Georgian State Electrosystem JSC Special Purpose Project … · 2017-08-24 · Georgian State Electrosystem JSC Transmission Grid Strengthening Project Loan No. 8377-GE dated 3 September

Georgian State Electrosystem JSC

Special Purpose Project Financial Statements

for the year ended 31 December 2016

TRANSMISSION GRID STRENGTHENING PROJECT

Loan No. 8377-GE dated 3 September 2014

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Contents

Independent Auditors’ Report 3

Statement of Balance Sheet 6

Statement of Designated Account 7

Statement of Funds Received 8

Statement of Uses of Funds 9

Statement of Expenditures 11

Notes to the Special Purpose Project Financial Statements 13

KPMG Georgia LLC 2nd Floor, Besiki Business Centre 4, Besiki Street 0108 Tbilisi, Georgia Telephone +995 322 93 5713 Internet www.kpmg.ge

KPMG Georgia LLC, a company incorporated under the Laws of Georgia, a

member firm of the KPMG network of independent member firms affiliated

with KPMG International Cooperative (“KPMG International”), a Swiss entity.

Independent Auditors’ Report on Special Purpose Project Financial Statements

To the Management Board of Georgian State Electrosystem JSC

Opinion

We have audited the special purpose project financial statements of the Transmission Grid Strengthening Project (the “Project”), financed under the International Bank for Reconstruction and Development (the “IBRD”) Loan Agreement No. 8377-GE dated 3 September 2014, implemented by Georgian State Electrosystem JSC (the “Company”), which comprise the Statement of Balance Sheet as at 31 December 2016 and the Statements of Designated Account, Funds Received, Uses of Funds, and Expenditures for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. The special purpose project financial statements have been prepared by management in accordance with the International Public Sector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting and in conformity with the World Bank’s Financial Management Sector Board’s “Guidelines: Annual Financial Reporting and Auditing for World Bank-Financed Activities” (the “World Bank Guidelines”) as described in Note 2 to the special purpose project financial statements.

In our opinion, the accompanying special purpose project financial statements present fairly, in all material respects, the financial position of the Project as at 31 December 2016, and its sources and uses of funds for the year then ended in accordance with the International Public Sector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting and the World Bank Guidelines.

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing

(ISAs). Our responsibilities under those standards are further described in the

Auditors’ Responsibilities for the Audit of the 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 (IESBA Code), and we have fulfilled our other

ethical responsibilities in accordance with 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 Use

We draw attention to Note 2 to the special purpose project financial statements, which describes the basis of accounting. The special purpose project financial statements are prepared to assist the Company to comply with the requirements of IBRD and for providing information to the Government of Georgia and IBRD to assist them in evaluating the Project implementation. As a result, the special purpose project financial statements may not be suitable for another purpose. Our opinion is not modified in respect of this matter.

Georgian State Electrosystem JSC Transmission Grid Strengthening Project Loan No. 8377-GE dated 3 September 2014 Independent Auditors’ Report Page 2

Responsibilities of Management and Those Charged with Governance for the Special Purpose Project Financial Statements

Management is responsible for the preparation and fair presentation of these special purpose project financial statements in accordance with the International Public Sector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting and the World Bank Guidelines, for determining the acceptability of the basis of accounting and for such internal control as management determines is necessary to enable the preparation of special purpose project financial statements that are free from material misstatement, whether due to fraud or error.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditors’ 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 auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these 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.

Evaluate the overall presentation, structure and content of the special purpose project financial statements, including the disclosures, and whether the special purpose project financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

Georgian State Electrosystem JSC Transmission Grid Strengthening Project Loan No. 8377-GE dated 3 September 2014

Independent Auditors' Report Page3

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.

The engagement partner on the audit resulting in this independent auditors' report


Transmission Grid Strengthening Project


Statement of Balance Sheet as at 31 December 2016

The statement of balance sheet is to be read in conjunction with the notes to, and forming part of, the special

purpose project financial statements set out on pages 13 to 18.

6

In USD

Assets

Note 2016 2015

Project designated account 4 3,000,000 600,000

Total assets 3,000,000 600,000

Funds received

Funds received from IBRD 28,942,986 7,703,418

Co-financing 8,934 -

Total funds received 28,951,920 7,703,418

Project expenditures

Project expenditures financed by IBRD (25,951,920) (7,103,418)

Total project expenditures (25,951,920) (7,103,418)

Total project funds less expenditures 3,000,000 600,000




Statement of Designated Account for the year ended 31 December 2016

The statement of designated account is to be read in conjunction with the notes to, and forming part of, the special


7

In USD

2016 2015

Balance at 1 January 600,000 -

IBRD advances and replenishments during the year 10,406,475 1,085,883

Project expenditures paid during the year (8,006,475) (485,883)

Balance at 31 December 3,000,000 600,000




Statement of Funds Received for the year ended 31 December 2016

8 The statement of funds received is to be read in conjunction with the notes to, and forming part of, the special purpose project financial statements set out on pages 13 to 18.

In USD

Fund received by sources

Actual Planned Variance Total

Year ended

31 December

2016

Year ended

31 December

2015

Cumulative to

31 December

2016

Year ended

31 December

2016

Year ended

31 December

2015

Cumulative to

31 December

2016

Year ended

31 December

2016

Year ended

31 December

2015

Cumulative to

31 December

2016

Project

Cost

IBRD funds 21,239,568 7,553,418 28,942,986 16,160,330 7,567,209 23,877,539 5,079,238 (13,791) 5,065,447 60,000,000

Government funds 8,934 - 8,934 52,000 - 52,000 (43,066) - (43,066) 1,875,000

Total funds received 21,248,502 7,553,418 28,951,920 16,212,330 7,567,209 23,929,539 5,036,172 (13,791) 5,022,381 61,875,000

Total use of funds 18,848,502 6,953,418 25,951,920 13,812,330 6,967,209 20,929,539 5,036,172 (13,791) 5,022,381 61,875,000

Net flow of funds 2,400,000 600,000 3,000,000 2,400,000 600,000 3,000,000 - - - -




Statement of Uses of Funds for the year ended 31 December 2016

9 The statement of uses of funds is to be read in conjunction with the notes to, and forming part of, the special purpose project financial statements set out on pages 13 to 18.

In USD

Project Activities


Year ended

31 December

2016

Year ended

31 December

2015

Cumulative to

31 December

2016

Year ended

31 December

2016

Year ended

31 December

2015

Cumulative to

31 December

2016

Year ended

31 December

2016

Year ended

31 December

2015

Cumulative to

31 December

2016

Project

Cost

Part A: Transmission System

Strengthening

18,803,662 6,953,418

25,757,080 12,980,330 6,967,209

19,947,539

5,823,332 (13,791)

5,809,541

52,350,000

1a: Procurement of plant design,

supply and installation of 220 kV

Akhaltsikhe-Batumi overhead

transmission line

12,424,546 6,330,000

18,754,546 7,481,050 6,330,000

13,811,050

4,943,496 -

4,943,496

36,650,000

1b: Consulting services for

supervision and management

683,315 461,093

1,144,408 800,000 467,584

1,267,584

(116,685) (6,491)

(123,176)

3,569,573

1c: Consulting services

- 162,325

162,325 - 169,625

169,625

- (7,300)

(7,300)

162,325

1d: Supply of TL equipment

5,695,801 -

5,695,801 4,699,280 -

4,699,280

996,521 -

996,521

8,920,000

1e: Contingencies

- -

- - -

-

- -

-

3,048,102

Part B: Wholesale Power

Exchange Platform

- -

- 490,000 -

490,000

(490,000) -

(490,000)

7,500,000

2a: Design, supply and

installation of the power

exchange platform

- -

- - -

-

- -

-

3,375,000

2b: Supervision of supply and

installation of the platform

- -

- 240,000 -

240,000

(240,000) -

(240,000)

1,000,000

2c: Design, supply and

installation of SCADA/EMS

upgrade

- -

- 250,000 -

250,000

(250,000) -

(250,000)

3,125,000




Statement of Uses of Funds for the year ended 31 December 2016

10 The statement of uses of funds is to be read in conjunction with the notes to, and forming part of, the special purpose project financial statements set out on pages 13 to 18.

Project Activities


Year ended

31 December

2016

Year ended

31 December

2015

Cumulative to

31 December

2016

Year ended

31 December

2016

Year ended

31 December

2015

Cumulative to

31 December

2016

Year ended

31 December

2016

Year ended

31 December

2015

Cumulative to

31 December

2016

Project

Cost

Part C: Electricity Sector

Strategic Environmental and

Social Assessment

- -

- - -

-

- -

-

1,250,000

3a: Electricity sector strategic

environmental and social

assessment

- -

- - -

-

- -

-

1,250,000

Part D: Project Management and

Transmission Systems Studies

44,840

-

44,840 342,000 -

342,000

(297,160) -

(297,160)

625,000

4a: Feasibility study and

conceptual design

44,840 -

44,840 236,000 -

236,000

(191,160) -

(191,160)

500,000

4b: Environmental and social

impact assessment

- -

- 106,000 -

106,000

(106,000) -

(106,000)

125,000

Loan endorsement fee

- -

150,000 - -

150,000

- -

-

150,000

Total Project Expenditures

18,848,502 6,953,418

25,951,920 13,812,330 6,967,209

20,929,539

5,036,172 (13,791)

5,022,381

61,875,000




Statement of Expenditures for the year ended 31 December 2016

11 The statement of expenditures is to be read in conjunction with the notes to, and forming part of, the special


In USD

2016

Expenditures Advances Total

Withdrawal

application

No.

Part A:

Transmission

system

strengthening

Part B:

Wholesale

power

exchange

platform

Part C:

Electricity

sector strategic

environmental

and social

assessment

Part D: Project

management

and

transmission

systems

studies:

Advance

payment

Total

disbursement

A007 - - - - 2,400,000 2,400,000

A008 1,612,078 - - - - 1,612,078

A009 875,861 - - - - 875,861

A010 984,885 - - - - 984,885

A011 839,415 - - - - 839,415

A012 1,435,426 - - - - 1,435,426

A013 2,885,703 - - - - 2,885,703

A014 1,123,309 - - - - 1,123,309

A015 2,143,494 - - - - 2,143,494

A016 1,018,682 - - - - 1,018,682

A017 847,619 - - - - 847,619

A018 1,748,842 - - - - 1,748,842

A019 1,661,360 - - - - 1,661,360

A020 1,222,837 - - - - 1,222,837

A021 404,151 - - 35,906 - 440,057

18,803,662 - - 35,906 2,400,000 21,239,568

/11 USD

2015

Expenditures

Part B: Part A:

Withdrawal Wholesale application

Transmission system

power No.

strengthening exchange platform

AOOl

A002 137,535

A003 6,330,000

A004 24,789

A005 297,14 1

A006 163,953

6,953,418

Georgian State Electrosystem JSC Transmission Grid Stre11gtlle11ing Project

Loan No. 8377-GE dated 3 September 2014 Statement of Expenditures for the year ended 31 December 2016

Advances Total

Part C: Part D: Project

Electricity management

sector strategic and

environmental and social

transmission

assessment systems studies:

Advance Total

disburse payment

ment

600,000 600,000

137,535

6,330,000

24,789

297,141

163,953

600,000 7,553,418

The special purpose R oject financial st ents were approved by the management of the Company on alfby:

Sulkh aun Int rnational Projects

and Reporting Department

12 The statement of expenditures is to be read in conjunction with the notes to, and forming part of, the special purpose project financial statements set out on pages 13 to 18.




Notes to the Special Purpose Project Financial Statements for the year ended 31 December 2016

13

1. Background

Transmission Grid Strengthening Project is implemented by Georgian State Electrosystem JSC (parts

A, B and D) and the Ministry of Energy of Georgia (component C).

The Project will: (i) improve stability and security of supply of the south-western part of the

transmission grid by additional transmission connection; (ii) provide transmission services to the newly

constructed hydropower station; (iii) establish power exchange platform, and (iv) assess the

environmental impact of the sector strategy.

The purpose of these special purpose project financial statements is to provide information to the

Government of Georgia and International Bank for Reconstruction and Development (IBRD) to assist

them in evaluating the Project implementation.

(a) Company

Georgian State Electrosystem JSC (the “Company”) is a joint stock company established under the laws

of Georgia on 12 November 2002 by the means of the merger of Electrogadatsema JSC and

Electrodispetcherizatsia-2000 LLC and is their legal successor in title.

The Company’s registered office is 2 Baratashvili Street, Tbilisi 0105, Georgia.

The principle activities of the Company are electricity transmission and dispatching over the entire

territory of Georgia that are regulated by the law on Electricity and Natural Gas. EnergoTrans LLC, the

major subsidiary of the Company, was established as a state-owned enterprise in 2002. The principal

activity of EnergoTrans LLC is electricity transmission, including export and transit of electricity, via

the 500kV Vardzia and Zekari energy transmission lines and the 400kV Meskheti interconnection line

with Turkey constructed as part of the “Black Sea Transmission Network Project”.

At 31 December 2016 and 2015 the parent and ultimate parent of the Company was the Partnership

Fund JSC. The ultimate controlling party of the Company is the Government of Georgia.

(b) Project

The Project commenced in 2015 and is expected to be completed by 31 March 2019. The Project is

financed by IBRD under the loan agreement No. 8377-GE signed between the Government of Georgia

and IBRD on 3 September 2014 and assigned to the Company on 23 December 2014 (the Loan

Agreement).

According to the Loan Agreement Project implementation consists of the following categories:





14

Project Categories Project cost

(USD million)

IBRD financing

(USD million)

IBRD financing as

% of project cost

(1) Goods, works, non-consulting

services, and consultant’s services

for Part A of the Project 52.35 52.35 100

(2) Goods, small works, non-consulting

services, and consultants’ services

for Part B and D of the Project 8.12 6.50 80

(3) Consultants’ services for Part C of

the Project 1.25 1.00 80

(4) Front-end fee 0.15 0.15 100

Total financing required 61.87 60.00 97

Part A: Transmission system strengthening (USD 52.35 million)

(1) Construction of a high voltage transmission line from Akhaltsikhe to Batumi, through: (a)

the supply and installation of a double –circuit, 220 kV transmission line from Akhaltsikhe

back-to-back and 500/400/220 kV substation (Akhaltsikhe station) to Batumi 220 kV

substation; and (b) the supervision of the supply and installation of the Akhaltsikhe Batumi

transmission line.

(2) Provision of equipment of high voltage transmission lines connecting substations

Tskhaltubo, Kutaisi and Zestafoni.

(3) Rehabilitation of the high voltage transmission line Kolkhida -1 connecting substations

Menji and Kutaisi.

Part B: Wholesale power exchange platform (USD 6 million)

(1) Design, Supply and installation of a power exchange platform including: (a) the provision

of hardware and software for metering, balancing, and trading systems; and (b) the supervision

of the supply and installation of the said platform.

(2) Updating of the Supervisory Control and Data Acquisition and Energy Management

Systems.

Part C: Electricity sector strategic environmental and social assessment (USD 1.0 million)

Preparation of an electricity sector strategic environmental and social assessment.

Part D: Project management and transmission systems studies (USD 0.5 million)

Provision of assistance to the Project Implementing Entity for the purposes of: (1) effective management

and implementation of Project activities; and (2) the preparation of: (a) a new transmission-system

expansion plan; (b) prospective transmission line feasibility studies; and (c) the preliminary designs for

the prospective transmission lines.





15

(c) Georgian business environment

The Project’s operations are located in Georgia. Consequently, the Project is exposed to the economic

and financial markets of Georgia which display characteristics of an emerging market. The legal, tax

and regulatory frameworks continue development, but are subject to varying interpretations and

frequent changes which together with other legal and fiscal impediments contribute to the challenges

faced by the projects executed in Georgia.

2. Basis of preparation and significant accounting policies

(a) Statement of compliance

These special purpose project financial statements have been prepared in accordance with International

Public Sector Accounting Standard: Financial Reporting under the Cash Basis of Accounting and in

conformity with the World Bank’s Financial Management Sector Board’s “Guidelines: Annual

Financial Reporting and Auditing for World Bank-Financed Activities” (the “World Bank Guidelines”).

(b) Cash basis of accounting

The cash basis of accounting recognizes transactions and events only when cash is received or paid by

the Company.

(c) Presentation currency

The national currency of Georgia is the Georgian Lari (“GEL”). These special purpose project financial

statements are presented in United States Dollars (“USD”). All financial information presented in USD

has been rounded to the nearest USD unless otherwise stated.

(d) Transactions in other currencies

Transactions related to funds disbursed through direct payments by IBRD in currencies other than

presentation currency are converted in USD at the exchange rate prevailing at the date of the transaction

using the IBRD rate at the transaction date.

Transactions through designated account are converted in USD at the exchange rate prevailing at the

date of the transaction using the rate at the transaction date as determined by the Bank the accounted is

maintained.

(e) Cash

Cash comprises bank balances.

(f) Budget

The budget is developed on the cash basis, using the same classifications and periods as these special

purpose project financial statements.





16

(g) Categories of expenditures

The categories of expenditures incurred are presented in line with the categories specified in the Loan

Agreement.

3. Reconciliation between the amounts received by the Project from IBRD and

disbursed by IBRD

USD Company IBRD Variance

2016

Withdrawal application No: A007 2,400,000

2,400,000

-


1,612,078

-

Withdrawal application No: A009 875,861

875,861

-


984,885

-


839,415

-


1,435,426

-


2,885,702

-


1,123,309

-


2,143,494

-


1,018,682

-


847,619

-


1,748,842

-


1,661,360

-


1,222,837

-


440,057

-

21,239,568 21,239,568 -





17

USD Company IBRD Variance

2015

Withdrawal application No: A001 600,000 600,000 -


Withdrawal application No: A003 6,330,000 6,330,000 -




7,553,418 7,553,418 -

4. Project designated account

2016 2015

Opening balance at 1 January 600,000 -

Closing balance at 31 December 2,999,980 603,244

Interest earned - (3,254)

Wire transfer fee 20 10

Total 3,000,000 600,000

The Company transfers the interest earned on designated account to the Company general bank account

at the beginning of every month.

5. Financial covenants

According to Section IV of the Project Agreement (part of the Loan Agreement), the Company should

maintain a ratio of current assets to current liabilities of not less than 1.

Under the Project Agreement current assets means, all assets, which could, in the ordinary course of

business, be converted into cash within twelve months, including accounts receivable, marketable

securities, inventories and prepaid expenses properly chargeable to operating expenses within the next

fiscal year. The current liabilities means all liabilities which will become due and payable or could

under circumstances then existing be called for payment within twelve months, including accounts

payable, customer advance, debts service requirements, taxes and payments in lieu of taxes, and

dividends.

The management calculates the above financial covenant at the end of each year based on both, stand-

alone financial information of the Company and consolidated financial statements of the Company and

its subsidiaries (the “Group”) prepared in accordance with IFRSs.





18

As at 31 December 2016 the Company and the Group were in breach of the above financial covenant

as the ratio of current assets to current liabilities based on both, stand-alone financial information of the

Company and consolidated financial statements of the Group prepared in accordance with IFRSs was

less than 1 (as at 31 December 2015 the Company and the Group were also in breach of the above

financial covenant).

The Group management assessed that the main reason for the breach of the covenant is related to the

fact that current liabilities also includes payables in relation to construction activities financed by IBRD

and other creditors. Without considering that part of payables related to construction activities, the

current ratio would have been above 1 (i.e. in compliance with the covenant) for the Company

standalone financial information but would have been below 1 (i.e. in breach of the covenant) for the

Group consolidated financial statements as at 31 December 2016.

In case of breach of the covenant the loan agreement does not prescribe explicitly any change in the

loan disbursement or repayment schedule. The management of the Group obtained clarification from

the IBRD that in general, the remedial measures in case of breaching a financial covenant such as

acceleration, suspension, and cancellation is applied in extreme cases when the risk, which the

respective financial covenant is aimed to address, is materialized. Such risks include many factors and

are not limited to the financial covenants only.

Therefore, the Company management does not expect that the above breach of financial covenant as at

31 December 2016 will affect the loan repayment schedule.

The Company and the Group were in compliance with other covenants as at 31 December 2016.

Documents

Georgian State Electrosystem JSC Special Purpose Project … · 2017-08-24 · Georgian State Electrosystem JSC Transmission Grid Strengthening Project Loan No. 8377-GE dated 3 September