UPDATE 2-Veolia adds energy services to water, waste as core business

Thu Nov 7, 2013 12:17pm EST

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* EDF, Veolia to split their Dalkia energy services venture

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* Asset-light services model offers growth for struggling utilities (Adds detail on energy services business, quotes)

By Geert De Clercq

PARIS, Nov 7 (Reuters) - Energy services will become a core business at French water and waste group Veolia Environnement after it takes over the international activities of its Dalkia joint venture with France's state-controlled utility EDF .

Veolia said on Thursday that if discussions with EDF result in an agreement, the utility would take over all of Dalkia's French activities while Veolia would assume control of its international arm.

Dalkia had 2012 revenue of 8.9 billion euros ($11.9 billion)- 4.1 billion euros in France and the rest abroad - and employed 49,800 employees in 35 countries.

The expansion of Dalkia, which is 66 percent owned by Veolia and 34 percent by EDF, had been held up by a tug of war between the shareholders. EDF chief executive Henri Proglio - who moved to the utility from Veolia in 2009 - was keen to boost his influence in Dalkia.

"Energy services are clearly and definitively a core activity for Veolia, on the same level as our waste and water business," Veolia chief executive Antoine Frerot told an earnings news conference.

Veolia's adjusted operating income in the first nine months of the year rose 20.4 percent to 621 million euros due to cost cuts and higher prices at Dalkia.

It also confirmed its financial outlook. Veolia's objectives beyond 2013 include organic revenue growth of more than three percent per year and growth in adjusted operating cash flow of more than five percent per year.

Frerot said that as Veolia acquires 100 percent ownership of Dalkia's foreign operations, energy services will represent 21 percent of Veolia's turnover, while water will account for 44 percent and waste and environment services 33 percent.

Frerot also said he saw more growth in energy services.

"In the years to come, energy services outside France will probably present more opportunities than other sectors," he said.

MAN IN A VAN

The Dalkia deal is set to be a milestone for the fast-growing energy services business, in which French utilities have played a leading role.

While most German and southern European peers have stuck with a traditional asset-heavy, people-light business model, French utilities like EDF and GDF Suez and water and waste groups like Veolia and Suez Environnement have built billion-dollar businesses more oriented to services.

Energy services embrace relatively asset-heavy district heating and cooling networks to combined heat and power plants (CHP) in apartment buildings, office blocks and factories.

More labour-intensive energy services include sales and maintenance of heating and air conditioning systems for homes and offices, insulation and energy efficiency advice, which all involve a man in a van visiting customer sites.

The market leader in energy efficiency is GDF Suez, whose energy services business had 2012 turnover of 14.7 billion euros and employed 78,000 staff in 30 countries, mainly via its Cofely business-to-business brand.

GDF's unit claims the number one position in energy services in France, the Benelux and Italy, is among the top players in the UK, Germany and Spain and has activities in Asia, Russia and other emerging market countries.

From running technical facilities at Starbucks stores to energy management at Dubai's Burj Khalifa tower, the world's tallest, the unit generated one billion euros of earnings before interest, tax, depreciation and amortisation (EBITDA) in 2012, seven percent of group total.

GDF expects energy efficiency revenues to grow 40 percent between 2011 and 2018.

Utilities analyst Martin Young at Royal Bank of Canada Capital Markets said that while asset-intensive models need higher margins because they have to amortise facilities, the more labour-intensive models hold plenty of promise.

"You can get a return on capital that is as good as or even better than what you get from asset-heavy activities," he said. ($1 = 0.7472 euros) (Reporting by Geert De Clercq; editing by Mark John and Anthony Barker)

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