VEOLIA PPP FINANCE: A « société de crédit foncier » in Veolia Environnement

1. VEOLIA PPP FINANCE:A « société de crédit foncier »in Veolia Environnement Denis DAUMAL Markets and Analysis Director

2. Veolia Environnement’s current risk profile • Veolia Environnement is a global leader in environment services in the concessionary companies sector. • Veolia Environnement is involved in • water distribution, • waste treatment sector, • Energy services, • Public transportation. • Concessionary contracts with state, regional and local authorities account for two thirds of VE’s turnover. Exposure to emerging markets is limited, with less than 10% of sales originating from countries with a credit rating lower than A3.

3. The conversion to IFRS standards • The implementation of the new international accounting standards (IFRS) led to a reconsideration of a number of tangible assets within the Veolia Environnement (VE) group that have been used under concession agreements. • Where VE has to construct infrastructure and subsequently manage it, at the end of the agreement the infrastructure becomes the asset of the contractor. As a consequence, these infrastructures are registered as financial assets instead of a tangible assets • VE therefore operates as a financial intermediary and this business activity is undertaken across the group. • It is predominant in areas that generate stable, recurring cash-flows. • This accounting position, which is a true reflection of the business situation, led the group to reconsider the presentation of its assets and liabilities statement: it substituted a line of financial receivables owed by public authorities or large companies, for €2 billion in tangible assets. This situation has also enabled the group to communicate to shareholders and investors a more realistic overview of the risk profile and balance sheet position, principally by reducing the group’s financial debt.

4. Issues relating to financing VE’s financial receivables • The group undertook a study on financing these receivables • 3 options were studied: • Securitisation of some part of the activities and their dedicated assets • « anglo-saxon » Covered Bond issue • Creation of a « société de crédit foncier », wich will issue « obligations foncières » • Quickly the Société de Crédit Foncier , « SCF », appeared as the good way to follow.

5. The VE Finance Project: a credit institution (« Société de Crédit Foncier », SCF) • A SCF is a regulated credit institution, which can only hold receivables from public sector entities (or mortgages that are not included in this project) and which may issue « obligations foncières » for these receivables. • « Obligations foncières » benefit from special, prudent treatment (10% weighting for the ESR) and belong to the very large class of European securitized assets, totalling €1,700bn. • SCF’s operate under the dual supervision of the French banking regulatory body (Commission Bancaire, CB) and a "specific supervisor", approved by the CB and primarily responsible for certifying the eligibility of receivables and adherence to specific SCF regulations. • Furthermore, the SCF must be managed (via an agreement) by a first tier credit institution, which must ensure banking regulations are adhered to and ALM management (currency risk, interest rate risk, early redemption risk, etc.) is of the requisite quality.

6. The SCF: a secure, competitive financing vehicle • The reform of SCFs in 1999 aimed to establish Paris as a more attractive location and to create a new refinancing tool for long-term credit as an alternative to FCCs, the French securitisation vehicle, which does not rely on the credit quality of its shareholders. • The SCF is an extremely safe vehicle, offering: • a targeted purpose, • asset quality governed by law, • a strengthened, prudent scheme (specific monitoring and over collateralization), • covered bond privileges, • a special scheme for public authority procedures at all stages (agreement extensions, non-extensions of shareholder bankruptcies, with the exception of optional nullification during the suspect period, etc.).

7. Where are we on the project • On 28 November 2006, Veolia PPP Finance was granted a license by the Banque de France’s Credit Institution and Investment Firms Committee (Comité des Etablissements de Crédit et des Entreprises d’Investissements - CECEI) to operate as a société de crédit foncier (SCF). • The management agreement between Veolia PPP Finance and Société Générale is finalised, and also approved by the CECEI. • We are now working on the presentation of the project to the rating agencies, which is a specific job because of the strong innovative aspect of the project. • Veolia PPP Finance is actually the first SCF out of the financial system, as long as its main shareholder is a corporate • The subject is for us to demonstrate that the flows capted by the SCF is absolutely immune from an operational risk.

8. Veolia PPP Finance: conclusion • To summarize, VEOLIA PPP FINANCE is: • A French Credit Institution, which benefits of the strength of the French Banking System • A Société de Crédit Foncier, agreed, supervised by a specific controller, and protected by a super privilege • Finally, A subsidiary of Veolia, a French Group listed on the New-York Stock Exchange, and by that forced to be Sarbannes Oxley compliant. For all these reasons, Veolia PPP Finance will offer to its bonds holders, a very high level of security, totally delinked from Veolia’s risk profile

9. 4,282 4500 +10.8% 3,863 4000 3,467(1) Repayment of operating financial assets Cash flow from operations 3500 +8.9% 3000 2500 2004 2005 2006 Cash flow generation = Cash flow from operations + Repayment of operatingfinancial assets 762 630 477 Veolia Environnement at a glance: 2006 key figures (in €m and at current exchange rates) (1) Excludes discontinuedoperations. 28,620 25,570 22,792 +11.9% Consolidated revenue 2,222 1,904 1,629 +16.7% +21% Recurring net income Recurring operating income