20-F 1 lveolia20f.htm VEOLIA ENVIRONNEMENT FORM 20-F VEOLIA ENVIRONNEMENT Form 20-F

As filed with the Securities and Exchange Commission on April 13, 2012

 


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F

    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2011
OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-15248

VEOLIA ENVIRONNEMENT

(Exact name of Registrant as specified in its charter)

N/A

36/38, avenue Kléber,

Republic of France

(Translation of Registrant’s name into English)

75116 Paris, France

(Jurisdiction of incorporation or organization)

(Address of principal executive offices)
Eric Haza, Group General Counsel, 36/38 avenue Kléber, 75116 Paris France 011 33 1 71 75 00 75
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

   

Ordinary shares, nominal value €5 per share represented by
American Depositary Shares
(as evidenced by American Depositary Receipts),
each American Depositary Share representing one ordinary share*

 

The New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
519,652,960 ordinary shares, nominal value €5 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:

Yes        

    No     

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

Yes        

    No     

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes        

    No     

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes        

    No     

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    

Accelerated filer    

Non-accelerated filer    

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP    

International Financial Reporting Standards as issued by the International Accounting Standards Board    

Other    

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17       

    Item 18   

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes        

    No     

* Listed, not for trading or quotation purposes, but only in connection with the registration of the American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission.







FORWARD-LOOKING STATEMENTS

We make some forward-looking statements in this document. When we use the words “aim(s),” “expect(s),” “feel(s),” “will,” “may,” “believe(s),” “anticipate(s)” and similar expressions in this 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 this document. In particular, from time to time in this 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. Some of 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 anticipated. 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 this document. Except to the extent required by applicable securities laws, we undertake no obligation to publish updated forward-looking statements to reflect events or circumstances after the date of this 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 Item 3. “Key Information—Risk Factors,” Item 5. “Operating and Financial Review and Prospects,” Item 8. “Financial Information—Significant Changes” and Item 11. “Quantitative and Qualitative Disclosures about Market Risk.”

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

Information on websites referenced herein is not incorporated by reference in this annual report.









TABLE OF CONTENTS

ITEM 1.     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

1

ITEM 2.     OFFER STATISTICS AND EXPECTED TIMETABLE

1

ITEM 3.     KEY INFORMATION

1

ITEM 4.     INFORMATION ON THE COMPANY

13

ITEM 4A.  UNRESOLVED STAFF COMMENTS

86

ITEM 5.     OPERATING AND FINANCIAL REVIEW AND PROSPECTS

87

ITEM 6.     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

148

ITEM 7.     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

202

ITEM 8.     FINANCIAL INFORMATION

205

ITEM 9.     THE OFFER AND LISTING

217

ITEM 10.   ADDITIONAL INFORMATION

221

ITEM 11.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

239

ITEM 12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

240

ITEM 12D. AMERICAN DEPOSITARY SHARES

240

ITEM 13.   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

242

ITEM 14.   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

242

ITEM 15.   CONTROLS AND PROCEDURES

242

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

243

ITEM 16B. CODE OF ETHICS

244

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

244

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

245

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

245

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

246

ITEM 16G. CORPORATE GOVERNANCE

247

ITEM 17.   FINANCIAL STATEMENTS

249

ITEM 18.   FINANCIAL STATEMENTS

249

ITEM 19.   EXHIBITS

249





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PART I

ITEM 1.     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

ITEM 2.     OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

ITEM 3.     KEY INFORMATION

SELECTED FINANCIAL DATA

You should read the following selected financial data together with Item 5. “Operating and Financial Review and Prospects” and our Consolidated Financial Statements contained in Item 18. “Financial Statements.” Our Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and with IFRS as adopted by the European Union. See Item 5. “Operating and Financial Review and Prospects” for a discussion of accounting changes, business combinations and dispositions of business operations that affect the comparability of the information provided below.



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At and for the year ended December 31,

 

(in US$) (1)

(in €)

(millions, except per share amounts) (3)(4)

2011

2011

2010

2009

2008

2007

INCOME STATEMENT DATA:

      

Revenue

38,360.6

29,647.3

28,764.2

27,847.7

29,063.1

25,303.3

Operating income

1,316.2

1,017.2

1,982.1

1,788.9

1,732.5

2,281.8

Net income from continuing operations

(406.5)

(314.2)

819.7

791.2

501.7

1,233.7

Net income (loss) from discontinued operations

(3.1)

(2.4)

29.3

25.6

193.4

(4.8)

Non-controlling interests

224.1

173.2

290.5

257.8

304.1

326.9

Net income / (loss) attributable to owners of the Company

(633.8)

(489.8)

558.5

559.0

391.0

902.0

Net income/ (loss) attributable to owners of the Company per share—Basic

(1.28)

(0.99)

1.16

1.18

0.84

2.07

Net income /(loss) attributable to owners of the Company per share—Diluted

(1.28)

(0.99)

1.16

1.18

0.84

2.05

Net income / (loss) from continuing operations attributable to owners of the Company per share—Basic

(1.26)

(0.97)

1.07

1.15

0.61

2.16

Net income / (loss) from continuing operations attributable to owners of the Company per share—Diluted

(1.26)

(0.97)

1.07

1.15

0.61

2.14

Dividends per share (in €)

 

0.70 (2)

1.21

1.21

1.21

1.21

Dividends per share (in US$) (5)

0.91

0.91

1.62

1.74

1.68

1.78

Number of shares (adjusted to reflect changes in capital)

519,652,960

519,652,960

499,126,367

493,630,374

472,576,666

471,762,756

       

BALANCE SHEET DATA (AT PERIOD END):

      

Equity attributable to owners of the Company

9,147.5

7,069.7

7,875.9

7,397.4

6,961.3

7,588.7

Equity attributable to non-controlling interests

3,578.2

2,765.4

2,928.5

2,670.1

2,530.5

2,577.8

Total assets

65,219.8

50,405.6

51,427.3

49,754.7

49,086.2

46,282.7

Total non-current assets

36,820.6

28,457.1

31,055.4

29,558.5

30,010.8

28,948.0

Total non-current liabilities

27,030.0

20,890.3

22,506.5

22,028.9

21,320.0

18,045.4

       

CASH FLOW DATA:

      

Net cash flow from operating activities

3,809.2

2,944.0

3,456.6

3,601.3

3,359.7

3,276.2

Operating Cash Flow before changes in working capital

4,338.3

3,352.9

3,718.7

3,559.4

3,781.5

3,859.1

Net cash from (used in) investing activities

(1,471.9)

(1,137.6)

(1,817.2)

(1,351.9)

(2,964.8)

(3,585.0)

Net cash used in financing activities

(1,780.3)

(1,375.9)

(1,878.4)

(488.4)

309.6

865.8

Purchases of property, plant and equipment

(2,922.0)

(2,258.3)

(2,083.7)

(2,104.8)

(2,390.3)

(2,160.3)

(1)  For your convenience we have converted the euro amounts of our selected financial data into U.S. dollars using the December 31, 2011 rate of US$1.00 = €0.77286. This does not mean that we actually converted, or could have converted, those amounts into U.S. dollars on this or any other date.

(2)  Amount of dividend per share to be proposed at the Annual Shareholders' Meeting of May 16, 2012.

(3)  In accordance with IFRS 5, Non-current assets held for sale and discontinued operations, the Income Statements of:

•     the Clemessy and Crystal entities in the Energy Services division, divested in December 2008;

•     the entities of the U.S. incineration activity in Environmental Services (Montenay International);

•     the Dutch activities in the Water division divested in the second half of 2010;

•     Transportation activities as a whole (which are in the process of being sold), German activities in the Energy Services division, Norway activities in the Environmental services division,

•     household assistance services (Proxiserve) held jointly by the Water and Energy Services divisions, divested in December 2011, and

•     urban lighting activities (Citelum) in the Energy Services division,

are presented in a separate line, “Net income from discontinued operations,” for the years ended December 31, 2011, 2010, 2009, 2008 and 2007. Furthermore, as the divestiture process for Water activities in Gabon and Pinellas incineration activities in the United States were interrupted in the first and second semesters of 2011 respectively, these activities are no longer presented in Net income from discontinued operations.

(4)  Figures for the years ended December 31, 2010, 2009, 2008 and 2007 have been adjusted for the application of IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors - See Note 1 to the Consolidated Financial Statements.

(5)  Based on relevant year-end exchange rate.




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Dividends

Under French law and our articles of association (statuts), our statutory net income in each fiscal year, as increased or reduced, as the case may be, by any profits or losses carried forward from prior years, less any contributions to legal reserves, is available for distribution to our shareholders as dividends, subject to other applicable requirements of French law and our statuts.

At our General Shareholders’ Meeting to be held on May 16, 2012, our shareholders will vote on a dividend payment proposed to be €0.70 per share in respect of our 2011 fiscal year, which will be paid beginning on June 18, 2011. The dividend will be payable in cash or in shares, and the period during which shareholders may choose between being paid the dividend in cash or in shares, subject to applicable legal restrictions, will begin on May 22, 2012 and end on June 6, 2012. Subject to the approval of the General Shareholders’ Meeting, new shares will be issued with no discount off of the average opening price on Euronext Paris of the shares over the twenty trading days prior to the day of the General Shareholders’ Meeting approving the dividend, less the amount of the dividend, rounded up to the next highest euro cent. We expect that Bank of New York Mellon as depositary will make this option available to ADR holders. On June 17, 2011, we paid a dividend of €1.21 per share in respect of our 2010 fiscal year. On June 9, 2010, we paid a dividend of €1.21 per share in respect of our 2009 fiscal year. On June 8, 2009, we paid a dividend of €1.21 per share in respect of our 2008 fiscal year. On May 27, 2008, we paid a dividend of €1.21 per share in respect of our 2007 fiscal year. On May 15, 2007, we paid a dividend of €1.05 per share in respect of the 2006 fiscal year.

Dividends paid to holders of our ADSs and non-French resident holders of our shares are subject to a French withholding tax generally at a rate of 30%. However, U.S. holders that are entitled to and comply with the procedures for claiming benefits under the applicable tax treaty may be subject to a 15% rate of withholding tax. See Item 10. “Additional Information—Taxation” for a summary of the material U.S. federal and French tax consequences to holders of shares and ADSs. Holders of shares or ADSs should consult their own tax advisers with respect to the tax consequences of an investment in the shares or ADSs. In addition, dividends paid to holders of ADSs will be subject to a charge by the depositary for any expenses incurred by the depositary of the ADSs in the conversion of euro to dollars.



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Exchange Rate Information

Share capital in our Company is represented by ordinary shares with a nominal value of €5 per share (generally referred to as “our shares”). Our shares are denominated in euro. Because we intend to pay cash dividends denominated in euro, exchange rate fluctuations will affect the U.S. dollar amounts that shareholders will receive on conversion of dividends from euro to dollars.

The following table shows the euro/U.S. dollar exchange rate from 2007 through April 6, 2012 based on the noon buying-rate, as defined below, expressed in U.S. dollars per euro. The information concerning the U.S. dollar exchange rate is based on the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”). We provide the exchange rates below solely for your convenience. We do not represent that euros were, could have been, or could be, converted into U.S. dollars at these rates or at any other rate. For information regarding the effect of currency fluctuations on our results of operations, see Item 5. “Operating and Financial Review and Prospects.”

Month
U.S. dollar/Euro

Period End

Average rate*

High

Low

April 2012 (through April 6th, 2012)

1.31

1.32

1.33

1.31

March 2012

1.33

1.32

1.33

1.30

February 2012

1.34

1.32

1.35

1.31

January 2012

1.31

1.29

1.32

1.27

December 2011

1.30

1.32

1.35

1.29

November 2011

1.35

1.36

1.38

1.32

October 2011

1.39

1.37

1.42

1.33

     

Year
U.S. dollar/Euro

    

2011

1.30

1.39

1.49

1.29

2010

1.34

1.33

1.45

1.20

2009

1.43

1.39

1.51

1.25

2008

1.39

1.47

1.60

1.24

2007

1.47

1.38

1.49

1.29

*    The average of the Noon Buying Rates on the last business day of each month (or portion thereof) during the relevant period for year average; on each business day of the month (or portion thereof) for monthly average.


Solely for the convenience of the reader, this annual report contains translations of certain euro amounts into U.S. dollars. These translations should not be construed as representations that the converted amounts actually represent such U.S. dollar amounts or could have been or will be converted into U.S. dollars at the rate indicated or at all. Unless otherwise specified, the translations from euro to U.S. dollars in this annual report are based on US$1.00 = €0.7729, the Noon Buying Rate on December 31, 2011. On April 12, 2012, the exchange rate as published by Bloomberg at approximately 1:00 p.m. (New York time) was US$1.3164 per one euro.


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RISK FACTORS

You should carefully consider the risk factors described below in addition to the other information presented in this document.

Risks relating to the environment in which we conduct our operations

We may fail to maintain or increase our competitiveness and adapt our business model to rapid changes in environment-related businesses.

Our business is highly competitive and requires substantial human and capital resources and cutting-edge technical expertise in numerous areas. Large international competitors, local niche companies and companies whose structure costs or profitability requirements are lower than ours (in particular public sector operators such as mixed public-private companies in France and Stadwerke in Germany) serve each of the markets in which we compete. Accordingly, we must make constant efforts to reduce our cost structure and remain competitive and convince potential customers of the quality and cost value of our service offerings. We may also need to develop new technologies and services in order to maintain or increase our competitive position, which could result in significant costs.

In addition, our contracts may not be renewed at the end of their term, which, in the case of major contracts, may require us to implement costly reorganization measures. When the contract does not provide for the transfer of the related assets and employees to the succeeding operator and/or appropriate compensation to cover our costs of termination, the impact on our results could be substantial. Public authorities may also increasingly seek to assume direct management of water or waste services (particularly under management contracts), increasing the risk of non-renewal.

Even when we are able to renew our contracts, the new terms may be less favorable than the prior terms. Moreover, certain contracts provide for periodic renegotiation of terms, and we may face pressure to agree to less favorable terms upon renegotiation.

Our cost savings and transformation plans may fail to generate the expected cost savings.

We have set cost reduction targets under two plans, but we might not be able to realize the savings objectives in these plans. In 2003, we began our “Efficiency Plan” to save costs, which we continue to implement. In 2011, we began to implement the new “Convergence Plan,” which is part of the transformation of our organization, aimed at standardizing processes, reinforcing the control and steering of operations and streamlining our structure. Key features of these plans are described under Item 4. “Information on the Company.”

These plans could take longer to implement than expected and, with respect to the Convergence Plan, require more costs than planned. In addition, our cost reduction measures are based on current conditions and do not take into account any future cost increases that could result from changes in our industry or operations, including new business developments, wage and price increases or other factors. Restructuring and disposals may harm our labor relations and public relations and could lead to disruptions. Our failure to successfully implement these plans, or the possibility that these efforts may not generate the level of cost savings we expect going forward or may result in higher than expected costs, could negatively affect our results of operations and financial condition.

We may not be able to realize all of the divestments that we are hoping to make. If we do, the proceeds may be lower than we currently expect.

We have announced a divestment program under which we will seek to sell €5 billion of assets over the next two years. In particular, we plan to withdraw progressively from Veolia Transdev, to sell our rate-regulated Water activities in the United Kingdom and solid waste activities in the United States, and to continue to streamline our geographical coverage. Divestitures have inherent risks, including possible delays in closing transactions (including potential difficulties in obtaining regulatory approvals), the risk of lower-than-expected sales proceeds for the divested businesses and unexpected costs associated with the separation of the business to be sold from our integrated systems. We may also lose valuable human resources and significant expertise with respect to financial services, human resources, real estate and general services.



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We have conducted and may continue to conduct external growth transactions through acquisitions and/or mergers, which could have a less favorable impact on our activities and results than anticipated, or which could affect our financial condition.

We have conducted and may continue to carry out external growth transactions, in varying legal forms, in particular through acquisitions of businesses or companies or through mergers, and of varying sizes, some of which may be significant at the Group level. These external growth transactions involve numerous risks, including the following: (i) the assumptions underlying the business plans supporting the valuations may prove inaccurate, in particular with respect to synergies and expected commercial demand; (ii) we may fail to successfully integrate the companies acquired and their technologies, products and personnel; (iii) we may fail to retain key employees, customers and suppliers of the companies acquired or merged; (iv) we may be required or wish to terminate pre-existing contractual relationships, which could prove costly and/or be performed at unfavorable terms and conditions; (v) we may increase our indebtedness to finance these acquisitions or mergers; and (vi) we may be forced to divest or to limit the growth of certain businesses so as to obtain the necessary authorizations, in particular with respect to anti-trust authorizations. As a result, the expected benefits of completed or future acquisitions, mergers or other external growth transactions may not materialize within the time periods or to the extent anticipated, or may impact our financial condition.

Currency exchange and interest rate fluctuations may negatively affect our financial results and the price of our shares.

We hold assets, earn income and incur expenses and liabilities in a variety of currencies. Our financial statements are presented in euros. Accordingly, when we prepare our financial statements, we must translate our foreign currency-denominated assets, liabilities, income and expense items into euros at applicable exchange rates. Consequently, fluctuations in the exchange rate of the euro against these other currencies can affect the value of these items in the financial statements, even if their intrinsic value is unchanged in the original currency. For example, an increase in the value of the euro may result in a decrease in the reported value, in euros, of our investments held in foreign currencies.

We are also subject to risks related to fluctuations in interest rates. As of December 31, 2011, 47.3% of our gross financial debt bore interest at floating rates after taking into account hedging instruments and fair value remeasurement of fixed-rate debt (see Note 29.1.1 to our Consolidated Financial Statements). Fluctuations in interest rates may also affect our future growth and investment strategy since a rise in interest rates may force us to finance acquisitions or investments or refinance existing debt at a higher cost in the future.

Our business is subject to greenhouse gas market and emission allowance risks.

As an operator of energy installations, we are exposed to the inherent risks of the greenhouse gas allowance system introduced by the European Union in the framework of the Kyoto Protocol. The rise in greenhouse gases in the atmosphere led certain States and the international community to introduce regulatory provisions. The Kyoto Protocol, which was signed in December 1997, came into force in February 2005. In accordance with this Protocol, Directive 2003/87/EC of October 13, 2003 created an emission allowance trading system within the European Union, known as ETS (Emission Trading Scheme). The resulting system, which began in 2005, led to the creation of National Allowance Allocation Plans (NAAP). These plans are being implemented in several phases. The pilot phase (NAAP 1), which aimed to set a price on carbon and put in place national registers, ran from January 1, 2005 to December 31, 2007. The ongoing phase 2 (2008-2012) reflects the implementation of the Kyoto Protocol. Allowances are granted free of charge to facilities. If a company exceeds its allowance then it must either adapt its facilities or purchase extra allowances, at market price, from a company that does not need them. Phase 3 (2013-2020) will be a strengthening of the system with a view to reducing greenhouse gas emissions by 20% by 2020 (compared to 1990). As a consequence of this, from January 1, 2013, some of the allowances needed by our Group (Dalkia) will have to be purchased (through an auction system), which is expected to generate additional costs.



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In this context, we are exposed to a double-sided risk: first, we may not be able to achieve the emission reductions imposed by the system over a number of years, which would result in our Group being required to purchase additional greenhouse gas allowances. Second, we may not be able to adjust our pricing policy so as to pass on the extra cost of purchasing these allowances from January 1, 2013.

Our business operations in some countries may be subject to political risks.

Sales outside of France generated 61% of total Group revenue in 2011. While our operations are concentrated mainly in Europe and the United States, we conduct business in markets around the world. We also conduct business in certain emerging countries. In a complex and sometimes unstable international environment, risks relating to conducting business in certain countries can affect our financial position, results of operations, reputation and outlook. In particular, given the nature of our activities and the term of our contracts, our results can partially depend on external operating conditions, including the geopolitical, economic, social or financial situation or the level of development, working conditions and environmental conditions of a given country.

The risks associated with conducting business in some countries can include the non-payment or slower payment of invoices, which is sometimes aggravated by the absence of legal recourse for non-payment, nationalization, increased foreign exchange risk and currency restrictions on fund repatriation. Furthermore, we may not be able to obtain sufficient financing for our operations in these countries. The setting of public utility fees and their structure may depend on political decisions that can impede any increase in fees for several years, such that they no longer cover service costs and appropriate compensation for a private operator. Major amendments to or the uneven application of regulations, social unrest, local authority claims challenging the tax system or the application of contractual terms, foreign exchange control measures and other negative actions or restrictions imposed by governments can also significantly affect operating conditions, particularly in emerging countries. We may not be able to insure or hedge against these risks. Furthermore, we may find we are unable to defend our rights before a court of law in certain emerging countries should we come into conflict with their governments or other local public entities.

The destabilization of a country may generate emergency situations and exceptional risks.

In certain cases, a combination of factors could lead to the general political and economic destabilization of a country in which we operate and even make it difficult for us to conduct business because of reduced security and stability. The risk of nationalization or expropriation of private assets may also be higher for companies of foreign origin. In addition, very large-scale or repetitive natural disasters may also lead to the exceptional disorganization of certain infrastructure (such as roads and means of communication) on which we depend for the conduct of our business and may cause damage to the infrastructure for which we are responsible. We could thus temporarily be unable to perform services according to the conditions defined by contract.

Our business operations are subject to criminal and terrorist risks.

Our activities must comply with stringent regulations that seek to safeguard sites, resources and infrastructure from criminal or terrorist acts. Water is a strategic resource that contributes to public health. In the areas of public transportation, energy services and waste management, our installations and vehicles may become terrorist targets around the world. In addition, our employees work and travel in countries where the risk of criminal acts, kidnapping or terrorism is either temporarily or permanently high. As a result, despite the preventive and safety measures implemented by us and the insurance policies subscribed, a criminal or terrorist attack could negatively affect our reputation or operating results.



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Risks Relating to Our Operations

Changes in the prices of energy and other commodities or in the price of recycled materials may reduce our profits.

The prices of energy and other commodities can be subject to significant fluctuations and represent major operating expenses of our businesses (particularly diesel fuel, gas and electricity). Although most of our contracts include price adjustment provisions that are intended to pass on any changes in the price of our supplies, often using price indexing formulas, certain events may prevent us from being fully protected against such increases, such as time lags between fuel price increases and the moment when we are authorized to increase prices to cover the additional costs or a mismatch between the price-increase formula and the cost structure (including taxes). A sustained increase in supply costs and/or related taxes could undermine our operations by increasing costs and reducing profitability, to the extent that we are unable to increase our prices sufficiently to cover such additional costs.

In addition, a substantial portion of our Environmental Services division’s revenue is generated by its sorting-recycling and trading businesses, which are particularly sensitive to fluctuations in the price of recycled raw materials (paper and ferrous and non-ferrous metal). A significant and long-term drop in the price of recycled raw materials, combined with the impact of economic conditions on volumes, has affected, and could continue to affect, our operating results.

Our business is affected by variations in weather conditions.

Varying weather conditions can have an impact on our results of operations. For example, Dalkia generates 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, while in the water sector, household water consumption tends to be highest between May and September in the northern hemisphere. Accordingly, these two businesses and therefore our results of operations may be affected by significant deviations from seasonal weather patterns.

Our long-term contracts may limit our capacity to quickly and effectively react to general economic changes.

We conduct the majority of our operations through long-term contracts. The initial circumstances or conditions under which we enter 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 such changes and restoring the initial balance of the contract, but they may not be fully effective. The implementation of such mechanisms may be triggered more or less automatically by the occurrence of a given event (for instance, price indexing clauses), or they may call for a procedure to revise or amend the contract with the agreement of both parties or of a third party. Accordingly, we may not be free to adapt our compensation, whether this consists of a price paid by the customer or a fee levied on end users based on an agreed-upon scale, in line with changes in our costs and demand. These constraints on us are exacerbated by the long-term nature of contracts. In all cases and most particularly with regard to public service management contracts, our actions must remain within the scope of the contract and ensure continuity of service. We cannot terminate unilaterally and suddenly a business that we believe is unprofitable, or change its features, except, under certain circumstances, in the event of proven misconduct by the customer.

Certain of our operations are performed under contracts containing performance objectives that we must fulfill in order to be compensated or the non-fulfillment of which would result in the imposition of penalties.

Through Veolia Water Solutions & Technologies, we perform “turnkey” contracts for the design and construction of infrastructure in the water sector, compensated at non-adjustable fixed prices. Our compensation is often subject to the fulfillment of certain performance objectives, the non-fulfillment of which results in imposition of penalties.



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The risks to which we are exposed under these types of contracts are generally technical (design and choice of tailored versus tried-and-tested technology), operational (site management during the performance, acceptance and warranty phases, ability to use a technology, that may be imposed by the customer) and economic (fluctuations in raw material prices, other supply prices or foreign exchange rates).

In accordance with standard practice, to the extent possible we seek to cover these risks contractually. We may, however, encounter difficulties over which we have no control, relating, for example, to the complexity of certain infrastructure, weather or economic variations, construction contingencies, the purchase and ordering of equipment and supplies, or changes in performance schedules. In certain cases, we must rely on existing information or studies provided by the customer that may prove inaccurate or inconsistent, or we may be required to use existing infrastructure with poorly-defined operating characteristics. These may lead to non-compliance with contract specifications or generate additional costs and construction delays, triggering, in certain cases, reductions in our revenue or contractual penalties, which could negatively affect our financial position, results or outlook. In certain cases, we must take into consideration public or private customer requests for additional work, whether or not such changes were provided for contractually. These changes may result in changes in the services provided, necessary investments or the invoicing method. While contracts generally include clauses providing for the payment of additional compensation should additional work be requested or should events such as those detailed above occur, we are exposed to the risk of not obtaining amounts sufficient to cover the resulting additional costs, or of obtaining such amounts only after the passage of time.

The rights of governmental authorities to terminate or modify our contracts unilaterally could have a negative impact on our revenue and profits.

Contracts with public authorities make up a significant percentage of our revenue. In numerous countries, including France, public authorities may unilaterally amend or terminate contracts under certain circumstances. While we often are entitled to compensation, this may not be true in all cases, and even when compensation is due, we may not be able to obtain full or timely compensation should a contract be unilaterally terminated by the relevant public authority.

We may make significant investments in projects without being able to obtain the required approvals for the project.

To engage in business, in most cases we must sign 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. We may invest significant resources in a project or public tender without obtaining the right to perform the planned activity or sufficient compensation to cover the cost of our investment. This could arise due to failure to obtain necessary permits or authorizations, or approval from antitrust authorities, or because authorizations are granted contingent on our abandoning certain of our development projects. This result increases the overall cost of our activities and could potentially, were the cost of failure to become too high, force us to abandon certain projects. Should such situations become more frequent, the scope and profitability of our business could be affected.

We incur significant costs of compliance with various environmental, health and safety laws and regulations.

We have incurred and will continue to incur significant costs and other expenditures to comply with our environmental, health and safety obligations as well as in sanitary risk management, in particular with respect to water emissions, drinking water quality, waste processing, soil and ground water contamination, the quality of smoke emissions and gas emissions. We have incurred and will continue to incur significant costs and other expenditures to comply with our environmental, health and safety obligations as well as in sanitary risk management. We are continuously required to incur expenditures to ensure that the installations that we operate comply with applicable legal, regulatory and administrative requirements, including specific precautionary and preventative measures, or to advise our customers so that they undertake the necessary compliance work themselves. Failure by the client to meet its compliance obligations could be prejudicial to us as operator and adversely affect our reputation and growth capacity.



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Furthermore, regulatory bodies have the power to launch proceedings which could lead to the suspension or cancellation of permits or authorizations held by us or injunctions to suspend or cease certain activities. These measures may be accompanied by fines and civil or criminal sanctions which could have a significant negative impact on our reputation, activities, financial position, results or outlook. If we are unable to recover this expenditure through higher prices, this could adversely affect our operations and profitability.

Each of our businesses, moreover, may become subject to stricter general or specific laws and regulations, and correspondingly incur greater compliance expenditures in the future. Moreover, the scope of application of environmental, health, safety and other laws and regulations is increasing constantly. As environmental laws and regulations are constantly being amended and tightened, these amendments can require significant compliance expenditure or investment that we may not be able to foresee.

Our operations and activities may cause damage or lead us to incur liability that we might be required to compensate or repair.

The increasingly broad laws and regulations expose us to greater risks of liability, in particular environmental liability, including in connection with assets that we no longer own and activities that have been discontinued. In addition, we may be required to pay fines, repair damage or undertake improvement work, even when we have conducted our activities with all due care and in full compliance with operating permits. In addition, due to lack of scientific data or studies, we may not be aware of risks to human health or the environment caused by our operations that may be identified in the future.

We could be the subject of legal action to compensate damage caused to individuals, property or the environment (including the ecosystem). While our policy is to limit our liability contractually, implement prevention and protection measures and take out insurance policies covering our main accident and operational risks, these precautions may be insufficient, leaving us exposed to significant liability.

In addition, our subsidiaries in France or abroad may, under environmental services outsourcing contracts, perform activities at certain environmentally sensitive sites known as high threshold Seveso sites (classified “AS” under the French “Installations Classified for the Protection of the Environment” (ICPE) system) or low threshold Seveso sites (or the foreign equivalent), operated by industrial customers (particularly petrochemical or chemical industry sites). With respect to such sites, we must manage 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 us to customer sites. The regulatory regime governing Seveso facilities applies only within the European Union, but we operate several similar sites outside of the European Union that are often subject to the same level of stringent regulation.

Our business operations may subject our employees to health and safety risks.

Our business operations require significant human resources. The intensity, nature and location of the work required, including on public roads and on customer sites, makes maintaining our employees’ safety particularly important. Despite our specific attention to the health and safety of our employees, which may require us to incur significant costs, we may nonetheless face increased work accidents and illness (both in frequency and severity).

Human resources management issues and industrial disputes could have a negative impact on our image and business.

Our operations, which we carry out on behalf of industrialists or localities, include the provision of essential services and always require human labor for their implementation. We operate in diverse locations, sometimes under difficult working conditions. We cannot guarantee that we will not encounter labor disputes (strikes, walkouts or the destruction of property in extreme cases) that could interrupt our operations over a significant period of time. In particular, our transformation, including the implementation of our Convergence Plan, which includes significant reorganization and the refocusing of our activities on certain businesses and geographical regions, could cause industrial relations to deteriorate and negatively affect productivity and, consequently, our results. Any such disputes could have an adverse effect on our financial condition as well as on our reputation.



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We may be unable to maintain and recruit employees with the skills necessary for our evolving business.

Our activities require a wide range of continually evolving skills in order to keep up with changes in our sector, in particular in our environment-related business. We may be unable to seek out new profiles, train staff in new techniques and recruit and train managers in every country where we do business in a timely manner. The implementation of our Convergence Plan, which involves significant reorganization, may exacerbate this risk.

There are legal matters in which adverse outcomes could have a material adverse effect on our business, results of operations and financial condition.

New legal proceedings and inquiries involving our Group were initiated in 2011, including a procedure launched by the European Commission investigating the possible existence of an anti-competitive cartel in the water sector, several actions concerning Société Nationale Maritime Corse Méditerranée (SNCM) and certain State Aid payments received, as well as a purported class action brought before the United States District Court for the Southern District of New York. Unfavorable outcomes in these matters, or in other matters, could materially and adversely affect our results of operations, financial condition, or business. See “Item 8. Financial Information — Consolidated Financial Statements and Other Financial Information — Litigation” and Note 38 to our Consolidated Financial Statements.

The unavailability of our information systems due to disaster or successful hacking could have a material adverse effect on our business, results of operations and financial condition.

Our operations and the management of our business, including the finance and human resources components, depend on the secure and reliable performance of our information systems. The unavailability of information systems because of a disaster or successful hacking involving one or more of these information systems could have major consequences on the quality or even the continuity of service delivered internally and the availability, integrity and confidential nature of our data. Despite all of the efforts and resources implemented to protect and secure our information systems, we may still be the target of a successful cyber attack. Any compromise of our security could result in a loss of confidence in our security measures and subject us to litigation, civil or criminal penalties, and adverse publicity that could adversely affect our financial condition and results of operations.

Risks Relating to Our Shares and ADSs

Because preemptive rights may not be available for U.S. persons, the ownership percentages of our U.S. shareholders may be diluted in the event of a capital increase of our Company.

Under French law, shareholders have preemptive rights (droits préférentiels de souscription) to subscribe, on a pro rata basis, for cash issuances of new shares or other securities giving rights to acquire additional shares. U.S. holders of our shares may not be able to exercise preemptive rights for our shares unless a registration statement under the U.S. Securities Act of 1933, as amended (“Securities Act”), is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not required to file registration statements in connection with issues of new shares or other securities giving rights to acquire shares to our shareholders. As a result, we may from time to time issue new shares or other securities giving rights to acquire additional shares at a time when no registration statement is in effect. If we undertake future unregistered capital increases, holders of our ADSs and U.S. holders of our shares may be subject to dilution, which may not be fully compensated by the proceeds from the sale of rights.



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We are permitted to file less information with the U.S. Securities and Exchange Commission (SEC) than a company incorporated in the United States.

As a “foreign private issuer,” we are exempt from rules under the U.S. Securities Exchange Act of 1934, as amended (“Exchange Act”), that impose some disclosure and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. Additionally, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our shares. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies with securities registered under the Exchange Act. Accordingly, there may be less information concerning our Company publicly available from time to time than there is for U.S. companies at those times.

The ability of holders of our ADSs to influence the governance of our Company may be limited.

Holders of our ADSs may not have the same ability to influence corporate governance with respect to our Company as would shareholders in some U.S. companies. For example, the ADS depositary may not receive voting materials in time to ensure that holders of our ADSs can instruct the depositary to vote their shares. In addition, the depositary’s liability to holders of our ADSs for failing to carry out voting instructions or for the manner of carrying out voting instructions is limited by the deposit agreement. Finally, except under limited circumstances, our shareholders do not have the power to call shareholders’ meetings.

Our auditors, like other independent registered public accounting firms operating in France, are not permitted to be subject to inspection by the Public Company Accounting Oversight Board, and as such, investors may be deprived of the benefits of such inspection.

As a public company, our auditors are required by U.S. law to undergo regular Public Company Accounting Oversight Board (PCAOB) inspections to assess their compliance with U.S. law and professional standards in connection with their audits of financial statements filed with the SEC. Under French law, however, the PCAOB is currently unable to inspect the audit work and practices of our auditors. As a result of this obstacle, investors who rely on our auditors’ audit reports are deprived of the benefits of PCAOB inspections of auditors, which may identify deficiencies in those firms’ audit procedures and quality control procedures and improve future audit quality.


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ITEM 4.     INFORMATION ON THE COMPANY

HISTORY AND DEVELOPMENT OF THE COMPANY

We are a leading global provider of environmental management services, which include water and wastewater services, waste management services, energy services (excluding the production, trading and sale of electricity, other than production through co-generation) and transportation services. Our clients include a wide range of public authorities, industrial and commercial services customers and individuals around the world.

The legal and commercial name of our Company is “Veolia Environnement.” Our Company is a société anonyme, a form of limited liability corporation, incorporated in 1995 pursuant to the French Commercial Code for a term of 99 years. Our registered office is located at 36/38, avenue Kléber, 75116 Paris, France, and the phone number of that office is (+33 1) 71 75 00 00. Our agent in the United States is Terri Anne Powers, Director of North American Investor Relations, 200 East Randolph Street, Suite 7900, Chicago, Illinois 60601—USA, and the phone number of that office is (+1) 312-552-2890.

Our operations are conducted through four divisions, each specializing in a single business sector: Water, Environmental Services, Energy Services and Transportation. Our principal operating subsidiaries in each division are Veolia Eau—Compagnie Générale des Eaux (Water), Veolia Propreté (Environmental Services), and Dalkia (Energy Services). We are in the process of divesting our Transportation business, which we conduct through Veolia Transdev, which is 50% owned by us and 50% owned by the Caisse des dépôts et consignations, a French state-owned financial institution. When referring to the activities of our divisions, we refer to the division names, and when referring to entities within our Group, we refer to their legal names.

Historical Background

Our 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. Our Company developed its municipal water distribution activities in France by obtaining concessions in Nantes (1854), Nice (1864), as well as a 50-year concession for Paris (1860) and its suburbs (1869).

In 1980, Compagnie Générale des Eaux reorganized its water activities by bringing together all of its design, engineering and operating activities relating to drinking water and wastewater treatment facilities within 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 our Company under the name “Vivendi Environnement” to conduct all of its environmental management activities, which were then conducted under the names Veolia Water (Water), Onyx (Environmental Services), Dalkia (Energy Services) and Connex (Transportation).

On July 20, 2000, Vivendi Environnement shares were listed on Euronext Paris.

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 Receipts on the New York Stock Exchange.



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From 2002 to 2004, Vivendi Universal progressively decreased its stake in our Company through successive disposals and dilution and held only 5.3% of our shares by December 2004. Since July 6, 2006, Vivendi no longer holds any shares in our Company.

In April 2003, we changed our name to “Veolia Environnement.”

Between 2002 and 2004, we undertook a major restructuring in order to refocus on our core environmental management services activities. This process was completed in 2004 with the sale of various U.S. subsidiaries in the Water division and our indirect interest in Fomento de Construcciones y Contratas (FCC), a Spanish company whose activities include construction and cement activities.

In November 2005, we rolled out our new brand policy aimed at increasing consistency between the divisions of the Group, the visibility of our Company and strengthening our identity and common culture of service values. The Water, Environmental Services and Transportation divisions are now united under a single brand, “Veolia,” which is linked to the name of their activity. The Energy Services division primarily operates under the brand “Dalkia.”

The development of our business in recent years has been significantly influenced by external factors relating both to our markets and to the economic environment in which we operate. After a series of acquisitions in 2006, 2007 and early 2008, the global financial crisis imposed significant financial constraints on public authorities and public customers. We implemented a policy of increased vigilance with respect to our investment activity, and established in 2009 a divestiture program of €3 billion for 2009-2011, a target that we were able to exceed. We also began to implement our Efficiency Plan, an initiative started in 2003 that targeted significant cost savings. We have met the goals of the Efficiency Plan in each year since then.

In May 2010, we signed an agreement to combine our transportation subsidiary, Veolia Transport, with Transdev. The transaction closed on March 3, 2011, creating Veolia Transdev, in which we hold a 50% interest, with the remainder held by the Caisse des dépôts et consignations, a French State-owned financial institution.

In 2011, we were affected by a number of changes in our markets, including pressure on credit markets in Europe as a result of uncertainties relating to the credit quality of certain sovereigns, coupled with lower GDP growth and decreased public spending in mature markets, which put increasing pressure on margins. In this context, we announced a strategic transformation plan (described in more detail below), based on refocusing our activities and business portfolio and changing our organizational structures to reduce costs further. The transformation plan targets €5 billion in asset divestments over the next two years, the concentration of activities on the three main business lines (Water, Environmental Services and Energy Services), the progressive exit from the Transporation business, and the sale of rate-regulated Water activities in the United Kingdom and solid waste activities in the United States.



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Business Overview

The following table provides our revenues by division for the year ended December 31, 2011. We have commenced our progressive withdrawal from the Transportation business. As a result, our share of the results of operations of Veolia Transdev are recorded as a discontinued operation and do not appear in this table.

2011 Revenues

(in € million)

Water

Environmental
Services

Energy
Services

Total
consolidated

Europe

8,732.8

7,098.7

6,534.3

22,365.8

of which France

4,560.1

3,384.2

3,515.1

11,459.4

of which Germany

1,519.3

1,210.2

9.5

2,739.0

of which the United Kingdom

811.6

1,626.0

194.2

2,631.8

of which other European countries

1,841.8

878.3

2,815.5

5,535.6

United States

743.0

1,230.3

314.0

2,287.3

Rest of the world

3,141.3

1,411.2

441.7

4,994.2

of which the Middle East

281.0

105.1

93.4

479.5

of which Oceania

238.6

704.6

49.8

993.0

of which Asia

1,573.3

237.8

100.6

1,911.7

of which Rest of World

1,048.4

363.7

197.9

1,610.0

TOTAL

12,617.1

9,740.2

7,290.0

29,647.3


Our Overall Strategy

We are the only international company focused on the environmental services sector, currently operating through four divisions, Water, Environmental Services, Energy Services and Transportation, at the service of our public authority, industrial and service-sector customers.

We provide most of our services under long-term contracts that generate recurring income and provide visibility. Through tailored provisions reflecting the needs of different markets, these contracts allow for gains in economic performance and environmental efficiency from technical, labor and organizational improvements.

Over the last fifteen years, we have developed and adapted a range of management models in several countries. This ability allows us to benefit fully from the potential of the environmental services market around the world, by positioning ourselves in areas of high economic growth in countries that have accepted the outsourcing model for the management of public services.

We target balanced and responsible growth, reflecting the long-term nature of our commitments, the extent of needs which also represent opportunities and the impact of our activities on the environment. We consider the long-term interests of all stakeholders – shareholders, lenders, employees and customers.

Faced with a changing global environment presenting new challenges, we are adapting and transforming our organization.

The financial crisis in Europe and the downturn in public finances in mature countries have increased pressure on selling prices and require tighter cost control. At the same time, expanding demand for environmental services (accelerated urbanization, new regulations, etc.) in high-growth as well as developing countries presents substantial development opportunities that form part of our selective growth policy. As the corporate reference in sustainable development, we are supported by solid fundamentals, leading positions in several markets, an extensive portfolio of long-term contracts and growth platforms in several emerging countries.



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During 2011, we launched a transformation plan aimed at:

increasing our positions in high-growth markets;

maximizing our competitive advantages;

developing synergies between our different businesses;

strengthening our leading positions.

This transformation policy comprises several components:

refocusing our business, enabling us to decrease net financial debt;

simplifying and tightening our organizational structure; and

cutting costs.

With greater financial flexibility and a service offering focused on high added-value service and technology solutions, we should be well placed to seize profitable growth opportunities.

As part of our transformation, we are refocusing our business activities and deleveraging our financial structure.

To attain this objective, we have launched a €5 billion asset divestment program for the period 2012/2013. This plan includes refocusing on core geographical regions and the disposal of certain assets, including the following significant assets:

the Transportation business;

rate-regulated water subsidiaries in the United Kingdom; and

solid waste activities in the United States.

We no longer believe that the Transportation business has its place within the Group, following an increase in the capital intensity of this business, and given the limited nature of synergies with our other businesses. Secondly, our rate-regulated water subsidiaries in the United Kingdom offer limited growth potential and are not part of our priority core markets. Finally, following a number of disposals in the environmental services sector in the United States in 2009, our critical size in that country and sector is insufficient to justify continuing solid waste activities there. The disposal program also supports our debt reduction policy, which aims to bring net financial debt to under €12 billion by the end of 2013.1




1    Excluding exchange rate effects.



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We are simplifying and tightening our organizational structure.

In 2011, we began to implement the new “Convergence Plan”, which is part of the transformation of our organization, aimed at standardizing processes, strengthening control and operational management and simplifying our organizational structure through the following steps:

the rationalization of organizational structures across all our entities:

o

redefinition of responsibilities at all management levels,

o

greater control by functional teams,

o

standardization of processes.

and a pooling process that encompasses:

o

certain support functions within the regions,

o

procurement and technology systems,

o

marketing resources, to improve and standardize commercial offerings and solutions proposed to public authorities and industrial companies.

We are aiming to realize significant cost savings.

By continuing the Efficiency Plan implemented in 2003, we aim to boost our operational performance and generate gross savings of €225 million in 2012 (excluding divestitures) and annual savings of €270 million from 2013 (excluding divestitures). Under the terms of certain contracts, we hope to generate savings that can in part be passed on to customers.

Our “Convergence Plan” aims to generate further savings, by reducing administrative, functional and operating costs in the short-term and through the transformation of the organizational structure in the long-term. Under the “Convergence Plan”, we anticipate a negative net impact on operating income on the order of €20 million in 2012, following which we target positive net impacts of €120 million in 2013, €220 million in 2014 and €420 million in 2015 (after divestitures).

We are positioning ourselves to be able to seize profitable growth opportunities.

With greater financial flexibility and through a strict and disciplined growth policy, we plan to concentrate our efforts on profitable organic growth opportunities that benefit from our technological, commercial and human resource expertise and our ability to offer a wide range of high added-value environmental services.

We will prioritize our investments, focusing first on meeting the objectives set by our transformation program: processing or recovering the most difficult pollutants (including hazardous waste, sludge from sewage treatment plants, CO2 emissions), offering solutions to deal with the increasing rarity of resources, and managing large-scale public services with efficiency, offering public and industrial customers cutting-edge solutions to increasingly complex challenges. These investments are intended to enable us to seize the best growth opportunities, based on a matrix of regions and businesses offering the highest levels of profitability. We plan to focus in particular on the water sector (management of major networks, etc.), environmental services (hazardous waste processing, integrated contracts in the United Kingdom etc.) and energy services (local production and optimization), as well as high added-value service management and offerings for industrial companies. Geographically, we plan to continue our development in the European Union, as well as in North America and Northern Asia where we already have a strong presence. Finally, we will accompany major industrial customers as they expand their geographical presence, particularly in emerging countries and Australia.



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We have also launched negotiations with the French Electric company Electricité de France, or EDF (which holds 34% of Dalkia and 50%, directly and indirectly, of Dalkia International) to rejuvenate the partnership between our two groups in a bid to optimize synergies and simplify and strengthen the governance of our joint energy services subsidiary.

At the end of 2013, we aim for our Group to be composed of three divisions operating in the water, environmental services and energy services sectors, with an organizational structure that is more reactive and that benefits from increased financial flexibility and operating cash flow enabling us to seize growth opportunities in mature countries where we have leading positions, as well as in developing countries.

Our Strategy by Division

Water

Through our Water division we intend to continue expanding our services around the world, while striving to ensure the quality and safety of the water we provide, conserve natural resources and protect the environment.

Veolia Eau will continue to optimize the allocation of its resources, operating costs and profitability, both in its “Operations” and “Technology and Network” businesses. Veolia Eau has a three-pillar strategy:

Pillar one comprises municipal activities where capital intensity is high (e.g. in China, Germany and Central Europe) or growing (France). Capital intensive municipal activities involve a public client and substantial investment either for acquisitions (i.e., privatizations) or to build or modernize infrastructure. Through sustained organic growth, the aim is to increase the profitability of Chinese assets, reorganize and rationalize Veolia Eau activities in France (in light of significant pressure on margins), and invest selectively in Eastern and Central Europe.

Pillar two comprises municipal activities where capital intensity is low, such as operating activities in the United States and Japan and Technology and Network activities for municipal customers. Low capital intensive municipal activities involve a public water company (generally owned by the municipality) and the provision of technical services such as asset management, maintenance optimization or subscriber relationship management services. We aim to capitalize on Veolia Eau’s expertise in asset renewal management, operating customer services and operating drinking water and wastewater treatment plants, and in the case of Technology and Network activities, to propose high-tech offerings.

Pillar three comprises industrial customer activities in the Operation and Technology and Networks sectors. These activities are performed at customer sites (primarily in emerging countries) and focus on three major industrial sectors:

o

heavy industry or industrial sectors exposed to substantial environmental restrictions, such as the mining or petroleum industries,

o

industries subject to strict specifications governing the use of water (e.g., food industry, cosmetics or semi-conductors), and

o

industries discharging recoverable effluents, such as the petrochemical industry, or enabling the recovery of energy sources such as biogas in certain treatment sectors.

In each of these pillars, we aim to have our Water division stand out from the competition through the high-tech content of its offerings.



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Environmental Services

Through our Environmental Services division, we intend to continue our expansion as the global benchmark in the management and recovery of waste.

Demand in this sector is rising, driven by growing environmental awareness, resulting in increased regulation and higher public expectations in a number of countries, and by the increasing rarity of raw materials and energy, which tends to drive the progressive move from landfilling and elimination to recycling and the transformation of waste treatment and recovery methods. As a result, experts who can provide long-term services under cost-effective conditions and in compliance with environmental regulations are highly sought after. The transition towards a model with a higher recycling component also involves increased exposure to fluctuations in energy and raw materials prices.

In this evolving context, we will focus our efforts through Veolia Propreté on:

transforming our activities, from elimination to recovery, at the right pace in accordance with local requirements;

developing industrial hazardous waste processing and recycling activities, benefiting from our competitive advantages and the high added value of our services;

adapting our collection activities to reflect current market conditions (reduced volumes, significant pressure on prices) and demand for collection systems with a higher technology component;

accelerating the transformation of waste processing methods away from elimination and towards recovery,

increasing the profitability of our activities by renegotiating fees, maximizing the use of our production tools and reducing structural costs (particularly by adapting them to activity levels, which tend to mirror economic cycles), while seeking, wherever possible, to generate economies of scale with our other businesses;

strengthening control of risks relating to energy price volatility; and

continuing a strict and disciplined growth policy, with controlled investment.

The following growth sectors have been identified and prioritized:

non-hazardous waste recovery in Europe;

the treatment and recycling of industrial hazardous waste;

Private Finance Initiatives (“PFI”) and Public-Private Partnerships (“PPP”) integrated waste management contracts in Europe.

We plan to sell our solid waste activities in the United States and focus on industrial services and hazardous waste.



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Energy Services

Through our Energy Services division, we are a global player in the energy services market. Dalkia provides innovative solutions for the sustainable growth of cities and companies. In a context of climate change, energy price volatility and increasingly rare resources, Dalkia places our expertise at the disposal of public authorities and companies to help in developing, designing and managing energy solutions with a higher technology component that are more environmentally friendly and less expensive.

Energy needs continue to rise while resources are becoming increasingly rare and expensive (with crude oil prices driven by global demand nearing U.S. $100 a barrel in 2011 and continuing to rise in 2012) and environmental regulations have also tightened. In this context, where energy must remain a factor of shared progress, as was the case for coal and crude oil in the last two centuries, energy and environmental efficiency is essential to meeting the energy challenges of the 21st century. It is also Dalkia’s business.

Dalkia’s core business focuses on optimizing the use of all sources of energy at customer sites, industrial production sites, service-sector sites and in all types of buildings. Dalkia has progressively developed a range of activities based on energy and environmental efficiency: heating and cooling networks, industrial utilities and energy services.

Our strategy focuses on establishing ourselves as a leader in the roll-out of new solutions which will accompany the energy revolution of the coming decades towards a more sustainable world that is less energy-hungry and more respectful of the environment and climate stability. Biomass-based offerings and energy-performance contracts are our priority.

Through Dalkia, we also intend to refocus our activities on our core businesses and the priority regions for our development, which are those where:

roll-out of the three target activities is possible: heating networks, energy services and industrial utilities;

local market factors are favorable: severe weather conditions, energy market characteristics, ability to form partnerships with the private sector, growth potential, public policies favorable to the development of target markets; and

Dalkia can become a major player in the market within five years and can mobilize synergies with our other activities or those of EDF.

France, Continental Europe, the United Kingdom/Ireland, North America, China and the Gulf States have already been identified as priority geographical regions.

Transportation

In December 2011, we decided to focus our activities on our three business lines and withdraw from the Transportation business, which we conduct through Veolia Transdev, our 50/50 joint venture with Caisse des dépôts et consignations since the combination in March 2011 of our subsidiary Veolia Transport with Transdev. We favor an orderly process of progressive withdrawal from Veolia Transdev.

Veolia Transdev aims to become a major transportation service provider on a worldwide scale. Its strategy is based on:

strengthening its profitability by benefiting from synergies generated by the combination of Veolia Transport and Transdev, the implementation of performance and efficiency plans and improvements to the performance of certain unprofitable contracts; and

a geographical refocus on certain regions, involving the consolidation of activities in major countries; priority will be given to the development of high added value activities (particularly transportation-on-demand) and a study of disposal projects for certain other activities.



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The major challenges in this sector are tied to an ever-rising demand for transportation, with growing requirements in terms of fluidity and flexibility. Public transportation networks must also take into account environmental concerns and propose increasingly high performing solutions to improve the quality of city travel and reduce car congestion.

Description of Our Main Businesses

Water

Veolia Environnement, through Veolia Eau-Compagnie Générale des Eaux, is the world’s leading provider(*) of water and wastewater services to public authorities and industrial companies. In addition, Veolia Eau, through its subsidiary Veolia Water Solutions & Technologies, is one of the world’s leaders in the design of technological solutions and the construction of structures for the performance of such services. Veolia Eau provides drinking water to more than 103 million people and supplies 73 million people with wastewater services.

As of December 31, 2011, Veolia Eau had 96,651 employees around the world. The Water division is present in sixty-nine countries, principally in France for historical reasons, but also in the United Kingdom, Germany, Italy, Belgium, the Czech Republic, Slovakia and Romania. The Asia-Pacific region (mainly China, Korea, Japan and Australia) also remains an important development objective, with the signing of a number of major contracts with municipal and industrial customers over the past several years. Veolia Eau also 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 Milwaukee. Finally, Veolia Eau is present in the Middle East and Africa. Thanks to its network of research centers in France and abroad coordinated by the Group, Veolia Eau has mastered numerous major technologies and tools within the water sector. Veolia Eau is therefore able to offer highly-skilled services in the areas of health protection, spillage reduction, productivity enhancement of water networks and plants, and preservation of resources.

Combined with our strong local presence and more than 150 years of experience providing services to municipal and industrial customers, our 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 customers seeking to optimize the management of their existing resources, whether they be municipalities seeking to respond to the trend towards urbanization, or industrial customers. New solutions, such as desalination of seawater, a sector where Veolia Eau recently excelled in the Middle East, or the re-use of treated water, may represent an appropriate response to specific situations.

The following table shows the consolidated revenue (revenue from ordinary activities under IFRS) and operating income of the Water division, after elimination of inter-company transactions.

Water*

   

(in € million)

Year ended
December 31, 2011

Year ended
December 31, 2010 **

Change
2011/2010

Revenue

12,617.1

12,250.3

3.0 %

Operating income

860.5

1,046.1

(17.7) %

*     Including our share in the results of the water activities of Proactiva, our joint venture with FCC, and of the activities of Artelia.

**   In accordance with IFRS 5, non-current assets held for sale and discontinued operations, the Income Statement of Proxiserve in the Water division (sold at the end of 2011) is presented in a separate line, net income from discontinued operations. Furthermore, water activities in Gabon transferred to discontinued operations in 2010 with a view to their disposal were added back in the different income statement accounts in 2011 following the interruption of the divestiture process at the beginning of 2011.



(*) Source Pinsent Masons Water Yearbook 2011-2012.




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Overview of the Water Division

Veolia Eau manages municipal drinking water and/or wastewater services on five continents through a geographical structure featuring a strong local presence. Contracts with public authorities are typically long-term and range from ten to twenty years in length and potentially up to fifty years under certain circumstances. These contracts take various forms, tailored 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. Changes in legislation and certain framework agreements have enabled us to integrate more elaborate mechanisms into our contracts allowing us 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 customer relations, and we are constantly improving the efficiency of our services and 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, we offer feasibility studies and technical assistance, which may include research plans, coordination and acceptance, network modeling and financial analysis. Outsourcing contracts with industrial and commercial customers generally have a term of three to ten years, although certain contracts have terms of up to twenty years.

Service Contracts with Public Authorities and Industrial Customers

The main focus of our water business is on water and wastewater management services for public authorities and industrial customers, which we refer to as “Operations” activities. We provide integrated services that cover the entire water cycle. Our 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. We also manage customer relationships, providing billing services and call centers, etc. 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. We continue to develop our service offering for industrial customers, capitalizing on its local presence in many regions and an appropriate organizational structure.

Engineering and Technological Solutions for the Treatment of Water

Through our “Technology and Network” activities, we develop technological solutions and design/build the infrastructure necessary to provide water services on behalf of public authorities and industrial and service sector customers. In addition, Veolia Water Solutions & Technologies designs, assembles, manufactures, installs and operates modular standardized and semi-standardized equipment, which is both reliable and high-performing, designed to treat water for municipal and industrial uses. A local technical assistance network is available at all times for the upkeep, maintenance and customer service of these installations. We treat groundwater, surface water, brackish or seawater, wastewater and refined sludge. Through a combination of physical, chemical and biological treatments, we have developed a comprehensive range of specific solutions for the purification of water or the reduction or elimination of impurities in effluents. Our recycling/reuse systems provide customers with the ability to circulate part or all of their treated water back into plant processes, thereby reducing water consumption, operating costs and environmental damage. Through SADE, we also design, build, renew and recover urban and industrial drinking water and wastewater networks and related infrastructures, in France and around the world. SADE’s services cover each stage of the water cycle, from collection to release, and its public and industrial customers benefit from SADE’s experience in this area.



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Key Factors

The key factors that may have an impact on the activities of Veolia Eau are of a technical, contractual and economic nature. They mainly concern the following success factors:

The key factors potentially impacting the “Operations” business are, from an economic point of view, trends in volumes billed, the ability to obtain, within the planned time-period, price increases in line with Group objectives and the ability to implement cost cutting programs. From a technical point of view, the ability to satisfy service commitments negotiated with the customer or regulator and, from a commercial point of view, the ability to renew existing contracts under satisfactory terms and conditions in a highly competitive environment are also essential. Our ability to control costs and obtain favorable terms and conditions in our contracts are key success factors, particularly in the Operations business in France. In certain cases, contracts provide for an interim renegotiation of terms and conditions prior to the contractual expiry date.

A number of our contracts in France will expire or face renegotiation in the coming years. The following table presents annual revenue (based on 2010 figures) generated by the principal contracts that are to be renewed or renegotiated during the 2012 to 2014 period:


City

2010 Revenue
(in € million)

Contract expiry date

Marseille

112

2013

Lyon *

100

2016

Toulouse – Water treatment

48

2020

Toulouse – Drinking water

42

2020

Nice **

36

2017

Montpellier

20

2014

Toulon

21

2019

*    This contract, scheduled for renegotiation in 2012, is covered by the “Olivet Commune” Order: the term of the contract beyond 2015 has not yet been confirmed. See “—Contracts” below, for a description of the “Olivet Commune” Order.

**  This contract is covered by the “Olivet Commune” Order: the term of the contract beyond February 2015 has not yet been confirmed.


The Technology and Networks business is potentially affected, at an economic level, by the rate of projects launched by public authorities and certain major industrial companies, as trends in demand levels have a direct impact on the order book. Continued technological leadership in tender bids and the ability to manage constraints and master technical solutions in the performance of contracts, are determining factors. Finally, at a contractual level, rigor in the negotiation and performance of contracts are also key factors in this sector (particularly the ability to meet deadlines and cost budgets).

Description of Activities in 2011

Our activity levels increased slightly year-on-year in 2011 and were marked by a contractual erosion in France, mainly due to the new terms and conditions of the renewed Paris suburbs contract (Syndicat des Eaux d’Ile de France (SEDIF), renewed in 2010). We recorded strong growth in Europe following the acquisition of certain United Utilities businesses in 2010, and modest growth in Asia.

The Technologies and Network business reported a slight increase in activity levels, as completion of the desalination worksites in the Middle East was more than offset by the marked recovery in industrial activities and the start-up of work on the Hong Kong sludge incinerator.



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In France, we provide approximately 24 million residents with drinking water and 17 million with wastewater services. The delegated management public service contracts that were renewed in 2011 represent estimated cumulative revenue of €1.01 billion in a highly competitive environment. The major successes of the period include the Montauban 9-year public service delegation contract. This city with a population of 58,000 decided to place its confidence in the delegated management model. Other successes include the renewal of drinking water contracts for the cities of Perpignan, Mandelieu, Ville du Port in La Réunion, and Beauvais. The main contract renewals include wastewater treatment contracts with Perpignan and the Melun Val de Seine Conurbation and the Caen and Aix-en-Provence wastewater treatment plants. We also lost a number of contracts, including the operating contract for the provision of drinking water to the cities of Hyères and Rambouillet and for the wastewater treatment plant in Angers. Overall, lost annual revenue represented by these contracts was offset by new public service delegation contract wins (services previously rendered by local authorities or our competitors) and service contract wins.

In this context and with the continued fall in unit consumption (down approximately 1% on volumes sold in 2010), we launched a plan (called project Hellébore) to reorganize our Water activities in France and to increase standardization of our operations and strengthen our resources allocated to commercial development. In addition, we continue to respond to the “ecological emergency” and are proposing service with an exemplary environmental footprint in terms of both resource use and carbon emissions.

Over and above the favorable impact of the acquisition of certain United Utilities activities at the end of 2010, activity rose significantly in Europe mainly due to a rise in volumes observed in our German companies and the impact of price increases in the Czech Republic and Romania. In Asia, 2011 was marked by further price increases in China (e.g., Shenzhen), by a surge in activity in Japan following the earthquake in March 2011 and by the completion of the Adelaide contract in Australia. In the United States, 2011 was marked by the early termination of the Indianapolis contract and by commercial wins in the industrial sector.  



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Major Contracts in 2011

Public authority
or company
and location thereof

Month of signature
of contract

New contract
or renewal

Contract
term

Estimated
cumulative
revenue
(in euros)

Services provided

OPERATIONS

     

France

     

Montauban

November

New

9 years

46 million

Public service delegation contract
for drinking water

Perpignan

October

Renewal

12 years

196 million

Public service delegation contracts
for drinking water
and wastewater treatment

Melun

December

Renewal

12 years

105 million

Public service delegation contract
for wastewater treatment

Asia

    

 

Hefei, China

December

New

15 years

10 million

Operation of an industrial
wastewater treatment plant

North America

     

California,

United States

January

New

10 years

51 million

Contract to design, build
and operate a water treatment plant
for a petroleum field

Oklahoma City, United States

January

Renewal

6 years

46 million

Operation and maintenance
of wastewater treatment services

Western Virginia, United States

May

New

10 years

37 million

Contract to design, build
and operate a wastewater treatment
plant (mining industry)

Europe

    

 

Bucharest, Romania

May/July

New*

14 years

600 million

Operation of a wastewater collection
system (Caseta) and a wastewater
treatment plant (Glina)

Middle East

    

 

Oman

January

New

5 years

31 million

Assistance with the operation
of drinking water services

TECHNOLOGY & NETWORKS

     

Az Zour Sud, Kuwait

March

New

30 months construction + 5 years operation

79 million

Contract to design, build
and operate a seawater
desalination plant

Yanbu, Saudi Arabia

July

New

17 months

45 million

Technology supply contract
for a drinking water plant

Achères, France

July

New

6.75 years

196 million

Contract to design/build the
biological treatment system as part of renovation work at the Seine plant

Niger

November

Renewal

10 years

290 million

Public service operating contract
for the production, transportation
and distribution of drinking water

*    More specifically, the extension of the existing contract scope.




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Main Acquisitions and Divestitures in 2011

The main divestitures during the year include:

in France,

o

the sale to Fonds Latour Capital of Proxiserve, held jointly by Veolia Eau-CGE and Dalkia,

o

the sale to Claire of Sainte-Lizaigne,

o

the sale of the P.I.C.A. (Produits Industriels Charbons Actifs) Group,

in Europe, the sale by Berlinwasser International of its subsidiary Berlinwasser China Holdings to Metito Group,

in Asia, the sale by Veolia Water Philippines of its subsidiary Clark Water Corporation to Manila Water, a subsidiary of Ayala Group

Following the creation, acquisition or consolidation of 25 companies in 2011 and the liquidation, divestiture or transfer of thirty-eight companies, the Water division (excluding Proactiva) was composed of 742 companies as of December 31, 2011, compared to 755 in 2010.

Environmental Services

Through our subsidiary Veolia Propreté, we are the worldwide reference in this sector(2), where we are involved in waste collection, recycling, processing, treatment and handling waste in all forms and at all stages of the waste cycle. Veolia Propreté manages liquid and solid waste, non-hazardous and hazardous waste (with the exception of nuclear waste) from collection to recovery, on behalf of both industrial and public-sector customers, such as local authorities.

As of December 31, 2011, Veolia Propreté employed 77,421 people(3) around the world, in approximately 33 countries. We have partnerships with over 750,000 industrial and public-sector customers(4) and serve nearly 61 million residents on behalf of local authorities. As of December 31, 2011, we manage approximately 746 waste processing units (excluding landfill sites in the post-closure phase and soil decontamination plants).

The term of our contracts usually depends on the nature of services provided, applicable local regulations and the level of industrial investment required. Collection contracts usually range from one to five years, while waste processing contracts can range from one year (for services provided on sites belonging to Veolia Propreté) to thirty years (for services involving the financing, construction, installation and operation of new waste processing infrastructures).




2    Source: Internal Studies and Eurostat.

3    As at December 31, 2011, there were 77,421 managed employees, including 7,070 allocated to Proactiva environmental services and 1,169 shared employees allocated to the Environmental Services division.

4    Figures below (number of inhabitants, population served, tonnages, etc.) do not include Proactiva, unless specifically indicated.



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The following table shows the consolidated revenue (revenue from ordinary activities under IFRS) and operating income of the Environmental Services division, after elimination of inter-company transactions.

Environmental Services*

   

(in € million)

Year ended

December 31, 2011

Year ended

December 31, 2010 **

Change

2011/2010

Revenue

9,740.2

9,337.8

4.3%

Operating income

359.6

585.8

(38.6)%

*     Including our share in the results of the environmental services activities of Proactiva, our joint venture with FCC.

**   In accordance with IAS 8, Accounting policies, changes in accounting estimates and errors, 2010 figures have been adjusted for the impact of the 2010 fraud in the Marine Services business in the United States, discovered during the second quarter of 2011.


Overview of the Environmental Services Division

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

Downstream, we conduct basic or more complex waste processing operations in order to eliminate pollutants and transform waste into a resource. Thus, Veolia Propreté:

sorts and processes waste in order to create new raw 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 agricultural recycling;

processes waste in the least damaging way possible, through landfill sites or incineration;

produces electricity or heat using waste in landfill sites or incineration, otherwise referred to as waste-to-energy recovery.

The services referred to above fall into three major business sectors: environmental services and logistics for public authorities and industrial companies, sorting and recycling of materials and waste recovery, and processing through composting, incineration and landfilling.

Key Factors

The key factors that may influence our activities are of a technical, contractual and economic nature and mainly concern the following success factors:

A presence at all points of the waste value chain, from pre-collection through to processing and recovery, in an appropriate range of geographical areas at different stages of maturity, enabling the identification and control of innovative, tailored solutions for proposal to customers and setting us apart from the competition in this market;

The management of risks relating to the protection of the environment and the safety of individuals and installations;

The quality of employee management in sectors which are often labor-intensive (limiting absenteeism and industrial action, developing skills and training);

The ability to innovate using new technologies (processing, rolling stock) and processes (sorting-recycling), founded on an effective technology, regulatory and competition watch system;



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Operating efficiency (purchases, sales, logistics, maintenance management) enabling the optimization of unit costs and the utilization rate of equipment, while ensuring the high level of quality required for products and services delivered;

Investment management in certain capital-intensive activities (selectivity, risk analysis, installation size);

The quality of contractual management for long-term contracts (major clauses, price review formulae, guarantees and deposits, etc.); and

Management of economic and financial risks: volume fluctuations, volatility of raw material prices (fuel, materials sold such as paper and metals), customer risk, foreign exchange and interest rate risk.

Environmental Services and Logistics for Public Authorities and Industrial Companies

Maintenance of Public Spaces and Urban Cleaning

Each day, we provide urban cleaning services in many cities throughout the world, including London, Paris, Singapore and Dresden. Veolia Propreté also provides mechanized street cleaning and building facade treatment services.

Cleaning and Maintenance of Industrial Sites

We provide cleaning services at the sites of our industrial and service sector customers, including cleaning of offices and maintenance of production lines.

In the industrial sector, cleaning services are extended to food-processing plants, and heavy industry and high-tech sites, where we offer specialized cleaning services (high pressure or extreme high pressure cleaning). We also offer cryogenic cleaning, and reservoir cleaning services at refineries and petrochemical sites. Finally, we have developed emergency services to treat site contamination in the event of an accident or other incident.

Liquid Waste Management

Through our specialized subsidiary SARP, we provide liquid waste management services that consist primarily of pumping and transporting sewer network liquids and oil residues to treatment centers.

We have developed liquid waste management procedures that emphasize environmental protection, such as on-site collection and the recycling and reuse of water during the processing of liquid waste. Used oil, which is hazardous for the environment, is collected before processing and re-refining by a Veolia Environmental Services subsidiary specializing in the management of hazardous waste.

Soil Decontamination

Land redevelopment and the expansion of residential and business areas may lead to the use of sites where the soil has been polluted through prior use. We provide specific techniques for treating difficult sites, which include treating polluted soil and rehabilitating temporarily inactive industrial areas, cleaning accidental spills and bringing active industrial sites into compliance with applicable environmental regulations.

Collection

In 2011, nearly 61 million people around the world benefited from our waste collection services. We collect household waste through door-to-door pickup or through pickup at designated drop-off sites, and collect commercial and non-hazardous industrial waste. We maintain the cleanliness of green areas and carry away “green” waste and also collect hazardous waste on behalf of our service sector and industrial customers, including hospital waste, laboratory waste and oil residue (ships, gas stations, etc.) and diffused hazardous waste.

We also provide related services to our public sector and industrial customers, such as preliminary studies of future waste collection needs and waste tracking after collection.



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Transfer and Regrouping of Materials

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 the appropriate processing center.

Hazardous waste is usually transported to specialized physical-chemical treatment centers, recycling units, special industrial waste incineration units or landfill sites designed to receive inert hazardous waste.

Sorting and Recycling of Materials

We process waste with a view to reintroducing such waste into the industrial production cycle.

Our recycling activities generally involve the selective collection of paper, cardboard, glass, plastic, wood and metal that customers either separate into different containers or mix with other recyclable materials.

We recover solid waste received at our 286 sorting and recycling centers. These specialized centers separate the different components of complex waste, such as electric and electronic products and fluorescent lamps. We work upstream in partnership with industrial customers and with our research center to develop new recycling activities. Recycled material is sold or distributed to intermediaries or directly to industrial customers.

Waste Recovery and Treatment through Composting, Incineration and Landfilling

We have a wide range of treatment centers, comprising sorting and recycling centers, composting units, hazardous waste treatment centers, incineration units and landfill sites.

Composting and Recovery of Organic Material from Fermentable Waste

Veolia Propreté and Veolia Eau work together to recover sludge from wastewater treatment plants. At our 126 Veolia Propreté composting units, we process urban and industrial sludge, part of which is then reintroduced into the agricultural cycle through land spreading, with a related tracking service.

Incineration and Waste-to-Energy Recovery

We operate 63 waste-to-energy recovery and incineration plants, which process non-hazardous solid waste (mainly urban waste).

Energy is generated from the heat created by incinerating waste at these plants. We use this energy to supply urban heating networks or sell it to electricity providers.

Landfilling and Waste-to-Energy Recovery

In 2011, Veolia Propreté had 121 non-hazardous waste landfill sites (excluding landfill sites for inert waste). We have developed expertise in processing waste through methods that reduce emissions of liquid and gas pollutants. In addition, 96 landfill sites have recovery systems to transform biogas emissions into alternative energies (including landfill sites in the post-closure phase).

Processing of Hazardous Waste

In 2011, we had 23 incineration units for hazardous industrial waste, 62 processing units using physical-chemical and stabilization methods, 15 class 1 landfill sites and 34 specialized recycling centers.

The principal methods used for processing industrial hazardous waste are incineration (for organic liquid waste, salt-water and sludge), solvent recycling, waste stabilization followed by processing at specially-designed landfill sites, and physical-chemical processing of inorganic liquid waste.

Through our specialized subsidiaries, SARP Industries and VES Technical Solutions (in the United States), we have a worldwide network of experts, which has helped us become a world leader in the processing, recycling and recovery of hazardous waste.



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Description of Activities in 2011

Major Contracts in 2011

The following table shows the major contracts signed in 2011 with either public authorities or industrial or service-sector companies (5):

Public authority or
company and location thereof

Month of
signature
of contract

New contract
or renewal

Contract
term

Estimated
cumulative revenue
(in euros)

Services provided

France

     

SYCTOM Nanterre

May

Renewal

6

36 million

Sorting of household waste produced
by a system of selective collection

Gironde Right Bank inter-communal authority

November

Renewal

5

30 million

Collection and processing

of household waste and equivalent

City of Hyères les Palmiers

April

Renewal

6

25 million

Collection of household and municipal waste + selective collection of recyclable materials

Bourget Airport

June

Renewal

5

18 million

Collection of household waste and equivalent

Pays de Lorient

June

Renewal

7

14 million

Operation of a biological treatment plant
for bio waste and residual household waste

SMITOM LOMBRIC Center West Seine and Marnais

August

Renewal

8

11 million

(EIG total €19 million)

Collection and transportation
of household waste and equivalent

CDA La Rochelle

November

Renewal

3

11 million

Operation of the La Rochelle
waste-to-energy plant

City of Paris – Clichy Batignolles

October

New

12

4.6 million

(EIG total €18 million)

Vacuum waste collection

Europe (excl. France)

    

 

Hertfordshire County Council
(United Kingdom)

July

New

25

1.6 billion

Integrated contract for the processing
and elimination of residual waste

London Borough of Haringey
(United Kingdom)

April

New

14

282 million

Waste collection and recycling
and town cleaning services

Chesterfield District Council

(United Kingdom)

December

Renewal

7

14 million

Waste collection and recycling
and related services

North America

    

 

UPS

June

New

5

38 million

Processing of hazardous waste

Columbia County, Florida

September

New

5

14 million

Collection of household waste and equivalent

Aberdeen Proving Ground

May

Renewal

4

10 million

Collection and processing of hazardous waste

Singapore

     

National Environmental Agency

January

Renewal

7

53 million

Collection of household waste and equivalent


Main Acquisitions and Divestitures in 2011

On March 25, 2011, we sold our sorting-recycling activities in Norway. On August 10, 2011, solid waste activities in Belgium were also sold. Following the creation, acquisition or consolidation of 32 companies in 2011 and the liquidation, divestiture or merger of 48 companies, the Environmental Services division (excluding Proactiva) comprised 631 companies as of December 31, 2011, compared to 647 in 2010.



5    Revenues estimated under the contracts won in 2011 have been converted into euros at the closing exchange rate as of December 31, 2011 and represent the portion due to Veolia Propreté under such contracts. Accordingly, these amounts may differ from the amounts announced in earlier Group press releases.



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Energy Services

We conduct our energy service activities through Dalkia, a global provider of energy services to companies and public authorities. Primarily in our role as a decentralized producer of thermal and electrical energy, we develop offerings for heating and cooling networks, industrial utilities and energy services. We seize opportunities offered by the development of the energy market and the need to contain energy consumption. We are present at all stages of the energy chain from decentralized production to optimizing distribution and containing demand, to improve the performance of energy systems. We join forces with our customers, helping them optimize their energy purchases and improving the efficiency of their installations both in terms of cost and atmospheric emissions.

Dalkia is owned 66.0% by Veolia Environnement and 34.0% by EDF. In France, Dalkia conducts its business through Dalkia France, a 99.9% subsidiary of Dalkia, while abroad Dalkia conducts its business through Dalkia International, owned 75.8% by Dalkia and 24.2% by EDF. Dalkia’s results are proportionately consolidated in the Consolidated Financial Statements.

As of December 31, 2011, Dalkia had 52,698 employees in 40 countries around the world, particularly in Europe. The following table shows the consolidated revenue (revenue from ordinary activities under IFRS) and operating income of the Energy Services division, after elimination of inter-company transactions.

Energy Services*

   

(in € million)

Year ended
December 31, 2011

Year ended

December 31, 2010**

Change
2011/2010

Revenue

7,290.0

7,176.1

1.6%

Operating income

(37.2)

529.3

(107.0)%

*     Including the share in the results of industrial multi-service entities, of the activities of Artelia and of renewable energy activities.

**   In accordance with IFRS 5, Non-current assets held for sale and discontinued operations, the Income Statement of Proxiserve in the Energy Services division (sold at the end of 2011) and Citelum urban lighting activities in the course of divestiture are grouped together in a separate line, Net income from discontinued operations.


Overview of the Energy Services Division

Dalkia is currently facing three major challenges: global warming and the need to reduce carbon dioxide emissions, the increase in the price of fossil fuels and their eventual scarcity, and growing urban expansion and related industrial development.

Dalkia’s core business focuses on optimizing the use of all sources of energy at customer sites, industrial production sites, service-sector sites and in all types of buildings. Dalkia has progressively developed a range of activities based on energy and environmental efficiency: heating and cooling networks, industrial utilities and energy services.

Dalkia provides energy management services to public and private customers with which it forms long-term partnerships. Management contracts for the operation of urban heating or cooling networks are typically long-term, lasting up to thirty years, while contracts for the operation of thermal and multi-technical installations for public or private customers may have terms of up to sixteen years. Contracts to provide service to industrial utilities generally have shorter terms (six to seven years on average).

Dalkia proposes energy solutions encompassing the entire conversion cycle from the purchase of energies entering the site (fuel, gas, biomass) to the sale on the market of the electricity produced.

Dalkia has in this way developed expertise in the purchase and sale of energy in deregulated markets and are also active in the CO2 allowance markets.



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Whenever possible, Dalkia offers solutions to its customers using 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. Energy sources are combined, wherever possible, to take advantage of the complementary nature of each source. Dalkia has considerably stepped-up development of its biomass sector by offering innovative services to customers.

Heating and Cooling Networks

The development of urban networks has been a key growth driver for Dalkia in recent years and will continue to be the main driving force over the next five years.

Dalkia is Europe’s leading operator of large urban heating and cooling networks. Dalkia currently manages 837 urban heating and cooling networks worldwide, particularly in France, the United Kingdom, Eastern and Central Europe and the Baltic states. Dalkia also operates networks in the United States where it has a strong market position. The networks operated by Dalkia provide heating, domestic hot water and air conditioning to a wide range of public and private facilities, including schools, health centers, office buildings and residences. In addition, the production plants often generate electricity sold to operators or on the market.

Industrial Utilities

The industrial market offers Dalkia substantial growth opportunities worldwide, in synergy with our other divisions. Dalkia is a leading provider of industrial utilities in Europe. Its strategy is based on its ability to roll-out an extensive and comprehensive range of services encompassing:

optimizing industrial utilities: steam, electricity and compressed air;

optimizing the use of process energy (aligning use with needs and identifying fatal energy sources and recoverable co-products);

optimizing building energy consumption (energy services, see below).

Dalkia provides services at 4,640 industrial sites.

Energy Services

Energy services consist of operating heating, domestic 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 service sector customers with integrated energy services including plant design, construction and improvement, energy supply, and plant management and maintenance.

Dalkia provides customers with a wide range of technical services and is introducing an extensive range of services to satisfy customer expectations for reduced energy consumption and CO2 emissions. This will bring about profound changes in the energy services market over the coming years, through the development of offerings encompassing performance commitments.

Key Factors

Dalkia manages 123,500 energy installations worldwide. Our Energy Services division activities may be influenced by the following key factors, which are primarily of a technical, contractual or economic nature:

contract management, enabling the identification of our risks and those borne by Dalkia’s customers. Contract management takes account of necessary regulatory developments, which are monitored by the division, and the implementation of a Research and Development program, enabling further improvements to Dalkia’s performance and competitive advantage;



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procurement management: primarily purchases of raw materials, to optimize costs and secure fuel supplies for the installations Dalkia manages;

environmental protection: optimization of energy efficiency, control of atmospheric emissions and a renewable energies-based offering.

Description of Activities in 2011

Activity levels remained stable in 2011 in the Energy Services division, as positive price effects were offset by unfavorable weather conditions compared to 2010 in the majority of countries where Dalkia operates. In addition, economic difficulties in Southern Europe were reflected by a decline in installation activities, particularly in Spain and Italy.

In 2011, Dalkia launched a strategy to refocus its business, which impacted Dalkia’s regional presence.

In France, new business and portfolio contract development proceeded at a rate over one and half times that of erosion, which enabled the division to report substantial revenue growth on an annualized basis. Industrial utilities contributed the majority of this growth,with the Areva – La Hague contract alone representing additional estimated annual revenue of nearly €25 million. Dalkia France renewed 70% of the contracts that expired during the year, compared to 80% in 2010, in the face of increased competition between players and the economic slowdown. Contracts not renewed in 2011 represented nearly 2.5% of Dalkia’s revenue in France, including the loss of heating network contracts, the cessation of cogeneration activities across all segments and the non-renewal of a number of major facilities management contracts (Tour Granite in La Défense, Arcelor Mittal in Dunkirk).

Outside France, commercial results (excluding acquisitions) were mixed, although a number of major contracts were signed in 2011. The San’t Orsola Bologna Hospital PPP will generate estimated average annual revenue in excess of €6 million over 21 years. At the end of 2011, Dalkia was also the successful bidder in Italy for the Trévise and Belluno Aree Vaste contracts, representing estimated annual revenue of €4.9 million over 9 years.

In Southern Europe (Italy and Spain), new management was appointed at the beginning of 2011 and launched a comprehensive restructuring plan (involving, in particular, employee redundancy plans, the regrouping of sites and the discontinuation of certain activities) in both Italy and Spain. In particular, photovoltaic field installation activities were discontinued in Spain and Italy. In Italy the division is faced with issues relating to the integration of acquisitions, increased competition in a context of economic crisis, a slump in the building industry and legislative changes. The restructuring plans aim to accelerate the integration of companies acquired, reduce costs and refocus activities on the healthcare/service, industry and telecommunications sectors.

In Canada, the CHUM Collectif consortium, in which Dalkia Canada has a 20% stake, won the call for tenders to design, build and operate the Montreal University Hospital (CHUM), which will be the largest in North America. On completion of the 5-year construction phase, Dalkia Canada has a 34-year contract for the operation and maintenance of installations, generating average estimated annual revenue of over €40 million. The development of Dalkia’s platform in the United States has fallen behind schedule due to the economic slowdown observed in this country over the last three years, which has had financial consequences. In addition, Citelum urban lighting activities are in the course of divestiture.



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Major Contracts in 2011

The following table shows the major contracts signed in 2011 with either public authorities or industrial or service-sector companies*:

Public authority
or company and location thereof

Month of
signature
of contract

New contract
or renewal

Contract
term

Estimated
cumulative revenue
(in euros)

Services provided

France

    

 

Argenteuil (95)

July

New

30 years

109 million

Heating network

Courbevoie (92)

January

Renewal

7 years

60 million

Urban heating and cooling network

Ministry of Defense – Balard (75)

May

New

3 + 27 years

205 million (1)

Contract to finance, design, build,
restructure, renovate, operate and maintain
buildings to house the regrouped headquarters and central departments
of the armed forces at the Balard site

Contract to build a shallow
geothermal power plant

Greater Dijon (21)

December

New

25 years

200 million

Heating network

Biomass-fired heating plant

Métropole Habitat
Saint-Etienne (42)

May - June

Renewal

12 years

41 million

Comprehensive management
of 3,000 housing units / 38 heating plants

Aquitaine high schools (40)

May

Renewal (and extension)

8 years

64 million

Energy management contract
for 67 high schools

Areva La Hague (50)

January

New

20 years

499 million

Renovation of installations
(new domestic fuel-fired heating plant
and biomass-fired heating plant)

Operation of the biomass-fired heating plant
Maintenance of on-site utilities

Canteleu (76)

June

Renewal

Cogeneration: 11 years

Urban heating:

24 years

88 million

Cogeneration

Urban heating network

Biomass-fired heating plant

Europe

(excl. France)

     

San’t Orsola Hospital

(Bologna – Italy)

November

New

3 + 21 years

139 million

Hospital PPP

European Investment Bank

(Belgium + Luxembourg)

October

New

4 + 3 years

56.5 million

Multi-technical management of EIB real
estate assets in Luxembourg

Energofuture

Frydek (Czech Republic)

October

New

3 + 7 years

40 million

Operation of a biomass-fired cogeneration
plant producing electricity and heat

Hale Village Properties

(London – United Kingdom)

April

New

25 years

19 million

Biomass-fired heating network

(supplying housing units in the new Hale
Village neighborhood in London)

North America

     

CHUM (Montreal University Hospital)

(Montreal – Canada)

June

New

5 + 34 years

1.2 billion

Hospital PPP

Asia

     

Hong-Kong government

February

New

6.5 years

26 million

Operation and maintenance of a cooling
network for the new neighborhood built on the former airport site (Kai Tak)

*     Revenues expected under the contracts won in 2011 have been converted into euros at the closing exchange rate as of December 31, 2011 and represent the portion due to Dalkia, including Veolia Energy North America Holding, under such contracts. Accordingly, these amounts may differ from the amounts announced in earlier Group press releases.

(1)  Dalkia share in the Opale Défense consortium.




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Main Acquisitions and Divestitures in 2011

The main acquisitions and divestitures in 2011 took place in Central Europe, France and the Baltic States. In October 2011 in Poland, we acquired an 85% stake in SPEC SA (Stołeczne Przedsiębiorstwo Energetyki Cieplnej) which operates the Warsaw urban heating network. This network is the largest in the European Union covering over 1,700 kilometers and the third largest in the world after Moscow and Saint Petersburg. It supplies 80% of the city’s buildings, primarily apartments, and has more than 10,000 customers. This acquisition strengthened Dalkia’s strategic position in Central Europe and confirmed its leadership in the heating market in Poland. The decision to refocus on its core businesses led us to sell all our activities in Germany in 2011, with the exception of activities in the Hamburg region. In December in Estonia, Dalkia sold 85% of Tallinna Elektrijaam OÜ, the owner of one of the largest biomass-fired heat and electricity cogeneration plants in the country. We will continue to operate this plant through our subsidiary, Tallinna Küte AS. At the end of 2011 in France, Dalkia and Veolia Eau sold their joint subsidiary, Proxiserve, as the activities of this company were not considered strategic (maintenance of individual boilers, valves and fittings and multi-maintenance services, as well as home assistance for private individuals through its 51% subsidiary, Domeo). Three Dalkia subsidiaries in the Greater Paris region were also sold as part of this transaction.

In total, over the course of 2011, the Energy Services division consolidated or purchased 71 companies, and sold, liquidated or merged 60 companies. As a result, it held 569 consolidated companies, including 320 foreign companies, as of December 31, 2011, compared to a total of 558 consolidated companies as of December 31, 2010.

Transportation

Activities in our Transportation division continued as in previous years up until March 3, 2011, when Veolia Environnement and Caisse des dépôts et consignations combined their respective transportation subsidiaries, creating the global benchmark in sustainable mobility. The resulting entity, Veolia Transdev, is held 50/50 by Veolia Environnement and Caisse des dépôts et consignations. Operational activities were merged in August and September 2011 and the new organizational structure was introduced in December 2011. On December 6, 2011, we announced our decision to progressively withdraw from the Transportation business, as described above.

The core business of Veolia Transdev is passenger transportation services on behalf of national, regional and local authorities. Veolia Transdev has managed and operated urban, regional and inter-regional 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.

As of December 31, 2011, Veolia Transdev had 101,798 employees around the world (data for 100% of Veolia Transdev). It conducts its business mainly in Europe, North America and Asia. Veolia Transdev also has a strong presence outside of France, where it generates more than 60% of its revenue.

As a result of our decision to withdraw from the Transportation business and the advancement of the divestiture process, the results of operations of Veolia Transdev are presented as a discontinued operation. See Item 5. “Operating and Financial Review and Prospects,” for further details. We recorded, under discontinued operations, revenues of €5.8 billion in 2010 and €4.3 billion in 2011, although these figures are not comparable, as they include Veolia Transport for all of 2010 and the first two months of 2011, and 50% of Veolia Transdev thereafter. For purposes of providing information about the overall business that is part of Veolia Transdev, we have estimated the combined revenues and operating income of the businesses that are currently conducted by Veolia Transdev, based on unaudited magagement account information, as set forth in the table below.



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Transportation

   

(in € million)

Year ended
December 31, 2011

Year ended
December 31, 2010

Change

2011/2010

Revenue (1)

7,863.8

8,048.6

(2.3)%

Operating income (1)

47.2

199.4

(76.3)%

(1)  Figures presented have been taken from the management accounts and represent 100% of the contribution of the former Transdev and Veolia Transport activities for a 12-month period in 2011 and 2010, excluding the contribution of discontinued operations in the United Kingdom and Norway.


Overview of the Transportation Division

Veolia Transdev mainly operates passenger transportation networks and scheduled services in accordance with public service specifications (which stipulate schedules, routes and fare structures) set by the relevant public authorities (which generally retains ownership of the infrastructures, particularly in urban areas). Contracts are awarded through public tenders.

Veolia Transdev generally manages outsourced transportation activities, under conditions and structures that differ from one country to another due to varying legal and regulatory requirements. The relationship between the public authority and the transportation company is governed by fixed-term contracts that determine the risks to be borne by each party and the remuneration of the transportation company. As the fares charged by Veolia Transdev to passengers on its transportation networks are usually insufficient to cover costs, the public authority typically provides Veolia Transdev with a payment or other compensation for services rendered. Moreover, in the case of certain contracts, and particularly for specialized school transportation services, Veolia Transdev is paid a flat fee for its transportation services and consequently does not bear the risks associated with lower receipts or decreased passenger use (such contracts are referred to as “Public Market” contracts in France).

Management contracts generally have a term of two to twelve years, with the exception of “operating concessions,” which have an average term of thirty years.

Veolia Transdev’s activities fall into four main categories:

mass road transportation (urban transport, urban beltway, inter-city and regional and other specific transportation services);

mass rail transportation;

individual shared transportation: taxis, limousines, airport shuttle services and regional and international tourist transportation;

transportation management (passenger information services, clearing-houses, call centers).

The activities of Veolia Transdev are influenced by key factors of a technical, contractual and economic nature and primarily by:

managing contract risks: we carry on our activities under long-term contracts which, while offering growth opportunities and long-term revenue streams, may also hinder our ability to react rapidly and appropriately to new financially negative situations (See Item 3 “Key Information – Risk Factors” above);

managing the various sustainable development aspects of contracts, which are increasingly included in transportation authority requirements (See Item 3 “Key Information – Risk Factors” above);

a lack of control over contractual changes (See Item 3 “Key Information – Risk Factors” above);

operating in dense, vast and increasingly complex areas brings with it increasing operating complexity, and greater inter-modality in particular, which calls forth all of Veolia Transdev’s expertise to respond to these complex issues.



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Mass Road Transportation

Veolia Transdev operates a number of bus networks, suburban trains, tramways and one metro, and provides customized transportation-on-demand services (particularly for individuals with special needs or disabilities). Veolia Transdev covers the entire mobility chain from design to operating services (including personnel management, providing drivers and ticket inspectors and marketing efforts), as well as maintenance. Through its subsidiary, Transamo, Veolia Transdev assists local authorities with the planning and steering of their public transportation projects, as well as the audit and optimization of transportation network operation and maintenance. Veolia Transdev operates ferry and river shuttle services in tandem with its bus services in various urban areas. This is particularly the case for services provided in Toulon harbor, Thonon-les Bains and services to the Morbihan islands in France, and services provided in the Netherlands, Australia and Sweden.

Urban and Beltway Road Transportation

In France, Veolia Transdev operates the tramway, bus and light rail networks in Rouen, Saint-Etienne, Nancy, Nice, Montpellier, Reims, Besancon and Mulhouse. Veolia Transdev also operates urban networks in Strasbourg, Nantes and Grenoble through semi-public undertakings. The majority of the share capital of such undertakings is held by territorial authorities and agencies, while private entities share the residual minority interest. In the majority of cases, Veolia Transdev has only a minority stake in these companies.

Veolia Transdev also manages bus networks directly for nearly 90 urban areas in France and through semi-public undertakings for 15 other urban areas. Veolia Transdev has a strong presence in the Greater Paris region, where it operates numerous bus lines in the intermediate suburbs of Paris and the greater metropolitan area. It is the main private operator in the region, operating the bus networks of its six component départments (Seine-Saint-Denis, Seine et Marne, Essonne, Yvelines, Hauts de Seine and Val de Marne) as well as the networks of the main towns in these départments (Melun, Rambouillet, Argenteuil, St. Germain-en-Laye, etc.). In addition, Veolia Transdev operates several express routes.

Through its subsidiary, Connexxion, Veolia Transdev leads the public transportation market in the Netherlands. In particular, Connexxion operates the Nijmegen network and the Ede-Wageningen and Amersfoort suburban network as well as the integrated (intermodal) public transport network in Limburg province (bus, transportation-on-demand, suburban rail transportation). In Southern Europe and Morocco, Veolia Transdev operates urban transportation services in several cities, including the Barcelona tramway. Veolia Transdev is a private operator in the urban and inter-city transportation market in Portugal, where it has a strong presence. In Morocco, despite deciding to terminate its bus service in Rabat due to operating difficulties under the initial contract, Veolia Transdev continues to operate the Rabat Salé tramway. In North America, Veolia Transdev provides bus transportation services in 33 States and two Canadian provinces, and particularly in Las Vegas, New Orleans, Los Angeles, Phoenix, Savannah and Washington DC. In Australia, Veolia Transdev operates the Sydney monorail and tramway and bus services in Perth, Brisbane and Sydney. In Asia, Veolia Transdev operates the bus networks of five cities in the Jiangsu and Anhui Chinese provinces and in Macao, as well as the Hong Kong tramway. In India, Veolia Transdev launched the pre-operation phase of the Mumbai metro. In the rest of the world, Veolia Transdev operates, through partnerships with other operators, a high-frequency right-of-way bus system (BRT: Bus Rapid Transit) in Bogota (Colombia) and a network of bus lines in Santiago, Chile.

In addition to urban transportation networks, Veolia Transdev is active in the development of new means of travel. Accordingly, Veolia Transdev operates several self-service bike rental systems through its specialized subsidiary, Veloway, as well as car-sharing systems.

Intercity and Regional Road Transportation

Veolia Transdev provides regional transportation services through the operation of road networks. As with urban transportation services, Veolia Transdev is responsible for designing, planning, operating and maintaining the network and stations and ensuring their security, as well as selling tickets and providing customer service. In France, Veolia Transdev has a strong presence in the intercity and school transportation markets. Veolia Transdev is present in all regions and particularly Normandy (Eure), the South West (Gironde) and the South East (Alpes Maritimes).



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Other Transport Services (Transportation-On-Demand, Para-Transit, Taxis, etc.)

In the Netherlands, Veolia Transdev is a major player in transportation services for individuals with special needs or disabilities through its subsidiary, Connexxion. Connexxion is also present in the ambulance market, primarily through its subsidiary, Connexxion Ambulance services.

Veolia Transdev also provides transportation services to individuals with special needs or disabilities (para-transit services) in Rouen, Le Mans, Le Havre and Tours as well as several other regions of France.

In the United States, para-transit services is a growth sector, particularly in California, Washington State (Seattle), Arizona (Phoenix), Nevada (Las Vegas), New Orleans and Nassau in the New York suburbs. Finally, Veolia Transdev provides student transportation services at a number of universities in the United States (particularly Stanford University and the University of Northern Illinois).

Passenger Rail Transportation

Veolia Transdev has been a rail operator for many years. It is currently present in seven countries and enjoys solid references in Europe and worldwide. In Germany, Veolia Transdev is the leading private operator of regional rail services and operates lines in nine regions (including North-Ostsee-Bahn, Dieselnetz and Mittelrhein Bahn, etc.). Veolia Transdev also operates open access long distance lines (InterConnex: Leipzig – Berlin – Rostock). In Sweden, the rail link between Stockholm and Malmö is the first long distance line operated by the private sector, with high added value services. In the Netherlands, transportation services provided in Limbourg Province encompass bus and rail networks, with joint design and management. In France, Veolia Transdev manages several regional rail networks through contracts with regional public authorities (PACA, Rhône, Mulhouse, etc.). Through a joint venture with Trenitalia, Veolia Transdev also operates the overnight service between Paris and Venice. In the United States, Veolia Transdev operates in particular the Boston and Miami suburban networks. In Asia, Veolia Transdev has operated the Seoul metro line 9 since July 2009. In Auckland, Veolia Transdev operates the suburban network of New Zealand’s largest city.

Commercial Transportation (B to C)

Transportation-on-demand

Under the SuperShuttle trade name, Veolia Transdev provides shared transportation services at 36 airports in the United States. In Europe, Veolia Transdev provides shuttle services at 5 airports (Roissy Charles de Gaulle, Orly, Beauvais, Arlanda and Schiphol). Veolia Transdev provides taxi services in the United States, in particular in Baltimore, Denver, Kansas City and Pittsburgh, as well as in London (United Kingdom) through its subsidiary, Greentomato. Taxis services are also provided in the Netherlands through Connexxion Taxi services.

Tourism

Through its subsidiaries, Eurolines and Internorte, Veolia Transdev transports passengers by coach on scheduled international routes serving over 600 cities throughout Europe. Veolia Transdev also has a strong presence in the tourism sector and particularly in Greater Paris though its subsidiary, Visual.

Digital Transportation Management

Over recent years, digital media for communicating with passengers has become essential to the customer relationship policy and a means of developing service use. Veolia Transdev has developed and rolled-out internet and cell phone solutions (public transportation websites and cell phone applications), primarily through its group subsidiaries Cityway and Dryade, but also in the Netherlands, Germany and the United States. Veolia Transdev has also invested in innovative ticketing solutions, including “Pass-Trams” and “VTD Pass” multi-canal remote selling solutions, the “ticketing service” developed with Accenture and the Near Field Communication cell phone technology in the BPass project rolled-out in Nice. Veolia Transdev’s activities are not limited to the customer relationship policies of transportation networks managed by the Group, but include new business models relating directly to managing travel information. Veolia Transdev continues to invest in innovation and improving the performance of these solutions. With the Smart Mobility project, it is targeting the digital cities market for all transportation issues.



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Description of Activities in 2011

In France, in the urban transportation sector, Veolia Transdev won contracts for the operation of the Mont de Marsan and Longwy bus networks and renewed contracts for the Avignon, Greater Nancy and Le Havre networks in 2011. In the intercity transportation sector, Veolia Transdev also renewed contracts for scheduled intercity bus services in Finistère, Maine et Loire and Seine Maritime and won new contracts to manage the Carcassonne and Perpignan airport hubs.

In 2011, Veolia Transdev was awarded the largest transit and para transit contract in the United States for Nassau County, Long Island (Greater New York). This 5-year contract (with an extension option for a further 5 years) represents Veolia’s largest public service delegation contract in the United States. In addition, new urban passenger transportation contracts were signed in Charleston, Antelope Valley, Jefferson Parish and Cobb County, while the Seattle para-transit contract was renewed. Similarly, the Orange County, Las Vegas and Dallas urban passenger transportation contracts were extended. In Chile, Veolia Transdev was awarded the contract to operate the bus network serving the north-east suburbs (zones B and C) of Santiago. In the Netherlands, the Arnhem-Nijmegen concession operated by Connexxion was renewed for 10 years, together with the contracts for the regional bus lines serving the area surrounding Utrecht and Ijsselmond, Zaanstreek and Gooi-Vechstreek. The term of Connexxion’s taxi business contract (Valys) was also extended.

Veolia Transdev strengthened its presence in the rail passenger transportation market in Germany, with Nordwestbahn winning the contract for the Wesertal and Lammetalbahn regional network, in particular. In the west of Germany, Nordwestbahn also successfully renewed a large part of the regional network operated around the city of Bielefeld, by winning the southern contract following the OWL Dieselnetz call for tenders. Nordwestbahn also successfully renewed its S28 Kaarster See-Mettmann regional line. In the south-west of the country, Veolia Transdev renewed the contract for the Strohgäubahn regional rail line, north of Stuttgart. In the bus sector, part of the operating contract for the Frankfurt urban network (Bündel A) was renewed during the year. Veolia Transdev was also awarded an 8-year operating contract for the regional transportation network comprising 55 lines in the Hilburghausen district in Southern Thuringe and an 8-year contract for the regional transportation network comprising 13 lines in the Gütersloh district. In Sweden, Veolia Transdev won the operating contract for the Swedish portion of the rail line linking the South of Sweden and Denmark (Öresundstrain).



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Major Contracts in 2011

The following table shows the major contracts signed in 2011 with either public authorities or industrial or service sector companies6:

Public authority
or company
and location thereof

Month of
signature
of contract

New contract
or renewal

Contract
term

Estimated
cumulative
revenue
(in euros)

Services provided

France

 

 

 

 

 

Greater Nancy

December

Renewal

7 years

374.6 million

Operation and management
of the Nancy tramway and bus network

Le Havre conurbation

December

Renewal

6 years

309.5 million

Public service delegation contract for urban
transportation in the Le Havre conurbation

Greater Avignon

December

Renewal

8 years

253.3 million

Management and operation of the urban public
transportation network of the Avignon conurbation

Europe

(excl. France)

 

 

 

 

 

Germany

     

OWL Dieselnetz (Southern contract)

June (award letter)

Partial renewal

12 years

288 million

Operation of four regional rail lines
around the city of Bielefeld

Netherlands

     

Arnheim – Nijmegen

December

Renewal

10 years

980 million

Concession for the operation of train and bus
networks in the Arnheim-Nijmegen region

Sweden

     

Öresundstrain

December

New

2 years

(+2 years at the customer’s option)

105 million

Operation of the cross-border rail line linking the
south of Sweden and Denmark

North America

 

 

 

 

 

Seattle

August

Extension

7 years

163.8 million

Operation of scheduled bus lines and maintenance of para-transit services in Seattle

Nassau

December

New

5 years

(with a potential 5-year extension at the customer’s option)

410 million

Operation of the Long Island bus network
(New York suburbs)

South America

     

Santiago

December

New

3 years

300 million

Operation of the bus networks for the north and
north-east suburbs of Santiago (Zones B and C)

 

Main Acquisitions and Divestitures in 2011

Following the combination with Transdev described above, the new entity, Veolia Transdev, was composed of 763 companies as of December 31, 2011 compared to 528 companies as of December 31, 2011 for Veolia Transport. In addition, during the year, 277 companies were consolidated for the first time, 6 were merged and 36 companies were liquidated or sold. The combination led to the substantial rationalization of structures, which will continue in 2012 and subsequent years. Veolia Transport activities in Norway and the United Kingdom were sold in 2011, although Veolia Transdev continues to operate in the United Kingdom, particularly in London and Yorkshire.



6    Revenues expected under the contracts won in 2011 have been converted into euros at the closing exchange rate as of December 31, 2011 and represent the portion due to Veolia Transdev under such contracts. Accordingly, these amounts may differ from the amounts announced in earlier Group press releases.



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Development of Synergies: Multi-Services Contracts with Industrial and Service Sector Customers

Outsourcing and Multi-Service Market

Our position forged over several years in the industrial services market and, more recently, the public and private service sector market, reflects the synergies that exist between the four divisions, which enable us to provide management services covering a wide range of services. Growth in this market is primarily driven by the expansion of outsourcing, as industrial companies seek to confer the management of certain activities ancillary to their core businesses to third party service providers.

This outsourcing trend applies to several of our businesses, including energy services, management of the water cycle, waste processing and recovery and on-site logistics management. We offer a “multi-service” alternative to our customers, which involves the provision of services by several of our divisions under a single contract. This option enables us to better satisfy the expectations of customers who wish to outsource a range of services to a single service provider. From an operational standpoint, the customer relationship changes: the service provider becomes the customer’s sole contact and a dialogue develops to seek solutions which satisfy the interests of both parties. This approach also allows for greater technical synergies, economies of scale and mutual commercial benefits.

Our multi-service 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 entrusting us with such a broad range of activities, 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 assumption of management activities that were previously subcontracted, and the implementation of a new energy policy. The economic and operational success of this partnership led the PSA group to seek the same scope of services from us at its new facility in Trnava (Slovakia) in 2005 and to extend the term of the contract for its sites in Eastern France to 2018 (see below).

Our Organizational Structure for the Provision of Multi-Services

In order to develop this multi-service activity, we set up a special purpose entity to coordinate these activities without replacing the divisions, each of which remains responsible for the ultimate performance of services falling within its area of expertise. The Veolia Environnement Industries (“VEI”) project structure manages our bids for multiservice contracts, and a project manager from VEI is appointed for each multi-service contract. Commercial projects and bids are prepared in conjunction with our divisions, and are then reviewed by a Commitments Committee before being submitted to the customer. The contract may then performed by a special purpose entity managed in part by the divisions involved in the project, especially when personnel is outsourced to the customer.

Multi-Services Business Activity

Our activities in the multi-service market primarily consist of approximately fifteen major contracts, which together generate average annual revenue of more than €520 million and which are expected to generate cumulative revenue over their remaining term of around €2.9 billion. The weighted average term of these contracts is approximately 13 years. Multi-business activities also have a strong international dimension, particularly when industrial customers invest in the construction of new factories abroad (so called “Greenfield” sites). This is particularly the case for Arcelor in Brazil, PSA Peugeot Citroën in Trnava (Slovakia), Artlant in Sines (Portugal) and Renault in Tangier (Morocco).



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Défense Environnement Services (DES) – a joint venture between Veolia Environnement Industries and DCNS, created in March 2009, in which Veolia holds a 51% stake – manages support and other services for the Defense sector (including services like utilities management, water cycle management, maintenance of industrial and service buildings, maintenance of small tooling and hoisting equipment, transportation of individuals, logistics, cleaning services and waste management). In 2011, DES – in partnership with Avenance – was awarded the first comprehensive service outsourcing contract for a military base, covering Creil (60) and its four satellites (Amiens, Senlis, Beauvais and Chambery). This contract, worth €20 million over 3 years, represents an estimated €5 million in revenue for DES over this period (51%). From this flagship reference, the challenge will be to corner a significant share of the future market represented by the 60 defense bases in France and worth €500 million based on our estimates. In June 2011, DES signed a multi-service and multi-technical contract with the French Defense Procurement Agency (DGA) for missile trial military bases. This 4-year contract will generate estimated total cumulative revenue over this period of €1.9 million (51%). In November 2011, DES signed an 8-year contract with DCNS for the provision of multi-services at the Cherbourg site. This 8-year contract will generate total estimated cumulative revenue over this period of €12.4 million (51%).

PSA Peugeot Citroën awarded us a multi-technical and multi-services contract covering the historical headquarters of the two companies and the Vélizy, Garenne-Colombes, Carrières-sous-Poissy and Poissy Pôle Tertiaire technical centers. Services will be provided for some 20,000 individuals working daily at these sites. The employment contracts of nearly 300 employees of the former service provider were transferred to us under the new contract. This 5-year contract will generate total estimated cumulative revenue of over €160 million. The PSA Peugeot Citroën contract covering production sites in the east of France (Sochaux, Vesoul and Mulhouse) was also extended in 2011 for a further five years to 2018, representing additional estimated cumulative revenue of €500 million. The quality of the customer relationship developed since 2003 was recognized in 2011 when we received an award for technical savings during the PSA Suppliers Trophies awards. These events in 2011 reflect the confidence placed by PSA Peugeot Citroën Group in Veolia Environnement, based primarily on its experience in the automobile sector.

Similarly, Renault extended for an indefinite period its multi-business management contract with us for its Paris region sites. This contract represents estimated annual revenue of over €80 million and primarily concerns the multi-technical management of the Guyancourt Technocenter.

Multi-Service Contracts signed in 2011(7) (Veolia Environment Group share)

Company

Location

Month of
signature
of contract

New contract
or renewal

Contract
term

Estimated
cumulative
revenue

(in euros)

Services provided

DES

DGA

Creil

DCNS (Cherbourg)

June

October

November

New

New

New

4 years

3 years

8 years

1.9 million

5.0 million

12.4 million

Multi–services –
military base support services

PSA

Greater Paris

December

New

5 years

160 million

Multi-services/
Multi-Technical services

PSA

Eastern France

May

Extension

5 years

500 million

Multi-services/
Multi-Technical services




7    Revenues expected under the contracts won in 2011 have been converted into euros at the closing exchange rate as of December 31, 2011. Accordingly, these amounts may differ from the amounts announced in earlier Group press releases.



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Market Overview

The Market for Environmental Management Services

Environmental management services include drinking-water treatment and distribution, wastewater treatment, passenger transportation and waste management as well as energy services. This market also includes designing and building the necessary installations to supply such services. These services are provided to public authorities, industrial and service-sector companies and private individuals. The contractual terms governing their implementation vary depending on the nature of the project, the customer and local regulations. The set-up of public-private and private-private partnerships for the construction of installations based on comprehensive solutions and key environmental objectives such as waste recovery and co-products, energy savings, the re-use of water and reducing emissions of pollutants, enables us to demonstrate our expertise and market our technologies in synergy with our main businesses. Prime examples include the public finance initiative (PFI) contract for the processing and elimination of residual waste with Hertfordshire County in the United Kingdom, which combines the recycling of waste and the recovery of energy and the concession arrangement awarded to Dalkia by Abu Dhabi (United Arab Emirates) to design, build and operate three cooling plants. Certain financing arrangements (European funds, IBRD, etc.) enable such projects or missions at the cutting edge of environmental performance technology to be performed in emerging countries.

In particular, we accompany industrial companies abroad in the implementation of their projects, helping them to design and build their own plants or adapt existing sites, by including technology enabling the environmental impact of activities to be reduced while improving competitivity. These actions and services contribute to the preservation of the environment and respond to the growing concerns of customers to take concrete measures in this direction. Their implementation requires local expertise, with the cross-fertilization of techniques and practices. In this way, our expertise in energy efficiency, energy recovery, water treatment and increasingly, the beneficial re-use of by-products, including wastewater, is effectively harnessed, whether the client is a public authority or industrial company and irrespective of the primary service supplied.

Public and private decision-makers alike know that new cost-efficient innovative solutions must be identified, perfected and implemented in order to limit the environmental footprint. Accordingly, as part of a consortium, we have won several of the first contracts for vacuum waste collection in France (Romainville, Lilas, Issy-les-Moulineaux and the Clichy Batignolles eco-neighborhood in Paris). While all our customers and the beneficiaries of our services are now aware of the environmental challenges facing us, our response must be tailored to the different requirements of each customer group and each specific context.

Citizens and public contractors are setting increasingly strict environmental performance requirements for the management of public services and utilities. As a result, this increases public sector customer awareness of environmental requirements and of their responsibilities in this area, leading them to implement measures to improve respect for the environment, particularly in towns, groupings and increasingly major conurbations. We actively participate in a certain number of the increasing studies and reviews focusing on this subject. Nonetheless, public sector management contracts remain largely awarded on an individual service basis, in response to competition requirements as well as those of administrative and budgetary bodies. Furthermore, the economic climate encourages public customers to seek budget savings, with resulting strong pressure on prices and supplier margins.



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Private sector customers seek to adopt a unified management policy for all these services and to call on a service provider grouping together all useful expertise and, where appropriate, able to assume the integrated management of outsourced environmental services. They seek innovative technical proposals producing resource savings, enabling the recovery of by-products and limiting the environmental footprint of their activities. Service offers must reflect their specific requirements, be adaptable, and tailored to closely match their expectations. They expect the organizational structure to generate productivity gains, to be shared by both parties. A transversal approach, encompassing several environmental management service families, could help satisfy this requirement by releasing synergies between services. These measures, now largely shared, have led to an increased demand for a range of environmental management services. This trend has accentuated with the international development of companies and the need for centralized management of these services, generating increased demand for specialist service providers offering a global presence able to satisfy the international requirements of their customers.

As set out in the “Low Carbon and Environmental Goods and Services (LCEGS)” report published in July 2011 by the UK Department for Business Innovation and Skills, demand for outsourced and increasingly integrated environmental management services should expand and grow for the following reasons:

The global environmental services market is enjoying sustained growth.

Customers need increased competitivity or savings.

As innovative technical solutions favorable to the environment are developed, our expertise is sought to identify, design, control, build and operate these solutions.

Faced with increasingly strict environmental standards and requirements, public and private players do not always have the necessary technical or operational resources that specialist professionals can mobilize to deal with environmental problems effectively and at minimum cost.

Private and public players also seek the legal security offered by an operator that accepts responsibility for the management of these activities. Expertise in environmental regulations is a determining factor in the choice of operators and an asset that sets us apart from the competition.

Customers need to be able to entrust service providers with the coordinated management of services for a range of sites spread across one or several continents.

In addition, public demand, which now widely reflects a concern for sustainable development, must keep commitments made at the international level and set exemplary standards. In a world that combines accelerated urbanization with demographic growth, major investment in environmental projects and services, as well as sustainable management, are needed in order to provide growing urban populations with adapted environmental services and replace existing environmental management infrastructures.

Nonetheless, the financial difficulties that plague all economic players, whether they are public authorities or private companies, could lead to certain decisions being postponed, especially when they involve new investments.



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These financial restrictions could also encourage public authorities and companies to seek the most cost efficient solutions and lead them to consider outsourcing a portion of their activities under complex, comprehensive long-term contracts. They often seek to simplify the contractual process by entrusting the performance of highly varied services to a single partner, who is able to commit to performance levels and, where appropriate, finance all or part of the investments necessary. This presents numerous opportunities for companies that are able to propose a wide range of integrated environmental management services. Accordingly, when the European Commission published the communication “Towards a Single Market Act” on October 27, 2010, it confirmed its desire to encourage public-private partnerships, and particularly service concession arrangements, which it considers effective levers for mobilizing long-term investment in energy services, waste management and transportation infrastructures.

We believe that market developments offer us significant opportunities, because we are able to provide high quality, innovative, and, depending on customer needs, integrated environmental management services in markets around the world. In order to seize these opportunities, we must, more than ever, strive to offer high-quality services, equipment and installations at competitive prices.

Customers

We provide environmental management services to a wide range of public authorities, industrial and service sector customers in many countries.

Public authorities

Demand from public authorities (primarily small local authorities, that increasingly pool their resources) is focused more and more on the search for quality and innovative solutions and, with increasing urgency, on a desire for efficiency, resource savings (water), energy savings (across all services), the recovery of by-products and the best total cost (by integrating operating concerns from the design phase). During this search, public authorities increasingly favor the concept of value-added services. They are aware of their environmental responsibilities and duties and of the need to update their operating methods, particularly with respect to the management of water resources, air pollution, transportation management and energy consumption. These trends, combined with a movement towards greater urbanization, are increasing the need for essential services.

We have the know-how to adapt to customer expectations and needs. We increasingly participate in upstream studies, helping public decision-makers to define policies for their cities or regions and make decisions based on their short- and long-term environmental impacts and their carbon footprint. We can propose a wide range of contract types, from a simple study or expertise contract to a tailored partnership enabling customers to benefit from the latest technology, and including design and build contracts for installations and contracts focused on measureable performances or objectives, such as energy efficiency contracts. In the current economic context, financial difficulties weigh heavily on public authorities and influence contract negotiations and required services levels. We are also able to adapt to these changes in customer needs.

We believe in the relevance of our comprehensive contract model, which gives us the ability to provide services tied to performance obligations and to design, build, and even finance necessary investments, depending on customer needs. This contributes to innovation and efficiency through mutual research efforts, stimulated by the periodic competitive tendering of contracts. This model takes on different legal forms depending on the traditions in each country. Certain countries, including those governed by European Union law, distinguish public markets from concessions (or other forms of Public Private Partnership, or PPP) based on whether operating rights are transferred and the extent which we assume operating risks and depending on whether the contract focuses on the service to be provided or the construction of infrastructure.



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Since the mid-19th century, French public authorities have generally chosen to entrust the management of public services (water, sanitation, transportation, waste collection and processing, urban heating) to companies under contracts that were traditionally considered to be concessions (or operating contracts in the absence of an investment component) and which are now classified by law as public service delegation contracts, but which retain the label “concessions” under the European Union definition. They have frequently preferred to retain control over the construction and financing of installations and merely place them at the disposal of the service provider for the term of the contract, at least for certain public services.

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 design and construction of the necessary public infrastructures, installations and equipment (as varied as administrative and educational buildings, hospitals, transportation infrastructure, prisons, wastewater treatment facilities or household waste processing plants), but also their financing and long-term maintenance before recovering them at the end of the contract. Two main categories of contracts have emerged, which, together, are often qualified as Public-Private Partnerships (PPPs). The first of these two types of contracts includes those belonging to the market category, where the resources intended to cover the cost and financing of infrastructure are similar to a price paid or guaranteed by the public authority and the service is provided to the public authority using the completed infrastructure. The second type includes contracts that are equivalent to concessions, as defined by the European Union, but resources are obtained through the commercial operation of the public service that is the main object of the contract (i.e. the public or general-interest service whose operation has been delegated), whereas the construction of infrastructure provides only the means necessary to gain access those resources. Different IFRS accounting treatments apply in each case and will result in the recognition of a financial asset corresponding to a receivable from the public authority or not, depending on how the contract is structured and classified. We can also distinguish these PPPs based on the nature of the services entrusted, such as Build Operate Transfer (BOT) contracts with financing, or Design, Build, Operate (DBO) contract, excluding financing.

Under European Union law, following the publication of “Towards a Single Market Act” on October 27, 2010, the European Commission published a proposed directive on December 20, 2011 regarding awards of concession contracts. This proposal requires the publication of a notice prior to awarding concessions with an estimated value, net of VAT, over €5,000,000. There is, nonetheless, a risk that the extensive regulation of PPPs will hinder realization of the objective of opening-up and developing the internal concessions market. We are closely monitoring current negotiations within the European Parliament and the Council concerning the proposed directive. Our objective is to secure and promote the use of concessions for services and construction work in other European Union countries, without assimilation of the public markets concession regime or substantially calling into question French public service delegation legislation.

On December 20, 2011, the European Commission also published two proposed amendments to directives concerning public procurement markets. In 2011, the Decree of August 25, 2011 created “comprehensive performance-based public procurement contracts”, to allow the creation of public procurement contracts encompassing design, build, operation and maintenance services. These provisions will enable public bodies to enter into energy performance contracts as defined in the Energy Efficiency Directive of April 5, 2006 (which is currently being revised) in order to implement the objectives of the “energy-climate” package adopted by the European Union at the end of 2008. We are closely monitoring the drafting of the proposed text. Our objective is to secure and promote the use of concessions for services and construction work in other European Union countries, without assimilation of the public markets concession regime or calling into question French public service delegation legislation.

Industrial and Service Sector Companies

We offer our industrial and service-sector customers a wide range of construction and/or operating services, to help them improve their competitivity and environmental footprint: improvements to installations, production of the utilities necessary for their industrial processes (steam, industrial heating and cooling, process water, demineralized water, compressed air, etc.), optimizing consumption, re-using process water and limiting and recovering by-products (treating effluents, recycling and recovering waste, and maintaining durable and efficient waste elimination channels).



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We offer customers innovative solutions tailored to the needs of each industrial site. We adopt a long-term partnership approach, entering into long-term contracts, which can require services to take account of changes in customer requirements or their business.

We consider the development of our industrial customer base as a major growth driver and aim to increase the share of revenue realized with industrial customers from 30% to 40% by 2015. This will primarily be achieved through the Environmental Services division where over 60% of revenue is generated with industrial customers, and through “engineering” activities in the Technologies and Network business in the Water division.

Competition

Most markets for environmental management 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 we participate is based primarily on the quality of the products and services provided, as well as the suppliers’ reliability, customer service, financial position, technology, price, the financial structure of the contract, 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 public authorities or non-outsourced departments of industrial or service sector companies. In each of the markets in which we operate, our competitive advantages are our technological and technical expertise, our financial position, our geographical reach, our experience in providing and performing all environmental management services, our management of outsourced employees, and our ability to comply with regulatory requirements.

In the environmental management services sector, Suez Environnement provides a range of services encompassing water and waste management. In the energy sector, the GDF-Suez merger does not significantly change our competitive position, despite the merger of Cofathech (GDF) and Elyo (Suez) to form Cofely. Certain players are originally from neighboring industrial sectors and are seeking to extend the scope of their business. This is the case for the subsidiaries of certain energy providers, notably in the heating network sector (Vattenfall, RWE). Companies specialized in electrical installations, such as Cegelec, have also expanded their environmental services offering. However, the vast majority of competitors do not offer the same range of technical expertise in environmental services that we do. Therefore, in certain cases, our competitors are required to set up special purpose entities to cover the service scope required by customers.

We expect that competitors, currently operating in a single or national market, will seek to expand their activities to become integrated environmental management service providers, in the coming years. This change has been prompted by the desire of potential customers to outsource a larger portion of their business. The development of companies with worldwide capabilities focusing on multi-site and international calls for tenders has therefore been observed, such as Sodexo Johnson Controls or Jones Lang Lasalle in facilities management. Industrial service providers are also moving towards greater consolidation by creating multi-service subsidiaries. This is the case of Voith in Germany.

A new form of competition has developed over recent years due to the growing role of financial groups such as infrastructure funds (Macquarie Bank, etc.) and private equity funds. Although they are not global or strategic competitors, these players are often present in privatization tenders and asset sales and can occasionally compete with us for growth opportunities. The development of PPPs has also resulted in the emergence of new players from the construction sector that are able to manage the major construction and financing challenges required by these operations. We may join forces with these service providers as part of alliances formed to respond to tender offers. Such companies mainly include Bouygues, Vinci and Eiffage. Finally, it is important to note that our main competitor is often the customer itself. Customers systematically compare the financial, technical and employee-related benefits and advantages of outsourcing with maintaining the status quo.



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There has been a trend in France in recent years towards a return to local government control over the provision of environmental services to public authorities, which has reduced the number of delegated management contracts available on the market. In Germany, public entities (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. This trend nonetheless remains limited. Finally, new players from the construction and public works sectors could look to expand into the service market involving major and/or complex new investment, which subsequently require the provision of services (e.g. construction of a hospital which then requires operation and maintenance of common and technical services). These new players may provide services as part of a BOT or concession contract or, in France, as part of a “partnership contract” authorized by the regulation of June 2004. The emergence of such new players is a natural outgrowth of the development of a comprehensive service market integrating the construction and financing of the infrastructures necessary to the performance of services, which then revert to the customer at the end of a contract.

Water

Veolia Eau is the worldwide leader in the water and wastewater treatment sectors(8), where its main competitor across all markets is Suez Environnement. In national, regional and international markets, we remain exposed to strong local competition from private, public and mixed private-public operators.

Our main competitors in France are Lyonnaise des Eaux (Suez Environnement), Saur and local public authorities. In Spain, our main competitors are Suez Environnement (through Aguas de Barcelona, Agbar and Aguas de Valencia) and construction and public works companies such as Aqualia-FCC, ACS, Sacyr and Acciona which are also focusing on an international development strategy to offset the slack national market. In the rest of Europe, aside from Suez Environnement, other players include the German companies Gelsenwasser and Remondis, which expanded its Water business in Germany by acquiring Eurawasser from Suez Environnement (which thus withdrew from the water business in this country) and certain RWE assets, as well as Aqualia, which has confirmed its interest in Central and Eastern Europe and even Russia.

The British market has recently experienced several changes: the restructuring of Biwater, acquisition of Northumbrian Water by the Hong King company Cheung Kong Infrastructure (which then sold Cambridge Water), the acquisition of a stake in Thames Water by the Abu Dhabi sovereign fund, the sale of Bristol Water by Agbar which thus withdrew from the United Kingdom market as well as the Chinese and South Korean markets in order to enter the US market. In the United States, the purely American companies, American Water and Aqua America, consolidated their geographic positions through asset swaps. In the North Africa and Middle East markets, as well as in Latin America (Chile, Peru and Brazil), Veolia Eau is in competition with Spanish companies (Acciona, Aqualia, ACS) and is facing the expansion of Japanese (Mitsui, Marubeni, Mitsubishi, Sumitomo, etc.) and even Korean trading companies (Samsung in Bahrain), which are seeking to establish a position in stable, long-term activities.

China is also a strategic development region for Suez Environnement and Asian companies, with competition from local companies, as well as Japanese and Singaporean companies, such as Hyflux, SembCorp and Moya Dayen, which are also present in the Middle East and North Africa (MENA) region. Australia is also a strategic development area, with competition from Spanish (Acciona, ACS, Cadagua, Sacyr) and Asian (Hyflux, Mitsubishi, Marubeni) companies, in addition to Suez Environnement.

The global water market is also of interest to technology providers such as the conglomerates General Electric and Siemens, which are targeting India in particular with a specific focus on the desalination and wastewater recycling sectors, as well as Asian players such as Doosan (South Korea), Kepel and Hyflux (Singapore) and new entrants such as LG, GS (which acquired Inima) and Hitachi.



8    Source: Pinsent Masons Water Yearbook 2011-2012.



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Environmental Services

Our main competitors in the waste management sector are either regional players, or players who cover only part of the services offered by our Environmental Services division. In Europe (including Central and Eastern Europe), where Veolia Propreté conducts the majority of its business, our principal competitors are Suez Environnement (acting through its subsidiary SITA), also present throughout the entire waste recovery chain, Remondis, a major player in Germany and Biffa, which developed its activities in the recycling sector in the United Kingdom through the acquisition of Greenstar UK.

The North American market is highly concentrated. In the solid waste sector, our two major competitors are Waste Management Inc. and Republic Services Inc. (the entity formed by the merger of Allied Waste Industries and Republic Services at the end of 2008), while Clean Harbors is the main competitor in the hazardous waste and industrial services sectors. Finally, in the Asia-Pacific region, our main competitors are Suez Environnement and various local companies. In Australia, Transpacific is the main national competitor in a concentrated market. The Chinese market remains fragmented and primarily comprises local and regional players.

Energy Services

The energy services market combines a diversified range of services and has many different types of market players. Through our Energy Services division, we face strong competition from primarily sector-specific players.

Only the group formed by the GDF-Suez merger, Cofely, has the ability to offer a diversified and comprehensive range of services with a strong international presence that is comparable to our own presence and services. Cofely represents a major competitor, mastering a range of expertise similar to ours. This competition increased in 2011, particularly in France, with an aggressive policy to win market share. Among sector-specific players, we face the active presence of large local competitors such as ENEL, Vattenfall, Fortum, Alpiq and EON, particularly in the energy infrastructure sector.

In the service 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 energy services. Technical maintenance companies focusing on areas such as electrical installations are also increasingly forming partnerships with major construction and public works groups (Vinci, Bouygues) or groups specializing in facility management (SERCO, JLL, etc.). In the intelligent building sector, equipment manufacturers are playing an increasing role (Schneider Electric, Siemens, etc.). Finally, we face historical competition from municipally- or publicly-run companies, principally in Central Europe.

Transportation

In the transportation sector, our principal competitors are large private operators, who are primarily French, American and British but also Asian, as well as public companies (national or local) that operate public monopolies. Considerable market consolidation took place in 2011, in addition to international expansion of historical competitors from the national railway sector (Deutsche Bahn, SNCF, Trenitalia). The main competitors on the global stage are the British groups FirstGroup, National Express and Stagecoach, the French group SNCF and its subsidiaries Keolis and RATP Dévelopmment, Deutsche Bahn and its subsidiary Arriva, and the Hong Kong company MTR Corporation.

In France in 2009, the merger of Keolis, a 45.4% subsidiary of SNCF and the car parking lot management company, Effia, a wholly-owned subsidiary of SNCF, provided SNCF with a 56.7% shareholding in the combined entity. In addition, SNCF Proximités, a specialist in local and regional mobility, is positioning itself in several business segments in France and abroad to export its know-how.



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With the current trend towards consolidation in the mass transportation market, Deutsche Bahn (the national rail operator in Germany) acquired the Arriva group, which is present in 12 European countries. Following this acquisition, the new group became the main European competitor of Veolia Transdev. Finally, another public rail operator, Trenitalia (a wholly-owned subsidiary of the Italian state-owned group, Ferrovie dello Stato), acting jointly with the Luxembourg investment fund, Cube, purchased the German assets of Arriva. Accordingly Trenitalia, which had already expressed interest in circulating its trains between France and Italy, is now a competitor in the German market, under the name Netinera.

In the United States, Amtrak’s persistent budget difficulties have opened the rail market to other operators under delegated management contracts or public-private partnerships. The competitive environment in the United States has changed with the arrival of new competitors such as Keolis and ACI and potentially European and Asian consortiums. Thus, several international groups are submitting bids to high-speed rail calls for tenders, in particular.

In conclusion, Veolia Transdev is operating in an environment marked by increasingly intense competition between the major international groups and a move towards consolidation, leading to the formation of a few extremely large local passenger transportation groups.

Contracts

Contractual relationships with public authorities for the provision of general-interest services to the public or public services, for which the local authority is responsible, take a variety of forms depending on the level of involvement of the public authority. The public authority may decide merely to regulate the services, to delegate operating activities to a company acting on its behalf but under its supervision, or to provide these services itself with, or without, the assistance of a company. Even when, as in certain countries and for certain services, public authorities choose to be involved as little as possible in the provision of public services to residents or be satisfied with more or less restrictive regulation of the relevant activities and customers must be sought directly among the local population, we are able to find our place, most often through acquisition of a private operator already serving a given area.

Generally, however, these so-called “general economic interest” services or public services are considered to be the responsibility of the competent public authority, which does not merely implement regulations and controls but also plays an active role in their management, through one of the following approaches:

the public authority can decide to directly operate public services (“direct” or “internal” management) with its own resources or resources transferred to an in-house company over which it exercises control similar to that exercised over its own departments;

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

the public authority may prefer to transfer responsibility for providing the public services to a company, to which it delegates or transfers (under the terms of a contract comprising technical performance commitments) the right and the obligation to operate the service, provide the human resources, equipment and financing necessary and, where appropriate, finance and build the infrastructure. Third parties selected by the public authority may be either private operators, mixed public-private companies or other public entities.



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The different ways in which public authorities choose to manage the provision of public services lead to different contractual mechanisms between the public authority and the company, to which we easily adapt. The contracts we use generally fall into one of three categories, depending on whether we are entrusted with full responsibility for providing the public service and whether we have a financial and commercial relationship with end users:

If 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 work for which it pays a contractually-agreed price. It therefore enters into a variety of contracts for the supply of construction work and services;

When new infrastructure is necessary for the provision of the services, the public authority may prefer a more comprehensive build/operate contract, which may include the financing of required infrastructure. These are known as public market contracts under EU law and also referred to as Build, Operate, Transfer (BOT) contracts, or since 2004 as partnership contracts, in France;

The public authority may entrust a company with 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 fees and charges paid by the end user of the service. The contractor thus has financial and operating responsibility for providing the service, but must do so in accordance with the terms set by the public authority encompassing needs to be satisfied, expected performance and prices charged to end users. This is the logic of “delegated management” contracts, in France, or “concession arrangements” under EU law (also known as a Public Private Partnerships – PPP), which transfer to the concession holder the “risks and perils” or “risks and benefits” of the activity, to the extent compensation is linked to operating results.

The historical traditions of the various countries in which we operate tend to favor one of the above-mentioned contract types over the others. Current practices in various countries are, however converging. Public authorities alternatively adopt one or another contract type depending on the situation. All contracts have, in most cases, the common feature of being long-term agreements, even if contract terms are shortening. In France, the so-called “Olivet Commune” Order (Council of State Order of April 8, 2009) may result in the residual term of certain old contracts still in effect being limited from 2015. This Order particularly concerns contracts in the water, wastewater and household waste sectors. Contracts increasingly include the building of infrastructure, or at least the upgrade of existing equipment and in all events its maintenance and may also provide for the financing thereof.

We also enter into outsourcing contracts for the management of complex services with our industrial and service sector customers, which are similar to the above contracts. Such contracts take a variety of forms but are always tailored to customer expectations. Despite differences relating to the nature of customers, the services contracted and the nature of the legal systems in which we operate, our customers tend to demand transparency during the bid process and during contract performance, the formation of a real partnership to improve productivity and execution and a desire for clear performance targets involving penalties or variable compensation depending on achievement.

We are also very attentive to contractual provisions, in particular when we must finance the investments required under a contract. Given the complexity of management agreements and their long-term nature, we possess skills in contract analysis and control and the content of our major bids is decided by Commitment Committees meeting at several levels. The legal and financial departments of our divisions, and potentially our  Group as a whole, are involved in the negotiation and preparation of tender bids and contracts. Audits are carried out on our main contracts. Each year, our Internal Audit Department includes a review of the contractual and financial risks inherent in our most significant contracts in its annual program. Contracts often specify that the financial conditions will be reviewed periodically during the contract term. Certain customers have recently used this review process to prepare the future renegotiation of the contracts.



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Intellectual Property – Company Dependence

We own a number of brands, including the “Veolia” brand. Since November 2005, our Group has adopted a single brand strategy aimed at uniting the Water, Environmental Services and Transportation divisions under the Veolia banner. The three divisions remain identifiable according to their business descriptions: “Water,” “Environmental Services” or “Transportation,” while the Veolia Energy Services division is mainly known under the name “Dalkia.” As a result, the companies at the head of the Water, Environmental Services and Transportation divisions, as well as most companies in the countries and regions where we are based, have modified their corporate names to include “Veolia.” This strategy, implemented by Company Executive Management, illustrates our desire to increase the global consistency of our divisions and our visibility, by strengthening our identity and global culture based on our service values. Accordingly, the “Veolia” brand has become an international reference for trust, reliability and expertise in the environmental services sector.

Innovation is essential to our growth and profitability and flows from the expertise and know-how of our businesses. The patent portfolio and developed expertise sets us apart from the competition and participates in our reputation as a worldwide reference for environmental services. We capitalize on this expertise primarily through the creation of technical, digital and IT tools that we seek to protect using tailored methods.

In our opinion, our business is not dependent on the existence or validity of any one or group of these patents, nor on any contract covering one or more intellectual property right(s). Furthermore, we are not dependent on any customer, major license or industrial, commercial or financial supply contract.

Seasonality

Certain of our businesses are subject to seasonal variations. Dalkia generates 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 wastewater treatment services 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. Thanks to the diverse nature of our operations and its worldwide presence, our results are, in general, not significantly affected by seasonal variations.

Raw Materials

Given our business activities (Water, Environmental Services, Energy and Transportation), changes in the price of raw materials (mainly fuel and natural gas prices) and recycled materials (paper, cardboard, iron and non-ferrous metals) can have an effect on our different divisions.

Fuel prices (mainly gas and coal) can be subject to significant fluctuations. Energy prices have fluctuated widely in the past few years. In 2011, the price of a barrel of Brent crude continued the upward trend commenced at the beginning of 2009. The average price of a barrel of Brent crude was US$111.4 in 2011, up US$31.8 on the average price in 2010. In the first half of the year, this increase was primarily due to political tension in the Arab world, which led to an annual high of US$126.6 per barrel in April. The price of a barrel of Brent crude then fell steadily amid fears regarding the economy, to close at US$108.6 per barrel at the end of December 2011. This increase in the price of Brent crude oil not only had an impact on fuel prices, but also on gas prices (particularly in France, where changes in STS gas prices track petroleum prices with a three month lag). Thus, average 2011 French gas prices increased approximately €6/MWh compared to 2010 (increase of 20%).

The general consensus among energy product analysts is, however, that energy prices will continue to increase in the long-term, due to the increasing rarity of known oil reserves, a marked increase in extraction costs and the need to adopt new energy sources in response to growing environmental requirements. However, the timeline of this underlying trend is difficult to forecast, due to the limited visibility of market participants regarding economic growth. Therefore, the possibility of a drop in commodity prices cannot be excluded. In any event, as in recent years, energy prices could remain volatile in 2012 and beyond.



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Our contracts generally include price review and/or indexation clauses, which enable us to pass on part of any increases in commodity or fuel prices to the price of services sold to customers, even if this may be carried out with a time delay.

In the Transportation division, numerous contracts contain indexing clauses that take fluctuations in fuel costs into account, significantly reducing the impact of a rise or fall in fuel prices. In certain contracts, especially contracts entered into in the United States, we are entitled to full compensation in the event of a rise in fuel prices. Approximately 70% of costs are covered by contractual indexing clauses. For those contracts not containing indexing clauses, a fuel hedging policy was implemented in 2008 to manage fluctuations in fuel costs. Veolia Transdev uses derivative instruments for this purpose, whose characteristics (notional amounts and maturity) are defined in accordance with forecast fuel requirements (based on firm orders or highly probable forecast flows). The majority of derivatives used are swaps.

In the Environmental Services division, collection services involving non-hazardous solid and liquid waste are the most sensitive to fluctuations in fuel prices. However, for our customers, indexing clauses in contracts generally allow us to pass on a significant portion of increases in such costs through the prices charged. Approximately two-thirds of activities are covered contractually. For customers not bound by contract, increases in fuel costs are either fully or partially passed on through an increase in fees or negotiation.

In the Transportation and Environmental Services divisions, the increase in fuel prices in 2011 compared to 2010 had a negative impact on fuel expenses of approximately €67 million in 2011, including the cost of swap hedging arrangements. The portion relating to Transportation was recorded in results of discontinued operations.

In the Energy Services division, given the long-term nature of contracts and the terms of supply agreements, changes in energy prices may have different impacts depending on the areas in which Dalkia intervenes. At the Energy Services division level, the overall positive impact on revenue was €265 million.

A portion of Environmental Services division revenue is generated by its sorting-recycling and trading businesses, which are particularly sensitive to fluctuations in the price of recycled materials (paper, cardboard, ferrous and non-ferrous metal). In 2011, annual averages for two representative price benchmarks (“Revipap 1.05” for recycled paper and “E40” for scrap metal) reported increases of 23% for recycled paper and 17% for scrap metal, compared to 2010 averages. The results of the Environmental Services division were therefore impacted positively in 2011 by the increase in the price of recycled materials compared to 2010. This increase in the annual average hides substantial price volatility in 2011 and particularly in the recycled paper market, where a price surge at the beginning of the year was followed by a substantial drop in the second half. Accordingly, at the end of 2011 recycled paper and scrap metal prices were 37% and 5% below their 2011 averages, respectively.

In our other divisions, as part of supply management and cost optimization measures, certain subsidiaries may be required, depending on their businesses, to contract forward purchases or sales of commodities (gas, electricity). We also entered into long-term contracts for the purchase of gas, coal, electricity and biomass in order to secure our supply chain. The majority of these commitments are reciprocal, and the third parties concerned are required to deliver the quantities indicated in these contracts just as we are obliged to accept them. Finally, with respect to its building activities, particularly in the Water division, the Group may also purchase financial instruments to hedge against increases in the price of nickel and copper primarily. See Notes 29.1.3 and 37 to our Consolidated Financial Statements included in Item 18 of this annual report on Form 20-F.

Industrial Investments and Divestitures

Our principal industrial investments and divestments for 2009, 2010 and 2011 are set out in this annual report at Item 5. “Operating and Financial Review and Prospects—Liquidity and Capital Resources” and “—Investing Activities—Industrial Investments” and in the Notes to the Consolidated Financial Statements.



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Environmental and Employee Regulations, Policies and Compliance

Environmental Regulation

Our businesses are subject to extensive, evolving and increasingly stringent environmental regulations, in particular in the European Union and also in North America and emerging countries.

Environmental regulation in European Union countries is primarily tied to European directives and regulations. The majority of our activities require operating permits or authorizations that include rules governing the operation of the installations. These operating permits are delivered by public authorities pursuant to authorization procedures, which include the performance of specific studies presenting, in particular, the environmental footprint of the installations. In France, the majority of our installations operated fall under the control of the ICPE regime (Facilities Classified for Environmental Protection). Our activities are subject to a wide range of regulations, the most important of which are presented below.

With regard to reducing pollution, the Directive on Industrial Emissions of November 24, 2010, sought to overhaul the 1996 Integrated Pollution Prevention and Control Directive and six sector-based directives. Henceforth, the application scope encompasses new activities, administrative permits must be issued based on the use of “Best Available Techniques” (BAT) and new limits apply to air, water and soil emissions. Obligations to monitor emissions likely to contaminate soil and groundwater have been introduced. The directive also provides for the preparation of a “baseline report” on the state of the site before starting operation of the installation or before a permit for an installation is updated for the first time, and redefines site restoration obligations on the cessation of activities. Member States have two years to enact this directive into national legislation.

In addition, the REACH regulation on chemicals, which came into effect on June 1, 2007, establishes a new European methodology for the management of chemicals that is aimed at enhancing the knowledge of substances currently circulating within the European market. This regulation seeks to reduce the health and environmental risks associated with the manufacture and use of chemical substances. It introduces, across Europe, a range of procedures aimed at improving knowledge of the health and environmental risks associated with chemicals marketed, together with the management of these risks throughout the lifecycle of the chemicals, in order to ensure better health, safety and environmental protection. It implies in particular for the Group as a user of such substances, the strengthening of cooperation and exchange of information with suppliers and customers. It also involves improving risk management at all stages of the life cycle of chemicals and strengthening the prevention of chemical risks concerning Group employees.

Our relevant subsidiaries are in compliance with the schedule set by the REACH regulation for chemicals requiring registration. After the systematic pre-registration of all substances potentially concerned and compliance with the first registration deadline of November 30, 2010, the next deadlines are being monitored. Other chemicals produced by us may be governed by other regulations, such as biocides which fall within the scope of the Directive of February 16, 1998.

The Classification, Labeling, Packaging (CLP) regulation of December 16, 2008, which has the same end purpose as the REACH regulation, came into effect on January 20, 2009. This regulation makes certain amendments to existing provisions concerning the classification, labeling and packaging of dangerous substances and defines new standards regarding labeling classifications and the packaging of chemical substances and mixtures.

This text seeks to provide a high level of protection for human health and the environment, while guaranteeing the free movement of chemicals. Henceforth, dangerous chemicals are identified and information on the dangers they represent provided based on new criteria defined by the General Harmonized System of classification and labeling of chemicals, enabling harmonization at a global level.



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In addition, the 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 came into force in February 2005 and gave the European Union the objective of reducing greenhouse gas emissions in the European Union by 8% over the period 2008-2012, compared with 1990 emission levels. Directive 2003/87/EC of October 13, 2003, created an emission allowance trading system within the European Union, known as ETS (Emission Trading Scheme). The resulting system operates in parallel with the Kyoto Protocol system, which came into operation in 2005 and led to the creation of National Allowance Allocation Plans (NAAP) for an initial period (2005-2007) followed by a second period (2008-2012), corresponding to the Kyoto Protocol commitment period. European Directive 2009/29/EC of April 26, 2009 amended the ETS Directive and extended the allowance trading system to cover a third period (2013-2020), which provides for a progressive reduction in allowances granted and new grant procedures. The European Regulation of November 12, 2010 established a scheme for auctioning greenhouse gas emission allowances for the period 2013-2020. The EC decision of December 15, 2010 defined rules for the free grant of allowances for the period 2013-2020. Allocation calculation guidance was published in the first and second quarters of 2011. Operators filed the necessary data with the national authorities and performed preliminary calculations. The definitive amount of allowances to be granted will be known at the end of 2012.

In May 2006, pursuant to the decisions made in light of the conclusions of the Convention on Biological Diversity, the European Commission implemented an action plan comprised of objectives aimed at halting the decline in biodiversity and measures enabling the achievement of objectives by the end of 2010. This action plan is based on an assessment of lost biodiversity in Europe and elsewhere in the world and measures already taken by the European Union to resolve this problem. In October 2009, the Conference of the Parties (COP) revised the strategic action plan of the Convention, setting new objectives for the period 2010-2020 which include primarily analyzing the services rendered by ecosystems to human well-being. At a global level, the United Nations Convention on Biodiversity held in October 2010 in Nagoya (COP10), adopted the Nagoya protocol. This protocol provides, in particular, for the adoption of a strategic plan covering the period 2011-2020, an agreement to create the IPBES (Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services) and the mobilization of the necessary financial resources to implement the related strategy.

In France, the planning law aimed at implementing the “Grenelle de l’environnement” decisions, known as the “Grenelle 1 Law” of August 3, 2009 was supplemented by a law that includes national environmental commitments, known as the “Grenelle 2 Law” of July 12, 2010. These laws seek to implement six major projects, which have significant implications for each of our divisions. The construction, transportation, health and waste, water and biodiversity and energy sectors are all concerned, as is environmental governance and information transparency. A significant number of Grenelle 2 law application decrees are scheduled to complete the implementation of these measures. Accordingly, a decree issued on July 11, 2011 concerns greenhouse gas emissions reports and a territorial climate-energy plan; it requires companies with more than 500 employees to prepare a greenhouse gas emissions report before December 31, 2012. This obligation also applies to the State and territorial authorities with a population of over 50,000.

With regard to Facilities Classified in France for the Protection of the Environment (ICPE), the Order of June 11, 2009 created a new ICPE category: the “registration” regime. This is an intermediary regime between the authorization and reporting regimes. This Order was supplemented by two application decrees on April 13, 2010 and by several ministerial orders setting general rules. The main objective of this new regime is to simplify administrative procedures for facilities presenting risks and justifying an upstream project review by the Classified Facilities inspectorate, as the risks concerned may be limited by “standard” recommendations.

The Directive of November 24, 2010 on industrial emissions was enacted into French law by the Order of January 5, 2012 creating a specific section in the French Environmental Code for the relevant installations. The conditions governing the installation and operations of these installations are set to ensure they are operated using Best Available Techniques (BAT) and with reference to the conclusions of these BATs. Account must also be taken of changes therein. In addition, the Order clarifies the circumstances under which information provided by the operator for the review of the installation’s authorization conditions, will be presented to a public enquiry.



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Water

Water and wastewater treatment activities are highly sensitive to regulation. In Europe and the United States, governments have enacted significant environmental laws at the European, national, and local levels in response to public expectations regarding environmental protection and safeguarding water resources. The quality of drinking water and the treatment of wastewater are increasingly subject to regulation in emerging countries, which are progressively adopting WHO standards in their internal regulations.

At the international level, the WHO directives on health and water are published for countries, to help them draft internal regulations governing the quality of water. These directives set guidelines for the quality of drinking water and emphasize the importance of the preventive management of health risks. Compliance with these recommendations guarantees the production of water which is safe for human consumption. The right of access to water is recognized by the majority of countries and access to clean water and sanitation was recognized by the United Nations as a human right on July 28, 2010.

At the European level, the quality of drinking water is strictly regulated by Directive 98/83/EC of November 3, 1998, on the quality of water intended for human consumption, which was enacted by EU member states and into French law by various provisions incorporated into the French Public Health Code. In addition to quality control measures, this directive introduces the concept of evaluating risks on an on-going basis. The collection, treatment and discharge of urban, industrial and commercial wastewater is governed by Directive 91/271/EC of May 21, 1991, the objectives of which were confirmed and extended by the water framework Directive 2000/60/EC of October 23, 2000, which concerns more generally the quality of water, whether above or below ground. The aim of Directive 2006/118/EC of December 12, 2006 (daughter directive of the framework directive) on the protection of groundwater is to ensure the good chemical and ecological quality of such water by 2015, through oversight and restrictions on chemical substances in water by this same date. Directive 2008/105/EC of December 16, 2008 (another daughter directive of the framework directive) lays down environmental quality standards for 33 priority substances and 13 priority dangerous substances presenting a major risk for the environment or public health in the water sector.

The treatment of wastewater is also directly impacted by Directive 2008/56/EC of June 17, 2008, known as the “Marine Strategy Framework Directive,” which seeks to protect and conserve the marine environment and thereby conserve the ecosystem. It also seeks to establish marine protected areas in order to contribute to achieving the healthy ecological condition of the European Union marine environment by 2020. European Directive 2006/7/EC of February 15, 2006 concerning “bathing water,” imposes new restrictions on the oversight and management of bathing water and information provided to the general public.

Public authorities also impose strict regulations concerning industrial wastewater likely to be discharged into collection systems, as well as processed wastewater and sludge originating from urban water treatment installations. In this respect, the waste framework directive of November 19, 2008 classifies land treatment using sludge produced by wastewater treatment plants as a recovery operation.

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 ground 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. The French law of December 30, 2006 on water and aquatic environments implements EU requirements for high quality water and significantly modifies French legislation on water, as well as implementing EU water quality objectives for 2015. Water development and management plans (SDAGE) take specific account of this water quality objective and the Order of January 25, 2010 sets out a water quality oversight program.



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In addition to measures to preserve the quality and quantity of resources, the Planning Law no. 2009-967 of August 3, 2009 aimed at implementing the “Grenelle de l’environnement” decisions, known as the “Grenelle 1 Law,” enabled the implementation of a blue infrastructure to preserve the ecological continuity of surface water masses. These objectives are taken into account in territorial planning, via “urbanism” and “water” planning documents. With regard to health aspects, measures must be taken to protect drinking water catchment areas of strategic supply importance and water emissions of certain toxic substances must be reduced by 2013. In the wastewater treatment sector, treatment plants must be brought up to standard by 2012 at the latest and autonomous wastewater treatment is subject to strict regulation to protect the quality of the receiving environment, sanitary conditions and public health.

The Grenelle 2 Law application texts implement the objectives set out in the green and blue infrastructures and provide for the acquisition and restoration of 20,000 hectares of wetland by the water bodies. In addition, this law confirms the responsibilities of municipalities with regard to the distribution of drinking water and seeks to improve knowledge of networks and reduce network losses. A financial incentive system was introduced to underwrite these obligations. With regard to wastewater treatment, the law clarifies and strengthens the content of the supervisory role of territorial bodies for non-collective wastewater treatment and requires municipalities to draw up to a collective wastewater treatment policy before the end of 2013. Priority is given to biological farming in order to protect certain drinking water catchment areas of particular importance to current or future supply. In addition, the Decree of October 10, 2011 implements action plans to protect water against nitrate pollution from agricultural activity and the Order of December 19, 2011 sets key measures for the national action plan. As a further measure to protect water resources, the Order of May 31, 2011 introduces an express authorization procedure for the aerial spraying of pesticide. Violation of these laws is punishable by both civil and criminal law and a company may even be found criminally liable.

In the United States, the main federal laws concerning 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 set up by the EPA and a number of states have done so.

Environmental Services

In numerous countries, waste processing facilities are subject to laws and regulations that require service providers to obtain permits from public authorities to operate most of their facilities. The permit process requires Veolia Environnement to complete environmental and health impact studies and risk assessments with respect to the relevant facility. Operators of landfill sites must provide specific financial guarantees (which typically take the form of bank guarantees) that cover in particular the monitoring and rehabilitation of sites for a period of 30 years after cessation of operating activities.

In addition, landfill sites must comply with a number of specific standards and incineration plants are usually subject to rules that limit the emission of pollutants. Waste may also be subject to various regulations depending on the type of waste. For example, for sludge produced at wastewater treatment stations to be used in agriculture it must comply with strict regulations relating to its content of organic materials and trace metals (heavy metals such as cadmium, mercury or lead). Moreover, the NFU 44-095 standard, implemented in 2002 and applicable in France since March 18, 2004, strictly regulates the composting of material produced by the treatment of wastewater.

At the European Union level, a new Waste Directive was adopted on November 19, 2008, setting up a hierarchy of different waste management measures and favoring (i) the prevention of production, primarily by requiring Member States to draft national programs, (ii) re-use, (iii) recycling, by defining new objectives to be attained by Member States by 2020, (iv) other forms of recovery and (v) safe disposal. It clarifies the concepts of recovery, elimination, end-of-waste status and by-products. The aim of this directive is to promote recycling, composting and waste-to-energy recovery of household waste.



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With respect to the cross-border transportation of waste, the regulation of June 14, 2006 on the transportation of waste entered into force in July 2007. This text defines the conditions for the supervision and audit of waste transfers and simplifies and defines current procedures for the supervision of waste transfers for non-hazardous, recyclable waste. Furthermore, through Directive 2003/87/EC of October 13, 2003, the European Union implemented an allowance system for greenhouse gas emissions, targeting carbon dioxide only. Our environmental services business falls outside the scope of the first and second phases (2005-2007 and 2008- 2012).

In France, pursuant to the provisions of Articles L. 511-1 et seq. of the French Environmental Code relating to facilities classified for the protection of the environment, several decrees and ministerial and administrative orders establish rules applicable to landfill sites for hazardous and non-hazardous waste. These orders govern the design and construction of waste processing centers, among other things. Hazardous waste is subject to strict monitoring at all stages of the processing cycle. It is tracked using a waste monitoring slip (bordereau de suivi des déchets - BSD). Waste-to-energy centers are subject to numerous restrictions, including in particular limits on pollutant emission levels: for example, Directive 2000/76/EC of December 4, 2000, on the incineration of waste sets emission thresholds for dioxins and NOX in particular.

The Grenelle 2 Law provides, in particular, for a 7% reduction in household waste in 5 years, by encouraging actual waste tonnage to be taken into account in amounts charged to users. In addition, it is planned to reduce the use of landfill sites and incineration by limiting waste tonnage that may be received at such sites, while developing recovery sectors through sorting-at-source and the selective collection of organic waste. That law strengthens and widens the Extended Producer Responsibility (EPR) scheme and specific recovery and associated processing sectors. Finally, the Grenelle 2 Law provides for the planning of construction and public works waste management and the performance of a pre-demolition appraisal. The full implementation of this law requires 199 decrees (including 50 priority decrees) covering the 6 major projects targeted by the Grenelle Law (buildings and urbanism; transportation; energy and climate; biodiversity; health risks and waste, governance).

The Waste Framework Directive of November 19, 2008 was enacted into French law by the Order of December 17, 2010, which clarified certain definitions, introduced a hierarchy of waste processing methods and clarified the responsibilities of producers and holders of waste.

Decree no. 2011.828 of July 11, 2011 brings into effect several measures adopted pursuant to the Grenelle 2 Law to improve prevention and waste management. It also completes the enactment of the framework directive and clarifies certain application conditions of the European regulation on the cross-border transportation of waste.

The major statutes governing our 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 production, collection and processing of waste, including, in most cases, the design, operation, maintenance, closure and post-closure maintenance of landfill sites and other hazardous and non-hazardous waste management facilities.

Energy Services

Our 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. Directive 2001/80/EC of October 23, 2001 sets 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. This directive will be superseded by Directive 2010/75/EU of November 24, 2010 (IED Directive) on industrial emissions by January 1, 2016 at the latest.



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Following the repeal of Regulation (EC) no. 2037/2000, a new European regulation no. 1005/2009 of September 16, 2009 sets a timetable for the elimination of substances that destroy the ozone layer and, in particular, refrigerating fluids such as chlorofluorocarbon and hydro-chlorofluorocarbon that are used in cooling plants. As a result of the Kyoto Protocol, Regulation (EC) no. 842/2006 of May 17, 2006 requires stringent confinement and traceability measures for greenhouse gases, whether HFC refrigerating liquids or SF6 electrical insulators. Two European regulations clarify leakage control measures for refrigeration equipment containing hydro-fluorocarbons (Regulation (EC) no. 1516/2007 of December 19, 2007) and fire protection systems (Regulation (EC) no. 1497/2007 of December 18, 2007).

Pursuant to European Directive 2003/87/EC of October 13, 2003 which establishes an allowance trading scheme for greenhouse gas emissions in the European Union, as amended by Directive 2009/29/EC of April 26, 2009, combustion installations with thermal output greater than 20 MW falling within the scope of the directive are recorded in the national plans for the allocation of allowances introduced in 2005 in all EU members States. European Directive 97/23/EC of May 29, 1997, aimed at harmonizing Member State legislation in the area of pressure equipment built after 2002, imposes various security requirements for the design and manufacture of such equipment, and requires an inspection of the compliance of the units housing such equipment.

All of the directives and regulations mentioned have been enacted by each Member State of the European Union. In France, this primarily means compliance with the Law of July 19, 1976 on facilities classified for the protection of the environment, now included in the Environmental Code. Under this law, Dalkia must obtain operating authorizations, file returns and register information with the competent authorities and scrupulously comply with operating requirements. For large combustion installations (thermal output greater than 20 MW), new regulations were imposed in 2002 (for new installations) and in 2003 (for existing installations) with respect to emission ceilings. These were later extended by the Order of July 25, 2010 which proposes, pursuant to European Directive 2001/80/EC of October 23, 2001, the systematic application of “Best Available Techniques” (BAT). In addition, the national environmental commitment law of July 12, 2010 (Grenelle 2) will give added impetus to the development of energy efficiency and renewable energies. Numerous application texts are being closely monitored by the Group.

Finally, with respect to its production of domestic hot water, we are primarily affected by European Directive 98/83/EC of November 3, 1998, as enacted in numerous national texts, which addresses the quality of water intended for human consumption. Eighteen Member States, including France, have taken the position that this directive applies to cold and hot water and to all types of management systems for the production and distribution of hot and cold water. Articles R.512-55 to R.512-66 of the Environmental Code also require periodic inspection of certain installations classified as subject to reporting requirements. The conditions governing these periodic inspections are set out in application orders for the relevant installations. MASE certified installations are no longer required to perform these inspections.

Decree no. 2007/737 of May 7, 2007, which is also integrated into the Environmental Code, supplements Regulation (EC) no. 842/2006 of May 17, 2006 and regulates the conditions of the market release, use, recovery and destruction of substances used or intended for use as refrigerating fluid in refrigeration or air-conditioning equipment. It was completed by several other orders clarifying how to quantify fluid handling and covering the set-up of training and recovery sectors. Pursuant to European Directive 97/23/EC of May 29, 1997, requirements governing pressure equipment were set out in the Order of March 15, 2000, recently amended by the Order of January 31, 2011.



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In relation to managing the risk of Legionnaires’ disease, the European Working Group for Legionella Infections (EWGLI), with the support and approval of the European Commission and based on the European Surveillance Scheme for Travel Associated Legionnaires’ Disease (EWGLINET), has published European guidelines for the control and prevention of travel-associated legionnaires’ disease (EWGLI 2005). In general, texts of varying reach are issued in Europe and around the world by public health authorities and associations for the protection of workers. Very often, these texts are presented in the form of preventive recommendations, which take into account the physical-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 Order of February 1, 2010 and its application circular on monitoring Legionnaires’ disease in domestic hot water production facilities defines the management rules for such facilities.

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 range of descriptive procedures set the action and liability framework. A Spanish standard-setting association has issued guidelines on the subject (100030IN). In the United Kingdom, an Approved Code of Practice (ACOP L8) issued by the Health and Safety Executive is applicable in full and largely inspired similar procedures applicable in Flanders (Belgium), the Netherlands, Ireland and at BWGLI. Italy and Portugal have partially adopted the ASHRAE guidelines, focusing preventive measures on the protection of tourists. Similarly, regulations exist in Asia and the Pacific region and were inspired by texts in New Zealand and Australia.

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 also issued recommendations.

Transportation

Veolia Transdev is subject to a number of national and European regulations that seek, among other things, to limit the pollution caused by road vehicles.

The objectives set by the European Union for reducing greenhouse gas emissions and fighting climate change have led to research programs to improve the environmental impact of heat engines and integrate hybrid and electrical technologies in the bus market. A series of European regulations, replaced by Regulation (EC) no. 595/2009 of June 18, 2009, have also been drafted setting EURO standards. These impose maximum atmospheric pollutant emission levels for heat engines. All new vehicles currently manufactured in the European Union comply with “EURO 5” standards since September 1, 2009 and these standards apply to all new vehicles since January 1, 2011. Regulation (EC) no. 595/2009 of June 18, 2009, as amended by Regulation (EC) no. 582/2011 of May 25, 2011, also introduces requirements concerning emissions by spare parts used only in motorized vehicles. It also introduces measures to improve access to information on vehicle repairs and promote the rapid production of compliant vehicles. This regulation was adopted in addition to Directive 2009/33/EC of April 23, 2009, generally known as the “Clean Vehicles Directive,” which requires operators to take account in their procurement procedure for road transport vehicles used in the management or operation of a passenger transport public service, of the energy and environmental impacts of these vehicles over their lifetime.

This directive was enacted in French law by Law no. 2011-12 of January 5, 2011, and this new system was also inserted in Order no. 2005-649 of June 6, 2005, as amended, on contracts entered into by certain public or private persons not governed by the Public Procurement Code (Code des marchés publics). Decree no. 2011-493 adopted on May 5, 2011 implements this system and clarifies the application conditions and the energy and environmental impacts to be taken into account, respectively, and also determines the methodology to be applied.



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In 2011, the European Union also introduced environmental specifications applicable to fuels to reduce pollution from motor vehicle emissions. Standards governing the quality of fuels used in transportation have since been significantly tightened, particularly with regard to their sulfur content. The use of biofuels has also become a necessity in order to reduce greenhouse gas emissions. European Directives no. 2009/28/EC and no. 2009/30/EC set additional environmental specifications applicable to fuels, and primarily concerning road vehicles, which were enacted into French law by Order no. 2011-1105 of September 14, 2011.

Since 2007, Veolia Transport (and now Veolia Transdev) closely monitor the “Grenelle” laws in France, through different professional federations (UTP, MEDEF). One of the objectives of the Grenelle 2 Law of July 12, 2010 is to improve coordination between transportation bodies and thereby facilitate the performance of the preparation work necessary to the development of transportation networks and the management of transportation services seeking greater inter-connection and inter-modality. With respect to sustainable mobility, this law offers municipalities the opportunity to include self-service bike rental systems in their transportation offering. The law defines the car-sharing concept and creates a label, for which the conditions of grant and use will be defined by decree.

As provided for in the Grenelle 2 Law, a High Council for Land Transportation and Inter-modality (Conseil supérieur des transports terrestres et de l’intermodalité) was created. This Council may be consulted by governmental authorities on questions relating to land transportation and inter-modality policies. It is made up of five colleges, including one consisting of land transportation companies and institutions.

Finally, to favor the intermodal transfer of passengers, companies will be required to indicate on transport tickets the CO2 emissions of transportation services. The date of effect of this measure will be set by ministerial decree and is expected to be between July 1 and December 31, 2013. In application of the Grenelle 2 Law, decree no. 2011-1336 of October 24, 2011 sets out a common calculation method applicable to all means of transport.

A Transportation Code (Code des transports) was adopted by Order no. 2010-1307 of October 28, 2010, for the legislative section. This code satisfies the objectives of grouping together, planning and clarifying a wide range of disparate legal texts and reorganizing them within a framework that gives the necessary weight to the founding principles defined in the Internal Transportation Framework Act (Loi d’Orientation des Transports Intérieurs, LOTI) of December 30, 1982. Certain texts are, however, retained in their original format and in particular environmental protection provisions. The codification of the regulatory segment is expected in 2012.

The majority of sites in France are subject to the regulations governing facilities classified for the protection of the environment (ICPE) resulting from Articles L. 511-1 et seq. of the Environmental Code, although generally only the simplified reporting system. Decrees and ministerial and administrative orders clarify the rules applicable to repair workshops, gas filling stations and gas and petroleum product storage and distribution installations, where activities may present environmental impacts or risks.

Environmental Policy and Information (Article 116 of the NRE Law)

As a specialist in environmental services management, we are naturally concerned about the environmental consequences of each of our businesses, both in France and worldwide. In this respect, we consistently endeavor to comply with applicable regulations, to meet the needs and demands of our customers and to optimize the techniques we implement.

Pursuant to the provisions of the NRE Law (Law no. 2001-420 of May 15, 2001), now incorporated in the French Commercial Code, and in addition to the description of our businesses (see “– Our Overall Strategy” and “– Our Strategy by Division” above) and the financial statements (see Item 18. below), we consider it appropriate to highlight below some of the more significant environmental actions that we have undertaken. The information below should be read together with our 2011 Sustainable Development Report and 2011 Corporate Social Responsibility Performance Report for further information on our sustainable development policy and actions.



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General Environmental Policy

We offer internal environmental management services, training and information for employees on the environment, methods for reducing environmental risks and implement structures to handle accidents with an impact beyond the confines of the Company.

Since 2002, we have managed our impact on the environment using an environmental management system (EMS or Environmental Management System). This system is largely based on ISO 14001 and is used by all Group divisions. It is made up of four levels of responsibility: Group, division, business unit and site. At each relevant level, it enables environmental impacts and compliance with regulations and in-house company requirements to be assessed. Objectives are set and resources and actions plans implemented to attain them. The system also covers the prevention of accidental pollution and defines the resources to be implemented in the event an accident nonetheless arises and ensures such resources are operational.

Employee training and information is an integral part of the resources managed by the EMS, including the preparation of environmental training plans. The Campus Veolia Environnement network provides business units with access to an environmental training offering, prepared at the request of the Group business committees (see Item 6. “Employees – Human Resources Policies – Training and Work Experience” below). This is supplemented by training sessions organized locally based on identified needs.

The role of the Sustainable Development department includes the roll-out and management of the Environmental Management System. It encourages consistent objectives and actions among the divisions, as well as the sharing of information and best practices. It heads an Environmental Management Committee comprised of environmental officers from the divisions, responsible for communicating information and coordinating action plans in the divisions. An environmental steering committee, chaired by our Secretary General and led by the Sustainable Development Department, comprising an Executive Committee member from each division and representatives from various departments (particularly the legal, risk and R&D departments), was formed to approve the strategic cap adopted for environmental management and report annually to the Veolia Environnement Executive Committee. Since 2007, a special team of internal environmental auditors has supervised the roll-out of the EMS.

In addition, our risk department is responsible for coordinating, identifying and assessing Group risks and particularly environmental risks and ensuring they are under control. It relies in particular on the work of the Group Risk Committee. We have also implemented a warning procedure and a crisis management procedure, including for environmental issues. In particular, this encompasses Group division on-call and alert systems at national and international levels, enabling any necessary measures to be taken on a timely basis and at an appropriate level (see Item 6. “—Board Practices—Comittees Created by Management—Risk Committee” below).

Compliance of Company Operations with Applicable Legislation and Regulations

Our EMS includes, among other things, an environmental audit program that allows it to monitor the regulatory compliance of sites, as well as their compliance with contractual obligations and Group standards. We have defined a general framework to ensure the consistency of the audit systems developed by its divisions, each of which remains responsible for the definition and implementation of its own system. Based on this definition, we set an objective of attaining by the end of 2011, an environmental assessment rate for “priority installations” in the preceding five years of 95%. In 2011, the number of priority installations increased by 1% and the assessment rate was 92%.

Priority sites are drinking water production sites with a capacity of over 10,000 m3/day and urban wastewater treatment plants with a capacity of over 50,000 eH, waste landfill sites (excluding inert waste), waste incinerators, physical-chemical waste processing plants for hazardous waste, hazardous waste recycling plants, Dalkia combustion installations with a thermal output greater than 20 MW and certain Veolia Transdev transportation centers (sites with a fixed fuel installation of over 80,000 liters or managing or receiving over 120 vehicles at least once a year or with a compression station of over 200kW). These facilities have the greatest environmental impact within our Group.



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Environmental Evaluation or Certification

The roll-out of the EMS is accompanied by the environmental appraisal, both external (ISO) and internal, of our activities. In 2008, based on a wider application scope encompassing our waste collection and cleaning businesses, we undertook to implement an Environmental Management System in 85% of relevant activities by the end of 2011. We further strengthened our internal environmental management requirements in 2009. The level of roll-out is verified by the statutory auditors adopting a level of reasonable assurance. This appraisal approach may be complemented locally by voluntary external certification, depending on the managerial stakes. Accordingly, 25,322 our sites were ISO 14001 certified in 2011.

Investments Incurred to Preserve the Environment from the Impact of Our Businesses

Given the nature of our services, a large majority of our expenditures and investments have a direct impact on the environment. Our industrial investments amounted to €2,301 million in 2011 (see Item 5. “Liquidity and Capital Resources – Investing Activities” below) and include growth and compliance investments. We invested in employee training, certification programs and the implementation of the Environmental Management System. Our Research and Innovation budget was also renewed. We are implementing a selective investment policy while preserving industrial investments or investments required by contractual commitments.

Provisions and Guarantees for Environmental Risks

As of December 31, 2011, provisions for site closure and post-closure costs (encompassing provisions for site restoration, the dismantling of installations and environmental risks) totaled €690.2 million. Provisions for litigation used in 2011 totaled €116.0 million, encompassing all types of litigation (tax, employment and other litigation).

International Environmental Targets

All of our foreign subsidiaries are covered by the roll-out of the Environmental Management System described above and the objectives set for our Group as a whole are broken down for the subsidiaries.

Sustainable Use of Resources

Use of Water Resources

We preserve water resources by working to prevent wasteful usage in our own installations and in those of its customers. In this respect, the progressive roll-out of our environmental management system provides, in particular, for the monitoring of water consumption in all of our activities. Action plans focus primarily on controlling leaks in the cold water distribution network (raw or treated). Our industrial water consumption (water consumption for the requirements of its activities) totaled 419.5 million cubic meters in 2011.

Climate change in certain regions of the world heightens stress on water resources. To help preserve water resources, we offer a wide range of solutions from optimizing existing resources (resource monitoring, long-term management of abstraction, reasoned use of resources) and protecting resources (identification of chronic sources of damage to resources, prevention of accidental pollution, establishment and supervision of protected areas), to developing alternative resources (re-use of water, recharging groundwater, sea water desalination). These developments are conducted in close association with local authorities, regulatory bodies and the scientific community. In addition, we develop and propose tools enabling customers and consumers to control their consumption (individual meters, awareness-raising measures, price incentives).



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A number of measures have been implemented at our Veolia Propreté installations to reduce water consumption, including the internal recycling of process water at incinerators, physical-chemical treatment facilities and landfill sites (leachate). Recycled water is also used to wash waste transport vehicles and installations. Finally, several installations have retention ponds to collect rainwater, which is then used, for example, to wash vehicles and ground areas. Specially-adapted washing machines at our sites enable Veolia Transdev to substantially reduce its consumption while recycling water used (up 80% of water is reused). In addition, certain sites have developed rainwater collection equipment.

Raw Material Consumption

The main raw materials consumed by our activities are processing reagents. Their use is adjusted to reduce consumption. As part of tests on the assessment methodology for indirect greenhouse gas emissions tied to the corporate value chain (scope 3) of the GHG Protocol, Veolia Eau inventoried these reagents in order to optimize their use and reduce related greenhouse gas emissions, without reducing water treatment efficiency.

We are firmly committed to the recovery chain, and particularly the recovery of materials from waste entrusted to the Company for treatment and by-products of its other activities and contribute to reducing third party consumption of raw materials by making recycled raw materials available.

Energy Consumption - Energy Efficiency and the Use of Renewable Energies

We contribute to the reduction of primary energy consumption. Dalkia optimizes energy management for more than 123,500 energy installations worldwide, from urban heating networks to housing, commercial and industrial building boilers. Optimizing the energy efficiency of such thermal installations focuses on operating and maintenance quality and their modernization. Heating networks that offer optimized energy performance by concentrating production on a single site and involving co–generation (the simultaneous production of thermal energy and electricity) represent strong growth areas for Dalkia.

Efforts in the renewable energy field affect all of our businesses. We are not only developing biomass, geothermal and solar energy offerings, but are also capturing energy from incineration plants and biogas from landfill sites. Veolia Transdev continues to provide environmental performance training to its drivers, with as a result not only enhanced passenger comfort and reduced polluting emissions, but also significant fuel savings.

In a bid to reduce our energy consumption, Veolia Eau performs energy audits and has implemented an optimization program which seeks to encourage innovation, accelerate the perfection and adoption of clean water treatment technologies and offer customers sustainable solutions. An increasing number of wastewater treatment plants are excellent examples of energy efficiency, such as the Braunschweig plant (275,000 population equivalent) which produces more energy than it needs to operate. In addition, the replacement policy for electro-mechanical equipment constantly seeks to optimize energy consumption.

The development of waste-to-energy recovery at waste processing plants, such as landfill sites and incinerators, enables the use of external energy sources for operations to be reduced and energy to be supplied to third parties. Accordingly, over 87% of energy consumed by Veolia Propreté in 2011 came from renewable energy or alternative energy sources. In addition, recycling activities and the preparation of refuse derived fuel helps reduce the primary energy needs of our customers. Overall, 165 million Mwh of energy was consumed in 2011 to deliver our services in the water, environmental services, energy services and transportation sectors.

Use of Soils

Our landfill sites and water treatment and production sites cover large areas. As part of our biodiversity policy, we are increasingly concerned by the integrated management of land. Conditions governing the use of soils are included in site operating rules and include our ecosystem management policy.



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Preparing a landfill site for operation requires that landfilling cells be dug and prepared. Where we are responsible for this task, we comply with all obligations regarding surface sealing and the recovery of excavated materials. Once used, the cells are covered as quickly as possible and re-integrated into their environment favoring local eco-systems. They are monitored for environmental impacts before being returned to general use and this monitoring is continued after the redevelopment of the entire site to ensure the species planted repopulate the area (post-operation phase).

When it operates wellfields for the production of drinking water, we and the delegating authority implement a protective perimeter around the catchment area, where certain human activities are forbidden or tightly controlled to avoid ground water pollution. These areas can offer opportunities for implementing biodiversity-friendly actions in favor of biodiversity (differentiated management of public parks, inventory of animal and plant life, etc.) such as those taken at the Crépieux-Charmy wellfield in Lyon.

Pollution and Waste Management: Air, Water and Ground Emissions, Noise, Olfactory Pollution and Waste

Limiting Greenhouse Gas Emissions

We contribute to an overall reduction in greenhouse gas emissions by reducing the emissions of the installations managed by the Company and by enabling third parties to reduce their emissions. Several levels of the organization are involved in the fight against climate change. Certain of our activities are subject to regulatory provisions encouraging a reduction in greenhouse gas emissions.

Dalkia’s combustion installations with a thermal output of greater than 20 MW are in particular governed by the provisions of European Directive 2003/87/EC of October 13, 2003, which created an allowance trading scheme for greenhouse gas emissions in the European Union, as amended by European Directive 2009/29/EC of April 26, 2009. Veolia Energie–Dalkia manages over 80,000 combustion installations in Europe, including nearly 250 installations concerned by emission allowances. However, allowances awarded to Dalkia represent slightly less than 1% of total European allowances. Through its special-purpose entity, VEETRA, the division actively manages its carbon emissions and the allowances granted. VEETRA purchases, sells and prices different types of greenhouse gas credits on behalf of the installations concerned. These initiatives have enabled us to be an early participant in the allowance trading market, in order to minimize the cost of carbon restrictions and in some cases finance new investments that help reduce greenhouse gas emissions.

Veolia Eau in Germany also became involved in this sector, following its takeover of the energy supply activities of certain public authority contracts (via BS Energy).

In Australia, the new Clean Energy Future regulation will come into force mid-2012, with an impact on the activities of both Veolia Propreté and Veolia Transdev. The Australian regulation includes a fuel tax amendment and the introduction of a tax on greenhouse gas emissions, including methane emissions at landfill sites. In the long-term, this tax will evolve into an allowance trading system similar to that in the European market. Incentive measures are being introduced in the United States and China to help reduce greenhouse gas emissions. While our activities in these regions are not affected by these regulatory changes, we are closely monitoring the situation and will continue efforts to develop renewable and alternative energies.

At an international level, we seek to generate emission credits, by participating in projects in partnership with other European or developing countries that help to reduce greenhouse gas emissions. Veolia Propreté has registered six projects adopting Clean Development Mechanisms (CDM), one of the flexible mechanisms defined in the Kyoto protocol: two in Brazil and one each in Egypt, Mexico, Argentina and Colombia. The experience gathered during these projects is now used for new projects under development. The majority of these projects is now in the operational phase and they have generated GHG Emission Reduction Certificates. Six projects are currently under development at sites operated by Proactiva in Latin America and at Veolia Propreté sites. Faced with the diversification of trading systems and platforms, Veolia Propreté also became active in other regions. Accordingly, where the regulatory context is not favorable, other mechanisms are used to incite and finance environmental investments such as the sale of credits or a voluntary market. For example, a Voluntary Carbon Standard (VCS) project has been launched in China and two Greenhouse Gas Friendly Program projects in Australia.



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Veolia Energy has a Joint Implementation (JI) project currently in progress in Hungry. Through Dalkia we are focusing on the development of CDMs in China, South America, the Middle East, Israel and North Africa with respect to heating networks, renewable energies and energy efficiency. Veolia Eau studies opportunities to obtain carbon credits for wastewater and sludge treatment projects, and in particular projects integrating biogas recovery. Veolia Eau has a JI project in Bulgaria and several others are under review or in the course of development, primarily in Africa and Asia.

In addition to the regulatory framework, we have a robust environmental reporting system which encompasses the GHG emissions (scope 1 and 2) of all relevant businesses. Methane production and emissions at landfill sites are measured using theoretical mathematical models. While this model is recognized internationally, it can generate uncertainty, sometimes significant, as to the correct quantification of landfill site methane emissions. By improving its knowledge of waste and the physical, bacteriological and chemical phenomena involved, Veolia Propreté aims to improve the relevance of its reporting and reduce the uncertainty surrounding these diffuse emissions. Finally, this joint commitment of all our businesses is applied daily in the operation of the installations.

Veolia Propreté continues to implement and optimize biogas collection systems at its landfill sites and waste-to-energy recovery systems. 96 waste landfill sites for which we control investment are equipped with biogas collection and processing systems. With renewable energy at the heart of our energy strategy, biomass and geothermal energy is increasingly used. Combined with cogeneration and energy efficiency services, these new energies contribute effectively to the fight against climate change. Two years ago, Veolia Eau launched an ambitious project entitled, “Water2Energy,” to promote a reduction in GHG emissions by encouraging self-sufficiency and the sale of renewable heat and electricity generated on-site at all its installations worldwide.

Veolia Transdev is also heavily involved in the fight against climate change. In order to reduce the greenhouse gas emissions generated by city transport, it is necessary to encourage modal transfer from private cars towards public transport and “soft” transportation methods. Veolia Transdev takes part in international negotiations on the climate to defend the sustainable mobility approach. In 2008, Veolia Transdev launched the initiative “Bridging the gap: pathways for transport in the post Kyoto process” (www.transport2012.org), to enable carbon financing mechanisms support low-carbon urban transportation projects. This initiative is the result of a partnership between Veolia Transdev, UITP (International Association of Public Transport), TRL (Transport Research Laboratory), GTZ (a German technical cooperation agency) and ITDP (Institute for Transportation and Development Policy). Veolia Transdev also became involved in the fight against climate change by proving the environmental performance of public transportation using the “Eco-Efficient Travel” calculator at a range of benchmark sites. The division is also looking to reduce its use of fossil fuels, for example by having a fleet of so-called clean vehicles and training drivers how to drive in a smooth and fuel-efficient manner.

With total direct and indirect emissions of 45.2 million tons of CO2 (carbon dioxide)9 equivalent in 2011, we are working actively to reduce our impact on the climate. We contributed to reducing greenhouse gas emissions, both through the daily management of sites that we operate and through the use of renewable and alternative energies in the amount of 26.5 million tons of CO2 equivalent in 2011, compared to 27.5 million tons of CO2 equivalent in 2010.10



9    Non-hazardous waste, excluding inert waste.

10  Adjusted value in 2010.



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Other Emissions

We are committed to reducing our emissions below regulatory requirements by (i) improving the treatment of air emissions and developing better technologies (treatment of incineration smoke by Veolia Propreté, reduction in vehicle emissions by Veolia Transdev, low NOX or SOX emission combustion technologies in Dalkia) and (ii) reducing consumption and encouraging the use of cleaner fuels (low-sulfur fuel oil and coal, natural gas, liquified natural gas (“LNG”) for combustion installations and vehicles and hybrid electric or bi-modal vehicles).

Installations, and primarily incineration installations, operated by us mainly emit sulfur and nitrogen oxides (SOX and NOX), carbon monoxide (CO), halogenated derivatives (HCI, HF), heavy metals (Hg, Cd, TI, Pb, etc.) and dust. SOX emissions from waste incineration units (hazardous and non-hazardous waste) totaled 88 grams per ton of incinerated waste in 2011, comparable to 2010.

Veolia Transdev continues its efforts to reduce polluting emissions (CO, HC, particles) from its fleet of passenger vehicles. A benchmark was defined, corresponding to 80% of the 2008 bus and coach fleet. Emission reduction targets were set for the end of 2011: 5% for carbon monoxide unit emissions (CO), 24% for hydrocarbons (HC) and 27% for particles, after adjustment of the targets set as of March 31, 2010. To this end, the Veolia Transdev network vehicle pool is gradually being brought into compliance with the “EURO 5” standard as vehicles are replaced. This standard imposes even stricter requirements with respect to reducing polluting emissions than the “EURO 4” standard, applicable since 2006. Further, Veolia Transdev is committed, as part of its environmental management system, to lowering its polluting emissions on a like-for-like basis and is preparing for new standards by testing and experimenting emission reduction systems (polluting emissions and greenhouse gases) which will subsequently be marketed, thereby reaffirming its role as expert and advisor to customer public authorities. In France, Veolia Transdev is pursuing research, in partnership with ADEME, into identifying and assessing the market systems best able to reduce NOX emissions by its bus and coach fleet.

Over the last few years, Dalkia has assessed available technologies for reducing NOX emissions (low emissions fuel oil, recycling of fumes, air terracing, combustion modeling, etc.).

Water Pollution

Veolia Eau has developed a comprehensive approach to assisting local authorities, tailored to their size and technical and regulatory challenges, to ensure the efficient management of wastewater collection and treatment. The success of a wastewater treatment project is dependent on a number of clearly defined steps: needs assessment, definition of a local strategy, quality guarantee, service performance measures and, finally, reporting on the impact of services to inhabitants. Veolia Eau offers its expertise in each of these areas. The wastewater treatment efficiency (BD0511) of our biological treatment stations with a capacity greater than 50,000 population-equivalent, was 93.5% in 2011.

Furthermore, flow monitoring systems covering a number of micro pollutants considered dangerous to the environment were implemented pursuant to the Water framework directive, particularly in France, to assess the impact of wastewater treatment plant emissions on the ecological state of bodies of water. Our center of environmental analysis has developed regulatory analysis techniques and offers customers a comprehensive range of monitoring services (sampling and analysis). Veolia Eau has also developed biological tools measuring the impact of these emissions on target organisms. Where necessary, Veolia Eau proposes the implementation of additional treatment solutions reducing or eliminating emissions of dangerous substances into the natural environment.



11   Average Influent Biological Demand.



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Ground Pollution

We ensure the correct storage and use of materials employed in our activities, in order to avoid infiltrations or accidental spillage leading to pollution. We are also active in the ground restoration and maintenance sector through the restoration of contaminated soils and agricultural recycling of waste and wastewater treatment sludge. In 2003, we integrated all activities relating to the treatment and recovery of sludge within a single entity, SEDE Environment. As a result, we have a precise, global and integrated overview of sludge management options, allowing us to optimize our agricultural recycling in particular.

We propose the implementation of monitoring systems covering emissions into the wastewater network (Actipol method which we developed), to enable action to be taken upstream to improve the quality of sludge produced. Veolia Eau has finalized certification guidelines defining requirements applicable to wastewater treatment systems for the production of quality sludge to be used in agriculture. Downstream, we promote the agricultural recycling of sludge through composting and engage an independent certifying body to audit our composting and agricultural recycling networks.

This recycling is conducted in conjunction with the agricultural recycling of the fermentable fraction of household waste. We produced 1,107.1 thousand tons of compost in 2011 and 48% of sludge produced was used as fertilizer in agricultural activities. We have initiated a quality enhancement program for organic material produced from organic waste and a program to assess our agricultural impact (the Quali- Agro program led by CRPE – our center for research for environmental and energy services - in coordination with INRA).

We are also active in the rehabilitation of polluted soils. Using several processes, including thermal desorption, Veolia Propreté processes almost all the pollutants present in the soil at industrial sites.

Noise and Olfactory Pollution

We have also developed new processing and storage techniques for odors, particularly in wastewater treatment plants and waste landfill sites. We also use new and more silent technologies in some of our installations, including special wall coatings, sound traps and exhaust gas exit silencers for cogeneration installations and transport vehicles.

Waste

Through our Environmental Services division, we are fully committed to developing sectors for the material and agricultural recycling of waste, as well as the waste-to-energy sector. We are naturally attentive to the generation of waste by our own installations and those we operate. We seek to reduce production and look for possible recycling outlets and, where none exist, we treat any waste produced.

Veolia Propreté uses the most innovative technologies in its waste recycling activities, to widen the range of recyclable sources and increase the recovery rate, which is heavily dependent on the quality of sorting. We have therefore multiplied our efforts to improve our recycled raw material identification, separation and preparation processes. We have created new waste standards for household and industrial waste, obtaining a recovery rate of around 70% in our high-performance sorting centers. Bottom ash is the non-combustible residue produced by incineration. Its recovery is subject to strict regulation. Depending on its composition and potentially after a period of maturation, it can be recycled as road construction material (for example in France and the United Kingdom).

Wastewater treatment produces sludge, which is a concentrate of the organic and mineral material previously contained in the water. We have developed an analysis tool covering health and environmental impacts, enabling the most appropriate recycling outlet or treatment approach to be chosen locally for the sludge. When sludge quality and the availability of recipient soil allow, agricultural recovery offers a possible outlet, as does methane production, incineration and storage with waste-to-energy recovery and wet air oxidation.



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The majority of waste produced by Dalkia (soot and bottom ash) is due to the combustion of wood and coal at its installations. Improvements to combustion techniques seek to limit production. Waste is treated or recycled in accordance with local regulations.

Protection of biodiversity

Preserving Biological Balance, Natural Environments and Protected Animal and Plant Species

We integrated the protection of biodiversity into the first promise of our Sustainable Development Charter and since 2004 we have developed an approach based on the nature of business impacts and the implementation of integrated management into the Environmental Management System. We identify these impacts using internal expertise, which primarily focuses on analyzing biological tools used to evaluate the ecological state of marine and land life. Moreover, we work with a number of universities and institutions in order to further our knowledge through innovative research programs covering the interaction of our activities and the functioning of ecosystems. To improve the structure of our policies, we use a methodology enabling sites to carry out their own biodiversity appraisals and to implement appropriate action plans.

Our Biodiversity policy focuses on the management of impacts on ecosystems, preserving biodiversity, foreseeing needs and conserving remarkable biodiversity. It will be rolled-out across all our businesses, to preserve ecosystems, restore and foster urban biodiversity, protect remarkable ecological areas near our sites and improve understanding of the dynamics of ecosystems.

In several countries, our main activities are subject to environmental protection regulations (Facilities Classified for Environmental Protection (ICPE) in France or their equivalent). Therefore, all business development is conducted in tandem with the preparation of environmental impact studies comprising a highly detailed section on animal and plant life. The management of these impacts is, accordingly, a constant concern for the operating staff of our different businesses (waste processing, decontamination stations, combustion facilities, rolling stock depots, etc.).

Beyond the strict regulatory framework, the biodiversity policy is implemented at each of our sites as part of the roll-out of the Environmental Management System. In parallel, specific measures are performed and monitored: the sustainable management of green (Veolia Eau: Braunschweig, Germany) and maritime areas, the roll-out of diagnostic guidelines in a local partnership with the Malaysia Terengganu University at the Dungun site (Malaysia) and the preservation of ecosystems in the development of sites and their surrounding areas - Graulhet and Saint-Cyr-des-Gats hazardous waste landfill sites in France, which received the Noé Conservation label, the Marchwood incinerator in the UK and the Pitsea (Essex, United Kingdom) and Croft Farm (Doncaster, United Kingdom) landfill sites which were certified by the Wildlife Trust in the United Kingdom.

In order to improve the awareness of all internal players and provide them with recognized tools, we introduced an Atlas of sustainable development responsibilities and opportunities, integrating in particular areas of biodiversity interest identified by Conservation International, classified using the International Union for Conservation of Nature (IUCN) international classification.



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In 2008, we entered into a partnership with the French Committee of the IUCN.12 The primary aim of this partnership is to assist us in integrating biodiversity into our corporate strategy, strengthening our R&D strategic cap thanks to a network of recognized experts and participating in raising awareness among our employees through training measures. IUCN France is composed of 55 members (government ministries, public institutions and NGOs) and a network of approximately 250 experts. At the international level, IUCN has been a United Nations observer since 1999. In France, in line with international biodiversity challenges, Veolia Environnement signed up to the French National Biodiversity Strategy launched on May 19, 2011, to enhance the country’s commitments and break them down within its activities.

We have also participated in international studies, primarily through the work of the WBCSD (Ecoystem Services Review (ESR), Corporate Ecosystem Valuation, with a case study focusing on the Berlin site). The integration into its activities of the principles of the Convention on Biological Diversity (CBD) is highlighted in “Responding to the Biodiversity Challenge – Business contribution to the CBD,” and a communication thereon was issued during the COP 10 convention in Nagoya.

Finally, with the research work of Veolia Recherche et Innovation (“Veolia Research and Innovation”), enhancing the value of ecosystem services rendered is at the heart of our concerns. Improving our understanding of ecological balance and sharing this knowledge by increasing awareness and communicating on biodiversity, are supplemented by the activities of the Veolia Environnement Foundation.

Corporate Sustainable Development Commitments

We strive to help enhance the quality of life and the environment wherever we operate, and have placed the challenges of sustainable development at the heart of our strategy. For this purpose, we focus not only on the preservation of the environment and the protection of natural resources and biodiversity, but we also assume our economic and social responsibilities, particularly at a local level where we are committed to stimulating progress. Further information concerning our commitment to sustainable development may be found in our Annual Sustainability Report available on our website.

The Veolia Environnement Institute: a Scientific Approach to the Environment and Sustainable Development

In a constantly evolving world, interaction between man and the environment represents a major challenge that requires the mobilization of a large number of resources and the commitment of all stakeholders at local, national and international level. This strong conviction led us to create the Veolia Environnement Institute (VEI) in 2001, to encourage forward-looking analysis of issues concerning the society-environment interface. As a collective discussion tool, we aim to extract in-depth environment change from the ambient “general noise.” Since 2010, we have focused particularly on the comprehensive management of the environment and its ecosystems, the expectations of society and citizens, sustainable development “users” and sustainable development performance measurement, both for cities and companies. Through its Foresight Committee, comprised entirely of individuals of international reputation and standing, VEI benefits from the contribution of leading outside expertise on different key subjects (including climate science, public health, the economy and human sciences) to guide discussions, while remaining firmly anchored in the daily realities of our different businesses. This dual capacity represents both the originality and force of the Institute.

Supported by a network of multi-disciplinary academic experts and sustainable development practitioners, VEI offers a unique platform. It captures and develops reliable scientific knowledge and tried-and-tested expertise in the field, communicating this knowledge to all public and private players involved in sustainable development discussions. Through its forward-looking study program, scientific publications and conferences, VEI sheds light on the challenges that will mark the provision of environmental services over the coming decades. This autonomous expertise supports our long-term vision and increases our ability to forward-plan.



12   The UN’s International Union for Conservation of Nature.



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In partnership with the French Development Agency, VEI organized the 6th Conference on Future Environmental Trends on June 27 and 28, 2011 in Paris, around the theme: “Reconciling poverty eradication and quality of the environment: what are the innovative solutions?” Sponsored by the French Ministry for the Economy, Finance and Industry and attended by two Nobel prize winners, Wangari Maathai, the founder of the Green Belt Movement and Amartya Sen, a Harvard University economist, as well as Antoine Frérot, Chairman and CEO of Veolia Environnement and Dov Zerah, Director General of the French Development Agency, this high-level international forum brought together 600 decision-makers, leading international institutions, development players in the field such as NGOs, scientists, companies and students. The 70 speakers from 15 countries included Joan Clos, Director General of UN Habitat, Julia Marton-Lefèvre, Director General of IUCN, Maria Nowak, founder of AIDE, Sheela Patel, Chair of Shack/Slum Dwellers, an international federation of shantytown dwellers and Pavan Sukhdev, the former head of the UNEP Green Economy Initiative. The Conference focused on four topics - poverty and climate change, poverty and biodiversity, poverty and the environment in an urban setting and the role of the private sector – and discussed current understanding of this multiple approach and local solutions and innovative practices already adopted in the field. The presentation by Antoine Frérot during the opening ceremony and contributions by other Group employees during 3 sessions, also offered an opportunity to discuss more widely the role and initiatives of a company like ours and the solutions proposed for the supply of adapted essential services, necessary to improving the living conditions of the poorest populations. The timing of the Conference in the international agenda was ideal, between the New York Summit on Millennium Development Goals in September 2010 and the Rio+20 Earth Summit on Sustainable Development in June 2012. Brice Lalonde, UN Executive Coordinator for the Rio+20 Summit spoke at the closing session, placing the message of the Poverty-Environment Conference in the perspective of the Rio+20 Summit. In November 2011, the VEI Conference framework articles were included in the UN Secretariat preparatory document, which will serve as a basis for official negotiations in Rio. It is also VEI’s aim to present the results of its joint work with its partners to leading international bodies, such as the United Nations, and thereby contribute to discussions on the future direction of our constantly evolving world.

At the same time, VEI continued its innovative scientific publication policy with its two e-journals: FACTS Reports, a journal dedicated to field work, which seeks to collect, circulate and capitalize on the knowledge and good practices of people in the field (NGOs, international organizations, etc.) and S.A.P.I.E.N.S. (Surveys And Perspectives Integrating the ENvironment and Society), a multidisciplinary review publishing articles from top specialists in order to set forth recent advances in the field of sustainable development. In this way, the Institute capitalizes on a unique source of information from real-life experience at the “foundation” of the global population, where future society and citizen trends are in their infancy. In order to focus on specific issues and attract both new contributors and new readers, FACTS Reports published a number of special issues covering specific topics or geographical areas in 2011. These include in particular, an edition on social innovation and the people creating change in partnership with Ashoka, the leading international network of social entrepreneurs and a special Brazil edition to create an active FACTS-based community prior to Rio+20. S.A.P.I.EN.S also forms editorial partnerships around scientific seminars, to cover more disciplines and touch new communities. Thanks to this approach the review continues to attract new insight and innovative ideas from sustainable development scientific experts, encouraging forward-looking discussions which benefit Veolia Environnement. During the second half of 2011, S.A.P.I.EN.S published the key papers presented at the Wuppertal Institute 3rd International Conference on the Climate, Energy and the Environment (Germany) entitled “Sustainable Growth and Resource Productivity.” These papers covered eco-innovation policies, resource productivity in 21st century Japan and links between the economy and the environment and transition towards a green economy.



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These Conferences and reviews help strengthen VEI’s international network of academic partners and field practitioners, with which it also develops a program of forward-looking and other studies focusing on urban issues. As we move towards a sustainable world, cities already are and will be increasingly in the future, directly involved in creating change. VEI aims to capitalize on its cutting-edge analysis work to mobilize the best expertise and produce tools useful for transforming cities into sustainable cities. Continuing the work performed with the College of Europe on carbon footprint calculation methods, VEI undertook work on measuring urban environmental performance in 2011 at the request of the United Nations Environment Program (UNEP). This study sought to define, at the scale of a city, global and local environmental impacts to be taken into account and the indicators which exist and those which need to be defined to enable a rigorous assessment. Initial results were presented to the Gwangju Summit (South Korea) organized by UNEP and the cities of Gwangju and San Francisco (USA) on October 11 and 13, 2011 entitled “Green City, Better City.”

In developing cities more specifically, the research project involving TERI (India), IDDRI (France) and Veolia Transdev entitled “The future of carbon financing schemes for sustainable transport: Mumbai paves the way” was extended in 2011 with the arrival of a new partner, the Institute for Transportation and Development Policy (ITDP). ITDP has worked for over 25 years with cities and local players around the world to reduce poverty, pollution and petrol dependency and contributes its technical expertise to promote transport that is both sustainable and socially equitable.

Bolstered by this work, VEI offers a discussion platform for exchanges on major environmental, economic and social issues to be called on to satisfy the demands of civil society. VEI’s existence and influence in the scientific and associative community bears witness to the originality of this initiative by a private operator like us attentive to changes in constantly evolving societies.

At the filing date hereof, the VEI Foresight Committee had seven members: Hélène Ahrweiler, historian, President of the University of Europe, Harvey Fineberg, President of the United States Institute of Medicine, Pierre Marc Johnson, lawyer and physician and former prime minister of Quebec, a specialist in major environment challenges, Philippe Kourilsky, biologist, member of the Academy of Sciences and professor at the Collège de France, Mamphela Ramphele, physician and anthropologist, former Director-General of the World Bank and former vice-rector of the University of Cape Town, Rajendra K. Pachauri, President of GIEC, 2007 Nobel Peace prize laureate and Director-General of TERI and Amartya Sen, economist, 1998 Nobel prize laureate and professor of economics and philosophy at Harvard University.

Regional Development Partnerships

We take into account the economic and social factors underlying the development of the countries in which we operate and work to develop solutions that are adapted to local restrictions and to transfer know-how to the geographical areas where our divisions have operational responsibilities. We favor a partnership approach with non-governmental organizations (NGOs), local authorities and associations in the implementation of action plans for the populations of emerging countries, which permits the development of model plans that can be reproduced. In each of our projects, we seek to include a beneficial and educational dimension for the improvement of public health and the protection of the environment. We also try to assist in the development of regions where we provide services by focusing on access by the poorest populations to essential services (water, wastewater treatment, energy, etc.).

In 2011, we continued to develop our strategy of forming partnerships with international institutions and our active participation in the United Nation’s Global Compact. The case studies highlighted on our dedicated internet site (“Communication on progress” page) show how our operating activities, both delegated management and industrial contracts, contribute to the implementation of the ten United Nations Global Compact principles.



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In addition, we backed the French Partnership for the City and Regions initiative (Partenariat français pour la Ville et les Territoires, PFVT), formed under the auspices of two government ministries and with the support of the French Development Agency: this platform brings together French expertise in cities and regions and offers us the opportunity to play a role in international urban cooperation. To this end, we joined the Institute for Local Authority International Cooperation (Institut pour la Coopération Internationale des Collectivités) created by the association, France United Cities (Cités Unies France, CUF).

Protecting the environmental and reducing inequality dominated the forward-looking studies and research carried out by the Veolia Environnement Institute, particularly for the international conference held in Paris in June 2011 with the active participation of UN-Habitat, which brought together numerous international experts.

In partnership with the Prince Albert II of Monaco Foundation, we participated in work on water use conflicts in countries surrounding the Mediterranean basin, which led to a symposium organized in Monaco in November 2011 attended by numerous experts. The conclusions of this symposium will be discussed further at future international conferences on this subject. Attention was focused successively on understanding the origin and nature of use conflicts, the social-economic challenges and the technical and financial means necessary to their resolution.

Elsewhere, we continued to participate in the UNITAR program for strengthening local governance, focusing on the management of urban services: in 2011, it met with over 500 public authority managers in Asia, Africa, South America and Central Europe during 12 work sessions. This program was launched in 2002 following the Johannesburg Summit on Sustainable Development and represents a long-term cooperation approach based on expertise that can be harnessed and which, for the first time in 2011, was used in an e-learning program led by UNITAR.

In the climate change sector, we confirmed our commitment to the “Territorial Climate Plan” approach launched by the R20 (meeting of the twenty largest regions worldwide: North American federal states such as California and Quebec, Spanish and Italian provinces, German landers and French regions). Our expertise in clean development mechanisms and energy efficiency was recognized by this group of regions and solicited for an initial experimental action in Morocco (Eastern region). Our partnership initiatives also lead to joint actions in France with associations and bodies committed to the development of regions and enhancing their value (for example, the Coastal Areas Conservatory (Conservatoire du Littoral) and Marine clusters (pôles Mer), etc.).

We also play a major role in discussions on the future Greater Paris Metropolis, taking the initiative to create our own think tank to support the public debate through publications or by participating in the organization of conferences (e.g. at the Paris City of Architecture in September 2011).

The Veolia Environnement Foundation

Since May 2004, we have pursued a charity program through a corporate foundation, the 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, occupational integration, and environmental protection. The Foundation was initially created for a period of five years and was extended in 2009 for a further five years. Since its creation, the Veolia Environnement Foundation has supported over 1,000 projects, each sponsored by a Group employee, in the areas of solidarity, occupational integration and the environment.

In 2008, the Foundation integrated our humanitarian assistance and international cooperation departments, Veolia Waterforce and Veolia Waterdev, within a single structure, Veoliaforce. The Foundation calls on the expertise of our four divisions for the purpose of its charity work and benefits from the support of all Group employees. Among the projects selected in 2011, the Foundation launched 130 new projects while continuing those initiated in previous years. Certain projects of major importance are presented below.



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In the environmental sector, the Foundation will support a joint scientific cooperation program in the United States between the Group and the University of Arizona focusing on “water and climate” and “energy and sustainable development” issues at the Biosphere 2 (B2) research site, the largest artificial closed ecological system in the world. Different ecosystems have been created at this site (a rainforest, an ocean and coral reef, a mangrove, a savannah, a desert, etc.) providing scientists with access to a unique work tool.

In Senegal, the Foundation supports an ecological restoration program led by the CNRS Man and the Environment Observatory based in Tessékéré. The Senegalese Water and Forests Department, with the support of the Dakar Cheikh Anta Diop University, launched a program to plant a range of ligneous species in an area covering 80,000 hectares. The program also includes a socio-economic section encompassing the 30 rural communities living in the area.

In Madagascar, the Foundation helped the “Man and the Environment” association which launched a plan to harness renewable energy at the Vohibola nature preserve, by building a solar energy-powered boat for transporting passengers and monitoring the site.

The Foundation continued to support the Tara Océans expedition which navigates on all oceans of the world, from the Mediterranean Sea to the Atlantic Ocean, as well as the Indian, Antarctic and Pacific Oceans. The main objectives of the expedition are to understand marine life diversity and how it operates and also to predict the reaction of marine ecosystems to climate change. During the course of its voyage, the scientific expedition, supported by the CNRS, will have covered 115,000 kilometers around the world and installed 130 sampling sites using cutting-edge technology financed to a large extent by the Foundation. Initial laboratory analyses of samples taken have shown that 60% to 80% of plankton genes were previously unknown.

In 2011, the Foundation was awarded the Special Jury Prize at the Corporate Patronage Awards for the environment and sustainable development by the Minister for the Ecology, Sustainable Development, Transportation and Housing in France, for its activities as a whole and for six projects in particular that it has supported since its creation: its partnerships with the Camargue Regional Nature Park, the French Southern and Antarctic Lands, the Tara Océans scientific expedition, the Arema association (for the restoration and maintenance of aquatic areas), the Médiaterre program and the French network of major sites.

In the areas of solidarity and occupational integration, the Foundation also supports major projects such as assistance with the creation and management of micro-companies provided by ADIE (Association for the right to economic initiative) in France. The continuation of this partnership, which has functioned successfully for the last four years, will primarily enable the opening of new Advice Centers in cities outside Paris and the development of online services for micro-entrepreneurs.

The Foundation is involved in many solidarity projects in France and abroad, such as a project in India with the association, International Development Enterprises India, which increases the revenues of one thousand small farmers in the State of Maharastra by helping them implement small irrigation systems and sustainable agricultural practices and a project in Togo, as part of a decentralized cooperation agreement with the Mantes en Yvelines conurbation (Camy), to improve access to drinking water and wastewater treatment services for the 15,000 inhabitants of the Liligodo region.

In France, the Foundation also enabled the development in 2011 of around forty centers for occupational training and integration through economic activity and the return to employment of at-risk individuals. The Foundation is also a founder member of the French Sports Foundation (Fondation du sport français) launched in December 2011, alongside the French National Olympic and Sports Committee (Comité National Olympique et Sportif Français, CNOSF), the French Games Foundation (Fondation Française des jeux) and the Sportsman Mutual Insurance Company (Mutuelle des sportifs). This “umbrella” public-interest foundation promotes, in the general interest, social innovation through and in sport and the value of human interaction.



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Since its formation, the Foundation has created two prizes. The Environmental Book Prize (Prix du livre Environnement) was created in 2006 and is awarded to writers and publishing houses that help raise public awareness of the environmental challenges facing the planet. The Student Solidarity Award (Prix de la Solidarité étudiante) created with Campus Veolia in 2009, seeks to support not-for-profit projects undertaken by associations of students pursuing their studies at master level at leading French and European schools and universities.

The Environmental Book Prize was awarded this year to Martine Chalvet for “History of the Forest,” while Carl Hiaasen received the Youth prize for “Panther.” The 2011 Student Solidarity Award was won by four associations: Ingénieurs du monde, a student association from the Lausanne Ecole Polytechnique Fédérale, for a project developing renewable energy in Nepalese schools, Istom Student Environnemental Expertise, a student association from ISTPOM (Ecole d’Ingénieur d’Agro-Développement International) in Cergy Pontoise, for a project building a plant nursery to decrease the over-exploitation of forest resources and to protect the biodiversity of the National Limpopo Park in Mozambique, equal with Captive 2000, a student association from ESIGELEC (Ecole Supérieure d’Ingénieur en Génie Electrique) in Rouen for the creation of a pocket electronic dictionary in Braille for individuals with visual impairment and POEMES (Paris Ouest Etudiants en Médecine et Solidarité), a student association from Versailles Saint-Quentin University, for the renovation of a maternity clinic in a village of Burkina Faso, while raising awareness of HIV and hygiene issues.

In 2011, the network of Veoliaforce volunteer employees, which joined the Foundation in 2008, took part in several emergency humanitarian operations involving French and foreign volunteers. Five volunteers were decorated last January by Professor Jean-François Mattéi, President of the French Red Cross. On behalf of the French Defense Minister, he presented them with the Haiti Commemorative Medal awarded by the French Ministry of Defense, alongside several members of the energy response teams for their actions in Haiti following the earthquake in January 2010. In response to a request for help from the city of Minamisanriku in Japan, the Foundation sent two mobile drinking water treatment units (e.g. Aquaforce 5,000) and installed them onsite with the help of Japanese volunteers from Veolia Water Asia. This town with a population of 18,000, is located on the east coast of the country and was severely affected by the earthquake and tsunami. Its 7,000 survivors have since been joined by numerous refugees from surrounding communes. The mobile units enable the distribution of water to neighboring regions by tank truck. In Chad, following the outbreak of a cholera epidemic in August in Guera province, Veoliaforce volunteers joined forces with the specialized Red Cross Water and Wastewater treatment teams and assisted the Canadian Red Cross medical teams. Their mission was to set-up a cholera treatment center in Mongo, the capital of Guera and to support six secondary cholera treatment centers throughout the province, while raising awareness of hygiene issues.

A new cooperation agreement was signed by the Veolia Environnement Foundation and UNHCR, the United Nations agency responsible for helping refugees and displaced people. Under this agreement the Foundation becomes a UNHCR “standby partner,” as it already is with UNICEF and the French Red Cross. The Foundation will help strengthen the response capacity of its new partner in emergency actions in favor of refugees by contributing its expertise and know-how.

The first practical application of this partnership signed in October 2011 took place in Ethiopia, where the Foundation ensured the proper operation of the wastewater treatment plant and distribution network supplying a Somali refugee camp and the local communities of Kebri Beyah. In addition, several technical expertise and support missions were performed in Africa (in Djibouti, Zimbabwe, Togo, Cameroon, Senegal, Benin, Burkina Faso, the Democratic Republic of Congo and in the French Southern and Antarctic Lands) as well as in Moldavia. In Cameroon, as part of a cooperation program between the International Association of French–speaking Mayors (AIMF) and the town of Bangangté in the west of the country, volunteers took part in a water and wastewater treatment access program (performance of technical and water conveyance studies in ten villages and launch of fifteen latrine construction worksites in the commune’s schools and markets), benefiting over 150,000 people. In Djibouti, at the request of UNICEF, Veoliaforce volunteers assessed bore-holes financed by the European Union and Saudi Arabia, in order to draw up general design, construction and operation recommendations to increase water production flow. In Benin, volunteers took part in a decentralized cooperation program between the Seine Eure conurbation (CASE) and the commune of Bohicon, which the Foundation has assisted technically and financially for the last two years. Their mission involved optimizing the conveyance of drinking water, installing chlorination equipment and training equipment maintenance teams.



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At the same time, the Foundation continues to train volunteers. Around fifty employees from all Group divisions learned to use emergency equipment and particularly Aquaforce 5000, and are now able to intervene rapidly in the event of a humanitarian disaster. During 2011, Veoliaforce mobilized the expertise of our employee volunteers, who spent over 1,200 days in the field.

Insurance

Objectives

Our Group's insurance procurement policy, for all of our divisions, has the following objectives:

Subscribing common insurance policies to implement a coherent risk transfer and coverage policy designed to maximize economies of scale, while taking into account the specific characteristics of our businesses and legal or contractual constraints; and

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

Implementation of the insurance policy

Insurance policy

Our insurance policy involves (i) defining the global insurance coverage policy for our activities particularly based on the expression of the needs of subsidiaries, (ii) selecting and entering into contracts with outside service providers (brokers, insurers, loss adjusters, etc.), (iii) leading specialized consolidated subsidiaries in insurance or reinsurance services, and (iv) leading and coordinating the network of insurance managers of the main subsidiaries.

Implementation

The policy of covering risks through insurance is implemented in coordination with our global risk management process. Implementation takes into account the insurability of risks associated with our activities, the availability of insurance and reinsurance coverage on the market and the premiums proposed compared with the level of coverage, exclusions, limits, sub-limits and deductibles.

The main actions undertaken in 2011 primarily concerned:

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

The ongoing roll-out of Group programs;

The organization of broker services for the placement and administration of our insurance programs.

Main Group insurance policies

Third-Party Liability

The general third-party liability and environmental damage program was renegotiated on July 1, 2011, for the whole world (excluding the US and Canada) for a period of three years. Initial coverage of up to €100 million per claim was subscribed. In the US and Canada, several contracts cover third-party liability and environmental damage for Group subsidiaries, up to a maximum of US$50 million per claim and per year.

For all our subsidiaries worldwide, an insurance program provides excess coverage of up to €400 million per claim, in addition to the basic coverage of €100 million outside the US and Canada, and of €450 million per claim in excess coverage over and above the basic coverage of US$50 million in the US and Canada. This program encompasses liability resulting from environmental damage sustained by third parties as a result of a sudden and accidental event.



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Third-party liability coverage for terrorist acts is included in the general liability program set-up for three years on July 1, 2011, with coverage of up to €200 million per claim and per year, excluding the US and Canada. Coverage for the US and Canada is €150 million per claim and per year, in addition to coverage of US$50 million. Certain activities, such as maritime transport, automobile and construction, have their own specific insurance policies.

Property Damage and Business Interruption

All four of our divisions are covered by property damage insurance policies, insuring the installations they own as well as those they operate on behalf of customers. Our Group insurance program provides either “business interruption” coverage or “additional operating cost” coverage depending on each subsidiary's ability to use internal or external solutions to ensure service continuity. These policies contain standard insurance market terms. Our Group damage insurance program initially set up on January 1, 2007 for a period of three years was extended to January 1, 2012 to maintain existing competitive insurance coverage.

The level of premiums, deductibles and sub-limits for exceptional socio-political or natural events reflects the terms proposed, or sometimes required, by insurers in the markets in which the risk is underwritten. Group insurance coverage carries a limit per event of €300 million per claim. Some of this coverage includes additional sub-limits per claim or per year.

Self-Insurance and Retained Risks

For any insured claim or loss, we remain liable for the deductible amount set out in the policy. This amount may range from several thousand euros to more than one million euros. Our Group self-insurance system is entirely based on its reinsurance subsidiary, Veolia Environnement Services-Ré, which retains a self-insured risk of €1.5 million per loss for the coverage of the third-party liability risk and €2.5 million per loss for the coverage of property damage risks and resulting financial losses, thereby limiting the accumulation risk. For both property damage and third-party liability, Veolia Environnement Services-Ré has set up reinsurance contracts to limit its exposure to frequency risk (“stop loss”-type contracts).

The insurance policy described above is constantly changing in response to the constant appraisal of risks, market conditions and available insurance capacity. We ensure that the main accidental and operating risks brought to our attention are covered by the insurance markets, when insurance is available on the market and it is economically feasible to do so.


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ORGANIZATIONAL STRUCTURE

Our Company is divided into four operating divisions corresponding to each of our four business segments and a number of centralized corporate departments that lead and coordinate the actions of teams present in each of the four operating divisions. We are currently preparing to divest one of these divisions, which consists of our investment in Veolia-Transdev. We believe that this organizational structure encourages the coherent development of our Group by reinforcing our identity, maintaining solidarity and cohesion, favoring economies of scale and encouraging professionalism through the sharing of best practices.

See Item 4. “Information on the Company—History and Development of the Company” for a description of the history of the creation of our organizational structure. A list of our principal subsidiaries is provided in Note 44 to our Consolidated Financial Statements.

PROPERTY, PLANT AND EQUIPMENT

We use various assets and equipment for the conduct of our activities, over which we exercise extremely diverse rights.

The total gross value of our non-current assets (excluding other intangible assets) as of December 31, 2011 was €30,971 million (net value of €18,563 million as of December 31, 2011, representing 37% of total consolidated assets), compared to €32,658 million as of December 31, 2010 (net value of €19,497 million).

Under concession arrangements, we provide public interest services (distribution of drinking water and heat, public transportation networks, household waste collection, etc.) to communities, in return for the payment of services rendered. We usually manage these collective services (also referred to as general interest services, general economic interest services and public services) pursuant to contracts entered into at the request of public entities that maintain the control of the assets used to perform such collective services. Concession arrangements are characterized by the transfer of operating rights for a fixed term, under the supervision of a public authority and are performed using special-purpose installations that we build or that are placed at our disposal either free of charge or for consideration. Installations normally consist of pipelines, water treatment and purification plants, pumps etc. in the Water division, incineration plants in the Environmental Services division, and urban heating networks and heating and co-generation plants in the Energy Services division.

We are usually contractually bound to maintain and repair installation assets managed under public service contracts. When necessary, related repair and maintenance costs are provided for in contractual commitments in the event of delays in the performance of work. The nature and extent of our rights and obligations under these different contracts vary by the type of public service rendered by the different Group businesses.

Under outsourcing contracts with industrial clients, BOT (Build, Operate, Transfer) contracts, or incineration or cogeneration contracts, we may grant customers the right to use a group of assets in return for rent included in the total contract remuneration. Pursuant to IFRIC 4, we would thus become a lessor with respect to these customers. The corresponding assets are therefore recorded in the consolidated balance sheet as operating financial assets.

We are also the outright owner of industrial installations, in particular for activities undertaken outside comprehensive contracts in the Environmental Services division (landfill sites and special waste processing plants), the Energy Services division (co-generation plants) and the Transportation division (buses, boats and trains). These assets are classified in the consolidated balance sheet as property, plant and equipment. Our property, plant and equipment are subject to certain charges, such as maintenance and repair costs and closure or post-closure costs.

We legally own relatively few real estate assets without any retrocession obligations. When possible, we do not own our office buildings. The assets purchased under finance leases fall into all three asset categories detailed above and represented a net amount of €593 million as of December 31, 2011. Environmental issues may also influence the Company’s use of property, plant and equipment, as detailed above.


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RESEARCH AND DEVELOPMENT (R&D)

Our activities are at the crossroads of several major challenges facing the modern world: demographic explosion and urbanization, increasing rarity of resources, access to water, and fighting climatic change. The solution to these challenges requires a global industrial and technological approach. This transversal approach lies at the heart of our Research and Innovation (R&I) strategy.

With today’s technologies, these challenges are already lost. It is therefore by focusing fully on the inventive-capacity of our research teams that we plan to rise to the environmental challenge, by proposing innovative solutions offering high economic and environmental performance at an affordable cost.

The four-pronged approach of the Veolia Environnement R&I Department comprises: (i) managing and preserving resources, (ii) limiting the impact on the environment, (iii) improving the quality of life of populations and (iv) developing renewable energy sources. Fighting against climate change also occupies a leading place in this framework. Research efforts are concentrated on optimizing energy consumption at our installations, developing alternative energy sources (bioenergies, biomass, waste-to-energy, alternative fuels), the desalination of sea water and the improvement of treatment processes, monitoring the quality of drinking water, microbiological prevention, the recycling and recovery of waste, the optimization of urban transportation and the intelligent management of cities and their different flows through information technology.

In each of these areas, our know-how and technologies set us apart from the competition. Thanks to their complementary nature, they are also unique assets enabling us to innovate at the crossroads between our businesses and develop the environmental services of the future.

These innovation efforts are supported by a network of international experts renowned for their excellence. Strengthened by this knowledge of markets and needs, the implementation of research programs at test sites around the world enables us to bring creative solutions to specific local problems and contexts that may be adapted to other regions of the world.

Innovation in environmental services offers an essential competitive edge when responding to calls for tenders, as well as clearly contributing to the development of a more virtuous economy.

The Organization of Research & Innovation activities

The organization of R&I activities seeks to break down barriers between research units and pool expertise and resources across transversal subjects. The scientific and technical teams of the divisions report directly to a single management structure comprising seven departments representing our main areas of expertise. For example, water and waste biologists work together directly. By organizing our teams by area of expertise, the R&I Department seeks to develop scientific synergies and thereby favor the emergence of ground-breaking solutions, innovate at the crossroads between the businesses and facilitate the development of outside partnerships.

Interaction between our different activities is constantly increasing - water and waste, waste and energy, energy and transportation, etc. – leading to the implementation of a more unified methodology and research team structure: improved information sharing, pooling of expertise, and the creation of transversal programs. Already, wastewater treatment plants have the means for energy self-sufficiency and to produce bioplastics; treated water can be reused to power energy turbines and waste is used to produce electricity.



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Organized into eight areas, the research programs reflect the eight major technological challenges facing the Group:

Bioresources;

Waste collection, sorting and recovery;

Drinking water;

Wastewater;

Building and network management;

Environmental and health performance;

Energy production and efficiency; and

Transportation.

These programs are carried out in a spirit of innovation, in close cooperation with the divisions. This synergy and openness strengthens our ability to respond to current and future challenges facing the Group. In addition, to give our experts sufficient time to concentrate on scientific aspects, a programs department is responsible for defining lines of research, monitoring each project and ensuring the roll-out of innovations in the field.

A Watch and Innovation Department was set-up in 2010. It aims for the more systematic identification of innovations perfected around the world and likely to be developed and integrated into our activities. It also seeks to encourage an “open innovation” approach, primarily with cleantech startups.

Each innovative solution must therefore lead to the creation of new services or an improvement in the quality of existing services: increased efficiency, yield or reliability or a decrease in impacts and costs. By intensifying its technology integration role, research activities also strengthen the difference between our offerings and so its competitiveness.

Veolia Environnement Research and Innovation Resources

Our research activities are overseen by Veolia Environnement Recherche et Innovation (VERI). In 2011, these R&I activities involved nearly 900 experts worldwide (including 450 researchers and 450 on-site developers), with a total budget of approximately €111.7 million. VERI works on behalf of all Group divisions, as their needs are similar. In particular, all seek to solve environmental and health problems with the support of numerous tools, such as modeling and chemical and bacteriological analysis. In this way, VERI helps ensure better consistency of R&D activities with our strategy. We have four main research centers in France in Rueil-Malmaison, Maisons-Laffitte, Limay and Saint-Maurice, which operate in a network as a single research center.

An International Network of Research and Innovation Officers

In 2003, we set up an international network of R&I officers, to identify innovation needs in each region of the world and communicate research work. Certain research centers abroad have acquired specialized expertise and have partnered with centers in France. These research units have become showcases for our technological expertise. Locally, the Research & Innovation department provides our divisions with a competitive advantage, by adapting their offerings to the specific requirements of each market. Globally, it groups together initiatives identified around the world in a pool of knowledge, enabling constant improvements in our know-how and the identification of future business trends.



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The management of water resources, the availability and quality of which can vary significantly, is a typical example of an area where innovation by the Research department enables technological solutions adapted to each local context to be proposed. In Germany, the Berlin Research Center (KWB) is working on hybrid solutions associating the natural environment (lake embankments) and technology (ozonation) for the production of drinking water or the refining of treated wastewater. In Milwaukee in the United States, the development of a Water Impact Index (Wii) enables a comprehensive assessment of the impact of city operations on water resources and the definition of action plans aimed at minimizing environmental pressure. In China, the majority of surface water is heavily polluted by industrial waste. In 2010, the Research and Innovation Department joined forces with a leading Chinese university, the University of Tsinghua, to open a joint research center and work on the treatment of this industrial effluent.

Innovation is also improving existing solutions where this is preferable to their replacement. In Central Europe for example, where most heating requirements are met by coal boilers, work by the Research department contributes to the replacement of an increasing percentage of this fossil fuel by biomass, improving the carbon footprint of operations. In Germany, where solid recovered fuels (SRF) are booming, researchers have developed a measurement tool enabling a more detailed assessment of waste deposits for the production of SRF.

The Research Department relies on its foreign units and has developed a network of over 200 international partners in order to stay tuned to emerging markets and technologies and benefit from genetic and marine biology expertise. In Sweden, it joined with Anox-Kaldnes, now a subsidiary of the Group, to perfect a bio-polymer producing wastewater treatment plant, leading to the roll-out of a prototype at the Brussels wastewater treatment plant this year. In the United States, the Research Department is working with Californian companies and start-ups to bring into service quick-charge electric buses.

Innovation: a Tried-and-Tested Approach

The research teams seek to provide innovative practical solutions within their areas of expertise, to improve the competitiveness of the Veolia Environnement Group. R&I is carried out as part of a tried-and-tested approach enabling technological risks to be controlled and enabling rapid progress and the creation of successful commercial applications that are both reliable and effective. The main steps in the innovation process are:

Strict monitoring of regulations and technology, as well as the competition that enables the Group to foresee future needs and launch new research programs as quickly as possible;

Laboratory or field tests to verify the feasibility of the research. Digital modeling is often carried out at this stage to enable operating areas to be more rapidly explored and procedures to be intensified (cost savings and efficiency gains, reduced emissions or residues, etc.);

If the tests are successful, a prototype is built in the laboratory or on-site to evaluate and refine the technology used and also develop advanced management tools to facilitate subsequent operational roll-out;

The next phase is the development of a pre-industrial unit to be installed at an appropriate site and operated by personnel.

At each step in the innovation process, the collaboration of various parties (research teams, university or private laboratories) is necessary and determines the successful outcome of the research project.

Our R&I teams are part of a network of researchers. They forge links with basic research teams, each drawing benefit from the expertise of colleagues. While this collaboration enriches the knowledge of the Group R&I department and keeps it informed of recent developments, it also provides effective outlets for scientific progress and feedback to our partners. R&I teams also work with several top universities and participate in research programs led by national and international institutions. They also share their technological knowledge with industrial players.



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Main Research and Innovation Challenges Facing Veolia Environnement

The four main challenges at the core of our current Research and Innovation are:

Managing and Preserving Natural Resources

The sector that will be most affected by climate change is water. Research into sea water desalination processes, collection of rain water and the re-use of wastewater after treatment, is aimed at meeting the expected increase in water requirements. In order to preserve natural resources, it is also essential to find solutions to decrease consumption. The mechanization and automation of sorting processes for used materials, as well as the design of recycling processes for end-of-life products or industrial effluents, encourage in this way the re-use and recovery of materials found in waste at a competitive cost.

Limiting Environmental Impacts

The improvement of treatment techniques for industrial effluents and hazardous waste makes it possible to limit the dispersion of pollutants in the environment and better respect biodiversity and public health. As a global reference in environmental services, we must set the example with regards to reducing the impact of its activities. Current efforts are therefore focused on reducing discharges from our facilities, decreasing noise and olfactory pollution and developing even cleaner means of transportation.

Improving Quality of Life Worldwide

The perfecting of wastewater depollution and 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 water and thus the health of those who consume it. Combined with the development of clean means of transportation, the organization of mass transportation reduces greenhouse gas emissions and atmospheric pollution. It also improves living conditions in major cities and encourages economic development in emerging countries.

Developing Alternative Energy Sources

As carbon dioxide emissions continue exceeding the absorption capacity of the biosphere, the production of substitute fuels and biofuels, the recovery of biomass as energy, the development of industrial applications for fuel cells and the optimization of the performance of Group waste incineration plants help limit greenhouse gas emissions. These measures also help respond to the increasing global demand for energy and address the depletion of fossil fuel reserves by replacing them with clean energies.

A large majority of our research programs contribute to reducing greenhouse gas emissions, bearing witness to our strong commitment to fighting climate change. Current processes seek to eliminate greenhouse gas emissions or, where this is not possible, reduce emission levels. To this end, R&I activities focus primarily on reducing emissions, improving processes and energetic efficiency and exploiting more renewable energy sources. System approaches now form an integral part of R&I work aimed at integrating the development of decentralized energy sources into the optimized management of energy utilities. At the same time, we are striving to implement processes to capture, store and recover CO2 and foresee future constraints relating to climate change.



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Progress in 2011

Open innovation: the Veolia Innovation Accelerator Signed its First 7 Partnerships with Startups in 2011 and Launched an Innovation Hub with the U.S. City of Milwaukee

The Veolia Innovation Accelerator (VIA) program was launched in February 2010 to identify, assess and roll-out the best ecotechnologies proposed by start-ups, on behalf of all of our divisions. Merely eighteen months after its launch, 300 startups have signed up to the VIA selection process. Following the announcement of the first five partnerships at the San Francisco Cleantech Forum at the beginning of the year with Ostara Nutrient Recovery Technologies Inc. (recovery of nutrients in wastewater), CoSMo (modeling and simulation of complex systems for sustainable cities), Envolure (rapid on-site assessment of wastewater and organic residue), Advanced Cyclones Systems (innovative cyclones for the treatment of smoke emissions) and Greenroad (real time driving assistance), two new partnerships were signed in the second half of 2011 with the start-ups ISD (forecasting water consumption) and Hara (managing the environmental footprint). Upstream of these partnerships, the Veolia Innovation Accelerator continued to work on developing awareness of the program in the cleantech community and among specialized investment funds.

A more-regional version of the VIA program was tested with the US city of Milwaukee, in close conjunction with Veolia Water North America. Together with VIA, the city aims to create a water innovation hub for the testing and roll-out of clean technologies for cities. This public-private initiative comes in response to strong demand from our customers for recovery technologies and support with their sustainable development policy (for further information visit : www.via.veolia.com).

Public Transport: the “European Bus System of the Future” Project Develops the Information Systems of Tomorrow to Accelerate the Development of Inter-Modality and New Digital Services

Mass transportation information systems are currently compartmentalized. They consist of a variety of applications and hardware specific to each operator and region which, with only a few exceptions, cannot communicate with each other. Interconnection systems are essential if inter-modal information is to become more readily accessible, rapid, reliable and less expensive than today.

Since 2008, our Research and Innovation Department has piloted a project on intelligent transportation as part of the EBSF European project launched under the auspices of the UITP and the European Union. Veolia Environnement Research and Innovation teams have piloted the work of 23 partners and approximately 50 individuals on the data communication architecture of the bus “system,” integrating the various components into a test bench and validating the operation of the overall architecture.

The results of this work were presented to all stakeholders during an EBSF event on November 18, 2011, attended by European Commission and UITP officials. This “open data” concept could be extended beyond bus systems to encompass all means of transport. It should encourage the development of new real-time digital services, such as the “predictive maintenance” service currently being tested by the Research Department and Veolia Transdev at the Burnoy site (Greater Paris), substantially decrease investment and operating costs below current levels (by 20 to 30%) and accelerate inter-modality at the European level, with the definition in the long-term of international communication standards (for further information see the scientific chronicles at www.chroniquesscientifiques.veolia.com).



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Renewable Energies: the Optima-Pac Project, which Aims to Optimize Performance While Reducing the Impact of Seawater Heat Pumps on Coastline Areas, Was Selected as Part of the 11th Call for Projects by the FUI (Inter-ministerial Unified Fund)

In France, the joint project to optimize the performance of seawater heat pumps and manage the impact on coastline areas (called the “Optima-Pac”) was selected as part of the 11th call for projects by the Inter-ministerial Unified Fund. This €2.2 million initiative will help identify the impact of seawater heat pumps on the marine environment. Optima-Pac was officially launched on May 5, 2011 and the consortium agreement was published at the end of the summer. This three-year project will be performed from a research site in Monaco, where several technologies of this type are currently in use. Over 25 researchers and engineers will study the impact on marine biodiversity, define measurement bio-indicators, model and optimize pump operating cycles and model the spread of thermal plume in order to better assemble and combine the pumps. Our Research and Innovation Department is more specifically involved in the bio-indicator, marine life modeling and heat pump energy efficiency aspects of this program. It is also responsible for managing and coordinating the different project batches.

The Brussels Wastewater Treatment Plant Inaugurates a Prototype Producing Bioplastic from Sludge Carbon Last October, Acquiris, the Belgian subsidiary of Veolia Eau which manages the Brussels wastewater treatment plant, the largest in Belgium, presented the first prototype in the world for the production of biodegradable plastic from wastewater.

Research carried out by Veolia Eau’s Swedish subsidiary, AnoxKaldnes, in conjunction with the Veolia Environnement Research and Innovation Department, identified that during the depollution process certain bacteria used to breakdown wastewater accumulate carbon in the form of biopolymer reserves, which have similar properties to products used in the chemicals industry. By reusing part of the sludge, the patented technology creates the conditions necessary for these bacteria to stock a maximum amount of biopolymers. These biopolymers are then recovered and recycled into a material that can be used, for example, by the plastics industry to manufacture plastic parts.

REVODYN: an Innovative Procedure for Automatically Regulating Waste Volumes Entering Sorting Centers on Conveyor Belts and Increasing Flow Through

Together, our Research and Innovation Department and Veolia Propreté developed the REVODYN procedure, a system which automatically regulates incoming waste flows and can be easily installed in selective collection sorting centers. This innovation combines off-the-shelf measurement equipment with the mathematical and regulatory expertise of Research Department experts. The procedure improves the stability of the height of waste on conveyor belts, enabling increased volumes to enter the sorting centers while reducing the risk of blocking or saturating the sorting equipment. The concept was developed and perfected at the CGECP site and final validation procedures prior to roll-out are currently being performed at the Bourges site.

CARBO-PRO: a New Decision-Making Tool Developed with INRA for the Recovery of Residual Organic Products (ROP), Based on the Calculation of Carbon Stored in Soils at the Time of Spreading

As for all Residual Organic Products (ROP) used for agricultural purposes (compost, sludge, digestates, manure, etc.), the addition of compost increases the amount of carbon stored in soil thereby improving its fertility. ROPs also help reduce greenhouse gas emissions by sequestrating carbon in the soil. The ability of ROPs to increase carbon stored in soil depends on the type of ROP and the treatment procedures performed prior to spreading (composting, anaerobic digestion, etc.).

The research performed together with INRA led to the development of a new tool, CARBO-PRO. Based on a range of scenarios, this decision-making tool calculates the carbon stored in soil following the spreading of ROPs and estimates the resulting improvements to certain soil properties, such as resistance to erosion, water retention capacity and nitrogen available for plants.



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ACTIFLO®: Development of a Range of Green Polymer Products

Actiflo®, combining ballasted flocculation and lamellar settling, is the most compact clarification process on the market. The development of the Actiflo Turbo® range enabled the Group to offer a process even more competitive than the original and far more compact: the ground area covered is half that of its predecessor. However, in order to operate at such high speeds Actiflo® requires a certain dose of polymers and the use of standard “polyacrylamide” polymers in water treatment is subject to increasing regulation in many countries. By modifying the properties of starch to change its viscosity and charge, the Research and Innovation teams successfully developed a natural additive offering the same level of treatment performance as the synthetic polymer.

Analysis of the Residual Life of Drinking Water Networks: the Russel Solution Helps Better Assess the State of Cast Iron Pipelines and Optimize their Replacement

A new probe using Eddy current technology (developed by Russel) to inspect cast iron pipelines was tested and validated at two Veolia Eau pilot sites. This differentiating technology offers real added value over the competition in Europe and Asia. By measuring the residual thickness of corroded pipelines in a network under pressure, it enables network downtime to be reduced. In addition, an air lock for introducing the probe into a network under pressure has been developed jointly by VERI and EIE (a SADE subsidiary).

ADEME Selects the EMIPAR Project to Improve Understanding of the Formation of Fine and Ultrafine Particles Emitted by Collective and Industrial Boilers

At the end of 2011, our Research and Innovation Department took part in the EMIPAR project selected by ADEME. This initiative is carried out in conjunction with Leroux et Lotz Technologies, Ecole des Mines de Douai and the Mulhouse Risk Management and Environment Laboratory and aims to improve the analysis of final particles and nanoparticles emitted by collective and industrial boilers.

With a term of just over two years, the primary scientific aim of this project is to further our understanding of the formation of fine and ultrafine particles in industrial combustion chambers of biomass-fired boilers with a thermal output of less than 20 MW, in order to reduce emissions at the source.

This project is of major importance to us as, in the long-term, it should enable size specifications to be established for smoke treatment systems for our biomass-powered boilers. These specifications will ensure we are ready for increasingly strict environmental standards in this area.

Patents and licenses

See above “– Intellectual Property – Company Dependence.”


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ITEM 4A.  UNRESOLVED STAFF COMMENTS

Not Applicable.


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ITEM 5.     OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion of our results of operations and financial condition should be read together with our Consolidated Financial Statements and related Notes included in Item 18. Our Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the IASB and with IFRS as adopted by the European Union.

The following discussion also contains forward-looking statements that involve risks and uncertainties, including, but not limited to, those described under Item 3. “Key Information—Risk Factors.” Our results may differ materially from those anticipated in the forward-looking statements. See “Forward-Looking Statements” at the beginning of this document for a more detailed discussion of the risks and uncertainties to which our results and financial condition are subject.

In the discussion that follows, our results of operations for 2009 and 2010 have been re-presented compared to previously published figures to reflect the reclassification of certain activities as discontinued operations (or the reclassification as continuing operations of activities previously classified as discontinued), as well as the correction of the impact of an accounting fraud discovered in 2011 in our Marine Services business (described below), which was immaterial in each of the years presented but has nonetheless been corrected in accordance with IAS 8. See “—Events in 2011 Impacting Results of Operations and Financial Condition—Discontinued Activities” and “—Marine Services Accounting Correction” below.

OVERVIEW

Results of Operations in 2011

General Context

For Veolia Environnement, 2011 was a year of transition, given the economic and financial crisis and the evolution of our historical markets. We experienced commercial successes, but also certain operational difficulties, particularly in Southern Europe, North Africa and the United States, as well as the erosion of margins in the Water division in France and increased asset maintenance costs in the United Kingdom. The year was also marked by the creation of the Veolia Transdev joint venture with the Caisse des dépôts et consignations on March 3, 2011, which was followed by our decision, announced on December 6, 2011, to withdraw progressively from the Transportation business, resulting in our share of the results of operations of Veolia Transdev being recorded as a discontinued operation. On December 6, 2011, we also announced our decision to implement a transformation program, which includes a restructuring of our portfolio of businesses and a transformation of our organization to reduce costs. See Item 4. “Information on the Company – Our Overall Strategy” for further details regarding the transformation program.

Revenue

Our consolidated revenue for the year ended December 31, 2011 was €29,647.3 million, compared to €28,764.2 million in 2010, representing an increase of 3.1% (2.0% at constant consolidation scope and exchange rates). Net external growth resulted in a 1.2% increase of revenues, while foreign exchange rate variations decreased revenues by 0.1%.



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The increase in revenues at constant scope of consolidation and exchange rates was mainly due to the following factors:

in the Environmental Services division, an increase in the price of recycled raw materials, which increased division revenues by €174 million (primarily in France and Germany), and an improvement in activity levels, particularly for the treatment of hazardous waste, although growth was slower in the second half of 2011;

growth in Water division revenue, mainly tied to the good contribution of operating activities in Europe (primarily Germany and Central and Eastern Europe) and in Asia, partially offset by the negative impact of contractual erosion in France and unfavorable summer weather conditions; and

in the Energy Services division, an increase in energy prices (which increased revenue by €265 million compared to 2010), which was offset by the impact of unfavorable weather conditions, particularly in the last quarter of 2011, a downturn in Works activities and the termination of installation activities in the photovoltaic solar energy sector in Southern Europe.

Growth slowed during the second half of 2011, particularly in the fourth quarter, due to an unfavorable base effect for the Technology and Network business in the Water division, the downturn in the economic environment in the Environmental Services division (primarily the price of recycled raw materials) and particularly unfavorable weather conditions for the Energy Services division.

Operating income, adjusted operating income and adjusted operating cash flow

Despite the growth in revenues, our operating income declined by €964.9 million, from €1,982.1 million in 2010 to €1,017.2 million in 2011, representing a decrease of 48.7%, or 49.2% at constant exchange rates. This was the result of several factors, including contractual erosion in the Water division in France, operational difficulties in the Marine Services business in the United States and in several businesses in Southern Europe, the termination of our contract in Alexandria, Egypt, in the Environmental Services division, lower levels of capital gains from divestitures, and significant goodwill and asset impairment charges (discussed below).

Adjusted operating income (a non-GAAP financial measure that we describe below) fell by 10.1% (10.3% at constant exchange rates), from €1,891.4 million in 2010 to €1,700.5 million in 2011. Adjusted operating income excludes goodwill impairment charges and certain special items (such as significant asset impairment charges, restructuring costs and capital gains), accounting for the difference in the amount of the 2011 decline compared to that of operating income.

Adjusted operating cash flow (a performance measure that we describe below), declined more modestly, from €3,314.6 million in 2010 to €3,152.3 million in 2011, representing a decrease of 4.9% (4.7% at constant exchange rates). Adjusted operating cash flow excludes substantially all of the items excluded from adjusted operating income, plus asset impairment charges and capital gains that are included in adjusted operating income, depreciation and amortization and certain other charges. As a result, the decline in adjusted operating cash flow reflected primarily the operational issues described above.

Our 2011 operating income was adversely impacted by €818 million of goodwill and asset impairment charges and restructuring costs (a figure that excludes impairment charges relating to Veolia Transdev, which are recorded in discontinued operations and discussed below). The impairment charges reflect primarily the substantial deterioration in the economic environment and in certain of our activities in Italy, which accounted for €520 million of the impairment charges. The remaining charges were recorded primarily in Spain (discontinuation of solar energy projects after termination of government support measures), the United States (deterioration in perspectives for development in the Energy Services division) and North Africa (contractual interpretation issues in the Water division in Morocco). See “—Events in 2011 Impacting Results of Operations and Financial Condition—Impairment Charges.”



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Discontinued operations

Our net loss from discontinued operations was €2.4 million in 2011. The largest business with results recorded in discontinued operations was Veolia Transdev, in respect of which we recorded a net loss of €55.7 million in 2011. This amount reflected a capital gain of €429.8 million and an impairment charge of €440 million. The capital gain was realized at the time of the combination of Veolia Transport and Transdev on March 3, 2011, which was treated under IFRS as the disposition of our former Transportation division and the acquisition of a 50% interest in Veolia Transdev. The impairment charge was recorded as of December 31, 2011, following our decision to progressively withdraw from the Transportation business, and reflected primarily a downturn in the performance of Veolia Transdev as well as the potential impact of current legal proceedings concerning SNCM, which is a Veolia Transdev group entity (see Item 8. “Financial Information – Consolidated Statements and Other Financial Information – Litigation” for a description of these legal proceedings) and a decrease in implicit market transaction valuation multiples in this sector.

Net income (loss)

We recorded a net loss attributable to owners of the Company of €489.8 million for the year ended December 31, 2011, compared to net income of €558.5 million in 2010. In addition to the decline in our operating income, the 2011 figure reflected, among other things, reductions of deferred tax assets of €86.9 million in France (reflecting revised forecasts of taxable income) and €137.6 million in the United States (reflecting expected changes in the scope of the US tax group resulting from the transformation plan). Adjusted net income attributable to owners of the Company (a non-GAAP measure that excludes the items excluded from adjusted operating income, as well as income and losses from discontinued operations and the reductions in deferred tax assets described above) amounted to €289.8 million in 2011, compared to €474 million in 2010.

Cash Flow and Financial Condition

In 2011, we generated net cash from operating activities of €2,944 million, compared to €3,457 million in 2010, reflecting primarily the change in adjusted operating cash flow described above, as well as reduced cash flow from discontinued operations and a slight increase in working capital requirements. However, we generated €438 million of free cash flow in 2011, compared to €409 million in 2010, due mainly to lower net investments resulting from significant divestitures and a selective growth policy, and a larger share of dividends paid in shares in 2011 compared to 2010 (free cash flow is a non-GAAP measure described under “—Liquidity and Capital Resources – Free Cash Flow”).

Our net financial debt declined from €15,218 million as of December 31, 2010 to €14,730 million as of December 31, 2011 (net financial debt is a non-GAAP measure described under “—Liquidity and Capital Resources – Liquidity – Financial Debt Structure” below).

In connection with our transformation plan, we intend to realize substantial additional divestitures and to reduce our net financial debt significantly by the end of 2013. See Item 4. “Information on the Company – Our Overall Strategy.”



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ACCOUNTING POLICIES AND PRESENTATION

Presentation of Information in this Item

Definition of “internal growth” and “external growth”

The term “internal growth” (or “growth at constant consolidation scope and exchange rates”) encompasses growth resulting from the expansion of an existing contract, particularly growth resulting from an increase in prices and/or volumes distributed or processed, as well as new contracts, and the acquisition of operating assets attributed to a particular contract or project.

The term “external growth” encompasses growth through acquisitions (completed in the current period, or which had an effect on revenues for only part of the prior period), net of divestitures, of entities and/or assets deployed in different markets and/or containing a portfolio of more than one contract.

Segment Reporting: Adjusted Operating Cash Flow

In accordance with IFRS 8, we report financial information on our segments. Historically, we have reported on four segments: Water, Environmental Services, Energy Services and Transportation. Since our decision, announced on December 6, 2011, to disengage from the Transportation sector, we report on three segments: Water, Environmental Services, and Energy Services. Our segment reporting information is presented in Note 42 to our Consolidated Financial Statements included in this annual report on Form 20-F.

One of the indicators presented in our segment reporting is “Adjusted operating cash flow” (known in French as capacité d’autofinancement opérationnelle), an indicator that our chief operating decision maker uses as a performance measure. Adjusted operating cash flow is equal to operating income, adjusted to add or subtract (as applicable) depreciation, amortization and operational provision expenses, impairment charges, net gains on divestitures and other non-cash items (primarily IFRS 2 share-based compensation charges and fair value adjustments in respect of derivatives).

We use adjusted operating cash flow as a tool to measure the performance of our business, because we believe it provides a uniform indicator of the performance of our long-term contracts (under which we conduct the larger part of our activities). The non-cash charges that we exclude from operating income to derive adjusted operating cash flow (such as depreciation, amortization and asset impairment) may be subject to significantly different accounting treatment depending on the legal characteristics of our contracts and/or the nature of our customers. Adjusted operating cash flow measures the cash generation of our contracts, which is generally not affected by these differences in accounting treatment. As a result we believe this indicator provides us with a comparable measure of the performance of our division and geographical operations.

Adjusted operating cash flow is only one of the indicators we use to measure our performance. We also use operating income and adjusted operating income (a non-GAAP financial measure that we define below), both of which take into account a number of non-cash charges. These charges are important, as we would not be able to realize cash flows from our contracts without incurring the expenditures that generate the non-cash charges. For example, depreciation charges for assets used in connection with our long-term contracts represent part of cost of generating revenue and cash flow from those contracts.

Adjusted operating cash flow is reconciled to operating income for the years ended December 31, 2011, 2010, and 2009 under “—Results of Operations—Year Ended December 31, 2011 Compared to Year Ended December 31, 2010” and “—Results of Operations—Year Ended December 31, 2010 Compared to Year Ended December 31, 2009.”



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Non-GAAP Measures

We use a number of non-GAAP financial measures to manage our business and to supplement the financial information presented in accordance with IFRS. Non-GAAP financial measures are defined as numerical measures of performance, position or cash flows that (i) exclude amounts that would ordinarily be included in the most directly comparable IFRS measure or (ii) include amounts that would ordinarily be excluded from the most directly comparable IFRS measure. We discuss below the non-GAAP financial measures that we use in multiple places in this Item 5, the reasons why we believe they provide useful information and the location in this section where they are reconciled to the most comparable IFRS measures. We provide similar information for non-GAAP measures that we use only once in the sections where those terms are used. You should not place undue reliance on non-GAAP financial measures or regard them as a substitute for the most comparable IFRS measures. Furthermore, these non-GAAP financial measures may not be comparable to similarly titled measures used by other companies, and are not meant to be predictive of future trends in results of operations, financial condition or cash flow.

The non-GAAP financial measures that we use in multiple places in this section include the following:

Adjusted operating income” and “Adjusted net income attributable to owners of the Company” are equal to operating income and net income attributable to owners of the Company, respectively, adjusted to exclude the impact of goodwill impairment charges and certain special items.

Special items include items such as gains and losses from asset disposals that substantially change the economics of one or more cash-generating units, and restructuring costs (costs resulting from the adoption of a detailed restructuring plan, as described in Note 1.13 of our Consolidated Financial Statements). For this purpose, we generally consider a disposal to have the potential to change the economics of one or more cash-generating units if the total consideration exceeds approximately €100 million based on enterprise value and before deducting non-controlling interests or adjusting for proportional consolidation. Special items also include significant impairment charges relating to assets other than goodwill. In general, we exclude impairment charges in respect of such assets as “special” items when they are large enough to significantly impact the economics of a cash-generating unit. Items may qualify as “special” although they may have occurred in prior years or are likely to recur in following years. Other “special” items may be nonrecurring, meaning that the nature of the relevant charge or gain is such that it is not reasonably likely to recur within two years, and there was not a similar charge or gain within the prior two years.

We believe that adjusted operating income and adjusted net income attributable to owners of the Company are useful measurement tools because they show the results of our operations excluding the impact of:

goodwill impairment charges, which we record when we determine that the value of a cash-generating unit with goodwill is less than its carrying value (as discussed under “—Critical Accounting Policies—Asset Impairment”), and which differ from the other revenue and expense items used to determine operating income as they depend on management’s assessment of the future potential of a cash-generating unit, rather than results of operations in the period in question,

“special” items, which relate to events or charges that we do not consider to be part of the normal income-generating potential of the business.

We also use adjusted operating income as a tool to manage our business, for purposes of evaluating our performance and for allocating resources internally.

Adjusted operating income and Adjusted net income attributable to owners of the Company are reconciled to operating income and net income attributable to owners of the Company, in each case for the years ended December 31, 2011, 2010, and 2009 under “—Results of Operations—Year Ended December 31, 2011 compared to Year Ended December 31, 2010” and “—Results of Operations—Year Ended December 31, 2010 compared to Year Ended December 31, 2009.”



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Constant Exchange Rates” is a term that we use to refer to growth in our revenues, adjusted operating cash flow, operating income and adjusted operating income, excluding the impact of changes in foreign currency exchange rates. We calculate constant exchange rate figures by applying to current year figures the exchange rate from the preceding year. When we present percentage growth (or decline) on a constant exchange rate basis, we also present the corresponding figure on a current exchange rate basis.

Concession Accounting

A significant portion of our business is conducted under concession agreements with public sector customers. Concession agreements are accounted for in accordance with IFRIC 12, Service Concession Arrangements. The application of IFRIC 12 is complex and is described in detail in Note 1.20 to our Consolidated Financial Statements. As a general matter, a contract is considered a concession agreement under IFRIC 12 if a public sector customer (the “grantor”) controls or regulates the services that we must provide with the infrastructure that we use, to whom the services must be provided and at what price, and if the grantor controls a significant residual interest in the infrastructure. Pursuant to IFRIC 12, the infrastructure used in a concession is not considered to be part of our property, plant and equipment, but instead we recognize financial assets or intangible assets (depending on the nature of our payment rights) in respect of the concession contracts.

Critical Accounting Policies

We prepare our Consolidated Financial Statements in conformity with IFRS as issued by the IASB and with IFRS as adopted by the European Union. Our Consolidated Financial Statements are affected by the accounting policies used and the estimates, judgments and assumptions made by management during their preparation. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented.

The principal significant estimates and assumptions made by management during the preparation of our Consolidated Financial Statements relate to the accounting policies used in connection with asset impairment, provisions, pension liabilities, deferred taxes and financial instruments.

Asset Impairment

The net carrying amount of non-financial assets, other than inventory and deferred tax assets, is reviewed at each period-end in order to assess the existence of any indication of loss in value. Where such indication exists, the recoverable amount of the asset or group of assets (equal to the higher of fair value less costs to sell and value in use) is estimated. The net carrying amount of an asset or group of assets is reduced to its recoverable amount, where this is lower. Impairment charges can be reversed, with the exception of those relating to goodwill.

We perform systematic annual impairment tests in respect of goodwill and other intangible assets with an indefinite useful life following the preparation of our long-term plan, or more frequently where there is an indication of loss in value. Where an exceptional impairment must be recorded, it is deducted first from goodwill allocated to the cash-generating unit (CGU) and then, where applicable, pro rata to the net carrying amounts of the other assets of the CGU.

Group management prepares cash flow forecasts based on the most recent long-term plan, prepared in June of each year and approved by the Board of Directors in November of each year (the most recent plan was approved by the Board of Directors on November 29, 2011). This plan covers the year in progress and the next six years. This period is representative of the average duration of our long-term contract portfolio and our short-term activities. The preparation of the plan requires management to exercise considerable judgment about matters that are necessarily subject to uncertainty when the plan is prepared.

The value in use is determined by discounting the future cash flows expected to be derived from the asset, CGU or group of CGUs considered, taking into account, where appropriate, the residual value. Given our activities, the cash-generating units are below operating segments in the organizational structure and generally represent a country in each division. Future cash flows are taken for the first six years from the long term plan.



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The terminal value is calculated based on discounted forecast flows for the last year (2017), and an assumed perpetual growth rate described below.

The main assumptions included in the calculation of the value-in-use of each CGU are the discount rate, the perpetual growth rate and the projected cash flow during the six-year period of the long-term plan.

A discount rate (weighted average cost of capital) is determined for each asset, CGU or group of CGUs. It is equal to the risk-free rate plus a risk premium weighted for country-specific risks. The discount rates estimated by management for each CGU therefore reflect current market assessments of the time value of money and the country-specific risks to which the cash-generating unit is exposed. Other risks are reflected in the expected future cash flows from the assets. In 2011, we decided not to change our discount rate in European countries that were significantly affected by the severe conditions in the secondary sovereign debt market, as the economic situation was considered to be exceptional and not to reflect the long-term time value of money in these countries.

The perpetual growth rate is used to determine the assumed flows for the period after the final year of the plan. Forecasted cash flows for the last year of the plan are assumed to grow at a perpetual growth rate that takes account of factors such as inflation.

Cash flow projections in the long-term plan are determined for each CGU, based on contracts and activities and in line with past data and expected changes over the period covered by the long-term plan. Pursuant to the provisions of IAS 36, investments included in estimates of future cash flows are those investments that enable the level of economic benefits expected to arise from the assets to be maintained in their current condition. In addition, estimates of future cash flows do not take account of restructuring plans to which we are not committed.

As Water activities in China follow a specific economic model, with extremely long contract terms (up to fifty years) and high investment flows during the initial contract years, fiscal year 2017 may not be considered a standard year. Therefore, the long-term plan was extended to 2025 for the “Water–China” cash-generating unit, in order to identify standard flows for the calculation of the terminal value. The perpetual growth rate applies starting from this year.

The estimated recoverable value of our CGUs is sensitive to changes in the assumptions that we use. We have performed sensitivity analyses in respect of the principal assumptions, and have described the results of these analyses in Note 5 to our Consolidated Financial Statements included in this annual report on Form 20-F. As described in Note 5 to our Consolidated Financial Statements, the changes in operating cash flows taken into account for the purpose of these sensitivity tests include operating cash flows before changes in working capital, less investments, plus changes in working capital. We performed a sensitivity analysis relating to the discount rate and perpetual growth rate for CGUs with a net carrying amount of goodwill in excess of €100 million. We have also performed a sensitivity analysis relating to the cash flow analysis over the period of the long-term plan for Veolia Energy Services-United States, Dalkia Italy and Water Southern Europe CGUs, which we consider to be material and sensitive (this analysis was conducted after taking into account the impairment charges recorded in 2011 in respect of the Veolia Energy Services – United States and Dalkia Italy CGUs). The results of these sensitivity analyses are the following:

A 1% increase in the discount rate used would result in recoverable values below the net carrying amount of CGUs in an aggregate amount of €143 million, including €59 million for the Veolia Energy Services-United States CGU, €32 million for the Dalkia Italy CGU and €28 million for the Water Southern Europe CGU.

A 1% decrease in the perpetual growth rate used would result in recoverable values below the net carrying amount of CGUs in an aggregate amount of €103 million, including €40 million for the Veolia Energy Services-United States CGU, €41 million for the Dalkia Italy CGU and €17 million for the Water Southern Europe CGU.



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A 5% decrease in cash flow over the period of the long-term plan would result in an aggregate decrease in the recoverable value of €28 million for the Veolia Energy Services-United States CGU, €19 million for the Dalkia Italy CGU and €16 million for the Water Southern Europe CGU.

As of December 31, 2011, the recoverable value of the Veolia Energy Services-United States, Dalkia Italy and Water Southern Europe CGUs exceeded the net carrying amount by respectively €47 million, €30 million and €19 million. The following table presents the percentage change in each of the key assumptions taken individually, which brings the estimated recoverable amount into line with the net carrying amount of these cash-generating units:

(in %)

Veolia Energy
Services
– United States

Dalkia
Italy

Water –
Southern
Europe

Discount rate

0.40

0.44

0.37

Perpetual growth rate

(0.50)

(0.53)

(0.47)

Operating cash flows

(8.31)

(7.60)

(5.88)


Provisions

Pursuant to IAS 37, Provisions, Contingent Liabilities and Contingent Assets, a provision is recorded when, at the year end, the Group has a current legal or implicit obligation to a third party as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and the amount of the obligation can be reliably estimated. Determining the amount of provisions to record requires management to exercise judgment by projecting potential future outflows of resources.

Our principal categories of provisions relate to onerous contracts, maintenance and repair obligations and site rehabilitation costs. We also record provisions in respect of matters such as litigation and restructuring charges.

As part of our obligations under public services contracts, we generally assume responsibility for the maintenance and repair of the installations we manage. The resulting maintenance and repair costs are analyzed in accordance with IAS 37 on provisions and, where necessary, a provision for contractual commitments is recorded where there is outstanding work to be performed.

In the case of provisions for rehabilitation of landfill facilities, we account for the obligation to restore a site as waste is deposited, recording a non-current asset component and taking into account inflation and the date on which expenses will be incurred (discounting). The asset is amortized based on its depletion.

In the event of a restructuring, an obligation exists if, prior to the period end, the restructuring has been announced and a detailed plan produced or implementation has commenced. Future operating costs are not provided. More information is available on our restructuring provisions in Note 20 to our Consolidated Financial Statements included in this annual report on Form 20-F.

Provisions giving rise to an outflow after more than one year are discounted if the impact is material. Discount rates reflect current assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recorded in the consolidated income statement in “Other financial income and expenses.”

Pension Liabilities

We maintain several pension plans, and measure our obligations under these plans using a projected unit credit method, which requires us to estimate the probability of personnel remaining with us until retirement, foreseeable changes in future compensation and the present value of our liability on the basis of the appropriate discount rate for each monetary zone in which we maintain a pension plan. As a result, we record pension-related assets or liabilities in our accounts and we record the related net expenses over the estimated term of service of our employees.



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In accordance with IFRS requirements, we use market yields of high quality corporate bonds with a maturity similar in duration to the pension liabilities to determine the discount rate at the balance sheet date when available. If no such market yields are available, then we use the yields on government bonds with a maturity similar in duration to the liabilities. We estimate future compensation based on inflation rates estimated using a combination of the spread between index linked and non-index linked bonds, current inflation rates, and published statements of central banks and economists with respect to inflation prospects. We use mortality tables published by national statistical agencies in our evaluations, reviewed periodically to ensure that the latest available tables are being used. The assumptions used to measure pension liabilities as of December 31, 2011 are described in Note 31 to our Consolidated Financial Statements.

The Group benefit obligation is especially sensitive to discount and inflation rates. A 1% increase in the discount rate would decrease the benefit obligation by €262 million and the current service cost of the next year by €7 million. A 1% decrease in the discount rate would increase the benefit obligation by €311 million and the current service cost of the next year by €9 million.

Conversely, a 1% increase in the inflation rate would increase the benefit obligation by €246 million and the current service cost of the next year by €9 million. A 1% decrease in the inflation rate would decrease the benefit obligation by €215 million and the current service cost of the next year by €7 million.

A 1% increase in the expected rate of return assumption would generate additional income of €12.3 million.

Deferred Tax Assets and Liabilities

We record deferred tax assets that fall into two categories: deductible timing differences and tax loss carryforwards. Deferred tax assets arising from timing differences are recorded when it is probable that, for a single tax group or entity, the taxable timing differences that are expected to reverse in one period are greater than or equal to reversals of deductible timing differences in the same period (or in the periods to which deferred tax assets arising from tax losses can be carried back or forward). Deferred tax assets arising from tax loss carryforwards are recorded when management determines that the Group is likely to generate sufficient future taxable profits against which the asset can be offset.

Whenever we determine that it is no longer probable that sufficient taxable profits will be available, deferred tax assets are impaired. Deferred tax assets and liabilities are also adjusted for the effects of changes in prevailing tax laws and rates at the year end. Deferred tax balances are not discounted.

Therefore, the accrual of deferred tax assets and liabilities requires us to make estimates and exercise judgment with regard to elements that are inherently uncertain, such as projected taxable profit. Such estimates and judgments are also subject to change in response to new events, such as changes in prevailing tax law.

Although realization of deferred tax assets is not assured, we believe that realization at December 31, 2011 of the recognized net deferred tax assets of €1,263.9 million is more likely than not based on expectations as to future taxable income in the jurisdictions in which the deferred tax assets arise.

We have recognized net deferred tax assets relating to tax loss carryforwards of €241.7 million as of December 31, 2011. In the United States, which represents €136 million of this amount, the Group would need to generate approximately €362 million of taxable income during the respective carry forward periods to fully realize its deferred tax assets.

We have recognized deferred tax assets relating to deductible timing differences of €1,022.2 million as of December 31, 2011 and deferred tax liabilities relating to taxable timing differences for €1,891.1 million. In the French tax group, we restricted recognized deferred tax assets on timing differences to the amount of deferred tax liabilities.



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We recorded significant charges in our income statement in 2011 resulting primarily from the reduction in the amount our deferred tax assets relating to tax loss carryforwards in the United States and France. See “—Results of Operations –Year ended December 31, 2011 compared to Year ended December 31, 2010 – Income Tax Expense.”

Financial Instruments

The recognition and measurement of financial assets and liabilities is governed by IAS 39, Financial instruments: recognition and measurement. Financial assets are classified as available-for-sale, held to maturity, assets at fair value through profit and loss, asset derivative instruments, loans and receivables and cash and cash equivalents. Financial liabilities include borrowings, other financing and bank overdrafts, liability derivative instruments and operating payables. These categories and their implications for our Consolidated Financial Statements are described in Note 1.14 to our Consolidated Financial Statements.

The determination of the proper classification of financial instruments requires management to exercise judgment, and depends in part on our intention regarding a given financial instrument, which is subject to change. Certain financial instruments (particularly derivative instruments that do not qualify for hedge accounting) are recorded in our consolidated balance sheet at fair value, and the change in fair value from one period to the next is recorded in our consolidated income statement as part of financial income and expense. Certain other financial instruments are recorded at fair value with the change from one period to the next recorded directly in equity, with the change released to the income statement upon sale or impairment. Certain other instruments are carried on the balance sheet at an amortized cost basis and subjected to impairment testing. Our determination regarding the classification of a financial instrument can have a material impact on our results of operations and our consolidated shareholders equity.

New Accounting Pronouncements

IFRS 11, Joint Arrangements

In May 2011, the International Accounting Standards Board published IFRS 11, Joint Arrangements, which is scheduled to become effective for annual periods starting on or after January 1, 2013. When it becomes effective, IFRS 11 will require most jointly controlled companies to be accounted for using the equity method, eliminating the option to use proportional consolidation that was previously available under IAS 31. In 2011, we used proportional consolidation to account for our interests in a number of companies, including Dalkia International, BWB (which operates the Berlin water contract), Proactiva, the companies that operate the Shenzhen, Tianjin and Pudong contracts in China, and Azalyia (a Water division joint venture in the Middle East, in respect of which our partner has announced its intention to withdraw in June 2012). Proportionately consolidated companies represented total revenues of €5.7 billion in 2011. See Note 1.1.4 and Note 35 to our Consolidated Financial Statements included in this annual report on Form 20-F for additional information.

IFRS 10, Consolidated Financial Statements, and IFRS 12, Disclosure of Interests in Other Entities

In May 2011, the IASB also published IFRS 10 Consolidated Financial Statements, which builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company, and IFRS 12, Disclosure of Interests in Other Entities, which will require companies to provide enhanced disclosure for subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 10 provides a single consolidation model that identifies control as the basis for consolidation for all types of entities. It replaces IAS 27 Consolidated and Separate Financial Statements and SIC 12 Consolidation - Special Purpose Entities. These new standards will be effective for annual periods starting on or after January 1, 2013. Procedures were launched in fiscal year 2011 to implement IFRS 10, Consolidated Financial Statements. These procedures included drafting a framework for the assessment of control as defined in the new standard and an analysis methodology for so-called complex cases, involving several partners in a dense contractual environment. Concomitantly, the scope of review procedures was identified within the different Group businesses. At this point, it is too early to tell whether IFRS 10 and IFRS 12 will have a material impact on our consolidated financial statements.


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EVENTS IN 2011 IMPACTING RESULTS OF OPERATIONS
AND FINANCIAL CONDITION

As discussed above, 2011 was a year of transition for Veolia Environnement in a number of aspects. We experienced commercial successes by winning new contracts, and we successfully developed our business in a number of areas, resulting in an increase in total revenues. We also generated higher free cash flow in 2011 than in 2010, due in part to the success of our divestiture program (see “—Liquidity and Capital Resources – Free Cash Flow”). At the same time, several of our businesses encountered operational difficulties. In addition, the severely disrupted economic situation in certain countries, along with factors relating to our businesses in those countries, resulted in significant impairment charges. We also completed the combination of our former Transportation division with Transdev to form Veolia Transdev (a company in which we hold 50% of the equity while the Caisse des dépôts et consignations, a French State-owned financial institution owns the remainder). On December 6, 2011, we announced a major transformation plan designed to adapt our businesses to the new environment, through an accelerated divestiture program (including a plan to withdraw progressively from the transportation sector) and a reorganization program designed to reduce our costs.

Before discussing our 2011 results of operations on a comparative basis with our results of operations recorded in 2010, we describe in this section certain commercial, operational and other factors that impacted our income statement and balance sheet in 2011.

Commercial Overview

In 2011, we continued our development and achieved a number of commercial successes related to enhanced and refined offerings, including the following:

the Haringey Council in London awarded the Environmental Services division a 14-year contract for urban street cleaning, recycling and waste collection services, representing estimated cumulative revenue of GBP 235 million (approximately €282 million);

Dalkia was awarded a 34-year contract for the operation and maintenance of the Montreal University Hospital, representing estimated cumulative revenue of CAD1.6 billion (approximately €1.2 billion);

Veolia Environmental Services was awarded a 25-year residual waste treatment Private Finance Initiative (“PFI”) contract by Hertfordshire County Council in the United Kingdom for the treatment of up to 350,000 tons of annual residual waste, representing estimated cumulative revenue of GBP 1.3 billion (approximately €1.6 billion);

Veolia Water was awarded a €79 million 5-year contract to design, build and operate a seawater desalination unit at the Az Zour South plant in Kuwait;

Veolia Water signed a contract related to wastewater treatment in Winnipeg, Canada in partnership with the city;

Veolia Water signed a 12-year contract to design, build and operate a mine wastewater treatment plant in West Virginia (United States), as well as a 10-year contract to design, build and operate a treatment plant for wastewater produced by a petroleum field in California. These two contracts represent estimated cumulative revenue of approximately €88 million.




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We also encountered a number of operational issues and difficulties that impacted our results of operations in 2011, including the following:

We began to experience the financial impact of contractual erosion in the French water market, relating primarily to our renewed contract with the Syndicats des Eaux d’Ile de France (SEDIF), signed in June 2010 and relating to water services in several suburban communities in the Paris region. As a result of the new terms of the contract, in 2011 we recorded lower revenues and adjusted operating cash flow in the Water division in France.

In an agreement dated October 20, 2010, the city of Indianapolis, Citizens Energy Group (CEG) and Veolia agreed to the terms of the early termination of the management contract between us and the city and the transfer of management activities from Veolia to CEG, to which the city sold its water treatment assets. This agreement received approval from the Indiana Utility Regulatory Commission (IURC) on July 13, 2011. Withdrawal from the contract became effective August 26, 2011 and we received the termination compensation of €20.5 million in full.

We implemented certain reorganization and restructuring measures in the Water division, primarily involving employee reductions and the exit from certain business activities, particularly in Asia.

We withdrew early from the Alexandria waste collection contract in Egypt, which could not practicably be operated following the extraordinary political events that occurred in the spring of 2011.

We experienced operational difficulties at our Marine Services business in the United States in the Environmental Services division. Marine Services provides services to offshore petroleum installations, primarily in the Gulf of Mexico. Its business and its fleet utilization rate were affected by the aftermath of the Deepwater Horizon incident in 2010 (its results in 2010 were not affected, as Marine Services participated in the cleanup effort following the incident). These operational difficulties were unrelated to the accounting fraud discovered at Marine Services, described below under “Marine Services Accounting Correction.”

We also experienced significant difficulties in our Water, Environmental Services and Energy divisions in Italy, our solar energy activities in Spain and our Water activities in Morocco, as well as reduced development perspectives in our Energy Services division in the United States, all of which gave rise to goodwill and asset impairment charges in 2011, as described below under “—Goodwill and Asset Impairment Charges and Restructuring Costs.”

Goodwill and Asset Impairment Charges and Restructuring Costs

Our 2011 operating income was adversely impacted by €818.2 million of goodwill and asset impairment charges (a figure that excludes impairment charges relating to Veolia Transdev, which are recorded in discontinued operations and discussed below) and restructuring costs. In this section, we first describe the events and circumstances that gave rise to these charges, and then we describe how they affected various items in our consolidated financial statements and the measures that we present in this Section.



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Events and Circumstances Giving Rise to Impairment Charges

The principal impairment charges, and the events and circumstances that gave rise to them, are described below.

Italy. Approximately €520 million of our impairment charges and restructuring costs were recorded in our activities in Italy. In 2011, the substantial economic disruption resulting from the spread of the European sovereign debt crisis to Italy resulted in a deterioration in the ability of public sector customers to make payments and to meet their obligations under our contracts. In addition, we experienced issues specific to each of our segments in Italy. In particular:

o

In the Water division, we recognized goodwill and non-current asset impairment charges of €75.5 million. Several factors contributed to these charges. We experienced a slowdown in payments from public sector customers, and difficulties obtaining continued financing, as banks would not provide factoring on the basis of public sector receivables. Economic adjustment mechanisms in our contract in Calabria were not implemented, and we ultimately provided notice of our intention to terminate the contract. Finally, the regulatory environment became subject to uncertainty following an unfavorable referendum vote on private sector involvement in the water business in June 2011.

o

In the Environmental Services division, we recognized goodwill, asset impairment and other charges of €196.8 million. In June 2011, we signed a settlement agreement resolving litigation involving the party that sold the Calabria business to us, which remained our minority partner until we purchased its interest in our subsidiary as part of the settlement. We also determined that, despite consistently winning litigation to obtain payments from the Calabria region, as a practical matter we were unlikely to collect those payments. In addition, we were unable to obtain authorization to restart the Falascaia incinerator in Tuscany. The litigation, the settlement agreement and the proceedings relating to the Tuscany incinerator are described in Item 8. “Financial Information—Consolidated Statements and Other Financial Information—Litigation”. As a result, we recorded €148.7 million of goodwill and asset impairment charges in respect of these matters. Subsequently, following our inability to negotiate acceptable contractual terms, we decided to terminate our incinerator concession arrangement in Calabria due to breach of contract by the Calabria concession authority, which has challenged the termination and we launched a restructuring plan and placed our subsidiary in Calabria in voluntary liquidation. As a result, we recorded an additional €48.1 million of charges for asset impairment and restructuring costs.

o

In the Energy Services division, following a gradual decline in the performance of our business, we appointed new management at the end of 2010. See Item 4, “Information on the Company – Description of our Main Businesses – Energy Services” for further information. Following its appointment, the new management adopted a comprehensive restructuring of our activities (involving, in particular, employee redundancy plans, the regrouping of sites and the discontinuation of certain activities, including solar activities that were managed jointly with our Spanish business described below). Related asset impairment charges and restructuring and other  costs totaled €247.7 million.

Spain. We recorded €20.4 million of goodwill and asset impairment charges resulting from the termination of our photovoltaic solar energy installation activities following the reduction of government support measures in 2011.

Portugal. We recorded €11.2 million of intangible asset impairment charges in the Water division as a result of uncertainties resulting from the economic crisis that significantly affected the public sector in Portugal in 2011.

Morocco. We recorded goodwill and asset impairment charges of €59.0 million in the Water division following the issuance of unfavorable preliminary conclusions by an independent audit commission appointed by us and by the Moroccan authorities to evaluate the tariff adjustment mechanisms in our contracts.



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United States. We recorded €153.1 million of goodwill impairment charges in the Energy Services division and €26.3 million in the Environmental Services division.

o

Our impairment charge in the Energy Services division resulted from reduced development prospects in this business. When we acquired our affiliate TNAI in 2007, we recorded goodwill relating to development opportunities in the energy services sector in the United States. Following the global financial crisis, we continued to pursue those development opportunities in 2009 and 2010. By the spring of 2011, those opportunities had not developed, and we determined that the likelihood that such opportunities might develop in the future was not sufficient to justify our continuing to maintain our goodwill at the recorded level. As a result, we decided to record an impairment charge in respect of TNAI.

o

The impairment charge in the Environmental Services division related to non-current assets of Marine Services (primarily its fleet of boats), and resulted from the difficulties experienced in the Gulf of Mexico, described above.

France. We recorded €25.3 million of impairment charges in relation to concession intangible assets in the Environmental Services and Energy Services divisions following the failure of contractual negotiations relating to our contracts in Nice.

Other. We recorded €2.9 million of net goodwill impairments, restructuring costs and other adjustments in other countries in which we have operations.

Treatment in Consolidated Financial Statements and Measures Presented in this Section

Of the €818.2 million of impairment charges and restructuring costs recorded in 2011, €782.7 million relates to goodwill and non-current assets. €504.8 million of this amount relates to goodwill, and €277.9 million relates to non-current assets such as concession intangibles, purchased contract rights and other assets. The remaining €35.5 million relates to other charges, primarily restructuring costs in Italy and Eastern Europe, and asset impairment charges in respect of current assets (such as receivables).

Approximately €683.3 million of our impairment charges are excluded from our adjusted operating income. As described above in this item under “Accounting Policies and Presentation – Presentation of Information in this Item – Non-GAAP Measures,” our goodwill impairment charges and our most significant asset impairment charges (which are part of our “special items”) are excluded from adjusted operating income, because we consider that they do not represent the normal income-generating aspects of our business. In general, we exclude impairment charges on non-current assets as “special” items when they do not reflect our ordinary activities and are large enough to significantly impact the economics of a cash-generating unit. In 2011, all impairment charges recorded in Italy (except the Environmental Services charge described below) were excluded from adjusted operating income, because they resulted at least in part from the same external economic trigger, even if certain charges taken individually would not otherwise have met our quantitative thresholds.

The only exception in Italy was the €48.1 million in charges (€41.5 million of non-current assets and €6.6 million of other charges) recorded in our Environmental Services division as a result of our decision to launch a restructuring plan and file for voluntary liquidation of the waste treatment company TEC in Calabria (Italy). We did not exclude this from adjusted operating income because it resulted from a separate event (the termination of our contract and closure of a facility) that we believe to be representative of our operating activities.

Certain other impairment charges recorded in other countries were also included in the determination of adjusted operating income, as they were either below our quantitative thresholds or considered to be representative or our operating activities.



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The following table summarizes our main impairment charges and restructuring costs recorded in 2011, breaking them down by division (indicating separately amounts recorded in Italy), and by category (goodwill, non-current assets and other charges) and indicating whether they are included in or excluded from adjusted operating income.

 

Impairment of assets and goodwill and reorganization costs

(€ million)

 

Non-current assets

 

Other Charges (*)

 
 

Goodwill

Included in
Adjusted
operating
income

Other non-
current asset
impairments
(adjustments)

Total

Included in
Adjusted
operating
income

Other
(adjustments)

Total

Water

(60.6)

(33.0)

(50.6)

(144.2)

  

(144.2)

of which Italy

(22.9)

-

(52.6)

(75.5)

  

(75.5)

Environmental Services

(78.1)

(79.9)

(50.0)

(208.0)

(6.6)

(20.6)

(235.2)

of which Italy

(78.1)

(41.5)

(50.0)

(169.6)

(6.6)

(20.6)

(196.8)

Energy Services

(366.1)

(15.4)

(49.0)

(430.5)

 

(8.3)

(438.8)

of which Italy

(193.8)

 

(49.0)

(242.8)

 

(4.9)

(247.7)

Total

(504.8)

(128.3)

(149.6)

(782.7)

(6.6)

(28.9)

(818.2)

(*)    Includes primarily restructuring costs (mainly in Italy and Eastern Europe) and current asset impairment charges.


Acquisitions and Divestitures

Divestitures

Overall, industrial and financial divestitures (including issues of share capital subscribed by non-controlling interests and transactions with non-controlling interests where there is no change in control) totaled €1,544 million in the year-ended December 31, 2011, including the impact of the Veolia Transdev combination, which reduced net financial debt by €550 million (as described below).

On February 14, 2011, we signed an agreement for the sale of sorting-recycling activities in Norway. The divestiture was completed on March 25, 2011.

In May and August 2011, the activities of the Energy Services division in Germany were sold for an enterprise value of €29 million (Group share).

On May 5, 2011, we sold our transportation activities in Norway for an enterprise value of €36 million (Group share).

On May 23, 2011, we sold 5% of Dalkia Ceska Republica to J&T Group for an enterprise value of €32 million.

On June 29, 2011, the EBRD and IFC acquired a 5% interest each in the Baltic-Russian activities of the Energy Services division in the amount of €38 million.

On July 1, 2011, we sold our United Kingdom activities previously owned by Veolia Transport.

On August 10, 2011, we sold our Belgian solid waste activities in the Environmental Services division.

On December 16, 2011, we sold our household assistance services business (“Veolia Habitat Services” or Proxiserve) for an enterprise value of €118 million.

On December 20, 2011, we sold our Estonian cogeneration activities in the Energy Services division for an enterprise value of €69 million (Group share).



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On December 22, 2011, we sold our remaining 15% stake in Dalkia Usti nad Labem to CEZ Group for an enterprise value of €26 million (Group share). Accordingly, in fiscal years 2010 and 2011, cumulative divestitures of Dalkia Usti nad Labem activities, comprising a cogeneration (heat and electricity) plant and the primary district heating system for the city of Usti nad Labem, represented a total enterprise value of €171 million (Group share).

In addition, as part of our transformation plan we intend to realize significant additional divestitures, with a target of approximately €5 billion over the next two years. Moves to refocus our activities on three core businesses (Water, Environmental Services and Energy Services) are now underway. The divestment process of regulated activities in the Water division in the United Kingdom and of solid waste activities in the Environmental Services division in the United States has commenced. In addition, Marine Services assets in the Environmental Services division, a non-core business, and Citelum urban lighting activities in the Energy Services division, are in the process of being divested.

Acquisitions

In general, we were highly selective in reviewing acquisition opportunities in 2011. The only significant acquisition during the year took place in the Energy Services division. On July 26, 2011, Dalkia Polska won the privatization bid for the Warsaw urban heating network. The European Commission issued a favorable opinion on the takeover by Dalkia Polska, a subsidiary of Dalkia International and the Australian investment fund IFM, of an 85% stake in SPEC, the owner and operator of the urban heating network of the City of Warsaw and its subsidiary Finpol. The transaction closed on October 11, 2011 for an enterprise value of €227 million (Group share).

Veolia Transdev

On March 3, 2011, we combined our former Transportation division (Veolia Transport) with Transdev, creating Veolia Transdev, a company in which we own a 50% interest, with the remainder held by the Caisse des dépôts et consignations (CDC). The transaction was implemented pursuant to an agreement signed on May 4, 2010, following approval by relevant competition authorities and final agreement on a simplified management structure that gave the parties joint control over the new venture.

As part of this combination, the companies Veolia Transport and Transdev were transferred by their shareholders to Veolia Transdev. Prior to completing the transaction, the CDC subscribed to a €200 million share capital increase by Transdev. The combination resulted in our Company losing exclusive control of Veolia Transport in exchange for a 50% interest in the new company, for purposes of IAS/IFRS accounting rules.

On December 6, 2011, as part of our transformation plan, we announced our decision to withdraw progressively from the Transportation business. This decision, as well as the progress made in the withdrawal process as of December 31, 2011, led us to classify the Transportation assets included in Veolia Transdev as a group of assets held for sale, and to consider our interest in Veolia Transdev as a discontinued operation as defined by IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations.

The principal accounting impacts of these transactions on our Consolidated Financial Statements are described and quantified below. More detailed information is given in Note 4 to our Consolidated Financial Statements.



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Income Statement Items

The net income and expenses of Veolia Transport or Veolia Transdev, as applicable, have been recorded in a separate income statement line, “Net income / (loss) from discontinued operations.” Income statement figures from 2010 and 2009 relating to these operations were also grouped retrospectively on the same line in order to present comparable figures over the three year period. Income and expenses reclassified in fiscal year 2011 consist of 100% of Veolia Transport income and expenses for the period January 1 to March 3, 2011 and 50% of Veolia Transdev income and expenses for the period March 3 to December 31, 2011 (including income and expenses incurred in transactions with other Company entities). Net income / (loss) from discontinued operations for Veolia Transdev reflects in particular the following:

A gain on disposal of €429.8 million was recognized following the loss of control of Veolia Transport on March 3, 2011, reflecting a gain on the disposal of Veolia Transport of €391.5 million, and items previously recorded directly in other comprehensive income of €38.3 million (mainly a foreign exchange translation gain of €34.2 million).

An impairment charge of €440 million was also recognized on Veolia Transdev goodwill as of December 31, 2011. This value adjustment reflects the results of a downturn in the performance of Veolia Transdev as well as the potential impact of current legal proceedings concerning SNCM, which is a Veolia Transdev group entity (see Item 8. “Financial Information – Consolidated Statements and Other Financial Information – Litigation” for a description of these legal proceedings). It is also based on a revised fair market value of the entity, based on decreased implicit valuation multiples that are observable on markets for publicly traded companies in this sector, and non-binding offers that we had received as of January 27, 2012.

Finally, transaction-related costs expensed in the financial statements of Veolia Transdev totaling €13.7 million.

Balance Sheet Items

Following our acquisition of 50% joint control over Veolia Transdev on March 3, 2011, the assets and liabilities held in the Veolia Transdev joint venture were recorded in our balance sheet on a proportionnal basis at their fair value. The fair value allocation primarily concerned contracts and contract portfolios, brands, real estate and transportation systems. We subsequently recognized an impairment charge of €440 million on Veolia Transdev goodwill at December 31, 2011, as described above.

As at December 31, 2011, we reclassified the proportionately consolidated assets and liabilities of the Veolia Transdev joint venture into assets and liabilities held for sale, following our decision to progressively withdraw from the Transportation sector.

The Veolia Transdev combination reduced our net financial debt by €550 million in the first quarter of 2011, primarily due to the refinancing of the new entity by both us and the CDC. The authorized loans by us and the CDC are attributed jointly to the consolidated balance sheet of each partner in Veolia Transdev. We pool and manage the cash and cash equivalents of Veolia Transdev and its subsidiaries. As of December 31, 2011, external financing and net cash and cash equivalents, in the amount of €205 million, were reclassified in assets and liabilities held for sale, resulting in a further reduction in our net financial debt in this amount.



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Discontinued operations

In accordance with IFRS 5, Non-current assets held for sale and discontinued operations, the 2009 and 2010 financial statements have been re-presented to give comparable data that excludes divested items and discontinued operations at December 31, 2011. As a result, the income statements for the years ended December 31, 2010 and 2009 have been re-presented by classifying the following entities into a separate line, “Net income / (loss) from discontinued operations”:

The Transportation business (Veolia Transdev, as described above);

Water activities in the Netherlands, divested in December 2010, and Environmental Services activities in Norway, divested in March 2011;

German operations in the Energy Services division, partially divested in May and August 2011;

Household assistance services (Proxiserve) held jointly by the Water and Energy Services divisions, divested in December 2011; and

Urban lighting activities (Citelum) in the Energy Services division.

Furthermore, as the divestiture processes for Water activities in Gabon and Pinellas incineration activities in the Environmental Services division in the United States were interrupted in the first and second halves of 2011, respectively, these activities are no longer presented in Net income / (loss) from discontinued operations.

The following assets and liabilities were classified as assets and liabilities held-for-sale as of December 31, 2011:

the Transportation business (Veolia Transdev, as described above);

urban lighting activities (Citelum) in the Energy Services division; and

Marine Services in the Environmental Services division.

Marine Services Accounting Correction

In the second quarter of 2011, we discovered an incidence of accounting fraud in the United States at the Marine Services unit, which is part of the Environmental Services division. Marine Services is an industrial services business, and a subsidiary of Veolia Environmental Services North America. As discussed above, Marine Services operates a fleet of ships and provides services to offshore petroleum installations, primarily in the Gulf of Mexico.

Following an investigation that was completed in July 2011, we determined that certain expenditures had been recorded as inventory, property, plant and equipment or prepaid expenses, rather than charges in the income statement. As a result, operating income in our consolidated financial statements for the years 2007 to 2010 was overstated by a total of approximately €52 million (excluding exchange rate impacts) for the four years combined. The amount involved was less than 1% of operating income for each of the affected years.

In light of these irregularities, we reviewed the profit forecasts for Marine Services that we used to record deferred tax assets with respect to the U.S. tax group during the affected years. We determined that our forecasts probably would have been different had the irregularities not existed. Deferred tax assets are determined on the basis of estimates of future taxable income, and thus are inherently subject to uncertainty. In the context of the identified irregularities, we estimated that the amount of deferred tax assets for the four affected years combined would have been approximately €33 million lower (excluding exchange rate impacts) if the operating income of Marine Services had been properly recorded.



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The impact of these accounting irregularities was not material in the context of our consolidated financial statements for the affected financial years. However, based on part on the guidance of the staff of the Securities and Exchange Commission in Staff Accounting Bulletin No. 108 (SAB 108), the cumulative impact of these immaterial changes in the balance sheet needed to be corrected. Had we made the full correction in the 2011 balance sheet, the impact of the cumulative correction on the 2011 income statement would have been material when compared to 2011 figures. In accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, as well as the guidance in SAB 108, we decided to correct comparative figures for each of the affected financial years in our 2011 Consolidated Financial Statements.

The corrections to the income statement for each of the years affected by these irregularities are as follows, in millions of euros:

(€ millions)

Revenue

Operating
income

Tax
impact

Foreign
exchange
impact

Total
Correction

2007

0

(6)

(19)

(1)

(26)

2008

0

(6)

(7)

(3)

(16)

2009

(3)

(18)

(7)

(1)

(26)

2010

1

(22)

0

0

(22)

TOTAL

(2)

(52)

(33)

(5)

(90)


The 2010 and 2009 consolidated income statements and the consolidated financial information presented under Item 3. “Key Information – Selected Financial Data” in this annual report on Form 20-F have therefore been corrected for the identified irregularities. These corrections did not impact the 2011 consolidated income statement. The impact of these retrospective corrections on earnings per share (a negative impact of €0.05 per share for each 2010 and 2009) was not material.

The consolidated statements of financial position presented in this annual report on Form 20-F as of December 31, 2010, December 31, 2009 and January 1, 2009, presented in comparison to data as of December 31, 2011, were corrected as follows:

(€ millions)

Equity
attributable
to owners
of the Company

Property,
plant
and equipment

Deferred
tax assets

Inventories and
work-in-progress

Operating
receivables

Operating
payables

As of December 31, 2010

(90.3)

(3.3)

(35.9)

(30.2)

(14.6)

6.3

As of December 31, 2009

(63.2)

(3.2)

(33.3)

(19.3)

(6.2)

1.2

As of January 1, 2009

(39.9)

(3.7)

(27.3)

(8.9)

0

0


We have initiated the sale of the Marine Services business and reclassified it in assets and liabilities held for sale as of December 31, 2011.



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RESULTS OF OPERATIONS

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Revenue

Overview

The following table shows a breakdown of our revenues in 2010 and 2011:

Year ended
December 31, 2011
(€ million)

Year ended
December 31, 2010
(€ million)

% Change
2011/2010

Internal
growth

External
growth

Foreign
exchange
impact

29,647.3

28,764.2

3.1%

2.0%

1.2%

(0.1)%


For the year ended December 31, 2011, our consolidated revenue was €29,647.3 million, representing an increase of 3.1% compared to re-presented revenue of €28,764.2 million for the year ended December 31, 2010. At constant consolidation scope and exchange rates, 2011 revenue increased 2.0% compared to re-presented 2010 revenue.

The impact of changes in consolidation scope on 2011 revenue includes €358.7 million relating to acquisitions and divestitures that took place in 2010 and 2011, including €239.1 million in the Water division (primarily the impact of the acquisition of certain assets from United Utilities in 2010), €(39.3) million in the Environmental Services division (principally the impact of the sale of operations in Belgium and New Caledonia) and €158.9 million in the Energy Services division (related to the acquisition of certain activities in the Czech Republic from NWR Group in 2010 and the acquisition of the Warsaw district heating network in October 2011).

The €46.7 million negative foreign exchange impact primarily reflects the appreciation compared to the euro of the Australian dollar in the amount of €65.9 million, the Swiss franc in the amount of €29.0 million and Eastern European currencies (Czech Republic and Poland) in the amount of €18.5 million, offset by the depreciation of the U.S. dollar in the amount of €111.7 million and the pound sterling in the amount of €26.0 million.

The increase in revenues at constant consolidation scope and exchange rates is explained principally by the following factors:

in the Environmental Services division, an increase in the price of recycled raw materials, which increased division revenues by €174 million (primarily in France and Germany), and an improvement in activity levels, particularly for the treatment of hazardous waste, although growth was slower in the second half of 2011;

growth in Water division revenue, mainly tied to the good contribution of operating activities in Europe (primarily Germany and Central and Eastern Europe) and in Asia, partially offset by the negative impact of contractual erosion in France and unfavorable summer weather conditions; and

in the Energy Services division, an increase in energy prices (which increased revenue by €265 million compared to 2010), which was offset by the impact of unfavorable weather conditions, particularly in the last quarter of 2011, a downturn in Works activities and the termination of installation activities in the photovoltaic solar energy sector in Southern Europe.

Growth slowed during the second half of 2011, particularly in the fourth quarter, due to an unfavorable base effect for the Technology and Network business in the Water division, the downturn in the economic environment in the Environmental Services division (primarily the price of recycled raw materials) and particularly unfavorable weather conditions for the Energy Services division.



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The share of revenue generated outside France in 2011 was €18,187.9 million, or 61.3% of total revenue compared to 60.6% in 2010.

The following table shows a breakdown of our revenues by division in 2011 and 2010:

Revenues by Division

Year ended

Year ended

% Change

(€ million)

December 31, 2011

December 31, 2010

2011/2010

Water

12,617.1

12,250.3

3.0%

Environmental Services

9,740.2

9,337.8

4.3%

Energy Services

7,290.0

7,176.1

1.6%

Revenue

29,647.3

28,764.2

3.1%

Revenue at 2010 exchange rates

29,694.0

28,764.2

3.2%


Water

The following table shows a breakdown of our revenues within the Water division in 2011 and 2010:

Year ended
December 31, 2011
(€ million)

Year ended
December 31, 2010
(€ million)

% Change
2011/2010

Internal
growth

External
growth

Foreign
exchange
impact

12,617.1

12,250.3

3.0%

1.2%

1.9%

(0.1)%


The increase in Water division revenue at constant consolidation scope and exchange rates is mainly due to the good level of activity in Europe, and particularly in Germany and Central and Eastern Europe, as well as good performance in Asia.

External growth in revenue in the Water division in 2011 is mainly attributable to the acquisition of certain assets from United Utilities in the United Kingdom and Central and Eastern Europe in November 2010.

Revenue from Operations increased 3.6% (1.4% at constant consolidation scope and exchange rates), reflecting the following:

In France, revenue declined 2.3%, mainly due to the impact of contractual negotiations (in particular the contract with “Syndicat des Eaux d’Ile de France” (SEDIF), described above) and to a lesser extent the ongoing decline in volumes sold compared to 2010 (representing a 1% decrease in volumes in 2011 compared to 2010). These two impacts were partially offset by a favorable price effect tied to movements in indices.

Outside France, revenue increased 7.2% (3.7% at constant consolidation scope and exchange rates). In Europe, growth of 12.9% (6.2% at constant consolidation scope and exchange rates) includes the favorable contribution of activities in Germany and the good performance recorded in Central and Eastern Europe (in particular a very favorable price impact with lower volumes sold). Revenue in the Asia-Pacific region rose 2.9% (stable at constant consolidation scope and exchange rates). Revenue increased in China, due to growth in volumes and the continuation of the tariff increase process (particularly in Shenzhen) and despite a decline in construction revenue. In the rest of Asia, a surge in activity in Japan following the earthquake in March 2011 offset a downturn in Australia due to the completion of construction work on the desalination and recycled water production plant and the end of the Adelaide contract.

Technology and Network revenue increased 1.5% (0.6% at constant consolidation scope and exchange rates) despite the completion of Middle East desalination contracts in the Design and Build sector. This activity benefited from the launch of construction work on the Hong Kong sludge incinerator and a net recovery in industrial client activities reflected by an increase in orders.



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Environmental Services

The following table shows a breakdown of our revenues in the Environmental Services division in 2011 and 2010:

Year ended
December 31, 2011
(€ million)

Year ended
December 31, 2010
(€ million)

% Change
2011/2010

Internal
growth

External
growth

Foreign
exchange
impact

9,740.2

9,337.8

4.3%

4.9%

(0.4)%

(0.2)%


The 4.9% internal growth in revenue reflects the increase in the price of recycled raw materials, which increased division revenues by €174 million (primarily in France and Germany), and the improvement in activity levels, particularly for the treatment of industrial non-hazardous and hazardous waste, but with a slower growth rate in the second half of the year. The fourth quarter of 2011 faced an unfavorable base effect given high paper and cardboard prices and activity levels that were already rising for these treatment and service businesses in the prior year quarter.

In France, revenue increased 3.9% (5.2% at constant consolidation scope) under the combined effect of recycled raw material prices that remained high (paper/cardboard and metals), net commercial gains and an increase in hazardous waste and landfill activities.

Outside France, revenue grew 4.5% (4.9% at constant consolidation scope and exchange rates). Revenue in Germany increased 9.5% (6.4% at constant consolidation scope) benefiting from higher paper and cardboard prices and the good contribution of activities in the commercial and industrial sector. Municipal waste collection activities continued to experience significant competitive pressure. Revenue in the United Kingdom increased 5.4% (6.7% at constant consolidation scope and exchange rates), in line with progress on integrated contracts and a better asset utilization rate and despite the economic environment, which remains difficult and is weighing on other division activities. North America revenue declined 4.6% (but was stable at constant consolidation scope and exchange rates), as the increase in hazardous waste treatment activities and the resistance of solid waste activities was penalized by the fall in the fleet utilization rate in the Gulf of Mexico in the Marine Services business. In the Asia-Pacific region, revenue growth of 9.2% (3.7% at constant consolidation scope and exchange rates) benefited from an increase in industrial services activities, driven by the mining industry and commercial waste collection in Australia.

Energy Services

The following table shows a breakdown of our revenues in the Energy Services division in 2011 and 2010:

Year ended
December 31, 2011
(€ million)

Year ended
December 31, 2010
(€ million)

% Change
2011/2010

Internal
growth

External
growth

Foreign
exchange
impact

7,290.0

7,176.1

1.6%

(0.5)%

2.2%

(0.1)%


Energy Services division revenue grew 1.6% in 2011, although it was down 0.5% at constant consolidation scope and exchange rates. Increases in energy prices had a positive impact of €265 million compared to 2010, but this was more than offset by the negative impact of less favorable weather conditions across the whole of Europe in 2011 compared to 2010 (representing a negative impact of €285 million compared to 2010).

In France, revenue rose 3.0% (2.4% at constant consolidation scope), driven by the increase in the average fuel basket prices in weather conditions considerably less favorable than in 2010.



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Outside France, revenue remained stable (down 3.2% at constant consolidation scope and exchange rates). Continental European countries reported growth of 4.3%, due in particular to the acquisition of the Warsaw district heating network in the last quarter of 2011. At constant consolidation scope and exchange rates, revenue fell 5.4%: the increase in the price of heat and electricity in 2011 compared to 2010 was offset by the impact of unfavorable weather conditions and the lower electric capacity revenue and subsidies received on the sale of cogenerated energy, which varied between countries (Czech Republic, Poland, Hungry, Estonia). In addition, activities in Southern Europe were penalized by commercial and operating difficulties and the discontinuation of photovoltaic field installation activities.

External revenue growth in the Energy Services division in 2011 is attributable to the reorganization of activities in the Czech Republic in 2010, and to the acquisition of the Warsaw district heating network in October 2011.

Revenue by Geographical Region

The following table shows a breakdown of our revenue by geographical region and operating segment (division):

Year ended
December 31,
2011

(€ million)

France

Germany

United
Kingdom

Central
and
Eastern
Europe

Other
European
countries

United
States

Oceania

Asia

Middle
East

Rest
of the
world

Total

Water

4,560.1

1,519.3

811.6

1,066.1

775.7

743.0

238.6

1,573.3

281.0

1,048.4

12,617.1

Environmental
Services

3,384.2

1,210.2

1,626.0

309.7

568.6

1,230.3

704.6

237.8

105.1

363.7

9,740.2

Energy Services

3,515.1

9.5

194.2

1,414.1

1,401.4

314.0

49.8

100.6

93.4

197.9

7,290.0

Revenue

11,459.4

2,739.0

2,631.8

2,789.9

2,745.7

2,287.3

993.0

1,911.7

479.5

1,610.0

29,647.3


Year ended
December 31,
2010

(€ million)

France

Germany

United
Kingdom

Central
and
Eastern
Europe

Other
European
countries

United
States

Oceania

Asia

Middle
East

Rest
of the
world

Total

Water

4,651.3

1,434.6

625.5

951.5

758.5

686.2

262.3

1,330.6

491.9

1,057.9

12,250.3

Environmental
Services

3,257.3

1,104.5

1,550.7

303.3

524.0

1,293.0

606.4

256.3

87.0

355.3

9,337.8

Energy Services

3,413.3

2.4

190.7

1,364.3

1,524.7

326.6

41.0

77.6

85.9

149.6

7,176.1

Revenue

11,321.9

2,541.5

2,366.9

2,619.1

2,807.2

2,305.8

909.7

1,664.5

664.8

1,562.8

28,764.2


Change
(€ million)

France

Germany

United
Kingdom

Central
and
Eastern
Europe

Other
European
countries

United
States

Oceania

Asia

Middle
East

Rest
of the
world

Total

Water

(91.2)

84.7

186.1

114.6

17.2

56.8

(23.7)

242.7

(210.9)

(9.5)

366.8

Environmental
Services

126.9

105.7

75.3

6.4

44.6

(62.7)

98.2

(18.5)

18.1

8.4

402.4

Energy Services

101.8

7.1

3.5

49.8

(123.3)

(12.6)

8.8

23.0

7.5

48.3

113.9

Revenue

137.5

197.5

264.9

170.8

(61.5)

(18.5)

83.3

247.2

(185.3)

47.2

883.1

Change (%)

1.2%

7.8%

11.2%

6.5%

(2.2)%

(0.8)%

9.2%

14.9%

(27.9)%

3.0%

3.1%

Change at constant exchange rates (%)

1.2%

7.8%

12.3%

6.1%

(3.6)%

4.0%

1.8%

14.4%

(26.6)%

4.7%

3.2%




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France

Revenue increased 1.2% in 2011. Water division activities in France suffered from the slowdown in the Construction business, contractual erosion (primarily on the contract with “Syndicat des Eaux d’Ile de France” (SEDIF)) and a decline in volumes sold compared to 2010, particularly in July 2011 due to weather conditions (with a negative impact of 1.0% in 2011 compared to 2010). This was partially offset by a positive price effect tied to movements in indices.

The Environmental Services division reported activity growth under the combined effect of recycled raw material prices that remained high (paper/cardboard and metals) and the development of certain activities, particularly hazardous waste and landfill.

The Energy Services division benefited from a favorable price effect in 2011, offset in part by the impact of weather conditions, which were considerably less favorable than in 2010.

Germany

Revenue increased 7.8% in 2011. Environmental Services division revenue in Germany benefited from the increase in the price of paper and cardboard and the good contribution from the commercial and industrial sector, while the urban municipal collection business remained highly competitive. The Braunschweig contract also contributed to revenue growth, while the contribution of the Berlin contract remained stable overall.

United Kingdom

Revenue increased 12.3% in 2011 at constant exchange rates. It benefited from the ramp-up of new integrated contracts, partially offset by a drop in landfill volumes in the Environmental Services division. Assets acquired from United Utilities account for the majority of the revenue increase in the Water division in this country.

Central and Eastern Europe

Revenue increased 6.1% in 2011 at constant exchange rates. Revenue growth in Central Europe was driven by the activities of the Water and Energy Services divisions, which benefited from the consolidation of the activities of assets purchased from United Utilities in Sofia, and the purchase of SPEC in Poland, as well as reorganization measures implemented in the Czech Republic in 2010.

Other European Countries

Revenue declined 3.6% at constant exchange rates. Revenue benefited from an increase in Energy Services activities in Northern European countries, although this was more than offset by difficulties in Southern Europe.

The economic and financial crisis affecting public authorities and countries in Southern Europe had negative consequences for the Company’s activities, primarily in Italy where the Company’s exposure is the greatest. Accordingly, Water division revenue in Italy declined 9.8%, reflecting these economic difficulties. Finally, following a change in management in Italy in the Energy Services division and the discontinuation of solar activities in Italy and Spain, these businesses are undergoing substantial restructuring, explaining the 9.9% fall in revenue.

United States

Revenue increased 4.0% at constant exchange rates. Activities in the United States were marked by contrasting developments across the businesses:

the Environmental Services division was penalized by the fall in the fleet utilization rate in the Gulf of Mexico in the first-half of the year in the Marine Services business, despite growth in hazardous waste treatment activities and the resistance of solid waste activities;

the Water division benefited from a net recovery in industrial client activities.



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Oceania

The 1.8% increase at constant exchange rates was due to growth in industrial service activities in the Environmental Services division in Australia (mostly present in services, industrial waste and landfill).

Asia

The increase of 14.4% at constant exchange rates was mainly achieved by the Water division, as a result of recent developments in China, one-off activities in Japan and the good performance of contracts in Korea.

Rest of the World (including the Middle East)

While our revenue in the Middle East declined by 26.6% in 2011, mainly due to the completion of certain major construction contracts in the Water division, other regions grew by 3.0% or 4.7% at constant exchange rates.

Operating Income and Adjusted Operating Income

Operating Income

Operating income was €1,017.2 million for the year ended December 31, 2011, compared to €1,982.1 million for the year ended December 31, 2010, representing a decrease of 48.7% (49.2% at constant exchange rates). The decline resulted primarily from the following factors:

A decline in adjusted operating cash flow of 4.9% (4.7% at constant exchange rates) to €3,152.3 million for the year ended December 31, 2011, compared to €3,314.6 million for the year ended December 31, 2010. The adjusted operating cash flow margin fell 0.9 points from 11.5% in 2010 to 10.6% in 2011. This is discussed below under “—Adjusted Operating Cash Flow”;

Impairment charges on goodwill and non-current assets of €782.7 million, discussed above under “—Events in 2011 Impacting Results of Operations and Financial Condition – Goodwill and Asset Impairment Charges and Restructuring Costs;”

The effect of changes in discount rates applied to site rehabilitation provisions in the Environmental Services division, which had a negative impact of €7 million for the year ended December 31, 2011, compared to a positive impact of €26 million for the year ended December 31, 2010; and

Capital gains on industrial and financial asset divestitures of €85.3 million in the year ended December 31, 2011, compared to €206.8 million in the year ended December 31, 2010 (including a capital gain of €89.0 million on the divestiture of Usti Nad Labem in the Energy Services division in 2010).

The effects of our ongoing Efficiency Plan contributed €259 million of gross savings in 2011.

Operating depreciation and amortization charges were €1,549.5 million for the year ended December 31, 2011, compared to €1,475.2 million for the same period in 2010. This increase includes the effect of changes in consolidation scope following the acquisition of certain United Utilities assets in the Water division and the acquisition of the Warsaw district heating network in the Energy Services division. It also includes the impact of the changes in discount rates associated with site rehabilitation provisions, described above.

Cost of sales totaled €24,919.0 million for the year ended December 31, 2011, or 84.1% of total revenue, compared to €23,255.0 million for the year ended December 31, 2010, or 80.8% of total revenue. The increase in ratio of cost of sales to total revenue is mainly due to the goodwill and non-current asset impairment charges being recognized in cost of sales, as well as modest increases in personnel costs and depreciation and amortization.

Selling costs and general and administrative expenses for the year ended December 31, 2011 totaled €595.1 million and €3,176.0 million, respectively, compared to €574.8 million and €3,139.5 million for the year ended December 31, 2010. Selling costs and general and administrative expenses represented 12.7% of revenue in 2011, compared to 12.9% in 2010. The increase in selling costs and general and administrative expenses was primarily due to expenses associated with implementing cost reduction plans in 2011.



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Adjusted Operating Income

Adjusted operating income was €1,700.5 million for the year ended December 31, 2011, compared to €1,891.4 million for the year ended December 31, 2010, representing a decrease of 10.1% (10.3% at constant exchange rates). The adjusted operating income margin fell from 6.6% for the year ended December 31, 2010 to 5.7% for the same period in 2011.

Adjusted operating income is equal to operating income, excluding goodwill impairment charges and special items. In 2011, adjusted operating income excluded €683.3 million of goodwill and other impairment charges, and other special items. In 2010, it excluded mainly a €89.0 million of capital gains relating to the divestiture of Usti Nad Labem in the Energy Services division. These differences explain the fact that the decline in adjusted operating income was much smaller than the decline in operating income. The following tables reconcile adjusted operating income to operating income for the years ended December 31, 2011 and 2010.

Year ended December 31, 2011
(€ million)

Adjusted
operating income

Adjustments

Operating
income

Impairment
Goodwill losses

Special
Items

Water

971.7

(60.6)

(50.6)

860.5

Environmental Services

508.3

(78.1)

(70.6)

359.6

Energy Services

386.2

(366.1)

(57.3)

(37.2)

Holding companies

(165.7)

-

-

(165.7)

Total

1,700.5

(504.8)

(178.5)

1,017.2



Year ended December 31, 2010
(€ million)

Adjusted
operating income

Adjustments

Operating
income

Impairment
Goodwill losses

Special
Items (1)

Water

1,045.7

 

0.4

1,046.1

Environmental Services

584.5

(0.2)

1.5

585.8

Energy Services

440.3

 

89.0

529.3

Holding companies

(179.1)

  

(179.1)

Total

1,891.4

(0.2)

90.9

1,982.1

(1)  Mainly capital gains realized on the divestiture of the 85% shareholding of Dalkia Usti nad Labem in the Energy Services division.


Adjusted operating income was negatively impacted in 2011 by operational difficulties that affected adjusted operating cash flow, as well as asset impairments, notably in North Africa, in Southern Europe and in Marine Services operations. Non-current asset impairments impacted adjusted operating income by €128.3 million, including €41.5 million relating to the termination of our incinerator activities and liquidation of our subsidiary in Calabria (an additional €6.6 million of impairment charges relating to current assets and restructuring costs relating to Calabria also impacted adjusted operating income). Adjusted operating income also included capital gains on industrial and financial asset divestitures of €85.3 million in 2011 compared to €117.8 million in capital gains for the same period in 2010.




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Operating Income and Adjusted Operating Income by Division

The following table breaks down changes in operating income and adjusted operating income by division for the years ended December 31, 2011 and 2010.

 

Operating income

Adjusted operating income

Year ended
December 31,
2011

Year ended
December 31,
2010

%
change

% change
at constant
exchange
rates

Year ended
December 31,
2011

Year ended
December 31,
2010

%
change

% change
at constant
exchange
rates

Water

860.5

1,046.1

(17.7)%

(18.0)%

971.7

1,045.7

(7.1)%

(7.3)%

Environmental
Services

359.6

585.8

(38.6)%

(38.9)%

508.3

584.5

(13.0)%

(13.3)%

Energy Services

(37.2)

529.3

(107.0)%

(108.3)%

386.2

440.3

(12.3)%

(12.1)%

Holding companies

(165.7)

(179.1)

7.5%

7.5%

(165.7)

(179.1)

7.5%

7.5%

Total

1,017.2

1,982.1

(48.7)%

 

1,700.5

1,891.4

(10.1)%

 

Total at 2010 exchange rates

1,006.0

1,982.1

 

(49.2)%

1,697.1

1,891.4

 

(10.3)%

Margin

3.4%

6.9%

  

5.7%

6.6%

  


Water

The Water division’s operating income declined to €860.5 million for the year ended December 31, 2011 compared to €1,046.1 million for the year ended December 21, 2010, representing a decrease of 17.7% (18.0% at constant exchange rates). Adjusted operating income decreased 7.1% (7.3% at constant exchange rates) to €971.7 million for the year ended December 31, 2011, compared to €1,045.7 million for the year ended December 31, 2010.

The following factors affected the change in both operating income and adjusted operating income from 2010 to 2011:

A decrease in adjusted operating cash flow of the division, discussed below under “—Adjusted Operating Cash Flow;”

A €43.3 million decrease in capital gains on industrial and financial divestitures, which were particularly favorable in 2010;

Impairment charges in respect of non-current assets in Southern Europe and North Africa in the amount of €33 million as of December 31, 2011 affected the adjusted operating income;

An increase in net operating depreciation and amortization charges attributable to changes in consolidation scope with the acquisition of certain assets from United Utilities.

In addition, operating income (but not adjusted operating income) was affected by €60.6 million of goodwill impairment charges recognized in Southern Europe and Morocco, and €50.6 million of additional non-current asset impairment charges recorded as special items (mainly reflecting charges recorded in Italy), in the year ended December 31, 2011.

The operating income margin (operating income / revenue) fell from 8.5% in the year ended December 31, 2010 to 6.8% in the year ended December 31, 2011. The adjusted operating income margin (adjusted operating income / revenue) fell from 8.5% in the year ended December 31, 2010 to 7.7% in the year ended December 31, 2011.



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Environmental Services

The Environmental Services division’s operating income declined to €359.6 million for the year ended December 31, 2011, compared to €585.8 million for the year ended December 21, 2010, representing a decrease of 38.6% (38.9% at constant exchange rates). Adjusted operating income decreased 13.0% (13.3% at constant exchange rates) to €508.3 million for the year ended December 31, 2011, compared to €584.5 million for the year ended December 31, 2010.

The following factors affected the change in both operating income and adjusted operating income from 2010 to 2011:

A decrease in adjusted operating cash flow of the division, discussed below under “—Adjusted Operating Cash Flow;”

The impact of the Veolia Environmental Services restructuring in Calabria which led to the recognition of non-current asset impairment charges of €41.5 million and €6.6 million of other charges in the fourth quarter of 2011;

The negative impact of changes in discount rates used at December 31 each year to calculate site rehabilitation provisions, which reduced operating income and adjusted operating income by €33 million in 2011 compared to 2010.

In addition, operating income (but not adjusted operating income) was impacted by €78.1 million of goodwill impairment charges, €50.0 million of non-current asset impairment charges and €20.6 million of current asset impairment charges and restructuring costs recognized in Italy and recorded as special items for the year ended December 31, 2011.

The operating income margin fell from 6.3% in the year ended December 31, 2010 to 3.7% in the year ended December 31, 2011. The adjusted operating income margin fell from 6.3% in the year ended December 31, 2010 to 5.2% in the year ended December 31, 2011.

Energy Services

The Energy Services division’s operating income declined to a net operating loss of €37.2 million for the year ended December 31, 2011 compared to an operating profit of €529.3 million for the year ended December 21, 2010. Adjusted operating income decreased 12.3% (a decline of 12.1% at constant exchange rates) to €386.2 million for the year ended December 31, 2011, compared to €440.3 million for the year ended December 31, 2010.

The following factors affected the change in both operating income and adjusted operating income from 2010 to 2011:

A decrease in adjusted operating cash flow of the division, discussed below under “—Adjusted Operating Cash Flow;” and

An increase in net operating depreciation and amortization charges primarily attributable to the acquisition of the Warsaw district heating network.

In addition, operating income (but not adjusted operating income) was impacted by a decrease in capital gains on divestitures (including primarily the absence in 2011 of €89.0 million of capital gains relating to Usti Nad Labem), recorded as special items. Operating income (but not adjusted operating income) was also impacted by €366.1 million of goodwill impairment charges recognized in Southern Europe and in the United States for the year ended December 31, 2011, as well as €49.0 million of non-current asset impairment charges recorded in Italy and €8.3 million of reorganization costs recorded in Italy and Eastern Europe, in each case recorded as special items.



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The adjusted operating income margin fell from 6.1% in the year ended December 31, 2010 to 5.3% in the year ended December 31, 2011. The operating income margin fell from 7.4% in the year ended December 31, 2010 to a loss of 0.5% of revenues in the year ended December 31, 2011.

Operating Income (Loss) of Holding Companies

Operating loss of holding companies decreased from €179.1 million for the twelve months ended December 31, 2010, to €165.7 million for the same period in 2011. The decrease in these costs during the period was mainly due to a reduction in overhead and the mutualization of shared services.

Adjusted Operating Cash Flow

Adjusted operating cash flow decreased by 4.9% (4.7% at constant exchange rates), from €3,314.6 million in 2010 to €3,152.3 million in 2011, reflecting:

the downturn in activities in Southern Europe, particularly in Italy, and in Marine Services operations in the Gulf of Mexico;

restructuring measures and contract terminations tied to the acceleration of the Company’s restructuring and asset optimization strategy and the downturn in the environment in Southern Europe and North Africa;

a fall in operational performance in the Water division, primarily related to contractual erosion in France and increased asset maintenance costs in the first quarter of 2011 in the United Kingdom; and

expenses relating to the implementation of cost reduction plans.

Conversely, adjusted operating cash flow benefited from:

the favorable impact of the increase in recycled raw materials prices and activity levels and favorable volume effects in the Environmental Services division;

the positive impact of energy prices, offset by weather conditions that were overall less favorable in 2011 than in 2010, in the Energy Services division; and

activity growth in the Water division in Central and Eastern Europe and Asia.

The following table breaks down adjusted operating cash flow by division, at both current and constant exchange rates:

Adjusted operating cash flow (€ million)

Year ended
December
31, 2011

Year ended
December
31, 2010

Change

%
change

% change at
constant
exchange rates

Water

1,462.4

1,525.6

(4.1)%

(4.2)%

Environmental
Services

1,197.3

1,271.8

(5.9)%

(5.6)%

Energy Services

597.6

658.0

(9.2)%

(8.8)%

Holding companies

(105.0)

(140.8)

25.4%

25.4%

Adjusted operating cash flow

3,152.3

3,314.6

(4.9)%

 

Adjusted operating cash flow at 2010 exchange rates

3,157.9

3,314.6

 

(4.7)%

Adjusted operating cash flow margin

10.6%

11.5%

  


The €5.6 million negative foreign exchange impact on adjusted operating cash flow primarily reflects the appreciation compared to the euro of the Australian dollar in the amount of €5.8 million and Eastern European currencies (Czech Republic and Poland) in the amount of €3.4 million, offset by the depreciation of the U.S. dollar, which accounted for a negative impact of €14.3 million.



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The following tables show a reconciliation of our adjusted operating cash flow to our operating income by division in 2011 and 2010:

Year ended

December 31, 2011
(€ million)

Adjusted
Operating
Cash Flow

Adjusted Operating Cash Flow To Operating Income

Net
operating
provisions

Net
depreciation
and
amortization

Impairment
losses
on goodwill

Capital gains
(losses) on
disposal of
non-current
assets

Others

Operating
Income

Water

1,462.4

19.3(1)

(565.5)

(58.6)

22.1

(19.2)

860.5

Environmental
Services

1,197.3

(106.6)

(710.9)

(78.1)

55.4

2.5

359.6

Energy Services

597.6

(37.5)

(236.3)

(366.1)

7.8

(2.7)

(37.2)

Holding companies

(105.0)

(23.4)

(36.8)

-

-

(0.5)

(165.7)

Total

3,152.3

(148.2)

(1,549.5)

(502.8)

85.3

(19.9)

1,017.2

(1)  Represents primarily the release of provisions following the final resolution of a dispute relating to certain French business taxes.


Year ended

December 31, 2010
(€ million)

Adjusted
Operating
Cash Flow

Adjusted Operating Cash Flow To Operating Income

Net
operating
provisions

Net
depreciation
and
amortization

Impairment
losses
on goodwill
and negative
goodwill

Capital gains
(losses) on
disposal of
non-current
assets (1)

Others

Operating
Income

Water

1,525.6

(15.0)

(512.4)

0.4

65.4

(17.9)

1,046.1

Environmental
Services

1,271.8

(20.4)

(706.6)

(0.2)

41.8

(0.6)

585.8

Energy Services

658.0

(5.8)

(226.9)

-

99.6

4.4

529.3

Holding companies

(140.8)

(1.9)

(29.3)

-

-

(7.1)

(179.1)

Total

3,314.6

(43.1)

(1,475.2)

0.2

206.8

(21.2)

1,982.1

(1)  Mainly capital gains realized on the divestiture of the 85% shareholding of Dalkia Usti nad Labem in the Energy Services division.


Water

Adjusted operating cash flow decreased 4.1% (4.2% at constant exchange rates) to €1,462.4 million for the year ended December 31, 2011, compared to €1,525.6 million for the year ended December 31, 2010. The adjusted operating cash flow margin (ratio of adjusted operating cash flow to revenue) fell from 12.5% for the year ended December 31, 2010 to 11.6% for the same period in 2011, penalized by both a fall in the margin on construction activities and downward pressure on margins on the renewal of contracts in France.

For Operations activities, adjusted operating cash flow declined 2.3% at current and constant exchange rates. In France, the decline in adjusted operating cash flow was due to the negative effects of contractual erosion, in a context of declining volumes sold compared to 2010 attributable to weather conditions in the summer of 2011. Outside France, adjusted operating cash flow benefited from activity growth in Asia and Central and Eastern Europe, but also reflects the negative impact of increased asset maintenance costs in the United Kingdom.

The adjusted operating cash flow of the Technologies and Network business declined in line with the increase in competitive pressure on pipe replacement activities in France. This fall was partially offset by the recovery in industrial activities in the United States.

The impact of our ongoing Efficiency Plan on adjusted operating cash flow of the division represented gross savings of €126 million in 2011.



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Environmental Services

Adjusted operating cash flow decreased 5.9% (5.6% at constant exchange rates) to €1,197.3 million for the year ended December 31, 2011 compared to €1,271.8 million for the year ended December 31, 2010. The decrease in adjusted operating cash flow in 2011 was mainly due to:

operational difficulties at Marine Services in the Gulf of Mexico, with in particular a fall in asset utilization rates, which had an impact of €28 million;

the consequences of the notification of the early termination of the Alexandria contract (Egypt), which had an impact of €27 million;

an unfavorable movement in fuel prices, which was only partially passed on to customers.

These negative items were partially offset by the following factors that had a positive impact on adjusted operating cash flow of the division in 2011:

a favorable recycled raw material price effect in 2011, particularly in the first six months;

growth in hazardous waste activities in France and in the United States;

the ramp-up of integrated contracts in the United Kingdom; and

the benefit of our ongoing Efficiency Plan (representing gross savings of €61 million for the division).

The adjusted operating cash flow margin decreased significantly from 13.6% in the year ended December 31, 2010, to 12.3% in the year ended December 31, 2011.

Energy Services

Adjusted operating cash flow decreased 9.2% (a decline of 8.8% at constant exchange rates) to €597.6 million for the year ended December 31, 2011, compared to €658.0 million for the year ended December 31, 2010. Energy Services division adjusted operating cash flow benefited in France from a favorable price impact which offset an unfavorable weather effect. Outside France, the decline in adjusted operating cash flow reflected:

unfavorable weather conditions compared to 2010, despite a positive energy price impact;

operational and economic difficulties in Southern Europe and particularly Italy; and

a fall in sales and electricity prices in Central Europe.

On the other hand, adjusted operating cash flow benefited from a positive contribution from CO2 quota sales in 2011.

The impact of our ongoing Efficiency Plan on adjusted operating cash flow of the division represented gross savings of €72 million in 2011.

The adjusted operating cash flow margin decreased significantly from 9.2% in the year ended December 31, 2010, to 8.2% in the year ended December 31, 2011.



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Adjusted Operating Cash Flow of Holding Companies

Adjusted operating cash flow of holding companies increased, moving from a net outflow of €140.8 million for the year ended December 31, 2010, to a net outflow of €105.0 million for the same period in 2011.

Net Finance Costs

Finance costs, net represent the cost of gross financial fair value debt, including profit and loss on related interest rate and exchange rate hedging, less income on cash and cash equivalents. The following table shows a breakdown of our finance costs, net:

Net Finance Costs
(€ million)

Year ended
December 31, 2011

Year ended
December 31, 2010

Income

113.1

92.7

Expenses

(861.5)

(851.6)

Finance costs, net

(748.4)

(758.9)


Net finance costs fell from €758.9 million in 2010 to €748.4 million in 2011. The average net financial debt decreased from €15.6 billion as of December 31, 2010 to €14.6 billion as of December 31, 2011.

This variation in net finance costs was the result of a rise in the financing rate (defined as the ratio of net finance costs, excluding fair value adjustments to instruments not qualifying for hedge accounting, to average monthly net financial debt for the period, including the net finance costs related to discontinued operations) from 5.09% in 2010 to 5.39% in 2011, primarily due to:

the increase in average low-yield cash investments (cost of carry);

the increase in short-term rates on the floating-rate portion of the debt;

the cost of buying back a portion of our 2013 U.S. dollar bond issue.

Other Financial Income (Expenses)

The following table shows a breakdown of our other financial income (expenses):

Other Financial Income (Expenses)
(€ million)

Year ended
December 31, 2011

Year ended
December 31, 2010

Net gains on loans and receivables

15.8

5.3

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

4.5

(1.4)

Assets and liabilities at fair value through profit and loss

0.0

(17.9)

Unwinding of the discount on provisions

(58.5)

(66.9)

Foreign exchange gains and losses

(8.4)

(0.1)

Other

(9.7)

(21.5)

Other financial income and expenses

(56.3)

(102.5)


Other financial income and expenses decreased from net expenses of €102.5 million for the year ended December 31, 2010 to €56.3 million in net expenses for the year ended December 31, 2011, reflecting the changes in line with items set forth in the table above.



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Income Tax Expense

Net income tax expense increased from €319.0 million in 2010 to €539.0 million in 2011. The increase was largely attributable to impairment charges in respect of deferred tax assets in France and the United States.

We decided not to recognize any deferred tax assets in excess of the amount of deferred tax liabilities as of December 31, 2011 in respect of the France tax group, given changes in projected taxable income and in particular margin erosion in the Water division. As a result, we recorded a charge in the amount of the opening balance of deferred taxes relating to loss carryforwards, which was €86.9 million (we also recorded a €115 reduction in reserves). The net expense in relation to French deferred tax assets was €75 million, as we recorded a net increase of approximately €12 million relating to timing differences.

We also reviewed our tax projections for the U.S. tax group as of December 31, 2011, taking account of the planned changes in scope for the U.S. tax group (including the planned disposal of our solid waste business in the United States as part of our transformation plan). As a result, we reduced its deferred tax assets in the amount of €137.6 million.

The income tax expense for the year ended December 31, 2011 is €314.5 million, excluding the write-down of the deferred tax assets of the France tax group and the impact of planned changes in U.S. operations. The income tax rate for the year ended December 31, 2011 is 37.2% after adjustment for the following items:

goodwill impairment of €504.8 million;

non-current asset impairments in Italy of €193.1 million;

the write-down of the net deferred tax asset position of the France tax group of €86.9 million (described above); and

the impact of planned changes in U.S. operations of €137.6 million (described above).

Share of Net Income of Associates

The share of net income of associates decreased from of €18.0 million in 2010 to net income of €12.3 million in 2011.

Net Income / (Loss) from Discontinued Operations

Net income from discontinued operations fell from a net income of €29.3 million in 2010 to a net loss of €2.4 million in 2011. The 2011 figure included €55.7 million of net losses relating to Veolia Transdev, and €58.1 million of net income relating to other discontinued operations.

Veolia Transdev

The net loss of €55.7 million recorded in respect of Veolia Transdev in 2011 included the offsetting impact of two major items relating to the creation of the venture and our decision to withdraw from the Transportation business:

We recognized a gain on disposal of our former Veolia Transport subsidiary in the amount of €429.8 million as of March 3, 2011 in connection with the Veolia Transdev combination.

We recognized an impairment charge of €440.0 million in connection with our decision to progressively withdraw from Veolia Transdev announced on December 6, 2011. This impairment charge is the result of a downturn in the performance of the subsidiary, a decrease in implicit market transaction valuation multiples and non-binding offers received in late January 2012. It also takes into account the uncertainty related to legal proceedings relating to SNCM (described under Item 8. “Financial Information – Consolidated Statements and Other Financial Information – Litigation”).



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The following table sets forth the key components of our 2010 net income from Veolia Transport and our 2011 net loss from Veolia Transport (through March 3, 2011) and Veolia Transdev (thereafter). Because of the substantial change in the scope of these activities, the figures for 2010 and 2011 are not comparable.

(€ million)

Veolia Transdev
Year ended December 31, 2011(*)

Veolia Transport
Year ended December 2010(**)

Revenue

4,259.0

5,822.0

Adjusted operating cash flow

173.0

319.9

Operating income

(449.0)

106.5

Of which : Impairment as of December 31, 2011

(440.0)

 

Capital gains and losses on disposal

443.0

(29.3)

Of which : Capital gain recognized on March 3, 2011

429.8

 

Net income

(55.7)

12.4

(*)  Veolia Transport for the period January 1 to March 3, 2011, plus Group share at 50% of Veolia Transdev for the period March 3 to December 31, 2011.

(**) including contribution of discontinued operations in United Kingdom as of December 31, 2010.


From an operational perspective, in 2011 the new entity Veolia Transdev benefited from indexing clauses and the growth of urban contracts in France (beginning of the Besançon contract and the start-up of the Reims tram); new contract wins and the full-year impact of contracts won in 2010 outside France, particularly in North America (the Phoenix contract started in 2010 in the USA and the York Southwest contract in Canada), Germany (full-year impact of S-Bahn Bremen rail contract and bus contract in Frankfurt, Oltholstein, Rhode and Sinsheim) and Australia (start-up of the Joondalup contract in 2011 and growth of the activities in Perth and New South Wales).

Adjusted operating cash flow and operating income were affected by increases in the cost of fuel, strikes at the beginning of the year (particularly at SNCM and in rail activities in Germany) and a number of one-off costs relating to the Veolia Transdev combination.  

Other Discontinued Operations

Our net income from discontinued operations other than Veolia Transdev in 2011 included primarily the following items:

a gain on disposal in respect of German activities in the Energy Services division sold in May and August 2011;

a gain on disposal in respect of Norwegian activities in the Environmental Services division sold in March 2011;

a gain on disposal in respect of “Proxiserve” household assistance services sold in December 2011; and

the reclassification of the net income and expenses of Citelum urban lighting activities in the Energy Services division, which is in the process of being divested.

Net Income for the Year Attributable to Non-controlling Interests

Net income attributable to non-controlling interests was €173.2 million for the year ended December 31, 2011, compared to €290.5 million for the year ended December 31, 2010. This decrease in net income attributable to non-controlling interests is mainly due to EDF’s share of impairments recorded in the Energy Services division in Southern Europe compared to EDF’s share in capital gains on the divestiture of Dalkia Usti nad Labem in 2010.



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Net Income (Loss) Attributable to Owners of the Company

Net loss attributable to owners of the Company was €489.8 million in 2011, compared to €558.5 million of net income attributable to owners of the Company in 2010. Adjusted net income attributable to owners of the Company was €289.8 million in 2011, compared to €474.0 million in 2010.

Given the weighted average number of shares outstanding of €496.3 million in 2011, compared to 481.9 million in 2010, loss per share attributable to owners of the Company (basic and diluted) was €0.99 in 2011, compared to earnings per share of €1.16 in 2010. Adjusted net income per share attributable to owners of the Company (basic and diluted) was €0.58 in 2011, compared to €0.98 in 2010. See Item 3. “Key Information—Selected Financial Data” for information on the weighted average number of shares outstanding in each period.

Adjusted net income attributable to owners of the Company for the year ended December 31, 2011 is determined as follows:

Year ended
December 31, 2011
(€ million)

Adjusted Net
Income

Adjustments

Net Income

Operating income

1,700.5

(683.3) (1)

1,017.2

Net finance costs

(748.4)

-

(748.4)

Other financial income and expenses

(56.3)

-

(56.3)

Income tax expense

(355.4)

(183.6) (2)

(539.0)

Share of net income of associates

12.3

-

12.3

Net income / (loss) from discontinued operations

-

(2.4)

(2.4)

Non-controlling interests

(262.9)

89.7 (3)

(173.2)

Net income attributable to owners of the Company

289.8

(779.6)

(489.8)

(1)  Adjustments to operating income are presented under “Events in 2011 Impacting Results of Operations and Financial Condition” and “Operating Income – Adjusted Operating Income.”

(2)  Primarily the impairment of deferred tax assets of the France tax group and the impact of planned changes in U.S. tax group as described under “Income Tax Expense” above, net of a tax benefit resulting from certain impairment charges that are excluded from Adjusted Operating Income, primarily in the Energy Services division in Southern Europe.

(3)  Primarily EDF’s share of impairment charges recorded by the Energy Services division in Southern Europe.


Adjusted net income attributable to owners of the Company for the year ended December 31, 2010 is determined as follows:

Year ended
December 31, 2010
(€ million)

Adjusted Net
Income

Adjustments

Net Income

Operating income

1,891.4

90.7 (1)

1,982.1

Net finance costs

(758.9)

-

(758.9)

Other financial income and expenses

(102.5)

-

(102.5)

Income tax expense

(301.8)

(17.2)

(319.0)

Share of net income of associates

18.0

-

18.0

Net income / (loss) from discontinued operations

-

29.3

29.3

Non-controlling interests

(272.2)

(18.3) (2)

(290.5)

Net income attributable to owners of the Company

474.0

84.5

558.5

(1)  Adjustments to operating income are described above under “Operating Income—Adjusted Operating Income.”

(2)  Primarily the portion attributable to minority interests of capital gains arising on the divestiture of Energy Services activities in the Czech Republic.




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Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenue

Overview

The following table shows a breakdown of our revenues in 2009 and 2010:

Year ended
December 31, 2010
(€ million)

Year ended
December 31, 2009
(€ million)

% Change
2010/2009

Internal
growth

External
growth

Foreign
exchange
impact

28,764.2

27,847.7

3.3%

2.4%

(1.8)%

2.7%


For the year ended December 31, 2010 Veolia Environnement consolidated revenue was €28,764.2 million, an increase of 3.3% compared to revenue of €27,847.7 million for the year ended December 31, 2009. At constant consolidation scope and exchange rates, consolidated revenue increased 2.4% during the same period.

This improvement in revenue growth is explained principally by the progressive growth in the global economic environment, the increase and maintenance of recycled raw material prices, and energy prices, a positive climate effect both within and outside of France, as well as the benefits of successful commercial development.

2010 full year revenue was negatively impacted by the non-renewal of certain significant contracts in 2009, as well as the completion of certain large construction contracts outside of France (Marafiq, Fujairah, Ras Laffan in the Middle East) in the Water division (€311 million impact compared to 2009).

In total, the decline in revenue resulting from net divestments completed in 2009 and 2010 amounted to €489.6 million (down 1.8% versus full year 2009), including €150.7 million in the Water division, €312.4 million in the Environmental Services division (principally Veolia Propreté Nettoyage et Multiservices or VPNM, which we divested in 2009) and €26.5 million in the Energy Services division.

The share of revenue generated outside France in 2010 was €17,442.3 million, which is 60.6% of total revenue compared to 60.1% for 2009.

The positive effect of the change in average exchange rates during 2010 was €736.7 million, reflecting essentially the appreciation compared to the euro of the Australian dollar for €168.3 million, the U.S. dollar for €110.5 million, the U.K. pound sterling for €82.8 million, Central European currencies for €87.7 million and Northern European currencies (Norway and Sweden) for €20.8 million.

The following table shows a breakdown of our revenues by division in 2010 and 2009:

Revenues by Division

Year ended

Year ended

% Change

(€ million)

December 31, 2010

December 31, 2009

2010/2009

Water

12,250.3

12,401.8

(1.2)%

Environmental Services

9,337.8

8,763.6

6.6%

Energy Services

7,176.1

6,682.3

7.4%

Revenue

28,764.2

27,847.7

3.3%

Revenue at 2009 exchange rates

28,027.5

27,847.7

0.6%




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Table of Contents


Water

The following table shows a breakdown of our revenues within the Water division in 2010 and 2009:

Year ended
December 31, 2010
(€ million)

Year ended
December 31, 2009
(€ million)

% Change
2010/2009

Internal
growth

External
growth

Foreign
exchange
impact

12,250.3

12,401.8

(1.2)%

(2.6)%

(1.2)%

2.6%


The revenue decline in the Water division is due essentially to the decline in Works activities resulting from the end of three large construction contracts in the Middle East (Marafiq, Fujairah and Ras Laffan). Excluding construction works, 2010 division revenue would have increased by 1.5% (1.0% at constant consolidation scope and exchange rates).

In France, revenue declined 0.3% (a decrease of 1.0% at constant consolidation scope) due to a slowdown in Works activities, as well as a 1% decline in volumes of water sold compared to 2009 and the end of the contract with the city of Paris.

Outside France, excluding Veolia Water Solutions & Technologies, revenue increased 3.1% (2.4% at constant consolidation scope and exchange rates). In Europe, growth was 7.1% (4.1% at constant consolidation scope and exchange rates), driven by Germany, the United Kingdom and Eastern Europe. Revenue in Asia increased 14.1% (3.9% at constant consolidation scope and exchange rates) due to the ramp-up of certain contracts in Central China and new contracts in Southern China. In the Pacific zone, revenue declined by 10.7% at constant consolidation scope and exchange rates (although it increased by 9.7% on a reported basis), reflecting the completion of the construction of the Sydney, Australia desalination plant.

Veolia Water Solutions & Technologies (VWST) achieved €2,147.5 million in revenue, down 13.1% compared to 2009 (down 16.8% at constant consolidation scope and exchange rates). The decline in VWST revenue reflects the completion of certain large Design and Build contracts outside of France. Excluding the impact of the end of the three large construction contracts in Fujairah, Marafiq and Ras Laffan, Veolia Water Solutions & Technologies revenue would have declined 0.5% compared to 2009.

In addition, the division benefited from a recovery in industrial solutions activities, as well as Design and Build activities for industrial clients, during the second half of 2010, particularly during the fourth quarter. The backlog for VWST activities is slightly higher at the end of 2010 compared to the end of 2009, with an acceleration of business wins during the last quarter of 2010.

Net divestments in the Water division in 2009 and 2010 had a negative impact on revenue of 1.2% (€150.7 million).

Environmental Services

The following table shows a breakdown of our revenues in the Environmental Services (waste management) division in 2010 and 2009:

Year ended
December 31, 2010
(€ million)

Year ended
December 31, 2009
(€ million)

% Change
2010/2009

Internal
growth

External
growth

Foreign
exchange
impact

9,337.8

8,763.6

6.6%

6.8%

(3.6)%

3.4%


The positive movement in recycled raw materials prices (notably in France and Germany), the good progression of certain activities in the United States, and the ramp-up and growth of integrated contracts in the United Kingdom contributed to 6.8% organic revenue growth in the Environmental Services division in 2010, compared to a depressed base in 2009. In addition, after a volume effect that was still marginally negative during the first quarter, the three remaining quarters of 2010 showed signs of volume recovery within certain division activities in many countries.



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