TIDMNTEA
RNS Number : 5580D
Northern Electric PLC
27 April 2017
The following regulated information, disseminated pursuant to
DTR 6.3.5, comprises the Annual Report and Accounts of Northern
Electric plc for the year ended 31 December 2016.
Pursuant to LR 17.3.1, the document has been submitted to the
National Storage Mechanism and will shortly be available for
inspection at:
www.hemscott.com/nsm.do
The 2016 Annual Report and Accounts are also available on the
website
http://www.northernpowergrid.com/document-library/financial
Enquiries:
Jenny Riley 01977 605155
REGISTERED NUMBER: 02366942 (England and Wales)
GROUP STRATEGIC REPORT, REPORT OF THE DIRECTORS AND
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARED 31 DECEMBER
2016
FOR
NORTHERN ELECTRIC PLC
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
CONTENTS OF THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARED 31 DECEMBER 2016
Page
Company Information 1
Group Strategic Report 2
Report of the Directors 21
Report of the Independent
Auditor 28
Consolidated Statement of
Profit or Loss 30
Consolidated Statement of
Profit or Loss and Other
Comprehensive Income 31
Consolidated Statement of
Financial Position 32
Company Statement of Financial
Position 34
Consolidated Statement of
Changes in Equity 35
Company Statement of Changes
in Equity 36
Consolidated Statement of
Cash Flows 37
Company Statement of Cash
Flows 38
Notes to the Consolidated
Financial Statements 39
NORTHERN ELECTRIC PLC
COMPANY INFORMATION
FOR THE YEARED 31 DECEMBER 2016
DIRECTORS: R Dixon
T E Fielden
J M France
P J Goodman
P A Jones
COMPANY SECRETARY: J C Riley
REGISTERED OFFICE: Lloyds Court
78 Grey Street
Newcastle upon Tyne
NE1 6AF
REGISTERED NUMBER: 02366942 (England and Wales)
AUDITOR: Deloitte LLP
Chartered Accountants and Statutory Auditor
Newcastle upon Tyne
United Kingdom
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
The directors present the annual reports and accounts of
Northern Electric plc (the "Company") and its subsidiary companies
(together the "Group") for the year ended 31 December 2016, which
includes the Strategic Report, the Report of the Directors and the
audited financial statements for that year. Pages 2 to 20 inclusive
comprise the Strategic Report and pages 21 to 27 comprise the
Report of the Directors, which have been drawn up and are presented
in accordance with the Companies Act 2006.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
These annual reports and accounts have been prepared for the
members of the Company only. The Company, its directors, employees
or agents do not accept or assume responsibility to any other
person in connection with this document and any such responsibility
or liability is expressly disclaimed. These annual reports and
accounts contain certain forward-looking statements, which can be
identified by the fact that they do not relate only to historical
or current facts. In particular, all statements that express
forecasts, expectations and projections with respect to future
matters, including trends in results of operations, business
prospects, the availability of financing to the Group and
anticipated cost savings are forward-looking statements.
By their nature, forward-looking statements and forecasts
involve risk and uncertainty because they relate to events and
depend on circumstances that may or may not occur in the future.
There are a number of factors that could cause actual results or
developments to differ materially from those expressed or implied
by these forward-looking statements and forecasts. The
forward-looking statements reflect the knowledge and information
available at the date of preparation of these annual reports and
accounts and will not be updated during the year. Nothing in these
annual reports and accounts should be construed as a profit
forecast.
BUSINESS MODEL
The Company is part of the Northern Powergrid Holdings Company
group of companies (the "Northern Powergrid Group") and acts as a
holding company of Northern Powergrid (Northeast) Limited
("Northern Powergrid"), Integrated Utility Services Limited ("IUS")
and Northern Powergrid Metering Limited ("Northern Powergrid
Metering"). Northern Powergrid is a distribution network operator
("DNO"), which distributes electricity, at voltages of up to 132
kilovolts (kV), to approximately 1.6 million customers connected to
its electricity distribution network within its distribution
services area in the northeast of England. IUS provides engineering
contracting services and Northern Powergrid Metering rents meters
to energy suppliers.
In common with the Northern Powergrid Group, the Group operates
a business model and strategy based on its six core principles (the
"Core Principles"), which are:
Principle Strategy Indicator
Financial strength Effective stewardship Profitability, cash
of the Group's flow and maintenance
financial resources, of investment grade
investing in assets credit ratings.
and focusing on
long-term opportunities,
which contribute
to the Group's
future strength.
Customer service Delivering reliability, Improving network
dependability, resilience and performance,
fair prices and measured by: customer
exceptional service. minutes lost, customer
interruptions and
customer satisfaction.
Operational excellence Setting high standards Effective asset
for the Group's management, managing
operations, system commercial risk
investment and and improving network
maintenance. resilience and performance.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
BUSINESS MODEL - continued
Principle Strategy Indicator
Employee commitment Equipping employees Leading safety performance,
with the resources engaging employees
and support they and effective leadership.
need to operate
successfully and
in a safe and
rewarding work
environment.
Environmental Using natural Reducing environmental
respect resources wisely impact and promoting
and protecting and pursuing long-term
the environment, sustainability.
where it is impacted
by the Group's
operations.
Regulatory integrity Adhering to a Strong internal
policy of strict controls, regulatory
compliance with engagement and industry
applicable laws, influence.
regulations, standards
and policies.
STRATEGIC OBJECTIVES
The Group's strategic objectives are based on the Core
Principles and accordingly remain consistent and are to build a
business, which:
- continues to generate value over the long-term;
- invests in and manages its electricity distribution
network in an efficient and effective manner;
- provides its customers with an excellent standard
of service;
- engages with its employees so that they feel rewarded
and recognised as part of a team that sets and
achieves increasingly high standards of performance;
and
- is viewed as being a leader in shaping the future
direction of the electricity distribution sector
in the United Kingdom.
As part of its strategy, the Group continues to be committed to
putting safety first, respecting its customers, their time and
property, doing a quality job, responding effectively to major
incidents on the network in times of severe weather and caring for
its local environment.
REVIEW OF THE YEAR
The Group delivered a satisfactory financial performance for the
year, benefitting from a further change to the rate of taxation,
settlement of a prior year tax claim, and continued effective cost
control, with revenue at GBP385 million being broadly in line with
the previous year.
Throughout 2016, Northern Powergrid continued its policy of
enhancing the efficiency of its electricity distribution network by
investing GBP181.3 million in order to deliver the improvements
required to maintain an effective supply of electricity to
customers. As was the case in 2015, the resilience of the network
was tested during the year by several major weather events,
including intense lightning storms, periods of very heavy rain and
high winds. Northern Powergrid's major incident management
processes were implemented in these instances to ensure that
interruptions to customers were minimised. The on-going investments
in the network, including those to assist with the management of
environmental incidents, and the responses put in place to mitigate
the effects of such events, supported Northern Powergrid's
achievements made against the incentive scheme operated by the
Office of Gas and Electricity Markets ("Ofgem") for quality of
service targets with the number of customer minutes lost and
customer interruptions both below the target levels.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
REVIEW OF THE YEAR - continued
Northern Powergrid remained focussed on the affordability,
availability and reliability of the service it provides.
Accordingly, the way in which Northern Powergrid interacted with
and supported its stakeholders continued to be important. The
results of Ofgem's stakeholder engagement and customer
vulnerability submission were disappointing. When compared against
the other five DNOs, the Northern Powergrid Group ranked in fifth
place (a decline from its previous position of second). In
response, the opportunity was taken to further engage with
vulnerable customers, those who struggle with fuel poverty,
customers who require priority services and those whose welfare
could be affected in the event of an interruption to supply.
Collaboration with partners including the Children's Society, the
British Red Cross and Citizens Advice was undertaken to deliver
enhanced support to those groups with a greater need for
assistance.
Customer satisfaction continued to be a management priority and
therefore multi-year programmes remained in place throughout the
year to embed improvements into the overall customer experience. To
further develop the quality of customer conversations, defined
performance standards were implemented, supported by a pilot
recognition and reward scheme for employees. The Customer
Relationship Management ("CRM") IT system was further deployed
allowing faster responses with a greater degree of accuracy for the
management of customer complaints, general enquiries services and
service alterations. The use of technology (including the CRM
system) was further embedded to enhance the ways in which customers
can make contact with Northern Powergrid. Due to the initiatives in
place, with Northern Powergrid writing, emailing and sending text
messages to remind customers 72 hours and then 24 hours ahead of
any planned power cuts taking place, further progress was made
during the year to improve the level of customer satisfaction
relating to planned power cuts.
The effect of Northern Powergrid's operations on the local
landscape, and upon wildlife and birds remained important and,
accordingly, progress continued in the implementation of measures
designed to protect the environment. Incidents reportable to the
Environment Agency, including oil spills and leaks from Northern
Powergrid's assets and SF6 gas discharges from electrical plant,
were all significantly better than target. Given the impact on the
environment of such events, Northern Powergrid remains committed to
reducing losses from fluid-filled cables and, during the ED1
period, plans to replace a significant number of those assets on a
phased and prioritised basis.
The health and safety of the Group's employees, its contractors
and customers continued to be a key priority in 2016, with the
focus on delivering a safety and health improvement plan designed
to accomplish a world class safety performance. Education
concerning the dangers of coming into contact with the network's
assets and how people can identify these dangers remained a firm
commitment. A number of approaches were therefore deployed during
the year to communicate health and safety messages to the Group's
employees and stakeholders, including delivering regional school
safety presentations, running operational seminars for the Group's
engineers and circulating regular safety newsflashes to all staff.
The Group also placed emphasis on the identification of significant
health and safety risks and allocating the necessary resource to
put actions in place to mitigate those risks. Driving the Group's
vehicles has been identified as one such risk, and therefore a
robust road risk management plan was expanded throughout 2016. This
included the completion of the programme to install a telematics
system in all fleet vehicles to increase driver and vehicle safety
and to assist with vehicle safety checks.
IUS' external revenue in 2016, at GBP27.7 million was GBP3.2
million lower than 2015 mainly due reduction in revenues from Rail
contracts partially offset by an increase in other contracts.
Northern Powergrid Metering's performance was encouraging, with
it delivering the contracts secured with energy suppliers for the
provision of smart meters in the United Kingdom and Ireland, and
continuing to pursue business development opportunities with other
energy suppliers in advance of the full smart meter roll-out
programme.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
CORE PRINCIPLES
Financial strength
During the year, the Group continued to maintain good control in
respect of both its capital and operating costs by effectively
managing the various financial risks that could have had an adverse
impact on its business.
The ED1 price control provides the Group with some stability in
terms of its income until 31 March 2023. The ED1 price control has
been set for eight years with provision for a mid-period review of
the outputs that Northern Powergrid is required to deliver and, in
that respect, Northern Powergrid recognises that it needs to
continue to show that it is delivering reliable services to its
customers, while operating in an efficient and effective
manner.
Key aspects of financial performance for the 2016 year were as
follows:
Revenue
The Group's revenue at GBP384.9 million was GBP1.5m lower than
the prior year as lower distribution use of system and contracting
revenues were partially offset by increased smart meter rental
volumes. The distribution use of system revenue reduction was due
to tariffs introduced with effect from the start of the ED1
period.
Operating profit and position at the year end
The Group's operating profit at GBP181.2 million was GBP15.0
million lower than the prior year mainly due to reduction in
revenues and higher depreciation and amortisation charges.
The consolidated statement of financial position on pages 31 and
32 shows that, as at 31 December 2016, the Group had total equity
of GBP974.8 million. The directors consider the Group to have a
strong statement of financial position which, when coupled with the
preference of its parent company, Berkshire Hathaway Energy Company
("Berkshire Hathaway Energy"), for operating with lower levels of
debt than equivalent companies in the sector, creates a stable base
for continued strong performance into ED1 by Northern
Powergrid.
Finance costs and investments
Finance costs net of investment income at GBP37.8 million were
GBP3.2m higher than the prior year reflecting higher
borrowings.
Taxation
The effective tax rate in the year was 5.0%. The effective tax
rate before adjusting for the impact of the changes in tax rates by
the Finance Act 2016 and agreement of a prior year tax claim would
be 19.9%. Details of the income tax expense are provided in Note 7
to the accounts.
Results and dividends
The Group made a profit after tax for the year of GBP136.7
million (2015: GBP144.8 million). An interim dividend of GBP100
million was paid during the year (2015: GBP20.6 million). The
directors recommended that no final dividend be paid in respect of
the year to 31 December 2016. Other comprehensive income for the
year net of income tax, was a loss of GBP70.5m (2015: GBP2.5m
loss).
Share capital and debt structure
There were no changes to the Company's share capital or debt
structure during the 0year.
Cash flow
The Group aims to collect from customers and pay suppliers
within contracted terms. Any surplus cash held is remitted to
Yorkshire Electricity Group plc ("YEG"), a company in the Northern
Powergrid Group, and invested accordingly, generating a market rate
of return for the Group.
Movements in cash flows were as follows:
Operating activities: Cash flow from operating activities at
GBP168.9 million was GBP42.4 million higher than the previous year,
mainly as a result of higher cash profits, favourable movements in
working capital and lower tax paid.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
Financial strength - continued
Investing activities: Net cash used in investing activities at
GBP214.8 million was GBP9.6 million lower than the previous year,
reflecting lower capital expenditure partially offset by lower
receipt of customer contributions.
Financing activities: The net cash used in financing activities
at GBP37.5 million was GBP16.3 million higher than GBP21.2 million
inflow in the previous year, reflecting net movements in borrowings
required to fund business operations.
Liquidity risk
As at 31 December 2016, Northern Powergrid had access to GBP75
million under a five-year committed revolving credit facility
provided by Lloyds Bank plc, The Royal Bank of Scotland plc and
Abbey National Treasury Services plc. This expires on 30 April
2020. Northern Powergrid expects to raise further facilities, as
required, at that time.
In addition, Northern Powergrid has access to further short-term
borrowing facilities provided by YEG and to a GBP19 million
overdraft facility provided by Lloyds Bank plc, which is reviewed
annually.
The directors do not consider there to be any doubt over the
Group's ability to raise appropriate levels of finance in the
future, given its investment grade issuer credit rating and the
fundamental financial strength and nature of its business.
Interest rate risk
The Group is financed by long-term borrowings at fixed rates and
has access to short-term borrowing facilities at floating rates of
interest. As at 31 December 2016, 100% of the Group's long-term
borrowings were at fixed rates and the average maturity for these
borrowings was 12 years.
Currency risk
No material currency risks are faced by the Group.
Pensions
The Company is the principal employer of the Northern Powergrid
Group of the Electricity Supply Pension Scheme (the "Scheme"), a
defined benefit scheme. Full details of the Company's commitments
to the Scheme and the associated deficit repair payments are
provided in Note 24 to the accounts.
Companies in the Group also participate in the Northern
Powergrid Pension Scheme, which is a defined contribution
scheme.
Insurance
As part of its insurance and risk strategy, the Northern
Powergrid Group has in place insurance policies, which cover risks
associated with employers, third party motor and public liability.
The Northern Powergrid Group carries appropriate excesses on those
policies and is effectively self-insured up to the level of those
excesses. Consequently, the risk management and health and safety
programmes in place are viewed as extremely important elements of
the business, given the contribution they make to the elimination
or reduction of exposure to such risks.
Customer service
During the year, Northern Powergrid distributed electricity to
customers in its distribution services area and continued to
improve the overall performance of the distribution network through
an investment strategy targeted at delivering improvements in an
efficient and cost-effective manner. Northern Powergrid remains
focused on delivering a safe, reliable and dependable supply of
electricity, together with a high standard of service to its
customers.
Customer service improvements are a priority for Northern
Powergrid, which, in recent years had been consistently ranking in
the lower half of Ofgem's customer service league tables. Northern
Powergrid has a long-term goal to improve this position and has a
multi-year programme of actions in place to support improvements to
the overall customer experience.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
Customer service - continued
Customer satisfaction with Northern Powergrid's response to
unplanned power cuts showed gradual improvement in the year and the
focus remains on improving restoration times and proactively
communicating more timely and accurate information to customers.
Continuous improvements were made to the interactive voice response
telephony system throughout the year to make it easier for
customers to talk to a customer service advisor and to route their
calls appropriately. Customer satisfaction with planned power cuts
also showed some improvement with Northern Powergrid continually
enhancing the content of written customer communications and
continuing to provide a text and email service to remind customers
72 hours and then 24 hours ahead of the planned power cut taking
place.
A framework was introduced during 2016 to define the high
standards required of our staff when interacting with our
customers, supported by a pilot recognition and reward scheme as
well as a performance management structure.
Northern Powergrid has continued to invest in improving the
reliability of under-performing parts of the distribution network
by identifying "hot spots" of substandard network performance and
taking specific action to address the issues in those areas. In the
customer service support areas, further investment has been
directed towards information technology with the continued
deployment of the new CRM system for customer complaints,
additional general enquiries services and service alterations, to
both improve the self-service offering and provide quicker and more
accurate information to customers with workflows automatically
routed within both Northern Powergrid and its contractors. This
technology will enable customers to communicate with Northern
Powergrid in a range of accessible and easy ways across several
channels.
During the year Northern Powergrid has continued to build on the
industry-leading communications and engagement approaches used to
support its business plan and maintains a number of engagement
channels. Independently chaired expert panels continue to play a
key role in challenging Northern Powergrid's plans, monitoring its
performance and helping to deliver innovative initiatives and
services. Guided by these panels, Northern Powergrid has been able
to direct effort towards public meetings in the operating zones,
community energy workshops aimed at enhancing the take-up of
low-carbon technologies and wider collaborations such as with other
utilities via Infrastructure North. The feedback received as part
of the stakeholder engagement process helped Northern Powergrid to
further develop its customer experience improvement and social
obligations programme.
Northern Powergrid recognised that the evolving nature of the
environment and the level of customer service provided in respect
of new connections to the network required additional significant
focus and, as such, initiated a fundamental business process
re-engineering review of this area of the business. Further details
regarding the connections activity in the year are provided under
"Connections to the network" below.
The single emergency number, 105, went live in September 2016,
providing customers with a free national easy to remember phone
number. During the winter period of 2016, approximately 28% of all
inbound calls relating to power cuts were received via the 105
number, calls that previously would all have been made to Northern
Powergrid's Freephone contact numbers.
In May 2016, Northern Powergrid put forward its stakeholder
engagement and customer vulnerability submission to Ofgem in
respect of its work during the year. This included initiatives such
as expanding the role of digital solutions in providing customer
services and the enhancement of Northern Powergrid's relationship
with some voluntary sector organisations, with which it works
closely in developing and delivering certain services particularly
in respect of those customers on Northern Powergrid'ss Priority
Services Register. Following the submission to Ofgem's panel, the
position of Northern Powergrid in the context of the wider DNO
group dropped from second place to fifth. The outcome was
disappointing and in response to Ofgem's feedback some changes were
initiated.
Under the Broad Measure of Customer Satisfaction, an independent
market research company carried out telephone surveys with Northern
Powergrid's customers to find out how satisfied they were with the
services provided. During the year, surveys were carried out with a
number of customers who had contacted Northern Powergrid regarding
an unplanned or a planned power cut, had requested a price
quotation and a subsequent connection, or had a general enquiry
where a service had been provided or a job completed. Northern
Powergrid recorded an overall satisfaction score of 86.4%.for the
financial year and expects that the customer experience improvement
plan, including the range of initiatives noted on pages 6 and 7,
will improve the services provided to customers and so increase the
satisfaction ratings year-on-year.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
Customer service - continued
While recognising that its customer service performance can
continually be improved, Northern Powergrid made significant
progress during the year ameliorating its overall customer
satisfaction scores.
Connections to the Network
During the year, Northern Powergrid continued to deliver its
action plans to improve the connections services provided to its
customers, whilst also actively facilitating the development of
competition from independent connections providers ("ICPs").
Northern Powergrid continued to engage regularly with its
connections customers both in groups and individually, by holding
monthly customer surgeries, twice yearly customer stakeholder
events and contributing to national stakeholder forums and
events.
There were three main areas of development in Northern
Powergrid's connections business during the year: the introduction
of the new Competition in Connections Code of Practice, compliance
with which became a licence condition with effect from the end of
October 2015, the introduction of the full Incentive on Connections
Engagement ("ICE") regime in April 2015 and the introduction of a
customer service improvement programme to deliver improvements in
customer satisfaction for connections customers.
The delivery of the customer satisfaction improvement programme
continued to evolve during 2016, with its focus being in response
to actions derived from customers' feedback obtained from weekly
Ofgem telephone surveys. The programme is designed to support
Northern Powergrid's goal to be the leading provider of customer
service within the electricity distribution sector.
Northern Powergrid participated with other DNOs in the
development of the new Competition in Connections code of practice
and implemented the required new processes, including the provision
of dual quotations, enabling ICPs to self-determine and approve
points of connection to the network, and simplifying the
authorisation process for ICPs' operational staff.
The start of the ED1 period saw the introduction of ICE in
respect of customers requiring larger connections to the network,
so that the needs of those customers can be met more effectively.
Under ICE, Northern Powergrid is required to submit a customer
service improvement work plan for the forthcoming regulatory year
at the end of April, followed by a comprehensive "looking back and
forward" report commenting on the actions delivered in the previous
year and future actions proposed in the service improvement plan.
Northern Powergrid worked throughout the year to deliver those
actions and continued to engage actively with customers through
both informal and formal stakeholder events.
Corporate responsibility
The Group as a whole places significant value on the
relationships that it has with its customers and other stakeholders
and relating to Northern Powergrid in particular, also understands
the importance of ensuring a secure and safe power supply for its
customers and their local communities. To further embed these
values, Northern Powergrid has developed a vision to maximise the
value of contact with customers, especially those who are
vulnerable and hard to reach, while ensuring that all stakeholders
have the opportunity to influence the local and national energy
agenda through effective engagement. This vision applies Ofgem's
feedback to Northern Powergrid in the Stakeholder Engagement and
Consumer Vulnerability review directed at a cohesive approach to
customer experience; consumer vulnerability and stakeholder
engagement. Northern Powergrid has made a commitment to tailor and
enhance the support provided for more vulnerable and hard to reach
customers and to ensure an optimum overall customer experience. In
addition, through effective engagement, stakeholders can shape and
influence Northern Powergrid's agenda and have the opportunity to
help shape and prioritise plans according to customer
preference.
Northern Powergrid continued to work closely with key partners
such as the Environment Agency, the local authorities and the local
resilience forums so that it can respond quickly to significant
faults on, or threats to, the network. An example of this
collaboration in the year included the cascade of the new national
'105' number, designed to make it easier for partners and customers
to quickly get in touch to report a problem. Northern Powergrid has
well-established emergency procedures that are implemented when
customers are without power for some time and, as such, Northern
Powergrid responded well to the significant weather-related
incidents, which affected the distribution network during the
year.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
Customer service - continued
To address customer concerns and resolve any complaints,
Northern Powergrid utilises its customer ambassadors and customer
liaison officers, who are allocated to each of its operating zones,
Dedicated Priority Service Register co-ordinators contact our
vulnerable customers to offer support during and after a power cut.
Support may include liaising with staff from the British Red Cross
who check on the welfare of the customer.
Northern Powergrid has developed its support for vulnerable
customers based on market research which defined where and what
assistance was most needed. This work has been supported by
Northern Powergrid's Social Issues Expert Group which comprises
external experts and advises on service improvements. Membership of
the internal Social Responsibility Management Group has been
widened to include more business representatives to help develop
this programme. Northern Powergrid continued to campaign to promote
the Priority Services Register to eligible customers and now has a
clear view of service need profiles for each customer to inform the
appropriate priority service response. Northern Powergrid has
undertaken a comprehensive data cleanse process for the Register
and developed a proactive contact programme to routinely renew
records and ensure that the quality of the information held on the
register and the services offered to priority services customers
continue to improve.
The Northern Powergrid Group has maintained its support to
charitable organisations through sponsorship and the "Safety
Champions" initiative, which is aimed at enhancing safety
performance in the operational zones. Furthermore, a volunteering
policy was implemented permitting employees to volunteer on schemes
specifically designed to support the five priority areas within the
Group's community investment programme.
Safety remains the Group's first priority and underpins all
operations. During the year, Northern Powergrid continued to
deliver initiatives that reached thousands of school children
including its regular series of school safety presentations.
Northern Powergrid participated in 'Crucial Crew', which is a
schools-based safety initiative that teaches children to recognise
and avoid situations that put them in danger.
Other programmes expanded during the year included Make the
Grade in Energy, an education, skills and employability programme,
Energy Heroes, a new educational programme, which uses the maths
curriculum at primary school level to promote awareness of energy
costs and ways of saving energy, and Green Doctors, a multi-partner
project which helped to install energy saving measures and give
advice to fuel poor households. New projects undertaken in the year
included a partnership with the Children's Society, which aims to
support young people and families through specialist support
services, including work sessions and group activities, and the
creation of an outreach worker in Citizens Advice to train
volunteers to help more vulnerable people, particularly those with
fuel debt.
Operational excellence
Northern Powergrid's core service continues to be providing and
maintaining an efficient distribution network that delivers
electricity effectively. During the year, GBP181.3 million was
invested in the improvement of the distribution network. Northern
Powergrid's inspection and maintenance regimes have ensured that
the underlying health of the network assets has been sustained and
none of the leading indicators used by Northern Powergrid suggest
any diminishing performance in this respect in the future.
Ofgem's incentive scheme for quality of service provides a
measure of the level of customer service. As a result of Northern
Powergrid's continued and substantial investment in its
distribution network, reliability has increased over a sustained
period and Northern Powergrid has generally outperformed in
relation to the customer service targets set by Ofgem in respect of
customer interruptions ("CI") and customer minutes lost
("CML").
CML and CI are the key performance indicators used by Northern
Powergrid to measure the quality of supply and system performance.
Both indicators are measured on a Regulatory Year basis, which runs
annually to 31 March, (being 31 March 2016 for the period covered
by this report). CML measures the average number of supply minutes
lost for every connected customer due to both planned and unplanned
power cuts that last for three minutes or longer. CI measures the
average number of supply interruptions per every 100 connected
customers due to planned and unplanned power cuts that last for
three minutes or longer.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
Operational excellence - continued
In respect of these key customer service performance indicators,
the goal is to achieve performance that is below Ofgem's target
number in respect of CML and CI. Northern Powergrid's currently
reported performance for the Regulatory Year is as follows:
Year to 31 March 2016 Year to 31 March 2015
Actual Target Actual; Target
CML 50.1 <65.9 56.1 <70.6
CI 58.3 <63.8 65.3 <68.1
Consequently, performance in the Regulatory Year was better than
Ofgem's target for both CML and CI and contributed to Northern
Powergrid's improved customer service performance.
Operational activity
During 2016, Northern Powergrid continued to implement its
approved network investment strategy, which is designed to deliver
improvements in an efficient and cost-effective manner in order to
improve the network's resilience. Northern Powergrid is committed
to enhancing the reliability of the network such that fewer power
cuts affect customers and, when power cuts do happen, they are
shorter in duration.
Northern Powergrid's Operations structure is designed to respond
effectively to the needs of customers and local communities by
delivering improved performance standards in the restoration of
power following power cuts and in new connection activities for
small works. That structure is organised into operating zones
around the main conurbation of Tyne and Wear, the industrialised
area around the Tees and the rural areas of Northumberland, Durham
and North Yorkshire, including the Dales, the Vale of York and the
North Yorkshire Moors. The guaranteed standard for the restoration
of supply within 12 hours of a power cut occurring came into effect
from 1 April 2015 and Northern Powergrid's operational structure
provides a localised focus to optimise response times in the event
of a power cut.
During the year, Northern Powergrid continued to invest in
technology to support its drive to improve response times,
including the expansion of the automated power restoration system
("APRS") which operates within the existing network management
system. In the event of a high-voltage fault, APRS analyses the
information presented by intelligent assets installed on the
network and, from that information, determines where the fault is
located and executes switching to restore power to the 'healthy'
network in a safe manner in under three minutes.
It is planned to enable APRS at 306 primary substations across
the Northern Powergrid Group by the end of the ED1 period. Northern
Powergrid expects, therefore, that APRS will significantly improve
the service to customers due to the speed with which it can
understand the information presented and then complete the
switching required to restore power.
Northern Powergrid responded well to the major weather events
that impacted its network during the year including as a result of
three significant events which resulted in Northern Powergrid
invoking its full major incident management plan on each
occasion.
Storm Gertrude brought 70 to 80mph winds widely across the whole
licence area on the 29 January 2016, causing almost 100 separate
incidents, of which 50 were on the high-voltage network.
Approximately 25,000 customers experienced power cuts mainly in
Northumberland, County Durham and Tyne and Wear with 98% restored
within 12 hours. Over 300 field staff were deployed in response
with helicopter patrols assisting with fault location when the
weather allowed.
An intense lightning storm crossed Northumberland and Tyne &
Wear during the early hours of 16 September 2016. Due to the high
overnight temperatures and atmospheric conditions, the localised
lightning was very damaging and gave rise to over 86 faults on the
high-voltage network affecting supplies to some 42,000 customers.
99% of affected customers' supplies were restored in 12 hours with
only 17 customers being off supply for more than 24 hours.
Following a particularly dry month, heavy rain caused
accelerated low-voltage cable failures across Northumberland,
Durham, Tyne and Wear and Teesside on 22 November 2016. Due to the
localised nature of each incident, overall numbers of customers
affected were small, but the nature of repairs required meant that
over 584 customers were off supply for more than 12 hours.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
Operational excellence - continued
Northern Powergrid's priorities during the year included
delivering a significant level of capital expenditure on the
network as in the previous year, a further reduction in the average
level of fault repair work in progress and continued focus on the
restoration times associated with both high-voltage and low-voltage
power cuts, with high-voltage restoration performance averaging
some 60.0 minutes (2015: 55.6 minutes), after allowing for severe
weather incidents and other exemptions.
Northern Powergrid undertook various major projects during the
year in support of those targets and as part of the investment
strategy, including:
- Completion of the work to reinforce the network
around Potterhouse substation and replacement
of one 66kV circuit breaker at Peterlee Industrial
substation;
- Refurbishment of eight EHV transformers, including
four at 66kV and four at 33kV;
- Cable replacement work on the Coalburns - Prudhoe
66kV underground cable circuit with 1.8km of oil
filled cable decommissioned and on the Bowesfield
- Urlay Nook 1 33kV circuit 1km of solid cable
was replaced. Work also commenced on the second
phase of the Sunderland - West Boldon scheme which
will result in the eventual decommissioning of
16km of 66kV oil-filled underground cable assets;
- Commissioning of 20km of 66kV underground cable
on the 66kV circuit route which runs between Malton,
Thornton Dale and Whitby in order to facilitate
the decommissioning of the overhead towers from
the North Yorkshire Moors in 2017;
- Refurbishment of twelve 132kV overhead line towers
and 286 EHV overhead line towers and the replacement
of two EHV poles based on their condition;
- 96km of high-voltage overhead line and 78km of
low-voltage overhead line were rebuilt and/or
refurbished;
- 14 units of high-voltage outdoor switchgear, 36
high-voltage distribution substations and 190
units of high-voltage indoor switchgear were replaced;
and
- 360 additional remote control points were installed
and commissioned.
In order to deliver its investment strategy, Northern Powergrid
undertook its activities using a mix of its own staff and
contractors, including affiliated companies in the Northern
Powergrid Group.
Employee commitment
Health and safety
The focus on health and safety continued to be of paramount
importance for the directors, as it is for all employees. There is
a continuous drive for improvement in safety performance through
the setting of challenging goals and the pursuit of a comprehensive
safety and health improvement plan, which reflects the Group's
fundamental objective that every employee and contractor should go
home uninjured and in good health after a productive day's work.
The Northern Powergrid Group makes no compromise in respect of its
health and safety obligations and centres its safety plans and
systems on the principles found in companies with world class
safety performance.
The Group's safety record over a number of years suggests that
it is one of the safest in the sector in which it operates. There
is an intention to improve performance still further and, in doing
so, maintain its position over the coming years. Having identified
issues that may pose an increased safety risk, such as metal theft
and the roll-out of smart meters, the Group is implementing
measures through its safety and health improvement plan that will
build incrementally on the existing strong safety record and ensure
that safety considerations are always part of the investment
decision-making and appraisal process.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
Employee commitment - continued
The Northern Powergrid Group measures its health and safety
performance in calendar years and operational incident performance
for the year ended 31 December 2016 had significantly improved with
only three switching-related incidents experienced on the
high-voltage network against a target of five and compared with
eight events recorded in 2015. As one of the key deliverables in
the Northern Powergrid Group's safety and health improvement plan
is to raise awareness and improve the concentration skills of its
operational engineers and other employees, Northern Powergrid
continued its operational audit programme of senior authorised
persons such that the operational practices of 81% of senior
authorised persons were verified during the year. The Northern
Powergrid Group also delivered operational seminars, stand-down
briefings, and regular safety newsflashes to staff in order to
cascade information on safety trends, issues and incidents.
Several key performance indicators are used to monitor safety
performance, with the goal of achieving performance that is below
the target number. The main key performance indicators are as
follows:
2016 2015
Target Actual Target Actual
Lost time accidents 1 1 1 2
Restricted duty
accidents 1 0 1 0
Medical treatment
accidents 1 1 1 0
Operational incidents 6 4 5 8
Preventable vehicle
accidents 11 13 10 9
The Group experienced one lost time accident in 2016 as opposed
to two in 2015. In addition the Group incurred one accident that
required medical treatment (none during 2015). Performance in
respect of preventable vehicle accidents was above the target for
the year. The Group contributed to the strong safety performance of
the Northern Powergrid Group and the long-term overall trend
continued to compare well with that of the industry. None of those
incidents reported gave rise to any significant safety-related
risks.
In common with the Berkshire Hathaway Energy Group, the Northern
Powergrid Group measures its safety performance in terms of the
OSHA rate, which is a measure used in the United States to capture
safety incidents down to minor levels of medical treatment, such as
a stitch or the use of prescription pain killers. As part of its
plan to reduce the OSHA rate across the group, Berkshire Hathaway
Energy issues daily e-mail updates in respect of performance
against its overall OSHA rate and preventable vehicle accident
targets, which include information on incidents that have occurred.
The Group's Director of Safety, Health and Environment also
delivered updates using conference call facilities, which were
available to the entire workforce, regarding performance and other
safety-related issues.
Delivery of the various initiatives in the safety and health
improvement plan also contributed to the Northern Powergrid Group
achieving an OSHA rate of 0.30 against a target of 0.30, which
equated to seven recordable incidents; this was one more than
performance recorded in 2015. The Group recorded an OSHA rate for
2016 of 0.20 (2015: 0.20) against a target of 0.32.
As part of the safety and health improvement plan and in order
to reinforce the operational safety values, Northern Powergrid
continued to implement its cross-business operational assurance
audit programme and its senior management field engagement
programme in order to improve two-way communication on safety and
other key business issues. During the year, a robust road risk
management plan was effective which involved electronic driving
licence checking, delivering road risk awareness workshops to new
employees and using risk reduction tools such as online driver
assessment and training followed by an on-road refresher training
session if required. The driver training programme provides
practical driving training to a targeted population of drivers and
is the primary route to improving driver skills in the longer term.
Recognising that driving is one of most hazardous activities
undertaken on a daily basis, the programme has continued to expand
further throughout 2016 via an interactive, web-based system
designed to assess skills and then provide individual training
plans to improve hazard perception and reinforce specific aspects
of driving-related skills. The Group also completed a programme to
install a telematics system in all of its fleet vehicles in order
to support driver and vehicle safety by encouraging responsible and
safe driving styles, assist with the completion and management of
vehicle safety checks, and expedite investigation of vehicle
accidents and incidents.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
Employee commitment - continued
During the year, Northern Powergrid received an Order of
Distinction Award from the Royal Society for the Prevention of
Accidents for achieving 15 consecutive Gold Awards in recognition
of achievements in 2015 and for continued or improving standards of
health and safety over a sustained period. The Group's OHSAS 18001
health and safety management systems successfully retained
certification having been subject to a ten-day recertification
audit by an external auditor.
The sickness absence rate across the Northern Powergrid Group
for 2016 was 2.96% (2015: 2.71%).
Management structure
Operational management of Northern Powergrid and that of its
affiliate, Northern Powergrid (Yorkshire) plc ("NPg Yorkshire"), is
undertaken by a single senior management team with specific
functional responsibilities. Those functional responsibilities are
in respect of operations, safety, health and environment, asset
management (including procurement), customer service, business
development (including new connections to the network), policy and
markets (including trading and innovation), regulation, human
resources, organisation development, legal and finance (including
property management, stakeholder engagement and information
technology). Some of those functions also provide services across
the Northern Powergrid Group.
Employees
The Group continued to apply appropriate control to its
headcount policy and to place significant emphasis on the
importance and application of high standards of management and
performance in support of the Core Principles. The Group ensures
that a level of consistency is adopted in so doing and, in respect
of employee relations, continued to build constructive and
partnered relationships with the trades unions. In that respect,
the Group has secured multi-year pay agreements with the various
employment groups such that the relevant terms and conditions are
fair and appropriate across the Northern Powergrid Group.
The Northern Powergrid Group will continue to recruit trainees
under its workforce renewal programme during ED1 taking account of
the rate at which existing employees either leave or retire from
the Northern Powergrid Group. A total of 71 new recruits joined the
workforce renewal programmes during 2016. In addition, 73 trainees
who were part of the workforce renewal programme in previous years
graduated from their training programmes. In total, the Northern
Powergrid Group recruited 95 new employees from the external
market.
As a member of the Berkshire Hathaway Inc. group of companies,
Berkshire Hathaway Energy sets high expectations for honesty and
integrity in the conduct of all business activity. Consequently,
the Group is committed to proper business conduct and has adopted
the Berkshire Hathaway Energy code of business conduct, which
details the commitment to ethics and compliance with the law,
provides reporting mechanisms for known or suspected ethical or
legal violations, and establishes minimum standards of behaviour
expected of all employees. All employees must complete annual
training on the code of business conduct. A "speaking up" policy is
also in place so that members of staff are able to raise any
instances of unethical acts, malpractice or impropriety. An
additional process is also available to all staff via an
international, anonymous help line operated by an independent
company.
In order to support the welfare of its employees, the Northern
Powergrid Group provides an employee assistance service to its
staff via an independent company that supports over 350
organisations in the United Kingdom. The programme is a
confidential, self-referral counselling and information service to
assist with personal or work-related problems that may be affecting
health, wellbeing or performance and is available 24 hours a day,
365 days a year. The services available include health, wellbeing
and family-care information, financial information and debt
counselling, and legal guidance. Working in partnership with its
occupational health provider, the Northern Powergrid Group is
delivering a long-term strategic programme aimed at improving the
health of its staff.
Progress continued to be made during the year on the key
priorities in the human resources and organisational development
functions, including recruitment, employee engagement, and
performance management and development. Throughout the year, the
Group continued to set and uphold the promotion of high standards
of probity among staff. In addition, the Group's organisational
structure has been developed to control business units and to
delegate authority and accountability, having regard to acceptable
levels of risk.
As at 31 December 2016, the Group employed 1,238 staff
(2015:1,297)
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
Environmental respect
The Group's approach to environmental compliance is governed by
an environmental policy and, in addition, the policy of
Environmental RESPECT (Responsibility, Efficiency, Stewardship,
Performance, Evaluation, Communication and Training) implemented by
Berkshire Hathaway Energy. These policies and their subordinate
operational control procedures and systems address compliance with
legal and other key environmental requirements, pollution
prevention and continual improvement, and also promote
environmental awareness and best practice amongst the Group's staff
and contractors.
The Group has operated a United Kingdom Accreditation Service
scheme for environmental management since the late 1990s, certified
to the environmental management systems standard ISO 14001: 2004.
It is subject to regular six-monthly assessment visits and a
three-yearly certificate renewal assessment by an accredited
external certification body in order to retain that status.
The most recent visit was a surveillance assessment carried out
by Lloyd's Register Quality Assurance in October 2016. The
assessment reported the continued improvement made to the
environmental management system over the past three years. There
were no non-conformances noted and, after a rigorous three-day
surveillance audit, continued certification was recommended and
subsequently confirmed.
Procedures and processes were reviewed and developed in the year
to improve the effectiveness of the environmental management
system. Operational controls at depots have also significantly
improved, which has supported the reduced number of minor
non-conformances raised at recent surveillance visits, with zero
minor non-conformances reported in 2016. In the event that fluid
leakages do occur, the Group has in place an emergency incident
response support contract with a specialist service provider, under
which 24-hour environmental incident assistance is provided,
including contamination mitigation, remediation and
incident-validation reporting.
Improvements in support of Northern Powergrid's environmental
policy objectives continued to focus on replacing selected
fluid-filled cable sections with non-fluid polymeric equivalents,
replacing oil-filled circuit breakers with vacuum and sulphur
hexafluoride gas-filled units at outdoor substations to reduce the
potential for oil leakage and using gas tracer technology to locate
cable fluid leaks quicker, where it was practicable to do so. The
Group also provided environmental awareness training for staff via
an online system to avoid the need for travelling to central
training locations. These improvements support Northern Powergrid
in delivering sustained environmental performance, which it
measures on a calendar year basis, and, in the year ended 31
December 2016, only five incidents were reportable to the
Environment Agency, which was significantly better than the target
of seven. Oil spills and leaks from Northern Powergrid's assets
were under the target of 17,142 litres by 1% with a loss of 17,044
litres and SF6 gas discharges from electrical plant were also under
the target of 28 kilogrammes by 49% with a loss of 14
kilogrammes.
During the year, work continued with many of the Group's key
stakeholders, including the Environment Agency, to enhance the
advanced environmental management processes already in place and,
in 2017, the Group plans to maintain this progress so that the
impact on the environment in which it works is reduced and the most
effective ways of doing so are utilised. Northern Powergrid's
business plan contains a commitment to reduce its business carbon
footprint by 10% by the end of ED1 and performance remains on
course to achieve that target.
The Group's commitment to the Environmental RESPECT policy and
its improved overall performance contributes towards minimising its
impact on the environment. As part of its annual environmental
improvement plan, Northern Powergrid has mobilised significant
programmes to replace fluid-filled cables and place overhead lines
underground in National Parks and Areas of Outstanding Natural
Beauty, reduce electrical losses and implement further improvements
to the network that take account of protected structures, features,
areas, wildlife and habitat. Birdlife is being protected by placing
bird-diverters on power lines where they are in proximity to nature
reserves, wetlands, flight paths or in locations where rare species
of bird are known to live or breed and also in response to
information obtained from incident trends. Northern Powergrid
continues to work with local social enterprises that rescue waste
timber in order to provide affordable reclaimed timber products to
the local community.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
Environmental respect - continued
Sustainability
The Northern Powergrid Group's activities have an important part
to play in the United Kingdom's transition to a low-carbon economy,
both in its capacity as a major participant in the United Kingdom
energy industry and in terms of its own carbon footprint.
As the country takes action to make significant reductions in
its carbon emissions, the way in which electricity is produced and
used is expected to have a significant impact on the electricity
network over time. Evidence of this has already been seen through
the number of installations made by customers of low-carbon
technologies such as photovoltaic solar panels, electric vehicles
and heat pumps which continued to increase during the year and are
reported via the regulatory reporting process. The volume and total
capacity of decentralised energy generation has also been growing
steadily for the last few years and, given the greater range of
load and generation technologies now being connected to the
network, Northern Powergrid is taking action to develop innovative
solutions that will reduce the need for traditional and potentially
expensive reinforcement of the network.
The Northern Powergrid Group's innovation projects have
continued this year from the platform established by the
ground-breaking Customer-Led Network Revolution ("CLNR") programme
of work that concluded in 2015. The four priorities of smart grids,
smart meters, digital-enabled services and issues of affordability
continue to be highly relevant to our stakeholders. In the smart
grid area, the transition to distribution system operator is taking
increased prominence in the innovation portfolio. During the year,
Northern Powergrid completed work to better understand how local
energy markets may develop, the potential impact of future market
models and the role of new players such as local authorities.
Deployment of innovation in the year has delivered GBP7.5 million
of value, with around half of that centred on releasing capacity
and providing flexible connections for immediate customer
benefit.
The Northern Powergrid Group climate change adaptation strategy
outlines the impact that climate change is anticipated to have on
the business, the risks that this poses and the proposals
recommended to mitigate these risks. The proposals include flood
defences, vegetation management, network specifications for
changing temperatures, improved weather prediction, and adequate
staff availability. The planned number of flood defences to be
installed during the year was not achieved. This was primarily due
to the re-tendering of the delivery contract. Under the re-phased
programme the delivery of the overall commitment to install further
flood defences during the ED1 period remains on-track.
Environmental performance was strong with incidents reportable
to the Environment Agency, fluid loss and the Northern Powergrid's
carbon footprint being lower than targeted. Northern Powergrid's
policy of installing over-sized cables continues to save network
losses, which contributed to further carbon emission
reductions.
Regulatory integrity
The Group manages its business to the highest behavioural
standards and adheres to a policy of strict compliance with all
relevant standards, legislation and regulatory conditions. The
Governance and Risk Management Group ("GRMG") is the principal risk
management forum in the Northern Powergrid Group, and monitors and
manages performance in risk-related and compliance areas. The GRMG
met on three occasions during the year in order to review the
mechanisms for meeting external obligations, to strengthen the
business-control-improvement environment, and to consider and
advise on key strategic risks facing the Group.
As has been the case for some years, breaches by a DNO of its
licence conditions and certain other statutory requirements could
lead to financial penalties, which Ofgem has stated "will have a
proportionate impact on shareholder returns". In order to assure
compliance with licence and other regulatory obligations, Northern
Powergrid operates a regulatory compliance affirmation process,
under which ownership of approximately 1,780 regulatory obligations
contained within the compliance database is currently assigned to
around 75 responsible managers. Those responsible managers are
required, on a quarterly basis, to review compliance with the
relevant obligations that have been assigned to them for
certification and report on any identified non-compliances or
perceived risks to the compliance process, which are then
addressed. The Head of Regulatory Compliance reports to the board
of directors on the outcome of each quarter's exercise.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
Regulatory integrity - continued
Under the RIIO (revenue = incentives + innovation + outputs)
model for regulation, price controls are set for eight years
(rather than five as has previously been the case), with provision
for a mid-period review of the outputs that network companies are
required to deliver. The ED1 price control became effective on 1
April 2015 and is due to end on 31 March 2023.
Under the ED1 price control, excluding the effects of incentive
schemes and any deferred revenues from the prior price control,
Northern Powergrid's base allowed revenue before inflation reduced
by 1.0% for the regulatory year ended 31 March 2017, relative to
the previous year. Base allowed revenues before inflation will then
be constant for each subsequent regulatory year through to the
regulatory year ended 31 March 2023. Nominal base allowed revenues
will therefore increase in line with inflation (as measured by the
United Kingdom's Retail Prices Index).
The ED1 price control is the first to be set for electricity
distribution in Great Britain since Ofgem completed its review of
network regulation (known as the RPI-X @ 20 project). The key
changes to the price control calculations, compared to those used
in previous price controls are that:
- the period over which new regulatory assets are
depreciated is being gradually lengthened, from
20 years to 45 years, with the change being phased
over eight years;
- allowed revenues will be adjusted during the price
control period, rather than at the next price
control review, to partially reflect cost variances
relative to cost allowances;
- the allowed cost of debt will be updated within
the price control period by reference to a long-run
trailing average based on external benchmarks
of public debt costs;
- allowed revenues will be adjusted in relation
to some new service standard incentives, principally
relating to speed and service standards for new
connections to the network; and
- there is scope for a mid-period review and adjustment
to revenues in the latter half of the period for
any changes in the outputs required of licensees
for certain specified reasons.
Many other aspects of the previous price control remain in place
(either in their previous or similar form), including adjustments
to revenues in relation to the number and duration of service
interruptions and customer service standards. In addition, network
tariffs, from which actual revenues are derived, are now set
further in advance than was previously the case.
With the start of the new price control, changes were also made
to the legislation that prescribes the standards of service to be
provided by the DNOs in specified circumstances and payments to be
made to end-customers for failure to meet those standards. The most
significant of these changes reduced from 18 to 12 hours the time
that is allowed for restoration of supplies following an unplanned
power cut in normal weather conditions.
Northern Powergrid submits a number of information returns to
Ofgem and is required, under the terms of the Northern Powergrid's
licences, to assure the accuracy of those returns. These
arrangements involve the preparation and submission to Ofgem, by
the end of February in each year, of a risk-based data-assurance
plan for the regulatory year ahead, together with a report
detailing the assurance work actually carried out in the regulatory
year just ended and the findings of that work.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
PRINCIPAL RISKS AND UNCERTAINTIES
There are a number of potential risks and uncertainties, which
could have an impact on the Group, its financial position and its
operations and may cause actual results to vary materially from
those expected or historically experienced. The principal risks are
outlined as follows:
Financial risk
As a holder of an electricity distribution licence, Northern
Powergrid is subject to regulation by the Gas and Electricity
Markets Authority (GEMA), which acts through Ofgem. Most of the
revenue of the electricity distribution licence holders is
controlled by the distribution price control formula set out in the
electricity distribution licence.
The price control formula does not constrain profits from year
to year but sets the maximum permitted revenue for each regulatory
year, taking into account base allowed revenues and movements in
Retail Prices Index ("RPI"), as well as factors such as performance
against certain regulatory incentives. Where Northern Powergrid
recovers more, or less, than this maximum the difference is carried
forward, with interest. For amounts relating to the regulatory year
ended 31 March 2016, the carry forward will be into the entitlement
for the regulatory year ended 31 March 2018.
The price control for ED1 has been set for the eight-year period
commencing on 1 April 2015, although the price control formula may
be reviewed at other times at the discretion of Ofgem, and it is
Ofgem's intention to use eight-year price control periods in the
future. A resetting of the formula is now made by GEMA without the
consent of the electricity distribution licence holder, but a
licensee can appeal to the CMA against a decision by GEMA to
proceed with such a modification. Certain other interested parties
have the same right.
During the term of the price control, the rate of inflation as
measured by RPI is taken into account in setting Northern
Powergrid's allowed income in respect of each regulatory year.
Consequently, one of the risks faced by the Group is that its costs
may increase by more than RPI. Any changes in costs incurred will
have a direct impact on Northern Powergrid's financial results, as
will changes in performance under incentive schemes, such as in
customer service, which can lead to adjustments to allowed
revenues.
Ofgem recognises that defined benefit pension schemes and,
particularly, the current deficit positions of various schemes,
represent a significant cost to the DNOs and, in its final
proposals in respect of the previous price control period
("DPCR5"), Ofgem confirmed that DNOs would be allowed to recover
the actuarial value of the deficits attributable to a licensee's
distribution business in existence as at 31 March 2010 via its
regulated revenues (after an adjustment to reflect the residual of
unfunded early retirement deficiency costs as at 31 March 2010).
Ofgem re-affirmed these principles in its ED1 final
determination.
However, given the stable and regulated nature of the DNOs'
businesses, Ofgem took the view that a notional repair period of 15
years from 1 April 2010 was appropriate for the purpose of
assessing the DNOs' allowed revenues in respect of pension costs.
Moreover, Ofgem reviews the reasonableness of the triennial
actuarial valuations of DNOs' pension schemes and calculates new
deficit funding allowances, including any adjustments that may be
necessary to account for differences between allowances received
and payments actually made to the relevant pension scheme.
The other financial risks facing the Group are outlined on page
6 of this Strategic Report.
Operational risk
There are a number of risks to Northern Powergrid's operational
performance in respect of which mitigating actions have been taken.
Appropriate credit cover arrangements are in place with the
electricity suppliers, which would allow recovery of defaulted
payments through the price control mechanism and a robust major
incident management plan is implemented whenever severe weather
impacts on the distribution network's performance. Given the
regular instances of metal theft experienced in previous years,
Northern Powergrid maintained its programme of risk-assessed and
enhanced security measures at its sites and pursued awareness
raising activity at a national and local level, including
commencing a social media campaign in early 2016 in partnership
with Crimestoppers.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
PRINCIPAL RISKS AND UNCERTAINTIES - continued
The electricity distribution business has an inherently
increased health and safety risk due to the network operating at up
to 132kV. Employees work at height, in closed spaces and with live
electricity, increasing the risk of potential safety matters.
Health and safety is given the highest priority within Northern
Powergrid and strict policies and procedures are in place both to
ensure the safety of the employees and customers.
Cyber security is an increasing risk. The Northern Powergrid
Group has a robust cyber security risk mitigation programme in
place including gaining accreditation under of ISO 27001
Information Security (process security) standard for certain
discrete business areas, plus compliance with the Centre for
Internet Security Critical Security Controls. Further advances to
this are being continuously implemented and managed.
Northern Powergrid recognises that there are uncertainties
around the future take-up of low-carbon technologies and the
resulting capacity requirements for the network, and from the
fitting of smart meters throughout Northern Powergrid's
distribution services area, which is expected to result in a
requirement to address a proportionate number of reported defects.
Northern Powergrid believes that it can effectively manage these
issues through its usual risk management practices.
Commercial risk
Managing commercial risk continued to be of key importance and
the Group remained focused on ensuring that its policies for credit
checking, payment terms, payment performance tracking and debt
management were strictly adhered to.
Northern Powergrid's relationship with its main customers is
governed by a distribution connection and use of system agreement
("DCUSA"), which is in place with each of those customers. Those
customers are the electricity suppliers who, under the terms of the
DCUSA, pay charges for the use of the distribution network, in
respect of which it is necessary to ensure that credit cover
arrangements in line with Ofgem's guidance remain in place. The
principal electricity suppliers that use Northern Powergrid's
network are RWE Npower, British Gas, EDF Energy, E.ON, Scottish and
Southern Energy and Scottish Power.
Northern Powergrid operates utilising a mix of direct labour and
contracted resource and has a range of contracts in place with
various service providers for delivery of its work programmes,
which are subject to regular market testing and tendering
exercises. Those services include vegetation management, overhead
line inspection and construction, substation construction and
maintenance, underground cable laying services, vehicle leasing and
servicing, tower refurbishment and information technology services.
Northern Powergrid also has an extensive suite of contracts in
place for the procurement of all of the goods and equipment it
requires to deliver its capital expenditure programme and to run
its business, including for varying types of transformers,
switchgear and cables
Risk Management
The Northern Powergrid Group operates a structured and
disciplined approach to the management of risk as part of its
overall risk management policy and, in DPCR5 and previous price
control periods, accepted and successfully managed substantial cost
and delivery risks by developing a culture of cost and risk
management over that period of time. Risks are divided into a
number of risk sectors which, in turn, align to the Northern
Powergrid Group's Core Principles, as detailed on pages 2 and 3 of
this Strategic Report. A report regarding the effectiveness of each
risk sector in terms of risk management, control activity, key
success factors and supporting measures is presented at meetings of
the GRMG. The risk environment is reviewed continually in order
that new or emerging potential risks are identified.
The Northern Powergrid Group identifies and assesses risks
associated with the achievement of its strategic objectives so that
any actions needed to further enhance the control environment are
identified, along with the person responsible for the management of
the specific risk. A regular review of the key risks, controls and
action plans is undertaken. The risk management programme includes
regular review of the crisis management, disaster recovery and
major incident plans, which are periodically tested, the sharing of
best practice on disaster preparedness and response, disaster
recovery tests of IT servers and priority processes, penetration
tests against firewall systems, and a peer review of the Northern
Powergrid Group's risk management systems by Berkshire Hathaway
Energy.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
PRINCIPAL RISKS AND UNCERTAINTIES - continued
Risk management continues to be a central theme of senior
management priority setting, as well as an explicit business
process that helps to identify lower probability, high consequence
threats to business success or continuity. This approach is
reinforced by that of the Berkshire Hathaway Energy group, whose
activities have continued to include benchmarking of risk
management activities across its business units, including the
sharing of significant lessons learned associated with risk
management.
A key element and requirement of the risk management process is
that a written certificate is provided by the President and Chief
Executive Officer of the Northern Powergrid Group confirming that
the effectiveness of the system of internal controls has been
reviewed during the year. A self-certification process is in place,
in support of this review, whereby certain senior managers are
required to confirm that the system of internal control in their
area of the business is operating effectively. Consequently, the
directors believe that a robust system of risk assessment and
management is in place.
Internal Control
A rigorous internal control environment exists within the
Northern Powergrid Group based on regular reporting, a series of
operational and financial policy statements, investigations
undertaken by internal audit and a stringent process for ensuring
the implementation of any recommendations. Berkshire Hathaway
Energy requires a quarterly risk control assessment to be
undertaken by certain senior managers as part of its programme for
compliance with the requirements of the United States
Sarbanes-Oxley Act and, while no significant areas of weakness have
been identified, any recommended improvements are implemented.
In addition, the Northern Powergrid Group employs comprehensive
business planning and financial reporting procedures, regularly
reviews key performance indicators to assess progress towards its
goals and has a strong internal audit function to provide
independent scrutiny of its internal control systems. The Northern
Powergrid Group has risk management procedures in place, including
the standards required by the United States Sarbanes-Oxley Act, and
has centralised treasury operations and established procedures for
the planning, approving and monitoring of major capital
expenditure.
The Northern Powergrid Group is committed to maintaining the
highest ethical standards in the conduct of its business and, in
that respect, implements Berkshire Hathaway Energy's code of
business conduct for employees. The code of conduct sets out and
emphasises the required standards and commitment to ethical
behaviour, provides reporting mechanisms for known or suspected
ethical issues, helps prevent wrongdoing, and creates and sustains
an ethical work environment across the Northern Powergrid Group.
All employees are required to complete annual training on the code
of business conduct and then confirm that they understand the
requirements outlined in the code. The training is available online
and employees who do not have access to the online system attend a
briefing with their line manager.
The Northern Powergrid Group does not have a specific human
rights policy but, as noted in this Strategic Report, it bases its
operations on the Core Principles in order to deliver its long-term
objectives. Accordingly, the Group remains fully committed to
operating ethically and responsibly and with fairness and integrity
through the policies and procedures it has in place which set the
approach to its employees, their health, safety and welfare, its
dealings with customers, particularly those who are vulnerable and
on the priority services register, its impact on the environment
and its contribution to the sustainability agenda within the energy
industry. The Core Principles are a key factor in the responsible
way in which Northern Powergrid operates its electricity
distribution business, examples of which are described throughout
this Strategic Report.
The Northern Powergrid Group is also committed to preventing
corruption in all its forms and continues to have a zero-tolerance
approach to corruption in its business or by those with whom it
does business. The board of Northern Powergrid Holdings Company has
addressed the risks introduced by the Bribery Act 2010 through a
compliance policy, changes to contractual terms, training and other
staff awareness measures. The introduction of annual risk
assessments and enhanced due diligence in respect of new business
transactions has further assisted in ensuring compliance.
The Northern Powergrid Group requires staff, suppliers of
services and business partners to comply with the Bribery Act. Its
policies encourage an employee who has any suspicion of bribery or
other form of corruption within or related to the Northern
Powergrid Group to report the suspicion to a manager or via the
international, anonymous help line mentioned in the Employee
commitment section.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
GROUP STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
PRINCIPAL RISKS AND UNCERTAINTIES - continued
Northern Powergrid has appropriate controls in place directed at
ensuring compliance with the conditions in its Licence requiring
any payments made to, or received from, affiliates or related
undertakings in respect of goods and services provided or supplied
to be on an arm's length basis and on normal commercial terms.
In preparing these accounts, the directors have assessed the
viability of the Group for the purposes of making the statement
below and do so on an ongoing basis as part of the preparation and
approval of the Group's ten-year business plan.
The directors have chosen the eight-year period from 1 April
2015 for the purposes of making this statement because it equates
to the ED1 regulatory period, though longer periods may be
appropriate given the 45-year life ascribed to the Group's new
assets, the enduring nature of the Group's business and the fact
that the notice period for revocation of Northern Powergrid's
electricity distribution licence is 25 years. Northern Powergrid's
income has been set for the ED1 regulatory period, although there
is scope for a mid-period review and Ofgem may adjust revenues in
the latter half of the period for any changes in the outputs
required of Northern Powergrid for certain specified reasons.
Consequently and given the general stability associated with the
regulatory environment in which Northern Powergrid operates, the
directors have been able to prepare sufficiently robust forecasts
as part of the Group's annual business planning process, taking
account of the principal risks and uncertainties which might have
an impact on those forecasts. The Group's forecasts look forward
for a 10-year period and anticipate the Group's continued stable
operations beyond the ED1 price control.
Details of the principal risks and uncertainties, which could
have an impact on the Group, are provided on pages 17 to 20 of the
Strategic Report and details of how those principal risks are
assessed and managed are provided in the Risk Management section of
the Strategic Report.
The directors' ongoing assessment of the principal risks and
uncertainties facing the Group also includes meeting the
obligations in Northern Powergrid's Licence to provide Ofgem with
annual certificates, approved by the board, confirming that the
directors have a reasonable expectation that the Group will have
sufficient financial resources, financial facilities and
operational resources available to it so that Northern Powergrid is
able to carry on its Distribution Business for a period of 12
months from the dates of those certificates. Assumptions taken into
account when approving those certificates include (i) the potential
for significant adverse financial impact from the various incentive
schemes that can lead to variations in Northern Powergrid's allowed
income under its price control arrangements; (ii) the occurrence of
catastrophic natural or other events, which could have a
significant impact on the operating performance of the distribution
network or involve significant expenditure; (iii) whether
significant customer payment defaults may be experienced; and (iv)
the continued availability to the Group of suitably qualified and
experienced staff. Given the regulatory environment in which the
Northern Powergrid operates, it is currently considered unlikely
that there will be material variances to the assumptions used in
providing those certificates during ED1.
The stable nature of the Group's business is evidenced by the
fact that the commitments made by Northern Powergrid in its
well-justified business plan, which was originally submitted to
Ofgem as part of the ED1 price control review process, have not
changed fundamentally. Consequently, assuming that the principal
risks and uncertainties facing the Group continue to be managed
effectively, the directors have a reasonable expectation that the
Group will be able to continue in operation and meet its
liabilities as they fall due over the ED1 period.
ON BEHALF OF THE BOARD:
J M France
Director
26 April 2017
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
REPORT OF THE DIRECTORS
FOR THE YEARED 31 DECEMBER 2016
The directors present their report with the financial statements
of the Company for the year ended 31 December 2016.
DIVIDS
During the year, an interim dividend of GBP100.0 million (78p
per ordinary share) was paid (2015: GBP20.6 million). The directors
recommend that no final dividend be paid in respect of the
year.
RESEARCH AND DEVELOPMENT
The Group supports a programme of research that is expected to
contribute to higher standards of performance and a more
cost-effective operation of its business. Projects to investigate
enhanced load reduction opportunities from customer participation,
the accessing of disbursed domestic demand-side response and,
alongside other utilities, to determine optimum energy system
technology approaches appropriate to local socio-economic factors
have continued. New activities initiated in the year included
projects regarding the use of domestic electricity storage in
conjunction with small-scale photovoltaic solar generation, an
improved methodology to determine network load growth and a project
to improve circuit reliability and reduce restoration times through
fault monitoring and anticipation on the low-voltage network. In
addition, a wood replacement technology for overhead line support
was evaluated and an investigations into environmentally acceptable
alternative systems for wood preservation, was undertaken.
During the year, the Group invested GBP0.8 million (2015: GBP2.1
million) (Note 6 to the accounts) in its research and development
activities.
FUTURE DEVELOPMENTS
The financial position of the Group, as at 31 December 2016, is
shown in the statement of financial position on pages 32 and
33.
There have been no significant events since the year end and the
directors intend that:
Northern Powergrid will continue to implement its well-justified
business plan that was revised as part of the ED1 price control
review process and will develop its business by operating with the
goal of efficiently investing in the network and improving the
quality of supply and service provided to customers.
The objective for IUS will remain the development of its
business in a manner that concentrates on its core skills of
engineering contracting by delivering a high standard of service to
its existing clients and pursuing opportunities to increase its
portfolio of clients across all regions of the United Kingdom in
the sectors within which it operates.
Northern Powergrid Metering will retain its focus on pursuing
opportunities in the market for meter asset provision as the smart
meter roll-out programme develops.
DIRECTORS
The directors who held office during the year under review and
to the date of signing this report were:
G E Abel Chairman (stood down from the board on
15 December 2016)
R Dixon Non-executive Director
T E Fielden Finance Director
J M France Regulation Director
P J Goodman Executive Vice-President and Chief Financial
Officer, Berkshire Hathaway Energy
P A Jones President and Chief Executive Officer
During the year, no director was interested in any contract
which was significant in relation to the business of the Company or
the Group.
During the year and up to the date of approval of the Directors'
Report, an indemnity contained in the Company's Articles of
Association was in force for the benefit of the directors of the
Company and as directors of associated companies, which was a
qualifying third party indemnity provision for the purposes of the
Companies Act 2006.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
REPORT OF THE DIRECTORS
FOR THE YEARED 31 DECEMBER 2016
FINANCIAL RISK MANAGEMENT
The Group's short-term financial objective is to ensure that it
has access to sufficient liquidity to enable it to meet its
obligations as they fall due and to provide adequately for
contingencies. The long-term objective is to provide a stable and
low cost of financing over time whilst observing approved risk
parameters. The main risks are liquidity and interest rate
risk.
Trading risk
Throughout the year under review, the Group's policy was that no
trading in financial instruments should be undertaken.
Financial derivatives
As at 31 December 2016 and during the year, it was the Group's
policy not to hold any derivative financial instruments.
Further details of the financial risks facing the Group are
provided in the Financial strength and Principal Risks and
Uncertainties sections on pages 5 and 17 to 20 respectively of the
Strategic Report.
POLITICAL DONATIONS
During the year, no contributions were made to political
organisations (2015: GBPnil).
EMPLOYEES
Employee consultation
The Group has a constitutional framework in place for employee
consultation and has agreed that framework with trade union
representatives. In addition, the Group communicates directly and
through the management structure with non-collectively bargained
staff, who are primarily of management grade, and keeps them
informed of and involved as appropriate in developments that may
impact on them now or in the future.
The Group is committed to maintaining and improving effective
engagement and communication with employees. Following the employee
engagement survey in 2016, the results continue to show improvement
and work has been undertaken to analyse the feedback and develop
local action plans. This approach is augmented by routine
communication channels including regular staff briefs on current
issues, meetings with staff and their representatives, and
utilising the Northern Powergrid Group's intranet to communicate
and engage with employees.
During the year, the President and Chief Executive Officer of
the Northern Powergrid Group continued to provide employees with
updates on the Northern Powergrid Group's financial,
organisational, safety and customer service performance through
postings and weekly blogs on the Northern Powergrid Group's
intranet on key elements of performance during the preceding
week.
Disabled employees
The Group is committed to equality at work and, as such, its
policy is to provide all protected groups, including disabled
people, with equality at work in respect of employment, training,
career development and promotion, having regard to their aptitudes
and abilities. Should any member of staff become disabled during
their employment, the Group would work to make reasonable
adjustments, wherever possible.
VOTE HOLDER AND ISSUER NOTIFICATION
There have been no disclosures to the Company under Disclosure
and Transparency Rule 5 (Vote Holder and Issuer Notification
Rules).
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
REPORT OF THE DIRECTORS
FOR THE YEARED 31 DECEMBER 2016
DIRECTORS' BIOGRAPHIES
RONALD DIXON
Appointed in October 1997, Mr Dixon, 79, worked for North
Eastern Electricity Board and Northern Electric plc throughout his
career, being appointed Secretary in 1987. He was appointed
Managing Director of the Power Division in 1990, responsible for
electricity supply and distribution, and Commercial Director in
1991. He retired from the board on 31 July 1997 and was
re-appointed in the capacity of a non-executive director on 22
October 1997. Mr Dixon is also a non-executive director of Northern
Powergrid Holdings Company, Northern Powergrid (Northeast) Limited
and Northern Powergrid (Yorkshire) plc.
THOMAS E FIELDEN
Appointed in October 2009, Mr Fielden, 46, joined the Northern
Powergrid Group in July 2009 and became Finance Director on 12
October 2009. Mr Fielden is a chartered accountant, having started
his career at Coopers & Lybrand and has held a variety of
finance appointments in BT, working in BT Group and BT Global
Services, before joining Great North East Railway (GNER) as
Financial Controller in 2005. He became Finance Director of GNER in
2006, transferring to National Express East Coast in 2007.
JOHN M FRANCE
Appointed in January 2000, Dr France, 59, is Regulation Director
for the Northern Powergrid Group. After leaving university he
joined the British Gas Corporation where he held a number of posts
before becoming a member of the team that handled the privatisation
of British Gas in 1986. He joined Northern Electric plc as its
Regulation Manager in 1989 and has been involved with all the
distribution (and supply) price control reviews that have affected
the Northern Powergrid Group since privatisation. He was a member
of the team that negotiated the acquisition of the distribution
business of Yorkshire Electricity Group plc and the sale of the
Northern Electric plc supply businesses in 2001.
PATRICK J GOODMAN
Mr Goodman, 49, is executive vice president and chief financial
officer of Berkshire Hathaway Energy. Mr Goodman is responsible for
managing all aspects of Berkshire Hathaway Energy's financial
operations. Mr Goodman serves as a director of PacifiCorp, Northern
Powergrid, Kern River Gas Transmission Company and Northern Natural
Gas Company. Mr Goodman supports the evaluation, negotiation and
closing of Berkshire Hathaway Energy's domestic and international
financings, acquisitions and project developments. Additionally, he
manages all accounting, financial reporting, tax, budgeting,
long-range financial planning and internal audit functions for
Berkshire Hathaway Energy. Mr Goodman has been the chief financial
officer since 1999 and has served in various financial positions,
including chief accounting officer since joining the Company in
1995. Mr Goodman has more than 20 years of experience in public
accounting and management and is a certified public accountant. He
received his accounting degree from the University of Nebraska at
Omaha.
PHILIP A JONES
Appointed in April 2007, Dr Jones, 48, is President and Chief
Executive Officer of the Northern Powergrid Group, the UK platform
in the global portfolio of Berkshire Hathaway Energy. Prior to his
appointment as President and Chief Executive Officer, he was
Strategy and Investment Director and, as such, was responsible for
technical, economic and regulatory strategy within the
organisation. Dr Jones is a chartered electrical engineer and has
been working in the UK power distribution sector since completing
his PhD in Electronic and Electrical Engineering in 1993. He has
held a range of technical and managerial roles, mostly in the
engineering field. He is also actively involved in a range of other
industry bodies. He has been a director of the Institute of Asset
Management and of the Energy Networks Association, the trade
association that represents the power transmission and distribution
companies.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
REPORT OF THE DIRECTORS
FOR THE YEARED 31 DECEMBER 2016
CORPORATE GOVERNANCE STATEMENT
In accordance with Disclosure and Transparency Rule (DTR) 7.2.9,
the directors have elected to set out the information required by
DTR 7.2.1 to DTR 7.2.7 R in the Group annual report and audited
consolidated financial statements of Northern Powergrid Holdings
Company, a copy of which can be found on Northern Powergrid's
corporate website. The Company has sought to apply a number of
provisions in the UK Corporate Governance Code 2014 (the "Code") in
so far as it considers them to be appropriate.
Audit committee
The board of Northern Powergrid Holdings Company has established
an audit committee for the Northern Powergrid Group under delegated
terms of reference which include monitoring the financial reporting
process, the effectiveness of internal controls, internal audit and
risk management systems, the statutory audit of the accounts, and
the independence of and the provision of non-audit services by the
auditor.
The audit committee comprises three members, two of whom are
considered as independent and one who has competence in accounting.
At its meetings, the committee receives reports from the GRMG and
from the Northern Powergrid Group's Head of Internal Audit on the
internal audits undertaken during the year and the audit plan for
the following year.
Committee members:
R Dixon Non-Executive Director (Chairman)
J Reynolds Non-Executive Director (appointed
20 January 2016)
T E Fielden Finance Director
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
REPORT OF THE DIRECTORS
FOR THE YEARED 31 DECEMBER 2016
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors are responsible for preparing the Group Strategic
Report, the Report of the Directors and the financial statements in
accordance with applicable law and regulations.
Company law requires the directors to prepare financial
statements for each financial year. Under that law the directors
have elected to prepare the financial statements in accordance with
International Financial Reporting Standards ("IFRS") as adopted by
the European Union. Under company law the directors must not
approve the financial statements unless they are satisfied that
they give a true and fair view of the state of affairs of the Group
and the Company and of the profit or loss of the Group and the
Company for that period.
In preparing these financial statements, International
Accounting Standard 1 requires the directors to:
- Properly select and apply accounting policies;
- Present information, including accounting policies,
in a manner that provides relevant, reliable,
comparable and understandable information;
- Provide additional disclosures when compliance
with the specific requirements in IFRS are insufficient
to enable users to understand the impact of particular
transactions, other events and conditions on the
Company's and the Group's financial position and
financial performance; and
- Make an assessment of the Company's and the Group's
ability to continue as a going concern.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group's and the
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the Group and the Company and enable
them to ensure that the financial statements comply with the
Companies Act 2006. They are also responsible for safeguarding the
assets of the Group and the Company and hence for taking reasonable
steps for the prevention and detection of fraud and other
irregularities. The directors are responsible for the maintenance
and integrity of any corporate and financial information relating
to the Company and the Group, which is included on the Northern
Powergrid Group's website. Legislation in the United Kingdom
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
DIRECTORS' RESPONSIBILITY STATEMENT PURSUANT TO DTR 4
Each of the directors as at the date of the Annual Reports and
Accounts, whose names and functions are set out on page 21 in the
Report of the Directors confirms that, to the best of their
knowledge
a) the Company's accounts, prepared in accordance with
applicable UK law and in conformity with IFRS, give a true and fair
view of the assets, liabilities, financial position and profit or
loss of the Company; and
b) the Management Report (which is comprised of the Strategic
Report and the Report of the Directors) includes a fair review of
the development and performance of the business and the position of
the Company, together with a description of the principal risks and
uncertainties it faces.
GOING CONCERN
A review of the Group's business activities during the year,
together with details regarding its future development, performance
and position, its objectives, policies and processes for managing
its capital, its financial risk management objectives and details
of its exposures to trading risk, credit risk and liquidity risk
are set out in the Strategic Report, the Report of the Directors
and the appropriate notes to the accounts.
When considering continuing to adopt the going concern basis in
preparing the annual reports and accounts, the directors have taken
into account a number of factors, including the following:
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
REPORT OF THE DIRECTORS
FOR THE YEARED 31 DECEMBER 2016
GOING CONCERN - continued
- The Group's main subsidiary, Northern Powergrid,
is a stable electricity distribution business
operating an essential public service and is regulated
by GEMA. In carrying out its functions, GEMA has
a statutory duty under the Electricity Act 1989
to have regard to the need to secure that licence
holders are able to finance the activities, which
are the subject of obligations under Part 1 of
the Electricity Act 1989 (including the obligations
imposed by the electricity distribution licence)
or by the Utilities Act 2000;
- The Group is profitable with strong underlying
cash flows; and
- The Group is financed by long-term borrowings
with an average maturity of 12 years and has access
to borrowing facilities provided by Lloyds Bank
plc, Royal Bank of Scotland plc and Abbey National
Treasury Services plc.
Consequently, after making enquiries, the directors have a
reasonable expectation that the Company and the Group have adequate
resources to continue in operational existence for the foreseeable
future. Accordingly, they continue to adopt the going concern basis
in preparing the annual reports and accounts.
STATEMENT AS TO DISCLOSURE OF INFORMATION TO AUDITOR
Each of the directors, who is a director of the Company as at
the date of this report, confirms that:
a) so far as he is aware, there is no relevant audit
information of which the Company's auditor is
unaware; and
b) he has taken all the steps he ought to have taken
as a director in order to make himself aware
of any relevant audit information and to establish
that the auditor is aware of that information.
This confirmation is given and should be interpreted in
accordance with the provisions of section 418 of the Companies Act
2006.
AUDITOR
A resolution to re-appoint Deloitte LLP as the Company's auditor
and authorise the directors to determine their remuneration will be
proposed at the Annual General Meeting.
ON BEHALF OF THE BOARD:
J M France
Director
26 April 2017
REPORT OF THE INDEPENT AUDITOR TO THE MEMBERS OF NORTHERN
ELECTRIC PLC
We have audited the financial statements of Northern Electric
plc Group ("the Company") for the year ended 31 December 2016,
which comprise the Statement of Profit or Loss, the Statement of
Profit or Loss and Other Comprehensive Income, the Statement of
Financial Position, the Statement of Changes in Equity, the
Statement of Cash Flows and related notes 1 to 29. The financial
reporting framework that has been applied in their preparation is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
This report is made solely to the Company's members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
Company's members those matters we are required to state to them in
a Report of the Auditor and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility
to anyone other than the Company and the Company's members as a
body, for our audit work, for this report, or for the opinions we
have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Statement of Directors'
Responsibilities set out on pages 25 and 26, the directors are
responsible for the preparation of the financial statements and for
being satisfied that they give a true and fair view. Our
responsibility is to audit and express an opinion on the financial
statements in accordance with applicable law and International
Standards on Auditing (UK and Ireland). Those standards require us
to comply with the Auditing Practices Board's Ethical Standards for
Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from
material misstatement, whether caused by fraud or error. This
includes an assessment of whether the accounting policies are
appropriate to the circumstances of the Company and the Group and
have been consistently applied and adequately disclosed, the
reasonableness of significant accounting estimates made by the
directors and the overall presentation of the financial statements.
In addition, we read all the financial and non-financial
information in the Strategic Report and the Report of the Directors
to identify material inconsistencies with the audited financial
statements and to identify any information that is apparently
materially incorrect based on, or materially inconsistent with, the
knowledge acquired by us in the course of performing the audit. If
we become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion the financial statements:
- give a true and fair view of the state of the
Company's and the Group's affairs as at 31 December
2016 and of the Group's profit for the year then
ended;
- have been properly prepared in accordance with
the requirements of the Companies Act 2006 and
in accordance with IFRSs as adopted by the European
Union;
- in respect of the Company, have been properly
prepared in accordance with IFRS as adopted by
the European Union and as applied in accordance
with the provisions of the Companies Act 2006;
and
- in respect of the Group, have been properly prepared
in accordance with Article 4 of the IAS Regulations.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of
the audit:
- the information given in the Strategic Report
and the Report of the Directors for the financial
year for which the financial statements are prepared
is consistent with the financial statements; and
- the Strategic Report and the Report of the Directors
have been prepared in accordance with applicable
legal requirements.
In the light of the knowledge and understanding of the Company
and its environment obtained in the course of the audit, we have
not identified any material misstatements in the Strategic Report
and the Report of the Directors.
REPORT OF THE INDEPENT AUDITOR TO THE MEMBERS OF NORTHERN
ELECTRIC PLC
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters
where the Companies Act 2006 requires us to report to you if, in
our opinion:
- adequate accounting records have not been kept
by the Company, or
- returns adequate for our audit have not been received
from branches not visited by us; or
- the financial statements of the Company or the
Group are not in agreement with the accounting
records and returns; or
- certain disclosures of directors' remuneration
specified by law are not made; or
- we have not received all the information and explanations
we require for our audit.
David M Johnson FCA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
N6wcastle upon Tyne
United Kingdom
26 April 2017
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
FOR THE YEARED 31 DECEMBER 2016
2016 2015
Notes GBP'000 GBP'000
CONTINUING OPERATIONS
Revenue 3 384,867 386,388
Cost of sales (43,336) (42,552)
GROSS PROFIT 341,531 343,836
Operating expenses (160,350) (147,675)
OPERATING PROFIT 181,181 196,161
Other gains 522 474
Finance costs 5 (39,139) (36,198)
Finance income 5 1,354 1,619
PROFIT BEFORE INCOME
TAX 6143,918 162,056
Income tax 7 (7,210) (17,282)
PROFIT FOR THE YEAR 136,708 144,774
Profit attributable to:
Owners of the parent 136,708 144,774
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME
FOR THE YEARED 31 DECEMBER 2016
2016 2015
GBP'000 GBP'000
PROFIT FOR THE YEAR 136,708 144,774
OTHER COMPREHENSIVE INCOME
Item that will not be reclassified to profit or loss:
Re-measurement of net pension obligation (84,700) (400)
Income tax relating to item
of other comprehensive income 14,197 (2,099)
OTHER COMPREHENSIVE
INCOME FOR THE YEAR, (70,503) (2,499)
NET OF INCOME TAX
TOTAL COMPREHENSIVE 142,275
INCOME FOR THE YEAR 66,205
Total comprehensive income attributable to:
Owners of the parent 66,205 142,275
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
31 DECEMBER 2016
2016 2015
Notes GBP'000 GBP'000
ASSETS
NON-CURRENT ASSETS
Intangible assets 11 40,857 31,623
Property, plant and equipment 12 2,322,900 2,130,082
Investments 13 3,319 3,556
Pension asset 24 31,500 88,100
Trade and other receivables 15 8,406 8,769
2,406,982 2,262,130
CURRENT ASSETS
Inventories 14 12,836 13,452
Trade and other receivables 15 83,640 73,879
Cash and cash equivalents 16 515 8,824
96,991 96,155
TOTAL ASSETS 2,503,973 2,358,285
EQUITY
SHAREHOLDERS' EQUITY
Called up share capital 17 72,173 72,173
Share premium 18 158,748 158,748
Other reserves 18 6,185 6,185
Retained earnings 18 737,668 771,463
TOTAL EQUITY 974,774 1,008,569
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION - continued
31 DECEMBER 2016
2016 2015
Notes GBP'000 GBP'000
LIABILITIES
NON-CURRENT LIABILITIES
Trade and other payables 19 562,308 526,800
Borrowings
Interest bearing loans
and borrowings 20 587,414 587,175
Deferred tax 23 89,462 104,859
Provisions 22 1,803 1,984
1,240,987 1,220,818
CURRENT LIABILITIES
Trade and other payables 19 129,882 110,011
Borrowings
Interest bearing loans
and borrowings 20 153,844 13,917
Tax payable 3,764 3,962
Provisions 22 722 1,008
288,212 128,898
TOTAL LIABILITIES 1,529,199 1,349,716
TOTAL EQUITY AND LIABILITIES 2,503,973 2,358,285
The financial statements were approved by the Board of Directors
on 26 April 2017 and were signed on its behalf by:
J M France
Director
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
COMPANY STATEMENT OF FINANCIAL POSITION
31 DECEMBER 2016
2016 2015
Notes GBP'000 GBP'000
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment 12 1,634 1,680
Investments 13 328,070 328,070
329,704 329,750
CURRENT ASSETS
Trade and other receivables 15 317 427
Tax receivable 6,047 2,694
Cash and cash equivalents 16 - 24,322
6,364 27,443
TOTAL ASSETS 336,068 357,193
EQUITY
SHAREHOLDERS' EQUITY
Called up share capital 17 72,173 72,173
Share premium 18 158,748 158,748
Other reserves 18 6,185 6,185
Retained earnings 18 23,391 107,480
TOTAL EQUITY 260,497 344,586
LIABILITIES
NON-CURRENT LIABILITIES
Borrowings
Interest bearing loans
and borrowings 20 1,117 1,117
Deferred tax 23 2,758 4,809
Provisions 22 1,705 1,652
5,580 7,578
CURRENT LIABILITIES
Trade and other payables 19 3,177 2,748
Borrowings
Interest bearing loans
and borrowings 20 66,806 2,272
Provisions 22 8 9
69,991 5,029
TOTAL LIABILITIES 75,571 12,607
TOTAL EQUITY AND LIABILITIES 336,068 357,193
The financial statements were approved by the Board of Directors
on 26 April 2017 and were signed on its behalf by:
J M France
Director
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 DECEMBER 2016
Called up
share Retained Share Other Total
capital earnings premium reserves equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Balance at 1 January 2015 72,173 649,788 158,748 6,185
886,894
Changes in equity
Dividends - (20,600) - - (20,600)
Total comprehensive income - 142,275 - - 142,275
Balance at 31 December 2015 72,173 771,463 158,748 6,185
1,008,569
Changes in equity
Dividends - (100,000) - - (100,000)
Total comprehensive income - 66,205 - - 66,205
Balance at 31 December 2016 72,173 737,668 158,748 6,185
974,774
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
COMPANY STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 DECEMBER 2016
Called up
share Retained Share Other Total
capital earnings premium reserves equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Balance at 1 January 2015 72,173 113,523 158,748 6,185
350,629
Changes in equity
Dividends - (20,600) - - (20,600)
Total comprehensive income - 14,557 - - 14,557
Balance at 31 December 2015 72,173 107,480 158,748 6,185
344,586
Changes in equity
Dividends - (100,000) - - (100,000)
Total comprehensive income - 15,911 - - 15,911
Balance at 31 December 2016 72,173 23,391 158,748 6,185
260,497
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARED 31 DECEMBER 2016
2016 2015
Notes GBP'000 GBP'000
Cash flows from operating activities
Cash generated from operations 28 217,880 189,124
Finance costs paid (41,413) (38,809)
Interest received 1,065 956
Tax paid (8,608) (24,805)
Net cash from operating activities 168,924 126,466
Cash flows used in investing activities
Purchase of intangible fixed assets (12,963) (10,476)
Purchase of tangible fixed assets (247,702) (271,339)
Sale of tangible fixed assets 487 467
Customer contributions 44,896 56,357
Dividends received 491 548
Net cash used in investing activities (214,791) (224,443)
Cash flows from financing activities
Movement in external loans - 50,365
Movement in loans from Group 137,558 (8,550)
Equity dividends paid (100,000) (20,600)
Net cash from financing activities 37,558 21,215
Decrease in cash and cash equivalents (8,309) (76,762)
Cash and cash equivalents
at beginning of year 8,824 85,586
Cash and cash equivalents
at end of year 515 8,824
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
COMPANY STATEMENT OF CASH FLOWS
FOR THE YEARED 31 DECEMBER 2016
2016 2015
Notes GBP'000 GBP'000
Cash flows from operating activities
Cash generated from operations 28 778 1,384
Finance costs paid (9,096) (9,028)
Interest received 56 195
Dividends received 22,291 21,113
Tax (paid)/received (2,885) 1,452
Net cash from operating activities 11,144 15,116
Cash flows from financing activities
Movement in borrowings 2,395 -
Movement in loans from Group 62,139 -
Equity dividends paid (100,000) (20,600)
Net cash from financing activities (35,466) (20,600)
Decrease in cash and cash equivalents (24,322) (5,484)
Cash and cash equivalents
at beginning of year 24,322 29,806
Cash and cash equivalents
at end of year - 24,322
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARED 31 DECEMBER 2016
1. GENERAL INFORMATION
Northern Electric plc (the "Company") is a company incorporated
in England and Wales and is part of the Northern Powergrid Holdings
Company group of companies (the "Northern Powergrid Group"). The
address of the registered office is Lloyds Court, 78 Grey Street,
Newcastle-upon-Tyne, NE1 6AF.
The nature of the Group's business model, strategic objectives,
operations and activities are set out in the Strategic Report.
2. ACCOUNTING POLICIES
Accounting convention and basis of preparation
These financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS"). These
financial statements have also been prepared in accordance with
IFRS as adopted by the European Union, and with those parts of the
Companies Act 2006 (the "Act") that are applicable to companies
reporting under IFRS. The Company's financial statements have also
been prepared in accordance with IFRS, as applied in accordance
with the provisions of the Act. The directors have taken advantage
of the exemption offered by Section 408 of the Act not to present a
separate statement of profit or loss for the Company.
The financial statements have been prepared under the historical
cost convention. Historical cost is generally based on the fair
value of the consideration given in exchange for goods and
services. Fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date, regardless of
whether that price is directly observable or estimated using
another valuation technique. In estimating the fair value of an
asset or a liability, the Group takes into account the
characteristics of the asset or liability if market participants
would take those characteristics into account when pricing the
asset or liability at the measurement date. Fair value for
measurement and/or disclosure purposes in these consolidated
financial statements is determined on such a basis, except for
leasing transactions which are in the scope of IAS 17, and
measurements that have some similarities to fair value but are not
fair value, such as net realisable value in IAS 2 or value in use
in IAS 36.
In addition, for financial reporting purposes, fair value
measurements are categorised into Level 1, 2 or 3 based on the
degree to which the inputs to the fair value measurements are
observable and the significance of the inputs to the fair value
measurement in its entirety, which are described as follows:
- Level 1 inputs are quoted prices (unadjusted)
in active markets for identical assets or liabilities
that the Company can access at the measurement
date;
- Level 2 inputs are inputs, other than quoted
prices included within Level 1, that are observable
for the asset or liability, either directly
or indirectly; and
- Level 3 inputs are unobservable inputs for the
asset or liability.
The principal accounting policies are set out below.
Basis of consolidation
The consolidated financial statements incorporate the financial
statements of the Company and entities controlled by the Company
and its subsidiaries made up to 31 December each year. Control is
achieved where the Company has power over the investee, is exposed,
or has rights, to variable returns from its involvement with the
investee, and has the ability to use its power to affects its
returns.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
2. ACCOUNTING POLICIES - continued
Investments in associates and joint ventures
An associate is an entity over which the Group has significant
influence. Significant influence is the power to participate in the
financial and operating policy decisions of the investee but is not
control or joint control over those policies. A joint venture is a
joint arrangement whereby the parties that have joint control of
the arrangement have the rights to the net assets of the joint
arrangement. Joint control is the contractually agreed sharing of
control of an arrangement, which exists only when decisions about
the relevant activities require unanimous consent of the parties
sharing control.
The results and assets and liabilities of associates or joint
ventures are incorporated in these consolidated financial
statements using the equity method of accounting except when
classified as held for sale. Investments in associates or joint
venture entities are initially recognised at cost and adjusted
thereafter to recognise the Group's share of profit or loss and
other comprehensive income of the associate or joint venture. When
the Group's share of losses of an associate or a joint venture
exceeds the Group's interest in that associate or joint venture,
the Group discontinues recognising its share of future losses.
An investment in an associate or a joint venture is accounted
for using the equity method from the date on which the investee
becomes an associate or a joint venture. On acquisition of the
investment in an associate or a joint venture, any excess of the
cost of the investment over the Group's share of the net fair value
of the identifiable assets and liabilities of the investee is
recognised as goodwill, which is included within the carrying
amount of the investment. Any excess of the Group's share of the
net fair value of the identifiable assets and liabilities over the
cost of the investment, after reassessment, is recognised
immediately in profit or loss in the period in which the investment
is acquired.
A joint operation is a joint arrangement whereby the parties
that have joint control of the arrangement have rights to the
assets, and obligations for the liabilities, relating to the
arrangement. Joint control is the contractually agreed sharing of
control of an arrangement, which exists only when decisions about
the relevant activities require unanimous consent of the parties
sharing control.
Fixed asset investments are stated at cost less provision or
amounts written off for impairment in value.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
2. ACCOUNTING POLICIES - continued
Application of new and revised IFRS
In the current year, the Company has a number of amendments to
IFRSs issued by the International Accounting Standards Board
("IASB") that are mandatorily effective for an accounting period
that begins on or after 1 January 2016:
- Amendments to IAS The amendments clarify that
1 Disclosure Initiative an entity need not provide
specific disclosure required
by an IFRS if the information
resulting from that disclosure
is not material, and give guidance
on the bases of aggregating
and disaggregating information
for disclosure purposes. However,
the amendments reiterate that
an entity should consider providing
additional disclosures when
compliance with the specific
requirements of IFRS is insufficient
to enable users of financial
statements to understand the
impact of particular transactions,
events and conditions on the
entity's financial position
and financial performance.
The application of these amendments
has not resulted in any impact
on the financial performance
or financial position of the
Company.
- IAS 16 and IAS 38 The amendments to IAS 16 prohibit
Clarification of entities from using a revenue-based
Acceptable Methods depreciation method for items
of Depreciation of property, plant and equipment.
and Amortisation The amendments to IAS 38 introduce
a rebuttable presumption that
revenue is not an appropriate
basis for amortisation of an
intangible asset. This presumption
can only be rebutted in the
following two limited circumstances:-when
the intangible asset is expressed
as a measure of revenue; or-when
it can be demonstrated that
revenue and consumption of
the economic benefits or the
intangible asset are highly
correlated.
As the group already uses the
straight line method for depreciation
for its property, plant and
equipment, and intangible assets
respectively, the application
of these amendments has had
no impact on the Company's
financial position.
- Annual Improvements The Annual Improvements to
to IFRSs 2012-2014 IFRSs 2012-2014 Cycle include
Cycle a number of amendments to various
IFRSs. The application of these
amendments has had no effect
on the Company's financial
statements.
New and revised standards in issue but not yet effective
The Company has not applied the following new and revised IFRSs
that have been issued but are not yet effective for the year ended
31 December 2016:
- IFRS 9 - Financial A revised version of IFRS 9,
Instruments (1 January Financial Instruments, was
2018). issued in July 2014 mainly
to include: a) impairment requirements
for financial assets; and b)
limited amendments to the classification
and measurement requirements
by introducing a 'fair value
through other comprehensive
income' ("FVTOCI") measurement
category for certain simple
debt instruments. The directors
of the Company anticipate that
the application of IFRS 9 in
the future is unlikely to have
an impact on amounts reported
in respect of the Company's
financial assets and financial
liabilities.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
2. ACCOUNTING POLICIES - continued
- IFRS 15 - Revenue In May 2014, IFRS 15, Revenue
from Contracts with from Contracts with Customers,
Customers (1 January was issued which establishes
2018). a single comprehensive model
for entities to use in accounting
for revenue arising from contracts
with customers.
IFRS 15 will supersede the
current revenue recognition
guidance including IAS 11 Construction
Contracts, IAS 18 Revenue and
the related Interpretations.
The core principle of IFRS
15 is that an entity should
recognise revenue to depict
the transfer of promised goods
or services to customers in
an amount that reflects the
consideration to which the
entity expects to be entitled
in exchange for those goods
or services.
Under IFRS 15, an entity recognises
revenue when (or as) a performance
obligation is satisfied. Far
more prescriptive guidance
has been added in IFRS 15 to
deal with specific scenarios.
Furthermore, extensive disclosures
are required by IFRS 15.
The directors anticipate that
the application of IFRS 15
will not have a material impact
on the Company's financial
statements.
- IFRS 16 - Leases IFRS 16 introduces a comprehensive
(1 January 2019) model for the identification
of lease arrangements and accounting
treatments for both lessors
and lessees. IFRS 16 will supersede
the current lease guidance
including IAS 17 Leases and
the related interpretations
when it becomes effective.
IFRS 16 distinguishes between
leases and service contracts
on the basis of whether an
identified asset is controlled
by a customer. Distinctions
between operating leases and
finance leases are removed
for lessee accounting, and
is replaced by a model where
right-of-use asset and a corresponding
liability have to be recognised
for all leases by lessees except
for short term leases and leases
of low-value assets.
As of 31 December 2016, the
Company has non-cancellable
operating lease commitments
of GBP23.2 million, IAS 17
does not require recognition
of any right-of-use asset or
liability for future payments
for these leases.
A preliminary assessment indicates
that these arrangements will
meet the definition of a lease
under IFRS 16, and hence the
Company will recognise a right-of-use
asset and corresponding liability
in respect of all these leases
unless they qualify for low-value
or short-term leases upon the
application of IFRS 16.
- Amendments to IAS The amendments require an entity
7 (1 January 2017) to provide disclosures that
enable users of financial statements
to evaluate changes in liabilities
arising from financing activities.
The directors of the Company
do not anticipate the application
of these amendments will have
a material impact on the Company's
financial statements.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
2. ACCOUNTING POLICIES - continued
Critical judgements in applying accounting policies
The following are the critical judgements, apart from those
involving estimations, that the directors have made in the process
of applying the Group's accounting policies and that have the most
significant effect on amounts recognised in the consolidated
financial statements:
- Revenue recognition, the methodology for which
is disclosed below;
- Useful economic lives for property, plant and
equipment, details of which can be found on
page 43; and
- The split of operating and capital expenditure
and the allocation of overheads to property,
plant and equipment. The allocation of overheads
to capital is derived from a detailed analysis
of indirect cost centres and their usage which
is reviewed on a regular basis.
Key sources of estimation uncertainty
The following are the key assumptions concerning the future and
other key sources of estimation uncertainty at the end of the
reporting period that may have a significant risk of causing a
material adjustment to the carrying amounts of assets and
liabilities within the next financial year:
- Assumptions used when evaluation long-term pension
plans, these assumptions and their possible
impacts are disclosed in note 24.
Revenue
Revenue is only recognised when the risks and rewards of
ownership have been transferred to a third party. No revenue is
recognised where there are significant uncertainties regarding the
consideration to be received or the costs associated with the
transaction.
Revenue is measured at the fair value of consideration received
or receivable.
Revenue represents charges for the use of the Group's
distribution network, rental of meters, amortisation of customer
contributions, recharge of costs incurred on behalf of related
parties, and the invoiced value of other goods sold and services
provided, exclusive of value added tax.
Revenues from charges to end customers for the use of the
Group's distribution network include estimates of the units
distributed. The estimated usage is based on historic data,
judgement and assumptions. Revenues are gradually adjusted to
reflect actual usage in the period during which actual meter
readings are obtained.
Any under or over-recovery of allowed distribution network
revenues as prescribed by Ofgem is not provided for in the
financial statements and will be recovered/repaid through future
tariffs.
Customer contributions towards distribution system assets are
included in deferred revenue. The Group's policy is to credit the
customer contribution to revenue on a straight-line basis, in line
with the useful life of the distribution system assets.
Income from credit sale charges is apportioned in the statement
of profit or loss over the period of the sales agreements.
Interest income from a financial asset is recognised when it is
probable that the economic benefits will flow to the Group and the
amount of income can be measured reliably. Interest income is
accrued on a time basis, by reference to the principal outstanding
and at the effective interest rate applicable, which is the rate
that exactly discounts estimated future cash receipts through the
expected life of the financial asset to that asset's net carrying
amount on initial recognition.
Dividend income from investments is recognised when the
shareholders' rights to receive payment have been established.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
2. ACCOUNTING POLICIES - continued
Construction contracts
Where the outcome of a construction contract can be estimated
reliably, revenue and costs are recognised by reference to the
stage of completion of the contract activity at the end of the
reporting period, based on the proportion of contract costs
incurred for work performed to date relative to the estimated total
contract costs, except where this would not be representative of
the stage of completion. Variations in contract work, claims and
incentive payments are included to the extent that they have been
agreed with the customer.
Where the outcome of a construction contract cannot be estimated
reliably, contract revenue is recognised to the extent of the costs
incurred where it is probable they will be recoverable. Contract
costs are recognised as expenses in the period in which they are
incurred. When it is probable that total contract costs will exceed
total contract revenue, the expected loss is recognised as an
expense immediately.
When contract costs incurred to date plus recognised profits
less recognised losses exceed progress billings, the surplus is
shown as amounts due from customers for contract work. For
contracts where progress billings exceed contract costs incurred to
date plus recognised profits less recognised losses, the surplus is
shown as the amounts due to customers for contract work. Amounts
received before the related work is performed are included in the
consolidated statement of financial position, as a liability, as
advances received. Amounts billed for work performed but not yet
paid by the customer are included in the consolidated statement of
financial position under trade and other receivables.
Software development costs
Costs in respect of major developments are carried at cost less
accumulated amortisation and accumulated impairment losses.
Amortisation is recognised on a straight-line basis over the
estimated useful life of the software of up to 10 years. The
estimated useful life and amortisation method are reviewed at the
end of each reporting period, with the effect of any changes in
estimate being accounted for on a prospective basis.
Property, plant and equipment and depreciation
Property, plant and equipment is stated at cost less accumulated
depreciation and accumulated impairment losses. Cost includes the
purchase price of the asset and any costs, including internal
employee and other costs, directly attributable to bringing the
asset to the location and condition necessary for it to be capable
of operating in the manner intended by management.
Depreciation is recognised so as to write off the cost of assets
less their residual values over their useful lives, using the
straight-line method:
Distribution system assets 45 years
Distributed generation included in distribution 15 years
system assets
Information technology equipment included up to 10
in distribution system assets years
Metering equipment up to 10
years
Non-operational assets:
Buildings - freehold up to 60
years
lower of
Buildings - leasehold lease period
or 60 years
Fixtures and equipment up to 10
years
Software development costs up to 10
years
Freehold land is not depreciated.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
2. ACCOUNTING POLICIES - continued
Property, plant and equipment and depreciation - continued
The estimated useful lives, residual values and depreciation
method are reviewed at the end of each reporting period, with the
effect of any material changes in estimate accounted for on a
prospective basis. Due to the significance of the Group's
investment in property, plant and equipment, variations in
estimates could impact operating results both positively and
negatively although, historically, few changes have been
required.
Assets in the course of construction are carried at cost, less
any recognised impairment loss. Costs include professional fees,
and, for qualifying assets, borrowing costs capitalised in
accordance with the Group's accounting policy. Such assets are
classified to the appropriate categories of property, plant and
equipment when incurred and ready for intended use. Depreciation on
these assets, on the same basis as other assets, commences when the
assets are commissioned.
Financial instruments
Financial assets and financial liabilities are recognised on the
statement of financial position when the Group becomes a party to
the contractual provisions of the instrument.
Financial assets and financial liabilities are initially
measured at fair value. Transaction costs that are directly
attributable to the acquisition or issue of financial assets and
financial liabilities are added to or deducted from the fair value
of the financial assets or financial liabilities, as appropriate,
on initial recognition.
Inventories
Inventories are stated at the lower of cost and net realisable
value. Net realisable value represents the estimated selling price
for inventories less all estimated costs of completion and costs
necessary to make the sale. Raw materials and goods for resale are
valued at purchase cost on an average price basis. Work in progress
is valued at the cost of direct materials and labour plus
attributable overheads based on the normal level of activity less
progress payments.
Assets held for sale comprise of vehicles which have been sold
to the Group at the end of the lease agreement and are stated at
the lower of the value attributed to the vehicle under the terms of
the agreement or net realisable value. Net realisable value is
based on estimated selling price less further costs expected to be
incurred to completion and disposal. Within the statement of profit
or loss, any profits or losses arising from the sale of assets held
for sale are recognised in costs of sales.
Taxation
The income tax expense represents the sum of the tax currently
payable and deferred tax.
The tax currently payable is based on taxable profit for the
year. Taxable profit differs from 'profit before tax' as reported
in the consolidated statement of profit or loss because of items of
income or expense that are taxable or deductible in other years and
items that are never taxable or deductible. The Group's current tax
is calculated using tax rates that have been enacted or
substantively enacted by the end of the reporting period.
Deferred tax is recognised on temporary differences between the
carrying amounts of assets and liabilities in the consolidated
financial statements and the corresponding tax bases used in the
computation of taxable profit. Deferred tax liabilities are
generally recognised for all taxable temporary differences.
Deferred tax assets are generally recognised for all deductible
temporary differences to the extent that it is probable that
taxable profits will be available against which those deductible
temporary differences can be utilised. Such deferred tax assets and
liabilities are not recognised if the temporary difference arises
from the initial recognition of assets and liabilities in a
transaction that affects neither the taxable profit nor the
accounting profit. In addition, deferred tax liabilities are not
recognised if the temporary difference arises from the initial
recognition of goodwill.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
2. ACCOUNTING POLICIES - continued
Taxation - continued
Deferred tax liabilities are recognised for taxable temporary
differences associated with investments in subsidiaries and
associates, and interests in joint ventures, except where the Group
is able to control the reversal of the temporary difference and it
is probable that the temporary difference will not reverse in the
foreseeable future. Deferred tax assets arising from deductible
temporary differences associated with such investments and
interests are only recognised to the extent that it is probable
that there will be sufficient taxable profits against which to
utilise the benefits of the temporary differences and they are
expected to reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each
reporting period and reduced to the extent that that it is no
longer probable that sufficient taxable profits will be available
to allow all or part of the asset to be recovered.
Current and deferred tax are recognised in profit or loss,
except when they relate to items that are recognised in other
comprehensive income or directly in equity, in which case the
current and deferred tax are also recognised in other comprehensive
income or directly in equity respectively.
Research costs
Expenditure on research activities is written off to the
statement of profit or loss in the year in which it is
incurred.
Other than the software development licenses, the Group and the
Company do not carry out any other development activity that would
give rise to an intangible asset.
Foreign currencies
Transactions in foreign currencies are recognised at the rate of
exchange prevailing at the date of the transaction. At the end of
each reporting period, monetary items denominated in foreign
currencies are retranslated at the rates prevailing at that date.
Non-monetary items carried at fair value that are denominated in
foreign currencies are retranslated at the rates prevailing at that
date when the fair value was determined. Non-monetary items that
are measured in terms of historical cost in a foreign currency are
not retranslated.
Leases
Leases are classified as finance leases wherever the terms of
the lease transfer substantially all the risks and rewards of
ownership to the lessee. All other leases are classified as
operating leases.
Operating lease rentals are charged to the statement of profit
or loss or in property, plant and equipment on a straight-line
basis over the lease term.
Provisions
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event, it
is probable that the Group will be required to settle the
obligation and a reliable estimate can be made of the amount of the
obligation. The amount recognised as a provision is the best
estimate of the consideration required to settle the present
obligation at the end of the reporting period, taking into account
the risks and uncertainties surrounding the obligation. When a
provision is measured using the cash flows estimated to settle the
present obligation, its carrying amount is the present value of
those cash flows (when the effect of the time value of money is
material). When some or all of the economic benefits required to
settle a provision are expected to be recovered from a third party,
a receivable is recognised as an asset if it is virtually certain
that reimbursement will be received and the amount of the
receivable can be measured reliably.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
2. ACCOUNTING POLICIES - continued
Pensions
The Group contributes to the Northern Powergrid Group of the
Electricity Supply Pension Scheme (the "Northern Powergrid Group of
the ESPS"), a defined benefit scheme.
The cost of providing benefits is determined using the projected
unit credit method, with actuarial valuations being carried out at
the end of each annual reporting period. Re-measurement, comprising
actuarial gains and losses, the effect of the changes to the asset
ceiling and the return on plan assets (excluding interest) are
reflected immediately in the statement of financial position with a
charge or credit recognised in other comprehensive income in the
period in which they occur. Re-measurement recognised in other
comprehensive income is reflected immediately in retained earnings
and will not be reclassified to profit or loss. Past service cost
is recognised in profit or loss in the period of a plan amendment.
Net interest is calculated by applying a discount rate at the
beginning of the period to the net defined liability or asset.
Defined benefit costs are categorised as service cost, net interest
expense or income and re-measurement.
The retirement benefit obligation recognised in the statement of
financial position represents the actual deficit or surplus in the
Group's defined benefit plan. Any surplus resulting from this
calculation is limited to the present value of any economic
benefits available in the form of refunds from the plan or
reductions in future contributions to the plan.
The Group also participates in a defined contribution scheme.
Contributions payable to the defined contribution scheme are
charged to the statement of profit or loss in the year or
capitalised as appropriate when employees have rendered service
entitling them to the contributions.
A liability is recognised for benefits accruing to employees in
respect of wages and salaries, annual leave and sick leave in the
period in which the related service is rendered at the undiscounted
amount of the benefits expected to be paid in exchange for that
service. Liabilities recognised in respect of short-term employee
benefits are measured at the undiscounted amount of the benefits
expected to be paid in exchange for the related service.
Liabilities recognised in respect of other long-term employee
benefits are measured at the present value of the estimated future
cash outflows expected to be made by the Company in respect of
services provided by employees up to the reporting date.
Financial assets
Financial assets, including trade and other receivables and cash
and cash equivalents, are classified as loans and receivables.
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. Loans and receivables are measured at amortised cost using
the effective interest method, less any impairment.
The effective interest method is a method of calculating the
amortised cost of an instrument and of allocating income over the
relevant period. The effective interest rate is the rate that
exactly discounts estimated future cash receipts through the
expected life of the instrument to the net carrying amount on
initial recognition.
Interest income is recognised by applying the effective interest
rate, except for short-term receivables when the effect of
discounting is immaterial.
Cash and cash equivalents (which are presented as a single class
of assets on the face of the statement of financial position)
comprise cash at bank and other short-term highly liquid
investments with a maturity of three months or less, which are
subject to an insignificant risk of changes in value.
Financial assets are assessed for indicators of impairment at
the end of each reporting period. Financial assets are considered
to be impaired where there is objective evidence that, as a result
of one or more events that occurred after the initial recognition
of the financial asset, the estimated future cash flows of the
investment have been affected.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
2. ACCOUNTING POLICIES - continued
For certain categories of financial assets, such as trade
receivables, assets are assessed for impairment on a collective
basis even if they were assessed not to be impaired individually.
Objective evidence of impairment for a portfolio of receivables
could include the Group's past experience of collecting payments,
an increase in the number of delayed payments in the portfolio past
the average credit period of 30 days, as well as observable changes
in national or local economic conditions that correlate with
default on receivables.
The carrying amount of the financial asset is reduced by the
impairment loss directly for all financial assets with the
exception of trade receivables, where the carrying amount is
reduced through the use of an allowance account. When a trade
receivable is considered uncollectible, it is written off against
the allowance account. Subsequent recoveries of amounts previously
written off are credited against the allowance account. Changes in
the carrying amount of the allowance account are recognised in the
statement of profit or loss.
Going Concern
The directors have, at the time of approving the financial
statements, a reasonable expectation that the Company and the Group
have adequate resources to continue in operational existence for
the foreseeable future. Accordingly, they continue to adopt the
going concern basis in preparing the financial statements. Further
detail is contained within the Going Concern Statement in the
Report of the Directors.
3. SEGMENTAL REPORTING
The tables below represent the internal information provided to
the President and Chief Executive Officer of the Northern Powergrid
Group for the purposes of resource allocation and segmental
performance appraisal.
The Group operates in three principal areas of activity, those
of the distribution of electricity, engineering contracting and
smart meter rental in the United Kingdom.
Group revenue, Group profit before tax and Group net assets are
analysed below:
Consolidation
Distribution Contracting Other adjustments Total
2016 2016 2016 2016 2016
GBPm GBPm GBPm GBPm GBPm
REVENUE
External
sales 332.5 27.7 24.7 - 384.9
Inter-segment
sales 0.5 2.0 3.6 (6.1) -
Total revenue 333.0 29.7 28.3 (6.1) 384.9
SEGMENT RESULTS
Operating (3.9)
profit/(loss) 153.5 7.7 23.9 181.2
Other gains 0.5
Finance costs (39.1)
Finance income 1.3
Profit before
tax 143.9
OTHER INFORMATION
Capital additions 199.7 - 90.1 (0.1) 289.7
Depreciation 11.2 (1.7)
and amortisation 77.9 - 87.4
Amortisation
of deferred (19.3) (19.3)
revenue - - -
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
3. SEGMENTAL REPORTING - continued
Distribution Contracting Other Consolidation
adjustments Total
2016 2016 2016 2016 2016
GBPm GBPm GBPm GBPm GBPm
STATEMENT OF
FINANCIAL POSITION
Segment assets 2,340.6 17.5 174.0 (32.0) 2,500.1
Unallocated
corporate
assets 3.8
Total assets 2,503.9
Segment liabilities (666.6) (9.8) (20.0) 1.7 (694.7)
Unallocated
corporate
liabilities (834.4)
Total liabilities (1,529.1)
Net assets
by segment 1,674.0 7.7 154.0 (30.3) 1,805.4
Unallocated
net corporate
liabilities (830.6)
Total net
assets 974.8
Consolidation
Distribution Contracting Other adjustments Total
2015 2015 2015 2015 2015
GBPm GBPm GBPm GBPm GBPm
REVENUE
External
sales 342.2 30.9 13.3 - 386.4
Inter-segment
sales 0.5 2.0 4.0 (6.5) -
Total revenue 342.7 32.9 17.3 (6.5) 386.4
SEGMENT RESULTS
Operating
profit 163.6 (0.5) 5.1 28.0 196.2
Other gains 0.5
Finance costs (36.2)
Finance income 1.6
Profit before
tax 162.1
OTHER INFORMATION
Capital additions 219.7 - 52.8 (5.4) 267.1
Depreciation 3.9 (1.8)
and amortisation 73.8 0.1 76.0
Amortisation
of deferred (22.2) (22.2)
revenue - - -
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
3. SEGMENTAL REPORTING - continued
Distribution Contracting Other Consolidation
adjustments Total
2015 2015 2015 2015 2015
GBPm GBPm GBPm GBPm GBPm
STATEMENT OF
FINANCIAL POSITION
Segment assets 2,219.2 18.2 89.2 19.3 2,345.9
Unallocated
corporate
assets 12.4
Total assets 2,358.3
Segment liabilities (643.1) (6.8) (15.1) 25.1 (639.9)
Unallocated
corporate
liabilities (709.9)
Total liabilities (1,349.8)
Net assets/(liabilities)
by segment 1,576.1 11.4 74.1 44.4 1,706.0
Unallocated
net corporate
liabilities (697.5)
Total net
assets 1,008.5
"Other" comprises smart meter rental and business support
units.
Unallocated corporate assets and liabilities include cash and
cash equivalents (2016: GBP0.5 million. 2015: GBP8.8 million),
borrowings (2016: GBP741.2 million, 2015: GBP601.1 million) and
taxation (2016: GBP93.0 million, 2015: GBP108.8 million).
External sales to RWE Npower plc in 2016 of GBP76.3 million
(2015: GBP86.1 million) are included within the Distribution
segment. External sales to British Gas plc in 2016 of GBP53.0
million (2015: GBP59.7 million) are included within the
Distribution segment.
Sales and purchases between the different segments are made at
commercial prices.
Consolidation Adjustments include the recognition of the
GBP31.5m retirement benefit asset (2015: GBP88.1 million).
4. EMPLOYEES AND DIRECTORS
2016 2015
GBP'000 GBP'000
Salaries 63,030 61,472
Social security costs 7,004 6,392
Defined benefit pension costs (2,458) (384)
Defined contribution pension costs 1,893 1,648
69,469 69,128
Less charged as capital expenditure (42,129) (41,591)
27,340 27,537
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
4. EMPLOYEES AND DIRECTORS - continued
The majority of the Group's employees are members of the
Northern Powergrid Group of the ESPS, details of which are given in
the Employee Benefit Obligations note.
The average monthly number of employees during the year was:
2016 2015
No. No.
Distribution 1,066 1,074
Engineering Contracting 160 166
Other 44 41
1,270 1,281
DIRECTORS' REMUNERATION
2016 2015
Highest Paid: GBP'000 GBP'000
Short-term employee benefits 342 266
Post-employment benefits 11 21
Other long-term benefits 396 335
749 622
Total:
Short-term employee benefits 551 462
Post-employment benefits 23 38
Other long-term benefits 562 523
1,135 1,023
Directors who are a member of the
defined benefit scheme 23
Accrued pension benefit relating --
to highest paid director
OTHER KEY PERSONNEL REMUNERATION
2016 2015
Total: GBP'000 GBP'000
Short-term employee benefits 520 423
Post-employment benefits 111 115
Other long-term benefits 316 209
948 747
Other key personnel includes a number of senior functional
managers who, whilst not board directors, have authority and
responsibility for planning, directing and controlling the
activities of the Company and the Group.
The directors and key personnel are remunerated for their
services to the Northern Powergrid Group, of which the Company is a
subsidiary. The figures above represent the share of the costs
borne by the Group.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
5. NET FINANCE COSTS
2016 2015
GBP'000 GBP'000
Finance income:
Interest in joint venture 254 628
Dividends received 37 35
Interest on tax refund 388 -
Deposit account interest 58 91
Interest receivable on
loans to Group undertakings 617 865
1,354 1,619
2016 2015
GBP'000 GBP'000
Finance costs:
Bank interest 113 918
Interest payable on other loans 25,612 22,618
Interest payable on loans
from Group undertakings 7,073 6,910
Capitalised interest (2,660) (3,249)
Preference dividends payable 9,001 9,001
39,139 36,198
Net finance costs 37,785 34,579
6. PROFIT BEFORE INCOME TAX
The profit before income tax is stated after
charging/(crediting):
2016 2015
GBP'000 GBP'000
Depreciation - owned assets 83,737 73,419
Software development costs amortisation 3,730 2,674
Foreign exchange differences (40) 23
Research costs 830 2,052
Amortisation of deferred revenue (19,342) (22,203)
Impairment of trade and other receivables 440 191
Profit on disposal of fixed assets (522) (474)
Analysis of auditor's remuneration is as follows:
2016 2015
GBP'000 GBP'000
Fees payable to the Company's auditor
for the audit of the Company's
annual accounts 26 33
Fees payable to the Company's auditor
for the audit of the Company's 208 140
subsidiaries pursuant to legislation
Total audit fees 234 177
Other services 45 50
Total auditor's remuneration 279 227
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
6. PROFIT BEFORE INCOME TAX - continued
2016 2015
GBP'000 GBP'000
Fees payable to the Company's auditor
and its associates in respect of
the audit of associated pension 7 7
schemes
7. INCOME TAX
Analysis of tax expense
2016 2015
GBP'000 GBP'000
Current tax 14,030 29,661
Deferred tax (6,820) (12,379)
Total tax expense in consolidated
statement of profit or loss 7,210 17,282
Factors affecting the tax expense
The tax assessed for the year is lower than the standard rate of
corporation tax in the UK. The difference is explained below:
2016 2015
Tax expense comprises: GBP'000 GBP'000
143,918 162,056
======== ========
Profit multiplied by the standard
rate of corporation tax in the
UK of 20.00% (2015 - 20.25%) 28,784 32,816
Effects of:
Dividends on non-equity preference
shares 1,800 1,823
Tax effect of result of joint venture (51) (127)
Agreement of prior year tax claim (13,817) (2,845)
Other over provision for prior
years (2,520) (441)
Changes in legislation (7,651) (13,942)
Pension contributions recognised
in Other Comprehensive Income ("OCI") 789 801
Other (124) (803)
Tax expense 7,210 17,282
The prior year tax claim refers to a capital allowances claim
for earlier years agreed with HMRC in the year ended 31 December
2016.
2016 2015
Tax expense comprises: GBP'000 GBP'000
Current tax expense:
Corporation tax charge for the
year 28,907 32,947
Over provision for prior years (14,877) (3,286)
Total current tax charge 14,030 29,661
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
7. INCOME TAX - continued
2016 2015
Deferred tax: GBP'000 GBP'000
Deferred tax expenses relating
to the origination and reversal
of temporary differences 831 1,562
Effect of changes in tax rates (7,651) (13,942)
Total deferred tax charge (6,820) (12,379)
Tax on profit before tax 7,210 17,282
The Finance No2 Act 2015 reduced the rate of corporation tax to
19% effective from 1 April 2017 and to 18% effective from 1 April
2020. The Finance Act 2016, which was substantively enacted on 6
September, 2016 further reduced the rate of corporation tax
effective from 1 April 2020 to 17%. Accordingly deferred tax assets
and liabilities have been calculated at the tax rates which will be
in force when the underlying temporary differences are expected to
reverse.
8. PROFIT OF PARENT COMPANY
As permitted by Section 408 of the Companies Act 2006, the
statement of profit or loss of the Company is not presented as part
of these financial statements. The Company's profit for the
financial year was GBP15.9 million (2015: 14.6 million).
9. DIVIDS
2016 2015
GBP'000 GBP'000
Interim dividend at 78p per
share (2015: 16p) 100,000 20,600
10. OPERATING EXPENSES
Operating expenses comprise:
2016 2015
GBP'000 GBP'000
Distribution costs 101,879 99,607
Administrative expenses 58,471 50,068
160,350 149,675
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
11. INTANGIBLE ASSETS
Group
Software
development
costs
GBP'000
COST
At 1 January 2016 65,503
Additions 12,964
At 31 December 2016 78,467
AMORTISATION
At 1 January 2016 33,880
Amortisation for year 3,730
At 31 December 2016 37,610
NET BOOK VALUE
At 31 December 2016 40,857
Software
development
costs
GBP'000
COST
At 1 January 2015 55,027
Additions 10,476
At 31 December 2015 65,503
AMORTISATION
At 1 January 2015 31,206
Amortisation for year 2,674
At 31 December 2015 33,880
NET BOOK VALUE
At 31 December 2015 31,623
The Company had no intangible assets at 31 December 2016 (2015:
GBPnil).
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
12. PROPERTY, PLANT AND EQUIPMENT
Group
Non-operational Fixtures
land and Distribution and Metering
buildings system fittings equipment Totals
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
COST
At 1 January
2016 6,534 2,872,430 67,721 133,218 3,079,903
Additions - 181,349 5,236 90,093 276,678
Disposals - (10,526) (217) (398) (11,141)
At 31 December
2016 6,534 3,043,253 72,740 222,913 3,345,440
DEPRECIATION
At 1 January
2016 5,973 823,154 56,712 63,982 949,821
Charge for
year 105 67,461 3,508 12,663 83,737
Eliminated on disposal - (10,403) (217) (398) (11,018)
At 31 December
2016 6,078 880,212 60,003 76,247 1,022,540
NET BOOK VALUE
At 31 December
2016 456 2,163,041 12,737 146,666 2,322,900
Non-operational Fixtures
land and Distribution and Metering
buildings system fittings equipment Totals
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
COST
At 1 January
2015 6,534 2,686,350 60,380 80,224 2,833,488
Additions - 195,828 7,781 53,021 256,630
Disposals - (9,748) (440) (27) (10,215)
At 31 December
2015 6,534 2,872,430 67,721 133,218 3,079,903
DEPRECIATION
At 1 January
2015 5,857 767,439 54,638 58,683 886,617
Charge for
year 116 65,463 2,514 5,326 73,419
Eliminated on disposal - (9,748) (440) (27) (10,215)
At 31 December
2015 5,973 823,154 56,712 63,982 949,821
NET BOOK VALUE
At 31 December
2015 561 2,049,276 11,009 69,236 2,130,082
Assets in the course of construction included above:
Distribution Fixtures
system and fittings Total
GBP'000 GBP'000 GBP'000
At 1 January 2016 162,715 - 162,715
Additions 181,503 5,236 186,739
Available for use (173,551) (5,236) (178,787)
At 31 December 2016 170,667 - 170,667
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
12. PROPERTY, PLANT AND EQUIPMENT - continued
The Group has entered into contractual commitments in relation
to the future acquisition of property, plant and equipment of
GBP32.8 million (2015: GBP25.5 million).
The net book value of the Group's non-operational land and
buildings comprises:
2016 2015
GBP'000 GBP'000
Freehold - 162
Long leasehold 363 306
Short leasehold 93 93
456 561
Company
Non
operational Fixtures
land and Distribution and
buildings system fittings Totals
GBP'000 GBP'000 GBP'000 GBP'000
COST
At 1 January 2016
and 31 December 2016 280 1,259 3,634 5,173
DEPRECIATION
At 1 January 2016 29 - 3,464 3,493
Charge for year 6-40 46
At 31 December 2016 35 - 3,504 3,539
NET BOOK VALUE
At 31 December 2016 245 1,259 130 1,634
Non
operational Fixtures
land and Distribution and
buildings system fittings Totals
GBP'000 GBP'000 GBP'000 GBP'000
COST
At 1 January 2015
and 31 December 2015 280 1,259 3,634 5,173
DEPRECIATION
At 1 January 2015 22 - 3,423 3,445
Charge for year 7-41 48
At 31 December 2015 29 - 3,464 3,493
NET BOOK VALUE
At 31 December 2015 251 1,259 170 1,680
The Company has no assets in the course of construction as at 31
December 2016.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
13. INVESTMENTS
Group
Share
of joint Shares
venture's in other
net assets undertakings Total
GBP'000 GBP'000 GBP'000
At 31 December 2015 3,535 21 3,556
Movement (237) - (237)
At 31 December 2016 3,297 21 3,318
Company
Subsidiary Shares
undertakings in other
undertakings Total
GBP'000 GBP'000 GBP'000
At 31 December 2015 327,099 971 328,070
Movement - - -
At 31 December 2016 327,099 971 328,070
Details of the investments of the Group at 31 December 2016 are
listed below:
Proportion
of voting
Name of company Holding rights Nature of
of shares and shares business
held
Subsidiary undertakings
Held by Company:
CE Electric Services 1 at GBP1 100% Dormant
Limited
Central PowerGrid 1 at GBP1 100% Dormant
Limited
East PowerGrid Limited 1 at GBP1 100% Dormant
Eastern PowerGrid 1 at GBP1 100% Dormant
Limited
Infrastructure North 1 at GBP1 100% Dormant
Limited
Engineering
Integrated Utility 3,103,000 100% contracting
Services Limited at GBP1 services
IUS Limited 100 at GBP1 100% Dormant
Midlands PowerGrid 1 at GBP1 100% Dormant
Limited
NEDL Limited 2 at GBP1 100% Dormant
North East PowerGrid 1 at GBP1 100% Dormant
Limited
North Eastern PowerGrid 1 at GBP1 100% Dormant
Limited
North PowerGrid Limited 1 at GBP1 100% Dormant
North West PowerGrid 1 at GBP1 100% Dormant
Limited
North Western PowerGrid 1 at GBP1 100% Dormant
Limited
Northern Electric 84,785,000 100% Non-trading
& Gas Limited at GBP1 company
Northern Electric 1 at GBP1 100% Dormant
Distribution Limited
Property
Northern Electric 32,207,100 100% holding &
Properties Limited at GBP1 management
company
Northern Electric
Share Scheme Trustee 2 at GBP1 100% Dormant
Limited
Northern Electricity 1 at GBP1 100% Dormant
(North East) Limited
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
13. INVESTMENTS - continued
Northern Electricity 1 at GBP1 100% Dormant
(Yorkshire) Limited
Northern Electricity 1 at GBP1 100% Dormant
Limited
Northern Electricity
Networks Company (North 1 at GBP1 100% Dormant
East) Limited
Northern Electricity
Networks Company (Yorkshire) 1 at GBP1 100% Dormant
Limited
Northern Electricity
Networks Company Limited 1 at GBP1 100% Dormant
Northern Electrics 2 at GBP1 100% Dormant
Limited
Northern Energy Funding 1 at GBP1 100% Dormant
Company Limited
Northern Metering 100 at GBP1 100% Dormant
Services Limited
Northern Powergrid 1 at GBP1 100% Meter asset
Metering Limited provider
Distribution
Northern Powergrid 200,000,100 100% of electricity
(Northeast) Limited at GBP1
Northern PowerGrid 1 at GBP1 100% Dormant
(North West) Limited
Northern Power Networks
Company (North East) 1 at GBP1 100% Dormant
Limited
Northern Power Networks
Company (Yorkshire) 1 at GBP1 100% Dormant
Limited
Northern Power Networks 1 at GBP1 100% Dormant
Company Limited
Northern Transport 7,000,000 100% Car finance
Finance Limited at GBP1 company
Northern Utility Services 100 at GBP1 100% Dormant
Limited
PowerGrid (Central) 1 at GBP1 100% Dormant
Limited
PowerGrid (East) Limited 1 at GBP1 100% Dormant
PowerGrid (Eastern) 1 at GBP1 100% Dormant
Limited
PowerGrid (Midlands) 1 at GBP1 100% Dormant
Limited
PowerGrid (North East) 1 at GBP1 100% Dormant
Limited
PowerGrid (North Eastern) 1 at GBP1 100% Dormant
Limited
PowerGrid (North West) 1 at GBP1 100% Dormant
Limited
PowerGrid (North Western) 1 at GBP1 100% Dormant
Limited
PowerGrid (North) 1 at GBP1 100% Dormant
Limited
PowerGrid (Northern) 1 at GBP1 100% Dormant
Limited
PowerGrid (South East) 1 at GBP1 100% Dormant
Limited
PowerGrid (South Eastern) 1 at GBP1 100% Dormant
Limited
PowerGrid (South West) 1 at GBP1 100% Dormant
Limited
PowerGrid (South Western) 1 at GBP1 100% Dormant
Limited
PowerGrid (South) 1 at GBP1 100% Dormant
Limited
PowerGrid (Southern) 1 at GBP1 100% Dormant
Limited
PowerGrid (West) Limited 1 at GBP1 100% Dormant
PowerGrid (Western) 1 at GBP1 100% Dormant
Limited
PowerGrid (Yorkshire) 1 at GBP1 100% Dormant
Limited
South East PowerGrid 1 at GBP1 100% Dormant
Limited
South Eastern PowerGrid 1 at GBP1 100% Dormant
Limited
South PowerGrid Limited 1 at GBP1 100% Dormant
South West PowerGrid 1 at GBP1 100% Dormant
Limited
South Western PowerGrid 1 at GBP1 100% Dormant
Limited
Southern PowerGrid 1 at GBP1 100% Dormant
Limited
West PowerGrid Limited 1 at GBP1 100% Dormant
Western PowerGrid 1 at GBP1 100% Dormant
Limited
YEDL Limited 1 at GBP1 100% Dormant
Yorkshire Electricity 1 at GBP1 100% Dormant
Distribution Limited
Yorkshire PowerGrid 1 at GBP1 100% Dormant
Limited
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
13. INVESTMENTS - continued
Held by the Company's subsidiaries:
Northern Electric 50,000 at 100% Finance company
Finance plc GBP1
Joint Venture Entity
Held by the Company:
Vehicle Lease and
Service Limited(registered
office - Centre for 950,000 50% Transport
Advanced Industry, at GBP1 services
3rd Floor, Coble Dene,
North Shields, NE29
6DE)
Held by Joint Venture
Entity Held by the
Company:
VLS Limited (registered
office - Centre for
Advanced Industry, 50% of 50% Dormant
3rd Floor, Coble Dene, 1 at GBP1
North Shields, NE29
6DE)
Except where indicated, the registered office address of the
above companies is Lloyds Court, 78 Grey Street, Newcastle upon
Tyne, NE1 6AF.
Interest in Joint venture
Summarised financial information in respect of the Group's joint
venture is set out below:
2016 2015
GBP'000 GBP'000
Long-term assets 16,192 16,849
Current assets 15,706 16,283
Long-term liabilities (14,962) (14,436)
Current liabilities (10,340) (11,626)
Net assets 6,596 7,070
Group's share of joint venture's
net assets 3,298 3,535
Revenue 18,417 17,515
Profit for the year 508 1,256
Group's share of joint venture's
profit for the year 254 628
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
14. INVENTORIES
Group
2016 2015
GBP'000 GBP'000
Stocks 11,853 12,541
Work-in-progress 232 265
Assets held for sale 751 646
12,836 13,452
The Company had no inventories at 31 December 2016 (2015 -
GBPnil).
15. TRADE AND OTHER RECEIVABLES
Group Company
2016 2015 2016 2015
GBP'000 GBP'000 GBP'000 GBP'000
Current:
Distribution use of
system receivables 50,280 39,854 - -
Construction contract
customers 1,974 3,901 - -
Amounts due from customers
for contract work 12,542 11,082
Amounts receivable in
respect of finance leases 8,047 5,342 - -
Amounts receivable for
sale of goods and services 8,011 9,675 65 176
Prepayments and accrued income 2,786 4,025 252 251
83,640 73,879 317 427
Non-current:
Amounts receivable in
respect of finance leases 8,406 8,769 --
Aggregate amounts 92,046 82,648 317 427
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
15. TRADE AND OTHER RECEIVABLES - continued
The directors consider that the carrying amount of trade and
other receivables approximates their fair value calculated by
discounting the future cash flows at the market rate at end of the
reporting period. The fair valuation of the assets is based on
Level 1 inputs. The maximum exposure of risk to the Group is the
book value of these receivables less any provisions for
impairment.
Distribution use of system receivables
The customers served by the Group's distribution network are
supplied predominantly by a small number of electricity supply
businesses with RWE NPower plc accounting for approximately 22% of
distribution revenues in 2016 (2015: 24%) and British Gas plc
accounting for approximately 15% of distribution revenues in 2016
(2015: 16%). Ofgem has determined a framework which sets credit
limits for each supply business based on its credit rating or
payment history and requires them to provide credit cover if their
value at risk (measured as being equivalent to 45 days usage)
exceeds the credit limit. Acceptable credit typically is provided
in the form of a parent company guarantee, letter of credit or an
escrow account. Included within other payables are customer
deposits of GBP0.4 million as at 31 December 2016 (2015: GBP0.4
million).
Ofgem has indicated that, provided Northern Powergrid
(Northeast) Limited has implemented credit control, billing and
collection processes in line with best practice guidelines and can
demonstrate compliance with the guidelines or is able to
satisfactorily explain departure from the guidelines, any bad debt
losses arising from supplier default will be recovered through an
increase in future allowed income. Losses incurred to date have not
been material. Included in the Group's use of system ("UoS")
receivables are debtors with a carrying value of GBP0.2 million,
which have been placed into administration and have therefore been
provided in full at the year-end (2015: GBPnil).
Construction contract customers
The average credit period on construction contracts is 30 days.
Interest is not generally charged on construction contracts paid
after the due date. The Group has provided fully for all
receivables over one year for UK Contracting debts and all
receivables over six months for Multi-Utility debts. Trade
receivables between 30 days and these pre-determined provision
dates are provided for based on estimated irrecoverable amounts,
determined by reference to past default experience.
Included in the Group's construction contracts balance are
debtors with a carrying amount of GBP3.3 million (2015: GBP2.5
million), which are past due at the reporting date for which the
Group has provided for an irrecoverable amount of GBP0.3 million
(2015: GBP0.2 million) based on experience. The Group does not hold
collateral over these balances. The average age of these
receivables is 91 days (2015: 55 days).
Included in the Group's construction contracts balance are
debtors with a carrying amount of GBPnil (2015: GBPnil) which are
past due at the reporting date for which the Group has not provided
as there has not been a significant change in credit quality and
the amounts are still considered recoverable. The Group does not
hold any collateral over these balances.
Amounts due from customers for contract work
Contracts in progress at the reporting date:
2016 2015
GBP'000 GBP'000
Contract costs incurred plus
recognised profits less recognised
losses to date 70,382 60,125
Less: progress billings (57,840) (49,043)
Amount due from customers 12,542 11,082
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
15. TRADE AND OTHER RECEIVABLES - continued
At 31 December 2016, retentions held by customers for contract
work amounted to GBP0.3 million (2015: GBP0.4 million).
Advances received from customers for contract work amounted to
GBPnil (2015: GBPnil).
The Company had no construction contracts at 31 December 2016
(2015: GBPnil).
Finance lease receivables
Minimum lease Present value
payments
2016 2015 2016 2015
GBP'000 GBP'000 GBP'000 GBP'000
Amounts receivable
under finance
leases:
Within one year 5,650 5,508 5,189 5,342
In the second
to fifth years
inclusive 12,913 10,384 10,522 8,769
More than five
years 4,962 - 742 -
23,525 15,892 16,453 14,111
Less: unearned
finance income (7,072) (1,781) --
16,453 14,111 16,453 14,111
Northern Transport Finance Limited ("NTFL"), a wholly-owned
subsidiary, enters into credit finance arrangements for motor
vehicles with employees in the Northern Powergrid Group. All
agreements are denominated in sterling. The term of the finance
agreements is predominantly three years.
The interest rate inherent in the agreements is fixed at the
contract date for all of the term of the agreement. The average
effective interest rate contracted is approximately 6.5% (2015:
6.5%) per annum. None of these debts are past due and there are no
indicators of impairment.
Northern Powergrid Metering Limited, a wholly-owned subsidiary,
enters into credit finance arrangements for smart meters with
energy supply companies. All agreements are denominated in
sterling. The term of the finance agreements is predominantly ten
years.
The interest rate inherent in the agreements is fixed at the
contract date for all of the term of the agreement. None of these
debts are past due and there are no indicators of impairment.
The directors consider the carrying value of finance lease
receivables approximates their fair value. The maximum risk
exposure is the book value of these receivables, less the residual
value of the leased assets.
Amounts receivable from sale of goods and services
Sales of goods and services comprise all income streams which
are not classified as UoS income. Examples of non-UoS income
streams would be meter rentals, service alterations, and recovery
of amounts for damage caused by third parties to the distribution
system.
The average credit period on sales of goods and services is 30
days. Interest is not generally charged on the trade receivables
paid after the due date. An allowance for doubtful debts is made
for debts past their due date based on estimated irrecoverable
amounts from the sale of goods and services, determined by
reference to past default experience
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
15. TRADE AND OTHER RECEIVABLES - continued
Included in the Group's amounts receivable for goods and
services balance are debtors with a carrying amount of GBP1.1
million (2015: GBP0.8 million) which are past due at the reporting
date and for which the Group has provided an irrecoverable amount
of GBP0.2 million (2015: GBP0.2 million) based on past experience.
The Group does not hold any collateral over these balances. The
average age of these receivables is 223 days (2015: 207 days).
Included in the Group's amounts receivable for goods and
services balance are debtors with a carrying amount of GBP0.2
million (2015: GBP0.2 million). These amounts are past due at the
reporting date and the Group has not provided for any amounts as
not being recoverable because there has not been a significant
change in credit quality and the amounts are still considered
recoverable. The Group does not hold any collateral over these
balances. The average age of these receivables is 78 days (2015: 66
days).
Ageing of past due but not impaired receivables:
2016 2015
GBP'000 GBP'000
30-60 days 116 133
60-120 days 66 49
120-210 days 7 12
Total 189 194
Movement in the allowance for doubtful debts
2016 2015
GBP'000 GBP'000
At 1 January 400 501
Amounts utilised/written off in
the year (262) (292)
Amounts recognised in statement
of profit or loss 620 191
At 31 December 758 400
In determining the recoverability of the trade and other
receivables, the Group considers any change in the credit quality
of the trade and other receivable from the date credit was
initially granted up to the reporting date. The concentration of
credit risk, other than in relation to UoS receivables, is limited
due to the customer base being large and unrelated. Accordingly,
the directors believe that there is no further credit provision
required in excess of the allowance for doubtful debts.
Included in the allowance for doubtful debts are specific trade
receivables, with a balance of GBP0.1 million (2015: GBP0.2
million) which have been placed in administration. The impairment
represents the difference between the carrying amount of the
specific trade receivable and the present value of the expected
liquidation dividend.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
15. TRADE AND OTHER RECEIVABLES - continued
Categories of financial assets
2016 2015
Group: GBP'000 GBP'000
Cash and bank balances 515 8,824
Loans and receivables at amortised
cost 89,260 78,623
Total financial assets 89,775 87,447
Non-current assets 2,367,076 2,165,261
Inventories 12,836 13,452
Prepayments and accrued income 2,786 4,025
Pension asset 31,500 88,100
Total non-financial assets 2,414,198 2,270,838
Total assets 2,503,973 2,358,285
2016 2015
Company: GBP'000 GBP'000
Cash and bank balances - 29,806
Loans and receivables at amortised
cost 65 81
Total financial assets 65 24,498
Non-current assets 329,704 329,750
Prepayments and accrued income 252 251
Income tax receivables 6,047 2,694
Total non-financial assets 336,003 332,695
Total assets 336,068 357,193
16. CASH AND CASH EQUIVALENTS
Group Company
2016 2015 2016 2015
GBP'000 GBP'000 GBP'000 GBP'000
Amounts owed by Group
undertakings 515 8,824 - 24,322
515 8,824 - 24,322
Cash and cash equivalents have a maturity of less than three
months, are readily convertible to cash and are subject to an
insignificant risk of changes in value. The carrying amount of
these assets approximates their fair value.
Amounts owed by Group undertakings represent surplus cash
remitted to Yorkshire Electricity Group plc ("YEG"), a fellow
company in the Northern Powergrid Group, and invested to generate a
market rate of return for the Group. This is repayable on demand by
YEG.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
17. CALLED UP SHARE CAPITAL
Allotted, issued and fully paid:
Number: Class: Nominal 2016 2015
value: GBP'000 GBP'000
127,689,809 Ordinary share capital 56 12/13p 72,173 72,173
The Company has one class of ordinary shares which carries no
right to fixed income.
Details of the cumulative non-equity preference shares are
contained in the borrowings note.
18. RESERVES
Group
Retained Share Other
earnings premium reserves Totals
GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2016 771,463 158,748 6,185 936,396
Profit for the
year 136,708 --136,708
Dividends (100,000) - - (100,000)
Movements on pension reserve (70,503) - - (70,503)
At 31 December 2016 737,668 158,748 6,185 902,601
Retained Share Other
earnings premium reserves Totals
GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2015 649,788 158,748 6,185 814,721
Profit for the
year 144,774 --144,774
Dividends (20,600) - - (20,600)
Movements on pension reserve (2,499) - - (2,499)
At 31 December 2015 771,463 158,748 6,185 936,396
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
18. RESERVES - continued
Company
Retained Share Other
earnings premium reserves Totals
GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2016 107,480 158,748 6,185 272,413
Profit for the
year 15,911 --15,911
Dividends (100,000) - - (100,000)
At 31 December 2016 23,391 158,748 6,185 23,391
Retained Share Other
earnings premium reserves Totals
GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2015 113,523 158,748 6,185 278,456
Profit for the
year 14,557 --14,557
Dividends (20,600) - - (20,600)
At 31 December 2015 107,480 158,748 6,185 272,413
19. TRADE AND OTHER PAYABLES
Group Company
2016 2015 2016 2015
GBP'000 GBP'000 GBP'000 GBP'000
Current:
Payments on account 37,438 49,345 - -
Trade creditors 5,037 7,817 263 387
Amounts owed to related
parties 583 499 - -
Social security and
other taxes 5,036 3,171 54 395
Other creditors 8,922 9,347 2,394 1,543
Deferred revenue 20,920 19,790 - -
Accrued expenses 51,946 20,042 466 423
129,882 110,011 3,177 2,748
Non-current:
Deferred revenue 562,308 526,800 - -
562,308 526,800 - -
Aggregate amounts 692,190 636,811 3,177 2,748
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
19. TRADE AND OTHER PAYABLES - continued
The directors consider that the carrying amount of other
financial liabilities approximates their fair value, calculated by
discounting future cash flows at market rate at the end of the
reporting period. The valuation of liabilities set out above is
based on Level 1 inputs. Trade creditors and accruals principally
comprise amounts outstanding for trade purchases and ongoing costs.
Invoices are paid at the end of the month following the date of the
invoice. The Group has financial risk management policies in place
to ensure that all payables are paid within the credit
timeframe.
The following tables detail the remaining contractual maturities
for non-derivative financial liabilities. The tables have been
drawn up based on the cash flows of financial liabilities based on
the earliest possible date on which the Company or the Group can be
required to pay. The tables include both interest and principal
cash flows.
Group
Less than 3 months
3 months to 1 year 1 to 5+ years Total
5 years
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2016:
Non-interest
bearing 71,524 - - - 71,524
Variable interest 2,925
rate liability - - - 2,925
Fixed interest 5,031 25,539 325,057 590,486 946,113
rate liability
79,480 25,539 325,057 590,486 1,020,562
2015:
Non-interest
bearing 40,876 - - - 40,876
Variable interest
rate liability 275 - - - 275
Fixed interest
rate liability 5,031 25,539 339,016 607,150 976,736
46,182 25,539 339,016 607,150 1,017,887
Company
Less than 3 months
3 months to 1 year 1 to 5+ years Total
5 years
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2016:
Non-interest
bearing 3,177 - - - 3,177
Variable interest
rate liability 66,806 - - - 66,806
Fixed interest 9,000 36,000 115,532 160,532
rate liability -
69,983 9,000 36,000 115,532 230,515
2015:
Non-interest
bearing 2,798 - - - 2,798
Fixed interest
rate liability - 9,000 36,000 115,532 160,532
2,798 9,000 36,000 115,532 163,330
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
19. TRADE AND OTHER PAYABLES - continued
Categories of financial liabilities
2016 2015
Group: GBP'000 GBP'000
Loans and payables at amortised
cost 755,740 618,755
Total financial liabilities 755,740 618,755
Payments received on account 37,438 49,345
Income tax liabilities 93,226 108,821
Other taxes and social security 5,036 3,171
Accruals 51,946 20,042
Deferred revenue 583,288 546,590
Provisions 2,525 2,992
Total non-financial liabilities 773,459 730,961
Total liabilities 1,529,199 1,349,716
2016 2015
Company: GBP'000 GBP'000
Loans and payables at amortised
cost 70,632 5,319
Total financial liabilities 70,632 5,319
Income tax liabilities 2,758 4,809
Other taxes and social security 54 395
Accruals 466 423
Provisions 1,661 1,661
Total non-financial liabilities 4,939 7,288
Total liabilities 75,571 12,607
Deferred Revenue
2016 2015
GBP'000 GBP'000
At 1 January 546,590 522,532
Additions 55,980 46,261
Amortisation (19,342) (22,203)
At 31 December 583,228 546,590
Deferred revenue represents contributions from customers made in
advance towards distribution system assets. This income is released
to the statement of profit or loss over 45 years on a straight line
basis (except for distributed generation which is released over 15
years on a straight line basis), in line with the useful economic
life of the distribution system assets.
The Company had no deferred revenue at 31 December 2016 (2015:
GBPnil).
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
20. BORROWINGS
The directors' consideration of liquidity, interest rate and
foreign currency risk is described in the Strategic Report.
Group
Book Value Fair Value
2016 2015 2016 2015
GBP'000 GBP'000 GBP'000 GBP'000
Loans 497,685 497,486 599,169 560,985
Cumulative preference
shares 3,368 3,368 167,790 163,602
Amounts owed to Group
undertakings 102,930 100,238 153,191 153,554
603,983 601,092 920,150 853,743
The borrowings are repayable as follows:
On demand or within
one year 16,569 13,917 16,569 38,315
Between one and five
years 218,268 218,103 256,576 257,034
After five years 369,146 369,072 647,005 582,792
603,983 601,092 920,150 853,743
Analysis of borrowings:
Short-term loan 11 53 11 53
Inter-company short-term
loan 2,914 222 2,914 222
Bond 2020 - 8.875% 101,192 101,052 130,276 130,560
Bond 2035 - 5.125% 152,959 152,883 207,505 180,462
Cumulative preference
shares 3,368 3,368 167,790 163,602
European Investment
Bank 2018 - 4.065%* 41,419 41,410 42,974 43,632
European Investment
Bank 2019 - 4.241%* 41,481 41,472 44,655 44,683
European Investment
Bank 2020 - 4.386%* 40,495 40,488 44,990 44,478
European Investment
Bank 2027 - 2.564% 120,128 120,128 128,758 117,117
Yorkshire Electricity
Group plc 2037 - 100,016 100,016 150,277 128,934
5.9%
603,983 601,092 920,150 853,743
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
20. BORROWINGS - continued
Company
Book Value Fair Value
2016 2015 2016 2015
GBP'000 GBP'000 GBP'000 GBP'000
The borrowings are
repayable as follows:
On demand or within
one year 66,806 2,272 66,806 2,273
After one year 1,117 1,117 165,539 158,560
67,923 3,389 232,345 160,833
Analysis of borrowings:
Short term loans 2,395 - 2,395 -
Inter-company short-term
loan 62,161 22 62,160 22
Cumulative preference
shares 3,367 3,367 167,790 160,810
67,923 3,389 232,345 160,832
Of the total financial liabilities, GBP500.9 million relates to
external borrowings and preference shares whose fair value is
determined with reference to quoted market prices. The directors'
estimates of the fair value of internal borrowings are determined
in accordance with generally accepted pricing models based on
discounted cash flow analysis using prices from observable current
market transactions or dealer quotes for similar instruments. The
valuation of liabilities set out above is based on Level 1
inputs.
* The borrowings from the European Investment Bank were drawn
down in twelve tranches, repayable in 2018, 2019 and 2020. The
interest rates shown are average rates for those repayment dates.
The spread of interest rates is as follows:
2018: 3.901% - 4.283%
2019: 4.077% - 4.455%
2020: 4.227% - 4.586%
Interest on short-term loans and on inter-company short-term
loans is charged at a floating rate of interest of LIBOR plus
0.35%, thus exposing the Group to cash flow interest rate risk. A
1% movement in interest rates would not subject the Group to any
material change in interest costs. All other loans are at fixed
interest rates and expose the Group to fair value interest rate
risk.
The Company had authorised 115,000,000 non-equity cumulative
preference shares of 1p each as at 31 December 2016 and 2015. As at
31 December 2016 and 2015 111,662,378 were allotted, called up and
fully paid.
The terms of the cumulative preference shares:
i) entitle holders, in priority to holders of
all other classes of shares, to a fixed cumulative
preferential dividend of 8.061p (net) per share
per annum payable half-yearly in equal amounts
on 31 March and 30 September;
ii) on a return of capital on a winding up, or
otherwise, will carry the right to repayment
of capital together with a premium of 99p per
share and a sum equal to any arrears or accruals
of dividend. This right is in priority to the
rights of ordinary shareholders;
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
20. BORROWINGS - continued
iii) carry the right to attend a general meeting
of the Company and vote if, at the date of
the notice convening the meeting, payment of
the dividend to which they are entitled is
six months or more in arrears, or if a resolution
is to be considered at the meeting for winding-up
the Company or abrogating, varying or modifying
any of the special rights attaching to them;
and
iv) are redeemable in the event of the revocation
by the Secretary of State of the Company's
Public Electricity Supply Licence at the value
given in (ii) above.
During the year ended 31 December 2001, under the terms of the
Company's transfer scheme, as approved by the Secretary of State in
accordance with the provisions of the Utilities Act 2000, the
Company's Public Electricity Supply Licence was converted into an
Electricity Distribution Licence and an Electricity Supply
Licence.
At 31 December 2016, the Group had available GBP97 million
(2015: GBP97 million) of undrawn committed borrowing facilities in
respect of which all conditions precedent had been met.
No material market risks in relation to currency or interest
rates are faced by the Group. As at 31 December 2016, 100% (2015:
100%) of the Group's long-term borrowings were at fixed rates and
the average maturity for these borrowings was 12 years (2015: 14
years).
21. LEASING AGREEMENTS
Group
2016 2015
GBP'000 GBP'000
Within one year 5,772 6,182
Between one and five years 14,530 18,195
In more than five years 2,921 8,689
23,223 33,066
Minimum lease payments under operating leases recognised in the
year
5,447 5,121
Company
2016 2015
GBP'000 GBP'000
Within one year 172 172
Between one and five years 88 218
260 390
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
22. PROVISIONS
Group Company
2016 2015 2016 2015
GBP'000 GBP'000 GBP'000 GBP'000
Other provisions 2,525 2,992 1,713 1,661
Analysed as follows:
Current 722 1,008 8 9
Non-current 1,803 1,984 1,705 1,652
2,525 2,992 1,713 1,661
Claims Other Total
GBP'000 GBP'000 GBP'000
At 1 January 2016 534 2,458 2,992
Utilised/paid in the year (874) (577) (1,451)
Charged to statement of
profit or loss 630 354 984
At 31 December 2016 290 2,235 2,525
Claims: Provision has been made to cover costs arising from
actual claims, which are not externally insured. Settlement is
expected substantially within 12 months.
Other: Primarily consists of a provision for future safe
disposal of transformers which contain oil contaminated with
Polychlorinated Biphenyls (PCBs) and for an amount to cover claims
made under section 74 of the New Road and Street Works Act 1991.
Costs are expected to be incurred over the next 15 years.
Also included in 'other' is a provision to cover the actuarial
assessment of the costs of unfunded pension arrangements in respect
of former employees. Further details can be found in the Employee
Benefit Obligations note.
23. DEFERRED TAX
Accelerated Rollover/ Retirement Other Total
tax depreciation holdover benefit
relief (obligations/
assets)
Group GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2016 89,204 6,016 9,295 344 104,859
Credit to the statement
of profit or loss (2,046) (2,141) (1,932) (701) (6,820)
Credit to other
comprehensive income - - (8,577) - (8,577)
At 31 December 2016 87,158 3,875 (1,214) (357) 89,462
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
23. DEFERRED TAX - continued
Accelerated Rollover/ Retirement Other Total
tax depreciation holdover benefit
relief (obligations/
assets)
Group GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2015 104,092 6,626 (2,516) (272) 107,930
Charge/(credit)
to the statement (12,379)
of profit or loss (14,888) (610) 2,503 616
Charge to other
comprehensive income - - 9,308 - 9,308
At 31 December 2015 89,204 6,016 9,295 344 104,859
Accelerated Rollover/ Retirement Total
tax depreciation holdover benefit
relief (obligations/
assets)
Company GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2016 (23) 5,129 (297) 4,809
Charge/(credit)
to statement of (2,051)
profit or loss 5 (2,063) 7
At 31 December 2016 (18) 3,066 (290) 2,758
Accelerated Rollover/ Retirement Total
tax depreciation holdover benefit
relief (obligations/
assets)
GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2015 (45) 5,594 (339) 5,210
Charge/(credit)
to statement of
profit or loss 22 (465) 42 (401)
At 31 December 2015 (23) 5,129 (297) 4,809
Other comprises provisions and employee expenses deductible for
tax on a paid basis.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
24. EMPLOYEE BENEFIT OBLIGATIONS
Introduction
The Company contributes to two pension schemes, which it
operates on behalf of the participating companies within the
Northern Powergrid Group. Those pension schemes are:
- The Northern Powergrid Group of the ESPS (the
"DB Scheme"); and
- The Northern Powergrid Pension Scheme.
The Northern Powergrid Pension Scheme was introduced for new
employees of the Northern Powergrid Group from July 1997 and is a
money purchase arrangement accounted for as a defined contribution
scheme.
The DB Scheme is a defined benefit scheme for directors and
employees, which provides pension and other related retirement
benefits based on final pensionable pay. The DB Scheme closed to
staff commencing employment with the Northern Powergrid Group on or
after 23 July 1997. Members who joined before this date, including
some Protected Persons under The Electricity (Protected Persons)
(England and Wales) Pension Regulations 1990, continue to build up
future pension benefits.
Under the DB Scheme, employees are typically entitled to annual
pensions on retirement at age 63 of one-eightieth of final
pensionable salary for each year of service plus an additional
tax-free cash lump sum at retirement of three times pension.
Benefits are also payable on death and following other events such
as withdrawing from active service.
No other post-retirement benefits are provided to members of the
DB Scheme.
Role of Trustees
The DB Scheme is administered by a board of Trustees which is
legally separate from the Company. The assets of the DB Scheme are
held in a separate trustee-administered fund. The board of Trustees
is made up of Trustees appointed by the Company, as the Principal
Employer of the DB Scheme, Trustees elected by the membership and
an independent trustee. The Trustees are required by law to act in
the interests of all relevant beneficiaries and are responsible in
particular for the asset investment strategy plus the day-to-day
administration of the benefits payable. They also are responsible
for jointly agreeing with the Principal Employer the level of
contributions due to the DB Scheme.
Funding requirements
UK legislation requires that pension schemes are funded
prudently (i.e. to a level in excess of the current expected cost
of providing benefits). The last actuarial valuation of the DB
scheme was carried out by the Trustees' actuarial advisors, Aon
Hewitt, as at 31 March 2013. Such valuations are required by law to
take place at intervals of no more than three years. Following each
valuation, the Trustees and the Northern Powergrid Group must agree
the contributions required (if any) to ensure the DB Scheme is
fully funded over time on the basis of suitable, prudent
assumptions. Contributions agreed in this manner constitute a
minimum funding requirement. The next funding valuation is due no
later than 31 March 2016 at which progress towards full-funding
will be reviewed.
Agreement was reached during October 2014 with the Trustees to
repair the funding deficit of GBP286.4m as at 31 March 2014 over
the 11 year period to 31 March 2025, subject to the actuarial
assumptions adopted for the triennial valuation as at 31 March 2013
being borne out in practice. The agreement includes cash payments
of GBP34.9m per annum over the period to 31 March 2015, made on a
monthly basis, followed by an agreed profile of payments to be made
over the remaining ten years of the recovery plan, as set out
below:
1 April 2015 to GBP28.6m
31 March 2016 p.a.
1 April 2016 to GBP18.4m
31 March 2025 p.a.
All contributions set out above are in 2014/15 prices and will
be increased each year in line with increases in RPI over the
period until they fall due.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
24. EMPLOYEE BENEFIT OBLIGATIONS - continued
The contributions payable by the Northern Powergrid Group to the
DB Scheme in respect of future benefits, which are accruing, are
34.2% of pensionable pay. These contributions were determined as
part of the 31 March 2013 actuarial valuation and are payable in
addition to the deficit repair contributions mentioned above. These
rates will remain in place until such a time as a new schedule of
contributions is agreed between the Trustees and the Company as
part of the 31 March 2016. In addition, the Northern Powergrid
Group pays 3.0% of pensionable pay to the DB Scheme to cover the
expenses of running the DB Scheme.
The Northern Powergrid Group's total contributions to the DB
Scheme for the next financial year are expected to be GBP36.7
million.
Under the rules of the DB Scheme, any future surplus in the DB
Scheme may, following consultation with the Group Trustees, be
allocated for the benefit of the members of the DB Scheme and/or
the Principal and Participating Employers.
Pensions' Regulation
The UK pensions market is regulated by the Pensions Regulator
whose key statutory objectives in relation to UK defined benefit
plans are to:
- protect the benefits of members;
- promote and to improve understanding of good
administration;
- reduce the risk of situations arising which
may lead to compensation being payable from
the Pension Protection Fund ("PPF"); and
- minimise any adverse impact on the sustainable
growth of an employer.
The Pensions Regulator has various powers including the power
to:
- wind up a scheme where winding up is necessary
to protect members' interests;
- appoint or remove a trustee;
- impose a schedule of company contributions or
the calculation of the technical provisions
where trustees and company fail to agree on
appropriate contributions; and
- impose contributions where there has been a
detrimental action against the scheme.
Profile of the DB Scheme
The Defined Benefit Obligation ("DBO") includes benefits for
current employees, former employees and current pensioners. The
overall duration of the DB Scheme's obligation was assessed to be
about 17 years based on the results of the 31 March 2013 funding
valuation. This is the weighted-average time over which benefit
payments are expected to be made.
Broadly, about 40% of the liabilities are attributable to
current employees (duration about 23 years), 10% to former
employees (duration about 24 years) and 50% to current pensioners
(duration about 12 years).
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
24. EMPLOYEE BENEFIT OBLIGATIONS - continued
Risks associated with the DB Scheme
The DB Scheme exposes the Northern Powergrid Group to a number
of risks, the most significant of which are:
Risk Description Mitigation
Volatile The DBO is calculated The allocation to return-seeking
asset using a discount rate assets is monitored
returns set with reference to ensure it remains
to corporate bond yields. appropriate given the
If assets underperform DB Scheme's long-term
this discount rate, objectives. The Trustees
this will create an regularly review the
element of deficit. strategy from return-seeking
The DB Scheme aims assets and have diversified
to hold a significant some return-seeking
proportion (48%) of assets from equities
its assets in return-seeking into Reinsurance and
assets (such as equities) Listed Infrastructure
which, although expected to reduce overall risk.
to outperform corporate To avoid concentration
bonds in the long-term, risk, the allocation
create volatility and to UK equity is restricted
risk in the short-term. to 35% of the total
equity allocation.
Changes A decrease in corporate The DB Scheme also
in bond bond yields will increase holds a substantial
yields the value placed on proportion of its assets
the DBO for accounting (61%) as bonds, which
purposes, although provide a hedge against
this will be partially falling bond yields
offset by an increase (falling yields which
in the value of the increase the DBO will
DB Scheme's bond holdings. also increase the value
of the bond assets).
There are some differences
in the credit quality
of bonds held by the
DB Scheme and the bonds
analysed to decide
the DBO discount rate,
such that there remains
some risk should yields
on different quality
bond/swap assets diverge.
Inflation A significant proportion The DB Scheme holds
risk of the DBO is indexed around 30% in UK government
in line with price index-linked bonds
inflation (specifically which provide a hedge
in line with RPI) and against higher than
higher inflation will expected inflation
lead to higher liabilities increases of the DBO
(rising inflation will
increase both the DBO
and the value of the
index-linked bond portfolio).
Currency To increase diversification, The DB Scheme hedges
risk the DB Scheme invests a proportion of the
in overseas assets. overseas investments
This leads to a risk currency risk for those
that foreign currency overseas currencies
movements negatively that can be hedged
impact the value of efficiently. The DB
assets in Sterling Scheme's currency hedging
terms. ratio is currently
50% in respect of overseas
developed market currencies.
Life The majority of the The DB Scheme regularly
expectancy DB Scheme's obligations reviews actual experience
are to provide benefits of its membership against
for the pensionable the actuarial assumptions
lifetime of the member, underlying the future
so increases in life benefit projections
expectancy will result and carries out detailed
in an increase in the analysis when setting
liabilities. an appropriate scheme
specific mortality
assumption.
The Company and Trustees have agreed a long-term strategy for
reducing investment risk as and when appropriate. This includes the
use of Liability Driven Investment (LDI) from October 2016 to more
closely match the nature and duration of the DB Scheme's
liabilities through the use of derivatives such as swaps and
repurchase agreements. The portfolio is designed to hedge a
proportion of the interest rate and inflation risk inherent in the
Scheme's liabilities. The target hedging level is currently 60% of
the DB Scheme's liabilities as measured on the basis used for the
funding valuation.
The Trustees insure certain benefits payable on death before
retirement.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
24. EMPLOYEE BENEFIT OBLIGATIONS - continued
Other risks
There are a number of other risks associated with the DB Scheme
including operational risks (such as paying out the wrong
benefits), legislative risks (such as the government increasing the
burden on pension schemes through new legislation) and other
demographic risks (such as a higher proportion members dying than
assumed with a dependant eligible to receive a survivor's pension
from the DB Scheme).
A particular legislative risk exists in relation to the
equalisation of the Guaranteed Minimum Pension ("GMP"), a
quasi-state benefit accrued by many UK plans over the period 1978
to 1997 as a result of a UK government programme allowing pension
plans to "contract out" of the State Second Pension. The UK
Government has announced its intention to ensure that these
benefits, which currently pay out at different levels for men and
women, are gender-equalised in accordance with sex-discrimination
legislation. This would increase the DBO but it is not possible to
fully quantify the impact of this change at this stage. However, it
could lead to an increase in the order of 2% to the DBO for a
typical scheme.
Reporting at 31 December 2016
For the purposes of this disclosure, the current and future
pension costs of the Northern Powergrid Group have been assessed by
Aon Hewitt, a qualified independent actuary, using the assumptions
set out below, which the actuary has confirmed represent a
reasonable best estimate of those costs. This review has been based
on the same membership and other data as at 31 March 2013. The
board of Northern Powergrid Holdings Company has accepted the
advice of the actuary and formally approved the use of these
assumptions for the purpose of calculating the pension cost of the
Northern Powergrid Group.
The results of the latest funding valuation at 31 March 2013
have been adjusted to 31 December 2016. Those adjustments take
account of experience over the period since 31 March 2013, changes
in market conditions, and differences in the financial and
demographic assumptions. The present value of the DBO and the
related current service cost were measured using the Projected Unit
Credit Method.
For schemes closed to new members, such as the DB Scheme, the
current service cost calculated under the Projected Unit Credit
Method is expected to increase as the members of the DB Scheme
approach retirement.
The principal assumptions used to calculate the liabilities
under IAS 19 are set out below:
Main financial assumptions 2016 2015
% p.a. % p.a.
RPI Inflation 3.00 2.90
Rate of long-term increase in
salaries 3.00 2.90
Pension increases 2.90 2.80
Discount rate for scheme liabilities 2.70 3.70
The financial assumptions reflect the nature and term of the DB
Scheme's liabilities.
Main demographic assumptions 2016 2015
Life expectancy for a male currently
aged 60 27.1 27.0
Life expectancy for a female
currently aged 60 28.8 28.7
Life expectancy at 60 for a male
currently aged 45 28.6 28.5
Life expectancy at 60 for a female
currently aged 45 30.6 30.4
Proportion of pension exchanged
for additional cash at retirement 10% 10%
The mortality assumptions are based on recent actual mortality
experience of DB Scheme members and allow for expected future
improvements in mortality rates.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
24. EMPLOYEE BENEFIT OBLIGATIONS - continued
The DB Scheme's funds are invested in the following assets:
Asset allocation 2016 2015
GBPm GBPm
Developed market equity 338.6 311.0
Emerging market equity 12.9 11.2
Property 91.4 146.0
Reinsurance 71.3 68.2
Listed infrastructure 99.2 90.1
Investment grade corporate bonds 366.9 375.5
Other debt 30.3 38.7
Fixed interest gilts 52.4 24.9
Index-linked gilts 3.1 453.7
Liability driven investments 581.2 -
Cash 107.1 22.0
Total 1,754.4 1,541.3
The fair values of the above equity and debt instruments are
determined based on quoted market prices in active markets whereas
the fair values of properties are not based on quoted prices in
active markets.
As at 31 December 2016, the fair value of the DB Scheme's
assets, which related to self-investment, amounted to nil% (2015:
nil%).
Changes to the present value 2016 2015
of the DBO during the year
GBPm GBPm
Opening DBO 1,453.2 1,463.2
Current service cost 14.9 15.9
Interest expense on defined benefit
obligation 53.0 52.0
Contributions by DB Scheme participants 1.0 1.5
Actuarial gains on DB Scheme
liabilities arising from changes
in demographic assumptions - (12.4)
Actuarial losses/(gains) on DB
Scheme liabilities arising from
changes in financial assumptions 311.5 (1.9)
Actuarial (gains)/losses on DB
Scheme liabilities arising from
experience (25.9) (5.6)
Net benefits paid out (84.8) (59.5)
Closing DBO 1,722.9 1,453.2
Changes in the fair value of 2016 2015
DB Scheme assets during the year
GBPm GBPm
Opening fair value of DB Scheme
assets 1,541.3 1,516.1
Interest income on DB Scheme
assets 56.7 54.5
Re-measurement gains/(losses)
on DB Scheme assets 200.9 (20.3)
Contributions by the employer 40.5 50.2
Contributions by DB Scheme participants 1.0 1.5
Net benefits paid out (84.8) (59.5)
Administration costs incurred (1.2 ) (1.2)
Closing fair value of DB Scheme
assets 1,754.4 1,541.3
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
24. EMPLOYEE BENEFIT OBLIGATIONS - continued
Actual return on DB Scheme assets 2016 2015
GBPm GBPm
Interest income on DB Scheme
assets 56.7 54.5
Re-measurement (loss)/gain on
DB Scheme assets 200.9 (20.3)
Actual return on DB Scheme assets 257.6 34.2
Re-measurement in OCI 2016 2015
GBPm GBPm
Return on plan assets (in excess)/below
of that recognised in net interest (200.9) 20.3
Actuarial (gains)/losses due
to changes in financial assumptions 311.5 (1.9)
Actuarial gains due to changes
in demographic assumptions - (12.4)
Actuarial (gains)/losses due
to liability experience (25.9) (5.6)
Total amount recognised in OCI 84.7 0.4
Reconciliation of funded status 2016 2015
to balance sheet
GBPm GBPm
Fair value of scheme assets 1,754.4 1,541.3
Present value of funded defined
benefit obligations (1,722.9) (1,453.2)
Asset/(liability) recognised
on the balance sheet 31.5 88.1
Sensitivity to key assumptions
The key assumptions used for IAS 19 are discount rate, inflation
and mortality. If different assumptions were used, it could have a
material effect on the results of the Group. The sensitivity of the
results to these assumptions is as follows.
Changes Revised
in DBO DBO
GBPm GBPm
Current Figures 1,722.9
Following a 10 bps decrease in
the discount rate 33.8 1,756.7
Following a 10 bps increase in
the discount rate (33.2) 1,689.7
Following a 10 bps increase in
the inflation assumption 30.0 1,752.9
Following a 10 bps decrease in
the inflation assumption (29.6) 1,693.3
Following a 1 year increase in
life expectancy 67.1 1,790.0
Following a 1 year decrease in
life expectancy (67.0) 1,655.9
The sensitivity information shown above has been prepared using
the same method as adopted when adjusting the results of the latest
funding valuation to the statement of financial position date. This
is the same approach as has been adopted in previous periods.
25. DIRECTORS' ADVANCES, CREDITS AND GUARANTEES
During the year, 2 directors (2015: 2) and 5 key personnel
(2015: 6) utilised the services provided by NTFL. The amounts
included in finance lease receivables owed by these directors and
key personnel total GBP43,000 (2015: GBP30,000) in respect of
non-current and GBP80,000 (2015: GBP15,000) in respect of current
receivables.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
26. RELATED PARTY DISCLOSURES
Group
Details of transactions between the Group and other related
parties are disclosed below.
The Group entered into transactions, in the ordinary course of
business, with affiliated companies. Transactions entered into and
balances outstanding at the year-end were as follows:
Finance/
investment
Amounts income/
Purchases owed (costs Borrowings
Sales from from/(to) from/(to) to/(from)
to
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Related Party
2016
Integrated
Utility Services 165
Limited (registered
in Eire) - (1,022) - -
Northern
Powergrid 53 - - - -
Gas Limited
Northern (6,222)
Powergrid - - - -
Limited
Northern
Powergrid
Insurance - - - - -
Services
Limited
Northern
Powergrid
(Yorkshire) 17,739 (11,311)
plc - - -
Vehicle Lease
and Service 418
Limited 175 (4,398) 617 -
Yorkshire
Electricity (7,073) (102,930)
Group plc - - -
17,967 (16,731) 583 (12,674) (102,930)
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
26. RELATED PARTY DISCLOSURES - continued
Finance/
investment
Amounts income/
Purchases owed (costs Borrowings
Sales from from/(to) from/(to) to/(from)
to
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Related Party
2015
Integrated
Utility Services
Limited (registered
in Eire) 7 (2,785) 82 - -
Northern
Powergrid 88 - - - -
Gas Limited
Northern (6,222)
Powergrid - - - -
Limited
Northern
Powergrid
Insurance - (356) - - -
Services
Limited
Northern
Powergrid
(Yorkshire) 25,717 (10,664)
plc - - -
Vehicle Lease
and Service 417
Limited 229 (3,718) 628 -
Yorkshire
Electricity (6,045) (100,238)
Group plc - - -
26,041 (17,523) 499 (11,639) (100,238)
Sales and purchases from related parties were made at commercial
prices.
Interest on loans from Northern Powergrid Group companies is
charged at a commercial rate.
The amounts outstanding are unsecured and will be settled in
cash. No guarantees have been given or received. No provisions have
been made for doubtful debts in respect of amounts owed by related
parties.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
26. RELATED PARTY DISCLOSURES - continued
Company
Details of transactions between the Company and other related
parties are disclosed below.
The Company entered into transactions, in the ordinary course of
business, with affiliated companies. Transactions entered into and
balances outstanding at the year-end were as follows:
Finance/
investment
Amounts income/
Purchases owed (costs) Borrowings
Sales from from/(to) from/(to) to/(from)
to
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Related Party
2016
Integrated
Utility Services (556) -
Limited 57 - -
Northern -
Powergrid 88 - - -
Gas Limited
Northern - (6,228)
Powergrid - - -
Limited
Northern
Powergrid
(Northeast) 5,658 -
Limited (35) 21,800 -
Northern 4,915 -
Powergrid - - -
(Yorkshire)
plc
Northern -
Transport 19 - - -
Finance Limited
Vehicle Lease
and Service -
Limited 138 - 491 -
Yorkshire
Electricity - (62,160)
Group plc - - 33
10,875 (591) - 16,036 (62,160)
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
26. RELATED PARTY DISCLOSURES - continued
Finance/
investment
Amounts income/
Purchases owed (costs Borrowings
Sales from from/(to) from/(to) to/(from)
to
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Related Party
2015
Integrated
Utility Services (564) -
Limited 60 - -
Northern -
Powergrid 88 - - -
Gas Limited
Northern - (6,222)
Powergrid - - -
Limited
Northern
Powergrid
(Northeast) 6,018 -
Limited (52) 20,600 -
Northern 3,962 -
Powergrid - - -
(Yorkshire)
plc
Northern -
Transport 20 - - -
Finance Limited
Vehicle Lease
and Service -
Limited 192 - 513 -
Yorkshire
Electricity - 24.,322
Group plc - - 195
10,340 (616) - 15,086 24,322
Sales and purchases from related parties were made at commercial
prices.
Interest on loans from Northern Powergrid Group companies is
charged at a commercial rate.
The amounts outstanding are unsecured and will be settled in
cash. No guarantees have been given or received. No provisions have
been made for doubtful debts in respect of amounts owed by related
parties.
27. ULTIMATE CONTROLLING PARTY
The immediate parent undertaking of Northern Electric plc Group
is Northern Powergrid Limited. The ultimate controlling party and
ultimate parent undertaking of Northern Powergrid Limited is
Berkshire Hathaway, Inc., a company incorporated in the United
States of America.
Copies of the group accounts of Berkshire Hathaway, Inc. (the
parent undertaking of the largest group preparing group accounts)
which include Northern Electric plc Group and the group accounts of
Northern Powergrid Holdings Company, the smallest company into
which the results of Northern Electric plc consolidate to prepare
group accounts in the UK, can both be obtained from the Company
Secretary, Northern Powergrid Holdings Company, Lloyds Court, 78
Grey Street, Newcastle upon Tyne, NE1 6AF.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEAR ENDED 31 DECEMBER 2016
28. RECONCILIATION OF PROFIT BEFORE INCOME TAX TO
CASH GENERATED FROM OPERATIONS
Group
2016 2015
GBP'000 GBP'000
Profit before income tax 143,918 162,056
Depreciation charges 87,421 76,093
Profit on disposal of fixed assets (522) (474)
Amortisation of deferred revenue (19,342) (22,203)
Retirement benefit obligations (28,753) (38,514)
Decrease in provisions (468) (607)
Finance costs 39,139 36,198
Finance income (1,354) (1,619)
220,039 210,930
Decrease/(increase) in inventories 615 (1,148)
Increase in trade and other receivables (10,367) (949)
Increase/(decrease) in trade and other payables 7,593
(19,709)
Cash generated from operations 217,880 189,124
Company
2016 2015
GBP'000 GBP'000
Profit before income tax 13,392 13,773
Depreciation charges 47 48
Increase/(decrease) in provisions 52 (35)
Finance costs 9,096 9,028
Finance income (22,347) (21,308)
240 1,506
Decrease/(increase) in trade and other receivables 110 (119)
Increase/(decrease) in trade and other payables 428 (3)
Cash generated from operations 778 1,384
29. OTHER RESERVES
At the Company's Annual General Meeting in August 1994, the
shareholders gave approval to on-market purchases of up to 10% of
its shares and this was given effect on 21 September 1994 when
12,370,400 shares were purchased. This transaction resulted in the
creation of a capital redemption reserve of GBP6.2m. Under section
831(4) of the Companies Act 2006 this reserve is treated as an
un-distributable reserve.
NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEAR ENDED 31 DECEMBER 2016
32. NOTICE OF ANNUAL GENERAL MEETING
Notice is hereby given that the Annual General Meeting of
Northern Electric plc will be held at Lloyds Court, 78 Grey Street,
Newcastle upon Tyne, NE1 6AF on Wednesday 21 June 2017 at 11.00
am
The following resolutions will be proposed as ordinary
resolutions:
Resolution 1: To receive and consider the strategic, directors'
and auditor's reports and the Group accounts for the year ended 31
December 2016.
Resolution 2: To declare that no final dividend be paid for the
year ended 31 December 2016.
Resolution 3: To re-elect Mr P J Goodman as a director.
Resolution 4: To re-elect Dr J M France as a director.
Resolution 5: To re-elect Mr R Dixon as a director.
Resolution 6: To re-appoint Deloitte LLP as auditor until the
conclusion of the next general meeting at which accounts are laid
and to authorise the directors to determine their remuneration.
By order of the Registered office:
board
Jennifer Riley Lloyds Court, 78
Grey Street,
Secretary Newcastle upon
Tyne, NE1 6AF
21 April 2017 Registered in England
No 2366942
Note:
1. All the issued ordinary shares in the Company
are held by or on behalf of Northern Powergrid
Limited.
2. Holders of preference shares have the right
to receive notice of, attend and speak at the
Annual General Meeting but are only entitled
to vote if, at the date of the notice of the
meeting, payment of the dividend to which they
are entitled is six months or more in arrears,
or if a resolution is to be considered at the
meeting for the winding up of the Company or
abrogating, varying or modifying any of the
special rights attaching to the preference
shares. As none of these circumstances apply
to this Annual General Meeting, preference
shareholders should note that they do not have
the right to vote on any of the business to
be considered.
3. Members are entitled to appoint a proxy to
exercise all or any of their rights on their
behalf at the meeting. A shareholder may appoint
more than one proxy in relation to the Annual
General Meeting provided that each proxy is
appointed to exercise the rights attached to
a different share or shares held by the shareholder.
A proxy need not be a shareholder of the Company.
4. Any person to whom this notice is sent who
is a person nominated under section 146 of
the Companies Act 2006 to enjoy information
rights (a "Nominated Person") may, under an
agreement between him/her and the shareholder
by whom he/she was nominated, have a right
to be appointed (or to have someone else appointed)
as a proxy for the Annual General Meeting.
If a nominated person does not have such a
right or does not wish to exercise it, he/she
may have a right under such an agreement to
give instructions to the member as to the exercise
of voting rights.
5. Any corporation which is a member can appoint
one or more corporate representatives who may
exercise on its behalf all of its powers as
a member provided that they do not do so in
relation to the same shares.
6. The current price of the Company's preference
shares can be obtained from the web site of
the London Stock Exchange at www.londonstockexchange.com.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SELFSWFWSEDL
(END) Dow Jones Newswires
April 27, 2017 06:41 ET (10:41 GMT)
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