TIDMBC39
RNS Number : 5586D
Northern Powergrid (Yorkshire) plc
27 April 2017
The following regulated information, disseminated pursuant to
DTR 6.3.5, comprises the Annual Report and Accounts of Northern
Powergrid (Yorkshire) plc for the year ended 31 December 2016.
Pursuant to LR 17.3.1, the document has been submitted to the
National Storage Mechanism and will shortly be available for
inspection at:
www.hemscott.com/nsm.do
The 2016 Annual Report and Accounts are also available on the
website
http://www.northernpowergrid.com/document-library/financial
Enquiries:
Jenny Riley 01977 605155
REGISTERED NUMBER: 04112320 (England and Wales)
STRATEGIC REPORT, REPORT OF THE DIRECTORS AND
FINANCIAL STATEMENTS FOR THE YEARED 31 DECEMBER 2016
FOR
NORTHERN POWERGRID (YORKSHIRE) PLC
NORTHERN POWERGRID (YORKSHIRE) PLC
CONTENTS OF THE FINANCIAL STATEMENTS
FOR THE YEARED 31 DECEMBER 2016
Page
Company Information 1
Strategic Report 2
Report of the Directors 22
Report of the Independent
Auditor 32
Statement of Profit or Loss 34
Statement of Profit or Loss
and Other Comprehensive Income 35
Statement of Financial Position 36
Statement of Changes in Equity 37
Statement of Cash Flows 38
Notes to the Financial Statements 39
NORTHERN POWERGRID (YORKSHIRE) PLC
COMPANY INFORMATION
FOR THE YEARED 31 DECEMBER 2016
DIRECTORS: R Dixon
T E Fielden
J M France
T H France
N M Gill
P A Jones
A J Maclennan
A R Marshall
P C Taylor
COMPANY SECRETARY: J C Riley
REGISTERED OFFICE: Lloyds Court
78 Grey Street
Newcastle upon Tyne
NE1 6AF
REGISTERED NUMBER: 04112320 (England and Wales)
AUDITOR: Deloitte LLP
Chartered Accountants and Statutory Auditor
Newcastle upon Tyne
United Kingdom
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
The directors present the annual reports and accounts for the
year ended 31 December 2016 of Northern Powergrid (Yorkshire) plc
(the "Company"), which include the Strategic Report, the Report of
the Directors and the audited financial statements for that year.
Pages 2 to 21 inclusive comprise the Strategic Report and pages 22
to 31 comprise the Report of the Directors, which have been drawn
up and are presented in accordance with the Companies Act 2006.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
These annual reports and accounts have been prepared for the
members of the Company only. The Company, its directors, employees
or agents do not accept or assume responsibility to any other
person in connection with this document and any such responsibility
or liability is expressly disclaimed. These annual reports and
accounts contain certain forward-looking statements, which can be
identified by the fact that they do not relate only to historical
or current facts. In particular, all statements that express
forecasts, expectations and projections with respect to future
matters, including trends in results of operations, business
prospects, the availability of financing to the Company and
anticipated cost savings are forward-looking statements.
By their nature, forward-looking statements and forecasts
involve risk and uncertainty because they relate to events and
depend on circumstances that may or may not occur in the future.
There are a number of factors that could cause actual results or
developments to differ materially from those expressed or implied
by these forward-looking statements and forecasts. The
forward-looking statements reflect the knowledge and information
available at the date of preparation of these annual reports and
accounts and will not be updated during the year. Nothing in these
annual reports and accounts should be construed as a profit
forecast.
BUSINESS MODEL
The Company is part of the Northern Powergrid Holdings Company
group of companies, (the "Northern Powergrid Group"), which is
ultimately owned by Berkshire Hathaway Inc. The Company is an
authorised distributor under the Electricity Act 1989 and holds an
electricity distribution licence granted by the Secretary of State.
As a distribution network operator ("DNO"), the Company distributes
electricity to approximately 2.3 million customers connected to its
electricity distribution network within its distribution services
area, which encompasses the counties of West Yorkshire, East
Yorkshire and almost all of South Yorkshire, together with parts of
North Yorkshire, Derbyshire, Nottinghamshire, Lincolnshire and
Lancashire. Some 21,628 gigawatt-hours (GWh) of electricity were
distributed to those customers during the year. The Company's
distribution network includes over 53,000 kilometres (km) of
overhead and underground cables and over 35,000 substations.
Electricity is received from the National Grid's transmission
system and from generators connected directly to the network and
then distributed at voltages of up to 132 kilovolts (kV).
In common with the Northern Powergrid Group, the Company
operates a business model and strategy based on its six core
principles (the "Core Principles"), which are:
Principle Strategy Indicator
Financial Effective stewardship Profitability, cash
strength of the Company's financial flow and maintenance
resources, investing of investment grade
in assets and focusing credit ratings.
on long-term opportunities,
which contribute to
the Company's future
strength.
Customer service Delivering reliability, Improving network
dependability, fair resilience and performance,
prices and exceptional measured by: customer
service. minutes lost, customer
interruptions and
customer satisfaction.
Operational Setting high standards Effective asset management,
excellence for the Company's managing commercial
operations, system risk and improving
investment and maintenance. network resilience
and performance.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
BUSINESS MODEL - continued
Employee commitment Equipping employees Leading safety performance,
with the resources engaging employees
and support they need and effective leadership.
to operate successfully
and in a safe and
rewarding work environment.
Environmental Using natural resources Reducing environmental
respect wisely and protecting impact and promoting
the environment, where and pursuing long-term
it is impacted by sustainability.
the Company's operations.
Regulatory Adhering to a policy Strong internal controls,
integrity of strict compliance regulatory engagement
with applicable laws, and industry influence.
regulations, standards
and policies.
STRATEGIC OBJECTIVES
The Company's strategic objectives are based on the Core
Principles and accordingly remain consistent to build a business,
which:
- continues to generate value over the long-term;
- invests in and manages its electricity distribution
network in an efficient and effective manner;
- provides its customers with an excellent standard
of service;
- engages with its employees so that they feel rewarded
and recognised as part of a team that sets and
achieves increasingly high standards of performance;
and
- is viewed as being a leader in shaping the future
direction of the electricity distribution sector
in the United Kingdom.
As part of its strategy, the Company continues to be committed
to putting safety first, respecting its customers, their time and
property, doing a quality job, responding effectively to major
incidents on the network in times of severe weather and caring for
its local community and environment.
REVIEW OF THE YEAR
The Company delivered a satisfactory financial performance for
the year, benefitting from a further change to the rate of
taxation, the settlement of a prior year tax claim, and continued
effective cost control, with revenue at GBP415.1 million being
GBP5.1 million less than 2015. The decrease in revenue was mainly
due to the reduction in tariffs introduced with effect from the
start of the current regulatory period, which runs from 1 April
2015 to 31 March 2023 (the "ED1 Period").
Throughout 2016, the Company continued its policy of enhancing
the efficiency of its electricity distribution network by investing
GBP225.1 million in order to deliver the improvements required to
maintain an effective supply of electricity to customers. As was
the case in 2015, the resilience of the network was tested during
the year by several major weather events, including intense
lightning storms, periods of very heavy rain and high winds. The
Company's major incident management processes were implemented in
these instances to ensure that interruptions to customers were
minimised. The on-going investments in the network, including those
to assist with the management of environmental incidents, and the
responses put in place to mitigate the effects of such events,
supported the Company's achievements made against the incentive
scheme operated by the Office of Gas and Electricity Markets
(Ofgem) for quality of service targets with the number of customer
minutes lost and customer interruptions both below the target
levels.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
REVIEW OF THE YEAR - continued
The Company remained focussed on the affordability, availability
and reliability of the service it provides. Accordingly, the way in
which the Company interacted with and supported its stakeholders
continued to be important. The results of Ofgem's stakeholder
engagement and customer vulnerability submission were
disappointing. When compared against the other five DNOs, the
Northern Powergrid Group ranked in fifth place (a decline from its
previous position of second). In response, the opportunity was
taken to further engage with vulnerable customers, those who
struggle with fuel poverty, customers who require priority services
and those whose welfare could be affected in the event of an
interruption to supply. Collaboration with partners including the
Children's Society, the British Red Cross and Citizens Advice was
undertaken to deliver enhanced support to those groups with a
greater need for assistance.
Customer satisfaction continued to be a management priority and
therefore multi-year programmes continued throughout the year to
embed improvements into the overall customer experience. To further
develop the quality of customer conversations, defined performance
standards were implemented, supported by a pilot recognition and
reward scheme for employees. The Customer Relationship Management
("CRM") IT system was further deployed allowing faster responses
with a greater degree of accuracy for the management of customer
complaints, general enquiries services and service alterations. The
use of technology (including the CRM system) was further embedded
to enhance the ways in which customers can make contact with the
Company. Due to the initiatives in place, with the Company writing,
emailing and sending text messages to remind customers 72 hours and
then 24 hours ahead of any planned power cuts taking place, further
progress was made during the year to improve the level of customer
satisfaction relating to planned power cuts.
The effect of the Company's operations on the local landscape,
and upon wildlife and birds remained important and, accordingly,
progress continued in the implementation of measures designed to
protect the environment. Incidents reportable to the Environment
Agency, including oil spills and leaks from the Company's assets
and SF(6) gas discharges from electrical plant, were all
significantly better than target. Given the impact on the
environment of such events, the Company remains committed to
reducing losses from fluid-filled cables and, during the ED1
period, plans to replace a significant number of those assets on a
phased and prioritised basis.
The health and safety of the Company's employees, its
contractors and customers continued to be a key priority in 2016,
with the focus on delivering a safety and health improvement plan
designed to accomplish a world class safety performance. Education
concerning the dangers of coming into contact with the network's
assets and how people can identify these dangers remained a firm
commitment. A number of approaches were therefore deployed during
the year to communicate health and safety messages to the Company's
employees and stakeholders, including delivering regional school
safety presentations, running operational seminars for the
Company's engineers and circulating regular safety newsflashes to
all staff. The Company also placed emphasis on the identification
of significant health and safety risks and allocating the necessary
resource to put actions in place to mitigate those risks. Driving
the Company's vehicles has been identified as one such risk, and
therefore a robust road risk management plan was expanded
throughout 2016. This included the completion of the programme to
install a telematics system in all fleet vehicles to increase
driver and vehicle safety and to assist with vehicle safety
checks.
In terms of health and safety performance, the Company made a
strong contribution to the health and safety performance of the
Northern Powergrid Group and the long-term overall trend continued
to compare well with that of the industry. In recognition of the
on-going health and safety initiatives in place, the Company was
awarded a President's Award from the Royal Society for the
Prevention of Accidents.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
CORE PRINCIPLES
Financial strength
During the year, the Company continued to maintain good control
in respect of both its capital and operating costs by effectively
managing the various financial risks that could have had an adverse
impact on its business.
The ED1 price control provides the Company with some stability
in terms of its income until 31 March 2023. The ED1 price control
has been set for eight years with provision for a mid-period review
of the outputs that the Company is required to deliver and, in that
respect, the Company recognises that it needs to continue to show
that it is delivering reliable services to its customers, while
operating in an efficient and effective manner.
Key aspects of financial performance for the year were as
follows:
Revenue
The Company's revenue at GBP415.1 million was GBP5.1 million
lower than the prior year mainly due to the reduction in tariffs
introduced with effect from the start of the ED1 period.
Operating profit and position at the year end
The Company's operating profit of GBP199.4 million was GBP5.5
million less than the previous year, primarily reflecting decreased
revenues and higher depreciation charges. The statement of
financial position on page 36 shows that, as at 31 December 2016,
the Company had total equity of 1,238.9 million. The directors
consider the Company to have a strong statement of financial
position which, when coupled with the preference of its parent
company, Berkshire Hathaway Energy Company ("Berkshire Hathaway
Energy"), for operating with lower levels of debt than equivalent
companies in the sector, creates a stable base for continued strong
performance during the ED1 period.
Finance costs and investments
Finance costs net of investment income at GBP46.4 million were
GBP3.7 million higher than the prior year due to the bond issuance
on 1 April 2015 and a new credit facility with the European
Investment Bank (the "EIB") from 16 December 2015 (see debt
structure below).
Taxation
The effective tax rate in the year was 3.5%. The effective tax
rate before adjusting for the impact of the changes in tax rates by
the Finance Act 2016 and the settlement of a prior year tax claim
would be 19.9%. Details of the income tax expense are provided in
Note 7 to the accounts.
Results and dividends
The Company made a profit after tax for the year of GBP148.1
million (2015: GBP146.7 million). An interim dividend of GBP28.7
million was paid during the year (2015: GBP27.6 million) and the
directors recommended that no final dividend be paid in respect of
the year to 31 December 2016.
Share capital and debt structure
There were no changes to the Company's share capital during the
year. On 1 March 2016, the Company entered into a Deed of Amendment
and Consent which increased the facility provided by the European
Investment Bank under the agreement entered into on 2 December 2015
from GBP130 million to GBP180 million. On 1 December 2016, the
Company drew on this additional GBP50 million credit facility in
its entirety at a fixed rate of 2.073% for a period of 9 years.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
CORE PRINCIPLES - continued
Financial strength - continued
Cash flow
The Company aims to collect from customers and pay suppliers
within contracted terms. Any surplus cash held is remitted to
Yorkshire Electricity Group plc ("YEG"), a company in the Northern
Powergrid Group, and invested accordingly, generating a market rate
of return for the Company.
Movements in cash flows were as follows:
Operating activities: Cash flow from operating activities at
GBP215.7 million was GBP18.9 million higher than the previous year,
mainly due to lower tax paid offset by adverse working capital
movements and higher finance costs paid.
Investing activities: Net cash used in investing activities at
GBP183.3 million was GBP24.9 million lower than the previous year,
reflecting lower capital expenditure partly offset by lower
customer contributions.
Financing activities: The net cash from financing activities at
GBP21.3 million was GBP135.8 million lower than prior year
reflecting net movements in borrowing to fund business
operations.
Liquidity risk
As at 31 December 2016, the Company had access to GBP75 million
under a five-year committed revolving credit facility provided by
Lloyds Bank plc, The Royal Bank of Scotland plc and Abbey National
Treasury Services plc. This expires on 30 April 2020. The Company
expects to raise further facilities, as required, at that time.
In addition, the Company has access to further short-term
borrowing facilities provided by YEG and to a GBP19 million
overdraft facility provided by Lloyds Bank plc, which is reviewed
annually.
The directors do not consider there to be any doubt over the
Company's ability to raise appropriate levels of finance in the
future, given its investment grade issuer credit rating and the
fundamental financial strength and nature of its business.
Interest rate risk
The Company is financed by long-term borrowings at fixed rates
and has access to short-term borrowing facilities at floating rates
of interest. As at 31 December 2016, 100% of the Company's
long-term borrowings were at fixed rates and the average maturity
for these borrowings was 10 years.
Currency risk
No material currency risks are faced by the Company.
Pensions
The Company is a participating employer in the Northern
Powergrid Group of the Electricity Supply Pension Scheme (the
"Scheme"), a defined benefit scheme. Further details of the
Company's commitments to the Scheme and the associated deficit
repair payments are provided in Note 22 to the financial
statements.
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 insurance policies, which cover risks
associated with employers, third party motor and public liability.
The Northern Powergrid Group carries appropriate excesses on those
policies and is effectively self-insured up to the level of those
excesses. Consequently, the risk management and health and safety
programmes in place are viewed as extremely important elements of
the business, given the contribution they make to the elimination
or reduction of exposure to such risks.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
CORE PRINCIPLES - continued
Customer service
During the year, the Company distributed electricity to
customers in its distribution services area and continued to
improve the overall performance of the distribution network through
an investment strategy targeted at delivering improvements in an
efficient and cost-effective manner. The Company remains focused on
delivering a safe, reliable and dependable supply of electricity,
together with a high standard of service to its customers.
Customer service improvements are a priority for the Company,
which, in recent years had been consistently ranking in the lower
half of Ofgem's customer service league tables. The Company has a
long-term goal to improve this position and has a multi-year
programme of actions in place to support improvements to the
overall customer experience.
Customer satisfaction with the Company's response to unplanned
power cuts showed gradual improvement in the year and the focus
remains on improving restoration times and proactively
communicating more timely and accurate information to customers.
Continuous improvements were made to the interactive voice response
telephony system throughout the year to make it easier for
customers to talk to a customer service advisor and to route their
calls appropriately. Customer satisfaction with planned power cuts
also showed some improvement with the Company continually enhancing
the content of written customer communications and continuing to
provide a text and email service to remind customers 72 hours and
then 24 hours ahead of the planned power cut taking place.
A framework was introduced during 2016 to define the high
standards required of our staff when interacting with our
customers, supported by a pilot recognition and reward scheme as
well as a performance management structure.
The Company has continued to invest in improving the reliability
of under-performing parts of the distribution network by
identifying "hot spots" of substandard network performance and
taking specific action to address the issues in those areas. In the
customer service support areas, further investment has been
directed towards information technology with the continued
deployment of the new CRM system for customer complaints,
additional general enquiries services and service alterations, to
both improve the self-service offering and provide quicker and more
accurate information to customers with workflows automatically
routed within both the Company and its contractors. This technology
will enable customers to communicate with the Company in a range of
accessible and easy ways across several channels.
During the year focus there was a focus to build on the
industry-leading communications and engagement approaches used to
support its business plan and maintains a number of engagement
channels. Independently chaired expert panels continue to play a
key role in challenging the Company's plans, monitoring its
performance and helping to deliver innovative initiatives and
services. Guided by these panels, the Company has been able to
direct effort towards public meetings in the operating zones,
community energy workshops aimed at enhancing the take-up of
low-carbon technologies and wider collaborations such as with other
utilities via Infrastructure North. The feedback received as part
of the stakeholder engagement process helped the Company to further
develop its customer experience improvement and social obligations
programme.
The Company recognised that the evolving nature of the
environment and the level of customer service provided in respect
of new connections to the network required additional significant
focus and, as such, initiated a fundamental business process
re-engineering review of this area of the business. Further details
regarding the connections activity in the year are provided under
"Connections to the network" below.
The single emergency number, 105, went live in September 2016,
providing customers with a free national easy to remember phone
number. During the winter period of 2016, approximately 28% of all
inbound calls relating to power cuts were received via the 105
number, calls that previously would all have been made to the
Company's Freephone contact numbers.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
CORE PRINCIPLES - continued
Customer service - continued
In May 2016, the Company put forward its stakeholder engagement
and customer vulnerability submission to Ofgem in respect of its
work during the year. This included initiatives such as expanding
the role of digital solutions in providing customer services and
the enhancement of the Company's relationship with some voluntary
sector organisations, with which it works closely in developing and
delivering certain services particularly in respect of those
customers on the Company's Priority Services Register. Following
the submission to Ofgem's panel, the position of the Company in the
context of the wider DNO group dropped from second place to fifth.
The outcome was disappointing and in response to Ofgem's feedback
some changes were initiated.
Under the Broad Measure of Customer Satisfaction, an independent
market research company carried out telephone surveys with the
Company's customers to find out how satisfied they were with the
services provided. During the year, surveys were carried out with a
number of customers who had contacted the Company regarding an
unplanned or a planned power cut, had requested a price quotation
and a subsequent connection, or had a general enquiry where a
service had been provided or a job completed. The Company recorded
an overall satisfaction score of 85.9% for the financial year and
expects that the customer experience improvement plan, including
the range of initiatives noted on pages 7 and 8, will improve the
services provided to customers and so increase the satisfaction
ratings year-on-year.
While recognising that its customer service performance can
continually be improved, the Company made significant progress
during the year ameliorating its overall customer satisfaction
scores.
Connections to the network
During the year, the Company continued to deliver its action
plans to improve the connections services provided to its
customers, whilst also actively facilitating the development of
competition from independent connections providers ("ICPs"). The
Company continued to engage regularly with its connections
customers both in groups and individually, by holding monthly
customer surgeries, twice yearly customer stakeholder events and
contributing to national stakeholder forums and events.
There were three main areas of development in the Company's
connections business during the year: the introduction of the new
Competition in Connections Code of Practice, compliance with which
became a licence condition with effect from the end of October
2015, the introduction of the full Incentive on Connections
Engagement ("ICE") regime in April 2015 and the introduction of a
customer service improvement programme to deliver improvements in
customer satisfaction for connections customers.
Delivery of the customer satisfaction improvement programme
continued to evolve during 2016, with its focus being actions
derived from customers' feedback obtained from weekly Ofgem
telephone surveys. The programme is designed to support the
Company's goal to be the leading provider of customer service
within the electricity distribution sector.
The Company participated with other DNOs in the development of
the new Competition in Connections code of practice and implemented
the required new processes, including the provision of dual
quotations, enabling ICPs to self-determine and approve points of
connection to the network, and simplifying the authorisation
process for ICPs' operational staff.
The start of the ED1 period saw the introduction of ICE in
respect of customers requiring larger connections to the network,
so that the needs of those customers can be met more effectively.
Under ICE, the Company is required to submit a customer service
improvement work plan for the forthcoming regulatory year at the
end of April, followed by a comprehensive "looking back and
forward" report commenting on the actions delivered in the previous
year and future actions proposed in the service improvement plan.
The Company worked throughout the year to deliver those actions and
continued to engage actively with customers through both informal
and formal stakeholder events.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
CORE PRINCIPLES - continued
Customer service - continued
Corporate responsibility
The Company places significant value on the relationships that
it has with its customers and other stakeholders and also
understands the importance of ensuring a secure and safe power
supply for its customers and their local communities. To further
embed these values, the Company has developed a vision to maximise
the value of contact with customers, especially those who are
vulnerable and hard to reach, while ensuring that all stakeholders
have the opportunity to influence the local and national energy
agenda through effective engagement. This vision applies Ofgem's
feedback to the Company in the Stakeholder Engagement and Consumer
Vulnerability review directed at a cohesive approach to customer
experience; consumer vulnerability and stakeholder engagement. The
Company has made a commitment to tailor and enhance the support
provided for more vulnerable and hard to reach customers and to
ensure an optimum overall customer experience. In addition, through
effective engagement, stakeholders can shape and influence the
Company's agenda and have the opportunity to help shape and
prioritise plans according to customer preference.
During the year, the Company continued to work closely with key
partners such as the Environment Agency, the local authorities and
the local resilience forums so that it can respond quickly to
significant faults on, or threats to, the network. An example of
this collaboration in the year included the cascade of the new
national '105' number, designed to make it easier for partners and
customers to quickly get in touch to report a problem. The Company
has well-established emergency procedures that are implemented when
customers are without power for some time and, as such, the Company
responded well to the significant weather-related incidents, which
affected the distribution network during the year.
To address customers' concerns and resolve any complaints, the
Company utilises its customer ambassadors and customer liaison
officers, who are allocated to each of its operating zones.
Dedicated Priority Services Register co-ordinators contact our
vulnerable customers to offer support during and after a power cut.
Support may include liaising with staff from the British Red Cross
who check on the welfare of the customer.
The Company has developed its support for vulnerable customers
based on market research which defined where and what assistance
was most needed. This work has been supported by the Company's
Social Issues Expert Group which comprises external experts and
advises on service improvements. Membership of the internal Social
Responsibility Management Group has been widened to include more
business representatives to help develop this programme. The
Company continued to campaign to promote the Priority Services
Register to eligible customers and now has a clear view of service
need profiles for each customer to inform the appropriate priority
service response. The Company has undertaken a comprehensive data
cleanse process for the Register and developed a proactive contact
programme to routinely renew records and ensure that the quality of
the information held on the register and the services offered to
priority services customers continue to improve.
The Northern Powergrid Group has maintained its support to
charitable organisations through sponsorship and the "Safety
Champions" initiative, which is aimed at enhancing safety
performance in the operational zones. Furthermore, a volunteering
policy was implemented permitting employees to volunteer on schemes
specifically designed to support the five priority areas within the
Company's community investment programme.
Safety remains the Company's first priority and underpins all
operations. During the year, the Company continued to deliver
initiatives that reached thousands of school children including its
regular series of school safety presentations. The Company
participated in 'Crucial Crew', which is a schools-based safety
initiative that teaches children to recognise and avoid situations
that put them in danger.
Other programmes expanded during the year included Make the
Grade in Energy, an education, skills and employability programme,
Energy Heroes, a new educational programme, which uses the maths
curriculum at primary school level to promote awareness of energy
costs and ways of saving energy, and Green Doctors, a multi-partner
project which helped to install energy saving measures and give
advice to fuel poor households. New projects undertaken in the year
included a partnership with the Children's Society, which aims to
support young people and families through specialist support
services, including work sessions and group activities, and the
creation of an outreach worker in Citizens Advice to train
volunteers to help more vulnerable people, particularly those with
fuel debt.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
CORE PRINCIPLES - continued
Operational excellence
The Company's core service continues to be providing and
maintaining an efficient distribution network that delivers
electricity effectively. During the year, GBP225.1 million was
invested in the improvement of the distribution network. The
Company's inspection and maintenance regimes have ensured that the
underlying health of the network assets has been sustained and none
of the leading indicators used by the Company suggest any
diminishing performance in this respect in the future.
Ofgem's incentive scheme for quality of service provides a
measure of the level of customer service. As a result of the
Company's continued and substantial investment in its distribution
network, reliability has increased over a sustained period and the
Company has generally outperformed in relation to the customer
service targets set by Ofgem in respect of customer interruptions
("CI") and customer minutes lost ("CML").
CML and CI are the key performance indicators used by the
Company to measure the quality of supply and system performance.
Both indicators are measured on a Regulatory Year basis, which runs
annually to 31 March, (being 31 March 2016 for the period covered
by this report). CML measures the average number of supply minutes
lost for every connected customer due to both planned and unplanned
power cuts that last for three minutes or longer. CI measures the
average number of supply interruptions per every 100 connected
customers due to planned and unplanned power cuts that last for
three minutes or longer.
In respect of these key customer service performance indicators,
the goal is to achieve performance that is below Ofgem's target
number in respect of CML and CI. The Company's reported performance
for the year was as follows:
Year to 31 March Year to 31 March
2016 2015
Actual Target Actual Target
CML 41.8 <63.1 50.4 <76.0
CI 52.5 <68.5 60.9 <75.3
Consequently, performance in the regulatory year was better than
Ofgem's target for both CML and CI and contributed to the Company's
improved customer service performance.
Operational activity
During 2016, the Company continued to implement its approved
network investment strategy, which is designed to deliver
improvements in an efficient and cost-effective manner in order to
improve the network's resilience. The Company is committed to
enhancing the reliability of the network such that fewer power cuts
affect customers and, when power cuts do happen, they are shorter
in duration.
The Company's Operations structure is designed to respond
effectively to the needs of customers and local communities by
delivering improved performance standards in the restoration of
power following power cuts and in new connection activities for
small works. That structure is organised into operating zones
around the main conurbations of West Yorkshire and South Yorkshire,
the industrialised area around the Humber and the rural areas of
the Yorkshire Dales, the east coast of Yorkshire and North
Lincolnshire. The guaranteed standard for the restoration of supply
within 12 hours of a power cut occurring came into effect from 1
April 2015 and the Company's operational structure provides a
localised focus to optimise response times in the event of a power
cut.
During the year, the Company continued to invest in technology
to support its drive to improve response times, including the
expansion of the automated power restoration system ("APRS") which
operates within the existing network management system. In the
event of a high-voltage fault, APRS analyses the information
presented by intelligent assets installed on the network and, from
that information, determines where the fault is located and
executes switching to restore power to the 'healthy' network in a
safe manner in under three minutes.
It is planned to enable APRS at 306 primary substations across
the Northern Powergrid Group by the end of the ED1 period. The
Company expects, therefore, that APRS will significantly improve
the service to customers due to the speed with which it can
understand the information presented and then complete the
switching required to restore power.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
CORE PRINCIPLES - continued
Operational excellence - continued
The Company responded well to the major weather events that
impacted its network during the year. There were three events -
Storm Gertrude brought strong winds in January, an intense
lightning storm in September and heavy rains following a prolonged
dry spell in November - which resulted in the Company invoking its
full major incident management plan.
The Company's priorities during the year included delivering a
significant level of capital expenditure on the network, a further
reduction in the average level of fault repair work in progress and
continued focus on the restoration times associated with both
high-voltage and low-voltage power cuts, with high-voltage
restoration performance averaging some 52.8 minutes (2015: 55.5
minutes), after allowing for severe weather incidents and other
exemptions.
The Company undertook various major projects during the year in
support of those targets and as part of the investment strategy,
including:
- Continuation of reinforcement of the primary network in the
Doncaster area with excavation and duct installation for the 132kV
cables to connect West Melton to the new 132/33kV Mallard Way
substation at Potteric Carr;
- Completion of the work to replace the 6kV network in the King
George Docks area of Hull and replacement of the 11kV switchboard
at West End Lane;
- Refurbishment of two 132kV transformers and plant replacement at Horbury substation;
- Replacement of 19km of 132kV oil-filled cable from Creyke Beck to Hull South;
- Replacement of 4km of 132kV oil-filled cable from Beeston Royds to Kirkstall;
- Extensive on-going works in the Sheffield area including the
replacement of 15km of 33kV gas insulated cable and 3km of 33kV
oil-filled cable;
- Extensive ongoing works in the Huddersfield area including the
replacement of 14km of 33kV solid cable and 1km of 33kV gas
insulated cable;
- Sections of nine extra-high-voltage overhead line circuits
were rebuilt with the replacement of 27km of conductor, 44 decayed
wood poles and the removal of 165 Woodhouse Mast overhead line
structures;
- 35km of high-voltage overhead line and 22km of low-voltage
overhead line were refurbished or rebuilt;
- 78 units of high-voltage outdoor switchgear, 60 high-voltage
distribution substations and 258 units of high-voltage indoor
switchgear were replaced; and
- 190 new remote control points were installed and commissioned.
In order to deliver its investment strategy, the Company
undertook its activities using a mix of its own staff and
contractors, including affiliated companies in the Northern
Powergrid Group.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
CORE PRINCIPLES - continued
Employee commitment
Health and safety
The focus on health and safety continued to be of paramount
importance for the directors, as it is for all employees. There is
a continuous drive for improvement in safety performance through
the setting of challenging goals and the pursuit of a comprehensive
safety and health improvement plan, which reflects the Company's
fundamental objective that every employee and contractor should go
home uninjured and in good health after a productive day's work.
The Company makes no compromise in respect of its health and safety
obligations and centres its safety plans and systems on the
principles found in companies with world class safety
performance.
The Company's safety record over a number of years suggests that
it is one of the safest in the sector in which it operates. There
is an intention to improve performance still further and, in doing
so, maintain its position over the coming years. Having identified
issues that may pose an increased safety risk, such as metal theft
and the roll-out of smart meters, the Company is implementing
measures through its safety and health improvement plan that will
build incrementally on the existing strong safety record and ensure
that safety considerations are always part of the investment
decision-making and appraisal process.
The Company measures its health and safety performance in
calendar years and operational incident performance for the year
ended 31 December 2016 had significantly improved, with only four
switching-related incidents experienced on the high-voltage network
against a target of six and compared with eight events recorded in
2015. As one of the key deliverables in the Company's safety and
health improvement plan is to raise awareness and improve the
concentration skills of its operational engineers and other
employees, the Company continued its operational audit programme of
senior authorised persons such that the operational practices of
86% of senior authorised persons were verified during the year. The
Company also delivered operational seminars, stand-down briefings,
and regular safety newsflashes to staff in order to cascade
information on safety trends, issues and incidents.
Several key performance indicators are used to monitor safety
performance, with the goal of achieving performance that is below
the target number. The main key performance indicators are as
follows:
2016 2015
Target Actual Target Actual
Lost time accidents 2 4 1 2
Restricted duty
accidents 1 0 1 0
Medical treatment
accidents 1 1 2 1
Operational incidents 6 4 6 8
Preventable vehicle
accidents 13 12 13 15
The Company experienced four lost time accidents in 2016 (as
opposed to two in 2015) and recorded one medical treatment
(equalling 2015). In addition, performance in respect of
preventable vehicle accidents was one accident below the target for
the year and performance improved with three fewer accidents
compared with 2015.
In common with the Berkshire Hathaway Energy Group, the Northern
Powergrid Group measures its safety performance in terms of the
OSHA rate, which is a measure used in the United States to capture
safety incidents down to minor levels of medical treatment, such as
a stitch or the use of prescription pain killers. As part of its
plan to reduce the OSHA rate across the group, Berkshire Hathaway
Energy issues daily e-mail updates in respect of performance
against its overall OSHA rate and preventable vehicle accident
targets, which include information on incidents that have occurred.
The Company's Director of Safety, Health and Environment also
delivered updates using conference call facilities, which were
available to the entire workforce, regarding performance and other
safety-related issues.
Delivery of the various initiatives in the safety and health
improvement plan contributed to the Northern Powergrid Group
achieving an OSHA rate of 0.30 against a target of 0.30, which
equated to only seven recordable incidents; one more than the
performance recorded in 2015. The Company recorded an OSHA rate for
2016 of 0.44 (2015: 0.26) against a target of 0.35.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
CORE PRINCIPLES - continued
Employee commitment - continued
As part of the safety and health improvement plan and in order
to reinforce the operational safety values, the Company continued
to implement its cross-business operational assurance audit
programme and its senior management field engagement programme in
order to improve two-way communication on safety and other key
business issues. During the year, a robust road risk management
plan was effective which involved electronic driving licence
checking, delivering road risk awareness workshops to new employees
and using risk reduction tools such as online driver assessment and
training followed by an on-road refresher training session if
required. The driver training programme provides practical driving
training to a targeted population of drivers and is the primary
route to improving driver skills in the longer term. Recognising
that driving is one of most hazardous activities undertaken on a
daily basis, the programme has continued to expand further
throughout 2016 via an interactive, web-based system
designed to assess skills and then provide individual training
plans to improve hazard perception and reinforce specific aspects
of driving-related skills. The Company also completed a programme
to install a telematics system in all of its fleet vehicles in
order to support driver and vehicle safety by encouraging
responsible and safe driving styles, assist with the completion and
management of vehicle safety checks, and expedite investigation of
vehicle accidents and incidents.
During the year, the Company was awarded a President's Award
from the Royal Society for the Prevention of Accidents for
achieving 12 consecutive Gold Awards in recognition of achievements
in 2015 and for continued or improving standards of health and
safety over a sustained period. The Company's OHSAS 18001 health
and safety management systems successfully retained certification
having been subject to a ten-day recertification audit by an
external auditor.
The sickness absence rate across the Northern Powergrid Group
for 2016 was 2.96% (2015: 2.71%).
Management structure
Operational management of the Company and that of its affiliate,
Northern Powergrid (Northeast) Limited ("NPg Northeast"), is
undertaken by a single senior management team with specific
functional responsibilities. Those functional responsibilities are
in respect of operations, safety, health and environment, asset
management (including procurement), customer service, business
development (including new connections to the network), policy and
markets (including trading and innovation), regulation, human
resources, organisation development, legal and finance (including
property management, stakeholder engagement and information
technology). Some of those functions also provide services across
the Northern Powergrid Group.
Employees
The Company continued to apply appropriate control to its
headcount policy and to place significant emphasis on the
importance and application of high standards of management and
performance in support of the Core Principles. The Company ensures
that a level of consistency is adopted in so doing and, in respect
of employee relations, continued to build constructive and
partnered relationships with the trades unions. In that respect,
the Company has secured multi-year pay agreements with the various
employment groups such that the relevant terms and conditions are
fair and appropriate across the Northern Powergrid Group.
The Northern Powergrid Group will continue to recruit trainees
under its workforce renewal programme during the ED1 period taking
account of the rate at which existing employees either leave or
retire from the Northern Powergrid Group. A total of 71 new
recruits joined the workforce renewal programmes during 2016. In
addition, 73 trainees who were part of the workforce renewal
programme in previous years graduated from their training
programmes. In total, the Northern Powergrid Group recruited 95 new
employees from the external market.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
CORE PRINCIPLES - continued
Employee commitment - continued
As a member of the Berkshire Hathaway Inc. group of companies,
Berkshire Hathaway Energy sets high expectations for honesty and
integrity in the conduct of all business activity. Consequently,
the Company is committed to proper business conduct and has adopted
the Berkshire Hathaway Energy code of business conduct, which
details the commitment to ethics and compliance with the law,
provides reporting mechanisms for known or suspected ethical or
legal violations, and establishes minimum standards of behaviour
expected of all employees. All employees must complete annual
training on the code of business conduct. A "speaking up" policy is
also in place so that members of staff are able to raise any
instances of unethical acts, malpractice or impropriety. An
additional process is also available to all staff via an
international, anonymous help line operated by an independent
company.
In order to support the welfare of its employees, the Northern
Powergrid Group provides an employee assistance service to its
staff via an independent company that supports over 350
organisations in the United Kingdom. The programme is a
confidential, self-referral counselling and information service to
assist with personal or work-related problems that may be affecting
health, wellbeing or performance and is available 24 hours a day,
365 days a year. The services available include health, wellbeing
and family-care information, financial information and debt
counselling, and legal guidance. Working in partnership with its
occupational health provider, the Northern Powergrid Group is
delivering a long-term strategic programme aimed at improving the
health of its staff.
Progress continued to be made during the year on the key
priorities in the human resources and organisational development
functions, including recruitment, employee engagement, and
performance management and development. Throughout the year, the
Company continued to set and uphold the promotion of high standards
of probity among staff. In addition, the Company's organisational
structure has been developed to control business units and to
delegate authority and accountability, having regard to acceptable
levels of risk.
As at 31 December 2016, the Company employed 1,184 staff (2015:
1,213).
Environmental respect
The Company's approach to environmental compliance is governed
by an environmental policy and, in addition, the policy of
Environmental RESPECT (Responsibility, Efficiency, Stewardship,
Performance, Evaluation, Communication and Training) implemented by
Berkshire Hathaway Energy. These policies and their subordinate
operational control procedures and systems address compliance with
legal and other key environmental requirements, pollution
prevention and continual improvement, and also promote
environmental awareness and best practice amongst the Company's
staff and contractors.
The Company has operated a United Kingdom Accreditation Service
scheme for environmental management since the late 1990s, certified
to the environmental management systems standard ISO 14001: 2004.
It is subject to regular six-monthly assessment visits and a
three-yearly certificate renewal assessment by an accredited
external certification body in order to retain that status.
The most recent visit was a surveillance assessment carried out
by Lloyd's Register Quality Assurance in October 2016. The
assessment reported the continued improvement made to the
environmental management system over the past three years. There
were no non-conformances noted and, after a rigorous three-day
surveillance audit, continued certification was recommended and
subsequently confirmed.
Procedures and processes were reviewed and developed in the year
to improve the effectiveness of the environmental management
system. Operational controls at depots have also significantly
improved, which has supported the reduced number of minor
non-conformances raised at recent surveillance visits, with zero
minor non-conformances reported in 2016. In the event that fluid
leakages do occur, the Company has in place an emergency incident
response support contract with a specialist service provider, under
which 24-hour environmental incident assistance is provided,
including contamination mitigation, remediation and
incident-validation reporting.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
CORE PRINCIPLES - continued
Environmental respect - continued
Improvements in support of the Company's environmental policy
objectives continued to focus on replacing selected fluid-filled
cable sections with non-fluid polymeric equivalents, replacing
oil-filled circuit breakers with vacuum and sulphur hexafluoride
gas-filled units at outdoor substations to reduce the potential for
oil leakage and using gas tracer technology to locate cable fluid
leaks quicker, where it was practicable to do so. The Company also
provided environmental awareness training for staff via an online
system to avoid the need for travelling to central training
locations. These improvements support the Company in delivering
sustained environmental performance, which it measures on a
calendar year basis, and, in the year ended 31 December 2016, only
three incidents were reportable to the Environment Agency, which
was significantly better than the target of seven. Oil spills and
leaks from the Company's assets were under the target of 25,714
litres by 39% with a loss of 15,722 litres and SF6 gas discharges
from electrical plant exceeded the target of 84 kilogrammes by 19%
with a loss of 100 kilogrammes.
During the year, work continued with many of the Company's key
stakeholders, including the Environment Agency, to enhance the
advanced environmental management processes already in place and,
in 2017, the Company plans to maintain this progress so that the
impact on the environment in which it works is reduced and the most
effective ways of doing so are utilised. The Company's business
plan contains a commitment to reduce its business carbon footprint
by 10% by the end of ED1 and performance remains on course to
achieve that target.
The Company's commitment to the Environmental RESPECT policy and
its improved overall performance contributes towards minimising its
impact on the environment. As part of its annual environmental
improvement plan, the Company has mobilised significant programmes
to replace fluid-filled cables and place overhead lines underground
in National Parks and Areas of Outstanding Natural Beauty, reduce
electrical losses and implement further improvements to the network
that take account of protected structures, features, areas,
wildlife and habitat. Birdlife is being protected by placing
bird-diverters on power lines where they are in proximity to nature
reserves, wetlands, flight paths or in locations where rare species
of bird are known to live or breed and also in response to
information obtained from incident trends. The Company continues to
work with local social enterprises that rescue waste timber in
order to provide affordable reclaimed timber products to the local
community.
Sustainability
The Company's activities have an important part to play in the
United Kingdom's transition to a low-carbon economy, both in its
capacity as a major participant in the United Kingdom energy
industry and in terms of its own carbon footprint.
As the country takes action to make significant reductions in
its carbon emissions, the way in which electricity is produced and
used is expected to have a substantial impact on the electricity
network over time. Evidence of this has already been seen through
the number of installations made by customers of low-carbon
technologies such as photovoltaic solar panels, electric vehicles
and heat pumps which continued to increase during the year and are
reported via the regulatory reporting process. The volume and total
capacity of decentralised energy generation has also been growing
steadily for the last few years and, given the greater range of
load and generation technologies now being connected to the
network, the Company is taking action to develop innovative
solutions that will reduce the need for traditional and potentially
expensive reinforcement of the network.
The Company's innovation projects have continued this year from
the platform established by the ground-breaking Customer-Led
Network Revolution ("CLNR") programme of work that concluded in
2015. The four priorities of smart grids, smart meters,
digital-enabled services and issues of affordability continue to be
highly relevant to our stakeholders. In the smart grid area, the
transition to distribution system operator is taking increased
prominence in the innovation portfolio. During the year, the
Company completed work to better understand how local energy
markets may develop, the potential impact of future market models
and the role of new players such as local authorities. Deployment
of innovation in the year has delivered GBP7.5 million of value,
with around half of that centred on releasing capacity and
providing flexible connections for immediate customer benefit.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
CORE PRINCIPLES - continued
Environmental respect - continued
The Northern Powergrid Group climate change adaptation strategy
outlines the impact that climate change is anticipated to have on
the business, the risks that this poses and the proposals
recommended to mitigate these risks. The proposals include flood
defences, vegetation management, network specifications for
changing temperatures, improved weather prediction, and adequate
staff availability. The planned number of flood defences to be
installed during the year was not achieved. This was primarily due
to the re-tendering of the delivery contract. Under the re-phased
programme, the delivery of the overall commitment to install
further flood defences during the ED1 period remains on-track.
Environmental performance was strong with incidents reportable
to the Environment Agency, fluid loss and the Company's carbon
footprint being lower than targeted. The Company policy of
installing over-sized cables continues to save network losses,
which contributed to further carbon emission reductions.
Regulatory integrity
The Company manages its business to the highest behavioural
standards and adheres to a policy of strict compliance with all
relevant standards, legislation and regulatory conditions. The
Governance and Risk Management Group ("GRMG") is the principal risk
management forum in the Northern Powergrid Group, and monitors and
manages performance in risk-related and compliance areas. The GRMG
met on three occasions during the year in order to review the
mechanisms for meeting external obligations, to strengthen the
business-control-improvement environment, and to consider and
advise on key strategic risks facing the Company.
Breaches by a DNO of its licence conditions and certain other
statutory requirements could lead to financial penalties, which
Ofgem has stated "will have a proportionate impact on shareholder
returns". In order to assure compliance with licence and other
regulatory obligations, the Company operates a regulatory
compliance affirmation process, under which ownership of
approximately 1,780 regulatory obligations contained within the
compliance database is currently assigned to around 75 responsible
managers. Those responsible managers are required, on a quarterly
basis, to review compliance with the relevant obligations that have
been assigned to them for certification and report on any
identified non-compliances or perceived risks to the compliance
process, which are then addressed. The Head of Regulatory
Compliance reports to the board of directors on the outcome of each
quarter's exercise.
Under the RIIO (revenue = incentives + innovation + outputs)
model for regulation, price controls are set for eight years
(rather than five as has previously been the case), with provision
for a mid-period review of the outputs that network companies are
required to deliver. The ED1 price control became effective on 1
April 2015 and is due to end on 31 March 2023.
Under the ED1 price control, excluding the effects of incentive
schemes and any deferred revenues from the prior price control, the
Company's base allowed revenue before inflation reduced by 0.5% for
the regulatory year ended 31 March 2017, relative to the previous
year. Base allowed revenues before inflation will then be constant
for each subsequent regulatory year through to the regulatory year
ended 31 March 2023. Nominal base allowed revenues will therefore
increase in line with inflation (as measured by the United
Kingdom's Retail Prices Index).
The ED1 price control is the first to be set for electricity
distribution in Great Britain since Ofgem completed its review of
network regulation (known as the RPI-X @ 20 project). The key
changes to the price control calculations, compared to those used
in previous price controls are that:
- the period over which new regulatory assets are depreciated is
being gradually lengthened, from 20 years to 45 years, with the
change being phased over eight years;
- allowed revenues will be adjusted during the price control
period, rather than at the next price control review, to partially
reflect cost variances relative to cost allowances;
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
CORE PRINCIPLES - continued
Environmental respect - continued
- the allowed cost of debt will be updated within
the price control period by reference to a long-run
trailing average based on external benchmarks
of public debt costs;
- allowed revenues will be adjusted in relation
to some new service standard incentives, principally
relating to speed and service standards for new
connections to the network; and
- there is scope for a mid-period review and adjust
revenues in the latter half of the period for
any changes in the outputs required of licensees
for certain specified reasons.
Many other aspects of the previous price control remain in place
(either in their previous or similar form), including adjustments
to revenues in relation to the number and duration of service
interruptions and customer service standards. In addition, network
tariffs, from which actual revenues are derived, are now set
further in advance than previously.
With the start of the new price control, changes were also made
to the legislation that prescribes the standards of service to be
provided by the DNOs in specified circumstances and payments to be
made to end-customers for failure to meet those standards. The most
significant of these changes reduced from 18 to 12 hours the time
that is allowed for restoration of supplies following an unplanned
power cut in normal weather conditions.
The Company submits a number of information returns to Ofgem and
is required, under the terms of the Company's licence, to assure
the accuracy of those returns. These arrangements involve the
preparation and submission to Ofgem, by the end of February in each
year, of a risk-based data-assurance plan for the regulatory year
ahead, together with a report detailing the assurance work actually
carried out in the regulatory year just ended and the findings of
that work.
PRINCIPAL RISKS AND UNCERTAINTIES
There are a number of potential risks and uncertainties, which
could have an impact on the Company, its financial position and its
operations and may cause actual results to vary materially from
those expected or historically experienced. The principal risks are
outlined as follows:
Financial risk
As a holder of an electricity distribution licence, the Company
is subject to regulation by the Gas and Electricity Markets
Authority (GEMA), which acts through Ofgem. Most of the revenue of
the electricity distribution licence holders is controlled by the
distribution price control formula set out in the electricity
distribution licence.
The price control formula does not constrain profits from year
to year but sets the maximum permitted revenue for each regulatory
year, taking into account base allowed revenues and movements in
Retail Prices Index ("RPI"), as well as factors such as performance
against certain regulatory incentives. Where the Company recovers
more, or less, than this maximum the difference is carried forward,
with interest. For amounts relating to the regulatory year ended 31
March 2016, the carry forward will be into the entitlement for the
regulatory year ended 31 March 2018.
The price control for ED1 has been set for the eight-year period
commencing on 1 April 2015, although the price control formula may
be reviewed at other times at the discretion of Ofgem, and it is
Ofgem's intention to use eight-year price control periods in the
future. A resetting of the formula is made by GEMA without the
consent of the electricity distribution licence holder, but a
licensee can appeal to the Competition and Markets Authority
against a decision by GEMA to proceed with such a modification.
Certain other interested parties have the same right.
During the term of the price control, the rate of inflation as
measured by RPI is taken into account in setting the Company's
allowed income in respect of each regulatory year. Consequently,
one of the risks faced by the Company is that its costs may
increase by more than RPI. Any changes in costs incurred will have
a direct impact on the Company's financial results, as will changes
in performance under incentive schemes, such as in customer
service, which can lead to adjustments to allowed revenues.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
PRINCIPAL RISKS AND UNCERTAINTIES - continued
Ofgem recognises that defined benefit pension schemes and,
particularly, the current deficit positions of various schemes,
represent a significant cost to the DNOs and, in its final
proposals in respect of the previous price control period
("DPCR5"), Ofgem confirmed that DNOs would be allowed to recover
the actuarial value of the deficits attributable to a licensee's
distribution business in existence as at 31 March 2010 via its
regulated revenues (after an adjustment to reflect the residual of
unfunded early retirement deficiency costs as at 31 March 2010).
Ofgem re-affirmed these principles in its ED1 final
determination.
However, given the stable and regulated nature of the DNOs'
businesses, Ofgem took the view that a notional repair period of 15
years from 1 April 2010 was appropriate for the purpose of
assessing the DNOs' allowed revenues in respect of pension costs.
Moreover, Ofgem reviews the reasonableness of the triennial
actuarial valuations of DNOs' pension schemes and calculates new
deficit funding allowances, including any adjustments that may be
necessary to account for differences between allowances received
and payments actually made to the relevant pension scheme.
The other financial risks facing the Company are outlined on
page 6 of this Strategic Report.
Operational risk
There are a number of risks to the Company's operational
performance in respect of which mitigating actions have been taken.
Appropriate credit cover arrangements are in place with the
electricity suppliers, which would allow recovery of defaulted
payments through the price control mechanism and a robust major
incident management plan is implemented whenever severe weather
impacts on the distribution network's performance. Given the
regular instances of metal theft experienced in previous years, the
Company maintained its programme of risk-assessed and enhanced
security measures at its sites and pursued awareness raising
activity at a national and local level, including commencing a
social media campaign in early 2016 in partnership with
Crimestoppers.
The electricity distribution business has an inherently
increased health and safety risk due to the network operating at up
to 132kV. Employees work at height, in closed spaces and with live
electricity, increasing the risk of potential safety matters.
Health and safety is given the highest priority within the Company
and strict policies and procedures are in place to ensure the
safety of both employees and customers.
Cyber security is an increasing risk. The Company has a robust
cyber security risk mitigation programme in place including gaining
accreditation under of ISO 27001 Information Security (process
security) standard for certain discrete business areas, plus
compliance with the Centre for Internet Security Critical Security
Controls. Further advances to this are being continuously
implemented and managed.
The Company recognises that there are uncertainties around the
future take-up of low-carbon technologies and the resulting
capacity requirements for the network, and from the fitting of
smart meters throughout the Company's distribution services area,
which is expected to result in a requirement to address a
proportionate number of reported defects. The Company believes that
it can effectively manage these issues through its usual risk
management practices.
Commercial risk
Managing commercial risk continued to be of key importance and
the Company remained focused on ensuring that its policies for
credit checking, payment terms, payment performance tracking and
debt management were strictly adhered to.
The Company's relationship with its main customers is governed
by a distribution connection and use of system agreement ("DCUSA"),
which is in place with each of those customers. Those customers are
the electricity suppliers who, under the terms of the DCUSA, pay
charges for the use of the distribution network, in respect of
which it is necessary to ensure that credit cover arrangements in
line with Ofgem's guidance remain in place. The principal
electricity suppliers that use the Company's network are RWE
Npower, British Gas, EDF Energy, E.ON, SSE and Scottish Power.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
PRINCIPAL RISKS AND UNCERTAINTIES - continued
The Company operates utilising a mix of direct labour and
contracted resource and has a range of contracts in place with
various service providers for delivery of its work programmes,
which are subject to regular market testing and tendering
exercises. Those services include vegetation management, overhead
line inspection and construction, substation construction and
maintenance, underground cable laying services, vehicle leasing and
servicing, tower refurbishment and information technology services.
The Company also has an extensive suite of contracts in place for
the procurement of all of the goods and equipment it requires to
deliver its capital expenditure programme and to run its business,
including for varying types of transformers, switchgear and
cables.
Risk Management
The Northern Powergrid Group operates a structured and
disciplined approach to the management of risk as part of its
overall risk management policy and, in DPCR5 and previous price
control periods, accepted and successfully managed substantial cost
and delivery risks by developing a culture of cost and risk
management over that period of time. Risks are divided into a
number of risk sectors which, in turn, align to the Northern
Powergrid Group's Core Principles, as detailed on pages 5 to 17 of
this Strategic Report. A report regarding the effectiveness of each
risk sector in terms of risk management, control activity, key
success factors and supporting measures is presented at meetings of
the GRMG. The risk environment is reviewed continually in order
that new or emerging potential risks are identified.
The Northern Powergrid Group identifies and assesses risks
associated with the achievement of its strategic objectives so that
any actions needed to further enhance the control environment are
identified, along with the person responsible for the management of
the specific risk. A regular review of the key risks, controls and
action plans is undertaken. The risk management programme includes
regular review of the crisis management, disaster recovery and
major incident plans, which are periodically tested, the sharing of
best practice on disaster preparedness and response, disaster
recovery tests of IT servers and priority processes, penetration
tests against firewall systems, and a peer review of the Northern
Powergrid Group's risk management systems by Berkshire Hathaway
Energy.
Risk management continues to be a central theme of senior
management priority setting, as well as an explicit business
process that helps to identify lower probability, high consequence
threats to business success or continuity. This approach is
reinforced by that of the Berkshire Hathaway Energy group, whose
activities have continued to include benchmarking of risk
management activities across its business units, including the
sharing of significant lessons learned associated with risk
management.
A key element and requirement of the risk management process is
that a written certificate is provided by the President and Chief
Executive Officer of the Northern Powergrid Group confirming that
the effectiveness of the system of internal controls has been
reviewed during the year. A self-certification process is in place,
in support of this review, whereby certain senior managers are
required to confirm that the system of internal control in their
area of the business is operating effectively. Consequently, the
directors believe that a robust system of risk assessment and
management is in place.
Internal Control
A rigorous internal control environment exists within the
Northern Powergrid Group based on regular reporting, a series of
operational and financial policy statements, investigations
undertaken by internal audit and a stringent process for ensuring
the implementation of any recommendations. Berkshire Hathaway
Energy requires a quarterly risk control assessment to be
undertaken by certain senior managers as part of its programme for
compliance with the requirements of the United States
Sarbanes-Oxley Act and, while no significant areas of weakness have
been identified, any recommended improvements are implemented.
In addition, the Northern Powergrid Group employs comprehensive
business planning and financial reporting procedures, regularly
reviews key performance indicators to assess progress towards its
goals and has a strong internal audit function to provide
independent scrutiny of its internal control systems. The Northern
Powergrid Group has risk management procedures in place, including
the standards required by the United States Sarbanes-Oxley Act, and
has centralised treasury operations and established procedures for
the planning, approving and monitoring of major capital
expenditure.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
PRINCIPAL RISKS AND UNCERTAINTIES - continued
The Northern Powergrid Group is committed to maintaining the
highest ethical standards in the conduct of its business and, in
that respect, implements Berkshire Hathaway Energy's code of
business conduct for employees. The code of conduct sets out and
emphasises the required standards and commitment to ethical
behaviour, provides reporting mechanisms for known or suspected
ethical issues, helps prevent wrongdoing, and creates and sustains
an ethical work environment across the Northern Powergrid Group.
All employees are required to complete annual training on the code
of business conduct and then confirm that they understand the
requirements outlined in the code. The training is available online
and employees who do not have access to the online system attend a
briefing with their line manager.
The Company does not have a specific human rights policy but, as
noted in this Strategic Report, it bases its operations on the Core
Principles in order to deliver its long-term objectives.
Accordingly, the Company remains fully committed to operating
ethically and responsibly and with fairness and integrity through
the policies and procedures it has in place which set the approach
to its employees, their health, safety and welfare, its dealings
with customers, particularly those who are vulnerable and on the
Priority Services Register, its impact on the environment and its
contribution to the sustainability agenda within the energy
industry. The Core Principles are a key factor in the responsible
way in which the Company operates its electricity distribution
business, examples of which are described throughout this Strategic
Report.
The Northern Powergrid Group is also committed to preventing
corruption in all its forms and continues to have a zero-tolerance
approach to corruption in its business or by those with whom it
does business. The board of Northern Powergrid Holdings Company has
addressed the risks introduced by the Bribery Act 2010 through a
compliance policy, changes to contractual terms, training and other
staff awareness measures. The introduction of annual risk
assessments and enhanced due diligence in respect of new business
transactions has further assisted in ensuring compliance.
The Northern Powergrid Group requires staff, suppliers of
services and business partners to comply with the Bribery Act. Its
policies encourage an employee who has any suspicion of bribery or
other form of corruption within or related to the Northern
Powergrid Group to report the suspicion to a manager or via the
international, anonymous help line mentioned in the Employee
commitment section.
The Company has appropriate controls in place directed at
ensuring compliance with the conditions in its licence requiring
any payments made to, or received from, affiliates or related
undertakings in respect of goods and services provided or supplied
to be on an arm's length basis and on normal commercial terms.
In preparing these accounts, the directors have assessed the
viability of the Company for the purposes of making the statement
below and do so on an ongoing basis as part of the preparation and
approval of the Company's ten-year business plan.
The directors have chosen the eight-year period from 1 April
2015 for the purposes of making this statement because it equates
to the ED1 regulatory period, though longer periods may be
appropriate given the 45-year life ascribed by Ofgem to the
Company's new assets, the enduring nature of the Company's business
and the fact that the notice period for revocation of the Company's
electricity distribution licence is 25 years. The Company's income
has been set for the ED1 regulatory period, although there is scope
for a mid-period review and Ofgem may adjust revenues in the latter
half of the period for any changes in the outputs required of the
Company for certain specified reasons. Consequently and given the
general stability associated with the regulatory environment in
which the Company operates, the directors have been able to prepare
sufficiently robust forecasts as part of the Company's annual
business planning process, taking account of the principal risks
and uncertainties which might have an impact on those forecasts.
The Company's forecasts look forward for a 10-year period and
anticipate the Company's continued stable operations beyond the ED1
price control period.
Details of the principal risks and uncertainties, which could
have an impact on the Company, are provided on pages 17 to 19 of
the Strategic Report and details of how those principal risks are
assessed and managed are provided in the Risk Management section of
the Strategic Report.
NORTHERN POWERGRID (YORKSHIRE) PLC
STRATEGIC REPORT
FOR THE YEARED 31 DECEMBER 2016
PRINCIPAL RISKS AND UNCERTAINTIES - continued
The directors' ongoing assessment of the principal risks and
uncertainties facing the Company also includes meeting the
obligations in the Company's licence to provide Ofgem with annual
certificates, approved by the board, confirming that the directors
have a reasonable expectation that the Company will have sufficient
financial resources, financial facilities and operational resources
available to it so that the Company is able to carry on its
Distribution Business for a period of 12 months from the dates of
those certificates. Assumptions taken into account when approving
those certificates include (i) the potential for significant
adverse financial impact from the various incentive schemes that
can lead to variations in the Company's allowed income under its
price control arrangements; (ii) the occurrence of catastrophic
natural or other events, which could have a significant impact on
the operating performance of the distribution network or involve
significant expenditure; (iii) whether significant customer payment
defaults may be experienced; and (iv) the continued availability to
the Company of suitably qualified and experienced staff. Given the
regulatory environment in which the Company operates, it is
currently considered unlikely that there will be material variances
to the assumptions used in providing those certificates during the
ED1 period.
The stable nature of the Company's business is evidenced by the
fact that the commitments made by the Company in its well-justified
business plan, which was originally submitted to Ofgem as part of
the ED1 price control review process, have not changed materially.
Consequently, assuming that the principal risks and uncertainties
facing the Company continue to be managed effectively, the
directors have a reasonable expectation that the Company will be
able to continue in operation and meet its liabilities as they fall
due over the ED1 period.
ON BEHALF OF THE BOARD:
P A Jones
Director
24 March 2017
NORTHERN POWERGRID (YORKSHIRE) PLC
REPORT OF THE DIRECTORS
FOR THE YEARED 31 DECEMBER 2016
The directors present their report with the audited financial
statements of the company for the year ended 31 December 2016.
DIVIDS
During the year, an interim dividend of GBP28.7 million (9.9p
per ordinary share) was paid (2015: GBP27.6 million, 9.5p per
ordinary share). The directors recommended that no final dividend
be paid in respect of the statutory accounting year ended 31
December 2016. No interim dividend was paid during the period from
1 January 2017 to 24 March 2017.
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.
RESEARCH AND DEVELOPMENT
The Company supports a programme of research that is expected to
contribute to higher standards of performance and a more
cost-effective operation of its business. Projects to investigate
enhanced load reduction opportunities from customer participation,
the accessing of disbursed domestic demand-side response and,
alongside other utilities, to determine optimum energy system
technology approaches appropriate to local socio-economic factors
have continued. New activities initiated in the year included
projects regarding the use of domestic electricity storage in
conjunction with small-scale photovoltaic solar generation, an
improved methodology to determine network load growth and a project
to improve circuit reliability and reduce restoration times through
fault monitoring and anticipation on the low-voltage network. In
addition, a wood replacement technology for overhead line support
was evaluated and an investigations into environmentally acceptable
alternative systems for wood preservation, was undertaken.
During the year, the Company invested GBP1.6 million (2015:
GBP2.7 million) (Note 6 to the accounts) in its research and
development activities.
FUTURE DEVELOPMENTS
The financial position of the Company, as at 31 December 2016,
is shown in the statement of financial position on page 36.
There have been no significant events since the year end and the
directors intend that the Company will continue to implement its
well-justified business plan that was revised as part of the ED1
price control review process and will develop its business by
operating with the goal of efficiently investing in the network and
improving the quality of supply and service provided to
customers.
DIRECTORS
The directors who held office during the year under review and
to the date of signing were:
R Dixon Non-executive Director
T E Fielden Finance Director
J M France Regulation Director
T H France General Counsel (appointed 15 December
2016)
N M Gill Operations Director
P A Jones President and Chief Executive Officer
A J Maclennan Business Development Director
A R Marshall Non-executive Director
P C Taylor Non-executive Director
During the year, no director was interested in any contract
which was significant in relation to the business of the
Company.
During the year and up to the date of approval of the Directors'
Report, an indemnity contained in the Company's Articles of
Association was in force for the benefit of the directors of the
Company and as directors of associated companies, which was a
qualifying third party indemnity provision for the purposes of the
Companies Act 2006.
NORTHERN POWERGRID (YORKSHIRE) PLC
REPORT OF THE DIRECTORS
FOR THE YEARED 31 DECEMBER 2016
FINANCIAL RISK MANAGEMENT
The Company's short-term financial objective is to ensure that
it has access to sufficient liquidity to enable it to meet its
obligations as they fall due and to provide adequately for
contingencies. The long-term objective is to provide a stable and
low cost of financing over time whilst observing approved risk
parameters. The main risks are liquidity and interest rate
risk.
Trading risk
Throughout the year, the Company's policy was that no trading in
financial instruments should be undertaken.
Financial derivatives
As at 31 December 2016 and during the year it was the Company's
policy not to hold any derivative financial instruments.
Further details of the financial risks facing the Company are
provided in the Financial strength section on pages 5 and 6, and
Principal Risks and Uncertainties section on pages 17 to 19 of the
Strategic Report.
POLITICAL DONATIONS
No contributions were made to political organisations during the
year (2015: GBPnil).
EMPLOYEES
Employee consultation
The Company has a constitutional framework in place for employee
consultation and has agreed that framework with trade union
representatives. In addition, the Company communicates directly and
through the management structure with non-collectively bargained
staff, who are primarily of management grade, and keeps them
informed of and involved as appropriate in developments that may
impact on them now or in the future.
The Company is committed to maintaining and improving effective
engagement and communication with employees. Following the employee
engagement survey in 2016, the results continue to show improvement
and work has been undertaken to analyse the feedback and develop
local action plans. This approach is augmented by routine
communication channels including regular staff briefings on current
issues, meetings with staff and their representatives, and
utilising Northern Powergrid Group's intranet to communicate and
engage with employees.
During the year, the President and Chief Executive Officer of
the Northern Powergrid Group continued to provide employees with
updates on the Northern Powergrid Group's financial,
organisational, safety and customer service performance through
postings and weekly blogs on Northern Powergrid Group's intranet on
key elements of performance during the preceding week.
Disabled employees
The Company is committed to equality at work and, as such, its
policy is to provide all protected groups, including disabled
people, with equality at work in respect of employment, training,
career development and promotion, having regard to their aptitudes
and abilities. Should any member of staff become disabled during
their employment, the Company would work to make reasonable
adjustments, wherever possible.
NORTHERN POWERGRID (YORKSHIRE) PLC
REPORT OF THE DIRECTORS
FOR THE YEARED 31 DECEMBER 2016
CORPORATE GOVERNANCE STATEMENT
The Company has sought to apply a number of provisions in the UK
Corporate Governance Code 2014 (the "Code") in so far as it
considers them to be appropriate.
The Company has not complied with certain of the main principles
of the Code, including main principles A2, A3, B2, B6, B7, D1, D2
and E2.
The directors confirm that the governance framework in place is
appropriate to the circumstances of the Company and where possible,
the spirit of the Code has been applied. The framework is agreed
with Berkshire Hathaway Energy and includes regular reporting to
and meetings with the Chairman and senior management of Berkshire
Hathaway Energy. Sufficiently independent, non-executive directors
are present at board meetings of the Company and in addition there
is a strong internal control environment designed to meet the
standards required by the United States Sarbanes-Oxley Act.
Section A: Leadership
Main Principle A1: The Role of the Board
The board meets on a quarterly basis to review business
performance, strategic initiatives and operational and risk-related
issues. Additional board meetings are held as required.
Attendance at meetings by board members during the year was as
follows:
R Dixon Non-executive Director 5
T E Fielden Finance Director 6
J M France Regulation Director 5
T H France General Counsel 0(of 0 following
appointment)
N M Gill Operations Director 6
President and Chief
P A Jones Executive Officer 5
Business Development
A J Maclennan Director 6
Sufficiently independent
A R Marshall non-executive Director 6
Sufficiently independent
P C Taylor non-executive Director 5
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, Berkshire Hathaway Energy requires a
quarterly risk control assessment to be undertaken by certain
senior managers as part of its programme for compliance with the
requirements of the United States Sarbanes-Oxley Act. The
assessments undertaken during the year did not identify any
significant weaknesses in the process but resulted in the
implementation of recommended improvements. The key features of the
Company's internal control system and the issues addressed by the
Company during the year can be found in the Strategic Report.
A schedule of key delegations of authority has been approved by
the board which enables senior and other managers to make decisions
in respect of issues such as capital expenditure, procurement,
contractual arrangements, human resource matters, payment processes
and for the conduct of claims and litigation. That schedule
reserves decision-making to the directors above certain financial
limits. Matters reserved for board approval includes but are not
limited to, the declaration of dividends, the approval of the
annual statutory and regulatory accounts and changes to capital
structure.
NORTHERN POWERGRID (YORKSHIRE) PLC
REPORT OF THE DIRECTORS
FOR THE YEARED 31 DECEMBER 2016
CORPORATE GOVERNANCE STATEMENT - continued
Operational management of the Company's business (and that of
its affiliate, Northern Powergrid (Northeast) Limited) is delegated
to a single senior management team, with specific functional
responsibilities. That senior management team meets on a monthly
basis with the senior management of the Northern Powergrid Group to
monitor performance and address issues of policy across all areas
of the business. In addition, weekly conference calls are held to
report on and consider performance-related issues. Further details
of the management structure of the Northern Powergrid Group are
provided in the Strategic Report.
Board and Management Committees
During the year, there were a number of committees in operation,
acting under delegated terms of reference, which oversee the
Northern Powergrid Group and, therefore, Company policy. As part of
their approved terms of reference, certain of those committees
report regularly to the board on their activities.
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. 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;
- 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 investigations into significant incidents.
Committee members:
G M Earl Director of Health, Safety and Environment
T E Fielden Finance Director
J M France Regulation Director
T H France General Counsel
N M Gill Operations Director
P A Jones President and Chief Executive Officer
A J Maclennan Business Development Director
Treasury Committee
The Treasury Committee oversees and implements the treasury
policies, which are outlined in the Strategic Report and the
Directors' Report.
Committee members:
G E Abel Chairman, Berkshire Hathaway Energy
L Bennett Treasurer and Investor Reporting Manager
D Brady Treasury and Reporting Manager
T E Fielden Finance Director
P J Goodman Executive Vice President and Chief
Financial Officer, Berkshire Hathaway
Energy
S Gormally Accounting Assistant and Secretary
to the Committee
P A Jones President and Chief Executive Officer
S J Lockwood Group Financial Controller
NORTHERN POWERGRID (YORKSHIRE) PLC
REPORT OF THE DIRECTORS
FOR THE YEARED 31 DECEMBER 2016
CORPORATE GOVERNANCE STATEMENT - continued
Pensions Committee
The Pensions Committee oversees the Northern Powergrid Group's
approach to the pension schemes to which it contributes.
Committee members:
N Dawson Senior Pensions Advisor (retired 24
February 2017)
T E Fielden Finance Director
J M France Regulation Director
S J Lockwood Group Financial Controller
K Mawson Head of Regulatory Finance and Systems
L Tweedie Head of Field Change
K Weatherburn Director of Human Resources
Governance and Risk Management Group (GRMG)
Details can be found on pages 27 and 28 below.
Audit Committee
Details can be found on page 29 below.
Main Principle A2: Division of Responsibility
Mr G E Abel, the Chairman of Berkshire Hathaway Energy, is also
the Chairman of Northern Powergrid Holdings Company. As President
and Chief Executive Officer, Dr P A Jones is responsible for the
operational management of both the Company and the Northern
Powergrid Group. Dr P A Jones reports directly to Mr G E Abel.
Main Principle A3: The Chairman
The board does not have a formally appointed Chairman. Dr P A
Jones chairs board meetings and is responsible for the operational
management of both the Company and the Northern Powergrid Group. Dr
P A Jones divides his time accordingly between his various
commitments within the Northern Powergrid Group.
Main Principle A4: Non-Executive Directors
Three non-executive directors served on the board during the
year, each of whom acts under the terms of their individual service
contracts or terms of reference. Mrs A R Marshall and Professor P C
Taylor were appointed to the board as sufficiently independent
non-executive directors in accordance with the requirement in
condition 43A of the Company's electricity distribution
licence.
Section B: Effectiveness
Main Principle B1: The composition of the board
The board comprises six executive directors and three
non-executive directors. Although the board does not include a
balanced number of executive and non-executive directors, the board
believes that it possesses the requisite skills and experience
necessary to provide effective leadership, stewardship and control
of the Company, a position supported by the presence of the
sufficiently independent directors required by the Company's
licence.
Main Principle B2: Appointments to the board
The Company does not have a nomination committee. The Chairman
of Berkshire Hathaway Energy, in conjunction with the President and
Chief Executive Officer make appointments to the board with due
regard to the board's overall composition including the balance of
skills and experience.
Main Principle B3: Commitment
The Company's non-executive directors commit sufficient time to
preparation for and attendance at board meetings. Service contracts
or terms of reference do not specify a time commitment.
NORTHERN POWERGRID (YORKSHIRE) PLC
REPORT OF THE DIRECTORS
FOR THE YEARED 31 DECEMBER 2016
CORPORATE GOVERNANCE STATEMENT - continued
Main Principle B4: Development
The directors continually update their knowledge of and
familiarity with the operations of the Company due to the robust
reporting arrangements in place and have on-going access to the
Company's operations and its staff.
Main Principle B5: Information and support
The board is provided with timely information during the course
of the regular board meeting cycle and via interim briefings in
order that it can discharge its duties effectively. The directors
are able to utilise the advice and services of the Company
Secretary, in respect of their duties and responsibilities and any
new legislation that may affect those duties and responsibilities.
Upon request, the directors have access to independent professional
advice.
Main Principle B6: Evaluation
As part of their approved terms of reference, certain committees
report regularly on their activities, enabling the board to perform
an evaluation of their effectiveness. The board itself does not
have a process of evaluation of its own performance or of the
performance of individual directors in their capacity as directors.
The performance of the executive directors and senior managers is
reviewed formally on an annual basis as part of Berkshire Hathaway
Energy's performance appraisal and development scheme. Performance
is measured against individual and Berkshire Hathaway Energy
goals.
Main Principle B7: Re-election
The Company's articles of association do not require the
periodic retirement and re-election of directors.
Section C: Accountability
Main Principle C1: Financial and business reporting
The board considers that the annual reports and accounts, which
include the Strategic Report and the Report of the Directors, taken
as a whole is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company's
performance, position, business model and strategy.
The directors explain, at pages 2 to 3, the Core Principles
behind the Company's strategy and, at page 30, their responsibility
for preparing the Strategic Report, the Report of the Directors and
the annual accounts. They have reported, at page 31 in the Report
of the Directors that the Company is a going concern and have
included the Report of the Independent Auditor to the Company at
pages 32 and 33 of these annual reports and accounts.
Main Principle C2: Risk management and internal control
Details of the principal risks and uncertainties facing the
Company and its internal control system, together with details of
the issues addressed by the Company during the year, can be found
at pages 17 to 21 of the Strategic Report. Also included at page 20
of the Strategic Report is an explanation of how the prospects of
the Company have been assessed, the period to which that assessment
relates and the reasons as to why that period is considered to be
appropriate.
The Governance and Risk Management Group ("GRMG") is the
principal management forum in the Northern Powergrid Group with
regard to corporate governance and the management of risk. Its
purpose is to ensure that companies in the Northern Powergrid Group
apply and maintain appropriate arrangements to deliver sound
corporate governance and comply with the overall strategy,
framework and supporting policies. The GRMG monitors and reviews
the strategic risk environment, ensuring the continued suitability,
adequacy and effectiveness of risk management arrangements and
reports to the Northern Powergrid Group's Audit Committee.
NORTHERN POWERGRID (YORKSHIRE) PLC
REPORT OF THE DIRECTORS
FOR THE YEARED 31 DECEMBER 2016
CORPORATE GOVERNANCE STATEMENT - continued
Committee members:
N Applebee Head of Shared Services
J Cardwell Head of Trading and Innovation
R Dixon Non-executive Director
M Drye Director of Asset Management
G Earl Director of Safety, Health and Environment
T E Fielden Finance Director
J M France Regulation Director
T H France General Counsel
N M Gill Operations Director
A Jones Head of Strategic Planning and Delivery
L Mackay Head of Internal Audit
A J Maclennan Business Development Director
A Patterson Director of Organisation Development
K Weatherburn Director of Human Resources
During the year, the GRMG monitored the risk management
framework regularly to ensure that all key risks were being
addressed and further enhanced the development of the risk
assessment process seeing guidance and training provided to
employees to support them in identifying and reporting on key
risks. In addition, risk management policies and procedures were
reviewed and updated to ensure a robust and clear approach was
maintained. Mr R Dixon, one of the Company's non-executive
directors, attended meetings of the GRMG to provide an independent
view in respect of the matters discussed.
The Company has a strong focus on the management of its assets
and as a consequence, the Asset Risk Management Executive Review
Group had comprehensive plans in place to manage risks affecting
all critical property assets and to strengthen the arrangements for
crisis management and business continuity planning. In that
respect, the Emergency Planning and Co-ordination Group ("EPCG")
has a remit to develop and maintain the Northern Powergrid Group's
approach to emergency planning and to provide strategic leadership
and guidance in respect of such matters.
The EPCG also ensures appropriate coordination between the
various emergency planning disciplines, which include operational
management of network incidents, property and the physical
environment, non-operational management and resources and the
support areas of human resources, information technology, health
and safety, communications and legal services.
Further details of the Northern Powergrid Group's approach to
corporate governance and the management of internal controls can be
found in the Strategic Report. Additional key features of the
internal control system include:
- Comprehensive business planning and financial
reporting procedures, including the annual preparation
of detailed operational budgets for the year ahead
and projections for subsequent years;
- Regular review of key performance indicators to
assess progress towards objectives;
- A range of policies, codes of practice and more
detailed instructions that define the processes
to be followed;
- A strong internal audit function, which provides
independent scrutiny of internal control systems
and risk management procedures, including the
standards required by the United States Sarbanes-Oxley
Act;
- On-going health and safety performance reviews
carried out by in-house safety professionals in
addition to the regime of routine health and safety
risk assessment and management processes carried
out within each of the operating units;
NORTHERN POWERGRID (YORKSHIRE) PLC
REPORT OF THE DIRECTORS
FOR THE YEARED 31 DECEMBER 2016
CORPORATE GOVERNANCE STATEMENT - continued
- Processes and procedures to operate under OHSAS
18001, which is subject to external certification
and regular assessment;
- An external obligations register, which assists
with compliance with financial, legal and regulatory
obligations;
- Centralised treasury operations that operate within
defined limits and are subject to regular reporting
requirements and audit reviews; and
- Established procedures for planning, approving
and monitoring major capital expenditure, major
projects and the development of new business which
includes short and long-term budgets, risk evaluation,
detailed appraisal and review procedures, defined
authority levels and post-investment performance
reviews.
Main Principle C3: Audit committee and auditor
The board of Northern Powergrid Holdings Company has established
an audit committee for the Northern Powergrid Group under delegated
terms of reference which include monitoring the financial reporting
process, the effectiveness of internal controls, internal audit and
risk management systems, the statutory audit of the accounts, and
the independence of and the provision of non-audit services by the
auditor.
The audit committee comprises three members, two of whom are
considered as independent and one who has competence in accounting.
At its meetings, the committee receives reports from the GRMG and
from the Northern Powergrid Group's Head of Internal Audit on the
internal audits undertaken during the year and the audit plan for
the following year.
Committee members:
R Dixon Non-Executive Director (Chairman)
J Reynolds Non-Executive Director (appointed 20
January 2016)
T E Fielden Finance Director
Details of the fees paid by the Company to Deloitte LLP in
relation to non-audit services during the year are provided in Note
6 to the accounts.
The Company has a process in place by which staff can
confidentially raise any concerns that they may have. Details of
the Company's "speaking up" policy can be found in the employee
section on page 14 of the Strategic Report.
Section D: Remuneration
Main Principle D1: The level and components of remuneration
Remuneration of the directors is designed to promote the
long-term success of the Company with clear performance
accountabilities defined either in personal goals, or in the
individual's terms of reference or service contract. 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. The Company does not
have a remuneration committee.
Main Principle D2: Procedure
As noted under main principle D1, the Company does not have a
remuneration committee. Annual remuneration awards for the senior
management of the Northern Powergrid Group are subject to the
performance appraisal and development scheme process and
consideration by the Chairman of Berkshire Hathaway Energy and the
President and Chief Executive Officer. No director is involved in
deciding his own remuneration.
NORTHERN POWERGRID (YORKSHIRE) PLC
REPORT OF THE DIRECTORS
FOR THE YEARED 31 DECEMBER 2016
CORPORATE GOVERNANCE STATEMENT - continued
Section E: Relations with shareholders
Main Principle E1: Dialogue with Shareholders
As a wholly-owned subsidiary of a privately held group of
companies, the board is in continuing dialogue with Berkshire
Hathaway Energy.
The President and Chief Executive Officer participates in weekly
performance review meetings with the Chairman of Berkshire Hathaway
Energy and other senior managers of the Berkshire Hathaway Energy
group, including the Executive Vice President and Chief Financial
Officer. At those weekly meetings, the key current issues facing
the Northern Powergrid Group are discussed. The review meetings are
supported by regular reports detailing the Northern Powergrid
Group's performance.
Weekly review meetings are also held in respect of Berkshire
Hathaway Energy's financial and legal functions, at which the
Northern Powergrid Group's Finance Director and General Counsel
present their respective updates.
Main Principle E2: Constructive use of General Meetings
This section of the Code is not applicable as the Company is
privately owned and not traded.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors are responsible for preparing the Strategic
Report, the Report of the Directors and the financial statements in
accordance with applicable law and regulations.
Company law requires the directors to prepare financial
statements for each financial year. Under that law, the directors
have elected to prepare the financial statements in accordance with
International Financial Reporting Standards ("IFRS") as adopted by
the European Union. Under company law, the directors must not
approve the financial statements unless they are satisfied that
they give a true and fair view of the state of affairs of the
Company and of the profit or loss of the Company for that
period.
In preparing these financial statements, International
Accounting Standard 1 requires the directors to:
- Properly select and apply accounting policies;
- Present information, including accounting policies,
in a manner that provides relevant, reliable,
comparable and understandable information;
- Provide additional disclosures when compliance
with the specific requirements in IFRSs are insufficient
to enable users to understand the impact of particular
transactions, other events and conditions on the
Company's financial position and financial performance;
and
- Make an assessment of the Company's ability to
continue as a going concern.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions, disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the Companies Act 2006. They
are also responsible for safeguarding the assets of the Company and
hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities. The directors are responsible
for the maintenance and integrity of any corporate and financial
information relating to the Company, which is included on the
Northern Powergrid Group's website. Legislation in the United
Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
NORTHERN POWERGRID (YORKSHIRE) PLC
REPORT OF THE DIRECTORS
FOR THE YEARED 31 DECEMBER 2016
GOING CONCERN
A review of the Company's business activities during the year,
together with details regarding its future development, performance
and position, its objectives, policies and processes for managing
its capital, its financial risk management objectives and details
of its exposures to trading risk, credit risk and liquidity risk
are set out in the Strategic Report, the Report of the Directors
and the appropriate notes to the accounts.
When considering continuing to adopt the going concern basis in
preparing the annual reports and accounts, the directors have taken
into account a number of factors, including the following:
- The Company is a stable electricity distribution
business operating an essential public service
and is regulated by GEMA. In carrying out its
functions, GEMA has a statutory duty under the
Electricity Act 1989 to have regard to the need
to secure that licence holders are able to finance
the activities, which are the subject of obligations
under Part 1 of the Electricity Act 1989 (including
the obligations imposed by the electricity distribution
licence) or by the Utilities Act 2000;
- The Company is profitable with strong underlying
cash flows and holds investment grade credit ratings;
and
- The Company is financed by long-term borrowings
with an average maturity of 10 years and has access
to borrowing facilities provided by Lloyds Bank
plc, Royal Bank of Scotland plc and Abbey National
Treasury Services plc.
Consequently, after making enquiries, the directors have a
reasonable expectation that the Company has adequate resources to
continue in operational existence for the foreseeable future.
Accordingly, they continue to adopt the going concern basis in
preparing the annual reports and accounts.
STATEMENT AS TO DISCLOSURE OF INFORMATION TO AUDITOR
Each of the directors, who is a director of the Company as at
the date of this report, confirms that:
a) so far as he or she is aware, there is no relevant
audit information of which the Company's auditor
is unaware; and
b) he or she has taken all the steps he/she ought
to have taken as a director in order to make himself/herself
aware of any relevant audit information and to
establish that the auditor is aware of that information.
This confirmation is given and should be interpreted in
accordance with the provisions of S418 of the Companies Act
2006.
AUDITOR
Deloitte LLP will continue in office in accordance with the
provisions in section 487 of the Companies Act 2006 and has
indicated its willingness to do so.
ON BEHALF OF THE BOARD:
P A Jones
Director
24 March 2017
REPORT OF THE INDEPENT AUDITOR TO THE MEMBERS OF
NORTHERN POWERGRID (YORKSHIRE) PLC
We have audited the financial statements of Northern Powergrid
(Yorkshire) plc ("the Company") for the year ended 31 December
2016, which comprise the Statement of Profit or Loss, the Statement
of Profit or Loss and Other Comprehensive Income, the Statement of
Financial Position, the Statement of Changes in Equity, the
Statement of Cash Flows and related notes 1 to 25. The financial
reporting framework that has been applied in their preparation is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
This report is made solely to the Company's members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
Company's members those matters we are required to state to them in
a Report of the Auditor and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility
to anyone other than the Company and the Company's members as a
body, for our audit work, for this report, or for the opinions we
have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Statement of Directors'
Responsibilities set out on page 30, the directors are responsible
for the preparation of the financial statements and for being
satisfied that they give a true and fair view. Our responsibility
is to audit and express an opinion on the financial statements in
accordance with applicable law and International Standards on
Auditing (UK and Ireland). Those standards require us to comply
with the Auditing Practices Board's Ethical Standards for
Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from
material misstatement, whether caused by fraud or error. This
includes an assessment of whether the accounting policies are
appropriate to the Company's circumstances and have been
consistently applied and adequately disclosed the reasonableness of
significant accounting estimates made by the directors, and the
overall presentation of the financial statements. In addition, we
read all the financial and non-financial information to identify
material inconsistencies with the audited financial statements and
to identify any information that is apparently materially incorrect
based on, or materially inconsistent with, the knowledge acquired
by us in the course of performing the audit. If we become aware of
any apparent material misstatements or inconsistencies we consider
the implications for our report.
Opinion on financial statements
In our opinion the financial statements:
- give a true and fair view of the state of the
Company's affairs as at 31 December 2016 and of
its profit for the year then ended;
- have been properly prepared in accordance with
IFRSs as adopted by the European Union; and
- have been prepared in accordance with the requirements
of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of
the audit:
- the information given in the Strategic Report
and the Report of the Directors for the financial
year for which the financial statements are prepared
is consistent with the financial statements; and
- the Strategic Report and the Report of the Directors
have been prepared in accordance with applicable
legal requirements.
In the light of the knowledge and understanding of the Company
and its environment obtained in the course of the audit, we have
not identified any material misstatements in the Strategic Report
and the Report of the Directors.
REPORT OF THE INDEPENT AUDITOR TO THE MEMBERS OF
NORTHERN POWERGRID (YORKSHIRE) 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:
- adequate accounting records have not been kept,
or
- returns adequate for our audit have not been received
from branches not visited by us; or
- the financial statements are not in agreement
with the accounting records and returns; or
- certain disclosures of directors' remuneration
specified by law are not made; or
- we have not received all the information and explanations
we require for our audit.
David M Johnson FCA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
Newcastle upon Tyne
United Kingdom
24 March 2017
NORTHERN POWERGRID (YORKSHIRE) PLC
STATEMENT OF PROFIT OR LOSS
FOR THE YEARED 31 DECEMBER 2016
2016 2015
Notes GBP'000 GBP'000
CONTINUING OPERATIONS
Revenue 3 415,126 420,220
Cost of sales (16,799) (16,834)
GROSS PROFIT 398,327 403,386
Operating expenses 9 (198,959) (198,455)
OPERATING PROFIT 199,368 204,931
Other gains 483 264
Finance costs 5 (47,522) (43,574)
Finance income 5 1,116 890
PROFIT BEFORE INCOME
TAX 6153,445 162,511
Income tax 7 (5,316) (15,852)
PROFIT FOR THE YEAR 148,129 146,659
NORTHERN POWERGRID (YORKSHIRE) PLC
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEARED 31 DECEMBER 2016
2016 2015
GBP'000 GBP'000
PROFIT FOR THE YEAR 148,129 146,659
OTHER COMPREHENSIVE INCOME - -
TOTAL COMPREHENSIVE 148,129 146,659
INCOME FOR THE YEAR
NORTHERN POWERGRID (YORKSHIRE) PLC (REGISTERED NUMBER:
04112320)
STATEMENT OF FINANCIAL POSITION
31 DECEMBER 2016
2016 2015
Notes GBP'000 GBP'000
ASSETS
NON-CURRENT ASSETS
Intangible assets 10 - -
Property, plant and equipment 11 3,054,645 2,921,050
3,054,645 2,921,050
CURRENT ASSETS
Inventories 12 265 465
Trade and other receivables 13 68,499 63,820
Cash and cash equivalents 14 199,298 145,668
268,062 209,953
TOTAL ASSETS 3,322,707 3,131,003
EQUITY
SHAREHOLDERS' EQUITY
Called up share capital 15 290,000 290,000
Retained earnings 16 948,896 829,467
TOTAL EQUITY 1,238,896 1,119,467
LIABILITIES
NON-CURRENT LIABILITIES
Trade and other payables 17 762,475 728,901
Borrowings
Interest bearing loans
and borrowings 18 1,022,804 972,174
Deferred tax 21 127,673 134,193
Provisions 20 1,170 886
1,914,122 1,836,154
CURRENT LIABILITIES
Trade and other payables 17 115,229 129,760
Borrowings
Interest bearing loans
and borrowings 18 33,340 33,294
Tax payable 20,087 11,215
Provisions 20 1,033 1,113
169,689 175,382
TOTAL LIABILITIES 2,083,811 2,011,536
TOTAL EQUITY AND LIABILITIES 3,322,707 3,131,003
The financial statements were approved by the Board of Directors
on 24 March 2017 and were signed on its behalf by:
P A Jones
Director
NORTHERN POWERGRID (YORKSHIRE) PLC
STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 DECEMBER 2016
Called up
share Retained Total
capital earnings equity
GBP'000 GBP'000 GBP'000
Balance at 1 January 2015 290,000 710,408 1,000,408
Changes in equity
Dividends - (27,600) (27,600)
Total comprehensive income - 146,659 146,659
Balance at 31 December 2015 290,000 829,467 1,119,467
Changes in equity
Dividends - (28,700) (28,700)
Total comprehensive income - 148,129 148,129
Balance at 31 December 2016 290,000 948,896 1,238,896
NORTHERN POWERGRID (YORKSHIRE) PLC
STATEMENT OF CASH FLOWS
FOR THE YEARED 31 DECEMBER 2016
2016 2015
Notes GBP'000 GBP'000
Cash flows from operating activities
Cash generated from operations 24 266,810 275,312
Finance costs paid (49,301) (43,453)
Dividends received 43 41
Interest received 1,128 849
Tax paid (2,964) (35,947)
Net cash from operating activities 215,661 196,802
Cash flows used in investing activities
Purchase of tangible fixed assets (234,831) (279,004)
Sale of tangible fixed assets 494 336
Receipt of customer contributions 51,006 70,419
Net cash used in investing activities (183,331) (208,249)
Cash flows from financing activities
Movements in borrowings in the year 50,000 208,114
Movement in loans from group undertaking - (23,399)
Equity dividends paid (28,700) (27,600)
Net cash from financing activities 21,300 157,115
Increase in cash and cash equivalents 53,630 145,668
Cash and cash equivalents
at beginning of year 145,668 -
Cash and cash equivalents
at end of year 199,298 145,668
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARED 31 DECEMBER 2016
1. GENERAL INFORMATION
Northern Powergrid (Yorkshire) plc (the "Company") is a company
incorporated in England and Wales and is part of the Northern
Powergrid Holdings Company group of companies (the "Northern
Powergrid Group"). The address of the registered office is Lloyds
Court, 78 Grey Street, Newcastle-upon-Tyne, NE1 6AF.
The nature of the Company's business model, strategic
objectives, operations and activities are set out in the Strategic
Report.
2. ACCOUNTING POLICIES
Accounting convention and basis of preparation
These financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS"). These
financial statements have also been prepared in accordance with
IFRSs as adopted by the European Union and with those parts of the
Companies Act 2006 (the "Act") that are applicable to companies
reporting under IFRS.
The financial statements have been prepared under the historical
cost convention. Historical cost is generally based on the fair
value of the consideration given in exchange for goods and
services.
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date, regardless of whether
that price is directly observable or estimated using another
valuation technique. In estimating the fair value of an asset or a
liability, the Company takes into account the characteristics of
the asset or liability if market participants would take those
characteristics into account when pricing the asset or liability at
the measurement date. Fair value for measurement and/or disclosure
purposes in these financial statements is determined on such a
basis, except for leasing transactions which are within the scope
of IAS 17, and measurements that have some similarities to fair
value but are not fair value, such as net realisable value in IAS 2
or value in use in IAS 36.
In addition, for financial reporting purposes, fair value
measurements are categorised into Level 1, 2 or 3 based on the
degree to which the inputs to the fair value measurements are
observable and the significance of the inputs to the fair value
measurement in its entirety, which are described as follows:
- Level 1 inputs are quoted prices (unadjusted)
in active markets for identical assets or liabilities
that the Company can access at the measurement
date;
- Level 2 inputs are inputs, other than quoted
prices included within Level 1, that are observable
for the asset or liability, either directly
or indirectly; and
- Level 3 inputs are unobservable inputs for the
asset or liability.
The principal accounting policies are set out below.
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
2. ACCOUNTING POLICIES- continued
Application of new and revised IFRSs
In the current year, the Company has a number of amendments to
IFRSs issued by the International Accounting Standards Board
("IASB") that are mandatorily effective for an accounting period
that begins on or after 1 January 2016:
- Amendments to IAS The amendments clarify that
1 Disclosure Initiative an entity need not provide
specific disclosure required
by an IFRS if the information
resulting from that disclosure
is not material, and give guidance
on the bases of aggregating
and disaggregating information
for disclosure purposes. However,
the amendments reiterate that
an entity should consider providing
additional disclosures when
compliance with the specific
requirements of IFRS is insufficient
to enable users of financial
statements to understand the
impact of particular transactions,
events and conditions on the
entity's financial position
and financial performance.
The application of these amendments
has not resulted in any impact
on the financial performance
or financial position of the
Company.
- IAS 16 and IAS 38 The amendments to IAS 16 prohibit
Clarification of entities from using a revenue-based
Acceptable Methods depreciation method for items
of Depreciation of property, plant and equipment.
and Amortisation The amendments to IAS 38 introduce
a rebuttable presumption that
revenue is not an appropriate
basis for amortisation of an
intangible asset. This presumption
can only be rebutted in the
following two limited circumstances:-when
the intangible asset is expressed
as a measure of revenue; or-when
it can be demonstrated that
revenue and consumption of
the economic benefits or the
intangible asset are highly
correlated.
As the group already uses the
straight line method for depreciation
for its property, plant and
equipment, and intangible assets
respectively, the application
of these amendments has had
no impact on the Company's
financial position.
- Annual Improvements The Annual Improvements to
to IFRSs 2012-2014 IFRSs 2012-2014 Cycle include
Cycle a number of amendments to various
IFRSs. The application of these
amendments has had no effect
on the Company's financial
statements.
New and revised standards in issue but not yet effective
The Company has not applied the following new and revised IFRSs
that have been issued but are not yet effective for the year ended
31 December 2016:
- IFRS 9 - Financial A revised version of IFRS 9,
Instruments Financial Instruments, was
(1 January 2018). issued in July 2014 mainly
to include: a) impairment requirements
for financial assets; and b)
limited amendments to the classification
and measurement requirements
by introducing a 'fair value
through other comprehensive
income' ("FVTOCI") measurement
category for certain simple
debt instruments. The directors
of the Company anticipate that
the application of IFRS 9 in
the future is unlikely to have
an impact on amounts reported
in respect of the Company's
financial assets and financial
liabilities.
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
2. ACCOUNTING POLICIES- continued
- IFRS 15 - Revenue In May 2014, IFRS 15, Revenue
from Contracts with from Contracts with Customers,
Customers (1 January was issued which establishes
2018). a single comprehensive model
for entities to use in accounting
for revenue arising from contracts
with customers. IFRS 15 will
supersede the current revenue
recognition guidance including
IAS 11 Construction Contracts,
IAS 18 Revenue and the related
Interpretations.
The core principle of IFRS
15 is that an entity should
recognise revenue to depict
the transfer of promised goods
or services to customers in
an amount that reflects the
consideration to which the
entity expects to be entitled
in exchange for those goods
or services. Under IFRS 15,
an entity recognises revenue
when (or as) a performance
obligation is satisfied. Far
more prescriptive guidance
has been added in IFRS 15 to
deal with specific scenarios.
Furthermore, extensive disclosures
are required by IFRS 15.
The directors anticipate that
the application of IFRS 15
will not have a material impact
on the Company's financial
statements.
- IFRS 16 - Leases IFRS 16 introduces a comprehensive
(1 January 2019) model for the identification
of lease arrangements and accounting
treatments for both lessors
and lessees. IFRS 16 will supersede
the current lease guidance
including IAS 17 Leases and
the related interpretations
when it becomes effective.
IFRS 16 distinguishes between
leases and service contracts
on the basis of whether an
identified asset is controlled
by a customer. Distinctions
between operating leases and
finance leases are removed
for lessee accounting, and
is replaced by a model where
right-of-use asset and a corresponding
liability have to be recognised
for all leases by lessees except
for short term leases and leases
of low-value assets.
As of 31 December 2016, the
Company has non-cancellable
operating lease commitments
of GBP8.6 million, IAS 17 does
not require recognition of
any right-of-use asset or liability
for future payments for these
leases.
A preliminary assessment indicates
that these arrangements will
meet the definition of a lease
under IFRS 16, and hence the
Company will recognise a right-of-use
asset and corresponding liability
in respect of all these leases
unless they qualify for low-value
or short-term leases upon the
application of IFRS 16.
- Amendments to IAS The amendments require an entity
7 (1 January 2017) to provide disclosures that
enable users of financial statements
to evaluate changes in liabilities
arising from financing activities.
The directors of the Company
do not anticipate the application
of these amendments will have
a material impact on the Company's
financial statements.
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
2. ACCOUNTING POLICIES- continued
Critical judgements in applying accounting policies
The following are the critical judgements, apart from those
involving estimations, that the directors have made in the process
of applying the Company's accounting policies and that have the
most significant effect on amounts recognised in the financial
statements:
- Revenue recognition.
Key sources of estimation uncertainty
The following are the key assumptions concerning the future and
other key sources of estimation uncertainty at the end of the
reporting period that may have a significant risk of causing a
material adjustment to the carrying amounts of assets and
liabilities within the next financial year:
- Useful economic lives for property, plant and
equipment;
- The split of operating and capital expenditure
and the allocation of overheads to capital;
- Impairment reviews carried out to evaluate the
carrying value of assets held at the end of
the reporting period; and
- Fair valuation measurements and valuation processes.
Revenue
Revenue is only recognised when the risks and rewards of
ownership have been transferred to a third party. No revenue is
recognised where there are significant uncertainties regarding the
consideration to be received or the costs associated with the
transaction.
Revenue is measured at the fair value of consideration received
or receivable.
Revenue represents charges for the use of the Company's
distribution network, rental of meters, amortisation of customer
contributions, recharge of costs incurred on behalf of related
parties and the invoiced value of other goods sold and services
provided, exclusive of value added tax.
Revenues from charges to end customers for the use of the
Company's distribution network include estimates of the units
distributed. The estimated usage is based on historic data,
judgement and assumptions. Revenues are gradually adjusted to
reflect actual usage in the period during which actual meter
readings are obtained.
Any under or over-recovery of allowed distribution network
revenues as prescribed by Ofgem is not provided for in the
financial statements and will be recovered/repaid through future
tariffs.
Customer contributions towards distribution system assets are
included in deferred revenue. The Company's policy is to credit the
customer contribution to revenue on a straight-line basis, in line
with the useful life of the distribution system assets.
Interest income from a financial asset is recognised when it is
probable that the economic benefits will flow to the Company and
the amount of income can be measured reliably. Interest income is
accrued on a time basis, by reference to the principal outstanding
and at the effective interest rate applicable, which is the rate
that exactly discounts estimated future cash receipts through the
expected life of the financial asset to that asset's net carrying
amount on initial recognition.
Dividend income from investments is recognised when the
shareholders' rights to receive payment have been established.
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
2. ACCOUNTING POLICIES - continued
Software development costs
Costs in respect of major developments are carried at cost less
accumulated amortisation and accumulated impairment losses.
Amortisation is recognised on a straight-line basis over the
estimated useful life of the software of up to 10 years. The
estimated useful life and amortisation method are reviewed at the
end of each reporting period, with the effect of any changes in
estimate being accounted for on a prospective basis.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated
depreciation and accumulated impairment losses. Cost includes the
purchase price of the asset and any costs, including internal
employee and other costs, directly attributable to bringing the
asset to the location and condition necessary for it to be capable
of operating in the manner intended by management.
Depreciation is recognised so as to write off the cost of assets
less their residual values over their useful lives, using the
straight-line method:
Distribution system assets 45 years
Distributed generation assets up to 15
years
Metering equipment included in distribution up to 5
system assets years
Information technology equipment included up to 10
in distribution system assets years
Non-operational assets:
Buildings - freehold up to 60 years
Buildings - leasehold lower of lease period
or 60 years
Fixtures and equipment up to 10 years
Software development costs up to 10
years
Freehold land is not depreciated.
The estimated useful lives, residual values and depreciation
method are reviewed at the end of each reporting period, with the
effect of any material changes in those estimates accounted for on
a prospective basis. Due to the significance of the Company's
investment in property, plant and equipment, variations in
estimates could impact operating results both positively and
negatively although, historically, few changes have been
required.
Assets in the course of construction are carried at cost, less
any recognised impairment loss. Costs include professional fees,
and, for qualifying assets, borrowing costs capitalised in
accordance with the Company's accounting policy. Such assets are
classified to the appropriate categories of property, plant and
equipment when completed and ready for intended use. Depreciation
on these assets, on the same basis as other assets, commences when
the assets are commissioned.
Financial instruments
Financial assets and financial liabilities are recognised on the
statement of financial position when the Company becomes a party to
the contractual provisions of the instrument.
Financial assets and financial liabilities are initially
measured at fair value. Transaction costs that are directly
attributable to the acquisition or issue of financial assets and
financial liabilities are added to or deducted from the fair value
of the financial assets or financial liabilities, as appropriate,
on initial recognition.
Inventories
Work in progress is valued at the cost of direct materials and
labour plus attributable overheads based on the normal level of
activity less progress payments.
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
2. ACCOUNTING POLICIES - continued
Taxation
The income tax expense represents the sum of the tax currently
payable and deferred tax.
The tax currently payable is based on taxable profit for the
year. Taxable profit differs from 'profit before tax' as reported
in the statement of profit or loss because of items of income or
expense that are taxable or deductible in other years and items
that are never taxable or deductible. The Company's current tax is
calculated using tax rates that have been enacted or substantively
enacted by the end of the reporting period.
Current and deferred tax are recognised in profit or loss,
except when they relate to items that are recognised in other
comprehensive income or directly in equity, in which case the
current and deferred tax are also recognised in other comprehensive
income or directly in equity respectively.
Deferred tax is recognised on temporary 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. Deferred tax liabilities are generally
recognised for all taxable temporary differences. Deferred tax
assets are generally recognised for all deductible temporary
differences to the extent that it is probable that taxable profits
will be available against which those deductible temporary
differences can be utilised. Such deferred tax assets and
liabilities are not recognised if the temporary difference arises
from the initial recognition of assets and liabilities in a
transaction that affects neither the taxable profit nor the
accounting profit. In addition, deferred tax liabilities are not
recognised if the temporary difference arises from the initial
recognition of goodwill.
Deferred tax liabilities recognised for taxable temporary
differences associated with investments in subsidiaries and
associates, and interests in joint ventures, except where the
Company is able to control the reversal of the temporary difference
and it is probable that the temporary difference will not reverse
in the foreseeable future. Deferred tax assets arising from
deductible temporary differences associated with such investments
and interests are only recognised to the extent that it is probable
that there will be sufficient taxable profits against which to
utilise the benefits of the temporary differences and they are
expected to reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each
reporting period and reduced to the extent that that it is no
longer probable that sufficient taxable profits will be available
to allow all or part of the asset to be recovered.
Research costs
Expenditure on research activities is written off to the
statement of profit or loss in the year in which it is
incurred.
Other than software development, the Company does not carry out
any other development activity that would give rise to an
intangible asset.
Foreign currencies
Transactions in foreign currencies are recognised at the rate of
exchange prevailing at the date of the transaction. At the end of
each reporting period, monetary items denominated in foreign
currencies are retranslated at the rates prevailing at that date.
Non-monetary items carried at fair value that are denominated in
foreign currencies are retranslated at the rates prevailing at that
date when the fair value was determined. Non-monetary items that
are measured in terms of historical cost in a foreign currency are
not retranslated.
Leases
Leases are classified as finance leases wherever the terms of
the lease transfer substantially all the risks and rewards of
ownership to the lessee. All other leases are classified as
operating leases.
Operating lease rentals are recognised in the statement of
profit or loss or in property, plant and equipment on a
straight-line basis over the lease term.
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
2. ACCOUNTING POLICIES - continued
Provisions
Provisions are recognised when the Company has a present
obligation (legal or constructive) as a result of a past event, it
is probable that the Company will be required to settle the
obligation, and a reliable estimate can be made of the amount of
the obligation.
The amount recognised as a provision is the best estimate of the
consideration required to settle the present obligation at the end
of the reporting period, taking into account the risks and
uncertainties surrounding the obligation. When a provision is
measured using the cash flows estimated to settle the present
obligation, its carrying amount is the present value of those cash
flows (when the effect of the time value of money is material).
When some or all of the economic benefits required to settle a
provision are expected to be recovered from a third party, a
receivable is recognised as an asset if it is virtually certain
that reimbursement will be received and the amount of the
receivable can be measured reliably.
Pensions
The Group contributes to the Northern Powergrid Group of the
Electricity Supply Pension Scheme (the "Northern Powergrid Group of
the ESPS"), a defined benefit scheme.
The cost of providing benefits is determined using the projected
unit credit method, with actuarial valuations being carried out at
the end of each annual reporting period. Re-measurement, comprising
actuarial gains and losses, the effect of the changes to the asset
ceiling and the return on plan assets (excluding interest) are
reflected immediately in the statement of financial position with a
charge or credit recognised in other comprehensive income in the
period in which they occur. Re-measurement recognised in other
comprehensive income is reflected immediately in retained earnings
and will not be reclassified to profit or loss. Past service cost
is recognised in profit or loss in the period of a plan amendment.
Net interest is calculated by applying a discount rate at the
beginning of the period to the net defined liability or asset.
Defined benefit costs are categorised as service cost, net interest
expense or income and re-measurement.
The retirement benefit obligation recognised in the statement of
financial position represents the actual deficit or surplus in the
Company's defined benefit plan. Any surplus resulting from this
calculation is limited to the present value of any economic
benefits available in the form of refunds from the plan or
reductions in future contributions to the plan.
The Group also participates in a defined contribution scheme.
Contributions payable to the defined contribution scheme are
charged to the statement of profit or loss in the year or
capitalised as appropriate when employees have rendered service
entitling them to the contributions.
A liability is recognised for benefits accruing to employees in
respect of wages and salaries, annual leave and sick leave in the
period in which the related service is rendered at the undiscounted
amount of the benefits expected to be paid in exchange for that
service. Liabilities recognised in respect of short-term employee
benefits are measured at the undiscounted amount of the benefits
expected to be paid in exchange for the related service.
Liabilities recognised in respect of other long-term employee
benefits are measured at the present value of the estimated future
cash outflows expected to be made by the Company in respect of
services provided by employees up to the reporting date.
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
2. ACCOUNTING POLICIES - continued
Financial assets
Financial assets, including trade and other receivables and cash
and cash equivalents, are classified as loans and receivables.
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. Loans and receivables are measured at amortised cost using
the effective interest method, less any impairment.
The effective interest method is a method of calculating the
amortised cost of an instrument and of allocating income over the
relevant period. The effective interest rate is the rate that
exactly discounts estimated future cash receipts through the
expected life of the instrument to the net carrying amount on
initial recognition.
Interest income is recognised by applying the effective interest
rate, except for short-term receivables when the effect of
discounting is immaterial.
Cash and cash equivalents (which are presented as a single class
of assets on the face of the statement of financial position)
comprise cash at bank and other short-term highly liquid
investments with a maturity of three months or less, which are
subject to an insignificant risk of changes in value.
Financial assets are assessed for indicators of impairment at
the end of each reporting period. Financial assets are considered
to be impaired where there is objective evidence that, as a result
of one or more events that occurred after the initial recognition
of the financial asset, the estimated future cash flows of the
investment have been affected.
For certain categories of financial assets, such as trade
receivables, assets are assessed for impairment on a collective
basis even if they were assessed not to be impaired individually.
Objective evidence of impairment for a portfolio of receivables
could include the Company's past experience of collecting payments,
an increase in the number of delayed payments in the portfolio past
the average credit period of 30 days, as well as observable changes
in national or local economic conditions that correlate with
default on receivables.
The carrying amount of the financial asset is reduced by the
impairment loss directly for all financial assets with the
exception of trade receivables, where the carrying amount is
reduced through the use of an allowance account. When a trade
receivable is considered uncollectible, it is written off against
the allowance account. Subsequent recoveries of amounts previously
written off are credited against the allowance account. Changes in
the carrying amount of the allowance account are recognised in the
statement of profit or loss.
Going concern
The directors have, at the time of approving the financial
statements, a reasonable expectation that the Company has adequate
resources to continue in operational existence for the foreseeable
future. Accordingly, they continue to adopt the going concern basis
in preparing the financial statements. Further detail is contained
within the Going Concern Statement in the Report of the
Directors.
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
3. SEGMENTAL REPORTING
IFRS 8 requires operating segments to be identified on the basis
of internal reports about components of the Company that are
regularly reviewed by the President and Chief Executive Officer of
the Northern Powergrid Group in order to allocate resources to
these segments and to assess their performance.
In practice, the President and Chief Executive Officer allocates
resources and assesses performance based upon the aggregate results
of the Company and Northern Powergrid (Northeast) Limited, another
distribution network operator in the Northern Powergrid Group,
suggesting that no segmental reporting is required.
Revenue, profit before tax and net assets are attributable to
electricity distribution. Revenue is all in respect of sales to
United Kingdom customers.
Revenue represents charges made to customers for use of the
distribution system, rental of meters, amortisation of customer
contributions, the recharge of costs incurred on behalf of related
parties and other services and is included net of value added
tax.
4. EMPLOYEES AND DIRECTORS
2016 2015
GBP'000 GBP'000
Salaries 58,487 57,233
Social security costs 6,501 5,860
Defined benefit pension costs 15,009 17,866
Defined contribution pension
costs 2,351 2,039
82,348 82,998
Less charged to property, plant
and equipment (50,318) (49,562)
32,030 33,436
The majority of the Company's employees are members of the
Northern Powergrid Group of the ESPS, most of the remaining
employees are members of the Northern Powergrid Pension Scheme,
details of both are given in the employee benefits note (note
22).
The average monthly number of employees during the year was:
2016 2015
No. No.
Technical 377 370
Industrial 589 591
Administration 98 99
Other 123 120
1,187 1,180
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
4. EMPLOYEES AND DIRECTORS - continued
DIRECTORS' REMUNERATION
2016 2015
GBP'000 GBP'000
Highest Paid:
Short-term employee benefits 319 255
Post-employment benefits 10 20
Other long-term benefits 370 322
699 597
2016 2015
GBP'000 GBP'000
Total:
Short-term employee benefits 667 627
Post-employment benefits 52 82
Other long-term benefits 612 496
1,331 1,205
Directors who are a member of the
defined benefit scheme 33
OTHER KEY PERSONNEL REMUNERATION
2016 2015
GBP'000 GBP'000
Total:
Short-term employee benefits 424 306
Post-employment benefits 81 74
Other long-term benefits 250 227
755 607
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.
Other long-term benefits relate to deferred bonus plan accrued
over the period of the plan.
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
5. NET FINANCE COSTS
2016 2015
GBP'000 GBP'000
Finance income:
Dividends received 43 41
Interest on tax refund 537 -
Deposit account interest 2 2
Interest receivable
on loans to Group undertakings 534 847
1,116 890
Finance costs:
Bank interest 105 1,000
Interest payable on other loans 50,073 45,900
Borrowing costs capitalised (2,656) (3,326)
47,522 43,574
Net finance costs 46,406 42,684
6. PROFIT BEFORE INCOME TAX
The profit before income tax is stated after charging:
2016 2015
GBP'000 GBP'000
Depreciation - owned assets 95,569 89,262
Research and development costs 1,562 2,727
Amortisation of deferred revenue (24,864) (23,044)
Impairment of trade and other receivables 841 390
Profit on disposal of fixed assets (482) (264)
Analysis of auditor's remuneration is as follows:
2016 2015
GBP'000 GBP'000
Fees payable to the Company's auditor
for the audit of the Company's 130 122
annual accounts
Other assurance services 45 48
Total fees payable to the Company's
auditor 175 170
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
7. INCOME TAX
Analysis of tax expense
2016 2015
GBP'000 GBP'000
Current tax 11,837 29,219
Deferred tax (6,520) (13,367)
Total tax expense in statement of
profit or loss 5,317 15,852
Factors affecting the tax expense
The tax assessed for the year is lower than the standard rate of
corporation tax in the UK. The difference is explained below:
2016 2015
GBP'000 GBP'000
Profit before income tax 153,445 162,511
Profit multiplied by the standard
rate of corporation tax in the 30,689 32,908
UK of 20% (2015 - 20.250%)
Effects of:
Changes in legislation (7,329) (13,871)
Over provision for prior years (18,276) (3,329)
Tax free income and disallowable
costs (70) 39
Prior deferred tax 380 124
Tax free capital receipt - (194)
Other (78) 175
Tax expense 5,316 15,852
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
7. INCOME TAX - continued
2016 2015
GBP'000 GBP'000
Tax expense comprises:
Current tax expense:
Corporation tax charge for the year 30,113 32,548
Over provision for prior years (18,276) (3,329)
Total current tax charge 11,836 29,219
Deferred tax:
Deferred tax expenses relating to
the origination and reversal of
temporary differences 809 504
Effect of changes in legislation (7,329) (13,871)
Total deferred tax charge (6,520) (13,367)
Tax on profit before tax 5,316 15,852
The Finance No2 Act 2015 reduced the rate of corporation tax to
19% effective from 1 April 2017 and to 18% effective from 1 April
2020. The Finance Act 2016, which was substantively enacted on 6
September, 2016 further reduced the rate of corporation tax
effective from 1 April 2020 to 17%. Accordingly deferred tax assets
and liabilities have been calculated at the tax rates which will be
in force when the underlying temporary differences are expected to
reverse.
8. DIVIDS
2016 2015
GBP'000 GBP'000
Interim dividend at 9.9p per
share (2015: 9.5p) 28,700 27,600
9. OPERATING EXPENSES
2016 2015
GBP'000 GBP'000
Operating expenses comprise
Distribution costs 142,139 137,482
Administrative expenses 56,820 60,973
198,959 198,455
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
10. INTANGIBLE ASSETS
Software
development
costs
GBP'000
COST
At 1 January 2016
and 31 December 2016 29,497
AMORTISATION
At 1 January 2016
and 31 December 2016 29,497
NET BOOK VALUE
At 31 December 2016 -
Software
development
costs
GBP'000
COST
At 1 January 2015
and 31 December 2015 29,497
AMORTISATION
At 1 January 2015
and 31 December 2015 29,497
NET BOOK VALUE
At 31 December 2015 -
11. PROPERTY, PLANT AND EQUIPMENT
Non
operational Fixtures
land & Distribution and
buildings system fittings Totals
GBP'000 GBP'000 GBP'000 GBP'000
COST
At 1 January 2016 4,505 3,665,873 30,701 3,701,079
Additions - 225,065 4,099 229,164
Disposals - (8,938) (304) (9,242)
At 31 December 2016 4,505 3,882,000 34,496 3,921,001
DEPRECIATION
At 1 January 2016 2,237 756,598 21,194 780,029
Charge for year 178 92,177 3,214 95,569
Eliminated on disposal - (8,938) (304) (9,242)
At 31 December 2016 2,415 839,837 24,104 866,356
NET BOOK VALUE
At 31 December 2016 2,090 3,042,163 10,392 3,054,645
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
11. PROPERTY, PLANT AND EQUIPMENT - continued
Non
operational Fixtures
land & Distribution and
buildings system fittings Totals
GBP'000 GBP'000 GBP'000 GBP'000
COST
At 1 January 2015 4,505 3,395,089 25,531 3,425,125
Additions - 281,523 5,583 287,106
Disposals - (10,739) (413) (11,152)
At 31 December 2015 4,505 3,665,873 30,701 3,701,079
DEPRECIATION
At 1 January 2015 2,059 680,827 18,953 701,839
Charge for year 178 86,430 2,654 89,262
Eliminated on disposal - (10,659) (413) (11,072)
At 31 December 2015 2,237 756,598 21,194 780,029
NET BOOK VALUE
At 31 December 2015 2,268 2,909,275 9,507 2,921,050
Assets in the course of construction included above:
Distribution Fixtures
system and Totals
fittings
GBP'000 GBP'000 GBP'000
At 1 January 2016 192,567 - 192,567
Additions 225,065 4,099 229,164
Available for use (228,863) (4,099) (232,962)
At 31 December 2016 188,769 - 188,769
The Company has entered into contractual commitments in relation
to the future acquisition of property, plant and equipment of
GBP20.0m (2015: GBP32.6m).
The net book value of non-operating land and buildings
comprise:
2016 2015
GBP'000 GBP'000
Freehold 1,225 1,346
Long leasehold 739 772
Short leasehold 126 150
2,090 2,268
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
12. INVENTORIES
2016 2015
GBP'000 GBP'000
Work-in-progress 265 465
13. TRADE AND OTHER RECEIVABLES
2016 2015
GBP'000 GBP'000
Current:
Distribution use of system receivables 61,406 57,282
Amounts receivable from sale
of goods and services 2,341 4,166
Prepayments and accrued income 4,752 2,372
68,499 63,820
The directors consider that the carrying amount of trade and
other receivables approximates their fair value calculated by
discounting the future cash flows at the market rate at the end of
the reporting period. The maximum exposure to risk to the Company
is the book value of these receivables less any provisions for
impairment.
Distribution use of system receivables
The customers served by the Company's distribution network are
supplied predominantly by a small number of electricity supply
businesses with RWE NPower plc accounting for approximately 23% of
distribution revenues in 2016 (2015: 24%) and British Gas plc
accounting for approximately 17% of distribution revenues in 2016
(2015: 18%). Ofgem has determined a framework which sets credit
limits for each supply business based on its credit rating or
payment history and requires them to provide credit cover if their
value at risk (measured as being equivalent to 45 days usage)
exceeds the credit limit. Acceptable credit typically is provided
in the form of a parent company guarantee, letter of credit or an
escrow account. Included within other payables are customer
deposits of GBP0.4 million as at 31 December 2016 (2015: GBP0.4
million).
Ofgem has indicated that, provided the Company has implemented
credit control, billing and collection processes in line with best
practice guidelines and can demonstrate compliance with the
guidelines or is able to satisfactorily explain departure from the
guidelines, any bad debt losses arising from supplier default will
be recovered through an increase in future allowed income. Losses
incurred to date have not been material. Included in the Company's
use of system ("UoS") receivables are debtors with a carrying value
of GBP0.3 million, which have been placed into administration and
have therefore been provided in full at the year-end (2015:
GBPnil).
Amounts receivable from sale of goods and services
Sales of goods and services comprise all income streams which
are not classified as UoS income. Examples of non-UoS income
streams would be customer contributions in relation to distribution
system assets and recovery of amounts for damage caused by third
parties to the distribution system.
The average credit period on sales of goods and services is 30
days (2015: 30 days). Interest is not generally charged on the
trade receivables paid after the due date. An allowance for
doubtful debts is made for debts past their due date based on
estimated irrecoverable amounts from the sale of goods and
services, determined by reference to past default experience.
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
13. TRADE AND OTHER RECEIVABLES - continued
Included in the Company's amounts receivable for goods and
services balance are debtors with a carrying amount of GBP2.2
million (2015: GBP2.2 million) which are past due at the reporting
date and for which the Company has provided an irrecoverable amount
of GBP1.5 million (2015: GBP0.7 million) based on past experience.
The Company does not hold any collateral over these balances. The
average age of these receivables is 300 days (2015: 297 days).
Included in the Company's amounts receivable for goods and
services balance are debtors with a carrying amount of GBP0.3
million (2015: GBP0.4 million). These amounts are past due at the
reporting date and the Company has not provided for any amounts as
not being recoverable, because there has not been a significant
change in credit quality and the amounts are still considered
recoverable. The Company does not hold any collateral over these
balances. The average age of these receivables is 72 days (2015: 96
days).
Ageing of past due but not impaired receivables
2016 2015
GBP'000 GBP'000
30-60 days 189 167
60-120 days 59 82
120-210 days 45 129
Total 293 378
Movement in the allowance for doubtful debts
2016 2015
GBP'000 GBP'000
At 1 January 721 618
Amounts utilised/written off in
the year (97) (287)
Amounts recognised in statement
of profit or loss 841 390
At 31 December 1,465 721
In determining the recoverability of the trade and other
receivables, the Company considers any change in the credit quality
of the trade and other receivable from the date credit was
initially granted up to the reporting date. The concentration of
credit risk, other than in relation to UoS receivables, is limited
due to the customer base being large and unrelated. Accordingly,
the directors believe that there is no further credit provision
required in excess of the allowance for doubtful debts.
Included in the allowance for doubtful debts are specific trade
receivables, with a balance of GBP1.0 million (2015: GBP0.4
million) which have been placed in administration. The impairment
represents the difference between the carrying amount of the
specific trade receivable and the present value of the expected
liquidation dividend.
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
13. TRADE AND OTHER RECEIVABLES - continued
Categories of financial assets
2016 2015
GBP'000 GBP'000
Cash and bank balances 199,298 145,668
Loans and receivables at amortised
cost 63,747 61,448
Total financial assets 263,045 207,116
Non-current assets 3,054,645 2,921,050
Inventories 265 465
Prepayments and accrued income 4,752 2,372
Total non-financial assets 3,059,662 2,923,887
Total assets 3,322,707 3,131,003
14. CASH AND CASH EQUIVALENTS
2016 2015
GBP'000 GBP'000
Cash in hand 199,298 145,668
Cash and cash equivalents represent amounts owed by companies
within the Northern Powergrid Group (see related party disclosures
note), which have a maturity date of less than three months and
which are subject to an insignificant risk of changes in value. The
fair value of cash and cash equivalents is equal to their book
value.
15. CALLED UP SHARE CAPITAL
Allotted, issued and fully paid:
Number: Class: Nominal 2016 2015
value: GBP'000 GBP'000
290,000,000 Ordinary share capital GBP1 290,000 290,000
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
16. RESERVES
Retained
earnings
GBP'000
At 1 January 2016 829,467
Profit for the
year 148,129
Dividends (28,700)
At 31 December 2016 948,896
Retained
earnings
GBP'000
At 1 January 2015 710,408
Profit for the
year 146,659
Dividends (27,600)
At 31 December 2015 829,467
17. TRADE AND OTHER PAYABLES
2016 2015
GBP'000 GBP'000
Current:
Payments on account 40,354 49,465
Trade creditors 5,283 6,023
Amounts owed to Group undertakings 429 440
Social security and other taxes 8,959 11,085
Other creditors 5,968 5,944
Deferred revenue 26,743 24,836
Accrued expenses 27,493 31,967
115,229 129,760
Non-current:
Deferred revenue 762,475 728,901
Aggregate amounts 877,704 858,661
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
17. TRADE AND OTHER PAYABLES - continued
The directors consider that the carrying amount of other
financial liabilities approximates their fair value, calculated by
discounting future cash flows at market rate at the end of the
reporting period. The valuation of liabilities set out above is
based on Level 1 inputs. Trade creditors and accruals principally
comprise amounts outstanding for trade purchases and ongoing costs.
Invoices are paid at the end of the month following the date of the
invoice. The Company has financial risk management policies in
place to ensure that all payables are paid within the credit
timeframe.
The following tables detail the remaining contractual maturities
for the non-derivative financial liabilities. The tables have been
drawn up based on the discounted cash flows of financial
liabilities based on the earliest possible date on which the
Company can be required to pay. The tables include both interest
and principal cash flows.
Less than 3 months
3 months to 1 year 1 to 5+ years Total
5 years
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2016:
Non-interest
bearing 48,132 - - - 48,132
Variable interest
rate liability 12 - - - 12
Fixed interest
rate liability 18,500 31,173 380,192 1,092,074 1,521,939
66,644 31,173 380,192 1,092,074 1,570,083
2015:
Non-interest
bearing 55,459 - - - 55,459
Variable interest
rate liability 53 - - - 53
Fixed interest
rate liability 18,500 30,137 394,546 1,068,064 1,511,247
74,012 30,137 394,546 1,068,064 1,566,759
Categories of financial liabilities
2016 2015
GBP'000 GBP'000
Loans and payables at amortised
cost 1,067,824 1,017,875
Total financial liabilities 1,067,824 1,017,875
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
17. TRADE AND OTHER PAYABLES - continued
2016 2015
GBP'000 GBP'000
Payments received on account 40,354 49,465
Income tax liabilities 147,760 145,408
Other taxes and social security 8,959 11,085
Accruals 27,493 31,967
Deferred Revenue 789,218 753,737
Provisions 2,203 1,999
Total non-financial liabilities 1,015,987 993,661
Total liabilities 2,083,811 2,011,536
Deferred Revenue
2016 2015
GBP'000 GBP'000
At 1 January 753,737 721,860
Additions 60,344 54,921
Amortisation 24,864 23,044
At 31 December 789,217 753,737
Deferred revenue represents contributions from customers made in
advance towards distribution system assets. This income is released
to the statement of profit or loss over 45 years or 15 years on a
straight line basis, in line with the useful economic life of the
distribution system assets.
18. BORROWINGS
The directors' consideration of liquidity, interest rate and
foreign currency risk are described in the Strategic Report.
Book Value Fair Value
2016 2015 2016 2015
GBP'000 GBP'000 GBP'000 GBP'000
Loans 1,056,144 1,005,468 1,260,799 1,121,056
1,056,144 1,005,468 1,260,799 1,121,056
The borrowings are repayable as follows:
On demand or within
one year 33,340 33,294 33,340 33,294
Between one and five
years 199,549 199,401 248,750 252.086
After five years 823,255 772773 878,709 835,676
1,056,144 1,005,468 1,260,799 1,121,056
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
18. BORROWINGS - continued
Analysis of borrowings:
Book Value Fair Value
2016 2015 2016 2015
GBP'000 GBP'000 GBP'000 GBP'000
Short-term loan 12 53 12 53
2020 - 9.25% bonds 217,227 217,079 266,428 269,764
2035 - 5.125% bonds 203,933 203,834 276,674 240,312
2032 - 4.375% bonds 150,528 150,409 187,202 164,512
2022 - European Investment
Bank 4.133% 153,692 153,674 179,923 172,953
2025 - 2.5% bonds 150,527 150,280 160,420 146,585
2022 - European Investment
Bank 2.564% 130,139 130,139 139,487 126,877
2022 - European Investment
Bank 2.073% 50,086 - 50,653 -
1,056,144 1,005,468 1,260,799 1,121,056
The fair value of the bonds is determined with reference to
quoted market prices. The directors' estimates of the fair value of
bank loans and internal borrowings are determined in accordance
with generally accepted pricing models based on discounted cash
flow analysis using prices from observable current market
transactions or dealer quotes for similar instruments. The fair
value of short-term borrowings is equal to their book value. All
loans are non-secured and are denominated in sterling.
The valuation of liabilities set out above is based on Level 1
inputs.
Interest on short-term loans and inter-company short term loans
is charged at a floating rate of LIBOR plus 0.35%, thus exposing
the Company to cash flow interest rate risk. A 1% movement in
interest rates would not subject the Company to any change in
interest costs during the year. All other loans are at fixed
interest rates and expose the Company to fair value interest rate
risk.
The covenants associated with the 2035 bonds issued by the
Company include restrictions on the issuance of new indebtedness
and the making of distributions dependent on the scale of the ratio
of Senior Total Net Debt to Regulatory Asset Value ("RAV").
The definition of Senior Total Net Debt excludes any
subordinated debt and any debt incurred on a non-recourse basis. In
addition, it excludes interest payable, any fair value adjustments
and unamortised issue costs.
The Company's Senior Total Net Debt as at 31 December 2016
totalled GBP831.7 million. Using the RAV value as at March 2017, as
outlined by Ofgem in its electricity distribution price control
financial model published in November 2015, and adjusting for the
effects of movements in the value of the Retail Prices Index
("RPI") gives an approximation for the RAV value as at December
2016 of GBP1,701.6 million. The Senior Total Net Debt to RAV ratio
for the Company is therefore estimated at 48.9% (2015: 50.9%)
At 31 December 2016, the Company had available GBP94.0 million
(2015: GBP94.0 million) of undrawn committed borrowing facilities
in respect of which all conditions precedent had been met.
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
19. LEASING AGREEMENTS
Minimum lease payments under non-cancellable operating leases
fall due as follows:
2016 2015
GBP'000 GBP'000
Within one year 2,343 2,590
Between one and five years 4,866 5,098
In more than five years 1,430 545
8,639 8,233
2016 2015
GBP'000 GBP'000
Minimum lease payments under operating
leases recognised in the year 4,587 4,514
Leases primarily relate to the hire of fleet vehicles with lease
terms between 2 and 7 years. The Company does not have the option
to purchase the vehicles at the end of the lease term.
20. PROVISIONS
2016 2015
GBP'000 GBP'000
Provisions 2,203 1,999
Analysed as follows:
Current 1,033 1,113
Non-current 1,170 886
2,203 1,999
Claims Other Total
GBP'000 GBP'000 GBP'000
At 1 January 2016 738 1,261 1,999
Utilised/paid in the year (834) (414) (1,248)
Charged to statement of profit
or loss 795 657 1,452
At 31 December 2016 699 1,504 2,203
Claims: Provision has been made to cover costs arising from
actual claims, which are not externally insured. Settlement is
expected substantially within 12 months.
Other: Primarily consists of a provision for future safe
disposal of transformers which contain oil contaminated with
Polychlorinated Biphenyls (PCBs) and for an amount to cover claims
made under section 74 of the New Road and Street Works Act 1991.
Costs are expected to be incurred over the next 15 years.
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
21. DEFERRED TAX
Accelerated
Tax Depreciation
Other Total
GBP'000 GBP'000 GBP'000
At 1 January 2016 134,423 (230) 134,193
(Credit)/charge to statement
of profit or loss (6,533) 13 (6,520)
At 31 December 2016 127,890 (217) 127,673
Accelerated
Tax Depreciation
Other Total
GBP'000 GBP'000 GBP'000
At 1 January 2015 147,820 (260) 147,560
(Credit)/charge to statement
of profit or loss (13,397) 30 (13,367)
At 31 December 2015 134,423 (230) 134,193
Other comprises provisions and employee expenses deductible for
tax on a paid basis and claims for hold over relief.
22. EMPLOYEE BENEFIT OBLIGATIONS
Introduction
The Company contributes to two pension schemes, which it
operates on behalf of the participating companies within the
Northern Powergrid Group. Those pension schemes are:
- The Northern Powergrid Group of the ESPS (the
"DB Scheme"); and
- The Northern Powergrid Pension Scheme.
The Northern Powergrid Pension Scheme was introduced for new
employees of the Northern Powergrid Group from July 1997 and is a
money purchase arrangement accounted for as a defined contribution
scheme.
The DB Scheme is a defined benefit scheme for directors and
employees, which provides pension and other related retirement
benefits based on final pensionable pay. The DB Scheme closed to
staff commencing employment with the Northern Powergrid Group on or
after 23 July 1997. Members who joined before this date, including
some Protected Persons under The Electricity (Protected Persons)
(England and Wales) Pension Regulations 1990, continue to build up
future pension benefits.
Under the DB Scheme, employees are typically entitled to annual
pensions on retirement at age 63 of one-eightieth of final
pensionable salary for each year of service plus an additional
tax-free cash lump sum at retirement of three times pension.
Benefits are also payable on death and following other events such
as withdrawing from active service.
No other post-retirement benefits are provided to members of the
DB Scheme.
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
22. EMPLOYEE BENEFIT OBLIGATIONS - continued
Role of Trustees
The DB Scheme is administered by a board of Trustees which is
legally separate from the Company. The assets of the DB Scheme are
held in a separate trustee-administered fund. The board of Trustees
is made up of Trustees appointed by Northern Electric plc, as the
Principal Employer of the DB Scheme, Trustees elected by the
membership and an independent trustee. The Trustees are required by
law to act in the interests of all relevant beneficiaries and are
responsible in particular for the asset investment strategy plus
the day-to-day administration of the benefits payable. They also
are responsible for jointly agreeing with the Principal Employer
the level of contributions due to the DB Scheme.
Unless otherwise stated, disclosures within this note are
representative of the Northern Powergrid Group as a whole and not
the Company on an individual basis as the Company accounts for the
DB Scheme as if it were a defined contribution scheme.
Funding requirements
UK legislation requires that pension schemes are funded
prudently (i.e. to a level in excess of the current expected cost
of providing benefits). The last actuarial valuation of the DB
scheme was carried out by the Trustees' actuarial advisors, Aon
Hewitt, as at 31 March 2013. Such valuations are required by law to
take place at intervals of no more than three years. Following each
valuation, the Trustees and the Northern Powergrid Group must agree
the contributions required (if any) to ensure the DB Scheme is
fully funded over time on the basis of suitable, prudent
assumptions. Contributions agreed in this manner constitute a
minimum funding requirement.
Agreement was reached during October 2014 with the Trustees to
repair the funding deficit of GBP286.4m as at 31 March 2014 over
the 11 year period to 31 March 2025, subject to the actuarial
assumptions adopted for the triennial valuation as at 31 March 2013
being borne out in practice. The agreement includes cash payments
of GBP34.9m per annum over the period to 31 March 2015, made on a
monthly basis, followed by an agreed profile of payments to be made
over the remaining ten years of the recovery plan, as set out
below:
1 April 2015 to GBP28.6m
31 March 2016 p.a.
1 April 2016 to GBP18.4m
31 March 2025 p.a.
All contributions set out above are in 2014/15 prices and will
be increased each year in line with increases in RPI over the
period until they fall due.
The contributions payable by the Northern Powergrid Group to the
DB Scheme in respect of future benefits, which are accruing, are
34.2% of pensionable pay. These contributions were determined as
part of the 31 March 2013 actuarial valuation and are payable in
addition to the deficit repair contributions mentioned above. These
rates will remain in place until such a time as a new schedule of
contributions is agreed between the Trustees and Northern Electric
plc as part of the 31 March 2016 or earlier valuation. In addition,
the Northern Powergrid Group pays 3.0% of pensionable pay to the DB
Scheme to cover the expenses of running the DB Scheme.
The next funding valuation is on-going and expected to be
concluded by the end of June 2017.
The Northern Powergrid Group's total contributions to the DB
Scheme for the next financial year are expected to be GBP36.7
million.
Under the rules of the DB Scheme, any future surplus in the DB
Scheme may, following consultation with the Group Trustees, be
allocated for the benefit of the members of the DB Scheme and/or
the Principal and Participating Employers.
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
22. EMPLOYEE BENEFIT OBLIGATIONS - continued
Pensions' Regulation
The UK pensions market is regulated by the Pensions Regulator
whose key statutory objectives in relation to UK defined benefit
plans are to:
- protect the benefits of members;
- promote and to improve understanding of good administration;
- reduce the risk of situations arising which may lead to
compensation being payable from the Pension Protection Fund
("PPF"); and
- minimise any adverse impact on the sustainable growth of an employer.
The Pensions Regulator has various powers including the power
to:
- wind up a scheme where winding up is necessary to protect members' interests;
- appoint or remove a trustee;
- impose a schedule of company contributions or the calculation
of the technical provisions where trustees and company fail to
agree on appropriate contributions; and
- impose contributions where there has been a detrimental action against the scheme.
Profile of the DB Scheme
The Defined Benefit Obligation ("DBO") includes benefits for
current employees, former employees and current pensioners. The
overall duration of the DB Scheme's obligation was assessed to be
about 17 years based on the results of the 31 March 2013 funding
valuation. This is the weighted-average time over which benefit
payments are expected to be made.
Broadly, about 40% of the liabilities are attributable to
current employees (duration about 23 years), 10% to former
employees (duration about 24 years) and 50% to current pensioners
(duration about 12 years).
Risks associated with the DB Scheme
The DB Scheme exposes the Northern Powergrid Group to a number
of risks, the most significant of which are:
Risk Description Mitigation
Volatile The DBO is calculated The allocation to return-seeking
asset using a discount rate assets is monitored
returns set with reference to ensure it remains
to corporate bond yields. appropriate given the
If assets underperform DB Scheme's long-term
this discount rate, objectives. The Trustees
this will create an regularly review the
element of deficit. strategy from return-seeking
The DB Scheme aims assets and have diversified
to hold a significant some return-seeking
proportion (48%) of assets from equities
its assets in return-seeking into Reinsurance and
assets (such as equities) Listed Infrastructure
which, although expected to reduce overall risk.
to outperform corporate To avoid concentration
bonds in the long-term, risk, the allocation
create volatility and to UK equity is restricted
risk in the short-term. to 35% of the total
equity allocation.
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
22. EMPLOYEE BENEFIT OBLIGATIONS - continued
Risk Description Mitigation
Changes A decrease in corporate The DB Scheme also
in bond bond yields will increase holds a substantial
yields the value placed on proportion of its assets
the DBO for accounting (61%) as bonds, which
purposes, although provide a hedge against
this will be partially falling bond yields
offset by an increase (falling yields which
in the value of the increase the DBO will
DB Scheme's bond holdings. also increase the value
of the bond assets).
There are some differences
in the credit quality
of bonds held by the
DB Scheme and the bonds
analysed to decide
the DBO discount rate,
such that there remains
some risk should yields
on different quality
bond/swap assets diverge.
Inflation A significant proportion The DB Scheme holds
risk of the DBO is indexed around 30% in UK government
in line with price index-linked bonds
inflation (specifically which provide a hedge
in line with RPI) and against higher than
higher inflation will expected inflation
lead to higher liabilities increases of the DBO
(rising inflation will
increase both the DBO
and the value of the
index-linked bond portfolio).
Currency To increase diversification, The DB Scheme hedges
risk the DB Scheme invests a proportion of the
in overseas assets. overseas investments
This leads to a risk currency risk for those
that foreign currency overseas currencies
movements negatively that can be hedged
impact the value of efficiently. The DB
assets in Sterling Scheme's currency hedging
terms. ratio is currently
50% in respect of overseas
developed market currencies.
Life The majority of the The DB Scheme regularly
expectancy DB Scheme's obligations reviews actual experience
are to provide benefits of its membership against
for the pensionable the actuarial assumptions
lifetime of the member, underlying the future
so increases in life benefit projections
expectancy will result and carries out detailed
in an increase in the analysis when setting
liabilities. an appropriate scheme
specific mortality
assumption.
The Northern Powergrid Group and Trustees have agreed a
long-term strategy for reducing investment risk as and when
appropriate. This includes the use of Liability Driven Investment
(LDI) from October 2016 to more closely match the nature and
duration of the DB Scheme's liabilities through the use of
derivatives such as swaps and repurchase agreements. The portfolio
is designed to hedge a proportion of the interest rate and
inflation risk inherent in the Scheme's liabilities. The target
hedging level is currently 60% of the DB Scheme's liabilities as
measured on the basis used for the funding valuation.
The Trustees insure certain benefits payable on death before
retirement.
Other risks
There are a number of other risks associated with the DB Scheme
including operational risks (such as paying out the wrong
benefits), legislative risks (such as the government increasing the
burden on pension schemes through new legislation) and other
demographic risks (such as a higher proportion members dying than
assumed with a dependant eligible to receive a survivor's pension
from the DB Scheme).
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
22. EMPLOYEE BENEFIT OBLIGATIONS - continued
A particular legislative risk exists in relation to the
equalisation of the Guaranteed Minimum Pension ("GMP"), a
quasi-state benefit accrued by many UK plans over the period 1978
to 1997 as a result of a UK government programme allowing pension
plans to "contract out" of the State Second Pension. The UK
Government has announced its intention to ensure that these
benefits, which currently pay out at different levels for men and
women, are gender-equalised in accordance with sex-discrimination
legislation. This would increase the DBO but it is not possible to
fully quantify the impact of this change at this stage. However, it
could lead to an increase in the order of 2% to the DBO for a
typical scheme.
Reporting at 31 December 2016
For the purposes of this disclosure, the current and future
pension costs of the Northern Powergrid Group have been assessed by
Aon Hewitt, a qualified independent actuary, using the assumptions
set out below, which the actuary has confirmed represent a
reasonable best estimate of those costs. This review has been based
on the same membership and other data as at 31 March 2013. The
board of Northern Powergrid Holdings Company has accepted the
advice of the actuary and formally approved the use of these
assumptions for the purpose of calculating the pension cost of the
Northern Powergrid Group.
The results of the latest funding valuation at 31 March 2013
have been adjusted to 31 December 2016. Those adjustments take
account of experience over the period since 31 March 2013, changes
in market conditions, and differences in the financial and
demographic assumptions. The present value of the DBO and the
related current service cost were measured using the Projected Unit
Credit Method.
For schemes closed to new members, such as the DB Scheme, the
current service cost calculated under the Projected Unit Credit
Method is expected to increase as the members of the DB Scheme
approach retirement.
The Company's total pension cost for the year ended 31 December
2016 was GBP17.4m (2015: GBP19.9m).
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
22. EMPLOYEE BENEFIT OBLIGATIONS - continued
The principal assumptions used to calculate the liabilities
under IAS 19 are set out below:
Main financial assumptions 2016 2015
% p.a. % p.a.
RPI Inflation 3.00 2.90
Rate of long-term increase in
salaries 3.00 2.90
Pension increases 2.90 2.80
Discount rate for scheme liabilities 2.70 3.70
The financial assumptions reflect the nature and term of the DB
Scheme's liabilities.
Main demographic assumptions 2016 2015
Life expectancy for a male currently
aged 60 27.1 27.0
Life expectancy for a female
currently aged 60 28.8 28.7
Life expectancy at 60 for a male
currently aged 45 28.6 28.5
Life expectancy at 60 for a female
currently aged 45 30.6 30.4
Proportion of pension exchanged
for additional cash at retirement 10% 10%
The mortality assumptions are based on recent actual mortality
experience of DB Scheme members and allow for expected future
improvements in mortality rates.
The DB Scheme's funds are invested in the following assets:
Asset allocation 2016 2015
GBPm GBPm
Developed market equity 338.6 331.0
Emerging market equity 12.9 11.2
Property 91.4 146.0
Reinsurance 71.3 68.2
Listed infrastructure 99.2 90.1
Investment grade corporate bonds 366.9 375.5
Other debt 30.3 38.7
Fixed interest gilts 52.4 24.9
Index-linked gilts 3.1 453.7
Liability driven investments 581.2 -
Cash 107.1 22.0
Total 1,754.4 1541.3
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
22. EMPLOYEE BENEFIT OBLIGATIONS - continued
The fair values of the above equity and debt instruments are
determined based on quoted market prices in active markets whereas
the fair values of properties are not based on quoted prices in
active markets.
As at 31 December 2016, the fair value of the DB Scheme's
assets, which related to self-investment, amounted to Nil% (2015:
Nil%).
Changes to the present value 2016 2015
of the DBO during the year
GBPm GBPm
Opening DBO 1453.2 1463.2
Current service cost 14.9 15.9
Interest expense on defined benefit
obligation 53.0 52.0
Contributions by DB Scheme participants 1.0 1.5
Actuarial gains on DB Scheme
liabilities arising from changes
in demographic assumptions - (12.4)
Actuarial losses/(gains) on DB
Scheme liabilities arising from
changes in financial assumptions 311.5 (1.9)
Actuarial gains on DB Scheme
liabilities arising from experience (25.9) (5.6)
Net benefits paid out (84.8) (59.5)
Closing DBO 1,722.9 1453.2
Changes in the fair value of 2016 2015
DB Scheme assets during the year
GBPm GBPm
Opening fair value of DB Scheme
assets 1541.3 1516.1
Interest income on DB Scheme
assets 56.7 54.5
Re-measurement gains/(losses)
on DB Scheme assets 200.9 (20.3)
Contributions by the employer 40.5 50.2
Contributions by DB Scheme participants 1.0 1.5
Net benefits paid out (84.8) (59.5)
Administration costs incurred (1.2 ) (1.2)
Closing fair value of DB Scheme
assets 1,754.4 1,541.3
Actual return on DB Scheme assets 2016 2015
GBPm GBPm
Interest income on DB Scheme
assets 56.7 54.5
Re-measurement gain/(loss) on
DB Scheme assets 200.9 (20.3)
Actual return on DB Scheme assets 257.6 34.2
Analysis of amounts recognised 2016 2015
in SoCI
GBPm GBPm
Total re-measurement gains 84.7 0.4
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
22. EMPLOYEE BENEFIT OBLIGATIONS - continued
Sensitivity to key assumptions
The key assumptions used for IAS 19 are discount rate, inflation
and mortality. If different assumptions were used, it could have a
material effect on the results of the Group. The sensitivity of the
results to these assumptions is as follows.
Changes Revised
in DBO DBO
GBPm GBPm
Current Figures 1,722.9
Following a 10 bps decrease in
the discount rate 33.8 1,756.7
Following a 10 bps increase in
the discount rate (33.2) 1,689.7
Following a 10 bps increase in
the inflation assumption 30.0 1,752.9
Following a 10 bps decrease in
the inflation assumption (29.6) 1,693.3
Following a 1 year increase in
life expectancy 67.1 1,790.0
Following a 1 year decrease in
life expectancy (67.0) 1,655.9
The sensitivity information shown above has been prepared using
the same method as adopted when adjusting the results of the latest
funding valuation to the statement of financial position date. This
is the same approach as has been adopted in previous periods.
23. RELATED PARTY DISCLOSURES
The Company entered into transactions, in the ordinary course of
business, with affiliated companies. Transactions entered into and
trading balances outstanding at the year-end were as follows:
Purchases Amounts Finance Borrowings
Sales from owed costs/income to/(from
to related related to related to related related
parties parties parties parties parties)
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Related Party
2016
Integrated Utility
Services Limited 112 1,210 - - -
Integrated Utility
Services Limited
(registered
in Eire) - 236 14 - -
Northern Electric
plc - 4,915 - - -
Northern Powergrid
Insurance Services - 633 - - -
Limited
Northern Powergrid
Metering Limited 355 - - - -
Northern Powergrid
(Northeast) 10,841 17,348
Limited - 55 -
Vehicle Lease
and Service 415
Limited 62 4,017 - -
Yorkshire Electricity
Group plc - - - (589) 199,298
11,371 28,359 429 (534) 199,298
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEARED 31 DECEMBER 2016
23. RELATED PARTY DISCLOSURES - continued
2015 Amounts Finance Borrowings
Sales Purchases owed costs/(income) to/(from
to related from to related to related related
parties related parties parties parties)
parties
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Integrated Utility
Services Limited 112 1,370 - - -
Integrated Utility
Services Limited
(registered
in Eire) - 212 25 - -
Northern Electric
plc - 3,962 - - -
Northern Powergrid
Insurance Services - 633 - - -
Limited
Northern Powergrid
Metering Limited 305 - - - -
Northern Powergrid
(Northeast) 9,294
Limited 17,887 - - -
Vehicle Lease
and Service 415
Limited 62 3,929 - -
Yorkshire
Electricity
Group plc - - - (847) 145,668
9,773 27,993 440 (847) 145,668
Sales and purchases from related parties were made at commercial
prices.
Interest on loans from Northern Powergrid Group companies is
charged at a commercial rate.
The amounts outstanding are unsecured and will be settled in
cash. No guarantees have been given or received. No provisions have
been made for doubtful debts in respect of amounts owed by related
parties.
24. RECONCILIATION OF PROFIT BEFORE INCOME TAX TO
CASH GENERATED FROM OPERATIONS
2016 2015
GBP'000 GBP'000
Profit before income tax 153,445 162,511
Depreciation charges 95,569 89,262
Profit on disposal of fixed assets (482) (264)
Amortisation of deferred revenue (24,864) (23,044)
Increase/(decrease) in provisions 204 (199)
Finance costs 47,522 43,574
Finance income (1,116) (890)
270,278 270,950
Decrease/(increase) in inventories 200 (184)
(Increase)/decrease in trade and other receivables (2,777)
7,566
Decrease in trade and other payables (891) (3,020)
Cash generated from operations 266,810 275,312
NORTHERN POWERGRID (YORKSHIRE) PLC
NOTES TO THE FINANCIAL STATEMENTS - continued
FOR THE YEAR ENDED 31 DECEMBER 2016
25. ULTIMATE CONTROLLING PARTY
The immediate parent undertaking of Northern Powergrid
(Yorkshire) plc is Yorkshire Electricity Group plc. The ultimate
controlling party and ultimate parent undertaking Yorkshire
Electricity Group plc is Berkshire Hathaway, Inc., a company
incorporated in the United States of America.
Copies of the group accounts of Berkshire Hathaway, Inc. (the
parent undertaking of the largest group preparing group accounts)
which include Northern Powergrid (Yorkshire) plc and the group
accounts of Northern Powergrid Holdings Company, the smallest
parent undertaking to prepare group accounts in the UK, can both be
obtained from the Company Secretary, Northern Powergrid Holdings
Company, Lloyds Court, 78 Grey Street, Newcastle upon Tyne, NE1
6AF.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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