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0 GrantThornton

Project's Financial Statements and Independent Auditor'sReport

Project for support of the implementation of theinvestment program and improving of the overalloperational efficiency of AD MEPSO Skopje

Loan Agreement IBRD no. 4814 MK and

Loan Agreement IBRD no. 80440 MK

31 December 2016

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Project for support of the implementation of the investment program and improving of the overall operationalefficiency of AD MEPSO Skopje

Loan Agreement IBRD no. 4814 MK and Loan agreement IBRD no. 80440 MK

Content

Page

Independent Auditor's Report 1

Statement of Cash Receipts and Payments 3

Special - purpose Statement of Expenditures 5

Special - purpose Statement of Special Account 9

Notes to the Project's financial statements 10

O GrantThornton

Independent Auditor's Report

Grant Thornton 000Sv. Kiril i Metodij 52b/1-201000 SkopjeMacedonia

T +389 (2) 3214 700F +389 (2) 3214 710www.grant-thornton.com.mk

To the Management of the Project for support of the implementation ofthe investment program and improving of the overall operational efficiency

- AD MEPSO Skopje

We have audited the accompanying financial statements of the Project for support of theimplementation of the investment program and improving of the overall operational

efficiency ("the Project"), implemented by AD MEPSO Skopje, financed by theInternational Bank for Reconstruction and Development ("IBRD") Loan 4814 MK andLoan 80440 MK, which comprise the Statement of Cash Receipts and Payments, Special -purpose Statement of Expenditures and Special - purpose Statement of Special Account("Project's financial statements"), as at and for the year ended 31 December 2016 and asummary of significant accounting policies and other explanatory information, included onpages 3 to 12.

Management's Responsibility for the Project's Financial StatementsManagement is responsible for the preparation and fair presentation of these Project's

financial statements in accordance with International Public Sector Accounting Standards(IPSAS) issued by the International Public Sector Accounting Standards Board of theInternational Federation of Accountants disclosed in note 3 in the accompanying Project'sfinancial statements and for such internal control as Management determines is necessary toenable the preparation of Project's financial statements that are free from material

misstatement, whether due to fraud or error.

Auditors' ResponsibilityOur responsibility is to express an opinion on these Project's financial statements based onour audit. We conducted our audit in accordance with the Auditing Standards accepted in

Republic of Macedonia 1. Those standards require that we comply with ethical requirementsand plan and perform the audit to obtain reasonable assurance about whether the financialstatements are free from material misstatements. An audit involves performing proceduresto obtain audit evidence about the amounts and disclosures in the Project's financial

statements. The procedures selected depend on the auditor's judgment, including the

assessment of the risks of material misstatement of the Project's financial statements,whether due to fraud or error.

1 International Standards on Auditing (ISA) issued by the International Auditing and Assurance Standards Board(IAASB), effective from 15 December 2009, translated and published in the "Official Gazette" of the Republicof Macedonia, no.79 from 2010.

Chartered AccountantsMember firm of Grant Thornton Internatonal Ltd

0 GrantThornton

In making those risk assessments, the auditor considers internal control relevant to theProject's preparation and fair presentation of the Project's financial statements in order todesign audit procedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the internal control. An audit also includesevaluating the appropriateness of accounting policies used and the reasonableness ofaccounting estimates made by the Management, as well as evaluating the overallpresentation of the Project's financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to providea basis for our audit opinion.

OpinionIn out opinion, the Statement of Cash Receipts and Payments, presents fairly, in all materialaspects, the cash receipts and payments of the Project for support of the implementation ofthe investment program and improving of the overall operational efficiency, implementedby AD MEPSO Skopje, for the year ended 31 December 2016 in accordance with theInternational Public Sector Accounting Standards issued by the International Public SectorAccounting Standards Board of the International Federation of Accountants disclosed innote 3 in the accompanying Project's financial statements.

In addition:

- With respect to the Special - purpose Statements of Expenditures (SOEs), of the Projectfor support of the implementation of the investment program and improving of the overalloperational efficiency, implemented by AD MEPSO Skopje, adequate supportingdocumentation has been maintained to support claims to the IBRD for reimbursements ofLoan number 4814 MK and Loan number 80440 MK.

- The Special - purpose Statement of Special Accounts of the Project for support of theimplementation of the investment program and improving of the overall operationalefficiency, implemented by AD MEPSO Skopje, present fairly, in all material aspects, thebalance of the Special Accounts as at 31 December 2016, as well as its movements for theyear ended 31 December 2016.

Skopje,30 June 2017

Gran rnton DO opje

Director ertid A tor

Suzana Stavrik Suzana Stavrik

Chartered AccountantsMember firm of Grant Thornton Intermadonal Lid

Project for support of the implementation of the investment program and improving of the overall 3operational efficiency, implemented by AD MEPSO SkopjeLoan agreement IBRD no. 4814 MK and Loan agreement IBRD no. 80440 MK

Project's financial statements31 December 2016

Statement of Cash Receipts and Payments

in EURFor the year ended For the year ended Cumulative up to31 December 2016 31 December 2015 31 December 2016

ReceiptsIBRD Loan 4814MKSOE Procedures - 17,000 5,729,990Direct payments 74,468 1,089,235 14,276,735Reimbursements of fundstransferred to general bank accountof AD MEPSO 25,038 25,038Refunded funds to IBRD (19,660) - (19,660)Front - end fee 4814MK 51,750

54,808 1,131,273 20,063,853IBRD Loan 80440MKSOE Procedures 740,000 428,000 2,818,000Direct payments 2,232,015 3,260,379 10,484,820Front - end fee 80440MK - - 35,000Refunded funds to IBRD (658) - (658)

2,971,357 3,688,379 13,337,162Total IBRD Funds 3,026,165 4,819,652 33,401,015TOTAL RECEIPTS 3,026,165 4,819,652 33,401,015

PaymentsIBRD Loan 4814MKFinanced from IBRD funds

Goods (74,468) (1,091,818) (19,459,382)Goods (paid from general bankaccount of AD MEPSO) - (25,038) (25,038)Consultants' services - 530,737)

Front - end fee 4814MK - (51,750)(74,468) (1,116,856) (20,066,907)

IBRD Loan 80440MKFinanced from IBRD funds

Goods (3,152,039) (4,167,770) (12,981,409)Reimbursements of fundsConsultants' services (72,390) (49,951) (321,411)

Front - end fee 80440MK - (35,000)(3,224,429) (4 217,721) (13,337,820)

Total funds financed from IBRD (3,298,897) (5,334 577) 33404,727TOTAL PAYMENTS (3,298,897) (5,334,577) (33,404,727)



Statement of Cash Receipts and Payments (continued)In EUR

For the year ended For the year ended Cumulative up to31 December 2016 31 December 2015 31 December 2016

Net cash (272,732) (514,925) (3,712)Opening balance 269,020 783,945Refunded unspent funds fromsuppliers directly to IBRD 3,825Foreign exchange difference (113)Closing balance 289,020 (3,712Y

*The amount of EUR (3,712) refers of unspent funds of EUR (2,530) and EUR (637) for the Loan No 4814 MK that aredirectly refunded from suppliers of MEPSO to 1BRD and EUR (658) for the Loan No 80440 MK that are directly refundedfrom suppliers of MEPSO to IBRD, due to close of special bank accounts of the Project.

The Project's financial statements set out on pages 3 - 12 were approved by AD MEPSO SkopjeManagement on 29 June 2017 and were signed on its behalf by:

Ms. Gordana Andonovska Sasho ski enalJoSenior economist / Finance D tor (Ir

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Project for support of the implementation of the investment program and improving of the overalloperational efficiency, implemented by AD MEPSO SkopjeLoan agreement IBRD no. 4814 MK and Loan agreement IBRD no. 80440 MK


Special - purpose Statement of SpecialAccounts

For the period: I January 2016 through 31 December 2016Account number: 00-701-00031378Depository Bank: NLB Tutunska Banka AD SkopjeAddress: 1 Vodnjanska, SkopjeLoan Number: 4814 MKLoan Number: 80440 MKCurrency: EUR

In EUR 31 December 2016 31 December 2015loan no. 4814 loan no. 80440 loan no. 4814 loan no. 80440

Opening balance 16,606 252,414 2,189 781,756Add:IBRD Replenishments:

- Front Fee - . .- Direct payments 74,468 2,232,015 1,089,235 3,260,379- SOE Procedures - 740,000 17,000 428,000

Deduct: 74,468 2,972,015 1,106,235 3,688,379

Front fee .Project Expenditure Payments: .- Goods 74,468 3,152,039 1,091,818 4,167,770- Consultants' services - 72,390 - 49,951

74,468 3,224,429 1,091,818 4,217,721Deduct:Refunded funds to IBRD 16,493 - - -Transferred fund to generalaccount of MEPSO arising fromforeign exchange difference 113Closing balance - 16,606 252,414


Notes to the Project's financial statements

I General InformationOn 19 April 2006, AD Prenos na Elektricna Energija i upravuvanje so elektroenergetskiot

sistem, vo drzavna sopstvenost, Skopje ("the Borrower" or "AD MEPSO") entered into

Loan Agreement with the International Bank for Reconstruction and Development

("IBRD" or "the Bank") No. 4814MK in the amount of EUR 20,700,000 to assist theBorrower in the acquisition of equipment for increasing the capacity of the Skopje 5

Substation, replacement of existing and construction of new Overhead Lines, upgrading the

existing EMS System and Planning Software, acquisition of equipment for upgrade and

rehabilitation of 110 kV Substations and the institutional strengthening of the Borrower's

capacity and development of the financial management system.

According to the Agreement's provisions, the Borrower shall pay interest semi - annually

on 15th April and 15th October each year, on the principal amount of the Loan withdrawal

and outstanding.

On 11 April 2011, AD MEPSO entered into additional Loan Agreement no. 80440 MKwith IBRD in amount of EUR 14,000,000 for additional financing of already existingproject and financing of the project 400KV Transmission line Stip (Macedonia) - Nis

(Serbia).

According to the Agreement's provisions, the Borrower shall pay interest semi - annually

on 15th May and 15th November each year, on the principal amount of the Loan

withdrawal and outstanding.

Closing date of the Loan Agreement No. 80440 MK was 31 July 2016 and 30 November

2015 of the Loan Agreement No. 4814 MK.

2 Project ImplementationAD MEPSO is responsible for the implementation of the Project. A Project

Implementation Unit (PIU) has not been separately established and different divisions of

AD MEPSO are responsible for various parts of the Loan Agreement, in coordination with

the Office for International Cooperation and International Banks.

The Division for Grid Operation is responsible for the rehabilitation and upgrade of the

substation, as well as for the new and the replacement of the transmission lines. The

Division for System Operation is responsible for the upgrade of the Energy Management

System. The Department of Information Technology and Telecommunications is

responsible for the introduction of the Financial Management Information System. The

project financial statements and notes to the project financial statements are prepared by the

Office for International Cooperation and International Banks.

Project for support of the implementation of the investment program and improving of the overalloperational efficiency, implemented by AD MEPSO SkopjeLoan agreement IBRD no. 4814 MK and Loan agreement IBRD no. 80440 MK

Notes to the Project's financial statement (continued)

3 Significant Accounting Policies3.1 Statement of complianceThe Project's financial statements have been prepared in accordance with the InternationalPublic Sector Accounting Standard ("IPSAS"), Financial Reporting under the Cash BasisAccounting.

3.2 Basis of preparationThe Project's policy is to prepare the financial statements on cash basis. On this basis,revenue is recognized when received rather than when earned and expenses are recognizedwhen paid rather than when incurred.

Due to the fact that the Project funding is received in Euros ("EUR") and all payments aremade in EUR, the reporting currency of the Project's financial statements is EUR.

The accounting policies are applied consistently throughout the period.

4 Schedule of payments by Project ActivitiesFor the year For the year Accumulated up

ended 31 ended 31 to 31 DecemberIn EUR December2016 December2015 2016Project activitiesExpansion of Skopje 5 substation(400/110 kV; 300 MVA)- Goods, including supply and installation - 2,701,436

- - 2,701,436Rehabilitation and Construction ofInterconnection and Overhead TransmissionLines- Consultants' services 72,390 49,951 321,411- Goods (paid from general bank account of ADMEPSO Skopje) - 25,038 25,038

- Goods, including supply and installation 3,226,507 4,805,621 20,131,2113,298,897 4,880,610 20,477,660

Upgrading of the Existing EMS System andPlanning Software- Goods, including supply and installation - - 593,090

- - 593,090Upgrading and Rehabilitation of 110 kVSubstations- Consultants' services - - 47,014- Goods, including supply and installation - 453,967 8,473,393

- 453,967 8,520,407Consultants' services- Consultants' services - 147,011- Goods, including supply and installation - 878,373

- - 1,025,384Front - end fee- Front - end fee 4814MK - - 51,750- Front - end fee 80440MK - - 35,000

- - 86,750

Total cash payments 34298,897 5,334,577 33,404,727

Project for support of the implementation of the investment program and improving of the overall 12operational efficiency, Implemented by AD MEPSO SkopjeLoan agreement lORD no. 4814 MK and Loan agreement lORD no. 80440 MK

Notes to the Project's financial statement (continued)

Schedule of payments by Project Activities (continued)The payments in the Statement of Cash Receipts and Payments are presented based on their

nature while the payments presented in the Schedule of payments by Project activities are

presented based on the Project's components and activities.

Project expenditures financed by AD MEPSO in amount EUR 0 thousand for Project

activities financed with the IBRD Loan 4814 and EUR 70 thousand for Project activities

financed with the IBRD Loan 80440 during the year 2016 mostly consisting of cost of

customs duties, VAT and cost of supervision of transmission line fields and L/C and bank

fees.

5 Unwlthdrawn and cancelled findsAs of 31 December 2016, available funds for future withdrawal from the IBRD Loan

4814MK ECSEE APL - 3 amounts to EUR 636,145. Subsequently, in March 2017 theamount of EUR 635,507 is cancelled due to end of the Project. EUR 638 relates to refundof spent funds for project expenses from December 2016.

As of 31 December 2016, available funds for future withdrawal from the IBRD Loan

80440MIK ECSEE APL - 3 amounts to EUR 662,838.

The Project is required to spend or return all received funds; therefore any unspent cash

represents liability at each reporting date.

-- I

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