INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SOUTH EASTERN POWER NETWORKS PLC
Page 42
Report on the audit of the financial statements
1. Opinion
In our opinion the financial statements of South Eastern Power Networks plc (the ‘company’):
give a true and fair view of the state of the company’s affairs as at 31 March 2023 and of its profit for the
year then ended;
have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice,
including Financial Reporting Standard 102 “The Financial Reporting Standard applicable in the UK and
Republic of Ireland”; and
have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements which comprise:
the profit and loss account;
the statement of comprehensive income;
the balance sheet;
the statement of changes in equity;
the cash flow statement; and
the related notes 1 to 22.
The financial reporting framework that has been applied in their preparation is applicable law and United
Kingdom Accounting Standards, including Financial Reporting Standard 102 “The Financial Reporting Standard
applicable in the UK and Republic of Ireland” (United Kingdom Generally Accepted Accounting Practice).
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable
law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the
audit of the financial statements section of our report.
We are independent of the company in accordance with the ethical requirements that are relevant to our audit
of the financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard
as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance
with these requirements. The non-audit services provided to the company for the year are disclosed in note 5
to the financial statements. We confirm that we have not provided any non-audit services prohibited by the
FRC’s Ethical Standard to the company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
3. Summary of our audit approach
Key audit matter
The key audit matter that we identified in the current year
was
:
Accuracy of cost classification.
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SOUTH EASTERN POWER NETWORKS PLC
Page 43
Materiality The materiality that we used in the current year was £15.5 million which was
determined based on 7.3% of profit before tax, adjusted for movements related to
derivative financial instruments.
Scoping Audit work to respond to the risks of material misstatement was performed directly
by the audit engagement team.
Significant changes in
our approach
Our approach is consistent with the prior year other than we have taken a
substantive audit approach to the accuracy of cost classification, and we have
removed the key audit matter relating to the accuracy of financial instruments, as
these are no longer matters that are most significant to our audit effort.
4. Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of
accounting in the preparation of the financial statements is appropriate.
Our evaluation of the directors’ assessment of the company’s ability to continue to adopt the going concern
basis of accounting included:
Obtaining an understanding of the relevant controls relating to the going concern process;
Understanding the financing facilities available to the company, including assessing all bank covenants
and facility expiry dates, and recalculating current and forecast covenant compliance;
Obtaining an understanding of the going concern forecast prepared by management, including the
downside scenarios as well as evaluating any plan for future actions;
Challenging the key assumptions, including forecast revenue and capital expenditure cash flows, on
which the assessment is based and evaluating the consistency of assumptions with other assumptions
within the going concern assessment as well as related assumptions used in other areas;
Evaluating management’s assessment of the impact of inflation and of the increased demand for
electric capacity within the forecast;
Testing the mathematical accuracy of the model used to prepare the going concern forecast;
Assessing the level of headroom in the forecast, with regard to both liquidity and debt covenant tests;
Assessing the outcome of the reverse stress testing performed by management;
Assessing whether any additional facts or information has become available since the date management
made its assessment; and
Evaluating the appropriateness of the going concern disclosures in the financial statements.
Based on the work we have performed, we have not identified any material uncertainties relating to events or
conditions that, individually or collectively, may cast significant doubt on the company’s ability to continue as a
going concern for a period of at least twelve months from when the financial statements are authorised for
issue.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the
relevant sections of this report.
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SOUTH EASTERN POWER NETWORKS PLC
Page 44
5. Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit
of the financial statements of the current period and include the most significant assessed risks of material
misstatement (whether or not due to fraud) that we identified. These matters included those which had the
greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts
of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on these matters.
5.1. Accuracy of cost classification
Key audit matter
description
The company continues to have an extensive capital investment programme. To
meet the requirements of FRS 102.17 Property Plant and Equipment (“PP&E”), it is
important that network costs are appropriately classified as either capital or
operating expenditure in nature. In the year, the company capitalised £250.0 million
(2022: £219.2 million) in relation to network assets, as disclosed in Note 10.
The classification of activities between capital (additions or enhancements to
network assets) and operating expenditure (maintenance or network repair) is
impacted by judgements undertaken by management. Management uses the cost
reflectivity model to apply these judgements to the total costs spent on the network
to determine what is capitalised and what is expensed.
Due to the judgements and complexity within the cost reflectivity model, we have
identified the accuracy of cost classification to be a key audit matter as well as a
potential fraud risk. We identify this key audit matter as a potential fraud risk as
management might be incentivised to fraudulently overstate capital expenditure and
understate operating expenditure, in the determination of the cost drivers that
underpin the classification of expenditure.
The classification of costs has been disclosed as a critical accounting judgement in
note 3, and the fixed asset note is included in note 10 to the financial statements.
How the scope of our
audit responded to the
key audit matter
We performed the following procedures:
• obtained an understanding of relevant controls over the application of the
policy in relation to classification of expenditure;
• assessed whether the company’s accounting policies in relation to
capitalisation comply with FRS 102.17 Property, Plant and Equipment;
• tested the implementation of these policies through assessing the capital
nature of a sample of costs against the capitalisation policy;
• agreed a sample of cost inputs to the reflectivity model to supporting
documentation, including invoices;
• assessed the proportion of capitalised overhead costs using historical
comparisons and expected changes based on enquiry and our sector
knowledge;
• assessed the assumptions and judgements made by management in relation
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SOUTH EASTERN POWER NETWORKS PLC
Page 45
to cost drivers used for each cost category as well as consistency with the
prior year and challenged any changes by performing inquiries with
operational teams and assessing the historical trends and changes to
capitalisation rates;
• tested the integrity and mechanics of the cost allocation model to assess its
mathematical accuracy; and
• assessed the appropriateness of the company’s disclosures of its
capitalisation policy, including the judgement involved in assessing
expenditure as capital and the judgement relating to the allocation of
overhead cost.
Key observations
The results of our procedures were satisfactory and on the basis of these we
concluded the accuracy of cost classification is appropriate.
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that
the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use
materiality both in planning the scope of our audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as
follows:
Materiality
£ 15.5 million (2022: £15.5 million)
Basis for
determining
materiality
7.3% of profit before tax, adjusted for movements related to derivative financial
instruments (2022: 7.5% of profit before tax, adjusted for movements related to
derivative financial instruments)
Rationale for the
benchmark
applied
As a profit-making entity, profit before tax, adjusted for movements related to derivative
financial instruments, is a key metric used by users of the financial statements.
We assessed which line items we understand to be the most important to investors and
analysts by reviewing the company’s communications to shareholders and lenders, as well
as the communications of peer companies. This assessment resulted in us considering the
profit before tax, adjusted for movements related to derivative financial instruments.
These movements do not form part of the company’s core business performance and have
therefore been excluded from our benchmark.
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SOUTH EASTERN POWER NETWORKS PLC
Page 46
6.2. Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate,
uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole.
Performance materiality was set at 70% of materiality for the 2023 audit (2022: 70%). In determining
performance materiality, we considered the following factors:
a) our ability to rely on internal controls across a number of areas of the audit,
b) assessment of the company’s control environment,
c) the stability of the business, the outcome of our risk assessment process,
d) the low number of corrected and uncorrected misstatements identified in prior years,
e) management’s willingness to correct errors identified and the stability of the finance team.
6.3. Error reporting threshold
We agreed with the group audit committee that we would report to the committee all audit differences in
excess of £0.8 million (2022: £0.8 million), as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds. We also report to the group audit committee on disclosure matters
that we identified when assessing the overall presentation of the financial statements.
7. An overview of the scope of our audit
7.1. Scoping
Our audit was scoped by obtaining an understanding of the company and its environment, including wider UK
Power Networks Holdings Limited group-wide controls, and assessing the risks of material misstatement at the
company and group level. All the audit work is performed directly by the audit engagement team.
7.2. Our consideration of the control environment
Our controls approach is consistent with prior year other than we took a fully substantive approach to the
accuracy of cost classification.
We have taken a controls reliance approach in performing our audit of the balances that have a high volume
of transactions namely for the revenue, related to the Distribution Use of System (“DUoS”), and operating
expenses.
We have taken a substantive audit approach on all other areas not mentioned above.
The wider UK Power Networks Holdings group controls environment that the company is included within
contains a number of IT systems, applications and tools used to support business processes and reporting.
PBT, adjusted for
movements related to
derivative financial
instruments. £211m
Materiality £15.5m
Audit Committee
reporting threshold
£0.8m
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SOUTH EASTERN POWER NETWORKS PLC
Page 47
We performed testing of General IT Controls (“GITCs”) of the accounting system, typically covering controls
pertaining to user access management, change management as well as controls over key reports generated
from the accounting system and its supporting infrastructure (database and operating system).
Our procedures enabled us to place reliance on IT controls pertaining to the accounting system.
7.3. Our consideration of climate-related risks
Management has considered transition and physical risks when factoring in climate change as part of their risk
assessment process when considering the principal risks and uncertainties facing the Group, as explained in
the strategic report on page 21. We have:
assessed how the directors considered climate change in their assessment of the impact on the
financial statements, including the going concern assumption, based on our understanding of the
business environment;
assessed how the impact of climate change has been considered within individual financial statement
lines which are supported by forward looking forecasts and estimates; and
read the climate risk disclosures included throughout the strategic report section of the annual report
to consider whether they are materially consistent with the financial statements and our knowledge
obtained in the audit.
8. Other information
The other information comprises the information included in the annual report, other than the financial
statements and our auditor’s report thereon. The directors are responsible for the other information contained
within the annual report.
Our opinion on the financial statements does not cover the other information and, except to the extent
otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether the other information is
materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or
otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine
whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work
we have performed, we conclude that there is a material misstatement of this other information, we are
required to report that fact.
We have nothing to report in this regard.
9. Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the
preparation of the financial statements and for being satisfied that they give a true and fair view, and for such
internal control as the directors determine is necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the company’s ability to
continue as a going concern, disclosing as applicable, matters related to going concern and using the going
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SOUTH EASTERN POWER NETWORKS PLC
Page 48
concern basis of accounting unless the directors either intend to liquidate the company or to cease operations,
or have no realistic alternative but to do so.
10. Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our
opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in
accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s
website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
11. Extent to which the audit was considered capable of detecting irregularities,
including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures
in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities,
including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is
detailed below.
11.1. Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-
compliance with laws and regulations, we considered the following:
the nature of the industry and sector, control environment and business performance including the
design of the company’s remuneration policies, key drivers for directors’ remuneration, bonus levels
and performance targets;
results of our enquiries of management, internal audit, the directors and the group audit committee
about their own identification and assessment of the risks of irregularities, including those that are
specific to the company’s sector;
any matters we identified having obtained and reviewed the company’s documentation of their policies
and procedures relating to:
o identifying, evaluating and complying with laws and regulations and whether they were aware of
any instances of non-compliance;
o detecting and responding to the risks of fraud and whether they have knowledge of any actual,
suspected or alleged fraud;
o the internal controls established to mitigate risks of fraud or non-compliance with laws and
regulations;
the matters discussed among the audit engagement team and relevant internal specialists, including
financial instruments, tax, valuations, pensions and IT specialists regarding how and where fraud might
occur in the financial statements and any potential indicators of fraud.
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SOUTH EASTERN POWER NETWORKS PLC
Page 49
As a result of these procedures, we considered the opportunities and incentives that may exist within the
organisation for fraud and identified the greatest potential for fraud in the accuracy of cost classification. In
common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the
risk of management override.
We also obtained an understanding of the legal and regulatory framework that the company operates in,
focusing on provisions of those laws and regulations that had a direct effect on the determination of material
amounts and disclosures in the financial statements. The key laws and regulations we considered in this context
included the UK Companies Act, Listing Rules, pensions legislation, and tax legislation.
In addition, we considered provisions of other laws and regulations that do not have a direct effect on the
financial statements but compliance with which may be fundamental to the company’s ability to operate or to
avoid a material penalty. These included the company’s compliance with the Ofgem licence requirements.
11.2. Audit response to risks identified
As a result of performing the above, we identified accuracy of cost classification as a key audit matter related to
the potential risk of fraud. The key audit matters section of our report explains the matter in more detail and
also describes the specific procedures we performed in response to that key audit matter.
In addition to the above, our procedures to respond to risks identified included the following:
reviewing the financial statement disclosures and testing to supporting documentation to assess
compliance with provisions of relevant laws and regulations described as having a direct effect on the
financial statements;
enquiring of management, the group audit committee and in-house legal counsel concerning actual and
potential litigation and claims;
performing analytical procedures to identify any unusual or unexpected relationships that may indicate
risks of material misstatement due to fraud;
reading minutes of meetings of those charged with governance, reviewing internal audit reports and
reviewing correspondence with HMRC; and
in addressing the risk of fraud through management override of controls, testing the appropriateness
of journal entries and other adjustments; assessing whether the judgements made in making accounting
estimates are indicative of a potential bias; and evaluating the business rationale of any significant
transactions that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement
team members including internal specialists, and remained alert to any indications of fraud or non-compliance
with laws and regulations throughout the audit.
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SOUTH EASTERN POWER NETWORKS PLC
Page 50
Report on other legal and regulatory requirements
12. Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
the information given in the strategic report and the directors’ report for the financial year for which the
financial statements are prepared is consistent with the financial statements; and
the strategic report and the directors’ report have been prepared in accordance with applicable legal
requirements.
In the light of the knowledge and understanding of the company and its environment obtained in the course of
the audit, we have not identified any material misstatements in the strategic report or the directors’ report.
13. Matters on which we are required to report by exception
13.1. Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
we have not received all the information and explanations we require for our audit; or
adequate accounting records have not been kept, or returns adequate for our audit have not been
received from branches not visited by us; or
the financial statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
13.2. Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’
remuneration have not been made.
We have nothing to report in respect of this matter.
14. Other matters which we are required to address
14.1. Auditor tenure
Following the recommendation of the group audit committee, we were appointed by the board in 2001 and
were reappointed following an audit tender in 2017 to audit the financial statements for the year ending 31
March 2018 and subsequent financial periods. The period of total uninterrupted engagement including previous
renewals and reappointments of the firm is 23 years, covering the years ending 31 December 2001 to 31 March
2023.
14.2. Consistency of the audit report with the additional report to the audit committee
Our audit opinion is consistent with the additional report to the group audit committee we are required to
provide in accordance with ISAs (UK).
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SOUTH EASTERN POWER NETWORKS PLC
Page 51
15. Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of
the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s
members those matters we are required to state to them in an auditor’s report and for no other purpose.
To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the
company and the company’s members as a body, for our audit work, for this report, or for the opinions we
have formed.
Marianne Milnes, ACA (Senior Statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
13 July 2023
