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Veolia Environnement (NYSE:VE)

2011 & 2012 Pro Forma Accounts After Implementation of IFRS 10, 11 & 12 Conference

April 18, 2013 2:00 am ET

Executives

Pierre-François Riolacci - Chief Finance Officer

Analysts

Nathalie F. Casali - JP Morgan Chase & Co, Research Division

Olivier Van Doosselaere - Exane BNP Paribas, Research Division

Julie Arav - Barclays Capital, Research Division

Arnaud Joan - BofA Merrill Lynch, Research Division

Louis Boujard - Banco Português de Investimento, S.A., Research Division

Philippe Ourpatian - Natixis S.A., Research Division

Emmanuel Turpin - Morgan Stanley, Research Division

Alex Arapoglou

Operator

Ladies and gentlemen, welcome to Veolia 2011 and 2012 presentation pro forma accounts after implementation of IFRS 10 to 12 conference call. I now hand over to Mr. Pierre-François Riolacci. Sir, please go ahead.

Pierre-François Riolacci

Thank you very much. Good morning, all of you. Thank you very much for attending this education call about our pro forma 2012 now that the proportional integration is gone probably forever. The purpose of the call is to help you to get a better understanding of Veolia under these new accounting rules. I'm afraid that you may have many technical questions and actually you will have a few days to dig in with the team. And if necessary, obviously, we will help you with the people who have been more associated to the collection of the accounts. I'm here in this call with the IR team, Ronald and Ariane, that you know very well; but also from the team, from the controlling side, Denis Gasquet, [ph] he's the head of control; Sophie Bucon Meier [ph], financial reporting; and the other team as well as the people from the [indiscernible].

You are aware already of the main impact of this accounting change. But I will go back to the basics, and I suggest that we start with Page 5 just to remind you that in the balance sheet, you will follow up the companies which are accounted for under the equity method for 2 lines: Investments in associates, which is the usual equity; and Investments in joint ventures, which is actually the new category flowing in.

On the income statement, we had clarification from regulation authorities. So the different lines that will be used are described in the slide. We will keep the operating income line. That is Résultat opérationnel in French. That will include the operating income of fully controlled entities, as well as the contribution of joint operation. You know that joint operations are not joint venture. They are basically unincorporated joint ventures.

There will be a specific line, operating income after share of net income of equity-accounted entities. This is a name which has been designed by the French accounting body, and this will include -- you will see the share of the contribution of the joint ventures. This will include the contribution of the joint ventures before minority interest that could be held. I know we come back on that one, and this has an impact on Dalkia International.

The third item would be the share of net income of other equity-accounted entities, and this has to do with stakes that we will have in businesses which are not directly related to group operation. Actually, there is none because you know that we are not a holding company and we have no residual stakes which are left in the balance sheet.

And then at the end of the day, you will get the adjusted operating income. That would be the operating profit of fully controlled subsidiary as well as the share of adjusted net income of joint venture associates, which are -- you will see engaged in the group business.

So that's for -- is the description of the different lines. On Page 6, you have little things that you don't know already. You are familiar with the adjusted net financial debt, which is deducting from the net financial debt, the loans which have been given to these joint ventures.

On the cash flow statement, we expect to see dividends received from the joint ventures and associates as well as the financial income that we get from the loans given to this company. And that would be obviously a cash in, together with -- that will be booked with the operating cash flow. That's for basically the cash flow statement. You know that there will be, in the notes to the financial statement, many information that will be disclosed according to IFRS 12.

So when it comes to Veolia, Page 7, here again, no big change compared to what we discussed a few weeks ago. Basically, the bulk of our proportional integration of companies will be accounted for joint venture that is under the equity method, and you know this already. We will have one significant associate, which will be Berlin Water. And you will see that between 2011 and 2012, Berlin changed from proportional integration to equity method, so you will see the impact in the pro forma as well because it's not flowing in the same -- at the same line.

Page 8. We will have a few joint operations, mainly in the construction business, where it's usual practice that, that would be very limited and that would be accounted as fully integrated entities. And then there is the specific case of Veolia Transdev, which is now Transdev, and which will be accounted for under the equity method, but also under IFRS as discontinued operation. So you get all the standard in that one, which is not very easy to follow up by fully subscribe. So that's for the general description of the move.

If we -- when we come to numbers, you got Page 10, the main numbers for 2012. You had already the 2011 number. Here, again, there is no big surprise compared to what you would expect. And we will dedicate the time that we have on numbers, more to look at what happened between 2011 and 2012 than from the prior [ph] treatment, which are very much alike, the one that we discussed about 2011.

So if you go to Page 11 in terms of revenues, you will see first as -- this major treatment on the revenue side. In the Water business, we lose about EUR 1.5 billion of sales. The first one is China -- Chinese Water operation in concessions, over EUR 500 million and the Berlin contract for EUR 450 million. That's compared to published accounts. Environmental Services are not very much impacted by the change. And the big one is this joint venture in Northern Europe, in Denmark and in Czech Republic. This accounts for about EUR 400 million -- a bit less than EUR 400 million of sales. In Energy Services, there is this massive impact of Dalkia International for EUR 3.7 billion. And the other is impacted by a joint venture in Latin America with FCC for close to EUR 300 million and SNCM, very well known, for about EUR 150 million. That's a big difference at the revenue side.

Page 12, you can see the variation of revenues from 2011 to 2012. You can see that it's up by 3.4%, slightly higher than the published variation, which was plus 3%. Where does it come from? In Water, slightly better. This is mainly due to the neutralization of the Berlin Water price effect. You remember that we have lower prices in Berlin, and that this effect disappear with the new accounting rule. In the Environmental Services, I repeat, there is no change. In Energy Services, we have a stronger growth, which is due to the fact that energy prices had a very positive impact on the variation, especially in France. So there is a sort of accretion of the growth rate due to the weight of France, which is obviously very, very much increased. That's the main reason of this change in variation.

When it comes to the breakdown of revenues by countries, Page 13, so 2 major change, the decrease of Central Europe and Other Europe, and this has to do with, obviously, the consolidation of Dalkia, consolidation under the equity method. And as a consequence, France is actually going up. It's not that we have increased the business, but obviously, the collective weight of France has increased due to this presentation.

When we move to adjusted operating cash flow, you have, for 2012, the same bridge that we had given you -- given to you in -- for 2011. There is no big change and you will see the same magnitude of contribution, obviously, with the change of operation, and I will come back on that.

You can see, on Page 15, the adjusted operating cash flow, which is down 1.4%. And this is obviously a slighter decrease than on the published accounts, which are minus 4.6%. You will find the same explanations as for [ph] revenues. For Water, we don't have the Berlin Water price effect, which was about EUR 35 million. So this obviously helps the variation rate of Water. In Energy Services, we do not have the impact of the write-off of considerables [ph] in Italy. And for Environmental Services, as you can see, there is minor changes. So that gives you a slightly different vision of the adjusted operating cash flow from 2012, 2011. This has to do with Italy and Berlin to make things simple.

When it comes to the reconciliation of adjusted operating cash flow to operating income, that's Page 16, you can see that there is still a stronger increase of depreciation and amortization, which obviously comes from the same result. Maybe I would highlight the increase of the position in the Environmental Services in the U.K. This has to do with CPA 5 [ph]. I should stress also that there is a higher deficit [ph] charge in France, taking in account some concessions that had been started, and also the write-off of a few assets in the context of shorter life of contract, and also investment in Australia which started to be depleted.

You have an increase in net capital gains. This is rather a technical matter. We've sold one asset with Dalkia International in 2012. That gave a small capital gain for about EUR 8 million. The point is that, from a technical standpoint, it was -- this has to do with the way that Dalkia International was built in 2001. The value of the asset was not the same as the level of Dalkia Holding and Dalkia International, which means that there is a capital gain at the level of Dalkia Holding of the net [ph] half, EUR 40 million, and there is a loss at Dalkia International for EUR 40 million. So you see, it's neutralized, but it creates a sort of discrepancy of plus and a minus EUR 40 million. So the capital gains have increased by EUR 40 million on the account of this sale of the small asset in Dalkia.

And obviously, you will get the counterpart in the following lines, the share of adjusted net adjusted income of JVs, which is negatively impacted by this EUR 40 million, as well as the CRM write-off, which accounts for EUR 82 million at this level. I stress that at this -- on this line, you've got the net income before minority interest of the -- which have recovered at the level. So there's a share of EDF in the result of Dalkia International still there, and then would be retrieved at the level of the minority interest of the group. That's the firm line, and that's -- I hope that you're still following me. But that's where -- that's how you bridge the operating cash flow to the operating income.

Page 17. You just have the addition of the adjusted operating cash flow and the noncash items that I just described.

And then we move to the cash flow statement. When we move to the cash flow statement, what can we say? First, on the operating cash flow, you can see that it's down by about EUR 900 million. Actually, adjusted operating cash flow level, operating [ph] cash flow, we are down by EUR 800 million and I think that we've discussed that already. The -- we booked the financial interest on the loans given to the joint venture. And this increase, this -- the financial operating cash flow about EUR 125 million to EUR 130 million, so this has to do with the loans that we give to the joint ventures, so it's a plus on -- EUR 100 million on this account.

On the contrary, the discontinued operation cash flow is down mainly due to Transdev. We lose about EUR 200 million of discontinued operation cash flow, which is now booked under the equity method. The net impact is still a variation of minus EUR 900 million.

The reimbursement of operating financial assets is down from EUR 371 million to EUR 181 million. The biggest contribution is Berlin for EUR 122 million in 2012.

Capital expenditures are down from EUR 3.3 billion to EUR 2.7 billion. There again, there is a little technical point to explain this move. Surprisingly enough, there is an increase of investment, which has to do with the takeover of the joint venture Azaliya that we had with Mubadala in the Middle East. You remember that during 2012, we bought out our partner, Mubadala, and we moved that from proportional integration to full integration. As a consequence, we had a new -- we had an increase in debt of about EUR 200 million.

When we move to the pro forma without proportionate integration, you can work it out by yourself. We actually increased the debt by EUR 400 million because we were -- we had no external debt on the balance sheet and we suddenly booked 100% of the debt. So the variation of debt is EUR 400 million and not EUR 200 million. It means that we have the next half of gross investment of EUR 200 million, which is the 50% of debt that was already in the balance sheet and the proportional integration, and which is no more on the balance sheet under the equity method. So when we come to -- from EUR 3.3 billion, you first have to add that EUR 200 million, then we lose debt. We lose CapEx that were on the proportional integration, EUR 300 million for Dalkia International, EUR 200 million for Transdev, EUR 100 million for Berlin and EUR 200 million on reserve, which is front operation. And that's how you come down from EUR 3.3 billion to EUR 2.7 billion. That's for the capital expenditures.

In the changes in working capital, we are down from EUR 100 million to EUR 30 million. The reason is that write-off of receivables in Italy, which was including, actually, the variation of working cap, is no more, obviously, in the cash flow statement.

Tax is down by EUR 100 million. This is pretty much in line with the operating cash flow. Interest expense is down by EUR 780 million to EUR 630 million. You should bear in mind that we have increased by EUR 100 million our cash received from the loans. So if the loans were externally funded, then it would mean that we will lose this cash at the level of the operating cash flow. But we will see -- we'll decrease interest expense by the same amount. And it means that interest expense would be slightly above EUR 500 million. Here, again, the decrease will be pretty much in line with the operating cash flow.

Dividends are down this -- our dividends which are paid to partners in our joint ventures, so they are no more on the cash flow statement. We will see increased dividends received from associates. That's pretty natural. And I think that's a big change, with the exception of divestments, which are down from EUR 5.1 billion to EUR 3.5 billion. And this includes, obviously, the debt consolidation of the external debt of Berlin for EUR 1.4 billion, together with some debt consolidation that we had on other joint ventures.

I think that's it for the cash flow statement. You should go to Page 19. This is the details of the gross investment, EUR 2.7 billion -- EUR 2.653 billion. Maybe I should help you to define the normative investments. Because in this EUR 2.6 billion, you have got some capital expenditures, which relate to assets which have been disposed. So if you -- you should deduct from this amount about EUR 120 million for the solid waste and the U.K.-regulated Water assets. You should deduct EUR 200 million on the account of the famous wind farm that we had at the end of 2012. And you should also deduct EUR 450 million on the account of Azaliya that I just mentioned, both the debt that we had to consolidate; and two, the capital expenditures on the JV itself. So if you take out this EUR 120 million, EUR 200 million and EUR 450 million, you will end up with softer normative CapEx of EUR 1.8 billion, EUR 1.9 billion in 2012. So you can see that 2013, EUR 1.7 billion target we've set is fully achievable given the slowdown of CapEx that we have budgeted. So that's where we are on the capital expenditures.

Page 20 for the net financial debt. The bridge is pretty familiar to you. And I think that you will see, there is no big change compared to what we mentioned during the last publication for 2011.

Page 21, we have the details of these same-use loans granted to the joint ventures. As you can see that there is no major change, a slight decrease with Dalkia International from 2012 to 2011. There is one big change, which is the Others side, which it only decreased. And this has to do with the way Berlin operation are financed. You know that they are under the equity method. The vehicles that actually hold the shares in Berlin is financed with inter-company loan.

So as of now, Berlin is consolidated under the equity method. So loan is not deducted from net financial debt, which means that the adjusted net financial debt is not including any deduction for the financing of Berlin. And you can see that we carry the EUR 3 billion of loans that we deduct from the net financial debt are exclusively linked to Dalkia International, EUR 2 billion; and VTD, EUR 900 million. So it's very easy to follow up.

That's it for 2012. Obviously, we provide you with some number for the first quarter 2012. That is the Page 23 and Page 24. They are pretty much consistent in substance with what we explained for 2012. And I leave to you to go through the numbers. And I think that you get the best information that we can provide you with.

That said, I know that you had the slide show yesterday night. Maybe you had no time to fully review it. I know that you are going to spend few hours maybe today and the day after with the team, but I would be happy to answer your question, provide that they are not too much technical, but I will be very happy to discuss different points with you. It's up to you now.

Question-and-Answer Session

Operator

[Operator Instructions] We have the first question from Nathalie Casali from JPMorgan.

Nathalie F. Casali - JP Morgan Chase & Co, Research Division

Nathalie Casali from JPMorgan. So I've got 2 questions. Firstly, on the CapEx where you went through the bridge to the normative CapEx. I'm sorry, but I think I missed some of it. Could you just explain what the EUR 200 million for wind farms was, if I understood correctly? And then secondly, you mentioned that in the D&A level for 2012, there was write-off of a few assets. I suspect that would be in the French concessions, the Water concessions. Could you just say how much that was and so maybe give us an idea of what you expect normative D&A to be?

Pierre-François Riolacci

Thank you, Nathalie. On the CapEx, I mentioned that the bridge from EUR 2.653 billion, you have to retrieve solid waste for, let's say EUR 90 million, U.K.-regulated assets for EUR 30 million. And Eolfi is a wind farm. You remember that when we published our accounts, we highlighted that we had a CapEx of about EUR 200 million on wind farms operations that we've sold by the end of the year, which means that it had no impact on the debt variation during 2012. It actually -- throughout the quarter, it actually deteriorated working capital. Then there has been the closing of the construction of the wind farm field, which converted the working cap into capital expenditures. And then afterwards, there had been the closing of the disposal of the company. So it went out through the disposal line. So when you look at the CapEx itself, it's still there. It was a fully integrated company. So it's still there in the EUR 2.653 billion, but it's a net prime [ph] investment, a sort of one shot that you won't never see it -- we will -- you will never see again since we've sold all this wind farm operation in December 2012. So that's the EUR 200 million I was referring to. I think that on the D&A, I mentioned that we indeed, we have written off a few assets in the French Water business. It's not something that we communicate too much on. These are limited announcement in the D&A amount. In the D&A line, they are very small amounts. So I think that I would not comment much further. This has to do with the life of contract and the -- but you get the assumption that it's limited amount. The increase from 2011 to 2012 of the D&A in the French Water business, including the new concession, is EUR 15 million.

Nathalie F. Casali - JP Morgan Chase & Co, Research Division

Sorry. Was that 5-0 million?

Pierre-François Riolacci

1-5.

Nathalie F. Casali - JP Morgan Chase & Co, Research Division

1-5, okay. That's very clear. So in terms of the normative level of D&A, would you be comfortable sort of for 2013 something around EUR 1.1 billion, EUR 1.2 billion?

Pierre-François Riolacci

That's -- yes, that's close to what we would expect, EUR 1.1 billion, EUR 1.2 billion.

Operator

We have our next question from Olivier Van Doosselaere from Exane.

Olivier Van Doosselaere - Exane BNP Paribas, Research Division

One question I have remaining on Slide 10. It's actually interesting to see how the changes in pension accounting, IAS 19 actually seems to have increased the net income compared to the published 2012 figures. If we look at the appendix though, it looks like that same measure would have decreased it for 2011. So I wonder, what do you expect going forward from that change in pension accounting. Do you think that there is sort of fully operating income line for 2012 at EUR 11 million? Is that something structurally to be added on or is that a one-off that you think will not occur again?

Pierre-François Riolacci

Olivier, I'm afraid you need to start again because I'm not sure I catch -- I caught the sense of your question. I'm sorry.

Olivier Van Doosselaere - Exane BNP Paribas, Research Division

Well, essentially, if we look at Slide 10, it looks like the adjustment with IAS 19 on pension accounting had a positive impact. Do you expect that positive impact to be recurring? Or is that actually a one-off and it can vary from one year to another? Because it looks like in 2011, the impact was actually negative.

Unknown Executive

One shot.

Unknown Executive

One shot?

Pierre-François Riolacci

It's a one-time error [ph], so you would not expect this to be -- to come back next year.

Operator

Our next question from Julie Arav from Barclays.

Julie Arav - Barclays Capital, Research Division

I have 2 quick questions, if I may. The first one is, can we have an idea of the impact of these IFRS changes on your capital employed at the group level? The second one is can we have an idea of the further dilution that you're expecting from disposal in 2013 and what are also the consequences of these IFRS changes? And the last thing is more on the breakdown in terms of geographies, offshore revenue, et cetera. You were targeting international to reach 50% of your revenue on the long term. Is it still a target given these changes?

Pierre-François Riolacci

On the disposal dilution that you would expect, you know that we have accounted most of the disposal, which remain to be done under the discontinued operation, which means that the ongoing activities give you, I think, a fair view of the earnings program. So you will not expect to see the significant level of dilution for the remaining disposal program, and this is -- and thanks to discontinued operation booking. You know that we have a discontinued operation, Veolia Transdev, Transdev now. We have our Moroccan assets, which are significant in 2013 disposal. And a few other assets like Citelum, the lighting subsidiary. So it's not a big deal. We have a few assets that will be sold on the top of that, but you would not expect, they are not -- I would not say that -- here again, they are not the jewel of the crown, so I would not expect to see the significant dilution in the context of this disposal so far.

France geographic breakdown, you're right to point it out. Clearly, the target that we have set were on the former accounting standard. We would like -- we will need to adjust unless we are about to change the accounting of Dalkia operation. I mean, clearly, that will be the major one that would change with the -- as the balance. For the Chinese Water operations, as you can imagine, there is little chance that we could change the accounting. But this would not jeopardize our target. However, Dalkia International, as you know, is substantial and it change -- obviously, it change of target by close to 10%. So clearly, the target of 50% in going market would need us to change the Dalkia International accounting. And I'm sorry, I didn't -- I don't remember your first question.

Julie Arav - Barclays Capital, Research Division

It was on the capital employed at the group level following the accounting changes.

Pierre-François Riolacci

We'll come back on that one. We'll come back on that one to you.

Operator

Our next question is from Arnaud Joan from Bank of America Merrill Lynch.

Arnaud Joan - BofA Merrill Lynch, Research Division

Pierre-Francois, I have 2 quick questions. First, can we just take a look at the Page 45 of your presentation? Can you just give us some more granularity on 2 items: The share of net income of equity-accounted equities that comes out at minus EUR 9 million in 2012. I had in mind a figure that would have been positive from what you presented in 2012 full year results. So maybe there are some non-recurring items, so maybe some more explanation around this figure. And then second one is about the minority interest line, which also looks quite low at EUR 35 million. Could we have some more explanation on that too? And -- well, let's start with this one, yes. Sorry.

Pierre-François Riolacci

First, I need to apologize. But in the presentation of 2012 when we refer -- there is a page in the presentation when we give the net income. That's Page 44 of the annual results, we gave indeed EUR 49 million figure for [indiscernible], that is parent company net income. Actually, this number is not parent company net income, it's net income, and the minority interest are to be taken out after this number. So that's -- that may explain why you were expecting a higher amount. You find some detail on this line if you look Page 49 and Page 50, you've got the contribution including net income level of Dalkia International and China, and these are before minority interest. So it means that -- and I think this would give you the answer to your question. You can see that Dalkia International is totally negative in 2012. This has to do obviously with the Italian write-off, and that explains why it's so negative and clearly, you would expect the Dalkia International to have a better contribution. And this explains also why the level of minority interest is that low. It's because EDF is taking its share of the negative income of Dalkia International.

Arnaud Joan - BofA Merrill Lynch, Research Division

Okay. Second question, we had a lot of data points recently -- so nothing to do with the accounting, we had a lot of data points on industry production recently in Europe. Can you just -- I know that you're presenting your Q1 in 2 weeks. But can you give us a quick update on the trends you've seen so far this year, mainly in waste for instance?

Pierre-François Riolacci

I'm not completely surprised by your question. I was expecting someone to move out from the accounting field and ask about the business. I mean, there is no -- we do not see any big change in the trends in the business. In what -- what you see is the slowdown from the works, which is partly on the account of lower bookings from municipal customers. Industrial customers are still doing well. Partly also on the account of the weather we have during the first quarter, which was not helping for some works usually, especially in France. And also we had -- in some concession, we had a slowdown here again of works. No change in volumes, but in works here, again, and we had less revenues under the IFRIC 12 numbers. So you would expect for Water to have slow revenues, could be negative on the account of works, again. Nothing major in the trends of volumes or whatever. In the Waste business, what we see is in line with the second half of the year in terms of volumes. That means that it's down by 2% to 3%, Germany being especially difficult for us as it was in Q4. You will remember the joint H2, we had been able to offset this move through operational availability of our international plant. Also saw some extra bookings in Australia, which is not the case in Q1 so you would expect volumes to be down by 2% to 3%. That's what we see. We did not have the accounts, but that's what we see from operational data. Second thing, in the Waste business, is that the prices of secondary materials is down. It's down by 7% to 10%. Even for [indiscernible] it's severely down. So you would expect, again, to -- let's say as of now average about 10% revenue down for this part of the business, which is something I'm reflecting. That's basically what we see at the level of the activity. For the rest, no change compared to what you have in 2012. You still have some headwinds in France that you are very familiar with in the French Water business, in the regulation for generation of East Dalkia. And you still have the positive, China and Dalkia International, there wouldn't be an account under the operating cash flow but they would be there in terms of operating income, are doing very well and quite strong. So cost-cutting is still there, pushing up, especially in the next quarters. So we would expect to have trends which are pretty much in line with 2012 with the exception of this lower level of activity. That would not be very strong on Water. You know that in Water, works are not a very significant margin, so that's not so much of a big deal. But it would be more sensitive in the Waste business because we have a downturn in volumes and we have lower price in the same thing. But to the rates, no surprise and we are not seeing any operational event during this first quarter.

Operator

Our next question is from Louis Boujard from BPI.

Louis Boujard - Banco Português de Investimento, S.A., Research Division

Louis Boujard from BPI. I wonder if you could give us a bit more detail regarding to the new accounting policy? Do you have an idea for your new sensitivity to the weather effect in Dalkia now? And what would be your remaining sensitivity to carbon prices, even if now the price are close to 0? Do you have a net long or short position in this point? And regarding more particularly SNCM, in your point of view, what potential scenario do you face now with regards to SNCM? And which one would you favor for the time being here?

Pierre-François Riolacci

Thank you very much for your question, especially the third one. On the -- we -- the economic sensitivity of the group is actually not impacted at all by this change of accounting. So you would not see anymore the impact at the level of the adjusted operating cash flow, but you will see it at the level of the adjusted operating income. On climate, on Dalkia, it's clear that we have been working very hard to try to reduce also sensitivity, and especially in France, balancing contracts which are linked to the heat that we deliver but also part which are paid under a lump sum. So we are balancing the portfolio and we tried to reduce the sensitivity to climate in France. So at the level of adjusted operating cash flow, clearly with the accounting change, it will decrease. Now abroad, we have countries in which we are quite sensitive to climate. That's the case in intra-Europe, [ph] but that's the case also in the U.S. And you know that in the U.S., the U.S. operation are still consolidated 100% by Veolia; it is not owned through Dalkia International, but directly by Veolia. So you would expect clearly the sensitivity to be reduced at the adjusted operating cash flow level, but this will not change at the level of the adjusted operating income. For the CO2, we have today a net short position at the beginning of any 1 year that we cover for the year. It's clear that given the current price, we have -- the short position is not very big. Here again, we've been working the last 2 years heavily with the customers to amend the contract and make sure that the cost of buying the CO2 certificate was incorporated in the cost of energy. And this is now implemented in significant part of our portfolio and you have negotiation, which obviously are going on for some of them. So sensitivity for CO2 will be declining again in the fiscal year. But clearly for -- you know that 2013 is the first year of the new regulation and we do not expect, given the current price, to see any significant impact of this position coming from long to short, because it has been managed for the last 2 years to make sure that there will not be a major -- or a cliff from 2012 to 2013. And today, we are confident that there wouldn't be any very addressable impact from the change of regulation. On SNCM, that's a long story. You know that I am conflicted because I'm Corsican, so it's very difficult for me to tell you these things publicly. But I would say that SNCM has been a pain for many people in last few years. That's not a secret. We, today, have -- we know that we have a tender ongoing. We have not yet the answer on the tenders. I think that what is critical in the months to come, first, is the tender itself. Clearly, we need to win. If SNCM was not winning the tender, then clearly the future of the company would be at stake and we would have to go for a major restructuring. And I think that's clearly in the mind of our customers. So we are confident, but we need to first win the contract. Two, there has been a claim under [indiscernible] about competition regulation. There will be a decision from [indiscernible] coming in a few months. If there was a major decision asking SNCM to repay money which has been given at the time of the privatization in 2006, clearly, SNCM has no way to repay large amounts. And here again, the future of the company would be endangered. So I think that we have these 2 uncertainties ahead of us. Once they are clear, we believe that SNCM could be transferred. Clearly, we are happy to manage the infrastructure of SNCM in the context of VTD Transdev move. You know that the Transdev transaction relies upon the external financing of the Transdev and the disposal program, both are underway. And I think that we have now, we'll clearly be under the disposal program. There have been rumors, and we will not comment on any rumor, but we believe that we'll be in a position to sell the items identified in a reasonable and timely manner, too. On the refinancing, we have a strong appetite from the banks. And clearly, both operation [indiscernible] banks will be there, so we are confident here again. But it's clear that we need also to deal with the SNCM issue, which is something that makes everyone nervous. So I think that's why in this context, the VE would be happy to deal with SNCM, at least to clear the way for a complete transfer. However, we need first to have these 2 uncertainties being cleared.

Louis Boujard - Banco Português de Investimento, S.A., Research Division

Okay. Do you have a kind of stop loss in SNCM? There's a lot of -- would you refinance in an adverse situation?

Pierre-François Riolacci

We have a stop loss, which is that we will not put any money in it. So today, the value of the asset SNCM in the books of Veolia is between EUR 10 million and EUR 15 million. So that's the value of the asset. And clearly, we will not consider injecting any money unless we have a full plan and we have -- we are off the hook for all these uncertainties that I just mentioned.

Operator

We have our next question from Philippe Ourpatian from Natixis.

Philippe Ourpatian - Natixis S.A., Research Division

I have in fact 3 questions. First of all, you mentioned that you are going to give some extra information related to those JVs and associated company. Could you just give us a kind of flavor about what kind of extra information in terms of profitability, debt, cash flow you're going to give on a recurring basis in your annual account or portfolio account? The second question is regarding Dalkia International and Dalkia, I would say, all in all. You mentioned that, that's going to be maybe a way to change some breakdown in terms of geography and so on. Could you just update where are you with EDF in terms of negotiation regarding Dalkia? And third, are you going to change the way that you are disclosing your quarterly basis figure due to the fact that all this change are also impacting your different item presented on a yearly basis? Are you going to give us more detail in terms of breakdown of operating profit, for example, cash flow and so on, division by division, for example, for the next coming disclosures?

Pierre-François Riolacci

Thank you, Philippe. I can recognize your appetite for further information. I'm not surprised. I'm afraid I'm going to disappoint you at least on a few items. For the information that we will give on our joint ventures, you will see -- in the notes, you will see all the major indicators like sales, adjusted operating cash flow, adjusted operating income and also the underlying financial result tax to the net income. That would be disclosed for the major operations. So that you will be able to have your own valuation actually of these assets. You will have clearly the proxy through -- there's a value of equity in joint venture that we disclosed in the balance sheet, but you will be able to make your own calculations based on the public information. On Dalkia, we will not comment in any discussion with EDF. And then quarterly results, no, we do not expect to change the way we give information. I mean, when we compare to ourselves, we believe that the quarterly information that we give is consistent with market practice. Olivier Orsini would be happy to answer all your questions if there is something that you don't understand on the 3rd of May and I'm [indiscernible] the vacation, Philippe. You know that we'll be happy to provide you with information that you will find the usual steps, that is the details by division for the sales. And then the adjusted operating cash flow, adjusted operating income, cash flow, net debt, adjusted net debt for the group with some colors, [ph] obviously, on the way and these figures that we can help. [ph] Maybe one last question?

Operator

Our last question is from Emmanuel Turpin from Morgan Stanley.

Emmanuel Turpin - Morgan Stanley, Research Division

One and a half questions then. Could you please update us on the position of rating agencies on the treatment of the integral debt? I remember that in previous calls, you said you expected them to adopt a pragmatic approach. I think with some of them, or one of them, at least, has mentioned something since then, number one. Number two, would you mind updating us on how you would see the cost-cutting impact on the existing cost-cutting plan, on everything that's been announced would now look at the EBITDA level? I believe you had given us some indications before, but now you may have confirmation of that.

Pierre-François Riolacci

Yes. Thank you very much, Emmanuel. You're right, you pointed out, yes, we confirm that about 80% of the global cost-cutting program will fall into the EBITDA level. The 80% accounts for the other presentation of the French contribution in cost-cutting, which has to do with the large amount of structure that we have in France. For rating agency, we have not yet met them in the context of the annual reviews. This will be done in the weeks to come for both of them. Both of them clearly stated that a change in accounting cannot figure any rating action, so that's very clear for both of them. Now we are discussing a way to deal with that. It could be changing some of their calculations. It could be also giving us a leeway in the target to reach, maybe not changing the targets but giving, let's say, extra time to reach it. So that's the sort of discussion that we will have during the annual review. So I cannot confirm any change in the way they put together the numbers or the figure, but I can confirm that both of them stated to us very clearly that the change in accounting cannot figure a rating action. Maybe, last one.

Operator

Our last one from Alex Arapoglou from King Street Capital.

Alex Arapoglou

I just had a couple questions I was hoping to get your thoughts on. The first one is the 10% decline in Waste revenues due to the 7% to 10% in the volume and a couple of percent in -- sorry, 7% to 10% in price and a couple of percent in volume. Obviously, that does seem like a big change from Q4. Q4, I thought, was up 3% organically in revenues, and I think Q3 was down by only a couple of percent organically. So I guess a big change and given that it's a low-teens EBITDA margin business, do you see this affecting profitability in that segment significantly? Second question is do you still feel like your EUR 50 million per year of EBITDA loss due to water renegotiations is still valid? Or has the price war become a bit -- has it subsided a bit now that Saur is in such difficulties? Do you see light at the end of the tunnel there in the renegotiations? And finally, just a quick question on the free cash flow. It does seem like given the new scope of Veolia, you are close to free cash flow breakeven before dividends if you include the recurring disposals that you do every year. But after dividends, it does seem like you're still going to be burning sort of like between EUR 250 million and EUR 500 million of cash and I was wondering what your thoughts are on this.

Pierre-François Riolacci

Thank you. On the Waste business, I think that the 10% decrease in price will impact the sorting and recycling business, which accounts for about 15% of the business. So that we will see this impact clearly and this is not the same that in Q4. We highlighted this point at the end of financial results. That the basis of comparison was much more in our favor in Q4 than it would be in Q1. And this was on the account that prices of recycled materials went down from the second quarter of 2012 to year end with a special decrease in Q2. So I think that this is really a question of basis of comparison and I think that we are all aware that about 15% of our business will be impacted by that. For the 2% to 3% volumes decline, that's consistent with what we had during H2. We've highlighted also that we had some items that allowed us to offset. And what I'm saying that in Q1, we don't have the same sorts of items, especially this increase in availability of [indiscernible] front in France, which is at the top already but decreasing, it's very good. But as it is at the top, difficult to improve. So that's what we see. Yes, there would be an impact on the margins. I mean, we already had the opportunity in fact to discuss some sensitivities of this business. And on the revenues of recycled materials, you know that any variation of revenues will convert in variation of operating cash flow with a rate of 20%. And there is no reason to believe that it will be very different during Q1 2013 than it was in the last 2 years. On the Water business, no, we are comfortable with the EUR 50 million a year decline on the account of the contract revision. We have not seen any sign of toughening conditions, so we are comfortable with this trend. There is something that we look closely at which is the restructuring of Saur, which is one of our competitor. We understand that things are moving rather swiftly. So we believe that, that could be probably something that maybe could get, as you mentioned, the light at end of the tunnel, maybe we could save a few kilometers if there is a good restructuring that goes complete. And that's it for what are pretty much in line in France with what we have seen in the past. And for the free cash flow question, I mean, that's a question that we had, here again, the occasion to discuss quite a lot. You're right to point it out. I mean, we work out the free cash calculation that end up, so before dividends, we have EUR 89 million for 2012. We definitely need to grow this number to the level of dividend by 2 years time. It means that we need to increase this number of close to EUR 500 million. That's our target. We discussed that you know that we have a plan to reduce the capital expenditures. You know that we have a cost-cutting plan to increase the operating cash flow. So that's exactly what convergence is about, that is to increase our ability to generate cash flows and improve returns. And this will be on the account of cost-cutting, gross platform starting at this line of mature operation and reducing CapEx.

Thank you very much, all of you, for this call. I really need to quit now, but I'm sure that you may have some other questions. The team -- the IR team is here to answer on taking any points. And here again, if you have a really technical matters, we'll be happy to provide you with all the information that you need. Thank you very much to all of you. Bye.

Operator

Ladies and gentlemen, this concludes the conference call. Thank you all very much for attending. You may now disconnect.

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Source: Veolia Environnement S.A.'s Management Hosts 2011 & 2012 Pro Forma Accounts After Implementation of IFRS 10, 11 & 12 Conference (Transcript)
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