Independent auditor's report
To: the Shareholder and Supervisory Board of TenneT Holding B.V.
Report on the audit of the financial statements 2016 included in the integrated annual report
We have audited the financial statements 2016 of TenneT Holding B.V., based in Arnhem. The financial statements include the consolidated financial statements and the company financial statements.
In our opinion:
- The accompanying consolidated financial statements give a true and fair view of the financial position of TenneT Holding B.V. as at 31 December 2016, and of its result and its cash flows for 2016 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 accompanying company financial statements give a true and fair view of the financial position of TenneT Holding B.V. as at 31 December 2016, and of its result for 2016 in accordance with Part 9 of Book 2 of the Dutch Civil Code.
The consolidated financial statements comprise:
- The consolidated statement of financial position as at 31 December 2016;
- The following statements for 2016: the consolidated statement of income, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows;
- The notes comprising a summary of the significant accounting policies and other explanatory information.
The company financial statements comprise:
- The company statement of financial position as at 31 December 2016;
- The company statement of income statement of income for 2016;
- The notes comprising a summary of the accounting policies and other explanatory information.
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 TenneT Holding B.V. in accordance with the Verordening inzake de onafhankelijkheid van accountants bij assurance-opdrachten (ViO, Code of Ethics for Professional Accountants, a regulation with respect to independence) and other relevant independence regulations in the Netherlands. Furthermore we have complied with the Verordening gedrags- en beroepsregels accountants (VGBA, Dutch Code of Ethics).
We believe the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
|Materiality||EUR 58 million|
|Benchmark applied||1.4% of total equity (excluding capital contribution by the sole shareholder of EUR 780 million in December 2016)|
|Explanation||In 2016 we have determined total equity (excluding capital contribution by the sole shareholder of EUR 780 million in December 2016) to be the most relevant measure for TenneT’s primary stakeholders, being the Dutch State (as the sole shareholder) and external investors in both equity and liability instruments of the group. A sufficient equity balance and solvency ratio is in our view the most relevant measure for the capital providers to make their investment decisions, also considering the long-term nature of TenneT’s core business.|
We have also taken misstatements into account and/or possible misstatements that in our opinion are material for the users of the financial statements for qualitative reasons.
We agreed with the supervisory board that misstatements in excess of EUR 2.9 million (being 5% of the materiality), which are identified during the audit, would be reported to them, as well as smaller misstatements that in our view must be reported on qualitative grounds.
Scope of the group audit
TenneT Holding B.V. is at the head of a group of entities. The financial information of this group is included in the consolidated financial statements of TenneT Holding B.V.
Our group audit mainly focused on the regulated significant group entities TSO Netherlands TSO Germany and BritNed (non-regulated). In establishing the overall approach to the group audit, we determined the type of work that needed to be performed at the reporting units within these business segments, either by us, as the group engagement team, or component auditors within EY Netherlands and EY Germany operating under our instruction. Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the group financial statements as a whole. Accordingly, we identified that the consolidated group entities TSO Netherlands and TSO Germany, which both consist of multiple entities, required an audit of their complete financial information due to their size.
Specific audit procedures on certain balances and transactions were performed at BritNed. These specific audit procedures were performed by a non-EY auditor. Based on the extent of reliance on the non-EY auditor, we determined the level of involvement needed to conclude whether sufficient audit evidence had been obtained as a basis for our opinion on the Group financial statements as a whole.
The procedures described above provide coverage of 100% of reported profit before tax and 93% of the total assets of the Group.
By performing the procedures mentioned above at group entities, together with additional procedures at group level, we have been able to obtain sufficient and appropriate audit evidence about the group’s financial information to provide an opinion about the consolidated financial statements.
Our key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements. We have communicated the key audit matters to the supervisory board. The key audit matters are not a comprehensive reflection of all matters discussed.
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.
|Topic||Our audit respons|
|TenneT’s 'underlying' financial performance reflected in Segment Reporting (IFRS 8), as disclosed in note 2 of the financial statements|
|The Executive Board manages and monitors its business based upon 'underlying' financial information, as explained in note 2 ‘Segment Information’. The underlying financial information is also used in the ‘Financial’ section of the Executive Board report. The consolidated IFRS financial statements and the underlying financial information differ with respect to the recognition of regulatory assets, regulatory liabilities and auction proceeds related to cross border interconnection capacity. The implications are primarily that auction proceeds and over- and underachievement on the regulatory allowed revenue for a given period, which are presented as revenues in the IFRS financial statements, are presented as assets or liabilities in the underlying financial information if, based on the prevailing regulatory framework, these can be recouped or are required to be returned through future grid tariffs. TenneT’s Executive Board is convinced that underlying financial information better represents its actual business and financial performance, and therefore uses it for the Executive Board reporting and analysis, as well as for internal decision-making and financial planning purposes. As such we conclude that the underlying financial information is a key audit matter. The underlying financial information is reconciled to the consolidated financial statements in note 2.||We have assessed whether the underlying financial information reflects how TenneT’s Executive Board assesses performance and manages the business, by reference to the internal quarterly reporting and other internal financial reports and analyses, including minutes of board meetings. We obtained the internal quarterly reporting that the Executive Board receives and reconciled that information to the segments identified in the segment reporting. We have obtained an understanding of the regulatory frameworks in the Netherlands and Germany, and of relevant regulatory developments. We audited the movements in respect of the underlying regulatory assets and liabilities referenced above and the reconciliation of underlying financial information to the consolidated financial statements.|
|Growth in renewable energy sources and the implications for Grid Expenses, as disclosed in note 3.2.1 and 5.6.3 of the financial statements|
|The increase in intermittent renewable energy generation, such as onshore and offshore wind and onshore photovoltaic capacity impacts the German onshore grid significantly. TenneT needs to ensure a stable grid operation and to achieve this, balancing measures are needed. The number of measures has grown compared to prior years, and, consequently, the related expenses increased significantly. When balancing measures executed by TenneT reduce the in-feed of renewable energy into the onshore grid, operators are entitled to a reimbursement. These reimbursements are current year expenses for TenneT, but, under the regulatory framework, they are reimbursed through tariffs 2 years later. In the past years, the balancing measures have significantly increased, resulting in a significant increase in the System Services line of the Grid Expenses. As such we conclude that this topic is a key audit matter.||We have obtained a detailed understanding of TenneT’s estimation process in relation to the accrual for balancing measures and other grid related expenses. TenneT is depending on local Distribution System Operators (‘DSOs’) to provide detailed information on the manner in which they effect the measures that TenneT takes, as they are responsible for the execution of the measures. We obtained and audited evidence to support the Executive Board’s estimates and key assumptions used in establishing the related accruals, in particular price assumptions, the type of renewable energy producer (onshore/offshore wind; photovoltaic) and the reduction in volume for the renewable energy producers and agreed these key metrics back to underlying sources. We also tested the integrity of the measurement model, including the formulas applied in the model.|
|Offshore related provisions, as disclosed in note 5.7 of the financial statements|
|Offshore grid connections and related undersea cabling and landside stations, which are required to be built by TSO Germany to connect offshore wind farms to the onshore high voltage grid, are in various stages of construction. The engineering, procurement and construction of these projects is complex, large in size and executed in parallel for a number of projects. As such we conclude that this topic is a key audit matter. In prior years, the liability risks resulting from delays or interruptions, asset retirement obligations and specific project related risks led to the recognition of significant provisions in the financial statements. With 1 project completed during 2016 and as TenneT gained more experience with the operation of offshore platforms, including the successful solution of technical issues in the start-up phase, the Executive Board's ongoing assessment of offshore risks and offset by an increase in numbers of projects, resulted in a limited net increase of provisions during the year.||We obtained evidence to support the Executive Board’s estimates and key assumptions used in establishing the various provisions, in particular probability assumptions. We also tested the integrity of the measurement model, including the formulas applied therein. We evaluated the reasonableness of the Executive Board’s judgements and assumptions applied in measuring the provisions recognised on the group’s statement of financial position as well as the disclosures included in Note 5.7.|
|Third-party claims, as disclosed in note 5.7.3 and 7.2.4 of the financial statements|
|Claims may relate to TenneT’s operations or specific elements of the regulatory framework. These claims are either provided for or disclosed as a contingent liability in the financial statements. The claims are a key element of our audit as they are material and the board makes assumptions about the legal position, the likelihood, and the impact of the expected future cash outflow related to these claims. For this, the board relies on internal and external advisors.||We validated the estimates of the management board with occurring correspondence with legal counterparties, minutes of meetings, external lawyer letters, and opinions from internal legal and regulatory advisors. Based on our work, we conclude that the claims are either sufficiently provided for in the financial statements or disclosed therein.|
Report on other information included in the integrated annual report
In addition to the financial statements and our auditor’s report thereon, the integrated annual report
contains other information that consists of:
- 2016 at a glance;
- Letter from the CEO;
- The Executive Board report;
- Supervisory Board report;
- Governance and risk management;
- Other information pursuant to Part 9 of Book 2 of the Dutch Civil Code.
Based on the following procedures performed, we conclude that the other information:
- Is consistent with the financial statements and does not contain material misstatements;
- Contains the information as required by Part 9 of Book 2 of the Dutch Civil Code.
We have read the other information. Based on our knowledge and understanding obtained through our audit of the financial statements or otherwise, we have considered whether the other information
contains material misstatements. By performing these procedures, we comply with the requirements of Part 9 of Book 2 of the Dutch Civil Code and the Dutch Auditing Standard 720. The scope of the procedures
performed is less than the scope of those performed in our audit of the financial statements.
Management is responsible for the preparation of the other information, including the Executive Board report in accordance with Part 9 of Book 2 of the Dutch Civil Code and other information pursuant to Part 9 of Book 2 of the Dutch Civil Code.
Report on other legal and regulatory requirements
We were engaged by the Supervisory Board as auditor of TenneT Holding B.V. on 14 March 2013, as of the audit for the year 2013 and have operated as statutory auditor ever since that date.
Description of responsibilities for the financial statements
Responsibilities of the Executive Board and the Supervisory Board for the financial statements
The Executive Board is responsible for the preparation and fair presentation of the financial statements in accordance with EU-IFRS and Part 9 of Book 2 of the Dutch Civil Code. Furthermore, the Executive Board is responsible for such internal control as the Executive Board determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error.
As part of the preparation of the financial statements, the Executive Board is responsible for assessing the company’s ability to continue as a going concern. Based on the financial reporting frameworks mentioned, the Executive Board should prepare the financial statements using the going concern basis of accounting unless the Executive Board either intends to liquidate the company or to cease operations, or has no realistic alternative but to do so. The Executive 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.
One of the Supervisory Board responsibilities is overseeing the company’s financial reporting process.
Our responsibilities for the audit of the financial statements
Our objective is to plan and perform the audit assignment in a manner that allows us to obtain sufficient and appropriate audit evidence for our opinion.
Our audit has been performed with a high, but not absolute, level of assurance, which means we may not have detected all material errors and fraud.
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. The materiality affects the nature, timing and extent of our audit procedures and the evaluation of the effect of identified misstatements on our opinion.
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 audit included e.g.:
- 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 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 Executive Board;
- Concluding on the appropriateness of the Executive Board’s use of the going concern basis of accounting, and based on the audit evidence obtained, whether a material uncertainty exists related to events 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. However, future events or conditions may cause a company to cease to continue as a going concern;
- Evaluating the overall presentation, structure and content of the financial statements, including the disclosures;
- Evaluating whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
Because we are ultimately responsible for the opinion, we are also responsible for directing, supervising and performing the group audit. In this respect we have determined the nature and extent of the audit procedures to be carried out for group entities. Decisive were the size and/or the risk profile of the group entities or operations. On this basis, we selected group entities for which an audit or review had to be carried out on the complete set of financial information or specific items.
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 findings 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.
Zwolle, 6 March 2017
Ernst & Young Accountants LLP
signed by A.E. Wijnsma