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Annual Financial Report

7 Apr 2014 10:10

RNS Number : 1978E
Northern Powergrid (Yorkshire) plc
07 April 2014
 



The following regulated information, disseminated pursuant to DTR 6.3.5, comprises the Annual Report and Accounts of Northern Powergrid (Yorkshire) plc for the year ended 31 December 2013.

 

Pursuant to LR 17.3.1, the document has been submitted to the National Storage Mechanism and will shortly be available for inspection at:

www.hemscott.com/nsm.do

 

The 2013 Annual Report and Accounts are also available on the website

http://www.northernpowergrid.com/downloads/financialinfo.cfm

 

 

Enquiries:

John Elliott 0191 223 5103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STRATEGIC REPORT, REPORT OF THE DIRECTORS AND

 

FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2013

 

FOR

 

NORTHERN POWERGRID (YORKSHIRE) PLC

 

REGISTERED NUMBER: 04112320

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

 

 

 

 

 

CONTENTS OF THE REPORTS AND FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2013

 

 

 

 

Page

 

Company Information 

1

 

Strategic Report 

3

 

Report of the Directors 

19

 

Responsibility Statement of the Directors 

29

 

Report of the Independent Auditor 

30

 

Statement of Profit or Loss 

31

 

Statement of Profit or Loss and Other Comprehensive Income 

32

 

Statement of Financial Position 

33

 

Statement of Changes in Equity 

34

 

Statement of Cash Flows 

35

 

Notes to the Financial Statements 

36

 

NORTHERN POWERGRID (YORKSHIRE) PLC

 

COMPANY INFORMATION

FOR THE YEAR ENDED 31 DECEMBER 2013

 

 

 

 

 

 

 

DIRECTORS: J P Barnett

R Dixon

T E Fielden

J M France

N M Gill

P A Jones

 

 

 

 

 

SECRETARY:

J Elliott

 

 

 

 

 

REGISTERED OFFICE: Lloyds Court

78 Grey Street

Newcastle upon Tyne

NE1 6AF

 

 

 

 

 

REGISTERED NUMBER: 04112320 (England and Wales)

 

 

 

 

 

AUDITOR: Deloitte LLP

Chartered Accountants and Statutory Auditor

Newcastle upon Tyne

United Kingdom

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

The directors present the annual reports and accounts of Northern Powergrid (Yorkshire) plc (the "Company") for the year ended 31 December 2013, which includes the Strategic Report, the Report of the Directors and the audited financial statements for that year. Pages 3 to 18 inclusive of this annual report comprise the Strategic Report and pages 19 to 28 comprise the Report of the Directors, which have been drawn up and presented in accordance with the Companies Act 2006.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report has been prepared for the members of the Company only. The Company, its directors, employees or agents do not accept or assume responsibility to any other person in connection with this document and any such responsibility or liability is expressly disclaimed. This annual report contains certain forward-looking statements, which can be identified by the fact that they do not relate only to historical or current facts. In particular, all statements that express forecasts, expectations and projections with respect to future matters, including trends in results of operations, business prospects, the availability of financing to the Company and anticipated cost savings are forward-looking statements.

 

By their nature, these statements and forecasts involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. The forward-looking statements reflect the knowledge and information available at the date of preparation of this annual report and will not be updated during the year. Nothing in this annual report should be construed as a profit forecast.

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

BUSINESS MODEL

 

The Company is part of the Northern Powergrid Holdings Company group of companies (the "Northern Powergrid Group") and, as a distribution network operator ("DNO"), distributes electricity to approximately 2.3 million customers connected to its electricity distribution network at voltages of up to 132kV.

 

In common with the Northern Powergrid Group, the Company operates a business model and strategy based on its six core principles (the "Core Principles"), which are:

 

Principle

 

Strategy

 

Indicator

 

Financial strength

 

Effective stewardship of the Company's financial resources, investing in assets and focusing on long-term opportunities, which contribute to the Company's future strength.

 

Profitability, cash flow and maintenance of investment grade credit ratings.

 

 

Customer service

 

Delivering reliability, dependability, fair prices and exceptional service.

 

Improving network resilience and performance, measured by: customer minutes lost, customer interruptions and customer satisfaction.

 

 

Operational excellence

 

Setting high standards for the Company's operations, system investment and maintenance.

 

Effective asset management, managing commercial risk and improving network resilience and performance.

 

 

Employee commitment

 

Equipping employees with the resources and support they need to operate successfully and in a safe and rewarding work environment.

 

Leading safety performance, engaging employees and effective leadership.

 

 

Environmental respect

 

Using natural resources wisely and protecting the environment, where it is impacted by the Company's operations.

 

Reducing environmental impact and promoting and pursuing long-term sustainability.

 

 

Regulatory integrity

 

Adhering to a policy of strict compliance with applicable laws, regulations, standards and policies.

 

Strong internal controls, regulatory engagement and industry influence.

 

 

STRATEGIC OBJECTIVES

 

The Company's strategic objectives are based on the Core Principles, remain consistent and are to build a business, which:

 

- continues to generate value over the long-term;

 

- invests in and manages its electricity distribution network in an efficient and effective manner;

 

- provides its customers with an excellent standard of service;

 

- engages with its employees so that they feel rewarded and recognised as part of a team that sets and achieves increasingly high standards of performance; and

 

- is viewed as being a leader in shaping the future direction of the electricity distribution sector in the United Kingdom.

 

As part of its strategy, the Company continues to be committed to putting safety first, respecting its customers, their time and property, doing a quality job, responding effectively to major incidents on the network in times of severe weather and caring for its local environment.

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

REVIEW OF THE YEAR

The Company delivered a satisfactory financial performance for the year, which benefited from a further change to the rate of taxation and continued effective cost control. However, that performance fell slightly short of plan due to a rebate of £13.0 million, which the Company paid to the electricity suppliers in December 2013 as part of the Government-led initiative to assist domestic customers with their energy bills and will be recovered by the Company in future years.

 

Ofgem finalised its price control policies early in 2013 in respect of the next regulatory period, which will run from 1 April 2015 to 31 March 2023 and is known as ED1. One of the main priorities for the Company in 2013, therefore, was the preparation of its well-justified business plan, which was submitted for Ofgem's consideration on 28 June 2013. Ofgem announced on 22 November 2013 that it had decided that the Company's plan was not to proceed on the "fast track" and, while recognising that the Company had submitted a strong plan, had certain reservations about the future cost efficiency and asset replacement elements. Although the Company was disappointed by that decision, most if not all of the commitments made in its plan will stand and, in order to deliver on those commitments, work has already begun to change the way the Company operates. Following Ofgem's decision, the Company revisited its plan and provided Ofgem with a revised version including further justification of the associated costs on 17 March 2014.

 

Having delivered its largest ever capital expenditure programme to date in 2012, the Company continued with its policy to invest efficiently in its electricity distribution network. During the year, the Company invested £243.1 million in its distribution network such that it exceeded its performance in 2012 and it remains well-placed in respect of the outputs it intends to deliver by the end of the current Distribution Price Control period to 31 March 2015 ("DPCR5").

 

The Company continued to design and deliver initiatives to improve the quality of service provided to its customers and, while recognising that improvements still have to be made in order to meet its targets, the Company maintained the upward trend in its customer service performance.

 

The Company introduced an online application process in April 2013, which allows customers to apply for certain types of new connection quickly, easily and conveniently. Work also began on developing an online self-quotation service for high volume connections customers which, when launched, will deliver a significant reduction in the time to serve those customers. When taken with other services such as 'ask our expert', an indicative pricing tool and a small scale embedded generation single connection notification process, the Company was the first DNO to offer customers such a wide variety of connection services online. The Company again beat Ofgem's targets for the quality of the electricity supply provided to its customers and continued to focus on reducing the average times taken to restore supplies following a power cut.

 

As delivery of the capital expenditure programme, the provision of excellent customer service and ensuring a reliable electricity supply are some of the most significant outputs the Company is required to deliver during DPCR5, the directors are confident that the performance delivered in 2013 maintains the strong basis for a successful conclusion to DPCR5 developed over the preceding three years.

 

Environmental performance continued to be strong with the Company's response time to environmentally-related network events improving such that fewer incidents were reportable to the Environment Agency than in 2012. Less oil was lost to the ground during the year than in 2012 despite the on-going issue of interference with the Company's assets by third parties intent on metal theft. Given the impact on the environment of such events, the Company included a commitment to reducing losses from fluid-filled cables in its well-justified business plan by replacing a significant number of those assets on a phased and prioritised basis over ED1 and increasing the use of perfluorocarbon tracers to improve the efficiency of oil leak identification.

 

The long-term trend in the Company's overall safety performance continued to compare well with that of the industry but the internal targets were missed in respect of lost time accidents, operational incidents and preventable vehicle accidents. Preventable vehicle accident performance was better than that recorded in 2012 but three more lost time accidents occurred in 2013 than in the previous year. The lost time accidents did not result in serious injuries to the employees concerned and included trips, falls and becoming trapped under a vehicle. None of the operational incidents gave rise to any significant safety-related issues.

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORE PRINCIPLES

 

Financial strength

 

During the year, the Company continued to maintain good control in respect of both its capital and operating costs by effectively managing the various financial risks that could have had an adverse impact on its business.

 

The Company benefits from the stability provided by the arrangements agreed in respect of DPCR5 in terms of its income until 31 March 2015 and recognises that it needs to show that it is delivering reliable services at a fair price to its customers, while operating in an efficient and effective manner.

 

Key aspects of financial performance for the year were as follows:

 

Revenue

The Company's revenue at £392.0 million was £13.0 million higher than the prior year mainly due to additional allowances arising from the settlement in respect of DPCR5, partly offset by the rebate to the electricity suppliers noted on page 4.

 

Operating profit and position at the year end

The Company's operating profit at £198.8 million was £0.8 million higher than the previous year reflecting increased revenue, partly offset by the rebate to electricity suppliers and increases in some operating costs such as depreciation and vegetation management costs. The statement of financial position on page 33 shows that, as at 31 December 2013, the Company had total equity of £889.8 million. The directors consider the Company to have a strong statement of financial position which, when coupled with the preference of its parent company, MidAmerican Energy Holdings Company ("MidAmerican"), for leaving equity in the business, creates a stable base for continued strong performance into ED1.

 

Finance costs and investments

Finance costs net of investment income at £40.2 million were £0.3 million lower than 2012 reflecting changes in the profile of borrowings during the year.

 

Taxation

The effective tax rate in the current year is 9%. The effective tax rate before adjusting for the impact of the changes in tax rates introduced by the Finance Act 2013 would be 23%. Details are provided in Note 7 to the accounts.

 

Results and dividends

The Company made a profit after tax for the year of £143.7 million (2012: £145.3 million). An interim dividend of £40.0 million was paid during the year (2012: £40.0 million) and the directors recommend that no final dividend be paid in respect of the year.

 

Share capital and debt structure

There were no changes to the Company's share capital or debt structure during the year.

 

Dividend policy

The Company'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 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 so as not to jeopardise its investment grade issuer credit rating.

 

Cash flow

The Company aims to collect from customers and pay suppliers within contracted terms. Any surplus cash held is remitted to Yorkshire Electricity Group plc ("YEG"), a company in the Northern Powergrid Group, and invested accordingly, generating a market rate of return for the Company.

 

Movements in cash flows were as follows:

 

Operating activities: Cash flow from operating activities at £192.0 million was £17.6 million higher than the previous year mainly due to higher profits and favourable working capital movements.

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORE PRINCIPLES - continued

 

Financial strength - continued

 

Cash flow - continued

Investing activities: Net cash used in investing activities at £222.4 million was £68.4 million higher than the previous year, reflecting higher net capital expenditure.

 

Financing activities: The net cash from financing activities at £9.3 million represents a£8.6 million favourable variance compared to the previous year, reflecting net movements in borrowings in the year.

 

Liquidity risk

The Company has access to £75 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 20 August 2017. The Company expects to raise further facilities, as required, at that time.

 

In addition, the Company has access to further short-term borrowing facilities provided by YEG and to a £19 million overdraft facility provided by Lloyds Bank plc, which is reviewed annually.

 

The directors do not consider there to be any doubt over the Company's ability to raise appropriate levels of finance in the future, given its investment grade issuer credit rating and the fundamental financial strength and nature of its business.

 

Interest rate risk

The Company is financed by long-term borrowings at fixed rates and has access to short-term borrowing facilities at floating rates of interest. As at 31 December 2013, 100% of the Company's long-term borrowings were at fixed rates and the average maturity for these borrowings was 14 years.

 

Currency risk

No material currency risks are faced by the Company.

 

Pensions

The Company is a participating employer in the Northern Powergrid Group of the Electricity Supply Pension Scheme (the "Scheme"), a defined benefit scheme. Full details of the Company's commitments to the Scheme and the associated deficit repair payments are provided in Note 23 to the accounts.

 

The Company also participates in the Northern Powergrid Pension Scheme, which is a defined contribution scheme.

 

Insurance

As part of its insurance and risk strategy, the Northern Powergrid Group has in place a range of insurance policies, including policies which cover risks associated with damage to property, employer's and third party motor liability and public liability. The Northern Powergrid Group carries appropriate excesses on those policies and is effectively self-insured up to the level of those excesses. Consequently, the risk management and health and safety programmes in place are viewed as extremely important elements of the business, given the contribution they make to the elimination or reduction of exposure to such risks.

 

Customer service

 

During the year, the Company distributed electricity to customers in its distribution services area and continued to improve the overall performance of the distribution network through an investment strategy targeted at delivering improvements in an efficient and cost-effective manner. The Company remains focused on delivering a reliable and dependable supply of electricity and a high standard of service to its customers.

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORE PRINCIPLES - continued

 

Customer service - continued

 

The Company aims to enhance its relationship with various stakeholders through direct engagement on the actions and investment planned to improve the performance of the network and on the environmental and social implications of its operations. Consequently, as part of the process of drafting its well-justified business plan for submission to Ofgem for consideration in respect of ED1, the Company consulted with a wide range of stakeholders regarding its services. That consultation included formal presentations to large groups, web-based communications and some high quality input from three expert panels, which looked at social issues, low carbon networks and customer service.

 

Taking account of the views of its stakeholders that were received as part of the consultation process, the Company took forward its programme to modernise and redesign the customer-facing elements of its business in support of the goal of improving customer satisfaction with the service provided. The various initiatives in that programme included:

 

- The transformation of the connections business so that it is led by and tailored to meet the requirements of customers in different market segments;

 

- Extending the means by which the Company undertakes its stakeholder engagement, which will involve building on the experience gained from the process of drafting the well-justified business plan and by increasing joint initiatives with other utility companies;

 

- Encouraging uptake of the Company's online community to facilitate discussion among stakeholders regarding the Company's services and use of the dedicated web area where stakeholders can provide feedback to influence the Company's policies and priorities and be in continuing contact with the Company;

 

- Further developing customer relationship management information technology, social media and website services to provide more accurate information to customers, particularly in respect of estimated times for the restoration of supply during power cuts and to engage more effectively with and receive feedback from customers;

 

- Developing and implementing self-service quotation facilities for customers seeking low voltage connections in order to extend the Company's online transactional capabilities;

 

- Improving the reliability of under-performing parts of the distribution network by continuing to identify "hot spots" of particularly poor network performance and taking specific action to address the issues in those areas;

 

- Refreshing and promoting the priority services register so enabling the Company to be aware of vulnerable customers who may be affected by power cuts so that it can take appropriate action to assist those people in such circumstances, engaging the support of the Red Cross where appropriate;

 

- Operating customer service vehicles wherever they can assist with the welfare of customers and provide support during power cuts; and

 

- Continuing to provide employees from across the Northern Powergrid Group with enhanced customer service awareness training and the tools and skills needed to handle power cut calls during periods of peak call demand.

 

The performance of the DNOs against guaranteed standards, which are set for activities such as restoring supplies after power cuts, provides a measure of the level of customer service. Performance against these measures forms part of the Company's regular reporting to Ofgem.

 

Ofgem's incentive scheme for quality of service, by which the DNOs are provided with financial incentives, is based upon targets set by Ofgem with regard to each DNO's performance in terms of the number of power cuts, the duration of those power cuts and customer satisfaction.

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORE PRINCIPLES - continued

 

Customer service - continued

 

Customer minutes lost ("CML") and customer interruptions ("CI") are the key performance indicators used by the Company to measure the quality of supply and system performance. CML measures the average number of supply minutes lost for every connected customer due to planned and unplanned power cuts that last for three minutes or longer. CI measures the average number of supply interruptions for every 100 connected customers due to planned and unplanned power cuts that last for three minutes or longer.

 

In respect of these key customer service performance indicators, the goal is to achieve performance that is below Ofgem's target number in respect of CML and CI. The Company's performance for the regulatory year to 31 March 2013 (the "Regulatory Year") was as follows:

 

 

Year to 31 March 2013

Year to 31 March 2012

 

Actual

Target

Actual

Target

CML

 

62.8

76.0

65.0

76.0

CI

 

72.2

75.3

69.3

75.3

 

Performance in the Regulatory Year was better than Ofgem's target for both CML and CI, showed improvement in the CML category in comparison with the prior year and contributed to the Company's improved customer service performance in the year.

 

The Regulatory Year was the third year in which the Ofgem discretionary reward for stakeholder engagement had been in operation and the first year that a financial incentive had been available. Building on the good performance in its stakeholder engagement over the Regulatory Year, the Company put forward a submission for consideration by Ofgem's panel, which achieved a score of 78.5%. As a result, the Company, together with its affiliate Northern Powergrid (Northeast) Limited, was ranked as the third placed DNO group and secured a reward which could total up to £0.9 million for the Northern Powergrid Group.

 

Under the Broad Measure of Customer Service, an independent market research company, Accent, carries out telephone surveys with the Company's customers to find out how satisfied they are with the services provided. During the Regulatory Year, Accent surveyed a number of customers who had contacted the Company regarding an unplanned or a planned power cut, had requested a price quotation and a subsequent connection or had a general enquiry where a service had been provided or a job completed. The Company recorded an overall satisfaction score of 78.1% for the Regulatory Year and expects that its customer service improvement plan, including the range of initiatives noted on page 7, will improve the services provided to customers and so increase the satisfaction rating year-on-year.

 

Connections to the network

During the year, the Company continued to improve the connections services provided to its customers, while also actively facilitating the development of competition from independent connections providers ("ICPs"), so providing increased choice to customers in the region. The Company continued to engage regularly with its connections customers in groups and individually, holding monthly customer surgeries, twice yearly customer events and contributing to national stakeholder forums and events. Taking account of feedback from such events, the Company introduced an online application process in April 2013, which allows customers to apply for certain types of new connection quickly, easily and conveniently. Work also began on developing an online self-quotation service for high volume connections customers which, when launched, will deliver a significant reduction in the time to serve those customers. Other online services include 'ask our expert', an indicative pricing tool and a small scale embedded generation single connection notification process. The Company was the first DNO to offer customers such a wide variety of connection services online.

 

As part of the DPCR5 final proposals, Ofgem put in place a competition test to encourage all of the DNOs to make it easier for ICPs to provide competing offers to customers and, in line with Ofgem's deadline for submission, the Company put forward a case to prove that competition exists in eight market segments. This is in addition to the high voltage segment, in respect of which the Company passed Ofgem's test in October 2012. It is expected that Ofgem will make a determination in respect of the Company's submission by the end of April 2014.

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORE PRINCIPLES - continued

 

Customer service - continued

 

Connections to the network - continued

Although there was a substantial reduction in volumes of housing and new development works due to the recession, connection requests for low carbon generation have remained very buoyant with the area covered by the Northern Powergrid Group being one of the busiest areas for such developments in the UK. Interest in the development of solar farms has begun to increase more recently and, as the new housing market starts to recover, the Company is seeing an increase in the number of requests for connections of new housing to the network.

 

The Company continues to seek feedback from its customers on a regular basis in order to assist with developing further improvements to its services and, in that respect, its connections customers have been instrumental in shaping the Company's strategy regarding the structure required of its connections business in preparation for ED1. The services provided in future will be tailored to the requirements of customers in the different market segments so that the Company provides a faster and more flexible service.

 

Corporate responsibility

 

The Company values its relationship with its customers and other stakeholders and recognises the importance of maintaining a secure and safe power supply for its customers and their local communities. That commitment is underpinned by five customer promises, which are to put safety first, to respect the Company's customers, their time and property, to do a really good job, to be there when needed and to care for the local environment.

 

The Company maintained its key partnerships with the Environment Agency, the local authorities and the local resilience forums, via a Civil Contingency Co-ordinator, so that it can respond quickly to significant faults on or threats to the network. In the event that river levels rise and flood warnings are issued, staff can be deployed immediately to erect perimeter flood defences at major substation sites and portable defence barriers at lower risk sites. In addition, the Company has well-established emergency procedures that are triggered in times of weather-related incidents or long-duration power cuts when people are without power for some time. The Company responded well to a number of major weather-related incidents during the year, which impacted on its assets, including the highest tidal surges on the east coast for a number of years in early December.

 

As well as redeploying staff from planned works to help restore power as quickly as possible when major incidents occur, the Company has a number of customer service vehicles, which are dispatched to the areas affected. Those vehicles are able to distribute hot drinks and to microwave meals and generally assist with the welfare of customers in order to alleviate the impact of the incident. The Company also utilised its 'customer ambassadors' to address customers' concerns and resolve their complaints and worked with the Red Cross in order to pay particular attention to the welfare of customers on the priority services register so that those customers are kept informed of the situation throughout the event and after the power has been restored. Having begun work to improve the quality of the information held on the priority services register, the Company is promoting the benefits of being on that register more widely and has revised the criteria for registration so that customers with short-term health or welfare issues are now able to benefit.

 

The Company has in place a small donation programme, which is focused on its key priorities of support for youth, education and the environment and from which grants were made during the year to organisations such as charitable trusts and community groups.

 

Safety remains the Company's first priority and underpins every aspect of its operations. During the year, the Company continued to participate, alongside other key organisations, in 'Crucial Crew', which is a schools-based safety initiative that teaches children to recognise and avoid situations that put them in danger, such as climbing electricity pylons and fishing near power lines. The Company's school safety programme included Crucial Crew events, school visits, participation in safety days and the "prison me - no way" campaign and is delivered by two dedicated safety presenters who promote the safety messages through an interactive presentation. The programme is also supported through an interactive website and mobile phone game.

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORE PRINCIPLES - continued

 

Operational excellence

 

The Company's core service continues to be providing and maintaining an efficient distribution network that delivers electricity effectively. During the year, £243.1 million was invested in the improvement of the distribution network, a 3.4% increase on the £235.1 million recorded in 2012. The Company's continued and substantial investment in its distribution network has seen reliability increase throughout DPCR5. During that period, an electricity supply has been available to the Company's customers for approximately 99.98% of the time and the Company has generally outperformed the targets set by Ofgem in respect of CI and CML. The Company's inspection and maintenance regimes have ensured that the underlying health of the network assets has been sustained and none of the leading indicators used by the Company suggest any diminishing performance in this respect in the future.

 

Operational activity

The Company continues to implement an investment strategy, which is designed to deliver improvements in an efficient and cost-effective manner in order to improve the network's resilience. In its well-justified business plan, the Company committed to enhancing the reliability of the network such that fewer power cuts affect customers and, when power cuts do happen, they are shorter in duration.

 

The Company's Field Operations structure is currently based on six individual business units. Those business units are Network Operations, which provides the day-to-day and reactive management of the network, Service Delivery, which has responsibility for the control and management of the direct labour force, Network Repairs, which focuses on core repair activities, Connections Delivery, which undertakes customer-driven work, Programme Delivery, which includes primary engineering projects and technical services, and Operational Services, which includes supply chain management and training services. As a new guaranteed standard for the restoration of supply within 12 hours of a power cut occurring will apply from 1 April 2015, the Company began a review of its operational structure in order to provide a more localised focus and, therefore, improved response times in the event of a power cut. If the Company fails to meet that 12 hour standard, it will make an automatic payment to customers, whenever it is aware of such a failure, rather than customers having to make a claim.

 

The Company's priorities during the year included delivering a similar, significant level of capital expenditure on the network as in 2012, a further reduction in the average level of fault repair work in progress, a robust approach to the control of operations on the low voltage network and continued focus on the restoration times associated with both high and low voltage power cuts with high voltage restoration performance averaging some 57 minutes during the year, after allowing for the impact of severe weather incidents.

 

The major projects undertaken in support of those targets and as part of the investment strategy included:

 

- Completion of the replacement of a 132kV transformer at Halifax substation, the replacement of the 66kV switchgear at Beighton and Wath substations in the Sheffield area, the replacement of the 33kV switchgear at Osgodby substation in Selby and the construction of a new 33kV substation to reinforce the network in the Scunthorpe area;

 

- Completion of major refurbishment works on the 132kV transformers at Girlington substation in Bradford, Whinmoor substation in Leeds and on the 66kV transformers at Woolley substation near Barnsley;

 

- Continuation of the replacement of the 132kV circuit breakers at Wold Newton, the 33kV and 11kV assets (including transformers) at Blackburn Valley and the 33kV transformers at Burton Road and Kirk Drive substations;

 

- Commencement of the replacement of the 132kV transformer at West Melton substation near Rotherham, the 66kV and 11kV assets at South Kirkby substation near Wakefield and a major scheme to reinforce the network in the Doncaster area;

 

- Completion of a number of projects across the Company's distribution services area that replaced 19km of 33kV fluid-filled cables, 14km of 33kV gas filled cables and 6.5km of 33kV solid cables and the completion of a project that replaced 0.5km of 132kV fluid filled cable;

 

 

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORE PRINCIPLES - continued

 

Operational excellence - continued

 

Operational activity - continued

- Completion of refurbishment works on 46km of 33kV and 66kV overhead line, the refurbishment of 92km of 132kV overhead line and the refurbishment or rebuilding of 244km of high voltage overhead line and 86km of low voltage overhead line;

 

- Replacement of 73 units of high voltage outdoor switchgear, 90 high voltage distribution substations and 365 units of high voltage indoor switchgear;

 

- The upgrade and reinforcement of 24 sites to address the quality of supply performance issues relating to those circuits; and

 

- The installation and commissioning of 373 new remote control points on the network.

 

In order to deliver its investment strategy, the Company used a mix of its own staff and contractors to undertake its activities, including affiliated companies in the Northern Powergrid Group.

 

Employee commitment

 

Health and safety

The focus on health and safety continued to be of paramount importance for the directors, as it is for all employees. There is a continuous drive for improvement in safety performance through the setting of challenging goals and the pursuit of a comprehensive safety and health improvement plan, which reflects the Company's fundamental objective that none of its staff should go home injured and all employees should commit to behaving safely all of the time. The Company makes no compromise in respect of its health and safety obligations and centres its safety plans and systems on the principles found in companies with world class safety performance.

 

The Company's safety record over a number of years suggests that it is one of the safest companies in the electricity distribution sector and it will strive to maintain that position over the coming years. Having identified issues that may pose an increased safety risk such as metal theft and the impending roll-out of smart meters, the Company intends to implement various measures through its safety and health improvement plan that will build incrementally on the existing strong safety record and ensure that safety considerations are always a part of the investment decision-making and appraisal process.

 

The Company uses several key performance indicators to monitor safety performance, with the goal of achieving performance that is below the target number. The main key performance indicators are as follows:

 

 

2013

2012

 

Target

Actual

Target

Actual

Lost time accidents

 

1

4

1

1

Restricted duty accidents

 

2

1

2

1

Medical treatment accidents

 

2

1

2

1

Operational incidents

 

4

6

4

7

Preventable vehicle accidents

 

13

16

13

20

 

In common with the MidAmerican 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 to capture safety incidents down to minor levels of medical treatment, such as a stitch or the use of prescription pain killers. As part of its plan to reduce the OSHA rate across the group, MidAmerican issues daily e-mail updates in respect of performance against its overall OSHA rate and preventable vehicle accident targets, which includes information on incidents that have occurred.

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORE PRINCIPLES - continued

 

Employee commitment - continued

 

Health and safety - continued

The Company's safety and health improvement plan targets continuous improvement and delivery of the various initiatives contained in that plan contributed to the Northern Powergrid Group achieving an OSHA rate of 0.43 against a target of 0.4, which represented its best ever performance.

 

Although the number of lost time accidents experienced by the Company increased in comparison to 2012 and the Company missed its internal target, the lost time accidents did not result in serious injuries to the employees concerned and included trips, falls and becoming trapped under a vehicle. Performance in respect of preventable vehicle accidents missed target for 2013 but showed an improvement compared with 2012. The number of operational incidents recorded during the year missed target but showed a slight improvement in comparison to 2012. None of the operational incidents gave rise to any significant safety-related risks.

 

As part of the safety and health improvement plan and in order to reinforce the operational safety values, the Company continued to implement its cross-business operational assurance audit programme and introduced a field engagement programme designed to link up the leadership of the Company with its employees in the field for the purposes of improving two-way communication on safety and other key business issues. The Company continued to implement a robust road risk management plan, which involved electronic driving licence checking, delivering road risk awareness workshops to new employees and using risk reduction tools such as online driver assessment and training followed by an on-road refresher training session if required. The driver training programme provides practical driving training to a targeted population of drivers and is the primary route to improving driver skills in the longer term.

 

Following a detailed research and design project, the Company issued innovative protective work wear to its employees during the first quarter of the year, which provides protection against the effects of events such as electrical flashovers. The Company invested a substantial amount in this new clothing, believes that it is unique in the industry and that it will be a significant factor in reducing the risk to its employees. The Company also delivered operational seminars and stand down briefings and issued regular safety newsflashes to staff in order to cascade information on safety trends, issues and incidents.

 

During the year, the Company received a President's Award from the Royal Society for the Prevention of Accidents for achieving nine consecutive Gold Awards, which had been presented in recognition of achievements in 2012 and for continued or improving standards of health and safety over a sustained period. The Company continued to maintain its occupational health and safety management system and retained its Occupational Health and Safety Assessment Series ("OHSAS") 18001 certification and environmental management system ISO 14001 certification.

 

The sickness absence rate across the Northern Powergrid Group for 2013 was 2.22% (2012: 2.55%), which was an improvement on 2012 and does not give rise to any particular cause for concern.

 

Management structure

Operational management of the Company's business and that of its affiliate, Northern Powergrid (Northeast) Limited, is undertaken by a single senior management team, with specific functional responsibilities. Those functional responsibilities are in respect of field operations, health, safety and environment, asset management (including procurement), commercial (including customer operations and information technology), regulation and strategy, human resources, organisation development and finance. Certain of those functions also provide services across the Northern Powergrid Group.

 

Employees

The Company continued to apply appropriate control to its headcount policy and to place significant emphasis on the importance and application of high standards of management and performance in support of the Core Principles. The Company ensures that a level of consistency is adopted in so doing and, in respect of employee relations, continued to work towards building constructive and partnered relationships with the trades unions. In that respect, the Company has long-term pay agreements in place with the various employment groups such that the relevant terms and conditions are consistent across the Northern Powergrid Group.

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORE PRINCIPLES - continued

 

Employee commitment - continued

 

Employees - continued

Given the demographics of the Company's workforce, the increasing investment in the distribution network and in order to encourage investment in a sustainable workforce, Ofgem provided an allowance in its DPCR5 final proposals in order to fund the plans for workforce renewal throughout DPCR5. Ofgem has stated that the allowance is on a "use it or lose it" basis and the Company will need to demonstrate that it has used that allowance appropriately and efficiently to recruit and train new staff or for other means of renewing its workforce and report annually on its progress in that respect.

 

The Northern Powergrid Group recruited a total of 227 members of staff in 2013, including 92 trainees under its workforce renewal programme. A total of 52 trainees recruited under that programme in previous years graduated from their training programmes during 2013 and commenced work as part of Northern Powergrid's operations. The plan remains in place to have recruited a total of 275 graduate trainees, technical trainees and craft apprentices by the end of DPCR5.

 

The Company is committed to proper business conduct and, in common with MidAmerican, has adopted a code of business ethics that emphasises the requirement for all staff to manage their activities to achieve the highest level of ethical conduct. A "speaking up" policy is in place so that members of staff are able to raise any instances of unethical acts, malpractice or impropriety. An additional process is also available to all staff via an international, anonymous help line operated by an independent company.

 

Human resource policies focus on skills, motivation and excellence and the promotion of high standards of probity among staff. In addition, the appropriate organisational structure has been developed to control business units and to delegate authority and accountability, having regard to acceptable levels of risk.

 

The Company employed 1,203 staff at the end of December 2013 (2012: 1,148).

 

Environmental respect

 

The Company's approach to environmental compliance is governed by its environmental policy and the policy of Environmental RESPECT (Responsibility, Efficiency, Stewardship, Performance, Evaluation, Communication and Training) implemented by MidAmerican. These policies and their subordinate operational control procedures and systems address compliance with legal and other key environmental requirements, pollution prevention and continual improvement and also promote environmental awareness and best practice amongst the Company's staff and contractors.

 

The Company has operated a United Kingdom Accreditation Service scheme for environmental management since the late 1990s, certified to the environmental management systems standard ISO 14001:2004. It is subject to regular six-monthly assessment visits and a three-yearly certificate renewal assessment by an accredited external certification body in order to retain that status.

 

The most recent visit was a six-monthly surveillance assessment carried out by Lloyd's Register Quality Assurance in September 2013. The assessment report drew management attention to only one minor non-conformance to be addressed by agreed proposed actions. The report also noted that significant improvements had been made to the environmental management system over the past three years. Procedures and processes have been reviewed and developed to improve the effectiveness of the aspects register, legal register and internal audits. Operational controls at depots were also seen to have significantly improved over the past three years which correlated to a reducing number of minor non-conformances raised at surveillance visits. There were no major non-conformances noted and continued certification was recommended and subsequently confirmed.

 

Improvements in support of the Company's environmental policy objectives included replacing selected fluid-filled cable sections with non-fluid polymeric equivalents, replacing oil-filled circuit breakers with vacuum and sulphur hexafluoride gas filled units at outdoor substations to reduce the potential for oil leakage and using gas tracer technology to locate cable fluid leaks quicker, where it was practicable to do so. In addition, the Company provided environmental awareness training for new personnel and contractors and periodic refresher training for all staff.

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORE PRINCIPLES - continued

 

Environmental respect - continued

 

The Company's commitment to the Environmental RESPECT policy and its overall performance shows that it can be relied on to keep its impact on the environment to a minimum. In preparing its well-justified business plan, the Company engaged directly with the Environment Agency in respect of a number of issues and will continue to maintain strong and open relationships with its various environmental stakeholders, particularly in respect of the network's visual impact. The main environmental elements of the well-justified business plan included significant programmes to replace fluid-filled cables and place overhead lines underground in national parks, reduce electrical losses and implement further improvements to the network that take account of protected structures, features, areas, wildlife and habitat. This includes protecting bird life by placing bird-diverters on power lines where they are in proximity to reserves, wetlands, flight paths or in locations where rare species of bird are known to live or breed and also in response to information obtained from incident trends.

 

Sustainability

The Company's activities have an important part to play in the United Kingdom's transition to a low carbon economy, both in its capacity as a major participant in the United Kingdom energy industry and in terms of its own carbon footprint. As the country takes action to make significant reductions in its carbon emissions, the way electricity is produced and used is expected to have a significant impact on the electricity network over time. The Company is taking actions to be able to demonstrate that its network will be ready to handle the energy flows its customers need when required and by working with customers to assist in solving issues raised by the installation of low-carbon generation and technologies. The Company is also actively involved in working with the industry and other interested parties in order to develop national policies and strategies to assist the low-carbon transition.

 

The Northern Powergrid Group measures and publishes details of its own carbon footprint and, between 2009 and 2013, reduced its carbon footprint by 13%. The Northern Powergrid Group has set a target to reduce its carbon footprint by a further 10% over the next 10 years and, in line with Ofgem's requirements, the Company has contributed to the sustainability agenda through public reporting on its carbon footprint. During the year, the Company gained re-certification under CEMARS (the Certified Emissions Measurement and Reduction Scheme) that its measurement of its greenhouse gas emissions was in compliance with ISO 14064.

 

The number of installations by customers of low-carbon technologies such as photovoltaic solar panels and heat pumps continued to increase during the year. The greater diversity of demands being placed on the network arising from the decarbonisation of the energy market means that the Company needs to develop smart solutions that avoid the need for expensive reinforcement of the network. In that respect, the Northern Powergrid Group's Customer-Led Network Revolution project aims to learn how novel network technology and changes in customers' energy usage habits may lead to the speedier and lower cost connection of low-carbon technologies to the network. By the end of 2013, more than 10,000 customers were participating in the trials and installation of the related equipment had been largely completed, with over 500 customers having taken part in a feedback survey and 230 interviews having taken place. Six electrical storage devices have been commissioned, as planned, and the initial results from the monitoring of customers' load profiles, including the impact of time-of-use tariffs, and from industrial and commercial trials of demand side management have been published and presented at over 50 events attended by various interested parties.

 

The well-justified business plan presented the Company's proposition for a sustainable network over ED1 including the need for investment in enabling technology, reinforcement of the network to alleviate the constraints associated with low carbon technologies and supporting the roll-out of smart meters. The Company believes that its plan will not only create some immediate benefits for customers during ED1 but also pave the way for much greater benefits after 2023.

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORE PRINCIPLES - continued

 

Regulatory integrity

 

The Company manages its business to the highest behavioural standards and adheres to a policy of strict compliance with all relevant standards, legislation and regulatory conditions. The Governance and Risk Management Group ("GRMG") monitored and managed performance in risk-related and compliance areas and met on four occasions during the year.

 

As has been the case for some years, breaches by a DNO of its licence conditions could lead to financial penalties, which Ofgem has stated "will have a proportionate impact on shareholder returns". In order to assure compliance with its licence and other regulatory obligations, the Company operates a regulatory compliance affirmation process, under which ownership of the approximately 1,700 regulatory obligations contained within the compliance database is currently assigned to around 60 responsible managers. Those responsible managers are required, on a quarterly basis, to review compliance with the relevant obligations that have been assigned to them for certification and report on any identified non-compliances or perceived risks to the compliance process, which are then addressed. The Regulation Manager reports to the board of directors on the outcome of each quarter's exercise.

 

A revenue-related issue arose during 2010 in that the adjustment of settlements data by certain suppliers had the effect of distorting the apparent performance of the Company under the losses incentive scheme for the regulatory year ended 31 March 2010. Throughout 2013, the Company continued to engage with Ofgem and other industry participants to resolve the complex issues surrounding the losses incentive arrangements for both the current and previous price control periods. Ofgem has removed the DPCR5 losses incentive and, on 21 March 2014, published its decision on the restatement of the 2009/2010 data and closing out the Distribution Price Control Review 4 period losses incentive, together with details of the final sums to be returned by each DNO during ED1. In accordance with International Financial Reporting Standards, the Company has not included any recognition of this issue in these Accounts.

 

Under the new RIIO (revenue = incentives + innovation + outputs) model for regulation, price controls will be set for eight years (rather than five as at present), with provision for a mid-period review of the outputs that network companies are required to deliver. Ofgem triggered the ED1 review process in the first quarter of 2012 and finalised its price control policies early in 2013, following which the Company submitted its well-justified business plan for Ofgem's consideration on 28 June 2013. Ofgem announced on 22 November 2013 that it had decided that the Company's plan was not to proceed on the "fast track" and, while recognising that the Company had submitted a strong plan, had certain reservations about the future cost efficiency and asset replacement elements. Following Ofgem's decision, the Company revisited its plan and provided Ofgem with a revised version including further justification of the associated costs on 17 March 2014. Ofgem will now consider the revised plan and discuss the details further with the Company during the remainder of 2014. A final decision is expected by December 2014 and, on conclusion of the process, the Company's revenues will be set for the period from 2015 to 2023.

 

During the year, the Company continued its voluntary involvement with the other DNOs in developing and trialling more formalised arrangements for assuring the accuracy of the information returns submitted to Ofgem. This exercise has involved the development of risk-assessment matrices and the preparation and submission to Ofgem of a risk-based data-assurance plan, followed by the submission of a report detailing the assurance work actually carried out and the findings of that work. The DNOs have been joined in the trial by transmission and gas distribution licensees and the new regime will continue to be developed in the light of experience during the year. The finalised arrangements will be incorporated into the licences of all the network operators in April 2015.

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

PRINCIPAL RISKS AND UNCERTAINTIES

There are a number of potential risks and uncertainties, which could have an impact on the Company, its financial position and its operations and may cause actual results to vary materially from those expected or historically experienced. The principal risks are outlined as follows:

 

Financial risk

As a holder of an electricity distribution licence, the Company is subject to regulation by the Gas and Electricity Markets Authority ("GEMA"), which acts through Ofgem. Most of the revenue of the electricity distribution licence holders is controlled by the distribution price control formula set out in the electricity distribution licence. The price control formula does not constrain profits from year to year but sets a maximum permitted revenue for each regulatory year and is a control on revenue that operates independently of most of the electricity distribution licence holder's costs. Where the Company recovers more, or less, than this maximum the difference is carried forward, with interest, into the entitlement for the following year.

 

It has been the practice of Ofgem to review and reset the formula at five-year intervals, although the formula has been, and may be, reviewed at other times at the discretion of Ofgem. A resetting of the formula is now made by GEMA without the consent of the electricity distribution licence holder but a licensee can appeal to the Competition Commission against a decision by GEMA to proceed with such a modification. Certain other interested parties have the same right. The current five-year price control period became effective on 1 April 2010 and has set the Company's revenues through to 31 March 2015.

 

During the term of the current price control, the rate of inflation as measured by the Retail Prices Index ("RPI") is taken into account in setting the Company's allowed income in respect of each regulatory year. Consequently, one of the risks faced by the Company is that its costs may increase by more than RPI. Any changes in costs incurred will have a direct impact on the Company's financial results, as will changes in performance under incentive schemes, such as in customer service, which can lead to adjustments to allowed revenues.

 

Ofgem recognises that defined benefit pension schemes and, particularly, the current deficit positions of various schemes, represent a significant cost to the DNOs and, in its DPCR5 final proposals, confirmed that DNOs would be allowed to recover the actuarial value of the deficits attributable to a licensee's distribution business in existence as at 31 March 2010 via its regulated revenues (after an adjustment to reflect the residual of unfunded early retirement deficiency costs as at 31 March 2010).

 

However, given the stable and regulated nature of the DNOs' businesses, Ofgem took the view that a notional repair period of 15 years was appropriate for the purpose of assessing the DNOs' allowed revenues in respect of pension costs in DPCR5.

 

The other financial risks facing the Company are outlined on page 6 of this Strategic Report.

 

Operational risk

There are a number of risks to the Company's operational performance in respect of which mitigating actions have been taken. Appropriate credit cover arrangements are in place with the electricity suppliers, which would allow recovery of defaulted payments through the price control mechanism and a robust major incident management plan is implemented whenever severe weather impacts on the distribution network's performance. Metal theft continued to be a significant issue for the Company during the year with the activities of metal thieves causing power cuts on various occasions, which affected a large number of customers in aggregate. In response, the Company maintained the programme of risk-assessed and enhanced security measures at its sites and pursued awareness raising activity at a national and local level. Those risk mitigation actions were supported by a change in the law which prohibited scrap metal dealers from paying for scrap metal in cash.

 

The Company recognises that there are uncertainties around the future take-up of low carbon technologies and the resulting capacity requirements for the network and from the fitting of smart meters throughout the Company's distribution services area, which is expected to result in a requirement to address a substantial number of reported defects. The Company believes that it can effectively manage these issues through its usual risk management practices.

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

PRINCIPAL RISKS AND UNCERTAINTIES - continued

 

Commercial risk

Managing commercial risk continued to be of key importance and the Company remained focused on ensuring that its policies for credit checking, payment terms, payment performance tracking and debt management were strictly adhered to.

 

The Company's relationship with its main customers is governed by a distribution connection and use of system agreement ("DCUSA"), which is in place with each of those customers. Those customers are the electricity suppliers who, under the terms of the DCUSA, pay charges for the use of the distribution network, in respect of which it is necessary to ensure that the credit cover arrangements in line with Ofgem's guidance remain in place. The principal electricity suppliers that use the Company's network are RWE Npower, British Gas, EDF Energy, E.ON, Scottish and Southern Energy and Scottish Power.

 

The Company operates its business utilising a mix of direct labour and contracted resource and has a range of contracts in place with various service providers for delivery of its work programmes, which are subject to regular market testing and tendering exercises. Those services include vegetation management, overhead line inspection and construction, substation construction and maintenance, underground cable laying services, vehicle leasing and servicing, tower painting and information technology services. The Company also has an extensive suite of contracts in place for the procurement of all of the goods and equipment it requires to deliver its capital expenditure programme and to run its business, including for varying types of transformers, switchgear and cables.

 

Risk Management

The Northern Powergrid Group operates a structured and disciplined approach to the management of risk as part of its overall risk management policy and, in DPCR5 and previous price control periods, has accepted and successfully managed substantial cost and delivery risks by developing a culture of cost and risk management over that period of time. Risks are assessed with due regard to probability and impact and the risk environment is reviewed continually in order that new or emerging potential risks are identified. Those risks assessed to be significantly high are logged within a risk register that the GRMG reviews regularly and key indicators are used to track and monitor those risks considered to be significant.

 

Risk mitigation and loss control plans are prepared in response to strategic risks in order that the directors can be assured that appropriate mitigating actions are in place and are being implemented. These plans are monitored through to implementation and reviewed to determine whether the residual, mitigated risk is within an acceptable level of tolerance.

 

The Northern Powergrid Group identifies and assesses risks associated with the achievement of its strategic objectives, including those of an environmental and social nature. Any key actions needed to further enhance the control environment are identified, along with the person responsible for the management of the specific risk. A regular review of the key risks, controls and action plans is undertaken. The risk management programme includes regular review of the crisis management, disaster recovery and major incident plans, which are periodically tested, the sharing of best practice on disaster preparedness and response, penetration tests against firewall systems and disaster recovery tests of IT servers and priority processes and a peer review of the Northern Powergrid Group's risk management systems by MidAmerican.

 

Risk management continues to be a central theme of senior management priority setting as well as an explicit business process that helps to stimulate the senior leadership's consciousness of lower probability, high consequence threats to business success or continuity. This approach is reinforced by that of the wider MidAmerican group, whose activities have continued to include a structured benchmarking of risk management activities across its business units, including the sharing of significant lessons learned associated with risk management.

 

A key element and requirement of the risk management process is that a written certificate is provided by the President and Chief Executive Officer of the Northern Powergrid Group confirming that the effectiveness of the system of internal controls has been reviewed during the year. A self-certification process is in place, in support of this review, whereby senior managers are required to confirm that the system of internal control in their area of the business is operating effectively.

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

 

PRINCIPAL RISKS AND UNCERTAINTIES - continued

 

Internal Control

A rigorous internal control environment exists within the Northern Powergrid Group based on regular reporting, a series of operational and financial policy statements, investigations undertaken by internal audit and a stringent process for ensuring the implementation of any recommendations. MidAmerican requires a quarterly control risk self-assessment to be undertaken by all senior managers as part of its programme for compliance with the requirements of the United States Sarbanes-Oxley Act and, while no significant areas of weakness have been identified, any recommended improvements are implemented.

 

In addition, the Company employs comprehensive business planning and financial reporting procedures, regularly reviews key performance indicators to assess progress towards its goals and has a strong internal audit function to provide independent scrutiny of its internal control systems. The Company has risk management procedures in place, including the standards required by the United States Sarbanes-Oxley Act, and has centralised treasury operations and established procedures for the planning, approving and monitoring of major capital expenditure.

 

The Northern Powergrid Group is committed to preventing corruption in all its forms and continues to have a zero-tolerance approach to corruption in its business or by those with whom it does business. The board of Northern Powergrid Holdings Company has addressed the risks introduced by the Bribery Act 2010 through a compliance policy, changes to contractual terms, training and other staff awareness measures. The introduction of annual risk assessments and enhanced due diligence in respect of new business transactions has further assisted in ensuring compliance. The Northern Powergrid Group requires staff, suppliers of services and business partners to comply with the Bribery Act. Its policies encourage an employee who has any suspicion of bribery or other form of corruption within or related to the Northern Powergrid Group to report the suspicion to a manager or via the international, anonymous help line mentioned in the employee section.

 

The Company has appropriate controls in place directed at ensuring compliance with the conditions in its licence requiring any payments made to, or received from, affiliates or related undertakings in respect of goods and services provided or supplied to be on an arm's length basis and on normal commercial terms.

 

ON BEHALF OF THE BOARD:

 

 

 

 

 

P A Jones

Director

 

 

21 March 2014

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

 

DIVIDENDS

During the year, an interim dividend of £40.0 million (14p per share) was paid (2012: £40.0 million, 14p per share). The directors recommend that no final dividend be paid in respect of the year.

 

RESEARCH AND DEVELOPMENT

During the year, the Northern Powergrid Group continued working, in partnership with British Gas, Durham University and EA Technology, on its major project under Ofgem's Low Carbon Networks Fund, known as the Customer-Led Network Revolution. This remains the largest project supported by Ofgem in the four years of the fund and the Northern Powergrid Group will incur expenditure of £31.0 million over the life of the project. Of that expenditure, 90% is funded by electricity customers in Great Britain. Successful delivery of the project over the period agreed with Ofgem will enable recovery of the additional 10% from customers and potentially qualify for a further discretionary award.

 

The project is assessing the potential for new network technology and flexible customer response to facilitate speedier and more economical take-up by customers of low-carbon technologies and the connection to the distribution network of increasing amounts of low-carbon or renewable energy generation. 2013 saw further, and increasingly mature, trialling of equipment and operational techniques to allow the efficient application of low carbon technologies on the network. The scale of the project's output is such that additional time has been sought from Ofgem, extending the project to four years, to ensure that the quality of learning delivered is relevant, timely and provides value-for-money for all stakeholders.

 

The Company also supports a programme of research that is expected to contribute to higher standards of performance and a more cost-effective operation of its business. New activities in voltage stabilisation, real time rating of assets to increase current carrying capacity and improved ultrasonic integrity assessment of overhead line assets have been commissioned. Other work completed during 2013, included the further application of network risk methodologies to a range of business processes, allowing better planning and operational execution, and research to better understand the environmental variation within network substations and its impact on the condition and service lifetime of the Company's assets.

 

During the year, the Company invested £4.7 million (2012: £5.6 million) (Note 6 to the accounts) in its research and development activities. The reduction in expenditure in comparison with 2012 was mainly due to lower contributions to the low carbon network fund.

 

FUTURE DEVELOPMENTS

The financial position of the Company, as at 31 December 2013, is shown in the statement of financial position on page 33. There have been no significant events since the year end.

 

During the year, the Company published its well-justified business plan for the future of its electricity distribution business and submitted that plan to Ofgem for consideration as part of the ED1 price control review process. That plan set out the Company's priorities for and the challenges it expects to see during ED1, which will last for the eight years until March 2023. The Company plans to provide its customers with more for less by improving performance in respect of all of the outputs expected of it, reducing prices in the first year of ED1 and then maintaining those prices at a relatively consistent level over the remainder of the period, delivering 20% shorter power cuts and providing a connections service that is 30% faster, together with a range of new and improved services. Having resubmitted the well-justified business plan for Ofgem's consideration on 17 March 2014, the directors intend to continue to develop the Company's business by operating that business with the goal of out-performing the allowances in the price control, while efficiently investing in the network and improving the quality of supply and service provided to its customers.

 

DIRECTORS

The directors shown below have held office during the whole of the period from 1 January 2013 to the date of this report.

 

J P Barnett

 

Commercial Director

R Dixon

 

Non-executive Director

T E Fielden

 

Finance Director

J M France

 

Regulation Director

N M Gill

 

Field Operations Director

P A Jones

 

President and Chief Executive Officer

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

 

FINANCIAL RISK MANAGEMENT

The Company's short-term financial objective is to ensure that it has access to sufficient liquidity to enable it to meet its obligations as they fall due and to provide adequately for contingencies. The long-term objective is to provide a stable and low cost of financing over time whilst observing approved risk parameters. The main risks are liquidity and interest rate risk.

 

Trading risk

Throughout the year under review, the Company's policy was that no trading in financial instruments should be undertaken.

 

Financial derivatives

As at 31 December 2013 and during the year it was the Company's policy not to hold any derivative financial instruments.

 

POLITICAL DONATIONS

During the year, no contributions were made to political organisations (2012: £nil).

 

EMPLOYEES

Employee consultation

The Northern Powergrid Group has a constitutional framework in place for employee consultation and has agreed that framework with trade union representatives. In addition, the Northern Powergrid Group communicates directly and through the management structure with personal contract holders and keeps them informed of and involved as appropriate in developments that may impact on them now or in the future.

 

The Northern Powergrid Group is committed to maintaining and improving effective communication with employees, principally through regular staff briefs on current issues, meetings with staff and their representatives and increased use of the Company's intranet to improve communication and engagement with the workforce.

 

During the year, the President and Chief Executive Officer delivered quarterly broadcast briefings using telephone conference call facilities in order to provide employees with updates on the Northern Powergrid Group's financial, organisational, safety and customer service performance and posted weekly blogs on the Company's intranet in order to provide updates on key elements of the Company's performance during the preceding week.

 

Disabled employees

The Northern Powergrid 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 Company would work to retrain and/or redeploy that member of staff, wherever possible.

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORPORATE GOVERNANCE STATEMENT

In September 2012, the Financial Reporting Council made available on its website a revised version of the UK Corporate Governance Code (the "Code"). The Disclosure and Transparency Rules ("DTR") require an issuer, to which section 7.2 of the DTR applies, to provide, in its annual Report of the Directors, a corporate governance statement. That statement sets out how the issuer has applied the main principles in the Code and, to the extent that it departs from the Code, the issuer is required to explain from which parts of the Code it departs and the reasons for doing so.

 

The Company, therefore, provides the following statement by reference to the principles in the Code.

 

Compliance statement

Set out below and in the review of the year in the Strategic Report are the areas in which the Company adopts and complies with the main principles of the Code. The Company has not complied with certain of the main principles of the Code, including main principles A2, A3, B2, B6, B7, C3, D1, D2 and E2. The directors confirm that such non-compliance was of a continuing nature throughout the year but consider the governance framework in place to be appropriate to the circumstances of the Company, given that the framework is agreed with MidAmerican and includes regular reporting to and meetings with the Chairman and senior management of MidAmerican, the presence of an independent non-executive director at board meetings of the Company and a strong internal control environment designed to meet the standards required by the United States Sarbanes-Oxley Act.

 

The Code is based on the "comply or explain" approach and the directors are of the opinion that, in the instances noted above where the Company does not comply with the Code, this approach is justifiable, given that the Company is a wholly-owned subsidiary of MidAmerican and the governance framework in place throughout the Northern Powergrid Group is agreed with MidAmerican.

 

Section A

Leadership

 

Main Principle A1:

The Role of the Board

 

The directors have agreed a quarterly schedule of board meetings at which they review performance, strategy and operational and risk-related issues. Regular items on the agenda for consideration at board meetings include general business performance, regulatory compliance, operational issues and key business activities.

 

In addition, the President and Chief Executive Officer participates in weekly performance review meetings with the Chairman of MidAmerican and other senior managers of the MidAmerican group, including the Executive Vice President and Chief Financial Officer. At those weekly meetings, the views of the Chairman of MidAmerican and the senior management team regarding the key, current issues facing the Northern Powergrid Group are discussed.

 

The Chairman of MidAmerican also receives weekly, monthly and quarterly reports on the Northern Powergrid Group's performance from the President and Chief Executive Officer. MidAmerican's Executive Vice President and Chief Financial Officer and Executive Vice President, General Counsel and Corporate Secretary also hold similar weekly review meetings in respect of MidAmerican's financial and legal functions, at which the Northern Powergrid Group's Finance Director and General Counsel present their respective weekly reports.

 

The board meets quarterly and as required to consider relevant issues and met on five occasions in total during the year, with the attendance of the directors being as follows:

 

J P Barnett

 

Commercial Director

5

R Dixon

 

Non-Executive Director

5

T E Fielden

 

Finance Director

5

J M France

 

Regulation Director

4

N M Gill

 

Field Operations Director

4

P A Jones

 

President and Chief Executive Officer

5

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORPORATE GOVERNANCE STATEMENT - continued

 

Section A

Leadership - continued

 

Main Principle A1:

The Role of the Board - continued

 

Operational management of the Company's business (and that of its affiliate, Northern Powergrid (Northeast) Limited) is delegated to a single senior management team, with specific functional responsibilities. That senior management team meets monthly with the senior management of the Northern Powergrid Group to monitor performance and address issues of policy across all areas of the business and holds weekly conference calls to report on and consider performance-related issues for that week. Further details of the management structure of the Northern Powergrid Group are provided in the Strategic Report.

 

The directors have overall responsibility for the internal control environment, which, within the Northern Powergrid Group, is based on regular reporting, a series of operational and financial policy statements, investigations undertaken by internal audit and a stringent process for ensuring the implementation of any recommendations. In addition, MidAmerican requires a quarterly control risk self-assessment to be undertaken by all senior managers as part of its programme for compliance with the requirements of the United States Sarbanes-Oxley Act. The assessments undertaken during the year did not identify any significant weaknesses in the process but resulted in the implementation of various recommended improvements. The key features of the Company's internal control system and the issues addressed by the Company during the year can be found in the Strategic Report.

 

A schedule of key delegations of authority has been approved by the board, which delegates authority for decision-making to senior and other managers in respect of issues such as capital expenditure, procurement, contractual, human resource and payment matters and for the conduct of claims and litigation. That schedule reserves decision-making to the directors above certain financial limits.

 

During the year, there were a number of committees in operation, acting under delegated terms of reference, which oversee the Northern Powergrid Group and, therefore, Company policy. As part of the approved terms of reference, certain of those committees report regularly to the board on their activities and are as follows:

 

Health and Safety Management Committee

 

The board of Northern Powergrid Holdings Company has established the Northern Powergrid Group Health and Safety Management Committee with delegated powers to manage the health and safety policy and performance of the Northern Powergrid Group. Membership of the committee comprises:

 

J P Barnett

 

Commercial Director

T E Fielden

 

Finance Director

J M France

 

Regulation Director

N M Gill

 

Field Operations Director

P A Jones

 

President and Chief Executive Officer

A J Maclennan

 

Managing Director, Integrated Utility Services Limited (an affiliated company)

G M Earl

 

Director of Safety, Health and Environment

 

The committee meets on a regular basis in order to oversee implementation of the health and safety policy, review and agree strategy for the management of health and safety issues, monitor health and safety performance across the Northern Powergrid Group, review the effectiveness of the health and safety policies and the health and safety management system and consider recommendations for changes in policy due to changes in appropriate legislation, codes of practice or guidance or due to recommendations arising from significant incidents.

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORPORATE GOVERNANCE STATEMENT - continued

 

Section A

Leadership - continued

 

Main Principle A1:

The Role of the Board - continued

 

Treasury Committee

 

The Treasury Committee oversees and implements the treasury policies, which are outlined in the Strategic Report and the Report of the Directors, and comprises:

 

G E Abel

 

Chairman, MidAmerican

P Ainsley

 

Group Financial Controller

D Brady

 

Treasurer

T E Fielden

 

Finance Director

P J Goodman

 

Senior Vice President and Chief Financial Officer, MidAmerican

P A Jones

 

President and Chief Executive Officer

S Gormally

 

Corporate Accountant and Secretary to the Committee

O Sutherland

 

Investor Reporting Manager

 

Pensions Committee

 

The Pensions Committee oversees the Northern Powergrid Group's approach to the pension schemes to which it contributes and comprises:

 

P Ainsley

 

Group Financial Controller

T E Fielden

 

Finance Director

J M France

 

Regulation Director

K Mawson

 

Head of Finance Development and Systems

L Hutchinson

 

Director of Human Resources

N Dawson

 

Pensions Manager

L Tweedie

 

Head of Field Change

 

Governance and Risk Management Group

 

The GRMG is the principal management forum in the Northern Powergrid Group with regard to corporate governance. Its purpose is to ensure that companies in the Northern Powergrid Group apply and maintain appropriate arrangements to deliver sound corporate governance and comply with the overall strategy, framework and supporting policies. The GRMG monitors and reviews the strategic risk environment, ensuring the continued suitability, adequacy and effectiveness of risk management arrangements and reports to the Northern Powergrid Group's Audit Committee. The GRMG comprises:

 

P Ainsley

 

Group Financial Controller

D Anderson

 

Head of Internal Audit

J P Barnett

 

Commercial Director

R Dixon

 

Non-Executive Director

M Drye

 

Director of Asset Management

G M Earl

 

Head of Safety, Health and Environment

J Elliott

 

Company Secretary

T E Fielden

 

Finance Director

J M France

 

Regulation Director

N M Gill

 

Field Operations Director

L Hutchinson

 

Director of Human Resources

A J Maclennan

 

Managing Director, Integrated Utility Services Limited (an affiliated company)

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORPORATE GOVERNANCE STATEMENT - continued

 

Section A

Leadership - continued

 

Main Principle A1:

The Role of the Board - continued

 

The risk management framework was monitored regularly during the year to ensure that all strategic risks, including those relating to environmental and social issues, were being addressed. Risk management policies and procedures were reviewed and updated to ensure a robust and clear approach was maintained. Mr Dixon attended meetings of the GRMG to provide an independent view in respect of the matters discussed.

 

Asset risk continued to be a strong focus through the Asset Risk Management Executive Review Group and comprehensive plans continued to be in place to manage risks affecting all critical property assets and to strengthen the arrangements for crisis management and business continuity planning.

 

Further details of the Northern Powergrid Group's approach to corporate governance and the management of internal controls can be found in the Strategic Report.

 

As explained in respect of main principles B2 and D1, the Company does not have either a remuneration committee or a nomination committee.

 

Main Principle A2:

Division of Responsibilities

 

Mr G E Abel, the Chairman of MidAmerican, is also Chairman of Northern Powergrid Holdings Company. As President and Chief Executive Officer, Dr Jones is responsible for the operation and management of both the Company and the Northern Powergrid Group and reports directly to Mr Abel.

 

Main Principle A3:

The Chairman

 

Dr Jones chairs board meetings and is responsible for the operation and management of both the Company and the Northern Powergrid Group and reports directly to Mr Abel.

 

Main Principle A4:

Non-Executive Directors

 

Mr Dixon was the Company's sole independent non-executive director during the year and acts under agreed terms of reference.

 

Section B

Effectiveness

 

Main Principle B1

The Composition of the Board

 

During the year, the board comprised five executive directors and Mr Dixon, an independent non-executive director, who, collectively, bring a range of skills and experience to the board. Although Mr Dixon was the sole non-executive director, so the board did not include a balanced number of executive and non-executive directors, the board believes that it possesses the skills and experience necessary to provide effective leadership, stewardship and control of the Company. However, under the terms of its electricity distribution licence, the Company is required to appoint two sufficiently independent directors (as defined in the licence) by 1 April 2014.

 

Main Principle B2

Appointments to the Board

 

The Company does not have a nomination committee. Appointments to the board are made by MidAmerican, in conjunction with the President and Chief Executive Officer.

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORPORATE GOVERNANCE STATEMENT - continued

 

Main Principle B3

Commitment

 

The Company's non-executive director commits sufficient time to preparation for and attendance at board meetings, although his terms of reference do not quantify the time commitment required.

 

Main Principle B4

Development

 

The directors continually update their knowledge of and familiarity with the operations of the Company due to the robust reporting arrangements in place and have on-going access to the Company's operations and its staff.

 

Main Principle B5

Information and Support

 

Directors receive monthly reports outlining progress against the Company's goals and targets, enabling financial performance against budget and operational performance against a number of indicators to be reviewed, and are also able to participate in weekly meetings, which consider the key issues of that week in some detail. The directors are able to utilise the advice and services of the Company Secretary, in respect of their duties and responsibilities as directors and any new legislation that may affect those duties and responsibilities. The directors also have access to external legal advice should they feel it necessary. Interim briefings are provided to the non-executive director, as appropriate.

 

Main Principle B6

Evaluation

 

As part of their approved terms of reference, certain committees report regularly on their activities, enabling the directors to evaluate the activities of those committees. However, the board does not have a process of evaluation of its own performance or of the performance of individual directors in their capacity as directors. MidAmerican has a performance appraisal and development scheme in place, under which each senior manager of the Northern Powergrid Group is subject to a formal annual appraisal of performance against his individual and MidAmerican's goals.

 

Main Principle B7

Re-election

 

The Company's articles of association do not require periodic retirement and re-election of directors.

 

Section C

Accountability

 

Main Principle C1

Financial and Business Reporting

 

The board believes that the Strategic Report and the Report of the Directors provide a balanced and understandable assessment of the Company's position and prospects. The directors explain, at page 3, the Core Principles behind the Company's strategy and, at page 27, their responsibility for preparing the Strategic Report, the Report of the Directors and the accounts, have reported, at pages 27 and 28 in the Report of the Directors, that the Company is a going concern and have included the Report of the Independent Auditor to the Company at page 30 of these accounts.

 

Main Principle C2

Risk Management and Internal Control

 

Details of the principal risks and uncertainties facing the Company and its internal control system, together with details of the issues addressed by the Company during the year, can be found at pages 16 to 18 of the Strategic Report.

 

Other key features of the internal control system are:

 

- Comprehensive business planning and financial reporting procedures, including the annual preparation of detailed operational budgets for the year ahead and projections for subsequent years;

 

- Regular review of key performance indicators to assess progress towards objectives;

 

- A range of policies, codes of practice and more detailed instructions that define the processes to be followed;

 

- A strong internal audit function, which provides independent scrutiny of internal control systems and risk management procedures, including the standards required by the United States Sarbanes-Oxley Act;

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORPORATE GOVERNANCE STATEMENT - continued

 

Main Principle C2

Risk Management and Internal Control - continued

 

-

 

On-going health and safety performance reviews carried out by in-house safety professionals in addition to the regime of routine health and safety risk assessment and management processes carried out within each of the operating units;

 

 

-

 

Processes and procedures to operate under OHSAS 18001, which is subject to external certification and regular assessment;

 

 

-

 

An external obligations register, which assists with compliance with financial, legal and regulatory obligations;

 

 

-

 

Centralised treasury operations that operate within defined limits and are subject to regular reporting requirements and audit reviews; and

 

 

-

 

Established procedures for planning, approving and monitoring major capital expenditure, major projects and the development of new business which includes short and long-term budgets, risk evaluation, detailed appraisal and review procedures, defined authority levels and post-investment performance reviews.

 

 

Main Principle C3

Audit Committee and Auditor

 

The board of Northern Powergrid Holdings Company has established an audit committee for the Northern Powergrid Group under delegated terms of reference, which include monitoring of the financial reporting process, the effectiveness of the internal control, internal audit and risk management systems, the statutory audit of the accounts, the independence of and the provision of additional services by the auditor.

 

The Audit Committee comprises one member who is independent and one member who has competence in accounting and receives annual reports from the GRMG and from the Northern Powergrid Group's Head of Internal Audit on the work of the Internal Audit Section during the year and the audit plan for the following year. The Audit Committee comprises:

 

R Dixon Non-Executive Director

T E Fielden Finance Director

 

Details of the fees paid by the Company to Deloitte LLP in relation to non-audit services during the year are provided in Note 6 to the accounts.

 

The employee section on page 13 of the Strategic Report contains details of the Company's "speaking up" policy.

 

Section D

Remuneration

 

Main Principle D1

The Level and Components of Remuneration

 

The Company does not have a remuneration committee. Annual remuneration awards for the senior management of the Northern Powergrid Group are subject to the performance appraisal and development scheme process and consideration by the Chairman of MidAmerican and the President and Chief Executive Officer. As the Company has no equity securities listed on the London Stock Exchange, it is not required to make directors' remuneration disclosures, other than those required for private companies.

 

Main Principle D2

Procedure

 

As noted under main principle D1, the Company does not have a remuneration committee. Annual remuneration awards for the senior management of the Northern Powergrid Group are subject to the performance appraisal and development scheme process and consideration by the Chairman of MidAmerican and the President and Chief Executive Officer. No director is involved in deciding his own remuneration.

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

 

CORPORATE GOVERNANCE STATEMENT - continued

 

Section E

Relations with Shareholders

 

Main Principle E1

Dialogue with Shareholders

 

As a wholly-owned subsidiary of a privately held group of companies, the board is in continuing dialogue with MidAmerican.

 

Main Principle E2

Constructive Use of the AGM

 

This section of the Code is not applicable to the Company, as it is a wholly-owned subsidiary of a privately held group of companies and, therefore, has no institutional shareholders.

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The directors are responsible for preparing the Strategic Report, the Report of the Directors and the financial statements in accordance with applicable law and regulations.

 

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

 

In preparing these financial statements, International Accounting Standard 1 requires the directors to:

 

- Properly select and apply accounting policies;

 

- Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

 

- Provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company's financial position and financial performance; and

 

- Make an assessment of the Company'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 transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

GOING CONCERN

 

A review of the Company's business activities during the year, together with details regarding its future development, performance and position, its objectives, policies and processes for managing its capital, its financial risk management objectives and details of its exposures to trading risk, credit risk and liquidity risk are set out in the Strategic Report, the Report of the Directors and the appropriate notes to the accounts.

 

When considering continuing to adopt the going concern basis in preparing the annual report and accounts, the directors have taken into account a number of factors, including the following:

 

- The Company is a stable electricity distribution business operating an essential public service and is regulated by GEMA. In carrying out its functions, GEMA has a statutory duty under the Electricity Act 1989 to have regard to the need to secure that licence holders are able to finance the activities, which are the subject of obligations under Part 1 of the Electricity Act 1989 (including the obligations imposed by the electricity distribution licence) or by the Utilities Act 2000;

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

 

GOING CONCERN - continued

 

- The Company is profitable with strong underlying cash flows and holds investment grade credit ratings; and

 

- The Company is financed by long-term borrowings with an average maturity of 14 years and has access to borrowing facilities provided by Lloyds Bank plc, Royal Bank of Scotland plc and Abbey National Treasury Services plc.

 

Consequently, after making enquiries, the directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

 

STATEMENT AS TO DISCLOSURE OF INFORMATION TO AUDITOR

Each of the directors, who is a director of the Company as at the date of this report, confirms that:

 

a) so far as he is aware, there is no relevant audit information of which the Company's auditor is unaware; and

 

b) he has taken all the steps he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the auditor is aware of that information.

 

This confirmation is given and should be interpreted in accordance with the provisions of S418 of the Companies Act 2006.

 

AUDITOR

A resolution to re-appoint Deloitte LLP as the Company's auditor and authorise the directors to determine their remuneration will be proposed at the Annual General Meeting.

 

ON BEHALF OF THE BOARD:

 

 

 

 

 

P A Jones

Director

 

21 March 2014

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL REPORTS AND ACCOUNTS

 

Each of the directors as at the date of the Annual Report, whose names and functions are set out on page 19 in the Report of the Directors confirms that, to the best of their knowledge:

 

a) the Company's accounts, prepared in accordance with applicable UK law and in conformity with IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

 

b) the Management Report (which is comprised of the Strategic Report and the Report of the Directors) includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties it faces.

 

ON BEHALF OF THE BOARD:

 

 

 

 

 

P A Jones

Director

 

21 March 2014

REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF NORTHERN POWERGRID

(YORKSHIRE) PLC

 

We have audited the financial statements of Northern Powergrid (Yorkshire) plc (the "Company") for the year ended 31 December 2013 which comprise the Statement of Profit or Loss, the Statement of Profit or Loss and Other Comprehensive Income, the Statement of Financial Position, the Statement of Changes in Equity, the Statement of Cash Flows and related notes 1 to 26. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

 

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in a Report of the Auditor and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

 

Respective responsibilities of directors and auditor

As explained more fully in the Statement of Directors' Responsibilities set out on page twenty seven, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

 

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of whether the accounting policies are appropriate to the Company's circumstances and have been consistently applied and adequately disclosed, the reasonableness of significant accounting estimates made by the directors and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Strategic Report and the Report of the Directors to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

 

Opinion on financial statements

In our opinion the financial statements:

- give a true and fair view of the state of the Company's affairs as at 31 December 2013 and of its profit for the year then ended;

- have been properly prepared in accordance with IFRSs as adopted by the European Union; and

- have been prepared in accordance with the requirements of the Companies Act 2006.

 

Opinion on other matter prescribed by the Companies Act 2006

In our opinion the information given in the Strategic Report and the Report of the Directors for the financial year for which the financial statements are prepared is consistent with the financial statements.

 

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

- adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or

- the financial statements are not in agreement with the accounting records and returns; or

- certain disclosures of directors' remuneration specified by law are not made; or

- we have not received all the information and explanations we require for our audit.

 

 

 

Christopher Powell FCA (Senior Statutory Auditor)

for and on behalf of Deloitte LLP

Newcastle upon Tyne

 

Date: 2 April 2014

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STATEMENT OF PROFIT OR LOSS

FOR THE YEAR ENDED 31 DECEMBER 2013

 

2013 2012

Notes £'000 £'000

 

CONTINUING OPERATIONS

Revenue 3 391,974 378,942

 

Cost of sales (15,036) (14,022)

GROSS PROFIT 376,938 364,920

 

Operating expenses 9 (178,146) (166,926)

OPERATING PROFIT 198,792 197,994

 

Other gains 249 352

 

Finance costs 5 (40,335) (40,499)

 

Investment income 5 100 -

 

 

PROFIT BEFORE INCOME TAX

6

158,806

157,847

 

Income tax 7 (15,074) (12,566)

PROFIT FOR THE YEAR 143,732 145,281

 

 

 

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2013

 

2013 2012

£'000 £'000

 

PROFIT FOR THE YEAR 143,732 145,281

 

OTHER COMPREHENSIVE INCOME - -

 

 

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

143,732

145,281

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STATEMENT OF FINANCIAL POSITION

31 DECEMBER 2013

 

2013 2012

Notes £'000 £'000

ASSETS

NON-CURRENT ASSETS

Intangible assets 11 417 1,186

Property, plant and equipment 12 2,547,824 2,383,371

2,548,241 2,384,557

CURRENT ASSETS

Inventories 13 249 231

Trade and other receivables 15 55,725 66,487

Cash and cash equivalents 16 - 21,054

55,974 87,772

TOTAL ASSETS 2,604,215 2,472,329

EQUITY

SHAREHOLDERS' EQUITY

Called up share capital 17 290,000 290,000

Retained earnings 18 599,779 496,047

TOTAL EQUITY 889,779 786,047

LIABILITIES

NON-CURRENT LIABILITIES

Trade and other payables 19 676,239 653,007

Borrowings 20 693,977 693,617

Deferred tax 22 145,820 168,974

Provisions 21 707 722

1,516,743 1,516,320

CURRENT LIABILITIES

Trade and other payables 19 98,542 121,679

Borrowings 20  79,645 30,418

Tax payable 18,232 16,228

Provisions 21 1,274 1,637

197,693 169,962

TOTAL LIABILITIES 1,714,436 1,686,282

TOTAL EQUITY AND LIABILITIES 2,604,215 2,472,329

The financial statements were approved by the Board of Directors on 21 March 2014 and were signed on its behalf by:

 

 

 

 

 

P A Jones

Director

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2013

 

 

Called up

share Retained Total

capital earnings equity

£'000 £'000 £'000

 

Balance at 1 January 2012 290,000 390,766 680,766

 

Changes in equity

Dividends - (40,000) (40,000)

Total comprehensive income - 145,281 145,281

 

 

 

 

 

 

Balance at 31 December 2012 290,000 496,047 786,047

 

 

 

 

 

 

 

Changes in equity

Dividends - (40,000) (40,000)

Total comprehensive income - 143,732 143,732

 

 

 

 

 

 

Balance at 31 December 2013 290,000 599,779 889,779

 

 

 

 

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2013

 

2013 2012

Notes £'000 £'000

Cash flows from operating activities

Cash generated from operations 25 271,066 254,906

Finance costs paid (42,947) (40,803)

Dividends received 100 -

Group relief paid - (4,568)

Tax paid (36,223) (35,169)

Net cash from operating activities 191,996 174,366

 

Cash flows from investing activities

Purchase of property, plant & equipment (261,498) (208,867)

Proceeds from disposals 249 467

Receipt of customer contributions 38,883 54,365

Net cash used in investing activities (222,366) (154,035)

 

Cash flows from financing activities

Movement in borrowings in the year 31,000 128,222

Movement in loans from group undertakings 18,316 (87,499)

Equity dividends paid (40,000) (40,000)

Net cash from financing activities 9,316 723

 

 

 

 

(Decrease)/increase in cash and cash equivalents

(21,054)

21,054

Cash and cash equivalents at beginning of year

15

21,054

-

 

 

Cash and cash equivalents at end of year

 

-

21,054

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2013

 

1. GENERAL INFORMATION

 

Northern Powergrid (Yorkshire) plc (the "Company") is a company originally incorporated in England and Wales under the Companies Act 1985 and is part of the Northern Powergrid Holdings Company group of companies (the "Northern Powergrid Group"). The address of the registered office is Lloyds Court, 78 Grey Street, Newcastle-upon-Tyne, NE1 6AF.

 

The nature of the Company's business model, strategic objectives, operations and activities are set out in the Strategic Report.

 

Accounting convention and basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). The financial statements have also been prepared in accordance with IFRSs adopted by the European Union and, therefore, comply with Article 4 of the EU IAS Regulation and with those parts of the Companies Act 2006 (the "Act") that are applicable to companies reporting under IFRS.

 

The accounts have been prepared under the historical cost convention.

 

Going concern

The directors have, at the time of approving the financial statements, a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. Further detail is contained within Going Concern Statement in the Report of the Directors.

 

Judgements in applying accounting policies and key sources of estimation uncertainty

Many of the amounts included in the financial statements involve the use of judgement and/or estimation. These judgements and estimates are based on management's best knowledge of the relevant facts and circumstances, having regard to previous experience, but actual results may differ from the amounts included in the financial statements. Information about such judgements and estimates is contained in the accounting policies and/or the notes to the financial statements and the key areas are summarised below.

 

Areas of judgement and estimation which have the most significant effect on the amounts recognised in the financial statements are:

 

- The estimation of useful economic lives for property, plant and equipment;

- The assumptions used to calculate the Defined Benefit Obligation (the "DBO");

- The split of operating and capital expenditure and the allocation of overheads to capital projects; and

- Impairment reviews carried out to evaluate the carrying value of assets held at the statement of financial position date.

 

Critical accounting policies

The critical accounting policies adopted by the directors relate to property, plant and equipment, taxation, pensions and revenue and are described below. The accounting policies have been applied consistently throughout the year and the preceding year.

 

Adoption of new or revised standards

The Northern Powergrid Group has applied IAS 19 Employee Benefits (as revised in 2011) and the related consequential amendments for the first time in 2013. IAS 19 (as revised in 2011) changes the accounting for defined benefit plans and termination benefits. The changes do not impact the accounting for the defined benefit scheme in these financial statements as it is accounted for as though it were a defined contribution scheme. IAS 19 (as revised in 2011) does however introduce certain changes in the presentation of the defined benefit cost including more extensive disclosures which are reflected within these financial statements.

 

There are no other new or revised standards or interpretations have been adopted in these financial statements.

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

2. ACCOUNTING POLICIES

 

Revenue

Revenue is only recognised when the risks and rewards of ownership have been transferred to a third party. No revenue is recognised where there are significant uncertainties regarding the consideration to be received or the costs associated with the transaction.

 

Revenue represents charges for the use of the Company's distribution network, amortisation of customer contributions, recharge of costs incurred on behalf of related parties and the invoiced value of other goods sold and services provided, exclusive of value added tax.

 

Revenues from charges to end customers for the use of the Company's distribution network include estimates of the units distributed. The estimated usage is based on historic data, judgement and assumptions. Revenues are gradually adjusted to reflect actual usage in the period during which actual meter readings are obtained.

 

Any under or over-recovery of allowed distribution network revenues, as prescribed by Ofgem, is not provided for in the financial statements and will be recovered/repaid through future tariffs.

 

Customer contributions towards distribution system assets are included in deferred revenue. The Company'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.

 

Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.

 

Dividend income from investments is recognised when the shareholders' rights to receive payment have been established.

 

Operating profit

Operating profit is stated before investment income, finance costs and profits on sale of property, plant and equipment.

 

Software development costs

Costs in respect of major developments are capitalised and amortised over the expected life of the software. Capitalised software costs that are not an integral part of the related hardware are included in intangible assets on the statement of financial position and amortised over the expected life of the software of up to 15 years.

 

Investments

Fixed asset investments are stated at cost less provision for impairment in value.

 

Property, plant and equipment and depreciation

Property, plant and equipment is stated at cost. Cost includes the purchase price of the asset and any costs, including internal employee and other costs, directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

 

The charge for depreciation is calculated to write off assets to their residual values over their estimated useful lives using the straight-line basis:

 

Distribution system assets

 

 45 years

 

Distributed generation

 

15 years

 

Metering equipment included in distribution system assets 

 

up to 5 years

 

Information technology equipment included in distribution system assets 

 

up to 10 years

 

 

Non-operational assets:

Buildings - freehold 

 

up to 60 years

 

Buildings - leasehold

 

lower of lease period or 60 years

 

Fixtures and equipment

 

up to 10 years

 

 

Freehold land is not depreciated.

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

2. ACCOUNTING POLICIES - continued

 

Property, plant and equipment and depreciation - continued

Assets in the course of construction are carried at cost. Depreciation on these assets, on the same basis as other assets, commences when the assets are commissioned.

 

The estimated useful economic lives of property, plant and equipment are based on management's judgement and experience. When management identifies that actual useful lives differ materially from the estimates used to calculate depreciation, that charge is adjusted prospectively. Due to the significance of the Company's investment in property, plant and equipment, variations between actual and estimated useful lives could impact operating results both positively and negatively, although historically, few changes to estimated useful lives have been required.

 

The Company is required to evaluate the carrying values of property, plant and equipment for impairment whenever circumstances indicate, in management's judgement, that the carrying value of such assets may not be recoverable. An impairment review requires management to make judgement concerning the cash flows, growth rates and discount rates for the cash-generating units under review.

 

Financial instruments

Financial assets and financial liabilities are recognised on the statement of financial position when the Company becomes a party to the contractual provisions on the instrument.

 

Financial assets are assessed for indicators of impairment at each statement of financial position date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.

 

For certain categories of financial assets, such as trade receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Company's past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period of 30 days, as well as observable changes in national or local economic conditions that correlate with default on receivables.

 

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectable, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in the statement of profit or loss.

 

Fair value measurements

For financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

 

· Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

 

· Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

 

· Level 3 inputs are unobservable inputs for the asset or liability.

 

Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangement entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities.

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

2. ACCOUNTING POLICIES - continued

 

Inventories

Work in progress is valued at the cost of direct materials and labour plus attributable overheads based on the normal level of activity less progress payments.

 

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

 

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the statement of profit or loss because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted at the statement of financial position date.

 

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the statement of financial position liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.

 

The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

 

Deferred tax is calculated at the tax rates that are expected to apply in the year when the liability is settled or asset realised, based on tax rates and tax legislation enacted or substantively enacted at the statement of financial position date.

 

Research costs

Expenditure on research activities is written off to the statement of profit or loss in the year in which it is incurred.

 

Leases

Leases are classified as finance leases wherever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

 

Operating lease rentals are charged to the statement of profit or loss in equal annual amounts over the lease term.

 

Pensions

The Company contributes to the Northern Powergrid Group of the Electricity Supply Pension Scheme (the "Northern Powergrid Group of the ESPS"). The Northern Powergrid Group of the ESPS is a defined benefit plan that shares risk between various entities under common control. There is no contractual agreement or stated policy for charging the net defined benefit cost for the plan as a whole to individual group entities and accordingly the Company accounts for the Northern Powergrid Group of the ESPS as if it were a defined contribution scheme. Contributions to the Northern Powergrid Group of the ESPS are charged to the statement of profit or loss or capitalised as appropriate. The capital costs of ex-gratia and supplementary pensions are normally charged to the statement of profit or loss in the period in which they are granted.

 

The Company also participates in a defined contribution scheme. Contributions payable to the defined contribution scheme are charged to the statement of profit or loss in the year or capitalised as appropriate. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the statement of financial position.

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

2. ACCOUNTING POLICIES - continued

 

Provisions

Provisions are recognised when the Company has a present obligation as a result of a past event and it is probable that the Company will be required to settle that obligation. Provisions are measured at the directors' best estimate of the expenditure required to settle the obligation at the statement of financial position date. Reasonable estimates involve judgement made by management after considering information including notifications, settlements, estimates performed by independent parties and legal counsel, available facts, identification of other potentially responsible parties and their ability to contribute and prior experience.

 

Where the effect is significant, provisions in respect of material future liabilities are stated at their net present value and arrived at by discounting the anticipated future costs, at the market rate at the statement of financial position date.

 

Trade receivables

Trade receivables are measured at initial recognition at fair value. Appropriate allowances for estimated irrecoverable amounts are recognised in the statement of profit or loss when there is objective evidence that the asset is impaired.

 

Trade payables

Trade payables are not interest bearing and are stated at their nominal value.

 

Borrowings

Borrowings are classified as other financial liabilities at amortised cost. They are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement for redemption and direct issue costs, are accounted for on an accruals basis in the statement of profit or loss using the effective interest rate method. They are added to the carrying amount of the instruments to the extent that they are not settled in the period in which they arise. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset.

 

3. SEGMENTAL REPORTING

 

IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Company that are regularly reviewed by the President and Chief Executive Officer of the Northern Powergrid Group in order to allocate resources to these segments and to assess their performance.

 

In practice, the President and Chief Executive Officer allocates resources and assesses performance based upon the aggregate results of the Company and Northern Powergrid (Northeast) Limited, another distribution network operator in the Northern Powergrid Group, suggesting that no segmental reporting is required.

 

Revenue, profit before tax and net assets are attributable to electricity distribution. Revenue is all in respect of sales to United Kingdom customers.

 

Revenue represents charges made to customers for use of the distribution system, the recharge of costs incurred on behalf of related parties, amortisation of customer contributions and other services and is included net of value added tax.

 

4. EMPLOYEES AND DIRECTORS

 

 

2013

2012

 

£'000

£'000

Salaries

 

50,975

48,671

Social security costs

 

5,225

4,761

Defined benefit pension costs

 

18,808

17,700

Defined contribution pension costs

 

1,266

944

 

 

76,274 72,076

Less charged to property, plant and equipment

 

(45,918)

(44,799)

 

 

30,536 27,277

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

4. EMPLOYEES AND DIRECTORS - continued

 

The majority of the Company's employees are members of the Northern Powergrid Group of the ESPS, details of which are given in the employee benefits note (note 23).

 

The average monthly number of employees during the year was:

 

 

2013

2012

 

No.

No.

Technical

 

345

293

Industrial

 

602

606

Administration

 

100

108

Other

 

114

104

 

 

1,161 1,111

 

DIRECTORS' REMUNERATION

 

 

2013

2012

Highest Paid:

 

£'000

£'000

Short-term employee benefits

 

206

141

Post-employment benefits

 

23

24

Other long-term benefits

 

270

242

 

 

499 407

 

Total:

Short-term employee benefits

 

523

420

Post-employment benefits

 

83

85

Other long-term benefits

 

630

543

 

 

1,236 1,048

 

 

Directors who are a member of the defined benefit scheme

 

4

4

 

 

OTHER KEY PERSONNEL REMUNERATION

 

 

2013

2012

Total:

 

£'000

£'000

Short-term employee benefits

 

167

215

Post-employment benefits

 

42

57

Other long-term benefits

 

120

104

 

 

329 376

 

Other key personnel includes a number of senior functional managers who, whilst not board directors, have authority and responsibility for planning, directing and controlling the activities of the Company.

 

The directors and key personnel are remunerated for their services to the Northern Powergrid Group, of which the Company is a subsidiary. The figures above represent the share of the costs borne by the Company.

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

5. NET FINANCE COSTS

2013 2012

£'000 £'000

Investment income:

Dividends received 100 -

 

2013 2012

£'000 £'000

Finance costs:

 

Interest payable on other loans

40,016

38,748

 

Interest payable on loans from Group undertakings

319

1,751

 

 

40,335 40,499

Net finance costs 40,235 40,499

During the year ended 31 December 2013, £3,061,000 of borrowing costs were capitalised (2012: £1,326,000).

 

6. PROFIT BEFORE INCOME TAX

 

The profit before income tax is stated after charging/(crediting):

2013 2012

£'000 £'000

Depreciation - owned assets 80,405 75,669

Profit on disposal of fixed assets (249) (352)

Software development costs amortisation 769 1,292

 

Research costs

4,721

5,610

 

Amortisation of deferred revenue

(20,284)

(18,865)

 

Impairment of trade and other receivables 

252

56

 

 

Analysis of auditor's remuneration is as follows:

 

2013

2012

 

£'000

£'000

Fees payable to the Company's auditor for the audit of the Company's annual accounts

 

107

103

Other assurance services

 

35

-

 

 

Total fees payable to the Company's auditor

 

142

103

 

 

7. INCOME TAX

 

Analysis of tax expense

2013 2012

£'000 £'000

Current Tax 38,228 36,682

Deferred tax (23,154) (24,116)

 

 

 

Total tax expense in statement of profit or loss

15,074

12,566

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

7. INCOME TAX - continued

 

Factors affecting the tax expense

The income tax charge for the year in the Statement of Profit or Loss is lower than the standard rate of corporation tax in the UK. The difference is explained below:

2013 2012

£'000 £'000

 

Profit on ordinary activities before income tax

158,806

157,847

 

 

Profit on ordinary activities

multiplied by the standard rate of corporation tax

in the UK of 23.25% (2012 - 24.50%) 36,922 38,673

 

Effects of:

 

Change in tax rates

(21,873)

(14,695)

 

Over provision for prior years

(927)

(3,891)

 

Permanent disallowances

27

-

 

Release of deferred tax provisions in relation to temporary differences

-

(6,858)

 

Prior deferred tax

841

-

 

Other

84

(663)

 

 

Tax expense 15,074 12,566

 

 

 

2013

2012

Tax expense comprises:

 

£'000

£'000

Current tax expense:

Corporation tax charge for the year

 

39,155

40,572

Over provision for prior years

 

(927)

(3,890)

 

 

Total current tax charge

 

38,228

36,682

 

Deferred tax:

Deferred tax expenses relating to the origination and reversal of temporary differences

 

(1,281)

(9,421)

Effect of changes in tax rates

 

(21,873)

(14,695)

 

 

Total deferred tax charge

 

(23,154)

(24,116)

 

 

Tax on profit before tax

 

15,074

12,566

 

 

The Finance Act 2013 includes a provision that the standard rate of corporation tax in the United Kingdom will reduce from 23% to 21% from April 2014 and to 20% from April 2015. Accordingly, 20% has been applied when calculating deferred tax assets and liabilities throughout the Northern Powergrid Group as at 31 December 2013.

 

8. DIVIDENDS

 

 

2013

2012

 

£'000

£'000

Interim dividend at 14p per share

 

40,000

40,000

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

9. OPERATING EXPENSES

 

Operating expenses comprise:

 

2013

2012

 

£'000

£'000

Distribution costs

 

124,876

118,081

Administrative expenses

 

53,270

48,845

 

 

178,146 166,926

 

10. OPERATING LEASE COMMITMENTS

 

 

2013

2012

 

£'000

£'000

Minimum lease payments under operating leases recognised in the year

 

4,451

4,465

 

 

At the statement of financial position date, the Company had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:

 

 

2013

2012

 

£'000

£'000

Within one year

 

3,205

3,213

In the second to fifth year

 

6,887

7,769

After five years

 

400

825

 

 

10,492 11,807

 

 

11. INTANGIBLE ASSETS

Software

development

costs

£'000

COST

At 1 January 2013

and 31 December 2013 29,497

AMORTISATION

At 1 January 2013 28,311

 

Amortisation for year

769

 

 

At 31 December 2013 29,080

NET BOOK VALUE

At 31 December 2013 417

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

11. INTANGIBLE ASSETS - continued

 

Software

development

costs

£'000

COST

At 1 January 2012

and 31 December 2012 29,497

 

AMORTISATION

At 1 January 2012 27,019

 

Amortisation for year

1,292

 

 

 

At 31 December 2012 28,311

 

NET BOOK VALUE

At 31 December 2012 1,186

 

 

12. PROPERTY, PLANT AND EQUIPMENT

Non

operational Fixtures

land & Distribution and

buildings system fittings Totals

£'000 £'000 £'000 £'000

COST

At 1 January 2013 4,505 2,919,791 21,386 2,945,682

Additions - 243,114 1,744 244,858

Disposals - (12,806) (279) (13,085)

At 31 December 2013 4,505 3,150,099 22,851 3,177,455

DEPRECIATION

At 1 January 2013 1,704 545,236 15,371 562,311

 

Charge for year

178

78,167

2,060

80,405

Eliminated on disposal - (12,806) (279) (13,085)

At 31 December 2013 1,882 610,597 17,152 629,631

NET BOOK VALUE

At 31 December 2013 2,623 2,539,502 5,699 2,547,824

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

12. PROPERTY, PLANT AND EQUIPMENT - continued

 

Non

operational Fixtures

land & Distribution and

buildings system fittings Totals

£'000 £'000 £'000 £'000

COST

At 1 January 2012 4,505 2,691,982 18,734 2,715,221

Additions - 235,054 2,718 237,772

Disposals - (7,245) (66) (7,311)

 

At 31 December 2012 4,505 2,919,791 21,386 2,945,682

 

DEPRECIATION

At 1 January 2012 1,526 479,079 13,332 493,937

 

Charge for year

178

73,386

2,105

75,669

Eliminated on disposal - (7,229) (66) (7,295)

 

At 31 December 2012 1,704 545,236 15,371 562,311

 

NET BOOK VALUE

At 31 December 2012 2,801 2,374,555 6,015 2,383,371

 

Assets in the course of construction included above:

 

Distribution system

 

Fixtures and fittings

 

Totals

 

 

£'000

 

 

£'000

 

 

£'000

 

At 1 January 2013

 

139,042

2,718

141,760

Additions

 

243,114

1,744

244,858

Available for use

 

(212,901)

(1,744)

(214,645)

 

 

At 31 December 2013

 

169,255

2,718

171,973

 

 

The Company has entered into contractual commitments in relation to the future acquisition of property, plant and equipment of £46,194,000 (2012: £30,722,000).

 

The net book value of non-operational land and buildings comprises:

 

 

2013

2012

 

£'000

£'000

Freehold

 

1,587

1,707

Long leasehold

 

837

869

Short leasehold

 

199

225

 

 

2,623 2,801

 

 

13. INVENTORIES

2013 2012

£'000 £'000

Work-in-progress 249 231

249 231

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

14. INVESTMENTS

 

Details of the Company's investments at 31 December 2013 are listed below:

 

Name of Company

 

Country of Registration

 

Holding of Ordinary Shares

 

Proportion

 

Nature of Business

 

Electralink Limited

 

England and Wales

 

619 at 10p

 

6.7%

 

Data transfer network operator

 

MRA Service Company Limited

 

England and Wales

 

1 at £1

 

1.0%

 

Governance of the electricity industry's Master Registration Agreement

 

DCUSA Limited

 

England and Wales

 

1 at £1

 

1.0%

 

Management and governance of the Distribution Connection and Use of System Agreement

 

 

The above investments are unlisted. The cost and net book value of the investments are Electralink Limited £62 (2012: £62), MRA Service Company Limited £1 (2012: £1) and DCUSA Limited £1 (2012: £1).

 

15. TRADE AND OTHER RECEIVABLES

 

2013 2012

£'000 £'000

Current:

 

Distribution use of system receivables

47,086

59,219

Amounts receivable from

sale of goods and services 1,364 1,186

Prepayments and accrued income 7,275 6,082

55,725 66,487

The directors consider that the carrying amount of trade and other receivables approximates their fair value calculated by discounting the future cash flows at the market rate at the statement of financial position date. The maximum exposure to risk to the Company is the book value of these receivables less any provisions for impairment. The valuation of assets set out above is based on Level 1 inputs.

 

Distribution use of system receivables

 

The customers served by the Company's distribution network are supplied predominantly by a small number of electricity supply businesses with RWE NPower plc accounting for approximately 27% of distribution revenues in 2013 (2012: 29%). Ofgem has determined a framework which sets credit limits for each supply business based on its credit rating or payment history and requires them to provide credit cover if their value at risk (measured as being equivalent to 45 days usage) exceeds the credit limit. Acceptable credit typically is provided in the form of a parent company guarantee, letter of credit or an escrow account. Included within other payables are customer deposits of £97,000 as at 31 December 2013 (2012: £60,000).

 

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 bad debt losses arising from supplier default will be recovered through an increase in future allowed income. Losses incurred to date have not been material. Included in the Company's use of system ("UoS") receivables are debtors with a carrying value of £nil, which have been placed into administration (2012: £nil).

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

15. TRADE AND OTHER RECEIVABLES - continued

 

Amounts receivable from sale of goods and services

 

Sales of goods and services comprise all income streams which are not classified as UoS income. Examples of non-UoS income streams would be service alterations/disconnections 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 (2012: 30 days). Interest is not generally charged on the trade receivables paid after the due date. An allowance for doubtful debts is made for debts past their due date based on estimated irrecoverable amounts from the sale of goods and services, determined by reference to past default experience.

 

Included in the Company's amounts receivable for goods and services balance are debtors with a carrying amount of £1,482,000 (2012: £592,000) which are past due at the reporting date and for which the Company has provided an irrecoverable amount of £240,000 (2012: £177,000) based on past experience. The Company does not hold any collateral over these balances. The average age of these receivables is 281 days (2012: 368 days).

 

Included in the Company's amounts receivable for goods and services balance are debtors with a carrying amount of £410,000 (2012: £258,000). These amounts are past due at the reporting date and the Company has not provided for any amounts as not being recoverable, because there has not been a significant change in credit quality and the amounts are still considered recoverable. The Company does not hold any collateral over these balances. The average age of these receivables is 62 days (2012: 57 days).

 

Ageing of past due but not impaired receivables

 

 

2013

2012

 

£'000

£'000

30-60 days

 

303

207

60-120 days

 

77

39

120-210 days

 

30

12

 

 

Total

 

410

258

 

 

 

Movement in the allowance for doubtful debts

 

 

2013

2012

 

£'000

£'000

At 1 January

 

177

208

Amounts utilised in the year

 

(189)

(87)

Amounts recognised in the statement of profit or loss

 

252

56

 

At 31 December

 

240

177

 

In determining the recoverability of the trade and other receivables, the Company considers any change in the credit quality of the trade and other receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk, other than in relation to UoS receivables, is limited due to the customer base being large and unrelated. Accordingly, the directors believe that there is no further credit provision required in excess of the allowance for doubtful debts.

 

Included in the allowance for doubtful debts are specific trade receivables, with a balance of £55,000 (2012: £101,000), which have been placed in administration. The impairment represents the difference between the carrying amount of the specific trade receivable and the present value of the expected liquidation dividend.

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

15. TRADE AND OTHER RECEIVABLES - continued

 

Categories of financial assets

 

 

2013

2012

 

£'000

£'000

 

Loans and receivables at amortised cost

 

48,450

81,459

 

 

Total financial assets

 

48,450

81,459

 

 

Non-current assets

 

2,548,241

2,384,557

Inventories

 

249

231

Prepayments and accrued income

 

7,275

6,082

 

 

Total non-financial assets

 

2,555,765

2,390,870

 

 

Total assets

 

2,604,215

2,472,329

 

 

16. CASH AND CASH EQUIVALENTS

2013 2012

£'000 £'000

Cash in hand - 21,054

Cash and cash equivalents comprise cash held at bank. The fair value of cash and cash equivalents is equal to their book value.

 

17. CALLED UP SHARE CAPITAL

 

 

2013

2012

 

No./£

No./£

Ordinary shares of £1 each

Allotted, called up and fully paid

 

290,000,000

290,000,000

 

 

The Company has one class of ordinary shares which carries no right to fixed income.

 

18. RESERVES

Retained

earnings

£'000

 

At 1 January 2013 496,047

 

Profit for the year

143,732

Dividends (40,000)

At 31 December 2013 599,779

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

19. TRADE AND OTHER PAYABLES

 

2013 2012

£'000 £'000

Current:

Payments on account 30,935 36,057

Trade creditors 4,185 3,585

Amounts owed to Group undertakings 451 425

 

Social security and other taxes

6,080

7,379

Other creditors 4,692 3,103

Deferred revenue 21,809 20,493

Accrued expenses 30,390 50,637

98,542 121,679

Non-current:

Deferred revenue 676,239 653,007

Aggregate amounts 774,781 774,686

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 of liabilities set out above is based on Level 1 inputs. Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. Invoices are paid at the end of the month following the date of the invoice. The Company has financial risk management policies in place to ensure that all payables are paid within the credit timeframe.

 

The following tables detail the remaining contractual maturities for the non-derivative financial liabilities. The tables have been drawn up based on the discounted cash flows of financial liabilities based on the earliest possible date on which the Company can be required to pay. The tables include both interest and principal cash flows.

 

Less than 3 months

3 months to 1 year

1 to 5 years

5+ years

Total

 

£'000

£'000

£'000

£'000

£'000

2013:

Non-interest bearing

 

45,798

-

-

-

45,798

Variable interest rate liability

 

49,367

-

-

-

49,367

Fixed interest rate liability

 

18,500

23,053

166,213

1,029,088

1,236,854

 

 

113,665 23,053 166,213 1,029,088 1,332,019

 

2012:

Non-interest bearing

 

65,129

-

-

-

65,129

Variable interest rate liability

 

138

-

-

-

138

Fixed interest rate liability

 

18,500

25,053

166,213

1,070,642

1,278,408

 

 

83,767 25,053 166,213 1,070,642 1,343,675

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

19. TRADE AND OTHER PAYABLES - continued

 

Categories of financial liabilities

 

 

2013

2012

 

£'000

£'000

Loans and payables at amortised cost

 

(782,950)

(731,148)

 

 

Total financial liabilities

 

(782,950)

(731,148)

 

 

Payments received on account

 

(30,935)

(36,057)

Income tax liabilities

 

(164,052)

(185,202)

Other taxes and social security

 

(6,080)

(7,379)

Accruals

 

(30,390)

(50,637)

Deferred Revenue

 

(698,048)

(673,500)

Provisions

 

(1,981)

(2,359)

 

 

Total non-financial liabilities

 

(931,486)

(955,134)

 

 

Total liabilities

 

(1,714,436)

(1,686,282)

 

 

Deferred Revenue

 

 

2013

2012

 

£'000

£'000

At 1 January

 

(673,500)

(650,735)

Additions

 

(44,832)

(41,630)

Amortisation

 

20,284

18,865

 

At 31 December

 

(698,048)

(673,500)

 

Deferred revenue represents contributions from customers made in advance towards distribution system assets. This income is released to the statement of profit or loss up to 45 years on a straight line basis, in line with the useful economic life of the distribution system assets.

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

20. BORROWINGS

 

The directors' consideration of liquidity, interest rate and foreign currency risk are described in the Strategic Report.

 

Book Value

Fair Value

 

2013

2012

2013

2012

 

£'000

£'000

£'000

£'000

Amounts owed to Group undertakings

 

18,318

-

18,318

-

Loans

 

755,304

724,035

837,226

848,250

 

 

773,622 724,035 855,544 848,250

 

The borrowings are repayable as follows:

On demand or within one year

 

79,645

30,418

79,645

30,418

After five years

 

693,977

693,617

775,899

817,832

 

 

773,622 724,035 855,544 848,250

 

Analysis of borrowings:

Short-term loan

 

31,049

140

31,049

140

Inter-company short-term loan

 

18,318

-

18,318

-

Bond 2020 - 9.25%

 

216,783

216,635

277,066

293,474

Bond 2035 - 5.125%

 

203,647

203,557

217,352

227,044

European Investment Bank 2022 - 4.133%

 

153,638

153,620

162,345

173,001

Bond 2032 - 4.375%

 

150,187

150,083

149,414

154,591

 

773,622 724,035 855,544 848,250

 

The fair value of the 2020, 2032 and 2035 bonds is determined with reference to quoted market prices. The directors' estimates of the fair value of the European Investment Bank and 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 fair value of short-term borrowings is equal to their book value. All loans are non-secured and are denominated in sterling.

 

The valuation of liabilities set out above is based on Level 1 inputs.

 

Interest on short-term loans and inter-company short-term loans is charged at a floating rate of LIBOR plus 1.25%, thus exposing the Company to cash flow interest rate risk. A 1% movement in interest rates would subject the Company to an approximate change in interest costs of £0.6 million per year. This is considered to be an acceptable level of risk. All other loans are at fixed interest rates and expose the Company to fair value interest rate risk.

 

The covenants associated with the 2035 bonds issued by the Company, include restrictions on the issuance of new indebtedness and the making of distributions dependent on the scale of the ratio of Senior Total Net Debt to Regulatory Asset Value ("RAV"). The definition of Senior Total Net Debt excludes any subordinated debt and any debt incurred on a non-recourse basis. In addition, it excludes interest payable, any fair value adjustments and unamortised issue costs.

 

The Company's Senior Total Net Debt as at 31 December 2013 was £750.2 million. Using the RAV as at March 2014, as outlined by Ofgem in its Final Proposals for Distribution Prices published in December 2009, and up rating for the effects of movements in the value of the Retail Prices Index (RPI) gives an approximation for the RAV as at 31 December 2013 of £1,525.4 million. The Senior Total Net Debt to RAV ratio for the Company is therefore estimated at 49.2%.

 

At 31 December 2013, the Company had available £63.0m (2012: £79.0m) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met.

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

21. PROVISIONS

 

2013 2012

£'000 £'000

Provisions 1,981 2,359

Analysed as follows:

Current 1,274 1,637

Non-current 707 722

1,981 2,359

 

 

 

Claims

Other

Total

 

£'000

£'000

£'000

At 1 January 2013

 

1,171

1,188

2,359

Utilised/paid in the year

 

(1,131)

(950)

(2,081)

Charged to statement of profit or loss

 

835

868

1,703

 

 

At 31 December 2013

 

875

1,106

1,981

 

 

Claims: Provision has been made to cover costs arising from actual claims, which are not externally insured. Settlement is expected substantially within 12 months.

 

Other: Primarily consists of a provision for future safe disposal of transformers which contain oil contaminated with Polychlorinated Biphenyls (PCBs) and for an amount to cover claims made under section 74 of the New Road and Street Works Act 1991. Costs are expected to be incurred over the next 20 years.

 

22. DEFERRED TAX

 

Accelerated Tax Depreciation

Other

Total

 

£'000

£'000

£'000

At 1 January 2013

 

169,151

(177)

168,974

Credit to statement of profit or loss

 

(23,151)

(3)

(23,154)

 

 

At 31 December 2013

 

146,000

(180)

145,820

 

 

 

 

£'000

£'000

£'000

At 1 January 2012

 

193,273

(183)

193,090

(Credit)/charge to statement of profit or loss

 

(24,122)

6

(24,116)

 

 

At 31 December 2012

 

169,151

(177)

168,974

 

 

Other comprises provisions and employee expenses deductible for tax on a paid basis and claims for hold over relief.

 

23. EMPLOYEE BENEFIT OBLIGATIONS

 

Introduction

 

The Company contributes to two pension schemes, which are operated by Northern Electric plc on behalf of the participating companies within the Northern Powergrid Group. Those pension schemes are:

 

- The Northern Powergrid Group of the ESPS (the "DB Scheme"); and

- The Northern Powergrid Pension Scheme.

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

23. EMPLOYEE BENEFIT OBLIGATIONS - continued

 

The Northern Powergrid Pension Scheme was introduced for new employees of the Northern Powergrid Group from July 1997 and is a money purchase arrangement accounted for as a defined contribution scheme.

 

The DB Scheme is a defined benefit scheme for directors and employees, which provides pension and other related retirement benefits based on final pensionable pay. The DB Scheme closed to staff commencing employment with the Northern Powergrid Group on or after 23 July 1997. Members who joined before this date, including some Protected Persons under The Electricity (Protected Persons) (England and Wales) Pension Regulations 1990, continue to build up future pension benefits.

 

Under the DB Scheme, employees are typically entitled to annual pensions on retirement at age 63 of one-eightieth of final pensionable salary for each year of service plus an additional tax-free cash lump sum at retirement of three times pension. Benefits are also payable on death and following other events such as withdrawing from active service.

 

The DB Scheme is a defined benefit plan that shares the risk between various entities under common control. There is no contractual agreement or stated policy for charging the defined benefit cost for the plan as a whole to individual companies within the Northern Powergrid Group and accordingly the Company accounts for the DB Scheme as if it were a defined contribution scheme.

 

The Company does not provide any other post-retirement benefits to members of the DB Scheme.

 

Unless otherwise stated, disclosures within this note are representative of the Northern Powergrid Group as a whole and not the Company on an individual basis as the Company accounts for the DB Scheme as if it were a defined contribution 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 Northern Electric plc, 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 interest of all relevant beneficiaries and are responsible in particular for the asset investment policy plus the day-to-day administration of the benefits payable. They also are responsible for jointly agreeing with the Principal Employer the level of contributions due to the DB Scheme.

 

Funding requirements

 

UK legislation requires that pension schemes are funded prudently (i.e. to a level in excess of the current expected cost of providing benefits). The last actuarial valuation of the DB scheme was carried out by the Group Trustees' actuarial advisors, Aon Hewitt, as at 31 March 2010. Such valuations are required by law to take place at intervals of no more than three years and, therefore, an actuarial valuation is currently ongoing with an effective date of 31 March 2013. Following each valuation, the Trustees and the Company must agree the contributions required (if any) to ensure the DB Scheme is fully funded over time on the basis of suitable, prudent assumptions. Contributions agreed in this manner constitute a minimum funding requirement.

 

Agreement was reached during June 2011 with the Group Trustees to repair the funding deficit of £276m as at 31 March 2010 over the 15 year period to 31 March 2025, subject to the actuarial assumptions adopted for the triennial valuation as at 31 March 2010 being borne out in practice. The agreement includes cash payments of £29.9m (of which £6.8m is borne by the Company) per annum over the period to 31 March 2015, made on a monthly basis, followed by an agreed profile of payments to be made over the remaining ten years of the recovery plan, as set out below:

 

1 April 2015 to 31 March 2016

 

£24.5m p.a.

 

1 April 2016 to 31 March 2023

 

£16.3m p.a.

 

1 April 2023 to 31 March 2025

 

£17.4m p.a.

 

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

23. EMPLOYEE BENEFIT OBLIGATIONS - continued

 

All contributions set out above are in 2010/11 prices and increase in line with increases in RPI over the period until they fall due. However, this recovery plan is currently under review as part of the actuarial valuation as at 31 March 2013.

 

The contributions payable by the Northern Powergrid Group to the DB Scheme in respect of future benefits, which are accruing, are 47.0% (for certain senior management) and 29.4% (for other employees) of pensionable pay. These contributions were determined as part of the 31 March 2010 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 Northern Electric plc as part of the 31 March 2013 valuation.

 

Under the rules of the DB Scheme, any future surplus in the DB Scheme may, following consultation with the Group Trustees, be allocated for the benefit of the members of the DB Scheme and/or the Principal and Participating Employers.

 

Pensions' Regulation

 

The UK pensions market is regulated by the Pensions Regulator whose key statutory objectives in relation to UK defined benefit plans are to:

 

-

 

protect the benefits of members;

 

-

 

promote and to improve understanding of the good administration; and

 

-

 

reduce the risk of situations arising which may lead to compensation being payable from the Pension Protection Fund (PPF).

 

 

The Pensions Regulator has various powers including the power to:

 

-

 

wind up a scheme where winding up is necessary to protect members' interests;

 

-

 

appoint or remove a trustee;

 

-

 

impose a schedule of company contributions or the calculation of the technical provisions where trustees and company fail to agree on appropriate contributions; and

 

-

 

impose a contribution where there has been a detrimental action against the scheme.

 

 

Reporting at 31 December 2013

 

For the purposes of this disclosure, the current and future pension costs of the Northern Powergrid Group have been assessed by Aon Hewitt, a qualified independent actuary, using the assumptions set out below, which the actuary has confirmed represent a reasonable best estimate of those costs. This review has been based on the same membership and other data as at 31 March 2010. 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 2010 have been adjusted to 31 December 2013. Those adjustments take account of experience over the period since 31 March 2010, 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 scheme approach retirement.

 

The Company pension cost for the year ended 31 December 2013 was £20.1m (2012: £18.6m).

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

23. EMPLOYEE BENEFIT OBLIGATIONS - continued

 

The principal assumptions used to calculate the liabilities under IAS 19 are set out below:

 

Main financial assumptions

 

2013

2012

 

% p.a.

% p.a.

RPI Inflation

 

3.15

2.80

Rate of long-term increase in salaries

 

3.15

2.80

Pension increases

 

3.05

2.80

Discount rate for scheme liabilities

 

4.40

4.40

 

The financial assumptions reflect the nature and term of the Scheme's liabilities.

 

Main demographic assumptions

 

2013

2012

Life expectancy for a male currently aged 60

 

27.1

27.9

Life expectancy for a female currently aged 60

 

28.8

28.1

Life expectancy at 60 for a male currently aged 45

 

28.8

29.6

Life expectancy at 60 for a female currently aged 45

 

30.6

29.8

Proportion of pension exchanged for additional cash at retirement

 

10%

0%

 

The mortality assumptions are based on recent actual mortality experience of DB Scheme members and allow for expected future improvements in mortality rates.

 

The DB Scheme's funds are invested in the following assets:

 

Asset allocation

 

2013

2012

 

£m

£m

Developed market equity

 

290.7

288.1

Emerging market equity

 

12.1

15.7

Property

 

112.2

103.4

Reinsurance

 

61.8

59.4

Listed infrastructure

 

66.8

0.0

Investment grade corporate bonds

 

331.2

330.7

Other debt

 

37.2

33.3

Fixed interest gilts

 

21.6

16.4

Index-linked gilts

 

358.7

357.9

Cash

 

18.4

17.9

 

 

Total

 

1,310.7

1,222.8

 

 

The fair values of the above equity and debt instruments are determined based on quoted market prices in active markets whereas the fair values of properties are not based on quoted prices in active markets.

 

As at 31 December 2013, the fair value of the DB Scheme's assets, which related to self-investment, amounted to £Nil (2012: £Nil).

 

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

23. EMPLOYEE BENEFIT OBLIGATIONS - continued

 

Changes to the present value of the defined benefit obligation of the Northern Powergrid Group during the year

 

2013

2012

 

£m

£m

 

Opening defined benefit obligation

 

1,259.3

1,141.8

 

 

Current service cost

 

13.9

12.2

Interest expense on defined benefit obligation

 

54.6

53.9

Contributions by DB Scheme participants

 

1.6

1.8

Actuarial gains on DB Scheme liabilities arising from changes in demographic assumptions

 

(23.2)

-

Actuarial losses on DB Scheme liabilities arising from changes in financial assumptions

 

57.6

83.3

Actuarial losses on DB Scheme liabilities arising from experience

 

10.7

17.0

Net benefits paid out

 

(53.2)

(50.7)

Past service cost (including curtailments)

 

-

-

Net increase in liabilities from disposals/acquisitions

 

-

-

Settlements

 

-

-

 

 

Closing defined benefit obligation

 

1,321.3

1,259.3

 

 

 

Changes in the fair value of DB Scheme assets of the Northern Powergrid Group during the year

 

2013

2012

 

£m

£m

Opening fair value of DB Scheme assets

 

1,222.8

1,128.2

 

 

Interest income on DB Scheme assets

 

53.8

54.1

Re-measurement gains on DB Scheme assets

 

36.4

40.3

Contributions by the employer

 

50.8

50.1

Contributions by DB Scheme participants

 

1.6

1.8

Net benefits paid out

 

(53.2)

(50.7)

Administration costs incurred

 

(1.5)

(1.0)

Net increase in assets from disposals/acquisitions

 

-

-

Settlements

 

-

-

 

 

Closing fair value of DB Scheme assets

 

1,310.7

1,222.8

 

 

 

Actual return on DB Scheme assets

 

2013

2012

 

£m

£m

Interest income on DB Scheme assets

 

53.8

54.1

Re-measurement gain on DB Scheme assets

 

36.4

40.3

 

 

Actual return on DB Scheme assets

 

90.2

94.4

 

 

 

Profile of the DB Scheme

 

The DBO includes benefits for current employees, former employees and current pensioners. The overall duration of the DB Scheme's obligation was assessed to be about 17 years based on the provisional results of the 31 March 2013 funding valuation. This is the weighted-average time over which benefit payments are expected to be made.

 

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

23. EMPLOYEE BENEFIT OBLIGATIONS - continued

 

Profile of the DB Scheme - continued

 

Approximately 40% of the DBO is attributable to current employees (duration about 23 years), 10% to former employees (duration about 24 years) and 50% to current pensioners (duration about 12 years).

 

Risks associated with the DB Scheme

 

The DB Scheme exposes the Northern Powergrid Group to a number of risks, the most significant of which are:

 

Risk

 

Description

 

Mitigation

 

 

Volatile 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 holds a significant proportion (29%) of its assets in growth assets (such as equities) which, although expected to outperform corporate bonds in the long-term, create volatility and risk in the short-term.

 

To avoid concentration risk, the allocation to UK equity is restricted to approximately 35% of the total equity allocation. The allocation to growth assets is monitored to ensure it remains appropriate given the DB Scheme's long-term objectives. The Trustees regularly review the strategy in respect of growth seeking assets and have recently diversified some return-seeking assets from equities into Reinsurance and Listed Infrastructure to reduce overall risk.

 

 

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.

 

The DB scheme also holds a substantial proportion of its assets (35%) as bonds, which provide a hedge against movements in the DBO. There are some differences in the credit quality of bonds held by the DB Scheme and the bonds analysed to decide the DBO discount rate, such that there remains some risk should yields on different quality bond/swap assets diverge.

 

 

Inflation 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

 

The DB Scheme holds around 30% in UK government index-linked bonds which provide a hedge against higher than expected inflation increases of the DBO (rising inflation will increase both the DBO and the value of the index-linked bond portfolio).

 

 

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.

 

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.

 

 

 

 

 

 

 

Life expectancy

 

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.

 

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.

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

23. EMPLOYEE BENEFIT OBLIGATIONS - continued

Other risks

 

There are a number of other risks associated with the DB Scheme including operational risks (such as paying out the wrong benefits), legislative risks (such as the government increasing the burden on pension schemes through new legislation) and other demographic risks (such as a higher proportion members dying than assumed with a dependant eligible to receive a survivor's pensions 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. The UK Government has announced its intention to ensure that these benefits, which currently pay out at different levels for men and women, are gender-equalised in accordance with sex-discrimination legislation. This would increase the DBO but it is not possible to fully quantify the impact of this change at this stage. However, it could lead to an increase in the order of 2% to the DBO for a typical scheme.

 

Sensitivity to key assumptions

 

The key assumptions used for IAS 19 are discount rate, inflation and mortality. If different assumptions were used, it could have a material effect on the results of the Northern Powergrid Group. The sensitivity of the results to these assumptions is as follows.

 

Changes in DBO

 

Revised DBO

 

Current Figures

 

1,321.3

 

 

Following a 10 bps decrease in the discount rate

 

22.7

 

1,344.0

 

Following a 10 bps increase in the discount rate

 

(22.3)

 

1,299.0

 

Following a 10 bps increase in the inflation assumption

 

14.4

 

1,335.7

 

Following a 10 bps decrease in the inflation assumption

 

(21.3)

 

1,300.0

 

Following a 1 year increase in life expectancy

 

40.4

 

1,361.7

 

Following a 1 year decrease in life expectancy

 

(41.0)

 

1,280.3

 

 

The sensitivity information shown above has been prepared using the same method as adopted when adjusting the results of the latest funding valuation to the statement of financial position date. This is the same approach as has been adopted in previous periods.

 

24. RELATED PARTY DISCLOSURES

 

The Company has received loans from other companies in the Northern Powergrid Group. The total interest included in finance costs in the statement of profit or loss for the year ended 31 December 2013 was £319,000 (2012: £1,751,000). Included within borrowings is £18,336,000 as at 31 December 2013 (2012: £nil) in respect of these loans.

 

Interest on loans from Northern Powergrid Group companies is charged at a commercial rate

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

24. RELATED PARTY DISCLOSURES - continued

 

The Company entered into transactions, in the ordinary course of business, with affiliated companies. Transactions entered into and trading balances outstanding at the year end were as follows:

 

Sales to related parties

Purchases from related parties

Amounts owed to related parties

Related Party

£'000

£'000

£'000

2013:

CE Insurance Services Limited

-

761

-

Integrated Utility Services Limited

113

123

-

Integrated Utility Services Limited (registered in Eire)

-

117

18

Northern Electric plc

-

3,891

-

Northern Powergrid (Northeast) Limited

7,697

13,832

-

Vehicle Lease and Service Limited

-

3,909

433

 

7,810 22,633 451

 

2012:

CE Insurance Services Limited

 

-

846

-

Integrated Utility Services Limited

 

73

282

-

Northern Electric plc

 

-

4,254

-

Northern Powergrid (Northeast) Limited

 

6,231

12,735

-

Vehicle Lease and Service Limited

 

-

3,870

425

 

 

6,304 21,987 425

 

Sales and purchases from related parties were made at commercial prices.

 

The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of amounts owed by related parties

 

25.

RECONCILIATION OF PROFIT BEFORE INCOME TAX TO CASH GENERATED FROM OPERATIONS

 

2013 2012

£'000 £'000

Profit before income tax 158,806 157,847

Depreciation charges 81,174 76,959

Profit on disposal of fixed assets (249) (352)

Amortisation of deferred revenue (20,284) (18,865)

(Decrease)/increase in provisions (378) 128

Finance costs 40,335 40,499

Finance income (100) -

259,304 256,216

 

(Increase)/decrease in inventories (18) 258

Decrease/(increase) in trade and other receivables 11,374 (583)

Increase/(decrease) in trade and other payables 405 (985)

 

 

 

Cash generated from operations

271,066

254,906

 

 

NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER: 04112320)

 

NOTES TO THE FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

 

26. ULTIMATE CONTROLLING PARTY

 

The immediate parent undertaking of Northern Powergrid (Yorkshire) plc is Yorkshire Electricity Group plc. The ultimate controlling party and ultimate parent undertaking of Yorkshire Electricity Group plc is Berkshire Hathaway, Inc., a company incorporated in the United States of America.

 

Copies of the group accounts of Berkshire Hathaway, Inc. (the parent undertaking of the largest group preparing group accounts) which include Northern Powergrid (Yorkshire) plc and the group accounts of Northern Powergrid Holdings Company, the smallest parent undertaking to prepare group accounts in the UK, can both be obtained from the Company Secretary, Northern Powergrid Holdings Company, Lloyds Court, 78 Grey Street, Newcastle upon Tyne, NE1 6AF.

 

This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
FR UBSWRSSASRRR
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