May 31, 2012
Summary:
Veolia Environnement S.A.
Primary Credit Analyst:
Nicolas Riviere, Paris (33) 1-4420-6709; nicolas_riviere@standardandpoors.com
Secondary Contact:
Vittoria Ferraris, Milan (39) 02-72111-207; vittoria_ferraris@standardandpoors.com
Table Of Contents
Rationale
Outlook
Related Criteria And Research
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Summary:
Veolia Environnement S.A.
Credit Rating:
BBB+/Stable/A-2
Rationale
The ratings on Veolia Environnement S.A. (Veolia) reflect Standard & Poor's Ratings Services' assessment of the
group's business risk profile as "strong" and its financial risk profile as "significant." They are supported by
Veolia's leading worldwide positions in water and waste, which represented 46% and 33% of EBITDA in 2011, and
by its stable and recurrent revenues from long-term municipal contracts that bear minimal volume and performance
risk. Veolia is also very diverse in terms of business, contract, and geography. The ratings are also underpinned by
the new management's financial discipline, the group's "strong" liquidity position, as our criteria define the term,
and our anticipation of free operating cash flow (FOCF) turning positive.
These strengths are offset by lower growth prospects and deteriorating negotiating powers with local authorities in
mature markets translating into declining margins, especially in the French water sector. The group also suffers from
the waste business' exposure to economic cycles and fuel and raw material prices, and the energy business' exposure
to weather conditions and energy prices that bring some volatility to group earnings. Veolia's high debt and
historically limited cash flows before disposals, as shown by its stretched credit metrics, also constrain the ratings.
Our ratings factor in the impact of the major strategic plan announced at the end of 2011. We appraise the plan as
credit neutral. The plan includes a €5 billion disposal program and pledges moderation in dividends and capital
expenditure (capex), which we believe will reduce debt and support the group's credit metrics and financial risk
profile. This probable improvement in the financial risk profile might compensate for the ongoing erosion of the
business risk profile, in our view. The group expects the streamlining of its global activities and the revamping of
management toward a more centralized and leaner organization to yield more than €400 million in cost savings by
2015, a significant proportion of which will, however, likely be passed onto customers, in our view. We therefore do
not expect Veolia's profitability to return to pre-2008 highs. Moreover, despite the expected disposal of the cyclical
and capital intensive transportation business, the higher exposure to industrial customers and emerging markets
Veolia is targeting will probably dilute its business risk profile, in our view.
S&P base-case operating scenario
Enduring competitive pressures in all three businesses and bearish macroeconomic conditions eroded Veolia's
earnings in the first quarter 2012, and led to a 3% EBITDA decrease year-on-year. First quarter results support our
base-case scenario forecast for a high-single-digit drop in EBITDA in 2012. Our scenario assumes some one-off
restructuring costs and the deconsolidation of U.K. regulated water and U.S. waste operations, the two largest parts
of the €5 billion disposal program. We expect these disposals to be the main driver of the decline in earnings in
2012, whereas the positive contribution to earnings of new growth businesses should offset margin losses in core
mature or cyclical businesses.
We expect Veolia's cost-cutting plans to start showing results and driving a turnaround in earnings from 2013,
despite continued challenging market conditions and additional asset disposals. The pace of earnings growth could
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Summary: Veolia Environnement S.A.
be in double digits after 2013, in our view, if Veolia meets its cost-cutting targets of €420 million and earns about
€400 million EBITDA from new assets, mostly in China and Eastern Europe.
S&P base-case cash flow and capital-structure scenario
Under our base-case scenario we expect Veolia to post growing positive FOCF in coming years, and improve its
aggressive credit metrics on the back of its €5 billion disposal program over 2012-2013 and beyond thanks to the
restructuring program's positive effect on cash flows. We forecast that Veolia's adjusted funds from operations
(FFO)-to-debt ratio will exceed 18% in 2012 and approach 20% in 2013, up from 17.2% in 2011, or 16.4% when
not adjusting debt to take into account the loans that the discontinued transportation division is expected to repay
to Veolia when sold.
We anticipate that Veolia will realize about two thirds of its announced disposal program in 2012, and the rest in
2013, and that as a result its adjusted debt will fall below €14 billion from €17.7 at the end of 2011. We also
assume that FFO will bottom out at about €2.2 billion-€2.3 billion annually, investments will average about €2.5
billion a year, and dividends will average €0.65 billion a year including minorities.
Liquidity
We assess Veolia's liquidity as strong under our criteria.
Projected sources of funds exceed projected uses by nearly 2x over the next 12 months and by more than 1.3x in the
subsequent 12 to 24 months.
We factor into our liquidity assessment for the next 12 months, based on our estimates, the following sources on
March 31, 2012:
• About €2.93 billion in available cash, excluding about €400 million of restricted cash;
• Nearly €4 billion on available committed credit lines maturing beyond 12 months, including a €2.5 billion
multi-currency syndicated loan maturing in 2016;
• Nearly €3.5 billion of asset disposals, including the proceeds of the U.K. regulated water and U.S. solid waste
division, for which Veolia already has multiple offers; and
• Our forecast of FFO of about €2.2 billion over the next 12 months.
Against these sources, we factor in the following liquidity uses:
• Short-term debt of about €3.4 billion;
• Our estimate of €2.6 billion in capex and acquisitions; and
• Dividend payments of about €660 million.
Outlook
The outlook is stable. Although we expect Veolia's earnings to erode again in 2012, we expect the group to meet its
disposal targets over the next two years and, importantly, to start restoring its operating margins from 2013 thanks
to its thorough cost-cutting plans. This, we believe, will lead to a strengthening of key credit metrics that will
compensate for the dilution of the group's business risk profile owing to tougher competitive conditions in its core
business and its strategic adjustment toward emerging and industrial clients. We view a ratio of adjusted FFO to
debt of about 20% as commensurate with our updated assessment of Veolia's business risk profile and current
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Summary: Veolia Environnement S.A.
'BBB+' rating.
We see no rating upside at present because of the negative environment for Veolia's core business profitability and
the execution risk in its ambitious disposal and cost-cutting plans.
We might take a negative rating action if disposals fell short of targets and credit measures fell below our
expectations. Any weakening of the group's business risk profile beyond our expectations, if not offset by a
commitment to maintain a stronger financial risk profile, could also lead to a negative rating action. More
prolonged and depressed conditions for waste markets than we currently expect, a failure of French water sector
margins to turnaround, or significant expansion in more volatile markets or operations could also a trigger negative
action.
Related Criteria And Research
• Top 10 Investor Questions: The Trends Affecting U.S. Environmental Services Companies Are Not Likely To
Change Ratings Stability, April 2, 2012
• Industry Report Card: Tough Market Conditions Keep 25 Top European Utilities Under Pressure, March 28,
2012
• From Public To Private And Sometimes Back Again: The Shifting Dynamics Of Water Utility Ownership, Feb. 27,
2012
• Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
• Principles Of Credit Ratings, Feb. 16, 2011
• Use Of CreditWatch And Outlooks, Sept. 14, 2009
• Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
• 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
• 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Additional Contact:
Infrastructure Finance Ratings Europe; InfrastructureEurope@standardandpoors.com
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