Northern Electric PLC Annual Financial Report

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Northern Electric PLC Annual Financial Report

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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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