VEOLIA ENVIRONNEMENT

Transcription

1 BASE PROSPECTUS VEOLIA ENVIRONNEMENT (Established as a société anonyme with limited liability in the Republic of France) EURO 8,000,000,000 EURO MEDIUM TERM NOTE PROGRAMME Under the Euro Medium Term Note Programme described in this Base Prospectus (the Programme ), Veolia Environnement ( Veolia Environnement orthe Issuer ), subject to compliance with all relevant laws, regulations and directives, may from time to time issue Euro Medium Term Notes (the Notes ). The aggregate nominal amount of Notes outstanding will not at any time exceed Euro 8,000,000,000 (or the equivalent in other currencies at the date of issue of any Notes). This Base Prospectus supersedes the Offering Circular dated 16 July Application may be made (i) to Euronext Paris S.A for Notes issued under the Programme during a period of 12 months from the date of this Base Prospectus to be listed and admitted to trading on the Eurolist of Euronext Paris S.A and/or (ii) to the competent authority of any other Member State of the European Economic Area ( EEA ) for Notes issued under the Programme to be listed and admitted to trading on a Regulated Market (as defined below) in such Member State. Euronext Paris S.A. is a regulated market for the purposes of the Investment Services Directive 93/22/EC (a Regulated Market ). However, Notes may be issued pursuant to the Programme which are not listed and admitted to trading on a Regulated Market. The relevant final terms (the Final Terms ) (forms of which are contained herein) in respect of the issue of any Notes will specify whether or not such Notes will be listed and admitted to trading, and, if so, the relevant Regulated Market in the EEA. Application has been made for approval of this Base Prospectus to the Autorité des marchés financiers (the AMF ) in France in its capacity as competent authority pursuant to Article of its Règlement Général which implements Directive 2003/71/EC of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading. Notes may be issued either in dematerialised form ( Dematerialised Notes ) or in materialised form ( Materialised Notes ) as more fully described herein. Dematerialised Notes will at all times be in book entry form in compliance with Article L of the French Code monétaire et financier. No physical documents of title will be issued in respect of the Dematerialised Notes. Dematerialised Notes may, at the option of the Issuer, be in bearer dematerialised form (au porteur) inscribed as from the issue date in the books of Euroclear France ( Euroclear France ) (acting as central depositary) which shall credit the accounts of Account Holders (as defined in Terms and Conditions of the Notes Form, Denomination, Title, Redenomination and Method of Issue ) including Euroclear Bank S.A./N.V. as operator of the Euroclear System ( Euroclear ) and the depositary bank for Clearstream Banking, société anonyme ( Clearstream, Luxembourg ) or in registered dematerialised form (au nominatif) and, in such latter case, at the option of the relevant holder in either fully registered form (nominatif pur), in which case they will be inscribed with the registration agent (designated in the relevant Final Terms) for the Issuer, or in administered registered form (nominatif administré) in which case they will be inscribed in the accounts of the Account Holders designated by the relevant Noteholders. Materialised Notes will be in bearer materialised form only and may only be issued outside France. A temporary global certificate in bearer form without interest coupons attached (a Temporary Global Certificate ) will initially be issued in connection with Materialised Notes. Such Temporary Global Certificate will be exchanged for definitive Materialised Notes in bearer form with, where applicable, coupons for interest attached on or after a date expected to be on or about the 40 th day after the issue date of the Notes (subject to postponement as described in Temporary Global Certificates issued in respect of Materialised Bearer Notes ) upon certification as to non US beneficial ownership as more fully described herein. Temporary Global Certificates will (a) in the case of a Tranche intended to be cleared through Euroclear and/or Clearstream, Luxembourg, be deposited on the issue date with a common depositary for Euroclear and/or Clearstream, Luxembourg and (b) in the case of a Tranche intended to be cleared through a clearing system other than or in addition to Euroclear and/or Clearstream, Luxembourg or delivered outside a clearing system, be deposited as agreed between the Issuer and the relevant Dealer (as defined below). Standard & Poor s Rating Services has ascribed a long-term debt rating of BBB to Veolia Environnement. Moody s Investors Services, Inc. has rated Veolia Environnement s senior long-term debt A3. Notes issued under the Programme may be rated or unrated. Where a tranche of Notes is rated, such rating will not necessarily be the same as the ratings assigned to the Issuer s long-term debt. Credit ratings are subject to revision, suspension or withdrawal at any time by the relevant rating organisation. A rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, change or withdrawal at any time by the assigning rating agency. The final terms of the relevant Notes will be determined at the time of the offering of each Tranche based on then prevailing market conditions and will be set out in the relevant Final Terms. ABN AMRO BNP PARIBAS Deutsche Bank IXIS Corporate & Investment Bank Natexis Banques Populaires Arranger ABN AMRO Dealers The Royal Bank of Scotland The date of this Base Prospectus is 8 November Barclays Capital Credit Suisse First Boston HSBC CCF Merrill Lynch International SG Corporate & Investment Banking

2 This Base Prospectus (together with any supplements to this Base Prospectus published from time to time (each a Supplement and together the Supplements ) comprises a base prospectus for the purposes of Article 5.4 of Directive 2003/71/EC (the Prospectus Directive ) in respect of, and for the purpose of giving information with regard to, Veolia Environnement and Veolia Environnement and its subsidiaries and affiliates taken as a whole (the Group ) which is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses and prospects of the Issuer. No person has been authorised to give any information or to make any representation other than those contained in this Base Prospectus in connection with the issue or sale of the Notes and, if given or made, such information or representation must not be relied upon as having been authorised by Veolia Environnement, the Dealers or the Arranger (as defined in Summary of the Programme ). Neither the delivery of this Base Prospectus nor any sale made in connection herewith shall, under any circumstances, create any implication that there has been no change in the affairs of Veolia Environnement or the Group since the date hereof or the date upon which this Base Prospectus has been most recently amended or supplemented or that there has been no adverse change in the financial position of Veolia Environnement or the Group since the date hereof or the date upon which this Base Prospectus has been most recently amended or supplemented or that any other information supplied in connection with the Programme is correct as of any time subsequent to the date on which it is supplied or, if different, the date indicated in the document containing the same. The distribution of this Base Prospectus and the offering or sale of the Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Base Prospectus comes are required by Veolia Environnement, the Dealers and the Arranger to inform themselves about and to observe any such restriction. The Notes have not been and will not be registered under the United States Securities Act of 1933, as amended (the Securities Act ) or with any securities regulatory authority of any state or other jurisdiction of the United States and the Notes may include Materialised Notes in bearer form that are subject to U.S. tax law requirements. Subject to certain exceptions, Notes may not be offered, sold or delivered within the United States or to the account or benefit of U.S. persons (as defined in Regulation S under the Securities Act ( Regulation S ) or, in the case of Materialised Notes in bearer form, the U.S. Internal Revenue Code of 1986, as amended (the U.S. Internal Revenue Code )). For a description of certain restrictions on offers and sales of Notes and on distribution of this Base Prospectus, see Subscription and Sale. This Base Prospectus does not constitute an offer of, or an invitation by or on behalf of Veolia Environnement or the Dealers to subscribe for, or purchase, any Notes. The Arranger and the Dealers have not separately verified the information contained in this Base Prospectus. None of the Dealers or the Arranger makes any representation, express or implied, or accepts any responsibility, with respect to the accuracy or completeness of any of the information in this Base Prospectus. Neither this Base Prospectus nor any other financial statements are intended to provide the basis of any credit or other evaluation and should not be considered as a recommendation by any of Veolia Environnement, the Arranger or the Dealers that any recipient of this Base Prospectus or any other financial statements should purchase the Notes. Each potential purchaser of Notes should determine for itself the relevance of the information contained in this Base Prospectus and its purchase of Notes should be based upon such investigation as it deems necessary. None of the Dealers or the Arranger undertakes to review the financial condition or affairs of Veolia Environnement or the Group during the life of the arrangements contemplated by this Base Prospectus nor to advise any investor or potential investor in the Notes of any information coming to the attention of any of the Dealers or the Arranger. In connection with the issue of any Tranche, the Dealer or Dealers (if any) named as the stabilising manager(s) (the Stabilising Manager(s) ) (or persons acting on behalf of any Stabilising Manager(s)) in the applicable Final Terms may over-allot Notes (provided that, in the case of any Tranche to be admitted to trading on the Eurolist of Euronext Paris or any other Regulated Market, the aggregate principal amount of Notes allotted does not exceed 105 per cent. of the aggregate principal amount of the relevant Tranche) or effect transactions with a view to supporting the market price of the Notes at a level higher than that which might otherwise prevail. However, there is no assurance that the Stabilising Manager(s) (or persons acting on behalf of a Stabilising Manager) will undertake stabilisation action. Any stabilisation action may begin on or 2

3 after the date on which adequate public disclosure of the terms of the offer of the relevant Tranche is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the issue date of the relevant Tranche and 60 days after the date of the allotment of the relevant Tranche. In this Base Prospectus, unless otherwise specified or the context otherwise requires, references to U.S.$ are to the currency of the United States of America, references to Japanese Yen and yen are to the currency of Japan, references to Sterling are to the currency of the United Kingdom, references to Swiss franc are to the currency of Switzerland and references to and Euro are to the single currency of the participating member states of the European Union which was introduced on 1 st January

4 TABLE OF CONTENTS RESUME EN FRANCAIS DU PROGRAMME (FRENCH SUMMARY OF THE PROGRAMME) 5 SUMMARY OF THE PROGRAMME 9 RISK FACTORS 13 SUPPLEMENT TO THE BASE PROSPECTUS 21 PERSONS RESPONSIBLE FOR THE INFORMATION GIVEN IN THE BASE PROSPECTUS TERMS AND CONDITIONS OF THE NOTES 22 TEMPORARY GLOBAL CERTIFICATE 45 USE OF PROCEEDS 46 DESCRIPTION OF VEOLIA ENVIRONNEMENT 47 SUBSCRIPTION AND SALE 109 FORM OF FINAL TERMS FORM OF FINAL TERMS GENERAL INFORMATION 138 CONSOLIDATED FINANCIAL STATEMENTS FOR THE HALF YEAR PERIOD ENDED 30 JUNE AUDITORS REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE HALF YEAR PERIOD ENDED 30 JUNE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER AUDITORS REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER IFRS FINANCIAL STATEMENTS 266 AUDITOR S REPORT 2004 IFRS FINANCIAL STATEMENTS 284 CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER AUDITORS REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER

5 RESUME EN FRANCAIS DU PROGRAMME (FRENCH SUMMARY OF THE PROGRAMME) Le résumé ci-dessous est une description générale du programme d émission de titres de Veolia Environnement (le Programme ). Il doit être lu comme une introduction au présent prospectus de base relatif au Programme (le Prospectus de Base ) et toute decision d investir dans des titres à émettre dans le cadre du Programme doit être fondée sur un examen exhaustif du Prospectus de Base. Lorsqu une action concernant l information contenue dans le Prospectus de Base est intentée devant un tribunal, l investisseur plaignant peut, selon la législation nationale des Etats membres de la Communauté Européenne ou parties à l accord sur l Espace Economique Européen, avoir à supporter les frais de traduction du Prospectus de Base avant le début de la procédure judiciaire. Conformément à l article L I du Code monétaire et financier, aucune action en responsabilité civile ne peut être intentée sur le fondement du seul résumé ou de sa traduction, sauf si le contenu du résumé du Prospectus de Base ou sa traduction est trompeur, inexact ou contradictoire par rapport aux informations contenues dans les autres parties du Prospectus de Base. I. TITRES POUVANT ETRE EMIS DANS LE CADRE DU PROGRAMME (LES TITRES ) Emetteur: Veolia Environnement (l Emetteur ) Arrangeur: Agents Placeurs: Montant maximum du Programme: Agent financier et agent payeur: Agent de cotation à Paris: Méthode d émission: Echéance: Devises: Modalités (prix, montant de l émission, taux d intéret, etc.): Valeur nominale: ABN AMRO BANK N.V. ABN AMRO Bank N.V., Barclays Bank PLC, BNP PARIBAS, CCF, Credit Suisse First Boston (Europe) Limited, Deutsche Bank AG, London Branch, IXIS Corporate & Investment Bank, Merrill Lynch International, Natexis Banque Populaires, Société Générale, The Royal Bank of Scotland plc euros BNP Paribas Securities Services BNP Paribas Les Titres sont émis dans le cadre d émissions syndiquées ou non-syndiquées. Toute échéance, sous réserve des lois, règlements et directives applicables. Les Titres peuvent être émis en euros, en dollars américains, en yen japonais, en francs suisses, en livres sterlings ou en toute autre devisementionnée dans les Conditions Définitives préparées à l occasion de l émission (Final Terms). Les modalités des Titres de chaque série seront précisées dans les Conditions Définitives. Tout montant, sous réserve des règles de la banque centrale compétente (ou toute autre autorité équivalente) et des lois ou règlements applicables en fonction de la devise des Titres. Les Titres dématérialisés seront émis avec une valeur nominale unique. Rang de créance: Les Titres pourront constituer des engagements subordonnées ou non subordonnés de l Emetteur. Les Titres non subordonnés constitueront des engagements directs, inconditionnels, non subordonnés et (sans préjudice des stipulations 5

6 de l article 4 des modalités des Titres), non assortis de sûretés de l Emetteur venant (sous réserve des exceptions impératives du droit français) au même rang entre eux et au même rang que tout autre engagement, présent ou futur, non subordonné et non assorti de sûretés de l Emetteur. Les Titres subordonnés constitueront des Titres subordonnés ordinaires, des Titres super subordonnés, des Titres subordonnés à durée indéterminée ou des Titres subordonnés à durée déterminée. Se reporter à l article 3(b) des modalités des Titres ( Terms and Conditions of the Notes Status ). Les Conditions Définitives peuvent prévoir que le paiement des intérêts dus au titre de Titres subordonnés pourra être différé conformément aux stipulations de l article 5(h) des modalités des Titres ( Terms and Conditions of the Notes Interest and Other Calculations ). Forme: Maintien de l emprunt à son rang: Cas de défaut (notamment défaut croisé): Remboursement: Remboursement pour raisons fiscales: Fiscalité: Dépositaire central: Systèmes de compensation: Cotation: Les Titres peuvent être émis soit sous forme de Titres dématérialisés soit sous forme de Titres matérialisés. Les Titres dématérialisés seront au porteur ou au nominatif. Les Titres matérialisés seront uniquement au porteur. Les modalités des Titres contiendront une clause de maintien de l emprunt à son rang. Les modalités des Titres comporteront des cas de défaut. Se reporter à l article 9 des modalités des Titres Terms and Conditions of the Notes Events of Default. Les Conditions Définitives préparées à l occasion de chaque émission de Titres indiqueront si ceux-ci peuvent être remboursés (en totalité ou en partie) avant la date d échéance prévue au gré de l Emetteur ou des porteurs et, si tel est le cas, les modalités applicables à ce remboursement. Les Titres pourront être remboursés par anticipation au gré de l Emetteur pour des raisons fiscales. Se reporter à l article 6(f) des modalités des Titres Terms and Conditions of the Notes Redemption, Purchases and Options Redemption for Taxation Reasons. Sauf exception prévue dans les Conditions Définitives, les paiements, relatifs aux Titres, seront effectués libres de toute retenue, prélèvement, ou impôt quelconque requis par, ou effectué au nom de la France. Euroclear France. Euroclear France, Clearstream, Luxembourg et Euroclear. Les Conditions Définitives préparées à l occasion de chaque émission de Titres indiqueront si ceux-ci ont vocation à être cotés et admis aux négociations sur Euronext Paris S.A. et/ou sur tout autre marché réglementé au sens de la Directive 93/22/EC (un «Marché Réglementé») ou bourse de valeurs. 6

7 Offre au public: Mode de publication du prospectus de base et des conditions finales : Notation: Restrictions de vente: Loi applicable: Les Titres ne seront pas offerts au public en France. Le Prospectus de Base et les Conditions Définitives préparées à l occasion de chaque émission de Titres cotés et admis à la négociation sur un Marché Réglementé seront disponibles sur les sites internet (a) de l Autorité des marchés Financiers ( et (b) de l émetteur ( Par ailleurs, si les Titres sont cotés et admis aux négocations sur un Marché Réglementé autre qu Euronext Paris S.A., les Conditions Définitives préparées à l occasion de l émission indiqueront si d autres modes de publications sont requis. Les Titres émis dans le cadre de ce Programme pourront faire l objet d une notation. Il existe des restrictions concernant la vente des Titres dans différents pays, notamment les Etats Unis, le Japon et certains Etats parties à l accord sur l Espace Economique Européen, parmi lesquels la France, les Pays Bas et le Royaume Uni. Des restrictions de vente supplémentaires peuvent être imposées dans le cadre de la vente d une série donnée et seront alors indiquées dans les Conditions Définitives. Droit français II. PRINCIPALES CARACTERISTIQUES DE L EMETTEUR Veolia Environnement est une société anonyme à conseil d administration créée en 1995 pour une durée de 99 ans conformément aux dispositions du Code du commerce français. Son siège social est au avenue Kléber, Paris, France. Veolia Environnement est la société de tête d un groupe indépendant spécialisé dans l offre de services à l environnement. Acteur unique dans son métier des services à l environnement, offrant une gamme complète de services environnementaux, Veolia Environnement possède les compétences pour définir une offre de services adaptés aux besoins de chaque client pour, par exemple, l approvisionner en eau et recycler les eaux usées, collecter, traiter et valoriser les déchets, fournir chaleur et climatisation et optimiser les processus industriels. Au travers de ses quatre divisions, chacune consacrée à une activité, Veolia Water (traitement de l eau), Dalkia (services énergétiques), Onyx (propreté) et Connex (transport), Veolia Environnement dessert aujourd hui environ 100 millions de personnes en eau, traite plus de 51,7 millions de tonnes de déchets, assure les besoins en énergie de centaines de milliers de bâtiments pour une clientèle d industriels, de collectivités et de particuliers et transporte près de 2 milliards de passagers par an. La Société s efforce de développer des offres de services regroupant plusieurs des métiers du groupe, soit au travers de contrats distincts, soit en combinant les services offerts au sein de contrats multiservices. III. FACTEURS DE RISQUE A. Principaux facteurs de risques relatifs à Veolia Environnement L Émetteur est spécialisé dans la fourniture de services à l environnement, et encourt de ce fait certains risques liés à son activité. Pour honorer les paiements afférents aux Titres émis dans le cadre du programme, l Émetteur est dépendant des revenus qu il perçoit dans le cadre de ses activités. La capacité à dégager des profits de l Émetteur est susceptible d être affectée par un grand nombre de facteurs, parmi lesquels : des activités dans certains pays pouvant être sujettes à des risques particuliers ; des contrats à long terme pouvant limiter la capacité de l Émetteur à répondre de manière efficace et rapide aux changements économiques globaux susceptibles d affecter sa rentabilité au titre de ces contrats ; 7

8 les droits des autorités gouvernementales de résilier ou de modifier des contrats ; l évolution des prix du pétrole et d autres matières premières ; la violation de règles relatives à l environnement, à la santé et à la sécurité ; la réalisation d investissements massifs dans des projets sans pouvoir obtenir les autorisations nécessaires pour les mener à terme ; les fluctuations des taux de change et des taux d intérêt; et des opérations commerciales pouvant être la cible d actes illégaux ou terroristes. B. Principaux facteurs de risques relatifs aux Titres à émettre par Veolia Environnement Investir dans les Titres implique certains risques majeurs qui doivent être pris en compte dans l évaluation des risques de marché associés aux Titres émis dans le cadre du Programme. Bien que ces risques ne soient qu éventuels, les investisseurs sont avertis que lesdits risques peuvent entrainer une certaine volatilité et/ou une baisse de la valeur de marché des Titres en deçà des attentes (financières ou autres) des investisseurs de ces Titres. Chaque investisseur potentiel doit déterminer, selon son appréciation personnelle et sur les conseils des professionnels qu il considérera appropriés selon les circonstances, si l acquisition des Titres est conforme à sa situation personnelle, ses besoins financiers et ses objectifs. Il doit aussi déterminer si l acquisition des Titres est conforme aux politiques d investissement, aux règles et aux restrictions qui lui sont applicables, et s il s agit d un investissement satisfaisant et conforme à son attente, malgré les risques réels et substantiels liés à tout investissement ou détention des Titres. Ces facteurs de risques relatifs aux Titres incluent notamment : le risque de modification des modalités des Titres par une décision de l assemblée générale des porteurs des Titres, les porteurs non présents ou en désaccord pouvant se retrouver liés par le vote de la majorité ; les risques liés au marché secondaire des Titres; les risques liés à l information sur le sous-jacent ; les risques liés aux conflits d intérêts potentiels entre l Emetteur, les banques et les porteurs des Titres ; les risques relatifs aux taux de change; les risques liés à l acquisition légale des titres ; les risques liés à la notation des Titres ; les risques liés à la fiscalité; les risques liés à la directive sur la fiscalité de l épargne; les risques à la valeur des Titres sur le marché; et les risques relatifs à un changement législatif. Il existe aussi des facteurs de risques liés à la structure de certains Titres en particulier (Titres pouvant être remboursés de façon anticipée à l initiative de l Emetteur, Titres portant intérêt à taux flottant, Titres portant intérêt à taux fixe, Titres dont le taux d intérêt est lié à un sous-jacent ou index, Titres subordonnés, etc.) Pour une description détaillée des facteurs de risques, se reporter à la section Risk factors du Prospectus de Base. 8

9 SUMMARY OF THE PROGRAMME This summary (the Summary ) is provided for the purposes of the issue of Notes of a denomination of less than Euro 50,000 (or its equivalent in other currencies). Investors in Notes of a denomination equal to or greater than Euro 50,000 should not rely on this summary in any way and the Issuer accepts no liability to such investors. This summary constitutes a general description of the Programme. It must be read as an introduction to this Base Prospectus. Any decision to invest in the Notes should be based on a consideration of the Base Prospectus as a whole. Where a claim relating to the information contained in the Base Prospectus is brought before a court in a Member State of the European Economic Area, the plaintiff may, under the national legislation of the Member State where the claim is brought, be required to bear the costs of translating the Base Prospectus before the legal proceedings are initiated. Pursuant to article L I of the French Code monétaire et financier, no civil action may be brought in liability against the Issuer solely on the basis of this Summary, including its translation, unless it is misleading, inaccurate or inconsistent when read together with the other parts of this Base Prospectus. Words and expressions defined in Terms and Conditions of the Notes below shall have the same meanings in this Summary. I. NOTES TO BE ISSUED UNDER THE PROGRAMME Issuer: Veolia Environnement Arranger: Dealers: ABN AMRO BANK N.V. ABN AMRO Bank N.V., Barclays Bank PLC, BNP PARIBAS, CCF, Credit Suisse First Boston (Europe) Limited, Deutsche Bank AG, London Branch, IXIS Corporate & Investment Bank, Merrill Lynch International, Natexis Banque Populaires, Société Générale, The Royal Bank of Scotland plc Programme Limit: Up to 8,000,000,000 Fiscal Agent and Paying Agent: Paris Listing Agent: Method of Issue: Maturities: Currencies: Commercial terms of the Notes (price, amount, interest rate, etc.): Denomination(s): BNP Paribas Securities Services BNP Paribas The Notes will be issued on a syndicated or non-syndicated basis. Subject to compliance with all relevant laws, regulations and directives, any maturity. Euro, U.S. Dollar, Japanese yen, Swiss franc, Sterling and any other currency specified in the relevant Final Terms. The commercial terms and conditions of the Notes of each Series of Notes will be set out in the applicable Final Terms. Any denomination, subject to compliance with the regulations of the relevant central bank (or equivalent body) or any applicable laws or regulations applicable to the Specified Currency. Dematerialised Notes will be issued in one denomination only. Status of Notes: The Issuer may issue Unsubordinated or Subordinated Notes. Unsubordinated Notes will constitue direct, unconditional, unsubordinated and (subject to the provisions of Condition 4) 9

10 unsecured obligations of the Issuer and will rank pari passu among themselves and (save for certain obligations required to be preferred by French law) equally with all other present or future unsecured and unsubordinated obligations of the Issuer from time to time outstanding; Subordinated Notes will constitute Ordinary Subordinated Notes, Deeply Subordinated Notes, Dated Subordinated Notes or Undated Subordinated Notes, all as set out and defined in Condition 3(b). See Terms and Conditions of the Notes Status. If so specified in the relevant Final Terms, the payment of interest in respect of Subordinated Notes may be deferred in accordance with the provisions of Condition 5(h) see Terms and Conditions of the Notes Interest and other Calculations. Form of Notes: Dematerialised Notes or Materialised Notes. Dematerialised Notes may be issued in bearer dematerialised form (au porteur) or in registered dematerialised form (au nominatif). Materialised Notes will be in bearer form only. Negative Pledge: Events of Default: (including cross default) Redemption: Taxation Redemption: Taxation: Central Depositary: Clearing Systems: Listing and Admission to Trading: Offer to the public: Method of Publication of the Base Prospectus and Final Terms: There will be a negative pledge in respect of the Notes. See Condition 9 Terms and Conditions of the Notes Events of Default. The Final Terms will specify the conditions under which the Notes may be redeemed prior to maturity at the option of the Noteholders or the Issuer. The Notes will be subject to redemption at the option of the Issuer for taxation reasons. See Condition 6(f) Terms and Conditions of the Notes Redemption, Purchases and Options Redemption for Taxation Reasons. Except as otherwise stated in the Final Terms, payments in respect of the Notes issued by Veolia Environnement will be made without withholding or deduction for, or on account of, taxes imposed by or on behalf of the Republic of France. Euroclear France. Euroclear France, Clearstream, Luxembourg and Euroclear. As specified in the relevant Final Terms, a Series of Notes may or may not be listed and admitted to trading on Euronext Paris S.A. and/ or any regulated market as defined by Directive 93/22/EC (a Regulated Market ) or other stock exchange. The Notes shall not be offered to the public in France. The Base Prospectus and the Final Terms related to Notes listed and admitted to trading on any Regulated Market will always be 10

11 published on the websites of (a) the Autorité des marchés financiers ( and (b) the Issuer ( In addition, if the Notes are listed and admitted to trading on a Regulated Market other than Euronext Paris S.A., the relevant Final Terms will provide whether additional methods of publication are required and what they consist of. Rating: Selling Restrictions: Governing Law: Notes issued under the Programme may be rated or unrated. The offer and sale of Notes will be subject to selling restrictions in various jurisdictions, in particular, those of the United States of America, Japan and those of the European Economic Area, including France, The Netherlands and the United Kingdom. Further restrictions that may apply to a Series of Notes will be specified in the applicable Final Terms. French law II. KEY INFORMATION ABOUT THE ISSUER Veolia Environnement is a société anonyme à conseil d administration incorporated in 1995 pursuant to the French commercial code for a term of 99 years. Its registered office is located at avenue Kléber, Paris, France. Veolia Environnement is the leading company of an independant group of companies which specializes in the supply of environmental management services. Veolia Environnement is a unique actor in the field of services related to the environment, offering a comprehensive array of services. Veolia Environnement has the expertise, for example, to supply treated water and to recycle wastewater at a customer s 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 customer s unique circumstances. Veolia Environnement s 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, Veolia Environnement currently provides water to approximately 100 million people, treats more than 51.7 million tons of waste, satisfies the energy requirements of hundreds of thousands of buildings for its industrial, municipal and individual customers and transports nearly 2 billion passengers per year. Veolia Environnement strives to offer services to clients that span across its four divisions, which are either packaged in the form of a single multiservices contract, or negotiated separately in the form of several contracts. III. RISK FACTORS A. Essential risks associated with Veolia Environnement The Issuer specializes in the supply of environmental management services and is therefore subject to certain risks in relation to its business activity. To make payments on the Notes issued under the Programme, the Issuer will depend on the income it receives from its business operations. The income producing capacity of the Issuer may be adversely affected by a large number of factors. These factors include: business operations in some countries which may be subject to additional risks; long-term contracts which may limit the Issuer s capacity to quickly and effectively react to general economic changes affecting its performance under those contracts; rights of governmental authorities to terminate or modify contracts; changes in prices of fuel and other commodities; 11

12 failure to comply with various environmental, health and safety laws and regulations; making significant investments in projects without being able to obtain required approvals; currency exchange and interest rate fluctuations; and business operations which may be the target of foul play or terrorism. B. Essential risks associated with the Notes to be issued by Veolia Environnement An investment in the Notes involves certain risks which are material for the purpose of assessing the market risks associated with Notes issued under the Programme. While all of these risk factors are contingencies which may or may not occur, potential investors should be aware that the risks involved with investing in the Notes may lead to a volatility and/or decrease in the market value of the relevant Tranche of Notes whereby the market value falls short of the expectations (financial or otherwise) of an investor upon making an investment in such Notes. However, each prospective investor of Notes must determine, based on its own independent review and such professional advice as it deems appropriate under the circumstances, that its acquisition of the Notes is fully consistent with its financial needs, objectives and condition, complies and is fully consistent with all investment policies, guidelines and restrictions applicable to it and is a fit, proper and suitable investment for it, notwithstanding the clear and substantial risks inherent in investing in or holding the Notes. These risks include: risk of modification of the conditions of the Notes by a General Meeting of Noteholders binding all Noteholers including those who did not attend oror who voted in a manner contrary to the majority; risk relating to the secondary/trading market for the Notes; risks related to the provision of information; risks relating to potential conflicts of interest between the Issuer, the Dealers, there respective affiliates and the Noteholders; risk relating to exchange rates; risks related to legality of purchase; risks relating to credit ratings; risks related to taxation; risks related to the EU Savings Directive; risks related to the market value of the notes; and risk of a change of law. There are also risks relating to the structure of a particular issue of Notes (Notes subject to optional redemption of the Issuer, Fixed Rate Notes, Floating Rate Notes, Index-Linked Notes, Subordinated Notes, etc.) These risk factors are more detailed in the section Risk factors of this Base Prospectus. 12

13 RISK FACTORS The Issuer believes that the following factors may affect its ability to fulfil its obligations under Notes issued under the Programme. All of these factors are contingencies which may or may not occur and the Issuer is not in a position to express a view on the likelihood of any such contingency occurring. The risk factors may relate to the Issuer or any of its subsidiaries. In addition, factors which are material for the purpose of assessing the market risks associated with Notes issued under the Programme are also described below. The Issuer believes that the factors described below represent the principal risks inherent in investing in Notes issued under the Programme, but the inability of the Issuer to pay interest, principal or other amounts on or in connection with any Notes may occur for other reasons and the Issuer does not represent that the statements below regarding the risks of holding any Notes are exhaustive. The risks described below are not the only risks the Issuer faces. Additional risks and uncertainties not currently known to the Issuer or that it currently believes to be immaterial could also have a material impact on its business operations. Prospective investors should also read the detailed information set out elsewhere in this Base Prospectus and reach their own views prior to making any investment decision. In particular, investors should make their own assessment as to the risks associated with the Notes prior to investing in Notes issued under the Programme. RISK FACTORS RELATING TO THE ISSUER The Issuer may suffer reduced profits or losses as a result of intense competition. The Issuer s business is highly competitive and requires substantial human and capital resources. Large international competitors and local niche companies serve each of the markets in which the Issuer competes. Accordingly, the Issuer must make constant efforts to remain competitive and convince potential clients of the quality and cost value of its service offerings. Competitors may also introduce new technology or services that the Issuer would have to match in order to remain competitive, which could result in significant development costs for it. In addition, the Issuer performs a substantial portion of its business under contracts, often of a long-term nature, with governmental authorities and clients from the industrial and commercial sectors. These contracts are often awarded through competitive bidding, at the end of which the Issuer may not be retained even though the Issuer may have incurred significant expenses in order to prepare the bid. The Issuer s contracts may not be renewed at the end of their term, which in the case of important contracts may oblige the Issuer 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 its costs of termination. The Issuer s business operations in some countries may be subject to additional risks. While the Issuer s operations are concentrated mainly in Europe, the Issuer conducts business in markets around the world. Sales generated in countries outside of Europe and North America represented approximately 8.04% of the Issuer s total revenue in 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. The Issuer may not be able to insure or hedge against these risks. Furthermore, the Issuer may not be able to obtain sufficient financing for its 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 the Issuer to record exceptional provisions or depreciation charges in connection with its operations in these countries, which could have a material adverse effect on its results. The Issuer s long-term contracts may limit its capacity to quickly and effectively react to general economic changes affecting its performance under those contracts. The general circumstances or conditions under which the Issuer enters 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 the Issuer s 13

14 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 the Issuer s financial performance under the contract. Because the Issuer s contracts generally do not allow it to unilaterally terminate them or interrupt or suspend the performance of its obligations under them, the Issuer attempts to foresee these possible changes at the time it negotiates its contracts and typically includes adjustment mechanisms in its contracts (such as price index clauses or the right to initiate a review or modification process). However, the Issuer may not always be able to foresee all potential changes or to negotiate adjustment clauses that cover all possible scenarios. In addition, even if the Issuer s contracts include these types of adjustment clauses, the Issuer s ability to react to these changes is limited to the adjustments permitted by these clauses. For example, the Issuer s long-term contracts typically provide for pre-determined fees or payments for the Issuer s services (either from the client or from the end user according to a set price list), and the Issuer 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, the Issuer s 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, the Issuer may be required to continue performing its obligations under its contracts even if the general conditions or circumstances of its 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 the Issuer s financial performance under the contract. The rights of governmental authorities to terminate or modify the Issuer s contracts could have a negative impact on the Issuer s revenue and profits. Contracts with governmental authorities make up a significant percentage of the Issuer s 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, the Issuer may not be entitled to or be able to obtain full indemnification in the event its contracts are terminated by governmental counterparties. Changes in prices of fuel and other commodities may reduce its profits. The prices of the Issuer s supplies of fuel and other commodities, which are significant operating expenses for its businesses, are subject to sudden increases. Although most of the Issuer s contracts contain tariff adjustment provisions that are intended to reflect possible variations in prices of its supplies using certain pricing formulas, such as its price index formulas, there may be developments that could prevent the Issuer from being fully protected against such increases, such as delays between fuel price increases and the time the Issuer is allowed to raise its prices to cover the additional costs or its failure to update an outdated cost structure formula. In addition, a sustained increase in supply costs beyond the price levels provided for under the Issuer s adjustment clauses could reduce its profitability to the extent that the Issuer is not able to increase its prices sufficiently to cover the additional costs. The Issuer 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 the Issuer s part, cause it to incur liability under these laws and regulations. The Issuer incurs significant costs of compliance with various environmental, health and safety laws and regulations. The Issuer has made and will continue to make significant capital and other expenditures to comply with applicable environmental, health and safety laws and regulations. The Issuer is continuously required to incur expenditures to ensure that the installations that it operates comply with applicable legal, regulatory and administrative requirements, including general precautionary obligations, or to advise its 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 the Issuer s transportation vehicles, heat generation plants and 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 the Issuer s operations, moreover, may become subject to stricter laws and regulations, and correspondingly greater compliance expenditures, in the future. If the Issuer is unable to recover these expenditures through higher tariffs, this could adversely affect its operations and profitability. 14

15 The Issuer s failure to comply with any applicable environmental, health and safety laws and regulations may cause the Issuer to incur liability or other damages that it 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 the Issuer to the risk of liabilities, including in connection with assets that the Issuer no longer owns and activities that have been discontinued. In some circumstances, the Issuer could be required to pay fines or damages under these laws and regulations or undertake remedial action even if it exercises due care in conducting its operations and complies with all applicable laws and regulations. Moreover, regulatory authorities may require the Issuer 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, the Issuer could also become subject to claims for personal injury, property damage or damage to the environment (including natural resources). The Issuer s incurrence of an obligation to undertake remedial action or to compensate for such damage could have a material adverse effect on its activities or its results. Certain facilities that the Issuer or its clients operate involve the use of hazardous substances, which may subject the Issuer to increased liability in the event of an accident at one of these facilities. Among the facilities that the Issuer owns and operates, 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. The Issuer s 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 the Issuer to potentially substantial liabilities. Moreover, in the context of its outsourcing contracts, the Issuer s 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, the Issuer may be held jointly liable with its clients for pollution or other serious accidents. The Issuer may make significant investments in projects without being able to obtain the required approvals for the project. To engage in business, the Issuer 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. The Issuer may invest significant resources in a project or public tender without obtaining the right to engage in the desired business nor sufficient compensation or indemnities to cover the cost of its investments. These situations increase the overall cost of the Issuer s activities and, if it does not obtain the desired business or is forced to withdraw from a public tender, its business may not grow as much or as profitably as it hopes. Currency exchange and interest rate fluctuations may negatively affect the Issuer s financial results and the price of its shares. The Issuer holds assets, earns income and incurs expenses and liabilities directly and through its subsidiaries in a variety of currencies. The Issuer s financial statements are presented in euro. Therefore, when the Issuer prepares its financial statements, it must translate its assets, liabilities, income and expenses in other currencies into euro at then-applicable exchange rates. Consequently, increases and decreases in the value of the euro in respect of these other currencies will affect the value of these items in its financial statements, even if their value has not changed in their original currency. For example, an increase in the value of the euro may result in a decline in the reported value, in euro, of the Issuer s interests held in foreign currencies. In addition, because the Issuer has a significant amount of debt outstanding, its results of operations and financial condition may be affected by changes in prevailing market rates of interest. The Issuer manages this exposure to interest rate risk by setting a target fixed rate for a significant part of its debt, which it achieves either through fixed rate debt or interest rate hedging activities. At December 31, 2004, the Issuer s outstanding total long-term 15

16 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 the Issuer s future growth strategy. A rise in interest rates may force the Issuer to finance acquisitions or operations or refinance existing debt at a higher cost in the future, which may lead the Issuer to decide to curtail or delay its then current expansion plans. The Issuer s 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, the Issuer s 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, the Issuer is generally required to implement monitoring and crisis procedures at its water sites either in partnership with or at the direction of the local public authority. The Issuer may also decide to implement additional safeguards on its own or in collaboration with local law enforcement. Nevertheless, the implementation of such safeguards with respect to its water activities may not be sufficient to prevent the occurrence of foul play or terrorism. The Issuer s activities in the areas of waste management, energy services and public transportation are subject to similar risks. Moreover, the issuer 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 the Issuer has attempted to implement, any one of its activities may fall victim to foul play or terrorism in the future. If an attack were to occur, it could negatively affect the Issuer s image and have a material adverse effect on its results. RISK FACTORS RELATING TO THE NOTES The following paragraphs describe the principal risk factors that the Issuer believes are material to the Notes to be offered and/or listed and admitted to trading in order to assess the market risk associated with these Notes. Prospective investors should consult their own financial and legal advisers about risks associated with investment in a particular Series of Notes and the suitability of investing in the Notes in light of their particular circumstances. The risk factors may be complemented in the Final Terms of the relevant Notes for a particular issue of Notes. 1. General Risks Relating to the Notes Independent Review and Advice Each prospective investor of Notes must determine, based on its own independent review and such professional advice as it deems appropriate under the circumstances, that its acquisition of the Notes is fully consistent with its financial needs, objectives and condition, complies and is fully consistent with all investment policies, guidelines and restrictions applicable to it and is a fit, proper and suitable investment for it, notwithstanding the clear and substantial risks inherent in investing in or holding the Notes. A prospective investor may not rely on the Issuer or the Dealer(s) or any of their respective affiliates in connection with its determination as to the legality of its acquisition of the Notes or as to the other matters referred to above. Modification, waivers and substitution The conditions of the Notes contain provisions for calling General Meetings of Noteholders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all Noteholders including Noteholders who did not attend and vote at the relevant General Meeting and Noteholders who voted in a manner contrary to the majority. No active Secondary/Trading Market for the Notes Notes issued under the Programme will be new securities which may not be widely distributed and for which there may be no active trading market (unless in the case of any particular Tranche, such Tranche is to be 16

17 consolidated with and form a single series with a Tranche of Notes which is already issued). If the Notes are traded after their initial issuance, they may trade at a discount to their initial offering price, depending upon prevailing interest rates, the market for similar securities, general economic conditions and the financial condition of the Issuer. Although in relation to Notes to be admitted to trading on Euronext Paris S.A. and/or any other Regulated Market in the European Economic Area and/or offered to the public in the European Economic Area, the Final Terms of the Notes will be filed with the Autorité des marchés financiers in France and/or with the competent authority of the Regulated Market of the European Economic Area where the Notes will be listed and admitted to trading, there is no assurance that such admission to trading or offer to the public will be occur, that any particular Tranche of Notes will be so listed and admitted or that an active trading market will develop. Accordingly, there is no assurance as to the development or liquidity of any trading market for any particular Tranche of Notes. Provision of Information None of the Issuer, the Dealer(s) or any of their respective affiliates makes any representation as to an index. Any of such persons may have acquired, or during the term of the Notes may acquire, non-public information with respect to an index that is or may be material in the context of index-linked Notes. The issue of index-linked Notes will not create any obligation on the part of any such persons to disclose to the Noteholders or any other party such information (whether or not confidential). Potential Conflicts of Interest The Issuer, the Dealer(s) or their respective affiliates may deal with and engage generally in any kind of commercial or investment banking or other business with any issuer of the securities taken up in an index, their respective affiliates or any guarantor or any other person or entities having obligations relating to any issuer of the securities taken up in an index or their respective affiliates or any guarantor in the same manner as if any index-linked Notes issued under the Programme did not exist, regardless of whether any such action might have an adverse effect on an issuer of the securities taken up in the index, any of their respective affiliates or any guarantor. The Issuer may from time to time be engaged in transactions involving an index or related derivatives which may affect the market price, liquidity or value of the Notes and which could be deemed to be adverse to the interests of the Noteholders. Exchange Rates Prospective investors of the Notes should be aware that an investment in the Notes may involve exchange rate risks. The reference assets or the Notes may be denominated in a currency other than the currency of the purchaser s home jurisdiction; and/or the reference assets or the Notes may be denominated in a currency other than the currency in which a purchaser wishes to receive funds. Exchange rates between currencies are determined by factors of supply and demand in the international currency markets which are influenced by macro economic factors, speculation and central bank and government intervention (including the imposition of currency controls and restrictions). Fluctuations in exchange rates may affect the value of the Notes or the reference assets. Legality of Purchase Neither the Issuer, the Dealer(s) nor any of their respective affiliates has or assumes responsibility for the lawfulness of the acquisition of the Notes by a prospective investor of the Notes, whether under the laws of the jurisdiction of its incorporation or the jurisdiction in which it operates (if different), or for compliance by that prospective investor with any law, regulation or regulatory policy applicable to it. Credit ratings may not reflect all risks One or more independent credit rating agencies may assign credit ratings to the Notes. The ratings may not reflect the potential impact of all risks related to structure, market, additional factors discussed above, and other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be revised or withdrawn by the rating agency at any time. 17

18 Taxation Potential purchasers and sellers of the Notes should be aware that they may be required to pay taxes or other documentary charges or duties in accordance with the laws and practices of the country where the Notes are transferred or other jurisdictions. In some jurisdictions, no official statements of the tax authorities or court decisions may be available for innovative Notes. Potential investors are advised not to rely upon the tax sections contained in this Base Prospectus and/or in the Final Terms but to ask for their own tax adviser s advice on their individual taxation with respect to the acquisition, sale and redemption of the Notes. Only these advisors are in a position to duly consider the specific situation of the potential investor. This investment consideration has to be read in connection with the taxation sections of this Base Prospectus and the additional tax sections, if any, contained in the relevant Final Terms. EU Savings Directive On 3 June 2003, the European Union adopted the Directive 2003/48/EC regarding the taxation of savings income in the form of interest payments (the Directive ). The Directive requires Member States as from 1 July 2005 to provide to the tax authorities of other Member States details of payments of interest and other similar income within the meaning of the Directive made by a paying agent within its jurisdiction to (or under circumstances to the benefit of) an individual resident in another Member State, except that Belgium, Luxembourg and Austria impose instead a withholding system for a transitional period unless the beneficiary of interest payment elects for the exchange of information. The same regime applies to payments to individuals resident in any of the following territories: Netherlands Antilles, Aruba, Guernsey, Jersey, the Isle of Man, Montserrat and the British Virgin Islands. If a payment were to be made or collected through a Member State which has opted for a withholding system and an amount of, or in respect of tax were to be withheld from that payment, neither the Issuer nor any Paying Agent nor any other person would be obliged to pay additional amounts with respect to any Note as a result of the imposition of such withholding tax. If a withholding tax is imposed on payment made by a Paying Agent, the Issuer will be required to maintain a Paying Agent in a Member State that will not be obliged to withhold or deduct tax pursuant to the Directive. Market Value of the Notes The market value of the Notes will be affected by the creditworthiness of the Issuer and a number of additional factors, including the value of the reference assets or an index, including, but not limited to, the volatility of the reference assets or index, or the dividend on the securities taken up in the index, market interest and yield rates and the time remaining to the maturity date. The value of the Notes, the reference assets or the index depends on a number of interrelated factors, including economic, financial and political events in France or elsewhere, including factors affecting capital markets generally and the stock exchanges on which the Notes, the reference assets, the securities taken up in the index, or the index are traded. The price at which a Noteholder will be able to sell the Notes prior to maturity may be at a discount, which could be substantial, from the issue price or the purchase price paid by such purchaser. The historical market prices of the reference assets or index should not be taken as an indication of the reference assets or index s future performance during the term of any Note. Change of Law The Terms and Conditions of the Notes are based on French law in effect as at the date of this Base Prospectus. No assurance can be given as to the impact of any possible judicial decision or change in French law or the official application or interpretation of French law after the date of this Base Prospectus. 2. Risks related to the structure of a particular issue of Notes The Programme allows for different types of Notes to be issued. Accordingly, each Tranche of Notes may carry varying risks for potential investors depending on the specific features of such Notes such as, inter alia, the provisions for computation of periodic interest payments, if any, redemption and issue price. Notes subject to optional redemption by the Issuer Unless in the case of any particular Tranche of Notes the relevant Final Terms specify otherwise, in the event that the Issuer would be obliged to increase the amounts payable in respect of any Notes due to any withholding or 18

19 deduction for or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by the country of domicile (or residence for tax purposes) of the Issuer, or on behalf of France, or any political subdivision thereof or any authority therein or thereof having power to tax, the Issuer may redeem all outstanding Notes in accordance with the Terms and Conditions. In addition, if in the case of any particular Tranche of Notes the relevant Final Terms specify that the Notes are redeemable at the Issuer s option in certain other circumstances the Issuer may choose to redeem the Notes at times when prevailing interest rates may be relatively low. During a period when the Issuer may elect, or has elected, to redeem Notes, such Notes may feature a market value not substantially above the price at which they can be redeemed. In such circumstances an investor may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as that of the relevant Notes. Fixed Rate Notes Investment in Notes which bear interest at a fixed rate involves the risk that subsequent changes in market interest rates may adversely affect the value of the relevant Tranche of Notes. Floating Rate Notes Investment in Notes which bear interest at a floating rate comprise (i) a reference rate and (ii) a margin to be added or subtracted, as the case may be, from such base rate. Typically, the relevant margin will not change throughout the life of the Notes but there will be a periodic adjustment (as specified in the relevant Final Terms) of the reference rate (e.g., every three months or six months) which itself will change in accordance with general market conditions. Accordingly, the market value of floating rate Notes may be volatile if changes, particularly short term changes, to market interest rates evidenced by the relevant reference rate can only be reflected in the interest rate of these Notes upon the next periodic adjustment of the relevant reference rate. Inverse Floating Rate Notes Investment in Notes which bear interest at an inverse floating rate comprise (i) a fixed base rate minus (ii) a reference rate. The market value of such Notes typically is more volatile than the market value of floating rate Notes based on the same reference rate (and with otherwise comparable terms). Inverse floating rate Notes are more volatile because an increase in the reference rate not only decreases the interest rate of the Notes, but may also reflect an increase in prevailing interest rates, which further adversely affects the market value of these Notes. Fixed to Floating Rate Notes Fixed to floating rate Notes may bear interest at a rate that the Issuer may elect to convert from a fixed rate to a floating rate, or from a floating rate to a fixed rate. The Issuer s ability to convert the interest rate will affect the secondary market and the market value of the Notes since the Issuer may be expected to convert the rate when it is likely to produce a lower overall cost of borrowing. If the Issuer converts from a fixed rate to a floating rate, the spread on the fixed to floating Rate Notes may be less favourable than then prevailing spreads on comparable floating rate Notes tied to the same reference rate. In addition, the new floating rate at any time may be lower than the rates on other Notes. If the Issuer converts from a floating rate to a fixed rate, the fixed rate may be lower than then prevailing rates on its Notes. Notes issued at a substantial discount or premium The market values of securities issued at a substantial discount or premium from their principal amount tend to fluctuate more in relation to general changes in interest rates than do prices for conventional interest-bearing securities. Generally, the longer the remaining term of the securities, the greater the price volatility as compared to conventional interest-bearing securities with comparable maturities. Index-Linked Notes Index-linked Notes are debt securities which do not provide for predetermined redemption amounts and/or interest payments but amounts due in respect of principal and/or interest will be dependent upon the performance 19

20 of an index, which itself may contain substantial credit, interest rate or other risks. The amount of principal and/ or interest, if any, payable by the Issuer might be substantially less than the issue price or, as the case may be, the purchase price invested by the Noteholder and may even be zero in which case the Noteholder may lose his entire investment. Index-linked Notes are not in any way sponsored, endorsed, sold or promoted by the index sponsor or the respective licensor of the index and such index sponsor or licensor makes no warranty or representation whatsoever, express or implied, either as to the results to be obtained from the use of the index and/or the figure at which the index stands at any particular time. Each index is determined, composed and calculated by its respective index sponsor or licensor, without regard to the relevant Issuer or the Notes. None of the index sponsors or licensors is responsible for or has participated in the determination of the timing of, prices at, or quantities of the Notes to be issued or in determination or calculation of the equation by which the Notes settle into cash. None of the index sponsors or licensors has any obligation or liability in connection with the administration, marketing or trading of the Notes. The index sponsor or licensor of an index has no responsibility for any calculation agency adjustment made for the index. Partly-paid Notes The Issuer may issue Notes where the issue price is payable in more than one instalment. Failure to pay any subsequent instalment could result in an investor losing all of his investment. Variable rate Notes with a multiplier or other leverage factor Notes with variable interest rates can be volatile investments. If they are structured to include multipliers or other leverage factors, or caps or floors, or any combination of those features, their market values may be even more volatile than those for securities that do not include those features. Structured Notes An investment in Notes, the premium and/or the interest on or principal of which is determined by reference to one or more values of currencies, commodities, interest rates or other indices or formulae, either directly or inversely, may entail significant risks not associated with similar investments in a conventional debt security, including the risks that the resulting interest rate will be less than that payable on a conventional debt security at the same time and/or that an investor may lose the value of its entire investment or part of it, as the case may be. Neither the current nor the historical value of the relevant currencies, commodities, interest rates or other indices or formulae should be taken as an indication of future performance of such currencies, commodities, interest rates or other indices or formulae during the term of any Note. Subordinated Notes In the event of any insolvency or liquidation of the Issuer, holders of Subordinated Notes would receive payments on any outstanding Subordinated Notes only after senior Noteholders and other senior creditors have been repaid in full, if and to the extent that there is still cash available for those payments. Thus, holders of Subordinated Notes generally face a higher performance risk than holders of senior Notes. 20

21 SUPPLEMENT TO THE BASE PROSPECTUS If at any time Veolia Environnement shall be required to prepare a supplement to this Base Prospectus pursuant to the provisions of Article of the Réglement Général of the Autorité des Marchés Financiers, Veolia Environnement will prepare and make available an appropriate supplement to this Base Prospectus or a restated Base Prospectus, which in respect of any subsequent issue of Notes to be listed and admitted to trading on the Eurolist of Euronext Paris S.A. or on a Regulated Market of a Member State of the European Economic Area, shall constitute a supplement to the Base Prospectus for the purpose of the relevant provisions of the Prospectus Directive 2003/71/EC. 21

22 TERMS AND CONDITIONS OF THE NOTES The following is the text of the terms and conditions that, subject to completion in accordance with the provisions of the relevant Final Terms, shall be applicable to the Notes. In the case of Dematerialised Notes, the text of the terms and conditions will not be endorsed on physical documents of title but will be constituted by the following text as completed by the relevant Final Terms. In the case of Materialised Notes, either (i) the full text of these terms and conditions together with the relevant provisions of the Final Terms or (ii) these terms and conditions as so completed, amended, supplemented or varied (and subject to simplification by the deletion of non-applicable provisions), shall be endorsed on definitive Materialised Bearer Notes. All capitalised terms that are not defined in these Conditions will have the meanings given to them in the relevant Final Terms. References in the Conditions to Notes are to the Notes of one Series only, not to all Notes that may be issued under the Programme. The Notes are issued with the benefit of an amended and restated agency agreement dated 8 November 2005 between Veolia Environnement, BNP Paribas Securities Services, as fiscal agent and the other agents named in it (as amended or supplemented as at the Issue Date, the Agency Agreement ). The fiscal agent, the paying agents, the redenomination agent, the consolidation agent and the calculation agent(s) for the time being (if any) are referred to below respectively as the Fiscal Agent, the Paying Agents (which expression shall include the Fiscal Agent), the Redenomination Agent, the Consolidation Agent andthe Calculation Agent(s). References below to Conditions are, unless the context requires otherwise, to the numbered paragraphs below. For the purpose of these Terms and Conditions, Regulated Market means any regulated market situated in a Member State of the European Economic Area ( EEA ) as defined in the Investment Services Directive 93/22/EC and as listed on the website of Europa: ( _market/en/finances/mobil/isd). 1. Form, Denomination(s), Title, Redenomination and Method of Issue (a) Form: Notes may be issued either in dematerialised form ( Dematerialised Notes ) or in materialised form ( Materialised Notes ). (i) Title to Dematerialised Notes will be evidenced in accordance with Article L of the Code monétaire et financier (the Code ) by book entries (inscriptions en compte). No physical document of title (including certificats représentatifs pursuant to R of the Code) will be issued in respect of the Dematerialised Notes. Dematerialised Notes are issued, at the option of the Issuer and as specified in the relevant final terms (the Final Terms ), in either bearer dematerialised form (au porteur), in which case they are inscribed in the books of Euroclear France (acting as central depositary) ( Euroclear France ) which shall credit the accounts of Account Holders, or in registered dematerialised form (au nominatif) and, in such latter case, at the option of the relevant Noteholder in either administered registered form (au nominatif administré) inscribed in the books of an Account Holder or in fully registered form (au nominatif pur) inscribed in an account in the books of Euroclear France maintained by the Issuer or the registration agent (designated in the relevant Final Terms) acting on behalf of the Issuer (the Registration Agent ). For the purpose of these Conditions, Account Holder means any authorised financial intermediary institution entitled, either directly or indirectly, to hold accounts on behalf of its customers with Euroclear France, and includes the depositary bank for Clearstream Banking, société anonyme ( Clearstream, Luxembourg ) and Euroclear Bank S.A. / N.V., as operator of the Euroclear System ( Euroclear ). (ii) Materialised Notes are issued in bearer form ( Materialised Bearer Notes ). Materialised Bearer Notes are serially numbered and are issued with coupons (the Coupons ) and, where appropriate, a talon (the Talon ) attached, save in the case of Zero Coupon Notes in which case references to interest (other than in relation to interest due after the Maturity Date), Coupons and Talons in these Conditions are not applicable. Instalment Notes are issued with one or more receipts (the Receipts ) attached. Any issue of Materialised Notes requires the appointment by the Issuer of a Materialised Note Agent (designated in the relevant Final Terms) which will perform the functions otherwise attributed, in these Conditions, to the Fiscal Agent and/or Paying Agent. In accordance with Article L of the Code, securities (such as Notes) which are governed by French law and are in materialised form must be issued outside the French territory. 22

23 (b) (c) (d) Denomination(s): Notes shall be issued in the specified denomination(s) as set out in the relevant Final Terms (the Specified Denomination(s) ) subject to compliance with the regulations of the relevant central bank (or equivalent body) or any laws or regulations applicable to the relevant Specified Currency. Dematerialised Notes shall be issued in one Specified Denomination only. Title: (i) Title to Dematerialised Notes in bearer dematerialised form (au porteur) shall pass upon, and transfer of such Notes may only be effected through, registration of the transfer in the accounts of Account Holders. Title to Dematerialised Notes in fully registered form (au nominatif pur) and in administered registered form (au nominatif administré) shall pass upon, and transfer of such Notes may only be effected through, registration of the transfer in the accounts of the Issuer or of the Registration Agent. (ii) Title to Materialised Bearer Notes in definitive form having, where appropriate, Coupons, Receipt(s) and/or a Talon attached thereto on issue ( Definitive Materialised Bearer Notes ), shall pass by delivery. (iii) Except as ordered by a court of competent jurisdiction or as required by law, the holder (as defined below) of any Note, Receipt, Coupon or Talon shall be deemed to be and may be treated as its absolute owner for all purposes, whether or not it is overdue and regardless of any notice of ownership, or an interest in it, any writing on it or its theft or loss and no person shall be liable for so treating the holder. (iv) In these Conditions, holder of Notes, holder of any Note or Noteholder means (i) in the case of Dematerialised Notes, the person whose name appears in the account of the relevant Account Holder or the Issuer or the Registration Agent (as the case may be) as being entitled to such Notes and (ii) in the case of Materialised Notes, the bearer of any Definitive Materialised Bearer Note and the Receipts, Coupons, or Talon relating to it, and capitalised terms have the meanings given to them in the relevant Final Terms, the absence of any such meaning indicating that such term is not applicable to the Notes. Redenomination: (i) The Issuer may (if so specified in the relevant Final Terms), on any Interest Payment Date, without the consent of the holder of any Note, Receipt, Coupon or Talon, by giving at least 30 days notice in accordance with Condition 15 and on or after the date on which the European Member State in whose national currency the Notes are denominated has become a participating Member State in the single currency of the European Economic and Monetary Union (as provided in the Treaty establishing the European Community (the EC ), as amended from time to time (the Treaty ), or events have occurred which have substantially the same effects (in either case, EMU ), redenominate all, but not some only, of the Notes of any Series (as defined below) into Euro and adjust the aggregate principal amount and the Specified Denomination(s) set out in the relevant Final Terms accordingly, as described below. The date on which such redenomination becomes effective shall be referred to in these Conditions as the Redenomination Date (ii) Unless otherwise specified in the relevant Final Terms, the redenomination of the Notes pursuant to Condition 1(d)(i) shall be made by converting the principal amount of each Note from the relevant national currency into Euro using the fixed relevant national currency Euro conversion rate established by the Council of the European Union pursuant to applicable regulations of the Treaty and rounding the resultant figure to the nearest Euro 0.01 (with Euro being rounded upwards). If the Issuer so elects, the figure resulting from conversion of the principal amount of each Note using the fixed relevant national currency Euro conversion rate shall be rounded down to the nearest Euro. The Euro denominations of the Notes so determined shall be notified to Noteholders in accordance with Condition 15. Any balance remaining from the redenomination with a denomination higher than Euro 0.01 shall be paid by way of cash adjustment rounded to the nearest Euro 0.01 (with Euro being rounded upwards). Such cash adjustment will be payable in Euro on the Redenomination Date in the manner notified to Noteholders by the Issuer. (iii) Upon redenomination of the Notes, any reference in the relevant Final Terms to the relevant national currency shall be construed as a reference to Euro. (iv) Unless otherwise specified in the relevant Final Terms, the Issuer may, with the prior approval of the Redenomination Agent and the Consolidation Agent, in connection with any redenomination pursuant to this Condition or any consolidation pursuant to Condition 14, without the consent of 23

24 (e) (v) the holder of any Note, Receipt, Coupon or Talon, make any changes or additions to these Conditions or Condition 14 (including, without limitation, any change to any applicable business day definition, business day convention, principal financial centre of the country of the Specified Currency, interest accrual basis or benchmark), taking into account market practice in respect of redenominated euromarket debt obligations and which it believes are not prejudicial to the interests of such holders. Any such changes or additions shall, in the absence of manifest error, be binding on the holders of Notes, Receipts, Coupons and Talons and shall be notified to Noteholders in accordance with Condition 15 as soon as practicable thereafter. Neither the Issuer nor any Paying Agent shall be liable to the holder of any Note, Receipt, Coupon or Talon or other person for any commissions, costs, losses or expenses in relation to or resulting from the credit or transfer of Euro or any currency conversion or rounding effected in connection therewith. Method of Issue: The Notes will be issued on a syndicated or non-syndicated basis. The Notes will be issued in series (each a Series ) having one or more issue dates and on terms otherwise identical (or identical other than in respect of the first payment of interest), the Notes of each Series being intended to be interchangeable with all other Notes of that Series. Each Series may be issued in tranches (each a Tranche ) on the same or different issue dates. The specific terms of each Tranche (which will be supplemented, where necessary, with supplemental terms and conditions and, save in respect of the issue date, issue price, first payment of interest and nominal amount of the Tranche, will be identical to the terms of other Tranches of the same Series) will be set out in the relevant Final Terms. 2. Conversion and Exchanges of Notes (a) Dematerialised Notes: (i) Dematerialised Notes issued in bearer dematerialised form (au porteur) may not be converted into Dematerialised Notes in registered dematerialised form, whether in fully registered form (au nominatif pur) or in administered registered form (au nominatif administré). (ii) Dematerialised Notes issued in registered dematerialised form (au nominatif) may not be converted into Dematerialised Notes in bearer dematerialised form (au porteur). (iii) Dematerialised Notes issued in fully registered form (au nominatif pur) may, at the option of the Noteholder, be converted into Notes in administered registered form (au nominatif administré), and vice versa. The exercise of any such option by such Noteholder shall be made in accordance with article R of the Code. Any such conversion shall be effected at the cost of such Noteholder. (b) Materialised Notes: Materialised Bearer Notes of one Specified Denomination may not be exchanged for Materialised Bearer Notes of another Specified Denomination. 3. Status of the Notes The obligations of the Issuer under the Notes may be either unsubordinated ( Unsubordinated Notes ) or subordinated ( Subordinated Notes ). (a) Status of Unsubordinated Notes The Unsubordinated Notes and, where applicable, any relative Receipts and Coupons relating to them constitute direct, unconditional, unsecured (subject to the provisions of Condition 4) and unsubordinated obligations of the Issuer and shall at all times rank pari passu and without any preference among themselves and (subject to such exceptions as are from time to time mandatory under French law) equally with all other present or future unsecured and unsubordinated obligations of the Issuer, from time to time outstanding. (b) Status of Subordinated Notes (i) General Subordinated Notes ( Subordinated Notes ) comprise Ordinary Subordinated Notes, Deeply Subordinated Notes, Dated Subordinated Notes and Undated Subordinated Notes (all as defined below). (ii) Ordinary Subordinated Notes The principal and (if the applicable Final Terms so specify) interest on ordinary subordinated notes ( Ordinary Subordinated Notes ) constitute direct, unconditional, unsecured and subordinated 24

25 obligations of the Issuer and rank and will rank pari passu among themselves and (save for certain obligations required to be preferred by French law) pari passu with all other present or future Ordinary Subordinated Notes, but in priority to the prêts participatifs granted to the Issuer and Deeply Subordinated Notes. (iii) Deeply Subordinated Notes The principal and (if the applicable Final Terms so specify) interest on deeply subordinated notes ( Deeply Subordinated Notes ) constitute direct, unconditional, unsecured and subordinated obligations of the Issuer and rank and will rank pari passu among themselves and (save for certain obligations required to be preferred by French law) pari passu with all other present or future Deeply Subordinated Notes, but subordinate to the prêts participatifs granted to the Issuer and Ordinary Subordinated Notes. (iv) Dated Subordinated Notes Subordinated Notes (which term, for the avoidance of doubt, includes both Ordinary Subordinated Notes and Deeply Subordinated Notes) may have a specified maturity date ( Dated Subordinated Notes ). (v) Undated Subordinated Notes Subordinated Notes (which term, for the avoidance of doubt, includes both Ordinary Subordinated Notes and Deeply Subordinated Notes) may not have a specified maturity date ( Undated Subordinated Notes ). (vi) Interest relating to Subordinated Notes Unless otherwise specified in the relevant Final Terms, payments of interest relating to Subordinated Notes constitute obligations which rank equally with the obligations of the Issuer in respect of Unsubordinated Notes issued by the Issuer in accordance with Condition 3(a). If so specified in the relevant Final Terms, payments of interest relating to Subordinated Notes may be deferred in accordance with the provisions of Condition 5(h). (vii) Payment of Notes in the event of the liquidation of the Issuer If any judgement is rendered by any competent court declaring the judicial liquidation (liquidation judiciaire) of the Issuer, or in the event of a transfer of the whole of the business of the Issuer (cession totale de l entreprise) subsequent to the opening of a judicial recovery procedure, or if the Issuer is liquidated for any other reason, the payments of the creditors of the Issuer shall be made in the following order of priority (in each case subject to the payment in full of priority creditors): unsubordinated creditors of the Issuer (including holders of Unsubordinated Notes) ordinary subordinated creditors of the Issuer (including holders of Ordinary Subordinated Notes) lenders in relation to prêts participatifs granted to the Issuer, and deeply subordinated creditors of the Issuer (including holders of Deeply Subordinated Notes). In the event of incomplete payment of unsubordinated creditors, the obligations of the Issuer in connection with Ordinary Subordinated Notes shall be terminated (then subsequently the obligations of the Issuer vis-à-vis the lenders in relation to prêts participatifs and holders of Deeply Subordinated Notes). The holders of Subordinated Notes shall take all steps necessary for the orderly accomplishment of any collective proceedings or voluntary liquidation. The above order of priority which relates to the principal of Subordinated Notes will apply mutatis mutandis to interest payments depending on whether they are unsubordinated or subordinated and in the latter case whether they are ordinary subordinated or deeply subordinated. 4. Negative Pledge So long as any of the Unsubordinated Notes, or, if applicable, any Receipts or Coupons relating to them, remain outstanding (as defined below), the Issuer shall not, and will ensure that none of its Principal Subsidiaries (as defined below) shall, create or permit to subsist any mortgage, charge, pledge, lien (other than a lien arising by operation of law) or other form of encumbrance or security interest upon the whole or any part of their respective undertakings, assets or revenues, present or future, to secure any Relevant Debt (as defined below), or any 25

26 guarantee of or indemnity in respect of any Relevant Debt unless, at the same time or prior thereto, its obligations under the Notes, Receipts and Coupons are (A) secured equally and rateably therewith or (B) have the benefit of such other security or other arrangement as shall be approved by the Masse of Noteholders in accordance with Condition 11. This Condition 4 shall not apply to Subordinated Notes. For the purposes of this Condition, outstanding means, in relation to the Notes of any Series, all the Notes issued other than (a) those that have been redeemed in accordance with the Conditions, (b) those in respect of which the date for redemption has occurred and the redemption moneys (including all interest accrued on such Notes to the date for such redemption and any interest payable after such date) have been duly paid (i) in the case of Dematerialised Notes in bearer form and in administered registered form, to the relevant Account Holders on behalf of the Noteholder as provided in Condition 7(a), (ii) in the case of Dematerialised Notes in fully registered form, to the account of the Noteholder as provided in Condition 7(a) and (iii) in the case of Materialised Notes, to the Fiscal Agent as provided in this Agreement and remain available for payment against presentation and surrender of Bearer Materialised Notes, Receipts and/or Coupons, as the case may be, (c) those which have become void or in respect of which claims have become prescribed, (d) those which have been purchased and cancelled as provided in the Conditions, (e) in the case of Materialised Notes (i) those mutilated or defaced Bearer Materialised Notes that have been surrendered in exchange for replacement Bearer Materialised Notes, (ii) (for the purpose only of determining how many such Bearer Materialised Notes are outstanding and without prejudice to their status for any other purpose) those Bearer Materialised Notes alleged to have been lost, stolen or destroyed and in respect of which replacement Bearer Materialised Notes have been issued and (iii) any Temporary Global Certificate to the extent that it shall have been exchanged for one or more Definitive Materialised Bearer Notes, pursuant to its provisions; Principal Subsidiaries means at any relevant time a Subsidiary of the Issuer: (a) whose total assets or operating income (or, where the Subsidiary in question prepares consolidated accounts whose total consolidated assets or consolidated operating income, as the case may be) attributable to the Issuer represent not less than fifteen per cent. of the total consolidated assets or the consolidated operating income of the Issuer, all as calculated by reference to the then latest audited accounts (or consolidated accounts, as the case may be) of such Subsidiary and the then latest audited consolidated accounts of the Issuer and its consolidated subsidiaries, (b) to which is transferred all or substantially all the assets and undertaking of a Subsidiary which immediately prior to such transfer is a Principal Subsidiary. Relevant Debt means any present or future indebtedness in the form of, or represented by, bonds, notes, debentures, loan stock or other securities that, at the time of the issue, are capable of being, or are intended to be, quoted, listed or ordinarily dealt in on any stock exchange, automated trading system, over-the-counter or other securities market. Subsidiary means, in relation to any person or entity at any time, any other person or entity (whether or not now existing) as defined in Article L of the French Code de commerce or any other person or entity controlling directly or indirectly such person or entity within the meaning of Article L of the French Code de commerce. 5. Interest and other Calculations (a) Definitions: In these Conditions, unless the context otherwise requires, the following defined terms shall have the meanings set out below: Business Day means: (i) in the case of euro, a day on which the Trans European Automated Real Time Gross Settlement Express Transfer system or any successor thereto (the TARGET System ) is operating (a TARGET Business Day ) and/or (ii) in the case of a specified currency other than euro, a day (other than a Saturday or Sunday) on which commercial banks and foreign exchange markets settle payments in the principal financial centre for such currency and/or (iii) in the case of a currency and/or one or more business centre(s) specified in the relevant Final Terms (the Business Centre(s) ) a day (other than a Saturday or a Sunday) on which commercial banks and 26

27 foreign exchange markets settle payments in such currency in the Business Centre(s) or, if no currency is indicated, generally in each of the Business Centres so specified Day Count Fraction means, in respect of the calculation of an amount of interest on any Note for any period of time (from and including the first day of such period to but excluding the last) (whether or not constituting an Interest Period, the Calculation Period ): (i) if Actual/365 FBF or Actual/Actual ISDA is specified in the relevant Final Terms, the actual number of days in the Calculation Period divided by 365 (or, if any portion of that Calculation Period falls in a leap year, the sum of (A) the actual number of days in that portion of the Calculation Period falling in a leap year divided by 366 and (B) the actual number of days in that portion of the Calculation Period falling in a non-leap year divided by 365) (ii) if Actual/Actual-ISMA 1 is specified in the relevant Final Terms: (A) if the Calculation Period is equal to or shorter than the Determination Period during which it falls, the number of days in the Calculation Period divided by the product of (x) the number of days in such Determination Period and (y) the number of Determination Periods normally ending in any year; and (B) if the Calculation Period is longer than one Determination Period, the sum of: the number of days in such Calculation Period falling in the Determination Period in which it begins divided by the product of (1) the number of days in such Determination Period and (2) the number of Determination Periods normally ending in any year; and the number of days in such Calculation Period falling in the next Determination Period divided by the product of (1) the number of days in such Determination Period and (2) the number of Determination Periods normally ending in any year in each case where Determination Period means the period from and including a Determination Date in any year to but excluding the next Determination Date and Determination Date means the date specified as such in the relevant Final Terms or, if none is so specified, the Interest Payment Date (iii) if Actual/365 (Fixed) is specified in the relevant Final Terms, the actual number of days in the Calculation Period divided by 365 (iv) if Actual/360 is specified in the relevant Final Terms, the actual number of days in the Calculation Period divided by 360 (v) if 30/360 ISDA, 360/360 or Bond Basis is specified in the relevant Final Terms, the number of days in the Calculation Period divided by 360 (the number of days to be calculated on the basis of a year of 360 days with day months (unless (a) the last day of the Calculation Period is the 31st day of a month but the first day of the Calculation Period is a day other than the 30th or 31st day of a month, in which case the month that includes that last day shall not be considered to be shortened to a 30-day month, or (b) the last day of the Calculation Period is the last day of the month of February, in which case the month of February shall not be considered to be lengthened to a 30-day month)) and (vi) if 30/360 FBF or Actual 30A/360 (American Bond Basis) is specified in the relevant Final Terms in respect of each Calculation Period, the fraction whose denominator is 360 and whose numerator is the number of days calculated as for Actual 30E/360, subject to the following exception: where the last day of this period is the 31st and the first day is neither the 30th nor the 31st, the last month of the period shall be deemed to be a month of 31 days. Using the notation as with 30E/360 below the fraction is: If dd2 = 31 and dd1 (30,31) 1/360 x [(yy2 yy1) x (mm2 mm1) x 30 + (dd2 dd1)] or 1/360 x [(yy2 yy1) x (mm2 mm1) x 30 + Min (dd2, 30) Min (dd1, 30)] (vii) 1 As announced on 3 February 2005 ISMA and IPMA have agreed the terms of a merger. The merger has been completed on 1 July 2005 and the merged association is called ICMA (the International Capital Markets Association). 27

28 (vii) if 30E/360 or Eurobond Basis is specified in the relevant Final Terms, in respect of each Calculation Period, the fraction whose denominator is 360 and whose numerator is the number of days elapsed during such period, calculated on the basis of a year comprising 12 months of 30 days, subject to the following exception: if the last day of the period is the last day of the month of February, the number of days elapsed during such month shall be taken as the actual number of days. Where: D1 (dd1, mm1, yy1) is the date of the beginning of the period D2 (dd2, mm2, yy2) is the date of the end of the period The fraction is: 1/360 x [(yy2 yy1) x (mm2 mm1) x 30 + Min (dd2, 30) Min (dd1, 30)] Effective Date means, with respect to any Floating Rate to be determined on an Interest Determination Date, the date specified as such in the relevant Final Terms or, if none is so specified, the first day of the Interest Accrual Period to which such Interest Determination Date relates Euro-zone means the region comprised of member states of the European Union that adopt the single currency in accordance with the Treaty establishing the EC, as amended FBF Definitions means the definitions set out in the 2001 FBF Master Agreement relating to Transactions on Forward Financial Instruments as supplemented by the Technical Schedules published by the Fédération Bancaire Française, as the case may be ( FBF ) (together the FBF Master Agreement ), unless otherwise specified in the relevant Final Terms Interest Accrual Period means the period beginning on (and including) the Interest Commencement Date and ending on (but excluding) the first Interest Period Date and each successive period beginning on (and including) an Interest Period Date and ending on (but excluding) the next succeeding Interest Period Date Interest Amount means the amount of interest payable, and in the case of Fixed Rate Notes, means the Fixed Coupon Amount or Broken Amount, as the case may be Interest Commencement Date means the Issue Date or such other date as may be specified in the relevant Final Terms Interest Determination Date means, with respect to a Rate of Interest and Interest Accrual Period, the date specified as such in the relevant Final Terms or, if none is so specified, (i) the day falling two TARGET Business Days prior to the first day of such Interest Accrual Period if the Specified Currency is euro or (ii) the first day of such Interest Accrual Period if the Specified Currency is Sterling or (iii) the day falling two Business Days in the city specified in the Final Terms for the Specified Currency prior to the first day of such Interest Accrual Period if the Specified Currency is neither Sterling nor euro Interest Payment Date means the date(s) specified in the relevant Final Terms Interest Period means the period beginning on (and including) the Interest Commencement Date and ending on (but excluding) the first Interest Payment Date and each successive period beginning on (and including) an Interest Payment Date and ending on (but excluding) the next succeeding Interest Payment Date Interest Period Date means each Interest Payment Date unless otherwise specified in the relevant Final Terms ISDA Definitions means the 2000 ISDA Definitions as published by the International Swaps and Derivatives Association, Inc., unless otherwise specified in the relevant Final Terms Page means such page, section, caption, column or other part of a particular information service (including, but not limited to, Reuters Markets 3000 ( Reuters ) and Telerate ( Telerate )) as may be specified for the purpose of providing a Relevant Rate, or such other page, section, caption, column or other part as may replace it on that information service or on such other information service, in each case as may be nominated by the person or organisation providing or sponsoring the information appearing there for the purpose of displaying rates or prices comparable to that Relevant Rate 28

29 (b) (c) Rate of Interest means the rate of interest payable from time to time in respect of the Notes and that is either specified or calculated in accordance with the provisions in the relevant Final Terms Reference Banks means the institutions specified as such in the relevant Final Terms or, if none, four major banks selected by the Calculation Agent in the interbank market (or, if appropriate, money, swap or over-the-counter index options market) that is most closely connected with the Benchmark (which, if EURIBOR is the relevant Benchmark, shall be the Euro-zone) Relevant Financial Centre means, with respect to any Floating Rate to be determined in accordance with a Screen Rate Determination on an Interest Determination Date, the financial centre as may be specified as such in the relevant Final Terms or, if none is so specified, the financial centre with which the relevant Benchmark is most closely connected (which, in the case of EURIBOR, shall be the Euro-zone) or, if none is so connected, Paris Relevant Rate means the Benchmark for a Representative Amount of the Specified Currency for a period (if applicable or appropriate to the Benchmark) equal to the Specified Duration commencing on the Effective Date Relevant Time means, with respect to any Interest Determination Date, the local time in the Relevant Financial Centre specified in the relevant Final Terms or, if no time is specified, the local time in the Relevant Financial Centre at which it is customary to determine bid and offered rates in respect of deposits in the Specified Currency in the interbank market in the Relevant Financial Centre or, if no such customary local time exists, am in the Relevant Financial Centre and for the purpose of this definition, local time means, with respect to Europe and the Euro-zone as a Relevant Financial Centre, Brussels time Representative Amount means, with respect to any Floating Rate to be determined in accordance with a Screen Rate Determination on an Interest Determination Date, the amount specified as such in the relevant Final Terms or, if none is specified, an amount that is representative for a single transaction in the relevant market at the time Specified Currency means the currency specified as such in the relevant Final Terms or, if none is specified, the currency in which the Notes are denominated and Specified Duration means, with respect to any Floating Rate to be determined in accordance with a Screen Rate Determination on an Interest Determination Date, the duration specified in the relevant Final Terms or, if none is specified, a period of time equal to the relative Interest Accrual Period, ignoring any adjustment pursuant to Condition 5(c)(ii). Interest on Fixed Rate Notes: Each Fixed Rate Note bears interest on its outstanding nominal amount from the Interest Commencement Date at the rate per annum (expressed as a percentage) equal to the Rate of Interest, such interest being payable in arrear on each Interest Payment Date except as otherwise provided in the relevant Final Terms. If a Fixed Coupon Amount or a Broken Amount is specified in the relevant Final Terms, the amount of interest payable on each Interest Payment Date will amount to the Fixed Coupon Amount or, if applicable, the Broken Amount so specified and in the case of the Broken Amount will be payable on the particular Interest Payment Date(s) specified in the relevant Final Terms. Interest on Floating Rate Notes and Index Linked Interest Notes: (i) Interest Payment Dates: Each Floating Rate Note and Index Linked Interest Note bears interest on its outstanding nominal amount from the Interest Commencement Date at the rate per annum (expressed as a percentage) equal to the Rate of Interest, such interest being payable in arrear (except as otherwise provided in the relevant Final Terms) on each Interest Payment Date. Such Interest Payment Date(s) is/ are either shown in the relevant Final Terms as Specified Interest Payment Dates or, if no Specified Interest Payment Date(s) is/are shown in the relevant Final Terms, Interest Payment Date shall mean each date which falls the number of months or other period shown in the relevant Final Terms as the Interest Period after the preceding Interest Payment Date or, in the case of the first Interest Payment Date, after the Interest Commencement Date. (ii) Business Day Convention: If any date referred to in these Conditions that is specified to be subject to adjustment in accordance with a Business Day Convention would otherwise fall on a day that is not a Business Day, then, if the Business Day Convention specified is (A) the Floating Rate Business Day Convention, such date shall be postponed to the next day that is a Business Day unless it would thereby fall into the next calendar month, in which event (x) such date shall be brought forward to the immediately preceding Business Day and (y) each subsequent such date shall be the last Business Day 29

30 of the month in which such date would have fallen had it not been subject to adjustment, (B) the Following Business Day Convention, such date shall be postponed to the next day that is a Business Day, (C) the Modified Following Business Day Convention, such date shall be postponed to the next day that is a Business Day unless it would thereby fall into the next calendar month, in which event such date shall be brought forward to the immediately preceding Business Day or (D) the Preceding Business Day Convention, such date shall be brought forward to the immediately preceding Business Day. (iii) Rate of Interest for Floating Rate Notes: The Rate of Interest in respect of Floating Rate Notes for each Interest Accrual Period shall be determined in the manner specified in the relevant Final Terms and the provisions below relating to either FBF Determination, ISDA Determination or Screen Rate Determination shall apply, depending upon which is specified in the relevant Final Terms. (A) FBF Determination for Floating Rate Notes: Where FBF Determination is specified in the relevant Final Terms as the manner in which the Rate of Interest is to be determined, the Rate of Interest for each Interest Accrual Period shall be determined by the Calculation Agent as a rate equal to the relevant FBF Rate plus or minus (as indicated in the relevant Final Terms) the Margin (if any). For the purposes of this sub-paragraph (A), FBF Rate for an Interest Accrual Period means a rate equal to the Floating Rate that would be determined by the Calculation Agent under a Transaction under the terms of an agreement incorporating the FBF Definitions and under which: (a) the Floating Rate is as specified in the relevant Final Terms and (b) the relevant Floating Rate Determination Date (Date de Détermination du Taux Variable) is the first day of that Interest Accrual Period unless otherwise specified in the relevant Final Terms For the purposes of this sub-paragraph (A), Floating Rate, Calculation Agent, Floating Rate Determination Date (Date de Détermination du Taux Variable) and Transaction have the meanings given to those terms in the FBF Definitions, provided that Euribor means the rate calculated for deposits in Euro which appears on Telerate Page 248, as more fully described in the relevant Final Terms. (B) ISDA Determination for Floating Rate Notes: Where ISDA Determination is specified in the relevant Final Terms as the manner in which the Rate of Interest is to be determined, the Rate of Interest for each Interest Accrual Period shall be determined by the Calculation Agent as a rate equal to the relevant ISDA Rate plus or minus (as indicated in the relevant Final Terms) the Margin (if any). For the purposes of this sub-paragraph (A), ISDA Rate for an Interest Accrual Period means a rate equal to the Floating Rate that would be determined by the Calculation Agent under a Swap Transaction under the terms of an agreement incorporating the ISDA Definitions and under which: (a) the Floating Rate Option is as specified in the relevant Final Terms; (b) the designated Maturity is a period specified in the relevant Final Terms; and (c) the relevant Reset Date is the first day of that Interest Accrual Period unless otherwise specified in the relevant Final Terms. For the purposes of this sub-paragraph (A), Floating Rate, Calculation Agent, Floating Rate Option, designated Maturity, Reset Date and Swap Transaction have the meanings given to those terms in the ISDA Definitions. (C) Screen Rate Determination for Floating Rate Notes: Where Screen Rate Determination is specified in the relevant Final Terms as the manner in which the Rate of Interest is to be determined, the Rate of Interest for each Interest Accrual Period shall be determined by the Calculation Agent at or about the Relevant Time on the Interest Determination Date in respect of such Interest Accrual Period in accordance with the following: (a) if the Primary Source for Floating Rate is a Page, subject as provided below, the Rate of Interest shall be: (i) the Relevant Rate (where such Relevant Rate on such Page is a composite quotation or is customarily supplied by one entity) or 30

31 (d) (e) (f) (g) (h) (ii) the arithmetic mean of the Relevant Rates of the persons whose Relevant Rates appear on that Page, in each case appearing on such Page at the Relevant Time on the Interest Determination Date (b) if the Primary Source for the Floating Rate is Reference Banks or if sub-paragraph (a)(i) or (a)(ii) applies and the Page is not available at the Relevant Time on the Interest Determination Date, or if sub-paragraph (a)(i) applies and no Relevant Rate appears on the Page at the Relevant Time on the Interest Determination Date or if sub-paragraph (a)(ii) applies and fewer than two Relevant Rates appear on the Page at the Relevant Time on the Interest Determination Date, subject as provided below, the Rate of Interest shall be the arithmetic mean of the Relevant Rates that each of the Reference Banks is quoting to leading banks in the Relevant Financial Centre at the Relevant Time on the Interest Determination Date, as determined by the Calculation Agent and (c) if paragraph (b) above applies and the Calculation Agent determines that fewer than two Reference Banks are so quoting Relevant Rates, subject as provided below, the Rate of Interest shall be the arithmetic mean of the rates per annum (expressed as a percentage) that the Calculation Agent determines to be the rates (being the nearest equivalent to the Benchmark) in respect of a Representative Amount of the Specified Currency that at least two out of five leading banks selected by the Calculation Agent in the principal financial centre of the country of the Specified Currency or, if the Specified Currency is euro, in the euro-zone as selected by the Calculation Agent (the Principal Financial Centre ) are quoting at or about the Relevant Time on the date on which such banks would customarily quote such rates for a period commencing on the Effective Date for a period equivalent to the Specified Duration (I) to leading banks carrying on business in Europe, or (if the Calculation Agent determines that fewer than two of such banks are so quoting to leading banks in Europe) (II) to leading banks carrying on business in the Principal Financial Centre; except that, if fewer than two of such banks are so quoting to leading banks in the Principal Financial Centre, the Rate of Interest shall be the Rate of Interest determined on the previous Interest Determination Date (after readjustment for any difference between any Margin, Rate Multiplier or Maximum or Minimum Rate of Interest applicable to the preceding Interest Accrual Period and to the relevant Interest Accrual Period). (iv) Rate of Interest for Index Linked Interest Notes: The Rate of Interest in respect of Index Linked Interest Notes for each Interest Accrual Period shall be determined in the manner specified in the relevant Final Terms and interest will accrue by reference to an Index or Formula as specified in the relevant Final Terms. Zero Coupon Notes: Where a Note the Interest Basis of which is specified to be Zero Coupon is repayable prior to the Maturity Date and is not paid when due, the amount due and payable prior to the Maturity Date shall be the Early Redemption Amount of such Note. As from the Maturity Date, the Rate of Interest for any overdue principal of such a Note shall be a rate per annum (expressed as a percentage) equal to the Amortisation Yield (as described in Condition 6(e)(i)(B)). Dual Currency Notes: In the case of Dual Currency Notes, if the rate or amount of interest falls to be determined by reference to a Rate of Exchange or a method of calculating a Rate of Exchange, the rate or amount of interest payable shall be determined in the manner specified in the relevant Final Terms. Partly Paid Notes: In the case of Partly Paid Notes (other than Partly Paid Notes which are Zero Coupon Notes), interest will accrue as aforesaid on the paid-up nominal amount of such Notes and otherwise as specified in the relevant Final Terms. Accrual of Interest: Interest shall cease to accrue on each Note on the due date for redemption unless (i) in the case of Dematerialised Notes, on such due date or (ii) in the case of Materialised Notes, upon due presentation, payment is improperly withheld or refused, in which event interest shall continue to accrue (as well after as before judgement) at the Rate of Interest in the manner provided in this Condition 5 to the Relevant Date. Deferral of Interest: In the case of Subordinated Notes, interest shall be payable on each Compulsory Interest Payment Date (as defined below) in respect of the interest accrued in the Interest Period ending on the day immediately preceding such date. On any Optional Interest Payment Date (as defined below) there may be paid (if the Issuer so elects) the interest accrued in the Interest Period ending on the day immediately preceding such date but the Issuer shall not have any obligation to make such payment and any such failure 31

32 (i) (j) to pay shall not constitute a default under the Notes or for any other purpose. Notice of any Optional Interest Payment Date shall (for so long as the rules of, or applicable to, any Regulated Market so require) be given to the Noteholders in accordance with Condition 15 and to the relevant Regulated Market. Such notice shall be given at least seven days prior to the relevant Optional Interest Payment Date(s). Any interest not paid on an Optional Interest Payment Date shall, so long as the same remains unpaid, constitute Arrears of Interest which term shall include interest on such unpaid interest as referred to below. Arrears of Interest may, at the option of the Issuer, be paid in whole or in part at any time upon the expiration of not less than seven days notice to such effect given to the Noteholders in accordance with Condition 15 but all Arrears of Interest on all Undated Subordinated Notes outstanding shall become due in full on whichever is the earliest of: (i) the Interest Payment Date immediately following the date upon which the General Meeting of shareholders passed a resolution to pay a dividend on the ordinary share capital of the Issuer and (ii) (a) a judgement rendered by any competent court declaring the transfer of the whole of the business (cession totale de l entreprise) or the judicial liquidation (liquidation judiciaire) of the Issuer or (b) the liquidation of the Issuer for any other reason. If notice is given by the Issuer of its intention to pay the whole or part of Arrears of Interest, the Issuer shall be obliged to do so upon the expiration of such notice. When Arrears of Interest are paid in part, each such payment shall be applied in or towards satisfaction of the full amount of the Arrears of Interest accrued in respect of the earliest Interest Period in respect of which Arrears of Interest have accrued and have not been paid in full. Arrears of Interest shall (to the extent permitted by law) bear interest accruing (but only, in accordance with Article 1154 of the Civil Code, after such interest has accrued for a period of one year) and compounding on the basis of the exact number of days which have elapsed at the prevailing rate of interest on the Undated Subordinated Notes in respect of each relevant Interest Period. For these purposes the following expressions have the following meanings: Compulsory Interest Payment Date means any Interest Payment Date unless at the General Meeting of the shareholders of the Issuer immediately preceding such date which was required to approve the annual accounts of the Issuer for the fiscal year ended prior to such General Meeting, no resolution was passed to pay a dividend on the ordinary share capital of the Issuer in respect of such previous fiscal year. Optional Interest Payment Date means any Interest Payment Date, as the case may be, other than a Compulsory Interest Payment Date. Margin, Maximum/Minimum Rates of Interest, Instalment Amounts and Redemption Amounts, Rate Multipliers and Rounding: (i) If any Margin or Rate Multiplier is specified in the relevant Final Terms (either (x) generally, or (y) in relation to one or more Interest Accrual Periods), an adjustment shall be made to all Rates of Interest, in the case of (x), or the Rates of Interest for the specified Interest Accrual Periods, in the case of (y), calculated in accordance with Condition 5(c) above by adding (if a positive number) or subtracting the absolute value (if a negative number) of such Margin or multiplying by such Rate Multiplier, subject always to the next paragraph (ii) If any Maximum or Minimum Rate of Interest, Instalment Amount or Redemption Amount is specified in the relevant Final Terms, then any Rate of Interest, Instalment Amount or Redemption Amount shall be subject to such maximum or minimum, as the case may be (iii) For the purposes of any calculations required pursuant to these Conditions (unless otherwise specified), (x) all percentages resulting from such calculations shall be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point (with halves being rounded up), (y) all figures shall be rounded to seven significant figures (with halves being rounded up) and (z) all currency amounts that fall due and payable shall be rounded to the nearest unit of such currency (with halves being rounded up), save in the case of yen, which shall be rounded down to the nearest yen. For these purposes unit means the lowest amount of such currency that is available as legal tender in the country(ies) of such currency. Calculations: The amount of interest payable in respect of any Note for any period shall be calculated by multiplying the product of the Rate of Interest and the outstanding nominal amount of such Note by the Day Count Fraction, unless an Interest Amount (or a formula for its calculation) is specified in respect of such period, in which case the amount of interest payable in respect of such Note for such period shall equal such Interest Amount (or be calculated in accordance with such formula). Where any Interest Period comprises 32

33 (k) (l) two or more Interest Accrual Periods, the amount of interest payable in respect of such Interest Period shall be the sum of the amounts of interest payable in respect of each of those Interest Accrual Periods. Determination and Publication of Rates of Interest, Interest Amounts, Final Redemption Amounts, Optional Redemption Amounts, Early Redemption Amounts and Instalment Amounts: As soon as practicable after the relevant time on such date as the Calculation Agent may be required to calculate any rate or amount, obtain any quotation or make any determination or calculation, it shall determine such rate and calculate the Interest Amounts in respect of each Specified Denomination of the Notes for the relevant Interest Accrual Period, calculate the Final Redemption Amount, Optional Redemption Amount, Early Redemption Amount or Instalment Amount, obtain such quotation or make such determination or calculation, as the case may be, and cause the Rate of Interest and the Interest Amounts for each Interest Period and the relevant Interest Payment Date and, if required to be calculated, the Final Redemption Amount, Optional Redemption Amount, Early Redemption Amount or any Instalment Amount, to be notified to the Fiscal Agent, the Issuer, each of the Paying Agents, the Noteholders, any other Calculation Agent appointed in respect of the Notes that is to make a further calculation upon receipt of such information and, if the Notes are listed and admitted to trading on a Regulated Market and the rules of, or applicable to, such Regulated Market so require, such Regulated Market as soon as possible after their determination but in no event later than (i) the commencement of the relevant Interest Period, if determined prior to such time, in the case of notification to such exchange of a Rate of Interest and Interest Amount, or (ii) in all other cases, the fourth Business Day after such determination. Where any Interest Payment Date or Interest Period Date is subject to adjustment pursuant to Condition 5(c)(ii), the Interest Amounts and the Interest Payment Date so published may subsequently be amended (or appropriate alternative arrangements made by way of adjustment) without notice in the event of an extension or shortening of the Interest Period. If the Notes become due and payable under Condition 9, the accrued interest and the Rate of Interest payable in respect of the Notes shall nevertheless continue to be calculated as previously in accordance with this Condition but no publication of the Rate of Interest or the Interest Amount so calculated need be made. The determination of any rate or amount, the obtaining of each quotation and the making of each determination or calculation by the Calculation Agent(s) shall (in the absence of manifest error) be final and binding upon all parties. Calculation Agent and Reference Banks: The Issuer shall procure that there shall at all times be four Reference Banks (or such other number as may be required) with offices in the Relevant Financial Centre and one or more Calculation Agents if provision is made for them in the relevant Final Terms and for so long as any Note is outstanding. If any Reference Bank (acting through its relevant office) is unable or unwilling to continue to act as a Reference Bank, then the Issuer shall appoint another Reference Bank with an office in the Relevant Financial Centre to act as such in its place. Where more than one Calculation Agent is appointed in respect of the Notes, references in these Conditions to the Calculation Agent shall be construed as each Calculation Agent performing its respective duties under the Conditions. If the Calculation Agent is unable or unwilling to act as such or if the Calculation Agent fails duly to establish the Rate of Interest for an Interest Period or Interest Accrual Period or to calculate any Interest Amount, Instalment Amount, Final Redemption Amount, Early Redemption Amount or Optional Redemption Amount, as the case may be, or to comply with any other requirement, the Issuer shall appoint a leading bank or investment banking firm engaged in the interbank market (or, if appropriate, money, swap or over-the-counter index options market) that is most closely connected with the calculation or determination to be made by the Calculation Agent (acting through its principal office or any other office actively involved in such market) to act as such in its place. The Calculation Agent may not resign its duties without a successor having been appointed as aforesaid. So long as the Notes are listed and admitted to trading on any Regulated Market and the rules of, or applicable to, that Regulated Market so require, notice of any change of Calculation Agent shall be given in accordance with Condition Redemption, Purchase and Options (a) Final Redemption: Unless previously redeemed, or purchased and cancelled as provided below or its maturity is extended pursuant to any option provided by the relevant Final Terms including any Issuer s option in accordance with Condition 6(c) or any Noteholders option in accordance with Condition 6(d), each Note shall be finally redeemed on the Maturity Date specified in the relevant Final Terms at its Final Redemption Amount (which, unless otherwise provided, is its nominal amount) or, in the case of a Note falling within Condition 6(b) below, its final Instalment Amount. (b) Redemption by Instalments: Unless previously redeemed, purchased and cancelled as provided in this Condition 6 or the relevant Instalment Date (being one of the dates so specified in the relevant Final Terms) 33

34 (c) (d) is extended pursuant to any Issuer s or Noteholder s option in accordance with Condition 6(c) or 6(d), each Note that provides for Instalment Dates and Instalment Amounts shall be partially redeemed on each Instalment Date at the related Instalment Amount specified in the relevant Final Terms. The outstanding nominal amount of each such Note shall be reduced by the Instalment Amount (or, if such Instalment Amount is calculated by reference to a proportion of the nominal amount of such Note, such proportion) for all purposes with effect from the related Instalment Date, unless payment of the Instalment Amount is improperly withheld or refused (i) in the case of Dematerialised Notes, on the due date for such payment or (ii) in the case of Materialised Notes, on presentation of the related Receipt, in which case, such amount shall remain outstanding until the Relevant Date relating to such Instalment Amount. Redemption at the Option of the Issuer, Exercise of Issuer s Options and Partial Redemption: If a Call Option is specified in the relevant Final Terms, the Issuer may, subject to compliance by the Issuer with all the relevant laws, regulations and directives and on giving not less than 15 nor more than 30 days irrevocable notice in accordance with Condition 15 to the Noteholders (or such other notice period as may be specified in the relevant Final Terms) redeem, or exercise any Issuer s option (as may be described) in relation to, all or, if so provided, some, of the Notes on any Optional Redemption Date or Option Exercise Date, as the case may be. Any such redemption of Notes shall be at their Optional Redemption Amount together with interest accrued to the date fixed for redemption (including, where applicable, any Arrears of Interest), if any. Any such redemption or exercise must relate to Notes of a nominal amount at least equal to the minimum nominal amount to be redeemed specified in the relevant Final Terms and no greater than the maximum nominal amount to be redeemed specified in the relevant Final Terms. All Notes in respect of which any such notice is given shall be redeemed, or the Issuer s option shall be exercised, on the date specified in such notice in accordance with this Condition. In the case of a partial redemption or a partial exercise of an Issuer s option in respect of Materialised Notes, the notice to holders of such Materialised Notes shall also contain the number of the Definitive Materialised Bearer Notes to be redeemed or in respect of which such option has been exercised, which shall have been drawn in such place and in such manner as may be fair and reasonable in the circumstances, taking account of prevailing market practices, subject to compliance with any applicable laws and requirements of the Regulated Market on which the Notes are listed and admitted to trading, as the case may be. In the case of a partial redemption of or a partial exercise of an Issuer s option in respect of Dematerialised Notes of any Series, the redemption may be effected, at the option of the Issuer, either (i) by reducing the nominal amount of all such Dematerialised Notes in proportion to the aggregate nominal amount redeemed or (ii) by redeeming in full some only of such Dematerialised Notes and, in such latter case, the choice between those Dematerialised Notes that will be fully redeemed and those Dematerialised Notes that will not be redeemed shall be made in accordance with Article R of the Code monétaire et financier and the provisions of the relevant Final Terms, subject to compliance with any other applicable laws and requirements of the Regulated Market on which the Notes are listed and admitted to trading. So long as the Notes are listed and admitted to trading on a Regulated Market, the Issuer shall, once in each year in which there has been a partial redemption of the Notes, cause to be published in a leading newspaper with general circulation in the city where the Regulated Market on which such Notes are listed and admitted to trading is located, which in the case of Euronext Paris S.A. is expected to be La Tribune, a notice specifying the aggregate nominal amount of Notes outstanding and, in the case of Materialised Notes, a list of any Definitive Materialised Bearer Notes drawn for redemption but not surrendered. Redemption at the Option of Noteholders and Exercise of Noteholders Options: If a Put Option is specified in the relevant Final Terms for a Series of Notes, the Issuer shall, at the option of the Noteholder, upon the Noteholder giving not less than 15 nor more than 30 days notice to the Issuer (or such other notice period as may be specified in the relevant Final Terms) redeem the relevant Note(s) on the Optional Redemption Date(s) at its Optional Redemption Amount together with interest accrued to the date fixed for redemption including, where applicable, any Arrears of Interest. To exercise such option or any other Noteholders option that may be set out in the relevant Final Terms (which must be exercised on an Option Exercise Date) the Noteholder must deposit with a Paying Agent at its specified office a duly completed option exercise notice (the Exercise Notice ) in the form obtained from any Paying Agent, within the notice period. In the case of Materialised Bearer Notes, the Exercise Notice shall have attached to it the relevant Notes (together with all unmatured Receipts and Coupons and unexchanged Talons). In the case of Dematerialised Notes, the Noteholder shall transfer, or cause to be transferred, the Dematerialised Notes to be redeemed to the account of the Paris Paying Agent as specified in the Exercise Notice. No option so exercised and, where applicable, no Note so deposited or transferred, may be withdrawn without the prior consent of the Issuer. 34

35 (e) (f) Early Redemption: (i) Zero Coupon Notes: (A) The Early Redemption Amount payable in respect of any Zero Coupon Note, the Early Redemption Amount of which is not linked to an index and/or a formula, upon redemption of such Note pursuant to Condition 6(f) or Condition 6(j) or upon it becoming due and payable as provided in Condition 9 shall be the Amortised Nominal Amount (calculated as provided below) of such Note unless otherwise specified in the relevant Final Terms. (B) Subject to the provisions of sub-paragraph (C) below, the Amortised Nominal Amount of any such Note shall be the scheduled Final Redemption Amount of such Note on the Maturity Date discounted at a rate per annum (expressed as a percentage) equal to the Amortisation Yield (which, if none is shown in the relevant Final Terms, shall be such rate as would produce an Amortised Nominal Amount equal to the issue price of the Notes if they were discounted back to their issue price on the Issue Date) compounded annually. (C) If the Early Redemption Amount payable in respect of any such Note upon its redemption pursuant to Condition 6(f) or Condition 6(j) or upon it becoming due and payable as provided in Condition 9 is not paid when due, the Early Redemption Amount due and payable in respect of such Note shall be the Amortised Nominal Amount of such Note as defined in sub-paragraph (B) above, except that such sub-paragraph shall have effect as though the date on which the Amortised Nominal Amount becomes due and payable were the Relevant Date. The calculation of the Amortised Nominal Amount in accordance with this sub-paragraph shall continue to be made (as well after as before judgement) until the Relevant Date, unless the Relevant Date falls on or after the Maturity Date, in which case the amount due and payable shall be the scheduled Final Redemption Amount of such Note on the Maturity Date together with any interest that may accrue in accordance with Condition 5(d). Where such calculation is to be made for a period of less than one year, it shall be made on the basis of the Day Count Fraction shown in the relevant Final Terms. (ii) Other Notes: The Early Redemption Amount payable in respect of any Note (other than Notes described in (i) above), upon redemption of such Note pursuant to Condition 6(f) or Condition 6(g), or upon it becoming due and payable as provided in Condition 9 shall be the Final Redemption Amount together with interest accrued to the date fixed for redemption (including, where applicable, any Arrears of Interest) unless otherwise specified in the relevant Final Terms. Redemption for Taxation Reasons: (i) If, by reason of any change in, or any change in the official application or interpretation of, French law, becoming effective after the Issue Date, the Issuer would on the occasion of the next payment of principal or interest due in respect of the Notes, not be able to make such payment without having to pay additional amounts as specified under Condition 8 below, and such obligation cannot be avoided by the Issuer taking reasonable measures available to it, the Issuer may, at its option, on any Interest Payment Date or, if so specified in the relevant Final Terms, at any time, subject to having given not more than 60 nor less than 30 days notice to the Noteholders (which notice shall be irrevocable), in accordance with Condition 15, redeem all, but not some only, of the Notes at their Early Redemption Amount together with, unless otherwise specified in the Final Terms, any interest accrued to the date set for redemption (including, where applicable, any Arrears of Interest) provided that the due date for redemption of which notice hereunder may be given shall be no earlier than 90 days before the latest practicable date on which the Issuer could make payment of principal and interest without withholding for such French taxes. (ii) If the Issuer would, on the next payment of principal or interest in respect of the Notes, be prevented by French law from making payment to the Noteholders or, if applicable, Couponholders of the full amounts then due and payable, notwithstanding the undertaking to pay additional amounts contained in Condition 8 below, then the Issuer, shall forthwith give notice of such fact to the Fiscal Agent and the Issuer shall redeem all, but not some only, of the Notes then outstanding at their Early Redemption Amount together with, unless otherwise specified in the Final Terms, any interest accrued to the date set for redemption (including, where applicable, any Arrears of Interest) on (A) the latest practicable Interest Payment Date on which the Issuer could make payment of the full amount then due and payable in respect of the Notes, provided that if such notice would expire after such Interest Payment 35

36 (g) (h) (i) (j) Date the date for redemption pursuant to such notice of Noteholders shall be the later of (i) the latest practicable date on which the Issuer could make payment of the full amount then due and payable in respect of the Notes and (ii) 14 days after giving notice to the Fiscal Agent as aforesaid or (B) if so specified in the relevant Final Terms, at any time, provided that the due date for redemption of which notice hereunder shall be given shall be the latest practicable date at which the Issuer could make payment of the full amount payable in respect of the Notes, or, if applicable, Receipts or Coupons or, if that date is passed, as soon as practicable thereafter. (iii) Before the publication of any notice of redemption pursuant to this paragraph (f), the Issuer shall deliver to the Fiscal Agent a certificate signed by two Directors of the Issuer stating that the Issuer is entitled or required to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right, or the requirements, as the case may be, of the Issuer so to redeem have occurred, and an opinion of independent legal advisers of recognised standing to the effect that the Issuer has or will become obliged to pay such additional amouts as a result of such change or amendment in the official application or interpretation of, French law. Partly Paid Notes: Partly Paid Notes will be redeemed, whether at maturity, early redemption or otherwise, in accordance with the provisions of this Condition and the provisions specified in the relevant Final Terms. Purchases: The Issuer shall have the right at all times to purchase Notes (provided that, in the case of Materialised Notes, all unmatured Receipts and Coupons and unexchanged Talons relating thereto are attached thereto or surrendered therewith) in the open market or otherwise at any price, in accordance with applicable laws and regulations. Cancellation: All Notes purchased by or on behalf of the Issuer must be cancelled, in the case of Dematerialised Notes, by transfer to an account in accordance with the rules and procedures of Euroclear France and, in the case of Materialised Bearer Notes, by surrendering the Temporary Global Certificate and the Definitive Materialised Bearer Notes in question together with all unmatured Receipts and Coupons and all unexchanged Talons to the Fiscal Agent and, in each case, if so transferred or surrendered, shall, together with all Notes redeemed by the Issuer, be cancelled forthwith (together with, in the case of Dematerialised Notes, all rights relating to payment of interest and other amounts relating to such Dematerialised Notes and, in the case of Materialised Notes, all unmatured Receipts and Coupons and unexchanged Talons attached thereto or surrendered therewith). Any Notes so cancelled or, where applicable, transferred or surrendered for cancellation may not be reissued or resold and the obligations of the Issuer in respect of any such Notes shall be discharged. Illegality: If, by reason of any change in French law, or any change in the official application of such law, becoming effective after the Issue Date, it will become unlawful for the Issuer to perform or comply with one or more of its obligations under the Notes, the Issuer will, subject to having given not more than 60 nor less than 30 days notice to the Noteholders (which notice shall be irrevocable), in accordance with Condition 15, redeem all, but not some only, of the Notes at their Early Redemption Amount together with any interest accrued to the date set for redemption (including, where applicable, any Arrears of Interest). 7. Payments and Talons (a) Dematerialised Notes: Payments of principal and interest (including, for the avoidance of doubt, any Arrears of Interest, where applicable) in respect of Dematerialised Notes shall be made (i) (in the case of Dematerialised Notes in bearer dematerialised form or administered registered dematerialised form) by transfer to the account denominated in the relevant currency of the relevant Account Holders for the benefit of the Noteholders and (ii), (in the case of Dematerialised Notes in fully registered form, to an account denominated in the relevant currency with a Bank designated by the Noteholders). All payments validly made to such Account Holders will constitute an effective discharge of the Issuer in respect of such payments. (b) Materialised Bearer Notes: Payments of principal and interest (including, for the avoidance of doubt, any Arrears of Interest, where applicable) in respect of Materialised Bearer Notes shall, subject as mentioned below, be made against presentation and surrender of the relevant Receipts (in the case of payments of Instalment Amounts other than on the due date for redemption and provided that the Receipt is presented for payment together with its relative Note), Materialised Bearer Notes (in the case of all other payments of principal and, in the case of interest, as specified in Condition 7(f)(vi)) or Coupons (in the case of interest, save as specified in Condition 7(f)(vi)), as the case may be, at the specified office of any Paying Agent outside the United States by a cheque payable in the relevant currency drawn on, or, at the option of the Noteholder, by 36

37 (c) (d) (e) (f) transfer to an account denominated in such currency with a bank in the principal financial centre for such currency or, in the case of euro, in a city in which banks have access to the TARGET System. Payments in the United States: Notwithstanding the foregoing, if any Materialised Bearer Notes are denominated in U.S. Dollars, payments in respect thereof may be made at the specified office of any Paying Agent in New York City in the same manner as aforesaid if (i) the Issuer shall have appointed Paying Agents with specified offices outside the United States with the reasonable expectation that such Paying Agents would be able to make payment of the amounts on the Notes in the manner provided above when due, (ii) payment in full of such amounts at all such offices is illegal or effectively precluded by exchange controls or other similar restrictions on payment or receipt of such amounts and (iii) such payment is then permitted by United States law, without involving, in the opinion of the Issuer, any adverse tax consequence to the Issuer. Payments Subject to Fiscal Laws: All payments are subject in all cases to any applicable fiscal or other laws, regulations and directives in the place of payment but without prejudice to the provisions of Condition 8. No commission or expenses shall be charged to the Noteholders or Couponholders in respect of such payments. Appointment of Agents: The Fiscal Agent, the Paying Agents, the Calculation Agent, the Redenomination Agent and the Consolidation Agent initially appointed under the Agency Agreement and their respective specified offices are listed below. The Fiscal Agent, the Paying Agents, the Redenomination Agent, the Registration Agent and the Consolidation Agent act solely as agents of the Issuer and the Calculation Agent(s) act(s) as independent expert(s) and, in each case such, do not assume any obligation or relationship of agency for any Noteholder or Couponholder. The Issuer reserves the right at any time to vary or terminate the appointment of the Fiscal Agent, any other Paying Agent, the Redenomination Agent, the Registration Agent and the Consolidation Agent or the Calculation Agent(s) and to appoint additional or other Paying Agents, provided that the Issuer shall at all times maintain (i) a Fiscal Agent, (ii) one or more Calculation Agent(s) where the Conditions so require, (iii) a Redenomination Agent and a Consolidation Agent where the Conditions so require, (iv) Paying Agents having specified offices in at least two major European cities (including Paris so long as the Notes are listed and admitted to trading on Euronext Paris S.A.), (v) in the case of Dematerialised Notes in fully registered form, a Registration Agent, (vi) a Paying Agent with a specified office in a European Union member state that will not be obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any European Union Directive implementing the conclusions of the ECOFIN Council meeting of November 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive and (vii) such other agents as may be required by any other Regulated Market on which the Notes may be listed and admitted to trading. In addition, the Issuer shall forthwith appoint a Paying Agent in New York City in respect of any Materialised Bearer Notes denominated in U.S. Dollars in the circumstances described in paragraph (c) above. On a redenomination of the Notes of any Series pursuant to Condition 1(d) with a view to consolidating such Notes with one or more other Series of Notes, in accordance with Condition 14, the Issuer shall ensure that the same entity shall be appointed as both Redenomination Agent and Consolidation Agent in respect of both such Notes and such other Series of Notes to be so consolidated with such Notes. Notice of any such change or any change of any specified office shall promptly be given to the Noteholders in accordance with Condition 15. Unmatured Coupons and Receipts and unexchanged Talons: (i) Unless Materialised Bearer Notes provide that the relative Coupons are to become void upon the due date for redemption of those Notes, Materialised Bearer Notes should be surrendered for payment together with all unmatured Coupons (if any) relating thereto, failing which an amount equal to the face value of each missing unmatured Coupon (together, where applicable, with the amount of any Arrears of Interest corresponding to such Coupon) or, in the case of payment not being made in full, that proportion of the amount of such missing unmatured Coupon (together, where applicable, with the amount of any Arrears of Interest corresponding to such Coupon) that the sum of principal so paid bears to the total principal due shall be deducted from the Final Redemption Amount, Amortised Nominal Amount, Early Redemption Amount or Optional Redemption Amount, as the case may be, due for payment. Any amount so deducted shall be paid in the manner mentioned above against surrender of such missing Coupon within a period of 10 years from the Relevant Date for the payment of such principal (whether or not such Coupon has become void pursuant to Condition 10). 37

38 (g) (h) (ii) If Materialised Bearer Notes so provide, upon the due date for redemption of any such Materialised Bearer Note, unmatured Coupons relating to such Note (whether or not attached) shall become void and no payment shall be made in respect of them. (iii) Upon the due date for redemption of any Materialised Bearer Note, any unexchanged Talon relating to such Note (whether or not attached) shall become void and no Coupon shall be delivered in respect of such Talon. (iv) Upon the due date for redemption of any Materialised Bearer Note that is redeemable in instalments, all Receipts relating to such Materialised Bearer Note having an Instalment Date falling on or after such due date (whether or not attached) shall become void and no payment shall be made in respect of them. (v) Where any Materialised Bearer Note that provides that the relative unmatured Coupons are to become void upon the due date for redemption of those Notes is presented for redemption without all unmatured Coupons, and where any such Note is presented for redemption without any unexchanged Talon relating to it, redemption shall be made only against the provision of such indemnity as the Issuer may require. (vi) If the due date for redemption of any Materialised Bearer Note is not a due date for payment of interest, interest accrued from the preceding due date for payment of interest or the Interest Commencement Date, as the case may be, (including, for the avoidance of doubt, any Arrears of Interest if applicable) shall only be payable against presentation (and surrender if appropriate) of the relevant Definitive Materialised Bearer Note. Interest accrued on a Materialised Bearer Note that only bears interest after its Maturity Date shall be payable on redemption of such Note against presentation of the relevant Materialised Bearer Notes. Talons: On or after the Interest Payment Date for the final Coupon forming part of a Coupon sheet issued in respect of any Materialised Bearer Note, the Talon forming part of such Coupon sheet may be surrendered at the specified office of the Fiscal Agent in exchange for a further Coupon sheet (and if necessary another Talon for a further Coupon sheet) (but excluding any Coupons that may have become void pursuant to Condition 10), provided that, in respect of Notes listed and admitted to trading on Euronext Paris S.A., such exchange shall always take place at the specified office of the Fiscal Agent or of the Paying Agent, as a case may be, in Paris. Non-Business Days: If any date for payment in respect of any Note, Receipt or Coupon is not a business day, the Noteholder shall not be entitled to payment until the next following business day nor to any interest or other sum in respect of such postponed payment. In this paragraph, business day means a day (other than a Saturday or a Sunday) (A) (i) in the case of Dematerialised Notes, on which Euroclear France is open for business or (ii) in the case of Materialised Notes, on which banks and foreign exchange markets are open for business in the relevant place of presentation, and on which banks and foreign exchange markets are open for business in such jurisdictions as shall be specified as Financial Centres in the relevant Final Terms and (B) (i) in the case of a payment in a currency other than euro, where payment is to be made by transfer to an account maintained with a bank in the relevant currency, on which foreign exchange transactions may be carried on in the relevant currency in the principal financial centre of the country of such currency or (ii) in the case of a payment in euro, which is a TARGET Business Day. 8. Taxation (a) Tax exemption for Notes issued or deemed to be issued outside France: Interest and other revenues with respect to Notes which constitute obligations and which, as may be specified in the relevant Final Terms, are being issued or deemed to be issued outside the Republic of France benefit from the exemption provided for in Article 131 quater of the Code Général des Impôts (general tax code) from deduction of tax at source. Accordingly such payments do not give the right to any tax credit from any French source. The tax regime applicable to Notes which do not constitute obligations will be set out in the relevant Final Terms. As to the meaning of the expression issued or deemed to be issued outside the Republic of France see General Information of the Programme below. (b) Additional amounts: Should French law require that payments of principal or interest in respect of any Note, Receipt or Coupon be subject to deduction or withholding in respect of any present or future taxes or duties whatsoever levied by the Republic of France, the Issuer, to the fullest extent then permitted by law, shall pay such additional amounts as shall result in receipt by the Noteholders or, if applicable, the Receiptholders and the Couponholders, as the case may be, of such amounts as would have been received by 38

39 (c) (d) them had no such withholding or deduction been required, except that no such additional amounts shall be payable with respect to any Note, Receipt or Coupon, as the case may be: (i) Other connection: to, or to a third party on behalf of, a Noteholder or, if applicable, the Receiptholder or Couponholder, as the case may be, who is liable to such taxes, duties, assessments or governmental charges in respect of such Note, Receipt or Coupon by reason of his having some connection with the Republic of France other than the mere holding of the Note, Receipt or Coupon; or (ii) Presentation more than 30 days after the Relevant Date: in the case of Materialised Notes, more than 30 days after the Relevant Date except to the extent that the Noteholder or, if applicable, the Receiptholder or Couponholder, as the case may be, would have been entitled to such additional amounts on presenting it for payment on the thirtieth such day; or (iii) Payment to individuals: where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any European Union Directive implementing the conclusions of the ECOFIN Council Meeting of November 2000 on the taxation of savings or any law implementing or complying with, or introduced in order to conform to, such Directive; or (iv) Payment by another Paying Agent: Definitive Materialised Bearer Notes presented for payment by or on behalf of a holder who would have been able to avoid such withholding or deduction by presenting the relevant Note, Receipt or Coupon to another Paying Agent in a Member State of the European Union. As used in these Conditions, Relevant Date in respect of any Note, Receipt or Coupon means the date on which payment in respect of it first becomes due (and, for the avoidance of doubt, in the case of Arrears of Interest, references to becomes due shall be interpreted in accordance with the provisions of Condition 5(h)) or (if any amount of the money payable is improperly withheld or refused) the date on which payment in full of the amount outstanding is made or, in the case of Materialised Notes (if earlier) the date seven days after that on which notice is duly given to the Noteholders that, upon further presentation of the Note, Receipt or Coupon being made in accordance with the Conditions, such payment will be made, provided that payment is in fact made upon such presentation. References in these Conditions to (i) principal shall be deemed to include any premium payable in respect of the Notes, all Instalment Amounts, Final Redemption Amounts, Early Redemption Amounts, Optional Redemption Amounts, Amortised Nominal Amounts and all other amounts in the nature of principal payable pursuant to Condition 6 or any amendment or supplement to it, (ii) interest shall be deemed to include all Interest Amounts and all other amounts (including, for the avoidance of doubt, all arrears of interest) payable pursuant to Condition 5 or any amendment or supplement to it and (iii) principal and/or interest shall be deemed to include any additional amounts that may be payable under this Condition. Tax exemption for Notes not issued or deemed to be issued outside France: Interest and other revenues with respect to Notes which, if so specified in the relevant Final Terms, are not being issued or deemed to be issued outside the Republic of France only benefit from the exemption from deduction of tax at source provided by, and subject to the provisions of, Article 125 A III of the Code Général des Impôts, which requires inter alia, certification of non-french residency. Certification of Non-Residency in France: Each Noteholder shall be responsible for supplying certification of non-french residency (a form of which shall be available at the specified offices of any of the Paying Agents or in such other form as may be required by the French tax authorities from time to time) in accordance with the provisions of Article 125 A III of the Code Général des Impôts and the Issuer shall not be responsible for any deduction or withholding in respect of any payment made under any Note, Receipt or Coupon resulting from the failure of such Noteholder to submit such certification. 9. Events of Default The Representative (as defined under Condition 11), upon request of any Noteholder, may, upon written notice to the Issuer and the Fiscal Agent given before all defaults shall have been remedied, cause all the Notes held by such Noteholder to become immediately due and payable, whereupon such Notes shall become immediately due and payable at their principal amount, plus accrued interest and, where applicable, any Arrears of Interest, without any other formality, if any of the following events (each an Event of Default ) shall occur: (a) Unsubordinated Notes: In the case of Unsubordinated Notes: (i) the Issuer is in default for a period of fifteen (15) days or more for the payment of any amout on the Notes, when and as the same shall become due and payable; or 39

40 (b) (ii) the Issuer is in default in the due performance of any of its other obligations under the Notes, unless remedied within thirty (30) days after receipt by the Issuer of the written notice of such default given by a Noteholder; or (iii) as a result of the Issuer and/or any of its Principal Subsidiaries being in default in the due and punctual payment of the principal of, or premium or interest on, any indebtedness for borrowed monies of or assumed or guaranteed by it when and as the same shall become due and payable and giving effect to any applicable grace periods, there shall be an acceleration of any such indebtedness or guarantee, provided that the aggregage amount of the relevant indebtedness for borrowed money in respect of which any one or more of the events mentioned in this sub-paragraph (iii) has or have occurred equals or exceeds Euro 30,000,000 (or its equivalent in any other currency); or (iv) the Issuer or any of its Principal Subsidiaries, makes any proposal for a general moratorium in relation to its debt or applies for the appointment of a conciliator (conciliateur) or enters into an amicable settlement (accord amiable) with its creditors or a judgment is issued for the judicial liquidation (liquidation judiciaire) or for a transfer of the whole of the business (cession totale de l entreprise à la suite d un plan de cession) of the Issuer or any of its Principal Subsidiaries or, to the extent permitted by applicable law, if the Issuer or any of its Principal Subsidiaries is subject to any other insolvency or bankruptcy proceedings or if the Issuer or any of its Principal Subsidiaries makes any conveyance, assignment or other arrangement for the benefit of its creditors or enters into a composition with its creditors or if the Issuer or any of its Principal Subsidiaries is wound up or dissolved, or (v) any Principal Subsidiary not established in France of the Issuer is adjudicated or found bankrupt or insolvent or shall stop or threaten to stop payment or shall be found unable to pay its debts or any order shall be made by any competent court or administrative agency for, or a resolution is passed by it for, judicial composition proceedings with its creditors or for the appointment of a receiver or trustee or other similar official in insolvency proceedings in relation to it or any event occurs which under the law of any relevant jurisdiction has an analogous or equivalent effect; or (vi) the Issuer and/or any of its Principal Subsidiaries sells or otherwise disposes of all or substantially all of its assets or ceases or threatens to cease to carry on the whole of its business or substantially the whole of its business or an order is made or an effective resolution passed for its winding-up, dissolution or liquidation, unless such winding-up, dissolution, liquidation, cessation or disposal is made in connection with a merger, consolidation, reconstruction, amalgamation or other form of combination (a Restructuring ) with or to, any other corporation and (i) in the case of the Issuer, the liabilities under the Notes are transferred to and assumed by such other corporation and the credit rating assigned by any of Standard & Poor s Rating Services or Moody s Investors Services Inc. (or other rating agency) to the long-term, unsecured and unsubordinated indebtedness of the surviving entity of such Restructuring following such Restructuring is not less than the credit rating assigned by any such credit rating agency to the long-term, unsecured and unsubordinated indebtedness of the Issuer immediately prior to the effective date of such Restructuring, or (ii) in the case of any Principal Subsidiary, the undertaking and assets of such Principal Subsidiary are vested in the Issuer or another of its Principal Subsidiaries. Subordinated Notes: In the case of Subordinated Notes and in accordance with Condition 3(b), if any judgment shall be issued for the transfer of the whole of its business (cession totale de l entreprise) or the judicial liquidation (liquidation judiciaire) of the Issuer or if the Issuer is liquidated for any other reason then the Subordinated Notes shall become immediately due and payable, in accordance with Condition 3(b), at their principal amount together with any accrued interest to the date of payment and where applicable, any Arrears of Interest, without further formality. 10. Prescription Claims against the Issuer for payment in respect of the Notes, Receipts and Coupons (which for this purpose shall not include Talons) shall be prescribed and become void unless made within 10 years (in the case of principal) or five years (in the case of interest) from the appropriate Relevant Date in respect of them. 11. Representation of Noteholders Except as otherwise provided by the relevant Final Terms, Noteholders will, in respect of all Tranches in any Series, be grouped automatically for the defence of their common interests in a masse (in each case, the Masse ). 40

41 The Masse will be governed by the provisions of the French Code of Commerce, with the exception of Articles L and L , and by the decree no of 23 March 1967, with the exception of Articles 222 and 224, subject to the following provisions: (a) Legal Personality: The Masse will be a separate legal entity and will act in part through a representative (the Representative ) and in part through a general meeting of the Noteholders (the General Meeting ). The Masse alone, to the exclusion of all individual Noteholders, shall exercise the common rights, actions and benefits which now or in the future may accrue respectively with respect to the Notes. (b) Representative: The office of Representative may be conferred on a person of any nationality who agrees to perform such function. However, the following persons may not be chosen as Representatives: (i) the Issuer, and the members of its Board of Directors (Conseil d administration), its general managers (directeurs généraux), its statutory auditors and its employees as well as their ascendants, descendants and spouse; (ii) companies guaranteeing all or part of the obligations of the Issuer, their respective managers (gérants), general managers (directeurs généraux), members of their Board of Directors (Conseil d administration), of their Management Board (Directoire) and of their Supervisory Board (Conseil de Surveillance), their statutory auditors and their employees as well as their ascendants, descendants and spouse; (iii) companies holding 10 per cent. or more of the share capital of the Issuer and companies having 10 per cent. or more of their share capital held by the Issuer; or (iv) persons to whom the practice of banker is forbidden or who have been deprived of the right of directing, administering or managing a business in whatever capacity. The names and addresses of the initial Representative of the Masse and its alternate will be set out in the relevant Final Terms. The Representative appointed in respect of the first Tranche of any Series of Notes will be the Representative of the single Masse of all Tranches in such Series. The Representative will be entitled to such remuneration in connection with its functions or duties as set out in the relevant Final Terms. In the event of death, retirement or revocation of appointment of the Representative, such Representative will be replaced by another Representative. In the event of death, retirement or revocation of appointment of the alternate Representative, an alternate will be elected by the General Meeting. All interested parties will at all times have the right to obtain the names and addresses of the initial Representative and the alternate Representative at the head office of the Issuer and the specified offices of any of the Paying Agents. (c) Powers of the Representative: The Representative shall (in the absence of any decision to the contrary of the General Meeting) have the power to take all acts of management necessary in order to defend the common interests of the Noteholders. All legal proceedings against the Noteholders or initiated by them, must be brought by or against the Representative. The Representative may not interfere in the management of the affairs of the Issuer. (d) General Meeting: A General Meeting may be called at any time, either by the Issuer or by the Representative. One or more Noteholders, holding together at least one-thirtieth of the principal amount of the Notes outstanding, may address to the Issuer and the Representative a demand for the General Meeting to be called. If such General Meeting has not been convened within two months after such demand, the Noteholders may commission one of their members to petition a competent court in Paris to appoint an agent (mandataire) who will call the General Meeting. Notice of the date, time, place and agenda of any General Meeting will be published as provided under Condition

42 (e) (f) (g) (h) Each Noteholder has the right to participate in a General Meeting in person, by proxy, correspondence, or, if the statuts of the Issuer so specify 1, videoconference or any other means of telecommunication allowing the identification of the participating Noteholders. Each Note carries the right to one vote or, in the case of Notes issued with more than one Specified Denomination, one vote in respect of each multiple of the lowest Specified Denomination comprised in the principal amount of the Specified Denomination of such Note. Powers of the General Meetings: The General Meeting is empowered to deliberate on the dismissal and replacement of the Representative and the alternate Representative and also may act with respect to any other matter that relates to the common rights, actions and benefits which now or in the future may accrue with respect to the Notes, including authorising the Representative to act at law as plaintiff or defendant. The General Meeting may further deliberate on any proposal relating to the modification of the Conditions including any proposal, whether for arbitration or settlement, relating to rights in controversy or which were the subject of judicial decisions, it being specified, however, that the General Meeting may not increase amounts payable by Noteholders, nor authorise or accept a postponement of the date of payment of interest on or a modification of the terms of repayment of or the rate of interest on the Notes nor establish any unequal treatment between the Noteholders, nor decide to convert Notes into shares. General Meetings may deliberate validly on first convocation only if Noteholders present or represented hold at least a quarter of the principal amount of the Notes then outstanding. On second convocation, no quorum shall be required. Decisions at meetings shall be taken by a two-third majority of votes cast by Noteholders attending such General Meetings or represented thereat. Decisions of General Meetings must be published in accordance with the provisions set forth in Condition 15. Information to Noteholders: Each Noteholder or Representative thereof will have the right, during the 15-day period preceding the holding of each General Meeting, to consult or make a copy of the text of the resolutions which will be proposed and of the reports which will be presented at the General Meeting, all of which will be available for inspection by the relevant Noteholders at the registered office of the Issuer, at the specified offices of any of the Paying Agents and at any other place specified in the notice of the General Meeting. Expenses: The Issuer will pay all expenses relating to the operation of the Masse, including expenses relating to the calling and holding of General Meetings and, more generally, all administrative expenses resolved upon by the General Meeting, it being expressly stipulated that no expenses may be imputed against interest payable under the Notes. Single Masse: The holders of Notes of the same Series, and the holders of Notes of any other Series which have been assimilated with the Notes of such first mentioned Series in accordance with Condition 14, shall, for the defence of their respective common interests, be grouped in a single Masse. The Representative appointed in respect of the first Tranche of any Series of Notes will be the Representative of the single Masse of all such Series. 12. Modifications These Conditions may be amended, modified or varied in relation to any Series of Notes by the terms of the relevant Final Terms in relation to such Series. 13. Replacement of definitive Notes, Receipts, Coupons and Talons If, in the case of any Materialised Bearer Notes, a Definitive Materialised Bearer Note, Receipt, Coupon or Talon is lost, stolen, mutilated, defaced or destroyed, it may be replaced, subject to applicable laws, regulations and regulations of the Regulated Market on which the Notes are listed and admitted to trading, at the specified office of the Fiscal Agent or such other Paying Agent as may from time to time be designated by the Issuer for the purpose and notice of whose designation is given to Noteholders, in each case on payment by the claimant of the fees and costs incurred in connection therewith and on such terms as to evidence, security and indemnity (which may provide, inter alia, that if the allegedly lost, stolen or destroyed Definitive Materialised Bearer Note, 1 At the date of this Base Prospectus the statuts of the Issuer do not contemplate the right for a Noteholder to participate in a General Meeting by videoconference or any other means of telecommunication allowing the identification of the participating Noteholders. 42

43 Receipt, Coupon or Talon is subsequently presented for payment or, as the case may be, for exchange for further Coupons, there shall be paid to the Issuer on demand the amount payable by the Issuer in respect of such Definitive Materialised Bearer Notes, Receipts, Coupons or further Coupons) and otherwise as the Issuer may require. Mutilated or defaced Materialised Bearer Notes, Receipts, Coupons or Talons must be surrendered before replacements will be issued. 14. Further Issues and Consolidation (a) Further Issues: Unless otherwise specified in the relevant Final Terms, the Issuer may, without the consent of the Noteholders, Receiptholders or Couponholders create and issue further Notes to be assimilated (assimilées) and form a single series with the Notes provided such Notes and the further notes carry rights identical in all respects (or in all respects save for the principal amount thereof and the first payment of interest specified in the relevant Final Terms) and that the terms of such further Notes provide for such assimilation and references in these Conditions to Notes shall be construed accordingly. (b) Consolidation: The Issuer, with the prior approval of the Consolidation Agent, may from time to time on any Interest Payment Date occurring on or after the Redenomination Date on giving not less than 30 days prior notice to the Noteholders in accordance with Condition 15, without the consent of the Noteholders, Receiptholders or Couponholders, consolidate the Notes of one Series with the Notes of one or more other Series issued by it, whether or not originally issued in one of the European national currencies or in euro, provided such other Notes have been redenominated in euro (if not originally denominated in euro) and which otherwise have, in respect of all periods subsequent to such consolidation, the same terms and conditions as the Notes. 15. Notices (a) Notices to the holders of Dematerialised Notes in registered form (au nominatif) shall be valid if either, (i) they are mailed to them at their respective addresses, in which case they will be deemed to have been given on the fourth weekday (being a day other than a Saturday or a Sunday) after the mailing, or, (ii) at the option of the Issuer, they are published in a leading daily newspaper with general circulation in Europe (which is expected to be the Financial Times) and, so long as such Notes are listed and admitted to trading on any Regulated Market and the rules of, or applicable to, such Regulated Market so require, in a leading daily newspaper with general circulation in the city where the Regulated Market on which such Notes are listed and admitted to trading is located, which in the case of Euronext Paris S.A. is expected to be La Tribune. (b) Notices to the holders of Materialised Bearer Notes and Dematerialised Notes in bearer form (au porteur) shall be valid if published, in a daily leading newspaper with general circulation in Europe (which is expected to be the Financial Times) and so long as such Notes are listed and admitted to trading on any Regulated Market, in a leading daily newspaper with general circulation in the city where the Regulated Market on which such Notes are listed and admitted to trading is located, which in the case of Euronext Paris S.A. is expected to be La Tribune. (c) If any such publication is not practicable, notice shall be validly given if published in another leading daily English language newspaper with general circulation in Europe. Any such notice shall be deemed to have been given on the date of such publication or, if published more than once or on different dates, on the date of the first publication as provided above. Couponholders shall be deemed for all purposes to have notice of the contents of any notice given to the holders of Materialised Bearer Notes in accordance with this Condition. (d) Notices required to be given to the holders of Dematerialised Notes (whether in registered or in bearer form) pursuant to these Conditions may be given by delivery of the relevant notice to Euroclear France, Euroclear, Clearstream, Luxembourg or any other clearing system through which the Notes are for the time being cleared in substitution for the mailing and publication of a notice required by Conditions 15 (a) and (b) above; except that (i) so long as the Notes are listed and admitted to trading on any Regulated Market and the rules of, or applicable to, such Regulated Market so require, notices shall be published in a leading daily newspaper of general circulation in the city where the Regulated Market on which such Notes are listed and admitted to trading is located, which in the case of Euronext Paris S.A. is expected to be La Tribune, and (ii) notices relating to the convocation and decision(s) of the General Meetings pursuant to Condition 11 shall also be published in a leading daily newspaper of general circulation in Europe. 43

44 16. Method of Publication of the Prospectus and the Final Terms This Base Prospectus and the Final Terms related to Notes listed and admitted to trading on any Regulated Market will always be published on the websites of (a) the AMF ( and (b) Veolia Environnement ( In addition, should the Notes be listed and admitted to trading on a Regulated Market other than Euronext Paris S.A., the Final Terms related to those Notes will provide whether this Base Prospectus and the relevant Final Terms will be published on the website of (x) such Regulated Market or (y) the competent authority of the Member State in the EEA where such Regulated Market is situated. 17. Governing Law and Jurisdiction (a) Governing Law: The Notes and, where applicable, the Receipts, the Coupons and the Talons are governed by, and shall be construed in accordance with, French law. (b) Jurisdiction: Any claim against the Issuer in connection with any Notes, Receipts, Coupons or Talons may be brought before any competent court in Paris. 44

45 TEMPORARY GLOBAL CERTIFICATE Temporary Global Certificate issued in respect of Materialised Bearer Notes A Temporary Global Certificate, without interest Coupons, will initially be issued in connection with Materialised Bearer Notes. Upon the initial deposit of such Temporary Global Certificate with a common depositary for Euroclear and Clearstream, Luxembourg (the Common Depositary ), Euroclear or Clearstream, Luxembourg will credit each subscriber with a nominal amount of Notes equal to the nominal amount thereof for which it has subscribed and paid. The Common Depositary may also (if indicated in the relevant Final Terms) credit the accounts of subscribers with other clearing systems through direct or indirect accounts with Euroclear and Clearstream, Luxembourg held by such other clearing systems with a nominal amount of Notes. Conversely, a nominal amount of Notes that is initially deposited with any clearing system other than Euroclear or Clearstream, Luxembourg may similarly be credited to the accounts of subscribers with Euroclear, Clearstream, Luxembourg or other clearing systems. Exchange Each Temporary Global Certificate issued in respect of Notes will be exchangeable, free of charge to the holder, on or after its Exchange Date (as defined below): (i) if the relevant Final Terms indicate that such Temporary Global Certificate is issued in compliance with the C Rules or in a transaction to which TEFRA is not applicable (as to which, see Summary Selling Restrictions ), in whole, but not in part, for Definitive Materialised Bearer Notes; and (ii) otherwise, in whole but not in part, for Definitive Materialised Bearer Notes upon certification as to non-us beneficial ownership (a form of which shall be available at the specified offices of any of the Paying Agents). A Noteholder must exchange its share of the Temporary Global Certificate for Materialised Bearer Notes before interest or any amount payable in respect of the Notes will be paid. Delivery of Definitive Materialised Bearer Notes On or after its Exchange Date, the holder of the Temporary Global Certificate must surrender such Temporary Global Certificate to or to the order of the Fiscal Agent (or its designated agent). In exchange for the Temporary Global Certificate so surrendered, the Issuer will deliver, or procure the delivery of, an equal aggregate nominal amount of duly executed and authenticated Definitive Materialised Bearer Notes. In this Base Prospectus, Definitive Materialised Bearer Notes means, in relation to any Temporary Global Certificate, the Definitive Materialised Bearer Notes for which such Temporary Global Certificate may be exchanged (if appropriate, having attached to them all Coupons and Receipts in respect of interest or Instalment Amounts that have not already been paid on the Temporary Global Certificate and a Talon). Definitive Materialised Bearer Notes will be security printed in accordance with any applicable legal requirements and requirements of the Regulated Market. Forms of such Definitive Materialised Bearer Notes shall be available at the specified offices of the designated Paying Agent(s). Exchange Date Exchange Date means, in relation to a Temporary Global Certificate, the day next succeeding the day that is 40 days after its issue date, provided that, in the event any further Materialised Notes are issued prior to such day pursuant to Condition 14, the Exchange Date for such Temporary Global Certificate shall be postponed to the day falling after the expiry of 40 days after the issue of such further Materialised Notes. 45

46 USE OF PROCEEDS The net proceeds of issues by Veolia Environnement will be used for its general corporate activities or as set out in the relevant Final Terms. 46

47 DESCRIPTION OF VEOLIA ENVIRONNEMENT Veolia Environnement (the Company ) is a société anonyme à conseil d administration incorporated in France in 1995 pursuant to the French commercial code for a term of 99 years under registration number RCS Paris. Its registered office is located at avenue Kléber, Paris, France (telephone number +33 (0) ). Veolia Environnement is the leading company of an independant group of companies (the Group ) which specializes in the supply of environmental management services. In accordance with Article 3 of the Articles of Association, the corporate object of Veolia Environnement directly or indirectly in France and in all other countries is: carrying on, for private, business and public customers, all service activities relating to the environment and, more particularly, to water, sewage, energy, transport cleaning, etc. acquiring, taking over and exploiting all patents, licences, trade marks and designs relating directly or indirectly to its business activity acquiring interests in existing or future companies through shares, bonds and other securities, whether by subscription, purchase, contribution, exchange or any other means, the Company retaining the right to assign such interests and, in general, all commercial, industrial and financial operations and all operations connected with real or movable property, relating directly or indirectly to the above-mentioned object and, in particular, issuing any guarantee, first-demand guarantee, surety and other securities, in particular in favour of any group, undertaking or company in which it holds and interest, in the context of its activities, as well as the financing or refinancing of its activities. Historical background On December 14, 1853, Compagnie Générale des Eaux was formed by Imperial decree and won its first public concession for the distribution of water in the city of Lyon, France. In the following years, Compagnie Générale des Eaux went on to develop its activities in France by obtaining concessions to supply water in Nantes, Nice, Paris and its suburbs. In 1880, Compagnie Générale des Eaux experienced its first commercial success abroad when it was awarded contracts to produce and distibute water in Venice, Constantinople and Porto. In addition to drinking water, Compagnie Générale des Eaux subsequently expanded its business into the water treatment industry. In 1980, Compagnie Générale des Eaux merged all of its operating subsidiaries specialising in the design, engineering and execution of drinking water and wastewater treatment facilities in a single company under the name OTV. In addition, Compagnie Générale des Eaux acquired Compagnie Générale d Entreprises Automobiles ( CGEA ), which would later become Connex and Onyx, and Compagnie Générale de Chauffe, which was later renamed Dalkia. During the same period (in the 1980 s), Compagnie Générale des Eaux accelerated its international expansion, particularly in the United States. In 1998, Compagnie Générale des Eaux changed its name to Vivendi and renamed its main water subsidiary Compagnie Générale des Eaux. In October 1998, Vivendi purchased a 49% interest in B 1998 S.L., the holding company controlling Fomento de Construcciónes y Contratas ( FCC ), a leading provider of urban waste management and the second largest provider of water and wastewater services in Spain. In April 1999, Vivendi acquired United States Filter Corporation (also known as USFilter), the leading water treatment services and equipment company in the United States. The same year, Vivendi created Vivendi Environnement, to which it contributed or sold all of its environmental management activities. On July 20, 2000, Vivendi Environnement s shares became listed on the Premier Marché of Euronext Paris through an initial public offering of Vivendi Environnement s shares in France and an international private placement, with Vivendi Universal (the new name of Vivendi) retaining about 72.3% of Vivendi Environnement s share capital. 47

48 In December 2000, Dalkia entered into an agreement with Electricité de France (EDF), the French state-owned electricity company, whereby Dalkia s energy services were consolidated with those of EDF. In August 2001, Vivendi Environnement s shares entered the CAC 40, the main equity index published by Euronext Paris. In October 2001, Vivendi Environnement s shares became listed in the form of American Depositary Shares on the New York Stock Exchange. In December 2001, Vivendi Environnement s main shareholder, Vivendi Universal, sold a block of shares in the company representing 9.3% of Vivendi Environnement s total share capital, thereby reducing its equity participation in the company from 72.3% to 63.05%. In December 2001, free warrants were distributed to all of Vivendi environnement s shareholders, which are exercisable until March In 2002, Vivendi Environnement became independent from Vivendi Universal whose stake in the company s share capital fell from 63.1% to 20.4% over the period, as a result of several sales of shares and a capital increase to which Vivendi Universal did not subscribe. As at December 31, 2003, only 20.36% of Vivendi Environnement s share capital was still held by Vivendi Universal, all of which were subject to call options granted by Vivendi Universal to a group of institutional investors. On April 30, 2003, the general meeting of the shareholders of the company decided to change its name from Vivendi Environnement to Veolia Environnement. From 2002, Veolia Environnement went through a significant restructuring with a view to refocusing on its core environmental services activities. This restructuring ended in 2004 with the sale of various assets within the US perimeter of its Water division and the sale of Veolia Environnement s indirect interest in FCC. General description Veolia Environnement is a unique actor in the field of services related to the environment, offering a comprehensive array of services. Veolia Environnement has the expertise, for example, to supply treated water and to recycle wastewater at a customer s 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 customer s unique circumstances. Veolia Environnement s 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, Veolia Environnement currently provides water to approximately 100 million people, treats more than 51.7 million tons of waste, satisfies the energy requirements of hundreds of thousands of buildings for its industrial, municipal and individual customers and transports nearly 2 billion passengers per year. Veolia Environnement strives to offer services to clients that span across its 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 Veolia Environnement s consolidated revenue for 2004 by geographic market and division, after elimination of all inter-company transactions. (in millions of euro) Water Waste Energy Services Transport Total Europe 8, , , , ,470.7 of which: 6, , , , ,439.1 France Other Europe 1, , , , ,031.6 Americas , ,218.2 Rest of the World 1, ,984.4 of which: Africa-Middle East Asia-Pacific ,159.9 Total 9, , , , ,

49 Organizational structure Veolia Environnement is divided into four operating divisions corresponding to each of its four business segments and a number of centralized corporate departments that lead and coordinate the action of teams which are present in each of the four operating divisions. Veolia Environnement believes that such an organizational structure favours a consistent growth of the Group by reinforcing its identity, maintaining solidarity and cohesion, favouring economies of scale and encouraging professionalism through the sharing of best practices. Simplified organizational chart of the Group The simplified organizational chart that follows reflects the principal operating companies that are held, directly or through intermediate holding companies, by the Company (by percentage of share capital) as of December 31, 2004 (VE and its subsidiaries, together, referred to as the Group ). 49

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51 Strategy Veolia Environnement s strategy Veolia Environnement s strategy consists in strengthening its 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 Veolia Environnement s expertise regarding contractual models, its general know-how and its competitive advantages. One business: environmental services Veolia Environnement is a worldwide provider of environmental services, which focuses on four areas in particular: water, waste management, transportation and energy services. Veolia Environnement has made a strategic choice to concentrate only in these areas and to focus fully on its environmental services business. As an illustration: (A) since 2000, Veolia Environnement has decided not to be present in the primary energy production market, so as to focus more fully on the provision of services that help clients optimize their energy consumption; (B) in 2004, Veolia Environnement finalized the sale of its industrial assets in the water sector (mostly in the United States) relating to equipment production and short-term service activities; (C) in 2004, Veolia Environnement also sold its minority interest in FCC, a Spanish company whose activities encompass non-environment related activities, such as construction and cement production. A long-term commitment Veolia Environnement s strategy consists of capitalizing on its ability to establish effective, long-term relationships with clients, an ability that Veolia Environnement has demonstrated for more than 150 years with respect to its water distribution contracts with public authorities, and over the past few decades with respect to its other activities. In addition, Veolia Environnement seeks to develop its 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 locally, who can permanently improve the operation, 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 transportation network of a geographical area, with the utmost concern for issues of security, cleanliness and the rights of employees. Long-term contracts adapted to each client s needs Veolia Environnement has developed a high level of expertise with respect to managing contracts across its four divisions, which allows it to commit itself to clients over the long-term. Veolia Environnement s main contracts last from a few years to several decades, an example of the latter being the 50-year contract entered into with the municipality of Shanghai in Over the past several years, Veolia Environnement has demonstrated its ability to adapt contracts to a variety of constraints in countries around the world involving a broad range of services. Long-term contracts provide visibility both to clients and to shareholders of Veolia Environnement. They can also generate efficiency gains for clients, whether public authorities or commercial or industrial companies, by providing 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 the 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. Veolia Environnement s large range of skills and experience ideally positions it in the market for outsourcing of environmental services. Further, Veolia Environnement can adapt its contracts and its services to meet specific client needs. Veolia Environnement therefore strives to provide its services under long-term contracts, which can generate a recurring revenue for Veolia Environnement over the course of several years. Veolia Environnement also works to improve the profitability of its contracts over time, through consistent efforts aimed at optimizing operating performance. 51

52 Strong financing capability Based on its long-term contracts and optimized operating performance, Veolia Environnement knows how to assist its clients (e.g. forming new partnerships and obtaining third-party financing) when it comes to financing infrastructure and other required investments. Hence, Veolia Environnement has the ability to help its clients realize ambitious projects, particularly in the water, waste management and energy services sectors, that lead to lasting improvements in the environment. It should be noted that the implementation of this policicy has not prevented Veolia Environnement from successfully conducting an ambitious debt reduction strategy over the past years. Continuous research efforts Veolia Environnement s activities require substantial technical knowledge. Mastering the production and treatment of water, the treatment of waste and developing increasingly efficient energy management require specialized teams whose skills are constantly expanding. Veolia Environnement has set up a research program for all of its businesses in which high-level researchers prepare for the Group s future. These researchers are in direct contact with Veolia Environnement s operating teams so that clients can benefit from the latest technological developments. Strong presence of operating teams on the ground In addition to tailoring its contract provisions to the specific needs of each client, Veolia Environnement also tailors its services to each client on an ongoing basis. Through call centers, Veolia Environnement s operating teams are quickly informed of any required responses. In crisis situations, Veolia Environnement s operating teams have consistently shown their professionalism, commitment and solidarity, e.g. during the floods in Prague in 2003 or in the aftermath of the tsunami that struck Southeast Asia on December 26, In an original way then, Veolia Environnement combines the advantages of being a world leader with the ability to develop a local foothold for each of its operations. Targeted international development Our planet needs in relation 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 largely demonstrated this. The opportunities for long-term growth in Veolia Environnement s business are therefore extensive. In this context, Veolia Environnement s strategy consists in actively, yet carefully, developing its activities internationally. Veolia Environnement currently conducts nearly half of its activity outside France. Considering the growing needs for environmental services, Veolia Environnement is in a position to pursue international growth selectively, by focusing on areas of strong economic development and countries where acceptance of Veolia Environnement s business model and the ability to fulfill long-term contractual commitments is the most accurate. Hence, while pursuing growth in France and in Western Europe, Veolia Environnement also seeks to develop its 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 Veolia Environnement, such as the United States or Japan, whose mid-term potential is still important. In 2000, Veolia Environnement also created Proactiva, a subsidiary jointly held with FCC, with a view to coordinating the development of Veolia Environnement s and FCC s water and waste management activities in Latin America and the Caribbean. 52

53 Veolia Environnement s solid international presence now allows it to partner with its industrial clients around the world, while providing uniform quality service. Development in the industrial sector Veolia Environnement has developed recognized expertise in the industrial sector, and is capable of delivering to its industrial clients on the five continents the entire range of environmental services in the areas of water, waste management, energy services and transport. The complementarity of Veolia Environnement s various services, a strong attribute, allows it to satisfy all of its industrial clients environmental needs. More precisely, Veolia Environnement s three key strengths with respect to its industrial client service offerings are: its ability to provide the entire range of energy services necessary for the operation of industrial processes, in particular energy fluids (steam, water, compressed air, etc.); its ability to control the environmental impact of liquid, solid and gaseous waste; its ability to accompany industrial clients around the world, thanks to its presence in nearly 80 countries and its experience in performing multiservice contracts. Veolia Environnement currently views itself 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 Veolia Environnement s ambitions for the future. Rigorous management adapted to business needs to protect shareholder interests Constant effort to improve the return on capital employed is the key to ensuring the sustainability of Veolia Environnement s development strategy, as well as the promotion of its shareholders interests. Structurally, Veolia Environnement s businesses allow it to forecast results and cash flows with some accuracy. Hence, Veolia Environnement has the ability to enter into contracts necessitating certain investments. However, this does not prevent Veolia Environnement s operating and financial teams from undertaking new projects selectively, after having analyzed all of the risks involved. Furthermore, 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 with respect to new projects and Veolia Environnement s strong market position all contribute to the implementation of this objective. Focus on sustainable development Sustainable development is part of the very nature of Veolia Environnement s activities. For this reason, Veolia Environnement has made it a major axis of its development strategy. Veolia Environnement partners with clients on a long-term basis with a view to satisfying fundamental population needs, through an offering that seeks balanced development over the long-term. Veolia Environnement also enforces this culture of responsibility and solidarity in its corporate management structure, favoring internal mobility, enrichment of skills and recognition of professional deeds. The constant pursuit of these values means that Veolia Environnement is currently well-positioned to respond to the needs and expectations generated 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. In 2004, following the evaluation conducted by the British research organization EIRIS (Ethical Investment Research), Veolia Environnement entered the FTSE4Good Index. This confirms the Group s progress with respect to sustainable development issues. Strategy per division Water Through its water division, Veolia Water, Veolia Environnement seeks to develop its water services throughout the world. In doing so, it strives to ensure the safety of drinking water, the preservation of natural resources and the protection of the environment. 53

54 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, Veolia Environnement will selectively pursue its development in the water sector with a view to optimizing its use of resources, operating costs and profitability. Veolia Water s 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 also enable it to take advantage of this favorable market environment. The success of Veolia Water s new commercial offerings in France in 2004 (analysis of the softness of bathing water, new methods for recovering sludge and non-collective wastewater treatment, etc.) also demonstrates Veolia Water s ability to expand the scope of its services within the water sector. Continued growth, maturation of large contracts and gains in productivity resulting from efficiency programs launched in 2003 (relating to purchases, information systems and sharing of best practices) are expected to boost Veolia Water s operating income in 2005 and beyond. Waste management Through its waste management division, Onyx, Veolia Environnement seeks to pursue its growth as one of the world leaders in the waste management sector. As is the case with the Group s other businesses, the waste management sector is showing signs of consistent and lasting demand, which has been reinforced by the tightening of environmental rules and regulations coupled with increased public demand in a number of countries. As a result, capable experts who can provide services under cost-effective conditions and in accordance with environmental regulations are becoming widely sought after. In this favorable market environment in Europe, the United States and the Asia-Pacific region, Veolia Environnement has the following priorities for its waste management division: developing its waste treatment capabilities and widening its technological lead in waste treatment and recovery; strengthening its offering to industrial clients by capitalizing on its mastering of the entire waste management chain, while seeking to generate synergies with the Group s 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. Energy services Through its energy services division, Dalkia, Veolia Environnement seeks to become the unchallenged European leader in the energy services sector. In 2000, Veolia Environnement entered into a strategic partnership in the energy services sector with EDF, a European leader in the production, distribution and sale of electricity, with a view to offering clients comprehensive energy services at the best possible price. The opportunities in this 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. Veolia Environnement s strategic priorities are focused in four main areas: deploying its service offerings in the deregulated energy markets of Europe; developing its activities in the area of large heating networks, particularly in France and the rest of Europe, as it has done so successfully over the past few years in Poland and the Czech Republic; developing its service offerings to industrial clients through the use of innovative technical solutions, often bringing together several of Veolia Environnement s skills in connection with an integrated service offering; and 54

55 promoting its integrated outsourcing services to public clients as it has done in the commercial and industrial sectors, by combining optimized services for facilities management (heating, air-conditioning, utilities, electricity, lighting). Veolia Environnement also develops energy services in areas outside Europe, including Latin America, Asia and the United States, which offer long-term growth opportunities. Transportation Through its transportation division, Connex, Veolia Environnement seeks to be the leading 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 local authorities and inhabitants in large cities. Accordingly, such changes are expected to boost Connex s future growth strategy. The challenge for the Group in the transportation market is to carefully manage its development, by anticipating risks and identifying the priority areas for growth. Veolia Environnement has therefore chosen to consolidate its presence in France and the rest of Europe, taking advantage from the opening of various European markets to regulated competition. In Europe, the railway transportation markets in Germany, Spain, Italy and Central Europe 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 Veolia Environnement is carefully considering the market potential in China and Latin America, due to the opportunities they may present for the transportation division. Finally, Connex should be able to expand its rail freight transportation activities in the wake of European Union legislation that has authorized the opening of such markets. Major developments in 2004 Refocusing of Veolia Environnement s activities In 2004, Veolia Environnement refocused on its core activities, namely the development of outsourcing on behalf of public authorities and the provision of services involving long-term contracts with municipal or industrial clients. Sale of U.S. activities in the Water division On May 12, 2004, Veolia Environnement signed an agreement for the sale of USFilter Corporation s equipment and short-term services businesses to Siemens, for a total consideration of US$1,015 million subject to postclosing adjustments. After application of the contractual price adjustment mechanisms, the total consideration paid to the Group amounted to US$975 million. On July 22, 2004, Veolia Environnement announced the signing of an agreement for the sale of its Culligan business to private equity firm Clayton Dubilier & Rice, for a total consideration of US$612 million in cash. The transaction closed on September 30, 2004, following approval by the regulatory authorities and satisfaction of other customary closing conditions. These sales represent the final step in the implementation of the strategic refocusing of Veolia Environnement s water operations in North America, which was originally announced in September Including the sale of Everpure and Surface Preparation in 2003 (resulting in US$345 million in proceeds) and the sale of farmlands held by USFilter in California in early 2004, the total proceeds generated by the sale of Veolia Environnement s US assets amounted to approximately US$2 billion. Sale of FCC In 2003, Veolia Environnement and Ms. Esther Koplowitz, its partner in B 1998 S.L. (FCC s holding company), had a number of disagreements relating to the strategic development of FCC. To avoid creating a deadlock and in the interest of FCC s development, Veolia Environnement proposed to Ms. Koplowitz several alternative ways to 55

56 resolve the parties differences. In the third quarter of 2003, Ms. Koplowitz informed Veolia Environnement of her preference to formally commence negotiations to repurchase the company s indirect interest in FCC. Veolia Environnement accepted the principle of a sale of its interest in FCC and on July 28, 2004, an agreement for the sale of Veolia Environnement s 49% stake in B 1998 S.L. was signed with Ms. Koplowitz. The transaction, which closed on September 15, 2004, allowed Veolia Environnement to reduce its net financial indebtedness by 1.1 billion, and resulted in a total cash payment to Veolia Environnement of 916 million (before transaction fees), including an exceptional dividend paid by B 1998 S.L. to Veolia Environnement prior to the sale. Sale of Berlikomm As part of the refocusing of its activities on water distribution, the Berlin water company sold telecommunications operator Berlikomm at the end of August In all, Veolia Environnement reduced its debt by 2.4 billion in 2004 as a result of the above sales. Continued reduction by Vivendi Universal of its shareholding In December 2004, Vivendi Universal reduced its holdings in the company to 5.3% of the share capital (down from 20.36% previously). Veolia Environnement participated in this transaction by purchasing 2% of its own share capital from Vivendi Universal for an amount of million. The shares bought by Veolia Environnement will be used in connection with future employee share programs. Pursuit of business expansion Building on the efforts undertaken since 2000, Veolia Environnement won in 2004 a number of major new contracts within the Group s strategy to focus on its environmental services business. Highlights include: in the water sector: 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; 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, the first one with the city of Hohhot for a 30-year term, and the second with the city of Weinan for a 22-year term; and the acquisition of a 74.9% interest in Braunschweiger Versorgungs-AG (BV-AG), a company that provides environmental services to the city of Braunschweig. Services to be provided by the Group under this contract include water distribution and management of a municipal heating, electricity and gas network. At the end of 2004, Veolia Water acquired a majority interest in the water services company Stadtwerke, which manages municipal water services for the city of Braunschweig in Lower Saxony, Germany, for a price of million. This acquisition forms part of Veolia Water s strategy to pursue further development in Europe, in particular Germany. The effects of the acquisition on the water division s results (expected revenue to amount to approximately 270 million) will begin to be felt in the 2005 fiscal year. in the waste management sector: a 21-year contract for waste management in Poland, launched in January 2004 with the inauguration of a landfilling facility in Chrzanow near Cracow, and 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; in the energy services sector: a contract between Dalkia 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; and in the transportation sector: a 5-year contract (which came into effect on 1 July 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. The Group also started operating services under the water contract with the city of Shenzhen (China), which was awarded in

57 The evolution in Veolia Environnement s contract portfolio in 2004 reaffirmed the trends witnessed in the previous years in both municipal and industrial markets. Accordingly, growth opportunities continue to arise in Veolia Environnement s main geographical markets, driven by accelerated urbanization and more stringent environmental regulations. Veolia Environnement s comprehensive service offerings, which are focused in areas where it believes it has a competitive advantage, increasingly necessitate a high level of technical expertise and involve the provision of high value-added services, both of which should help relieving the pressure on prices despite the presence of competitors in the market. Pursuit of targeted geographical development In 2004, Veolia Environnement pursued its targeted development in Asia, and particularly China. It entered into two important water contracts, one in the Guizhou province in southern China, and the other in Hohhot, the capital of Inner Mongolia. Veolia Environnement also strengthened its 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. High level of contract renewals and extensions Veolia Environnement renewed a substantial number of contracts that were due to expire in 2004, which reflects the satisfaction and confidence of clients in Veolia Environnement s abilities and business model, in particular its 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 Veolia Environnement s abilities. In the rest of the world, the expansion of services provided under certain contracts and the extensions in contract length that Veolia Environnement has successfully negotiated have also reaffirmed Veolia Environnement s choice of service offerings and its business model. Highlights include: in the water sector, the renewal of a water distribution contract in Rennes (France) for a 10-year term, and the 18-year extension of a wastewater treatment contract with the city of Richmond (California), which is expected to generate total revenues of approximately 50 million over this period; in the waste management sector, the 10-year extension of a contract to operate, maintain and manage a waste-to-energy recovery plant in Miami-Dade County (United States), is expected to generate additional total revenues of 1,085 million during this period and the 5-year extension of a contract for integrated waste management with the county of Sheffield (United Kingdom), is expected to generate additional total revenues of more than 525 million during this period; and in the transportation sector, 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 being expected to generate total revenues of approximately 1.5 billion during a 5-year period. The Veolia Environnement Foundation The Veolia Environnement Foundation (Fondation d Entreprise Veolia Environnement) was established in Its purpose is to organize the Group s philanthropic initiatives, and its founding members are Veolia Environnement itself along with its four divisions. The foundation has three main goals, which are the promotion of: (1) solidarity (provision of support to populations devastated by crisis or in need of development assistance), (2) employment (creation or consolidation of jobs in the services sector), and (3) environment (support of research or educational initiatives in environment). The foundation may act, depending on the circumstances, in partnership with other humanitarian organizations like the Red Cross, international organizations or 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 skill training programs to facilitate re-entry into the workforce and the establishment of sports programs designed to foster social integration. 57

58 The Veolia Environnement Campus Veolia Environnement s former Urban Environment Institute was renamed «Campus Veolia Environnement» in January Established in 1994, the Veolia Environnement Campus is the education center of Veolia Environnement. It provides both initial and on-going training to individuals and regroups a training and apprenticeship center, training staff from all four of Veolia Environnement s divisions, a social observatory, partnerships with universities and a new factual-based study program. The Veolia Environnement 2005 efficiency plan The Group announced an efficiency plan at the end of September 2003 called Veolia Environnement 2005, which the Group hopes will generate 300 million in annual savings beginning in An operational pilot program has been implemented and a project team reporting directly to the Group s chief executive officer has been formed. The efficiency plan aims to generate savings through improvements to the Group s operational processes, purchasing functions and support functions, as well as through an optimized use of assets. The efficiency plan extends to all Group subsidiaries so as to take advantage of all possible synergies, in particular with respect to optimizing purchases, structural costs and operating efficiency. Veolia Environnement also intends to emphasize the sharing of best practices and the use of advanced technologies in order to achieve the goals of its efficiency plan. The efficiency plan is being implemented according to schedule. Savings made in 2004 amounted to 126 million, of which 116 million were included in EBIT (as defined below). Accordingly, Veolia Environnement continues to have an objective of 300 million in annual savings as from Savings for 2004 were achieved in the areas of purchases (18%), structural and IT costs (30%), operational processes (34%) and asset management (18%). Share capital General information about the Company s share capital Changes to share capital and the voting rights attached to shares Any modification of share capital or of the voting rights attached to shares is subject to applicable legal requirements. The Company s articles of association (statuts) do not provide for any specific additional requirements. Share capital as of September 15, 2005 Number of shares issued: 406,516,755 Nominal value per share: 5 euros Nominal value of total shares issued: 2,032,583,775 euros, fully paid Securities convertible into shares In March 2001, Vivendi Universal issued 1.8 billion principal amount of bonds due in 2006 that are exchangeable for existing shares of the Company held by Vivendi Universal. Each of the 32,352,941 bonds was initially exchangeable for 1 VE share (since increased to VE shares after adjustments). Between January 27, 2003 and February 17, 2003, 31,858,608, or 98.47%, of the outstanding bonds were redeemed early. Accordingly, as of December 31, 2004, 494,323 bonds remained outstanding, which may be exchanged for a total of 505,247 of the Company s existing shares, representing approximately 0.12% of its share capital. Because the bonds are only exchangeable into already existing shares of the Company, any exchange would not alter the share capital of the Company. In December 2001, the Company distributed one free stock warrant for each of its 346,174,955 shares to persons who held the Company s shares on December 14, 2001 (COB visa n dated December 10, 2001). Subject to adjustments, including those resulting from the Company s capital increase with preferential subscription rights conducted on August 2, 2002, each 7 warrants will entitle the holder to subscribe for shares of the Company, nominal value 5 euros per share 1, at a subscription price of 55 per share. The warrants 1 The reduction in the nominal value of VE s shares to 5 euros per share decided on April 30, 2003 did not have any impact on the number of shares that may be subscribed for through exercise of the warrants. 58

59 may be exercised at any time up to and including March 8, The warrants are listed on the Eurolist of Euronext (code Sicovam 64355). As of December 31, 2004, 99,526 warrants had been exercised, which resulted in the issuance of 14,218 new shares and a corresponding increase in share capital of 71,090. As of December 31, 2004, the number of outstanding shares of the Company before exercise of outstanding warrants was 406,421,983 shares. At this date, if all of the outstanding warrants had been exercised, 49,884,301 new shares would have been issued, representing a 12.27% ownership dilution. Major shareholders The table below shows the ownership of the Company s shares and voting rights as at September 15, 2005: Shareholder Number of shares Percentage of share capital (%) Number of voting rights Percentage of voting rights (%) Caisse des Dépôts et Consignations 35,095, ,095, Capital Research and Management Company (1) 28,785, ,785, Groupe Société Générale (2) 26,380, ,380, Groupe Groupama 23,229, ,229, Vivendi Universal 21,522, ,522, EDF 16,255, ,255, Caisse Nationale des Caisses d Epargne (3) 15,570, ,570, Veolia Environnement 16,183, Public and other investors 223,493, ,493, Total 406,516, ,333, (1) Management company acting on behalf of its clients (North American mutual funds). (2) Including 11,466,571 shares (around 2.82% of the capital) held by Lyxor Asset Management, a management company acting on behalf of its clients. (3) Including 9,481,182 shares (around 2.33% of the capital) held by Ecureuil Gestion on behalf of its clients. On October 24, 2005 Vivendi Universal announced that they had agreed with Société Générale to wind up the derivative structure affecting 5 per cent. of the share capital of the Company (20,321,100 shares) which had been set up between them in December As a result of this winding up, Société Générale announced that it would sell 4.5 per cent. of the share capital of the Company (approximately 18.3 million shares), which constituted its hedge of the derivative structure. Vivendi Universal announced that it would retain its remaining stake of 5.3 per cent. in the share capital of the Company (21,522,776 shares) and that it would not sell those shares for a period of three months. Since September 15, 2005, Société Générale declared on November 4, 2005 (i) having fallen, directly and through subsidiaries, below the threshold of 5 per cent. of the share capital and the voting rights of the Company, in the context of its trading activities and (ii) directly and indirectly owning 18,370,057 shares representing 4.52 per cent. of the share capital and 4.71 per cent of the voting rights of the Company. Administrative, management and supervisory bodies Until April 30, 2003, Veolia Environnement was a société anonyme à directoire et conseil de surveillance, a form of stock corporation with a two-tier management structure pursuant to which a management board (directoire) managed the day-to-day business of the Company under the general supervision of a supervisory board (conseil de surveillance). On April 30, 2003, the shareholders approved the change of the Company s corporate form to a société anonyme à conseil d administration, which is a French corporation with a single board of directors. 59

60 Board of directors At its meeting on April 30, 2003, Veolia Environnement s board of directors adopted a charter aimed at following the recommendations of the report of a French blue ribbon panel chaired by Mr. Daniel Bouton for the improvement of corporate governance in French public companies. Veolia Environnement estimates that its practices reflect and comply with applicable regulations in France as well as with French corporate governance best practices. Composition Pursuant to the Company s articles of association, the board of directors must have between 3 and 18 members. Each director must own at least 750 of the Company s shares in registered form. Each director is elected by the shareholders at an ordinary general meeting of the shareholders for a renewable six-year term, based on proposals by the board of directors, which itself receives proposals from the nominations and compensation committee. The board of directors elects a chairman and, if necessary, one or two vice-chairmen, for a term not exceeding the length of such persons terms as directors. The Company s directors can be removed from office by a majority shareholder vote at any time. The board of directors does not include any members elected by employees or any deputy directors (censeurs), but a representative of the Company s works council attends board of director meetings in a consultative role. The terms of half of the Company s directors (or, should there be an uneven number of directors, half plus one additional director) will come up for renewal every three years on a rolling basis. Accordingly, the terms of seven pre-selected directors will be subject to renewal or replacement in Thereafter, the terms of board members will come up for renewal or replacement every three years based on seniority of appointment. The Company s board of directors currently consists of 14 members, who were all elected at the Company s ordinary general meeting of shareholders on April 30, 2003 for six years, except for 7 directors whose terms will end in 2006 so as to initiate the rolling renewal mechanism described above. These directors are Serge Michel, Daniel Bouton, Jean-Marc Espalioux, Jacques Espinasse, Paul-Louis Girardot, Georges Ralli and Murray Stuart. Review of directors independence To qualify as independent under the Company s charter, a director must not have any relationships with the Company, its subsidiaries or its management that could impair his objective judgment. The Company s charter sets forth in detail the independence criteria that each director must satisfy, which are based on the recommendations of the report of a French blue ribbon panel chaired by Mr. Daniel Bouton for the improvement of corporate governance in French public companies. Nevertheless, the Company s charter also provides a certain measure of flexibility in applying these independence criteria, since the board of directors may deem that one of its members is independent in light of the specific facts and circumstances of that member, his share ownership or any other reason, even if that member fails to meet all of the independence criteria set forth in the charter. Conversely, the Company s board of directors may deem one of its members not to be independent, even though he otherwise meets all of the independence criteria set forth in the Company s charter. The Company s charter provides that the board must conduct an annual review of the independence of each of its members prior to the publication of the Company s document de référence. Such review must take into account the independence rules set forth in the Company s charter, the particular facts and circumstances involved and the conclusions of the Company s nominations and compensation committee. On March 30, 2004, the Company s nominations and compensation committee conducted an evaluation of the independence of the Company s directors and submitted its conclusions to the board of directors. On April 5, 2004, the Company s board of directors determined that Messrs. Jean Azema, Daniel Bouton, Jean-Marc Espalioux, Philippe Kourilsky, Arthur Laffer, Francis Mayer, Baudouin Prot, Georges Ralli, Louis Schweitzer and Murray Stuart qualified as independent directors under the independence criteria set forth above and the particular facts and circumstances involved. Messrs. Bouton, Prot and Ralli in particular were deemed to satisfy the Company s independence criteria, despite the banking relationship which the Company maintains with Société Générale, BNP Paribas and Banque Lazard, respectively. The board of directors concluded so on the basis of the Company s financial situation, its independence with regard to bank financing and the limited nature of the Company s commitments with these banks. 60

61 On March 29, 2005, the Company s board of directors conducted a new evaluation of board members independence, which reaffirmed its earlier conclusions, except with respect to Mr. Georges Ralli, whom the board deemed no longer independent due to the nature of the banking relationship between the Company and Banque Lazard in As a result, the board of directors currently features nine independent directors. Board evaluation Under its charter, the Company s board of directors is required to evaluate its work and procedures each year, verify that important matters are adequately prepared and discussed within the board and measure the contribution to its work and the participation in its debates by each of its members. Duties of directors The charter of the board of directors provides that each of the Company s directors is bound by a number of duties and obligations, such as: a duty to act in the corporate interest of the Company, an obligation to inform the board of directors of any existing or potential conflict of interest and to abstain from voting in any situation where such a conflict of interest exists, as well as an obligation to inform the chairman of the board of any agreement entered into by the Company or on the Company s behalf in which he has any direct or indirect interest, a duty of professional secrecy and an obligation to comply with the Company s insider trading policy. Powers of the board of directors Under French law and the Company s articles of association, the board of directors has broad powers to act on behalf of the Company within its corporate purposes and to define and implement the Company s policies, subject to those powers expressly granted by law or the Company s articles of association to the shareholders. In addition, the board of directors charter provides that certain significant decisions made by the Company s chief executive officer must be first approved by the board of directors. The decisions of the Company s chief executive officer in relation to any of the following matters are subject to such prior authorization: (i) strategic orientation of the Group, (ii) transactions in line with the Company s strategy in excess of 300 million per transaction or, for transactions which are in the Company s budget, in excess of 150 million, (iii) transactions not in line with the Company s strategy in excess of 100 million per transaction, (iv) financing transactions (whatever their terms) representing an amount in excess of 1.5 billion per transaction, and (v) transactions involving the Company s shares representing an amount in excess of 1% of the Company stotal outstanding shares. 61

62 Board members The following table sets forth the names and ages of the members of the Company s board of directors, their current function in the Company and their principal business activities outside of the Company. The terms of the members of the board of directors expire on the date of the general shareholders meeting called to approve the Company s financial statements for fiscal year 2008, except for Messrs. Bouton, Michel, Espalioux, Espinasse, Girardot, Ralli and Stuart, whose term expire on the date of the general shareholders meeting called to approve the Company s financial statements for fiscal year Name Age Function in Veolia Environnement Henri Proglio 55 Chairman and Chief Executive Officer Principal business activities outside Veolia Environnement Date initially appointed None April 2003 Jean Azema* 52 Director CEO of Groupama SA April 2003 Daniel Bouton* 54 Director Chairman and CEO of Société April 2003 Générale Jean-Marc Espalioux* 53 Director Former chairman of the management April 2003 board of Groupe Accor Jacques Espinasse 61 Director Executive vice president and CFO of April 2003 Vivendi Universal Paul-Louis Girardot 71 Director Chairman of the supervisory board of April 2003 Compagnie Générale des Eaux Philippe Kourilsky* 62 Director Former chief executive officer of the April 2003 Institut Pasteur Arthur Laffer* 63 Director Chairman and CEO of Laffer April 2003 Associates and Laffer Investments Francis Mayer* 54 Director CEO of Caisse des Dépôts et April 2003 Consignations Serge Michel 77 Director Chairman of Soficot SAS April 2003 Baudouin Prot* 52 Director Director and CEO of BNP Paribas April 2003 Georges Ralli 56 Director Executive vice president of Lazard April 2003 Frères SAS Louis Schweitzer* 62 Director Chairman of the board of directors of April 2003 Renault SA Murray Stuart* 71 Director None April 2003 * Independent directors. All positions and offices of the Company s directors indicated above are given as of September 15, Directors may be contacted at the Company s headquarters, located at 36/38 avenue Kléber, Paris. Conflict of interests To the knowledge of Veolia Environnement, there is no potential conflict of interest between any duties to it of the directors and their private interests or other duties. Senior management The board of directors directs the manner in which Veolia Environnement is managed in accordance with its articles of association. In particular, the board of directors appoints a chief executive officer to manage the Company s business on a day-to-day basis. The chairman of the board of directors may serve as chief executive officer where the board of directors so decides. On April 30, 2003, the Company s board of directors appointed its chairman, Mr. Henri Proglio, to act as chief executive officer. The chief executive officer has broad powers to act on the Company s behalf, including the power to represent the Company in dealings with third parties, within the limits of the Company s corporate purpose and the powers expressly reserved to the Company s shareholders and board of directors. 62

63 Following the change in the Company s corporate form on April 30, 2003 and with a view to implementing the Company s governance principles, the Company s chairman and chief executive officer created an executive committee composed of seven members (all of whom, but one, were members of the Company s former management board until April 30, 2003). The Company s executive committee meets approximately every fifteen days and is chaired by Mr. Henri Proglio. The executive committee helps to determine the Company s principal strategy. Board practices Following the Company s transformation into a société anonyme à conseil d administration on April 30, 2003, the Company s existing accounts, audit and commitments committee and nominations and compensation committee were retained and their charters adapted to the needs of the new board of directors. Accounts, audit and commitments committee The Company s accounts, audit and commitments committee principally performs the following functions: regarding accounting matters, the committee reviews with the auditors the appropriateness and consistency of the accounting methods adopted to prepare the financial statements and examines whether significant transactions have been adequately treated, provides an opinion on accounting methods and on the draft semiannual and annual financial statements and examines significant commitments, and meets, if necessary, with the auditors, management and financial officers to discuss various issues, the committee being entitled to meet with such persons outside of the presence of the Company s management; regarding internal auditing and risk control, the committee is informed of the procedures established to identify significant risks, examines the internal audit plan and receives a periodic summary of the group s internal audit reports. The committee meets as often as necessary with the internal audit director to discuss the organization of internal audit; regarding the supervision of the Company s independent auditors, the committee examines the auditors work plan and meets as often as necessary with the auditors and the Company s management, including the Company s accounting and treasury officers. The committee is entitled to meet with such persons outside the presence of the Company s management. Non-audit services to be performed by the auditors require the prior approval of the committee, which also reviews the fees which the Company pays to the auditors for all of their services and ascertains that the portion of revenue of the audit firm and its network represented by such fees does not call into question the independence of the auditors. The committee also monitors the implementation of the procedure for selecting independent auditors. Pursuant to the committee s charter, members must be selected on the basis of their financial or accounting skills. The committee currently consists of four members, three of whom are independent(*) based on criteria set forth in the board s charter: Murray Stuart* (chairman), Jean Azema*, Jean-Marc Espalioux* and Paul-Louis Girardot, the latter appointed by the board of directors at its meeting of March 15, Nominations and compensation committee The Company s nominations and compensation committee principally performs the following functions: regarding compensation, the committee reviews and makes annual recommendations on the compensation of directors and executive officers and with respect to retirement and other benefits. The committee also proposes a total amount and breakdown for the fees paid to directors, and advises the board of directors on stock option policy and awards. The committee is also informed of the compensation policy for the principal executive officers of the Company s subsidiaries, and reviews all share capital increases reserved for employees. The committee may also hire specialized consultants in connection with senior management compensation issues; regarding nominations, the nominations and compensation committee makes recommendations regarding the directors and senior managers of the Company and arranges for their succession. It also makes recommendations for the members and chairman of each of the Company s committees. The committee s choices must strive to reflect a diversity of experience and points of view and ensure that the board remains objective and independent with respect to a shareholder or group of shareholders. The committee also strives to ensure that independent directors represent at least half of the members of the board of directors, two-thirds of the members of the accounts, audit and commitments committee and half of the members of the nominations and compensation committee. 63

64 The committee also performs an annual review on a case-by-case basis of the independence of each director in light of the independence criteria mentioned in the board of directors charter and submits its findings to the board of directors. It arranges and coordinates the required review of the board s functioning, and submits its opinion regarding the performance of executive management. The committee s charter provides that the committee must consist of three to five members appointed by the board of directors upon the recommendation of the then current members of the nominations and compensation committee. The committee currently consists of three members, two of whom are independent(*): Serge Michel (chairman), Louis Schweitzer* and Daniel Bouton*, the latter appointed by the board of directors at its meeting of March 15, The committee meets at the request of its chairman or the chairman of the board of directors at least twice in a year. Disclosure committee In addition to the above committees, the Company s chief executive officer and chief financial officer created a disclosure committee, which was presented to the Company s former management board on December 11, Pursuant to its charter, the disclosure committee principally oversees the implementation of internal procedures to collect information about the Company that will be disclosed to the public, defines processes for preparing the Company s reports and other communications, reviews the information to be disclosed and approves the final version of reports or communications (in particular the Company s U.S. Form 20-F), which are filed with French and U.S. regulatory authorities and approves the procedures for publication or filing of documents. The disclosure committee reports on its work to the chief executive officer and the senior executive vice president. Ethics committee In February 2003, the Company initiated an ethics program entitled Ethics, Commitment and Responsibility, which was later updated in December This program is intended to guide the daily behavior of the Group s employees with respect to ethical matters. In March 2004, the Company s executive committee decided to create an ethics committee and to adopt its charter with the view of implementing the ethical values and principles set forth in the program. The ethics committee is entitled to pursue any matter that it wishes regarding group ethics. Employees may also freely consult with the committee. The ethics committee must act independently with respect to the matters that it handles and hold confidential the information relating thereto. Each year, the ethics committee prepares a report on the Group s compliance with ethical norms, including any difficulties encountered and suggested improvements, if any. Corporate Governance The Company complies with all rules of corporate governance in France. 64

65 RECENT DEVELOPMENTS AND OUTLOOK Recent Events New Contracts In July 2005 Onyx won a 30-year concession for the investment, design, construction and operation of a new domestic waste storage centre in Foshan, in the Guandong province in southern China (75 million inhabitants). The site will have the capacity to process 24 million cubic metres of waste. The estimated turnover for the contract during the concession period will be approximately Euro 270 million. At the end of July 2005, Onyx announced the signing of a 10-year contract with the Guangzhou municipality Environment and Health Authority, giving it control over the operation and maintenance of an energy-giving development unit of domestic waste in the Chinese province of Guandong. The unit is designed to treat 1,000 tonnes of domestic waste daily and should generate 21 mega watts of power from December The total turnover is estimated to be approximately Euro 45 million over the length of the contract. Connex announced on 28 July 2005 that it had signed a USD 93 million contract with the National Express Corporation for the acquisition of ATC. The corporation is the American subsidiary of urban transport company National Express, whose annual turnover is approximately USD 260 million. ATC Corporation, which is based in Arizona, California, North and South Carolina and Nevada runs some very important contracts, such as those in Las Vegas, Dallas and Seattle. The acquisition was completed on 1 September 2005, after the conditions precedents typical for this type of acquisition had been satisfied. On 11 August 2005, Dalkia signed a contract with the Polish Treasury Minister for the acquisition of ZEC Lodz, a company that carries out the administration and production of heating in Lodz through the co-generation of heat and electricity. The company has an annual turnover of Euro 167 million. Following the acquisition Dalkia will double its activity in Poland with an expected annual turnover of Euro 300 million. In early September 2005, Veolia Water won two tenders for two new contracts relating to the management of wastewater purification factories in China, which fits in with the development strategies of Veolia Environnement in China. The first is a 23 year contract signed with the city of Urumqi (1.2 million inhabitants) in partnership with Beijing Capital Group, for the modernisation and operation of the purification of the city s wastewater. The second is a 25-year contract with the city of Handon (800,000 inhabitants) and concerns the construction and operation of a new wastewater purification plant. The accumulated estimated turnover for the two contracts is Euro 340 million. In September 2005, Onyx signed a 3 year contract with the Alcatel Group for the global management of Déchets d Equipement Electrique et Electronique (D3E). The contract puts Onyx in charge of the collection, dismantlement, treatment, development and recycling of electric and electronic waste equipment on Alcatel and client sites in 27 European countries (European Union countries, Norway and Switzerland). On 15 September 2005, Dalkia announced the signing of a contract for the buy-back of a steam distribution network in Cambridge, Massachusetts. This network, which serves one zone in the United States comprising of the industrial areas surrounding the Harvard and Massachusetts s Institute of Technology campuses, provides steam intended for the industrial processes of clients who are world leaders in pharmaceuticals and biotechnology. On 23 September 2005, Veolia Water announced that it had won a contract to manage the clean-up of the Fort Knox military base in Radcliff, Kentucky, which is home to the United State s gold reserve. Veolia Water bid for this tender, which was launched by the American army in the form of a public to private partnership (PPP), with Harding County. The latter is in charge of the installations and the former in charge of their operation. The contract is for 20 years and will provide an estimated accumulated turnover of Euro 24 million. At the end of September 2005, Veolia Water won, in the form of a public to private partnership, a contract to manage water services (production, distribution of drinking water and operation of the customer service) of the ChangZhou city in China (1.2 million inhabitants). Allocated following an international invitation to tender, this 30 years contract represents a total turnover estimated to more than Euro 800 million. For this contract, Veolia Water entered into a partnership with a Hong Kong partner in order to acquire 49% of the municipal company ChangZhou Tap Water Group. Veolia Water will manage this company, the other 51% will remain property of the city. In light of the agreement signed in December 2000, EDF and Veolia Environnement announced in the end of July 2005 that they were in the process of discussing the evolution of their industrial and commercial partnership, as well as the partnership agreement concerning their respective holdings in Dalkia. In 65

66 conformity with this partnership agreement, EDF benefited from a call option by which it was permitted, under certain conditions, to raise its holding in Dalkia s capital to 50%. Given this, as a precaution, on 28 July 2005 EDF exercised its call option, which expired on 30 September The original partnership is not affected by the expiration of EDF s call option, and on 3 October 2005, the Company and EDF announced that this factor has no impact on their desire to reinforce their partnership, in order to benefit from new opportunities within the European Energy market. On 27 Octobre 2005, the Company, EDF and Dalkia announced that Arjo Wiggins has chosen Dalkia to build and operate a new facility providing steam for its Wizernes plant in northern France. The project will be carried out under a twelve-year contract representing annual revenues of 10.6 million for Dalkia. To be commissioned on 1 November 2006, the new facility with its 10 MWe gas turbine will allow the plant to increase output. Dalkia will supply 340,000 metric tonnes of steam a year and will operate and maintain the facility. This successful bid comes on the heels of two other projects with Argo Wiggins, in Arches and Bessé-sur-Braye. The paper manufacturer selected Dalkia in 1998 to manage and maintain a facility in Bessé-sur-Braye and again in 2004 to manage the steam heating plant. Forward-looking information The Company has confirmed its previously announced goal of an increase in revenues (proceeds from normal activities) of more than 8% for 2005 and double-digit growth in its recurring operating income for Such growth is attributed to the income realized in the first six months of 2005 and the developments within the Water sector during 2005 (the contract in Braunschweig and projects in China), Energy Services in Lodz, Poland, and the Transportation sector in the United States (acquisition of ATC). These goals are based mainly on the following assumptions: (i) foreign exchange rates which are set at the group level, (ii) anticipated processed or distributed volumes, based mainly on historical data, (iii) evolution of yearly rates on long-term contracts, (iv) evolution of the market price in certain Waste division services, (v) impact of the policy aiming to streamline operating costs and their progression and (iv) energy prices. Certain information, assumptions and estimates stem from, or are based on, partially or completely, the decisions or evaluations made by the governing bodies of Veolia Environnement and its subsidiaries and are subject to change. The goals, statements and forward-looking information summarized above are mainly based on data, assumptions and estimates previously expressed or considered as reasonable by Veolia Environnement. The reader is advised that these forward-looking statements depend on future circumstances or events that are expected to occur in the future. These statements are not historical facts and should not be interpreted as guarantees that the expected events will happen or that the goals will be attained. By their nature, such information, assumptions and estimates, as well as all the elements taken into account in defining these objectives, statements or expectations may not materialize and may change in relation to the uncertainty related to the economical, financial or competitive environment of the Company. In addition, the occurrence of certain risks described in section 4.7 Risk Factors in the Reference Document of Veolia Environnement may have an impact on the Group s activities and on the achievement of certain objectives, statements and forward-looking information described above. The same uncertainty exists as to the interpretation and application of certain IFRS accounting standards, particularly in relation to the treatment of concessions or licenses until the work of the IFRIC is completed (see not I.A. 1 of the consolidated financial statements as of June 30, 2005). Outlook In the mid-term and taking into account the contracts portfolio, the optimization and productivity programs, and a selective investment policy, the Company has set the following goals: (i) achievement of ROCE, after tax, of more than 10% in 2007, (ii) a regular increase in the dividend of more than 10% per year and (iii) maintenance of a net debt ratio over EBITDA of less than

67 Report of the statutory auditors on the forward-looking statements As statutory auditors and in accordance with Regulation (EC) N 809/2004, we have issued this report on the forecasts of Veolia Environnement for the year ended 2005, included in section 2.3 of the third update of the 2004 reference document filed with the AMF on October 24, These forecasts presented herein and the significant underlying assumptions have been prepared under your responsibility, in accordance with Regulation (EC) N 809/2004 and with CESR recommendations relating to forecasts. It is our responsibility to issue a conclusion, based on our procedures, in accordance with paragraph 13.3, appendix I of Regulation (EC) N 809/2004, on the appropriateness of the forecasts production. We conducted our works in accordance with professional standards applied in France. These works included an assessment of the procedures implemented by the Management for the production of forecasts, as well as the implementation of procedures enabling to ensure the compliance of the accounting methods adopted, with those used for the production of the historical data of Veolia Environnement. They also consisted in collecting the information and explanations that we considered necessary allowing to obtain reasonable assurance that the forecasts are adequately made on the basis of the stated assumptions. Regarding forecasts which are, by essence, uncertain, we remind you that reality may sometimes differ significantly from forecasts presented herein and that we make no conclusion about the possible fulfilment of these forecasts. In our opinion: the forecasts have been correctly produced on the indicated basis; the accounting basis used to make those forecasts is in compliance with the accounting methods used by Veolia Environnement. Without reappraising our conclusion, we draw your attention to potential uncertainties regarding the interpretation and implementation of certain IFRS accounting principles, specifically those related to service concession arrangements, which are currently being reviewed for interpretation by the IFRIC. This situation could significantly affect the historical information and forecasts issued by the company. This report is issued in accordance with Regulation (EC) N 809/2004 for the sole purpose of a public offer that could be carried out on a prospectus basis including or incorporating the 2004 reference document and its updates, in France and other European countries where the prospectus of this offer would be notified. It cannot be used, translated or reproduced in another situation. Paris and Paris-La Défense, October, 24, 2005 The Statutory Auditors SALUSTRO REYDEL BARBIER FRINAULT ET CIE Membre de KPMG International Ernst & Young Bernard CATTENOZ Bertrand VIALATTE Patrick GOUNELLE Jean BOUQUOT 67

68 Rapport des commissaires aux comptes sur les informations prévisionnelles En notre qualité de commissaire aux comptes et en application du Règlement (CE) N 809/2004, nous avons établi le présent rapport sur les prévisions de résultat de la société Veolia Environnement relatives à l exercice 2005, incluses dans la section 2.3 de la troisième actualisation de son document de référence 2004 déposée à l AMF le 24 octobre Ces prévisions et les hypothèses significatives qui les sous-tendent ont été établies sous votre responsabilité, en application des dispositions du Règlement (CE) N 809/2004 et des recommandations CESR relatives aux prévisions. Il nous appartient, sur la base de nos travaux, d exprimer une conclusion, dans les termes requis par l annexe I, point 13.3 du Règlement (CE) N 809/2004, sur le caractère adéquat de l établissement de ces prévisions. Nous avons effectué nos travaux selon les normes professionnelles applicables en France. Ces travaux ont comporté une évaluation des procédures mises en place par la Direction pour l établissement des prévisions ainsi que la mise en oeuvre de diligences permettant de s assurer de la conformité des méthodes comptables utilisées avec celles suivies pour l établissement des informations historiques de la société Veolia Environnement. Ils ont également consisté à collecter les informations et les explications que nous avons estimées nécessaires permettant d obtenir l assurance raisonnable que les prévisions sont adéquatement établies sur la base des hypothèses qui sont énoncées. Nous rappelons que, s agissant de prévisions présentant par nature un caractère incertain, les réalisations différeront parfois de manière significative des prévisions présentées et que nous n exprimons aucune conclusion sur la possibilité de réalisation de ces prévisions. A notre avis : les prévisions ont été adéquatement établies sur la base indiquée ; la base comptable utilisée aux fins de cette prévision est conforme aux méthodes comptables appliquées par la société Veolia Environnement. Sans remettre en cause notre conclusion, nous attirons votre attention sur l existence d incertitudes sur l interprétation et l application de certaines normes comptables IFRS, en particulier celles se rapportant au traitement des concessions qui font l objet à ce jour de projets d interprétation de l IFRIC. Cette situation est susceptible de modifier significativement les données historiques et prévisionnelles publiées par la société. Ce rapport est émis en application du Règlement (CE) N 809/2004 aux seules fins d une offre au public, en France et dans les autres pays de l Union Européenne dans lesquels le prospectus de cette offre serait notifié, qui serait réalisée sur la base d un prospectus incluant ou incorporant par référence le document de référence 2004 et ses actualisations. Il ne peut être utilisé, traduit ou reproduit dans un autre contexte. Paris et Paris-La Défense Le 24 octobre 2005 SALUSTRO REYDEL BARBIER FRINAULT ET CIE Membre de KPMG International Ernst & Young Bernard CATTENOZ Bertrand VIALATTE Patrick GOUNELLE Jean BOUQUOT 68

69 Consolidated revenue 1 for the first 9 months of (Unaudited IFRS figures) VEOLIA ENVIRONNEMENT Continued strong growth: Revenue up 10.8% Recurring operating income up 17.3% 9-mos ( m) 9-mos ( m) % change 2005/2004 Organic growth External growth Currency effect 18, , % 9.0% 1.5% 0.3% The Group s consolidated revenue rose by 10.8% to 18,111.1m, versus 16,348.8m in the first nine months of This growth confirmed the trend posted over the first half of the year. Organic growth remained robust at 9.0%. Revenues deriving from outside France stood at 9,436.4m, or 52% of the total. VEOLIA WATER 9-mos ( m) 9-mos ( m) % change 2005/2004 Organic growth External growth Currency effect 6, , % 11.6% 2.0% 0.3% In accordance with IAS 18, revenue now excludes indirect charges and taxes collected on behalf of third parties in the Water division. In France, the engineering and construction business continued to grow and the distribution business performed well, lifting organic growth in revenue to 5%. Internationally, revenue was up sharply (22.0% at constant scope and exchange rates). The strong growth in Europe (+33.0% at constant exchange rates) was driven by the Braunschweig contract in Germany, other new contracts signed in recent months (in particular in the Czech Republic and in Italy), as well as the five-year price review plan in the UK. In North America, revenue advanced by more than 8%, at constant exchange rates, owing in particular to favorable revenue levels from the Indianapolis contract. In Asia/Pacific, revenue growth was strong, exceeding 20%, underpinned by the start-up of the Shenzhen contract. Several large design build construction contracts in France and abroad enabled Veolia Water Systems to post organic growth in revenue of more than 8.0%. The Water division posted external growth of 2.0%, deriving from two factors: the acquisition of an engineering concern in Germany in 2004, and in the second quarter of 2005, the division increased its stake in certain Italian water companies. VEOLIA ENVIRONMENTAL SERVICES (WASTE) 9-mos ( m) 9-mos ( m) 1 Revenue from ordinary activities 2 Fiscal year ending December 31, 2005 % change 2005/2004 Organic growth External growth Currency effect 4, , % 4.5% -0.6% -0.2% Revenue growth in the Environmental Services (waste) division remained stable, consistent with the first half of the year, at 3.7%. In France, organic growth in revenue totaled 2.1%. This growth was achieved despite a relatively unfavorable economic environment affecting the industrial waste activities. Internationally, organic growth in revenue accelerated to 6.6%. The businesses benefited from the increasing impact of integrated contracts, higher tonnages in the UK and strong growth in the Asia/Pacific region (+15.9%). In North America, new contracts, favorable hazardous waste volumes and a high level of activity in industrial services, led to solid revenue growth of 5.4%. 69

70 VEOLIA ENERGY 9-mos ( m) 9-mos ( m) % change 2005/2004 Organic growth External growth Currency effect 3, , % 7.9% 0.3% 0.7% In France, revenue was up 7.8% organically and continued to benefit from the increased price of energy in the heating business. Internationally, internal revenue growth was 8.0%. Organic growth was especially high in eastern Europe (22.6%), driven, in particular, by the full impact of new contracts in Poland, Hungary and Romania. The net effect of external growth reflects the Group s efforts to optimize the portfolio of businesses. This included acquisition growth in Spain and the divestiture of the nuclear industry construction business the Energy Services division in France, as well as the German facilities management activity. VEOLIA TRANSPORTATION 9-mos ( m) 9-mos ( m) % change 2005/2004 Organic growth External growth Currency effect 3, , % 12.5% 5.8% 0.4% In France, revenue increased by 16.2% primarily due to the full effect of urban transit contracts renewed in 2004 and the Toulouse contract, which began on January 1, Internationally, revenue grew 10.0% organically and benefited from the full effect of the Melbourne contract and the latest developments achieved in the United States (Denver, Los Angeles Metrolink) and Europe (Dublin tramway, Helsinki bus contract). External growth in Transportation (5.8%) reflected the impact of last September s acquisition of ATC in the US. * * * Recurring operating income increased 17.3% at current exchange rates (16.4% at constant exchange rates) to 1,321m in the first nine months of 2005 from 1,127m in the year-earlier period. Each of the divisions contributed to this improvement, which was driven by the increasing maturity of contracts, the favorable impact from the efficiency program, and the accelerated growth. These operating results confirmed the improvement in the Group s performance. When taking into account the non-recurring items included in the nine-month 2004 results, consolidated operating income increased 24.9% to 1,321m, versus 1,058m in the year-earlier period. * * * Net financial debt remained stable at billion, versus billion at June 30, After deducting financial receivables and marketable securities, economic net debt totaled 10.8 billion, versus 10.9 billion at June 30, All investments, including those in the third quarter (acquisition of the heating network of the city of Lodz, acquisition of the transportation company ATC in the US and of Shanks toxic waste business in the UK), were financed by operating cash flow generated during the period. OUTLOOK The results for the first nine months of 2005 are supportive of Veolia Environnement s strategic choices centered on selective and profitable growth in the buoyant environmental services market. This allows the company to confirm its growth and profitability expectations. Regroupement of Veolia s 4 divisions under a common name On 3 November 2005, Veolia announced that its 4 divisions (Veolia Environnement ; Veolia Transportation ; Veolia Energy ; and Veolia Environmental Services (Waste) would now be regrouped under a common denomination : Veolia. 70

71 BUSINESS OVERVIEW Market overview The market for environmental management services 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 through co-generation) and transportation, were provided in an uncoordinated manner, each by a different entity. Moreover, public authorities and industrial and commercial companies 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, as industrial and commercial companies have continued to expand on a global scale and increasingly require environmental management services providers with a global reach. Veolia Environnement believes that the 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, to provide growing urban populations with adequate environmental services and to 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 resources 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, the 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. Veolia Environnement thinks that each of these trends taken individually creates significant opportunities for companies with its expertise and, taken as a whole, they allow Veolia Environnement to provide innovative and integrated environmental management services in markets around the world. Clients Veolia Environnement provides environmental management services to a wide range of public authorities, industrial and commercial customers and individuals around the world. Public authorities Demand by public authorities has been sustained by the search for efficiency gains and innovative solutions, the rationalization of public purchases in pursuit of reduced costs, the reorganization of several municipalities in France, 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. In this context, Veolia Environnement believes that the historical model of delegated public service management contracts, which leaves to the public authorities the role of defining, organizing and overseeing the services provided to citizens, can be flexibly applied to satisfy the needs of each client, thereby resulting in a mutually beneficial relationship between the private operator and public authority. Accordingly, Veolia Environnement believes that it can adapt to the different needs and expectations of public authorities around the world with a view to assisting them in (i) responding to the need for heightened efficiency and productivity in the 71

72 provision of public services so as 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, Veolia Environnement intends to take advantage of a new ordonnance dated June 17, 2004 which sets out a new form of partnership contract. The ordonnance 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 related services, in exchange for compensation that is set by the public authority as a function of performance. Industrial or commercial companies and individuals Veolia Environnement delivers to its industrial and commercial clients a large range of services, the primary purpose of which is generally to achieve the following goals: providing clients with the services necessary for their industrial processes (steam, industrial heating and cooling, processed water, demineralized water, compressed air, etc.) and optimizing their consumption, reducing the impact of their industrial processes on the environment, which may include treating effluents, recycling and recovering waste, and maintaining long-lasting and efficient waste elimination channels. Veolia Environnement often partners with clients over the long term, and offers innovative solutions adapted to the needs of each industrial site. Veolia Environnement believes that the further development of its industrial client base will see a significant area of growth. In particular, multiservice contracts with industrial clients tend to play an increasingly important role. As far as services to individuals and meter-reading services are concerned, Veolia Water and Dalkia offer household services in France through Proxiserve and Domeo, two jointly held subsidiaries that provide assistance and maintenance relating to water, heating and gas services. Description of Veolia Environnement s principal businesses Except otherwise stated, market data and/or data regarding Veolia Environnement s position compared to its competitors appearing in this document result from Veolia Environnement s estimate on the basis of information in terms of revenue published by its competitors or analysts. Water Veolia Environnement, through its water division, Veolia Water, the lead company of which is Compagnie Générale des Eaux, is the world s leading provider of water and wastewater services for public authorities and industrial companies. Veolia Water is also 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, 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 award of significant contracts in the region in the past two years. With a portfolio of a more than 600 patents and a network of research centers in France and abroad employing more than 300 engineers, Veolia Water masters 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 Water s technical aptitude provides it with a unique advantage in the water services market, which is growing increasingly competitive. 72

73 The increased demand in the water services market has been driven substantially by clients seeking to optimize the management of their existing resources, whether public authorities seeking to respond to the urbanization trend or industrial clients. New solutions, such as desalination or re-use of treated water, may also be needed depending on client circumstances. The following table shows the consolidated revenue and operating income (EBIT) before amortization and depreciation of goodwill and indefinite life tangible assets and restructuring costs of Veolia Environnement s water operations in each of the last three fiscal years, after elimination of all inter-company transactions. (in millions of euro)* 2004** 2003 (pro forma)*** Revenue 9,805 9,585 11,340 13,294 EBIT ,024 * Includes Veolia Environnement s share in the results of the water activities of Proactiva, Veolia Environnement s joint venture with FCC. Results of the 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 Environnement s interest in FCC. For the purposes of the 2003 pro forma figures, results of the activities of Proactiva were 50% consolidated. ** On December 31, 2004, Veolia Environnement began applying the provisions of Article of 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 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 Corporation s 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 USFilter s 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 may take various forms, depending on the needs and goals of the public authority (e.g., outsourcing contracts, public-private partnerships, concessions, BOT, DBO, etc.). They generally 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. Recent legislative changes have allowed Veolia Environnement to integrate more elaborate mechanisms in its contracts so as to share value added under the contract (e.g., productivity gains, improvement in the level of services, etc.), which directly benefits 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 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 Water s 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 Water s offerings. Service contracts with public authorities and industrial clients The main focus of Veolia Environnement s water business is on water and wastewater management services for public authorities and industrial clients. Veolia Water provides integrated services that cover the entire water 73

74 cycle, from the collection of natural sources, treatment, storage and distribution of water, to the collection, decontamination of wastewater and return to natural resources. Veolia Water s 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. They are now 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. Veolia Water continues to develop its service offerings to industrial clients through its regional organization, and has developed a presence in the United Kingdom, Germany and the Czech Republic, as well as in Asia and South Korea in particular. Within VE Industries Veolia Water also contributes to the development of common service offerings of the Group, in particular in Europe. Engineering and technological solutions for the treatment of water Through Veolia Water Systems, Veolia Water is one of the world s leading designers of technological solutions and a leader in 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 Water s 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 and renovates urban and industrial drinking water and wastewater networks and related infrastructures, both in France and around the world. SADE s services cover each stage of the water cycle, from its collection to its release, and its public and industrial customers benefit from SADE s experience in this area. Description of activities in 2004 Veolia Water achieved solid revenue growth in 2004, despite weather conditions returning to normal in Europe and the reduction in revenues resulting from the restructuring of its activities in the United States (see above). Business was helped by a high level of contract renewal in France, sustained internal growth outside 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 witnessed 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 aiming 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 won in 2004, Veolia Water renewed more of its contracts due to expire in 2004 than it did in 2003 (based on 2004 revenues), thereby demonstrating the confidence of public authorities in its 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. 74

75 In the rest of Europe, growth was strong generally but especially in Germany, where at the end of 2004 Veolia Water acquired the water services company of Braunschweig (Lower Saxony), and otherwise pursued its development (either individually or through multiservices contracts signed with VE Industries). In the Czech Republic, Veolia Water signed a water management contract with the water company of Kladno-Melnik (Central Bohemia) and 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 about ten municipal contracts. It also won a contract that involves the 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. Veolia Water Systems design and construction activity for new installations made significant progress in 2004, notably in France, the Netherlands and Russia. Veolia Water Systems also enjoyed strong development in the area of construction and rehabilitation of urban and industrial networks, in particular in Romania and Hungary. The following table shows the principal contracts signed or renewed in 2004 with public authorities and industrial or commercial companies 1. Public authority or company and location thereof Month of signature of the contract New contract or renewal Contract maturity Estimated total cumulative revenue (in euros) Services to be provided France Public authorities City of Rennes January Renewal 10 years 150 million Production and distribution of water. City of Chartres September Renewal 10 years 85 million Production and distribution of water and management of wastewater treatment services. SIAEP Tremblaye Claye Souilly June Renewal 12 years 47 million Management of drinking water services. Europe (outside France) Public Authorities V.A.K. Zlin (Czech Republic) Compagnie des Eaux de Kladno-Melnik (Czech Republic) June New 30 years 360 million Production and distribution of drinking water, customer relations and wastewater collection and treatment on behalf of V.A.K. Zlin, the public water authority for the eastern part of Moravia. November New 20 years 600 million Production and distribution of drinking water, customer relations and wastewater collection and treatment. 1 Revenues expected under foreign contracts won in 2004 have been converted into euros at the rate of exchange prevailing on December 31, Accordingly, these amounts may differ from the amounts announced in earlier press releases. 75

76 Public authority or company and location thereof Month of signature of the contract New contract or renewal Contract maturity Estimated total cumulative revenue (in euros) Services to be provided Asia Public Authorities City of ZunYi (China) City of Hohhot (China) City of Weinan (China) May New 35 years 210 million Rehabilitation of ZunYi s two drinking water plants (600,000 inhabitants), in the province of Guizhou. October New 30 years 600 million Rehabilitation and operation of a drinking water production site, including a treatment plant and a well field. October New 22 years 190 million Rehabilitation and operation of a drinking water production site. North America Public Authorities Government of the U.S. Virgin Islands City of Richmond (California) March New 20 years 81 million Management of wastewater services for the islands of St. Thomas and St. Croix. October New 18 years 50 million Operation and reinforcement of wastewater networks. Acquisitions and disposals in 2004 In 2004, Veolia Water completed the implementation of its policy adopted in 2000 which aimed to refocus its operations on its core water businesses. In the United States, Veolia Environnement completed the sale of its Culligan business to private equity firm Clayton Dubilier & Rice for a total consideration of US$612 million in cash, as well as the sale of USFilter Corporation s equipment and short-term services businesses to Siemens for US$1,015 million (before price adjustments). Veolia Water s 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 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 Water s 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. Waste management Veolia Environnement, through its waste management division, Onyx, is 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. For instance, 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 authorities and industrial clients. With approximately 78,700 employees around the world, Onyx operates in 34 countries. Onyx partners with more than 348,000 industrial and commercial clients and serves nearly 50 million citizens on behalf of public authorities. 76

77 In 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 maturity of Onyx s waste management contracts usually depends on 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 (EBIT) before amortization and depreciation of goodwill and indefinite life tangible assets and restructuring costs of Veolia Environnement s waste management operations in each of the last three fiscal years, after elimination of all inter-company transactions. (in millions of euro)* (pro forma) Revenue 6,220 5,909 5,971 6,139 EBIT * Includes Veolia Environnement s share in the results of the waste management activities of Proactiva, Veolia Environnement s joint venture with FCC. Results of the 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 Environnement s interest in FCC. For the purposes of the 2003 pro forma figures, results of the activities of Proactiva were 50% consolidated. Overview of waste management Onyx provides 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 with a view to reducing pollution and transforming waste for the following uses: Onyx sorts and treats waste to create new primary materials, which is known as recycling or material recovery; Onyx transforms organic material into compost to be returned to the soil, which is known 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, which is known as waste-to-energy recovery. These services fall into the three categories of activity conducted by Onyx, which are respectively: 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). Onyx s 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. 77

78 In the commercial sector, Veolia Environnement 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 re-use 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 Onyx s 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 previous use. Onyx has developed 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. Collection: 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 Onyx s waste collection services in 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 delivers 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 to reintroducing such waste into the industrial production cycle. Onyx s 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 Veolia 78

79 Environnement s 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 re-using 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. Onyx s 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, saltwater 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 today s 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-l Agly in the eastern Pyrenees. Over 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. 79

80 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 public authorities and industrial or commercial companies 2. Public authority or company and location thereof France Month of signature of the contract New contract or renewal Contract maturity Estimated total cumulative revenue (in euros) Services to be provided Public Authorities Espira-de-l Agly June Commencement of activities Chatuzange Le Goubet SYCTOM of Paris and its suburbs Dunkerque (North) Sivom de la Rive Droite March Expansion of activities and extension of contract term 23 years 168 million Commencement in June 2004 of activities at a new class 2 landfilling facility in Espira-de-l Agly, near Perpignan (100,000 tons per year). 17 years 204 million Operation of a class 2 landfilling facility in Chatuzange Le Goubet (200, ,000 tons per year). July New 5 years 21 million Operation on behalf of the SYCTOM of Paris and its suburbs (89 districts, 5.5 million inhabitants) of a new sorting center for selective waste situated in Nanterre, Hauts-de- Seine (28,000 tons in 2004). July New 11 years 50 million Operation of an energy recovery plant in Dunkerque, which is currently being constructed (launch expected in 2007). September Renewal 5 years (plus a 2-year extension option) 25 million Waste collection in Bordeaux (involving 11 areas surrounding Bordeaux). La Rochelle October Renewal 8 years 32 million Operation of an energy recovery unit with a capacity of 63 kt/year. 2 Revenues expected under foreign contracts won in 2004 have been converted into euros at the rate of exchange prevailing on December 31, Accordingly, these amounts may differ from the amounts announced in earlier press releases. 80

81 Public authority or company and location thereof Companies Month of signature of the contract New contract or renewal Contract maturity Estimated total cumulative revenue (in euros) Services to be provided Plateforme du Batiment September Extension 3 years 18 million Installation of in situ disposal bins for collecting the hazardous and nonhazardous industrial waste of 22 stores. Europe (outside France) Public Authorities City of Sheffield (United Kingdom) October Extension 5 years 525 million Integrated waste management; collection, recycling and operation of existing energy recovery units, as well as construction of a new energy recovery unit. Companies BP (Germany) North America Public Authorities February and August New 5 years 46 million Contracts involving industrial maintenance and (very high) pressurized waste services and management, at sites in Cologne and Gelsenkirchen. City of Pontiac (United States) June New 20 years 185 million Collection and management of waste in voluntary drop-off centers, transfer and treatment of household and commercial waste in the city of Pontiac, Michigan. Miami-Dade County (United States) August Renewal 10 years (plus four 5-year renewal options) 1,085 million Operation of a wasteto-energy recovery plant (3,000 tons per day). 81

82 Public authority or company and location thereof Month of signature of the contract New contract or renewal Contract maturity Estimated total cumulative revenue (in euros) Services to be provided Companies Intel (United States, Ireland, Israel and China) September Renewal 5 years 50 million total (of which 37 million will come from the U.S.) Worldwide waste management contract, approximately 75% of which will involve activities in the U.S. Pfizer December New + Renewal 3 years 66 million Multi-site waste management contract (involving Connecticut, Michigan, Pennsylvania and Puerto Rico). BP (United States) July New 3 years 33 million Maintenance and cleaning of ten chemical and refining sites of British Petroleum (BP) located in eight different U.S. states. Asia Public Authorities Sydney (Australia) February New 5 years (plus a 2-year renewal option) 11 million Collection and recycling of household waste. Acquisitions and disposals in 2004 In 2004, changes in Onyx s group of companies (acquisitions and divestitures) were limited in number and impact, having no material effect on Onyx s consolidation scope. In total, net changes in the scope of consolidation accounted for less than 0.2% of Onyx s consolidated revenues. Energy services Dalkia, the energy services division of Veolia Environnement, 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 take advantage from opportunities relating to the opening of gas and electricity markets in Europe, as well as from the growing concern for sustainable development. Dalkia acts as 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 benefit from the trade in carbon dioxide emission licenses. With approximately 43,300 employees around the world, 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 who have the right to choose their electricity supplier freely, which currently includes all professional entities but not individuals). Dalkia s French operations are conducted through Dalkia France, a wholly-owned 82

83 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 (EBIT) before amortization and depreciation of goodwill and indefinite life intangible assets and restructuring costs of Veolia Environnement s energy services operations in each of the last three fiscal years, after elimination of all inter-company transactions. (in millions of euro) Revenue 5,036 4,654 4,571 EBIT Overview of energy services Dalkia s activity focuses on optimal energy management. Dalkia has progressively established a range of activities linked to energy management, including heating and cooling systems, thermal and multi-technical services, industrial utilities, installation and maintenance of production equipment, integrated facilities management and electrical services on public streets and roads. Dalkia provides energy management services to public and private clients with whom it forms long-term partnerships. Dalkia s 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. Whenever it is possible, Dalkia offers its clients solutions relying on 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 Dalkia is one of Europe s 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: 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 Dalkia s revenue in 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. 83

84 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 institution 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. In 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. Highlights include: in Italy, 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 over the entire period; 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. 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 Zuidpolder s building in Delft, the Netherlands. 84

85 The following table shows the principal contracts signed or renewed in 2004 with public authorities and industrial or commercial companies 1 : Public authority or company and location thereof Month of signature of the contract of renewal New contract or renewal Contract maturity Estimated total cumulative revenue (in euros) Services to be provided France Public Authorities CHU Nancy August Renewal 10 years 31 million Operation and management of thermal installations and climate engineering (P1, P2, P3) with integration of a co-generation unit (4 Mw). City of Montluçon October Renewal 20 years 62 million Delegated public service management of the heating networks of Fontbouillant, Bien Assis and Ville-Gozet in Montluçon (completion of a co-generation unit, involving renovation and return to compliance with applicable standards). Lyon-Villeurbanne October Renewal 25 years 500 million Concession of the heating and cooling networks of Lyon- Villeurbanne, third largest heating network in France. Companies Peugeot Citroen Automobiles SA January (effective date) New 10 years 46 million per year Production and distribution of energy and fluid, electricity distribution, management of specific technical equipment and maintenance of rail links. Europe (outside France) Public Authorities Stockholm (Sweden) March Renewal 4 years 3.5 million Technical maintenance of the infrastructure of the Stockholm metro. 1 Revenues expected under foreign contracts won in 2004 have been converted into euros at the rate of exchange prevailing on December 31, Accordingly, these amounts may differ from the amounts announced in earlier press releases. 85

86 Public authority or company and location thereof Month of signature of the contract of renewal New contract or renewal Contract maturity Estimated total cumulative revenue (in euros) Services to be provided Prince Charles Hospital (United Kingdom) City of Druskininkai (Lithuania) City of Brezno (Slovakia) January New 25 years 20 million Refurbishing of thermal installations at Prince Charles Hospital in Wales, including the installation of a new steam network and a new co-generation unit (500 KW). October New 30 years 110 million Concession of the city s heating network. March New 20 years 50 million Delegated management of the city s heating network. Lazio Region (Italy) October New 8 years 430 million Contract for energy and fluid management on behalf of 34 hospitals and other care facilities in Rome and its suburbs. Companies Jernhusen (Sweden) February New 5 years 25.5 million Technical maintenance of all buildings (stations, garages, other real estate) of Jernhusen, a company which manages the real estate of Swedish railway companies, located on approximately 20 sites in Stockholm, Göteborg, Malmö and Orebro. Richter Gedeon Rt (Hungary) March New 6 years 80 million Construction of a new co-generation unit and provision of steam to Richter Gedeon Rt, the Hungarian leader in pharmacy services, for its Köbanya site in Budapest. Heinz (United Kingdom) August New 15 years 18 million Energy management for Heinz s most important European canning unit located in Kitt Green, near Manchester. 86

87 Acquisitions and disposals in 2004 In the Czech Republic, Dalkia Morava and Ekoterm combined to form Dalkia Ceska Republika in February In the United Kingdom, Dalkia created Sterience Ltd., a company specialized in the provision of decontamination and sterilization services relating to medical equipment. In March, Dalkia acquired the heating and power station of Poznan (ZEP Poznan). In December, Citélum, Dalkia s subsidiary, created its first company in China (based in Shanghai) in partnership with the Oriental Pearl Group. In aggregate, 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. Transportation Veolia Environnement, through its transportation division, Connex, is one of the world s leading private operators of ground transportation. Connex operates road and rail passenger transportation networks under contracts 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 19 th 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 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 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 (EBIT) before amortization and depreciation of goodwill and indefinite life tangible assets and restructuring costs of Veolia Environnement s transportation operations in each of the last three fiscal years, after elimination of all inter-company transactions. (in millions of euro) Revenue 3,613 3,673 3,422 EBIT Overview of transportation Connex 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. The contracts that Connex has with public authorities define the relationships between the two parties, in particular Connex s compensation and the risks borne by each party, and typically last for a set period. Because the fares Connex charges to passengers on its transportation networks are usually insufficient to cover its costs, public authorities typically provide Connex with a payment or other form of compensation for the services being rendered. In some contracts, Connex is paid a flat fee for its transportation services; consequently, it does not bear the risks related 87

88 to lower receipts or decreased passenger use (such contracts are referred to as Public Market contracts in France). Connex s management contracts generally last from 2 to 12 years. Connex s 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. City transportation 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 the region. Connex also delivers specially integrated transportation services within networks managed by different operators in such urban areas as 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, for example in Toulon (France) and Göteborg (Sweden). 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 Ile-de-France, 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 Environnement s and FCC s transportation activities in Spain. Through this entity, Connex operates the Barcelona tramway and, since 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, 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. Complementary services: In certain cities Connex offers innovative transportation services that supplement traditional transportation networks. For instance, in France Connex offers Créabus, an on-demand minibus service that is tracked by a 88

89 Global Positioning System (GPS) and which it 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 areas in 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. Connex has also developed recently ferry transport services in areas such as Finnmark (Norway, since 2003) and Zeeland province (the 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 railway 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 Veolia Environnement s 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, Connex s 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 needed. 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. Industrial markets 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. Rail transport: Connex operates a number of regional freight trains in France under sub-contracts with SNCF, and delivers rail transportation services for long distance freight in Germany through its subsidiary Connex Cargo Logistics. After 89

90 the opening of the European rail freight market to competition, Connex obtained its operator license and security certificate in France in 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. Airport services: 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 run 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 Environnement s existing client network. It will focus in particular on those industrial market activities that may enrich the Group s offerings and constitute a growth area for Connex. Description of activities in 2004 In 2004, Connex won several contracts in the course of its expansion. Highlights include: in Australia, the 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 over a 5-year period; in Germany, following Connex s award in 2003 of a public tender to operate Germany s 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 over 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 over a 5-year period. This marks the second contract (after Boston) that Connex has taken over from Amtrak, the previous operator; in France, Connex was selected to manage the transportation network of Toulouse in 2005 (contract expected to generate total revenues of approximately 54 million euros over a 6-month period), which marks the largest city contract won by Connex in France since the one involving St. Etienne in 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 those in Nice, Toulon, St. Etienne and Chambéry. No significant contracts were lost. However, Connex s results in Scandinavia in 2004 were disappointing, 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 In 2004 Connex pursued growth outside France by developing a presence in Canada and, at the end of the year, in Switzerland. 90

91 The following table shows the principal contracts signed or renewed in 2004 with public authorities and industrial or commercial companies 1. Public authority or company and location thereof Month of signature of the contract New contract or renewal Contract maturity Estimated total cumulative revenue (in euros) Services to be provided France Nice June Renewal 7 years 595 million Operation of urban network (tram and bus) for the community of Nice Cote d Azur. Toulon June Renewal 8 years 314 million Operation of urban network (tram and bus) for the community of Toulon Provence Méditerranée. Saint Etienne July Renewal 8 years 345 million Operation of urban network (tram and bus) for Saint Etienne. Chambéry December Renewal 6 years 156 million Operation of urban network (bus) for Chambéry Métropole. Toulouse December New 6 months (firm commitment) months possible 54 million (for 6 months) Operation of urban network (bus and metro) for the Syndicat Mixte des Transports Toulousains. Ille et Vilaine October Renewal years 52 million Operation of intercity lines in the department of Ille et Vilaine. Europe (outside France) Germany March New 12 years 402 million Rail contract in the Nordharz region. Netherlands December New 6 years 210 million Operation of regional and urban bus services in the region of Apeldoorn, located in the province of Gelderland. Finland May New 6 years 55 million Management of 12 bus lines, 62 buses and 130 drivers in the city of Vantaa. Germany May New 10 years 70 million Operation of regional trains in Brandenburg. 1 Revenues expected under foreign contracts won in 2004 have been converted into euros at the rate of exchange prevailing on December 31, Accordingly, these amounts may differ from the amounts announced in earlier press releases. 91

92 Public authority or company and location thereof Month of signature of the contract New contract or renewal Contract maturity Estimated total cumulative revenue (in euros) Services to be provided Sweden May New 9 years 92 million Operation of an urban transport network in the city of Vaxjo and an intercity network in Kronoberg county. North America Denver June New 3 years (plus a 2-year renewal option) Los Angeles November New 5 years (plus a 5-year renewal option) Asia 22 million (for 3 years) 70 million (for 5 years) Operation of a bus network in Denver. Metrolink: Operation of a rail network in the suburbs of Los Angeles. Australia February Renewal and expansion 5 years billion Operation of the entire suburban rail network of Melbourne. New Zealand March New 4 years 28 million Operation of suburban trains of Auckland. Acquisitions and disposals 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 Connex s first Canadian presence. During the same month, 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 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 aggregate, over the course of 2004, Connex created or purchased 49 companies, merged 23 companies, sold 3 companies and liquidated 1 company. As a result, at December 31, 2004, Connex held 429 consolidated companies (compared to 407 in 2003). Development of synergies: multiservice contracts with industrial and commercial clients The outsourcing and multiservices market Veolia Environnement believes that its position in the environmental services market for industrial and commercial customers has allowed it to take advantage of the synergies that exist among its 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 Veolia Environnement s businesses, including energy services, water services, waste management services and the on-site management of rail junctions. 92

93 Veolia Environnement offers a multiservices alternative to its customers, which involves the provision of services by several of its divisions under a single contract. This allows Veolia Environnement 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. Veolia Environnement s largest multiservices contract, signed in 2003 with Peugeot Citroën Automobile, provides a good illustration of the synergies that can be achieved. Société d Environnement et de Services de l Est, the subsidiary created to service this contract, manages all of the environmental services at Peugeot s sites in Sochaux, Mulhouse and Vesoul, involving more than twenty different activities. By delegating such a broad range of activities to Veolia Environnement, 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. Veolia Environnement s organization for the provision of multiservices To develop this multiservices activity, Veolia Environnement has established a specific organization, VE Industries ( VEI ), in charge of coordinating its various activities. While VEI plays a coordinating role, each of Veolia Environnement s divisions remains responsible for the ultimate performance of services falling within its expertise. VEI prepares Veolia Environnement s bids for multiservice contracts, with a project manager from VEI appointed for each multiservices contract. Commercial projects and bids are prepared in coordination with Veolia Environnement s divisions, and are then submitted to an investment committee before their submission to clients. Later, contract performance is often entrusted to an ad hoc entity formed by the divisions involved in the project, particularly when Veolia Environnement decides to rely on the working force of its client. Each division participates in the share capital of the relevant entity and consolidates its revenues (and other financial items relating to its income statement and balance sheet) to the extent of its share in the services provided under the contract. Veolia Environnement has created a reporting body to track the performance of these ad hoc entities. Multiservices contracts The demand for multiservices contracts in 2004 was the strongest outside France, in particular in Germany and the United Kingdom. Veolia Environnement entered into the following multiservices contracts in 2004: Company Location Month of signature of the contract Contract maturity Estimated total cumulative revenue (in euros) Services to be provided VISTEON Deutschland GmbH Düren (Germany) March 10 years 60 million Management of energy services, industrial fluids, water cycle, industrial waste, metallic residue, industrial cleaning and chemical products at VISTEON s production site, management and maintenance of industrial and administrative buildings. Corus Packaging Plus Trostre (United Kingdom) October 10 years 78 million Management and optimization of Corus existing effluent treatment plant; construction, operation and maintenance of a new boiler facility; provision of on-site waste management services. 93

94 Significant new products Due to the specificity of Veolia Environnement s main business, that is the provision of environmental management services, the company has not developed other significant new services than those described in this document. Other information relating to Veolia Environnement s business Competition 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 Veolia Environnement s markets is based primarily on the quality of products and services, reliability, customer service, financial strength, technology, price, reputation and experience. Additional considerations include the ability to adapt to changing legal and regulatory environments, as well as the ability to manage employees accustomed to working for governmental authorities or non-outsourced divisions of industrial or commercial enterprises. In each of the markets in which Veolia Environnement operates, its competitive strengths are its high level of technological and technical expertise, its financial position, its geographical reach and its experience in providing the relevant services, managing privatized and outsourced employees and meeting regulatory requirements. As regards the services to the industry, Veolia Environnement s 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. Veolia Environnement anticipates that other firms competing with it in individual sectors will, in the coming years, seek to expand their activities to become integrated environmental management services providers. With respect 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 trend remains 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 built to support the provision of comprehensive environmental services often reverts back to the client at the end of a contract s 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 truly competitive presence in the market. Water Veolia Environnement s 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 recently entered the market for services to industrial companies by consolidating all of its acquisitions in the water services sector into a single business unit. Veolia Environnement has a number of local competitors both at national and regional levels, particularly coming from 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 to conduct water activities. In addition, Veolia Environnement faces competition from newly emerging competitors, public institutions and local mixed publicprivate companies. Waste management Veolia Environnement s principal competitors in the waste management sector are either solely regional, or they cover only part of the sector in which Onyx operates. In Europe, where Onyx conducts the majority of its activities, the principal competitor is Suez, acting through its subsidiary SITA. 94

95 Onyx has taken significant steps towards consolidating its market position in North America, where its principal competitor is Waste Management. In Latin America, Onyx s operations are concentrated in Brazil and Mexico, where it primarily competes with Suez and a variety of local companies. In the Asia/Pacific region, Onyx s main competitors are Cleanaway and Suez (acting through SITA), as well as various local companies. Energy services The energy services market has many actors and therefore Veolia Environnement faces very dispersed competition. Veolia Environnement believes that the only three companies with a strong international presence and a diversified and complete range of services similar to its own are Suez (Elyo), RWE and Cofatech (GDF). Transportation Veolia Environnement s 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 SNCF as an industrial partner and shareholder but also witnessed in 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), Deutsche Bahn (the national rail operator in Germany) and the British groups Arriva, First Group, National Express (the Australian activities of which were acquired by Connex in 2004), Go Ahead and Stagecoach. In North America, transport company MV has adopted an aggressive pricing strategy that now positions it as a competitor, along with Connex s historical competitors in the market which 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, Amtrak s persistent budget difficulties could pave the way to further delegated private management. In Asia, Veolia Environnement anticipates that groups in China and Singapore may in the long-term become new competitors in an increasingly dynamic transportation market. Contracts Veolia Environnement provides its services either directly to the customer who requests them for example, under an outsourcing agreement Veolia Environnement has with a public authority or industrial or commercial company or indirectly on behalf of the customer for the benefit of a third party for example, in connection with the delegated public service management of a drinking water production and distribution service. The services that Veolia Environnement provides are often vast and multi-functional, requiring adequate employee infrastructure and specialized resources. They may also require the management of works or infrastructure that are technically complex, for example a wastewater treatment network and purification plant. These works or infrastructure may either be provided by the client, or financed and built by Veolia Environnement itself. The services to the public which are provided by Veolia Environnement on behalf of public authorities include water distribution, wastewater treatment, household waste collection and treatment, public transportation and energy services. In numerous countries, the provision of these services, often referred to as general economic interest or public services, is considered to be the responsibility of the local public authority. Accordingly, the public authority is not only in charge of implementing regulations and controls over the services being delivered, but it must also involve itself in their management, through one of the following means. A public authority may first decide to manage a public service on its own (which is known as direct or internal management), thereby limiting the number of projects granted to private operators like Veolia Environnement. But it may also decide to confer on a third party the entire responsibility for providing the relevant service, in which case the latter, depending on the specifications of the contract, will become responsible for providing the human resources, materials and finances necessary for such service. The public authority may also request the third party to finance and build any required infrastructure under the contract. Third parties to whom the public authority resorts may be either private operators, mixed public-private companies or other public entities. 95

96 Based on the different ways in which public authorities choose to manage their public services, Veolia Environnement has developed various types of contracts to respond to their specific requirements. The contracts Veolia Environnement uses generally fall into one of the two following categories, depending on whether Veolia Environnement is entrusted with full responsibility for the operation of the service and whether Veolia Environnement has a financial and commercial relationship with end users. A public authority may choose to retain the management of a public service (direct management), but its resources are limited and it must rely on a private operator, to whom it pays a set price, to provide certain services or perform certain tasks (including the construction and operation of infrastructure, and the financing thereof). These contracts are known as public market contracts, BOT (Build, Operate, Transfer) contracts (for example, a contract for building, financing and operating a water purification plant) and partnership contracts. Alternatively, a public authority may decide to delegate the management of a full public service to a private operator, who assumes all or part of the operational risks related to the service. Generally, the service is financed by the end users who pay for it. The contractor is thus free to operate the service, but it must do so in accordance with the terms set by the public authority (e.g., in respect of expected performances and prices charged to end users). This is the logic of delegated management, concession and BOO (Build, Own, Operate) contracts, whereby the entity assuming the management of a public service also assumes the risks and perils of the service, to the extent that its compensation is substantially a function of its operating results. Veolia Environnement uses both types of contracts, but it should be noted that the type of contract Veolia Environnement generally uses in a given instance does not in itself determine the specific conditions (e.g., as to tariffs) under which it will provide its services. Moreover, these contracts are subject to various nuances. Under Veolia Environnement s delegated public service management contracts, for example, even though Veolia Environnement is generally paid by the end users of the service, it sometimes receives compensation by the public authority as well. This may the case, for instance, where a management contract 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 Veolia Environnement operates tend to favor one of the above-mentioned general types of contract 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, though, France has adopted a new ordonnance (dated June 17, 2004) which permits the development of partnership contracts. This new legal form of contract allows a public authority to entrust a private operator with the full management of public services, including construction and financing. The private operator is compensated by the public authority on the basis of various agreed upon performances. Contractual practices in the various countries have tended to converge over time, with public authorities resorting to one or the other type of contract depending on the situation. However, all contracts have, in most cases, the common feature of being long-term agreements. Veolia Environnement also enters into outsourcing contracts for the management of complex services with industrial and commercial clients. These contracts are analogous to the contracts made with public authorities. Despite differences related to the nature of clients, the services contracted for and the nature of the legal systems in which Veolia Environnement operates, it should be noted that the expectations of Veolia Environnement s clients tend to converge towards (i) more transparency during the bid process and contract performance, (ii) the formation of a real partnership in search of ways to improve productivity and performance, and (iii) clear performance targets and variable compensation depending on achievement. Veolia Environnement watches closely its contractual provisions, in particular when it must finance investments. Given the complexity of management agreements and their generally longer term, Veolia Environnement has developed skills in contract analysis and control. The legal departments of Veolia Environnement s divisions are involved in the preparation of contracts, and controls are imposed on the implementation of Veolia Environnement s main contracts. Each year, Veolia Environnement s internal audit department includes a review of the contractual and financial stakes of Veolia Environnement s most significant contracts in its annual program. 96

97 Research and development Veolia Environnement must make continuous efforts to adapt its 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 Veolia Environnement, to which it has devoted greater resources in all segments of its business. Veolia Environnement s research and development activities are coordinated by its research, development and technology ( research ) department. In 2004, this department consisted of nearly 600 employees worldwide with a total annual budget of 98 million. Veolia Environnement s 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, Veolia Environnement seeks to preserve its technological advances through constant improvement in its operating performance. Research and development efforts that successfully achieve the foregoing enable Veolia Environnement both to extend its service offering to clients and to reduce the cost of providing such services. Veolia Environnement has 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.), material recovery and the 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 (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. Veolia Environnement established an international research and development correspondent network in 2003 to supplement the work of its research centers. This network enables Veolia Environnement to identify and analyze specific local needs in terms of technical development and innovation, and constitutes a forum for exchange among Veolia Environnement s research department, area universities and research organizations. This network also facilitates the circulation throughout the world of studies conducted by Veolia Environnement s research department. In addition to the research centers mentioned above, Veolia Environnement has also created research units in connection with specific contracts that further highlight Veolia Environnement s technical expertise. For example, Veolia Environnement provides 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 for information relating to the protection of water resources. Veolia Environnement s 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 Veolia Environnement s health department. In the health and sanitary safety field, Veolia Environnement finds answers to the new risks it faces 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 Veolia Environnement s 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 legionnaire s disease. The health department is also a recognized partner for public health bodies and institutions such as the Institut de Veille Sanitaire, Direction Générale de la Santé, AFSSE or INSERM. 97

98 Veolia Environnement s research department also focuses on the protection of the environment. A specific environmental department assesses the environmental impact of Veolia Environnement s activities and steers Veolia Environnement s environmental management system. It prepares the follow-up, monitoring and reporting procedures of the Group s environmental data and contributes to the preparation of the Group s commercial offers. A network of information experts within the research department manages the Group s scientific and technical information and places tools at employees disposal for technical, competitive and regulatory monitoring. In the area of energy services in particular, Veolia Environnement conducted research and development activities aimed at developing tools that enable Dalkia to adapt to new market conditions, and generally improve the performance of existing installations. Moreover, Veolia Environnement s 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 set up 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, Veolia Environnement s research teams are seeking to optimize the conditions of waste biodegradation through the 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. In the area of water, research efforts have focused in particular on the protection of water resources. For example, Veolia Environnement is 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 expand Veolia Environnement s experience in this field as well as the array of technologies Veolia Environnement is 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 Veolia Environnement s research and development efforts. Efforts relate to all types 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 Veolia Environnement 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. Veolia Environnement s 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 Veolia Environnement to achieve operating developments that expand Veolia Environnement s service offerings and anticipate required technical improvements. 98

99 Environmental regulation, policies and compliance Environmental regulation Veolia Environnement s businesses are subject to extensive, evolving and increasingly stringent environmental regulations in developing countries as well as in the European Union and North America. Water Water and wastewater services activities are highly sensitive to governmental regulation. In Europe and North America, governments have enacted significant environmental laws at the national and local level in response to public concern over the environment. The quality of drinking water and the treatment of wastewater are increasingly subject to regulation in developing countries as well, both in urban and rural areas. 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 used for human consumption, which was transposed into French law by decree on December 20, This directive introduces, beyond quality control, the concept of evaluating risks on an ongoing basis, as such risks may 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 the water Directive 2000/60/CE of October 23, Public authorities also impose strict regulations on 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 the release of certain substances in the 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. Waste management In numerous countries, waste treatment facilities are subject to laws and regulations that require Veolia Environnement to obtain permits to operate most of its facilities from governmental authorities. The permitting process requires Veolia Environnement to complete environmental and health impact studies and risk assessments with respect to the relevant facility. Operators of landfills must provide specific financial guarantees (which typically take the form of bank guarantees) that cover in particular the monitoring and recovery of the site during, and up to, 30 years after its operation. In addition, landfills must comply with a number of standards and incineration plants are usually subject to rules that limit the emission of pollutants. Waste may also be subject to various regulations depending on the type of waste. For example, the sludge produced at wastewater treatment stations that will be composted must comply with strict regulations relating to its content in terms of organic materials and trace metals (heavy metals like cadmium, mercury or led). Further, the NFU standard, which was established in 2002 and is 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, several decrees and ministerial and administrative orders have set rules that apply to landfills for household, industrial, commercial and hazardous waste. These orders govern, among other things, the design and 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 limitations on the amount of pollutant emissions: for example, the directive 2000/76/CE of December 4, 2000 on the incineration of waste fixes emission thresholds for dioxins and NOX. 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, with a view to determining the actions that these operators will have to undertake to update their sites by the end of

100 At European Union level, the framework for waste management regulation is formed by directives that set overarching goals of waste prevention, collection, recycling and reuse. The EU 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 the directive 2003/87/CE of October 13, 2003, implemented a quota system for the emission of greenhouse gases. Veolia Environnement s waste management business is excluded from the first phase ( ) of this directive, but may be targeted subsequently, and as a result may establish procedures to reduce methane and carbon dioxide emissions. The major statutes governing Veolia Environnement s waste management activities in the United States include the Resource Conservation and Recovery Act of 1976, the Clean Water Act, the Toxic Substances Control Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (also known as CERCLA or Superfund ), and the Clean Air Act, all of which are administered either by the EPA or state agencies to which the EPA delegates enforcement powers. Each state in which Veolia Environnement operates also has its own laws and regulations governing the generation, collection and treatment of waste, including, in most cases, the design, operation, maintenance, closure and post-closure maintenance of landfills and other solid and hazardous waste management facilities. Energy services Veolia Environnement s energy-related activities in Europe (primarily the supply of thermal and independent energy) are subject to a European directive that sets 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. In some instances the use of gas and other combustible material in France is subject 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 comply with a number of environmental requirements at its sites of operation. In France, Dalkia must comply with 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. As regards the management of the risk of legionnaire s disease, the health ministry recommended in 1997 that health professionals and institution managers implement best practices for the maintenance of sanitary hot water networks, air conditioning systems and other installations at risk. Since then, these recommendations have been extended to all institutions that receive the public. In addition, the provisions relating to the control and maintenance of classified 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 the European Union directive 2001/80/CE of October 23, 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 used for human consumption. 18 states, including France, believe that the directive applies to cold and hot water and to all types of management systems for production and distribution. As regards the European Union directive 2003/87/CE of October 13, 2003 on quotas for the emission of greenhouse gases, Veolia Environnement s energy services have been affected and, for combustion installations of more than 20 MW, are part of the national plans for the allocation of quotas, which have been implemented since February Dalkia also has certain contractual obligations to limit greenhouse gas emissions. Finally, markets for the exchange of quotas allocated at European level are already functioning in certain countries such as the United Kingdom. 100

101 Transportation Veolia Environnement s transportation activities are subject to a number of national and European regulations and particularly European Union directives that limit the emissions from petrol and diesel engines and require Veolia Environnement to obtain certain permits. In the European Union, standards called EURO have been established for polluting emissions from thermal engines. All new vehicles currently manufactured in the European Union are in compliance with EURO 3 standards and Connex s 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 commited itself, with respect to its environmental management system, to lowering its overall emissions and preparing for the new standards by testing and experimenting 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, the activities of which 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. Environmental policies Veolia Environnement strives to contribute to the enhancement of the quality of life in places where it operates. As a worldwide leading provider of environmental services, Veolia Environnement has placed the challenges of sustainable development at the heart of its strategy. To this end, Veolia Environnement does not focus only on the preservation of the environment and the protection of natural resources, but also assumes its economic and social responsibilities, particularly at a local level where Veolia Environnement is committed to stimulating progress. Further information concerning Veolia Environnement s commitment to sustainable development is contained in its 2004 Sustainable Development Report. Preservation of ecological balances Whether through the limitation of water evaporation, the enhancement of the quality of its waste, the effort to optimize energy consumption in connection with its water distribution and treatment activities, the use of alternative energies in its heating operations, the recovery and treatment of biogas emissions at its landfills or the use of low-emission fuels in its fleet of public or private transport vehicles, Veolia Environnement gets involved in the main environmental problems currently affecting our planet by applying its know-how, technological capabilities and research potential to these problems. Veolia Environnement contributes to the enhancement of the quality of life and sanitary conditions of local populations in its day-to-day operations. For example, by supplying drinking water to impoverished areas Veolia Environnement helps to reduce infant mortality. In developed countries Veolia Environnement runs programs to protect against the risk of legionella in public or industrial facilities, thereby improving public sanitation. Preservation of economic and social balances Veolia Environnement also considers the economic and social factors that underlie the course of development in the countries in which it operates, and it works to develop solutions that fit local constraints and know-how transfers. For example, Veolia Environnement has developed integration strategies in Shanghai, Prague and Gabon, that have allowed its employees locally to better understand the challenges in the provision of water services. Veolia Environnement gives some 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 allows for the development of model plans that can be reproduced. In each of its projects, Veolia Environnement seeks to create a beneficial and educational dimension for the improvement of public health and the protection of the environment. Moreover, Veolia Environnement participates in an initiative for developing a charter on public-private partnerships and access of the public to essential services, which is supported by the French Ministry of Foreign Affairs and pursued by several agencies of the United Nations. Veolia Environnement 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 its commitment thereto at the World Urban Forum held in Barcelona in September This initiative forms part of the United Nations Millenium Development Goals, 101

102 which were announced in 2000 by the U.N. Secretary General. The initiative purports to define the role of private operators with respect to local public service management, while emphasizing the principles of transparency and the sharing of technology and know-how, principles to which Veolia Environnement already adheres in connection with its adherence to the U.N. Global Compact. At the World Urban Forum in Barcelona, Veolia Environnement also shared some of its concrete experience in assisting development around the world. Veolia Environnement often does so in partnership with experienced international organizations, in areas where its operational know-how is able to contribute high added value. In Morocco for example, Veolia Environnement has 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 fight against 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, Veolia Environnement s urgent humanitarian intervention group. The two focal points will be the 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 institutions whose needs have been identified as urgent. Acting in tandem with Veolia Water Force, Waterdev is the expression of Veolia Environnement s will to go beyond urgent conditions and enter into developmental activities. Its purpose is to share experience 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 help the victims of the tsunami that devastated populations in Southeast Asia on December 26, More than 36 tons of supplies were sent to the Maldives, Indonesia and Sri Lanka. Hundreds of employees volunteered to help respond to the crisis both on-site and through the provision of logistics. More than 30 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. Veolia Environnement s efforts were financed by its divisions, by its 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 Veolia Environnement participated in a partnership to protect the Antarctic region through its cooperation agreement with Institut Paul-Émile-Victor (IPEV), an entity that manages the French presence on this continent. This agreement, signed on 10 July 2003, relates to the analysis of the environmental impact of research bases on polar environments. It confirms Veolia Environnement s 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, Veolia Environnement created the Veolia Environnement Institute in 2001 to encourage prospective reflection on a number of issues relating to sustainable development, and to shed light progressively on the principal trends that will influence the provision of environmental services over the next decade. Through its Prospects Committee, which is exclusively composed of individuals of international reputation and standing, the institute benefits from the contribution of leading external expertise on different key subjects (including public health, economy and human sciences) while maintaining a presence in the daily realities of Veolia Environnement s different activities. This dual capability represents both the originality and the strength of the Veolia Environnement Institute, which intends to be at the heart of the main environmental debates and issues of the 21 st century. The main themes to be considered by the institute in 2005, which are defined by the members of the Prospects Committee, include the relationship between health and the environment, the consequences of climatic change, urban growth and the sociological and economic dimensions of environmental change. 102

103 As of today, the members of the Veolia Environnement Institute s Prospects Committee are: Amartya Sen (India), economist, winner of the Nobel Prize for Economics in 1998, professor of political economics and economics at Lamont University and professor of philosophy at Harvard University; Hélène Ahrweiler, historian, president of the University of Europe and an expert for UNESCO on human and social sciences; Philippe Kourilsky, biologist, chairman of the Pasteur Institute in Paris, France, research director at the Centre national 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), chairman of the Institute of Medicine of the United States. Intellectual property Veolia Environnement currently owns a significant number of patents and trademarks in France and other countries around the world that are of value to Veolia Environnement s business. However, Veolia Environnement believes that the diversity of its patents and trademarks does not make any of its activities dependent on any one of these patents or trademarks individually. Marketing Veolia Environnement markets its products and services by continuously offering to provide a more comprehensive range of environmental services to clients. The Company often sells its products and services by responding to requests for proposal. These may be highly regulated events when it comes to a public authority conducting a public bid tender, but generally Veolia Environnement is able in such situations to take advantage of its reputation and know-how and propose a solution that is best adapted to the client s needs. In the absence of a formal bidding procedure, which is generally the rule for commercial clients, Veolia Environnement analyzes the environmental service needs of prospective clients and demonstrates to them how Veolia Environnement s services could improve the efficiency of their operations. Seasonality Because of the diverse nature of Veolia Environnement s operations and its worldwide presence, Veolia Environnement s business is typically not subject to material seasonal variations. Veolia Environnement s 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. Raw materials Veolia Environnement purchases raw materials on a worldwide basis from numerous suppliers. Veolia Environnement seeks to accumulate and maintain a reserve inventory of raw materials and supplies, qualify new suppliers, and develop production processes in its own facilities. Veolia Environnement undertakes to secure the supply of strategic materials through mid and long-term contracts. It has not experienced difficulties in obtaining sufficient amounts of raw materials and supplies in the recent years and it does not have any reason to anticipate any material difficulties in the future. However, the price of raw materials and supplies may vary substantially. Fuel prices for instance have increased recently, and Veolia Environnement cannot anticipate the evolution of these prices in the future. Historically Veolia Environnement s operations 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 Veolia Environnement s contracts typically contain price adjustment and/or indexing provisions designed to compensate Veolia Environnement for increases in the cost of providing its services, which enables the Company to pass along a portion of the rise in energy or raw material prices to clients (subject to a possible time period in which the Company has 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, Veolia Environnement is entitled to full compensation in the event of rising fuel prices. In the waste management division, collection services involving non-hazardous solid and liquid waste are the most sensitive to fluctuations in fuel prices. However, for clients that have contracts with Veolia Environnement, 103

104 indexing clauses in those contracts generally allow the Company to pass along a good portion of its increase in such costs in the prices it charges to clients. For clients not bound by contract, increases in fuel costs are either fully or partially passed along to 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 Veolia Environnement s use of indexing clauses in its contracts. Veolia Environnement intends to develop the skills necessary to manage and optimize its gas supplies within the new market environment. Insurance Insurance renewals as of January 1, 2004 were characterized by (i) the underwriting by Codeve Insurance Company Limited, Veolia Environnement s consolidated insurance subsidiary, of underlying contracts for property damage and civil liability beginning on January 1, 2004, in continuation of the Group s 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) recognition by the Company that a reduced number of insurers are 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). Veolia Environnement s insurance programs covering property damage/business interruption, comprehensive general liability and environmental impairment liability have been renewed at the same limits and primary coverage as in the previous year. Veolia Environnement s policy for insurance policies across its operating divisions consists of: maintaining common insurance policies to establish a consistent risk transfer policy and maximize economies of scale, while taking into account the specificities of Veolia Environnement s businesses and legal or contractual constraints; optimizing the thresholds and the means for accessing the insurance or reinsurance markets through the use of varying deductibles or acceptance of a primary layer of retention through Codeve Insurance Company Limited; and tailoring insurance coverage to meet Veolia Environnement s contractual obligations, which are often triggered through its participation in public bid tenders. Veolia Environnement s role with respect to insurance procurement is to (i) establish an insurance procurement policy to cover Veolia Environnement s activities, based on the needs expressed by its subsidiaries in particular, (ii) select and sign contracts with outside providers (brokers, insurers, loss adjusters, etc.), (iii) monitor claims that impact second-line insurance coverage, (iv) manage consolidated subsidiaries specializing in insurance or reinsurance coverage, (v) lead and coordinate the network of insurance managers present among Veolia Environnement s principal subsidiaries, and (vi) prepare and deliver an annual report on insurance activities. The implementation of an insurance procurement policy aimed at covering risk is effected in coordination with Veolia Environnement s global risk management process. Implementation is affected by insurers willingness to cover risks related to Veolia Environnement s 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, Veolia Environnement undertook actions principally related to: the determination of retention levels on the basis of the divisions knowledge of their risks and loss history, an assessment of the costs and coverage proposed by insurers, as well as contractual obligations that sometimes require Veolia Environnement s 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 Veolia Environnement s most important facilities; the reinforcement of its information process for the insurance and reinsurance markets; 104

105 the opening of insurance coverage to competitive bidding or the renegotiation of contracts, in particular relating to its civil and pollution liability coverage; a review of major past claims of the Company and of the insurance limits relating to civil liability; and extending the adoption of its coverage to the greatest number of subsidiaries. A general rule, Veolia Environnement purchases insurance policies only from insurers and reinsurers who have at least an A credit rating. As of January 1, 2003, Veolia Environnement 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 Veolia Environnement s 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 $50 million. An underlying general liability policy agreement insures Veolia Environnement s non-north American subsidiaries for up to 50 million per claim with an annual ceiling of 100 million. Veolia Environnement s subsidiaries outside the United States and Canada are insured in excess of 1.5 million through local policies, except for railroad activities ( 8 million attachment point), sea transportation and Veolia Water Systems ( 10 million). Veolia Environnement s North American business units are responsible for purchasing US$ 50 million in insurance coverage. This program was renewed on January 1, 2004 for an 18-month period. Veolia Environnement also maintains various environmental impairment liability insurance policies that provide coverage to its 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. Veolia Environnement s excess general liability policies described above also cover third party claims resulting from sudden and accidental events. In light of the difficulties encountered in the insurance market, Veolia Environnement covers motor liability risks relating to the vehicles used in its 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. For any insured claim or loss, Veolia Environnement remains liable for the deductible amount. Veolia Environnement s deductibles for property damage policies range from 50,000 to more than 1 million, while the main deductible under Veolia Environnement s general liability policies is between 30,000 and US$2 million. Veolia Environnement s consolidated insurance subsidiary, Codeve Insurance Company Limited, has underwritten: from 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 from July 1, 2004, underlying contracts for 1.5 million per civil liability claim and environmental liability claim. Codeve Insurance Company Limited also underwrote a quota-share of insurance contracts relating to construction projects in which one of Veolia Environnement s subsidiaries was acting as lead. The consolidated insurance subsidiary s portfolio of risks involves all aspects of Veolia Environnement s 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, there is an annual stop-loss of 5 million, occurring after the exhaustion of the 10 million total annual claims limit borne by the insurance subsidiary, which is triggered by claims greater than 30,000 in civil liability or the original deductible if the latter is higher. 105

106 Veolia Environnement s 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 Veolia Environnement s property damage coverage and general liability policies issued by French insurers. 100% of the quota-share reinsurances accepted have been retroceded, enabling Veolia Environnement 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) are protected by a stop-loss for Codeve Insurance Company Limited as described above. Legal and arbitration proceedings Compagnie Générale des Eaux On February 27, 2001, the French Competition Council (Conseil de la concurrence) notified Compagnie Générale des Eaux of a complaint alleging that several joint ventures that it had formed with other water services companies affected the level of competition in the market. On July 11, 2002, the Council rejected the allegations of anticompetitive cooperation (entente anticoncurrentielle) among the water services companies in question and refused to impose monetary sanctions or issue an injunction against these companies. However, the Council found that the existence of the joint ventures constituted a collective dominant position in the market and requested the French Ministry of Economy, Finance and Industry to take all necessary measures to modify, complete or terminate the pooling of means arrangement of these companies through their joint ventures. Compagnie Générale des Eaux contested this finding, first before the relevant judicial authorities, which declared that they did not have jurisdiction over the matter (decision dated July 12, 2004 of the commercial section of the French Supreme Court (Cour de cassation), and then before the relevant administrative authorities (action currently pending before the French Conseil d Etat). In light of the nature of the litigation, Veolia Environnement has not accrued a reserve for its potential outcome. SADE In April 2000, SADE, a subsidiary of Veolia Water, and 40 other companies received notice from the French Competition Council of a complaint alleging anticompetitive agreements (entente anticoncurrentielle) among these companies in respect of public bids for 44 public sector construction contracts in the Ile-de-France department, which includes Paris and its suburbs. These companies, including SADE, filed answers to the complaint in September The Council filed a supplemental complaint in November 2001, which replaced its original complaint and reduced the number of construction contracts subject to scrutiny to 32 contracts. The companies filed an answer to the new complaint in January However, on October 26, 2004, the Council filed a second supplemental complaint, the stated objective of which was to clarify and supplement the information contained in the earlier complaints. SADE, which was implicated with respect to 9 contracts in the complaint, filed a response in January 2005 that contested the Council s complaint on the merits and on the basis of irregularities in the complaint procedure that affected its right of defense. On June 9, 2005, the Competition Council retained against SADE the objection of exchange of information for only one contract awarded to a competitor, and condemned SADE to pay a 5 millions euros fine. SADE filed a notice of appeal against this decision before the Paris Appeal Court. OTV At the end of 1993, NOSS, a consortium led by Northwest Water International Limited in which Veolia Water participates through its subsidiary Omnium de Traitement et Valorisation, or OTV, won a contract to build a water treatment facility and a wastewater collection network in the city of Bangkok pursuant to an offer made in a public tender held in The value of the contract at the time was 150 million pounds sterling and required 38 months of public works. Because of numerous difficulties encountered with Bangkok municipal authorities (including, for example, restrictions on access to key sites and modifications of project specifications) and the failure to agree on compensation during the ensuing discussions, NOSS terminated the contract on March 6, 1998 and commenced an arbitration proceeding for damages. The Bangkok municipal authorities rescinded the contract in June 1999 and drew on the project guarantees, which were partially paid by the issuer banks. In addition, all related outsourcing contracts were terminated by mutual consent, except for a contract with Euro Iseki Limited, or EIOL, which commenced its own arbitration proceeding against NOSS. The dispute between EIOL and NOSS has been settled, at no cost to OTV. Regarding the claim against the city of Bangkok, Veolia Environnement does not expect that a final award will be rendered in this proceeding for several years, as arbitrators are still in the process of being appointed. Although OTV is jointly and severally liable with the other 106

107 members of the NOSS consortium in respect of any monetary damages that may be awarded to the other parties in these proceedings, it does not believe, given the current stance taken by the city of Bangkok, that this litigation will have a material adverse effect on the Company. Nevertheless, OTV has accrued a reserve for its potential outcome. Water Applications & Systems Corporation and Aqua Alliance International Several present and former indirect subsidiaries of Veolia Water in the United States 1 are defendants in lawsuits in the United States in which the plaintiffs seek to recover for personal injury and other damages for alleged exposure to asbestos, silica and other potentially harmful substances. Regarding the lawsuits against Veolia Water s former subsidiaries, certain of Veolia Water s current subsidiaries have retained all liability relating thereto and are sometimes involved in the management of such lawsuits. Further, the purchasers of Veolia Water s former subsidiaries in some instances benefit from guarantees given by Veolia Water or by the Company in respect of the outcome of such lawsuits. These lawsuits typically allege that the plaintiffs injuries resulted from the use of products manufactured or sold by Veolia Water s present or former subsidiaries or their predecessors. There are generally numerous other defendants, in addition to Veolia Water s present or former subsidiaries, which allegedly contributed to the claimed injuries. Reserves have been accrued by Veolia Water s present subsidiaries for their estimated liability in these cases based on, among other things, the nexus between the claimed injuries and the products manufactured or sold by Veolia Water s subsidiaries or their predecessors, the extent of the injuries allegedly sustained by the plaintiffs, the involvement of other defendants, and the availability of insurance coverage. These reserves are accrued at the time such liabilities are probable and reasonably estimable. A number of such claims have been resolved to date either through settlement or dismissal. To date, none of these claims has been tried to a verdict. Veolia Environnement does not expect these claims to have a material adverse effect on its business, financial condition or results of operation. It is not possible, however, to predict the extent to which additional claims of this type may be filed in the future against Veolia Water s present or former subsidiaries or the amounts for which Veolia Water s present or former subsidiaries ultimately may be liable as a result of such claims. Connex On November 27, 1998, the French General Direction for Consumers, Competition and the Prevention of Fraud, or DGCCRF, obtained an order from a French court authorizing it to perform an inspection on the premises of Veolia Environnement s transportation subsidiary CGEA Transport (now Connex) and other companies in the public transportation market, with the objective of obtaining elements of proof relating to possible anticompetitive practices in this market. The DGCCRF proceeded to perform these inspections and seizures in Connex was informed in February 2003 that the Ministry of Economy, Finance and Industry had requested the French Competition Council to render a decision in this matter on the merits. In September 2003, the French Competition Council notified Connex of two grievances that raised the possibility, between 1994 and 1999, of collusion among operators which might have had the effect of limiting competition at the local and national level in the public transportation market relating to urban, inter-urban and school services. In September 2004, the French Competition Council notified Connex of additional grievances alleging the existence of an anticompetitive agreement (entente anticoncurrentielle) at the European Union level. In January 2005, the judge advocate (rapporteur) of the French Competition Council transmitted his conclusions, in which a part of one of the grievances was dropped. On July 5, 2005, the Competition Council welcomed partially the DGCCRF s request and condemned Connex to pay a five millions euros fine. Connex has brought an appeal against this decision. Onyx Following a fire that started on July 25, 1997 in a landfill operated by Onyx Méditerranée, a subsidiary of Onyx, in Septèmes-les-Vallons, in the south of France, Onyx Méditerranée was ordered under a May 6, 2003 judgment of the criminal court (tribunal correctionnel) of Aix-en-Provence, and under a December 17, 2003 decision of the Court of Appeal of Aix-en-Provence, to pay a 100,000 fine for the involuntary destruction of property. The sanction was amnestied after payment of the fine. Furthermore, the tribunal ordered an expert review in respect of the claims for indemnification brought by civil parties relating primarily to the deterioration of woods and plantations. Veolia Environnement believes that such litigation will not have a material adverse effect on the 1 These include subsidiaries of Aqua Alliance and subsidiaries of Water Applications & Systems Corporation (formerly known as United States Filter Corporation), the holding company of the former USFilter group the majority of the activities of which were sold to different purchasers in 2003 and

108 financial condition of the Company in light of insurance coverage notably and, accordingly, has not accrued a reserve in respect of the potential outcome. Dalkia During 2004, arbitration proceedings between Finenergia, an Italian subsidiary of Dalkia, and members of the Jacorossi family were settled. The proceedings arose in connection with Finenergia s planned acquisition of the Fintermica group, which was never completed because due diligence conducted in respect of the Fintermica group proved unsatisfactory. The settlement puts a definitive end to the dispute, which represented one of Dalkia s greatest potential liabilities. Given the terms of the settlement and the tax position of Dalkia s Italian subsidiaries, as well as the reserves accrued in respect of this claim in prior fiscal years, the settlement did not have a material impact on the 2004 financial statements of these Italian subsidiaries. Proactiva On September 22, 1999 and February 10, 2000, several lawsuits were filed in the Commonwealth Court in Arecibo, Puerto Rico (transferred to San Juan, following the decision of the Supreme Court of Puerto Rico) against, among others, Compañía de Aguas de Puerto Rico, or CAPR. CAPR was a subsidiary of Aqua Alliance until 2000, when it was transferred to Proactiva, Veolia Environnement s joint venture with FCC. The complaints allege that CAPR operated (until June 2002) a wastewater treatment facility in Barceloneta, Puerto Rico, that emitted offensive odors and hazardous substances into the environment, which damaged the health of the plaintiffs, a group of local residents. On August 11, 2003, the Supreme Court of Puerto Rico overturned the order of the court of first instance authorizing the consolidation of the lawsuits of the different plaintiffs, leaving this question open to further debate. The lawsuit is currently in the preliminary stage of determining damages and responsibility. Concurrently, a mediation proceeding commenced on May 28, 2003, at the request of the court and all parties, in order to find a complete solution to this litigation. This mediation proceeding has not yet resulted in a specific proposal. In light of the state of advancement of these two proceedings and CAPR s insurance coverage, Veolia Environnement has not accrued a reserve for the potential outcome of this litigation. The aggregate amount of reserves accrued by Veolia Environnement in respect of all litigation, including tax claims, in which Veolia Environnement or its subsidiaries are involved, cover the losses that Veolia Environnement believes are probable as a result of all types of litigation in which it is involved in the course of its business, including a large number of claims and proceedings that, individually, are not material to Veolia Environnement s business. The largest individual reserve accrued in Veolia Environnement s 2004 audited financial statements relating to litigation amounts to approximately 10 million. Other than as described above, there are no other exceptional facts or legal proceedings in which the Company is currently involved which may have a material adverse effect on its results of operations, assets, financial condition or perspectives. 108

109 SUBSCRIPTION AND SALE Summary of Dealer Agreement Subject to the terms and on the conditions contained in an Amended and Restated Dealer Agreement dated 8 November 2005 (as amended or supplemented as at the issue date, the Dealer Agreement ) between Veolia Environnement, the Permanent Dealers and the Arranger, the Notes will be offered on a continuous basis to the Permanent Dealers. However, Veolia Environnement has reserved the right to sell Notes directly on its own behalf to Dealers that are not Permanent Dealers. The Notes may also be sold by the Issuer through the Dealers, acting as agents of the Issuer. The Dealer Agreement also provides for Notes to be issued in syndicated Tranches that are jointly and severally underwritten by two or more Dealers. Veolia Environnement will pay each relevant Dealer a commission as agreed between them in respect of Notes subscribed by it. Veolia Environnement has agreed to reimburse the Arranger for certain of its expenses incurred in connection with the establishment of the Programme and the Dealers for certain of their activities in connection with the Programme. The commissions in respect of an issue of Notes on a syndicated basis will be stated in the relevant Final Terms. Veolia Environnement has agreed to indemnify the Dealers against certain liabilities in connection with the offer and sale of the Notes. The Dealer Agreement entitles the Dealers to terminate any agreement that they make to subscribe Notes in certain circumstances prior to payment for such Notes being made to the Issuer. Selling restrictions European Economic Area In respect of the Notes the denomination per unit of which is less than Euro 50,000 (or its equivalent in another currency): In relation to each Member State of the European Economic Area which has implemented Directive 2003/71/EC (the Prospectus Directive ) (each, a Relevant Member State ), each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be required to represent and agree, that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date ), it has not made and will not make an offer of Notes to the public in that Relevant Member State except that it may, unless otherwise provided in the selling restrictions relating to a particular Member State, with effect from and including the Relevant Implementation Date, only offer at any time: (a) in (or in Germany where the offer starts within) the period beginning on the date of publication of a prospectus in relation to those Notes which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with Article 18 of the Prospectus Directive and ending on the date which is 12 months after the date of such publication; or (b) to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities; or (c) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000 and (3) an annual turnover of more than 50,000,000, as shown in its last annual or consolidated accounts; or (d) in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive. For the purposes of this provision, the expression an offer of Notes to the public in relation to any Notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe the Notes, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive includes any relevant implementing measure in each Relevant Member State. France (a) Each of the Dealers and the Issuer has represented and agreed that offers and sales of Notes will be made in France only to qualified investors (investisseurs qualifiés), as defined in, and in accordance with, articles L and D of the French Code monétaire et financier. 109

110 (b) Additionally, each of the Dealers and the Issuer has represented and agreed that it has not distributed or caused to be distributed and will not distribute or cause to be distributed to the public in France, the Base Prospectus or any other offering material relating to any Notes issued under the Programme other than to those investors to whom offers and sales of the Notes may be made as described above. These selling restrictions may be amended or supplemented in the relevant Final Terms. United Kingdom Each Dealer has represented, warranted and agreed and each further Dealer appointed under the Programme will be required to represent, warrant and agree that: (i) (ii) in relation to any Notes which have a maturity of less than one year, (a) it is a person whose ordinary activities involve it in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of its business and (b) it has not offered or sold and will not offer or sell any Notes other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses where the issue of the Notes would otherwise constitute a contravention of section 19 of the Financial Services and Markets Act 2000 (the FSMA ) by the Issuer; it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of any Notes in circumstances in which Section 21(1) of the FSMA does not apply to the Issuer; and (iii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to such Notes in, from or otherwise involving the United Kingdom. The Netherlands Zero coupon Notes in definitive form and other Notes in definitive form on which interest does not become due and payable during their term but only at maturity (savings certificates or spaarbewijzen as defined in the Dutch Savings Certificates Act or Wet inzake spaarbewijzen, the SCA ) may only be transferred and accepted, directly or indirectly, within, from or into the Netherlands through the mediation of either the Issuer or a member of Euronext Amsterdam N.V. with due observance of the provisions of the SCA and its implementing regulations (which include registration requirements). No such mediation is required, however, in respect of (i) the initial issue of such Notes to the first holders thereof, (ii) the transfer and acceptance by individuals who do not act in the conduct of a profession or business, and (iii) the issue and trading of such Notes if they are physically issued outside the Netherlands and are not immediately thereafter distributed in The Netherlands. Each Dealer has furthermore represented and agreed and each further Dealer appointed under the Programme will be required to represent and agree that Notes with a maturity of less than 12 months which qualify as money market instruments will only be offered, directly or indirectly, in or from the Netherlands, (i) if they each have a minimum denomination (or minimum aggegrate purchase price) of 50,000 or the equivalent thereof in another currency; or (ii) solely to persons who trade or invest in securities in the conduct of their profession or business (which includes banks, securities firms, investment institutions, insurance companies, pension funds, other institutional investors, and finance companies and large enterprises which as an ancillary activity regularly invest in securities); or (iii) in circumstances where another exception to or exemption or dispensation from the prohibition of section 3 subsection 4 of the Dutch Act on the Supervision of the Securities Trade 1995 (Wet toezicht effectenverkeer 1995) applies. Japan The Notes have not been and will not be registered under the Securities and Exchange Law of Japan (the Securities and Exchange Law ). Accordingly, each of the Dealers has represented and agreed that it has not, directly or indirectly, offered or sold and will not, directly or indirectly, offer or sell any Notes in Japan or to a resident of Japan except pursuant to an exemption from the registration requirements of, and otherwise in compliance with the Securities and Exchange Law and other relevant laws and regulations of Japan. As used in this paragraph, resident of Japan means any person resident in Japan, including any corporation or other entity organised under the laws of Japan. 110

111 United States The Notes have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in certain transactions exempt from the registration requirements of the Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S under the Securities Act. Bearer Notes having a maturity of more than one year are subject to U.S. tax law requirements and may not be offered, sold or delivered within the United States or its possessions or to a United States person, except in certain transactions permitted by U.S. tax regulations. Terms used in this paragraph have the meanings given to them by the U.S. Internal Revenue Code and regulations thereunder. Each Dealer has agreed that, except as permitted by the Dealer Agreement, it will not offer, sell or deliver the Notes of any identifiable Tranche, (i) as part of their distribution at any time or (ii) otherwise until 40 days after completion of the distribution of such Tranche as determined, and certified to the Issuer, by the Fiscal Agent, or in the case of Notes issued on a syndicated basis, the Lead Manager, within the United States or to, or for the account or benefit of, U.S. persons, and it will have sent to each dealer to which it sells Notes during the distribution compliance period as defined in Regulation S (the Distribution Compliance Period ) a confirmation or other notice setting forth the restrictions on offers and sales of the Notes within the United States or to, or for the account or benefit of, U.S. persons. The Notes are being offered and sold outside the United States to non-u.s. persons in reliance on Regulation S. In addition, until 40 days after the commencement of the offering, an offer or sale of Notes within the United States by any dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act. General These selling restrictions may be modified by the agreement of the Issuer and the Dealers following a change in a relevant law, regulation or directive. Any such modification or supplement will be set out in the Final Terms issued in respect of the issue of Notes to which it relates or in a supplement to this Base Prospectus. No action has been taken in any jurisdiction that would permit a public offering of any of the Notes, or possession or distribution of the Base Prospectus or any other offering material or any Final Terms, in any country or jurisdiction where action for that purpose is required. Each Dealer has agreed that it will comply with all relevant laws, regulations and directives in each jurisdiction in which it acquires, purchases, offers, sells or delivers Notes or has in its possession or distributes the Base Prospectus, any other offering material or any Final Terms and that it will obtain any consent, approval or permission required for the purchase, offer or sale of Notes under the laws and regulations in force in any jurisdiction in which it makes such purchase, offer or sale. None of the Issuer or any other Dealer shall have responsibility therefore. Each of the Dealers and the Issuer has represented and agreed that Materialised Notes may only be issued outside France. 111

112 FORM OF FINAL TERMS 1 FORM OF FINAL TERMS FOR USE IN CONNECTION WITH ISSUES OF NOTES WITH A DENOMINATION OF LESS THAN 50,000 TO BE ADMITTED TO TRADING ON A REGULATED MARKET OR REGULATED MARKETS AND/OR OFFERED TO THE PUBLIC IN THE EUROPEAN ECONOMIC AREA Final Terms dated [Š] VEOLIA ENVIRONNEMENT Euro 8,000,000,000 Euro Medium Term Note Programme SERIES NO: [Š] TRANCHE NO: [Š] [Brief description and Amount of Notes] [Name(s) of Dealer(s)] PART A CONTRACTUAL TERMS Terms used herein shall be deemed to be defined as such for the purposes of the Conditions set forth in the Base Prospectus dated [current date] which received visa n [Š] from the Autorité des marches financiers ( AMF ) in France on [Š] [and the supplement to the Base Prospectus dated [Š] which received visa n [Š] from the AMF on [Š] which [together] constitute[s] a prospectus for the purposes of the Prospectus Directive (Directive 2003/71/EC) (the Prospectus Directive ). This document constitutes the Final Terms of the Notes described herein for the purposes of Article 5.4 of the Prospectus Directive and must be read in conjunction with such Base Prospectus [as so supplemented]. Full information on the Issuer and the offer of the Notes is only available on the basis of the combination of these Final Terms and the Base Prospectus. The Base Prospectus [and the supplement to the Base Prospectus] [is] [are] available for viewing at the office of the Fiscal Agent or each of the Paying Agents and on the websites of (a) the AMF ( and (b) Veolia Environnement ( the Issuer ) ( and copies may be obtained from Veolia Environnement, avenue Kléber, Paris.[In addition 1, the Base Prospectus [and the supplement to the Base Prospectus] [is] [are] available for viewing [at/on] [Š]]. The following alternative language applies if the first tranche of an issue which is being increased was issued under [a Base Prospectus] with an earlier date. Terms used herein shall be deemed to be defined as such for the purposes of the Conditions (the Conditions) set forth in the [Base Prospectus] dated [original date] which received visa n [Š] from the Autorité des marches financiers ( AMF ) in France on [Š] [and the supplement to the Base Prospectus] dated [Š] which received visa n [Š] from the AMF on [Š]]. This document constitutes the Final Terms of the Notes described herein for the purposes of Article 5.4 of the Prospectus Directive (Directive 2003/71/EC) (the Prospectus Directive ) and must be read in conjunction with the Base Prospectus dated [current date] which received visa n [Š] from the AMF on [Š] [and the supplement to the Base Prospectus dated [Š] which received visa n [Š] from the AMF on [Š]], which [together] constitute[s] a prospectus for the purposes of the Prospectus Directive, save in respect of the Conditions which are extracted from the [Base Prospectus] dated [original date] which received visa n [Š] from the AMF on [Š] [and the supplement to the Base Prospectus] dated [Š]which received visa n [Š] from the AMF on [Š]] and are attached hereto. Full information on the Issuer and the offer of the Notes is only available on the basis of the combination of these Final Terms and the [Base Prospectus] dated [original date] which received visa n [Š] from the AMF on [Š] and the Base Prospectus dated [current date] [and the supplement to the Base Prospectus dated [Š]]. The Base Prospectus [and the supplement to the Base Prospectus] [is] [are] available for viewing at the office of the Fiscal Agent or each of the Paying Agents and on the websites of (a) the AMF ( and (b) Veolia Environnement ( the Issuer ) ( and copies may be obtained from Veolia Environnement, avenue Kléber, Paris.[In addition 2, the Base Prospectus [and the supplement to the Base Prospectus] [is] [are] available for viewing [at/on] [Š]]. 1 If the Notes are admitted to trading on a regulated market other than Euronext Paris S.A. 2 If the Notes are admitted to trading on a regulated market other than Euronext Paris S.A. 112

113 1. (i) Issuer: Veolia Environnement 2. (i) Series Number: [Š] (ii) [Tranche Number: (if fungible with an existing Series, details of that Series, including the date on which the Notes become fungible).] [Š] 3. Specified Currency or Currencies: [Š] 4. Aggregate Nominal Amount: (i) Series: [Š] (ii) Tranche: [Š] 5. (i) Issue Price: [Š] per cent. of the Aggregate Nominal Amount [plus accrued interest from [insert date](in the case of fungible issues only, if applicable)] 6. Specified Denomination(s): [Š] 3 (one denomination only for Dematerialised Notes) [Š] 7. [(i)] Issue Date: [Š] [(ii) Interest Commencement Date: [Š]] 8. Maturity Date: [specify date or (for Floating Rate Notes) Interest Payment Date falling in or nearest to the relevant month and year] 9. Interest Basis: [[Š] per cent. Fixed Rate] [[specify reference rate] +/ [Š] per cent. Floating Rate] [Zero Coupon] [Index Linked Interest] [Other (specify)] (further particulars specified below) 10. Redemption/Payment Basis 4 : [Redemption at par] [Index Linked Redemption] [Dual Currency] [Partly Paid] [Instalment] [Other (specify)] 11. Change of Interest or Redemption/Payment Basis: [Specify details of any provision for convertibility of Notes into another interest or redemption/ payment basis] 12. Put/Call Options: [Put] [Call] [(further particulars specified below)] 3 Notes (including Notes denominated in Sterling) in respect of which the issue proceeds are to be accepted by the Issuer in the United Kingdom or whose issue otherwise constitutes a contravention of section 19 of the Financial Services and Markets Act 2000 and which have a maturity of less than one year must have a minimum redemption value of 100,000 (or its equivalent in other currencies). 4 If the Final Redemption Amount is less than 100% of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex 12 to the Prospectus Directive Regulation will apply. This pro forma has been annotated to indicate where the key additional requirements of Annex 12 are dealt with. 113

114 13. (i) Status of the Notes: [Subordinated / Unsubordinated] Notes [specify details of any provisions for subordinated Notes in particular whether dated or undated, whether ordinary or deeply, whether interest deferral provisions apply and whether any additional events of default should apply] (ii) Dates of corporate authorisations for issuance of the Notes: [Decision of the Conseil d administration of Veolia Environnement] Method of distribution: [Syndicated/Non-syndicated] PROVISIONS RELATING TO INTEREST (IF ANY) PAYABLE 15. Fixed Rate Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Rate [(s)] of Interest: [Š] per cent. per annum [payable [annually/ semi-annually/quarterly/monthly] in arrear] (ii) Interest Payment Date(s): [Š] in each year [adjusted in accordance with [specify Business Day Convention and any applicable Business Centre(s) for the definition of Business Day]/not adjusted] (iii) Fixed Coupon Amount [(s)]: [Š] per[š] in nominal amount (iv) Broken Amount: [Insert particulars of any initial or final broken interest amounts which do not correspond with the Fixed Coupon Amount [(s)] and the Interest Payment Date(s) to which they relate] (v) Day Count Fraction (Condition 5(j)): [30/360/Actual/Actual (ISMA 6 /ISDA)/other] (Day count fraction should be Actual-Actual- ISMA for all fixed rate issues other than those denominated in U.S. Dollars, unless agreed otherwise) (vi) Other terms relating to the method of calculating [Not applicable/give details] interest for Fixed Rate Notes: (vii) Determination Date(s) (Condition 5(a)): [Š] in each year (insert regular interest payment dates, ignoring issue date or maturity date in the case of a long or short first or last coupon. N.B. only relevant where Count Fraction is Actual/ Actual (ISMA)) 16. Floating Rate Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining subparagraphs of this paragraph. Also consider whether EURO BBA LIBOR or EURIBOR is the appropriate reference rate for Notes denominated in Euro) (i) Interest Period(s): [Š] (ii) Specified Interest Payment Dates: [Š] 5 Relevant only for Notes constituting obligations under French law. 6 As announced on 3 February 2005 ISMA and IPMA have agreed the terms of a merger. The merger has been completed on 1 July 2005 and the merged association is called ICMA (the International Capital Markets Association). 114

115 (iii) Business Day Convention: [Floating Rate Business Day Convention/ Following Business Day Convention/Modified Following Business Day Convention/Preceding Business Day Convention/other (give details)] (iv) Business Centre(s) (Condition 5(a)): [Š] (v) (vi) Manner in which the Rate(s) of Interest is/are to be determined: Party responsible for calculating the Rate(s) of Interest and Interest Amount(s) (if not the Calculation Agent): [FBF Determination/ISDA Determination/ Screen Rate Determination /other (give details)] (vii) FBF Determination (Condition 5(b)(iii)(A)): Floating Rate: [Š] Floating Rate Determination Date [Š] (Date de Détermination du Taux Variable): FBF Definitions (if different from those set [Š] out in the Condtions): (viii) ISDA Determination (Condition 5(b)(iii)(B)): Floating Rate Option: [Š] Designated Maturity: [Š] Reset Date: [Š] ISDA Definitions: [Š] (if different from those set out in the Conditions) (ix) Screen Rate Determination (Condition 5(b)(iii)(C)): Relevant Time: [Š] Interest Determination Date: [[Š] [TARGET] Business Days in [specify city] for [specify currency] prior to [the first day in each Interest Accrual Period/each Interest Payment Date]] Primary Source for Floating Rate: [Specify relevant screen page or Reference Banks ] Reference Banks (if Primary Source is [Specify four] Reference Banks ): Relevant Financial Centre: [The financial centre most closely connected to the Benchmark specify if not London] Benchmark: [LIBOR, LIBID, LIMEAN, EURIBOR or other benchmark] Representative Amount: [Specify if screen or Reference Bank quotations are to be given in respect of a transaction of a specified notional amount] Effective Date: [Specify if quotations are not to be obtained with effect from commencement of Interest Accrual Period] Specified Duration: [Specify period for quotation if not duration of Interest Accrual Period] (x) Margin(s): [+/ ] [Š] per cent. per annum (xi) Minimum Rate of Interest: [Š] per cent. per annum (xii) Maximum Rate of Interest: [Š] per cent. per annum 115 [Š]

116 (xiii) Day Count Fraction (Condition 5(j)): [Š] (xiv) Rate Multiplier: [Š] (xv) Fall back provisions, rounding provisions, denominator and any other terms relating to the method of calculating interest on Floating Rate Notes, if different from those set out in the Conditions: [Š] 17. Zero Coupon Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Amortization Yield (Condition 6(e)): [Š] per cent. per annum (ii) Day Count Fraction (Condition 5(j)): [Š] (iii) Any other formula/basis of determining amount [Š] payable: 18. Index Linked Interest Note Provisions* [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Index/Formula: [Give or annex details] (ii) Calculation Agent responsible for calculating [Š] the interest due: (iii) Provisions for determining Coupon where calculation by reference to Index and/or Formula and/or other variable: [Š] (iv) Determination Date(s): (v) Provisions for determining Coupon where calculation by reference to Index and/or Formula and/or other variable is impossible or impracticable or otherwise disrupted: (vi) Interest or calculation Period(s): [Š] (vii) Specified Interest Payment Dates: [Š] (viii) Business Day Convention: [Floating Rate Business Day Convention/ Following Business Day Convention/Modified Following Business Day Convention/Preceding Business Day Convention/other (give details)] (ix) Business Centre(s) (Condition 5 (a)): [Š] (x) Minimum Rate of Interest: [Š] per cent. per annum (xi) Maximum Rate of Interest: [Š] per cent. per annum (xii) Day Count Fraction (Condition 5(j)): [Š] 19. Dual Currency Note Provisions* [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Rate of Exchange/Method of calculating Rate of Exchange: [Give details] * If the Final Redemption Amount is less than 100% of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex 12 of the Prospectus Directive Regulation will apply. This pro forma has been annotated to indicate where the key additional requirements of Annex 12 are dealt with. 116

117 (ii) (iii) Calculation Agent, if any, responsible for calculating the principal and/or interest due: Provisions applicable where calculation by reference to Rate of Exchange impossible or impracticable: (iv) Person at whose option Specified Currency(ies) [Š] is/are payable: (v) Day Count Fraction (Condition 5(j)): [Š] PROVISIONS RELATING TO REDEMPTION 20. Call Option [Applicable/Not Applicable] (If not applicable, delete the remaining subparagraphs of this paragraph) (i) Optional Redemption Date(s): [Š] (ii) Optional Redemption Amount(s) of each Note and method, if any, of calculation of such amount(s): [Š] per Note of [Š] specified denomination (iii) If redeemable in part: Minimum nominal amount to be redeemed: [Š] Maximum nominal amount to be redeemed: [Š] (iv) Option Exercise Date(s): [Š] (v) Description of any other Issuer s option: [Š] (vi) Notice period (if other than as set out in the [Š] Conditions): (vii) Notice period: [Š] 21. Put Option [Applicable/Not Applicable] (If not applicable, delete the remaining subparagraphs of this paragraph) (i) Optional Redemption Date(s): [Š] (ii) Optional Redemption Amount(s) of each Note and method, if any, of calculation of such amount(s): [Š] per Note of [Š] specified denomination (iii) Option Exercise Date(s): [Š] (iv) Description of any other Noteholders option: [Š] (v) Notice period: [Š] 22. Final Redemption Amount of each Note [[Š] per Note of [Š] specified denomination/ Other/See Appendix] 23. Early Redemption Amount (i) Early Redemption Amount(s) of each Note payable on redemption for taxation reasons (Condition 6(f)) or an event of default (Condition 9) and/or the method of calculating the same (if required or if different from that set out in the Conditions): [Š] (ii) (iii) Redemption for taxation reasons permitted on days other than Interest Payment Dates (Condition 6(f)): Unmatured Coupons to become void upon early redemption (Bearer Notes only) (Condition 7(f)): 117 [Š] [Š] [Yes/No] [Yes/No/Not Applicable]

118 GENERAL PROVISIONS APPLICABLE TO THE NOTES 24. Form of Notes: [Dematerialised Notes / Materialised Notes, (Materialised Notes are only in bearer form)] [Delete as appropriate] (i) Form of Dematerialised Notes: [Not Applicable/Bearer dematerialised form (au porteur)/registered dematerialised form (au nominatif)] (ii) Registration Agent: [Not Applicable/if Applicable give name and details] (Note that a Registration Agent must be appointed in relation to Registered Dematerialised Notes only) (iii) Temporary Global Certificate: [Not Applicable /Temporary Global Certificate exchangeable for Definitive Materialised Bearer Notes on [Š] (the Exchange Date ), being 40 days after the Issue Date subject to postponement as provided in the Temporary Global Certificate] (iv) Materialised Note Agent [Not Applicable / if Applicable give name and details] (Note that a Materialised Note Agent must be appointed in relation to Materialised Notes) (v) Applicable TEFRA exemption: [C Rules/D Rules/Not Applicable] 25. Financial Centre(s) (Condition 7(h)) or other special provisions relating to payment dates: 26. Talons for future Coupons or Receipts to be attached to Definitive Notes (and dates on which such Talons mature): 27. Details relating to Partly Paid Notes: amount of each payment comprising the Issue Price and date on which payment is to be made and consequences (if any) of failure to pay, including any right of the Issuer to forfeit the Notes and interest due on late payment: [Not Applicable/Give details. Note that this item relates to the date and place of payment, and not interest period end dates, to which items 15(ii), 16(iv) and 18(ix) relate]] [Yes/No. If yes, give details] [Not applicable/give details] 28. Details relating to Instalment Notes: [Not applicable/give details] (i) Instalment Amount(s): [Š] (ii) Instalment Date(s): [Š] (iii) Minimum Instalment Amount: [Š] (iv) Maximum Instalment Amount: [Š] 29. Redenomination, renominalisation and reconventioning provisions: [Not Applicable/The provisions [in Condition [Š]] [annexed to these Final Terms] apply] 30. Consolidation provisions: [Not Applicable/The provisions [in Condition [Š]][annexed to these Final Terms] apply] 118

119 31. Masse: [Applicable/Not Applicable/Condition 11 replaced by the full provisions of French Code of Commerce relating to the Masse] (Note that: (i) in respect of any Tranche of Notes issued outside France, Condition 11 may be waived, amended or supplemented, and (ii) in respect of any Tranche of Notes issued inside France, Condition 11 must be waived in its entirely and replaced by the provisions of French Code of Commerce relating to the Masse. If Condition 11 (as it may be amended or supplemented) applies or if the full provisions of French Code of Commerce apply, insert details of Representative and Alternative Representative and remuneration, if any). 32. Applicable tax regime: [Condition 8(c) applies and the Notes are issued (or deemed issued) outside France] [Condition 8(c) and 8(d) apply and the Notes are neither issued nor deemed issued outside France] [in all other cases, description of applicable tax regime to be provided as appropriate] 33. Other final terms: [Not Applicable/give details] (When adding any other final terms consideration should be given as to whether such terms constitute a significant new factor and consequently triggers the need for a supplement to the Base Prospectus under Article 16 of the Prospectus Directive.) DISTRIBUTION 34. (i) If syndicated, names and addresses of Managers and underwriting commitments: [Not Applicable/give names, addresses and underwriting commitments] (Include names and addresses of entities agreeing to underwrite the issue on a firm commitment basis and names and addresses of the entities agreeing to place the issue without a firm commitment or on a best efforts basis if such entities are not the same as the Managers.) (ii) Date of Subscription Agreement: [Š] (iii) Stabilising Manager (if any): [Not Applicable/give name] 35. If non-syndicated, name and [Not Applicable/give name] address of Dealer: 36. Total commission and concession: [Š] per cent. of the Aggregate Nominal Amount 37. Additional selling restrictions: [Not Applicable/give details] [LISTING AND ADMISSION TO TRADING APPLICATION These Final Terms comprise the final terms required to list and have admitted to trading the issue of Notes described herein pursuant to the Euro 8,000,000,000 Euro Medium Term Note Programme of the Issuer.] RESPONSIBILITY The Issuer accepts responsibility for the information contained in these Final Terms. Signed on behalf of Veolia Environnement: Duly represented by: 119

120 PART B OTHER INFORMATION 1. RISK FACTORS [[Insert any risk factors that are material to the Notes being offered and/or listed and admitted to trading in order to assess the market risk associated with these Notes and that may affect the Issuer s ability to fulfil its obligations under the Notes which are not covered under Risk Factors in the Base Prospectus. If any such additional risk factors need to be included consideration should be given as to whether they constitute a significant new factor and consequently triggers the need for a supplement to the Base Prospectus under Article 16 of the Prospectus Directive.][Where the underlying is an index need to include the name of the index and a description if composed by the Issuer and if the index is not composed by the Issuer need to include details of where the information about the index can be obtained. Where the underlying is not an index need to include equivalent information.]*] 2. LISTING (i) Listing: (ii) Admission to trading: (iii) Additional publication of Base Prospectus and Final Terms: (iv) Regulated markets or equivalent markets on which, to the knowledge of the issuer, securities of the same class of the securities to be offered or admitted to trading are already admitted to trading: 3. RATING 4. NOTIFICATION [Eurolist of Euronext Paris S.A./other (specify)/none] [Application has been made for the Notes to be listed and admitted to trading on [Š] with effect from [Š].] [Not Applicable.] (Where documenting a fungible issue need to indicate that original securities are already listed and admitted to trading.) [Š] (See Condition 16 which provides that the Base Prospectus and Final Terms of Notes listed and admitted to trading on any Regulated Market will be published on the websites of (a) the AMF and (b) the Issuer. Please provide for additional methods of publication in respect of a listing and admission to trading on a Regulated Market other than Euronext Paris S.A. [Š] The Notes to be issued have been rated: [S & P: [Š]] [Moody s: [Š]] [[Other]: [Š]] [Need to include a brief explanation of the meaning of the ratings if this has previously been published by the rating provider.] (The above disclosure should reflect the rating allocated to Notes of the type being issued under the Programme generally or, where the issue has been specifically rated, that rating.) The Autorité des Marchés Financiers in France [has been requested to provide/has provided include first alternative for an issue which is contemporaneous with the establishment or update of the Programme and the second alternative for subsequent issues] the[include names of competent authorities of host Member States] with a certificate of approval attesting that the Base Prospectus has been drawn up in accordance with the Prospectus Directive.] * If the Final Redemption Amount is less than 100% of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex 12 to the Prospectus Directive Regulation will apply. This pro forma has been annotated to indicate where the key additional requirements of Annex 12 are dealt with. 120

121 5. [INTERESTS OF NATURAL AND LEGAL PERSONS INVOLVED IN THE [ISSUE/OFFER] Need to include a description of any interest, including conflicting ones, that is material to the issue/offer, detailing the persons involved and the nature of the interest. May be satisfied by the inclusion of the following statement: [ So far as the Issuer is aware, no person involved in the offer of the Notes has an interest material to the offer. ]/[Š]] 6. [THIRD PARTY INFORMATION AND STATEMENT BY EXPERTS AND DECLARATIONS OF ANY INTEREST Where a statement or report attributed to a person as an expert is included in respect of the Issuer or the Notes, provide such person s name, business address, qualifications and material interest if any in the Issuer. If the report has been produced at the Issuer s request a statement to that effect that such statement or report is included, in the form and context in which it is included, with the consent of that person who has authorised the contents of that part in respect of the Issuer or the Notes. Where information has been sourced from a third party, provide a confirmation that this information has been accurately reproduced and that as far as the Issuer is aware and is able to ascertain from information published by that third party, no facts have been omitted which would render the reproduced information inaccurate or misleading. In addition, the Issuer shall identify the source(s) of the information.] 7. REASONS FOR THE OFFER, ESTIMATED NET PROCEEDS AND TOTAL EXPENSES [(i) Reasons for the offer: [Š] (See Use of Proceeds wording in Base Prospectus if reasons for offer different from making profit and/or hedging certain risks will need to include those reasons here.)] [(ii)] Estimated net proceeds: [Š] (If proceeds are intended for more than one use will need to split out and present in order of priority. If proceeds insufficient to fund all proposed uses state amount and sources of other funding.) [(iii)] Estimated total expenses: [Š] [Include breakdown of expenses.] (If the Notes are derivative securities to which Annex 12 of the Prospectus Directive Regulation applies it is only necessary to include disclosure of net proceeds and total expenses at (ii) and (iii) above where disclosure is included at (i) above.) 8. [FIXED RATE NOTES ONLY YIELD Indication of yield: [Š] Calculated as [include details of method of calculation in summary form] on the Issue Date. As set out above, the yield is calculated at the Issue Date on the basis of the Issue Price. It is not an indication of future yield.] 9. [Floating Rate Notes only HISTORIC INTEREST RATES Details of historic [LIBOR/EURIBOR/other] rates can be obtained from [Š].] 10. [Index-Linked or other variable-linked Notes only PERFORMANCE OF INDEX/FORMULA/other variable, EXPLANATION OF EFFECT ON VALUE OF INVESTMENT AND ASSOCIATED RISKS and other information concerning the underlying 7 Need to include details of where past and future performance and volatility of the index/formula/other variable can be obtained, the underlying on which it is based and of the method used to relate the two, a clear and comprehensive explanation of how the value of the investment is affected by the underlying and the circumstances when the risks are most evident and any market disruption or settlement disruption events that affect the underlying. Include details of rules with relation to events concerning the underlying.] 7 For derivative securities to which Annex 12 to the Prospectus Directive Regulation applies, please complete instead paragraph 12 below relating to explanation of effect on value of investment, return on derivatives securities and information concerning the underlying. 121

122 11. [Dual Currency Notes only PERFORMANCE OF RATE[S] OF EXCHANGE AND EXPLANATION OF EFFECT ON VALUE OF INVESTMENT 8 Need to include details of where past and future performance and volatility of the relevant rate[s] can be obtained, the underlying on which it is based and of the method used to relate the two, a clear and comprehensive explanation of how the value of the investment is affected by the underlying and the circumstances when the risks are most evident and any market disruption or settlement disruption events that affect the underlying. Include details of rules with relation to events concerning the underlying.] 12. [Derivatives only EXPLANATION OF EFFECT ON VALUE OF INVESTMENT, RETURN ON DERIVATIVES SECURITIES AND Information concerning the underlying 9 EXPLANATION OF EFFECT ON VALUE OF INVESTMENT Need to include a clear and comprehensive explanation of how the value of the investment is affected by the underlying, the circumstances when the risks are most evident, and the risk that investors may lose part or all of their investment. RETURN ON DERIVATIVES SECURITIES Return on derivative securities: [Description of how any return on derivative securities takes place] Payment or delivery date: [Š] Method of calculation: [Š] INFORMATION CONCERNING THE UNDERLYING The exercise price or the final reference price of the [Š] underlying: A statement setting out the type of the underlying and details of where information on the underlying can be obtained: - an indication where information about the past and [Š] the further performance of the underlying and its volatility can be obtained: - where the underlying is a security: [Applicable/Not Applicable] the name of the issuer of the security: the ISIN (International Security Identification Number) or other such security identification code: - where the underlying is an index: [Applicable/Not Applicable] the name of the index and a description of the index if it is composed by the issuer. If the index is not composed by the issuer, where information about the index can be obtained: - where the underlying is an interest rate: [Applicable/Not Applicable] a description of the interest rate: [Applicable/Not Applicable] - others: 8 For derivative securities to which Annex 12 to the Prospectus Directive Regulation applies, please complete instead paragraph 12 below relating to explanation of effect on value of investment, return on derivatives securities and information concerning the underlying. 9 Required for derivative securities to which Annex 12 to the Prospectus Directive Regulation applies. See footnote ** below. ** If the Final Redemption Amount is less than 100% of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex 12 to the Prospectus Directive Regulation will apply. This pro forma has been annotated to indicate where the key additional requirements of Annex 12 are dealt with. 122

123 where the underlying does not fall within the categories specified above the securities note shall contain equivalent information: - where the underlying is a basket of underlyings: [Applicable/Not Applicable] disclosure of the relevant weightings of each underlying in the basket: A description of any market disruption or settlement disruption events that affect the underlying: Adjustment rules with relation to events concerning the underlying:] [Derivatives only POST-ISSUANCE INFORMATION concerning the underlying 11 Indicate whether or not the Issuer intends to provide post-issuance information concerning the underlying. If the Issuer intends to report such information, specify what information will be reported and where such information can be obtained.] 14. OPERATIONAL INFORMATION ISIN Code: Common Code: Depositaries: (i) Euroclear France to act as Central Depositary: (ii) Common depositary for Euroclear and Clearstream Luxembourg: Any clearing system(s) other than Euroclear and Clearstream, Luxembourg and the relevant identification number(s): Delivery: Names and addresses of additional Paying Agent(s) (if any): The aggregate principal amount of Notes issued has been translated into Euro at the rate of [ ] producing a sum of: 15. [PUBLIC OFFER(S)] [Š] [Š] [Yes/No] [Yes/No] [Not Applicable/give name(s) and number(s)] Delivery [against/free of] payment (i) Public Offer(s): [Yes/Not Applicable] [Š] (Insert name of Materialised Agent here if Notes are Materialised Notes) (ii) Member State(s): [The Notes will be offered to the public in [Š] (insert any Member State of the European Economic Area where the Notes will be offered to the public/ Not Applicable] 10 Required for derivative securities to which Annex 12 to the Prospectus Directive Regulation applies. See footnote ** below. ** If the Final Redemption Amount is less than 100% of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex 12 to the Prospectus Directive Regulation will apply. This pro forma has been annotated to indicate where the key additional requirements of Annex 12 are dealt with. 11 Required for derivative securities to which Annex 12 to the Prospectus Directive Regulation applies. See footnote ** below. ** If the Final Redemption Amount is less than 100% of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex 12 to the Prospectus Directive Regulation will apply. This pro forma has been annotated to indicate where the key additional requirements of Annex 12 are dealt with. 123 [Š]

124 (iii) Time period, including any possible amendments, during which the offer will be open and description of the applicable process, and manner in which results of the offer are made public (iv) Description of the possibility to reduce subscriptions and the manner for refunding excess amount paid by applicants (v) Details of the minimum and/or maximum amount of application, (whether in number of securities or aggregate amount to invest) (vi) Procedure for the exercise of any right of preemption, the negotiability of subscription rights and the treatment of subscription rights not exercised (vii) Process for notification to applicants of the amount allotted and indication whether dealing may begin before notification is made [[-]/Not Applicable] [[-]/Not Applicable] [[-]/Not Applicable] [[-]/Not Applicable] [[-]/Not Applicable] 16. OFFER CONDITIONS, STATISTICS AND EXPECTED TIMETABLE (i) Offer conditions (i) Offer statistics (ii) Expected timetable 124

125 FORM OF FINAL TERMS 2 FORM OF FINAL TERMS FOR USE IN CONNECTION WITH ISSUES OF NOTES WITH A DENOMINATION OF AT LEAST 50,000 TO BE ADMITTED TO TRADING ON A REGULATED MARKET Final Terms dated [Š] VEOLIA ENVIRONNEMENT Euro 8,000,000,000 Euro Medium Term Note Programme SERIES NO: [Š] TRANCHE NO: [Š] [Brief description and Amount of Notes] [Name(s) of Dealer(s)] PART A CONTRACTUAL TERMS Terms used herein shall be deemed to be defined as such for the purposes of the Conditions set forth in the Base Prospectus dated [current date] which received visa n [Š] from the Autorité des marches financiers ( AMF ) in France on [Š] [and the supplement to the Base Prospectus dated [Š] which received visa n [Š] from the AMF on [Š] which [together] constitute[s] a prospectus for the purposes of the Prospectus Directive (Directive 2003/71/EC) (the Prospectus Directive ). This document constitutes the Final Terms of the Notes described herein for the purposes of Article 5.4 of the Prospectus Directive and must be read in conjunction with such Base Prospectus [as so supplemented]. Full information on the Issuer and the offer of the Notes is only available on the basis of the combination of these Final Terms and the Base Prospectus. The Base Prospectus [and the supplement to the Base Prospectus] [is] [are] available for viewing at the office of the Fiscal Agent or each of the Paying Agents and on the websites of (a) the AMF ( and (b) Veolia Environnement ( the Issuer ) ( and copies may be obtained from Veolia Environnement, avenue Kléber, Paris.[In addition 1, the Base Prospectus [and the supplement to the Base Prospectus] [is] [are] available for viewing [at/on] [Š]]. The following alternative language applies if the first tranche of an issue which is being increased was issued under [a Base Prospectus] with an earlier date. Terms used herein shall be deemed to be defined as such for the purposes of the Conditions (the Conditions) set forth in the [Base Prospectus] dated [original date] which received visa n [Š] from the Autorité des marches financiers ( AMF ) in France on [Š] [and the supplement to the Base Prospectus] dated [Š] which received visa n [Š] from the AMF on [Š]]. This document constitutes the Final Terms of the Notes described herein for the purposes of Article 5.4 of the Prospectus Directive (Directive 2003/71/EC) (the Prospectus Directive ) and must be read in conjunction with the Base Prospectus dated [current date] which received visa n [Š] from the AMF on [Š] [and the supplement to the Base Prospectus dated [Š] which received visa n [Š] from the AMF on [Š]], which [together] constitute[s] a prospectus for the purposes of the Prospectus Directive, save in respect of the Conditions which are extracted from the [Base Prospectus] dated [original date] which received visa n [Š] from the AMF on [Š] [and the supplement to the Base Prospectus] dated [Š]which received visa n [Š] from the AMF on [Š]] and are attached hereto. Full information on the Issuer and the offer of the Notes is only available on the basis of the combination of these Final Terms and the [Base Prospectus] dated [original date] which received visa n [Š] from the AMF on [Š] and the Base Prospectus dated [current date] [and the supplement to the Base Prospectus dated [Š]]. The Base Prospectus [and the supplement to the Base Prospectus] [is] [are] available for viewing at the office of the Fiscal Agent or each of the Paying Agents and on the websites of (a) the AMF ( and (b) Veolia Environnement ( the Issuer ) ( and copies may be obtained from Veolia Environnement, avenue Kléber, Paris.[In addition 1, the Base Prospectus [and the supplement to the Base Prospectus] [is] [are] available for viewing [at/on] [Š]]. 1 If the Notes are admitted to trading on a regulated market other than Euronext Paris S.A. 125

126 1. (i) Issuer: Veolia Environnement 2. (i) Series Number: [Š] (ii) [Tranche Number: (if fungible with an existing Series, details of that Series, including the date on which the Notes become fungible).] [Š] 3. Specified Currency or Currencies: [Š] 4. Aggregate Nominal Amount: (i) Series: [Š] (ii) Tranche: [Š] 5. (i) Issue Price: [Š] per cent. of the Aggregate Nominal Amount [plus accrued interest from [insert date](in the case of fungible issues only, if applicable)] 6. Specified Denomination(s): [Š] 2 (one denomination only for Dematerialised Notes) [Š] 7. [(i)] Issue Date: [Š] [(ii) Interest Commencement Date: [Š]] 8. Maturity Date: [specify date or (for Floating Rate Notes) Interest Payment Date falling in or nearest to the relevant month and year] 9. Interest Basis: [[Š] per cent. Fixed Rate] [[specify reference rate] +/ [Š] per cent. Floating Rate] [Zero Coupon] [Index Linked Interest] [Other (specify)] (further particulars specified below) 10. Redemption/Payment Basis 3 : [Redemption at par] [Index Linked Redemption] [Dual Currency] [Partly Paid] [Instalment] [Other (specify)] 11. Change of Interest or Redemption/ Payment Basis: [Specify details of any provision for convertibility of Notes into another interest or redemption/payment basis] 12. Put/Call Options: [Put] [Call] [(further particulars specified below)] 13. (i) Status of the Notes: [Subordinated / Unsubordinated] Notes [specify details of any provisions for subordinated Notes in particular whether dated or undated, whether ordinary or deeply, whether interest deferral provisions apply and whether any additional events of default should apply] 2 Notes (including Notes denominated in Sterling) in respect of which the issue proceeds are to be accepted by the Issuer in the United Kingdom or whose issue otherwise constitutes a contravention of section 19 of the Financial Services and Markets Act 2000 and which have a maturity of less than one year must have a minimum redemption value of 100,000 (or its equivalent in other currencies). 3 If the Final Redemption Amount is less than 100% of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex 12 to the Prospectus Directive Regulation will apply. This pro forma has been annotated to indicate where the key additional requirements of Annex 12 are dealt with. 126

127 (ii) Dates of corporate authorisations for issuance of the Notes: [Decision of the Conseil d administration of Veolia Environnement] Method of distribution: [Syndicated/Non-syndicated] PROVISIONS RELATING TO INTEREST (IF ANY) PAYABLE 15. Fixed Rate Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Rate [(s)] of Interest: [Š] per cent. per annum [payable [annually/ semi-annually/quarterly/monthly] in arrear] (ii) Interest Payment Date(s): [Š] in each year [adjusted in accordance with [specify Business Day Convention and any applicable Business Centre(s) for the definition of Business Day]/not adjusted] (iii) Fixed Coupon Amount [(s)]: [Š] per[š] in nominal amount (iv) Broken Amount: [Insert particulars of any initial or final broken interest amounts which do not correspond with the Fixed Coupon Amount [(s)] and the Interest Payment Date(s) to which they relate] (v) Day Count Fraction (Condition 5(j)): [30/360/Actual/Actual (ISMA 5 /ISDA)/other] (Day count fraction should be Actual-Actual-ISMA for all fixed rate issues other than those denominated in U.S. Dollars, unless agreed otherwise) (vi) Other terms relating to the method of calculating interest for Fixed Rate Notes: [Not applicable/give details] (vii) Determination Date(s) (Condition 5(a)): [Š] in each year (insert regular interest payment dates, ignoring issue date or maturity date in the case of a long or short first or last coupon. N.B. only relevant where Count Fraction is Actual/ Actual (ISMA)) 16. Floating Rate Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph. Also consider whether EURO BBA LIBOR or EURIBOR is the appropriate reference rate for Notes denominated in Euro) (i) Interest Period(s): [Š] (ii) Specified Interest Payment [Š] Dates: (iii) Business Day Convention: [Floating Rate Business Day Convention/ Following Business Day Convention/Modified Following Business Day Convention/Preceding Business Day Convention/other (give details)] (iv) Business Centre(s) (Condition 5(a)): [Š] (v) Manner in which the Rate(s) of Interest is/are to be determined: [FBF Determination/ISDA Determination/Screen Rate Determination/other (give details)] 4 Relevant only for Notes constituting obligations under French law. 5 As announced on 3 February 2005 ISMA and IPMA have agreed the terms of a merger. The merger has been completed on 1 July 2005 and the merged association is called ICMA (the International Capital Markets Association). 127

128 (vi) (vii) (viii) (ix) Party responsible for calculating the Rate(s) of Interest and Interest Amount(s) (if not the Calculation Agent): [Š] FBF Determination (Condition 5(b)(iii)(A)): Floating Rate: [Š] Floating Rate [Š] Determination Date (Date de Détermination du Taux Variable): FBF Definitions (if different from those set out in the Condtions): [Š] ISDA Determination (Condition 5(b)(iii)(B)): Floating Rate Option: [Š] Designated Maturity: [Š] Reset Date: [Š] ISDA Definitions: [Š] (if different from those set out in the Conditions) Screen Rate Determination (Condition 5(b)(iii)(C)): Relevant Time: [Š] Interest Determination Date: Primary Source for Floating Rate: Reference Banks (if Primary Source is Reference Banks ): [[Š] [TARGET] Business Days in [specify city] for [specify currency] prior to [the first day in each Interest Accrual Period/each Interest Payment Date]] [Specify relevant screen page or Reference Banks ] [Specify four] Relevant Financial Centre: [The financial centre most closely connected to the Benchmark specify if not London] Benchmark: [LIBOR, LIBID, LIMEAN, EURIBOR or other benchmark] Representative Amount: [Specify if screen or Reference Bank quotations are to be given in respect of a transaction of a specified notional amount] Effective Date: [Specify if quotations are not to be obtained with effect from commencement of Interest Accrual Period] Specified Duration: [Specify period for quotation if not duration of Interest Accrual Period] (x) Margin(s): [+/ ] [Š] per cent. per annum (xi) Minimum Rate of Interest: [Š] per cent. per annum (xii) Maximum Rate of Interest: [Š] per cent. per annum (xiii) Day Count Fraction [Š] (Condition 5(j)): (xiv) Rate Multiplier: [Š] 128

129 (xv) Fall back provisions, rounding provisions, denominator and any other terms relating to the method of calculating interest on Floating Rate Notes, if different from those set out in the Conditions: [Š] 17. Zero Coupon Note Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Amortization Yield [Š] per cent. per annum (Condition 6(e)): (ii) Day Count Fraction [Š] (Condition 5(j)): (iii) Any other formula/basis of determining amount payable: [Š] 18. Index Linked Interest Note Provisions* [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Index/Formula: [Give or annex details] (ii) Calculation Agent responsible [Š] for calculating the interest due: (iii) Provisions for determining Coupon where calculation by reference to Index and/or Formula and/or other variable: [Š] (iv) Determination Date(s): (v) Provisions for determining Coupon where calculation by reference to Index and/or Formula and/or other variable is impossible or impracticable or otherwise disrupted: (vi) Interest or calculation Period(s): [Š] (vii) Specified Interest Payment [Š] Dates: (viii) Business Day Convention: [Floating Rate Business Day Convention/Following Business Day Convention/Modified Following Business Day Convention/ Preceding Business Day Convention/other (give details)] (ix) Business Centre(s) [Š] (Condition 5(a)): (x) Minimum Rate of Interest: [Š] per cent. per annum (xi) Maximum Rate of Interest: [Š] per cent. per annum (xii) Day Count Fraction (Condition 5(j)): [Š] * If the Final Redemption Amount is less than 100% of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex 12 of the Prospectus Directive Regulation will apply. This pro forma has been annotated to indicate where the key additional requirements of Annex 12 are dealt with. 129

130 19. Dual Currency Note Provisions* [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Rate of Exchange/Method of [Give details] calculating Rate of Exchange: (ii) Calculation Agent, if any, responsible for calculating the principal and/or interest due: [Š] (iii) (iv) Provisions applicable where calculation by reference to Rate of Exchange impossible or impracticable: Person at whose option Specified Currency(ies) is/are payable: [Š] [Š] (v) Day Count Fraction [Š] (Condition 5(j)): PROVISIONS RELATING TO REDEMPTION 20. Call Option [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Optional Redemption Date(s): [Š] (ii) Optional Redemption Amount(s) of each Note and method, if any, of calculation of such amount(s): [Š] per Note of [Š] specified denomination (iii) If redeemable in part: Minimum nominal amount [Š] to be redeemed: Maximum nominal amount [Š] to be redeemed: (iv) Option Exercise Date(s): [Š] (v) Description of any other [Š] Issuer s option: (vi) Notice period (if other than as [Š] set out in the Conditions): (vii) Notice period: [Š] 21. Put Option [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Optional Redemption Date(s): [Š] (ii) Optional Redemption Amount(s) of each Note and method, if any, of calculation of such amount(s): [Š] per Note of [Š] specified denomination * If the Final Redemption Amount is less than 100% of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex 12 of the Prospectus Directive Regulation will apply. This pro forma has been annotated to indicate where the key additional requirements of Annex 12 are dealt with. 130

131 (iii) Option Exercise Date(s): [Š] (iv) Description of any other [Š] Noteholders option: (v) Notice period: [Š] 22. Final Redemption Amount of each [[Š] per Note of [Š] specified denomination/other/see Appendix] Note 23. Early Redemption Amount (i) Early Redemption Amount(s) of each Note payable on redemption for taxation reasons (Condition 6(f)) or an event of default (Condition 9) and/or the method of calculating the same (if required or if different from that set out in the Conditions): [Š] (ii) (iii) Redemption for taxation reasons permitted on days other than Interest Payment Dates (Condition 6(f)): Unmatured Coupons to become void upon early redemption (Bearer Notes only) (Condition 7(f)): [Yes/No] [Yes/No/Not Applicable] GENERAL PROVISIONS APPLICABLE TO THE NOTES 24. Form of Notes: [Dematerialised Notes / Materialised Notes, (Materialised Notes are only in bearer form)] [Delete as appropriate] (i) Form of Dematerialised Notes: [Not Applicable/Bearer dematerialised form (au porteur)/ Registered dematerialised form (au nominatif)] (ii) Registration Agent: [Not Applicable/if Applicable give name and details] (Note that a Registration Agent must be appointed in relation to Registered Dematerialised Notes only) (iii) Temporary Global Certificate: [Not Applicable / Temporary Global Certificate exchangeable for Definitive Materialised Bearer Notes on [ ] (the Exchange Date ), being 40 days after the Issue Date subject to postponement as provided in the Temporary Global Certificate] (iv) Materialised Note Agent [Not Applicable / if Applicable give name and details] (Note that a Materialised Note Agent must be appointed in relation to Materialised Notes) (v) Applicable TEFRA exemption: [C Rules/D Rules/Not Applicable] 25. Financial Centre(s) (Condition 7(h)) or other special provisions relating to payment dates: 26. Talons for future Coupons or Receipts to be attached to Definitive Notes (and dates on which such Talons mature): [Not Applicable/Give details. Note that this item relates to the date and place of payment, and not interest period end dates, to which items 15(ii), 16(iv) and 18(ix) relate]] [Yes/No. If yes, give details] 131

132 27. Details relating to Partly Paid Notes: amount of each payment comprising the Issue Price and date on which payment is to be made and consequences (if any) of failure to pay, including any right of the Issuer to forfeit the Notes and interest due on late payment: [Not applicable/give details] 28. Details relating to Instalment Notes: [Not applicable/give details] (i) Instalment Amount(s): [Š] (ii) Instalment Date(s): [Š] (iii) Minimum Instalment Amount: [Š] (iv) Maximum Instalment Amount: [Š] 29. Redenomination, renominalisation and reconventioning provisions: [Not Applicable/The provisions [in Condition [Š]][annexed to these Final Terms] apply] 30. Consolidation provisions: [Not Applicable/The provisions [in Condition [Š]][annexed to these Final Terms] apply] 31. Masse: [Applicable/Not Applicable/Condition 11 replaced by the full provisions of French Code of Commerce relating to the Masse] (Note that: (i) in respect of any Tranche of Notes issued outside France, Condition 11 may be waived, amended or supplemented, and (ii) in respect of any Tranche of Notes issued inside France, Condition 11 must be waived in its entirely and replaced by the provisions of French Code of Commerce relating to the Masse. If Condition 11 (as it may be amended or supplemented) applies or if the full provisions of French Code of Commerce apply, insert details of Representative and Alternative Representative and remuneration, if any). 32. Applicable tax regime: [Condition 8(c) applies and the Notes are issued (or deemed issued) outside France] [Condition 8(c) and 8(d) apply and the Notes are neither issued nor deemed issued outside France] [in all other cases, description of applicable tax regime to be provided as appropriate] 33. Other final terms: [Not Applicable/give details] (When adding any other final terms consideration should be given as to whether such terms constitute a significant new factor and consequently triggers the need for a supplement to the Base Prospectus under Article 16 of the Prospectus Directive.) DISTRIBUTION 34. (i) If syndicated, names of Managers: [Not Applicable/give names of Managers] (ii) Stabilising Manager (if any): [Not Applicable/give name] 35. If non-syndicated, name of Dealer: [Not Applicable/give name] 36. Additional selling restrictions: [Not Applicable/give details] 132

133 [LISTING AND ADMISSION TO TRADING APPLICATION These Final Terms comprise the final terms required to list and have admitted to trading the issue of Notes described herein pursuant to the Euro 8,000,000,000 Euro Medium Term Note Programme of the Issuer.] RESPONSIBILITY The Issuer accepts responsibility for the information contained in these Final Terms Signed on behalf of Veolia Environnement: Duly represented by: 133

134 PART B OTHER INFORMATION 1. RISK FACTORS [[Insert any risk factors that are material to the Notes being offered and/or listed and admitted to trading in order to assess the market risk associated with these Notes and that may affect the Issuer s ability to fulfil its obligations under the Notes which are not covered under Risk Factors in the Base Prospectus. If any such additional risk factors need to be included consideration should be given as to whether they constitute a significant new factor and consequently triggers the need for a supplement to the Base Prospectus under Article 16 of the Prospectus Directive.][Where the underlying is an index need to include the name of the index and a description if composed by the Issuer and if the index is not composed by the Issuer need to include details of where the information about the index can be obtained. Where the underlying is not an index need to include equivalent information.]*] 2. LISTING (i) Listing: [Eurolist of Euronext Paris S.A./other (specify)/none] (ii) Admission to trading: [Application has been made for the Notes to be listed and admitted to trading on [Š] with effect from [Š].] [Not Applicable.] (Where documenting a fungible issue need to indicate that original securities are already listed and admitted to trading.) (iii) Additional publication of Base Prospectus and Final Terms: [Š] (See Condition 16 which provides that the Base Prospectus and Final Terms of Notes listed and admitted to trading on any Regulated Market will be published on the websites of (a) the AMF and (b) the Issuer. Please provide for additional methods of publication in respect of a listing and admission to trading on a Regulated Market other than Euronext Paris S.A. (iv) Regulated markets or equivalent [Š] markets on which, to the knowledge of the issuer, securities of the same class of the securities to be offered or admitted to trading are already admitted to trading: 3. RATING The Notes to be issued have been rated: [S & P: [Š]] [Moody s: [Š]] [[Other]: [Š]] [Need to include a brief explanation of the meaning of the ratings if this has previously been published by the rating provider.] (The above disclosure should reflect the rating allocated to Notes of the type being issued under the Programme generally or, where the issue has been specifically rated, that rating.) 4. NOTIFICATION The Autorité des Marchés Financiers in France [has been requested to provide/has provided include first alternative for an issue which is contemporaneous with the establishment or update of the Programme and the second alternative for subsequent issues] the[include names of competent authorities of host Member States] with a certificate of approval attesting that the Base Prospectus has been drawn up in accordance with the Prospectus Directive.] * If the Final Redemption Amount is less than 100% of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex 12 to the Prospectus Directive Regulation will apply. This pro forma has been annotated to indicate where the key additional requirements of Annex 12 are dealt with. 134

135 5. [INTERESTS OF NATURAL AND LEGAL PERSONS INVOLVED IN THE [ISSUE/OFFER] Need to include a description of any interest, including conflicting ones, that is material to the issue/offer, detailing the persons involved and the nature of the interest. May be satisfied by the inclusion of the following statement: [ So far as the Issuer is aware, no person involved in the offer of the Notes has an interest material to the offer. ]/[Š]] 6. [THIRD PARTY INFORMATION AND STATEMENT BY EXPERTS AND DECLARATIONS OF ANY INTEREST Where a statement or report attributed to a person as an expert is included in respect of the Issuer or the Notes, provide such person s name, business address, qualifications and material interest if any in the Issuer. If the report has been produced at the Issuer s request a statement to that effect that such statement or report is included, in the form and context in which it is included, with the consent of that person who has authorised the contents of that part in respect of the Issuer or the Notes. Where information has been sourced from a third party, provide a confirmation that this information has been accurately reproduced and that as far as the Issuer is aware and is able to ascertain from information published by that third party, no facts have been omitted which would render the reproduced information inaccurate or misleading. In addition, the Issuer shall identify the source(s) of the information.] 7. REASONS FOR THE OFFER, ESTIMATED NET PROCEEDS AND TOTAL EXPENSES [(i) Reasons for the offer: [Š] (See Use of Proceeds wording in Base Prospectus if reasons for offer different from making profit and/or hedging certain risks will need to include those reasons here.)] [(ii)] Estimated net proceeds: [(iii)] Estimated total expenses: [Š] (If proceeds are intended for more than one use will need to split out and present in order of priority. If proceeds insufficient to fund all proposed uses state amount and sources of other funding.) [Š] [Include breakdown of expenses.] (Only necessary to include disclosure of net proceeds and total expenses at (ii) and (iii) above where disclosure is included at (i) above.) 8. [FIXED RATE NOTES ONLY YIELD Indication of yield: [Š] As set out above, the yield is calculated at the Issue Date on the basis of the Issue Price. It is not an indication of future yield.] 9. [Floating Rate Notes only HISTORIC INTEREST RATES Details of historic [LIBOR/EURIBOR/other] rates can be obtained from [Š].] 10. [Index-Linked or other variable-linked Notes only PERFORMANCE OF INDEX/FORMULA/other variable, and other information concerning the underlying 1 Need to include details of where past and future performance and volatility of the index/formula/other variable can be obtained, the underlying on which it is based and of the method used to relate the two, a clear and comprehensive explanation of how the value of the investment is affected by the underlying and the circumstances when the risks are most evident and any market disruption or settlement disruption events that affect the underlying. Include details of rules with relation to events concerning the underlying. 1 For derivative securities to which Annex 12 to the Prospectus Directive Regulation applies, please complete instead paragraph 12 below relating to explanation of effect on value of investment, return on derivatives securities and information concerning the underlying. 135

136 11. [Dual Currency Notes only PERFORMANCE OF RATE[S] OF EXCHANGE AND EXPLANATION OF EFFECT ON VALUE OF INVESTMENT 2 Need to include details of where past and future performance and volatility of the relevant rate[s] can be obtained. 12. [Derivatives only EXPLANATION OF EFFECT ON VALUE OF INVESTMENT, RETURN ON DERIVATIVES SECURITIES AND Information concerning the underlying 3 EXPLANATION OF EFFECT ON VALUE OF INVESTMENT Need to include a clear and comprehensive explanation of how the value of the investment is affected by the underlying and the circumstances when the risks are most evident, and the risk that investors may lose part or all of their investment. RETURN ON DERIVATIVES SECURITIES Return on derivative securities: [Description of how any return on derivative securities takes place] Payment or delivery date: [Š] Method of calculation: [Š] INFORMATION CONCERNING THE UNDERLYING The exercise price or the final reference price of the [Š] underlying: A statement setting out the type of the underlying and details of where information on the underlying can be obtained: - an indication where information about the past and [Š] the further performance of the underlying and its volatility can be obtained: - where the underlying is a security: [Applicable/Not Applicable] the name of the issuer of the security: the ISIN (International Security Identification Number) or other such security identification code: - where the underlying is an index: [Applicable/Not Applicable] the name of the index and a description of the index if it is composed by the issuer. If the index is not composed by the issuer, where information about the index can be obtained: - where the underlying is an interest rate: [Applicable/Not Applicable] a description of the interest rate: [Applicable/Not Applicable] - others: where the underlying does not fall within the categories specified above the securities note shall contain equivalent information: - where the underlying is a basket of underlyings: [Applicable/Not Applicable] 2 For derivative securities to which Annex 12 to the Prospectus Directive Regulation applies, please complete instead paragraph 12 below relating to explanation of effect on value of investment, return on derivatives securities and information concerning the underlying. 3 Required for derivative securities to which Annex 12 to the Prospectus Directive Regulation applies. See footnote ** below. ** If the Final Redemption Amount is less than 100% of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex 12 to the Prospectus Directive Regulation will apply. This pro forma has been annotated to indicate where the key additional requirements of Annex 12 are dealt with. 136

137 disclosure of the relevant weightings of each underlying in the basket: A description of any market disruption or settlement disruption events that affect the underlying: Adjustment rules with relation to events concerning the underlying:] [Derivatives only POST-ISSUANCE INFORMATION concerning the underlying 5 Indicate whether or not the Issuer intends to provide post-issuance information concerning the underlying. If the Issuer intends to report such information, specify what information will be reported and where such information can be obtained.] 14. OPERATIONAL INFORMATION ISIN Code: [Š] Common Code: [Š] Depositaries: [Yes/No] (i) Euroclear France to act as Central Depositary: (ii) Common depositary for Euroclear and Clearstream Luxembourg: Any clearing system(s) other than Euroclear and Clearstream, Luxembourg and the relevant identification number(s): Delivery: Names and addresses of additional Paying Agent(s) (if any): The aggregate principal amount of Notes issued has been translated into Euro at the rate of [Š] producing a sum of: [Yes/No] [Not Applicable/give name(s) and number(s)] Delivery [against/free of] payment [Š] (Insert name of Materialised Note Agent here if Notes are Materialised Notes) [Š] 4 Required for derivative securities to which Annex 12 to the Prospectus Directive Regulation applies. See footnote ** below. ** If the Final Redemption Amount is less than 100% of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex 12 to the Prospectus Directive Regulation will apply. This pro forma has been annotated to indicate where the key additional requirements of Annex 12 are dealt with. 5 Required for derivative securities to which Annex 12 to the Prospectus Directive Regulation applies. See footnote ** below. ** If the Final Redemption Amount is less than 100% of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex 12 to the Prospectus Directive Regulation will apply. This pro forma has been annotated to indicate where the key additional requirements of Annex 12 are dealt with. 137

138 GENERAL INFORMATION 1 Application has been made to list and admit the Notes on the Eurolist of Euronext Paris S.A. In connection with the application to list and admit a Series of notes on Euronext Paris S.A.: (a) The Autorité des marchés financiers (the AMF ) has allocated the visa number on 8 November 2005 to this Base Prospectus. (b) A legal notice relation to the issue of such Notes will be published in the Bulletin des Annonces légales obligatoires prior to such listing. 2 Veolia Environnement has obtained all necessary consents, approvals and authorisations in the Republic of France in connection with the establishment of the Programme. Any issue of Notes, to the extent that such Notes constitute obligations, requires the prior authorisation of the conseil d administration of Veolia Environnement, which may delegate its powers to its président or to any other member of the conseil d administration. Any issue of Notes, to the extent that such Notes do not constitute obligations, will fall within the general powers of the président of the conseil d administration or a directeur général of Veolia Environnement. For this purpose, on 29 March 2005 the conseil d administration of Veolia Environnement has authorised issues of Notes which authority will, unless previously cancelled, expire on 12 May 2006 and has authorised its président-directeur général to issue Notes within the limits set out by the conseil d administration mentioned above. 3 Save as disclosed in this Base Prospectus there has been no significant change in the financial or trading position of Veolia Environnement or of the Group since 30 June 2005 and no material adverse change in the financial position or prospects of Veolia Environnement or of the Group since 31 December Save as disclosed in this Base Prospectus neither Veolia Environnement nor any member of the Group is or has been involved in any governmental, legal or arbitration proceedings (including any such proceeding which are pending or threatened of which Veolia Environnement is aware), during a period covering at least the previous 12 months which may have, or have had in the recent past, significant effects on the financial position or profitability of the Group. 5 Each definitive Bearer Materialised Note, Receipt, Coupon and Talon will bear the following legend: Any United States person who holds this obligation will be subject to limitations under the United States income tax laws, including the limitations provided in Sections 165(j) and 1287(a) of the Internal Revenue Code. 6 Notes have been accepted for clearance through the Euroclear and Clearstream, Luxembourg systems, which are entities in charge of keeping the records. The Common Code, the International Securities Identification Number (ISIN) and (where applicable) the identification number for any other relevant clearing system for each Series of Notes will be set out in the relevant Final Terms. The address of Euroclear is 1 boulevard du Roi Albert II, 1210 Bruxelles, Belgium and the address of Clearstream, Luxembourg is 42 avenue John Fitzgerald Kennedy, L Luxembourg, Grand-Duchy of Luxembourg. 7 Dematerialised Notes will be inscribed in the books of Euroclear France (acting as central depositary). Dematerialised Notes which are in registered form (au nominatif) are also inscribed either with the Issuer or with the registration agent. The address of Euroclear France is 115 rue Réaumur, Paris Cedex 02, France. 8 For so long as Notes may be issued pursuant to this Base Prospectus, the following documents will be available, during usual business hours on any weekday (Saturdays and public holidays excepted), at the registered office of Veolia Environnement and at the specified offices of the Fiscal Agent and the Paying Agents: (a) the statuts of Veolia Environnement; (b) a copy of this Base Prospectus (including its annexes) together with any supplement to this Base Prospectus or further Base Prospectus; (c) the Final Terms for Notes that are listed and admitted to trading on Euronext Paris S.A. or any Regulated Market in the EEA; 138

139 (d) all reports, letters and other documents, balance sheets, valuations and statements by any expert any part of which is extracted or referred to in this Base Prospectus. So long as Floating Rate Notes for which the Rate of Interest is determined on the basis of ISDA Determination or FBF Determination are outstanding, a copy of the ISDA Definitions or FBF Definitions, as the case may be, will be available during usual business days on any weekday (Saturday and public holiday excepted) at the registered office of Veolia Environnement. 9 For so long as Notes may be issued pursuant to this Base Prospectus, the following documents will be available on the website of the AMF: (i) the Final Terms for Notes that are listed and admitted to trading on Euronext Paris S.A. or any other Regulated Market in the EEA; and (ii) this Base Prospectus together with any supplement to this Base Prospectus or further Base Prospectus. 10 Though Veolia Environnement publishes both consolidated and non-consolidated accounts, the non-consolidated accounts do not provide significant additional information as compared to the consolidated accounts. 11 Copies of the latest annual report and annual non-consolidated and consolidated accounts of Veolia Environnement (in French and, where available, in English) (in each case as soon as they are published) may be obtained, and copies of the Amended and Restated Agency Agreement will be available for inspection, at the specified offices of each of the Paying Agents during normal business hours, so long as any of the Notes is outstanding. 12 Barbier, Frinault et Cie Ernst & Young at Tour Ernst & Young, Faubourg de l Arche, Paris-La Défense Cedex France, and Salustro Reydel at 8, avenue Delcassé, Paris Cedex 08, France (both entities regulated by the Haut Conseil du Commissariat aux Comptes and duly authorised as Commissaires aux comptes) have audited and rendered (i) unqualified audit reports on the consolidated financial statements of the Issuer for the years ended 31 December 2003 and 2004 and (ii) reports on the limited review of the interim financial statements for the six month period ended 30 June In respect of derivatives securities referred to in Article 15 of Commission Regulation no.809/2004 of 29 April 2004, the Final Terms will indicate whether or not Veolia Environnement intends to provide postissuance information concerning the underlying. If the Issuer intends to report such information, the Final Terms will specify what information will be reported and where such information can be obtained. 14 Payments in respect of the Notes issued by Veolia Environnement will be made without withholding or deduction for, or on account of, taxes imposed by or on behalf of the Republic of France as provided by Article 131 quater of the French General Tax Code, to the extent that the Notes are issued or deemed to be issued outside France. Notes constituting obligations under French law will be issued or deemed to be issued outside France by Veolia Environnement (i) in the case of syndicated or non-syndicated issues of Notes, if such Notes are denominated in euro, (ii) in the case of syndicated issues of Notes denominated in currencies other than euro, if, inter alia, the relevant Issuer and the relevant Dealers agree not to offer the Notes to the public in the Republic of France in connection with their initial distribution and such Notes are offered in the Republic of France only through an international syndicate to qualified investors (investisseurs qualifiés) as described in Article L of the French Code monétaire et financier or (iii) in the case of nonsyndicated issues of Notes denominated in currencies other than euro, if each of the subscribers of the Notes is domiciled or resident for tax purposes outside the Republic of France, in each case as more fully set out in the Circular 5 I of the Direction Générale des Impôts dated 30 September However, if so provided in the relevant Final Terms, Notes constituting obligations denominated in currencies other than euro may be issued on a non-syndicated basis and placed with subscribers who are all resident outside the Republic of France. In such cases, the Notes will not benefit from the exemption from deduction at source provided by Article 131 quater of the French General Tax Code and payments under such Notes made to a non-french resident will be exempt from withholding or deduction imposed by or on behalf of the Republic of France at source only if the beneficiary of the payment provides certification that he is not resident in the Republic of France, all in accordance with the provisions of Article 125 A III of the French General Tax Code, as more fully described in Condition 8. See Terms and Conditions of the Notes Taxation. The tax regime applicable to Notes which do not constitute obligations will be set out in the relevant Final Terms. 139

140 15 The Notes to be issued by the Issuer qualify under Category 2 for the purposes of Regulation S under the Securities Act ( Regulation S ). Materialised Notes will be issued in compliance with US Treas. Reg (c)(2)(i)(D) (the D Rules ) unless (i) the relevant Final Terms state that such Materialised Notes are issued in compliance with US Treas. Reg (c)(2)(i)(C) (the C Rules ), or (ii) such Materialised Notes are issued other than in compliance with the D Rules or the C Rules but in circumstances in which the Notes will not constitute registration required obligations under the United States Tax Equity and Fiscal Responsibility Act of 1982 ( TEFRA ), which circumstances will be referred to in the relevant Final Terms as a transaction to which TEFRA is not applicable. The TEFRA rules do not apply to any Dematerialised Notes. 16 On 3 June 2003, the European Union adopted the Directive 2003/48/EC regarding the taxation of savings income in the form of interest payments (the Directive ). The Directive requires Member States as from 1 July 2005 to provide to the tax authorities of other Member States details of payments of interest and other similar income within the meaning of the Directive made by a paying agent within its jurisdiction to (or under circumstances to the benefit of) an individual resident in another Member State, except that Belgium, Luxembourg and Austria will instead impose a withholding system for a transitional period unless the beneficiary of interest payment elects for the exchange of information. The same regime applies to payments to individuals resident in any of the following territories: Netherlands Antilles, Aruba, Guernsey, Jersey, the Isle of Man, Montserrat and the British Virgin Islands. If a payment were to be made or collected through a Member State which has opted for a withholding system and an amount of, or in respect of tax were to be withheld from that payment, neither the relevant Issuer nor any Paying Agent nor any other person would be obliged to pay additional amounts with respect to any Note as a result of the imposition of such withholding tax. If a withholding tax is imposed on payment made by a Paying Agent, the relevant Issuer will be required to maintain a Paying Agent in a Member State that will not be obliged to withhold or deduct tax pursuant to the Directive. In relation to French taxation, the Directive has been implemented in French law under Article 242 ter of the French General Tax Code and Articles 49 Iterto 49 I sexies of the Schedule III to the French General Tax Code. 140

141 VEOLIA ENVIRONNEMENT CONSOLIDATED FINANCIAL STATEMENTS FOR THE HALF YEAR PERIOD ENDED 30 JUNE

142 CONSOLIDATED FINANCIAL STATEMENTS FOR THE HALF YEAR PERIOD ENDED 30 JUNE HALF-YEARLY CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED INCOME STATEMENT ( millions) June 30, 2005 % June 30, 2004 % December 31, 2004 % Revenues 12, % 11, % 22, % Costs of sales (9,939.6) (8,983.1) (18,314.9) Selling costs (222.0) (204.3) (439.7) General and administrative costs (1,129.1) (1,067.4) (2,236.4) Other operating income and costs (28.7) Operating income % % 1, % Cost of net financial debt (324.1) (334.4) (732.1) Other financial income and expenses Income taxes (236.7) (185.1) (184.1) Equity in net income of affiliates Net income before discontinued operations % % % Net income from discontinued operations 83.9 (105.7) Net income % % % Minority interests (108.5) (89.2) (137.5) Net income (Group s share) % % % Basic earnings per share Diluted earnings per share

143 CONSOLIDATED BALANCE SHEET-ASSETS ( millions) Notes June 30, 2005 December 31, 2004 Goodwill I.C. 4, ,285.9 Other intangible assets I.D. 1, ,112.5 Tangible assets I.E. 11, ,958.1 Investments accounted for using the equity method Financial assets I.F. 2, ,914.3 Net deferred taxes Total non-current assets 20, ,678.3 Assets used in operations 9, ,823.4 Financial assets I.G Cash and cash equivalents I.H. 3, ,660.3 Total current assets 13, ,139.4 Discontinued assets Total assets 34, ,847.9 CONSOLIDATED BALANCE SHEET-LIABILITIES ( millions) Notes June 30, 2005 December 31, 2004 Shareholders equity 3, ,222.8 Minority interests I.I. 1, , Total equity 5, ,005.3 Deferred income Provisions for liabilities and charges I.L. 1, ,105.7 Financial long-term debts I.J. 13, ,055.8 Other long-term debts I.K Total non-current liabilities 14, ,515.1 Debts from operations 9, ,576.0 Current provisions for liabilities and charges I.L Short-term financial debts I.J. 3, ,426.1 Bank overdrafts Total current liabilities 14, ,323.0 Discontinued liabilities 4.5 Total liabilities 34, ,

144 CONSOLIDATED STATEMENTS OF CASH FLOW ( millions) June 30, 2005 June 30, 2004 December 31, 2004 Net income (Group s share) Minority interests Depreciation and amortization Financial depreciation and amortization (24.9) (15.7) (38.2) Others estimated profit and expenses 3.3 (27.7) (9.1) Gains on sales (33.9) (39.3) (161.3) Earning of affiliates (5.6) (30.1) (24.2) Dividends received (4.0) (4.7) (6.0) Cost of net financial debt Taxes Others Cash flow from operations 1, , ,460.6 Increase (decrease) in working capital (195.8) Tax paid (176.0) (153.0) (238.0) Cash flow provided by operating activities 1, , ,517.0 Purchase of tangible assets (868.1) (903.4) ( ) Proceeds from sale of tangible assets Purchase of investments (464.4) (172.7) (334.0) Proceeds from sales of financial assets Contracts interpretation IFRIC4 : New loans IFRIC 4 (84.3) (98.8) (177.0) Principal payment on loans IFRIC Dividends received Disbursement on notes receivables (340.8) (87.0) (132.5) Principal payment on notes receivables Net (increase) decrease in short-term loans Sales and purchases of marketable securities (42.3) Cash flow provided by investing activities (975.4) (741.7) Net increase (decrease) in short-term debts (1,580.1) (213.0) New loans and other long-term debts 1, Principal payment on bonds and other long-term debt (1,397.3) (676.3) (3,468.7) Net proceeds from issuance of common stock Purchase of treasury shares 6.2 (183.2) Dividends paid (352.4) (310.6) (389.6) Interests paid (248.0) (224.4) (640.9) Net cash provided by financing activities (2,178.1) (1,188.5) (1,795.5) Cash and cash equivalents beginning 4, , ,320.6 Currency exchange and others (76.2) 23.5 Cash and cash equivalents ending 2, , ,240.2 Cash and cash equivalents 3, , , Cash liabilities Cash and cash equivalents ending 2, , ,

145 STATEMENT OF CHANGE IN SHAREHOLDERS EQUITY Share capital Additional paid-in capital Fair value cash flow hedges (IAS32/39) Actuarial gains and losses (IAS19) Share based payments (IFRS2) Retained earnings Net incomes Shareholders equity Balance at January 1, , ,321.9 (86.7) (2,910.7) (2,054.7) 3,271.4 Capital increase (180.5) (128.5) Dividends paid & net income appropriation (2,272.6) 2,054.7 (217.9) Foreign currency translation adjustments (72.0) (72.0) Fair value Others (22.8) (22.8) Income at December 31, Balance at January 1, , ,357.6 (85.6) 6.9 (5,458.6) ,222.8 Capital increase Dividends paid & net income appropriation (391.5) (265.4) Foreign currency translation adjustments Fair value (2.3) (2.3) Others (17.4) (1.1) (18.5) Income at June 30, Balance at June 30, , ,359.5 (87.9) (17.4) 17.3 (5,148.1) ,

146 I.A. ACCOUNTING PRINCIPLES AND METHODS I.A.1. Preparation of Accounts as of June 30, 2005 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, Veolia Environnement has, beginning with its 2005 fiscal year, begun preparing its consolidated financial statements under IFRS, as published by the International Accounting Standards Board (IASB) and as endorsed by the European Union. For the preparation of half-yearly accounts for 2005, Veolia Environnement does not apply IAS34 but rather an alternative method proposed by the Autorité des Marchés Financiers (AMF) in its press release of June 27, Pursuant to this method: The presentation of the interim accounts and the notes thereto follows national regulations and recommendation CNC-99-R-01 relating to interim accounts; The accounting rules and principles of valuation applied are those required by IFRS. Some uncertainty remains regarding the definition and interpretation of certain accounting standards, in particular those relating to the treatment of concessions. New accounting pronouncements (three drafts of IFRIC interpretation) could significantly affect the future preparation of financial statements (see I.A.22) for 2004 and June 2005 that will be compared to the financial statements for December 2005 and June I.A.2. Preparation of 2004 IFRS Financial Statements In order to publish comparative statements for the 2005 fiscal year and in accordance with the AMF s recommendation on financial communications during the transition period, Veolia Environnement has prepared financial information for the 2004 fiscal year under IFRS and preliminary disclosed the expected impact of IFRS on its opening shareholders equity, on its financial situation as of December 31, 2004 and on its results for the first half of 2004 and the full 2004 fiscal year. The expected impact on opening shareholders equity, financial condition as of December 31, 2004 and financial performance for 2004 fiscal year was published by Veolia Environnement in an update to the Reference Document filed on April 5, 2005 with the AMF. This financial information for 2004 regarding the expected impact of IFRS has been prepared by applying to 2004 figures those IFRS standards and interpretations that Veolia Environnement believes that it must apply for the preparation of comparative consolidated financial statements as of and for the year ended December 31, The preparation of financial information for 2004 is based on the following IFRS standards and interpretations that must be applied at December 31,2005 as published to date; IFRS standards and interpretations that must be applied after 2005 which Veolia Environnement has decided to adopt early; options and exemptions that Veolia Environnement will likely choose in preparing its first IFRS consolidated financial statements for 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 are 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, Veolia Environnement has made the following choices: Business combinations realized before the date of transition were not retrospectively reassessed. Actuarial variations, cumulated at January 1, 2004, relating to pensions benefits commitments are accounted for in shareholders equity. Translation currency adjustment accumulated at January 1, 2004 is reclassified definitively in consolidated reserves. Valuation of tangible and intangible assets were left at historical cost; and without option for fair value; 146

147 Sales of Dailly (discounting of receivables) were consolidated retrospectively from January 1, For all other IFRS standards, the restatement of the initial value of assets and liabilities as of January 1, 2004 was made retrospectively as though those standards were always applied. Further, Veolia Environnement has opted to apply the following standards in advance: IAS 32 and 39, which relate to financial instruments (Regulation (EC) No. 2086/2004 of the European Commission of November 19,2004 and No. 2237/2004 of the European Commission of December 29,2004); IFRS 5, which relates to discontinued operations (Regulation (EC) No. 2236/2004 of the European Commission of December 23, 2004); and IFRIC 4 (interpretation of IAS 17 on leases). I.A.3. Principles of Consolidation All companies over which the Group has legal or effective control are fully consolidated. The Group uses the equity method of accounting for its investments in certain affiliates in which it owns at least 20% of the share capital or voting rights, and/or over which it exercises significant influence. The proportionate method of consolidation is used for investments in jointly controlled companies, where the Group and other shareholders have agreed to exercise joint control through a mutual agreement between the partners. In accordance with SIC12 interpretation, Special Purpose Entities (SPE) are consolidated when the substance of the relationship between the SPE and Veolia Environnement or its subsidiaries indicates that the SPE is controlled by Veolia Environnement. Control may arise through the predetermination of the activities of the SPE or through the fact that the substance of the financial and operating policies are defined by Veolia Environnement or that Veolia Environnement benefits from most of the economic advantages and/or assumes most of the economic risks related to the activity of the SPE. In accordance with IAS27, potential voting rights, linked to financial instruments that can give Veolia Environnement or its subsidiaries voting rights, are taken into account in evaluating control or significant influence. The Group uses the proportionate method of consolidation as required by rule IAS31. I.A.4. Use of Estimates The preparation of financial statements and financial information requires that certain estimates and assumptions be made, which affect the reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. Actual results could differ significantly from these estimates. Significant estimates made by the management of Veolia Environnement in the preparation of financial information for 2004 relating to the transition to IFRS and for June 30, 2005 include amounts for pension liabilities, deferred taxes, valuation estimates for long-lived assets, provisions as well as recorded and disclosed amounts for certain financial instruments. 147

148 I.A.5. Translation of Foreign Subsidiaries Financial Statements (IAS21) Balance sheets, income statements and cash flows of subsidiaries whose functional currency is different from that of the Group are translated into the reporting currency at the applicable exchange rate (i.e., the rate as of June 30, 2005 for balance sheets, or the average rate for the first half year June, 30 income and cash flow statements ). Translation gains and losses are recorded in retained earnings. The exchange rates of the significant currencies of non-euro countries used in the preparation of the consolidated financial statements were as follows: Closing exchange rates June 30, 2005 Average exchange rates First half year 2005 (one currency = xx ) (one currency = xx ) U.S. dollar U.S. dollar Pound sterling Pound sterling I.A.6. Foreign Currency Transactions (IAS21 IAS39) Foreign currency transactions are converted into euros at the exchange rate in effect on the transaction date. At closing, receivables and payables denominated in foreign currencies are converted into euros at closing exchange rates. The resulting exchange losses and gains are recorded in the current earnings period. Exchange gains or losses on borrowings denominated in foreign currencies or on foreign currency derivatives that qualify as hedges of net investments in foreign subsidiaries are included as currency translation adjustments in retained earning equity. I.A.7. Tangible Assets (IAS16) Tangible assets are carried at cost. Interest expenses on funding of acquisition and construction of identified facilities are capitalized as part of the cost of tangible assets in accordance with IAS23. Subsidies are deducted from the gross value of the tangible assets. The tangible assets are recorded by components. Every component is depreciated using the useful life. In accordance with IAS17, assets financed by capital lease are recognized at the present value of the minimum lease payments, or at the fair value, if lower, and amortized over the shorter of the lease term or the estimated useful lives of the assets. I.A.8. Other Intangible Assets (IAS38) Other intangible assets include costs to obtain contracts, such as fees paid to local authorities for public service contracts, and are amortized over the duration of the contract. Start-up costs relating to the implementation of new contracts are not recognized as intangible assets, and are charged to expense in the period they are incurred. Market shares and trademarks acquired in connection with a business combination are reclassified as goodwill. Pre-paid expenses recorded as assets are not recognized under IFRS and are accounted for based on the nature of the costs. With respect to its emission rights related to greenhouse gases, Veolia Environnement applies accounting method consistent with avis no 2004-C of the Comité d urgence du Conseil National de la Comptabilité of March 23, An intangible asset is recorded at fair value at the date of award of the emission rights and a public subsidy is recorded in liabilities as a counterpart. A part of the subsidy relating to depletion for a given period is later reclassified as a provision for liabilities and charges. This accounting treatment is provisional and could be modified in 2005, as the company awaits a decision by the IFRIC/IASB matter. 148

149 I.A.9. Business Combinations and Goodwill (IFRS3) All business combinations are recorded using the purchase accounting method. Under the purchase accounting method, assets acquired and liabilities assumed are recorded at their fair value. The excess of the purchase price over the fair value of net assets acquired, if any, is capitalized as goodwill. Under IFRS, goodwill is not required to be amortized. Pursuant to IAS36, impairment tests on goodwill must be made at the level of the cash generating unit every year. The cash generating unit is defined as a geographical area per business segment. I.A.10. Valuation of Long Lived Assets (IAS36) IAS36, relating to asset impairment, requires continual monitoring of asset values. Tangible and intangible assets with definitive life are subject to an impairment test as soon as an indication of a loss in value is detected. Intangible assets with indefinite useful life are reviewed annually, even in the absence of an indication of a loss in value. Each year, Veolia Environnement systematically reviews its goodwill during its strategic planning. If the longterm prospects of an activity are durably downgraded, an estimate is realized and an impairment is accounted for at the interim accounts closing if necessary. The assets are valued at market value in case of a decision to sell them and, at fair value if they are retained. In case of disposal, market value is based on the multiples method (brokers surveys) or recent similar transactions. When the assets are retained, the preferred method is the discounted future cash flows method with terminal value. The discontinued future cash flows include the cash flow before the cost of net financial debt but after tax, the change in working capital requirement and renewal investments. The discount rate, defined by Cash Generating Units, is equivalent to the sum of risk-free rate, a local risk premium and a global risk premium with business specific adjustments. I.A.11. Provisions (IAS37) In accordance with IAS37, provisions which mature in more than 12 months are discounted. In the case of reserves for site restoration, Veolia Environnement accounts for the obligation to restore a site as waste is deposited at the site, recording a tangible asset and taking into account inflation and the date on which expenses are committed. This asset is amortized based on its depletion. Accretion expenses (the effects of passage of time) are recorded in the income statement under other financial income and expenses. I.A.12. Inventories (IAS2) Group companies value inventories according to the provisions of IAS2, at the lower of cost or net realizable value. I.A.13. Financial Instruments (IAS 32 & 39) VALUATION OF FINANCIAL INSTRUMENTS Investments in marketable securities : Under IFRS, investments in debt and equity securities are classified into three categories and accounted for as follows: Debt securities that the Group has the intention and the ability to hold to maturity are carried at cost and classified as held-to-maturity. 149

150 Debt and equity securities that are acquired and held principally for the purpose of sale in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses included in earnings. All other investment securities not otherwise classified as either held-to-maturity or trading are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in shareholders equity. Upon the sale of shares, the cumulative variation of fair value booked in equity is recorded in the income statement. Financial debt accounting : Financial debts are valued and recorded at amortized cost according to the effective interest rate method. Premium redemption reserves and fees bond issuance costs are a part of the cost of the debt. These are initially deducted from debt for valuation purposes. Treasury shares : Under IFRS, treasury shares are recorded as a reduction of shareholders equity. Profit and loss on the disposal of treasury shares is recognized as an adjustment to shareholders equity and does not affect net income. Derivative financial instruments According to IAS 32 & 39, derivative financial instruments (including those embedded in other contracts) should be recorded on the balance sheet at their fair value. Accounting for changes in fair value depends on whether the derivative instrument is classified as a fair value hedge, a net investment in a foreign currency hedge or a cashflow hedge, or is regarded as not being a hedging instrument under IAS 32 & 39. a) Variations of fair value hedges are recorded in financial income (expenses). The effect on income is matched by the reevaluation of the hedged asset, debt or firm commitment which is also recorded in financial income (expenses). b) Variations of cash-flow hedges are recorded in shareholders equity in a specific item. They are recorded in income depending on the realization of the underlying cash-flow. The change in fair value of derivatives regarded as ineffective is recorded in the income statement. c) Variations of net investment in a foreign currency hedge are recorded under cumulative translation adjustment. The change in fair value of derivatives regarded as ineffective is recorded in the income statement. d) Derivative instruments used by Veolia Environnement as part of its risk management policy, but which do not constitute hedging instruments under IAS32 & 39, are recorded at their fair value, with changes to their value included in net income for the period. A hedging relationship is denoted when derivative instruments are assigned to an asset, a debt, a firm commitment or a future cash flow and must be defined and justified from the outset. Hedge effectiveness is the degree to which off setting changes in fair value or cash flows attributable to a hedged risk are achieved by the hedging instrument. Hedge effectiveness has to be regularly checked. The ineffectiveness of the hedging instrument is systematically recorded in financial income (expenses). I.A.14. Pension Plans (IAS19) The Group has several pension plans. Pension obligations are calculated using the projected unit credit method. This method considers the probability of personnel remaining with companies in the Group until retirement, the foreseeable changes in future compensation, and the appropriate discount rate for each country in which the Group maintains a pension plan. This results in the recognition of pension-related assets or liabilities, and the recognition of the related net expenses over the estimated term of service of the employees. Veolia Environnement has chosen to allocate actuarial gains and losses to equity at January 1, 2004 and to apply revised IAS19 in advance. Consequently new actuarial gains and losses at this date are charged to shareholders equity and no amortization linked to those actuarial gains and losses has been recorded in the income statement. 150

151 I.A.15. Share-Based Payments (IFRS2) IFRS2 on share-based payments modifies the measurement of share subscription plans or share option plans and other additional employee remuneration in shares by the Group. The fair value of those plans at grant date is accounted as a charge with direct counter-party in equity at the date the rights are vested and services rendered. According to IFRS2, only plans that were granted after 7 November 2002 and for which rights are not vested at 1 January 2005 are valued and recorded under personel costs. I.A.16. Accounting Polices Specific to Environmental Services Activities Veolia Environnement provides environmental management services to municipal and industrial clients. In so doing, Veolia Environnement manages numerous contracts with its municipal and industrial clients under which it operates assets that it returns at the end of the contract. In certain cases, Veolia Environnement may also be called upon to provide asset financing on behalf of these clients. As part of the analysis conducted to implement IFRS, Veolia Environnement was required to examine the substance of such contracts. For purposes of this examination, Veolia Environnement relied on IAS 17 (Accounting for leases), and in particular on the interpretation thereof, IFRIC 4, published in December 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. Veolia Environnement conducted an analysis of its 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. This treatment led to reclassification of tangible assets under French GAAP to financial receivables. Facilities in progress by a subsidiary of Veolia Environnement and which are likely to be accounted in financial receivables during the operating cycle are recorded as financial receivables. Those financial receivables are measured at amortized cost according to the effective interest method. The implied interest and rate on receivables is calculated, after contract analysis and financing analysis, on the financing rate of the Group or on the debt linked to the contract. Concession and affermage contracts While it waits for the forthcoming accounting rules on concessions to be issued, Veolia Environnement has chosen to retain its existing accounting methods for these contracts, except for certain restatements in terms of presentation. Accordingly, financial depreciation charges ( amortissement de caducité ), recorded under French GAAP as provisions for risks and charges, were reclassified as a deduction from tangible assets. 151

152 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. The Group, as part of its contractual obligations under public services contracts, assumes responsibility for the replacement of fixed assets in the publicly owned utility networks it manages. Maintenance and repair costs are expensed as incurred except for specific contracts for which costs are accrued in advance (provision for renewal and total guarantee), and continue to be recorded as they were under French GAAP. Other contracts 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. Veolia Environnement will again analyze its contracts as soon as the interpretive drafts relating to concession and affermage contracts are published. I.A.17. Construction (IAS11) Under IAS11, Veolia Environnement is using the completion method for the accounting of construction contracts. I.A.18. Revenues (IAS18) Under IAS18, the definition of revenues has been modified. The conditions under which income may be recognized at its fair value necessitate that the risks and advantages, as well as control over the items sold, be effectively transferred to the purchaser. Because of the specific activities of Veolia Environnement, fees and taxes collected on behalf of local authorities are excluded from revenues, since there is no risk of non-reimbursement by third parties. Incomes concerning contracts IFRS 4 (see I.A.16) include: the reimbursement of local authorities financing ; the yield of the financial receivables The first item is not included in revenues, but the related financial incomes are included I.A.19. Deferred Taxes (IAS12) Deferred tax assets are recognized for deductible temporary differences, net tax operating loss carry forwards and tax credit carry forwards. Deferred tax liabilities, including those relating to tax loss carry-forwards, are recognized for taxable temporary differences. Deferred tax assets are recorded at their estimated net realizable value. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the enactment date. Deferred taxes are not discounted. I.A.20. Cash and Cash Equivalents Cash and cash equivalents include all cash balances and short-term highly liquid investments with original maturities of three months or less at the time of purchase, highly liquid investment funds (OPCVM) and negotiable instruments of debt. These investments are mobile or transferable in the short-term and bear no significant risk in terms of loss of value. I.A.21. Segment Information (IAS14) Pursuant to IAS14, Veolia Environnement has chosen to report primary financial information by business segment and by geographical area. There is no difference between IFRS and French standards. Business segments are Water, Waste Management, Energy Services and Transportation. 152

153 I.A.22. Future Interpretations Applicable in 2005 or 2006, relating to Concessions (text projects d12, d13, d14 are in progress for examination) The draft IFRIC interpretation s published in March 2005 would apply to contracts with the following characteristics: the service provided can be regarded as a public service, the grantor determines the conditions under which the assets are operated and directly or indirectly fixes the tariff for the service and assets of material residual value revert to the grantor at the end of the concession. According to these draft interpretations, the assets used in public services arrangements could not be recognized in the balance sheet of the operator as tangible assets. When the operator provides the required infrastructure, two accounting models may be applied to the balance sheet of the operator: the financial asset model or the intangible asset model. The Group is analyzing the impacts of these drafts of interpretations. Consequently, while it waits for the forthcoming accounting rules on concessions to be issued, Veolia Environnement has chosen to retain its existing French GAAP accounting methods for these contracts, except for certain restatements in terms of presentation. In light of the draft IFRIC interpretations and IAS11, Veolia Environnement decided to modify the previous published 2004 financial information relating to the treatment of so-called Build Operating and Transfer (BOT) contracts. This modification leds to the recording in 2004 of revenues resulting from the construction phase of such contracts. These contracts give rise to the recording of a financial loan on the balance sheet as a counterpart to revenue, according to the completion method set forth in standard IAS11 on construction contracts. Revenues were increased by 147 million and operating assets were reclassified by 258 million. The effect on net income and equity was not significant. I.B. SIGNIFICANT EVENTS At January 1, 2005, the group acquired a water services company in connection with the commencement of operations under its of Braunschweig contract, in Lower Saxony (Germany). The Group invested 374 million in this company and acquired 74.9% of its share capital. At June 30, 2005 revenues recorded under this contract amounted to 195 million. I.C. GOODWILL ( millions) June December 31, 2004 Water 2, ,861.3 Waste Management 1, ,359.4 Energy Services Transportation Proactiva Total 4, ,285.9 The increase in goodwill is mainly due to the acquisition of the water services company in Braunschweig, Germany ( 146 million) and appreciation of the dollar against the euro (+ 98 million). The allocation of the acquisition cost for this water services company is provisional and is subject to change in the full year 2005 accounts. I.D. INTANGIBLE ASSETS ( millions) June 30, 2005 December 31, 2004 Gross value Amortization Net value Fees paid to local authorities 1,405.2 (739.8) Trademarks 98.6 (14.5) Software (253.9) Other intangible assets (151.5) Total 2,414.7 (1,159.7) 1, ,

154 The million increase in intangible assets results primarily from the recording of 98.1 million CO² emission rights in other intangible assets and a positive exchange rate effect of 27.5 million, offset by total amortization of (84.8) million and a consolidation scope effect of (28.6) million. I.E. TANGIBLE ASSETS ( millions) June 30, 2005 December 31, 2004 Gross value Amortization Net value Owned tangible asset under construction 16,394.4 (8,532.2) 7, ,216.0 Pub.-owned tangible asset under construction 6,595.8 (2,801.4) 3, ,742.1 Total 22,990.2 (11,333.6) 11, ,958.1 The increase in tangible assets results primarily from investments of million, positive exchange rate effects of million (including 86.8 million, 78.2 million, and 33.6 million relating to the appreciation of the Dollar, the Pound and the Chinese Yuan versus the Euro, respectively), consolidation scope effects of million (with the acquisition of the company in Braunschweig accounting for million), offset by total amortization of (606.0) million. I.F. NON CURRENT FINANCIAL ASSETS ( millions) June 30, 2005 December 31, 2004 Financial loans interpretation I4 1, ,725.0 Other long-term financial loans 434, Derivatives instruments Instruments accounted for using the cost method Others Non current financial assets 2, ,914.3 The increase in financial loans interpretation I4 for 84.3 million results from the BOT projects in Brussels and The Hague (Water). Reimbursements relate to (82.8) million in cogeneration. Derivatives instruments include fair value hedges of financial debt for 301 million as of June 30, 2005 and 284 million as of December 31, I.G. CURRENT FINANCIAL ASSETS ( millions) June 30, 2005 December 31, 2004 Financial loans Interpretation I Others short term financial loans Net marketable securities Current others financial assets The million decrease in net marketable securities is due mainly to disposals of mutual funds for 117 million. I.H. CASH AND CASH EQUIVALENTS Cash and cash equivalents amount to 3,171 million at June 30, 2005 versus 4,660 million at December 31, ( millions) June 30, 2005 December 31, 2004 Cash 1, Monetary instruments 1, ,228.9 Other instruments of short-term cash Cash and cash equivalents 3, ,

155 The reduction in cash and cash equivalents is mainly due to the repayment of outstanding bonds (OCEANEs) in amount of 1,535 million (see Note I.J debt section current financial liabilities) I.I. MINORITY INTERESTS ( millions) June 30, 2005 Minority interests beginning 1,782.5 Changes in consolidation s scope Minority interests in income of consolidated subsidiaries Dividends paid by consolidated subsidiaries (100.8) Impact of foreign currency fluctuations in minority interests 5.9 Others Changes (0.8) Minority interests ending 1,906.1 The variation mainly derives from minority interest in the company holding the Braunschweig contract. I.J. DEBT Long-term financial debt The principal components of long-term financial debt are as follows: ( millions) June 30, 2005 December 31, 2004 EMTN (a) 6, ,538.7 Us Private placement (b) Three Valleys Montgomery Tyseley Berliner Wasser Betriebe (c) 1, ,340.1 Syndicated credit in CZK (d) Capital lease Special purposes entities Veolia Water France securitization Public authority loans (concessions) COGEVOLT TSAR (e) Other debt (unit amount < 100 million) 1, ,603.3 Total 13, ,055.8 (a) At June 30, 2005, bonds issued under the EMTN program totaled 6,764.2 million of which 6,263.9 million was due to expire in more than one year. Revaluation at fair value of non current debt is million. During the first half of 2005, VE issued notes under its EMTN program totaling million, the average maturity of which was 10 years, which broke down as follows: 600 million issuance linked to European inflation, with maturity on June 17, 2015 and nominal rate of 1.75%. Amortization cost amounts to million as of June 30, $50 million issuance, with maturity on June 30, 2015 and a nominal rate of 4.685%. Amortization cost amounts to 40.4 million as of June 30, (b) The US private placement in the United States amounts to million (including 12 million of revaluation at fair value) as of June 30,2005. (c) The Berliner Wasser Betriebe debt break down as follows: The outstanding debt carried by operating companies amounts to 1,274.9 million at June 30, 2005 versus 1,040.1 million at December 31,

156 (d) (e) The acquisition debt amounts to 600 million at June 30, The part of the acquisition debt ( 300 million) that matured on January 31, 2005 was refinanced on January 13, 2005 for a 3-year term and has been reclassified in long-term debt. This syndicated credit, arranged by Crédit Lyonnais, ING Bank et Komerčni Banka, for the benefit of Veolia Environnement and an amount of CZK 8,000 million crowns falls due completely on November 7, At June 30, 2005, the syndicated credit is fully drawn ( million). The purpose of this syndicated credit is to finance Czech activities of the Group. It has been refinanced on July 29, 2005 for CZK 12,000 million. VEFO redeemed the TSARs on March 31, 2005 for 300 million. The breakdown of the original financial debts long-term by currency is as follows : ( millions) June 30, 2005 December 31, 2004 Euro 10, ,922.8 U.S Dollar Pound Sterling Czech Crowns Australian Dollar Korean Won Norwegian Crown Others Total 13, ,055.8 The increase in long-term debt denominated in euro of million during the first half of the year results primarily from: Issuance of bonds linked to European inflation for 600 million. Refinancing of the acquisition debt of Berlin for 300 million (consolidated contribution). The early redemption of the TSARs on March 31, 2005 for 300 million partly offset the increase in debt during the first half of The breakdown of long-term financial debts by maturity is as follows: ( millions) June 30, 2005 December 31, 2004 Due between one and two years 1, ,404.0 Due between two and five years 4, ,205.6 Due after five years 7, Total 13, ,055.8 Current financial liabilities The amount of financial liabilities amounts to 3,440.5 million on June 30, 2005 compared to 5,426.1 million on December 31, The reduction of 1,986 million is due to the repayment of outstanding OCEANEs in the amount of 1,535 million on January 1, 2005, as well as the refinancing of 300 million of debt related to the Berlin acquisition (for a 3-year period), fallen the January 1, 2005, refinanced on 13 January 2005 in a 3 year debt and reclassified as long-term debt. Undrawn credit lines The main undrawn credit lines at June 30, 2005 were as follows: In Veolia Environnement holding: Undrawn multi purposes short-term credits lines for 640 million, Undrawn multi purposes medium-term credits lines for 450 million, Medium-term syndicated credits for 4,000 million maturing on April 20,

157 I.K. OTHER NON CURRENT LIABILITIES ( millions) June 30, 2005 December 31, 2004 Derivatives instruments Emission rights subsidies 42,8 Other non current liabilities Total The emission rights subsidies relates to public subsidies for the emission of greenhouse gases not yet used during the first half year 2005 (see note I.A.8). I.L. PROVISIONS In accordance with IAS37 ( see note I.A.11) provisions with maturity exceeding one year are discounted. This evolution of the rates is as follows : Change of the rates June 30, 2005 December 31, 2004 Euros 2 to 5 years 2.78% 3.23% 6 to 10 years 3.58% 4.79% More than 10 years 4.17% 5.16% Dollars 2 to 5 years 4.24% 2.84% 6 to 10 years 4.71% 4.79% More than 10 years 5.05% 5.16% Pound Sterling 2 to 5 years 4.79% 5.42% 6 to 10 years 5.04% 5.67% More than 10 years 5.12% 5.67% The discount rates mainly decreased between December 31, 2004 and June 30, The actualization of the provisions involves additional allowances. Provisions for liabilities and charges ( millions) June 30, 2005 December 31, 2004 Current provisions for liabilities and charges Non current provisions for liabilities and charges Additional provision for closure and post closure costs resulting from new commitments, discounting and change in discount rates of the provision impact provisions respectively up to 20.3 million, 8.1 million and (2.9) million. The increase in the provision for liabilities and charges is mainly due to the use of the CO² emission rights by the Energy Services Division in the amount of 55.1 million (see note I.A.8). Provision for employee benefits ( millions) June 30, 2005 December 31, 2004 Employee benefits > 1 year Employee benefits <1 year

158 The increase in the provision for employee benefits results primarily from additional actuarial losses of 28.7 million, allowances of 12.5 million and change in consolidation scope of 12.8 million. I.M. SECTORIAL INFORMATIONS Within the framework of IAS14, Veolia Environnement provides primary information by business segment and secondary information by geographical area. The application of IAS14 does not result differences with French standards. The business segments are Water, Waste Management, Energy Services and Transportation. Water the Group manages and operates water and wastewater treatment and distribution systems for public authorities and private companies. The Group is also a designer and manufacturer of water and wastewater treatment equipment and water systems. Waste Management the Group collects hazardous and non-hazardous waste and offers related services, including disposal, treatment and recycling. Energy Services the Group provides energy management services and offers a wide range of industrial utilities and facilities management services. Transportation the Group provides integrated transportation solutions involving bus, train, maritime, tram and other networks. Revenues by segment ( millions) June 30, 2005 June 30, 2004 December 31, 2004 Water 4, , ,777.4 Waste Management 3, , ,214.4 Energy Services 2, , ,919.8 Transportation 2, , ,588.7 Revenues 12, , ,500.3 By geographical area ( millions) June 30, 2005 June 30, 2004 December 31, 2004 France 5, , ,085.0 United Kingdom ,336.2 Germany ,291.0 Rest of Europe 2, , ,378.1 United States of America ,102.8 Rest of the world 1, , ,307.2 Revenues 12, , ,500.3 Operating income by segment ( millions) June June 30, 2004 December 31, 2004 Water Waste Management Energy Services Transportation Holdings (38.9) (46.0) (71.1) Operating income ,

159 I.N. OTHERS COMPONENTS OF INCOME STATEMENT Personnel charges Personnel charges amount to 3,958 million in the first half of 2005 versus 3,913 million in the first half 2004, excluding activities in the process of being sold. Cost of net financial debt ( millions) June June December 31, 2004 Income Expense (366.3) (375.1) (829.1) Total (324.1) (334.4) (732.1) Income tax ( millions) June June Current tax (169.3) (149.8) France (63.5) (70.1) Other countries (105.8) (79.7) Deferred tax (67.4) (35.3) France (9.3) (42.3) Other countries (58.1) 7.0 Total (236.7) (185.1) The computation of the income tax is based on effective tax rate method for the first half year 2005, which consists of multiplying accounting income before tax by the expected tax rate for the full year. I.O. COMMITMENTS AND CONTINGENCIES Specific commitments given Southern Water operation In 2003, the company refinanced its investment in Southern Water. As a result, the company signed a first contract with Société Générale Bank Trust ( SGBT ) on June 30, 2003 and a second contract with CDC Ixis on July 18, The terms are as follows: SGBT and CDC Ixis each subscribed for 110 million of preferred shares without voting rights issued by Southern Water and previously acquired by Veolia Water UK, SGBT and CDC Ixis each hold a put option, maturing in 5 years, allowing them to sell the preferred shares without voting rights to Veolia Environnement at an average exercise price based on a price adjusted by an annual yield of 5.5%. The put options relate to unlisted company whose fair value cannot be reliably estimated. As of June 30, 2005 there is no impairment on the put. Agreements with EDF EDF entered into a call option with the Group on Dalkia shares in case of a takeover bid on the Group by a competitor of EDF. Furthermore, the Group entered into a call option with EDF on its Dalkia shares in case of a change in EDF s status or a takeover bid on EDF by a competitor of Veolia Environnement. The share price is to be determined by an independent expert if there is no agreement. EDF and Veolia Environnement each hold call options and put options which would allow, in case of exercise by one of the parties, EDF to own 50% of the equity and voting rights of Dalkia. Exercise of these options is subject to the liberalization of the electricity market in France. The agreement is presently under review and was the subject of a press releases in July 2005 (see note I.Q). 159

160 Replacement engagement The Group and its water distribution and energy services subsidiaries, as part of their contractual obligations through public services contracts and in return for the revenue they receive, assume responsibility for the replacement of fixed assets in the publicly owned utility networks they manage. The Group forecasts the expenditures required in this regard over the remaining duration of the relevant contracts. The accumulated expenditure forecast is estimated at 2.3 billion ( 1.8 billion for water and 0.5 billion for energy). These expenditures will either be expensed or amortized over the shorter of the estimated useful lives of the assets or the contract period, according to the contract terms. Performance Bonds issued for U.S. subsidiaries Insurance companies have issued performance guarantees in connection with the activities of the Group s U.S. subsidiaries (operational guarantees, guarantees of site restoration), which have been underwritten by Veolia Environnement SA up to a maximum amount of $1.4 billion ($0.1 billion at June 30, 2005). Specific Berlin contract engagement Under the Berlin water contract, the Group may be obligated to pay approximately 610 million (at 50%) to previous land owners, not indemnified by the Berlin government, who present claims for payments. The commitment results from the former situation of the eastern side of Berlin in which water pipes may run under private property. Timetable of the specific commitments given Specific engagement given ( millions) December 31, 2004 June 30, 2005 June 30, 2005 Maturity 1to5 years More than 5 years Put Southern Water Water replacement engagement 1,756 1, Energy Services replacement engagement Performance bonds issued for US subsidiaries Specific Berlin contract engagement Total 3,355 3, ,302 1,635 Others commitments given Other commitments given do not include either the valuable securities given against the loan guarantee (see note I.P) nor the specific commitments mentioned above. In conformity with the recommendation of the AMF, detail on other commitments given is as follows: ( millions) December 31, 2004 June 30, 2005 June 30, 2005 Maturity 1to5 years More than 5 years Operational guarantees 2, , , ,088.9 Financial guarantees Debt guarantees Warranty obligations given Commitments given Obligations to buy * Obligations to sell Other commitments given Letters of credit Other commitments given Total 4, , , , ,104.9 * Including million representing commitment to acquire Lodz contract under process since April 2005 and finalized in August

161 Operational guarantees (performance bonds): In the course of their normal activities, the Group s subsidiaries give guarantees to their customers. If the company does not reach its specified targets, it may have to pay penalties. This commitment is often guaranteed by an insurance company, a financial institution, or the parent company of the Group. These guarantees included in the contract are performance commitments. The insurance company or the financial institution often requires counter guarantees from the parent company. The commitment is the amount of the guarantee anticipated in the contract and given by the parent company to the customer or the counter guarantee given by the parent company to the insurance company or to the financial institution. Debt guarantees: These relate to guarantees given to financial institutions in connection with the financial debt of non-consolidated companies, companies accounted for under the equity method, or companies consolidated through proportional consolidation. Warrantly obligations given: These primarily include guarantees linked to Water disposals in the United States for 359 million, to Bonna disposals for 65.2 million and to the disposal of Connex Transport UK for 24.2 million. Letters of credit: The amount of the credit line given by a bank or financial institution which has not been drawn against. Other commitments given are distributed by division as follows : ( millions) June 30, 2005 December 31, 2004 Water 2, ,334.4 Waste Management Energy Services Transportation Proactiva Holding Others Total 4, ,600.2 Operating leases and capital leases The Group uses capital leases in order to finance certain operating assets and investment properties. The Group has capitalized these assets and recorded the principal portion of the related capital leases as long-term debt at its present value ( million) (see note I.J.). Payments under these capital lease obligations at June 30, 2005 and at December 31, 2004 represent 1.2 billon and 1.1 billion respectively. Furthermore, the Group uses operating leases (mainly for transportation equipment and treatment plants). As of June 30, 2005, minimum future payments for these contracts amounted to: ( millions) Operating leases Capital leases (balance sheet) and later years Total minimum future capital lease payments 1, ,153.2 Less amounts representing interest Present value of net minimum future capital lease payment Litigation (other than those specifically accounted for) The Group is subject to various litigation in the normal course of its business. Although it is not possible to predict the outcome of such litigation with certainty, based on the facts known by the Group and after 161

162 consultation with counsel, management believes that such litigation will not have a material adverse effect on the Group s financial position or results of operations. Commitments received ( millions) June 30, 2005 December 31, 2004 Commitments received 1, ,031.3 Debt guarantees Warrantly obligations received Other engagements received 1,396.7* * Including million relating to commitments on EDF s electric contracts and million relating to the receipt of emission rights for 2006 ( million) and 2007 ( million). I.P. BANK BORROWINGS SUPPORTED BY COLLATERAL GUARANTEES At June 30, 2005, 715 million in bank borrowings was supported by collateral guarantees. The breakdown by type of asset is as follows (in millions): Type of collateral guarantees / mortgage Amount pledged (a) Total amount on the balance sheet (b) % (a) / (b) On intangible assets 2 1, % On tangible assets , % On financial assets 414 Total non-current assets 676 On current assets 39 13, % Total assets 715 * As financial assets pledged as collateral are essentially stocks on consolidated subsidiaries, the assets pledged/total balance sheet item ratio is not meaningful. The breakdown of collateral by maturity is as follows: ( millions) December 31, 2004 June 30, 2005 Less than 1 year Maturity 1to5 years More than 5 years Intangible assets Tangible assets Mortgages Other tangible assets (1) Financial assets Shenzen (2) (4) Samsung VW Inchon (2) (4) Delfluent (2) (4) Chengdu (2) (4) Crivina (2) (4) VW Industrial Dvpt (2) (4) VW Korean Daesan (3) (4) Cle Brazil Connex Regiobahn Technoborgo (2) (4) Taitung (2) (5) PPC (2) 9 Current assets Accounts receivable Other tangible assets (inventories) Total (1) Mainly equipment and traveling system. 162

163 (2) 100% of equity pledged as collateral. (3) 95% of equity pledged as collateral. (4) Securities consolidated at June 30, (5) Equity method investments as of June 30, I.Q. SUBSEQUENT EVENTS Evolution of the partnership between EDF and Veolia Environnement In connection with the agreement signed in December 2000, EDF and Veolia Environnement are currently engaged in discussions on future changes in their industrial and commercial partnership and the shareholders agreement related to their respective shareholdings in Dalkia. In accordance with this partnership agreement, EDF has a call option allowing it to increase its shareholding in Dalkia up to 50%, subject to a certain number of conditions being met. The terms and conditions of this option were clarified on April 19, 2005 in an amendment agreement. In this context, EDF has exercised on July 28, 2005, as a precautionary measure, the call option that was granted to it until July 31, However, this option will be deemed to have been definitively exercised, if and when the parties enter into a formal agreement relating to, inter alia, the reorganization of their relations arising from their industrial and commercial agreement and of their rights and obligations under the shareholders agreement, including the rules of corporate governance. If no agreement were to be reached on September 30, 2005 at the latest, the option would automatically expire and would be of no further force and effect; the original partnership would not be affected in any other respect. 163

164 II MANAGEMENT REPORT I.R. BUSINESS ACTIVITY DURING THE FIRST HALF OF 2005 I.R.1. Focused on its Core Business, the Group Has Pursued its Development Two contracts in particular had a significant impact on the Group s activity: The finalization of the acquisition under the Braunschweig contract (involving water, heating, gas distribution and electricity services) for a price of 374 million and yielding revenues for the first half of 2005 of 195 million. The commencement of operations under a one-year urban transport contract in Toulouse while the group awaits a new solicitation of public bids. Revenues under this contract amounted to 55 million for the first half The Group also won other contracts during the first part of 2005, which are expected to have a material impact on the results at the time that operations under such contracts begin: In March 2005, Onyx was awarded the only electricity production project relying on biogas collection and recovery from household and non-hazardous industrial waste in the Biomass Biogas competitive bid organized by the French Ministry for Industry and the Commission de Régulation de l Electricité (CRE) to promote renewable energies. Operations under this 15-year contract will begin at the end of 2006, with total revenues during the contract term expected to exceed 160 million. On March 29, 2005 PSA Peugeot Citroën, the second largest European car manufacturer, entrusted Veolia Environnement the management of environment services at its new factory in Trnava (Slovakia). This 8-year contract is expected to generate total revenues during the contract term of 60 million. In April 2005, the York transport authority (York Regional Transit) awarded Connex, the transport division of Veolia Environnement, the operation of the express right-of-way bus network in York in the suburbs of Toronto (Ontario province), Canada. The renewable 5-year operating contract that starts as of September 2005 is expected to generate total revenues during the contract term of approximately 62 million. In June 2005, Veolia Water was awarded a major contract to supply water services by the Hradec Kralove water company, the public water authority of Eastern Bohemia (Czech Republic). This contract covers drinking water production and distribution, customer relations, as well as wastewater collection and treatment. The 30-year contract is expected to generate total revenues during the contract term in excess of 525 million. The Group won various water contracts in Italy from the ENEL company, representing an investment of 37 million and revenues for the first half of 2005 of 21 million. In July 2005, Onyx won a 26-year contract in Notthinghamshire country (Great Britain), expected to generate total revenues during the contract term of approximately of 1.2 billion. In August 2005, Dalkia signed a contract for the purchase of a company that manages urban heating for the town of Lodz (Poland) and and the production of heat and electricity through cogeneration. This contract expected to generate annual revenue of 167 million. In September 2005, Veolia Water won two new management contracts for wastewater treatment plants in China (with terms of 23 years and 25 years, respectively), expected to generate total revenues of 340 million. I.R.2. Continuation of the Review of Assets During thee first quarter of 2005, Veolia Environnement sold the nuclear maintenance activity of its Energy division for 17 million. The first half of 2005 was also marked by the finalization of the sale of CBM ( trading of spare parts for buses) for a price of 31.5 million. Finally, the Group sold its minority in Acque Potabili company in Italy for 21 million. 164

165 I.R.3. Improvement in Moody s Rating Following its annual review, Moody s raised the Group s long-term financial debt rating from Baa1 to A3 in June I.R.4. Evolution of the Partnership Between EDF and Veolia Environnement In connection with the agreement signed in December 2000, EDF and Veolia Environnement are currently engaged in discussions on future changes in their industrial and commercial partnership and the shareholders agreement related to their respective shareholdings in Dalkia. In accordance with this partnership agreement, EDF has a call option allowing it to increase its shareholding in Dalkia up to 50%, subject to a certain number of conditions being met. The terms and conditions of this option were clarified on April 19, 2005 in an amendment agreement. In this context, EDF has exercised on July 28, 2005, as a precautionary measure, the call option that was granted to it until July 31, However, this option will be deemed to have been definitively exercised, if and when the parties enter into a formal agreement relating to, inter alia, the reorganization of their relations arising from their industrial and commercial agreement and of their rights and obligations under the shareholders agreement, including the rules of corporate governance. If no agreement were to be reached on September 30, 2005 at the latest, the option would automatically expire and would be of no further force and effect; the original partnership would not be affected in any other respect. II.B. ACCOUNTING AND FINANCIAL INFORMATION II.B.1. Definitions The term «organic growth» covers the growth resulting from: Expansion of existing contractual arrangements through increases in prices and/or volumes delivered; New contracts won; 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. Net recurring income is defined as follows: recurring part of the operating income + the recurring part of financial components + equity in net income of affiliates + recurring part of the minority interests + normative taxes on these results. II.B.2. Revenues II.B.2.1. General comment June 30, 2005 ( millions) June 30, 2004 ( millions) Variation 2005/2004 Of which organic growth Of which external growth 12, , % 9.2% 1.2% Effect of exchange rates The sales turnover consolidated of the Group, in progression of 10.4% result in 12,148.3 million against 11, million at June 30, The organic growth amounts 9.2%. 165

166 The share of the sales turnover realized with the International activities reaches 6,206.3 million, that it to say 51% of the total. II.B.2.2. Revenues by segment ( millions) June 30, 2005 June 30, 2004 Water 4, ,697.7 Waste Management 3, ,048.7 Energy Services 2, ,492.2 Transportation 2, ,767.7 Revenues 12, ,006.3 Water June 30, 2005 ( millions) June 30, 2004 ( millions) Variation 2005/2004 Of which organic growth Of which external growth Effect of exchange rates 4, , % 12.2% 1.4% 0.2% The external growth of 1.4% comes primarily from an acquisition in the engineering carried out by Veolia Water Systems. In France, strong recorded growth (+5.9%) was obtained thanks to the continuation of the growth of the work activity and the good performance of the distribution activity. InInternational, except Veolia Water Systems, the sales turnover is into rising sharply (+23.1% with exchange and constant perimeter). In Europe (+33.2% with constant exchange) the strong growth is carried by the starting in Germany of the contract Braunschweig, impact of the other new contracts signed during last month (in Czech Republic) and effects of the tariff rises in Great Britain. In Asia/ Oceania, the strong growth of the activity is largely drawn by the implementation from the contract of Schenzhen. Veolia Water Systems posts a appreciable sales turnover increase compared to the six first months of 2004 thanks to the good behaviour of the entire activities in France as to International and to the acquisition of Berkefeld (Germany). Waste Management June 30, 2005 ( millions) June 30, 2004 ( millions) Variation 2005/2004 Of which organic growth Of which external growth Effect of exchange rates 3, , % 4.4% 0.2% (0.9)% In Waste Management Activity the sales turnover in France increases of 3% (including 2.8% of organic growth) after the growth resumption recorded during the year A better performance recorded in industrial Waste Activity and the starting of new contracts of collection and cleaning allowed an acceleration during the second six-month period. In International, the progression of +4.3% (including 5.8% of organic growth) is particulary marked on the one hand in the United Kingdom because of the rise of tonnage and the powerfull rise of the great integrated contracts and on the other hand because of the strong growth recorded in the Asia/Pacific zone (+13.2%). In North America, obtaining new contracts and good volumes in toxic waste and a strong level of activity in the industrial services made it possible to record a satisfactory performance. Energy Services June 30, 2005 ( millions) June 30, 2004 ( millions) Variation 2005/2004 Of which organic growth Of which external growth Effect of exchange rates 2, , % 7.1% 0.8% In Energy services Division, the sales turnover in France (7.4% of organic growth) profits mainly from the raising of prices of energy in the thermal activity. 166

167 In International (6.6% of organic growth), the progression is primarily fed by the countries of Eastern Europe (+27.9% with perimeter and constant exchange) in particular in Poland, Hungary and Romania because of the full effect of new contracts. Transportation June 30, 2005 ( millions) June 30, 2004 ( millions) Variation 2005/2004 Of which organic growth Of which external growth Effect of exchange rates 2, , % 13.6% 4.4% 0.2% In Transportation division, the rise of the sales turnover is marked in France (17.1% of organic growth) by the effect of the starting of the contract of Toulouse at January 1, 2005 and the renewals and extensions occurred in 2004 (Nice, Saint-Etienne). In International (+11.1% of organic growth), the sales turnover profits from the new contract of Melbourne and other contracts won in Australia and North America. II.B.2.3. By geographical area ( millions) June 30, 2005 June 30, 2004 Growth rate France 5, , % Great Britain % Germany % Other Europe 2, , % United States % Rest of the world 1, , % Revenues 12, , % France The 7.8% increase is primarily due to the activities in the Water, Energy and Transport divisions. Germany The 35.9% increase is related to the consolidation of the company that holds the Braunschweig contract in Germany (Water). Europe - Other The 13.1% increase is due to favorable climatic effects in the Energy division, and to the full effect of the acquisitions in 2004 in the Transport and Energy divisions. United States There is stability despite the effects of an unfavorable dollar exchange rate (-4.6%); due primarily to the good performance of operational activities in the Water division, to the new contracts signed in Waste Management division and to various acquisitions in the Transport division. Rest of world The 15.1% increase is due in particular to the full effects of the Melbourne contract (Transport) in Australia as well as new contracts in Asia, especially in the Water division. 167

168 II.B.3. Other Components of the Income Statement II.B.3.1. Operating income ( millions) June 30, 2005 June 30, 2004 Growth rate December 31, 2004 Water % Waste Management % Energy Services % Transportation % 31.3 Holdings (38.9) (46.0) (71.1) Operating income % Impact of currency exchanges (5.6) Non recurring components (4.5) Recurrent operating income % Operating income increased by 20.7% and by 15.2% at constant exchange rates, excluding non-recurring items. WATER In the first half of 2005, operating income rose to million, compared to million in the first half of This represents an increase of 29.5% or 17.0% at constant exchange rates and excluding non-recurring items. Non-recurring items at June 30, 2004 related to the 34.9 million provision booked for the sale of Berlikomm, subsidiary of the holding that holds the Berlin contract, which was finalized at the end of In France, operating income benefited from solid business activity from ongoing efforts to improve operating performance. Outside France, the growth in profitability was primarily related to the commencement of operations under the Braunschweig contract, tariff increases in Great Britain and the implementation of profitability enhancement plans across various entities. The engineering and technological solutions business line also demonstrated improvement. WASTE MANAGEMENT Operating income rose from million to million, which is an increase of 11.3% or 12.4% at constant exchange rates, despite an increase in fuel costs. The improvement in operating performance in France was due to the impact of prior restructuring measures and improvements taken to enhance productivity. Outside of France, the rise in operating income was especially pronounced in United Kingdom due to the growth in integrated contracts in continental Europe due to the favorable effect of the sale of a contract. In the United States, growth was strong in the industrial services, toxic waste and solid waste businesses. ENERGY Operating income in the Energy division rose to million, up 11.5% or 10.7% at constant exchange rates and excluding non-recurring items. Non-recurring items at June 30, 2005 related to the capital gain on the sale of the nuclear maintenance business ( 4.5 million) and at June 30, 2004 related to a write-back of negative goodwill for 6.1 million. The thermal services France showed strong growth. In the heat distribution business, rising. energy prices have had a slight positive effect on margins. Outside of France, results were strong in the Baltic states, Belgium and Italy and benefited from the full effect of new contracts in Central Europe. 168

169 TRANSPORT Operating income in the Transport division rose to 60.1 million, up 6.0% or 5.6% at constant exchange rates. Despite increased fuel costs in France, the increase in profitability is continuing. Outside France, improvement that occurred during 2004 is continuing in II.B.3.2. Cost of net financial debt ( millions) June 30, 2005 June 30, 2004 Incomes Expenses (366.3) (375.1) Total (324.1) (334.4) The cost of net financial debt represents the cost of the financial debt minus available cash. The cost includes the recognition of the revaluation of derivative instruments that were not qualified as hedges: this cost, which is volatile by nature, had a positive balance of 35 million on June 30, 2004, and was also positive at 10 million on June 30, The drop in the cost of net financial debt is a result of the decrease in debt following the disposals that took place during the second half of Taking these items into account, the average borrowing rate is 5.0%, which is in line with that for the fiscal year 2004 (5%) but up slightly compared to the first half of 2004 (4.8%). This small increase is the result of an extension in the average debt maturity and from setting up fixed-rate hedges in II.B.3.3. Other financial incomes and expenses Other financial incomes and expenses declined to 30 million from 70 million. During the first half of fiscal 2004, Dalkia booked a capital gain of 44.4 million on the sale of VINCI securities. Other financial incomes and expenses on June 30, 2005 includes 19.3 million in revenue on receivables and dividends as well as a positive exchange rate gain of 9.7 million. II.B.3.4. Income taxes In the first half of 2005, the Group had a consolidated net burden of (236.7) million ( (169.3) million in tax liability and (67.4) million in deferred tax) compared to (185.1) million in the first half of 2004 ( (149.8) million in tax liability and (35.3) million in deferred taxes). The overall increase in the tax burden is a result of the growth in operating income, while the reduction in the tax liability in France is a result of taxable capital gains in the first half of 2004 (sale of VINCI securities in 2004). Income tax for fiscal year 2004 stood at (184.1) million. Stability in relation to the first half of 2004 could be explained by the additional capitalization of losses carried forward, taking the earnings outlook of certain entities into consideration. II.B.3.5. Net income from discontinued operations During the first half of 2004, the Group recognized net income of the FCC group, the equipment business and short-term services of US Filter as well as that of Culligan. Since these businesses were discontinued in the second half of 2004, this income only represents operations for the first half of Total net income for 2004 stands at (105.7) million, including capital losses ( (96.2) million) and the tax effects ( (92.5) million). II.B.3.6. Minority interests The increase in minority interests from (89.2) million on June 30, 2004 to (108.5) million reveals the growth of before-tax income, especially pertaining to the holding that holds the Berlin water contract that was allocated to the first half of 2004 by the provision that was booked pertaining to the disposal of the Berlikomm company. 169

170 II.B.3.7. Consolidated net income Consolidated net income of the Group was million, compared to million at June 30, The recurring net income (see definition at paragraph II.B.1) was million at June 30, 2005 compared to million at June 30,2004. Taking into account the average number of outstanding shares (which totalled 390,258,551 at June 30, 2005 and 396,007,320 at June 30, 2004), consolidated net income per share amounted to 0.82 at June 30, 2005 compared to 0.88 at June 30, The recurring net income per share amounted to 0.82 in 2005, versus 0.64 at June 30, First half-year of 2005 ( millions) Recurring Non recurring Total Comments Operating income II.B.3.1 Cost of net financial debt (324.1) (324.1) II.B.3.2 Other financial income and expenses II.B.3.3 Income tax (234.2) (2,5) (236.7) II.B.3.4 Equity in net income of affiliates Income from discontinued operations Minority interests (107.0) (1.5) (108.5) II.B.3.6 Consolidated net income First half year of 2004 ( millions) Recurring Non recurring Total Comments Operating income (28.8) II.B.3.1 Cost of net financial debt (334.4) (334.4) II.B.3.2 Other financial income and expenses II.B.3.3 Income tax (181.1) (4.0) (185.1) II.B.3.4 Equity in net income of affiliates Income from discontinued operations 83, III.B.6 Minority interests (89.8) 0.6 (89.2) II.B.3.6 Consolidated net income The recurring net income rose from million to million, or 25.9%. This rise resulted from the improvement in operating income and control over financing cost. II.C. Financing II.C.1. Cash flow statement Cash flow from operations is down from 1,839.6 million in the first half of 2004 to 1,785.7 million in the first half of Excluding the cash flow from operations of business in the process of discontinuation in the first half of 2004 ( million), it is up 12.2%, reflecting improvement in the group s performance. Cash flow from operations, in the sense of the definition recommended by the CNC, excludes the tax and effects of financing operation. Cash flow provided by operating activities is down, dropping from 1,731.2 million in the first half of 2004 to 1,413.9 million in the first half of Other than the change in cash flow from operations, the drop is due to the negative effects in the change in the working capital requirement, (195.8) million in the first half of 2005, compared to 44.6 million in the first half of 2004, due to the increase in activity and seasonal events affecting accounts receivable. Cash flow provided by investing activities stands at (975.4) million compared to (741.7) million in the first half of The million increase primarily relates to an investment in the company holding the Braunschweig contract for million, offset by a slight drop in industrial investment. Sales of industrial assets are down million euros, with the first half of 2004 marked by the sale of American farmlands ( 67 million) and railroad assets within the framework of the new Melbourne contract ( 69 million). The increase in disposals of financial assets for 67 million results from the sales of the nuclear maintenance businesses of Dalkia ( 17 million), CBM ( 31.5 million) and Acque Potabili ( 21 million). 170

171 Cash provided by operating activities increased from (1,188.5) million to (2,178.1) million. This (989.6) million increase can be explained by the redemption of OCEANEs in the amount of 1.5 billion and TSARs for 0.3 billion, offset by the issue of bonds indexed on inflation for 0.6 billion. Free cash-flow before major projects is defined as: cash flow from operations +/- deduction in the change of working capital requirement - tax + asset disposals investment excluding investment projects +/- changes in scope. It has reached 306 million. In 2004, it had reached 563 million due to the improvement in working capital requirements. Considering the change in the flows described above and the redemption of the TSARs and OCEANEs and the issue of bonds indexed to inflation, the closing cash position at June 30, 2005 was 2,629.7 million, compared to 4,240.2 million at December 31, II.C.2. Capital expenditures, financial investments and receivables IFRIC 4 ( millions) New I4 receivables Capital expenditures Financial Inv. June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 Water Waste Management Energy Transportation Proactiva 5 7 Others Total Net of cash of new companies, financial investments amount to 460 million. Approximately 620 million was dedicated to the replacement and maintenance of industrial tool and 789 million to the growth of the Group, mainly outside of France. The principal growth investments related to: Water: Braunschweig for 374 million, and various projects of development in Italy and Asia; The Waste Management division with various great projects in France and United Kingdom on incineration factories for 95 million; The Transportation division has various development projects totalling 62 million. II.C.3. Outstanding financial debt ( millions) June 30, 2005 December 31, 2004 Financial long-term debts, non current 13, ,055.8 Short-term financial debts, current 3, ,426.1 Bank overdraft Sub-total financial debts 16, ,902.0 Cash and cash equivalents (3,171.1) (4,660.3) Fair value impact of hedging derivatives (300.9) (284.0) Net debt 13, ,957.7 Long-term and short-term financial loans and marketable securities (2,663.0) (2,764.0) Net economic debt 10, ,193.7 II.D. STATUTARY ACCOUNTS OF THE PARENT COMPANY The company s revenues for the first half of 2005 amounted to million versus million for the first half of Income before tax amounted to 260 million to million at June 30,

172 II.E. OUTLOOK In light of these results and given the new contracts signed since the end of the first half of 2005 in the Energy services division in Poland (in Lödz), the Transportation division in the United States (ATC) and in the Water and Waste Management divisions in China, Veolia Environnement maintains its objective of revenue growth in excess of 8% for the full-year The company also confirms its objective of a double-digit increase in operating income and further progress in improving the ROCE. III. ANALYSIS OF RESTATEMENTS OF INCOME STATEMENT AND CASH FLOW STATEMENT III.A. IFRS Income Statement as of June 30, 2004 ( millions) French GAAP IFRS Revenues 14,243.1 Revenues 11,006.3 Costs of sales (11,798.2) Selling, general and administrative Costs of sales (8,983.1) costs (1,517.7) Other operating costs 47.6 Selling costs (204.3) = EBIT Restructuring costs (16.1) General and administrative costs (1,067.4) Amortization of goodwill and impairment losses recognized on intangible assets with indefinite life (97.3) Other operating income and costs 37.7 = Operating income Operating income Cost of net financial debt (303.6) Cost of net financial debt (334.4) Other financial income and expenses 15.6 = Operating income less net financial expense before tax, equity and minority interests Other financial income and expenses 70.3 Other income and expenses (66.9) Income taxes (185.1) = Income before tax Equity net income of affiliates 14.4 Income taxes (224.5) Net income before discontinued operations = Net income before equity and minority interests Net income from discontinued operations 83.9 Equity in net income of affiliates 29.6 Net income Minority interests (130.2) Minority interests (89.2) = Net income (Group s share) Net income (Group s share)

173 III.A.1. Revenues ( millions) Water Waste Management Energy Transportation FCC Total Revenues French GAAP 5, , , , , ,243.1 Discontinued operations (734.3) (5.2) (1,488,7) (2,228.2) Repayment of financial receivable in connection with IFRIC4 (1) (10.0) (7.6) (57.5) (5,2) (80.3) Revenues in connection with completion method IAS 11 (2) Charges and taxes paid to public authorities(third-party revenue) (1) (1,007.2) (0.4) (1,007.6) Others (2.8) (3.9) 9.0 Revenues IFRS 3, , , , ,006.3 (1) See Note I.A.18 (2) See Note I.A.17 III.A.2. Operating income ( millions) Total Water Waste Management Energy Transportation Holdings EBIT French GAAP Other income and expenses (66.9) (39.2) (1.2) (30.9) Restructuring costs (16.1) (6.6) (1.7) (6.6) (1.2) Amortization and depreciation of goodwill and intangible assets with indefinite life (97.2) (26.5) (22.5) (19.9) (8.4) (19.9) Operating income format IFRS Amortization and depreciation of goodwill and intangible assets with indefinite life (IAS36) IFRIC4 impacts (0.4) Components (IAS16) (4.7) (3.6) 0.2 (1.3) Others contractual analysis Intangible assets (IAS38) (0.3) Provisions (IAS37) Discontinued operations (IFRS5) (1) (106.9) (34.4) 3.1 (75.6) Others (9.1) (1.7) 0.2 (2.0) 0.3 (5.9) Total impact IFRS restatements (5.4) (81.4) Operating income IFRS (46.0) (1) The profit and loss account under French GAAP for first half year 2004 did not include a separate line for discontinued operations. The operating income at June 30, 2004 under IFRS includes a depreciation of Berlikomm shares for 35 million in Water division and a badwill release of 6 million in the Czech Republic in Energy services division. These are considered to be non-recurring. Restatements of revenues and operating result under IFRS affected costs of sales throught: The reduction of 1 billion with respect to income received on behalf of third parties; The reduction of depreciation of industrial assets which were reclassified in other financial receivables according to interpretation IFRIC4, the revenues having decreased by 80 million; The recognition of the revenues on the BOT for 70 million; The allocation to costs of sales of amortization of goodwill. 173

174 III.A.3. Financial components ( millions) Total Cost of net financial debt French Gaap (303.6) + Stocked & fixed financial expenses Income of financial loans and marketable securities (1) (51.6) Cost of net financial debt format IFRS (351.7) + Debt at amortized cost (2) (24.3) + Fair value hedge reassessment (3) Interests on TSAR(4) (4.4) + Loans annuities(4) (4.4) + Discontinued operations (IFRS5) (5) Others 9.6 Cost of net financial debt IFRS (334.4) Other financial income and expenses French Gaap Stocked and fixed financial expenses (3.5) + Income from loans and marketable securities (1) 51.6 Other financial income and expenses format IFRS Discounting of provisions (4.7) + Debt at amortized cost(2) Discontinued operations (IFRS5) (5) (12.9) + Others 1.8 Other financial revenues and expenses IFRS 70.3 (1) Under IFRS, cost of net financial debt reflects cost of gross financial debt less cash and cash equivalents. As a result financial loans and marketable securities income are reclassified under Other financial income and expenses. (2) See Note I.A.13 on financial debt. Under French GAAP, premium reserve redemption and amortization of borrowing costs regarded as other financial expenses. Under IFRS, they are part of amortized costs. (3) See Note I.A.13 on derivatives. Reassessment of derivatives. (4) See Note I.L on non current financial debt. (5) The profit and loss account under French GAAP for the first half year 2004 did not include a separate line for discontinued aperations. III.A.4. Tax June 2004 French GAAP Discontinue Others IFRS operations (IFRS 5) Current tax (202.0) (149.8) Deferred tax (22.5) (6.0) (6.8) (35.3) Total (224.5) (185.1) III.A.5. Equity in net income of affiliates ( millions) June 30, 2004 Equity in net income under French GAAP 29.6 Discontinued operations (IFRS5) (15.6) Others 0.4 Equity in net income under IFRS 14.4 Discontinued operations relate to affiliates within FCC group. 174

175 III.A.6. Income from discontinued operations ( millions) June 30, 2004 Operating income Cost of net financial debt (19.1) Other financial income and expenses 12.9 Income tax (32.8) Equity net income of affiliates 15.6 Minority interests (44.2) Net income from discontinued operations under French GAAP format IFRS 39.3 Amortization and depreciation of goodwill and intangible assets with undefinite life (IAS36) 19.9 Amortization of tangible assets (IFRS5) 65.0 Minorities on amortization of tangible assets (IFRS5) (34.6) Others (5.7) Net income from discontinued operations under IFRS 83.9 Comparaison with full year 2004: ( millions) June 30, 2004 December 31, 2004 Net income of the operations Realized gains and losses (96.2) Currency exchange (6) Tax effects (92.5) Net income from discontinued operations under IFRS 83.9 (105.7) III.A.7. Minority interests ( millions) June 30, 2004 Minority interests under French GAAP (130.2) Discontinued operations (IFRS5) 44.2 Others (3.2) Minority interest under IFRS (89.2) Restatements relate to minorities in FCC. III.A.8. Net income of the Group from French GAAP to standard IFRS ( millions) June 30, 2004 Net income under French GAAP Amortization and depreciation of goodwill and intangible assets with indefinite life Other impacts on operating income 18.0 Non-amortization on discontinued operations assets (IFRS5) 30.4 Impacts on financial components 23.9 Others (7.9) Net income under IFRS

176 III.B. CONSOLIDATED STATEMENTS OF CASH FLOW AS OF JUNE 30, 2004 ( millions) French GAAP IFRS Net income Minority interest Depreciation and amortization 1, Financial provisions 55.5 (15.7) Other estimated profit and expenses (27.7) Gains on sales 31.9 (39.3) Earning of affiliates (18.0) (30.1) Dividends received (4.7) Cost of net financial debt Taxes Deferred taxes 14.4 Prepaid, deferrals and accruals (21.5) Others Cash flow from operations 1,839.6 Increase (decrease) in working capital (104.2) 44.6 Tax paid (153.0) Cash flow provided by operating activities 1, ,731.2 Purchase of tangible assets (1,039.0) (903.4) Proceeds from tangible assets Purchase of investments (172.7) (172.7) Proceeds from sales of investments Contracts interpretation IFRIC4 : New loans IFRC4 (98.8) Loans reimbursements IFRIC Dividends received 16.3 Disbursement on notes receivables (87.0) (87.0) Principal payment on notes receivables Net (increase) decrease in short-term loans Sales and purchases of marketable securities (259.8) Cash flow provided by investing activities (1,260.7) (741.7) Net increase (decrease) in short-term debts (213.0) (213.0) Proceeds from issuance of bonds and other long-term debt Principal payment on bonds and other long-term debt (676.3) (676.3) Net proceeds from issuance of common stock Purchase of treasury shares Dividends paid (315.3) (310.6) Interests paid (224.4) Net cash provided by financing activities (938.8) (1,188.5) Cash and cash equivalents beginning 1, ,320.6 Currency exchange and others (12.8) (76.2) Cash and cash equivalents ending 1, ,045.4 Cash and cash equivalents 1, ,557.7 Cash liabilities Cash and cash equivalents ending 1, ,045.4 The consolidated statements of cash flow have been prepared in accordance with Conseil National de la Comptabilité recommendation N of October 27, 2004, and adapted to Group specificities. Cash flow provided by operating activities: 365 millions Before interest paid: 224 million. Interest paid reclassified to cash flow from financing activities Reclassification of repayment of financial receivables in connection with IFRIC4. Under French GAAP as part of revenues; under IFRS as part of net cash from investing activities ( (98) million). Effect of consolidation of discounting of receivables on change in working capital: 262 million. During the first half year of 2004 the receivables discounted decrease by 262 million. 176

177 Differences of amount for increase (decrease) in working capital are linked to reclassifications of tax payable and receivable to tax paid to a separate line. Cash flow provided by investing activities: 519 million Purchase of tangible assets: 136 million investments covered by capital leases excluded: 30 million (capital leases are non cash components); reclassification of investments of contracts IFRIC4: 99 million. Financial receivables interpretation IFRIC4: (1) million New loans: (99) million; Amortization of financial loans: 98 million. Sales and purchases of marketable securities: 383 million in highlyliquid investments regarded as cash and cash equivalents. Cash flow provided by financing activities: (250) million Decrease of new capital lease: (30) million; Included interest paid: (224) million. Cash and cash equivalents Liquidity assets under the statement of cash of flow for June 30, 2004 are the following: cash 840 million monetary instruments 1,234 million other instruments of short-term cash 484 million 2,558 million 177

178 STATUTORY AUDITORS REVIEW REPORT ON THE FINANCIAL STATEMENTS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2005 This is a free translation into English of the Statutory Auditors review report on the financial statements for the six-month period ended June 30, 2005, issued in French language and provided solely for the convenience of English speaking readers. The statutory auditors review report includes information specifically required by French law in all audit reports, whether qualified or not. This report should be read in conjunction with, and construed in accordance with French law and professional auditing standards applied in France. Dear Shareholders, As Statutory Auditors and in accordance with Article L of the French Commercial Code, we have: performed a limited review of the accompanying consolidated balance sheet of VEOLIA ENVIRONNEMENT and the related statements of income, changes in equity, cash flow and notes for the six-month period ended June 30, 2005; verified the information provided in the report for the six-month period ended June 30, These interim consolidated financial statements are the responsibility of the Board of Directors. It is our responsibility to express an opinion on them, based on our limited review. As part of the conversion to IFRS, as adopted in the European Union for the preparation of the consolidated financial statements for the year ended 2005, the consolidated financial statements for the six-month period ended June 30, 2005 have been prepared for the first time by applying the recognition and measurement principles under IFRS as adopted in the European Union, and in accordance with the presentation and disclosure requirements for interim financial statements defined in the regulations of the AMF. They include comparative data for full year 2004 and for first half of 2004, restated in conformity with the same accounting policies. We conducted our limited review in accordance with professional standards applied in France. Those standards require that we plan and perform limited procedures to obtain moderate assurance, lower than which would result from an audit, as to whether the interim consolidated financial statements are free from material misstatement. A review of this nature does not include certain procedures required by an audit and is limited to performing analytical procedures and to obtaining the information we considered necessary from Company management and other appropriate sources. Based on our review, we did not find any material misstatements which could call into question the conformity, in all material respects, of the interim consolidated financial statements with on the one hand the presentation and disclosure requirements for the interim financial statements generally accepted in France, and on the other hand recognition an measurement principles under IFRS adopted in the European Union, as described in the notes to the financial statements. Without qualifying our opinion expressed above, we draw your attention to: note I.A.1 to the interim consolidated financial statements which describes the options adopted for the presentation of the consolidated financial statements for the six-month period ended June 30, 2005 which do not include all the disclosures in the notes required by IFRS, as adopted in the European Union, in order to present fairly the financial position, the assets and liabilities as of June, 30, 2005 and the results of operations of the group of companies for the period then ended; note I.A.1 to the interim consolidated financial statements which sets out the reasons why the comparative information that will be presented in the consolidated financial statements for the period ending December, 31, 2005 and in the consolidated financial statements for the six-month period ending June, 30, 2006 may differ from the information presented in the accompanying interim financial statements; note I.A.22 to the interim consolidated financial statements which describes the accounting policies adopted by the company regarding service concession arrangements; in anticipation of the outcome of the IFRIC interpretation, the company has chosen to retain its existing French Gaap accounting methods for theses contracts, for the preparation of its interim consolidated financial statement for the six-month ended June, 30, The implementation of the interpretation draft underway could significantly affect the future preparation of the financial statements for 2004 and for first half of 2004 and 2005; 178

179 In accordance with professional standards applied in France, we have also reviewed the information contained in the interim report that accompanies the consolidated financial statements for the six-month period ended June 30, 2005 that were the subject of our limited review. We have no matters to report with respect to the fairness of such presentation and its consistency with the interim consolidated financial statements. Paris and Paris-La Défense, September, 16, 2005 The Statutory Auditors SALUSTRO REYDEL Membre de KPMG International BARBIER FRINAULT ET CIE Ernst & Young Bernard CATTENOZ Bertrand VIALATTE Patrick GOUNELLE Jean BOUQUOT 179

180 The original in French reads: Mesdames, Messieurs les actionnaires, RAPPORT DES COMMISSAIRES AUX COMPTES SUR L INFORMATION SEMESTRIELLE 2005 En notre qualité de commissaires aux comptes et en application de l article L du Code de commerce, nous avons procédé à : l examen limité du tableau d activité et de résultats présenté sous la forme de comptes semestriels consolidés de la société VEOLIA ENVIRONNEMENT, relatifs à la période du 1er janvier au 30 juin 2005, tels qu ils sont joints au présent rapport ; la vérification des informations données dans le rapport semestriel. Ces comptes semestriels consolidés ont été établis sous la responsabilité du Conseil d administration. Il nous appartient, sur la base de notre examen limité, d exprimer notre conclusion sur ces comptes. Dans la perspective du passage au référentiel IFRS tel qu adopté dans l Union européenne, pour l établissement des comptes consolidés de l exercice 2005, les comptes semestriels consolidés ont été préparés pour la première fois en appliquant les principes de comptabilisation et d évaluation des normes IFRS adoptées dans l Union européenne, sous la forme de comptes intermédiaires tels que définis dans le Règlement général de l AMF. Ils comprennent à titre comparatif des données relatives à l exercice 2004 et au premier semestre 2004 retraitées selon les mêmes règles. Nous avons effectué notre examen limité selon les normes professionnelles applicables en France; ces normes requièrent la mise en œuvre de diligences limitées conduisant à une assurance, moins élevée que celle résultant d un audit, que les comptes semestriels consolidés ne comportent pas d anomalies significatives. Un examen de cette nature ne comprend pas tous les contrôles propres à un audit, mais se limite à mettre en œuvre des procédures analytiques et à obtenir des dirigeants et de toute personne compétente les informations que nous avons estimées nécessaires. Sur la base de notre examen limité, nous n avons pas relevé d anomalies significatives de nature à remettre en cause la conformité, dans tous leurs aspects significatifs, des comptes semestriels consolidés au regard d une part, des règles de présentation et d information applicables en France et, d autre part, des principes de comptabilisation et d évaluation des normes IFRS adoptées dans l Union européenne, tels que décrits dans les notes annexes. Sans remettre en cause la conclusion exprimée ci-dessus, nous attirons votre attention sur : la note I.A.1 de l annexe qui expose les options retenues pour la présentation des comptes semestriels consolidés, qui n incluent pas toutes les informations de l annexe exigées par le référentiel IFRS tel qu adopté dans l Union européenne et permettant de donner, au regard de ce référentiel, une image fidèle du patrimoine, de la situation financière et du résultat de l ensemble constitué par les entreprises comprises dans la consolidation ; La note I.A.1 de l annexe qui expose les raisons pour lesquelles l information comparative qui sera présentée dans les comptes consolidés au 31 décembre 2005 et dans les comptes consolidés semestriels au 30 juin 2006 pourrait être différente des comptes joints au présent rapport. la note I.A.22 de l annexe qui précise le traitement comptable relatif aux contrats de concession retenu par VEOLIA ENVIRONNEMENT ; dans l attente de l aboutissement des travaux de l IFRIC, la société a maintenu, pour l établissement des comptes consolidés intermédiaires au 30 juin 2005, les principes comptables appliqués jusqu à présent aux contrats de concession selon les règles françaises en vigueur. L application des interprétations en cours d étude est susceptible de modifier significativement les données relatives à l exercice 2004 ainsi que celles relatives aux premiers semestres 2004 et 2005 ; Nous avons également procédé, conformément aux normes professionnelles applicables en France, à la vérification des informations données dans le rapport semestriel commentant les comptes semestriels consolidés sur lesquels a porté notre examen limité. 180

181 Nous n avons pas d observation à formuler sur leur sincérité et leur concordance avec les comptes semestriels consolidés. Paris et Paris-La Défense, le 16 septembre 2005 Les Commissaires aux Comptes SALUSTRO REYDEL Membre de KPMG International BARBIER FRINAULT ET CIE Ernst & Young Bernard CATTENOZ Bertrand VIALATTE Patrick GOUNELLE Jean BOUQUOT 181

182 VEOLIA ENVIRONNEMENT CONSOLIDATED FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER

183 VEOLIA ENVIRONNEMENT CONSOLIDATED BALANCE SHEETS ASSETS Notes At December 31, ($ millions) ( millions) Proforma Goodwill, net 3 4, , , , ,152.8 Other intangible assets, net 4 2, , , , ,904.9 Property plant and equipment 22, , , , ,679.2 Publicly-owned utility networks 9, , , , ,463.6 Accumulated depreciation (13,715.8) (10,069.6) (9,228.2) (10,303.1) (9,602.0) Property, plant and equipment, net 5 18, , , , ,540.8 Investments accounted for using the equity method Investments accounted for using the cost method Portfolio investments held as financial assets 7 1, , , ,243.5 Financial assets 1, , , , ,969.5 Total long-term assets 27, , , , ,568.0 Inventories and work-in-progress 8 1,012, , ,174.5 Accounts receivable 8 12, , , , ,145.8 Short-term loans Cash and cash equivalents 10 4, , , , ,381.9 Other marketable securities 10 2, , , , Total current assets 21,533,3 15, , , ,450.4 Discontinued operations 5,661.5 TOTAL ASSETS 49, , , , ,018.4 The accompanying notes are an integral part of these consolidated financial statements. For the convenience of the reader, the financial statements as of and for the year ended December 31, 2004 have been translated into U.S. Dollars at the rate of U.S. $ 1 =

184 VEOLIA ENVIRONNEMENT CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS EQUITY Notes At December 31, ($ millions) ( millions) Proforma Share capital 2, , , , ,404.4 Additional paid-in capital 8, , , , ,919.1 Retained earnings (6,712.8) (4,928.3) (2,694.0) (2,694.0) (2,333.1) Net Income (2,054.7) (2,054.7) Total shareholders equity 12 4, , , , ,329.6 Minority Interests 13 2, , , , ,585.2 Deferred income 14 1, , , , ,413.4 Reserves and allowances 15 3, , , , ,946.1 Bonds 8, , , , ,633.8 Other long-term financial debt 6, , , , ,279.2 Long-term debt 16 14, , , , ,913.0 Other long-term liabilities Total long-term liabilities and shareholders equity 28, , , , ,614.8 Accounts payable 9 14, , , , ,607.7 Bank overdrafts and other short-term borrowings 16 6, , , , ,795.9 Total current liabilities 21, , , , ,403.6 Discontinued operations 3,575.9 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 49, , , , ,018.4 The accompanying notes are an integral part of these consolidated financial statements. For the convenience of the reader, the financial statements as of and for the year ended December 31, 2004 have been translated into U.S. Dollars at the rate of U.S. $ 1 =

185 VEOLIA ENVIRONNEMENT CONSOLIDATED STATEMENTS OF INCOME Notes At December 31, ($ millions) ( millions) Proforma Revenues 33, , , , ,078.7 Costs of sales (28,074.5) (20,611.2) (19,949.6) (23,725.6) (24,638.1) Selling, general and administrative costs (3,456.5) (2,537.6) (2,509.8) (3,208.3) (3,508.8) Other operating income (expense) EBIT 2, , , , ,971.3 Goodwill amortization and depreciation of intangible assets with indefinite life (1) 25 (345.0) (253.3) (242.7) (2,424.5) (327.2) Restructuring costs (69.5) (51.0) (86.5) (93.3) (56.6) Operating income (loss) 1, , ,108.2 (766.9) 1,587.5 Financial income (expenses) 25 (864.9) (635.0) (708.2) (749.9) (648.1) Other income (expenses) 25 (78.1) (57.3) (14.2) (62.4) (59.7) Net income (loss) before taxes, minority and equity interests (1,579.2) Income taxes 17 (248.4) (182.4) (195.4) (274.4) (437.3) Net income (loss) before minority and equity interests (1,853.6) Equity in net income of affiliates Minority interest 13 (173.1) (127.1) (136.6) (245.5) (142.2) Net income (loss) before discontinued operations income (2,054.7) Discontinued operations income (283.1) (207.8) (2,119.4) Net income (loss) (2,054.7) (2,054.7) 339,2 Basic earnings per share 0.31 (5.13) (5.13) 0.93 Diluted earnings per share 0.31 (5.13) (5.13) 0.93 Average number of common shares outstanding 400,436, ,322, ,322, ,711,156 (1) Includes goodwill and intangible asset write-downs of million in 2004, 2,214.9 million in 2003 and 77.0 million in The accompanying notes are an integral part of these consolidated financial statements. For the convenience of the reader, the financial statements as of and for the year ended December 31, 2004 have been translated into U.S. Dollars at the rate of U.S. $ 1 =

186 VEOLIA ENVIRONNEMENT CONSOLIDATED STATEMENTS OF CASH FLOWS (Prepared in accordance with International Accounting Standard No. 7) Notes At December 31, ($ millions) ( millions) Cash flow from operating activities: Net income (loss) (2,054.7) Adjustment to reconcile net income to net cash provided by operating activities Depreciation and amortization 25 3, , , ,396.7 Financial provisions Gains on sale on property and equipment and financial assets, net (105.6) Undistributed earnings of affiliates, net (6.5) (4.8) (27.0) (15.2) Deferred taxes (95.4) (70.0) (97.4) (19.3) Minority interests Net changes in current assets and liabilities Prepaid, deferrals and accruals 4 (39.1) (28.7) (53.1) (70.5) Increase (decrease) in working capital (1) (463.1) Net cash provided by operating activities 4, , , ,316.7 Cash flow from investing activities: Purchase of property, plant and equipment (3,153.3) (2,315.0) (2,455.7) (2,603.4) Proceeds from sale of property, plant and equipment Purchase of investments (517.2) (379.7) (266.1) (1,005.9) Proceeds from sales of investments 2, , ,259.9 Purchase of portfolio investments held as financial assets (207.7) (124.8) Proceeds from sales of portfolio investments held as financial assets Disbursement on notes receivables (180.5) (132.5) (78.7) (420.9) Principal payment on notes receivables Net (increase) decrease in short-term loans Sales and purchases of marketable securities (379.1) (278.3) (928.4) 6.2 Net cash used in investing activities (1,034.7) (759.6) (3,112.0) (2,108.6) (1) The decrease in working capital excludes the deferred taxes for the period. The accompanying notes are an integral part of these consolidated financial statements. For the convenience of the reader, the financial statements as of and for the year ended December 31, 2004 have been translated into U.S. Dollars at the rate of U.S. $ 1 =

187 VEOLIA ENVIRONNEMENT CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Prepared in accordance with International Accounting Standard No. 7) Notes At December 31, ($ millions) ( millions) Cash flow from financing activities: Net increase (decrease) in short-term borrowings 2, , (2,031.7) Proceeds from issuance of bonds and other long-term debt 1, , , ,194.1 Principal payment on bonds and other long-term debt (4,724.7) (3,468.7) (3,791.2) (3,870.4) Net proceeds from issuance of common stock ,554.1 Purchase of treasury stock (249.5) (183.2) (115.8) Cash dividends paid (542.8) (398.5) (309.3) (300.0) Net cash provided by financing activities (1,403.4) (1,030.3) (569.7) Effect of foreign currency exchange rate changes on cash and cash equivalents (210.2) (92.1) Change in cash and cash equivalents 1, , (453.7) Cash and cash equivalents: Beginning 2, , , ,089.3 Ending 4, , , ,635.6 Cash and cash equivalents 4, , , ,381.9 Cash liabilities (694.8) (510.1) (685.6) (746.3) Cash and cash equivalents 4, , , ,635.6 Supplemental disclosures of cash flow information: Cash payments for: Interest 872,9 640, Income Taxes 324,2 238, Supplemental disclosures for non-cash investing and financial activities: Acquisition: Issuance of common stock in settlement of note payable Issuance of common stock of subsidiaries 17,7 13,0 The accompanying notes are an integral part of these consolidated financial statements. For the convenience of the reader, the financial statements as of and for the year ended December 31, 2004 have been translated into U.S. Dollars at the rate of U.S. $ 1 =

188 VEOLIA ENVIRONNEMENT CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY ( millions except for share information) Number of shares Share capital Additional paid- in capital Retained earnings Net income Shareholders equity Balance at December 31, ,175,772 4, , ,048.2 (2,251.2) 5,740.0 Net income for the year Foreign currency translation adjustment (957.2) (957.2) Dividends paid and net income appropriation (2,438.7) 2,251.2 (187.5) Treasury shares (64.1) (86.9) (151.0) Conversion of warrant Capital increase 58,894, ,531.5 Other Balance at December 31, ,070,459 5, ,919.1 (2,333.1) ,329.6 Net income for the year 2003 (2,054.7) (2,054.7) Foreign currency translation adjustment (509.1) (509.1) Dividends paid and net income appropriation (339.2) (217.8) Treasury shares 40.3 (40.3) Capital decrease 56 (3,443.1) 3,443.1 Other Balance at December 31, ,070,515 2, ,321.9 (2,694.0) (2,054.7) 3,574.8 Net income for the year Foreign currency translation adjustment Dividends paid and net income appropriation (2,272.6) 2,054.7 (217.9) Treasury shares Capital increase 1,351, Other Balance at December 31, ,421,983 2, ,355.1 (4,928.3) ,563.2 Balance at December 31, 2004 ($ millions) 2, ,656.3 (6,712.8) ,853.4 The accompanying notes are an integral part of these consolidated financial statements. For the convenience of the reader, the financial statements as of and for the year ended December 31, 2004 have been translated into U.S. Dollars at the rate of U.S. $ 1 =

189 VEOLIA ENVIRONNEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS Presentation of the Group Veolia Environnement is a société anonyme, a form of stock corporation under French law, listed on both the Paris and New York stock exchanges. Veolia Environnement was formed at the end of 1999 and leads an independent worldwide group providing environmental services, which is organized in four divisions : water, waste management, energy services and transportation. Veolia Environnement has been listed on the Paris stock exchange since July 20, 2000 and on the New York stock exchange since October 5, Veolia Environnement supplies a wide array of environmental management services to a range of public authorities and industrial, commercial and residential customers. The Group offers a variety of integrated services, including water treatment and system operation, waste management, energy services, and transportation services. The following is a brief description of each of the Group s business segments: Water the Group manages and operates water and wastewater treatment and distribution systems for public authorities and private companies. The Group is also a designer and manufacturer of water and wastewater treatment equipment and water systems. Waste management the Group collects hazardous and non-hazardous waste and offers related services, including disposal, treatment and recycling. Energy services the Group provides energy management services and offers a wide range of industrial utilities and facilities management services. Transportation the Group provides integrated transportation solutions involving bus, train, maritime, tram and other networks. Significant events In 2004, Veolia Environnement completed its strategic restructuring purporting to refocus on its core environmental services activities. Sales of activities in the U.S. In February 2004, Veolia Environnement finalized the sale of farmlands located in Imperial Valley (California) to Imperial Irrigation District for US$77.3 million. At the end of July 2004, Veolia Environnement completed the sale of USFilter Corporation s 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, Veolia Environnement completed the sale of its Culligan business to the private equity firm 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 Veolia Environnement s water operations in North America, which was originally announced in September They are part of Veolia Environnement s 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 Veolia Environnement s U.S. asset sales in 2003 and 2004 amounted to approximately US$2.0 billion. Sale of FCC In 2003, Veolia Environnement and its partner in FCC s 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 189

190 interest of FCC s development, Veolia Environnement proposed to Ms. Esther Koplowitz several alternative ways to resolve the parties differences. In the third quarter of 2003, Ms. Esther Koplowitz informed Veolia Environnement of her preference to formally commence negotiations to repurchase the Company s indirect interest in FCC. Veolia Environnement accepted the principle of a sale of its interest in FCC and various proposals were exchanged. In this context, Veolia Environnement 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 Veolia Environnement s 49% stake in B 1998 S.L., the holding company that owned 52.5% of FCC, to a company controlled by Ms. Esther Koplowitz. The transaction allowed Veolia Environnement to reduce its net indebtedness by 1.1 billion, and resulted in a total cash payment to Veolia Environnement of 916 million (before transaction fees), including an exceptional dividend paid by B 1998 S.L. to Veolia Environnement prior to the sale. The transaction, which closed on September 15, 2004, was subject to applicable Spanish anti-trust regulatory approvals. Sale of Berlikomm As part of the refocusing of its activities on water distribution, the Berlin water company sold telecommunications operator Berlikomm at the end of August Impact of asset sales The asset sales referred to above allowed Veolia Environnement to reduce its debt by 2.4 billion in Evolution of the shareholder structure Following a shareholder restructuring on December 9, 2004, Vivendi Universal reduced its holdings in Veolia Environnement from 20.36% to 5.3% of share capital. This constituted a significant step in the restructuring of Veolia Environnement s shareholder base. At the same time, in order to help develop its employee shareholder base, Veolia Environnement repurchased 2% of its share capital from Vivendi Universal in connection with the shareholder restructuring, for an amount of million. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with accounting principles generally accepted in France ( French GAAP ) and are consistent with the provisions of the January 3, 1985 law and its implementation rule of February 17, 1986 and the new rules approved by the Comité de la Réglementation Comptable in April The Group applies the recommendation of the Conseil National de la Comptabilité and includes in its consolidated financial statements assets financed by capital leases, pension obligations and employee termination costs. Veolia Environnement applies the preference method for the treatment of capital leases. Financial statements of subsidiaries have been adjusted when necessary, in order to homogenize valuation methods in the Group. The Group does not apply regulation CRC , relating to amortization and depreciation of assets. Change of presentation and accounting principles On December 31, 2004, Veolia Environnement began applying the provisions of Article of 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 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, as follows: the North American activities disposed of in 2004 and FCC (which leads to accounting for Proactiva using proportional consolidation and no longer using full consolidation). The result of discontinued operations includes net income of the activities until the disposal date, capital gains and losses and the related taxes. The cash-flow statement includes flows generated by the disposed activities until the date of disposal. 190

191 Article 133 of the 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 of the IFRS standards. This amendment is applicable to Veolia Environnement as of January 1, On December 31, 2004, special purpose entities, within the meaning of paragraph of CRC Regulation 99-02, were consolidated, which resulted in additional long-term financial debt in the amount of million and the consolidation of the securitization program in France for an amount of million. Pro-forma balance sheet and income statements were established for 2003 to present the accounts of the Group excluding FCC (that led to accounting for Proactiva using proportional consolidation) and the Water American activities sold in 2003 and 2004 under separate lines of the balance sheet and the income statement. In 2003, the Group changed the amortization plans for tangible fixed assets in waste and energy activities, which impacted the financial statements by 33.1 million. In 2002, the Group did not change its presentation or accounting principles. Convenience translations The consolidated balance sheet and consolidated statements of income and cash flows include amounts as of and for the year ended December 31, 2004 denominated in millions of U.S. dollars. These amounts have been translated for convenience as permitted under Rule 3-20 of Regulation S-X of the U.S. Securities Exchange Commission and have been prepared using an exchange rate of U.S.$1 to , which was the exchange rate as of December 31, Convenience translations are presented solely for the convenience of the reader of these financial statements and should not be construed as representations that the local currency has been, could have been, or could in the future be converted into U.S. dollars at this or any other rate of exchange. Principles of consolidation All companies over which the Group has legal or effective control are fully consolidated. The Group uses the equity method of accounting for its investments in certain affiliates in which it owns less than 20% of the voting shares. In these situations, the Group exercises significant influence over the operating and financial decisions of the affiliate either (a) through the disproportionate representation on the affiliate s board of directors, e.g., the percentage of directors appointed to the board by the Group is greater than the percentage of its shareholding interest and those directors allow the Group to exercise significant influence, (b) because there is no shareholder with a majority voting ownership in the affiliate, which is a consideration under French accounting principles in determining whether significant influence exists, or (c) because the Group exercises substantive participating rights through shareholder agreements that allow the Group to veto or block decisions taken by the board of the affiliate in question. Significant investments in which the Group has 20% to 50% ownership or otherwise exercises significant influence are accounted for using the equity method. The proportional integration method of consolidation is used for investments in jointly controlled companies, where the Group and other shareholders have agreed to exercise joint control over significant financial and operating policies. For such entities, the Group records its proportional interest in the balance sheet and income statements. All other investments in affiliates that are not consolidated are accounted for at cost. Subsidiaries acquired are included in the consolidated financial statements as of the acquisition date. All material intercompany transactions have been eliminated. In the case of proportionally consolidated companies, intercompany transactions are eliminated on the basis of the Group s interest in the company involved. Use of estimates The preparation of financial statements requires the management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. Actual results could differ significantly from these estimates. Significant estimates made by the management in the preparation of these financial statements include amounts for pension liabilities, deferred taxes, valuation estimates for long-lived assets, reserves as well as recorded and disclosed amounts for certain financial instruments. 191

192 Translation of foreign subsidiaries financial statements Balance sheets, statements of income and cash flows of subsidiaries whose functional currency is different from that of the Group are translated into the reporting currency at the applicable exchange rate (i.e., the closing year-end rate for balance sheets, or the average annual rate for income and cash flow statements). Translation gains and losses are recorded in retained earnings. The exchange rates of the significant currencies of non-euro countries used in the preparation of the consolidated financial statements were as follows: Year-end closing exchange rates (one currency = xx ) U.S. dollar Pound sterling Average annual exchange rates (one currency = xx ) U.S. dollar Pound sterling The balance sheets, income and cash flow statements of subsidiaries operating in highly inflationary economies are re-measured (according to the historical method) into a functional currency. The functional currency is defined as the currency used in the dominant country of the economic area to which the subsidiaries belong. Related translation effects are included in the net income. These financial statements are then translated from the functional currency into the reporting currency on the basis of the year-end or average annual exchange rate and the translation adjustments are recorded in retained earnings. Revenue recognition Revenues are recorded when title passes to the customer or when services are rendered and measured in accordance with the relevant contract or contracts; title of property is considered to have passed to the customer when goods are shipped. Revenues resulting from government subsidies associated with long-term operating agreements are recorded ratably over the year. Revenues relating to specific activities are discussed in the relevant sections of these footnotes. EBIT EBIT, which appears as a profit and loss account sub-total, is defined as operating income before amortization and depreciation of goodwill and indefinite-life intangible assets and restructuring charges. This corresponds to the definition of résultat d exploitation under French GAAP (rule CRC 99-02). Other income and expenses This item includes income or expenses resulting from exceptional operations or events that are not part of the ordinary operations of Veolia Environnement. This primarily includes capital gains and losses on sales of subsidiaries, affiliates and activities. Goodwill and business combinations All business combinations are accounted using the purchase accounting method. Under the purchase accounting method, assets acquired and liabilities assumed are recorded at their fair value. The excess of the purchase price over the fair value of the net assets acquired, if any, is capitalized as goodwill and amortized over the estimated period of benefit on a straight-line basis. Amortization periods for goodwill range from 20 to 40 years. Other intangible assets Start-up costs relating to the implementation of new activities, including pre-operating costs, are amortized over their estimated useful life. 192

193 Other intangible assets include costs incurred to obtain contracts, such as fees paid to local authorities for public service contracts. Fees paid to local authorities are amortized over the duration of the contract, which can be up to 30 years. Market share and trademarks are not amortized. Business assets acquired, such as customer lists and operating rights, are amortized over their estimated useful life. Property, plant and equipment Property, plant and equipment is carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method using the following useful lives: Estimated useful lives in years Buildings 20 to 50 Technical systems 7 to 24 Transport equipment 3 to 25 Other equipment and machinery 3 to 12 Assets financed by capital lease are capitalized and amortized over the shorter of the lease term or the estimated useful lives of the assets. Amortization expense on assets acquired under such leases is included in depreciation and amortization expense. Interest expense incurred as a result of expenditures for a fixed asset during the period necessary for its intended use is capitalized as part of the historical cost of fixed assets. Valuation of long-lived assets Long-lived assets are regularly re-evaluated 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 asset s fair value. Valuation of goodwill and other intangible assets Veolia Environnement performs an annual review of its goodwill and other intangible assets during its strategic planning in mid-year. If the long-term prospects of an activity appear durably downgraded, an estimate is made and an impairment is booked in the interim closing accounts if necessary. Assets are valued at market value in case of a decision to sell them and at fair value if they are retained. At the closing date, a negative budget variance that is considered to be irreversible may lead to an impairment test. In case of disposal, market value is based on the multiples method (broker surveys) or the similar recent transactions method. When the assets are retained, the preferred valuation is the discounted future cash flows method. Alternative methods are the multiple method or similar recent transactions method. Balance sheet recognition of financing assets Lease contracts As mentioned above, Veolia Environnement uses the preference method for the treatment of capital leases and uses IAS 17 criteria to identify capital lease contracts. In order to make this classification, leases can be examined with respect to the following criteria: the lease transfers ownership of the asset to the lessee by the end of the lease term; the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised; the lease term is for the major part of the economic life of the asset even if title of property is not transferred; at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; 193

194 the leased assets are of a specialized nature such that only the lessee can use them without major modifications being made; if the lessee can cancel the lease, the lessor s losses associated with the cancellation are borne by the lessee; gains or losses from the fluctuation in the fair value of the residual fall to the lessee; and the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than the market rent. Financial assets Investments accounted for using the cost method Investments in unconsolidated affiliates are carried at cost. Any negative difference between the carrying value and fair value which is not temporary is subject to a reserve. Portfolio investments held as financial assets Portfolio and other investments include unlisted and listed equity securities of unconsolidated subsidiaries and long-term loans that are recorded at cost. When fair value is less than cost and is determined to be other than temporary, a valuation allowance is provided. Estimated fair value is determined on the basis of the Group s share of the equity of the companies concerned adjusted to market value in case of listed securities or pursuant to other applicable procedures. Bonds and debentures Issue costs, as well as discounts and premiums on convertible debt are amortized over the life of the debt. Inventories and work-in-progress Group companies value inventories in accordance with the provisions of the French Commercial Code, either on a first-in-first-out or a weighted average cost basis. Inventories are stated at the lower of cost or net realizable value. Deferred taxes Deferred tax assets are recognized in cases of deductible temporary differences, net tax operating loss carry forwards and/or tax credit carry forwards. Deferred tax liabilities are recognized in the case of taxable temporary differences. Deferred tax assets are recorded at their estimated net realizable value. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the enactment date. Cash, cash equivalents and marketable securities Cash and cash equivalents include all cash balances and short-term highly liquid investments with original maturities of three months or less at the time of purchase and are stated at cost, which approximates their fair value. Marketable securities include treasury shares and other highly liquid investments. Treasury shares are classified as marketable securities when they are acquired to stabilize the market price of the Group s shares or in connection with stock options granted to directors and employees. Treasury shares held for other reasons are recorded as an offset to shareholders equity. Marketable securities are carried at cost, and a valuation allowance is provided if the fair value is less than the carrying value. Pension plans The Group has several pension plans. Pension obligations are calculated using the projected unit credit method. This method is based on the probability of personnel remaining with companies in the Group until retirement, the foreseeable changes in future compensation, and the appropriate discount rate for each country in which the Group maintains a pension plan. This results in the recognition of pension-related assets or liabilities, and the recognition of the related net expenses over the estimated term of service of the employees. 194

195 Employees in France and most other European countries are eligible for severance pay pursuant to applicable law immediately upon termination. The Group accounts reserves for such employee termination liabilities using the projected unit credit method. Stock based compensation The Group has adopted stock option incentive plans that grant options on its common shares to certain directors and officers. The purpose of these stock option plans is to align the interest of the management with the interest of the shareholders by providing certain officers and other key employees with additional incentives to increase the Group s performance on a long-term basis. Shareholders equity is credited for the cumulative strike price to reflect the issuance of shares upon the exercise of options. Treasury shares held to cover commitments relating to stock option purchases are shown under marketable securities at the lower of cost or fair market value. The Group accounts for any capital gains in the year in which shares under the plan are sold. Derivative financial instruments The Group manages certain of its financial risks by using derivative financial instruments that qualify as hedges. Interest rate swaps and caps The Group primarily uses interest rate swaps and caps to manage interest rate risks relating to its borrowing requirements. The purpose of these swaps is, depending on the circumstances involved, 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 as hedge accounting, the income or expense related to these instruments is recognized when the income or expense on the hedged item is itself recognized. Thus the differences in the interest receivable and payable on interest swaps and caps and the associated premiums and cash payments are recognized over the life of the contracts as an adjustment in the interest expense of the financial debt. Interest rate derivatives used to manage interest rate risk related to debt, but which do not qualify as hedge accounting are recognized in the following manner: an allowance is recorded for the unrealized losses on the market value of the instrument; unrealized gains are recognized only when the instruments are sold or matured. Foreign currency derivatives The Group uses currency swaps and forward exchange contracts to manage its 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 life 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 likely) that are not yet recognized on the balance sheet, are deferred and recognized when the hedging transaction is realized. 195

196 Foreign currency transactions Foreign currency transactions are converted into euros at the exchange rate in effect on the transaction date. At year-end, receivables and payables denominated in foreign currencies are remeasured into euros at year-end exchange rates. The resulting exchange losses and gains are recorded in the current earnings period. Exchange gains or losses on borrowings denominated in foreign currencies or on foreign currency derivatives that qualify as hedges on net investments in foreign subsidiaries are included in equity as currency translation adjustments. Research and development The Group s research and development costs are expensed as incurred. Earnings per share Basic earnings per share calculations are based on the Group s net income after taxes divided by the weighted average number of common shares outstanding, as per the Avis n 27 de l Ordre des Experts Comptables. Dilutive earnings per share reflect the potential dilution that would occur if all securities and other contracts to issue ordinary shares were exercised or converted. For this calculation, the weighted average number of common shares outstanding includes shares issuable on exercise of dilutive options. As of December 31, 2004, the potential dilutive securities or other contracts to issue ordinary shares are warrants issued in December 2001 and stock options. Accounting policies specific to environmental services activities Public service contracts The Group holds public service contracts in relation to its operations in water distribution and treatment, district heating networks, urban transportation and waste collection and treatment. In the French legal system, there are three primary types of public service contracts: affermage (or public service management) contracts, where the operator is granted the obligation to manage and maintain facilities owned and financed by local authorities, concession, facility management contracts similar to BOT (build-operate transfer) agreements, and contracts presenting mixed characteristics of affermage and concession contracts. Revenue is recognized on these contracts when services are rendered in accordance with the terms of the contracts. On an exceptional basis, the Group may also operate management contracts in which it manages a public service for a fixed fee as well as an incentive which is calculated in relation to the performance of the contract. For these contracts, the Group recognizes billing to customers as revenue and all related costs as operating expenses. In France, the Group s public service contracts are primarily affermage contracts. Facilities Facilities operated by the Group are generally financed by local authorities and remain theirs throughout the contract period. Individual facilities financed by the Group as a consequence of specific contractual terms are recorded as fixed assets and depreciated to their estimated residual value, if any, using the shorter of their economic useful lives or the contract s term. Wherever the contract s term is shorter than the useful economic life of the asset, such depreciation is classified under liabilities as financial depreciation. Fees paid to local authorities The Group does not have any obligation to make compensation payments to local authorities during the contract period, except for fees that have been agreed by both parties and formally defined by the contract. The Group s policy is to expense fees that are paid to local authorities on a pro-rata basis when these fees are paid annually and to amortize these costs on a straight-line basis over the life of the contract when the fees consist of payments at the beginning of the contract. 196

197 Commitments to maintain and repair assets The Group generally assumes a contractual obligation to maintain and repair facilities managed through public service contracts. Corresponding repair and maintenance costs are expensed as incurred, except for some investments in specific contracts for which costs are accrued in advance. Planned maintenance projects The Group s policy is to expense costs relating to planned maintenance projects as they are incurred. Landfill capitalization and depletion Landfill sites are carried at cost and amortized on a pro-rata basis using the units of production method over the estimated useful life of the site as the airspace of the landfill is consumed. Landfill costs include capitalized engineering and other professional fees paid to third parties incurred to obtain a disposal facility permit. When the Group determines that a facility cannot be developed or the likelihood of permit grants cannot be determined before final authorization, as is the case in France and the United Kingdom, these costs are expensed as incurred. Landfill closure and post-closure costs The Group has financial obligations relating to closure and post-closure costs and the remediation of the disposal facilities it operates or for which it is otherwise responsible. Landfill final closure and post-closure accruals include estimates for costs of the final cap and cover for the site, methane gas control, leachate management, groundwater monitoring, and other monitoring and maintenance to be incurred after the site ceases to accept waste. The cost estimates are prepared by engineers based on the applicable local, state and federal regulations and site specific permit requirements. These estimates do not take into account discounts for the present value of total estimated costs. The Group accrues a reserve for these estimated future costs pro-rata over the estimated useful life of the sites. Accruals for environmental remediation obligations are recognized when such costs are likely and reasonably estimable. These liabilities are classified as reserves and allowances. Construction To calculate their margin, construction companies record revenue according to the percentage of completion method. This method is applied to contracts with a duration of six months or more; for contracts with a duration of less than six months, the completed contracts method is used. 197

198 NOTE 3. GOODWILL AND BUSINESS COMBINATIONS Goodwill by segment is detailed as follows: ( millions) 2002 Net 2003 Net Change in consolidation scope (1) Foreign exchange translation(2) 2004 Amortization(3) Other movements Water 3, , (1.7) (54.4) 1,666.1 Waste management 1, , (37.6) (67.5) (5.2) 1,008.7 Energy services (45.0) (15.8) Transportation (16.6) FCC & Proactiva (549.2) (1.8) (19.8) 2.3 Total 6, ,238.4 (415.5) (40.5) (203.3) (20.6) 3,558.5 (1) The changes in consolidation scope are mainly related to the sale of FCC (for (549.2) million) and the acquisitions of the company holding the Shenzhen contract (for 36.6 million), Wabag Gmbh in Germany (for 13.3 million), the company holding the Zlinska contract in the Czech Republic (for 11.0 million) and Dalkia Poznan (for 26.6 million). (2) Foreign exchange translation adjustments are mainly the result of the depreciation of the U.S. dollar against the euro. (3) Total goodwill amortization expenses for the years ended December 31, 2004, 2003 and 2002 were (203.3) million, (1,773.8) million and (327.2) million, respectively. They include goodwill write-downs of (36.4) million in 2004, (1,564.2) million in 2003 and (77) million in The difference in goodwill amortization expense between the consolidated balance sheets and the income statement is due to the goodwill amortization of FCC ( 20.0 million), which is booked against discontinued operations income in the income statement, and to the amortization of Scandinavian market shares in the transportation segment ( 70.0 million), whose balance sheet impact is recorded in intangible assets (see note 4). The following is a summary of the most significant acquisitions during the periods presented in the accompanying financial statements. Net FCC FCC was sold on September 15, In October 1998, Vivendi Universal acquired for cash 49% and obtained joint control of a Spanish holding company whose only asset was a 57% ownership interest in FCC, a publicly listed company in Spain active in the environmental services sector. Vivendi Universal sold to the Group its interest in the holding company for 691 million. The holding company, which fully consolidates FCC, is reflected in the Group s financial statements using the proportional integration method. The details of the Group s acquisition are as follows (in millions of euros): Fair value of net tangible and intangible assets acquired 212 Purchase price 691 Goodwill recorded on acquisition 479 Goodwill from this transaction is being amortized over 20 years. In 2004, amortization of goodwill relates to the first half year. The impact is included in the item Discontinued operations income. 198

199 USFilter Corporation In April 1999, Vivendi Universal acquired for cash 100% of the outstanding shares of United States Filter Corporation, a U.S.-based water treatment and equipment manufacturing company. The transaction was accounted for as a purchase. The details of the acquisition are as follows (in millions of euros): Fair value of net tangible and intangible assets acquired 459 Purchase price 5,801 Goodwill recorded on acquisition 5,342 Goodwill from this transaction is being amortized over 40 years. In 2004, the sale of Equipment short term contracts and Consumer and Commercial units of USFilter has no impact on the goodwill, which had been fully written off in On January 1, 2001, Veolia Environnement renounced the imputation of a part of the initial goodwill of USFilter recorded as a reduction of shareholders equity. As a result, the net goodwill was increased by 2,037 million on December 31, The goodwill recorded on the acquisition was 5,342 million, of which 3,253 million was initially recorded as an asset, and 2,089 million as a reduction of shareholders equity following the acquisition of USFilter by Veolia Environnement from Vivendi Universal on December 23, 1999, which the Group has now renounced. The amortization of the goodwill initially recorded as an asset as of December 31, 2001 was 216 million. Taking into account the theoretical amortization of the goodwill recorded as a reduction of shareholders equity of 52 million (calculated as if the goodwill had been recorded as an asset), the net goodwill reintegrated as an asset amounts to 2,037 million. Goodwill amortization in 2001 included a write-off of goodwill of 2,611 million, related to activities of USFilter. The management determined that the goodwill was impaired, and goodwill was written down based on an estimate of discounted future cash flow. The analysis was based on a projection over 10 years with a terminal value and with a discount rate of 7% for the goodwill. The management revised the estimated cash flows as a result of the evolution of the U.S. economic situation. In 2002, the Group actualized the projection of USFilter over 10 years, with a terminal value and used a discount rate of 6% taking into account the reduction in the US risk-free rate. As a result of commercial gains and business development in 2002, and its perspectives for 2003 and despite the US economic situation in 2002, the valuation did not call into question the long-term growth prospects of USFilter. The carrying value of the goodwill of USFilter was justified as of December 31, As of June 30, 2003, the Group booked a write-off of goodwill of 1,441 million. The review of the values (goodwill and trademarks) as of December 31, 2003 relating to activities to be sold and to those maintained did not call into question the December 30, 2003 valuation. Onyx Waste Services (previously Superior Services) In June 1999, Veolia Environnement acquired for cash 100% of the outstanding shares of Superior Services, a U.S. based waste management company. The transaction was accounted for as a purchase. The details of the acquisition are as follows (in millions of euros): Fair value of net tangible and intangible assets acquired 168 Purchase price 932 Goodwill recorded on acquisition 764 Goodwill net at December 31, Goodwill from this transaction is being amortized over 40 years. 199

200 NOTE 4. OTHER INTANGIBLE ASSETS The evolution of net intangible assets is as follows: ( millions) Additions Disposals Amortization in scope Change Foreign exchange translation Other movements 2004 Fees paid to local authorities(1) (1.4) (35.2) (135.7) (0.6) Trademarks, market share and business assets acquired(2) 2, , (7.1) (102.7) (537.8) (65.0) (29.7) Software (2.4) (52.4) (0.2) Prepaid expenses(3) (44.5) (3.4) (2.3) Other intangible assets (29.8) (9.5) (13.5) Total 3, , (7.1) (264.6) (686.6) (81.3) ,859.3 (1) Fees paid to local authorities relating to public service contracts, which are primarily located in France, amounted to million in 2004, compared with million in 2003, and 568,5 million in These are amortized over the life of the contracts to which they relate. They include amortization of fees paid to local authorities at the beginning of the contract in Compagnie Générale des Eaux for 16.0 million and in its regional subsidiaries for 8.2 million. Change in scope relates to FCC proceeds for (138) million. (2) Trademarks, market share and business assets amounted to million, compared with 1,227.0 million in 2003, and 2,283.5 million in These assets mainly include the valuation of waste management operating rights for Onyx Waste Services for million and the trademarks of Veolia Water North America ( VWNA ) for million. The carrying value of trademarks, market share and business assets are reviewed every year based on the same criteria used to assess their initial value, such as the position of the market, net sales and gross operating surplus or deficit. If the review indicates an other than temporary reduction in value, a valuation allowance is recorded (see note 2). The Scandinavian market shares of the transportation segment have been written off for 70.0 million. The changes in scope of consolidation are principally due to the effects of the sales of Culligan trademarks and of Equipment short term contracts units of USFilter for (566.0) million. Foreign exchange translation adjustments are mainly the result of the depreciation of the US dollar against the euro. (3) Prepaid expenses include expenses of million, million, and million, as of December 31, 2004, 2003 and 2002, respectively, to be allocated over several financial years, mainly relating to the difference between the contractual amounts of debt servicing payments made to local authorities and the expense charged to income over the contract period. Certain subsidiaries of the Group may be obligated to assume responsibility for the repayment of the debt entered into by local authorities relating to the utility network they manage. These obligations are part of the contracts between Veolia Environnement and the local authorities; there are no guarantees given to the lenders. The annual payments generally decrease each year and extend over a period shorter than the contract period. This difference between the amounts paid to the local authorities and the expense charged to income is recorded as a prepaid expense on the balance sheet. Total amortization expense for other intangible assets for the years ended December 31, 2004, 2003 and 2002 was million, million (including 70.0 million and million respectively in impairment) and million, respectively. Accumulated amortization amounted to 1,058.7 million, 1,761.3 million and million, as of December 31, 2004, 2003 and 2002, respectively. 200

201 NOTE 5. PROPERTY, PLANT AND EQUIPMENT Evolution of property, plant and equipment: ( millions) Additions Disposals At December 31, Change in scope Foreign exchange translation Other movements 2004 Property, plant and equipment 17, , ,501.7 (902.8) (1,555.4) (96.0) 16,645.6 Publicly-owned utility networks 6, , (102.5) (85.2) (12.3) (28.5) 7,268.0 Total gross book value 24, , ,974.0 (1,005.3) (1,640.6) (108.3) (28.5) 23,913.6 Property, plant and equipment (7,601.5) (8,183.2) (1,185.6) (23.3) (7,825.3) Publicly-owned utility networks (2,000.5) (2,119.9) 39.4 (183.5) (2,224.3) Depreciation (9,602.0) (10,303.1) (1,369.1) (10.9) (10,069.6) Total net book value 14, , ,974.0 (314.9) (1,369.1) (749.4) (76.4) (39.4) 13,844.0 Publicly-owned utility networks are assets financed by the Group as part of their management of public service contracts, and will be returned to the local authority at the end of the contract. Additions are related to the water segment ( million), waste management segment ( million), energy services segment ( million), transportation segment ( million) and FCC ( 91.5 million). Disposals are mainly due to the water segment ( (100.3) million), transportation segment ( (96.4) million) and energy services segment ( (85.0) million). Changes in scope are mainly related to the sale of FCC ( (960.5) million), to the sale of Equipment short term contracts units of USFilter and Culligan ( (440.9) million), and to the acquisition of the Shenzhen contract in the water segment ( 91.2 million) and of Groupe Connex GVI in Canada and Montanesa in Spain in the transportation segment (respectively 17.2 million and 11.8 million). This also includes the effects of the consolidation of ad-hoc entities in Berlin ( million) in accordance with the Loi de Sécurité Financière. Effects of foreign currency translation adjustments mainly relate to the water segment ( (45.8) million) and waste management segment ( (70.5) million), as a result of the depreciation of the US dollar against the euro, and to the energy services segment ( 34.6 million) as a result of the appreciation of the Czech and Polish currencies. Property, plant and equipment by segment can be broken down as follows: At December 31, ( millions) Property, Plant and equipment Depreciation Publiclyowned utility networks Accumulated depreciation/ amortization Net tangible assets Net tangible assets Net tangible assets Water 4, ,990.9 (3,930.6) 6, , ,989.4 Waste Management 6, (3,165.4) 3, , ,258.9 Energy Services 2, (1,638.4) 1, , ,002.9 Transportation 2, (1,335.2) 1, , ,443.7 FCC Total 16, ,268.0 (10,069.6) 13, , ,

202 The breakdown of net property, plant and equipment is as follows : At December 31, ( millions) Land ,146.7 Buildings 1, , ,663.3 Technical systems 3, , ,040.7 Assets under construction Other 1, , ,579.7 Property, plant and equipment 8, , ,077.7 Publicly owned utility networks 5, , ,463.1 Total 13, , ,540.8 Amortization expense for the years ended December 31, 2004, 2003 and 2002 was 1,369.1 million, 1,500.2 million and 1,485.1 million, respectively. Accumulated amortization for the years ended December 31, 2004, 2003 and 2002 was 10,069.6 million, 10,303.1 million and 9,602.0 million, respectively. Tangible assets financed under capital and operating leases are detailed as follows: ( millions) Gross value Capital lease Accumulated amortization Net value Operating lease Land 20.8 (10.4) Buildings (111.7) Technical systems (337.6) Other (252.8) ,091.7 Buildings-work in progress 1.9 (0.5) 1.4 Property, plant and equipment 1,443.2 (713.0) ,526.5 Publicly owned utility networks (151.0) Total ,750.6 (864.0) ,761.8 Total ,815.6 (842.9) ,267.2 Total ,643.6 (641.3) 1,002.3 The decrease of operating leases is related to the effects of the consolidation of ad-hoc entities in Berlin for (524) million. 202

203 NOTE 6. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD ( millions) At December 31, Interest Proportional share of equity Proportional share of net income Realia(1) 24.09% 24.10% Domino(2) 15.00% 30.00% 30.00% (0.2) (0.2) (0.5) South Staffordshire Water 9.2 Grubar Hoteles 24.50% 19.70% (2.5) (2.1) Intan utilities berhad(3) 30.00% 30.00% Acque Potabil 14.36% 13.4 (0.1) Fovarosi Csatomazasi Muvek Reszvenytarsasag 25.00% 25.00% 25.00% Eaux du Centre et du Rhône 34.97% Tiru 24.00% 24.00% 24.00% Grand Bahamas 49.00% 49.00% 49.00% Technoborgo 49.00% 49.00% 49.00% (0.1) CICG 41.97% 41.97% 41.97% PCP Holding 19.08% 19.21% 19.85% Southern Water Investments Limited 19.90% 19.90% Other (per unit < 5 million) 53.4* Total (1) Shares left due to the sale of FCC. (2) Shares belonging to Proactiva which was 50% consolidated using the proportional integration method as of July 1, Proactiva was fully consolidated as of December 31, (3) Shares sold in * The evolution compared to 2003 is due to the sales of the other investments belonging to FCC ( (75.0) million) accounted for under the equity method. The evolution in 2004 of equity investments is as follows: ( millions) Interest 2003 Net income Distribution of dividends Foreign exchange translation Change in scope Others 2004 Realia 90.4 (90.4) Domino 15.00% 28.9 (0.2) 0.9 (14.4) 15.2 Grubar Hoteles 38.3 (38.3) Intan Utilities Berhad 8.2 (8.2) Fovarosi Csatomazasi Muvek Reszvenytarsasag 25.00% Tiru 24.00% (0.5) 11.5 Grand Bahamas 49.00% (1.4) (1.0) 11.9 Technoborgo 49.00% (1.7) 8.9 CICG 41.97% 5.3 (0.1) 5.2 PCP Holding 19.21% Southern Water Investments Limited 19.90% (3.3) 14.8 Other (per unit < 5 million) (10.6) (3.9) (73.6)* (2.4) 53.4 Total (17.6) 2.0 (224.9) (2.4) * Impact of the sale of FCC for (75)million. Dividends received from equity affiliates amount to 17.6 million in 2004, 17.4 million in 2003 and 23.8 million in

204 Summarized financial information for the major equity method investments is as follows: ( millions) At December 31, Balance sheet s data Long term assets 4, , ,865.6 Current assets 1, , Total assets 6, , ,744.5 Shareholders equity , ,126.2 Minority interests Financial debt 4, , Other liabilities and reserves 1, , Total liabilities and shareholders equity 6, , ,744.5 Income statement s data Net revenue 1, , Operating income Net income (loss) NOTE 7. INVESTMENTS ACCOUNTED FOR USING THE COST METHOD Investments accounted for using the cost method are as follows: At December 31, ( millions) Interest Gross Depreciation(1) Net Net Net Alazor Inversiones SA(2) Stadtwerke Weiss Wasser GmbH(3) 29.8 Codeve Insurance Company Ltd(4) 16.0 Genova Acque(5) 20.00% Acque Potabili(5) 14.36% Ta-Ho Yunlin(6) 33.30% Rev Suisse recyclage hoding(7) 70.00% Stredoceske Vodarny(7) 99.76% Other (Per unit < 10 million in 2004) (31.0) Total (31.0) (1) Net depreciation expense amounts to (0.9) million in (2) Sold with FCC. (3) Consolidated in (4) Fully consolidated in (5) Non consolidated company at December 31, 2004 as a result of loss of exercise of significant influence. (6) Beginning of activity, consolidated with the equity method in (7) Company bought in 2004 and consolidated in

205 NOTE 8. OTHER PORTFOLIO INVESTMENTS HELD AS FINANCIAL ASSETS Other portfolio investments held as financial assets can be analyzed as follows: At December 31, ( millions) Long-term loans Other financial assets Depreciation (273.4) (212.3) (53.7) Net value , ,234.3 They are detailed as follows: ( millions) Acquisitions At December 31, Sales/ reimbursement Depreciation Change in scope Foreign exchange translation Other 2004 Gross long term loans (129.4) (58.9) Valuation allowances (8.8) (76.3) (61.7) Net long term loans (129.4) 5.7 (54.9) Gross other financial assets (45.7) (25.0) (193.7) (14.5) (22.2) Valuation allowances (44.9) (136.0) (83.5) (211.7) Net other financial assets (45.7) (25.0) (83.5) (186.0) (14.4) (22.2) Total 1, , (154.4) (77.8) (240.9) (2.8) Long term loans Changes in scope are mainly related to the effects of the sale of FCC for ( 45) million. The Acquisitions amounts are mainly related to a loan granted by Veolia Environnement SA to Dalkia International (the latter is consolidated using the proportional integration method) for 48.5 million and to the increase of deposits of Veolia Environnement SA for 16.0 million. The decrease of the gross long-term loans results mainly from the reimbursement of the loans belonging to the previous transportation contract of Melbourne ( (44.6) million). Valuation allowances mainly include the impairment of water segment long-term loans in the US amounting to (58.0) million (allocated in 2003). At December 31, 2004, net long-term loans include essentially long term loans in the contexte of Veolia Water s participation in the Berlin water company for an amount of 107 million and a loan related to Dalkia International for 48.5 million (other individual amounts are less than 30 million each). Other financial assets Changes in scope ( (186) million) relate essentially to the sale of FCC ( (20.7) million), to the sale of Equipment short term contracts units of USFilter ( (93.2) million) and to the elimination of subordinated borrowings assumed by Veolia Environnement ( (69.2) million) as part of its securitization of accounts receivable, which resulted from the reconsolidation of the French water securitization agreement as of December 1, Valuation allowances ( (83.5) million) correspond to the amortization of the redemption premium of our issued bonds amounting to (34.7) million (of which convertible bonds for (30.2) million) and to the amortization of the balancing cash adjustment of the Vivendi Universal / Veolia Environnement swap for (39.1) million (see note 24). 205

206 As of December 31, 2004, the acquisition flow ( (45.7) million) includes (80) million pledged as a collateral guarantee intended to be invested in the Shenzhen contract. The acquisition was completed in 2004, and the company has been consolidated since the last quarter As of December 31, 2004, net other financial assets mainly include 126 million of pensions assets in the UK, 65.2 million of Southern Water preferred shares, 28 million corresponding to the net amount of the redemption premium of bonds. NOTE 9. WORKING CAPITAL Net working capital is detailed as follows: ( millions) At December 31, 2003 Variation in working capital Change in scope Foreign exchange translation Other movements At December 31, 2004 Inventories and work in progress 1,067.8 (315.7) (13.4) Accounts receivable 10, (1,314.5) (182.4) ,357.7 Accounts payable 11, (1,626.0) (90.7) ,379.6 Working capital net 36.2 (290.4) (4.2) (1) (105.1) 84.9 (278.6) Variation of differed taxes (38.4) Working capital net (328.8) (1) Changes in scope include essentially the sales of the Culligan and Equipment short term contracts units of the water segment in the US ( (382.8) million), the sale of FCC ( (68.5) million) and the consolidation of the French securitization of receivables, in accordance with the Loi de Sécurité Financière. Inventories and work in progress The breakdown by segment is as follows: ( millions) At December 31, Water Waste management Energy services Transportation FCC Total , ,244.3 Less valuation allowance (1) (42.8) (57.5) (69.8) Net value (2) , ,174.5 (1) Net allowance expenses for 2003 are (3.5) million. (2) In 2004, the decrease in the water sector is related to the change in consolidation scope for (356.4) million (of which (138.2) million relate to the sale of the Culligan and Equipment short term contracts units in the US and (206.3) million relate to the sale of FCC) and to the effects of foreign currency translation adjustments for (15.1) million. 206

207 Accounts receivable Accounts receivable are detailed as follows: ( millions) At December 31, Trade accounts receivable 7, , ,271.2 Valuation allowance (371.5) (464.3) (484.6) Total trade accounts receivable 7, , ,786.6 VAT and other accounts receivable 1, , ,347.4 Other including deferred tax ,011.8 Total accounts receivable, net 9, , ,145.8 The majority of trade receivables are due in less than one year. Securitization of receivables in France The French securitization agreement was signed in June 2002 for 5 years with a SPE (Special Purpose Entity). The Group securitized accounts receivable through its water segment for a total amount of 415 million net of discount ( million at December 31, 2003). Article 133 of the Loi de Sécutié Financière cancelled the provisions of the Commercial law that link the consolidation by a controlling entity to the holding of at least one share. This modification of the law requires an analysis in substance of the control of assets using the SIC-12 interpretation of the IFRS framework. This has been applicable to Veolia Environnement since January 1, As of December 31, 2004, the French securitization program accounted for 378million of receivables. Discounting of receivables The Group discounted million of receivables at December 31, 2004 ( million at December 31, 2003). This decrease stems mainly from the sale of FCC. Allowances for doubtful accounts The allowances for doubtful accounts for the years ended December 31, 2004, 2003 and 2002 are as follows: ( millions) At December 31, Balance at beginning of period (464.3) (484.6) (472.7) Amounts charged to expense (128.5) (146.6) (165.7) Deductions of reserve* Other adjustments** Balance at end of period (371.5) (464.3) (484.6) * Of which 9.3 million of reversal. ** Of which 87.1 million related to the change in consolidation scope (sale of FCC for (59.7) million and sale of the Culligan and Equipment short term contracts units of the water segment in the US for (22.4) million). 207

208 Accounts payable Accounts payable are detailed as follows (in millions of euros): At December 31, Trade accounts payable 5, , ,307.5 Social and tax costs payable 4, , ,359.5 Other (1) Total accounts payable 10, , ,607.7 (1) Including deferred tax liabilities of million at December 31, 2004, million at December 31, 2003 and million at December 31, NOTE 10. SHORT TERMS LOANS ( millions) At December 31, Variations Provisions Foreign Change in scope exchange translation Other movements Gross short term loans (41.1) 1.4 (5.4) (20.7) Valuation allowance (165.3) (165.6) (163.0) Net short term loans (41.1) (5.4) (20.5) At December 31, 2004, net short-term loans amounted to million ( million at December 31, 2003 and million at December 31, 2002). The decrease in the net amount ( (41.1) million) is related to variations of (10.6) million in a pre-financing equipment investment linked to contracts in the transportation segment; to decreases in loans in Italy (Dalkia) for 12.5 million, in Veolia Water Systems for 24.4 million, and to an increase in a Berlin water company loan for 31 million. Other amounts are smaller than 10 million per unit. Changes in the consolidation scope ( 1.7 million) are mainly related to the sale of FCC ( (29.8) million) and the acquisition of Wabag France ( 12.0 million). Other amounts are smaller than 20 million per unit. As of December 31, 2004, short-term loans included 81.0 million related to a loan granted by Eaux de Berlin to a company of the Group, million related to the pre-financing of an investment linked to a German contract in the transportation sector and 26.3 million related to a reimbursement in Italy. NOTE 11. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES Marketable securities: At December 31, ( millions) Gross value Net value Depreciation Unrealized gains Estimated fair value Net value Estimated fair value Net value Estimated fair value Veolia Environnement (6.8) Sicav 1,329.3 (0.3) 1, ,329.2 BMTN Vinci Vivendi Universal 5.8 (1.0) Others 68.7 (0.9) Total 1,687.1 (9.0) 1, , , , The main changes in marketable securities are as follows: purchase of Veolia Environnement shares for 195 million; acquisition of shares in short-term investments funds by Veolia Environnement SA for 1,329.3 million as a result of the collection of proceeds from sales; 208

209 sale of BMTN ( Bons à Moyen Terme Négociables ) for million; transfer of Vinci shares belonging to Dalkia. Veolia Environnement shares have been acquired to cover stock options (770,000 shares) in the aggregate of 26.2 million and to cover future employee schemes (11,182,929 shares) in the aggregate of million with a view to securing employee profit sharing. In connection with Vivendi Universal s placement in December 2004, Veolia Environnement SA acquired 2% of its capital (8,128,440 shares for million). Cash and cash equivalents amount to 3,635.1 million, consisting at December 31, 2004 of cash for 971 million, commercial paper for 2,201 million and short term investments for 463 million (maturity of less than three months). The increase in commercial paper of 1,642 million essentially results from the collection of proceeds from sales. Net valuation allowances amounted to (3.4) million in NOTE 12. SHAREHOLDERS EQUITY On August 2, 2002, Veolia Environnement completed a 1.5 billion capital increase. This capital increase, subscribed to by a group of declared investors, resulted in the issuance of 57.7 million new shares at a subscription price of 26.5 per share. In December 2002, Veolia Environnement issued 1.2 million new shares at a subscription price of 26.5 per share. The shares were subscribed by employees in the context of the stock purchase plan Sequoia. In addition, 13,345 shares were issued following the exchange of 93,415 warrants. In accordance with the board meeting decision of December 11, 2002, the treasury stocks (4.7 million shares) not allocated to stock option plans and employee saving schemes were reclassified as other portfolio investments held as financial assets in Veolia Environnement SA s statutory financial statements and were allocated as a reduction of consolidated shareholders equity for an amount of million. As of December 31, 2002, foreign currency translation adjustments ( (957.2) million) were mainly due to the depreciation of the dollar against the euro, for (821) million. As of December 31, 2002, the accumulated foreign currency adjustments were (303.1) million. At December 31, 2002, other included proceeds from transferred contracts by Vivendi Universal for an amount of 25.4 million and call options on shares of Veolia Environnement agreed to by Vivendi Universal for an amount of (7.6) million. In accordance with Resolution n 17 of the shareholders meeting of April 30, 2003, Veolia Environnement SA reduced its shareholders equity by 3.4 billion by reducing the nominal value of its shares from 13.5 to 5. It increased the share premium by the same amount at the same time. Due to the capital reduction resulting from the reduction of the nominal value of the shares, the amount of capital and share premium in the treasury stock allocated to consolidated shareholders equity was modified by 40.3 million in In 2003, 392 warrants were converted, resulting in the issuance of 56 new shares. As of December 31, 2003, the foreign currency translation loss totaled million, of which 296 million resulted from the depreciation of the dollar against the euro and 89 million from the depreciation of the pound sterling against the euro. Foreign currency translation adjustment reserves amounted to (812.2) million as of December 31, At December 31, 2003, other included income taxes related to capital increase costs charged against the issuance premium in 2002 which amounted to (10.5) million. 209

210 The Group s consolidated and unconsolidated subsidiaries have certain restrictions on the distribution of net equity. These restrictions mainly relate to French companies where, pursuant to French law, they are legally required to reserve a minimum of 5% of annual net income in a retained earnings account. This minimum contribution is not required once the reserve equals 10% of the aggregate nominal share capital. The legal reserve is distributable only upon liquidation. The share capital of the Group consisted of 405,070,515 shares at December 31, All these shares have one voting right and may be registered upon request by the owners. Pursuant to a decision of the chairman and chief executive officer dated December 6, 2004, the share capital of the Company was increased as a result of the subscription of Veolia Environnement shares by employees member of the Group s savings plans in France and abroad for 25.3 million. 516,899 treasury shares were monetised in 2004 in the context of the purchase of Onyx Ireland minority interests. As of December 31, 2004, foreign currency translation adjustments ( 33.2 million) included 94.2 million related to the externalization of foreign currency translation adjustments for the following discontinued activities: sales of the Culligan and Equipment short term contracts units of USFilter ( 75.3 million), of FCC ( 9.3 million) and of Proactiva up to FCC shares ( 9.6 million) ; the other variations ( (61) million) are mainly related to the dollar ( (72.8) million). Foreign currency translation adjustment reserves equaled (779.0) million as of December 31, At December 31, 2004, other included the impact in net equity of the reconsolidation of the Berlin water company special purpose entities for 6.2 million. NOTE 13. MINORITY INTERESTS Minority interests are detailed as follows (in millions of euros): Minority interests at January 1, 2, , ,531.1 Changes in consolidation (634.0) (11.3) 58.8 Minority interests in income of consolidated subsidiaries Dividends paid by consolidated subsidiaries (180.7) (91.5) (112.9) Impact of foreign currency fluctuations in minority interests 10.4 (48.0) (33.9) Other Changes 8.6 (0.1) (0.1) Minority interests at December 31, 2, , ,585.2 In December 2001, Veolia Environnement Financière de l Ouest (VEFO), a company fully controlled by Veolia Environnement SA, issued 300 million in debt securities redeemable in priority shares of shares of issuer and maturing on December 28, As a result of their composition, these securities have been accounted for as minority interests. The remuneration of these securities is included in the minority interest table above. VEFO holds 8% of Onyx s capital. Minority interests in income include an FCC contribution of 44.2 million for Minority interests in income disclosed at the profit and loss level exclude FCC. In 2004, FCC minorities are accounted for under the item Discontinued operations income. Changes in consolidation result from the disposal of FCC, completed on September 15, 2004, for (723) million and from miscellaneous capital increases of subsidiaries outside France subscribed by third parties ( 113 million). 210

211 NOTE 14. DEFERRED INCOME Deferred income includes mainly million in investment subsidies received in connection with the management of municipal outsourcing contracts ( million at December 31, 2003) and million in payments resulting from the securitization of future receivables ( million at December 31, 2003). To finance most of its cogeneration plants, Dalkia sold in advance the proceeds from the sale of electricity that EDF has pledged to acquire under long-term contracts. Since January 1, 1998, these proceeds have been amortized on an actuarial basis over the life of these receivables, which range from 5 to 12 years. NOTE 15. RESERVES AND ALLOWANCES Reserves and allowances are detailed as follows (in millions of euros): At December 31, Charged to expenses Utilization Reversal Change in scope Translation adjustments Others 2004 Litigation including social and fiscal (105.2) (11.4) (45.1) (1.8) (0.6) Financial depreciation (42.2) (3.2) (16.0) (38.5) Maintenance and repair costs accrued in advance (83.9) (9.9) 6.1 (0.6) Valuation allowance on work in progress (88.8) (3.3) 12.5 (3.3) Reserves related to fixed assets (10.9) Closure and post closure costs (35.1) (4.5) 5.0 (6.7) (13.7) Pensions (11.7) (1.1) (6.2) (1.3) (7.7) Restructuring costs (43.8) (7.4) (0.1) (1.3) (0.6) 47.5 Losses on investment in unconsolidated companies (63.0) (3.1) (10.4) 0.9 (23.1) 69.8 Warranties and customer care (83.5) (1.2) (144.7) (3.4) Others (144.3) (27.2) 5.6 (6.7) (29.2) Total reserves and allowances 2, , (712.4) (72.1) (193.2) (23.7) (65.8) 2,673.4 The principal reserves and allowances give rise to the following comments: Reserves for litigation This includes those losses that are considered likely and that relate to litigation that Veolia Environnement experiences in conducting its normal business operations. The water, energy services and waste management businesses account for million, 79.9 million and 27.1 million of the total reserves for litigation, respectively. Reserves for the energy services segment include a 17.8 million litigation reserve in Italy. Changes in scope mainly relate to FCC proceeds amounting to 42.2 million (of which 38.6 million relates to tax disputes). Financial depreciation Veolia Environnement finances individual installations which, as a consequence of specific contractual provisions, are accounted for as tangible assets and amortized, up to their estimated residual value over the shorter of their useful lives or the period of the contract. When the contract period is shorter than the useful life of the asset, such depreciation is recorded as a liability under financial depreciation. These reserves mainly relate to the water business ( million) and energy services business ( million). Maintenance and repair costs accrued in advance As part of its obligations under public service contracts, the Group assumes responsibility for the replacement of fixed assets in the publicly owned utility networks it manages. Maintenance and repair costs are expensed as incurred except for specific contracts for which costs are accrued in advance. These reserves relate to the water business for million and to the energy services business for million. 211

212 Valuation allowance on work in progress The principal reserves relate to the transportation business ( 29.9 million) and the engineering activities of the water business for million. In the transportation segment, the balance sheet of Bayerische Oberlandbahn was modified by 18.2 million due to the allocation of acquisition costs arising from a business combination. Closure and post-closure costs The Group has financial obligations relating to closure and post-closure costs and the remediation of the disposal facilities it operates or for which it is otherwise responsible. Landfill final closure and post-closure accruals consider estimates for costs of the final cap and cover for the site, methane gas control, leachate management, groundwater monitoring, and other monitoring and maintenance to be incurred after the site ceases to accept waste. Cost estimates are prepared by engineers based on the applicable local, state and federal regulations and site specific permit requirements. These estimates do not take into account discounts for the present value of total estimated costs. The Group accrues a reserve for these estimated future costs pro rata over the estimated useful life of the sites. Those reserves amounted to million in 2004, compared to million and million in 2003 and 2002, respectively. As of December 31, 2004, the total anticipated costs, undiscounted, amounted to 500 million. Other reserves and accruals are related to plant dismantling and site remediation in the water and waste management businesses, totaling 20.9 million, 27.4 million and 54.1 million for the years ended December 31, 2004, 2003 and 2002 respectively. Pensions The Group has accrued reserves of million and 31.6 million to cover retirement obligations in France and Germany respectively. These reserves principally cover the indemnities paid upon retirement. Defined pension schemes are essentially limited to the British subsidiaries of Veolia Environnement. The 126 million of net assets invested in funds are accounted for on the balance sheet as other financial assets. Restructuring charges Restructuring reserves relate primarily to the water and energy services businesses for 27.3 million and 11.1 million, respectively. Losses on investments in unconsolidated companies Within its normal activities, Veolia Environnement must book allowances for certain affiliated companies. The decrease in 2004 is principally due to the utilization of a reserve covering the closure of U.K. bus activity for an amount of 25.8 million. Warranties and customer care These reserves principally relate to captive insurance companies ( 58.6 million of incurred losses), to the engineering and equipment activities of the water business ( 51.8 million) and to the energy services segment ( 45.3 million). The change in scope is related to the sale of FCC. Other Other reserves and allowances include those obligations recorded as part of the normal operation of the Group s subsidiaries. 212

213 NOTE 16. DEBT Long-term financial debt ( millions) At December 31, Change in scope(1) Foreign exchange translation Maturities/ Other Acquisitions Disposals movements 2004 Bonds 5, , (2,135.9) (25.0) ,221.5 Other long term financial debt 7, , (1,156.2) (67.3) ,579.9 Long term financial debt 12, , ,016.5 (3,292.1) (44.6) ,801.4 (1) Mainly related to the consolidation at January 1, 2004 of special purpose entities (SPE) Eaux de Berlin ( 378 million), the securitization program in France (Veolia Water, 325 million) and the transfer of FCC s financial debts ( (331) million). The table below presents an analysis of the consolidated long-term debt balance by type of debt instrument (in millions of euros): At December 31, EMTN (a) 5, , ,551.6 US private placement (b) Three Valleys (c) Tyseley (d) Montgomery (e) Veolia Environnement 1.5% bond (f) 1, ,535.3 Berliner Wasser Betriebe (g) 1, , ,977.6 Syndicated credit in CZK (h) Capital Leases (i) SPE (i) Securitization in France (k) Bonds, bank Loans (l) 1, , ,806.2 Total 10, , ,913.0 (a) (b) On December 31, 2004, European Medium Term Notes (EMTN) outstanding consisted of 5,829.2 million (of which 5,329.2 million matures in more than one year), and broke down as follows: 500 million bearing interest of 4.75%, maturing on November 8, 2005, 2,000 million bearing interest of 5.875%, maturing on June 27, 2008, 1,000 million bearing interest of 5.875%, maturing on February 1, 2012, 1,000 million bearing interest of 4.875%, maturing on May 28, 2013, 750 million bearing interest of 5.375%, maturing on May 28, 2018, 700 million bearing interest of 6.125%, maturing on November 25, 2033, In 2004, Veolia Environnement conducted only one new issuance under its EMTN program, in an amount of US$ 27 million bearing interest at U.S. LIBOR, and maturing on March 4, Further, in the first half of 2004, Veolia Environnement redeemed part of the outstanding notes relating to its issuance of 2 billion conducted in 2001 and maturing on June 27, 2008 (as set forth above), in the amount of 150 million. As of December 31, 2003, Veolia Environnement had issued bonds through a private placement in the United States for a global amount of million, which broke down as follows: Series A, B and C maturing January 30, 2013 with the following respective amounts: 33 million (bearing interest of 5.84%), 7 million (bearing interest of 6.22%), $147 million (bearing interest of 5.78%), 213

214 Series D maturing January 30, 2015 for $125 million bearing interest of 6.02%, Series E maturing January 30, 2018 for $85 million bearing interest of 6.31%, and which represent a total outstanding of million at December 31, The legal documentation relating to this debt includes the following clauses: Breach of the following financial ratios is an event of default which may trigger an accelerated redemption of the debt, which is otherwise redeemable at maturity: the interest cover ratio (EBITDA/net interest expense) must remain greater than 4.00 in 2004 and subsequent years; the debt payout ratio (net financial debt/ebitda) must remain less than 4.00 in 2004 and subsequent years. In case of downgrading of Veolia Environnement s credit rating below than BBB+ or Baa1, these covenants would be tested semi-annually (instead of annually today). Compensation is due in case of accelerated redemption. (c) This bond issuance by Three Valleys (of which million are outstanding, corresponding to million at December 31, 2004), bears interest at a 5.875% rate and matures on July 13, It was launched to repay an inter-company loan and align this subsidiary s maturing debt with its future cash flows. (d) This bond issuance (of which 63.8 million are outstanding, corresponding to 90.5 million at December 31, 2004), bears interest at a 6.675% rate and matures on June 30, It was launched to finance the Tyseley project. The principal is amortized over the entire life of the bond. (e) This bond issuance (of which $97.8 million are outstanding, corresponding to 71.8 million at December 31, 2004), bears interest at a 4.5% rate and matures on January 1, It was launched to finance a plant in Montgomery, Pennsylvania (United States). The principal is amortized over the entire life of the bond. (f) These bonds, convertible into Vivendi Universal shares (OCEANE) and issued on April 26, 1999, matured on January 1, 2005 and were reclassified as short-term debt prior to such maturity. Their value ( 1,535.3 million) includes a redemption premium of 91 million, with the asset counterpart recorded in Other longterm investments. This has been totally amortized as of December 31, (g) Berliner Wasser Betriebe debt as of December 31, 2004 consists of two lines: a debt without guarantee of 1,056.2 million (affiliates), compared to 1,265.8 million as of December 31, 2003; the acquired debt of 600 million which matures on January 15, 2005 ( 300 million of which are classified as short-term debt) is guaranteed by Veolia Environnement. This guarantee contains two clauses: niveau de marge is linked to the debt coverage ratio in the case of violating the following financial ratios, the debt covenant contains an accelerated redemption clause. Interest cover ratio (EBITDA/net interest expense): > 4.00 to 1 in Debt ratio (Net financial debt/ebitda): < 4.00 to 1 in This debt was refinanced on January 13, 2005 and matures on January 13, This financing does not include any covenants. (h) This syndicated credit facility amounts to 8,000 million in Czech crowns ( million) and is due to mature on November 7, 2008; it was arranged by Credit Lyonnais, ING Bank and Komerèni Banka. At December 31, 2004, the facility had been fully drawn upon for 8,000 million in Czech crowns, or million, indexed on PRIBOR. 214

215 (i) (j) (k) (l) At December 31, 2004, capital leases were due to mature between 2005 and 2031, and had fixed rates of interest ranging between 2.31% and 13.1% and variable rates of interest primarily indexed on EONIA, T4M and TAM. Pursuant to the Loi de Sécurité Financière of August 1, 2003, special purpose entities (SPE) had to be consolidated at December 31, 2004 for an amount of million. This principally relates to entities involved in Berlin water. Pursuant to the Loi de Sécurité Financière, the Acqueduc II securitization vehicle had to be consolidated as at December 31, 2004 for an amount of million. Other bonds and bank loans are due to mature between 2005 and 2024 and are indexed on fixed-interest rates ranging from 1.4% to 14.5% and pegged to various variable-interest rates, mainly EURIBOR and LIBOR. This amount also includes 72.4 million in subordinated debt (TSDI) which is due to mature on December 20, The breakdown of long-term financial debt by currency in which it is denominated is as follows (in millions of euros): At December 31, Euro(a) 8, ,079.5 U.S. Dollar(b) ,5 Pound Sterling Czech Crowns Australian Dollar 97, Korean Won 134, Norwegian Crown 55, Other 466, Total 10, ,586.4 (a) The decrease in Euro-denominated long-term debt by 2,413 million in 2004 is mainly due to: transfer to short-term debt of OCEANE for 1,535 million, transfer to short-term debt of 500 million in EMTN maturing November 2005, transfer to short-term debt of part of the Berlin acquisition debt up to 300 million, repurchase of 2 billion in bonds maturing June 2008 for 150 million, sale of FCC whose debt amounted to 316 million as of December 31, 2003, and consolidation from January 1, 2004 of special purposes entities and of the Aqueduc II securitization vehicle which offsets the decrease in Euro long term debt by 699 million. (b) The increase in Sterling-denominated long-term debt by 256 million mainly results from the bonds issued by Three Valley for 200 million ( million) on July 13, The table below presents a summary of the repayment schedules for long-term financial debt excluding subordinated securities (in millions of euros): At December 31, Due between one and two years , ,311.5 Due between two and five years 3, , ,660.8 Due after five years 6, , ,940.7 Total 10, , ,

216 Short term borrowings The table below summarizes Veolia Environnement s short-term borrowings (all amounts are in millions of euro): ( millions) At December 31, Variations Change in scope (1) Foreign exchange translation Other movements 2004 Bank overdrafts and other short term borrowings 3, , ,580.6 (233.6) (35.7) (17.8) 5,120.2 (1) Mainly transfer of FCC: (278) million. The Group s main short-term borrowings as of December 31, 2004 are detailed below: cash liabilities: million, 1,535.3 million of bonds convertible into Vivendi Universal shares and maturing on January 1, 2005, 500 million EMTN maturing on November 8, 2005, commercial paper program in the amount of 1,057 million issued by Veolia Environnement SA, million of accrued interest at Veolia Environnement SA s level. 300 million Berlin acquisition debt guaranteed by Veolia Environnement and maturing on January 15, Undrawn credit lines The main undrawn credit lines as of December 31, 2004 were as follows: 3,500 million in syndicated credit maturing on February 19, 2009, 643 million in short-term credit lines, 915 million in medium-term credit lines. Bank borrowings supported by collateral At December 31, 2004, 666 million in bank borrowings were supported by collateral. The breakdown by type of asset is as follows (in millions of euro): Amount pledged (a) Total amount on the balance sheet (b) % (a)/(b) On intangible assets 1 1, % On tangible assets , % On financial assets(1) 374 Total long term assets 628 On current assets 38 15, % Total assets 666 (1) As financial assets pledged as collateral are essentially stocks of consolidated subsidiaries, the ratio is not meaningful. 216

217 The breakdown by maturity is as follows: ( millions) At December 31, 2003 At December 31, 2004 Less than 1 year Maturity 1 to 5 years More than 5 years Intangible assets Tangible assets Land Other tangible assets(1) Financial assets VW Industrial Dvpt (2)(5) Chengdu(2)(5) VW Korean Daesan(3)(5) Samsung VW Inchon(2)(5) Defluent(3)(5) Cle Brazil Crivina(2)(5) Shenzhen(2)(5) PPC(2)(5) Connex Regiobahn(2)(5) Taitung(2) 3 5 Technoborgo(2)(6) 5 5 Amendis Tanger Tetouan(4)(5) 2 Zhuhai(4)(5) 1 Current assets Cash collateral 3 Accounts receivable Inventories Total (1) Mainly equipment and traveling systems. (2) 100% of equity pledged as collateral. (3) 95% of equity pledged as collateral. (4) Part of equity pledged as collateral less than 10%. (5) Non-consolidated company as of December 31, (6) Equity method investments as of December 31, NOTE 17. INCOME TAXES Analysis of income tax expense Components of the income tax provision are as follows (in millions of euro): At December 31, Pro-forma France (92.3) (143.5) (143.5) (93.8) Other countries (133.7) (122.5) (208.7) (248.9) Current income tax expense (226.0) (266.0) (352.2) (342.7) France 128.8(1) (58.4) (58.4) (11.9) Other countries (85.1)(2) (82.7) Deferred income tax (benefit) (94.6) Total income tax expense (195.4) (274.4) (437.3) (1) Of which 207 million of deferred tax assets as a result of French tax group. (2) Of which 83 million of deferred tax assets as a result of US tax group. In 2001, a French tax group was created. Veolia Environnement SA pays tax for the group to the French tax authority. The tax saving is recorded at Veolia Environnement SA s level. 217

218 According to article no. 39 of the 2004 Finance Law, Veolia Environnement accounted for 8.8 million in exit tax of 2.5% from reserves of long-term appreciations within the limit of 200 million and after a write-off of 500,000 on the amount of the reserves. Deferred tax assets and liabilities The timing differences which give rise to significant deferred tax assets and liabilities are as follows (in millions of euro): At December 31, Deferred tax assets: Employee benefits Provisions for risks and liabilities Tax loss Other timing differences Gross deferred tax assets 1, , ,184.6 Unrecorded deferred tax assets(1) (263.0) (204.5) (172.8) Deferred tax assets recorded in the books ,011.8 Deferred tax liabilities: Depreciation Reevaluation of assets Other taxable timing differences Gross deferred tax liabilities (1) Represents tax savings from operating leases or other non-activated savings. They have not been recorded as assets because their recovery is not likely. Net valuation allowance amounted to (31.7) million in In the consolidated balance sheets, deferred tax assets are classified as accounts receivable and deferred tax liabilities as accounts payable. Tax rate reconciliation At December 31, Statutory tax rate 35.43% 35.43% 35.43% Goodwill amortization not deductible for tax purposes 14.87% (55.22)% 12.75% Permanent differences (17.63)% (13.33)% 8.91% Lower tax rate on long-term capital gains and losses 1.22% (0.53)% (5.89)% Tax losses (15.55)% 8.02% 5.13% Other, net 10.03% 7.75% (8.73)% Effective tax rate (1) 28.38% (17.88)% 47.60% (1) The effective tax rate is computed by dividing income taxes and deferred taxes by income before minority interests, income taxes and deferred taxes. Net operating tax loss At December 31, 2004, the Group had tax losses representing a potential tax saving of million (based on the effective tax rate). 218

219 Tax losses expire as follows (in millions of euro): Years Amount and thereafter Total NOTE 18. FINANCIAL INSTRUMENTS AND COUNTERPARTY RISKS The Group uses various financial derivative instruments to manage its exposure to fluctuations in interest rates and foreign currency rates. The Group does not anticipate any third-party defaults, which could have a significant impact on its financial position and the results of its transactions. Interest rate and foreign currency agreements The contractual amounts stated below are those outstanding as at December 31, 2004, 2003 and These amounts represent the levels of involvement by the Group and are not indicative of gains or losses. They are expressed in millions of euro. Total At December 31, 2004 Less than 1year 1to5 years More than 5 years Interest rate hedging activity Interest rate swaps payable at fixed rate / receivable at variable rate Nominal amount 2, , Weighted average received rate (evaluated on December, 31) 2.43% Weighted average paid rate (evaluated on December, 31) 4.92% Interest rate swaps payable at variable rate / receivable at fixed rate Nominal amount 4, , ;151.7 Weighted average received rate (evaluated on December, 31) 5.18% Weighted average paid rate (evaluated on December, 31) 3.00% Interest rate swaps payable at variable rate / receivable at variable rate Nominal amount Weighted average received rate (evaluated on December, 31) 1.66% Weighted average paid rate (evaluated on December, 31) 1.83% Cross currency swaps Nominal amount Weighted average received rate (evaluated on December, 31) 2.28% Weighted average paid rate (evaluated on December, 31) 1.60% Interest caps, floors and collars (a) Nominal amount 2, Average guarantee rate 4.16% Interest rate swap option Nominal amount Weighted average received rate when exercised 2.81% Weighted average paid rate when exercised 2.56% Foreign currency hedging activity Forward exchange contracts (b) Nominal amount 1, , (a) Interest caps are used to protect the group from interest fluctuations that affect variable debt, so as to limit the interest paid. On December 31, 2004, the cap portfolio was made up of the following: covering exposure to Euribor 3 months, with a notional of 1,314.6 million. The weighted average rate was 4.49% 219

220 covering exposure to Libor USD 3 and 6 months, with a notional of $850 million. The weighted average rate was 3.48% covering exposure to Pribor CSK 12 months, with a notional of CZK2,000 million. The weighted average rate was 4.00% (b) The use of forward exchange contracts is linked to foreign currency borrowing. On December 31, 2004, the exchange transaction portfolio was as follows: (in millions of foreign currency) Currency Swaps and forward buy Swaps and forward sale USD GBP AUD Other currency ( equivalent) Reminder for 2003 Total At December 31, 2003 Less than 1 year 1to5 years More than 5 years Interest rate hedging activity Interest rate swaps payable at fixed rate / receivable at variable rate Nominal amount 1, , Weighted average received rate (evaluated on December, 31) 1.87% Weighted average paid rate (evaluated on December 31) 5.38% Interest rate swaps payable at variable rate / receivable at fixed rate Nominal amount 5, , ,107.0 Weighted average received rate (evaluated on December, 31) 5.12% Weighted average paid rate (evaluated on December 31) 2.88% Interest rate swaps payable at variable rate / receivable at variable rate Nominal amount 1, Weighted average received rate (evaluated on December, 31) 1.30% Weighted average paid rate (evaluated on December 31) 1.37% Cross currency swaps Nominal amount 2, , Weighted average received rate (evaluated on December, 31) 2.78% Weighted average paid rate (evaluated on December 31) 1.93% Interest caps, floors and collars Nominal amount 2, , Average guarantee rate 3.96% Interest rate swap option Nominal amount Weighted average received rate when exercised 2.81% Weighted average paid rate when exercised 1.15% Foreign currency hedging activity Forward exchange contracts Nominal amount 1, ,

221 Reminder for 2002 Total At December 31, 2002 Less than 1 year 1to5 years More than 5 years Interest rate hedging activity Interest rate swaps payable at fixed rate / receivable at variable rate Nominal amount 1, Weighted average received rate (evaluated on December, 31) 2.29% Weighted average paid rate (evaluated on December 31) 5.50% Interest rate swaps payable at variable rate / receivable at fixed rate Nominal amount 2, ,200.0 Weighted average received rate (evaluated on December, 31) 5.63% Weighted average paid rate (evaluated on December 31) 3.06% Interest rate swaps payable at variable rate / receivable at variable rate Nominal amount 1, ,334.6 Weighted average received rate (evaluated on December, 31) 1.60% Weighted average paid rate (evaluated on December 31) 1.61% Cross currency swaps Nominal amount 775, Weighted average received rate (evaluated on December, 31) 2.23% Weighted average paid rate (evaluated on December 31) 4.74% Interest caps, floors and collars Nominal amount 2, , Average guarantee rate 4.11% Interest rate swap option Nominal amount 1, , NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS On December 31, 2004, 2003 and 2002 Veolia Environnement used for financing the following types of financial instruments: notes, commercial paper and derivative financial instruments allowing it to manage interest rate risk, foreign currency risk and equity risk. The fair value of financial instruments detailed below is generally determined using quoted prices. When no quoted price is available, fair value is based on estimates using discounted future cash flows or other estimates. At December 31, ( millions) Assets (liabilities) Carrying amount Estimated fair value** Carrying amount Estimated fair value Carrying amount Estimated fair value Investments* 2, , , , , ,514.3 Long-term debt (10,801.4) (11,155.1) (12,586.4) (12,768.0) (12,913.0) (13,125.0) Treasury management Interest rate swaps ,5 Cross currency interest rate swaps Forward exchange contracts Interest caps, floors and collars (5.8) Interest rate swap option (5.8) (10.0) * Excluding treasury shares held for stock option purposes. ** Clean market value. Financial instruments including cash and cash equivalents, accounts receivable, short-term loans, accounts payable and bank overdrafts and short-term borrowings are excluded from the table above. For these instruments, fair value was estimated to be the carrying amount due to the short maturity. 221

222 NOTE 20. PENSION BENEFITS The pension benefits were disclosed in the previous financial statements in the US GAAP section. From 2004 onwards, this information is given in French GAAP Pension ( millions) benefits Benefit obligation at beginning of year 1,023.9 Service cost 75.5 Interest cost 49.8 Plan participants contributions 4.8 Business combinations 3.2 Disposals (35.1) Curtailments (4.8) Actuarial loss (gain) 46.0 Benefits paid (49.1) Special termination benefits 20.8 Others (foreign currency translation) 10.4 Benefit obligation at end of year 1,145.4 Change in plan assets Fair value of plan assets at beginning of year Actual return on plan assets 60.2 Group contributions 39.9 Plan participants contributions 4.8 Acquisitions Disposals (27.5) Curtailments (0.3) Benefits paid (28.6) Others (foreign currency translation) (2.7) Fair value of plan assets at end of year Funded status of plan (431.2) Unrecognized actuarial loss and profit Unrecognized actuarial prior service costs 44.0 Others (0.5) Accrued benefit cost (190.6) Accrued benefit liability (316.7) Prepaid benefit cost The plan assets are invested as follows: 2004 Assets Shares 42% Bonds 36% Insurance risk free funds 12% Cash 8% Others (including real estate) 2% The assumptions are the following: 2004 Pension benefits Discount rate 5,0% Expected return on plan assets 6,5% 222

223 NOTE 21. OFF BALANCE SHEET COMMITMENTS Commitments related to the cooperation agreement between Vivendi Universal and Veolia Environnement are detailed in section 24. Specific commitments Southern Water Put In 2003, the company refinanced its investment in Southern Water. As a result, the company signed a first contract with Société Générale Bank Trust ( SGBT ) on June 30, 2003 and a second contract with CDC Ixis on July 18, 2003 whereby: SGBT and CDC Ixis each subscribed for 110 million of preferred shares without voting rights issued by Southern Water and previously acquired by Veolia Water UK, SGBT and CDC Ixis each hold a put option, maturing in 5 years, allowing them to sell the preferred shares without voting rights to Veolia Environnement at an average exercise price based on a price adjusted by an annual yield of 5.5%. FCC Put The sale of FCC on September 15, 2004 cancelled all commitments related to the FCC shareholding. EDF agreements EDF entered into a call option with the Group on Dalkia s shares in case of a takeover bid on the Group by a competitor of EDF. Similarly, the Group entered into a call option with EDF on its Dalkia shares in case of a change in EDF s status or a takeover bid on EDF by a competitor of Veolia Environnement. The share price is to be determined by an independent expert if there is no agreement. EDF and Veolia Environnement each hold call options and put options which would allow, in case of exercise by one of the parties, EDF to own 50% of equity and voting rights in Dalkia. Exercise of these options is subject to the liberalization of the electricity market in France. Renewal obligations The Group and its water distribution and energy services subsidiaries, as part of their contractual obligations under public service contracts and in return for the revenue they receive, assume responsibility for the replacement of fixed assets in the publicly owned utility networks they manage. The Group forecasts the expenditures required in this regard over the remaining duration of the relevant contracts. The accumulated expenditure forecast is estimated at 2.3 billion ( 1.8 billion for water and 0.5 billion for energy). These expenditures will either be expensed or amortized over the shorter of the estimated useful lives of the assets or the contract period, according to the contract terms. Performance bonds issued for US subsidiaries Insurance companies have issued performance guarantees in connection with the activities of the Group s US subsidiaries (operational guarantees, guarantees of site restoration), which have been underwritten by Veolia Environnement SA up to a maximum amount of $1.4 billion ($0.2 billion used at December 31, 2004). Specific Berlin commitment Under the Berlin water contract, the Group may be obligated to pay approximately 610 million (at 50%) to previous land owners who have presented claims to this effect, should these people not be indemnified by the Berlin government. 223

224 Fee obligations with local authorities As described in note 25, under certain public service contracts, the Group has assumed fee obligations with local authorities. At December 31, 2004, the minimum future payments of these commitments are 144 million, of which two thirds are to be paid within five years. The breakdown by maturity of these specific commitments is as follows: (in millions of euro) At December 31, 2003 At December 31, 2004 Less than 1 year Maturity 1 to 5 years More than 5 years Southern Water Put FCC Put 995 Water renewal obligations 2,010 1, Energy Services renewal obligations Performances bonds issued by VE for US subsidiaries Specific Berlin commitment (50%) Fee obligations with local authorities Total 5,181 3, ,310 1,740 Other commitments and contingencies Other commitments and contingencies do not include collateral given on banking loans (see note 16) nor the specific commitments and contingencies described above. Other commitments and contingencies are detailed below (in millions of euro): At December 31, 2003 At December 31, 2004 Less than 1 year Maturity 1 to 5 years More than 5 years Operational guarantees 3, , , Financial guarantees Debt guarantees Warranty obligations Commitments given Obligations to buy Obligations to sell Other commitments given Letters of credit Other commitments given Total 4, , , ,745.2 Operational guarantees In the course of their normal activities, the Group s subsidiaries give guarantees to their customers. These guarantees, which are not related to the financing of the relevant contract, are called operational guarantees and include bid bonds, return of advance payment bonds and performance bonds. Debt guarantees These are essentially guarantees given to financial institutions in connection with the financial debt of non-consolidated companies, companies accounted for under the equity method, or companies consolidated through proportional consolidation. Warranty obligations These are essentially the warranty obligations undertaken in connection with the sale of water activities in the United States for 319 million, the sale of Bonna for 65 million and the sale of Connex Transport UK Ltd for 24 million. 224

225 Letters of credit These are letters of credit issued by financial institutions as collateral for the benefit of creditors, clients or providers of the Group. The Group s contingent liabilities by business segment are as follows (in millions of euro): At December 31, Water 2, , ,783.0 Waste Management Energy Services Transportation FCC/Proactiva , Holding 993.0(1) Others Total 4, , ,270.8 (1) Of which 455 million of operational guarantees: 348 million for the Water business and 107 million for the Waste business. Capital leases and operating leases The Group uses capital leases to finance certain operating assets and investment properties (see note 5). Payments remaining to be made under these contracts represented 1.1 billion as at December 31, 2004 (as opposed to 1.3 billion as at December 31, 2003 and 1.2 billion as at December 31, 2002). These payments are accounted for their present value ( million as at December 31, 2004) and are classified as long-term financial indebtedness (see note 16). The Group also uses operating leases, mainly for transportation equipment. As at December 31, 2004, minimum future payments under capital and operating lease contracts amounted to (in millions of euro): Operating leases Capital leases (balance sheet) and thereafter Total minimum future capital lease payments 1, ,131.3 Less amounts representing interest Present value of net minimum future capital lease payments Litigation (other than those accounted for) The Group is subject to various litigation in the normal course of its business. Although it is not possible to predict the outcome of such litigation with certainty, based on the facts known by the Group and after consultation with counsel, the management believes that such litigation will not have a material adverse effect on the Group s financial position or results of operations. 225

226 Commitments received ( millions) Commitments received 1,031,3 1,215.0 Debt guarantees Warranty obligations given Other commitments received * ,057.7 * Including million on behalf of EDF s commitments under electricity contracts. NOTE 22. TAX REVIEWS In the normal course of their business, the Group s subsidiaries are subject to regular tax reviews in France and abroad. In 2004, most of the tax reviews carried out in the French companies of the four divisions were finalized. Significant claims were resolved in the Group s favor. Reviews leading to additional tax expenses were adequately provided for. The Group operates in 80 countries outside France and is regularly reviewed. Tax reviews are presently in progress in Germany and in the United States of America, two significant markets for the Group. Where the review has given rise to a claim, it is monitored with the assistance a local tax advisor. Claims which have been identified but which have not been notified to the Group are provided for on a best knowledge basis. NOTE 23. SEGMENT INFORMATION In accordance with the provisions of SFAS 131, the Group has identified four reportable segments: water, waste management, energy services and transportation. These segments constitute the basis on which the management assesses investments and results. The water segment is comprised of water and wastewater activities such as water distribution, water and wastewater treatment, industrial process water, manufacturing of water treatment equipment and systems. The waste management segment collects, processes and disposes of household, commercial and industrial waste. The energy services segment includes energy optimization and related services. The transportation segment focuses on the operation of passenger transportation services, both by road and by rail. Revenue from external customers ( millions) At December 31, Proforma Water 9, , , ,293.7 Waste management 6, , , ,138.8 Energy services 5, , , ,570.9 Transportation 3, , , ,422.2 FCC 2, ,653.1 Total 24, , , ,

227 EBIT ( millions) At December 31, Proforma Water ,024.3 Waste management Energy services Transportation FCC Other (69.4) (55.3) (55.3) (48.1) Total 1, , , ,971.3 Revenue between segments ( millions) At December 31, Water Waste management Energy services Transportation FCC Other Total Amortization expense ( millions) At December 31, Water Waste management Energy services Transportation FCC/Proactiva Other Total 1, , ,699.3 Total assets ( millions) At December 31, Water 7, , ,095.1 Waste management 4, , ,280.0 Energy services 5, , ,950.7 Transportation 2, , ,631.3 FCC/Proactiva , ,191.8 Other 16, , ,869.5 Total 36, , ,

228 Expenditures for long lived assets ( millions) At December 31, Water 1, , ,086.3 Waste management Energy services Transportation FCC/Proactiva Other Total expenditures 2, , ,603.4 Long-term assets ( millions) At December 31, Water 10, , ,945.4 Waste management 4, , ,245.4 Energy services 2, , ,867.5 Transportation 2, , ,967.5 FCC/Proactiva , ,130.4 Other Total long-term assets 20, , ,568.0 Equity method investments At December 31, ( millions) Investment Share in net earnings Investment Share in net earnings Investment Share in net earnings Water Waste management Energy services (0.4) Transportation 4.9 (1.5) 2.4 (5.8) 5.7 (2.1) FCC Other Total

229 Geographical breakdown of net sales ( millions) At December 31, 2004 France Germany United Kingdom Rest of Europe United States of America Rest of world Water 6, , ,804.8 Waste management 2, , ,220.0 Energy services 3, , ,035.5 Transportation 1, , ,613.0 FCC Total 13, , , , , , ,673.3 Total ( millions) At December 31, 2003 France Germany United Kingdom Rest of Europe United States of America Rest of world Water 6, , , ,339.8 Waste management 2, , ,971.5 Energy services 2, , ,654.0 Transportation 1, , ,673.1 FCC , ,964.6 Total 13, , , , , , ,603.0 Total ( millions) At December 31, 2002 France Germany United Kingdom Rest of Europe United States of America Rest of world Water 6, , , ,293.7 Waste management 2, , ,138.8 Energy services 2, , ,570.9 Transportation 1, , ,422.2 FCC , ,653.1 Total 12, , , , , , ,078.7 Total Geographical breakdown of long lived assets ( millions) As at December 31, France Germany United Kingdom Rest of Europe United States of America Rest of world , , , , ,839,8 2, , , , , , , , , , , , , , , ,568.0 Total 229

230 NOTE 24. RELATED PARTY TRANSACTIONS The main transactions with related parties (principally Vivendi Universal, its subsidiaries and some minority shareholders in Veolia Environnement subsidiaries) and the amounts receivable from and payable to them are detailed below (in millions of euro): At December 31, Call option/shares of Veolia Environnement Treasury shares purchased from Vivendi Universal ,9 Cancellation of the Vivendi Universal / Veolia Environnement swap 75.8 Receivables Trade accounts(1) Loans(2) Payables Vinci convertible bonds Trade accounts Loans 1.3 Sales Operating income (expense) Interest expense (1.1) (58.8) Interest income (1) Includes 33.2 million payable by Vivendi Universal in connection with the maintenance or replacement of equipment (see guarantees). (2) Includes 4.4 million relating to receivables in connection with water contracts transferred. Veolia Environnement shares held by Vivendi Universal Veolia Environnement acquired 3,624,844 Veolia Environnement shares from Vivendi Universal at the end of For each share, Vivendi Universal issued a call option allowing Veolia Environnement to acquire 3,624,844 Veolia Environnement shares by December 23, 2004 for a price of 26.5 per share. The purchase price of the calls amounted to 7.6 million ( 2.1 per share). These calls expired on December 31, At the end of 2004, Veolia Environnement acquired 8,128,440 Veolia Environnement shares from Vivendi Universal for million. The purchase price of the treasury shares amounts to 73.9 million ( 20.4 per share). The call options are accounted for as a reduction of the Group shareholder s equity. The treasury shares are booked under Cash, cash equivalents and marketable securities, the purpose of the shares being to cover employee stock purchase plans. At the end of 2004, Vivendi Universal owned 5.3% of the capital of Veolia Environnement. Financial agreements between Vivendi Universal and Veolia Environnement Following different refinancing steps and with a view to taking advantage of low interest rates, the notional interest rate swap with Vivendi Universal was reduced in 2001, then cancelled in Veolia Environnement paid Vivendi Universal 75.8 million in 2002, related to the fair value of the swap that had been cancelled. The payment was expensed over the life of the swap. Agreement between Vivendi Universal and Veolia Environnement In order to finalize the separation of Veolia Environnement from Vivendi Universal, Veolia Environnement and Vivendi Universal reached an agreement on December 20, Counter-guarantee agreement Vivendi Universal and Veolia Environnement agreed that Vivendi Universal would be replaced by Veolia Environnement in a number of guarantees issued by Vivendi Universal for Veolia Environnement subsidiaries. The maximum amount of the commitments not yet transferred equaled approximately million at the end of

231 Guarantees In connection with the formation of the Group and Vivendi Universal s contribution or sale to the Group of its interests in its water and energy services, Veolia Environnement has replaced Vivendi Universal as managing partner (associé commandité) of substantially all Vivendi Universal s historic water and energy services subsidiaries. As managing partner of these subsidiaries, Veolia Environnement has agreed, or will agree, to reimburse these subsidiaries for expenses related to the maintenance and replacement of equipment. Under the guarantee agreement dated June 2000 and modified on December 20, 2002, Vivendi Universal will compensate Veolia Environnement for any loss that Veolia Environnement suffers as a result of its undertaking to reimburse the subsidiaries for expenses related to maintenance or replacement of equipment. On December 21, 2004, Vivendi Universal delegated its obligations under the guarantee agreement to Société Générale in respect of the 2004 fiscal year and onward, which the Group accepted. At the time of such delegation, the parties took note of the guarantee limits already in place, and set forth the maximum amounts that the Group could seek from Société Générale under the guarantee agreement in respect of the 2004 fiscal year and subsequent fiscal years. In 2004 value, the total maximum amount guaranteed by Société Générale was million. The Group may draw on this guarantee annually in an amount of up to million per year (which amount shall increase by 4.5% annually). The last fiscal year in respect of which the Group may claim reimbursement under the guarantee agreement is Vinci bonds Veolia Environnement indirectly took part in the issuance of Vivendi Universal bonds convertible into Vinci shares or repayable in cash in March Vivendi Universal lent Veolia Environnement 120 million against 1,552,305 shares of Vinci held by the Group through Dalkia France. On September 30, 2003, Veolia Environnement reimbursed the loan in advance for an amount of million. FCC agreement The sale of FCC terminated the shareholders agreement of October 6, 1998 between the Company and its partner as well as the put option of Ms. Esther Koplowitz regarding her 51% interest in the holding company B 1998 SL. NOTE 25. INCOME STATEMENT Employees and personnel charges Personnel charges including profit sharing amounted to 7,4 billion in 2004 compared with 8.6 billion in 2003 and 8.7 billion in ( millions) At December 31, Personnel costs 7,372 8,519 8,654 Profit sharing Aggregate 7,424 8,569 8,693 The decrease in personnel costs between 2003 and 2004 results mainly from FCC and the divested US water businesses. Weighted-average number of employees * By category At December 31, Executives 25,350 31,245 34,393 Employees 210, , ,784 Aggregate 235, , ,177 * Personnels from entities consolidated by way of proportional integration are taken into account pro rata the integration rate, whereas personnels from entities consolidated under the equity method are not included. 231

232 By segment At December 31, Water 58,801 65,669 74,223 Waste management 66,923 67,418 65,007 Energy services 36,767 35,101 34,075 Transportation 54,726 51,437 48,389 Proactiva 3,755 8,851 9,876 FCC 14,148 28,295 25,408 Other Aggregate 235, , ,177 By method of consolidation At December 31, Full consolidation 191, , ,359 Proportional integration 43,942 49,457 50,818 Aggregate * 235, , ,177 * In 2004, FCC exited the consolidation scope on June 30, which lead its personnel to be taken into account at 50% over a six-month period and Proactiva to be reclassified among the companies which are integrated proportionally. Research and development costs Research and development costs amounted to 62.7 million, 95.3 million and 92.5 million for 2004, 2003 and 2002 respectively. The decrease observed in 2004 results from the divestitures made in Depreciation and amortization ( millions) At December 31, 2004 Notes Additions Utilization/ reversals Net In the statement of cash-flows Amortization Goodwill 3 (203.3) (203.3) Tangible assets 5 (1,377.9) 8.8 (1,369.1) Intangible assets 4 (265.1) 0.5 (264.6) Depreciation of financial assets Investments accounted for using the cost method 7 (17.5) 16.6 (0.9) Long term loans 8 (0.8) Other financial assets 8 (84.0) 0.5 (83.5) Short term loans 10 (4.4) Cash, cash equivalent and other marketable securities 11 (8.1) Other portfolio investments (2.3) (2.3) Reserves and allowances (1) 15 (826.7) (42.2) Valuation allowances on differed taxes 17 (82.6) 50.9 (31.7) (1,986.4) Renewal expenses (2) (321.6) (2,308.0) Valuation allowance on current assets Inventories and work in progress 9 (11.7) 8.2 (3.5) Trade accounts receivables 9 (128.5) (6.7) Other accounts receivables (22.5) 12.8 (9.7) (19.9) (1) Operational, financial and others. (2) All renewal costs for publicly-owned utility networks are considered in the cash flow statement as investments, whether the utility network was originally financed by the concessionary or not. In addition, in 232

233 the transition from net income (loss) to net cash provided by operating activities, all renewal costs are eliminated under adjustments for depreciation and amortization. Amortization and depreciation of goodwill and intangible assets with indefinite life Details are as follows: ( millions) At December 31, Goodwill amortization (146.9) (209.6) (250.2) Impairment of goodwill (106.4)* (2,214.9)** (77.0)*** Total (253.3) (2,424.5) (327.2) * Including (70,0) million of transportation market shares in Scandinavia. ** Including (2,091.3) million of US Filter goodwill impairment. *** Including (40.0) million of Latin America goodwill impairment. 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 Amortization and depreciation charges in 2004 broke down as follows: (146.9) million in recurring amortization expense, compared to (209.6) million in 2003, and (106.4) million in non-recurring amortization expense, compared to (2,214.9) million in Recurring amortization expense decreased in 2004, due primarily to the write-off as of June 30, 2003 of goodwill relating to USFilter, and the allocation of goodwill amortization relating to FCC to a separate line of the income statement for discontinued operations. Non-recurring amortization charges in 2004 consisted primarily of a write-off of (70.0) million of market share for the transportation division related to the Scandinavian operations. Other non-recurring amortization charges (amounting to (36.4) million) involved the waste management ( (19.0) million) and energy services ( (14.9) million) divisions, in light of the market environment in 2004 and future prospects in these 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 a 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). The write-off related to the reorganization of the U.S. water activities and the contemplated divestment of several of these activities. In addition, in light of the market environment in 2003 and prospects for the Group s markets, Veolia Environnement wrote-off goodwill amounting to million in aggregate, of which 36.0 million were recorded in several engineering subsidiaries of the water division, 21.6 million in the German waste management operations and 18.8 million in the energy services activities. This million write-off of goodwill also included a charge of 9.7 million in the 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. Financial income and expenses ( millions) At December 31, Interest expense (602.1) (623.7) (680.9) Other financial income (expense) Provisions (45.8) (134.1) (109.4) Financial income (expense) (635.0) (749.9) (648.1) Veolia Environnement incurred net financial expense of (635.0) million in 2004, compared to net financial expense of (749.9) million in The decrease in net financial expense was partially due to a continued 233

234 decline in financing costs, from (623.7) million in 2003 to (602.1) million in It was also due to a reduction in net accruals of reserves, which fell from (134.1) million in 2003 to (45.8) million in The decrease in financing costs is principally attributable to a reduction in outstanding indebtedness, which offset an increase in the average cost of debt from 4.31% in 2003 to 4.63% in The increase in the average cost of debt results 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 VE s outstanding OCEANEs on January 3, 2005). Excluding the impact of financing costs, Veolia Environnement recorded net financial expense of 32.9 million in 2004, compared to net financial expense of (126.2) million in The principal components of financial income and expense in 2004 were the following: a one-time capital gain of 44.4 million from the sale of Vinci shares, as well as a one-time capital gain of 7.8 million from the sale of Rome Vendôme shares (compared to a capital gain of 30.5 million in 2003 from the sale of Vinci shares), a non-recurring write-back of reserves of 3.6 million relating to shares of Veolia Environnement 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 Veolia Environnement s 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), fees 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 (expenses) ( millions) At December 31, Capital gains and losses (47.7) 22.0 (31.4) Losses, reserves and impairment of assets 2.8 (86.6) (30.4) Other (12.4) Aggregate (57.3) (62.4) (59.7) Non-recurring income and charges are recorded as other income (expense). Non-recurring income and charges are defined as those resulting from extraordinary events that are not likely to occur again in the ordinary course of Veolia Environnement s operations, including capital gains and losses recorded in connection with the sale of Veolia Environnement s subsidiaries and assets. Veolia Environnement recorded net other expense of (57.3) million in 2004, compared to (62.4) million in Net other expense in 2004 principally resulted from: a (55.2) million capital loss recorded in connection with the sale by the Berlin water company of telecommunications operator Berlikomm, a (13.8) million settlement paid to resolve a dispute relating to a failed acquisition in Italy, and other insignificant charges. Net other expense in 2003 resulted from the (65.0) million capital losses recorded in connection with the sale of several of USFilter s activities (including the impact of fluctuations in exchange rates on the sale 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 Connex s 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 These net capital gains resulted primarily from a 30.8 million gain on the sale of Veolia 234

235 Environnement s interest in Wyuna and a 40.8 million gain on the sale by FCC of Compañía de Energía Hydroeléctrica de Navarra. Income from discontinued activities Water FCC Total United ( millions) States Net income / discontinued activities Capital gains and losses (47.2) 36.1 (11.1) Taxes (201.7) (31.2) (232.9) Income from discontinued activities (248.7) 40.9 (207.8) The income (loss) from the US divested businesses ( 0.2 million) takes into account the effect of the restructuring steps taken in relation to the sale of these assets, whereas the capital loss results mainly from the price adjustment negotiated with the buyers. The financial position resulting from the asset sales in the water sector in the US was heavily impacted by the tax consequences of these transactions, namely: a 63.5 million charge relating to the use of deferred tax assets in connection with the sale. Thanks to the sale structure, this charge proved to be considerably lower than the charge in excess of 200 million anticipated in Veolia Environnement s F; 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 the U.S. assets. In previous fiscal years, this tax charge has been deducted directly from a currency transaction adjustments reserve in accordance with the consolidation rules relating to net foreign investments. This 138 million tax charge therefore has no impact on shareholders equity, as indicated in Veolia Environnement s semi-annual report of June 30, FCC contributed to net income for a 9-month period. The sale of FCC yielded a consolidated capital gain of 36 million. In accordance with a tax treaty between France and Spain, Veolia Environnement paid 31.2 million to the Spanish tax authorities in 2004 in conection with the sale of FCC. The main indicators on the profit and loss accounts of the discontinued operations are the following: Water FCC Total United ( millions) States Revenues , ,0 EBIT ,6 Operating income ,8 Financial income (expense), Net (5.0) (4.3) (9,3) Other income (expense) (19.2) (19,2) Income tax expense (7.9) (37.4) (45.3) Share in net earning of companies accounted for by the equity method (12.1) ,4 Minority interests -44,2 (44,2) Consolidated net income (loss) ,0 36,2 235

236 Veolia Environnement s 2004 banking ratios 2004 Reference EBITDA bank definition EBIT 1,616.9 Income statement + Operational amortization 1,563.0 Note 23 Depreciation and amortization + Operational valuation allowance on long term assets idem + Profit sharing 52.0 Note 25 Employees and personnel charges (a) EBITDA bank definition 3,231.9 Net interest expenses bank definition Interest expenses Note 25 Financial income and expenses Other financial incomes (expenses) (12.9) idem (b) Net interest expenses bank definition Debt long-term financial debt 10,801.4 Balance sheet short-term financial debt 5,120.2 Balance sheet Total gross debt 15,921.6 Short-term financial loans Balance sheet Long-term financial loans Note 8: Other financial asset Marketable securities 1,678.1 Balance sheet Cash and cash equivalent 3,635.1 Balance sheet Total financial assets 6,125.1 (c) Total net financial debt 9,796.5 (d) Interest coverage ratio = (a) / (b) for 2003 (e) Debt payout ratio = (c) / (a) for

237 NOTE 26. INFORMATION AS TO ENTITIES CONSOLIDATED BY WAY OF PROPORTIONAL INTEGRATION ( millions) At December 31, Balance sheet data Non-current assets 7, , ,185.5 Current assets 2, , ,655.0 Total assets 10, , ,840.5 Shareholders equity 4, , ,435.4 Minority interests (15.4) Financial debt 2, , ,093.2 Reserves and other liabilities 3, , ,306.9 Total liabilities and shareholders equity 10, , , Income statement data Net sales 4, , ,569.8 Operating income Net income* Cash flow data Operating cash flow Investing cash flow (707.8) (494.3) (849.6) Financing cash flow (254.3) * Contribution of the companies to Group share net income. In 2004, FCC exited the consolidation scope on June 30, which lead Proactiva to be reclassified among the companies which are integrated proportionally. The Berlin water contract, which is 50% consolidated, generated revenues of 573 million and an operating profit of 188 million. The total balance sheet was 4.3 billion. Financial indebtedness amounted to 1.7 billion, of which 1.1 billion were generated by the operating companies and 600 million guaranteed by Veolia Environnement and RWE. The economic interest of Veolia Environnement in the Berlin water company is 25%. 237

238 NOTE 27. LISTING OF THE MAIN COMPANIES INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS IN 2004 In 2004, the Group consolidated or accounted for a total of 1,986 companies, of which the principals are: Group and Address Consolidation % holding Veolia Environnement SA 36-38, avenue Kléber Paris Full Sense SAS rue Annette Bloch Montbéliard Prop WATER Veolia Water 52, rue d Anjou Paris Full Générale des Eaux and its subsidiaries 52, rue d Anjou Paris Full Including in France : Compagnie des Eaux et de l Ozone 52, rue d Anjou Paris Full Compagnie des Eaux de Paris 7, rue Troson-du-Coudray Paris Full Société Française de Distribution d Eau 7, rue Troson-du-Coudray Paris Full Compagnie Fermière de Services Publics 3, rue Marcel Sembat Immeuble CAP Nantes Full Compagnie Méditerranéenne d exploitation des Services d Eau 12, boulevard René Cassin Nice Full Société des Eaux de Melun Zone Industrielle 198/398, rue Foch Vaux Le Pénil Full Société des Eaux de Marseille and its subsidiaries 25, rue Edouard Delanglade BP Marseille Prop Société des Eaux du Nord 217, boulevard de la Liberté Lille Prop Société des Eaux de Versailles et de Saint-Cloud 145, rue Yves le Coz Versailles Prop Sade-Compagnie Générale de Travaux d Hydraulique and its subsidiaries 28, rue de la Baume Paris Full Veolia Water Systems (previously OTV) l Aquarène 1, place Montgolfier St Maurice Cedex Full Sainte-Lizaigne SA 52, rue d Anjou Paris Full Prague Water CGE AW 52, rue d Anjou Paris Full Including outside France : Veolia Water UK Plc and its subsidiaries Old Queen Street, London SW1H 9JA (United Kingdom) Full Veolia Water North America Heathrow Forest Parkway Suite 200 Houston TX77032 Texas (United States) Full Berliner Wasser Betriebe Neue Jüdenstrasse 1 D10179 Berlin Mitte (Germany) Prop Servitec KFT (Veolia Water Hungary) Lovas UT 131b 1012 Budapest (Hungary) Full

239 Group and Address Consolidation % holding OEWA Wasser und Abwasser Walter Köhn Strasse LeipzFull (Germany) Full Southern Water Investments Limited Southern House Yeomen Road Worthing West Sussex BN13 3 NX (United-Kingdom) ME Veolia Water Shenzhen n 1019 Shennan Zhong Road Shenzhen (China) Prop ENERGY SERVICES Dalkia Saint-André 37, avenue du Mal de Lattre de Tassigny St André les Lille Full Dalkia France 37, avenue du Mal de Lattre de Tassigny St André les Lille Full Cogestar Saint André 37, avenue du Mal de Lattre de Tassigny St André les Lille Full Cogestar 2 Saint André 33, place Ronde Quartier Valmy Puteaux Full Crystal S.A. Saint André 37, avenue du Mal de Lattre de Tassigny St André les Lille Full Citelum 37, rue de Lyon Paris Full Dalkia Morava AS 28 Rijna Ostrava (Czech Republic) Prop Dalkia PLC and its subsidiaries Elizabeth House London Road Staines TW18 4BQ (United Kingdom) Prop Clemessy and its subsidiaries 18, rue de Thann Mulhouse Full Siram, SPA and its subsidiaries Via Bisceglie, Milano (Italy) Prop ZTO (Dalkia Ostrava) Pivovarska, 84/1 PSC Ostrava (Czech Republic) Prop Dalkia Poznan Zep and its subsidiaries UL Gdynska Poznan (Poland) Prop WASTE MANAGEMENT Onyx Parc des Fontaines 163 / 169, avenue Georges Clémenceau Nanterre Full Société d Assainissement Rationnel et de Pompage (S.A.R.P.) and its subsidiaries 162/16 Energy Park IV 162/166, boulevard de Verdun Courbevoie Cedex Full SARP Industries and its subsidiaries 427, route du Hazay Zone Portuaire Limay-Porcheville Limay Full Onyx Environmental Group Plc Onyx house 401 Mile end Road E34 PB London (United Kingdom) Full Onyx North America Corp Aviation Avenue 4th Floor Miami (United States) Full Onyx Waste Service One Honey Creed Corporate Center 125 South 84th Street Suite 200 WI Milwaukee (United States) Full Collex Waste Management Pty Ltd 280 Georges Street Level 12 P.O. Box H126 Australia Square NSW 1215 Sydney (Australia) Full

240 Group and Address Consolidation % holding Marius Pedersen Danemark Ørbaekvej Ferritslev (Denmark) Full TRANSPORTATION Connex Parc des Fontaines 163 / 169, avenue Georges Clémenceau Nanterre Full Connex Transport AB Englundavagen 9 Box Solna (Sweden) Full Connex Transport UK Ltd Waterloo Business Center 117 Waterloo Road London SE1 8UL (United Kingdom) Full Connex Verkher GmBh Rödelheimer Bahnweg Francfort (Germany) Full Connex Group Australia Pty Ltd Level 3, Flinders St Station, 223 Flinders St Melbourne, Victoria 3000 (Australia) Full Connex Nort America (CNA) 2100 Huntingdon Avenue MD Baltimore (United States) Full C.F.T.I. (Compagnie Française de Transport Interurbain) Parc des Fontaines 163 / 169, avenue Georges Clémenceau Nanterre Full C.G.F.T.E. (Compagnie Générale Française de Transports et d Entreprises) Parc des Fontaines 163 / 169, avenue Georges Clémenceau Nanterre Full Connex GVI Inc 720 rue Trotter St-Jean-sur-Richelieu, QC, J3B 8T2 (Canada) Full PROACTIVA 216 Paso de la Castellana Madrid (Spain) Prop Full: Full consolidation Prop: Proportional integration ME: Equity method 240

241 NOTE 28. SUPPLEMENTAL DISCLOSURES The following information has been prepared to present supplemental disclosures required under U.S. GAAP and SEC regulations applicable to the Group. NOTE 28A. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING POLICIES GENERALLY ACCEPTED IN THE UNITED STATES AND FRANCE The consolidated financial statements of the Group have been prepared in accordance with accounting principles generally accepted in France ( French GAAP ) which differ in certain respects from accounting principles generally accepted in the United States ( U.S. GAAP ). The principal differences between French GAAP and U.S. GAAP as they relate to the Group are discussed in further detail below. Use of the proportional integration method Under French GAAP, it is appropriate to use the proportional integration method for subsidiaries over which the Group and other shareholders have agreed to exercise joint control over significant financial and operating policies. Under the proportional integration method, the Group recognizes the assets, liabilities, equity, revenues and expenses of subsidiaries to the extent of its interest in the Group ownership. Under U.S. GAAP, when the Group controls a subsidiary based on majority ownership or voting or other rights, the subsidiary is fully consolidated. When the Group does not exercise control over a subsidiary, but has significant influence over the entity, the Group uses the equity method to account for its investment. Summarized financial information for those investments accounted for under the proportional integration method are included in note 26. This difference in accounting policy has no effect on either net income or shareholders equity. Income taxes Under French GAAP, the Group does not recognize deferred tax assets on net operating loss carryforwards or on temporary differences when it s not more likely than not that the recovery of the related deferred tax asset will not be realized. Under U.S. GAAP, deferred tax assets are recognized for deductible temporary differences and net operating loss carryforwards and are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax asset will not be realized. This difference in accounting policy has no effect on either net income or shareholders equity but has a presentation effect on gross, net deferred tax assets. Under French GAAP, Veolia Environnement has elected to discount deferred taxes when the company has a reliable reversal plan for temporary differences. Under US GAAP, deferred taxes are not discounted. Goodwill Under French GAAP, goodwill should be amortized over its estimated useful life, which is generally 20 to 40 years. Moreover, an impairment test should be performed at cash-generating unit level if there is an indication that the recoverable amount may be lower than the carrying amount. An asset s cash-generating unit is the smallest group of assets that includes the asset and that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets. Under US GAAP, goodwill is no longer amortized since January 1, An impairment test should be performed once a year at least at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment. 241

242 Specific transactions: businesses sold by Vivendi Universal When it formed the Group, Vivendi Universal sold certain subsidiaries and affiliates to the Group. In accordance with French GAAP, these transactions were accounted at market value which, in certain cases, has resulted in the generation of additional goodwill. Under U.S. GAAP, transfers of assets among entities under common control, including transfers of operating subsidiaries, are recorded at the predecessor s historical cost basis. Dilution profit or capital gain There may be a difference between French and U.S. GAAP regarding the amount of dilution profit or capital gain included in the profit and loss account because of the impact of U.S. GAAP adjustments on the carrying value of sold entities. Net investment in a foreign entity to be sold Under French GAAP, the Cumulative Translation Adjustment (CTA) should not be included in the carrying value of a net investment in a foreign entity to be sold for the impairment test. Under US GAAP, the CTA should be included in the carrying value of this investment, net of the CTA on the effective foreign currency hedge. Intangible assets Start-up costs Under French GAAP, certain costs, such as start-up costs, are capitalized and amortized over their useful lives or the duration of the contract, if applicable. Under U.S. GAAP, start-up costs are charged to expense in the period they are incurred. Other intangible assets acquired in business combinations Under French GAAP, market shares acquired in a business combination should be accounted for as a separate intangible asset and are not required to be amortized. According to SFAS 141, market shares have been reclassified in goodwill as of January 1, They were previously amortized over their useful lives, up to 40 years. Under French GAAP, trademarks acquired in a business combination are not required to be amortized. According to SFAS 142, those intangible assets with a definite useful life are amortized over their useful lives, those intangible assets with an indefinite useful life are not amortized and are subject to an annual impairment test, or more frequently if circumstances dictate. Trademarks were previously amortized over their useful lives, up to 40 years. Tangible assets As mentioned in note 2, the Group has changed its amortization plan for some previously recorded assets (from the double-declining-balance method to the straight-line method). Under French GAAP, it is considered as a change of estimate, which is accounted for prospectively. Under US GAAP, it is considered as a change of accounting principles, which is accounted for retrospectively. The cumulative effect of the change on the amount of retained earnings at the beginning of the period in which the change is made is included in the net income of the period of change. Public service contracts Commitments to maintain and repair assets Under French GAAP, a few consolidated subsidiaries, for specific contracts, apply the accrue in advance method to account for repair costs. Under U.S. GAAP, the Group applies the expensed as incurred method for maintenance and repair expenditures. 242

243 Payments to local authorities Under French GAAP, these obligations are not recorded as a liability on the balance sheet. The debt service payments are expensed in a manner that results in the straight-line recognition of the total payments over the contract period. The payments made in early years of the contract period may exceed the straight-line expense amount. This difference is recorded as a prepaid expense and amortized to income over the remaining contract period so as to achieve the straight line expense amount throughout the contract period. Under US GAAP, the present value of the total obligation must be recorded as debt on the balance sheet. The interest element of the obligation is amortized to income so as to achieve a constant rate of interest on the outstanding liability. Reserves Under French GAAP, certain reserves and allowances may be provided when it is likely that those costs will be incurred. Under U.S. GAAP, contingent losses are accrued only if it is likely that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. Under French GAAP, reserves related to fixed assets, inventories and investments in unconsolidated subsidiaries may be accounted as liabilities. Under U.S. GAAP, these reserves are recognized as a reduction of the carrying value of the related assets. Restructuring reserves Under French GAAP, restructuring costs (i.e. contractual breakage costs) must be accrued as soon as the company has an implied obligation. As regards operating leases relating to unused assets, the reserve must be reduced by the amount of rental to be received in case of sub-lease. Under U.S GAAP, restructuring costs may be accrued only if the company has a contractual or legal obligation. As regards operating leases relating to unused assets, the reserve must be reduced by the amount of rental that could reasonably be expected from a sub-lease, event if the company has no intention to sub-lease. Indemnities paid to employees who work beyond the minimum (legal) notice period must be recognized ratably over the work period. Asset retirement obligations Under French GAAP, asset retirement obligations are measured at current cost, without effect of inflation and discounting. Under US GAAP and according to SFAS 143, these obligations are measured at present value, including the effect of inflation and discounting. Securitization and discounting of receivables The Group has entered into various securitizations agreements, various discounting of receivables and sales of future receivables as described in notes 9 and 14. Under French GAAP and until 2003, the receivables sold to a SPE ( Special Purpose Entity ) under the securitization agreement signed in June 2002 (see note 9) were derecognized immediately, as the SPE was not consolidated. As of January 1, 2004, according to Article 133 of the Loi de Sécurité Financière of August 1, 2003, Veolia Environnement consolidates the SPE (see note 2 Change in accounting principles), therefore the receivables are not derecognized. This securitization agreement does not comply with all the requirements of SFAS 140 which states, among other things, that the originator and its affiliates cannot be entitled or obligated to repurchase or redeem the receivables, or have the ability to unilaterally cause the return of specific receivables, other than through a clean-up call. The call option held by the Group allows the repurchase of the receivables irrespective of any default in payments. Consequently, receivables sold under the securitization program are not derecognized under U.S. GAAP. Under French GAAP, future receivables sold (see note 14) are accounted as deferred income and the discounting of receivables is accounted for as a sale. Under U.S. GAAP, the deferred income is reclassified as long-term 243

244 financial debt whereas the discounting of receivables does not qualify as a true sale as per the provisions of SFAS 140. Financial instruments Marketable securities Under French GAAP, investments in debt and non-consolidated equity securities are recorded at acquisition cost and an allowance is provided if the management considers that there has been an other-than-temporary decline in fair value. Unrealized gains and temporary unrealized losses are not recognized. Under U.S. GAAP, investments in debt and equity securities are classified into three categories and accounted for as follows: debt securities that the Group has the intention and the ability to hold to maturity, are carried at cost and classified as held-to-maturity, debt and equity securities that are acquired and held principally for the purpose of sale in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses included in earnings, all other securities not otherwise classified as either held-to-maturity or trading are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in shareholders equity. Under U.S. GAAP, Vivendi Universal shares owned by the Group are accounted for as available-for-sale securities. Convertible bonds Under French GAAP, the accrual of redemption premium is optional. Under U.S. GAAP, the redemption premium is accrued as financial interest expense. The Group s convertible bonds include an exchange premium linked to the contingent conversion of the bonds into the Group s shares or Vivendi Universal s shares. The conversion was contingent upon the Group effecting an initial public offering of its shares, which it did in July, In accordance with French GAAP, the Group did not record financial interest expense in connection with the exchange premium until December 31, Under U.S. GAAP, a financial interest expense related to the potential conversion of all bonds must be recorded over the life of the bonds. Treasury shares Under French GAAP, shares of the Group s own stock owned by the Group and its subsidiaries are recorded as financial assets in statutory accounts and as a reduction of consolidated shareholder s equity, or as marketable securities in the consolidated financial statements where those shares are acquired to stabilize the market price or in connection with stock options granted to directors and employees. Under U.S. GAAP, treasury shares are recorded as a reduction of shareholders equity. Profit and loss on the disposal of treasury shares is recognized as an adjustment to shareholders equity. Derivative financial instruments Under French GAAP, the effects of financial instruments which qualify as hedging instruments are included in net income along with the corresponding hedged item. For those financial instruments which do not qualify as hedging instruments, a provision is recorded when their market value is negative. According to SFAS 133, derivative financial instruments (including those embedded in other contracts) must be recorded on the balance sheet at their fair value. Changes to fair value are recorded differently depending on whether the derivative instrument qualifies as a fair value hedge, a cash-flow hedge or a hedge of a foreign currency risk, or is not regarded as being a hedging instrument under SFAS 133. The variations of fair value hedges are recorded in financial income (expenses). The effect on income is matched by the reevaluation of the hedged asset, debt or firm commitment which is also recorded in financial income (expenses). The variations of cash-flow hedges are recorded as other comprehensive income. They are recorded in income depending on the realization of the underlying cash-flow. 244

245 The variations of hedges of a foreign currency risk are recorded as cumulative translation adjustments. The hedge qualification stems from the initial intention of the company to use the relevant financial instrument as a means of hedging an asset, debt, firm commitment or future cash-flow. Such an intention has to be defined and documented from the outset. The effectiveness of the hedging must be periodically demonstrated by showing the correlation between the changes in the hedging instrument and the hedged item. The ineffective part of the hedging instrument is systematically recorded as financial income (expense). The derivative instruments which are used by Veolia Environnement as part of its risk management policy but which do not constitute hedging instruments for the purposes of SFAS 133 are recorded at their fair value, with changes to their value included in net income of the year. Because of its involvement in financial transactions, Veolia Environnement is exposed to market risks (essentially because of changes in interest rate or exchange rates). The Company s management uses derivative financial instruments to limit these financial risks. Nevertheless, some of the financial instruments used do not satisfy the criteria of SFAS 133 to qualify as hedging instruments. Accordingly, the volatility of the market value of these derivative instruments is reflected in the Company s financial income (expense). Stock based compensation Vivendi Universal has set up several stock option plans whereby certain officers and employees have been granted options on its common shares. Vivendi Universal also maintains stock purchase plans that allow substantially all full-time employees of the Group and its subsidiaries to purchase shares of Vivendi Universal. According to the agreement signed on December 20, 2002 between Vivendi Universal and Veolia Environnement, Vivendi Universal assumes the responsibility for these plans until their maturity. Besides, Veolia Environnement has set up a stock option plan in favour of a limited number of employees. Under French GAAP, common shares issued upon the exercise of options granted to employees and officers are recorded as an increase to share capital at the cumulative exercise price. In case of sale to employees, they are reclassified from marketable securities to share capital and the difference between the carrying value of the treasury shares and the cumulative exercise price by the stock purchase plan is recognized as a gain or loss in the period when the shares are sold. In accordance with French GAAP, the Group does not recorded any supplementary expense in relation to stock-based plans whereby shares may be granted with a discounted exercise price of up to 20% from the market value at the date of grant. Under U.S. GAAP, Veolia Environnement applies APB opinion No. 25, whereby a stock option plan (i.e., under which shares can be granted or sold to employees) is considered as compensatory if the relevant plan is open to a minority of employees only or does not require the employee to make a substantial investment, usually defined as being no less than 85% of the market value of the share market price at the grant date. Where a plan is deemed to be compensatory, APB Opinion No. 25 requires that the compensation arising from such plan be assessed on the basis of the intrinsic value of the shares granted or sold to employees. In fixed plans, compensation is defined as the difference between the exercise price of the options or the price at which the relevant shares were purchased and the share market price at the date of grant of the options or shares. The cost thus measured is recognized over the vesting period of the corresponding rights. Pension plans Since January 1997, the Group has adopted an accounting policy to record pension obligations in respect of all eligible employees that relies on the projected unit credit method. Under U.S. GAAP, the projected unit credit method is required to be applied as of January 1, The transition obligation or fund excess determined as of January 1, 1989 is amortized over the average residual active life of the population that was covered under the plan at that date. Under French GAAP, some postretirement benefits other than pensions are recorded as expense when the corresponding amounts are paid. Under U.S. GAAP, the Group must recognize an obligation for amounts to be paid under postretirement plans, other than pensions. A postretirement transition obligation may be determined as of January 1, 1995 and 245

246 amortized over the estimated average life of retirees covered by the plan. Current period charges are based on estimated future payments to expected retirees. Presentation of net sales in the income statement in U.S. GAAP format Under its management contracts, the Group typically manages a public service for a fixed fee and an incentive calculated with reference to the performance of the contract. Under French GAAP, billings to customers are recognized as revenue and related costs are recognized as costs of sales. The difference between revenue and related costs represents the compensation paid to the operator, which consists of a fixed fee and a bonus. Under US GAAP, only the compensation paid to the operator (i.e., fixed fee and bonus) is recognized as revenue when a service is rendered. Presentation of the effects of change in accounting method in the income statement in U.S. GAAP format Under French GAAP, there is no specific presentation regarding the effects of changes in accounting method (changes arising from a decision by Veolia Environnement and/or new accounting rules). Under U.S. GAAP, such effects are shown on a specific line of the income statement. Net income under U.S. GAAP before effects of changes in accounting method is shown for the years 2004, 2003 and 2002 in note 28C. Presentation of discontinued operations in the income statement in U.S. GAAP format Under French GAAP, Veolia Environnement applied in 2004 the provisions of Article of 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 of the income statement (see note 2). Previously, there was no specific display in the income statement for the results of operations of a component of an entity that is sold during the year until its sale. According to SFAS 144, the results of operations of a component of an entity that is classified as held for sale and that meets some conditions must be reported in discontinued operations as a separate item of the income statement. NOTE 28B. NEW ACCOUNTING STANDARDS IN THE UNITED STATES EFFECTIVE IN 2005 OR 2006 In December 2004, the FASB issued SFAS No. 123 (revised 2004) Share-based payment. SFAS 123 (R) requires all share-based payments to employees to be measured at the fair value of the award. The Company plans to adopt SFAS 123 (R) using the modified-prospective method under which compensation cost is recognized from the effective date on January 1, 2006 in connection with all share-based payments granted, modified or settled after January 1, 2006 as well as for any awards that were not fully vested as of January 1, The Group is currently assessing the impact of adopting SFAS 123 (R). In December 2004, the FASB also issued SFAS No. 153 Exchanges of non monetary assets, an amendment of APB opinion N 29. SFAS 153 requires that exchanges of productive assets be accounted for at fair value, unless neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or the transaction lacks commercial substance. SFAS 153 is effective for the period beginning January 1, The Group is currently assessing the impact of adopting SFAS 153. In March 2005, the FASB issued FIN 47 Accounting for conditional asset retirement obligations, an interpretation of SFAS 143. FIN 47 clarifies the term conditional asset retirement obligation which is used in SFAS 143. FIN 47 also clarifies when an entity has sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for the year ending December 31, The Group is currently assessing the impact of adopting FIN 47. On June 1, 2005, the FASB issued SFAS No. 154 Accounting changes and error corrections, which replaces APB No. 20 Accounting changes and FASB Statement No. 3 Reporting accounting changes in interim financial statements. SFAS 154 addresses all voluntary changes in accounting principles as well as changes imposed by new regulations that do not include any specific transition provisions. SFAS 154 requires retrospective application to prior periods financial statements of changes in accounting principle, unless it is 246

247 impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 shall become effective on January 1, NOTE 28C. RECONCILIATION OF SHAREHOLDERS EQUITY AND NET INCOME TO U.S. GAAP The following is a summary reconciliation of shareholders equity and net income reported in the consolidated financial statements to shareholders equity and net income calculated under U.S. GAAP as at December 31, 2004, 2003 and ( millions) At December 31, Shareholders equity reported in the consolidated balance sheets 3, , ,329.6 Adjustments to conform to U.S. GAAP: Goodwill (Gross) (714.5) (822.1) (813.1) Goodwill accumulated amortization (61.5) Intangible assets (Gross) (319.0) (319.0) (343.2) Intangible assets depreciation (23.1) (98.6) (119.8) Tangible assets accumulated amortization Commitments to maintain and repair assets Payments to local authorities (180.5) (176.3) (171.2) Asset retirement obligations Other reserves Treasury shares (272.6) (90.1) (92.1) Other financial instruments (175.4) (80.9) (243.9) Stock based compensation (6.5) 1.0 (14.9) Pension plans (10.5) (31.7) (9.9) Leases (property, plant & equipment) (1.6) (2.9) (3.0) Others (1) Tax effect of above adjustments and reversal of discounting of long term tax (1) (89.6) U.S. GAAP shareholders equity 2, , ,923.2 (1) Including a reclassification between captions Others and Tax effect of above adjustments for 58.6 million as of December 31, 2003 and ( millions) At December 31, Net income/(loss) reported in the consolidated statements of income (2,054.7) Adjustments made to conform to U.S. GAAP: Goodwill (Gross) 67.7 Goodwill amortization (2,415.2) Dilution profit or capital gain/loss Intangible assets (Gross) (1.0) (10.5) Intangible assets amortization 48.4 (8.2) (27.4) Tangible assets amortization (17.1) 26.7 Commitments to maintain and repair assets (14.5) (0.8) (9.9) Payments to local authorities 30.0 (4.3) (1.6) Reserves for restructuring liabilities (53.4) Asset retirement obligations Other reserves (1.1) (11.7) 5.2 Treasury shares (5.2) Other financial instruments (74.8) (8.8) Stock based compensation (7.5) Pension plans 5.8 (1.1) 2.1 Leases (property, plant & equipment) (0.1) (1.8) Others 28.4 (9.9) (3.4) Tax effect of above adjustments and reversal of discounting of long term tax (142.3) (106.4) 58.4 U.S. GAAP net income/(loss) (1,826.9) (1,988.8) 247

248 Basic and diluted earnings per share For U.S. GAAP purposes, basic earnings per share are computed in the same manner as basic earnings per share under French GAAP, i.e., by dividing net income by the weighted average number of shares outstanding. Diluted earnings per share reflect the potential dilution that would occur if all securities and other contracts to issue ordinary shares were exercised or converted. Net income represents the earnings of the Group after minority interests. The computation of diluted earnings per share is as follows (except earnings per share, in millions of euros or millions of shares): At December 31, Net income/(loss) (under U.S. GAAP) (1,826.9) (1,988.8) Net income before cumulative effect of adoption of SFAS Net loss before cumulative effect of adoption of SFAS 143 and change in amortization plan for some tangible assets (1,880.4) Weighted average number of shares Outstanding-basic Dilutive effect of: Shares issuable on exercise of dilutive options Weighted average number of shares Outstanding-diluted Earnings per share: Basic 0.54 (4.56) (5.45) Diluted 0.54 (4.56) (5.45) Earnings per share before cumulative effect of adoption of SFAS 142 : Basic 1.53 Diluted 1.53 Earnings per share before cumulative effect of adoption of SFAS 143 and change in amortization plan for some tangible assets: Basic (4.70) Diluted (4.70) 248

249 NOTE 28D. COMPREHENSIVE INCOME The notion of comprehensive income does not exist under French GAAP, whereas under U.S. GAAP, SFAS 130 Reporting comprehensive income and concept statement 6 provide a definition of such notion. According to this definition, comprehensive income mainly includes (net of tax impact, in millions of euros): minimum pension liability adjustments (MLA), unrealized gains and losses on investment securities classified as available for sale (including Vivendi Universal shares owned by the Group), and on derivatives classified as cash flow hedges, foreign currency translation adjustments. Comprehensive income Accumulated foreign translation Accumulated unrealized gains (losses) on equity securities and hedging instruments Minimum liability adjustments Accumulated other comprehensive income Comprehensive income for the year ended December 31, 2001 (U.S. GAAP) ,050.0 (19.5) 2.0 1,032.5 Net loss 2002 (U.S. GAAP) (1,988.8) Other comprehensive income 2002, net of tax (U.S. GAAP): (1,299.0) Including : foreign currency translation adjustments (1,219.7) (1,219.7) (1,219.7) holding losses arising during the period on equity securities (11.2) (11.2) (11.2) unrealized losses on hedging derivatives (124.0) (124.0) (124.0) deferred income taxes MLA Comprehensive income for the year ended December 31, 2002 (U.S. GAAP) (3,287.8) (169.7) (108.3) 11.5 (266.5) Net loss 2003 (U.S. GAAP) (1,826.9) Other comprehensive income 2003, net of tax (U.S. GAAP): (526.9) Including : foreign currency translation adjustments (559.9) (559.9) (559.9) holding losses arising during the period on equity securities (2.8) (2.8) (2.8) unrealized losses on hedging derivatives deferred income taxes (20.0) (26.5) 6.5 (20.0) MLA (21.6) (21.6) (21.6) Comprehensive income for the year ended December 31, 2003 (U.S. GAAP) (2,353.8) (729.6) (60.2) (3.6) (793.4) Net income 2004 (U.S. GAAP) Other comprehensive income 2004, net of tax (U.S. GAAP): 81.6 Including : foreign currency translation adjustments holding gain arising during the period on equity securities unrealized losses on hedging derivatives (36.7) (36.7) (36.7) deferred income taxes (3.0) (2.1) (0.9) (3.0) MLA Comprehensive income for the year ended December 31, 2004 (U.S. GAAP) (617.1) (93.2) (1.5) (711.8) 249

250 NOTE 28E. STOCK BASED COMPENSATION Veolia Environnement stock option plans Veolia Environnement has adopted a series of stock option plans whereby options on its common shares are granted to certain directors and officers of the Group. The purpose of these stock option plans is to align the interest of the management with the interest of shareholders by providing certain officers and other key employees with additional incentives to increase the company s performance on a long term basis. Veolia Environnement has operated certain classic fixed stock option plans and a senior management variable plan. The Group granted on June 23, 2000, 780,000 options on its common shares to certain employees and officers. Under this plan, the number of exercisable options is based on a formula that measures the performance of Veolia Environnement s stock against the performance of a basket of peer companies. The exercise price is 32.5 and the maturity is 8 years. In 2001, the Group granted 3,462,000 options on its common shares to a range of employees. The exercise price and maturity are respectively 42 and 8 years. These options vest over a period of three years. In 2002, the Group granted 4,413,000 options on its common shares, including 336,300 options on its ADS (American, Depositary Shares), to a range of employees. The exercise price and maturity of these options are and 8 years respectively, and $33.26 and 8 years for options on ADS. These options vest over a three year period. In 2003, the Group granted 5,192,635 options on its common shares, including 449,500 options on its ADS, to a range of employees. The exercise price and maturity of these options are and 8 years respectively, and $24.95 and 8 years for options on ADS. These options vest over a three year period. In 2004, the Group granted 3,341,600 options on its common shares to 3 categories of employees. The first category of employees consists of senior officers of Veolia Environnement, including members of Veolia Environnement s Executive Committee. The second category is comprised of senior managers of the Group, and the third category is formed by key employees of the Group. The exercise price and the maturity of these options are and 8 years respectively. Under this plan the number of exercisable options is based on the level of ROCE (return on capital employed) as follows: % exercisable / ROCE <7.50% > 7.50% and < 8.50% > 8.50% Group 1 0% Between 50% and 100% 100% Group 2 50% Between 75% and 100% 100% For the third category of employees, the options vest over a three year period. 250

251 Summary information about the options granted in 2004, 2003 and 2002 is set below: Number of shares outstanding Weighted average exercise price (in euros) December 31, ,232, Granted 4,076, Exercised Forfeited (67,800) Expired December 31, ,240, Granted 4,743, Exercised Forfeited (26,035) Expired December 31, ,958, Granted 3,510,041* Exercised Forfeited (470,084) Expired December 31, ,997, * In 2004, to correct the effects of the 2002 capital increase, the Group modified the exercise price and allocated an additional 168,441 options. As these modifications did not result in either an increase in the intrinsic value of awards or a reduction in the ratio of exercise price to market value per share, no accounting consequences have been recognized. At December 31, 2004, 4,051,240 options were exercisable, none of which were exercised. Summary information about the stock options on ADS is set below: Number of shares outstanding Number of shares exercisable Weighted average exercise price (in dollar) December 31, , Granted Exercised Forfeited Expired December 31, , No compensation expense has been recorded in connection with stock options granted by Veolia Environnement under French GAAP. Under U.S. GAAP, the compensation expense recorded by the Group was 0.7 million, compared to compensation income of 0.9 million for the years ended December 31, 2004 and 2003 respectively. Summary information about Veolia Environnement s stock options outstanding at December 31, 2004 is set in the table below: Exercise price Number outstanding Average exercise price (in euros) Average remaining life (in years) Number vested ,908, ,522, , , ,038, ,692, ,358, ,358,870 15,997, ,265,

252 Summary information about Veolia Environnement s ADS stock options outstanding at December 31, 2004 is set in the table below: Exercise price Number outstanding Average exercise price (in USD) Average remaining life (in years) Number vested , , , , , ,033 The Group accounts for employee stock-based compensation on the basis of APB Opinion No. 25. Pro forma information, as if Veolia Environnement had applied SFAS 123, is shown in note 28J. Employee stock purchase plans Veolia Environnement maintains savings plans that allow substantially all full time employees of Veolia Environnement and its subsidiaries to purchase shares of Veolia Environnement. The shares are sold to employees at a discount of 20% from the average share market price over the last 20 business days preceding the date at which the purchase price is set. Shares purchased by employees under these plans are subject to certain restrictions regarding their sale or transfer. Relevant information regarding the shares sold to employees of Veolia Environnement is as follows: Number of shares 1,351,468 Proceeds on sales (in millions of euros) 25.3 Under French GAAP, 3.6 million of compensation expense is recorded in connection with employee stock purchase plans for the year ended December 31,2004. Under U.S. GAAP, the compensation cost recorded by the Group for the year ended December 31, 2004 amounted to 10.3 million, using the intrinsic value method. 252

253 NOTE 28F. PENSION PLANS AND OTHER POST RETIREMENT BENEFITS Disclosures, as per the requirements of SFAS 132, are as follows (in millions of euros): Pension Benefits Other Benefits Change in benefit obligation Benefit obligation at beginning of year Service cost Interest cost Plan participants contributions Disposals (35.1) (281.7) (5.4) 0.0 Curtailments (4.7) (0.8) (16.9) 0.0 Actuarial loss (gain) (40.0) 0.0 Benefits paid (38.0) (28.4) (33.6) (1.9) Plan amendments Others (including business combinations and foreign currency translation) 81.6 (35.5) Benefit obligation at end of year Change in plan assets Fair value of plan assets at beginning of year Actual return on plan assets (117.4) 0.0 Group contributions Plan participant contributions Disposals (27.5) (279.1) (3.8) 0.0 Curtailments (0.3) (7.5) 0.0 Benefits paid (23.8) (22.8) (29.0) 0.0 Others (including business combinations and foreign currency translation) 32.0 (46.2) (3.3) 0.0 Fair value of plan assets at end of year Funded status of plan (313.0) (231.7) (207.2) (24.0) Unrecognized actuarial loss Unrecognized actuarial prior service costs (71.2) 7.6 Unrecognized actuarial transition obligation 0.0 (5.7) (9.2) 0.0 Others (37.4) 0.7 (7.7) (13.4) Accrued benefit cost (141.8) (64.2) (31.0) (24.0) Prepaid expenses arising from overtime work under multi-employer plans (activities under lease contract) are written off since they are unlikely to be recovered otherwise than through a future suspension of contributions. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for those pension plans with accumulated benefit obligation in excess of plan assets were million, million and million at December 31, 2004, million, million and million at December 31, 2003, million, million and 28.0 million at December 31, The geographical breakdown of the projected benefit obligation ( million) and the accumulated benefit obligation ( million) was as follows at the end of 2004 : million and million in the United Kingdom, million and million in France and 94.8 and 82.1 million in other countries. The fair value of plan assets in France amounted to 74.9 million at the end of Veolia Environnement s domestic plans assets are invested principally in insurance company funds. The expected long-term rates of return on these assets are directly based on historical returns. Contributions paid to these plan assets are essentially discretionary contributions without contractual or legal requirements. The accumulated benefit obligation for domestic plans was million at December 31, The fair value of plan assets in the United Kingdom amounted to million at the end of These assets are invested essentially in equities and bonds through a trustee structure. The expected long-term rates of return on these assets are based on statistical returns of the observed market performance over a long-term basis. The accumulated benefit obligation for these plans was million at the end of

254 Amounts recognized in the balance sheets consist of (in millions of euros): Pension Benefits Other Benefits Accrued benefit liability (including MLA) (267.9) (208.5) (188.2) (24.0) Prepaid benefit cost Net amount accrued for under U.S. GAAP (141.8) (85.7) (49.7) (24.0) Intangible assets (MLA)(1) Net amount recognized under U.S. GAAP (125.5) (64.2) (31.0) (16.4) (1) Adjustments for U.S. GAAP purposes: the benefit liability accrued under U.S. GAAP is at the greater of either the excess of the accumulated benefit obligation over the fair value of plan assets or the net amount recognized under U.S. GAAP. Net accruals in the accompanying consolidated balance sheet can be compared with balances determined under U.S. GAAP as follows: (in millions of euros) Pension Benefits Other Benefits Net amount accrued for under U.S. GAAP (141.8) (85.7) (49.7) (24.0) Excess funding of plans recognized in income only when paid back to the Group Changes in scope (73.0) (62.1) (64.5) (2.6) Impacts of transition obligation, of prior service cost and of actuarial gains recognized with a different timing under local regulations Minimum liability adjustments (MLA) Net amount accrued for under French GAAP in the accompanying consolidated balance sheet (177.4) (126.3) (95.4) (13.2) Accrued (303.5) (248.8) (233.7) (13.2) Prepaid Net periodic cost under U.S. GAAP was as follows: (in millions of euros) Pension Benefits Other Benefits Service cost Expected interest cost Expected return on plan assets (33.9) (20.4) (69.7) 0.0 Amortization of unrecognized prior service cost 0.9 (1.6) (8.5) 0.2 Amortization of actuarial net loss (gain) Amortization of net transition obligation (6.4) (7.8) (3.1) 0.0 Curtailments/Settlements (0.9) (0.8) (11.5) (6.8) Others (3.5) 0,4 (10.0) 0.0 Net periodic benefit cost under U.S. GAAP (4.1) The following are weighted-average assumptions used to determine benefit obligations at December 31, 2004, December 31, 2003 and December 31, 2002: Pension Benefits Other Benefits Discount rate 5.0% 5.4% 5.9% 5.6% Rate of compensation increase 3.8% 3.9% 4.1% 0.0% 254

255 The following are weighted-average assumptions used to determine net periodic benefit costs for the years ended December 31, 2004, December 31, 2003 and December 31, 2002: Pension Benefits Other Benefits Discount rate 5.4% 5.9% 5.6% 5.6% Expected return on plan assets 6.6% 6.8% 7.4% 0.0% Rate of compensation increase 3.8% 3.9% 4.1% 0.0% Expected residual active life (in years) As regards health insurance plans, an increase of one percent in health expenses would not have any significant impact. The Group s post-retirement benefit plan weighted-average asset allocation at December 31, 2004 and 2003, by asset category is as follows: Equity securities 42% 45% 53% Debt securities 37% 35% 35% Insurance contracts 14% 14% 9% Cash 6% 6% 3% Other 0% 1% 0% The Group expects to contribute 21.0 million to its pension and post-retirement benefit plans in 2005, of which 2.6.million are expected discretionary contributions Expected future benefit payments

256 NOTE 28G. RESTRUCTURING COSTS Provisions for restructuring by segment details are as follows (in millions of euros): 256 Dec.31, 2001 Change in scope of consolidation and other Additions charged to operating Income Utilization Reversal Dec.31, 2002 Change in scope of consolidation and other Additions charged to operating income Utilization Reversal Dec.31, 2003 Change in scope of consolidation and other Additions charged to operating Income Utilization Reversal Dec.31, 2004 Water 64.2 (16.7) 32.0 (32.7) 46.7 (7.4) 27.3 (33.9) 32.7 (5.4) 23.2 (19.3) (3.9) 27.3 Other activities (4.2) (17.9) (3.5) 27.3 Employee termination costs (4.2) (17.9) (3.5) 27.3 United States Filter Corporation 33.5 (3.0) 24.9 (21.6) 33.8 (8.4) 11.3 (26.8) 9.9 (8.4) 0.3 (1.4) (0.4) Employee termination costs 13.3 (2.1) 15.3 (13.4) 13.1 (2.1) 6.0 (14.8) 2.2 (1.1) 0.3 (1.4) Lease termination costs 2.3 (2.7) 7.5 (0.6) 6.5 (2.7) (4.3) (0.4) Other restructuring costs (7.6) 14.2 (3.6) 4.4 (12.0) 3.0 (3.0) USFI Benelux 23.8 (13.9) (8.6) (1.3) 5.0 (5.0) Employee termination costs 16.2 (8.9) (7.3) (5.0) Lease termination costs and other costs 7.6 (5.0) (1.3) 1.3 (1.3) USFI Other locations 6.5 (2.6) (1.6) 5.3 (5.3) Employee termination costs 6.5 (2.6) (1.6) 5.3 (5.3) Energy (4.8) (0.3) (7.9) (2.8) (6.7) (1.4) 11.1 Employee termination costs (4.7) (0.3) (5.7) (2.2) (4.7) (0.2) 9.2 Other restructuring costs (0.1) (2.2) (0.6) (2.0) (1.2) 1.9 Waste Management 7.8 (0.4) 0.9 (0.3) 8.0 (0.8) 7.9 (0.5) 14.6 (1.3) 6.4 (14.9) (0.2) 4.6 Employee termination costs 1.1 (0.4) 0.1 (0.3) 0.5 (0.6) (1.3) 6.4 (5.4) (0.2) 4.6 Other restructuring costs (0.2) 2.7 (0.5) 9.5 (9.5) Transportation (0.8) (0.2) (1.7) (0.2) 3.2 Employee termination cost (0.2) 2.4 Other restructuring costs (0.8) (0.2) 2.5 (1.7) 0.8 Total 77.7 (14.3) 41.4 (38.7) (0.3) 65.8 (5.6) 43.8 (42.5) (2.8) 58.7 (2.0) 37.8 (42.6) (5.7) 46.2

257 Water In 2004, the water division sold the Consumer and Commercial and Equipment and short-term contracts activities of USFilter. Consequently there are no restructuring costs any longer in respect of these units. From 2001 to 2003 the restructuring costs related to profitability improvement programs. United States Filter Corporation International was combined with OTV in 2000 to create Veolia Water Systems. This combination was achieved through several restructuring plans, the most significant of which was the restructuring of USFI Benelux. The plan involved the closure or sale of three facilities and the significant downsizing of a fourth; costs totaled 37.6 million, of which 29.0 million were for severance costs and other associated costs of 8.6 million, principally for lease terminations. This plan extended until the beginning of 2002 due to significant legal constraints, which required long termination periods. In 2003, considering the decline of the activity in the Netherlands, VWS launched a further downsizing program for Rossmark to be implemented in 2004 regarding 40 employees, 14 of whom are executives, for a total estimated cost of 5.0 million. In 2004, all the plans launched in 2002 (residual restructuring in the UK) and 2003 and relating to USFilter (VWSTI and Rossmark) are gathered in other activities column change in scope of consolidation for an amount of 10.3 million. They have been performed for a total cost of 7.5 million with the termination of 118 employees, including 49 executives, and the closure of 3 sites in France. Nevertheless, the plans in France, in the UK and in Rossmark will be fully completed in 2005 with the termination of 39 additional employees, including 9 executives, and the definitive sale of 2 sites closed in 2004 for a total amount of 4.2 million. In addition, following the acquisitions performed in Germany in 2004 and the transfer to VWS of North American operational entities from US Filter, two restructuring plans have been launched to reorganize those activities from an amount of 4.1 million. In Germany, the plan is made of the closure of 3 sites and the termination of 66 employees for a total cost of 2.0 million. At the end of 2004, 1 site was already closed and 21 employees terminated. With the integration of Apa Nova Bucuresti, the Group initiated a restructuring plan covering the termination of 2,700 employees for the period from 2001 to May The restructuring costs (primarily severance costs) totaled 19.2 million. At the end of 2001, 1,700 employees had been terminated for a total cost of 12.3 million. In 2002, the plan s completion was delayed by several months and no additional employees were terminated. In 2003, 404 employees left. The restructuring reserve to complete the plan amounted to 3.8 million at the end of In 2004, the original restructuring plan was completed. 600 employees were terminated for a total cost of 2.7 million. A new plan has been presented to, and accepted by, personnel representatives at the end of 2004 to face a trend of declining volume in water consumption. This plan aims at a reduction of 250 white and blue collars between 2005 and Accordingly, an additional reserve of 3.1 million has been booked in In 2003, Berliner Wasserbetriebe (BWB), a joint venture held at 50% and accounted for under the proportional integration method, implemented a restructuring plan aiming to adapt to future market demands by optimising processes and realigning the organization. This restructuring plan amounts to 10.0 million (at 100%) and provides termination costs for 970 employees. Restructuring reserves are booked on an annual basis, according to the number of people who wish to take part in the plan, which is to be implemented over several years. The potential number of employees concerned is 970. In 2003, employee termination costs were booked for 147 employees up to the amount of 10.0 million (at 100%), and were effectively incurred in the amount of 2.0 million. In 2004, 136 new employees decided to join the plan. A related reserve of 16 million (at 100%) was thus accrued. The employee termination costs effectively incurred in 2004 amounted to 4.2 million. In the US, after the divesture of USFilter, water treatment activities have been reorganized and a restructuring plan was launched in the first half of The plan provides for the termination of 111 employees, including 85 executives, for a total cost of 1.6 million. At the end of 2004, 54 employees had already been terminated and the remaining part of the plan will be completed in Energy services In 2002, Dalkia International (a joint venture held at 75% and accounted for under the proportional integration method) implemented restructuring plans to integrate recent acquisitions including SIRAM in Italy and for contracts won in 2001 and 2002, particularly the contracts for the cities of Tallinn and Vilnius in Eastern Europe. These restructuring plans involve termination costs for 596 employees, including 6 executives, up to the aggregate amount of 7.3 million. Other restructuring costs amount to 3.6 million. In 2003, Dalkia International implemented restructuring plans to integrate recent acquisitions including DBU in the Netherlands, Pec Poznan in Poland and Giglio in Italy. These restructuring plans involve termination costs for 257

258 215 employees, including 26 executives, up to the aggregate amount of 5.8 million. Other restructuring costs amount to 2.5 million. In 2004, further to the acquisition of a power plant in Poznan in Poland, Dalkia International implemented a restructuring plan for 4.7 million which are recognized in the column change in scope. This plan involves termination costs for 210 employees. Additional restructuring plans were launched in DBU (Netherlands) for 3.1 million covering miscellaneous costs. Waste management As part of a program to reduce its overhead costs, Onyx has implemented a reorganization of its IT services, the total cost of which is 7.3 million. In 2002 and 2003, employee termination costs and other costs were incurred in the amounts of 0.3 million and of 0.5 million respectively. Other restructuring costs were incurred in 2004 up the amount of 6.5 million. At the end of 2003, Onyx decided to change its North American management, which led to a 5.2 million reserve being accrued for employee termination costs. This reserve was fully used in Transportation In Germany, Connex keeps implementing a new restructuring plan related to a reorganization by geographical area and the transfer of its headquarters. This plan amounts to 2.7 million, consisting in termination costs for 100 employees, 6 of whom were executives. Reconciliation to French GAAP disclosure At December 31, million in accruals qualified as restructuring costs under French GAAP but not under U.S. GAAP. Because this is only a reclassification, there is no corresponding entry in note 28C, either in net income or in shareholders equity. By the end of 2002, 2003 and 2004 this amount had been reduced to, respectively, 3.7 million, 3.3 million and 1.3 million. NOTE 28H. FINANCIAL INSTRUMENTS The main items of the Other financial instruments category (see note 28C) are the following: (in millions of euros) Net Income Shareholders Equity Variation of the fair value of the FCC put* 3.4 (3.1) (3.4) Marketable securities** (21.8) (27.3) (11.5) Derivative instruments and hedges (36.2) (7.0) (157.2) (95.6) (261.8) Accrual of convertible bonds redemption premium (15.1) (30.2) Long term receivables (31.0) (31.0) Others (0.9) 8.0 (2.3) Total (74.8) (8.8) (175.4) (80.9) (243.9) * Described in note 21. ** Vinci shares are trading securities. These differences are described in note 28A. The amount of other comprehensive income that has been reclassified into earning during the year is (32.7) million, compared to (35.2) million in 2003 and 7.8 million in At December 31, 2004, the amount of accumulated other comprehensive income relating to cash flow hedges amounted to (97.0) million (net of tax), of which an amount of (27.9) million (net of tax) will be reclassified into earnings in the next year. Cash flow hedges are used by the Group to hedge underlying variable interest rate debt on the period. The amount of inefficiency is not significant at December 31, 2004 both for fair value hedges and cash flow hedges. 258

259 NOTE 28I. GOODWILL AND OTHER INTANGIBLE ASSETS The Group adopted SFAS 142 Goodwill and other intangible assets on January 1, Since then, goodwill and intangible assets with indefinite useful lives have not been amortized. At December 31, 2004, such intangible assets mainly included the valuation of waste management operating rights for Onyx Waste Services in the amount of million and the trademarks of Veolia Water North America (previously included in US Filter reporting unit) for million. At December 31, 2003 and December 31, 2002 these intangible assets essentially included the trademarks of US Filter, which amounted to, respectively, million and 1,611.4 million. The evolution of US Filter s trademarks in 2004 may be analysed as follows: disposal of Culligan and Equipment and short-term contracts units for million, variance of the Cumulative Translation Adjustment. Differences in evolution with French GAAP (see note 4) mainly stem from the amortization of trademarks over 40 years under US GAAP until December 31, 2001, whereas such trademarks were not amortized under French GAAP. At December 31, 2004, residual trademarks were not amortized, both in French GAAP and US GAAP. A deferred tax liability is recognized on these trademarks under US GAAP. Impairment test on goodwill and other intangible assets which are not amortized is made each year on June 30, or more frequently where the circumstances dictate. Changes in the carrying amount of goodwill for 2003 (under French GAAP) were as follows: ( millions) 2002 Net Change in consolidation scope Foreign exchange translation 2003 Other movements Water 3, (99.3) (1,549.0) 7.3 1,655.0 Waste Management 1, (127.5) (79.6) 5.9 1,097.4 Energy Services (2.2) (49.0) Transportation (4.0) (27.6) FCC & Proactiva (19.6) (68.6) (1.5) Total 6, (233.0) (1,773.8) ,238.4 Nets Changes in the carrying amount of goodwill for 2002 (under French GAAP) were as follows: ( millions) 2001 Net Change in consolidation scope Foreign exchange translation 2002 Amortization Amortization Other movements Water 3,769.3 (14.7) (351.9) (133.9) ,291.1 Waste Management 1, (140.2) (62.2) 1.6 1,285.7 Energy Services (0.9) (35.0) Transportation (15.8) FCC & Proactiva (80.3) (0.2) Total 6, (491.2) (327.2) ,152.8 Net 259

260 The evolution of net intangible assets in 2003 was as follows (under French GAAP): ( millions) 2002 Additions Disposals Amortization Change in scope Foreign exchange translation Other movements 2003 Fees paid to local authorities (0.4) (41.4) 5.2 (5.4) (3.6) Trademarks, market share and business assets acquired 2, (1.3) (679.5) (110.7) (270.0) (4.8) 1,227.0 Software (2.8) (52.0) 1.0 (0.6) Prepaid expenses (64.7) 6.7 (8.1) Other intangible assets (5.6) (37.4) 3.4 (59.5) (50.5) Total 3, (10.1) (875.0) (94.4) (343.6) 7.0 2,749.1 The evolution of net intangible assets in 2002 was as follows (under French GAAP): ( millions) 2001 Additions Utilization Change in scope Foreign exchange translation Other movements 2002 Fees paid to local authorities (41.7) 3.0 (14.8) Trademarks, market share and business assets acquired 2, (29.1) (183.1) (439.3) (15.9) 2,283.5 Software (42.4) 4.7 (0.5) Prepaid expenses (54.7) 6.6 (7.3) (44.2) Other intangible assets (46.3) (0.5) (27.2) (2.4) Total 4, (214.2) (169.3) (489.1) (30.3) 3,904.9 NOTE 28J. PRO-FORMA INFORMATION Veolia Environnement stock option plans Veolia Environnement applies the intrinsic value method to account for the compensation cost arising from options granted to employees (see note 28E). The average fair value of the options granted by Veolia Environnement in 2004, 2003 and 2002 was 6.56, 6.0 and 15.3 respectively, using the binomial option pricing model with the following assumptions for the grants: Veolia Environnement Expected life (in years) Interest rate 3.40% 3.90% 4.33% Volatility 21.45% 22.67% 30.00% Dividend yield 2.1% 1.00% 1.00% Pro forma net income and basic earnings per share are shown hereafter, as if the compensation cost for stock options awarded under these plans had been determined based on the fair value at the dates of grant. Asset retirement obligations On January 1, 2003 Veolia Environnement adopted SFAS No. 143 Accounting for Asset Retirement Obligations. The cumulative effect of the adoption of SFAS 143 on the consolidated accounts was an increase in net income of 36.3 million, net of a tax effect of 20.4 million. The pro forma net income shown below restates the effect of SFAS 143 as if it had been adopted as of December 31, The pro forma amounts have been measured using current (that is, as of the date of adoption of SFAS 143) information, current assumptions, and current interest rates. 260

261 The amount of the pro forma liability for asset retirement obligations is as follows: ( millions) At December 31, 2002 Liability for asset retirement obligations as reported Pro forma adjustment (56.7) Pro forma liability for asset retirement obligations The evolution of the liability for closure and post closure costs (see note 15) under US GAAP is as follows : At December 31, 2002 At December 31, 2003 Charged to expenses Utilization Reversal Change in scope Translation adjustments Others At December 31, 2004 Closure and post closure costs (33.2) (4.7) 4.5 (5.9) Discontinued operations Everpure, which had been sold at December 31, 2003, and USFilter Corporation s systems and service businesses and Culligan, which had been sold at December 31, 2004, must be reported as discontinued operations under US GAAP. The main impacts under US GAAP on the income statement for years 2004, 2003 and 2002 are as follows: ( millions except earnings per share) At December 31, Revenues of discontinued operations , ,496.0 Net income of discontinued operations (225.7) (2,120.3) (2,557.3) Impact of net income of discontinued operations on basic earnings per share (0.57) (5.29) (7.02) Pro forma net income and basic earnings per share Veolia Environnement s pro forma net income and basic earnings per share are calculated as follows (in millions of euros, except per share data): ( millions) At December 31, Net income (loss) under US GAAP as reported (1,826.9) (1,988.8) Include: Total stock based-employee compensation expense determined under APB25 for all awards net of related tax effects (3.6) Deduct: Total stock based-employee compensation expense determined under fair value based method for all awards, net of related tax effects (17.0) (34.8) (48.8) Include: Cumulative effect of adoption of SFAS 143, net of tax (36.3) Deduct: effect on net income as if SFAS 143 had been applied during all periods affected, net of related tax effects (2.4) Include: cumulative effect of adoption of SFAS 133 Deduct: net income of discontinued operations , ,557.3 Pro forma net income (loss) Net income (loss) basic earning per share 0.54 (4.56) (5.45) Net income (loss) diluted earning per share 0.54 (4.56) (5.45) Net income (loss) pro forma per share Net income (loss) pro forma diluted per share

262 REPORT OF THE INDEPENDENT AUDITORS ON THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 This is a free translation into English of the statutory auditors report issued in the French language which is provided solely for the convenience of English speaking readers. The statutory auditors report includes for the information of the reader, as required under French law in any auditor s report, whether qualified of not, explanatory paragraphs separate from and presented below the audit opinion discussing the auditors assessments of certain significant accounting and auditing matters. These assessments were considered for the purpose of issuing an audit opinion on the consolidated financial statements taken as a whole and not to provide separate assurance on individual account caption or on information taken outside of the consolidated financial statements. Such report should be read in conjunction and construed in accordance with French law and the French auditing professional standards. To the Shareholders of Veolia Environnement, In compliance with the assignment entrusted to us by your shareholders annual general meetings, we have audited the accompanying consolidated financial statements of Veolia Environnement, as of and for the year ending December 31, These consolidated financial statements are the responsibility of the Company s board of directors. Our responsibility is to express an opinion on these financial statements based on our audit. I Opinion on the consolidated financial statements We conducted our audit in accordance with the professional standards applied in France. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the Group s financial position and of its assets and liabilities as of December 31, 2004, and of the results of its operations for the year then ended in accordance with the accounting principles generally accepted in France. Without qualifying the above opinion, we draw your attention to the change in accounting method described in note 2 Summary of significant accounting policies to the consolidated financial statements, regarding the consolidation of certain entities in accordance with the provisions of CRC Regulation of May 4, II Justification of assessments Pursuant to the provisions of Article L , paragraph 2, of the French Commercial Code (Code de commerce) relating to the justification of our assessments, we draw your attention to the following items: Note 2 Summary of significant accounting policies to the consolidated financial statements sets out the accounting principles relating to the presentation of discontinued operations in accordance with the provisions of paragraph of CRC Regulation of April 29, In connection with our assessment of the accounting principles applied by your company, we verified the appropriateness of the above-mentioned accounting principles and of the information presented in the notes, and checked their proper implementation. As set forth in Note 2.4 of the notes to the consolidated financial statements, the management of Veolia Environnement is required to make estimates and assumptions that impact the amounts reported in its financial statements and the accompanying notes. Note 2.4 also specifies that actual results may differ significantly from these estimates. In connection with our audit of the consolidated financial statements as of December 31, 2004, we concluded that among the items that are subject to significant accounting estimates, the following elements related to long-term tangible and intangible assets, deferred tax assets and provisions for risks could be open to our assessment: with respect to depreciation of long-term tangible and intangible assets as set forth in Notes 2.14 and 2.15 of the notes to the consolidated financial statements, we evaluated the data and assumptions on which their 262

263 estimates were based, examined the Company s approval procedure for these estimates and reviewed the calculations made by the Company and explained in Notes 3 and 4 of the notes to the consolidated financial statements, regarding deferred tax assets, the terms of which are set forth in Note 2.18 of the notes to the consolidated financial statements, we evaluated the data and assumptions on which their estimates were based, specifically their recovery estimates as set by the Company s financial and tax departments, and reviewed the calculations made by the Company and explained in Note 17 of the notes to the consolidated financial statements, with respect to provisions for risks, the terms of which are set forth in Notes 2.21 and 2.25 of the notes to the consolidated financial statements, we evaluated the data and assumptions on which these provisions were based and reviewed the appropriateness of the information presented in Note 15 of the notes to the consolidated financial statements. Based on our assessments, we checked that these estimates are reasonable. The assessments we conducted were undertaken in connection with our audit processes of the consolidated financial statements, taken as a whole, and therefore contributed to the formation of our unqualified opinion as disclosed in the first part of this report. III Specific Check We also performed the verification of the information given in the management report of the group. We have no comment as to its fair presentation and its conformity with the consolidated financial statements. We draw your attention to paragraphs and of the management report that address the group migration program to international accounting principles IFRS. French original signed in Paris and La Défense on March 30, 2005 by the Statutory Auditors. The Statutory Auditors SALUSTRO REYDEL BARBIER FRINAULT & CIE ERNST & YOUNG Bernard Cattenoz Bertrand Vialatte Jean Bouquot Patrick Gounelle 263

264 The original in French reads: Mesdames, Messieurs les Actionnaires, RAPPORT DES COMMISSAIRES AUX COMPTES SUR LES COMPTES CONSOLIDÉS En exécution de la mission qui nous a été confiée par vos Assemblées Générales, nous avons procédé au contrôle des comptes consolidés de la société Veolia Environnement relatifs à l exercice clos le 31 décembre 2004, tels qu ils sont joints au présent rapport. Les comptes consolidés ont été arrêtés par le Conseil d administration. Il nous appartient, sur la base de notre audit, d exprimer une opinion sur ces comptes. I. Opinion sur les comptes consolidés Nous avons effectué notre audit selon les normes professionnelles applicables en France : ces normes requièrent la mise en œuvre de diligences permettant d obtenir l assurance raisonnable que les comptes consolidés ne comportent pas d anomalies significatives. Un audit consiste à examiner, par sondages, les éléments probants justifiant les données contenues dans ces comptes. Il consiste également à apprécier les principes comptables suivis et les estimations significatives retenues pour l arrêté des comptes et à apprécier leur présentation d ensemble. Nous estimons que nos contrôles fournissent une base raisonnable à l opinion exprimée ci-après. Nous certifions que les comptes consolidés sont, au regard des règles et principes comptables français, réguliers et sincères et donnent une image fidèle du patrimoine, de la situation financière, ainsi que du résultat de l ensemble constitué par les entreprises comprises dans la consolidation. Sans remettre en cause l opinion exprimée ci-dessus, nous attirons votre attention sur le changement de méthode comptable présenté dans la note 2 «Principes comptables et méthodes d évaluation» de l annexe aux comptes consolidés relatifs à la consolidation de certaines entités requise par les dispositions du règlement CRC n du 4 mai II. Justification des appréciations En application des dispositions de l article L , 2 alinéa, du Code de commerce relatives à la justification de nos appréciations, nous portons à votre connaissance les éléments suivants : La note 2 «Principes comptables et méthodes d évaluation» de l annexe aux comptes consolidés expose les règles et méthodes comptables relatives à la présentation du résultat des activités cédées conformément aux dispositions du paragrapthe du règlement CRC n du 29 avril Dans le cadre de notre appréciation des règles et principes comptables suivis par votre société, nous avons vérifié le caractère approprié des méthodes comptables précisées ci-dessus et des informations fournies dans les notes de l annexe et nous nous sommes assurés de leur correcte application. Comme il est précisé dans la note 2.4 de l annexe aux comptes consolidés, la direction de Veolia Environnement est conduite à effectuer des estimations et à formuler des hypothèses qui affectent les montants figurant dans ses états financiers et les notes qui les accompagnent. Cette note précise également que les résultats réels futurs sont susceptibles de diverger sensiblement par rapport à ces estimations. Dans le cadre de notre audit des comptes consolidés au 31 décembre 2004, nous avons considéré que parmi les comptes qui sont sujets à des estimations comptables significatives, les actifs corporels et incorporels à long terme, les impôts différés actifs et les provisions pour risques étaient susceptibles d une justification de nos appréciations sur les points suivants : Pour ce qui concerne la dépréciation des actifs corporels et incorporels à long terme telle qu exposée aux notes 2.14 et 2.15 de l annexe aux comptes consolidés, nous avons apprécié les données et les hypothèses sur lesquelles se fondent leurs estimations, avons examiné la procédure d approbation de ces estimations par la société et avons revu les calculs effectués par la société et expliqués dans les notes 3 et 4 de l annexe aux comptes consolidés, 264

265 Concernant les impôts différés actifs dont les modalités de constitution sont exposées à la note 2.18 de l annexe aux comptes consolidés, nous avons apprécié les données et les hypothèses sur lesquelles se fondent leurs estimations, en particulier les prévisions de recouvrabilité de ces actifs établies par les directions financière et fiscale, et avons revu les calculs effectués par la société et expliqués dans la note 17 de l annexe aux comptes, S agissant des provisions pour risques et charges dont les modalités de constitution sont exposées aux notes 2.21 et 2.25 de l annexe aux comptes consolidés, nous avons apprécié les données et les hypothèses sur lesquelles ces provisions ont été constituées et avons revu le caractère approprié des informations données dans la note 15 de l annexe aux comptes consolidés. Dans le cadre de nos appréciations, nous nous sommes assurés du caractère raisonnable de ces estimations. Les appréciations ainsi portées s inscrivent dans le cadre de notre démarche d audit des comptes consolidés, pris dans leur ensemble, et ont donc contribué à la formation de notre opinion sans réserve, exprimée dans la première partie de ce rapport. III. Vérification spécifique Par ailleurs, nous avons également procédé à la vérification des informations données dans le rapport sur la gestion du groupe. Nous n avons pas d observation à formuler sur leur sincérité et leur concordance avec les comptes consolidés. Nous attirons votre attention sur les paragraphes et du rapport de gestion relatifs au programme de migration du groupe vers les règles comptables internationales IFRS. Paris et La Défense Le 30 mars 2005 Les Commissaires aux comptes SALUSTRO REYDEL BARBIER FRINAULT & CIE ERNST & YOUNG Bernard Cattenoz Bertrand Vialatte Jean Bouquot Patrick Gounelle 265

266 2004 IFRS FINANCIAL STATEMENTS Accounting principles applicable in 2004 Introduction In accordance with Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of July 19, 2002 and Regulation (EC) No. 1725/2003 of the European Commission of September 29, 2003, as from 2005 Veolia Environnement will prepare its consolidated financial statements under the International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board (IASB) and endorsed by the European Union. In order to publish comparative statements for 2005 and in accordance with the recommendation of the Autorité des Marchés Financiers (AMF) on financial communications during the transitional period, Veolia Environnement has prepared financial information for the 2004 fiscal year under IFRS and disclosed as preliminary information the expected impact of IFRS on its opening equity, its financial condition as of December 31, 2004 and its results for the 2004 fiscal year. This financial information for 2004 regarding the expected impact of IFRS has been prepared by applying to the 2004 figures the IFRS standards and interpretations that Veolia Environnement believes must be applied for the preparation of comparative consolidated financial statements in Hence, the preparation of financial information for 2004 is based on the following: IFRS standards and interpretations to be applied at December 31, 2005, as published to date; IFRS standards and interpretations to be applied after 2005, which Veolia Environnement has decided to adopt early; options and exemptions that Veolia Environnement will likely choose in preparing its first IFRS consolidated financial statements for 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 relating to the 2005 fiscal year, which will also include 2004 comparative figures prepared in accordance with IAS/IFRS. IFRS 1 offers companies the choice of various options in connection with their first-time adoption of IFRS. As a result, Veolia Environnement has 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 are definitively classified in consolidated reserve; valuation of tangible and intangible assets to be left at historical cost; and no option for fair value; Dailly discountings of receivables to be consolidated retrospectively from January 1, For all other IFRS standards, the restatement of the initial value of assets and liabilities as of January 1, 2004 was made retrospectively as if such standards had always been applied. Furthermore, Veolia Environnement has opted to apply the following standards in advance: IAS 32 and 39, which relate to financial instruments (Regulations (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, the Group has decided to retain the proportional integration method, in accordance with IAS 31. Some uncertainty remains as to 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 for 2004 under IFRS that will be compared to the financial statements for For the time being, French accounting standards relating to the treatment of concessions have been applied to the financial statements for

267 Principles of consolidation All companies over which the Group has legal or effective control are fully consolidated. The Group uses the equity method of accounting for its investments in certain affiliates in which it owns at least 20% of the voting shares and exercises significant influence. The proportional integration method of consolidation is used for investments companies where the Group and other shareholders have agreed to exercise joint control through a mutual agreement. In accordance with SIC12 interpretation, special purpose entities (SPE) are consolidated when the substance of the relationship between the SPE and Veolia Environnement or its subsidiaries indicates that the SPE is controlled by Veolia Environnement. Control may result from the predetermination of the activities of the SPE or the fact that the substance of the financial and operating policies are defined by Veolia Environnement or that Veolia Environnement benefits from most of the economic advantages and/or assumes most of the economic risks related to the activity of the SPE. In accordance with IAS27, potential voting rights resulting from financial instruments are taken into account when assessing the existence of control or significant influence. Use of estimates The preparation of the 2004 financial information relating to the transition to IFRS requires that certain estimates and assumptions be made, which affect the reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. Actual results may differ significantly from these estimates. Significant estimates made by the management of Veolia Environnement in the preparation of the 2004 financial information relating to the transition to IFRS include amounts for pension liabilities, deferred taxes, valuation estimates for long-lived assets, provisions as well as recorded and disclosed amounts for certain financial instruments. Translation of foreign subsidiaries financial statements (IAS21) Balance sheets, income statements and cash flows of subsidiaries whose functional currency is different from that of the Group are translated into the reporting currency at the applicable exchange rate (i.e., the closing year-end rate for balance sheets, or the average annual rate for income and cash flow statements). Translation gains and losses are recorded in retained earnings. The exchange rates of the significant currencies of non-euro countries used for the preparation of the consolidated financial statements are as follows: Year-end closing exchanges rates 2004 Average annual exchange rates 2004 (one currency = xx ) (one currency = xx ) U.S. dollar U.S. dollar Pound sterling Pound sterling Foreign currency transactions (IAS21 IAS39) Foreign currency transactions are converted into euros at the exchange rate in effect on the transaction date. At year-end, receivables and payables denominated in foreign currencies are converted into euros at year-end exchange rates. The resulting exchange losses and gains are recorded in the current earnings period. Exchange gains or losses on borrowings denominated in foreign currencies or on foreign currency derivatives that qualify as hedges of net investments in foreign subsidiaries are included as currency translation adjustments in equity. Tangible assets (IAS16) Tangible assets are carried at cost. Interest expenses incurred as a result of expenditures for tangible assets are capitalized as part of the cost of tangible assets in accordance with IAS

268 Subsidies are deducted from the gross value of the tangible assets. The tangible assets are recorded by component. Every component is depreciated on the basis of its useful life. In accordance with IAS17, assets financed by capital lease are recognized at the present value of the minimum lease payments, or at the fair value, if lower, and amortized over the shorter of the lease term or the estimated useful life of the asset. Other intangible assets (IAS38) Other intangible assets include costs to obtain contracts, such as fees paid to local authorities for public service contracts, and are amortized over the life of the contract. Start-up costs relating to the implementation of new contracts are not recognized as intangible assets, and are charged to expense in the period they are incurred. Market shares and trademarks acquired in connection with business combinations are reclassified as goodwill. Pre-paid expenses recorded as assets are not recognized under IFRS and are accounted for based on the nature of the costs. Business combinations and goodwill (IFRS3) All business combinations are recorded using the purchase accounting method. Under the purchase accounting method, assets acquired and liabilities assumed are recorded at their fair value. The excess of the purchase price over the fair value of net assets acquired, if any, is capitalized as goodwill. Under IFRS, goodwill is not required to be amortized. Pursuant to IAS36, impairment tests on goodwill must be made at the level of the cash generating unit every year. The cash generating unit is defined as a geographical area per business segment. Valuation of long lived assets (IAS 36) IAS36 relating to asset impairment requires an on-going monitoring of asset values. Tangible and intangible assets with definite life are subject to an impairment test as soon as an indication of a loss in value is detected. Intangible assets with indefinite useful life are reviewed annually, even in the absence of an indication of a loss in value. Each year, Veolia Environnement reviews systematically its goodwill during its strategic planning. If long term prospects of an activity are durably downgraded, an estimate is realized and an impairment is accounted for at the interim accounts closing if necessary. The assets are valued at market value if a decision has been taken to sell them and at fair value if they are kept. In case of disposal, market value is based on the multiples method (brokers surveys) or recent similar transactions. When the assets are kept, the preferred method is discounted future cash flows with terminal value. The discounted future cash flows include the cash flow before the cost of financing but after tax, the change in working capital requirement and renewal investments. The discount rate, defined by Cash Generating Units, is equivalent to the sum of a risk-free rate, a local risk premium and a global risk premium with business specific adjustments. Provisions (IAS37) In accordance with IAS37, provisions which a maturity of more than 12 months are discounted. In the case of reserves for site restoration, Veolia Environnement accounts for the obligation to restore a site when waste is deposited against a component of the tangible asset, taking into account the effects of inflation and the date at which the relevant expenses are incurred (discounting). This asset is amortized within the year in accordance with its consumption. Accretion expenses (the effects of passage of time) are recorded in the income statement under other financial income and expenses. 268

269 Inventories Group companies value inventories in accordance with the provisions of IAS2, at the lower of cost or net realizable value. Financial instruments (IAS 32 and 39) Valuation of financial instruments Marketable securities Under IFRS, investments in debt and equity securities are classified into three categories and accounted for as follows: debt securities that the Group has the intention and the ability to hold to maturity, are carried at cost and classified as held-to-maturity ; debt and equity securities that are acquired and held principally for the purpose of sale in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses included in earnings; all other investment securities not otherwise classified as either held-to-maturity or trading are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in shareholders equity. Upon the sale of shares, the cumulative variation of fair value booked in equity is recorded in the income statement. At December 31, 2004, the Group s investments in marketable securities were not material. Financial debt accounting Financial debts are valued and recorded at amortized cost in accordance with the effective interest rate method. Premium redemption reserves and bond issuance costs are a part of the cost of the debt. They are initially deducted from debt for valuation purposes. Treasury shares Under IFRS, treasury shares are recorded as a reduction of shareholders equity. Profit and loss on the disposal of treasury shares is recognized as an adjustment to shareholders equity and does not impact net income. Derivative financial instruments Pursuant to IAS 32 and 39, derivative financial instruments (including those embedded in other contracts) must be recorded on the balance sheet at their fair value. Accounting of changes in fair value depends on whether the derivative instrument is classified as a fair value hedge, a net investment in a foreign currency hedge or a cashflow hedge, or is regarded as not being a hedging instrument under IAS 32 and The variations of fair value hedges are recorded in financial income (expenses). The effect on income is matched by the reevaluation of the hedged asset, debt or firm commitment which is also recorded in financial income (expenses). 2. The variations of cash-flow hedges are recorded in shareholders equity in a specific item. They are recorded in income depending on the realization of the underlying cash-flow. The change in fair value of derivatives regarded as ineffective is recorded in the income statement. 3. The variations of net investment in foreign currency hedges are recorded under cumulative translation adjustment. The change in fair value of derivatives regarded as ineffective is recorded in the income statement. 4. The derivative instruments used by Veolia Environnement as part of its risk management, but which do not constitute hedging instruments under IAS32 & 39, are recorded at their fair value, and changes to their value are included in the net income for the period. The hedge qualification stems from the initial intention of the company to use the relevant financial instrument as a means of hedging an asset, debt, firm commitment or future cash-flow. Such an intention has to be defined 269

270 and documented from the outset. The effectiveness of the hedging must be periodically demonstrated by showing the correlation between the changes in the hedging instrument and the hedged item. The ineffective part of the hedging instrument is systematically recorded as financial income (expense). Pension plans (IAS19) The Group has several pension plans. Pension obligations are calculated using the projected unit credit method. This method considers the likelihood of personnel remaining with companies in the Group until retirement, the foreseeable changes in future compensation and the appropriate discount rate for each country in which the Group maintains a pension plan. This results in the recognition of pension-related assets or liabilities, and the recognition of the related net expenses over the estimated term of service of the employees. Veolia Environnement has chosen to allocate actuarial gains and losses to equity at January 1, No amortization linked to those actuarial gains and losses has been recorded in the income statement for Share-based payments (IFRS2) IFRS2 share-based payments modifies the assessment of share subscription plans or share option plans and other additional employee share compensation schemes offered by the Group. The fair value of these plans at the grant date is accounted as a charge with a direct counter-party in equity over the period in which the benefit is kept and services are rendered. Pursuant to IFRS2, only grants of shares and share options that were granted after November 7, 2002 and for which rights are not vested at January 1, 2005 are accounted as personal costs. Accounting polices specific to service contracts Veolia Environnement provides environmental management services to municipal and industrial clients. Through numerous contracts, Veolia Environnement operates assets that it returns at the end of the contract. In certain cases, Veolia Environnement may also be asked to provide asset financing on behalf of its clients. As part of the analysis conducted to implement IFRS, Veolia Environnement was required to examine the substance of such contracts. For the purposes of such examination, Veolia Environnement relied on IAS 17 ( Accounting for leases ) and in particular on the interpretation thereof, IFRIC 4, published in December 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 pursuant to the criteria set forth in IAS 17 (risk and reward analysis). In accordance with IAS 17, the contract operator is then considered as 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. Veolia Environnement conducted an analysis of its 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, where the requirements were met, 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. This treatment led to reclassification of tangible assets under French GAAP to financial receivables. Facilities being built by a subsidiary of Veolia Environnement and which are likely to be accounted as financial receivables during the operating cycle are recorded as work in progress. Financial receivables as per the above analysis are valued at amortized cost pursuant to the effective interest method. 270

271 The implied interest rate on the receivable is calculated, after contract analysis and financing analysis, on the basis of the financing rate which is applicable to the Group or to the debt related to the contract. Concession and affermage contracts Pending the release of the new accounting rules on concessions, Veolia Environnement has elected to retain its existing accounting methods for these contracts, except for certain restatements in terms of presentation. Accordingly, financial depreciations (amortissements de caducité) recorded under French GAAP as provisions for risks and charges were reclassified as a deduction from tangible assets. On the other hand, tangible assets recorded in connection with concession contracts, and the related provisions (for renewal and total guarantee), continue to be recorded as liabilities as they were under French GAAP. The Group, as part of its contractual obligations under public service contracts, assumes responsibility for the replacement of fixed assets in the publicly owned utility networks it manages. Maintenance and repair costs are expensed as incurred except for specific contracts for which costs are accrued in advance (provision for renewal and total guarantee). The accounting methods remain unchanged. Other contracts Tangible assets related to contracts falling in neither of the above categories continue to be recorded as tangible assets. In accordance with IAS 16, the component-based approach was adopted. Veolia Environnement will again analyze its contracts as soon as the interpretation drafts relating to concession and affermage contracts are published. Construction (IAS 11) In accordance with IAS11, Veolia Environnement uses the completion method for the accounting of construction contracts. Revenues (IAS18) In accordance with IAS18, the definition of revenues has been modified. Revenues now stand for sales at fair value of goods and services in respect of which the risks and advantages, as well as control over the items sold, have been effectively transferred to the purchaser. Because of the specific activities of Veolia Environnement, fees and taxes collected on behalf of local authorities are excluded from revenues, since there is no risk of non-reimbursement by third parties. As regards IFRIC 4 contracts (see above), income from these contracts includes: the reimbursement of the financing principal by the relevant authority; and the yield levied on the financial receivable. Revenues (as per the above definition) do not include the first item but include the second one. Deferred taxes (IAS12) Deferred tax assets are recognized for deductible temporary differences, net tax operating loss carry forwards and tax credit carry forwards. Deferred tax liabilities, including those relating to tax loss carry-forwards, are recognized for taxable temporary differences. Deferred tax assets are recorded at their estimated net realizable value. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the enactment date. Deferred taxes are not discounted. Cash and cash equivalents Cash and cash equivalents include cash balances, deposits with a maturity of less than three months, highly liquid investment funds, and commercial paper (titres de créances négociables). These investments may be liquidated or transferred within a very short period of time and thus do not generate any significant risk in terms of loss of value. 271

272 Segment information (IAS14) Pursuant to IAS14, Veolia Environnement has elected to report primary financial information by business segment and by geographical area. There is no difference between IFRS and French standards in that respect. The relevant business segments are water, waste management, energy services and transportation. Future rules and interpretations applicable in 2005 and 2006 Interpretations applicable in 2005 or 2006 with respect to concessions (D12-D13-D14 drafts) The drafts of interpretation published by IFRIC in March 2005 would apply to contracts whereby: the service provided can be regarded as a public service; the grantor determines the conditions under which the assets are operated and, directly or indirectly, sets the price paid for the service; and assets with a material residual value revert to the grantor s ownership at the end of the concession. Concession operators would no longer recognize tangible assets. When the concession operator provides the required infrastructure, one of two accounting models may be applied: the financial asset model or the intangible asset model. At the date of publication of 2004 financial information relating to the transition to IFRS, the Group was reviewing the impact of the different drafts of interpretation. Its conclusions are not yet available. IAS19 revision The revised IAS19 allows companies to allocate actuarial profits and losses to equity. The revised standard will become compulsory on January 1, 2006 and will be applied early by Veolia Environnement as from January 1, IFRIC3 interpretation on emissions rights An interpretation related to the accounting of obligations and rights linked to greenhouse gas emission rights will apply as from January 1, The interpretation has not yet been endorsed by the European Union. 272

273 Veolia Environnement is currently assessing the impact of this release on its financial statements. Impacts of IFRS on main statements In M At December 31, 2004 French IFRS GAAP Difference Revenues 24,673 22,353 (2,320) Net income before discontinued operations Net income Shareholders equity 3,563 3,240 (323) Total equity 5,619 5,022 (596) Gross debt 15,922 17,902 +1,980 Cash and cash equivalents 3,635 4,660 +1,025 Fair value impact of hedging derivatives Net debt 12,287 12, Reconciliation of total equity under French GAAP with total equity under IFRS at January 1, 2004 and at December 31, 2004 and reconciliation of result 2004 In M On January 1, 2004 Net income Capital variation Shareholders equity Foreign Dividends translation paid adjustments Consolidation scope Other At December 31, 2004 Shareholder s equity French GAAP 3, (218) ,563 Goodwill Cumulative actuarial gains (124) Contractual analysis Treasury shares (110) (183) (293) Financial instruments (90) (21) (30) (141) Discontinued activities 104 (104) Taxes (84) (10) 1 (93) Others (32) (4) 10 (2) (5) (33) Shareholder s equity IFRS 3, (129) (218) -72 (22) 3,239 Minority interest French GAAP 2, (181) 10 (747) 9 2,055 TSAR (300) (9) 9 (300) Discontinued activities (707) (44) Others (19) 28 Minority interest IFRS 1, (144) 13 (24) (9) 1,

274 Consolidated financial statements as of December 31, 2004 Balance sheet In M At December 31, 2004 French GAAP in IFRS format Adjustments IAS/IFRS At December 31, 2004 IAS/IFRS Goodwill 3, ,285.9 Other intangible assets 1,859.3 (746.8) 1,112.5 Tangible assets 13,844.0 (2,885.9) 10,958.1 Investments accounted for using the equity method (6.0) Financial assets , ,656.3 Net deferred taxes (46.5) Total non current assets 20,690.5 (1,270.2) 19,420.3 Operating assets 9, ,081.4 Financial assets 2,072.8 (1,417.1) Cash and cash equivalents 3, , ,660.3 Total current assets 14, ,397.4 Discontinued assets Total assets 35,621.9 (774.0) 34,847.9 Shareholders equity 3,563.2 (323.7) 3,239.5 Minority interests 2,055.4 (272.9) 1,782.5 Total equity 5,618.6 (596.6) 5,022.0 Subsidies (868.8) Deferred income (527.9) 1.1 Provisions for liabilities and charges 1,546.1 (440.3) 1,105.7 Financial long-term debt 10, , ,055.8 Other long-term debts Total non current liabilities 14,018.9 (503.8) 13,515.1 Debt from operations 9,736.9 (160.9) 9,576.0 Current provisions for liabilities and charges 1,127.3 (243.4) Short-term financial debt 4, ,426.1 Bank overdraft (90.0) Total current liabilities 15, ,306.3 Discontinued liabilities Total liabilities 35,621.9 (774.0) 34,

275 IFRS income statement as of December 31, 2004 French GAAP IFRS Revenues 24,673 Revenues 22,353 Costs of sales (20,611) Selling, general and administrative costs (2,538) Costs of sales (18,167) Other operating costs 92 = EBIT 1,617 Selling costs (440) Restructuring costs (51) General and administrative costs (2,236) Amortization of goodwill and impairment losses recognized on intangible assets with indefinite lives (253) Other costs (29) = Operating income 1,313 Operating income 1,481 Cost of financing (602) Cost of net financial debt (732) Other financial income and expense (33) = Operating income less net financial expense before tax, equity and minority interests 678 Other financial income and expense 46 Other income and expense (57) Income tax (184) = Income before tax 620 Equity net income of affiliates 24 Income tax (182) Net income before discontinued operations 635 = Net income before equity and minority interests 438 Net income from discontinued operations (106) Equity in net income of affiliates 22 Net income 529 Minority interests (127) Income from discontinued operations (208) Minority interests (137) = Net income (Group s share) 125 Net income (Group s share)

276 Consolidated statements of cash flows as of December 31, 2004 In m French GAAP IFRS Net income Minority interest Depreciation and amortization 2, ,041.5 Financial provisions 83.6 (38.2) Other estimated profit and expenses (9.1) Gains on sales (161.3) Earning of affiliates (4.8) (24.2) Dividends received (6.0) Cost of net financial debt Taxes Deferred taxes (70.0) Prepaid, deferrals and accruals (28.7) Others 8.3 Cash flow 3,460.6 Increase (decrease) in working capital Tax paid (238.0) Cash flow provided by operating activities 3, ,517.0 Purchase of tangible assets (2,315,0) (1,964.0) Proceeds from tangible assets Purchase of investments (334.0) (334.0) Proceeds from sales of investments 1, ,184.2 Contracts interpretation IFRIC4 : Work in progress (facilities to be constructed) (147.0) New loans (30.0) Principal payment on loans Dividends received 23.5 Disbursement on notes receivables (132.5) (132.5) Principal payment on notes receivables Net (increase) decrease in short-term loans Sales and purchases of marketable securities (278.3) (42.3) Cash flow provided by investing activities (759.6) Net increase (decrease) in short-term debts 1, ,789.2 Proceeds from issuance of bonds and other long-term debt 1, Principal payment on bonds and other long-term debt (3,468.7) (3,468.7) Net proceeds from issuance of common stock Purchase of treasury shares (183.2) (183.2) Cash dividends paid (398.5) (389.6) Interests paid (640.9) Net cash provided by financing activities (1,030.3) (1,795.5) Cash and cash equivalents beginning 1, ,320.6 Currency exchange and others Cash and cash equivalents ending 3, ,240.3 Cash and cash equivalents 3, ,660.3 Cash liabilities Cash and cash equivalents ending 3, ,

277 Main restatements in the balance sheet Goodwill In M French GAAP Reclassifications (1) Goodwill amortization (2) Others IFRS Total 3, ,286 (1) This item consists mainly of assets acquired in connection with the acquisition of businesses, which under French GAAP are accounted for as intangible assets (e.g., trademarks). Under IFRS, these items have been restated as goodwill (IAS38). These assets relate to waste management ( 249 million), water ( 110 million), transportation ( 94 million) and energy services ( 25 million). (2) Goodwill will no longer be amortized. Instead, IAS 36 provides that goodwill impairment tests must be conducted at the cash generating unit (CGU) level. Impairments tests conducted as of December 31, 2004 did not require the recording of any additional impairment as compared with that recorded under French GAAP. Other intangible assets In M French GAAP Reclassifications (1) Contractual analysis (2) Fees obligation with local authorities (3) Intangible not recognized (4) Financial instruments (4) Others IFRS Total 1,859 (478) (72) (47) (118) (24) (7) 1,113 (1) This item consists mainly of assets acquired in connection with the acquisition of businesses, which under French GAAP are accounted for as intangible assets (e.g., trademarks, market shares). Under IFRS, these items have been restated as goodwill (IAS38). (2) Results from contractual analysis in connection with IAS17-IFRIC4. Reclassification of intangible assets for 72 million in water mainly in Asia. (3) See Long term financial debt (4) Mainly pre-paid charges cancelled. Tangible assets En M French GAAP Concessions (1) Contractual analysis (2) Components (3) Capital leases (4) Subsidies (5) Others IFRS Total 13,844 (589) (1,765) (45) 84 (522) (49) 10,958 (1) Financial depreciations (amortissements de caducité) recorded as provisions for charges under French GAAP deducted from tangible assets. See Concession and affermage contracts. (2) See Concession and affermage contracts (contracts corresponding to IFRIC4). (3) See Concession and affermage contracts (other contracts) and Other intangible assets. (4) Application of IAS 17. (5) See Tangible assets. Non-current financial assets In M French GAAP IFRS Long-term loans ,850.1 Other financial assets Investments accounting for using the cost method Others Non current financial assets ,

278 The long-term loans increase by 1,433 million relates mainly (up to 1,403 million) to the reclassification of tangible and intangible assets as a result of IFRIC4. See Acounting policies specific to service contracts. The other financial assets increase by 247 million stems (up to 424 million) from the reassessment of derivatives in accordance with IAS32 and 39. Under French GAAP, only currency exchange derivatives are recorded in the balance sheet. For interest rate derivatives, only accrued interest, premiums and cash adjustments for swaps are accounted for. Furthermore, financial assets in the UK were deducted from shareholders equity in the amount of 117 million under IFRS in connection with cumulative gains and unrecognized losses. Net deferred tax assets The decrease by 47 million results from the net tax impact on IFRS statements and from the undoing of discounts. Operating assets The increase by 858 million of accounts receivable results mainly from the reconsolidation of Dailly discountings of receivables for 825 million, the reclassification of future tangible assets to work-in-progress for 251 million (as per IFRIC4 interpretation), contractual analysis leading to the reclassification of accounts receivable for (84) million and the reclassification of receivables in the water business for (110) million (invoices to be issued). Current financial assets Current financial assets include 466 million corresponding to short-term financial loans (including 133 million from contractual analysis and IFRIC4, see Acounting policies specific to service contracts ) and 190 million of marketable securities. Under French GAAP current financial assets included 395 million of short-term financial loans and 1,678 million of marketable securities. The increase in short-term loans ( 71 million) results for an amount of 133 million from the reclassification of tangible and intangible assets in connection with contracts corresponding to IFRIC4. The decrease in marketable securities ( 1,488 million) results from the reclassification of highly liquid investment funds for 1,212 million, and deduction of treasury shares from shareholders equity for 276 million. Cash and cash equivalents Cash and cash equivalents amount to 4,660 million under IFRS, versus 3,635 million under French GAAP. The principal restatements consisted in the reclassification of 1,212 million of highly liquid investment funds and (179) million of accrued interest from derivatives, the fair value of which is recorded in non-current financial assets. Subsidies The deduction of subsidies in IFRS results mainly from their reclassification as financial loans under IFRIC4 (up to (347) million), whereas the remaining subsidies are reclassified as a deduction of tangible assets. Deferred income Under French GAAP, deferred income includes payments received from the securitization of future receivables in the energy servies segment. This transaction (known as Cogevolt) was designed to finance the cogeneration plants of the energy services segment. Since January 1, 1998, the proceeds have been amortized on an actuarial basis over the life of the receivables, which ranges between 5 and 12 years. Under IFRS, these proceeds are regarded as financing and are reclassified as financial debt (see Long term financial debt and Bank overdraft ). 278

279 Non-current provisions for charges and liabilities In M French GAAP Reclassification tangible assets (1) Discounting (2) Provisions unrecognized Actuarial gains Others IFRS Provisions 1,341 (591) 29 (13) Employee benefits (1) Financial assets (amortissements de caducité) deducted from tangible assets. See Concession and affermage contracts. (2) See Provisions. Long-term financial debt In M French GAAP 10,801.4 TSAR (a) Impact debt at amortized cost (b) (76.0) Fair value hedge (c) Consolidation special purpose entities (SIC12) 17.3 Capital lease (IAS17) 44.9 Public authority loans (d) COGEVOLT (e) Put option 12.7 Miscellaneous 23.0 IFRS impacts 1,254.4 Long-term financial debt IFRS 12,055.8 (a) (b) (c) (d) (e) In December 2001, Veolia Environnement Financière de l Ouest (VEFO) issued 300 million in subordinated debt securities redeemable in preference shares (TSAR) due to mature on December 28, Given the characteristics of the TSAR, these securities were categorized as minority interests under French GAAP. Under IFRS, the TSAR are categorized as debt instruments pursuant to an analysis under IAS 32 and 39. See Financial debt accounting. Hedged instruments at fair value. Hedging instruments at fair value and recorded in non-current financial assets or non-current debt. Fee obligations with local authorities were regarded as off balance sheet commitments under French GAAP. They are considered as financial debt under IFRS. See Deferred income. Other non-current debt The increase by 79 million results from the reassessment of derivatives. Debt from operations The decrease by 160 million results from the reclassification of accounts payable in connection with not yet issued invoices in the water segment for 132 million and contractual analysis for 42 million. Current provisions for charges and liabilities In M French GAAP Tangible assets reclassified Unrecognized provisions Others IFRS Provisions 1,016 (135) (83) (60) 738 Employee benefits

280 Current financial debt In M French GAAP 4,610.1 Capital leases (IAS17) 46.7 Discontinued receivables (a) Dailly (a) COGEVOLT (b) 66.7 Financial instruments (c) (71.3) Others (50.8) IFRS impacts Current financial debt IFRS 5,426.1 (a) (b) (c) The implementation of IAS39 leads to consider Dailly discountings as a bank financing guaranteed by receivables. See Deferred income. As a result of fair value reevaluation of the derivative financial statements including accrued interests, reclassification of the deferred incomes and accrued investments. Bank overdraft The decrease by 90 million is caused by the reclassification of Cogevolt deferred income to current and non-current financial debt up to 112 million. Income statement Revenues In M Water Waste Energy Transportation Total Revenues French GAAP 9, , , , ,673.3 Discontinued operations (5.2) (5.2) Repayment of financial receivables in connection with IFRS4 (1) (17.4) (19.0) (110.3) (10.1) (156.8) Charges and taxes paid to public authorities (third-party revenue) (1) (2,129.3) (0.1) (2,129.4) Others (27.9) 13.4 (5.3) (9.1) (28.9) Revenues IFRS 7, , , , ,353.0 (1) See Revenues. 280

281 Operating income In M Total Water Waste Energy Transportation Holdings EBIT French GAAP 1, (69.4) Other income and expenses (57.3) (53.4) 8.0 (10.5) (1.5) Restructuring costs (51.1) (28.5) (2.7) (17.2) (2.7) Amortization and depreciation of goodwill and intangible assets with indefinite life (253.3) (54.4) (67.5) (45.0) (86.6) 0,1 Operating income format IFRS 1, (69.3) Amortization and depreciation of goodwill and intangible assets with indefinite life (IAS36) (0.1) IFRIC4 impacts (7.5) (0.4) Components (IAS36) (5.9) (2.5) (0.7) Others contractual analysis Intangible assets (IAS38) Provisions (IAS37) Others (0.8) 9.8 (2.0) (6.3) (0.5) (1.8) Total impact IFRS restatements (1.9) Operating income IFRS 1, (71.1) The operating income includes a 55 million capital loss in connection with the sale by Berlin water of Berlikom, a 14 million settlement paid to resolve a dispute in Italy (energy services) and a write-off of 70 million of goodwill in Scandinavia (transportation). Adjustments under IFRS led to the following restatements in the cost of sales: deduction of charges and taxes paid to public authorities (up to (2.1) billion); decrease of tangible assets amortization (reclassified in other financial receivables) as a result of IFRIC4 ( (157) million decrease in revenues); deduction of goodwill write-off. Cost of financing In M Total Costs of financing French GAAP (602.1) + Stocked & fixed financial expenses Income of financial loans and marketable securities (1) (72.9) Costs of financing format IFRS (662.8) + Debt at amortized cost (2) (45.0) + Fair value hedge reassessment (3) (16.5) + Interest on TSAR (4) (8.9) + Public authority loans (4) (8.8) + Others 9.9 Cost of financing IFRS (732.1) Other financial income and expenses Other financial income and expenses French GAAP (32.9) + Income from loans and marketable securities (1) 60.7 Other financial income and expenses format IFRS Discounting of provisions (10.8) + Debt at amortized cost (2) Others (15.6) Other financial revenues and expenses IFRS

282 (1) Under IFRS, cost of financing reflects the cost of gross financial debt less cash and cash equivalents. As a result financial loans and marketable securities income are reclassified under Other financial income and expenses. (2) See Financial instruments on financial debt. Under French GAAP, premium reserve redemption and amortization of borrowing costs are regarded as other financial expenses. Under IFRS, they are part of amortized costs. (3) See Financial instruments on derivatives. Reassessment of derivatives. (4) See Long term financial debt. Tax Year 2004 French GAAP IFRS Difference Current tax (225.9) (225.2) +0.7 Deferred tax (2.3) Net income from discontinued operations In M Year 2004 American disposals (162.2) FCC disposal 58.4 UK Connex disposal (1.9) Total (105.7) Net income from discontinued operations French GAAP (207.8) Currency exchange effect of American disposals (49.8) Tax effect of above Currency exchange effect of FCC disposals 17.5 Others (5.9) Net income from discontinued operations IFRS (105.7) As a result of the reset of the exchange differences at January, (see Introduction ), currency exchange impacts and related taxes on US and FCC disposals are unrecognized under IFRS. Net income In M Year 2004 Net income French GAAP Goodwill amortization Other impacts on operating income 44.0 Currency exchange effect of US and FCC disposals (32.3) Tax effect on above Impacts on financial components (51.1) Others (16.2) Net income IFRS Consolidated statements of cash flows The consolidated statements of cash flows have been prepared in accordance with the Conseil National de la Comptabilité recommendation N of October 27, 2004, and adapted to fit the Group s specificities. Cash flow provided by operating activities : 482 million Before interest paid : 641 million. Interest paid reclassified to cash flow from financing activities. Reclassification of repayment of financial receivables in connection with IFRIC4. Under French GAAP as part of revenues; under IFRS as part of net cash from investing activities ( (130) million). 282

283 Differences of amount for increase (decrease) in working capital are linked to reclassifications of tax payable and receivable to tax paid. Cash flow provided by investing activities : 934 million Purchase of tangible assets : 351 million exclusion of investments covered by capital leases: 133 million (capital leases are non cash components); reclassification of investments as per the IFRIC4 interpretation: 177 million. Proceeds from sales of investments : 369 million US and FCC activities being regarded as discontinued operations, cash and cash equivalents related to these assets are excluded. Proceeds exclude cash and cash equivalents under IFRS format. Investments in IFRIC4 contracts: (47) million work in progress and new loans : (177) million; repayment of financial receivables : 130 million. Sales and purchases of marketable securities: 286 million: high liquid investment funds are regarded as cash and cash equivalents. Cash flow provided by financing activities: (765) million Decrease in new loans related to new capital leases: (133) million. Interest paid: (641) million. Cash and cash equivalents Liquidities in the cash flow statements for 2004 break down as follows: cash 948 million monetary instruments 3,229 million other short-term instruments 483 million 4,660 million 283

284 SPECIAL PURPOSE AUDIT REPORT ON THE PRELIMINARY IFRS FINANCIAL INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2004 This is a free translation into English of the special purpose audit report on the preliminary IFRS financial information for the year ended 2004, issued in the French language and provided solely for the convenience of English speaking readers. The auditors report includes information specifically required by French law in all audit reports, whether qualified or not. This report should be read in conjunction with, and construed in accordance with French law and French generally accepted auditing standards. Dear Shareholders, In accordance with the terms of our engagement and as Statutory Auditors of Veolia Environnement ( the Company ), we have audited the accompanying consolidated preliminary IFRS balance sheet of the Company as at December 31, 2004, and the related consolidated statements of income for the year then ended ( the 2004 IFRS financial information ), which present the expected impact of the conversion to the standards adopted in the European Union ( IFRS ) for the preparation of financial information for the year ending The 2004 IFRS financial information, which is the responsibility of the Company s Board of Directors has been prepared as part of the conversion to the IFRS standards adopted in the European Union to provide the comparative financial information expected to be included in the Company s first complete set of IFRS financial statements for the year ending 2005 from the 2004 consolidated financial statements prepared in accordance with French generally accepted accounting principles ( the consolidated financial statements ). After performing our audit in accordance with French generally accepted auditing standards, we issued an unqualified opinion on the consolidated financial statements. Our responsibility is to express an opinion on the 2004 IFRS financial information, based on our audit. We conducted our audit in accordance with French generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance that the 2004 IFRS financial information is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting policies used and significant estimates and judgements made by the directors in the preparation of the 2004 IFRS financial information, as well as evaluating the overall presentation of the information. We believe that our work provides a reasonable basis for our opinion. In our opinion, the 2004 IFRS financial information has been prepared, in all material respects, in accordance with the basis set out in the notes to the 2004 IFRS financial information. The basis of preparation describes how IFRS have been applied under IFRS 1 and other international financial reporting standards adopted in the European Union, including the assumptions made by the Company about the standards and interpretations expected to be effective, and the policies expected to be adopted when it prepares the first complete set of consolidated IFRS financial statements for the year ending December 31, Without qualifying our opinion, we draw your attention to the following matters: note I.1. 1 which explains why the 2004 IFRS financial information may be different from the 2004 IFRS financial information included in the IFRS financial statements for the year ending 2005, note II.1. 2 which describes the accounting policies the Company expects to adopt regarding service concession arrangements, when the interpretation draft underway has been completed. 284

285 Moreover, we draw attention to the fact that the Company has prepared the 2004 IFRS financial information as part of its conversion to IFRS, as adopted in the European Union for the preparation of consolidated financial statements for the year ending The 2004 IFRS financial information does not constitute a complete set of consolidated IFRS financial statements and therefore does not provide a fair presentation of the Company s financial position, results of operations and cash flows in accordance with IFRS. Paris and La Défense, May 13, 2005 The Statutory Auditors SALUSTRO REYDEL BARBIER FRINAULT & CIE ERNST & YOUNG Bernard Cattenoz Bertrand Vialatte Jean Bouquot Patrick Gounelle 1 Section Introduction in the Consolidated Financial Statements for the year ended 31 December 2004 in this Base Prospectus 2 Section Interpretations applicable in 2005 or 2006; texts D12-D13-D14 relating to concessions in the Consolidated Financial Statements for the year ended 31 December 2004 in this Base Prospectus 285

286 The original in French reads: RAPPORT SPECIFIQUE DES COMMISSAIRES AUX COMPTES SUR LES INFORMATIONS FINANCIERES IFRS AU 31 DECEMBRE 2004 Mesdames, Messieurs les Actionnaires, A la suite de la demande qui nous a été faite et en notre qualité de commissaires aux comptes de la société Veolia Environnement («la société»), nous avons effectué un audit des informations financières IFRS présentant l impact attendu du passage au référentiel IFRS tel qu adopté dans l Union européenne («les IFRS») sur le bilan consolidé au 31 décembre 2004 et le compte de résultat consolidé de l exercice clos le 31 décembre 2004 (les «informations financières IFRS 2004»), telles qu elles sont jointes au présent rapport. Les informations financières IFRS 2004 ont été établies sous la responsabilité du Conseil d administration, dans le cadre du passage au référentiel IFRS tel qu adopté dans l Union européenne pour l établissement des comptes consolidés de l exercice 2005, à partir des comptes consolidés de l exercice clos le 31 décembre 2004 préparés en conformité avec les règles et principes comptables français (les «comptes consolidés»), qui ont fait l objet de notre part d un audit selon les normes professionnelles applicables en France. L audit des comptes consolidés 2004 nous a conduit à exprimer une opinion sans réserve sur ces comptes. Il nous appartient, sur la base de notre audit, d exprimer une opinion sur les informations financières IFRS Nous avons effectué notre audit selon les normes professionnelles applicables en France ; ces normes requièrent la mise en œuvre de diligences permettant d obtenir l assurance raisonnable que les informations financières IFRS 2004 ne comportent pas d anomalies significatives. Un audit consiste à examiner, par sondages, les éléments probants justifiant les données contenues dans ces informations. Il consiste également à apprécier les principes comptables suivis et les estimations significatives retenues pour l établissement des informations financières IFRS 2004 et à apprécier leur présentation d ensemble. Nous estimons que nos contrôles fournissent une base raisonnable à l opinion exprimée ci-après. A notre avis, les informations financières IFRS 2004 ont été établies, dans tous leurs aspects significatifs, conformément aux règles d élaboration décrites dans la note de présentation sur la transition aux IFRS, laquelle précise comment la norme IFRS 1 et les autres normes comptables internationales adoptées dans l Union européenne ont été appliquées et indique les normes, interprétations, règles et méthodes comptables qui, selon la direction, devraient être applicables pour l établissement des comptes consolidés de l exercice 2005 selon les IFRS. Sans remettre en cause l opinion exprimée ci-dessus, nous attirons votre attention sur: la note I.1. 1 qui expose les raisons pour lesquelles les informations financières IFRS 2004 présentées dans les comptes consolidés de l exercice 2005 pourraient être différentes des informations financières IFRS 2004 jointes au présent rapport la note II.1. 2 qui précise le traitement comptable relatif aux contrats de concession, susceptible d être retenu par la société, résultant des projets d interprétations en cours d examen. Par ailleurs, nous rappelons que, s agissant de préparer le passage au référentiel IFRS tel qu adopté dans l Union européenne pour l établissement des comptes consolidés de l exercice 2005, les informations financières IFRS 2004 ne constituent pas des comptes consolidés établis selon les IFRS, permettant de donner, au regard de ce référentiel, une image fidèle du patrimoine, de la situation financière et du résultat de l ensemble constitué par les entreprises comprises dans la consolidation. Paris et La Défense, le 13 mai 2005 Les Commissaires aux Comptes SALUSTRO REYDEL BARBIER FRINAULT ET CIE ERNST & YOUNG Bernard Cattenoz Bertrand Vialatte Jean Bouquot Patrick Gounelle 1 Paragraphe Introduction dans les comptes consolidés au 31 décembre 2004 dans le présent Document de Base 2 Paragraphe Interpretations applicable in 2005 or 2006; texts D12 - D13 - D14 relating to concessions dans les comptes consolidés au 31 décembre 2004 dans le présent Document de Base 286

287 VEOLIA ENVIRONNEMENT CONSOLIDATED FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER

288 VEOLIA ENVIRONNEMENT CONSOLIDATED BALANCE SHEETS ASSETS Notes At December 31, ($ millions) ( millions) Goodwill, net 3 5, , , ,795.8 Other intangible assets, net 4 3, , , ,477.0 Property plant and equipment 22, , , ,843.4 Publicly-owned utility networks 8, , , ,156.7 Accumulated depreciation (13,012.3) (10,303.1) (9,602.0) (8,808.8) Property, plant and equipment, net 5 18, , , ,191.3 Investments accounted for using the equity method Investments accounted for using the cost method Portfolio investments held as financial assets 8 1, , , ,072.8 Financial assets 2, , , ,936.6 Total long-term assets 29, , , ,400.7 Inventories and work-in-progress 9 1, , , ,543.7 Accounts receivable 9 13, , , ,066.0 Short-term loans Cash and cash equivalents 11 3, , , ,089.3 Other marketable securities 11 1, , Total current assets 19, , , ,008.6 TOTAL ASSETS 49, , , ,409.3 The accompanying notes are an integral part of these consolidated financial statements. For the convenience of the reader, the financial statements as of and for the year ended December 31, 2003 have been translated into U.S. Dollars at the rate of U.S. $ 1 =

289 VEOLIA ENVIRONNEMENT CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS EQUITY Notes At December 31, ($ millions) ( millions) Share capital 2, , , ,673.4 Additional paid-in capital 7, , , ,269.6 Retained earnings (3,402.4) (2,694.0) (2,333.1) 1,048.2 Net Income (2,595.0) (2,054.7) (2,251.2) Total shareholders equity 12 4, , , ,740.0 Minority Interests 13 3, , , ,531.1 Deferred income 14 1, , , ,483.1 Reserves and allowances 15 3, , , ,195.7 Bonds 10, , , ,193.6 Other financial long-term debt 5, , , ,940.4 Long-term debt 16 15, , , ,134.0 Other long-term liabilities Total long-term liabilities and shareholders equity 29, , , ,580.5 Accounts payable 9 14, , , ,939.3 Bank overdrafts and other short-term borrowings 16 4, , , ,889.5 Total current liabilities 19, , , ,828.8 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 49, , , ,409.3 The accompanying notes are an integral part of these consolidated financial statements. On January 1, 2001 Veolia Environnement has forgone the imputation of the goodwill of US Filter recorded as a reduction of shareholders equity, which represents an increase in additional paid-in capital of 2,037 million. For the convenience of the reader, the financial statements as of and for the year ended December 31, 2003 have been translated into U.S. Dollars at the rate of U.S. $ 1 =

290 VEOLIA ENVIRONNEMENT CONSOLIDATED STATEMENTS OF INCOME Notes At December 31, ($ millions) ( millions) Revenues 36, , , ,126.7 Costs of sales (29,964.1) (23,725.6) (24,638.1) (23,550.9) Selling, general and administrative costs (4,051.9) (3,208.3) (3,508.8) (3,556.7) Other operating income (expense) (6.0) EBIT 2, , , ,013.1 Goodwill amortization and depreciation of intangible assets with indefinite life (1) 25 (3,062.0) (2,424.5) (327.2) (2,910.1) Restructuring costs (117.8) (93.3) (56.6) (49.4) Operating income (loss) (968.5) (766.9) 1,587.5 (946.4) Financial income (expenses) 25 (947.1) (749.9) (648.1) (798.0) Other income (expenses) 25 (78.8) (62.4) (59.7) 38.9 Net income (loss) before taxes, minority and equity interests (1,994.4) (1,579.2) (1,705.5) Income taxes 17 (346.6) (274.4) (437.3) (462.3) Net income (loss) before minority and equity interests (2,341.0) (1,853.6) (2,167.8) Equity in net income of affiliates Minority interest 13 (310.1) (245.5) (142.2) (131.2) Net income (loss) (2,595.0) (2,054.7) (2,251.2) Basic earnings per share (6.48) (5.13) 0.93 (6.55) Diluted earnings per share (6.48) (5.13) 0.93 (6.55) The accompanying notes are an integral part of these consolidated financial statements. (1) includes goodwill and intangible assets write-downs of 2,214.9 million in 2003, 77.0 million in 2002 and 2,652.2 million in For the convenience of the reader, the financial statements as of and for the year ended December 31, 2003 have been translated into U.S. Dollars at the rate of U.S. $ 1 =

291 VEOLIA ENVIRONNEMENT CONSOLIDATED STATEMENTS OF CASH FLOWS (Prepared in accordance with International Accounting Standard No. 7) Notes At December 31, ($ millions) ( millions) Cash flow from operating activities: Net income (loss) (2,595.0) (2,054.7) (2,251.2) Adjustment to reconcile net income to net cash provided by operating activities Depreciation and amortization 25 5, , , ,684.0 Financial provisions Gains on sale on property and equipment and financial assets, net (105.6) (144.9) Undistributed earnings of affiliates, net (34.1) (27.0) (15.2) (14.9) Deferred taxes (123.0) (97.4) (19.3) 90.2 Minority interests Net changes in current assets and liabilities: Prepaid, deferrals and accruals 4 (67.1) (53.1) (70.5) (92.9) Increase (decrease) in working capital (1) (463.1) Net cash provided by operating activities 3, , , ,892.0 Cash flow from investing activities: Purchase of property, plant and equipment (3,101.4) (2,455.7) (2,603.4) (2,878.5) Proceeds from sale of property, plant and equipment Purchase of investments (336.1) (266.1) (1,005.9) (1,168.8) Proceeds from sales of investments , Purchase of portfolio investments held as financial assets (262.3) (207.7) (124.8) (146.6) Proceeds from sales of portfolio investments held as financial assets Disbursement on notes receivables (99.4) (78.7) (420.9) (98.7) Principal payment on notes receivables Net (increase) decrease in short-term loans Sales and purchases of marketable securities (1,172.5) (928.4) Net cash used in investing activities (3,930.3) (3,112.0) (2,108.6) (3,392.4) The accompanying notes are an integral part of these consolidated financial statements. (1) The decrease in working capital excludes the deferred taxes of the period. For the convenience of the reader, the financial statements as of and for the year ended December 31, 2003 have been translated into U.S. Dollars at the rate of U.S. $ 1 =

292 VEOLIA ENVIRONNEMENT CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Prepared in accordance with International Accounting Standard No. 7) Notes At December 31, ($ millions) ( millions) Cash flow from financing activities: Net increase (decrease) in short-term borrowings (2,031.7) (3.8) Proceeds from issuance of bonds and other long-term debt 5, , , ,604.4 Principal payment on bonds and other long-term debt (4,788.1) (3,791.2) (3,870.4) (3,335.9) Net proceeds from issuance of common stock , Purchase of treasury stock (115.8) (138.4) Cash dividends paid (390.6) (309.3) (300.0) (299.0) Net cash provided by financing activities (569.7) 1,238.5 Effect of foreign currency exchange rate changes on cash and cash equivalents (265.5) (210.2) (92.1) (176.9) Change in cash and cash equivalents (453.7) Cash and cash equivalents: Beginning 2, , , ,528.1 Ending 2, , , ,089.3 Cash and cash equivalents 3, , ,381.9 Cash liabilities (865.9) (685.6) (746.3) Cash and cash equivalents 2, , ,635.6 The accompanying notes are an integral part of these consolidated financial statements. For the convenience of the reader, the financial statements as of and for the year ended December 31, 2003 have been translated into U.S. Dollars at the rate of U.S. $ 1 =

293 VEOLIA ENVIRONNEMENT CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY ( millions except for share information) Number of Shares Share capital Additional paid-in capital Retained earnings Net income Shareholders equity Balance at December 31, ,174,955 4, ,208.3 Net loss for the year 2001 (2,251.2) (2,251.2) Foreign currency translation adjustment (30.5) (30.5) Dividends paid and net income appropriation (614.8) (222.6) Goodwill 2,037.0 (1.0) 2,036.0 Conversion of warrants Capital increase 817 Balance at December 31, ,175,772 4, , ,048.2 (2,251.2) 5,740.0 Net income for the year Foreign currency translation adjustment (957.2) (957.2) Dividends paid and net income appropriation (2,438.7) 2,251.2 (187.5) Treasury shares (64.1) (86.9) (151.0) Conversion of warrant Capital increase 58,894, ,531.5 Other Balance at December 31, ,070,459 5, ,919.1 (2,333.1) ,329.6 Net income for the year 2003 (2,054.7) (2,054.7) Foreign currency translation adjustment (509.1) (509.1) Dividends paid and net income appropriation (339.2) (217.8) Treasury shares 40.3 (40.3) Capital decrease 56 (3,443.1) 3,443.1 Other Balance at December 31, ,070,515 2, ,321.9 (2,694.0) (2,054.7) 3,574.8 Balance at December 31, 2003 ($ millions) 2, ,984.2 (3,402.4) (2,595.0) 4,514.7 The accompanying notes are an integral part of these consolidated financial statements. For the convenience of the reader, the financial statements as of and for the year ended December 31, 2003 have been translated into U.S. Dollars at the rate of U.S. $ 1 =

294 1. DESCRIPTION OF BUSINESS 1.1. Presentation of the Group Veolia Environnement ( VE or the Group ) is a société anonyme according to French law, a form of stock corporation, listed on both the Paris and New York stock exchanges. Veolia Environnement is an independent group formed at the end of 1999 and is a world-wide group providing environmental services organized into four divisions: water, waste management, energy services and transportation as well as an interest in the Spanish company Fomento de Construcciones y Contratas ( FCC ). Veolia Environnement has been listed on the Paris stock exchange since July 20, 2000 and on the New York stock exchange since October 5, SEGMENT DESCRIPTION Veolia Environnement supplies a wide array of environmental management services to a range of public authorities and industrial, commercial and residential customers. The Group offers a variety of integrated services, including water treatment and system operation, waste management, energy services, and transportation services. Through FCC, a publicly listed Spanish company, the Group also provides environmental and construction services. Following is a brief description of each of the Group s business segments: Water the Group manages and operates water and waste water treatment and distribution systems for public authorities and private companies. The Group is also a designer and manufacturer of water and waste water treatment equipment and water systems. In addition, the Group provides consumers with bottled water. Waste management the Group collects hazardous and non-hazardous waste and offers related services, including disposal, treatment and recycling. Energy services the Group provides energy management services and offers a wide range of industrial utilities and facilities management services. Transportation the Group provides integrated transportation solutions involving bus, train, maritime, tram and other networks. FCC FCC operates in a number of different environmental and construction related industries Significant Events Strategic Review of our North American Water Assets Because of the evolution of our water activities in the United States during the first half of 2003, our management, at the time of the presentation of our results for the first half of 2003, announced our decision to reorganize these activities and revalue certain activities no longer considered strategic by our company in view of their divestment. The most significant factors that our management noted in our water markets in the United States during the first half of 2003 were the following: our water equipment markets did not experience the turnaround we had anticipated and the profitability of our equipment sales business did not improve as expected, but rather continued to decline, reaching a historical low in the first half of Although customer orders in this business are subject to a degree of seasonality, our backlog in the industrial sector did not allow us to envision a quick turnaround of our profitability in this market, compounded by an expected increase in competition for orders due to the arrival of new competitors in this market; the limited potential for large municipal outsourcing contracts in the United States, though our belief in the medium- to long-term potential of this market remains unchanged. In this context, the announcement made by one of our main competitors to withdraw from a large contract and redefine its scope of operations with a view to decreasing its presence in this market had an adverse effect on the short-term prospects of this market; and the continued absence of any synergies between our Consumer & Commercial activities with the rest of our activities. 294

295 In light of this analysis, we undertook a strategic review of our North American water assets and decided to: reorganize our Water & Wastewater activities by regrouping our long-term contracts, our engineering and construction activities and several activities related to essential processes under outsourcing-longterm contracts. These activities are very similar to our other concession and outsourcing activities in both the municipal and industrial markets; regroup our equipment and technology sales activities and related services under Equipment-short-term contracts, with a view to divesting this unit; and divest our Consumer & Commercial activities. In connection with the reorganization and contemplated divestments, we decided to restate the carrying value of these assets to our best estimate of their fair market value as of June 30, To this end, we undertook a review of the enterprise value of these activities on the basis of comparable multiples used by other listed companies in our markets and in recent transactions. As a result of this review, we recorded in the first half of 2003 a 2.2 billion write-down in the carrying value of USFilter, without taking into account the potential impact of fluctuations in exchange rates on the contemplated divestments. This write-down consisted of a write-off of goodwill recorded in connection with the acquisition of USFilter of US$1.64 billion, an impairment charge of US$0.74 billion relating to trademarks (which are intangible assets with an indefinite life) and a write-off of various other assets amounting in aggregate to US$0.12 million. We have commenced implementing our divestment plan relating to these assets. In this context, we sold on December 31, 2003, slightly ahead of schedule, USFilter s Everpure subsidiary to Pentair Inc. for US$215 million. We also announced in February 2004 the sale of certain real property (farm land) in California for US$77 million. We are in the process of finalizing the preparation for sale of the remaining activities in the Equipment short-term contracts and Consumer & Commercial units of USFilter. We incurred charges in 2003 of 67 million relating to the legal reorganization of these activities and the preparatory measures for their divestment, which are recorded under EBIT in our consolidated financial statements Termination of Our Connex South Eastern License (United Kingdom) Following the decision announced by the UK Strategic Rail Authority (SRA) in June 2003 to end all negotiations seeking to restore the financial equilibrium of the South Eastern license, the SRA took over all operations conducted under this license on November 8, As of this date, the SRA released us from any further financial obligation under this license. Additional expenses related to the termination of this license amounted to 33.7 million Southern Water In accordance with the agreement signed with Southern Water Capital, in 2003 we refinanced our investment in Southern Water. As of July 23, 2003, our total investment in Southern Water amounted to 56 million ( 81 million) Relationship with FCC On July 17, 2003 a new law was passed in Spain relating to the corporate governance of private Spanish companies (such as FCC s holding company), which, in particular, governs the provisions of shareholders agreements relating to voting rights and transfers of shares. The scope and manner of implementation of this law remains unclear and there has not been any legal or administrative interpretation of this law yet. Although this law had not had any effect on FCC s corporate governance and control as of December 31, 2003, we believe that this law may in the future have an impact on the contractual balance of the shareholders agreement dated October 6, 1998 between our company and our partner in FCC s holding company, Ms. Esther Koplowitz. In addition, we and Mrs. Esther Koplowitz had a number of disagreements relating to the strategic development of FCC during To avoid creating a deadlock and in the interest of FCC s development, we proposed to Mrs. Esther Koplowitz several alternative ways to resolve our differences. Mrs. Esther Koplowitz, however, informed us in the third quarter of 2003 of her preference to formally start negotiations to repurchase our interest in FCC. We accepted the principle of a sale of our interest in FCC to Mrs. Esther Koplowitz and have discussed various proposals with her. In this context, we informed the Spanish stock market authorities (Comisión Nacional del Mercado de Valores) on March 1, 2004 of these negotiations and that, as of that date, we had not commenced negotiations to sell our interest in FCC to any other person. Although we have received expressions of interest 295

296 from other persons relating to our stake in FCC, we are not currently in negotiations with any other party pending the outcome of our discussions with Mrs. Esther Koplowitz. Depending on the outcome of our discussions with Mrs. Esther Koplowitz, we may decide to change our method of accounting for our participation in FCC. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Preparation The consolidated financial statements of the Group have been prepared in accordance with accounting principles generally accepted in France ( French GAAP ) and are in accordance with the provisions of the January 3, 1985 law and its implementation rule as of February 17, 1986 and the new rules approved by the Comité de la Réglementation Comptable in April The Group applies the recommendation of the Conseil National de la Comptabilité and accounts for in its consolidated financial statements, assets financed by capital leases, pensions obligations and other retirement costs. Veolia Environnement uses the preference method for the treatment of capital leases. The Group does not apply by anticipation the regulation CRC relative to amortization and depreciation of assets. The financial statements of foreign subsidiaries have been adjusted to comply with French GAAP when necessary. French GAAP differs in certain aspects from accounting principles generally accepted in the United States. A description of these differences and their effects on net income and shareholders equity is set forth in Note 29. The financial statements have been formatted in the original French GAAP financial statements presentation and where necessary have been modified to include certain additional disclosures in order to conform with the content of financial statements required by the generally accepted accounting principles in the United States ( U.S. GAAP ). Change of presentation and accounting principles In 2003, the Group made the following significant changes to its accounting methods and the presentation of its accounts under accounting principles generally accepted in France, or French GAAP: the Group changed the method of depreciating certain operating assets in its waste management activities relating to Urban Cleaning and Industrial Waste in France. Until December 31, 2002, the Group depreciated these assets using double declining method over five years. As from January 1, 2003, the Group depreciates these assets on a straight-line basis over eight years to better reflect the useful life of these assets. This change in depreciation method contributed an additional 25.6 million to its operating income (loss) before amortization charges and restructuring costs (EBIT) in The Group increased the useful life of its co-generation facilities in its energy services division. Because the Group anticipates that these facilities will be in use for a longer period of time due to the evolution of the demand for electricity, the useful life of these assets for purposes of depreciation has been increased from 12 years to 24 years. This change, which became effective on July 1, 2003, contributed an additional 7.5 million to the operating income (loss) before amortization charges and restructuring costs (EBIT) in In 2002, the Group did not change presentation or its accounting principles. Since January 1, 2001 Veolia Environnement no longer recorded goodwill as a reduction of shareholders equity. Convenience Translations The consolidated balance sheet and consolidated statements of income and cash flows include amounts as of and for the year ended December 31, 2003 denominated in millions of U.S. dollars. These amounts are presented as permitted convenience translations under Rule 3-20 of Regulation S-X of the U.S. Securities Exchange Commission and have been prepared using an exchange rate of U.S.$1 to , which was the exchange rate as of December 31, Convenience translations are presented solely for the convenience of the reader of these financial statements and should not be construed as representations that the local currency has been, could have been, or could in the future be converted into U.S. dollars at this or any other rate of exchange. 296

297 Principles of Consolidation All companies over which the Group has legal or effective control are consolidated. The Group uses the equity method of accounting for its investments in certain affiliates in which it owns less than 20% of the voting shares. In these situations, the Group exercises significant influence over the operating and financial decisions of the affiliate either (a) through the disproportionate representation on the affiliate s board of directors, e.g., the percentage of directors appointed to the board by the Group is greater than the percentage of its shareholding interest and those directors allow the Group to exercise significant influence, and (b) because there is no shareholder with a majority voting ownership in the affiliate, which is a consideration under French accounting principles in determining whether significant influence exists, or (c) because the Group exercises substantive participating rights through shareholder agreements that allow the Group to veto or block decisions taken by the board of the affiliate in question. Significant investments in which the Group has 20% to 50% ownership or otherwise exercises significant influence are accounted for under the equity method. The proportionate method of consolidation is used for investments in jointly controlled companies, where the Group and other shareholders have agreed to exercise joint control over significant financial and operating policies. For such entities, the Group records its proportionate interest in the balance sheet and income statement accounts. All other investments in affiliates that are not consolidated are accounted for at cost. Subsidiaries acquired are included in the consolidated financial statements as of the acquisition date. All material intercompany transactions have been eliminated. In the case of proportionally consolidated companies, intercompany transactions are eliminated on the basis of the Group s interest in the company involved. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. Actual results could differ significantly from these estimates. Significant estimates made by management in the preparation of these financial statements include amounts for pension liabilities, deferred taxes, valuation estimates for long-lived assets, reserves as well as recorded and disclosed amounts for certain financial instruments. Translation of Foreign Subsidiaries Financial Statements Balance sheets, statements of income and cash flows of subsidiaries whose functional currency is different from that of the Group are translated into the reporting currency at the applicable exchange rate (i.e., the closing year-end rate for balance sheets, or the average annual rate for income and cash flow statements). Translation gains and losses are recorded in retained earnings. The exchange rates of the significant currencies of non-euro countries used in the preparation of the consolidated financial statements were as follows: Year-End Closing Exchange Rates (one currency = xx ) U.S. dollar Pound sterling Average Annual Exchange Rates (one currency = xx ) U.S. dollar Pound sterling The balance sheets, income and cash flow statements of subsidiaries operating in highly inflationary economies are re-measured (according to the historical method) into a functional currency. The functional currency is defined as the currency used in the dominant country of the economic area to which the subsidiaries belong. Related translation effects are included in net income. These financial statements are then translated from the functional currency into the reporting currency on the basis of the year-end or average annual exchange rate and the translation adjustments are recorded in retained earnings. 297

298 Revenue Recognition Revenues are recorded when title passes to the customer or when services are rendered and measured in accordance with contracts; title of property is considered to have passed to the customer when goods are shipped. Revenue resulting from government subsidies associated with long-term operating agreements is recorded ratably over the year. Revenue relating to specific activities are discussed in applicable sections of these footnotes. Other income and expenses This item includes income or expenses resulting from exceptional operations or events that are not part of the ordinary operations of Veolia Environnement. They primarily include capital gains and losses on sales of subsidiaries, affiliates and activities. Goodwill and Business Combinations All business combinations are accounted using the purchase accounting method. Under the purchase accounting method, assets acquired and liabilities assumed are recorded at their fair value. The excess of the purchase price over the fair value of net assets acquired, if any, is capitalized as goodwill and amortized over the estimated period of benefit on a straight-line basis. Amortization periods for goodwill range from 20 to 40 years. Other Intangible Assets Start-up costs relating to the implementation of new activities, including pre-operating costs, are amortized over their estimated useful life. Other intangible assets include costs incurred to obtain contracts, such as fees paid to local authorities for public services contracts. Fees paid to local authorities are amortized over the duration of the contract, which can be up to 30 years. Market share and trademarks are not amortized. Business assets acquired, such as customers lists and operating rights, are amortized over their estimated useful life. Property, Plant and Equipment Property, plant and equipment is carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the following useful life: Estimated useful lives in years Buildings 20 to 50 Technical systems 7 to 24 Transport equipment 3 to 25 Other equipment and machinery 3 to 12 Assets financed by capital lease are capitalized and amortized over the shorter of the lease term or the estimated useful lives of the assets. Amortization expense on assets acquired under such leases is included with depreciation and amortization expense. Interest expense incurred as a result of expenditures for a fixed asset during the period necessary for its intended use is capitalized as part of the historical cost of fixed assets. Valuation of Long-lived Assets Long-lived assets are regularly re-evaluated 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 asset s fair value. 298

299 Valuation of goodwill and other intangible assets Each year, Veolia Environnement review systematically its goodwill and other intangible assets during its strategic planning in mid year. If long term prospects of an activity are durably downgraded, an estimate is realized and an impairment is accounted for at the interim accounts closing if necessary. The assets are valued at market value in case of a decision to sale them and at fair value if they are conserved. At a closing date, a negative budget variance considered as irreversible may lead to an impairment test. In case of disposal, market value is based on the multiples method (brokers surveys) or recent similar transactions. When the assets are held, the preferred method is the discounted future cash flows. Alternative methods are the multiples method or recent similar transactions. Balance sheet recognition of financing assets Lease contracts As mentioned above, Veolia Environnement uses the preference method for the treatment of capital leases and uses IAS 17 criteria to identify capital lease contracts. In order to make this classification, leases can be examined with respect to the following criteria: the lease transfers ownership of the asset to the lessee by the end of the lease term; the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised; the lease term is for the major part of the economic life of the asset even if title of property is not transferred; at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; the leased assets are of a specialized nature such that only the lessee can use them without major modifications being made; if the lessee can cancel the lease, the lessor s losses associated with the cancellation are borne by the lessee; gains or losses from the fluctuation in the fair value of the residual fall to the lessee; and the lessee has the ability to continue the lease for a secondary period at a rent which is substantially lower than market rent. Trade accounts receivables financing Securitization of receivables contracts are deconsolidated if the following criteria are met : true sale of receivables to a third party, no shares held in equity of a securitization fund. Financial Assets Investments Accounted for Using the Cost Method Investments in unconsolidated affiliates are carried at cost. Any negative difference between carrying value and fair value that is determined to be other than temporary is reserved. Portfolio Investments Held as Financial Assets Portfolio and other investments include unlisted and listed equity securities of unconsolidated subsidiaries and long-term loans that are recorded at cost. When fair value is less than cost and is determined to be other than temporary, a valuation allowance is provided. Estimated fair value is determined on the basis of the Group s share of the equity of the companies concerned adjusted to market value in case of listed securities or pursuant to other applicable procedures. 299

300 Bonds and Debentures Issue costs, as well as discounts and premiums on convertible debt are amortized over the life of the debt. Inventories and Work-in-progress Group companies value inventories according to the provisions of the French Commercial Code, either on a first-in-first-out or a weighted average cost basis. Inventories are stated at the lower of cost or net realizable value. Deferred Taxes Deferred tax assets are recognized for deductible temporary differences, net tax operating loss carry forwards and tax credit carry forwards. Deferred tax liabilities, including those relating to tax loss carry-forwards, are recognized for taxable temporary differences. Deferred tax assets are recorded at their estimated net realizable value. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the enactment date. Cash, Cash Equivalents and Marketable Securities Cash and cash equivalents include all cash balances and short-term highly liquid investments with original maturities of three months or less at the time of purchase and are stated at cost which approximates their fair value. Marketable securities including treasury shares and other highly liquid investments. Treasury shares are classified as marketable securities when they are acquired to stabilize the market price of the Group s shares or in connection with stock options granted to directors and employees. Treasury shares held for other reasons are recorded as an offset to shareholders equity. Marketable securities are carried at cost, and a valuation allowance is provided if the fair value is less than the carrying value. Pension Plans The Group has several pension plans. Pension obligations are calculated using the projected unit credit method. This method considers the probability of personnel remaining with companies in the Group until retirement, the foreseeable changes in future compensation, and the appropriate discount rate for each country in which the Group maintains a pension plan. This results in the recognition of pension-related assets or liabilities, and the recognition of the related net expenses over the estimated term of service of the employees. Employees in France and most other European countries are eligible, for severance pay pursuant to applicable law immediately upon termination. The Group provides reserves for such employee termination liabilities using the projected unit credit method. Stock Based Compensation The Group has adopted stock option incentive plans that grant options on its common shares to certain directors and officers. The purpose of these stock option plans is to align the interest of management with the interest of shareholders by providing certain officers and other key employees with additional incentives to increase the Group s performance on a long-term basis. Shareholders equity is credited for the cumulative strike price to reflect the issuance of shares upon the exercise of options. Treasury shares held to cover commitments relating to stock purchase options are shown under marketable securities at the lower of cost and fair market value. The Group accounts for any capital gains or losses in the year in which shares are sold under the plan. Derivative Financial Instruments The Group manages certain of its financial risks by using derivative financial instruments that qualify as hedges. The Group primarily uses interest rate swaps and caps to manage interest rate risks relating to its borrowing requirements. The goal of these swaps is, depending on the circumstances involved, to modify from fixed to floating rates and from floating to fixed as well as to modify the underlying index on floating rate debt. The goal 300

301 of the interest caps is to limit the upside risk relating to floating rate debt. Interest rate swaps that modify borrowings or designated assets are accounted for on an accrual basis. Premiums paid for interest rate caps are expensed as incurred. The Group uses currency swaps and forward exchange contracts to manage its foreign currency risk. Forward exchange contracts are used to hedge firm and anticipated transactions relating to assets denominated in foreign currencies. Currency rate swaps are used to modify the interest rate and currency of foreign denominated debt. Gains and losses arising from the change in the fair value of currency instruments that qualify for hedge accounting treatment are deferred until related gains or losses on hedged items are realized. Any financial instrument that does not qualify as a hedge for financial reporting purposes is recorded at the lower of cost or fair value in other current assets or liabilities. Foreign Currency Transactions Foreign currency transactions are converted into euros at the exchange rate in effect on the transaction date. At year-end, receivables and payables denominated in foreign currencies are remeasured into euros at year-end exchange rates. The resulting exchange losses and gains are recorded in the current earnings period. Exchange profits or losses on borrowings denominated in foreign currencies that qualify as hedges of net investments in foreign subsidiaries are included as translation adjustments in retained earnings. Research and Development The Group s research and development costs are expensed as incurred. Earnings Per Share Basic earnings per share calculations are based, according to Avis n 27 de l Ordre des Experts Comptables, on the Group s net income after taxes divided by the weighted average number of common shares outstanding. Dilutive earnings per share reflect the potential dilution that would occur if all securities and other contracts to issue ordinary shares were exercise or converted. For its calculation weighted average number of common shares outstanding includes shares issuable on exercise of dilutive options. At December 31, 2003, potential dilutive securities or other contracts to issue ordinary shares are warrants issued in December 2001 and stock-options. Accounting Policies Specific to the Environmental Services Activities Public Service Contracts The Group holds public service contracts relating to its operations in water distribution and treatment, district heating networks, urban transportation and waste collection and treatment. Under the French legal system, there are three primary types of public service contracts: affermage (or public service management) contracts, where the operator is granted the obligation to manage and maintain facilities owned and financed by local authorities, concession, facility management contracts which are similar to BOT (build-operate-transfer) agreements and contracts presenting mixed characteristics of affermage and concession contracts. Revenue is recognized on these contracts when services are rendered in accordance with the terms of the contracts. On an exceptional basis, the Group may also operate management contracts in which it manages a public service for a fixed fee as well as an incentive which is calculated in relation to the performance of the contract. For these contracts, the Group recognizes billing to customers as revenue and all related costs as operating expenses. In France, the Group s public service contracts are primarily affermage contracts. Facilities Facilities operated by the Group are generally financed by local authorities and remain theirs throughout the contract period. Individual facilities financed by the Group as a consequence of specific contractual terms are 301

302 recorded as fixed assets and depreciated to their estimated residual value, if any, on the shorter of their economic useful lives or the contract s term. Wherever the contract s term is shorter than the economic useful life of the asset, such depreciation is classified as a liability as a financial depreciation. Fees Paid to Local Authorities The Group does not have any obligation for compensation payments to local authorities during the contract period, except for fees that have been agreed upon by both parties and formally defined by the contract. The Group s policy is to expense ratably fees that are paid to local authorities when these fees are paid annually and to amortize these costs on a straight-line basis over the life of the contract when the fees consist of payments at the beginning of the contract. Commitments to Maintain and Repair Assets The Group generally assumes a contractual obligation to maintain and repair facilities managed through public service contracts. Corresponding repair and maintenance costs are expensed as incurred, except for some specific contracts for which costs are accrued in advance. Planned Maintenance Projects The Group s policy is to expense costs relating to planned maintenance projects as they are incurred. Landfill Capitalization and Depletion Landfill sites are carried at cost and amortized ratably using the units of production method over the estimated useful life of the site as the airspace of the landfill is consumed. Landfill costs include capitalized engineering and other professional fees paid to third parties incurred to obtain a disposal facility permit. When the Group determines that the facility cannot be developed or the likelihood of grant of the permit cannot be determined before its final authorization, as it is the case in France and the United Kingdom, these costs are expensed as incurred. Landfill Closure and Post-closure Costs The Group has financial obligations relating to closure and post-closure costs and the remediation of disposal facilities it operates or for which it is otherwise responsible. Landfill final closure and post-closure accruals consider estimates for costs of the final cap and cover for the site, methane gas control, leachate management, groundwater monitoring, and other monitoring and maintenance to be incurred after the site discontinues accepting waste. The cost estimates are prepared by engineers based on the applicable local, state and federal regulations and site specific permit requirements. These estimates do not take into account discounts for the present value of total estimated costs. The Group accrues a reserve for these estimated future costs prorata over the estimated useful life of the sites. Accruals for environmental remediation obligations are recognized when such costs are probable and reasonably estimable. These liabilities are classified as reserves and allowances. Construction To calculate their margin, construction companies record revenue according to the percentage of completion method. This method is applied to contracts with a duration of six months or more; for contracts with a duration of less than six months, the completed contracts method is used. 302

303 3. GOODWILL AND BUSINESS COMBINATIONS Goodwill by segment is detailed as follows: ( millions) Net Net Change in consolidation scope (1) Foreign exchange translation (2) Amoztization (3) Other movements Water 3, , (99.3) (1,549.0) 7.3 1,655.0 Waste Management 1, , (127.5) (79.6) 5.9 1,097.4 Energy Services (2.2) (49.0) Transportation (4.0) (27.6) FCC & Proactiva (19.6) (68.6) (1.5) Total 6, , (233.0) (1,773.8) ,238.4 Nets (1) The changes in consolidation scope are mainly related to a step up acquisition in the company holding the Rabat contract in Morocco (for 8,7 million) and the acquisitions of Stadtwerke Weisswasser in Germany (for 11,3 million) in Water segment, Giglio in Italy (for 20,8 million) in Energy segment, FFR in Norway (for 10,0 million) in Transportation segment and the sales in Berlin water subsidiaries (for (16) million). Other acquisitions have small individual amounts of less than 10 million. (2) Foreign exchange translation adjustment are mainly the result of the depreciation of the US dollar against the euro. (3) Total goodwill amortization expense for the years ended December 31, 2003, 2002 and 2001 were (1,773.8), (327.2) million and (2,910.1) million respectively. They include goodwill write-downs for (1,564.2) million in 2003, (77) million in 2002 and (2,652.2) million in The following is a summary of the most significant acquisitions during the periods presented in the accompanying financial statements. FCC In October 1998, Vivendi Universal acquired for cash 49% and obtained joint control of a Spanish holding company whose only asset is a 57% ownership interest in FCC, a publicly listed company in Spain active in the environmental services sector. Vivendi Universal sold to the Group its interest in the holding company for 691 million. The holding company, which fully consolidates FCC, is reflected in the Group s financial statements using the proportionate consolidation method. The details of the Group s acquisition are as follows (in millions of euros): Fair value of net tangible and intangible assets acquired 212 Purchase price 691 Goodwill recorded on acquisition 479 Goodwill net at December 31, Goodwill recorded from this transaction is being amortized over 20 years. USFilter Corporation In April 1999, Vivendi Universal acquired for cash 100% of the outstanding shares of United States Filter Corporation, a U.S. based water treatment and equipment manufacturing company. The transaction was accounted for as a purchase. The details of the acquisition are as follows (in millions of euros): Fair value of net tangible and intangible assets acquired 459 Purchase price 5,801 Goodwill recorded on acquisition 5,342 Goodwill net at December 31, Goodwill recorded from this transaction is being amortized over 40 years. 303

304 On January 1, 2001 Veolia Environnement renounced the imputation of a part of the initial goodwill of USFilter recorded as a reduction of shareholders equity. As a result the net goodwill was increased by 2,037 million on December 31, The goodwill recorded on acquisition was 5,342 million of which 3,253 million was initially recorded as an asset, and 2,089 million as a reduction of shareholders equity on the acquisition of USFilter by Veolia Environnement from Vivendi Universal on December 23, 1999 which the Group has now renounced. The amortization of the goodwill initial recorded as an asset as of December 31, 2001 was 216 million. Taking into account the theoretical amortization of the goodwill recorded as a reduction of shareholders equity of 52 million (calculated as if the goodwill had been recorded as an asset), the net goodwill reintegrated as an asset amounts to 2,037 million. Goodwill amortization in 2001 included a write-off of goodwill of 2,611 million, related to activities of USFilter. The management determined that the goodwill was impaired, and goodwill was written down based upon an estimate of discounted future cash flow. The analysis was based on a projection over 10 years with a terminal value and with a discount rate of 7% for the goodwill. The management revised the estimated cash flows as a result of the evolution of the US economic situation. In 2002, the Group actualized the projection of USFilter over 10 years, with a terminal value and utilized a discount rate of 6% which takes into account the reduction in the US risk-free rate. As a result of commercial gains and business development in 2002, and its perspectives for 2003 and despite the US economic situation in 2002, the valuation has not put into question the long term growth prospects of USFilter. The carrying value of the goodwill of USFilter has been justified as of December 31, As of June 30, 2003, the Group accounted for a write-off of goodwill of 1,441 million (see note 1.2). The review of the values (goodwill and trademarks) as of December 31, 2003 related to activities to be sold and to those maintained did not call into question the June 30, 2003 valuation. Onyx Waste Services (previously Superior Services) In June 1999, Veolia Environnement acquired for cash 100% of the outstanding shares of Superior Services, a U.S. based waste management company. The transaction was accounted for as a purchase. The details of the acquisition are as follows (in millions of euros): Fair value of net tangible and intangible assets acquired 168 Purchase price 932 Goodwill recorded on acquisition 764 Goodwill net at December 31, Goodwill recorded from this transaction is being amortized over 40 years. 304

305 4. OTHER INTANGIBLE ASSETS The evolution of net intangible assets is as follows: ( millions) Additions Disposals Amortization Change in scope Foreign exchange translation Other movements 2003 Fees paid to local authorities (1) (0.4) (41.4) 5.2 (5.4) (3.6) Trademarks, market share and business assets acquired (2) 2, , (1.3) (679.5) (110.7) (270.0) (4.8) 1,227.0 Software (2.8) (52.0) 1.0 (0.6) Prepaid expenses (3) (64.7) 6.7 (8.1) Other intangible assets (5.6) (37.4) 3.4 (59.5) (50.5) Total 4, , (10.1) (875.0) (94.4) (343.6) 7.0 2,749.1 (1) Fees paid to local authorities relating to public service contracts, which are primarily located in France, amounted to million in 2003, compared with 568,5 million in 2002 and million in These are amortized over the term of the contracts to which they relate. They include amortization of fees paid to local authorities at the beginning of the contract in Compagnie Générale des Eaux for 16.5 million and in its regional subsidiaries for 8.6 million. (2) Trademarks, market share and business assets amounted to 1,227.0 million in 2003, compared to 2,283.5 million in 2002, and 2,922.6 million in These assets mainly include the allocation to trademarks of part of the purchase price of USFilter for million which have been impaired for an amount of million as of June 30, 2003 (see note 1.2). The carrying value of trademarks, market share and business assets are reviewed every year on the same basis of criteria used to assess their initial value, such as the position of the market, net sales and gross operating surplus or deficit. If the review indicates an other than temporary reduction in value, a valuation allowance is recorded (see note 2). Trademarks and market shares are not amortized. Acquired business assets, such as customer lists and operating rights, are amortized over their estimated useful lives. The changes in scope of consolidation are principally due to US Filter trademarks for (110.1) million as a result of the sale of Everpure. (3) Prepaid expenses include expenses of million, million and million, as of December 31, 2003, 2002 and 2001, respectively, to be allocated over several financial years, mainly relating to the difference between the contractual amounts of debt servicing payments made to local authorities and the expense charged to income over the contract period. Certain subsidiaries of the Group may be obligated to assume responsibility for the repayment of the debt entered into by local authorities relating to the utility network they manage. These obligations are part of the contracts between Veolia Environnement and the local authorities, there are no guarantees given to the lenders. The annual payments generally decrease each year and extend over a period shorter than the contract period. This difference between the amounts paid to the local authorities and the expense charged to income is recorded as a prepaid expense on the balance sheet. Total amortization expense for other intangible assets for the years ended December 31, 2003, 2002 and 2001 was million (including million of impairment), million and million. Accumulated amortization amounted to 1,761.3 million, million and million, as of December 31, 2003, 2002 and 2001, respectively. 305

306 5. PROPERTY, PLANT AND EQUIPMENT Evolution of property, plant and equipment: ( millions) Additions Disposals December 31, Depreciation Change in scope Other movements 2003 Property, plant and equipment 16, , ,709.0 (683.1) (55.5) (907.1) (44.4) 17,698.1 Publicly-owned utility networks 6, , (70.5) (21.2) ,024.2 Total gross book value 23, , ,102.7 (753.6) (928.3) ,722.3 Property, plant and equipment (6,898.0) (7,601.5) (1,347.0) (44.9) (8,183.2) Publicly-owned utility networks (1,910.8) (2,000.5) 26.5 (153.2) (0.5) 8.3 (0.5) (2,119.9) Depreciation (8,808.8) (9,602.0) (1,500.2) (45.4) (10,303.1) Total net book value 14, , ,102.7 (240.1) (1,500.2) (634.7) ,419.2 Publicly-owned utility networks are assets financed by the Group as part of their management of public service contracts, and will be returned to the local authority at the end of the contract. Additions are mainly related to Water segment ( million), Waste segment ( million) and FCC segment ( million). Disposals are mainly due to Water segment ( (49.6) million), Energy segment ( (47.9) million) and Transportation segment ( (101.0) million). Change in scope are mainly related to Transportation segment, following the purchase of minority interests of Sometrar, which has been consolidated under the global method in 2003 (consolidated under the proportionate method in 2002). Effects of foreign currency translation adjustments mainly relate to Water segment ( million) and Waste segment ( million) as the result of the depreciation of the US dollar against the euro. Property, plant and equipment by segment are detailed as follows: At December 31, ( millions) Property, Plant and equipment Foreign exchange translation Publiclyowned utility networks Accumulated depreciation/ amortization Net tangible assets Net tangible assets Net tangible assets Water 5, ,618.9 (3,901.8) 6, , ,130.2 Waste Management 6, (2,922.7) 3, , ,304.1 Energy Services 2, (1,411.1) 1, , ,724.5 Transportation 2, (1,282.1) 1, , ,321.9 FCC 1, (785.4) Total 17, ,024.2 (10,303.1) 14, , ,

307 The detail of net property, plant and equipment is as follows : At December 31, ( millions) Land , ,210.8 Buildings 1, , ,686.2 Technical systems 4, , ,052.1 Assets under construction Other 1, , ,434.0 Property, plant and equipment 9, , ,945.1 Publicly owned utility networks 4, , ,246.2 Total 14, , ,191.3 Amortization expense for the years ended December 31, 2003, 2002 and 2001 was 1,500.2 million, 1,485.1 million and 1,322.8 million, respectively. Accumulated amortization for the years ended December 31, 2003, 2002 and 2001 was 10,303.1 million, 9,602.0 million and 8,808.8 million, respectively. Tangible assets financed under capital and operating leases are detailed as follows : Capital lease Operating lease ( millions) Gross value Accumulated amortization Net value Net value Land 21.0 (10.5) Buildings (134.6) Technical systems (330.6) Other (271.5) Buildings-work in progress 9.3 (3.3) 6.0 Property, plant and equipment 1,558.7 (750.5) ,615.5 Publicly owned utility networks (92.4) Total ,815.6 (842.9) ,267.2 Total ,643.6 (641.3) 1,002.3 Total ,039.3 (388.6)

308 6. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD ( millions) At December 31, Interest Proportionate share of equity Proportionate share of net income Realia 24.09% 24.10% 24.10% Philadelphia Suburban (1) 16.88% Domino 30.00% 30.00% 30.00% (0.2) (0.5) 6.7 South Staffordshire Water (1) 31.74% Grubar Hoteles 24.50% 19.70% 18.31% (2.5) (2.1) (0.2) Bristol Water (1) 24.14% Intan utilities berhad 30.00% 30.00% 30.00% (10.7) Acque Potabili (2) 14.36% 14.36% (0.1) Egyptian company for prestressed concr % Fovarosi Csatomazasi Muvek Reszvenytarsasag 25.00% 25.00% 25.03% Eaux du Centre et du Rhône 34.97% 34.97% Tiru 24.00% 24.00% 24.00% Technoborgo 49.00% 49.00% (0.1) CICG 41.97% 41.97% 41.97% PCP Holding (3) 19.21% 19.85% Southern Water Investments Limited 19.90% Other (per unit < 5 million) Total (1) Shares sold in (2) deconsolidated company due to non exercise of significant influence. (3) deconsolidated company as of December 31, 2002 due to sale of all its shares then consolidated under equity method as a result of the repurchase of 19.21% of its shares. The evolution in 2003 of equity investments is as follows : ( millions) Interest 2002 Net income Distribution of dividends Foreign exchange translation Change in scope Others 2003 Realia 24.09% (10.8) 90.4 Domino 30.00% 28.2 (0.2) (0.2) 28.9 Grubar Hoteles 24.50% 46.0 (2.5) (5.3) Intan Utilities Berhad 30.00% (0.3) (2.7) 8.2 Acque Potabili 13.4 (13.4) Fovarosi Csatomazasi Muvek Reszvenytarsasag 25.00% (9.7) 87.0 Eaux du Centre et du Rhône 5.6 (5.6) Tiru 24.00% (0.9) 6.9 Technoborgo 49.00% CICG 41.97% 5.5 (0.1) (0.1) 5.3 PCP Holding 19.21% Southern Water Investments Limited 19.90% 4.3 (0.4) (6.7) Other (per unit < 5 million) (5.1) (7.8) (7.7) Total (17.4) (31.3) (6.8) Dividends received from equity affiliates amount to 17,4 million in 2003, 23.8 million in 2002 and 32.9 million in

309 Summarized financial information for the major equity method investments is as follows: ( millions) At December 31, Balance sheet s data Long term assets 5, , ,470.6 Current assets 2, Total assets 8, , ,945.4 Shareholders equity 1, , ,033.4 Minority interests Financial debt 5, Other liabilities and reserves 1, ,138.2 Total liabilities and shareholders equity 8, , ,945.4 Income statement s data Net revenue 1, Operating income Net income (loss) INVESTMENTS ACCOUNTED FOR USING THE COST METHOD Investments accounted for using the cost method are detailed as follows: At December 31, ( millions) Interest Gross Depreciation Net Net Net Alazor Inversiones SA 15.75% Stadtwerke Weiss Wasser GmbH(2) 29.8 Codeve Insurance Company Ltd(3) % Genova Acque(4) 20.00% Acque Potabili(4) 14.36% Ta-Ho Yunlin(5) 33.30% Other (Per unit < 10 million in 2003) (72.9) Total (72.9) (1) Net depreciation expense amounts to (20.9) million in (2) Acquired on December 30, 2002 and consolidated in (3) Created on December 12, 2003 with an activity beginning on January 1, (4) Non consolidated or deconsolidated company at December 31, 2003 as a result of the loss of exercise of significant influence. (5) Beginning of activity. 309

310 8. OTHER PORTFOLIO INVESTMENTS HELD AS FINANCIAL ASSETS Other portfolio investments held as financial assets can be analyzed as follows : ( millions) At December 31, Long-term loans Other financial assets Depreciation (212.3) (53.7) (14.0) Net value 1, , ,052.0 They are detailed as follows : ( millions) At December 31, Acquisitions Sales/ Reimbursement Depreciation Change in scope Foreign exchange translation Other 2003 Gross long term loans (77.3) 37.4 (23.8) (50.0) Valuation allowances (7.7) (8.8) (74.4) (76.3) Net long term loans (77.3) (74.4) 37.4 (17.1) (49.8) Gross other financial assets (46.6) 16.3 (52.8) (27.2) Valuation allowances (6.3) (44.9) (90.9) (0.2) (136.0) Net other financial assets (46.6) (90.9) 16.3 (53.0) (27.2) Total 1, , (123.9) (165.3) 53.7 (70.1) (77.0) 1,155.3 Long term loans : Acquisitions, sales, reimbursements and change in scope amounts are individually less than 30 million. Other movements mainly includes 84 million long term hedging financial instruments reevaluation affected to long term financial debt as of December 31, Valuation allowances mainly include impairment of USFilter long term loans for an amount of 69.8 million. At December 31, 2003, net long term loans include essentially long term loans within the framework of the participation of Veolia Water in Berlin for an amount of 110 million (other amounts are individually less than 60 million). Other financial assets : Acquisitions ( millions) relate essentially to Southern Water preferred shares for an amount of 65.3 million and to an amount of 80.0 million, pledged as collateral guarantee, intended to be invested in the Shenzhen contract. Sales individual amounts are less than 10 million. Valuation allowances ( (90.9) million) correspond to the amortization of the redemption premium of our convertible bonds for (30.2) million and to the amortization of the balancing cash adjustment of Vivendi Universal / Veolia Environnement swap for (55.6) million (see note 24). 310

311 As of December 31, 2003, net other financial assets mainly include 121 million of pensions assets in the U.K., 65.3 million of Southern Water preferred shares, 80 million of amount pledged as collateral guarantee intended to be invested in the Shenzhen contract, 30.2 million corresponding to the net amount of the redemption premium of our convertible bonds, 69.1 million corresponding to subordinated borrowings assumed by Veolia Environnement as part of its securitization of accounts receivables (see note 9) and 39.1 million corresponding to the balancing cash adjustment of Vivendi Universal / Veolia Environnement swap. 9. WORKING CAPITAL Net working capital is detailed as follows: ( millions) At December 31, 2002 Variation of working capital Change in scope Foreign exchange translation Other movements At December 31, 2003 Inventories and work in progress 1,174.5 (32.2) (65.3) (48.6) ,067.8 Accounts receivable 11,145.8 (181.9) (115.4) (410.9) (4.7) 10,432.9 Accounts payable 11, (364.9) ,464.5 Working capital net (271.0) (335.6) (94.6) Variation of differed taxes (126.6) Working capital net (397.6) Inventories and work in progress The breakdown by segment is as follows : ( millions) At December 31, Water (1) ,088.4 Waste Management Energy Services Transportation FCC Total 1, , ,640.7 Less valuation allowance (2) (57.5) (69.8) (97.0) Net value 1, , ,543.7 (1) In 2002, the decrease in the water sector is related to change in consolidation scope for (97) million (of which (65) million for USFilter and (16) million for Berliner Water subsidiaries) and to the effects of foreign currency translation adjustments ( (49) million). (2) Net allowance expenses for 2003 are (8.0) million. Accounts receivable Accounts receivable are detailed as follows: ( millions) At December 31, Trade accounts receivable 8, , ,623.0 Valuation allowance (464.3) (484.6) (472.7) Total trade accounts receivable 8, , ,150.3 VAT and other accounts receivable 1, , ,904.7 Other including deferred tax , ,011.0 Total accounts receivable, net 10, , ,066.0 The majority of trade receivables are due in less than one year. 311

312 Securitization in France The French securitization agreement has been signed in June 2002 for 5 years with a SPE (Special Purpose Entity). The Group securitized through its water segment accounts receivable for a total amount of 430 million net of discount ( 416 million at December 31, 2002). The securitized receivables are the assets of the SPE. The SPE is financed by senior borrowings assumed by banks and by retained interests of 69 million assumed by Veolia Environnement. Reimbursements of the retained interests will occur only after complete reimbursement of the senior borrowings. According to the securitization agreement, the subsidiaries are responsible for collecting the receivables. The Group provides guarantees on the performance of its subsidiaries in recovering these amounts. The increase of the French securitization program since December 31, 2002 ( 14 million) is reflected in the decrease in working capital in the consolidated statement of cash-flows. Discounting of receivables The Group has discounted 998 million of receivables at December 31, 2003 ( 767 million at December 31, 2002). Allowances for doubtful accounts The allowances for doubtful accounts for the years ended December 31, 2003, 2002 and 2001 are as follows: ( millions) At December 31, Balance at beginning of period (484.6) (472.7) (435.8) Amounts charged to expense (146.6) (165.7) (141.4) Deductions of reserve* Other adjustments** (13.3) Balance at end of period (464.3) (484.6) (472.7) * of which 8 million of reversal. ** of which 20.1 million related to foreign currency translation adjustments. Accounts payable Accounts payable are detailed as follows (in millions of euros): At December 31, Trade accounts payable 6, , ,438.7 Social and tax costs payable 4, , ,716.7 Other (1) Total accounts payable 11, , ,939.3 (1) Including deferred tax liabilities of million at December 31, 2003, million at December 31, 2002 and million at December 31,

313 10. SHORT TERM LOANS ( millions) At December 31, Variations Provisions Change in scope Foreign exchange translation Other movements Gross short term loans 1, (27.3) (14.8) Valuation allowance (22.5) (165.3) (0.5) 0.1 (165.6) Net short term loans (27.3) (0.5) (14.8) At December 31, 2003, net short term loans amount to million ( million at December 31, 2002 and million at December 31, 2001). The decrease of the net amount is related to the reimbursement of 72 million of a part of a pre-financing of an investment linked to an Australian contract in Transportation segment. This short term loan amount to 83 million at December 31, 2003 ( 155 million at December 31, 2002). Other amounts are smaller than 50 million per unit. According to the sale agreement of Schwarze Pumpe, Veolia Environnement retains a loan which has been totally impaired at December 31, 2002 for an amount of million. 11. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES Marketable Securities At December 31, ( millions) Gross value Net value Depreciation Unrealized gains Estimated fair value Net value Estimated fair value Net value Estimated fair value Veolia Environnement (10.4) BMTN Vinci Vivendi Universal 7.4 (2.1) Others (a) (1.3) Total 1,216.4 (13.8) 1, , (a) This amount includes mainly short term highly liquid investments with fair value equal to cost value. Veolia Environnement shares have been acquired to cover stock options (770,000 shares) for a total of 26.2 million and to cover Employee Stock Purchase Plans (3,624,844 shares) for a total of 73.9 million. The initial exercise price of these options is Within the framework of its cash management, the Group subscribed million of BMTN ( Bons à Moyen Terme Négociables ) to financial institutions with minimum notation of AAA. In accordance with Board meeting of December 11, 2002, shares acquired to stabilize the market price (4,747,518 shares) for a total amount of million have been reclassified in other portfolio investments in Veolia Environnement s statutory accounts and have been accounted for as a reduction of the Group consolidated shareholder s equity at June 30, 2002 net book value ( 151 million). Cash and cash equivalents amount to 2,538.4 million, consisting at December 31, 2003 of cash for 1,200.3 million, commercial papers for 559 million and short term investments for million (maturity of less than three months). Net valuation allowances amounted to (2.9) million in

314 12. SHAREHOLDERS EQUITY In 1999, 2,776 million of the goodwill arising from the acquisition of USFilter Corporation was allocated, in anticipation, to the paid-in premium to be recorded on the public offering of Veolia Environnement. In 2000, taking into account the results of the capital increase realized in July, 687 million of the goodwill initially recorded as a reduction of shareholders equity was recorded as an asset. In 2001, the net goodwill was reintegrated as an asset for an amount of 2,037 million (see note 3). In December 2001, the Group issued a total of 346,174,955 warrants. These warrants give the holder the right to convert seven warrants into one common share at an exercise price of 55.0 per share. In 2001, a total of 5,719 warrants were converted, resulting in the issuance of 817 new shares, over the course of 2002 a total of 93,415 warrants were converted, resulting in the issuance of 13,345 new shares. In 2001, the translation adjustments concern principally the US dollar for (24.5) million. This amount includes the appreciation of the US dollar against the euro for million. In addition, the write-off of goodwill resulted in the reclassification to earnings of foreign currency translation adjustments for 319 million. Accumulated foreign currency adjustments were million, as of December 31, On August 2, 2002 Veolia Environnement completed its 1.5 billion capital increase, this capital increase, subscribed by a group of declared investors, was made by issuing 57.7 million new shares at a subscription price of 26.5 per share. During December 2002, Veolia Environnement issued 1.2 million new shares at a subscription price of 26.5 per share. The shares were subscribed to by the employee stock purchase plan Sequoia. In accordance with Board meeting of December 11, 2002, the treasury stocks (4.7 million shares) not allocated to stock option plans and employee saving schemes were reclassified under other portfolio investments held as financial assets in Veolia Environnement SA s statutory financial statements and were allocated as a reduction of consolidated shareholders equity for an amount of million. As of December 31, 2002 foreign currency transaction adjustment ( (957.2) million) is due for (821) million to the depreciation of the dollar against the euro. As of December 31, 2002 the accumulated foreign currency adjustments were (303.1) million. At December 31, 2002, other includes proceeds from transferred contracts by Vivendi Universal for an amount of 25.4 million and call options on shares of Veolia Environnement agreed by Vivendi Universal for an amount of (7.6) million. In accordance with Resolution N 17 of the Shareholders Meeting of April 30, 2003, Veolia Environnement SA reduced its shareholders equity by 3.4 billion by reducing the nominal value of its shares from 13.5 to 5. It increased the share premium by the same amount at the same time. Due to the capital reduction by the reduction of the nominal value of the shares, the amount of capital and share premium in the treasury stock allocated to consolidated shareholders equity was modified by 40.3 million in Over the course of 2003 a total of 392 warrants were converted, resulting in the issuance of 56 new shares. As of December 31, 2003, the foreign currency translation loss totaled million, with 296 million due to the depreciation of the dollar against the euro and 89 million due to the depreciation of the pound sterling against the euro. Foreign currency translation adjustment reserves amounted to (812.2) million as of December 31, At December 31, 2003, other includes income taxes related to capital increase costs charged against the issuance premium in 2002 for an amount of (10.5) million. The Group s consolidated and unconsolidated subsidiaries have certain restrictions on the distribution of net equity. These restrictions mainly concern French companies where, pursuant to French law, they are legally required to reserve a minimum of 5% of its annual net income within the retained earnings account. This 314

315 minimum contribution is not required once the reserve equals 10% of the aggregate nominal share capital. The legal reserve is distributable only upon liquidation. The share capital of the Group consisted of 405,070,515 shares at December 31, All shares have one voting right and may be registered upon request by the owners. 13. MINORITY INTERESTS Minority interests are detailed as follows (in millions of euros): Minority interests at January 1, 2, , ,031.1 Changes in consolidation (11.3) TSAR (1) Minority interests in income of consolidated subsidiaries Dividends paid by consolidated subsidiaries (91.5) (112.9) (76.4) Impact of foreign currency fluctuations in minority interests (48.0) (33.9) 5.4 Other Changes (0.1) (0.1) 0.8 Minority interests at December 31, 2, , ,531.1 (1) TSAR -VEFO ((Veolia Environnement Financière de l Ouest), a company fully controlled by Veolia Environnement SA) issued in December 2001, 300 million of company obligated manditorily redeemable securities maturing on December 28, As a result of their profile, these securities are accounted for as a minority interest. The remuneration of these securities is included in the minority interest table above. VEFO holds 8% of CGEA Onyx s capital. 14. DEFERRED INCOME Deferred income includes mainly million in investment subsidies received in connection with the management of municipal outsourcing contracts ( million at December 31, 2002) and million in payments in respect of income from the securitization of future receivables ( million at December 31, 2002). To finance most of its cogeneration plants, Dalkia has sold in advance the proceeds from the sale of electricity that EDF has pledged to acquire under long-term contracts. Since January 1, 1998, the proceeds have been amortized on an actuarial basis over the duration of these loans, which ranges between 5 and 12 years. The increase of investment subsidies in 2003 ( 183 million) is mainly due for an amount of 134 million to the change in consolidation method of Sometrar a subsidiary in Transportation segment which was consolidated under proportionate method until December 31, 2002 and which is fully consolidated since January 1, 2003 as a result of the purchase of the minority interests. 315

316 15. RESERVES AND ALLOWANCES Reserves and allowances are detailed as follows (in millions of euros): At December 31, At December 31, At December 31, Charged to expenses Utilization Reversal Changes in scope Translation adjustments Others 2003 Litigation including social and fiscal (117.5) (21.8) (4.3) (6.2) Financial depreciation (41.2) 18.0 (0.1) (2.5) Maintenance and repair costs accrued in advance (75.1) (1.4) (1.5) Valuation allowance on work in progress (137.0) (0.2) (0.4) Reserves related to fixed assets (16.0) (0.2) 0.7 (0.6) (0.5) 54.4 Closure and post closure costs (33.4) (12.4) (2.1) (27.0) (23.0) Pensions (16.9) (0.8) 1.7 (2.8) Restructuring costs (43.5) (2.8) 2.1 (4.7) (4.7) 62.0 Losses on investment in unconsolidated companies (24.3) (1.9) Warranties and customer care (96.6) (21.9) (5.3) (8.9) Others (129.1) (23.7) 4.8 (28.2) Total reserves and allowances 3, , (730.6) (84.3) 22.0 (80.3) ,913.9 The principal reserves and allowances incite the following comments: Reserves for litigation Includes those losses that are considered probable that relate to the litigation that Veolia Environnement experiences in conducting its normal business operations. The Water and Energy businesses account for million and million respectively of the total reserves for litigation. Financial depreciation Veolia Environnement finances individual installations which, as a consequence of a specific contractual dispositions, are accounted for as tangible assets and amortized, up to their estimated residual value over the shorter of their useful lives and the period of the contract. When the contract period is shorter than the useful life of the asset, such depreciation is recorded as a liability as a financial depreciation. These reserves mainly relate to the Water business ( million) and Energy business ( million). Maintenance and repair costs accrued in advance The Group, as part of these contractual obligations through public services contracts, assumes responsibility for the replacement of fixed assets in the publicly owned utility networks they manage. Maintenance and repair costs are expensed as incurred except for specific contracts for which costs are accrued in advance. These reserves concern the Water business for million and Energy business for million. Valuation allowance on work in progress The principal reserves are for the Energy business 28.1 million and the engineering activities of the Water business for million. Closure and post-closure costs The Group has financial obligations relating to closure and post-closure costs and the remediation of disposal facilities it operates or for which it is otherwise responsible. 316

317 Landfill final closure and post-closure accruals consider estimates for costs of the final cap and cover for the site, methane gas control, leachate management, groundwater monitoring, and other monitoring and maintenance to be incurred after the site discontinues accepting waste. The cost estimates are prepared by engineers based on the applicable local, state and federal regulations and site specific permit requirements. These estimates do not take into account discounts for the present value of total estimated costs. The Group accrues a reserve for these estimated future costs pro rata over the estimated useful life of the sites. Those reserves amounted to million in 2003, compared to million and million in 2002 and 2001 respectively. As of December 31, 2002 the total anticipated costs, undiscounted, amounted to 500 million. Other reserves and accruals are related to the plant dismantling and site remediation in the Water and Waste business with an amount of 27.4 million, 54.1 million and 40.9 million for the years ended December 31, 2003, 2002 and 2001 respectively. Pensions The Group has accrued reserves of 135 million and 49 million to cover retirement obligations in France and Germany respectively, principally to cover the indemnities paid on retirement. Those defined pension schemes are essentially limited to the British subsidiaries of Veolia Environnement. The 121 million of net assets invested in funds, are accounted for on the balance sheet as other financial assets (Note 8). The analysis of pension and other retirement benefits is undertaken in note 29E. Restructuring charges The developments in the reserve for restructuring costs for the years ended December 31, 2003, 2002 and 2001 are as follows (in million of euros): At December 31, Balance at beginning of period Amount charged to expenses Utilization (cash) (43.5) (141.5) (128.6) Other adjustments* (10.1) (2.4) 35.4 Balance at the end of period * Reflects primarily changes in the scope of consolidation. Losses on investments in unconsolidated companies Within its normal activities, Veolia Environnement is drawn to make allowances for certain affiliated companies. The increase in 2003 is principally due to a reserve covering the closure of U.K. bus activity for an amount of 25.2 million. Warranties and customer care These reserves are principally those obligations related to the construction activity of FCC ( million) and the engineering and equipment activities of the Water business ( 83.4 million). Other Other reserves and allowances include those obligations recorded as part of the normal operating of the Group s subsidiaries. 317

318 16. DEBT Long term financial debt ( millions) At December 31, At December 31, 2001 At December 31, 2002 Acquisitions Sales / Reimbursements Change in scope Foreign exchange translation Other movements At December 31, 2003 Bonds 5, , ,343.5 (167.6) 0.4 (678.8) (84.1) 8,047.2 Other long term financial debt 7, , (3,352.3) (89.8) 56.5 (36.0) 4,539.2 Long term financial debt 13, , ,025.1 (3,519.9) (89.4) (622.3) (120.1) 12,586.4 The table below presents an analysis of the consolidated long-term debt balance by type of debt instrument (in millions of euros): At December 31, Société Générale borrowing (a) 1, ,076.5 Deutsche Bank borrowing (b) Syndicated credit in CZK (c) Berliner Wasser Betriebe (d) 1, , ,987.8 Onyx Waste Services (e) Veolia Environnement 1.5% bond (f) 1, , ,535.6 EMTN (g) 5, , ,806.7 US private placement (h) Vinci convertible bond (i) Montgomery (j) Tyseley (k) Capital Leases (l) Bonds, Bank Loans (m) 1, , ,756.0 Total 12, , ,134.0 (a) (b) This Syndicated credit ( 2,164.7 million) maturing on November 3, 2004 is led by the Société Générale. At December 31, 2003 the credit was not used. The debt contains two clauses: The syndicated interest rate is linked to the debt coverage ratio. In the case of breaking the following financial ratios, the debt contain accelerated redemption clause, otherwise redemption will occur at maturity. Interest cover ratio (EBITDA/net interest expense): > 4.00 to 1 in 2003 and Debt ratio (Net financial debt/ebitda): < 4.25 to 1 in 2003 and On December 31, 2002 Veolia Environnement issued a 3,000 million syndicated loan led by Deutsche Bank, that has been reduced on March 14, 2002 to 2,250 million and which matures on March 13, As of December 31, 2003 the credit was not used. The debt contains two clauses: The syndicated interest rate is linked to the debt coverage ratio. In the case of breaking the following financial ratios, the debt contain accelerated redemption clause, otherwise redemption will occur at maturity. 318

319 Interest cover ratio (EBITDA/net interest expense): > 4.00 to 1 in 2003 and the following years. Debt ratio (Net financial debt/ebitda): < 4.25 to 1 in 2003 and <4.00 to 1 for the following years. Those two syndicated credits have been relayed on February 19, 2004 by another one amounted to 3,500 million maturing on February 19, The syndicated interest rate is linked to the debt coverage ratio (Net financial debt/ebitda). Those disruptive covenants have been totally removed and the cross default agreement has been replaced by a proven acceleration agreement. (c) This Syndicated credit amounts to 8,000 million of Czech crowns ( 247 million) maturing on November 7, 2008 is led by the Credit Lyonnais, ING Bank and Komerčni Banka At December 31, 2003 the outstanding credit reaches 7,000 million of Czech crowns, million, indexed on Pribor. The debt contains two clauses : The syndicated interest rate is linked to the debt coverage ratio. In the case of breaking the following financial ratios, the debt contain accelerated redemption clause, otherwise redemption will occur at maturity. Interest cover ratio (EBITDA/net interest expense):> 4.00 to 1 in 2003 and the following years. Debt ratio (Net financial debt/ebitda):< 4.25 to 1 in 2003 and <4.00 to 1 for the following years. (d) Berliner Wasser Betriebe debt as of December 31, 2003 consists of two lines: the acquired debt of 600 million which matures on January 15, 2005, and debt of 1,265.8 million. The acquired debt is guaranteed by Veolia Environnement and contains two clauses: The interest rate is linked to the debt coverage ratio. In the case of breaking the following financial ratios, the debt contain accelerated redemption clause. Interest cover ratio (EBITDA/net interest expense): > 4.00 to 1 in 2003 and Debt ratio (Net financial debt/ebitda): < 4.25 to 1 in 2003 and <4.00 to 1 in (e) This stand-alone credit facility of Onyx Waste Services (previously Superior Services) allows initially borrowings up to $650 million. It has been reduced on January 1, 2004 to $425 million maturing August 18, It has not been used at December 31, This credit facility could be used to issue guarantees. As of December 31, 2003, guarantees amounted to million. The debt contains two redemption clauses at the Onyx Waste Services level: The interest rate is linked to the cover debt ratio. The non respect of one of this four covenants might carry an accelerated redemption. Leverage ratio: < 3.00 to 1. Interest cover ratio (EBITDA/total interest expense): > 3.00 to 1. Debt to shareholders equity ratio: < 50 % Capital expenditure (capital expenditure/depreciation expense): < (f) In April 1999, Veolia Environnement issued a 2,850 million of bonds that bear interest at 1.5%, which mature on January 1, 2005, and that were convertible, at the option of the bondholder, into Vivendi Universal shares. These bonds could also be converted into shares of Veolia Environnement at a predetermined conversion rate if there was an initial offering of Veolia Environnement shares. As a consequence of an initial offering conversion into Veolia Environnement shares, the number of bonds in circulation was 5,331,058, which are only convertible into Vivendi Universal shares. The liability recorded for these bonds 1,535.3 million, includes a premium of 91 million, the counterpart is recorded against other long-term investments (see Note 8). Taking into account, the growing possibility of non converting Veolia Environnement obligation 319

320 into Vivendi Universal shares, the premium has been amortized since January 1, These bonds contained a cross default agreement with Vivendi Universal as part of the guarantee given by Vivendi Universal to investors. On August 20, 2002, this guarantee was removed at the extraordinary general meeting of bondholders. The Oceane s coupon was also modified from 1.50% to 2.25% per year, with a starting effect at September 1, (g) On December 31, 2003, EMTN consists of 5,819.7 million, from which a 5,801.4 million matures over one year, and is made as following: 1,000 million bears interest of 4.875%, maturing on May 28, 2013, 750 million bears interest of 5.375%, maturing on May 28, 2018, 700 million bears interest of 6.125%, maturing on November 25, (h) Veolia Environnement issued bonds through a private placement in the United States for a global amount as of December 31, 2003 of million which is detailed as follows: Part A, B and C maturing January 30, 2013 with respective amounts: 33 million (bearing interest of 5.84%), 7 million (bearing interest of 6.22%), $147 million (bearing interest of 5.78%), Part D maturing January 30, 2015 with respective amounts : $125 million bearing interest of 6.02%, Part E maturing January 30, 2018 with respective amounts : $85 million bearing interest of 6.31%, The debt contains two clauses : In the case of breaking the following financial ratios, the debt contain accelerated redemption clause, otherwise redemption will occur at maturity. Interest cover ratio (EBITDA/net interest expense):> 4.00 to 1 in 2003 and the following years. Debt ratio (Net financial debt/ebitda):< 4.25 to 1 in 2003 and <4.00 to 1 for the following years. In the case of notation less than BBB+ or Baa1, covenants would be tested on the basis of semi-annual accounts instead of only annual accounts. (i) This bond exchangeable for Vinci shares contracted by Veolia Environnement with Vivendi Universal in March 2001 for 120 million has been totally reimbursed on September 30, (j) This bond finances the Montgomery plant and bears interest at a 4.5% fixed rate and matures on January 1, (k) This bond which outstanding is 68.0 million, 96.5 million at December 31, 2003, finances the Tyseley project, bears interest at a 6.675% rate and matures on June 30, The principal is amortized over the entire life of the bond. (l) As of December 31, 2003, capital leases mature between 2004 and 2031 and bear fixed interest rate between 2.90% and 12.09% and variable interest rate are mainly indexed on EONIA, T4M and TAM. (m) Other bonds and banks loans mature between 2004 and 2024 and are indexed on fixed-interest rates between 2.0% and 12.82% and on various variable-interest rates, mainly EURIBOR and LIBOR. Besides, this amount includes 93.3 million subordinated debt (TSDI) underwritten by OTV, to finance the Waste Water plant in Zaragoza, Spain, and which matures on December 20, Cover ratios are respected as of December 31,

321 Long-term financial debt listed according to the currency in which it is denominated is as follows (in millions of euros) : At December 31, Euro (a) 11, ,223.8 U.S. Dollar (b) 312,5 2,564.5 Pound Sterling Czech Crowns Australian Dollar Korean Won Norwegian Crown Other Total 12, ,913.0 (a) The 1,856 million increase in euro debt during 2003 was due to the 2,450 million bond issue in connection with the EMTN program, the (250) million reimbursement used from the Deutsche Bank medium term syndicated credit and the reimbursement of Vinci convertible bond for (120) million. (b) The 2,252 million decrease in US dollar debt principally resulted from the full reimbursements of the 496 million used on the Deutsche Bank medium term syndicated credit and of the 1,520 million used on the Société Générale medium term syndicated credit, the reimbursement of 227 million used on the Fleet National Bank medium term syndicated credit arranged for Onyx Waste Services and along with a dollar bond issue connected with a 283 million placement in the United States. The table below presents a summary of the repayment schedules of the long-term financial debt excluding subordinated securities (in millions of euros): At December 31, Due between one and two years 3, , ,227.4 Due between two and five years 3, , ,461.8 Due after five years 5, , ,444.8 Total 12, , ,134.0 Short term borrowings The table below summarizes Veolia Environnement s short-term borrowings (all amounts are in millions of euros): ( millions) At December 31, At December 31, 2001 At December 31, 2002 Variations Change in scope Foreign exchange translation Other movements 2003 Bank overdrafts and other short term borrowings 4, , (79.2) (157.4) ,826.7 The Group s main short term borrowings as of December 31, 2003 are detailed below: 218 million of accrued interest at Veolia Environnement holding level. Cash liabilities : 686 million, 18 million EMTN maturing in 2004, Commercial paper program amounting to 1,500 million issued by Veolia Environnement holding, The Group s main short term borrowings as of December 31, 2002 are detailed below: Cash liabilities : 746 million, 268 million EMTN maturing in 2003, 321

322 Commercial paper program amounting to 1,139 million issued by Veolia Environnement holding with a maximum amount of 4 billion, interest rates are based on EONIA or fixed rates, with maturities between 30 to 180 days, 154 million of accrued interest at Veolia Environnement holding level, 214 million of short-term borrowings in Berlin (Vivendi Water). The Group s main short term borrowings as of December 31, 2001 are detailed below : Syndicated Credit facility amounting to $650 million, with an interest rate of LIBOR USD 3 months, maturing on March 12, Commercial paper program amounting to 2,005 million, interest rates are based on EONIA or fixed rates, with maturities between 30 to 180 days. Unused credit lines The main unused credit lines amounted as of December 31, 2003 was composed as follows: In Veolia Environnement holding: 880 million of unused short-term credit line, 1,248 million of unused middle-term credit line, 2,250 million of unused syndicated credit led by Deutsche Bank, 2,164.7 million of unused syndicated credit led by Société Générale, 31 million of unused syndicated credit in Czech crowns. In Veolia Environnement s subsidiaries : 435 million of middle-term credit line. The main unused credit lines amounted as of December 31, 2002 to 3,872 million. It was composed as follows: In Veolia Environnement holding: 1,150 million of short-term credit line. 150 million of middle-term credit line. 2,149 million of unused credit facility. In Veolia Environnement s subsidiaries : 423 million of middle-term credit line. The main unused credit lines amounted to 2,889 million at December 31, 2001 of which 1,809 million are long term credit lines maturing between 2004 and Bank borrowings supported by collateral guarantees At December 31, 2003, 587 million in bank borrowings was supported by collateral guarantees. The breakdown by type of asset is as follows (in millions of euros) : Amount pledged (a) Total amount in the balance sheet (b) % (a) /(b) On intangible assets 2 2, % On tangible assets , % On financial assets (1) 213 Total long term assets 498 On current assets 89 15, % Total assets 587 (1) Financial assets pledged as collateral being essentially stocks of consolidated subsidiaries, the ratio is not meaningful. 322

323 The breakdown by maturity is as follows : ( millions) At December 31, 2002 At December 31, 2003 Maturity Less than 1 year 1 to 5 years More than 5 years Intangible assets Tangible assets Land Other tangible assets (1) Financial assets VW Industrial Dvpt (2) (5) Chengdu (2) (5) VW Korean Daesan (3) (5) Samsung VW Inchon (2) (5) PPC (2) (5) 9 9 Connex Regiobahn (2) (5) Technoborgo (2) (6) Wyuna Water PTY 74 Amendis Tanger Tetouan (4) (5) 2 2 Zhuhai (4) (5) 1 1 Current assets Cash collateral 3 3 Accounts receivable Inventories Total (1) mainly equipments and traveling systems. (2) 100% of equity pledged as collateral. (3) 95% of equity pledged as collateral. (4) Part of equity pledged as collateral less than 10%. (5) Non consolidated company as of December 31, (6) Equity method investments as of December 31, Shenzhen contract : An amount of 80 million has been pledged for collateral guarantee in the framework of the investment in Shenzhen contract (see note 8). 17. INCOME TAXES Analysis of Income Tax Expense Components of the income tax provision are as follows (in millions of euros): At December 31, France (143.5) (93.8) (128.5) Other countries (208.7) (248.9) (256.3) Current income tax expense (352.2) (342.7) (384.8) France (58.4) (11.9) 9.6 Other countries (1) (82.7) (87.1) Deferred income tax (benefit) 77.8 (94.6) (77.5) Total income tax expense (274.4) (437.3) (462.3) (1) of which 146 million of differed tax assets as a result of US tax group. Anticipated reversal of approximately 200 million in 2004 in case of sales of USFilter activities. In 2001, a French Tax Group was created. Veolia Environnement SA paid the Group tax to the French tax authority. The tax saving is recorded at the Veolia Environnement SA level. 323

324 Deferred Tax Assets and Liabilities The timing differences which give rise to significant deferred tax assets and liabilities are as follows (in millions of euros): At December 31, Deferred tax assets: Employee benefits Provisions for risks and liabilities Tax loss Other timing differences Gross deferred tax assets 1, , ,118.0 Unrecorded deferred tax assets (1) (204.5) (172.8) (107.0) Deferred tax assets recorded in the books , ,011.0 Deferred tax liabilities: Depreciation Reevaluation of assets Other taxable timing differences Gross deferred tax liabilities (1) Represents tax savings from operating losses or other non-activated tax savings. They have not been recorded as assets because their recovery is not probable. Net valuation allowance amounted to (35.1) million in In the consolidated balance sheets, deferred tax assets are classified in accounts receivable and deferred tax liabilities in accounts payable. Tax Rate Reconciliation At December 31, Statutory tax rate 35.43% 35.43% 36.43% Goodwill amortization not deductible for tax purposes (55.22)% 12.75% (61.30)% Permanent differences (13.33)% 8.91% (2.07)% Lower tax rate on long-term capital gains and losses (0.53)% (5.89)% 1.76% Tax losses 8.02% 5.13% (4.42)% Other, net 7.75% (8.73)% 1.71% Effective tax rate (a) (17.88)% 47.60% (27.89)% (a) The effective tax rate is computed by dividing income taxes and deferred taxes by Income before minority interest, income taxes and deferred taxes. 324

325 Net Operating Tax Loss At December 31, 2003, the Group had tax losses which represent a potential tax saving of million (based on the effective tax rate). Tax losses expire as follows (in millions of euros): Years Amount (2) (1) and thereafter 19.9 Unlimited Total (1) of which 191 million usable in 2004 within the framework of the sales of USFilter activities. (2) Since 2004 French tax law, net operating tax losses are usable without time limitation. 325

326 18. FINANCIAL INSTRUMENTS AND COUNTERPARTY RISKS The Group uses various financial derivative instruments to manage its exposure to fluctuations in interest rates and foreign currency rates. The Group does not anticipate any third-party defaults, which could have a significant impact on its financial position and the results of its transactions. Interest rate and foreign currency agreements The contractual amounts stated below are outstanding as of December 31, 2003, 2002 and These amounts represent the levels of involvement by the Group and are not indicative of gains or losses. The amounts are in millions of euros. Total As of December 31, 2003 Less than 1year 1to5 years More than 5 years Interest rate hedging activity Interest rate swaps-pay at fixed rate / receivable at variable rate Nominal amount 1, , Weighted average received rate (evaluated on December, 31) 1.87% Weighted average paid rate (evaluated on December, 31) 5.38% Interest rate swaps-pay at variable rate / receivable at fixed rate Nominal amount 5, , ,107.0 Weighted average received rate (evaluated on December, 31) 5.12% Weighted average paid rate (evaluated on December, 31) 2.88% Interest rate swaps-pay at variable rate / receivable at variable rate Nominal amount 1, Weighted average received rate (evaluated on December, 31) 1.30% Weighted average paid rate (evaluated on December, 31) 1.37% Swap-cross currency Nominal amount 2, , Weighted average received rate (evaluated on December, 31) 2.78% Weighted average paid rate (evaluated on December, 31) 1.93% Interest caps, floors and collars (a) Nominal amount 2, , Average guarantee rate 3.96% interest rate swap option Nominal amount Weighted average received rate when exercised 2.81% Weighted average paid rate when exercised 1.15% Foreign currency hedging activity Forward exchange contracts (b) Nominal amount 1, , (a) Interest caps are used to protect the group from the interest fluctuation which should impact the variable debt, limiting the interest paid. On December 31, 2003, the cap portfolio is made of the following : Covering exposure to Euribor 3 month, with a nominal of million. The weighted average guarantee rate is 4.96%. Covering exposure, to Libor USD 6 and 12 month, with a nominal of $1,900 million. The weighted average guarantee rate is 3.59%. Covering exposure to Pribor CZK 12 month, with a nominal amount of 2,000 millions of CZK. The weighted average rate is 4.00%. (b) The use of forward exchange contracts is linked to foreign currency borrowing. 326

327 On December 31, 2003, the exchange operation portfolio is as follows: (in million of foreign currency) Currency Forward buy Forward sale AUD GBP USD Other currency ( equivalent) Total As of December 31, 2002 Less than 1year 1to5 years More than 5 years Interest rate hedging activity Interest rate swaps-pay at fixed rate / receivable at variable rate Nominal amount 1, Weighted average received rate (evaluated on December, 31) 2.29% Weighted average paid rate (evaluated on December, 31) 5.50% Interest rate swaps-pay at variable rate / receivable at fixed rate Nominal amount 2, ,200.0 Weighted average received rate (evaluated on December, 31) 5.63% Weighted average paid rate (evaluated on December, 31) 3.06% Interest rate swaps-pay at variable rate / receivable at variable rate Nominal amount 1, ,334.6 Weighted average received rate (evaluated on December, 31) 1.60% Weighted average paid rate (evaluated on December, 31) 1.61% Swap-cross currency Nominal amount 775, Weighted average received rate (evaluated on December, 31) 2.23% Weighted average paid rate (evaluated on December, 31) 4.74% Interest caps, floors and collars (a) Nominal amount 2, , Average guarantee rate 4.11% Foreign currency hedging activity Forward exchange contracts (b) Nominal amount 1, , Total As of December 31, 2001 Less than 1year 1to5 years More than 5 years Interest rate hedging activity Interest rate swaps-pay at fixed rate / receivable at variable rate Nominal amount 4, , , Weighted average received rate (evaluated on December, 31) 3.17% Weighted average paid rate (evaluated on December, 31) 4.94% Interest rate swaps-pay at variable rate / receivable at fixed rate Nominal amount 2, ,007.6 Weighted average received rate (evaluated on December, 31) 5.67% Weighted average paid rate (evaluated on December, 31) 3.31% Swap-cross currency Nominal amount Weighted average received rate (evaluated on December, 31) 4.07% Weighted average paid rate (evaluated on December, 31) 3.42% Interest caps, floors and collars Nominal amount Average guarantee rate 4.69% Foreign currency hedging activity Forward exchange contracts Nominal amount

328 19. FAIR VALUE OF FINANCIAL INSTRUMENTS On December 31, 2003, 2002 and 2001 Veolia Environnement used for financing, notes receivables, as well as derivative financial instruments used to manage interest rate risk, foreign currency risk and equity risk. They were characterized by investments, invoices, loans and advances, short and long-term borrowings. The carrying value of cash equivalents, short-term receivables, short-term borrowings and the short-term part of long-term debt was approximately equal to the fair value due to their short maturities. The fair value of financial instruments detailed as follows, is generally determined using quoted prices. When no quoted prices are available, fair value is based on estimates using discounted future cash flows or other estimates. At December 31, ( million) Assets (liabilities) Carrying amount Estimated fair value Carrying amount Estimated fair value Carrying amount Estimated fair value Investments* 2, , , , , ,674.1 Long-term debt (12,586.4) (12,768.0) (12,913.0) (13,125.0) (13,134.0) (13,265.0) Treasury management Interest rate swaps ,5 (25.7) Cross Currency interest rate swaps (10.0) (4.1) Forward exchange contracts Interest caps, floors and collars 14.4 (5.8) 0.4 Interest rate swap option * Excluding treasury shares held for stock option purposes. Financial instruments including cash and cash equivalents, accounts receivables, short term loans, accounts payable and bank overdrafts and short term borrowings are excluded from the table above. For these instruments, fair value was estimated to be the carrying amount due to the short maturity. 20. SPECIAL PURPOSE ENTITIES The water company of Berlin has transactions with three special purposes entities as defined by French consolidation rules ( paragraph of rule CRC 99-02) without holding any share in the entities. Telo KG : The water company of Berlin is committed to Telo KG through an operating lease contract of wasted water treatment plant (the minimum future payments are given in note 21 Capital leases and operating leases ). The book value of assets held by Telo KG amounts to million (for Veolia Environnement stake) and the financial debt to million (for Veolia Environnement stake). Roland Ufer KG : The water company of Berlin is committed to Rolan Ufer KG through an operating lease contract of administrative offices (the minimum future payments are given in note 21 Capital leases and operating leases ). The book value of assets held by Roland Ufer KG amounts to million (for Veolia Environnement stake) and the financial debt to million (for Veolia Environnement stake). Molavia : The water company of Berlin sold real estate assets to Molavia in 2000 and is committed to financial guarantees. The assets book values amount to 10 million (for Veolia Environnement stake) and the financial debt to 16 million (for Veolia Environnement stake). If the companies were consolidated in 2003, the EBIT would have been increased by 33.6 million. For the purposes of development in municipal and industrial outsourcing, US Filter takes part in funds with other partners. US Filter share in the financial debt of these funds equals $57 million at the end of The expected disposal of Equipment short term contracts would reduce the Group exposure to 31 million. The characteristics of the SPE used for securitization in France are given in note 9. Further to the enactment of Loi de sécurité financière of August 1, 2003, the special purposes entities may be consolidated from January 1, 2004, providing new events occur. 328

329 21. COMMITMENTS AND CONTINGENCIES Commitments related to cooperation agreement between Vivendi Universal and Veolia Environnement are detailed in note 24. Specific Commitments Put Southern Water The company has refinanced in 2003 its investment in Southern Water. As a result, the company dealt with a first contract with Société Générale Bank Trust ( SGBT ) on June 30, 2003 and a second one with CDC Ixis on July 18, The terms are as follows: SGBT and CDC Ixis subscribed each other for 110 million of preferred shares without voting rights issued by Southern Water and previously acquired by Veolia Water UK, SGBT and CDC Ixis hold each other a put option, maturing in 5 years, allowing them to sell to Veolia Environnement the preferred shares without voting rights at an average exercise price based on a price adjusted by an annual yield of 5.5%. Put FCC The Group has agreed to buy the 51% partner s interest in B1998 SL if the partner exercises the option agreement, which remains valid during 10 years, until October 16, 2008 at a price based on the average of the market value of FCC s shares during the three months preceding the exercise of the option (up to seven times FCC s EBITDA or 29.5 times FCC s earnings per share for the previous year, whichever is lower). B1998 SL is a holding company which owns 52.5% of FCC. Based on the average of the market value of FCC s shares during the three months preceding the December 31, 2003, the price would be approximately 995 million. If the partner exercises the option agreement, the Group would be the sole shareholder of B1998 SL. As a result of which, the Spanish law could require the Group to launch take over bid on the remaining shares of FCC (47.5%) not held by B1998 SL. The offering price would be determined by the Spanish market authority. According to the share price of FCC on February 26, 2004, the acquisition price of the remaining 47.5% would be around 1,825 million, subject to adjustment by the Spanish authority. EDF agreements EDF entered into a call option with the Group on Dalkia shares in case of a take over bid on the Group by a competitor of EDF. Furthermore, the Group entered into a call option with EDF on its Dalkia shares in case of a change in EDF s status or a take over bid on EDF by a competitor of Veolia Environnement. The share price would be determined by an independent expert if there is no agreement. EDF and Veolia Environnement hold each other call options and put options which would allow, in case of exercise by one of the parties, to EDF to own 50% of equity and voting rights of Dalkia. Exercise of these options is submitted to liberalization of electricity market in France. It would happen at July 1, Replacement engagement The Group and its water distribution and energy services subsidiaries, as part of their contractual obligations through public services contracts and in return for the revenue they receive, assume responsibility for the replacement of fixed assets in the publicly owned utility networks they manage. The Group forecasts the expenditures required in this regard over the remaining duration of the relevant contracts. The accumulated expenditure forecast is estimated at 2.5 billion ( 2.0 billion for water and 0.5 billion for energy). These expenditures will either be expensed or amortized over the shorter of the estimated useful lives of the assets or the contract period, according to the contract terms. 329

330 Performance bonds issued for US subsidiaries Insurance companies have issued performance guarantees in connection with the activities of the Group s US subsidiaries (operational guarantees, guarantees of site restoration), which have been underwritten by Veolia Environnement SA up to a maximum amount of $1.4 billion ($0.7 billion used at December 31, 2003). Specific Berlin contract engagement Under the Berlin water contract, the Group may be obligated to pay approximately 610 million (at 50%) to previous land owners, not indemnified by the Berlin government, who present claims for payments. Securitization According to the securitizaton agreement, the subsidiaries are responsible for collecting the receivables. The Group provides guarantees on the performance of its subsidiaries in recovering these amounts (see note 9). Fees obligations with local authorities As described in note 2, under certain public service contracts, the Group has assumed fees obligations with local authorities. At December 31, 2003, the minimum future payments of these commitments is 183 million. The breakdown by maturity of specific commitments is as follows: (in millions of euros) At December 31, 2002 At December 31, 2003 Less than 1 year Maturity 1 to 5 years More than 5 years Put Southern Water Put FCC / B Water replacement engagement 1,937 2, Energy Services replacement engagement Performances bonds VE issued for US subsidiaries Specific Berlin contract engagement (50%) Fees obligations with local authorities Total 5,467 5, ,584 2,151 Other commitments and contingencies Other commitments and contingencies do not include collateral given in guarantee of banking loans (see note 16) nor specifics commitments and contingencies described above. Other commitments and contingencies are detailed as follows (in millions of euros) (in millions of euros) At December 31, 2002 At December 31, 2003 Less than 1 year Maturity 1 to 5 years More than 5 years Operational guarantees 2, , , ,470.5 Financial guarantees Debt guarantees Warranty obligation given Commitments given Obligation to buy Obligation to sell Other commitments given Letters of credit Other commitments given Total 4, , , ,

331 Operational guarantees (performance bonds) : the Group s subsidiaries in the course of their normal activities, give guarantees to their customers. If the company does not reach its specified targets, it may have to pay penalties. This commitment is often guaranteed by an insurance company, a financial institution, or the parent company of the Group. These guarantees included in the contract are performance commitments. The insurance company or the financial institution often requires counter guarantees from the parent company. The commitment is the amount of the guarantee anticipated in the contract and given by the parent company to the customer or the counter guarantee given by the parent company to the insurance company or to the financial institution. Debt guarantees : they relate to guarantees given to financial institutions in connection with financial debt of non consolidated companies, companies accounted for under the equity method, or companies consolidated through proportional consolidation. Warranty obligations given : they include guarantees in connection to sale of Distribution for 39.6 million and the sale of Bonna Sabla for 65.2 million. Letter of credits : The amount of the credit line given by a bank or financial institution which has not been drawn against. The Group s contingent liabilities relating to certain performance guarantees by segments are as follows (in millions of euros): At December 31, Water 1, , ,005.0 Waste Management Energy Services Transportation FCC/Proactiva 1, Holding Others Total 4, , ,116.0 Capital Leases and Operating Leases The Group uses capital leases in order to finance certain operating assets and investment properties. As stated in Note 2 to the consolidated financial statements, the Group has capitalized these assets (see note 5) and recorded the principal portion of the related capital leases as long-term debt for its present value ( million) (see note 16-j). Payments under these capital lease obligations at December 31, 2003, 2002 and 2001 represent 1.3 billion, 1.2 billion and 0.8 billion, respectively. Furthermore, the Group uses operating leases (mainly transportation equipment and treatment plants). 331

332 Veolia Environnement has concluded capital and operating leases. As of December 31, 2003, minimum future payments for these contracts amount to (in millions of euros): Operating leases Capital leases (balance sheet) and thereafter Total minimum future capital lease payments 2,281.1* 1,271.8 Less amounts representing interest Present value of net minimum future capital lease payments * of which 524 million regarding Berliner Water operating leases. Litigation (other than those accounted for) The Group is subject to various litigation in the normal course of business. Although it is not possible to predict the outcome of such litigation with certainty, based on the facts known by the Group and after consultation with counsel, management believes that such litigation will not have a material adverse effect on the Group s financial position or results of operations. Commitments received ( millions) Commitments received 1, ,215.0 Debt guarantees Warranty obligations given Other engagements received * 1, ,057.7 * Including million behalf EDF s electric contracts commitments. 22. TAX REVIEWS As a part of their normal activities the Group s subsidiaries are subjected to regular tax reviews. In 2003, most of tax review occurred in the French companies of the four divisions are finalized. Significant claims were positively solved for the Group. Reviews leading to additional tax expenses were adequately reserved. Some reviews focusing on key issues were submitted to the central departments of the French Finance and Economy Ministry for technical opinion. Outside France, tax reviews in progress did not lead in 2003 to claim and in some cases were adequately reserved and based on best knowledge of the Group on its subsidiaries. Veolia Environnement has made allowances for those risks it considers appropriate. 23. SEGMENT INFORMATION In accordance with the provision of SFAS 131, the Group has identified five reportable segments which include: Water, Waste Management, Energy Services, Transportation, and FCC. These segments are consistent with the basis on which management evaluates investments and results. The Water segment integrates water and wastewater activities such as water distribution, water and wastewater treatment, industrial process water, manufacturing of water treatment equipment and systems. 332

333 The Waste Management segment collects, processes and disposes of household and trade and industrial waste. The Energy Services segment includes energy optimization and related services. The Transportation segment focuses on the operation of passenger transportation services, both road and rail networks. FCC is a separate segment that operates in construction, urban sanitation and water services, cement production and urban related activities mostly in Spain. Revenue From External Customers ( millions) For the year ended at December 31, Water 11, , ,641.2 Waste management 5, , ,914.4 Energy 4, , ,017.4 Transportation 3, , ,098.9 FCC 2, , ,454.8 Total 28, , ,126.7 Revenue Between Segments ( millions) For the year ended at December 31, Water Waste management Energy Transportation FCC Other 4.9 Total Amortization Expense ( millions) For the year ended at December 31, Water Waste management Energy Transportation FCC/Proactiva Other Total 1, , ,484.6 EBIT ( millions) For the year ended at December 31, Water , ,089.6 Waste management Energy Transportation FCC/Proactiva Other (55.3) (48.1) (29.3) Total 1, , ,

334 Total Assets ( millions) At December 31, Water 11, , ,095.8 Waste management 4, , ,474.9 Energy 4, , ,471.0 Transportation 2, , ,576.0 FCC/Proactiva 3, , ,749.5 Other 11, , ,042.1 Total 38, , ,409.3 Expenditures for Long Lived Assets ( millions) For the year ended at December 31, Water 1, , ,188.3 Waste management Energy Transportation FCC/Proactiva Other Total expenditures 2, , ,878.5 Long-term Assets ( millions) At December 31, Water 11, , ,441.0 Waste management 4, , ,504.2 Energy 2, , ,565.1 Transportation 2, , ,762.6 FCC/Proactiva 1, , ,883.9 Other Total long-term assets 23, , ,400.7 Equity Method Investments At December 31, ( millions) Investment Share in net earnings Investment Share in net earnings Investment Share in net earnings Water Waste management Energy (0.4) Transportation 2.4 (5.8) 5.7 (2.1) FCC/Proactiva Other Total

335 Geographical Breakdown of Net Sales ( millions) At December 31, 2003 France United Kingdom Rest of Europe United States of America Rest of the world Water 6, , , , ,339.8 Waste management 2, , ,971.5 Energy 2, , ,654.0 Transportation 1, , ,673.1 FCC , ,964.6 Total 13, , , , , ,603.0 Total ( millions) At December 31, 2002 France United Kingdom Rest of Europe United States of America Rest of the world Water 6, , , , ,293.7 Waste management 2, , ,138.8 Energy 2, , ,570.9 Transportation 1, , ,422.2 FCC , ,653.1 Total 12, , , , , ,078.7 Total ( millions) At December 31, 2001 France United Kingdom Rest of Europe United States of America Rest of the world Water 6, , , , ,641.2 Waste management 2, , ,914.4 Energy 2, ,017.4 Transportation , ,098.9 FCC , ,454.8 Total 12, , , , , ,126.7 Total Geographical Breakdown of Long Lived Assets ( millions) As of December 31, France United Kingdom Rest of Europe United States of America Rest of the world , , , , , , , , , , , , , , , , , ,400.7 Total 335

336 24. RELATED PARTY TRANSACTIONS The main transactions with related parties (principally Vivendi Universal, its subsidiaries and some minority stockholders in Veolia Environnement subsidiaries) and amounts receivable from and payable to them were as follows (in millions of euros): At December 31, Call option/shares of Veolia Environnement Treasury shares purchased from Vivendi Universal 73,9 Vivendi Universal / Veolia Environnement swap cancelled 75.8 Receivables Trade accounts (1) Loans (2) Payables Vinci convertible bonds Trade accounts Loans Sales Operating income (expense) (16.2) Interest expense (3) (1.1) (58.8) (91.2) Interest income (1) Include 50.3 million of payable by Vivendi Universal associated with the maintenance or replacement of equipment. (see guarantees) (2) Include 4.4 million relating to receivables in connection with Water contracts transferred (3) Include 34.1 million of payments by Vivendi Universal associated with the maintenance or replacement of equipment. (see guarantees) Veolia Environnement shares held by Veolia Universal Veolia Environnement acquired 3,624,844 Veolia Environnement shares from Vivendi Universal at the end of For each share, Vivendi Universal issued a call option allowing Veolia Environnement to acquire 3,624,844 Veolia Environnement shares by 23 December 2004 for a unit share price of The purchase price of the calls amount to euros 7.6 million ( 2.1 per share). The purchase price of treasury shares amounts to 73.9 million ( 20.4 per share). The call options are accounted for as a reduction of the Group shareholder s equity. The treasury shares are classified in Cash, cash equivalents and marketable securities, the purpose of the shares being covering Employee Stock Purchase Plans. Financial agreements between Vivendi Universal and Veolia Environnement Initial agreements in 2000 At the time of the IPO, the Group was fully financed by Vivendi Universal as a result of a financial agreement signed on June 20, The current account with Vivendi Universal bore interest at 5.7%, which corresponded to the market rate of 5.2% plus a margin of 0.5 %. An annual payment of 41.2 million was paid by Vivendi Universal to the Group. In September 2000, the Group entered into an interest rate swap with Vivendi Universal (Veolia Environnement pays 5.2% fixed and receives EURIBOR 3 months variable). The maximum notional amount of this swap is 5 billion, and this swap expires in Modifications occurred in 2001 and 2002 The current account with Vivendi Universal was fully reimbursed in May The bulk of the financial agreement was cancelled. The amount of the quarterly payment by Vivendi Universal to Veolia Environnement was reduced in 2001 and cancelled in As a result, Vivendi Universal paid in 2001 and 2002 to Veolia Environnement a compensation equal to the present value of the reduction in future payments. They amount to 58 million in 2001 and 52.6 million. 336

337 Further to different refinancing operations and in order to take advantage of low level of interest rate, the notional of the interest rate swap was reduced in 2001 and cancelled in Consequently, Veolia Environnement paid to Vivendi Universal 58 million in 2001 and 75.8 million in They relate to the fair value of the swap that has been cancelled. The payment is expensed over the life of the swap. Agreement between Vivendi Universal and Veolia Environnement In order to finalize the separation of Veolia Environnement from Vivendi Universal, Veolia Environnement and Vivendi Universal reached an agreement, on December 20, Transfer of interest Most of the transfers were realized at the end of The most significant transfers represent the sale to Générale des Eaux of interests in foreign water companies such as the Rumanian company Apa Nova Bucaresti, the Italian company Genova Acque, the Moroccan company Société des Eaux et de l électricité du Nord (Tanger- Tétouan). Transfer of Water Distribution and Treatment Operations to Compagnie Générale des Eaux Vivendi Universal has economically transferred to Générale des Eaux (wholly-owned subsidiary of Veolia Environnement, previously named Compagnie Générale des Eaux-Sahide) all its water-related operations in France and the right to the operating income including income relating to contracts not yet transferred. The last transfer occurred last October 1, Four contracts representing a non material turnover are still held by Vivendi Universal with the operating support of Compagnie Générale des Eaux. Counter-Guarantee Agreement Vivendi Universal and Veolia Environnement agreed that Vivendi Universal would be replaced by Vivendi Environnement for some guarantees given to Veolia Environnement by Vivendi Universal. The maximum amount of the commitments not yet transferred equals to 234 million at the end of Guarantees In connection with the formation of the Group and Vivendi Universal s contribution or sale to the Group of its interests in its water and energy services, the Group has replaced Vivendi Universal as managing partner (associé commandité) of substantially all Vivendi Universal s historic water and energy services subsidiaries. As managing partner of these subsidiaries, the Group has agreed, or will agree, to reimburse those subsidiaries for expenses related to the maintenance and replacement of equipment. Under the guarantee agreement dated June 2000, Vivendi Universal will pay us for any loss that we suffer over a period of 12 years as a result of our undertaking to reimburse the subsidiaries for expenses associated with maintenance or replacement of equipments. Pursuant to the terms of the Agreement dated December 2002, the initial limit of 15.2 million was increased by an additional 15.2 million, raising the initial cap to 30.5 million (in June 2000 euros), or million after indexing. The additional 15.2 million will be only payable beginning in January 2005 and will bear interest at the legal interest rate. The Agreement also provides that if the cumulative amount of our renewal expenses exceeds million, Vivendi Universal will cover the excess amount up to a maximum and definitive amount of 76.2 million. Veolia Environnement received 17 million in 2003 and earned 17 million in deferred income in 2003 payable in These amounts are reductions from the operating expenses. The total amount payable by Vivendi Universal to Veolia Environnement by 2005 equals 33.2 million. Vinci bonds The Group indirectly took part in the issuance of the Vivendi Universal bonds convertible into Vinci shares last March Vivendi Universal lent to the Group 120 million against 1,552,305 shares of Vinci held by the Group through Dalkia France. On the 30th September 2003, Veolia Environnement reimbursed the loan for an amount of million 337

338 FCC agreement Prior to the restructuring of Veolia Environnement s capital, on June 17, 2002, Veolia Environnement and Ms. Esther Koplowitz signed an agreement making Veolia Environnement the partner in all the contractual documents concerning B 1998 SL, in place of Vivendi Universal. Ms. Esther Koplowitz thereby accepted to not exercise her purchase right on her partner s stake in B 1998 SL, should Vivendi Universal s holding be reduced to less than 50% of Veolia Environnement s capital and voting rights. In consideration for this, Veolia Environnement awarded Madame Esther Koplowitz and her group of shareholders in B 1998 SL a preferential purchase right for the B 1998 SL shares held by Veolia Environnement, should Veolia Environnement be the target of a hostile takeover. A hostile takeover is defined as the direct or indirect acquisition of at least 25% of Veolia Environnement s capital, which has not been approved by Veolia Environnement s Supervisory and Management Board, by a direct competitor of FCC in Spain. The striking price of the preferential purchase right would be the average between the price paid by Veolia Environnement for its stake, which is about 691 million, and the market value of that stake, calculated in a transparent manner on the basis of the average price of FCC s shares during the quarter preceding the hostile takeover. In addition, Veolia Environnement confirmed its intention to strengthen revenue growth in FCC s business activities other than Realia and Grucycsa. Veolia Environnement thus awarded the Chairman of FCC s board of directors a casting vote, until December 31, 2004, to be used in the event of a deadlock on the decisions of FCC s executive committee on projects with this objective. The casting vote may become permanent after December 31, 2004, if FCC s revenue does not meet certain growth targets. 338

339 25. INCOME STATEMENT Employees and personnel charges Personnel charges including profit sharing amount to 8.6 billion in 2003, compared to 8.7 billion in 2002 and 8.0 billion in ( millions) For the year ended at December 31, Personnel costs 8,519 8,654 7,992 Profit sharing ,569 8,693 8,034 Weighted-average number of employees By category For the year ended at December 31, Executives 31,245 34,393 33,320 Employees 225, , , , , ,036 By segment For the year ended at December 31, Water 65,669 74,223 72,538 Waste management 67,418 65,007 60,710 Energy 35,101 34,075 30,691 Transportation 51,437 48,389 42,122 Proactiva 8,851 9,876 9,779 FCC 28,295 25,408 23,124 Other , , ,036 By method of consolidation * For the year ended at December 31, Fully consolidation 207, , ,466 Proportionate consolidation 49,457 50,818 47, , , ,036 * In 2001 and 2002, entities consolidated with the multi-proportionate consolidation method were included in the line proportionate consolidation, in 2003, they are included in the line fully consolidation. Research and development costs Research and development costs amounted to 95.3 million, 92.5 million and million for 2003, 2002 and 2001 respectively. 339

340 Depreciation and Amortization ( millions) At December 31, 2003 Notes Additions Utilization/ Reversal Net In the statement of cash-flows Amortization Goodwill 3 (1,773.8) (1,773.8) Tangible assets 5 (1,504.4) 4.2 (1,500.2) Intangible assets 4 (876.4) 1.4 (875.0) Depreciation of financial assets Investments accounted for using the cost method 7 (42.9) 22.0 (20.9) Long term loans 8 (113.1) 38.7 (74.4) Other financial assets 8 (92.3) 1.4 (90.9) Short term loans 10 (10.3) 9.8 (0.5) Cash and cash equivalent and other marketable securities 11 (9.4) 6.5 (2.9) Other portfolio investments Reserves and allowances (1) 15 (823.2) (8.3) Valuation allowances on differed taxes 17 (68.3) 33.2 (35.1) (4,364.4) Renewal expenses (2) (310.1) (4,674.5) Valuation allowance on current assets Inventories and work in progress 9 (50.2) 42.2 (8.0) Trade accounts receivables 9 (146.6) (4.9) Other accounts receivables (25.0) 9.3 (15.7) (28.6) (1) Operational, financial and others (2) All renewal costs for publicly-owned utility networks are considered in the cash flow statement, as investments, whether the utility network have been originally financed by the concessionary or not. In addition, in the passage from net income (loss) to net cash provided by operating activities, all renewal costs are eliminated under adjustments for depreciations and amortizations. Goodwill amortization and depreciation of intangible assets with indefinite life Details are as follows : ( millions) For the year ended at December 31, Goodwill amortization (209.6) (250.2) (257.9) Impairment of goodwill (2,214.9)* (77.0)** (2,652.2)*** Total (2,424.5) (327.2) (2,910.1) * Including (2,091.3) million of US Filter goodwill impairment. ** Including (40.6) million of Latin America goodwill impairment. *** Including (2,611) million of US Filter Corporation goodwill impairment. Goodwill amortization decrease as a result of the depreciation of the US dollar against the euro and of the impairment of USFilter goodwill accounted for at June 30, Our amortization expenses relating to goodwill and intangible assets with an indefinite life increased sharply from 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 brands 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 note 1). In addition, in light 340

341 of the market environment in 2003 and our prospects for our markets, in 2003 we wrote-off goodwill amounting in aggregate to million, of which 36 million was recorded in several engineering subsidiaries of our water division, 21.6 million in our German waste management operations, 18.8 million in our energy services activities, 24.2 million in FCC and 9.7 million due to the termination of our Connex South Eastern contract. Financial income and expenses Net financial income for 2003, 2002 and 2001 amounts to a loss of (749.9) million, (648.1) million and (798.0) million, respectively. It includes interest expenses, foreign exchange income and provisions. ( millions) For the year ended at December 31, Interest expense (623.7) (680.9) (764.2) Other financial income (expense) Provisions (134.1) (109.4) (53.5) Financial income (expense) (749.9) (648.1) (798.0) 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 million in 2003, compared to net financial expense of million in 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 average financing costs from million in 2002 to million in 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 The average cost of our debt increased slightly from 4.25% in 2002 to 4.31% in 2003, mainly due to the 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 million in 2003, compared to net financial income of 32.8 million in In 2003, we recorded financial income as a result of a non-recurring capital gain of 30.5 million from the sale of shares of Vinci held by us (compared to a capital gain of million in 2002 from the sale of our participation in Philadelphia Suburban Corporation), while in 2002 we had also recorded financial income from a net foreign exchange gain of 44.0 million, which arose mainly in connection with the sale of USFilter s Distribution division, and dividends from companies accounted for under the equity method amounting to 16.4 million. Our financial income in 2003 was more than offset by financial expenses resulting mainly from: the accrual of non-recurring 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 non-recurring 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 (OCEANE); commissions paid to financial institutions amounting to 13.0 million (compared to 28.5 million in 2002); and a net foreign exchange loss of 7.8 million. 341

342 Other income (expenses) For the year ended at ( millions) December 31, Capital gains and losses 22.0 (31.4) Losses, reserves and impairment of assets (86.6) (30.4) (117.0) Other (62.4) (59.7) 38.9 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 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 In 2002, capital gains and losses include the losses on sales of Bonna Sabla for (44) million, of the Distribution Branch of USFilter for (59) million and of Schwarze Pumpe ( Eaux de Berlin subsidiary) for (24) million. They also include the gains on sales of the minority participations in the subsidiaries of Bristol Water holding and South Staffordshire for 73 million and a capital gain on FCC/Portland merge for 10.7 million. Losses, reserves and impairment of assets include a reserve on a German subsidiary not linked to water distribution activity for (10) million taking into account the expectations in terms of results. 342

343 In 2001, capital gains and losses are related to the sale of Dalkia to EDF for 121 million and the capital gain on the sale of SAFEI and Midkent for 34 million Bank ratio 2003 Reference EBITDA bank definition EBIT 1,750.9 Income statement + Operational amortization 1,724.5 Note 23 Depreciation and amortization + Operational valuation allowance on long term assets idem + Profit sharing 49.8 Note 25 Employees and personnel charges (a) EBITDA bank definition 3,525.2 Net interest expenses bank definition Interest expenses Note 25 Financial income and expenses Other financial incomes (expenses) (7.9) idem (b) Net interest expenses bank definition Debt Financial long term debt 12,586.4 Balance sheet Financial short term debt 3,826.7 Balance sheet Total gross debt 16,413.1 Short term financial loans Balance sheet Long term financial loans Note 8 : Other financial asset Marketable securities 1,202.6 Balance sheet Cash and cash equivalent 2,538.4 Balance sheet Total financial assets 4,608.8 (c) Total net financial debt 11,804.3 (d) Interest coverage ratio = (a) / (b) 5,7 6.9 for 2002 * (e) Debt payout ratio = (c) / (a) 3,3 3.5 for 2002 * The economic ratio Interest coverage ratio, excluding Philadelphia Suburban disposal, amounts to

344 26. INVESTMENTS ACCOUNTED FOR USING THE PROPORTIONATE CONSOLIDATION METHOD Investments accounted for using the proportionate consolidation method represent companies in which the Group and other shareholders have agreed to exercise joint control over significant financial and operating policies. Summarized financial information for major subsidiaries consolidated under the proportionate consolidation method is as follows (in millions of euros): At December 31, Balance sheet data Non-current assets 8, , ,081.6 Current assets 5, , ,693.9 Total assets 13, , ,775.5 Shareholders equity 5, , ,145.4 Minority interests Financial debt 2, , ,851.9 Reserves and other liabilities 5, , ,614.9 Total liabilities and shareholders equity 13, , , Income statement data Net sales 5, , ,923.3 Operating income Net income Cash flow data Operating cash flow Investing cash flow (494.3) (849.6) (677.9) Financing cash flow (254.3) LOI DE SÉCURITÉ FINANCIÈRE : LAW OF AUGUST 1, 2003 Article 133 of the law cancels the provisions of the Commercial law that links the consolidation by a controlling entity to the holding of at least one share. This modification of the law leads to analyze in substance the control of assets by using SIC-12 interpretation of the IFRS framework. It has been applicable to Veolia Environnement since January 1, Veolia Environnement has reviewed the existing contracts at the end of Securitization in France (note 9) and special purposes entities described in note 20 may be consolidated from January 1, 2004 onwards. 344

345 28. LISTING OF MAIN COMPANIES INCLUDED IN CONSOLIDATED FINANCIAL STATEMENTS IN 2003 In 2003, the Group consolidated or accounted for a total of slightly over 2,397 companies, of which the principal companies are: Group and Address Consolidation % holding Veolia Environnement SA 36-38, avenue Kléber Paris Full Water Veolia Water 52, rue d Anjou Paris Full Générale des Eaux Sahide et ses filiales 52, rue d Anjou Paris Full Of which in France : Compagnie des Eaux et de l Ozone 52, rue d Anjou Paris Full Compagnie des Eaux de Paris 4, rue du Général Foy Paris Full Société Française de Distribution d Eau 4, rue du Général Foy Paris Full Compagnie Fermière de Services Publics 3, rue Marcel Sembat Immeuble CAP Nantes Full Compagnie Méditerranéenne d exploitation des Services d Eau 12, boulevard René Cassin Nice Full Société des Eaux de Melun Zone Industrielle 198/398, rue Foch Vaux Le Pénil Full Société des Eaux de Marseille and its subsidiaries 25, rue Edouard Delanglade BP Marseille Prop Société des Eaux du Nord 217, boulevard de la Liberté Lille Prop Société des Eaux de Versailles et de Saint-Cloud 145, rue Yves le Coz Versailles Prop Sade-Compagnie Générale de Travaux d Hydraulique and its subsidiaries 28, rue de la Baume Paris Full Veolia Water Systems (previously OTV) l Aquarène 1, place Montgolfier St Maurice Cedex Full Sainte-Lizaigne SA Tour Ariane 5, place de la Pyramide Puteaux La Défense Full Prague Water CGE AW 52, rue d Anjou Paris Full Of which outside France : Veolia Water UK Plc and its subsidiaries Old Queen Street, London SW1H 9JA (United Kingdom) Full US Filter Corporation and its subsidiaries Cook Street Palm Desert (United States) Full Berliner Wasser Betriebe Anstalt des Offentlichen Rechts Hohenzollerndamn Berlin (Germany) Prop

346 Group and Address Consolidation % holding Servitec KFT Lovas UT 131b 1012 Budapest (Hungary) Full Veolia Water Ceska Republica Sokolovska 238 Prague 9 (Czech Republic)) Full OEWA Wasser und Abwasser Walter Köhn Strasse LeipzFull (Germany) Full Southern Water Investments Limited Southern House Yeomen Road Worthing West Sussex BN13 3 NX (United-Kingdom) ME ENERGY Dalkia Saint-André 37, avenue du Mal de Lattre de Tassigny St André les Lille Full Dalkia France 37, avenue du Mal de Lattre de Tassigny St André les Lille Full Cogestar Saint André 37, avenue du Mal de Lattre de Tassigny St André les Lille Full Cogestar 2 Saint André 33, place Ronde Quartier Valmy Puteaux Full Crystal S.A. Saint André 37, avenue du Mal de Lattre de Tassigny St André les Lille Full Citelum 37, rue de Lyon Paris Full Dalkia Morava AS 28 Rijna Ostrava (Czech Republic) Prop Dalkia PLC and its subsidiaries Elizabeth House London Road Staines TW18 4BQ (United Kingdom) Prop Clemessy and its subsidiaries 18, rue de Thann Mulhouse Full Siram, SPA and its subsidiaries Via Bisceglie, Milano (Italy) Prop ZTO Pivovarska, 84/1 PSC Ostrava (Czech Republic) Prop Giglio Giovanni Spa via provinciale n Gragnano Trebbiense PC (Italy) Prop WASTE MANAGEMENT CGEA ONYX Parc des Fontaines 163 / 169, avenue Georges Clémenceau Nanterre Full Société d Assainissement Rationnel et de Pompage and its subsidiaries (S.A.R.P.) 162/16 Energy Park IV 162/166, boulevard de Verdun Courbevoie Cedex Full SARP Industries and its subsidiaries 427, route du Hazay Zone Portuaire Limay-Porcheville Limay Full Onyx Environmental Group Plc Onyx house 401 Mile end Road E34 PB London (United Kingdom) Full Onyx North America Corp Aviation Avenue 4th Floor Miami (United States) Full Onyx Waste Service One Honey Creed Corporate Center 125 South 84th Street Suite 200 WI Milwaukee (United States) Full

347 Group and Address Consolidation % holding Collex Waste Management Pty Ltd 280 Georges Street Level 12 P.O. Box H126 Australia Square NSW 1215 Sydney (Australia) Full Marius Pedersen Danemark Ørbaekvej Ferritslev (Denmark) Full TRANSPORTATION CGEA CONNEX Parc des Fontaines 163 / 169, avenue Georges Clémenceau Nanterre Full Connex Transport AB Englundavagen 9 Box Solna (Sweden) Full Connex Transport UK Ltd Waterloo Business Center 117 Waterloo Road London SE1 8UL (United Kingdom) Full Connex Verkher GmBh Rödelheimer Bahnweg Francfort (Germany) Full Connex Group Australia Pty Ltd Level 3, Flinders St Station, 223 Flinders St Melbourne, Victoria 3000 (Australia) Full Connex North America (CNA) 2100 Huntingdon Avenue MD Baltimore (United States) Full C.F.T.I. (Compagnie Française de Transport Interurbain) Parc des Fontaines 163 / 169, avenue Georges Clémenceau Nanterre Full C.G.F.T.E. (Compagnie Générale Française de Transports et d Entreprises) Parc des Fontaines 163 / 169, avenue Georges Clémenceau Nanterre Full F.C.C. F.C.C. and its subsidiaries Calle Balmes Barcelona (Spain) Prop Proactiva 216 Paso de la Castellana Madrid (Spain) Full Full: Full consolidation Prop: Proportionate consolidation ME: Equity method 29. SUPPLEMENTAL DISCLOSURES The following information has been prepared to present supplemental disclosures required under U.S. GAAP and SEC regulations applicable to the Group. 347

348 29A. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING POLICIES GENERALLY ACCEPTED IN THE UNITED STATES AND FRANCE The consolidated financial statements of the Group have been prepared in accordance with accounting principles generally accepted in France ( French GAAP ) which differ in certain respects from accounting principles generally accepted in the United States ( U.S. GAAP ). The principal differences between French GAAP and U.S. GAAP as they relate to the Group are discussed in further detail below. Use of the Proportionate Consolidation Method Under French GAAP, it is appropriate to use the proportionate consolidation method for subsidiaries over which the Group and other shareholders have agreed to exercise joint control over significant financial and operating policies. Under the proportionate consolidation method, the Group recognizes the assets, liabilities, equity, revenues and expenses of subsidiaries to the extent of its interest in the Group ownership. Under U.S. GAAP, when the Group controls a subsidiary based on majority ownership or voting or other rights, the subsidiary is fully consolidated. When the Group does not exercise control over a subsidiary, but has significant influence over the entity, the Group uses the equity method to account for its investment. Summarized financial information for those investments accounted for under the proportionate consolidation method are included in note 26. This difference in accounting policy has no effect on either net income or shareholders equity. Use of the Equity Method Under French GAAP there are several criteria to be met which result in the presumption that equity accounting should be used. For investments under 20%, equity accounting is followed if the investor is determined to have significant influence due to the relative level of ownership, board of directors representation, and other contractual relationships. Another consideration is the level of ownership by others in the investee. The Group applies the criteria described in Note 2. Under U.S. GAAP, equity accounting is generally required when an investor s ownership interest is equal to or greater than 20% of the investee s total voting securities. In unusual situations where the ownership interest is less than 20% equity accounting may be appropriate if significant influence exists as the result of other contractual relationships and board representation. Income taxes Under French GAAP, the Group does not recognize deferred tax assets on net operating loss carryforwards or on temporary differences when the recovery of the related deferred tax asset is not probable. Under U.S. GAAP, deferred tax assets are recognized for deductible temporary differences and net operating loss carryforwards and are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax asset will not be realized. This difference in accounting policy has no effect on either net income or shareholders equity. Under French GAAP, deferred taxes should be discounted when the company has a reliable reversal plan for temporary differences. Under US GAAP, deferred taxes are not discounted. Goodwill Under French GAAP, goodwill should be amortized over its estimated useful life, which is generally 20 to 40 years. Moreover, an impairment test should be performed if there is an indication that the recoverable amount may be lower than the carrying amount. Under US GAAP, goodwill is no longer amortized since January 1, 2002 and an impairment test at reporting unit level should be performed once a year at least. 348

349 Specific transactions: Businesses sold by Vivendi Universal Upon forming the Group, Vivendi Universal sold certain subsidiaries and affiliates to the Group. According to French GAAP, these transactions were at market value which, in certain cases, has resulted in the generation of additional goodwill. Under U.S. GAAP, transfers of assets among entities under common control, including transfers of operating subsidiaries, are recorded at the predecessor s historical cost basis. Dilution profit or capital gain There is a difference between French and U.S. GAAP regarding the amount of dilution profit or capital gain due to the impact of U.S. GAAP adjustments on the carrying value of sold entities. These U.S. GAAP adjustments are posted as goodwill and therefore have been reported on this line item. Net investment in a foreign entity to be sold Under French GAAP, the Cumulative Translation Adjustment (CTA) should not be included in the carrying value of a net investment in a foreign entity to be sold for the impairment test. Under US GAAP, the CTA should be included in the carrying value of this investment, net of the CTA on the effective foreign currency hedge. Intangible Assets Start-up Costs Under French GAAP, certain costs, such as start-up costs, are capitalized and amortized over their useful lives or the duration of the contract, if applicable. Under U.S. GAAP, start-up costs are charged to expense in the period they are incurred. Other Intangible Assets Acquired in Business Combinations Under French GAAP, market shares acquired in a business combination should be accounted for as a separate intangible asset and are not required to be amortized. According to SFAS 141, market shares has been reclassified in goodwill as of January 1, They were previously amortized over their useful lives, up to 40 years. Under French GAAP, trademarks acquired in a business combination are not required to be amortized. According to SFAS 142, those intangible assets with a finite useful life are amortized over their useful lives, those intangible assets with an indefinite useful life are not amortized and are subject to an annual impairment test, or more frequently if circumstances dictate. Trademarks were previously amortized over their useful lives, up to 40 years. Tangible assets As mentioned in Note 2.2., the Group has changed its depreciation method for some previously recorded assets (from the double-declining-balance method to the straight-line method). Under French GAAP, this change is accounted for prospectively. Under US GAAP, this change is accounted for retrospectively. Public Service Contracts Commitments to Maintain and Repair Assets Under French GAAP, a few consolidated subsidiaries for specific contracts apply the accrue in advance method to account for repair costs. Under U.S. GAAP, the Group applies the expensed as incurred method for maintenance and repair expenditures. 349

350 Payments to Local Authorities Under French GAAP, these obligations are not recorded as a liability on the balance sheet. The debt service payments are expensed in a manner that results in the straight-line recognition of the total payments over the contract period. The payments made in early years of the contract period may exceed the straight-line expense amount. This difference is recorded as a prepaid expense and amortized to income over the remaining contract period so as to achieve the straight line expense amount throughout the contract period. Under US GAAP, the present value of the total obligation has been recorded as debt on the balance sheet. The interest element of the obligation is amortized to income so as to achieve a constant rate of interest on the outstanding liability. Reserves Under French GAAP, certain reserves and allowances may be provided when it is possible that those costs will be incurred. Under U.S. GAAP, contingent losses are accrued only if it is probable that a liability had been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. Under French GAAP, reserves related to fixed assets, inventories and investments in unconsolidated subsidiaries may be accounted as liabilities. Under U.S. GAAP, these reserves are recognized as a reduction of the carrying value of the related assets. Restructuring reserves Under French GAAP, restructuring costs should be accrued at the date of a company s commitment to an exit plan, generally when the company has a constructive obligation. For operating lease relative to unused assets, the reserve should be reduced of rental to be received if the asset will be sub-leased. In addition, for certain reserves, such as restructuring charges, additional criteria must be met. If these criteria are not met, the provision for these reserves and allowance may not be recognized. Reconciling adjustments were made to certain restructuring reserves because the probability criteria under SFAS 5 had not been met or the criteria for severance ratification and employee identification under EITF 94-3 had not been completed at the time the reserves were established under French GAAP. Reconciling adjustments were also made to reverse reserves recorded under French GAAP for estimates of future possible repair and maintenance costs. The conditions under which the reserves were recorded did not meet the liability criteria under SFAS 5. Securitization and discounting of receivables The Group has entered into various securitizations agreements, various discounting of receivables and sales of future receivables as described in Note 9 and Note 14. The securitization agreement signed in June 2002 with a SPE (Special Purpose Entity) described in Note 9 does not comply with all the requirements of SFAS 140 which notably states that the Originator and its affiliates cannot be entitled and obligated to repurchase or redeem the receivables, or have the ability to unilaterally cause the return of specific receivables, other than through exercise of a clean-up call. The call option held by the Group allows the repurchase of the receivables irrespective of any default payments. Consequently, the securitization is restated under U.S. GAAP. Under French GAAP, future receivables sale (see Note 14) are accounted as deferred income and the discounting of receivables are accounted for as a sale. Under U.S. GAAP, the deferred income is reclassified as long-term financial debt whereas the discounting of receivables does not qualify as a true sale in compliance with the provisions of SFAS

351 Financial Instruments Investment Securities Under French GAAP, investments in debt and non-consolidated equity securities are recorded at acquisition cost and an allowance is provided if management deems that there has been an other-than-temporary decline in fair value. Unrealized gains and temporary unrealized losses are not recognized. Under U.S. GAAP, investments in debt and equity securities are classified into three categories and accounted for as follows: Debt securities that the Group has the intention and the ability to hold to maturity, are carried at cost and classified as held-to-maturity. Debt and equity securities that are acquired and held principally for the purpose of sale in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses included in earnings. All other investment securities not otherwise classified as either held-to-maturity or trading are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in shareholders equity. Under U.S. GAAP, Vivendi Universal shares owned by the Group are accounted for as available-for-sale securities. Convertible bonds Under French GAAP, the accrual of redemption premium is optional. Under U.S. GAAP, the redemption premium is accrued as financial interest expense. The Group s convertible bonds include a beneficial conversion feature associated with the contingent conversion of the bonds into the Group s shares or Vivendi Universal s shares. The conversion was contingent upon the Group effecting an initial public offering of its shares, which it did in July, In accordance with French GAAP, the Group has not recorded financial interest expense in connection with the beneficial conversion feature. Under U.S. GAAP, a financial interest expense related to the feature computed upon the full amount of bonds eligible was recorded as of the date of the initial public offering. Treasury Shares Under French GAAP, shares of the Group s own stock owned by the Group and its subsidiaries are recorded as financial assets in statutory accounts and as a reduction of consolidated shareholder s equity, or as marketable securities in the consolidated financial statements if those shares are acquired to stabilize the market price or in connection with stock options granted to directors and employees. Under U.S. GAAP, treasury shares are recorded as a reduction of shareholders equity. Profit and loss on the disposal of treasury shares is recognized as an adjustment to shareholders equity. Derivative Financial Instruments According to French GAAP, the effects of financial instruments which qualify as hedging instruments are included in net income along with the corresponding hedged item. For those financial instruments which do not qualify as hedging instruments, a provision is recorded when their market value is negative. On January 1, 2001, Veolia Environnement adopted SFAS 133 Accounting for derivative instruments and hedging activities. According to SFAS 133, derivative financial instruments (including those embedded in other contracts) should be recorded on the balance sheet at their fair value. Changes to fair value are recorded depending on whether the derivative instrument is classified as a fair value hedge, a net investment in a foreign currency hedge or a cash-flow hedge, or is regarded as not being a hedging instrument under SFAS 133. The variations of fair value hedges are recorded in financial income (expenses). The effect on income is matched by the reevaluation of the hedged asset, debt or firm commitment which is also recorded in financial income (expenses). 351

352 The variations of net investment in a foreign currency hedges are recorded under cumulative translation adjustment. The variations of cash-flow hedges are recorded under other comprehensive income. They are recorded in income depending on the realization of the underlying cash-flow. The qualification of the hedge, results from the initial intention of the financial instrument as a means of hedging an asset, debt, firm commitment or future cash-flow. The effectiveness of the hedging instrument should be periodically tested to show the correlation between the changes in the hedging instrument and the hedged item. The ineffective part of the hedging instrument is systematically recorded to financial income (expenses). The derivative instruments used by Veolia Environnement as part of its risk management, but which do not constitute hedging instruments under SFAS 133 are recorded at their fair value, with changes to their value included in net income of the exercise. Due to its financial operations, Veolia Environnement is exposed to market risks (essentially due to changes in interest rate or exchange rates). Management uses these financial instruments to limit these financial risks. Nevertheless, some of the financial instruments used do not satisfy the criteria defined by SFAS 133 to qualify as hedging instruments. Consequently, the volatility of the market value of these derivative instruments is reflected in financial income (expenses). Stock Based Compensation Vivendi Universal has adopted stock option incentive plans that grant options on its common shares to certain directors and officers, including those of the Group. Vivendi Universal also maintains employee stock purchase plans that allow substantially all full-time employees of the Group and its subsidiaries to purchase shares of Vivendi Universal. According to the agreement signed on December 20, 2002 between Vivendi Universal and Veolia Environnement, Vivendi Universal assumes the responsibility for these plans until their maturity. In addition, Veolia Environnement has implemented a stock option plan attributed to a limited number of employees. Under French GAAP, common shares issued upon the exercise of options granted to employees and directors are recorded as an increase to share capital at the cumulative exercise price. In cases where Veolia Environnement shares are sold to employees through qualified employee stock purchase plans, they are reclassified from marketable securities to share capital and the difference between the carrying value of the treasury shares and the cumulative exercise price by the stock purchase plan is recognized as a gain or loss in the period that the shares are sold. In accordance with French GAAP, the Group has not recorded compensation expense on stock-based plans with a discounted exercise price of up to 20% off the fair value of the common shares at the date of grant. Under U.S. GAAP, APB opinion No. 25 defines plans that grant or sale of common shares to employees as compensatory if such plans are not open to substantially all employees and do not require the employee to make a reasonable investment in the shares, usually defined as no less than 85% of the market value at the grant date. If a plan is deemed to be compensatory, APB Opinion No. 25 requires that the compensation arising from such plans be measured based on the intrinsic value of the shares granted or sold to employees. For fixed plans remuneration is the difference between the exercise price of the stock option and the market value of the corresponding shares. For compensatory stock option plans, remuneration is recognized in the period for which the relative service is performed. Pension Plans Since January 1997, the Group has adopted an accounting policy to record pension obligations, covering all eligible employees, using the projected unit credit method. The transition obligation as of the date of adoption is amortized over the average residual life of the employees. Under U.S. GAAP, the projected unit credit method is required to be applied as of January 1, The transition obligation or fund excess determined as of January 1, 1989 is amortized over the average residual active life of the population that was covered under the plan at that date. 352

353 Under French GAAP, postretirement benefits other than pensions are recorded as expense when amounts are paid. Under U.S. GAAP, the Group must recognize an obligation for amounts to be paid under postretirement plans, other than pensions. A postretirement transition obligation may be determined as of January 1, 1995 and amortized over the estimated average life of retirees covered by the plan. Current period charges are based on estimated future payments to expected retirees. 29B NEW ACCOUNTING STANDARDS IN THE UNITED STATES EFFECTIVE IN 2003 In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143 Accounting for Asset Retirement Obligations which becomes effective in January This statement addresses accounting and reporting for obligations and costs, which will occur when the long-term assets are retired. Among other things, the statement requires that the present value of the liability associated with future asset retirements be recorded on the balance sheet when an obligation has been incurred and when it can be reasonably measured. The amortization of the capitalized costs and increase in the present value of the obligation which result from the passage of time, are charged to earnings. Under French GAAP, assets retirement obligations are measured at current cost, without effect of inflation and discounting. Under US GAAP, these obligations are measured at the present value, including the effect of inflation and discounting. The first application of this standard has a positive effect of 36.3 million on 2003 net income. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146 Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 replaces EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), and changes the timing of recognition for certain exit costs associated with restructuring activities. Under SFAS 146 certain exit costs would be recognized over the period in which the restructuring activities occur. Currently, exit costs are recognized when the Company commits to a restructuring plan. SFAS 146 is to be applied prospectively to exit or disposal activities initiated since December 31, 2002, though early adoption is allowed. The Company has adopted SFAS 146 for exit or disposal activities since January 1, The adoption of this standard do not have a material impact for the Group. In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ( FIN 45 ). FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The disclosure provisions of FIN 45 are effective for financial statements of annual periods that end after December 15, The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, The adoption of this interpretation do not have a material impact for the Group. In 2003, the FASB issued FASB Interpretation No. 46 Consolidation of Variable Interest Entities (FIN 46) and its amendment FIN 46R. This Interpretation as amended clarifies existing accounting principles related to the preparation of consolidated financial statements when the equity investors in an entity do not have characteristics of a controlling financial interest or when the equity at risk is not sufficient for the entity to finance its activities without additional subordinated financial support. Fin 46R requires a company to evaluate all existing arrangements to identify situations where a company has a variable interest in a variable interest entity and further determine when such interests require a company to consolidate the variable interest entities financial statements with its own. The Group must adopt this statement in 2004 and consolidate any variable interest entities for which it will absorb a majority of the entities expected losses or receive a majority of the expected residual gains. Management does not believe it has any variable interests, which will require consolidation or disclosure. In May 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement requires that an issuer classifies a financial instrument that is within its scope as a liability (or asset in some circumstances). Many of those instruments were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective on January 1, 2004 for the Company. The Group do not entered into or modified financial instruments within the scope of this 353

354 standard after May 31, We believe that the adoption of SFAS 150 on January 1, 2004 will not have any material effect on classification of financial instruments entered into before May 31, In May 2003, the EITF reached a consensus on issue N Determining the Classification and Benefit Attribution Method for a Cash Balance Pension Plan. The consensus requires certain cash balance pension plans to be accounted for as defined benefit plans. For cash balance plans described in the consensus, EITF requires the use of the traditional unit credit method for purposes of measuring the benefit obligation and annual cost of benefits earned, as opposed to the projected unit credit method. EITF is applicable as of the plan s next measurement date after May 28, 2003 if the cash balance pension plan had been accounting for as a defined benefit plan, and as of January 1, 2004 if it had been accounting for as a defined contribution plan. This consensus has no material effect on 2003 financial statements. The Group is currently assessing the impact as of January 1, C NEW ACCOUNTING STANDARDS IN THE UNITED STATES EFFECTIVE IN 2004 In November 2002, the EITF reached a consensus on issue No Accounting for Revenue Arrangements with Multiple Deliverables ( EITF ) on a model to be used to determine when a revenue arrangement involving the delivery or performance of multiple products, services and/or rights to use assets should be divided into separate units of accounting. Additionally, EITF addresses if separation is appropriate, how the arrangement consideration should be allocated to the identified accounting units. EITF will be applicable to agreements entered into on or after January 1, In addition, companies are permitted to apply EITF to all existing arrangements as the cumulative effect of a change in accounting principle in accordance with APB Opinion No. 20, Accounting Changes. The Group is currently assessing the impact on its financial statements. In May 2003, the EITF reached a consensus on issue N Determining Whether an Arrangement Contains a Lease, relating to new requirements on identifying leases contained in contracts or other arrangements that sell or purchase products or services. The evaluation of whether an arrangement contains a lease within the scope of SFAS n 13 Accounting for Leases should be based on the evaluation of whether an arrangement conveys the right to use property, plant and equipment. This consensus is effective prospectively for contracts entered into or significantly modified after January 1, The Group is currently assessing the impact on its financial statements. 354

355 29D.RECONCILIATION OF SHAREHOLDERS EQUITY AND NET INCOME TO U.S. GAAP The following is a summary reconciliation of shareholders equity as reported in the consolidated balance sheet to shareholders equity as adjusted for the approximate effects of the application of U.S. GAAP for the period ended December 31, 2003 and 2002, and net income as reported in the consolidated statement of income to net income as adjusted for the approximate effects of the application of U.S. GAAP for the period ended December 31, 2003 and 2002 (in millions of euros). At December 31, Shareholders equity as reported in the consolidated balance sheets 3, ,329.6 Adjustments to conform to U.S. GAAP: Goodwill (Gross) (878.1) (852.2) Goodwill accumulated amortization 12.7 (61.5) Dilution profit or capital gain/loss Intangible assets (Gross) (319.0) (343.2) Intangible assets depreciation (98.6) (119.8) Tangible assets accumulated amortization 26.0 Commitments to maintain and repair assets Payments to local authorities (176.3) (171.2) Reserves Treasury shares (90.1) (92.1) Other financial instruments (80.9) (243.9) Stock based compensation 1.0 (14.9) Pension plans (31.7) (9.9) Leases (property, plant & equipment) (2.9) (3.0) Use of equity method Others (33.1) (25.4) Tax effect of above adjustments U.S. GAAP Shareholders Equity 2, ,923.2 For the year ended at December 31, Net income as reported in the consolidated statements of income (2,054.7) Adjustments to conform to U.S. GAAP: Goodwill (Gross) 67.7 Goodwill accumulated amortization 90.9 (2,415.2) Dilution profit or capital gain/loss Intangible assets (Gross) (1.0) (10.5) Intangible assets accumulated amortization (8.2) (27.4) Tangible assets accumulated amortization 26.7 Commitments to maintain and repair assets (0.8) (9.9) Payments to local authorities (4.3) (1.6) Reserves 47.1 (48,2) Treasury shares Other financial instruments (8.8) Stock based compensation Pension plans (1.1) 2.1 Leases (property, plant & equipment) (0.1) (1.8) Use of equity method Others (9.9) (3.4) Tax effect of above adjustments (106.4) 58.4 U.S. GAAP Net Income (1,826.9) (1,988.8) 355

356 29E. PENSION PLAN AND OTHER POST RETIREMENT BENEFITS OTHER THAN PENSION PLANS Disclosures, presented in accordance with SFAS 132, are as follows (in millions of euros): Pension Benefits Other Benefits Change in benefit obligation Benefit obligation at beginning of year Service cost Interest cost Plan participants contributions Business combinations Disposals (281.7) (5.4) Curtailments (0.8) (16.9) Actuarial loss (gain) 28.9 (40.0) Benefits paid (28.4) (33.6) Special termination benefits Others (foreign currency translation) (36.4) (0.5) Benefit obligation at end of year Change in plan assets Fair value of plan assets at beginning of year Actual return on plan assets 50.3 (117.4) Group contributions Plan participant contributions Acquisitions Disposals (279.1) (3.8) Curtailments (7.5) Benefits paid (22.8) (29.0) Others (foreign currency translation) (46.3) (3.6) Fair value of plan assets at end of year Funded status of plan (231.7) (207.2) Unrecognized actuarial loss Unrecognized actuarial prior service costs 11.5 (71.2) Unrecognized actuarial transition obligation (5.7) (9.2) Others 0.7 (7.7) Accrued benefit cost (64.2) (31.0) Amounts recognized in the balance sheets consist of (in millions of euros): Pension Benefits Other Benefits Accrued benefit liability (including MLA) (208.5) (188.2) Prepaid benefit cost Net amount accrued for under U.S. GAAP (85.7) (49.7) Intangible assets (MLA)(a) Net amount recognized under U.S. GAAP (64.2) (31.0) (a) Adjustment for U.S. GAAP purpose: the benefit liability accrued under U.S. GAAP has to be the minimum between the accumulated benefit obligation net of fair value of plan assets and the net amount recognized under U.S. GAAP. 356

357 Net accruals in the accompanying consolidated balance sheet can be compared with balances determined under U.S. GAAP as follows (in millions of euros): Pension Benefits Other Benefits Net amount accrued for under U.S. GAAP (85.7) (49.7) Excess funding of plans recognized in income only when paid back to the Group Changes in scope (62.1) (64.5) Impacts of transition obligation, of prior service cost and of actuarial gains recognized with a different timing under local regulations Minimum liability adjustments (MLA) Net amount accrued for under French GAAP in the accompanying consolidated balance sheet (126.3) (95.4) Accrued (248.8) (233.7) Prepaid Net periodic cost under U.S. GAAP was as follows (in millions of euros): Pension Benefits Other Benefits Service cost Expected interest cost Expected return on plan assets (20.4) (69.7) Amortization of unrecognized prior service cost (1.6) (8.5) Amortization of actuarial net loss (gain) Amortization of net transition obligation (7.8) (3.1) Curtailments/Settlements (0.8) (11.5) Others 0,4 (10.0) Net periodic benefit cost under U.S. GAAP The retained assumptions are as follows: Pension Benefits Other Benefits Discount rate 5.4% 5.9% Expected return on plan assets 6.8% 7.4% Expected residual active life (in years) As regards health insurance plans, an increase of one percent in health expenses would not have any significant impact. 357

358 STATUTORY AUDITORS REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS This is a free translation into English of the statutory auditors report issued in the French language and is provided solely for the convenience of English speaking readers. The statutory auditors report includes for the information of the reader, as required under French law in any auditor s report, whether qualified of not, explanatory paragraphs separate from and presented below the audit opinion discussing the auditors assessments of certain significant accounting and auditing matters. These assessments were considered for the purpose of issuing an audit opinion on the consolidated financial statements taken as a whole and not to provide separate assurance on individual account caption or on information taken outside of the consolidated financial statements. Such report should be read in conjunction and construed in accordance with French law and French auditing professional standards. To the Shareholders of the Company Veolia Environnement, In compliance with the assignment entrusted to us by your shareholders annual general meetings, we hereby report to you, for the year ended December 31, 2003, on the audit of the accompanying consolidated financial statements of the company Veolia Environnement. The consolidated financial statements have been approved by the Board of Directors. Our role is to express an opinion on these financial statements based on our audit. I Opinion on the consolidated financial statements We conducted our audit in accordance with professional standards applied in France. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the group s financial position and of its assets and liabilities as of December 31, 2003, and of the results of its operations for the year then ended in accordance with accounting principles generally accepted in France. II Justification of assessments Pursuant to the provisions of Article L , Paragraph 2, of the French Commercial Code (Code de commerce) relating to the justification of our assessments, which provisions were introduced by the Financial Security Law of August 1, 2003 and apply beginning with the fiscal year just ended, we draw your attention to the following items: As set forth in Note of the notes to the consolidated financial statements, the new Spanish law of July 17, 2003, which governs the provisions of shareholders agreements relating to voting rights and transfers of shares, has not had any effect on FCC s corporate governance and control. Further, the Veolia Environnement group has not changed its method of accounting for its investment in FCC (proportional consolidation), applied since Our diligence relating to the audit of the consolidation scope confirms that the accounting method employed by the Veolia Environnement group is appropriate. As set forth in Note 2 of the notes to the consolidated financial statements, the management of Veolia Environnement is required to make estimates and assumptions that affect the amounts reported in its financial statements and the accompanying notes. Note 2 also specifies that actual results may differ significantly from these estimates. In connection with our audit of the consolidated financial statements as of December 31, 2003, we concluded that among the items that are subject to significant accounting estimates, long-term tangible and intangible assets, deferred tax assets and provisions for risks were capable of assessment on our part on the following points: With respect to the depreciation of long-term tangible and intangible assets as set forth in Note 2 of the notes to the consolidated financial statements, we evaluated the data and assumptions on which their estimates 358

359 were based, examined the company s approval procedure for these estimates and reviewed the calculations made by the company and explained in Notes 1.2.1, 3 and 4 of the notes to the consolidated financial statements, Regarding the deferred tax assets the terms of which are set forth in Note 2 of the notes to the consolidated financial statements, we evaluated the data and assumptions on which their estimates were based, in particular the recovery estimates for these assets set by the company s financial and tax departments, and reviewed the calculations made by the company and explained in Note 17 of the notes to the consolidated financial statements, With respect to the provisions for risks the terms of which are set forth in Note 2 of the notes to the consolidated financial statements, we evaluated the data and assumptions on which these provisions were based and reviewed the appropriateness of the information presented in Note 15 of the notes to the consolidated financial statements. Based on our assessments, we ensured that these estimates are reasonable. The assessments we conducted were undertaken in connection with our audit processes of the consolidated financial statements, taken as a whole, and therefore contributed to the formation of our unqualified opinion as disclosed in the first part of this report. III Specific Verification We also performed the verification of the information given in the management report of the group. We have no comment as to its fair presentation and its conformity with the consolidated financial statements. April 16, 2004 The Statutory Auditors RSM SALUSTRO REYDEL BARBIER FRINAULT & CIE ERNST & YOUNG Bernard Cattenoz Bertrand Vialatte Jean Bouquot Patrick Gounelle 359

360 The original in French reads: Mesdames, Messieurs les Actionnaires, RAPPORT DES COMMISSAIRES AUX COMPTES SUR LES COMPTES CONSOLIDÉS En exécution de la mission qui nous a été confiée par vos assemblées générales, nous avons procédé au contrôle des comptes consolidés de la société Veolia Environnement relatifs à l exercice clos le 31 décembre 2003, tels qu ils sont joints au présent rapport. Les comptes consolidés ont été arrêtés par le conseil d administration. Il nous appartient, sur la base de notre audit, d exprimer une opinion sur ces comptes. I Opinion sur les comptes consolidés Nous avons effectué notre audit selon les normes professionnelles applicables en France ; ces normes requièrent la mise en œuvre de diligences permettant d obtenir l assurance raisonnable que les comptes consolidés ne comportent pas d anomalies significatives. Un audit consiste à examiner, par sondages, les éléments probants justifiant les données contenues dans ces comptes. Il consiste également à apprécier les principes comptables suivis et les estimations significatives retenues pour l arrêté des comptes et à apprécier leur présentation d ensemble. Nous estimons que nos contrôles fournissent une base raisonnable à l opinion exprimée ci-après. Nous certifions que les comptes consolidés sont, au regard des règles et principes comptables français, réguliers et sincères et donnent une image fidèle du patrimoine, de la situation financière, ainsi que du résultat de l ensemble constitué par les entreprises comprises dans la consolidation. II Justification des appréciations En application des dispositions de l article L , 2 alinéa, du Code de commerce relatives à la justification de nos appréciations, introduites par la loi de sécurité financière du 1er août 2003 et applicables pour la première fois à cet exercice, nous portons à votre connaissance les éléments suivants : Comme le précise la note de l annexe, la loi espagnole du 17 juillet 2003 régissant les pactes extrastatutaires en matière de droits de vote et de transfert des droits sociaux, n a pas eu d impact sur le mode de fonctionnement des organes de direction de FCC et ses modalités de contrôle. Aussi le groupe Veolia Environnement a maintenu la méthode de consolidation de sa participation dans FCC (intégration proportionnelle) appliquée depuis Nos diligences relatives à l audit du périmètre de consolidation ont permis de confirmer le caractère approprié de la méthode comptable retenue par le groupe Veolia Environnement. Comme il est précisé dans la note 2.4 de l annexe aux comptes consolidés, la direction de Veolia Environnement est conduite à effectuer des estimations et à formuler des hypothèses qui affectent les montants figurant dans ses états financiers et les notes qui les accompagnent. Cette note précise également que les résultats réels futurs sont susceptibles de diverger sensiblement par rapport à ces estimations. Dans le cadre de notre audit des comptes consolidés au 31 décembre 2003, nous avons considéré que parmi les comptes qui sont sujets à des estimations comptables significatives, les actifs corporels et incorporels à long terme, les impôts différés actifs et les provisions pour risques étaient susceptibles d une justification de nos appréciations sur les points suivants : Pour ce qui concerne la dépréciation des actifs corporels et incorporels à long terme telle qu exposée aux notes 2.14 et 2.15 de l annexe aux comptes consolidés, nous avons apprécié les données et les hypothèses sur lesquelles se fondent leurs estimations, avons examiné la procédure d approbation de ces estimations par la société et avons revu les calculs effectués par la société et expliqués dans les notes 1.2.1, 3 et 4 de l annexe aux comptes consolidés, Concernant les impôts différés actifs dont les modalités de constitution sont exposées à la note 2.18 de l annexe aux comptes consolidés, nous avons apprécié les données et les hypothèses sur lesquelles se fondent leurs estimations, en particulier les prévisions de recouvrabilité de ces actifs établies par les directions financière et fiscale, et avons revu les calculs effectués par la société et expliqués dans la note 17 de l annexe aux comptes consolidés, S agissant des provisions pour risques dont les modalités de constitution sont exposées aux notes 2.21 et 2.25 de l annexe aux comptes consolidés, nous avons apprécié les données et les hypothèses sur lesquelles ces provisions ont été constituées et avons revu le caractère approprié des informations données dans la note 15 de l annexe aux comptes consolidés. Dans le cadre de nos appréciations, nous nous sommes assurés du caractère raisonnable de ces estimations. Les appréciations ainsi portées s inscrivent dans le cadre de notre démarche d audit des comptes consolidés, pris dans leur ensemble, et ont donc contribué à la formation de l opinion sans réserve, exprimée dans la première partie de ce rapport. 360

361 III Vérification spécifique Par ailleurs, nous avons également procédé à la vérification des informations données dans le rapport sur la gestion du groupe. Nous n avons pas d observation à formuler sur leur sincérité et leur concordance avec les comptes consolidés. Le 16 avril 2004 Les Commissaires aux comptes RSM SALUSTRO REYDEL BARBIER FRINAULT & CIE ERNST & YOUNG Bernard Cattenoz Bertrand Vialatte Jean Bouquot Patrick Gounelle 361

362 RESPONSIBILITY FOR BASE PROSPECTUS Individuals assuming responsibility for the Base Prospectus In the name of the Issuer Having taken all reasonable measures for this purpose, we declare that the information contained in this Base Prospectus is true to our knowledge. All the information necessary for investors to be able to base their judgments on the business, activity, financial situation, income and outlook of the Issuer and on the rights attached to financial instruments is included in the Base Prospectus and there has been no omission of material facts. Veolia Environnement avenue Kléber Paris On 8 November 2005 Duly represented by Henri Proglio, chairman of the board and CEO In accordance with articles L and L of the French Code monétaire et financier and with the General Regulations (Réglement général) of the Autorité des marchés financiers (AMF), in particular articles to , the AMF has granted to this Base Prospectus the visa n on 8 November This document may only be used for the purposes of a financial transaction if completed by Final Terms. It was prepared by the Issuer and its signatories assume responsibility for it. In accordance with article L I of the French Code monétaire et financier, the visa was granted following an examination by the AMF of whether the document is complete and comprehensible, and whether the information it contains is coherent. It does not imply that the AMF has verified the accounting and financial data set out in it. This visa has been granted subject to the publication of Final Terms in accordance with article of the AMF s General Regulations, setting out the terms of the securities being issued. 362

363 Au nom de l émetteur RESPONSABILITÉ DU PROSPECTUS DE BASE Personnes qui assument la responsabilité du présent Prospectus de Base Après avoir pris toutes mesures raisonnables à cet effet, nous déclarons que les informations contenues dans le présent Prospectus de Base sont, à notre connaissance, conformes à la réalité. Elles comprennent toutes les informations nécessaires aux investisseurs pour fonder leur jugement sur le patrimoine, l activité, la situation financière, les résultats et les perspectives de l Emetteur ainsi que sur les droits attachés aux instruments financiers et elles ne comportent pas d omission de nature à en altérer la portée. Veolia Environnement avenue Kléber Paris le 8 Novembre 2005 Représenté par Henri Proglio, Président-Directeur Général En application des articles L et L du Code monétaire et financier et de son règlement général, notamment des articles à , l Autorité des marchés financiers a visé le présent prospectus de base le 8 Novembre 2005 sous le numéro n Ce document ne peut être utilisé à l appui d une opération financière que s il est complété par des conditions définitives. Il a été établi par l émetteur et engage la responsabilité de ses signataires. Le visa, conformément aux dispositions de l article L I du code monétaire et financier, a été attribué après que l AMF a vérifié si le document est complet et compréhensible, et si les informations qu il contient sont cohérentes. Il n implique pas l authentification par l AMF des éléments comptables et financiers présentés. Ce visa est attribué sous la condition suspensive de la publication de conditions définitives établies, conformément à l article du règlement général de l AMF, précisant les caractéristiques des titres émis. 363

364 ABN AMRO Bank N.V. 250 Bishopsgate London EC2M 4AA Royaume Uni Crédit Commercial de France 103, avenue des Champs Elysées Paris France IXIS Corporate & Investment Bank 47, quai d Austerlitz Paris Cedex 13 France Société Générale 29 boulevard Haussmann Paris France VEOLIA ENVIRONNEMENT avenue Kléber Paris France Tel: +33 (0) DEALERS Barclays Bank PLC 5 The North Colonnade Canary Wharf London E14 4BB Royaume Uni Credit Suisse First Boston (Europe) Limited One Cabot Square London E14 4QJ Royaume Uni Merrill Lynch International Merrill Lynch Financial Centre 2 King Edward Street London EC1A 1HQ Royaume Uni ARRANGER ABN AMRO Bank N.V. 250 Bishopsgate London EC2M 4AA Royaume-Uni BNP PARIBAS 10 Harewood Avenue London NW1 6AA Royaume Uni Deutsche Bank AG, London Branch Winchester House 1 Great Winchester Street London EC2N 2DB Royaume Uni Natexis Banques Populaires 45, rue Saint Dominique Paris France The Royal Bank of Scotland plc 135 Bishopsgate London EC2M 3UR Royaume Uni FISCAL AGENT, PAYING AGENT, CALCULATION AGENT, REDENOMINATION AGENT AND CONSOLIDATION AGENT Barbier, Frinault et Cie Ernst & Young Tour Ernst & Young Faubourg de l Arche Paris-La Défense Cedex France BNP Paribas Securities Services Immeuble Tolbiac 25 quai Panhard Levassor Paris Cedex 09 France AUDITORS to the Issuer Salustro Reydel 8, avenue Delcassé Paris Cedex 08 France to Veolia Environnement Clifford Chance Europe LLP 112, avenue Kléber Paris France LEGAL ADVISERS 364 to the Dealers Linklaters 25, rue de Marignan Paris France

365