or biological treatments, Veolia Eau has developed a complete range of specific solutions for the purification of water or the reduction or elimination of impurities in effluents. Veolia Eau’s recycle/re-use systems provide clients with the ability to circulate part or all of their treated water back into plant processes, thereby reducing their water usage, operating costs and environmental damage.

Through SADE, Veolia Eau also designs, builds, renews and recovers urban and industrial drinking water and wastewater networks and conducts related work in France and around the world. Sade’s services cover each stage of the water cycle, from its collection to its release, and its public and industrial clients benefit from Sade’s experience in this area.

Description of Activities in 2007

In 2007, Veolia Eau enjoyed several commercial successes, and its revenues increased by 8.3% in 2007 compared to 2006, thanks to a high level of contract renewal in France, sustained organic growth outside of France, in particular in Asia, and strong growth in the engineering and construction business in France and internationally. Veolia Eau did not lose any significant contracts in 2007 relative to total revenues in the water division.

In France, Veolia Eau provides approximately 24 million inhabitants with drinking water and 16 million with wastewater services. Contracts renewed in 2007 represent expected total cumulative revenues of almost €920 million. Among the contracts renewed, the most important ones are with the community of Nice Côte d’Azur area, the city of Beauvais, the city of Macon and the Intercommunal Syndicate of the Mâconnaise Area, which integrate the latest technical innovations relating to environmental protection.



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Veolia Eau continues its development efforts in order to further increase its service offering to reach new clients in areas such as the management of wastewater treatment plants, the management of storage of mud , online availability of water consumption levels, management and maintenance of rainwater networks, the maintenance of non-collective wastewater installations, and the monitoring of swimming water, which are all services related to increasing awareness of the challenges of sustainable development.

In the rest of Europe, the EBRD has committed to invest up to €105 million in 2007, €90 million of which has been invested since 2007, to acquire 10% of Veolia Voda, a holding company for Veolia Eau’s businesses in Central and Eastern Europe, with the aim of increasing the role of the private sector in providing water conveyance and the purification of waste water, notably in Russia and the Ukraine.

At the end of 2007, the International Financial Corporation (IFC), the private sector arm of the World Bank Group, and PROPARCO, the subsidiary of Agence Française de Développement in charge of financing private investments in developing countries, acquired shareholdings of 13.89% and 5.56%, respectively, in Veolia Water AMI. Veolia Water AMI is a subsidiary of Veolia Water and operates water, wastewater and electricity services in Africa, the Middle East and the Indian subcontinent. The aim of this holding company is to develop infrastructures to serve those populations who are without water and electricity in the urban areas of these regions.

In the Middle East, in addition to the Jubail and Fujairah contracts, negotiations with the Sultanate of Oman led to the signing of a contract in January 2007, in partnership with National Power and Water, to build, finance and operate a reverse osmosis seawater desalination plant in Oman (80,000 m3 / day). The 22-year contract should represent estimated total consolidated revenue of €434 million, including the construction of the plant.

In Asia, Veolia Eau won several contracts in China (see chart below) and in Japan, where the company won a three year contract, for the operation and maintenance of a water decontamination plant in Chiba, a suburb of Tokyo which has significantly grown. In Australia, new Sydney contract followed the contracts that were won in 2006 relating to consulting the State of Queensland to recycle water produced by treatment installations in the region of Brisbane in an effort to combat drought, and the design, construction and management of a desalination by reverse osmosis facility designed to sustain, in particular, the Gold Coast.

Veolia Eau recorded solid earnings in 2007 due to the good performance of existing contracts across all geographical areas and in all business segments. This success was also due to the continued pursuit of measures to enhance productivity (sharing of best practices, better use of information technology, etc.) and to the progress generated by the implementation of new technology during past years (energy efficiency, return on installation and networks, etc).

Principal Contracts 2007

The following table shows the principal contracts signed or renewed in 2007 with either public authorities or industrial or commercial companies.7


7 Revenues expected under foreign contracts won during 2007 have been converted into euros at the rate of exchange prevailing on December 31, 2007 and represent the portion due to Veolia Eau under such contracts. Accordingly, these amounts may differ from the amounts announced in earlier press releases.



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Public Authority

or

Company and Location thereof

Month of Signature of Contract

New Contract or Renewal

Duration of Contract

Estimated Total Cumulative Revenue

(in euros)

Services Provided

France

     

Public Authorities

     

City of Nice Côte d’Azur and its suburbs

December

Renewal

12 years

75 million

Operation of drinking water services for the Nice Cote d’Azur communities.

Beauvais

October

Renewal

12 years

38 million

Operation of drinking water services.

Mâcon

June

Renewal

10 years

59 million

Management of water and waste water services.

Europe (outside France)

     

Public Authorities

     

Campo Dalias (Spain)

May

New

18 months (construction) + 15 years (operation)

78 million

Design, construction, operation and maintenance of reverse osmosis water desalination plant.

Companies

     

Shell Green (United Kingdom)

September

New

30 months

62 million

Modernization of wastewater treatment plant in Widnes in Cheshire.

Asia

     

Public Authorities

     

City of Lanzhou (Gansu province, China)

January

New

30 years

1.6 billion

Acquisition of 45% of the Lanzhou municipal water company, company holding the water management contract (3.2 million inhabitants).

Haikou (Hainan island, China)

June

New

30 years

776 million

Acquisition of 49% of the company managing the production and distribution of drinking water and the operation of a wastewater treatment plant (800,000 inhabitants).



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Public Authority

or

Company and Location thereof

Month of Signature of Contract

New Contract or Renewal

Duration of Contract

Estimated Total Cumulative Revenue

(in euros)

Services Provided

Sydney (Australia)

July

New

23 years (20 years of operating)

540 million

Construction and operation of a water treatment plant through reverse osmosis with a capacity of treating 250,000 square meters per day.

Tianjin Shibei (China)

September

New

30 years

2.5 billion

Acquisition of 49% of the company managing the drinking water service (3 millions inhabitants)

Asia

     

Companies

     

Tianjin Soda (China)

September

New

27 years

492 million

Construction and operation of water treatment plant.

PTTPE (Thailand)

May

New

15 years

75 million

Construction and operation of water treatment plant.

Qingdao Soda (China)

June

New

25 years

33 million

Operation of a demineralization plant.

North America

     

Public Authorities

     

Tampa Bay (Florida)

April

New

16 years (13 years of operating)

108 million

Construction and operation concerning the extension of the surface water treatment plant of Tampa bay.

Milwaukee (Wisconsin)

December

New

10 years

272 million

Management of the regional liquid waste management network of the Milwaukee region, and management of the production of Milorganite, fertilizer in granules produced by the drying of residual mud from the waste water purification plant.

Africa

     

Public Authorities

     

Mauritania

May

New

33 months

203 million

Construction of a drinking water supply line for the city of Nouakchott.



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Public Authority

or

Company and Location thereof

Month of Signature of Contract

New Contract or Renewal

Duration of Contract

Estimated Total Cumulative Revenue

(in euros)

Services Provided

Middle East

     

Public Authorities

     

Jubail (Saudi Arabia)

June

New

34 months

647 million

Construction and operation of a seawater desalination plant, able to process 800,000 cubic meters of water per day for the city of Jubail and the Eastern province of Saudi Arabia.

Fujairah (UAE)

August

New

32 months

547 million

Construction of a seawater desalination plant.

Fujairah (UAE)

December

New

12 years

71 million

Operation and maintenance of seawater treatment plant through reverse osmosis in Qidfa.


Principal Acquisitions and Divestitures in 2007

In the United Kingdom on November 28, 2007, Veolia Eau acquired a portion of the unregulated activities of Thames Water, in particular for the provision of services and asset management in the water and sewage sectors, some of which are financed by the “Private Finance Initiative” (PFI).

Also of note was the integration of the biological treatment activities of the Swedish company AnoxKaldnes which were acquired in the second half of 2007.

Moreover, in late 2007, Veolia Eau acquired the U.S. assets of one of the divisions of the Tetra Technologies Group which is responsible for the treatment of waste in the petroleum sector.

Veolia Eau created, acquired or integrated 96 companies during 2007, and liquidated or sold 48 companies. As of December 31, 2007, Veolia Eau’s group (excluding Proactiva) included 684 companies, compared to 636 in 2006. The principal changes included the purchase or creation of new companies with contracts that were effective as of the beginning of 2007.

6.1.4.2

Environmental Services

In 2007, Veolia Environnement, through its waste management subsidiary Veolia Propreté, became the largest environmental services operator in the world (in terms of revenue) in the area of waste collection, recycling and treatment. Veolia Propreté is the only company that handles waste in all its forms and at all stages of activity. Veolia Propreté manages liquid and solid waste and non-hazardous and hazardous waste (with the exception of nuclear waste) from collection to energy recovery, on behalf of both public authorities and industrial clients.



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In 2007, Veolia Propreté once again reinforced its position by acquiring Sulo in Germany and TMT in Italy (now known as VSA Tecnitalia).

In 2007, Veolia Propreté employed 100,032 people around the world8 in approximately 35 countries.

Veolia Propreté has partnered with more than 750,000 industrial and commercial services clients9 and serves nearly 60 million inhabitants on behalf of public authorities.

During 2007, Veolia Propreté estimates that it has collected nearly 40.6 million tons of waste and treated nearly 66 million tons of waste (of which 61.8 million tons were non-hazardous household and industrial waste and 3.9 million tons were hazardous waste). As of December 31, 2007, Veolia Propreté managed approximately 796 waste treatment units.

The term of Veolia Propreté’s waste management contracts usually depends upon the nature of the services provided, applicable local regulations and the level of capital expenditure required under the contract. Collection contracts usually range from 1 to 5 years, while treatment contracts can range from 1 year (for services provided on sites belonging to Veolia Propreté) to 30 years (for services involving the financing, construction, installation and operation of new infrastructure).

The following table shows the consolidated revenue and operating income of the Environmental Services division, after elimination of all intra-company transactions.

Environmental Services*


(in millions of euro)

2007

2006

Change

2007/2006

Revenue**

9,214.3

7,462.9

23.5%

Operating income

803.5

648.3

23.9%

*

Includes Veolia Environnement’s share in the results of the waste management activities of Proactiva, Veolia Environnement’s joint venture with FCC.

**

Revenue from ordinary activities under IFRS.


Overview of Environmental Services

Veolia Propreté furnishes waste management and logistical services, which include waste collection, waste treatment, cleaning of public spaces, offices and factories, maintenance of production equipment, treatment of polluted soil, and management of waste discharge at industrial sites.

Downstream, Veolia Propreté conducts basic or more complex waste treatment operations in order to reduce pollution and transform waste into a resource. Veolia Propreté:

• sorts and treats waste in order to create new primary materials, otherwise referred to as recycling or material recovery;

• transforms organic material into compost to be returned to the soil, otherwise referred to as composting or agronomic recovery;


8 As of December 31, 2007, including Proactiva’s 6,850 employees who are active in waste management activities.

9 The commercial figures provided in this section (in terms of number of clients, number of inhabitants served, tons of waste collected, etc.) do not take into account Proactiva’s activities, unless otherwise indicated, but do take into account Sulo for the second half-year of 2007 and Tecnitalia for the 4th quarter of 2007.



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• returns waste to the natural environment in the least damaging way possible, through landfilling or incineration;

• produces electricity or heat through landfilled or incinerated waste, otherwise referred to as waste-to-energy recovery.

The services referred to above fall into one of three large categories of activity conducted by Veolia Propreté: waste management services and logistics for local authorities and industrial companies, sorting and recycling of materials and waste recovery and treatment through composting, incineration and landfilling.

Environmental Services and Logistics for Local Authorities and Industrial Companies

Maintenance of Public Spaces and Urban Cleaning

Veolia Propreté provides urban cleaning services in many cities throughout the world, including London, Paris, Alexandria, , Rabat, and Singapore. Veolia Propreté’s services include mechanized street cleaning and treatment of building facades.

Cleaning and Maintenance of Industrial Sites

Veolia Propreté provides cleaning services at its industrial and commercial clients’ sites, including cleaning of offices and maintenance of production lines. In the commercial services sector, Veolia Propreté provides these services in train stations, subway networks, airports, museums and commercial centers.

In the industrial sector, cleaning services are extended to food-processing plants, and heavy industry and high-tech sites, where Veolia Propreté offers specialized cleaning services (high pressure or extreme high pressure cleaning). Veolia Propreté also offers cryogenic cleaning, and reservoir cleaning at refineries and petro-chemical sites in particular. Finally, Veolia Propreté has developed emergency services to treat site contamination in the event of an accident or other incident.

Liquid Waste Management

Through its subsidiary SARP, Veolia Propreté provides liquid waste management services that consist primarily of pumping and transporting sewer network liquids and oil residues to treatment centers.

Veolia Propreté has developed liquid waste management procedures that emphasize environmental protection, such as the on-site collection, recycling and reuse of water during the provision of its liquid waste management services. Used chemicals, which are hazardous to the environment, are collected before treatment and transferred to one of Veolia Propreté’s subsidiaries specialized in the management of hazardous waste.

Soil Decontamination

Land redevelopment and the expansion of residential or commercial areas may occur in areas where the soil has been polluted through prior use. Veolia Propreté has specific techniques for treating each site, which include treating polluted soil and rehabilitating temporarily inactive industrial areas, cleaning up accidental spills and restoring active industrial sites to be in compliance with applicable environmental regulations.



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Collection

In 2007, Veolia Propreté collected approximately 40.6 million tons of waste from individuals, local authorities and commercial and industrial sites. More than 60 million people around the world benefited from Veolia Propreté’s waste collection services.

Veolia Propreté collects household waste through door-to-door pickup or through pickup at designated drop-off sites, and collects commercial and non-hazardous industrial waste. It maintains the cleanliness of green spaces and carries away “green” waste, such as dead leaves and grasses, and also collects hazardous waste on behalf of its commercial and industrial clients, including hospital waste, laboratory waste and oil residue (ships, gas stations and drilling platforms) and diffused dangerous waste. In 2007, Veolia Propreté collected approximately 1.9 million tons of hazardous waste.

Veolia Propreté offers related services to its commercial and industrial clients, such as preliminary studies of future waste collection needs and waste tracking after collection.

Transfer and Grouping of Waste

Waste of the same type is transported either to transfer stations in order to be carried in large capacity trucks, or to grouping centers where it is separated by type and then sorted before being sent to an adapted treatment center. Hazardous waste is usually transported to specialized physico-chemical treatment centers, recycling units, special industrial waste incineration units or landfills designed to receive inert hazardous waste.

Sorting and Recycling of Materials

Veolia Propreté treats waste with a view towards reintroducing such waste into the industrial production cycle. Veolia Propreté’s recycling activities generally involve the selective collection of paper, cardboard, glass, plastic, wood and metal that clients either separate into different containers or mix with other recyclable materials.

Veolia Propreté received approximately 9 million tons of solid waste at its 307 sorting and recycling units in 2007, of which 6.1 million tons were recovered, including 2.8 million tons of paper. Veolia Propreté also provides decomposition services for complex waste products at specialized treatment centers, such as electric and electronic products and fluorescent lamps. Veolia Propreté works in partnership with upstream industrial clients and with Veolia Environnement’s CREED research center in order to develop new recycling activities. Veolia Propreté sells or distributes recycled material to intermediaries or directly to industrial and commercial clients.

Waste Recovery and Treatment through Composting, Incineration and Landfilling

In 2007, Veolia Propreté treated nearly 66 million tons of waste in its sorting and recycling centers, composting units, hazardous waste treatment centers, incineration units and landfills.

Composting and Recovery of Organic Material from Fermentable Waste

Veolia Propreté and Veolia Eau work together to recover sludge from wastewater treatment plants. In 2007, Veolia Propreté recovered almost 2.3 million tons of waste at its 114 composting units. 235,000 tons of urban and industrial sludge were reintegrated by Veolia Propreté into the agricultural cycle through manure spreading with a related tracking service offering.



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Waste-to-Energy and Incineration

Veolia Propreté treats approximately 11.4 million tons of non-hazardous solid waste (consisting mainly of urban waste) per year at its 78 waste-to-energy recovery and incineration plants. Energy is generated from the heat created by incinerating waste at these plants. Veolia Propreté uses this energy to supply district thermal networks or for sales to electricity providers.

Landfilling and Energy Recovery from Waste

In 2007, Veolia Propreté treated approximately 38.4 million tons of non-hazardous waste in 150 landfills. Veolia Propreté has developed the expertise to treat waste through methods that reduce emissions of liquid and gas pollutants. Veolia Propreté currently has 160 landfills that accept or have accepted biodegradable waste and that are equipped to retrieve and treat biogas emissions from the anaerobic fermentation of waste, of which 76 landfills have recovery systems to transform biogas emissions into alternative energies.

Treatment of Hazardous Waste

In 2007, Veolia Propreté treated 3.9 million tons of hazardous waste, of which 1.08 million tons were incinerated in 22 incineration units for specialized industrial waste, 759,000 tons were landfilled in 14 class 1 landfills and 1.71 million tons were treated in 61 units by physico-chemical or stabilization methods. The remaining 480,000 tons were treated in 35 specialized recycling centers.

The principal methods used for treating industrial hazardous waste are incineration (for organic liquid waste, salt-water and sludge), solvent recycling, waste stabilization followed by treatment in specially-designed landfills, and physico-chemical treatment of inorganic liquid waste.

Through its specialized subsidiaries SARP Industries and VES Technical Solutions (in the United States) Veolia Propreté has a worldwide network of experts enabling it to become one of the current world leaders in treating, recycling and recovering hazardous waste.

Description of Activities in 2007

In 2007, Veolia Propreté’s revenues increased by 23.5% compared to 2006. Excluding the effect of exchange rate and acquisitions and divestitures, internal growth was 7.5%.

Growth in France reached 7.1% (of which 6.6% was organic) due to a strong increase in the price of recycled materials (paper, metal), the growth in quantity of solid waste collected and sorted-recycled (paper, metal), the D3E business (electrical and electronic equipment waste) and land decontamination, the increase in buried tonnage and the efficiency of the incineration facilities.

In the United Kingdom, organic growth reached 7.9%, as a result of the integrated contracts of East Sussex and Nottinghamshire and the industrial services (in particular in the petroleum sector). In the rest of Europe, organic growth (8.4%) was particularly strong in Norway and Denmark.

In North America, organic growth reached 7.7% as a result of increased fees relating to solid wastes, the Marine Services businesses, the new Pinellas contract and the treatment of military waste at Port Arthur.

South America benefited from short-term contracts in the chemical and petroleum sectors that allowed it to grow by 40%.

A limited number of significant contracts were lost in 2007: Chennai in India (cleaning), Canca in France (collection in Nice), and Solihull Borough in the United Kingdom (collection).



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Significant developments in 2007 included the following:

In France, Veolia Propreté reinforced its recycling activities through the acquisition of the Bartin Recycling Group, number 3 in France in the business of recycling and reuse of scrap-metal and metals (see chapter 12, §12.2 below). The development of D3E activities continued. A new treatment unit for hydrocarbons and mineral liquid waste, Hydropale, was opened in Dunkerque. A ship dismantling unit was created in Bordeaux. Finally, the Polynesian businesses were sold.

In the United Kingdom, Veolia Propreté, while managing the acquisition and integration of Cleanaway UK, signed a new 27-year PFI (“Private Finance Initiative”) contract for the integrated management of household waste in the County of Shropshire, representing estimated total cumulative revenue of more than €1 billion.

In Europe, Veolia Propreté continued to reinforce its commercial position within the incineration and related energy authorization sectors through the acquisition of TMT in Italy. In Germany, the acquisition of SULO enabled Veolia Propreté to reinforce its role in the recycling sector in Europe and the reuse of recycled material, especially paper.

In North America, Veolia Propreté reinforced its position within the industrial services sector, winning several contracts for the maintenance and industrial cleaning of oilrigs in the Gulf of Mexico following the expansion of a fleet of specialized boats for this marine branch. In early 2007, Veolia Propreté won a 17-year contract for the operation of the energy recycling unit in the Pinellas County (Florida), one of the largest incineration units in the United States.

In Asia, Veolia Propreté signed a 29-year concession agreement for the construction and operation of a new household waste storage facility for the city of Jiujiang in China. A 28-year concession agreement for the operation of a medical waste incineration unit was also executed with the city of Foshan. Finally, the repurchased Cleanaway businesses were integrated.

Principal Contracts in 2007

The following table shows the principal contracts signed or renewed in 2007 with either public authorities or industrial or commercial companies.10

Public Authority

or

Company and Location thereof

Month of Signature of Contract

New Contract or Renewal

Duration of Contract

Estimated Total Cumulative Revenue

(in euros)

Services Provided

France

     

Public Authorities

     

SIOM (Chevreuse)

June

New

5 years

25 million

Operation and maintenance of the household waste incineration plant of Villejust.


10 Revenues expected under foreign contracts won during 2007 have been converted into euros at the exchange rate on December 31, 2007 and represent the portion due to Veolia Propreté under such contracts. Accordingly, these amounts may differ from the amounts announced in previous press releases.



46






Public Authority

or

Company and Location thereof

Month of Signature of Contract

New Contract or Renewal

Duration of Contract

Estimated Total Cumulative Revenue

(in euros)

Services Provided

SMICTOM (Fontainbleau)

June

Renewal

7 years

24 million

Transfer, transport and treatment of household and hospital waste.

Limoges

December

Renewal

10 years

40 million

Operation and maintenance of the household waste incineration plant of Limoges.

Companies

     

Arcelor-Mittal

June

New

5 years

21 million

Supply energy to the Arcelor-Mittal site, via UIOM Arc-en-Ciel (Nantes).

Europe (outside France)

     

Public Authorities

     

Shropshire (United Kingdom)

September

New

27 years

1,030 million

Contract integrating the global treatment of waste.

Bautzen (Germany)

July

Renewal

7 years

17 million

Collection of municipal waste, sorting recycling and composting.

North America

     

Public Authorities

     

Pinellas (Florida)

January

New

17 years

356 million

Operation and maintenance of household waste incineration plant.



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Public Authority

or

Company and Location thereof

Month of Signature of Contract

New Contract or Renewal

Duration of Contract

Estimated Total Cumulative Revenue

(in euros)

Services Provided

Asia-Pacific

     

Public Authorities

     

Jiujiang (China)

August

New

30 years

92 million

Construction and operation of Jiujiang landfill.

Singapour

November

Renewal

5 years

28 million

Urban cleaning


Acquisitions and Divestitures in 2007

On July 2, 2007, Veolia Propreté finalized the acquisition of Sulo for an enterprise value of €1,450 million, which significantly reinforced its position in the waste management sector in Germany and in Eastern Europe. Sulo was the second largest operator of waste management in Germany; it is a leading specialist in paper and plastic recycling and has a high level of expertise in the areas of sorting and organic reuse. Sulo is also a leader in Eastern Europe and in the Baltic states. Sulo’s Environmental Technologies division was sold to Plastic Omnium in July 2007 for an enterprise value of €142 million.

In addition, on October 3, 2007, Veolia Propreté finalized the acquisition of 75% of the share capital of TMT, which has since been renamed VES Tecnitalia, the former subsidiary of Termomeccanica Ecologia in Italy. Tecnitalia is the leading private operator for the thermal waste treatment on the Italian market. It operates ten treatment installations, of which four are thermal treatment installations, and has numerous contracts, as well as several factories that are currently under construction.

Other less significant acquisitions occurred in 2007. They are expected to increase Veolia Propreté’s treatment and recycling capacities in Europe, Northern America and in Asia.

Taking into account all formations, acquisitions and integrations of companies (a total of 202) and liquidations, sales, and mergers (a total of 74), the scope of consolidation of Veolia Propreté (excluding Proactiva) included 753 companies at December 31, 2007, compared to 625 in 2006.

6.1.4.3

Energy Services

Veolia Environnement conducts its energy service activities through Dalkia, the leading European provider of energy services to companies and municipalities. Dalkia provides services relating to heating and cooling networks, thermal and multi-technical systems, industrial utilities, installation and maintenance of production equipment, integrated facilities management and street lighting. It attempts to leverage the opportunities for the development of energy and greenhouse gas markets. Dalkia seeks to partner with its clients, helping them optimize their energy purchases and improve the efficiency of their installations (both in terms of cost and atmospheric emissions).

In 2007, Dalkia employed approximately 54,375 employees around the world. Dalkia is present in almost 40 countries, primarily in Europe.



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The following table shows the consolidated revenue and operating income of the Energy Services division, after elimination of all inter-company transactions.

Energy Services

(in millions of euro)

2007

2006

Change

2007/2006

Revenue*

6,896.4

6,118.4

12.7%

Operating income

398.7

377.7

5.6%

* Revenue from ordinary activities under IFRS.


Overview of Energy Services

Dalkia’s business is currently facing three major challenges:

• global warming and the need to reduce carbon dioxide emissions;

• the increase in the prices of fossil fuels and their eventual scarcity;

• growing urban development and the related industrial development.

Dalkia’s activity focuses on optimal energy management. Dalkia has progressively established a range of activities linked to energy management, including heating and cooling systems, thermal and multi-technical services, industrial utilities, installation and maintenance of production equipment, integrated facilities management and electrical services on public streets and roads. The health sector is particularly important to Dalkia: in 2007, it won landmark contracts such as Santa Casa de Misericordia in Brasil.

Dalkia provides energy management services to public and private clients with whom it has formed long-term partnerships. Dalkia’s management contracts for the operation of urban heating or cooling systems are typically long-term, lasting up to 30 years, while its contracts for the operation of thermal and multi-technical installations for public or private clients may last up to 16 years. Contracts to provide industrial utilities services generally have shorter terms (6 to 7 years on average), while contracts in the facilities management sector generally last 3 to 5 years.

When possible, Dalkia offers solutions to its clients utilizing renewable or alternative energy sources such as geothermal energy, biomass (organic material), heat recovered from household waste incineration, “process” heat (heat produced by industrial processes) and thermal energy produced by co-generation projects. A combination of energy sources may also be selected in order to take advantage of the complimentary nature of each source. For instance, in 2007 Dalkia acquired PannonPower, the leading biomass plant in Hungary.

Heating and Cooling Networks

Dalkia is one of Europe’s leading operators of large “district” heating and cooling networks. Dalkia currently manages 700 urban and district heating and cooling networks worldwide, particularly in the United States, France, the United Kingdom, Italy, Germany, Eastern and Central Europe and the Baltic states. Dalkia does not necessarily own the networks it operates and in some cases, public authorities own the networks and delegate the responsibility of managing, maintaining and repairing them to Dalkia. The networks operated by Dalkia provide heating, sanitary hot water and air conditioning to a wide range of public and private facilities, including schools, health centers, office buildings and residences.



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Thermal and Multi-Technical Services

Thermal services consist of operating heating, sanitary hot water and air conditioning systems to provide comfortable living and working environments, as well as improving the operation of existing systems to optimize their efficiency. Dalkia provides public, industrial and commercial services clients with integrated energy services including plant design, construction and improvement, energy supply, and plant management and maintenance. Dalkia provides clients with a large range of technical services and manages more than 100,000 energy plants throughout the world.

Industrial Utilities, Installation and Maintenance of Production Equipment

Dalkia has become a leading provider of industrial utilities services in Europe. It has developed expertise regarding the analysis of industrial processes, the enhancement of productivity and the operation, and the maintenance and servicing of equipment.

Integrated Facilities Management

Facilities management contracts integrate into one global service a range of services, from thermal, electrical and mechanical equipment maintenance to logistics. Accordingly, the client’s various needs are provided for by one company. Dalkia provides facilities management services for its industrial or commercial clients (such as business premises, corporate offices or health establishment sites…).

Street Lighting Services

Citélum, a subsidiary of Dalkia, has earned a worldwide reputation for the management of urban street lighting, the regulation of urban traffic and the lighting of monuments and other structures. Citélum operates and maintains lighting in a number of cities in France and abroad, and provides artistic lighting services at important architectural works and sites. 2007 saw the opening of an establishment of Chile where Citélum won an operation-maintenance contract for public lighting of the city of Santiago de Chile. Citelum was also awarded a contract by the city of Syracuse in Sicily and also signed a Public Private Partnership (PPP) contract with the city of Agde.

Services to Individuals

Dalkia provides residential services to individuals through Proxiserve, a joint subsidiary of Dalkia and Veolia Water, including the maintenance of heating, air conditioning and plumbing systems and meter-reading services.

Description of Activities in 2007

In 2007, the Energy Services Division increased its revenues by 12.7% compared to 2006. These results were the result of commercial growth and significant international expansion (notably in central Europe and in the Asia Pacific region), despite an extremely mild early 2007.

In France, Dalkia renewed 80% of its contracts that were due to expire during the fiscal year. Contracts that were lost included the paper mills of the Gorge region due to the closure of the site, the heating network of a section of Bourges, the Palais des Congrès in Nice, and the ONERA in Chatillon. The unrenewed contracts represented approximately 2% of Dalkia’s revenues.

In addition to the contracts signed in 2007, which appear in the table below, in October 2007 Dalkia began the implementation of a heat and electricity supply contract for the a bio-ethanol production plant in Usti Nad Laben, in the Czech Republic. This contract, signed in April 2006, represents estimated revenue of €67.7 million over a period of 10 years.



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Principal Contracts in 2007

The following table shows the principal contracts signed or renewed in 2007 with either public authorities or industrial or commercial companies.11

Public Authority

or

Company and Location thereof

Month of Signature of Contract or of Renewal

New Contract or Renewal

Duration of Contract

Estimated Total Cumulative Revenue

(in euros)

Services Provided

France

     

Public/Local Authorities

     

Lille

December

Renewal

8 years

5 million

Management of 282 communal buildings in Lille: schools, cultural, social and administrative centers.

Vandoeuvre

March

Renewal

20 years

6.135 million

Management of heating network.

Vémars

July

New

24 years

3.8 million

Sustainable urban development project: commercial, industrial and living zone. Private biomass and wood-energy electricity and heating network.

Industrial and commercial services

     

Tour Granite, La Defense

December

New

4 years

4.95 million

Management of the new Société Générale Granite tower (70,000 m², 4,500 working stations, label HQE).

Rest of World (outside France)

     

Public/Local Authorities

     

Jiamusi, China

April

New

25 years

1 billion

Management of the leading heating network in China: 250,000 inhabitants, 5.5 million square meters of commercial and municipal buildings.


11 Revenues expected under foreign contracts won during 2007 have been converted into euros at the exchange rate on December 31, 2007 and represent the portion due to Dalkia under such contracts.    Accordingly, these amounts may differ from the amounts announced in previous press releases.



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Public Authority

or

Company and Location thereof

Month of Signature of Contract or of Renewal

New Contract or Renewal

Duration of Contract

Estimated Total Cumulative Revenue

(in euros)

Services Provided

Industrial and
commercial services

     

Setra, Sweden

March

New

15 years

35.8 million

Construction and operation of a biofuel boiler providing hot water to a sawmill.

Bahrain Bay, Bahrain

March

New

25 years

215 million

Design, construction and management of a cooling network for a real estate project in Bahrain Bay.

Santa Casa de Misericordia Hospita, Brazil

May

New

15 years

186 million

Providing multi-technical services, management of utilities, management of the subcontracting of hospital security and catering services.


Acquisitions and Divestitures in 2007

In 2007, Dalkia expanded in central Europe through various acquisitions such as, for example, PannonPower in Hungary, the central unit of which feeds the second largest heating network in the country; Rekotak in Slovakia, which manages thermal plants in a section of Bratislava pursuant to a 29-year contract, or the operator of the urban heating network and heat and electricity production of Varna, the third-largest city in Bulgaria.

In China, through the acquisition of a majority stake in YangGuang, Dalkia took over the construction and operation project relating to the “South West” heating network of the city of Harbin, the capital of the Heilongjiang province in the North East of China, which has 9.5 million inhabitants.

At the end of 2007, the Energy Services division expanded to the United States through its acquisition of Thermal North America Inc., the leading portfolio of heating and cooling networks in the United States.

In total, over the course of 2007, Dalkia created or purchased 71 companies, and sold, liquidated or merged 19 companies. As a result, at December 31, 2007, Dalkia held 469 consolidated companies, including 242 foreign companies.

6.1.4.4

Transportation

Veolia Environnement, through its transportation division, Veolia Transport, is the leading private operator of public ground transportation in Europe. Veolia Transport operates road and rail passenger transportation networks under contracts with national, regional and local transit authorities. Veolia Transport has been managing and operating urban, regional and interregional road and rail networks and maritime transport for more than a century, having won its first tramway concessions at the end of the 19th century.



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Veolia Transport estimates that the worldwide transportation market currently stands at €460 billion, of which only 15%, or approximately €70 billion, is currently open to competition. The development potential therefore stands at around €390 billion. The opening of transportation markets over the past several years has been particularly significant in Europe, but has occurred on other continents as well. Thus, by 2016, the estimated revenue represented by the worldwide public transportation market is expected to total €760 billion, €100 to 200 billion of which are likely to be open to competition.

Moreover, the worldwide population trend of movement towards urban areas increases the need for mass transportation services, thus strengthening the market potential in areas that Veolia Transport seeks to service.

At the end of 2007, Veolia Transport had approximately 81,532 employees around the world. It has a presence in more than 30 countries, and conducts its activity mainly in Europe, North America and Australia. While continuing to strengthen its position in France, Veolia Transport has a strong presence outside of France as well, where it earns approximately 60.6% of its revenues. In 2007, Veolia Transport pursued its growth in North America and Europe.

Veolia Transport estimates that it provided transportation in 2007 to more than 2.7 billion travelers, and that it managed contracts with approximately 5,000 public authorities.

The following table shows the consolidated revenue and operating income of the Transportation division, after elimination of all inter-company transactions.

Transportation

(in millions of euro)

2007

2006

Change

2007/2006

Revenue*

5,590.1

4,951.5

12.9%

Operating income

130.3

13.6

858.1%

*

Revenue from ordinary activities under IFRS.


Overview of Transportation

Veolia Transport primarily operates road and rail passenger transportation networks under contracts won through public bidding processes initiated by various public authorities. The public authorities with which Veolia Transport contracts generally own the heavy infrastructure used by Veolia Transport, and typically establish schedules, routes and fare structures for the networks that Veolia Transport operates and manages.

Veolia Transport primarily conducts its business through outsourced management of transportation activities under conditions and structures that differ from one country to another due to varying legal and regulatory requirements. Each contract between a public authority and Veolia Transport governs the relationships between the two parties, including payment to Veolia Transport and the risks to be borne by each party, and typically lasts for a fixed period. Because the fares Veolia Transport charges passengers on its transportation networks are usually insufficient to cover its costs, the public authority typically provides Veolia Transport with a payment or other compensation for services rendered. Moreover, in the case of certain contracts, Veolia Transport is paid a flat fee for its transportation services; consequently, it does not bear the risks associated with lower receipts or decreased passenger use (such contracts being referred to as “Public Market” contracts in France).

Veolia Transport’s management contracts generally last from 2 to 12 years, except for those that take the form of “operating concessions,” which on average last approximately 30 years.



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Veolia Transport’s activities can be broken down into four principal categories:

• urban mass transportation (urban transport, urban beltway and other supplementary transportation services);

• intercity and regional transportation;

• industrial markets;

• transportation management (passenger information services, clearinghouses, central telephone operator).

Urban Mass Transportation

Veolia Transport operates a number of bus networks, suburban trains, tramways and metros, and provides customized transportation services as well. Veolia Transport is either partially or entirely responsible for designing, planning and operating services, managing personnel, inspecting vehicles and stations it uses in its networks (including obtaining various permits), undertaking marketing efforts and managing client service.

In many urban areas, Veolia Transport provides interconnected bus, tramway, metro and train transportation services through a ticketing system coordinated by the principal transportation provider or transportation authority within a given region. Veolia Transport also offers services within networks managed by several different operators in urban areas, including, particularly, the Paris suburbs, Stockholm, Sydney and Düsseldorf.

Veolia Transport operates ferry services in tandem with its bus services in various urban areas. It does so in Toulon (France) and Göteborg (Sweden), for example.

• Urban and Suburban Transportation

In France, Veolia Transport operates the tramways, bus networks and light rail networks in Rouen, Saint-Etienne, Nancy, Nice and Bordeaux. Veolia Transport is also the operator of bus networks, notably in Nice, Toulon (where tramway infrastructure is currently being installed as well) and approximately 40 other French cities.

Veolia Transport has a strong presence in the Ile-de-France region, where it operates numerous bus lines in the intermediate suburbs of Paris and greater metropolitan area. It is the main private operator in the region, operating the bus networks of Melun, Rambouillet, Argenteuil, St. Germain-en-Laye and Seine-Saint-Denis.

In Europe, Veolia Transport operates tramways and light rail networks in Görlitz and Berlin (Germany), Dublin (Ireland), Trondheim (Norway) and Norrköping and Stockholm (Sweden). Veolia Transport also operates the Stockholm metro, as well as bus lines in Scandinavia, the Netherlands, Switzerland, Czech Republic and numerous cities in Poland.

In southern Europe, until the sale by FCC-Connex of its Spanish bus subsidiary CTSA in November 2007, FCC-Connex Corporación SL, which is jointly owned by Veolia Transport and FCC, combined the passenger transport activities of two companies in Spain. FCC-Connex managed the urban and suburban transport services in several cities, including in particular the Barcelona tramway and the urban transport network of Jérez. Veolia Transport operated the urban network of the city of Pamplona. Following the sale, Veolia Transport intends to redevelop its activities in Spain through its wholly owned subsidiary Veolia Transport España SL.



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In the United States, Veolia Transport provides bus transportation services principally in California, Arizona, Nevada (Las Vegas), Colorado, Texas, Maryland and Virginia. Veolia Transport and its partners in the Massachusetts Bay Commuter Railroad Company (the Bombardier group and a local partner, ACI) manage suburban trains in the Boston area. Veolia Transport also manages suburban trains in Los Angeles (Metrolink).

In Canada, Veolia Transport provides transportation services in the southern suburbs of Montreal, as well as bus services in York (Ontario).

In Australia, Veolia Transport operates the entire suburban rail network of Melbourne as well as the monorail and light rail network of Sydney. It also operates bus services in Perth, Brisbane and Sydney. In New Zealand, Veolia Transport operates trains in the urban region of Auckland.

In the rest of the world, Veolia Transport operates, through partnership with other operators, a high-frequency right-of-way bus system (BRT: Bus Rapid Transit) in Bogotá (Colombia), a network of bus lines in Santiago of Chile and three urban bus networks and inter-urban bus lines in Israel. In Jerusalem, Veolia Transport is also part of the consortium that has been awarded the concession for the operation of a future tramway.

• Other Transport Services (transportation on demand, para-transport, taxis…)

Veolia Transport offers innovative transportation services in certain cities that supplement traditional transportation networks. For example, Veolia Transport offers Créabus, an on-demand minibus service that is tracked by a Global Positioning System, or GPS, which operates in Dieppe, Montluçon, Vierzon, Bourges, Bordeaux, Ile-de-France and Fairfax (United States). Veolia Transport also manages all of the on-demand transportation services in the North Brabant region and of Limburg in the Netherlands.

Veolia Transport manages taxi services in the Netherlands and the United States, in particular in Baltimore, Denver, and Kansas City. It provides transport for persons with reduced mobility in Bordeaux and other regions of France, in Canada and in the United States (“para-transit”), in particular California, Arizona, Nevada, Texas, Maryland and South Carolina. In addition, in 2007, Veolia Transport obtained the means to add the “bicycle business” to its range of services.

Intercity and Regional Transportation

Veolia Transport provides regional transportation services through the operation of road and rail networks. As with urban transportation services, Veolia Transport is responsible for designing, planning, operating, maintaining and providing security on the vehicles and stations it uses in its regional networks, as well as for ticket sales and client service.

In France, Veolia Transport has a strong presence in the intercity and student transportation markets, involving more than 60 French departments across the country. Veolia Transport also operates a number of regional rail networks, covering approximately 300 kilometers, through contracts with regional public authorities or sub-contracts with the Société Nationale des Chemins de Fer (SNCF), the French national railroad company, particularly in the regions of Brittany, Provence, the Alps and the French Riviera.

In Europe, Veolia Transport has a strong presence in Germany, with more than 3,000 kilometers of regional railway lines in Denmark, the United Kingdom, Norway, Sweden, Finland, Slovenia, Slovakia, Belgium, Spain, the Czech Republic, the Netherlands and, since late 2006, Serbia and Croatia.

Through its subsidiary, Eurolines, Veolia Transport provides transport by motor coach on regular international routes serving over 1,500 cities throughout Europe.

In the United States, in the regional rail network sector, Veolia Transport operates Sprinter, in South Los Angeles, and Tri-Rail, a network in the suburbs of Miami.



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Veolia Transport is continuing to develop ferry transport service in areas such as Finnmark and Norrland (Norway) and Zeeland province (Netherlands), as well as through its 28% shareholding in the Société Nationale Maritime Corse Méditerranée12 (SNCM), which manages passenger and freight maritime transportation services between Marseille, Nice, Corsica and North Africa. Veolia Transport is a shareholder of SNCM alongside Butler Capital Partners (38%) and the French State (25%).

Industrial Markets

Besides the personnel transport services provided by subsidiaries in France, such as for example the Eurocopter site in Marignane, and in the rest of Europe, Veolia Transport’s industrial activities are focused on two areas that represent nearly 4% of its revenues: rail transport (freight transport and management of industrial rail junctions and related logistics) and airport services.

• Rail Transport

This sector is operated in Europe through Veolia Cargo, with the support of national subsidiaries in France, Belgium, Germany and the Netherlands.

In the freight transport area, Veolia Transport operates a number of regional, national, and international freight trains in France, the Netherlands and Germany.

In 2007, Veolia Cargo reinforced its position in Germany, developed its client portfolio in the French national market, and consolidated its development strategy in France and Germany. Veolia Cargo also launched several container transport lines, thus solidifying its partnership with the ship owner CMA-CGM. Another highlight of the year was the creation of subsidiaries in Belgium and in Italy.

Moreover, in the area of industrial rail junctions and related logistics, Veolia Cargo, through its subsidiaries in France and Germany, manages junctions for large industrial clients (in particular in the steel and refining industries) with factories that are linked to a national rail network.

• Airport Services

This activity covers a range of services for airline clients (freight transport at Charles de Gaulle airport, baggage handling, maintenance of vehicles, etc.). It is carried out by VE Airport, the share capital of which is 60% held by Veolia Transport.

Veolia Transport also manages passengers transport services inside airports.

Management of Airport Infrastructure

With regard to airport infrastructure management, Veolia Transport has been operating, maintaining and managing the public areas of the Nîmes-Garons airport (land, construction, building maintenance, airline receipts infrastructures for passenger or freight passengers), since January 1, 2007. This project represents a new air transportation infrastructure management business for the Group, which provides total management of a site accommodating 250,000 travelers per year.


12 SNCM is fully consolidated in the consolidated financial statements of Veolia Environnement (see Chapter 20.1, note 45 of the consolidated financial statements).  This consolidation method was analyzed using the IAS27 norm and is a result of the SNCM’s rules of governance.  In particular, Veolia Transport appoints all of the members of SNCM’s management board, has broad operational and financial management authority and exercises control over the SNCM as defined under the IFRS accounting norms.



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Transportation Management


Growth in Veolia Transport’s business depends on increased use of public transportation networks, which in turn is closely related to the quality of service provided by these networks.

To increase passenger usage of its networks, Veolia Transport’s efforts focus on matching service offerings with demand for such services, and developing local information services for travelers relating to transportation systems. Veolia Transport has developed the “Optio” system, a service that provides complete information to anyone who wants to use public transport within a region (regardless of the operator). The service involves the use of a call center, an internet site, wireless text messages, such as SMS, and wireless internet access, such as WAP. The “Optio” system currently operates in the French departments of Oise and Isére. In addition, Veolia Transport has developed “Connector Plus”, a real-time information system installed in the rail network of Melbourne (Australia), which notifies users of service interruptions or delays through wireless text messages on their mobile phones. Veolia Transport has installed the “Connector Plus” system in Stockholm as well.

In addition, Veolia Transport has recently created several internet sites that allow users to prepare their itineraries using local transportation systems within France and Australia.

Transportation Activity in 2007

In 2007, revenues in the Transportation division increased by 12.9% compared to 2006, due to an increase in revenues from urban and inter-urban passenger transport abroad resulting from the latest developments in Europe.

On a commercial level, despite the non-renewal of a contract for the operation of the train line linking Göteborg to Stockholm and the North of the country (Norrland train) and a contract relating to the operation of a portion of the Stockholm bus network – these contracts together representing less than 1.5% of Veolia Transport’s revenue – 2007 saw the renewal or the initial conclusion of a large number of medium-sized contracts, particularly in Europe. For instance, 17 contracts for the operation of regional bus lines in Belgium were renewed, worth a combined estimated revenue of around €33 million. The revenue represented by non-renewed contracts in 2007 is not significant in comparison with total revenues in the transportation division.

The highlights of the past year included:

• In April 2007 in the Rhône department of France, Veolia Transport won the operating contract for Leslys, the leading express railway link between the city and its airport, in a consortium that included Vinci, la Caisse des Dépôts, Vossloh and Cegelec. In maritime transportation, the operating contract for the transportation to the Morbihan Islands known as « îles du grand large », represents average annual traffic of approximately 1,600,000 passengers.

• In the United States, railway activities grew significantly in 2007. Besides the renewal of the Boston contract in December 2007, which is the contract for the operation of the largest suburban train in the American market, two new railway contracts were concluded: the Tri-Rail contract in the south of Florida (suburban train) began on July 1, 2007 for a term of 7 years and estimated total cumulative revenue of €43.2 million; in Austin (Texas), a contract for freight transport (this activity being sub-contracted to another operator) and urban and suburban passenger transport with a five-year term was concluded in August 2007 for estimated total cumulative revenue of approximately €73.5 million. The renewal of contracts with Boston and Las Vegas in January 2008 (see chapter 12, §12.2 below) constituted a major success, and strengthens the position of Veolia Transport in North America.



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• In India, a consoritum in which Veolia Transport holds a 5% interest, was awarded the 35-year concession contract (five years of which are dedicated to construction) relating to the construction, operation, and transfer of the first subway line in Mumbai (Bombay). The operation and maintenance contract of this subway line, which is currently being negotiated between the company granting the concession and a company whose majority shareholder is Veolia Transport, should be concluded during the first half-year of 2008.

Principal contracts in 2007

The following table shows the principal contracts signed or renewed in 2007 with either public authorities or industrial or commercial companies.13 

Public Authority

or

Company and Location thereof

Month of Signature of Contract or of Renewal

New Contract or Renewal

Duration of Contract

Estimated Total Cumulative Revenue

(in euros)

Services Provided

France

Public Authorities

     

Lyon

April

New

30 years

360 million

Operation of tramway network linking Saint-Exupéry airport to Lyon.

Morbihan Islands

November

New

7 years

154 million

Operation of service to the Morbihan Islands.

Marseille – Corsica

June

New

6.5 years

1.2 billion

Operation by the SNCM of passenger and freight maritime transport between the continent and Corsica.

Europe (outside France)

Public Authorities

     

Norway

June

Renewal

8 years

1.3 billion

Operation of the public transport network in Finnmark.

Norway

April

Renewal

5.5 years

231 million

Operation of the public bus transport network in the Rogaland Province.

Holland

January

Renewal

7 years

371 million

Operation of the public transport network in Brabant.

North America

Public Authorities

     

Boston

December

Renewal

3 years

450 million

Operation of a public transportation network railway.



13 Revenues expected under foreign contracts won during 2007 have been converted into euros at the exchange rate on December 31, 2007 and represent the portion due to Veolia Tranport under such contracts. Accordingly, these amounts may differ from the amounts announced in earlier press releases.



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Public Authority

or

Company and Location thereof

Month of Signature of Contract or of Renewal

New Contract or Renewal

Duration of Contract

Estimated Total Cumulative Revenue

(in euros)

Services Provided

Rest of the World

Public Authorities

     

Melbourne

November

Renewal

1 year

368.5 million

Operation and maintenance of trains for Melbourne suburbs

Auckland

September

Renewal

2 years

52 million

Operation and maintenance of trains for Auckland region.

Seoul

June

New

10 years

400 million

Operation of the metro line 9 which will open in 2009.


Acquisitions and Divestitures in 2007

In 2007, Veolia Transport pursued its expansion in the Pacific zone with the acquisition, in February, of Transit First, which operates more than 80 buses in the region of Sydney. As a result of this acquisition, Veolia Transport has more than 420 employees and a fleet of 250 buses in Sydney, which transports approximately 11 million passengers per year. Veolia Transport also acquired Brookers, thus strengthening its development in the charter sector in Brisbane. Finally, in November 2007, Veolia Transport acquired the Australian bus operator South West Coach Lines, which is the leading operator in the south-west portion of the country. As a result of these three acquisitions, Veolia Transport has approximately 4,000 employees in Australia as well as a fleet of more than 1,000 vehicles that transport more than 200 million passengers per year.

In October 2007, Veolia Transport acquired the public transportation company People Travel Group, which operates mainly in Sweden but also in Russia, providing airport services as well as charter and tourism services. This company, which has approximately 900 employees and 165 buses, generates annual revenue of approximately €63 million. Veolia Transport also acquired Värmlandsbuss, which operates in the county of Värmland in Sweden.

On August 31, 2007, Veolia Transport sold its entire shareholding in Veolia Transport Danmark A/S. This company and its five subsidiaries, whose activities include public bus transport, has approximately 1,600 employees and operates more than 640 buses.

On December 31, 2007, Veolia Transport included 528 consolidated companies, approximately 520 as of December 31, 2006. During the past year, 55 companies were integrated, 38 were merged, and 18 were liquidated or sold.

6.1.4.5

Development of synergies: Multiservice contracts to benefit industrial and commercial services clients

Outsourcing and Multiservices Market

Veolia Environnement believes that its position in the market for industrial and commercial services clients has allowed it to take advantage of the synergies that exist among its four divisions. Growth in this market, which is estimated to exceed 10% per year, was initially due to the expansion of outsourcing as industrial companies attempted to outsource certain ancillary activities to third party service providers.

This outsourcing trend applies to all of Veolia Environnement’s businesses, including energy services, water services, waste management services, on-site management of rail junctions and rail freight transport.



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Veolia Environnement offers a “multiservice” alternative to its clients, which involves the provision of services by several of its divisions under a single contract.

This option improves Veolia Environnement’s response to the expectations of certain clients who wish to outsource a range of services to a single service provider. This relationship also allows for greater technical synergies, economies of scale and mutual commercial benefits.

Veolia Environnement’s multiservice contract, signed in 2003 with PSA Peugeot Citroën, is a good example of these synergies. The subsidiary that was created to service this contract, Société d’Environnement et de Services de l’Est, manages all environmental services at Peugeot’s sites in eastern France, which involves more than twenty different activities. By delegating such a broad range of activities to Veolia Environnement, PSA Peugeot Citroën is able to ensure that its sites comply with regulations while achieving significant cost savings. These savings are mainly the result of an overhaul of the previous organization and work plan, the implementation of skills training programs, the taking over of management activities that were previously subcontracted, and the implementation of a new energy policy. In 2005, the economic and operational success of this partnership led the PSA group to seek the same scope of services from Veolia Environnement at its new facility in Travna (Slovakia).

Veolia Environnement’s Organization for the Provision of Multiservices

In order to develop this multiservices activity, Veolia Environnement has established a specific coordination organization, Veolia Environnement Industries (“VEI”). While VEI plays a supervisory role, each of Veolia Environnement’s divisions remains responsible for the ultimate performance of services falling within its area expertise.

VEI manages Veolia Environnement’s bids for multiservice contracts, and a project manager from VEI is appointed for each multiservices contract. Commercial projects and bids are prepared in collaboration with Veolia Environnement’s divisions, and are then reviewed by a commitments committee before being submitted to clients.

Thereafter, the contract is performed by a dedicated, special purpose entity managed in part by the divisions involved in the project, in particular if Veolia Environnement decides to work with the client’s personnel.

Multiservices Business Activity

The Group’s activities within the multiservices market are organized primarily around 12 major contracts, which together generate revenues of more than €437 million annually and are expected to generate total revenue over the life of such contracts of over €2.5 billion. The average length of these contracts is eight years.

The multiservices market has a strong international dimension, in particular with respect to the construction of new factories (so called “Greenfield” sites). This is notably the case for Arcelor in Brazil and PSA Peugeot Citroën in Trnava (Slovakia).



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Under a five-year multi-services contract with Renault signed in December 2006, which started operationally in January 2007, Veolia Environment manages general and environmental services in all of the automobile construction sites in the Paris region (Boulogne-Billancourt, Guyancourt and Rueil-Malmaison). This contract relies on the expertise of its Energy, Environmental Services and Transportation divisions in order to provide a wide range of services at the 1 million m² site at which Renault employs more than 20,000 people. This contract aims to reduce expenditures by 20%. The range of the services to be provided includes the management of electrical, heating and air conditioning equipment, management and disposal of waste, management of open spaces and developed sites, logistics and transportation (management of all employee vehicles and their garages, management of inventories, mail transport, etc.) as well as commercial services (reception area for visitors). This is the most significant contract signed to date by Veolia Environnement with respect to commercial sites. It represents consolidated revenues of €600 million.

Veolia Environnement manages of all the energy production and services for Socata, a subsidiary of the group EADS, at its Tarbes site. This contract incorporates the expertise of several of Veolia’s businesses. Work on this contract began in early 2007. The range of services to be provided includes the production of gas, electricity and water for all of the buildings, as well as for the industrial processes, including Lipofit2, a “clean” fuel. Also included are all services relating to the technical maintenance of the plant and the buildings, environmental services for the site, and services for users including mail, caretaking, and reception. This is a three-year contract that may be extended to five years and represents estimated annual revenues of €3.4 million.

On December 21, 2007, Veolia Environnement and Novartis renewed a multi-services contract relating to the pharmaceutical group’s site in Basel in Switzerland. The initial contract, which was signed in 2000 for a seven-year term was, at the time, the largest environmental services outsourcing agreement to be signed by an industrial company and allowed the integration of more than 300 Novartis employees within Veolia Environnement. Novartis, as well as Ciba and Huntsman, which are located at the same sites, renewed their relationship with Veolia Environnement through the conclusion of a new 7 years contract representing combined annual revenues of €140 million. This contract, which represents cumulative revenue of close to €1 billion, is the largest contract to be signed by the Veolia Environnement Group with an industrial client. The services are to be provided by a subsidiary of Veolia Environnement, Valorec Services AG, at the sites of St Johann, Klybeck in Basel and Schweizerhalle. The scope of services, which is virtually unchanged, includes the management and maintenance of the energy production and distribution utilities, the solvent recycling plant (one of the largest sites in Europe), the incineration of hazardous materials and the global management of everyday waste.

Veolia Environnement continues to perform contracts previously entered into with Arcelor (in Montataire-France and in Brazil), Futuroscope (in Poitiers-France), Visteon (in Germany), Corus Packaging (in the United Kingdom), PSA Peugeot Citroën (in Mulhouse, Sochaux, Vesoul, Belfort and in Trnava in Slovakia), and Schenectady (in Béthune, France).



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Multiservices Contracts Signed in 200714

Company

Location

Month of Signature of Contract

New Contract or Renewal

Duration of Contract


Estimated Total Cumulative Revenue

(in euros)

Services Provided

Socata (EADS)

Tarbes (France)

January

New

3 year

10 million

Provision of gas, electricity and water utilities for buildings and processes; use of the clean fuel “Lipofit2”; technical maintenance and building maintenance; user services.

Novartis
(CIBA, Huntsman)

Basel (Switzerland)

December

Renewal

7 years

980 million

Management and maintenance of energy production and distribution parts; management of solvent regeneration installations; management of the incineration of dangerous waste; management of everyday waste.


6.2

Market overview

6.2.1

The market for environmental management services

The market for environmental management services has emerged only recently, including water treatment and distribution, wastewater treatment and collection, waste treatment and management, energy services (excluding the production, trading and sale of electricity, other than production through co-generation) and transportation. Traditionally, these services were, and often remain, considered to be independent services to be outsourced to individual providers. Moreover, many public authorities and industrial and commercial companies were able to meet many of their own environmental needs without turning to private firms specialized in these areas. This situation has changed drastically in recent years. The need to take action to prevent further damage to the environment has become a global reality. There is a growing need for excellence and efficiency, which has led decision-makers to seek a global approach to the management of activities that have an impact on the environment with a view to developing solutions that allow interaction and optimization between these environmental management services. These measures, now largely shared, have led to an increased demand for integrated environmental management services. This trend has been highlighted by the continued global expansion of industrial and commercial companies, which has generated a need for environmental management service providers who are able to respond to their clients on an international scale.

Veolia Environnement believes that the demand for external and global customized packages of environmental management services is likely to grow around the world for the following reasons:

• In a world that combines accelerated urbanization with demographic growth, major investments in environmental projects and services, as well as effective management, are needed in order to meet increasingly stringent environmental standards, provide growing urban populations with adequate environmental services, and replace existing environmental infrastructures. In addition, public demand, which now widely reflects a concern for sustainable development, must respect commitments made at the international level and must set exemplary standards. The qualitative criteria underlying environmental requirements is increasingly a decisive factor in the choice of operators, which is an opportunity for the Company;


14 Revenues expected under foreign contracts won during 2006 have been converted into euros at the exchange rate on December 31, 2006.  Accordingly, these amounts may differ from the amounts announced in earlier press releases.



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• Governments throughout the world face budgetary constraints and often lack the technical and operational skills of private sector firms to address environmental issues efficiently.

As a result, public authorities and private businesses are increasingly turning to the private sector to address their environmental needs:

• Public and private entities are increasingly attempting to simplify the administration of their complex operations by entrusting a wide variety of responsibilities to a single partner, thus creating a business opportunity for companies that are capable of offering a broad range of environmental management services in an integrated fashion.

• Large private firms and public authorities increasingly recognize that a “one size fits all” approach will not meet their unique and changing needs. As a result, demand for customized environmental management services has increased.

• Finally, the increasingly multinational profile of many large industrial and commercial firms encourages them to outsource non-core activities to companies with similar geographic reach in order to simplify administration and ensure they receive consistent service at each of their facilities.

Veolia Environnement believes that each of these trends, taken individually, presents significant opportunities for companies with its level of expertise, and, taken as a whole, they allow Veolia Environnement, in particular, to provide high quality, innovative, and depending on customer needs, integrated environmental management services in markets around the world.

6.2.2

Clients

Veolia Environnement provides environmental management services to a wide range of public authorities, industrial and commercial services clients and individuals around the world.

Public Authorities

Demand from public authorities (often small localities that are increasingly pooling resources) has been influenced and strengthened by trends relating to the search for quality, efficiency, innovation and cost reduction (by integrating operating concerns starting at the development stage), and by their commitment to assume their responsibility towards the environment, particularly regarding the management of water resources, air pollution, mass transportation policies and energy consumption. These trends, combined with a movement towards greater urbanization, are increasing the need for essential environmental services.

Veolia Environnement has the know-how to adapt to its clients’ expectations and needs, but it believes that its global contract model, which gives the company the ability to provide services tied to performance obligations, as well as, depending on client requests, the development, construction and even financing of necessary investments, remains as appropriate as ever. It enhances innovation and efficiency through mutual research efforts and the periodic reentry in competition of contracts. This model takes on different legal forms depending on the traditions within the respective countries. Certain countries, including those subject to European Union law, distinguish public markets from concessions (or other forms of Public Private Partnership, or PPP) based on whether the service is provided to a public entity or directly to the end user, and depending on whether the assignment is based on the service being provided or the completed work, or depending on the risk to revenues assumed by the company.



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In France, since the middle of the 19th century, public authorities have generally chosen to have public services (water, sanitation, transportation, waste collection, urban heating) managed by companies through contracts that were traditionally considered to be concessions (or leases in the absence of investment completion assignments) and which are now legally qualified as public service delegations, but which remain concessions under the European community’s definition. They have frequently preferred, at least in the case of some public services, to continue to manage the construction of installments, as well as their financing, before making them available to the provider or lessee during the term of the contract.

In the last few years, a new trend has emerged whereby public authorities in all countries, including France, have asked companies to manage not only the necessary development and completion of work and installments or public facilities and equipment (as varied as, for example, buildings for administration or education, hospitals, transportation infrastructure, prisons, water treatment facilities or waste treatment plants), but also their financing and long-term maintenance before recovering them at the end of the contract. Two main categories have emerged from these contracts, which, together, are often qualified as PPPs. In the first, which includes contracts similar to those in the market category, the resources intended to cover the cost of work and their financing are similar to a contract price or guaranteed sum from the public authority, and the service is provided to the authority once the works are completed. In the second case, which includes contracts resembling concessions under the European community’s definition, the resources must be sought from a commercial operation of the public services (the public or general-interest service whose operation has been delegated) that are the main purpose of the contract, the completion of the works being only a means to do so. Distinct accounting treatments according to the IFRS standard (reporting or non-reporting of a financial asset corresponding to debt of the public authority) apply in each case. We prefer to distinguish these PPPs based on the nature of the assignments (“Built Operate Transfer” or “BOT”, “BFOT” if the financing is added, or “DBFOT” if development is added).

In France, since the public market code (code des marchés publics) has come to prohibit the entrusting to companies with the construction and operation on the one hand, and all financing assignments for commissioned work on the other hand, it became necessary, in order to encourage the development of this type of global PPP contract (which does not fall under the category of public service delegations (délégation de service public), which is the French term for community concessions), to create a new category of markets qualified as partnership contracts by an order dated June 17, 2004.

This contractual model between a public entity responsible for providing collective services and private companies, whatever their form, is frequently used for the provision of collective services, but is not the only available model. Public authorities may decide that they should not be directly involved in the provision of some of these public services. In these cases, they are usually not the owners of facilities or networks, and do not enter into contracts with preferred private operators; instead, they leave the provision of the public service to the market. However, they do sometimes verify the competence of private operators through the issuance of operating licenses and the regulation of service conditions and prices. This situation rarely arises with respect to water services, but is more common in the fields of energy services, waste management and transportation. Public authorities may also have an ownership interest in the private operator in these instances; Veolia Environnement may seek to acquire a stake in such operators.

Services Sold Directly to Individuals

The Company also offers services directly to individuals through its specialized subsidiaries. These services include assistance and maintenance relating to water (including meter-reading), heating and gas services.



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Industrial or Commercial Services Companies

Veolia Environnement offers its industrial and commercial clients a large range of services, which generally aim to achieve the following two main goals in relation to environmental protection:

• provide clients with the necessary services for their industrial processes (steam, industrial heating and cooling, processed water, demineralized water, compressed air, etc.) and optimizing their consumption thereof,

• reduce the impact of their industrial processes on the environment, which may include treating effluents, recycling and recovering waste, and maintaining durable and efficient waste elimination channels.

Veolia Environnement partners with such clients over the long term, and offers innovative solutions tailored to the needs of each industrial site.

Veolia Environnement believes that the further development of its industrial client base will constitute a significant growth area. In particular, multiservice contracts entered into with industrial clients have acquired an increasingly important role and are expected to continue to do so (see §6.1.4.5 supra).

6.2.3

Competition

Most markets for environmental services are very competitive and are characterized by increasing technological challenges due to changes in regulation, as well as the presence of experienced competitors.

Competition in each of the markets in which Veolia Environnement participates is based primarily on the quality of the products and services provided, and the suppliers’ reliability, client service, financial viability, technology, price, reputation and experience in providing services. Additional considerations include the ability to adapt to changing legal and regulatory environments, as well as the ability to manage employees accustomed to working for governmental authorities or non-outsourced divisions of industrial or commercial enterprises. In each of the markets in which Veolia Environnement operates, its competitive advantages are its technological and technical expertise, its financial position, its geographical reach, its experience in providing environmental management services, managing privatized and outsourced employees, and its ability to comply with regulatory requirements.

With respect to the provision of environmental services to industry, Suez Environnement provides a range of services including energy, water and waste management. The GDF-Suez merger and the anticipated listing of Suez Environnement do not significantly change the competitive position of Suez Environnement. Certain actors in the industrial sector are also trying to enlarge the scope of their business to include the provision of environmental services. In particular, the subsidiaries of certain energy producers (such as Cofatech, a subsidiary of GDF, RWE) have been active in doing so. Companies specialized in electronic installation, such as Cegelec, have also expanded their environmental services offering. In the area of facilities management, companies such as Johnson Controls seek to provide multi-service offers to their commercial clients. Cleaning companies, such as ISS, are looking to expand their offerings and to provide solutions outside of the cleaning business. Finally, among new competitors, GE announced its intention to develop its business within the water sector. However, the majority of competitors do not offer the same range of technical expertise in environmental services as Veolia Environnement. Therefore, in certain cases, Veolia Environnement’s competitors are forced to set up ad-hoc arrangements to respond to clients’ demands.

Veolia Environnement expects that its competitors in individual sectors will, in the coming years, seek to expand their activities to become integrated environmental management services providers. This change has been prompted by the desire of potential clients to outsource a larger portion of their business. This is why companies with worldwide abilities respond to multi-site and multi-national calls for tenders, such as Jones Lang Lasalle in facilities management. Industrial services providers are also moving towards greater consolidation by creating multi-service subsidiaries. This is the case of Voith in Germany.



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A new form of competition has developed over the last few years due to the growing role of financial groups such as infrastructure funds (Macquarie Bank…) or private equity funds. Although they are not global or strategic competitors, they are often present in privatization tenders and asset sales and can occasionally compete with the Group for growth opportunities. The development of PPP has also resulted in the appearance of new players from the construction sector who are capable of managing the significant construction and financing challenges imposed by these operations. Service providers such as Veolia Environnement may collaborate with these companies within the framework of groupings formed to respond to calls for tender offers. These include mainly Bouygues, Vinci and Eiffage.

It is important to note that Veolia Environnement’s major competitor is often the client itself. Clients systematically compare the benefits and advantages of outsourcing to maintaining the status quo.

With regards to the provision of environmental services to public authorities, there has been a tendency in France over the last few years towards returning to local government control, which has reduced the number of delegated management contracts available on the market. Nevertheless, this tendency has remained fairly limited. In Germany, the Stadtwerke play a leading role in the environmental services market (in the areas of water, waste management and energy services). In a number of countries in Eastern Europe, markets are slowly opening to competition, albeit partially. Finally, new actors from the public works and building sectors may start to offer services in the market following completion of large and/or extensive investments, which subsequently require the provision of services (e.g., construction of a hospital which then requires ongoing maintenance of technical services). These new actors may provide services within the context of a BOT or concession contract or, in France, as part of a “partnership contract” authorized by the new regulation of June 2004. The emergence of such new actors is a natural outgrowth of a market in which ownership of the infrastructure developed in order to support comprehensive environmental services often reverts back to the client at the term of a contract. For the moment, however, these new actors have acted on a project-by-project basis, and do not seem to have a global strategy for establishing a competitive presence on the market.

Water

The principal international competitor of Veolia Eau in the water sector in 2007 was Suez Environnement (through its subsidiary Ondeo), which strengthened its position in Spain (by increasing its stake in Agbar and investing in the capital of Aguas de Valencia following the repurchase of the stake previously held by SAUR). RWE, which in 2006 had announced a reorganization process in order to focus on its energy businesses, sold Thames Water Holdings plc in 2007, the most significant water management company in Great Britain, to the consortium Kemble Water Limited, managed by Macquarie. After the announcement in March 2006, the initial public offering of its American subsidiary American Water was postponed.

On the North African, Middle Eastern, Chinese and Indian markets, Veolia Eau competes with Asian companies (Singaporean companies, such as Hyflux and Asia Environment, and Japanese companies, such as Marubeni and Mitsui…) and Spanish companies from the building and public works sectors (Acciona, Aqualie-FCC, ACS), but also with conglomerates, particularly General Electric and Siemens, which have shown their international ambitions in the area of water treatment technology.

At both the national and regional level, Veolia Eau faces a number of local competitors, including public companies and local mixed public-private companies such as Acea and Amga in Italy, Gelsenwasser in Germany (which entered the French market through the purchase of a stake in the share capital of Nantaise des Eaux), Canal Isabel II in Spain, or public enterprises in Brisbane, Australia or semi public entities (régies départementales) in France.

Moreover, investment funds and other pension funds seeking stable revenues (Hastings Funds Management, Macquarie, JPMorgan, Canadian Pension Fund) made significant investments in regulated water assets in Britain (South East Water, Thames Water, Southern Water) and Chile (Ontario Teacher’s Pension Plan with Essbio and Aguas Nuevo).



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Environmental Services

Veolia Propreté’s main competitors in the environmental services sector are either regional players, or they cover only one part of the sector in which Veolia Propreté operates.

In Europe, where Veolia Propreté conducts the majority of its waste management activities, and in the PECO zone, its principal competitors are Suez Environnement, acting through its subsidiary SITA, Remondis, FCC and Biffa.

Veolia Propreté may expand further in North America as well, where its principal competitor is Waste Management, along with Allied Waste and Republic Services.

In Latin America, Veolia Propreté’s operations are concentrated in Brazil and Mexico, where it competes primarily with Suez Environnement and a variety of local companies.

In the Asia/Pacific region, Veolia Propreté’s main competitors are Suez Environnement as well as various local companies. The Australian group Brambles (operating under the Cleanaway brand) has withdrawn from the waste management business.

Energy Services

The energy services market combines diverse services and has many different types of market players. Veolia Environnement, through its Energy Services division, therefore faces strong competition composed of sector-specific players. Only two players, Elyo (Suez) and Cofatech (GDF), have a strong international presence and offer a diversified and complete range of services in this market that is comparable to Dalkia’s own presence and services.

Among these sector-specific players, Dalkia is confronted with the active presence of large local competitors such as ENEL, Vattenfall, Fortum, ATEL and EON.

In the commercial services sector, competition takes many forms, and comes from specialized companies (in the areas of cleaning, food services, etc.) seeking to expand their offering to include multi-technical services, and from technical maintenance companies focusing on technical maintenance such as electrical installation.

In addition, the company faces growing competition from municipally- or publicly-run companies, principally in Central Europe, Germany, Austria and Italy.

Transportation

In the transportation sector, Veolia Environnement’s principal competitors are large private operators, primarily French, American or British, and public companies (national or local) operating public monopolies.

Its principal private competitors at the international level are the British groups FirstGroup, National Express, Stagecoach, Arriva and Go Ahead, and French groups Kéolis (which has SNCF as an industrial partner and shareholder, though 53% of its share capital is held by Axa Private Equity and la Caisse de Dépot et Placement du Québec, following the transfer by 3i, an investment fund, of its interest in the group) and Transdev (a subsidiary of the Caisse des Dépôts et Consignations, which has an alliance with the French subway operator, RATP). FirstGroup is the world’s largest group for public and private transportation. Among Veolia Transport’s largest public competitors are Deutsche Bahn (the national rail operator in Germany) and, in France, the RATP and SNCF.



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In North America, the competitive market has evolved, particularly as a result of the purchase of Laidlaw by FirstGroup. In the area of rail transport, Amtrak’s persistent budget difficulties have further opened the market to delegated private management.

In Asia, companies with international objectives constitute new competitors in the European and Asian markets. These companies include, in particular, ComfortDelgro, the transport network operator in Singapore, 40% of the revenue of which result from international business, especially in China and the United Kingdom, and MTRC, the subway operator in Hong Kong, which participated in several calls for tenders for railways in Asia and Europe.

6.2.4

Contracts

Veolia Environnement’s activity is centered on the provision of services either to the public, usually in connection with a contract with a public entity responsible for the service—for example, in connection with the delegated public service management of a drinking water production and distribution service or management of an urban heating and cooling network—or to the contractual counterparty directly, which may be a public entity or an industrial or tertiary enterprise (such as an outsourcing contract. But more and more often, the assignments involve the development and building, as well as financing, if needed, of facilities and the work necessary for the operation. This tendency is a natural result of increasingly stringent requirements relating to environmental and economic efficiency and the significant awareness that this efficiency requires equipment and work, which from the beginning take operational concerns into account. Budgetary constraints placed upon public finances in a number of countries are also a factor. All of the contracts concluded with public entities are global assignments involving conception, construction, financing and management, which are sometimes called PPP by extension. Contracts can normally be distinguished based on their legal status and according to whether the person receiving the service from the company is a public or private person seeking assistance in its activities, or whether the public is paying directly for at least part of the costs.

The services Veolia Environnement provides are often vast and multi-functional, requiring adequate employee infrastructure and specialized resources. They may also require management of works or infrastructure that are technically complex—for example a wastewater treatment network and purification plant or an industrial co-generation facility. These works or infrastructure projects may either be provided by the client, or financed and built by Veolia Environnement itself.

Veolia Environnement’s global management services to public entities provided on behalf of public authorities include water distribution, wastewater treatment, collection and treatment of household waste, public transport, production and distribution of heating and cooling through urban networks and energy services. In many countries, the provision of such services, often referred to as general economic interest or public services, is considered to be the responsibility of the local public authority. Accordingly, the public authority is not only in charge of implementing regulations or controls over the provision of public services, but must also implicate itself more directly in their management, through one of the following means:

• the public authority can decide to directly manage and provide public services on its own (“direct” or “internal” management);

• the public authority can decide to provide the service itself, but to use private operators as subcontractors to manage the service on its behalf, or to provide limited services ;

• the public authority may prefer to confer on a third party the entire responsibility for providing the public services, in which case the third party, depending on the specifications of the contract, would be responsible for providing the human resources, materials and finances necessary. The public authority may also request that the third party finance and build any required infrastructure under the contract. Third parties to whom the public authority resorts may be either private operators, mixed public-private companies or other public entities.



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Based on the different manners in which public authorities choose to manage the provision of public services, Veolia Environnement has developed various types of contracts to respond to their specific requirements. The contracts Veolia Environnement uses generally fall into one of three categories, depending on whether Veolia Environnement is entrusted with total responsibility for provision of a public service and whether Veolia Environnement has a financial and commercial relationship with the end users:

• the public authority chooses to manage and provide public services on its own (direct management), but has only limited means and therefore calls upon a private operator to provide certain limited services or works. It pays the operator a set price under a contract;

• the public authority may prefer a more expansive contract involving construction and management of services, which may include the financing of required infrastructure. These are known as public market contracts under municipal law, also referred to as Build, Operate, Transfer contracts, or since 2004 in France, as “partnership contracts”, or

• the public authority entrusts a company with the responsibility for the full provision of a public service, with the company assuming all or part of the operational risks. Generally, the provision of the service is then financed by the end user of the service. The contractor is thus responsible for the business, on an operational and financial level, but must conduct it in accordance with the terms set by the public authority based on expected performances and prices charged to end users. This is the logic of “delegated management” or “concession” in a global sense (also known as a Public Private Partnership – PPP), which means that the entity assumes the “risks and perils” or “risks and advantages” to the extent its compensation is linked to the operating results.

In certain countries, public authorities may also choose to be involved as little as possible in the provision of public services to inhabitants or to be satisified with the more or less restrictive regulation of the relevant activities. This creates opportunities for Veolia Environnement as well, most often through acquisition of the private operator that is already serving a given area.

The historic traditions of the various countries in which Veolia Environnement operates tend to favor one of the above-mentioned general contract types over the others. In France, for example, where there is a long tradition of granting concessions and delegated public service management contracts are often the preferred choice.

Current practices in various countries have tended to converge, with public authorities resorting to one or the other contract types depending on the situation. All such contracts have, in most cases, the common feature of being long-term agreements.

Veolia Environnement also enters into outsourcing contracts for the management of complex services with its industrial and commercial clients, which are analogous to the contracts entered into with public authorities above.

Despite differences related to the nature of clients, the services contracted for and the nature of the legal systems in which Veolia Environnement operates, the expectations of Veolia Environnement’s clients have tended towards a demand for transparency during the bid process and during contract performance, formation of a real partnership in search of ways to improve productivity and performance, and a desire for clear performance targets and variable compensation depending on achievement.



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Veolia Environnement is also very attentive to contractual provisions, in particular when Veolia Environnement must finance the investments called for under a contract. Given the complexity of management agreements and their generally longer term, Veolia Environnement possesses skills regarding contract analysis and control. The legal departments of Veolia Environnement’s divisions are involved in the preparation of contracts, and verifications are made on the implementation of Veolia Environnement’s main contracts. Each year, Veolia Environnement’s internal audit department includes a review of the contractual and financial stakes of Veolia Environnement’s most significant contracts in its annual program.

6.2.5

Intellectual property – Dependence of the Company

Veolia Environnement owns a significant number of patents and trademarks in France and other countries around the world that are of value to its business. However, Veolia Environnement believes that the diversity of its patents and trademarks does not make any of its activities dependent on any one of these patents or trademarks individually.

Moreover, Veolia Environnement believes that its activities are not materially dependent on any one license that it may have, nor on any one industrial, commercial or financing contract. Veolia Environnement also believes that it is not materially dependent upon any particular contract or client.

Veolia Environnement owns a number of brands, including the “Veolia” brand. Since November 2005, the Group has adopted a new brand strategy aimed at uniting the water, environmental services and transport divisions under the Veolia banner. The four divisions will remain identifiable according to their business descriptions: “Water”, “Environmental Services” or “Transport”; the Veolia Energy division will be known under the name “Dalkia”.

As a result, the companies at the head of the water, environmental services and transport divisions, as well as most of companies in the countries and regions where the Group is based, are progressively modifying their corporate names in order to include “Veolia”.

This strategy, implemented by the Company’s general management, illustrates Veolia Environment’s desire to increase the global consistency between its divisions and the visibility of the Company by reinforcing the identity and global culture of Veolia Environnement based on its service values. Accordingly, the “Veolia” brand will become an international reference for trusted and reliable services in the environmental services sector.

6.2.6

Seasonality

Certain of the Company's businesses are subject to seasonal variations. Dalkia realizes the bulk of its operating results in the first and fourth quarters of the year, corresponding to periods in which heating is used in Europe. In the water sector, household water consumption and the related treatment services required tend to be higher between May and September in the northern hemisphere, where Veolia Eau conducts most of its activities. Finally, in transportation, SNCM’s activity is strongest in the summer season. Because of the diverse nature of Veolia Environnement’s operations and its worldwide presence, in general, results are only slightly affected by seasonal variations.

6.2.7

Raw materials

Energy prices have fluctuated widely in the past few years. After a lull at the end of 2006, Brent oil doubled in price per barrel from its lowest level in January 2007 (USD 49) to its price in February 2008 (USD 101), due in part to fears of potential supply problems in light of the geopolitical tensions within the major oil producing countries (Nigeria, Venezuela), as well as OPEC’s reluctance to raise its production quotas to respond to strong global growth in 2007. Although the lag in the American economy is likely to contain any further price volatility, the market expects the price per barrel to remain high.



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The impact of the rise in the price of raw energy materials on results in 2007 was limited because contracts typically contain price adjustment and/or indexing provisions designed to compensate Veolia Environnement for increases in the cost of providing its services15. These provisions therefore assist the Company in passing along a portion of any rise in energy or raw material prices to clients (subject to a possible time period during which the Company must wait to assess the impact of a price adjustment) (see §4.1 supra).

In the transportation division, numerous contracts contain indexing clauses that take variations in fuel costs into account, that significantly reduces the impact of a rise or fall in fuel prices. In certain contracts, especially those involving the United States, Veolia Environnement is entitled to full compensation in the event of rising fuel prices.

In the waste management division, collection services involving non-hazardous solid and liquid waste are the most sensitive to fluctuations in fuel prices. However, for clients that have contracts with Veolia Environnement, indexing clauses in their contracts generally allow the Company to pass along a significant portion of its increase in such costs in the prices it charges to clients. For clients not bound by contract, increases in fuel costs are either fully or partially passed along to them through an updating of fees or through negotiation.

In the energy services division, the situation with respect to combustible materials used for its activities is similar to the description above. With respect to gas supplies in particular, the deregulation of the market has not altered Veolia Environnement’s use of indexing clauses in its contracts. Veolia Environnement has developed the skills necessary to manage and optimize its gas supplies within the new market environment.

6.3

Environmental regulation, policies and compliance

6.3.1

Environmental regulation

Veolia Environnement’s businesses are subject to extensive, evolving and increasingly stringent environmental regulations in developing countries as well as in the European Union and North America. On April 21, 2004, The European Union adopted a directive concerning environmental responsibility that has been transposed, or is in the process of being transposed, by member states. This text establishes the principle of operators’ civil liability for any serious damage to protected species and natural habitats and any damage to the water and soil, excluding persons and property. This potential liability encourages the implementation of preventive measures. In addition, the REACH regulation on chemicals, which has been in force since June 1, 2007, has established a new European methodology for the management of chemicals that is aimed at enhancing the knowledge of the substances that are currently circulating within the European market which implies in particular for the Group as a user of such substances the reinforcement of the cooperation and exchange of information with suppliers.

Water

Water and wastewater services activities are highly sensitive to governmental regulation. In Europe and North America, governments have enacted significant environmental laws at the national and local level in response to public concern over the environment. The quality of drinking water and the treatment of wastewater are increasingly subject to regulation in developing countries as well, both in urban and rural areas.


15 Such provisions include indexing clauses that take into account the variation of certain parameters, review clauses in the case of an increase in certain parameters above a given level, hardship clauses (unforeseeable changes due to extraordinary circumstances) or re-adjustment clauses.



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The quality of drinking water is strictly regulated at the European Union level by Directive 98/83/EC of November 3, 1998, relating to the quality of water destined for human consumption, which was transposed into EU member states and French law by a decree on December 20, 2001 (certain provisions of which have also been incorporated into the French public health code). This directive introduces, beyond quality control, the concept of evaluating risks on an ongoing basis. The collection, treatment and discharge of urban, industrial and commercial wastewater is governed by Directive 91/271 of May 21, 1991, the objectives of which were further reinforced and expanded by water Directive 2000/60/EC of October 23, 2000. Public authorities also impose strict regulations upon industrial and commercial wastewater that enters collection systems and the wastewater and sludge from urban wastewater treatment plants. Directive 2006/118/CE of December 12, 2006 concerning the quality of ground water provides for oversight and a limit regarding the amount of chemical substances in water by 2015. In France, regulations concerning water destined for human consumption were revised, resulting in new water quality limits and references. For installations serving more than 10,000 inhabitants, the person responsible for the water distribution must prepare a study concerning the vulnerability of water fixtures to malicious acts. In establishments where water is provided to the public, it is the responsibility of the person in charge of the establishment (and no longer that of the public service provider) to ensure that the water is fit for consumption.

Public authorities also impose strict regulations concerning industrial wastewater likely to penetrate collection systems, as well as wastewater and mud originating in urban used water treatment installations.

France has numerous laws and regulations concerning water pollution, as well as numerous administrative agencies involved in the enforcement of those laws and regulations. Certain discharges, disposals, and other actions with a potentially negative impact on the quality of surface or underground water sources require authorization or notification. For instance, public authorities must be notified of any facility that pumps groundwater in amounts that exceed specified volumes and French law prohibits or restricts release of certain substances in water. Individuals and companies are subject to civil and criminal penalties under these laws and regulations. The law relating water and aquatic environments of December 30, 2006 addresses community demands for high quality water and significantly modifies the French legislation on water, also addressing community objectives concerning water quality until 2015.

In the United States, the primary federal laws affecting the provision of water and wastewater treatment services are the Water Pollution Control Act of 1972, the Safe Drinking Water Act of 1974 and related regulations promulgated by the Environmental Protection Agency (EPA). These laws and regulations establish standards for drinking water and liquid discharges. Each U.S. state has the right to establish criteria and standards stricter than those established by the EPA and a number of states have done so.

Environmental Services

In numerous countries, waste treatment facilities are subject to laws and regulations that require Veolia Environnement to obtain permits to operate most of its facilities from governmental authorities. The permitting process requires Veolia Environnement to complete environmental and health impact studies and risk assessments with respect to the relevant facility. Operators of landfills must provide specific financial guarantees (which typically take the form of bank guarantees) that cover in particular the monitoring and recovery of the site during, and up to 30 years after, its operation. In addition, landfills must comply with a number of standards, and incineration plants are usually subject to rules that limit the emission of pollutants. Waste may also be subject to various regulations depending upon the type of waste. For example, sludge produced at wastewater treatment stations that will be composted must comply with strict regulations relating to its content of organic materials and trace metals (heavy metals like cadmium, mercury or led). Further, the NFU 44-095 standard, established in 2002 and henceforth applicable in France, strictly regulates the composting of material that results from the treatment of wastewater.



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In France, pursuant to the provisions of the Environment Code (Code de l’environnement) (articles L. 511-1 et seq.) relating to classified facilities for the protection of the environment, several decrees and ministerial and administrative orders establish rules applicable to landfills for household, industrial, commercial and hazardous waste. These orders govern, among other things, the design and the construction of waste treatment centers. Hazardous waste is subject to strict monitoring at all stages of the treatment process. Waste-to-energy centers are subject to numerous restrictions, including in particular limitations on the amount of pollutant emissions: for example, directive 2000/76/EC of December 4, 2000 on the incineration of waste fixes emission thresholds for dioxins and NOX in particular. In connection with the application of this directive in France, conformity studies were submitted to the government in June 2003, in order to determine the necessary corrective measures to be implemented by the end of 2005.

At the European Union level, the framework for waste management regulation is provided by directives that set overall regulatory goals of waste prevention, collection, recycling and reuse. European Union member states are required to prohibit the uncontrolled discarding, discharge and treatment of waste pursuant to these directives. Several existing European regulations seek to have member states define a national strategy that allows for the progressive reduction of dumping of biodegradable waste. The regulations are intended to promote recycling, composting and energy recovery of household waste.

With respect to the transportation of waste across national borders, the regulation of June 14, 2006 concerning the transfer of waste entered into force in July 2007. This text defines the terms of the supervision and audit of waste transfers and simplifies and defines the current procedures for the supervision of waste transfers for non-hazardous, recyclable waste.

Furthermore, the European Union has, through directive 2003/87/EC of October 13, 2003, implemented a quota system for the emission of greenhouse gases targeting carbon dioxide in particular. Veolia Environnement’s waste management business is excluded from the first and second phases (2005-2007 and 2008-2012).

The major statutes governing Veolia Environnement’s waste management activities in the United States include the Resource Conservation and Recovery Act of 1976, the Clean Water Act, the Toxic Substances Control Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (also known as “CERCLA” or “Superfund”), and the Clean Air Act, all of which are administered either by the EPA or state agencies to which the EPA delegates enforcement powers. Each state in which Veolia Environnement operates also has its own laws and regulations governing the generation, collection and treatment of waste, including, in most cases, the design, operation, maintenance, closure and post-closure maintenance of landfills and other hazardous and non-hazardous waste management facilities.

Energy Services

Veolia Environnement’s energy-related activities in Europe (primarily the supply of energy services involving thermal and independent energy) are subject to directives and regulations that seek to control environmental impact and risks. One such directive of October 23, 2001 establishes emission limits for sulfur dioxide, nitrogen oxides and dust and regulates the construction of large combustion plants. It requires the implementation of national emission ceilings for certain atmospheric pollutants such as sulfur dioxide, nitrogen oxide and volatile organic compounds.

Since the end of 2007, the IPPC directive of September 24, 1996 regarding the “integrated prevention of pollution” is fully applicable. The directive requires a number of European industrial facilities, including the large combustion facilities, to obtain a license authorizing its operations, to be renewed periodically, and based, as much as possible, upon the techniques having the least amount of environmental impact, i.e. “the best techniques available”.



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European regulation 2037/2000/EC of June 29, 2000 sets a timetable for the elimination of substances that destroy the ozone layer, in particular refrigerating fluids such as chlorofluorocarbon and hydro chlorofluorocarbon that are used in cooling plants.

As a result of the Kyoto Protocol, the European regulation 842/2006/CE of May 17, 2006 imposes rigorous confinement and traceability measures for greenhouse gases, whether HFC refrigerating liquids or SF6 electrical insulators.

With respect to European directive 2003/87/EC of October 13, 2003 on greenhouse gases and carbon dioxide quotas, the energy services’ combustion installations of more than 20 MW have been part of the national plans of EU member states for the allocation of quotas since February 2005.

European directive 97/23/EC of May 29, 1997, aimed at harmonizing member state legislation in the area of pressure equipment, imposes various security requirements for the design and manufacturing of such equipment, and requires that it be inspected for proper use.

With respect to European directive 2003/87/EC of October 13, 2003 on greenhouse gases and carbon dioxide quotas, Dalkia’s combustion installations of more than 20 MW have been part of the national plans of EU member states for the allocation of quotas since February 2005.

Finally, with respect to its production of sanitary hot water, Dalkia is directly affected by European directive 98/83/EC of November 3, 1998, which addresses the quality of water destined for human consumption. 18 states, including France, have taken the position that this directive applies to cold and to hot water and to all types of management systems for production and distribution.

All of the directives and regulations mentioned above have been subsequently implemented in each member state of the European Union. In France, this primarily means compliance with a July 19, 1976 law and its implementing decrees relating to the environmental protection of designated installations. Under this law, Dalkia must obtain various permits and authorizations from regulatory authorities in order to operate its facilities, and ensure that its operations comply strictly with the terms of such permits. For large combustion installations (output greater than 20 MW), new regulations were imposed in 2002 (for new installations) and in 2003 (for existing installations) with respect to emission limits, in application of European Union directive 2001/80/EC of October 23, 2001.

With regard to pressure equipment, directive 97/23/EC of May 29, 1997 (which applies to material constructed since 2002) has modified the regulatory regimes of member states in relation to procedure and inspection, and has helped to harmonize the operation of all installations that use such equipment. In France, a decree of March 15, 2000, as modified by a more recent decree of March 30, 2005, has transposed this directive into national law.

In relation to managing the risk of legionnella disease, the European Working Group for Legionella Infections (EWGLI) has, with the support and approval of the European Commission, published new European guidelines for the control and prevention of travel associated legionnella disease. In general, texts on the issue are issued in Europe and around the world by public health authorities and associations for the protection of travelers. Very often, these texts are presented in the form of recommendations for prevention, which take into account the physico-chemical and biological nature of water and prescribe corrective actions when certain indicators are present. Various professional associations have also issued their own guidelines for prevention.

In France, the health ministry has recommended, since 1997, that health professionals and managers of establishments implement best practices for the maintenance of sanitary hot water networks, air climate systems and other installations at risk. In December 2004, there were also newly issued guidelines for the design and operation of cooling facilities using vapor processes (cooling towers).



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In Spain, decree (real decreto) 865/2003 of July 4, 2003 establishes criteria for the quality of water and the frequency of inspection procedures, as well as for when action must be taken once certain limits are exceeded. A Spanish association has issued a guide on the subject (100030IN). In the United Kingdom, an approved code of practice (ACOP L8) issued by the Health and Safety Executive is the authoritative text, which has also inspired similar procedures in Belgium, the Netherlands, Ireland and at EWGLI. In the United States, the Occupational Safety and Health Administration (OSHA) issues its own guidelines and action plans. The American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) and the Cooling Technology Institute (CTI) have issued guidelines as well. Italy and Portugal have partially adopted the ASHRAE guidelines relating to the protection of tourists.

Transportation

Veolia Environnement’s transportation service activities are subject to a number of national and European regulations and particularly European Union directives that limit emissions from petrol and diesel engines and require Veolia Environnement to obtain certain permits.

In the European Union, standards called “EURO” have been established for polluting emissions from thermal engines. All new vehicles currently constructed in the European Union are in compliance with “EURO 4” standards and Veolia Transport’s networks are renewing their fleets with “EURO 4” or “EURO 5” vehicles. In 2006, a “EURO 4” standard took effect with even stricter requirements for the reduction of polluting emissions.

Further, Veolia Transport has made a commitment, in connection with its environmental management system, to lower its total emissions globally and to prepare for the new standards by testing and experimenting with emission reduction systems which will eventually be sold, thereby reaffirming its role as expert and consultant to client collectivities.

Veolia Transport is subject to the environmental standards applicable to depots, garages and underground cisterns whose activities may present a danger or inconvenience to the environment. For this reason, the majority of sites in France are subject to the regulations governing classified facilities for the protection of the environment, more generally to the simple notification regime.

Finally, in France, the law of February 11, 2005, concerning equal rights and opportunities, the involvement and citizenship of handicapped persons provides that all public transport must be accessible to handicapped persons within 10 years.

6.3.2

Environmental policies

Veolia Environnement strives to contribute to the enhancement of quality of life in places where it operates, and has placed the challenges of sustainable development at the heart of its strategy. To this end, Veolia Environnement focuses not only on the preservation of the environment and the protection of natural resources and biodiversity, but also assumes its economic and social responsibilities, particularly at a local level where Veolia Environnement is committed to stimulating progress. Further information concerning Veolia Environnement’s commitment to sustainable development is contained in its Sustainable Development Report.

Veolia Environnements action regarding greenhouse gases

An increase in greenhouse gases in the atmosphere has led certain countries, as well as the international community, to implement regulatory measures in order to limit this trend. At the international level, the Kyoto Protocol, finalized in 1997, came into force in February 2005. At the European level, the European Union has decided to implement a quota exchange system for carbon gas emissions, through Directive 2003/87/EC of October 13, 2003. This system has been in place since the beginning of 2005.



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The Group is already active in this field at the European Union level and internationally, as well as at the national level (see chapter 20, §20.1, note 42 and §20.2, note 1, §1.24).

• At the European Union level, all large combustion installations with thermal output greater than 20 MW fall under the new quota exchange system. For the Group, this primarily affects its Energy Services division, which manages almost 73,000 such installations in Europe (i.e., more than 2% of total installations). Quotas awarded to Dalkia represent approximately 1% of all European quotas awarded. Dalkia has worked to help keep carbon dioxide emissions within quota limits, and has established an adapted organization and created a dedicated legal structure, VEETRA, whose purpose it is to purchase, sell and recycle different kinds of greenhouse gas quotas. These initiatives have allowed it to be an early participant in the quota exchange market, and through its participation the Group has optimized the profitability of its contracts and in some cases assisted clients in financing new investments that help to reduce greenhouse gas emissions. Some of Veolia Eau’s sites in Germany have also been affected, following its securing of certain municipal contracts (Stadtwerke).

• At the international level (Kyoto Protocol), the Group has begun trying to generate emission credits that would be tradable on the market, by participating in projects with other countries that help to reduce greenhouse gases. Veolia Propreté and Veolia Énergie (Dalkia) have already tested this in practice, through projects in Brazil and Egypt, along with six other South American projects. Dalkia has also enacted a joint project in Lithuania. By using dedicated teams, Dalkia and Veolia Propreté intend to pursue this activity in the future. Regarding transportation services, the first challenge in reducing greenhouse gas emissions is to establish reliable measurement tools. Veolia Transport is actively involved in developing an initial tool that would apply to business transportation, in collaboration with EpE and ADEME.

• At the national level, a number of countries have designed mechanisms to reduce greenhouse gas emissions, either in the form of a set of targeted incentives (as France has done under its Plan Climat) or in the form of “domestic projects” that allow selected projects to benefit from emission credits (as New Zealand, Canada, Australia, and some U.S. states have done). The latter is currently being studied by France as well. The Group’s teams are following all of these developments and attempting to integrate them into their planning.

Direct greenhouse emissions on sites that the Group managed in 2007 reached 42.8 million tons of CO2 (carbon dioxide) equivalents (compared to 36.5 million tons in 2006).

The Group is generally contributing to a reduction in greenhouse gas emissions, both through the daily management of sites that it operates and through the use of renewable and alternative energies (in particular biomass, landfill gas, geothermal energy). It is actively following regulatory developments that will undoubtedly become more restrictive in the future, viewing them as new opportunities to develop its environmental management skills.

Preserving ecological balances

Whether through the limitation of water evaporation, the enhancement of the quality of its waste, the effort to optimize energy consumption in connection with its water distribution and treatment activities, the use of alternative energies in its heating operations, the recovery and treatment of biogas emissions at its landfills or the use of low-emission fuels in its fleet of public or private transport vehicles, Veolia Environnement gets involved in the main environmental problems currently affecting our planet by applying its know-how, technological capabilities and research potential to these problems. Veolia Environnement contributes to the enhancement of quality of life and sanitary conditions of local populations in its day-to-day operations. For example, by supplying drinking water to impoverished areas Veolia Environnement helps to reduce infant mortality. In developed countries Veolia Environnement has implemented plans to protect against the risk of the presence of legionella in public or industrial facilities, thereby improving public and environmental sanitation.



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Preserving economic and social balances

Veolia Environnement also considers the economic and social factors that underlie the course of development in the countries in which it operates, and it works to develop solutions that are adapted to local constraints and know-how transfers. For example, Veolia Environnement has instituted a program in Shanghai to educate employees about safety at work. In Romania, Alexandria and Gabon, Veolia Environnement has developed programs that have allowed local employees and consumers to better understand the challenges in the provision of water and waste management services. The launch of the company in Alexandria was subsidized by the UN-Habitat agency of the United Agencies (Scroll of Honor 2006). Veolia Environnement gives preference to a partnership approach with non-governmental organizations (NGOs), local authorities and associations in the implementation of action plans for the population of emerging countries, which permits the development of model plans that can be reproduced. In each of its projects, Veolia Environnement seeks to create a beneficial and educational dimension for the improvement of public health and the protection of the environment. It also tries to assist in the development of areas where it provides services.

Moreover, Veolia Environnement continues to participate in an initiative for developing a charter on public-private partnerships (PPP) in order to improve public access to essential services, which is being supported by the French Ministry of Foreign Affairs and pursued by several agencies of the United Nations. Veolia Environnement testified as to best practices in this area during the Urban World Forum in Vancouver in June 2006. This initiative forms part of the United Nations’ Millennium Development Goals, which were announced in 2000 by the U.N. Secretary General. The initiative aims at defining the role of private operators with respect to local public service management, while emphasizing the principles of transparency and the sharing of technology and know-how, principles to which Veolia Environnement already adheres in connection with its adherence to the U.N. Global Compact. This sharing of know-how occurs in particular through Veolia Environnement’s participation in the cooperation program for sustainable urbanization implemented by the United Nations Institute for Training and Research (UNITAR) and the World Bank (using research centers based in Poland, Malaysia, Brazil and Africa).

Veolia Environnement’s cooperation with UN agencies on multi-year programs as well as its sharing of know-how have led to it being nominated as an associate member of the congress of Asian cities (Citynet).

Since May 2004, Veolia Environnement has pursued a charity program through a corporate foundation called Fondation d’Entreprise Veolia Environnement. This initiative is part of a long-standing tradition of corporate charity work, while enabling improved coordination of actions and a greater involvement of employees in the areas of solidarity, professional reinsertion, and environmental protection. Since its creation, the Fondation Veolia Environnement has supported over 600 projects, each sponsored by one of the Group’s employees.

Among the 183 projects selected in 2007 (76 dedicated to sustainable development in communities, 67 to employment and 40 to environmental protection), some of them illustrate the Foundation’s international development. Several countries have participated, including Slovakia, where the Foundation supports a center for information, health, education and professional related services in Lomnicka, to assist the Roma community. The Foundation subsidized the purchase of a refridgerated truck to distribute food to the homeless in suburban Chicago, in the United States, and has also supported a food bank in Montreal, Canada. In Chili, it helped build and equip a general sports field for young people living in disadvantaged neighborhoods in Santiago. In India, the first Indian sponsor collaborated with a number of NGOs in India to support a program to combat the sexual exploitation of young girls. In Afghanistan, Stérience, a subsidiary of Dalkia specialized in the sterilization of hospital materials, is lending its expertise to the Foundation in order to assist with the creation of a care center for victims of serious burns.

The Prix du Livre sur l’Environnement, created by the Foundation in 2006, was awarded to “Collapse” by Jared Diamond in 2007.



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Veolia Environnement has two humanitarian aid and international cooperation departments: Veolia Water Force and Veolia Waterdev.

Veolia Waterforce was created in 1998 to assist the victims of the Mitch cyclone (Nicaragua) and the flood of the Yangtze river in China. Its main purpose is to share expertise through its network of 450 volunteer employees. Since its creation, Veolia Waterforce has carried out nearly 50 projects in emergency and development activities, in partnership with the United Nations, government institutions, local communities, NGOs and private companies. In 2007 Veolia Waterforce helped with the deployment of seven emergency humanitarian operations with French and foreign volunteers, in the Sudan, Oman, Pakistan, Peru, North Korea, Mexico and Bangladesh. Veolia Waterforce was also called upon by its main partners, the Ministry of Foreign Affairs and emergency medical care NGOs, to join forces in order to reinforce the capacity to provide common actions (tests of materials, coordination, development and unified procedures).

Veolia Environnement also participates in development projects through Veolia Waterdev, an international cooperation department whose objective is to share experiences and formulate, together with public entities, civil society representatives and NGOs, solutions that will facilitate access to local public water and sanitation services. Veolia Waterdev can intervene in these circumstances to urge French municipalities to cooperate in a decentralized manner. In 2007, Veolia Waterdev participated in nearly 30 projects for the rehabilitation of water production and distribution systems in 15 countries, either through technical support for decentralized support programs or through the Alliance for Development, an innovative partnership bringing together the Ministry of Foreign Affairs, the French Development Agency, Sanofi and the Institut Pasteur to reinforce access to water, sanitation and health in Niger, Madagascar and Vietnam.

The Veolia Environnement Institute: a scientific approach dedicated to the prospective tools for the environment and sustainable development

Human management of the environment represents a major challenge that requires the mobilization of a large number of resources, the support of the public at large and close cooperation among international, national and local participants. To address this challenge, Veolia Environnement created the Veolia Environnement Institute, or VEI, in 2001 to encourage prospective reflection on a number of issues relating to sustainable development, as well as to progressively shed light on the principal trends that will influence the provision of environmental management services over the next decade.

Through its Prospects Committee, which is composed entirely of individuals of international reputation and standing, VEI benefits from the contribution of leading external expertise on different key subjects (including public health, economy and human sciences) while maintaining a presence in the daily realities of Veolia Environnement’s different activities. This dual capability represents both the originality and the strength of VEI, which intends to be a leading figure in the main environmental debates and issues of the 21st century. In order to achieve this, the Institute is enlarging its network of partners, in particular in North America and Asia, and developing its prospective program. It has collaborated with the JPAL, the MIT (Massachusetts Institute of Technology) lab, on a study on air pollution within a poor State of India. The partnership with TERI (The Energy and Resources Institute) is a study on the concept of ecological footprints and its measure in two towns, one in India and one in China.

At the same time, VEI is developing a high level scientific policy. In 2008, the Surveys and Perspectives Integrating Environment and Society (S.A.P.I.E.N.S), a multidisciplinary review, will publish articles from top specialists in order to set forth the latest advancements within sustainable development. On another note, the FACTS (Field Action Science) Reports review aims to develop and consolidate the knowledge and know-how of field-work (conducted by NGO’s, institutions…) and has therefore facilitated the evolution towards a larger understanding of these actions whilst improving their efficiency.



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The main themes to be considered by VEI in 2006, which are defined by the members of the Prospects Committee, will include the economic and social dimensions of environmental change, the relationship between health and the environment, and the consequences of climatic change on ways of life and urban growth.

As of the date hereof, the members of VEI’s Prospects Committee are: Amartya Sen (India), economist, winner of the Nobel Prize for Economics in 1998, professor of political economics and economics at Lamont University and professor of philosophy at Harvard University; Hélène Ahrweiler, historian, president of the University of Europe and an expert for UNESCO on human and social sciences; Philippe Kourilsky, biologist, member of the Académie des Sciences and professor at the Collège de France; Pierre-Marc Johnson (Canada), attorney, physician, ex-prime minister of Quebec, Canada, and expert on environmental matters; Harvey Fineberg (USA), President of the Institute of Medicine of the United States; and Ms. Mamphela Ramphele (South Africa), physician and anthropologist, previously Chairman of the University of Cape Town and Chairman of the World Bank.

VEI also organizes international conferences in France and abroad. In 2007 the fourth conference was held in Montreal concerning “The climate 2050 – technological and political solutions”. Organized with the help of two North American partners, the Table Center on Global Climate Change (USA) and the National Round Table on the Economy and the Environment (Canada), this event, held in October, brought together almost 400 participants from 12 countries. Under the patronage of Pierre Marc Johnson, Jean Charest, the Prime Minister of Quebec, Thierry Vandal, the Chairman and Chief Executive Officer of Hydro-Québec and Sheila Watt Cloutier, the Inuit representative and Nobel peace prize nominee, were the honored guests of the opening ceremony. The fifth VEI conference, to be held towards the end of 2008 or early 2009, is expected to be in Abu Dhabi, the United Arab Emirates, on the theme of the environment in an urban setting, in collaboration with the Chair of the Middle Eastern and Mediterranean Political Studies Institute and a local partner with expertise on this subject.

6.3.3

Environmental information (article 116 of NRE Law)

As a specialist in environmental management services, Veolia Environnement is naturally concerned about the environmental consequences of each of its activities, both in France and worldwide. In this respect, Veolia Environnement consistently endeavors to comply with applicable regulations, to meet the needs and requests of its clients and to optimize the techniques it implements.

To illustrate its commitment, and in addition to the description of the Company’s activities (see § 6.1 above) and financial statements (see chapitre 9 below), Veolia Environnement highlights below some of the more significant environmental actions that it has undertaken without any regulatory or contractual obligation to do so. The information below should be read together with Veolia Environnement’s 2007 Sustainable Development Report for further information regarding the Company’s commitment to sustainable development.

Use of water resources, raw material and energy, measures implemented to improve energy efficiency and the development and use of renewable energies, conditions of use of soils, air, water and soil pollutions, noise and olfactive pollution and waste:



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Water

Use of Water Resources

Veolia Environnement preserves water resources by working to prevent wasteful usage in its own installations and in those of its clients. In this respect, the continued implementation of Veolia Environnement’s environmental management system provides, in particular, for the monitoring of water consumption and quality in all of Veolia Environnement’s activities. Veolia Environnement’s action plan reflects two primary concerns: increased monitoring of the health quality of water destined for human consumption, the control of leaks in cold water distribution networks (raw or treated) and leaks in domestic hot water production networks. During 2004, Veolia Environnement installed an indicator to monitor the quality and compliance with regulatory standards of its drinking water. Veolia Environnement’s industrial water consumption amounted to 452.6 million cubic meters in 2007.

Climate changes in certain regions of the world heighten strains on water resources. Veolia Environnement studies and promotes techniques through which alternative resources are used, such as the production of drinking water by desalination of seawater and production of water for industry or farm irrigation by recycling wastewater. These developments are conducted strictly in association with local authorities, regulatory proceedings and the scientific community.

Water pollution

99.3% of Veolia Propreté’s landfills are equipped with treatment stations for leachate (water that percolates through stored waste).

Waste water

Veolia Environnement’s wastewater treatment efficiency, measured at biological treatment stations with a capacity greater than 50,000 EH, reached 90% in 2007.

Energy – Energy efficiency and the use of renewable energies

Veolia Environnement contributes to the reduction of primary energy consumption. Dalkia optimizes energy management for more than 100,000 energy installations in the world, from municipal heating networks to housing, commercial or industrial building boilers. Optimizing the energy efficiency of such thermal installations relies upon the quality of their operations and maintenance, as well as upon their modernization.

Dalkia’s strong growth emphasizes the use of heating networks that offer optimized energy performances by concentrating production on a single site and involving co-generation. Efforts in the renewable energy field affect all of the Group’s activities. Veolia Environnement is not only developing biomass, geothermal and solar energy, but it is also capturing energy from incineration factories and biogas from landfills.

Veolia Transport continues to pursue its objective for the provision of environmental performance training to 90% of its public transport drivers during the first five years of their careers. This training effort enables Veolia Environnement not only to enhance passengers’ comfort and limit polluting emissions, but also to achieve significant fuel economy. In 2007, Veolia Environnement continued with its policy of employee training, notably thanks to the campus.

Veolia Environnement’s total energy consumption amounted to 117.59 million MWh in 2007, as a result of the development of the Group’s activities.



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Use of soils

Since 2003, Veolia Environnement integrated all activities relating to the treatment and recovery of sludge in a single entity (SEDE Environment). As a result, Veolia Environnement has a specific and integrated overview of sludge management options, allowing it to optimize its agricultural recovery in particular.

Veolia Environnement has pursued its efforts to manage the quality of waste in the sewage networks and acted upstream to enhance the quality of sludge produced by implementing pollutant controls in Veolia Environnement’s wastewater treatment networks (through its Actipol method). Veolia Eau has finalized a reference and certification system defining the applicable requirements for a sewage system for the production of quality sludge to be used as compost. As a second step, Veolia Environnement promotes the agricultural recovery of sludge through composting and engages an independent certifying body to audit its composting and agricultural recovery networks.

This recovery is conducted in conjunction with the agricultural recovery of the portion that is usable for fertilization from household waste. Veolia Environnement produced 1,006.1 tons of compost in 2007, 45.8% of which was eligible to be used in agricultural activities. The Group has initiated a quality enhancement program for organic material produced from organic waste and a program to evaluate their agricultural impact (the Quali-Agro program led by CRPE – Veolia Environnement’s center for research on waste energy services) in coordination with the INRA. Veolia Environnement is also active in the rehabilitation of polluted soils. Relying on several processes, including thermal absorption, Veolia Propreté processes almost all of the pollutants present in the soil at industrial sites.

Air Pollution

Limiting Greenhouse Gas Emissions

Certain of Dalkia’s activities (in particular its combustion installations with thermal output greater than 20 MW) are subject to the provisions of European Directive 2003/87/EC of October 13, 2003, which establishes a quota exchange system for carbon gas emissions. This system has been in place among EU member states since the beginning of 2005.

Direct and indirect (linked to energy use) greenhouse gas emissions (including biogas discharges) on sites that the Group managed in 2007 amounted to 42.8 million tons of CO2 (carbon dioxide) equivalent, due to development of the Group’s activities. Given the differing national and international methods for measuring the production and emission of methane at waste landfills, the Group is unable to provide a reliable measure at this time. Within this context, the Group decided to further its knowledge of measuring methods, notably through participating in working groups of international authorities (WBCSD and WRI). The work of elaborating and attempting to reconcile the different methods should allow for a single method to be identified, which can serve as a reference for all of the Veolia Environmental Services sites and allow for a homogenous and comparable reporting method.

The Group is also contributing to a reduction in greenhouse gas emissions, on the one hand by reducing its direct emissions and on the other hand by avoiding emissions which would have been produced without Veolia Environmental Services. Among the Group’s actions to reduce greenhouse gas emissions, Veolia Environmental Services continues its efforts with the implementation and optimization of biogas collecting and recovery systems in its landfills. 90 waste landfills for which the Group controls investments are equipped with collection and biogas recovery systems. In 2007, the efforts carried out by the Group contributed to a global decrease of 24.71 million tons of CO2.

Furthermore, the Group actively participates in the flexibility mechanisms outlined in the Kyoto protocol, which came into force on February 16, 2005. Veolia Environmental Services participates in the reduction of greenhouse gas emissions with the MDP (Mécanismes de Developpement Propre) project in Brazil, Mexico and Egypt for biogas collecting and recovery systems.



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Other Emissions

Installations that Veolia Environnement operates mainly emit sulfur and nitrogen oxides (SOx and NOx), carbon monoxide (CO), volatile organic compounds and dust. Emissions of SOx from waste incineration units (hazardous and non-hazardous) amounted to approximately 90 grams per ton of incinerated waste in 2007.

In particular, Veolia Transport is pursuing, in partnership with ADEME, research in order to identify and assess the systems on the market in order to reduce the NOx that is emitted by its bus and coach fleet.

The Group seeks to reduce its emissions below beyond regulatory minimums by (i) improving the treatment of emissions and developing better technologies (treatment of incineration fumes by Veola Propreté, improvement of transportation vehicle emissions for Veolia Transport, low NOx -emitting combustion technologies for Dalkia) and (ii) reducing consumption and encouraging the use of cleaner fuels (low-sulfur coal, natural gas, GNV for combustion installations and vehicles or electric cars).

Furthermore, Veolia Transport continues to pursue its efforts to reduce polluting emissions (CO2, HC, particles) from its fleet of passenger vehicles. In 2006, a new reference perimeter was defined, corresponding to 80% of its 2005 bus and coach fleet. Emissions reduction targets have been set for the end of 2008: 8% for carbon monoxide unit emissions (CO), 14% for hydrocarbons (HC) and 15% for particles. Veolia Transport also continues to pursue its commitment to train its drivers in environmental performance. These training efforts allow not only for better comfort for passengers and a reduction in polluting emissions but also for substantial gas savings to be achieved. In 2007, the number of employees being trained increased to 55.9%.

With regards to NOx emissions, over the last few years Dalkia has carried out an evaluation program relating to the available technologies (fuel oil emissions, recycling of fumes, air terassing, combustion modelling, etc…).

Veolia Propreté developed a semi-permanent dioxin emission control method during waste incineration, allowing for a control of the flow of pollutants emitted throughout the year. Veolia Environnement offers this reliable and efficient measurement technique to all of its clients.

Noise and olfactive pollution

Veolia Environnement has also developed new treatment and storage techniques for odors, particularly in wastewater treatment plants and landfills for household waste. Veolia Environnement also uses new and more silent technologies in some of its installations, including special wall coatings, sound traps and exhaust gas exit silencers for cogeneration installations or transport vehicles.

Preserving biological balance, natural environments and protected species

Veolia Environment integrated the protection of biodiversity into the first undertaking of its Sustainable Development Charter and since 2004 has developed an approach based on the nature of its businesses’ impact and the implementation of management integrated in its Environmental Management System.

To distinguish its impact, the Group relies on an internal expert who is primarily responsible for the analysis of biological tools used to evaluate the ecological state of marine and land life. Moreover, the Group works with a number of universities and institutions in order to further its knowledge through innovative research programs covering the interactions between its activities and the functioning of ecosystems.



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Veolia Environment also carries out a number of management plans with the aim of informing its employees and promoting best practices. Among the latter, the Geographical Biodiversity Information System may be mentioned, which allows the location of the Company’s main facilities to be precisely located in relation to ecological zones of interest (Hotspot of the International Conservation Organization).

In order to improve the structure of its policies, the Group is currently working on defining a methodology allowing sites to carry out their biodiversity diagnostic and to implement an appropriate action plan.

In France, numerous activities fall under the control of either the ICPE (facilities classified for environmental protection) or its equivalent. Therefore, all business development is conducted in tandem with the preparation of environmental impact studies concerning very precise facets of flora and fauna. The management of these impacts accordingly is a constant concern in Veolia Environnement’s different business operations (waste treatment, decontamination stations, combustion facilities, railway depositories, etc.).

Evaluation or certification regarding the environment

Veolia Environnement’s activities have been subject to environmental certification, both external (ISO) and internal, for a long time. In 2002, Veolia Environnement committed to implementing an environmental management system covering 80% of its activities before 2008. Subject to the circumstances of each of the entities concerned, this voluntary step results in the general application of the ISO 14001 certification standards. Veolia Environnement currently has 939 sites covered by an ISO 14001 certification.

Compliance with applicable legal and regulatory provisions

Veolia Environnement’s environmental management system includes, among other things, an environmental audit program that allows it to monitor its sites’ regulatory compliance, as well as their compliance with contractual obligations and Group standards. Veolia Environnement has defined a general framework to ensure consistency of the audit systems developed by its divisions, and each of Veolia Environnement’s divisions remains responsible for the definition and implementation of its own system. Veolia Environnement surpassed its goal of conducting audits for 80% of priority sites in 2005. Priority sites are drinking water production sites and urban treatment stations, waste treatment sites, Dalkia’s classified installations and several of Veolia Transport’s transportation centers. By the end of 2008, 100% of Veolia Environnement’s primary facilities will be subject to a regulatory compliance audit. These facilities are the most sensitive to environmental impacts. As of December 31, 2007, 89.4% of the primary facilities were subject to a statutory auditing for compliance.

Expenses incurred to preserve the environment

Given the nature of its services, a large majority of Veolia Environnement’s expenditures and investments have a direct impact on the environment. Veolia Environnement’s capital expenditures amounted to €2,462 billion in 2007 (see Chapter 9, paragraph 9.3.4, infra), which includes not only investments of a contractual nature, but also expenses incurred for Research and Development, employee training, Veolia Environnement’s certification program and the implementation of Veolia Environnement’s environmental management system.



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Internal environmental management services, training and information for employees on the environment, methods for reducing environmental risks and organization for handling accidents that may have public ramifications

In addition to the measures described above for the reduction of environmental risks, such as research and development or employee training, Veolia Environnement has formed an environmental performance department. This department’s principal mission is the deployment and management of the Environmental Management System, thereby encouraging consistent objectives and actions among the divisions as well as information sharing and best practices. It is head of an environmental management committee, made up of representatives of all of Veolia Environnement’s divisions and representatives from the sustainable development department. A steering committee, made up of a number of members of the executive committee from each division and representatives from various departments (particularly its sustainable development, legal and communication departments) will also be formed to approve the strategic direction relating to environmental management and to report to Veolia Environment’s executive committee on an annual basis.

In addition, Veolia Environnement’s risk department is in charge of identifying, evaluating and managing risks. It relies on the Group’s risk committee (see §4.2.2).

Veolia Environnement has also established crisis management procedures that cover environmental crisis management, including, in particular, on-call and alarm systems at national and international levels that would allow any necessary measures to be taken as soon as possible.

Reserves and guarantees for environmental risks

As of December 31, 2007, Veolia Environnement’s accrued reserves for site remediation amounted to €539.5 million.

Indemnities and damages paid in 2006 for environmental claims pursuant to court orders

Reserves for litigation consummated in 2007 amounted to €89.8 million, including all types of litigations (tax, employment and other litigation).

International environmental targets

The Environmental Management System described above continued to spread in 2007 to reach nearly 75%. The Group is pursuing its goal of deploying the EMS in 80% of its relevant businesses by the end of 2008.



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CHAPTER 7
ORGANIZATIONAL CHART


The following simplified organizational chart sets forth the principal operating companies by division held directly or indirectly by Veolia Environnement as of December 31, 2007. Unless otherwise indicated, the ownership percentages below reflect both the percentage of voting rights and of share capital held by Veolia Environnement or by the divisions.

The list of the principal companies integrated into the consolidated financial statements in 2007 figure in Chapter 20, paragraph 20.1, note 45 in the consolidated financial statements.



85






organigramme



86






The principal cash flows between Veolia Environnement and its Divisions are described in the notes to the statutory financial statements set forth in Chapter 20, paragraph 20.2, note 7.

Veolia Environnement primarily finances its divisions through loans and current accounts (€8.6 billion as of December 31, 2007) and through equity; as a result it received €416.6 million in interest and €511.4 million in dividends in 2007. The Company has set up a system to centralize its treasury in the main countries in which it operates and uses derivative instruments to hedge its exposure, mainly at the Group level, in accordance with its risk management policy (see Chapter 20, paragraph 20.1, note 30 of the consolidated financial statements).

In addition, Veolia Environnement charged the divisions management fees as well as royalties in connection with the use of the Veolia Environnement trademark pursuant to agreements for a total amount of €127.6 million in 2007. Also, in connection with contractual commitments relating to the management of expenses for the renovation of facilities made available by delegating authorities, the Company received from its Water and Energy subsidiaries €183.3 million in renewal indemnities and paid to the Water and Energy subsidiaries €228.5 million in 2007.

Veolia Environnement granted financial guarantees and counter guarantees in connection with operating activities for €3,161 million as of December 31, 2007.

The EDF group holds 34% of Dalkia’s capital and 24.2% of Dalkia International. Veolia Environnement has exclusive control over Dalkia and joint control with EDF over Dalkia International.

The table below details the consolidated amounts as of December 31, 2007, broken down among Veolia Environnement and its four divisions, of certain line items of the balance sheet (current assets, liabilities, net cash), of net cash flow from operating activities and of the amount of dividends paid in 2007 and recovered by the Company.

(in millions of euros)

Consolidated amounts as of December 31, 2007

Veolia Eau

Veolia Propreté

Dalkia

Veolia Transport

Other subsidiaries

VE

Total consolidated amount

Non-current assets (including goodwill)(1)

4,458.1

6,569.6

3,334.0

1,962.0

-416.7

13,063.4

28,970.4

Non-group financial debt (2)

-4,064.5

-1,332.3

-1,181.1

-369.4

-50.5

-10,782.9

-17,780.7

Cash and cash equivalents less bank overdrafts (3)

311.9

157.6

308.4

114.1

217.3

1,546.9

2,656.2

Net cash flow from operating activities

1,415.1

1,192.9

540.9

244.4

101.7

139.6

3,634.7

Dividends paid during the period and attributable to Veolia Environnement

310.5

130.2

70.7

0

0

-

-

(1)

Corresponds to the sub-total “Non-current assets” in the balance sheet.

(2)

Corresponds to long-term borrowings + short-term borrowings +/- readjustment of cash instruments.

(3)

Corresponds to cash and cash equivalents less bank overdrafts and other cash position items.





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CHAPTER 8
PROPERTY, PLANTS AND EQUIPMENT

Veolia Environnement uses various assets and equipment for the conduct of its activities, with respect to which it has very different rights.

The total gross value of Veolia Environnement’s fixed assets (other than other intangible assets) as of December 31, 2007 was €28,711 million (a net value of €17,820 million as of December 31, 2007 representing 38% of the total consolidated assets), compared to €25,833 million as of December 31, 2006 (a net value of €15,724 million).

In the scope of its concession businesses, Veolia Environnement must ensure the provision of public services (distribution of drinking water, heat, a transport network for travelers or household waste collection services…) for communities, for payment of the services rendered. These collective services (also referred to as general services, general economic services or public services) are usually managed by Veolia Environnement within the scope of contracts executed upon the request of public entities that maintain the control of assets linked to such collective services. The concession contracts are characterized by the transfer of an operating right for a fixed term, under the control of the public authorities, through appropriate installations built by Veolia Environment or put at its disposal whether free of charge or not. The installations normally consist of pipelines, water treatment and purification plants, pumps, etc. in the water division, incineration plants in the environmental services division, and heating and co-generation plants in the energy services division.

With regards to these assets, Veolia Environment is usually contractually bound to maintain and repair the installation’s assets managed under these public service contracts. If need be, the related repair and maintenance costs are covered by a fund in the form of a deposit for contractual commitments in the event of delays in the work. The nature and duration of the rights acquired and the obligations of Veolia Environnement with regards to these various contracts differ depending on the public services that are rendered by the Group’s different businesses.

Within the scope of its outsourcing contracts with industrial clients, BOT (Build, Operate, Transfer) contracts or incineration or co-generation contracts, the Group may grant its clients a user right for a group of assets in return for rent included in the general payment of the contract. Under the IFRIC4, the Group thus becomes a a credit-lessor with respect to its clients. The corresponding assets are therefore registered in the consolidated balance sheet as operational financial assets.

The Group is also the full owner of industrial installations, in particular for activities undertaken outside of global contracts in Veolia Environnement’s waste management division (CSDU, storage centers for ultimate waste and special waste treatment plants), in the energy services division (co-generation plants) and in the transport business (buses, boats and trains). These assets are categorized in the consolidated balance sheet as tangible assets.

Veolia Environnement’s property, plants and equipment are subject to certain charges, such as maintenance and repair costs and closure or post-closure costs. The Group avoids owning any offices.

Finally, the assets financed through direct financing leases, which can be entered under any of the three categories mentioned above, represent a net amount of €900 million as of December 31, 2007 (see Chapter 20, paragraph 20.1, note 18 of the consolidated financial statements).

The main insurance policies subscribed to by the Company are described in Chapter 4, paragraph 4.5 of this current reference document.

Environmental concerns may also influence the Company’s use of property, plants and equipment, as described in paragraph 6.3 of this reference document.



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CHAPTER 9
OPERATING AND FINANCIAL REVIEW

9.1

Results of operations in 2007

9.1.1

General context

The Group’s strategy of developing environmental businesses through long-term contracts enabled it, once again, to record a marked increase in activity, with a 14% rise in revenue based on current exchange rates (14.9% at constant exchange rates). This growth was accompanied by a further improvement in recurring operating income of 11.1% and in recurring net income of 22.5%.

These performances are the result of the Group’s key development choices, focusing primarily on Europe, Asia and North America in all areas and the Group’s ability to generate savings and synergies and to renew its contracts.

Development continued through new contracts and targeted acquisitions. These acquisitions notably enabled the Group to complete its business range in countries where only certain activities were represented. In this way, the Group significantly strengthened its position in Germany through the acquisition of Sulo (Environmental Services) and a number of smaller companies in the Energy Services sector. Similarly, the Group extended its presence in the United States, where it was already active in the Environmental Services, Water and Transportation sectors, through the acquisition of Thermal North America Inc, a company active in Energy Services. In China, the Group benefited from local privatizations in order to add new businesses in the Water, Environmental Services and Energy Services sectors.

The financial crisis triggered at the beginning of the summer by difficulties in the sub-prime lending market, did not have a significant impact on the Group and in particular its liquidity and financing capacity. Any effects on the economy, in particular in the United States, did not impact the Group’s activities in 2007. The strengthening of the Group’s financial structure through the €2.6 billion share capital increase completed on July 10, 2007 and its standard long-term financing policy protected the Group against fluctuations in the credit market, despite a slight increase in financing costs.


9.1.2

New commercial successes within growth markets

The Group won several major contracts in 2007:

In January 2007, Veolia Eau won its 21st contract in China. This contract for a 30-year concession with the Lanzhou Water Supply Company in the capital of Gansu province, represents total cumulative revenue estimated at €1.6 billion.

In January 2007, Veolia Eau won a contract to build, finance and operate a reverse osmosis seawater desalination plant in the Sultanate of Oman. This 22-year contract is expected to represent total cumulative revenue estimated at €434 million, including the construction of the new plant.

At the end of January 2007, Veolia Propreté won a contract to operate a waste-to-energy facility in Pinellas, Florida. This 17-year contract represents total cumulative revenue estimated at €356 million.

On March 15, 2007, as part of a consortium, Veolia Eau won a contract to design, build, operate and maintain a reverse osmosis seawater desalination plant in Campo de Dalias, in southern Spain, representing total cumulative revenue estimated at approximately €128 million for the consortium and total consolidated revenue estimated at €78 million for Veolia Eau.



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In April 2007, Veolia Transport, as part of a consortium, won a 30-year contract to operate Leslys, the future tramway line between the city of Lyon and its airport Saint Exupery; this contract represents total cumulative revenue estimated at €360 million.

In April 2007, Veolia Eau signed a new contract to design, build and operate one of the largest water treatment plants in the United States. This contract to expand the capacity of a regional surface water treatment plant in Tampa Bay, Florida, represents total cumulative revenue estimated at €108 million.

On May 7, 2007, Veolia Eau won a new contract in Japan to operate and maintain the wastewater treatment plant of Chiba, near Tokyo. This 3-year contract represents total cumulative revenue estimated at €17.8 million.

In April 2007, Dalkia won its first contract to operate and develop a heating network in China, to serve the town of Jiamusi, in Heilongjiang province. This 25-year contract represents total cumulative revenue estimated at €1 billion.

In May 2007, Dalkia took over the contract to build and operate the southwest district heating network in Harbin, the capital of Heilongjiang province located in the northeast of China. This initial transaction represents an investment of €70 million and forecast revenue for the first year of operation is €19 million.

On June 5, 2007, the Conseil d’Etat (the highest French administrative court) issued a ruling in favor of SNCM. The public service delegation contract was awarded on June 7, 2007, effective July 1, 2007, for a term of six and a half years and represents total cumulative revenue estimated at €1.2 billion.

On June 14, 2007, Veolia Eau won its 22nd contract in China. This 30-year contract for the comprehensive management of the drinking water public service and the operation of a wastewater treatment plant in the leading economic city of Haikou, the capital of Hainan Island in southern China, represents total cumulative revenue estimated at €776 million.

On June 28, 2007, Veolia Water Solutions & Technologies, through its subsidiary SIDEM, was selected to design and build in Saudi Arabia one of the largest desalination plants in the world. Considered of national importance, the plant will provide 800,000m3/day of desalinated water to the industrial city of Jubail and a province of Saudi Arabia (Marafiq) - a desert region facing massive industrialization plans and a growing population. This contract represents total cumulative revenue estimated at USD945 million (€647 million).

In June 2007, Veolia Transport won a 10-year contract to operate the ninth line of the Seoul subway. Total cumulative revenue from this contract is estimated at €400 million.

On July 18, 2007, Veolia Eau won a major contract to design, build, operate and maintain a reverse osmosis desalination plant in Sydney, Australia. This contract, which seeks to provide a secure and reliable supply of drinking water to the city of Sydney, represents total cumulative revenue estimated at €540 million.

On August 29, 2007, Veolia Eau won a USD805 million (€547 million) contract to build a desalination plant in the United Arab Emirates. The plant will be built by SIDEM (a subsidiary of Veolia Eau) and will be located in Qidfa, in the Emirate of Fujairah.

On August 30, 2007, Veolia Propreté was selected by Shropshire Waste Partnership (UK) to provide integrated waste management services. This 27-year contract represents total cumulative revenue of €1,030 million.

On September 27, 2007, Veolia Eau was selected to supply drinking water to 3 million inhabitants of Tianjin, a city enjoying one of the highest economic growth rates in China. The 30-year contract represents total cumulative revenue estimated at €2.5 billion.



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On October 1, 2007, Dalkia announced the signature of a contract for the comprehensive management of the largest hospital complex in Brazil. This 15-year contract represents total revenue of €186 million.

In August 2007, Veolia Propreté signed a contract to build and operate a waste storage facility in South-East China. This 30-year concession represents total cumulative revenue of €92 million.

In November 2007, Veolia Transport won the ferry service contract for the Morbihan Islands (Groix, Belle-Ile-en-Mer, Houat and Houëdic) in France. This 7-year contract started on January 1, 2008 and represents total cumulative revenue of €154 million.

On December 6, 2007, Veolia Eau won a 10-year contract in the United States to manage the wastewater system serving a population of 1.1 million in the greater Milwaukee area. This contract represents total cumulative revenue of €272 million.

On December 21, 2007, Veolia Eau won a second contract for the operation and maintenance of the Fujairah IWPP desalination plant in the United Arab Emirates. This operating and maintenance contract is for a 12-year period, as from summer 2010 and represents total cumulative revenue of €71 million.

The Group also strengthened its position as market leader through targeted acquisitions generating growth and cost synergies:

In North America (Canada), Veolia Propreté purchased Ecolocycle for €19.2 million.

In the Asia-Pacific region, Veolia Propreté purchased Cleanaway Asia for €23.2 million.

In the Central European area, Veolia Energie purchased Pannon Power in Hungary for €75.2 million, Kolin in the Czech Republic for €27.7 million and Sinesco in Hungary for €26.4 million.

On April 27, 2007, Veolia Environnement announced the signature of an agreement to acquire SULO, the German number two in waste management and market leader in the collection of municipal waste and packaging, for an enterprise value of €1,450 million (including financial debt). An agreement was signed on July 29, 2007 to sell the ET Division (manufacture of plastic containers) of Sulo, considered non-core, for an amount of €172 million (including financial debt). The acquisition was finalized on July 2, 2007 and had an impact of €627.6 million on revenue for the year ended December 31, 2007.

On May 31, 2007, Veolia Propreté announced the signature of an agreement for the acquisition of a controlling interest in TMT, an Italian subsidiary of Termomeccanica Ecologica specialized in waste management and treatment. The transaction concerns 75% of the shares based on a total enterprise value of €338 million. This acquisition was finalized on October 3, 2007.

On June 12, 2007, Veolia Energie signed an agreement to acquire Thermal North America, Inc., a privately owned company with the largest portfolio of district heating and cooling networks in the United States, for an enterprise value of USD788 million. The acquisition was finalized on December 12, 2007.

On August 9, 2007, Veolia Eau signed an agreement to purchase the non-regulated activities of Thames Water in the United Kingdom for an enterprise value of €233 million. This acquisition, which was finalized on November 28, 2007, will enable Veolia Eau to participate in the construction and management of major Private Finance Initiatives (PFI) in the United Kingdom and the Republic of Ireland.

On August 24, 2007, Veolia Propreté signed an agreement to acquire the solid waste treatment business of Allied Waste Industries in the United States, for an enterprise value of €71 million.

On December 24, 2007, Veolia Eau purchased the assets of the Process Services Division of Tetra Technologies. This acquisition seeks to expand Veolia’s petroleum refinery waste treatment activities in the United States.



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Finally, the Group pursued its development strategy in new businesses, directly linked to its areas of expertise:

On July 1, 2007, Veolia Water Solutions & Technologies purchased Anox Kaldnes, a company with expertise in biological wastewater treatment.

On October 29, 2007, Veolia Environnement purchased 50% of the share capital of Eolfi, a company specialized in wind-turbine energy, through an €18 million reserved share capital increase.

On November 20, 2007, Veolia Propreté signed an agreement to purchase the Bartin Group (Bartin Recycling Group), the third French operator in waste recovery and recycling, which reported revenue of €249 million in 2006. This acquisition, combined with recycling activities already purchased in Germany, considerably strengthens Veolia Propreté’s position in the Western Europe recycling market. This acquisition was finalized on February 13, 2008.

The Group continued its portfolio review during 2007 and made a number of partial and total divestitures, which did not impact its operating capacity:

The sale of certain assets owned by recently acquired companies and not included in the development plan, such as the Fawley incinerator in the United Kingdom for €36 million and the Sulo ET division (manufacture of plastic containers) for €172 million.

The continuation of the Group’s partnership in Central Europe with the EBRD which acquired a 10 % stake in the water division company, Veolia Voda (Czech Republic, Slovakia, Poland, etc.), through a €90 million reserved share capital increase.

The acquisition by the International Finance Company (IFC) and Société de Promotion et de Participation pour la Coopération Economique (PROPARCO) of a 19.45% stake in Veolia Water AMI, the holding company for water division activities in Africa, the Middle East and the Indian sub-continent.

The disposal by the transportation division of its activities in Denmark on August 31, 2007 and its activities in Spain (with the exception of certain contracts including the Barcelona tramway) on November 9, 2007.

Finally, the Group introduced partners into the share capital of certain consolidated subsidiaries, in order to optimize commercial development opportunities or reduce risk, particularly in China and Morocco.


9.2

Accounting and financial information

9.2.1

Definitions and accounting context

The term “organic growth” includes growth resulting from:

the expansion of an existing contract, particularly resulting from an increase in prices and/or volumes delivered or processed;

new contracts;

the acquisition of operating assets attributed to a particular contract or project.

The term “external growth” includes growth through acquisitions, net of divestitures, of entities that hold multiple contracts and/or assets used in one or more markets.

Net financial debt represents gross financial debt (long-term borrowings, short-term borrowings, bank overdrafts and other cash position items), net of cash and cash equivalents and excluding fair value adjustments to derivatives hedging debt.



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Net finance costs represent the cost of gross financial debt, including related gains and losses on interest rate and foreign exchange hedges, less income on cash and cash equivalents.

Net income (expense) from discontinued operations is the total of income and expenses, net of tax, related to businesses sold or in the process of being sold, in accordance with IFRS 5. It is equal to the net income (expense) generated in the period by the assets and liabilities reported in the balance sheet headings, “Assets of discontinued operations” and “Liabilities of discontinued operations.”

Recurring net income attributable to equity holders of the parent is defined as follows : recurring portion of operating income + recurring portion of financial items + recurring portion of net income of associates + recurring portion of net income attributable to minority interests + recurring portion of the income tax expense. An accounting item is non-recurring if it is unlikely to recur during each period and if it substantially changes the economics of one or more cash-generating units.

Accounting context

The 2007 financial statements are comparable to the 2006 financial statements. There were no major events of an accounting nature during the year.

Concession agreements are accounted for in accordance with IFRIC 12, Service Concession Arrangements, published in November 2006. This interpretation, whose adoption by the European Union is still under discussion, is applicable to periods beginning on or after January 1, 2008. In fiscal year 2006, Veolia Environnement elected to adopt IFRIC 12 early, and this change in accounting method was applied retrospectively in accordance with IAS 8 on changes in accounting method. As such, the Veolia Environnement financial statements for the year ended December 31, 2005 were adjusted for the retrospective application of IFRIC 12.

Following a decision to dispose of the Danish activities of the transportation division in 2007, the results of this business were transferred to net income from discontinued operations in accordance with IFRS 5 on operations held for sale, and the 2005 financial statements were restated accordingly. The disposal of Southern Water was also recorded in accordance with IFRS 5, and the 2005 financial statements were restated accordingly.


9.2.2

Revenue

9.2.2.1

Overview

At Dec.31, 2007
(€m)

At Dec. 31, 2006
(€m)

% change 2007/2006

Internal growth

External growth

Currency effect

32,628.2

28,620.4

14.0%

7.8%

7.1%

-0.9%


Veolia Environnement's consolidated revenue for the year ended December 31, 2007 amounted to €32,628.2 million compared to €28,620.4 million for the year ended December 31, 2006, an increase of 14.0% at current exchange rates and 14.9% at constant exchange rates.

Internal growth was 7.8%, including internal growth of 10.1% recorded outside France.

The 7.1% external growth resulted, in particular, from acquisitions made by Veolia Propreté in the United Kingdom and Germany (a contribution of approximately €1,200 million), by Veolia Energie in Europe and Australia (€254 million) and by Veolia Transport in France and the United States (€161 million). The contribution of acquisitions enabled the Group to accelerate its growth outside France, where revenue totaled €18,372.3 million, or 56.3% of total revenue, compared to 53.2% in 2006.



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The negative impact of exchange rate movements (a negative impact of €263 million, or -0.9%) primarily reflects the weakening of the US dollar against the euro (a negative impact of €237 million).


9.2.2.2

Revenue by division

 (€ million)

2007

2006

% Change 2007/2006

Water

10,927.4

10,087.6

8.3%

Environmental Services

9,214.3

7,462.9

23.5%

Energy Services

6,896.4

6,118.4

12.7%

Transportation

5,590.1

4,951.5

12.9%

Revenue

32,628.2

28,620.4

14.0%

Revenue at 2006 exchange rates

32,891.6

28,620.4

14.9%


Water


At Dec. 31, 2007
(€m)

At Dec. 31, 2006
(€m)

% change 2007/2006

Internal growth

External growth

Currency effect

10,927.4

10,087.6

8.3%

7.9%

1.1%

-0.7%


In France, internal growth was 4.6%, boosted by a broader services offering and robust growth in engineering work. This performance was achieved in spite of lower volumes due notably to the summer wheather conditions.

Outside France, revenue was up 10.3% at constant scope and exchange rates. In Europe, despite the decrease in BOT engineering work (Brussels and The Hague), the division recorded growth of 3.8% (+2.3% at constant scope and exchange rates) reflecting the start-up of new contracts signed in 2006, in particular in Central Europe.

In the Asia/Pacific region, the very strong growth in revenue, close to 47% (at constant scope and exchange rates), was largely driven by the start-up of new contracts in China (Shenzhen, Lanzhou and Kunming), Australia (Gold Coast and seawater desalination plant in Sydney), South Korea and Japan.

Business was also strong in the Africa/Middle East region, where it grew by 19.3% (on a like-for-like basis) thanks to growth in business in Morocco and the construction of a seawater desalination plant in the Sultanate of Oman.

Veolia Water Solutions & Technologies posted revenue of €1,881 million, up 12.8%, principally due to the strength of the "Design and Build" business for municipal and industrial customers, which was particularly pronounced in the Middle East (Marafiq and the industrial contract with Shell in Qatar).




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Environmental Services


At Dec.31, 2007
(€m)

At Dec.31, 2006
(€m)

% change 2007/2006

Internal growth

External growth

Currency effect

9,214.3

7,462.9

23.5%

7.5%

18.0%

-2.0%


In France, revenue increased by 7.1% (+6.6% at constant scope) as a result of strong price increases for recycled materials (paper, metals), higher tonnages in the collection and sorting-recycling of solid waste, waste electrical and electronic equipment (WEEE) operations and the treatment of polluted soil, the increase in tonnages to landfills and the good level of business activity at incineration plants.

Outside France, 7.9% internal growth came from all regions. It was noteworthy in the United Kingdom with the start-up of new integrated contracts (Shropshire) and the expansion of existing integrated contracts (East Sussex and Nottinghamshire), but also in Scandinavia with an increase in the recycling business in Norway. In North America, the business achieved internal growth of 7.7%, driven mainly by the momentum in industrial services and the incineration business.

External growth of 18.0% mainly reflected the full-year effect of the acquisitions of Cleanaway in the United Kingdom and Biffa in Belgium and the acquisitions in 2007 of SULO (consolidated since July 2) in Germany and of TMT in Italy.


Energy Services


At Dec.31, 2007
(€m)

At Dec. 31, 2006
(€m)

% change 2007/2006

Internal growth

External growth

Currency effect

6,896.4

6,118.4

12.7%

7.9%

4.6%

0.2%


The effects of the mild weather in the first months of 2007 were partly offset by colder weather in the fourth quarter of 2007.

In France, revenue grew 8.2% (at constant scope), thanks to commercial development and an increase in the volume of engineering work. This performance was achieved despite the impact of the mild winter weather and a slight decline in average energy prices.

Outside France, the impact of the weather was offset by the Group’s recent business development, which generated both internal and external growth, notably in Central Europe (Hungary, Czech Republic and Slovakia), the United Kingdom, Italy and Australia. Accordingly, total growth in revenue outside France amounted to 18.3%.


Transportation


At Dec. 31, 2007
(€m)

At Dec.31, 2006
(€m)

% change 2007/2006

Internal growth

External growth

Currency effect

5,590.1

4,951.5

12.9%

8.1%

5.9%

-1.1%


• Revenue in France rose by 9.8% (+4.3% at constant scope), driven by the development of business in Île-de-France, in urban (Bordeaux, Nice and Toulon) and intercity networks, and the impact of the full-year contribution from SNCM.



95







Outside France, revenue increased by 14.9% (+10.4% at constant scope and exchange rates) reflecting the full impact of business development in North America (impact from the full-year contribution from Supershuttle and a good level of business activity), the growth in business activity in Australia as well as in Europe.


9.2.2.3

Revenue by geographical area

 (€ million)

At Dec. 31, 2007

At Dec. 31, 2006

% Change 2007/2006 (year-end exchange rates)

% Change 2007/2006 (constant exchange rates)

France

14,255.9

13,403.0

6.4%

6.4%

United Kingdom

2,945.7

2,186.8

34.7%

35.5%

Germany

2,702.9

1,992.9

35.6%

35.6%

Other European countries

6,033.3

5,317.9

13.5%

12.4%

United States

2,580.4

2,650.3

-2.6%

6.3%

Oceania

1,308.2

931.4

40.5%

38.1%

Asia

961.0

770.9

24.7%

30.8%

Rest of the world (including the Middle East)

1,840.8

1,367.2

34.6%

37.3%

Revenue

32,628.2

28,620.4

14.0%

14.9%


France

Revenue growth in France totaled 6.4%, despite unfavorable weather conditions which penalized Water activities in the third quarter and Energy Services at the beginning of the year. Conversely, Veolia Eau benefited from continued vigorous growth in engineering and construction work and Veolia Energie from new industrial and municipal contracts. Veolia Propreté growth is linked to increased production levels at the new incineration plants and an increase in solid and toxic waste tonnage collected and treated under high value-added service contracts. In addition to the full year impact of the consolidation of SNCM, Veolia Transport benefited from sustained activity growth in intercity transit systems and the Greater Paris region.

United Kingdom

Revenue, on a constant exchange rate basis, grew 35.5%. This growth was attributable to the acquisition of Cleanaway UK (full year impact compared to one quarter in 2006) in the environmental services division, commercial development and small acquisitions by Veolia Energie and the acquisition of the non-regulated activities of Thames Water by Veolia Eau (1 month of revenue contribution).

Germany

Revenue growth in Germany totaled 35.6% and was primarily attributable to the acquisition of the Sulo Group by Veolia Propreté , an increase of sales under the Braunschweig contract (Veolia Eau), the impact of acquisitions in 2006 and the organic growth of railway activities (Veolia Transport).

Other European countries

Revenue growth of 13.5% was mainly due to the expansion of Veolia Energie in Southern Europe, the acquisition of TMT in Italy by Veolia Propreté (3 months of revenue contribution) and the growth in Veolia Eau and Veolia Energie activities in Central Europe.

United States

Revenue growth of 6.3% at constant exchange rates was particularly strong across all Veolia Propreté activities and in Veolia Transport, where the full effect of recent developments was felt. The acquisition of Thermal North America Inc by Veolia Energie did not contribute to 2007 revenue.



96






Oceania

The 40.5% revenue growth in Oceania was driven by Veolia Eau contracts in Australia (Gold Coast and desalination plant in Sydney), the acquisition of TDU in Australia by Veolia Energie and the increase in contract revenue under the Veolia Transport Melbourne contract.

Asia

Growth of 24.7% in Asia was mainly driven by Veolia Eau and attributable to recent developments (contracts in China and acquisitions in Japan), by Veolia Propreté and by Veolia Energie with the start-up of new contracts.

Rest of the world (including the Middle East)

Revenue growth of 34.6% was marked by the steady growth of Veolia Eau activities in North Africa and new contracts won by this Division in the Middle East.


9.2.3

Other income statement items

9.2.3.1

Operating income

Evolution in operating income and recurring operating income breaks down as follows:

 

Operating income

Recurring operating income

At Dec. 31, 2007

At Dec. 31, 2006

% Change

At Dec. 31, 2007

At Dec. 31, 2006

% Change

Water

1,267.7

1,160.6

9.2%

1,265.7

1,163.4

8.8%

Environmental Services

803.5

648.3

23.9%

803.5

648.3

23.9%

Energy Services

398.7

377.7

5.6%

388.2

377.7

2.8%

Transportation

130.3

13.6

858.1%

115.1

100.1

15.0%

Holding companies

(103.3)

(67.3)

-

(103.3)

(67.3)

-

Total

2,496.9

2,132.9

17.1%

2,469.2

2,222.2

11.1%

Total at 2006 exchange rates

2,513.9

2,132.9

17.9%

2,486.2

2,222.2

11.9%




97





The recurring/non-recurring breakdown of Operating income for the years ended December 31, 2007 and 2006 is as follows:


2007

Recurring items

Non recurring items

Total

(€ million)

Impairment losses

Other

Water

1,265.7

2.0

 

1,267.7

Environmental Services

803.5

-

-

803.5

Energy Services

388.2

10.5

 

398.7

Transportation

115.1

5.7

9.5

130.3

Holding companies

(103.3)

-

-

(103.3)

Total

2,469.2

18.2

9.5

2,496.9



2006

Recurring items

Non recurring items

Total

(€ million)

Impairment losses

Other

Water

1,163.4

(2.8)

-

1,160.6

Environmental Services

648.3

-

-

648.3

Energy Services

377.7

-

-

377.7

Transportation

100.1

(86.5)

-

13.6

Holding companies

(67.3)

-

-

(67.3)

Total

2,222.2

(89.3)

-

2,132.9


Operating income increased 17.1%. Excluding non-recurring items and exchange rates effect, operating grew 11.9%.


Water division

The Water division reported a 9.2% increase in operating income from €1,160.6 million in 2006 to €1,267.7 million in 2007. Excluding non-recurring items and at constant exchange rates, operating income rose 9.3%.

In France, productivity efforts, the development of new services and the continued good level of construction activities offset the fall in volumes delivered.

In Europe, Asia and the United States, growth in operating income benefited from the start-up of new contracts and the positive effect of contracts reaching maturity. Excluding non-recurring items in 2006, growth in Veolia Eau Solutions & Technologies business also contributed to the increase in operating income, despite the temporary delay in the delivery of the Brussels facility. Finally, Veolia Eau also benefited in 2007 from the definitive resolution of the dispute with the Land of Berlin concerning rainwater activities and a dilution capital gain resulting from the acquisition by the EBRD of a stake in Veolia Voda, the holding company for Central European activities.

The operating margin (recurring operating income/revenue) increased 0.1 point from 11.5% in 2006 to 11.6% in 2007, despite an increase in the contribution of lower-margin engineering and construction activities.




98





Environmental Services division

The Environmental Services division reported a 23.9% increase in operating income (26.4% at constant exchange rates) from €648.3 million in 2006 to €803.5 million in 2007.

Operating performance in France benefited from the combined impact of an increase in volumes processed, notably by incineration and landfill site activities and the excellent performance of toxic waste activities.

Outside France, the increase in operating income was particularly high in the U.K. market, following the consolidation of Cleanaway United Kingdom in the fourth quarter of 2006 and the good performance of integrated municipal waste management contracts in this country. In Germany, the consolidation of Sulo with effect from July 2, 2007 provided a significant contribution. In the United States, operating income increased substantially for high-growth industrial services and in the solid waste business thanks to price increases.

The operating margin (recurring operating income / revenue) remained stable at 8.7% in 2006 and 2007.


Energy Services division

The Energy Services Division reported a 5.6% increase in operating income from €377.7 million in 2006 to €398.7 million in 2007. Excluding non-recurring items and at constant exchange rates, operating income rose 1.8%.

In France, profitability benefited from an improvement in construction activities. Harsh weather conditions at the end of the year helped partially offset the impact of the mild weather in the opening months of 2007.

In Europe, operating income increased significantly in Central Europe, thanks to an increase in electricity sales prices (Czech Republic and Romania) and the impact of acquisitions (Hungary), partially offset by an increase in the price of gas in the Baltic States. In Southern Europe, operating income benefited from commercial development in Italy.

Due to the impact of weather conditions, the reduction in the sales of CO² allowances and the development of lower margin service activities, the operating margin (recurring operating income / revenue) fell from 6.2% in 2006 to 5.6% in 2007.


Transportation division

The transportation division reported operating income of €130.3 million in 2007, compared to €13.6 million in 2006.

Transportation division non-recurring operating income included in 2006, losses of €86.5 million recognized in Germany and, in 2007, the impact on net income of the completion of the SNCM opening balance sheet (€20.5 million) and asset impairments relating to the Eurolines activity (-€6.9 million).

Recurring operating income increased 15% from €100.1 million to €115.1 million.

In addition, a dilution gain of €18.7 million was realized in 2006 following the acquisition by the EBRD of a shareholders’ stake in Central European companies.

In France, the profitability of the passenger transport business improved particularly with respect to intercity activities and activities in the Greater Paris region as well as improvements resulting from the consolidation of SNCM, which has reported results in line with the market plan drawn up on privatization.



99






International activities were boosted by solid performances in Belgium and Australia, by the full-year impact of acquisitions in North America (notably ATC and Shuttleport) and by the turnaround of activities in Germany.

However the start-up of the Limburg and Brabant contracts had a negative impact on the results for the year.

Following a review of Division assets with a view to improving profitability, Veolia Transport sold its activities in Denmark and Spain.

Operating margin (recurring operating income / revenue) improved from 2.0% in 2006 to 2.1% in 2007.

Holding companies

The downturn in the contribution in 2007 was due to an increase in IFRS 2 expenses, a rise in research and development expenditure and the centralization of third-party liability insurance.


9.2.3.2

Net finance costs

(€ million)

At Dec. 31, 2007

At Dec. 31, 2006

Income

152.5

 82.8

Costs

(969.6)

(783.8)

Net finance costs

(817.1)

(701.0)


The increase in net finance costs reflects:

the increase in average net financial debt from €14,001 million for 2006 to €14,609 million for 2007, as a result of the investment and growth policy,

the increase in floating rates due to tension in the European, U.S. and U.K. interbank markets starting in the summer of 2007,

the increase in the average maturity of debt following long-maturity issues (euro issue maturing 2022 and sterling issue maturing 2037).

The financing rate (defined as the ratio of net finance costs, excluding fair value adjustments to financial instruments not qualifying for hedge accounting, to average quarterly net financial debt) increased from 5.07% in 2006 to 5.49% in 2007.

Fair value adjustments to financial instruments not qualifying for hedge accounting represented losses of €15.4 million, compared to gains of €6.4 million in 2006. These adjustments, which are calculated in accordance with IAS 39 and depend on market conditions at the balance sheet date, are highly volatile.




100





9.2.3.3

Other financial income and expenses


(€ million)

At Dec. 31, 2007

At Dec. 31, 2006

Net gains on loans and receivables

56.8

21.5

Net gains and losses on available-for-sale assets (including dividends)

10.3

9.7

Assets and liabilities at fair value through the Income Statement

5.5

(21.6)

Unwinding of the discount on provisions

(60.8)

(15.9)

Foreign exchange gains and losses

(2.8)

(14.3)

Other income (expenses)

(7.6)

(13.4)

Other financial income and expenses

1.4

(34.0)


Other financial income and expenses improved from a net expense of €34.0 million in 2006 to a net income of €1.4 million in 2007.

This improvement in the contribution of other financial income and expenses was mainly due to:

- the turnaround in the foreign exchange loss position, with a reduction in losses of €11.5 million;

- the impact of the fair value measurement of embedded derivatives for €26.9 million (other income (expenses)); the fair value measurement of derivatives embedded in contracts and in particular certain industrial contracts in South Korea had an impact of +€10.6 million in 2007, compared to -€16.3 million in 2006;

- the increase in net gains on loans and receivables of €34.6 million (including interest income on the Berlin Lander rainwater receivable of €26.5 million);

- offset by an increase in the charge in respect of the unwinding of the discount on provisions of €44.9 million. In 2007, the increase in this charge on long-term provisions related to SNCM (provisions for loss-making contracts), pension obligations and provisions for closure and post-closure costs for waste storage facilities in the environmental services division.


9.2.3.4

Income tax expense

The consolidated income tax expense of the Group for 2007 was €420.1 million (current tax expense of €416.3 million and deferred tax expense of €3.8 million), compared to €409.6 million for 2006 (current tax expense of €330.9 million and deferred tax expense of €78.7 million).

The increase in the income tax expense in 2007 was due to:

▪ an increase in the scope of consolidation of the Group and pre-tax income, increasing both the current and deferred tax expense;

▪ a reduction in tax rates in a sizeable number of countries with a total positive impact of €62.0 million relating to deferred tax liability balances (including a positive impact of €54.6 million in Germany and the United Kingdom);

▪ an improvement in the outlook for the use of ordinary tax losses of the U.S. tax group, generating an additional deferred tax credit of €85 million.



101





Excluding non-recurring items, the income tax expense decreased from €495.8 million to €431.1 million. The effective income tax rate decreased from 29.3% in 2006 to 25% in 2007, primarily as a result of the aforementioned tax rate cuts and the recognition of additional deferred tax assets related to tax losses in the United States.


9.2.3.5

Share of net income of associates

The share of net income of associates increased from €6.0 million in 2006 to €16.9 million in 2007.

The increase in the net income of associates is mainly due to improvement in the results of Veolia Propreté associates in Taiwan and the inclusion of the associates of the SULO sub-group (Veolia Propreté, Germany).


9.2.3.6

Net income (loss) from discontinued operations

The net loss from discontinued operations was €23.2 million in 2007 (including impairment losses of €21.3 million in respect of the Transportation business in Denmark), compared to net income of €0.6 million in 2006.


9.2.3.7

Net income for the year attributable to minority interests

Net income for the year attributable to minority interests was €326.9 million for 2007, compared to €236.2 million for 2006. This line item reflects minority interests in water division subsidiaries (€178.9 million), environmental services division subsidiaries (€21.8 million), energy division subsidiaries (€96.4 million) and transportation division subsidiaries (€28.9 million). The increase between 2006 and 2007 mainly concerned the water division in Germany, following the positive outcome of the dispute with the Berlin Lander and the transportation division, as a result of the consolidation of SNCM for a full year.

In 2006, net income for the year attributable to minority interests totaled €236.2 million and mainly concerned minority interests in water division subsidiaries (€115.7 million), environmental services division subsidiaries (€18.6 million), energy division subsidiaries (€87.1 million) and transportation division subsidiaries (€14.7 million).


9.2.3.8

Net income for the year attributable to equity holders of the parent

Net income for the year attributable to equity holders of the parent was €927.9 million in 2007, compared to €758.7 million in 2006. Recurring net income attributable to equity holders of the parent was €933.2 million in 2007, compared to €762.0 million in 2006.

Given the weighted average number of shares outstanding of 430.0 million in 2007 and 393.8 million in 2006, earnings per share attributable to equity holders of the parent was €2.16 in 2007, compared to €1.90 in 2006 (adjusted for the share capital increase in July 2007). Recurring net income per share was €2.17 in 2007, compared to €1.91 in 2006 (adjusted for the share capital increase in July 2007).




102





Recurring net income for the year ended December 31, 2007 is determined as follows:


Fiscal year 2007

(€ million)

Recurring

Non recurring

Total

Comments

Operating income

2,469.2

27.7

2,496.9

2.3.1

Net finance costs

(817.1)

-

(817.1)

2.3.2

Other financial income and expenses

6.0

(4.6)

1.4

2.3.3

Income tax expense

(431.1)

11.0

(420.1)

2.3.4

Share of net income of associates

16.9

 

16.9

2.3.5

Net loss from discontinued operations

-

(23.2)

(23.2)

2.3.6

Minority interests

(310.7)

(16.2)

(326.9)

2.3.7

Net income attributable to equity holders of the parent

933.2

(5.3)

927.9

 


Recurring net income for the year ended December 31, 2006 is determined as follows:


Fiscal year 2006

(€ million)

Recurring

Non recurring

Total

Comments

Operating income

2,222.2

(89.3)

2,132.9

2.3.1

Net finance costs

(701.0)

-

(701.0)

2.3.2

Other financial income and expenses

(34.0)

-

(34.0)

2.3.3

Income tax expense

(495.8)

86.2

(409.6)

2.3.4

Share of net income of associates

6.0

-

6.0

2.3.5

Net income from discontinued operations

-

0.6

0.6

2.3.6

Minority interests

(235.4)

(0.8)

(236.2)

2.3.7

Net income attributable to equity holders of the parent

762.0

(3.3)

758.7

 


Recurring net income increased 22.5% from €762.0 million in 2006 to €933.2 million in 2007. This rise is mainly attributable to the increase in operating income, strict management of finance costs (despite a more volatile external environment) and tight control over income tax expenses.


9.3

Financing

9.3.1

Cash flows

Operating cash flow before changes in working capital increased 9.8%, from €3,844.4 million in 2006 to €4,219.4 million in 2007. Excluding the cash flows of discontinued operations (-€8.0 million in 2006 and -€1.5 million in 2007), operating cash flow before changes in working capital increased 9.6%, reflecting improved performance and the growth of the Group. The definition of Operating cash flow before changes in working capital recommended by the CNC (French National Accounting Institute) excludes the impact of financing activities and taxation.

Net cash from operating activities increased from €3,389.6 million in 2006 to €3,634.6 million in 2007, primarily as a result of the increase in operating cash flows before changes in working capital. Working capital requirements increased slightly in 2007 given the growth of activities.



103





Net cash used in investing activities increased from €2,904.0 million in 2006 to €4,018.4 million in 2007. This increase of €1,114.4 million on 2006 was mainly due to investments in the SULO Group companies in Germany (€129 million), the Thermal North America Inc. Group in the United States (€308 million), VES Technitalia (formerly TMT) in Italy (€100.5 million) and an increase in capital expenditure of €501.1million.

Financing cash flows changed from a net outflow of €71.5 million in 2006 to a net inflow of €940.8 million in 2007.

Fiscal year 2007 included :

▪ the €2.6 billion share capital increase finalized on July 10;

▪ a €1 billion bond issue paying fixed-rate interest of 5.125% and maturing May 2022, finalized in May;

▪ a GBP500 million bond issue (supplemented by an additional GBP150 million bond issue in January 2008); and

▪ the redemption of the EMTN issued in November 2005 in the amount of €491 million.


As a result of the cash flows described above, the effects of foreign exchange rates and other movements representing a cash outflow of €102.8 million, cash and cash equivalents totaled €2,656.2 million as of December 31, 2007, compared to €2,202 million as of December 31, 2006.


9.3.2

Sources of funds

9.3.2.1

External financing

As of December 31, 2007, Moody’s and Standard & Poor's rated VE SA as follows:


 

Short-term

Long-term

Outlook

Recent events

Moody’s

P-2

A3

Stable

In October 2007, Moody’s confirmed the rating awarded to Veolia Environnement on June 27, 2005.

Standard and Poor's

A-2

BBB+

Stable

On June 12, 2007, Standard and Poor’s confirmed the rating awarded to Veolia Environnement on October 3, 2005.

On September 26, 2007, following the end of the structural subordination impacting Veolia Environnement debt, Standard and Poor’s increased the long-term rating awarded to bond issues from BBB to BBB+.


Veolia Environnement pursued an active refinancing policy in 2007, aimed at strengthening its financial position and extending debt maturities.

The main debt facilities maturing in 2007 and either redeemed or refinanced were as follows:

▪ €491 million EMTN issue (series 16), issued in November 2005 and maturing May 30, 2007 redeemed in full at maturity,

▪ €142 million EMTN issue (series 19), issued in January 2006 and maturing July 18, 2007, redeemed in full at maturity.



104






In addition, Veolia Environnement launched the following new bond issues for a total euro equivalent of €1,882 million as of December 31, 2007:

▪ in February, a €200 million bond issue paying floating-rate interest (Euribor 3M+0.50%), maturing August 2008,

▪ in May, a €1 billion bond issue paying fixed-rate interest of 5.125%, maturing May 2022,

▪ in October, a GBP 500 million bond issue paying fixed-rate interest of 6.125%, maturing October 2037.

No major bank financing was secured or repaid in 2007.

The syndicated credit documentation and bilateral credit lines do not contain any events of default tied to restrictive financial covenants (such as debt payout ratios or interest coverage ratios).

The net financial debt structure as of December 31, 2007 and 2006 was as follows:


(€ million)

As of December 31, 2007

As of December 31, 2006

Non current borrowings

13,948.0

14,001.6

Current borrowings

3,805.0

2,904.1

Bank overdrafts and other cash position items

459.4

456.0

Sub-total borrowings

18,212.4

17,361.7

Cash and cash equivalents

(3,115.6)

(2,658.0)

Offset of fair value gains(losses) on hedging derivatives

27.7

(28.8)

Net financial debt

15,124.5

14,674.9


Group long-term borrowings fall due as follows as of December 31, 2007:


(€ million)

Total

Amounts falling due in

2 to 3 years

4 to 5 years

More than 5 years

Bond issues

9,009.6

122.3

1,020.5

7,866.8

Bank borrowings

4,938.4

1,636.4

1,120.2

2,181.8

Non current borrowings

13,948.0

1,758.7

2,140.7

10,048.6




9.3.2.2

Share capital increase

In order to support its growth strategy and profit from market conditions, Veolia Environnement launched a cash rights offering (augmentation de capital avec maintien des droits préférentiels de souscription des actionnaires) on June 12, for an amount of €2,581.5 million (before offset of share issue costs against additional paid-in capital).

The subscription period opened on June 14 and closed on June 27, 2007.

The transaction resulted in the issue of 51,941,040 new shares with a par value of €5 each, representing a share capital increase of €259.7 million and the recognition of additional paid-in capital of €2,321.8 million.

This fund-raising transaction enabled the Group in particular to strengthen its equity and increase its financial flexibility and thereby continue its development under good conditions.



105






In addition, the introduction of minority interests into certain consolidated companies, in line with the Group’s desire to find partners in order to exploit commercial opportunities and/or dilute the risk exposure of the Group in certain countries, provided the Group with funds of €206 million in 2007. These transactions mainly concerned:

▪ the acquisition of a 10% stake by the EBRD in Veolia Voda, the holding company for Veolia Eau activities in Central and Eastern Europe, by way of a share capital increase of €90.4 million;

▪ the acquisition by IFC/Proparco of a stake in the share capital of the water division holding company for activities in the Middle East and Africa, generating funds of €34.8 million;

▪ the acquisition by partners of stakes in Chinese contracts of the water division (Lanzhou and Liuzhou), generating funds of €64.2 million.


9.3.3

Divestitures

Asset divestitures totaled €415 million, or €394.6 million net of cash of the companies sold.

Financial divestitures in 2007 mainly concerned the following transactions (€202 million excluding cash balances of companies sold):

▪ 19% of Veolia Service Environnement Maroc (Veolia Eau) for €36.4 million ;

▪ transportation activities in Spain for €24.0 million;

▪ shares in Residuos Industriales Multiquim SA by SARPI Mexico for €13.1 million;

▪ transportation activities in Denmark for €11.6 million;

▪ a 39% stake in Proactiva Mexico for €9.9 million.

The main industrial divestitures in 2007 totaled €212.9 million and comprised the following transactions:

▪ sale of Fawley installations in the United Kingdom in the environmental services division for GBP24 million (€35.8 million);

▪ sale of buildings, in particular in the Netherlands in the transportation division, for €16 million;

▪ other industrial asset sales mainly reflect the turnover of operating assets.

Principal payments on operating financial assets totaled €360.7 million in 2007, compared to €438.1 million in 2006.



106






9.3.4

Investments

 (€ million)

Capital expenditure (1)

Financial investment (2)

New operating financial assets

 

2007

2006

2007

2006

2007

2006

Water

866

853

794

214

280

262

Environmental Services


846


692


482


875


32


20

Energy Services

429

318

547

102

73

63

Transportation

459

302

101

253

36

16

Other

42

32

42

8

-

-

Total

2,642

2,197

1,966

1,452

421

361

(1)

Including assets purchased under finance leases.

(2)

Excluding cash and cash equivalents of companies acquired.


Capital expenditure

Capital expenditure (excluding assets purchased under finance leases) totaled €2,519 million in 2007, up 25% on 2006 capital expenditure of €2,018 million.

Capital expenditure including assets purchased under finance leases totaled €2,642 million and breaks down as follows:

▪ €866 million in the water division (up 1.5% on 2006), including growth investment of €335 million and maintenance-related investment of €531 million (€498 million in 2006);

▪ €846 million in the environmental services division (up 22.3% on 2006), including growth investment of €292 million and maintenance-related investment of €554 million. The increase in capital expenditure mainly reflects the growth of the environmental services division and the launch of a number of major industrial projects in France (new storage capacity) and Italy (incinerator);

▪ €429 million in the Energy Services Division (up 34.9% on 2006), including growth investment of €166 million and maintenance-related investment of €263 million. This increase in investment reflects activity growth and, notably, the construction of heat and electricity production installations in France;

▪ €459 million in the transportation division (up 52.0% on 2006), including growth investment of €233 million and maintenance-related investment of €226 million. Capital expenditure includes the purchase of the Jean Nicoli ship by SNCM;

▪ Maintenance-related investment totaled €1,590 million (4.9% of revenue), compared to €1,417 million in 2006 (5% of revenue).


Financial investment

Financial investment, including €131 million of cash and cash equivalents balances of companies acquired in 2007, totaled €1,835 million in 2007, compared to €1,291 million in 2006.



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In 2006, financial investments particularly included the acquisition by Veolia Eau of Banska Bystrica and Poprad in Slovakia for €71 million and of the Kunming and Liuzhou contracts in China for €60 million, the acquisition by Veolia Propreté of Cleanaway in the United Kingdom for €745 million and of Biffa Belgium for €63 million and the acquisition by Veolia Transport of SNCM for €72 million and of Shuttleport and Supershuttle in the United States for €100 million.

Financial investments of €1,966 million in 2007 (excluding cash and cash equivalents balances of companies acquired) break down as follows:

▪ €794 million in the water division (compared to €214 million in 2006). The main financial investments concern the non-regulated assets of Thames Water for €86 million, the acquisition of the Lanzhou, Haikou and Tianjin Shibei in China (for €98 million, €91 million and €219 million respectively), the assets of the Process Services Division of Tetra Technologies for €43 million and the acquisition of Anox Kaldnes, a Swedish technology company, for €74 million;

▪ €482 million in the environmental services division (compared to €875 million in 2006). The main financial investments concern the acquisition of SULO in Germany for €156 million (net of the proceeds of the sale of the ET Division at the end of July 2007), of VES Tecnitalia (formerly TMT) in Italy for €104 million and Allied assets in the United States for €71 million;

▪ €547 million in the Energy Services Division (compared to €102 million in 2006). The main financial investments concern the acquisition of Thermal North America, Inc. for €316 million, of Hungarian companies for €63 million, of Kolin in the Czech Republic for €27 million and of cogeneration companies in Germany for €29.5 million;

▪ €101 million in the transportation division (compared to €253 million in 2006). The main financial investments concern the acquisition of People Travel Group (PTG) in Sweden for €46.6 million and of “transport-on-demand” companies in the United States for €19 million.

Cash balances of companies acquired total €131 million and mainly concern the SULO Group companies in the amount of €26 million.


New operating financial assets (IFRIC 12 and IFRIC 4 receivables)

New operating financial assets total €421 million in 2007, compared to €361 million in 2006 and break down as follows:

▪ €280 million in the water division, an increase of €18 million compared to 2006; this increase is mainly attributable to the Oman Sur BOT contract in the amount of €47 million and the increase in Berlin Water receivables for €26 million, offset by a reduction in BOT construction activities of €60 million in Belgium and the Netherlands;

▪ €32 million in the environmental services division, an increase of €12 million compared to 2006;

▪ €73 million in the Energy Services Division, an increase of €10 million compared to 2006;

▪ €36 million in the transportation division, an increase of €20 million compared to 2006.


9.3.5

Operating working capital requirements

Working capital requirements increased in 2007 from €111.8 million in 2006 to €167.1 million in 2007, primarily as a result of activity growth.



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9.3.6

Market risk

Please refer to Note 31 to the consolidated financial statements.


9.4

Return on capital employed (ROCE)

Veolia Environnement has adopted the performance indicator ROCE (return on capital employed) to track the Group’s profitability. This indicator measures Veolia Environnement’s ability to provide a return on the funds provided by shareholders and lenders.

The return on capital employed is defined as the ratio of:

▪ Recurring operating income after tax, plus the share of net income of associates, less net operating income after tax from operating financial assets (return on operating financial assets net of tax allocated to this activity);

▪ Average capital employed during the year;

▪ Since 2005 and the adoption of IFRS, capital employed excludes operating financial assets and net income from operations excludes the related income. The application of IFRIC 12 in 2006 triggered significant movements in operating financial assets, which were taken into accounting in the restated financial statements.

Net income from operations is calculated as follows:


(€ million)

2007

2006

Recurring operating income

2,469.2

2,222.2

+ Share of net income of associates

16.9

6.0

- Income tax expense (1) (2)

(406.9)

(463.2)

- Revenue from operating financial assets

(345.1)

(351.0)

+ Income tax expense allocated to operating financial assets

62.5

54.5

Net income from operations

1,796.6

1,468.5

(1)

In 2004, the financial restructuring transactions following the divestiture of the U.S. activities of the water division generated tax losses which where recognized in the consolidated balance sheet. Given its exceptional nature, the resulting credit of €138.4 million recognized in net income was eliminated from the calculation of ROCE. The utilization of these tax losses in 2006 and 2007 generated charges of €32.7 million and €24.2 million respectively, which were similarly eliminated from the calculation of ROCE.

(2)

In 2006, the non-recurring deferred tax credit of €86.3 million relating to the restructuring of the U.S. tax group was eliminated from the calculation of ROCE. In 2007, a tax benefit of €11 million was considered non-recurring.

Average capital employed during the year is defined as the average of opening and closing capital employed.


Capital employed is defined as the sum of net intangible assets and property, plant and equipment, goodwill net of impairment, investments in associates, net operating and non-operating working capital requirements and net derivative instruments less provisions and other non-current debts.




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Capital employed is calculated as follows:


(€ million)

As of December 31, 2007

As of December 31, 2006

As of December 31, 2005

Intangible assets and property, plant and equipment, net (1)

14,117.8

11,644.1

10,258.9

Goodwill, net of impairment

6,913.2

5,705.0

4,752.3

Investments in associates

292.1

241.0

201.5

Operating and non-operating working capital requirements, net (2)

(33.2)

198.8

160.8

Net derivative instruments and other (3)

79.4

26.9

(66.6)

Provisions

(2,964.7)

(3,022.5)

(2,402.0)

Other non-current debt

-

(207.3)

(203.7)

Capital employed

18,404.6

14,585.0

12,701.2

Average capital employed

16,494.8

13,643.1

N/A

(1) Including the investment in Tianjin Shibei (water division) for €219 million

(2)

Including net deferred tax but excluding deferred tax relating to U.S. divestitures and related restructurings (€60.7 million in 2007, €84.9 million in 2006 and €117.6 million in 2005).

(3)

Excluding derivatives hedging the fair value of debt for €27.7 million in 2007, -€28.8 million in 2006 and -€161.1 million in 2005.


The return on capital employed (ROCE) of the Group is as follows:


(€ million)

Net income from operations

Average capital employed during the year

ROCE

2007

1,796.6

16,494.8

10.9%

2006

1,468.5

13,643.1

10.8%


Unlike income statement line items, ROCE is relatively insensitive to fluctuations in foreign exchange rates.

Therefore, ROCE improved slightly despite the marked increase in average capital employed as a result of activity growth and acquisitions. This is due to the combined impact of productivity measures, the increased maturity of the contract portfolio, the contribution of companies acquired and the improvement in the income tax expense.



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9.5

Statutory auditors’ fees

In 2007 and 2006, Veolia Environnement and its fully and proportionally consolidated subsidiaries paid the following fees to its Statutory Auditors for services rendered in connection with all consolidated companies:


(€ millions)

KPMG network

Ernst &Young network

 

BeforeTax

Percentage

BeforeTax

Percentage

 

2007

2006

2007

2006

2007

2006

2007

2006

Audit

        

Statutory auditors, certification, review of statutory and consolidated accounts(1)

        

• Veolia Environnement

1.2

1.2

5.1%

5.5%

1.1

1.2

4.8%

6.0%

• Subsidiaries (proportionally consolidated subsidiaries)

15.3

13.2

64.5%

60.8%

15.7

13.3

68.6%

66.2%

Other related diligence and services rendered (2)

        

• Veolia Environnement

1.0

1.1

4.2%

5.1%

1.2

0.8

5.2%

4.0%

• Subsidiaries (proportionally consolidated subsidiaries)

6.2

6.2

26.2%

28.6%

4.9

4.8

21.4%

23.8%

Sub-Total 1

23.7

21.7

100.0%

100.0%

22.9

20.1

100.0%

100.0%

Other services rendered by the networks to the globally consolidated subsidiaries

        

• Legal, fiscal, social

0

0

0.0%

0.0%

0

0

0.0%

0.0%

• Other

0

0

0.0%

0.0%

0

0

0.0%

0.0%

Sub-Total 2

0

0

0.0%

0.0%

0

0

0.0%

0.0%

Total (1+2)

23.7

21.7

100.0%

100.0%

22.9

20.1

100.0%

100.0%

(1) Includes fees relating to independent experts or audit network members whom the statutory auditor appeals to during the review of the accounts.

(2) Diligence and services rendered to Veolia Environnement or its subsidiaries by the statutory audit or by members of the network.

(3) Services other than auditing services rendered by members of the network to subsidiaries of Veolia Environnement.



9.6

Outlook

See chapter 13, infra.



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CHAPTER 10
CASH FLOW AND CAPITAL

Information relating to cash flows, working capital requirements and investments is set forth in the reference document, in chapter 9, paragraphs 9.3.1, 9.3.4 and 9.3.5 and in chapter 20, paragraph 20.1, notes 13, 15, 20 and 33 of the consolidated financial statements.

Information relating to borrowing conditions and the structure of Veolia Environnement’s financing is set forth in the reference document in chapter 9, paragraph 9.3.2 and chapter 20, paragraph 20.1, notes 18, 19, 20, 23 and 24 of the consolidated financial statements.

Like most bank debt and bond documentation, Veolia Environnement’s financing documents contain “covenants” or traditional undertakings that require certain actions (such as the requirement to provide annual and six-month financial statements) and that restrict certain actions (such as covenants not to grant security interests with respect to financial debt, subject to certain exceptions).

With the exception of the private placement in 2003 in the United States (see chapter 20, paragraph 20.1, note 18 of the consolidated financial statements), the Company’s financing documents do not include any restrictive financial covenants, such as an interest coverage ratio or a debt payout ratio. The latter is the ratio between net debt and operating cash flow adjusted for certain elements. This ratio is however used to determine the margin applicable to certain significant financings of the Company (princing grids), for example the syndicated credit lines signed in 2004, for a maximum aggregate amount of US$1.25 billion (drawn down in the amount of approximately €544 million as of December 31, 2007) and a syndicated credit line for the refinancing of the acquisition of the Berlin water contract, signed in January 2005 for a principal amount of €600 million, which came to maturity on January 15, 2008.

The financial ratios may also be used in certain project financings, which are generally effected through special purpose entities, for which the financing is precisely based on the cash flows generated by the relevant project. These project financings, the amounts of which are not individually significant at the Group level, are either “without recourse” or with limited recourse. The financial ratios may also exist in certain financings approved by multilateral development banks.

The Company centralizes its significant financings to ensure optimization. In certain financings contracted by the parent company, this centralization is subject to structural subordination intended to assure lenders that the majority of the financings are at the level of Veolia Environnement and that the Group does not modify its financing policy.

As of December 31, 2007, Veolia Environnement was in compliance with its covenants.



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CHAPTER 11
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

11.1

Research and Development (R&D)

11.1.1

Research and Development: a priority area for Veolia Environnement

The activities of Veolia Environnement are at the crossroads of the main challenges of the modern world: urbanization, access to water, fighting against climatic change. The solutions to these current challenges require a global industrial and technological approach. This global approach lies at the core of Veolia Environnement’s Research and Development (R&D) strategy.

The focus of Veolia’s R&D includes managing and preserving resources, limiting the impact on the environment, improving the quality of life of populations, developing sources of renewable energies. Fighting against climate change is also a top priority. Research efforts relate mainly to the optimization of energy within the group’s facilities, the collection and storage of carbon dioxide, the development of bioenergies and clean transport methods.

In each of these areas, the know-how and technologies of the Group are complementary. This is the case, for example, in the area of sludge, biomass, biofuels, prevention of legionellas, or treatment of factory effluents.

In addition, the mobilization of a network of international experts and the application of research programs on different geographical study sites make it possible for Veolia Environnement to benefit from answers to specific local problems and contexts that may be adaptable to other regions of the world.

Veolia Environnement’s research teams are committed, in all their work, to respond to environmental challenges while ensuring the group’s competitiveness. R&D is a priority area for the Company: the 45% increase since 2003 of the resources allocated to these efforts is evidence of this commitment.

11.1.2

Research and Development Resources

Veolia Environnement’s research activities are overseen by Veolia Environnement Recherche et Innovation (VERI), which since January 2007 has fulfilled the missions of the Research, Development and Technology department, or “Research Department”. In 2007, this department consisted of nearly 800 experts worldwide (including 400 researchers and 400 on-site developers) with a total budget of approximately €118 million16.

The Veolia Environnement Research Department works on behalf of all of the Group’s divisions, given that their needs are similar. In particular, all seek to solve environmental and health problems with the aid of numerous tools, such as modeling and chemical and bacteriological analysis. By working on behalf of all divisions, the research department helps to ensure a better consistency of the Group’s R&D activities with the Group’s strategy.

Veolia Environnement has four main research centers that operate as a network. Located in the Ile-de-France region (Paris area) and specialized in water, waste, energy and transport, the centers have related units or correspondents in France and abroad (United Kingdom, Australia, Germany, United States and Australia).


16 For the fiscal year ended December 31, 2007, research expenses totaled €84.6 million (see chapter 20, § 20.1, note 22 below), which, when added to operational development costs, amounts to an estimated budget of €118 million.



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In 2003, Veolia Environnement established an international Research and Development correspondent network to identify and analyze specific local technical development and innovation needs. Certain research centers abroad have acquired specialized expertise and are partners with centers in France. These research units enhance Veolia Environnement’s technological expertise. In the area of water for example, the Berlin Center of Competence for Water (Kompetenzzentrum Wasser Berlin) is the reference point for the protection of water resources. Australia has become the reference point for information relating to the recycling of water.

The research teams include experts in the fields of health, environment and analysis who help anticipate the needs and provide support to operators:

• The Environment Department runs the research programs centered on the management and protection of water resources, environmental model building as well as on the evaluation of risks and environmental impacts (ACV);

• The Health Department evaluates the risks and health benefits linked to the activities of Veolia Environnement, in concert with doctors and environmental health specialists. It preventively identifies emerging health dangers and oversees the safety of the Group’s services with regards to human health;

• The Environmental Analyses Center (EAC) conducts the analytical research activities of Veolia Environnement and manages a network of laboratories. It carries out environmental and health monitoring control analyses for the entire group. It develops measurement methods to rapidly and precisely identify pollutants or microorganisms in a very low concentration.

11.1.3

Innovation: a rationalized method

The research team aims to provide innovative practical solutions within their areas of expertise, which are crucial for the competitiveness of the Veolia Environnement Group. R&D is driven by a rationalized method allowing technological risks to be mastered, and allowing rapid progress and the creation of successful commercial applications that are both reliable and effective. The main steps in the innovation process are:

• Strict regulatory, technological and commercial monitoring that enables the Group to anticipate future needs and proceed with the launch of new research programs as quickly as possible. Laboratory or field tests are then carried out to verify the feasibility of the research. At this stage, analytical modeling17 may be carried out, depending on the circumstances (i.e., exploring functionality and cost containment potential).

• If the tests are successful, a prototype is built in the laboratory or on site in order to evaluate and refine the technology.

• The next phase is the development of a pre-industrial unit to be installed on an appropriate site and operated by personnel.

For each step in the innovation process, various entities (research teams, university or private laboratories) are called upon to collaborate.


17 At each step of the innovation process, researchers implement sophisticated tools, such as digital fluid mechanics.  This technology enables researchers to simulate the operation of installations and test a larger number of scenarii to improve efficiency.  Over a shorter period, such software enables researchers to optimize test protocols.



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Veolia Environnement’s researchers are part of an international network of researchers. They forge fundamental links with other research teams, each taking advantage of the expertise of the others. While these collaborations enrich the knowledge of the R&D group and keep it up to date, they also provide effective prospects for scientific advancement and return on our partners experience. Researchers also work with several top universities and participate in research programs for national and international institutions. They also share their technological knowledge with industrial players.

11.1.4

Main Research & Development Areas for Veolia Environnement

The four areas that are at the core of Veolia Environnement’s current R&D are:

• The management and preservation of natural resources

Research on sea water desalination processes, collection of rain water or re-use of wastewaters after treatment aimed at meeting the growing need for water. The mechanization and automation of sorting processes for used materials, as well as the design of recycling processes for end of life products or factory effluents, encourage the re-use of materials found in waste at a competitive cost.

• Limitation of environmental impacts

The improvement of treatment techniques for factory effluents and dangerous waste makes it possible to limit the dispersion of pollutants in the environment and better respect biodiversity and human health. As a leader in environmental services, the Veolia Environnement Group must set the example with regards to the reduction of the impact of its activities. Efforts are therefore focused on reducing the refuse coming from Veolia Environnement facilities, diminishing noise and olfactory nuisance, and developing cleaner means of transportation.

• Improvement of quality of life

The perfecting of used water decontamination and of waste management systems tailored to developing countries improves the environmental safety of non-Western cities and helps prevent epidemics from spreading on a worldwide scale. It also preserves the quality of the water and thus the health of those who consume it. Along with the development of clean means of transportation, the organization of mass transportation limits greenhouse gases and atmospheric pollution. It improves living conditions in major cities and encourages economic development in developing countries.

• The development of alternative energy sources

As carbon dioxide emissions continue to exceed the absorption capacity of the biosphere, the production of substitute fuels and biofuels, the recycling of biomass as energy, the development of industrial applications of fuel cells and the optimization of the performance of the Group’s waste incineration units help limit emissions of greenhouse gases. These measures also help respond to the increasing demand for energy, address the depletion of fossil fuel reserves, and further the attempts to economize hydrogen.

More than 70% of Veolia Environnement’s research programs aim to limit greenhouse gas emissions. Relying on an approach aimed at, first, not releasing greenhouse gases, and, when that is impossible, reducing such emissions, the Company aims to control needs, improve processes and energetic efficiency as well as exploit more renewable energy sources. The Group also strives to implement processes to capture, store and upgrade greenhouse gases and anticipate future constraints resulting from climatic changes.



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11.1.5

Improvements for 2007

• A research platform dedicated to high-performance systems for the treatment of drinking water

In September 2007, Veolia Environnement opened a 1000 square meter test hall close to the drinking water plant of Annet-sur-Marne near Paris, France. Dedicated to studies on high-performance systems for the treatment of drinking water, it brings together close to twenty pilots that serve several research projects. Diminishing organic matter, reducing the inconveniency of chlorination, especially relating to the taste of water and undesirable byproducts and controlling emerging health risks are the main objectives. Research relating to technological performance is coupled with the energy and environment results in order to select the most reliable processes. In particular, two kinds of treatment are studied in the hall:

- Hybrid processes (traditional system plus membranes) that are grouped within the Opaline system (trademark filed by the Group): they associate ultra filtration membranes (0,01 micron pores) with absorbents, resin or activated carbon. They are currently being tested on an industrial scale to treat waters with high organic matter content.

- Nanofiltration: in this system, the pores of the membranes are ten times closer together than in the former one. Implemented for over ten years, Veolia Environnement is seeking to optimize this system in order to reduce the related energy consumption, avoid clogging and limit the impact of effluents.

• A research program focused on the collection, transport, use and storage of carbon dioxide

This solution, which should in 2050 contribute to the reduction of greenhouse gases worldwide by 20 to 30%, has been the subject of a research program since 2007, although the Veolia Environnement Group has been studying this topic since 2005.

The goal of this program is to create a new means of reducing the Group’s greenhouses gas emissions, increase its expertise and explore new markets, along with the ability to propose a complete range of services relating to the reduction of greenhouse gas emissions.

To this end, the program’s objectives are to find catchment solutions that are appropriate for various types and sizes of facilities within the Group, to study the various transport and recycling systems for the adapted to the geographical position of its facilities, to establish an acceptable framework for the risks and stakes of this solution, and to set up pilots in order to enhance its expertise in the field of catchment, transporting, recycling and storage of carbon dioxide.

The first on-site research pilots will be launched in 2008.

• Development and reinforcement of the bio-energy program

The use of biomass and waste (solid and liquid) as an energy source represents a solution not only for the conservation of fossil fuels but also for the promotion of renewable energies while minimizing environmental and health risks. One of the objectives of Veolia Environnement’s Research and Development department is to develop, evaluate, and validate the recourse to bio-energies, such as solid combustible waste, biogas from storage centers, mud from purification stations and biofuels.

A reorganization of the program was conducted in 2007 through the creation of three major projects: biofuels, biomass depositing and energy recycling platform. The research teams were reinforced in order to implement these projects.



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• A research program on atmospheric pollution modeling

A research program concerning atmospheric pollution modeling was launched one year ago. The approach consists in developing software that is applicable to all Veolia Environnement trades. The aim is to better understand the spreading mechanisms of atmospheric pollution, track pollution and better understand emissions in order to control the concentration levels of pollutants in the environment. The innovative aspect of this approach is that, in the future, the Company will be able to monitor in real time the concentrations of pollutants in a given location and to adapt the activity based on such concentrations or measures, in particular during the design and location selection phase of facilities. The model is based on exiting flows, weather conditions, topography, land use… In the long term, the control of pollution levels by adapting exit flows will be a function of local weather forecasts.

• A research program to limit the polluting emissions of composting platforms

The studies led by the Veolia Environnement research teams aim to optimize the design of composting platforms, to control and limit their health and environmental impact and to guarantee the traceability, the agronomic quality, and the harmlessness of the composts. The R&D teams have developed an urban organic waste composting process (sludge, household waste and assimilated). The modeling of windrow airing systems coupled with an innovative patented composting technique makes it possible to guarantee the composts’ purification, by reducing the energy consumption of current industrial facilities as well as odors and greenhouses gas emissions. This is particularly the case for nitrous oxide which has a global warming potential that is 310 times stronger than that of carbon dioxide.

• Advances in biofuels research

Veolia Transport’s goals include encouraging the use of biofuels by helping local communities make the right choices among new energies and renewing the fleet of motor vehicles to reduce their environmental impact and greenhouse gases. To this end, Veolia Environnement’s researchers have tested, evaluated and approved a biodiesel, also called Diester, made with 30% of canola seed ester that does not alter the performance of motors.

Particle filter tests on motors fueled by biodiesel are currently being conducted. A more significant use of biofuels in the Veolia Transport fleets is currently being considered.

In cooperation with Veolia Propreté, researchers are currently testing a system of esterification of used oils mixed with diesel fuel, a successful example of the reuse of collected waste.

• A research program to optimize the electric consumption of street railways

Non-polluting, silent, preserving the environment and the quality of service, street railways have been making a comeback since the 1990’s. However, on street railway networks, electric consumption is a parameter that has not yet been completely mastered. With the help of the research conducted on the Rouen and St Etienne networks, Veolia Transport’s Research and Innovation Center has established a complete energy assessment of the equipment tested. For instance, it has identified the portion used by the heating system in the winter, or the influence of driving on the vehicle’s consumption. An energy conservation policy will be established and the optimization of electric storage on board will be assessed.

11.2

Patents and licenses

See Chapter 6, paragraph 6.2.5 (Intellectual property – Dependence of the Company).




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CHAPTER 12
TREND INFORMATION

12.1

Trends

The principal trends relating to or affecting the Company’s business are described in chapter 6, paragraphs 6.1 and 6.2.

There has been no material adverse change in Veolia Environnement’s prospects since the end of the 2007 fiscal year. The Company does not know of any event or circumstance that could reasonably have a material effect on its prospects for the current fiscal year.

12.2

Recent developments

Veolia Environnement (Group level)

On February 5, 2008, the Company published its consolidated revenues for the year ended December 31, 2007 (unaudited IFRS figures), which amounted to €32,628.2 million. Veolia Environnement also submitted its quarterly financial information as at December 31, 2007 to the AMF and released it to the public (Transparency Directive).

On March 7, 2008, the Company published a press release regarding its annual results for 2007.

On February 12, 2008, Veolia Environnement announced the launch of the Veolia Observatory of Urban Lifestyles. Having worked with various cities for over 150 years, the Company is able to anticipate the complexity of urban problems and their interrelation so as to offer essential services that improve the quality of urban life. By 2030, 60% of the world population will be living in cities. Veolia Environnement has created the Veolia Observatory of Urban Lifestyles to enhance its knowledge of city life. The Observatory is publishing the findings of its first study, which was carried out by Ipsos, the French market research institute, between September and December 2007. The study examines the relationship between city dwellers and the place where they live. A total of 8,500 people were surveyed in 14 cities around the world. The detailed findings of this survey can be found in a brochure published by the Veolia Observatory of Urban Lifestyles. The survey will be carried out again in 2009 using a new group of major cities around the world.


Veolia Eau

On February 11, 2008, Veolia Eau announced that it had won, via its subsidiary Veolia Water Solutions & Technologies, a contract in a consortium including Warbud, the Polish civil engineering company, and WTE, the German water company, to upgrade and extend the Czajka wastewater treatment plant in Warsaw, Poland. The contract will provide estimated total cumulative revenues of €500 million for the consortium, of which approximately €148 million will go to Veolia Eau. After completion, which is scheduled for 2010, Czajka will be the largest wastewater treatment plant in Poland. This contract is part of a larger development project in the countries in Eastern Europe, which have a significant need to renew their purification infrastructures. This contract will allow Veolia Water, which already has a strong presence in this part of Europe, and particularly in the Czech Republic, Romania, Hungary and Slovakia, to reinforce its presence in Poland.

Veolia Propreté

The acquisition of Bartin Recycling Group, the third company in France for recycling and reuse of scrap iron and metals, which generated €249 million revenues in 2006, was finalized on February 13, 2008. This acquisition will increase Veolia Propreté’s metal recycling capacity in France from 250,000 to more than one million tons per year, which is a significant gain considering that 50% of steel worldwide is produced from scrap iron.

In February 2008, Veolia Propreté entered into a signifcant twenty five-year PFI agreement in Southwark County, U.K. The agreement represents estimated global revenues of €900 million, thanks



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to a global integrated management strategy which proposes the reduction, collection, reception, transfer, recycling, composting, pretreatment and disposal of waste.

On March 17, 2008, the district authorities of West Berkshire awarded to Veolia Propreté a Private Finance Initiative (PFI) contract for integrated waste management with a twenty-five year term, representing total aggregate estimated revenues of €667 million. The contract covers the collection, recycling and elimination of waste from the district as well as urban cleaning services. Veolia Propreté will build and manage the installations for the upgrade, transfer, composting and recycling of household waste.

Dalkia

On February 18, 2008, Dalkia announced the success of the public tender offer launched on December 17, 2007 for the Polish company Praterm. Dalkia is now the majority shareholder of the company, holding 97.9% of its share capital for an investment of €142 million. With more than 260 km of small and medium sized networks, Praterm is present in 21 cities in the north, south, and southeast of Poland. It produces and distributes heat to nearly 520,000 inhabitants and is expected to generate revenue of approximately €55 million in 2008.

Veolia Transport

In January 2008, the urban and suburban bus transportation agreement in Las Vegas was renewed for a two-year term. This agreement, the operation of which will begin in April 2008, represents cumulative estimated revenues of approximately €137 million. The renewal of the Boston agreement in 2007 and of the Las Vegas agreement in 2008 constitute major successes for Veolia Transport, these two agreements being the most significant in Northern America in their respective markets in terms of revenues.

Since January 2008, Veolia Transport Sweden has held two thirds of the share capital of the company Tagia, the manager of the Stockholm metro. This company, the remaining capital of which is owned by Storstockholms Lokaltrafik AB (SL), the company overseeing the public transport system in the Stockholm region, generated revenues of approximately €75 million in 2007.


On February 20, 2008, Veolia Cargo, a subsidiary of Veolia Transport specialized in railway logistics, announced the execution of an agreement relating to the acquisition of Rail4Chem, a German railway company specialized in international railway freight transport. Rail4Chem generated revenues in 2007 of more than €80 million. This acquisition will be finalized during 2008, subject to the approval of the competition authorities.




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CHAPTER 13
FORECASTS OR ESTIMATES OF RESULTS

13.1

Forecasts

For 2008, Veolia Environnement anticipates increasing its revenue, opearting cash flow, and net income (Group share) by at least 10%.

These objectives are based principally on assumptions and estimates relating to the following: (i) exchange rate parity determined at the Group level and interest rate changes, (ii) treated or distributed volume estimates based on historical experience, (iii) estimates relating to annual price adjustments on long-term contracts, (iv) estimates as to the evolution in market prices in certain segments of the waste management sector, (v) success of the strategy to control operating costs and of their evolution, (vi) the price of energy, (vii) climatic conditions and (viii) the effect of the development of existing contracts and the impact of recent commercial developments and of acquisitions. Certain of these data, assumptions and estimates result from or are based upon, in whole or in part, the conclusions or decisions of the management of Veolia Environnement and its subsidiaries, and may be changed or modified in the future.

The objectives, statements and prospective information summarized above are based on data, assumptions and estimates considered to be reasonable by Veolia Environnement. These data, assumptions and estimates are dependent on future facts and circumstances. They do not constitute historical data and cannot be interpreted as guarantees of future results. By definition, this information, and these assumptions and estimates, as well as the elements used to determine such objectives and prospective information, may not occur, and may change or be modified as a result of uncertainties tied to the Company’s economic, financial and competitive landscape. In addition, the occurrence of certain risks described under “Risk Factors” in chapter 4 of the 2007 reference document may have an impact on the Group’s activities and its ability to realize its objectives as set forth above.

13.2

Statutory Auditors’ Report on profit forecasts

This is a free translation into English of the statutory auditors’ report issued in the French language and is provided solely for the convenience of English speaking readers. This report includes information specifically required by French law and should be read in conjunction with, and is construed in accordance with, French law and professional auditing standards applicable in France.


To M. Henri Proglio, Chairman and Chief Executive Officer of Veolia Environnement,

In our capacity as Statutory Auditors of your company and in accordance with Commission Regulation (EC) No 809/2004, we hereby present our report on profit forecasts of Veolia Environnement in part 13 (section 13.1) of its “document de référence” registered by the French stock exchange regulatory body (AMF) on March 31, 2008.

These forecasts and underlying significant assumptions were prepared under your responsibility, in accordance with the provisions of Commission Regulation (EC) No 809/2004 and the CESR advice on forecasts.

It is our responsibility to express, in accordance with the terms required by Annex I, item 13.2 of Commission Regulation (EC) No 809/2004, our conclusion on the appropriateness of the preparation of such forecasts.



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We conducted our work in accordance with the auditing standards generally accepted in France. Our work included an assessment of the procedures implemented by management to prepare the forecasts, as well as the performance of procedures to obtain assurance about whether the accounting methods used are consistent with those used for the preparation of historical data of Veolia Environnement. They also involved collecting data and explanations we deemed necessary in order to obtain assurance about whether the forecasts are appropriately prepared on the basis of the specified assumptions.

We wish to remind you that, as this concerns forecasts, which are uncertain by nature, actual results may differ significantly from the forecasts presented and so, we do not express any conclusion as to the potential realisation of such forecasts.

In our opinion:

• The forecasts have been appropriately prepared on the indicated basis,

• The accounting basis used for the purposes of these forecasts is consistent with the accounting methods used by Veolia Environnement.

This report is issued for the sole purpose of any public offering - in France and any other EU country - realised on the basis on a prospectus registered with the French stock exchange regulatory body (AMF), including or incorporating by reference the 2007 “document de référence”. It may not be used in any other context.

Paris-La Défense et Neuilly-sur-Seine, on March 31, 2008

KPMG Audit

Department of KPMG S.A.

ERNST & YOUNG et Autres

SALUSTRO REYDEL

Member de KPMG International

BARBIER FRINAULT & AUTRES

Ernst & Young

Jay Nirsimloo

Baudouin Griton

Jean Bouquot

Patrick Gounelle


13.3

Objectives and outlook18

In the medium-term, the Group intends to pursue its development in each of its business segments and will seek to increase revenue by 8% to 10% and the maintenance of an after-tax ROCE of 10% (excluding the potential effects of the timing of acquisitions).

This growth will depend on organic growth of existing contracts, acquisition goals for new contracts in growing markets in priority regions (Europe, North America and certain Asia-Pacific and Middle Eastern countries) and a selective, value-driven acquisition policy in environmental services.

This growth strategy will be pursued in compliance with the Group’s balance sheet commitments (ratio of net financial debt to the sum of operating cash flow plus payments on operating financial assets between 3.5 and 4), and the maintenance of its dividend distribution policy comprised between 50 and 60% of the recurring net income.


18 These objectives are not part of the profit forecast information that is the subject of the Statutory Auditors’ Report in paragraph 13.2.




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CHAPTER 14
BOARD OF DIRECTORS, MANAGEMENT AND SUPERVISORY BODIES

The Company has been a société anonyme à conseil d’administration since its general shareholders’ meeting held on April 30, 2003, which is a French corporation with a single board of directors. Its shares are quoted on the Euronext Paris market and on the New York Stock Exchange (NYSE). The Company is subject to French regulations, in particular relating to corporate governance, and to regulations applicable to foreign companies listed in the United States.

14.1

Board of Directors of the Company

Composition of the board of directors and business activities conducted by the directors outside of the Company

The board of directors, at its meeting held on March 29, 2007, appointed Mr. Augustin de Romanet de Beaune, the new chief executive officer of the Caisse des Dépôts et Consignations, as Mr. Francis Mayer’s replacement.

The combined general Shareholders’ meeting of May 10, 2007 approved the appointment of Mr. Augustin de Romanet de Beaune and of Mr. Paolo Scaroni who was appointed by the board of directors during its meeting held on December 12, 2006.

The following table sets forth the names and ages of the members of the board of directors as of the date of filing of this reference document, the date of their first appointment, or renewal, as the case may be, to the board and the date of expiration of their current term, their current principal business activities conducted outside of the Company including other directorships, as well as any other positions held over the past five years.



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The directorships set forth below are provided as of January 31, 2008.

Director

Principal business activities outside the Company; Other directorships

Other professional activities carried out over the past 5 years

Henri Proglio

Age 58

Date of first appointment:
4/30/2003

Expiration of term:
GM 2009

Principal Function within the Company:

Chairman and Chief Executive Officer of Veolia Environnement


In France:

Member of the supervisory board of Natixis; Member of the supervisory board of Elior;

Director of EDF;

Director of Casino, Guichard-Perrachon;

Member of the supervisory board of Lagardère;

Member of the supervisory board of CNP Assurances;

Deputy director (censeur) on the supervisory board of Caisse Nationale des Caisses d’Epargne;

Manager of Veolia Eau – Compagnie Générale des Eaux; Chairman of the board of directors of Veolia Propreté;

Chairman of the board of directors of Veolia Transport;

Member of the supervisory boards A and B of Dalkia;

Chairman of the board of directors of Veolia Water;

Chairman of the supervisory board of Dalkia France;

Director of SARP Industries;

Director of Dalkia International;

Director of Société des Eaux de Marseille;

President of Campus Veolia Environnement.


Outside France:

Director of Veolia ES Australia; Director of Veolia Transport Australia; Director of Veolia Environnement Services Holdings Plc; Director of Siram; Director of Veolia ES Asia; Director of Veolia Transport Northern Europe; Director of Veolia Environnement UK Ltd (United Kingdom); Director of Veolia ES North America Corp.

Chairman of the management board of Vivendi Environnement;

Director of Thales;

Director of EDF International;

Director of Vinci;

Member of the supervisory board of CEO;

Member of the supervisory board of CFSP;

Director of Comgen Australia;

Chairman and chief executive officer of Veolia Transport;

Director of Connex Asia Holdings (Singapore);

Director of Connex Leasing (United Kingdom);

Director of Connex Transport AB (Sweden);

Director of Connex Transport UK (United Kingdom);

Director of Coteba Management;

Member of the supervisory board of Société des Eaux de Melun;

Director of Esterra;

Director of SARP ;

Director of B 1998 SL and FCC (Spain);

Director of GRUCYCSA (Spain); Director of Montenay International Corporation (USA);

Director of ONEL (United Kingdom);

Chairman and chief executive officer of Veolia Propreté;

Director of Onyx UK Holdings (United Kingdom);

Director of OWS (USA);

Director of SAFISE;

Chairman and chief executive officer of Veolia Water;

Director of WASCO (f/k/a USFilter, USA).

Jean Azéma

Age 55

Date of first appointment:
4/30/2003

Expiration of term:
GM 2009

Principal function outside the Company:

Chief Executive Officer of Groupama SA

Other current directorships and positions:

Chairman of the management board of Groupama SA;

Permanent representative of CCAMA in Gimar Finance SCA;

Permanent representative of



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Director

Principal business activities outside the Company; Other directorships

Other professional activities carried out over the past 5 years

Principal Function within the Company:

Member of the board of directors of Veolia Environnement

In France:

Chief executive officer of Fédération Nationale Groupama.

Chairman of the board of directors of Groupama International;

Chief executive officer of Groupama Holding and Groupama Holding 2;

Director of Société Générale;

Permanent representative of Groupama SA on the board of directors of Bolloré;

Chairman of the Fédération Française des Sociétés d’Assurance Mutuelle (FFSAM);

Vice Chairman of the Fédération Française des Sociétés d’Assurance.


Outside France:

Member of the supervisory board of Mediobanca.

Groupama Investissement in Gimar Finance SCA;

Permanent representative of CCAMA in SCI Groupama les Massues;

Permanent representative of Groupama Assurances et Services in Bolloré Investissement;

Director of Mediobanca.

Daniel Bouton

Age 57

Date of first appointment:
4/30/2003

Renewal of term:
5/11/2006

Expiration of term:
GM 2012

Principal Function within the Company:

Member of the board of directors of Veolia Environnement

Member of the Nominations and Compensation Committee since April 1, 2005

Principal function outside the Company:

Chairman and Chief Executive Officer of Société Générale

Other current directorships and positions:

Director of Total SA.


Member of the supervisory board of Vivendi Environnement;

Director of Arcelor;

Director of Schneider Electric SA.



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Director

Principal business activities outside the Company; Other directorships

Other professional activities carried out over the past 5 years

Jean-François Dehecq

Age 68

Date of first appointment:
05/11/2006

Expiration of term:
GM 2012

Principal Function within the Company:

Member of the board of directors of Veolia Environnement

Principal function outside of the Company:

Chairman of the board of directors of Sanofi-Aventis.

Other current directorships and positions:

In France:

Director of Air France;

Director of Agence Nationale de la Recherche ;

Chairman of the Association Nationale de la Recherche Technique ;

Member of the Fondation Française pour la recherche sur l’Epilepsie ;

Chairman of the board of ENSAM/Paris Tech (Ecole Nationale supérieure des Arts et Metiers).


Outside France:

Vice-President of EFPIA (European Federation of Pharmaceutical Industries and Associations);

Council member of IFPMA (International Federation of Pharmaceutical Manufacturers Associations).

Director of Pechiney ;

Chairman of the Conservatoire National des Arts et Métiers ;

Chairman of EFPIA (European Federation of Pharmaceutical Industries and Associations) ;

Member of the French board of INSEAD ;

Chief executive officer of Sanofi-Aventis;

Director of Finance and Management; Director of Société Financière des Laboratoires de Cosmétologie Yves Rocher ;

Member of the supervisory board of Agence de l’Innovation Industrielle. 

  

  


Augustin de Romanet de Beaune

Age 46

Date of first appointment:
3/29/2007

Expiration of term:
GM 2009

Principal Function within the Company:

Member of the board of directors of Veolia Environnement

Principal function outside the Company:


Chief executive officer of Caisse des Dépôts et Consignations


Other current directorships and positions:


In France:


President of the supervisory board of SNI;

Member of the supervisory board of CNP;

Director of Dexia, Accor and Icade.

Member of the executive committee and deputy financial and strategic director of Crédit Agricole;

Deputy general secretary to the President of the Republic, Jacques Chirac;

Deputy director of the cabinet of the Prime Minister Jean-Pierre Raffarin.



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Director

Principal business activities outside the Company; Other directorships

Other professional activities carried out over the past 5 years

Jean-Marc Espalioux

Age 56

Date of first appointment:
4/30/2003

Renewal of term:
5/11/2006

Expiration of term:
GM 2012

Principal Function within the Company:

Member of the board of directors of Veolia Environnement

Member of the Accounts and Audit Committee since April 30, 2003

Member of the strategic research, innovation and sustainable development committee since September 14, 2006

Principal function outside the Company:


Chairman and chief executive officer of Financière Agache Private Equity.


Other current directorships and positions:


Director of Air France-KLM;

Deputy director (censeur) of the supervisory board of Caisse Nationale des Caisses d’Épargne;

Member of the supervisory board of Homair Vacances;

Chairman of the supervisory committee of Lyporis (Go Voyages);

Director of the supervisory board of Groupe Flo.


Chairman of the management board of the Groupe Accor.



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Director

Principal business activities outside the Company; Other directorships

Other professional activities carried out over the past 5 years

Paul-Louis Girardot

Age 74

Date of first appointment: 4/30/2003

Renewal of term:
5/11/2006

Expiration of term:
GM 2012

Principal Function within the Company:

Member of the board of directors of Veolia Environnement

Member of the Accounts and Audit Committee since April 1, 2005

Member of the strategic research, innovation and sustainable development committee since September 14, 2006

Principal function outside the Company:


Chairman of the Supervisory Board of Veolia Eau—Compagnie Générale des Eaux


Other current directorships and positions:


In France:


Chairman of the supervisory board of Compagnie des Eaux de Paris;

Member of the supervisory board of Dalkia France;

Member of supervisory boards A and B of Dalkia;

Director of Veolia Transport;

Director of Veolia Propreté;

Director of Veolia Water;

Director of Société des Eaux de Marseille;

Member of the supervisory board of Compagnie des Eaux et de l’Ozone;

Vice-chairman of Comité de Basse Seine Normandie.

Director of Eiffage;

Director of JC Decaux;

Member of the supervisory board of Telecom Développement;

Director of GG TS;

Member of the supervisory board of Vivendi Environnement;

Director of FCC (Spain).

Philippe Kourilsky

Age 65

Date of first appointment: 4/30/2003

Expiration of term:
GM 2009

Principal Function within the Company:

Member of the board of directors of Veolia Environnement

Chairman of the strategic research, innovation and sustainable development committee since September 14, 2006

Principal function outside the Company:


Professor at the Collège de France.


Other current directorships and positions:


Member of the board of directors of Collège International de Philosophie.

Chief executive officer of Institut Pasteur;

Director of Institut Curie;

Director of Institut Pasteur de Lille;

Permanent representative of Institut Pasteur on the board of directors of Aventis Pasteur;

Director of Institut Pasteur de Montevideo (Uruguay), of Institut Pasteur de Hong Kong (China), of Institut Pasteur de Shanghai (China) and of Institut Pasteur de Séoul (South Korea);

Member of the board of directors of Ecole Polytechnique;

Member of the board of directors of LEEM Recherche.



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Serge Michel

Age 81

Date of first appointment: 4/30/2003

Renewal of term:
5/11/2006

Expiration of term:
GM 2012

Principal Function within the Company:

Member of the board of directors of Veolia Environnement

President of the Nominations and Compensation Committee since April 30, 2003

Principal function outside the Company:


Chairman of Soficot SAS


Other current directorships and positions:


In France:


Chairman of CIAM Domaine de Pin Fourcat;

Chairman of SAS Carré des Champs-Elysées;

Chairman of Société Gastronomique de l’Etoile (SAS);

Chairman of Groupe Epicure (SAS);

Member of the supervisory board of Eolfi;

Member of the supervisory committee of Compagnie des Eaux de Paris;

Director of SARP Industries;

Permanent representative of EDRIF on the supervisory committee of Veolia Eau-Compagnie Générale des Eaux;

Member of the supervisory committee of Société des Eaux de Trouville, Deauville et Normandie;

Permanent representative of CEPH on the board of directors of SEDIBEX;

Director of Orsay Finance, Eiffage, LCC and Infonet Services.

Director of VINCI;

Director of SOGEA;

Director of Fomento de Construcciones y Contratas (FCC) Holding (Spain);

Director of FCC Construccion (Spain);

Director of Cementos Portland (Spain);

Director of Vinci Construction;

Director of DB Logistique;

Director of STDB;

Member of the supervisory board of G+H Montage (Germany);

Chairman of the supervisory board of SEGEX.

Baudoin Prot

Age 56

Date of first appointment: 4/30/2003

Expiration of term:
GM 2009

Principal Function within the Company:

Member of the board of directors of Veolia Environnement


Principal function outside the Company:


Director and Chief Executive Officer of BNP Paribas


Other current directorships and positions:


In France:


Director of Pinault-Printemps-Redoute; Director of Accor.


Outside France:


Director of Pargesa Holding SA (Switzerland);

Director of ERBE (Belgium);

Director of BNL (Italy);

Director of BNL Progetto SpA (Italie).

Director of Pechiney;

Director of BNP Intercontinentale SA;

Permanent representative of BNP Paribas on the supervisory board of Fonds de Garantie des Dépôts;

Chairman of the board of directors of BNP Paribas E3 and BNP Paribas E3 SAS;

Permanent representative of BNP Paribas on the supervisory board of Accor;

Member of the supervisory board of Cetelem;

Member of the supervisory board of Eurosecurities Partners.



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Director

Principal business activities outside the Company; Other directorships

Other professional activities carried out over the past 5 years

Georges Ralli

Age 59

Date of first appointment: 4/30/2003

Renewal of term:
5/11/2006

Expiration of term:
GM 2012

Principal Function within the Company:

Member of the board of directors of Veolia Environnement


Principal function outside the Company:


Chief Executive of European Investment Banking Business of Lazard Group LLC (USA);

Chief executive officer Vice President and Managing Partner of Lazard Frères SAS


Other current directorships and positions:


In France:


ExecutiveVice President and Managing Partner of Compagnie Financière Lazard Frères SAS;

President of Maison Lazard SAS;

Chairman and managing partner of Lazard Frères Gestion SAS;

Chairman-Chief Executive Officer and director of Lazard Frères Banque;

Director of Fonds Partenaires Gestion;

Director of VLGI;

Director of Chargeurs and Silic;

Deputy director (censeur) of Eurazeo.


Outside France:


Deputy Chairman of Lazard Group LLC (USA);

Co-chairman of the European Investment Banking Committee of Lazard Group LLC (USA);

Member of the European advisory board of Lazard Group LLC (USA);

Member of the executive committee of Lazard Strategic Coordination Company LLC (USA);

Member of the board of directors of Lazard & Co. Srl (Italie).

Deputy chief executive officer of Lazard Frères Banque SA;

Director of Lazard Régions SA;

Director of Eurazeo;

Member of the supervisory boards of Vivendi Environnement and Eurazeo;

Permanent representative of Lazard Frères Banque on the board of directors of Direct Finance SA;

Director of Crédit Agricole Lazard Financial Products (UK);

Managing Partner of Maison Lazard SAS ;

Managing Partner of Partena (SCS).



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