HZ CARGO d.o.o., Zagreb SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No. 8502 HR PROJECT FINANCIAL STATEMENTS AND SPECIAL ACCOUNT STATEMENT TOGETHER WITH INDEPENDENT AUDITOR'S REPORTS FOR THE YEAR ENDED 31 December 2018 SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No. 8502 HR CONTENTS Page Independent Auditor's Report 1 -2 Statement of Assets and Liabilities 3 Statement of Sources and Uses of Funds 4 Statement of Uses of Funds by Project Activity 5 Cost statement and withdrawal review 6 - 16 Designated Account Statement 17 -20 Notes to the Project Financial Statements 21 - 26 Reconciliation of the Designated Account 27 Management Letter 28 - 29 Checklist 30 Tel: +385 1 2395 741 BDO Croatia d.o.o. Fax: +385 1 2303 691 10000 Zagreb E-mail: bdo-croatia.hr Trg J. F. Kennedy 6b INDEPENDENT AUDITOR'S REPORT 1. We have audited the accompanying Financial Statements of the SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT (hereinafter: the "Project") financed under the INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No. 8502 HR ("Loan"), which comprise the Statement of Assets and Liabilities, the Statement of Sources and Uses of Funds, the Statement of Uses of Funds by Project Activities, Statement of Expenditure (SOE) and Designated Account Statement for the year ended 31 December 2018 ("Project Financial Statements"). 2. The Project Financial Statements are the responsibility of the Project's management. Our responsibility is to express an opinion on the Project Financial Statements based on our audit. 3. We conducted our audit in accordance with International Standards on Auditing issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall statement presentation. We believe our audit provides a reasonable basis for our opinion. The Project management's policy is to prepare the accompanying statements on the cash receipts and payments basis in conformity with International Public Sector Accounting Standards issued by the Public Sector Committee of the International Federation of Accountants. On this basis, cash receipts are recognized when received and cash expenditures are recognized when paid rather than when incurred. 4. In our opinion, Financial Statements of the SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT present fairly in all material respects the cash receipts and payments of the Project during the year ended 31 December 2018 in accordance with International Public Sector Accounting Standards issued by the Public Sector Committee of the International Federation of Accountants. Registrirano kod Trgovakog suda u Zagrebu pod brojem 080044149 01B 76394522236 1 IB D O BDO Croatia d.o.o. 5. With respect to Summary Statement of Expenditure ("SOE") - Application for Loan Withdrawal: (a) Adequate supporting documentation has been maintained to support claims for reimbursements of expenditures incurred; (b) the Summary Statement of Expenditure has been reconciled to the other Project Financial Statements and (c) the expenditure disbursements underlying the Summary Statement of Expenditure have been made in accordance with the purposes intended in the Loan Agreement No. 8502 HR. BDO CROATIA d.o.o., Zagreb Trg J. F. Kennedy 6b CROAnA 10000 Zagreb Croatia a Vedrana Stip), Member of the Management Board Vedrana Stipk, certified auditor Zagreb, 29 June 2019 2 STATEMENT OF ASSETS AND LIABILITIES for the year ended 31 December 2018 Notes 31 December 2018 31 December 2017 EUR EUR Assets Front end fee 8 103,750 103,750 Project expenditures 8 28,081,507 22,971,002 Letter of credit - 291,008 Designated Account 9 249,379 87,957 TOTAL 28,434,636 23,453,717 Liabilities IBRD Loan No. 8502 HR 2 28,434,636 23,453,717 TOTAL 28,434,636 23,453,717 NET ASSETS - Project is effective as of 4 August 2015. 3 SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No. 8502 HR STATEMENT OF SOURCES AND USES OF FUNDS for the year ended 31 December 2018 Actual in EUR Plan in EUR Cumulative until 31 December Plan during Completion 2018 2018 Project life progress in % EUR EUR EUR Sources of Funding 4,819,496 28,185,257 40,964,712 69% Counterpart funding - - - IBRD Loan Funds 4,819,496 28,185,257 40,964,712 69% Payments from Designated Account 4,822,248 16,692,689 - Reimbursement - 10,265,309 - Direct Payments - 1,227,259 - Project expenditures by loan categories 4,819,496 28,185,257 40,964,712 69% Retrenchment Payments - cat 4. 517,788 17,780,306 20,867,248 85% Goods, works, non-consulting services, consultants' services and Training for Part C - cat 5. 4,592,716 10,301,201 19,993,714 52% Front end fee - cat 8. - 103,750 103,750 100% Letter of credit-cat 5. (299,200) - Letter of credit-Goods-cat. 5. 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"�С и° � гаа г° .rnг о+ о� � о о о� о о о ч°н гч h� Ф = й г Ф DESIGNATED ACCOUNT STATEMENT for the year ended 31 December 2018 (EUR) Account No. HR2123900011300035785 Depository Bank Hrvatska pogtanska banka d.d., Zagreb Address Juriiieeva 4, Zagreb Loan IBRD Loan No. 8502 From the beginning For the year of the Project EUR EUR I Opening balance at the beginning of the period 871967 Add: 2 World Bank advances into DA during the period 4,980,908 16,942,057 3 Letter of credit-refund of unused funds 2,752 2,752 4 Interest earned (if credited into DA) - 10 Funds available during the period 4,983,660 16,944,819 Less: 5 Payments for eligible expenditures during the period (4,822,?!L8L (16,695,440) (4,822,248) (16,695,440) 6 Closing balance at the end of the period 249,379 249,379 17 SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No. 8502 HR DESIGNATED ACCOUNT STATEMENT -continued for the year ended 31 December 2018 Payments from the WB Special Account for the project expenditures Description/supplier/contract Date EUR HRK KONCAR ELEKTRICNA VOZILA 5 January 2018 408,141 3,032,488 LUMARO PROJEKT d.o.o. 5 January 2018 54,282 403,313 CKTZ 5 January 2018 20,064 149,075 TONELI d.o.o. 8 January 2018 10,260 76,312 LUMARO PROJEKT d.o.o. 15 January 2018 49,772 369,703 ZELJEZNICKI FOND 15 January 2018 17,654 131,137 CKTZ 23 January 2018 7,099 52,675 TONELI d.o.o. 5 February 2018 36,828 273,336 CKTZ 5 February 2018 29,272 217,143 CKTZ 6 February 2018 12,769 94,772 KONCAR ELEKTRICNA VOZILA 9 February 2018 407,592 3,032,488 KONCAR ELEKTRICNA VOZILA 12 February 288,256 2,144,625 2018 2ELJEZNItKI FOND 15 February 17,739 131,785 2018 LUMARO PROJEKT d.o.o. 21 February 45,235 336,094 2018 KONCAR ELEKTRItNA VOZILA 26 February 408,251 3,032,488 2018 INSTITUTE FOR LABOR MARKET DEVELOPMENT 27 February 16,221 120,572 2018 Non retroactive retrenchments 28 February 6,449 48,000 2018 2ELJEZNItKI FOND 20 March 2018 18,722 139,232 RAILDATA 22 March 2018 55,504 - KONCAR ELEKTRICNA VOZILA 23 March 2018 407,592 3,032,488 LUMARO PROJEKT d.o.o. 3 April 2018 1,811 13,444 Non retroactive retrenchments 9 April 2018 247 1,821 KONCAR ELEKTRINA VOZILA 17 April 2018 289,423 2,144,625 KONdAR ELEKTRItNA VOZILA 20 April 2018 409,408 3,032,488 2ELJEZNICKI FOND 20 ApriL 2018 17,894 132,543 INSTITUTE FOR LABOR MARKET DEVELOPMENT 2 May 2018 11,897 88,095 2ELJEZNIKI FOND 21 May 2018 19,408 143,096 Non retroactive retrenchments 30 May 2018 28,419 209,733 18 SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No. 8502 HR DESIGNATED ACCOUNT STATEMENT -continued for the year ended 31 December 2018 Payments from the WB Special Account for the project expenditures Description/supplier/contract Date EUR HRK TONELI d.o.o. 11 June 2018 2,259 16,650 ZELJEZNICKI FOND 20 June 2018 17,728 130,815 Non retroactive retrenchments 29 June 2018 8,128 60,000 ZELJEZNItKI FOND 23 July 2018 16,465 121,710 Non retroactive retrenchments 31 July 2018 1,179 8,714 Non retroactive retrenchments 6 August 2018 8,125 60,000 2ELJEZNICKI FOND 16 August 2018 15,082 111,832 IVICA PERICA (UM i UM d.o.o.) 31 August 2018 10,501 77,917 INSTITUTE FOR LABOR MARKET DEVELOPMENT 4 September 20,908 2018 2ELJEZNICKI FOND 17 September 1,009 7,481 2018 2ELJEZNIKI FOND 17 September 13,163 97,735 2018 OV 5 July 2018 163,957 1,210,000 KONCAR ELEKTRICNA VOZILA 12 July 2018 185,199 1,368,805 SMART CORPORATION 18 September 83,795 621,337 2018 TONELI d.o.o. 18 September 5,385 39,995 2018 TONELI d.o.o. 25 September 36,971 274,253 2018 TONELI d.o.o. 3 October 2018 10,770 79,990 SMART CORPORATION 26 September 40,658 301,762 2018 CIOS CARGO D.O.O. 2 October 2018 58,483 434,063 Non retroactive retrenchments 9 October 2018 10,578 78,470 CIOS CARGO D.O.O. 11 October 2018 138,514 1,023,619 CIOS CARGO D.O.O. 15 October 2018 46,670 345,638 2ELJEZNI(KI FOND 16 October 2018 14,099 104,305 CIOS CARGO D.O.O. 22 October 2018 35,066 260,438 Non retroactive retrenchments 22 October 2018 23,346 173,389 CIOS CARGO D.O.O. 23 October 2018 12,870 95,494 CIOS CARGO D.O.O. 24 October 2018 35,166 260,438 BDO Croatia d.o.o. 25 October 2018 15,152 112,500 Non retroactive retrenchments 30 October 2018 7,029 52,185 19 SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No. 8502 HR DESIGNATED ACCOUNT STATEMENT -continued for the year ended 31 December 2018 Payments from the WB Special Account for the project expenditures Description/supplier/contract Date EUR HRK TONELI d.o.o. 12 November 4,999 37,138 2018 CIOS CARGO D.O.O. 13 November 46,613 345,638 2018 2ELJEZNItKI FOND 15 November 12,997 96,410 2018 CIOS CARGO D.O.O. 19 November 46,683 345,638 2018 Non retroactive retrenchments 19 November 10,766 79,564 2018 Non retroactive retrenchments 21 November 16,194 120,000 2018 TONELI d.o.o. 3 December 38,164 282,823 2018 CIOS CARGO D.O.O. 10 December 46,803 345,638 2018 CIOS CARGO D.O.O. 12 December 46,866 345,638 2018 Non retroactive retrenchments 11 December 8,621 63,665 2018 Non retroactive retrenchments 13 December 19,303 142,363 2018 2ELJEZNICKI FOND 17 December 23,486 173,329 2018 CIOS CARGO D.O.O. 18 December 70,579 520,875 2018 CIOS CARGO D.O.O. 19 December 70,294 520,875 2018 CIOS CARGO D.O.O. 20 December 70,294 520,875 2018 TONELI d.o.o. 27 December 14,253 105,702 2018 CIOS CARGO D.O.O. 28 December 140,872 1,041,750 2018 TOTAL 4,822,248 35,201,017 20 SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No. 8502 HR NOTES TO THE PROJECT FINANCIAL STATEMENTS for the year ended 31 December 2018 1. GENERAL INFORMATION In May 2015 International Bank for Reconstruction and Development approved three loans to railway sector totalling to EUR 163,5 million, of which EUR 43 million to the company H2 PUTNICKI PRIJEVOZ d.o.o., Zagreb, EUR 41 million to the company H2 CARGO d.o.o., Zagreb and EUR 79 million to the company HZ INFRASTRKTURA d.o.o., Zagreb. Granted loans are part of the "Sustainable Croatian Railways in Europe Project" (SUCRE) which became effective on 4 August 2015. The objective of the Project is to improve the operational efficiency and the financial sustainability of the public railway sector in the Republic of Croatia. The Project consists of the following parts: Part A Support to the Sector Restructuring and Coordination 1. Finalizing asset management separation among the railway companies and clarifying the legal status of their main assets, through the provision of consulting services and non-consulting services to Ministry of Maritime Affairs, Transport and Infrastructure. 2. Project coordination support, sector reform monitoring, and definition of railway services obligations with HZ INFRASTRUKTURA d.o.o., Zagreb and H2 PUTNICKI PRIJEVOZ d.o.o., Zagreb through the provision of consulting services, non-consulting services, Training, and Operating Costs to Ministry of Maritime Affairs, Transport and Infrastructure. Part B Support to restructuring of the company H2 PUTNICKI PRIJEVOZ d.o.o., Zagreb 1. Retrenchment. Provision of the retrenchment payments for the company H2 PUTNIKI PRIJEVOZ d.o.o., Zagreb, including job outplacement and retraining services, counselling and advisory support. 2. Investment to contribute to the restructuring plan of the company H2 PUTNICKI PRIJEVOZ d.o.o., Zagreb (a) Rehabilitating rolling stock to improve efficiency of the fleet. (b) Modernizing and integrating information technology. (c) Preparing studies to adapt business processes to reorganize operations and improve energy efficiency of operations. (d) Capacity building on management and restructuring. 21 SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No. 8502 HR NOTES TO THE PROJECT FINANCIAL STATEMENTS-continued for the year ended 31 December 2018 Part C Support to the restructuring of the company H2 CARGO d.o.o., Zagreb 1. Retrenchment -provision of the retrenchment payments for the company H2 CARGO d.o.o., Zagreb, including job outplacement and retraining services, counselling and advisory support. 2. Investment to contribute to the restructuring plan of the company H2 CARGO d.o.o., Zagreb (a) Rehabilitating rolLing stock to improve efficiency of the fleet. (b) Modernizing and integrating information technology. (c) Capacity building on management and restructuring. Part D Support to the restructuring of the company H2 INFRASTRUKTURA d.o.o., Zagreb rand enabling investment to increase system efficiency 1. Retrenchment Provision of the retrenchment payments for the company H2 INFRASTRUKTURA d.o.o., Zagreb including job outplacement and retraining services, counselling and advisory support. 2. Installing railway safety crossings based on prioritization criteria set forth in Supplemental Letter 4. 3. Undertaking other railway safety works, including: (a) Reinforcing cuts and slope on the two corridors from Rijeka; (b) Rehabilitating or replacing the KLostar and Ljubosina bridges on the Zagreb-Rijeka axis. 4. Undertaking emergency infrastructure investments, including: (a) Rehabilitating the OguLin - Moravice ine; (b) Rehabilitating the Varazdin-Cakovec ine; and (c) Replacing switches, electrical, and support systems (for safety and signalling) on international and national corridors selected pursuant to criteria set forth in Supplemental Letter 4; and (d) Constructing and improving the Borongaj, Rijeka-Brajdica, and Vinkovci railway stations. 5. Capacity building on management and restructuring. The Company is responsible for the management of the activities including procurement, disbursement, financial management, monitoring, reporting and coordination. The objective of these components is to support operational and financial restructuring of the Company and to contribute in restoration of the physical infrastructure's conditions. 22 SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No. 8502 HR NOTES TO THE PROJECT FINANCIAL STATEMENTS-continued for the year ended 31 December 2018 2. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN AGREEMENT H2 CARGO d.o.o., Zagreb (the Company) signed a Loan Agreement with the International Bank for Reconstruction and Development (the Bank) in the amount of EUR 41 million on 6 May 2015 for the financing of the Sustainable Croatian Railways in Europe Project. Principal, charges, fees and interest are the obligations of the Company as a Borrower. It was agreed that the Company would pay to the Bank a front-end fee in the amount of 0.25% from the total loan amount or EUR 103,750. The Commitment charge payable by the Company is 0.25% per annum on the unwithdrawn loan balance. The interest payable by the Company is at a rate equal to reference rate for the loan currency plus the variable spread. Interest, commitment charges on the unwithdrawn loan balance and other charges shall be repayable semi-annually in arrears on 15 July and 15 January in each year. The principal amount of the loan repayable on each principal payment date is determined by multiplying: withdrawn loan balance as of the first principal payment date; by the instalment share for each principal payment date as shown in the table below: 23 SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No. 8502 HR NOTES TO THE PROJECT FINANCIAL STATEMENTS-continued for the year ended 31 December 2018 Instalment share Principal payment date (Expressed as a percentage) 15 July 2020 2.28% 15 January 2021 2.34% 15 July 2021 2.40% 15 January2022 2.46% 15 July 2022 2.52% 15 January2023 2.58% 15 July 2023 2.64% 15 January2024 2.71% 15 July 2024 2.78% 15 January2025 2.85% 15 July 2025 2.92% 15 January 2026 2.99% 15 July 2026 3.07% 15 January 2027 3.14% 15 July 2027 3.22% 15 January 2028 3.30% 15 July 2028 3.39% 15 January 2029 3.47% 15 July 2029 3.56% 15 January 2030 3.65% 15 July 2030 3.74% 15 January 2031 3.83% 15 July 2031 3.93% 15 January 2032 4.02% 15 July 2032 4.12% 15 January 2033 4.23% 15 July 2033 4.33% 15 January 2034 4.44% 15 July 2034 4.55% 15 January 2035 4.54% 24 SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No. 8502 HR NOTES TO THE PROJECT FINANCIAL STATEMENTS-continued for the year ended 31 December 2018 Pursuant to the finance contract, the Company has to ensure documents on the assets/funds usage and shall purchase goods, procure services and order works for the Project in accordance with the current edition of the IBRD Guide to Procurement. The Company has to use funds approved by and remitted from the loan exclusively for the purpose they were intended. The Bank is authorized to cancel further assets usage if they establish that the approved assets are not used for designated purposes. 3. DEBT SERVICE COVERAGE Except as the Bank shall otherwise agree, the Company shall not incur any debt unless a reasonable forecast of the revenues and expenditures of the Company shows that the estimated net revenues of the Company for each fiscal year during the term of the debt to be incurred: (a) shall be at least 1.0 times the estimated debt service requirements of the Company in such year on all debt of the Company including the debt to be incurred, up to the Closing Date; and (b) shall be at least 1.1 times the estimated debt service requirements of the Company in such year on all debt of the Company including the debt to be incurred, after the Closing Date until the repayment of the Loan under this Agreement. 4. PROJECT COST AND FINANCING Goods, works, non-consulting Retrenchment services, and Payments under consultants' Capitalization of Sources of funds Part C of the services for Part C interest charges Ft (in EUR million) Total Project of the Project front-end fee IBRD loan 41 20.9 20 0.1 Government funds - - - Total 41 20.9 20 0.1 5. PROJECT MANAGEMENT Project implementation unit ("PIU") has been established within the Company and is in charge for the project implementation. 25 SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No. 8502 HR NOTES TO THE PROJECT FINANCIAL STATEMENTS-continued for the year ended 31 December 2018 6. ACCOUNTING RECORDS AND BASE FOR PRESENTATION Within the business books (general ledger) of the Company are recorded all Project transactions. Project accounting records are also kept in supporting tables (excel), based on which the enclosed Financial Statements of the Project have been made. 7. DEVIATIONS FROM AGREED CONDITIONS There were no deviations from the contracted terms. 8. PROJECT EXPENDITURES Expenditures in EUR 31 December 2018 31 December 2017 Retrenchment Payments 17,780,306 17,262,517 Goods, works, non-consulting services, and consultants' services 10,301,201 5,708,485 Front end fee 103,750 103,750 Letter of credit 291,008 Total 28,185,257 23,365,760 9. DESIGNATED ACCOUNT AND NET ASSETS The Company opened Designated Account at Hrvatska poitanska banka d.d., Zagreb ("HPB") in order to realize the Project. Designated Account balance as of 31 December 2018 in the amount of EUR 249,379 is confirmed by the bank statement of HPB. 26 SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No. 8502 HR Reconciliation of the Designated Account in EUR Loan disbursed until 31 December 2018 28,434,636 Amount on Designated account 249,379 Add: total expenditures stated in the Statement of sources and Uses of funds 28,081,507 Add: Front-end fee 103,750 Letter of credit Total recorded 28,434,636 27 SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No. 8502 HR