Power Recovery Project IBRD Loan No. 8429 Financial Statements for the year ended 31 December 2017 (with independent auditors' report thereon) Contents INDEPENDENT AUDITORS' REPORT .............................................................................................................. STATEM ENT OF SOURCES AND USES OFFUNDS ...................................................................................... 1 STATEM ENT OF EXPENDITURES................................................................................................................. 2 1. GENERAL .................................................................................................................................................. 3 2. BASIS OF PREPARATION ........................................................................................................................ 3 3. SUM M ARY OF SIGNIFICANT ACCOUNTING POLICIES...................................................................3 4. KESH CONTRIBUTIONS .......................................................................................................................... 4 5. IBRD FUNDIN .......................................................................................................................................... 4 6. PURCHASE OF ENERGY .......................................................................................................................... 5 7. VAT PAYM ENTS REIM BURSABLE BY KESH ...................................................................................... 5 8. LOAN INTERE ST AND PRINCIPAL PAYM EN .................................................................................... 5 9. CASH AT BANKS ....................................................................................................................................... 5 STATEM ENT OF PROJECT S ACCOUNT .................................................................................................. I ErnsL & Young Ceiified Auditors Tel +35542419575 Albania Branch ey.com NLJIS K519110121 ± "> i ibrahim Rugova Str. Sky Tower,6ioor 1 . 11001,Tira,raAlbania Independent Auditor's Report To the shareholder and management of Korporata Elektroenergjitike Shqiptare sh.a. Opinion We have aud'ted the financial statements of "Albanian Power Recovery Project" ("the Project"), implemented by Korporata Elektroenergjitike Shqiptare sh.a. ("the Company" or "KESH") and financed by Internatonal Bank for Reconstruction and Development ("IBRD") Loan No. 8429, which comprise the Statement of Sources and Uses of Funds and Statement of Expenditures for the year ended 31 December 2017, and notes, comprising sfgnificant accounting policies and other explanatory information. In our opinion, the accompanying financial statements are prepared in all material respects, in accordance with the basis of accounting described in Notes 2 and 3 to the financial statements. 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 Financial Statements sectfon of our report. We are independent of the Company and the Project in accordance with International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) and with Institute of Authorized Chartered Auditors of Albania Code of Ethics (IEKA Code), that are relevant to our audit of the Project's financial statements, and we have fulfilled our other ethical responsibilities n accordance with these requirements and the IESBA Code and IEKA 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 and Distribution We draw attention to Notes 2 and 3 to the financial statements, which describe the basis of accounting. The financial statements are prepared to prov'de information to the Project's lender, and to the shareholder and management of the Company. As a result, the financial statements may not be sutable for another purpose. Our report is intended solely for the Project's management, the lender, and the shareholder and management of the Company and should not be used by other parties. Our opinion is not modified in respect of this matter. Report on Other Requirements As required under the Terms of Reference guidelines, we have examined the supplementary schedule of the Special Account and Project Account associated with the Project. We report that this supplementary schedule is consistent, in all material aspects, with the accounting and financial matters reflected in the Project's financial statements for the year ended 31 December 2017. Other Matters - Prior Year Auditor's Report The financial statements of "Albanian Power Recovery Project" ("the Project"), implemented by Korporata Elektroenergjtike Shqiptare Sh.a. ("the Company" or "KESH"), as at and for the year ending on 31 December 2016, were audited by another auditor, who issued an unqualified opinion on July 27, 2017. Other Matters The Project's Statement of Sources and Uses of Funds, includes numeric information for cumulative funds and expenditure from the inception date to 31 December 2017. These balances are provided for information purposes only and do not form part of the audited financial statements. Responsibilities of Management and Those Charged with Governance for the Project's Financial Statements Management is responsible for the preparation of the Project's financial statements in accordance with the basis of accounting described in Notes 2 and 3 to the 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. Those charged with governance are responsible for overseeing the Project's financial reporting process. Auditor's Responsibilities for the Audit of the Project's Financial Statements Our objectives are to obtain reasonable assurance about whether the Project's financial statements as a whole are tree 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 Project's 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 Project's 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 Project's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. We communicate with those charged with governance of the "Albania Power Recovery Project" 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. Ernst & Young Ekspert6 Kontab6l t& Auto.ri2uar Dega n6 Shqip6ri 8 November 2018 Tirane, Albania Power Recovery Project IBRD Loan No 8429 (Amounts in EUR, unless otherwise stated) Statement of Sources and Uses of Funds for the year ended 31 December 2017 Cumulative from 26 October 2015 Year ended Year ended (inception date) to Notes 31-Dec-17 31-Dec-16 3-Dec-17 (unaudited) Sources of funds IBRD funding Direct payment 5 17,180,017 - 17,180,017 Special Account replenishment 5 4,418,755 - 4,418,755 KESH contribution 7 4,319,754 - 4,319,754 Total 25,918,526 - 25,918,526 Uses of funds Purchase of energy 6 21,598,772 - 21,598,772 VAT balance paid by IKESH 7 4,319,754 - 4,319,754 Total 25,918,526 - 25,918,526 Surplus of purchases over disbursements Cash at the beginning of the period - - Transfer from special accounts 5 4,418,755 - 4,418,755 Net decrease in cash during the year 5 (4,418,755) - (4,418,755) Bank charges (2,137) - (2,137) Fund transfer from KESH 2,500 - 2,500 Interest 63 - 63 Cash at the end of the period 9 426 426 The Statement of Sources and Uses of Funds is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 2 to 5. The financial statement of the Power Recovery Project as implemented by Korporata Elektroenergjitike Shqiptare Sh.a. (KES was authorised for issue by the Management of KESH on 30 October 2018 and signed on its behalf by: RakelaLArbn Tasi Director ofPMU Project Ac ountant Korporata Elektroenergj th c e sh.a. Korporata Elektroenergeie Shqiptare Sh a. Power Recovery Project IBRD Loan No 8429 (Amounts in EUR, unless otherwise stated) Statement of Expenditures For the year ended 31 December 2017 Direct payment Replenishment Total Date (all categories) (all categories) disbursements Ayen Energy Trading sh.a. 10/10/2017 - 238,500 238,500 EFT AG 10/10/2017 - 100,354 100,354 Axpo doo Beograd 10/10/2017 - 444,960 444,960 HSE DOO 10/10/2017 - 401,501 401,501 A&A Group sh.p.k 10/10/2017 - 232,524 232,524 Future Energy AL 20/10/2017 239,040 - 239,040 Devoll Hydropower sh.a 20/10/2017 690,228 - 690,228 GSA sh,p.k 24/10/2017 1,857,600 - 1,857,600 GEN-I Tirana sh.p.k 24/10/2017 2,975,335 - 2,975,335 EFT AG 07/11/2017 - 1,499,500 1,499,500 EFT AG 22/11/2017 4,182,987 - 4,182,987 EFT AG 11/12/2017 1,605,254 - 1,605,254 GEN-I Tirana sh.p.k 11/12/2017 2,009,952 - 2,009,952 Devoll Hydropower sh.a 11/12/2017 1,485,432 - 1,485,432 GSA sh.p.k 11/12/2017 1,659,924 - 1,659,924 Network for Trading doo Beograd 11/12/2017 474,264 - 474,264 Aycn Energy Trading sh.a. 15/12/2017 - 238,500 238,500 Albanian Energy Supplier 15/12/2017 - 124,337 124,337 HSE DOO 15/12/2011 0 7 4,18755 21,58,7 Total171007 44855 2,972 Power Recovery Project IBRD Loan no. 8429 Notes to the Financial Statements for the year ended 31 December 2017 (Amounts in EUR, unless otherwise stated) 1. General These financial statements are prepared for reporting on the implementation of "Albania Power Recovery Project" (the "Project"), by Korporata Elektroenergjitike Sbqipetare Sh.a ("KESH"). The main objective of the "Albania Power Recovery Project" is to improve the reliability of supply and financial viability of the power sector in the Republic of Albania. This project consists of four components: i) short-term complementary power import support; ii) upgrading distribution infrastructure, iii) transmission meter/data center upgrade; and iv) supporting power sector reforms and project implementation. The total cost of the Project is estimated to be financed by the following financing agreement: * IBRD Loan No. 8429 Based on the Loan Agreement dated 3 November 2014 the ("Loan Agreement"), the International Bank for Reconstruction and Development ("IBRD") extends to the Republic of Albania, represented by the Minister of Finance (the "Borrower"), a loan of EUR 112,100,000 that will be used to finance the implementation of the "Albania Power Recovery Project". Sub-Loan Agreement Pursuant to the Loan Agreement and based on the Sub-Loan agreement dated 26 January 2015 (the "Sub- Loan"), signed between the Albanian Ministry of Finance and KESH, the Borrower sub-lent to KESJH a portion of the Loan amounting to EUR 22,477,504 for the purpose of implementing the Project. The Sub- Loan is payable over a period not exceeding 22.5 years from the date of the Sub-Loan Agreement, including a grace period that doesn't exceed 7 years, in semi-annual principal instalments commencing on 15 November 2021 and ending on 15 May 2036. The Sub-Loan bears a fixed interest rate of 0.75% p.a. The front-end fee payable by KESH is 0.25% of the Sub-Loan amount. 2. Basis of preparation The Project's Financial Statements have been prepared on the cash basis of accounting, which differs from Albanian and International Financial Reporting Standards. On this basis, revenues are recognised when received rather than when earned and expenses are recognised when paid rather than when incurred. Accordingly, direct payments of the Project's expenses, are recognized as sources and uses of funds at the time the payment is made. Fixed assets are not capitalised for the purpose of these financial statements. Cumulative information on cash receipts and disbursements from the Project's inception to date is presented in the Statement of Sources and Uses of funds for information purposes only (unaudited). 3. Summary of significant accounting policies The accounting policies set out below have been applied consistently throughout the period. a) Reporting currency The Project financial statements are presented in Euro, as its reporting currency for consistency with the reporting currency of the financing agreement of the principle donors. Funds are received in EUR and expenses are sustained in the same currency of funds received. Cash and bank balances in other currencies are converted into EUR at the year-end rate of exchange. Transactions in other currencies are converted into EUR using the exchange rate ruling at the date of the transaction. Foreign exchange differences that may arise are recognized in the Statement of Sources and Uses of Funds. The applicable official Bank of Albania (EUR to LEK) as at 31 December 2017 is as below: 31 December 2017 31 December 2016 LEK/EUR 132.95 135.23 3 Power Recovery Project IBRD Loan no. 8429 Notes to the Financial Statements for the year ended 31 December 2017 (Amounts in EUR, unless otherwise stated) 3. Summary of significant accounting policies (continued) b) Recognition of revenues and expenses Revenues are recognised when received rather than when earned, and expenses are recognised when paid rather than when incurred. Accordingly, direct payments of the Project's expenses, which are made from the proceeds of loans, are recognised as sources and uses of funds at the time the payment is made. c) Loans Principal and Expenditures Accounting policy Loan related expenditure (interest and other charges) are included in the Statement of Sources and Uses of Funds if a direct Loan Agreement between KESH and the lender is signed and if paid by the project accounts. The payments are presented as both KESH contribution under "Sources of Funds" and as expenditure under the "Uses of Funds". If an agreement has been entered between KESH, and the Government of Albania for netting of rights and obligations, the related netting of principal and interest is included in the Project's financial statement. However, if a Sub-loan Agreement is entered between KESH and Government of Albania, the loan expenditure is not included in the Statement of Sources and Uses of Funds. d) Taxation In accordance with the General Conditions applicable to Development Credit Agreements, no proceeds of the Credit shall be withdrawn on account of payments for any taxes levied by, or in the territory of, the Borrower on goods or services, or on the importation, manufacture, procurement or supply thereof 4. KESH Contributions As at 31 December 2017, KESH has not paid any contribution related to payments of loan interest and principal for IBRD. Disbursement arrangements with IBRD include the following methods: - Advances into a Designated Account of the Borrower represent advances made to finance eligible expenditures as they are incurred and for which supporting documents will be provided ("Special Account Replenishment"). - Special Commitments to pay a third party represent payments made by the IBRD directly to the bank accounts of suppliers/contractors, for eligible expenditures under terms and conditions agreed with the IBRD and using letters of credit issued from banks ("Direct Payments"). 5. IBRD Funding Special Account Supplier replenishment Direct payment Energy Financing Team AG 1,599,854 5,788,241 GEN-I Tirana sh.p.k - 4,985,287 GSA sh.p.k 35 t7,524 Devoll Hydropower sh.a - 2,175,660 HSE DOO 1,540,080 - Ayen Energy Trading sh.a. 477,000 - Network for Trading doo Beograd - 474,264 Axpo doo Beograd 444,960 - Albanian Energy Supplier 124,337 Future Energy AL - 239,040 A&A Group sh.p.k 232,524 - Total 4,418,755 17,180,017 4 Power Recovery Project IBRD Loan no. 8429 Notes to the Financial Statements for the year ended 31 December 2017 (Amounts in EUR, unless otherwise stated) 6. Purchase of energy Statement of expenditures or use of funds for the purchase of energy occurred in 2017 is presented below. Supplier 2017 EFT AG 7,388,096 GEN-I Tirana sh.p.k 4,985,287 GSA sh.p.k 3,517,524 Devoll Hydropower sh.a 2,175,660 HSE DOO 1,540,080 Ayen Energy Trading sh.a. 477,000 Network for Trading doo Beograd 474,264 Axpo doo Beograd 444,960 Future Energy AL 239,040 A&A Group sh.p.k 232,524 - Albanian Energy Supplier 124,337 Total 21,598,722 All purchases are settled within the year ended as at 31 December 2017 except for the amount of EUR 119,563 to Albanian Energy Supplier, which is settled on January 2018. 7. VAT payments reimbursable by KESH All VAT payments are made by KESH during 2017. The total amount of VAT that KESH has paid through its own contribution during the year ending on 31 December 2017 is EUR 4,319,754, For this reason, it is presented in the Statement of Sources of Funds, and in the Statement of Uses of Funds. None of the VAT payments are reimbursable to KESH by IBRD or the Ministry of Finance, as per the Loan . Agreement Article 22 of the Project Appraisal Document of the Loan Agreement, the Borrower has committed to finance all applicable taxes on project expenditures, such as local taxes, custom duties and VAT. 8. Loan interest and principal payment During 2017, there have been no payments of interest to IBRD. Currently KESH is in grace period for principal repayment. As at 31 December 2017, loan interest due and unpaid (due date 15 November 2017) amounts to EUR 1,353 (LEK 179,848) as per received notice dated 25 October 2017. Part of the same notice, is the front-end fee amounting EUR 59,055 (LEK 7,851,392), which as at 31 December 2017 is not yet paid. Accrued interest as at 31 December 2017 amounts to EUR 338 (LEK 44,962). 9. Cash at banks Cash at banks as at 31 December 2017 comprises the following: 2017 2016 Credins Bank Ace. 00000949097 EUR 426 Reconciliation between opening balance of the bank account, movements during the year and the closing balance are presented in Appendix I to these financial statements. 5 Power Recovery Project IBRD Loan no. 8429 Statement of Project's Account (Supplementary schedules to the Financial Statements) Power Recovery Project Statement of Project's Accounts As at and for the year ended 31 December 2017 (Amounts in EUR, unless otherwise staed) Account No. 00000949097 Depository Bank Credins Bank Address Rr."Vaso Pash" nr.8, Tirana Currency EUR 2017 2016 Balance as at 1 January - Funds received: Transfer from designated accounts 4,418,755 Fund transfer from KESH 2,500 Interest 63 Total funds received 4,421,318 - Disbursement: Purchase of energy (4,418,755) Bank charges (2,137) - Total disbursements (4,420,892) - Cash in transit - Balance as at 31 December 426 - J1