Reporting 2006

• Annual report 2006
  • Review of 2006
  • Risk Factors
  • Report of the Management Board
    • The operational highlights in brief
    • The financial highlights in brief
    • Analysis of Results
    • Analysis by segment
    • Other aspects
  • Details of the Management Board
  • Corporate Governance
  • Report of the Supervisory Board
  • Details of the Supervisory Board
  • Remuneration Report
• Financial statements 2006

Analysis by segment

Distribution & Sales the Netherlands
Production & Trade
Grid Management
Other activities

Distribution & Sales the Netherlands

Net turnover by segment In millions of euros, including internal supplies

Operating profit by segment In millions of euros

Description of activities
Distribution & Sales the Netherlands comprises the activities in the Netherlands relating to the construction, maintenance and management of infrastructure for the distribution of energy, both in the regulated and non-regulated domains, as well as the delivery of energy and energy-related products to both businesses and consumers. In addition, this segment encompasses the activities in the field of the delivery of heating and cooling and the activities in the field of district-lighting and metering services.

Operational developments in 2006
In response to the administrative problems that had arisen in the energy sector in 2005, the Dutch Office of Energy Regulation (DTe) carries out a quarterly measurement of the timeliness of invoicing. The ‘scorecard’ is published every quarter. In all four quarters of 2006, Nuon realised the best average score of the large energy companies.

Nuon offers customers a diversity of products and services. The price movement of energy in the past years has created a need for the possibility to fix energy prices in the longer term. Alongside the existing fixed-price products VastePrijsStroom and VastePrijsGas, Nuon also launched Nuon VastePrijsNatuurStroom on 1 March 2006. This product offers renewable energy at a fixed price. Customers can opt to fix their delivery price by concluding a contract for 1, 2, 3 or 5 years.

In July, Nuon announced that it had sold the Industrial Maintenance unit of Emmtec Services to Imtech N.V. Emmtec Services is part of Nuon Business. The acquisition was announced in May of this year.

In July, Nuon announced its plans to construct a new district-heating network in the south of Rotterdam. This heating network will prevent the emission of about 700,000 tonnes of CO2 over a period of thirty years. The new heating network will ultimately supply about 18,000 homes, offices and the new hospital Medisch Centrum Rijnmond-Zuid with residual heat from the nearby port industry. The heating network is expected to be completed in 2012.

In August, Nuon officially opened its cooling station. The station delivers renewable cooling to business and retail customers on the Amsterdam South axis. The cooling is generated from a natural source, so that the system realises a CO2 reduction of about 70% compared to the current cooling methods.

In October, Nuon launched the new product Nuon NatuurCertificaat, which allows customers to compensate for the CO2 emissions from their gas consumption.

In November, Nuon announced that as of 1 January 2007 the energy bill would increase by an average of € 10 per month as a result of increased purchase prices. The price increase remained limited thanks to the decrease of the oil price in the autumn of 2006 and the abolition of the environmental MEP levy. Nuon has put an extensive package of measures in place that help customers control their energy costs. These measures vary from an online support and advisory tool to home visits from an energy advisor.

Financial results for 2006
Net turnover of the Distribution & Sales the Netherlands segment increased to € 4,239 million in 2006 (2005: € 3,791 million). The increase in electricity and gas prices effective from 1 January 2006 in the consumer market, together with the increase in the volume of supplied electricity in the business market, led to the increase in net turnover. This increase was partly offset by a decrease in the supplied volume of gas as a result of the mild weather in the fourth quarter of 2006, despite the relatively cold first 5 months of the year. The number of customers purchasing gas and/or electricity from Nuon in the business and consumer markets in the Netherlands remained stable in 2006. Nuon has managed to reverse the downward trend in the business market and improved its market position in 2006. In 2004, the strategy in the business market was adjusted, with a shift in focus from market share to margin retention. In addition, customer satisfaction, based on the company’s own measurements, improved both in consumer and in business markets. Turnover from heating and other products increased last year, partly due to an increase in prices in response to the increase in the prices of raw materials such as oil and gas and partly due to an increase in the number of connections compared to the previous year. In addition, the other activities in such fields as installation (Feenstra), security, street-lighting, metering and industrial estate management made good progress and contributed to the increase in turnover for 2006.

The gross margin on heating and other products increased compared to last year due to, among other things, an increase in the number of heating connections compared to last year and the increase in the turnover from installation activities (Feenstra). In addition, the other activities such as security, street-lighting, metering and industrial estate management made good progress and contributed to the increase in the gross margin. The decrease in the operating expenses compared to last year also contributed towards the increase in the operating profit. In 2005, relatively high costs were incurred to solve the promblems with the administrative backlogs and to improve the operational and customer processes.

Operating profit for 2006 amounted to € 616 million (2005: € 443 million). Excluding incidental items, the operating profit increased to € 625 million (2005: € 456 million). This increase was caused by the increase in the gross margin in the Dutch consumer market. The gas and electricity gross margin expressed as a percentage of the turnover decreased as a result of the increased purchase costs of gas, electricity and raw materials for the generation of electricity.

Production & Trade

Description of activities
The Production & Trade segment engages in generating, sourcing, trading and storage of energy, as well as in the national and international production activities in the field of (the development of) renewable energy.

Operational developments in 2006
In January, Nuon and Gasunie Trade & Supply announced their decision to set up a joint venture for the underground storage of gas in order to further improve the security of gas supply. Total capital expenditures will amount to € 350 million. Each party will have equal rights to the storage facility.

In 2006, the construction of the 36 wind turbines of the offshore wind farm at Egmond aan Zee was completed. Nuon’s share in the total investment in the project amounts to over
€ 100 million. The offshore wind farm is managed by NoordzeeWind, a joint venture of Nuon and Shell, and has a total capacity of 108 MW which is sufficient to supply over 100,000 Dutch households with renewable energy. The wind farm already started supplying electricity in 2006. After completion of the test phase, the wind farm will be taken into operation in 2007.

July saw the finalisation of the sale of Nuon’s German wind farms to CRC Global Structured Energy Fund, a fund that is managed by Christofferson, Robb & Company (CRC). The five wind farms are spread over three German regions and have a joint capacity of 100 MW.

In 2006, major steps were taken in the preparations for the construction of the new large power station of 1,200 MW. In July, Nuon announced that it had selected Eemshaven (Groningen) as the location for this power station. Arrangements have been made in this respect with the provincial authorities of Groningen and the Ministry of Transport, Public Works and Water Management. Nuon also obtained the licence from Royal Dutch Shell plc for the application of Shell’s modern coal gasification technology.

After the completion of the construction phase, Nuon took into service its first underground gas storage facility in the German town of Epe – near Enschede – in January 2007. This storage facility serves as a buffer, allowing the company to respond more flexibly to fluctuations in the supply and demand of gas. The storage facility represents an investment of more than € 100 million. Ownership of gas storage facilities fits in with Nuon’s strategy to occupy a more independent position in the gas market.

Capacity and production
Nuon has ‘grey’ production capacity totalling 3,445 MW. This capacity was used to generate 12 TWh of electricity in 2006 (2005: 3,445 MW with which 14 TWh of electricity was generated). In addition, Nuon has 302 MW of renewable production capacity, with which 625 GWh of electricity was generated in 2006 (2005: 459 MW with which 1,181 GWh was generated).

Financial results for 2006
Net turnover amounted to € 3,182 million in 2006 (2005: € 2,768 million). Excluding incidental items, the net turnover increased to € 2,974 million compared to € 2,492 million in 2005. The increase was largely caused by the increase in the electricity price in the past period, despite the decrease in the company’s own production.

Operating profit for 2006 amounted to € 162 million (2005: € 245 million). Excluding incidental items, the operating profit decreased to € 33 million compared to € 58 million in the previous year. The decrease in the settled results from the trading activities, adjusted for additions to the hedge reserve, made an important contribution to this decrease. The settled results from trading activities relate to the energy commodity contracts that were wound up and settled in the past year with third parties. The total result from the trading activities, including the unrealised fair value movement, increased however compared to last year. The operating profit was also influenced by a lower production of Nuon’s power stations. Operating expenses decreased compared to last year, partly due to lower impairments on trade receivables and the release of provisions.

Fuel Mix 2006

Fuel Mix 2005

Grid Management

Description of activities
The Grid Management segment engages in activities involving the provision of connections to the electricity and gas grids, the transportation of electricity and gas, and the delivery of market-facilitating services. In addition, the Grid Management segment delivers metering services to its customers.

The results of the Grid Management segment are included in the consolidated figures of Nuon. The Grid Management segment operates in accordance with Dutch energy legislation under the supervision of its own Supervisory Board and publishes its own annual report.

Operational developments in 2006
The availability of metering data is an important element for a smooth handling of market processes. In co-operation with the energy sector and the Ministry of Economic Affairs, a structural improvement was found in placing ‘smart’ meters at the premises of all small users. The metering market for this customer segment will be regulated and the grid managers have committed themselves to install ‘smart’ electricity and gas meters in the small user market in the years to come. With this type of meter, metering data are easy readable from a distance and various other activities can be undertaken from a distance. Among other things, it is possible to disconnect from a distance. This entails a substantial simplification in the complex administrative processes concerning yearly billing, removals and switching by customers.

On 21 November 2006, the Upper Chamber adopted the Law on Independent Grid Management. This lays down that the unbundling of the grid operations from the supply/production operations shall only take place subject to certain conditions. Unbundling is only required if prescribed by European legislation or if actions of the energy companies jeopardise the conduct of public and independent grid management. The management of the 110 and 150 kV grid must be transferred before 1 January 2008 to the national grid manager TenneT. In addition, the economic ownership of the other grids must be placed with the grid manager (‘broad’ grid manager).

Investments made in the gas and electricity grids by Distribution & Sales the Netherlands on behalf of Continuon Netbeheer amounted to € 216 million in 2006 (2005: € 182 million). The average outage time for each customer in 2006 was 29.7 minutes compared to 24.3 minutes in 2005. The increase in the electricity outage time mainly occurred during the heat wave, combined with an increase in electricity usage, in July 2006. A particular kind of connection between cables (‘Nekaldietmof’) appeared to be very sensitive to extremely hot weather and a high grid burdening. Further investigation should confirm this relation of cause and effect. Certainly, we endeavour to continue the downward trend from past years. Continuon Netbeheer’s grid is one of the best performing electricity grids in the world: in 2006 the reliability of the electricity grid of Continuon Netbeheer was 99.994%.

Financial results for 2006
Net turnover increased to € 1,248 million in 2006 (2005: € 1,225 million). The turnover of the Grid Management segment increased, mainly as a consequence of positive volume and price differences and the settlement of estimated sales to be invoiced at the end of 2005.

Operating profit increased to € 222 million compared to € 189 million in 2005. Excluding incidental items, the operating profit increased to € 241 million in 2006 (2005: € 189 million). This increase was, among other things, caused by a decrease in charged costs of capital and lower impairments on trade receivables.

Other activities

Description of activities
Other activities include the activities of Nuon Germany, Nuon Belgium, service activities, other foreign participations and the Corporate Center. Nuon Germany focuses on the sale of electricity and gas both to consumers and customers with an electricity consumption in excess of 1 million kWh per annum. In addition, it performs activities in the field of the management and commercial operation of energy-intensive industrial estates and the related provision of complementary facility services. Nuon Belgium focuses on the delivery of electricity and gas to the consumer and business markets in Flanders and the Walloon Region.

Operational developments in 2006
During 2006, important steps were taken in the disposal of non-core activities. February brought the completion of the sale of Nuon China International which carried out Nuon’s wind energy activities in China. In April 2006, Nuon announced that agreement had been reached with Vitens about the sale of Nuon’s 36.1% interest in Vitens. After the merger between Vitens and Hydroncompanies on 1 October 2006, Nuon still retained an interest of 25%. That interest will be purchased by Vitens in three tranches with a maximum of 10% each. The final tranche of shares is expected to be settled in May 2007. Nuon received the total proceeds for the sale of its interest in Vitens in December 2006. On 20 April 2006, Nuon completed the sale of the US water company Utilities Inc. to Hydro Star. Nuon and Hydro Star reached agreement on the sale of the water company in May 2005. The completion of the transaction took place after the US authorities granted their approval. In June, Nuon finalised the sale of its 50% stake in Cascal to Biwater. The finalisation followed the approval of the transaction by the relevant UK authorities. In the summer of 2005, Nuon and Biwater signed an agreement for the sale. On 5 July 2006, Nuon announced that agreement had been reached on the sale of its 50% stake in Paques to the co-owner. Nuon bought its interest in Paques in the nineties. Paques develops and realises water and gas purification systems using innovative biotechnology.

In January, Nuon started with the sale of electricity to consumers in Berlin. On 4 July 2006, Nuon announced the start of gas sales to households in Hamburg and Berlin. Nuon thus wants to offer more choice to consumers in the German energy market. This initiative is supported by the German regulatory body which is committed to promoting more freedom of choice in the gas and electricity markets. In Berlin, Nuon recently reduced its gas prices and thus remained the cheapest supplier for consumers. In January 2007, Nuon started with the delivery of electricity with an attractive fixed-price guarantee for a year in Stuttgart and environs.

On 1 October 2006, Alexander Dewulf was appointed as managing director of Nuon Belgium. Dewulf reports to the Management Board of Nuon. Meanwhile, the market penetration in the Walloon Region is being prepared. This market was liberalised on 1 January 2007 so that Nuon Belgium is now able to deliver gas and electricity throughout Belgium. A site near Charleroi was purchased and the opportunities of building a modern gas-fired power station there are now being explored.

Financial results for 2006
Net turnover in the Other segment increased to € 625 million in 2006 (2005: € 502 million). This increase is attributable to the aforementioned increases in gas and electricity prices in Germany and Belgium that were passed on to customers and to the growth in the number of customers following Nuon Germany’s entry into the consumer market in Berlin and Hamburg.

Operating profit in the Other segment decreased from a profit of € 221 million in 2005 to a loss of € 151 million in 2006. In the year 2005, substantial incidental items were reported in the Other segment. These amounted on balance to a gain of € 272 million versus a gain of
€ 25 million in 2006. Excluding incidental items, the operating profit in the Other segment decreased from a loss of € 51 million in 2005 to a loss of € 126 million in 2006 due to increasing pressure on margins in Belgium and higher costs incurred for building up a market position in Germany, the recognition of a provision in connection with property as well as higher (project) costs in the central Nuon organisation in connection with, among other things, the unbundling debate and strategic projects.

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