![Graphics]() Registered number: 03070482 (England and Wales) # Northern Electric Finance plc Annual Report and Financial Statements for the Year Ended 31 December 2023 ![Graphics]() Northern Electric Finance plc Contents Company Information 1 Strategic Report 2 to 3 Directors' Report 4 to 7 Independent Auditor's Report 8 to 14 Statement of Profit or Loss 15 Statement of Financial Position 16 Statement of Changes in Equity 17 Statement of Cash Flows 18 Notes to the Financial Statements 19 to 36 ![Graphics]() Northern Electric Finance plc Company Information Directors A P Jones P A Jones T H France Company Secretary J C Riley Registered office Lloyds Court 78 Grey Street Newcastle upon Tyne NE1 6AF Registered number 03070482 (England and Wales) Auditor Deloitte LLP Statutory auditor Newcastle upon Tyne United Kingdom Page 1 ![Graphics]() Northern Electric Finance plc Strategic Report for the Year Ended 31 December 2023 The directors present the annual reports and the audited financial statements for the year ended 31 December 2023 of Northern Electric Finance plc (the "Company"), which have been drawn up and presented in accordance with the Companies Act 2006. 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 financing company. The principal activity of the Company is to meet its obligations to make the interest payments required by the 2035 5.125% bonds and the 2049 2.75% bonds, both of which are guaranteed by Northern Powergrid (Northeast) plc. Those payments for the year were made on 4 May 2023 and 24 May 2023 respectively. The Company made loss after tax for the year of £21,000 (2022: profit of £12,000) mainly due to interest expenses exceeding interest income. KEY PERFORMANCE INDICATORS The directors manage the Company's operations on a Northern Powergrid Group basis. Accordingly, the development, performance and position of the Company, is evaluated on the group basis which has been discussed in the annual report and financial statements of Northern Powergrid Holdings Company. SECTION 172(1) STATEMENT The information pursuant to Section 414CZA of the Companies Act 2006 which describes how the directors have had regard to the matters set out in Section 172(1) (a) to (f) when performing their duty under Section 172 is set out below: (a) the likely consequences of any decision in the long term: Decisions are made with due regard to the principal activity of the Company and the wider impact upon the Northern Powergrid Group. (b)the interests of the Company's employees: The Company does not have any employees. (c) the need to foster the Company's business relationships with suppliers, customers and others: The Company does not have customers or interact with suppliers. Relationships with bond holders are managed by the Northern Powergrid Group’s treasury department and the relevant bond trustee. (d) the impact of the Company's operations on the community and the environment: The Company’s operation has negligible impact on the community and environment. (e) the desirability of the Company maintaining a reputation for high standards of business conduct: In common with Northern Powergrid Group, the Company has adopted the Berkshire Hathaway Energy Company’s Core Principles which includes Regulatory Integrity. This requires that the Company’s affairs are managed in accordance with the highest behavioural standards and adherence to a policy of strict compliance with all relevant standards, legislation and regulatory conditions. (f) the need to act fairly as between members of the Company: The Company has one class of shares which are all held by Northern Powergrid (Northeast) plc, a company owned by the Northern Powergrid Group. Page 2 ![Graphics]() Northern Electric Finance plc Strategic Report for the Year Ended 31 December 2023 (continued) PRINCIPAL RISKS AND UNCERTAINTY The principal risks and uncertainties are integrated with the principal risks of the Northern Powergrid Group and are not managed separately. Accordingly, the principal risks and uncertainties, which include those of the Company, are discussed in the annual reports and financial statements of Northern Powergrid Holdings Company. Approved by the Board on 30 April 2024 and signed on its behalf by: A P Jones Director Page 3 ![Graphics]() Northern Electric Finance plc Directors' Report for the Year Ended 31 December 2023 The directors present their report together with the auditor's report and the audited financial statements for the year ended 31 December 2023. Dividends During the year no interim dividend was paid (2022: £nil). The directors recommend that no final dividend be paid in respect of the year (2022: £nil). Directors of the Company The directors, who held office during the year and to the date of signing were as follows; A P Jones P A Jones T H France During and as at the end of the year, none of the directors had any interest in any contract which was significant in relation to the business of the Company and 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. Future developments The financial position of the Company, as at 31 December 2023, is shown in the statement of financial position on page 16. There have been no significant events since the year end. There are no plans to change the existing business model. Research and development The Company does not undertake research and development. Financial risk management Details of financial risks are covered in Note 15, within the Notes to the financial statements. Political donations During the year, no contributions were made to political organisations (2022: £nil). Corporate governance statement The directors have elected to apply the exemption set out in Section 1B.1.6R of the Disclosure and Transparency Rules (“DTR”). Audit committee The board of Northern Powergrid Holdings Company has established an audit committee for the Northern Powergrid Group under delegated terms of reference which carries out the functions required by DTR 7.1.3 R. Committee members: - J Reynolds - Non-executive Director - Northern Powergrid Holdings Company (Chair) - A P Jones, Finance Director - M Knowles - Independent member - Northern Powergrid Holdings Company Page 4 ![Graphics]() Northern Electric Finance plc Directors' Report for the Year Ended 31 December 2023 (continued) STATEMENT OF DIRECTORS' RESPONSIBILITIES The directors are responsible for preparing the Annual Report 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 United Kingdom adopted international accounting standards. The financial statements also comply with the International Financial Reporting Standards (IFRSs) as issued by the IASB. Under company law the directors must not approve the accounts 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, the directors are required to: • properly select and apply accounting policies; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable International Financial Reporting Standards (IFRSs) as adopted by the IASB have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and 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. DIRECTORS' RESPONSIBILITY STATEMENT PURSUANT TO DTR 4 Each of the directors as at the date of the annual reports and financial statements, whose names and functions are set out on page 4 in the Directors' Report confirms that, to the best of their knowledge: - the financial statements, prepared in accordance with applicable UK law and in conformity with IFRS, give a true and fair view of the assets, liabilities, financial position and loss of the Company and the undertakings included in the consolidation taken as a whole; and - the management report (which is comprised of the Strategic Report and the Report of the Directors) includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties it faces. Page 5 ![Graphics]() Northern Electric Finance plc Directors' Report for the Year Ended 31 December 2023 (continued) 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 Directors Report and the appropriate notes to the financial statements. The Northern Powergrid Group is financed both in its operating companies and in other entities within the Northern Powergrid Group, and companies may lend within the Northern Powergrid Group. For that reason, financial health is considered with reference to the Northern Powergrid Group. Those entities with net current liabilities position obtaining a letter of support from Northern Powergrid Holdings Company. When considering continuing to adopt the going concern basis in preparing the annual report and financial statements, the directors have taken into account a number of factors, including the following: • The Northern Powergrid Group's main subsidiaries, Northern Powergrid (Northeast) plc and Northern Powergrid (Yorkshire) plc, are stable electricity distribution businesses operating an essential public service and are regulated by the Gas and Electricity Markets Authority (“GEMA”). In carrying out its functions, GEMA has a statutory duty under the Electricity Act 1989 to have regard to the need to secure that licence holders are able to finance the activities, which are the subject of obligations under Part 1 of the Electricity Act 1989 (including the obligations imposed by the electricity distribution licence) or by the Utilities Act 2000; • The Northern Powergrid Group is profitable with strong underlying cash flows. Northern Powergrid Holdings Company, a company in the Northern Powergrid Group, Northern Powergrid (Northeast) plc and Northern Powergrid (Yorkshire) plc hold investment grade credit ratings; • The Northern Powergrid Group is financed by long-term borrowings with an average maturity of 18 years and has access to short-term committed borrowing facilities of £242 million provided by Barclays Bank plc, Lloyds Bank plc, HSBC UK Bank plc and Royal Bank of Canada; • The Northern Powergrid Group benefits from strong investment-grade credit ratings which allow access to a range of financing options. A successful bond issue by the Northern Powergrid Group in November 2023, demonstrates that the Northern Powergrid Group’s bonds remain attractive to investors and there is an active market with strong appetite to invest; • The Northern Powergrid Group has prepared forecasts which taking into account reasonable possible changes in trading performance, show that the Northern Powergrid Group has sufficient resources to settle its liabilities as they fall due for at least the 12 months from the date of these accounts. The directors have had discussions with the bank who have indicated that they would continue to provide the short-term facilities to the Northern Powergrid Group for the foreseeable future on acceptable terms; and • Consideration was also given to the obligations contained in Northern Powergrid (Northeast) plc and Northern Powergrid (Yorkshire) plc licences to provide Ofgem with annual certificates, confirming that the directors have a reasonable expectation that the Northern Powergrid Group will have sufficient financial and operational resources available for the continuation of business for a period of at least 12 months. The board determined any material variations to the assumptions used when providing those certificates were unlikely within the eight-year period or beyond. 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. As the Company is in a net liability position, a letter of support was received from Northern Powergrid Holdings Company. Accordingly, they continue to adopt the going concern basis in preparing the annual report and financial statements. Statement as to disclosure of information to the auditor Each of the directors, who is a director of the Company as at the date of this report, confirms that: - so far as he is aware, there is no relevant audit information of which the Company's auditor is unaware; and - he has taken all the steps he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the auditor is aware of that information. Page 6 ![Graphics]() Northern Electric Finance plc Directors' Report for the Year Ended 31 December 2023 (continued) Resignation and appointment of auditor In accordance with the auditor rotation requirements of the Statutory Auditors and Third Country Auditors Regulations 2016, Deloitte LLP will resign from office and the directors will put a resolution to the Company’s shareholder recommending the appointment of KMPG at the Company’s annual general meeting. Approved by the Board on 30 April 2024 and signed on its behalf by: A P Jones Director Page 7 ![Graphics]() Northern Electric Finance plc Independent Auditor's Report to the Members of Northern Electric Finance plc 1. Opinion In our opinion the financial statements of Northern Electric Finance plc (the 'company'): • give a true and fair view of the state of the company's affairs as at 31 December 2023 and of its profit for the year then ended; • have been properly prepared in accordance with United Kingdom adopted international accounting standards and International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB); and • have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements which comprise: • the statement of profit or loss; • the statement of financial position; • the statement of changes in equity; • the statement of cash flows; and • the related notes 1 to 17. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as issued by the IASB. 2. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the company. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 3. Summary of our audit approach Key audit matters The key audit matter that we identified in the current year was: • Valuation of borrowings and the associated interest. Within this report, key audit matters are identified as follows: - Similar level of risk (< >) Materiality The materiality that we used in the current year was £249,100 which was determined on the basis of 2.0% of interest receivables. Scoping Audit work to respond to the risks of material misstatement was performed directly by the audit engagement team. Significant changes in our approach We have not made any significant changes in our approach from the previous year audit. Page 8 ![Graphics]() Northern Electric Finance plc Independent Auditor's Report to the Members of Northern Electric Finance plc (continued) 4. Conclusions relating to going concern In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. The company is a subsidiary of the group headed by Northern Powergrid Holdings Company (the ‘Northern Powergrid Group') and the going concern of the company is closely linked to the Northern Powergrid group. Our evaluation of the directors’ assessment of the company’s ability to continue to adopt the going concern basis of accounting has therefore been performed at the Powergrid group level, supplemented with procedures specific to the company, and included: • Reviewing financing facilities and understanding the cash flows of the entity; • Considerin g the limited recourse features of the bonds and assessing the guarantees in place from Northern Powergrid Group undertaking, including the ability of Northern Powergrid group to repay the obligations of the company; • Assessing the impact of the current macroeconomic conditions such as inflation on Northern Powergrid group; • Analy sing the current and forecasted performance of the Northern Powergrid group, by assessing management’s assumptions and sensitivity analysis against the budgets; • Evaluating the sophistication of the model used to prepare the forecasts prepared by Northern Powergrid group, testing of clerical accuracy of those forecasts, and assessing the historical accuracy of forecasts prepared by Group’s management; • Assessing the appropriateness of the going concern disclosures in the financial statements; and • Recalculating the covenants co mpliance as per the management’s 10-year plan disaggregated into the next 12 months from the date of the approval of the financial statements. . Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. Page 9 ![Graphics]() Northern Electric Finance plc Independent Auditor's Report to the Members of Northern Electric Finance plc (continued) 5. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 5.1 Valuation of borrowings and the associated interest (< >) Key audit matter description The company acts as a financing company within the Northern Powergrid Group, therefore the largest balances in the financial statements relate to the borrowings and the associated interest reported, both of which are determined in accordance with IFRS 9 with reference to the relevant underlying loan agreements. The key inputs into the calculation of the value of the loan and associated interest, include the amortisation of initial costs and the effective interest rate. There is a risk that the balance is materially misstatement due to the information not being presented in line with the agreement, or the miscalculation of the amortised costs and effective interest rate As disclosed in Note 11 ‘Loans and borrowings’ to the financial statements, borrowings at 31 December 2022 totalled £307 million (2022: £303 million) and consists of the 2035 5.125% bonds and 2049 2.750% bonds. The associated interest payable on these loans for the year ended 31 December 2023 is disclosed in Note 3 - 'Finance income and costs’ £12.5 million (2022: £12.4 million) to the financial statements. The accounting policy is disclosed in Note 2 to the financial statements. How the scope of our audit responded to the key audit matter In response to this key audit matter, we have completed the following procedures: • Recalculation of amortised costs and analysis of the effective in terest rate, comparing it to prior year and assessing whether the base calculation was appropriate; and • Evaluated the disclosures made in the financial statements in line with IFRS 9. Key observations Based on the work performed, we concluded that the valuation of borrowing and associated interest was appropriate and in line with IFRS 9 requirements. 6. Our application of materiality 6.1.Materiality We define materiality as the magnitude of misstatement in the financial statemen ts that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Materiality £249,100 (2022: £248,000). Basis for determining materiality 2.0% (2022: 2.0%) of interest receivables. Rationale for the benchmark applied The company is a wholly owned subsidiary used as a financing company for the group. This entity, therefore, manages group financing (borrowing and lending) which are the key areas of interest for the group company. Interest receivable is the main source of income for the entity which allows the entity to pay off their liabilities. The interest income balance is hence the main focus area for the holding company who is the main user of the financial statement of the company. Page 10 • Analysis of the orig inal loan agreements to assess whether the value of the loan is in compliance with IFRS 9 requirements; ![Graphics]() Northern Electric Finance plc Independent Auditor's Report to the Members of Northern Electric Finance plc (continued) 6.2. Performance materiality We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole. Performance materiality was set at 50.0% of materiality for the 2023 audit (2022: 70.0%). In determining performance materiality, we considered the following factors: a. our risk assessment, including our assessment of the company’s overall control environment and; b. we continued to identify control deficiencies and were not able to take a control reliant approach; and 6.3. Error reporting threshold We agreed with the Board of Directors that we would report to the Board all audit differences in excess of £12,400 (2022:£12,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Board of Directors on disclosure matters that we identified when assessing the overall presentation of the financial statements. Page 11 c. the volume and value of uncorrected misstatements 7.1. Scoping The company is a subsidiary of Northern Powergrid (Northeast) Plc and is operated by the shared finance function at the groups head office located in Newcastle upon Tyne. Our audit was scoped by obtaining an understanding of the company and its environment, including internal control, and assessing the risk of material misstatement. Audit work to respond to the risks of material misstatement was performed directly by the audit engagement team. 7. An overview of the scope of our audit 7 .2. Our consideration of the control environment With the involvement of our IT specialists, we assessed relevant controls over the group’s IT landscape which contains a number of IT systems and tools used to support business processes. These included relevant controls within the Oracle and Durabill systems integral to relevant business cycles. We have obtained an understanding of the key manual controls of all material business cycles through a combination of tests of inquiry, inspection and observation. However, we continued to identify control deficiencies and reported these to the Board of Directors and were not able to take a controls reliant approach. We evaluated the impact of these deficiencies on our audit and revised our risk assessment as appropriate. ![Graphics]() Northern Electric Finance plc Independent Auditor's Report to the Members of Northern Electric Finance plc (continued) 8. Other information The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information contained within the annual report. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 9. Responsibilities of directors As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so. 10. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Page 12 7.3. Our consideration of climate-related risks We have made enquiries with management to understand the impact of climate-related risks and controls relevant to the business, assessed the risks, and adapted our assessment of the risks of material misstatement as appropriate. We performed our own risk assessment of the potential impact of climate change on the group’s account balances and class of transactions and have read the annual report to consider whether they are materially consistent with the financial statements and our knowled ge obtained in the audit. Management have disclosed their climate change adaptation in the strategic report of ‘Northern Powergrid Group’ accounts. We have involved our ESG (Environmental, Social and Governance specialists) to review the Northern Powergrid group’s climate change disclosures and evaluate the information presented in its accounts. No additional risks were identified by the group aud it engagement team. ![Graphics]() Northern Electric Finance plc Independent Auditor's Report to the Members of Northern Electric Finance plc (continued) 11. Extent to which the audit was considered capable of detecting irregularities, including fraud Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below. 11.1. Identifying and assessing potential risks related to irregularities In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, we considered the following: • The nature of the industry and sector, control environment and business performance including the design of the company’s remuneration policies, key drivers for directors’ remuneration, bonus levels and performance targets; • Results of our enquiries of management, internal audit and the Board about their own identification and assessment of the risks of irregularities; • Any matters we identified having obtained and reviewed the company’s documentation of their policies and procedures relating to: - Identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance; - Detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud; - The internal controls established to mitigate risks of fraud or non-compliance with laws and regulations; • The matters discussed among the audit engagement team and relevant internal specialists, including tax and IT specialist regarding how and where fraud might occur in the financial statements and any potential indicators of fraud. As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override. We also obtained an understanding of the legal and regulatory framework that the company operates in, focusing on provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws and regulations we considered in this context included the UK Companies Act, listing rules and tax legislation. In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements but compliance with which may be fundamental to the company’s ability to operate or to avoid a material penalty. 11.2. Audit response to risks identified As a result of performing the above, we did not identify any key audit matters related to the potential risk of fraud or non-compliance with laws and regulations. Our procedures to respond to risks identified included the following: • Reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the financial statements; • Enquiring of management, the Board and legal counsel concerning actual and potential litigation and claims; • Performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud; • Reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with HMRC; and • In addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business. We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members, including internal specialists, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. Page 13 ![Graphics]() Northern Electric Finance plc Independent Auditor's Report to the Members of Northern Electric Finance plc (continued) Report on other legal and regulatory requirements 12. Opinions on other matters 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 directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • The strategic report and the directors’ report 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 or the directors’ report. 13. Matters on which we are required to report by exception 13.1. Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: • We have not received all the information and explanations we require for our audit; or • 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. We have nothing to report in respect of these matters. 13.2. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made. We have nothing to report in respect of this matter. 14. Other matters which we are required to address 14.1. Auditor tenure Following the recommendation of the Board of Directors, we were appointed by the Board of Northern Powergrid Holdings Company in 1998 to audit the financial statements for the year ending 31 December 1998 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 26 years, covering the years ending 31 December 1998 to 31 December 2023. As set out in the Director’s report on page 7, the financial year ended 31 December 2023 is the final year of our audit tenure. 14.2. Consistency of the audit report with the additional report to the audit committee Our audit opinion is consistent with the additional report to the audit committee we are required to provide in accordance with ISAs (UK). 15. Use of our report 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 an auditor’s report 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. Anthony Matthews FCA (Senior Statutory Auditor) For and on behalf of Deloitte LLP, Statutory Auditor Newcastle upon Tyne United Kingdom 30 April 2024 Page 14 ![Graphics]() Northern Electric Finance plc Statement of Profit or Loss for the Year Ended 31 December 2023 Note 2023 £ 000 2022 £ 000 Revenue - - Administrative expenses (28) (23) Operating loss (28) (23) Finance costs 3 (12,458) (12,394) Finance income 3 12,459 12,432 (Loss)/profit before tax (27) 15 Income tax credit/(expense) 6 6 (3) (Loss)/profit for the year (21) 12 There has been no other comprehensive income during the year (2022: £nil). The notes on pages 19 to 36 form an integral part of these financial statements. Page 15 ![Graphics]() Northern Electric Finance plc (Registration number: 03070482) Statement of Financial Position as at 31 December 2023 Note 31 December 2023 £ 000 31 December 2022 £ 000 Assets Non-current assets Trade and other receivables 7 296,267 296,110 Current assets Trade and other receivables 7 9,251 4,126 Cash and cash equivalents 8 - 1,597 9,251 5,723 Total assets 305,518 301,833 Equity and liabilities Equity Share capital 9 (50) (50) Retained losses 1,807 1,786 Total equity 1,757 1,736 Non-current liabilities Loans and borrowings 11 (296,271) (296,115) Current liabilities Trade and other payables 12 - (2) Loans and borrowings 11 (10,998) (7,440) Income tax liability (6) (12) (11,004) (7,454) Total liabilities (307,275) (303,569) Total equity and liabilities (305,518) (301,833) Approved by the Board on 30 April 2024 and signed on its behalf by: ......................................... A P Jones Director The notes on pages 19 to 36 form an integral part of these financial statements. Page 16 ![Graphics]() Northern Electric Finance plc Statement of Changes in Equity for the Year Ended 31 December 2023 Note Share capital £ 000 Retained losses £ 000 Total £ 000 At 1 January 2023 50 (1,786) (1,736) Loss for the year - (21) (21) Total comprehensive expense - (21) (21) At 31 December 2023 50 (1,807) (1,757) Share capital £ 000 Retained losses £ 000 Total £ 000 At 1 January 2022 50 (1,798) (1,748) Profit for the year - 12 12 Total comprehensive expense - 12 12 At 31 December 2022 50 (1,786) (1,736) The notes on pages 19 to 36 form an integral part of these financial statements. Page 17 ![Graphics]() Northern Electric Finance plc Statement of Cash Flows for the Year Ended 31 December 2023 Note 2023 £ 000 2022 £ 000 Cash flows from operating activities (Loss)/profit for the year (21) 12 Adjustments to cash flows from non-cash items Finance income 3 (12,459) (12,432) Finance costs 3 12,458 12,394 Interest received 7,177 12,280 Income tax (credit)/expense 6 (6) 3 Net cash flow from operating activities 7,149 12,257 Income taxes (paid)/received 6 - - Net cash from operating activities 7,149 12,257 Net cash flows used in financing activities Movement in intercompany loans 3,558 - Interest paid (12,304) (12,245) Net cash flows used in financing activities (8,746) (12,245) Net movement in cash and cash equivalents (1,597) 12 Cash and cash equivalents at 1 January 8 1,597 1,585 Cash and cash equivalents at 31 December 8 - 1,597 Yorkshire Electricity Group plc, a Northern Powergrid Group company, acting on behalf of other group companies was authorised to settle various liabilities against the relevant intercompany accounts. The Company has disclosed the underlying cash flows as operating, investing or financing according to their nature on the basis that, as a principal, the entity has the right to the cash inflows and/or the obligation to settle the liability and ensure clarity of disclosure of the cash costs of the business. The notes on pages 19 to 36 form an integral part of these financial statements. Page 18 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 1 General information The Company is a public company limited by share capital, incorporated under the Companies Act and domiciled in England and Wales. The address of its registered office is Lloyds Court, 78 Grey Street, Newcastle upon Tyne, NE1 6AF. 2 Accounting policies Statement of compliance The financial statements have been prepared in accordance with United Kingdom adopted International Accounting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB) in conformity with the requirements of the Companies Act 2006. Summary of significant accounting policies and key accounting estimates The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Basis of preparation The financial statements have been prepared in accordance with adopted IFRSs and under historical cost accounting rules. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of appyling the Company's accounting policies. The nature of the Company's business model, strategic objectives, operations and activities are set out in the Strategic Report. Page 19 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 2 Accounting policies (continued) 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 Directors Report and the appropriate notes to the financial statements. The Northern Powergrid Group is financed both in its operating companies and in other entities within the Northern Powergrid Group, and companies may lend within the Northern Powergrid Group. For that reason, financial health is considered with reference to the Northern Powergrid Group. Those entities with net current liabilities position obtaining a letter of support from Northern Powergrid Holdings Company. When considering continuing to adopt the going concern basis in preparing the annual report and financial statements, the directors have taken into account a number of factors, including the following: • The Northern Powergrid Group's main subsidiaries, Northern Powergrid (Northeast) plc and Northern Powergrid (Yorkshire) plc, are stable electricity distribution businesses operating an essential public service and are regulated by the Gas and Electricity Markets Authority (“GEMA”). In carrying out its functions, GEMA has a statutory duty under the Electricity Act 1989 to have regard to the need to secure that licence holders are able to finance the activities, which are the subject of obligations under Part 1 of the Electricity Act 1989 (including the obligations imposed by the electricity distribution licence) or by the Utilities Act 2000; • The Northern Powergrid Group is profitable with strong underlying cash flows. Northern Powergrid Holdings Company, a company in the Northern Powergrid Group, Northern Powergrid (Northeast) plc and Northern Powergrid (Yorkshire) plc hold investment grade credit ratings; • The Northern Powergrid Group is financed by long-term borrowings with an average maturity of 18 years and has access to short-term committed borrowing facilities of £242 million provided by Barclays Bank plc, Lloyds Bank plc, HSBC UK Bank plc and Royal Bank of Canada; • The Northern Powergrid Group benefits from strong investment-grade credit ratings which allow access to a range of financing options. A successful bond issue by the Northern Powergrid Group in November 2023, demonstrates that the Northern Powergrid Group’s bonds remain attractive to investors and there is an active market with strong appetite to invest; • The Northern Powergrid Group has prepared forecasts which taking into account reasonable possible changes in trading performance, show that the Northern Powergrid Group has sufficient resources to settle its liabilities as they fall due for at least the 12 months from the date of these accounts. The directors have had discussions with the bank who have indicated that they would continue to provide the short-term facilities to the Northern Powergrid Group for the foreseeable future on acceptable terms; and • Consideration was also given to the obligations contained in Northern Powergrid (Northeast) plc and Northern Powergrid (Yorkshire) plc licences to provide Ofgem with annual certificates, confirming that the directors have a reasonable expectation that the Northern Powergrid Group will have sufficient financial and operational resources available for the continuation of business for a period of at least 12 months. The board determined any material variations to the assumptions used when providing those certificates were unlikely within the eight-year period or beyond. Consequently, after making enquiries, including detailed considerations of the impact of the coronavirus pandemic, the directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Despite the Company's net liability position, a letter of support was received from Northern Powergrid Holdings Company. Accordingly, they continue to adopt the going concern basis in preparing the annual report and financial statements. Page 20 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 2 Accounting policies (continued) Critical judgements in applying accounting policies In the preparation of financial statements in conformity with IFRS the directors did not identify any critical accounting judgements or 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. Key sources of estimation uncertainty In the preparation of financial statements in conformity with IFRS the Directors did not identify any 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. Changes in accounting policy New standards, interpretations and amendments effective Effective for periods beginning on or after 1 January 2023 - Amendments to IFRS 17: Insurance Contracts - Amendments to IAS 1: Disclosure of Accounts Policies - Amendments to IAS 8: Definition of Accounting Estimates - Amendments to IAS 12: Income Taxes- International Tax Reform - Pillar Two Model Rules These amendments did not have a material impact on the financial statements. The other amendments have had no material impact on the financial statements including the comparitives. The directors have considered new accounting standards issued that are not yet applicable and have noted no material changes are likely to arise. Finance income and costs policy Finance 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. Finance costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are recognised in profit or loss in the period which they are incurred. Page 21 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 2 Accounting policies (continued) Tax The tax expense for the period comprises current tax. Tax is recognised in profit or loss, except that a change attributable to an item of income or expense recognised as other comprehensive income is also recognised directly in other comprehensive income. The current income tax charge is calculated on the basis of tax rates and laws that have been enacted or substantively enacted by the reporting date in the countries where the Company operates and generates taxable income. Deferred income tax is recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements and on unused tax losses or tax credits in the Company. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the reporting date. The carrying amount of deferred tax assets are reviewed at each reporting date and a valuation allowance is set up against deferred tax assets so that the net carrying amount equals the highest amount that is more likely than not to be recovered based on current or future taxable profit. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and call deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Trade receivables Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets. Trade receivables are recognised initially at the transaction price. They are subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for the impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. Trade payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade payables are recognised initially at the transaction price and subsequently measured at amortised cost using the effective interest method. Borrowings All borrowings are initially recorded at the amount of proceeds received, net of transaction costs. Borrowings are subsequently carried at amortised cost, with the difference between the proceeds, net of transaction costs, and the amount due on redemption being recognised as a charge to the income statement over the period of the relevant borrowing. Interest expense is recognised on the basis of the effective interest method and is included in finance costs. Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. Share capital Ordinary shares are classified as equity. Equity instruments are measured at the fair value of the cash or other resources received or receivable, net of the direct costs of issuing the equity instruments. If payment is deferred and the time value of money is material, the initial measurement is on a present value basis. Page 22 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 2 Accounting policies (continued) Financial instruments Initial recognition Financial assets and financial liabilities comprise all assets and liabilities reflected in the statement of financial position, although excluding property, plant and equipment, investment properties, intangible assets, deferred tax assets, prepayments, deferred tax liabilities and employee benefits plan. The Company recognises financial assets and financial liabilities in the statement of financial position when, and only when, the Company becomes party to the contractual provisions of the financial instrument. Financial assets are initially recognised at fair value. Financial liabilities are initially recognised at fair value, representing the proceeds received net of premiums, discounts and transaction costs that are directly attributable to the financial liability. All regular way purchases and sales of financial assets and financial liabilities classified as fair value through profit or loss (“FVTPL”) are recognised on the trade date, i.e. the date on which the Company commits to purchase or sell the financial assets or financial liabilities. All regular way purchases and sales of other financial assets and financial liabilities are recognised on the settlement date, i.e. the date on which the asset or liability is received from or delivered to the counterparty. Regular way purchases or sales are purchases or sales of financial assets that require delivery within the time frame generally established by regulation or convention in the market place. Subsequent to initial measurement, financial assets and financial liabilities are measured at either amortised cost or fair value. Classification and measurement Financial instruments are classified at inception into one of the following categories, which then determine the subsequent measurement methodology: Financial assets are classified into one of the following three categories: · financial assets at amortised cost; · financial assets at fair value through other comprehensive income (FVTOCI); or · financial assets at FVTPL. Financial liabilities are classified into one of the following two categories: · financial liabilities at amortised cost; or · financial liabilities at FVTPL. The classification and the basis for measurement are subject to the Company’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets, as detailed below: Financial assets at amortised cost A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL: · the assets are held within a business model whose objective is to hold assets in order to collect contractual cash flows; and · the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. If either of the above two criteria is not met, the financial assets are classified and measured at FVTPL. If a financial asset meets the amortised cost criteria, the Company may choose to designate the financial asset at FVTPL. Such an election is irrevocable and applicable only if the FVTPL classification significantly reduces a measurement or recognition inconsistency. Page 23 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 2 Accounting policies (continued) Financial assets at fair value through other comprehensive income (FVTOCI) A financial asset is measured at FVTOCI only if it meets both of the following conditions and is not designated as at FVTPL: · the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and · the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. On initial recognition of an equity investments that is not held for trading, the Company may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-by-investment basis. If an equity investment is designated as FVTOCI, all gains and losses, except for dividend income, are recognised in other comprehensive income and are not subsequently included in the statement of income. Financial assets at fair value through the profit or loss (FVTPL) Financial assets not otherwise classified above are classified and measured as FVTPL. Financial liabilities at amortised cost All financial liabilities, other than those classified as financial liabilities at FVTPL, are measured at amortised cost using the effective interest rate method. Financial liabilities at fair value through the profit or loss Financial liabilities not measured at amortised cost are classified and measured at FVTPL. This classification includes derivative liabilities. Page 24 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 2 Accounting policies (continued) Derecognition Financial assets The Company derecognises a financial asset when; - the contractual rights to the cash flows from the financial asset expire; - it transfers the right to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred; or - the Company neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset. On derecognition of a financial asset, the difference between the carrying amount of the asset and the sum of the consideration received is recognised as a gain or loss in the profit or loss. Any cumulative gain or loss recognised in OCI in respect of equity investment securities designated as FVTOCI is not recognised in profit or loss on derecognition of such securities. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Company is recognised as a separate asset or liability. The Company enters into transactions whereby it transfers assets recognised on its statement of financial position, but retains either all or substantially all of risks and rewards of the transferred assets or a portion of them. In such cases, the transferred assets are not derecognised. When the Company derecognises transferred financial assets in their entirety, but has continuing involvement in them then the entity should disclose for each type of continuing involvement at the reporting date: (a) The carrying amount of the assets and liabilities that are recognised in the entity’s statement of financial position and represent the entity’s continuing involvement in the derecognised financial assets, and the line items in which those assets and liabilities are recognised; (b) The fair value of the assets and liabilities that represent the entity’s continuing involvement in the derecognised financial assets; (c) The amount that best represents the entity’s maximum exposure to loss from its continuing involvement in the derecognised financial assets, and how the maximum exposure to loss is determined; and (d) The undiscounted cash outflows that would or may be required to repurchase the derecognised financial assets or other amounts payable to the transferee for the transferred assets. Financial liabilities The Company derecognises a financial liability when its contractual obligations are discharged, cancelled, or expire. Modification of financial assets and financial liabilities Financial assets If the terms of a financial asset are modified, the Company evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, then the contractual rights to the cash flows from the original financial asset are deemed to expire. In this case the original financial asset is derecognised and a new financial asset is recognised at either amortised cost or fair value. If the cash flows are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, the Company recalculates the gross carrying amount of the financial asset and recognises the amount arising from adjusting the gross carrying amount as a modification gain or loss in the statement of income. Page 25 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 2 Accounting policies (continued) Financial liabilities If the terms of a financial liabilities are modified, the Company evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, then the contractual obligations from the cash flows from the original financial liabilities are deemed to expire. In this case the original financial liabilities are derecognised and new financial liabilities are recognised at either amortised cost or fair value. If the cash flows are not substantially different, then the modification does not result in derecognition of the financial liabilities. In this case, the Company recalculates the gross carrying amount of the financial liabilities and recognises the amount arising from adjusting the gross carrying amount as a modification gain or loss in the statement of income. Impairment of financial assets Measurement of Expected Credit Losses The Company recognises loss allowances for expected credit losses (ECL) on financial instruments that are not measured at FVTPL, namely: - Financial assets that are debt instruments; - Accounts and other receivables; - Financial guarantee contracts issued; and - Loan commitments issued. The Company classifies its financial instruments into stage 1, stage 2 and stage 3, based on the applied impairment methodology, as described below: Stage 1: for financial instruments where there has not been a significant increase in credit risk since initial recognition and that are not credit-impaired on origination, the Company recognises an allowance based on the 12-month ECL; Stage 2: for financial instruments where there has been a significant increase in credit risk since initial recognition but they are not credit-impaired, the Company recognises an allowance for the lifetime ECL; and Stage 3: for credit-impaired financial instruments, the Company recognises the lifetime ECL. The Company measures loss allowances at an amount equal to the lifetime ECL, except for the following, for which they are measured as a 12-month ECL: - debt securities that are determined to have a low credit risk (equivalent to investment grade rating) at the reporting date; and - other financial instruments on which the credit risk has not increased significantly since their initial recognition. The Company considers a debt security to have low credit risk when their credit risk rating is equivalent to the globally understood definition of ‘investment grade’. A 12-month ECL is the portion of the ECL that results from default events on a financial instrument that are probable within 12 months from the reporting date. Provisions for credit-impairment are recognised in the statement of income and are reflected in accumulated provision balances against each relevant financial instruments balance. Evidence that the financial asset is credit-impaired include the following; - Significant financial difficulties of the borrower or issuer; - A breach of contract such as default or past due event; - The restructuring of the loan or advance by the Company on terms that the Company would not consider otherwise; - It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; - The disappearance of an active market for the security because of financial difficulties; or - There is other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the Company, or economic conditions that correlate with defaults in the Company. Page 26 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 2 Accounting policies (continued) For trade receivables, the Company applies the simplified approach, which requires expected lifetime losses to be recognised from initial recognition of the receivables. To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due. The contract assets relate to unbilled work in progress and have substantially the same risk characteristics as the trade receivables for the same types of contracts. The Company has therefore concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the contract assets. The expected loss rates are based on the payment profiles of sales over a period of 36 month before 31 December 2021 and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. The Company has identified the Gross Domestic Porduct (GDP) and the unemployment rate of the countries in which it sells its goods and services to be the most relevant factors, and accordingly adjusts the historical loss rates based on expected changes in these factors. Definition of default The Company considers the following as constituting an event of default for internal credit risk management purposes as historical experience indicates that financial assets that meet either of the following criteria are not recoverable: • when there is a breach of financial covenants by the debtor; and • information developed internally or obtained from external sources indicates that the debtor is unlikely to pay its creditors, including the Company, in full. Accounting estimates and assumptions The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of certain financial assets, liabilities, income and expenses. The use of estimates and assumptions is principally limited to the determination of provisions for impairment, the valuation of financial instruments and as explained in more detail below: Provisions for impairment In determining impairment of financial assets, judgement is required in the estimation of the amount and timing of future cash flows as well as an assessment of whether the credit risk on the financial asset has increased significantly since initial recognition and incorporation of forward-looking information in the measurement of ECL. Fair value of financial assets and liabilities Where the fair value of financial assets and liabilities cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is derived from observable markets where available, but where this is not feasible, a degree of judgement is required in determining assumptions used in the models. Changes in assumptions used in the models could affect the reported fair value of financial assets and liabilities. Page 27 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 3 Finance income and costs 2023 £ 000 2022 £ 000 Finance income Interest received from group undertakings 12,459 12,432 Finance costs Interest on borrowings (12,359) (12,349) Interest paid to group undertakings (99) (45) Total finance costs (12,458) (12,394) Net finance income 1 38 4 Employees and directors No directors' or key personnel remuneration was charged for the year (2022: £nil). There were no employees during the year (2022: none). At 31 December 2023 no directors accrued benefits under a defined benefit scheme (2022: none). 5 Auditor's remuneration 2023 £ 000 2022 £ 000 Audit of the financial statements 21 23 No non audit services were provided during the financial year. Page 28 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 6 Income tax Tax credited in the income statement 2023 £ 000 2022 £ 000 Current taxation UK corporation tax (6) 3 The tax on profit before tax for the year is the same as the standard rate of corporation tax in the UK (2022 - the same as the standard rate of corporation tax in the UK) of 19% to 31 March 2023 and 25% thereafter (2022 - 19%). The differences are reconciled below: 2023 £ 000 2022 £ 000 (Loss)/profit before tax (27) 15 Corporation tax at standard rate (6) 3 Total tax (credit)/charge (6) 3 Finance Act 2024 confirmed that the corporation tax rate will remain at 25% from 1 April 2023 as previously enacted. There is no uncertainty over the acceptable income tax treatment. Should any uncertainties arise the Company will apply adopted amendments to IFRIC 23. Page 29 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 7 Trade and other receivables 31 December 2023 £ 000 31 December 2022 £ 000 Current trade and other receivables Amounts due from group undertakings 9,251 4,126 Non-current trade and other receivables Amounts due from group undertaking 296,267 296,110 305,518 300,236 The fair value of the trade and other receivables as at 31 December 2023 is estimated to be £268 million (2022: £251 million), determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable market transactions or dealer quotes for similar instruments. The valuation of assets set out above is based on Level 2 inputs. None of these debts are past due or impaired at the statement of financial position date as the directors do not consider there to be any doubt over their recoverability. Amounts due from Northern Powergrid Group undertakings represents £300 million of long-term loans made to Northern Powergrid (Northeast) plc, the Company's immediate parent. They are at fixed rates of interest ranging from 2.75% to 5.125% with maturities ranging from 2035 to 2049. Northern Powergrid (Northeast) plc maintains an investment grade credit rating. Prepayments and accrued income represent the accrued interest due on these loans. The maximum risk exposure to the Company is the book value of these loans. 8 Cash and cash equivalents 31 December 2023 £ 000 31 December 2022 £ 000 Other cash and cash equivalents - 1,597 Cash and cash equivalents have a maturity of less than three months, are readily convertible to cash and are subject to an insignificant risk of changes in value. The carrying value amount of these assets approximates their fair value. Page 30 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 9 Share capital Allotted, called up and fully paid shares 31 December 2023 31 December 2022 No. £ No. £ Ordinary Share Capital of £1 each 50,000 50,000 50,000 50,000 10 Reserves Retained losses £ 000 At 1 January 2023 (1,786) Loss for the year (21) Total comprehensive expense (21) At 31 December 2023 (1,807) Retained losses £ 000 At 1 January 2022 (1,798) Profit for the year 12 Total comprehensive expense 12 At 31 December 2022 (1,786) Page 31 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 11 Loans and borrowings 31 December 2023 £ 000 31 December 2022 £ 000 Non-current loans and borrowings 296,271 296,115 Current loans and borrowings 10,998 7,440 307,269 303,555 Book value Fair value 31 December 2023 £ 000 31 December 2022 £ 000 31 December 2023 £ 000 31 December 2022 £ 000 Intercompany 3,558 - 3,558 - 2035 - 5.125% bonds 153,550 153,457 158,526 150,066 2049 - 2.75% bonds 150,161 150,098 106,192 100,507 307,269 303,555 268,276 250,573 The fair value of the bonds is determined with reference to quoted market prices. The fair valuation of the borrowings is based on level 1 inputs. At 31 December 2023, the Company had no undrawn committed borrowing facilities. The Company's 5.125% 2035 bonds are guaranteed by Northern Powergrid (Northeast) plc and AMBAC Assurance UK Limited. The Company's 2.75% 2049 bonds are guaranteed by Northern Powergrid (Northeast) plc. Borrowings are measured at amortised cost using the effective interest method. The covenants associated with the 2035 bonds issued by the Company include restrictions on the issuance of new indebtedness and the making of distributions dependant on the scale of the ratio of Senior Total Net Debt to Regulatory Asset Value ("RAV") of Northern Powergrid (Northeast) plc. 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 liquidity risk, credit risk and market risk associated with these borrowings, and the management thereof, is covered within Financial Risk Management on pages 35 to 36 of these financial statements. 12 Trade and other payables 31 December 2023 £ 000 31 December 2022 £ 000 Accrued expenses - 2 Page 32 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 13 Net debt reconciliation At 1 January 2023 £ 000 Cash flows £ 000 Other changes £ 000 At 31 December 2023 £ 000 Cash and cash equivalents 1,597 (1,597) - - Borrowings (303,555) (3,558) (3,714) (310,827) (301,958) (5,155) (3,714) (310,827) At 1 January 2022 £ 000 Cash flows £ 000 Other changes £ 000 At 31 December 2022 £ 000 Cash and cash equivalents 1,585 12 - 1,597 Borrowings (303,403) - (152) (303,555) (301,818) 12 (152) (301,958) Other changes relate to accrued interest and amortisation of financing fees and discounts. 14 Classification of financial and non-financial assets and financial and non-financial liabilities The classification of financial assets and financial liabilities by accounting categorisation for the period ending 31 December 2023 was as follows: Financial assets at amortised cost £ 000 Financial liabilities at amortised cost £ 000 Non-financial assets & liabilities £ 000 Assets Non-current assets Trade and other receivables 296,267 - - 296,267 - - Current assets Trade and other receivables 9,251 - - Total assets 305,518 - - Liabilities Non-current liabilities Loans and borrowings - (296,271) - Current liabilities Loans and borrowings - (10,998) - Income tax liability - - (6) - (10,998) (6) Total liabilities - (307,269) (6) Page 33 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 14 Classification of financial and non-financial assets and financial and non-financial liabilities (continued) The classification of financial assets and financial liabilities by accounting categorisation for the period ending 31 December 2022 was as follows: Financial assets at amortised cost £ 000 Financial liabilities at amortised cost £ 000 Non-financial assets & liabilities £ 000 Assets Non-current assets Trade and other receivables 296,110 - - 296,110 - - Current assets Trade and other receivables 4,126 - - Cash and cash equivalents 1,597 - - 5,723 - - Total assets 301,833 - - Liabilities Non-current liabilities Loans and borrowings - (296,115) - Current liabilities Trade and other payables - (2) - Loans and borrowings - (7,440) - Income tax liability - - (12) - (7,442) (12) Total liabilities - (303,557) (12) The fair value of assets classified as fair value through profit or loss are valued using level 3 inputs. Page 34 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 15 Financial risk review This note presents information about the Company’s exposure to financial risks and the Company’s management of capital. Capital management The Group manages its capital centrally to ensure that entities in the Group will be able to continue as going concerns while maximising the return to stakeholders through the optimisation of the debt and equity balance. The Group’s overall strategy remains unchanged from 2022. The capital structure of the Company consists of net debt (borrowings as detailed in note 11 offset by equity of the Company (comprising issued capital, reserves and retained earnings as detailed in notes 9 and 10). The Company has no externally imposed capital requirements. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company has adopted a policy of only dealing with creditworthy counterparties. The Company's exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. The carrying amount of financial assets recorded in the financial statements, which is net of impairment losses, represents the Company's maximum exposure to credit risk as no collateral or other credit enhancements are held. There is no expected credit loss as the receivables are with a related party, Northern Powergrid (Northeast) plc, an investment grade company within the Northern Powergrid Group. Liquidity risk Ultimate responsibility of liquidity risk management rests with the board of directors, which has established an appropriate liquidity risk management framework for the management of the Company's short, medium, and long-term funding and liquidity management requirements. The Company manages liquidity by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets and liabilities. Maturity analysis for financial liabilities The following tables set out the remaining contractual maturities of the company’s financial liabilities by type. 2023 Non-derivative liabilities Total outflow £ 000 1-3 months £ 000 3 months - 1 year £ 000 1-5 years £ 000 More than 5 years £ 000 Non-interest bearing - - - - - Variable interest rate liabilities 3,557 3,557 - - - Fixed interest rate liabilities 499,500 - 11,813 47,250 440,437 Total 503,057 3,557 11,813 47,250 440,437 2022 Non-derivative liabilities Total outflow £ 000 1-3 months £ 000 3 months - 1 year £ 000 1-5 years £ 000 More than 5 years £ 000 Non-interest bearing 1 1 - - - Fixed interest rate liabilities 511,312 - 11,813 47,250 452,249 Total 511,313 1 11,813 47,250 452,249 Page 35 ![Graphics]() Northern Electric Finance plc Notes to the Financial Statements for the Year Ended 31 December 2023 (continued) 15 Financial risk review (continued) Market risk The Company's activities do not expose it to significant financial risks of changes in foreign currency exchange rates and interest rates. Materially all income and expenses are denominated in pound sterling. All loans are at fixed interest rates and expose the Company to fair value interest rate risk. 16 Related party transactions Summary of transactions with other related parties Yorkshire Electricity Group plc provides the intercompany treasury account to the Northern Powergrid Group. Loans to related parties 2023 Parent £ 000 Other related parties £ 000 At start of period 300,236 1,597 Advanced - (5,155) Amortisation 156 - At end of period 300,392 (3,558) 2022 Parent £ 000 Other related parties £ 000 At start of period 300,084 1,585 Repaid - (36) Net interest - 48 Amortisation 152 - At end of period 300,236 1,597 Details of loans from related parties Loans from related parties are detailed in trade and other receivables Note 7 on page 30. 17 Parent and ultimate parent undertaking The Company's immediate parent is Northern Powergrid (Northeast) plc. The ultimate parent is Berkshire Hathaway, Inc. These financial statements are available upon request from 3555 Farnam Street, Omaha, Nebraska 68131. Relationship between entity and parents The parent of the largest group in which these financial statements are consolidated and the ultimate controlling party is Berkshire Hathaway, Inc, incorporated in United States. The registered address of Berkshire Hathaway, Inc is: 3555 Farnam Street, Omaha, Nebraska 68131. The parent of the smallest group in which these financial statements are consolidated is Northern Electric plc, incorporated in United Kingdom. The registered address of Northern Electric plc is: Lloyds Court, 78 Grey Street, Newcastle upon Tyne, NE1 6AF. Page 36