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EPS PART I OF THE FLOODS EMERGENCY RECOVERY PROJECT PROJECT OPERATION NUMBER 8449YF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Independent Auditors' Report and Statement of Sources and Uses of Funds Statement of Expenditures and Special Account Statement For the period from i January through 31 December 2016 Belgrade, June 2017 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

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Page 1: Independent Auditors' Report and Statement of Sources and ... · of Sources and Uses of"Funds, the Statement of Expenditures and Special Account Statements for the period from 1 January

EPS PART I OF THE FLOODS EMERGENCY RECOVERYPROJECT

PROJECT OPERATION NUMBER 8449YF

INTERNATIONAL BANK FOR RECONSTRUCTION ANDDEVELOPMENT

Independent Auditors' Report andStatement of Sources and Uses of Funds

Statement of Expenditures andSpecial Account Statement

For the period from i Januarythrough 31 December 2016

Belgrade, June 2017

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Page 2: Independent Auditors' Report and Statement of Sources and ... · of Sources and Uses of"Funds, the Statement of Expenditures and Special Account Statements for the period from 1 January

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pwcINDEPENDENT AUDITOR'S REPORT

To the Management of Javno Preduze6e Elektroprivreda Srbije, Beograd

We have audited the accompanying project financial statements for the Project No. 8449 YF entitled"EPS Part I Of The Floods Emergency Recovery Project" (the "Project") financed under the loanprovided by the International Bank for Reconstruction and Development (the "IBRD") whichcomprise the Statement of Sources and Uses of Funds, the Statement of Expenditures and SpecialAccount Statements for, the period from 1 January through 31 December 2016, and Notes to theStatements, comprising a summary of accounting conventions and other explanatory notes. Theproject financial statement has been prepared by management of Javno Preduze6e ElektroprivredaSrbije,lteograd (the "Company") using the cash receipts and disbursements basis of accountingdescribed in Note 3.

Management's responsibility for thefinancial statements

Management is responsible for the preparation and fair presentation of these project financialstatements in accordance with the cash receipts and disbursements basis of accounting described inNote 3; this includes determining that the cash receipts and disbursements basis of accounting is anacceptable basis for the preparation of the project financial statement in the circumstances, and forsuch internal control as management determines is necessary to enable the preparation of financialstatements that is free from material misstatement, whether due to fraud or error.

Auditor's responsibility

Our responsibility is to express an opinion on these project financial statements based on our audit.We conducted our audit in accordance with Law on Auditing and auditing regulation effective in theRepublic of Serbia. This regulation requires that we comply with ethical requirements and plan andperform the audit to obtain reasonable assurance about whether the project financial statements arefree from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosuresin the project financial statements. The procedures selected depend on the auditor's judgment,including the assessment of the risks of material misstatement of the project financial statements,whether due to fraud or error. In making those risk assessments, the auditor considers internalcontrol relevant to the Company's preparation and fair presentation of the project financialstatements in order to design audit procedures that are appropriate in the circumstances, but not forthe purpose of expressing an opinion on the effectiveness of the Company's internal control. An auditalso includes evaluating the appropriateness of accounting policies used and the reasonableness ofaccounting estimates made by management, as well as evaluating the overall presentation of theproject financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis forour audit opinion.

Opinion

In our opinion, the project financial statements present fairly, in all material respects, sources andapplication of funds, expenditure details and movements in the Special Account of the Projectfinanced under the IBRD loan for the period from i January 2015 through 31 December 2016, inaccordance with the cash receipts and disbursements basis of accounting described in Note 3.

PricewaterhouseCoopers d.o.o., Omladinskih brigada 88a, 11o7o Belgrade, Republic of SerbiaT: +381113302100, F-+38113302101, www.pwc.rs

TIhis version of our report/ tl c necomuiripanyin d0LUDCoctis is a transai11 ftom t le original, which was prepared in Serbian. Allpossible Care has been takenl to cvnsurv that the translation is an acclurate ouprecsentafionl of the original. However, inl all

mttrera of interpretation of informiition, views or opilinions, tihe original Ilngua ge version of our report takes prccedence overthis translation.

Page 3: Independent Auditors' Report and Statement of Sources and ... · of Sources and Uses of"Funds, the Statement of Expenditures and Special Account Statements for the period from 1 January

Basis ofAccounting and Restriction on Use and Distribution

Without modifying our opinion, we draw attention to Note 3 to the project financial statements, whichdescribes the basis of accounting. The project financial statements are prepared for the purpose ofreporting of Company on the activities of the project with respect to the funding received for the1 completion of the Project objectives in accordance with the respective loan agreement. As a result, theproject financial statements may not be suitable for another purpose. Our report is intended solely forthe use of EPS management and IBRD and should not be distributed to or used by parties other thanCompany of IBRD. 1

X-ouse

Milivoje Negovic ricewaterhouseCoopers .o.o., BeogradLicensed Auditor

Belgrade, 30 June 2017

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This versionf of u report/ the accompanlying documllents is a translation from the original, which was prepared in Serbian Allpossible care has been taken to cnstire ithat ihei translaion is an accurate represeatalion of the origin al. I ow-ever, ill all

mnatters of interpretation of information, views or opinionls, the original lanlguage version of our rcportL takei pro cdence overthis Iranlslation.

Page 4: Independent Auditors' Report and Statement of Sources and ... · of Sources and Uses of"Funds, the Statement of Expenditures and Special Account Statements for the period from 1 January

jJI

pwcMANAGEMENT LETTER

To the Management of Javno Preduze6e Elektroprivreda Srbije, Beograd

We have audited project financial statements for the Project No. 8449 YF entitled "EPS Part I Of TheFloods Emergency Recovery Project" (the "Project") financed under the loan provided by theInternational Bank for Reconstruction and Development (the "IBRD") which comprise the Statementof Sources and Uses of"Funds, the Statement of Expenditures and Special Account Statements for theperiod from 1 January through 31 December 2016, and Notes to the Statements, comprising asummary of accounting conventions and other explanatory notes. The project financial statement hasbeen pfepared by management of Javno Preduze6e Elektroprivreda Srbije, Beograd (the "Company")using the cash receipts and disbursements basis of accounting described in Note 3.

The principal objective of our audit procedures is to enable us to express our opinion on the truth andfairness of the project financial statements as a whole. An audit opinion is based on the concept ofreasonable assurance. It is not a guarantee that the project financial statements are free ofmisstatement. We explained our audit responsibilities, and their limitations, in our letters ofengagement from 24 November 2015.

Our audit procedures are tailored to our assessment of the risk of material misstatement, taking intoaccount the inherent risks of error or fraud, and our assessment of the effectiveness of controls ineliminating or reducing those risks.

We have prepared this report solely for your use within your organization. As you know, this reportforms part of a continuing dialogue between you and us and, therefore, it is not intended to includeevery matter that came to our attention. For this reason, we believe that it would be inappropriate forthe report to be made available to third parties. If such a third party were to obtain a copy without ourprior written consent, we would not accept any responsibility for any reliance that they might place onit.

We consider controls primarily at the level of Project Implementation Unit for Project No. 8449 YF.We cannot in practice examine every operatingactivity or accounting procedure in the organization,nor can we substitute for management's responsibility to maintain adequate controls at all levels ofthe operation. Our work cannot, therefore, be expected to identify all weaknesses in your systems andprocedures which a special investigation directed at these systems and procedures might reveal. As tothe possibility of fraud, we plan our audit to have a reasonable expectation of its disclosure if thepotential effects of the fraud would be material to the project financial statements. However, there aremany kinds of fraudulent activity, particularly those involving forgery, collusion and managementoverride of control systems, which it would be unreasonable to expect the normal audit to uncover.

In accordance with aforementioned we have not identified any issue concerning the accounting andinternal control system applied in the Project Implementation Unit for Project No. 8449 YF.

We would like to emphasize that this letter cannot be regarded as a comprehensive statement ofweaknesses of the internal control system that may exist, nor of all improvements that might be made.

oseC0 0

PricewaterhouseCoopers d.6o Beograd *

Belgrade, 30 June 2017

PricewaterhouseCoopers d.o.o., Omladinskih brigada 88a, 1107o e grade, Republic ofSerbiaT: +3811133o2 ioo, F:+38 113302101, www.pwc.rs

This version of our report/ the accolpalnying documllentis is a translation from the original, which was prepared in Serbian. Allpossible care has been tAkel to ensure that the translation is an accurate representation ofthe original. H1owever, in all

matters of interpretation of information, views or opilions, the 1 original language version of ou reporl takes precedence overth is translaitin

Page 5: Independent Auditors' Report and Statement of Sources and ... · of Sources and Uses of"Funds, the Statement of Expenditures and Special Account Statements for the period from 1 January

Project Operation Number 8449_YF Public Enterprise "Elektroprivreda Srbije", Belgrade

STATEMENT OF SOURCES AND USES OF FUNDSFor the period from 1 January through 31 December 2016

In EURo0 January oi Januarythrough 31 through 31

December 2016 December 2015PROJECT FINANCING

Cash balance at the begi ning of the period -

Proceeds fron the IBRD loan

Reimbursement for goods and services provided 8,776,089 109,867,207Transfers to the Special Account 59,780

Total Project financing 8,835,869 109,867,207

PROJECT EXPENDITURES

IBRD financed:Part I Energy Sector Support

A. Financing of electricity purchases to improve power (8,776,089)availability 794,911,098)

B. Supporting urgent restoration of the distributionnetwork (59,780)

C. Dewatering of Tamnava West Open Pit Mine _ (14,956,109)Payments from the Special account

Total Project expenditures (8,835,869) (og,867,207)Earned interest deposited on the separate bank account -

Cash balance at the end of the period - .

Signed on behalfOublic Enterp' e "Eleoprivreda Srbije", Belgrade:

Project Manager

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Page 6: Independent Auditors' Report and Statement of Sources and ... · of Sources and Uses of"Funds, the Statement of Expenditures and Special Account Statements for the period from 1 January

Project Operation Number 8449_YF Public Enterprise "Elektroprivreda Srbije", Belgrade

STATEMENT OF EXPENDITURESFor the period from 1 January through 31 December 2016

In EURBudget Actual Variance

ol January oi January Cumulativethrough 31 through 31 to DateDecember December

Sources ofFunds 2016 2o16

CounterpartPunds from EPS -World Bank 6,671,200 8,835,869 (2,164,669)Interests Earned

Total 6,671,200 8,835,869 (2,164,669)

Uses of Funds

Financed by WB

Component 1 - Financing of electricity purchases to improve power 6,611,420 8,776,089 (2,164,669)availabilityComponent 2 - Supporting urgent restoration of the distribution network 59,780 59,780Component 3 - Dewatering of Tamnava West Open Pit Mine - 0Sub-total financed by the WB 6,671,200 8,835,869 (2,164,669)Financed by EPS

Component 1 - Financing of electricity purchases to improve poweravailabilityComponent 2 - Supporting urgent restoration of the distribution network -

Component 3 - Dewatering of Tamnava West Open Pit Mine

Sub-total financed by the EPS - -

Total uses of funds * 6,671,200 8,835,869 (2,164,669)

Out of the total expenditures (EUR 8,835,869), the amount of EUR 2,164,669 was paid by EPS to suppliersduring 2015 related to Component 1: Financing of electricity purchases to improve power availability: EUR2,164,669.

Total reimbursement from IBRD (EUR 8,776,089) was received during 2016.Total transfers to Designated Account A from IBRD (EUR 59,780) was made during 2016.

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Page 7: Independent Auditors' Report and Statement of Sources and ... · of Sources and Uses of"Funds, the Statement of Expenditures and Special Account Statements for the period from 1 January

Project Operation Number 8449_YF Public Enterprise "Elektroprivreda Srbiye" Belgrade

SPECIAL ACCOUNT STATEMENTFor the period from 1 January through 31 December 2o16

Special Account No. 10226960911-29Depository Bank Societe Generale Banka Srbija, AD, BelgradeCurrency EURSpecial Account No. 275-10226960904-50Depository Bank Societe Generale Banka Srbija, AD, BelgradeCurrency RSD

In EURo0 January

o1 Januar through 31through 31 December

December 2016 2015Cash balance at the beginning of the period-.

Cash balance at the end of the period

Reconciliation of cash balance to project expenditures:- Reimbursement from the IBRD 8,776,o89 109,867,207- Payments from the Special Account 59,780 -

8,835,869 109,867,207

Please note that both Special accounts were open during May 2016.

-I

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Page 8: Independent Auditors' Report and Statement of Sources and ... · of Sources and Uses of"Funds, the Statement of Expenditures and Special Account Statements for the period from 1 January

Project Operation Number 8449_YF Public Enterprise "Eleletroprivreda Srbije" Belgrade

i) Project Background

Republic of Serbia (the "Borrower") entered into a loan agreement with the International Bank forReconstruction and Development (the "IBRD") on 9 October 2014 with the aim to provide funds for the projectdescribed in Schedule 1 of the Loan Agreement.

The objectives of the Project are to: (i) help restore power system capability to reliably meet domestic demand;(ii) protect livelihoods of farmers in the Flood Affected Areas; (iii) protect people and assets from floods; and (iv)improve the Borrower's capacity to respond effectively to disasters.

The Project consists of the following parts:

Part I Energy Sector SupRort

A. Financing of electricity purchases to improve power availability.B. Supporting urgent restoration of the distribution network by: (i) provision of metering devices for Flood

"Affected Areas; (ii) provision of mobile substations; (iii) provision for energy-efficient light bulbs, andtechnical assistance and other goods to support power system load management activities.

C. Dewatering of Tamnava West Open Pit Mine.

Part II Agricultural Sector SuppoSupporting the financing of payments to farmers under the Borrower's Farm Incentives Program, in FloodAffected Areas.

Part III Flood ProtectionA. Rehabilitating and restructuring priority flood prevention and drainage control infrastructure through

the provision of works, goods and consultants' services in Flood Affected Areas, and areas vulnerable toflooding.

B. Support for Project management, including operating costs, and strengthening technical capacity forimproved flood prevention and management, including technical studies to identify priority floodprevention infrastructure works and preparation of technical designs, bidding documents and terms ofreference for such activities.

Part IV Contingent Emergency ResponseProvision of immediate response to an Eligible Crisis or Emergency, as needed.

2) The Loan Agreement

Loan Agreement signed between Republic of Serbia and IBRD refers to the amount of EUR 227,480,000. Inorder to facilitate the carrying out of the Project Implementing Entity's Respective Part of the Project, theBorrower shall make part of the proceeds of the Loan available to the Project Implementing Entity under asubsidiary agreement between the Borrower and the Project Implementing Entity, under terms and conditionsapproved by the Bank, which shall include the following: the principal amount of the Loan made available underthe Subsidiary Agreement shall be: a) denominated and repayable in Euros; and (b) made in no less favourablethan terms of the loan.

Republic of Serbia entered into Subsidiary Agreement with the EPS on 19 February 2015 with the aim to financei- Project I Energy Sector Support (as described in Schedule 1 of the Loan Agreement and as listed above in Note 1,Project Background). Out of the total loan amount of EUR 227,480,000, the amount of EUR 157,107,000 isallocated by the aforementioned Subsidiary Agreement to EPS for the financing of Project I.

-1 The loan is repayable in forty-two semi-annual instalments on each interest payment date, beginning with thefirst loan repayment date falling in November 2023 and ending with the last interest payment date falling in May2044. The Interest Payment Dates are i May and 1 November of each year. The loan is subject of commitmentcharge of 0.25% per annum on the Unwithdrawn Loan Balance. The loan bears interest rate that is calculated asa sum of six months EURIBOR and the variable spread (currently 0,95%) per annum.

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Page 9: Independent Auditors' Report and Statement of Sources and ... · of Sources and Uses of"Funds, the Statement of Expenditures and Special Account Statements for the period from 1 January

Project Operation Number 8449_YF Public Enterprise "Elektroprivreda Srbije", Belgrade

Allocated loan Percentage of expenditures to beRCategory financed

(i) Power Purchases for Part I. A of the 119,817,000 ioo% (exclusive of taxes)Project

a] Goods (excluding Power Purchasesunder Category (I)), works, non-

(2) consulting services, training, and 37,290,000 100%consultants' services for Part I of the

a ProjectTotal as per SubsidiaryAgreement that relates to EPS 157,107,000

Payments under the Farm Incentives 53,084,000 io%S3 Program under ParNI of the Project

Goqds, works, non-consultingservices, consultants' services,

(4) Training and Incremental Operating 16,720,300 loo%Costs for Paits II and III of theProjectEmergency Expenditures under PartWof the Project - 1oo%

Amount payable pursuant to Section 2.03(6) Front-end commission 568,700 of this Agreement in accordance with

Section 2.07 (b) of the General ConditionsTotal 227,48o,000

3) Basis of preparation and accounting conventions

3.1 General

The accompanying statements have been prepared for the purposes of reporting of EPS on the activities of theProject with respect to the funding received for the completion of the Project objectives in accordance with therespective loan agreements.

3.2 Accounting Records and Basis of Presentationa

Funds originated through the IBRD loan are accounted for using the cash receipts and disbursements basis.

3.3 Exchange Rates

Expenditures paid in Serbian Dinars (RSD) were translated into EUR at the average exchange rate of NationalBank of Serbia in effect at the date of each payment.

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