MANAGEMENT REPORT OF THE EXECUTIVE BOARD 2005 1 ASSET FINANCIAL POSITION FINANCIAL PERFORMANCE 1.1. Analysis of and comments on the Group’s financial position and performance 2 1.1.1. Overview 2 1.1.2. Transition to International Financial Reporting Standards 5 1.1.3. Key data 6 1.1.4. Events subsequent to year-end 40 1.1.5. Outlook 41 1.2. Human Resources report 2005 42 1.2.1. Key data 42 1.2.2. Changes in number of employees and human resources data 43 1.2.3. Supporting the Group’s development through Human Resources programs 44 1.2.4. 2005 review 45 1.3. Environmental report 51 1.3.1. Environmental policy 51 1.3.2. Environmental risk management and prevention 54 1.3.3. Environmental performance improvement 58 1.3.4. Strengthening relations with external stakeholders 64 1 ASSET – FINANCIAL POSITION – FINANCIAL PERFORMANCE 1.1. Analysis of and comments on the Group’s financial position and performance 1.1. Analysis of and comments on the Group’s financial position and performance 1.1.1. OVERVIEW The following comments are based on financial information for 1.1.1.1. Business trends fiscal years 2005 and 2004 and must be read in conjunction with AREVA’s consolidated financial statements for the years ended The AREVA group is a global leader in solutions for CO2-free power December 31, 2005 and 2004. These comments have been generation solutions and electricity Transmission & Distribution. drafted based on the Group consolidated financial statements Energy is the AREVA group’s primary business. The Group is the prepared in accordance with International Accounting Standards world leader in nuclear power generation solutions and number (IAS) and International Financial Reporting Standards (IFRS). three worldwide for the supply of equipment and services for electricity Transmission & Distribution. It is the only group to be The figures for 2004 are presented first as published under active in every stage of the nuclear cycle. The Group’s customers IAS/IFRS (“2004 IFRS”) and secondly as adjusted for disposal of include some of the world’s largest utilities, with which AREVA the Connectors Division (“2004 IFRS adjusted"). The Group sold does a large share of its business under medium- and long-term FCI to the investment fund Bain Capital on November 3, 2005. contracts. The Group employs 58,000 people and has industrial In accordance with IFRS 5, the Connectors Division was operations in 40 countries. deconsolidated retroactively to January 1, 2005. The division’s net income up to the date of the sale and the net income from The Group reported 2005 sales of €10,125 million, compared the sale appear on a separate line of the income statement. The with €9,821 million in 2004, adjusted for disposal of the Connectors division’s sales are no longer included in the AREVA group’s sales, Division, representing 3.1% growth in terms of reported data. retroactive to January 1, 2005. As explained in section 1.1.3, the Like-for-like growth was 3.7% in 2005. Energy operations scope for data reported in 2004 is therefore not comparable to accounted for 68% of sales in 2005, with 26% coming from the that of 2005. For purposes of comparison, a column called "2004 Front End Division, 23% from the Reactors and Services Division IFRS adjusted” includes the main indicators for 2004, not including and 19% from the Back End Division. The Transmission & the Connectors Division. Distribution Division represented 32% of sales in 2005. In general, this management report comments on changes The Group is present in every region offering attractive growth between 2004 adjusted for the contribution of the Connectors prospects, for the development of nuclear power as well as Division and 2005. electricity Transmission & Distribution. The Group earned 37% of its 2005 sales outside the euro zone, 18% of which came from The financial data for 2004 and prior years were reported per North America, where the Group is present in every aspect of the generally accepted accounting principles in France (“French energy business. GAAP”) in chapter 5 of the 2004 annual report. In addition, the transition from French GAAP to IAS/IFRS in 2004 is addressed Group contracts, and particularly those covering the entire nuclear in section 5.1.9. of the 2004 annual report. cycle, produced a significant backlog totaling more than €20 billion at the end of 2005. Of this backlog, 85% came from the nuclear businesses, with contracts averaging less than four years. The high level of the backlog demonstrates the repeat nature of business and the visibility which the Group enjoys across these businesses. Operating income was slightly down in 2005 compared with 2004, adjusted for disposal of the Connectors Division, most notably with: • stable operating income in the Front End and Reactors and Services divisions; • a drop in operating income in the Back End Division, mainly due to the end of the contract with Japanese customer JNFL, which 2 Management report of the Executive Board 2005 ASSET – FINANCIAL POSITION – FINANCIAL PERFORMANCE 1 1.1. Analysis of and comments on the Group’s financial position and performance had been a significant contributor to operating income in 2004, 1.1.1.2. Key characteristics of for which an extension to 2006 and 2007 was signed in late 2005; AREVA’s business model • significant improvement in income from the Transmission & AREVA’s business model is characterized by the specific features Distribution Division, with the optimization plan launched in of the different business units making up each stage of the nuclear 2004 acting as a major contributor. cycle as well as those relating to the electricity Transmission & Distribution business. The Group’s nuclear operations are carried Net income attributable to equity holders of the parent for 2005 out by three divisions, Front End, Reactors and Services, and Back stood at €1,049 million, up sharply from €451 million in 2004 End. The electricity Transmission & Distribution businesses are IFRS (€428 million reported for 2004 under French GAAP). The consolidated in the Transmission & Distribution Division. Each of the large increase is primarily the result of the divestment of the four divisions consists of several Business Units. Connectors Division in November 2005. Net income from discontinued operations came to €598 million in 2005. The Front End Division operates under long-term contracts equivalent to an average backlog of three years to five years (for the The Group had €783 million in pre-tax free operating cash flow, Mining Business Unit) and which contain standard price escalation compared with €782 million(2) in 2004, adjusted for disposal of the clauses. Consequently, the business is only now beginning to Connectors Division. The positive difference is due to significant benefit from inflationary pressures on natural uranium prices, improvement in EBITDA in all divisions, despite the cash- given the structure of uranium supplies and a backlog still consuming change in operating working capital requirement (WCR) dominated by firm prices set prior to the price increase that began and increased capital expenditure (Capex). in 2003. In addition, the Front End Division’s businesses have large capital requirements that demand heavy investment, but Net Capex in nuclear rose from €354 million in 2004 to €459 million which support operations over very long periods of time. Investment in 2005 with continuing major investments, especially in the Front in uranium exploration and development and in production plant End Division (mining) and in the Reactors and Services Division replacement or upgrades is scheduled for the 2005-2015 period. (EPR development and licensing, chiefly in the United States). The Transmission & Distribution Division consumed €11 million The Reactors and Services Division typically has recurring business in cash from operating activities in 2005 before income from the (services and engineering) carried out under long-term or regularly sale of operating assets, despite the significant improvement in renewed contracts. In these businesses, the division conducts a EBITDA. The division’s WCR was sharply up from a low point significant portion of its operations in North America and, as such, reached in December 2004 as work-in-progress increased in is sensitive to fluctuations in the euro/US dollar exchange rate. connection with the growth in the backlog recorded during the This is particularly true for the Equipment Business Unit, as its second half of 2005. Outgoing cash flow in respect of restructuring manufacturing plants are located in France and its costs are activities was €65 million in 2005, compared with €58 million in denominated in European currencies. In addition, the division 2004. has attractive prospects with regard to non-recurring business, linked in particular to nuclear power plant upgrades and The Group has a solid financial structure, with more than €6.3 billion construction, with independent organizations such as the in Equity and a net debt situation at end-2005 of €268 million, as International Atomic Energy Agency (IAEA) and the World Nuclear compared with net debt of €566 million at January 1, 2005. The Association (WNA) forecasting increases in installed capacity by divestment of the Connectors Division in November 2005 generated 2030. The Group gives significant guarantees due to the type of €853 million in proceeds. goods and services sold by the main business units of the Reactors and Services Division. As an operator of nuclear facilities, the Group has a legal obligation to decommission its facilities when they are shut down permanently. The Back End Division operates under long-term contracts with a These end-of-life-cycle obligations will generate expenditure over limited number of customers. The backlog represents close to the 2005 to 2060 period, depending on facility shut-down dates, three years of sales.