GrantThornton

Project's Financial Statements and IndependentAuditors' Report

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 2014

El

171

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

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 Auditors' Report 1

Statement of Cash Receipts and Payments 3

Special - purpose Statement of Expenditures 4

Special - purpose Statement of Special Account 8

Notes to the Project's financial statements 9

GrantThornton

Independent Auditors' Report

Grant Thornton DOOSv. Kiril i Metodil 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 operationalefficiency (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 asat and for the year ended 31 December 2014 and a summary of significant accountingpolicies and other explanatory information, included on pages 3 to 11.

Management's Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these Project'sfinancial 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 materialmisstatement, whether due to fraud or error.

Auditors' ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audit.We conducted our audit in accordance with the International Standards on Auditing. Thosestandards require that we comply with ethical requirements and plan and perform the auditto obtain reasonable assurance about whether the financial statements are free from materialmisstatements. An audit involves performing procedures to obtain audit evidence about theamounts and disclosures in the Project's financial statements. The procedures selecteddepend on the auditor's judgment, including the assessment of the risks of materialmisstatement of the Project's financial statements, whether due to fraud or error.

Chartered AccuntantsMember fim of Grant Thornton internatonal Ltd

2

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 our opinion, the Statement of Cash Receipts and Payments, present fairly the cashreceipts and payments of the Project for support of the implementation of the investmentprogram and improving of the overall operational efficiency, implemented by AD MEPSOSkopje, for the year ended 31 December 2014 in accordance with the International PublicSector Accounting Standards issued by the International Public Sector AccountingStandards Board of the International Federation of Accountants.

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 the balance of the SpecialAccounts at 31 December 2014, as well as its movements for the year ended 31 December2014.

Skopje,10 June 2015

3arant Thornton DOO

OCDirectorCertified AuditorSuzana Stavrik ko Suzana Stavrik

Chartered AccountanteMember fin of Grant Thornton Intemational Ltd

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

Financial statements31 December 2014

Statement of Cash Receipts and Payments

In EURUi For the year ended For the year ended Cumulative up to31 December 2014 31 December 2013 31 December 2014

ReceiptsIBRD Loan 4814MKSOE Procedures 770,000 - 5,712,990Direct payments 132 187,523 13,113,032Front - end fee 4814MK - - 51,750

770,132 187,523 18,877,772IBRD Loan 80440MK .SOE Procedures 700,000 950,000 1,650,000Direct payments 4,129,520 862,906 4,992,426Front - end fee 80440MK - - 35,000

4,829,520 1,812,906 6,677,426Total IBRD Funds 5,599,652 2,000,429 25,555,198TOTAL RECEIPTS 5,599,652 2,000,429 25,555,198

PaymentsIBRD Loan 4814MKFinanced from IBRD funds

Goods (773,543) (794,511) (18,293,096)Consultants' services (50,304) (38,683) (530,737)

Front - end fee 4814MK - (51,750)(823,847) (833,194) (18,875,583)

IBRD Loan 80440MKFinanced from IBRD funds

Goods (4,511,250) (1,150,350) (5,661,600)Consultants' services (40,300) (158,770) (199,070)

Front - end fee 80440MK - (35,000)(4,551,550) (1,309,120) (5,895,670)

Total funds financed from IBRD (5,375,397) (2,142,314) (24,771,253)TOTAL PAYMENTS (5,375,397) (2,142,314) (24,771,253)

Net cash 224,255 (141,885) 783,945Opening balance 559,690 701,575 -Closing balance 783,945 559,690 783,945

The Project's financial statements set out on pages 3 - 11 were approved by AD MEPSO SkopjeManagement on 27 February 2015 and were signed on its behalf by:

Ms. Gordana Andonovska . Sasho Vasilev Mr. Sinisha SpasovSenior economist Finance De or General Manager

4Project for support of the implementation of the investment program and improving of the overall operational efficiency, implemented by AD MEPSO SkopjeLoan agreement IBRD no. 4814 MK and Loan agreement IBRD no. 80440 MK

Financial statements31 December 2014

Special - purpose Statement of Expenditures

In EURFor the period from 1 January 2014 through 31 December 2014, Loan agreement IBRD no. 4814

Disbursement categoriesConsultants' Total

Application number Application date Goods services expenditures Disbursed Difference

DA-63 31.01.2014 400,000 100,000 500,000 500,000*DA-64 30.04.2014 214,964 50,304 265,268 - (265,268)*DA-65 11.08.2014 84,391 - 84,391 - (84,391)DA-66 15.10.2014 200,000 70,000 270,000 270,000

*DA-67 28.10.2014 142,734 - 142,734 - (142,734)*DA-68 **20.02.2015 331,321 - 331,321 - (331,321)

1,373,410 220,304 1,593,714 770,000 (823,714)*The expenditures presented in applications DA-64, DA-65, DA-67 and DA-68 have been approved by the Bank, but there has been no reimbursement yet** Incurred in 2014, application submitted in 2015

In EURFor the period from 1 January 2014 through 31 December 2014, Loan agreement IBRD no. 80440

Disbursement categoriesConsultants' Total

Application number Application date Goods services expenditures Disbursed Difference

*DA-11 30.04.2014 106,003 - 106,003 - (106,003)*DA-12 11.08.2014 104,605 - 104,605 - (104,605)DA-13 19.09.2014 600,000 100,000 700,000 700,000

*DA-14 28.10.2014 126,915 40,300 167,215 - (167,215)*DA-15 **15.02.2015 44,206 - 44,206 - (44,206)

981,729 140,300 1,122,029 700,000 (422,029)*The expenditures presented in applications DA-11, DA-12, DA-14 and DA-15 have been approved by the Bank, but there has been no reimbursement yet** Incurred in 2014, application submitted in 2015

Project for support of the implementation of the investment program and improving of the overall operational efficiency, implemented by AD MEPSO Skopje 5Loan agreement IBRD no. 4814 MK and Loan agreement IBRD no. 80440 MK

Financial statements31 December 2014

Special - purpose Statement of Expenditures (continued)

In EURAccumulated up to 31 December 2014Disbursement categories (loan 4814)

TotalApplication number Application date Goods Consultants' services expenditures Disbursed DifferenceDA-B3 25.07.2006 1,000,000 - 1,000,000 1,000,000 -DA-B11 20.11.2006 22,544 - 22,544 22,544 -DA-B12 22.02.2007 28,970 - 28,970 28,970 -DA-B14 17.05.2007 241,454 - 241,454 241,454 -DA-B17 16.08.2007 644,570 - 644,570 644,570 -DA-B18 19.11.2007 50,719 - 50,719 50,719 -DA-B19 15.02.2008 48,231 - 48,231 48,231 -DA-B21 12.05.2008 345,533 - 345,533 345,533 -DA-B22 29.09.2008 214,280 - 214,280 214,280 -DA-B23 03.11.2008 148,179 - 148,179 148,179 -DA-B24 03.11.2008 148,456 - 148,456 148,456 -DA-B25 09.04.2009 90,370 - 90,370 90,370 -DA-B26 10.07.2009 170,900 18,784 189,684 189,684 -DA-B27 12.02.2010 90,370 - 90,370 90,370 -DA-B28 05.04.2010 29,700 - 29,700 29,700 -DA-B29 16.08.2010 - 32,872 32,872 32,872 -DA-B35 12.11.2010 4,750 67,072 71,822 71,822 -DA-B40 14.02.2011 99,170 42,264 141,434 141,434 -DA-B48 13.05.2011 205,349 100,608 305,957 305,957 -DA-B50 11.08.2011 65,668 4,750 70,418 47,845 (22,573)

6Project for support of the implementation of the investment program and improving of the overall operational efficiency, implemented by AD MEPSO SkopjeLoan agreement IBRD no. 4814 MK and Loan agreement IBRD no. 80440 MK

Financial statements31 December 2014

Special - purpose Statement of Expenditures (continued)

In EURAccumulated up to 31 December 2014Disbursement categories (loan 4814)

TotalApplication number Application date Goods Consultants services expenditures Disbursed DifferenceDA-B51 14.11.2011 287284 67,072 354,356 - (354,356)DA-B52 24.02.2012 74,998 50,304 125,302 - (125,302)DA-B53 14.05.2012 500,000 - 500,000 500,000DA-B54 17.05.2012 173,930 38,682 212,612 - (212,612)DA-B55 01.08.2012 29,100 - 29,100 - (29,100)DA-B56 13.11.2012 430,334 19,342 449,676 - (449,676)DA-B57 13.12.2012 550,000 - 550,000 550,000DA-B58 01.02.2013 154,806 154,806 - (154,806)DA-B59 10.04.2013 284,068 - 284,068 - (284,068)DA-B60 15.08.2013 221,029 38,683 259,712 - (259,712)DA-B61 08.11.2013 20,680 - 20,680 - (20,680)DA-B62 **31.01.2014 81,211 - 81,211 - (81,211)DA-63 31.01.2014 400,000 100,000 500,000 500,000*DA-64 30.04.2014 214,964 50,304 265,268 - (265,268)*DA-65 11.08.2014 84,391 - 84,391 - (84,391)DA-66 15.10.2014 200,000 70,000 270,000 270,000*DA-67 28.10.2014 142,734 - 142,734 - (142,734)*DA-68 ***20.02.2015 331,321 - 331,321 - (331,321)Total 7,830,063 700,737 8,530,800 5,712,990 (2,817,810)*The expenditures presented in applications DA-64, DA-65, DA-67 and DA-68 have been approved by the Bank, but there has been no reimbursement yet** Incurred in 2013, application submitted in 2014

Incurred in 2014, application submitted in 2015

Project for support of the implementation of the investment program and improving of the overall operational efficiency, implemented by AD MEPSO Skopje 7Loan agreement IBRD no. 4814 MK and Loan agreement IBRD no. 80440 MK

Financial statements31 December 2014

Special - purpose Statement of Expenditures (continued)

In EURAccumulated up to 31 December 2014Disbursement categories (loan 80440)TotalApplication number Application date Goods Consultants' services expenditures Disbursed DifferenceDA-1 20.02.2013 300,000 200,000 500,000 500,000DA-4 15.08.2013 167,545 - 167,545 - (167,545)DA-5 08.11.2013 119,899 - 119,899 - (119,899)DA-9 18.12.2013 250,000 200,000 450,000 450,000DA-10 **31.01.2014 -158,770 158,770 - (158,770)*DA-1 1 30.04.2014 106,003 - 106,003 - (106,003)*DA-12 11.08.2014 104,605 - 104,605 - (104,605)DA-13 19.09.2014 600,000 100,000 700,000 700,000*DA-14 28.10.2014 126,915 40,300 167,215 - (167,215)*DA-15 ***15.02.2015 44,206 - 44,206 - (44,206)Total 1,819,173 699,070 2,518,243 1,650,000 (868,243)*The expenditures presented in applications DA-1 1, DA-1 2, DA-1 4 and DA-1 5 have been approved by the Bank, but there has been no reimbursement yet** Incurred in 2013, application submitted in 2014

Incurred in 2014, application submitted in 2015

8Project 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

Financial statements31 December2014

Special - purpose Statement of SpecialAccounts IBRD no. 4814MK and IBRDno. 80440MK

ILI

LIFor the period: 1 January 2014 through 31 December 2014Account number: 00-701-00031378Depository Bank: NLB Tutunska Banka AD SkopjeAddress: I Vodnjanska, SkopjeLoan Number: 4814 MKLoan Number: 80440 MKCurrency: EUR

In EUR 31 December 2014 31 December 2013loan no. 4814 loan no. 80440 loan no. 4814 loan no. 80440

Opening balance 55,904 503,786 701,575Add:IBRD Replenishments:- Front Fee - . .- Direct payments 132 4,129,520 187,523 862,906- SOE Procedures 770,000 700,000 - 950,000

770,132 4,829,520 187,523 1,812,906Deduct:Front fee - . .Project Expenditure Payments:- Goods 773,543 4,511,250 794,511 1,150,350- Consultants' services 50,304 40,300 38,683 158,770

823,847 4,551,550 833,194 1,309,120Closing balance 2,189 781,756 55,904 503,786

F,

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 statements

I General InformationOn 19 April 2006, AD Prenos na Elektricna Energija i upravuvanje so elektroenergetskiotsistem, vo drzavna sopstvenost, Skopje ("the Borrower" or " AD MEPSO") entered intoLoan Agreement with the International Bank for Reconstruction and Development

("IBRD" or "the Bank") in amount of EUR 20,700,000 to assist the Borrower in the

acquisition of equipment for increasing the capacity of the Skopje 5 Substation, replacementof existing and construction of new Overhead Lines, upgrading the existing EMS Systemand Planning Software, acquisition of equipment for upgrade and rehabilitation of 110 kV

El Substations and the institutional strengthening of the Borrower's capacity and developmentof the financial management system.

According to the Agreement's provisions, the Borrower shall pay interest semi - annuallyon 15th April and 15th October each year, on the principal amount of the Loan withdrawal

7 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 - annuallyon 15th May and 15th November each year, on the principal amount of the Loanwithdrawal and outstanding.

2 Project ImplementationAD MEPSO is responsible for the implementation of the Project. A ProjectImplementation Unit (PIU) has not been separately established and different divisions ofAD MEPSO are responsible for various parts of the Loan Agreement, in coordination withthe Office for International Cooperation and International Banks.

The Division for Grid Operation is responsible for the rehabilitation and upgrade of thesubstation, as well as for the new and the replacement of the transmission lines. TheDivision for System Operation is responsible for the upgrade of the Energy ManagementSystem. The Department of Information Technology and Telecommunications isresponsible for the introduction of the Financial Management Information System. Theproject financial statements and notes to the project financial statements are prepared by theOffice for International Cooperation and International Banks.

Project for support of the implementation of the investment program and improving of the overall 10operational efficiency, implemented by AD MEPSO SkopjeLoan agreement IBRD no. 4814 MK and Loan agreement IBRD no. 80440 MK

Notes to the Project financial statement (continued)

3 Significant Accounting Policies3.1 Statement of complianceThe financial statements have been prepared in accordance with the International PublicSector 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 December 2014 December 2013 2014L ~Project 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 40,300 158,770 199,070- Goods, including supply and installation 5,111,596 1,716,511 12,099,083

5,151,896 1,875,281 12,298,153Upgrading 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 132 126,595 8,019,426

132 126,595 8,066,440Consultants' services- Consultants' services 50,304 38,683 147,011- Goods, including supply and installation 173,065 101,755 878,373

223,369 140,438 1,025,384Front - end fee- Front - end fee 4814MK - - 51,750- Front - end fee 80440MK - - 35,000

- - 86,750

Total cash payments 5,375,397 2,142,314 24,771,253

'A~

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 financial statement (continued)

Schedule of payments by Project Activities (continued)

The payments in the Statement of Cash Receipts and Payments are presented based on theirnature while the payments presented in the Schedule of payments by Project activities arepresented based on the Project's components and activities.

AD MEPSO is obligated to finance part of the expenditures from own sources. Suchproject expenditures amount EUR 199 thousand for Project activities financed with theIBRD Loan 4814 and EUR 1,249 thousand for Project activities financed with the IBRDLoan 80440 during the year 2014 mostly consisting of expropriations, L/C and bank fees'provisions.

5 Unwithdrawn amountAs of 31 December 2014, available funds for future withdrawal from the IBRD Loan4814MK ECSEE APL - 3 amounts to EUR 1,822,228.

As of 31 December 2014, available funds for future withdrawal from the IBRD Loan80440MK ECSEE APL - 3 amounts to EUR 7,322,574.

The Project is required to spend or return all received funds; therefore any unspent cashrepresents liability at each reporting date.

tl

i

K1

r,~

ui

I

r]i

Fl