Deloitte, Í~ Albania Power Recovery Project Part 2 - Upgrading Distribution Infrastructure IBRD loan No. 8429-AL, dated November 3, 2014 Statements of cash receipts and payments for the year ended December 31, 2017 (with independent auditors' report thereon) Table of contents Page Independent Auditors' Report Statements of cash receipts and payments for the years ended December 31, 2017 1 Notes to the financial statements 2-5 Supplementary schedule - designated account 6 Deloitte Audit Albania sh.p.k Rr. Elbasanit. Pallati posie Fakulteti Gjeologji- Miniera Tirana, Albania D eloitte. Tel: +355 4 45 17 920 Fax: +355 4 45 17 990 www.deloitte.al INDEPENDENT AUDITOR'S REPORT To the Management and Shareholder of Operatori i Shpgrndarjes s Energjis Elektrike Sha ("OSHEE") Opinion We have audited the Statements of cash receipts and payments of "Albania Power Recovery Project, Part 2 - Upgrading Distribution Infrastructure" ("the Project"), as set out on pages 1 to 5, and as implemented by OSHEE ("the Company"), and financed by Loan Agreement dated November 3, 2014 (the "Loan Agreement") for the year ended December 31, 2017, and notes, comprising significant accounting policies and other explanatory information (together "the financial statements"). In our opinion, the accompanying financial statements of the Project for the year ended December 31, 2017 are prepared in all material respects, in accordance with accounting requirements as described in Note 2.1 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 Auditor's Responsibilities for die Audit of the Financial Statements section of our report. We are independent of the Company in accordance with International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) and with the ethical requirements that are relevant to our audit of the financial statements in Albania, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 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 Note 2.1 to the financial statements, which describe the basis of accounting. The financial statements are prepared to provide information to the Project's lender and to the shareholder and management of the Company. As a result, the financial statements may not be suitable 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. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company imited by guarantee, and Its network of member firms, each of which Is a legally separate and independent entIty. Please see http:/1www daloitt.com/aabout for a detailed descriptlon of the legal structure of Deloitte Touche Tohmatsu Limited and its memberfirms @2018 Deloitte Audit Albania Other Matters 1. The Project's financial statements as at and for the year ended December 31, 2016 were audited by another auditor who expressed an unmodified opinion on those statements on January 12, 2018. 2. The Project's financial statements, include numeric information for cumulative receipts and payments from the inception date to December 31, 2017. Such figures are provided for information purposes only and do not form part of the audited financial statements. 3. The accompanying Supplementary Schedule of the Designated Account statement, included as appendix to the Project financial statements (page 6) is provided for information purposes only and is not a required part of the financial statements. This schedule is the responsibility of management and does not form part of the audited financial statements. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting requirements as described in Note 2.1 to the financial statements, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related 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 Financial Statements Our objectives are to obtain reasonable assurance about whether the 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 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 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 and the Project internal control. Auditor's Responsibilities for the Audit of the Financial Statements (continued) * 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 and the Project 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 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 to cease to continue as a going concern. * Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with Company's and the Project 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. Deloitte Audit Albania sh.p.k - Rr. Elbasanit, Pallati poshte Fakultetit Gjeologji - Min P ,t Tirana, Albania Identification number (NUIS): IAl7090 Enida Cara Engagement Part4r Statutory Auditor Tirana, Albania August 8, 2018 Albania Power Recovery Project, Part 2 - Upgrading Distribution Infrastructure IBRD Loan No. 8429-AL, dated November3, 2014 Statements of cash receipts and payments for the year ended December 31, 2017 (in EUR) Cumulative from As at As at January 26, 2015 December 31, December 31, (inception date) to Notes 2017 2016 December 31, 2017 RECEIPTS TBRD loan 3 14,208,603 7,336,262 21,544,865 OSHEE 4 5,438,948 698,732 6,137,680 Interest received from banks 5 14 22 36 Total receipts 19,647,565 8,035,016 27,682,581 PAYMENTS Goods 6,7 18,012,150 2,505,216 18,691,538 Taxes 4,7 3,613,121 663,600 6,102,548 Bank Charges 7 1,293 730 2,023 Total payments 7 21,626,564 3,169,546 24,796,110 (Decrease)/increase in cash balances (1,978,999) 4,865,470 2,886,472 Cash balances: At the beginning of the year 4,864,825 - - Transfers from designated account 6,466,251 5,182,356 11,648,607 Net decrease in cash during the year (8,445,250) (316,886) (8,762,136) Exchange rate differences 191 (645) (454) At the end of the year 8 2,886,018 4,864,825 2,886,018 The Statements of cash receipts and payments are to be read in conjunction with the notes to and forming part of the financial statements set out on pages 2 to 5. The Supplementary Schedule of the Designated Account statement is set out on page 6. These financial statements have been authorised for issue by the Management of OSHEE on July 27, 2018 and signed on its behalf by: Arben Mithi Project Director Operatori i Shp&rndarjes si EnergfisJ Elektrike Sh.a Albania Power Recovery Project, Part 2 - Upgrading Distribution Infrastructure IBRD Loan No. 8429-AL, dated November 3, 2014 Notes to the Statements of cash receipts and payments for the year ended December 31, 2017 (Amounts in EUR, unless otherwise stated) 1. Introduction These financial statements are prepared for reporting on the implementation of "Albania Power Recovery Project, Part 2 - Upgrading Distribution Infrastructure" (the "Project"), by Operatori i Shprndarjes s6 Energjise Elektrike Sh.a ("OSHEE"). 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. Part 2 of the "Albania Power Recovery Project" relates to Upgrading Distribution Infrastructure and is implemented by OSHEE. Loan Agreement Based on the Loan Agreement dated 3 November 2014 the ("Loan Agreement"), the International Bank for Reconstruction and Development ("IBRD") shall extend 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". The last available date for the drawdown of the Loan is 30 November 2019. Eligible expenditures related to "Part 2 - Upgrading Distribution Infrastructure" that may be financed based on the Loan Agreement include goods, consulting services, non-consulting services, and trainings, and the loan amount allocated to Part 2 is EUR 69,500,000. The percentage of expenditures to be financed by the Loan, excluding taxes is 90%. OSHEE will contribute 10% of the contracted values. Based on the Loan Agreement "Part 2 - Upgrading Distribution Infrastructure" will support the Government of Albania and the OSHEE's plan to reduce distribution losses, improve cash collection and reliability of power supply. The investments will be focused on: i) supply and installation of transformers and ancillary equipment at selected substations in Tirana; ii) providing targeted investments in the medium and low voltage grid including cable line; concrete poles, metal clad switchgears, power distribution cabins and associated metering equipment; iii) supplying and installing power meters to customers who have no or damaged meters and upgrading the billing and collection system to implement OSHEE performance management program, including among others, loss reduction and collection increase plan. Sub-Loan Agreement Pursuant to the Loan Agreement and based on the Sub-Loan agreement dated 26 January 2015 (the "Sub- Loan"), between the Albanian Ministry of Finance and OSHEE, the Borrower sub-lent to OSHEE a portion of the Loan amounting to EUR 69,679,034 for the purpose of implementing the Project. That amount includes the loan amount allocated to Part 2 and the related front-end fees calculated by the Ministry of Finance. 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 not exceeding 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 OSHEE is 0.25% of the Sub-Loan amount. These financial statements relate to the sub-lent funds from Ministry of Finance to OSTEE and to funds contributed by OSHEE, which correspond to the implementation of Part 2 of the "Albania Power Recovery Project". Funds contributed by OSHEE presented as payments in the financial statements, do not include repayments of Sub-Loan to the Ministry of Finance and payments of the related interest expenses (see Note 2.4), and also do not include payments made for incremental operating costs, other than taxes and eligible expenditures, as defined in the Loan Agreement. 2. Basis of accounting and accounting policies 2.1 Basis of accounting The financial statements have been prepared on the cash basis of accounting, based on which transactions and events are recognized only when cash is received or paid by the Project. On such basis, revenues are recognized when received rather than when earned and expenditures are recognized when paid rather than when incurred. Purchases of equipment and other assets are presented as payments at the time of payment, whilst expenses incurred but not yet paid are not accrued and not presented as liabilities. Cumulative information on cash receipts and disbursements from the Project's inception to date is presented in the Statements of cash receipts and payments for information purposes only. 2 Albania Power Recovery Project, Part 2 - Upgrading Distribution Infrastructure IBRD Loan No. 8429-AL, dated November 3, 2014 Notes to the Statements of cash receipts and payments for the year ended December 31, 2017 (Amounts in EUR, unless otherwise stated) 2. Basis of accounting and accounting policies (continued) 2.2 Cash balances Cash balances comprises balances in current accounts and demand deposits with banks that are controlled by OSHEE. Amounts disbursed by the IBRD in a Designated Account controlled by the Borrower, are not included as cash balances in the financial statements of the Project (see the Supplementary Schedule). 2.3 Foreign currency transaction The Project's records are maintained in Euro ("EUR") and the Statements of cash receipts and payments are presented in EUR. The cash receipts and cash payments made in a currency other than EUR are translated into EUR at the exchange rate prevailing at the date of transaction. Cash balances held in a foreign currency are reported using the closing exchange rate. The closing exchange rates were as follows: December 31, 2017 December 31, 2016 Lek/EUR 132.95 135.23 Any resulting net gains or losses from exchange rates are included in the Statements of cash receipts and payments. 2.4 Loans principal repayments and related interest According to the Project Appraisal Document (PAD), this Project has only one category - Goods, Consulting services, non-consulting services and training under Part 2. OSHEE will provide 10% of the financing for all contracts value in Component 2. Contribution for all financing payment it will be 90% from IBRD fund and 10% form OSHEE fund, while payments made by OSHEE to the Ministry of Finance for the Sub-Loan repayment and related interest expenses are not included in the statements of cash receipts and payments of the Project, because these payments. According to the Sub-Loan Agreement dated Januaryy 26, 2015, between Ministry of Finance and OSHEE, for Power Recovery Project, Part 2, are related to the legal obligations between them and are included in the statements of OS11EE. 2.5 Taxation In accordance with Article 22 of the Project Appraisal Document of the Loan Agreement, OSIIEE has committed to finance all applicable taxes on project expenditure. 3. IBRD Loan disbursements 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 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. The following IBRD Loan disbursements made in 2017, using the agreed disbursement arrangements: Advances into the Loan disbursement year Designated Account Special Commitment Total 2017 6,466,251 7,742,352 14,208,603 2otal 6,466,251 7,742,352 14,208,603 4. OSHEE contributions December 31, 2017 December 31, 2016 Goods 1,825,827 35,132 Taxes 3,613,121 663,600 Total 5,438,948 698,732 3 Albania Power Recovery Project, Part 2 - Upgrading Distribution Infrastructure IBRD Loan No. 8429-AL, dated November 3, 2014 Notes to the Statements of cash receipts and payments for the year ended December 31, 2017 (Amounts in EUR, unless otherwise stated) 5. Interest received from banks Interest received from banks of EUR 14 relates to balances placed in accounts with banks. 6. Goods Goods of EUR 21,626,564 (2016: EUR 3,169,546) in 2017 represent payments made to suppliers for investments in the medium voltage grid, including cable lines and concrete poles. 7. Project expenditures by category and source of financing Project expenditures by category and source of financing for the year ended December 31, 2017 and 2016 are composed as follows: 2017 IBRD Loan OSIIEE contribution Total Goods 16,186,323 1,825,827 18,012,150 Taxes - 3,613,121 3,613,121 Bank Charges 1,293 - 1 ,2 9 3 Total 16,187,616 5,438,948 21,626,563 2016 IBRD Loan OSHEE contribution Total Goods 2,470,084 35,132 2,505,216 Taxes - 663,600 663,600 Bank Charges 730 - 730 Total 2,470,814 698,732 3,169,546 Goods financed by the IBRD Loan of EUR 16,186,323 (2016: EUR 2,470,814) include payments made through the designated bank accounts of the Project of EUR 8,443,970 (2016: EUR 5,182,356) (see Note 8) and through the Special Commitments arrangements of EUR 7,742,353 (2016: EUR 2,153,906). 8. Cash balances Balances with banks by each cLurency and in EUR equivalents as at December 31, 2017 and 2016 are as follows: Original Currency EUR equivalent As at December As at December As at December As at December 31,2017 31,20176 31,2017 31,20176 Credins Bank Account in EUR 2,885,033 4,849,816 2,885,033 4,849,816 Account in ALL 130,993 2,029,606 985 15,009 Total 2,886,018 4,864,825 4 Albania Power Recovery Project, Part 2 - Upgrading Distribution Infrastructure IBRD Loan No. 8429-AL, dated November 3, 2014 Notes to the Statements of cash receipts and payments for the year ended December 31, 2017 (Amounts in EUR, unless otherwise stated) 8. Cash balances (continued) The table below presents total movements in the bank accounts by each currency during the year: Amounts in EUR equivalent EUR ALL Total Balance as at January 1, 2017 4,849,816 15,009 4,864,825 Add: Fund transfer from Designated account 6,466,251 - 6,466,251 Interest received from banks - 14 14 Transfer from account to account (7,781,542) - (7,781,542) Deduct: Project expenses (648,218) (7,795,753) (8,443,971) Bank charges (1,275) (18) (1,293) Transfer from account to account - 7,781,542 7,781,542 Exchange rate differences - 191 191 Balance as at December 31, 2017 2885,033 985 2,886,018 5 Albania Power Recovery Project, Part 2 - Upgrading Distribution Infrastructure IBRD Loan No. 8429-AL, dated November 3, 2014 Supplementary Schedule (Amounts in EUR, unless otherwise stated) Supplementary Schedule of the Designated Account statement Designated Account balances are held at Bank of Albania and are not controlled by OSHTEE. The movements in the Designated Account are presented below: December 31, December 31, (inaudited) 2017 2016 At the beginning of the year - 5,000,000 Advances made by IBRD 6,466,252 182,356 Transfers to cash balances (6,466,252 (5,182,356) At the end of the year - - 6 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company imited by guarantee ("DTTL"), its network of member firms, and their related entities. DTTL and ach 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/al/about to learn more about our global network of member firms. Deloitte provides audit, consulting, legal, financial advisory, risk advisory, tax and related services to public and private clients spanning multiple industries. 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Me nje rrjet global firmash an6tare ne m6 shume se 150 vende, Deloitte sjell ekspertiz6 me nivel nderkombtar dhe shrbime me cilesi tL lart6 per klientet e saj, duke i dheni bizneseve njohurite qe iu nevojiten per t6 adresuar sfidat mb complekse q6 ata hasin. Pr t mesuar mi shume rreth impaktit p&r t6 cilin angazhohen rreth 263 900 profesionistb te Deloitte, ju lutem vizitoni faqet tona ne Facebook, LinkedIn, ose Twitter. Str.Rr.Elbasanit, iallati poshte Fakultetit Gjeologji - Miniera, Tirana, Albania Nww.deloitte.com/al © 2018 Deloitte Audit Albania Sh.P.K