REPUBLIC OF TURKEYPRIME MINISTRY

Undersecretariat of Treasury

INDEPENDENT AUDITOR'S REPORT

On

RENEWABLE ENERGY INTEGRATION PROJECT

Implemented by

TURKISH ELECTRICITY TRANSMISSION COMPANY

And

Financed Under

World Bank Loan Agreement No: TF16958

As of December 31, 2015 for the year then ended

Report Number

156/3- 30/6-13/7

Prepared by

ErgUl HALNSQELIK, PhD Semih $AHIN Meryem KO$ARSenior Treasury Controller Junior Treasury Controller Junior Treasury Controller

June 17, 2016

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TABLE OF CONTENTS

1. EXECUTIVE SUMMARY

2. FINANCIAL STATEMENTS OF THE PROJECT

2.1. Independent Auditor's Report

2.2. Statement of Sources and Uses of Funds

2.3. Statement of Cumulative Investments

2.4. Statement of Special Account

2.5. Notes to the Project Financial Statements

I. Objectives and Description of The Project

2. Accounting Policies

3. Limitations on The Use of Funds and Other Entities

4. Cash Balance as of 31 December 2015

5. Amounts Planned in PAD6. Interest Income

7. Exchange Rate

8. Interest

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EXEC1IJTIVE SUMMARY

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EXECUTIVE SUMMARY

A. Project Summary

The Loan Agreement for "Renewable Energy Integration Project No 16958-TR" has beensigned between the International Bank for Reconstruction and Development, acting in its capacityas an implementing entity of the Clean Technology Fund (CTF) and T0rkiye Elektrik Iletim A.$.(TEIA$) on 10 July 2014.

The objective of the Project is to assist the Republic of Turkey in meeting its increasedpower demand by strengthening the transmission system and facilitating large-scale renewableenergy generation.

The project consists of the following parts:

1-Development of transmission infrastructure; Construction and equipping of highlydigitalized substations, namely Can Basin 380 kV, izmir Basin 380 kV, Vize Basin 380 kVsubstations and any other substations agreed with the Bank, together with associated gridconnection structures for evacuation of wind power in the Selected Provinces.

2- Smart-grid investments; Carry out investments that enable the Borrower to monitor thetransmission grid network status in real-time and to operate the entire network reliably andsecurely, including:

(a) Upgrading of the hardware and software of the existing Supervisory Control and DataAcquisition ("SCADA") system at National Control Center, the Emergency NationalControl Center and nine Regional Control Centers and the addition of a RenewableEnergy Resource ("RER") Operator Desk on the SCADA system.(b) Installation of Remote Terminal Units (RTU) in substations and power plants tofacilitate acquisition of real-time transmission network data.(c) Installation of digital protection relays in the power grid to accelerate fault clearingand minimize network disturbances and outage area.(d) Installation of shunt reactors in the bulk-transmission network to control load flow andto secure appropriate system voltage.

3- Lapseki 2-Sutluce 2 submarine power cable; Construction of a second double-circuitsubmarine cable across the Dardanelles Strait.

4- Strengthening of transmission networks; Carry out investments to strengthen thetransmission networks, including:

(a) Construction of an underground cable to connect the Yeni Ambarli substation to theYeni Bosna substation.(b) Construction of four (4) 380/154/33 kV substations and related facilities in theprovince of Istanbul, Antalya and Urgup.(c) Construction of four (4) 154/33 kV substations and related facilities in the provincesIstanbul and Antalya.

(d) Construction of four (4) 154 kV underground cables in the provinces of Istanbul andIzmir.

Through the Loan Agreement dated 10 July 2014, a loan of 50.000.000 Dollar isenvisaged to be used by TEIAS within the framework of the "Renewable Energy IntegrationProject". As of 31.12.2015, TEIAS has used an amount of 465.592,60 Dollar and an amount of49.534.407,40 Dollar has not been used yet. TEIAS has used an amount of 465.592,60 Dollarfrom World Bank sources between 01.01.2015 and 31.12.2015.

As of 31.12.2015, some 465.592,60 Dollar out of the total loan has been used through theSpecial Account. 225.000 Dollar as the Management Fee and 55.000 Dollar as loan payable havebeen paid from own funds.

B. Objectives of Audit

The objectives of our audit are;

a) To give an opinion on whether the financial statements, prepared as of December 31,2015 present fairly in all material respects the financial position of the Project inaccordance with the cash receipts and disbursements basis of accounting,

b) To determine, as of December 31, 2015, whether the TEIAS has complied, in allmaterial respects, with the rules and procedures of the Loan Agreement,

c) To examine whether adequate supporting documentation has been maintained tosupport claims to the World Bank for reimbursements of expenditures incurred withrespect to SOEs and evaluate eligibility of these expenditures for financing under theWorld Bank Loan Agreement.

C. Scope of Audit

We have performed an audit of financial statements of the project as of December 31,2015 and for the year then ended in accordance with the cash receipts and disbursements basis ofaccounting, We have also performed a compliance audit on whether Project activities are in linewith the Loan Agreement and related World Bank Guidelines.

Our audit was conducted in accordance with the International Standards on Auditingpublished by International Federation of Accountants and related World Bank guidelines.

There was no limitation in our scope for the Project's audit.

D. Audit Results

For the financial statements of the project; our audit resulted with an unqualified opinion.

In addition, as of December 31, 2015, TEIAS has complied, in all material respects, withthe rules and procedures of the Loan Agreement.

In our audit period, there was not any disbursement under the Statement of ExpendituresV (SOE).

E. Management Recommendations

A management letter, dated June 17, 2016, to the attention of the TEIAS was issuedseparately from this report. The objective of this Management Letter is to enable the auditors tocommunicate appropriately to those charged with governance and management deficiencies ininternal control that the auditors have identified during the audit and that, in the auditors'professional judgment, are of sufficient importance to merit their respective attentions. For thispurpose, our recommendations in order of priorities are attached to the Letter.

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LFINANCIAL STATEMENTS OF THE PROIECT

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REPUBLIC OF TURKEYPRIME MINISTRY

Undersecretariat of Treasury

F- INDEPENDENT AUDITOR'S REPORT

TO TURKISH ELECTRICITY TRANSMISSION COMPANYANKARA

We have audited the accompanying Statement of Sources and Uses of Funds, Statementof Cumulative Investments, Statement of Special Account of the TF16958 Renewable EnergyIntegration Project as of December 31, 2015, and a summary of significant accounting policiesand other explanatory information. The financial statements have been prepared by the TurkishElectricity Transmission Company based on relevant provisions of the World Bank LoanAgreement, numbered TF16958.

Management's Responsibility for the Financial Statements

Turkish Electricity Transmission Company is responsible for the preparation and fairpresentation of these financial statements in accordance with the relevant provisions of the WorldBank Loan Agreement, numbered TF16958, and for such internal control as managementdetermines is necessary to enable the preparation of financial statements that are free frommaterial misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based on ouraudit, and to determine whether Turkish Electricity Transmission Company has complied with, inall material respects, the requirements of the World Bank Loan Agreement, numbered TF16958.We conducted our audit in accordance with International Standards on Auditing. Those standardsrequire that we comply with ethical requirements and plan and perform the audit to obtainreasonable assurance about whether the financial statements are free from material misstatementand whether the Turkish Electricity Transmission Company has complied with, in all materialrespects, the requirements of the World Bank Loan Agreement, numbered TF16958.

An audit involves performing procedures to obtain audit evidence about the amounts anddisclosures in financial statements. The procedures selected depend on the auditor's judgment,including the assessment of the risks of material misstatement of the financial statements,whether due to fraud or error. In making those risk assessments, the auditor considers internalcontrol relevant to the entity's preparation and fair presentation of the financial statements inorder to design audit procedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the entity's internal control. An audit alsoincludes evaluating the appropriateness of accounting policies used and the reasonableness ofaccounting estimates made by management, as well as evaluating the overall presentation of theconsolidated financial statements. We believe that the audit evidence we have obtained issufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion,

a) The accompanying Statement of Sources and Uses of Funds, Statement of CumulativeInvestments and Statement of Special Account present fairly, in all material respects, thefinancial position of the Renewable Energy Integration Project accounting policies and as ofDecember 31, 2015 in accordance with the provisions of the World Bank Loan Agreement,numbered TF16958.

b) Turkish Electricity Transmission Company, as of December 31, 2015 has compliedwith, in all material respects, the requirements of the World Bank Loan Agreement, numberedTF16958.

c) In our audit period, there was not any disbursement under the Statement ofExpenditures (SOE).

Basis of Accounting and Restriction on Distribution and Use

Without affecting our opinion; we would like to draw attention to Note "2" to theFinancial Statements which describe the basis of accounting. The financial statements areprepared to assist the Turkish Electricity Transmission Company to comply with the financialreporting provisions of the World Bank Loan Agreement, numbered TF16958. As a result, thefinancial statements may not be suitable for another purpose. Our report is intended solely for theTurkish Electricity Transmission Company, Undersecretariat of Treasury, and World Bank, andshould n be distributed or used by other parties

1mi SUCUActing Chairman of Board of Treasury Controllers

A ALISce Chairman

(A Part r)

rgil H(ALZSMELiK,PhD HemiAHN Meryem KO$ARSenior Treasury Controller Junior Treasury Controller Junior Treasury Controller

Date : 17/06/2016Address : Republic of Turkey Prime MinistryUndersecretariat of TreasuryThe Board of Treasury ControllersANKARA/TURKEY

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TURKISH ELECTICITY TRANSMISSION CO.16968-TR (RENEWABLE ENERGY INTEGRATION PROJECT)

STATEMENT OF CUMULATIVE INVESTMENTSAs of December 31, 2015 and For The Year Then Ended

(EURO)

Actual PAD Planned Variance

DIRECT PROJECT COSTS YTD Cumulative YTD Cumulative YTD CUMUlatiVO

A-Renewable Energy Projects 429,093,11 429 093,11 0.00 6.700.000,00 0,00 6.270 906,89Al -SCADAIEMS 429.093,11 429 093111 0,00 6,700 000.00 0,00 &270.905,89

Lb-Total 429.093,11 42M93,11 O'Go 6.700.000,00 0,00 6.270.906,89

OTAL DIRECT PROJECT COSTS 429.093,11 429.093,11 0,00 6 700 000,00 0,00 6.270-906,89

ll-INDIRECT PROJECT COSTS

k-Front and Fee 0,00 177.823,44 0 00 0,00 0,00 -17T823,44

3-Loan Fee 0,00 40.617,38 0,00 0,00 0,00 -40.617,38C-Interest 0,00 0,00 0.00 0,00 0,00 0,00)-Foreign Exchange Loses (net) 0,00 0,00 0.00 0,00 0,00 0,00

10TAL INDIRECT PROJECT COSTS 0,00 218.440,83 0,00 0,00 0,00 -218.440,83

,TOTAL PROJECT INVESIVIENTS 429.093,11 647.533,94 0,00 6.700.000,00 0,00 6.052.466,06

TEiASRENEWABLE ENERGY INTEGRATION PROJECT

16958-TRSPECIAL ACCOUNT STATEMENT

ACC.NO : 58000156AT HALK BANK

For The Year Ended December 31, 2015(EURO)

NotesOpening Balance 0,00

Reimbursement to SA 422,000,00a) Advance 422.000,00b) SOE Procedure 0,00c) Summary Sheet 0,00

Refunds to SA 0,00Intrest Income (net) 6 14,22

Available Funds 422.014,22

Payments made for Expenditures 421.981,85

Commisions 0,00

Transfer to the general budget 6 0,00

Service charges for the account 0,00

Total Project Investments 421.981,85

Closing Balance 4 32,37

ouIk

GENERAL MANAGEMENT OFTURKISH ELECTRICITY TRANSMISSION COMPANY

"RENEWABLE ENERGY INTEGRATION PROJECT LOAN NO 16958-TR"NOTES TO PROJECT FINANCIAL STATEMENTS AS OF THE END OF THE FISCAL

YEAR 31.12.2015

1. THE OBJECTIVES AND DESCRIPTION OF THE PROJECT

The Loan Agreement for "Renewable Energy Integration Project No 16958-TR" has beensigned between the International Bank for Reconstruction and Development, acting in its capacityas an implementing entity of the Clean Technology Fund (CTF) and Tiirkiye Elektrik iletim A.$.(TEIA$) on 10 July 2014.

The objective of the Project is to assist the Republic of Turkey in meeting its increasedpower demand by strengthening the transmission system and facilitating large-scale renewableenergy generation.

The project consists of the following parts:

1- Development of transmission infrastructure; Construction and equipping of highlydigitalized substations, namely Can Basin 380 kV, izmir Basin 380 kV, Vize Basin 380 IVsubstations and any other substations agreed with the Bank, together with associated gridconnection structures for evacuation of wind power in the Selected Provinces.

2- Smart-grid investments; Carry out investments that enable the Borrower to monitor thetransmission grid network status in real-time and to operate the entire network reliably andsecurely, including:

(a) Upgrading of the hardware and software of the existing Supervisory Control and DataAcquisition ("SCADA") system at National Control Center, the Emergency National ControlCenter and nine Regional Control Centers and the addition of a Renewable Energy Resource("RER") Operator Desk on the SCADA system.

(b) Installation of Remote Terminal Units (RTU) in substations and power plants tofacilitate acquisition of real-time transmission network data.

(c) Installation of digital protection relays in the power grid to accelerate fault clearing andminimize network disturbances and outage area.

(d) Installation of shunt reactors in the bulk-transmission network to control load flow andto secure appropriate system voltage.

3- Lapseki 2-Sutluce 2 submarine power cable; Construction of a second double-circuitsubmarine cable across the Dardanelles Strait.

4- Strengthening of transmission networks; Carry out investments to strengthen thetransmission networks, including:

(a) Construction of an underground cable to connect the YeniAmbarli substation to theYeniBosna substation.

(b) Construction of four (4) 380/154/33 kV substations and related facilitiesin the province ofIstanbul, Antalya and Urgup.

II

(c) Construction of four (4) 154/33 kV substations and related facilities in the provinces Istanbuland Antalya.

(d) Construction of four (4) 154 kV underground cablesin the provinces of Istanbul and Izmir.

Through the Loan Agreement dated 10 July 2014, a loan of 50.000.000 Dollar isenvisaged to be used by TEIAS within the framework of the "Renewable Energy Integration

Project". As of 31.12.2015, TEIAS has used an amount of 465.592,60 Dollar (422.000,00 Euro)and an amount of 49.534.407,40 Dollar has not been used yet. TEIAS has used an amount of465.592,60 Dollar (422.000,00 Euro) from World Bank sources between 01.01.2015 and31.12.2015.

As of 31.12.2015, some 465.592,60 Dollar (422.000,00 Euro) out of the total loan hasbeen used through the Special Account. 225.000 Dollar as the Management Fee and 55.000Dollar as loan payable have been paid from own funds.

2. MAIN ACCOUNTING POLICIES

In TEIAS, a separate accounting system has not been established for the World Bankprojects. TEIAS obtains a number of loans from the Bank, and other international organizations,by which it utilized a substantial amount of funds at total.

Financial statements of the project has been established according to the accountingprinciples based on cash collection and payment.

3. LIMITATIONS ON THE USE THE FUNDS AND OTHER ENTITIES

In accordance with the Loan Agreement between the Turkish Government and the WorldBank, the use of the funds in the Special Account is limited to the project objectives. Projectfunds left in the Account at the end of the project will be returned to the World Bank.

4. CASH BALANCE AS OF 31 DECEMBER 2015

The cash balance in Euro as of 31 December 2015 is as follows:

Loan Funds Counter Part TotalFunds ______

Special Account(Halkbank Ankara Corporate Branch) 32,37 0,00 32,37Fixed Funds 0,00 0,00 0,00Checking Accounts (Local Bank 0,00 0,00 0,00Account)

Total 32,37 0,0 32,37

5. AMOUNTS PLANNED IN PAD

2

The cumulative amounts for the financing of TIAS projects under REIP (16958-TR) arenot included in PAD, however the project amounts in the Table of Sources and Utilization ofFunds have been taken from the relevant Departments in TEIAS.

6. INTEREST INCOME

The amount of interest earnings accumulated in the Special Account in the AnkaraCorporate Branch of Halkbank is 14,22 Euro as of 31.12.2015. The interest earnings accumulatedhas been transferred to the running account of our Company in the same Bank at the beginning of2016. Those gains are not used for the Project's purposes, they are used to finance ordinarybusiness activities of TEIAS and accounted in the accounting system of TEIAS.

7. EXCHANGE RATE

The currency of the credit no. 16958-TR is Euro. However contracts for projects involveone or more currency. Therefore, payments are made the currency specified in the contract. Dueto the time difference between invoice amounts and payments dates may occur favorable orunfavorable foreign exchange gain or loss. Related issues has been given a place in the Statementof Sources and Uses of Funds.

8. INTEREST

Our company undertakes interest payments for the used part of the credit twice a year

(April-October) according to the credit contracts. The interest wasn't paid in the year 20 15.

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