TIDMNTEA
RNS Number : 6341X
Northern Electric PLC
30 April 2019
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 2018.
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
The 2018 Annual Report and Accounts are also available on the
website
http://www.northernpowergrid.com/document-library/financial
Enquiries:
Jenny Riley 01977 605155
Registration number: 02366942 (England and Wales)
Northern Electric plc
Annual Report and Consolidated Financial Statements
for the Year Ended 31 December 2018
Northern Electric plc
Contents
Company Information 1
2 to
Strategic Report 11
12 to
Directors' Report 16
17 to
Independent Auditor's Report 22
Consolidated Income Statement 23
Consolidated Statement of Comprehensive Income 24
25 to
Consolidated Statement of Financial Position 26
Statement of Financial Position 27
Consolidated Statement of Changes in Equity 28
Statement of Changes in Equity 29
Consolidated Statement of Cash Flows 30
Statement of Cash Flows 31
32 to
Notes to the Financial Statements 97
Northern Electric plc
Company Information
Directors
T E Fielden
T H France
P J Goodman
P A Jones
J N Reynolds
Company secretary
J C Riley
Registered office
Lloyds Court
78 Grey Street
Newcastle upon Tyne
Tyne and Wear
NE1 6AF
Registration
number
02366942 (England and Wales)
Auditor
Deloitte LLP
Statutory Auditor
Newcastle upon Tyne
Tyne and Wear
United Kingdom
Northern Electric plc
Strategic Report for the Year Ended 31 December 2018
The directors present their annual reports and financial
statements for the year ended 31 December 2018 of Northern Electric
plc (the "Company"), which have been drawn up and are presented in
accordance with the Companies Act 2006.
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 ("NPg
Northeast"), Integrated Utility Services Limited ("IUS") and
Northern Powergrid Metering Limited ("Northern Powergrid
Metering"), collectively, (the "Group").
NPg Northeast is an authorised distributor under the Electricity
Act 1989 and holds an electricity distribution licence granted by
the Secretary of State. As a distribution network operator ("DNO"),
NPg Northeast 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.
The majority of revenue generated by NPg Northeast is controlled
by a distribution price control formula which is set out in the
electricity distribution licence. The price control formula does
not directly constrain profits from year to year, but is a control
on revenue that operates independently of a significant portion of
NPg Northeast's costs. Allowed revenue is recovered from
electricity suppliers via the application of Distribution use of
System charges. These charges account for approximately 15% of the
electricity end users overall electricity bill.
In common with the Northern Powergrid Group, the Group operates
a business model and strategy based on six core principles (the
"Core Principles"), which are:
Core Principle Strategic objective Key Performance Indicators ("KPI")
Financial strength Strong finances Operating profit
that enable improvement Maintenance of investment grade
and growth. credit ratings
Cash flow measures
------------------------ --------------------------------------
Customer service Delivering exceptional Broad measure of customer satisfaction
customer service. Stakeholder Engagement rank
------------------------ --------------------------------------
Operational excellence High-quality, efficient Customer Minutes Lost
operators running Customer Interruptions
a smart reliable Network investment
energy system. High voltage restoration time
------------------------ --------------------------------------
Employee commitment High-performing Occupational Safety and Health
people doing rewarding Administration Rate
jobs in a safe and Preventable Vehicle Accidents
secure workplace. Lost time accidents
Restricted duty accidents
Medical treatment accidents
Operational incidents
Absence rate
------------------------ --------------------------------------
Environmental Leaders in environmental Total Oil/Fluid Lost
respect respect and low SF6 Gas discharges
carbon technologies. Environmental Incidents
Carbon Footprint
------------------------ --------------------------------------
Regulatory integrity Trustworthy, fair Quarterly certification process
and balanced, creating
win-win outcomes.
------------------------ --------------------------------------
The Core Principles (which are applied by the Northern
Powergrid's parent company, Berkshire Hathaway Energy Company
("Berkshire Hathaway Energy")), set out the basis on which the
Company generates shareholder value over the longer term and also
define the Group's values and vision. Each core principle is
defined by a number of strategic objectives (which correspond to
NPg Northeast's 2015 to 2023 regulatory well justified business
plan) and are measured through financial and non-financial KPIs.
The report focuses on each core principle and the performance of
each KPI throughout the financial year in order to provide a
summary of the success in achieving each strategic objective.
Northern Electric plc
Strategic Report for the Year Ended 31 December 2018
(continued)
FINANCIAL STRENGTH
Strategic objective: Strong finances that enable improvement and
growth.
KPI 2018 2017
GBP 173.9 GBP 180.2
Operating Profit million million
GBP 231.4 GBP 205.7
Cash from operating activities million million
GBP 232.8 GBP 280.1
Cash used in investing activities million million
Credit Rating (Standard & Poor's) A A
Strategic focus: To provide the financial resources to support
long-term corporate stability.
Performance during the year: The Group continued to maintain
good control in respect of both its capital and operating costs by
effectively managing the financial risks that could have had an
adverse impact on its business. The ED1 price control has been set
for eight years (1 April 2015 to 31 March 2023) and provides the
Group with some stability in terms of its income until 31 March
2023.
Revenue: The Group's revenue at GBP419.0 million was GBP15.5
million higher than the prior year due to higher distribution
system revenues, higher smart metering revenue, higher amortisation
of deferred revenue and introduction of assessment and design fees
offset by lower contracting revenue.
Operating profit and position at the year-end: The Group's
operating profit of GBP173.9 million was GBP6.3 million lower than
the previous year, primarily reflecting higher depreciation, higher
business rates and higher pension deficit payments, offset by
higher revenues. The statement of financial position on pages 25
and 26 shows that, as at 31 December 2018, the Group had total
equity of GBP1,169.3 million (2017: GBP1,111.8 million). The
directors consider the Group to have a strong financial position
which, when coupled with the preference of Berkshire Hathaway
Energy, for operating with lower levels of debt than equivalent
companies in the sector, creates a stable base for continued strong
performance during the ED1 period.
Finance costs and investments: Finance costs net of investment
income at GBP44.0 million were GBP3.7 million higher than the prior
year due to higher borrowings and lower capitalised interest.
Taxation: The effective tax rate in the year was 19.0%. Tax
charge for the year was GBP24.9 million which was lower than the
prior year of GBP28.8 million mainly due to a reduction in
accounting profits and prior year adjustments in comparison to
2017. Details of the income tax expense are provided in note 10 to
the financial statements.
Share capital: There were no changes to the Company's share
capital during the year.
Cash flow: Movements in cash flows were as follows:
-- Operating activities: Cash flow from operating activities at GBP231.4
million was GBP25.7 million higher than the previous year, mainly
due to higher earnings before interest, tax and depreciation, and
favourable working capital.
-- Investing activities: Cash flow used in investing activities at
GBP232.8 million was GBP47.3 million lower than the previous year,
mainly due lower capital deployed offset by lower receipt of customer
contributions.
-- Financing activities: Cash flow from financing activities at GBP13.0
million was GBP77.5 million lower than the previous year, mainly
due to lower net borrowing in the year offset by no dividend paid
in 2018.
Pensions: The Company is a participating employer in the Group
of the Electricity Supply Pension Scheme (the "DB Scheme"), a
defined benefit scheme. Further details of the Group's commitments
to the DB Scheme and the associated deficit repair payments are
provided in note 25 to the financial statements. The Group also
participates in the Northern Powergrid Pension Scheme, which is a
defined contribution scheme.
Insurance: As part of its insurance and risk strategy, the Group
has in place insurance policies, which cover risks associated with
employees, third party motor and public liability. The Group
carries appropriate excesses on those policies and is effectively
self-insured up to the level of those excesses. Consequently, risk
management in respect of safety, the Group's motor fleet and
employee health and wellbeing is extremely important, given the
contribution it makes to the elimination or reduction of exposure
to those risks.
Northern Electric plc
Strategic Report for the Year Ended 31 December 2018
(continued)
CUSTOMER SERVICE
Strategic objective: Delivering exceptional customer
service.
KPI 2018 2017
BMCS 86.8% 87.2%
BMCS Rank (out of 14) 11 9
BMCS Power Cuts 87.7% 88.2%
BMCS General Enquiries 90.1% 90.7%
BMCS Connections 84.8% 85.1%
SECV Rank (out of 6) (combined with Northern Powergrid
(Yorkshire) plc) 2 3
Strategic focus: To improve the service delivered to
customers.
Performance during the year: Under the broad measure of customer
satisfaction ("BMCS"), an independent market research company
carried out telephone surveys with the NPg Northeast's customers to
find out how satisfied they were with services related to unplanned
or planned power cuts, quotations and subsequent connections, and
general enquiries. NPg Northeast recorded overall satisfaction
scores that were comparable to the prior year (2018: 86.8% versus
2017: 87.2%). The BMCS rank achieved of 11 declined in comparison
to the prior year (2017: 9). The change was predominantly
attributed to a reduction in the BMCS Power Cuts scores which
accounted for approximately one quarter of the overall score.
To address the decline in BMCS and to further enhance the
service provided to customers, a number of initiatives from NPg
Northeast's customer service improvement plan were implemented
during the year. This included the continued development of the
customer relationship management system, enhancement of pro-active
customer communications via text, interactive voice response and
social media, as well as focus on improving self-service offerings
to customers.
The Quality Framework (developed to deliver exceptional customer
service) was further enhanced and an additional communication with
customers was introduced to confirm satisfaction with the service
provided and confirmation that the work in question had been
completed.
Connections to the network
Strategic focus: To reduce routine, small works end-to-end
connections lead times by 30% during the ED1 period, actively
facilitate the development of competition from independent
connections providers ("ICPs") and deliver the major works service
improvement plan as part of the Office for Gas and Electricity
Markets ("Ofgem") Incentive on Connections Engagement ("ICE").
Performance during the year: Reducing end-to-end connections
lead times continues to pose a challenge. The NPg Northeast has
invested more time at the start of the quotations process
(including offering customers the option of a site visit) to avoid
delays later on, and remains confident it will achieve the 30%
reduction by the end of the ED1 period. Within connections services
(the performance of which is measured by the BMCS connections KPI),
work to improve the level of customer service within the small
works connections business continued. In support of this, the
processes implemented during 2017, which introduced a single point
of customer contact for the delivery of small works connections and
the online service alteration quotation facility, were further
embedded during 2018.
NPg Northeast continued to encourage competition in connections
by providing dual quotations, enabling ICPs to self-determine and
approve points of connection to the network, and simplifying the
authorisation process for ICPs' operational staff.
In relation to NPg Northeast's ICE commitments for the 2017/18
regulatory period, the 26 actions included in the service
improvement plan were successfully delivered.
Northern Electric plc
Strategic Report for the Year Ended 31 December 2018
(continued)
Corporate responsibility
Strategic focus: To build effective relationships with
stakeholders whilst maximising the value of contact with customers,
especially those who are vulnerable and hard to reach.
Performance during the year: NPg Northeast continued to work
closely with key partners such as local authorities, local
enterprise partnerships, Members of Parliament and local resilience
forums, particularly during periods of severe weather.
Collaboration with stakeholders in the wider energy industry
included consultations on the emerging plans for the transition to
Distribution System Operator ("DSO").
In April 2018, NPg Northeast (with Northern Powergrid
(Yorkshire) plc) put forward its Stakeholder Engagement and
Customer Vulnerability ("SECV") submission to Ofgem in respect of
work undertaken during the previous year. The submission provided
an overview of activities and case studies, which included a series
of roundtable events with key stakeholders to gather feedback on
priorities in areas such as safety, environment, customer service,
reliability and availability to inform the annual strategic
planning process.
Following the submission to Ofgem's panel, the position of NPg
Northeast with Northern Powergrid (Yorkshire) plc in the context of
the wider DNO group increased from third place to second. The
improvement demonstrated the effectiveness of comprehensive, open
dialogue with stakeholders on key issues which formed part of the
refreshed engagement strategy updated in 2018.
Throughout the year, a number of tailored education and safety
programmes were also delivered including, 'Look up - It's live', a
campaign to promote safety messages to the rural community; Make
the Grade in Energy, an education, skills and employability
programme, Energy Heroes, targeted at the primary school pupils to
promote awareness of energy costs and ways of saving energy whilst
developing their mathematical skills; and attendance at The Big
Bang Fair, which encourages young people to pursue science,
technology, engineering and maths subjects.
The stakeholder summit was successfully launched during the year
to broaden the range of stakeholders engaging with NPg Northeast
and to provide an annual update of the NPg Northeast's progress in
delivering the well justified business plan.
OPERATIONAL EXCELLENCE
Strategic objective: High-quality, efficient operators running a
smart reliable energy system.
NPg Northeast
2017/18 2016/17
KPI Actual Target Actual Target
Customer minutes lost 44.6 <61.9 45.2 <64.1
Customer interruptions 51.8 <62.1 53.3 <62.7
KPI 2018 2017
High voltage restoration time 61 57
Network investment 170.0 186.4
Strategic focus: To enhance the reliability of the network in
support of the commitment to achieve 8% fewer unplanned power cuts
and reduce the average length of unplanned power cuts by 20% during
the ED1 period.
Performance during the year: Customer minutes lost ("CML") and
customer interruptions ("CI") are the KPIs set by Ofgem and used by
NPg Northeast to measure the quality of supply and system
performance. Both CML and CI are measured on a regulatory year
basis which commences on 1 April of any given year and concludes on
31 March of the subsequent year. 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. Performance during the
year was better than Ofgem's target for both CML and CI.
Northern Electric plc
Strategic Report for the Year Ended 31 December 2018
(continued)
NPg Northeast invested GBP170.0 million during the year through
its approved network investment strategy (2017: GBP186.4 million),
which has been designed to deliver improvements and increase the
network's resilience. Various major projects were undertaken to
reinforce the primary network, refurbish transformers, rebuild
overhead lines, remove and replace oil-filled cables, change
deteriorated poles, replace switchgear and install and commission
new remote control points.
Enhancements to the network also continued through investment in
the use of technology. This included the deployment of over 500
smart fuses to restore supplies in under three minutes to customers
affected by intermittent faults, and the roll out of 100 next
generation innovative low-voltage technology devices to perform
multiple restorations of customers' supplies, again in under three
minutes. In addition, NPg Northeast continued to further expand the
automated power restoration system, designed to restore power to
the network in a safe manner in under three minutes. In relation to
high-voltage restoration, NPg Northeast's high-voltage restoration
performance during the calendar year 2018 averaged 61 minutes
(2017: 55.8 minutes), after allowing for severe weather incidents
and other exemptions.
EMPLOYEE COMMITMENT
Strategic objective: High-performing people doing rewarding jobs
in a safe and secure workplace.
2018 2017
KPI Actual Target Actual Target
Occupational safety and health
administration rate 0.26 0.26 0.44 0.26
Preventable vehicle accidents 14 12 12 13
Lost time accidents 1 1 2 1
Restricted duty accidents 0 0 1 0
Medical treatment accidents 2 1 0 1
Operational incidents 4 5 2 5
KPI 2018 2017
Absence rate 3.34% 2.90%
Health and safety
Strategic focus: To deliver a comprehensive safety and health
improvement plan ("SHIP") resulting in world class safety
performance and to achieve the Northern Powergrid Group commitment
of halving its accident rate during the ED1 period.
Performance during the year: In common with the Berkshire
Hathaway Energy group, the Northern Powergrid Group measures its
safety performance in terms of the Occupational Safety and Health
Administration ("OSHA") rate, which is a measure used in the United
States ("US") to capture safety incidents down to minor levels of
medical treatment. The Northern Powergrid Group achieved its OSHA
rate of 0.26 (2017: 0.44) recording a total of six recordable
incidents against a target of six or fewer. NPg Northeast narrowly
failed to meet the Preventable Vehicle Accidents target. The
failure was primarily the result of a series of relatively minor
driving incidents. NPg Northeast continues to take action to seek
to improve driving standards. The Group's long term safety record
suggests that it is one of the safest in its sector.
Improving safety performance remains a priority and the way in
which this is achieved is set out in NPg Northeast's SHIP. The SHIP
focuses on leadership engagement, supervisory oversight, and
workplace risk management. These three areas are supported by
driver training, operational safety seminars, stand-down briefings
and regular safety reports and newsflashes.
The health and wellbeing of staff, is a key priority of the
Northern Powergrid Group and forms an integral part of the SHIP.
Existing support includes the availability of an independent
employee assistance service, which is a confidential, self-referral
counselling and information service to assist with personal or
work-related problems and access to services including counselling
and physiotherapy referrals. A number of new initiatives focused
specifically on mental health and wellbeing were launched during
the year. These included the recruitment of mental health first aid
volunteers, providing mental health awareness training and a series
of mental health campaigns in conjunction with the United Kingdom
mental health awareness week.
Northern Electric plc
Strategic Report for the Year Ended 31 December 2018
(continued)
NPg Northeast's OHSAS 18001 health and safety management systems
successfully retained certification.
Employees
Strategic focus: To emphasise the importance of leadership and
high standards of performance by engaging, collaborating and
working with employees and their trade union representatives.
Performance during the year: NPg Northeast conducted an
externally facilitated employee survey to benchmark the level of
employee engagement against top performing organisations and to
identify areas for improvement. In response to feedback from the
most recent survey, a number of commitments were made in respect of
communication and to enhance the quality and quantity of time spent
discussing personal objectives and development.
During the year, 82 new recruits (2017: 68) joined NPg Northeast
and Northern Powergrid (Yorkshire) plc's workforce renewal
programme.
NPg Northeast 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. In support of
this, a "speaking up" process is in place enabling all employees to
raise concerns of unethical acts, malpractice or impropriety
(including bribery or corruption), and an anonymous help line
operated by an independent company is also available.
At 31 December 2018, the Group had 1,297 employees (2017:
1,271).
ENVIRONMENTAL RESPECT
Strategic objective: Leaders in environmental respect and low
carbon technologies.
2018 2017
KPI Actual Target Actual Target
Total oil/fluid lost (litres) 14,179 <12,400 14,066 <12,600
SF6 gas discharges (kg) 17.95 <30.00 33.33 <34.00
Environmental incidents 5 <4 4 <5
KPI 2018 2017
Carbon footprint (tonnes) 21,393 22,757
Strategic focus: Deliver Environmental "RESPECT"
(Responsibility, Efficiency, Stewardship, Performance, Evaluation,
Communication and Training) and in doing so reduce oil and fluid
loss by 15% and our business carbon footprint by 10% during the ED1
period.
Performance during the year: NPg Northeast and IUS both operate
a United Kingdom Accreditation Service scheme for environmental
management and are certified to the environmental management
systems standard ISO 14001:2015. The ISO 14001 standard is designed
to enhance environmental performance, fulfil compliance obligations
and achieve environmental objectives, all of which contribute to
the achievement of the Northern Powergrid Group's KPIs. A full
recertification assessment was carried out in March 2017 and
surveillance audits are carried out twice per year, the last one
being conducted in November 2018. Continued certification was
confirmed following each audit.
NPg Northeast's and IUS' carbon footprint reporting framework is
certified under the Certified Emissions Measurement and Reduction
Scheme for compliance with ISO 14064-1:2006. The last full audit
was undertaken in November 2018, where continued certification was
confirmed. Initiatives including the implementation of telematics
in fleet vehicles facilitated a further improvement in reducing NPg
Northeast's carbon footprint during the year to 21,393 tonnes
(2017: 22,757 tonnes).
Northern Electric plc
Strategic Report for the Year Ended 31 December 2018
(continued)
In support of the target to further reduce oil and fluid loss,
the 2018 annual environmental improvement plan included replacing
fluid-filled cables and locating cable fluid leaks more quickly
which resulted in a total fluid loss of 14,179 litres (2017:
14,066). The total oil and fluid loss target was missed due to a
number of leaks from underground cables. NPg Northeast continues to
take steps and implement innovative solutions to minimise oil and
fluid loss across the network. Additional activity to minimise NPg
Northeast's impact on the environment included placing overhead
lines underground in National Parks and Areas of Outstanding
Natural Beauty and protecting wildlife and habitat.
Sustainability
Strategic focus: To help facilitate the United Kingdom's
transition to a low-carbon economy in NPg Northeast's capacity as a
major participant in the United Kingdom energy industry and in
terms of its own carbon footprint.
Performance during the year: 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 substantial
impact on the electricity network over time. This has already been
seen through the number of low-carbon technology installations such
as photovoltaic solar panels, electric vehicles and heat pumps. The
volume and total capacity of decentralised energy generation has
also been growing steadily and, given the greater range of load and
generation technologies now connected to the network, NPg Northeast
is taking action to develop innovative solutions that will reduce
the need for traditional and potentially expensive reinforcement of
the network.
From an innovation perspective, NPg Northeast is running a
portfolio of projects in the priority areas of smart meters,
digital-enabled customer service and affordability.
A partnership with Nissan is supporting new electric vehicle
projects for the trialling of 'vehicle to grid' technology to
enable car users to supply power to the electricity network. In
addition, a new project is developing hybrid battery technology to
expedite the restoration of the electricity supply following a
power cut. Collaboration with Northern Gas Networks at the Integrel
demonstrator site continues to assess the potential future benefits
of integrating both gas and electricity energy systems. NPg
Northeast is also scoping the role of DSO with a new project to
explore the value of the transition for customers and to understand
the business changes that are required to realise those
benefits.
NPg Northeast's change adaptation strategy recognises the impact
that climate change is anticipated to have on the business, the
risks this poses and the proposed actions to mitigate these risks
including vegetation management, network specifications for
changing temperatures and improved weather prediction. The
installation of flood defences is one such key activity that is
already underway and the delivery of the committed programme in the
ED1 period remains on track.
REGULATORY INTEGRITY
Strategic objective: Trustworthy, fair and balanced, creating
win-win outcomes.
KPI: Completion of the Northern Powergrid Group's quarterly
regulatory compliance affirmation process
Strategic focus: To manage the Group's business to the highest
behavioural standards and adhere to a policy of strict compliance
with all relevant standards, legislation and regulatory
conditions.
Performance during the year: Under the RIIO (revenue =
incentives + innovation + outputs) model for regulation, price
controls are set for a fixed period. The ED1 price control became
effective on 1 April 2015 and is due to end on 31 March 2023. NPg
Northeast's opening base allowed revenue (excluding the effects of
incentive schemes and any deferred revenues from the prior price
control) has been set to remain constant for each year from 2016/17
through to 31 March 2023. Nominal opening base allowed revenues
will increase in line with inflation (as measured by the United
Kingdom's Retail Prices Index).
In order to assure compliance with licence and other regulatory
obligations, Northern Powergrid Group operates a regulatory
compliance affirmation process, under which ownership of
approximately 2,000 regulatory obligations are assigned to around
80 responsible managers. Those responsible managers are required to
review compliance with the relevant obligations on a quarterly
basis and report on any identified non-compliances or perceived
risks which are then addressed by members of the executive team. To
minimise the risk of NPg Northeast breaching its licence conditions
and other statutory requirements (which could lead to financial
penalties), the board of directors review the outcome of each
quarter's exercise.
NPg Northeast submitted a risk-based data-assurance plan to
Ofgem 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
Strategic Report for the Year Ended 31 December 2018
(continued)
PRINCIPAL RISKS AND UNCERTAINTIES
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 support of its financial
reporting practices. A robust system is in place to facilitate the
identification of new risks, including those associated with the
achievement of the Group's strategic objectives and Core
Principles. Once identified, key risks and their respective
controls and mitigation plans are continually assessed and formally
reviewed by the Governance and Risk Management Group ("GRMG"),
which reports to the Audit Committee.
Supported by the internal audit function, the risk management
programme includes regular reviews of the crisis management,
disaster recovery and major incident plans. To determine the level
of disaster preparedness and responsiveness against threats to
business continuity, risk management plans and processes are
periodically tested. This self-evaluation approach is reinforced by
that of the Berkshire Hathaway Energy group, which benchmarks risk
management activities across its business units and shares
significant lessons learned.
Risks
Cyber security
Unauthorised access or compromise of the Information Technology
or Operational Technology networks, resulting in loss of network
control and availability.
Mitigations:
-- Robust cyber security risk mitigation programme is in place.
-- Accreditation under the ISO 27001 Information Security (process
security) standard for certain discrete business areas.
-- Compliance with the Centre for Internet Security Critical Security
Controls.
-- Monitored by the Information Security Executive Committee and the
board.
Regulatory and policy positioning
Decisions taken resulting in negative impacts to our business
model.
Mitigations:
-- NPg Northeast's policy position supporting the expanded role of
DSO is being set out.
-- Innovation projects in place to develop and demonstrate future technologies
and commercial practices.
-- Regulatory and stakeholder engagement programme.
-- The NPg Northeast is actively involved in consultations on the RIIO-2
price controls.
Network resilience
Loss of the operational network due to significant weather
events, targeted physical attack or catastrophic asset failure
resulting in sustained or widespread loss of essential supply.
Mitigations:
-- Major incident and crisis management policies, plans and governance
arrangements are in place.
-- An industry mutual aid agreement exists.
-- Network investment ensures grid resilience.
-- Grid resilience programme and audits.
Northern Electric plc
Strategic Report for the Year Ended 31 December 2018
(continued)
Safety
Fatality or serious harm caused to an employee or a third
party.
Mitigations:
-- Overseen by the Health and Safety Committee.
-- Clear policies and procedures exist that comply with legislation
to ensure the safety of the employees and customers.
-- Health and safety training is provided to employees on a continuous
basis.
-- Audit programme and inspection regimes are in place.
-- ISO18001 safety management system in place.
Environment
Failure to prevent network assets from having a significant
negative impact on the environment.
Mitigations:
-- Incident response process and robust policies and procedures in
place.
-- Programme to reduce fluid loss and NPg Northeast's business carbon
footprint.
-- Investment in technology to minimise environmental incidents and
'self-heal' the network.
-- Asset inspection programme.
-- ISO14001 environmental management system in place.
Information security
Unauthorised access or loss of large volumes of data or
sensitive data.
Mitigations:
-- Robust cyber security risk mitigation programme is in place.
-- Accreditation under the ISO 27001 Information Security (process
security) standard for certain discrete business areas.
-- Compliance with the Centre for Internet Security Critical Security
Controls.
-- Monitored by the Information Security Executive Committee and the
board.
Efficiency and output performance
Failure to maintain cost and output performance competiveness in
the industry.
Mitigations:
-- Robust business planning process.
-- Monthly financial controls in place including detailed review of
actuals against budget, competitive tendering process, and capital
expenditure approvals process.
-- Monthly executive business performance review.
-- Comprehensive "Efficient Output Delivery" programme.
Northern Electric plc
Strategic Report for the Year Ended 31 December 2018
(continued)
Financial risks
The exposure to interest rate, tax, liquidity and treasury
risks.
Mitigations:
-- Monitored by the Treasury Committee quarterly.
-- The Group is financed by long-term borrowings at fixed and floating
rates and has access to short-term borrowing facilities at floating
rates of interest.
-- As at 31 December 2018, 96% of the Group's long-term borrowings
were at fixed rates and the average maturity for these borrowings
was 9 years. The Group uses interest rate swaps to mitigate exposure
to uncertain future interest rates.
-- Financial covenant monitoring is in place.
Resource availability
Access to and availability of skilled resource resulting in an
inability to deliver work programmes during the ED1 period.
Mitigations:
-- Mix of direct labour and contracted resource is used.
-- Workforce renewal programmes in place to recruit and retain employees.
-- On-going training and development builds internal capability.
-- Employee engagement and health and well-being initiatives are in
place.
Brexit
The Brexit negotiations are not considered a principal risk to
the Group.
Internal control
A rigorous internal control environment exists within the Group
to support the financial reporting process, the key features of
which include regular reporting, a series of operational and
financial policies, investigations undertaken by internal audit and
a stringent process for ensuring the implementation of internal
audit recommendations. In addition, the Group utilises
comprehensive business planning procedures, regularly reviews KPIs
to assess progress towards its goals, and has a strong internal
audit function to provide independent scrutiny. Financial controls
include a centralised treasury operations and established
procedures for the planning, approving and monitoring of major
capital expenditure.
In accordance with Berkshire Hathaway Energy's requirements to
comply with the US Sarbanes-Oxley Act, the Group undertakes a
quarterly risk control assessment 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.
The Group does not have a specific human rights policy. However,
in accordance with the Core Principles, it remains fully committed
to operating ethically and responsibly and with fairness and
integrity. This is implemented through the policies and procedures
it has in place which are applicable to all stakeholder groups and
encompasses employees' health, safety and welfare, dealings with
customers, particularly those who are vulnerable, the impact of the
Group on the environment and the contribution to
sustainability.
The Group is committed to maintaining the highest ethical
standards in the conduct of its business and, implements Berkshire
Hathaway Energy's code of business conduct, details of which can be
found on page 7. The Group has robust procedures in place to meet
the requirements of the Bribery Act 2010. Every employee must
undertake the code of business conduct training each year, which
includes training in respect of the Group's anti-corruption and
anti-bribery policy.
Approved by the Board on 15 April 2019 and signed on its behalf
by:
P A Jones
Director
Northern Electric plc
Directors' Report for the Year Ended 31 December 2018
The directors present their annual report and the audited
consolidated financial statements for the year ended 31 December
2018.
Dividends
During the year, an interim dividend of GBPnil was paid (2017:
GBP22.7 million). The directors recommend that no final dividend be
paid in respect of the year (2017: GBPnil).
The Company and Group's dividend policy is that dividends will
be paid only after having due regard to available distributable
reserves, available liquid funds and the financial resources and
facilities needed to enable the Company and Group to carry on its
business for at least the next year. In addition, the level of
dividends is set to maintain sufficient equity in the Company and
Group so as not to jeopardise its investment grade issuer credit
rating.
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. The new projects
initiated during the year have been detailed in the
'sustainability' section on page 8.
During the year, the Group invested GBP2.4 million (2017: GBP1.5
million) (note 5 to the financial statements) in its research and
development activities.
Future developments and future outlook
The financial position of the Group, as at 31 December 2018, is
shown in the consolidated statement of financial position on pages
25 and 26. There have been no significant events since the year end
and the directors intend that:
-- NPg Northeast will continue to implement well-justified business
plan and will develop its business by efficiently investing in the
network and improving the quality of supply and service provided
to customers.
-- IUS will develop its business by concentrating on its core skills
of engineering contracting thereby delivering a high standard of
service to its existing clients and pursuing opportunities to increase
its portfolio of clients.
-- 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.
There are no plans to change the existing business model of the
Company, or any of the companies within the Group.
Directors
The directors who held office during the year under review and
to the date of signing this report were:
T E Fielden Finance Director
J M France Regulation Director (resigned 5 April 2018)
T H France General Counsel (appointed 28 March 2018)
P J Goodman Executive Vice-President and Chief Financial Officer,
Berkshire Hathaway Energy
P A Jones President and Chief Executive Officer
J N Reynolds Independent non-executive Director
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.
Political donations
During the year, no contributions were made to political
organisations (2017: GBPnil).
Northern Electric plc
Directors' Report for the Year Ended 31 December 2018
(continued)
Financial instruments
Financial risk management
Details of financial risks are included in the Principal Risks
and Uncertainties on page 9 to 11 of the Strategic Report and in
note 29 to the financial statements.
Financial derivatives
As at 31 December 2018 the Group held one derivative financial
instrument (2017: one) to mitigate the interest rate risk on a
floating interest rate loan. More details on derivative financial
instruments are available in note to the financial statements.
Employee consultation
A constitutional framework agreed with trade union
representatives exists in respect of employee consultation. The
management team keep employees and trade union representatives
informed of, and involved as appropriate, in developments that may
impact them now or in the future.
Employee engagement continues to show improvement with local
action plans augmented by routine communication channels including
regular staff briefings, meetings with staff and their
representatives, and utilising the Northern Powergrid Group's
intranet.
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
regular electronic briefings.
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 relevant company will make reasonable
adjustments, wherever possible.
In accordance with Section 414C of the Companies Act 2006
disclosures concerning relations with employees and greenhouse gas
emissions can be found on pages 6 and 7 of the Strategic
Report.
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).
Directors' biographies
Thomas E Fielden
Appointed in October 2009, Mr Fielden joined the Northern
Powergrid Group in July 2009 and became Finance Director in 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 Eastern Railway (GNER) as Financial
Controller in 2005. He became Finance Director of GNER in 2006,
transferring to National Express East Coast in 2007.
Thomas H France
Appointed in March 2018, Mr France joined the Northern Powergrid
Group in November 2013 and he became General Counsel in July 2015.
He is a solicitor, having qualified with Herbert Smith in their
corporate energy and infrastructure team.
Northern Electric plc
Directors' Report for the Year Ended 31 December 2018
(continued)
Patrick J Goodman
Mr Goodman 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, AltaLink, HomeServices of America, Inc., 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 25 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 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 is Chairman of the Energy Networks Association,
the trade association that represents the power transmission and
distribution companies.
John N Reynolds OBE
Mr. Reynolds was appointed in January 2011 as a director of
Northern Powergrid Holdings Company and in October 2017 as Chairman
of the audit committee. Mr Reynolds is the Chief Executive Officer
of Castle Water. He is a Fellow of the Institution of Engineering
& Technology, a Fellow of the Energy Institute and is a former
commission member of the Water Industry Commission for Scotland. Mr
Reynolds chaired the Church of England Ethical Investment Advisory
Group, and is a former council member of the Central Finance Board
of the Methodist Church. He is the author of a number of books and
articles on business ethics. Mr. Reynolds previously held senior
management roles at HSBC and Houlihan Lokey.
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 the Northern Powergrid
Group's corporate website.
Diversity policy
The Northern Powergrid Group has adopted a number of policies
(including the policy on diversity at work and code of business
conduct) that collectively comprise the policy on diversity.
Diversity is actively supported through recruitment, educational
programmes, employee opportunities and the Global Days of Service
charitable support programme. All appointments (which includes
board, board committee, and senior management appointments) are
based on merit with due regard for diversity, including gender.
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 carries out the functions required by DTR
7.1.3 R.
Committee members
-- J N Reynolds, non-executive Director (Chairman)
-- T E Fielden, Finance Director
-- M Knowles, independent member - Northern Powergrid Holdings Company
(appointed 17 July 2018)
Northern Electric plc
Directors' Report for the Year Ended 31 December 2018
(continued)
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors are responsible for preparing the annual reports
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 (IFRSs) 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
Company and the Group and of the profit or loss of the Group and
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 IFRSs 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 Company's and
the Group's transactions and disclose with reasonable accuracy at
any time the financial position of the Company and the Group 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 Company and the Group 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 the corporate and financial information included
on the 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
financial statements, whose names and functions are set out on page
12 in the Report of the Directors confirms that, to the best of
their knowledge:
-- the financial statements, 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 of the Company
and the undertakings included in the consolidation taken as a whole;
-- 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
and the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties
it faces; and
-- the annual report and financial statements, taken as a whole, are
fair, balanced and understandable and provide the information necessary
for shareholders.
Non-financial information statement
In accordance with Section 414CB(7) of the Companies Act 2006,
the directors have elected to set out the information required by
Section 414CB (1) to (6) 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.
Northern Electric plc
Directors' Report for the Year Ended 31 December 2018
(continued)
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 financial statements.
When considering if to continue to adopt the going concern basis
in preparing the annual report and financial statements, the
directors have taken into account a number of factors, including
the following:
-- The Group's main subsidiaries, NPg Northeast, is a stable electricity
distribution businesses operating an essential public service and
are regulated by the Gas and Electricity Markets Authority ("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. The Company
and NPg Northeast hold investment grade credit ratings;
-- The Group is financed by long-term borrowings with an average maturity
of 8 years and has access to short-term committed borrowing facilities
of GBP97 million;
-- The Northern Powergrid Group plans to issue long-term borrowings
within the next 12 months and early indications from our relationship
banks suggest there is an active market with appetite to invest;
and
-- The Group has prepared forecasts which taking into account reasonable
possible changes in trading performance, show that the Group has
sufficient resources to settle its liabilities as they fall due.
The directors have had discussions with the bank who have indicated
that they would continue to provide the short term facilities to
the Group for the foreseeable future on acceptable terms.
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 financial statements.
Disclosure of information to the auditor
Each director has taken steps that they ought to have taken as a
director in order to make themselves aware of any relevant audit
information and to establish that the company's auditor is aware of
that information. The directors confirm that there is no relevant
information that they know of and of which they know the auditor is
unaware.
Reappointment of 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.
Approved by the Board on 15 April 2019 and signed on its behalf
by:
P A Jones
Director
Northern Electric plc
Independent Auditor's Report to the Members of Northern Electric
plc
Opinion
In our opinion:
-- the financial statements of Northern Electric plc (the 'parent company')
and its subsidiaries (the 'group') give a true and fair view of
the state of the group's and of the parent company's affairs as
at 31 December 2018 and of the group's profit for the year then
ended;
-- the group financial statements have been properly prepared in accordance
with International Financial Reporting Standards (IFRSs) as adopted
by the European Union;
-- the parent company financial statements have been properly prepared
in accordance with IFRSs as adopted by the European Union and as
applied in accordance with the provisions of the Companies Act 2006;
and
-- the financial statements have been prepared in accordance with the
requirements of the Companies Act 2006 and, as regards the group
financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements which comprise:
-- the consolidated income statement;
-- the consolidated statement of comprehensive income;
-- the consolidated and parent company statement of financial position;
-- the consolidated and parent company statements of changes in equity;
-- the consolidated and parent company cash flow statement; and
-- the related notes 1 to 34.
The financial reporting framework that has been applied in their
preparation is applicable law and IFRSs as adopted by the European
Union and, as regards the parent company financial statements, as
applied in accordance with the provisions of the Companies Act
2006.
Summary of our audit approach
The key audit matters that we identified in the current year
were:
-- Accounting for capital spend - overhead allocation model
-- Valuation of defined benefit obligations
Materiality: The materiality that we used for the group
financial statements was GBP6.5m which was determined on the basis
of 5% of income before tax.
Scoping: The focus of our audit work was on the main regulated
business, Northern Powergrid (Northeast) Ltd and the significant
sub-consolidations in the group.
Significant changes in our approach: There has not been a
significant change in our approach since the prior year, however,
the valuation of the defined benefit obligations is now a key audit
matter because of the increased settlements in the scheme and the
sensitivities of the assumptions utilised to value the
obligation.
Conclusions relating to going concern
We have nothing to report in respect of the following matters in
relation to which the ISAs (UK) require us to report to you
where:
-- the directors' use of the going concern basis of accounting in the
preparation of the financial statements is not appropriate; or
-- the directors have not disclosed in the financial statements any
identified material uncertainties that may cast significant doubt
about the group's or the parent company's ability to continue to
adopt the going concern basis of accounting for a period of at least
twelve months from the date when the financial statements are authorised
for issue.
Northern Electric plc
Independent Auditor's Report to the Members of Northern Electric
plc (continued)
Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had
the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the
engagement team.
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
Accounting for capital spend - overhead allocation model
Key audit matter description
Total additions to property, plant and equipment in the year in
Northern Powergrid (Northeast) were GBP173m (2017: GBP192m) with
the majority of the additions to the electricity distribution
system, as disclosed in note 11 to the financial statements. These
additions include capitalised overheads. A portion of the overheads
are capitalised to the extent that they are considered to relate to
capital additions that have taken place during the year.
The calculation of capitalised overheads remains an area at risk
of potential bias due to the level of subjectivity in the
percentage of overheads capitalised, which also creates a potential
fraud risk. In particular, the key risk is that management's
judgement in the percentage amounts capitalised are not reflective
of the capital spend, as disclosed in notes 2, including the note
relating to critical judgements in applying accounting
policies.
How the scope of our audit responded to the key audit matter
-- We have evaluated the design and implementation of controls surrounding
accounting for capital spend.
-- We have analysed the capital spend and the overhead allocation percentages
in the year and compared these to prior year to identify any unusual
fluctuations. We have also analysed current policies in place and
assessed their suitability in line with IAS 16, along with reviewing
the approach management takes towards assessing capitalised overheads
and any changes introduced in the current year.
-- We have obtained relevant industry benchmarks for the proportions
for capitalisation, using these benchmarks to challenge management
as to the appropriateness of their judgement.
-- We have performed testing of the total overheads included within
the allocation model which are subsequently capitalised based on
management's assessment of percentage allocation.
Key observations
No material differences were identified based upon the
procedures above. We have therefore concluded management's overhead
capitalisation judgement is reasonable, with policies applied being
appropriate and consistent with prior year and IFRS
requirements.
Valuation of defined benefit obligations
Key audit matter description
The key judgements relate to the determination of the present
value of defined benefit obligation. The present value of the
funding asset was GBP85m, with an underlying obligation of
GBP1,468m. The present value of the defined benefit obligation is
actuarially derived and is subject to judgement in the assumption
setting. Due to the continued settlements in the year for the
scheme we have noted additional risk around the valuation modelling
of each settlement and the impact to the actuarial assumptions due
to the change in the profile of the membership of the scheme. The
accounting policy and disclosure is found in note 26.
Northern Electric plc
Independent Auditor's Report to the Members of Northern Electric
plc (continued)
How the scope of our audit responded to the key audit matter
-- We have evaluated the design and implementation of the review of
the actuary report at the year end.
-- We have obtained and tested the underlying data and assumptions
utilised by the actuary in the calculation of the pension obligation.
-- We have challenged the settlement model utilised by independently
recalculating the model based on assumptions we would have expected
the model to utilise, and have tested the underlying data used in
the model to derecognise the obligation.
-- We have considered the estimates of experienced actuaries and challenged
management assumptions and judgements by using specialists to benchmark
assumptions, and we derived an independent calculation on settlements
required.
Key observations
We concluded that each of the assumptions used by management to
estimate the defined benefit obligation are consistent with the
requirements of IAS 19 and are in a reasonable range when compared
to comparable schemes and our internal benchmarks, albeit slightly
towards the optimistic end. In the prior year the assumptions were
consistently towards the optimistic end.
Our application of materiality
We define materiality as the magnitude of misstatement in the
financial statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or
influenced. We use materiality both in planning the scope of our
audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:
Group financial statements
-- Materiality: GBP6.5m (2017: GBP7m)
-- Basis for determining materiality: 5% of income before tax
-- Rationale for the benchmark applied: The group contains large trading
entities. The industry revenue is highly regulated, therefore, there
is a focus on profit.
Parent company fianncial statements
-- Materiality: GBP7m (2017: GBP7m)
-- Basis for determining materiality: 3% of adjusted net assets
-- Rationale for the benchmark applied: Total equity shows how much
the value of shareholdings are in the company and as such investor
value. The company is not trading as such incurs no revenue.
We agreed with the Board of Directors that we would report to
the Board all audit differences in excess of GBP0.32m (2017:
GBP0.25m), as well as differences below that threshold that, in our
view, warranted reporting on qualitative grounds. We also report to
the Board of Directors on disclosure matters that we identified
when assessing the overall presentation of the financial
statements.
An overview of the scope of our audit
Our group audit was scoped by obtaining an understanding of the
Group and its environment, including internal controls, and
assessing the risks of material misstatement at the Group level.
The operations of the group are mainly focused in the United
Kingdom in the electricity distribution business, with some
overseas assets in the oil and gas industry.
The focus of our audit work was on the main regulated business,
Northern Powergrid (Northeast) Ltd, with work performed at a
combination of the group's offices in the North East and Yorkshire
regions, and we have audited the significant sub consolidations in
the group. Other sizeable companies within the group include
Integrated Utility Services Ltd, which provides contracting and
maintenance services to the electricity, rail and water industries,
and Northern Powergrid Metering Ltd which leases smart meters to
energy providers.
At the group level, we have tested the consolidation process and
carried out analytical procedures to confirm our conclusion that
there were no significant risks of material misstatement of the
aggregated financial information of the remaining components not
subject to audit or audit of specified account balances.
Northern Electric plc
Independent Auditor's Report to the Members of Northern Electric
plc (continued)
Other information
The directors are responsible for the other information. The
other information comprises the information included in the annual
report, other than the financial statements and our auditor's
report thereon. Our opinion on the financial statements does not
cover the other information and, except to the extent otherwise
explicitly stated in our report, we do not express any form of
assurance conclusion thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit or otherwise appears to be materially misstated. If we
identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a
material misstatement in the financial statements or a material
misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact.
We have nothing to report in this regard.
Responsibilities of directors
As explained more fully in the Statement of Directors
Responsibilities (set out on page 15), the directors are
responsible for the preparation of the financial statements and for
being satisfied that they give a true and fair view, and for such
internal control as the directors determine is necessary to enable
the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the group's and the parent company's
ability to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the
group or the parent company or to cease operations, or have no
realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
Details of the extent to which the audit was considered capable
of detecting irregularities, including fraud are set out below.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditor's report.
Extent to which the audit was considered capable of detecting
irregularities, including fraud
We identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, and then
design and perform audit procedures responsive to those risks,
including obtaining audit evidence that is sufficient and
appropriate to provide a basis for our opinion.
Identifying and assessing potential risks related to
irregularities
In identifying and assessing risks of material misstatement in
respect of irregularities, including fraud and non-compliance with
laws and regulations, our procedures included the following:
-- enquiring of management and the Board, including obtaining and reviewing
supporting documentation, concerning the group's policies and procedures
relating to:
-- identifying, evaluating and complying with laws and regulations
and whether they were aware of any instances of non-compliance;
-- detecting and responding to the risks of fraud and whether they
have knowledge of any actual, suspected or alleged fraud;
-- the internal controls established to mitigate risks related to
fraud or non-compliance with laws and regulations;
Northern Electric plc
Independent Auditor's Report to the Members of Northern Electric
plc (continued)
-- discussing among the engagement team and involving relevant internal
specialists, including tax, valuations, pensions, IT and industry
specialists regarding how and where fraud might occur in the financial
statements and any potential indicators of fraud. As part of this
discussion, we considered the risk of potential bias due to the
level of subjectivity in determining the percentage of overheads
capitalised to property, plant and equipment, and judgements in
pensions valuations; and
-- obtaining an understanding of the legal and regulatory framework
that the group operates in, focusing on those laws and regulations
that had a direct effect on the financial statements or that had
a fundamental effect on the operations of the group. The key laws
and regulations we considered in this context included the UK Companies
Act, pensions legislation and tax legislation. In addition, compliance
with Ofgem regulations were fundamental to the company's ability
to continue as a going concern.
Audit response to risks identified
As a result of performing the above, we identified accounting
for capital spend - overhead allocation model as a key audit
matter, in addition to valuation of defined benefit obligations.
The key audit matters section of our report explains the matters in
more detail and also describes the specific procedures we performed
in response to that key audit matters. Our additional procedures to
respond to risks identified included the following:
-- reviewing the financial statement disclosures and testing to supporting
documentation to assess compliance with relevant laws and regulations
discussed above;
-- enquiring of management, the Board and legal counsel concerning
actual and potential litigation and claims;
-- performing analytical procedures to identify any unusual or unexpected
relationships that may indicate risks of material misstatement due
to fraud;
-- reading minutes of meetings of those charged with governance, reviewing
internal audit reports and reviewing correspondence with HMRC and
Ofgem; and
-- in addressing the risk of fraud through management override of controls,
testing the appropriateness of journal entries and other adjustments;
assessing whether the judgements made in making accounting estimates
are indicative of a potential bias; and evaluating the business
rationale of any significant transactions that are unusual or outside
the normal course of business.
We also communicated relevant identified laws and regulations
and potential fraud risks to all engagement team members including
internal specialists, and remained alert to any indications of
fraud or non-compliance with laws and regulations throughout the
audit.
Report on other legal and regulatory requirements
Opinions on other matters 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 directors'
report for the financial year for which the financial statements
are prepared is consistent with the financial statements; and
-- the strategic report and the directors' report have been prepared
in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the group and
of the parent company and their environment obtained in the course
of the audit, we have not identified any material misstatements in
the strategic report or the directors' report.
Northern Electric plc
Independent Auditor's Report to the Members of Northern Electric
plc (continued)
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
-- we have not received all the information and explanations we require
for our audit; or
-- adequate accounting records have not been kept by the parent company,
or returns adequate for our audit have not been received from branches
not visited by us; or
-- the parent company financial statements are not in agreement with
the accounting records and returns.
We have nothing to report in respect of these matters.
Directors' remuneration
Under the Companies Act 2006 we are also required to report if
in our opinion certain disclosures of directors' remuneration have
not been made.
We have nothing to report in respect of this matter.
Other matters
Auditor tenure
Following the recommendation of the Board of Directors, we were
appointed by the Board of Northern Powergrid Holdings Company in
1998 to audit the financial statements for the year ending 31
December 1998 and subsequent financial periods. The period of total
uninterrupted engagement including previous renewals and
reappointments of the firm is 21 years, covering the years ending
31 December 1998 to 31 December 2018.
Consistency of the audit report with the additional report to
the audit committee
Our audit opinion is consistent with the additional report to
the audit committee we are required to provide in accordance with
ISAs (UK).
Use of our report
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
an auditor's report 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.
David M Johnson FCA (Senior Statutory Auditor)
For and on behalf of Deloitte LLP, Statutory Auditor
Newcastle upon Tyne
Tyne and Wear
30 April 2019
Northern Electric plc
Consolidated Income Statement for the Year Ended 31 December
2018
2018 2017
Note GBP 000 GBP 000
Revenue 3 418,973 403,441
Cost of sales (33,096) (41,615)
--------- ---------
Gross profit 385,877 361,826
Distribution costs (116,624) (107,931)
Administrative expenses (95,316) (73,679)
--------- ---------
Operating profit 5 173,937 180,216
Other gains 4 909 331
Finance income 6 1,549 1,100
Finance costs 6 (45,513) (41,404)
--------- ---------
Profit before tax 130,882 140,243
Income tax expense 10 (24,864) (28,805)
--------- ---------
Profit for the year 106,018 111,438
========= =========
Profit attributable to:
Owners of the Company 106,018 111,438
========= =========
The above results were derived from continuing operations.
Northern Electric plc
Consolidated Statement of Comprehensive Income for the Year
Ended 31 December 2018
2018 2017
Note GBP 000 GBP 000
Profit for the year 106,018 111,438
Items that will not be reclassified subsequently
to profit or loss
Remeasurements of post employment benefit
obligations (net) 25 (49,566) 48,538
Items that may be reclassified subsequently
to profit or loss
Gain/(loss) on cash flow hedges (net) 1,076 (287)
-------- --------
Total comprehensive income for the year 57,528 159,689
======== ========
Total comprehensive income attributable to:
Owners of the Company 57,528 159,689
======== ========
Northern Electric plc
(Registration number: 02366942)
Consolidated Statement of Financial Position as at 31 December
2018
31 December 31 December
2018 2017
Note GBP 000 GBP 000
Assets
Non-current assets
Property, plant and equipment 11 2,686,862 2,551,472
Intangible assets 12 50,638 47,568
Equity accounted investments 13 3,494 3,428
Retirement benefit obligations 25 84,600 116,900
Trade and other receivables 15 6,877 6,358
Other non-current financial assets 837 -
----------- -----------
2,833,308 2,725,726
----------- -----------
Current assets
Inventories 14 13,409 13,382
Trade and other receivables 15 78,010 84,600
Cash and cash equivalents 16 28,143 16,612
Restricted cash 17 13,809 2,182
Contract assets 3 6,005 9,721
Other current financial assets 114 -
----------- -----------
139,490 126,497
----------- -----------
Total assets 2,972,798 2,852,223
=========== ===========
Equity and liabilities
Equity
Share capital 18 (72,173) (72,173)
Share premium (158,748) (158,748)
Capital redemption reserve (6,185) (6,185)
Cash flow hedging reserve 19 (789) 287
Retained earnings (931,396) (874,944)
----------- -----------
Equity attributable to owners of the Company (1,169,291) (1,111,763)
----------- -----------
Non-current liabilities
Loans and borrowings 20 (670,361) (694,092)
Deferred revenue 24 (597,215) (584,348)
Deferred tax liabilities 10 (98,555) (102,552)
Other non-current financial liabilities - (327)
----------- -----------
(1,366,131) (1,381,319)
----------- -----------
Northern Electric plc
(Registration number: 02366942)
Consolidated Statement of Financial Position as at 31 December
2018 (continued)
31 December 31 December
2018 2017
Note GBP 000 GBP 000
Current liabilities
Trade and other payables 23 (110,901) (122,378)
Loans and borrowings 20 (297,803) (203,972)
Income tax liability (3,106) (7,421)
Deferred revenue 24 (22,780) (22,450)
Provisions 22 (2,786) (2,901)
Other current financial liabilities - (19)
----------- -----------
(437,376) (359,141)
----------- -----------
Total liabilities (1,803,507) (1,740,460)
----------- -----------
Total equity and liabilities (2,972,798) (2,852,223)
=========== ===========
Approved by the Board on 15 April 2019 and signed on its behalf
by:
P A Jones
Director
Northern Electric plc
(Registration number: 02366942)
Statement of Financial Position as at 31 December 2018
31 December 31 December
2018 2017
Note GBP 000 GBP 000
Assets
Non-current assets
Property, plant and equipment 11 1,555 1,587
Investments in subsidiaries, joint ventures
and associates 13 243,285 328,070
Deferred tax asset 10 118 137
----------- -----------
244,958 329,794
----------- -----------
Current assets
Trade and other receivables 15 302 3,762
Income tax asset 2,843 1,684
Cash and cash equivalents 16 43,633 -
----------- -----------
46,778 5,446
----------- -----------
Total assets 291,736 335,240
=========== ===========
Equity and liabilities
Equity
Share capital 18 (72,173) (72,173)
Share premium (158,748) (158,748)
Capital redemption reserve (6,185) (6,185)
Retained earnings (39,409) (14,797)
----------- -----------
Total equity (276,515) (251,903)
----------- -----------
Non-current liabilities
Loans and borrowings 20 (1,117) (1,117)
Current liabilities
Trade and other payables 23 (3,913) (6,073)
Loans and borrowings 20 (8,656) (74,537)
Provisions 22 (1,535) (1,610)
----------- -----------
(14,104) (82,220)
----------- -----------
Total liabilities (15,221) (83,337)
----------- -----------
Total equity and liabilities (291,736) (335,240)
=========== ===========
The Directors have taken the exemption offered under section 408
of the Act from publishing a separate statement of profit or loss.
The Company reported a profit for the financial year ended 31
December 2018 of GBP24.6m (2017: GBP14.1m).
Approved by the Board on 15 April 2019 and signed on its behalf
by:
P A Jones
Director
Northern Electric plc
Consolidated Statement of Changes in Equity for the Year Ended
31 December 2018
Capital redemption Cash flow Retained
Share capital Share premium reserve hedging reserve earnings
GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
At 1 January 2018 72,173 158,748 6,185 (287) 874,944
Profit for the year - - - - 106,018
Other comprehensive income - - - 1,076 (49,566)
------------- ------------- ------------------ ---------------- ---------
Total comprehensive income - - - 1,076 56,452
------------- ------------- ------------------ ---------------- ---------
At 31 December 2018 72,173 158,748 6,185 789 931,396
============= ============= ================== ================ =========
Total
GBP 000
At 1 January 2018 1,111,763
Profit for the year 106,018
Other comprehensive income (48,490)
---------
Total comprehensive income 57,528
---------
At 31 December 2018 1,169,291
=========
Capital redemption Cash flow Retained
Share capital Share premium reserve hedging reserve earnings
GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
At 1 January 2017 72,173 158,748 6,185 - 737,668
Profit for the year - - - - 111,438
Other comprehensive income - - - (287) 48,538
------------- ------------- ------------------ ---------------- ---------
Total comprehensive income - - - (287) 159,976
Dividends - - - - (22,700)
------------- ------------- ------------------ ---------------- ---------
At 31 December 2017 72,173 158,748 6,185 (287) 874,944
============= ============= ================== ================ =========
Total
GBP 000
At 1 January 2017 974,774
Profit for the year 111,438
Other comprehensive income 48,251
---------
Total comprehensive income 159,689
Dividends (22,700)
---------
At 31 December 2017 1,111,763
=========
Northern Electric plc
Statement of Changes in Equity for the Year Ended 31 December
2018
Capital redemption Retained
Share capital Share premium reserve earnings Total
GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
At 1 January 2018 72,173 158,748 6,185 14,797 251,903
Profit for the year - - - 24,612 24,612
------------- ------------- ------------------ --------- --------
Total comprehensive income - - - 24,612 24,612
------------- ------------- ------------------ --------- --------
At 31 December 2018 72,173 158,748 6,185 39,409 276,515
============= ============= ================== ========= ========
Capital redemption Retained
Share capital Share premium reserve earnings Total
GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
At 1 January 2017 72,173 158,748 6,185 23,391 260,497
Profit for the year - - - 14,106 14,106
------------- ------------- ------------------ --------- --------
Total comprehensive income - - - 14,106 14,106
Dividends - - - (22,700) (22,700)
------------- ------------- ------------------ --------- --------
At 31 December 2017 72,173 158,748 6,185 14,797 251,903
============= ============= ================== ========= ========
Northern Electric plc
Consolidated Statement of Cash Flows for the Year Ended 31
December 2018
2018 2017
Note GBP 000 GBP 000
Cash flows from operating activities
Profit for the year 106,018 111,438
Depreciation and amortisation 5 121,715 102,551
Amortisation of deferred revenue (22,355) (21,210)
Profit on disposal of property plant and
equipment 4 (909) (331)
Retirement benefit obligation (27,700) (27,600)
Finance income 6 (1,549) (1,100)
Finance costs 6 45,513 41,404
Income tax expense 10 24,864 28,805
--------- ---------
245,597 233,957
Increase in inventories 14 (27) (546)
Decrease/(increase) in trade and other receivables 15 6,071 (11,454)
(Decrease)/increase in trade and other payables 23 (917) 1,814
Decrease in contract assets 3 3,716 2,821
(Decrease)/increase in provisions 22 (115) 376
--------- ---------
Cash generated from operations 254,325 226,968
Income taxes paid (22,962) (21,261)
--------- ---------
Net cash flow from operating activities 231,363 205,707
--------- ---------
Cash flows used in investing activities
Acquisitions of property plant and equipment (259,786) (321,520)
Proceeds from sale of property plant and
equipment 1,325 331
Acquisition of intangible assets 12 (10,357) (11,417)
Receipt of customer contributions 34,543 51,485
Interest received 730 435
Dividend income 6 753 556
--------- ---------
Net cash flows used in investing activities (232,792) (280,130)
--------- ---------
Cash flows used in financing activities
Proceeds from long-term borrowing draw downs 40,000 155,011
Repayment of long-term borrowing (51,046) -
Proceeds from short-term borrowing 44,526 -
Movement in intercompany treasury account 35,302 2,808
Movement in restricted cash (11,627) (2,182)
Interest paid (44,195) (42,417)
Dividends paid 26 - (22,700)
--------- ---------
Net cash flows used in financing activities 12,960 90,520
--------- ---------
Net increase in cash and cash equivalents 11,531 16,097
Cash and cash equivalents at 1 January 16,612 515
--------- ---------
Cash and cash equivalents at 31 December 28,143 16,612
========= =========
Northern Electric plc
Statement of Cash Flows for the Year Ended 31 December 2018
2018 2017
Note GBP 000 GBP 000
Cash flows from operating activities
Profit for the year 24,612 14,106
Adjustments to cash flows from non-cash items
Depreciation and amortisation 5 32 47
Loss from disposals of investments 84,785 -
Finance income (116,646) (23,209)
Finance costs 9,379 9,413
Income tax expense (458) 1,371
--------- --------
1,704 1,728
Working capital adjustments
Decrease/(increase) in trade and other receivables 15 3,460 (3,384)
(Decrease)/increase in trade and other payables 23 (2,115) 2,835
Decrease in provisions 22 (75) (103)
--------- --------
Cash generated from operations 2,974 1,076
Income taxes (paid)/received (727) 97
--------- --------
Net cash flow from operating activities 2,247 1,173
--------- --------
Cash flows from investing activities
Interest received 803 509
Dividend income 115,843 22,700
--------- --------
Net cash flows from investing activities 116,646 23,209
--------- --------
Cash flows from financing activities
Movement in intercompany treasury account (68,549) 4,015
Interest paid (379) (427)
Proceeds from bank borrowing draw downs 2,668 3,716
Interest on preference shares (9,001) (9,001)
Dividends paid 26 - (22,700)
Foreign exchange (gains) / losses 1 15
--------- --------
Net cash flows from financing activities (75,260) (24,382)
--------- --------
Net increase in cash and cash equivalents 43,633 -
Cash and cash equivalents at 1 January - -
--------- --------
Cash and cash equivalents at 31 December 43,633 -
========= ========
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018
1 General information
The company is a public company limited by share capital,
incorporated in England and Wales and domiciled in the United
Kingdom.
The address of its registered office is:
Lloyds Court
78 Grey Street
Newcastle upon Tyne
Tyne and Wear
NE1 6AF
United Kingdom
2 Accounting policies
Statement of compliance
The Group financial statements have been prepared in accordance
with International Financial Reporting Standards and its
interpretations adopted by the EU ("adopted IFRS's").
Summary of significant accounting policies and key accounting
estimates
The principal accounting policies applied in the preparation of
these financial statements are set out below. These policies have
been consistently applied to all the years presented, unless
otherwise stated.
Basis of preparation
The financial statements have been prepared in accordance with
adopted IFRSs and under the historical cost convention as modified
by financial instruments recognised at fair value.
The preparation of financial statements in conformity with IFRS
requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of
applying the Group's accounting policies.
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 financial statements.
When considering if to continue to adopt the going concern basis
in preparing the annual report and financial statements, the
directors have taken into account a number of factors, including
the following:
-- The Group's main subsidiaries, NPg Northeast, is a stable electricity
distribution businesses operating an essential public service and
are regulated by the Gas and Electricity Markets Authority ("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. The Company
and NPg Northeast hold investment grade credit ratings;
-- The Group is financed by long-term borrowings with an average maturity
of 8 years and has access to short-term committed borrowing facilities
of GBP97 million;
-- The Northern Powergrid Group plans to issue long-term borrowings
within the next 12 months and early indications from our relationship
banks suggest there is an active market with appetite to invest;
and
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
2 Accounting policies (continued)
-- The Group has prepared forecasts which, taking into account reasonable
possible changes in trading performance, show that the Group has
sufficient resources to settle its liabilities as they fall due.
The directors have had discussions with the bank who have indicated
that they would continue to provide the short-term facilities to
the Group for the foreseeable future on acceptable terms.
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 financial statements.
Basis of consolidation
The Group financial statements consolidate the financial
statements of the Company and its subsidiary undertakings drawn up
to 31 December 2018.
A subsidiary is an entity controlled by the Company. Control is
achieved where the Company has the power to govern the financial
and operating policies of an entity so as to obtain benefits from
its activities.
The results of subsidiaries acquired or disposed of during the
year are included in the income statement from the effective date
of acquisition or up to the effective date of disposal, as
appropriate. Where necessary, adjustments are made to the financial
statements of subsidiaries to bring their accounting policies into
line with those used by the group.
The purchase method of accounting is used to account for
business combinations that result in the acquisition of
subsidiaries by the group. The cost of a business combination is
measured as the fair value of the assets given, equity instruments
issued and liabilities incurred or assumed at the date of exchange,
plus costs directly attributable to the business combination.
Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are measured
initially at their fair values at the acquisition date. Any excess
of the cost of the business combination over the acquirer's
interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities recognised is recorded as
goodwill.
Inter-company transactions, balances and unrealised gains on
transactions between the Company and its subsidiaries, which are
related parties, are eliminated in full.
Intra-group losses are also eliminated but may indicate an
impairment that requires recognition in the consolidated financial
statements.
Accounting policies of subsidiaries have been changed where
necessary to ensure consistency with the policies adopted by the
group. Non-controlling interests in the net assets of consolidated
subsidiaries are identified separately from the Group's equity
therein. Non-controlling interests consist of the amount of those
interests at the date of the original business combination and the
non-controlling shareholder's share of changes in equity since the
date of the combination. Total comprehensive income is attributed
to non-controlling interests even if this results in the
non-controlling interests having a deficit balance.
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:
-- 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 the
costs and their cost drivers which is reviewed on annual basis.
The percentage allocation of overheads across the workstream categories
are obtained from section managers who are asked to provide reasoning
and supporting evidence for the allocation. Finance then undertake
a financial impact assessment review and the rationale to ensure
it complies with IFRS. The amount of overheads capitalised in the
year was GBP40.8 million (2017: GBP41.4 million).
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
2 Accounting policies (continued)
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 25.
Changes in accounting policy
The following have been applied for the first time from 1
January 2018 and have had an effect on the financial
statements:
IFRS 9 - Financial instruments
In the current year, the Company has applied IFRS 9 Financial
Instruments (as revised in July 2014) and the related consequential
amendments to other IFRSs in advance of their effective dates. IFRS
9 introduces new requirements for 1) the classification and
measurement of financial assets and financial liabilities, 2)
impairment for financial assets and 3) general hedge accounting.
Details of these new requirements as well as their impact on the
Company's financial statements are described below. The Company has
applied IFRS 9 in accordance with the transition provisions set out
in IFRS 9.
(a) Classifications and measurement of financial assets
The date of initial application (i.e. the date on which the
Company has assessed its existing financial assets and financial
liabilities in terms of the requirements of IFRS 9) is 1 January
2018. Accordingly, the Company has applied the requirements of IFRS
9 to instruments that have not been derecognised as at 1 January
2018 and has not applied the requirements to instruments that have
already been derecognised as at 1 January 2018. Comparative amounts
in relation to instruments that have not been derecognised as at 1
January 2018 have been restated where appropriate.
All recognised financial assets that are within the scope of
IFRS 9 are required to be subsequently measured at amortised cost
or fair value on the basis of the entity's business model for
managing the financial assets and the contractual cash flow
characteristics of the financial assets, specifically:
-- debt investments that are held within a business model whose objective
is to collect the contractual cash flows, and that have contractual
cash flows that are solely payments of principal and interest on
the principal amount outstanding, are subsequently measured at amortised
cost;
-- debt investments that are held within a business model whose objective
is both to collect the contractual cash flows and to sell the debt
instruments, and that have contractual cash flows that are solely
payments of principal and interest on the principal amount outstanding,
are subsequently measured at fair value through other comprehensive
income (FVTOCI); and
-- all other debt investments and equity investments are subsequently
measured at fair value through profit or loss (FVTPL).
Despite the aforegoing, the Company may make the following
irrevocable election / designation at initial recognition of a
financial asset:
-- the Company may irrevocably elect to present subsequent changes
in fair value of an equity investment that is neither held for trading
nor contingent consideration recognised by an acquirer in a business
combination to which IFRS 3 applies in other comprehensive income;
and
-- the Company may irrevocably designate a debt investment that meets
the amortised cost or FVTOCI criteria as measured at FVTPL if doing
so eliminates or significantly reduces an accounting mismatch.
In the current year, the Company has not designated any debt
investments that meet the amortised cost or FVTOCI criteria as
measured at FVTPL.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
2 Accounting policies (continued)
When a debt investment measured at FVTOCI is derecognised, the
cumulative gain or loss previously recognised in other
comprehensive income is reclassified from equity to profit or loss
as a reclassification adjustment. In contrast, for an equity
investment designated as measured at FVTOCI, the cumulative gain or
loss previously recognised in other comprehensive income is not
subsequently reclassified to profit or loss.
Debt instruments that are subsequently measured at amortised
cost or at FVTOCI are subject to impairment. See (b) below.
The directors of the Company reviewed and assessed the Company's
existing financial assets as at 1 January 2018 based on the facts
and circumstances that existed at that date and concluded that the
initial application of IFRS 9 has had the following impact on the
Company's financial assets as regards their classification and
measurement:
-- financial assets classified as held-to-maturity and loans and receivables
under IAS 39 that were measured at amortised cost continue to be
measured at amortised cost under IFRS 9 as they are held within
a business model to collect contractual cash flows and these cash
flows consist solely of payments of principal and interest on the
principal amount outstanding; and
-- financial assets that were measured at FVTPL under IAS 39 continue
to be measured as such under IFRS 9.
Note (e) below tabulates the change in classification of the
Company's financial assets upon application of IFRS 9. None of the
reclassifications of financial assets have had any impact on the
Company's financial position, profit or loss, other comprehensive
income or total comprehensive income for both years.
(b) Impairment of financial assets
In relation to the impairment of financial assets, IFRS 9
requires an expected credit loss model as opposed to an incurred
credit loss model under IAS 39. The expected credit loss model
requires the Company to account for expected credit losses and
changes in those expected credit losses at each reporting date to
reflect changes in credit risk since initial recognition of the
financial assets. In other words, it is no longer necessary for a
credit event to have occurred before credit losses are
recognised.
Specifically, IFRS 9 requires the Company to recognise a loss
allowance for expected credit losses on i) debt investments
subsequently measured at amortised cost or at FVTOCI, ii) lease
receivables, iii) contract assets and iv) loan commitments and
financial guarantee contracts to which the impairment requirements
of IFRS 9 apply. In particular, IFRS 9 requires the Company to
measure the loss allowance for a financial instrument at an amount
equal to the lifetime ECL if the credit risk on that financial
instrument has increased significantly since initial recognition,
or if the financial instrument is a purchased or originated
credit-impaired financial asset. On the other hand, if the credit
risk on a financial instrument has not increased significantly
since initial recognition (except for a purchased or originated
credit-impaired financial asset), the Company is required to
measure the loss allowance for that financial instrument at an
amount equal to 12 month ECL. IFRS 9 also provides a simplified
approach for measuring the loss allowance at an amount equal to
lifetime ECL for trade receivables, contract assets and lease
receivables in certain circumstances.
As at 1 January 2018, the directors of the Company reviewed and
assessed the Company's existing financial assets, amounts due from
customers and financial guarantee contracts for impairment using
reasonable and supportable information that is available without
undue cost or effort in accordance with the requirements of IFRS 9
to determine the credit risk of the respective items at the date
they were initially recognised, and compared that to the credit
risk as at 1 January 2018 and 1 January 2017. The result of the
assessment is as follows:
-- Trade and other receivables: The Company applies the simplified
approach and recognises lifetime ECL for these assets.
-- Cash and bank balances: All bank balances are assessed to have low
credit risk at each reporting date as they are held with reputable
international banking institutions.
(c) Classification and measurement of financial liabilities
One major change introduced by IFRS 9 in the classification and
measurement of financial liabilities relates to the accounting for
changes in the fair value of a financial liability designated as at
FVTPL attributable to changes in the credit risk of the issuer.
The application of the IFRS 9 impairment requirements has not
resulted in additional loss allowance to be recognised in the
current year (2017: GBPnil).
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
2 Accounting policies (continued)
Specifically, IFRS 9 requires that the changes in the fair value
of the financial liability that is attributable to changes in the
credit risk of that liability be presented in other comprehensive
income, unless the recognition of the effects of changes in the
liability's credit risk in other comprehensive income would create
or enlarge an accounting mismatch in profit or loss. Changes in
fair value attributable to a financial liability's credit risk are
not subsequently reclassified to profit or loss, but are instead
transferred to retained earnings when the financial liability is
derecognised. Previously, under IAS 39, the entire amount of the
change in the fair value of the financial liability designated as
at FVTPL was presented in profit or loss. This change in accounting
policy has not affected the Company.
Profit and other comprehensive income reported for 2018 and 2017
have not been affected as the Company did not have any financial
liabilities designated as at FVTPL in the prior year.
(d) General hedge accounting
The new general hedge accounting requirements retain the three
types of hedge accounting. However, greater flexibility has been
introduced to the types of transactions eligible for hedge
accounting, specifically broadening the types of instruments that
qualify for hedging instruments and the types of risk components of
non-financial items that are eligible for hedge accounting. In
addition, the effectiveness test has been overhauled and replaced
with the principle of an 'economic relationship'. Retrospective
assessment of hedge effectiveness is also no longer required.
Enhanced disclosure requirements about the Company's risk
management activities have also been introduced.
In accordance with IFRS 9's transition provisions for hedge
accounting, the Group has applied the IFRS 9 hedge accounting
requirements prospectively from the date of initial application on
1 January 2018. The Group's qualifying hedging relationships in
place as at 1 January 2018 also qualified for hedge accounting in
accordance with IFRS 9 and were therefore regarded as continuing
hedging relationships. No rebalancing of any of the hedging
relationships was necessary on 1 January 2018. As the critical
terms of the hedging instruments match those of their corresponding
hedged items, all hedging relationships continue to be effective
under IFRS 9's effectiveness assessment requirements. The Group has
also not designated any hedging relationships under IFRS 9 that
would not have met the qualifying hedge accounting criteria under
IAS 39.
Consistent with prior periods, the Group has continued to
designate the change in fair value of the entire forward contract,
i.e. including the forward element, as the hedging instrument in
the Group's cash flow hedge and fair value hedge relationships.
The application of the IFRS 9 hedge accounting requirements has
had no impact on the results and financial position of the Group
for the current and/or prior years. Please refer to note 29 for
detailed disclosures regarding the Group's risk management
activities.
(e) Disclosures in relation to the initial application of IFRS
9
The below illustrates the classification and measurement of
financial assets and financial liabilities under IFRS 9 and IAS 39
at the date of initial application, 1 January 2018.
-- Trade receivables (note 15) - basic loans and receivables where
the objective of the entity's business model for realising these
assets is collecting contractual cash flows are recognised at amortised
cost under both IFRS 9 and as loans and receivables under IAS 39,
there was no change in carrying value;
-- Cash and bank balances (note 16) - these were classified as financial
assets at amortised cost under IFRS 9 and loans and receivables
under IAS 39, there has been no change in carrying value.
-- Investments in equity instruments (note 13) - Investments in equity
instruments are designated as at FVTPL under IFRS 9 and IAS 39,
there has been no change in carrying value.
-- Intercompany treasury account (note 20) - the objective of the entity's
business model for realising these assets is collecting contractual
cash flows, as such they are recognised at amortised cost under
IFRS 9 and as loans and receivables under IAS 39, there has been
no change in carrying value;
-- Trade and other payables (note 23) - were recognised as financial
liabilities at amortised cost under both IFRS 9 and IAS 39, there
has been no change in carrying value;
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
2 Accounting policies (continued)
-- Borrowings (note 20) - were recognised as financial liabilities
at amortised cost under both IFRS 9 and IAS 39, there has been no
change in carrying value; and
-- Interest rate swaps (note 30) - these are classified as derivatives
designated as hedging instruments under IAS 39 and IFRS 9, there
was no change in carrying value.
There were no financial assets or financial liabilities which
the Company had previously designated as at FVTPL under IAS 39 that
were subject to reclassification, or which the Company has elected
to reclassify upon the application of IFRS 9. There were no
financial assets or financial liabilities which the Company has
elected to designate as at FVTPL at the date of initial application
of IFRS 9.
(f) Financial impact of initial application of IFRS 9
There has been no adjustment to financial statement line items
because of the application of IFRS 9 for the current and prior
years.
Amendments to IFRS 7
The consequential amendments to IFRS 7 have had no impact on the
comparatives and therefore no restatement is required; they have
resulted in more extensive disclosures in relation to the Group's
exposure to credit risk in the financial risk review (note 28).
IFRS 15 - Revenue from contracts with customers
Revenue from Contracts with Customers establishes a single
comprehensive model for entities to use in accounting for revenue
arising from contracts with customers. IFRS 15 supersedes 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. Apart from providing more
extensive disclosures, the application of IFRS 15 has not had a
significant impact on the financial position or performance of the
Company.
None of the other standards, interpretations and amendments
effective for the first time from 1 January 2018 have had a
material effect on the financial statements.
New standards, interpretations and amendments not yet
effective
The following newly issued but not yet effective standards,
interpretations and amendments, which have not been applied in
these financial statements, will or may have an effect on the
Company financial statements in future:
IFRS 16 - Leases
IFRS 16 introduces a comprehensive 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 2018, the
Group has non-cancellable operating lease commitments of GBP26.2
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 Group 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. The directors of
the Group anticipate that the application of IFRS 16 is unlikely to
have a material impact on amounts reported in the statement of
profit or loss.
None of the other standards, interpretations and amendments
which are effective for periods beginning after 1 January 2018 and
which have not been adopted early, are expected to have a material
effect on the financial statements:
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
2 Accounting policies (continued)
Effective for periods beginning or after 1 January 2019
-- Amendments to IAS 28 - Long-term interests in associates and joint
ventures;
-- Amendments to IAS 19 - Plan amendment, curtailment or settlement;
-- Annual improvements to IFRS 2015-2017 cycle;
Effective for periods beginning or after 1 January 2020
-- Amendments to IFRS 3 - Definition of a business;
-- Amendments to IAS 1 and IAS 8 - Definition of material; and
-- Amendments to References to the Conceptual Framework in IFRS Standards.
Revenue recognition
Recognition
The Group earns revenue from the provision of services relating
to revenue from a contract to provide services is recognised by the
following means:
- Distribution use of system income is recognised on a per GWh
basis;
- Customer contributions for connections are amortised over the
life of the corresponding asset;
- Contracting revenue is recognised in line with
expenditure;
- Meter asset provision income is accounted for under lease
accounting;
- Intercompany recharges for services provided are based on
costs incurred; and
- Other revenue includes connections and disconnections from the
network and are recognised by reference to the proportion of total
costs of providing the service.
. This revenue is recognised in the accounting period when the
services are rendered at an amount that reflects the consideration
to which the entity expects to be entitled in exchange for
fulfilling its performance obligations to customers.
The principles in IFRS are applied to revenue recognition
criteria using the following 5 step model:
1. Identify the contracts with the customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
in the contract
5. Recognise revenue when or as the entity satisfies its
performance obligations
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
2 Accounting policies (continued)
Fee arrangements
Below are details of fee arrangements and how these are measured
and recognised, for revenue from the provision of services:
-- For regulated use of system income the revenue for the service is
recognised on the basis of agreed charging methodologies on a per
GWh basis.
-- For fixed price for contracted service revenue is recognised based
on the stage of completion and performance obligations met for actual
services provided as a proportion of the total fixed fee agreed
in the contract.
-- For stage payment on long-term contracts revenue is recognised by
reference to stage of manufacture at the year end date using contractual
rates specified in the contract. Revenue on materials is measured
at the actual amount of the material used on the contract at the
price specified in the contract.
Performance obligations
The main performance obligations in contracts consist of the
provision of a distribution network to electricity suppliers. For
these contracts, through the distribution and connection use of
system agreement (DCUSA) the delivery of performance obligations
are measured at the balance sheet date by the number of GWh
distributed by the system.
To calculate the transaction price of contracts is:
- DUoS - the transaction price is calculated in relation to
allowed revenue;
- Engineering contracting - the transaction price of fixed fee
and stage payment contracts is determined by the fee specified in
the contract for the product;
- Meter asset provision - the transaction price of fixed fee
contracts is determined by the fee specified in contract; and
- Vehicle provision - the transaction price of fixed fee
contracts is determined by the fee specified in contract.
The performance obligations involved in engineering contracting
work are accounted for as follows:
-- Where the outcome of a 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 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.
Other performance obligations include but are not limited
to:
- Provision of vehicles over a specified period accounted for
under lease accounting;
- Provisions of exploration equipment over a specified period;
and
- Passage of milestones and completion of installation of
equipment for connections and engineering contracting.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
2 Accounting policies (continued)
Transaction price
To calculate the transaction price of contracts is:
- DUoS - the transaction price is calculated in relation to
allowed revenue;
- Engineering contracting - the transaction price of fixed fee
and stage payment contracts is determined by the fee specified
in the contract for the product;
- Meter asset provision - the transaction price of fixed fee
contracts is determined by the fee specified in contract.
- Vehicle provision - the transaction price of fixed fee
contracts is determined by the fee specified in contract.
Where discounts to the contract price are applied the Group
presents these as a discount from contract revenue at the point
in
time the discount terms are met by the customer.
Contract modifications
The Group's contracts are often amended for changes in contract
specifications and requirements. Contract modification exists when
the amendment either creates new or changes the existing
enforceable rights and obligations. The effect of a contract
modification on the transaction price and the Group's measure of
progress for the performance obligation to which it relates, is
recognised as an adjustment to revenue in one of the following
ways:
a. Prospectively as an additional separate contract:
b. Prospectively as a termination of the existing contract and
creation of a new contract;
c. As part of the original contract using a cumulative catch up;
or
d. As a combination of b) and c).
The facts and circumstances of any contract modification are
considered individually as the types of modifications will vary
contract by contract and may result in different accounting
outcomes. Judgement is applied in relation to the accounting for
such modifications where the final terms or legal contracts have
not been agreed prior to the period end as management need to
determine if a modification has been approved and if it either
creates new or changes existing enforceable rights and obligations
of the parties. Depending upon the outcome of such negotiations,
the timing and amount of revenue recognised may be different in the
relevant accounting periods. Modification and amendments to
contracts are undertaken via an agreed formal process. For example,
if a change in scope has been approved but the corresponding change
in price is still being negotiated, management use their judgement
to estimate the change to the total transaction price.
Tax
The tax expense for the period comprises current and deferred
tax. Tax is recognised in profit or loss, except that a change
attributable to an item of income or expense recognised as other
comprehensive income is also recognised directly in other
comprehensive income.
The current income tax charge is calculated on the basis of tax
rates and laws that have been enacted or substantively enacted by
the reporting date in the countries where the Group operates and
generates taxable income.
Deferred income tax is recognised on temporary differences
arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements and on
unused tax losses or tax credits in the group. Deferred income tax
is determined using tax rates and laws that have been enacted or
substantively enacted by the reporting date.
The carrying amount of deferred tax assets are reviewed at each
reporting date and a valuation allowance is set up against deferred
tax assets so that the net carrying amount equals the highest
amount that is more likely than not to be recovered based on
current or future taxable profit.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
2 Accounting policies (continued)
Property, plant and equipment
Property, plant and equipment is stated in the statement of
financial position at cost, less any subsequent accumulated
depreciation and subsequent accumulated impairment losses.
The cost of property, plant and equipment includes directly
attributable incremental costs incurred in their acquisition and
installation.
Depreciation
Depreciation is charged so as to write off the cost of assets,
other than land and properties under construction over their
estimated useful lives, as follows:
Depreciation method and
Asset class rate
Distribution system assets 45 years
Distribution generation assets 15 years
Information technology equipment included in up to 10 years
distribution system assets
Freehold land & buildings up to 60 years
Leasehold land & buildings lower of lease period
or 60 years
Metering equipment up to 10 years
Fixtures and equipment up to 10 years
Freehold land is not depreciated.
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 those estimates accounted for on
a prospective basis. Due to the significance of the Company'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 Company's accounting policy. Such assets are
classified to the appropriate categories of property, plant and
equipment when completed and ready for intended use. Depreciation
on these assets, on the same basis as other assets, commences when
the assets are commissioned. Assets are derecognised when they are
disposed of profit or loss on disposal is recognised in other gains
on the statement of profit or loss.
Intangible assets
Goodwill arising on the acquisition of an entity represents the
excess of the cost of acquisition over the group's interest in the
net fair value of the identifiable assets, liabilities and
contingent liabilities of the entity recognised at the date of
acquisition. Goodwill is initially recognised as an asset at cost
and is subsequently measured at cost less any accumulated
impairment losses. Goodwill is held in the currency of the acquired
entity and revalued to the closing rate at each reporting period
date.
Goodwill is not subject to amortisation but is tested for
impairment.
Negative goodwill arising on an acquisition is recognised
directly in the income statement. On disposal of a subsidiary or a
jointly controlled entity, the attributable amount of goodwill is
included in the determination of the profit or loss recognised in
the income statement on disposal.
Amortisation
Amortisation is provided on intangible assets so as to write off
the cost, less any estimated residual value, over their expected
useful economic life as follows:
Amortisation method and
Asset class rate
Software development up to 15 years
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
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.
Investments in subsidiaries
Investments in subsidiaries are account for at cost less
impairment.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and call
deposits, and other short-term highly liquid investments that are
readily convertible to a known amount of cash and are subject to an
insignificant risk of changes in value.
Trade receivables
Trade receivables are amounts due from customers for merchandise
sold or services performed in the ordinary course of business. If
collection is expected in one year or less (or in the normal
operating cycle of the business if longer), they are classified as
current assets. If not, they are presented as non-current
assets.
Trade receivables are recognised initially at the transaction
price. They are subsequently measured at amortised cost using the
effective interest method, less provision for impairment. A
provision for the impairment of trade receivables is established
when there is objective evidence that the Group will not be able to
collect all amounts due according to the original terms of the
receivables.
Inventories
Inventories are stated at the lower of cost and net realisable
value. Cost is determined using the first-in, first-out (FIFO)
method.
The cost of finished goods and work in progress comprises direct
materials and, where applicable, direct labour costs and those
overheads that have been incurred in bringing the inventories to
their present location and condition. At each reporting date,
inventories are assessed for impairment. If inventory is impaired,
the carrying amount is reduced to its selling price less costs to
complete and sell; the impairment loss is recognised immediately in
profit or loss.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
2 Accounting policies (continued)
Trade payables
Trade payables are obligations to pay for goods or services that
have been acquired in the ordinary course of business from
suppliers. Accounts payable are classified as current liabilities
if payment is due within one year or less (or in the normal
operating cycle of the business if longer). If not, they are
presented as non-current liabilities.
Trade payables are recognised initially at the transaction price
and subsequently measured at amortised cost using the effective
interest method.
Borrowings
All borrowings are initially recorded at the amount of proceeds
received, net of transaction costs. Borrowings are subsequently
carried at amortised cost, with the difference between the
proceeds, net of transaction costs, and the amount due on
redemption being recognised as a charge to the income statement
over the period of the relevant borrowing.
Interest expense is recognised on the basis of the effective
interest method and is included in finance costs.
Borrowings are classified as current liabilities unless the
Group has an unconditional right to defer settlement of the
liability for at least 12 months after the reporting date.
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 that
obligation and a reliable estimate can be made of the amount of the
obligation.
Provisions are measured at the directors' best estimate of the
expenditure required to settle the obligation at the reporting date
and are discounted to present value where the effect is
material.
Share capital
Ordinary shares are classified as equity. Equity instruments are
measured at the fair value of the cash or other resources received
or receivable, net of the direct costs of issuing the equity
instruments. If payment is deferred and the time value of money is
material, the initial measurement is on a present value basis.
Dividends
Dividend distribution to the Company's shareholders is
recognised as a liability in the Company's financial statements in
the period in which the dividends are approved by the Company's
shareholders.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
2 Accounting policies (continued)
Financial instruments
Initial recognition
Financial assets and financial liabilities comprise all assets
and liabilities reflected in the statement of financial position,
although excluding property, plant and equipment, investment
properties, intangible assets, deferred tax assets, prepayments,
deferred tax liabilities and employee benefits plan.
The Group recognises financial assets and financial liabilities
in the statement of financial position when, and only when, the
Group becomes party to the contractual provisions of the financial
instrument.
Financial assets are initially recognised at fair value.
Financial liabilities are initially recognised at fair value,
representing the proceeds received net of premiums, discounts and
transaction costs that are directly attributable to the financial
liability.
All regular way purchases and sales of financial assets and
financial liabilities classified as fair value through profit or
loss ("FVTPL") are recognised on the trade date, i.e. the date on
which the Group commits to purchase or sell the financial assets or
financial liabilities. All regular way purchases and sales of other
financial assets and financial liabilities are recognised on the
settlement date, i.e. the date on which the asset or liability is
received from or delivered to the counterparty. Regular way
purchases or sales are purchases or sales of financial assets that
require delivery within the timeframe generally established by
regulation or convention in the marketplace.
Subsequent to initial measurement, financial assets and
financial liabilities are measured at either amortised cost or fair
value.
Classification and measurement
Financial instruments are classified at inception into one of
the following categories, which then determine the subsequent
measurement methodology:
Financial assets are classified into one of the following three
categories:
-- financial assets at amortised cost;
-- financial assets at fair value through other comprehensive
income (FVTOCI); or
-- financial assets at fair value through the profit or loss
(FVTPL).
Financial liabilities are classified into one of the following
two categories:
-- financial liabilities at amortised cost; or
-- financial liabilities at fair value through the profit or
loss (FVTPL).
The classification and the basis for measurement are subject to
the Group's business model for managing the financial assets and
the contractual cash flow characteristics of the financial assets,
as detailed below:
Financial assets at amortised cost
A financial asset is measured at amortised cost if it meets both
of the following conditions and is not designated as at FVTPL:
-- the assets are held within a business model whose objective
is to hold assets in order to collect contractual cash flows;
and
-- the contractual terms of the financial assets give rise on
specified dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding.
If either of the above two criteria is not met, the financial
assets are classified and measured at fair value through the profit
or loss (FVTPL).
If a financial asset meets the amortised cost criteria, the
Group may choose to designate the financial asset at FVTPL. Such an
election is irrevocable and applicable only if the FVTPL
classification significantly reduces a measurement or recognition
inconsistency.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
2 Accounting policies (continued)
Financial assets at fair value through other comprehensive
income
A financial asset is measured at FVTOCI only if it meets both of
the following conditions and is not designated as at FVPTL:
-- the asset is held within a business model whose objective is
achieved by both collecting contractual cash flows and selling
financial assets; and
-- the contractual terms of the financial assets give rise on
specified dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding.
On initial recognition of an equity investments that is not held
for trading, the Group may irrevocably elect to present subsequent
changes in fair value in OCI. This election is made on an
investment-by-investment basis.
If an equity investment is designated as FVTOCI, all gains and
losses, except for dividend income, are recognised in other
comprehensive income and are not subsequently included in the
statement of income.
Financial assets at fair value through the profit or loss
Financial assets not otherwise classified above are classified
and measured as FVTPL.
Financial liabilities at amortised cost
All financial liabilities, other than those classified as
financial liabilities at FVTPL, are measured at amortised cost
using the effective interest rate method.
Financial liabilities at fair value through the profit or
loss
Financial liabilities not measured at amortised cost are
classified and measured at FVTPL. This classification includes
derivative liabilities.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
2 Accounting policies (continued)
Derecognition
Financial assets
The Group derecognises a financial asset when:
- the contractual rights to the cash flows from the financial
asset expire;
- it transfers the right to receive the contractual cash flows
in a transaction in which substantially all of the risks and
rewards of ownership of the financial asset are transferred; or
- the Group neither transfers nor retains substantially all of
the risks and rewards of ownership and it does not retain control
of the financial asset.
On derecognition of a financial asset, the difference between
the carrying amount of the asset and the sum of the consideration
received is recognised as a gain or loss in the profit or loss.
Any cumulative gain or loss recognised in OCI in respect of
equity investment securities designated as FVTOCI is not recognised
in profit or loss on derecognition of such securities. Any interest
in transferred financial assets that qualify for derecognition that
is created or retained by the group is recognised as a separate
asset or liability.
The Group enters into transactions whereby it transfers assets
recognised on its statement of financial position, but retains
either all or substantially all of risks and rewards of the
transferred assets or a portion of them. In such cases, the
transferred assets are not derecognised.
When the Group derecognises transferred financial assets in
their entirety, but has continuing involvement in them then the
entity should disclose for each type of continuing involvement at
the reporting date:
(a) The carrying amount of the assets and liabilities that are
recognised in the entity's statement of financial position and
represent the entity's continuing involvement in the derecognised
financial assets, and the line items in which those assets and
liabilities are recognised;
(b) The fair value of the assets and liabilities that represent
the entity's continuing involvement in the derecognised financial
assets;
(c) The amount that best represents the entity's maximum
exposure to loss from its continuing involvement in the
derecognised financial assets, and how the maximum exposure to loss
is determined; and
(d) The undiscounted cash outflows that would or may be required
to repurchase the derecognised financial assets or other amounts
payable to the transferee for the transferred assets.
Financial liabilities
The Group derecognises a financial liability when its
contractual obligations are discharged, cancelled, or expire.
Modification of financial assets and financial liabilities
Financial assets
If the terms of a financial asset are modified, the Group
evaluates whether the cash flows of the modified asset are
substantially different. If the cash flows are substantially
different, then the contractual rights to the cash flows from the
original financial asset are deemed to expire. In this case the
original financial asset is derecognised and a new financial asset
is recognised at either amortised cost or fair value.
If the cash flows are not substantially different, then the
modification does not result in derecognition of the financial
asset. In this case, the Group recalculates the gross carrying
amount of the financial asset and recognises the amount arising
from adjusting the gross carrying amount as a modification gain or
loss in the statement of income.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
2 Accounting policies (continued)
Financial liabilities
If the terms of a financial liabilities are modified, the Group
evaluates whether the cash flows of the modified asset are
substantially different. If the cash flows are substantially
different, then the contractual obligations from the cash flows
from the original financial liabilities are deemed to expire. In
this case the original financial liabilities are derecognised and
new financial liabilities are recognised at either amortised cost
or fair value.
If the cash flows are not substantially different, then the
modification does not result in derecognition of the financial
liabilities. In this case, the Group recalculates the gross
carrying amount of the financial liabilities and recognises the
amount arising from adjusting the gross carrying amount as a
modification gain or loss in the statement of income.
Impairment of financial assets
Measurement of Expected Credit Losses
The Group recognises loss allowances for expected credit losses
(ECL) on financial instruments that are not measured at FVPTL,
namely:
- Financial assets that are debt instruments;
- Accounts and other receivables;
- Financial guarantee contracts issued; and
- Loan commitments issued.
The Group classifies its financial instruments into stage 1,
stage 2 and stage 3, based on the applied impairment methodology,
as described below:
Stage 1: for financial instruments where there has not been a
significant increase in credit risk since initial recognition and
that are not credit-impaired on origination, the Group recognises
an allowance based on the 12-month ECL.
Stage 2: for financial instruments where there has been a
significant increase in credit risk since initial recognition but
they are not credit-impaired, the Group recognises an allowance for
the lifetime ECL.
Stage 3: for credit-impaired financial instruments, the Group
recognises the lifetime ECL.
The Group measures loss allowances at an amount equal to the
lifetime ECL, except for the following, for which they are measured
as a 12-month ECL:
- debt securities that are determined to have a low credit risk
(equivalent to investment grade rating) at the reporting date;
and
- other financial instruments on which the credit risk has not
increased significantly since their initial recognition.
The Group considers a debt security to have low credit risk when
their credit risk rating is equivalent to the globally understood
definition of 'investment grade'.
A 12-month ECL is the portion of the ECL that results from
default events on a financial instrument that are probable within
12 months from the reporting date.
Provisions for credit-impairment are recognised in the statement
of income and are reflected in accumulated provision balances
against each relevant financial instruments balance.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
2 Accounting policies (continued)
Evidence that the financial asset is credit-impaired include the
following;
- Significant financial difficulties of the borrower or
issuer;
- A breach of contract such as default or past due event;
- The restructuring of the loan or advance by the Group on terms
that the group would not consider otherwise;
- It is becoming probable that the borrower will enter
bankruptcy or other financial reorganisation;
- The disappearance of an active market for the security because
of financial difficulties;
- There is other observable data relating to a Group of assets
such as adverse changes in the payment status of borrowers or
issuers in the group, or economic conditions that correlate with
defaults in the Group.
For trade receivables, the Group applies the simplified
approach, which requires expected lifetime losses to be recognised
from initial recognition of the receivables.
To measure the expected credit losses, trade receivables and
contract assets have been grouped based on shared credit risk
characteristics and the days past due. The contract assets relate
to unbilled work in progress and have substantially the same risk
characteristics as the trade receivables for the same types of
contracts. The Group has therefore concluded that the expected loss
rates for trade receivables are a reasonable approximation of the
loss rates for the contract assets.
The expected loss rates are based on the payment profiles of
sales over a period of 36 months before 31 December 2018 and the
corresponding historical credit losses experienced within this
period. The historical loss rates are adjusted to reflect current
and forward-looking information on macroeconomic factors affecting
the ability of the customers to settle the receivables. The Group
has identified the GDP and the unemployment rate of the countries
in which it sells its goods and services to be the most relevant
factors, and accordingly adjusts the historical loss rates based on
expected changes in these factors.
Derivative financial instruments
Derivative financial instruments are contracts, the value of
which is derived from one or more underlying financial instruments
or indices, and include futures, forwards, swaps and options in the
interest rate, foreign exchange, equity and credit markets.
Derivative financial instruments are recognised in the statement
of financial position at fair value. Fair values are derived from
prevailing market prices, discounted cash flow models or option
pricing models as appropriate.
In statement of financial position, derivative financial
instruments with positive fair values (unrealised gains) are
included as assets and derivative financial instruments with
negative fair values (unrealised losses) are included as
liabilities.
The changes in the fair values of derivative financial
instruments entered into for trading purposes are included in
trading income.
Hedge accounting
Derivatives held for risk management purposes include all
derivative assets and liabilities that are not classified as
trading assets and liabilities.
The Group designates certain derivatives held for risk
management as well as certain non-derivative financial instruments
as hedging instruments in qualifying hedging relationships. On
initial designation of the hedge, the Group formally documents the
relationship between the hedging instruments and hedge items,
including the risk management objective and strategy in undertaking
the hedge, together with the method that will be used to assess the
effectiveness of the hedging relationship. The Group makes an
assessment, both at inception of the hedge relationship and on an
ongoing basis, of whether the hedging instruments are expected to
be highly effective in offsetting that changes in the fair value or
cash flows of the respective hedged items during the period for
which the hedge is designated.
These hedging relationships are discussed below.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
2 Accounting policies (continued)
Cash flow hedges
The Group makes an assessment for a cash flow hedge of a
forecast transaction, of whether the forecast transaction is highly
probable to occur and presents an exposure to variations in cash
flows that could ultimately affect profit or loss.
When a derivative is designated as the hedging instrument in a
hedge of the variability in cash flows attributable to a particular
risk associated with a recognised asset or liability that could
affect profit or loss, then the effective portion of changes in the
fair value of the derivative is recognised in OCI and presented in
the hedging reserve within equity. Any ineffective portion of
changes in the fair value of the derivative is recognised
immediately in profit or loss. The amount recognised in OCI is
reclassified to profit or loss as a reclassification adjustment in
the same period as the hedged cash flows affect profit or loss, and
in the same line item in the statement of profit or loss and
OCI.
If the hedging derivative expires or is sold, terminated or
exercised, or the hedge no longer meets the criteria for cash flow
hedge accounting, or the hedge designation is revoked, then hedge
accounting is discontinued prospectively. However, if the
derivative is novated to a central clearing counterparty by both
parties as a consequence of laws or regulations without changes in
its terms except for those that are necessary for the novation,
then the derivative is not considered expired or terminated.
Accounting estimates and assumptions
The preparation of the financial statements requires management
to make estimates and assumptions that affect the reported amounts
of certain financial assets, liabilities, income and expenses.
The use of estimates and assumptions is principally limited to
the determination of provisions for impairment, the valuation of
financial instruments as explained in more detail below:-
Provisions for impairment
In determining impairment of financial assets, judgement is
required in the estimation of the amount and timing of future cash
flows as well as an assessment of whether the credit risk on the
financial asset has increased significantly since initial
recognition and incorporation of forward-looking information in the
measurement of ECL.
Fair value of financial assets and liabilities
Where the fair value of financial assets and liabilities cannot
be derived from active markets, they are determined using a variety
of valuation techniques that include the use of mathematical
models. The input to these models is derived from observable
markets where available, but where this is not feasible, a degree
of judgement is required in determining assumptions used in the
models. Changes in assumptions used in the models could affect the
reported fair value of financial assets and liabilities.
3 Revenue
The analysis of the Group's revenue for the year from continuing
operations is as follows:
2018 2017
GBP 000 GBP 000
Distribution revenue 312,520 306,749
Amortisation of deferred revenue 22,355 21,210
Contracting revenue 21,353 33,036
Meter asset rental 58,579 37,482
Other revenue 4,166 4,964
-------- --------
418,973 403,441
======== ========
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
3 Revenue (continued)
The tables below represent the internal information provided to
the President and Chief Executive Officer of the Group for the
purposes of resource allocation and segmental performance
appraisal. The Group operates in four principal areas of activity,
those of the distribution of electricity, engineering contracting,
gas exploration and smart meter rental in the United Kingdom.
Reportable segments are those that meet two or more of the
following criteria under IFRS 8:
- Its reported revenue is 10% or more of the combined revenue of
all segments;
- The absolute measure of its profit or loss is 10% or more of
the combined reported profit; and
- Its assets are 10% or more of the combined assets of all
segments.
The Group is separated into the following segments:
-- Distribution - Northern Powergrid (Northeast) Limited
-- Contracting - IUS Ltd
-- Metering - Northern Powergrid Metering Limited
-- Other - includes vehicle leasing, corporate services and property
services.
Distribution Contracting Metering Other Total
2018 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Revenue 334,875 21,353 58,579 4,166 418,973
Inter-segment sales 379 5,103 - (5,482) -
----------------- --------------- ----------- ----------- -----------
Total revenue 335,254 26,456 58,579 (1,316) 418,973
================= =============== =========== =========== ===========
Operating profit 127,184 356 21,194 25,203 173,937
================= =============== =========== =========== ===========
Other gains 909
Finance costs (45,513)
Finance income 1,549
-----------
Profit before tax 130,882
===========
Capital additions 184,037 110 78,288 (1,844) 260,591
Depreciation 88,620 61 34,756 (1,722) 121,715
Amortisation of deferred
revenue (22,355) - - - (22,355)
======== === ====== ======= ========
Segment assets 2,551,933 10,106 364,157 43,030 2,969,226
========= ====== ======= ====== =========
Unallocated corporate assets 3,572
---------
Total assets 2,972,798
=========
Segment liabilities (703,747) (6,872) (196,895) (24,560) (932,074)
========= ======= ========= ======== ===========
Unallocated corporate liabilities (871,433)
-----------
Total liabilities (1,803,507)
===========
Segment net assets 1,848,186 3,234 167,262 18,470 2,037,152
========= ===== ======= ====== =========
Unallocated net corporate liabilities (867,861)
---------
Total net assets 1,169,291
=========
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
3 Revenue (continued)
Distribution Contracting Metering Other Total
2017 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Revenue 327,959 33,036 37,482 4,964 403,441
Inter-segment sales 342 3,662 - (4,004) -
------------ ----------- -------- -------- --------
Total revenue 328,301 36,698 37,482 960 403,441
============ =========== ======== ======== ========
Operating profit 137,121 3,120 14,181 25,794 180,216
============ =========== ======== ======== ========
Other gains 331
Finance costs (41,404)
Finance income 1,100
--------
Profit before tax 140,243
========
Capital additions 202,982 6 137,299 (2,453) 337,834
Depreciation and amortisation 82,019 47 22,165 (1,580) 102,651
Amortisation of deferred
revenue (21,209) - - - (21,209)
======== ======= ======= ========
Segment assets 2,462,379 16,206 278,174 73,242 2,830,001
========= ====== ======= ====== =========
Unallocated corporate assets 22,222
---------
Total assets 2,852,223
=========
Segment liabilities (694,271) (8,255) (22,717) (7,280) (732,523)
========= ======= ======== ======= ===========
Unallocated corporate liabilities (1,007,937)
-----------
Total liabilities (1,740,460)
===========
Segment net assets 1,768,108 7,951 255,457 65,962 2,097,478
========= ===== ======= ====== =========
Unallocated net corporate liabilities (985,715)
---------
Total net assets 1,111,763
=========
External sales to RWE Npower plc in 2018 of GBP64.9 million
(2017: GBP69.3 million) and to British Gas plc in 2018 of GBP41.4
million (2017: GBP48.3 million) are included within the
Distribution segment.
Sale and purchases between different segments are made at
commercial prices. Unallocated net corporate assets and liabilities
include cash and cash equivalents of GBPnil (2017: GBP16.6
million), borrowings of GBP729.8 million (2017: GBP741.2 million)
and taxation of GBP101.6 million (2017: GBP110.0 million).
Contract assets arise where goods or services are transferred to
the customer before the customer pays consideration, or before
payment is due. All contract assets relate to engineering
contracting work within Integrated Utility Services. Contracts in
progress at statement of financial position date:
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
3 Revenue (continued)
Assets recognised from costs to fulfil a contact with
customers
31 December 31 December
2018 2017
GBP 000 GBP 000
Contract costs incurred plus recognised profit
less recognised losses to date 30,117 48,851
Less: progress billings (24,112) (39,130)
----------- -----------
6,005 9,721
=========== ===========
At 31 December 2018, retentions held by customers for contract
work amounted to GBP0.4 million (2017: GBP0.3 million).
Advances received from customers for contract work amounted to
GBPnil (2017: GBPnil).
The Company had no contract assets at 31 December 2018 (2017:
GBPnil).
4 Other gains and losses
The analysis of the Group's other gains and losses for the year
is as follows:
2018 2017
GBP 000 GBP 000
Gain on diposal of property, plant and equipment 909 331
======== ========
5 Operating profit
Arrived at after charging/(crediting)
2018 2017
GBP 000 GBP 000
Depreciation expense 114,428 97,845
Amortisation expense 7,287 4,706
Research and development 2,437 1,479
Loss allowance 2,350 361
Amortisation of deferred revenue (22,355) (21,210)
======== ========
Amortisation is included in adminstration costs within the
statement of profit or loss on page 23.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
6 Finance income and costs
2018 2017
GBP 000 GBP 000
Finance income
Dividend income 62 46
Other finance income 1,487 1,054
------------ ------------
Total finance income 1,549 1,100
------------ ------------
Finance costs
Interest on borrowings at amortised cost (47,753) (44,192)
Borrowing costs included in cost of qualifying
asset 2,240 2,788
------------ ------------
Total finance costs (45,513) (41,404)
------------ ------------
Net finance costs (43,964) (40,304)
============ ============
Borrowing costs included in the costs of qualifying assets
during the year arose on the general borrowing pool and are
calculated by applying a capitalisation rate of 5.33% within NPg
Northeast (2017: 5.26%) to expenditure on such assets.
7 Staff costs
2018 2017
GBP 000 GBP 000
Salaries 60,946 63,699
Social security costs 7,102 7,049
Defined benefit pension cost 1,154 (869)
Defined contribution pension cost 2,803 2,312
-------- --------
72,005 72,191
Less charged to property plant and equipment (40,784) (41,372)
-------- --------
31,221 30,819
======== ========
A large proportion of the Group's employees are members of the
DB Scheme, details of which are given in the Employee Benefit
Obligations note 25.
The average number of persons employed by the Group (including
directors) during the year, analysed by category was as
follows:
2018 2017
No. No.
Distribution 1,108 1,072
Engineering contracting 153 159
Other 13 29
----- -----
1,274 1,260
===== =====
The Company had an average of 13 employees during the year ended
31 December 2018 (2017: 29).
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
8 Directors' remuneration
The directors' remuneration for the year was as follows:
2018 2017
GBP GBP
Highest paid
Short-term employee benefits 419,946 393,702
Other long-term benefits 547,789 466,273
--------- ---------
967,735 859,975
========= =========
Total
Short-term employee benefits 681,192 619,726
Post retirement benefits - defined contribution 8,577 3,366
Other long-term benefits 662,463 587,188
--------- ---------
1,352,232 1,210,280
========= =========
Post retirement benefits
Directors who are members of a defined contribution
scheme 2 2
========= =========
Directors who are members of a defined benefit
scheme - -
========= =========
2018 2017
GBP GBP
Key personnel remuneration
Short-term employee benefits 663,680 527,765
Post retirement benefits - defined benefit 60,076 72,605
Post retirement benefits - defined contribution 49,411 51,338
Other long-term benefits 345,398 313,803
--------- ---------
1,118,565 965,511
========= =========
Other key personnel includes a number of senior functional
managers who, whilst not board directors, have authority and
responsibility for planning, directing and controlling activities
of the Group.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
9 Auditors' remuneration
The auditors' remuneration for the year was as follows:
2018 2017
GBP 000 GBP 000
Fees payable to the auditor for audit of the
Company's annual accounts 26 26
Fees payable to the auditor for audit of the
Company's subsidiaries pursuant to legislation 199 205
-------- ---------
Total audit fees 225 231
Audit of regulatory reporting 45 45
Other services 7 22
-------- ---------
Total auditors' remuneration 277 298
======== =========
10 Income tax
Tax charged/(credited) in the income statement
2018 2017
GBP 000 GBP 000
Current taxation
UK corporation tax 25,423 26,477
UK corporation tax adjustment to prior periods (1,430) 3,697
-------- --------
23,993 30,174
-------- --------
Deferred taxation
Arising from origination and reversal of temporary
differences 1,236 1,212
Deferred tax expense (credit) from unrecognised
temporary difference from a prior period 722 (1,312)
Deferred tax expense (credit) relating to changes
in tax rates or laws (1,087) (1,269)
-------- --------
Total deferred taxation 871 (1,369)
-------- --------
Tax expense in the income statement 24,864 28,805
======== ========
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
10 Income tax (continued)
The tax on profit before tax for the year is lower than the
standard rate of corporation tax in the UK (2017 - higher than the
standard rate of corporation tax in the UK) of 19.00% (2017 -
19.25%).
The differences are reconciled below:
2018 2017
GBP 000 GBP 000
Profit before tax 130,882 140,243
======== ========
Corporation tax at standard rate 24,868 26,997
Effect of difference between corporation and
deferred tax rates (1,087) (1,269)
Tax effect of result of joint venture entities (144) (119)
(Decrease)/increase in current tax from adjustment
for prior periods (1,430) 3,697
Permanent differences (including non-taxable
dividends) (92) (149)
Pension contributions recognised in other comprehensive
income 234 588
Deferred tax over provision for prior years 722 (1,312)
Non-deductible interest 1,710 1,733
Release of deferred tax in respect of prior year
holdover relief claim - (1,369)
Other 83 8
-------- --------
Total tax charge 24,864 28,805
======== ========
Finance Act No.2 2015 included provisions to reduce the
corporation tax from 20% to 19% with effect from 1 April 2017 and
Finance Act 2016 introduced a further reduction in the main rate of
corporation tax to 17% from 1 April 2020. 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.
Amounts recognised in other comprehensive income
2018
Tax (expense)
Before tax benefit Net of tax
GBP 000 GBP 000 GBP 000
Gain/(loss) on cash flow hedges (net) 1,296 (220) 1,076
Remeasurements of post employment
benefit obligations (net) (60,000) 10,434 (49,566)
---------- ------------- ----------
(58,704) 10,214 (48,490)
========== ============= ==========
2017
Tax (expense)
Before tax benefit Net of tax
GBP 000 GBP 000 GBP 000
Gain/(loss) on cash flow hedges (net) (346) 59 (287)
Remeasurements of post employment
benefit obligations (net) 57,800 (9,262) 48,538
---------- ------------- ----------
57,454 (9,203) 48,251
========== ============= ==========
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
10 Income tax (continued)
Deferred tax
Group
Deferred tax assets and liabilities
Deferred tax movement during the year:
Recognised
in other At
At 1 January Recognised comprehensive 31 December
2018 in income income 2018
GBP 000 GBP 000 GBP 000 GBP 000
Accelerated tax depreciation 88,851 1,311 - 90,162
Rollover/holdover relief 950 (49) - 901
Other items (459) (62) 221 (300)
Pension benefit obligations 13,210 (329) (5,088) 7,793
Net tax assets/(liabilities) 102,552 871 (4,867) 98,556
============ ========== ============== ============
Deferred tax movement during the prior year:
Recognised
in other At
At 1 January Recognised comprehensive 31 December
2017 in income income 2017
GBP 000 GBP 000 GBP 000 GBP 000
Accelerated tax depreciation 87,158 1,693 - 88,851
Rollover/holdover relief 3,875 (2,925) - 950
Other items (357) (43) (59) (459)
Pension benefit obligations (1,214) (94) 14,518 13,210
Net tax assets/(liabilities) 89,462 (1,369) 14,459 102,552
============ ========== ============== ============
Other comprises provisions and employee expenses deductible for
tax on a paid basis.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
10 Income tax (continued)
Company
Deferred tax assets and liabilities
Deferred tax movement during the year:
At
At 1 January Recognised 31 December
2018 in income 2018
GBP 000 GBP 000 GBP 000
Accelerated tax depreciation (14) 3 (11)
Rollover/holdover relief 151 16 167
Pension benefit obligations (274) - (274)
Net tax assets/(liabilities) (137) 19 (118)
============ ========== ============
Deferred tax movement during the prior year:
At
At 1 January Recognised 31 December
2017 in income 2017
GBP 000 GBP 000 GBP 000
Accelerated tax depreciation (18) 4 (14)
Rollover/holdover relief 3,066 (2,915) 151
Pension benefit obligations (290) 16 (274)
Net tax assets/(liabilities) 2,758 (2,895) (137)
============ ========== ============
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
11 Property, plant and equipment
Group
Furniture,
Land and Distribution Metering fittings
buildings system equipment and equipment Total
GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Cost or valuation
At 1 January 2017 6,534 3,043,253 222,913 72,740 3,345,440
Additions - 186,418 137,299 2,700 326,417
Disposals - (7,024) - (423) (7,447)
---------- ------------ ---------- -------------- ---------
At 31 December 2017 6,534 3,222,647 360,212 75,017 3,664,410
---------- ------------ ---------- -------------- ---------
At 1 January 2018 6,534 3,222,647 360,212 75,017 3,664,410
Additions - 169,995 78,288 1,951 250,234
Disposals - (10,966) (4,328) (390) (15,684)
---------- ------------ ---------- -------------- ---------
At 31 December 2018 6,534 3,381,676 434,172 76,578 3,898,960
---------- ------------ ---------- -------------- ---------
Depreciation
At 1 January 2017 6,078 880,212 76,247 60,003 1,022,540
Charge for year 103 70,094 23,641 4,007 97,845
Eliminated on disposal - (7,024) - (423) (7,447)
---------- ------------ ---------- -------------- ---------
At 31 December 2017 6,181 943,282 99,888 63,587 1,112,938
---------- ------------ ---------- -------------- ---------
At 1 January 2018 6,181 943,282 99,888 63,587 1,112,938
Charge for the year 103 70,448 39,681 4,196 114,428
Eliminated on disposal - (10,966) (3,912) (390) (15,268)
---------- ------------ ---------- -------------- ---------
At 31 December 2018 6,284 1,002,764 135,657 67,393 1,212,098
---------- ------------ ---------- -------------- ---------
Carrying amount
At 1 January 2017 456 2,163,041 146,666 12,737 2,322,900
========== ============ ========== ============== =========
At 31 December 2017 353 2,279,365 260,324 11,430 2,551,472
========== ============ ========== ============== =========
At 31 December 2018 250 2,378,912 298,515 9,185 2,686,862
========== ============ ========== ============== =========
Included within the net book value of land and buildings above
is GBP2,140,000 (2017 - GBP) in respect of freehold land and
buildings, and GBP(1,890,000) (2017 - GBP591,000) in respect of
long leasehold land and buildings.
Expenditure recognised in the carrying amount of property, plant
and equipment in the course of construction was as follows:
31 December 31 December
2018 2017
GBP 000 GBP 000
Distribution system 211,655 211,489
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
11 Property, plant and equipment (continued)
The Company had no property, plant and equipment assets as at 31
December 2018 (2017: GBPnil).
Contractual commitments for the acquisition of property, plant
and equipment were as follows:
31 December 31 December
2018 2017
GBP 000 GBP 000
Distribution system 20,500 19,400
12 Intangible assets
Group
Software development Total
GBP 000 GBP 000
Cost or valuation
At 1 January 2017 78,467 78,467
Additions 11,417 11,417
-------------------- --------
At 31 December 2017 89,884 89,884
-------------------- --------
At 1 January 2018 89,884 89,884
Additions 10,357 10,357
-------------------- --------
At 31 December 2018 100,241 100,241
-------------------- --------
Amortisation
At 1 January 2017 37,610 37,610
Amortisation charge 4,706 4,706
-------------------- --------
At 31 December 2017 42,316 42,316
-------------------- --------
At 1 January 2018 42,316 42,316
Amortisation charge 7,287 7,287
-------------------- --------
At 31 December 2018 49,603 49,603
-------------------- --------
Carrying amount
At 31 December 2018 50,638 50,638
==================== ========
At 31 December 2017 47,568 47,568
==================== ========
At 1 January 2017 40,857 40,857
==================== ========
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
13 Investments
Investment Share in other
in joint ventures undertakings Total
GBP 000 GBP 000 GBP 000
At 1 January 2017 3,298 21 3,319
Investments in joint ventures profit 619 - 619
Investment in joint ventures dividends
paid (510) - (510)
------------------ -------------- --------
At 31 December 2017 3,407 21 3,428
Investments in joint ventures profit 757 - 757
Investment in joint ventures dividends
paid (691) - (691)
------------------ -------------- --------
At 31 December 2018 3,473 21 3,494
================== ============== ========
Summary of the company investments
31 December 31 December
2018 2017
GBP 000 GBP 000
Investments in subsidiaries 243,285 328,070
=========== ===========
Group subsidiaries
Details of the Group subsidiaries as at 31 December 2018 are as
follows:
Proportion
of ownership
interest
and voting
Registered office rights held
Name of subsidiary Principal activity and country of incorporation 2018 2017
CE Electric Services
Limited Dormant England and Wales 100% 100%
Central PowerGrid Limited Dormant England and Wales 100% 100%
East PowerGrid Limited Dormant England and Wales 100% 100%
Eastern PowerGrid Limited Dormant England and Wales 100% 100%
Infrastructure North
Limited Dormant England and Wales 100% 100%
Integrated Utility
Services Limited Engineering contracting England and Wales 100% 100%
IUS Limited Dormant England and Wales 100% 100%
Midlands PowerGrid
Limited Dormant England and Wales 100% 100%
NEDL Limited Dormant England and Wales 100% 100%
North East PowerGrid
Limited Dormant England and Wales 100% 100%
North Eastern PowerGrid
Limited Dormant England and Wales 100% 100%
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
13 Investments (continued)
Proportion
of ownership
interest
and voting
Registered office rights held
Name of subsidiary Principal activity and country of incorporation 2018 2017
North PowerGrid Limited Dormant England and Wales 100% 100%
North West PowerGrid
Limited Dormant England and Wales 100% 100%
North Western PowerGrid
Limited Dormant England and Wales 100% 100%
Northern Electric Distribution
Limited Dormant England and Wales 100% 100%
Northern Electric Properties Property holdings
Limited & management company England and Wales 100% 100%
Northern Electric Share
Scheme Trustee Limited Dormant England and Wales 100% 100%
Northern Electricity
(North East) Limited Dormant England and Wales 100% 100%
Northern Electricity
(Yorkshire) Limited Dormant England and Wales 100% 100%
Northern Electricity
Limited Dormant England and Wales 100% 100%
Northern Electricity
Networks Company (North
East) Limited Dormant England and Wales 100% 100%
Northern Electricity
Networks Company (Yorkshire)
Limited Dormant England and Wales 100% 100%
Northern Electricity
Networks Company Limited Dormant England and Wales 100% 100%
Northern Electrics
Limited Dormant England and Wales 100% 100%
Northern Energy Funding
Company Limited Dormant England and Wales 100% 100%
Northern Metering Services
Limited Dormant England and Wales 100% 100%
Northern Powergrid
Metering Limited Meter asset provider England and Wales 100% 100%
Northern Powergrid Distribution of
(Northeast) Limited electricity England and Wales 100% 100%
Northern Powergrid
(North West) Limited Dormant England and Wales 100% 100%
Northern Power Networks
Company (North East)
Limited Dormant England and Wales 100% 100%
Northern Power Networks
Company (Yorkshire)
Limited Dormant England and Wales 100% 100%
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
13 Investments (continued)
Proportion
of ownership
interest
and voting
Registered office rights held
Name of subsidiary Principal activity and country of incorporation 2018 2017
Northern Power Networks
Company Limited Dormant England and Wales 100% 100%
Northern Transport
Finance Limited Car finance company England and Wales 100% 100%
Northern Utility Services
Limited Dormant England and Wales 100% 100%
PowerGrid (Central)
Limited Dormant England and Wales 100% 100%
PowerGrid (East) Limited Dormant England and Wales 100% 100%
PowerGrid (Eastern)
Limited Dormant England and Wales 100% 100%
PowerGrid (Midlands)
Limited) Dormant England and Wales 100% 100%
PowerGrid (North East)
Limited Dormant England and Wales 100% 100%
PowerGrid (North Eastern)
Limited Dormant England and Wales 100% 100%
PowerGrid (Midlands)
Limited Dormant England and Wales 100% 100%
PowerGrid (North East)
Limited Dormant England and Wales 100% 100%
PowerGrid (North Eastern)
Limited Dormant England and Wales 100% 100%
PowerGrid (North West)
Limited Dormant England and Wales 100% 100%
PowerGrid (North Western)
Limited Dormant England and Wales 100% 100%
PowerGrid (North) Limited Dormant England and Wales 100% 100%
PowerGrid (Northern)
Limited Dormant England and Wales 100% 100%
PowerGrid (South East)
Limited Dormant England and Wales 100% 100%
PowerGrid (South Eastern)
Limited Dormant England and Wales 100% 100%
PowerGrid (South West)
Limited Dormant England and Wales 100% 100%
PowerGrid (South Western)
Limited Dormant England and Wales 100% 100%
PowerGrid (South) Limited Dormant England and Wales 100% 100%
PowerGrid (Southern)
Limited Dormant England and Wales 100% 100%
PowerGrid (West) Limited Dormant England and Wales 100% 100%
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
13 Investments (continued)
Proportion
of ownership
interest
and voting
Registered office rights held
Name of subsidiary Principal activity and country of incorporation 2018 2017
PowerGrid (Western)
Limited Dormant England and Wales 100% 100%
PowerGrid (Yorkshire)
Limited Dormant England and Wales 100% 100%
South East PowerGrid
Limited Dormant England and Wales 100% 100%
South Eastern PowerGrid
Limited Dormant England and Wales 100% 100%
South PowerGrid Limited Dormant England and Wales 100% 100%
South West PowerGrid
Limited Dormant England and Wales 100% 100%
South Western Powergrid Dormant England and Wales 100% 100%
Southern PowerGrid
Limited Dormant England and Wales 100% 100%
West PowerGrid Limited Dormant England and Wales 100% 100%
Western PowerGrid Limited Dormant England and Wales 100% 100%
YEDL Limited Dormant England and Wales 100% 100%
Yorkshire Electricity
Distribution Limited Dormant England and Wales 100% 100%
Yorkshire PowerGrid
Limited Dormant England and Wales 100% 100%
Northern Electric Finance
plc Finance company England and Wales 100% 100%
Unless otherwise stated the registered office of the above
companies is: Lloyds Court, 78 Grey Street, Newcastle upon Tyne,
Tyne and Wear, NE1 6AF
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
13 Investments (continued)
Group joint ventures
Details of the Group joint ventures as at 31 December 2018 are
as follows:
Proportion of ownership
interest and voting
rights held by
Name of Joint-ventures Principal activity Registered office the Group
2018 2017
Centre for Advanced
Industry, 3rd Floor,
Coble Dene, North
Vehicle Lease and Service Shields, NE29 6DE
Limited Transport services England and Wales 50% 50%
Centre for Advanced
Industry, 3rd Floor,
Coble Dene, North
Shields, NE29 6DE
VLS Limited Dormant England and Wales 50% 50%
Joint ventures and associates are not strategic to the Group's
activities.
Summarised financial information in respect of the Group's joint
venture is set out below:
31 December 31 December
2018 2017
GBP 000 GBP 000
Current assets 15,258 11,322
Non-current assets 18,815 19,244
Current liabilities (11,501) (10,328)
Non-current liabilities (15,625) (13,424)
----------- -----------
Net assets 6,947 6,814
=========== ===========
Group's share of net assets 3,473 3,407
=========== ===========
Revenue 17,810 18,711
=========== ===========
Profit for the year 1,514 1,238
=========== ===========
Group's share of profit for the year 757 619
=========== ===========
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
14 Inventories
Group Company
31 December 31 December 31 December 31 December
2018 2017 2018 2017
GBP 000 GBP 000 GBP 000 GBP 000
Raw materials and consumables 12,422 12,284 - -
Work in progress 449 799 - -
Vehicle inventory 538 299 - -
----------- ----------- ----------- -----------
13,409 13,382 - -
=========== =========== =========== ===========
15 Trade and other receivables
Group Company
31 December 31 December 31 December 31 December
2018 2017 2018 2017
GBP 000 GBP 000 GBP 000 GBP 000
Distribution use of system
receivables 48,039 49,140 - -
Trade receivables 22,845 21,765 70 60
Finance lease receivable 6,021 8,041 - -
Loss allowance (2,974) (855) - -
----------- ----------- ----------- -----------
Net trade receivables 73,931 78,091 70 60
Social security and other
taxes - - 26 3,487
Prepayments 152 304 206 215
Other receivables 3,927 6,205 - -
----------- ----------- ----------- -----------
78,010 84,600 302 3,762
Non-current trade receivables 6,877 6,358 - -
----------- ----------- ----------- -----------
84,887 90,958 302 3,762
=========== =========== =========== ===========
The average credit period on receivables is 30 days. No interest
is charged on outstanding trade receivables.
The Group always measures the loss allowance for trade
receivables at an amount equal to lifetime expected credit loss.
The expected credit losses on trade receivables are estimated using
a provision matrix by reference to past default experience of the
debtor and an analysis of the debtor's current financial position,
adjusted for factors that are specific to the debtors, general
economic conditions of the industry in which the debtors operate
and an assessment of both the current as well as the forecast
direction of conditions at the reporting date.
There has been no change in the estimation techniques or
significant assumptions made during the current reporting
period.
The Group writes off a trade receivable when there is
information indicating that the debtor is in severe financial
difficulty and there is no realistic prospect of recovery, e.g.
when the debtor has been placed under liquidation or has entered
into bankruptcy proceedings. None of the trade receivables that
have been written off is subject to enforcement activities.
As the Company's historical credit loss experience does shows
significantly different loss patterns for different customer
segments, the provision for loss allowance based on past due status
is distinguished as follows:
-- Distribution businesses: DUoS receivables, damages receivables,
and other receivables;
-- Metering: contracted meters, contracted churn, and non-contracted
churn; and
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
15 Trade and other receivables (continued)
-- Engineering contracting.
Included in the loss allowance are specific trade receivables,
with a balance of GBP4.3m (2017: GBP1.4m), 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.
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 loss allowance.
The movement in loss allowance for the year was as follows:
31 December 31 December
2018 2017
GBP 000 GBP 000
At 1 January 758 647
Amounts utilised/written off in the year (134) (153)
Amounts recognised in the income statement 2,350 361
----------- -----------
At 31 December 2,974 855
=========== ===========
There has been no significant change in the gross amounts of
trade receivables that has affected the estimation of loss
allowance.
Significant increase in credit risk
In assessing whether the credit risk on a financial instrument
has increased significantly since initial recognition, the Company
compares the risk of a default occuring on a financial instrument
at the reporting date with the risk of a default occuring on the
financial instrument at the date of initial recognition. In making
this assessment the Company considers historical experience as well
as forward-looking information that is available without undue cost
or effort. Forward-looking information includes the future
prospects of the industries in which the Company's debtors operate
obtained from economic expert reports, financial analysts,
government bodies, relevant think-tanks and other similar
organisations. In particular the following information is taken
into account when assessing whether credit risk has increased
significantly since initial recognition:
-- existing or forecast adverse changes in business, financial or economic
conditions that are expected to cause a significant decrease in
the debtor's ability to meet its debt obligations;
-- an actual or expected significant deterioration in the operating
results of the debtor;
-- significant increases in credit risk on other financial instruments
of the same debtor; and
-- an actual or expected significant adverse change in the regulatory,
economic, or technological environment of the debtor that results
in a significant decrease in the debtor's ability to meet its debt
obligations.
Distribution use of system receivables
The customers served by the Group's distribution networks are
supplied predominantly by a small number of electricity supply
businesses with RWE NPower plc accounting for approximately 19% of
distribution revenues in 2018 (2017: 22%) and British Gas plc
accounting for approximately 13% of distribution revenues in 2018
(2017: 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.
Ofgem has indicated that, provided the Company 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 losses arising from supplier default will be
recovered through an increase in future allowed income. Losses
incurred to date have not been material therefore no ECL has been
made on DUoS balances.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
15 Trade and other receivables (continued)
The following is the expected credit loss for receivables past
due:
Not due Current 1-3 months 3-6 months
2018 GBP 000 GBP 000 GBP 000 GBP 000
Total balance 26,392 21,219 34 394
Less specific provisions - (190) (4) (387)
-------- -------- ---------- ----------
Balance eligible for ECL 26,392 21,029 30 7
Lifetime ECL 0% 0% 0% 0%
-------- -------- ---------- ----------
Expected credit loss - - - -
======== ======== ========== ==========
Not due Current 1-3 months 3-6 months
2017 GBP 000 GBP 000 GBP 000 GBP 000
Total balance 25,536 23,115 - 246
Less specific provisions - - - (242)
-------- -------- ---------- ----------
Balance eligible for ECL 25,536 23,115 - 4
Lifetime ECL 0% 0% 0% 0%
-------- -------- ---------- ----------
Expected credit loss - - - -
======== ======== ========== ==========
Other distribution trade receivables
Sales of goods and services comprise all income streams which
are not classified as UoS income. Examples of non-UoS income
streams would be service alterations/disconnections, assessment and
design fees, 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 tradereceivables paid after the due date.
The following is the expected credit loss for receivables past
due:
Non-damages receivables
Not due Current 1-6 months 6-12 months Over 1 year
2018 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Total balance 1,960 1,018 2,247 1,058 273
Less other balances (1,681) (810) (1,991) (1,010) (192)
-------- -------- ---------- ----------- -----------
Balance eligible
for ECL 279 208 256 48 81
Lifetime ECL 0% 0% 0% 15% 20%
-------- -------- ---------- ----------- -----------
Expected credit
loss - - - 7 16
======== ======== ========== =========== ===========
Not due Current 1-6 months 6-12 months Over 1 year
2017 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Total balance 1,231 945 984 509 474
Less other balances (1,212) (751) (849) (490) (440)
-------- -------- ---------- ----------- -----------
Balance eligible
for ECL 19 194 135 19 34
Lifetime ECL 0% 0% 0% 15% 15%
-------- -------- ---------- ----------- -----------
Expected credit
loss - - - 3 5
======== ======== ========== =========== ===========
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
15 Trade and other receivables (continued)
Damages receivables
0-6 months 6-12 months 1-2 years 2-3 years Over 3 year
2018 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Total balance 871 788 525 186 19
Less specific
provisions - (47) (11) (133) -
---------- ----------- --------- --------- -----------
Balance eligible
for ECL 871 741 514 53 19
Lifetime ECL 10% 10% 15% 30% 60%
---------- ----------- --------- --------- -----------
Expected credit
loss 87 74 77 16 11
========== =========== ========= ========= ===========
0-6 months 6-12 months 1-2 years 2-3 years Over 3 year
2017 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Total balance 675 536 280 31 6
Less specific
provisions - (70) (145) - -
---------- ----------- --------- --------- -----------
Balance eligible
for ECL 675 466 135 31 6
Lifetime ECL 10% 10% 15% 30% 60%
---------- ----------- --------- --------- -----------
Expected credit
loss 68 47 20 9 4
========== =========== ========= ========= ===========
Meter asset provision
Included in trade receivables are balances relating to the
provision of meters through Northern Powergird Metering Limited.
The average credit period on these receivables is 30 days. Interest
is not generally charged on receivables paid after the due
date.
The Group writes off a trade receivable when there is
information indicating that the debtor is in severe financial
difficulty and there is no realistic prospect of recovery, e.g.
when the debtor has been placed under liquidation or has entered
into bankruptcy proceedings, or when the debtor is over 1 year past
due. None of the trade receivables that have been written off is
subject to enforcement activities.
For receivables where there is no specific provisions, a
provision is made for debts past their due date based on lifetime
expected credit loss determined by reference to past default
experience. The following is the expected credit loss for
receivables past due:
Contracted
Current 1-3 months 3-6 months 6-12 months Over 1 year
2018 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Total balance 4,270 3,090 195 - -
Less specific
provisions (152) (360) - - -
-------- ---------- ---------- ----------- -----------
Balance eligible
for ECL 4,118 2,730 195 - -
Lifetime ECL 0% 0% 0% 50% 100%
-------- ---------- ---------- ----------- -----------
Expected credit
loss - - - - -
======== ========== ========== =========== ===========
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
15 Trade and other receivables (continued)
Current 1-3 months 3-6 months 6-12 months Over 1 year
2017 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Total balance 3,662 266 - - -
Less specific
provisions - - - - -
-------- ---------- ---------- ----------- -----------
Balance eligible
for ECL 3,662 266 - - -
Lifetime ECL 0% 0% 0% 50% 100%
-------- ---------- ---------- ----------- -----------
Expected credit
loss - - - - -
======== ========== ========== =========== ===========
Contracted churn
Current 1-3 months 3-6 months 6-12 months Over 1 year
2018 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Total balance 258 382 56 - -
Less specific
provisions (108) (363) (53) - -
-------- ---------- ---------- ----------- -----------
Balance eligible
for ECL 150 19 3 - -
Lifetime ECL 0% 0% 10% 50% 100%
-------- ---------- ---------- ----------- -----------
Expected credit
loss - - - -
======== ========== ========== =========== ===========
Current 1-3 months 3-6 months 6-12 months Over 1 year
2017 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Total balance 141 16 8 - -
Less specific
provisions - - (8) - -
-------- ---------- ---------- ----------- -----------
Balance eligible
for ECL 141 16 - - -
Lifetime ECL 0% 0% 10% 50% 100%
-------- ---------- ---------- ----------- -----------
Expected credit
loss - - - - -
======== ========== ========== =========== ===========
Non-contracted churn
Current 1-3 months 3-6 months 6-12 months Over 1 year
2018 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Total balance 1,713 318 4 - -
Less specific
provisions (78) (139) (3) - -
-------- ---------- ---------- ----------- -----------
Balance eligible
for ECL 1,635 179 1 - -
Lifetime ECL 0% 0% 10% 50% 100%
-------- ---------- ---------- ----------- -----------
Expected credit
loss - - - -
======== ========== ========== =========== ===========
Current 1-3 months 3-6 months 6-12 months Over 1 year
2017 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Total balance 2,147 175 31 - -
Less specific
provisions - - - - -
-------- ---------- ---------- ----------- -----------
Balance eligible
for ECL 2,147 175 31 - -
Lifetime ECL 0% 0% 10% 50% 100%
-------- ---------- ---------- ----------- -----------
Expected credit
loss - - 3 - -
======== ========== ========== =========== ===========
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
15 Trade and other receivables (continued)
Engineering contracting receivables
The average credit period on engineering contracting receivables
is 30 days. Interest is not generally charged on receivables paid
after the due date. Included in the Group's construction contracts
balance are debtors with a carrying amount of GBP1.2 million (2017:
GBP3.0 million), which are past due at the reporting date for which
the Group has provided for an irrecoverable amount of GBP0.2
million (2017: GBP0.4 million) based on past experience. The Group
does not hold any collateral over these balances. The average age
of these receivables is 115 days (2017: 76 days).
Included in the Group's construction contracts balance are
debtors with a carrying amount of GBPnil (2017: 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.
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.
Current 1-3 months 3-6 months 6-12 months Over 1 year
2018 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Total balance 1,932 1,068 157 76 88
Less specific
provisions - (58) (4) (35) (88)
-------- ---------- ---------- ----------- -----------
Balance eligible
for ECL 1,932 1,010 153 41 -
Lifetime ECL 0% 1% 10% 50% 100%
-------- ---------- ---------- ----------- -----------
Expected credit
loss - 10 15 21 -
======== ========== ========== =========== ===========
Current 1-3 months 3-6 months 6-12 months Over 1 year
2017 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Total balance 3,069 2,628 246 63 158
Less specific
provisions - - (1) (5) (158)
-------- ---------- ---------- ----------- -----------
Balance eligible
for ECL 3,069 2,628 245 58 -
Lifetime ECL 0% 1% 10% 50% 100%
-------- ---------- ---------- ----------- -----------
Expected credit
loss - 26 25 29 -
======== ========== ========== =========== ===========
Finance lease receivables
Northern Transport Finance Limited ("NTFL"), a wholly owned
subsidiary, enters into credit finance arrangements for motor
vehicles with employees in the 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% (2017:
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
electricity 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.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
15 Trade and other receivables (continued)
Minimum lease
payments Interest Present value
2018 GBP 000 GBP 000 GBP 000
Within one year 6,241 (220) 6,021
In two to five years 9,272 (2,991) 6,281
In over five years 2,842 (2,246) 596
--------------- ---------- --------------
18,355 (5,457) 12,898
=============== ========== ==============
Minimum lease
payments Interest Present value
2017 GBP 000 GBP 000 GBP 000
Within one year 5,932 (512) 5,420
In two to five years 10,483 (2,341) 8,142
In over five years 3,820 (2,983) 837
--------------- ---------- --------------
20,235 (5,836) 14,399
=============== ========== ==============
Operating lease receivables
Operating leases relate to the metering assets owned by the
Group with lease terms of 10 years, these are disclosed in note 11.
The lessee does not have an option to purchase the meters at the
expiry of the lease period.
The total future value of minimum lease payments is as
follows:
31 December 31 December
2018 2017
GBP 000 GBP 000
Within one year 59,393 49,127
In two to five years 235,878 197,787
Over five years 188,359 205,047
----------- -----------
483,630 451,961
=========== ===========
16 Cash and cash equivalents
Group Company
31 December 31 December 31 December 31 December
2018 2017 2018 2017
GBP 000 GBP 000 GBP 000 GBP 000
Cash at bank 28,143 16,612 - -
Other cash and cash equivalents - - 43,633 -
----------- ----------- ----------- -----------
28,143 16,612 43,633 -
=========== =========== =========== ===========
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. Other cash and cash
equivalents include intercompany loans that are highly liquid and
repayable on demand.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
17 Restricted cash
Group Company
31 December 31 December 31 December 31 December
2018 2017 2018 2017
GBP 000 GBP 000 GBP 000 GBP 000
Restricted cash 13,809 2,182 - -
=========== =========== =========== ===========
Restricted cash are cash and cash equivalents that are
restricted as to withdrawal or use under the terms of certain
contractual agreements.
18 Share capital
Alloted, issued, and fully paid:
2018 2017
Share value Number GBP 000 GBP 000
Ordinary shares 56 12/13p 127,689,809 72,173 72,173
The Company has one class of ordinary shares which carries no
right to fixed income. Details of cumulative non-equity preference
shares are contained in the borrowings note 20.
19 Reserves
Group
The changes to each component of equity resulting from items of
other comprehensive income for the current year were as
follows:
Cash flow
hedging reserve Retained earnings Total
GBP 000 GBP 000 GBP 000
Gain/(loss) on cash flow hedges (net) 1,076 - 1,076
Remeasurements of post employment benefit
obligations (net) - (49,566) (49,566)
---------------- ----------------- --------
1,076 (49,566) (48,490)
================ ================= ========
The changes to each component of equity resulting from items of
other comprehensive income for the prior year were as follows:
Cash flow
hedging reserve Retained earnings Total
GBP 000 GBP 000 GBP 000
Gain/(loss) on cash flow hedges (net) (287) - (287)
Remeasurements of post employment benefit
obligations (net) - 48,538 48,538
---------------- ----------------- --------
(287) 48,538 48,251
================ ================= ========
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
20 Loans and borrowings
Group Company
2018 2017 2018 2017
GBP 000 GBP 000 GBP 000 GBP 000
Non-current loans and borrowings 670,361 694,092 1,117 1,117
Current loans and borrowings 297,803 203,972 8,656 74,537
-------- -------- -------- --------
968,164 898,064 9,773 75,654
======== ======== ======== ========
Group
Carrying value Fair value
2018 2017 2018 2017
GBP 000 GBP 000 GBP 000 GBP 000
Short-term loans 44,566 10 44,566 10
Inter-company short-term
loans 178,404 141,446 178,404 141,446
Bond 2020 - 8.875% 101,512 101,345 114,357 122,791
Bond 2035 - 5.125% 153,112 153,034 197,140 207,238
Amortising loan 2026 - 2.736%* 185,058 155,298 185,058 155,298
European Investment Bank
2018 - 4.065% - 41,427 - 41,444
European Investment Bank
2019 - 4.241% 41,493 41,489 41,506 43,015
European Investment Bank
2020 - 4.386% 40,507 40,503 41,796 43,426
European Investment Bank
2027 - 2.564% 120,128 120,128 126,761 129,281
Yorkshire Electricity Group
- 5.9% 100,016 100,016 141,879 149,768
Cumulative preference shares 3,368 3,368 141,879 182,585
-------- -------- --------- ---------
968,164 898,064 1,213,346 1,216,302
======== ======== ========= =========
* Loan is 85% swapped at a fixed rate of 2.8182%, with the
remaining 15% floating at 3 month LIBOR plus 1.75%
Company
Carrying value Fair value
2018 2017 2018 2017
GBP 000 GBP 000 GBP 000 GBP 000
Short-term loans 6,405 22 6,405 22
Amounts owed to Group undertakings - 72,265 24,881 72,264
Cumulative preference shares 3,368 3,367 154,111 182,585
-------- -------- -------- --------
9,773 75,654 185,397 254,871
======== ======== ======== ========
Of the total financial liabilities of GBP745.2 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:
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
20 Loans and borrowings (continued)
-- 2018: 3.901% - 4.283%
-- 2019: 4.077% - 4.455%
-- 2020: 4.227% - 4.586%
The terms of the cumulative preference shares:
-- 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;
-- 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;
-- carry the right to attend a general meeting of Northern Electric
plc 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 the winding-up of Northern Electric plc or abrogating,
varying or modifying any of the special rights attaching to them;
and
-- are redeemable in the event of the revocation by the Secretary of
State of Northern Electric plc's Public Electricity Supply Licence
at the value given in (ii) above.
During the year ended 31 December 2001, under the terms of the
Northern Electric plc's transfer scheme, as approved by the
Secretary of State in accordance with the provisions of the
Utilities Act 2000, the Northern Electric plc's Public Electricity
Supply Licence was converted into an Electricity Distribution
Licence and an Electricity Supply Licence.
More details on the classification of loans and borrowings is
available in note 28.
The Group's capital management and exposure to market and
liquidity risk; including maturity analysis, in respect of loans
and borrowings is disclosed in financial risk review note 29.
21 Obligations under leases and hire purchase contracts
Group
Operating leases
Operating lease commitments relate to fleet vehicles from
Vehicle Lease and Service Ltd, a joint venture, with terms of up to
7 years and operational and non-operational land and buildings with
terms of up to 50 years.
The total future value of minimum lease payments is as
follows:
31 December 31 December
2018 2017
GBP 000 GBP 000
Within one year 3,075 5,448
In two to five years 7,647 15,715
In over five years 901 2,842
----------- -----------
11,623 24,005
=========== ===========
The amount of non-cancellable operating lease payments
recognised as an expense during the year was GBP5,954,000 (2017 -
GBP6,245,000)
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
21 Obligations under leases and hire purchase contracts (continued)
Company
Operating leases
The total future value of minimum lease payments is as
follows:
31 December 31 December
2018 2017
GBP 000 GBP 000
Within one year 8 89
22 Other provisions
Group
Claims Other Total
GBP 000 GBP 000 GBP 000
At 1 January 2018 800 2,102 2,902
Additional provisions 945 601 1,546
Provisions used (1,292) (370) (1,662)
-------- -------- --------
At 31 December 2018 453 2,333 2,786
======== ======== ========
Current liabilities 453 2,333 2,786
======== ======== ========
Other: Relates primarily to environmental liabilities, wayleave
disputes, provision for future safe disposal of transformers which
contain oil contaminated with Polychlorinated Biphenyls (PCBs) and
holidays in suspense. Settlement is expected substantially after
the next 12 months.
Also included in 'Other' is a provision to cover the actuarial
assessment of the costs of unfunded pension arrangements in respect
of former employees. As at 31 December 2018 the provision relating
to unfunded pensions is GBP1.5m (2017: GBP1.6m). This is expected
to be realised over the next 20 years.
Company
Other provisions Total
GBP 000 GBP 000
At 1 January 2018 1,610 1,610
Additional provisions 58 58
Provisions used (133) (133)
---------------- --------
At 31 December 2018 1,535 1,535
================ ========
The Company's provisions relate to the actuarial assessment of
the costs of unfunded pension arrangements in respect of former
employees. As at 31 December 2018 the provision relating to
unfunded pensions is GBP1.5m (2017: GBP1.6m). This is expected to
be realised over the next 20 years.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
23 Trade and other payables
Group Company
31 December 31 December 31 December 31 December
2018 2017 2018 2017
GBP 000 GBP 000 GBP 000 GBP 000
Payments on account 43,717 44,726 - -
Trade payables 3,112 5,683 1,125 3,243
Capital creditors 36,349 45,901 - -
Accrued expenses 9,976 12,807 2,582 2,789
Social security and other
taxes 7,515 2,906 74 49
Outstanding defined contribution
pension costs - - 31 (16)
Other payables 10,232 10,355 101 8
----------- ----------- ----------- -----------
110,901 122,378 3,913 6,073
=========== =========== =========== ===========
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 statement of
financial position date. The valuation is based on Level 1 inputs.
Trade creditors and accruals principally comprise amounts
outstanding for trade purchases and on-going 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
standard payment term for trade payables is net monthly.
The Group's exposure to market and liquidity risks, including
maturity analysis, related to trade and other payables is disclosed
in the financial risk review note 29.
24 Deferred revenue
Group Company
31 December 31 December 31 December 31 December
2018 2017 2018 2017
GBP 000 GBP 000 GBP 000 GBP 000
Current 22,780 22,450 - -
Non-current 597,215 584,348 - -
----------- ----------- ----------- -----------
619,995 606,798 - -
=========== =========== =========== ===========
Deferred revenue relates to customer contributions towards
distribution system assets. 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.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
25 Pension and other schemes
Defined benefit pension schemes
Electricity Supply Pension Scheme
The Company contributes to two pension schemes, which it
operates on behalf of the participating companies within the 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 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 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.
Pension 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 where trustees and
company fail to agree on appropriate contributions; and
- impose contributions where there has been a detrimental action
against the 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.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
25 Pension and other schemes (continued)
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 Trustee's actuarial advisors, Aon
Hewitt, as at 31 March 2016. Such valuations are required by law to
take place at intervals of no more than three years. Following each
valuation, the Trustees and the Group must agree the contributions
required (if any) such that the DB Scheme is fully funded over time
on the basis of suitably prudent assumptions. The next funding
valuation is due no later than 31 March 2019, at which progress
towards full-funding will be reviewed.
The Trust Deed provides the Group with an unconditional right to
a refund of surplus assets assuming the full settlement of plan
liabilities in the event of a plan wind-up. Furthermore, in the
ordinary course of business the Trustees have no rights to
unilaterally wind up, or otherwise augment the benefits due to
members of the DB Scheme. Based on these rights, any net surplus in
the scheme is recognised in full.
Contributions payable to the pension scheme at the end of the
year are GBPNil (2017 - GBPNil).
The expected contributions to the plan for the next reporting
period are GBP43,000,000.
The scheme was most recently valued on 31 March 2016. Agreement
was reached during August 2017 with the Trustees to repair the
funding deficit of GBP194.9m as at 31 March 2016 over the 9 year
period to 31 March 2025, subject to the actuarial assumptions
adopted for the triennial valuation as at 31 March 2016 being borne
out in practice. The agreement includes payments of GBP2.3m per
month to be made over the remaining 8 years and 3 months of the
recovery plan. This amount is in 2017/18 prices and will be updated
on 1 April 2018 and on each 1 April thereafter in line with annual
changes in RPI.
The contributions payable by the Group to the DB Scheme in
respect of future benefits which are accruing increased from 34.2%
to 43.6% of pensionable pay from 1 September 2017. These
contributions were determined as part of the 31 March 2016
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 Group as part of the 31 March
2019 valuation. In addition, the Group pays contributions to cover
the expenses of running the DB Scheme which increased from 3.0% to
3.6% of pensionable pay from 1 September 2017, then increased to
5.0% of pensionable pay from 1 November 2018.
Profile of the 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 19 years based on the results of the 31 March 2016 funding
valuation. This is the weighted-average time over which benefit
payments are expected to be made.
As at 31 March 2016, broadly about 40% of the liabilities are
attributable to current employees (duration about 24 years), 10% to
former employees (duration about 25 years) and 50% to current
pensioners (duration about 14 years).
Investment objectives for the DB Scheme
The Trustees aim to achieve the Scheme's investment objectivs
through investing partly in a diversified mix of growth assets
which, over the long term, are expected to grow in value by more
than low risk assets like cash and gilts. This is done with a broad
liability driven investing framework that uses cash, gilts and
other hedging instruments like swaps in a capital efficient way. In
combination this efficiently captures the Trustees' risk tolerances
and return objectives relative to the Scheme's liabilities.
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 75%
(2017: 75%) of the DB Scheme's liabilities as measured on the basis
used for the funding valuation.
The trustees insure certain benefits which are payable on death
before retirement.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
25 Pension and other schemes (continued)
Settlements
Settlement cashflows during 2018 exceeded the threshold (of
service cost plus interest cost) resulting in a recognition in the
pension expense. This was predominantly due to transfers out of the
scheme to other pension arrangements being high, which was a
continuation of the trend observed in 2017 when a settlement was
also triggered.
The settlement was triggered and initially accounted for at 30
April 2018. As agreed with the company, we have carried out
assessments at each subsequent quarter end over 2018 and accounted
for settlements over each period based on market conditions at that
time. The total assets paid out over the 12 month period to 31
December 2018 in respect of settlements were GBP153.2m.
As instructed, transfers out of the scheme, trivial commutation
and commutation at retirement have been treated as settlements.
Death lump sum benefits and the standard scheme lump sum benefit
(of 3times pension) have not been included.
Risks
Volatile asset returns
The DBO is calculated using a discount rate set with reference
to corporate bond yields. If assets underperform this discount
rate, this will create an element of deficit. The DB Scheme aims to
hold a significant proportion (44%) of its assets in return-seeking
assets (such as equities) which, although expected to outperform
corporate bonds in the long-term, create volatility and risk in the
short-term.
Mitigation
The allocation to return-seeking assets is monitored to ensure
it remains appropriate given the DB Scheme's long-term objectives.
The Trustees regularly review the strategy from return-seeking
assets and have diversified some return-seeking assets from
equities into Reinsurance and Listed Infrastructure to reduce
overall risk. To avoid concentration risk, the allocation to UK
equity is restricted to 35% of the total equity allocation.
Changes in bond yields
A decrease in corporate bond yields will increase the value
placed on the DBO for accounting purposes, although this will be
partially offset by an increase in the value of the DB Scheme's
bond holdings.
Mitigation
The allocation to return-seeking assets is monitored to ensure
it remains appropriate given the DB Scheme's long-term objectives.
The Trustees regularly review the strategy from return-seeking
assets and have diversified some return-seeking assets from
equities into Reinsurance and Listed Infrastructure to reduce
overall risk. To avoid concentration risk, the allocation to UK
equity is restricted to 35% of the total equity allocation.
Inflation risk
A significant proportion of the DBO is indexed in line with
price inflation (specifically in line with RPI) and higher
inflation will lead to higher liabilities
Mitigation
The DB Scheme invests around 35% in LDI (included in the 56%
above) which provides a hedge against higher-than-expected
inflation increases on the DBO (rising inflation will increase both
the DBO and the value of the LDI portfolio).
Life expectancy risk
The majority of the DB Scheme's obligations are to provide
benefits for the pensionable lifetime of the member, so increases
in life expectancy will result in an increase in the
liabilities.
Mitigation
The DB Scheme regularly reviews actual experience of its
membership against the actuarial assumptions underlying the future
benefit projections and carries out detailed analysis when setting
an appropriate scheme specific mortality assumption. The Trustees
insure certain benefits payable on death before retirement.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
25 Pension and other schemes (continued)
Currency risk
To increase diversification, the DB Scheme invests in overseas
assets. This leads to a risk that foreign currency movements
negatively impact the value of assets in Sterling terms.
Mitigation
The DB Scheme hedges a proportion of the overseas investments
currency risk for those overseas currencies that can be hedged
efficiently. The DB Scheme's currency hedging ratio is currently
50% in respect of overseas developed market currencies.
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 of 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 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.
On 26 October 2018, the High Court issued a judgement in a claim
involving Lloyds Banking Group's defined benefit pension schemes.
The judgement confirmed that the schemes should be amended to
equalise benefits in relation to guaranteed minimum pensions (GMPs)
for men and women.
The issues determined by the judgement arise in relation to many
other occupational pension schemes. It is not yet agreed how
benefits will be equalised in practice, however on the grounds that
actual implementation will not lead to any further obligations,
then we have estimated that equalising benefits will increase the
liabilities of the DB Scheme by GBP5.7M. This has been reflected as
a past service cost during 2018.
Reporting at 31 December 2018
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. The review has been based
on the same membership and other data as at 31 March 2016. 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 2016
have been adjusted 31 December 2018. Those adjustments take account
of experience over the period since 31 March 2016, 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.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
25 Pension and other schemes (continued)
Principal actuarial assumptions
The significant actuarial assumptions used to determine the
present value of the defined benefit obligation at the statement of
financial position date are as follows:
31 December 31 December
2018 2017
% %
Discount rate 2.90 2.60
Future salary increases 3.55 3.45
Future pension increases 2.95 2.85
Inflation 3.05 2.95
Proportion of pension exchanged for additional
cash at retirement 10.00 10.00
=========== ===========
Post retirement mortality assumptions
31 December 31 December
2018 2017
Years Years
Life expectancy for male currently aged 60 26.60 26.70
Life expectancy for female currently aged 60 28.70 28.80
Life expectancy at 60 for male currently aged
45 27.90 28.10
Life expectancy at 60 for female currently aged
45 29.90 29.90
=========== ===========
Reconciliation of scheme assets and liabilities to assets and
liabilities recognised
The amounts recognised in the statement of financial position
are as follows:
31 December 31 December
2018 2017
GBP 000 GBP 000
Fair value of scheme assets 1,552,300 1,746,000
Present value of scheme liabilities (1,467,700) (1,629,100)
----------- -----------
Defined benefit pension scheme surplus 84,600 116,900
=========== ===========
Scheme assets
Changes in the fair value of scheme assets are as follows:
31 December 31 December
2018 2017
GBP 000 GBP 000
Fair value at start of year 1,746,000 1,754,400
Interest income 45,900 46,900
Remeasurement (loss)/gains on scheme assets (77,900) 64,700
Employer contributions 45,200 45,000
Contributions by scheme participants 700 900
Benefits paid (206,300) (164,600)
Administrative expenses paid (1,300) (1,300)
----------- -----------
Fair value at end of year 1,552,300 1,746,000
=========== ===========
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
25 Pension and other schemes (continued)
Analysis of assets
The major categories of scheme assets are as follows:
31 December 31 December
2018 2017
GBP 000 GBP 000
Developed market equity 215,200 187,900
Emerging market equity 6,600 7,300
Property 181,100 164,700
Reinsurance 78,600 83,400
Listed infrastructure 79,500 112,700
Investment grade corporate bonds 144,600 423,200
Other debt (non-investment grade) 120,900 43,400
Fixed interest gilts 6,600 28,200
Index-linked gilts 9,100 -
Liability driven investments 453,900 644,200
Cash 256,200 51,000
----------- -----------
1,552,300 1,746,000
=========== ===========
The pension scheme has not invested in any of the Company's own
financial instruments or in properties or other assets used by the
Company.
Scheme liabilities
Changes in the present value of scheme liabilities are as
follows:
31 December 31 December
2018 2017
GBP 000 GBP 000
Present value at start of year (1,629,100) (1,722,900)
Current service cost (14,300) (17,900)
Past service cost (5,700) -
Actuarial gains and losses arising from changes
in demographic assumptions 9,700 33,300
Actuarial gains and losses arising from changes
in financial assumptions 33,300 (49,700)
Actuarial gains and losses arising from experience
adjustments (25,100) 9,500
Interest cost (42,100) (45,100)
Benefits paid 206,300 164,600
Contributions by scheme participants (700) (900)
----------- -----------
Present value at end of year (1,467,700) (1,629,100)
=========== ===========
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
25 Pension and other schemes (continued)
Amounts recognised in the income statement
31 December 31 December
2018 2017
GBP 000 GBP 000
Current service cost 14,300 17,900
Past service cost 5,700 -
Administrative expenses paid 1,300 1,300
Net interest (3,800) (1,800)
----------- -----------
Amounts recognised 17,500 17,400
----------- -----------
Costs included in cost of qualifying assets (10,300) (11,900)
----------- -----------
Total recognised in the income statement 7,200 5,500
=========== ===========
Amounts taken to the Statement of Comprehensive Income
31 December 31 December
2018 2017
GBP 000 GBP 000
Actuarial gains and losses arising from changes
in demographic assumptions (9,700) (33,300)
Actuarial gains and losses arising from changes
in financial assumptions (33,300) 49,700
Actuarial gains and losses arising from experience
adjustments 25,100 (9,500)
Return on plan assets, excluding amounts included
in interest income/(expense) 77,900 (64,700)
----------- -----------
Amounts recognised in the Statement of Comprehensive
Income 60,000 (57,800)
=========== ===========
Sensitivity analysis
Significant actuarial assumptions for determination of the
defined benefit obligation are discount rate, inflation, and
mortality. The sensitivity analyses below have been determined
based on reasonably possible changes of the respective assumptions
occuring at the end of the reporting period, while holding all
other assumptions constant:
31 December 31 December
2018 2017
Adjustment to discount + 0.1% 0.0% - 0.1% + 0.1% 0.0% - 0.1%
rate GBP 000 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Present value of total
obligation 1,442,900 1,467,700 1,493,800 1,597,600 1,629,100 1,661,000
========= ========= ========= ========= ========= =========
31 December 31 December
2018 2017
Adjustment to rate of + 0.1% 0.0% - 0.1% + 0.1% 0.0% - 0.1%
inflation GBP 000 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Present value of total
obligation 1,490,800 1,467,700 1,446,100 1,656,100 1,629,100 1,602,400
========= ========= ========= ========= ========= =========
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
25 Pension and other schemes (continued)
31 December 31 December
2018 2017
Adjustment to mortality + 1 Year None - 1 Year + 1 Year None - 1 Year
age rating assumption GBP 000 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Present value of total
obligation 1,525,700 1,467,700 1,410,500 1,697,600 1,629,100 1,562,000
========= ========= ========= ========= ========= =========
The sensitivity analysis presented above may not be
respresentative of the actual change in defined benefit obligation
as it is unlikely that the changes in assumptions would occur in
isolation of one another as some of the assumptions may be
correlated.
26 Dividends
31 December 31 December
2018 2017
GBP 000 GBP 000
Interim dividend of GBPNil (2017 -
GBP14.10)
per ordinary share - 22,700
27 Reconciliation of liabilities arising from financing activities
Group
At 1 January Financing At 31 December
2018 cash flows Other changes 2018
GBP 000 GBP 000 GBP 000 GBP 000
Long term borrowings 756,608 (11,040) (374) 745,194
Short term borrowings 143,124 79,828 18 222,970
------------ ----------- ------------- --------------
899,732 68,788 (356) 968,164
============ =========== ============= ==============
At 1 January Financing At 31 December
2017 cash flows Other changes 2017
GBP 000 GBP 000 GBP 000 GBP 000
Long term borrowings 601,058 155,011 539 756,608
Short term borrowings 140,316 2,808 - 143,124
------------ ----------- ------------- --------------
741,374 157,819 539 899,732
============ =========== ============= ==============
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
28 Classification of financial and non-financial assets and financial
and non-financial liabilities
Group
The classification of financial assets and financial liabilities
by accounting categorisation for the period ending 31 December 2018
was as follows:
Financial Financial Financial Financial
assets at assets & assets & liabilities Non-financial
amortised liabilities liabilities at amortised assets &
cost at FVTPL at FVTOCI cost liabilities
Non-current assets GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Property, plant and equipment - - - - 2,686,862
Intangible assets - - - - 50,638
Investments in subsidiaries,
joint ventures and associates - 3,494 - - -
Retirement benefit obligations - - 84,600 - -
Trade and other receivables 6,877 - - - -
Other non-current financial
assets - - 837 - -
---------- ------------ ------------ ------------- -------------
6,877 3,494 85,437 - 2,737,500
---------- ------------ ------------ ------------- -------------
Current assets
Inventories - - - - 13,409
Trade and other receivables 78,010 - - - -
Cash and cash equivalents 28,143 - - - -
Restricted cash 13,809 - - - -
Contract assets 6,005 - - - -
Other current financial
assets - - 114 - -
---------- ------------ ------------ ------------- -------------
125,967 - 114 - 13,409
---------- ------------ ------------ ------------- -------------
Total assets 132,844 3,494 85,551 - 2,750,909
========== ============ ============ ============= =============
Non-current liabilities
Loans and borrowings - - - (670,361) -
Deferred revenue - - - (597,215) -
Deferred tax liabilities - - - (98,555) -
---------- ------------ ------------ ------------- -------------
- - - (1,366,131) -
---------- ------------ ------------ ------------- -------------
Current liabilities
Trade and other payables - - - (110,901) -
Loans and borrowings - - - (297,803) -
Income tax liability - - - (3,106) -
Deferred revenue - - - (22,780) -
Provisions - - - (1,491) (1,295)
---------- ------------ ------------ ------------- -------------
- - - (436,081) (1,295)
---------- ------------ ------------ ------------- -------------
Total liabilities - - - (1,802,212) (1,295)
========== ============ ============ ============= =============
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
28 Classification of financial and non-financial assets and financial
and non-financial liabilities (continued)
The classification of financial assets and financial liabilities
by accounting categorisation for the period ending 31 December 2017
was as follows:
Financial Financial Financial Financial
assets at assets & assets & liabilities Non-financial
amortised liabilities liabilities at amortised assets &
cost at FVTPL at FVTOCI cost liabilities
GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Non-current assets
Property, plant and equipment - - - - 2,551,472
Intangible assets - - - - 47,568
Investments in subsidiaries,
joint ventures and associates - 3,428 - - -
Retirement benefit obligations - - 116,900 - -
Trade and other receivables 6,358 - - - -
---------- ------------ ------------ ------------- -------------
6,358 3,428 116,900 - 2,599,040
---------- ------------ ------------ ------------- -------------
Current assets
Inventories - - - - 13,382
Trade and other receivables 84,600 - - - -
Cash and cash equivalents 16,612 - - - -
Restricted cash 2,182 - - - -
Contract assets 9,721 - - - -
---------- ------------ ------------ ------------- -------------
113,115 - - - 13,382
---------- ------------ ------------ ------------- -------------
Total assets 119,473 3,428 116,900 - 2,612,422
========== ============ ============ ============= =============
Non-current liabilities
Loans and borrowings - - - (694,092) -
Deferred revenue - - - (584,348) -
Deferred tax liabilities - - - (102,552) -
Other non-current financial
liabilities - - (327) - -
---------- ------------ ------------ ------------- -------------
- - (327) (1,380,992) -
---------- ------------ ------------ ------------- -------------
Current liabilities
Trade and other payables - - - (122,378) -
Loans and borrowings - - - (203,972) -
Income tax liability - - - (7,421) -
Deferred revenue - - - (22,450) -
Provisions - - - (1,690) (1,211)
Other current financial
liabilities - - (19) - -
---------- ------------ ------------ ------------- -------------
- - (19) (357,911) (1,211)
---------- ------------ ------------ ------------- -------------
Total liabilities - - (346) (1,738,903) (1,211)
========== ============ ============ ============= =============
Fair values are derived from level 1 inputs.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
28 Classification of financial and non-financial assets and financial
and non-financial liabilities (continued)
Company
The classification of financial assets and financial liabilities
by accounting categorisation for the period ending 31 December 2018
was as follows:
Financial Financial
assets at Financial liabilities
amortised assets & liabilities at amortised Non-financial
cost at FVTPL cost assets & liabilities
GBP 000 GBP 000 GBP 000 GBP 000
Assets
Non-current assets
Property, plant and equipment - - - 1,555
Investments in subsidiaries,
joint ventures and associates - 243,285 - -
Deferred tax asset 118 - - -
---------- --------------------- ------------- ---------------------
118 243,285 - 1,555
---------- --------------------- ------------- ---------------------
Current assets
Trade and other receivables 302 - - -
Income tax asset 2,843 - - -
Cash and cash equivalents 43,633 - - -
---------- --------------------- ------------- ---------------------
46,778 - - -
---------- --------------------- ------------- ---------------------
Total assets 46,896 243,285 - 1,555
========== ===================== ============= =====================
Liabilities
Non-current liabilities
Loans and borrowings - - (1,117) -
Current liabilities
Trade and other payables - - (3,913) -
Loans and borrowings - - (8,656) -
Provisions - - (1,535) -
---------- --------------------- ------------- ---------------------
- - (14,104) -
---------- --------------------- ------------- ---------------------
Total liabilities - - (15,221) -
========== ===================== ============= =====================
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
28 Classification of financial and non-financial assets and financial
and non-financial liabilities (continued)
The classification of financial assets and financial liabilities
by accounting categorisation for the period ending 31 December 2017
was as follows:
Financial Financial
assets at Financial liabilities
amortised assets & liabilities at amortised Non-financial
cost at FVTPL cost assets & liabilities
GBP 000 GBP 000 GBP 000 GBP 000
Assets
Non-current assets
Property, plant and equipment - - - 1,587
Investments in subsidiaries,
joint ventures and associates - 328,070 - -
Deferred tax asset 137 - - -
---------- --------------------- ------------- ---------------------
137 328,070 - 1,587
---------- --------------------- ------------- ---------------------
Current assets
Trade and other receivables 3,762 - - -
Income tax asset 1,684 - - -
---------- --------------------- ------------- ---------------------
5,446 - - -
---------- --------------------- ------------- ---------------------
Total assets 5,583 328,070 - 1,587
========== ===================== ============= =====================
Liabilities
Non-current liabilities
Loans and borrowings - - (1,117) -
Current liabilities
Trade and other payables - - (6,073) -
Loans and borrowings - - (74,537) -
Provisions - - (1,610) -
---------- --------------------- ------------- ---------------------
- - (82,220) -
---------- --------------------- ------------- ---------------------
Total liabilities - - (83,337) -
========== ===================== ============= =====================
29 Financial risk review
Capital management
The Group manages its capital centrally to ensure that entities
in the Group will be able to continue as going concerns while
maximising the return to stakeholders through the optimisation of
the debt and equity balance. The Group's overall strategy remains
unchanged from 2017.
The capital structure of the Group consists of net debt
(borrowings as detailed in note 20 offset by equity of the Company
(comprising issued capital, reserves and retained earnings as
detailed in notes 18 and 19.
At 31 December 2018, the Group had available GBP53.0m (2017:
GBP137.0m) of undrawn committed borrowing facilities in respect of
which all conditions precedent had been met.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
29 Financial risk review (continued)
At 31 December 2018, 96% of the Group's long-term borrowings
were at fixed rates (2017: 97%) and the average maturity for these
borrowings was 9 years (2017: 9).
Credit risk
Credit risk refers to the risk that a counterparty will default
on its contractual obligations resulting in financial loss to the
Group. The Group has adopted a policy of only dealing with
creditworthy counterparties. The Group's exposure and the credit
ratings of its counterparties are continuously monitored and the
aggregate value of transactions concluded is spread amongst
approved counterparties. The carrying amount of financial assets
recorded in the financial statements, which is net of impairment
losses, represents the Group's maximum exposure to credit risk as
no collateral or other credit enhancements are held.
The Group's income is primarily generated from use of system
revenue from electricity suppliers; suppliers are credit checked by
independent ratings agencies. Impaired income from DUoS will be
recovered in future periods through system charges and is therefore
of no material risk to the Group. The Company's receivables are
subject to expected credit loss calculations disclosed further
within the trade receivables (note 15). The Group's credit risk
exposure is shown below:
Group
Gross carrying Net carrying
amount Loss allowance amount
2018 Notes GBP 000 GBP 000 GBP 000
Trade and other receivables 15 87,861 (2,974) 84,887
Cash and short-term deposits 16 28,143 - 28,143
Contracts 3 6,005 - 6,005
-------------- -------------- ------------
15 122,009 (2,974) 119,035
============== ============== ============
Gross carrying Net carrying
amount Loss allowance amount
2017 Notes GBP 000 GBP 000 GBP 000
Trade and other receivables 15 91,813 (855) 90,958
Cash and short-term deposits 16 16,612 - 16,612
Contracts 3 9,721 - 9,721
-------------- -------------- ------------
15 118,146 (855) 117,291
============== ============== ============
For trade receivables the Group has applied the simplified
approach in IFRS 9 to measure the loss allowance at lifetime ECL.
The Group determines the expected credit losses on these items by
using a provision matrix, estimated based on historical credit loss
experience based on the past due status of the debtors, adjusted as
appropriate to reflect current conditions and estimates of future
economic conditions. Accordingly, the credit risk profile of these
assets is presented based on their past due status in terms of the
provision matrix. Note 15 includes further details on the loss
allowance for these assets.
The carrying amount of the Group's financial assets at FVTPL as
disclosed in note 28 best represents their respective maximum
exposure to credit risk. The Group holds no collateral over any of
these balances.
Company
Gross carrying Net carrying
amount Loss allowance amount
2018 Notes GBP 000 GBP 000 GBP 000
Trade and other receivables 15 276 - 276
============== ============== ============
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
29 Financial risk review (continued)
Gross carrying Net carrying
amount Loss allowance amount
2017 Notes GBP 000 GBP 000 GBP 000
Trade and other receivables 15 275 - 275
============== ============== ============
Amounts due from Group undertakings are regarded as low credit
risk as the Group has a strong capacity to meet its contractual
cash flow obligations and maintains an investment grade credit
rating.
Liquidity risk
Ultimate responsibility of liquidity risk management rests with
the board of directors, which has established an appropriate
liquidity risk management framework for the management of the
Company's short, medium, and long-term funding and liquidity
management requirements. The Company manages liquidity by
maintaining adequate reserves, banking facilities and reserve
borrowing facilities, by continuously monitoring forecast and
actual cash flows, and by matching the maturity profiles of
financial assets and liabilities.
The Group has access to GBP150 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., which expires on 30 April 2020. In addition, the Group has
access to a GBP38 million overdraft facility provided by Lloyds
Bank plc, which is reviewed annually, these borrowings are
repayable on demand. At 31 December 2018, the Company had available
GBP53m (2017: GBP137m) of undrawn committed borrowing facilities in
respect of which all conditions precedent had been met.
Maturity analysis for financial liabilities
The following table sets out the remaining contractual
maturities of financial liabilities by type.
Group
Less than 3 months More than
3 months - 1 year 1-5 years 5 years Total
2018 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Non-interest bearing 70,301 - - - 70,301
Short-term interest bearing 44,458 - - - 44,458
Long-term interest bearing 43,405 53,280 329,178 629,054 1,054,917
--------- --------- --------- --------- ---------
158,164 53,280 329,178 629,054 1,169,676
========= ========= ========= ========= =========
Less than 3 months More than
3 months - 1 year 1-5 years 5 years Total
2017 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Non-interest bearing 71,524 - - - 71,524
Short-term interest bearing 2,925 - - - 2,925
Long-term interest bearing 5,031 25,539 325,057 590,486 946,113
--------- --------- --------- --------- ---------
79,480 25,539 325,057 590,486 1,020,562
========= ========= ========= ========= =========
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
29 Financial risk review (continued)
Company
Less than 3 months More than
3 months - 1 year 1-5 years 5 years Total
2018 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Non-interest bearing 6,073 - - - 6,073
Short-term interest bearing 72,286 - - - 72,286
Long-term interest bearing - 9,001 36,004 226,144 271,149
--------- --------- --------- --------- --------
78,359 9,001 36,004 226,144 349,508
========= ========= ========= ========= ========
Less than 3 months More than
3 months - 1 year 1-5 years 5 years Total
2017 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Non-interest bearing 6,073 - - - 6,073
Short-term interest bearing 72,286 - - - 72,286
Long-term interest bearing - 9,001 36,004 226,144 271,149
--------- --------- --------- --------- --------
78,359 9,001 36,004 226,144 349,508
========= ========= ========= ========= ========
Market risk
Market risk is the risk of loss arising from movements in market
variables such as interest rates, exchange rates and commodity
prices. Risks are mitigated by utilising appropriate risk
management products.
The Group's policy on interest rate risk is designed to limit
the Group's exposure to floating interest rates. Consistent with
this policy, at 31 December 2017 the Group had 96% (2016: 97%) of
net debt at fixed rates. Short-term loans are charged at a floating
rate of LIBOR plus 0.35%, thus exposing the Group to cash flow
interest rate risk. A 1% movement in interest rates would subject
the Group to an approximate change in interest costs of GBP0.5m per
year. This is considered to be an acceptable level of risk. All
other loans are at fixed interest rates and expose the Group to
fair value interest rate risk.
More information on the use of cash flow hedges to manage
interest rate risk on is available in note 30.
The Group is not subject to significant risk relating to foreign
exchange.
The Group is not exposed to commodity price risk.
30 Derivatives held for risk management and hedge accounting
Group
Derivatives held for risk management
Derivatives are financial instruments that derive their value
from the price of an underlying item such as interest rates,
foreign exchange rates, credit spreads, commodities, equity or
other indices. In accordance with Board approved policies,
derivatives are transacted to manage our exposure to fluctuations
in interest rate. The Group uses derivatives to manage these risks
from our financing portfolio to optimise the overall cost of
accessing the debt capital markets.
The following table provides a reconciliation by risk category
of components of equity and analysis of other comprehensive income
items (net of tax) resulting from hedge accounting. All derivative
financial instruments relate to cash flow hedges.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
30 Derivatives held for risk management and hedge accounting (continued)
2018 2017
Assets Liabilities Assets Liabilities
GBP 000 GBP 000 GBP 000 GBP 000
Non-current 837 - - (327)
Current 114 - - (19)
--------------- -------------------- --------------- -------------------
951 - - (346)
=============== ==================== =============== ===================
The maturity of financial instruments was as follows:
3 months to More than
1 year 1 to 5 years 5 years Total
GBP 000 GBP 000 GBP 000 GBP 000
2018
Notional principal 19,239 83,195 58,177 160,611
Cash flow hedge 114 492 345 951
=========== ============ ========= ========
2017
Notional principal 9,389 80,587 80,024 170,000
Cash flow hedge (19) (164) (163) (346)
=========== ============ ========= ========
All interest rate swap contracts exchanging floating rate
interest amounts for fixed rate interest amounts are designated as
cash flow hedges to reduce the Group's cash flow exposure resulting
from variable interest rate borrowings. The interest rate swaps and
interest payments on the underlying loan occur simultaneously and
the amount accumulated in equity is reclassified to profit or loss
over the period that the floating rate interest payments on debt
affect profit or loss.
The interest rate swaps are settled on a quarterly basis and are
based on receiving a floating rate of 3-month LIBOR and paying a
fixed rate of 1.0682%. The Group will settle the difference between
the fixed and floating interest rate on a net basis.
Further details of the Group's risk management is available in
the strategic report, pages 9 to 11, and in financial risk review,
note 29.
Effectiveness testing
The Company is using regression analysis to assess the
effectiveness of the interest rate swap on a retrospective and
prospective basis throughout the term of the hedging relationship.
The dollar offset method was also performed at inception, showing
zero ineffectiveness.
Nature of the risk being hedged
The Company is hedging the risk of variability in cash flows
indexed to 3-month LIBOR. Further details of the Group's risk
management is available in the strategic report, pages 9 to 11, and
in financial risk review, note 29.
31 Related party transactions
Directors' advances, credits and guarantees
During the year, 2 directors (2017: 2) and 5 key personnel
(2017: 4) utilised the services provided by Northern Transport
Finance Limited. The amounts included in finance lease receivables
owed by these directors and key personnel were GBP23,000 in respect
of current receivables (2017: GBP20,000), and GBP94,000 in respect
of non-current receivables (2017: GBP38,000).
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
31 Related party transactions (continued)
Group
Purchases Amounts owed Borrowings
Sales to from from/(to) Finance income/(costs) to/(from)
2018 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Integrated Utility Services
(Eire) 296 (3,393) - - -
Northern Powergrid Gas
Limited 41 - - - -
Northern Powergrid Limited - - - (6,228) -
Northern Powergrid (Yorkshire)
plc 23,640 (12,129) - - -
Vehicle Lease and Service
Limited 16 (5,659) - 757 -
Yorkshire Electricity
Group - - - (8,602) (278,404)
-------- --------- ------------ ---------------------- ----------
23,993 (21,181) - (14,073) (278,404)
======== ========= ============ ====================== ==========
Purchases Amounts owed Borrowings
Sales to from from/(to) Finance income/(costs) to/(from)
2017 GBP 000 GBP 000 GBP 000 GBP 000 GBP 000
Integrated Utility Services
(Eire) - (3,270) 230 - -
Northern Powergrid Gas
Limited 68 - - - -
Northern Powergrid Limited - - - (6,228) -
Northern Powergrid (Yorkshire)
plc 24,103 (12,732) - - -
Vehicle Lease and Service
Limited 33 (4,562) - 519 -
Yorkshire Electricity
Group - - - (7,238) (241,463)
-------- --------- ------------ ---------------------- ----------
24,204 (20,564) 230 (12,947) (241,463)
======== ========= ============ ====================== ==========
Company
Purchases Borrowings
Sales to from Finance income/(costs) to/(from)
2018 GBP 000 GBP 000 GBP 000 GBP 000
Integrated Utility Services
(Eire) 72 (464) - -
Northern Powergrid Gas Limited 41 - - -
Northern Powergrid Limited - - (6,228) -
Northern Powergrid (Northeast)
Limited 4,919 (15) 23,700 -
Northern Powergrid (Yorkshire)
plc 2,500 (2) - -
Northern Transport Finance
Limited 11 - - -
Vehicle Lease and Service
Limited 74 - 757 -
Northern Electric & Gas
Limited - - 92,143 -
Yorkshire Electricity Group - - (257) 43,633
-------- --------- ---------------------- ----------
7,617 (481) 110,115 43,633
======== ========= ====================== ==========
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
31 Related party transactions (continued)
Purchases Borrowings
Sales to from Finance income/(costs) to/(from)
2017 GBP 000 GBP 000 GBP 000 GBP 000
Integrated Utility Services
(Eire) 98 (576) - -
Northern Powergrid Gas Limited 67 - - -
Northern Powergrid Limited - - (6,228) -
Northern Powergrid (Northeast)
Limited 5,983 (25) 21,700 -
Northern Powergrid (Yorkshire)
plc 3,525 (2) - -
Northern Transport Finance
Limited 19 - - -
Vehicle Lease and Service
Limited 158 - 519 -
Yorkshire Electricity Group - - (426) (72,264)
-------- --------- ---------------------- ----------
9,850 (603) 15,565 (72,264)
======== ========= ====================== ==========
32 Parent and ultimate parent undertaking
The company's immediate parent is Northern Powergrid
Limited.
The ultimate parent is Berkshire Hathaway Inc.. These financial
statements are available upon request from 3555 Farnam Street,
Omaha, Nebraska 68131
Relationship between entity and parents
The parent of the largest group in which these financial
statements are consolidated is Berkshire Hathaway Inc.,
incorporated in United States of America.
The address of Berkshire Hathaway Inc. is:
3555 Farnam Street, Omaha, Nebraska 68131
The parent of the smallest group in which these financial
statements are consolidated is Northern Powergrid Holdings Company,
incorporated in England and Wales.
The address of Northern Powergrid Holdings Company is:
Lloyds Court, 78 Grey Street, Newcastle upon Tyne, Tyne and
Wear, NE1 6AF
33 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
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
34 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 19 June 2019 at 11.00
am.
The following resolutions will be proposed as ordinary
resolutions:
Annual Report and Accounts
1 To receive and consider the strategic, directors' and auditor's
reports and the Group accounts for the year ended 31 December
2018.
Dividend
2 To declare that no final dividend be paid for the year ended 31
December 2018.
Re-election of Directors
3 To re-elect Mr T H France as a director.
4 To re-elect Mr P J Goodman as a director.
The Auditors
5 To re-appoint Deloitte LLP as the Company's 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 board
Jennifer Riley
Company Secretary
15 April 2019
Registered office:
Lloyds Court, 78 Grey Street,
Newcastle upon Tyne, NE1 6AF
Registered in England No 2366942
Notes:
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.
Northern Electric plc
Notes to the Financial Statements for the Year Ended 31 December
2018 (continued)
34 Notice of annual general meeting (continued)
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 website of the London Stock Exchange at www.londonstockexchange.com.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR LLFEESVIIVIA
(END) Dow Jones Newswires
April 30, 2019 12:11 ET (16:11 GMT)
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