O GrantThornton

Project's Financial Statements and Independent Auditors'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 2015

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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 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

O GrantThornton

Independent Auditors' Report

Grant Thornton DOOSV. Kiril i Metodij 52bil-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 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 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 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 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 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' ResponsibilityOur 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 AccountantsMember fin of Grant Thomton International Ltd

2

O GrantThornton

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.

OpinionIn 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 80440 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 2015.

Skopje,27 May 2016

G t omnton DOO, j

k oCertified Auditor

Suzana Stavrik Suzana Stavrik

Chartered AccountantsMember fin of Grant Thornton International 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

Project's financial statements31 December 2015

Statement of Cash Receipts and Payments

In EURFor the year ended For the year ended Cumulative up to31 December 2015 31 December 2014 31 December 2015

ReceiptsIBRD Loan 4814MKSOE Procedures 17,000 770,000 5,729,990Direct payments 1,089,235 132 14,202,267Reimbursements of fundstransferred to general bank accountof AD MEPSO 25,038 - 25,038Front - end fee 4814MK - - 51,750

1,131,273 770,132 20,009,045IBRD Loan 80440MKSOE Procedures 428,000 700,000 2,078,000Direct payments 3,260,379 4,129,520 8,252,805Front - end fee 80440MK - - 35,000

3,688,379 4,829,520 10,365,805Total IBRD Funds 4,819,652 5,599,652 30,374,850TOTAL RECEIPTS 4,819,652 5,599,652 30,374,850

PaymentsIBRD Loan 4814MKFinanced from IBRD funds

Goods (1,091,818) (773,543) (19,384,914)Goods (paid from general bankaccount 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 80440MKFinanced 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) 5,375,397 30 105,830TOTAL PAYMENTS (5,334,577) (5,375,397) (30,105,830)

Net cash (514,925) 224,255 269,020Opening balance 783,945 559,690 -Closing balance 269,020 783,945 269,020

The Project's financial statements set out on pages 3 - 11 were approved by AD MEPS SkopjeManagement on 26 May 2016 and were signed on its behalf by:

or An doosa N)sho VasilevsT1 Mr,'Simisli SpasovsnGorcno donovsk c

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Project for support of the implementation of the investment program and improving of the overall 8

operational efficiency, implemented by AD MEPSO SkopjeLoan agreement IBRD no. 4814 MIK and Loan agreement ORD no. 80440 IVIK

ProjecVs financial statements31 December 2015

Special - purpose Statement of SpecialAccounts

For the period: 1 January 2015 through 31 December 2015Account number: 00-701-00031378Depository Bank: NLB Tutunska Banka AD SkopjeAddress: 1 Vodnjanska, SkopjeLoan Number: 4814 IVIKLoan Number: 80440 MKCurrency: EUR

In EUR 31 December 2015 31 December 2014loan no. 4814 loan no. 80440 loan no. 4814 loan no. 80440

Opening balance 2,189 781,756 65,904 503,786Add:IBRD Replenishments:

- Front Fee - -

- Direct payments 1,089,235 3,260,379 132 4,129,520- SOE Procedures 17,000 428,000 770,000 700,000

1,106,236 3,688,379 770,132 4,829,520Deduct:Front fee - - - -Project Expenditure Payments:- Goods 1,091,818 4,167,770 773,543 4,511,250- Consultants' services - 49,951 50,304 40,300

1,091,818 4.217,721 823,847 4,551,550Closins balance 16,606 252,414 2,189 781,756

The Project has paid project expenditures from general current account of AD NMPSOSkopje in the amount of 25,038 EUR and subsequently those expenditures were reimbursedto general current account of AD NMPSO Skopje by IBRD with the withdrawal

applications number 69, 70 and 73.

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 InformatlonOn 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. 80440 MK

with 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.

2 Project ImplementationAD MEPSO is responsible for the implementation of the Project. A ProjectImplementation 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 thesubstation, 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 overall 10operational 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 Slgnificant Accounting Policies3.1 Statement of complianceThe 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 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 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 ActivitiesFor the year For the year Accumulated up

ended 31 ended 31 to 31 Decemberin EUR December 2015 December 2014 2015Project 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 49,951 40,300 249,021-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 17,178,763Upgrading 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 453,987 132 8,473,393

453,967 132 8,520,407Consultants' services- Consultants' services - 50,304 147,011- Goods, including supp y and installation - 173,065 878 373

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

- .. 86,750

Total cash payments 5,334,577 5,375,397 30,105,830

Project for support of the implementation of the investment program and improving of the overall 11operational 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)

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 80440 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 amountAs 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.

GrantThorntonwww.grant-thormton.com.rnk