Report of the Chairman

Extraordinary yet ordinary

The year 2007 was an eventful one. One noteworthy activity concerned the proposed merger with Essent. In September, however, the parties agreed to discontinue this process. In addition, the forced unbundling of the company became inevitable in 2007. Against the background of these special developments, we can look back on a year that was very successful in financial and operational terms. In addition, major steps were made in the implementation of our strategy, serving to further reinforce our position throughout the entire chain: production, trading, distribution and supply. Our customers experienced no inconvenience as a result of the various strategic projects, and customer satisfaction levels improved further in 2007. Central to our mission is the commitment to ensure an uninterrupted and reliable energy supply for our customers. This applies to all our business processes, from the initial energy connection or switch to Nuon as energy supplier through to invoicing and additional services. Our customers consider this uninterrupted and reliable supply of energy as something that is ordinary. Extraordinary yet ordinary.

Extraordinary: merger and unbundling

In 2007, Nuon and Essent worked with a lot of energy and a strong sense of common purpose to bring about a merger between the two companies. In the course of the year, however, it became clear that the basis for a merger had ceased to exist and that the parties were unable to reach agreement on certain aspects. In September, the Management Boards and Supervisory Boards of both companies announced the termination of the merger process. In the subsequent period, speculation arose over a possible renewed merger attempt. This, however, is not on Nuon’s agenda. Shareholders, the Supervisory Board and the Management Board all agree that this is no longer the way forward. 

At the end of 2006 we believed that the threat of the forced unbundling of our company had been warded off on the grounds of the Independent Network Operation Act (WON). In the course of 2007, however, the government decided to press ahead with forced unbundling after all. Under the current regulations, by no later than 1 January 2011 the company must be unbundled into a network company and a production and supply company. In the run-up to that date, various compulsory steps must be taken, including the creation of a ‘broad’ network manager and the transfer of the economic ownership of the networks to network manager Continuon Netbeheer by 1 July 2008. 

Whilst rejecting the arguments for unbundling our company, this political decision was taken as part of a democratic process. This means that we are obliged to implement the WON. We intend to do so with speed and vigour, though reserving the right to demand compensation for the financial consequences of the unbundling. At the end of 2007 we started, in close consultation with our Supervisory Board and shareholders, to prepare our company for unbundling. Our aspiration is to finalise this process by mid-2008. This will involve the creation of two companies under the Nuon holding company: a network company and a production and supply company. Until the time of the obligatory unbundling, on 1 January 2011, both companies will continue to form part of Nuon, with the holding company representing their joint interests. We see strategic advantages in a rapid unbundling between the network activities on the one hand and the commercial production and supply activities on the other hand. Various measures have already been taken in preparation for the creation of the two separately operating companies within the Nuon group under a financial holding company. At the time of the publication of this annual report, various teams are already working under the direction of members of the Management Board to get the two companies up and running. Together with our shareholders and Supervisory Board, we will give due consideration to the future direction of both companies in the coming months. 

Yet ordinary: our operational activities

Our day-to-day business suffered no ill effects from the strategic projects that demanded considerable management attention in 2007. Our Production & Trade segment can look back on a successful year: the margin on production increased, thanks to the solid strategy for the purchasing of raw materials and the hedging of price risks by our trading department. Moreover, thanks to the improved availability of our power stations, we were able to respond to fluctuations in the supply and demand of electricity and saw our trading results improve compared to the previous year. In addition, important steps were made towards strengthening and greening the energy chain and reinforcing our gas position in West Europe. Examples are the operationalisation of the underground gas storage facility in Epe (Germany) and the Offshore Wind Farm in Egmond aan Zee by NoordzeeWind (our joint venture with Shell). Finally, a number of projects are currently being implemented and developed: alongside the construction of Nuon Magnum, we are working on underground gas storage in Zuidwending (Groningen) as well as additional storage facilities in Epe.

Customer satisfaction in our principal markets improved, and at the end of 2007 Nuon scored first place in the Dutch consumer market while Continuon Netbeheer captured first position in the small and large business markets. The quality of our administrative processes remained as high as ever. This is evident from the quarterly measurement of administrative processes for changes of address, end-of-year invoices and switching suppliers that is carried out by the Office of Energy Regulation (DTe). Customer attrition in the competitive Dutch consumer market remained limited to less than 1%.

Continuon Netbeheer operates one of the most reliable networks in the world. When an Apache helicopter hit a high-voltage line across the river Waal in December, we demonstrated our ability as an organisation to restore the power supply for 30,000 households in the shortest possible time. Unfortunately, this incident caused the average outage time of our network to increase to 48.4 minutes. Excluding the accident, the outage time would have decreased from 29.7 minutes in 2006 to 23.5 minutes in 2007. 
Continuon Netbeheer is also pioneering new developments through a pilot project with smart meters for online energy metering. Meanwhile, about 62,000 smart meters have been placed with customers in Arnhem, Alphen aan den Rijn and certain regions in Friesland. The government has stipulated that all households must be equipped with smart meters by 2015. This will lead to a further improvement in the administrative processes for end-of-year invoices, changes of address and supplier switches. 

Our activities in Germany and Belgium continued to grow in the past year. In the German market we expanded the number of cities where we deliver energy to consumers and the number of contracts has increased. A further expansion of our activities in Germany is planned for the coming year. In addition, we are currently connecting our underground gas storage facility in Epe to the German gas network as well as building new generation capacity in the form of a 450 MW gas-fired power station in Frankfurt am Main. Belgium saw the liberalisation of the Walloon market at the start of 2007. Though contending with difficult conditions in a market dominated by a small number of producers, Nuon Belgium succeeded in growing the number of contracts. In Belgium, too, we are working on the realisation of our own generation capacity and are preparing the construction of a 450 MW gas-fired power station in the vicinity of Charleroi. 

Corporate Social Responsibility

Corporate Social Responsibility (CSR) plays a prominent part in our business operations. Various initiatives were undertaken in the past year and CSR objectives in the field of sustainability and human resources were incorporated into the personal objectives, including those of the members of the Management Board.
 
One important priority involves promoting the greening of the electricity supply. In 2007, major advances were made in the field of energy renewability and our solid results of the past years enable us to carry out an extensive investment programme towards further sustainability. 
Amongst other things, our shareholders have approved the construction of the first phase of Nuon Magnum, the gas-fired part of the 1,300 MW multi-fuel power station. At present, we are making preparations for the construction of a coal gasification installation where large-scale CO2 capture can take place in the future. Appropriate decision-making for this purpose will take place in due course. In addition, we started a pilot for CO2 capture at our Willem-Alexander power station in Buggenum, decided to continue investing in the development of solar cell foil by our subsidiary Helianthos and concluded a contract with central heating producer Remeha and the Australian company CFCL for the development of a high-performance boiler based on a fuel cell. 

We were proud to announce the foundation of the Nuon Energy Transition Fund at the start of 2008. Nuon is putting up an initial amount of € 40 million for this Fund, which will focus on the development and support of various initiatives aimed at moving towards a more sustainable energy supply. 

Our customers are showing a growing awareness of the consequences of the burden imposed on the environment by the rising demand for energy. We are helping to build this awareness and offer customers opportunities to play an active role in saving energy and thus reducing CO2 emissions. In 2007, we introduced our energy-saving promotions as part of the ‘CO2OK’ campaign. Our customers can buy energy-saving products that are paid with the monthly savings on their energy bill. In the past year we found that our customers are taking responsibility as well as genuine steps towards reducing CO2 emissions. 

In Amsterdam, Nuon initiated the Step2Save pilot programme where eight young citizens – selected by the Work & Income Department – will spend a year visiting 10,000 social housing households to give free energy advice and install energy-saving devices. The benefits are threefold: the youngsters take part in a job experience programme under expert supervision, 10,000 households will emit less CO2 and customers on low incomes save energy costs.

Financial

As noted earlier, the past year was an extremely successful one, with net profit rising 15% to € 875 million compared to the previous year. The production and trade activities made an important contribution to the increase in net profit. In addition, our supply and transport activities again provided a solid basis for the 2007 results. In the past year a lot of attention was devoted to cost control and efficiency and our financial position was strengthened. At the end of the year the net cash position (i.e. the balance of cash and cash equivalents less  interest-bearing debt) was € 293 million compared to a net debt position of € 72 million at the end of 2006.
This net cash position puts us in an excellent starting position for the investment programme of more than € 5 billion for new projects and to continue pursuing a more sustainable energy supply in the coming years.

The increase in the result enables the Management Board and the Supervisory Board to propose a dividend of € 413 million to the shareholders. 

Shareholders

We attach great importance to the communication with our shareholders. In the light of the proposed merger with Essent and the unbundling, contacts with shareholders were further intensified in 2007. Alongside the General Meeting of Shareholders and the two Extraordinary General Meetings of Shareholders, consultation was held with the majority shareholders on five occasions in 2007. In addition, we organised a workshop entitled ‘Developments in the international energy markets’ in December 2007 for representatives of majority shareholders and members of the Supervisory Board in order to give up-to-date insight into the developments in numerous areas of the international energy markets and other external factors confronting Nuon.

In these consultative meetings with majority shareholders and representatives of provinces and municipalities who are shareholders of Nuon, the future of Nuon was considered and discussed at length. In 2008 these contacts will be continued with a view to arriving at a shared and broadly endorsed vision for the future of the network company and the production and supply company that will come into existence after the unbundling.

Employees

In the past year we were greatly satisfied to see how our employees raised the company to a higher level. Substantial effort was put into improving the quality of our organisation and implementing the various strategic projects. Nuon has made major strides towards the fulfilment of its strategic goals. We would never have been able to achieve this without the involvement of our employees in all sections of the organisation. On behalf of the entire Management Board I would like to express my gratitude and appreciation for this.

Passing on the baton

On 23 April 2008, after the General Meeting of Shareholders, I will hand over my position as Chairman of the Management Board to my colleague Øystein Løseth. Nuon is at a crossroads, and major challenges lie ahead. This is therefore an excellent time for me to step back and confidently give a new generation of directors an opportunity to take Nuon forward. I have greatly enjoyed the past six years leading an organisation that was confronted with the complete restructuring of the energy sector. Liberalisation of the market, privatisation of the production sector, internationalisation and sustainability were the ingredients for an intensive, but above all exciting period. Despite, or perhaps thanks to, all the dynamics and turbulence Nuon has survived and thrived. This is good for the company, good for everyone involved with Nuon and good for the future – because it promises a healthy development towards a reliable and sustainable energy future. A future in which energy will remain extraordinary yet ordinary.

Amsterdam, 25 March 2008
Ludo van Halderen, Chairman of the Management Board