ANALYSIS

INFRASTRUCTURE JUNE 25, 2012

Table of Contents:

SUMMARY 1 COMPARATIVE STRATEGIES 2 WATER & WASTE WATER 4 WASTE 6 INTERNATIONAL OPERATIONS 8 OTHER BUSINESSES 9 FINANCIAL ANALYSIS 10 MOODY’S RELATED RESEARCH 14

Analyst Contacts:

LONDON +44.20.7772.5454

Niel Bisset +44.20.7772.5344 Senior Vice President niel.bisset@moodys.com

Monica Merli +44.20.7772.5433 Managing Director – Infrastructure Finance monica.merli@moodys.com

This Analysis provides an in-depth discussion of credit rating(s) for Suez Environnement Company and Veolia Environnement S.A. and should be read in conjunction with Moody’s most recent Credit Opinion and rating information available on Moody's website.

SUEZ Environnement vs Veolia Environnement A comparison of two environmental services companies

Summary

This report compares two French environmental services companies, Veolia Environnement (Baa1 stable) and SUEZ Environnement (A3 stable) whose credit profiles share several similarities including leading shares in the French water, waste water and waste markets, and a high degree of geographic diversification. Their exposure to the economic cycle varies by activity, and is moderated by the essential nature of their services: delivering water & waste services to individuals and small businesses, often through a contract with local municipalities. Both companies’ earnings show relatively low volatility, thanks to the nature of their services and granularity of contracts - but both are quite highly geared. At the same time they face similar challenges, including pressure on profitability from sluggish economies; environmental concerns in certain European markets; and the risks associated with managing substantial international investments.

The rating differential between the two factors in SUEZ Environnement’s stronger business and financial risk profiles. SUEZ Environnement’s better business risk profile reflects its more settled strategy and track record of relatively stable EBITDA margins in recent years; the additional pressures being experienced by Veolia in French water; and the greater complexity and geographical diffuseness of the Veolia group, although the latter enjoys some risk diversification from its Energy Services business.

SUEZ Environnement operates with lower overall financial leverage than Veolia, although it carries sufficient debt at its subsidiaries to warrant notching down to A3 from its consolidated credit quality which we assess in the mid single-A range. The ratings differential also incorporates an element of execution risk as Veolia looks to reshape the group in line with its new strategy which was announced in December 2011. To the extent that Veolia delivers on its strategy, and lowers leverage, the differential between the two ratings could narrow.

The report compares and contrasts the companies in the following key areas and notes how differences are factored into their ratings. We also consider how these differences might narrow, and the potential for ratings convergence.

» Comparative strategies. We think SUEZ Environnement’s strategy has been more settled and consistent than Veolia’s in recent years. A more settled business profile is likely also to differentiate it from Veolia over 2012 and 2013 during Veolia’s ‘Transition Period’.

» Water & waste water. We think SUEZ Environnement’s water division has a stronger business risk profile overall, and is not suffering the same pressure on margins being experienced by Veolia’s French water business. To the extent pressure on Veolia’s margins begins to abate, as its re-organisation in France bears fruit and returns in China grow, that differential could narrow.

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» Waste. Overall we view the business risk profiles as broadly similar.

» International operations. While international markets present a control challenge for both companies, we see SUEZ Environnement’s international presence as lower risk because it has a more concentrated presence in fewer countries, and because a substantial proportion of its investment (in Chile and the US) is in regulated assets. As Veolia delivers on its planned simplification of the group, the differential in risk profile should narrow.

» Other businesses. Veolia’s Energy Services division provides some risk diversification from its core businesses.

» Financial analysis. Veolia has historically operated with more leverage than SUEZ Environnement. The difference should narrow over the next two years as Veolia executes on its strategy to delever in line with its evolving business risk profile. Both companies maintain solid liquidity.

Comparative Strategies

Water and waste industry dynamics

Both Veolia and SUEZ Environnement operate within sectors which benefit from positive underlying dynamics. These are more marked in emerging economies characterised by population growth, the trend to urbanisation and industrialisation, and an expectation of rising living standards. Together with public concern at the impact of climate change on scarce resources and environmental regulation, these positive underlying factors are combining (i) to increase demand for existing technologies for the provision of water, waste water and waste management services; and (ii) to extend demand into new services and technologies which, for example, facilitate water preservation, or the ongoing shift towards waste reclamation.

Positive long-term drivers of growth are partly offset by the negative impact of environmental concerns on water consumption and slowing waste volume growth – in certain Western countries. The steady, structural, contraction in like-for-like water volumes in certain European countries, for example, is driven mainly by a more ‘resource-aware’ population rather than de-industrialisation. Moreover, public sector provision of water services continues to be the norm in most countries, although cash constraints may provide growth opportunities in the future.

Longer term trends are not immune from short-term economic pressures, especially in the waste business. More generally, pricing pressure on the services provided by both companies has become more acute in more mature markets during the economic downturn.

Strategies have much in common

The strategies of Veolia and SUEZ Environnement have much in common. Both have diversified beyond strong positions in France in water and waste, and developed sizeable businesses across Europe. Over the last decade, environmental concerns and slow growth rates in mature economies have prompted expansion into regions, such as Asia, where demand for their services is boosted by structural growth drivers.

Both companies are flexible in adapting to local models of water provision. Where provision of water services has migrated to the private sector, most arrangements are based on some variation on the concession model (Délégation de Service Public in France), under which the water company is granted a long-term contract to provide water and waste water services in return for some capital investment in pipes or treatment facilities. Few markets operate under a formal regulatory framework (Veolia is in

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the process of selling its UK regulated water business), although SUEZ Environnement holds significant investments in regulated assets in Chile and the United States.

Growth rate targets of both companies tend to be benchmarked against expected GDP growth plus some additional margin for capital investment and additional services provided. In tough economic conditions both have shown the ability to cut costs and moderate growth and maintenance capex to preserve cash, even if at the expense of growth. As capital investment is reduced, each company will aim to leverage its technical expertise, for example in designing and managing water and waste water systems, in less capital-intensive agreements.

While having much in common, Veolia’s greater scale and diversification had arguably been achieved at the expense of increased complexity and a reduced focus by comparison with SUEZ Environnement. A high proportion of the aggregate €818 million impairment charges and reorganization costs, and consequent two profit warnings, reported by Veolia in 2011 reflect the difficulty of controlling a wide-ranging group of businesses. The diffuseness of its presence across more than 70 countries meant that several operations lacked the critical mass required to be competitive and created a distraction for management. Veolia’s new strategy, announced in December 2011, aims to lower its overall risk profile by simplifying the group, reducing capital intensity, and focusing on free cash flow generation. It provides for:

i) the restructuring of the Group’s divisions and portfolio of activities through a substantial €5 billion divestment programme over 2012-13 which will see it reduce the number of countries in which it operates to around 40 from more than 70.

ii) a reduction in net financial debt from €14.7 billion at end-2011, to under €12 billion by end-2013.

iii) a reduction in its cost base by streamlining and introducing greater standardization of management structures across the Group, titled ‘Convergence’.

iv) leveraging existing positions of strength in four main areas (Water and Energy Services in CEE, Water in China, and in PFI in the UK) in order to maintain momentum as it de-leverages and sells assets.

Overall we think SUEZ Environnement’s strategy has been more settled and consistent than Veolia’s in recent years. A more settled business profile is likely also to differentiate it over 2012 and 2013 during Veolia’s ‘Transition Period’, and this is a factor in the current differential between our ratings for the two companies. As Veolia’s new strategy is put into effect, it should benefit progressively from a more focused asset portfolio and a reduced cost base. However, Veolia’s Baa1 rating also takes account of uncertainties around the timing and extent of delivery of the strategy in current challenging markets, as well as the costs associated with closing operations in more than 30 countries. Although Veolia has a reasonable track record in recent years of realising targeted disposal proceeds, completing the planned divestments (which include Veolia TransDev, its transportation business; its US waste operation; and the UK water division) on a timely basis will present a considerable challenge, in our view.

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Water & Waste Water

France

France is by some distance the most important market for both companies in their respective Water operations: it accounted for 36% of Veolia’s Water division’s €12.6 billion turnover in 2011, and 32% of SUEZ Environnement’s total water revenues. Veolia (through Compagnie Générale des Eaux) and SUEZ Environnement (Lyonnaise des Eaux) have leading positions in what is a heavily-concentrated market, with shares of about 40%, and 20% respectively in potable water. Almost three quarters of the French water supply market is held by private operators (and slightly more than half of the wastewater market) under long term contracts. Under these concession agreements, typically of 10-20 years duration, the water company undertakes to operate and maintain the local authority’s infrastructure and to provide water and other services to customers in exchange for a fee indexed to a basket of costs. Both companies have thousands of such agreements, which with typical renewal rates of around 90% provide a stable if low growth revenue stream.

FIGURE 1

Water Revenues by Geography Veolia Environnement

France -36%

Germany -12%

UK - 6%

CEE - 8%

Rest of Europe -6%

US - 6%

Middle-East - 2%

Oceania -2%

Asia - 12%

Rest of the world - 8%

Source: Veolia’s 2011 annual report, SE’s 2011 results presentation

Suez Environnement

France -32%

Spain - 17%

USA - 12%

Chile/South America -11%

Middle-East/N. Africa - 11%

China/Asia - 7%

Australia/ Oceania -5%

Other Europe - 5%

However, the profitability of French water operations is under pressure for two reasons: (i) a steady, structural, decline in water volumes consumed of between 0.5% to 1% a year, which will continue to exert negative pressure on turnover growth and impact margins. This can be to an extent offset by indexation increases, new services and efficiencies, but customers are increasingly looking to maximize their share of savings; and (ii) in the last couple of years, cash-constrained municipalities have negotiated more aggressively at contract renewal, with threats on occasion to re-municipalise the management of water infrastructure.

Negative pressure on profitability has been more acute for Veolia than SUEZ Environnement, reflecting that it has been experiencing more intense pricing pressure on the large contracts it has been renegotiating, and has a larger cost base. The €107 million decline in operating cash flow generated by Veolia’s French water business in 2011 was the main reason for lower Water division cash flows overall. The decline in the operating cash flow margin of Veolia’s global Water business to 11.4% in 2011 from 12.4% in 2010 implies that margins achieved on recent renewals (for example on the SEDIF contract) have been both lower than expected and lower than its portfolio average. The company’s reorganisation of its water operations in France as part of Convergence Phase 2 is designed

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to reduce its cost base by replacing the current territorial organisation along functional lines. This should allow it to reduce costs by working ‘more smartly’ and reducing headcount. From 2012 Veolia plans to eliminate 110 local agencies, reduce the numbers of regions and centers, and create three vertical organisations dealing with business development, customer services and operations.

More positively, we note that Veolia has now been through the renewal process for its largest French contracts and has no significant water contract up for renewal in France before the Marseille contract in 2013 (which generated €112 million of revenue in 2010), which should begin to ease the pressure on margins.

Outside France

Strong positions at home have incentivised both companies to develop their activities beyond France. Roughly half of VE’s main other water markets are in Europe including Central & Eastern Europe (9% of water revenues), where it recently added the Sofia contract to its portfolio, and Germany (12%). It has also made significant investments in Asia, and especially China where it has a long-term presence through contracts of up to 50 years. SE’s largest market outside France is Spain where it owns 75.4% of Aguas de Barcelona (Agbar), the market leader, which generated 17% of 2011 water revenues. Beyond Europe it has significant investments in regulated assets in North America through its ownership of United Water (rated Baa1), and in Chile through Agbar. It is developing its presence in Asia, but this remains smaller than Veolia’s.

Contract structures outside France vary by market. These can either be capital intensive, requiring the companies to invest in infrastructure in exchange for the right to distribute water and provide waste water services on a long-term basis, or structured as O&M or management contracts requiring little investment. Veolia, for example, had €1.8 billion capital employed in Asia at end-2011, 27% of the division’s €6.7 billion, and more than the €1.2 billion capital employed in France. SUEZ Environnement also has significant capital invested abroad, for example in its regulated assets in Chile, which we estimate represent a significant proportion of the €6.4 billion capital employed in the Water Europe segment at end-2011.

SUEZ Environnement’s returns have shown more stability

Comparing the profitability of both companies’ water operations is difficult because of the wide range of contract structures in their portfolios, and differences in scope. Exhibit 7 on page 8 highlights how SUEZ Environnement’s EBITDA margin has been consistently higher than Veolia’s, although much of the differential will reflect: (i) its higher proportion of regulated assets; (ii) that much of its design and construction business is captured within its International division, while it forms part of Veolia’s Water division result in the shape of Veolia Water Technologies & Networks; (iii) that Veolia’s margin is stated net of renewal expenses; and (iv) Veolia’s greater proportion of operating financial assets.

However, the trends in margin and ROCE since 2007 point to more resilience and stability in SUEZ Environnement’s business. Its post tax ROCE at 9.7% in 2011 showed a recovery over the 7.9% reported in 2010. Veolia’s pre-tax ROCE, by contrast, has been in steady decline since 2007 and declined further in 2011, much of it attributable to pressure in France water, and the so far lower returns from substantial capital invested in Asia.

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FIGURE 2

Comparison of Water Divisions’ ROCE Veolia's Pre-Tax Water ROCE

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2007 2008 2009 2010 2011 Source: Companies’ annual reports and annual presentations

Suez's Post-Tax Water Europe ROCE

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Moody’s considers SUEZ Environnement’s water division has a stronger business risk profile than Veolia, which contributes to the rating differential between the two companies. To the extent pressure on Veolia’s margins begins to abate, for example as its re-organisation in France bears fruit and returns in China grow, that differential could narrow.

Waste

Waste operations are more exposed to the economic cycle than water, reflecting the higher proportion of industrial and commercial customers (estimated in the range of 60%-70%), contract terms more often linked to volumes collected or processed, and the exposure to paper and scrap metal prices of the sorting and recycling business (roughly 25% and 15% respectively of SUEZ Environnement’s and Veolia’s waste revenues). While the impact on municipal collection (roughly 30%-40% of the business) has so far been muted, the economic cycle does affect the higher value-added recycling business through secondary raw material prices both directly on revenues, and indirectly as depressed prices decrease the economic rationale behind recycling, so reducing treated volumes.

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FIGURE 3

Waste Revenues by Geography Veolia Environnement

France -35%

Germany -12%UK - 17%

CEE - 3%

Rest of Europe -6%

US - 13%

Middle-East - 1%

Oceania -7%

Asia - 2% Rest of the world - 4%

Source: Veolia’s 2011 annual report, SE’s 2011 results presentation

Suez Environnement

France -48%

Benedelux -21%

UK/Scandinavia - 16%

Australia -9%

Other - 6%

Both companies’ waste activities are concentrated in France and Europe, where Veolia and SUEZ Environnement generated 73% and 85% of 2011 divisional revenues respectively. As Veolia completes the planned sale of its US waste activities, its mix will more closely resemble its peer’s. With barriers to entry low in the collecting and elimination of non-hazardous waste, both companies continue to invest in activities up the ‘value’ chain which can include sorting, hazardous materials and recovery. For example, SUEZ Environnement commissioned its €200 million energy from waste facility at Baviro in the Netherlands in 2011; and in the UK, where Veolia had €1.1 billion capital employed at end-2011, or 20% of its divisional investment, it leads the private finance initiative market with twelve long-term contracts with local authorities for the recovery of materials and energy from waste. While energy from waste contracts are generally structured on a ‘deliver or pay’ basis, and returns on capital employed are higher, we note that as the business mix shifts towards a higher recovery content, the exposure of both companies to materials and energy price fluctuations will rise, implying some increase in business risk.

Within Europe, SUEZ Environnement is more focused in the north, where it has strong positions in Benedelux, the UK and Scandinavia. Veolia has strong positions in the UK and in Germany. Its wider geographical reach also positioned it in southern Europe and north Africa, where it incurred the substantial losses in 2011 which prompted its strategic rethink.

Waste’s relative sensitivity to the economic cycle is reflected in the variability of both companies’ cash flow generation over 2007-2011 – caused by changes in volumes and secondary raw materials’ price movements - although Veolia’s 2011 result was also negatively affected by the €118 million exceptional losses in Italy, the US and North Africa. A gradual, but steady, decline in profitability from around 16% in 2007 to 13%-14% in 2011 is also apparent for both companies – reflecting the negative impact of lower volumes and the difficulty of reducing costs much further. Moody’s estimates that Veolia’s recycling business has more sensitivity to commodity price movements than SUEZ Environnement’s. In 2011 for example Veolia stated that the rise in secondary raw material prices had a favourable impact on operating cash flow of about €35 million.

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FIGURE 4

Comparison of Waste Divisions’ Margins Veolia Environnement's Waste Margin (OCF Before WCC)

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2007 2008 2009 2010 2011 Source: Companies’ annual reports and annual presentations

Suez Environnement's Waste Europe Margin (EBITDA)

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Overall Moody’s views the business risk profiles of the two waste divisions as broadly similar.

International Operations

The charts below show how France and Europe generated the majority of revenues for both companies in 2011, accounting for 71% of SUEZ Environnement’s turnover, and 75% of Veolia’s. Operations beyond the mature economies of Western Europe nevertheless represent a substantial investment in growth.

FIGURE 5

Total Revenues by Geography Veolia Environnement

France -39%

Germany -9%UK - 9%

CEE - 9%

Rest of Europe -9%

US - 8%

Middle-East - 2%

Oceania -3%

Asia - 7%Rest of the world - 5%

Source: Veolia’s 2011 annual report, SE’s 2011 results presentation

Suez Environnement

France -36%

Benedelux -13%Spain - 10%

UK - 6%

Other Europe -6%

USA - 5%

Chile - 4%

Australia -7%

Asia - 4%

Other - 9%

The outlook is for SE to increase revenues generated outside Europe as it invests in emerging markets with growing populations and infrastructure needs, for example in South America, Australia and China. Its geographical presence will accordingly continue to shift gradually, until Europe represents about two thirds of revenues. Veolia, by contrast, is likely to see the proportion of non-European revenues remain at around one quarter, with growth in China offsetting the effect of the sale of its US

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waste business and withdrawal from more peripheral markets. Within Europe, it sees a shift towards faster growing CEE countries and away from France and southern Europe.

While acknowledging a more cautious approach to capital deployment (for example, through a preference for O&M contracts over more capital intensive concession agreements) and the use of local partners where capital is invested, Moody’s considers that international activities often imply incremental risk. The results of both companies reflected this in 2011. Veolia reported non recurring operating cash flow losses of €117 million in Southern Europe, North Africa and Marine Services in the Gulf of Mexico, and impairment charges and reorganisation costs of €818 million, of which €520 million against its Italian business – results which prompted it to reduce the number of countries in which it operates. SUEZ Environnement’s construction subsidiary, Degrémont, experienced losses in relation to the construction of the huge Melbourne desalination plant (with initial delivery of water due by mid-2012 and full capacity by end-2012). Although there have been no technological hitches, poor weather and industrial action caused a 6 month delay on completion of the project. This had a negative impact of €153 million on EBITDA in 2011 as a result of cost overruns and liquidated damages, and the company and its construction partner have lodged a claim for more than AUD 1 billion. Moody’s notes the group’s argument that these issues represent a ‘one-off’, and that it retains the 27 year O&M contract on the plant, but it is likely that it will in future limit the scale of overseas contracts it takes on in the Design-Build market segment.

While international markets present a control challenge for both companies, we see SUEZ Environnement’s international presence as lower risk because it has a generally more concentrated presence in fewer countries, and because a substantial proportion of its investment (in Chile and the US) is in regulated assets. As Veolia delivers on its planned simplification of the group, the differential in risk profile should narrow.

Other Businesses

In addition to its water and waste businesses which generated about 70% of operating cash flow, the Veolia group includes Energy Services and Transportation divisions. It is currently selling the latter, which has delivered consistently weak profitability. However, the Energy Services division should continue to generate relatively stable cash flows, and helps diversify risk from its core businesses.

It includes a range of activities where the group, through its subsidiary Dalkia, acts as a subcontractor for public and private customers to manage or maintain energy installations. These include heating and cooling networks and decentralised electricity generation, on a district scale, for industrial and commercial customers or for households.

The management of district heating and cooling networks often requires significant long-term investments, and therefore involves contracts with municipalities for up to thirty years. The contracts include indexation and pass-through clauses that will cover variations in energy prices, although these can be subject to some regulatory risk. Although Veolia will usually retain an exposure as an incentive to deliver efficiencies, the long-term nature of the contracts ensures relatively stable cash flows. Energy services in Central and Eastern European countries where demand for heat is high and where there are significant modernisation investment needs is one of Veolia’s four key platforms for growth, as reflected in its October 2011 purchase of Warsaw’s district heating networks.

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Financial Analysis

Both companies’ financial risk profiles are underpinned by the cash flow generated by their operating businesses, much of which is based on revenues derived from multi-year contracts to deliver essential services, mainly to relatively low risk counterparties in the public sector. Although France accounts for 36% to 39% of turnover, their portfolios of thousands of contracts are diversified by sector, service and contract type, and geography. This helps mitigate overall cash flow volatility even if the waste business’s relatively high exposure to the economic cycle has been apparent during the downturn and subsequent recovery in the last three years.

SUEZ Environnement has shown less volatility overall

Veolia’s cash flow generation generation has shown quite good stability in absolute terms through a difficult economic period. However, Moody’s sees the comparatively lower volatility of SUEZ Environnement’s profitability on the following measures as reflective of a lower business risk profile overall (although the picture is distorted by the exceptional losses both companies suffered in 2011):

» In absolute terms the 7.4% increase in SUEZ Environnement’s EBITDA in 2011 to €2.5 billion (partly boosted by the first full year consolidation of Agbar) contrasted with the deterioration in Veolia’s profitability in 2011, when operating cash flow dipped by 8% to €3.7 billion, thanks mainly to pressure on domestic water margins and the one-off problems in waste;

FIGURE 6

OCF/EBITDA by Division VE's OCF before WCC (EUR mn) 2007 2008 2009 2010 2011

Water 1,595 1,532 1,555 1,514 1,444

Waste 1,456 1,358 1,176 1,284 1,174

Energy Services 550 642 622 677 604

Transportation 280 292 312 316 171

Total (including holding) 3,860 3,788 3,559 3,719 3,353

Renewal Expenses 359 390 361 364 400

Total (excl renewal expenses) 4,219 4,178 3,920 4,083 3,752

SE's EBITDA (EUR mn) 2007 2008 2009 2010 2011

Water Europe 810 812 866 1,038 1,212

Waste Europe 903 924 798 839 881

International 392 419 468 556 471

Total (including holding) 2,061 2,102 2,060 2,340 2,513

Source: Companies’ annual reports and annual presentations

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» SUEZ Environnement’s group EBITDA margin has been stable at between 16.8% and 17.1% over the five year period; Veolia’s has been between 11.5% and 12.8%;

FIGURE 7

Divisional OCF/EBITDA Margins Trends 2007-11 Veolia's Operating Cash Flow Before WCC Margins

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Total WaterWaste Energy ServicesTransportation

Source: Companies’ annual reports and annual presentations

Suez Environnement's EBITDA Margins

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Total Water EuropeWaste Europe International

» The decline in ROCE over the period – under pressure from declining France water margins and lower waste volumes – has been more pronounced at Veolia whose post tax ROCE on broadly unchanged capital employed of roughly €22 billion (including roughly €5.4 billion of operating financial assets) reduced from 9.4% in 2007 to 6.0% in 2011 (excluding operating financial assets ROCE went from 10.9% to 6.2%). SUEZ Environnement’s post-tax ROCE also declined, from 9.7% to 7.1%, on capital employed which increased markedly from €9.8 billion in 2008 to €13.9 billion in 2011 largely due to the Agbar acquisition in 2010. The charts below (on a pre-tax basis for Veolia) highlight the steadier performance of SUEZ Environnement’s water and waste divisions, as well as the stabilising effect of Veolia’s energy services business.

FIGURE 8

Divisional ROCE trends 2007-11 Veolia’s Pre-Tax ROCE by Division

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2007 2008 2009 2010 2011

ROCE Water ROCE WasteROCE Energy ROCE Transport

Source: Companies’ annual reports and annual presentations

SE’s Post-Tax ROCE by Division

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ROCE Water ROCE WasteROCE International

Moody’s incorporates this comparative stability into the differential between its assessment of SUEZ Environnement’s consolidated credit quality of mid-single A, and Veolia’s Baa1 rating.

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SUEZ Environnement is less levered

The differential between the companies’ ratings also reflects that Veolia has historically operated with more financial leverage than SUEZ Environnement. The latter’s FFO/net debt ratio has been consistently in the low 20s% ranges (with 2010’s dip to 20.5% explained by the acquisition of Agbar). By contrast Veolia has operated with FFO/net debt at 2-3% lower, in the upper teens, reflecting that until its strategy change it had operated a less conservative financial policy, targeting net debt/EBITDA in the range 3.85x-4.35x. SUEZ Environnement has targeted net debt/EBITDA of 3.0x since it was spun off from GDF SUEZ in 2008. SUEZ Environnement’s net financial debt/EBITDA ratio was 3x at end-2011 and at Q1 2012. Veolia’s was 3.88x at end-2011.

FIGURE 9

Comparison of Key Financial Ratios

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2006 2007 2008 2009 2010 2011

FFO/Net Debt Suez FFO/Net Debt Veolia RCF/Net Debt Suez RCF/Net Debt Veolia

Source: Moody’s calculations

This difference should narrow over the next two years as Veolia executes on its strategy to delever in line with its evolving business risk profile. As it applies asset disposal proceeds to reducing debt to €12 billion by 2013 (from €14.7 billion at end-2011), it will thereafter target a net debt/EBITDA ratio of 3.0x. Veolia’s strategy provides for €5 billion of asset disposals in 2012-2013, with the bulk of the sales in 2012. These include its transportation division, the solid waste business in the US, and its UK regulated water activities, as well as the businesses sold as it reduces the countries in which it is active.

Both companies have shown a willingness to offer a scrip dividend option in order to conserve cash. This has helped underpin retained cashflow/net debt ratios when profitability has been pressured – as for example by Veolia in 2009 and 2010; and in 2011 by SUEZ Environnement, when the 78% take-up of the scrip option underpinned a RCF/net debt ratio of 19%.

Moody’s has in the last year tightened ratio guidance for both companies, reflecting pressures on profitability in tougher economic conditions and rising exposure to material and energy prices as the companies invest in higher value added activities; tightening also took account of some of the additional uncertainties associated with their international activities:

» Guidance for Veolia’s Baa1 rating includes: (i) a retained cash flow (RCF)/net debt ratio of at least the mid-teens in percentage terms; (ii) a funds from operations (FFO)/net debt ratio of around 20% in percentage terms; and (iii) an FFO/interest ratio of more than 4.0x.

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ANALYSIS: SUEZ ENVIRONNEMENT VS VEOLIA ENVIRONNEMENT

» Guidance for the assessment of SUEZ Environnement’s consolidated credit quality at mid-single-A includes RCF/net debt comfortably in the upper-teens, FFO/debt in the low 20%s and FFO ICR above 4.5x.

Stricter guidance for Veolia factors in Moody’s assessment of its comparatively weaker business risk profile – which in turn reflects: SUEZ Environnement’s more settled strategy and track record of relatively stable profitability in recent years; the additional pressures being experienced by Veolia in French water; the greater complexity and geographical diffuseness of the Veolia group; and the stabilising contribution to Veolia’s cash flows from its Energy Services business. The guidance also incorporates an element of execution risk as Veolia looks to reshape the group in line with its new strategy. To the extent that Veolia delivers on its strategy, and business risk equalises, then ratio guidance should become more closely aligned.

Notching for subordination

SUEZ Environnement’s A3 rating takes into account the structural subordination of bond holders to creditors at subsidiary level given the proportion of debt located at subsidiaries, much of which is due to specific local circumstances (eg regulatory requirements, or joint venture financing). Although there has been a steady reduction in the amount of debt at subsidiary level as a result of the bond issuance by the parent company since 2009, the proportion remains sufficient in Moody’s view to warrant notching down by one rating notch SUEZ Environnement’s rating from the consolidated Group's credit quality, which is seen as relatively weakly positioned at mid single-A. Moody’s notes also that full consolidation of Agbar had the effect of increasing subsidiary debt, and assumes that management will continue its efforts to refinance this.

Liquidity

Both issuers have good liquidity profiles, thanks to sizeable cash balances: €2.5 billion for SUEZ Environnement and €5.7 billion for Veolia as at year-end 2011. Due to significant capex needs they both display slightly negative free cash flow (on the basis of Moody’s definition), but benefit from unused credit facilities, most of which contain no triggers, covenants, MAC or general restriction amounting to €2.5 billion for SUEZ Environnement and €3.7 billion for Veolia; this more than covers free cash flow and maturing debt for the next twelve months.

Despite some pressure to reduce cash holdings in order to reduce the cost of carry Moody’s assumes both groups will maintain strong liquidity positions. Both issuers have well-spread debt maturities, with nearly 50% of their debt matures after five years. At 8.7 years, Moody’s estimates that Veolia has a slightly longer average debt maturity than SUEZ Environnement.

INFRASTRUCTURE

14 JUNE 25, 2012

ANALYSIS: SUEZ ENVIRONNEMENT VS VEOLIA ENVIRONNEMENT

Moody’s Related Research

Special Comment:

» Corporates in EMEA: 2011 Outlook, December 2010 (129412)

Rating Methodology:

» Moody's Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corporations, December 2010 (128137)

Analysis:

» Veolia Environnement S.A., May 2011 (132871)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

INFRASTRUCTURE

15 JUNE 25, 2012

ANALYSIS: SUEZ ENVIRONNEMENT VS VEOLIA ENVIRONNEMENT

Report Number: 143252

Author Niel Bisset

Associate Analyst Augustin Bilodeau

Production Specialist Wendy Kroeker

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