Environmental Services

INDEPENDENT RESEARCH 30th November 2015 It is time to take a rest on Veolia! PENNON GROUP NEUTRAL FV 800p Bloomberg PNN LN Reuters PNN.L Price 837p High/Low 919.5/713p Market cap. GBP3,451m Enterprise Val GBP6,258m PE (2015e) 25.6x EV/EBIT (2015e) 24.8x SUEZ BUY FV EUR19 Bloomberg SEV FP Reuters SEVI.PA Price EUR17.75 High/Low EUR18.96/13.53 Market Cap. EUR9,632m Enterprise Val EUR20,324m PE (2015e) 21.6x EV/EBIT (2015e) 16.2x VEOLIA ENVIRONNEMENT NEUTRAL vs. BUY FV EUR22 Bloomberg VIE FP Reuters VIE.PA Price EUR22.765 High/Low EUR22.765/13.73 Market Cap. EUR12,801m Enterprise Val EUR20,483m PE (2015e) 23.5x EV/EBIT (2015e) 16.0x 120 115 110 105 100 95 90 85 30/11/15 Source Thomson Reuters STOXX EUROPE 600 UTILITIES E STOXX EUROPE 600 2015 was a strong year for environmental services groups, played by investors as proxies to a European industrial recovery which in the end never occurred, to the detriment of integrated utilities. Valuations as well as yields for both stocks are no longer attractive while the upside on the 2016-18 earnings growth potential looks quite limited. We identify through a blue/cloudy sky case scenario analysis that the upside is still more attractive at Suez than at Veolia despite lower future earnings growth potential and lower shareholders return. We downgrade our rating on Veolia from Buy to Neutral while keeping our Buy rating on Suez. A quick look on the mirror: In this report, we take a look at the earnings growth we expect for 2015 and identify and summarise the different drivers both groups could benefit from as soon as next year. Environmental services stocks have strongly benefited within the sector from a large positive consensus, and had been played mainly by investors as proxies on a European industrial recovery. In the end, this recovery did not happen, but we expect both groups to generate still impressive earnings this year. Good 2015 performance to expect, not driven by macro: We expect Veolia to outpace Suez in terms of earnings growth this year, helped by the last high annual cost reduction contribution from the Convergence Plan and helped by further optimisation of financial costs. All in all, we expect Veolia to post 6.4% lfl EBITDA growth this year vs. 2.1% for Suez. What will drive earnings up next year? 1/ Further restructurings (+); 2/ a slight rise in waste volumes treated vs. 2015 (+); 3/ inflation (+), even if limited; 4/ FX (+ for VIE, - for SEV); 5/ new services contracts (+); and 6/ growth with industrials in the water division (+). All in all, we expect Veolia to post 5.5% lfl EBITDA growth this year vs. 5.2% for Suez. We downgrade Veolia to Neutral while keeping our Buy rating on Suez: Ahead of the investors day which Veolia is hosting on December 14 th, we downgrade our rating on Veolia from Buy to Neutral without changing our FV (EUR22, no upside), due to the very limited upside we expect on consensus from the new Convergence 2016-18 Plan and due to the timid macro outlook management is likely to comment upon at its 2015 earnings presentation (February 2015). We remain at Buy for Suez (Buy, FV EUR19). Analyst: Xavier Caroen 33(0) 1.56.68.75.18 xcaroen@bryangarnier.com r r

Table of contents 1. It is time to take a rest!... 3 2. A quick look on the mirror... 4 2.1. Good 2015 performance expected, not driven by macro... 5 2.2. What s next?... 7 2.2.1. What to expect beyond 2015?... 7 2.2.2. Our assumptions for both stocks... 13 2.3. What is the potential upside/downside on 2016/17 estimates/consensus?... 17 3. Suez vs. Veolia... 20 3.1. Earnings growth comparison (2015-2020)... 20 3.2. Cash flow generation comparison (2015-2020)... 22 3.3. Shareholder return comparison (2015-2020)... 24 3.4. Valuation comparison (2016-2020)... 25 4. Suez... 27 4.1. Our estimates... 27 4.2. Our FV... 29 5. Veolia... 30 5.1. Our estimates... 30 5.2. Our FV... 32 Price Chart and Rating History... 33 Bryan Garnier stock rating system... 35

1. It is time to take a rest! Since the beginning of the year, the utilities sector (SX6P) has strongly underperformed all other sectors and most importantly the Stoxx 600, due notably to major political interference on a large number of stocks and, most importantly, due to the further decline (on top of the already observed decline since 2008) in commodity prices, which has altered the sector s earnings made in Europe on merchant activities. Within the sector, companies and sub-segments have suffered to varying degrees. Integrated utilities, such as EDF (-34% YTD), RWE (-56%), E.ON (-35%) and even Engie (-15.5%), have suffered the most while environmental services stocks as well as renewables stocks stood out from the crowd due to the commissioning of new projects or in part restructuring contributions to earnings growth for 2015. The question is now whether the trend in the SX6P is going to last into 2016, given 1/ equity stories for outperforming stocks as Suez or Veolia are well known by investors, implying potential further upside to consensus is more limited; and 2/ valuations on these stocks is now demanding, with most newsflow being the main drivers of share price rises. For H1-16, we remain negative on the sector (on a relative basis), given we do not expect strong positive news that will structurally modify consensus for 2016 or 2017. As of today, 2016 is expected to be a flat year for the sector (EPS estimates for 2016 on SX6P) with 2017 being the year of growth we all expect. We would therefore recommend to play it safe until H1-16 and then to go for the sector s 2017 earnings growth potential by H2-16. Such a prudent view on the sector could imply investors in the sector will continue to favour environmental services stocks such as Suez, Veolia or Séché Environnement to the detriment of integrated utilities (at least during H1-16), yet given the newsflow is set be less important and given the valuation is no longer demanding, we believe it is fair to assume some investors will start to take their profits on these stocks; hence the reason for our writing today. In this report we take a quick look at what happened this year in the sector, while detailing our estimates for 2015 and beyond, and estimate the potential upside and downside on consensus earnings for Suez and Veolia. We finish by making a quick comparison between the stocks, which confirms our preference for Suez over Veolia and explains our downgrade on the latter from Buy to Neutral ahead of the investors day (December 14 th ). We recommend to play it safe and start taking some profit on Veolia following the strong past run, while we still see 10% upside on Suez linked predominantly to potential surprises on M&A. 3

2. A quick look on the mirror 2015 is a strong year for European environmental services stocks and especially for Veolia and Suez which notably benefited from the smaller appetite of investors for integrated utilities. Since the end of December 2014, the SX6P index is down 0.5% while in the meantime the SXXP index is up 12.2%, reflecting the strong disinterest of investors in the sector, notably due to the massive deterioration in commodity prices observed since 2014 (Brent price in EUR is down 42%, TTF gas price is down >43% and the power price in Central Europe is down 19%). As already mentioned, within the SX6P index (26 companies), on average environmental services stocks have strongly outperformed, with Veolia being the top performer at + 54% (followed by Suez at +23%). Conversely, all European integrated utilities have strongly underperformed (-14% on average) while distribution/ transmission utilities have performed strongly compared with the sector (+10% on average). On top of the more favourable allocation within the SX6P index to the profit of environmental services companies and so to the detriment of stocks exposed to the deterioration in commodity prices (integrated utilities), environmental services stocks, such as Veolia and Suez (Séché Environnement, not yet included in the SX6P Index) or even to a certain extent stocks such as Severn Trent or United Utilities, have benefited from stabilisation in the underlying economic drivers (waste volumes, price increases in the water business), contrary to the underlying economic drivers of integrated utilities. Fig. 1: SX6P Index evolution and composition Weight in % of Env. Serv. vs. Integrated Ut. SX6P YTD perf. of SX6P & subsectors 58,0% 56,0% 54,0% 52,0% 50,0% 48,0% 46,0% 19,0% 18,5% 18,0% 17,5% 17,0% 16,5% 16,0% 15,5% 15,0% 20,0% 15,0% 10,0% 5,0% 0,0% -5,0% -10,0% -15,0% -20,0% Integrated Utilities BG Index recomposed Integrated Utilities Distribution/Transmission Others ; Datastream Since the end of 2014, Veolia s share price has performed strongly, in line with the solid results the group has published since February 2015. The expected economic rebound in Europe did not occur, implying most of the earnings growth generated by Veolia (and by Suez) came from restructuring efforts. Among all five environmental services stocks belonging to the SX6P (Veolia, Suez, Pennon, Severn Trent & United Utilities), the two French stocks outperformed the UK ones, mainly due to their lower exposure to regulated assets and to their stronger exposure to the waste business. On both stocks, investors have played the positive EBITDA FY 2015 and FY 2016 earnings upward revisions by consensus since the beginning of the year, to the detriment of other environmental services stocks for which consensus made either lower positive adjustments or negative adjustments (lower inflation, pressure on prices ). 4

2.1. Good 2015 performance expected, not driven by macro Suez and Veolia guidances were based on a stability in industrial production (PMI) in Europe compared with last year, a EUR/USD rate at 1.15 (February 2015), a stability in commodity prices compared with 2014 and a limited inflation rate in the region. Since February 2015 (2014 earnings presentations, and 2015 targets unveiled by the managements of both groups), most of the assumptions have differed from initial guidance, with a stronger dollar (+) and a further decline in commodity prices (-). Assumptions concerning inflation and the PMI have remained in line with guidance, though leading all in all to a confirmation of 2015 targets for both groups, which was not the case for all utilities stocks in the SX6P index. Since January 2015, consensus on EBITDA and net income for Veolia were positively revised up by respectively 15.3% and by 22% for the year, and by 14.7% and by 11.7% for 2016. This should be compared with respectively -2% and -1.9% for Suez for 2015 and -1.7% and 0% for 2016. Such an outperformance is explained by: 1/ the formulaic change in EBITDA for Veolia (new definition implemented in ; which positively impacted the group s EBITDA by ); 2/ the slightly better contribution last year from the Compass programme; and 3/ by more favourable FX effects at Veolia than at Suez for 2015. Fig. 2: 2015/16e EBITDA & Net income consensus evolution for VIE & SEV since Jan 2015 2015e/16e EBITDA rebased 100 in Jan 2015 2015e/16e Net income rebased 100 in Jan 2015 120 115 110 105 100 95 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 SEV EBITDA 15e SEV EBITDA 16e VIE EBITDA 15e VIE EBITDA 16e 125 120 115 110 105 100 95 90 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 SEV NRI 15e SEV NRI 16e VIE NRI 15e VIE NRI 16e ; Datastream As indicated above, the macro indicators in Europe (GDP and PMI) were not the main drivers of growth for consensus given that at the end of the day no real positive trend was observed since the beginning of the year, with a timid first quarter (due notably to unfavourable basis comparison with Q1-14), a solid month of May in Q2 and the positive trend observed in August 2015. 5

Fig. 3: PMI evolution (YoY) in France and in Europe PMI France YoY & PMI Europe YoY since 2006 PMI France YoY & PMI Europe YoY since 2013 15,0% 10,0% 5,0% 0,0% -5,0% -10,0% -15,0% -20,0% -25,0% Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 5,0% 4,0% 3,0% 2,0% 1,0% 0,0% -1,0% -2,0% -3,0% -4,0% -5,0% Industrial Production YoY France Industrial Production YoY - Europe Industrial Production YoY France Industrial Production YoY Europe Linear (Industrial Production YoY France) Linear (Industrial Production YoY - Europe) Linear (Industrial Production YoY France) Linear (Industrial Production YoY Europe) ; Datastream Fig. 4: PMI & GDP evolution (YoY & MoM) in France and in Europe since Q1-14 PMI & GDP evolution (YoY) in France since Q1-14 PMI & GDP evolution (MoM) in France since Q1-14 3,0% 0,6% 14,0% 1,8% 2,0% 1,0% 0,0% -1,0% -2,0% -3,0% 0,5% 0,4% 0,3% 0,2% 0,1% 12,0% 10,0% 8,0% 6,0% 4,0% 2,0% 0,0% -2,0% -4,0% 1,6% 1,4% 1,2% 1,0% 0,8% 0,6% 0,4% 0,2% -4,0% Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 0,0% -6,0% Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 0,0% PMI Euro Area YoY GDP Euro Area YoY PMI Euro Area MoM GDP Euro Area MoM ; Datastream It is hard to see any real trends in France or Europe for industrial and/or economic recovery since the beginning of2014. The trends seem slightly better or at least to the upside; reflecting higher confidence by both final consumers and industrials. But a real rebound in PMI and therefore on waste volumes treated, we believe, will take longer than first anticipated, implying for 2016 and 2017 that most of the earnings growth potential for both stocks will continue to come from self-help drivers. 6

2.2. What s next? We assume 2015 earnings will be correct, in line with both group s guidance (actually even slightly outperforming targets thanks to favourable FX effect and to the unexpected hotter than average temperatures in France during summer). Investors, on these two stocks, are not playing anymore 2015 but are looking at 2016 and 2017. Given investors are well aware of both Suez and Veolia s equity stories and that these two stocks, along with Rubis and Séché Environnement, are among the best French utility stock performers this year, we assume only two questions are now tormenting investors: 1/ what to expect beyond 2015, and, more importantly, 2/ what is the potential upside/downside in the 2016 and 2017 EBITDA and net income consensus for both stocks? 2.2.1. What to expect beyond 2015? As a reminder, both Veolia s and Suez s earnings are driven by five main elements: Waste Industrial production in Europe, given this affects the amount of waste generated by industry. Any indicators linked to final consumer consumption, to industrial production or to the level of stocks could therefore be seen as interesting proxies to follow. Recyclates prices: Both Veolia and Suez are, through the rise of recycling businesses within their waste businesses (around one third of waste sales for both stocks), highly sensitive (strong exposure on sales, more moderate on earnings) to massive changes in recyclates prices. Trends in paper, steel and plastic prices are therefore important metrics for both groups. Water Inflation, given it affects the tariff formula in water contracts with municipalities, which still represent around >90% of water business sales generated by both groups. Temperature differences vs. average climate in France and Europe, given when discrepancies with average temperatures are important (as observed this summer in France), water consumption tends to differ from average usage (greater need for watering of gardens, filling of swimming pools when temperatures are hotter than average), leading to a higher/lower margin in the water divisions during the period (leverage effect of 100% on the margin as it is a fixed cost business) compared with previous year. Confidence index evolution in the oil & gas industry, an index which is linked directly to oil & gas price trends. This indicator is important given it reflects the growth potential that would come from oil & gas industrials where the need for water treatment and water recycling is increasing (financial constraints and regulation constraints). Obviously, on top of these five main drivers, which are carefully tracked by investors, FX rate changes (EUR/USD; EUR/AUD; EUR/CLP and EUR/GBP) are quite important elements to follow too, especially when they are large. Below is therefore a summary of our expectations for 2016-2018 for these five main proxies. 7

Industrial production in Europe In the waste business, Europe represents 76% of Veolia s sales with the group being mainly exposed to France, the UK and Germany, while it represents 90% of Suez s sales with most of the business being generated in France and the Benelux (increasing exposure to the UK with new EfW sites). Veolia has an exposure to the US waste market, contrary to Suez. It is never easy to assess how industrial production will vary over the coming years as each industry has a different cycle and the strongest driver of growth is linked to final consumption, and, more importantly, to the level of inventories. Assuming both Veolia and Suez have similar exposures to the European industry in terms of waste volumes treated, this implies similar sensitivities of their waste businesses to changes in industry production and therefore similar impacts to both waste divisions EBITDA. Construction remains the main generator of waste in France/Europe (20-25%), with the chemical industries being the number two contributor (13-15%) and the automotive industry number three (10-15%). While looking at the expected trends for these three industries, we see either a stabilisation or a slight improvement in construction and the automotive industry, compared with 2014 and 2015, while the chemical industry s global trend seems also slightly more favourable. The overall trend in Europe therefore seems to be slightly improving on the industrial side, making us believe a positive waste volume growth expectation for 2016 is realistic. In our model, we assume for both groups positive volume growth in the waste business of respectively +0.5% and +0.6% for Suez in 2016 and 2017 (Europe only) and +0.7% and +1% for Veolia (worldwide). 8

Recyclates prices evolution Due to the increasing exposure of both groups to recycling processes within their waste businesses (around a third of volumes treated), their sensitivity to recyclates price swings also rises. Since 2012, both Veolia and Suez have suffered in their waste businesses P&L from the deterioration in recyclates prices, with a more limited impact on margins (the margin is more at risk when the recycling process is long). Since 2012, aluminium prices have deteriorated by >20% while E40 steel prices have dropped by 30%. Only paper prices have slightly risen compared with 2012 after passing through a difficult cycle in 2013 and 2014 (prices up 5% since 2012). Fig. 5: Aluminium prices evolution (EUR/t) Aluminium prices evolution since 2009 (EUR/t) Aluminium prices evolution since 2014 (EUR/t) 1 700 1 180 1 600 1 500 1 130 1 400 1 080 1 300 1 200 1 030 1 100 980 1 000 900 930 800 880 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 ; Datastream Fig. 6: E40 steel prices evolution prices evolution (EUR/mt) E40 steel prices evolution since 2009 (EUR/mt) E40 steel prices evolution since 2014 (EUR/mt) 1 700 1 200 1 600 1 150 1 500 1 400 1 300 1 200 1 100 1 000 900 1 100 1 050 1 000 950 900 850 800 800 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 ; Datastream 9

Fig. 7: Paper prices evolution prices evolution (EUR/mt) Paper prices evolution since 2012 (EUR/mt) Paper prices evolution since 2014 (EUR/mt) 140 130 120 110 100 90 80 70 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 140 130 120 110 100 90 80 70 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 ; Copacel 2015 is therefore set to be a difficult year for both groups with some of the improvement in the waste business margin (due to a positive perimeter effect or restructuring efforts) being offset by the negative pricing effect. In our model, we assume a negative EUR15m and a negative EUR12m impact respectively on Suez s and Veolia s 2015e EBITDA due to the negative price swings. As for 2016, we remain prudent and assume no rebound in prices for either aluminium or steel, while considering a stabilisation in paper prices, implying all in all a further deterioration compared with 2015. We then assume a further decline in 2016 recyclates prices compared with 2015 to the detriment of the groups sales. The negative impact on EBITDA is set to be marginal though. 10

In our model we assume inflation at +1% in Eurozone and +4.5% in Chile. Inflation Changes in inflation have an impact on pricing for all municipal water division contracts given they are included in indexation clauses. The water divisions of both groups are obviously exposed to French municipal contracts (bigger exposure for Veolia given its higher market share) but it is important to bear in mind that Suez differs from Veolia outside Europe as it consolidates 100% of Aguas Andinas (while owning only 28.2% of it), a Chilean firm which manages the Santiago de Chile municipal water contract. This specific exposure implies Suez s water division earnings are set to grow organically at a higher pace than at Veolia. In our model we assume inflation at +1% in Euro-zone and +4.5% in Chile. We expect a negative climate effect of around EUR15m on Suez EBITDA for 2016; none for Veolia. Temperatures Veolia and Suez are both quite sensitive to important temperature changes, especially during summers when temperatures are hotter than average, as water usage tends to increase slightly (filling of swimming pools; watering of plants & gardens ) to the profit of the water business margin. Given both groups remain still highly exposed to France in the water business and given municipalities remain the main activity so far (>70% of sales), most temperature sensitivity comes from France. 2014 was a hot year in both France and Europe (which negatively impacted companies exposed to gas and power supplies such as EDF or Engie) yet during the summer temperatures were slightly lower than average climate implying both Veolia s and Suez s earnings were not positively impacted. For 2015, temperatures in the first ten months are in line with average climate in France but during the summer were hotter than average, which explained the good Q3 performance reported by both groups (especially Veolia). Veolia even indicated during its Q3 earnings conference call that Water s EBITDA in Q3 was positively impacted by around EUR20-30m thanks to the hot summer; implying, if we assume a normal climate for 2016, a potential negative impact of this amount on the 2016 Water EBITDA compared with 2015. Suez has not indicated the impact on Q3-15 EBITDA, but we assume the group did benefit from it in its accounts (EUR15m estimated). Fig. 8: Average monthly temperatures in C in France 25,0 20,0 15,0 10,0 5,0 0,0 Jan Feb March April May June July August Sept Oct Nov Dec Monthly average 2014 Monthly average 2015 Monthly average - Average climate ; RTE 11

On top of this weather exposure for the Water division, Veolia, through its Energy division, Dalkia International, is also exposed to winter weather because the group sells heat in Germany and Eastern Europe. In Q1-15, this division suffered from unfavourable weather conditions (hotter than average temperatures) leading to a negative one-off of around EUR30m on Energy s Q1 EBITDA, offsetting on an annual basis the positive effect observed later on in the French Water division. The question for 2015 remains whether the temperatures in Q4-15 will be cold or not in Eastern Europe (so far, in France, temperatures in October 2015 have been colder than average and, most importantly, colder than last year). In our model, we assume no change (positive or negative) compared with Q4-14, implying overall the weather impact is neutral for Veolia in 2015 while it will be slightly positive for Suez. As for 2016, assuming climate in France and Europe comes back closer to average temperatures, this would imply a neutral impact on Veolia and a slightly negative impact for Suez. In our model, we assume minus EUR15m on Suez s EBITDA compared with 2015. We remain cautious on the short term given the pressure on commodities is quite important, to the detriment of new projects development. Industrial indexes (for specialised markets) Both groups are exposed to European GDP growth and, more importantly, to European PMI growth on the waste business (>70% of waste business being made with industrials), yet, given the increasing demand for water treatment expertise from some very specific industries, logically, also water businesses for both groups tend to be more exposed to industrial development. For the water business, the main sectors targeted are: 1/ the oil & gas sector; 2/ the agriculture sector; and 3/ the paper industry. The oil & gas sector remains strongly under pressure following important commodities prices deterioration, delaying the commissioning of new projects to the detriment of Veolia, or Suez, while the agriculture sector remains mainly driven by emerging market s rise in consumption. We assume a strong part of the earnings growth on water business will come from these markets yet we remain cautious on the short term given the pressure on commodities is quite important, to the detriment of new projects development. 12

2.2.2. Our assumptions for both stocks When looking at current consensus for both stocks, we assume the global expectations on GDP growth and PMI growth for Europe are quite prudent, as they are in our model. We also assume the consensus is not integrating any positive/negative FX effect vs. 2015 either. In our model, we currently assume for Suez a 3.6% YoY EBITDA growth for Suez to EUR2.74bn versus consensus at EUR2.68bn, while assuming a 6.4% YoY EBITDA growth for Veolia to EUR3.13bn versus consensus at EUR2.97bn. Most of the earnings growth we expect should be coming from M&A and restructurings. Fig. 9: Suez 2016e EBITDA growth (bridge in EURm) 3 000 2 500 2 647 - (20) 100 37 2 764 2 000 1 500 1 000 +3.6% 500 0 EBITDA 2015e o/w perimeter o/w FX o/w Compass (before inflation costs) o/w business EBITDA 2016e development (with inflation) ; Datastream Fig. 10: Suez 2017e EBITDA growth (bridge in EURm) 3 500 3 000 2 500 2 764 35-100 54 2 954 2 000 1 500 1 000 +6.9% 500 0 EBITDA 2015e o/w perimeter o/w FX o/w Compass (before inflation costs) o/w business EBITDA 2017e development (with inflation) ; Datastream 13

Fig. 11: Veolia 2016e EBITDA growth (bridge in EURm) 3 500 3 000 2 945-25 173 (11) 3 133 2 500 2 000 1 500 + 6.4% 1 000 500 0 EBITDA 2015e restated - New Definition o/w perimeter o/w FX o/w Convergence (before inflation) o/w business EBITDA 2016e development (with inflation) ; Datastream Fig. 12: Veolia 2017e EBITDA growth (bridge in EURm) 3 500 3 000 3 133 - - 173 15 3 321 2 500 2 000 1 500 + 6% 1 000 500 0 EBITDA 2016e restated - New Definition o/w perimeter o/w FX o/w o/w business EBITDA 2017e Convergence development (before (with inflation) inflation) ; Datastream We summarise in the tables below our changes in estimates for both stocks. Most of our changes are due to: 1/ the integration of FX effects for 2016 based on the latest rates we use for 2016 and we compare them to the 2015 average (favourable for Veolia due to a stronger USD and unfavourable to Suez due to longer CLP); 2/ the integration of lower volume waste growth expected for 2016-18, given we believe the industrial recovery in Europe will take longer than previously anticipated (we now stand at +0.5% (lfl) for 2016 for Suez and at +0.6% (lfl) for 2017 vs. respectively +0.8% and +1% previously modelled; and now assume +0.7% for 2016 and +1% for 2017 for Veolia, vs. +1% and +1.5% before); and 3/ the integration of a lower sales contribution from the waste business due to further deterioration in recyclates prices. All in all, our 2015 adjusted EPSs for Suez and Veolia remain flat versus our previous estimates, while our 2016 and 2017 estimates for Suez increase by respectively 6.9% and 8.7% (due to the delay in M&A by one year, with financing weighing on our net debt and our financial charges) and increase by 2.1% and 1.9% for Veolia. 14

Fig. 13: Suez Estimates changes for 2015-18 (EURm) 2014R 2015e 2016e 2017e 2018e Estimates change - New Old New Old New Old New Old 2015 2016 2017 2018 Revenues 14 321 14 956 14 795 15 283 15 182 15 823 15 737 16 206 16 122 1,1% 0,7% 0,5% 0,5% o/w Water Europe 4 516 4 730 4 727 4 867 4 881 4 988 5 025 5 127 5 189 0,1% -0,3% -0,7% -1,2% o/w Waste Europe 6 367 6 410 6 372 6 483 6 489 6 744 6 740 6 818 6 793 0,6% -0,1% 0,1% 0,4% o/w International 3 447 3 826 3 706 3 943 3 823 4 102 3 982 4 271 4 151 3,2% 3,1% 3,0% 2,9% o/w Others (10) (10) (10) (10) (10) (10) (10) (10) (10) 0,0% 0,0% 0,0% 0,0% EBITDA 2 643 2 647 2 646 2 764 2 792 2 954 2 965 3 129 3 071 0,0% -1,0% -0,4% 1,9% % of sales 18,5% 17,7% 17,9% 18,1% 18,4% 18,7% 18,8% 19,3% 19,0% -1% -2% -1% 1% o/w Water Europe 1 245 1 312 1 320 1 326 1 356 1 372 1 398 1 424 1 432-0,6% -2,2% -1,9% -0,6% o/w Waste Europe 743 775 770 825 821 921 904 988 938 0,7% 0,6% 1,9% 5,3% o/w International 728 642 638 687 689 742 739 801 779 0,6% -0,2% 0,5% 2,8% o/w Others (73) (82) (82) (74) (74) (81) (76) (83) (78) 0,0% 0,0% 6,6% 6,4% EBITDA margin 18,5% 17,7% 17,9% 18,1% 18,4% 18,7% 18,8% 19,3% 19,0% -1,0% -1,6% -0,9% 1,4% o/w Water Europe 27,6% 27,7% 27,9% 27,2% 27,8% 27,5% 27,8% 27,8% 27,6% -0,6% -2,0% -1,1% 0,6% o/w Waste Europe 11,7% 12,1% 12,1% 12,7% 12,7% 13,6% 13,4% 14,5% 13,8% 0,1% 0,6% 1,8% 4,9% o/w International 21,1% 16,8% 17,2% 17,4% 18,0% 18,1% 18,6% 18,7% 18,8% -2,5% -3,3% -2,4% 0,0% o/w Others - - - - - - - - - - - - - D&A (1 067) (1 128) (1 119) (1 145) (1 140) (1 196) (1 192) (1 239) (1 235) 0,9% 0,4% 0,3% 0,3% % of sales -7,5% -7,5% -7,6% -7,5% -7,5% -7,6% -7,6% -7,6% -7,7% - - - - EBIT Reported 1 255 1 258 1 267 1 304 1 330 1 443 1 441 1 572 1 494-0,7% -2,0% 0,2% 5,2% % of sales 8,8% 8,4% 8,6% 8,5% 8,8% 9,1% 9,2% 9,7% 9,3% -1,7% -2,6% -0,4% 4,7% Exceptional (81) (70) (70) (15) (15) (15) (15) (15) (15) 0,0% 0,0% 0,0% 0,0% EBIT Adjusted 1 174 1 188 1 197 1 289 1 315 1 428 1 426 1 557 1 479-0,7% -2,0% 0,2% 5,3% % of sales 8,2% 7,9% 8,1% 8,4% 8,7% 9,0% 9,1% 9,6% 9,2% -1,8% -2,7% -0,4% 4,8% Net income reported 417 401 400 503 473 584 539 665 564 0,3% 6,4% 8,2% 17,9% Net income adjusted 321 443 442 475 445 556 511 637 536 0,3% 6,9% 8,7% 18,9% EPS reported 0,81 0,75 0,74 0,94 0,88 1,09 1,00 1,24 1,05 0,3% 6,4% 8,2% 17,9% EPS BG estimates (with hybrid costs and adjusted for non-recurring elements) 0,62 0,82 0,82 0,88 0,83 1,03 0,95 1,18 1,00 0,3% 6,9% 8,7% 18,9% Dividend 0,65 0,65 0,65 0,65 0,65 0,71 0,65 0,80 0,68 0,0% 0,0% 8,2% 17,9% Implied pay-out on net income adjusted 80,7% 87,2% 87,5% 69,4% 73,9% 65,0% 65,0% 65,0% 65,0% -0,3% -6,1% 0,0% 0,0% Net margin 2,2% 3,0% 3,0% 3,1% 2,9% 3,5% 3,2% 3,9% 3,3% -0,8% 6,2% 8,1% 18,3% Net debt 7 186 7 883 8 093 8 419 8 652 8 875 8 907 9 068 9 187-2,6% -2,7% -0,4% -1,3% 15

Fig. 14: Veolia Estimates changes for 2015-18 (EURm) 2014R 2015e 2016e 2017e 2018e Estimates change - New Old New Old New Old New Old 2015 2016 2017 2018 Revenues 23 880 24 970 24 376 25 488 24 988 26 086 25 612 26 702 26 255 2,4% 2,0% 1,9% 1,7% o/w Water 11 215 11 445 10 834 11 655 11 048 11 874 11 271 12 100 11 502 5,6% 5,5% 5,3% 5,2% o/w Waste 8 506 9 016 9 033 9 170 9 277 9 390 9 518 9 615 9 766-0,2% -1,2% -1,4% -1,5% o/w Energy (Dalkia) 3 926 4 271 4 271 4 420 4 420 4 575 4 575 4 735 4 735 0,0% 0,0% 0,0% 0,0% o/w Transport - - - - - - - - - - - - - EBITDA (CAFOP) margin 2 164 2 563 2 533 2 745 2 707 2 928 2 888 3 109 3 069 1,2% 1,4% 1,4% 1,3% % of sales 9,1% 10,3% 10,4% 10,8% 10,8% 11,2% 11,3% 11,6% 11,7% -1,2% -0,6% -0,5% -0,4% o/w Water 930 1 035 1 005 1 102 1 090 1 185 1 171 1 267 1 253 3,0% 1,1% 1,1% 1,2% o/w Waste 943 1 057 1 057 1 123 1 121 1 198 1 197 1 272 1 271 0,0% 0,2% 0,1% 0,1% o/w Dalkia 335 515 515 565 540 590 566 616 591 0,0% 4,6% 4,4% 4,2% o/w others (44) (44) (44) (45) (45) (45) (45) (46) (46) 0,0% 0,0% 0,0% 0,0% EBITDA (CAFOP) margin 9,1% 10,3% 10,4% 10,8% 10,8% 11,2% 11,3% 11,6% 11,7% -1,2% -0,6% -0,5% -0,4% o/w Water 9,6% 9,5% 9,9% 10,0% 10,4% 10,5% 10,9% 10,8% 11,2% -4,2% -4,0% -3,8% -3,6% o/w Waste 11,7% 12,3% 12,1% 12,8% 12,6% 13,2% 13,0% 13,6% 13,3% 1,4% 1,5% 1,6% 1,9% o/w Energy (Dalkia) 12,1% 12,8% 12,2% 12,9% 12,4% 13,0% 12,5% 12,9% 12,4% 4,6% 4,4% 4,2% 4,2% o/w others - - - - - - - - - - - - - New EBITDA definition 2 620 2 945 2 915 3 133 3 093 3 321 3 280 3 508 3 466 1,0% 1,3% 1,2% 1,2% % of sales 11,0% 11,8% 12,0% 12,3% 12,4% 12,7% 12,8% 13,1% 13,2% -1,4% -0,7% -0,6% -0,5% Reported EBIT 414 1 260 1 258 1 298 1 281 1 440 1 420 1 531 1 508 0,1% 1,3% 1,4% 1,5% % of sales 1,7% 5,0% 5,2% 5,1% 5,1% 5,5% 5,5% 5,7% 5,7% -2,2% -0,6% -0,5% -0,2% Non recurrent elements (41) 0 0 0 0 0 0 0 0 - - - - Net income reported 246,1 615,7 615,0 649,7 637,8 765,3 752,0 831,7 816,0 0,1% 1,9% 1,8% 1,9% Net income adjusted - VEOLIA 326,0 585,7 585,0 619,7 607,8 735,3 722,0 801,7 786,0 0,1% 2,0% 1,8% 2,0% Estimates Net income adjusted - BG Est. 123,1 545,7 545,0 579,7 567,8 695,3 682,0 761,7 746,0 0,1% 2,1% 1,9% 2,1% EPS reported 0,44 1,10 1,09 1,16 1,13 1,36 1,34 1,48 1,45 0,1% 1,9% 1,8% 1,9% EPS adjusted - VEOLIA 0,58 1,04 1,04 1,10 1,08 1,31 1,28 1,43 1,40 0,1% 2,0% 1,8% 2,0% Estimates EPS adjusted - BG Estimates 0,22 0,97 0,97 1,03 1,01 1,24 1,21 1,35 1,33 0,1% 2,1% 1,9% 2,1% Dividend 0,70 0,71 0,71 0,75 0,74 0,88 0,87 0,96 0,94 0,1% 1,9% 1,8% 1,9% Implied Pay-out 121% 65% 65% 65% 65% 65% 65% 65% 65% 0,0% 0,0% 0,0% 0,0% Net margin 0,5% 2,2% 2,2% 2,3% 2,3% 2,7% 2,7% 2,9% 2,8% -2,2% 0,1% 0,1% 0,4% Net debt 8 311 8 831 8 795 8 740 8 720 8 670 8 652 8 564 8 550 0,4% 0,2% 0,2% 0,2% 16

2.3. What is the potential upside/downside on 2016/17 estimates/consensus? Most of the upside/risk for both stocks are linked to FX, economic growth in Europe, to M&A (for Suez) and to restructurings (for Veolia). In the graphs below we summarize both upside and downside to our 2016e & 2017e EBITDA estimates for both Suez and Veolia and so the potential impact on consensus. We remind here our 2016 and 2017 estimates are based on latest FX changes, on latest commodity and recyclates prices, on a GDP growth in Europe of 1.6% for 2016 and 1.7% for 2017, and positive waste volumes growth of 0.5% for 2016 and +0.6% for 2017. Following our adjustments compared with our previous estimates (see section 2.2.2) it appears we now stand 2.5% above consensus on 2016e Suez EPS and 6% on 2017 (due notably to M&A) while we stand 0.4% above on Veolia for 2016e and +2.3% on 2017. Fig. 15: Suez BG vs. consensus (EURm) 2015e 2016e 2017e 2018e Difference BG Cons. BG Cons. BG Cons. BG Cons. 2015e 2016e 2017e 2018e Sales 14 956 14 900 15 283 15 400 15 823 16 000 16 206-0,4% -0,8% -1,1% - EBITDA 2 647 2 620 2 764 2 760 2 954 2 920 3 129-1,0% 0,2% 1,2% - EBIT 1 258 1 250 1 304 1 300 1 443 1 440 1 572-0,6% 0,3% 0,2% - Net income adjusted - SUEZ Estimates 401 404 503 491 584 550 665 - -0,8% 2,5% 6,1% - Net debt 7 883 8 000 8 419 8 200 8 875 8 300 9 068 - -1,5% 2,7% 6,9% - Fig. 16: Veolia BG vs. consensus (EURm) 2015e 2016e 2017e 2018e Difference BG Cons. BG Cons. BG Cons. BG Cons. 2015e 2016e 2017e 2018e Sales 24 970 25 055 25 488 25 651 26 086 26 425 26 702 27 095-0,3% -0,6% -1,3% -1,4% EBITDA 2 945 2 956 3 133 3 114 3 321 3 294 3 508 3 476-0,4% 0,6% 0,8% 0,9% EBIT 1 277 1 327 1 380 1 429 1 526 1 574 1 621 1 714-3,8% -3,4% -3,1% -5,4% Net income adjusted - VEOLIA Estimates 586 559 620 617 735 719 802 839 4,8% 0,4% 2,3% -4,4% Net debt 8 831 8 531 8 740 8 432 8 670 8 366 8 564 8 138 3,5% 3,7% 3,6% 5,2% For Suez, we estimate most of the upside from earnings growth on both our estimates and consensus would come from M&A, while the downside (on consensus only this time) will come from FX (CLP depreciation compared with 2015). Assuming the group is able to reach its 2017 EUR3bn EBITDA guidance, thanks to an important M&A deal in 2016, this would imply a potential positive EBITDA adjustment of 1.6% on our 2017e EBITDA estimates and 2.7% on consensus, while on 2017e EPS the potential upside is estimated at respectively 4% and 7%. On top of this, assuming a higher industrial rebound in Europe on the waste business (+1% vs. +0.5% in waste volumes treated in Europe (lfl) for 2016e and +1.5% vs. +0.6% in waste volumes treated in Europe (lfl) for 2017e), this would imply a further 6.8% upside to our EPS adjusted 2017e estimates. Cumulating more bullish M&A assumptions with 17

more positive assumptions on an industrial recovery in Europe (while still expecting an unfavourable FX effect in our model due to CLP) would imply potential positive adjustments to our 2017 adjusted EPS of 11%, leading to a EUR0.5/share positive impact (before rounding) on our EUR19/share FV (+3%). As for Veolia, we estimate the upside on earnings growth on both our estimates and consensus (2016-18) would only come from a more aggressive than expected contribution from the Convergence Plan for 2016-18 and from a favourable FX adjustment (USD appreciation compared with 2015). In our model, we currently assume the next plan will be able to generate EUR650m of gross additional restructuring over 2016-18 period and EUR520m net of implementation costs (but before inflation costs) leading by 2018 to an EBITDA (new definition) of EUR3,508m. On Veolia, we only stand 0.9% above 2018 consensus implying the market expects quite a similar contribution from the cost reduction plan Our blue sky scenario on Veolia implies potential positive adjustment of 9% on our 2017 EPS and a positive EUR0.9/share impact on FV. We only stand 0.9% above 2018 consensus implying the market expects quite a similar contribution from the cost reduction plan. While we see very limited upside potential on the amount the group will be able to announce on December 14 th at its Investors Day, we could potentially be positively surprised on the lower implementation costs needed for this new plan (compared with previous one). In our model we currently assume implementations costs will amount around 20% of the EUR650m we expect. Assuming it is only 10%, this will positively impact our 2016, 2017 and 2018 adjusted EPSs by respectively 2.7%, 4.5% and 6.5%. Assuming similar more positive assumptions on an industrial recovery in Europe (+1.1% vs. +0.7% in waste volumes treated worldwide (lfl) for 2016 and +1.9% vs. +1% in waste volumes treated worldwide by the group (lfl) for 2017e) would imply further a 1%, 3.1% and 2.4% upside to our 2016-18 adjusted EPSs respectively. Together, these two more bullish assumptions on Veolia would imply potential positive adjustments of our 2017 adjusted EPS of 8.7%, leading to a EUR1/share positive impact (before rounding) on our EUR22/share FV (+4.7%). A blue sky scenario on both stocks would then imply a 11% upside on our 2017 adjusted EPS for Suez and an 7.6% upside on our 2017 adjusted EPS for Veolia and, most importantly, would in terms of FV imply (cumulating current upside/downside from our current FV versus the current share price with additional upside estimated on current FV from these more positive assumptions) a 12% upside on Suez current share price and 2% upside on Veolia current share price. Conversely (a cloudy sky scenario), assuming darker assumptions on both stocks (no M&A at all in our models, and -0.5% in waste volumes treated in Europe by Suez in 2016 (lfl) and 0% (lfl) in 2017 for Suez; and only a 30% share from implementation costs out of the new Convergence Plan for 2016-18 and -0.3% in waste volumes treated worldwide by Veolia in 2017 (lfl) and +0.4% (lfl) in 2017) would imply a negative 12.5% impact on our 2017 restated EPS for Suez and -8% on Veolia s. The estimated impact on our FV is minus EUR0.5/share for Suez (-3%) and minus EUR0.9/share on Veolia (-5%) implying our theoretical FVs would give us 4% upside on Suez current share price and 7% downside on Veolia. We then see lower risks on Suez than on Veolia comforting our more positive view on Suez. 18

Below is a table summarizing of our analysis: Fig. 17: Sum-up of impacts Base case Waste volumes 2016e Waste volumes 2017e Restructuring/M&A 2017e EPS 2018e EPS FV Suez 0,5% 0,6% EUR500m M&A spent in total in 2016&17 1,03 1,18 19,1 Veolia 0,7% 1,0% EUR520m restructuring net 2016-18 1,24 1,35 21,9 Bull Suez 1,0% 1,5% EUR500m M&A spent in total in 2016 1,15 1,25 20,0 Veolia 1,1% 1,9% EUR585m restructuring net 2016-18 1,33 1,48 22,8 Bear case Suez -0,5% 0,0% No M&A 0,90 1,01 18,6 Veolia -0,3% 0,4% EUR455m restructuring net 2016-18 1,13 1,23 20,9 Change Waste volumes 2016e Waste volumes 2017e Restructuring/M&A 2017e EPS 2018e EPS FV Bull Suez - - - 11,3% 5,8% 4,7% Veolia - - - 7,6% 8,9% 4,1% Bear case Waste volumes 2016e Waste volumes 2017e Restructuring/M&A 2017e EPS 2018e EPS FV Suez - - - -12,5% -15,1% -3.5% Veolia - - - -8,3% -9,5% -4,6% 19

3. Suez vs. Veolia In this section, we compare both stocks through four main indicators: earnings growth, cash flow generation, shareholders return and valuation. Both stocks have relatively the same earnings exposure linked to any rebound in treated waste volumes in Europe (around +/- 1% change in treated volumes implies +/- EUR30m impact on EBITDA), but as Veolia is bigger than Suez in terms of EBITDA and net income, this implies the sensitivity to an industrial recovery in Europe will be stronger at Suez than at Veolia. As for earnings growth potential, we assume Veolia will be able to generate higher growth over the 2015-20, which could potentially be boosted by a further rise in capex (not in our model). The return to shareholders is also set to be higher at Veolia than at Suez, yet, following the strong share price performance in 2015 (and, most importantly, the share price outperformance over Suez), the implied yields based on our estimates for 2016-20 are more attractive at Suez than at Veolia. When looking at the valuation for both groups, it appears that Veolia is more expensive (compared with historical multiples) than Suez at the current share prices by an average 30% (26% average premium vs. historical multiples for Veolia vs. 20% premium for Suez). Besides this, when comparing stocks together (after restatement), it also appears Veolia is more expensive than Suez by around 5%. 3.1. Earnings growth comparison (2015-2020) Our new estimates imply for Suez a 2015-20 CAGR of 4.9% on EBITDA and 11% on adjusted EPS for Suez vs. respectively 5.9% and 10% for Veolia. In our two models, we assume almost similar organic earnings growth for both stocks. Most of growth discrepancies therefore comes from a different business positioning (exposure to industrials, exposure to regulated business) and from the groups strategies (organic or external growth). Fig. 18: Earnings growth comparison 2015-20 (rebased 100 in 2015e) EBITDA growth VIE vs. SEV (rebased 100 in 2015e) Net adjusted inc. growth VIE vs. SEV (rebased 100 in 2015e) 135 170 130 160 125 150 120 140 115 130 110 120 105 110 100 2015e 2016e 2017e 2018e 2019e 2020e 100 2015e 2016e 2017e 2018e 2019e 2020e Suez Veolia Suez Veolia 20

Fig. 19: Summary of main metrics Veolia vs. Suez EURm 2014 2015e 2016e 2017e 2018e 2019e 2020e EBITDA - Veolia - 2 945 3 133 3 321 3 508 3 667 3 828 EBITDA - Suez - 2 647 2 764 2 954 3 129 3 245 3 370 Net adjusted income - Veolia - 586 620 735 802 880 951 Net adjusted income - Suez - 443 475 556 637 680 735 YoY EBITDA growth - Veolia - 6,6% 6,4% 6,0% 5,6% 4,5% 4,4% YoY EBITDA growth - Suez - 5,3% 4,4% 6,9% 5,9% 3,7% 3,8% YoY Net adjusted income - Veolia - 343,3% 6,2% 19,9% 9,5% 10,3% 8,5% YoY Net adjusted income - Suez - 33,0% 7,4% 16,9% 14,6% 6,8% 8,0% 21

3.2. Cash flow generation comparison (2015-2020) Thanks to its important disposals and restructuring program implemented since 2009, Veolia is able (since 2015) to generate sufficient operating cash flow to both finance growth and maintenance capex and most importantly to finance dividend and hybrid coupon payment. This change is obviously massive for the group given it suffered over the past from a bad comparison with Suez which was already able to finance most of these cash outflows. We summarize below three cash flow metrics to reflect different level of cash out flows funding s: 1/Operating cash-flow after tax & financials (the cash flow generated by the activity post financing of activities and taxes); 2/the FCF before dividends (the cash flow generated post capex spent for maintenance and growth capex); and 3/the cash flow post dividends & hybrid coupons (the cash flow generated after all capex, including M&A which will be used to shareholder return and to finance hybrid coupons). Given the groups have two different mid-term strategies (external growth for Suez and organic growth for Veolia), it makes sense to compare both groups through number 1 and number 2metrics just mentioned above. Fig. 20: Cash flow metrics for Suez and Veolia since 2014 (%) 2014R 2015e 2016e 2017e 2018e 2019e 2020e EBITDA margin - Veolia 9,1% 10,3% 10,8% 11,2% 11,6% 11,9% 12,2% EBITDA margin - Suez 18,5% 17,7% 18,1% 18,7% 19,3% 19,5% 19,8% Operating CF after tax and financials - % of sales - Veolia 6,7% 8,1% 9,1% 9,0% 9,4% 9,6% 9,8% Operating CF after tax and financials - % of sales - Suez 11,2% 9,7% 10,1% 10,7% 11,2% 11,3% 11,4% FCF before dividends - % of sales - Veolia 0,9% 1,9% 2,7% 2,6% 3,0% 3,2% 3,4% FCF before dividends - % of sales - Suez 3,7% 2,0% 2,4% 2,8% 3,1% 3,1% 3,3% CF post dividends & hybrid coupons - % of sales - Veolia -1,0% -0,2% 0,4% 0,3% 0,4% 0,5% 0,6% CF post dividends & hybrid coupons - % of sales - Suez -3,2% -3,8% -2,8% -2,1% -0,5% -0,6% -0,6% Our analysis indicates Suez, due to its higher profitability (notably due to its presence on regulated water business), is able to generate higher operating cash flow after tax and financials margin (1) over the 2015-20 period. Then again, due to this presence on regulated business (higher capex), discrepancies in the margin between both groups diminishes to around 3% of sales on average over the period. Both groups cash flow generation is therefore quite similar over the next cycle, yet given Veolia will spent around EUR1bn of growth capex/year over the period (the group is bigger than Suez) vs. only EUR570m/year for Suez, we assume Veolia will be in better shape to gain growth with industrials on its water business. 22

Fig. 21: Suez Simplified CF statement EURm (2014-2020) 2014R 2015e 2016e 2017e 2018e 2019e 2020e EBITDA reported 2 643 2 647 2 764 2 954 3 129 3 245 3 370 EBITDA margin 18,5% 17,7% 18,1% 18,7% 19,3% 19,5% 19,8% Operating cash-flow after tax and financials (1) 1 610 1 455 1 544 1 695 1 811 1 872 1 950 % of sales 11,2% 9,7% 10,1% 10,7% 11,2% 11,3% 11,4% Gross capex (excluding M&A) (1 076) (1 154) (1 182) (1 247) (1 315) (1 349) (1 387) o/w maintenance capex (594) (637) (652) (688) (726) (745) (766) o/w growth capex (482) (517) (529) (559) (589) (604) (622) % of sales -3,4% -3,5% -3,5% -3,5% -3,6% -3,6% -3,6% FCF before dividends (2) 534 301 363 448 496 523 563 % of sales 3,7% 2,0% 2,4% 2,8% 3,1% 3,1% 3,3% M&A (net) (241) (338) (250) (250) 0 0 0 Dividends (548) (337) (350) (350) (379) (432) (460) Dividends to minorities (210) (200) (184) (188) (191) (195) (199) Hybrid coupons (30) (28) (28) (28) (28) (28) (28) Cash flow post dividends & hybrid coupons (3) (465) (574) (421) (339) (75) (105) (97) % of sales -3,2% -3,8% -2,8% -2,1% -0,5% -0,6% -0,6% Net debt reported 7 186 7 883 8 419 8 875 9 068 9 293 9 512 Net debt reported /EBITDA ratio 2,72x 2,98x 3,05x 3,00x 2,90x 2,86x 2,82x Fig. 22: Veolia Simplified CF statement EURm (2014-2020) 2014R 2015e 2016e 2017e 2018e 2019e 2020e EBITDA reported 2 763 2 945 3 133 3 321 3 508 3 667 3 828 EBITDA margin 9,1% 10,3% 10,8% 11,2% 11,6% 11,9% 12,2% Operating cash-flow after tax and financials (1) 1 600 2 015 2 309 2 351 2 503 2 624 2 751 % of sales 6,7% 8,1% 9,1% 9,0% 9,4% 9,6% 9,8% Gross capex (excluding M&A) (1 380) (1 550) (1 628) (1 667) (1 708) (1 749) (1 793) o/w Maintenance capex (549) (617) (648) (663) (679) (696) (713) o/w Growth capex (831) (933) (981) (1 004) (1 028) (1 053) (1 080) % of sales -3,5% -3,7% -3,8% -3,8% -3,9% -3,9% -3,9% FCF before dividends (2) 219 465 681 683 795 874 958 % of sales 0,9% 1,9% 2,7% 2,6% 3,0% 3,2% 3,4% M&A (net) 0 0 0 0 0 0 0 Dividends (329) (394) (460) (482) (557) (601) (652) Dividends to minorities (60) (60) (60) (60) (60) (60) (60) Hybrid coupons (70) (70) (70) (70) (70) (70) (70) Cash flow post dividends & hybrid coupons (3) (240) (59) 91 71 108 144 176 % of sales -1,0% -0,2% 0,4% 0,3% 0,4% 0,5% 0,6% Net debt reported 8 311 8 831 8 740 8 670 8 564 8 424 8 253 Net debt reported /EBITDA ratio 3,01x 3,00x 2,79x 2,61x 2,44x 2,30x 2,16x 23

3.3. Shareholder return comparison (2015-2020) Suez s financial situation is tougher than Veolia s implying, despite quite similar earnings growth potential over the period, we expect lower dividend growth potential over 2015-20 compared with Veolia. For both stocks, we assume a pay-out of 65% on the reported net income generated. At end 2015, we already assume the EUR0.7/share dividend distributed by Veolia will imply a pay-out of 65% (vs. >120% in 2014), implying in the short term any additional earnings should generate positive dividend distribution growth (dividend growth expected as soon as next year). As for Suez, we only assume the 65% pay-out will allow the distribution of a higher dividend by 2017 (distributed in 2018). Fig. 23: Dividend comparison between both groups (2014-2020) 2014 2015e 2016e 2017e 2018e 2019e 2020e Dividend / share - Veolia 0,70 0,71 0,72 0,86 0,94 1,03 1,11 Dividend / share - Suez 0,65 0,65 0,65 0,68 0,78 0,84 0,90 Dividend growth - Veolia 0% 1,7% 1,8% 18,5% 8,9% 9,7% 8,0% Dividend growth - Suez 0% 0,0% 0,0% 5,3% 14,3% 6,7% 7,9% Implied yield @ current share price - Veolia 5,16% 3,19% 3,25% 3,85% 4,19% 4,59% 4,96% Implied yield @ current share price - Suez 4,65% 3,64% 3,64% 3,83% 4,38% 4,67% 5,04% Shareholders return is therefore set to be higher at Veolia than at Suez over the next cycle, however the average yield offered by Suez remains today still more attractive than that offered by Veolia following the strong share price outperformance of Veolia over Suez. Fig. 24: Dividend/share & dividend yield evolution Veolia vs. Suez (2014-20) 1,20 1,00 0,80 0,60 0,40 0,20 0,00 1,13 1,05 0,96 0,88 0,92 0,86 0,80 0,70 0,75 0,71 0,71 0,65 0,65 0,65 2014 2015e 2016e 2017e 2018e 2019e 2020e 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Dividend / share - Veolia Pay-out Veolia Dividend / share - Suez Pay-out Suez 24