MINISTRY OF ENERGY AND COAL INDUSTRY OF UKRAINE SECOND POWER TRANSMISSION PROJECT, PART 3, SPECIAL PURPOSE FINANCIAL STATEMENTS For the period from 01 January 2018 to 31 December 2018 Together with Independent Auditor's Report IBDO SECOND POWER TRANSMISSION PROJECT, PART 3 SPECIAL PURPOSE FINANCIAL STATEMENTS For the period from 01 January 2018 to 31 December 2018 In USD Contents: INDEPENDENT AUDITOR'S' REPORT 3-5 SUMMARY OF SOURCES AND USES OF FUNDS 6 STATEMENT OF WITHDRAWALS FROM THE LOAN ACCOUNT 7 STATEMENT OF WITHDRAWALS THROUGH THE SUMMARY OF STATEMENTS OF EXPENDITURES 8 STATEMENT OF CASH WITHDRAWAL FROM SPECIAL ACCOUNTS 9 SPECIAL ACCOUNT STATEMENT 10 STATEMENT OF FACTUAL EXPENDITURES IN NATIONAL CURRENCY 11 RECONCILIATION BETWEEN RECORDS OF PIU AND THE BANK 12 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS 13 WORLD BANK AUDIT DOCUMENTATION CHECKLIST 16 2 BDO .b.ua [ - Te;: +806 7 04 e-mail- dnipro@bdocomL1 UKans Opinion We have audited the accompanying In our opinion, the accompanying special purpose financial special purpose financial statements statements give true and fair view of the sources and uses of of the Second Power Transmission funds of the Loan No. 8462-UA in respect of the Second Power Project, Part 3 (the "Project"), Transmission Project, Part 3, for the period from 01 January financed from the Loan No. 8462-UA 2018 to 31 December 2018, in accordance the Bank's for the period from 01 January 2018 regulations. to 31 December 2018, which External funds have been used in compliance with the comprise: requirements of the corresponding general conditions, financial M Summary of Sources and Uses of agreements, and the Disbursement Letter, paying due attention Funds as at 31 December 2018; to efficiency and cost-effectiveness; and have been used only for the corresponding purposes. * Report on the Statements of Conditions of the Loan Agreement NQ 8462-UA do not provide for Expenditure from 01 January the use of partners' funds. 2018 to 31 December 2018; The services have been purchased in compliance with the a Special Account Statement for corresponding general conditions, financial agreements, and the the period from 01 January 2018 Disbursement Letter. to 31 December 2018; Accounting and storing of the necessary interim documents, N Summary of significant accounting data and accounts regarding all Project transactions, accounting policies and other including those concerning the expenditures disclosed in the explanatory notes. Statements of actual expenditures, are performed in a due manner. There is a clear interconnection between accounting data and the financial statements provided to the World Bank. The prepared special purpose financial statements comply with the requirements of generally accepted accounting principles and practices, and the instructions from the World Bank; and truly and objectively reflect the financial position of the Project as at 31 December 2018 as well as the resources and expenditures for the period from 01 January 2018 to 31 December 2018. * Opinion regarding expenditures n addition, with regard to the expenditures for the period from 01 January 2018 to 31 December 2018, adequate supporting documentation was maintained to confirm applications submitted to the Bank for reimbursement of the expenditures incurred, and that the expenditures stated in the withdrawal applications are to be financed in accordance with the terms and conditions of the Loan N2 8462-UA. tE-'. Ll UKram , 1 i XCC mem c of C Im Fme 10rt aF h -~1IBDO 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 Auditor's Responsibilities for the Audit of the Special Purpose Financial Statements section of our report. We are independent of the Ministry of Energy and Coal Industry of Ukraine in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA's Code), and ethical requirements applied in Ukraine to our audit of financial statements, and we have fulfilled our other ethical responsibilities in accordance with the IESBA's Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Emphasis of matter We draw attention to Note 2 to the Special Purpose Financial Statements, where the fact is disclosed that the Closing Date is 30 June 2020, or such later date set by the Bank. We do not further qualify our opinion in this regard. Responsibility of Management and Those Charged with Governance for the Special Purpose Financial Statements Management is responsible for the preparation and fair presentation of these special purpose financial statements in accordance with World Bank's regulations, and for such internal control as management determines is necessary to enable the preparation of the special purpose financial statements that are free from material misstatement, whether due to fraud or error. In preparing the special purpose financial statements, management is responsible for assessing the Project ability to continue as a going concern within the period of uses of funds, i.e. before 30 June 2020, or such later date set by the Bank disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Project or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the financial reporting process of the Project. Auditor's Responsibility for the Audit of the Special Purpose Financial Statements Our objectives are to obtain reasonable assurance about whether the special purpose financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's 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 financial statements. IBDO 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 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 internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the management. * Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Project's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the special purpose financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Project to cease to continue as a going concern. * Evaluate the overall presentation, structure and content of the special purpose financial statements, including the disclosures, and whether the special purpose financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 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. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The audit was performed under the supervision of the Head f the Audit dep-t, Nikolaenko Alexander N. Head of the Audit dep-t Nikolaenko A.N. On behalf of BDO LLC ~ Director B LBalchenko 5.0. 24 May 2019 Kyiv SECOND POWER TRANSMISSION PROJECT, PART 3 SUMMARY OF SOURCES AND USES OF FUNDS ;7 For the period from 01 January 2018 to 31 December 2018 In USD Factual For the period Total Opening balance Special account with JSC Ukreximbank - USD 88,000 Current account with JSC Ukreximbank - UAH 1,226 Total available funds at the beginning of period: 89,226 Sources of funds: Loan of the International Bank for Reconstruction and Development 80,172 346,116 Total financing: 80,172 346,116 Project expenditure: Category 2: Goods, non-consuLting services, consultants' services, and Training for Part 3 of the Project 166,702 343,420 Total Project expenditure: 166,702 343,420 Closing balance Special account with JSC Ukreximbank - USD Current account with JSC Ukreximbank - UAH 2,696 2,696 2,696 2,696 Notes on pages 13 - 15 are an integral part of these financial statements. 6 SECOND POWER TRANSMISSION PROJECT, PART 3 STATEMENT OF WITHDRAWALS FROM THE LOAN ACCOUNT For the period from 01 January 2018 to 31 December 2018 In USD Payment USD Number of Date of application Category withdrawal Currency Amount equivalent 5-MECI/SA DA-C 28.08.2018 USD 80,172 80,172 Total: 80,172 Summary schedule by categories: DA-C 80,172 =A Total: 80,172 Notes on pages 13 - 15 are an integral part of these financial statements. 7 SECOND POWER TRANSMISSION PROJECT, PART 3 STATEMENT OF WITHDRAWALS THROUGH THE SUMMARY OF STATEMENTS OF EXPENDITURES For the period from 01 January 2018 to 31 December 2018 In USD Number of application Category 2 Total 1. Expenditures factually incurred up to 01.01.2018 and compensated by the World Bank during the period from 01.01.2018 - 31.12.2018 5-MECI/SA 9,032 9,032 Total 9,032 9,032 2. Applications submitted to the World Bank and reimbursed for the period 01.01.2018 - 31.12.2018 5-MECI/SA 71,140 71,140 Total 71,140 71,140 3. Costs actually incurred for the period from 01 January 2018 to 31 December 2018 From the Loan account - - From Special Accounts 26,605 26,605 From current accounts in 140,097 140,097 national currency Total 166,702 166,702 4. Table of differences in Project costs between the World Bank records and PIU for the period from 01 January 2018 to 31 December 2018 Reimbursed according to 71,140 71,140 IBRD information Amount of costs not provided for reimbursement as at 31 95,562 95,562 December 2018 According to PIU data 166,702 166,702 Notes on pages 13 - 15 are an integral part of these financial statements. 8 SECOND POWER TRANSMISSION PROJECT, PART 3 STATEMENT OF CASH WITHDRAWAL FROM SPECIAL ACCOUNTS For the period from 01 January 2018 to 31 December 2018 In USD Payment USD Equivalent Category Date of withdrawal Currency Amount amount Sub_account 24.01.2018 USD 12,500 12,500 2 26.01.2018 EUR 8,928 11,205 Sub_account 13.03.2018 USD 9,600 9,600 Sub_account 28.03.2018 USD 9,900 9,900 Sub_account 11.05.2018 USD 9,400 9,400 Sub_account 30.05.2018 USD 9,600 9,600 Sub_account 22.06.2018 USD 9,200 9,200 Sub_account 13.07.2018 USD 7,500 7,500 Sub_account 25.07.2018 USD 9,095 9,095 Sub_account 31.08.2018 USD 11,800 11,800 Sub_account 24.09.2018 USD 20,500 20,500 Sub_account 04.10.2018 USD 23,500 23,500 2 30.10.2018 EUR 13,392 15,401 Sub_account 28.12.2018 USD 8,971 8,971 Total: 168,172 Surnnary by categori.es Category 2 26,605 Sub_account 141,566 Total: 168,172 Notes on pages 13 - 15 are an integral part of these financial statements. 9 SECOND POWER TRANSMISSION PROJECT, PART 3 SPECIAL ACCOUNT STATEMENT For the period from 01 January 2018 to 31 December 2018 In USD Deposit bank Ukreximbank Account No. 25235000000000 Loan No. 84620 Currency USD OPENING BALANCE 88,000 Receipts: Funds received 80,172 -Accrued interest TOTAL FUNDS RECEIVED 80,172 Ho[dback: expenditure Translation of funds in national currency 141,566 Direct payments from special account 26,605 Payment of bank services . TOTAL EXPENDITURE 168,172 CLOSING BALANCE Notes on pages 13 - 15 are an integral part of these financial statements. 10 SECOND POWER TRANSMISSION PROJECT, PART 3 STATEMENT OF FACTUAL EXPENDITURES IN NATIONAL CURRENCY For the period from 01 January 2018 to 31 December 2018 In USD ----- Payment----- USD Equivalent Currency Amount amount Category 2: Goods, non-consulting services, consultants' services, and Training for Part 3 of the UAH 3,820,494 140,097 Project Total expenditure of the period 3,820,494 140,097 Notes on pages 13 - 15 are an integral part of these financial statements. 11 SEcowo POWER TRANSMISSION PROJECT, PART 3 EZCNI ATION BETWEEN RECORDS OF PIU AND THE BANK !J --e period from 01 January 2018 to 31 December 2018 n UD Loan amount 2,500,000 Subtract: Project costs: Category 2: Goods, non-consulting services, consultants' services, and Training for Part 3 of the 343,420 Project Total: (343,420) Special account with JSC Ukreximbank - USD - Current account with JSC Ukreximbank - UAH 2,696 Total available funds (2,696) Total withdrawals: (346,116) Balance as at 31 December 2018 2,153,884 Notes on pages 13 - 15 are an integral part of these financial statements. 12 SECOND POWER TRANSMISSION PROJECT, PART 3 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS For the period from 01 January 2018 to 31 December 2018 In USD 1. PROJECT DESCRIPTION Since 2004, the Ministry of Fuel and Energy (MoFE) and, more recently, the Ministry of Energy and Coal Industry (MoECI) together with the World Bank have been implementing measures to prepare and implement the energy sector reform and development program. The program is aimed at increasing the level of security and reliability of energy supply, promoting the uninterrupted operation of the energy market in Ukraine, as well as providing Ukraine with support for legal, institutional and technical harmonization of the energy sector of Ukraine with the EU internal energy market. Launched in 2015, the Second Power Transmission Project is supported by the IBRD loan of USD 330 million and the loan of the Clean Technology Fund of 48,425 million USD. The Project includes Part 3 in the amount of 2.5 million USD to provide the Ministry of Energy and Coal Industry with institutional capacity for reform implementation in the energy sector in accordance with Ukraine's commitments in the framework of the Energy Community membership, as well as the Association Agreement between Ukraine and the EU. According to paragraph B6 Section II of Additional article 2 to the Loan Agreement "The Borrower, through MoECI, shall have the Financial Statements corresponding to Part 3 of the project audited in accordance with the provisions of Section 5.09 (b) of the General Conditions. Each such audit of the Financial Statements shall cover the period of one fiscal year of the Borrower. The audited Financial Statements for each such period shall be furnished to the Bank not later than six (6) months after the end of such period". Total amount of Part 3 f the Loan No. 8462-UA is USD 2 500 000.00. Part 3 Procurement Plan specifies that the Part funds shall be used to finance consulting services (individual consultants and consulting companies). The first contract under Part 3 was signed on 23 August 2016. The use of funds to finance activities under Part 3 of the Loan No. 8462-UA began in the fourth quarter of 2016. The following accounts were opened for use of funds under Part 3 of the Loan No. 8462-UA: * Special (USD) account in JSC "State Export-Import Bank of Ukraine" (advances from the World Bank Loan Account, settlements in foreign currency, receipt of funds from the Loan Account for resale, remittance of currency funds for further settlements in UAH); * Special account in national currency in JSC "State Export-Import Bank of Ukraine" (enrollment of Ukrainian hryvnias received from the sale of foreign currency funds, payments in UAH); * Special (EUR) account in JSC "State Export-Import Bank of Ukraine" (payment of services in EUR). 2. BASIS OF PRESENTATIONY These special purpose financial statements of the Project are prepared on a cash basis and include such significant accounting policies that have been consistently applied in all material respects and are in accordance with the recommendations of the World Bank's Financial Management Committee "Recommendations: Annual Financial Reporting and Audit of Activities, funded by the World Bank". Project financing is recognized as a source of funds for the Project at the time of receipt of funds. Project costs are recognized as the use of funds under the Project at the time of making payments. The reporting currency is US Dollars. Items included in the special purpose financial statements of the Project are valued using the currency that best reflects the economic substance of the Company's relevant events and circumstances ("functional currency"). The functional currency of the Project is US Dollars. 13 5Ec:ND POWER TRANSMISSION PROJECT, PART 3 CZES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS :the period from 01 January 2018 to 31 December 2018 J SD ransactions in other currencies are translated into US dollars at the interbank currency exchange rate, was effective on the date of the respective conversion of US dollars into the payment currency. Cash balances in other currencies are translated into US dollars at the interbank exchange rate of the ast conversion of USD into the currency of payment. 3. ACCOUNTING POLICIES Basis of preparation Special purpose financial statements were prepared on the cash basis. The accounting policy was applied consistently throughout the period of using the Loan funds. Reporting period This report covers the Disbursement period of Part 3 of the Loan No. 8462-UA from 01 January 2018 to 31 December 2018. The World Bank has established the closing date - 30 June 2020, or such later date set by the Bank. Special bank account In accordance with the terms of the Loan Agreement and to ensure the implementation of the Project for the Ministry of Energy and Coal Industry of Ukraine, a Special Account in US dollars was opened in PJSC "State Export-import Bank of Ukraine" under terms and conditions agreed with the IBRD. Recognition of receipts and expenditures The Project keeps its records and prepares its financial statements on the cash basis. Receipts are recorded when they are made on bank accounts, which are supported by advances from the IBRD. Expenditures are recorded on the date of funds withdrawal from accounts. Project Statements are prepared in accordance with the provisions of Section 5.08 of the General Conditions and on the basis of indicators acceptable to the Bank. Each Project Statement covers a period equal to one calendar quarter and is submitted to the Bank no later than forty-five (45) days after the end of the period covering each such report. All goods, works and non-consulting services required for the Project and to be financed out of the proceeds of the Loan shall be procured in accordance with the requirements set forth or referred to in Section I of the Procurement Guidelines and with the provisions of Section III of Supplement 2 to the Loan Agreement. All consultants' services required for the Project and to be financed out of the proceeds of the Loan shall procured in accordance with the requirements set forth or referred to in Sections I and IV of the Consultant Guidelines and the provisions of Section 111, Supplement 2, of the Loan Agreement. Foreign currency transactions The accompanying financial statements are presented in USD. Transactions in other currencies are translated into US dollars at the actual exchange rate at which these currencies were purchased, unless otherwise stated. Statements of expenditures The statements of expenditure are used to recognize the expenditures of the Loan during the calendar quarter that were paid from the Special Account. According to additional withdrawal instructions of the IBRD, all expenditures paid from the Special Account shall be included in the statements of expenditure for the relevant period and submitted to the IBRD. Together with the statements of expenditure, the primary documents are submitted (copies of checks, invoices, works acceptance acts, etc.). 14 SECOND POWER TRANSMISSION PROJECT, PART 3 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS For the period from 01 January 2018 to 31 December 2018 nUSD 4. BUDGET From the Loan proceeds (Part 3 of the Project), the following items were financed; they were used exclusively for the activities of the established categories: Total allocated Loan funds (USD- % financed Category denominated) expenditures (2): Goods, non-consulting services, consultants' services, and Training for 2,500,000 100% Part 3 of the Project TOTAL 2,500,000 5. AMORTIZATION SCHEDULE (including Part 3) The following table sets forth the Principal Payment Dates of the Loan and the percentage of the total principal amount of the Loan payable on each Principal Payment Date ("Installment Share"). If the proceeds of the Loan have been fully withdrawn as of the first Principal Payment Date, the principal amount of the Loan repayable by the Borrower on each Principal Payment Date shall be determined by the Bank be multiplying: (a) Withdrawn Loan Balance as of the first Principal Payment Date; by (b) the Installment Share for each Principal Payment Date, such repayable amount to be adjusted, as necessary, to deduct any amounts referred to in paragraph 4 of the Supplement to the Loan Agreement to which a Currency Conversion applies. Principal Payment Date Installment Share (Expressed as a Percentage) On each 15 January and 15 July Beginning 15 January 2020 3.85% Through 15 January 2032 On 15 July 2032 3.75% 6. OPERATING ENVIRONMENT The principal economic activity is performed on the territory of Ukraine. The Ukrainian economy is in a protracted crisis, complicated by the military conflict in eastern Ukraine and the unrecognized separation of the Autonomous Republic of Crimea. Stabilization of the situation in Ukraine will largely depend on the government's actions aimed at resolving the military conflict, reforming the country's financial, administrative, fiscal and legal systems. To solve the above-mentioned tasks, the government of the country introduces rather severe and unpopular measures, such as partial mobilization of the population liable to military service, introduction of new taxes and fees, as well as - restrictions on cash and non-cash foreign currency transactions, etc. 15 WORLD BANK AUDIT DOCUMENTATION CHECKLIST Name of Loan/Credit: World Bank UKRAINE Loan/Credit # 8462-UA Audit Report: Year ended December 31, 2018 Check if Check if Included N/A 1. Audit report (Opinion): A. Applicable accounting standards noted X B. Applicable auditing standards noted X C. Opinion rendered on all forms of withdrawals: 1. Statement of Expenditures X 2. Special Account X D. All sources of financing for the project are noted X II. Financial Reports: A. Revenue Earning Entity (all of the following are required): 1. Balance sheet X 2. Cash Flow Statement X 3. Income Statement X B. Non-Revenue Earning Entity (all of the following are required): 1. Balance sheet X 2. Summary of Sources and Uses of Funds X C. If applicable (refer to Loan Agreement): 1. Statement of Expenditure (SOE) Statement X 2. Special Account Statement X III. Notes to the Financial Statements X IV. Reconciliation between World Bank records and project records X V. Management Letter X 16