Northern Electric : Annual Report and Accounts for Northern Electric plc for the Year Ended 31 December 2022

Registration number: 02366942 (England and Wales)

Northern Electric plc

Annual Report and Consolidated Financial Statements

for the Year Ended 31 December 2022

Northern Electric plc

Contents

Company Information	1
Strategic Report	2 to 21
Directors' Report	22 to 27
Independent Auditor's Report	28 to 36
Consolidated Income Statement	37
Consolidated Statement of Comprehensive Income	38
Consolidated Statement of Financial Position	39 to 40
Statement of Financial Position	41 to 42
Consolidated Statement of Changes in Equity	43
Statement of Changes in Equity	44
Consolidated Statement of Cash Flows	45
Statement of Cash Flows	46
Notes to the Financial Statements	47 to 120

Northern Electric plc

Company Information

Directors	A P Jones
	S J Lockwood
	J N Reynolds
Company Secretary	J C Riley
Registered office	Lloyds Court
	78 Grey Street
	Newcastle upon Tyne
	Tyne and Wear
	NE1 6AF
Registration number	02366942 (England and Wales)
Auditor	Deloitte LLP
	Statutory Auditor
	London
	United Kingdom

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Northern Electric plc

Strategic Report for the Year Ended 31 December 2022

The directors present their annual report and audited financial statements for the year ended 31 December 2022 of Northern Electric plc (the "Company"), which have been drawn up and are presented in accordance with the Companies Act 2006 (the "CA06").

Business model

The Company is part of the Northern Powergrid Holdings Company and its subsidiaries group of companies (the "Northern Powergrid Group") and acts as a holding company of Northern Powergrid (Northeast) plc ("NPg Northeast"), Integrated Utility Services Limited ("IUS") and Northern Powergrid Metering Limited ("NPg Metering"), collectively, (the "Group").

NPg Northeast is an authorised distributor under the Electricity Act 1989 and holds an Licence granted by the Secretary of State. As a distribution network operator ("DNO"), NPg Northeast is regulated by the office of Gas and Electricity Markets ("Ofgem"), which in turn, is governed by the Gas and Electricity Markets Authority ("GEMA"). The completion of the 2021/22 Regulatory Year (on 31 March 2022), represented the end of year seven of the current RIIO-ED1 price control, which became effective on 1 April 2015 and is due to end on 31 March 2023 (the "ED1 period"). NPg Northeast distributes electricity, to approximately 1.6 million customers connected to its electricity distribution network within its distribution services area in the northeast of England. As NPg Northeast is the largest contributor to the Group in terms of revenue, the Strategic Report predominantly concentrates on the performance and progress of that entity throughout the reporting year.

Revenue generated by NPg Northeast is primarily controlled by a distribution price control formula which is set out in the Licence. The price control formula does not directly constrain profits from year to year, but is a control on revenue that operates independently of a significant portion of NPg Northeast's costs. Allowed revenue is recovered from electricity suppliers via the application of Distribution use of System charges. These charges account for approximately 15% of the electricity end user's overall electricity bill. NPg Northeast's opening base allowed revenue (excluding the effects of incentive schemes and any deferred revenues from the prior price control) has been set to remain constant for each Regulatory Year from 1 April 2016 through to 31 March 2023. Nominal opening base allowed revenues will increase in line with inflation (as measured by the United Kingdom's Retail Prices Index "RPI").

IUS provides engineering contracting services and NPg Metering rents meters to energy suppliers.

Strategy

In common with the Northern Powergrid Group, the Group operates a strategy based on six core principles (the "Core Principles"), which comprise Financial Strength, Customer Service, Operational Excellence, Employee Commitment, Environmental Respect and Regulatory Integrity. The Core Principles (which are applied by the Northern Powergrid Group's parent company, Berkshire Hathaway Energy Company ("Berkshire Hathaway Energy")), set out the basis on which the Company and Group generates shareholder value over the longer-term and defines the standards by which the Northern Powergrid Group holds itself accountable. Each Core Principle is defined by a strategic objective which is intrinsically linked to the commitments made in the NPg Northeast's 2015 to 2023 regulatory well-justified business plan (the "Business Plan").

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Northern Electric plc

Strategic Report for the Year Ended 31 December 2022 (continued)

Submitted to Ofgem in March 2014, the Business Plan described the long-term strategy and commitments that NPg Northeast would achieve during the ED1 period in order to deliver sustainable growth with regard to those with whom NPg Northeast interacted and served. Developed after a period of consultation with stakeholders, the Business Plan focused on a number of priorities (described throughout the Strategic Report) including minimising costs, improving flood defences, enhancing customer service, prioritising employee safety, supporting vulnerable customers, protecting the environment and transitioning to low carbon technologies. The directors refer to the values established by the Core Principles and the commitments contained within the Business Plan when considering the consequence of decisions they make. The 2022 financial year denotes the last full year in which NPg Northeast operated under the Business Plan.

Following the publication of RIIO-ED2 ("ED2") Business Planning guidance by Ofgem in August 2020, the Company commenced the development of its regulatory business plan for the ED2 period (1 April 2023 to 31 March 2028) (the "ED2 Plan"), which was submitted to Ofgem on 1 December 2021 (a copy of which can be found on the Northern Powergrid Group website). As part of the development of the ED2 Plan, the Company worked with the Customer Engagement Group ("CEG"), which was established for the purpose of providing independent scrutiny and challenge to ensure that customers' interests are adequately reflected in the ED2 Plan. Ahead of the implementation of the ED2 Plan on 1 April 2023, the Company will participate in open hearings with Ofgem and interested stakeholders and consultations before Ofgem publishes its final determination in December 2022 (for further detail, see Regulatory Integrity).

During the transition into the ED2 Period and beyond, the strategy set out in the ED2 Plan will support NPg Northeast's evolution from DNO to Distribution System Operator ("DSO"), in order to facilitate decarbonisation and take steps to achieve a fully integrated energy system. See Environmental Sustainability for more detail.

Many of the conditions set out in the Licence, including the way in which base allowed revenue will be determined will be revised as a result of the stipulations set out in the ED2 final determination. However, these will not come into effect until 1 April 2023 and will therefore not be reported on until the 31 December 2023 annual report and financial statements of the Group.

The Strategic Report focuses on each Core Principle and the performance of each KPI throughout the year in order to provide a summary of the success in achieving each strategic objective, progress made against certain Business Plan commitments and performance in relation to the Annual Plan.

The delivery of the Business Plan is supported by an annual business plan (the "Annual Plan") which is submitted to the Northern Powergrid Group's shareholder each financial year and is designed to phase progress towards the achievement of each commitment over the duration of the ED1 period. The phasing ensures that the deliverables in both plans can be measured effectively by using a mix of financial and non-financial Key Performance Indicators ("KPI").

The Strategic Report focuses on each Core Principle and the performance of the associated KPIs throughout the Regulatory Year in order to provide a summary of the success in achieving each strategic objective, progress made against certain Business Plan commitments and performance in relation to the Annual Plan.

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