National Power Company "UKRENERGO" Second Power Transmission Project Special Purpose Project Financial Statements for the Period from 9 June 2015 (date of inception) to 31 December 2017 NATIONAL POWER COMPANY "UKRENERGO" SECOND POWER TRANSMISSION PROJECT TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD FROM 9 JUNE 2015 (DATE OF INCEPTION) TO 31 DECEMBER 2017 1 INDEPENDENT AUDITOR'S REPORT 2-3 Special purpose statement of sources and uses of funds 4 Special purpose statement on expenditure detail 5 Notes to the special purpose project financial statements 6-9 NATIONAL POWER COMPANY "UKRENERGO" SECOND POWER TRANSMISSION PROJECT STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD FROM 9 JUNE 2015 (DATE OF INCEPTION) TO 31 DECEMBER 2017 Management is responsible for the preparation of the special purpose project financial statements of the Second Power Transmission Project (the "Project") financed by the International Bank for Reconstruction and Development (the "IBRD") loans under the Loan Agreements # 8462-UA and TF017661 dated 10 February 2015 between the IBRD and Ukraine, whose executor is National Power Company "Ukrenergo" (the "Company"), which comprise the special purpose statement of sources and uses of funds for the period from 9 June 2015 (date of inception) to 31 December 2017, the special purpose statement on expenditure detail for the period from 9 June 2015 (date of inception) to 31 December 2017 and a summary of significant accounting policies and other explanatory information (the "special purpose project financial statements"), which are prepared in accordance with the basis of accounting, described in Note 2. In preparing the special purpose project financial statements, management is responsible for: . Properly selecting and applying accounting policies; * Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and * Providing additional disclosures and supplementary schedules when compliance with the requirements of the basis of accounting, described in Note 2, are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the special purpose project financial statements; * Making an assessment of the Company's ability to continue as a going concern. Management is also responsible for: * Designing, implementing and maintaining an effective and sound system of internal controls; * Maintaining adequate accounting records that disclose, with reasonable accuracy at any time, the financial position of the Project, and which enable them to ensure that the special purpose project financial statements comply with the basis of accounting, described in Note 2; * Maintaining accounting records in compliance with the legislation and accounting standards of Ukraine; * Taking such steps as are reasonably available to them to safeguard the assets of the Project; and * Preventing and detecting fraud and other irregularities. The special purpose project financial statements for the period from 9 June 2015 (date of inception) to 31 December 2017 were approved by management on 6 August 2018. On behalf of the management: 0. A. Chechulinska, Deputy Chief Accountant - Head of Methodology and Reporting Department 1 PISC "Deloitte & Touche USC" 48, 50A, Zhylyanska St. Kyv 01033 Delotte.Ukraine Tel: +38 (044) 490 9000 Fax: +38 (044) 490 9001 deloitte.ua INDEPENDENT AUDITOR'S REPORT To Management of National Power Company "Ukrenergo": Opinion We have audited the accompanying special purpose project financial statements of the Second Power Transmission Project (the "Project") financed by the International Bank for Reconstruction and Development (the "IBRD") loans under the Loan Agreements # 8462-UA and TF017661 dated 10 February 2015 between the IBRD and Ukraine, whose executor is National Power Company "Ukrenergo" (the "Company"), which comprise the special purpose statement of sources and uses of funds for the period from 9 June 2015 (date of inception) to 31 December 2017, the special purpose statement on expenditure detail for the period from 9 June 2015 (date of inception) to 31 December 2017 and a summary of significant accounting policies and other explanatory information (the "special purpose project financial statements"), which are prepared in accordance with the basis of accounting, described in Note 2. In our opinion, the accompanying special purpose project financial statements are prepared, in all material respects, in accordance with the basis of accounting, described in Note 2. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (the "ISAs"). Our responsibilities under those standards are further described in the Auditor's 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 (the "IESBA Code") together with the ethical requirements that are relevant to our audit of the special purpose project financial statements in Ukraine, and we have fulfilled our other ethical responsibilities in accordance with these requirements and 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 Distribution and Use We draw attention to Note 2 to the special purpose project financial statements, which describes the basis of accounting. The accompanying special purpose project financial statements are prepared to assist the Project in complying with the requirements of the IBRD. As a result, the special purpose project financial statements may not be suitable for another purposes. This report is intended solely for use by management of National Power Company "Ukrenergo" in communicating to the IBRD, the Ministry of Finance of Ukraine, the Ministry of Energy and Coal Industry of Ukraine and the National Commission for State Energy and Public Utilities Regulation about Company's compliance with the basis of accounting, described in Note 2. This report is not intended for the benefit of the IBRD, the Ministry of Finance of Ukraine, the Ministry of Energy and Coal Industry of Ukraine and the National Commission for State Energy and Public Utilities Regulation or any other third parties and we accept no responsibility or liability to any party other than the Company in respect of the report. Should any third party take decisions based on the contents of the report, the responsibility for such decisions shall remain with those third parties. Our opinion is not modified in respect of this matter. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ("DTTL"), its network of member firms, and their related entities. OTTL and each of Its member firms are legally separate and Independent entities. DTTL (also referred to as "Deloitte Global") does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms. 0 2018 PISC Deloitte & Touche USC". All rights reserved, Emphasis of Matter - Noncompliance with Financial Covenants We draw attention to Note 4 to the special purpose project financial statements, which describes a non- compliance with financial covenants under IBRD and other loan agreements, which may lead to a suspension of further funding by IBRD or require an early repayment of the outstanding debt in full. Our opinion is not modified in respect of this matter. Responsibilities of Management and Those Charged with Governance for the Special Purpose Project Financial Statements Management is responsible for the preparation of the special purpose project financial statements in accordance with the basis of accounting, described in Note 2, and for such internal control as management determines is necessary to enable the preparation of the special purpose project financial statements that are free from material misstatement, whether due to fraud or error In preparing the special purpose project financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company's financial reporting process. Auditor's 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 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 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. * 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 Company'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 project 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 Company's to cease to continue as a going concern. 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. Th%ctk,Ux L Toj 6 August 2018 3 NATIONAL POWER COMPANY "UKRENERGO" SECOND POWER TRANSMISSION PROJECT SPECIAL PURPOSE STATEMENT OF SOURCES AND USES OF FUNDS FOR THE PERIOD FROM 9 JUNE 2015 (DATE OF INCEPTION) TO 31 DECEMBER 2017 AND CUMULATIVE AS OF 31 DECEMBER 2017 In USD From 9 June 2015 Cumulative Cumulative to amount as of amount as of 31 December 31 December 9 June 2015 2017 2017 Financing: Direct payments from the IBRD's loans account - 5,767,943 5,767,943 Transfers from the IBRD loan accounts to disbursement account - 10,000,000 10,000,000 Own funds 31,233 2,123,116 2,154,349 Total financing 31,233 17,891,059 17,922,292 Project expenditure: Construction works and equipment - 6,323,832 6,323,832 Services 31,233 383,347 414,580 Finance cost - 3,158,752 3,158,752 Total Project expenditure 31,233 9,865,931 9,897,164 On behalf of the management: 0. A. Chechuithska, Acti rDeputy Chief Accountant - Head of Methodology and Reporting Department 4 The notes on pages from 6 to 9 form an integral part of these special purpose project financial statements. NATIONAL POWER COMPANY "UKRENERGO" SECOND POWER TRANSMISSION PROJECT SPECIAL PURPOSE STATEMENT ON EXPENDITURE DETAIL FOR THE PERIOD FROM 9 JUNE 2015 (DATE OF INCEPTION) TO 31 DECEMBER 2017 AND CUMULATIVE AS OF 31 DECEMBER 2017 In USD From 9 June 2015 Cumulative Cumulative to amount as of amount as of 31 December 31 December 9 June 2015 2017 2017 Construction works and equipment: Construction works and equipment - the IBRD loans - 6,323,832 6,323,832 _6,323,832 6,323,832 Assistance services: Services - the IBRD loans - 382,336 382,336 Services - own funds 31,233 1,011 32,244 31,233 383,347 414,580 Finance costs: Front-end-fee - the IBRD loans - 1,036,647 1,036,647 Interest and commitment charges on the IBRD loans - own funds - 2,122,105 2,122,105 - 3,158,752 3,158,752 Total Project expenditure 31,233 9,865,931 9,897,164 On behalf of the management: V. V K0. A. Chechulinska, Aci ct Deputy Chief Accountant - Head of Methodology and Reporting Department 5 The notes on pages from 6 to 9 form an integral part of these special purpose project financial statements. NATIONAL POWER COMPANY "UKRENERGO" SECOND POWER TRANSMISSION PROJECT NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD FROM 9 JUNE 2015 (DATE OF INCEPTION) TO 31 DECEMBER 2017 In USD 1. BACKGROUND The International Bank for Reconstruction and Development (the "IBRD") and the Government of Ukraine (the "Borrower") entered into Loan Agreements # 8462-UA and TF017661 dated 10 February 2015 to finance the Second Power Transmission Project (the "Project"). The objectives of the Project is to enhance security, reliability and effectiveness of electricity transmission, improve compensation of reactive capacity in power grids to create technical conditions for approximation of integration of the Integrated power system of Ukraine into the European Network of Electricity Transmission System Operators (ENTSO-E) and allow Ukraine to become an important, full-fledged player in European electricity markets. National Power Company "Ukrenergo" (the "Company") was appointed by the Borrower as the Project's executor. Ministry of Finance of Ukraine was appointed by the Borrower as its representative. In order to provide the Company with access to IBRD funds, Sub-loan Agreements #13010-05/53 and #13010-05/54 dated 25 May 2015 have been signed between the Borrower, the Ministry of Finance of Ukraine, the Ministry of Energy and Coal Industry of Ukraine, National Commission for State Energy and Public Utilities Regulation and the Company. In accordance with terms and conditions of Sub-loan Agreements the Borrower transfers a portion of funds under loan # 8462-UA in amount of USD 327,493,734 and loan TF017661 in amount of USD 48,425,000 to the Company. The Company agreed to undertake the obligation to repay loan and interest on the outstanding loan principal to the Borrower and margin to Ministry of Finance of Ukraine (Note 5). According to the original terms and conditions of the Project, its final completion is scheduled to 30 June 2020. The Company can obtain tranches per the loan agreements up to 30 June 2020. The loan # 8462-UA is repayable in accordance with the settlement schedule specified in the agreement, starting from 15 January 2020 to 15 July 2032. The loan TF017661 is repayable in accordance with the settlement schedule specified in the agreement, starting from 15 January 2025 to 15 July 2034. The initial cost of the Project was estimated in the amount of USD 378,425,000, which includes the IBRD's loans to the Borrower # 8462-UA in the amount of USD 330,000,000 and loan TF017661 in the amount of USD 48,425,000. 2. BASIS OF ACCOUNTING These special purpose project financial statements are prepared on the cash basis of accounting. The Project's financing is recognised as a source of Project funds when the cash is received. The Project's expenditures are recognised as a use of Project funds when the payments are made. The reporting currency is US Dollar ("USD"). Items included in the special purpose project financial statements are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to the Company (the "functional currency"). The functional currency of the Project is USD. Transactions in other currencies are translated to USD at the exchange rates prevailing at the dates of relevant transactions. Cash balances in other currencies are translated to USD at the period end exchange rate. 3. ACCOUNTING POLICIES The special purpose statement of sources and uses of funds and the special purpose statement on expenditure detail are prepared on the cash basis of accounting. Financing by sources is recognised when received rather than earned, and expenditures are recognised when paid rather than incurred. Accruals for interest and commitment charges on the IBRD loans are not recorded in the special purpose project financial statements, except for the finance costs actually paid to the IBRD on the loan account. 6 NATIONAL POWER COMPANY "UKRENERGO" SECOND POWER TRANSMISSION PROJECT NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD FROM 9 JUNE 2015 (DATE OF INCEPTION) TO 31 DECEMBER 2017 In USD 4. FUND WITHDRAWAL PROCEDURES IBRD loans Funds from the IBRD loan account are distributed by means of special accounts, letters of credit and direct payments to suppliers' accounts. Special accounts are deposit accounts in JSC "The State Export-Import Bank of Ukraine" in United States dollars and Ukrainian hryvnias, which are opened and controlled by the Ministry of Finance of Ukraine. All disbursements to suppliers from the special accounts must be approved by the IBRD as eligible expenditures for the Project. Letters of credit are issued to suppliers of the Company in accordance with the terms of contracts for goods and services as approved by the IBRD. The Company does not pay any commissions on these letters of credit. In accordance with the payment request sent to the IBRD by the Company, the IBRD makes direct payments to suppliers' accounts in accordance with the terms of contracts for goods and services as approved by the IBRD. Terms and conditions of the loan agreements with IBRD and other creditors require that the Company comply with certain financial covenants. Financial covenants are calculated based on the information from most recent financial statement of the Company prepared under International Financial Reporting Standards. As of 31 December 2017, the Company failed to comply with certain financial covenants under the IBRD and other loan agreements. According to the general conditions for IBRD loans in the case of non-compliance with any of the terms and conditions thereunder, including financial covenants, the IBRD may suspend further disbursements of the loan and/or require that the Company repay in full the outstanding amounts. As of 31 December 2017 and until the date the special purpose project financial statements were authorised for issue, the Company did not receive any notice with a requirement for immediate repayment of the loan or suspension of further disbursements. Own funds The amount represents own funds of the Company incurred in the course of the Project's preparation, implementation and execution. 5. LOAN REPAYMENT PROCEDURES IBRD loan # 8462-UA Upon signing the loan agreement # 8462-UA, the Company paid from loan funds the front-end fee in the amount of USD 818,734, representing 0.25/ of the loan amount. The Company pays interest charged on the outstanding loan principal at a floating interest rate based on LIBOR plus a variable spread. During the period from 9 June 2015 (date of inception) to 31 December 2017 the average annual interest rate for the loan was 1.58%, plus a margin of 2.00% payable to the Ministry of Finance of Ukraine. In addition, the Company pays the IBRD a commission of 0.25% on the unused loan balance. The interest on the outstanding loan principal, margin to the Ministry of Finance of Ukraine and commission on the unused loan balance are repayable on the semi-annual basis on 15 January and 15 July. For the period from 9 June 2015 (date of inception) to 31 December 2017 the total amount of interest, commission and margin on the loan paid by the Company to the Ministry of Finance of Ukraine was USD 2,109,337. The repayment of the outstanding loan principal will be also performed on a semi-annual basis on 15 January and 15 July beginning from 15 January 2020. As of 31 December 2017 the balance of actually used and not repaid the IBRD loan amounted to USD 15,550,030. 7 NATIONAL POWER COMPANY "UKRENERGO" SECOND POWER TRANSMISSION PROJECT NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD FROM 9 JUNE 2015 (DATE OF INCEPTION) TO 31 DECEMBER 2017 In USD IBRD loan TF017661 Upon signing the loan agreement TF017661, the Company has paid from loan funds a front-end fee in the amount of USD 217,913, representing 0.45% of the loan amount. The Company pays interest charged on the outstanding loan principal at a fixed interest rate of 0.75% plus a margin of 2.00% payable to the Ministry of Finance of Ukraine. The interest on the outstanding loan principal and margin to the Ministry of Finance of Ukraine are repayable on the semi-annual basis on 15 June and 15 December. For the period from 9 June 2015 (date of inception) to 31 December 2017 the total amount of interest and margin on the loan paid by the Company to the Ministry of Finance of Ukraine was USD 12,768. The repayment of the outstanding loan principal will be also performed on a semi-annual basis on 15 lanuary and 15 July beginning from 15 January 2025. As of 31 December 2017 the balance of actually used and not repaid the IBRD loan amounted to USD 217,913. 6. DISBURSEMENT ACCOUNT STATEMENT Special accounts have been opened by the Ministry of Finance of Ukraine in JSC "The State Export- Import Bank of Ukraine" (transit accounts in United States dollar and Ukrainian hryvnia). Movements on the disbursement account for the period from 9 June 2015 (date of inception) to 31 December 2017 are as follows: USD Opening balance as of 9 June 2015 - Movements during the period Transfers frorn the IBRD loan accounts to disbursement account 10,000,000 E>peritures paid (1,971,426) Bank charges (3,446) Net change in cash balance on the account 8,025,128 Closing balance as of 31 December 2017 8,025,128 7. OPERATING ENVIRONMENT In the recent years, Ukraine has been in a political and economic turmoil. Crimea, an autonomous republic of Ukraine, was effectively annexed by the Russian Federation. In 2016-2017, an armed conflict continued in certain parts of Luhanska and Donetska regions. These events resulted in higher inflation, devaluation of the national currency against major foreign currencies, decrease of GDP, illiquidity, and volatility of financial markets. In 2017, annual inflation rate amounted to 13.7% (2016: 12.4%). The Ukrainian economy proceeded recovery from the economic and political crisis of previous years that resulted in real GDP smooth growth of around 2.5% (2016: 2.4%) and stabilization of national currency. From trading perspective, the economy was demonstrating refocusing on the European Union ("EU") market, which was a result of the signed Association Agreement with the EU in January 2016 that established the Deep and Comprehensive Free Trade Area ("DCFTA"). Under this agreement, Ukraine has committed to harmonize its national trade-related rules, norms, and standards with those of the EU, progressively reduce import customs duties for the goods originating from the EU member states, and abolish export customs duties during a 10-year transitional period. Implementation of DCFTA began on 1 January 2017. As a result, the Russian Federation implemented a trade embargo or import duties on key Ukrainian export products. In response, Ukraine implemented similar measures against Russian products. 8 NATIONAL POWER COMPANY "UKRENERGO" SECOND POWER TRANSMISSION PROJECT NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD FROM 9 JUNE 2015 (DATE OF INCEPTION) TO 31 DECEMBER 2017 In USD In terms of currency regulations, the National Bank of Ukraine ("NBU") decreased the required share of mandatory sale of foreign currency proceeds from 65/o to 50% from April 2017, increased settlement period for export-import transactions in foreign currency from 120 to 180 days from May 2017, and allowed companies to pay the 2013 (and earlier) dividends with a limit of USD 2 million per month from November 2017 (from June 2016, companies were allowed to pay dividends for 2014-2016 to non-residents with a limit of USD 5 million per month). In March 2015, Ukraine signed four-year Extended Fund Facility ("EFF") with the International Monetaiy Fund ("IMF") that will last until March 2019. The total program amounted to USD 17.5 billion, while Ukraine has so far received only USD 8.7 billion from the entire amount. In September 2017, Ukraine successfully issued USD 3 billion of Eurobonds, of which USD 1.3 billion is new financing, with the remaining amount aimed to refinance the bonds due in 2019. The NBU expects that Ukraine will receive another USD 3.5 billion from the IMF in 2018. To receive next tranches, the government of Ukraine has to implement certain key reforms, including in such areas as pension system, anti-corruption regulations, and privatization. Further stabilization of the economic and political situation depends, to a large extent, upon success of the Ukrainian government's efforts, yet further economic and political developments are currently difficult to predict. 8. SUBSEQUENT EVENTS Subsequent to 31 December 2017 no events have occurred that are required to be disclosed in these special purpose project financial statements. 9. APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS These special purpose project financial statements were approved by the Company's management and authorised for issue on 6 August 2018. 9