Independent auditor's report
To: the general meeting of shareholders and supervisory board of Alliander N.V
Report on the financial statements
In our opinion:
- the consolidated financial statements give a true and fair view of the financial position of Alliander N.V. as at 31 December 2015 and of its result and cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union (EU-IFRS) and with Part 9 of Book 2 of the Dutch Civil Code;
- the company financial statements give a true and fair view of the financial position of Alliander N.V. as at 31 December 2015 and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code.
What we have audited
We have audited the financial statements 2015 of Alliander N.V., Arnhem (‘the company’). The financial statements include the consolidated financial statements of Alliander N.V. and its subsidiaries (together: ‘the Group’) and the company financial statements.
The consolidated financial statements comprise:
- the consolidated statement of financial position as at 31 December 2015;
- the following statements for 2015: the consolidated income statement, the consolidated statements of comprehensive income, changes in equity and cash flows; and
- the notes, comprising a summary of significant accounting policies and other explanatory information.
- The company financial statements comprise:
- the company balance sheet as at 31 December 2015;
- the company profit and loss account for the year then ended; and
- the notes, comprising a summary of the accounting policies and other explanatory information.
The financial reporting framework that has been applied in the preparation of the financial statements is EU-IFRS and the relevant provisions of Part 9 of Book 2 of the Dutch Civil Code for the consolidated financial statements and Part 9 of Book 2 of the Dutch Civil Code for the company financial statements.
The basis for our opinion
We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. Our responsibilities under those standards are further described in the “Our responsibilities for the audit of the financial statements” section of our report.
We are independent of Alliander N.V. in accordance with the “Verordening inzake de onafhankelijkheid van accountants bij assurance-opdrachten” (ViO) and other relevant independence requirements in the Netherlands. Furthermore, we have complied with the “Verordening gedrags- en beroepsregels accountants” (VGBA).
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Our audit approach
We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the management board made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain, such as judgements with respect to goodwill, provisions, ‘precario’, grid losses, useful lives and impairments of fixed assets, (deferred) tax positions and the provisional accounting of acquisition and divestment of group companies. As in all of our audits, we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the management board that may represent a risk of material misstatement due to fraud.
We ensured that the audit team included the appropriate skills and competences which are needed for the audit of an energy network company and grid operator. We therefore included specialists in the areas of IT, taxes, treasury, valuation, regulation and corporate governance in our team.
- Overall materiality: € 10 million, which represents 0.75% of total expenses.
- We paid particular attention in our audit work to the significant components Alliander N.V. and Liander N.V.
- Special attention was given – besides the key audit matters mentioned below – to the expiration of the credit default swap and the release of the related provision, claims and litigations against the entity, the remuneration of the management board and the supervisory board and the internal control including the business control framework.
- Audit coverage: 95% of consolidated revenue and 90% of consolidated total assets.
Key audit matters
- Useful lives of property, plant and equipment
- Divestment of Endinet Groep B.V. and acquisition of Aktivabedrijf Enexis Friesland B.V.
- Uncertain income tax positions
- Strip risk with respect to cross border lease transactions
The scope of our audit is influenced by the application of materiality which is further explained in the section ‘Our responsibilities for the audit of the financial statements’.
We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and to evaluate the effect of identified misstatements on our opinion.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall group materiality
€ 10 million (2014: € 10 million).
How we determined it
0.75% of total expenses.
Rationale for benchmark applied
We have applied this benchmark, a generally accepted auditing practice, based on our analysis of the common information needs of users of the financial statements and the importance of expenses in a regulatory environment. Grid companies are responsible for maintaining the energy grids, distributing energy to customers and connecting customers to the energy grids. Alliander’s revenues are regulated as well as non-regulated. The regulated revenues result from distributing electricity and gas to customers and connecting customers to the energy grids and consist of fixed components, being the allowed capacity fee set by the Dutch Authority Consumer & Markets (‘ACM’). The allowed capacity fee is based on the incurred expenses with respect to the regulatory environment.
To each component in our audit scope, we, based on our judgement, allocate materiality that is less than our overall group materiality. The range of materiality allocated across components was between €6 and €9 million.
We also take misstatements and/or possible misstatements into account that, in our judgment, are material for qualitative reasons.
We agreed with the supervisory board that we would report to them misstatements identified during our audit above €1 million (2014: €1 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. We reported all identified misstatements, including misstatements below €1 million, to the management board. These identified misstatements have been adjusted.
The scope of our group audit
Alliander N.V. is head of a group of entities. The financial information of this group is included in the consolidated financial statements of Alliander N.V.
The group audit focussed on the significant components Alliander N.V. and Liander N.V. Additionally, we audited the group’s consolidation, the notes and disclosures in the financial statements. All audit work at all group components was performed by the same audit team.
Components Alliander N.V. and Liander N.V. were subjected to audits of their complete financial information as those components are individually significant to the group. The remaining components were subjected to specific risk-focussed audit procedures as they include significant or higher risk areas.
In total, in performing these procedures, we achieved the following coverage on the financial line items:
- Revenue 95%
- Total assets 90%
- Profit before tax 88%
None of the remaining components represented more than 3% of the consolidated revenue or total consolidated assets. For those remaining components we performed, amongst others, analytical procedures to corroborate our assessment that there were no significant risks of material misstatements within those components.
By performing the procedures above at the group components, combined with additional procedures at group level, we have obtained sufficient and appropriate audit evidence regarding the financial information of the group as a whole to provide a basis for our opinion on the consolidated financial statements.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements. We have communicated the key audit matters to the supervisory board, but they are not a comprehensive reflection of all matters that were identified by our audit and that we discussed. We described the key audit matters and included a summary of the audit procedures we performed on those matters.
The key audit matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon. We do not provide a separate opinion on these matters or on specific elements of the financial statements. Any comments we make on the results of our procedures should be read in this context.
The key audit matters ‘Useful lives of property, plant and equipment’, ‘Uncertain income tax positions’ and ‘Strip risk with respect to cross border lease transactions’ are just as last year a key audit matter. The divestment of Endinet Group B.V. and acquisition of Aktivabedrijf Enexis Friesland B.V.’ is a new key audit matter. The in 2014 reported key audit matter ‘Valuation of the Credit Default Swaps (CDS) including the provision for the risk related to the CDS’ is no longer a key audit matter for our audit due to the expiration of the CDS and release of the provision.
Key audit matter
How our audit addressed the matter
Useful lives of property, plant and equipment
The disclosures to the property, plant and equipment are included in the accounting policies and notes 3, 26 and 35.
The useful lives of property, plant and equipment has been identified as a key audit matter as property, plant and equipment is the most significant balance sheet item in the financial statements and given the subjectivity of the assessment of the useful lives. The carrying value of property, plant and equipment as at 31 December 2015 amounts to € 5.9 billion, divided in land and buildings, grids, other plant and equipment, and assets under construction. Based on EU-IFRS, the management board is required to annually reconsider the useful lives of property, plant and equipment. Due to the carrying value amounting to € 5.0 billion, the reconsideration of the useful lives of grids was especially significant for our audit. As a result of the continuous developments in the energy landscape, which are relevant to all grid companies, the estimates of useful lives of electricity and gas grids are affected by market and technological developments, regulatory and political considerations, combined with choices in maintenance and investment plans. This implies that the process of reconsidering useful lives is complex, requires management judgement on underlying assumptions, and is inherently subjective. In 2015 the management board extensively evaluated the useful lives of property, plant and equipment with specific attention for the gas grids and traditional meters. This evaluation did not result in any adjustments of the useful lives of property, plant and equipment.
As part of our audit work, we tested the reasonable and consistent application of the underlying assumptions in the annual evaluation performed by management of the useful lives and the carrying value as at 31 December 2015 of separate groups of assets, such as meters, cables and pipes, and substations, taking into account aforementioned developments. We used, among others, known maintenance data and planned investments, based on the company’s long-term strategic plans. The company has performed an additional analysis regarding the useful life of the gas grids given the developments in the energy transition. From this analysis, among other things, it was concluded that on the basis of IAS 16 the economic useful life is equal to the regulatory useful lifetime, so that costs and revenues are realized simultaneously and that the company has a legal obligation to provide access to and to maintain the gas and electricity grids.
Key audit matter
How our audit addressed the matter
Divestment Endinet Groep B.V. and acquisition of Aktivabedrijf Enexis Friesland B.V.
The disclosures to these transactions are included in the accounting policies and note 36.
On 27 July 2015 Alliander N.V. and Enexis Holding N.V. agreed to exchange a part of their grids. On 1 January 2016 Alliander N.V. acquired the shares of Aktivabedrijf Enexis Friesland B.V. (grids in Friesland and the Noordoostpolder) from Enexis Holding N.V. On the same date Alliander N.V. sold their shares of Endinet Groep B.V. (grids in the Eindhoven region and South-East Brabant) to Enexis Holding N.V. As at 31 December 2015 Endinet Groep B.V. is recognized as ' assets and liabilities held for sale ' and presented as 'result from discontinued operations '. The transaction has resulted in a provisional payment of € 365 million in January 2016 by Enexis Holding N.V. to Alliander N.V. The valuation of the exchanged grids determines the book profit on the sold shares and the goodwill for the acquired shares.
As part of our audit procedures, we have assessed the aforementioned agreement and other legal documents that are related to these transactions. We have ascertained that Endinet Groep B.V. has been recognized in accordance with IFRS 5 as ‘assets and liabilities held for sale ' and as ‘result from discontinued operations '. We have ascertained that the provisional payment by the bank is received. Supported by our valuation specialists, we have audited the calculations of the (provisional) fair value of Endinet Group B.V. and the (provisional) purchase price of the shares of Aktivabedrijf Enexis Friesland B.V. We have reviewed the assumptions used by the management board in relation to the cash flow forecasts for the (medium)long term, regulatory developments, outperformance effects and synergy benefits. The competence and objectivity of the external experts have been assessed by us. Finally, we audited whether the transactions, including the main uncertainties, have been appropriately disclosed in the financial statements in accordance with IFRS 3 as a subsequent event after the balance sheet date.
Key audit matter
How our audit addressed the matter
Uncertain income tax positions
The disclosures to the uncertain income tax positions are included in note 20.
The uncertain income tax position has been identified as a key audit matter as this ongoing disagreement between Alliander N.V. and the tax authority results in a significant uncertainty. In November 2010, Alliander issued a subordinated perpetual bond with a nominal amount of € 500 million, which was redeemed in 2013. According to EU-IFRS, this instrument classifies as equity. The paid periodic compensation to the bond holders was considered by management to be deductible for corporate income tax purposes. The Dutch tax authorities did not accept this deduction of periodic compensation. In 2015 the appeal of Alliander to this decision was dismissed by the tax authorities. On 23 April 2015 Alliander N.V. has submitted a notice of appeal against this decision and this lawsuit is ongoing. The management board estimates the maximum impact for Alliander at year-end 2015 to be between € 20 million and € 30 million, based on the income tax for the periodic compensations for the years 2010 to 2013, increased with estimated legal interest. Based on written opinions by external legal and tax experts, the management board concludes that it is highly probable that Alliander’s position in the tax declaration is accepted in the end. Therefore, no provision has been recognised.
Supported by our tax specialists, we read, among other things, the correspondence between the tax authorities, Alliander N.V. and the external experts which were appointed by the management board. We reviewed the management board estimate and verified its reasonableness and the supporting level of documentation. We assessed the level of expertise and the independence of the external experts. Additionally, we verified the adequate disclosure in the financial statements of the uncertain income tax positions.
Key audit matter
How our audit addressed the matter
Strip risk with respect to cross border lease transactions
The disclosures to the cross border lease transactions are included in the accounting policies and notes 3, 19, and 34.
The 'strip risk 'of the cross border lease transactions has been identified as a key audit matter as this is a significant off-balance liability with respect to the cross border lease contracts. The ‘strip risk’ is the portion of the ‘termination value’, which cannot be settled from the deposits and investments held for this purpose in the event of early termination of a cross border lease transaction by Alliander. At year-end 2015, the ‘strip risk’ for all transactions amounts to $ 180 million (year-end 2014: $ 194 million). The level of the ‘strip risk’ is significantly affected by the interest developments in the United States. Alliander N.V. is not contractually obliged to cooperate with an offer of an investor for an early termination of a CBL. Based on a consideration of the costs in relation to the decrease of the risk that the company will realize, the management board may decide to accept the offer of an investor for termination of a lease. In 2015 the ENW-transactions have been ended at the request of the investor.
We tested the accurate calculation of the ‘strip risk’. We reconciled the ‘termination value’ with the lease contracts. The value of the deposits and investments was reconciled to confirmations of independent and professional third parties. Based on the contracts, we verified that the company is entitled to not early terminating the contracts and that the company is not liable at the moment and in future for any deficits, as long as the contracts are not terminated early. The management board confirmed to us that Alliander has no intentions to early terminating the contracts. This confirmation is consistent with other audit evidence we obtained, including reading minutes of management board meetings and attending meetings of the audit committee and supervisory board. We also audited that the early termination ENW-transactions on initiative of the investor has been adequately accounted for. Finally we reviewed and determined that the cross border lease positions, including the ‘strip risk’ are adequately disclosed in the financial statements.
Responsibilities of the management board and the supervisory board
The management board is responsible for:
- the preparation and fair presentation of the financial statements in accordance with EU-IFRS and with Part 9 of Book 2 of the Dutch Civil Code, and for the preparation of the management board report in accordance with Part 9 of Book 2 of the Dutch Civil Code, and for
- such internal control as the management board determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
As part of the preparation of the financial statements, the management board is responsible for assessing the company’s ability to continue as a going concern. Based on the financial reporting frameworks mentioned, the management board should prepare the financial statements using the going concern basis of accounting unless the management board either intends to liquidate the company or to cease operations, or has no realistic alternative but to do so. The management board should disclose events and circumstances that may cast significant doubt on the company’s ability to continue as a going concern in the financial statements.
The supervisory board is responsible for overseeing the company’s financial reporting process.
Our responsibilities for the audit of the financial statements
Our responsibility is to plan and perform an audit engagement to obtain sufficient and appropriate audit evidence to provide a basis for our opinion. Our audit opinion aims to provide reasonable assurance about whether the financial statements are free from material misstatement. Reasonable assurance is a high but not absolute level of assurance which makes it possible that we may not detect all misstatements. Misstatements may arise due to fraud or error. They are considered to be material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
A more detailed description of our responsibilities is set out in the appendix to our report.
Report on other legal and regulatory requirements
Our report on the management board report and the other information
Pursuant to the legal requirements of Part 9 of Book 2 of the Dutch Civil Code (concerning our obligation to report about the management board report and other information):
- We have no deficiencies to report as a result of our examination whether the management board report, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required by Part 9 of Book 2 of the Dutch Civil Code has been annexed.
- We report that the management board report, to the extent we can assess, is consistent with the financial statements.
We were appointed as auditors of Alliander N.V. by the supervisory board following the passing of a resolution by the shareholders at the annual meeting held on 8 April 2015. The year 2015 is our last year as external auditor of the company as a result of the current regulation for rotation of audit firms.
Amsterdam, 23 February 2016
PricewaterhouseCoopers Accountants N.V.
Original Dutch version signed by:
drs. R. Dekkers RA
Appendix to our auditor’s report on the financial statements 2015 of Alliander N.V.
In addition to what is included in our auditor’s report we have further set out in this appendix our responsibilities for the audit of the financial statements and explained what an audit involves.
The auditor’s responsibilities for the audit of the financial statements
We have exercised professional judgment and have maintained professional scepticism throughout the audit in accordance with Dutch Standards on Auditing, ethical requirements and independence requirements. 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. Our audit consisted, among others of:
- Identifying and assessing the risks of material misstatement of the financial statements, whether due to fraud or error, designing and performing audit procedures responsive to those risks, and obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the intentional override of internal control.
- Obtaining an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control.
- Evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the management board.
- Concluding on the appropriateness of the management board’s use of the going concern basis of accounting, and based on the audit evidence obtained, concluding whether a material uncertainty exists related to events and/or conditions that may cast significant doubt on the company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report and are made in the context of our opinion on the financial statements as a whole. However, future events or conditions may cause the company to cease to continue as a going concern.
- Evaluating the overall presentation, structure and content of the financial statements, including the disclosures, and evaluating whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
We communicate with the supervisory board regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We provide the supervisory board with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with the supervisory board, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, not communicating the matter is in the public interest.