veolia water annual report 2002

1 s Veolia Water in 2002

10 s Consolidated financial statements10 s Consolidated balance sheet

12 s Consolidated income statement by function

13 s Cash flow statement

15 s Notes to the consolidated financial statements

37 s Report of the statutory auditors on the consolidated financial statements

38 s Parent company accounts38 s Management report

42 s Balance sheet at December 31, 2002

44 s Income statement at December 31, 2002

45 s Cash flow from operations

45 s Cash flow statement

46 s Overall change in working capital requirements

47 s Notes to the balance sheet and income statement for the 2002 financial year

53 s List of subsidiaries and affiliates

54 s Five year financial summary

55 s General report of the statutory auditors on the annual financial statements

56 s Special report by the auditors on agreements involving company directors

60 s Statutory auditors’ report on the reduction in capital stock

61 s Resolutions

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Contents

F i n a n c i a l r e p o r t 2 0 0 2 V e o l i a W a t e r 1

1. Presentation of theCompany

The parent company, previously known as SIG49, was

formally registered in December 1998. It acquired its

former name, Vivendi Water, when it was created in

late 1999 as an independent company encompassing

all of the water-related activities of Vivendi Universal.

Vivendi Water is a wholly controlled subsidiary of

Vivendi Environnement, which is itself 20.4% owned

by Vivendi Universal.

The Vivendi Water group was created in December

1999 through the following transactions:

– The contribution at book value on December 23,

1999 by Vivendi Universal to Vivendi

Environnement of its shareholdings in the

capital of Compagnie Generale des Eaux (100%;

holding company for water and wastewater

services) for E1.3077 billion and Philadelphia

Suburban Corporation (14.3%; water services)

for E51.9 million. Compagnie Generale des Eaux

and Philadelphia Suburban Corporation were

then transferred at book value by Vivendi

Environnement to Vivendi Water, using the

same method;

– The sale by Vivendi Universal to Vivendi

Environnement of its shares (Filter stocks) in

Vivendi North America Operations, which has

held a 100% stake in US Filter since April 1999, for

$2.7 billion.

Prior to these aforementioned transactions, Vivendi

Universal transferred to its subsidiary, Compagnie

Generale des Eaux, all its water and wastewater

services in France from a financial perspective. This

transfer was structured as a partial asset contribution

of the entire division on November 1, 1999, with

retroactive effect from January 1, 1999. This operation

provided for the immediate transfer of certain assets

and the deferred transfer of contracts regarding which

consent had not been secured from the relevant

municipal authorities by year-end 1999.

Pending the transfer of these contracts, Compagnie

Generale des Eaux obtained a right to a certain

portion of the receivables accruing on contracts not

transferred. As a result of this transaction, the

operating income of the water division of Vivendi

Universal was transferred in its entirety to Compagnie

Generale des Eaux, with retroactive effect from

January 1, 1999. Revenue for the 2002 financial year

from contracts not yet transferred amounted to

approximately E10 million, compared with

E66 million in 2001.

On April 30, 2003, the General Meeting of Vivendi

Environnement’s shareholders decided to change the

name of the company to Veolia Environnement. On

the same day, a special meeting of Vivendi Water

shareholders decided, as a consequence, to change

the name of the company to Veolia Water. The new

name will be used in this annual report. A general

meeting of Vivendi Water Systems shareholders is

scheduled by the end of May 2003, to adopt the new

name of Veolia Water Systems.

With approximately 73,000 employees around the

world (consolidated weighted average workforce for

2002), Veolia Water is the world leader in water

services and one of the leading designers and

suppliers of water treatment facilities, equipment

and systems for the municipal, industrial and

commercial sectors. The company is present in

nearly 100 countries and serves around 110 million

people worldwide, while fulfilling more than 7,000

operating contracts. Veolia Water has three main

subsidiaries: Compagnie Generale des Eaux, which is

the leading European provider of water and

wastewater services and is also active

internationally; US Filter, a leader in water treatment

equipment and services in North America; and Veolia

Water Systems, which designs and supplies water

treatment systems and facilities.

Veolia Water manages numerous municipal water

and wastewater services throughout the world, with

the largest in France being Paris’s right bank, the Paris

suburbs, Lyons and Nice. Outside France, the biggest

contracts are for Berlin (Germany), the North London

suburbs (UK), Budapest (Hungary), Bucharest

(Romania), Prague (Czech Republic), Adelaide

(Australia), Indianapolis (United States), Tianjin

(China), and Libreville (Gabon). In addition, the

company has major industrial customer references,

including General Motors, Conoco, Hyundai, Danone,

British Petroleum (BP), Renault and Arcelor. Lastly, two-

thirds of its residential customers are in North

America, with the rest primarily located in Europe.

In 2002, Veolia Water generated 62% of its revenue

through contracts with municipalities, 33% with

industrial and commercial companies, and 5% with

residential customers.

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Veolia Water in 2002

2 V e o l i a W a t e r F i n a n c i a l r e p o r t 2 0 0 2

2. Highlights of the financialyear

The table below shows the growth in revenue and in

consolidated EBITARC for Veolia Water.

2002 2001In millions of euros

Revenue 13,147 13,329

EBITARC 1,039 1,094

* Earnings before interest, tax, goodwill amortization andrestructuring costs: internal indicator of operating profitability(cf. ‘‘Income statement measures,’’ page 16).

Veolia Water’s landscape was significantly modified

by the disposal of non-core businesses during 2002.

The company generated revenue of E13.2 billion for

the year. Revenue for core businesses amounted to

E11.3 billion, an increase of 4.7%.

In France, water distribution activities and contracts

for equipment and construction grew 2.2%, generating

revenue of E5.6 billion. Revenue from water

distribution activities grew 3.1% due to the combined

effect of the indexing of pricing formulas, a slight

growth in volume, and the development of new

municipal wastewater services and industrial services.

Contracting work by specialized subsidiaries declined

compared with 2001, which was marked by strong

cyclical demand.

Veolia Water Systems had revenue of E1.1 billion due

to increased selectivity in order taking and the cyclical

nature of Sidem’s activities (i.e., desalination activities

in the Near East and the Arabian Peninsula).

International business, excluding the United States,

rose 23%. This increase of E370 million over 2001 was

the result of contracts won in 2001 and 2002.

US Filter’s revenue grew at varying rates depending on

the activity. It rose 7.8% in core businesses (i.e., water

and wastewater, and Culligan) due to a 12% increase

in industrial and municipal contracts, helped, in

particular, by the contract with the Indianapolis

municipality. However, as a result of the depressed

American economic situation, equipment sales

registered only a slight increase.

EBITARC, which amounted to E1.039 billion in 2002,

declined 5%, while EBITARC for core businesses grew

3.4% to E909 million in constant currency.

Profitability increased in France and internationally,

excluding the United States, due to sustained efforts

to maintain margins in France and to the full-year

effect of productivity plans previously initiated by

Veolia Water Systems and continued in 2002.

Profitability also benefited from winning new

contracts in continental Europe and Asia.

The restructuring operations conducted in the United

States relating to divestments, and the adaptation of

industrial operations to the economic slowdown,

particularly in the equipment market, have not yet

produced all of the expected results. The rise in

insurance costs (for the first full year in 2002) as well

as some exceptional events also took a toll on

profitability.

The EBITARC-to-revenue ratio held steady near the 8%

level.

In France, Veolia Water signed a contract for the

upgrade of the Acheres wastewater treatment plant,

which treats much of the wastewater for the greater

Paris region. This contract represents estimated

cumulative revenue of E390 million.

In the Netherlands, Veolia Water signed a preliminary

agreement for the design, construction, financing and

operation—for a period of 30 years—of wastewater

treatment plants for the city and region of The Hague,

with cumulative revenue estimated at E1.5 billion.

On May 7, 2002, Veolia Water UK, a wholly-owned

subsidiary of Veolia Water, entered into an agreement

to acquire the parent company of Southern Water,

one of Britain’s largest water companies, which

provides water and wastewater services in southeast

England.

Through this acquisition, Veolia Water was seeking to

gain control of a major, recognized operator in the UK

water market, in a dynamic geographical area, with

access to the wastewater market.

The acquisition was subject to prior approval by the

British Competition Commission as well as to the

availability of long-term financing. These two

suspensive conditions were not met in a satisfactory

manner. Veolia Water consequently decided to

abandon its plans to take control of Southern Water.

In February 2003, an agreement was signed between

the Royal Bank of Scotland, Veolia Water UK and

Southern Water Capital, according to which Veolia

Water UK would hold only 19.9% of Southern Water as

a result of the transaction, together with a purchase

option on 5.1% of common shares.

These agreements are subject to the approval of the

British regulatory authorities and to certain procedural

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conditions. Veolia Water is of the opinion that these

regulatory authorizations will be obtained.

Veolia Water and its parent company, Veolia

Environnement, will invest £160 million (E243

million) in shares and in various debt instruments.

Veolia Environnement also intends to guarantee the

placement of £110 million (E167 million) in preferred

shares among third-party investors with a put option

at par value, which can be exercised on Veolia

Environnement after five years.

In the Czech Republic, Veolia Water obtained an

extension until 2028 (subject to the lifting of

suspensive conditions) for the term of the contract

awarded in 2001 for the management of water

services for the 1.2 million inhabitants of Prague and

its suburbs.

In the United States, Veolia Water won the largest

outsourcing contract ever awarded in America for the

management of a municipal water system, for the city

of Indianapolis. US Filter, a subsidiary of Veolia Water,

will be responsible over a period of 20 years for the

operation, maintenance, infrastructure rehabilitation

and customer service for the city’s drinking water

system, serving 1.1 million people. Total revenue is

estimated at $1.5 billion.

In Morocco, Veolia Water took over the 26-year

outsourcing contract for water, wastewater and

electricity services for the 2 million people in the

Rabat-Sale region, worth an estimated E4.5 billion

over the duration of the contract.

In China, Veolia Water was the successful bidder in

international competitive bidding for water

management services for the 1.9-million-inhabitant

business district of Pudong, Shanghai, for a period of

50 years, representing total revenue estimated at E10

billion. Also in China, Veolia Water signed two

outsourcing contracts with the Baoji and Zhuhai

municipalities.

In Malaysia, Veolia Water concluded an outsourcing

contract for water treatment and distribution services

with the Petronas oil group for the petrochemical

complex of Kertith, for a period of 20 years, with

cumulative revenue estimated at E200 million.

3. Strategy

Veolia Water’s strategy for its outsourcing services is

based on selective growth, both via developing

established market positions and by obtaining large

new contracts. In the medium term, Veolia Water

intends to refocus its activities on developed countries

with a well-balanced risk position. In France, where

Veolia Water is facing increased competition, it is

relying on the experience and initiative of its sales

force to continue its current level of performance. In

addition to its continued efforts to renew expiring

contracts and gain new municipal water and

wastewater contracts, its objective is to further

develop the range of services it offers to industrial

customers and to offer additional services to

municipalities. In continental Europe, Veolia Water

intends to consolidate its leadership position by taking

full advantage of the major contracts it has won over

the past three years, specifically in Berlin, Bucharest,

Budapest and Prague, in order to increase its influence

both with municipal customers and with industrial

and commercial companies. In the United States, after

the implementation of the restructuring plan drawn

up at the time of the acquisition of US Filter, the Veolia

Water group is now appearing as a water services

provider for industrial companies and municipalities,

with an approach targeted at the non-regulated

segment; owing to the fact that it is four times larger

than its next competitor, the company enjoys the

position of uncontested leader in this segment. In Asia,

Veolia Water intends to intensify its growth efforts by

targeting three high-potential countries that it

considers as key drivers for its growth in this area:

China, South Korea and Japan.

Veolia Water’s design and build activities in

Equipment and Water Treatment Systems are used

as forerunners in newly opened-up markets, and as

support activities along with the operation of water

services. Veolia Water’s strategy is therefore to seek

out and develop the synergies between services and

equipment sales, and between design and build

activities and outsourcing. In the United States, in

the current difficult economic environment, the

equipment and systems arm of US Filter is relying

on the proactiveness of its sales teams and on the

performance of its technologies to maintain its

leading position in these market segments. Veolia

Water Systems has almost finished the integration

and restructuring of the subsidiaries of US Filter

International and is continuing its selective order-

taking approach by focusing on profitability over

revenue. The strategy of Veolia Water Systems in

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these markets is to (i) position itself as a provider of

custom design-build services and (ii) promote the

creation of packaged, standardized, modular systems.

Such systems will meet the needs of specific industrial

sectors and make it possible to offer municipal and

industrial customers temporary solutions to their

water-quality problems that can remain in place for as

long as required.

For its services to residential customers, Veolia Water

already operated through Proxiserve (a 50-50 joint

venture with Dalkia), and Culligan. Such services will

also be provided through Generale des Eaux Services, a

newly-incorporated subsidiary of Compagnie Generale

des Eaux. Generale des Eaux Services operates in the

sale of services and products in France not provided by

public water utilities, such as assistance and repair

services and solutions specifically intended for

individual housing. Veolia Water thus offers a very

wide range of high value-added services directly to

residential customers, an offering that it intends to

develop further.

4. Research anddevelopment

Expenditures for research and development

amounted to more than E63 million.

In the area of municipal wastewater treatment, the

company has a wide range of solutions to treat

sludge, which is produced in ever-increasing

quantities. Veolia Water is continuing to develop

new processes, particularly through turnkey

applications. They include the BIOTHELYS process,

which reduces the quantities of sludge produced, the

SAPHYR process, which improves the quality of sludge

through hygienization and odor reduction, and the

ATHOS process, which offers recycling solutions. The

company also has plans to develop a new generation

of biological treatment processes combined with

membranes for the clarification of water and the

removal of pathogenic agents.

In the field of drinking water, Veolia Water has

produced a benchmark technical procedure for the

treatment of legionella bacteria in all of the company’s

activities. It has also developed a new pre-treatment

process intended for implementation upstream from

the various types of membrane used in drinking water

and municipal wastewater treatment, sea water

desalination, and industrial waste management.

Furthermore, Veolia Water has developed methods

for the rapid detection (using molecular biology) and

inactivation of legionella bacteria as well as a means

of measuring the compounds responsible for taste

and odors in water.

In the area of resource management, Veolia Water

has begun a multi-year project involving research on

groundwater recharge in conjunction with a group of

30 researchers and five universities in Berlin. It is also

conducting research on the development of algae in

the Erdre river, and has obtained the European label

for its modeling center in the fields of hydraulics and

biological treatment. Veolia Water intends to study

artificial groundwater-recharge techniques, to develop

preventive and curative solutions for the proliferation

of algae, and to develop computer-assisted tools for

the design and operation of infrastructure, systems

and plants.

In the industrial field, Veolia Water has developed a

new range of electronic membrane treatments for

process water and has built a number of industrial

pilots—in particular by adapting the BIOSTYR process,

which was initially developed for municipal water

systems—for the nitrification of refinery effluents.

Veolia Water intends to develop management tools

for combined water and energy savings, using the

PINCH process, as well as processes using ion

exchange resins and membranes (electro-

deionization).

5. Veolia Water’s businessactivities in 2002

> Outsourcing services formunicipal and industrialcustomers

The management and operation of water and

wastewater services for public authorities and

private-sector companies constitutes Veolia Water’s

core business activity. The company supplies a range

of integrated services that cover the complete water

cycle (abstracting water from the natural

environment, treatment, storage and distribution,

then collection and treatment of wastewater). The

company’s activities include the design, construction,

management and large-scale operation of (i) facilities

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for the production of drinking water and for the

treatment and recycling of wastewater, (ii) drinking

water distribution networks and (iii) wastewater

collection systems. Veolia Water also provides the

end customers with other services relating to water

and wastewater.

Municipal outsourcing servicesFor 150 years, Veolia Water and its subsidiaries has

been providing water-related services in France and

many other countries, under long-term contracts

adapted to local conditions. The company’s

experience, technology and expertise have enabled it

to profit from the worldwide trend toward

privatization of municipal water and wastewater

services.

In France, Veolia Water, under the brand name

Generale des Eaux, holds more than 8,000

municipal contracts, serving 26 million people for

water services and 17 million people for wastewater

services. The market is becoming increasingly

competitive due to the expiry of a growing number

of contracts, the arrival of new local competitors and

the political choice of some municipalities to return to

running their services themselves. However,

Compagnie Generale des Eaux affirmed its

competitiveness by winning 43 new contracts in

2002, of which two-thirds were for wastewater

services. Out of 256 contracts that reached expiry

date in 2002, 236 were put up for renewal in

competitive bidding and 217 were renewed with the

company. The 39 contracts that were not renewed

accounted for only 0.25% of the annual revenue for

business in France, which nonetheless grew 3%. This

performance was also sustained by a notable increase

in service activities assigned to Compagnie Generale

des Eaux under public-sector contracts, such as

wastewater collection system maintenance, technical

support for networks and leak detection.

In Europe, Veolia Water, which has been established in

the UK, Germany and Eastern Europe for many years,

has strengthened its leadership position in municipal

services by winning a number of significant contracts.

For example, in September 2002 the company signed

a preliminary agreement in the Netherlands for the

design, construction, financing and operation of

wastewater treatment plants for the city and region

of The Hague for a period of 30 years, with cumulative

revenue estimated at E1.5 billion. In Prague, the

contract awarded in 2001 to provide comprehensive

water cycle management (drinking water and

wastewater) for the 1.2 million inhabitants of the

city and its suburbs was extended in 2002 from 12 to

24 years, subject to the lifting of suspensive

conditions. Veolia Water also increased its interest in

PVK, the Prague water utility, from 66% to 100%.

In Asia, a strategic area for expansion, Veolia Water is

already established in Thailand, Malaysia, South Korea

and, above all, China. In May 2002, Veolia Water was

successful in international competitive bidding for

water management services for Pudong, the business

district of Shanghai, for a period of 50 years, with

cumulative revenue estimated at E10 billion. Pudong

is one of the main commercial and financial hubs of

Asia and currently has 1.9 million inhabitants. Also in

China, Veolia Water signed two outsourcing contracts

with the Baoji and Zhuhai municipalities in December

2002. The contract signed with Baoji concerns the

refurbishment, extension and operation (for 23 years)

of two drinking water production plants supplying

500,000 people, with cumulative revenue estimated

at E300 million. The Zhuhai contract, which is the first

wastewater treatment contract won in China by

Veolia Water, concerns two wastewater treatment

plants—one already existing, the other to be

built—that will be operated for a period of 30 years.

Revenue is estimated at E400 million over the

duration of the contract.

In the United States, where its subsidiary US Filter

disposed of non-core businesses to focus on its service

activities and strengthen its leadership position in

equipment and systems, Veolia Water continued its

expansion in the non-regulated municipal market by

winning several significant contracts. US Filter’s

contract with the city of Indianapolis, signed in

March 2002, is America’s largest outsourcing

contract for a municipal water system. The 20-year

contract covers operation, maintenance, infrastructure

rehabilitation and customer service for the city’s water

service, serving 1.1 million people (cumulative revenue

estimated at $1.5 billion). In September 2002, US Filter

signed a contract with a total revenue value estimated

at $200 million with the Atlanta municipality for the

development and management of a sludge treatment

program for the city’s wastewater treatment plants. In

May 2002, US Filter was awarded a 20-year contract

for wastewater treatment for Richmond, California

($60 million in estimated revenue over the contract

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duration). In November 2002, US Filter’s contract to

manage the wastewater service for Oklahoma City

was renewed for five years (cumulative estimated

revenue of $36 million).

In North Africa, following on from the successful

contract bids for Tangiers and Tetouan in 2001, in

October 2002 Veolia Water took over the 26-year

outsourcing contract for municipal water, wastewater

and electricity services for the 2 million inhabitants of

the Rabat-Sale region, with cumulative revenue of

approximately E4.5 billion.

Industrial outsourcing servicesThe average term for industrial and commercial

contracts ranges from 3 to 10 years, with the term

for certain contracts ranging up to 20 years. Industrial

outsourcing business increased in 2002.

In France, Veolia Water signed a number of major

contracts. In the pulp and paper sector, Smurfit

Cellulose du Pin selected Veolia Water in January 2002

for a 12-year contract to treat the industrial effluents

of its paperboard plant in Facture, near Bordeaux (one

of the largest paperboard plants in Europe), and to

build a new biological treatment plant, with estimated

cumulative revenue of E11 million. In the chemical

sector, Rhodia selected Veolia Water in July 2002 for

the management and improvement of a wastewater

treatment plant at its Saint Fons location, near Lyons,

for a period of five years. This plant also processes

wastewater from a CIBA site and from another Rhodia

site located at Belle Etoile. Total revenue is estimated

at E6 million. In the iron and steel sector, Veolia Water

concluded a contract with Arcelor Packaging in April

2002 for the treatment of effluents from its Florange

location in Moselle for a term of 15 years, with revenue

of approximately E26 million over the life of the

contract. Lastly, in the food and beverage sector, Veolia

Water entered into contracts with such companies as

LU, LDC, Laurent Perrier, Stalaven and Saupiquet.

In the rest of Europe, Shell Chemicals selected Veolia

Water in May 2002 to build and manage water

filtration and softening units in Stanlow, UK, for 10

years. In December 2002, Veolia Water’s joint venture

in the Czech Republic with its industrial partner,

Cutisin (one of the largest Czech companies), was

expanded; Veolia Water will now provide all water

services for the Cuitsin subsidiary in Jilemnica for a

term of 10 years, with total revenue estimated at

E5 million.

In Malaysia, Veolia Water concluded a large

outsourcing contract in September 2002 with the

Petronas oil group for water treatment and

distribution services for the Kertith petrochemical

complex, worth an estimated E200 million in

cumulative revenue over 20 years.

In the United States, US Filter signed a 20-year

outsourcing contract in April 2002 with Alon for water

and wastewater services for its refinery in Big Springs,

Texas, worth nearly $66 million in cumulative revenue.

> Design-build, and watertreatment equipment andsystems

Veolia Water, through US Filter and Veolia Water

Systems, is one of the world’s leading designers and

manufacturers of water treatment equipment,

systems and facilities for the public sector and for

industrial and commercial companies. Veolia Water

treats groundwater, surface water and salt water, as

well as wastewater, using various processes and

separation technologies, and develops custom

systems for reducing or eliminating the impurities

found in water. The recycling and reuse systems

employed by Veolia Water let its customers return

treated water to their production processes, thereby

reducing water consumption, operating costs and

environmental impact.

In addition, Veolia Water designs, implements,

manufactures, installs and manages standard and

semi-standard water treatment equipment for

specific municipal and industrial uses. Thanks to the

large number of facilities built and operated, Veolia

Water has a competitive advantage in terms of costs,

performance and reliability, which are particularly

sensitive criteria for industrial and commercial

businesses. As an example, many production

processes, especially in the food and beverage,

pharmaceutical, microelectronic, pulp and paper,

chemical treatment and petroleum and

petrochemical industries, use processed water to

improve the quality of their products and reduce

wear on equipment. Water treatment adapted to the

customer’s particular needs is ensured by a

combination of a wide array of technologies for

physical, biological and chemical water treatment.

Through SADE, Veolia Water designs, builds, replaces

and rehabilitates municipal and industrial water

networks and wastewater collection systems, along

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with related infrastructure, in France and throughout

the world. From water intake to wastewater discharge,

SADE plays a role at all stages of the water cycle,

working with both municipal and industrial

customers.

In 2002, revenue from engineering activities and from

the supply of equipment and systems decreased as a

result of the disposal of non-core businesses.

Nevertheless, the company was awarded several

large contracts.

Municipal contractsIn France, Veolia Water Systems signed a major

contract in May 2002 for the upgrade of the

downstream Seine wastewater treatment plant at

Acheres, near Paris, which treats a large part of the

wastewater from the Greater Paris region. This

contract is worth an estimated E390 million in

cumulative revenue.

Outside France, Veolia Water Systems will provide the

design and build phase for the facilities planned under

outsourcing contracts for The Hague in the

Netherlands, for Baoji and Zhuhai in China, and for

Ashkelon in Israel (where the initial capacity of the

plant under construction has doubled). Veolia Water

Systems was also awarded other significant contracts

in 2002, such as that for the construction of a water

production plant for Machala, Ecuador, that

represents estimated revenue of E16.2 million.

In the United States, US Filter was awarded many

municipal contracts in spite of the difficult economic

situation. They included, in March 2002, a contract

with Orange County, California, where US Filter will

install the largest microfiltration plant in the world,

making it possible to treat the county’s wastewater to

a level where it can be injected into the aquifer, thus

preventing sea water intrusion (estimated revenue of

$25 million).

SADE also concluded various contracts for the

construction and replacement of municipal water

supply networks both in France and internationally.

Industrial contractsIn France, Veolia Water Systems will assume the

design and build phase for the facilities covered by

several industrial outsourcing contracts won by Veolia

Water, including the biological treatment plants to be

built for Smurfit and LDC. SADE entered into several

contracts to reinforce the wastewater systems and fire

prevention systems for industrial sites.

A number of contracts were also signed with

industrial and commercial companies throughout

the world. Among the most significant are those

with Celluloso, Aranco y Constitucion SA, which

selected Aquaflow-Veolia Water Systems to design

and implement a water cycle management solution

for its future plant in the Cruse River valley in Chile

(with estimated revenue of E4 million), and with

TyskieE, a large Polish brewery and member of the

South African Breweries group, for the construction of

its treatment plant (estimated revenue ofE5.8 million).

In North America, in spite of the difficult economic

environment, US Filter was awarded various contracts

for treatment equipment and systems, of which the

largest included a contract with the Genespee Power

Station in Canada for the supply of a high-

condensation-rate demineralization system, and a

contract with the Saltville Gas Storage Co. in Virginia

for the supply of a salt crystallization system.

> Residential customersThrough US Filter, Veolia Water supplies North

American and European consumers with bottled

water under the Culligan brand, as well as various

water treatment products, such as water softeners

and filters.

The distribution network for Culligan products and

services includes more than 1,200 retailers, of which

75% are located in North America, with the rest

located mainly in Europe. Under the Everpure brand,

the company also supplies the water filtration

systems used by 1.5 million customers in the food

service and restaurant industry through 50,000

suppliers throughout the world. Culligan is

constantly developing new distribution channels for

its products through mass merchandise and retail

store channels and by offering drinking water for sale

in supermarkets.

In 2002, the company experienced significant growth

as a result of increased sales of bottled water in North

America and other countries.

In France, Veolia Water offers a complete range of

services to residential customers through Proxiservice

(a 50-50 joint venture with Dalkia), which supplies in-

home technical services (i.e., cost distribution systems,

plumbing and fixture maintenance, maintenance of

individual heating systems, hot water production, and

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all-purpose maintenance), and Generale des Eaux

Services, which supplies residential and commercial

customers with services and products that are not

provided by public water utilities (including assistance

and repair services and solutions for private homes).

6. Changes in theconsolidation scope in2002

In 2002, Veolia Water continued its policy of

refocusing on its core businesses, begun in 2000.

The total figure for disposals carried out in 2002

throughout the world amounted to E1.5 billion.

In the United States, 2002 divestitures encompassed

US Filter’s remaining Filtration and Separation

activities (i.e., those activities specializing in filtration

and separation technologies for industrial applications

other than water), all its distribution and retail outlets

operating exclusively in the United States (supplying

equipment such as valves, pipes and meters), and a

peripheral Culligan subsidiary, Plymouth Products.

Veolia Water also disposed of its interest in

Philadelphia Suburban Corporation, a company

operating in the regulated water sector, of which it

was the main shareholder with 17% of the capital

stock.

In Europe, Veolia Water sold a total of E168 million in

minority interests, including two UK water distribution

companies: Bristol Water Holdings, in which it had a

24% interest, and South Staffordshire Water (32%

interest). It also disposed of Schwarze Pumpe, aka SVZ,

an incineration company and subsidiary of BWB,

which provides water management services for Berlin.

In France, the disposal of Bonna Sabla, a company

specializing in the manufacture of concrete

components for the public works market, was

concluded for the sum of E100 million, with Veolia

Water retaining a 20% interest in the company.

7. Competition

Veolia Water is the number 1 private provider of water

services for municipalities, industrial and commercial

companies. Its main competitors are Suez (through

Ondeo) and RWE with its UK subsidiary, Thames

Water. In France, Veolia Water has various local

competitors (in addition to its long-standing

competitors, Ondeo and Saur), which are often

offshoots of the construction and civil engineering

sector. It is also in competition with public

establishments (i.e., companies controlled by

municipalities or departements) and local

companies under mixed public and private

control. In 2002, more than half of non-renewed

contracts were returned to public control. However,

it should, be noted that the non-renewal rate

represented only 0.25% of annual revenue for the

water sector in France.

In the American market, US Filter has a number of

modestly sized competitors specializing in specific

technologies in the field of equipment and systems

sales, and also competes with specific players in the

non-regulated water sector (such as OMI and

Earth Tech.).

8. Environmental regulations

Activities relating to water and wastewater are very

sensitive to regulation. In Europe and the United

States, some significant environmental laws have

been enacted at the national and local levels to

respond to public concerns regarding the

environment. The quality of drinking water and the

treatment of wastewater are also increasingly subject

to regulation in developing countries, both in rural and

urban areas.

Drinking water quality is strictly regulated in Europe

by the drinking water directive, which was written into

French law by the Decree of December 20, 2001. The

collection, treatment and discharge of municipal,

industrial and commercial wastewaters are

regulated by the directive covering municipal

wastewater. The public authorities also impose strict

regulations to ensure that industrial wastewater does

not enter municipal wastewater collection systems, as

well as rules concerning wastewater and sludge

originating from municipal wastewater treatment

plants.

In France, there are many laws and regulations

concerning water pollution and various

administrative authorities are responsible for their

application. Some discharges and disposal methods,

as well as certain other activities with a potentially

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negative impact on surface or groundwater quality,

are subject to prior authorization or must be reported

to the authorities. For example, the public authorities

must be informed of any pumping facility for

groundwater in excess of certain predetermined

volumes, and legislation also prohibits or regulates

the discharge of certain substances into water. There

are both civil and criminal penalties for the violation of

these laws and regulations, and the company itself

may be found criminally liable.

In the United States, the main federal laws relating to

water and wastewater services are the Water

Pollution Control Act of 1972, the Safe Drinking

Water Act of 1974, and the regulations issued for

the application of these laws by the Environmental

Protection Agency (EPA). These laws and regulations

establish standards for drinking water and liquid

discharges. Each state has the right to establish

standards and criteria that are even stricter than those

set by the EPA, and a number of states have done so.

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ASSETS2002 2001

In millions of euros

Net intangible assets (note 3) 2,912.3 3,428.2

Net goodwill (note 4) 3,487.9 3,986.2

Owned property, plant and equipment 5,362.7 5,753.9

Publicly owned utility networks financed and

managed by the company 5,199.0 4,965.4

Accumulated depreciation (3,652.8) (3,686.6)

Net tangible assets (note 5) 6,908.9 7,032.7

Investments accounted for by the equity method (note 6) 124.5 301.4

Unconsolidated investments and other fixed assets (note 7) 123.6 90.7

Portfolio investments held as fixed assets (note 7) 8.5 20.1

Other financial assets (note 7) 560.8 570.3

Financial assets 817.4 982.5

I. Fixed assets 14,126.5 15,429.6

Inventories and work in process (note 9) 611.5 1,005.8

Accounts receivable and deferred tax (note 8) 4,778.0 5,892.0

Short-term financial receivables (note 10) 471.9 943.3

Cash and marketable securities (note 10) 816.7 865.3

II. Current assets 6,678.1 8,706.4

TOTAL ASSETS (I+II) 20,804.6 24,136.1

The accompanying notes are part of the consolidated financial statements

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SHAREHOLDERS’ EQUITY AND LIABILITIES2002 2001

in millions of euros

Capital stock 4,016.2 4,016.2

Additional paid-in-capital 36.2 36.2

Retained (losses)/earnings (2,485.6) (1,905.0)

Shareholders’ equity (after income for the year) (note 11) 1,566.8 2,147.4

Minority interests (note 12) 753.3 758.6

Deferred income and subsidies 369.1 320.5

Subordinated debt and securities 2,362.0 2,357.6

Equity and quasi-equity 5,051.2 5,584.1

Provisions (note 13) 1,423.2 1,700.3

Bond issues 7.3 7.6

Other long-term debt 6,997.7 7,899.7

Long-term debt (note 14) 7,005.0 7,907.3

Other long term liabilities 227.6 363.4

I. Long-term capital 13,707.0 15,555.1

Accounts payable (note 15) 5,230.3 6,710.5

Short-term debt (note 14) 1,867.3 1,870.5

II. Short-term debt 7,097.6 8,581.0

TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES (I+II) 20,804.6 24,136.1

The accompanying notes are part of the consolidated financial statements.

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(NB : Resultat operationnel = Operating income/(expense)2002 2001

in millions of euros

Revenue (excluding capitalized production) (note 20) 13,147.1 13,328.7

Cost of sales (10,529.7) (10,542.0)

Research and development expenses (63.7) (76.8)

Cost of production (10,593.4) (10,618.8)

Commercial expenses (558.1) (615.1)

Administrative expenses and overhead (971.7) (974.7)

Commercial and administrative expenses and overhead (1,529.8) (1,589.8)

Operating margin 1,023.9 1,120.1

Non-recurring operating charges and income 15.5 (26.5)

Restructuring costs (34.7) (33.7)

Goodwill amortization from consolidated companies (138.7) (2,770.6)

Operating income 866.0 (1,710.7)

Cost of financing (440.6) (595.6)

Provisions, other financial charges and income 26.8 (16.8)

Net financial expense (note 22) (413.8) (612.4)

Net exceptional expense (note 22) (61.4) (102.7)

Pre-tax income (note 16) 390.8 (2,425.8)

Income tax (271.4) (156.2)

Deferred tax (50.7) (220.7)

Income of consolidated companies 68.7 (2,802.7)

Income of companies accounted for by the equity method (note 6) 12.4 28.1

Goodwill amortization from companies accounted for by the

equity method (0.6) (13.3)

Minority interest (note 12) 3.2 35.7

Net income 83.7 (2,752.2)

Income per share (in euros) 0.10 (3.22)

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Operating transactions

Cash flow from operations 955 869

Change in working capital requirements (*) (484) 513

I. Net operating cash flow 471 1,381

Investment transactions

Capital expenditures (**) (1,085) (1,157)

Financial investments (740) (511)

Proceeds from disposals of industrial and financial assets 1,729 284

Change in short-term and long-term financial receivables and

marketable securities 172 117

II. Net investment cash flow 76 (1,267)

Financing transactions

Issue of parent company stock — 200

Minority interests in capital increases 4 5

Change in financial debt and other debt long-term (270) 31

III. Net financing cash flow (266) 236

Total financial cash flow (I+II+III) 281 350

Cash at January 1 582 990

Total financial cash flow 281 350

Impact of exchange rates, changes in consolidation scope and other (411) (758)

Cash at December 31 452 582

(*) including variance on securitization (refer to note 8)(**) including cost of replacement of assets (refer to note 19)

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Operating transactions

Cash flow from operations 955 869

– Change in working capital requirements (*) (484) 513

– Dividends received from companies accounted for by the equity method — (29)

Net operating cash flow (A) 471 1,353

Investment transactions

Capital expenditures (**) (1,085) (1,157)

Financial investments (740) (511)

Proceeds from disposals of assets (industrial & financial) 1,729 284

Total investing cash flow (B) (96) (1,384)

Financing transactions

Issue of parent company stock — 200

Minority interests in capital increases of subsidiaries 4 5

Net repayments of other long-term debt (45) 151

Dividends paid (41) (29)

Total financing cash flow (C) (82) 327

Total net debt flow (= A+B+C) 294 296

Balance sheet reconciliation

Net financial indebtedness at January 1 (note 14) (10,150) (10,015)

Cash flow for the financial year 294 296

Impact of exchange rates, changes in consolidation scope and other 136 (431)

Net financial indebtedness at December 31 (note 14) (9,720) (10,150)

(*) including variance on securitization (refer to note 8)(**) including cost of replacement of assets (refer to note 19)

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1. Significant accountingpolicies

> General principlesThe consolidated financial statements of Veolia Water

were prepared using French accounting standards and

comply with the provisions of the French Commercial

Law (Code de Commerce ‘‘L233-28’’), and the decree

issued on February, 17th 1986, and with the new

methodology approved by the French Accounting

Standards Board, the Comite de la Reglementation

Comptable (the ‘‘CRC’’), in April 1999.

Furthermore, Veolia Water applies the

recommendations of the French accounting body,

the Conseil National de la Comptabilite (the ‘‘CNC’’)

and records employees benefits. For finance leases,

Veolia Water uses the recommended method of

accounting.

The local financial statements of subsidiaries have,

where necessary, been restated to be consistent with

the accounting policies used within Veolia Water. Any

departures from this practice are supported by specific

industry circumstances.

Since the beginning of 2001, Veolia Water has applied

CRC rule 2000-06 relating to liabilities.

> Changes in presentation andaccounting methods

Veolia Water has not made any changes in accounting

methods or presentation during the course of 2002.

> Principles of consolidationVeolia Water fully consolidates all subsidiaries and

sub-subsidiaries over which it exercises legal or de

facto control. In addition, Veolia Water consolidates a

subsidiary only on condition that no other shareholder

or group of shareholders has substantive participating

rights.

Veolia Water accounts for companies in which it has

an ownership interest or voting rights of at least 20%,

and where it exercises significant influence, under the

equity method.

Proportionate consolidation is used only for

companies over which control is jointly exercised by

the company and one or more partners. For these

entities, the company accounts for its share under the

appropriate headings of the balance sheet and

income statement.

All other unconsolidated holdings are carried at

acquisition cost.

Subsidiaries acquired are recorded in the consolidated

financial statements on the acquisition date, or

exceptionally, when the impact is not significant, on

the basis of the last financial statements prepared

prior to that date.

In some cases, the company has expanded at the

international level by acquiring a stake in companies

that were previously under public control. The

innovative nature of this approach in certain

countries has led the outsourcing public authority,

regardless of the level of operating control granted to

the company, to choose to retain ownership of capital,

in some cases as the majority partner.

The management of Veolia Water decides on a case-

by-case basis, and after a detailed analysis of all the

contract elements beyond the percentage held, which

consolidation method best reflects the rights, duties,

liabilities and obligations that the company assumes

or from which it benefits.

This analysis, performed at each level of control,

results, as appropriate, in full consolidation (BWB AoR

for the Berlin contract and Csatorna for the Budapest

contract), proportionate consolidation (Midewa) or the

equity method (subsidiaries jointly owned with

Schlumberger).

This position is revised in the event of major

contractual events.

All significant transactions between companies

included in the financial statements have been

eliminated. In the case of proportionately

consolidated companies, such transactions are

eliminated on the basis of the percentage held by

Veolia Water in that entity.

> Use of estimatesTo prepare financial statements, Veolia Water may

use estimates and assumptions which affect the book

value of assets and liabilities, income and expenses, as

well as information relating to unrealized gains and

losses. Actual future results may differ materially from

these estimated figures.

The key significant estimates made by Veolia Water

primarily concern pension liabilities, deferred taxes

and the valuation of long-term assets.

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> Translation of foreignsubsidiaries’ financial statements

The balance sheets, income statements and cash flow

statements of subsidiaries for which the operating

currency is different from the currency used by the

parent company have been converted into the

reference currency on the basis of the relevant

exchange rates prevailing at the end of the year,

namely the year-end exchange rate for the balance

sheet and the average annual exchange rate for the

income and cash flow statements. Translation

adjustments are recorded in shareholders’ equity.

The exchange rates for the principal currencies of the

countries outside the euro zone used to prepare the

consolidated financial statements are as follows:

2002 2001Year-end exchange rate

U.S. dollar 0.95356 1.13565

Pound Sterling 1.53727 1.60298

2002 2001Average annual exchange rate

U.S. dollar 1.05453 1.11476

Pound Sterling 1.58893 1.60583

The balance sheets, income statements and cash flow

statements of subsidiaries in countries with high

inflation are translated into the stable currency of the

dominant country of the economic region in which

the subsidiary is located. The resulting translation

adjustments are charged to income for the period.

Financial statements prepared in this stable currency

are then translated into the reference currency on the

basis of the year-end exchange rate or the average

annual exchange rate and the translation

adjustments are charged against shareholders’ equity.

> Revenue recognitionRevenue is recognized upon transfer of ownership or

the provision of services to the customer according to

the contractual arrangements. Ownership is

transferred to the customer upon shipment of

goods. The sector-specific procedures governing

revenue recognition are presented in the relevant

sections of these notes.

> Income statement measuresEBITARC, the internal indicator for management

purposes relating to the income statement,

represents earnings before interest, tax, goodwill

amortization and restructuring costs. It differs from

operating income, which only includes recurring items

relating to operations. It complies with CRC rule 99-02.

Non-recurring operating charges and income include

profit or loss from operations or events of an

exceptional nature (i.e., which are not likely to recur

during the normal operations of Veolia Water, in

particular capital gains and losses from the disposal of

investments). These correspond to the restrictive

definition of extraordinary items as set out by

International Accounting Standard IAS 8.

> Goodwill and businesscombinations

All business combinations are accounted for as

mergers or acquisitions. Assets and liabilities

acquired are recorded at their fair value. If any, the

excess of the purchase price over the fair value of the

assets and liabilities acquired is recorded as goodwill

and amortized on a straight-line basis over its useful

life. The amortization period for goodwill is between

20 and 40 years.

> Other intangible assetsTrademarks, brands and market share are not written

down. Their fair value is determined every year on the

basis of valuation criteria used at the time of the

acquisition.

The disposal of non-core business activities at US Filter

led management to carry out an assessment of which

intangible assets should be retained on the balance

sheet following disposals, as well as their value and

valuation criteria.

Other intangible assets include expenses incurred to

secure contracts, such as fees paid to municipal

authorities for public utility contracts. Fees paid to

municipal authorities are amortized over the contract

period, which may be up to 30 years.

> Tangible fixed asetsTangible fixed assets are carried at acquisition cost

less cumulative depreciation. This depreciation is

calculated on a straight-line basis over the following

periods:

Estimated useful life

Buildings 20 – 50 years

Equipment 3 – 12 years

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Assets financed through finance leases are recorded

on the balance sheet and depreciated over the shorter

of the contract period and the estimated useful life of

the asset. Depreciation allowances for assets acquired

under finance leases are included under fixed asset

depreciation expenses and provisions.

> Valuation of long-term assetsThe book value of long-term assets, including goodwill

and other intangibles, is regularly reviewed in the light

of internal and external factors or circumstances that

may trigger a write-down. In such a case, an

exceptional write-down or a provision for

depreciation is recorded on the basis of the current

estimated fair value.

> Financial assetsUnconsolidated investmentsUnconsolidated investments are stated at acquisition

cost.

Where the book value is higher than the value in use,

the difference is charged to income as a provision for

depreciation. Value in use is decided on the basis of

the percentage of shareholders’ equity that the

investment represents. If necessary, the percentage

can be rectified to take into account these companies’

degree of importance to the group, as well as their

outlook for growth and earnings.

Other long-term investments andfinancial assetsOther long-term investments and financial assets

include listed and unlisted securities of unconsolidated

companies and long-term financial receivables stated

at acquisition cost. When the fair value is consistently

less than the acquisition cost, a provision is

established. Fair value is determined by reference to

Veolia Water’s pro-rata share in the shareholders’

equity of the companies concerned or by reference to

the market value for listed securities.

> Inventories and work in processInventories are recorded according to the provisions of

the French Commercial Code, i.e., on either a FIFO or

a weighted average cost basis. Inventories are

stated at the lower of cost and net realizable value

based on market prices and sales prospects,

excluding marketing costs.

> Accounts receivableTrade accounts receivable are stated after any

provision for depreciation to reflect the risk of non-

payment of the receivables. Provisions for depreciation

relating to receivables booked by French water

distribution companies are assessed using statistical

techniques.

> Deferred taxDeferred tax assets are recognized in respect of timing

differences between pre-tax accounting income and

taxable income giving rise to a tax saving, as well as

tax losses and tax credits. Deferred tax liabilities are

recognized for taxes payable in future years. Deferred

tax assets are recorded at their estimated net

recoverable value. Both deferred tax assets and

liabilities are adjusted to take into account the

impact of changes in the tax legislation and the tax

rates applicable at the balance sheet date.

> Cash and marketable securitiesCash includes all cash balances and short-term assets

with an initial maturity less than or equal to three

months from the date of purchase.

Bank overdrafts and other cash position items

corresponds to bank overdrafts (very short term).

Marketable securities include Vivendi Universal stock

and other highly liquid investments. They are stated at

acquisition cost and a provision for depreciation is

recorded where their market value is less than book

value.

> Pension plansVeolia Water has set up several pension plans that

cover virtually all its employees, especially in countries

other than France. Company pension liabilities are

determined on the basis of the projected credit unit

method (actuarial cost). This method takes into

account the probability of staff remaining with the

company until retirement, foreseeable changes in

compensation and the appropriate discounted cash

flow rates. The rates used are specific to each

monetary zone. Under this method, the assets and

liabilities are recorded on the balance sheet and the

corresponding net expenses are recognized over the

estimated remaining employment period.

In France as in most European countries, personnel

employed by Veolia Water are entitled by law to lump-

sum payments at the end of their employment

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contract. Veolia Water accrues for these liabilities

according to the projected credit unit method

(actuarial cost).

> Stock option plansVeolia Environnement has established a stock option

plan that grants stock options conferring a right to

purchase common stock to designated executive

officers of the Veolia Water group. These plans are

intended to align the interests of management with

those of shareholders by providing senior managers

and other key employees with additional incentives to

enhance the company’s performance over the long

term.

> Derivative financial instrumentsVeolia Water generally uses forward currency

exchange contracts to cover foreign exchange risks

associated with irrevocable and prospective

transactions relating to assets denominated in

foreign currencies.

> Transactions in foreign currenciesTransactions in foreign currencies are converted into

euros at the exchange rate prevailing on the

transaction date. At the end of the financial year,

trade receivables and payables denominated in

foreign currencies are converted into euros on the

basis of the year-end exchange rate. The

corresponding currency gains and losses are

charged/credited to the profit and loss account.

Currency losses on borrowings denominated in

foreign currencies for the purpose of hedging net

equity interests in foreign subsidiaries are included in

the translation adjustments set off against

shareholders’ equity.

> Research and developmentResearch and development expenses are expensed as

incurred.

> Internally developed softwareInternal and external direct costs relating to the

internal development of software are capitalized

under assets during the development phase. Out of

that phase, they are recorded as expenses. These

capitalized expenses are amortized over the estimated

useful lives of the corresponding applications.

> Advertising costsAdvertising costs are expensed as incurred.

> Specific accounting provisionsrelating to Veolia Waterbusinesses

Contractual provisionsVeolia Water is the concessionary public utilities

company for water treatment and distribution

services. French law provides for three types of

public utility concessions: leasing contracts

(affermage), whereby the operator is responsible

for the management and maintenance of

infrastructure owned and financed by

municipalities; concessions, which correspond to

BOT (Build Operate Transfer) agreement; and time

and materials contracts (regies).

In France, Veolia Water operates primarily leasing

contracts (affermages).

Revenue recognitionRevenue from services rendered is recognized using

the completed contract method.

InfrastructureInfrastructure managed by the company is generally

financed by the municipalities, which retain

ownership throughout the duration of the contract.

Individual facilities financed by the company through

specific contractual provisions are recorded as fixed

assets and depreciated, when applicable, on the basis

of their estimated residual value over the shorter of

their useful life and the contract period. Where this

period is shorter than the useful life of the asset, the

write-down is recorded under liabilities as an

amortization of assets under concession.

Commitments relating to the maintenanceand repair of assetsVeolia Water is generally subject to a contractual

obligation to maintain and repair facilities and

equipment on the property it manages under public

service contracts. The corresponding maintenance and

repair costs are expensed as incurred, barring certain

investments in joint ventures for which provisions are

recorded in advance. These costs are covered by Veolia

Environnement under a commitment given (refer to

note 19).

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Fees paid to municipalitiesVeolia Water is not obligated to make any payments

to municipalities during the contract period, with the

exception of contractual fees agreed upon by the two

parties and formally stipulated in the contract.

The company’s policy is to expense fees paid to

municipalities as they are incurred in the case of

annual payments and on a straight-line basis when

the fees are paid on the start date of the contract.

Building contractsTo calculate their margin, construction companies

generally record revenue according to the percentage-

of-completion method.

When it is not possible to determine the technical

degree of completion, the calculation is based on the

ratio of costs cumulated since the start of the project

to the total estimated cost of the contract at

completion.

The company considers work completed when

accepted by the customer. This acceptance is

attested to by the customer’s signature of a specific

document.

The company recognizes expenses relating to claims

immediately, whereas the related income is not

recognized until approved by the customer. When

additional expenses are attributed to the fault of the

general contractor, the income is nevertheless

recognized if the management considers it as an

integral part of the contract, if not provided for on the

contract date, and based on legitimate, identifiable

and justifiable expenses effectively resulting in

additional income.

Expenses and income on completion are periodically

reviewed during the performance of the work to take

into account modifications identified in the

contractual conditions. The impact of these changes

on budgeted gross earnings is allocated to income of

the period if determined by the company before the

publication of the definitive financial statements.

Otherwise, a provision is recorded when it is expected

that the changes will result in a loss on completion.

2. Scope and methods ofconsolidation in 2002

> Scope of consolidationIn 2002, the Veolia Water group consolidated 635

companies (564 fully consolidated, 61 proportionally

consolidated and 10 using the equity method); 437 of

which were foreign companies (refer to note 23).

Acquisitions and divestments were accounted for

from the date of their acquisition or disposal by the

company.

As regards Vivendi Universal’s water activity, which

was transferred in 1999 to Veolia Water, the estimated

balance sheet and income statement items relating to

contracts transferred, as well as income deriving from

rights to receivables from non-transferred contracts,

were accounted for in 1999 as if these items were

transferred on January 1, 1999. In 1999, Compagnie

Generale des Eaux received from Vivendi Universal,

with retroactive effect to January 1, 1999, the assets

and liabilities relating to all contracts that were the

subject of an amendment with the outsourcing

municipalities and was granted a right to annual

revenue from the remaining non-transferred

contracts. These transfers continued under the same

basis in 2000, 2001 and 2002.

> Tax consolidation groupFollowing the listing of Veolia Environnement in 2000,

the scope of Vivendi Universal’s fiscal consolidation

was changed in such a way that Veolia Water was

excluded. In 2001, Veolia Water integrated a new tax

consolidation group headed by Veolia Environnement.

> GoodwillGoodwill recorded in the consolidated financial

statements of Veolia Water was calculated in

accordance with the consolidation principles and

methods specified above and on the basis of the

acquisition cost of the corresponding shares for Veolia

Water and its subsidiaries.

The reduction in net goodwill in 2001 was principally

the result of the mark-to-market write-down of the US

Filter branches to be sold in 2002 and the

E2,915 million impairment charge booked because

of the downward revision of the business plan for the

core activities.

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> Activities transferred by means ofasset contributions

Since contributions by Vivendi Universal to Veolia

Water were made at net book value, no additional

goodwill was recognized in Veolia Water’s financial

statements.

> Activities transferred by means ofasset sales

Divestments made by Vivendi Universal to form the

water activity in 1997, for a net amount of E1.4 billion

at that time, were carried out at market value and

generated additional goodwill to that recorded in

Vivendi Universal’s financial statements.

3. Other intangible assetsIntangible assets other than goodwill can be analyzed

as follows:

At December 312002 2001In millions of Euros

Payments to municipalities 411.1 406.6

Trademarks, brands, market

share 1,755.6 2,471.5

Software and miscellaneous 415.0 226.0

Expenses to be allocated over

several years 330.6 324.1

Total 2,912.3 3,428.2

Payments to municipalities for public service

contracts, primarily in France, amounted to

E411.1 million for the 2002 financial year, compared

with E406.6 million in 2001.

Trademarks, brands and market share, mainly

concerning US Filter, amounted to E1,756 million at

December 31, 2002, compared with E2,472 million at

December 31, 2001, and E2,309 million in 2000. The

variance is attributable to the disposals carried out by

US Filter and the euro/dollar exchange rate. The book

value of market share is adjusted each year according

to the same criteria as those used to assess its initial

value, or more appropriate methods if the original

criteria are no longer pertinent owing to market

developments. If this examination shows a

permanent loss in value, a provision for depreciation

is recorded.

Identified trademarks with recognized, long-term

recognition are valuated mainly on the basis of

royalties resulting from their market use.

Software and other intangible assets stood at

E414.6 million at December 31, 2002, versus

E226 million at December 31, 2001.

Expenses to be allocated over several years amounted

to E330.6 million at December 31, 2002, compared

with E324.1 million at December 31, 2001. They

primarily relate to the difference between the

contractual amount of debt servicing repayments to

municipalities and the expense charged to income

over the period of the public service contract.

Amortization of the year of other intangible assets

amounted to E85 million in 2002, compared with

E75 million in 2001.

Accumulated amortization stood at E535 million in

2002, versus E469 million in 2001.

4. GoodwillThe main sources of goodwill can be broken down as

follows (gross values in millions of euros):

2002Gross

2001GrossIn millions of Euros

US Filter 3,963 5,789

Water segment companies in

France 830 832

Veolia Water UK and its

subsidiaries 303 306

Shanghai Pudong (*) 181 —

Berliner Wasser Betriebe 180 180

Prague 177 161

Veolia Water Systems 175 153

Redal (*) 110 —

Bucharest 22 22

Gorlitz 20 18

Autres 128 102

TOTAL 6,089 7,562

(*) Brought into the scope of consolidation in 2002

The main acquisitions carried out in 2002 resulted in

additional goodwill in the total amount of

E447 million, primarily including Shanghai Pudong

(E181 million), Redal (E110 million), and US Filter

(E46 million).

Since the net book value of the acquired companies is

subject to adjustment during the first 12 months

following the transaction, the amounts relating to

acquisitions during the fiscal year were still provisional

at December 31, 2002.

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On the other hand, the disposal of Distribution

activities and of Plymouth Products contributed to a

decrease in goodwill at US Filter in the respective

amounts of E954 million and E86 million.

Variations in the dollar-euro exchange rate resulted in

a negative currency translation adjustment of

E871 million for the fiscal year.

Recurring amortization and accumulated goodwill

amortization amounted to E2,601 million at

December 31, 2002.

5. Tangible fixed assets

2001Change in

ScopeAdditions/allocations

Disposals/reversals

Othermovements 2002In millions of Euros

Owned property, plant and equipment 5,753.9 (371.0) 505.3 (157.1) (368.4) 5,362.7

Publicly owned utility networks financed

and managed by the company 4,965.4 (2.4) 290.1 (17.6) (36.6) 5,198.9

Gross tangible assets 10,719.3 (373.4) 795.4 (174.7) (405.0) 10,561.6

Depreciation of owned property (2,022.8) 347.1 (371.4) 104.3 52.7 (1,890.1)

Depreciation of publicly owned utility

networks (1,663.9) 0.0 (113.2) 15.1 (0.6) (1,762.6)

Net tangible assets 7,032.6 (26.3) 310.8 (55.3) (352.9) 6,908.9

The tangible fixed assets that are newly included within the scope of consolidation (E279 million) primarily relate

to: Shanghai Pudong (E123 million), Redal (E82 million) and US Filter (E46 million). Those leaving the scope of

consolidation (E305 million) primarily relate to: US Filter (E130 million), Schwarze Pumpe (E84 million) and Bonna

Sabla (E75 million).

Other movements include a currency translation loss of E272 million.

Tangible fixed assets can be broken down as follows:


Land 238.6 292.9

Buildings 607.4 722.7

Technical facilities 1,749.4 1,895.5

Construction in process 230.5 305.6

Other 646.7 514.4

Owned net tangible assets 3,472.6 3,731.1

Publicly owned distribution

networks (net values) 3,436.3 3,301.5

Total 6,908.9 7,032.6

s Cumulated depreciation for tangible assets

amounted to E3,652.7 million in 2002, versus

E3,686.7 million in 2001.

s Tangible assets financed through finance leases

amounted to E203.9 million at December 31,

2002, versus E190 million at December 31, 2001.

s Total depreciation expense for the year for these

assets financed through finance leases stood at

E43.6 million in 2002, compared with

E21.3 million in 2001.

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6. Investments accounted for by the equity method

The principal companies accounted for by the equity method are listed below:

Percentageheld

Share of netshareholders’ equity

Share ofnet income

2002 2001 2002 2001 2002 2001At December 31, in millions of Euros

Fovarosi Csatornazasi Muvek Reszvenytarsasag 25.00% 25.03% 95.4 88.9 0.5 1.8

Philadelphia Suburban (1) 15.15% 80.0 10.7

South Staffordshire Water (1) 31.74% 59.6 9.2 10.3

Bristol Water (1) 24.14% 37.6 3.9

Intan utilities berhad 30.00% 30.00% 10.7 12.0 0.7 1.5

Acque Potabili 14.36% 14.36% 9.4 9.5 —

Egyptian company for prestressed concrete (1) 30.00% 5.6 1.3 1.2

Compania Mexicana de Aguas 49.98% 50.00% 1.8 5.8 0.2 —

PCP Holding (2) 19.85% 4.5

Other 2.7 2.4 0.5 (1.3)

Total 124.5 301.4 12.4 28.1

(1) Holdings disposed of in 2002

(2) Acquired in 2002 (as counterpart of the disposal of Bonna Sabla)

The changes during 2002 in companies accounted for by the equity method can be analyzed as follows:

Percentageheld in 2002 2001

Change inconsolidation

scope IncomeDividend

distribution

Currencytransaction

lossesand

gains

Change inpercentage

held Replacement

Exit fromconsolidation

scope 2002In millions of Euros

Fovarosi CsatornazasiMuvek Reszvenytarsasag 25.00% 88.9 0.5 5.7 (0.1) 0.4 95.4Philadelphia Suburban — 80.0 (80.0) 0.0South Staffordshire Water — 59.6 9.2 (5.0) (2.6) (61.2) 0.0Bristol Water — 37.6 (1.5) (36.1) 0.0Intan utilities berhad 30.00% 12.0 0.7 (0.5) (1.5) 10.7Acque Potabili 14.36% 9.5 (0.1) 9.4Egyptian company forprestressed concrete — 5.6 1.3 (6.9) 0.0Compania Mexicana deAguas 49.98% 5.8 0.2 (0.5) (0.8) (2.9) 1.8PCP Holding 19.85% — 4.5 4.5Others 2.4 0.1 0.5 0.2 (0.5) 2.7Total 301.4 4.6 12.4 (6.1) (0.7) (0.1) (2.3) (184.7) 124.5

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7. Unconsolidated investments at December 31, 2002 andother financial assets

Unconsolidated investments amounted to a net book value of E123.6 million:

Percentage ofcapital held at

31/12/02

Bookvalue

2002

Bookvalue

2001In millions of Euros

AMENDIS (1) 25% 6.2

STERIENCE (2) 51% 8.5

STADTWERKE WEISSWASSER Gmbh (2) 74.9% 29.8

Other investments (gross unit book value less than E6 million) (2) 103.1 101.6

Gross book value 141.4 107.8

Provisions for depreciation (17.8) (17.1)

Net book value 123.6 90.7

(1) Company consolidated in 2002: 51% jointly owned by Veolia Water and Vivendi Universal, with Veolia Water having operationalcontrol

(2) Companies to be consolidated in 2003

Other investments held as fixed assets can be analyzed as follows:


Long-term loans (1) 231.8 181.9

Other financial assets (2) 338.2 394.1

Depreciation (9.2) (5.7)

Total net 560.8 570.3

(1) Including E97.5 million as a result of the creation in 2001 of a silent partnership with the regional government of Berlin (anoffsetting entry of the identical amount is recorded in long-term debt in the consolidated balance sheet) and a deferredreceivable of E59.8 million on US Filter’s sale of Kinetics.

(2) Including E128 million at Veolia Water UK for pension funds and E184 million at US Filter (E74 million in financing forcustomers or franchises, E23 million in investments in unconsolidated affiliates, etc.)

8. Accounts receivable

> Accounts receivable

2002 2001In millions of Euros

Trade receivables 3,830.2 3,786.2

Provisions for doubtful

receivables (257.3) (268.5)

Total trade receivables 3,572.9 3,517.7

Other receivables and

company institutions 796.3 1,905.6

Deferred tax 356.5 468.7

Total accounts receivable 4,725.6 5,892.0

Owing to the nature of Veolia Water’s business

activities, the majority of trade receivables are due in

less than one year.

> Adjustments for doubtfulreceivables


Opening balance (268.5) (237.6)

Provisions (76.6) (62.7)

Reversals 54.5 65.1

Other adjustments 33.3 (33.3)

Closing balance (257.3) (268.5)

Other adjustments reflect changes in the scope of

consolidation and exchange rates.

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> Securitization of trade receivablesin FranceAs part of the agreement signed in December 2002 for

the transfer of receivables by means of a special

purpose vehicle (fonds commun de creances, or FCC),

several companies within the Veolia Water group,

which belongs to the Veolia Environnement group,

securitized their receivables at their net discounted

book value, yielding an amount of E416 million in

France. The amount of the secured receivables was

posted to the assets of the FCC. This vehicle is

financed by senior shares, underwritten by banks,

and by subordinate shares, underwritten by Veolia

Environnement. The subordinate shares will be

reimbursed only after payment of the senior

shares. Any repayment of the discount to the

transferring companies of the Veolia Water group

will be made only after reimbursement of the

subordinate shares.

As part of this agreement, each company is

responsible for recovering and managing receivables.

With regard to the FCC and matters relating thereto,

Veolia Environnement guarantees that its obligations

will be appropriately met.

in the United StatesThe securitization of US Filter’s accounts receivable,

which was begun in 2001 for an amount of $155

million, was ended following the disposal of its

Distribution branch in 2002.

> Sale of receivablesReceivables sold under the terms of France’s Dailly Act

amounted to E56 million versus E90 million in 2001.

9. Inventories and work inprocess

Inventories and work in process are broken down by

business segment as follows (cf. note 20):

At December 31

In millions of euros 2002 2001

Domestic 308.4 484.2

International 351.5 604.2

Total 659.9 1,088.4

Provision for depreciation (48.4) (82.6)

Net value 611.5 1,005.8

Disposals and exchange rate fluctuations led to a

reduction in inventories and work in process of E231

million and E57 million respectively in 2002 (in net

value).

10. Short-term financialreceivables, cash andmarketable securities

This item amounted to E1,288.6 million in 2002,

compared with E1,808.6 million in 2001.

Short-time financial receivables can be broken down

as follows:


Short-term financial

receivables

(> 3 months)(1) 627.7 959.6

Provisions for short-

term financial

receivables

(> 3 months)(2) (155.8) (16.3)

Total 471.9 943.3

(1) In 2002, Vivendi Universal reimbursed most of its currentaccount with Compagnie Generale des Eaux as part of thecontinuation of contract transfers.

(2) As part of the disposal of Schwarze Pumpe, a peripheralsubsidiary of the Berlin water company, the financialreceivable held by the Berlin water company relating to itsformer subsidiary was fully covered by a provision.

Cash and marketable securities can be analyzed as

follows:


Cash (net) 728.2 790.0

Marketable securities 88.5 75.3

Total cash and

marketable securities 816.7 865.3

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11. Shareholders’ equity

Capital

Additionalpaid-incapital

Retainedearnings/

(losses)Net

incomeShareholders’

equityIn millions of euros

Balance at December 31, 2001 4,016.2 36.2 847.2 (2,752.2) 2,147.4

Capital increase(1) 25.3 25.3

Net income appropriation and dividends paid (2,752.2) 2,752.2 0.0

Foreign currency translation adjustment(2) (715.7) (715.7)

Miscellaneous 26.1 26.1

2002 net income 83.7 83.7

Balance at December 31, 2002 4,016.2 36.2 (2,569.3) 83.7 1,566.8

(1) As a result of the transfer of contracts from Vivendi Universal to Compagnie Generale des Eaux, the additional paid-in capitalwas increased by E25.3 million.

(2) The main translation adjustments involved the dollar (a decrease of E649.1 million), pound sterling (decrease of E40.2 million)and the Chinese yuan (decrease of E13.4 million). At December 31, 2002, the cumulative translation adjustment amounted to anegative impact of E22.1 million.

12. Minority interestsThe change in minority interests is detailed below:


Minority interests at January 1 758.6 752.3

Changes in consolidation scope 31.6 54.7

Minority share in the Group’s income (3.2) (35.7)

Proportional share of dividends in consolidated companies (41.3) (29.6)

Foreign currency translation adjustments 10.6 4.5

Other movements (3.0) 12.4

Minority interests at December 31 753.3 758.6

Changes in the scope of consolidation are mainly due to the consolidation of Amendis (E28 million), to a change

in the consolidation ratio for the Czech companies (from proportionate to full consolidation) in the amount of

E21 million, and to the increase in the consolidation ratio for Prague (from 66% to 100%), contributing to a

E13 million decrease in minority interests.

13. Provisions for liabilities and charges

> Movements in provisions for liabilities and chargesProvisions for liabilities and charges amounted to E1,423.2 million at December 31, 2002, versus E1,700.3 million in

2001.

2001

Change inconsolidation

scope andother

Foreigncurrency

translationadjustements Allocations Reversals 2002In millions of euros

Provisions for replacements and full

warranty 116.7 (6.3) (0.6) 34.0 (36.3) 107.5

Amortization of assets under

concession 349.3 (26.9) 0 27.6 (0.7) 349.4

Pension provisions 90.9 13.4 0 8.9 (18.3) 94.9

Other provisions for liabilities and

charges 1,143.4 (150.5) (42.2) 301.4 (380.8) 871.4

Total provisions 1,700.3 (170.2) (42.8) 371.9 (436.1) 1,423.2

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The net balance for provisions and reversals for the

year amounted to E64 million, including E52 million

(at 50%) for the reversal of the provision for subsidiary-

related risks for Schwarze Pumpe by BWB.

Other provisions for risks and liabilities (representing a

total amount of E871.4 million) include provisions for

environmental risks and post-closure care of sites

(E133.5 million), for litigation (E122 million), for losses

on contracts (E129.4 million), for warranties and after-

sales service (E72.9 million), for subsidiary-related risks

(E52.7 million), for employee benefits (E52.7 million),

for tax-related risks (E49.2 million), for restructuring

(E48.2 million, relating mainly to US Filter in the

amount of E33 million, Apa Nova Bucaresti for E7

million, and Veolia Water Systems for E5 million).

> Analysis by segment(refer to note 20)

At December 312002 2001In millions of euros

Domestic 860.5 946.2

International 562.7 754.1

Total 1,423.2 1,700.3

14. Net debt

> Breakdown by category ofexpense


Bond issues 7.3 7.6

Subordinated debt and

securities(1) 2,362.0 2,357.6

Other long-term debt(2) 6,997.7 7,899.7

Long-term debt 9,367.0 10,264.9

Short-term financial debt and

bank overdrafts and other

cash position items 1,867.3 1,870.5

Total debt 11,234.3 12,135.4

Long-term financial

receivables (225.5) (176.7)

Short-term financial

receivables and cash and

marketable securities (1,288.5) (1,808.6)

Total financial receivables and

cash (1,514.0) -1,985.3

Net debt 9,720.3 10,150.1

(1) Including E2,250 million of Veolia Environnementsubordinated debt in 2002.

(2) Including E4,231.6 million with respect to VeoliaEnvironnement in 2002.

At the close of the 2002 financial year, bank loans

totaling E208 million were supported by collateral

guarantees. These guaranteed debts primarily relate

to Wyuna Water (Australia) for up to E77 million,

Veolia Water Industrial Development for E71 million

and Veolia Water Korean Daesan for E56 million.

Moreover, debt of E75 million recorded on the balance

sheet of Three Valleys relates to the financing of

specific assets.

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> Maturity analysis of long-term debt2002 2001In millions of euros

Due between 1 and 2 years 136.6 197.0

Due between 2 and 5 years 4,989.4 6,287.4

Due after 5 years 4,241.0 3,780.5

Total 9,367.0 10,264.9

Debts denominated in currencies other than the euro amounted to E2,860 million, including E2,519 million

denominated in US dollars, E82 million denominated in sterling and E73 million denominated in Australian

dollars.

> Change in long-term debt

Amount at31/12/2001 New borrowings Repayment

Changes inconsolidation

scope

Foreign currencytranslation

adjustments,reclassificationsand changes in

accounting policyAmount at

31/12/2002In millions of euros

Domestic 3,598.3 665.6 (442.4) (14.9) 164.2 3,970.8

International 6,666.6 411.2 (732.3) (53.4) (895.9) 5,396.2

Total 10,264.9 1,076.8 (1,174.7) (68.3) (731.7) 9,367.0

The variation in exchange rates in 2002 (principally dollar to euro) had a positive impact of approximately E458

million.

15. Accounts payable

Accounts payable can be analyzed as follows:


Trade payables 2,198.4 2,508.9

Accrued payroll charges, deferred tax and other 3,031.8 4,201.6

Total accounts payable 5,230.2 6,710.5>

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16. Tax

> Deferred tax assets and liabilitiesTiming differences giving rise to deferred tax assets and liabilities are shown below:

Amount atDecember 31


Company benefits 20.1 14.7

Provisions for liabilities and charges 14.0 2.4

Carry-forwards 229.4 408.7

Liability revaluation 11.3 8.3

Other deductible timing differences 161.4 47.8

Gross deferred tax assets 436.2 481.9

Deferred tax asset limitation (79.8) (13.2)

Deferred tax assets included in the financial statements 356.5 468.7

Deferred tax liabilities

Fiscal-based depreciation 130.3 55.4

Asset revaluation 7.2 7.0

Other taxable timing differences 199.5 187.5

Gross deferred tax liabilities 337.0 249.9

Deferred tax assets are shown on the consolidated

balance sheet under accounts receivable. Deferred tax

liabilities are recorded under accounts payable.

> Reconciliation of tax ratesThe reconciliation of the French statutory tax rate to

the effective tax rate incurred by the company can be

analyzed as follows:



Statutory tax rate 35.4% 36.4%

Exceptional items included in

tax payable 18.9% (2.7)%

Permanent differences

between book and tax income 19.7% (2.5)%

Items subject to a special tax

rate (16.9)% (47.2)%

Restatement or consolidation

entries that do not generate

tax savings (4.4)% 6.6%

Changes in deferred tax asset

limitation 12.9% (7.6)%

Other differences, net 14.5% 1.4%

Effective tax rate (a) 80.1% (15.6)%

(a) The effective tax rate is obtained by dividing tax expenseand deferred tax by net income before tax expense anddeferred tax.

> Net operating tax lossesThe maturity structure of the tax loss carryforwards

can be analyzed as follows:



Financial year

2002 — 11.8

2003 0.2 0.8

2004 5.3 1.1

2005 2.5 1.3

2006 and beyond 221.4 393.7

Total 229.4 408.7

17. Pension plans and otherretirement benefits

Pursuant to the laws and practices of each country,

certain companies within the group contribute to

pension plans offering employees invalidity/death

coverage as well as retirement and pre-retirement

benefits. These plans offer various benefits in the form

of flat-rate annuities proportional to employees’

length of service and retirement pensions included

in local inter-company social security and retirement

funds.

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Most pension plans are financed by unit-linked

investments such as insurance policies, as well as

portfolio investments in shares and bonds. These

pension plans do not hold any parent company

shares.

For defined contribution and inter-company plans, the

company records a charge equal to contributions paid.

For defined benefit plans, the charges to be paid are

determined according to the actuarial projected credit

unit method.

Retirement benefits are recorded on acceptance of the

offer by employees or their representatives.

Actuarial differences are amortized over the entire

period for which the commitments are calculated.

The table below shows pension commitment and

other company benefits.

2002(*) 2001(*) 2001(**)In millions of euros

Total commitments in

France 81 93 109

– covered by insurance 40 36 49

– covered by provisions 40(1) 54 57

– actuarial differences 1 3 3

Commitments outside

France 248 212 175

– covered by provisions 97(2) 80 47(4)

– covered by pension

funds 151(3) 132 128

(*) Commitments broken down by nationality of beneficiaries

(**) Commitments broken down by country where companiesare registered

(1) Regional water companies, E20 million; VWS, E14 million

(2) Berlin, E41 million; US Filter, E26 million; Gabon,E12 million

(3) UK, E128 million; United States, E23 million

(4) Excluding E21 million posted as provisions for other risksand liabilities

18. Financial instruments

> Forward exchange contracts andoptions

Forward exchange contracts and options are intended

to hedge irrevocable and prospective transactions

relating to assets held in foreign currencies.

19. Commitments andoff-balance-sheet items

> Commitments and contingentliabilities

The Veolia Water group’s contingent liabilities

resulting from certain performance guarantees can

be analyzed as follows:

Commitments given and received bynature


Commitments given 4,700 1,947

Commitments received (2,113) (84)

Net commitments 2,587 1,863

Net commitments, by companyThe main commitments include:

s A joint and several guarantee with RWE for the

Berlin project in the amount of E800 million.

s A completion bond at US Filter in the amount of

E615 million.

s A commitment involving the recognition of an

easement right establishing a protective

perimeter around the water and wastewater

pipes running across private property in Berlin.

The property owners, who have not yet been

compensated, must file a petition to that end.

The total amount comes to E610 million and is

subject to specific compensation arrangements

valid only for a limited duration. It will result in

contractually stipulated rate compensation.

> Specific contractual commitmentsSome of Veolia Water’s water distribution subsidiaries,

as part of their contractual obligations as concession

holders and in consideration of the income they

receive, assume responsibility for the replacement of

fixed assets in the publicly owned utility networks

they manage.

Whenever possible, these obligations are guaranteed

by Veolia Environnement. In return, the water

distribution companies pay Veolia Environnement an

annual fee, which is charged to operating expenses

(other external expenses). Replacement expenditures

incurred by the water distribution companies are

reimbursed by Veolia Environnement.

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This reimbursement is recorded as operating revenue

(other operating revenue).

Cumulated expenditures forecast for replacements

that are the responsibility of Veolia Water subsidiaries

amount to E1.94 billion for the residual period of the

contracts.

Moreover, Veolia Water assumes several concession

payments to public bodies by virtue of concessionary

Public Utilities contracts. Minimum payments

outstanding represent E219 million, two-thirds of

which to be paid within the next five years.

> Capital and long-term leasesVeolia Water uses finance leases to finance certain

operating assets and investment properties. Minimum

payments outstanding represented E75 million in

2002 versus E78 million in 2001.

Veolia Water also uses operating leases. Minimum

payments outstanding represented E121 million in

2002 versus E127 million in 2001.

Operatingleases

FinanceleasesIn millions of euros

2003 26 16

2004 21 15

2005 18 13

2006 13 8

2007 10 6

2008 and beyond 33 17

> Contingencies other than thosealready accounted for

The company is involved in several litigation actions as

part of its normal activity. Although their outcome

remains uncertain, management considers that, in the

light of current information and after consultation,

this litigation will not materially affect the financial

situation or the operating income of the company.

The French competition authority (Conseil de la

Concurrence) had notified Compagnie Generale

des Eaux on February 27, 2001 regarding a series

of grievances challenging the existence of jointly

held subsidiaries between Compagnie Generale

des Eaux and other companies in the municipal

water and wastewater sector that would affect the

level of competition in this sector. The authority

rendered its decision on July 11, 2002 and did not

uphold the grievance of collusion for purposes of

unfair competition between the incriminated

companies, nor did it impose monetary sanctions

or even pronounce a direct injunction against these

companies. The proceedings are not completed,

however, since an appeal was filed against this

ruling. Considering the nature of this affair,

Compagnie Generale des Eaux did not deem it

necessary to establish a provision in its accounts in

this regard.

In April 2000, SADE, a subsidiary of Veolia Water,

received notification from the Conseil de la

Concurrence, as did 40 other companies, of

grievances alleging ‘‘anti-competitive under-

standings’’ among these companies with regard to

44 public works contracts concluded with several

different contracting authorities in the Ile-de-France

region. SADE, which is involved with regard to four of

these public works contracts, first of all contests the

merits of the grievances lodged against it, and

secondly contests them on procedural grounds for

non-compliance with defense rights. At this stage in

the proceedings, the company is not in a position to

evaluate the financial risks involved and SADE is

unable to justify a provision in its accounts in this

regard.

Omnium de Traitement et de Valorisation (OTV) is a

member of an ad hoc consortium of companies

(known as NOSS) that is led by Northwest Water

International Limited. In 1992, the NOSS consortium

submitted a tender for the construction of a

wastewater collection system and treatment plant

for the Bangkok municipality. Due to the various

obstacles raised by the municipality, NOSS terminated

the contract on March 6, 1998 and initiated arbitration

proceedings for damages. The Bangkok municipality

pronounced the termination of the contract in June

1999 and called in the guarantee bonds that had been

issued, which were partially paid.

The outcome of these two arbitration proceedings will

not be known for several years. Although it is jointly

and severally liable with the other members of the

NOSS consortium, OTV believes that this litigation

should not have significant consequences for the

company.

Certain US Filter subsidiaries are defendants in legal

proceedings in the United States where the plaintiffs

are seeking compensatory damages for bodily harm

and other damages resulting from exposure to

asbestos and other potentially dangerous

substances. These alleged injuries resulted from the

use of products manufactured or sold by the

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subsidiaries of US Filter or their predecessors. US Filter

has established provisions for any liability that may be

found against these subsidiaries in these cases, in

amounts determined by the relationship between the

alleged injuries and the products manufactured or

sold by the subsidiaries or their predecessors and the

coverage provided by an insurance policy. US Filter

does not believe that this litigation will have

substantial damaging effects on its activities,

financial situation or operating income. It is not

possible, however, to determine to what extent other

claims could be lodged against the subsidiaries of US

Filter in the future or to anticipate other factors that

could affect the amounts for which the subsidiaries

may eventually be found liable.

> Environmental issuesIn several jurisdictions, the activities of Veolia Water

are subject to changes in increasingly stringent

environmental protection regulations. These

activities are covered by insurance policies.

Environmental issues did not lead to any significant

losses at December 31, 2002.

20. Business segments

The company has identified two business segments corresponding to its accounting units: domestic (water

activities in France) and international (activities outside France).

These segments correspond to the criteria used by management for assessing investment and income. They

include the water and wastewater services such as water production and distribution, wastewater collection and

treatment, industrial processes, and the manufacture of water treatment equipment and systems.

> Revenue

Business segments in millions of Euros

At December 312002 2001

Domestic 7,041 7,077

International 6,106 6,252

Revenue(*) 13,147 13,329

(*) Excluding revenue from water and wastewater contracts in France operated by CGE on behalf of VU: 10 million in 2002 versus66 million in 2001

> Revenue (breakdown by destination)

FranceUnited

KingdomRest ofEurope

UnitedStates

Rest ofthe world TotalIn millions of Euros

2002 6,203 625 1,700 3,379 1,240 13,147

2001 6,138 698 1,549 3,817 1,127 13,329

> EBITARC (breakdown by geographic area)

FranceUnited


UnitedStates


2002 340 107 183 327 82 1,039

2001 300 108 151 477 58 1,094

> Net intangible and tangible assets (breakdown by geographic area)

FranceUnited


UnitedStates


2002 1,993 917 3,248 2,653 1,010 9,821

2001 2,056 899 3,237 3,460 809 10,461

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21. Transactions with relatedparties

The main transactions with related parties (primarily

Vivendi Universal, Veolia Environnement and its

subsidiaries not affiliated with Veolia Water, as well

as all Veolia Water’s equity-accounted affiliates and its

unconsolidated shareholdings) and the amounts due

to or from these related parties are analyzed below:

2002In millions of Euros

Accounts receivable

Trade receivables and other accounts

receivable 19.9

Financial current accounts (assets)

and short-term receivables 333.6

Total 353.5

Debts

Other long-term debts 6,887.2

Trade payables and other accounts

payable 49.8

Financial current accounts (liabilities)

and other short-term debts 983.0

Total 7920.0

Sales

Revenue 26.9

Purchases

Other operating expenses (50.2)

Net financial expense (256.9)

On December 20, 2002, Vivendi Universal and Veolia

Environnement entered into a cooperation agreement

on the continuation, in relation to Veolia Water, of the

constitution of the water division that began in 1997

(see paragraph 2, scope and methods of

consolidation).

Several shares, participating interests and contracts

have been or are in the course of being transferred

pursuant to this supplementary protocol: sale to

Veolia Water of the stakes held in Apa Nova Bucuresti

(Romania), Genova Acque (Italy) and Amendis

(Morocco).

22. Other items in theincome statement

> Payroll costs2002 2001In millions of Euros

Payroll charges 3,054 3,115

Employee profit-sharing 15 15

Total 3,069 3,130

The weighted average number of employees can be

broken down as follows:

2002 2001

Management 19,697 17,348

Other 53,242 55,263

Total 72,939 72,611

The change in the workforce is primarily attributable

to new contracts (increases of 501 for Redal, 177 for

Poland, etc.), the full consolidation of Czech companies

(increase of 1,855), layoffs in Bucharest (decrease of

1,119), and a workforce reduction at US Filter owing to

disposals (20,265 in 2002 versus 21,850 in 2001).

The breakdown by company is as follows:

2002 2001

Fully consolidated companies 66,231 63,699

Proportionally consolidated

companies 6,708 8,912

Total integrated companies 72,939 72,611

> Research and developmentResearch and development expenses totaled

E63.7 million and E76.8 million for the financial

years ending December 31, 2002 and 2001 respectively.

> Depreciation and provisionsDepreciation and provisions (excluding goodwill

amortization) can be analyzed as follows:


Depreciation and amortization (564) (524)

Provisions (165) (88)

TOTAL (729) (612)

Operating (602) (490)

Financial (11) (17)

Exceptional (116) (105)

TOTAL (729) (612)

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Goodwill amortization of consolidated and equity-

accounted companies can be analyzed as follows:


Recurring amortizations 121 196

Non-recurring amortizations 20(2) 2,588(1)

Total 141 2,784

(1) Exceptional write-off of US Filter and Intan goodwill

(2) Exceptional write-off of Berlikomm : peripheral subsidiaryof the Berlin Water Company

> Financial expenses and incomeNet financial expense for 2002 was E414 million,

versus E613 million in 2001. It included net financial

expenses, currency losses and gains, and provisions.


Cost of financing (441) (596)

Other income and expenses 36 0

Provisions (11) (17)

Net financial expense (414) (613)

Profit or loss from currency translation resulted in a

E44.8 million loss in 2002. It is included in the ‘‘other

income and charges’’ accounting item, as is the capital

gain on the disposal of the interest in philadelphia

suburban corporation (E95 million). This gain is

included in this item of the income statement

because of the reclassification of these securities for

accounting purposes as investment securities held for

sale. Excluding this one-time item, net financial

expense will amount to E510 million.

> Exceptional income and expensesNet exceptional expense can be broken down as

follows:


Asset disposals and profit

dilution 9 9

Net allowances to exceptional

amortization and provisions (31) (101)

Other exceptional income and

expenses (39) (11)

Net exceptional expense (61) (103)

Is included the consolidated impact (capital gains or

losses, allocations to and reversals of provisions) of

disposals of the Distribution branch of US Filter

(E59 million loss), of Bonna Sabla in France

(E44 million loss) of Schwarze Pumpe in Germany

(E24 million loss), of minority stakes in two UK water

companies Bristol Waterworks and South

Staffordshire Water (E73 million gain) as well as a

provision of E10 million relating to Berlikomm*.

* peripheral subsidiaries of the Berlin contract

> Analysis of tax expense (taxcredit)

The tax provision can be analyzed as follows:


France (132.6) (106.8)

Other countries (138.9)(*) (49.4)

Tax expense payable (271.5) (156.2)

France 3.9 5.2

Other countries (54.6)(**) (225.9)

Deferred tax expense/revenue (50.7) (220.7)

Total tax expense (322.2) (376.9)

(*) In the United Kingdom: corporate tax expense ofE23.6 million.

(**) In the United States: deferred tax expense on the disposalof US Filter assets of E84.4 million and depreciation ofAqua Alliance’s DTA for E29.7 million

In the United Kingdom: deferred tax expense of E15.9 million.

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23. List of main companies included in the consolidatedfinancial statements in 2002

In 2002, the Veolia Water group consolidated 635 companies (564 fully consolidated, 61 proportionately

consolidated and 10 accounted for by the equity method), of which 437 were non-French companies. The main

companies are listed below:

PC FC EM Total

France 35 159 4 198

Outside France 26 405 6 437

2002 total 61 564 10 635

Siret No.Consolidation

method % heldCompany and address

Veolia Water52, rue d’Anjou – 75008 Paris 421 345 042 00012 FC 100.00

Compagnie Generale des Eaux and its subsidiaries52, rue d’Anjou – 75008 Paris 572 025 526 00029 FC 100.00

In France:Compagnie des Eaux et de l’Ozone52, rue d’Anjou – 75008 Paris 775 667 363 01597 FC 100.00

Compagnie des Eaux de Paris4, rue du General Foy – 75008 Paris 329 207 740 00047 FC 100.00

Societe Francaise de Distribution d’Eau4, rue du General Foy – 75008 Paris 542 054 945 00069 FC 99.60

Compagnie Fermiere de Services Publics3, rue Marcel Sembat – Immeuble CAP 44 – 44100Nantes 575 750 161 00011 FC 99.86

Compagnie Mediterraneenne d’exploitation desServices d’Eau12, boulevard Rene Cassin – 06100 Nice 780 153 292 00104 FC 99.52

Societe des Eaux de MelunZone Industrielle – 198/398, rue Foch – 77000 Vaux LePenil 785 751 058 00047 FC 99.22

Societe des Eaux de Marseille25, rue Edouard Delanglade – BP 29 – 13254 Marseille 057 806 150 00017 PC 48.82

Societe des Eaux du Nord217, boulevard de la Liberte – 59800 Lille 572 026 417 00244 PC 49.54

Societe des Eaux de Versailles et de Saint-Cloud145, rue Yves le Coz – 78000 Versailles 318 634 649 00053 PC 50.00

Sade-Compagnie Generale de Travaux d’Hydrauliqueand its subsidiaries28, rue de la Baume – 75008 Paris 562 077 503 00018 FC 98.57

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Siret No.Consolidation

method % heldCompany and address

Veolia Water Systems and its subsidiariesl’Aquarene – 1, place Montgolfier – 94417 St MauriceCedex 542 078 688 01065 FC 100.00

Sainte-Lizaigne SATour Ariane – 5, place de la Pyramide – 92800 PuteauxLa Defense 966 505 760 00217 FC 99.45

CGE Guadeloupe17 Morne Vergain BP100 – 97139 Les AbymesGuadeloupe 342 397 270 00014 FC 99.99

Outside France:Veolia Water UK Plc and its subsidiaries37-41 Old Queen Street, London SW1H 9JA (United Kingdom) FC 100.00

US Filter Corporation and its subsidiaries40-004 Cook Street – 92211 Palm Desert (United States) FC 100.00

Berliner Wasser BetriebeAnstalt des Offentlichen Rechts – Hohenzollerndamn 45 – 10631 Berlin (Germany) PC 24.95

Servitec KFTLovas UT 131b – 1012 Budapest (Hungary) FC 100.00

Veolia Water Ceska RepublicaSokolovska 238 – Prague 9 (Czech Republic) FC 100.00

OEWA Wasser und AbwasserWalter Kohn Strasse 1 – 04358 Leipzig (Germany) FC 94.50

Societe d’Energie et d’Eau du Gabon (SEEG)BP 2187 Libreville (Gabon) FC 50.99

Wuyna WaterLevel 37, Suite 3702, Gateway – 1 Macquarie Place – NSW 2000 Sydney (Australia) FC 100.00

United Water180 Greenhill Road – Parkside SA 5063 6-GPO Box 1875 – SA 5001 Adelaide(Australia) PC 47.50

TianjinTianjin CGE – Ling Bin Road – Li Qi Zhang Xi – Nan Kai District 300381 Tianjin(China) FC 38.50*

* control chain maintained

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Consolidationmethod % heldCompany and address

Severoceske Vodovody (SCVK)1689 Prikovska – 41550 Teplice (Czech Republic) PC 50.09

CGE PortugalAv. Duarte Pacheco, nº 19-7D – 1070 Lisbon (Portugal) FC 100.00

CGE UtilitiesIst.Fl. – Syed Kechik Foundation Building – Nº1 Jalan Kapas, Bangsar59100 Kuala Lumpur (Malaysia) FC 55.00

SiemecViale Lombardia 12 – 35043 Monselice – Padua (Italy) FC 72.00

Apa Nova BucurestiStrada Muzeul Zambaccian nº34 – Bucharest (Romania) FC 83.69

Prazske Vodovody a Kanalizace AS (PVK)Klatovy – Ostravska 169/IV – 33901 Klatovy (Czech Republic) FC 99.76

Stadtwerke GorlitzDemioni Platz 24 – D-02826 Gorlitz (Germany) FC 64.41

Ste d’Exploitation des Eaux du Niger (SEEN)BP 12209 Niamey (Niger) FC 56.43

Veolia Water Korea Daesan (HPC)634 Dolkan-ri Daesan-eup - Seosan-shi Hubngchongnan-do – 356712 Korea(South Korea) FC 100.00

Veolia Water Korea Ichon (HEI)634 Dolkan-ri Daesan-eup – Seosan-shi Hubngchongnan-do – 356712 Korea(South Korea) FC 100.00

Redal19 rue Ibn Sina – Rabat Agdal – (Morocco) FC 99.99

Amendis23 rue Carnot – 90000 Tangiers – (Morocco) FC 25.00**

Veolia Water DungunLoji Rawatan Air Petronas – KM 13, Jalan Dungun-Bukit BesiP.O. Box 727, 23000 Dungun – Terengganu, (Malaysia) FC 65.00

VHS Dobrany S.R.O.Protifasistickych bojovniku 947 – Dobrany, 334 14 – Okres Plzen Jih –(Czech Republic) FC 100.00

PWIKPrzedsiebiostwo Wodociagow I Kanalizacji Sp zo.oUL. Opolska 51 – 42-600 Tarnowskie Gory – (Poland) FC 53.32

** 51% jointly held by Veolia Water and Vivendi Universal, with Veolia Water having operational controlFC : Full consolidationPC : Proportionate consolidationEM : Equity method

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For the period ended 31 December 2002

In accordance with our appointment by your Shareholders’ Meeting and corporate charter, we have audited the

accompanying consolidated financial statements of VEOLIA WATER (ex VIVENDI WATER) for the period ended

31 December 2002.

The consolidated financial statements are the responsibility of the management board of your company. Our

responsibility is to express an opinion on those financial statements, based on our audit.

We conducted our audit in accordance with the auditing standards generally accepted in France. Those standards

require that we plan and perform the audit to obtain reasonable assurance that the consolidated financial

statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting

the amounts and disclosures in the financial statements. An audit also includes assessing the accounting

principles used and significant estimates made by management, as well as evaluating the overall presentation of

the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion

below.

In our opinion, the consolidated financial statements give a true and fair view of the financial position and the

results of operations of all the entities consolidated, in conformity with the accounting principles generally

accepted in France (French GAAP).

We have also verified the information provided in the group management report. We have no comments to make

as to its fair presentation and conformity with the consolidated financial statements.

Paris La Defense and Paris, 16 May 2003

The Statutory Auditors

The French version of the preceding text has been signed by Barbier Frinault & Compagnie, Ernst & Young and

RSM Salusto Reydel, the independent public accountants of Veolia Water.

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tsReport of the statutory auditors on theconsolidated financial statements


The management report for the 2002 financial year is

presented in the form of an analysis of the financial

statements for the year ended December 31, 2002.


> Change of nameOn April 30, 2003, the Vivendi Environnement

Shareholders’ Meeting voted in favor of changing

the company’s name from Vivendi Environnement to

Veolia Environnement. Consequently, on the same

date, a Vivendi Water Shareholders’ Meeting decided

to change the company name to Veolia Water. The

new name will be used throughout this Management

Report.

> Partial repayment of US Filter loanOn November 22, 2002, US Filter paid $449.952 million

to Veolia Water in partial repayment of its loan. Veolia

Water then paid $450 million to Veolia Environnement

as repayment of the long-term debt in dollars.

These transactions generated a currency gain of

E48.985 million. Under an agreement signed on

December 31, 1999, this currency gain was entirely

assigned to Veolia Environnement and therefore had

no impact on Veolia Water’s accounts.

> Tax auditIn 2002, Veolia Water received a tax adjustment notice

following an audit by the tax authorities of the 1999

and 2000 financial statements. At this stage, the

hearings procedure between the two parties has not

yet been completed. Veolia Water has partially

appealed against the notice and intends to provide

proof that its position is with merit. Pending

completion of the hearings procedure, the company

has recorded a provision against the outcome of this

dispute, which has an impact of E158 million on

corporate tax.

> Acquisition and divestment offinancial assets

The following significant transactions were completed

in 2002:

– Sale of Philadelphia Suburban shares for E185

million;

– Sale of California Water shares on the open

market for E13 million;

– Reduction of Veolia Water Korea Daesan capital

stock by creating a long-term loan to

shareholders in the amount of E33 million;

– Participation in the capital increases of Aquiris

for E9 million;

– Participation in the capital increases of Inchon

for E3 million;

– Acquisition of an interest in Veolia Water Japan

for E3 million;

– Acquisition of interests in Zhuhai (asset company

and operating company) for E3 million.

> Restructuring of short-term andlong-term debt

During the financial year, the company reclassified

E700 million of the short-term debt owed to Veolia

Environnement as long-term debt. Cash flows on

securitization transactions in the amount of E381

million were also reclassified from short-term to

long-term debt.

2. Income statementThe following significant changes were recorded:

> Operating lossThe operating loss amounted to E4 million in 2002

compared with a loss of E1 million in 2001.

> Net financial expenseNet financial expense amounted to E50 million in

2002 compared with a net financial expense of E3,041

million in 2001. This change was mainly due to the

E2,913 million depreciation provision for US Filter

shares recorded in 2001.

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tsParent company accountsManagement report for the 2002financial year


> Net exceptional incomeNet exceptional income amounted to E1 million in

2002, the same as in 2001.

> Corporate taxA provision of E158 million was recorded under

corporate tax following the tax audit of Veolia Water

for financial years 1999 and 2000 (refer ‘‘Highlights of

the financial year’’).

> Net lossThe 2002 financial year ended with a loss of E211

million compared with a loss of E3,041 million in 2001.

This change is mainly attributable to the depreciation

provision for US Filter shares recorded in 2001 and the

tax charge of E158 million recorded in 2002.

> Appropriation of net lossWe recommend that you allocate the loss as follows:

Origin of loss to be charged:

Loss for the year (E211,629,905.04)

Retained losses (E3,045,095,573.90)

Total (E3,256,725,478.94)

Proposed appropriation:

Retained losses (E3,256,725,478.94)

Total (E3,256,725,478.94)

3. Balance sheetThe following significant changes were recorded:

> Financial assetsThe main changes in investments in subsidiaries and

affiliates are listed under ‘‘Highlights of the financial

year.’’

The other significant change was the diminution of

‘‘long-term loans to subsidiaries and affiliates’’ due to

the repayment of $450 million of the long-term loan

to US Filter.

> Foreign currency translationlosses

A translation loss of E151 million was recognized in

2002 and fully provisioned. It corresponds mainly to

the translation loss of E119 million on the US Filter

loan in dollars.

> Foreign currency translation gainsA translation gain of E418 million was recognized in

2002, mainly reflecting the gain of E384 million on

Veolia Environnement’s long-term current account

advance in dollars.

4. Dividends paid in previousyears

Pursuant to Article 243 bis of the French General Tax

Code, we hereby inform you that no dividend was

distributed for the last three financial years.

5. Agreements referred to inarticle L-225-38 of theFrench Commercial Code

We also invite you to approve the agreements referred

to in article L-225-38 of the French Commercial Code

that were duly authorized by your Board of Directors

during the 2002 financial year.

The Statutory Auditors have been informed of these

agreements, which are mentioned in their special

report.

6. Remuneration of seniormanagement

We hereby inform you of the overall gross

remuneration (including benefits in kind) paid in

2002 to senior managers (executive directors) by

Veolia Water or by companies controlled under the

terms of Article L233-16 of the French Commercial

Code:

FAMILY NAME &given name Office

Amount of theremuneration

PROGLIO Henri Chairman of the Board E9,300.00

GIRARDOT Paul-Louis Chief Executive Officer E12,375.00

GALAN Pierre-Henri Director Zero

HECKMAN Richard Director Zero

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7. Functions and offices held by senior managers during thefinancial year

Appointment holder Appointment/function Company

GALAN Pierre-Henri Chairman and Chief ExecutiveOfficer

COMPAGNIE NOUVELLE D’ETUDES INDUSTRIELLES ETCOMMERCIAL

Chairman and Chief ExecutiveOfficer (*)

SOCIETE D’INVESTISSEMENTS ET DE GESTION 48

Director (*) VEOLIA WATERDirector COFICODirector COMPAGNIE NOUVELLE D’ETUDES INDUSTRIELLES ET

COMMERCIALDirector COMPAGNIE PROVINCIALE D’INVESTISSEMENTSDirector SEGICLINDirector (*) SOCIETE D’INVESTISSEMENTS ET DE GESTION 48Director (*) SOCIETE D’INVESTISSEMENTS ET DE GESTIONS 12 – SIG 12Director SOCIETE NOUVELLE D’INVESTISSEMENTS & DE GESTIONS –

SNIG

GIRARDOT Paul-Louis Chairman of the Supervisory Board COMPAGNIE GENERALE DES EAUXChairman of the Supervisory Board COMPAGNIE DES EAUX DE PARISChief Executive Officer (*) VEOLIA WATERDirector SOCIETE DES EAUX DE MARSEILLEDirector CGEA CONNEXDirector CGEA ONYXMember of the Supervisory Board COMPAGNIE DES EAUX ET DE L’OZONE (M.P. OTTO

processes)Member of the Supervisory Board DALKIA FRANCEMember of the Supervisory Board VEOLIA ENVIRONNEMENT

HECKMANN Richard President US FILTER FARMS GP, INC.President US FILTER FARMS LP, INC.President USF C ACQUISITION INC.President VEOLIA WATER SYSTEMS SERVICIOS & PRODUCTOSChairman USF CONSUMER & COMMERCIAL WATERGROUP, INC.Director VEOLIA WATERDirector US FILTER FARMS GP, INC.Director US FILTER FARMS LP, INC.Director USF C ACQUISITION INC.Member of the Supervisory Board VEOLIA ENVIRONNEMENT

PROGLIO Henri Chairman of the Management Board VEOLIA ENVIRONNEMENTGeneral Manager COMPAGNIE GENERALE DES EAUXChairman of the Board VEOLIA WATERChairman of the Board CGEA CONNEXChairman of the Board CGEA ONYXChairman of the Supervisory Board DALKIA FRANCEChairman (*) COLLEX PTY LtdChairman ONYX ASIA HOLDINGS PTE LTDPresident ASSOCIATION VALORISATION. ENSEIGNEMENT

CONNAISSANCE. ET TECHNIQUE DE L’ENVIRON-NEMENTURBAIN (non-profit organization)

Director SOCIETE DES EAUX DE MARSEILLEDirector ANJOU RECHERCHEDirector CNESDirector CENTRE DE RECHERCHE POUR L’ENVIRONNEMENT,

L’ENERGIE ET LE DECHET (CREED)Director (*) COTEBA MANAGEMENTDirector DALKIA INTERNATIONALDirector EDFDirector ESTERRADirector SAFISE

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Appointment holder Appointment/function Company

Director SARP INDUSTRIESDirector THALESDirector VINCIMember of the Supervisory Board COMPAGNIE DES EAUX ET DE L’OZONE

(Procedes M.P. OTTO)Member of the Supervisory Board COMPAGNIE FERMIERE DE SERVICES PUBLICSMember of the Supervisory Board DALKIA FRANCEMember of the Supervisory Board ELIORMember of the Supervisory Board SOCIETE D’ASSAINISSEMENT RATIONNEL ET DE POMPAGEMember of the Supervisory Board SOCIETE DES EAUX DE MELUNDirector B 1998 SLDirector FOMENTO DE CONSTRUCCIONES Y CONTRATAS SADirector GRUCYCSA SADirector CGEA TRANSPORT ABDirector CGEA UK PLCDirector COLLEX PTY LtdDirector COMGEN AUSTRALIA PTY LtdDirector (*) CONNEX ASIA HOLDINGS PTE LtdDirector CONNEX LEASING LTDDirector CONNEX TRANSPORT A.B.Director CONNEX TRANSPORT UK LTDDirector (*) MONTENAY INTERNATIONAL CORPORATIONDirector ONYX ASIA HOLDINGS PTE LTDDirector ONYX ENVIRONMENTAL GROUP PLCDirector ONYX NORTH AMERICA CORPORATION.Director (*) ONYX NORTHERN EUROPE LIMITEDDirector (*) ONYX WASTE SERVICES, Inc.Director UNITED STATES FILTER CORPORATIONDirector VEOLIA UK LIMITEDPermanent representative of CGEACONNEX, Director

EUROLUM

Permanent representative of CGEAONYX, Director

CALEDONIENNE DE SERVICES PUBLICS SA


ROUTIERE DE L’EST PARISIEN


SUD CARS

(*) No longer holds this function following resignation, or absorption or liquidation of the company

8. Cancellation of the nominal value of the shares andreduction of the capital stock

We propose that, as authorized under French law, we proceed with the cancellation of the nominal value of our

shares in order to facilitate possible financial transactions on our stock.

We also propose that, in order to stabilize the company’s financial situation, we proceed with a capital stock

reduction in the amount of E3,256,725,478.94 through incorporation of the retained losses. The capital stock will

thus be reduced from E4,016,194,988.40 to E759,469,509.46 and our shareholders’ equity will be reconstituted.

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ASSETS2002 2001

GROSSDepreciation &

provisions NET NET(Amounts in Euros)

Software 1,370,398.07 508,262.50 862,135.57 110,714.99

Intangible assets in process 49,504.44 49,504.44 349,440.00

Intangible assets 1,419,902.51 508,262.50 911,640.01 460,154.99

Office equipment and software 3,795.98 1,518.40 2,277.58 3,036.78

Tangible assets, owned property,

plant and equipment 3,795.98 1,518.40 2,277.58 3,036.78

Investments in subsidiaries and

affiliates 7,212,949,098.81 2,913,000,000.00 4,299,949,098.81 4,384,601,368.12

Portfolio investments held as fixed

assets 9,133,068.30 7,311,262.00 1,821,806.30 19,994,126.12

Loans to subsidiaries and affiliates 2,737,335,844.82 2,737,335,844.82 3,452,802,686.32

Other investments held as fixed assets 100.00 100.00 100.00

Other financial assets 8,945.00 8,945.00 8,945.00

Financial assets 9,959,427,056.93 2,920,311,262.00 7,039,115,794.93 7,857,407,225.56

I Fixed assets 9,960,850,755.42 2,920,821,042.90 7,040,029,712.52 7,857,870,417.33

Trade accounts receivable and related

accounts 22,598,101.61 22,598,101.61 33,259,103.11

Current accounts 1,961,818,958.13 1,961,818,958.13 1,122,379,783.37

Other amounts due 21,428,572.45 38,004.80 21,390,567.65 73,169,740.49

Receivables 2,005,845,632.19 38,004.80 2,005,807,627.39 1,228,808,626.97

Cash 22,120,611.85 0.00 22,120,611.85 112,736,927.77

Pre-paid expenses 5,000.00 5,000.00

II Current assets 2,027,971,244.04 38,004.80 2,027,933,239.24 1,341,545,554.74

III FOREIGN CURRENCY TRANSLATION

LOSSES 151,561,868.48 151,561,868.48 1,856,867.00

OVERALL TOTAL (I+II+III) 12,140,383,867.94 2,920,859,047.70 9,219,524,820.24 9,201,272,839.07

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tsBalance sheet at December 31, 2002


SHAREHOLDERS’ EQUITY AND LIABILITIES2002 2001

(In euros)

Capital stock 4,016,194,988.40 4,016,194,988.40

Reserves 7,284,842.38 7,284,842.38

Additional paid-in capital 36,175,160.57 36,175,160.57

Retained earnings (3,045,095,573.90) (4,397,121.05)

Net income for the year (211,629,905.04) (3,040,698,452.88)

I Shareholders’ equity 802,929,512.41 1,014,559,417.42

Subordinated long-term loan 2,250,000,000.00 2,250,000,000.00

II Other equity 2,250,000,000.00 2,250,000,000.00

Provisions for currency losses 150,635,206.08 1,856,867.00

III Provisions for liabilities and charges 150,635,206.08 1,856,867.00

Amounts due to credit institutions 125,036.39 125,463.37

Loans and other debts 5,385,420,152.16 5,868,053,503.29

Trade accounts payable and related accounts 36,396,249.38 19,239,649.89

Tax and social security liabilities 162,006,016.18 3,528,072.50

Other liabilities 14,013,253.00 1,225,831.60

IV Debt and liabilities 5,597,960,707.11 5,892,172,520.65

V FOREIGN CURRENCY TRANSLATION GAINS 417,999,394.64 42,684,034.00

OVERALL TOTAL (I+II+III+IV+V) 9,219,524,820.24 9,201,272,839.07

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2002 2001(In euros)

Revenue from domiciliations 24,012,000.00 24,142,000.00

Other revenue 5,028,211.15 5,879,877.83

Operating revenue (I) 29,040,211.15 30,021,877.83

Purchases and other external services 32,973,119.09 30,717,464.27

Taxes other than income tax 14,269.00 53.20

Depreciation, amortization and provisions 367,902.54 141,878.36

Operating expense (II) 33,355,290.63 30,859,395.83

Operating expense (I – II) (4,315,079.48) (837,518.00)

Dividends from investments in subsidiaries and affiliates 112,109,983.56 12,001,596.15

Interest on current account 107,130,151.55 212,743,986.74

Interest on loan 70,178,005.80 89,823,904.14

Currency gains 4,703,926.86 588,919.73

Net income on the sale of marketable securities 115,670,132.06

Other financial income 4,763,211.43

Reversals 1,856,867.00 326,829.05

Financial income (III) 416,412,278.26 315,485,235.81

Interest on current account 298,925,774.96 439,330,757.75

Currency losses 6,562,449.35 162,508.24

Other financial expense 4,758,253.00

Provisions 156,148,557.28 2,916,692,782.18

Financial expense (IV) 466,395,034.59 3,356,186,048.17

Net financial expense (III – IV) (49,982,756.33) (3,040,700,812.36)

Pre-tax operating expense after net financial expense

(I – II + III – IV) (54,297,835.81) (3,041,538,330.36)

Other exceptional income 5,312,505.03 0.57

From asset disposals 12,667,367.24 57,419,323.33

Exceptional income (V) 17,979,872.27 57,419,323.90

Other exceptional expense 4,000,000.00 777,570.53

Disposal of assets – investments in subsidiaries and affiliates 12,841,996.50 55,801,875.89

Exceptional expense (VI) 16,841,996.50 56,579,446.42

Net exceptional income (V – VI) 1,137,875.77 839,877.48

Income tax (VII) 158,469,945.00

Total revenue (I + III + V) 463,432,361.68 402,926,437.54

Total expense (II + IV + VI + VII) 675,062,266.72 3,443,624,890.42

LOSS (211,629,905.04) (3,040,698,452.88)

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tsIncome statement atDecember 31, 2002


2002 2001(in millions of euros)

Net loss (211.6) (3,040.7)

Capital gains and losses on sales of fixed assets (115.5)

Net provisions:

for depreciation of shares 5.5 2,914.8

for depreciation of trade accounts receivable

for liabilities and charges 148.8 1.6

Amortizations 0.4 0.1

Total (172.5) (124.2)

Cash flow statement2002 2001

(in millions of euros)

Cash flow from operations (172.5) (124.2)

Net change in working capital requirements 250.9 (97.3)

Operating transactions (I) 78.4 (221.5)

Capital expenditures (0.8) (0.5)

Financial investments (18.6) (2,608.7)

Disposals of securities and reductions in fixed assets 198.1

Decrease in other financial receivables 748.8 2,046.6

Investing transactions (II) 927.5 (562.6)

Capital increases 200.0

Impact of exchange rate fluctuations 266.4

Financing transactions (III) 266.4 200.0

Cash flows for the financial year (I + II + III) 1,272.3 (584.1)

Net debt at January 1 (IV) 4,673.9 4,089.8

Net debt at December 31 (V) 3,401.6 4,673.9

Change in debt (IV – V) (1,272.3) 584.1

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Cash flow from operations


Overall change in working capitalrequirements

2002 2001Requirements (+) Discharge (–) Balance Requirements (+) Discharge (–) Balance

(in millions of euros)

Inventory and work in process 0.0 0.0

Deposits and installments paid 0.0 0.0

Trade receivables and related

accounts 10.7 (10.7) 14.8 14.8

Other receivables 51.8 (51.8) 69.4 69.4

Asset accruals 0.0 0.0

Deposits and installments

received 0.0 0.0

Trade payables and related

accounts 17.2 (17.2) 1.0 1.0

Tax and social security liabilities 158.5 (158.5) 13.3 13.3

Other liabilities 12.8 (12.8) 1.2 (1.2)

Liability accruals 0.0 0.0

Working capital requirements 0.0 250.9 (250.9) 98.5 1.2 97.3

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> Change of nameOn April 30, 2003, the Vivendi Environnement

Shareholders’ Meeting voted in favor of changing

the company’s name from Vivendi Environnement to

Veolia Environnement. Consequently, on the same

date, a Vivendi Water Shareholders’ Meeting decided

to change the company name to Veolia Water. The

new name will be used throughout this document.

> Partial repayment of US Filter loanOn November 22, 2002, US Filter paid $449.952 million

to Veolia Water in partial repayment of its loan. Veolia

Water then paid $450 million to Veolia Environnement

as repayment of the long-term debt in dollars.

These transactions generated a currency gain of

E48.985 million. Under an agreement signed on

December 31, 1999, this currency gain was entirely

assigned to Veolia Environnement and therefore had

no impact on Veolia Water’s accounts.

> Tax auditIn 2002, Veolia Water received a tax adjustment notice

following an audit by the tax authorities of the 1999

and 2000 financial statements. At this stage, the

hearings procedure between the two parties has not

yet been completed. Veolia Water has partially

appealed against the notice and intends to provide

proof that its position is with merit. Pending

completion of the hearings procedure, the company

has recorded a provision against the outcome of this

dispute, which has an impact of E158.47 million on

corporate tax.

2. Accounting principles andstandards

> General principlesThe financial statements for the year ended December

31, 2002 were prepared and are presented in

accordance with the applicable French laws and

regulations.

> Financial assets‘‘Investments in subsidiaries and affiliates’’ covers

shares in companies in which Veolia Water owns a

substantial share of the capital, in principle more than

10%. They are valued at acquisition cost. A

depreciation provision is recorded when this cost is

higher than value in use. Value in use is the fraction of

equity represented by the shares (adjusted to take

account of their market value in the case of listed

securities), the interest of these companies to Veolia

Water and their revenue and earnings growth

prospects.

> Accounts receivable and payableAccounts receivable and payable are recorded at

nominal value. Accounts receivable and payable

denominated in foreign currency are converted into

and booked in the national currency based on the

year-end exchange rate.

Receivables are provisioned to reflect the risk of

default.

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Notes to the balance sheet and incomestatement for the 2002 financial year


3. Notes to the balance sheet

Assets

Fixed assets: Changes in gross values during the year

Gross value at01/01/2002 Increases Decreases

Gross value at31/12/2002(Amounts in thousands of euros)

Intangible fixed assets 601 819 1,420

Tangible fixed assets 4 4

Financial assets 10,772,205 45,873 858,651 9,959,427

Total 10,772,810 46,692 858,651 9,960,851

Intangible and tangible fixed assets:These items comprise fixed assets owned by the

company (IT hardware, software, etc.).

Financial assets:Financial assets consist of investments in

subsidiaries and affiliates and the loans and

advances to them. Such loans and advances are

for more than one year.

Other investments held as fixed assets are those the

company intends to keep in the long term.

Changes in depreciation, amortization and provisions during the year:

01/01/2002 Appropriations Reversals 31/12/2002(amounts in thousands of euros)

Intangible fixed assets 141 367 508

Tangible fixed assets 1 1 2

Financial assets 2,914,798 5,513 2,920,311

Total 2,914,940 5,881 2,920,821

> Current assetsCurrent assets correspond to:

31/12/2002 31/12/2001(amounts in thousands of euros)

(maturing in less than one year)

Trade receivables 22,598 33,259

Current account advances 1,961,819 1,122,380

Deductible VAT 7,293 15,667

Other debtors 14,136 57,540

Total 2,005,846 1,228,846

The increase in current account advances is due mainly to variation in receivables securitized by French water

distribution subsidiaries, which had a negative impact in the amount of E381.106 million at December 31, 2002

compared with the negative impact in the amount of E713.470 million at December 31, 2001.

The reduction in receivables from the State is due to the reimbursement of 2001 corporate tax down-payments in

the amount of E10.050 million.

‘‘Other debtors’’ fell from E57.54 million at December 31, 2001 to E14.136 million at December 31, 2002. The amount

at December 31, 2001 was made up primarily of compensation owed by US Filter on the USF Bendigo transaction.

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> Marketable securitiesMarketable securities include highly liquid securities.

Marketable securities are stated at acquisition cost,

and a provision for depreciation is recorded where

their market value is less than book value.

> Foreign currency translationlosses

This item comprised E151.562 million in unrealized

losses on December 31, 2002 on receivables and

liabilities denominated in foreign currencies. A

provision for currency risks in the same amount was

booked under liabilities.

Shareholders’ equity and liabilities

> Shareholders’ equity

Capital stockVeolia Water’s capital stock amounts to E4,016,194,988, made up of 854,509,572 fully paid-up shares with a

nominal value of E4.70.

Other equityThis item covers a subordinated long-term loan of E2,250 million maturing on December 29, 2010, from Veolia

Environnement.

> Provision for liabilities and chargesThis account recorded a provision for liabilities relating to foreign currency translation losses of E150.635 million.

01/01/2002 Appropriations Reversals 31/12/2002(amounts in thousands of euros)

Provisions for currency translation losses 1,857 150,635 1,857 150,635

Total 1,857 150,635 1,857 150,635

> IndebtednessDebt can be analyzed as follows:


Bank facilities 125 125

Long-term current account advance from Veolia Environnement, in euros 1,799,695 1,480,997

Long-term current account advance from Veolia Environnement, in dollars 2,431,582 3,312,831

Short-term current account advance from Veolia Environnement 705,731 705,031

Other current account liabilities and loans 448,412 369,195

Total 5,385,545 5,868,179

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> Accounts payableThis item can be analyzed as follows:


(maturing in less than one year)

Trade payables and related accounts 36,396 19,240

Tax and social security liabilities 162,006 3,528

Other liabilities 14,013 1,226

Total 212,415 23,994

Tax and social security liabilities include a charge of E158.47 million on 2000 corporate tax following the tax audit

(see ‘‘Highlights of the financial year’’).

> Maturity analysis of receivables and debt and liabilitiesReceivables

TotalDue in oneyear or less

Due in morethan one year

Long-term loans to subsidiaries and affiliates 2,737,336 — 2,737,336

Current account advances 1,961,819 2,342,925 (381,106)

Trade receivables 22,598 22,598 —

Other receivables 21,429 21,429 —

Total 4,743,182 2,386,952 2,356,230

Debt and liabilities

TotalDue in oneyear or less

Due in one tofive years

Due in morethan five years

Subordinated loan from Veolia Environnement 2,250,000 — — 2,250,000

Facilities from and debts to credit institutions 125 125 — —

Other debt 5,385,420 1,154,143 — 4,231,277

Trade payables 36,396 36,396 — —

Other liabilities 176,019 176,019 — —

Total 7,847,960 1,366,683 — 6,481,277

> Foreign currency translation gainsThis item records unrealized gains of E417.999 million based on the translation of receivables and liabilities

denominated in foreign currencies at the year-end exchange rate.

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4. Notes to the income statement

> Operating revenueIn 2002, the company invoiced its subsidiaries E24.012 million for administrative and legal management costs.

> Operating expenseOperating expense mainly covers administrative and legal management costs.

> Net financial expenseNet financial expense of E49.983 million, compared with a net financial expense of E3,040.701 million in 2001)

breaks down as follows:


Revenue from investments in subsidiaries and affiliates 112,110 12,001

Net cost of financing (121,618) (136,763)

Foreign exchange gains (losses) (1,858) 426

Other revenue and financial expense 115,675

Appropriations/reversals of provisions (154,292) (2,916,366)

Total (49,983) (3,040,702)

The increase in revenue from investments in subsidiaries and affiliates is due to the payment of a dividend of

E105.764 million by Compagnie Generale des Eaux.

The ‘‘other revenue and financial expense’’ is made up primarily of a capital gain on the sale of Philadelphia

Suburban shares (E115.670 million).

Provisions at December 31, 2001 consisted mainly of the provision of E2,913 million for the US Filter shares. In 2002,

the provision of E156.149 million is due principally to that for currency translation risks.

> Net exceptional incomeThis item breaks down as follows:


Capital gains/(losses) on asset divestments (175) 1,617

Other exceptional income 5,313 —

Other exceptional expense (4,000) (777)

Total 1,138 840

The capital loss of E175,000 at December 31, 2002 is attributable to the sale of California Water shares. At

December 31, 2001 the USF Bendigo transaction generated a capital gain of E1.617 million.

Other exceptional income is made up mainly of an exceptional payment of E4 million by Veolia Environnement

for the office removal costs of Compagnie Generale des Eaux. The amount was invoiced to Compagnie Generale

des Eaux and has been recorded under other exceptional expense.

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5. Other information

> Off-balance-sheet commitmentsThe total amount comes to E770 million. It includes

mainly commitments for E131,4 million, operating

guarantees for E170,3 million and performance bonds

for E452,7 million.

> EmployeesThe company did not have any employees in 2002.

> Directors’ remunerationNo directors’ fees were paid for the 2002 financial

year.

> Identity of consolidating companyVeolia Water’s accounts are fully consolidated by:

VEOLIA ENVIRONNEMENT36 avenue Kleber – 75016 Paris

Trade and Companies Register B 403.210.032

a societe anonyme (limited company)

with capital of E5,468,451,196.50

> Tax regimeVeolia Water has been a member of the Veolia

Environnement tax consolidation group since

January 1, 2001. Veolia Environnement SA alone is

liable to the French administration for income tax

calculated on the basis of the whole tax consolidation

group. Any saving realized is acquired by the

consolidating company, Veolia Environnement SA.

This option does not affect the income tax charge

booked by Veolia Water.

> OwnershipVeolia Environnement owns the entire capital of

Veolia Water.

> Related partners and affiliatesThis table shows the amounts in the balance sheet

and income statement connected with transactions

with fully consolidated subsidiaries.

(in thousands of euros)

Financial assets:

Investments in subsidiaries and affiliates 7,212,949

Loans and advances to subsidiaries and

affiliates 2,737,336

Receivables:

Current account advances 1,961,819

Trade accounts receivable 22,273

Other receivables 4,000

Debt and liabilities:

Subordinated long-term loans 2,250,000

Current account advances 1,154,143

Long-term debts 4,231,277

Trade accounts payable 35,107

Operating income:

Resources 24,012

Operating expense:

Resources 25,242

Other purchases and external expense 6,624

Financial income:

Income from investments in

subsidiaries and affiliates 112,110

Interest and similar income 177,308

Other financial income 4,758

Financial expense:

Interest and similar charges 298,829

Other financial expense 4,758

Exceptional income:

Other exceptional income 4,000

Exceptional expense:

Other exceptional expense 4,000

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in thousands of euros(except furtherinformation)

Capitalstock

Shareholders’equity

(excludingcapital stock)(1)

Percentageof capital

stock held

Book valueof shares held

GROSS NETLoans

granted Guarantees2002

revenue

2002pre-taxincome

Dividends andshare of

profitsreceived ObservationsCompanies

Compagnie Generale des Eaux

52 rue d’Anjou75008 ParisFrance 1,207,287 749,034 99.99% 1,308,975 1,308,975 1,495,915 3,120,915 196,181 105,764

Filter Stock, VNAO

USA 5,206,367 (2,821,484) 100.00% 5,467,503 2,554,503 2,872,120 432,800 3,936,735 (2,375,192) 0thousands of

US dollarsthousands of



US dollars 0

Global Environment

169 avenue GeorgesClemenceau92735 Nanterre CedexFrance 500 470 33.33% 167 167 13,660 52 0

Ulpu International Co LtdTaiwan 52,500 23,911 289,273 6,050 0

thousands ofTaiwanese

dollars


dollars 74.90% 5,613 5,613


dollars


dollars 0

Veolia Water AlgerieAlgeria 99.00% 1 1 0 not available

Veolia Water Korea DaesanSouth Korea 4,920,000 30,324,625 68,254,639 5,919,685

thousands ofwons

thousands ofwons 100.00% 22,791 22,791 27,268

thousands ofwons

thousands ofwons 1,132

Inchon 4,918,000thousands of

wonsthousands of

wons 100.00% 3,295 3,295thousands of

wonsthousands of

wons not available

Aquiris 19,950 (470) 59.00% 11,771 11,771 0 (470)

VW Japan 100.00% 2,586 2,586 not available

Veolia Water Systems 307,515 (162,967) 100.00% 315,715 315,715 266,600 0 (25,804)

VW Industrial Development 87,437 100.00% 71,146 71,146 377 not available

MV Investissements 25.00% 259 259 not available

Zhuhai Asset Company 49.00% 2,181 2,181 not available

Zhuhai Operating Company 51.00% 601 601 not available

Veolia Water Korea 100.00% 43 43 not available

Chilgok 100.00% 30 30 not available

Vigie 11 11,000 4.95% 272 272

Total 7,212,949 4,299,949 4,395,303 701,900 107,273

(1) including 2002 pre-tax income

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List of subsidiaries and affiliates


Categories2002 2001 2000 1999 1998

In Euros

Year-end financial situation

Capital stock 4,016,194,988 4,016,194,988 3,816,194,986 1,323,212,193 38,112

Number of shares outstanding 854,509,572 854,509,572 811,956,380 271,240,719 2,500

Overall trading income

Net revenue 29,040,211 30,021,878 16,311,672

Income before tax, employee profit-sharing,

depreciation and provisions 101,499,632 (124,190,622) 10,729,544 (144,962) (1,711)

Income tax 158,469,945 14,653,164

Income before tax, depreciation and provisions (211,629,905) (3,040,698,452) (4,250,448) (144,962) (1,711)

Dividends paid 0 0 0 0 0

Net income per share

Net income after tax and employee profit-sharing,

but before depreciation and provisions (0.07) (0.15) 0.00 0.00 (0.68)

Net income after tax, depreciation and provisions (0.25) (3.56) (0.01) 0.00 (0.68)

Dividends paid per share 0.00 0.00 0.00 0.00 0.00

Employees

Number of employees 0 0 0 0 0

Total payroll expense 0 0 0 0 0

Social security costs and other social expenses 0 0 0 0 0

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tsFive-year financial summary



In accordance with our appointment by your Shareholders’ Meeting and corporate charter, we hereby report to

you, for the period ended 31 December 2002, on:

– the audit of the accompanying financial statements of VEOLIA WATER (ex VIVENDI WATER),

– the specific verifications and information required by law.

The financial statements are the responsibility of the management board of your company. Our responsibility is to

express an opinion on these financial statements, based on our audit(directoire).

Opinion on the financial statements

We conducted our audit in accordance with the auditing standards generally accepted in France. Those standards

require that we plan and perform the audit to obtain reasonable assurance that the annual financial statements

are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the

amounts and disclosures in the financial statements. It also includes assessing the accounting principles used and

the significant estimates made, as well as evaluating the overall presentation of the financial statements. We

believe that our audit provides a reasonable basis for our opinion below.

In our opinion the annual financial statements give a true and fair view VEOLIA WATER’s financial position and its

assets and liabilities at 31 December 2002 and of the results of its operations for the year then ended, in

conformity with the accounting principles generally accepted in France.

Specific verifications and information

We also carried out the specific verifications required by law, in accordance with the auditing standards generally

accepted in France.

We have no comments to make as to the fair presentation and the conformity with the financial statements of

the information provided in the management report and in the documents sent to the shareholders with respect

to the financial position and the annual financial statements.

As required by law, we have verified that the information on investments and the acquisition of controlling

interests has been disclosed in the management report.





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General report of the statutory auditorson the annual financial statements



As the Statutory Auditors of your company, we hereby report to you on the agreements involving company

directors.

AGREEMENTS AUTHORIZED DURING THE PERIOD

In accordance with Article L. 225-40 of the Commercial Code, we have been notified of the agreements previously

authorized by your Board of Directors.

We are not required to investigate the possible existence of other agreements, but to inform you, on the basis of

the information provided, of the basic terms and conditions of the agreements which have been brought to our

attention. Nor are we required to express an opinion on their appropriateness or merit. It is your responsibility,

according to the provisions of Article 92 of the Decree of 23 March 1967, to assess the purpose and benefits of

these agreements, with a view to approving them.

We conducted our work in accordance with the auditing standards generally accepted in France. Those standards

require that we plan and perform our work to enable us to verify that the information provided to us conforms

with the source documentation from which it is derived.

Agreements concerning the remuneration of guarantees given by VeoliaEnvironnement (ex Vivendi Environnement) on behalf of its subsidiaries

Chairman and directors involved(1):

Mr Henri Proglio

Mr Paul Louis Girardot

Mr Richard Heckmann

The parties agreed on the need to ensure that Veolia Environnement (ex Vivendi Environnement) was fairly

compensated for the service rendered to its direct subsidiaries – Veolia Water (ex Vivendi Water), Dalkia and CGEA

Onyx – and indirect subsidiaries through the issue of guarantees of various types to third parties.

The remuneration due is dependent on the country in which the guarantee was issued, on the nature and

duration of the guarantee, and on the value of the commitment given.

For 2002, your company recorded an expense of E4.76 million for commitments received from Veolia

Environnement (ex Vivendi Environnement). Your company also recorded the same amount under receivable

income from its subsidiary.

(1) Chairman and directors involved at the date of the authorization by the Board of Directors of those agreements.

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tsSpecial report by the auditors onagreements involving company directors


Agreements concerning the building located at 36/38 avenue Kleber

With Veolia Environnement (ex Vivendi Environnement)


Mr Henri Proglio


Mr Richard Heckmann

With a view to setting up the new group head office at 36/38 Avenue Kleber, your company, CGEA Onyx, CGEA

Connex, Dalkia France and Veolia Environnement (ex Vivendi Environnement) set up the ‘‘GIE’’ (economic interest

group) Kleber (holder of the lease for Veolia Environnement’s building located in avenue Kleber and also

responsible for the work required to furnish the head office), in order to provide common services and manage the

new building and signed an agreement setting out the terms and conditions of the various services to be provided

by the GIE Kleber , on behalf of Veolia Environnement (ex Vivendi Environnement) and its subsidiaries.

The GIE will invoice rent to each of these entities, on the basis of the surface occupied by each for an annual price

of 2,300 euros per m2, along with IT services, valued at 6,400 euros per year and per employee workstation. During

2002, the GIE invoiced your company E1,878,871 euros for all these services.

Your company received a final lump sum payment from Veolia Environnement (ex Vivendi Environnement) to

cover the moving costs and the additional costs resulting from the multiple sites and the obligation for your

company to keep other premises, and generally participate in the new material structure. Thus, Veolia Water (ex

Vivendi Water) received E4 million from Veolia Environnement (ex Vivendi Environnement) in 2002.

With Compagnie Generale des Eaux


Mr Henri Proglio


Following the set-up of the GIE Kleber, your company and Compagnie Generale des Eaux signed an agreement

setting out the various services provided in relation to the building located at 36/38 avenue Kleber, along with the

associated financial arrangements incumbent upon Compagnie Generale des Eaux, as the company regrouping

the main central services of the Veolia Water group (ex Vivendi Water). Your company will mainly invoice

Compagnie Generale des Eaux for the rent charged to it by the GIE, on the basis of the surface it occupies, at an

annual rate of 2,300 euros per m2, along with IT services, valued at 6,400 euros per year and per employee

workstation. During 2002, Veolia Water (ex Vivendi Water) invoiced Compagnie Generale des Eaux E1,878,871 for

all these services.

Furthermore, your company transferred to Compagnie Generale des Eaux the final compensatory payment

received from Veolia Environnement (ex Vivendi Environnement), for the moving costs and additional costs

incurred due to the significant expense resulting from the multiple sites and the obligation incumbent upon

Compagnie Generale des Eaux to keep other premises, and generally participate in the new material structure.

Thus, Veolia Water (ex Vivendi Water) paid E4 million to Compagnie Generale des Eaux in 2002.

(1) Chairman and directors concerned at the date of the authorization by the Board of Directors of the agreements.

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Agreements concerning Southern Water

Agreement with Veolia Environnement (ex Vivendi Environnement)


Mr Henri Proglio


Mr Richard Heckmann

Southern Water was bought in March 2002 by a group of investors through a company called First Acqua JV Co

(‘JVCo’). Part of the acquisition was financed by preferred shares to the value of £374 million, subscribed by a bank

consortium.

On 8 March 2002, Veolia Environnement (ex-Vivendi Environnement) signed an agreement with Salomon

Brothers International Limited (‘SBIL’), which represented the bank consortium, on the non-voting preferred shares

issued by JVCo. Under the terms of this agreement SBIL was granted a put option to be exercised in March 2005

and Veolia Environnement (ex-Vivendi Environnement) was granted a call option that may be exercised until

March 2007 at the latest.

On 31 December 2002, your company and Veolia Environnement (ex Vivendi Environnement) signed a parallel

agreement with the agreement of 8 March 2002, to transfer the non-voting preferred shares to your company, in

the event that Veolia Environnement (ex Vivendi Environnement) were forced to accept receipt of them under the

terms of the contractual agreements. Upon the conclusion of the agreement of 31 December 2002, Veolia

Environnement (ex Vivendi Environnement) irrevocably promised to sell the non-voting preferred shares to your

company, and your company irrevocably promised to buy those non-voting preferred shares, assuming that the

latter had acquired them from SBIL. The sales price was set at the price paid by Veolia Environnement (ex Vivendi

Environnement), in accordance with the agreement of 8 March 2002.

Agreement with CGTH Sade Corporation

Your company acquired from CGTH Sade, of which it owns more than 5%, 5 shares of the compagny Aquiris

corporation for E51,000.

(2) Chairman and directors involved at the date of the authorization by the Board of Directors of those agreements.

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AGREEMENTS APPROVED DURING THE PREVIOUS PERIOD WHICHCONTINUED TO BE APPLICABLE DURING THE PERIOD

Moreover, in accordance with the Decree of 23 March 1967, we have been informed of the following agreements,

which were approved during the previous year, and were applicable during the period.

Agreement with Veolia Environnement (ex Vivendi Environnement) tocover the foreign currency translation differences

On 31 December 1999, Veolia Water (ex Vivendi Water) acquired a US$ 5,292m receivable from Veolia

Environnement (ex Vivendi Environnement) concerning US Filter, for an amount equal to the value of this

receivable in euros at the date of the transfer. This transaction put Veolia Water (ex Vivendi Water), a wholly-

owned subsidiary of Veolia Environnement (ex Vivendi Environnement) in a situation of exchange risk due to the

changing US$/euro parity.

As Veolia Environnement (ex Vivendi Environnement) deemed that its subsidiaries should not have to support

exchange risk, particularly for investments which were part of group strategy, it signed an agreement with Veolia

Water (ex Vivendi Water), whereby Veolia Environnement (ex Vivendi Environnement) agreed to bear or enjoy all

currency translation loss or gains recorded by Veolia Water (ex Vivendi Water) upon the repayment, either before

term or at contract term, of the US$5,292m loan granted to US Filter.

As of 31 December 2002, this loan amounted to US$2,842m and through the application of the contract terms had

generated a gain of E49m recorded by Veolia Environnement (ex Vivendi Environnement).

Loan agreements concluded with Veolia Environnement(ex Vivendi Environnement)

Veolia Environnement (ex Vivendi Environnement) signed subordinated loan and long-term loan agreements with

Veolia Water (ex Vivendi Water), which came into effect as of 29 December 2000.

Those agreements were applicable throughout the period. The value of the various loans as of 31 Decembre 2002

totalled:

– E2,250 million for Veolia Water (ex Vivendi Water) in subordinated loans,

– E5,400 million for Veolia Water (ex Vivendi Water) in long-term loans. The applicable interest rates agreed

by the parties were the Euribor rate + 0.7 % or the Libor rate + 0,7%.





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Extraordinary Shareholders’ Meeting of 30 June 2003

As Statutory Auditors of VEOLIA WATER (ex VIVENDI WATER) and in accordance with the assignment set forth in

Article L 225-204 of the Commercial Code relating to the reduction of capital stock, we hereby present our report

on our appraisal of the causes and conditions of the planned reduction in capital stock.

We conducted out work in accordance with the auditing standards generally accepted in France. Those standards

require that we plan and perform our work to ensure that the causes and conditions of the planned capital

reduction are free of material misstatement. Our work included verifying that the capital reduction does not

reduce the capital to below the legal minimum, and does not undermine the position of the shareholders.

We have no comments to make on the clauses and conditions of this transaction which will reduce your

company’s capital from E4,016,194,988.40 to E759,469,509,46.





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tsStatutory auditors’ report on thereduction in capital stock


Ordinary part

First resolutionAfter hearing the management report of the Board of

Directors and the general report of the Statutory

Auditors on the 2002 financial year, the General

Meeting approves the financial statements for the

said financial year and the transactions reflected in

these accounts and summarized in these reports.

Second resolutionThe General Meeting approves the consolidated

financial statements, prepared in accordance with

articles L 357-1 et seq. of the Commercial Code, as

presented.

Third resolutionAfter hearing the special Statutory Auditors’ report

provided for in article L225-40 of the Commercial Code,

the General Meeting approves the transactions

described in this report.

Fourth resolutionThe General Meeting approves the Board of Directors’

proposal to appropriate the net accounting loss of

E211,629,905.04 for the financial year ended

December 31, 2002, to ‘‘retained losses,’’ increasing

the total from E3,045,095,573.90 to E3,256,725,478.94.

The General Meeting takes note that it has been

advised that no dividend has been distributed since

the company’s creation.

Fifth resolutionThe General Meeting grants full discharge to the

members of the Board of Directors for their

management actions during the financial year.

Extraordinary part

Sixth resolutionThe General Meeting, ruling on the basis of the

requisite quorum and majority conditions for an

Extraordinary Shareholders’ Meeting, takes note that,

in accordance with Article L 228-8 of the French

Commercial Code, all shareholders expressly declared

that they accepted the cancellation of the nominal

value of the 854,509,572 shares making up the capital

stock of the company.

Seventh resolutionThe General Meeting, ruling on the basis of the


Extraordinary Shareholders’ Meeting, and after

hearing the report of the Board of Directors and the

report of the Statutory Auditors prepared in

accordance with the provisions of Article L 225-204

paragraph 2 of the French Commercial Code, and

having taken note:

– that in application of the third resolution voted

during the present General Meeting, the retained

loss for the financial year amounts to

E3,256,725,478.94,

– decide to reduce the capital stock in the amount

of E3,256,725,478.94 through incorporation of

the retained losses; the capital stock is therefore

reduced from E4,016,194,988.40 to

E759,469,509.46.

Eighth resolutionAs a result of the preceding resolution, the General

Meeting, ruling on the basis of the requisite quorum

and majority conditions for an Extraordinary

Shareholders’ Meeting, takes note that, following

this transaction, Article 6 of the by-laws will now

read as follows:

‘‘Article 6: CAPITAL STOCK

The amount of the capital stock is set at

E759,469,509.46, divided into 854,509,572 shares of

the same category and all fully paid up.’’

Ninth resolutionThe General Meeting, ruling on the basis of the


Extraordinary Shareholders’ Meeting, takes note of the

reconstitution of the company’s shareholders’ equity.

Tenth resolutionThe General Meeting invests the bearer of a copy or

excerpt of the minutes of this General Meeting with

the authority necessary to carry out all legal

formalities.

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ResolutionsResolutions submitted to the ordinaryand extraordinary shareholders’meeting of June 30, 2003

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veolia water annual report 2002

Documents

affiliates54 s

s veolia water

s income statement

vivendi water group

financial perspective

financial yearfrom contracts

ownedby vivendi universal

water servicesfor e51