Nthn.elec.prf Regulatory News (NTEA)

The following regulated information, disseminated pursuant to DTR 6.3.5, comprises the Annual Report and Accounts of Northern Electric plc for the year ended 31 December 2016.

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

www.hemscott.com/nsm.do

The 2016 Annual Report and Accounts are also available on the website

http://www.northernpowergrid.com/document-library/financial

Enquiries:

Jenny Riley 01977 605155

REGISTERED NUMBER: 02366942 (England and Wales)

GROUP STRATEGIC REPORT, REPORT OF THE DIRECTORS AND

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016

FOR

NORTHERN ELECTRIC PLC

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

CONTENTS OF THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2016

Page

NORTHERN ELECTRIC PLC

COMPANY INFORMATION

FOR THE YEAR ENDED 31 DECEMBER 2016

DIRECTORS: R Dixon

T E Fielden

J M France

P J Goodman

P A Jones

REGISTERED OFFICE: Lloyds Court

78 Grey Street

Newcastle upon Tyne

NE1 6AF

REGISTERED NUMBER: 02366942 (England and Wales)

AUDITOR: Deloitte LLP

Chartered Accountants and Statutory Auditor

Newcastle upon Tyne

United Kingdom

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

The directors present the annual reports and accounts of Northern Electric plc (the "Company") and its subsidiary companies (together the "Group") for the year ended 31 December 2016, which includes the Strategic Report, the Report of the Directors and the audited financial statements for that year. Pages 2 to 20 inclusive comprise the Strategic Report and pages 21 to 27 comprise the Report of the Directors, which have been drawn up and are presented in accordance with the Companies Act 2006.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

BUSINESS MODEL

The Company is part of the Northern Powergrid Holdings Company group of companies (the "Northern Powergrid Group") and acts as a holding company of Northern Powergrid (Northeast) Limited ("Northern Powergrid"), Integrated Utility Services Limited ("IUS") and Northern Powergrid Metering Limited ("Northern Powergrid Metering"). Northern Powergrid is a distribution network operator ("DNO"), which distributes electricity, at voltages of up to 132 kilovolts (kV), to approximately 1.6 million customers connected to its electricity distribution network within its distribution services area in the northeast of England. IUS provides engineering contracting services and Northern Powergrid Metering rents meters to energy suppliers.

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

BUSINESS MODEL - continued

STRATEGIC OBJECTIVES

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

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

REVIEW OF THE YEAR

The Group delivered a satisfactory financial performance for the year, benefitting from a further change to the rate of taxation, settlement of a prior year tax claim, and continued effective cost control, with revenue at £385 million being broadly in line with the previous year.

Throughout 2016, Northern Powergrid continued its policy of enhancing the efficiency of its electricity distribution network by investing £181.3 million in order to deliver the improvements required to maintain an effective supply of electricity to customers. As was the case in 2015, the resilience of the network was tested during the year by several major weather events, including intense lightning storms, periods of very heavy rain and high winds. Northern Powergrid's major incident management processes were implemented in these instances to ensure that interruptions to customers were minimised. The on-going investments in the network, including those to assist with the management of environmental incidents, and the responses put in place to mitigate the effects of such events, supported Northern Powergrid's achievements made against the incentive scheme operated by the Office of Gas and Electricity Markets ("Ofgem") for quality of service targets with the number of customer minutes lost and customer interruptions both below the target levels.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

REVIEW OF THE YEAR - continued

Northern Powergrid remained focussed on the affordability, availability and reliability of the service it provides. Accordingly, the way in which Northern Powergrid interacted with and supported its stakeholders continued to be important. The results of Ofgem's stakeholder engagement and customer vulnerability submission were disappointing. When compared against the other five DNOs, the Northern Powergrid Group ranked in fifth place (a decline from its previous position of second). In response, the opportunity was taken to further engage with vulnerable customers, those who struggle with fuel poverty, customers who require priority services and those whose welfare could be affected in the event of an interruption to supply. Collaboration with partners including the Children's Society, the British Red Cross and Citizens Advice was undertaken to deliver enhanced support to those groups with a greater need for assistance.

Customer satisfaction continued to be a management priority and therefore multi-year programmes remained in place throughout the year to embed improvements into the overall customer experience. To further develop the quality of customer conversations, defined performance standards were implemented, supported by a pilot recognition and reward scheme for employees. The Customer Relationship Management ("CRM") IT system was further deployed allowing faster responses with a greater degree of accuracy for the management of customer complaints, general enquiries services and service alterations. The use of technology (including the CRM system) was further embedded to enhance the ways in which customers can make contact with Northern Powergrid. Due to the initiatives in place, with Northern Powergrid writing, emailing and sending text messages to remind customers 72 hours and then 24 hours ahead of any planned power cuts taking place, further progress was made during the year to improve the level of customer satisfaction relating to planned power cuts.

The effect of Northern Powergrid's operations on the local landscape, and upon wildlife and birds remained important and, accordingly, progress continued in the implementation of measures designed to protect the environment. Incidents reportable to the Environment Agency, including oil spills and leaks from Northern Powergrid's assets and SF6 gas discharges from electrical plant, were all significantly better than target. Given the impact on the environment of such events, Northern Powergrid remains committed to reducing losses from fluid-filled cables and, during the ED1 period, plans to replace a significant number of those assets on a phased and prioritised basis.

The health and safety of the Group's employees, its contractors and customers continued to be a key priority in 2016, with the focus on delivering a safety and health improvement plan designed to accomplish a world class safety performance. Education concerning the dangers of coming into contact with the network's assets and how people can identify these dangers remained a firm commitment. A number of approaches were therefore deployed during the year to communicate health and safety messages to the Group's employees and stakeholders, including delivering regional school safety presentations, running operational seminars for the Group's engineers and circulating regular safety newsflashes to all staff. The Group also placed emphasis on the identification of significant health and safety risks and allocating the necessary resource to put actions in place to mitigate those risks. Driving the Group's vehicles has been identified as one such risk, and therefore a robust road risk management plan was expanded throughout 2016. This included the completion of the programme to install a telematics system in all fleet vehicles to increase driver and vehicle safety and to assist with vehicle safety checks.

IUS' external revenue in 2016, at £27.7 million was £3.2 million lower than 2015 mainly due reduction in revenues from Rail contracts partially offset by an increase in other contracts.

Northern Powergrid Metering's performance was encouraging, with it delivering the contracts secured with energy suppliers for the provision of smart meters in the United Kingdom and Ireland, and continuing to pursue business development opportunities with other energy suppliers in advance of the full smart meter roll-out programme.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

CORE PRINCIPLES

Financial strength

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

The ED1 price control provides the Group with some stability in terms of its income until 31 March 2023. The ED1 price control has been set for eight years with provision for a mid-period review of the outputs that Northern Powergrid is required to deliver and, in that respect, Northern Powergrid recognises that it needs to continue to show that it is delivering reliable services to its customers, while operating in an efficient and effective manner.

Key aspects of financial performance for the 2016 year were as follows:

Revenue

The Group's revenue at £384.9 million was £1.5m lower than the prior year as lower distribution use of system and contracting revenues were partially offset by increased smart meter rental volumes. The distribution use of system revenue reduction was due to tariffs introduced with effect from the start of the ED1 period.

Operating profit and position at the year end

The Group's operating profit at £181.2 million was £15.0 million lower than the prior year mainly due to reduction in revenues and higher depreciation and amortisation charges.

The consolidated statement of financial position on pages 31 and 32 shows that, as at 31 December 2016, the Group had total equity of £974.8 million. The directors consider the Group to have a strong statement of financial position which, when coupled with the preference of its parent company, Berkshire Hathaway Energy Company ("Berkshire Hathaway Energy"), for operating with lower levels of debt than equivalent companies in the sector, creates a stable base for continued strong performance into ED1 by Northern Powergrid.

Finance costs and investments

Finance costs net of investment income at £37.8 million were £3.2m higher than the prior year reflecting higher borrowings.

Taxation

The effective tax rate in the year was 5.0%. The effective tax rate before adjusting for the impact of the changes in tax rates by the Finance Act 2016 and agreement of a prior year tax claim would be 19.9%. Details of the income tax expense are provided in Note 7 to the accounts.

Results and dividends

The Group made a profit after tax for the year of £136.7 million (2015: £144.8 million). An interim dividend of £100 million was paid during the year (2015: £20.6 million). The directors recommended that no final dividend be paid in respect of the year to 31 December 2016. Other comprehensive income for the year net of income tax, was a loss of £70.5m (2015: £2.5m loss).

Share capital and debt structure

There were no changes to the Company's share capital or debt structure during the 0year.

Cash flow

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

Movements in cash flows were as follows:

Operating activities: Cash flow from operating activities at £168.9 million was £42.4 million higher than the previous year, mainly as a result of higher cash profits, favourable movements in working capital and lower tax paid.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

Financial strength - continued

Investing activities: Net cash used in investing activities at £214.8 million was £9.6 million lower than the previous year, reflecting lower capital expenditure partially offset by lower receipt of customer contributions.

Financing activities: The net cash used in financing activities at £37.5 million was £16.3 million higher than £21.2 million inflow in the previous year, reflecting net movements in borrowings required to fund business operations.

Liquidity risk

As at 31 December 2016, Northern Powergrid had access to £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. This expires on 30 April 2020. Northern Powergrid expects to raise further facilities, as required, at that time.

In addition, Northern Powergrid has access to further short-term borrowing facilities provided by YEG and to a £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 Group's ability to raise appropriate levels of finance in the future, given its investment grade issuer credit rating and the fundamental financial strength and nature of its business.

Interest rate risk

The Group is financed by long-term borrowings at fixed rates and has access to short-term borrowing facilities at floating rates of interest. As at 31 December 2016, 100% of the Group's long-term borrowings were at fixed rates and the average maturity for these borrowings was 12 years.

Currency risk

No material currency risks are faced by the Group.

Pensions

The Company is the principal employer of the Northern Powergrid Group of the Electricity Supply Pension Scheme (the "Scheme"), a defined benefit scheme. Full details of the Company's commitments to the Scheme and the associated deficit repair payments are provided in Note 24 to the accounts.

Companies in the Group also participate in the Northern Powergrid Pension Scheme, which is a defined contribution scheme.

Insurance

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

Customer service

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

Customer service improvements are a priority for Northern Powergrid, which, in recent years had been consistently ranking in the lower half of Ofgem's customer service league tables. Northern Powergrid has a long-term goal to improve this position and has a multi-year programme of actions in place to support improvements to the overall customer experience.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

Customer service - continued

Customer satisfaction with Northern Powergrid's response to unplanned power cuts showed gradual improvement in the year and the focus remains on improving restoration times and proactively communicating more timely and accurate information to customers. Continuous improvements were made to the interactive voice response telephony system throughout the year to make it easier for customers to talk to a customer service advisor and to route their calls appropriately. Customer satisfaction with planned power cuts also showed some improvement with Northern Powergrid continually enhancing the content of written customer communications and continuing to provide a text and email service to remind customers 72 hours and then 24 hours ahead of the planned power cut taking place.

A framework was introduced during 2016 to define the high standards required of our staff when interacting with our customers, supported by a pilot recognition and reward scheme as well as a performance management structure.

Northern Powergrid has continued to invest in improving the reliability of under-performing parts of the distribution network by identifying "hot spots" of substandard network performance and taking specific action to address the issues in those areas. In the customer service support areas, further investment has been directed towards information technology with the continued deployment of the new CRM system for customer complaints, additional general enquiries services and service alterations, to both improve the self-service offering and provide quicker and more accurate information to customers with workflows automatically routed within both Northern Powergrid and its contractors. This technology will enable customers to communicate with Northern Powergrid in a range of accessible and easy ways across several channels.

During the year Northern Powergrid has continued to build on the industry-leading communications and engagement approaches used to support its business plan and maintains a number of engagement channels. Independently chaired expert panels continue to play a key role in challenging Northern Powergrid's plans, monitoring its performance and helping to deliver innovative initiatives and services. Guided by these panels, Northern Powergrid has been able to direct effort towards public meetings in the operating zones, community energy workshops aimed at enhancing the take-up of low-carbon technologies and wider collaborations such as with other utilities via Infrastructure North. The feedback received as part of the stakeholder engagement process helped Northern Powergrid to further develop its customer experience improvement and social obligations programme.

Northern Powergrid recognised that the evolving nature of the environment and the level of customer service provided in respect of new connections to the network required additional significant focus and, as such, initiated a fundamental business process re-engineering review of this area of the business. Further details regarding the connections activity in the year are provided under "Connections to the network" below.

The single emergency number, 105, went live in September 2016, providing customers with a free national easy to remember phone number. During the winter period of 2016, approximately 28% of all inbound calls relating to power cuts were received via the 105 number, calls that previously would all have been made to Northern Powergrid's Freephone contact numbers.

In May 2016, Northern Powergrid put forward its stakeholder engagement and customer vulnerability submission to Ofgem in respect of its work during the year. This included initiatives such as expanding the role of digital solutions in providing customer services and the enhancement of Northern Powergrid's relationship with some voluntary sector organisations, with which it works closely in developing and delivering certain services particularly in respect of those customers on Northern Powergrid'ss Priority Services Register. Following the submission to Ofgem's panel, the position of Northern Powergrid in the context of the wider DNO group dropped from second place to fifth. The outcome was disappointing and in response to Ofgem's feedback some changes were initiated.

Under the Broad Measure of Customer Satisfaction, an independent market research company carried out telephone surveys with Northern Powergrid's customers to find out how satisfied they were with the services provided. During the year, surveys were carried out with a number of customers who had contacted Northern Powergrid regarding an unplanned or a planned power cut, had requested a price quotation and a subsequent connection, or had a general enquiry where a service had been provided or a job completed. Northern Powergrid recorded an overall satisfaction score of 86.4%.for the financial year and expects that the customer experience improvement plan, including the range of initiatives noted on pages 6 and 7, will improve the services provided to customers and so increase the satisfaction ratings year-on-year.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

Customer service - continued

While recognising that its customer service performance can continually be improved, Northern Powergrid made significant progress during the year ameliorating its overall customer satisfaction scores.

Connections to the Network

During the year, Northern Powergrid continued to deliver its action plans to improve the connections services provided to its customers, whilst also actively facilitating the development of competition from independent connections providers ("ICPs"). Northern Powergrid continued to engage regularly with its connections customers both in groups and individually, by holding monthly customer surgeries, twice yearly customer stakeholder events and contributing to national stakeholder forums and events.

There were three main areas of development in Northern Powergrid's connections business during the year: the introduction of the new Competition in Connections Code of Practice, compliance with which became a licence condition with effect from the end of October 2015, the introduction of the full Incentive on Connections Engagement ("ICE") regime in April 2015 and the introduction of a customer service improvement programme to deliver improvements in customer satisfaction for connections customers.

The delivery of the customer satisfaction improvement programme continued to evolve during 2016, with its focus being in response to actions derived from customers' feedback obtained from weekly Ofgem telephone surveys. The programme is designed to support Northern Powergrid's goal to be the leading provider of customer service within the electricity distribution sector.

Northern Powergrid participated with other DNOs in the development of the new Competition in Connections code of practice and implemented the required new processes, including the provision of dual quotations, enabling ICPs to self-determine and approve points of connection to the network, and simplifying the authorisation process for ICPs' operational staff.

The start of the ED1 period saw the introduction of ICE in respect of customers requiring larger connections to the network, so that the needs of those customers can be met more effectively. Under ICE, Northern Powergrid is required to submit a customer service improvement work plan for the forthcoming regulatory year at the end of April, followed by a comprehensive "looking back and forward" report commenting on the actions delivered in the previous year and future actions proposed in the service improvement plan. Northern Powergrid worked throughout the year to deliver those actions and continued to engage actively with customers through both informal and formal stakeholder events.

Corporate responsibility

The Group as a whole places significant value on the relationships that it has with its customers and other stakeholders and relating to Northern Powergrid in particular, also understands the importance of ensuring a secure and safe power supply for its customers and their local communities. To further embed these values, Northern Powergrid has developed a vision to maximise the value of contact with customers, especially those who are vulnerable and hard to reach, while ensuring that all stakeholders have the opportunity to influence the local and national energy agenda through effective engagement. This vision applies Ofgem's feedback to Northern Powergrid in the Stakeholder Engagement and Consumer Vulnerability review directed at a cohesive approach to customer experience; consumer vulnerability and stakeholder engagement. Northern Powergrid has made a commitment to tailor and enhance the support provided for more vulnerable and hard to reach customers and to ensure an optimum overall customer experience. In addition, through effective engagement, stakeholders can shape and influence Northern Powergrid's agenda and have the opportunity to help shape and prioritise plans according to customer preference.

Northern Powergrid continued to work closely with key partners such as the Environment Agency, the local authorities and the local resilience forums so that it can respond quickly to significant faults on, or threats to, the network. An example of this collaboration in the year included the cascade of the new national '105' number, designed to make it easier for partners and customers to quickly get in touch to report a problem. Northern Powergrid has well-established emergency procedures that are implemented when customers are without power for some time and, as such, Northern Powergrid responded well to the significant weather-related incidents, which affected the distribution network during the year.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

Customer service - continued

To address customer concerns and resolve any complaints, Northern Powergrid utilises its customer ambassadors and customer liaison officers, who are allocated to each of its operating zones, Dedicated Priority Service Register co-ordinators contact our vulnerable customers to offer support during and after a power cut. Support may include liaising with staff from the British Red Cross who check on the welfare of the customer.

Northern Powergrid has developed its support for vulnerable customers based on market research which defined where and what assistance was most needed. This work has been supported by Northern Powergrid's Social Issues Expert Group which comprises external experts and advises on service improvements. Membership of the internal Social Responsibility Management Group has been widened to include more business representatives to help develop this programme. Northern Powergrid continued to campaign to promote the Priority Services Register to eligible customers and now has a clear view of service need profiles for each customer to inform the appropriate priority service response. Northern Powergrid has undertaken a comprehensive data cleanse process for the Register and developed a proactive contact programme to routinely renew records and ensure that the quality of the information held on the register and the services offered to priority services customers continue to improve.

The Northern Powergrid Group has maintained its support to charitable organisations through sponsorship and the "Safety Champions" initiative, which is aimed at enhancing safety performance in the operational zones. Furthermore, a volunteering policy was implemented permitting employees to volunteer on schemes specifically designed to support the five priority areas within the Group's community investment programme.

Safety remains the Group's first priority and underpins all operations. During the year, Northern Powergrid continued to deliver initiatives that reached thousands of school children including its regular series of school safety presentations. Northern Powergrid participated in 'Crucial Crew', which is a schools-based safety initiative that teaches children to recognise and avoid situations that put them in danger.

Other programmes expanded during the year included Make the Grade in Energy, an education, skills and employability programme, Energy Heroes, a new educational programme, which uses the maths curriculum at primary school level to promote awareness of energy costs and ways of saving energy, and Green Doctors, a multi-partner project which helped to install energy saving measures and give advice to fuel poor households. New projects undertaken in the year included a partnership with the Children's Society, which aims to support young people and families through specialist support services, including work sessions and group activities, and the creation of an outreach worker in Citizens Advice to train volunteers to help more vulnerable people, particularly those with fuel debt.

Operational excellence

Northern Powergrid's core service continues to be providing and maintaining an efficient distribution network that delivers electricity effectively. During the year, £181.3 million was invested in the improvement of the distribution network. Northern Powergrid's inspection and maintenance regimes have ensured that the underlying health of the network assets has been sustained and none of the leading indicators used by Northern Powergrid suggest any diminishing performance in this respect in the future.

Ofgem's incentive scheme for quality of service provides a measure of the level of customer service. As a result of Northern Powergrid's continued and substantial investment in its distribution network, reliability has increased over a sustained period and Northern Powergrid has generally outperformed in relation to the customer service targets set by Ofgem in respect of customer interruptions ("CI") and customer minutes lost ("CML").

CML and CI are the key performance indicators used by Northern Powergrid to measure the quality of supply and system performance. Both indicators are measured on a Regulatory Year basis, which runs annually to 31 March, (being 31 March 2016 for the period covered by this report). CML measures the average number of supply minutes lost for every connected customer due to both planned and unplanned power cuts that last for three minutes or longer. CI measures the average number of supply interruptions per every 100 connected customers due to planned and unplanned power cuts that last for three minutes or longer.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

Operational excellence - continued

In respect of these key customer service performance indicators, the goal is to achieve performance that is below Ofgem's target number in respect of CML and CI. Northern Powergrid's currently reported performance for the Regulatory Year is as follows:

Consequently, performance in the Regulatory Year was better than Ofgem's target for both CML and CI and contributed to Northern Powergrid's improved customer service performance.

Operational activity

During 2016, Northern Powergrid continued to implement its approved network investment strategy, which is designed to deliver improvements in an efficient and cost-effective manner in order to improve the network's resilience. Northern Powergrid is committed to enhancing the reliability of the network such that fewer power cuts affect customers and, when power cuts do happen, they are shorter in duration.

Northern Powergrid's Operations structure is designed to respond effectively to the needs of customers and local communities by delivering improved performance standards in the restoration of power following power cuts and in new connection activities for small works. That structure is organised into operating zones around the main conurbation of Tyne and Wear, the industrialised area around the Tees and the rural areas of Northumberland, Durham and North Yorkshire, including the Dales, the Vale of York and the North Yorkshire Moors. The guaranteed standard for the restoration of supply within 12 hours of a power cut occurring came into effect from 1 April 2015 and Northern Powergrid's operational structure provides a localised focus to optimise response times in the event of a power cut.

During the year, Northern Powergrid continued to invest in technology to support its drive to improve response times, including the expansion of the automated power restoration system ("APRS") which operates within the existing network management system. In the event of a high-voltage fault, APRS analyses the information presented by intelligent assets installed on the network and, from that information, determines where the fault is located and executes switching to restore power to the 'healthy' network in a safe manner in under three minutes.

It is planned to enable APRS at 306 primary substations across the Northern Powergrid Group by the end of the ED1 period. Northern Powergrid expects, therefore, that APRS will significantly improve the service to customers due to the speed with which it can understand the information presented and then complete the switching required to restore power.

Northern Powergrid responded well to the major weather events that impacted its network during the year including as a result of three significant events which resulted in Northern Powergrid invoking its full major incident management plan on each occasion.

Storm Gertrude brought 70 to 80mph winds widely across the whole licence area on the 29 January 2016, causing almost 100 separate incidents, of which 50 were on the high-voltage network. Approximately 25,000 customers experienced power cuts mainly in Northumberland, County Durham and Tyne and Wear with 98% restored within 12 hours. Over 300 field staff were deployed in response with helicopter patrols assisting with fault location when the weather allowed.

An intense lightning storm crossed Northumberland and Tyne & Wear during the early hours of 16 September 2016. Due to the high overnight temperatures and atmospheric conditions, the localised lightning was very damaging and gave rise to over 86 faults on the high-voltage network affecting supplies to some 42,000 customers. 99% of affected customers' supplies were restored in 12 hours with only 17 customers being off supply for more than 24 hours.

Following a particularly dry month, heavy rain caused accelerated low-voltage cable failures across Northumberland, Durham, Tyne and Wear and Teesside on 22 November 2016. Due to the localised nature of each incident, overall numbers of customers affected were small, but the nature of repairs required meant that over 584 customers were off supply for more than 12 hours.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

Operational excellence - continued

Northern Powergrid's priorities during the year included delivering a significant level of capital expenditure on the network as in the previous year, a further reduction in the average level of fault repair work in progress and continued focus on the restoration times associated with both high-voltage and low-voltage power cuts, with high-voltage restoration performance averaging some 60.0 minutes (2015: 55.6 minutes), after allowing for severe weather incidents and other exemptions.

Northern Powergrid undertook various major projects during the year in support of those targets and as part of the investment strategy, including:

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

Employee commitment

Health and safety

The focus on health and safety continued to be of paramount importance for the directors, as it is for all employees. There is a continuous drive for improvement in safety performance through the setting of challenging goals and the pursuit of a comprehensive safety and health improvement plan, which reflects the Group's fundamental objective that every employee and contractor should go home uninjured and in good health after a productive day's work. The Northern Powergrid Group makes no compromise in respect of its health and safety obligations and centres its safety plans and systems on the principles found in companies with world class safety performance.

The Group's safety record over a number of years suggests that it is one of the safest in the sector in which it operates. There is an intention to improve performance still further and, in doing so, maintain its position over the coming years. Having identified issues that may pose an increased safety risk, such as metal theft and the roll-out of smart meters, the Group is implementing measures through its safety and health improvement plan that will build incrementally on the existing strong safety record and ensure that safety considerations are always part of the investment decision-making and appraisal process.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

Employee commitment - continued

The Northern Powergrid Group measures its health and safety performance in calendar years and operational incident performance for the year ended 31 December 2016 had significantly improved with only three switching-related incidents experienced on the high-voltage network against a target of five and compared with eight events recorded in 2015. As one of the key deliverables in the Northern Powergrid Group's safety and health improvement plan is to raise awareness and improve the concentration skills of its operational engineers and other employees, Northern Powergrid continued its operational audit programme of senior authorised persons such that the operational practices of 81% of senior authorised persons were verified during the year. The Northern Powergrid Group also delivered operational seminars, stand-down briefings, and regular safety newsflashes to staff in order to cascade information on safety trends, issues and incidents.

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

The Group experienced one lost time accident in 2016 as opposed to two in 2015. In addition the Group incurred one accident that required medical treatment (none during 2015). Performance in respect of preventable vehicle accidents was above the target for the year. The Group contributed to the strong safety performance of the Northern Powergrid Group and the long-term overall trend continued to compare well with that of the industry. None of those incidents reported gave rise to any significant safety-related risks.

In common with the Berkshire Hathaway Energy Group, the Northern Powergrid Group measures its safety performance in terms of the OSHA rate, which is a measure used in the United States to capture safety incidents down to minor levels of medical treatment, such as a stitch or the use of prescription pain killers. As part of its plan to reduce the OSHA rate across the group, Berkshire Hathaway Energy issues daily e-mail updates in respect of performance against its overall OSHA rate and preventable vehicle accident targets, which include information on incidents that have occurred. The Group's Director of Safety, Health and Environment also delivered updates using conference call facilities, which were available to the entire workforce, regarding performance and other safety-related issues.

Delivery of the various initiatives in the safety and health improvement plan also contributed to the Northern Powergrid Group achieving an OSHA rate of 0.30 against a target of 0.30, which equated to seven recordable incidents; this was one more than performance recorded in 2015. The Group recorded an OSHA rate for 2016 of 0.20 (2015: 0.20) against a target of 0.32.

As part of the safety and health improvement plan and in order to reinforce the operational safety values, Northern Powergrid continued to implement its cross-business operational assurance audit programme and its senior management field engagement programme in order to improve two-way communication on safety and other key business issues. During the year, a robust road risk management plan was effective which involved electronic driving licence checking, delivering road risk awareness workshops to new employees and using risk reduction tools such as online driver assessment and training followed by an on-road refresher training session if required. The driver training programme provides practical driving training to a targeted population of drivers and is the primary route to improving driver skills in the longer term. Recognising that driving is one of most hazardous activities undertaken on a daily basis, the programme has continued to expand further throughout 2016 via an interactive, web-based system designed to assess skills and then provide individual training plans to improve hazard perception and reinforce specific aspects of driving-related skills. The Group also completed a programme to install a telematics system in all of its fleet vehicles in order to support driver and vehicle safety by encouraging responsible and safe driving styles, assist with the completion and management of vehicle safety checks, and expedite investigation of vehicle accidents and incidents.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

Employee commitment - continued

During the year, Northern Powergrid received an Order of Distinction Award from the Royal Society for the Prevention of Accidents for achieving 15 consecutive Gold Awards in recognition of achievements in 2015 and for continued or improving standards of health and safety over a sustained period. The Group's OHSAS 18001 health and safety management systems successfully retained certification having been subject to a ten-day recertification audit by an external auditor.

The sickness absence rate across the Northern Powergrid Group for 2016 was 2.96% (2015: 2.71%).

Management structure

Operational management of Northern Powergrid and that of its affiliate, Northern Powergrid (Yorkshire) plc ("NPg Yorkshire"), is undertaken by a single senior management team with specific functional responsibilities. Those functional responsibilities are in respect of operations, safety, health and environment, asset management (including procurement), customer service, business development (including new connections to the network), policy and markets (including trading and innovation), regulation, human resources, organisation development, legal and finance (including property management, stakeholder engagement and information technology). Some of those functions also provide services across the Northern Powergrid Group.

Employees

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

The Northern Powergrid Group will continue to recruit trainees under its workforce renewal programme during ED1 taking account of the rate at which existing employees either leave or retire from the Northern Powergrid Group. A total of 71 new recruits joined the workforce renewal programmes during 2016. In addition, 73 trainees who were part of the workforce renewal programme in previous years graduated from their training programmes. In total, the Northern Powergrid Group recruited 95 new employees from the external market.

As a member of the Berkshire Hathaway Inc. group of companies, Berkshire Hathaway Energy sets high expectations for honesty and integrity in the conduct of all business activity. Consequently, the Group is committed to proper business conduct and has adopted the Berkshire Hathaway Energy code of business conduct, which details the commitment to ethics and compliance with the law, provides reporting mechanisms for known or suspected ethical or legal violations, and establishes minimum standards of behaviour expected of all employees. All employees must complete annual training on the code of business conduct. A "speaking up" policy is also in place so that members of staff are able to raise any instances of unethical acts, malpractice or impropriety. An additional process is also available to all staff via an international, anonymous help line operated by an independent company.

In order to support the welfare of its employees, the Northern Powergrid Group provides an employee assistance service to its staff via an independent company that supports over 350 organisations in the United Kingdom. The programme is a confidential, self-referral counselling and information service to assist with personal or work-related problems that may be affecting health, wellbeing or performance and is available 24 hours a day, 365 days a year. The services available include health, wellbeing and family-care information, financial information and debt counselling, and legal guidance. Working in partnership with its occupational health provider, the Northern Powergrid Group is delivering a long-term strategic programme aimed at improving the health of its staff.

Progress continued to be made during the year on the key priorities in the human resources and organisational development functions, including recruitment, employee engagement, and performance management and development. Throughout the year, the Group continued to set and uphold the promotion of high standards of probity among staff. In addition, the Group's organisational structure has been developed to control business units and to delegate authority and accountability, having regard to acceptable levels of risk.

As at 31 December 2016, the Group employed 1,238 staff (2015:1,297)

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

Environmental respect

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

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

The most recent visit was a surveillance assessment carried out by Lloyd's Register Quality Assurance in October 2016. The assessment reported the continued improvement made to the environmental management system over the past three years. There were no non-conformances noted and, after a rigorous three-day surveillance audit, continued certification was recommended and subsequently confirmed.

Procedures and processes were reviewed and developed in the year to improve the effectiveness of the environmental management system. Operational controls at depots have also significantly improved, which has supported the reduced number of minor non-conformances raised at recent surveillance visits, with zero minor non-conformances reported in 2016. In the event that fluid leakages do occur, the Group has in place an emergency incident response support contract with a specialist service provider, under which 24-hour environmental incident assistance is provided, including contamination mitigation, remediation and incident-validation reporting.

Improvements in support of Northern Powergrid's environmental policy objectives continued to focus on replacing selected fluid-filled cable sections with non-fluid polymeric equivalents, replacing oil-filled circuit breakers with vacuum and sulphur hexafluoride gas-filled units at outdoor substations to reduce the potential for oil leakage and using gas tracer technology to locate cable fluid leaks quicker, where it was practicable to do so. The Group also provided environmental awareness training for staff via an online system to avoid the need for travelling to central training locations. These improvements support Northern Powergrid in delivering sustained environmental performance, which it measures on a calendar year basis, and, in the year ended 31 December 2016, only five incidents were reportable to the Environment Agency, which was significantly better than the target of seven. Oil spills and leaks from Northern Powergrid's assets were under the target of 17,142 litres by 1% with a loss of 17,044 litres and SF6 gas discharges from electrical plant were also under the target of 28 kilogrammes by 49% with a loss of 14 kilogrammes.

During the year, work continued with many of the Group's key stakeholders, including the Environment Agency, to enhance the advanced environmental management processes already in place and, in 2017, the Group plans to maintain this progress so that the impact on the environment in which it works is reduced and the most effective ways of doing so are utilised. Northern Powergrid's business plan contains a commitment to reduce its business carbon footprint by 10% by the end of ED1 and performance remains on course to achieve that target.

The Group's commitment to the Environmental RESPECT policy and its improved overall performance contributes towards minimising its impact on the environment. As part of its annual environmental improvement plan, Northern Powergrid has mobilised significant programmes to replace fluid-filled cables and place overhead lines underground in National Parks and Areas of Outstanding Natural Beauty, reduce electrical losses and implement further improvements to the network that take account of protected structures, features, areas, wildlife and habitat. Birdlife is being protected by placing bird-diverters on power lines where they are in proximity to nature reserves, wetlands, flight paths or in locations where rare species of bird are known to live or breed and also in response to information obtained from incident trends. Northern Powergrid continues to work with local social enterprises that rescue waste timber in order to provide affordable reclaimed timber products to the local community.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

Environmental respect - continued

Sustainability

The Northern Powergrid Group's activities have an important part to play in the United Kingdom's transition to a low-carbon economy, both in its capacity as a major participant in the United Kingdom energy industry and in terms of its own carbon footprint.

As the country takes action to make significant reductions in its carbon emissions, the way in which electricity is produced and used is expected to have a significant impact on the electricity network over time. Evidence of this has already been seen through the number of installations made by customers of low-carbon technologies such as photovoltaic solar panels, electric vehicles and heat pumps which continued to increase during the year and are reported via the regulatory reporting process. The volume and total capacity of decentralised energy generation has also been growing steadily for the last few years and, given the greater range of load and generation technologies now being connected to the network, Northern Powergrid is taking action to develop innovative solutions that will reduce the need for traditional and potentially expensive reinforcement of the network.

The Northern Powergrid Group's innovation projects have continued this year from the platform established by the ground-breaking Customer-Led Network Revolution ("CLNR") programme of work that concluded in 2015. The four priorities of smart grids, smart meters, digital-enabled services and issues of affordability continue to be highly relevant to our stakeholders. In the smart grid area, the transition to distribution system operator is taking increased prominence in the innovation portfolio. During the year, Northern Powergrid completed work to better understand how local energy markets may develop, the potential impact of future market models and the role of new players such as local authorities. Deployment of innovation in the year has delivered £7.5 million of value, with around half of that centred on releasing capacity and providing flexible connections for immediate customer benefit.

The Northern Powergrid Group climate change adaptation strategy outlines the impact that climate change is anticipated to have on the business, the risks that this poses and the proposals recommended to mitigate these risks. The proposals include flood defences, vegetation management, network specifications for changing temperatures, improved weather prediction, and adequate staff availability. The planned number of flood defences to be installed during the year was not achieved. This was primarily due to the re-tendering of the delivery contract. Under the re-phased programme the delivery of the overall commitment to install further flood defences during the ED1 period remains on-track.

Environmental performance was strong with incidents reportable to the Environment Agency, fluid loss and the Northern Powergrid's carbon footprint being lower than targeted. Northern Powergrid's policy of installing over-sized cables continues to save network losses, which contributed to further carbon emission reductions.

Regulatory integrity

The Group manages its business to the highest behavioural standards and adheres to a policy of strict compliance with all relevant standards, legislation and regulatory conditions. The Governance and Risk Management Group ("GRMG") is the principal risk management forum in the Northern Powergrid Group, and monitors and manages performance in risk-related and compliance areas. The GRMG met on three occasions during the year in order to review the mechanisms for meeting external obligations, to strengthen the business-control-improvement environment, and to consider and advise on key strategic risks facing the Group.

As has been the case for some years, breaches by a DNO of its licence conditions and certain other statutory requirements could lead to financial penalties, which Ofgem has stated "will have a proportionate impact on shareholder returns". In order to assure compliance with licence and other regulatory obligations, Northern Powergrid operates a regulatory compliance affirmation process, under which ownership of approximately 1,780 regulatory obligations contained within the compliance database is currently assigned to around 75 responsible managers. Those responsible managers are required, on a quarterly basis, to review compliance with the relevant obligations that have been assigned to them for certification and report on any identified non-compliances or perceived risks to the compliance process, which are then addressed. The Head of Regulatory Compliance reports to the board of directors on the outcome of each quarter's exercise.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

Regulatory integrity - continued

Under the RIIO (revenue = incentives + innovation + outputs) model for regulation, price controls are set for eight years (rather than five as has previously been the case), with provision for a mid-period review of the outputs that network companies are required to deliver. The ED1 price control became effective on 1 April 2015 and is due to end on 31 March 2023.

Under the ED1 price control, excluding the effects of incentive schemes and any deferred revenues from the prior price control, Northern Powergrid's base allowed revenue before inflation reduced by 1.0% for the regulatory year ended 31 March 2017, relative to the previous year. Base allowed revenues before inflation will then be constant for each subsequent regulatory year through to the regulatory year ended 31 March 2023. Nominal base allowed revenues will therefore increase in line with inflation (as measured by the United Kingdom's Retail Prices Index).

The ED1 price control is the first to be set for electricity distribution in Great Britain since Ofgem completed its review of network regulation (known as the RPI-X @ 20 project). The key changes to the price control calculations, compared to those used in previous price controls are that:

Many other aspects of the previous price control remain in place (either in their previous or similar form), including adjustments to revenues in relation to the number and duration of service interruptions and customer service standards. In addition, network tariffs, from which actual revenues are derived, are now set further in advance than was previously the case.

With the start of the new price control, changes were also made to the legislation that prescribes the standards of service to be provided by the DNOs in specified circumstances and payments to be made to end-customers for failure to meet those standards. The most significant of these changes reduced from 18 to 12 hours the time that is allowed for restoration of supplies following an unplanned power cut in normal weather conditions.

Northern Powergrid submits a number of information returns to Ofgem and is required, under the terms of the Northern Powergrid's licences, to assure the accuracy of those returns. These arrangements involve the preparation and submission to Ofgem, by the end of February in each year, of a risk-based data-assurance plan for the regulatory year ahead, together with a report detailing the assurance work actually carried out in the regulatory year just ended and the findings of that work.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

PRINCIPAL RISKS AND UNCERTAINTIES

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

Financial risk

As a holder of an electricity distribution licence, Northern Powergrid is subject to regulation by the Gas and Electricity Markets Authority (GEMA), which acts through Ofgem. Most of the revenue of the electricity distribution licence holders is controlled by the distribution price control formula set out in the electricity distribution licence.

The price control formula does not constrain profits from year to year but sets the maximum permitted revenue for each regulatory year, taking into account base allowed revenues and movements in Retail Prices Index ("RPI"), as well as factors such as performance against certain regulatory incentives. Where Northern Powergrid recovers more, or less, than this maximum the difference is carried forward, with interest. For amounts relating to the regulatory year ended 31 March 2016, the carry forward will be into the entitlement for the regulatory year ended 31 March 2018.

The price control for ED1 has been set for the eight-year period commencing on 1 April 2015, although the price control formula may be reviewed at other times at the discretion of Ofgem, and it is Ofgem's intention to use eight-year price control periods in the future. A resetting of the formula is now made by GEMA without the consent of the electricity distribution licence holder, but a licensee can appeal to the CMA against a decision by GEMA to proceed with such a modification. Certain other interested parties have the same right.

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

Ofgem recognises that defined benefit pension schemes and, particularly, the current deficit positions of various schemes, represent a significant cost to the DNOs and, in its final proposals in respect of the previous price control period ("DPCR5"), Ofgem confirmed that DNOs would be allowed to recover the actuarial value of the deficits attributable to a licensee's distribution business in existence as at 31 March 2010 via its regulated revenues (after an adjustment to reflect the residual of unfunded early retirement deficiency costs as at 31 March 2010). Ofgem re-affirmed these principles in its ED1 final determination.

However, given the stable and regulated nature of the DNOs' businesses, Ofgem took the view that a notional repair period of 15 years from 1 April 2010 was appropriate for the purpose of assessing the DNOs' allowed revenues in respect of pension costs. Moreover, Ofgem reviews the reasonableness of the triennial actuarial valuations of DNOs' pension schemes and calculates new deficit funding allowances, including any adjustments that may be necessary to account for differences between allowances received and payments actually made to the relevant pension scheme.

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

Operational risk

There are a number of risks to Northern Powergrid's operational performance in respect of which mitigating actions have been taken. Appropriate credit cover arrangements are in place with the electricity suppliers, which would allow recovery of defaulted payments through the price control mechanism and a robust major incident management plan is implemented whenever severe weather impacts on the distribution network's performance. Given the regular instances of metal theft experienced in previous years, Northern Powergrid maintained its programme of risk-assessed and enhanced security measures at its sites and pursued awareness raising activity at a national and local level, including commencing a social media campaign in early 2016 in partnership with Crimestoppers.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

PRINCIPAL RISKS AND UNCERTAINTIES - continued

The electricity distribution business has an inherently increased health and safety risk due to the network operating at up to 132kV. Employees work at height, in closed spaces and with live electricity, increasing the risk of potential safety matters. Health and safety is given the highest priority within Northern Powergrid and strict policies and procedures are in place both to ensure the safety of the employees and customers.

Cyber security is an increasing risk. The Northern Powergrid Group has a robust cyber security risk mitigation programme in place including gaining accreditation under of ISO 27001 Information Security (process security) standard for certain discrete business areas, plus compliance with the Centre for Internet Security Critical Security Controls. Further advances to this are being continuously implemented and managed.

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

Commercial risk

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

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

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

Risk Management

The Northern Powergrid Group operates a structured and disciplined approach to the management of risk as part of its overall risk management policy and, in DPCR5 and previous price control periods, accepted and successfully managed substantial cost and delivery risks by developing a culture of cost and risk management over that period of time. Risks are divided into a number of risk sectors which, in turn, align to the Northern Powergrid Group's Core Principles, as detailed on pages 2 and 3 of this Strategic Report. A report regarding the effectiveness of each risk sector in terms of risk management, control activity, key success factors and supporting measures is presented at meetings of the GRMG. The risk environment is reviewed continually in order that new or emerging potential risks are identified.

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

PRINCIPAL RISKS AND UNCERTAINTIES - continued

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

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

Internal Control

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

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

The Northern Powergrid Group is committed to maintaining the highest ethical standards in the conduct of its business and, in that respect, implements Berkshire Hathaway Energy's code of business conduct for employees. The code of conduct sets out and emphasises the required standards and commitment to ethical behaviour, provides reporting mechanisms for known or suspected ethical issues, helps prevent wrongdoing, and creates and sustains an ethical work environment across the Northern Powergrid Group. All employees are required to complete annual training on the code of business conduct and then confirm that they understand the requirements outlined in the code. The training is available online and employees who do not have access to the online system attend a briefing with their line manager.

The Northern Powergrid Group does not have a specific human rights policy but, as noted in this Strategic Report, it bases its operations on the Core Principles in order to deliver its long-term objectives. Accordingly, the Group remains fully committed to operating ethically and responsibly and with fairness and integrity through the policies and procedures it has in place which set the approach to its employees, their health, safety and welfare, its dealings with customers, particularly those who are vulnerable and on the priority services register, its impact on the environment and its contribution to the sustainability agenda within the energy industry. The Core Principles are a key factor in the responsible way in which Northern Powergrid operates its electricity distribution business, examples of which are described throughout this Strategic Report.

The Northern Powergrid Group is also committed to preventing corruption in all its forms and continues to have a zero-tolerance approach to corruption in its business or by those with whom it does business. The board of Northern Powergrid Holdings Company has addressed the risks introduced by the Bribery Act 2010 through a compliance policy, changes to contractual terms, training and other staff awareness measures. The introduction of annual risk assessments and enhanced due diligence in respect of new business transactions has further assisted in ensuring compliance.

The Northern Powergrid Group requires staff, suppliers of services and business partners to comply with the Bribery Act. Its policies encourage an employee who has any suspicion of bribery or other form of corruption within or related to the Northern Powergrid Group to report the suspicion to a manager or via the international, anonymous help line mentioned in the Employee commitment section.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

GROUP STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2016

PRINCIPAL RISKS AND UNCERTAINTIES - continued

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

In preparing these accounts, the directors have assessed the viability of the Group for the purposes of making the statement below and do so on an ongoing basis as part of the preparation and approval of the Group's ten-year business plan.

The directors have chosen the eight-year period from 1 April 2015 for the purposes of making this statement because it equates to the ED1 regulatory period, though longer periods may be appropriate given the 45-year life ascribed to the Group's new assets, the enduring nature of the Group's business and the fact that the notice period for revocation of Northern Powergrid's electricity distribution licence is 25 years. Northern Powergrid's income has been set for the ED1 regulatory period, although there is scope for a mid-period review and Ofgem may adjust revenues in the latter half of the period for any changes in the outputs required of Northern Powergrid for certain specified reasons. Consequently and given the general stability associated with the regulatory environment in which Northern Powergrid operates, the directors have been able to prepare sufficiently robust forecasts as part of the Group's annual business planning process, taking account of the principal risks and uncertainties which might have an impact on those forecasts. The Group's forecasts look forward for a 10-year period and anticipate the Group's continued stable operations beyond the ED1 price control.

Details of the principal risks and uncertainties, which could have an impact on the Group, are provided on pages 17 to 20 of the Strategic Report and details of how those principal risks are assessed and managed are provided in the Risk Management section of the Strategic Report.

The directors' ongoing assessment of the principal risks and uncertainties facing the Group also includes meeting the obligations in Northern Powergrid's Licence to provide Ofgem with annual certificates, approved by the board, confirming that the directors have a reasonable expectation that the Group will have sufficient financial resources, financial facilities and operational resources available to it so that Northern Powergrid is able to carry on its Distribution Business for a period of 12 months from the dates of those certificates. Assumptions taken into account when approving those certificates include (i) the potential for significant adverse financial impact from the various incentive schemes that can lead to variations in Northern Powergrid's allowed income under its price control arrangements; (ii) the occurrence of catastrophic natural or other events, which could have a significant impact on the operating performance of the distribution network or involve significant expenditure; (iii) whether significant customer payment defaults may be experienced; and (iv) the continued availability to the Group of suitably qualified and experienced staff. Given the regulatory environment in which the Northern Powergrid operates, it is currently considered unlikely that there will be material variances to the assumptions used in providing those certificates during ED1.

The stable nature of the Group's business is evidenced by the fact that the commitments made by Northern Powergrid in its well-justified business plan, which was originally submitted to Ofgem as part of the ED1 price control review process, have not changed fundamentally. Consequently, assuming that the principal risks and uncertainties facing the Group continue to be managed effectively, the directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the ED1 period.

ON BEHALF OF THE BOARD:

J M France

Director

26 April 2017

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2016

The directors present their report with the financial statements of the Company for the year ended 31 December 2016.

DIVIDENDS

During the year, an interim dividend of £100.0 million (78p per ordinary share) was paid (2015: £20.6 million). The directors recommend that no final dividend be paid in respect of the year.

RESEARCH AND DEVELOPMENT

The Group supports a programme of research that is expected to contribute to higher standards of performance and a more cost-effective operation of its business. Projects to investigate enhanced load reduction opportunities from customer participation, the accessing of disbursed domestic demand-side response and, alongside other utilities, to determine optimum energy system technology approaches appropriate to local socio-economic factors have continued. New activities initiated in the year included projects regarding the use of domestic electricity storage in conjunction with small-scale photovoltaic solar generation, an improved methodology to determine network load growth and a project to improve circuit reliability and reduce restoration times through fault monitoring and anticipation on the low-voltage network. In addition, a wood replacement technology for overhead line support was evaluated and an investigations into environmentally acceptable alternative systems for wood preservation, was undertaken.

During the year, the Group invested £0.8 million (2015: £2.1 million) (Note 6 to the accounts) in its research and development activities.

FUTURE DEVELOPMENTS

The financial position of the Group, as at 31 December 2016, is shown in the statement of financial position on pages 32 and 33.

There have been no significant events since the year end and the directors intend that:

Northern Powergrid will continue to implement its well-justified business plan that was revised as part of the ED1 price control review process and will develop its business by operating with the goal of efficiently investing in the network and improving the quality of supply and service provided to customers.

The objective for IUS will remain the development of its business in a manner that concentrates on its core skills of engineering contracting by delivering a high standard of service to its existing clients and pursuing opportunities to increase its portfolio of clients across all regions of the United Kingdom in the sectors within which it operates.

Northern Powergrid Metering will retain its focus on pursuing opportunities in the market for meter asset provision as the smart meter roll-out programme develops.

DIRECTORS

The directors who held office during the year under review and to the date of signing this report were:

During the year, no director was interested in any contract which was significant in relation to the business of the Company or the Group.

During the year and up to the date of approval of the Directors' Report, an indemnity contained in the Company's Articles of Association was in force for the benefit of the directors of the Company and as directors of associated companies, which was a qualifying third party indemnity provision for the purposes of the Companies Act 2006.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2016

FINANCIAL RISK MANAGEMENT

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

Trading risk

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

Financial derivatives

As at 31 December 2016 and during the year, it was the Group's policy not to hold any derivative financial instruments.

Further details of the financial risks facing the Group are provided in the Financial strength and Principal Risks and Uncertainties sections on pages 5 and 17 to 20 respectively of the Strategic Report.

POLITICAL DONATIONS

During the year, no contributions were made to political organisations (2015: £nil).

EMPLOYEES

Employee consultation

The Group has a constitutional framework in place for employee consultation and has agreed that framework with trade union representatives. In addition, the Group communicates directly and through the management structure with non-collectively bargained staff, who are primarily of management grade, and keeps them informed of and involved as appropriate in developments that may impact on them now or in the future.

The Group is committed to maintaining and improving effective engagement and communication with employees. Following the employee engagement survey in 2016, the results continue to show improvement and work has been undertaken to analyse the feedback and develop local action plans. This approach is augmented by routine communication channels including regular staff briefs on current issues, meetings with staff and their representatives, and utilising the Northern Powergrid Group's intranet to communicate and engage with employees.

During the year, the President and Chief Executive Officer of the Northern Powergrid Group continued to provide employees with updates on the Northern Powergrid Group's financial, organisational, safety and customer service performance through postings and weekly blogs on the Northern Powergrid Group's intranet on key elements of performance during the preceding week.

Disabled employees

The Group is committed to equality at work and, as such, its policy is to provide all protected groups, including disabled people, with equality at work in respect of employment, training, career development and promotion, having regard to their aptitudes and abilities. Should any member of staff become disabled during their employment, the Group would work to make reasonable adjustments, wherever possible.

VOTE HOLDER AND ISSUER NOTIFICATION

There have been no disclosures to the Company under Disclosure and Transparency Rule 5 (Vote Holder and Issuer Notification Rules).

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2016

DIRECTORS' BIOGRAPHIES

RONALD DIXON

Appointed in October 1997, Mr Dixon, 79, worked for North Eastern Electricity Board and Northern Electric plc throughout his career, being appointed Secretary in 1987. He was appointed Managing Director of the Power Division in 1990, responsible for electricity supply and distribution, and Commercial Director in 1991. He retired from the board on 31 July 1997 and was re-appointed in the capacity of a non-executive director on 22 October 1997. Mr Dixon is also a non-executive director of Northern Powergrid Holdings Company, Northern Powergrid (Northeast) Limited and Northern Powergrid (Yorkshire) plc.

THOMAS E FIELDEN

Appointed in October 2009, Mr Fielden, 46, joined the Northern Powergrid Group in July 2009 and became Finance Director on 12 October 2009. Mr Fielden is a chartered accountant, having started his career at Coopers & Lybrand and has held a variety of finance appointments in BT, working in BT Group and BT Global Services, before joining Great North East Railway (GNER) as Financial Controller in 2005. He became Finance Director of GNER in 2006, transferring to National Express East Coast in 2007.

JOHN M FRANCE

Appointed in January 2000, Dr France, 59, is Regulation Director for the Northern Powergrid Group. After leaving university he joined the British Gas Corporation where he held a number of posts before becoming a member of the team that handled the privatisation of British Gas in 1986. He joined Northern Electric plc as its Regulation Manager in 1989 and has been involved with all the distribution (and supply) price control reviews that have affected the Northern Powergrid Group since privatisation. He was a member of the team that negotiated the acquisition of the distribution business of Yorkshire Electricity Group plc and the sale of the Northern Electric plc supply businesses in 2001.

PATRICK J GOODMAN

Mr Goodman, 49, is executive vice president and chief financial officer of Berkshire Hathaway Energy. Mr Goodman is responsible for managing all aspects of Berkshire Hathaway Energy's financial operations. Mr Goodman serves as a director of PacifiCorp, Northern Powergrid, Kern River Gas Transmission Company and Northern Natural Gas Company. Mr Goodman supports the evaluation, negotiation and closing of Berkshire Hathaway Energy's domestic and international financings, acquisitions and project developments. Additionally, he manages all accounting, financial reporting, tax, budgeting, long-range financial planning and internal audit functions for Berkshire Hathaway Energy. Mr Goodman has been the chief financial officer since 1999 and has served in various financial positions, including chief accounting officer since joining the Company in 1995. Mr Goodman has more than 20 years of experience in public accounting and management and is a certified public accountant. He received his accounting degree from the University of Nebraska at Omaha.

PHILIP A JONES

Appointed in April 2007, Dr Jones, 48, is President and Chief Executive Officer of the Northern Powergrid Group, the UK platform in the global portfolio of Berkshire Hathaway Energy. Prior to his appointment as President and Chief Executive Officer, he was Strategy and Investment Director and, as such, was responsible for technical, economic and regulatory strategy within the organisation. Dr Jones is a chartered electrical engineer and has been working in the UK power distribution sector since completing his PhD in Electronic and Electrical Engineering in 1993. He has held a range of technical and managerial roles, mostly in the engineering field. He is also actively involved in a range of other industry bodies. He has been a director of the Institute of Asset Management and of the Energy Networks Association, the trade association that represents the power transmission and distribution companies.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2016

CORPORATE GOVERNANCE STATEMENT

In accordance with Disclosure and Transparency Rule (DTR) 7.2.9, the directors have elected to set out the information required by DTR 7.2.1 to DTR 7.2.7 R in the Group annual report and audited consolidated financial statements of Northern Powergrid Holdings Company, a copy of which can be found on Northern Powergrid's corporate website. The Company has sought to apply a number of provisions in the UK Corporate Governance Code 2014 (the "Code") in so far as it considers them to be appropriate.

Audit committee

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

The audit committee comprises three members, two of whom are considered as independent and one who has competence in accounting. At its meetings, the committee receives reports from the GRMG and from the Northern Powergrid Group's Head of Internal Audit on the internal audits undertaken during the year and the audit plan for the following year.

Committee members:

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2016

STATEMENT OF DIRECTORS' RESPONSIBILITIES

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

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

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

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's and the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of any corporate and financial information relating to the Company and the Group, which is included on the Northern Powergrid Group's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

DIRECTORS' RESPONSIBILITY STATEMENT PURSUANT TO DTR 4

Each of the directors as at the date of the Annual Reports and Accounts, whose names and functions are set out on page 21 in the Report of the Directors confirms that, to the best of their knowledge

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

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

GOING CONCERN

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

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2016

GOING CONCERN - continued

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

STATEMENT AS TO DISCLOSURE OF INFORMATION TO AUDITOR

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

This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.

AUDITOR

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

ON BEHALF OF THE BOARD:

J M France

Director

26 April 2017

REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF NORTHERN ELECTRIC PLC

We have audited the financial statements of Northern Electric plc Group ("the Company") for the year ended 31 December 2016, which comprise the Statement of Profit or Loss, the Statement of Profit or Loss and Other Comprehensive Income, the Statement of Financial Position, the Statement of Changes in Equity, the Statement of Cash Flows and related notes 1 to 29. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

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

Respective responsibilities of directors and auditor

As explained more fully in the Statement of Directors' Responsibilities set out on pages 25 and 26, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

Scope of the audit of the financial statements

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

Opinion on financial statements

In our opinion the financial statements:

Opinion on other matter prescribed by the Companies Act 2006

In our opinion, based on the work undertaken in the course of the audit:

In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report and the Report of the Directors.

REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF NORTHERN ELECTRIC PLC

Matters on which we are required to report by exception

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

David M Johnson FCA (Senior Statutory Auditor)

for and on behalf of Deloitte LLP

Chartered Accountants and Statutory Auditor

N6wcastle upon Tyne

United Kingdom

26 April 2017

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

FOR THE YEAR ENDED 31 DECEMBER 2016

2016 2015

Notes £'000 £'000

CONTINUING OPERATIONS

Revenue 3 384,867 386,388

Cost of sales (43,336) (42,552)

GROSS PROFIT 341,531 343,836

Operating expenses (160,350) (147,675)

Other gains 522 474

Finance costs 5 (39,139) (36,198)

Finance income 5 1,354 1,619

Income tax 7 (7,210) (17,282)

PROFIT FOR THE YEAR 136,708 144,774

Profit attributable to:

Owners of the parent 136,708 144,774

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2016

2016 2015

£'000 £'000

PROFIT FOR THE YEAR 136,708 144,774

OTHER COMPREHENSIVE INCOME 

Item that will not be reclassified to profit or loss:

Re-measurement of net pension obligation (84,700) (400)

Total comprehensive income attributable to:

Owners of the parent 66,205 142,275

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

31 DECEMBER 2016

2016 2015

Notes £'000 £'000

ASSETS

NON-CURRENT ASSETS

Intangible assets 11 40,857 31,623

Property, plant and equipment 12 2,322,900 2,130,082

Investments 13 3,319 3,556

Pension asset 24 31,500 88,100

Trade and other receivables 15 8,406 8,769

2,406,982 2,262,130

CURRENT ASSETS

Inventories 14 12,836 13,452

Trade and other receivables 15 83,640 73,879

Cash and cash equivalents 16 515 8,824

96,991 96,155

TOTAL ASSETS 2,503,973 2,358,285

EQUITY

SHAREHOLDERS' EQUITY

Called up share capital 17 72,173 72,173

Share premium 18 158,748 158,748

Other reserves 18 6,185 6,185

Retained earnings 18 737,668 771,463

TOTAL EQUITY 974,774 1,008,569

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION - continued

31 DECEMBER 2016

2016 2015

Notes £'000 £'000

LIABILITIES

NON-CURRENT LIABILITIES

Trade and other payables 19 562,308 526,800

Borrowings

Deferred tax 23 89,462 104,859

Provisions 22 1,803 1,984

1,240,987 1,220,818

CURRENT LIABILITIES

Trade and other payables 19 129,882 110,011

Borrowings

Tax payable 3,764 3,962

Provisions 22 722 1,008

288,212 128,898

TOTAL LIABILITIES 1,529,199 1,349,716

TOTAL EQUITY AND LIABILITIES 2,503,973 2,358,285

The financial statements were approved by the Board of Directors on 26 April 2017 and were signed on its behalf by:

J M France

Director

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

COMPANY STATEMENT OF FINANCIAL POSITION

31 DECEMBER 2016

2016 2015

Notes £'000 £'000

ASSETS

NON-CURRENT ASSETS

Property, plant and equipment 12 1,634 1,680

Investments 13 328,070 328,070

329,704 329,750

CURRENT ASSETS

Trade and other receivables 15 317 427

Tax receivable 6,047 2,694

Cash and cash equivalents 16 - 24,322

6,364 27,443

TOTAL ASSETS 336,068 357,193

EQUITY

SHAREHOLDERS' EQUITY

Called up share capital 17 72,173 72,173

Share premium 18 158,748 158,748

Other reserves 18 6,185 6,185

Retained earnings 18 23,391 107,480

TOTAL EQUITY 260,497 344,586

LIABILITIES

NON-CURRENT LIABILITIES

Borrowings

Deferred tax 23 2,758 4,809

Provisions 22 1,705 1,652

5,580 7,578

CURRENT LIABILITIES

Trade and other payables 19 3,177 2,748

Borrowings

Provisions 22 8 9

69,991 5,029

TOTAL LIABILITIES 75,571 12,607

TOTAL EQUITY AND LIABILITIES 336,068 357,193

The financial statements were approved by the Board of Directors on 26 April 2017 and were signed on its behalf by:

J M France

Director

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2016

Called up

share Retained Share Other Total

capital earnings premium reserves equity

£'000 £'000 £'000 £'000 £'000

Balance at 1 January 2015 72,173 649,788 158,748 6,185 886,894

Changes in equity

Dividends - (20,600) - - (20,600)

Total comprehensive income - 142,275 - - 142,275

Balance at 31 December 2015 72,173 771,463 158,748 6,185 1,008,569

Changes in equity

Dividends - (100,000) - - (100,000)

Total comprehensive income - 66,205 - - 66,205

Balance at 31 December 2016 72,173 737,668 158,748 6,185 974,774

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

COMPANY STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2016

Called up

share Retained Share Other Total

capital earnings premium reserves equity

£'000 £'000 £'000 £'000 £'000

Balance at 1 January 2015 72,173 113,523 158,748 6,185 350,629

Changes in equity

Dividends - (20,600) - - (20,600)

Total comprehensive income - 14,557 - - 14,557

Balance at 31 December 2015 72,173 107,480 158,748 6,185 344,586

Changes in equity

Dividends - (100,000) - - (100,000)

Total comprehensive income - 15,911 - - 15,911

Balance at 31 December 2016 72,173 23,391 158,748 6,185 260,497

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2016

2016 2015

Notes £'000 £'000

Cash flows from operating activities

Cash generated from operations 28 217,880 189,124

Finance costs paid (41,413) (38,809)

Interest received 1,065 956

Tax paid (8,608) (24,805)

Net cash from operating activities 168,924 126,466

Cash flows used in investing activities

Purchase of intangible fixed assets (12,963) (10,476)

Purchase of tangible fixed assets (247,702) (271,339)

Sale of tangible fixed assets 487 467

Customer contributions 44,896 56,357

Dividends received 491 548

Net cash used in investing activities (214,791) (224,443)

Cash flows from financing activities

Movement in external loans - 50,365

Movement in loans from Group 137,558 (8,550)

Equity dividends paid (100,000) (20,600)

Net cash from financing activities 37,558 21,215

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

COMPANY STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2016

2016 2015

Notes £'000 £'000

Cash flows from operating activities

Cash generated from operations 28 778 1,384

Finance costs paid (9,096) (9,028)

Interest received 56 195

Dividends received 22,291 21,113

Tax (paid)/received (2,885) 1,452

Net cash from operating activities 11,144 15,116

Cash flows from financing activities

Movement in borrowings 2,395 -

Movement in loans from Group 62,139 -

Equity dividends paid (100,000) (20,600)

Net cash from financing activities (35,466) (20,600)

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2016

1. GENERAL INFORMATION

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

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

2. ACCOUNTING POLICIES

Accounting convention and basis of preparation

These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). These financial statements have also been prepared in accordance with IFRS as adopted by the European Union, and with those parts of the Companies Act 2006 (the "Act") that are applicable to companies reporting under IFRS. The Company's financial statements have also been prepared in accordance with IFRS, as applied in accordance with the provisions of the Act. The directors have taken advantage of the exemption offered by Section 408 of the Act not to present a separate statement of profit or loss for the Company.

The financial statements have been prepared under the historical cost convention. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for leasing transactions which are in the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 or value in use in IAS 36.

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

The principal accounting policies are set out below.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company and its subsidiaries made up to 31 December each year. Control is achieved where the Company has power over the investee, is exposed, or has rights, to variable returns from its involvement with the investee, and has the ability to use its power to affects its returns.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2016

2. ACCOUNTING POLICIES - continued

Investments in associates and joint ventures

An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have the rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

The results and assets and liabilities of associates or joint ventures are incorporated in these consolidated financial statements using the equity method of accounting except when classified as held for sale. Investments in associates or joint venture entities are initially recognised at cost and adjusted thereafter to recognise the Group's share of profit or loss and other comprehensive income of the associate or joint venture. When the Group's share of losses of an associate or a joint venture exceeds the Group's interest in that associate or joint venture, the Group discontinues recognising its share of future losses.

An investment in an associate or a joint venture is accounted for using the equity method from the date on which the investee becomes an associate or a joint venture. On acquisition of the investment in an associate or a joint venture, any excess of the cost of the investment over the Group's share of the net fair value of the identifiable assets and liabilities of the investee is recognised as goodwill, which is included within the carrying amount of the investment. Any excess of the Group's share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognised immediately in profit or loss in the period in which the investment is acquired.

A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

Fixed asset investments are stated at cost less provision or amounts written off for impairment in value.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2016

2. ACCOUNTING POLICIES - continued

Application of new and revised IFRS

In the current year, the Company has a number of amendments to IFRSs issued by the International Accounting Standards Board ("IASB") that are mandatorily effective for an accounting period that begins on or after 1 January 2016:

New and revised standards in issue but not yet effective

The Company has not applied the following new and revised IFRSs that have been issued but are not yet effective for the year ended 31 December 2016:

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2016

2. ACCOUNTING POLICIES - continued

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2016

2. ACCOUNTING POLICIES - continued

Critical judgements in applying accounting policies

The following are the critical judgements, apart from those involving estimations, that the directors have made in the process of applying the Group's accounting policies and that have the most significant effect on amounts recognised in the consolidated financial statements:

Key sources of estimation uncertainty

The following are the key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year:

Revenue

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

Revenue is measured at the fair value of consideration received or receivable.

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

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

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

Customer contributions towards distribution system assets are included in deferred revenue. The Group's policy is to credit the customer contribution to revenue on a straight-line basis, in line with the useful life of the distribution system assets.

Income from credit sale charges is apportioned in the statement of profit or loss over the period of the sales agreements.

Interest income from a financial asset is recognised when it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount on initial recognition.

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2016

2. ACCOUNTING POLICIES - continued

Construction contracts

Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the end of the reporting period, based on the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs, except where this would not be representative of the stage of completion. Variations in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer.

Where the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent of the costs incurred where it is probable they will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

When contract costs incurred to date plus recognised profits less recognised losses exceed progress billings, the surplus is shown as amounts due from customers for contract work. For contracts where progress billings exceed contract costs incurred to date plus recognised profits less recognised losses, the surplus is shown as the amounts due to customers for contract work. Amounts received before the related work is performed are included in the consolidated statement of financial position, as a liability, as advances received. Amounts billed for work performed but not yet paid by the customer are included in the consolidated statement of financial position under trade and other receivables.

Software development costs

Costs in respect of major developments are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over the estimated useful life of the software of up to 10 years. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

Property, plant and equipment and depreciation

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

Depreciation is recognised so as to write off the cost of assets less their residual values over their useful lives, using the straight-line method:

Non-operational assets:

Freehold land is not depreciated.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2016

2. ACCOUNTING POLICIES - continued

Property, plant and equipment and depreciation - continued

The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any material changes in estimate accounted for on a prospective basis. Due to the significance of the Group's investment in property, plant and equipment, variations in estimates could impact operating results both positively and negatively although, historically, few changes have been required.

Assets in the course of construction are carried at cost, less any recognised impairment loss. Costs include professional fees, and, for qualifying assets, borrowing costs capitalised in accordance with the Group's accounting policy. Such assets are classified to the appropriate categories of property, plant and equipment when incurred and ready for intended use. Depreciation on these assets, on the same basis as other assets, commences when the assets are commissioned.

Financial instruments

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

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.

Inventories

Inventories are stated at the lower of cost and net realisable value. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. Raw materials and goods for resale are valued at purchase cost on an average price basis. Work in progress is valued at the cost of direct materials and labour plus attributable overheads based on the normal level of activity less progress payments.

Assets held for sale comprise of vehicles which have been sold to the Group at the end of the lease agreement and are stated at the lower of the value attributed to the vehicle under the terms of the agreement or net realisable value. Net realisable value is based on estimated selling price less further costs expected to be incurred to completion and disposal. Within the statement of profit or loss, any profits or losses arising from the sale of assets held for sale are recognised in costs of sales.

Taxation

The income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from 'profit before tax' as reported in the consolidated statement of profit or loss because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group's current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from the initial recognition of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. In addition, deferred tax liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2016

2. ACCOUNTING POLICIES - continued

Taxation - continued

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

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

Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case the current and deferred tax are also recognised in other comprehensive income or directly in equity respectively.

Research costs

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

Other than the software development licenses, the Group and the Company do not carry out any other development activity that would give rise to an intangible asset.

Foreign currencies

Transactions in foreign currencies are recognised at the rate of exchange prevailing at the date of the transaction. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at that date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Leases

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

Operating lease rentals are charged to the statement of profit or loss or in property, plant and equipment on a straight-line basis over the lease term.

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value of money is material). When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2016

2. ACCOUNTING POLICIES - continued

Pensions

The Group contributes to the Northern Powergrid Group of the Electricity Supply Pension Scheme (the "Northern Powergrid Group of the ESPS"), a defined benefit scheme.

The cost of providing benefits is determined using the projected unit credit method, with actuarial valuations being carried out at the end of each annual reporting period. Re-measurement, comprising actuarial gains and losses, the effect of the changes to the asset ceiling and the return on plan assets (excluding interest) are reflected immediately in the statement of financial position with a charge or credit recognised in other comprehensive income in the period in which they occur. Re-measurement recognised in other comprehensive income is reflected immediately in retained earnings and will not be reclassified to profit or loss. Past service cost is recognised in profit or loss in the period of a plan amendment. Net interest is calculated by applying a discount rate at the beginning of the period to the net defined liability or asset. Defined benefit costs are categorised as service cost, net interest expense or income and re-measurement.

The retirement benefit obligation recognised in the statement of financial position represents the actual deficit or surplus in the Group's defined benefit plan. Any surplus resulting from this calculation is limited to the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

The Group also participates in a defined contribution scheme. Contributions payable to the defined contribution scheme are charged to the statement of profit or loss in the year or capitalised as appropriate when employees have rendered service entitling them to the contributions.

A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and sick leave in the period in which the related service is rendered at the undiscounted amount of the benefits expected to be paid in exchange for that service. Liabilities recognised in respect of short-term employee benefits are measured at the undiscounted amount of the benefits expected to be paid in exchange for the related service. Liabilities recognised in respect of other long-term employee benefits are measured at the present value of the estimated future cash outflows expected to be made by the Company in respect of services provided by employees up to the reporting date.

Financial assets

Financial assets, including trade and other receivables and cash and cash equivalents, are classified as loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment.

The effective interest method is a method of calculating the amortised cost of an instrument and of allocating income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the instrument to the net carrying amount on initial recognition.

Interest income is recognised by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial.

Cash and cash equivalents (which are presented as a single class of assets on the face of the statement of financial position) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less, which are subject to an insignificant risk of changes in value.

Financial assets are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2016

2. ACCOUNTING POLICIES - continued

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

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

Going Concern

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

3. SEGMENTAL REPORTING

The tables below represent the internal information provided to the President and Chief Executive Officer of the Northern Powergrid Group for the purposes of resource allocation and segmental performance appraisal.

The Group operates in three principal areas of activity, those of the distribution of electricity, engineering contracting and smart meter rental in the United Kingdom.

Group revenue, Group profit before tax and Group net assets are analysed below:

REVENUE

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2016

3. SEGMENTAL REPORTING - continued

REVENUE

SEGMENT RESULTS

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2016

3. SEGMENTAL REPORTING - continued

"Other" comprises smart meter rental and business support units.

Unallocated corporate assets and liabilities include cash and cash equivalents (2016: £0.5 million. 2015: £8.8 million), borrowings (2016: £741.2 million, 2015: £601.1 million) and taxation (2016: £93.0 million, 2015: £108.8 million).

External sales to RWE Npower plc in 2016 of £76.3 million (2015: £86.1 million) are included within the Distribution segment. External sales to British Gas plc in 2016 of £53.0 million (2015: £59.7 million) are included within the Distribution segment.

Sales and purchases between the different segments are made at commercial prices.

Consolidation Adjustments include the recognition of the £31.5m retirement benefit asset (2015: £88.1 million).

4. EMPLOYEES AND DIRECTORS

69,469 69,128

27,340 27,537

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2016

4. EMPLOYEES AND DIRECTORS - continued

The majority of the Group's employees are members of the Northern Powergrid Group of the ESPS, details of which are given in the Employee Benefit Obligations note.

The average monthly number of employees during the year was:

1,270 1,281

DIRECTORS' REMUNERATION

749 622

Total:

1,135 1,023

OTHER KEY PERSONNEL REMUNERATION

948 747

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

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2016

5. NET FINANCE COSTS

2016 2015

£'000 £'000

Finance income:

Interest in joint venture 254 628

Dividends received 37 35

Interest on tax refund 388 -

Deposit account interest 58 91

1,354 1,619

2016 2015

£'000 £'000

Finance costs:

Bank interest 113 918

Capitalised interest (2,660) (3,249)

Preference dividends payable 9,001 9,001

39,139 36,198

Net finance costs 37,785 34,579

6. PROFIT BEFORE INCOME TAX

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

2016 2015

£'000 £'000

Depreciation - owned assets 83,737 73,419

Software development costs amortisation 3,730 2,674

Foreign exchange differences (40) 23

Analysis of auditor's remuneration is as follows:

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2016

6. PROFIT BEFORE INCOME TAX - continued

7. INCOME TAX

Analysis of tax expense

2016 2015

£'000 £'000

Current tax 14,030 29,661

Deferred tax (6,820) (12,379)

Factors affecting the tax expense

The tax assessed for the year is lower than the standard rate of corporation tax in the UK. The difference is explained below: