Northern Electric PLC 28 October 2005 NORTHERN ELECTRIC plc INTERIM REPORT SIX MONTHS ENDED 30 JUNE 2005 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 COMMENTARY Adoption of International Financial Reporting Standards ("IFRS") From 1 January 2005, Northern Electric plc is required to prepare consolidated financial statements in accordance with IFRS, which is the required reporting basis for all European Union listed companies from 2005. The Company previously prepared consolidated financial statements in accordance with UK GAAP until 31 December 2004. The interim accounts for the six months ended 30 June 2005 are the Company's initial financial statements prepared under IFRS and do not comprise statutory accounts within the meaning of Section 240 of the Companies Act 1985. The date of transition to IFRS is 1 January 2004. As part of the IFRS transition the Company is publishing restated condensed financial information in relation to the year ended 31 December 2004 and the six months ended 30 June 2004 together with statements showing the adjustments made to these previously reported UK GAAP results under IFRS. In addition, a summary reconciliation of equity is also provided. The interim accounts for the six months ended 30 June 2005 and related notes have been reviewed by Deloitte & Touche LLP. Their review report to the Company is published on pages 3 and 4. Financial Overview During the six months ended 30 June 2005 the consolidated profit from ordinary activities after tax was £39.1m which represented an increase of £3.2m when compared with the same period in the prior year primarily reflecting higher income received from its interests in associated companies. No ordinary dividends were paid in the period resulting in £39.1m being transferred to reserves. An interim dividend of £50.0m was declared and paid on 26 July 2005. The results of Northern Electric Distribution Limited ("NEDL"), a wholly owned subsidiary, reflect the impact of the revised distribution price control, which is effective for the period 1 April 2005 to 31 March 2010 as agreed with the regulator, The Office of Gas and Electricity Markets ("Ofgem"). Tariffs for the use of NEDL's electricity distribution network were increased by approximately 5% with effect from 1 April 2005 in order to reduce the shortfall of revenues allowed under the regulatory price control formula prior to this date. The Group has reached agreement with the Independent Trustee and Group Trustees to repair the defined benefit pension scheme deficit. In financial terms the agreement comprises monthly cash payments of £1.9m (£23.1m per annum) starting in April 2005.Of these payments £0.3m (£3.8m per annum) are recovered by the Group from other companies within the CE Electric UK Funding Company Group, the ultimate UK parent company. These payments address the funding deficiency of £116.6m over six years and the deficit of £190.3m over 12 years subject to movements in actuarial assumptions. On 5 May 2005 the Company's wholly owned subsidiary, Northern Electric Finance plc issued £150.0m of 5.125% bonds due 2035, guaranteed as to principal and interest by NEDL and Ambac Assurance UK Limited. £100.0m of the proceeds was invested in a guaranteed investment contract at a rate of 4.75%, which matures on 27 December 2007. Capital expenditure during the period was £41.8m primarily in relation to the electricity distribution network. Net debt at 30 June 2005 was £57.3m which represented a reduction of £6.7m since 31 December 2004. Cash and cash equivalents were £203.8m as at 30 June 2005. Outlook The Company will continue to invest in its electricity distribution network and focus on exceeding Ofgem's targets for customer service whilst endeavoring to minimise the level of operating costs. NEDL's revenues for the period to 31 March 2010 have been set by Ofgem. Enquiries John Elliott Company Secretary 0191 2235103 INDEPENDENT REVIEW REPORT TO THE MEMBERS OF NORTHERN ELECTRIC plc Introduction We have been instructed by the Company to review the financial information for the six months ended 30 June 2005 which comprises the consolidated income statement, the consolidated statement of recognised income and expense, the consolidated balance sheet, the consolidated cash flow statement and related notes 1 to 12. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. This report is made solely to the Company in accordance with Bulletin 1999/4 issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the members of the Company those matters we are required to state to them in an independent review 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, for our review work, for this report, or for the conclusions we have formed. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules of the Financial Services Authority and the requirements of International Accounting Standard 34, "Interim Financial Reporting" ("IAS 34"), which require that the accounting policies and presentation applied to the interim figures are consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. International Financial Reporting Standards ("IFRSs") As disclosed in note 12, the next annual financial statements of the group will be prepared in accordance with IFRSs as adopted for use in the EU. Accordingly, the interim report has been prepared in accordance with IAS 34 and the requirements of IFRS 1, "First Time Adoption of International Financial Reporting Standards" relevant to interim reports. Review work performed We conducted our review in accordance with the guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with International Standards on Auditing (UK and Ireland) and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information. Limitation of scope The evidence available in respect of Teesside Power Limited, an associated company, was limited because financial information in respect of that associate, prepared in accordance with IFRSs was not available to either the directors or ourselves. The carrying value of the investment in this associate is included at nil within the accompanying financial information at 1 January 2004, 30 June 2004 and 31 December 2004 under IFRSs, based on the associate's net liabilities calculated in accordance with applicable United Kingdom law and accounting standards. There were no other satisfactory procedures that we could adopt to determine the effect of any restatement necessary under IFRSs. Qualified review conclusion arising from limitation of scope Except for any adjustments to the financial information that might have been found to be necessary had we been able to obtain sufficient evidence concerning the financial information in respect of Teesside Power Limited, on the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2005. Deloitte & Touche LLP Chartered Accountants and Registered Auditors Newcastle upon Tyne 28 October 2005 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 CONSOLIDATED INCOME STATEMENT 6 Months ended 6 Months Year ended 30 June 2005 ended 30 June 2004 31 December 2004 Note Unaudited Unaudited Audited £m £m £m Revenue 3 135.8 142.8 287.8 Cost of sales (41.2) (45.2) (94.1) Gross profit 94.6 97.6 193.7 Distribution costs (27.5) (25.3) (49.2) Administrative expenses (4.7) (8.5) (20.6) Operating profit 3 62.4 63.8 123.9 Share of profits of associates and joint 0.3 0.3 0.5 ventures Other income 4.7 - 0.1 Finance costs - net (9.6) (10.9) (20.8) Profit before tax 3 57.8 53.2 103.7 Income tax expense 4 (18.7) (17.3) (42.4) Profit from ordinary activities after tax 39.1 35.9 61.3 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE There is no other income or expense other than the profits reported above. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 CONSOLIDATED BALANCE SHEET AT 30 JUNE 2005 30 June 30 June 31 December 2004 Note 2005 2004 Unaudited Unaudited Audited £m £m £m Non-current assets Property, plant and equipment 964.2 896.2 937.2 Intangibles 6.1 7.2 6.9 Investments in associates 3.2 2.9 3.1 Investments in other companies 13.6 0.1 0.1 Long-term securities 100.0 - - Trade receivables 4.1 4.7 4.8 1,091.2 911.1 952.1 Current assets Inventories 21.3 14.5 13.1 Trade and other receivables 42.5 38.5 46.2 Cash and cash equivalents 203.8 145.7 152.9 267.6 198.7 212.2 Total assets 1,358.8 1,109.8 1,164.3 Current liabilities Trade and other payables (90.8) (72.7) (76.2) Current income tax liabilities (19.0) (27.5) (30.7) Borrowings (100.0) - (99.9) Provisions (6.4) (8.7) (8.0) (216.2) (108.9) (214.8) Net current assets/(liabilities) 51.4 89.8 (2.6) Non-current liabilities Borrowings (246.7) (199.2) (99.4) Deferred income tax liabilities 7 (148.3) (127.8) (142.0) Retirement benefit obligations (55.1) (72.2) (66.8) Deferred revenue (291.0) (264.6) (278.8) Provisions (0.3) (0.4) (0.4) (741.4) (664.2) (587.4) Total liabilities (957.6) (802.2) (773.1) Net assets 401.2 336.7 362.1 EQUITY Share capital 72.2 72.2 72.2 Share premium 158.8 158.8 158.8 Retained earnings 164.0 99.5 124.9 Other reserves 6.2 6.2 6.2 Equity attributable to equity holders of the parent 401.2 336.7 362.1 The interim accounts were approved by the board of directors on 28 October 2005 and signed on its behalf by J M France, Director NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 CONSOLIDATED CASH FLOW STATEMENT 6 Months 6 Months Year ended ended ended 30 31 December 30 June June 2005 2004 2004 Note Unaudited Unaudited Audited £m £m £m Net cash from operating activities 9 25.7 70.6 114.3 Investing activities Dividends received from joint ventures 0.2 0.2 0.2 Proceeds from disposal of business unit/associate 3.5 - (1.1) Purchase of long term securities (100.0) - - Proceeds from disposal of property, plant and equipment - - 0.1 Purchases of property, plant and equipment (42.0) (45.0) (95.0) Purchases of intangible assets (0.4) (1.2) (1.8) Receipt of customer contributions 17.8 10.2 27.6 Net cash used in investing activities (120.9) (35.8) (70.0) Financing activities Movement in loan from parent undertaking (3.2) 0.6 (1.7) New loans raised 149.3 - - Net cash from/(used in) financing activities 146.1 0.6 (1.7) Net increase in cash and cash equivalents 50.9 35.4 42.6 Cash and cash equivalents at beginning of period 152.9 110.3 110.3 Cash and cash equivalents at end of period 203.8 145.7 152.9 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS 1. GENERAL INFORMATION The information for the year ended 31 December 2004 does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. A copy of the statutory accounts for that year has been delivered to the Register of Companies. The auditors' report on those accounts was unqualified. 2. ACCOUNTING POLICIES Basis of preparation The interim financial statements have been prepared in accordance with IFRS that the directors expect to be applicable as at 31 December 2005. IFRS are subject to amendment or interpretation by the International Accounting Standards Board and there is an ongoing process of review and endorsement by the European Commission. For these reasons, it is possible that the information for the six months ended 30 June 2005 and the restated information for the six months ended 30 June 2004 and year ended 31 December 2004 may be subject to change before their inclusion in the Group's 2005 Annual Report and Accounts, which will contain the Group's first complete financial statements prepared in accordance with IFRS. In preparing these interim consolidated financial statements in accordance with IFRS 1, the Group has applied the mandatory exceptions from full retrospective application of IFRS. In addition it has elected to recognise all cumulative pension scheme actuarial gains and losses as at 1 January 2004. The particular accounting policies adopted by the directors are described below. Basis of consolidation The interim accounts consolidate the accounts of Northern Electric plc and its subsidiary undertakings. Undertakings, other than subsidiary undertakings, which the Group jointly controls are treated as joint ventures. Where material the Group accounts include the appropriate share of these undertakings' results and reserves based on accounts prepared to the balance sheet date. Revenue Revenue represents charges for the use of the Group's distribution network, amortisation of customer contributions and the invoiced value of other goods sold and services provided, exclusive of value added tax. Income from credit sales charges is apportioned in the trading accounts over the period of the sales agreements. Profit is recognised on long-term contracts, if the final outcome can be assessed with reasonable certainty, by including in the profit and loss account turnover and related costs as contract activity progresses. Revenue is calculated as that proportion of the total contract value which costs incurred to date bear to total expected costs for that contract. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 2. ACCOUNTING POLICIES (continued) Property, plant and equipment and depreciation Property, plant and equipment is stated at cost. The charge for depreciation is calculated to write off assets to their residual values over their estimated useful lives on a straight-line basis: Distribution system assets 50 years Metering equipment included in distribution system assets up to 15 years Non-operational assets: Buildings - freehold up to 60 years - 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. Customer contributions Customer contributions towards distribution system assets are included in deferred revenue. The Group's policy is to credit the customer contribution to revenue over 50 years on a straight-line basis, in line with the useful life of the distribution system assets. Software development costs Costs in respect of major developments are capitalised and amortised over the expected life of the software. Capitalised software costs that are not an integral part of the related hardware are included in intangible assets on the balance sheet and amortised over the expected life of the software of up to 10 years. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 2. ACCOUNTING POLICIES (continued) Investments Investments in associates and joint ventures are shown using the equity method. The Group's share of the results of associates and joint ventures is included in the income statement. Fixed asset investments are stated at cost less provision or amounts written off for impairment in value. Inventories Inventories are stated at the lower of cost and net realisable value as follows: Raw materials and goods for resale - purchase cost on an average price basis. Work in progress - cost of direct materials and labour plus attributable overheads based on the normal level of activity less progress payments on short-term contracts. Net realisable value is based on estimated selling price less further costs expected to be incurred to completion and disposal. Long-term contracts Amounts recoverable on long-term contracts, which are included in trade receivables, are stated at the net sales value of the work done less payments on account. Cumulative costs incurred net of amounts transferred to cost of sales, less provision for anticipated future losses on contracts, are included as work in progress in inventories. Leases Rental costs under operating leases are charged to the income statement in equal amounts over the periods of the leases. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 2. accounting policies (continued) Taxation 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 as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantially enacted at the balance sheet date. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the year when the liability is settled or asset realised. The interim tax charge is arrived at by applying the estimated tax rate for the year. Research costs Expenditure on research activities is written off to the income statement in the year in which it is incurred. Debt Debt is initially stated at the amount of the net proceeds after deduction of issue costs. Issue costs are amortised over the period of the related loan. Borrowing costs are allocated to the income statement as incurred. Derivatives The Group may use derivative financial instruments to reduce exposure to foreign exchange risk and interest rate movements. As at 30 June 2005 the Group did not hold any derivative financial instruments. Cash and cash equivalents Loans advanced to the parent company are included within cash and cash equivalents, having a maturity of less than three months. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 2. accounting policies (continued) Pensions The Group contributes to the Electricity Supply Pension Scheme, a defined benefit scheme. The cost of providing benefits is determined using the projected unit credit method, with actuarial valuations being carried out at each December balance sheet date. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of the plan assets or 10% of the defined benefit obligation are spread to income over the employees' expected average remaining working lives. Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average period until the benefits become vested. The cost for the interim period represents 50% of the annual charge as calculated above. The liability recognised in the balance sheet represents the present value of the defined benefit obligation less the fair value of the scheme assets on a bid value basis, together with adjustments for unrecognised actuarial gains and losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the future cash outflows using interest rates of high quality sterling corporate bonds that have terms to maturity approximating to the terms of the related pension liability. The liability at the interim period represents the liability at the beginning of the year as adjusted by the difference between the pension cost calculated above and the contributions paid for the interim period. The Group participates in a defined contribution scheme. Contributions payable to the scheme are charged to the income statement in the period. Differences between contributions payable in the period and contributions actually paid are shown as either accruals or prepayments in the balance sheet. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 3. REVENUE AND SEGMENTAL ANALYSIS The Group operates in two principal areas of activity, that of the distribution of electricity and electrical contracting, predominantly in the United Kingdom. Six months ended 30 June 2005 (Unaudited) Electrical Distribution Contracting Other Total £m £m £m £m REVENUE External 92.8 42.4 0.6 135.8 Inter-segment sales - 14.1 (14.1) - Total Revenue 92.8 56.5 (13.5) 135.8 SEGMENT RESULTS Operating profit 46.5 5.8 10.1 62.4 Share of profits of associates and joint ventures - - 0.3 0.3 Other income - - 4.7 4.7 Finance costs - net (11.1) - 1.5 (9.6) Profit before tax 35.4 5.8 16.6 57.8 OTHER INFORMATION Capital additions 44.8 0.1 (3.1) 41.8 Depreciation and amortisation 15.6 0.2 (0.2) 15.6 Amortisation of deferred revenue (3.2) - - (3.2) "Other" comprises generation, business support units and consolidation adjustments. Interest on loans to and from the different activities is charged at a commercial rate of interest. Sales and purchases between the different activities are made at market prices. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 3. TURNOVER AND SEGMENTAL ANALYSIS (continued) 6 months ended 30 June 2004 (Unaudited) Electrical Distribution Contracting Other Total £m £m £m £m REVENUE External 98.8 43.4 0.6 142.8 Inter-segment sales - 13.6 (13.6) - Total Revenue 98.8 57.0 (13.0) 142.8 SEGMENT RESULTS Operating profit 56.9 5.2 1.7 63.8 Share of profits of associates and joint ventures - - 0.3 0.3 Finance costs - net (10.8) - (0.1) (10.9) Profit before tax 46.1 5.2 1.9 53.2 OTHER INFORMATION Capital additions 44.0 0.1 (2.5) 41.6 Depreciation and amortisation 12.8 0.2 (0.2) 12.8 Amortisation of deferred revenue (2.7) - - (2.7) "Other" comprises generation, business support units and consolidation adjustments. Interest on loans to and from the different activities is charged at a commercial rate of interest. Sales and purchases between the different activities are made at market prices. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 3. TURNOVER AND SEGMENTAL ANALYSIS (continued) Year ended 31 December 2004 (Audited) Electrical Distribution Contracting Other Total £m £m £m £m REVENUE External 193.0 93.5 1.3 287.8 Inter-segment sales - 27.8 (27.8) - Total Revenue 193.0 121.3 (26.5) 287.8 SEGMENT RESULTS Operating profit 106.0 9.9 8.0 123.9 Share of profits of associates and joint ventures - - 0.5 0.5 Other income - - 0.1 0.1 Finance costs - net (21.9) - 1.1 (20.8) Profit before tax 84.1 9.9 9.7 103.7 OTHER INFORMATION Capital additions 100.4 0.3 (3.4) 97.3 Depreciation and amortisation 27.2 0.5 0.1 27.8 Amortisation of deferred revenue (5.6) - - (5.6) "Other" comprises generation, business support units and consolidation adjustments. Interest on loans to and from the different activities is charged at a commercial rate of interest. Sales and purchases between the different activities are made at market prices. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 4. INCOME TAX EXPENSE Six months ended 30 Six months ended 30 Year ended June June 31 December 2005 2004 2004 Unaudited Unaudited Audited £m £m £m Current tax 12.3 13.0 23.9 Deferred tax 6.4 4.3 18.5 18.7 17.3 42.4 Tax for the interim period is calculated by applying the effective average tax rate of 30% (2004: 30%) on profit before preference dividends accrued. Preference dividends are included within finance costs. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 5. PRIOR PERIOD ADJUSTMENT During the year ended 31 December 2004 the accounting policy in relation to interest costs was changed. Interest costs attributable to capital work in progress are now expensed rather than being capitalised. This change in policy was made in order to bring the Group into line with the accounting policies of companies operating in the same sector. The impact on the results for the six months ended 30 June 2004 of the change in accounting policy is as follows: £m Operating costs 0.4 Profit from operations 0.4 Finance costs - net (0.8) Profit before tax (0.4) Tax on profit on ordinary activities 0.1 Profit from ordinary activities after tax (0.3) The impact on the 30 June 2004 balance sheet is as follows: £m Property, plant and equipment (30.4) Deferred income tax liabilities 4.8 Equity (25.6) 6. BORROWINGS On 5 May 2005 the Group issued a £150m 30-year bond at a rate of 5.125%. £100m of the proceeds were invested in a guaranteed investment contract at a rate of 4.75%, which matures on 27 December 2007. 7. DEFERRED TAX Deferred tax of £37.3m (June 2004: £29.5m, December 2004: £37.3m), has been provided for in relation to rollover relief claimed in accordance with IAS 12 " Income Tax". This liability will not result in a cash outflow from the Group. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 8. RELATED PARTY TRANSACTIONS Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and subsidiaries of its parent company and between the Group and its associates are disclosed below. The Group has received/made loans from/to companies in the CE Electric UK Funding Company Group. The total interest included in finance costs in the income statement for the six months ended 30 June 2005 was £3.9m (six months ended 30 June 2004: £2.5m, year ended 31 December 2004: £5.9m). Included within cash and cash equivalents is £203.8m as at 30 June 2005 (30 June 2004: £145.1m, 31 December 2004: £152.9m) and within trade and other payables £15.5m as at 30 June 2005 (30 June 2004: £21.0m, 31 December 2004: £18.7m) in respect of these loans. Interest on loans from/to group companies is charged at a commercial rate of interest. The Group entered into transactions, in the ordinary course of business, with Yorkshire Electricity Distribution plc ("YEDL"), Teesside Power Limited ("TPL") and Vehicle Lease and Service Limited ("VLS"). Transactions entered into and trading balances outstanding were as follows: Purchases Amounts Owed from Related by Related Sales to Party Party Amounts Owed to Related Party Related Party Related Party £m £m £m £m June 2005: YEDL 17.5 - 2.9 - TPL - (0.8) 0.1 - VLS 0.1 3.0 0.4 - June 2004: YEDL 16.5 - - - TPL - (0.1) 0.1 - VLS 0.1 3.0 - 0.3 December 2004: YEDL 39.7 - - - TPL - (0.3) - - VLS 0.2 5.8 1.4 0.3 Sales and purchases from related parties were made at market prices. 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. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 9. NOTES TO THE CASH FLOW STATEMENT Reconciliation of operating profit to net cash from operating activities Six months Six months Year ended ended 30 June ended 30 June 2005 2004 31 December 2004 Unaudited Unaudited Audited £m £m £m Operating profit 62.4 63.8 123.9 Depreciation and amortisation 15.6 12.8 27.8 Amortisation of deferred revenue (3.2) (2.7) (5.6) Decrease in retirement benefit obligation (10.3) (3.1) (7.6) (Decrease)/increase in provisions (0.9) 0.7 1.1 Operating cash flows before movements in working capital 63.6 71.5 139.6 Increase in inventories (8.1) (4.8) (3.4) Decrease in receivables 4.1 13.9 5.4 Decrease in payables (7.3) (5.1) 3.7 Cash generated by operations 52.3 75.5 145.3 Income taxes paid (24.1) (2.9) (10.4) Interest received 7.3 4.4 10.9 Interest paid (9.8) (6.4) (31.5) Net cash from operating activities 25.7 70.6 114.3 10. PENSIONS The principal annual actuarial assumptions used were as follows: 30 June 30 June 31 December 2005 2004 2004 Unaudited Unaudited Audited % % % Discount rate 5.25 5.50 5.50 Expected return on plan assets 7.00 7.00 7.00 Future salary increases 2.75 2.75 2.75 Future pension increases 2.50 2.50 2.50 11. CAPITAL AND OTHER COMMITMENTS The Group has entered into contractual commitments in relation to capital investment of £5.0m (30 June 2004: £4.8m, 31 December 2004: £5.0m). NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS The Group's financial statements for the year ended 31 December 2005 will be the first annual financial statements that comply with IFRS. These interim financial statements have been prepared as described in note 2. The Group has applied IFRS 1, "First-Time Adoption of International Financial Reporting Standards". The Group's transition date is 1 January 2004. The Group prepared its opening IFRS balance sheet at that date. In preparing these interim consolidated financial statements in accordance with IFRS 1, the Group has applied the mandatory exceptions from full retrospective application of IFRS. In addition it has elected to recognise all cumulative pension scheme actuarial gains and losses as at 1 January 2004. SUMMARY RECONCILIATION OF EQUITY 1 January 30 June 31 December Note 2004 2004 2004 Audited Unaudited Audited £m £m £m Total equity under UK GAAP 417.2 477.1 505.0 Prior period adjustment (Note 5) - (25.6) - Total equity under UK GAAP (restated) 417.2 451.5 505.0 Retirement benefit obligations A (51.2) (48.0) (44.7) Restatement of carrying value of TPL B 24.3 25.5 2.7 Reclassification of preference shares C (1.1) (1.1) (1.1) Reversal of deferred tax discount D (58.9) (61.7) (62.5) Recognition of deferred tax on rollover relief claims E (29.5) (29.5) (37.3) Total equity under IFRS 300.8 336.7 362.1 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) RECONCILIATION OF EQUITY AT 1 JANUARY 2004 Effect of Transition to IFRS Note UK GAAP IFRS Audited £m £m £m Non-current assets Property, plant and equipment A, F, G & H 613.6 253.8 867.4 Intangibles H - 7.2 7.2 Investments in associates 2.8 - 2.8 Investments in other companies 0.1 - 0.1 Trade receivables 4.1 - 4.1 620.6 261.0 881.6 Current assets Inventories G 10.7 (1.0) 9.7 Trade and other receivables I 161.0 (110.3) 50.7 Cash and cash equivalents I - 110.3 110.3 171.7 (1.0) 170.7 Total assets 792.3 260.0 1,052.3 Current liabilities Trade and other payables F (66.9) (5.6) (72.5) Current income tax liabilities (17.3) - (17.3) Provisions (7.8) - (7.8) (92.0) (5.6) (97.6) Net current assets 79.7 (6.6) 73.1 Non-current liabilities Borrowings C (198.1) (1.1) (199.2) Deferred income tax liabilities A, D & E (57.1) (66.4) (123.5) Retirement benefit obligations A (3.1) (73.2) (76.3) Deferred revenue F - (254.4) (254.4) Provisions B (24.8) 24.3 (0.5) (283.1) (370.8) (653.9) Total liabilities (375.1) (376.4) (751.5) Net assets 417.2 (116.4) 300.8 EQUITY Share capital C 73.3 (1.1) 72.2 Share premium 158.8 - 158.8 Retained earnings A, B, D & E 178.9 (115.3) 63.6 Other reserves 6.2 - 6.2 Equity attributable to equity holders of the parent 417.2 (116.4) 300.8 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) RECONCILIATION OF EQUITY AT 30 JUNE 2004 UK GAAP Effect of Transition to Restated IFRS Note (Note 5) IFRS Unaudited £m £m £m Non-current assets Property, plant and equipment A, F, G & H 632.8 263.4 896.2 Intangibles H - 7.2 7.2 Investments in associates 2.9 - 2.9 Investments in other companies 0.1 - 0.1 Trade receivables 4.7 - 4.7 640.5 270.6 911.1 Current assets Inventories G 15.5 (1.0) 14.5 Trade and other receivables I 183.6 (145.1) 38.5 Cash and cash equivalents I 0.6 145.1 145.7 199.7 (1.0) 198.7 Total assets 840.2 269.6 1,109.8 Current liabilities Trade and other payables F (66.7) (6.0) (72.7) Current income tax liabilities (27.5) - (27.5) Provisions (8.7) - (8.7) (102.9) (6.0) (108.9) Net current assets 96.8 (7.0) 89.8 Non-current liabilities Borrowings C (198.1) (1.1) (199.2) Deferred income tax liabilities A, D & E (57.2) (70.6) (127.8) Retirement benefit obligations A (4.6) (67.6) (72.2) Deferred revenue F - (264.6) (264.6) Provisions B (25.9) 25.5 (0.4) (285.8) (378.4) (664.2) Total liabilities (388.7) (384.4) (773.1) Net assets 451.5 (114.8) 336.7 EQUITY Share capital C 73.3 (1.1) 72.2 Share premium 158.8 - 158.8 Retained earnings A, B, D & E 213.2 (113.7) 99.5 Other reserves 6.2 - 6.2 Equity attributable to equity holders of the parent 451.5 (114.8) 336.7 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) RECONCILIATION OF EQUITY AT 31 DECEMBER 2004 Effect of Transition to IFRS Note UK GAAP IFRS Audited £m £m £m Non-current assets Property, plant and equipment A, F, G & H 659.8 277.4 937.2 Intangibles H - 6.9 6.9 Investments in associates 3.1 - 3.1 Investments in other companies 0.1 - 0.1 Trade receivables 4.8 - 4.8 667.8 284.3 952.1 Current assets Inventories G 14.1 (1.0) 13.1 Trade and other receivables I 199.1 (152.9) 46.2 Cash and cash equivalents I - 152.9 152.9 213.2 (1.0) 212.2 Total assets 881.0 283.3 1,164.3 Current liabilities Trade and other payables F (69.8) (6.4) (76.2) Current income tax liabilities (30.7) - (30.7) Borrowings (99.9) - (99.9) Provisions (8.0) - (8.0) (208.4) (6.4) (214.8) Net current assets/(liabilities) 4.8 (7.4) (2.6) Non-current liabilities Borrowings C (98.3) (1.1) (99.4) Deferred income tax liabilities A, D & E (61.4) (80.6) (142.0) Retirement benefit obligations A (4.8) (62.0) (66.8) Deferred revenue F - (278.8) (278.8) Provisions B (3.1) 2.7 (0.4) (167.6) (419.8) (587.4) Total liabilities (376.0) (426.2) (802.2) Net assets 505.0 (142.9) 362.1 EQUITY Share capital C 73.3 (1.1) 72.2 Share premium 158.8 - 158.8 Retained earnings A, B, D & E 266.7 (141.8) 124.9 Other reserves 6.2 - 6.2 Equity attributable to equity holders of the parent 505.0 (142.9) 362.1 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) RECONCILIATION OF NET INCOME FOR 6 MONTHS ENDED 30 JUNE 2004 UK GAAP Restated Effect of Transition to (Note 5) IFRS Note IFRS Unaudited £m £m £m Revenue F 140.1 2.7 142.8 Cost of sales (45.2) - (45.2) Gross profit 94.9 2.7 97.6 Distribution costs F (22.6) (2.7) (25.3) Administrative expenses A (13.1) 4.6 (8.5) Operating profit 59.2 4.6 63.8 Share of profits of associates and joint ventures B 1.3 (1.0) 0.3 Finance costs - net B & C (9.0) (1.9) (10.9) Profit before tax 51.5 1.7 53.2 A, B, D & E Income tax expense (12.7) (4.6) (17.3) Profit from ordinary activities after tax 38.8 (2.9) 35.9 Dividends C (4.5) 4.5 - Retained Profit 34.3 1.6 35.9 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) RECONCILIATION OF NET INCOME FOR YEAR ENDED 31 DECEMBER 2004 Effect of Transition to IFRS Note UK GAAP IFRS Audited £m £m £m Revenue F 282.2 5.6 287.8 Cost of sales (94.1) - (94.1) Gross profit 188.1 5.6 193.7 Distribution costs F (43.6) (5.6) (49.2) Administrative expenses A (29.9) 9.3 (20.6) Operating profit 114.6 9.3 123.9 Share of profits of associates and joint ventures B 36.3 (35.8) 0.5 Other income 0.1 - 0.1 Finance costs - net B & C (18.0) (2.8) (20.8) Profit before tax 133.0 (29.3) 103.7 Income tax expense A, B, D & (36.2) (6.2) (42.4) E Profit from ordinary activities after tax 96.8 (35.5) 61.3 Dividends C (9.0) 9.0 - Retained Profit 87.8 (26.5) 61.3 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) RECONCILIATION OF CASH FLOWS Loans advanced to the parent company are included within cash and cash equivalents, having a maturity of less than three months. Taxation outflows of £2.9m in relation to the 6 months ended 30 June 2004 and £10.4m in respect of the year ended 31 December 2004 are included within operating cash flows. Under UK GAAP these were shown as a separate category on the cash flow statement. Finance cost outflows of £2.0m in relation to the 6 months ended 30 June 2004 and £20.6m in respect of the year ended 31 December 2004 are included within operating cash flows. Under UK GAAP these were shown within returns on investments and servicing of finance. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) NOTES A - Retirement benefit obligation Deferred income tax Property, plant Retirement liabilities and equipment benefit obligation Equity £m £m £m £m Recognition of actuarial loss not recognised under UK GAAP at date of transition 1 January 2004 - (73.2) 22.0 (51.2) Adjustment to pension costs in accordance with IAS 19 (1.0) 5.6 - 4.6 Deferred tax on cost adjustment - - (1.4) (1.4) Impact on equity at 30 June 2004 (1.0) (67.6) 20.6 (48.0) Adjustment to pension costs in accordance with IAS 19 (0.9) 5.6 - 4.7 Deferred tax on cost adjustment - - (1.4) (1.4) Impact on equity at 31 December 2004 (1.9) (62.0) 19.2 (44.7) NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) NOTES (continued) B - Investment in associates and joint ventures Unlike UK GAAP there is no requirement under IFRS to carry an associate or a joint venture at a negative value unless there is an obligation to fund that deficit. Long-term Provisions Equity £m £m Reversal of negative carrying value for investment in associate at date of transition 1 January 2004 24.3 24.3 Reversal of share of associate's operating profit (0.9) (0.9) Reversal of share of associate's finance expense 2.6 2.6 Reversal of share of associate's tax expense (0.5) (0.5) Impact on equity at 30 June 2004 25.5 25.5 Reversal of share of associate's operating profit (34.5) (34.5) Reversal of share of associate's finance expense 3.4 3.4 Reversal of share of associate's tax expense 8.3 8.3 Impact on equity at 31 December 2004 2.7 2.7 The share of the profits of an associate or joint venture is shown as a single line item on the income statement in accordance with IFRS. Under UK GAAP the share of the operating results, net finance cost and income tax expense are included separately in the income statement. Six months Year ended 31 ended 30 June December 2004 2004 £m £m Share of profits of associates and joint ventures (0.1) (0.4) Finance costs - net - 0.2 Income tax expense 0.1 0.2 C - Preference shares Preference shares totalling £1.1m, previously included within share capital have been reclassified to non-current borrowings. Dividends payable of £4.5m for the six months ended 30 June 2004 and £9.0m for the year ended 31 December 2004 on these shares have been reclassified from dividends to finance costs. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) NOTES (continued) D - Deferred tax discount Deferred tax under IFRS is calculated on a gross basis whereas under UK GAAP the gross liability was discounted if material. Deferred income tax liabilities Equity £m £m Reversal of deferred tax discount at date of transition 1 January 2004 (58.9) (58.9) Reversal of discount in tax expense (2.8) (2.8) Impact on equity at 30 June 2004 (61.7) (61.7) Reversal of discount in tax expense (0.8) (0.8) Impact on equity at 31 December 2004 (62.5) (62.5) E - Deferred tax on rollover relief claims In accordance with IFRS deferred tax has been provided on chargeable gains that have been rolled over into qualifying replacement capital expenditure. Deferred income tax liabilities Equity £m £m Recognition of deferred tax on rollover relief claims at date of transition 1 January 2004 (29.5) (29.5) Recognition of tax expense on rollover relief claimed - - Impact on equity at 30 June 2004 (29.5) (29.5) Recognition of tax expense on rollover relief claimed (7.8) (7.8) Impact on equity at 31 December 2004 (37.3) (37.3) NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) NOTES (continued) F - Customer contributions In accordance with IFRS, customer contributions are recorded on the balance sheet as deferred. Under UK GAAP they were netted against property, plant and equipment. The amortisation of the deferred revenue is included in revenue, as opposed to a reduction in the deprecation charge. Property, Trade and plant and other equipment payables Deferred revenue £m £m £m Reclassification at date of transition 1 January 2004 260.0 (5.6) (254.4) Additions 13.3 - (13.3) Released to the income statement (2.7) - 2.7 Reclassification - (0.4) 0.4 Impact at 30 June 2004 270.6 (6.0) (264.6) Additions 17.5 - (17.5) Released to the income statement (2.9) - 2.9 Reclassification - (0.4) 0.4 Impact at 31 December 2004 285.2 (6.4) (278.8) NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) NOTES (continued) G - Strategic spares Strategic spares that can only be used in connection with an item of property, plant and equipment and the use of which is expected to be irregular, are accounted for as fixed assets and are depreciated over a time period not exceeding the useful life of the related asset. Property, plant and equipment Inventories £m £m Reclassification at date of transition 1 January 2004 1.0 (1.0) Net additions - - Impact on equity at 30 June 2004 1.0 (1.0) Net additions - - Impact on equity at 31 December 2004 1.0 (1.0) H - Software costs Capitalised software costs that are not an integral part of the related hardware are treated as an intangible asset on the balance sheet. Property, plant and equipment Intangibles £m £m Reclassification at date of transition 1 January 2004 (7.2) 7.2 Net additions (1.2) 1.2 Depreciation and amortisation 1.2 (1.2) Impact at 30 June 2004 (7.2) 7.2 Net additions (0.6) 0.6 Depreciation and amortisation 0.9 (0.9) Impact at 31 December 2004 (6.9) 6.9 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) NOTES (continued) I - Cash and cash equivalents Loans advanced to the parent company of £110.3m as at 1 January 2004, £145.1m as at 30 June 2004 and £152.9m as at 31 December 2004 have been reclassified from trade and other receivables to cash and cash equivalents, having a maturity of less than three months. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) NOTES (continued) SUMMARY INCOME STATEMENT Finance costs - Income tax expense net £m £m 6 months ended 30 June 2004 (A) Retirement benefit obligations - (1.4) (B) Investment in associate 2.6 (0.4) (C) Preference shares (4.5) - (D) Deferred tax discount - (2.8) (E) Deferred tax on rollover relief claims - - Net impact of adoption of IFRS (1.9) (4.6) Year ended 31 December 2004 (A) Retirement benefit obligations - (2.8) (B) Investment in associate 6.2 8.0 (C) Preference shares (9.0) - (D) Deferred tax discount - (3.6) (E) Deferred tax on rollover relief claims - (7.8) Net impact of adoption of IFRS (2.8) (6.2) NORTHERN ELECTRIC plc INTERIM REPORT SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) NOTES (continued) SUMMARY BALANCE SHEET Property, Deferred income plant and tax liabilities equipment £m £m 1 January 2004 (A) Retirement benefit obligations - 22.0 (D) Deferred tax discount - (58.9) (E) Deferred tax on rollover relief claims - (29.5) (F) Customer contributions 260.0 - (G) Strategic spares 1.0 - (H) Software costs (7.2) - Net impact of adoption of IFRS 253.8 (66.4) 30 June 2004 (A) Retirement benefit obligations (1.0) 20.6 (D) Deferred tax discount - (61.7) (E) Deferred tax on rollover relief claims - (29.5) (F) Customer contributions 270.6 - (G) Strategic spares 1.0 - (H) Software costs (7.2) - Net impact of adoption of IFRS 263.4 (70.6) 31 December 2004 (A) Retirement benefit obligations (1.9) 19.2 (D) Deferred tax discount - (62.5) (E) Deferred tax on rollover relief claims - (37.3) (F) Customer contributions 285.2 - (G) Strategic spares 1.0 - (H) Software costs (6.9) - Net impact of adoption of IFRS 277.4 (80.6) This information is provided by RNS The company news service from the London Stock Exchange