Veolia Environnement 20-F 2005
As filed with the Securities and Exchange Commission on June 30, 2005
Washington, D.C. 20549
OF THE SECURITIES EXCHANGE ACT OF 1934
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2004
o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from __ to __
Commission File Number: 001-15248
(Exact name of Registrant as specified in its charter)
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report:
406,421,983 ordinary shares, nominal value €5 per share
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 x No o
Indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 o Item 18 x
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 managements current assumptions regarding future sales volumes and prices, which are subject to a number of risks and uncertainties that may cause actual sales volumes and prices to differ materially from those projected. As a result, actual revenue recorded under these new contracts or from these new investments, assets and operations may differ materially from those set forth in this document. Other than in connection with applicable securities laws, we undertake no obligation to publish revised forward-looking statements to reflect events or circumstances after the date of 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 InformationRisk Factors, Item 5. Operating and Financial Review and Prospects, 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.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
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. Our consolidated financial statements have been prepared in accordance with French GAAP, which differs in certain significant respects from U.S. GAAP. Note 28 to our consolidated financial statements describes the principal differences between French GAAP and U.S. GAAP as they relate to us. 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.
We changed the presentation of our financial statements in 2001 to present our income statement by function, as opposed to our previous method of presenting our income statement by category of expense. As a result, since 2001 our operating income corresponds to our revenue after cost of sales, selling, general and administrative expenses, other operating expenses, goodwill amortization and restructuring expenses. In addition, certain expenses that we previously classified as exceptional items are now classified as operating expenses. Because 2001 was a year of transition to our new accounting presentation, we restated in 2001 our financial statements for 2000 to reflect the new presentation method. As a result, the following table shows our selected financial data based on the new accounting presentation for the periods presented.
For your convenience, we have converted the euro amounts of our selected financial data into U.S. dollars using the December 31, 2004 rate of $1.00 = €0.7342. This does not mean that we actually converted, or could have converted, those amounts into U.S. dollars on this or any other date.
On December 31, 2004, Veolia Environnement applied the provisions of Article 23100 of French CRC Regulation 99-02, which allows companies to report their share in the net income of businesses sold during the year on a separate line item of the income statement. These businesses are excluded from the new scope of consolidation and therefore no longer contribute to consolidated revenues and operating income for the fiscal year in which they were sold. For the 2004 fiscal year, these businesses included FCC, Culligan and USFilter Corporations equipment and short-term services businesses.
EBIT is defined as operating income (loss) before amortization and depreciation of goodwill and indefinite life intangible assets and restructuring costs. EBIT is calculated in accordance with accounting principles generally accepted in France, and is not a measurement of operating performance calculated in accordance with accounting principles generally accepted in the United States. EBIT should not be considered a substitute for operating income, net income, cash flows from operating activities or other statement of operations or cash flow statement data prepared in accordance with accounting principles generally accepted in the United States, or as a measure of profitability or liquidity. Because of its recent adoption, EBIT is not indicative of our historical operating results, nor is it meant to be predictive of potential results. Because all companies do not calculate EBIT identically, the presentation of EBIT contained in this document may not be comparable to similarly named measures of other companies.
Net financial debt is defined as the sum of long-term debt and bank overdrafts and other short-term borrowings after deduction of short-term loans, cash and cash equivalents, marketable securities and long-term loans. Long-term loans are included in our consolidated financial statements under the caption “Other Portfolio Investments Held as Financial Assets.” See Note 8 to our consolidated financial statements. Long-term loans (before valuation allowances) amounted to €478.9 million in 2004, €486.2 million in 2003, €521.2 million in 2002, €349.5 million in 2001 and €284.6 million in 2000.
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 on May 12, 2005, our shareholders approved a dividend payment of €0.68 per share in respect of our 2004 fiscal year to persons who held our shares on January 1, 2005, which was paid on May 27, 2005. On May 28, 2004, we paid a dividend of €0.55 per share in respect of the 2003 fiscal year to persons who held our shares on January 1, 2004. On May 7, 2003, we paid a dividend of €0.55 per share in respect of the 2002 fiscal year to persons who held our shares on January 1, 2003. On May 6, 2002, we paid a dividend of €0.55 per share in respect of the 2001 fiscal year to persons who held our shares on January 1, 2002. On May 10, 2001, we paid a dividend of €0.55 per share in respect of the 2000 fiscal year to persons who held our shares on April 27, 2001. We did not pay dividends as a stand-alone company in respect of any fiscal years before 2000.
Dividends paid to holders of our ADSs and non-French resident holders of our shares normally are subject to a 25% French withholding tax. However, non-resident holders that are entitled to and comply with the procedures for claiming benefits under an applicable tax treaty may be subject to a reduced rate of withholding tax (15% for holders who are residents of the United States) and be entitled to certain benefits. See Item 10. Additional InformationTaxation 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.
Exchange Rate Information
Under the provisions of the Treaty on European Union negotiated at Maastricht in 1991 and signed by the then 11 member states of the European Union in early 1992, a European Monetary Union, known as EMU, was implemented on January 1, 1999 and a single European currency, known as the euro, was introduced. As of December 31, 2004, the following 12 member states had adopted the euro as their national currency: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.
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 for 2000 through May 2005 based on the noon buying rate 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.
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. The translations from euro to U.S. dollars in this annual report are based on $1.00 = €0.7342, the Noon Buying Rate on December 31, 2004. On June 28 , 2005, the Noon Buying Rate was U.S.$1.21 per euro.
You should carefully consider the risk factors described below in addition to the other information presented in this document.
Risks Relating to Our Operations
We may suffer reduced profits or losses as a result of intense competition.
Our business is highly competitive and requires substantial human and capital resources. Large international competitors and local niche companies serve each of the markets in which we compete. Accordingly, we must make constant efforts to remain competitive and convince potential clients of the quality and cost value of our service offerings. Competitors may also introduce new technology or services that we would have to match in order to remain competitive, which could result in significant development costs for us.
In addition, we perform a substantial portion of our business under contracts, often of a long-term nature, with governmental authorities and clients from the industrial and commercial sectors. These contracts are often awarded through competitive bidding, at the end of which we may not be retained even though we may have incurred significant expenses in order to prepare the bid. Our contracts may not be renewed at the end of their term, which in the case of important contracts may oblige us to engage in a costly reorganization or restructuring of assets and operations covered by the contract when the contract does not provide for the transfer of the related assets and employees to the succeeding operator and/or adequate indemnification to cover our costs of termination.
Our business operations in some countries may be subject to additional risks.
While our operations are concentrated mainly in Europe, we conduct business in markets around the world. Sales generated in countries outside of Europe and North America represented approximately 8.04% of our total revenue in 2004. The risks associated with conducting business in some countries outside of Western Europe, the United States and Canada can include slower payment of invoices, which is sometimes aggravated by the absence of legal recourse for non-payment, nationalization, social, political and economic instability, increased currency exchange risk and currency repatriation restrictions, among other risks. We may not be able to insure or hedge against these risks. Furthermore, we may not be able to obtain sufficient financing for our operations in these countries. The establishment of public utility fees and their structure can be highly political, slowing and impeding for several years any increase in fees that no longer allow coverage of service costs and appropriate compensation for a private operator. The occurrence of unfavorable events or circumstances in certain countries may lead us to record exceptional provisions or depreciation charges in connection with our operations in these countries, which could have a material adverse effect on our results.
Our long-term contracts may limit our capacity to quickly and effectively react to general economic changes affecting our performance under those contracts.
The general circumstances or conditions under which we enter into a contract may change over the term of the contract, particularly in the case of long-term contracts. For example, changes in the prices of our supplies may increase beyond levels that were foreseen or foreseeable at the time the contract was entered into or changes in end user behavior may significantly affect our financial performance under the contract. Because our contracts generally do not allow us to unilaterally terminate them or interrupt or suspend the performance of our obligations under them, we attempt to foresee these possible changes at the time we negotiate our contracts and typically include adjustment mechanisms in our contracts (such as price index clauses or the right to initiate a review or modification process). However, we may not always be able to foresee all potential changes or to negotiate adjustment clauses that cover all possible scenarios. In addition, even if our contracts include these types of adjustment clauses, our ability to react to these changes is limited to the adjustments permitted by these clauses. For example, our long-term contracts typically provide for pre-determined fees or payments for our services (either from the client or from the end user according to a set price list), and we cannot adjust these fees or prices to reflect anticipated shifts in costs or product demand other than in accordance with the terms of the adjustment clause. Also, our right to initiate a review or modification process in respect of a contract may be subject to conditions, including the consent of the other parties to the contract or of a third party (such as a public authority). As a result, we may be required to continue performing our obligations under our contracts even if the general conditions or circumstances of our performance are different from those that had been foreseen and provided for at the time the contract was signed, which in some cases may alter the financial equilibrium of the contract and adversely affect our financial performance under the contract.
The rights of governmental authorities to terminate or modify our contracts could have a negative impact on our revenue and profits.
Contracts with governmental authorities make up a significant percentage of our revenue. In numerous countries, including France, government contracts often allow the governmental authority to modify or terminate these contracts under certain circumstances, but generally with full indemnification. In other countries, however, we may not be entitled to or be able to obtain full indemnification in the event our contracts are terminated by governmental counterparties.
Changes in prices of fuel and other commodities may reduce our profits.
The prices of our supplies of fuel and other commodities, which are significant operating expenses for our businesses, are subject to sudden increases. Although most of our contracts contain tariff adjustment provisions that are intended to reflect possible variations in prices of our supplies using certain pricing formulas, such as our price index formulas, there may be developments that could prevent us from being fully protected against such increases, such as delays between fuel price increases and the time we are allowed to raise our prices to cover the additional costs or our failure to update an outdated cost structure formula. In addition, a sustained increase in supply costs beyond the price levels provided for under our adjustment clauses could reduce our profitability to the extent that we are not able to increase our prices sufficiently to cover the additional costs.
We must comply with various environmental, health and safety laws and regulations, which is costly and may, in the event of any failure to comply on our part, cause us to incur liability under these laws and regulations.
We incur significant costs of compliance with various environmental, health and safety laws and regulations.
We have made and will continue to make significant capital and other expenditures to comply with applicable environmental, health and safety laws and regulations. We are continuously required to incur expenditures to ensure that the installations that we operate comply with applicable legal, regulatory and administrative requirements, including general precautionary obligations, or to advise our clients on the measures that they must undertake in order to maintain the compliance of their installations. These expenditures mainly relate to air pollution (including, for example, the control of emissions from our transportation vehicles, our heat generation plants and our waste incineration facilities), the quality of drinking water, the disposal of wastewater and other effluents and the protection of land and biodiversity (including through restrictions on waste disposal and the use of landfills). Each of our operations, moreover, may become subject to stricter laws and regulations, and correspondingly greater compliance expenditures, in the future. If we are unable to recover these expenditures through higher tariffs, this could adversely affect our operations and profitability.
Our failure to comply with any applicable environmental, health and safety laws and regulations may cause us to incur liability or other damages that we might be required to compensate.
The scope of application of environmental, health, safety and other laws and regulations is becoming increasingly broad. These laws and regulations govern, among other things, any discharge in a natural environment, the collection, treatment and disposal of all types of waste, and the rehabilitation of old sites. These increasingly broad laws and regulations expose us to the risk of liabilities, including in connection with assets that we no longer own and activities that have been discontinued. In some circumstances, we could be required to pay fines or damages under these laws and regulations or undertake remedial action even if we exercise due care in conducting our operations and we comply with all applicable laws and regulations. Moreover, regulatory authorities may require us to conduct investigations and undertake remedial activities, curtail operations or close facilities temporarily or permanently in connection with applicable laws and regulations, including to prevent imminent risks or in light of expected changes in those laws and regulations. In the event of an accident or other incident, we could also become subject to claims for personal injury, property damage or damage to the environment (including natural resources). Our incurrence of an obligation to undertake remedial action or to compensate for such damage could have a material adverse effect on our activities or our results.
Certain facilities that we or our clients operate involve the use of hazardous substances, which may subject us to increased liability in the event of an accident at one of these facilities.
Among the facilities that we own and operate, one has been categorized a Seveso facility. Seveso facilities are places where dangerous substances are present in quantities equal to or above thresholds specified in European Union Directive 96/82/EC (also known as the Seveso II Directive), relating to the control of major accident hazards involving dangerous substances. As such, these facilities are the subject of special concern and heightened regulation. Our Seveso facility is a toxic waste incineration factory at Limay (Yvelines). The manipulation of waste and toxic products in this facility can, in the case of an accident, cause serious damage to the environment, neighbors or employees, exposing us to potentially substantial liabilities. Moreover, in the context of our outsourcing contracts, our subsidiaries are involved in the operation of Seveso sites by industrial
clients (particularly petroleum or chemical industry sites). In the event of an accident at one of these sites, we may be held jointly liable with our clients for pollution or other serious accidents.
We may make significant investments in projects without being able to obtain the required approvals for the project.
To engage in business, we must in most cases obtain a contract and sometimes obtain, or renew, various permits and authorizations from regulatory authorities. The competition and/or negotiation process which must be followed to obtain such contracts is often long, 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 engage in the desired business nor sufficient compensation or indemnities to cover the cost of our investments. These situations increase the overall cost of our activities and, if we do not obtain the desired business or are forced to withdraw from a public tender, our business may not grow as much or as profitably as we hope.
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 directly and through our subsidiaries in a variety of currencies. Our financial statements are presented in euro. Therefore, when we prepare our financial statements, we must translate our assets, liabilities, income and expenses in other currencies into euro at then-applicable exchange rates. Consequently, increases and decreases in the value of the euro in respect of these other currencies will affect the value of these items in our financial statements, even if their value has not changed in their original currency. For example, an increase in the value of the euro may result in a decline in the reported value, in euro, of our interests held in foreign currencies.
In addition, because we have a significant amount of debt outstanding, our results of operations and financial condition may be affected by changes in prevailing market rates of interest. We manage this exposure to interest rate risk by setting a target fixed rate for a significant part of our debt, which we achieve either through fixed rate debt or interest rate hedging activities. At December 31, 2004, our outstanding total long-term debt amounted to €15.9 billion, of which 46.4% was subject to variable rates and 53.6% was subject to fixed interest rates (after giving effect to financial hedging instruments). Fluctuations in interest rates may also affect our future growth strategy. A rise in interest rates may force us to finance acquisitions or operations or refinance existing debt at a higher cost in the future, which may lead us to decide to curtail or delay our then current expansion plans.
Our business operations may be the target of foul play or terrorism.
Out of concern for public health and the need to assure the availability of water resources to the public, public authorities have adopted various laws and regulations aimed at protecting water resources from the risk of foul play and terrorism. Accordingly, our drinking water production and distribution activities must comply with these laws and regulations, which generally call for the safeguarding of facilities, water sources and treatment procedures. Further, we are generally required to implement monitoring and crisis procedures at our water sites either in partnership with or at the direction of the local public authority. We may also decide to implement additional safeguards on our own or in collaboration with local law enforcement. Nevertheless, the implementation of such safeguards with respect to our water activities may not be sufficient to prevent the occurrence of foul play or terrorism.
Our activities in the areas of waste management, energy services and public transportation are subject to similar risks. Moreover, we may have employees who work or travel in areas where the risk of foul play, kidnapping or terrorism is either temporarily or permanently elevated.
As a result, despite the measures that we have attempted to implement, any one of our activities may fall victim to foul play or terrorism in the future. If an attack were to occur, it could negatively affect our image and have a material adverse effect on our results.
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 imposed by 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. For example, in July 2002 we effected a capital increase through the issuance of rights to acquire new shares to all of our shareholders, but those rights were generally exercisable only by persons located outside the United States. Holders of our ADSs were not permitted to exercise the rights corresponding to the shares underlying the ADSs and received the net proceeds of the sale of these rights in the French market by the ADS depositary.
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 depositarys 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.
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 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 stock 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 0000. Our agent in the United States is T. Michael OBrien. He can be reached at Veolia Water North America Operating Services, 184 Schuman Boulevard, Naperville, IL 60563.
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. Early on, it commenced developing its municipal water distribution activities in France by obtaining concessions in Nantes (1854), Nice (1864), Paris (1860) and its suburbs (1869).
In 1980, Compagnie Générale des Eaux reorganized its water activities by regrouping all of its design, engineering and execution activities relating to drinking water and wastewater treatment facilities under its subsidiary Omnium de Traitement et de Valorisation (OTV). At the same time, Compagnie Générale des Eaux expanded its business during the 1980s with the acquisition of Compagnie Générale dEntreprises Automobiles (CGEA, which would become Connex and Onyx) 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 are today conducted under the names Veolia Water (water), Onyx (waste management), Dalkia (energy services) and Connex (transportation).
On July 20, 2000, our shares were listed on the Premier Marché of Euronext Paris, which became the Eurolist of Euronext Paris on February 21, 2005.
In August 2001, our shares were included in the CAC 40, the main equity index published by Euronext Paris, and in October 2001 were listed in the form of American Depositary Shares for trading on The New York Stock Exchange.
During 2002, Vivendi, which had been renamed Vivendi Universal in 2000, progressively decreased its stake in our company, such that it held only 20.36% of our shares as of December 31, 2002, an interest that was further reduced to 5.30% in December 2004. See Item 7. Major Shareholders and Related Party TransactionsMajor Shareholders. In April 2003, we changed our name to Veolia Environnement.
Since 2002, we have been conducting a significant restructuring in order to refocus on our core environmental services activities. This restructuring was completed in 2004 with the sale of various U.S. subsidiaries within our water division conducting certain non-core activities, and with the sale of our indirect interest in Fomento de Construcciones y Contratas (FCC), a Spanish company whose activities include construction and cement services, as well as other services related to the environment. See Major Developments in 2004Refocusing of Our Activities and Item 5. Operating and Financial Review and ProspectsOverviewMajor Developments in 2004 for further detail regarding the restructuring that occurred during 2004.
Our principal capital expenditures and divestitures are described under Item 5. Operating and Financial Review and Prospects. Material capital expenditures currently in progress include those associated with the continued expansion of our existing businesses and replacement and maintenance spending related to our existing operations.
Major Developments in 2004
Below we discuss the main developments in our business during 2004. The discussion below and in the remainder of Item 4 includes the revenue amounts that we expect to earn from various contracts, including total revenue expected to be generated from all services under combined contracts to build and operate facilities. These revenue amounts take into account updates to our volume and price assumptions since the date these contracts were publicly announced. In addition, revenue amounts expected under foreign contracts won during 2004 have been converted into euro at the rate of exchange prevailing on December 31, 2004. As a result, publicly announced revenue amounts may differ from the amounts of expected revenue included in this document. In addition, these expected revenue amounts constitute forward-looking statements that involve risks and uncertainties, including, but not limited to, those described under Item 3. Key InformationRisk Factors. Actual revenue amounts 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 forward-looking statements are subject.
Refocusing of Our Activities
During 2004, we refocused our activities in order to concentrate more fully on the development of outsourcing on behalf of public authorities, as well as on the provision of services involving long-term contracts with municipal or industrial clients.
Sale of U.S. Activities within the Water Division
On May 12, 2004, we signed an agreement for the sale of USFilter Corporations equipment and short-term services businesses to Siemens, for total consideration of US$1,015 million based on the amount of cash these businesses were expected to hold at closing. After application of the contractual price adjustment mechanisms, total consideration amounted to US$975 million, based on the sold businesses working capital requirements and cash held on July 31, 2004, the date of closing.
On July 22, 2004, we also announced the signing of an agreement for the sale of our Culligan business to the private equity firm Clayton Dubilier & Rice, for total consideration of US$612 million in cash. The transaction closed on September 30, 2004, following approval by regulatory authorities and satisfaction of other customary closing conditions.
These sales represent the final step in the implementation of the strategic refocusing of our water operations in North America, which was originally announced in September 2003. Including the sale of Everpure in late 2003 to Pentair and the sale of farmlands held by USFilter in California, followed by the sale of USFilters equipment and short-term services businesses to Siemens and the sale of Culligan in 2004, the total proceeds generated from these sales amount to approximately US$2.0 billion.
Sale of FCC
On July 28, 2004, we signed an agreement to sell our 49% stake in B 1998 S.L., the holding company that owns 52.5% of FCC, to a company controlled by Ms. Esther Koplowitz. The transaction allowed us to reduce our net indebtedness by €1.1 billion, and resulted in a total cash payment to us of €916 million (before transaction fees), including an exceptional dividend paid by B 1998 S.L. to us prior to the sale. The transaction, which closed on September 15, 2004, was subject to applicable Spanish anti-trust regulatory approvals. For us, the transaction was part of our strategy to refocus on our core environmental services activities. Further, the transaction allowed us to strengthen our financial condition. See Item 7. Major Shareholders and Related Party TransactionsRelated Party TransactionsFCC Relationship with Our Co-Shareholder.
Continued Reduction by Vivendi Universal of its Shareholdings
In December 2004, Vivendi Universal reduced its holdings in our company to 5.30% of share capital (down from 20.36% prior to such time). See Item 7. Major Shareholders and Related Party TransactionsMajor Shareholders.
Major Business Developments in 2004
In 2004, we won major new contracts that formed part of our strategy to focus on our core environmental services business, representing a continuation of efforts undertaken since 2000.
The evolution in our contract portfolio during 2004 reaffirmed the trends witnessed in prior years in both the municipal and industrial markets. Accordingly, growth opportunities continue to present themselves in our main geographical markets, driven by accelerated urbanization and more stringent environmental regulations. Our comprehensive service offerings, which are focused in areas where we believe we have a competitive
advantage, increasingly necessitate a higher level of technical expertise and involve the provision of higher value-added services, both of which should help to relieve pricing pressure despite the presence of other competitors in the market.
Pursuit of Targeted Geographical Development
We pursued targeted development in Asia, and particularly China, during 2004. We entered into two important water contracts, one in Guizhou province in southern China, and the other in Hohhot, the capital of Inner Mongolia. We also strengthened our presence in Germany (water), and in Central and Eastern Europe and the United States (transportation and waste management) through the signing of several important contracts.
The other major contracts we won during 2004 are described below under Business OverviewOur Services.
High Level of Contract Renewals and Extensions
We renewed a substantial number of contracts that were due to expire in 2004, reflecting the satisfaction and confidence of clients in our abilities and business model, in particular our high quality of services and technical expertise.
In the water division, for example, where contracts have come up for renewal mainly in France due to the longer maturity of the remaining contract portfolio, there has been a sustained level of contract renewal due to the confidence of municipal clients in our abilities. In the rest of the world, the expansions in the scope of services provided under a contract or the extensions in contract length that we have been able to negotiate have also reaffirmed our choice of service offerings and our business model.
Veolia Environnement Foundation
The Veolia Environnement Foundation was established in 2004. Its purpose is to organize our philanthropic initiatives, and its founding members are our company along with our four divisions. The foundation has three main fields of action, for the promotion of: (1) solidarity (provision of support to populations devastated by crisis or in need of development aid), (2) employment (creation or consolidation of jobs in the service sector), and (3) environment (support of research or educational initiatives in the area of the environment). The foundation may act, depending on the circumstances, in partnership with other humanitarian organizations like the Red Cross, with international organizations or with non-governmental organizations. In 2004, the foundation supported approximately 75 projects, including the construction of the Mother and Child Hospital in Kabul, the refurbishment of basement corridors used by sick children at the Armand Trousseau hospital in Paris, the establishment of skills training programs to facilitate re-entry into the workforce and the establishment of sports programs designed to foster social integration.
Veolia Environnement Campus
Our former Urban Environment Institute was renamed the Veolia Environnement Campus in January 2004. Established in 1994, the Veolia Environnement Campus is the initial and continuing education center of our company. It offers training to individuals by grouping together a training and apprenticeship center, training staff from all four of our divisions, a social observatory, partnerships with universities and a new factual-based study program.
“Veolia Environnement 2005” Efficiency Plan
We announced an efficiency plan at the end of September 2003 called “Veolia Environnement 2005,” which we hope will generate €300 million in annual savings beginning in 2006. An operational pilot program has been implemented and a project team reporting directly to our chief executive officer has been formed. The efficiency plan aims to generate savings through improvements to our operational processes, purchasing functions and support functions, as well as through an optimized use of assets. The efficiency plan extends to all of our subsidiaries so as to take advantage of all possible synergies, in particular with respect to optimizing purchases, structural costs and operating efficiency. We also intend to emphasize the sharing of best practices and the use of advanced technologies in order to help achieve the goals of our efficiency plan. The efficiency plan is being implemented according to schedule. Savings realized during 2004 amounted to €126 million, of which €116 million was included in EBIT (as defined below). Accordingly, we continue to have an objective of €300 million in annual savings beginning in 2006.
Traditionally, environmental management services, which include water treatment and distribution, wastewater treatment and collection, waste treatment and management, energy services (excluding the production, trading and sale of electricity, other than production through co-generation) and transportation, have been provided in an uncoordinated manner, each by a different entity. Public authorities and industrial and commercial companies, moreover, have typically met many of their own environmental needs without looking to private firms that specialize in these areas. This situation has changed fundamentally in recent years, however, as industrial and commercial companies have continued to expand on a global scale and increasingly require environmental management services providers with a global reach.
We believe that demand for integrated, customized packages of environmental management services is likely to grow around the world for the following reasons:
In a world that combines accelerated urbanization with demographic growth, major investments in environmental projects and services as well as effective management are needed to meet increasingly stringent environmental standards, provide growing urban populations with adequate environmental services and replace existing environmental infrastructure. In addition, there is also an increase in public demand for high-quality and reliable environmental products and services.
Governments throughout the world face budgetary constraints and often lack the technical and operational skills of private sector firms to address environmental issues efficiently. As a result, public authorities are increasingly turning to the private sector to address their environmental needs.
Public and private entities are increasingly attempting to simplify the administration of their complex operations by outsourcing a wide variety of responsibilities to a single partner. This tendency creates a business opportunity for companies capable of offering a broad range of environmental management services in an integrated fashion.
Large private firms and public authorities increasingly recognize that a one size fits all approach will not meet their unique and changing needs. As a result, demand for customized environmental management services has grown.
The increasingly multinational profile of many large industrial and commercial firms encourages them to outsource non-core activities to companies with similar geographic reach in order to simplify administration and ensure they receive consistent service at each of their facilities.
We think that each of these trends, taken individually, creates significant opportunities for companies with our expertise, and, taken as a whole, they allow our company, in particular, to provide innovative and integrated environmental management services in markets around the world.
We provide environmental management services to a wide range of public authorities, industrial and commercial customers and individuals around the world.
Demand by public authorities has been influenced and strengthened by trends relating to the search for efficiency gains and innovative solutions, the rationalization of public purchases in pursuit of reduced costs, the reorganization in France of several municipalities, and a heightened sensitivity to environmental issues, including the management of water resources, air pollution, mass transportation policies and energy consumption. These trends, combined with a movement towards greater urbanization, are increasing the need for essential environmental services.
Within this context, we believe that the historical model of delegated public service management contracts, which leaves to public authorities the role of defining, organizing and overseeing the services provided to inhabitants, can be flexibly applied to satisfy the needs of each client, resulting in a mutually beneficial relationship between the private operator and public authority. Accordingly, we believe that we can adapt to the different needs and expectations of public authorities around the world in order to assist them in (i) responding to the need for heightened efficiency and productivity in the provision of public services in order to
control costs, (ii) accessing more sophisticated technical skills in order to resolve complex environmental problems, and (iii) responding to the demand for prompt and professional service expressed by end users.
In France in particular, we intend to take advantage of a new French ordinance dated June 17, 2004 allowing for the creation of a new form of partnership contract. The ordinance allows public authorities to entrust private operators (who may be associated with financial organizations) with the entire responsibility for building and/or financing an installation and operating the services related thereto, in exchange for compensation that is set by the public authority as a function of performance. See Contracts below.
Industrial or Commercial Companies and Individuals
We offer our industrial and commercial clients a large range of services, which generally aim to achieve the following two main goals in relation to the environment:
furnishing clients with the services necessary for their industrial processes (vapor, industrial heating and cooling, processed water, demineralized water, compressed air, etc.) and optimizing their consumption thereof, and
reducing the impact of their industrial processes on the environment, which may include treating effluents, recycling and recovering waste, and maintaining durable and efficient waste elimination channels.
We often partner with such clients over the long term, and offer innovative solutions adapted to the needs of each industrial site.
We believe that the further development of our industrial client base will be a significant area of growth. In particular, multiservice contracts entered into with industrial clients have assumed an increasingly important role and are expected to continue to do so. See Development of Synergies: Multiservice Contracts to Benefit Industrial and Commercial Clients below.
Regarding services to individuals and meter-reading services, Veolia Water and Dalkia offer household services in France through Proxiserve and Domeo, jointly held subsidiaries that provide assistance and maintenance relating to water, heating and gas services.
While we provide services around the world, our largest market is Europe and, to a lesser extent, the United States. In 2004, we generated approximately 54.5% of our revenues in France, 28.5% in the rest of Europe, 9.0% in the Americas and 8.0% in the rest of the world, including 4.7% in the Asia-Pacific region. We are not materially dependent upon any particular customer.
Our Overall Strategy
Our strategy is to strengthen our position as a worldwide provider of integrated environmental services, by capitalizing as fully as possible on the growth potential of the environmental services market and by improving margins, while at the same time fulfilling client needs and fostering the durability of natural resources. This strategy relies on our expertise regarding contractual models, our general know-how and our competitive advantages.
One business: environmental services
We are a worldwide provider of environmental services, concentrating in four areas in particular: water, waste management, transportation and energy services. We have made a strategic choice to concentrate only in these areas and to focus fully on our environmental services business. For instance:
since 2000, we have decided not to be present in the primary energy production market, in order to focus more fully on providing services to clients that help to optimize their energy consumption;
in 2004, we finished disposing of our industrial assets in the water sector (mostly in the United States) relating to equipment production and the short-term service activities generated thereby;
in 2004 as well, we sold our minority interest in FCC, a Spanish company whose activities include construction and cement services, as well as other services related to the environment.
A long-term commitment
Our strategy consists of capitalizing on our ability to establish effective, long-term relationships with clients, an ability that we have demonstrated for more than 150 years with respect to our water distribution contracts with public authorities, and over the past few decades with respect to our other activities. In addition, we seek to develop our presence in countries where conditions are favorable, and to offer services adapted to the needs of non-public clients, in particular industrial companies.
Public authorities seeking to improve the environment for citizens must be able to rely on a partner that can develop a long-term presence in an area, who can permanently improve the functioning, for example, of a water treatment or production facility, a waste incineration or landfill facility, or an urban heating network, or who can manage the public transport network of an area, with the utmost concern for issues of security, cleanliness and the rights of employees.
Long-term contracts adapted to the needs of each client
We have developed a high level of expertise with respect to managing contracts across our four divisions, which allows us to commit ourselves to clients over the long-term. Our main contracts last anywhere from a few years to several decades; an example of the latter is the 50-year contract entered into with the municipality of Shanghai during 2002. Over the past several years, we have demonstrated our ability to adapt contracts to a variety of constraints in countries around the world involving a broad range of services.
Long-term contracts provide a measure of visibility both to our clients and shareholders. For clients, whether they be public authorities or commercial or industrial companies, long-term contracts can also provide efficiency gains by providing them with a real partner for the future. Long-term contracts can lead to improvements in performance and productivity as part of a strategy that integrates, in addition to local factors, technical, labor and management considerations and, if necessary, financing of required infrastructure or investments. Industrial and commercial companies that enter into such long-term partnering relationships are able to focus their resources on their core businesses by relying upon a specialized service provider. Our large range of skills and experience ideally positions us in the market for outsourcing of environmental services. Further, we can adapt our contracts and our services to meet specific client needs.
We therefore strive to provide our services under long-term contracts, which can provide a recurring revenue flow to our company over the course of several years. At the same time, we work to improve the profitability of our contracts over time, through consistent efforts aimed at optimizing operating performance.
Strong financing capability
We know how to partner with clients in order to help them finance required infrastructure, investments and other work, made possible through long-term contracts and optimized operating performance. Accordingly, we have the ability, in particular through forming new partnerships and obtaining third-party financing, to help our clients realize their more ambitious projects. Such projects typically would involve the water, waste management and energy services sectors, and will often lead to a lasting improvement in the environment. At the same time, we have been able over the past several years to successfully realize our strategy for reducing net debt, despite this willingness to partner with clients for all of their financing needs.
Continuous research efforts
Our activities require substantial technical knowledge. The mastery of water production and treatment, along with the mastery of waste treatment and the development of increasingly efficient energy management, all require specialized teams whose skills are constantly expanding. We have implemented a research program for all of our activities pursuant to which high-level researchers are currently preparing for our companys future. These researchers are in direct contact with our operating teams so that clients can benefit from the latest technological developments.
Strong presence of operating teams on the ground
In addition to tailoring our contract provisions to the specific needs of each client, we also tailor our services to each client on an ongoing basis. Through call centers, our operating teams are quickly informed of any required responses.
In crisis situations, our operating teams have consistently shown their professionalism, commitment and solidarity, whether it be during the floods in Prague in 2003 or during the aftermath of the tsunami that struck southeast Asia on December 26, 2004.
In an original way then, we combine the advantages of being a world leader with the ability to develop a local foothold for each of our operations.
Targeted international development
The needs of our planet in matters relating to the environment are significant. Numerous countries suffer from poor water quality, uncontrolled pollution, inefficient energy consumption and poor traffic conditions; accordingly, the need for skills in these sectors is significant. The opening of countries in Eastern Europe has amply demonstrated this. The opportunities for long-term growth in our business are therefore extensive.
Within this context, our strategy is to actively, yet carefully, develop our activities internationally. We currently conduct nearly half of our activity outside of France. Considering the growing needs in the area of environmental services, we are in a position to pursue international growth selectively, by focusing on areas of strong economic development and countries where acceptance of our business model and the ability to fulfill long-term contractual commitments is most pronounced.
While pursuing growth in France and in Western Europe, we also seek to develop our business:
in the countries of Central and Eastern Europe, which are new entrants into the European Union;
in certain targeted Asian countries, in particular China, where there is a significant need for services related to urban growth and compliance with environmental standards; and
in large markets still mostly closed to management by environmental services companies like ours, such as the United States or Japan, whose medium-term potential is still important.
In 2000, we also created Proactiva, a subsidiary held jointly with FCC, in order to coordinate the development of our and FCCs water and waste management activities in Latin America and the Caribbean.
Our solid international presence accordingly allows us to partner with our industrial clients around the world, while providing uniform quality service.
Development in the industrial sector
We have developed recognized expertise in the industrial sector, and are capable of offering our industrial clients on five continents the entire range of our environmental services in the areas of water, waste management, energy services and transport. The complementarity of our various services, a strong attribute, allows us to satisfy all of our industrial clients environmental needs. Our three key strengths with respect to our industrial client service offerings are:
our ability to furnish the entire range of energy services necessary for the functioning of industrial processes, in particular energy fluids (steam, water, compressed air, etc.);
our ability to control the environmental impact of liquid, solid and gaseous waste;
our ability to accompany industrial clients around the world, thanks to our presence in nearly 80 countries and our experience in performing multiservice contracts.
We currently view ourselves as the natural choice as privileged partner of industrial clients for all of their environmental service needs. Joining with industrial clients in their development, offering them innovative outsourcing solutions and building mutually beneficial and environmentally sound partnerships are at the heart of our ambitions for the future.
Rigorous management adapted to business needs so as to protect shareholder interests
A constant effort to improve the return on capital employed is a key factor in ensuring the sustainability of our development strategy, as well as the promotion of shareholder interests.
Structurally, our activities allow results and cash flows to be estimated with some accuracy. We may therefore enter into contracts that call for us to finance certain investments. However, our operating and financial teams undertake new projects selectively, after having analyzed all of the risks involved. Further, these teams attempt to use debt leverage effectively in order to optimize the return on capital employed in the interest of shareholders.
The favoring of organic growth, the frequent search for financial partners to help finance new developments and our strong market position all help to contribute to realization of these objectives.
Focus on sustainable development
Sustainable development is part of the very nature of our activities. It is for this reason that we have made it a part of our development strategy. We partner with clients on a long-term basis in order to satisfy fundamental population needs, through an offering that seeks balanced development over the long-term.
We have also attempted to impose this culture of responsibility and solidarity on our corporate management structure, by favoring internal mobility, enrichment of skills and recognition of professional accomplishments.
The constant pursuit of these values means that we are currently well-positioned to respond to the needs and expectations engendered by the strengthening of environmental and health standards, as well as the increased sensitivity of the public, elected officials and industrial companies to environmental issues.
Our Strategy by Division
Through our specialized subsidiary Veolia Water, we seek to continue to develop our water services throughout the world. While doing so, we strive to ensure the safety of drinking water, the conservation of natural resources and the protection of the environment.
The market for water services has the potential to grow worldwide, supported by four factors in particular:
population growth and higher urban density,
the strengthening of environmental and sanitary norms and regulations,
the growing acceptance of private sector operators as an alternative to public management, and
the attempt by industrial clients to refocus on their core businesses.
Given this growth potential, we will selectively pursue our development in the water sector in order to optimize our use of resources, our operating costs and our profitability. Further, Veolia Waters technical expertise, research and development efforts and mobilization of local teams on the ground, combined with the restructuring it recently conducted to focus on its core activities, should all help enable it to take advantage of this favorable market environment.
The success of Veolia Waters new commercial offers in France during 2004 (analysis of the softness of bathing water, new methods for recovering sludge and non-collective wastewater treatment, etc.) also demonstrates Veolia Waters ability to expand the scope of its services within the water sector. Continued development, together with the maturing of larger contracts and gains in productivity resulting from efficiency programs launched in 2003 (relating to purchases, information systems and sharing of best practices) should help support an improvement in the water divisions operating income for 2005 and beyond.
Through our specialized subsidiary Onyx, we seek to pursue our development as one of the world leaders in the waste management sector. As is the case with our other businesses, the waste management sector is showing signs of consistent and lasting demand, which has been reinforced by the tightening of environmental rules and regulations coupled with increased public demand in a number of countries. As a result, capable experts who can provide services under cost-effective conditions and in accordance with environmental regulations are becoming more highly sought after.
Within this favorable market environment in Europe, the United States and the Asia-Pacific region, we have the following priorities for our waste management division:
developing its waste treatment capabilities and widening its technological lead in waste treatment and recovery;
strengthening the offering to industrial clients by capitalizing on its mastery of the entire waste management chain, while seeking to generate synergies with our other operating divisions;
increasing the profitability of its activities by renegotiating tariffs, maximizing productivity and reducing structural costs; and
ensuring that all of its activities contribute to the development of high value-added services.
Through our specialized subsidiary Dalkia, we seek to become the uncontested European leader in the energy services sector. In 2000, we entered into a strategic partnership in the energy services sector with EDF, a European leader in the production, distribution and sale of electricity, in order to be able to offer clients comprehensive energy services at the best possible price.
The opportunities in the sector are significant, due in particular to the opening of energy markets in Europe and the rapid development of countries in Central and Eastern Europe.
Our strategic priorities are focused in four main areas:
deploying our service offerings in the deregulated energy markets of Europe;
developing our activities in the area of large heating networks, particularly in France and the rest of Europe, as we have done so successfully over the past few years in Poland and the Czech Republic;
developing our service offerings to industrial clients through the use of innovative technical solutions, often bringing together several of our skills in connection with an integrated service offering; and
promoting our integrated outsourcing services to public clients as we have done in the commercial and industrial sectors, by combining optimized services for facilities management (heating, air-conditioning, utilities, electricity, lighting).
Finally, we are also developing energy services in areas outside of Europe, notably in Latin America, Asia and the United States, which offer long-term opportunities for growth.
Through our specialized subsidiary Connex, we seek to be the leading European private operator of public transportation services in Europe.
Between 2000 and 2020, the proportion of the world population living in urban areas is expected to increase from 50% to 60%, and urban transport needs are expected to increase by 50% (source: International Association of Public Transport). These demographic changes will likely increase concerns relating to the environment and urban congestion, with public transportation services constituting a foremost concern for the local authorities and inhabitants of large cities. Accordingly, such changes should help to support Connexs future development strategy.
Our challenge in the transportation market is to carefully control our development, by anticipating risks and identifying the priority areas for growth. We have therefore chosen to consolidate our presence in France and the rest of Europe, by profiting from the opening of various European markets to regulated competition.
In Europe, the markets in Germany, Spain, Italy and Central Europe in the area of railway transport in particular appear promising, while France appears a promising market as well in the longer term. North America and Australia are also priority areas for growth, and we are carefully considering the market potential in China and Latin America, due to the opportunities they may present for the transportation division. Finally, we should be able to expand our rail freight transport activities in the wake of European Union legislation that has authorized the opening of such markets.
Our company is a unique actor in the field of services related to the environment, offering a comprehensive array of services. We have the expertise, for example, to supply treated water and to recycle wastewater at a customers facility, to collect, treat and recover waste generated in the facility, and to supply heating and cooling services and optimize industrial processes used in such facility, all in an integrated service package designed to address the customers unique circumstances.
Our operations are conducted primarily through four divisions, each of which specializes in a single business: Veolia Water (water), Onyx (waste management), Dalkia (energy services) and Connex (transportation). Through these divisions, we currently provide water to approximately 100 million people, treat more than 51.7 million tons of waste, satisfy the energy requirements of hundreds of thousands of buildings for our industrial, municipal and individual customers and transport nearly 2 billion passengers per year. We strive to offer services to clients that span across our four divisions, which are either packaged in the form of a single multiservices contract, or negotiated separately in the form of several contracts.
The following table breaks down our consolidated revenue for 2004 by geographic market and division, after elimination of all inter-company transactions.
On December 31, 2004, Veolia Environnement applied the provisions of Article 23100 of French CRC Regulation 99-02, which allows companies to report their share in the net income of businesses sold during the year on a separate line item of the income statement. These businesses are excluded from the new scope of consolidation and therefore no longer contribute to consolidated revenues for the fiscal year in which they were sold. For the 2004 fiscal year, these businesses included FCC, Culligan and USFilter Corporations equipment and short-term services businesses.
The dates set forth below relating to new contracts we have won or renewed correspond to the date of announcement or signing of such contracts, or to the date of our commencement of operations under such contracts, depending on the circumstances.
Through our water division, Veolia Water, the lead company of which is Compagnie Générale des Eaux, we are the worlds leading provider of water and wastewater services for public authorities and industrial companies. Further, Veolia Water is the world leader in the design of technological solutions and the construction of structures necessary to perform such services. With approximately 67,800 employees around the world (as of December 31, 2004, and including Proactivas 1,633 employees who are active in water activities), Veolia Water serves more than 100 million people around the world and operates more than 5,000 contracts. Veolia Water has a permanent presence in more than 60 countries, principally in France for historical reasons, but also in the United Kingdom, Germany, Italy, Belgium and the Netherlands. It is pursuing targeted growth in Eastern Europe, where it has enjoyed commercial success in recent years, in particular in the Czech Republic and Romania. Asia (China, South Korea and Japan) also remains a long-term target for development following the win of significant contracts in the region during the past two years.
With a portfolio of more than 600 patents and a network of research centers in France and abroad employing more than 300 engineers, Veolia Water has mastered numerous technologies and tools within the water sector. As a result, Veolia Water is able to offer highly skilled services in the areas of sanitary protection, spillage reduction, productivity enhancement of water networks and plants and resource preservation. Combined with an extensive geographical presence and more than 150 years of experience in the provision of services to public authorities and industrial clients, Veolia Waters technical aptitude provides it with a unique advantage in the water services market, which is growing increasingly competitive.
Increased demand within the water services market has been driven substantially by clients seeking to optimize the management of their existing resources, whether they be public authorities seeking to respond to the trend towards urbanization or industrial clients. New solutions, such as desalination or re-use of treated water, may also be called for depending on an individual clients circumstances.
The following table shows the consolidated revenue and operating income before amortization and depreciation of goodwill and indefinite life intangible assets and restructuring costs (EBIT) of our water operations in each of the last three fiscal years, after elimination of all inter-company transactions.
Includes Veolia Environnements share in the results of the water activities of Proactiva, Veolia Environnements joint venture with FCC. Results of the water activities of Proactiva were 100% consolidated in 2002, 2003 and the first half of 2004, and then 50% consolidated in the second half of 2004 following the sale of Veolia Environnements interest in FCC. For purposes of the 2003 pro forma figures, results of the water activities of Proactiva were 50% consolidated.
On December 31, 2004, Veolia Environnement applied the provisions of Article 23100 of French CRC Regulation 99-02, which allows companies to report their share in the net income of businesses sold during the year on a separate line item of the income statement. These businesses are excluded from the new scope of consolidation and therefore no longer contribute to consolidated revenues or EBIT for the fiscal year in which they were sold. For the 2004 fiscal year, these businesses included, in the water division, Culligan and USFilter Corporations equipment and short-term services businesses.
Pro forma figures exclude the results of North American assets sold in 2003 and 2004 (i.e. Surface Preparation, Everpure, Culligan and USFilters short-term equipment and short-term services activities) and FCC (leading Proactiva to be proportionally consolidated at 50%, in lieu of full consolidation).
Overview of Veolia Water
Veolia Water manages municipal drinking water and/or wastewater services on five continents thanks to a geographical organization with a strong local presence. Contracts with public authorities are typically long-term and range from 10 to 20 years in length, but may extend up to 50 years in certain circumstances. These contracts take various forms, all adapted to the needs and goals of the public authority, and may include outsourcing contracts, public-private partnerships, concessions, BOT (Build, Operate & Transfer) contracts, DBO (Design, Build & Operate) contracts and others (discussed further under Contracts below). They are generally contracts that involve the operation, design or construction of installations, with the public authority remaining the owner of assets (except in the United Kingdom and Chile) and the head of water policy. Further, recent legislative changes will allow us to integrate more elaborate mechanisms into our contracts to address increases in value produced under the contract and the division thereof (e.g., productivity gains, improvement in the level of services, etc.), which will directly benefit the consumer as the end user of services. Veolia Water is often asked by public authorities to manage relations with consumers, and has developed specific services and information systems in order to do so.
In certain countries where public authorities wish to either implement new water and wastewater treatment systems or improve the functioning of existing ones, Veolia Water also offers feasibility studies and technical assistance, which may include research plans, network modeling and financial analysis.
Veolia Waters outsourcing contracts with industrial and commercial customers generally last from 3 to 10 years, although certain contracts have terms of up to 20 years. Relying on technologies designed and developed by Veolia Water Systems/OTV (a subsidiary specializing in technological solutions) in responding to the particular needs of the industrial market, Veolia Water not only designs and completes customized projects for industrial clients but offers them standardized solution kits as well. A large range of associated services, such as after-sale service, operational assistance, expert consultation and training, may also complement Veolia Waters offerings.
Service Contracts for Public Authority and Industrial Clients
The main focus of our water business is on water and wastewater management services for public authorities and industrial clients. Veolia Water provides integrated services that cover the entire water cycle, from collection from natural sources, treatment, storage and distribution of water, to collection, decontamination of wastewater and return to natural resources. Veolia Waters activities include the design, construction, management and operation of large-scale, customized drinking water plants, wastewater decontamination and recycling plants, drinking water distribution networks and wastewater collection networks. Veolia Water also provides services to end users relating to water and wastewater treatment.
Veolia Water 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 adapted to local environments. Currently, Veolia Water and its subsidiaries are attempting to capitalize on the worldwide trend towards delegated management of municipal drinking water and wastewater treatment services.
In France, Veolia Water operates in over 8,000 municipalities under the name Générale des Eaux, supplying water to more than 26 million people and treating wastewater generated by more than 17 million people.
Générale des Eaux continues to develop its service offerings for industrial clients through its regional organization, and has accordingly developed a presence in the United Kingdom, Germany and the Czech Republic, as well as a presence in Asia and South Korea in particular. Veolia Water also contributes within VE Industries to the development of common service offerings of the Group, in particular in Europe (as discussed further below under Development of Synergies: Multiservice Contracts to Benefit Industrial and Commercial Clients).
Engineering and Technological Solutions for the Treatment of Water
Through Veolia Water Systems, Veolia Water is one of the worlds leading designers of technological solutions and of the construction of facilities necessary to provide water services on behalf of public authorities and industrial and commercial clients. Veolia Water treats groundwater, surface water, brackish or sea water, wastewater and refined sludge. Thanks to the combination of physical, chemical or biological treatments, Veolia Water develops a complete range of differentiated solutions for the purification of water or the reduction or elimination of impurities in effluents. Veolia Waters recycle/re-use systems provide customers with the ability to circulate part or all of their treated water back into plant processes, thereby reducing their water usage, operating costs and environmental damage.
In addition, Veolia Water designs, assembles, manufactures, installs and operates modular standardized and semi-standardized water and wastewater equipment and systems designed to treat water for municipal and industrial uses. A local technical assistance network is available at all times for the upkeep, maintenance and after-sale service of these installations.
Through SADE, Veolia Water also designs, builds, renovates and recovers urban and industrial potable water and wastewater networks and conducts related work in France and around the world. SADEs services cover each stage of the water cycle, from its collection to its release, and its public and industrial customers benefit from SADEs experience in this domain.
Description of Activities in 2004
Veolia Water achieved solid revenue growth during 2004, within a context in which weather conditions returned to normal in Europe. It achieved this growth despite the reduction in revenues resulting from the restructuring of its activities in the United States (sale of equipment and short-term services businesses, commercial services and services to individuals).
Business was helped by a high level of contract renewal in France, sustained internal growth outside of France and new large projects in Asia. In 2004, Veolia Water won and/or renewed contracts representing expected total cumulative revenues of approximately 3.7 billion euros.
In France, public authorities continued the trend seen over the past few years of outsourcing the management of public services to private operators. Accordingly, the award of new outsourcing contracts to Veolia Water and amendments to existing contracts so as to enlarge the scope of services provided thereunder managed to compensate for any loss of revenue that occurred due to public authorities deciding not to renew contracts in favor of direct management. In addition to the new contracts it won in 2004, Veolia Water renewed more of its contracts due to expire in 2004 than it did in 2003 (based on 2004 revenues), demonstrating the confidence of public authorities in Veolia Waters services.
Contracts renewed in 2004 represent expected total cumulative revenues of more than 730 million euros. Among the most important contracts renewed were those involving the cities of Rennes and Chartres (France). At the same time, Veolia Water lost 39 contracts (compared to 53 in 2003), representing approximately 0.15% of annual revenues from delegated public service management contracts in France.
In the rest of Europe, growth was strong generally but especially so in Germany, where at the end of 2004 Veolia Water acquired the water services company Stadtwerke in Braunschweig (Lower Saxony), and otherwise pursued its development on behalf of public authorities and industrial clients (either individually or through multiservices contracts signed with VE Industries). In the Czech Republic, Veolia Water signed a water management with Compagnie des Eaux de Kladno-Melnik (Central Bohemia), as well as a contract with a public
water company in eastern Moravia involving the production and distribution of drinking water and the collection and treatment of wastewater.
In the United States, Veolia Water renewed approximately ten municipal contracts. It also won a contract that involves management of wastewater services for the islands of St. Thomas and St. Croix, and a significant extension of its contract with the city of Richmond in California.
In China, public authorities continued to award the Group delegated management contracts to improve and operate their sites. The most important contracts involved the cities of Hohhot, ZunYi and Weinan.
Finally, Veolia Water Systems design and construction activity for new installations made significant progress during 2004, notably in France, the Netherlands and Russia. Further, in the area of construction and rehabilitation of urban and industrial networks, Veolia Water Systems enjoyed strong development, in particular in Romania and Hungary.
The following table shows the principal contracts signed or renewed in 2004 with either public authorities or industrial or commercial companies.
Acquisitions and Divestitures in 2004
In 2004, we completed implementation of our policy adopted in 2000 to refocus our operations on our core water businesses. In the United States, we completed the sale of our Culligan business to the private equity firm Clayton Dubilier & Rice for total consideration of US$612 million in cash, as well as the sale of USFilter Corporations equipment and short-term services businesses to Siemens for US$1,015 million, before price adjustments. Veolia Waters divestments worldwide generated proceeds of €1.6 billion in 2004 (€1.3 billion in the U.S.).
In addition, Veolia Water integrated 33 companies into its group in 2004, of which 9 companies were located in France and 24 companies outside of France. Veolia Water also divested 33 companies in 2004, in addition to the divestitures previously mentioned (71 companies in the U.S.).
At the end of 2004, Veolia Water Systems finalized the acquisition of two companies, Wabag (now known as Krüger Wabag) and Elga Berkefeld, which provide technological water treatment solutions in Germany.
As of December 31, 2004, Veolia Waters group included 524 companies (compared to 595 in 2003), of which 452 companies were fully consolidated, 65 companies were proportionally consolidated and 7 companies were accounted for under the equity method.
Through our waste management subsidiary, Onyx, we are the second largest operator in the world (in terms of revenue) in the area of waste collection, recycling and treatment. Onyx is the only company that handles waste in all its forms and at all stages of activity. For example, Onyx manages liquid and solid waste and non-hazardous and hazardous waste (with the exception of nuclear waste) from collection to energy recovery, on behalf of both public authority and industrial clients.
With approximately 78,700 employees around the world (as of December 31, 2004, and including Proactivas 6,993 employees who are active in waste management activities), Onyx operates in 34 countries. Onyx has partnered with more than 348,000 industrial and commercial clients1 and serves nearly 50 million inhabitants on behalf of public authorities.
During 2004, Onyx collected more than 32 million tons of waste and treated more than 51 million tons of waste (of which 48.4 million tons were non-hazardous household and industrial waste and 3.3 million tons were hazardous waste). As of December 31, 2004, Onyx managed approximately 630 waste treatment units.
The duration of Onyxs waste management contracts usually depends upon the nature of the services provided, applicable local regulations and the level of capital expenditure required under the contract. Collection contracts usually last from 1 to 5 years, while treatment contracts can range from 1 year (for services provided on sites belonging to Onyx) to 30 years (for services involving the financing, construction, installation and operation of new infrastructure).
The following table shows the consolidated revenue and operating income before amortization and depreciation of goodwill and indefinite life intangible assets and restructuring costs (EBIT) of our waste management operations in each of the last three fiscal years, after elimination of all inter-company transactions.
Includes Veolia Environnements share in the results of the waste management activities of Proactiva, Veolia Environnements joint venture with FCC. Results of the water activities of Proactiva were 100% consolidated in 2002, 2003 and the first half of 2004, and then 50% consolidated in the second half of 2004 following the sale of Veolia Environnements interest in FCC. For purposes of the 2003 pro forma figures, results of the waste management activities of Proactiva were 50% consolidated.
Results of the waste management activities of Proactiva have been 50% consolidated for purposes of the 2003 pro forma figures, to reflect the sale of FCC during 2004 (leading Proactiva to be proportionally consolidated at 50%, in lieu of full consolidation). Actual 2003 figures reflect 100% consolidation of the waste management activities of Proactiva.
Overview of Waste Management
Onyx furnishes waste management and logistical services, which include waste collection, waste treatment, cleaning of public spaces, offices and factories, maintenance of production equipment, treatment of polluted soil, and management of waste discharge at industrial sites.
In addition, Onyx conducts basic or more complex waste treatment operations in order to reduce pollution and transform waste for the following uses:
Onyx sorts and treats waste in order to create new primary materials, otherwise referred to as recycling or material recovery;
Onyx transforms organic material into compost to be returned to the soil, otherwise referred to as composting or agronomic recovery;
Onyx returns waste to the natural environment in the least damaging way possible, through landfilling or incineration;
Onyx produces electricity or heat through landfilled or incinerated waste, otherwise referred to as waste-to-energy recovery.
1 The commercial figures provided in this section (in terms of number of clients, number of inhabitants served, tons of waste collected, etc.) do not take into account Proactivas activities, unless otherwise indicated.
The services referred to above fall into one of three large categories of activity conducted by Onyx:
waste management services and logistics for local authorities and industrial companies;
sorting and recycling of materials; and
waste recovery and treatment through composting, incineration and landfilling.
Waste Management Services and Logistics for Local Authorities and Industrial Companies
Maintenance of Public Spaces and Urban Cleaning
Onyx provides urban cleaning services in a large number of cities throughout the world, including London (U.K.), Paris (France), Alexandria (Egypt), Rabat (Morocco), Singapore and Chennai (India). Onyxs services include mechanized street cleaning and treatment of building facades.
Cleaning and Maintenance of Industrial Sites
Onyx provides cleaning services to its industrial and commercial clients installations, including cleaning of offices and maintenance of production lines. In the commercial sector, it provides these services in train stations, subway networks, airports, museums and commercial centers.
In the industrial sector, cleaning services extend to food-processing plants, heavy industry and high-tech sites, where Onyx offers specialized cleaning services (high pressure or extreme high pressure cleaning). Onyx also offers cryogenic cleaning, and reservoir cleaning at refineries and petro-chemical sites in particular. Finally, Onyx has developed emergency services to treat site contamination upon the occurrence of an accident or other incident.
Liquid Waste Management
Through its subsidiary SARP, Onyx provides liquid waste management services that consist primarily of pumping and transporting sewer network liquids and oil residues to treatment centers. Onyx can also provide services following accidents and other incidents involving liquid waste.
Onyx has developed liquid waste management procedures that emphasize environmental protection, such as the on-site collection, recycling and reuse of water during the provision of its liquid waste management services. Used chemicals, which are hazardous to the environment, are collected before treatment and transferred to one of Onyxs subsidiaries that is specialized in the management of hazardous waste.
Treatment of Polluted Soil
Land redevelopment and the expansion of residential or commercial areas may occur in areas where the soil has been polluted through prior use. Onyx has specific techniques for treating each site, which include treating polluted soil and rehabilitating temporarily inactive industrial areas, cleaning up accidental spills and restoring active industrial sites to be in compliance with applicable environmental regulations.
In 2004, Onyx collected approximately 32.8 million tons of waste on behalf of individuals, local authorities and commercial and industrial sites. More than 50 million people around the world benefited from Onyxs waste collection services in 2004.
Onyx collects household waste through door-to-door pickup or through pickup at designated drop-off sites, and collects commercial and non-hazardous industrial waste. It maintains the cleanliness of green spaces and carries away green waste, such as dead leaves and grasses.
Onyx also collects hazardous waste on behalf of its commercial and industrial clients, including hospital waste, laboratory waste and oil residue (ships, gas stations and drilling platforms). In 2004, Onyx collected approximately 1.7 million tons of hazardous waste.
Onyx offers related services to its commercial and industrial clients, such as preliminary studies of future waste collection needs and waste tracking after collection.
Transfer and Grouping of Waste
When waste is of the same type, it is transported either to transfer stations in order to be carried in large capacity trucks, or to grouping centers where it is separated by type and then sorted before being sent to an adapted treatment center. Hazardous waste is usually transported to specialized physico-chemical treatment centers, recycling units, special industrial waste incineration units or landfills designed to receive inert hazardous waste.
Sorting and Recycling of Materials
Onyx treats waste with a view towards reintroducing such waste into the industrial production cycle. Onyxs recycling activities generally involve the selective collection of paper, cardboard, glass, plastic, wood and metal that customers either separate into different containers or mingle with other recyclable materials. As the use of separate containers has become more widespread, selective collection services have become well developed.
Onyx received approximately 7 million tons of solid waste at its 219 sorting and recycling units in 2004, of which 4.8 million tons were recovered, including 2 million tons of paper. Onyx also provides decomposition services for complex waste products at specialized treatment centers, such as electric and electronic products and fluorescent lamps. Onyx works in partnership with upstream industrial customers and with our companys CREED research center in order to develop new recycling activities. Onyx sells or distributes recycled material to intermediaries or directly to industrial and commercial clients.
Onyx designs and develops recycling systems that enable its industrial and commercial customers to optimize their production chains by reusing certain waste by-products generated in the manufacturing process, thereby reducing waste management costs.
Waste Recovery and Treatment through Composting, Incineration and Landfilling
In 2004, Onyx treated nearly 52 million tons of waste in its sorting and recycling centers, composting units, hazardous waste treatment centers, incineration units and landfills.
Composting and Recovery of Organic Material from Fermentable Waste
Onyx and Veolia Water work together to recover sludge from wastewater treatment plants. In 2004, Onyx recovered almost 1.8 million tons of waste at its 97 composting units. 198,000 tons of urban and industrial sludge were reintegrated by Onyx into the agricultural cycle through manure spreading.
Onyxs Biodiv service includes an adapted container offer for the frequent collection and nearby composting treatment of organic waste produced by industrial companies, while guaranteeing the complete traceability of waste from its collection to its recovery in the form of high quality compost.
Waste-to-Energy and Incineration
Onyx treats approximately 9 million tons of non-hazardous solid waste (consisting mainly of urban waste) per year at its 65 waste-to-energy recovery and incineration plants. Energy is generated from the heat created by incinerating waste at these plants. Onyx uses this energy to supply district thermal networks or for sales to electricity providers. Waste-to-energy recovery is often the favored treatment solution in areas of high population density where there is insufficient space to construct landfills.
Landfilling and Energy Recovery from Waste
In 2004, Onyx treated approximately 30.3 million tons of non-hazardous waste in 147 landfills. Onyx has developed the expertise to treat waste through methods that reduce emissions of liquid and gas pollutants. Onyx currently has 118 landfills that accept or have accepted biodegradable waste and that are equipped to retrieve and treat biogas emissions from the anaerobic fermentation of waste, of which 48 landfills have recovery systems to transform biogas emissions into alternative energies.
Treatment of Hazardous Waste
In 2004, Onyx treated 3.3 million tons of hazardous waste, of which 901,000 tons were incinerated in 18 incineration units for specialized industrial waste, 696,000 tons were landfilled in 8 class 1 landfills and 1.5 million tons were treated in 46 units by physico-chemical or stabilization methods. The remaining 273,000 tons were treated in 28 specialized recycling centers.
The principal methods used for treating industrial hazardous waste are incineration (for organic liquid waste, salt-water and sludge), solvent recycling, waste stabilization followed by treatment in specially designed landfills, and physico-chemical treatment of inorganic liquid waste.
Through its specialized subsidiaries SARP Industries and Onyx Environmental Services (in the United States), Onyx has a worldwide network of experts enabling it to become one of todays world leaders in treating, recycling and recovering hazardous waste.
Description of Activities in 2004
Among the commercial developments marking the year 2004 were the following:
In France, Onyx inaugurated a new waste landfill at Espira-de-lAgly in the eastern Pyrenees. During the past 18 months, Onyx has created 14 million cubic meters of landfilling capacity for household and related waste in France. Further, Onyx unveiled DIGITALE in June, a new generation sorting facility located in Rilleux-la-Pape (northern Lyon). Highly automated and mechanized, this facility will allow 30,000 tons of selected waste to be treated per year.
In the United States, Onyx North America began operating under a contract that involves the collection, management, transfer and treatment of household and commercial waste in Pontiac, Michigan over a period of 20 years. In addition, Onyx North America signed a 3-year contract (renewable for 2 years) that involves the maintenance and cleaning of ten chemical and refining sites of British Petroleum (BP) located in eight different U.S. states. This contract was awarded just a few months after the win of a similar contract with BP in Germany, and the signing of a contract for industrial cleaning in the United Kingdom.
Onyx negotiated a 10-year extension of a contract for the operation, maintenance and management of a waste-to-energy recovery facility in Miami-Dade County (United States), currently the largest incineration facility with energy recovery capability in the world. Onyx also negotiated a 5-year extension of an integrated waste management contract with the city of Sheffield in the United Kingdom.
The following table shows the principal contracts signed or renewed in 2004 with either public authorities or industrial or commercial companies.
Acquisitions and Divestitures in 2004
In 2004, changes in Onyxs group of companies (acquisitions and divestitures) were limited in number and impact, having no material effect on Onyxs consolidation scope. In total, net changes in the scope of consolidation accounted for less than 0.2% of Onyxs consolidated revenues.
Dalkia, our energy services division, is the leading European provider of energy services to companies and municipalities. Dalkia provides services relating to heating and cooling networks, thermal and multi-technical systems, industrial utilities, installation and maintenance of production equipment, integrated facilities management and street lighting. It seeks to profit from opportunities relating to the opening of gas and electricity markets in Europe, as well as from the increased preoccupation with sustainable development. Dalkia becomes a partner to its clients, helping them to optimize their energy purchases, improve the energy efficiency of their installations (both in terms of cost and atmospheric emissions) and profit from the trade in carbon dioxide emission licenses. With approximately 43,300 employees around the world (as of December 31, 2004), Dalkia has a permanent presence in nearly 38 countries, located principally in France and the rest of Europe.
Dalkia is partly owned by Electricité de France (EDF), which holds 34% of its share capital and with which Dalkia is developing joint international offerings for international customers and eligible clients in France (i.e., those that have the right to choose their electricity supplier freely, which currently includes all clients other than individual households). Dalkias French operations are conducted through Dalkia France, a wholly-owned subsidiary of Dalkia. Outside France, Dalkia conducts its activities through Dalkia International, in which it holds a 76% interest and EDF holds the remaining 24%.
The following table shows the consolidated revenue and operating income before amortization and depreciation of goodwill and indefinite life intangible assets and restructuring costs (EBIT) of our energy services operations in each of the last three fiscal years, after elimination of all inter-company transactions.
EBIT represents operating income before amortization and depreciation of goodwill and indefinite life intangible assets and restructuring costs, which corresponds to operating income as defined by French CRC Regulation 99-02.
Overview of Energy Services
Dalkias activity focuses on optimal energy management. Dalkia has progressively established a range of activities linked to energy management, including heating and cooling systems, thermal and multi-technical services, industrial utilities, installation and maintenance of production equipment, integrated facilities management and electrical services on public streets and roads.
Dalkia provides energy management services to public and private clients with whom it has formed long-term partnerships. Dalkias contracts to operate urban heating systems are typically long-term, lasting up to 25 or 30 years, while its contracts to operate thermal and multi-technical installations for public or private clients may last up to 16 years. Contracts to provide industrial utilities services generally have shorter terms (6 to 7 years on average), while contracts in the facilities management sector generally last 3 to 5 years.
When possible, Dalkia offers its clients solutions utilizing renewable or alternative energy sources such as geothermal energy, biomass (organic material), heat recovered from household waste incineration, process heat (heat produced by industrial processes) and thermal energy produced by co-generation projects. A combination of energy sources may also be selected so as to take advantage of the complementarity of each source.
Heating and Cooling Networks
is one of Europes leading operators of large district heating
and cooling networks. Dalkia currently manages 620 district heating and
cooling networks in the world, particularly in France, the United Kingdom, Italy,
Germany, Eastern and Central Europe and the Baltic states. Dalkia does
not ordinarily own the networks it operates. Rather, in most cases, public
authorities own the networks and delegate to Dalkia.
the responsibility of managing, maintaining and repairing them. The networks operated by Dalkia provide heating, sanitary hot water and air conditioning to a wide variety of public and private facilities, including schools, health centers, office buildings and residences.
Thermal and Multi-Technical Services
Thermal services consist of operating heating, sanitary hot water and air conditioning systems to provide comfortable living and working environments, as well as improving the operation of existing systems to optimize their efficiency. Dalkia provides public, industrial and commercial customers with integrated energy services, which include installation design, construction and improvement, energy supply, installation management and maintenance. Dalkia provides customers with a large range of technical services and manages approximately 80,000 energy installations throughout the world.
Industrial Utilities, Installation and Maintenance of Production Equipment
Dalkia has become a leading provider of industrial utilities services in France and the United Kingdom. It has thereby developed expertise regarding the analysis of industrial processes, the enhancement of productivity and the operation, maintenance and servicing of equipment. Industrial utilities services generated 27.5% of Dalkias revenue in 2004.
In addition, Dalkia continues to pursue activities in a number of promising sectors, such as the maintenance of white rooms by Dalkia Technologies, a subsidiary of Dalkia. It specializes in the design and operation of controlled atmosphere rooms, and in electricity production through co-generation plants outside winter periods when tariffs are regulated.
Integrated Facilities Management
Facilities management contracts integrate a range of services, from thermal, electrical and mechanical equipment maintenance to logistics, into one global service. As a result, the client can meet its need for different services through one company. Dalkia provides facilities management services for its industrial or commercial customers (such as Coeur Défense or Canal+) at industrial, commercial, corporate office or health establishment sites.
Street Lighting Services
Citélum, a subsidiary of Dalkia, has acquired a worldwide reputation for the management of urban street lighting, the regulation of urban traffic and the lighting of monuments and other structures. In France, Citélum operates and maintains the lighting for the Paris beltway. Citélum also manages lighting and urban traffic for the city of Puebla in Mexico. During 2004 (The year of China in France), Citélum provided lighting services for the Eiffel Tower in Paris and the Forbidden City in Beijing.
Services to Individuals
Dalkia provides residential services to individuals through Proxiserve, a joint subsidiary of Dalkia and Veolia Water, including maintenance of heating, air conditioning and plumbing systems and meter-reading services.
Description of Activities in 2004
In 2004, Dalkia won contracts representing expected total cumulative revenues of more than 2 billion euros, among which the principal contracts are:
In Hungary, a contract for the construction of a new co-generation unit and provision of steam to Richter Gedeon Rt, the Hungarian leader in the pharmaceutical industry. This contract is expected to generate total revenues of approximately 80 million euros over a 6-year period.
In Sweden, a contract for the technical maintenance of all buildings (stations, garages, other real estate) of Jernhusen, a company which manages the real estate of Swedish railway companies. This contract is expected to generate total revenues of approximately 25.5 million euros over a 5-year period.
Italy, Dalkia was awarded a contract for energy and fluid management on behalf
of 34 hospitals and other care facilities in Rome and its suburbs for a period
of 8 years, expected to generate total revenues of approximately 430 million
euros during the entire period.
Dalkia renewed approximately 80% of its contracts due to expire in 2004, including a contract for the technical maintenance of infrastructure of the Stockholm metro for a period of 4 years (estimated total revenue of approximately €3.5 million), and a contract for the global maintenance of a part of SFR’s radio sites in France for a period of 3 years (estimated total revenue of approximately €30 million). In addition, Dalkia won a 20-year contract extension for the delegated management of urban heating networks in Dubravka, a district of Bratislava in Slovakia (estimated total revenue of approximately €50 million).
Dalkia lost contracts representing approximately 1.9% of its consolidated revenues. Among those not renewed were contracts with SMI Bourgogne and Rousselot, a facilities management contract with Synthomer in the United Kingdom and a contract ending upon the closing of Zuidpolders building in Delft, the Netherlands.
The following table shows the principal contracts signed or renewed in 2004 with either public authorities or industrial or commercial companies.
Acquisitions and Divestitures in 2004
In the Czech Republic, Dalkia Morava and Ekoterm combined to form Dalkia Ceska Republika in February 2004. In the United Kingdom, Dalkia created Sterience Ltd., a company specialized in the provision of decontamination and sterilization services relating to medical material. In March, Dalkia acquired the heating and power station of Poznan (ZEP Poznan). In December, Citélum, Dalkias subsidiary, created its first company in China (based in Shanghai) in partnership with the Oriental Pearl Group.
In total, over the course of 2004, Dalkia created or purchased 36 companies, and sold, liquidated or merged 34 companies. As a result, as of December 31, 2004, Dalkia held 365 consolidated companies, of which 165 were non-French.
Through our transportation division, Connex, we are one of the worlds leading private operators of ground transportation. Connex operates road and rail passenger transportation networks under contract with national, regional and local transit authorities. Connex has been managing and operating 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.
Connex estimates that the portion of the worldwide transportation market presently open to competition stands at €50 billion, and that the portion not yet open to competition (thereby offering development potential) stands at €250 billion. The opening of transportation markets that has occurred over the past several years has been particularly pronounced in Europe, but has occurred on other continents as well.
Moreover, the worldwide trend of population movement towards urban areas increases the need for collective transportation services, thereby strengthening the market potential of areas that Connex seeks to service.
At the end of 2004, Connex had approximately 61,300 employees around the world. It has a presence in nearly 25 countries, and conducts its activity mainly in Europe. While continuing to strengthen its position in France, Connex benefits from a strong presence outside of France as well, where it earns approximately 60% of its revenues. In 2004, Connex pursued development in Australia and North America, as well as in Germany and certain other central European countries. This has helped to offset the effects of the discontinuation of services in the United Kingdom, which occurred during 2004.
Connex estimates that it provided transportation to nearly 2 billion travelers in 2004, and that it managed contracts with approximately 5,000 public authorities.
The following table shows the consolidated revenue and operating income before amortization and depreciation of goodwill and indefinite life intangible assets and restructuring costs (EBIT) of our transportation operations in each of the last three fiscal years, after elimination of all inter-company transactions.
EBIT represents operating income before amortization and depreciation of goodwill and indefinite life intangible assets and restructuring costs, which corresponds to operating income as defined by French CRC Regulation 99-02.
Overview of Transportation
primarily operates road and rail passenger transportation networks under contracts
won through auction with various public authorities. The public authorities
with which Connex contracts generally own the heavy infrastructure Connex uses
and typically establish schedules, routes and fare structures for the networks
that Connex operates and manages. Connex primarily conducts its business
through outsourced management under conditions and structures that differ from
one country to another due to varying legal and regulatory requirements. Each
contract between a public authority and Connex outlines the relations between
the two parties, including payment to Connex and the risks to be borne by each,
and typically lasts for a set period. Because the fares Connex charges
passengers on its transportation networks are usually insufficient to cover
its costs, the public authority typically provides Connex with a payment or
other compensation for services rendered. Moreover, in the case of certain contracts,
Connex is paid a flat fee for its transportation services;
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consequently, it does not bear the risks associated with lower receipts or decreased passenger use (such contracts being referred to as Public Market contracts in France). Connexs management contracts generally last from 2 to 12 years.
Connexs activities can be broken down into four principal categories: (i) city transportation (urban, urban beltway and other supplementary transportation services), (ii) intercity and regional transportation, (iii) passenger information services, and (iv) industrial markets.
Connex operates a number of bus networks, suburban trains, tramways and metros and provides customized services as well. Connex is either partially or fully responsible for designing, planning and operating services, managing personnel, inspecting vehicles and stations it uses in its networks (including obtaining various permits), conducting marketing efforts and managing customer service.
In many urban areas, Connex provides interconnected bus, tramway, metro and train transportation services through a ticketing system coordinated by the principal transportation provider or transportation authority for a region. Connex also offers special integrated transportation services within networks managed by several different operators in an urban area, including the suburbs of Paris, Rouen, Saint-Étienne, Stockholm, Sydney and Düsseldorf, among others.
Connex operates ferry-boat services to complement its bus services in various urban areas. It does so in Toulon (France) and Göteborg (Sweden), for example.
Urban and Urban Beltway Transportation
In France, Connex operates the tramways, bus networks and light rail networks in Rouen, Saint-Etienne, Nancy and Bordeaux. Connex is also the operator of the bus networks in Nice, Toulon (where tramway infrastructure is currently being installed as well) and 40 other French cities. Connex has a strong presence in the Ile-de-France region, where it operates numerous bus lines. It is the main private operator in the region, operating the networks of Melun, Rambouillet, Argenteuil, St. Germain-en-Laye and Seine-Saint-Denis.
In Europe, Connex operates tramways and light rail networks in Görlitz and Berlin (Germany), Dublin (Ireland) and Norrköping and Stockholm (Sweden). Connex also operates the Stockholm metro, as well as bus lines in Scandinavia, Poland (Warsaw and numerous other cities), the Netherlands, Denmark (Copenhagen), the Czech Republic and Estonia.
Connex operates transportation services in several cities in Spain and Portugal through FCC Connex Corporación, which is jointly-owned by Connex and a subsidiary of FCC. Formed in 2002, FCC Connex Corporación consolidates certain of Veolia Environnements and FCCs transportation activities in Spain. Through this entity, Connex operates the Barcelona tramway and, as of October 15, 2004, the urban network for the city of Pampelune.
In the United States, Connex provides bus transportation services principally in the regions of Washington D.C., Baltimore and Los Angeles. Connex and its partners in the Massachusetts Bay Commuter Railroad Company (the Bombardier group and a local partner, ACI) also launched a contract for the management of suburban trains in the Boston area on July 1, 2003.
In Canada, Connex repurchased GVI in August 2004, a company that provides transportation services in the south suburbs of Montreal.
In Australia, Connex operates the entire suburban rail network of Melbourne as well as the monorail and light rail network of Sydney. Since October 2004, it has also been operating bus services in Perth, Brisbane and Sydney.
In the rest of the world, Connex operates through partnership with other operators a high-frequency right-of-way bus system (BRT: Bus Rapid Transit) in Bogota (Colombia) and bus lines in Israel and Lebanon. In Israel, Connex is also part of the consortium that has been awarded the concession for the future tramway of Jerusalem.
Connex offers innovative transportation services in certain cities that supplement traditional transportation networks. For example, in France Connex offers Créabus, an on-demand minibus service that is tracked by a Global Positioning System, or GPS, which operates in Dieppe, Montluçon, Vierzon, Bourges, Bordeaux, Ile-de-France and Fairfax (United States). Connex also manages all of the on-demand transportation services in the Nord Brabant region of the Netherlands.
Connex manages taxi services in Baltimore, Denver and the Netherlands. It provides transport for persons with reduced mobility in Bordeaux and other regions of France, as well as in the United States (paratransit) and Canada.
Intercity and Regional Transportation
Connex provides regional transportation services through the operation of road and rail networks. As with urban transportation services, Connex is responsible for designing, planning, operating, maintaining and providing security on the vehicles and stations it uses in its regional networks, as well as for ticket sales and customer service.
Further, Connex has recently developed ferry transport service in areas such as Finnmark (Norway, since 2003) and Zeeland province (Netherlands).
In France, Connex has a strong presence in the intercity and student transportation markets, involving more than 60 French departments across the country. Connex also operates a number of regional rail networks, covering approximately 850 kilometers, through contracts with regional public authorities or sub-contracts with the Société Nationale des Chemins de Fer (SNCF), the French national railroad company, particularly in the regions of Brittany, Provence, the Alps and the French Riviera.
In Europe, Connex has a strong presence in Germany, Denmark, Norway, Sweden, Finland, Slovenia, Belgium, Spain, the Czech Republic and the Netherlands. Through Eurolines, a company in which Connex has a 50% interest together with Keolis, Connex provides transport by motorcoach on regular international routes throughout Europe.
Passenger Information Services
Growth in our transportation business depends on increased use of public transportation networks, which in turn is closely related to the quality of service provided by these networks. To increase passenger usage of its networks, Connexs efforts focus on adequately matching service offerings with demand for these services, and developing local information services relating to transportation systems for travelers.
Accordingly, Connex has developed the Optio system, a service that provides anyone who wants to use public transport in a region (regardless of the operator) with the information that they need. The service involves use of a central telephone operator, internet site, wireless text messages, such as SMS, and wireless internet access, such as WAP. The Optio system currently operates in the department of Oise in France.
In addition, Connex has developed Connector Plus, a real-time information system installed in the rail network of Melbourne (Australia), which notifies users of service interruptions or delays through wireless text messages on their mobile phones. Connex has installed the Connector Plus system in Stockholm and is testing it in Bordeaux.
Connex has also recently created several internet sites that allow users to find their itineraries on local transportation systems in France and Australia.
Beyond the personnel transport services provided by numerous subsidiaries in France and the rest of Europe, Connex is present in two areas of industrial activity which represent slightly more than 3% of its revenues: rail transport (freight transport and management of industrial rail junctions with related logistics) and airport services. At the beginning of 2004, Connex created a dedicated subsidiary, Connex Industries, for the purpose of grouping its European activities in these areas. In addition, Connex created a subsidiary in the Netherlands (Connex Cargo Nederland) in order to be able to provide services to markets in North Sea ports.
In the area of freight transport, Connex operates a number of regional freight trains in France under sub-contract with SNCF, and offers rail transport services for long distance freight in Germany through its subsidiary Connex Cargo Logistics. After the opening of the European rail freight market to competition, Connex obtained its operators license and security certificate in France in 2004. These documents will allow Connex to market itself directly to international clients, with services to be provided on rail freight corridors throughout Europe.
In the area of industrial rail junctions and related logistics, Connex manages junctions in France and Germany for customers in the automobile, petrochemical and refining industries with factories that are linked to a national rail network.
This activity covers a range of services to airlines (freight transport on the platform of Charles de Gaulle airport, baggage handling, maintenance of vehicles, etc.). It is conducted by VE Airport, 60% of the share capital of which is owned by Connex.
Connex intends to develop its industrial market activities by relying on Veolia Environnements existing client network. It will focus in particular on those industrial market activities that will help to enrich the Groups offerings and constitute a growth area for Connex.
Description of Activities in 2004
In 2004, Connex won several contracts as it pursued its expansion, among which the principal contracts are:
In Australia, a renewal and extension of a contract for the operation of the entire suburban rail network of Melbourne, expected to generate total revenues of approximately 1.35 billion euros during a 5-year period.
In Germany, following Connexs win in 2003 of a public tender to operate Germanys regional Marschbahn line, Connex strengthened its competitive position vis à vis Deutsche Bahn by winning a new rail contract in the Nordharz region, expected to generate total revenues of approximately 402 million euros during a 12-year period.
In the United States, a Metrolink contract for the suburbs of Los Angeles, expected to generate total revenues of approximately 70 million euros during a 5-year period. This marks the second contract (after Boston) that Connex has taken over from Amtrak, the prior operator.
In France, Connex was selected to manage the transportation network in Toulouse during 2005 (expected to generate total revenues of approximately 54 million euros during a 6-month period), which marks the largest city contract won by Connex in France since the one involving St. Etienne in 2000. During this time, the public authority in Toulouse will be conducting a bidding process for a 6-year contract to manage the transportation network, in which Connex intends to participate.
Connex renewed the majority (based on 2004 revenues) of its contracts due to expire in 2004, including in those in Nice, Toulon, St. Etienne and Chambéry. No significant contracts were lost.
Connexs results in Scandinavia during 2004 were disappointing, however, in particular with respect to its bus activities in Sweden and Denmark and its Norland railway contract. Accordingly, Connex was forced to revise its outlook for the region, and decided to write-off €70 million of goodwill recorded in connection with its acquisition of Linjebuss in 1998.
Connex pursued growth outside of France during 2004 by developing a presence in Canada and, at the end of the year, Switzerland.
Acquisitions and Divestitures in 2004
In August 2004, Connex acquired Groupe Autobus Viens Inc., an operator of urban and school-related transportation services in the south suburbs of Montreal, Canada. The acquisition price was 10.8 million euros. This marks Connexs first Canadian presence.
In August 2004, Connex purchased two bus companies: Transport Management Group in Perth and National Bus Company in Brisbane, Australia. The two bus companies revenues totaled 25.9 million euros in 2003. The acquisition price was 16.4 million euros.
In October 2004, Connex acquired Montanesa (2003 revenues: 19.6 million euros), the company holding the concession for the urban and urban beltway transport network of Pampelune. The acquisition price was 1.8 million euros.
Connex also acquired some smaller companies in Europe (France, Poland, Slovenia and Germany) and the United States.
In total, over the course of 2004, Connex created or purchased 49 companies, merged 23 companies, sold 3 companies and liquidated 1 company. As a result, as of December 31, 2004, Connex held 429 consolidated companies (compared to 407 in 2003).
Development of Synergies: Multiservice Contracts to Benefit Industrial and Commercial Clients
Outsourcing and Multiservices Market
We believe that our position in the environmental services market for industrial and commercial customers has allowed us to take advantage of the synergies that exist among our four divisions. The growth in this market, estimated to be greater than 10% per year, was initially driven by the development of outsourcing, as industrial companies sought to outsource certain peripheral activities to external service providers. This
outsourcing trend covers all of our businesses, including energy services, water services, waste management services and the on-site management of rail junctions.
We offer a multiservices alternative to our customers, which involves the provision of services by several of our divisions under a single contract. This allows us to better respond to the expectations of certain customers who wish to outsource a range of services to a single service provider. This relationship also allows for greater technical synergies, economies of scale and commercial complementarity.
Our largest multiservices contract, signed in 2003 with Peugeot Citroën Automobile, provides a good illustration of the synergies that are possible. The subsidiary created to service this contract, Société dEnvironnement et de Services de lEst, manages all of the environmental services at Peugeots sites in Sochaux, Mulhouse and Vesoul, involving more than twenty different activities. By delegating such a broad range of activities to our company, Peugeot Citroën Automobile is able to ensure the regulatory compliance of its sites, while realizing significant savings. These savings largely result from an overhaul of the previous organization and work plan, the implementation of skill training programs, the reassumed management of activities that were previously subcontracted, and the implementation of a new energy policy.
Our Organization for the Provision of Multiservices
To develop this multiservices activity, we have established a specific organization, VE Industries (VEI), to coordinate our various activities. While VEI plays a coordinating role, each of our divisions remains responsible for the ultimate performance of services falling within its expertise.
VEI prepares our bids for multiservice contracts, with a project manager from VEI appointed for each multiservices contract. Commercial projects and bids are prepared in coordination with our divisions, and are then submitted to a commitments committee before their submission to clients. Later, contract performance is often entrusted to an ad hoc company formed by the divisions involved in the project, in particular when we decide to utilize the personnel of one of our industrial clients. Each division participates in the share capital of such ad hoc company to the extent of its provision of services under the contract, with revenues and other financial items relating to the income statement and balance sheet of such ad hoc company being consolidated in each divisions financial statements to the extent of its participation. Finally, we have created a reporting body to follow the performance of these specialized companies.
Demand for multiservices contracts during 2004 was strongest outside of France, in particular in Germany and the United Kingdom. Therefore, in addition to the multiservices contracts entered into in 2003, notably with Alstom, Peugeot Citroën Automobile and Arcelor, we entered into the following multiservices contracts in 2004:
Most markets for environmental services are very competitive and are characterized by increasing technological challenges arising from regulatory changes, as well as the presence of experienced competitors. Competition in each of the markets we serve occurs primarily on the basis of the quality of the products and services provided, reliability, customer service, financial strength, technology, price, reputation and experience in providing services. Additional considerations include the ability to adapt to changing legal and regulatory environments, as well as the ability to manage employees accustomed to working for governmental authorities or non-outsourced divisions of industrial or commercial enterprises. In each of the markets in which we operate, our competitive strengths are our high level of technological and technical expertise, our financial position, our geographical reach and our experience in providing environmental management services, managing privatized and outsourced employees and meeting regulatory requirements.
With regard to the provision of environmental services to industry in particular, our main competitors are Suez and RWE, which provide a range of services including energy, water and waste management. Certain actors in the area of electricity production also enrich their offering through the provision of industrial fluids. We anticipate that other enterprises that compete with us in individual sectors will, in the coming years, seek to expand their activities to become integrated environmental management services providers.
With regard to the provision of environmental services to public authorities, there has been a tendency over the last few years to return the provision of such services to local government control, which has reduced the number of delegated management contracts available in the market. Nevertheless, this tendency has remained fairly limited.
New actors from the public works and building sectors may begin to offer services in the market following completion of large and/or extensive investments. The emergence of such new actors is a natural outgrowth of a market in which ownership of infrastructure constructed to support the provision of comprehensive environmental services often reverts back to the client at the end of a contracts term. For the moment, however, these new actors have acted on a project-by-project basis, and do not seem to have a global strategy for establishing a true competitive presence in the market.
Through Veolia Water, our principal competitors in the water sector are Suez (through its subsidiary Ondeo) and RWE (through its U.K. subsidiary Thames Water and its American subsidiary American Water Works). In addition, General Electric has recently entered the market for services to industrial companies as it consolidates all of its acquisitions in the water services sector into a single business unit.
At both the national and regional level, we have a number of local competitors, particularly in the building and public works sectors. Examples of such competitors include Saur in France and FCC and Agbar in Spain. In the United States, competitors include American Water (a subsidiary of RWE) and United Water (a subsidiary of Suez). In Asia, various conglomerates (Marubeni, Mitsui, Kerry Utilities, Cheung Kong Infrastructure) have attempted to form partnerships in order to conduct water activities. Further, we face competition from newly emerging competitors, and from public establishments and local mixed public-private companies.
Through Onyx, our principal competitors in the waste management sector are either solely regional, or they cover only one part of the sector in which Onyx operates.
In Europe, where Onyx conducts the majority of its waste management activities, the principal competitor is Suez, acting through its subsidiary SITA.
Onyx has taken significant steps toward consolidating its market position in North America, where its principal competitor is Waste Management.
In Latin America, Onyxs operations are concentrated in Brazil and Mexico, where it primarily competes with Suez and a variety of local companies.
In the Asia/Pacific region, Onyxs main competitors are Cleanaway and Suez (acting through SITA), as well as various local companies.
The energy services market has many actors and we, through our subsidiary Dalkia, therefore face very dispersed competition. We believe that the only three companies with a strong international presence and a diversified and complete range of services in this market similar to our own presence and services are Suez (Elyo), RWE and Cofatech (GDF).
Through Connex, our principal competitors in the transportation market are large private operators, primarily French or British, and public monopolies that conduct their activities in open markets. Major competitors include Kéolis (which counts the SNCF as an industrial partner and shareholder but which also witnessed during 2004 the purchase of 53% of its share capital by 3i, an investment fund), Transdev (a subsidiary of the Caisse des Dépôts et Consignations, which has an alliance with the French metro operator, RATP), the Deutsche Bahn (the national rail operator in Germany) and the British groups Arriva, First Group, National Express (the Australian activities of which Connex acquired in 2004), Go Ahead and Stagecoach.
In North America, the transport company MV has adopted an aggressive pricing strategy that now positions it as a competitor, along with Connexs historical competitors in the market that include Laidlaw and the subsidiaries of the British groups First Group, National Express and Stagecoach (which in 2004 significantly reduced its U.S. activities by selling a part thereof to First Group). In the area of rail transport, Amtraks persistent budget difficulties could lead the way to further delegated private management.
In Asia, we anticipate that groups in China and Singapore may in the long-term become new competitors in an increasingly dynamic transportation market.
We provide a range of services either directly to the customer making the requestfor example, in connection with an outsourcing agreement we have with a public authority or industrial or commercial companyor indirectly on behalf of such customer for the benefit of a third partyfor example, in connection with the delegated public service management of a drinking water production and distribution service. The services we provide are often vast and multi-functional, requiring adequate employee infrastructure and specialized resources. They may also require management of works or infrastructure that are technically complexan example would be a wastewater treatment network and purification plant. These works or infrastructure may either be provided by the client, or financed and constructed by our company itself.
Our services to the public provided on behalf of public authorities include water distribution, wastewater treatment, collection and treatment of household waste, public transport and energy services. In numerous countries, the provision of such services, often referred to as general economic interest or public services, is considered to be the responsibility of the local public authority. Accordingly, the public authority is charged not only with implementing regulations or controls over the provision of public services, but must also implicate itself more directly in their management, through one of the following means:
The public authority can decide to directly manage and provide public services on its own (direct or internal management), thereby limiting the number of projects granted to private operators like us, or
The public authority may prefer to confer on a third party the entire responsibility for providing the public services, in which case the latter, depending on the specifications of the contract, would be responsible for providing the human resources, materials and finances necessary to provide the services. The public authority may also request that the third party finance and construct any required infrastructure under the contract. Third parties to whom the public authority resorts may be either private operators, mixed public-private companies or other public entities.
Based on the different ways in which public authorities choose to manage the provision of public services, we have developed various types of contracts to respond to their specific requirements. The contracts we employ generally fall into one of two categories, depending on whether we are entrusted with total responsibility for provision of a public service and whether we have a financial and commercial relationship with end users:
the public authority chooses to directly manage and provide public services on its own (direct management), but has only limited means and therefore calls upon a private operator to provide certain limited services or works, to whom it pays a set price under contract. Alternatively, the
public authority may prefer a more expansive contract involving construction and management of services, which may include financing of required infrastructure. These are known as public market contracts under municipal law, also referred to as Build, Operate, Transfer contracts (for example, a contract for building, financing and operating a water purification plant), or from now on in France as partnership contracts, or
the public authority entrusts a company with the responsibility for the full provision of a service, with the latter assuming all or part of the operational risks. Generally, the provision of the service is then financed by the end user of the service. The contractor is thus responsible for and free to implement the means necessary to provide the service, but must do so in accordance with the terms set by the public authority in respect of expected performances and prices charged to end users. This is the logic of delegated management, concession and Build, Own, Operate contracts, under which the entity that assumes management also assumes the risks and perils or risks and advantages to the extent its compensation is substantially a function of its operating results.
The general type of contract we employ in a given instance does not in itself determine the specific operating conditions under which we provide our services. Further, such contracts are subject to various nuances. Under our delegated public service management contracts, for example, even though we are generally paid by the end users of the service, we sometimes receives compensation by the public authority as well. This can occur in the case of a management contract that provides for variable compensation by the public authority, based on the fulfillment of specific targets by the private operator.
The historic traditions of the various countries in which we operate tend to favor one of the above-mentioned general contract types over the other. In France, for example, where there is a long tradition of granting concessions, delegated public service management contracts are often the preferred choice. At the same time, France has adopted a new ordinance dated June 17, 2004 that permits the development of partnership contracts. This new legal form of contract allows a public authority to entrust a private operator with full management of public services, including construction and financing. The private operator is then compensated by the public authority following completion of various agreed upon performances.
Current practices in various countries have tended to converge, with public authorities resorting to one or the other contract types depending on the situation. All such contracts have, in most cases, the common feature of being long-term agreements.
We also enter into outsourcing contracts for the management of complex services with our industrial and commercial clients, which are analogous to the contracts entered into with public authorities above.
Despite differences related to the nature of clients, the services contracted for and the nature of the legal systems in which we operate, the expectations of our clients have tended to converge towards (i) a demand for transparency during the bid process and during contract performance, (ii) formation of a real partnership in search of ways to improve productivity and performance, and (iii) a desire for clear performance targets and variable compensation depending on achievement.
We are also very attentive to contractual provisions, in particular when we must finance the investments called for under a contract. Given the complexity of management agreements and their generally longer term, we possess skills regarding contract analysis and control. The legal departments of our divisions are involved in the preparation of contracts, and controls are imposed on the implementation of our main contracts. Each year, our internal audit department includes a review of the contractual and financial stakes of our most significant contracts in its annual program.
Environmental Regulation, Policies and Compliance
Our businesses are subject to extensive, evolving and increasingly stringent environmental regulations in developing countries as well as in the European Union and North America.
Water and wastewater services activities are highly sensitive to governmental regulation. In Europe and North America, governments have enacted significant environmental laws at the national and local level in response to public concern over the environment. The quality of drinking water and the treatment of wastewater are increasingly subject to regulation in developing countries as well, both in urban and rural areas.
The quality of drinking water is strictly regulated at the European Union level by Directive 98/83/CE of November 3, 1998, relating to the quality of water destined for human consumption, which was transposed into EU member states and French law by a decree on December 20, 2001 (certain provisions of which have also been incorporated into the French public health code). This directive introduces, beyond quality control, the concept of evaluating risks on an ongoing basis, which risks may ultimately be addressed by future directives or regulations. The collection, treatment and discharge of urban, industrial and commercial wastewater is governed by Directive 91/271 of May 21, 1991, the objectives of which were further reinforced and expanded by water Directive 2000/60/CE of October 23, 2000. Public authorities also impose strict regulations upon industrial and commercial wastewater that enters collection systems and the wastewater and sludge from urban wastewater treatment plants.
France has numerous laws and regulations concerning water pollution, as well as numerous administrative agencies involved in the enforcement of those laws and regulations. Certain discharges, disposals, and other actions with a potentially negative impact on the quality of surface or underground water sources require authorization or notification. For instance, public authorities must be notified of any facility that pumps groundwater in amounts that exceed specified volumes and French law prohibits or restricts release of certain substances in water. Individuals and companies are subject to civil and criminal penalties under these laws and regulations.
In the United States, the primary federal laws affecting the provision of water and wastewater treatment services are the Water Pollution Control Act of 1972, the Safe Drinking Water Act of 1974 and related regulations promulgated by the Environmental Protection Agency (EPA). These laws and regulations establish standards for drinking water and liquid discharges. Each U.S. state has the right to establish criteria and standards stricter than those established by the EPA and a number of states have done so.
In numerous countries, waste treatment facilities are subject to laws and regulations that require us to obtain permits to operate most of our facilities from governmental authorities. The permitting process requires us to complete environmental and health impact studies and risk assessments with respect to the relevant facility. Operators of landfills must provide specific financial guarantees (which typically take the form of bank guarantees) that cover in particular the monitoring and recovery of the site during, and up to 30 years after, its operation. In addition, landfills must comply with a number of standards, and incineration plants are usually subject to rules that limit the emission of pollutants. Waste may also be subject to various regulations depending upon the type of waste. For example, sludge produced at wastewater treatment stations that will be composted must comply with strict regulations relating to its content of organic materials and trace metals (heavy metals like cadmium, mercury or led). Further, the NFU 44-095 standard, established in 2002 and henceforth applicable in France, strictly regulates the composting of material that results from the treatment of wastewater.
In France, pursuant to the provisions of the Environment Code relating to classified facilities for the protection of the environment, several decrees and ministerial and administrative orders establish rules applicable to landfills for household, industrial, commercial and hazardous waste. These orders govern, among other things, the design and the construction of waste treatment centers. Hazardous waste is subject to strict monitoring at all stages of the treatment process. Waste-to-energy centers are subject to numerous restrictions, including in particular limitations on the amount of pollutant emissions: for example, directive 2000/76/CE of December 4, 2000 on the incineration of waste fixes emission thresholds for dioxins and NOX in particular. In connection with the application of this directive in France, compliance studies were submitted by waste treatment operators to the French government in June 2003, in order to help determine the measures that these waste treatment operators will have to undertake to update their sites by the end of 2005.
At the European Union level, the framework for waste management regulation is provided by directives that set overall regulatory goals of waste prevention, collection, recycling and reuse. European Union member states must prohibit the uncontrolled discarding, discharge and treatment of waste. In addition, several European regulations seek to have member states define a national strategy that allows for the progressive reduction of dumping of biodegradable waste. The regulations are intended to promote recycling, composting and energy recovery of household waste. Further, the European Union has, through directive 2003/87/CE of October 13, 2003, implemented a quota system for the emission of greenhouse gases. Our waste management business is excluded from the first phase (2005-2007) of this directive, but may be targeted subsequently, and may as a result establish procedures to reduce methane and carbon dioxide emissions.
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 we operate also has its own laws and regulations governing the generation, collection and treatment of waste, including, in most cases, the design,
operation, maintenance, closure and post-closure maintenance of landfills and other solid and hazardous waste management facilities.
Our energy-related activities in Europe (primarily the supply of thermal and independent energy) are subject to a European directive that establishes emission limits for sulfur dioxide, nitrogen oxides and dust and regulates the construction of combustion plants. Other existing directives require the implementation of national emission ceilings for certain atmospheric pollutants such as sulfur dioxide, nitrogen oxide and volatile organic compounds.
The use of gas and other combustible material in France is subject in some instances to a domestic natural gas tax. Energy produced by a co-generation facility is exempt from this tax for a period of five years after the facility begins operations.
In addition, Dalkia, in its capacity as an operator, must respect a number of environmental requirements at its sites of operation. In France, Dalkia must respect regulations based on a July 19, 1976 law and its implementing decrees relating to the environmental protection of designated installations by obtaining and renewing various permits and authorizations from regulatory authorities.
In relation to controlling the risk of legionnaires disease, the health ministry has recommended, since 1997, that health professionals and managers of establishments implement best practices for the maintenance of sanitary hot water networks, air climate systems and other installations at risk, these recommendations having since been extended to all establishments that receive the public. In connection with regulations relating to classified facilities for the protection of the environment, provisions relating to the control and maintenance of these facilities are strengthened each year, with new language specifying the obligations of owners and operators of facilities that use cooling towers (installations for the production of cool air, combustion or electricity).
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 limits, in application of European Union directive 2001/80/CE of October 23, 2001.
With respect to its production of sanitary hot water, Dalkia is directly affected by European directive 98/83/CE, which addresses the quality of water destined for human consumption. 18 states, including France, believe that the directive applies to cold and to hot water and to all types of management systems for production and distribution.
With respect to European Union directive 2003/87/CE of October 13, 2003 on quotas for the emission of greenhouse gases, our energy services have been affected and, for combustion installations of more than 20 MW, are part of the national plans of EU member states for the allocation of quotas, implemented in February 2005. Dalkia also has certain contractual obligations to limit greenhouse gas emissions. Finally, markets for the exchange of quotas provided for at the European level are already functioning in certain countries such as the United Kingdom.
Our transportation activities are subject to a number of national and European regulations and particularly European Union directives that limit emissions from petrol and diesel engines and require us to obtain certain permits.
In the European Union, standards called EURO have been established for polluting emissions from thermal engines. All new vehicles currently constructed in the European Union are in compliance with EURO 3 standards and Connexs networks are renewing their fleets with EURO 3 vehicles. In 2005, a EURO 4 standard takes effect with even stricter requirements for the reduction of polluting emissions.
Further, Connex has made a commitment, in connection with its environmental management system, to lower its total emissions globally and to prepare for the new standards by testing and experimenting with emission reduction systems which will eventually be sold, thereby reaffirming its role as expert and consultant to client collectivities.
Finally, Connex is subject to the environmental standards applicable to depots and garages whose activities may present a danger or inconvenience to the environment. For this reason, the majority of sites in France are subject to the regulations governing classified facilities for the protection of the environment, more generally in the form of a simple notification.
We strive to contribute to the enhancement of quality of life in places where we operate. As a leading worldwide provider of environmental management services, we have placed the challenges of sustainable development at the heart of our strategy. To this end, we do not focus only on the preservation of the environment and the protection of natural resources, but also assume our economic and social responsibilities, particularly at a local level, where we are committed to stimulating progress.
Preserving ecological balances
Whether through the limitation of water evaporation, the enhancement of the quality of our waste, the effort to optimize energy consumption in connection with our water distribution and treatment activities, the use of alternative energies in our heating operations, the recovery and treatment of biogas emissions at our landfills or the use of low-emission fuels in our fleet of public or private transport vehicles, we are dealing with the main environmental problems currently affecting our planet by applying our know-how, technological capabilities and research potential to these problems. We contribute to the enhancement of quality of life and sanitary conditions of local populations in our day-to-day operations. For example, by supplying drinking water to impoverished areas, we help to reduce infant mortality. In developed countries, we have implemented plans to protect against the risk of the presence of legionella in public or industrial facilities, thereby improving public sanitation.
Preserving economic and social balances
We also consider the economic and social factors that underlie the course of development in the countries in which we operate, and we work to develop solutions that are adapted to local constraints and know-how transfers. For example, we have developed integration strategies in Shanghai, Prague and Gabon, that have allowed our local employees to better understand the challenges in the provision of water services. We give preference to a partnership approach with non-governmental organizations (NGOs), local authorities and associations in the implementation of action plans for the population of emerging countries, which permits the development of model plans that can be reproduced. In each of our projects, we seek to create a beneficial and educational dimension for the improvement of public health and the protection of the environment.
Moreover, we are participating in an initiative for developing a charter on public-private partnerships and access of the public to essential services, which is being supported by the French Ministry of Foreign Affairs and pursued by several agencies of the United Nations. We participated in an event organized around this initiative at a meeting of the U.N. Sustainable Development Commission that was held in New York on April 28-29, 2004, and confirmed our commitment thereto at the World Urban Forum held in Barcelona in September 2004. This initiative forms part of the United Nations Millennium Development Goals, which were announced in 2000 by the U.N. Secretary General. The initiative aims at defining the role of private operators with respect to local public service management, while emphasizing the principles of transparency and the sharing of technology and know-how, principles to which we already adhere in connection with our adherence to the U.N. Global Compact.
At the World Urban Forum in Barcelona, we also shared some of our concrete experience in aiding development around the world. We often do so in partnership with experienced international organizations, in areas where our operational know-how is able to contribute high added value.
In Morocco, for example, we have joined forces with UNICEF and the French Committee for UNICEF to participate in the implementation of a program backed by the Moroccan government that aims to combat school dropouts, particularly among girls. Scheduled to last three years, this partnership also includes the urban district of Tangiers, a Moroccan NGO, the Amendis Corporation (a subsidiary of Veolia Water) and Veolia Water Force, our urgent humanitarian intervention group. The two focal points will be improvement of health infrastructure in schools (installation of permanent water and toilet facilities) and the raising of awareness on the part of teachers and parents regarding hygiene and health issues for schoolchildren and their families. Work will be undertaken at 9 establishments whose needs have been identified as urgent.
Acting in tandem with Veolia Water Force, Waterdev is the expression of our will to go beyond urgent conditions and enter into developmental activities. Its purpose is to share experiences and to design, in partnership with public actors, representatives from non-profit organizations and NGOs, solutions that will facilitate public access to water and sewage services in the poor areas of large cities.
Veolia Water Force also mobilized alongside the French Red Cross to aid victims of the tsunami that devastated populations in Southeast Asia on December 26, 2004. More than 36 tons of supplies were sent to the Maldives, Indonesia and Sri Lanka. Hundreds of employee volunteers helped respond to the crisis both on-site and through the provision of logistics. More than 30 such volunteers went to Indonesia and Sri Lanka to set up mobile units for treating drinking water and supplying refugee camps, hospitals and schools. These volunteers also disinfected more than 20 water wells, while at the same time training local municipal technicians in ways to analyze water quality. Our efforts were financed by our divisions, by our municipal partners and by a €500,000
donation from the Veolia Environnement Business Foundation. Going forward, Veolia Water Force’s efforts will focus more on the long-term, in particular the rebuilding that will be required in devastated areas.
Finally, in 2004 we participated in a partnership to protect the Antarctic region through our cooperation agreement with Institut Paul-Émile-Victor (IPEV), an entity that manages the French presence on this continent. This agreement, signed on July 10, 2003, relates to the analysis of the environmental impact of research bases on polar environments. It confirms our willingness to engage in sustainable development, particularly in this part of the world. It also supplements partnerships signed with Australian organizations in October 2001 and Chilean organizations in October 2002 that related to, among other matters, waste management and the prevention of water shortages.
The Veolia Environnement Institute: a prospective tool for the environment and sustainable development
Human management of the environment represents a major challenge that requires the mobilization of a large number of resources, the support of the public at large and close cooperation among international, national and local participants. To address this challenge, we created the Veolia Environnement Institute, or VEI, in 2001 to encourage prospective reflection on a number of issues relating to sustainable development, as well as to progressively shed light on the principal trends that will influence the provision of environmental management services over the next decade.
Through its Prospects Committee, which is exclusively composed of individuals of international reputation and standing, VEI benefits from the contribution of leading external expertise on different key subjects (including public health, economy and human sciences) while maintaining a presence in the daily realities of our companys different activities. This dual capability represents both the originality and the strength of VEI, which intends to be at the heart of the main environmental debates and issues of the 21st century. The main themes to be considered by VEI in 2005, which are defined by the members of the Prospects Committee, will include the relationship between health and the environment, the consequences of climatic change, urban growth and the sociological and economic dimensions of environmental change.
As of the date hereof, the members of VEIs Prospects Committee are: Amartya Sen (India), economist, winner of the Nobel Prize for Economics in 1998, professor of political economics and economics at Lamont University and professor of philosophy at Harvard University; Hélène Ahrweiler, historian, president of the University of Europe and an expert for UNESCO on human and social sciences; Philippe Kourilsky, biologist, President of the Pasteur Institute in Paris, France, Director of Research at the Centre nationale de recherche scientifique (CNRS) and professor at the Collège de France; Pierre-Marc Johnson (Canada), attorney, ex-prime minister of Quebec, Canada, and expert on environmental matters; and Harvey Fineberg (USA), President of the Institute of Medicine of the United States.
As a specialist in environmental management services, we are concerned about the environmental consequences of each of our activities, both in France and worldwide. In this respect, we consistently endeavor to comply with applicable regulations, to meet the needs and requests of our clients and to optimize the techniques we implement. To illustrate our commitment, we highlight below some of the more significant environmental actions that we have undertaken regardless of any regulatory or contractual obligation to do so.
Use and Protection of Natural Resources
We preserve water resources by working to prevent wasteful usage in our own installations and in those of our clients. In this respect, the continued implementation of our environmental management system provides, in particular, for the monitoring of water consumption and quality in all of our activities. Our current action plan reflects two primary concerns: increased monitoring of the health quality of water destined for human consumption, and control of leaks in cold water distribution networks (raw or treated) and leaks in domestic hot water production networks. During 2004, we installed an indicator to monitor the quality and compliance with regulatory standards of our drinking water. Our industrial water consumption amounted to 246.3 million cubic meters in 2004.
Climatic developments in certain regions of the world heighten stresses on water resources. We study and promote techniques through which alternative resources are used, such as the production of drinking water by desalination of seawater and production of water for industry or farm irrigation by recycling wastewater. These developments are done strictly in association with local authorities, regulatory proceedings and the scientific community.
We also take measures to avoid polluting water resources. For example, 94.5% of Onyxs landfills are equipped with treatment stations for leachate (water that percolates through stored waste). In addition, our wastewater treatment efficiency, measured at biological treatment stations with a capacity greater than 50,000 EH, reached 93% in 2004.
Energy Energy efficiency and the use of renewable energies
We contribute to the reduction of energy consumption. Dalkia optimizes energy management for close to 80,000 energy installations in the world, from municipal heating networks to public housing, commercial or industrial building boilers. Optimizing the energy efficiency of such thermal installations relies upon the quality of their operations and maintenance, as well as upon their modernization.
Dalkias strong growth emphasizes the use of heating networks that offer optimized energy performances by concentrating production on a single site and involving co-generation. Efforts in this field include all of our activities. We are not only developing the use of renewable energies, like biomass and solar energy (Dalkia), but we are also capturing energy from incineration factories and biogas from landfills (Onyx).
Connex has set as an objective for 2005 the provision of environmental performance training to 90% of its public transport drivers during the first five years of their careers. This training effort enables us not only to enhance passengers comfort and limit polluting emissions, but also to achieve significant fuel economy. In 2004, 59% of our employees participated in training activities.
Our total energy consumption amounted to 97.1 million MWh in 2004.
Use of soils
In 2003, we integrated all activities relating to the treatment and recovery of sludge in a single entity (SEDE Environment). This integration continued during 2004, resulting in the implementation during 2005 of indicators to measure the quality of sludge. This is expected to result in our having a specific and integrated overview of sludge management options, allowing us to optimize our agricultural recovery in particular.
In this way we have pursued our efforts to control the quality of waste in the sewage networks and acted to enhance the quality of sludge produced by implementing pollutant controls in our wastewater treatment networks (through our Actipol method). Veolia Water has finalized a reference and certification system defining the applicable requirements for a sewage system for the production of quality sludge to be used as compost. As a second step, we promote the agricultural recovery of sludge through composting and engage an independent certifying body to audit our composting and agricultural recovery networks. This recovery is done in conjunction with the agricultural recovery of the fraction usable for fertilization from household waste.
We produced 757,200 tons of compost in 2004, 46% of which was eligible to be used in agricultural activities.
We have initiated a quality enhancement program for organic matter produced from organic waste and a program to evaluate their agricultural impact (the Quali-Agro program led by CREED our center for research on waste energy services) in coordination with the INRA. We are also active in the rehabilitation of polluted soils. Relying on several processes, including thermal absorption, Onyx processes almost all of the pollutants present in the soil at industrial sites.
Limiting Greenhouse Gas Emissions
Certain of Dalkias activities (combustion installations with thermal output greater than 20 MW) are subject to European Union directive 2003/87/CE of October 13, 2003, which implemented an emissions trading system for greenhouse gases in EU member states (transposed into EU member states in early 2005). Further, we control our emission of greenhouse gases in all of our activities, and we are implementing an action plan to improve the energy performance of our activities. In addition to the implementation of the energy efficiency policy described above, this action plan provides, in particular, for our active participation in the flexibility mechanisms provided for by the Kyoto protocol that entered into force on February 16, 2005. Our direct emissions of greenhouse gases (including biogas from landfills) reached the equivalent of 31.5 million tons of carbon dioxide in 2004.
The evaluation of the production and emission of methane (CH4) gas in landfills is particularly uncertain (to date there exist many national and international methods.) We participate in studies to develop and bring consistency to the different methods, notably in the context of the Greenhouse Gases protocol developed by international authorities. We contribute to the reduction of CH4 emissions by setting-up biogas capture,
Installations that we operate mainly emit sulfur and nitrogen oxides (SOX and NOX), carbon monoxide (CO), volatile organic compounds and dust. The method of calculating emissions of SOX from waste incineration units (hazardous and non-hazardous) was improved in 2004 and allowed us to estimate that these emissions amounted to approximately 151 grams per ton of incinerated waste in 2004. We are still working towards the development of an indicator for NOX emissions. For example, Connex, in partnership with ADEME, is pursuing a study to identify and assess the market systems capable of reducing the NOX emissions of its buses and coaches. Dalkia has also been conducting an evaluation program for several years on the various techniques available for reducing emissions (low emission burners, smoke recirculation, air staging, combustion modeling, etc.).
We attempt to reduce our emissions, in addition to complying with regulatory standards, by:
enhancing air pollution treatment and developing more effective treatment technologies, including treating smoke from our waste incineration units, enhancing the quality of emissions of our transport vehicles and utilizing low NOX combustion technology in the case of Dalkias activities, and
reducing consumption and favoring the use of clean fuels, such as fuel oil or low sulfur coal, natural gas, natural gas for combustion installations or vehicles, and electric or dual-mode vehicles.
We have developed a semi-continuous method to monitor emissions of dioxins during waste incineration, allowing for control of the aggregate flow of such pollutants emitted throughout the year. We offer this reliable and efficient measurement technique to all of our clients.
Noise and Odors
We have developed new treatment and storage techniques for odors, particularly in wastewater treatment plants and landfills for household waste. 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 or transport vehicles.
The permanent increase in waste quantities around the world presents major risks for the environment. We strive to develop every aspect of the waste management business that enables us to limit such risks, including the reduction of the sources of waste, waste collection and processing, selective sorting, waste recycling and waste-to-energy recovery. Our efforts also address the waste produced by our own activities, such as residues from combustion, residues from smoke purification, treated sludge and leachate (water that percolates through waste at landfills).
Preserving biological balance, natural environments and protected species
In France, numerous activities fall under the control of either the ICPE (facilities classified for environmental protection) or its equivalent. Therefore, all business development is conducted in connection with the realization of environmental impact studies concerning very precise facets of flora and fauna. The control of these impacts therefore comprises a constant preoccupation for our different business operations (waste treatment, decontamination stations, combustion facilities, railway depositories, etc.) In addition, our researchers closely follow the evolution of scientific debates on biodiversity in order to be able to identify the most pertinent indicators in our areas of activity.
Evaluation or certification regarding the environment
Our activities have been subject to environmental certification, both external (ISO) and internal, for a long time. The number of our ISO 14001 certified sites has increased continuously since 1999. In addition, we seek to achieve the targets set by our environmental management system for all of our installations, which lead, subject to the circumstances of each of the entities concerned, to the general application of the ISO 14001 certification standards. We currently have 529 sites covered by an ISO 14001 certification.
Compliance with applicable legal and regulatory provisions
Our environmental management system includes, among other things, an environmental audit program that allows us to monitor our sites regulatory compliance, as well as their compliance with contractual obligations and Group standards. We have defined a general framework to ensure consistency of the audit systems developed by our divisions, and each of our divisions remains responsible for the definition and implementation of its own system. Our goal is to conduct audits for 80% of priority sites by 2005 and 100% by 2008. Priority sites are drinking water production sites and urban treatment stations, waste treatment sites, Dalkias classified installations and several of Connexs transportation centers. As of December 31, 2004, 57% of our primary facilities were subject to a regulatory compliance audit. These facilities are the most sensitive to environmental impacts.
Expenses incurred to preserve the environment
Given the nature of our services, a large majority of our expenditures and investments have a direct impact on the environment. Our capital expenditures amounted to €2.315 billion in 2004, which includes not only investments of a contractual nature, but also expenses incurred for research and development, employee training, our certification program and the implementation of our environmental management system.
Prevention of environmental risks
In addition to the measures described above to reduce environmental risks, we have established an environmental department. This department ensures that the objectives and actions of our divisions are consistent, particularly in connection with the implementation of the environmental management system, and encourages information sharing and best practices. It leads an environmental committee, composed of representatives of all of our divisions and departments (particularly our sustainable development, legal and communication departments).
In addition, we created a risk department in 2004 that is charged with identifying, evaluating and managing risks according to a set methodology. Its work is complemented by that of a risk committee, which is chaired by the senior executive vice president. The risk committee meets at quarterly intervals throughout the year and brings together representatives from each division as well as officers from our corporate departments. This committee tracks our efforts with respect to risk management, in particular in the areas of industrial, environmental and health risks. See Item 11. Quantitative And Qualitative Disclosures About Market RiskEthics, Vigilance and Risk ManagementRisk Committee for a description of the risk committee.
We have also established crisis management procedures that cover environmental crisis management, including, in particular, on-call and alarm systems at national and international levels that would allow any necessary measures to be taken as soon as possible.
Reserves and guarantees for environmental risks
As of December 31, 2004, our accrued reserves for site remediation amounted to €367 million.
Indemnities and damages paid in 2004 for environmental claims pursuant to court orders
As of December 31, 2004, our accrued reserves for litigation ended in 2004 (including all types of claims and disputes) amounted to €105 million.
International environmental targets
We apply our environment management system, as described above, to all of our subsidiaries worldwide.
We currently own a significant number of patents and trademarks in France and other countries around the world that are of value to our business. However, we believe that the diversity of our patents and trademarks does not make any of our activities dependent on any one of these patents or trademarks individually.
We market our products and services by continuously offering to provide a more comprehensive range of environmental services to clients. We often sell our products and services by responding to requests for consultations. These may be highly regulated events when it comes to a public authority conducting a public bid tender, but generally we are able in such situations to take advantage of our reputation and know-how and propose a solution that is best adapted to a clients needs. In the absence of a formal bidding procedure, which is generally the rule for commercial clients, we analyze the environmental service needs of prospective clients and demonstrate to them how our services could improve the efficiency of their operations. See Contracts. For more information regarding marketing efforts by each of our divisions, see Our Services.
Because of the diverse nature of our operations and our worldwide presence, our business is typically not subject to material seasonal variations. Our results are only slightly affected globally, with the exception of Dalkia, which realizes the bulk of its operating results in the first and fourth quarters of the year, corresponding to periods in which heating is used in Europe. In the water sector, household water consumption and the related treatment services required tend to be more elevated between May and September in the northern hemisphere, where Veolia Water conducts the majority of its activity.
We purchase raw materials on a worldwide basis from numerous suppliers. We seek to accumulate and maintain a reserve inventory of raw materials and supplies, qualify new suppliers, and develop production processes in our own facilities. We undertake to secure the supply of strategic materials through medium-term and long-term contracts. We have not experienced difficulties in obtaining sufficient amounts of raw materials and supplies in recent years and we do not have any reason to anticipate any material difficulties in the future. However, the price of raw materials and supplies may vary substantially.
For instance, fuel prices have increased recently, and we cannot anticipate the evolution of these prices in the future. Our operations historically have not been, and are not expected to be in the future, materially affected in the long-term by changes in the price or availability of energy or other raw materials, as our contracts typically contain price adjustment and/or indexing provisions designed to compensate us for increases in the cost of providing our services. Such provisions include indexing clauses that take into account the variation of certain parameters, review clauses in the case of a rise in certain parameters above a given level, hardship clauses (unforeseeable changes due to extraordinary circumstances) or re-equilibrium clauses, all of which would assist us in passing along a portion of the rise in energy or raw material prices to clients (subject to a possible time period in which we might have to await reimbursement).
In the transportation division, numerous contracts contain indexing clauses that take variations in fuel costs into account, which significantly reduces the impact of a rise or fall in fuel prices. In certain contracts, notably those involving the United States, we are entitled to full compensation in the event of rising fuel prices.
In the waste management division, collection services involving non-hazardous solid and liquid waste are the most sensitive to fluctuations in fuel prices. However, for clients that have contracts with us, indexing clauses in those contracts generally allow us to pass along a good portion of our increase in such costs in the prices we charge to clients. For clients not bound by contract, increases in fuel costs are either fully or partially passed along to clients through an updating of tariffs or through commercial negotiation.
In the energy services division, the situation with respect to combustible materials used for activities is similar to the description above. With respect to gas supplies in particular, the deregulation of the market has not altered our use of indexing clauses in our contracts. We intend to develop the skills necessary to manage and optimize our gas supplies within the new market environment.
Background and Insurance Procurement Policy
Insurance renewals as of January 1, 2004 were characterized by (i) the underwriting by Codeve Insurance Company Limited, our consolidated insurance subsidiary, of primary layer contracts for property damage and civil liability in continuation of our policy adopted in 2003 to accept a primary layer of retention, (ii) a decrease in the insurance premiums paid to outside insurers as a result of an opening of the process to competitive bidding and the renegotiation of contracts with insurers within a more favorable market environment, and (iii) our recognition that there are a reduced number of insurers willing to insure at economically competitive terms the risks of large companies (catastrophic exposure in property damage/business interruption, fortuitous pollution risk and motor liability for public passenger transportation).
Our insurance programscovering property damage/business interruption, comprehensive general liability, environmental impairment liability and directors and officers liabilityhave been renewed at the same limits and primary coverage as in the prior year.
Our policy for insurance policies for our company and all of our operating divisions consists of:
maintaining common insurance policies to establish a coherent risk transfer policy and maximize economies of scale, while taking into account the specificities of our businesses and legal or contractual constraints;
optimizing the thresholds and the means for accessing the insurance or reinsurance markets through use of varying deductibles or acceptance of a primary layer of retention through Codeve Insurance Company Limited; and
tailoring insurance coverage to meet our contractual obligations, which are often triggered through our participation in public bid tenders.
Organization and Implementation of Insurance Procurement Policy
Our role with respect to insurance procurement is to (i) establish an insurance procurement policy to cover our activities, based on the needs expressed by our subsidiaries in particular, (ii) select and sign contracts with outside providers (brokers, insurers, loss adjusters, etc.), (iii) monitor claims that impact umbrella or excess insurance coverage, (iv) manage consolidated subsidiaries specializing in insurance or reinsurance coverage, (v) lead and coordinate the network of insurance managers present among our principal subsidiaries, and (vi) prepare and deliver an annual report on insurance activities.
Implementation of Insurance Procurement Policy
Our insurance procurement policy aimed at covering insurable risk is designed and implemented in coordination with our global risk management process. See Item 11. Quantitative And Qualitative Disclosures About Market Risk below. Implementation is affected by insurers willingness to cover risks related to our activities, by the market availability of insurance and reinsurance, and by the relationship between premiums and the level of coverage, exclusions, limits, sub-limits and deductibles.
In 2004, we undertook actions principally related to:
the determination of retention levels on the basis of the divisions knowledge of their risks and loss history, an evaluation of the costs and coverage proposed by insurers, as well as contractual obligations that sometimes require our subsidiaries to retain contracts with limited deductibles;
the reinforcement of efforts to identify, prevent and protect against risks through deployment of a rating system for the property damage and business interruption risk profile for our most important facilities;
the reinforcement of our information process for the insurance and reinsurance markets;
the opening of insurance coverage to competitive bidding or the renegotiation of contracts, in particular relating to our civil and pollution liability coverage;
a review of our major past claims and of the insurance limits relating to civil liability; and
extending participation in our group insurance program to the greatest number of subsidiaries.
We generally only purchase insurance policies from insurers and reinsurers who have at least an A credit rating.
Main Insurance Policies
As of January 1, 2003, we entered into an 18-month layered insurance program that provides coverage for up to US $400 million on the Bermuda market. It provides coverage for all of our subsidiaries in amount over and above US $50 million. This program was renewed on July 1, 2004 for a 12-month period, and provides coverage for up to US $450 million in amount over and above US $50 million.
An underlying general liability policy agreement insures our non-North American subsidiaries for up to €50 million per claim with an annual aggregate of €97 million. Our subsidiaries outside the United States and Canada are insured in excess of €1.5 million through local policies, except for railroad activities (€8 million attachment point), sea transportation and Veolia Water Systems (€10 million). Our North American business units are responsible for purchasing US$ 50 million in insurance coverage. This program was renewed on January 1, 2004 for an 18-month period.
We also maintain various environmental impairment liability insurance policies that provide coverage to our subsidiaries with annual limits ranging from US $5 million to US $50 million per claim. A worldwide insurance policy (excluding the U.S. and Canada) was renewed on January 1, 2004 for an 18-month period. Coverage is up to €50 million per claim throughout the period of insurance. Our excess general liability policies described above also cover third party claims resulting from sudden and accidental events.
Property Damages and Business Interruption Policies
All of our divisions maintain property damage insurance policies to cover assets that they own as well as those for which they have a contractual obligation to insure. Some policies provide either business interruption coverage or additional cost of working coverage depending on such subsidiaries exposure and their capacity to use internal or external solutions to ensure service continuity. These policies contain standard market terms. The level of premiums, deductibles and sub-limits for exceptional socio-political or natural events reflects the terms proposed, or sometimes imposed, by insurers in the markets in which the risk is underwritten. Group insurance coverage implemented on January 1, 2004 carries a limit per claim of up to €205 million. Some of this coverage contains further inner limits per claim or per year.
During 2004, we did not present any claims in excess of €10 million.
Other Insurance Policies
In light of the difficulties encountered in the insurance market, we cover motor liability risks relating to the vehicles used in our activities (such as passenger transportation or collection of hazardous and non-hazardous waste) through deductibles or reserves accrued per event from €150,000 to €1 million. Depending on the country, collateral may be required, including sureties or letters of credit.
Construction projects are insured through construction all-risk policies either by the main contractor or the operating company.
Self-Insured Retention and Deductibles
For any insured claim or loss, we remain liable for the deductible amount. Our deductibles for property damage policies range from €50,000 to more than €1 million, while the main deductible under our general liability policies is between €30,000 and US$2 million.
Our consolidated insurance subsidiary, Codeve Insurance Company Limited, has underwritten:
beginning on January 1, 2004, underlying contracts for €5 million per event for property damage and business interruption, which may be increased to €7.5 million per event involving collision or derailment; and
beginning on July 1, 2004, underlying contracts for €1.5 million per civil liability claim, including environmental liability and employer liability.
Codeve Insurance Company Limited also underwrote a quota-share of insurance contracts relating to construction projects in which one of our subsidiaries was acting as lead.
The consolidated insurance subsidiarys portfolio of risks involves all aspects of our business in numerous countries. The subsidiary is protected by a stop-loss of €37.5 million per year for property damage insurance after the exhaustion of the €12.5 million total annual claims limit borne by the subsidiary, which is triggered by claims greater than €500,000 in damages or the original deductible if the latter is higher, or, in the case of claims involving collision or derailment, by claims greater than €2 million in damages. For civil liability,
Our consolidated reinsurance subsidiary, VE Services Ré, underwrote primary insurance coverage of €1.5 million per claim for civil liability until June 30, 2004 as well as a quota-share of our property damage excess coverage and excess general liability policies issued by French insurers.
100% of the quota-share reinsurances accepted have been retroceded, enabling us to benefit from the gap in prices between the insurance and reinsurance markets. The underlying retained coverages for civil liability insurance (€1.5 million per claim) is protected by a common stop-loss for Codeve Insurance Company Limited as described above.
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 believe that this organizational structure encourages the coherent development of our group by reinforcing its identity, maintaining solidarity and cohesion, favoring economies of scale and encouraging professionalism through the sharing of best practices.
See History and Development of the Company for a description of the history of the creation of our organizational structure.
PROPERTY, PLANTS AND EQUIPMENT
We rent a building located at 36/38, avenue Kléber, 75116, Paris, France that we use as our corporate headquarters. Our and our divisions senior management have maintained their offices in this building since May 2002, where certain central functions are performed.
Our real properties are relatively limited. Many buildings and installations that we use do not belong to us. Very often, service contracts are performed through use of buildings or installations belonging to the client. We may also lease properties. Even when we have legal ownership, we may not have the right to dispose of such real property due to contractual provisions which obligate us to transfer these assets to the client or another successor at the end of a contract.
However, we are sometimes the full owner of real property, including industrial installations, in particular for activities undertaken outside global contracts. In our waste management division, for example, we may own CSDUs (storage centers for ultimate waste), and in our energy services division, we may own co-generation plants.
RESEARCH AND DEVELOPMENT
We must make continuous efforts to adapt our know-how, due to factors such as rapidly changing demographics in emerging economies, the aging of the population in more developed countries, the trend towards urbanization across the globe, and the imposition of increasingly stringent environmental and health standards. More than ever, the ability to innovate has become a priority for us, to which we have devoted greater resources in all segments of our business.
Our research and development activities are coordinated by our research, development and technology department, or research department. In 2004, this department consisted of nearly 600 employees worldwide with a total annual budget of €98 million (€62.7 million of which constituted research costs, and the remainder development costs). In 2003 and 2002, research and development costs totaled €95.3 million and €92.5 million, respectively.
Our researchers aim to design new processes and services that correspond as closely as possible to evolving client requirements, while paying constant attention to technical, economic, environmental and sanitary performance. At the same time, we seek to preserve our technological advances through constant improvement in our operating performance. Research and development efforts that successfully achieve the foregoing enable us both to extend our service offering to clients and to reduce the cost of providing such services.
We have three main research centers in France, which are divided by area of technical expertise:
Creed, which is based in Limay and has branches in the United Kingdom and Australia, focuses on waste treatment technologies (incineration, co-incineration, CET, etc.), on material recovery and on optimization of services in the energy sector, including by resorting to alternative energies (fuel cells and wood channels) or renewable energies (solar sensors).
Eurolum focuses on information systems (both for the operator and for the traveling client), on innovative transportation systems (transportation on demand, for example), on vehicles and clean fuels, and on infrastructures, logistics and monetics.
Anjou Research, based in Maisons-Laffitte, is the historical research center of Compagnie Générale des Eaux. Its work mainly relates to water themes (from production to distribution of drinking water) and purification (urban and industrial wastewater treatment, odor treatment). This research center also includes an expert center on membranes.
We established an international research and development correspondent network in 2003 in order to supplement the work of our research centers. This network enables us to identify and analyze specific local needs in terms of technical development and innovation, and constitutes a forum for exchange among our research department, area universities and research organizations. This network also facilitates the circulation throughout the world of studies conducted by our research department. In addition to the research centers mentioned above, we have also created research units in connection with specific contracts that further highlight our technical expertise. For example, we provide technical and financial support to research projects conducted at the Berlin Centre of Competence for Water (KompetenzZentrum Wasser), an international center for water research and knowledge transfer that has become an international reference point for information relating to the protection of water resources.
Our research department coordinates technical support functions relating to technological information, environmental management, intellectual property defense and laboratory analysis. The research department also coordinates the functions of various other departments, such as our health department. In the health and sanitary safety field, we find answers to the new risks we face by developing techniques of analysis and prevention, which may sometimes include the development of specific curative treatments as well. The health department assists in defining the scope of our research programs in this regard, and later assists in completing them. In particular, the health department identifies emerging sanitary dangers and establishes sanitary indicators, and conducts work aimed at achieving better command over the risk of legionnaires disease. The health department is also a recognized partner of public health bodies and institutions, such as the Institut de Veille Sanitaire, Direction Générale de la Santé, AFSSE or INSERM.
Our research department also concentrates on the protection of the environment. A specific environmental department assesses the environmental impact of our activities and steers our environmental management system. It prepares the follow-up, monitoring and reporting procedures of our environmental data and contributes to the preparation of our commercial offers. A network of information experts within the research department manages our scientific and technical information and places at employees disposal tools for technical, competitive and regulatory monitoring.
In the area of energy services in particular, we conducted research and development activities aimed at developing tools to enable Dalkia to adapt to new market conditions, and to generally improve the performance of existing installations. Moreover, our research teams are still exploring the possibilities offered by technological breakthroughs (such as fuel cells) and their potential application.
In the area of waste management, numerous programs have been created to help optimize waste treatment conditions (relating to combustion capacity, smoke treatment at incineration facilities, greater mastery of composting and methanization procedures, automated sorting, etc.). Research on sanitary landfills (or bioreactors) also continued in France, Australia and the United States. Finally, our research teams are seeking to optimize the conditions of waste biodegradation through re-circulation of leachates and recovery of biogas emissions.
In the area of transportation, research continued on a logistics program, which consists of providing innovative technologies to traveling agents of the divisions (permanent geo-localization and built-in computer systems). The logistics program allows work to be organized more efficiently, leading to better client service and, in the future, a source of savings for all parties involved. With respect to the struggle against air pollution, work is being conducted on optimizing the operation of electric buses, while carpooling and self-service vehicles are also being experimented with.
In the area of water, research efforts have focused in particular on the protection of water resources. For example, we are involved in the Bankfiltration project at the Berlin Centre of Competence for Water, which is aimed at controlling the entire water cycle, including ground water. The project involves the efforts of approximately thirty researchers and five universities. Other research is being conducted in Australia on the injection of groundwater, which will broaden our experience in this field as well as the array of technologies we are capable of offering to clients. With respect to drinking water production, research efforts relate to the optimization of treatment processes and the use of membranous technologies.
In the area of wastewater treatment, research into pollution control installations and networks have enabled the development of real-time management tools for wastewater treatment systems. With respect to sewage sludge, research into agronomic recovery is carried out in tandem with the development (in particular by industrialization) of new processes such as Biothelys, which reduces the amounts of sludge emitted, Saphyr, which sanitizes and reduces odors, and Pyromix, which co-incinerates sludge and household waste.
The perfecting of tools to assist operations also constitutes a significant part of our research and development efforts. Efforts relate to all type of operations (networks, plants, tanks, stations, etc.), and all fields: water, wastewater treatment, waste management, transportation and energy. Recent developments made with the help of artificial intelligence (neural networks, fuzzy logic, genetic algorithms, etc.) should lead to valuable new uses, in particular for the advanced conduct of processes. They should lead to a range of functions enabling us to anticipate incidents, to define automatic instructions and to prepare more adjusted maintenance programs.
At each step of the research process, researchers implement sophisticated tools, such as digital fluid mechanics, for example. Such technology enables researchers to simulate the running of works (plants and networks) and to test scenarios to improve their efficiency. It is also very useful in the context of research programs: by permitting the simulation of the greatest number of scenarios, over a shorter period, such software enables the optimization of test protocols for the development of a process.
Our researchers take part in European research programs (involvement in the LIFE and PCRD projects in particular) and build up a strong network of fruitful relations with numerous industrial, university and institutional partners. Such partnerships allow us to achieve operating developments that expand our service offerings and anticipate required technical improvements.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our operations should be read together with our consolidated financial statements and related notes included elsewhere in this report. The following discussion contains forward-looking statements that involve risks and uncertainties, including, but not limited to, those described under Item 3. Key InformationRisk 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.
Major Developments in 2004
During 2004, we completed our strategic restructuring to refocus on our core activities. Further maturation of our contract portfolio and continued implementation of the Veolia Environnement 2005 efficiency plan led to a solid improvement in our profitability and financial structure. These actions were conducted in parallel with a strategy to strengthen and further develop our contract portfolio.
An enriched and renewed contract portfolio with longer maturity
We renewed and extended several significant contracts during 2004, including:
Renewal of a water distribution contract in Rennes (France) for a 10-year term;
An 18-year extension of a wastewater treatment contract with the city of Richmond (California), expected to generate total revenues of approximately €50 million during this period;
In the waste management division, a 10-year extension of a contract to operate, maintain and manage a waste-to-energy recovery plant in Miami-Dade County (United States), expected to generate additional total revenues of €1,085 million during this period;
A 5-year extension of a contract for integrated waste management with the county of Sheffield (United Kingdom), expected to generate additional total revenues of more than €525 million during this period; and
In the transportation division, the renewal and expansion of contracts in Nice (and surrounding areas), Toulon and Saint-Etienne (France), and the renewal and expansion of a contract for the operation of the entire suburban rail network of Melbourne (Australia), the latter expected to generate total revenues of approximately €1.5 billion during a 5-year period.
We also won new contracts and activities during 2004, among which the most significant were:
A 30-year contract for water and wastewater management in Zlin in eastern Moravia (Czech Republic), expected to generate total revenues of approximately €360 million during this period;
In the water division, a 20-year contract (renewable for another 20-year term) for water management signed with Kladno-Melnik (Central Bohemia), expected to generate total revenues of more than €600 million during this period;
A 35-year contract for the rehabilitation and operation of drinking water plants in the province of Guizhou (China), expected to generate total revenues of approximately €210 million during this period;
Two water contracts in China expected to generate total revenues of approximately €790 million, one with the city of Hohhot for a 30-year term, the other with the city of Weinan for a 22-year term;
Acquisition of a 74.9% interest in Braunschweiger Versorgungs-AG (BV-AG), a company that provides environmental services to the city of Braunschweig. Services which include water distribution and management of a municipal heating, electricity and gas network. In 2005, we will invest €370 million to acquire our 74.9% interest in BV-AG, which has annual revenues of approximately €300 million;
A 21-year contract for waste management in Poland, launched in January 2004 with the inauguration of a landfilling facility in Chrzanow near Cracow, expected to generate total revenues of approximately €250 million during this period;
A 20-year contract for the collection, management, transfer and treatment of household and commercial waste in Pontiac, Michigan (United States), expected to generate total revenues of approximately €185 million during this period;
A contract between Dalkia (energy services division) and the Polish Treasury Ministry to privatize the heating and power station of Poznan (ZEP Poznan). The contract was signed at the beginning of 2004 and is expected to generate annual revenues of approximately €74.6 million;
An 8-year contract for the global management of energy installations on behalf of hospitals in the Lazio region of Rome (Italy), expected to generate total revenues of approximately €430 million during this period;
A 5-year contract (term beginning on July 1, 2005) for the operation of a rail network in the suburbs of Los Angeles (United States), expected to generate total revenues of approximately €70 million during this period.
Finally, during 2004 we commenced operations under our water contract with the city of Shenzhen (China), which we were awarded in 2003.
Successful completion of restructuring plan
During 2004, we pursued our strategic restructuring to refocus on our core environmental services activities.
Sales of activities in the U.S.
In February 2004, we finalized the sale of farmlands located in Imperial Valley (California) to Imperial Irrigation District (IDD) for US$77.3 million.
At the end of July 2004, we completed the sale of USFilter Corporations equipment and short-term services businesses to Siemens. After application of the contractual price adjustment mechanisms, the final value of the sale amounted to US$975 million.
At the end of September 2004, we completed the sale of our Culligan business to Clayton Dubilier & Rice, for total consideration of US$612 million.
These U.S. sales represent the final step in the implementation of the strategic refocusing of our water operations in North America, which was originally announced in September 2003. They are part of our broader effort to concentrate more fully on the development of outsourcing on behalf of public authorities, as well as on the provision of services involving long-term contracts with municipal or industrial clients. Including the sale of Everpure and Surface Preparation in 2003 (resulting in US$345 million in proceeds), the total proceeds generated from our U.S. asset sales in 2003 and 2004 amounted to approximately US$2.0 billion.
Sale of FCC
During 2003, we and our partner in FCCs holding company, Ms. Esther Koplowitz, had a number of disagreements relating to the strategic development of FCC. To avoid creating a deadlock and in the interest of FCCs development, we proposed to Ms. Koplowitz several alternative ways to resolve the parties differences. Ms. Koplowitz, however, informed us in the third quarter of 2003 of her preference to formally commence negotiations to repurchase our indirect interest in FCC. We accepted the principle of a sale of our interest in FCC and various proposals were exchanged. In this context, we informed the Spanish stock market authorities (Comisión Nacional del Mercado de Valores) on March 1, 2004 of these negotiations.
Negotiations during the first half of 2004 resulted in the sale of our 49% stake in B 1998 S.L., the holding company that owns 52.5% of FCC, to a company controlled by Ms. Esther Koplowitz. The transaction allowed us to reduce our net financial indebtedness by €1.1 billion, and resulted in a total cash payment to our company of €916 million (before transaction fees), including an exceptional dividend paid by B 1998 S.L. to us prior to the sale. The transaction closed on September 15, 2004.
Sale of Berlikomm
As part of the refocusing of its activities on water distribution, Berlin Water sold telecommunications operator Berlikomm at the end of August 2004.
Impact of Asset Sales
The asset sales referred to above allowed us to reduce our debt by €2.4 billion in 2004.
Evolution of the shareholder structure
Following a shareholder restructuring on December 9, 2004, Vivendi Universal reduced its holdings in our company from 20.36% to 5.30% of share capital. This constituted a significant step in the restructuring of our shareholder base. At the same time, in order to help develop our employee shareholder base, we repurchased 2% of our share capital from Vivendi Universal in connection with the shareholder restructuring, for an amount of €194.8 million.
Preliminary results under the “Veolia Environnement 2005” efficiency plan
The “Veolia Environnement 2005” efficiency plan, which aims to generate €300 million in savings in 2006, is being implemented according to schedule. Savings realized during 2004 amounted to €126 million, of which €116 million was included in EBIT (as defined below). Accordingly, we continue to have an objective of €300 million in annual savings beginning in 2006.
Savings for 2004 were achieved in the areas of purchases (18%), structural and IT costs (30%), operational processes (34%) and asset management (18%).
Presentation of Information in this Section
In our consolidated financial statements, we present a French GAAP measure of operating performance, which we refer to as EBIT. We define EBIT as operating income (loss) before amortization and depreciation of goodwill and intangible assets with indefinite lives and restructuring costs. EBIT complies and is calculated in accordance with the definition of résultat dexploitation set forth in CRC Regulation 99-02 under French GAAP.
Historical and Comparable Financial Information
In order to provide a meaningful comparison of our operating performance in 2002, 2003 and 2004, we present our results on a comparable basis by excluding the impact of the implementation of our divestiture program in each of these periods and the fluctuation of currency exchange rates in 2003 and 2004. As a result, our comparable results in each of these periods exclude the results of businesses that were sold in 2002, 2003 and 2004 pursuant to our divestment program.
In presenting our comparable results for 2002 and 2003, the businesses sold in 2002 and 2003 relate to our water activities and include USFilters Filtration & Separation, Surface Preparation, Plymouth Products and Distribution divisions and our Bonna Sabla subsidiary in France. As of December 31, 2002, all of these businesses had been sold, except for USFilters Surface Preparation division, which was sold in 2003. For purposes of the discussion of our results of operations on a comparable basis, however, the businesses sold in 2002 and 2003 do not include USFilters Everpure business, which was sold at the end of 2003 following our strategic review of our North American water assets.
In presenting our comparable results for 2003 and 2004, we employ the term new scope of consolidation. The term new scope of consolidation excludes the results of North American assets sold in 2003 and 2004 (i.e. Surface Preparation, Everpure, Culligan and USFilters short-term equipment and short-term services activities) and FCC (leading Proactiva to be proportionally consolidated at 50%, in lieu of full consolidation).
In addition, our comparable results eliminate the effect of fluctuations in exchange rates on the later of the two periods presented. For example, our discussion of our results in 2003 compared to our results in 2002 include our actual results in 2002, while our results in 2003 have been adjusted to eliminate the effect of fluctuations in exchange rates. We have made a similar adjustment in our discussion of our results in 2004 compared to our results in 2003, where we present our actual results in 2003 and our adjusted results in 2004.
Definition of organic and external growth
As used in this report, the term organic growth includes growth resulting from new contracts won and the expansion of existing contractual arrangements through increases in prices and/or volumes delivered. We also frequently offer, in the course of bidding on a contract, to acquire operating assets related to the performance of the contract. As a result, our organic growth also includes acquisitions of assets for dedicated use in a particular project or contract.
The term external growth relates to growth resulting from acquisitions (net of disposals) of entities that hold multiple contracts and assets used in one or more markets.
Changes in Accounting Methods and Presentation of Accounts
In 2004, we made the following changes to our accounting methods under accounting principles generally accepted in France, or French GAAP:
On December 31, 2004, we applied the provisions of Article 23100 of French CRC Regulation 99-02, which allows companies to report their share in the net income of businesses sold during the year on a separate line item of the income statement. These businesses are excluded from the new scope of consolidation and therefore no longer contribute to consolidated revenues for the fiscal year in which they were sold. For the 2004 fiscal year, these businesses included FCC (leading Proactiva to be proportionally consolidated at 50%, in lieu of full consolidation), Culligan and USFilter Corporations equipment and short-term services businesses. The net income of businesses sold is composed of the net income of the businesses until the date of the transaction, capital gain (loss) from the sale and the related taxes. The cash-flow statement includes flows generated by the businesses sold until the date of sale.
Article 133 of the French Loi de Sécurité Financière of August 1, 2003 eliminated from the French Commercial Code the provision that makes consolidation by a controlling company subject to the holding of at least one share. As a result of this statutory amendment, substantive control is determined by reference to the interpretation of SIC-12 under International Financial Reporting Standards (IFRS). This amendment became applicable to our company as of January 1, 2004. On December 31, 2004, special purpose entities,” within the meaning of paragraph 10052 of French CRC Regulation 99-02, were consolidated, which resulted in an increase in long-term financial debt in the amount of €364.6 million and an increase in the securitization program in France in the amount of €334.2 million.
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with French GAAP. 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 pension liabilities, deferred taxes, valuation of goodwill and intangible assets and derivative financial instruments.
We maintain several pension plans covering substantially all of our employees. We determine our obligations under these plans using a projected unit credit method, which requires us to estimate the probabilities that our employees will continue to work for our company until retirement, the foreseeable changes in the compensation of our employees and the present value of our potential liabilities on the basis of the appropriate discount rate for each country in which we maintain a pension plan. As a result, we record pension-related assets or liabilities in our accounts and record the related net expenses over the estimated term of service of our employees. In addition, employees in France and most other European countries are eligible for severance payment under applicable law immediately upon termination of employment. We estimate and record provisions in respect of these employee termination liabilities using the projected unit credit method.
Valuation of Long-Lived Assets
Long-lived assets are regularly reviewed according to circumstances, either internal or external, which could lead to depreciation. If this is the case, an exceptional amortization or valuation allowance is recorded on the basis of the assets fair value.
Valuation of Goodwill and Other Intangible Assets
We perform an annual review of our goodwill and other intangible assets during our strategic planning in mid-year. If the long-term prospects of an activity appear durably downgraded, we estimate the value of the impairment based either on the market value of the assets related to this activity in cases where we decide to dispose of the activity or on fair value in cases where we decide to retain the activity. We then record a one-time write-off or write-down of the carrying value of our goodwill to bring it in line with our estimates. Market value is based on the multiples method (brokers surveys) or recent similar transactions method. Fair value is based on the discounted future cash flows method. Alternative methods are the multiples method or recent similar transactions method. During the periods under review, we impaired the value of part of our goodwill and our intangible assets with indefinite lives.
We recognize deferred tax assets for deductible temporary differences, net tax operating loss carry-forwards and tax credit carry-forwards. We record our deferred tax assets at their estimated net realizable value. We recognize deferred tax liabilities for taxable temporary differences. We adjust our deferred tax assets and liabilities for the effects of changes in tax laws and rates on the enactment date.
Derivative Financial Instruments
We manage a part of our financial risks by using derivative financial instruments that qualify as hedges.
Interest rate swaps and caps
We primarily use interest rate swaps and caps to manage interest rate risks relating to our borrowings. The goal of these swaps is, depending on the circumstances, to substitute fixed for floating rates and floating for fixed rates, as well as to modify the underlying index on floating rate debt.
For transactions that qualify for hedge accounting, the income or expense associated with these instruments is recognized when the income and expense on the hedged item is itself recognized. The differences in the interest receivable and payable on interest swaps and caps and the associated premiums and cash payments are therefore recognized over the term of the contracts as an adjustment in the interest expense of our financial debt.
Interest rate derivatives used to manage interest rate risk related to debt, but which do not qualify for hedge accounting are recognized in the following manner:
an allowance is recorded for the unrealized losses on the market value of the instrument; and
unrealized gains on the instruments are recognized only when sold or matured.
Foreign currency derivatives
We also use currency swaps and forward exchange contracts to manage our foreign currency risk. Forward exchange contracts are mainly used to hedge firm and anticipated transactions relating to assets and liabilities denominated in foreign currencies. Cross currency swaps are used to modify the interest rate and currency of foreign denominated debt or to hedge net foreign investments.
The difference (known as premium/discount) between the forward rate and the spot rate of forward exchange contracts and cross currency swaps that qualify as hedging transactions is recognized over the term of the contract as interest income or expense.
Cross currency derivative instruments that hedge a balance sheet item or foreign net investment are measured at the year-end rate. Any change in value is recognized in the balance sheet with offsets relating to:
the income statement when the hedged item is remeasured (monetary or currency liabilities or receivables);
currency translation adjustments in equity for hedges on net investments.
Unrealized gains and losses resulting from future foreign currency hedging transactions (firm or highly probable) that are not yet recognized on the balance sheet are deferred and recognized when the hedging transaction is realized.
U.S. GAAP Reconciliation
Our consolidated financial statements have been prepared in accordance with French GAAP, which differs in certain respects from U.S. GAAP. The following table shows our net income (loss) and shareholders equity under French GAAP and U.S. GAAP for the periods indicated:
The most significant item in reconciling French GAAP and U.S. GAAP, as applied to our company, relates to the impairment and amortization of goodwill and other intangible assets. In 2002, we evaluated goodwill and other intangible assets using SFAS No. 142 , Goodwill and Other Intangible Assets, under which goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed at least annually for impairment. Intangible assets with a definite life continue to be amortized over their useful lives. The cumulative effect of the adoption of this standard led us to record in 2002 a transitional impairment charge of €2,621 million, accounted for as a change in accounting principles. At the end of 2002, we reassessed the evaluations made during the transition period, which led us to record an impairment charge of €83 million. As a result of these adjustments, the carrying value of our goodwill under French GAAP differs from that under US GAAP, which in 2003 led us to record different goodwill impairment charges under French and US GAAP, although the differences were significantly smaller than in prior years.
The most significant items in reconciling our net income (loss) under French GAAP and U.S. GAAP in 2004, as reflected in Note 28 to our consolidated financial statements, were:
Financial instruments of €(74.8) million before taxes; and
Goodwill amortization charges of €208.8 million.
The most significant items in reconciling our shareholders’ equity under French GAAP and U.S. GAAP in 2004, as reflected in Note 28 to our consolidated financial statements, were:
Goodwill recorded at market value under French GAAP in connection with the transfer of certain subsidiaries and affiliates to our group by Vivendi Universal, our former parent company. Under U.S. GAAP, goodwill relating to these transfers was recorded at Vivendi Universals historical cost basis, and the difference between these two bases stood at €(714.5) million at the end of 2004;
Treasury shares were deducted from equity under U.S. GAAP in an amount of €(272.6) million;
Other financial instruments resulted in a reduction of equity of €(175.4) million;
The difference in accounting treatment regarding payments to local authorities, which stood at €(180.5) million at the end of 2004; and
Maintenance and repair costs, which are accrued in advance for specific contracts under French GAAP and expensed as incurred under U.S. GAAP. The impact on shareholders’ equity amounted to €197.7 million at December 31, 2004.
For a more detailed discussion of the significant differences between French GAAP and US GAAP as applied to our company, see Note 28 to our consolidated financial statements.
Migration to International Financial Reporting Standards (IFRS)
We launched a program at the end of 2003 to prepare our company for the change of the accounting principles applicable to our financial statements from French GAAP to International Financial Reporting Standards (IFRS). Pursuant to a decision adopted by the European Union, all European listed companies are required to adopt IFRS on January 1, 2005, with retroactive effect to January 1, 2004.
In connection with our migration program, we created a steering committee composed of the principal financial officers of our group, which is chaired by our chief financial officer. This committee has already completed work under the migration program that has led to:
the formation of project teams charged with analyzing the differences between French and U.S. GAAP, on the one hand, and IFRS, on the other, on the basis of the IFRS published or proposed so far, including the potential impact that the change to IFRS may have on our financial statements;
IFRS training for nearly 1,200 employees, who form part of our financial, legal and operating teams;
distribution of a group-wide manual of accounting principles and procedures that has been rewritten to reflect IFRS; and
adaptation of consolidation systems and procedures to meet the specificities of the IFRS principles relating to consolidation.
These efforts have allowed us, working together with all other entities within our group, to establish an opening balance sheet under IFRS as of January 1, 2004.
2004 Opening Balance Sheet Under IFRS
Accounting principles and methods
In accordance with Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of July 19, 2002 and with Regulation (EC) No. 1725/2003 of the European Commission of September 29, 2003, we will prepare our consolidated financial statements under IFRS beginning with our 2005 fiscal year.
Pursuant to IFRS 1 (adopted by the European Union in Regulation (EC) No. 707/2004) relating to the first-time adoption of IFRS, the first set of financial statements to be published under IAS/IFRS will be those in respect of the 2005 fiscal year, which will include 2004 comparative figures prepared under IAS/IFRS.
IFRS 1 offers companies the choice of various options in connection with their first-time adoption of IFRS. As a result, we have made the following choices:
no restatements for business combinations prior to January 1, 2004;
cumulative actuarial gains and losses unrecognized at December 31, 2003 to be charged to shareholders equity at January 1, 2004;
exchange differences reset to zero at January 1, 2004;
valuation of tangible and intangible assets to be left at historical cost;
sales of Dailly (discounting of receivables) to be consolidated retrospectively from January 1, 2004.
Further, we have opted to apply the following standards in advance:
IAS 32 and 39, which relate to financial instruments (Regulation (EC) No. 2086/2004 and No. 2237/2004);
IFRS 5, which relates to discontinued activities (Regulation (EC) No. 2236/2004); and
IFRIC 4 (interpretation of IAS 17 on leases).
Finally, we have decided to retain the proportionate consolidation method, in accordance with IAS 31.
The following balance sheets at January 1, 2004 have been prepared under IFRS, in accordance with the standards and interpretations that have been published thus far. Some uncertainty remains regarding the definition and interpretation of certain accounting standards, in particular those relating to the treatment of concessions. New accounting pronouncements could significantly affect the future preparation of financial statements under IFRS.
IFRS Balance Sheet at January 1, 2004 (Assets) – Transition table
IFRS Balance Sheet at January 1, 2004 (Shareholders Equity and Liabilities) Transition table
The following notes help to explain any restatements made, excluding analysis of activities sold which is separately explained in note 10 below.
This item consists mainly of assets acquired in connection with the acquisition of businesses, which under French GAAP is accounted for as intangible assets. Under IFRS, this item has been restated as goodwill.
Further, goodwill will no longer be amortized. Instead, IAS 36 provides that goodwill impairment tests must be conducted at least once per year.
Accordingly, we will continue our policy of systematically reviewing all of our long-term assets on an annual basis. We have adjusted our valuation methods and analytical structures in order to comply with IFRS requirements, namely by identifying our cash generating units (CGU) and the value in use of each CGU.
See the paragraph below on Contractual Analysis: IAS 17- IFRIC 4.
Following contractual analysis (see Contractual Analysis: IAS 17- IFRIC 4 below), a number of tangible assets were reclassified as financial assets.
IFRS restatements mainly involved:
a €1.5 billion reclassification of tangible and intangible assets in connection with “Contracts Corresponding to IFRIC 4” (see “Contractual Analysis: IAS 17- IFRIC 4” below), and
a reassessment of derivatives.
The restatement under IAS 39 resulted from the consolidation of securitization programs in France and sales of Dailly (discounting of receivables) (see discussion of debts under notes 8 and 9 below).
The principal restatement made with respect to other current assets, in accordance with IAS 32, was a €0.9 billion reclassification of BMTNs (Bons à Moyen Terme Négociables) into cash. See note 11 of the annual consolidated financial statements.
The restatement of provisions for liabilities and charges primarily involved:
a reclassification of amortization charges for decay as a deduction from tangible assets (see Contractual Analysis: IAS 17- IFRIC 4 below); and
an updating of provisions. The updated rate corresponds to a risk-free rate before tax in the relevant monetary zone.
In accordance with IAS 37, expense schedules were prepared and long-term provisions in this case, provisions to restate landfills were reduced following reanalysis and updating.
Restatements of long-term financial debt broke down as follows (in euro billions):
In December 2001, VEFO (Veolia Environnement Financière de l’Ouest) issued €300 million in subordinated loan notes redeemable by preference shares (TSAR), which will mature on December 28, 2006. Considering the characteristics of the TSARs, these securities were categorized as minority interests under French GAAP. Under IFRS, the TSARs will be categorized as debt instruments pursuant to an analysis under IAS 32 and 39.
Application of the SIC 12 interpretation led to the consolidation of securitization programs (€0.3 billion) and ad-hoc entities (€0.4 billion).
Under French GAAP, application of the French Financial Security Law resulted in the reconsolidation of securitization programs and ad-hoc entities beginning on January 1, 2004.
Financial debt is categorized based on the interest rate method in effect, which led to the reclassification of repayment premiums and issuance costs as a reduction of liabilities.
Reassessment of a cross currency swap (under French GAAP) the value of which is recorded in other non-current financial assets.
Under French GAAP, deferred income includes payments made in respect of income from the securitization of future receivables in the energy services division (referred to as a COGEVOLT transaction). COGEVOLT transactions are used to help finance the cost of Dalkias co-generation plants. Since January 1, 1998, the proceeds have been amortized on an actuarial basis over the duration of these receivables, which ranges between 5 and 12 years.
Under IFRS, COGEVOLT transactions will be treated as additional financing and recognized as financial debt.
Restatements of short-term financial debt principally relate to the consolidation of operations of sales of Dailly receivables in France.
Activities sold assets and liabilities relating to USFilter and FCC. These transactions are described in paragraph Successful completion of restructuring plan above.
Shareholders Equity Transition Table
We reviewed our pension obligations and similar benefit commitments as part of the implementation of IAS 19. No new material commitments were identified.
The restatement above reflects our decision to reset actuarial gains and losses to zero at January 1, 2004.
See Contractual Analysis: IAS 17- IFRIC 4 below.
The early adoption of IAS 32 and IAS 39 by our company primarily resulted in the following:
allocation to shareholders’ equity of the value of treasury stock, representing an amount of €110 million;
accounting for financial debt at amortized cost;
recording of derivatives in the balance sheet at fair value and revaluation of items hedged by fair value hedge derivatives.
Under IAS 32 and IAS 39, all derivative financial instruments (including those embedded in other contracts) must be recorded in the balance sheet at their market value.
Variations in the market value of derivatives are recorded as reserves or as income depending on whether the derivative is used as a fair value hedge, a cash flow hedge or a net investment hedge (debt denominated in foreign currencies allocated to foreign investments), or is not used at all for hedging purposes.
See note 8(a) above relating to the analysis of TSARs under IFRS.
Contractual Analysis: IAS 17- IFRIC 4
We provide environmental management services to municipal and industrial clients. In so doing, we manage numerous contracts with our municipal and industrial clients under which we operate assets that we return at the end of the contract. In certain cases, we may also be called upon to provide asset financing on behalf of these clients.
As part of the analysis conducted to implement IFRS, we were required to examine the substance of such contracts. For purposes of this examination, we relied on IAS 17 (Accounting for leases), and in particular on the interpretation thereof, IFRIC 4, published in December 2004.
IFRIC 4 (Determining whether an arrangement contains a lease) deals with how to consider and account for service agreements that, though not having the legal form of a lease, convey rights to use assets to customers in return for payments. Under IFRIC 4, such service agreements are categorized as leases, which are then analyzed and accounted for as leases according to the criteria set forth in IAS 17 (risk and reward analysis).
In accordance with IAS 17, the contract operator becomes in this instance a lessor vis-à-vis its customers, to whom it transfers the risks and rewards of the activity. As a result, the operator records a financial receivable to reflect the financing carried.
We conducted an analysis of our contract portfolio in light of these standards and interpretations, and identified three types of contracts:
Contracts covered by the IFRIC 4 interpretation
These contracts were analyzed pursuant to IAS 17 and, if the requirements were met, they were accounted for as financial receivables. Contracts that fell into this category included certain industrial contracts, Build, Operate & Transfer (BOT) contracts, incineration contracts and co-generation contracts. The restatement that ensued under IFRS resulted in a reclassification of these assets from tangible assets under French GAAP to financial receivables” under IFRS, in an amount of approximately €1.6 billion.
Concession and affermage contracts
While we wait for the forthcoming accounting rules on concessions to be issued, we have chosen to retain our existing accounting methods for these contracts, except for certain restatements in terms of presentation. Accordingly, financial depreciation (amortissement de caducité), recorded under French GAAP as provisions for risks and charges, were reclassified as a deduction from tangible assets (as set forth in note (7) above). On the other hand, tangible assets recorded in connection with concession contracts, as well as related provisions (for renewal and total guarantee), continue to be recorded as liabilities as they were under French GAAP.
Tangible assets related to contracts falling in neither of the categories above continue to be recorded as tangible assets. In accordance with IAS 16, the component-based approach was adopted.
There remains a degree of uncertainty on some key IAS/IFRS standards and interpretations, in particular relating to the treatment of concessions. We undertake no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.
RESULTS OF OPERATIONS
Unless otherwise indicated, the following discussion relates to our French GAAP financial information.
Year ended December 31, 2004 compared to year ended December 31, 2003
We generated revenue of €24,673 million in 2004 (after application of the provisions of Article 23100 of French CRC Regulation 99-02 as described above), a decline of 13.7% from revenue of €28,603 million in 2003. Under the new scope of consolidation (as defined above), our revenue grew by 3.5% from €23,821 million in 2003 to €24,645 million in 2004 and, at constant exchange rates, by 4.4% to €24,862 million in 2004. The negative impact of exchange rate fluctuations, which amounted to €218 million in 2004, was mainly due to the depreciation of the U.S. dollar (which accounted for €172 million), which traded at an average rate of exchange of $1.2462 per euro in 2004 compared to $1.1418 per euro in 2003. The increase in revenue on a comparable basis is principally attributable to organic growth in 2004 of 3.9%.
The following table shows a breakdown of our revenue (according to Article 23100 of CRC Regulation 99-02 under French GAAP):
(1) After application of the specific provisions of Article 23100 of French CRC Regulation 99-02 as described above.
The following table shows a breakdown of our revenue by division under the new scope of consolidation:
The following table shows a breakdown of our revenue by division in France and elsewhere under the new scope of consolidation:
Revenue generated in France increased from €13,022.7 million in 2003 to €13,439.1 million in 2004, reflecting solid growth of more than 5% across all divisions except for water, which in 2003 recorded higher than normal revenue due to the heatwave that struck most of France.
Revenue generated outside France increased by 3.8% to €11,205.5 million in 2004 (compared to €10,798.8 million in 2003), and by 5.8% at constant exchange rates. Growth in our water, waste management and energy services divisions was particularly strong and helped contribute to the overall positive result. This growth was offset, however, by a decline in revenue outside France for our transportation division, which was due to the loss of the Connex South Eastern license in the United Kingdom.
The following table shows a breakdown of our revenue by division and by geographical regions outside of France under the new scope of consolidation:
Revenue from Europe outside France remained stable due to the loss of the Connex South Eastern license in 2003, which was offset by growth in our other divisions. Excluding the effect of the loss of Connex South Eastern, our revenue from Europe outside France grew by 7.4%, and by 7.2% at constant exchange rates.
The principal factors contributing to this increase were:
expansion in our waste management activities in the UK and Northern Europe,
expansion in our energy services activities in Italy and the UK,
development of our transportation activities in Eastern Europe, and
growth in our water activities in Germany.
In the Americas, revenue increased by 21% at constant exchange rates, due primarily to the full-year impact of our operations under the Boston transportation contract and our other new development in the transportation division.
In the rest of the world, revenue increased by 20.3%, due primarily to new contracts won by our water division in China, a solid performance by our waste management division and our operations under the newly renewed and expanded Melbourne contract in our transportation division.
Our water business generated revenue of €9.8 billion in 2004, an increase of 2.2% compared with 2003, despite the negative impact of fluctuations in currency exchange rates (which represented a 0.8% decline in revenue). At constant exchange rates, revenue from our water business grew by 3.0% in 2004, including the 0.5% positive impact of external growth. As a result, our water business recorded organic growth of 2.5%, which is primarily attributable to the following:
In France, revenue was affected by weather conditions that were much less favorable than in 2003, which led to a reduction in our billings for payments collected on behalf of local water authorities (third-party revenues) during 2004. Nevertheless, our business benefited from an excellent rate of contract renewals and an important contribution from new contracts and complementary services. Revenue growth came to 1%. However, when adjusted for the reduction in total billings collected from local water authorities, revenue grew by 2.6%.
Outside France, excluding Veolia Water Systems, organic growth remained strong at nearly 9%. Our business benefited from highly favorable trends across Europe and from the commencement of operations under new contracts won in the Asia-Pacific region (representing organic growth of 19%). The activities we retained in the United States also performed well.
Revenue posted by Veolia Water Systems declined slightly by 2.7% at comparable scope and constant exchange rates, due to measures we undertook both in France and elsewhere to refocus on more profitable contracts.
Our waste management business generated revenue of €6.2 billion in 2004, an increase of 4.9% compared with 2003, despite the negative impact of fluctuations in currency exchange rates relating to the U.S. dollar in particular (which represented a 2.1% decline in revenue). At constant exchange rates, waste management revenue increased by 7.0% compared with 2003, despite negative external growth of 0.2%. Organic growth of 7.2% in our waste management business was primarily attributable to the following:
In France, despite a challenging economic environment, the expansion of waste collection, sorting and waste-to-energy activities as well as an overall improvement in service offerings helped to lift organic revenue growth to 6.6%.
Total revenue growth outside France, excluding Latin America (Proactiva), was nearly 8% at comparable scope and constant exchange rates. Business in Northern and Central Europe (in particular in the United Kingdom, Norway and the Czech Republic) posted continued strong growth. In the United States, our solid waste and industrial services activities recorded a strong performance. Our operations in Asia continued to benefit from satisfactory growth in volumes, especially in Hong Kong. Revenue in Australia posted a tangible increase following expansion in New South Wales and Queensland.
Our energy services business generated revenue of €5.0 billion in 2004, an increase of 8.2% compared with 2003. Revenue growth resulted mainly from organic growth of 7.2%, and to a small extent from 1% in external growth (principally relating to the acquisition of Giglio in Italy). Organic growth of 7.2% in our energy services business was primarily attributable to the following:
Revenue in France grew by 5.9% as a result of expansion in business, in particular with industrial customers, and the entry into service of cogeneration plants.
Outside France, organic revenue growth was 9.6%. Expansion was particularly strong in Southern Europe (organic growth in Italy ran at nearly 18% due to new contract wins, while overall growth came to 29% due primarily to the acquisition of Giglio) and in the UK (growth of 12.6% at comparable scope and constant exchange rates).
* Under new scope of consolidation.
Our transportation business generated revenue of €3.6 billion in 2004, a 1.6% decrease compared with 2003. This decrease was primarily due to negative organic growth of 1.9% and the impact of fluctuations in currency exchange rates (which represented a 0.5% decline in revenue), which was partially offset by external growth of 0.8%. At constant exchange rates, revenue from our transportation business decreased by 1.1% compared with 2003. Negative organic growth of 1.9% in our transportation business was primarily attributable to the discontinuation of rail and bus operations in the United Kingdom in November 2003. Excluding the impact of this discontinuation, organic growth came to 14.7%, which was primarily attributable to the following:
In France, organic revenue growth of 8% was due to both business expansion as well as contract renewals or expansions.
Outside France, excluding the impact of the operations discontinued in the UK, organic growth was up 19.6%. Connex benefited in particular from the full-year impact of operations under the Boston contract, rail contracts won in Germany and the renewal and expansion of the Melbourne contract in Australia.
Operating Income (Loss) before Amortization and Depreciation of Goodwill and Indefinite Life Intangible Assets and Restructuring Costs (EBIT)
Our operating income (loss) before amortization and depreciation of goodwill and indefinite life intangible assets and restructuring costs (which we refer to as EBIT in our consolidated financial statements, as permitted by French accounting principles) decreased from €1,750.9 million in 2003 to €1,616.9 million in 2004 (after application of the provisions of Article 23100 of French CRC Regulation 99-02 as described above). Under the new scope of consolidation, our EBIT increased by 12.4% from €1,437.4 million in 2003 to €1,615.8 million in 2004, and at constant exchange rates by 13.5% to €1,631.6 million in 2004.
The following table shows a breakdown of our EBIT (according to Article 23100 of CRC Regulation 99-02 under French GAAP):
(1) After application of the provisions of Article 23100 of French CRC Regulation 99-02 as described above.
The following table shows a breakdown of our EBIT by division under the new scope of consolidation:
EBIT of our water division amounted to €830.3 million in 2004, an 11.7% increase from the €743.2 million recorded in 2003. At constant exchange rates, EBIT increased by 12.2% in 2004, which was primarily attributable to the following:
In France, the profitability of our water division decreased slightly in 2004, given that weather conditions were less favorable than in 2003 (when a heatwave struck most of France). However, this was almost entirely offset by our continued pursuit of productivity and cost-control measures in France.
Outside France, operating margins improved due primarily to an increase in tariffs under the Berlin water contract. In the rest of Europe, EBIT increased in Germany, the Czech Republic and Romania. In Asia, our operations under new contracts are beginning in accordance with development plans. In the United States, we implemented a new organizational structure for the U.S. assets we decided to retain. Engineering and technology activities within our water division benefited from a strategy aimed at choosing contracts more selectively, and also recorded a significant increase in profitability.
As a result of these factors, our water division’s EBIT/revenue ratio increased from 7.7% in 2003 to 8.5% in 2004.
EBIT of our waste management division amounted to €455.8 million in 2004, a 19.2% increase from the €382.5 million recorded in 2003. At constant exchange rates, EBIT increased by 22.4% in 2004, which was primarily attributable to the following:
In France, results were strong due to the impact of several profitability measures and rationalization of operating processes that occurred over the past few years, in particular in the areas of collection, incineration and hazardous waste activities. Our waste management division has also attempted to refocus itself on the provision of high value-added services.
Outside France, EBIT increased noticeably in Northern Europe. In the United Kingdom, for example, our waste management division benefited from an improvement in the profitability of municipal contracts and the impact of large integrated contracts, while in Norway the divisions recycling activities yielded favorable results. In the United States, EBIT increased due primarily to industrial service activities.
As a result of the general improvement in profitability, our waste management divisions EBIT/revenue ratio increased from 6.6% in 2003 to 7.4% in 2004.
* Under new scope of consolidation.
EBIT of our energy services division amounted to €295.8 million in 2004, a 7.8% increase at current and constant exchange rates from the €274.4 million recorded in 2003. The increase was primarily attributable to the following:
In France, EBIT improved due in particular to continued strengthening of work organization.
Outside France, EBIT increased strongly in Italy due to the twin effects of new commercial development and efforts to improve profitability. EBIT also increased in Eastern Europe, benefiting from the commencement of operations under new contracts won over the past two years, in particular in Poland and the Baltic region.
As a result of these factors, our energy services divisions EBIT/revenue ratio remained stable at 5.9% in 2004.
EBIT of our transportation division amounted to €103.3 million in 2004, an 11.5% increase compared with 2003. At constant exchange rates, EBIT increased by 12.5% in 2004, which was primarily attributable to the following:
In France, businesses performed well, in particular the inter-city transportation business.
Outside France, results improved noticeably due to profits realized under the Boston contract, the initial effects of the newly expanded Melbourne contract and contract negotiations in Germany. This improvement was offset, however, by difficulties encountered in the Scandinavian market, which involved bus activities in Sweden and Denmark and an operating deficit by the Norland Trafic railway line in Sweden.
As a result of these factors, the transportation divisions EBIT/revenue ratio increased from 2.5% in 2003 to 2.9% in 2004.
EBIT by Region
The following table shows a breakdown of our EBIT by geographical region under the new scope of consolidation:
Assets disposals in the United States and Spain have led to an increase in the proportional contribution to EBIT of our activities in France.
EBIT margins (EBIT/revenue ratio)
EBIT margins (under the new scope of consolidation) improved in different divisions due to an improvement in operating performances, and broke down as follows:
The following table shows a breakdown of our operating expenses in 2004 (new scope) and 2003:
Amortization of Goodwill and Depreciation of Intangible Assets with Indefinite Lives
Our amortization and depreciation charges relating to goodwill and intangible assets with indefinite lives decreased from €2,424.5 million in 2003 to €253.3 million in 2004. Amortization charges in 2004 included a write-off of €70.0 million of goodwill for our transportation division in various parts of the Scandinavian market. Other write-offs (amounting to €36.4 million) involved mainly the waste management (€19.0 million) and energy services (€14.9 million) divisions, in light of the market environment in 2004 and our prospects for our markets.
In 2003, amortization and depreciation charges relating to goodwill and intangible assets with indefinite lives amounted to €2,424.5 million, principally due to our write-off in the first half of 2003 of €2,091.3 million of goodwill recorded in connection with the acquisition of USFilter and several trademarks held by USFilter (which are recorded as intangible assets with an indefinite life) following our reorganization of our U.S. water activities and the contemplated divestment of several of these activities, including the Equipmentshort-term contracts and Consumer & Commercial units of USFilter. In addition, in light of the market environment in 2003 and our prospects for our markets, in 2003 we wrote-off goodwill amounting in the aggregate to €123.6 million, of which €36 million was recorded in several engineering subsidiaries of our water division, €21.6 million in our German waste management operations and €18.8 million our energy services activities. This €123.6 million write-off of goodwill also included a charge of €9.7 million in our transportation division due to the termination of the Connex South Eastern license, and charges of €24.2 million relating to FCC, notably with respect to its cement activities in the U.S.
Our restructuring costs decreased from €93.3 million in 2003 to €51.0 million in 2004. Restructuring costs in 2004 related mainly to:
€28.5 million accrued in our water division, due primarily to the implementation of restructuring plans for subsidiaries, including Veolia Water Systems (€8.5 million), Novo in Berlin (€8.0 million) and Apa Nova Bucuresti in Bucharest (€3.1 million). Various other restructuring charges amounted to less than €2 million each;
€17.1 million accrued in our energy services division, of which €10.6 million and €6.5 million related to employee termination costs in France and abroad, respectively;
€2.7 million accrued in our waste management division; and
€2.7 million accrued in our transportation division.
Restructuring costs in 2003 related mainly to:
€31.5 million accrued in our transportation division, of which €20.9 million relate to the additional costs incurred in connection with the loss of the South Eastern license in the United Kingdom, which were fully paid in 2003 to obtain the release of our financial obligations under the license. Most of the remaining balance relates to the reorganization of our German transportation activities (€3.6 million);
€33.9 million accrued in our water division, including €12.7 million recorded by USFilter’s subsidiaries in the United States in connection with various profitability measures (particularly in its engineering activities), €9.8 million relating to Veolia Water’s engineering activities (particularly in the Benelux region), and €4.0 million in connection with changes in the management of the Africa and Middle East region;
€15.1 million accrued in our energy services division, of which €14.6 million were recorded in France and the remaining €0.5 million elsewhere; and
€12.6 million accrued in our waste management division, including €5.0 million in costs associated with a reorganization plan in the United States.
Operating income is defined as EBIT after amortization and depreciation of goodwill and intangible assets with indefinite lives and restructuring costs. It is therefore affected by exceptional write-offs of goodwill and market shares. We recorded operating income of €1,312.6 million in 2004, compared to an operating loss of €766.9 million in 2003. Our operating loss in 2003 is mainly attributable to the write-off of goodwill and indefinite life intangible assets associated with the acquisition of USFilter recorded in our water division in the first half of 2003.
The following table shows a breakdown of our operating income by division:
Excluding the results of Proactivas water and waste management activities, as applicable.
Figures reflect our consolidated 49% share of FCCs operating income.
Financial Income (Expense), Net
Our net financial income (expense) includes dividends received, profit or loss on sales of marketable securities, foreign exchange profit or loss and financing costs. We incurred net financial expense of €635.0 million in 2004, compared to net financial expense of €749.9 million in 2003. The decrease in net financial expense was partially due to a continued decline in our financing costs, from €623.7 million in 2003 to €602.1 million in 2004. It was also equally due to a reduction in net accruals of reserves, which fell from €134.1 million in 2003 to €45.8 million in 2004.
The decrease in our financing costs is principally attributable to a reduction in our outstanding indebtedness, which offset an increase in the average cost of our debt from 4.31% in 2003 to 4.63% in 2004. The increase in the average cost of our debt resulted from an extension in the maturity of debt, the implementation of fixed-rate hedges in 2004 and the investment of proceeds resulting from asset sales into short-term money market instruments (to be used for the redemption of our outstanding convertible bonds (OCEANEs) on January 3, 2005).
Excluding the impact of our financing costs, we recorded net financial expense of €32.9 million in 2004, compared to net financial expense of €126.2 million in 2003. The other principal components of financial income and expense in 2004 were the following:
a capital gain of €44.4 million from the sale of shares of Vinci, as well as a capital gain of €7.8 million from the sale of shares of Rome Vendôme (compared to a capital gain of €30.5 million in 2003 from the sale of shares of Vinci),
a write back of reserves of €3.6 million relating to shares of our company held as treasury stock (compared to net accrual of reserves of €61.1 million in 2003, including a €69.8 million reserve accrued in connection with several financial credits held by USFilter),
the amortization of €34.7 million in redemption premium (stable compared to €34.1 million in 2003), a substantial part of which corresponds to redemption premium on our convertible bonds, or OCEANEs (€30.2 million),
the amortization of €18.8 million in borrowing costs, a slight increase compared to 2003 (€14.0 million),
commissions paid to financial institutions amounting to €9.6 million (compared to €13.0 million in 2003), and
a net foreign exchange loss of €19.9 million (compared to €7.8 million in 2003).
Other Income (Expense)
We record non-recurring income and charges as “other income (expense). We define non-recurring income and charges as those resulting from extraordinary events that are not likely to reoccur in the ordinary course of our operations, including capital gains and losses recorded in connection with the sale of our subsidiaries and assets. We recorded net other expense of €57.3 million in 2004, compared to €62.4 million in 2003.
Our net other expense in 2004 principally resulted from:
a €55.2 million capital loss recorded in connection with the sale by Berlin Water of telecommunications operator Berlikomm,
a €13.8 million settlement paid to resolve a dispute relating to a failed acquisition in Italy,
other insignificant charges.
Our net other expense in 2003 resulted from the €65.0 million in capital losses recorded in connection with the sale of several of USFilter’s activities (including the impact of fluctuations in exchange rates on the sales proceeds) and reserves accrued in respect of USFilter activities in the process of being sold, a €28.3 million reserve accrued in respect of companies in the United Kingdom to be sold following our strategic decision to withdraw from the U.K. transportation market, and a €21.6 million reserve accrued by FCC in respect of the sale of Grubar Hotels. These capital losses and reserves more than offset net capital gains of €52.5 million from various divestments in 2003. Our net capital gains resulted primarily from a €30.8 million gain on the sale of our interest in Wyuna and a €40.8 million gain on the sale by FCC of Compañía de Energía Hydroeléctrica de Navarra.
Income Tax Expense
Our income tax expense in 2004 was €182.4 million, compared to €274.4 million in 2003. Our 2004 income tax expense is composed of a tax charge of €226.0 million, partially offset by €43.6 million in deferred income tax benefits (compared to €352.2 million and €77.8 million, respectively, in the 2003 accounts). In 2004, this tax expense does not take into account tax charges on divestments, which are included in the net income for discontinued operations.
While our profitability has improved, our average tax rate (calculated on the basis of income tax before taxes on income resulting from minority interests and before amortization and depreciation of goodwill and intangible assets with indefinite life) has decreased from 32.5% in 2003 to 20.9% in 2004. This decrease is due to the effect of tax synergies of our U.S. and French businesses. Further, the improvement in operating profitability has had a favorable impact on tax planning. We believe that we should be able to record additional deferred tax
assets in the future, in particular in the area of fiscal year losses which were not taken into account in the balance sheet in 2003.
Our Share in Net Earnings of Companies Accounted for by the Equity Method
Our share in net earnings of companies accounted for by the equity method reached €22.4 million in 2004, compared to €44.4 million in 2003. The largest contributions were made by companies accounted for by Onyx using the equity method (€9.1 million), Veolia Water (€5.8 million) and Proactiva (€5.0 million). The decrease in our share of net earnings of equity investees in 2004 compared to 2003 is primarily attributable to the sale of FCC in 2004, which in 2003 contributed €30.7 million to our share of net earnings of equity investees.
Our income allocable to minority interests totaled €127.1 million in 2004, compared to €245.5 million in 2003. The principal minority interests in 2004 are related to our water subsidiaries (€42.4 million), our energy services subsidiaries (€44.9 million), our waste management subsidiaries (€18.1 million) and our transportation subsidiaries (€12.7 million). The decrease in income allocable to minority interests in 2004 compared to 2003 is primarily attributable to the sale of FCC in 2004.
The principal minority interests in 2003 were related to FCC (€111.9 million), our water subsidiaries (€61.2 million, mainly related to Berlin Water), our energy services subsidiaries (€41.4 million), our waste management subsidiaries (€15.5 million), our transportation subsidiaries (€11.3 million) and Proactiva (€(5.8) million).
Income (loss) from discontinued operations
The net income from U.S. businesses sold (€0.2 million) includes the effect of restructurings related to the sale of these assets. The capital loss incurred takes into account the price adjustments negotiated with buyers.
Income (loss) related to USFilter was heavily influenced by the tax consequences of the U.S. asset sale, such that:
we recorded a €63.5 million charge relating to our use of deferred tax assets in connection with the sale;
moreover, as a result of tax regulation in France, currency gains and losses on loans and debts are taxed without taking into account the effects of currency fluctuations on equity. Consequently, a French tax charge of approximately €138 million was imposed on the sale of U.S. assets. In previous fiscal years, this tax charge has been deducted directly from a currency transaction adjustments reserve in accordance with consolidation rules relating to net foreign investments. This €138 million tax charge therefore has no impact on shareholders’ equity.
Regarding FCC, it contributed to net income for a 9-month period. The sale of FCC yielded a consolidated capital gain of €36.1 million. Further, we paid €31.2 million to Spanish tax authorities during 2004 relating to the sale of FCC, in accordance with a tax treaty between France and Spain.
The principal components of the profit and loss accounts for discontinued operations for the year ended December 31, 2004 are the following:
Consolidated Net Income (Loss)
We recorded consolidated net income of €125.4 million in 2004 (with a positive contribution of €333.2 million from businesses that we have decided to retain in the future), compared to a consolidated net loss of €2,054.7 million in 2003. Excluding the impact of our €2,214.9 million write-off of goodwill and intangible assets in 2003, the increase in our consolidated net income for 2004 compared to 2003 is principally due to the improved performance of our businesses (yielding a positive effect of €133 million), which was partially offset by an increase in the average cost of financing (yielding a negative effect of €27 million).
Based on our average number of shares outstanding during each period (406.4 million in 2004 compared to 405.0 million in 2003) and the number of treasury shares not taken into account in our consolidated net position in each period (4.2 million), we recorded net earnings per share of €0.31 in 2004, compared to a net loss per share of €(5.13) in 2003.
Year ended December 31, 2003 compared to year ended December 31, 2002
We generated revenue of €28.6 billion in 2003, a decline of 4.9% from revenue of €30.1 billion in 2002. Excluding revenue from business sold in 2002 and 2003, revenue grew by 1.2% from €28.1 billion in 2002 to €28.4 billion in 2003 and, at constant exchange rates, by 5.3% to €29.6 billion in 2003. The negative impact of exchange rate fluctuations, which amounted to €1.2 billion in 2003, was mainly due to the depreciation of the dollar (which accounted for €740 million) and, to a lesser extent, fluctuations in the British pound (which accounted for €182 million) and several Latin-American currencies (which accounted for €92 million). The increase in revenue on a comparable basis is principally attributable to organic growth in 2003 of 5.6%.
The businesses sold in 2002 and 2003 generated revenue of €184.8 million in 2003, compared to €2.0 billion in 2002. The sharp decline in revenue contributed by these businesses is mainly attributable to the sale of most of these businesses over the course of 2002.
The following table shows a breakdown of our revenue by division in France and elsewhere:
Figures reflect a 49% share of FCCs revenue. Under French GAAP, we proportionally consolidate FCC based on our 49% interest in the holding company that controls it. See OverviewMajor Developments in 2003Relationship with FCC. Under U.S. GAAP, FCC would be accounted for using the equity method. See Note 28A to our consolidated financial statements.
Percentages are based on total figures and may not exactly correspond to the figures above due to rounding.
Revenue generated in France remained stable at €13.0 billion due mainly to the sale of Bonna Sabla at the end of 2002 and a decline in revenue generated by Dalkia’s construction activities, which was offset by growth in all of our other activities. Revenue generated outside France declined by 8.8% to €15.6 billion in 2003 due mainly to the sales of USFilter’s assets in 2002 and 2003 and the impact of fluctuations in exchange rates.
The following table shows a breakdown of our revenue by division and by geographical regions outside of France:
Figures reflect a 49% share of FCCs revenue. Under French GAAP, we proportionally consolidate FCC based on our 49% interest in the holding company that controls it. See OverviewMajor Developments in 2003Relationship with FCC. Under U.S. GAAP, FCC would be accounted for using the equity method. See Note 28A to our consolidated financial statements.
Revenue from the euro zone outside France increased by approximately 13.0% in 2003, principally due to strong growth in our transportation and energy services divisions and at FCC. Revenue from our energy services division in this region increased mainly as the result of the impact of the acquisitions of the DBU group in the Benelux region, FP2 in Ireland and Giglio in Italy in 2003. Growth in revenue from our transportation division in this region was primarily due to the commencement of operations under the EKO-Stahl contract in Germany and our ferry and taxi operations in the Netherlands. FCCs revenue increased principally due to demand in the construction market in Spain.
The 9% decline in revenue generated in Europe outside the euro zone countries was driven mainly by the impact of fluctuations in exchange rates, primarily relating to the British pound, and to lower revenues recorded by USFilters U.K. activities, as well as the termination of our South Eastern transportation license in the United Kingdom on November 8, 2003.
In the Americas, the decline in revenue is primarily attributable to the impact of fluctuations in exchange rates, the impact of the sale in 2002 and 2003 of businesses that were formerly operated by USFilter and the full-year impact of the non-renewal of our water contract in Puerto Rico on July 1, 2002, all of which more than offset the increase in revenue generated by our transportation activities in the United States due to the commencement of operations under our Boston contract.
The decline in revenue in the rest of the world region in 2003 reflects primarily the impact of fluctuations in exchange rates and the sale of USFilters operations in this region. Revenue in the Asia-Pacific region represented 56.4% of revenue in the rest of world region.
Our water business generated revenue of €11.3 billion in 2003, a decrease of 14.7% compared with 2002, which is mainly attributable to the sale in 2002 and 2003 of businesses formerly operated by USFilter. Excluding revenue from businesses sold in 2002 and 2003, revenue from our water businesses declined by 1.2% to €11.2 billion in 2003, mainly due to the impact of fluctuations in currency exchange rates (which represented a 4.7% decline in revenue) primarily related to the depreciation of the U.S. dollar. Excluding revenue from businesses sold in 2002 and 2003 and at constant exchange rates, revenue from our water business grew by 3.7% in 2003, despite negative external growth of 0.3%. As a result, our water business recorded organic growth of 3.9%, which is primarily attributable to the following:
In France, we experienced a 4.2% increase in revenue due mainly to the positive effects of the heat wave that struck the entire country in the summer of 2003;
Revenue excluding businesses sold in 2002 and 2003 recorded by USFilter grew by 4.6%, due mainly to the sharp increase in revenue from its services activities (which grew by 10% in 2003) due to the full-year impact of our Indianapolis contract, as well as a slight increase in revenue generated by its equipment sales activities. In Latin America, Proactiva, our joint venture with FCC, recorded revenue of €34 million in 2003, compared to €145 million in 2002, due to its decision to limit its water activities in this region upon the termination of several of its contracts; and
Outside France and the Americas, we experienced a 14% increase in revenue attributable to the impact of the commencement of operations under new contracts won in 2003 in Europe, North Africa and Asia, as well as growth in revenue generated under our existing contract portfolio.
The increase in revenue experienced in all of our regions was partially offset, however, by an 8.4% decline in revenue recorded by Veolia Water Systems that resulted mainly from the implementation of our policy of increased selectivity of our engineering and construction projects.
Our waste management segment recorded revenue of €6.0 billion in 2003, a decrease of 2.7% compared to 2002, reflecting primarily a 6.9% decline in revenue attributable to the impact of fluctuations in currency exchange rates, resulting primarily from the depreciation of the U.S. dollar, which was only partially offset by organic growth of 4.1% and external growth of 0.2%. Organic growth in our waste management business is primarily attributable to the following:
In France, our waste management revenue increased by almost 4%, reflecting primarily growth recorded in our industrial waste and incineration activities; and
Outside France, revenue increased by 4.2% at constant exchange rates primarily due to growth in our Northern European activities, which benefited in particular from the commencement of operations under a large number of contracts won in the United Kingdom at the end of 2002, and to strong growth in our solid waste and incineration activities in the United States.
Our energy services business generated revenue of €4.7 billion in 2003, an increase of 1.8% compared to 2002. Revenue growth resulted mainly from organic growth of 5.4%, which was partially offset by negative external growth of 2.2% and a 1.4% decrease in revenue attributable to the impact of fluctuations in currency exchange rates. At constant exchange rates, revenue from our energy services activities grew by 3.2% in 2003 due mainly to the following:
In France, revenue increased by almost 3% in organic growth primarily due to our heating activities, which benefited from increases in tariffs and favorable weather conditions. This growth was partially offset by a decline in revenue recorded in our maintenance activities; and
Outside France, organic growth was 9.2% due to strong growth of 13.6% in Central Europe, primarily attributable to the full-year impact of new contracts won in this region (in Lithuania, Poland, etc.) and to favorable weather conditions, and of 14.5% in Southern Europe, primarily attributable to the commencement of operations under new contracts won in Italy. The strong
growth in Central and Southern Europe was partially offset by lower growth in revenues in Northern Europe.
Revenue from our transportation business reached €3.6 billion in 2003, an increase of 7.3% compared to 2002. This increase resulted primarily from organic growth of 9.4% and external growth of 1.1%, which more than offset the 3.1% decline in revenue attributable to the impact of fluctuations in exchange rates. At constant exchange rates, revenue from our transportation business grew by 10.5% in 2003 due mainly to the following:
In France, we recorded organic growth in revenue of almost 5% primarily attributable to an increase in revenue in our urban transportation activities; and
Outside France, we recorded growth of 12% primarily attributable to our activities in Northern and Eastern Europe with the award of new contracts in Belgium, Germany, Slovenia and Sweden. In the United States, our transportation revenue almost doubled due to the commencement of operations under our new contract in Boston on July 1, 2003. Our transportation revenue includes revenue recorded under our South Eastern license in the United Kingdom until November 8, 2003. Excluding the impact of the termination of this license on November 8, 2003, our transportation revenue would have recorded an increase of 16% at constant exchange rates outside France. We expect that our withdrawal from the transportation market in the United Kingdom will lead us to record a decline in revenues of €0.6 million in 2004, which we hope to offset with the commencement of operations under new contracts in the United States and the positive effects of the renegotiation of our Melbourne contract in the first quarter of 2004.
Excluding the results of Proactiva, which are included in the results of our water and waste management segments, our consolidated 49% share of FCC’s total revenue grew by 11.7% from €2.7 billion in 2002 to €3.0 billion in 2003. Excluding changes in the scope of FCCs consolidation, FCCs revenue increased by almost 12% in 2003 at constant exchange rates. The increase in FCCs revenue is primarily attributable to new contracts won in its urban and public services activities and to new construction projects awarded to FCC, particularly infrastructure projects.
Operating Income (Loss) before Amortization and Depreciation of Goodwill and Indefinite Life Intangible Assets and Restructuring Costs (EBIT)
Our operating income (loss) before amortization and depreciation of goodwill and indefinite life intangible assets and restructuring costs (which we refer to as EBIT in our consolidated financial statements, as permitted by French accounting principles) decreased from €1,971.3 million in 2002 to €1,750.9 million in 2003, primarily as a result of the sale of businesses in 2002 and 2003 and the negative impact of fluctuations in currency exchange rates in 2003. Excluding EBIT of businesses sold in 2002 and 2003, our EBIT decreased by 5.3% from €1,847.3 million in 2002 to €1,748.6 million in 2003, and at constant exchange rates by 1.8% to €1,813.4 million in 2003. As a percentage of our revenue, our EBIT decreased from 6.6% in 2002 to 6.1% in 2003 due to the combined effect of lower revenue and a decline in EBIT.
The following table shows a breakdown of our EBIT by division:
Figures reflect a 49% share of FCCs EBIT. Under French GAAP, we proportionally consolidate FCC based on our 49% interest in the holding company that controls it. See OverviewMajor Developments in 2003Relationship with FCC. Under U.S. GAAP, FCC would be accounted for using the equity method. See Note 28A to our consolidated financial statements.
The decline in EBIT of our water division is primarily attributable to the impact of the sale of businesses in 2002 and 2003 and of fluctuations in currency exchange rates. Excluding businesses sold in 2002 and 2003 and at constant exchange rates, EBIT decreased by 10.2% due primarily to a decline in EBIT in our U.S. activities, where our profitability has been affected by the impact of the economic downturn on the water equipment market (despite a stable level of business in the second half of 2003) and the write-off of operating assets and the creation of reserves relating to activities currently in the process of being sold. On a comparable basis and excluding EBIT of USFilters Equipmentshort-term contracts and Consumer & Commercial activities, which are in the process of being sold, we believe that EBIT in our water division would have increased by approximately 6.1% in 2003. See OverviewMajor Developments in 2003Strategic Review of Our North American Water Assets.
Our EBIT increased in all of our regions (except the United States) as a result of the impact of weather conditions in the summer of 2003 and of productivity and cost-control measures in France and the commencement of operations under contracts recently won outside of France, particularly in Europe and Asia.
As a result of these factors, our water divisions EBIT / revenue ratio declined from 7.7% in 2002 to 6.9% in 2003.
The decline in EBIT of our waste management division resulted mainly from the impact of fluctuations in currency exchange rates, particularly the depreciation of the U.S. dollar against the euro. At constant exchange rates, EBIT of our waste management division increased by 6.6% in 2003. This increase is primarily attributable to the impact of several profitability measures and the rationalization of operating processes in France, as well as a sustained level of activity in the United Kingdom, particularly in waste collection and integrated contracts, Norway (after a difficult year in 2002) and the United States (at constant exchange rates), particularly in solid waste.
As a result of the general improvement in our profitability, our waste management divisions EBIT / revenue ratio slightly increased from 6.3% in 2002 to 6.4% in 2003.
At constant exchange rates, EBIT of our energy services division grew by 14.3%. In France, our profitability increased due to new contracts won, a favorable evolution in tariffs and a high utilization rate at our co-generation units, which more than offset a decline in profitability of our installation and maintenance activities attributable to a downturn in the market for these services. Outside France, our EBIT increased primarily as a result of the implementation of a program to achieve synergies between Siram, which we acquired in 2002, and Dalkias other Italian activities, as well as, to a lesser extent, the integration of Giglio, which we acquired in 2003. In addition, our profitability benefited from the commencement of operations under new contracts in Eastern Europe, particularly the Baltic region and Poland, as well as from favorable weather conditions.
Our energy services divisions EBIT / revenue ratio increased from 5.3% in 2002 to 5.9% in 2003 due to the improvement in profitability and the impact of acquisitions made outside France.
The decrease in EBIT of our transportation division is primarily attributable to the state of the U.K. transportation market, which affected both our rail and bus activities. Following the decision of the UK Strategic Rail Authority to terminate our license to operate the South Eastern rail network, and in light of the disappointing results recorded by our bus operations in this country, we have decided to divest our bus operations in the United Kingdom in 2004. The negative impact of our U.K. activities was partially offset by an increase in profitability of our transportation activities in France, particularly in our urban transportation operations, and the impact of the commencement of operations under our Boston contract in the United States in the second half of 2003.
As a result of these factors, our transportation divisions EBIT / revenue ratio declined from 3.4% in 2002 to 2.5% in 2003.
Our share of EBIT generated by FCC amounted to €275.3 million, an increase of 10.0% over €250.3 million in 2002. This increase is primarily due to an increase in profitability of FCC’s urban and public services and construction activities, which more than offset a decline in EBIT from FCC’s cement activities attributable mainly to lower profitability in its U.S. operations.
Our share of FCCs EBIT represented 9.3% of our share of FCCs revenue in 2003, compared to 9.4% in 2002.
EBIT by Region
The following table shows a breakdown of our EBIT by geographical region:
The decrease in the proportional contribution to EBIT of our activities in the Americas in favor of France and Europe (except France) is primarily attributable to the sale of businesses in 2002 and 2003 and the decline in profitability of USFilter.
The following table shows a breakdown of our operating expenses in 2003 and 2002:
Amortization and Depreciation of Goodwill and Intangible Assets with Indefinite Lives
Our amortization and depreciation charges relating to goodwill and intangible assets with indefinite lives increased sharply from €327.2 million in 2002 to €2,424.5 million in 2003, principally due to a write-off in the first half of 2003 of €2.1 billion of goodwill recorded in connection with the acquisition of USFilter and several trademarks held by USFilter (which are recorded as intangible assets with an indefinite life) following our reorganization of our U.S. water activities and the contemplated divestment of several of these activities. See OverviewMajor Developments in 2003Strategic Review of Our North American Water Assets. In addition, in light of the market environment in 2003 and our prospects for our markets, in 2003 we wrote-off goodwill amounting in the aggregate to €123.6 million, of which €36 million was recorded in several engineering subsidiaries of our water division, €21.6 million in our German waste management operations and €18.8 million in our energy services activities. In 2002, we wrote off goodwill amounting in aggregate to €77.0 million, including the write-off of all of the goodwill associated with Proactiva’s Latin American subsidiaries in light of the general situation of our Latin American markets and the non-renewal of our water services contract in Puerto Rico as from July 2002, and the write-off of €20 million of goodwill associated with a German subsidiary of Veolia Water that does not conduct any water distribution activities.
Excluding the impact of goodwill write-offs and depreciation of intangible assets with indefinite lives, we recorded a slight decrease in goodwill amortization from €250.2 million in 2002 to €209.6 million in 2003. This decrease is primarily attributable to the impact of fluctuations of currency exchange rates on our amortization charges and to the significant write-off of goodwill associated with USFilter recorded in the first half of 2003.
Our restructuring costs increased from €56.6 million in 2002 to €93.3 million in 2003. Restructuring expenses in 2003 related mainly to:
€31.5 million accrued in our transportation activities, of which €20.9 million relate to the additional costs incurred in connection with the loss of our South Eastern license in the United Kingdom, which were fully paid in 2003 to obtain the release of our financial obligations under the license. Most of the remaining balance relates to the reorganization of our German transportation activities;
€33.9 million accrued in our water activities, including €12.7 million recorded by USFilter’s subsidiaries in the United States in connection with various profitability measures (particularly in its engineering activities), €9.8 million relating to Veolia Water’s engineering activities (particularly in the Benelux region), and €4.0 million in connection with changes in the management of our Africa and Middle East region;
€15.1 million accrued in our energy services activities, of which €14.6 million were recorded in France and the remaining €0.5 million elsewhere; and
€12.6 million accrued in our waste management activities, including €5.0 million in costs associated with a reorganization plan in the United States.
Restructuring expenses in 2002 related mainly to the restructuring of USFilter (€24.9 million), our transportation activities (€11.5 million), our energy services activities (€8.7 million) and the engineering activities of our water division (€5.0 million).
We recorded an operating loss of €766.9 million in 2003, compared to operating income of €1.6 billion in 2002. Our operating loss in 2003 is mainly attributable to the write-off of goodwill and indefinite life intangible assets associated with the acquisition of USFilter recorded in our water division in the first half of 2003.
The following table shows a breakdown of our operating income by division:
Excluding the results of Proactivas water and waste management activities, as applicable.
Figures reflect our consolidated 49% share of FCCs operating income. See OverviewMajor Developments in 2003Relationship with FCC.
The decline in operating income in our waste management and transportation businesses in 2003 is mainly due to a decline in EBIT, goodwill write-offs and higher restructuring costs recorded in each of these divisions.
Financial Income (Expense), Net
Our net financial income (expense) includes dividends received, profit or loss on sales of marketable securities, foreign exchange profit or loss and financing costs. We incurred net financial expense of €749.9 million in 2003, compared to net financial expense of €648.1 million in 2002. The increase in net financial expense was principally due to the accrual of a number of reserves in 2003 as further described below, which was only partially offset by a decline in our financing costs from €680.9 million in 2002 to €623.7 million in 2003. The decrease in our financing costs is attributable to a reduction in our outstanding indebtedness as a result of our capital increase in 2002 and the implementation of our divestment program in 2002 and 2003. The average cost of our debt increased slightly from 4.25% in 2002 to 4.31% in 2003, mainly due to the positive impact in 2002 of the termination of our financial arrangements with Vivendi Universal.
Excluding the impact of our financing costs, we recorded net financial expense of €126 million in 2003, compared to net financial income of €32.8 million in 2002. The principal components of our financial income and expense in 2003 were the following:
a capital gain of €30.5 million from the sale of shares of Vinci held by us (compared to a capital gain of €110.3 million in 2002 from the sale of our participation in Philadelphia Suburban Corporation),
the accrual of reserves on financial assets amounting to, net of reserves reversed or released over the same period, €61.1 million, including a €69.8 million reserve accrued in connection with several financial credits held by USFilter (compared to €62.5 million in reserves accrued in 2002, of which €32.2 million related to shares of our company that we held as treasury stock and €30.3 relating to various financial assets),
the amortization of €34.1 million in redemption premium (compared to €33.4 million in 2002), a substantial part of which corresponds to redemption premium on our convertible bonds (OCEANEs),
the amortization of €14.0 million in bond issuance costs (compared to €13.5 million in 2002),
commissions paid to financial institutions amounting to €13.0million (compared to €28.5 million in 2002), and
a net foreign exchange loss of €7.8 million (compared to a gain of €44.0 million in 2002).
Other Income (Expense)
We record non-recurring income and charges as other income (expense). We define non-recurring income and charges as those resulting from extraordinary events that are not likely to reoccur in the ordinary course of our operations, including capital gains and losses recorded in connection with the sale of our subsidiaries and assets. We recorded net other expense of €62.4 million, compared to €59.7 million in 2002.
Our net other expense in 2003 resulted from:
€65 million in capital losses recorded in connection with the sale of several of USFilter’s activities (including the impact of fluctuations in exchange rates on the sales proceeds) and reserves accrued in respect of USFilter activities in the process of being sold,
a €28.3 million reserve accrued in respect of companies in the United Kingdom to be sold following our strategic decision to withdraw from the U.K. transportation market, and
a €21.6 million reserve accrued by FCC in respect of the sale of Grubar Hotels,
which more than offset net capital gains of €53 million from various divestments. Our net capital gains resulted primarily from a €30.8 million gain on the sale of our interest in Wyuna and a €40.8 million gain on the sale by FCC of Compañía de Energía Hydroeléctrica de Navarra, which were more than offset several insignificant capital losses on other sales in 2003.
Our net other expense in 2002 resulted from the capital losses recorded in connection with the sale of USFilter’s Distribution division (€59 million), Bonna Sabla (€44 million) and Schwarze Pumpe (€24 million), a subsidiary of our Berlin water company, and a provision recorded for a German subsidiary of Veolia Water that does not conduct any water distribution activities in light of this subsidiary’s anticipated results (€10 million). These capital losses were only partially offset from capital gains of €73 million recorded in connection with the sale of our minority interest in two U.K. water distribution companies, Bristol Water Holding and South Staffordshire, and a dilution gain of €10.7 million that arose from the merger of FCC with Portland Valderrivas, which controlled Cementos Portland, FCC’s main cement subsidiary.
Our tax expense in 2003 was €274.4 million, compared to €