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 2013.

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

www.hemscott.com/nsm.do

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

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

Enquiries:

John Elliott 0191 223 5103

STRATEGIC REPORT, REPORT OF THE DIRECTORS AND

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2013

FOR

NORTHERN ELECTRIC PLC

REGISTERED NUMBER: 02366942

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

CONTENTS OF THE REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2013

Page

NORTHERN ELECTRIC PLC

COMPANY INFORMATION

FOR THE YEAR ENDED 31 DECEMBER 2013

DIRECTORS: G E Abel

J A Andreasen

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)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

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 2013, which includes the Strategic Report, the Report of the Directors and the audited financial statements for that year. Pages 2 to 18 inclusive of this annual report comprise the Strategic Report and pages 19 to 28 comprise the Report of the Directors, which have been drawn up and presented in accordance with the Companies Act 2006.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

BUSINESS MODEL

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

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:

STRATEGIC OBJECTIVES

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

- continues to generate value over the long-term;

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

- provides its customers with an excellent standard of service;

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

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

As part of its strategy the 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.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

REVIEW OF THE YEAR

The Group delivered a satisfactory financial performance for the year, which benefited from a further change to the rate of taxation and continued effective cost control. However, that performance fell slightly short of plan due to a rebate of £15.5 million, which Northern Powergrid made to the electricity suppliers as part of the Government-led initiative to assist domestic customers with their energy bills and will be recovered by Northern Powergrid in future years.

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

Having delivered its largest ever capital expenditure programme to date in 2012, Northern Powergrid continued with its policy to invest efficiently in its electricity distribution network. During the year, Northern Powergrid invested £200.8 million in its distribution network such that it improved on its performance in 2012 and remains well-placed in respect of the outputs it intends to deliver by the end of the current Distribution Price Control period to 31 March 2015 ("DPCR5").

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

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

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

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

The long-term trend in the Group's overall safety performance continued to compare well with that of the industry but the internal targets were missed in respect of lost time accidents. Preventable vehicle accident performance achieved target and showed a slight improvement on that recorded in 2012. The same number of lost time accidents occurred in 2013 as in the previous year but one of those lost time accidents was an electrical contact incident, which had the potential to be more serious than the ultimate outcome. In addition, an employee of a contractor to Northern Powergrid tragically died while working on the network. That incident was subject to an investigation by the Health and Safety Executive, which concluded with the Health and Safety Executive not taking any further action against Northern Powergrid.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

REVIEW OF THE YEAR - continued

Activity levels in the UK Contracting area of IUS' business in the North of England increased in comparison to 2012 and IUS successfully secured contracts in its Rail activities that significantly increased its revenue in 2013. IUS also saw an increase in the number of orders across all areas of its business with the improved forward order book in place at the end of 2013 for delivery in 2014 creating a solid foundation for achieving anticipated future growth.

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.

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

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

Revenue

The Group's revenue at £350.9 million was £19.3 million higher than the prior year mainly due to additional allowances arising from the settlement in respect of DPCR5 and increased contracting revenues, partly offset by the rebate to the electricity suppliers noted on page 4.

Operating profit and position at the year end

The Group's operating profit at £180.8 million was £0.5 million lower than the previous year, with higher costs such as grid connection charges, depreciation and amortisation being partially offset by the increased distribution revenues and contracting gross margin. The consolidated statement of financial position on pages 35 and 36 shows that, as at 31 December 2013, the Group had total equity of £756.0 million. The directors consider the Group to have a strong statement of financial position which, when coupled with the preference of its parent company, MidAmerican Energy Holdings Company ("MidAmerican"), for leaving equity in the business, creates a stable base for continued strong performance into ED1 by Northern Powergrid.

Finance costs and investments

Finance costs net of investment income at £33.9 million were £1.0 million lower than 2012 reflecting changes in the profile of borrowings during the year.

Taxation

The effective tax rate in the current year is 10% (2012: 10%). The effective tax rate before adjusting for the impact of the changes in tax rates introduced by the Finance Act 2013 and amounts allocated to other comprehensive income would be 23%. Details are provided in Note 7 to the accounts.

Results and dividends

The Group made a profit after tax for the year of £132.4 million (2012: £131.3 million). An interim dividend of £30.0 million was paid during the year (2012: £30.0 million) and the directors recommend that no final dividend be paid in respect of the year. Other comprehensive income for the year, net of income tax, was a loss of £13.0 million (2012: loss of £49.7 million).

Share capital and debt structure 

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

Dividend policy

The Company's dividend policy is that dividends will be paid only after having due regard to available distributable reserves, available liquid funds and the financial resources and facilities needed to enable the Company to carry on its business for at least the next year. In addition, the level of dividends is set to maintain sufficient equity in the Company so as not to jeopardise its investment grade issuer credit rating.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

CORE PRINCIPLES - continued

Financial strength - continued

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 £130.9 million was £24.5 million higher than the previous year, mainly due to favourable working capital movements.

Investing activities: Net cash used in investing activities at £174.6 million was £43.6 million higher than the previous year, reflecting higher net capital expenditure.

Financing activities: The net cash used in financing activities at £0.5 million represents a £54.5 million favourable variance compared to the previous year, reflecting net movements in borrowings in the year.

Liquidity risk

Northern Powergrid has access to £75 million under a five year committed revolving credit facility provided by Lloyds Bank plc, The Royal Bank of Scotland plc and Abbey National Treasury Services plc, which expires on 20 August 2017. Northern Powergrid expects to raise further facilities, as required, at that time.

In addition, the Group has access to further short-term borrowing facilities provided by YEG and to a £22 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 2013, 100% of the Group's long-term borrowings were at fixed rates and the average maturity for these borrowings was 15 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 25 to the accounts.

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

Insurance 

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

CORE PRINCIPLES - continued

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 reliable and dependable supply of electricity and a high standard of service to its customers.

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

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

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

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

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

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

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

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

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

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

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

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

CORE PRINCIPLES - continued

Customer service - continued

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

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

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

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

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

Under the Broad Measure of Customer Service, an independent market research company, Accent, carries out telephone surveys with Northern Powergrid's customers to find out how satisfied they are with the services provided. During the Regulatory Year, Accent surveyed a number of customers who had contacted 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 77.9% for the Regulatory Year and expects that its customer service improvement plan, including the range of initiatives noted on page 7, will improve the services provided to customers and so increase the satisfaction rating year-on-year.

Connections to the network

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

CORE PRINCIPLES - continued

Customer service - continued

Connections to the network - continued

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

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

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

Corporate responsibility

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

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

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

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

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

CORE PRINCIPLES - continued

Operational excellence

The Group's core service continues to be providing and maintaining an efficient distribution network that delivers electricity effectively. During the year, £200.8 million was invested in the improvement of the distribution network, an 9.0% increase on the £184.2 million recorded in 2012. Northern Powergrid's continued and substantial investment in its distribution network has seen reliability increase throughout DPCR5. During that period, an electricity supply has been available to Northern Powergrid's customers for approximately 99.98% of the time and Northern Powergrid has generally outperformed the targets set by Ofgem in respect of CI and CML. 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.

Operational activity

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

Northern Powergrid's priorities during the year included delivering a similar, significant level of capital expenditure on the network as in 2012, a further reduction in the average level of fault repair work in progress, a robust approach to the control of operations on the low voltage network and continued focus on the restoration times associated with both high and low voltage power cuts with high voltage restoration performance averaging some 64 minutes during the year, after allowing for the impact of severe weather incidents.

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

- Completion of works to replace a 66kV transformer at Linton, the 66kV circuit breakers at Cramlington and Grangetown, the 11kV switchgear at Hartmoor substation and the 33kV transformers at Mount Road substation in Sunderland. In addition, major refurbishment works were completed on the transformers at Darlington West and Tynemouth Central substations;

- Continuation of works to reinforce the 33kV network in the Harrogate area, to replace the 66kV circuit breakers at Coalburns substation in Gateshead, to replace the 66kV transformer at Maddison Street, to replace the 66/11kV transformers and 20kV switchgear at Sunderland substation and to replace the 11kV switchgear at Northallerton and Catterick Camp substations;

- Commencement of works to replace the 132kV transformers, the 66kV transformers, the 20kV and the 11kV switchgear at Potterhouse substation in Durham in order to reinforce the network in the Durham area;

- Commencement of major works to install new 33kV transformers and a new 33kV cable circuit to Foss Island substation to reinforce the network in the York area;

- Commencement of works to replace the 132kV transformers in substations at Harraton and Barrack Road in Newcastle city centre and to replace the 66kV assets in substations at Bowesfield, North Tees, Fossway in York and Spencerbeck in Middlesbrough;

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

CORE PRINCIPLES - continued

Operational excellence - continued

Operational activity - continued

- The completion of refurbishment or rebuilding works on 22km of 33kV and 66kV overhead line, 120km of 132kV overhead line and the refurbishment or rebuilding of 401km of high voltage overhead line and 120km of low voltage overhead line;

- Completion of a number of projects across Northern Powergrid's distribution services area that replaced 12km of 33kV fluid-filled cables and 3km of 132kV fluid filled cable;

- Replacement of 52 units of high voltage outdoor switchgear, 56 high voltage distribution substations and 247 units of high voltage indoor switchgear;

- The upgrade and reinforcement of 28 sites to address the quality of supply performance issues relating to those circuits; and

- The installation and commissioning of 447 new remote control points on the network.

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

Employee commitment

Health and safety

The focus on health and safety continued to be of paramount importance for the directors, as it is for all employees. There is a continuous drive for improvement in safety performance through the setting of challenging goals and the pursuit of a comprehensive safety and health improvement plan, which reflects the Group's fundamental objective that none of its staff should go home injured and all employees should commit to behaving safely all of the time. The 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 electricity distribution and engineering contracting sectors and it will strive to maintain that position over the coming years. Having identified issues that may pose an increased safety risk such as metal theft and the impending roll-out of smart meters, Northern Powergrid intends to implement various measures through its safety and health improvement plan that will build incrementally on the existing strong safety record and ensure that safety considerations are always a part of the investment decision-making and appraisal process.

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

CORE PRINCIPLES - continued

Employee commitment - continued

Health and safety - continued

In common with the MidAmerican group, the Northern Powergrid Group measures its safety performance in terms of the Occupational Safety and Health Administration ("OSHA") rate, which is a measure used in the United States to capture safety incidents down to minor levels of medical treatment, such as a stitch or the use of prescription pain killers. As part of its plan to reduce the OSHA rate across the group, MidAmerican issues daily e-mail updates in respect of performance against its overall OSHA rate and preventable vehicle accident targets, which include information on incidents that have occurred.

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

Although the number of lost time accidents experienced by the Group was the same as in 2012 and the Group only slightly missed its internal target, overall safety performance was disappointing. One of those lost time accidents was an electrical contact incident, which had the potential to be more serious than the ultimate outcome, and an employee of a contractor to Northern Powergrid tragically died while working on the network. The Northern Powergrid Group worked with the Health and Safety Executive as part of its investigation into that incident, which concluded with the Health and Safety Executive not taking any further action against Northern Powergrid. As at 31 December 2013, IUS had worked 1.6 million man hours without incurring a lost time accident.

Performance in respect of preventable vehicle accidents achieved the target for 2013 and represented a slight improvement on 2012. None of those incidents gave rise to any significant safety-related risks.

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

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

During the year, Northern Powergrid received a President's Award from the Royal Society for the Prevention of Accidents for achieving 12 consecutive Gold Awards and IUS received its fifth consecutive Gold Medal, which entitled it to receive a President's Award. Those awards were presented in recognition of achievements in 2012 and for continued or improving standards of health and safety over a sustained period. Northern Powergrid continued to maintain its occupational health and safety management system and retained its Occupational Health and Safety Assessment Series ("OHSAS") 18001 certification and environmental management system ISO 14001 certification.

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

CORE PRINCIPLES - continued

Employee commitment - continued

Management structure

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

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 work towards building constructive and partnered relationships with the trades unions. In that respect, the Group has long-term pay agreements in place with the various employment groups such that the relevant terms and conditions are consistent across the Northern Powergrid Group.

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

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

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

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

The Group employed 1,303 staff at the end of December 2013 (2012: 1,224).

Environmental respect

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

Northern Powergrid 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.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

CORE PRINCIPLES - continued

Environmental respect - continued

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

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

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

Sustainability

The 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 electricity is produced and used is expected to have a significant impact on the electricity network over time. Northern Powergrid is taking actions to be able to demonstrate that its network will be ready to handle the energy flows its customers need when required and by working with customers to assist in solving issues raised by the installation of low-carbon generation and technologies. Northern Powergrid is also actively involved in working with the industry and other interested parties in order to develop national policies and strategies to assist the low-carbon transition.

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

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

CORE PRINCIPLES - continued

Environmental respect - continued

Sustainability - continued

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

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") monitored and managed performance in risk-related and compliance areas and met on four occasions during the year.

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

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

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

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

PRINCIPAL RISKS AND UNCERTAINTIES

There are a number of potential risks and uncertainties, which could have an impact on the 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 a maximum permitted revenue for each regulatory year and is a control on revenue that operates independently of most of the electricity distribution licence holder's costs. Where Northern Powergrid recovers more, or less, than this maximum the difference is carried forward, with interest, into the entitlement for the following year.

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

During the term of the current price control, the rate of inflation as measured by the Retail Prices Index ("RPI") is taken into account in setting Northern Powergrid's allowed income in respect of each regulatory year. Consequently, one of the risks faced by Northern Powergrid 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 DPCR5 final proposals, confirmed that DNOs would be allowed to recover the actuarial value of the deficits attributable to a licensee's distribution business in existence as at 31 March 2010 via its regulated revenues (after an adjustment to reflect the residual of unfunded early retirement deficiency costs as at 31 March 2010).

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

The other financial risks facing the Group are outlined on page 6 of this Strategic Report and on page 20 of the Report of the Directors.

Operational risk

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

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 substantial number of reported defects. Northern Powergrid believes that it can effectively manage these issues through its usual risk management practices.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

PRINCIPAL RISKS AND UNCERTAINTIES - continued

Commercial risk

Managing commercial risk continued to be of key importance and the 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 the 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 its business utilising a mix of direct labour and contracted resource (including affiliates) and has a range of contracts in place with various service providers for delivery of its work programmes, which are subject to regular market testing and tendering exercises. Those services include vegetation management, overhead line inspection and construction, substation construction and maintenance, underground cable laying services, vehicle leasing and servicing, tower painting and information technology services. 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, has accepted and successfully managed substantial cost and delivery risks by developing a culture of cost and risk management over that period of time. Risks are assessed with due regard to probability and impact and the risk environment is reviewed continually in order that new or emerging potential risks are identified. Those risks assessed to be significantly high are logged within a risk register that the GRMG reviews regularly and key indicators are used to track and monitor those risks considered to be significant.

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

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

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

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

STRATEGIC REPORT

FOR THE YEAR ENDED 31 DECEMBER 2013

PRINCIPAL RISKS AND UNCERTAINTIES - continued

Internal Control

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

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

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.

ON BEHALF OF THE BOARD:

P A Jones

Director

16 April 2014

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

DIVIDENDS

During the year, an interim dividend of £30.0 million (24p per ordinary share) was paid (2012: £30.0 million). The directors recommend that no final dividend be paid in respect of the year.

RESEARCH AND DEVELOPMENT

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

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

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

During the year, the Group invested £8.2 million (2012: £8.1 million) (Note 6 to the accounts) in its research and development activities.

FUTURE DEVELOPMENTS

The financial position of the Group, as at 31 December 2013, is shown in the Consolidated Statement of Financial Position on pages 35 and 36. There have been no significant events since the year end.

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

IUS will continue to develop 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 ELECTRIC PLC (REGISTERED NUMBER: 02366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

DIRECTORS

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

G E Abel Chairman

J A Andreasen General Counsel

R Dixon Non-executive Director

T E Fielden Finance Director

J M France Regulation Director

P J Goodman Executive Vice-President and Chief Financial Officer, MidAmerican Energy Holdings Company

P A Jones President and Chief Executive Officer

FINANCIAL RISK MANAGEMENT

Liquidity risk

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 2013 and during the year it was the Group's policy not to hold any derivative financial instruments.

POLITICAL DONATIONS

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

EMPLOYEES

Employee consultation

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

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

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

Disabled employees

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

CORPORATE GOVERNANCE STATEMENT

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

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

Compliance statement

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

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

The directors have agreed a schedule of board meetings at which they review performance, strategy and operational and risk-related issues. In addition, the President and Chief Executive Officer participates in weekly performance review meetings with the Chairman of MidAmerican and other senior managers of the MidAmerican group, including the Executive Vice President and Chief Financial Officer. At those weekly meetings, the views of the Chairman of MidAmerican and the senior management team regarding the key, current issues facing the Northern Powergrid Group are discussed.

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

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

CORPORATE GOVERNANCE STATEMENT - continued

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

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

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

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

Health and Safety Management Committee

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

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

CORPORATE GOVERNANCE STATEMENT - continued

Treasury Committee

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

Pensions Committee

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

Governance and Risk Management Group

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

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

CORPORATE GOVERNANCE STATEMENT - continued

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

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

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

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

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

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

During the year, the board comprised six executive directors and Mr Dixon, an independent non-executive director, who, collectively, bring a range of skills and experience to the board. Although Mr Dixon was the sole non-executive director, so the board did not include a balanced number of executive and non-executive directors, the board believes that it possesses the skills and experience necessary to provide effective leadership, stewardship and control of the Company.

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

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

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

CORPORATE GOVERNANCE STATEMENT - continued

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

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

The directors retire by rotation and offer themselves for re-election in accordance with the Company's articles of association.

The board believes that the Strategic Report and the Report of the Directors provide a balanced and understandable assessment of the Group's position and prospects. The directors explain, at page 3 of the Strategic Report, the Core Principles behind the Group's strategy and, at page 27, their responsibility for preparing the Strategic Report, the Report of the Directors and the accounts, have reported, at page 27 in the Report of the Directors, that the Company and the Group are going concerns and have included the Report of the Independent Auditor to the Company at page 32 of these accounts.

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

Other key features of the internal control system are:

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

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

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

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

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

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

CORPORATE GOVERNANCE STATEMENT - continued

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

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

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

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

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

R Dixon Non-Executive Director

T E Fielden Finance Director

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

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

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

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

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

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

STATEMENT OF DIRECTORS' RESPONSIBILITIES

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

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

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

- Properly select and apply accounting policies;

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

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

- Make an assessment of the Company's and the Group's ability to continue as a going concern.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's and the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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 report and accounts, the directors have taken into account a number of factors, including the following:

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

- The Group is profitable with strong underlying cash flows; and

- The Group is financed by long-term borrowings with an average maturity of 15 years and has access to borrowing facilities provided by Lloyds Bank plc, Royal Bank of Scotland plc and Abbey National Treasury Services plc.

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2013

STATEMENT AS TO DISCLOSURE OF INFORMATION TO AUDITOR

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

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

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

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

AUDITOR

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

ON BEHALF OF THE BOARD:

P A Jones

Director

16 April 2014

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

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

Each of the directors as at the date of the Annual Report, whose names and functions are set out on page 20 in the Report of the Directors confirms that, to the best of their knowledge:

a) the 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 of the Company and the undertakings included in the consolidation taken as a whole; 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 and the undertakings included in the consolidation as a whole, together with a description of the principal risks and uncertainties they face.

This responsibility statement was approved by the Board of Directors on 16 April 2014 and signed on its behalf by:

P A Jones

Director

16 April 2014

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

DIRECTORS' BIOGRAPHIES

GREGORY E ABEL

Appointed in January 1997, Mr Abel, 51 is chairman, president and chief executive officer of MidAmerican Energy Holdings Company, based in Des Moines, Iowa. Through its energy-related businesses, MidAmerican provides electric and natural gas service to more than 8.4 million customers worldwide. These businesses are Pacific Power, Rocky Mountain Power and PacifiCorp Energy, MidAmerican Energy Company, NV Energy, Northern Natural Gas Company and Kern River Gas Transmission Company, Northern Powergrid Holdings Company, MidAmerican Renewables, MidAmerican Transmission, CalEnergy and HomeServices of America, Inc., which is the second-largest residential real estate brokerage firm in the U.S. Mr Abel serves as chairman and CEO of PacifiCorp, as chairman of Northern Powergrid and as a director of MidAmerican Energy Holdings Company, Kern River, Northern Natural Gas and HomeServices. Mr Abel serves on the board and executive committee of the Edison Electric Institute and the Greater Des Moines Partnership. He also serves on the H.J. Heinz Company board of directors, the Nuclear Electric Insurance Limited board of directors, the Kum & Go, L.C. board of directors, the executive board of the Mid-Iowa Council Boy Scouts of America, the American Football Coaches Foundation board of directors and is a past member of the Drake University board of trustees.

JON A ANDREASEN

Appointed in March 2010, Mr Andreasen, 50, has been Vice President & General Counsel for the Northern Powergrid Group since 2005. In addition to this appointment, he provides legal counsel to MidAmerican Energy Holdings Company and its other subsidiaries. He is a 1989 graduate of the University of Iowa College of Law and has worked in the electricity utility business since 1989. From 2000-2002 he worked in Newcastle-upon-Tyne for the Northern Powergrid Group and is currently based in Urbandale, Iowa, USA.

RONALD DIXON

Appointed in October 1997, Mr Dixon, 76, 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.

JOHN M FRANCE

Appointed in January 2000, Dr France, 56, 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 Company 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.

THOMAS E FIELDEN

Appointed in October 2009, Mr Fielden joined the Northern Powergrid Group in July 2009 and became Finance Director on 12 October 2009. Mr Fielden, 43, 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.

PATRICK J GOODMAN

Appointed in May 1999, Mr Goodman, 47, is Executive Vice President and Chief Financial Officer of MidAmerican Energy Holdings Company and is responsible for managing all aspects of MidAmerican'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 MidAmerican's domestic and international financings, acquisitions and project developments. Mr Goodman has been the chief financial officer since 1999 and has served in various financial positions, including chief accounting officer since joining MidAmerican 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.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

DIRECTORS' BIOGRAPHIES

PHILIP A JONES

Appointed in April 2007, Dr Jones, 45, is President and Chief Executive Officer of the Northern Powergrid Group, the UK platform in the global portfolio of MidAmerican. Prior to his appointment as President and Chief Executive Officer, he was Strategy & 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 & 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.

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

We have audited the financial statements of Northern Electric plc ("the Company") for the year ended 31 December 2013, which comprise the Consolidated Statement of Profit or Loss, the Consolidated Statement of Profit or Loss and Other Comprehensive Income, the Consolidated and Company Statements of Financial Position, the Consolidated and Company Statements of Changes in Equity, the Consolidated and Company Statements of Cash Flows and the 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 page twenty seven, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

Scope of the audit of the financial statements

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

Opinion on financial statements

In our opinion the financial statements:

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

- have been properly prepared in accordance with the requirements of the Companies Act 2006 and in accordance with IFRSs as adopted by the European Union;

- in respect of the Company have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and

- in respect of the Group Financial Statements, have been properly prepared in accordance with Article 4 of the IAS Regulations.

Opinion on other matter prescribed by the Companies Act 2006

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

Matters on which we are required to report by exception

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

- adequate accounting records have not been kept by the Company, or

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

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

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

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

Christopher Powell FCA (Senior Statutory Auditor)

for and on behalf of Deloitte LLP

Newcastle upon Tyne

Date: 28 April 2014.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

FOR THE YEAR ENDED 31 DECEMBER 2013

2013 2012

as restated

Notes £'000 £'000

CONTINUING OPERATIONS

Revenue 3 350,919 331,614

Cost of sales (42,162) (30,274)

GROSS PROFIT 308,757 301,340

Operating expenses 11 (127,930) (119,977)

OPERATING PROFIT 180,827 181,363

Other gains 444 285

Finance costs 5 (35,895) (36,882)

Finance income 5 1,963 1,912

Income tax 7 (14,971) (15,370)

PROFIT FOR THE YEAR 132,368 131,308

Profit attributable to:

Owners of the parent 132,368 131,308

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2013

2013 2012

as restated

£'000 £'000

PROFIT FOR THE YEAR 132,368 131,308

OTHER COMPREHENSIVE INCOME

Items that will not be reclassified subsequently to profit or loss:

Employee benefit obligation (8,700) (59,700)

Total comprehensive income attributable to:

Owners of the parent 119,393 81,588

The notes on pages 42 to 86 form part of these financial statements

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

31 DECEMBER 2013

2013 2012

as restated

Notes £'000 £'000

ASSETS

NON-CURRENT ASSETS

Intangible assets 13 14,762 7,388

Property, plant and equipment 14 1,790,233 1,647,814

Investments 15 3,392 3,325

Trade and other receivables 17 6,081 4,658

1,814,468 1,663,185

CURRENT ASSETS

Inventories 16 10,399 11,009

Trade and other receivables 17 50,192 66,248

Cash and cash equivalents 18 105,897 150,071

166,488 227,328

TOTAL ASSETS 1,980,956 1,890,513

EQUITY

SHAREHOLDERS' EQUITY

Called up share capital 19 72,173 72,173

Share premium 20 158,748 158,748

Other reserves 20 6,185 6,185

Retained earnings 20 518,891 429,498

TOTAL EQUITY 755,997 666,604

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION - continued

31 DECEMBER 2013

2013 2012

 as restated

Notes £'000 £'000

LIABILITIES

NON-CURRENT LIABILITIES

Trade and other payables 21 484,500 473,421

Borrowings 22 466,759 470,086

Pension liability 25 10,600 36,500

Deferred tax 24 93,164 98,879

Provisions 23 2,063 2,196

1,057,086 1,081,082

CURRENT LIABILITIES

Trade and other payables 21 119,743 122,800

Borrowings 22 44,536 11,425

Tax payable 2,017 7,218

Provisions 23 1,577 1,384

167,873 142,827

TOTAL LIABILITIES 1,224,959 1,223,909

TOTAL EQUITY AND LIABILITIES 1,980,956 1,890,513

The financial statements were approved by the Board of Directors on 16 April 2014 and were signed on its behalf by:

P A Jones

Director

The notes on pages 42 to 86 form part of these financial statements

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

COMPANY STATEMENT OF FINANCIAL POSITION

31 DECEMBER 2013

2013 2012

Notes £'000 £'000

ASSETS

NON-CURRENT ASSETS

Property, plant and equipment 14 1,788 1,837

Investments 15 328,070 328,070

329,858 329,907

CURRENT ASSETS

Trade and other receivables 17 338 566

Tax receivable 7,067 4,518

Cash and cash equivalents 18 33,187 46,271

40,592 51,355

TOTAL ASSETS 370,450 381,262

EQUITY

SHAREHOLDERS' EQUITY

Called up share capital 19 72,173 72,173

Share premium 20 158,748 158,748

Other reserves 20 6,185 6,185

Retained earnings 20 119,293 124,872

TOTAL EQUITY 356,399 361,978

LIABILITIES

NON-CURRENT LIABILITIES

Borrowings 22 1,117 1,117

Deferred tax 24 6,140 7,051

Provisions 23 1,725 1,743

8,982 9,911

CURRENT LIABILITIES

Trade and other payables 21 2,796 7,100

Borrowings 22 2,273 2,273

5,069 9,373

TOTAL LIABILITIES 14,051 19,284

TOTAL EQUITY AND LIABILITIES 370,450 381,262

The financial statements were approved by the Board of Directors on 16 April 2014 and were signed on its behalf by:

P A Jones

Director

The notes on pages 42 to 86 form part of these financial statements

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2013

Called up

share Retained Share Other Total

capital earnings premium reserves equity

£'000 £'000 £'000 £'000 £'000

Balance at 1 January 2012

(as previously reported) 72,173 539,460 158,748 6,185 776,566

Prior year adjustment - (161,550) - - (161,550)

Balance at 1 January 2012

(as restated) 72,173 377,910 158,748 6,185 615,016

Changes in equity

Dividends - (30,000) - - (30,000)

Total comprehensive income

(as previously reported) - 135,407 - - 81,588

Total comprehensive income

(prior year adjustment) - (53,819) - - (53,819)

Balance at 31 December 2012

(as restated) 72,173 429,498 158,748 6,185 666,604

Changes in equity

Dividends - (30,000) - - (30,000)

Total comprehensive income - 119,393 - - 119,393

Balance at 31 December 2013 72,173 518,891 158,748 6,185 755,997

The notes on pages 42 to 86 form part of these financial statements

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

COMPANY STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2013

Called up

share Retained Share Other Total

capital earnings premium reserves equity

£'000 £'000 £'000 £'000 £'000

Balance at 1 January 2012 72,173 130,861 158,748 6,185 367,967

Changes in equity

Dividends - (30,000) - - (30,000)

Total comprehensive income - 24,011 - - 24,011

Balance at 31 December 2012

72,173 124,872 158,748 6,185 361,978

Changes in equity

Dividends - (30,000) - - (30,000)

Total comprehensive income - 24,421 - - 24,421

Balance at 31 December 2013 72,173 119,293 158,748 6,185 356,399

The notes on pages 42 to 86 form part of these financial statements

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2013

2013 2012

as restated

Notes £'000 £'000

Cash flows from operating activities

Cash generated from operations 27 198,035 171,882

Finance costs paid (38,005) (36,970)

Interest received 1,017 1,912

Group relief paid - (4,568)

Tax paid (30,162) (25,902)

Net cash from operating activities 130,885 106,354

Cash flows from investing activities

Purchase of intangible fixed assets (8,776) (3,960)

Purchase of tangible fixed assets (199,392) (169,658)

Sale of tangible fixed assets 444 285

Customer contributions 32,670 42,071

Dividends received 492 334

Net cash used in investing activities (174,562) (130,928)

Cash flows from financing activities

Movement in external loans 30,341 (22,000)

Movement in loans from Group (838) (2,987)

Equity dividends paid (30,000) (30,000)

Net cash used in financing activities (497) (54,987)

The notes on pages 42 to 86 form part of these financial statements

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

COMPANY STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2013

2013 2012

Notes £'000 £'000

Cash from operating activities

Cash generated from operations 27 (2,511) 520

Finance costs paid (9,401) (9,605)

Interest received 660 951

Dividends received 30,405 30,351

Tax paid (2,234) (3,247)

Net cash from operating activities 16,919 18,970

Cash flows from investing activities

Purchase of tangible fixed assets (3) (56)

Net cash used in investing activities (3) (56)

Cash flows from financing activities

Equity dividends paid (30,000) (30,000)

Net cash used in financing activities (30,000) (30,000)

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2013

1. GENERAL INFORMATION

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

The nature of the 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 IFRSs 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. A summary of the more important group accounting policies is set out below.

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 Report of the Directors on page 27.

Judgments in applying accounting policies and key sources of estimation uncertainty

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

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

Critical accounting policies

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

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee company so as to obtain benefits from its activities.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

2. ACCOUNTING POLICIES - continued

Adoption of new or revised standards

The Group has applied IAS 19 Employee Benefits (as revised in 2011) and the related consequential amendments for the first time in 2013.

IAS 19 (as revised in 2011) changes the accounting for defined benefit plans and termination benefits. The most significant change relates to the accounting for changes in defined benefit obligations and plan assets. The amendments require the recognition of changes in defined benefit obligations and in the fair value of plan assets when they occur and hence eliminate the 'corridor approach' permitted under the previous version of IAS 19 and accelerate the recognition of past service costs. All actuarial gains and losses are recognised immediately through other comprehensive income in order for the net pension asset or liability recognised in the consolidated statement of financial position to reflect the full value of the plan deficit or surplus. Furthermore, the interest cost and expected return on plan assets used in the previous version of IAS 19 are replaced with a 'net interest' amount under IAS 19 (as revised in 2011), which is calculated by applying the discount rate to the net defined benefit liability or asset. These changes have had an impact on the amounts recognised in the statement of profit or loss and other comprehensive income in prior years (see the tables below for details). In addition, IAS 19 (as revised in 2011) introduces certain changes in the presentation of the defined benefit cost including extensive disclosures.

Specific transitional provisions are applicable to the first-time application of IAS 19 (as revised in 2011). The Group has applied the relevant transitional provisions and has restated the comparative amounts on a retrospective basis (see the tables below for details).

Impact on profit/(loss) for the year of the application of IAS 19 (as revised in 2011):

£m

Impact on other comprehensive income for the year of the application of IAS 19 (as revised in 2011):

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

2. ACCOUNTING POLICIES - continued

Impact on assets, liabilities and equity as at 1 January 2012 of the application of IAS 19 (as revised in 2011):

Assets

Equity

Liabilities

Impact on assets, liabilities and equity as at 31 December 2012 of the application of IAS 19 (as revised in 2011):

Assets

Equity

Liabilities

IFRS 11 replaces IAS 31 - Interests in Joint Ventures. IFRS 11 deals with how a joint arrangement, in respect of which two or more parties have joint control, should be classified and accounted for. Under IFRS 11, there are only two types of joint arrangements - joint operations and joint ventures. Previously IAS 31 contemplated three types of joint arrangements - jointly controlled entities, jointly controlled operations and jointly controlled assets. The classification of joint arrangements under IAS 31 was primarily determined based on the legal form of the arrangement. Under IFRS 11, classification is determined based on the rights and obligations of the parties to the joint arrangement.

The directors reviewed and assessed the classification of the Group's investments in joint arrangements in accordance with the requirements of IFRS 11. The directors concluded that the Group's investment in Vehicle Lease and Service Limited, which was classified as a jointly controlled entity under IAS 31 and was accounted for using the equity method, should be classified as a joint venture under IFRS 11 and continue to be accounted for using the equity method. Consequently, no change in accounting is required.

Revenue

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

Revenue represents charges for the use of the Group's distribution network, amortisation of customer contributions, recharge of costs incurred on behalf of companies in the Northern Powergrid Holdings Company group of companies (the "Northern Powergrid Group") and the invoiced value of other goods sold and services provided, exclusive of value added tax.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

2. ACCOUNTING POLICIES - continued

Revenue - continued

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

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

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 statement of financial position date. This is normally measured by the proportion that contract costs incurred for work performed to date bear 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, revenue in respect of that contract is recognised to the extent of the costs incurred where it is probable they will be recovered. 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.

Operating profit

Operating profit is stated before profit on disposals, the share of the results of joint ventures, investment income and finance costs.

Software development costs

Costs in respect of major developments are capitalised and amortised over the expected life of the software.

Capitalised software costs that are not an integral part of the related hardware are included in intangible assets on the statement of financial position and amortised over the expected life of the software of up to 10 years.

Investments

Undertakings, other than subsidiary undertakings, which the Group jointly controls, are treated as joint ventures.

The results and assets and liabilities of joint ventures are incorporated in these financial statements using the equity method of accounting. Investments in joint ventures are carried in the statement of financial position at cost as adjusted by post-acquisition changes in the Group's share of the net assets of the joint venture, less any impairment in the value of individual investments. Losses of the joint venture in excess of the Group's interest in those joint ventures are not recognised.

Fixed asset investments are stated at cost less provision for 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 2013

2. ACCOUNTING POLICIES - continued

Property, plant and equipment and depreciation

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

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

Non-operational assets:

Freehold land is not depreciated.

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

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

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

Financial instruments

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

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

For certain categories of financial assets, such as trade receivables and construction contract debt, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables and construction contract debts 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.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

2. ACCOUNTING POLICIES - continued

Financial instruments - continued

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

Fair value measurements

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

Financial liabilities and equity

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

Inventories

Inventories are stated at the lower of cost and net realisable value as follows:

Taxation

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

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

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

2. ACCOUNTING POLICIES - continued

Taxation - continued

Deferred tax liabilities are recognised for taxable temporary differences arising on 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.

The carrying amount of deferred tax assets is reviewed at each statement of financial position date 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.

To the extent that gains or losses are recognised in other comprehensive income, tax related to those gains or losses are recognised in other comprehensive income.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the statement of profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

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 software development costs noted below, the Group and Company do not carry out any other development activity that would give rise to an intangible asset.

Leases

Leases are classified as finance leases whenever 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.

Rental costs under operating leases are charged to the statement of profit or loss or to property, plant and equipment in equal amounts over the periods of the leases.

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 each statement of financial position date. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in other comprehensive income.

Past service cost is recognised immediately, to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average period until the benefits become vested.

The asset or liability recognised in the statement of financial position represents the present value of the defined benefit obligation less the fair value of the scheme assets on a bid value basis, together with adjustments for unrecognised actuarial gains and losses and past service costs. The asset or liability initially recognised is then assessed against the requirements of IFRIC 14, The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, and adjustments made when appropriate.

The defined benefit obligation is calculated annually by an independent actuary using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the future cash outflows using yields on high quality sterling corporate bonds that have terms to maturity approximating to the terms of the related pension liability.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

2. ACCOUNTING POLICIES - continued

Pensions - continued

The key assumptions used for the actuarial valuation are based on the best estimate of the variables that will determine the ultimate cost of providing post-employment benefits and follow discussions with the actuary. The operating results are affected by the actuarial assumptions used. These assumptions include investment returns on the scheme's assets, discount rates, pay growth and increases to pensions and deferred pensions. These assumptions may differ from actual results due to changing market and economic conditions and longer or shorter lives of scheme members. Further detail is provided in Note 25.

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. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the statement of financial position.

Provisions

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

Trade receivables

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

Amounts due from customers for contract work is valued based on the cost of direct materials and labour plus attributable overheads based on the normal level of activity less progress payments.

Trade payables

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

Borrowings

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

Cash and cash equivalents

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.

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 the principal area of activity of the distribution of electricity in the United Kingdom.

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

3. SEGMENTAL REPORTING - continued

REVENUE

SEGMENT RESULTS

OTHER INFORMATION

"Other" comprises Engineering Contacting and business support units.

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

Consolidation Adjustments include the recognition of the £10.6m retirement benefit liability.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

3. SEGMENTAL REPORTING - continued

Unallocated corporate assets and liabilities include cash and cash equivalents (£105.9m), borrowings (£511.3m) and taxation (£95.2m).

External sales to RWE Npower plc in 2013 of £86.6m are included within the Distribution segment.

REVENUE

SEGMENT RESULTS

OTHER INFORMATION

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 02366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2013

3. SEGMENTAL REPORTING - continued

"Other" comprises Engineering Contracting and business support units.

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

Consolidation Adjustments include the recognition of the £36.5m retirement benefit liability.

Unallocated corporate assets and liabilities include cash and cash equivalents (£150.1m), borrowings (£481.5m) and taxation (£106.1m).

External sales to RWE Npower plc in 2012 of £81.6m are included within the Distribution segment.

4. EMPLOYEES AND DIRECTORS

58,604, 52,750