PUBLIC ENTERPRISE FOR STATE ROADS INDEPENDENT AUDITOR’S REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 DECEMBER 2018 Skopje, June 2019 PUBLIC ENTERPRISE FOR STATE ROADS CONTENTS Page Independent Auditor’s report 1-3 Financial Statements Statement of comprehensive income 4 Statement of financial position 5 Cash flow statement 6 Statement of changes in equity 7 Notes to the financial statements 8-30 Sv.Kiril i Metodij 20, 1000 Skopje, Republic of Macedonia Tel: +389 (2) 32 14 706 Fax: +389 (2) 32 14 707 www.moorestephens.mk www.moorestephens.com INDEPENDENT AUDITOR’S REPORT TO THE MANAGEMENT OF THE PUBLIC ENTERPRISE FOR STATE ROADS We have audited the accompanying financial statements of the Public Enterprise for State Roads (“the Enterprise”), which comprise the Statement of Financial Position as at 31 December 2018, and the Statement of Comprehensive Income, Statement of changes in equity and Cash flow statement for the period then ended, and a summary of significant accounting policies and other explanatory notes. Management’s Responsibility for the Financial Statements Management of the Enterprise for the preparation and fair presentation of these financial statements in accordance with the accounting standards which are accepted in the Republic of Macedonia and for such internal control as management determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Audit Law and International Standards on Auditing which are accepted and published in the Official gazette of the Republic of Macedonia (79/2010). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the 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 internal control relevant to the entity’s preparation and fair presentation of the financial statements 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 entity’s internal control. An audit also includes evaluating the appropriateness of accounting polices used and the reasonableness of accounting estimates made by the management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. An independent member firm of Moore Stephens International Limited - members in principal cities throughout the world INDEPENDENT AUDITOR’S REPORT (Continued) TO THE MANAGEMENT OF THE PUBLIC ENTERPRISE FOR STATE ROADS Basis for qualified opinion As it is described in Note 3.8. to the financial statements, the Enterprise has systematically revalued its property and equipment, in the previous years, by applying official uniformed revaluation coefficient based on the manufacturer's price increase index. In our opinion, this method of revaluation, does not comply with IAS 16, which requires property and equipment to be measured at cost less for any accumulated depreciation or by up to date fair value estimated by professional and qualified valuers. Owing to the fact that the Enterprise did not prepared the required information for the PPE fair value according to IAS, we were not able to obtain reasonable assurance as to their valuation. As it is presented in Note 19 to the financial statements, as at 31 December 2018, the Enterprise has capitalized foreign exchange losses, arising from payment in USD currency to one of the contractors of the projects in amount of 807,645 thousands of MKD as construction in progress. This type of recording was carried out in accordance with the Report and the requirement of the State Audit Office. According to our opinion and the IAS accepted in Republic of Macedonia (IAS 16; IAS 23 and IAS 21), there is no possibility for capitalization of foreign exchange differences arising from the settlement of liabilities in foreign currency into the cost of the assets. They should be recognized in the current profit or loss. According to the previous, the current profit is overstated for an amount of 807,645 thousands of MKD, as well as the cost of construction in progress. Our report for the financial statements for the previous year was also qualified for the same reason for the amount of 487,920 thousands of MKD. As it is presented in Note 19 to the financial statements, as at 31 December 2018, the Enterprise has construction in progress in municipality roads in amount of 4,227,607 thousands of MKD which are financed under IBRD and EBRD Loans for the Project for improvement of current regional and municipality roads. Municipality roads which are in jurisdiction of the municipalities should be transferred to the them after its construction completion and technical acceptance i.e. financial transfer of these municipality roads should be done. These roads are still recorded in the financial evidence of the Enterprise. Because of the previous, we were not able to obtain reasonable assurance as to presented construction in progress. 2 MOORE STEPHENSSKOPIE INDEPENDENT AUDITOR'S REPORT (Gontinued) TO THE MANAGEMENT OF THE PUBLIC ENTERPRISE FOR STATE ROADS Qualified opinion ln our opinion, except for the effects described in the preceding paragraph "Basis for qualified opinion", if any, the financial statements present fairly, in all material respects, the financial position of the Enterprise for state roads as of 31 December 2018, and of its financial performance and its cash flows for the year then ended in accounting standards which are accepted in the Republic of Macedonia. Emphasis of matter As it is presented in Notes 19 and 24 to the financial statements, as at 31 December 2018, the Enterprise has property in progress - construction of highway Kicevo - Ohrid in total amount of 17,701,901 thousands of MKD which investment is still not finished and also the time limit for utilization of the loan funds from Export-lmport Bank China has passed at the beginning of 2019. Due to the fact that as at the date of this report, no Appendix has been made for extension of the period and amount of the Loan agreement, we draw attention to the importance of this issu for the financial statements of the Enterprise in the future period because of existence of risk for disinvesting of the assets in progress. Skopje,27 June 2019 Certified Auditor Manager and Auditor 3 PUBLIC COMPANY FOR STATE ROADS INCOME STATEMENT for the year ended at 3'l Oecember 2018 2017 Notes (000) MKD (000) MKD Revenues trom allowances 8 7,030.648 6 415,543 Other income 9 48,853 48,033 7,079,501 6,463,576 Costs from basic activities 10 (1,067,800) (1,198,748) Depreciation (1,680,553) (1,590,146) Employees costs 11 (259,362) (21O,332) Other costs 't2 (433,673) (337,378) Provisions (27,530) OPERATING PROFIT 3,610,583 3,126,972 Financing income 13 574,290 2,533,721 Financing expenses 14 (1,68s,615) (134,834) PROFIT BEFORE TAXATION 2,499,258 5,525,859 lncome lax 22 (346,979) NET PROFIT 2,499,258 5,178,880 Other comprehensive income TOTAL COMPREHENSIVE INCOME 2,499,254 5,'178,880 Skopje, 12.03.2019 Oirector n Kitanov Notes comprise an integral part of the Financial Statements 4 PUBLIC COMPANY FOR STATE ROADS BALANCE SHEET as at 31 December 2018 2017 Notes (000) MKD (000) MKD ASSETS Current assets Cash and cash equivalents 15 3,036,905 2,575,703 Loans given (Current part) 17 13,977 13,982 Income tax receivables and other current assets 320,605 6,834 Accrued income 31,233 23,315 Inventories 16 1,371 1,395 Total current assets 3,404,091 2,621,229 Non-Current assets Loans given 17 62,894 76,852 Advances for Property and Equipment 18 3,317,213 4,246,450 Intangible assets 20 23,015 28,081 Property and Equipment 19 87,563,473 77,742,502 Total Non-current assets 90,966,595 82,093,885 TOTAL ASSETS 94,370,686 84,715,114 LIABILITIES AND EQUITY Current liabilities Trade Payables 21 3,681,829 2,005,008 Current maturities of long term interest bearing borrowings 24 1,964,342 1,307,441 Other liabilities 22 361,022 453,004 Provisions 27 136,918 132,441 Total Current liabilities 6,144,111 3,897,894 Non-Current liabilities Government grants (deferred income) 23 792,481 799,824 Long term interest bearing borrowings 24 35,003,070 30,085,630 Total Non-Current liabilities 35,795,551 30,885,454 Total liabilities 41,939,662 34,783,348 Equity State owned capital 25 5,000 5,000 Revaluation reserves 9,796,453 9,796,453 Accumulated profit (loss) 42,629,571 40,130,313 Total equity 52,431,024 49,931,766 TOTAL LIABILITIES AND EQUITY 94,370,686 84,715,114 Notes comprise an integral part of the Financial Statements 5 PUBLIC COMPANY FOR STATE ROADS CASH FLOW STATEMENT for the year ended at 31 December 2018 2017 (000) MKD (000) MKD CASH FLOWS FROM OPERATING ACTIVITIES Cash inflows from allowances 7,022,730 6,452,123 Cash inflows from other operating activities (287,500) 22,451 Payments to suppliers for basic activities (1,043,869) (1,210,104) Paid wages (259,362) (210,332) Payments for other operating expenses (433,322) (337,425) Paid income tax (167,186) (377,428) Received interest 7,549 3,759 Net cash flow from operating activities 4,839,040 4,343,044 CASH FLOWS FROM INVESTING ACTIVITIES Loans given/collected to other entities 13,963 12,151 Acquisition of intangible assets (4,048) (24,311) Acquisition of PPE (9,824,433) (9,402,542) Paid advances for PPE, net 929,237 1,299,102 Net cash flow from investing activities (8,885,281) (8,115,600) CASH FLOWS FROM FINANCING ACTIVITIES Paid interest (22,772) (34,759) Received/Repaid long-term borrowings, net 4,530,215 4,315,293 Net cash flow from financing activities 4,507,443 4,280,534 Net increase (decrease) of cash and cash equivalents 461,202 507,978 Cash and cash equivalents at the begging of the year 2,575,703 2,067,725 Cash and cash equivalents at the end of the year 3,036,905 2,575,703 Notes comprise an integral part of the Financial Statements 6 PUBLIC COMPANY FOR STATE ROADS STATEMENT OF CHANGES IN EQUITY for the year ended at 31 December State owned Revaluation Reinvested Accumulated Total equity capital reserve profit profit (loss) (000) MKD (000) MKD (000) MKD (000) MKD (000) MKD Balance as at 1 January 2017 5,000 9,796,453 1,035,873 33,915,560 44,752,886 Adjustments - - - - - Balance as at 1 January 2017 - restated 5,000 9,796,453 1,035,873 33,915,560 44,752,886 Profit (loss) for the year - - - 5,178,880 5,178,880 Reinvested profit from previous year according to Board of Directors Decision and Government of RM approval - - 2,067,617 (2,067,617) - Utilizied reinvested profit - - (1,035,873) 1,035,873 - Balance as at 31 December 2017 5,000 9,796,453 2,067,617 38,062,696 49,931,766 Balance as at 1 January 2018 5,000 9,796,453 2,067,617 38,062,696 49,931,766 Reconciliation - - - - - Balance as at 1 January 2018 5,000 9,796,453 2,067,617 38,062,696 49,931,766 Profit (loss) for the year - - - 2,499,258 2,499,258 Reinvested profit from previous year according to Board of Directors Decision and Government of RM approval - - 5,178,880 (5,178,880) - Utilizied reinvested profit - - (2,067,617) 2,067,617 - Balance as at 31 December 2018 5,000 9,796,453 5,178,880 37,450,691 52,431,024 Notes comprise an integral part of the Financial Statements 7 PUBLIC ENTERPRISE FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 1. Basic information and activity The Public enterprise for state roads, previous Agency for state roads (“The Enterprise”) was founded according to the Law on Public Enterprises and it is engaged in managing, maintenance, repairs, development and improvement of the state (national and regional) roads in the Republic of Macedonia. Specifically, the Enterprise is engaged in the following activities:  management with the state roads;  development, maintenance, follow-up and monitoring of state roads;  investment activities relating to public roads;  encumber with debts in domestic and foreign financial institutions for financing of its activities and  other activities relating to the Law. According to the Law on Public Roads, the financing of the Enterprise activities is provided with the following allowances:  transfers from the State Budget (part of the oil derivates tax);  allowances for motor vehicles utilization of public roads, which is collected by vehicles registration;  allowances for utilization of national and regional roads (pay toll);  allowances for advertising billboards, connecting of access roads to state roads, setting of installations on roads, construction and using of commercial premises on state roads, over usage of state roads, extraordinary transport, claims for damages on roads;  borrowings and loans and  other allowances according to the Law; Total number of employees of the Enterprise as at 31 December 2018 is 447 employees (2017: 386 employees). The Enterprise head office is at St. Dame Gruev No.14 in Skopje. 2018 Financial statements 8 PUBLIC ENTERPRISE FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 2. Basis of preparation of the financial statements 2.1. Basis of preparation The financial statements set on pages 4 to 30 are prepared in accordance with the International Financial Reporting Standard (IFRS) which were published in the Official gazette of the Republic of Macedonia No.159/2009 and became effective from 1 January 2010. The financial statements were prepared for the period ending 31 December 2018 and 2017. The figures for the current and the previous period are shown in thousands of Macedonian denars (000 MKD). Where appropriate, comparative figures have been adjusted and harmonized, in order to match the current year presentation. 2.2. Basic accounting methods The financial statements are prepared based on the principal of cost. 2.3. Accounting estimates and judgements The Enterprise is applying certain accounting estimates and judgments during the process of preparation of the financial statements. Certain items in the financial statements, which can not to be accurately measured, are estimated. The estimation process includes judgments based on the latest available information. Estimates are used in determining the useful life’s of assets, fair value of receivables or their uncollectibility, inventory obsolesce, fair value of investments available for sale etc. During the periods, certain estimates can be revised if there are changes in the circumstances on which the estimation was based or as a result of new information, grater experience and subsequent events. The effects of the changes in the accounting estimates are included in the net profit or loss for the period as well as in the future periods on which the change takes effect or the both. 2.4. Going concern concept The financial statements are prepared based on the going concern concept which means that the Enterprise will continue to operate in the future on a continuing basis. The Enterprise has neither intention nor need to liquidate or restrict significantly the scope of its operations. 2018 Financial statements 9 PUBLIC ENTERPRISE FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 3. Basic accounting policies and estimates 3.1. Recognition of revenues Revenues are recognized when there is a probability for future inflows for the Enterprise and when it can be measured reliably. Enterprise’s revenues are benefits received during the period which are provided in the normal course of business and result in equity increase. The Enterprise revenues arise from the allowances according to the Law on Public Roads, mentioned in Note 1. Interest income is recognized on a time basis, by reference of the principal outstanding and at the effective interest rate applicable. 3.2. Recognition of expenses Expenses are recognized when there is a probability for future outflows, connected with decrease of certain asset or increase of liability for the Enterprise and when it can be measured reliably. Expenses are recognized on the basis of matching concept meaning connection between the realized expenses and earning of revenues. 3.3. Foreign currencies The Enterprise is keeping records and preparing financial statements in Macedonian denars (MKD). Transactions in foreign currencies are recorded at the exchange rate ruling at the date of the transaction. All assets and liabilities in foreign currencies are translated and shown in the financial statements at exchange rate ruling at the end of the year. Foreign exchange gains and losses arising from translation of foreign currency assets and liabilities during the year are included in the income statement as financing income or expenses. Most of the Enterprise’s transactions are in EUR and USD. The exchange rates ruling at 31 December in 2018 and 2017 for EUR and USD are as it follows: In MKD 1 EUR 1 USD 31 December 2018 61.4950 MKD 53.6887 MKD 31 December 2017 61.4907 MKD 51.2722 MKD 2018 Financial statements 10 PUBLIC ENTERPRISE FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 3. Basic accounting policies and estimates (Continued) 3.4. Cash and cash equivalents Cash and cash equivalents are carried out in the balance sheet at cost. For the purposes of these financial statements, cash and cash equivalents are comprised of cash in hand, cash in banks denar and foreign currency accounts, demand deposits and time deposits with maturity up to three months. 3.5. Receivables for advances Receivables for advances are carried out at their nominal value, less for provision for bad and doubtful receivables and are consist of advances to contractors for day-to-day and investment maintenance. 3.6. Inventories Inventories are valued at the lower of cost and net realizable value. Cost includes all costs to bring the inventories to their present condition and location. Net realisable value is selling price less cost to complete the inventory and sell it. 3.7. Advances for property and equipment Advances for property and equipment are comprised of payments in advance to suppliers for fixed assets (construction companies) and are stated at their nominal value, less impairment losses. 3.8. Property and equipment (1) Basic presentation Initially, property and equipment are carried out at cost. Cost includes invoiced value and all other costs to bring the fixed assets to their present condition and location. Subsequently, until 2012, property and equipment were revalue at each year-end using uniformed prescribed revaluation coefficient based on the manufacturer’s price increase index which is applied to historical cost or later revaluations and to the accumulated depreciation and which is published by the State statistics office. Starting form 01.01.2013 this type of revaluation is no longer calculated. The effects of revaluation of property and equipment are credited to revaluation reserves. The depreciation is charged on the previous year’s re-valued property and equipment figures commencing with the following year. 2018 Financial statements 11 PUBLIC ENTERPRISE FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 3. Basic accounting policies and estimates (Continued) 3.8. Property and equipment (Continued) (2) Depreciation Depreciation is charged on a straight-line basis at prescribed rates to allocate the revalue cost of the property and equipment over their estimated useful lives. Depreciation is not charge to the property and equipment in progress until they are put in to use. The basic depreciation annual rates used in 2018 compare to 2017 are as follows: Asset 2018 2017 Property 1% 1% National Roads (motorways) 7% 7% Regional Roads 3% 3% Computer equipment 20 % 20 % Other equipment 12 % 12 % Motor vehicles 15 % 15 % 3.9. Trade payables Trade payables are stated at their nominal value (cost). Trade payables are written off by crediting other revenues, after the expiration of the legal maturity period or by off-court agreement between parties. 3.10. Borrowings Borrowings represent short-term and long-term interest bearing borrowings stated at their nominal value. The amounts of the interest agreed are shown as financing expenses in the income statement and as short-term financial liabilities in the balance sheet. Foreign interest bearing borrowings are stated at the exchange rate at 31 st December, and losses or gains of exchange are stated as financial revenues or expenses. Details of the movements on long-term interest bearing borrowings are set-out in note 24 to the financial statements. 2018 Financial statements 12 PUBLIC ENTERPRISE FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 3. Basic accounting policies and estimates (Continued) 3.11. State-owned capital The state-owned capital as at 31 December 2012 represents the state capital of the Enterprise in amount of 38,926,796 thousands of MKD. Changes in the state-owned capital till 31 December 2012 comprise of revaluation reserves from revaluation of the property, plant and equipment, realized profits and losses, revaluation adjustments and other corrections. As at 01.01.2013 the former Agency for state roads has been transformed into Public Enterprise for State Roads with basic capital in amount of 5,000 thousands of MKD in cash. Based on this, adjustment in the amount of basic capital has been made. Owner of the Enterprise is the Government of the Republic of Macedonia. The assets for the basic capital arise from the cash on the bank accounts of the Agency for state roads which were balance on the opening date of the Enterprise account. 3.12. Provisions Provisions (uncertain liabilities) are recognized when the Enterprise has a present obligation (legal or constructive) as a result of a past event, when it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, for example through insurance agreements, the reimbursement is recognized as an asset when, and only when, it is virtually certain that the reimbursement will be received. The expense relating to a provision is presented in the income statement net of the amount recognized for a reimbursement. Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation using pre-tax rates that reflects current market assessments. 3.13. Contingencies Contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Enterprise. Contingent liability is not recognized in the financial statements, only are disclosed. Contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Enterprise. Contingent asset are recognized only when the realization of income is virtually certain. 2018 Financial statements 13 PUBLIC ENTERPRISE FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 3. Basic accounting policies and estimates (Continued) 3.14. Government grants (deferred income) Government grants are recognized when there is reasonable assurance that the grants will be received and the entity will comply with the grant conditions. Government grants related to assets are presented it the balance sheet at the nominal value and are recognized in the income statement over the life of a depreciable asset. 3.15. Income tax (current and deferred) Income tax for the year comprises current and deferred tax. Income tax is presented in the income statement of the Company. Current tax is calculated and paid in accordance with Macedonian law on income tax. According to tax legislation, the current income tax is calculate at 10% rate to financial result before taxation presented in the income statement, adjusted for non-deductible expenses and less recognized revenues from related parties (2017: 10%). Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. The tax rates that are currently valid are used in determination of deferred income tax. 2018 Financial statements 14 PUBLIC ENTERPRISE FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 4. Risk management The Enterprise is engaged in different kind of business transactions which derive from its daily activities and which are connected with the customers, suppliers and creditors. The main financial risks to which the Enterprise is exposed during its business and the policies for their management are the following: 4.1. Market risk Foreign exchange risk The Enterprise does enter in transactions denominated in foreign currencies, which arise from borrowings in foreign currencies and therefore the Enterprise is exposed to foreign currency risk. The Enterprise has no special policy to avoid this kind of risk as there are no financial instruments in Republic of Macedonia. According to this, the Enterprise is exposed to possible foreign currencies rates fluctuations, whose effect is reported below. 4.2. Interest rate risk The Enterprise is exposed to risk of interest rate fluctuation, which relates to the loans, borrowings or bank deposits concluded with variable interest rates. The Enterprise is exposed to this kind of risk through used these kinds of borrowings and loans which depends on movements on financial markets and the Enterprise does not hedge against it. 4.3. Liquidity risk Liquidity risk includes the risk of being unable to fund its liabilities at appropriate maturities with its cash. This kind of risk is managed by maintaining sufficient cash for regular funding of its committed credit facilities. 4.4. Taxation risk According to local legislation, the tax authorities may at any time inspect the books and records subsequent to the reported tax year, and may impose additional tax assessments. Up to the date of the Auditors report, inspection for income tax, personnel income tax and contributions on allowances for period 2018 is not yet executed and therefore additional taxes or contributions cannot be assessed reliably. 2018 Financial statements 15 PUBLIC ENTERPRISE FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 5. Fair value estimation The Enterprise has financial assets and liabilities, as well as non-financial assets, for which large number of accounting policies and disclosures require establishing of their fair value. The fair value of financial assets and liabilities generally approximate their carrying amount as most of them have maturity up to one year of the balance sheet date, except for the long- term borrowings, but these liabilities have variable interest rates and therefore it can be considered that their fair value generally approximate their carrying amount. 6. Financial instruments 6.1. Capital risk management The Enterprise uses long-term loans to finance its operations, in order to provide adequate return of investments. The Enterprise reviews its leverage on a regular basis which as at 31 December 2018 and 2017 is as it follows: In (000) MKD 2018 2017 Debt 36,967,412 31,393,071 Cash and cash equivalents (3,036,905) (2,575,703) Net debt (cash) 33,930,507 28,817,368 Total equity 52,431,024 49,931,766 % of debt 65% 58% 6.2. Foreign currency risk The Enterprise does enter into transactions in foreign currencies, by using loans in foreign currencies and therefore the Enterprise is exposed to foreign currency risk. The carrying amount of the financial assets and liabilities denominated in foreign currencies as at 31 December 2018 and 2017 is as follows: Assets Liabilities In (000) MKD 2018 2017 2018 2017 EUR 2,048,745 1,464,053 11,702,660 10,450,927 USD 610 501 25,264,752 20,942,144 other 1,969 1,474 - - 2,051,324 1,466,028 36,967,412 31,393,071 The Enterprise generally is exposed to EUR and USD. Exposure to foreign currencies at financial liabilities includes loan liabilities from banks with FX clause which repayment in MKD currency depends from the movement of the official exchange rates. 2018 Financial statements 16 PUBLIC ENTERPRISE FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 6. Financial instruments (Continued) 6.2. Foreign currency risk (Continued) The sensitivity analysis below has been determined based on the 10% increase or decrease of the Macedonian Denar (MKD) related to the foreign currencies. The analysis has been done based on the carrying amounts of the assets and liabilities denominated in foreign currency at the balance sheet date. A positive number below indicates an increase in profit and equity and negative number below indicates a decrease. + 10% - 10% In (000) MKD 2018 2017 2018 2017 EUR (965,392) (898,687) 965,392 898,687 USD (2,526,414) (2,094,164) 2,526,414 2,094,164 other 197 147 (197) (147) Net effect (3,491,609) (2,992,704) 3,491,609 2,992,704 6.3. Interest rate risk The Enterprise is exposed to interest risk arising from deposits and borrowings from banks and other entities, with a variable interest rate clause. The carrying amount of the financial assets and liabilities according to their exposure to interest risk at the end of the year is as follows: 31 December In (000) MKD 2018 2017 Financial assets Non-interest bearing: - Cash and cash equivalents 1,934 1,870 - Other assets 7,359 6,834 9,293 8,704 Variable interest bearing : - Given loans 76,871 90,834 - Cash and cash equivalents 3,034,971 2,573,833 3,111,842 2,664,667 3,121,135 2,673,371 Financial liabilities Non-interest bearing: - Trade payables 3,681,829 2,005,008 - Other current liabilities 297,570 245,904 3,979,399 2,250,912 Variable interest bearing: - Borrowings 11,702,660 10,450,927 11,702,660 10,450,927 Fixed interest bearing: - Borrowings 25,264,752 20,942,144 25,264,752 20,942,144 40,946,811 33,643,983 2018 Financial statements 17 PUBLIC ENTERPRISE FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 6. Financial instruments (Continued) 6.3. Interest rate risk (Continued) The sensitivity analysis below has been determined based on the exposure to interest rates as a result of a 1% points increase or decrease for the bank deposits and borrowings at the balance sheet date. A positive number below indicates an increase in profit and equity and negative number below indicates a decrease. plus 1% points less 1% points In (000) MKD 2018 2017 2018 2017 Borrowings (117,027) (104,509) 117,027 104,509 Bank deposits 769 908 (769) (908) Net effect (116,258) (103,601) 116,258 103,601 6.4. Liquidity risk The following table details the Enterprise’s remaining contractual maturity for its financial assets and liabilities as at 31 December 2018: In (000) MKD Less than 1 1 to 3 3 to 12 Over 12 Total month month month months Cash 3,036,905 - - - 3,036,905 Given loans - - 13,977 62,894 76,871 Other receivables 7,359 - - - 7,359 3,044,264 - 13,977 62,894 3,121,135 Trade payables 3,681,829 - - - 3,681,829 Borrowings - 221,346 1,742,996 35,003,070 36,967,412 Other payables 297,570 - - - 297,570 3,979,399 221,346 1,742,996 35,003,070 40,946,811 2018 Financial statements 18 PUBLIC ENTERPRISE FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 6. Financial instruments (Continued) 6.4. Liquidity risk The following table details the Enterprise’s remaining contractual maturity for its financial assets and liabilities as at 31 December 2017: In (000) MKD Less than 1 1 to 3 3 to 12 Over 12 Total month month month months Cash 2,575,703 - - - 2,575,703 Given loans - - 13,982 76,852 90,834 Other receivables 6,834 - - - 6,834 2,582,537 - 13,982 76,852 2,673,371 Trade payables 2,005,008 - - - 2,005,008 Borrowings - 251,958 1,055,483 30,085,630 31,393,071 Other payables 245,904 - - - 245,904 2,250,912 251,958 1,055,483 30,085,630 33,643,983 7. Segment reporting The Company does not have any segment reporting as it has no obligation for such reporting neither is divided in separate business or geographical segments. 2018 Financial statements 19 PUBLIC COMPANY FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 8. REVENUES FROM ALLOWANCES The revenues from allowances realized according to their types, is as follows: 2018 2017 (000) MKD (000) MKD Revenue from petrol price (State Budget transfers) 2,979,886 2,542,061 Revenue from highway utilization pay-toll 2,494,201 2,381,825 Revenue from motor vehicles registration 1,556,561 1,491,657 Total revenues from allowances 7,030,648 6,415,543 9. OTHER OPERATING INCOME The other operating income realized according to types, is as follows: 2018 2017 (000) MKD (000) MKD Income from compensations by other entities 23,322 20,844 Income from free of charge assets (Note 19) 22,582 22,582 Income from releasing of provisions - - Other income 2,949 4,607 Total other operating income 48,853 48,033 10. COST FOR BASIC ACTIVITIES The cost for basic activities realized according to their types, is as follows: 2018 2017 (000) MKD (000) MKD Expenses for road reconstruction and maintenance 767,799 897,244 Transfer of allowances to local communities 300,001 301,504 Total cost for basic activities 1,067,800 1,198,748 2018 Financial Statements 20 PUBLIC COMPANY FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 11. EMPLOYEES EXPENSES The costs for employees realized according to their types, are as follows: 2018 2017 (000) MKD (000) MKD Employees wages 235,892 200,255 Severance payments and bonuses 9,224 1,921 Business travel allowances 307 349 Expenses for transport 13,939 7,807 Total 259,362 210,332 12. OTHER OPERATING EXPENSES The other operating expenses realized according to their types, are as follows: 2018 2017 (000) MKD (000) MKD Expenses for monitoring and security of pay tolls 173,712 137,001 Bank fees 31,495 29,271 Public utility services expenses 65,446 44,385 Expenses for motor vehicles association fees 68,280 64,498 Other services 14,760 7,191 Maintenance and repairing expenses 41,198 28,143 Material costs 11,991 12,110 Insurance costs 974 1,245 Representation 923 1,260 Expenses for court litigations - - Other operating expenses 24,894 12,274 Total other operating expenses 433,673 337,378 13. FINANCING INCOME The financing income realized according to their types, are as follows: 2018 2017 (000) MKD (000) MKD Interest income 7,549 3,759 Gains on exchange 566,741 2,529,962 Total financing income 574,290 2,533,721 2018 Financial Statements 21 PUBLIC COMPANY FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 14. FINANCING EXPENSES The financing expenses realized according to their types, are as follows: 2018 2017 (000) MKD (000) MKD Interest expenses from borrowings 61,484 81,765 Penal interest 12,560 1,577 Loss on exchanges 1,611,571 51,492 Total financing expenses 1,685,615 134,834 The interest expenses according to the creditors, are as follows: 2018 2017 (000) MKD (000) MKD IBRD - The World Bank 661 868 EBRD - local and regional roads 4,014 5,644 EIB I 1,257 10,747 EIB II 55,384 64,506 EBRD - ring road 168 - Total interest expenses 61,484 81,765 15. CASH AND CASH EQUIVALENTS The cash and cash equivalents as at 31 December consist of the following: 2018 2017 (000) MKD (000) MKD Denar accounts at domestic banks 1,060,631 1,198,722 Cash in hand 1,821 1,787 Foreign currency accounts at domestic banks 915,958 647,835 Letters of credit - - Cash in hand - foreign currency 113 83 Foreign exchange accounts in Sparkasse bank 1,058,382 727,276 Total cash and cash equivalents 3,036,905 2,575,703 Foreign exchange accounts in Sparkasse Bank Macedonia AD Skopje as at 31 December 2018 are comprised of withdrawn but still not used cash from foreign creditors and are as follows: Account (SA) for IBRD Loans 301,500 200,720 Account (SA) for EBRD Loans 756,882 526,556 Total 1,058,382 727,276 2018 Financial Statements 22 PUBLIC COMPANY FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 16. INVENTORIES Inventories as at 31 December consist of the following: 2018 2017 (000) MKD (000) MKD Materials 1,371 1,395 Total inventories 1,371 1,395 17. GRANTED LOANS Loans given to others as at 31 December consist of the following: 2018 2017 (000) MKD (000) MKD Loans to: JP Macedonian Railways 28,440 33,605 Customs office of the RM 48,431 57,229 76,871 90,834 Current portion of long term loans (13,977) (13,982) Total loans given 62,894 76,852 Loans given in amount of 62,894 thousands of MKD (2017: 76,852 thousands of MKD) comprise of disbursed fund by the Enterprise from the loan IBRD 4859 MK and at the same time placed to JP Macedonian Railways and Customs Office according to the loan agreement articles. 18. ADVANCES FOR PROPERTY AND EQUIPMENT 2018 2017 (000) MKD (000) MKD Advances given to: Sinohidro Podruznica Skopje 1,912,791 3,549,697 Konstrukciones Rubau Spain 276,735 293,589 GD Granit AD Skopje 487,439 261,986 Aselsan 56,344 86,957 Kompanija Eskavatori DOO 274,595 - Gradezen Institut Makedonija 259,210 - Alpine Podruznica Skopje 30,181 30,181 EGIS International - 2,035 Elcom TDS Sistemi 2,596 3,435 Elektrosoft Skopje 9,047 9,047 Aitoniks - 7,565 DG Beton AD Skopje 8,275 1,958 Total advances for property and equipment 3,317,213 4,246,450 2018 Financial Statements 23 PUBLIC COMPANY FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 19. PROPERTY AND EQUIPMENT Changes of property and equipment during 2018 are as follows: Construction Buildings Roads Equipment in progress Total (000) MKD (000) MKD (000) MKD (000) MKD (000) MKD Cost or revaluation Balance as at 1 January 18,654 99,826,610 207,344 33,634,803 133,687,411 Additions - 1,687,090 1,070 9,804,576 11,492,736 Transfer from P/E in progress - 28,370 33,671 (62,041) - Disposal of fixed assets - - - - - Capitalized exchange rate differences - - - - - Free of charge additions - - - - - Balance as at 31 December 18,654 101,542,070 242,085 43,377,338 145,180,147 Accumulated depreciation Balance as at 1 January 8,754 55,757,106 179,049 - 55,944,909 Depreciation 185 1,662,136 9,117 - 1,671,438 Disposal of fixed assets - - - - - Free of charge additions - - (3,610) - (3,610) Balance as at 31 December 8,939 57,419,242 184,556 - 57,612,737 Carrying amount as at: 31.December 2017 9,715 44,122,828 53,592 43,377,338 87,563,473 31.December 2016 9,900 44,069,504 28,295 33,634,803 77,742,502 Construction in progress as at 31 December 2018 in total amount of 43,377,338 thousands of MKD (2017: 33,634,803 thousands of MKD ) are comprised of investments in building up to national, regional and local roads. During 2007, the Agency has made accounting activation of investments in construction, reconstruction and upgrading of several roads in total amount of 682,141 thousands of MKD, which arise from realized projects in the previous years for construction of national and regional roads by the Ministry of transportation with transfers from the State Budget (Telekom assets). 2018 Financial Statements 24 PUBLIC COMPANY FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 20. INTANGIBLE ASSETS Changes during 2018: Licenses Software Total (000) MKD (000) MKD (000) MKD Cost Balance as at 1 January 1,634 36,462 38,096 Additions - 4,048 4,048 Balance as at 31 December 1,634 40,510 42,144 Accumulated amortization Balance as at 1 January 1,634 8,381 10,015 Amortization - 9,114 9,114 Balance as at 31 December 1,634 17,495 19,129 Carrying amount as at: 31.December 2018 - 23,015 23,015 31.December 2017 - 28,081 28,081 21. TRADE PAYABLES Trade payables as at 31 December consist of the following: 2018 2017 (000) MKD (000) MKD Domestic payables for property, equipment and expenses 1,875,743 683,373 Domestic payables for retained deposits 1,806,086 1,321,635 Total liabilities to suppliers 3,681,829 2,005,008 Domestic payables in amount of 1,875,743 thousands of MKD mostly include obligations related to unpaid interim statements towards contractor Sinohidro Podruznica Skopje in amount of 1,565,889 thousands of MKD. These liabilities are settled through borrowing from Eksport Import Bank of China (90%), and the other part of (10%) is financed by funds from the Public Enterprise. Domestic payables for retained deposits to construction companies in amount of 1,806,086 thousands of MKD (2017: 1,321,635 thousands of MKD) arise from interim payment statement for building of roads and represent deposits to contractors as a security for quality performance, which are release at the end of the projects by adequate confirmation. 2018 Financial Statements 25 PUBLIC COMPANY FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 22. OTHER SHORT-TERM LIABILITIES The other short-term liabilities as at 31 December consist of the following: 2018 2017 (000) MKD (000) MKD Liabilities for income tax - 167,186 Interest liabilities 287,323 236,051 Liabilities for vehicles registration 6,583 6,140 Liabilities for concessions - - Liabilities for expropriation of land 63,452 39,914 Liabilities for net wages - - Other liabilities 3,664 3,713 Total other current liabilities 361,022 453,004 Income tax liabilities in amount of 0 thousands of MKD (2017: 167,186 thousands of MKD) arise from calculated income tax of 10% on financial result presented in the income statement, adjusted for non-deductible expenses and redused by the amount of the reinvested profit in accordance with the tax regualtions in 2018 (2017: 10% income tax calculated on financial result presented in the income statement, adjusted for non-deductible expenses less reinvested profit). 23. GOVERNMENT GRANTS (DEFERRED INCOME) Government grants as at 31 December consist of following: 2018 2017 (000) MKD (000) MKD Balance as at 1 January 799,824 795,218 Received grants during the period 15,239 27,188 Released to the income statement (22,582) (22,582) Balance as at 31 December 792,481 799,824 The government grants arise from accounting activation of investments in construction, reconstruction and upgrading of several roads realized by the Ministry of transportation with transfers from the State Budget (Telekom assets) in amount of 671,818 thousands of MKD. These deferred income is amortized as income over the life of the depreciable assets commencing from date of their activation and put into use (01.01.2008). The annual amount of deferred income is in amount of 22,852 thousands of MKD. Grant from EIB is grant for technical assistance for the implementation of Project for construction of Corridor 10 (Demir Kapija - Smokvica road). These assets are aimed for consulting services to SAFEGE (Consulting Engineers Belgium) for implementation of project for construction of Corridor 10 (Demir Kapija - Smokvica road) in amount of 150,587 thousands of MKD. These deferred income should be amortized commencing from the date of road activation. 2018 Financial Statements 26 PUBLIC COMPANY FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 24. LONG-TERM INTEREST BEARING BORROWINGS a) Type analysis Principal Exchange Interest Principal Principal outstanding rate rate terms and period of outstanding outstanding 31.12.2018 31.12.2018 repayment 31.12.2018 31.12.2017 Bank or creditor Currency in currency MKD % MKD (000) MKD (000) EIB I EUR - 61.4950 2.5 % p/y 30 semiannually installments - 144,064 15/10/2003 - 15/04/2018 EIB II EUR 19,274,922 61.4950 3.62 % p/y 36 semiannually installments 1,185,311 1,400,725 15/11/2006 - 15/05/2024 EBRD EUR - 61.4950 Libor +1 21 semiannually installments - 111,801 20/09/2007 - 20/03/2018 IBRD 4859 MK EUR 6,712,644 61.4950 Libor 24 semiannually installments 412,794 487,813 15/12/2012 - 15/06/2024 IBRD 7532 MK EUR 45,486,493 61.4950 Libor 30 semiannually installments 2,797,192 3,090,973 15/09/2013 - 15/03/2028 EBRD EUR 24,470,640 61.4950 Libor +1 22 semiannually installments 1,504,822 1,839,098 05/12/2012 - 05/06/2023 The Export-Import Bank 60 months grace period and 180 months of China (Miladinovci - Stip) USD 182,911,924 53.6887 2 % p/y repayment period 9,820,303 8,072,584 The Export-Import Bank 60 months grace period and 180 months of China (Kicevo - Ohrid) USD 287,666,643 53.6887 2 % p/y repayment period 15,444,448 12,869,560 IBRD 8420 MK EUR 34,921,630 61.4950 Libor 32 semiannually installments 2,147,506 1,843,413 15/10/2020 - 15/10/2036 EBRD 41981 - Project corridor X EUR 6,649,621 61.4950 Libor +1 22 semiannually installments 408,918 293,540 20.10.2015-20.04.2026 EBRD 47955 - National roads 48 months grace period and 132 months Program EUR 28,667,000 61.4950 Libor +1 repayment period 1,762,877 1,226,739 20.02.2019 - 20.08.2029 35 months grace period from 31.12.2020 IBRD 8525 MK EUR 13,479,689 61.4950 Libor and 40 semi anual repayment period 828,933 12,759 15.11.2023-15.05.2043 EBRD 47829 EUR 10,640,000 61.4950 Libor +1 23 semiannually installments 654,307 - 20/03/2020 - 20/03/2031 Total foreign currency borrowings 36,967,412 31,393,071 Minus: Current portion of long-term foreign currency borrowings (1,964,342) (1,307,441) Total net foreign currency borrowings 35,003,070 30,085,630 Total long - term interest bearing borrowings 35,003,070 30,085,630 2018 Financial Statements 27 PUBLIC COMPANY FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 24. LONG-TERM INTEREST BEARING BORROWINGS (Continued) b) Changes during the year 2018 2017 MKD (000) MKD (000) Balance as at 1 January 31,393,071 29,550,197 New borrowings 5,851,109 5,775,657 Repayment of principal of foreign borrowings (1,320,894) (1,460,363) Losses (Gains) on exchange, net 1,044,126 (2,472,419) Unused funds - repayment - - Balance as at 31 December 36,967,412 31,393,072 c) Maturity of borrowings 2018 2017 MKD (000) MKD (000) In period of 1 year 1,964,342 1,307,441 In period of 1 to 3 years 3,991,847 3,553,513 Over 3 years 31,011,223 26,532,117 Total 36,967,412 31,393,071 25. EQUITY As at 31 December 2018, the total equity of the Enterprise is in amount of 5,000 thousands of MKD and it is consist of cash share. Owner of the Enterprise is the Government of the Republic of Macedonia. The assets for the basic capital arise from the cash on the bank accounts of the Agency for state roads which were balance on the opening date of the Enterprise account. The capital is registered in the Central Registry of the Republic of Macedonia. 26. COMMITMENTS FROM LOAN AGREEMENTS According to the concluded loan agreements with IBRD and EBRD, the Company is obliged to adhere to certain financial covenants during the whole period of Project realization, such as: a) debt service coverage ratio - not less than 1.0 Debt service coverage ratio Means the ratio of (i) net Cash Flows Arising From Operating Activities for the 12 months preceding the date of calculation plus all interest charged on accrual basis during such period, minus those Cash Flows Arising From Operating Activities for such period which are applied during that period to acquiring long-term assets except to the extent financed by the Guarantor, to (ii) the sum of the principal repayment and all interest charged on an accruals basis on all Financial Debt during such period. 2018 Financial Statements 28 PUBLIC ENTERPRISE FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 26. COMMITMENTS FROM LOAN AGREEMENTS (Continued) 2018 2017 Net Cash Flows Arising From Operating Activities 4,839,040 4,343,044 Plus all interest charged on accrual basis 61,484 81,765 Minus Cash Flows Arising From Operating Activities for such period which are applied during that period to acquiring long-term assets (8,899,244) (8,127,751) Plus Cash Flows Arising From Operating Activities for such period which are applied during that period to acquiring long-term assets financed by the Guarantor 5,851,109 5,775,657 Total 1,852,389 2,072,715 Sum of the principal repayment during such period 1,320,894 1,460,363 Sum of all interest charged on an accruals basis on all Financial Debt during such period 61,484 81,765 Total 1,382,378 1,542,128 Debt service coverage ratio (DSCR) 1.3 1.3 b) Estimated net revenues / estimated debt service ratio - not less than 1.2 Estimated net revenues / estimated debt service ratio means the ratio of (i) net revenues as a difference between revenues from all sources related to operations plus non-operating income and all expenses related to operations, excluding depreciation, non cash operating charges and interest on debt to (ii) the aggregate amounts of repayments of, and interest and other charges, on debt. 2018 2017 Revenues from all sources 7,030,648 6,415,543 Plus non-operating income 48,853 48,033 Minus all expenses related to operations, excluding depreciation, non cash operating charges and interest (1,760,835) (1,746,458) Total 5,318,666 4,717,118 Sum of the principal repayment during such period 1,320,894 1,460,363 Sum of all interest charged on an accruals basis on all Financial Debt during such period 61,484 81,765 Total 1,382,378 1,542,128 Estimated net revenues / estimated debt service ratio 3.8 3.1 c) current ratio - not less than 1 Current ratio means the ratio of (i) current assets including estimated net revenues for the next year to (ii) the current liabilities. 2018 2017 Current assets 3,404,091 2,621,229 Estimated net revenues for next year 5,055,500 4,860,000 Total 8,459,591 7,481,229 Current liabilities 6,144,111 3,897,894 Current ratio 1.4 1.9 2018 Financial Statements 29 PUBLIC ENTERPRISE FOR STATE ROADS NOTES TO THE FINANCIAL STATEMENTS 27. CONTINGENCIES AND PROVISIONS The contingencies are recorded and shown in the financial statements only if a probability for future outflows of funds that include economic benefits and a possibility for reasonable estimate of the amount exist. Provisions are liabilities with uncertain time and amount. Provisions are recognized as liabilities, while contingencies are only disclosed. a) Court procedures (contingencies) The Enterprise is involved in routine legal proceedings with its clients. The list of court procedures against the Enterprise are as follows: 2018 Basis: (000) MKD Debts 66,740 Expropriation of land 39,997 Claims for damages 84,015 Other 1,622 Total 192,374 Above mentioned amounts do not include interest. b) Provisions During 2018, the Enterprise has made provision for court litigations in balance sheet in amount of 17,035 thousands of MKD, an amount of 27,530 thousands of MKD in income statement, an amount of 7,090 thousands of MKD is paid, and released in amount of 32,997 thousands of MKD or balance of 136,918 thousands of MKD at 31 December. . During 2017, an amount of 7,278 thousands of MKD was paid from the provision for court litigations, and the balance of the provisions at the end of the year is 132,441 thousands of MKD. 28. POST BALANCE SHEET EVENTS There were no materially significant events after the balance sheet date that should be disclosed in the financial statements. 2018 Financial Statements 30