Continued positioning for tomorrow s energy market. N.V. Nuon Energy Annual Report 2013

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1 Continued positioning for tomorrow s energy market N.V. Nuon Energy Annual Report 2013

2 About this report The annual report of N.V. Nuon Energy is the integrated representation of our company s financial and non-financial performance for the calendar year The scope of this report comprises N.V. Nuon Energy and its subsidiaries. Nuon s consolidated accounts have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The last section of the annual report includes the auditor s report and the profit appropriation. Qualitative information about the Vattenfall group and its activities is included insofar as these activities affect Nuon s customers, employees or stakeholders. The qualitative reports were provided by experts throughout the organisation. We, Nuon, Nuon Energy, the company, Nuon Energy Group, the Nuon Group, the group or similar expressions are used in this report as a synonym for N.V. Nuon Energy and its subsidiaries. The name Vattenfall or similar expressions refer to Vattenfall AB, the parent company of Nuon.

3 Contents Key facts 1 Highlights Report of the Management Board 4 Market developments 4 Strategy 6 Operational performance 8 Financial performance 15 Outlook and challenges 20 Corporate governance report 22 Report of the Supervisory Board 3 1 Remuneration report Consolidated accounts 40 Notes to the consolidated accounts 46 Company accounts 86 Notes to the company accounts 88 Other 94 Independent auditor s report 94 Independent assurance report 95 Declaration of Compliance with the Code of Conduct for Suppliers and Metering companies 97 Profit appropriation 98 Ratios and definitions 99

4 Nuon at a glance Nuon is part of Vattenfall Vattenfall is one of Europe s largest generators of electricity and the largest producer of heat. Its main products are electricity, heat and gas. In electricity and heat, Vattenfall operates in all parts of the value chain: production, distribution and sales. In gas, Vattenfall is active in sales. The company also conducts energy trading. The Vattenfall group has approximately 31,800 employees (FTEs) and the parent company, Vattenfall AB, is wholly owned by the Swedish State. In 2013, main operations were conducted in the Nordic countries, Germany, the Netherlands and the United Kingdom. As from 1 January 2014, Vattenfall is organised in two regions: Nordic and Continental/UK. Vattenfall s operations in the Netherlands are carried out by N.V. Nuon Energy and its subsidiaries ( Nuon ). Nuon also has limited operations in Germany and the United Kingdom. It produces and supplies electricity, gas, heat and cooling offering its customers a wide range of energy-saving products and services. Nuon has approximately 4,800 employees (FTEs) and serves 2.1 million customers, businesses and public and other organisations in the Netherlands. With net sales of EUR 3.7 billion in 2013, Nuon holds a top-three position in the Dutch energy market. More information about Vattenfall can be found in the 2013 Annual and sustainability report of Vattenfall AB at As part of Vattenfall, Nuon s financial and sustainability results are included in this Vattenfall report. More detailed information about Vattenfall s work with sustainability is also available at Vattenfall is organised in two regions: Nordic and Continental/UK. Nuon is part of Continental/UK. Nuon Employees, full-time equivalents (FTEs) 4,833 Fossil-based electricity production 16.6 TWh Renewable electricity production 1.6 TWh Nuclear electricity production 0.0 TWh Vattenfall Group Employees, full-time equivalents (FTEs) 31,819 Fossil-based electricity production 87.9 TWh Renewable electricity production 41.9 TWh Nuclear electricity production 51.9 TWh Investments EUR 384 million Net sales EUR 3,720 million Loss for the year EUR 419 million Investments EUR 3,134 million (SEK 27,761 million) Net sales EUR 19,379 million (SEK 171,684 million) Loss for the year EUR 1,529 million (SEK 13,543 million)

5 N.V. Nuon Energy Annual Report 2013 Key facts 1 Key facts The energy sector continues to be under pressure from overcapacity, lower demand, fierce competition and the increasing share of subsidised renewable energy coming from Germany; The market will remain very challenging in the coming years, especially for gas-fired power plants; As a result of these circumstances, Nuon recognised an impairment loss of EUR 687 million in 2013, specifically on the value of our gas-fired production assets; The underlying operating result decreased by 37% to EUR 210 million (2012: EUR 333 million); After several years of investing in the security of supply and sustainable energy capacity, the free cash flow is positive and amounts to EUR 28 million (2012: EUR -743 million); In 2013, Nuon invested EUR 89 million in sustainable energy production capacity; On 1 July 2013, Vattenfall acquired an additional 11.96% of the Nuon shares. Consequently, Vattenfall holds 79% of the Nuon shares. The remaining 21% of the shares, which are currently owned by Dutch provinces and municipalities, will be acquired by Vattenfall in 2015 under fixed terms. Nuon key facts change in % Financial (EUR million) Net sales 3,720 3, % Earnings before interest, taxation, depreciation and amortisation (EBITDA) % Underlying earnings before interest, taxation, depreciation and amortisation (EBITDA) % Operating result % Underlying operating result % Net result % Underlying net result % Investments % Cash flow from operating activities ,187.5% Free cash flow % Net debt 1,034 1, % Ratios Return on capital employed -16.2% -24.9% -34.9% Underlying return on capital employed 1 6.1% 8.8% -30.7% Solvency 46.0% 48.8% -5.7% Employees (as at 31 December) Number of own employees (FTE) 4,833 5, % Lost Time Injury Frequency (LTIF) 2 for own personnel % Electricity production and emissions Fossil-based electricity production (TWh) % Renewable production (TWh) % CO 2 emissions per generated unit of electricity (g/kwh) % Sales volumes Sales of electricity (TWh) % Sales of gas (TWh) % Sales of heat (TWh) % 1 For items affecting comparability and the impact from divestments, which are excluded from the underlying results, refer to the financial overview on page Number of accidents leading to sick leave divided by the total number of hours worked, multiplied by one million. 3 Electricity production by joint ventures and externally contracted capacity is fully included. 4 This relates to the CO2 emissions factor of the energy production fuel mix.

6 < Contents 2 N.V. Nuon Energy Annual Report 2013 Highlights Highlights 2013 May City Partnership Nuon and the municipality of Amsterdam agree to cooperate in a City Partnership: in the coming years, both parties will join forces to promote and realise energy savings, using solar and wind power. The city s heat and cold network of Westpoort Warmte, a joint venture of Nuon and Afval Energiebedrijf Amsterdam, expands to Houthaven, the new climate-neutral district. July Nuon to build new wind farm in the UK A decision is taken to build a new wind farm in Southern Wales, at an investment of GBP 384 million (EUR 460 million). This wind farm, named Pen y Cymoedd, comprises 76 wind turbines with a combined capacity of 228 MW and is expected to be commissioned in late February First electricity deliveries from Magnum gas-fired power plant The Magnum gas-fired power plant (total installed capacity of 1,311 MW) in Eemshaven makes its first deliveries of electricity. As a result of deteriorated market conditions, starting in 2014 only one of the three units is put into commercial operation. June Two new gas-fired power plants Two new Dutch gas-fired power plants are opened: Hemweg 9 and Diemen 34. Both plants have a high electrical efficiency of over 59%, making the plants more environmentally friendly and among the most efficient in the Netherlands. Diemen 34 also provides heat to local district heating networks, increasing its efficiency to maximum 85%. September Inauguration of the Princess Alexia Wind Farm The Zuidlob land-based wind farm in the Netherlands, comprising 36 turbines with a combined capacity of 122 MW, is officially opened. Her Royal Highness Princess Beatrix inaugurates the facility, changing the name to that of her granddaughter: Princess Alexia Wind Farm.

7 < Contents N.V. Nuon Energy Annual Report 2013 Highlights November Heat in Arnhem Nuon decides to invest EUR 19 million in the Arnhem region s heat supply by constructing an interconnector between the heating networks of Duiven, Arnhem and Westervoort. Using this interconnector, homes in Arnhem can be heated with the residual heat from the AVR waste and power plant in Duiven, which will help to decrease CO 2 emissions. October December Nuon Solar Team wins World Solar Challenge 2013 New office building With a fully redesigned solar car, the Nuna7, the Nuon Solar Team wins the bi-annual World Solar Challenge across Australia for the fifth time in seven attempts. In an exciting final, the team, consisting of students of the Technical University Delft, defeats the defending champions. December Launch of customer loyalty program Nuon launches Nuon Exclusief, a customer loyalty programme aimed at rewarding Nuon s loyal customers. The longer the customer stays with Nuon, the greater the benefits. Some 2,100 Nuon employees move into the new office building in Amsterdam Zuidoost. The fully renovated office offers 26,000 m² of space for the employees, who were previously spread across different locations. The building has energy label A, a BREEAM score of very good and is easily accessible by public transport. To celebrate the opening of the new office, Nuon organises a large St Maarten parade, together with nearby primary school De Polstok. Approximately 500 children take part in the event.

8 < Contents 4 N.V. Nuon Energy Annual Report 2013 Report of the Management Board 4 Report of the Management Board The entire European energy industry is undergoing a fundamental transformation. In recent years, prices have continued to fall due to a surplus of production capacity, weak demand and subsidised renewable energy imported from Germany, triggered by the Energiewende. We believe that the future energy landscape will be more fragmented and local than in the recent years. Adapting to these changes therefore means that we face a number of challenges in positioning our company for tomorrow s energy market. Market developments An industry in transformation Electricity generation is part of a complex global system in which production costs, regulation and sustainability aspects all interact. Everyone in society needs access to power, at the lowest possible price and with the least possible environmental impact. During the year, it became even clearer that the traditional business model, based on large-scale electricity generation in conventional power plants, is being challenged. Awareness of the negative consequences of climate-affecting emissions from coal has increased, while the expansion of renewable energy continues with undiminished strength. At the same time, increasing numbers of consumers want to be able to control and have detailed information about their energy consumption. Surplus of production capacity Up until only a few years ago, the general view in the market was that electricity would be generated in large-scale power plants, providing economies of scale. The price trend in both the spot and futures markets pointed upward, largely owing to rising costs for CO 2 emission allowances. Demand for electricity in Europe was high, especially from industry. As a result of this outlook, subsidies and support systems, substantial new production capacity was added, consisting of both conventionally operated power plants (hard coal and gas) and renewable energy, such as wind power and solar energy. In addition specifically the gas-fired power plants were expected to become vital for the stability and reliability of supply into the electricity grid, as they offer the flexibility to absorb the intermittent availability of renewable energy. These market conditions changed after the financial crisis in Europe, and demand for electricity has since fallen. Some electricity-intensive industry has been shut down or moved out of Europe. Meanwhile, large amounts of renewable energy have been added as a result of political policies, financial support systems and technological development. New conventional power plants were built and commissioned. These developments have resulted in overcapacity in the market which in turn has led to lower prices on the electricity exchanges. Consequently, conventional coal- and gas-fired power plants are not profitable all hours of the day; in fact the number of hours per day that a gas-fired power plant is profitable has decreased dramatically. Nevertheless, these gas-fired power plants are still needed to provide flexibility to compensate for the intermittent availability of renewable energy. Changes in profitability between types of power Electricity generation based on natural gas has lost competitiveness against coal-based generation. In recent years, coal prices have fallen globally including in Europe. This is partly due to a drop in domestic demand for coal in the United States, where the increased production of shale gas has led to a greater supply of cheap gas. A large share of the US coal surplus is being exported. Due to the growth of renewable energy, gas-fired power is not needed as often as expected for balancing power during hours when demand for electricity is highest ( peak hours ). Energy policy differences among the European countries, combined with the declining significance of the EU Emissions Trading System (EU ETS) for CO 2 emission allowances, have resulted in a low price for the allowances.

9 < Contents N.V. Nuon Energy Annual Report 2013 Report of the Management Board 5 Clean Dark Spread (CDS) and Clean Spark Spread (CSS) in the Netherlands /MWh CDS CSS Due to these developments, the margins for electricity generation based on coal are higher than for gas. In January 2010, clean spark spreads (the margin on electricity generation using gas, including the cost of CO 2 emission allowances), based on futures prices for 2014, were above EUR 35/MWh. Three years later, this margin moved into negative territory, while margins for coal-fired electricity generation remained relatively stable. Lower costs for new, renewable capacity Given today s wholesale electricity prices, construction of new generation capacity is not profitable for any type of power without subsidies or support systems. At the same time, the cost to generate electricity from renewable energy sources has decreased in recent years. This applies, above all, to wind power and solar energy. For example, the production cost of building land-based wind power-generating facilities in favourable areas is among the lowest for all new construction alternatives. The need for flexibility will grow Since conventional power plants are not profitable during certain hours of the day due to the increased generation of renewable energy, a need has emerged to create the technical ability to start and stop plants on short notice and at a low cost. Gas-fired power plants can provide the production flexibility needed to compensate for the continuous fluctuation in the supply of renewable energy, but are in turn affected by the changes in profitability between different types of power. Meanwhile, there will be an increased need to steer electricity demand (referred to as demand-side management ) in an effort to smooth out consumption over a 24-hour period, improve price elasticity and better conform to electricity generated from intermittent sources like solar energy and wind power. Rising pressure on cities Sustainability is becoming increasingly important, and many cities are setting their own sustainability targets. Cities like Amsterdam, Rotterdam, Arnhem and Nijmegen are committing themselves to these targets. This is generating opportunities for companies that can create innovative energy efficiency products, heat and cold production and transportation solutions. Changes in the value chain Customers increased influence over their own electricity production is leading to changes in the traditional value chain. Electricity no longer flows only downstream, i.e. from large-scale power plants through the electricity grid to end customers. Instead, it is increasingly being generated by small-scale power plants or solar panels, where it is fed in to local and regional networks. More customers are becoming so-called prosumers (customers who are both consumers and producers), where the flow between the traditional electric utility and customers is moving in both directions. Increased competition Customer mobility, defined as the number of customers switching between suppliers, has increased. This was accelerated by large-scale energy auctions in which organisations tender for low prices on behalf of groups of customers. Customers are also more engaged in finding out the source of the electricity they use, and interest is rising in local electricity generation and source-labelled electricity and heat.

10 < Contents 6 N.V. Nuon Energy Annual Report 2013 Report of the Management Board 6 New opportunities in the customer market A new market for customer-centric services is emerging, as many customers are seeking to be more active as consumers. Smart electric meters make it possible for individual customers to have more influence over their consumption patterns. In some cases customers even want to be electricity producers themselves. These prosumers are creating new business opportunities for the energy companies, which can offer access and connection to the electricity grid for solar panels or other self-produced electricity, provide assistance in handling the balance between production and consumption, or provide the tools and services that enable customers to influence their consumption. For the electric utilities, positioning the brand in this new energy landscape represents a major opportunity. Political frameworks affecting Nuon Nuon s operations are governed to a high degree by political regulations and frameworks. The EU s climate and energy package for 2020 provides guidelines on how much each EU member state must reduce emissions by 2020 to ensure that the EU meets its climate targets. The 2020 framework will soon be followed up with goals and measures for Summarising these market developments, it can be said that the breakdown of operating profit for the electricity industry as a whole is expected to move away from the previous model, where large-scale electricity generation accounted for the largest share of earnings. An increasingly larger contribution is thus expected to come from sales activities, including new products and services related to small-scale electricity generation or energy efficiency improvements, and from renewable energy production. Strategy Vattenfall faces a number of challenges and must adapt to the changed market conditions. Its large-scale electricity generation must be modified to fit a market situation in which electricity prices are considerably lower than in the past. Costs must be lowered along the entire value chain, the production portfolio must be restructured and flexibility must be increased where technically possible. At the same time, new financing solutions need to be found in order to increase investments in renewable energy mainly wind power. Demand from customers and society for new, sustainable products and services must be met. However, EU countries differ in their rules and regulations for achieving their emission targets. In the UK, the Electricity Market Reform (EMR) programme aims to bring about a shift to a secure, climate-friendly electricity supply at a time when large parts of Britain s aging power system are in great need of renewal. In Germany the Energiewende symbolises the transition to a sustainable economy by means of renewable energy, energy efficiency and sustainable development. In the Netherlands, the political situation for the past ten years has been characterised by enormous volatility in energy policy plans. However, in September 2013, the Dutch energy sector, government, trade unions and environmental organisations signed the Energy Agreement for Sustainable Growth. This commitment outlining policy and targets for renewable energy until 2023, is expected to bring more stability to the Dutch energy policy. Under the agreement, the share of renewable energy in the Netherlands (as a percentage of total energy production) must rise to 16% in The idea is to significantly boost wind production capacity, both onshore and offshore, to increase the co-firing of biomass in conventional power plants and to close old and inefficient coal-fired power plants. This last issue is not a concern for Nuon as our power plants are relatively efficient. Furthermore, the Dutch coal tax, which was reintroduced in 2013, will be abolished again in And in August 2013, the Leveranciersmodel (supplier s model) was introduced, with the aim of offering customers a clear insight in their power and gas bills. Vattenfall s strategy, which was laid out in 2010 and modified in 2012, continues to apply. Vattenfall will reduce its CO 2 exposure, grow in renewable energy, and build up a market position offering smart and sustainable energy solutions. Vattenfall will continue to reduce costs and develop operational excellence. Sustainability is an integral part of its strategy and a prerequisite for the ability to deliver on its strategic focus areas and goals. Nuon translates this strategy in such a way that it contributes to overall value creation while fulfilling the needs of its shareholders and local stakeholders. New regional organisation On 1 January 2014, Vattenfall adopted a new geographic organisational structure, and has now been split into two regions Nordic and Continental/UK. In contrast to the former functional organisational structure, a regional structure gives the company greater opportunities to address national differences and changes in the energy market. The new organisation also increases Vattenfall s strategic and financial flexibility.

11 < Contents N.V. Nuon Energy Annual Report 2013 Report of the Management Board 7 Five strategic focus areas Vattenfall s mission is to generate a market rate of return by operating a commercial energy business that enables it to be among the leaders in developing environmentally sustainable energy production. As guidance for the achievement of this objective, in 2012 the Board of Directors established four strategic focus areas. In 2013, a fifth focus area was added which defines Vattenfall s strategy in the end customer market. The focus areas described below outline Vattenfall s strategy for shifting its production portfolio towards more sustainable energy production and offering customers sustainable and smart energy solutions. At the same time, Vattenfall must be able to generate a market rate of return and be a financially stable company. Growth in renewables Growth in renewable energy is important for Vattenfall. One of Vattenfall s main goals is to grow faster than the market with respect to renewable energy capacity. This has to be balanced against limited financial resources as well as limited scope and profitability of new projects due to the difficult market conditions throughout the energy industry. The challenge is therefore to recover capital and free up funds for investments in renewable energy without burdening cash flow, for example by realising growth projects in partnership with other companies or inviting external financiers to become part owners of projects that have already been commissioned. Expanding further in district heating projects also provides valuable opportunities to expand further in renewable energy, as district heating provides a significant reduction of CO 2 emissions in comparison with conventional gas-heated boilers. Finally, the continuing growth of intermittent renewable energy capacity will further increase the demand for flexibility of conventional power plants, which fits well with Nuon s work related to gas-fired power plants. Strong Nordic position The Nordic countries are a natural focus area for Vattenfall given the company s strong market position in that region. Today, Vattenfall has a leading position in the Nordic market throughout the value chain and intends to further strengthen this position. This focus area of the Vattenfall strategy does not directly affect Nuon, since Nuon does not have any operations in Nordic countries. However, the Netherlands is identified as a core market in the Vattenfall Group. Nuon therefore strives to consolidate and, where possible, further strengthen its position in the Dutch market. Define measures to reduce Vattenfall s CO 2 exposure Production costs are mainly affected by the type of fuel used and the cost of any CO 2 emission allowances. Despite setbacks due to the low prices of CO 2 emission allowances and a lack of political support and acceptance for Carbon Capture and Storage (CCS), Vattenfall is maintaining its goal to reduce its emissions to 65 million tonnes of CO 2 by Measures currently planned for Vattenfall s own operations will lead to a reduction to 79 million tonnes of CO 2 emissions. In order to reduce the CO 2 emission exposure by another 14.6 million tonnes, operations must be partly or fully sold. Offer smart and sustainable energy solutions The changed market conditions in the end customer markets, where customers are increasingly asking for energy-efficient and sustainable energy solutions, represent a major opportunity. To capture those opportunities Vattenfall aspires to be a Smart Energy Enabler. This entails promoting energy efficiency (by mapping, advising, measuring and visualising customers electricity, gas and heat consumption) and developing energy efficiency improvement solutions together with customers. Stronger focus on Operational Excellence and cost-cutting Vattenfall has been working to consolidate the company and reduce costs since Annual costs have thus far been cut by EUR 1 billion (SEK 9 billion). In 2013, Vattenfall decided to increase its costs reductions for 2014 from EUR 0.2 billion (SEK 1.5 billion) to EUR 0.3 billion (SEK 2.5 billion) and to set a new savings target of EUR 0.2 billion (SEK 2 billion) for However, this will not be achievable without substantial staff reductions. On 6 March 2013, Vattenfall announced that the number of employees is expected to decrease by approximately 2,500 by year-end 2014, including a reduction of approximately 500 FTEs in the Netherlands. Vattenfall will continue to focus on Operational Excellence and foster a culture of continuous change, improve work processes and enable knowledge sharing within the various operations. Activities that are not profitable or not strategically important will be divested or discontinued.

12 < Contents 8 N.V. Nuon Energy Annual Report 2013 Report of the Management Board 8 Operational performance Developments during the year Energy generation Energy generation covers the development and construction of production plants and the production of electricity and heat. Operation of the plants is optimised on the basis of the forecasted production spreads and the variable power plant costs. Production spreads are affected mainly by the price of electricity and heat, the type of fuel that is used and the cost of any CO 2 emission allowances. The electricity and heat produced along with the fuels and CO 2 emission allowances are traded on the wholesale market, on exchanges and with bilateral counterparties. As part of Vattenfall, the aim for Nuon is to reduce the impact of the volatility of market prices of these commodities on group results. As such, part of Nuon s future electricity generation and required fuel and CO 2 purchases are hedged within the trading organisation. In addition, Nuon conducts proprietary trading in these energy commodities. Risk mandates are set for both hedging and proprietary trading. Generation activities Nuon s operations are primarily concentrated on three sources of energy: wind, natural gas and coal, with approximately 5,834 MWe (electricity) and 3,167 MWth (heat) of installed production capacity. The majority of electricity is produced by gas-fired power plants. During 2013, 18.2 TWh of electricity, an increase of 25% compared to 2012, and 4.5 TWh (16.3 PJ) of heat were produced. Installed own wind capacity increased by 25% to 471 MWe. Installed capacity and production per energy source Electricity Heat Capacity 1 Production 2 Capacity 1 Production MWe GWh GWh MWth TJ TJ Hard Coal 903 4,753 5, Gas 4,181 11,803 7,630 2,947 16,115 15,307 Oil Total Production Plants 5,084 16,556 13,266 3,160 16,156 15,673 Wind 471 1, Wind contracted externally Hydro Solar Biomass Co-firing biomass Total Renewables 749 1,606 1, Total 5,834 18,162 14,750 3,167 16,303 15,824 1 Electricity capacity of production plants decreases with a higher heat supply capacity. The amount depends on factors such as the temperature of the outside air, cooling water and heating pipelines. Wind capacity relates to wind parks in which Nuon has a majority or minority interest or which Nuon has contracted externally. For this capacity Nuon feeds the electricity into the electricity grid via grid connection points. The pro rata Nuon ownership wind capacity amounts to 360 MWe. 2 Production of electricity comprises all electricity that Nuon, acting as producer and benefical owner, feeds into the electricity grid via grid connection points (for the UK wind farms through Vattenfall).

13 < Contents N.V. Nuon Energy Annual Report 2013 Report of the Management Board 9 Fossil-based energy generation The clean spark spread has decreased further and was around or even below zero for most of the year. This is the result of structural overcapacity, low CO 2 emissions and coal prices and the growing share of subsidised renewable energy imported from Germany. As a consequence, both the profitability and the number of operational hours of our gasfired plants have further decreased. These market conditions are not expected to improve in the foreseeable future, which increases the business risk in the industry. As a consequence of this increased risk profile and revised long-term outlook, Nuon recognised total impairment losses on production assets of EUR 0.6 billion. Investments in renewable energy capacity RA-verified Amounts in EUR million In late February, the first deliveries of electricity were made from the Magnum gas-fired power plant in Eemshaven, Groningen. The total installed capacity amounts to 1,311 MW. This additional capacity was expected to be required and decided upon before the effects of the economic crisis and the Energiewende became apparent. However, as a result of the deteriorated market conditions it was decided, starting in 2014, to put only one of the three units of the power plant into full commercial operation. This decision was made in response to the increasingly difficult market position of natural gas-fired power plants in the European energy market Wind Solar Hydro In 2013, the total installed wind power capacity, including externally contracted wind farms, amounted to 716 MW. The total annual wind electricity production was 1,517 GWh, which was 15% more than in Wind levels in 2013 were comparable to In July and August there was less wind compared to previous years, but this negative effect was offset by the strong autumn winds in October and December. The Willem-Alexander power plant in Buggenum was closed in March. The 253 MW power plant was taken into operation in 1993 as a coal gasification demonstration plant. Due to the rapidly changed market conditions and the cost structure of the plant, its operations were no longer profitable. Plans to co-fire biomass on a large scale proved inadequate to change this situation. In June 2013, Nuon officially opened its new Hemweg 9, Diemen 34 and Magnum gas-fired plants. Both Hemweg 9 and Diemen 34 are highly efficient gas-fired power plants (STEG power plants), offering an installed electricity capacity of 435 MW. In addition, Diemen has a heat capacity of 260 MW. These new gas-fired power plants were developed anticipating market circumstances were the flexibility to absorb the intermittent availability of renewable energy would become increasingly important. By offering this flexibility they make a major contribution to maintaining the reliability of the energy supply in the Netherlands. Renewable energy generation In line with Vattenfall s strategic objective to continue growth in renewable energy production, and despite the difficult economic circumstances affecting the energy industry as a whole, Nuon invested in developing new wind farms. Despite comparable weather conditions, Nuon s wind farms generated 238 GWh more electricity in This was due to the contribution of the new Princess Alexia Wind Farm, which produced electricity for the first time in The Princess Alexia Wind Farm consists of 36 wind turbines, with a combined capacity of 122 MW. In total, Nuon s onshore wind capacity, spread over 28 wind farms, offers an installed capacity of 363 MW. The only offshore wind farm, near the coast of Egmond aan Zee, adds another 108 MW to the overall installed wind capacity. The remaining 245 MW capacity relates to externally contracted wind farms. In July, it was announced to invest in a new onshore wind farm in the United Kingdom. The Pen Y Cymoedd wind farm in the south of Wales will consist of 76 wind turbines, which will provide a combined installed capacity of 228 MW. This is enough to supply 140,000 homes with renewable energy. Construction starts in 2014 and is expected to take approximately three years to complete. The total investment amounts to approximately EUR 460 million. Total investments in renewable energy generation in 2013 amounted to EUR 89 million. The majority of the EUR 89 million was invested in the completion of the Princess Alexia Wind Farm and the development of the Pen Y Cymoedd wind farm. The remainder was spent on the development of new wind farms in the Netherlands, including Beaufort, IJsselmeerdijk and Wieringermeer.

14 < Contents 10 N.V. Nuon Energy Annual Report 2013 Report of the Management Board 10 Nuon fuel mix energy production in the Netherlands RA-verified % 27.0% Coal 25.9% Natural gas CHP 22.6% Natural gas power stations 15.7% Blast furnace gas 1 8.3% Wind 2 0.4% Hydro 0.1% Biomass 0.0% Solar Fossil-based energy 91.2% Renewable energy 8.8% CO 2 emission rate g/kwh Radioactive waste rate g/kwh 1 At our power plants in Velsen, the residual gas released during the steel production of Tata Steel is used as a fuel to produce electricity. In this way, this blast furnace gas is put to good use by Nuon. The gas contains a high percentage of CO 2. It has been agreed with the Office of Energy Regulation of the Dutch Competition Authority that Nuon is to adjust the CO 2 emissions in the production fuel mix to avoid double counting. The CO 2 emission factor of blast furnace gas is calculated in this mix on the basis of the use of natural gas. 2 The wind energy production comprises all electricity that Nuon, as producer and beneficial owner, feeds into the electricity grid via grid connection points. Nuon energy production fuel mix Despite the strong increase of electricity production by 25%, Nuon s CO 2 emissions rate decreased by 5% to 444 grams per kwh, reflecting the use of cleaner energy sources. The new gas-fired power plants Magnum, Diemen 34 and Hemweg 9 have resulted in a higher share of gas-fired electricity production compared to prior years. While the closure of the coal-fired Buggenum plant in March reduced the share of coal-fired electricity production. Both installed capacity and electricity production from wind power increased significantly compared to 2012 as a result of the opening of the Princess Alexia Wind Farm. However, the share of wind power in the fuel mix decreased due to the strong rise in electricity production from the gas-fired power plants. Developments during the year Customers Satisfied customers are a prerequisite for the success of the business. Customer behaviour, driven by customer satisfaction and loyalty, has a significant effect on Nuon s results. Increased customer mobility The consumer market is fiercely competitive, resulting in higher customer mobility. The growth of the number of large-scale collective customer auctions continued in 2013, further accelerating the volume of switches between suppliers. The number of Nuon electricity contracts decreased from 2.2 million in 2012 to 2.1 million in In the same period, the number of gas supply contracts also decreased, from 1.9 million to 1.8 million. Dutch electricity sales to consumers and business customers decreased from 17.8 TWh in 2012 to 17.2 TWh in 2013 and gas sales increased by 0.4 TWh to 51.5 TWh. The higher gas volumes in early 2013, which where due to the cold weather, were almost completely offset by the relatively mild final months of the year. Financial results were also impacted by higher costs due to the implementation of the new market model. Energy suppliers are now responsible for collecting all meter readings and the billing and collection of all network charges. Previously, these tasks were carried out by the grid companies. In addition to offering conventional and sustainable electricity, gas and heat products, Nuon also aspires to be a Smart Energy Enabler and thus offers its customers energy efficiency improvement solutions. Besides products like boilers, insulation and ventilation, solutions are also provided in the form of energy advice, working with customers to help them gain control over their energy bill. Business solutions In the B2B segment, the number of connections increased by 8,000 to 97,000 in Nuon s energy experts offer business customers tailormade solutions that extend beyond the physical deliveries of electricity and gas. These range from delivering sustainable cold and heat solutions, to real-time monitoring of electricity use, tools for risk management, market information and advice on reducing energy costs as well as CO 2 emissions. In 2013, Nuon also worked closely with Amsterdam RAI and Amsterdam ArenA to help them install solar panel roofs measuring 2,700 m² and 7,000 m², respectively. Fuel mix energy supply All electricity suppliers in the EU are legally required to publish the fuel mix of their electricity supply to customers. Nuon s supply mix is shown in the figures on the next page, which illustrates that the majority of supply in the Netherlands is sourced from natural gas. The share of renewable electricity represents the number of Guarantees of Origin (GoO) used for the green electricity supplied to end customers. This share showed a slight decrease, from 15.9% in 2012 to 15.2% in 2013.

15 < Contents N.V. Nuon Energy Annual Report 2013 Report of the Management Board 11 Fuel mix energy supply Nuon Group RA-verified % 49.3% Natural gas 25.5% Coal 10.9% Hydro 5.2% Miscellaneous 4.8% Nuclear 4.2% Wind 0.1% Biomass 0.0% Solar Fossil-based energy 84.8% Renewable energy 15.2% CO 2 emission rate g/kwh Radioactive waste rate g/kwh Nuon fuel mix energy supply business market RA-verified % 47.0% Natural gas 24.3% Coal 17.1% Hydro 5.0% Miscellaneous 4.6% Nuclear 1.9% Wind 0.1% Biomass 0.0% Solar District heating Nuon is one of the largest providers of district heating in the Netherlands. Nuon delivered 4.1 TWh of district heating in 2013, 2.5 TWh of which went directly to consumers and business customers, while the remainder was sold in the wholesale market. District heating fits well with Nuon s strategy, since it offers a 50% to 80% reduction of CO 2 emissions compared to conventional gas-heated boilers, depending on the source of the heat. Nuon decided to invest EUR 19 million in the heat supply structure in the Arnhem region, where the demand for district heating is increasing as a result of newly constructed homes and local urban improvements. By constructing a five-kilometer interconnector, the heating systems of Duiven, Arnhem and Westervoort will be linked. This will mean that in future, homes in Arnhem can be heated using the residual heat from the AVR waste and power plant in Duiven. The interconnector is expected to be completed by the end of Nuon also cooperated with Warmtebedrijf Rotterdam and the Rotterdam municipality in a project called De Nieuwe Warmteweg. The project involved the construction of a 26-kilometer heat pipeline to connect the waste incinerator in Rozenburg with Nuon s district heating system on the south bank of the Nieuwe Waterweg. Nuon transports the heat to city households, some 23,000 of which will be connected to the district heating grid over the next few years. However, the ambition of the municipality reaches even further. Ultimately, the aim is to provide 150,000 homes throughout Rotterdam with district heating. Fossil-based energy 80.9% Renewable energy 19.1% CO 2 emission rate g/kwh Radioactive waste rate g/kwh Nuon fuel mix energy supply consumer market RA-verified % 51.4% Natural gas 26.6% Coal 6.2% Wind 5.4% Miscellaneous 5.3% Hydro 5.1% Nuclear 0.0% Biomass 0.0% Solar At the end of 2013, Nuon started building a heat storage facility at its location in Diemen. The 50-metre high heat buffer will have a maximum capacity of 22,000 m 3 and is expected to be finalised in The heat buffer will enable residual heat from our two CHP plants in Diemen to be stored. The heat is used in the district heating systems in Almere, IJburg and Amsterdam Zuid-Oost. The new facility will mean that the supply of heat to the district heating systems will be partially decoupled from the production of heat and electricity. As a result the two power plants can be run more efficiently, leading to fuel savings and lower CO 2 emissions. As part of its City Partnership with the municipality of Amsterdam, Nuon has also developed several district heating initiatives in Amsterdam. Fossil-based energy 88.5% Renewable energy 11.5% CO 2 emission rate g/kwh Radioactive waste rate g/kwh

16 < Contents 12 N.V. Nuon Energy Annual Report 2013 Report of the Management Board 12 City Partnership City Partnership is Vattenfall s concept for contributing to cities efforts to shift to more sustainable energy use. The aim is to take a comprehensive approach to urban energy systems and develop solutions in which Vattenfall integrates various products and services. Vattenfall has entered into City Partnerships with the municipalities of Uppsala, Berlin and Hamburg. In the Netherlands, Nuon has started a cooperation with the municipality of Amsterdam to promote and realise energy saving among its inhabitants using more renewable energy sources. Amsterdam has set the target of lowering its CO 2 emissions by 40% by 2025 compared with In cooperation with the city, Nuon is making a contribution by replacing gas-based heating with district heating and has also invested in storage facilities for district heating. Nuon offers district cooling to companies as well, using water that is cooled in nearby lakes. In 2013, the city s heat and cold network of Westpoort Warmte, a joint venture of Nuon and Afval Energiebedrijf Amsterdam (the municipality s Waste Energy Company), expanded to Houthaven, the new climateneutral district in Amsterdam. Houthaven is a model project for the city s aspiration to construct 100% climate-neutral buildings. The total investment amounts to EUR 26 million. No other district has yet combined district heating and comfort cooling, using cold surface water, on such a large scale. In 2013, Nuon and partner Heijmans also continued to expand their public charging network for electric cars in the Amsterdam region, as 200 additional charging stations were installed. Close to 800,000 kwh of green electricity have been supplied to electric vehicles, equalling approximately 4 million electric kilometers. Customer satisfaction A key driver for Nuon s sales operations is customer satisfaction. The overall customer satisfaction index improved slightly in 2013 to 73, compared to 72 in the previous year. In the last quarter of 2013, we experienced challenges with the phone accessibility of our customer contact centre. As a result, waiting times were temporarily unacceptably high. A lot of effort and resources were invested in bringing quality and performance back up to the desired level. Branding In 2011, the Vattenfall brand name and logo were used in the Dutch market for the first time, under the header Nuon, part of Vattenfall. In subsequent years, this new branding was used more widely. Nuon is well known among Dutch consumers, but in anticipation of further rebranding to Vattenfall, less was invested in the Nuon brand. This has had an impact, both on the strength of the Nuon brand and on our customers. Consumer behaviour in the Netherlands is changing, and consumers are more inclined to switch suppliers than a few years ago. In light of these developments we re-evaluated our branding strategy and decided to stop the rebranding to Vattenfall, and instead to maximise the benefits of the strong Nuon brand. We will launch new campaigns, explicitly engage with our customers, focus on customer loyalty for example through our newly launched loyalty programme and ensure that we are clearly visible in the market. Developments during the year Human Resources Focus on Nuon s employees As an employer, Nuon strives to give its employees opportunities to develop their full potential as well as offering an attractive and inspiring workplace. The company s efforts in the area of diversity and equal opportunity are a natural part of its operations. The goal is to be an attractive employer, and to attract and retain the best talent. At year-end 2013, Nuon employed a total of 4,833 FTEs (2012: 5,200 FTEs). The decrease compared to 2012 was mainly the result of a continuing focus on cost efficiency and the closure of the Buggenum power plant. Of Nuon s total workforce of 5,180 employees, 1,381 were female and 3,799 male. A total of 4,693 employees had permanent contracts, compared to 5,035 employees at year-end The number of employees with a temporary contract decreased from 520 in 2012 to 487 in In 2013, the average age of Nuon employees in the Netherlands was 42.8, compared to 42.5 in Diversity and equality At Nuon, we are convinced that striving for diversity helps build a more profitable, efficient and attractive company. Our overall ambition is to firmly establish diversity as a natural part of our daily business by increasing knowledge, acceptance and a willingness to work with the diverse aspects of our business. Nuon aims to increase the number of female managers in order to create more diverse management culture in the organisation. Specific targets have been set to achieve this. Gender diversity of employees Number 100% 80% 60% 40% 20% 0% Male Female 1,785 1,629 4,693 4,576 1,504 4,358 1,492 4,063 1,381 3,799

17 < Contents N.V. Nuon Energy Annual Report 2013 Report of the Management Board 13 Diversity by age % employees Lost Time Injury Frequency (LTIF) for own personnel Number of incidents/million worked hours Dutch working population 2013 <25 year year year year >56 year 0 Energy Related Services Production Heat Projects Nuon Other Nuon Total Health and Safety Safety is one of Nuon s core values; we believe that all work-related injuries and occupational illnesses are preventable. Nuon continuously strives to ensure safe and sound workplaces. The goal is to achieve zero accidents in the workplace, have no workplace-related absences, and provide all employees with a safe and inspiring work environment. Safety risks shall be reduced as far as possible, and no work is so important that it should be undertaken in an unsafe manner. When a work situation is no longer considered to be safe, every employee is required to stop work immediately. The Lost Time Injury Frequency (LTIF) is a measure of workplace-related absence. It shows the number of work-related injuries per million hours worked that result in absence. Nuon s systematic focus on safety has resulted in an improvement in our safety culture and performance. Since 2010, the LTIF decreased continuously in almost all business areas except for the Energy Related Services (ERS), supplied by the subsidiary Feenstra. Due to a number of safety incidents at ERS, the LTIF increased compared to This also fully accounts for the overall rise in Nuon s LTIF from 1.2 in 2012 to 1.6 in The development of the safety performance within ERS clearly lags behind that of the other business areas. The experience gained within these other businesses will therefore be used to strengthen the safety culture within ERS ,500 1, Total registered safety incidents and near-incidents Number ,381 1, Near-incidents Incidents without lost-time Lost-time incidents 733

18 < Contents 14 N.V. Nuon Energy Annual Report 2013 Report of the Management Board 14 Rolling average sick leave 1 % Value for the Netherlands, excluding the energy related services companies, which are not included as not all comparative figures are available. Furthermore, a new Nuon Social Plan went into effect in 2013, following negotiations between Nuon and the relevant employee organisations. It defines and elaborates a number of social principles that will apply during the processes of organisational changes within Nuon. The Social Plan aims primarily to facilitate these processes in a socially responsible manner and offers solutions for the redundancies that will arise. New way of working When moving to the new office in Amsterdam Zuidoost in December, Nuon introduced employees to the new Smart Working concept. This flexible way of working is in line with the growing need of employees to determine where and when they perform their activities. The concept promotes a culture where flexibility, confidence and taking individual responsibility to optimise work-life balance are central, leading to more satisfied and motivated employees. It also leads to both improved personal effectiveness and improved cooperation between colleagues. Nuon s health policy focuses on each individual, paying close attention to feedback from our employees about their health and working environment. In 2012, Nuon introduced a structured approach to health issues and set up a quality management system for health management. The system is organised in the same way as OHSAS, the international standard for occupational health and safety management systems. The approach includes three processes: medical examinations, targeted health promotion and reintegration. Nuon works actively to improve employees health by offering regular check-ups and preventive measures. In addition, Nuon strives to increase awareness of health issues. The rolling average of sick leave among Nuon employees decreased from 3.9% in 2012 to 3.6% in Employment terms and conditions In 2013, a new Collective Labour Agreement (CAO) for the Dutch energy production and supply sector was concluded, thus providing security for both employer and employees on terms and conditions for the coming period. The new CAO took effect on 1 May 2013 and will be valid until 30 April To optimally facilitate its employees, Nuon offers a flexible compensation and benefit arrangement platform called my budget, my choice. Under this arrangement, employees can make their own personal choices with respect to their flexible employment benefits. They can opt to have those benefits paid out, purchase extra flexible benefits, or reserve the benefits for payment later in the year. Social engagement Via the Step2work program, Nuon helps people who have lost ground or a disadvantage in the labour market, giving them experience and new working opportunities. To this end, Nuon facilitates 35 work experience places within the various Business Units. Since 2006, more than 250 participants in this program have gained experience within Nuon. The company has also established the Nuon Foundation as a platform to encourage Nuon employees to participate in various social projects. For example, Nuon employees volunteered to help out at the Opkikkerdag, on outings organised by De Zonnebloem and at fundraising events of the Voedselbank. Via this platform, employees can also apply to Nuon for financial sponsorship of their activities and projects. Employee representation A number of matters arose during the year in which the employee representatives were closely involved. Among other things, discussions covered the ongoing optimisation of the organisation and related topics, such as the announced workforce reduction and the closure of the Buggenum plant.

19 < Contents N.V. Nuon Energy Annual Report 2013 Report of the Management Board 15 Financial performance Income statement The table below shows the results for 2013 compared to Financial overview For the year ended 31 December Amounts in EUR million Reported Items affecting comparability Underlying Reported Items affecting comparability and divestments Underlying Net sales 3,720-3,720 3,879-3,879 Other operating income Gross margin 1, ,270 1, ,340 Operating expenses Earnings before interest, taxation, depreciation and amortisation (EBITDA) Depreciation, amortisation and impairments ,259-1, Operating result (EBIT) , Net result Electricity production (TWh) Electricity sales (TWh) Gas sales (TWh) Number of contracts Dutch consumer market - Electricity 2.1 million 2.2 million - Gas 1.8 million 1.9 million Net sales by product Amounts in EUR million 4,500 3,720 3, ,700 1,811 1,800 3, ,853 Net sales Net sales decreased by 4.1% to EUR 3,720 million. This decrease was mainly driven by lower customer numbers in both electricity and gas due to increased competition, lower average electricity consumption per customer and lower gas prices. This decrease was partially offset by higher average gas consumption per customer due to colder weather conditions in the first half of , ,375 Electricity Gas Heat & other products

20 < Contents 16 N.V. Nuon Energy Annual Report 2013 Report of the Management Board 16 Gross margin Amounts in EUR million EBITDA Amounts in EUR million 1,600 1,200 1,214 1, ,270 1, Underlying Items affecting comparability Underlying Items affecting comparability Gross margin Gross margin decreased by 4.6% to EUR 1,214 million. Underlying gross margin decreased by 5.2% to EUR 1,270 million. This decrease was mainly driven by a lower production margin due to decreased spark spreads and the lower margin on gas sales. These effects were partially offset by higher trading results and higher average gas consumption per customer due to colder weather conditions in the first half of Depreciation, amortisation and impairment charges Depreciation, amortisation and impairment charges decreased from EUR 1,259 million in 2012 to EUR 901 million in 2013 as a result of lower impairment charges (EUR 0.7 billion) in 2013 than in 2012 (EUR 1.1 billion). In both years, the impairment charges mainly related to the gas-fired power plants. Underlying depreciation, amortisation and impairment charges increased by 16.9% to EUR 214 million due to the commissioning of the Hemweg 9 and Diemen 34 plants in 2012 as well as the Magnum power plant and Princess Alexia Wind Farm in Operating expenses by category Amounts in EUR million EBIT Amounts in EUR million 1, , , , , Personnel expenses Sub-contracted work Other operating expenses Items affecting comparability Own work capitalised Underlying Items affecting comparability Operating expenses Operating expenses decreased by 11.2% to EUR 885 million in Underlying operating expenses increased slightly by 1.7% to EUR 885 million, mainly driven by the commissioning of the new gas-fired power plants. In addition, costs were higher due to the introduction of the new market model and increased costs for bad debts resulting from the economic crisis. Part of the operationally-driven increase in costs was offset by lower personnel expenses. These expenses decreased by EUR 28 million following the staff reductions in 2013, which were mainly related to the closure of the power plant in Buggenum. The number of own staff decreased by 7.1%, from 5,200 FTEs at the end of 2012 to 4,833 FTEs at the end of The decline was due to the closure of Buggenum and the continuing focus on efficiencies and cost savings. EBIT EBIT (earnings before interest and taxes) increased from EUR -938 million in 2012 to EUR -536 million in This improvement was mainly driven by the lower impairment charges in 2013 compared to Underlying EBIT decreased by 36.9% to EUR 210 million, primarily due to lower spark spreads and higher depreciation charges.

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