O GrantThornton. Project's Financial Statements and Independent Auditors' Report

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized O GrantThornton Project's Financial Statements and Independent Auditors' Report Project for support of the implementation of the investment program and improving of the overall operational efficiency of AD MEPSO Skopje Loan Agreement IBRD no MK and Loan Agreement IBRD no MK 31 December 2015 Public Disclosure Authorized

2 Project for support of the implementation of the investment program and improving of the overall operational efficiency of AD MEPSO Skopje Loan Agreement IBRD no MK and Loan agreement IBRD no 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

3 O GrantThornton Independent Auditors' Report Grant Thornton DOO SV. Kiril i Metodij 52bil Skopje Macedonia T +389 (2) F +389 (2) To the Management of the Project for support of the implementation of the 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 the implementation of the investment program and improving of the overall operational efficiency ("the Project"), implemented by AD MEPSO Skopje, financed by the International Bank for Reconstruction and Development ("IBRD") Loan 4814 MK and Loan 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 2015 and a summary of significant accounting policies and other explanatory information, included on pages 3 to 11. Management's Responsibility for the Project's Financial Statements Management 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 the International Federation of Accountants disclosed in note 3 in the accompanying Project's financial statements and for such internal control as Management determines is necessary to enable the preparation of Project's financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these Project's financial statements based on our audit. We conducted our audit in accordance with the International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatements. An audit involves performing procedures to 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. Chartered Accountants Member fin of Grant Thomton International Ltd

4 O GrantThornton 2 In making those risk assessments, the auditor considers internal control relevant to the Project's preparation and fair presentation of the Project's financial statements 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 internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Management, as well as evaluating the overall presentation of the Project's financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the Statement of Cash Receipts and Payments, presents fairly, in all material aspects, the cash receipts and payments of the Project for support of the implementation of the investment program and improving of the overall operational efficiency, implemented by AD MEPSO Skopje, for the year ended 31 December 2015 in accordance with the International Public Sector Accounting Standards issued by the International Public Sector Accounting Standards Board of the International Federation of Accountants disclosed in note 3 in the accompanying Project's financial statements. In addition: - With respect to the Special - purpose Statements of Expenditures (SOEs), of the Project for support of the implementation of the investment program and improving of the overall operational efficiency, implemented by AD MEPSO Skopje, adequate supporting documentation has been maintained to support claims to the IBRD for reimbursements of Loan number 4814 MK and Loan number MK. - The Special - purpose Statement of Special Accounts of the Project for support of the implementation of the investment program and improving of the overall operational efficiency, implemented by AD MEPSO Skopje, present fairly, in all material aspects, the balance of the Special Accounts as at 31 December 2015, as well as its movements for the year ended 31 December Skopje, 27 May 2016 G t omnton DOO, j Suzana Stavrik k ocertified Auditor Suzana Stavrik Chartered Accountants Member fin of Grant Thornton International Ltd

5 Project for support of the implementation of the investment program and improving of the overall 3 operational efficiency, implemented by AD MEPSO Skopje Loan agreement IBRD no MK and Loan agreement IBRD no MK Project's financial statements 31 December 2015 Statement of Cash Receipts and Payments In EUR For the year ended For the year ended Cumulative up to 31 December December December 2015 Receipts IBRD Loan 4814MK SOE Procedures 17, ,000 5,729,990 Direct payments 1,089, ,202,267 Reimbursements of funds transferred to general bank account of AD MEPSO 25,038-25,038 Front - end fee 4814MK ,750 1,131, ,132 20,009,045 IBRD Loan 80440MK SOE Procedures 428, ,000 2,078,000 Direct payments 3,260,379 4,129,520 8,252,805 Front - end fee 80440MK ,000 3,688,379 4,829,520 10,365,805 Total IBRD Funds 4,819,652 5,599,652 30,374,850 TOTAL RECEIPTS 4,819,652 5,599,652 30,374,850 Payments IBRD Loan 4814MK Financed from IBRD funds Goods (1,091,818) (773,543) (19,384,914) Goods (paid from general bank account of AD MEPSO) (25,038) - (25,038) Consultants' services (50,304) (530,737) Front - end fee 4814MK - (51,750) (1,16,856) (823,847) (19,992,439) IBRD Loan 80440MK Financed from IBRD funds Goods (4,167,770) (4,511,250) (9,829,370) Consultants' services (49,951) (40,300) (249,021) Front - end fee 80440MK - (35,000) (4,217,721) (4,551,550) (10,113,391) Total funds financed from IBRD 5,334,577) 5,375, ,830 TOTAL PAYMENTS (5,334,577) (5,375,397) (30,105,830) Net cash (514,925) 224, ,020 Opening balance 783, ,690 - Closing balance 269, , ,020 The Project's financial statements set out on pages 3-11 were approved by AD MEPS Management on 26 May 2016 and were signed on its behalf by: Skopje or An doosa N)sho VasilevsT1 Mr,'Simisli Spasov sngorcno donovsk c Senior economist E' ance Director Ge~~lanagpr

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10 '' Project for support of the implementation of the investment program and improving of the overall 8 operational efficiency, implemented by AD MEPSO Skopje Loan agreement IBRD no MIK and Loan agreement ORD no IVIK ProjecVs financial statements 31 December 2015 Special - purpose Statement of Special Accounts For the period: 1 January 2015 through 31 December 2015 Account number: Depository Bank: NLB Tutunska Banka AD Skopje Address: 1 Vodnjanska, Skopje Loan Number: 4814 IVIK Loan Number: MK Currency: EUR In EUR 31 December December 2014 loan no loan no loan no loan no Opening balance 2, ,756 65, ,786 Add: IBRD Replenishments: - Front Fee Direct payments 1,089,235 3,260, ,129,520 - SOE Procedures 17, , , ,000 1,106,236 3,688, ,132 4,829,520 Deduct: Front fee Project Expenditure Payments: - Goods 1,091,818 4,167, ,543 4,511,250 - Consultants' services - 49,951 50,304 40,300 1,091, , ,847 4,551,550 Closins balance 16, ,414 2, ,756 The Project has paid project expenditures from general current account of AD NMPSO Skopje in the amount of 25,038 EUR and subsequently those expenditures were reimbursed to general current account of AD NMPSO Skopje by IBRD with the withdrawal applications number 69, 70 and 73.

11 Project for support of the implementation of the investment program and improving of the overall operational efficiency, implemented by AD MEPSO Skopje Loan agreement IBRD no MK and Loan agreement IBRD no MK Notes to the Project's financial statements I general Informatlon On 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 the Borrower 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 MK with IBRD in amount of EUR 14,000,000 for additional financing of already existing project 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. 2 Project Implementation AD 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.

12 Project for support of the implementation of the investment program and improving of the overall 10 operational efficiency, implemented by AD MEPSO Skopje Loan agreement IBRD no MK and Loan agreement IBRD no MK Notes to the Project's financial statement (continued) 3 Slgnificant Accounting Policies 3.1 Statement of compliance The Project's financial statements have been prepared in accordance with the International Public Sector Accounting Standard ("IPSAS"), Financial Reporting under the Cash Basis Accounting. 3.2 Basis of preparation The 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 recognized when paid rather than when incurred. Due to the fact that the Project funding is received in Euros ("EUR") and all payments are made 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 Activities For the year For the year Accumulated up ended 31 ended 31 to 31 December in EUR December 2015 December Project activities Expansion of Skopje 5 substation (400/110 kv; 300 MVA) - Goods, including supply and installation - - 2,701, ,701,436 Rehabilitation and Construction of Interconnection and Overhead Transmission Lines - Consultants' services 49,951 40, ,021 -Goods (paid from general bank account of AD MEPSO Skopje) 25,038-25,038 - Goods, including supply and installation 4,805,621 5,111,596 16,904,704 4,880,610 5,151,896 17,178,763 Upgrading of the Existing EMS System and Planning Software - Goods, including supply and installation , ,090 Upgrading and Rehabilitation of 110 kv Substations - Consultants' services ,014 - Goods, including supply and installation 453, ,473, , ,520,407 Consultants' services - Consultants' services - 50, ,011 - Goods, including supp y and installation - 173, ,369 1,025,384 Front - end fee - Front - end fee 4814MK ,750 - Front - end fee 80440MK - 35, ,750 Total cash payments 5,334,577 5,375,397 30,105,830

13 Project for support of the implementation of the investment program and improving of the overall 11 operational efficiency, implemented by AD MEPSO Skopje Loan agreement IBRD no MK and Loan agreement IBRD no 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 25 thousand for Project activities financed with the IBRD Loan 4814 and EUR 675 thousand for Project activities financed with the IBRD Loan during the year 2015 mostly consisting of cost of customs duties, VAT and cost of supervision of transmission line fields and L/C and bank fees. a Unwlthdrawn amount As of 31 December 2015, available funds for future withdrawal from the IBRD Loan 4814MK ECSEE APL - 3 amounts to EUR 690,955. As of 31 December 2015, available funds for future withdrawal from the IBRD Loan 80440MK ECSEE APL - 3 amounts to EUR 3,634,195. The Project is required to spend or return all received funds; therefore any unspent cash represents liability at each reporting date.

14 GrantThornton