HZ CARGO d.o.o., Zagreb SUSTAINABLE CROATIAN RAILWAYS IN...

HZ CARGO d.o.o., ZagrebSUSTAINABLE CROATIAN RAILWAYS IN EUROPE

PROJECTINTERNATIONAL BANK FOR RECONSTRUCTION AND

DEVELOPMENT LOAN No. 8502 HRPROJECT FINANCIAL STATEMENTS

ANDSPECIAL ACCOUNT STATEMENT

TOGETHER WITH INDEPENDENT AUDITOR' S REPORTSFOR THE YEAR ENDED

31 December 2016

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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 Activity 5

Summary Reports and Statement of Expenditure 6 -8

Designated Account Statement 9 - 10

Notes to the Project Financial Statements 11-16

Reconciliation of the Designated Account 17

Management Letter 18 - 19

Checklist 20

SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECTINTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No. 8502 HR

Tel: +385 1 2395 741 BDO Croatia d.o.oIB D O Fax: +385 1 2303 691 10000 ZagrebE-mail: bdo-croatia.hr Trg J. F. Kennedy 6b

INDEPENDENT AUDITOR'S REPORT

1. We have audited the accompanying Financial Statements for the year ended 31December 2016 of the SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECT (hereinafter:the "Project) financed under the INTERNATIONAL BANK FOR RECONSTRUCTION ANDDEVELOPMENT LOAN No. 8502 HR, which comprise the Statement of Assets and Liabilities,the Statement of Sources and Uses of Funds, the Statement of Uses of Funds by ProjectActivities, Statement of Expenditure (SOE) and Designated Account Statement (alltogether, the "Project Financial Statements").

2. The Project Financial Statements are the responsibility of the Project'smanagement. Our responsibility is to express an opinion on the Project FinancialStatements based on our audit.

3. We conducted our audit in accordance with International Standards on Auditingissued by the International Auditing and Assurance Standards Board of the InternationalFederation of Accountants. These standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management as well asevaluating the overall statement presentation. We believe our audit provides a reasonablebasis for our opinion.

The Project management's policy is to prepare the accompanying financial statements onthe cash receipts and payments basis in conformity with International Public SectorAccounting Standards issued by the Public Sector Committee of the InternationalFederation of Accountants. On this basis, cash receipts are recognized when received andcash expenditures are recognized when paid rather than when incurred.

4. In our opinion, Financial Statements of the SUSTAINABLE CROATIAN RAILWAYS INEUROPE PROJECT present fairly in all material respects the cash receipts and payments ofthe Project during the year ended 31 December 2016. in accordance with InternationalPublic Sector Accounting Standards issued by the Public Sector Committee of theInternational Federation of Accountants.

L

Registrirano kod TrgovaEkog suda u Zagrebu pod brojern 08004414901B 76394522236

1

BDO Croatia d.o.o.

5. With respect to Summary Statement of Expenditure ("SOE") - Application for LoanWithdrawal:

(a) adequate supporting documentation has been maintained to support claims forreimbursements of expenditures incurred; (b) the Summary Statement of Expenditure hasbeen reconciled to the other Project Financial Statements and (c) the expendituredisbursements underlying the Summary Statement of Expenditure have been made inaccordance with the purposes intended in the Loan Agreement No. 8502 HR.

BDO CROATIA d.o.o., ZagrebTrg J. F. Kennedy 6b10000 Zagreb @D0Hrvatska

ji~ ~ ~ ~ ~~~"' Nt..2'.'. V13no il Usluga4Zarb.iE. v n icdx 61Ij

Zdenko Balen, Member of the Management Board Zdenko Baten, certified auditor

Zagreb, 28 April 2017

2

STATEMENT OF ASSETS AND LIABILITIESFor the year ended 31 December 2016

Notes 31 December 2016 31 December 2015 31 December 2014

EUR EUR EURAssets

Front end fee 8 103,750 103,750Project expenditures 8 15,183,047 11,271,959Designated Account 9 421 7,006

TOTAL 15,287,218 11,382,715

Liabilities

IBRD Loan No. 8502 HR 2 15,287,208 11,382,708TOTAL 15,287,208 11,382,708

NET ASSETS 9 10 7

Project is effective as of 4 August 2015

3SUSTAINABLE CROATIAN RAILWAYS IN EUROPE PROJECTINTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENTLOAN No. 8502 HR

STATEMENT OF SOURCES AND USES OF FUNDSFor the year ended 31 December 2016

Actual in EUR Plan in EURCumulative

till 31December Plan for Completion

2016 2015 2016 Project Life Progress in %Sources of Funding

Counterpart funding - .IBRD Loan Funds 3,911,088 11,375,709 15,286,797 41,500,000 37%

Payments from DesignatedAccount 3,911,088 1,006,650 4,917,738 - -

Reimbursement - 10,265,309 10,265,309 - -

Direct Payments - 103,750 103,750

Project expenditures by loancategories 3,911,088 11,375,709 15,286,797 41,500,000 37%

Retrenchment Payments - cat 4. 3,831,142 11,218,310 15,049,452 23,100,000 65%

Goods, works, non-consultingservices, consultants' services andTraining for Part C - cat 5. 79,946 53,649 133,595 18,296,250 1%Front end fee - cat 8. - 103,750 103,750 103,750 100%


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DESIGNATED ACCOUNT STATEMENTfor the year ended 31 December 2016

(EUR)

Account No. HR2123900011300035785

Depository Bank Hrvatska pogtanska banka d.d., Zagreb

Address Jurigiteva 4, Zagreb

Loan IBRD Loan No. 8502

From thebeginning

For the year of the ProjectEUR EUR

I Opening balance at the beginning of the period 7,005.89

Add:

2 World Bank advances into DA during the period 3,904,500.00 4,918,149.003 Interest earned (if credited into DA) 3.11 10.02

Funds available during the period (3,911,087.58) 4,918,159.02Less:

4 Payments for eligible expenditures during the period (3,911,087.58) (4,917,737.60)5 Refund to World Bank from the DA during the period6 Service charges (if debited to DA)

(3,911,087.58) (4,917,737.60)

7 Closing balance at the end of the period 421.42 421.42


DESIGNATED ACCOUNT STATEMENTfor the year ended 31 December 2016

Payments from the WB Special Accountfor the Project expenditures

Description/supplier/contract Date Amount in EUR Amount in HRKNon retroactive retrenchments 19 Feb 2016 355,947 2,708,759Non retroactive retrenchments 21 Mar 2016 1,791,654 13,480,400RAILDATA - share in railway projects 25 Mar 2016 64,898 -Non retroactive retrenchments 18 April 2016 16,000 120,000Non retroactive retrenchments 17 May 2016 448,107 3,357,219Non retroactive retrenchments 19 JuLy 2016 205,126 1,534,346Non retroactive retrenchments 18 Aug 2016 92,603 692,485Subsidiaries retrenchments 30 Aug 2016 566,776 4,237,217Consulting services 30 Aug 2016 15,048 112,500Non retroactive retrenchments 12 Oct 2016 92,382 692,865Non retroactive retrenchments 21 Oct 2016 88,769 666,123Non retroactive retrenchments 17 Nov 2016 87,947 661,006Non retroactive retrenchments 19 Dec 2016 85,831 646,304Total 3,911,088 28,900,224


NOTES TO THE PROJECT FINANCIAL STATEMENTSFor the year ended 31 December 2016

1. GENERAL INFORMATION

In May 2015 International Bank for Reconstruction and Development approved threeloans to railway sector totalling to EUR 163,5 million, of which EUR 43 million tothe company H2 PUTNIKI PRIJEVOZ d.o.o., Zagreb, EUR 41.5 million to thecompany HZ CARGO d.o.o., Zagreb and EUR 79 million to the company H2INFRASTRKTURA d.o.o., Zagreb. Granted loans are part of the "SustainableCroatian Railways in Europe Project" (SUCRE) which became effective on 4 August2015

The objective of the Project is to improve the operational efficiency and thefinancial sustainabitity 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 andclarifying the legal status of their main assets, through the provision ofconsulting services and non-consulting services to Ministry of MaritimeAffairs, Transport and Infrastructure.

2. Project coordination support, sector reform monitoring, and definition ofrailway services obligations with HZ INFRASTRUKTURA d.o.o., Zagreb and H2PUTNICKI PRIJEVOZ d.o.o., Zagreb through the provision of consultingservices, non-consulting services, Training, and Operating Costs to Ministryof Maritime Affairs, Transport and Infrastructure.

Part B Support to restructuring of the company HZ PUTNICKI PRIJEVOZ d.o.o.,Zagreb

1. Retrenchment. Provision of the retrenchment payments for the company HZPUTNICKI PRIJEVOZ d.o.o., Zagreb, including job outplacement andretraining services, counselling and advisory support.

2. Investment to contribute to the restructuring plan of the company HZPUTNICKI 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.


NOTES TO THE PROJECT FINANCIAL STATEMENTSFor the year ended 31 December 2016 - continued

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 HZCARGO 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 HZCARGO 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 HZ INFRASTRUKTURA d.o.o.,Zagreb rand enabling investment to increase system efficiency

1. Retrenchment Provision of the retrenchment payments for the company HZINFRASTRUKTURA d.o.o., Zagreb including job outplacement and retrainingservices, counselling and advisory support.

2. Installing railway safety crossings based on prioritization criteria set forth inSupplemental 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 line;(b) Rehabilitating the Varazdin-Cakovec line; and(c) Replacing switches, electrical, and support systems (for safety and

signalling) on international and national corridors selected pursuantto criteria set forth in Supplemental Letter #4; and

(d) Constructing and improving the Borongaj, Rijeka-Brajdica, andVinkovci railway stations.

5. Capacity building on management and restructuring.

The Company is responsible for the management of the activities includingprocurement, disbursement, financial management, monitoring, reporting andcoordination. The objective of this components is to support operational andfinancial restructuring of the Company and to contribute in restoration of thephysical infrastructure's conditions.



2. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOANAGREEMENT

HZ CARGO d.o.o., Zagreb (the Company) signed a Loan Agreement with theInternational Bank for Reconstruction and Development (the Bank) in the amountof EUR 41.5 millions on 6 May 2015 for the financing of the Sustainable CroatianRailways in Europe Project. Principal, charges, fees and interest are the obligationsof the Company as a Borrower.

It was agreed that the Company will pay to the Bank a front-end fee in the amountof 0.25% from the total loan amount or EUR 103,750. The Commitment chargepayable 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 theloan currency plus the variable spread. Interest, commitment charges on theunwithdrawn loan balance and other charges shall be repayable semi-annually inarrears on 15 July and 15 January in each year.

The principal amount of the loan repayable on each principal payment date isdetermined by multiplying: withdrawn loan balance as of the first principalpayment date; by the instalment share for each principal payment date as shown inthe table below:



Instalment sharePrincipal payment date (Expressed as a

percentage)

15 Juty 2020 2.28%

15 January 2021 2.34%

15 July 2021 2.40%

15 January 2022 2.46%

15 July 2022 2.52%

15 January 2023 2.58%

15 July 2023 2.64%

15 January 2024 2.71%

15 July 2024 2.78%15 January 2025 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%



Pursuant to the finance contract, the Company has to ensure documents on theassets/funds usage and shalL purchase goods, procure services and order works forthe Project in accordance with the current edition of the IBRD Guide toProcurement.

The Company has to use funds approved by and remitted from the loan exclusivelyfor the purpose they were intended. The Bank is authorized to cancel furtherassets usage if they establish that the approved assets are not used for designatedpurposes.

3. DEBT SERVICE COVERAGE

Except as the Bank shalt otherwise agree, the Company shalt not incur any debtunless a reasonable forecast of the revenues and expenditures of the Companyshows that the estimated net revenues of the Company for each fiscal year duringthe term of the debt to be incurred:(a) shall be at least 1.0 times the estimated debt service requirements of theCompany in such year on all debt of the Company including the debt to beincurred, up to the Closing Date; and(b) shall be at least 1.1 times the estimated debt service requirements of theCompany in such year on all debt of the Company including the debt to beincurred, after the Closing Date until the repayment of the Loan under thisAgreement.

4. PROJECT COST AND FINANCING

Goods, works,non-consultingservices, and

Retrenchment consultants' CapitalizationPayments services for of interest

Sources of funds under Part C Part C of the charges E(in EUR million) Total of the Project Project front-end fee

IBRD loan 41.5 23.1 18.3 0.1Government funds - - -

Total 41.5 23.1 18.3 0.1

5. PROJECT MANAGEMENT

Project implementation unit ("PIU") has been established within the Company andis in charge for the project implementation.



6. ACCOUNTING RECORDS AND BASE FOR PRESENTATION

Within the business books (general Ledger) of the Company are recorded all Projecttransactions.

Project accounting records are also kept in supporting tables (excel), based onwhich 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 2016 31 December 2015

Retrenchment Payments 15,049,452 11,218,310

Goods, works, non-consulting services,and consultants' services 133,595 53,649

Front end fee 103,750 103,750

Total 15,286,797 11,375,709

9. DESIGNATED ACCOUNT AND NET ASSETS

The Company opened Designated Account at Hrvatska pogtanska banka d.d., Zagreb("HPB") in order to realize the Project. Designated Account balance as of 31December 2016 in the amount of EUR 421 is confirmed by the bank statement ofHPB. As of 31 December 2016 interest in the amount of EUR 10 have been bookedin the account and represents net assets of the Project.


Reconciliation of the Designated Account

in EURLoan disbursed until 31 December 2016 15,287,208

Amount on Designated account 421

Add: total expenditures stated in the Statement of sourcesand Uses of funds 15,183,047Add: Front-end fee 103,750

15,287,218

Minus: Interest earned (10)Total recorded 15,287,208


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