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 2011.

Pursuant to LR 14.3.6, the document has been submitted to the National Storage Mechanism and will shortly be available for inspection at:

www.hemscott.com/nsm.do

The 2011 Annual Report and Accounts are also available on the website

www.northernpowergrid.com

For a fully formatted version of this document please go to:

http://www.northernpowergrid.com/som_download.cfm?t=media:documentmedia&i=1031&p=file

Enquiries:

John Elliott 0191 223 5103

REPORT OF THE DIRECTORS AND

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011

FOR

NORTHERN ELECTRIC PLC

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

CONTENTS OF THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2011

Page

NORTHERN ELECTRIC PLC

COMPANY INFORMATION

FOR THE YEAR ENDED 31 DECEMBER 2011

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: 2366942 (England and Wales)

AUDITOR: Deloitte LLP

Newcastle upon Tyne

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011

The directors present the annual report and accounts of Northern Electric plc (the "Company") and its subsidiary companies (together the "Group") for the year ended 31 December 2011, which includes the business review and audited financial statements for that year. Pages 1 to 24 inclusive of this annual report comprise a Report of the Directors that has been drawn up and presented in accordance with the Companies Act 2006.

Cautionary statement regarding forward-looking statements

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

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

PRINCIPAL ACTIVITY

The Company is part of the Northern Powergrid Holdings Company group of companies (the "Northern Powergrid Group") and its principal activity during the year was to act as a holding company.

The activities of the Company's principal subsidiaries during the year were the distribution of electricity by Northern Powergrid (Northeast) Limited ("Northern Powergrid"), which was previously called Northern Electric Distribution Limited, and the provision of engineering contracting services by Integrated Utility Services Limited ("IUS").

Northern Powergrid serves an area of approximately 14,400 sq km in the northeast of England with a resident population of 3.2 million, which extends from North Northumberland, south to York and west to the Pennines. Northern Powergrid's distribution system receives electricity from the National Grid's transmission system and distributes it, at voltages of up to 132kV, to approximately 1.6 million customers connected to its network of transformers, switchgear and overhead and underground cables. Northern Powergrid is an authorised distributor under the Electricity Act 1989 and holds an electricity distribution licence granted by the Secretary of State.

IUS operates an engineering contracting business, which is divided into three main streams. UK Contracting provides design, construction and maintenance services to public and private networks throughout the UK, Rail provides a total service from feasibility to design, installation, commissioning and on-going maintenance and Multi-utility provides new electrical, gas and water connections to housing and property developers. IUS also provides connections consultancy and system study services.

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

REVIEW OF BUSINESS

Although there continued to be only limited evidence of any improvement in the general economic environment, the Group delivered a satisfactory financial performance for the year, which was mainly attributable to a benefit from the change to the rate of corporation tax, and higher tariffs introduced during the year, which resulted in an increase in revenue compared to the prior year. The difficult trading conditions in the engineering contracting market continued for IUS and had an adverse impact on IUS' earnings due to lower volumes of work being awarded and delivered, with activity levels in the UK Contracting and Rail areas of IUS' business reducing in comparison to 2010. IUS continued to make a positive contribution to the performance of the Group.

During the year, Northern Powergrid completed a review of the efficiency of its capital expenditure in order to maintain consistent delivery of its unit costs under the Distribution Price Control 5 ("DPCR5") arrangements and continued its drive to improve customer service with action being taken to consolidate the operations and extend the opening hours of the customer relations centre, the creation of geographically-located customer response teams and the introduction of certain internet-based services in order to improve the efficiency of those services.

There Group's health and safety performance continued to compare well with the industry average but the internal targets were missed in respect of lost time accidents, operational incidents and preventable vehicle accidents. However, environmental performance improved with the amount of fluid loss to ground and carbon emissions reducing in comparison to the prior year.

RESEARCH AND DEVELOPMENT

In 2011 Northern Powergrid began working, in partnership with British Gas, Durham University and EA Technology, on a three-year project, the Customer-Led Network Revolution, under Ofgem's Low Carbon Networks Fund. This was the largest project supported by Ofgem in the first year of the fund and Northern Powergrid will incur expenditure of £31m over the three-year life of the project. Of that expenditure, 90% is funded by electricity customers in Great Britain and successful delivery of the project over the three years 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.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

The first year of the project comprised the project initiation and detailed specification phases. All four key milestones for the year were met and the project remains on track to deliver learning that is relevant, timely and valuable.

Northern Powergrid 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. That programme includes building on the previously successful field trials of newly developed superconducting fault limiters to provide alternatives to traditional engineering solutions for network constraints, investigating demand side management impacts on network risk to support the low carbon network activities and developing a warning device to detect when vehicles and other equipment are in contact with live conductors, so allowing operators to take mitigating action safely and at decreased risk of injury to themselves and others.

During the year, the Group invested £4,075,000 (Note 6 to the accounts) in its research and development activities.

FUTURE DEVELOPMENTS

The financial position of the Group, as at the year end, is shown in the statement of financial position on page 32 and there have been no significant events since the year end.

The Company intends to continue to act as a holding and investment company and the directors intend to develop the Group's business in a manner that concentrates on its core skills of electricity distribution and engineering contracting.

Northern Powergrid will continue to operate its business with the goal of out-performing the allowances provided in distribution price control 5 ("DPCR5"), while efficiently investing in the electricity distribution system with the aim of improving the quality of supply provided to customers.

IUS will look 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.

DIRECTORS

The directors shown below have held office during the whole of the period from 1 January 2011 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

GROUP'S POLICY ON PAYMENT OF CREDITORS

The Group complies with the Better Payment Practice Code for the prompt payment of suppliers in accordance with the normal terms of trade. It is Group policy with respect to its suppliers to settle the terms of payment with those suppliers when agreeing the terms of each transaction, to ensure that those suppliers are aware of the terms of payment and to pay in accordance with the Group's contractual and other legal obligations. The number of days purchases in trade creditors for the Group at 31 December 2011 was 23 (2010: 32).

VOTE HOLDER AND ISSUER NOTIFICATION

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

POLITICAL AND CHARITABLE CONTRIBUTIONS

During the year, charitable donations of £19,125 were made (2010: £25,452), principally to local charities serving the communities in which the Group operates. No contributions were made to political organisations (2010: nil).

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

STRATEGIC OBJECTIVES

As part of the Northern Powergrid Group, the Group's strategic objectives remain based on the Core Principles 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 terms of shaping the future direction of the electricity distribution network 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.

CORE PRINCIPLES

Financial strength

During the year, the Group continued to maintain good control in respect of both its capital and non-operational expenditure and Northern Powergrid completed the financing arrangements with the European Investment Bank ("EIB"), which commenced in 2010. The Company secured an acceptable settlement in the triennial valuation of the defined benefit pension scheme and the Group continued to closely monitor and manage the various financial issues that may impact on its business as a result of the effect of the general economic climate on its customers, including lower activity in terms of new connections required to the network and the potential for higher debt write-off.

Northern Powergrid benefits from the stability provided by 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 £301,427,000 was £12,858,000 higher than the prior year mainly due to additional allowances from the DPCR 5 settlement, partly offset by a reduction in engineering contracting revenues.

Operating profit

The Group's operating profit at £171,218,000 was £17,618,000 higher than the previous year reflecting increased revenues, combined with cost savings.

Finance costs and investment income

Finance costs net of investment income at £35,689,000 were £3,749,000 higher then the previous year reflecting additional borrowings.

Taxation

The effective tax rate in the current year is 15%. Details are provided in Note 7 to the accounts.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

Results and dividends

The Company made a profit after tax for the year of £116,139,000. An interim dividend of £30m was paid during the year and the directors recommend that no final dividend be paid in respect of the year.

Share capital and debt structures

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

The financial obligations of Northern Powergrid in respect of the £119m credit facility provided by EIB are guaranteed by Northern Powergrid Holdings Company and, between 31 January 2011 and 28 February 2011, Northern Powergrid drew down the entire facility of £119m at an average fixed rate of 4.228%.

Dividend policy

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

Cash flow

The 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.

Movements in cash flows were as follows:

- Operating activities: Cash flow from operating activities at £124,468,000 was £23,650,000 higher than the previous year primarily as a result of the increase in distribution revenue in the year and favourable working capital movements.

- Investing activities: Net cash used in investing activities at £74,864,000 was £7,900,000 lower than the previous year reflecting a reduction in net capital expenditure.

- Financing activities: The net cash generated from financing activities at £112,867,000 represents a £205,145,000 favourable variance compared to 2010 due to the raising of new external debt finance during 2011 and the payment of a larger dividend in the prior year.

Treasury

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.

Liquidity risk

Northern Powergrid has access to £75m under a three year committed revolving credit facility provided by Lloyds TSB Bank plc, The Royal Bank of Scotland plc and Abbey National Treasury Services plc, which expires on 31 March 2013. 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 has a £7m overdraft facility provided by Lloyds TSB Bank plc, which is renewable 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.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

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 2011, 99% of the Group's borrowings were at fixed rates and the average maturity for these borrowings was 17 years.

Currency risk

No material currency risks are faced by the Group.

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 2011 and during the year it was the Group's policy not to hold any derivative financial instruments.

Pensions

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

During the year, the Company was engaged with the Group Trustees in the triennial actuarial valuation process, as at 31 March 2010, in order to determine the funding position of the Scheme and the associated deficit repair arrangements. The actuarial valuation concluded that there was a shortfall of assets in the Scheme compared to the value of accrued benefits of £276m.

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

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

Insurance

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

Customer service

During the year, Northern Powergrid distributed electricity to customers in its distribution services area and continued to improve the overall performance of the distribution network through an investment strategy targeted at delivering improvements in an efficient and cost-effective manner. Northern Powergrid is focused on delivering a reliable and dependable supply of electricity and a high standard of service to its customers. Northern Powergrid made a major commitment to improving customer service, with the introduction of a programme focused on the development of the customer experience and actions being taken aimed at improving performance in its contact centre services, web services, stakeholder engagement and customer service competencies and complaints handling processes. A significant number of improvements have already been identified and delivered as part of the overall goal to improve customer satisfaction with the service provided.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

Those improvements included:

- the introduction of monthly connections surgeries to enable new connections customers to discuss their specific projects with Northern Powergrid representatives;

- building on the introduction of the interactive voice response system in the customer relations centre in order to take advantage of the latest developments in automatic messaging and to enable the provision of an improved service to customers during power cuts, including text and voice-message updates;

- launching a new website offering so that customers can self-serve on several service lines and obtain information on power cuts via a smart phone application;

- improving the accuracy of the times estimated for the restoration of supply during power cuts that are provided to customers;

- continuing to improve under-performing parts of the distribution network by identifying "hot spots" and taking specific action to address the issues in those areas;

- maintaining the priority services register so that Northern Powergrid is aware of people with disabilities or special needs, who may be affected by power cuts and can take appropriate action to assist those people in such circumstances;

- undertaking a programme to reduce the number of instances in which Northern Powergrid fails to meet an electricity guaranteed standard of performance;

- undertaking a training programme to provide employees from other parts of the Northern Powergrid Group with the tools and skill sets to handle calls regarding power cuts during periods of peak call demand and supporting that process with the implementation of new voice-over-internet-protocol technology; and

- undertaking a major customer service training programme for employees in all areas of the business to provide a service personal to each customer.

Northern Powergrid achieved a customer satisfaction score of 86.6% for the regulatory year to 31 March 2011 and, by building on the telephony system and actions mentioned above, intends to more effectively integrate its other customer facing processes in order to improve the service provided. Continued development of Northern Powergrid's customer service improvement plan will include increasing focus on excellence in customer service in order to achieve a customer satisfaction score of greater than 90%.

Northern Powergrid's performance in respect of the new electricity connections guaranteed standards of performance introduced in October 2010 has continued to be positive, with the recorded performance for the first calendar year of operation being 99.87%.

The performance of the distribution network operators ("DNOs") against guaranteed standards, set for activities such as restoring supplies after unplanned interruptions, provides a measure of the level of customer service. Performance against these measures forms part of Northern Powergrid's regular reporting to Ofgem.

Ofgem's incentive scheme for quality of service, by which the DNOs are provided with financial incentives, is based upon targets set by Ofgem with regard to each DNO's performance in the following areas:

- The number of interruptions to supply;

- The duration of interruptions to supply; and

- Customer satisfaction.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

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 faults and planned outages that last for three minutes or longer. CI measures the average number of supply interruptions for every 100 connected customers due to faults and planned outages 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 the target number in respect of CML and CI and more than the target number in respect of customer satisfaction. Northern Powergrid's reported performance for the regulatory year to 31 March 2011, against the targets determined by Ofgem, was as follows:

Performance in the regulatory year to 31 March 2011 was better than Ofgem's target for both CML and CI. Customer satisfaction was below target and was affected by the introduction into the target, in April 2010, of an element relating to the unsuccessful call rate. Measured without the unsuccessful call element and on a like-for-like basis with the prior year, customer satisfaction performance would have been 90%. In this respect, Northern Powergrid is continuing to develop its telephony system to address the unsuccessful call rates and anticipates that the actions mentioned above, together with the various improvement actions in respect of the network's resilience, will continue to support improvements in customer service performance.

Operational excellence

The Group's core service continues to be providing and maintaining an efficient distribution network that delivers electricity effectively. During the year, £122,710,000 was invested in the improvement of the distribution network, including the replacement of assets and continuing network improvements intended to increase the quality of the electricity supply provided to customers.

Operational activity

Northern Powergrid's investment strategy is designed to deliver improvements in an efficient and cost-effective manner in order to improve the network's resilience by minimising the number of faults that occur, reducing the average number of customers affected by a fault and providing a quicker restoration service in the event of a fault.

The Field Operations structure is designed to provide the best possible foundation for optimum operational performance and is based on seven individual business units for the operation of the network. Those business units are Health and Safety, 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.

Northern Powergrid's priorities during the year included a reduction in the average level of fault repair work in progress, the introduction of improvements in field response and supply restoration times and in the management of intermittent faults, the implementation of enhanced controls for outage risk management and a more robust approach to the control of operations on the low voltage network.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

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

- Completion of major asset replacement works for the 132kV switchgear at Tynemouth in North Tyneside, a new 33/20kV substation to provide improved voltage regulation in the Wensleydale area of North Yorkshire, the replacement of 3.5km of 33kV oil-filled cables over the River Tyne, refurbishment of over 8km of 66kV overhead line and the refurbishment or rebuilding of 44km of high voltage and 31km of low voltage overhead line;

- Commencement of works to reinforce the 33kV network in the Harrogate area, to replace the 20kV switchgear at Fawdon and Hartmoor substations and the 11kV switchgear at Northallerton and Catterick Camp substations, to refurbish almost 20km of 66kV overhead line and almost 50km of 132kV overhead line and of a number of projects that will conclude with the replacement of approximately 20km of 33kV oil filled cables in 2012;

- Replacement of 111 units of high voltage outdoor switchgear, 42 high voltage distribution substations and 339 units of high voltage indoor switchgear;

- The upgrade and reinforcement of 21 sites to address the quality of supply performance issues relating to those circuits; and

- The installation and commissioning of 10 new remote control sites.

In order to deliver its investment strategy, Northern Powergrid used a mix of its own staff and contractors, including Integrated Utility Services Limited, an affiliated a company registered in the Republic of Ireland.

Employee commitment

Health and safety

During the year, the focus on health and safety continued to be of paramount importance for the directors, as it is for all employees. Providing and maintaining a safe working environment is the first objective of the Northern Powergrid Group. There is a continuous drive for improvement in safety performance through the setting of challenging goals and the pursuit of a programme of on-site safety audits, which reflect the Northern Powergrid Group's fundamental objectives that none of its staff should go home injured and all employees should commit to behaving safely all of the time. The Northern Powergrid Group makes no compromise in respect of its health and safety obligations and centres its safety plans and systems on the principles found in companies with world class safety performance.

In 2011 Northern Powergrid received a President's Award and IUS received its fourth consecutive Gold Medal from the Royal Society for the Prevention of Accidents. The President's Award is for achieving ten consecutive Gold Awards, which are presented in recognition of achievements in the year in question and continued or improving standards of health and safety over a sustained period. Northern Powergrid also 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.

In respect of the main key performance indicators used by the Group to monitor safety performance, the goal is to achieve performance that is below the target number. Those key performance indicators are as follows:

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

The Group measures its safety performance in calendar years and, although performance continued to be better than the industry average, it fell short of the internal goals in certain areas during 2011. The Northern Powergrid Group continues to implement a safety and health improvement plan that targets delivery of continuous improvement and, as part of that plan, carried out a cross-business operational assurance audit programme by senior managers during the year in order to reinforce the operational safety values. The Northern Powergrid Group also delivered operational seminars and stand down briefings to cascade information on safety trends and to launch a new method of site specific risk assessment.

Performance in respect of preventable vehicle accidents failed to achieve the target for 2011 and showed a downturn in performance compared with 2010. The Northern Powergrid Group continued to implement a robust road risk management plan, which involved a significant number of staff undertaking the Institute of Advanced Motorists online driver assessment and training module 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.

In terms of the health of employees, the sickness absence rate across the Northern Powergrid Group was 2.82% and, in support of the drive for continuous improvement, the Group introduced a new health surveillance policy during 2011 and conducted a stress survey, which led to action plans being implemented to address those areas which were identified for development.

Management structure

The Group has a clearly defined leadership team in which specific roles are identified so allowing effective management of the Group's business and response to any control weaknesses that may become apparent, with single units being in place for field operations, customer operations, asset management, and health, safety and environment. The business systems, human resources, procurement and finance functions are centralised in order to provide those services across the Northern Powergrid Group. IUS has its own dedicated management team.

Employees

The challenging external economic environment continued throughout the year and the Group continued to implement its programme of cost mitigation, which included the control of headcount.

The Group continues to place significant emphasis on the importance and application of high standards of management and performance in pursuit of the Core Principles and ensures that a level of consistency is adopted in so doing. In respect of employee relations, the Group and the trades unions continue to work towards building constructive and partnered relationships.

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 across the DPCR5 period. 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 64 members of staff in 2011 and has a target to recruit an additional 75 in 2012 under its workforce renewal programme. Overall, plans are in place to have recruited a total of 275 graduate trainees, technical trainees and craft apprentices by the end of 2015.

The Group employed 1,162 staff at the end of December 2011 (2010: 1,149).

The Northern Powergrid Group is committed to proper business conduct and, in common with MidAmerican Energy Holdings Company ("MidAmerican"), its parent company, 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 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.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

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.

Disabled employees

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

Employee consultation

The Northern Powergrid Group has a constitutional framework in place 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 any 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 the issue of an employee publication. During the year, the President and Chief Executive Officer of the Northern Powergrid Group delivered regular broadcast briefings using telephone conference call facilities in order to provide employees with updates such as on the performance of the Northern Powergrid Group, financial, organisational and safety issues and customer service performance.

Environmental respect

The Northern Powergrid 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. The most recent visit was a six-monthly surveillance assessment carried out by Lloyd's Register Quality Assurance in October 2011. The assessment report drew management attention to some minor non-conformances to be addressed by agreed proposed actions. The report also noted good processes for identifying environmental aspects and legal requirements and taking them into account in the system. There were no major non-conformances noted and continued certification was recommended and subsequently confirmed.

Having met its key improvement target in the reduction of cable fluid leakages for the year, strong performance on all environmental targets continued to provide a crucial contribution to the control of Northern Powergrid's environmental impact to ground and the associated risk to the business. Future improvements are supported by the Northern Powergrid Group's continued asset investment plan.

Improvements in support of the Northern Powergrid Group's environmental policy objectives during the year 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 installing underground cables using trenchless technology, where it is efficient and practicable to do so, as opposed to open-cut excavations. In addition the Group provides environmental awareness training for new personnel and contractors and periodic refresher training for all staff.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

Environmental impact on protected structures, features, areas, wildlife and habitat is a central consideration when planning improvements to the electricity distribution network. This includes protecting bird life by placing bird-diverters on power lines, in reserves or in locations where rare species of bird are known to live or breed and in response to information from incident trends and the proximity of wetlands and flight paths.

Sustainability

The Group takes its responsibilities in respect of its contribution to reducing the impact of global warming seriously, both in its capacity as a major participant in the UK energy industry and in terms of its own carbon footprint. Through its involvement in industry groups and its interactions with government and regulators, the Group is contributing to the target of reducing the carbon emissions of the UK economy and it also works with customers to assist in solving issues raised by the introduction of low-carbon generation and technologies and their implications for the planning and operation of the electricity network.

The Northern Powergrid Group measures and publishes details of its own carbon footprint. It set and achieved a target of reducing that footprint by 5% in 2011 and has set a target to reduce its carbon footprint by a further 3.5% in 2012. Actions taken in 2011 to assist in meeting this target included fitting speed limiters to the vehicle fleet, trialling the use of an electric car for six months and extending the recycling of office waste to all major office sites. Northern Powergrid has, in line with Ofgem's requirements, contributed to the sustainability agenda through public reporting on the carbon footprint of its business and, during 2011, achieved 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 significant increase in the number of installations by customers of low-carbon technologies such as photovoltaic solar panels and heat pumps continued during 2011 and Northern Powergrid worked with customers and installers to facilitate the process of connecting this technology to the electricity network. In June 2011, Northern Powergrid hosted a well attended and well received micro-generation conference, in conjunction with CO2 Sense, to provide information to and obtain feedback from installers and social-housing providers about this process.

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 1,550 regulatory obligations contained within the compliance database is currently assigned to 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 perceived risks to the compliance process, which are then addressed. The Regulation Manager reports to Northern Powergrid's board of directors on the outcome of each quarter's exercise.

A revenue-related issue arose during 2010 in that the adjustment of settlements data by certain suppliers had the effect of distorting the apparent performance of Northern Powergrid under the losses incentive scheme for the regulatory year ended 31 March 2010. Throughout 2011 Northern Powergrid has engaged with Ofgem, which is seeking to resolve the complex issues of the Distribution Price Control Review 4 losses incentive arrangements and the impact of electricity supplier data-management programmes. Ofgem's decision to approve the Northern Powergrid Group's application to use a revised methodology for the calculation of 2009-2010 annual reported losses was sustained throughout 2011 and Northern Powergrid expects to reach a final conclusion to this issue with Ofgem during 2012. In accordance with International Financial Reporting Standards, the Group has not included any recognition of this issue in the accounts.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

Under the new RIIO (revenue = incentives + innovation + outputs) model for regulation that emerged in 2010 from Ofgem's review of energy-network regulatory arrangements, price controls will be set for eight or nine years (rather than five as at present), with provision for a mid-period review of the outputs that network companies are required to deliver and there will be increased involvement for stakeholders. As part of the move to RIIO, Ofgem determined in the first quarter of 2011 that it intends to retain a 20-year depreciation profile for existing assets while moving new assets to a 45-year profile. Ofgem launched the RIIO-ED1 price control review during March 2012 which, on conclusion of the process, will set revenues for the period from 2015 to either 2023 or 2024.

Corporate social responsibility

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

The Group 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. The Group seeks to engage disadvantaged groups in projects that bring about benefits for participants and communities, which is supported by a small donation programme focused on the Group's key priorities of support for youth, education and the environment.

In order to improve its response to emergency situations, Northern Powergrid has developed 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.

As well as redeploying staff from planned works to help restore power as quickly as possible when major incidents occur, Northern Powergrid dispatches customer service vehicles to the heart of areas affected, which are able to distribute hot drinks and microwave meals and generally assist with the welfare of customers in order to alleviate the impact of the incident. Northern Powergrid also utilises 'customer ambassadors' who are able to pay particular attention to customers who have registered on the Priority Services Register. Working in conjunction with the customer relations centre, the ambassadors ensure that these high-priority customers are comfortable and kept informed of the situation both throughout the event and after the power is restored.

As safety is the first priority and underpins every aspect of its operations, Northern Powergrid participates 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. This campaign and a school visits programme promoting safety messages are supported through an interactive website and mobile phone game. In addition, the Group supports a sports programme in partnership with England Athletics, which is delivered through local schools and combines important safety messages with the promotion of healthy lifestyles.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

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, if a licensee wishes to appeal such a modification, the licensee may insist that the matter is referred to the Competition Commission for it to determine whether the modification should be made. 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. However, it is expected that the next price control will be set for eight or nine years. During the term of the current price control, changes in costs incurred will have a direct impact on Northern Powergrid's financial results.

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 full value of the deficits attributable to a licensee's distribution business in existence as at 31 March 2010 (after an adjustment to reflect the residual of unfunded early retirement deficiency costs as at 31 March 2010), via its regulated revenues.

However, given the regulated nature of the DNOs' businesses, Ofgem took the view that there is not the same risk or urgency as in other sectors of the economy to ensure that those deficits are repaired as soon as possible and therefore set a notional repair period of 15 years for the purpose of assessing the DNOs' allowed revenues in respect of pension costs over the DPCR5 period.

The other financial risks facing the Group are outlined in the Treasury section on page 6 of this report.

Operational risk

There are a number of risks to Northern Powergrid's operational performance in respect of which mitigating actions have been taken. Appropriate credit cover arrangements are in place with the electricity suppliers, which would allow recovery of defaulted payments through the price control mechanism, a robust major incident management plan is implemented whenever severe weather impacts on the distribution network's performance and a programme of enhanced security measures has been put in place and awareness raising activity pursued at a national and local level in respect of the issues associated with metal theft from Northern Powergrid's sites.

The principal operational risks facing IUS include the risk of increased competition and tighter margins, the loss of key management, personnel and sub-contract resource, revenue dependency on contractual relationships and the potential impact on profitability of increased bad debt as a result of the economic climate.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

Commercial risk

Managing commercial risk in the context of the difficult economic and financial trading conditions, which continued throughout the year, was, and will continue to be, of key importance to the Group's operations. In that respect the Group 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 remain in place in line with Ofgem's guidance. 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.

Risk management

The Northern Powergrid Group operates a structured and disciplined approach to the management of risk, as part of the overall risk management approach. 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 level of 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.

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.

The risk management programme includes regular review of crisis management and disaster recovery plans, which are periodically tested. During the year, activities included a review of the Northern Powergrid Group's major incident plan for operational systems, participation in a national exercise to review the planned response to a major flood event, a seminar with other regional utilities to share best practice on disaster preparedness and response, a peer review of the Northern Powergrid Group's risk management systems by MidAmerican, a review of business continuity plans in the event of the loss of a key office building, penetration tests against firewall systems and disaster recovery tests of IT servers and priority processes.

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: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (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 Sarbanes-Oxley Act. A review is undertaken of the company-wide controls in place on a regular basis and, while no significant areas of weakness have been identified, any recommended improvements are implemented.

In addition, the 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 Sarbanes-Oxley Act, operates under OHSAS 18001, which is subject to external certification and regular assessment, 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. During 2011, the board of Northern Powergrid Holdings Company addressed the risks introduced by the Bribery Act 2010 through a new 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 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.

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.

CORPORATE GOVERNANCE STATEMENT

The Financial Reporting Council issued the UK Corporate Governance Code (the "Code") in June 2010. 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 should set 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 main principles incorporated in the Code.

Compliance statement

Set out below and in the review of the year in the Report of the Directors 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 B2, B6, B7, 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 Sarbanes-Oxley Act.

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

Section A: Leadership

Main Principle A1: The Role of the Board:

The board of directors is responsible for the overall management of the Company and its system of internal controls. The directors have agreed a schedule of board meetings at which they review performance, strategy and operational and risk-related issues for the Group.

In addition, the President and Chief Executive Officer of the Northern Powergrid Group 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 Company are discussed.

The Chairman of MidAmerican also receives weekly, monthly and quarterly reports on the Company's performance from the Northern Powergrid Group's 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 Company's Finance Director and General Counsel present their respective weekly reports.

The board meets as required to consider relevant issues and met on seven occasions in total during the year, with the attendance of those directors, who were directors as at 31 December 2011, being as follows:

Operational management of Northern Powergrid's business 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. The senior management team of IUS also meets monthly but separately with the President and Executive Officer and other senior managers of the Northern Powergrid Group.

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 Sarbanes-Oxley Act.

A review is undertaken of the company-wide controls in place on an annual basis and the review carried out in 2011, while not identifying any areas of significant weakness, resulted in the implementation of various recommended improvements. The key features of the Northern Powergrid Group's internal control system and the issues addressed by the Company and the Northern Powergrid Group during the year can be found in the review of business in the Report of the Directors.

A schedule of key delegations of authority 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.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

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

Treasury Committee

The Treasury Committee oversees and implements the treasury policies outlined 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:

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

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 Northern Powergrid Group companies 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.

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 Report of the Directors.

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

Main Principle A2: Division of Responsibilities

Mr Abel, the Chairman of MidAmerican, was formally appointed as Chairman of the Board with effect from 1 August 2011 and Dr Jones was appointed as President and Chief Executive Officer with effect from the same date. As President and Chief Executive Officer, Dr Jones is responsible for the operation and management of both the Company and the Northern Powergrid Group and reports directly to Mr Abel.

Main Principle A3: The Chairman

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

Main Principle A4: Non-executive Directors

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

Section B: Effectiveness

Main Principle B1: The Composition of the Board

The board comprises 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 is the sole non-executive director, so the board does 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.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

Main Principle B2: Appointments to the Board

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

Main Principle B3: Commitment

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

Main Principle B4: Development

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

Main Principle B5: Information and Support

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

Main Principle B6: Evaluation

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

Main Principle B7: Re-election

The directors present themselves for re-election in accordance with the Company's articles of association.

Section C: Accountability

Main Principle C1: Financial and Business Reporting

The board believes that the Report of the Directors and review of the year provide a balanced and understandable assessment of the Company's position and prospects. The directors explain, at page 2, the Core Principles behind the Company's strategy and, at page 23, their responsibility for preparing the report and accounts, have reported, at page 23 in the Report of the Directors, that the Company is a going concern and included the independent auditor's report at page 28 of the report and accounts.

Main Principle C2: Risk Management and Internal Control

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 15 to 17 of the directors' 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 to provide independent scrutiny of internal control systems and risk management procedures, including the standards required by the Sarbanes-Oxley Act;

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

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

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

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

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

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

Main Principle C3: Audit committee and auditors

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 and the independence of and the provision of additional services by the auditor.

The Audit Committee 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:

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

The employees section on page 11 of the Report of the directors contains details of the Company's "speaking up" policy.

Section D: Remuneration

Main Principle D1: The Level and Components of Remuneration

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

Main Principle D2: Procedure

As mentioned under main principle D1, the annual remuneration awards for 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. Mr Fielden, Dr France and Dr Jones are subject to the performance appraisal and development scheme process in their capacity as senior managers of the Northern Powergrid Group and not, specifically, in their capacity as board directors. No director is involved in deciding his own remuneration.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

Section E: Relations with Shareholders

Main Principle E1: Dialogue with Shareholders

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

Main Principle E2: Constructive use of the AGM

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

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors are responsible for preparing 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 ("IFRSs") as adopted by in 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 to 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

The Group's business activities, together with details regarding its future development, performance and position are set out in the Business Review in the Report of the Directors. In addition, the Group's objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities and its exposures to credit risk and liquidity risk are included in 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:

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

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED 31 DECEMBER 2011 (CONTINUED)

b) The Group is profitable with strong underlying cash flows. The Company and Northern Powergrid hold investment grade credit ratings;

c) The Group is financed by long-term borrowings with an average maturity of 17 years and has access to borrowing facilities provided by Lloyds TSB Bank plc, Royal Bank of Scotland plc and Abbey National Treasury Services plc; and

d) No repayments of long term-debt are due until 2018.

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 financial statements.

STATEMENT AS TO DISCLOSURE OF INFORMATION TO AUDITORS

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 auditors are 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 auditors are aware of that information.

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

AUDITORS

A resolution to reappoint Deloitte LLP and to authorise the directors to determine their remuneration will be proposed at the Annual General Meeting, notice of which is provided at page 81.

ON BEHALF OF THE BOARD:

J Elliott

Company Secretary

20 April 2012

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

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

Each of the directors in office as at the date of the Annual Report, whose names and functions are set out on page 4 of 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 or loss of the Company and the undertakings included in the consolidation taken as a whole; and

b) 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 20 April 2012 and signed on its behalf by:

P A Jones

Director and President and Chief Executive Officer

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

DIRECTORS' BIOGRAPHIES

GREGORY E ABEL

Appointed in January 1997, Mr Abel, 49 is chairman, president and chief executive officer of MidAmerican Energy Holdings Company, based in Des Moines, Iowa. He serves as chairman and chief executive officer of PacifiCorp, which provides electric service to six Western states and approximately 1.6 million customers, and as chairman of the Northern Powergrid Group, which distributes electricity to approximately 3.8 million customers in England. Mr Abel is also a director of Kern River Gas Transmission Company and Northern Natural Gas Company. Kern River is a 1,700 mile interstate pipeline transporting Rocky Mountain and Canadian natural gas to markets in California, Nevada and Utah. Northern Natural Gas Company operates 16,400 miles of pipeline extending from the Permian Basin in Texas to the Upper Midwest. His responsibilities at MidAmerican are the operation and management of the holdings company, PacifiCorp's and MidAmerican Energy Company's supply and marketing and delivery services businesses, the Northern Powergrid distribution businesses, CalEnergy's operations as an independent power producer and the Kern River Gas Transmission Company and Northern Natural Gas Company pipeline operations.

JON A ANDREASEN

Appointed in March 2010, Mr Andreasen, 48, 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 electric 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, 74, 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, 54, 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

Mr Fielden joined the Northern Powergrid Group in July 2009, became Finance Director on 12 October 2009 and was appointed as a director of the Company on 16 October 2009. Mr Fielden, 41, 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 and transferred to National Express East Coast in 2007.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

DIRECTORS' BIOGRAPHIES

PATRICK J GOODMAN

Appointed in May 1999, Mr Goodman, 45, is Executive Vice President and Chief Financial Officer of MidAmerican and is responsible for managing all aspects of MidAmerican's financial operations. Mr Goodman supports the negotiation and closing of MidAmerican's international and domestic project financings along with supporting future acquisitions and project developments. Additionally, Mr Goodman manages all accounting, financial reporting, tax, budgeting and long-range financial planning functions for MidAmerican. Since joining MidAmerican in 1995, Mr Goodman has served in various financial positions including Chief Accounting Officer. Prior to joining MidAmerican, he served as a financial manager for National Indemnity Company and was a senior associate at PricewaterhouseCoopers.

PHILIP A JONES

Appointed in April 2007, Dr Jones, 43, 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 2011 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Company Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Company Statement of Changes in Equity, the Consolidated Statement of Cash Flows, the Company Statement of Cash Flows and related notes 1 to 29. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in a Report of the Auditors 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 three, 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 Group's and the Company's circumstances and have been consistently applied and adequately disclosed, the reasonableness of significant accounting estimates made by the directors and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on financial statements

In our opinion the financial statements:

Opinion on other matter prescribed by the Companies Act 2006

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

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

Matters on which we are required to report by exception

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

Christopher Powell FCA (Senior Statutory Auditor)

for and on behalf of Deloitte LLP

Newcastle upon Tyne

April 2012

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2011

2011 2010

Notes £'000 £'000

CONTINUING OPERATIONS

Revenue 3 301,427 288,569

Cost of sales (24,035) (29,176)

GROSS PROFIT 277,392 259,393

Administrative expenses 10 (106,174) (105,793)

OPERATING PROFIT 171,218 153,600

Other gains 358 641

Finance costs 5 (37,617) (33,913)

Finance income 5 1,928 1,973

Income tax 7 (19,748) (25,131)

PROFIT FOR THE YEAR 116,139 97,170

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2011

2011 2010

£'000 £'000

PROFIT FOR THE YEAR 116,139 97,170

OTHER COMPREHENSIVE INCOME - -

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

31 DECEMBER 2011

2011 2010

Notes £'000 £'000

ASSETS

NON-CURRENT ASSETS

Intangible assets 12 4,164 4,011

Property, plant and equipment 13 1,515,896 1,439,853

Investments 14 3,346 3,328

Pension asset 24 201,800 158,345

Trade and other receivables 16 3,780 4,609

1,728,986 1,610,146

CURRENT ASSETS

Inventories 15 13,383 10,341

Trade and other receivables 16 54,882 51,166

Cash and cash equivalents 17 229,632 67,161

297,897 128,668

TOTAL ASSETS 2,026,883 1,738,814

EQUITY

SHAREHOLDERS' EQUITY

Called up share capital 18 72,173 72,173

Share premium 19 158,748 158,748

Other reserves 19 6,185 6,185

Retained earnings 19 539,460 453,321

TOTAL EQUITY 776,566 690,427

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION - continued

31 DECEMBER 2011

2011 2010

Notes £'000 £'000

LIABILITIES

NON-CURRENT LIABILITIES

Trade and other payables 20 441,679 417,504

Deferred tax 23 172,120 177,933

Provisions 22 2,594 2,752

1,085,033 947,661

CURRENT LIABILITIES

Trade and other payables 20 113,588 74,430

Tax payable 12,907 14,544

Provisions 22 1,000 2,102

165,284 100,726

TOTAL LIABILITIES 1,250,317 1,048,387

TOTAL EQUITY AND LIABILITIES 2,026,883 1,738,814

The financial statements were approved by the Board of Directors on 20 April 2012 and were signed on its behalf by:

P A Jones

Director

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

COMPANY STATEMENT OF FINANCIAL POSITION - 31 DECEMBER 2011

2011 2010

Notes £'000 £'000

ASSETS

NON-CURRENT ASSETS

Property, plant and equipment 13 1,802 1,535

Investments 14 328,070 328,070

329,872 329,605

CURRENT ASSETS

Trade and other receivables 16 800 681

Tax receivable 78 -

Cash and cash equivalents 17 57,357 65,247

58,235 65,928

TOTAL ASSETS 388,107 395,533

EQUITY

SHAREHOLDERS' EQUITY

Called up share capital 18 72,173 72,173

Share premium 19 158,748 158,748

Other reserves 19 6,185 6,185

Retained earnings 19 130,861 131,229

TOTAL EQUITY 367,967 368,335

LIABILITIES

NON-CURRENT LIABILITIES

Deferred tax 23 7,680 12,120

Provisions 22 1,600 1,493

10,397 14,730

CURRENT LIABILITIES

Trade and other payables 20 7,470 6,395

Tax payable - 1,259

9,743 12,468

TOTAL LIABILITIES 20,140 27,198

TOTAL EQUITY AND LIABILITIES 388,107 395,533

The financial statements were approved by the Board of Directors on 20 April 2012 and were signed on its behalf by:

P A Jones

Director

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2011

Called up

share Retained Share Other Total

capital earnings premium reserves equity

£'000 £'000 £'000 £'000 £'000

Balance at 1 January 2010 72,173 416,151 158,748 6,185 653,257

Changes in equity

Dividends - (60,000) - - (60,000)

Total comprehensive income - 97,170 - - 97,170

Balance at 31 December 2010 72,173 453,321 158,748 6,185 690,427

Changes in equity

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

Total comprehensive income - 116,139 - - 116,139

Balance at 31 December 2011 72,173 539,460 158,748 6,185 776,566

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

COMPANY STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2011

Called up

share Retained Share Other Total

capital earnings premium reserves equity

£'000 £'000 £'000 £'000 £'000

Balance at 1 January 2010 72,173 172,326 158,748 6,185 409,432

Changes in equity

Dividends - (60,000) - - (60,000)

Total comprehensive income - 18,903 - - 18,903

Balance at 31 December 2010 72,173 131,229 158,748 6,185 368,335

Changes in equity

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

Total comprehensive income - 29,632 - - 29,632

Balance at 31 December 2011 72,173 130,861 158,748 6,185 367,967

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2011

2011 2010

Notes £'000 £'000

Cash flows from operating activities

Cash generated from operations 28 183,032 155,978

Finance costs paid (33,177) (33,685)

Interest received 1,536 1,620

Group relief paid (828) (15,533)

Tax paid (26,095) (7,562)

Net cash from operating activities 124,468 100,818

Cash flows from investing activities

Purchase of intangible fixed assets (2,654) (843)

Purchase of tangible fixed assets (131,186) (120,844)

Sale of tangible fixed assets 813 644

Customer contributions 57,771 37,926

Dividends received 392 353

Net cash used in investing activities (74,864) (82,764)

Cash flows from financing activities

Movement in external loans 141,154 (33,500)

Loans from Group undertakings 1,713 1,222

Equity dividends paid (30,000) (60,000)

Net cash from/(used in) financing activities 112,867 (92,278)

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

COMPANY STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2011

2011 2010

Notes £'000 £'000

Cash flows from operating activities

Cash generated from operations 28 3,233 1,004

Finance costs paid (9,618) (10,540)

Interest received 1,010 1,386

Dividends received 30,553 21,083

Group relief paid (1,256) (2,073)

Tax paid 1,025 -

Net cash from operating activities 24,947 10,860

Cash flows from investing activities

Purchase of tangible fixed assets (296) -

Net cash used in investing activities (296) -

Cash flows from financing activities

Movement in borrowings in year (2,541) 2,563

Equity dividends paid (30,000) (60,000)

Net cash used in financing activities (32,541) (57,437)

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2011

1. GENERAL INFORMATION

Northern Electric plc is a company originally incorporated in England and Wales under the Companies Act 1985. The address of the registered office is Lloyds Court, 78 Grey Street, Newcastle-upon-Tyne, NE1 6AF.

The nature of the Group's operations and its principal activities are set out in the Business Review in the Report of the Directors and in Note 3.

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 parent 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 income statement for the parent 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 23.

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:

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

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

- Impairment reviews carried out to evaluate the carrying value of assets held at the balance sheet date; and

- Assumptions used when evaluating long-term pension plan assets and liabilities.

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.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2011

2. ACCOUNTING POLICIES - continued

Adoption of new or revised standards

In the current year, the following new and revised Standards and Interpretations have been adopted in these financial statements.

Standards affecting presentation and disclosure:

IFRS 7 Financial Instruments: Disclosure

The amendments to IFRS 7 clarify the required level of disclosure around credit risk and encourage qualitative disclosures to help readers to form an overall picture of the nature and extent of risks arising from financial instruments. This change has not led to any change in the disclosures contained within these financial statements.

IAS 1 Presentation of Financial Statements

The amendments to IAS 1 clarify that an entity may present the analysis of other comprehensive income by item either in the statement of changes in equity or in the notes to the financial statements. This amendment has not impacted these financial statements.

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.

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.

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 over 15-45 years 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 income statement 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.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2011

2. ACCOUNTING POLICIES - continued

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 balance sheet 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 balance sheet 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 balance sheet 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.

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.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2011

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 balance sheet 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 balance sheet 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: 2366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2011

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 income statement.

Financial liabilities and equity

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

Inventories

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

Raw materials and consumables are valued at purchase cost determined on an average price basis.

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

Net realisable value is based on estimated selling price less further costs expected to be incurred to completion and costs to be incurred in marketing, selling and distribution.

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 income statement 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 balance sheet 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 balance sheet 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.

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 balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, 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.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2011

Research costs

Expenditure on research activities is written off to the income statement 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 income statement or to property, plant and equipment in equal amounts over the periods of the leases.

Pensions

The Group contributes to the Northern Electric Group of the Electricity Supply Pension Scheme (the "Northern Electric 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 December balance sheet date. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of the plan assets or 10% of the defined benefit obligation are spread to income over the employees' expected average remaining working lives.

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 balance sheet 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.

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 24.

The Group also participates in a defined contribution scheme. Contributions payable to that scheme are charged to the income statement in the year. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the balance sheet.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2011

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 balance sheet 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 income statement when there is objective evidence that the asset is impaired.

Trade payables

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

Borrowings

Borrowings are classified as other financial liabilities at amortised cost. They are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement for redemption and direct issue costs, are accounted for on an accruals basis in the income statement 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.

Cash and cash equivalents

Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) 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.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2011

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:

REVENUE

SEGMENT RESULTS

OTHER INFORMATION

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2011

3. SEGMENTAL REPORTING - continued

BALANCE SHEET

"Other" comprises Engineering Contracting and business support units.

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

Segment assets in "Other" include investments in the Distribution and Engineering Contracting activities totalling £203.1m, which are eliminated in Consolidation Adjustments. Consolidation Adjustments also include a £41.6m credit to operating profit, the recognition of the £201.8m retirement benefit asset and a £25.8m reduction in cumulative capitalised costs as a consequence of all segments accounting for retirement benefits on a cash accrued basis.

Unallocated corporate assets and liabilities include cash and cash equivalents, borrowings and taxation.

External sales to RWE Npower plc of £77.6m are included within the Distribution segment.

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2011

3. SEGMENTAL REPORTING - continued

REVENUE

SEGMENT RESULTS

OTHER INFORMATION

BALANCE SHEET

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2011

3. SEGMENTAL REPORTING - continued

"Other" comprises business support units.

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

Segment assets in "Other" include investments in the Distribution and Engineering Contracting activities totalling £203.1m, which are eliminated in Consolidation Adjustments. Consolidation Adjustments also include a £31.0m credit to operating profit, the recognition of the £158.3m retirement benefit asset and a £23.0m reduction in cumulative capitalised costs as a consequence of all segments accounting for retirement benefits on a cash accrued basis.

Unallocated corporate assets and liabilities include cash and cash equivalents, borrowings and taxation.

External sales to RWE Npower plc of £77.1m are included within the Distribution segment. External sales of £6.8m to E.ON are included within the Engineering Contracting segment.

4. EMPLOYEES AND DIRECTORS

41,293 53,487

12,617 24,278

The majority of the Group's employees are members of the Northern Electric Group of the ESPS, details of which are given in the pension note.

The average monthly number of employees during the year was:

1,157 1,166

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2011

DIRECTORS' REMUNERATION

351 286

Total:

719 584

OTHER KEY PERSONNEL REMUNERATION

630 635

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

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

5. NET FINANCE COSTS

2011 2010

£'000 £'000

Finance income:

Share of profits of joint venture 392 353

1,928 1,973

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2011

2011 2010

£'000 £'000

Finance costs:

Preference dividends payable 9,001 9,001

37,617 33,913

Net finance costs 35,689 31,940

6. PROFIT BEFORE INCOME TAX

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

2011 2010

£'000 £'000

Depreciation - owned assets 49,167 47,116

Profit on disposal of fixed assets (358) (641)

Software development costs amortisation 2,501 1,571

Analysis of auditor's remuneration is as follows:

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2011

7. INCOME TAX

Analysis of the tax charge

2011 2010

£'000 £'000

Current tax:

Tax 25,561 27,113

Deferred tax (5,813) (1,982)

Total tax charge in income statement 19,748 25,131

Factors affecting the tax charge

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

2011 2010

£'000 £'000

Profit on ordinary activities before tax 135,877 122,301

Profit on ordinary activities

multiplied by the standard rate of corporation tax

in the UK of 26.5% (2010 - 28%) 36,007 34,244

Effects of:

Total income tax 19,748 25,131

NORTHERN ELECTRIC PLC (REGISTERED NUMBER: 2366942)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEAR ENDED 31 DECEMBER 2011

Current tax expense:

Deferred tax: