Georgian State Electrosystem JSC. Special Purpose Project Financial Statements for the year ended 31 December 2016

Transcription

1 Public Disclosure Authorized Georgian State Electrosystem JSC Public Disclosure Authorized Special Purpose Project Financial Statements for the year ended 31 December 2016 Public Disclosure Authorized TRANSMISSION GRID STRENGTHENING PROJECT Loan No. 8377GE dated 3 September 2014 Public Disclosure Authorized

2 Contents Independent Auditors Report 3 Statement of Balance Sheet 6 Statement of Designated Account 7 Statement of Funds Received 8 Statement of Uses of Funds 9 Statement of Expenditures 11 Notes to the Special Purpose Project Financial Statements 13

3 KPMG Georgia LLC 2nd Floor, Besiki Business Centre 4, Besiki Street 0108 Tbilisi, Georgia Telephone Internet Independent Auditors Report on Special Purpose Project Financial Statements To the Management Board of Georgian State Electrosystem JSC Opinion We have audited the special purpose project financial statements of the (the Project ), financed under the International Bank for Reconstruction and Development (the IBRD ) Loan Agreement No. 8377GE dated 3 September 2014, implemented by Georgian State Electrosystem JSC (the Company ), which comprise the Statement of Balance Sheet as at 31 December 2016 and the Statements of Designated Account, Funds Received, Uses of Funds, and Expenditures for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. The special purpose project financial statements have been prepared by management in accordance with the International Public Sector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting and in conformity with the World Bank s Financial Management Sector Board s Guidelines: Annual Financial Reporting and Auditing for World BankFinanced Activities (the World Bank Guidelines ) as described in Note 2 to the special purpose project financial statements. In our opinion, the accompanying special purpose project financial statements present fairly, in all material respects, the financial position of the Project as at 31 December 2016, and its sources and uses of funds for the year then ended in accordance with the International Public Sector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting and the World Bank Guidelines. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the Special Purpose Project Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Emphasis of Matter Basis of Accounting and Restriction on Use We draw attention to Note 2 to the special purpose project financial statements, which describes the basis of accounting. The special purpose project financial statements are prepared to assist the Company to comply with the requirements of IBRD and for providing information to the Government of Georgia and IBRD to assist them in evaluating the Project implementation. As a result, the special purpose project financial statements may not be suitable for another purpose. Our opinion is not modified in respect of this matter. KPMG Georgia LLC, a company incorporated under the Laws of Georgia, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity.

4 Loan No. 8377GE dated 3 September 2014 Independent Auditors Report Page 2 Responsibilities of Management and Those Charged with Governance for the Special Purpose Project Financial Statements Management is responsible for the preparation and fair presentation of these special purpose project financial statements in accordance with the International Public Sector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting and the World Bank Guidelines, for determining the acceptability of the basis of accounting and for such internal control as management determines is necessary to enable the preparation of special purpose project financial statements that are free from material misstatement, whether due to fraud or error. Those charged with governance are responsible for overseeing the Company s financial reporting process. Auditors Responsibilities for the Audit of the Special Purpose Project Financial Statements Our objectives are to obtain reasonable assurance about whether the special purpose project financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors 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 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 special purpose project financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the special purpose project financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain 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. Obtain 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. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Evaluate the overall presentation, structure and content of the special purpose project financial statements, including the disclosures, and whether the special purpose project financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

5 Loan No. 8377GE dated 3 September 2014 Independent Auditors' Report Page3 We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. The engagement partner on the audit resulting in this independent auditors' report

6 Loan No. 8377GE dated 3 September 2014 Statement of Balance Sheet as at 31 December 2016 In USD Note Assets Project designated account 4 Total assets Funds received Funds received from IBRD Cofinancing Total funds received Project expenditures Project expenditures financed by IBRD Total project expenditures Total project funds less expenditures 3,000, ,000 3,000, ,000 28,942,986 7,703,418 8,934 28,951,920 7,703,418 (25,951,920) (7,103,418) (25,951,920) (7,103,418) 3,000, ,000 The statement of balance sheet is to be read in conjunction with the notes to, and forming part of, the special purpose project financial statements set out on pages 13 to 18. 6

7 Loan No. 8377GE dated 3 September 2014 Statement of Designated Account for the year ended 31 December 2016 In USD Balance at 1 January IBRD advances and replenishments during the year Project expenditures paid during the year Balance at 31 December ,000 10,406,475 1,085,883 (8,006,475) (485,883) 3,000, ,000 The statement of designated account is to be read in conjunction with the notes to, and forming part of, the special purpose project financial statements set out on pages 13 to 18. 7

8 Loan No. 8377GE dated 3 September 2014 Statement of Funds Received for the year ended 31 December 2016 In USD Fund received by sources Year ended 31 December 2016 Actual Planned Variance Total Cumulative to Year ended Year ended Cumulative to Year ended Year ended Cumulative to Project 31 December 31 December 31 December 31 December 31 December 31 December 31 December Cost Year ended 31 December 2015 IBRD funds Government funds Total funds received Total use of funds Net flow of funds 21,239,568 7,553,418 28,942,986 16,160,330 7,567,209 23,877,539 5,079,238 (13,791) 5,065,447 60,000,000 8,934 8,934 52,000 52,000 (43,066) (43,066) 1,875,000 21,248,502 7,553,418 28,951,920 16,212,330 7,567,209 23,929,539 5,036,172 (13,791) 5,022,381 61,875,000 18,848,502 6,953,418 25,951,920 13,812,330 6,967,209 20,929,539 5,036,172 (13,791) 5,022,381 61,875,000 2,400, ,000 3,000,000 2,400, ,000 3,000,000 The statement of funds received is to be read in conjunction with the notes to, and forming part of, the special purpose project financial statements set out on pages 13 to 18. 8

9 In USD Project Activities Year ended 31 December 2016 Year ended 31 December 2015 Georgian State Electrosystem JSC Loan No. 8377GE dated 3 September 2014 Statement of Uses of Funds for the year ended 31 December 2016 Actual Planned Variance Total Cumulative to Year ended Year ended Cumulative to Year ended Year ended Cumulative to Project 31 December 31 December 31 December 31 December 31 December 31 December 31 December Cost Part A: Transmission System Strengthening 18,803,662 6,953,418 25,757,080 12,980,330 6,967,209 19,947,539 5,823,332 (13,791) 5,809,541 52,350,000 1a: Procurement of plant design, supply and installation of 220 kv AkhaltsikheBatumi overhead transmission line 12,424,546 6,330,000 18,754,546 7,481,050 6,330,000 13,811,050 4,943,496 4,943,496 36,650,000 1b: Consulting services for supervision and management 683, ,093 1,144, , ,584 1,267,584 (116,685) (6,491) (123,176) 3,569,573 1c: Consulting services 162, , , ,625 (7,300) (7,300) 162,325 1d: Supply of TL equipment 5,695,801 5,695,801 4,699,280 4,699, , ,521 8,920,000 1e: Contingencies 3,048,102 Part B: Wholesale Power Exchange Platform 2a: Design, supply and installation of the power exchange platform 490, ,000 (490,000) (490,000) 7,500,000 3,375,000 2b: Supervision of supply and installation of the platform 240, ,000 (240,000) (240,000) 1,000,000 2c: Design, supply and installation of SCADA/EMS upgrade 250, ,000 (250,000) (250,000) 3,125,000 The statement of uses of funds is to be read in conjunction with the notes to, and forming part of, the special purpose project financial statements set out on pages 13 to 18. 9

10 Loan No. 8377GE dated 3 September 2014 Statement of Uses of Funds for the year ended 31 December 2016 Project Activities Year ended 31 December 2016 Actual Planned Variance Total Year ended Cumulative to Year ended Year ended Cumulative to Year ended Year ended Cumulative to Project 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December Cost Part C: Electricity Sector Strategic Environmental and Social Assessment 3a: Electricity sector strategic environmental and social assessment 1,250,000 1,250,000 Part D: Project Management and Transmission Systems Studies 44,840 44, , ,000 (297,160) (297,160) 625,000 4a: Feasibility study and conceptual design 44,840 44, , ,000 (191,160) (191,160) 500,000 4b: Environmental and social impact assessment 106, ,000 (106,000) (106,000) 125,000 Loan endorsement fee 150, , ,000 Total Project Expenditures 18,848,502 6,953,418 25,951,920 13,812,330 6,967,209 20,929,539 5,036,172 (13,791) 5,022,381 61,875,000 The statement of uses of funds is to be read in conjunction with the notes to, and forming part of, the special purpose project financial statements set out on pages 13 to

11 Loan No. 8377GE dated 3 September 2014 Statement of Expenditures for the year ended 31 December 2016 In USD 2016 Withdrawal application No. Part A: Transmission system strengthening Expenditures Advances Total Part B: Wholesale power exchange platform Part C: Electricity sector strategic environmental and social assessment Part D: Project management and transmission systems studies: Advance payment Total disbursement A007 2,400,000 2,400,000 A008 1,612,078 1,612,078 A , ,861 A , ,885 A , ,415 A012 1,435,426 1,435,426 A013 2,885,703 2,885,703 A014 1,123,309 1,123,309 A015 2,143,494 2,143,494 A016 1,018,682 1,018,682 A , ,619 A018 1,748,842 1,748,842 A019 1,661,360 1,661,360 A020 1,222,837 1,222,837 A ,151 35, ,057 18,803,662 35,906 2,400,000 21,239, The statement of expenditures is to be read in conjunction with the notes to, and forming part of, the special purpose project financial statements set out on pages 13 to 18.

12 Transmission Grid Stre11gtlle11ing Project Loan No. 8377GE dated 3 September 2014 Statement of Expenditures for the year ended 31 December 2016 /11 USD 2015 Withdrawal application No. AOOl Part A: Transmission system strengthening Expenditures Part B: Wholesale power exchange platform Part C: Electricity sector strategic environmental and social assessment Part D: Project management and transmission systems studies: Advances Total Total Advance disburse payment ment 600, ,000 A , ,535 A003 6,330,000 6,330,000 A004 24,789 24,789 A , ,141 A , ,953 6,953, ,000 7,553,418 The special purpose R oject financial st ents were approved by the management of the Company on alfby: Sulkh aun Int rnational Projects and Reporting Department 12 The statement of expenditures is to be read in conjunction with the notes to, and forming part of, the special purpose project financial statements set out on pages 13 to 18.

13 Loan No. 8377GE dated 3 September 2014 Notes to the Special Purpose Project Financial Statements for the year ended 31 December Background is implemented by Georgian State Electrosystem JSC (parts A, B and D) and the Ministry of Energy of Georgia (component C). The Project will: (i) improve stability and security of supply of the southwestern part of the transmission grid by additional transmission connection; (ii) provide transmission services to the newly constructed hydropower station; (iii) establish power exchange platform, and (iv) assess the environmental impact of the sector strategy. The purpose of these special purpose project financial statements is to provide information to the Government of Georgia and International Bank for Reconstruction and Development (IBRD) to assist them in evaluating the Project implementation. (a) Company Georgian State Electrosystem JSC (the Company ) is a joint stock company established under the laws of Georgia on 12 November 2002 by the means of the merger of Electrogadatsema JSC and Electrodispetcherizatsia2000 LLC and is their legal successor in title. The Company s registered office is 2 Baratashvili Street, Tbilisi 0105, Georgia. The principle activities of the Company are electricity transmission and dispatching over the entire territory of Georgia that are regulated by the law on Electricity and Natural Gas. EnergoTrans LLC, the major subsidiary of the Company, was established as a stateowned enterprise in The principal activity of EnergoTrans LLC is electricity transmission, including export and transit of electricity, via the 500kV Vardzia and Zekari energy transmission lines and the 400kV Meskheti interconnection line with Turkey constructed as part of the Black Sea Transmission Network Project. At 31 December 2016 and 2015 the parent and ultimate parent of the Company was the Partnership Fund JSC. The ultimate controlling party of the Company is the Government of Georgia. (b) Project The Project commenced in 2015 and is expected to be completed by 31 March The Project is financed by IBRD under the loan agreement No. 8377GE signed between the Government of Georgia and IBRD on 3 September 2014 and assigned to the Company on 23 December 2014 (the Loan Agreement). According to the Loan Agreement Project implementation consists of the following categories: 13

14 Loan No. 8377GE dated 3 September 2014 Notes to the Special Purpose Project Financial Statements for the year ended 31 December 2016 Project Categories Project cost (USD million) IBRD financing (USD million) IBRD financing as % of project cost (1) Goods, works, nonconsulting services, and consultant s services for Part A of the Project (2) Goods, small works, nonconsulting services, and consultants services for Part B and D of the Project (3) Consultants services for Part C of the Project (4) Frontend fee Total financing required Part A: Transmission system strengthening (USD million) (1) Construction of a high voltage transmission line from Akhaltsikhe to Batumi, through: (a) the supply and installation of a double circuit, 220 kv transmission line from Akhaltsikhe backtoback and 500/400/220 kv substation (Akhaltsikhe station) to Batumi 220 kv substation; and (b) the supervision of the supply and installation of the Akhaltsikhe Batumi transmission line. (2) Provision of equipment of high voltage transmission lines connecting substations Tskhaltubo, Kutaisi and Zestafoni. (3) Rehabilitation of the high voltage transmission line Kolkhida 1 connecting substations Menji and Kutaisi. Part B: Wholesale power exchange platform (USD 6 million) (1) Design, Supply and installation of a power exchange platform including: (a) the provision of hardware and software for metering, balancing, and trading systems; and (b) the supervision of the supply and installation of the said platform. (2) Updating of the Supervisory Control and Data Acquisition and Energy Management Systems. Part C: Electricity sector strategic environmental and social assessment (USD 1.0 million) Preparation of an electricity sector strategic environmental and social assessment. Part D: Project management and transmission systems studies (USD 0.5 million) Provision of assistance to the Project Implementing Entity for the purposes of: (1) effective management and implementation of Project activities; and (2) the preparation of: (a) a new transmissionsystem expansion plan; (b) prospective transmission line feasibility studies; and (c) the preliminary designs for the prospective transmission lines. 14

15 Loan No. 8377GE dated 3 September 2014 Notes to the Special Purpose Project Financial Statements for the year ended 31 December 2016 (c) Georgian business environment The Project s operations are located in Georgia. Consequently, the Project is exposed to the economic and financial markets of Georgia which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by the projects executed in Georgia. 2. Basis of preparation and significant accounting policies (a) Statement of compliance These special purpose project financial statements have been prepared in accordance with International Public Sector Accounting Standard: Financial Reporting under the Cash Basis of Accounting and in conformity with the World Bank s Financial Management Sector Board s Guidelines: Annual Financial Reporting and Auditing for World BankFinanced Activities (the World Bank Guidelines ). (b) Cash basis of accounting The cash basis of accounting recognizes transactions and events only when cash is received or paid by the Company. (c) Presentation currency The national currency of Georgia is the Georgian Lari ( GEL ). These special purpose project financial statements are presented in United States Dollars ( USD ). All financial information presented in USD has been rounded to the nearest USD unless otherwise stated. (d) Transactions in other currencies Transactions related to funds disbursed through direct payments by IBRD in currencies other than presentation currency are converted in USD at the exchange rate prevailing at the date of the transaction using the IBRD rate at the transaction date. Transactions through designated account are converted in USD at the exchange rate prevailing at the date of the transaction using the rate at the transaction date as determined by the Bank the accounted is maintained. (e) Cash Cash comprises bank balances. (f) Budget The budget is developed on the cash basis, using the same classifications and periods as these special purpose project financial statements. 15

16 Loan No. 8377GE dated 3 September 2014 Notes to the Special Purpose Project Financial Statements for the year ended 31 December 2016 (g) Categories of expenditures The categories of expenditures incurred are presented in line with the categories specified in the Loan Agreement. 3. Reconciliation between the amounts received by the Project from IBRD and disbursed by IBRD USD 2016 Withdrawal application No: A007 Withdrawal application No: A008 Withdrawal application No: A009 Withdrawal application No: A010 Withdrawal application No: A011 Withdrawal application No: A012 Withdrawal application No: A013 Withdrawal application No: A014 Withdrawal application No: A015 Withdrawal application No: A016 Withdrawal application No: A017 Withdrawal application No: A018 Withdrawal application No: A019 Withdrawal application No: A020 Withdrawal application No: A021 Company IBRD Variance 2,400,000 2,400,000 1,612,078 1,612, , , , , , ,415 1,435,426 1,435,426 2,885,702 2,885,702 1,123,309 1,123,309 2,143,494 2,143,494 1,018,682 1,018, , ,619 1,748,842 1,748,842 1,661,360 1,661,360 1,222,837 1,222, , ,057 21,239,568 21,239,568 16

17 Loan No. 8377GE dated 3 September 2014 Notes to the Special Purpose Project Financial Statements for the year ended 31 December 2016 USD Company IBRD Variance 2015 Withdrawal application No: A , ,000 Withdrawal application No: A , ,535 Withdrawal application No: A003 6,330,000 6,330,000 Withdrawal application No: A004 24,789 24,789 Withdrawal application No: A , ,141 Withdrawal application No: A , ,953 7,553,418 7,553, Project designated account Opening balance at 1 January 600,000 Closing balance at 31 December 2,999, ,244 Interest earned (3,254) Wire transfer fee Total 3,000, ,000 The Company transfers the interest earned on designated account to the Company general bank account at the beginning of every month. 5. Financial covenants According to Section IV of the Project Agreement (part of the Loan Agreement), the Company should maintain a ratio of current assets to current liabilities of not less than 1. Under the Project Agreement current assets means, all assets, which could, in the ordinary course of business, be converted into cash within twelve months, including accounts receivable, marketable securities, inventories and prepaid expenses properly chargeable to operating expenses within the next fiscal year. The current liabilities means all liabilities which will become due and payable or could under circumstances then existing be called for payment within twelve months, including accounts payable, customer advance, debts service requirements, taxes and payments in lieu of taxes, and dividends. The management calculates the above financial covenant at the end of each year based on both, standalone financial information of the Company and consolidated financial statements of the Company and its subsidiaries (the Group ) prepared in accordance with IFRSs. 17

18 Loan No. 8377GE dated 3 September 2014 Notes to the Special Purpose Project Financial Statements for the year ended 31 December 2016 As at 31 December 2016 the Company and the Group were in breach of the above financial covenant as the ratio of current assets to current liabilities based on both, standalone financial information of the Company and consolidated financial statements of the Group prepared in accordance with IFRSs was less than 1 (as at 31 December 2015 the Company and the Group were also in breach of the above financial covenant). The Group management assessed that the main reason for the breach of the covenant is related to the fact that current liabilities also includes payables in relation to construction activities financed by IBRD and other creditors. Without considering that part of payables related to construction activities, the current ratio would have been above 1 (i.e. in compliance with the covenant) for the Company standalone financial information but would have been below 1 (i.e. in breach of the covenant) for the Group consolidated financial statements as at 31 December In case of breach of the covenant the loan agreement does not prescribe explicitly any change in the loan disbursement or repayment schedule. The management of the Group obtained clarification from the IBRD that in general, the remedial measures in case of breaching a financial covenant such as acceleration, suspension, and cancellation is applied in extreme cases when the risk, which the respective financial covenant is aimed to address, is materialized. Such risks include many factors and are not limited to the financial covenants only. Therefore, the Company management does not expect that the above breach of financial covenant as at 31 December 2016 will affect the loan repayment schedule. The Company and the Group were in compliance with other covenants as at 31 December